Investor's Eye-July24 12 - The Smart Investor

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Index

� Stock Update >> Ashok Leyland

� Stock Update >> Lupin

� Stock Update >> Wipro

� Stock Update >> Hindustan Unilever

� Stock Update >> Larsen & Toubro

� Stock Update >> Torrent Pharmaceuticals

� Stock Update >> Polaris Financial Technology

� Sector Update >> Telecommunications

� Viewpoint >> Idea Cellular

2Sharekhan Home NextJuly 24, 2012

Company details

Price chart

Shareholding pattern

Price performance

(%) 1m 3m 6m 12m

Absolute -0.6 -21.6 -7.6 -4.3

Relative -0.3 -21.5 -9.5 4.4to Sensex

Ashok Leyland Ugly Duckling

Stock Update

Q1FY2013 results: First-cut analysis Hold; CMP: Rs23

Price target: Rs28

Market cap: Rs6,199 cr

52 week high/low: Rs33/20

NSE volume: 63.5 lakh(no. of shares)

BSE code: 500477

NSE code: ASHOKLEY

Sharekhan code: ASHOKLEY

Free float: 163.3 cr(no. of shares)

Result highlights

Ashok Leyland’s Q1FY2013 results: PAT 23% below estimates on higher em-

ployee and interest costs

Ashok Leyland Ltd (ALL)’s performance in Q1FY2013 was significantly below our

and the street’s estimates. Higher employee costs impacted the operating margin

that came in 70 basis points below our estimates at 8%. Higher interest costs

further marred profitability leading to a profit after tax (PAT) of Rs67 crore, 23%

below estimates.

Positive surprises

� Contribution per vehicle improved on a sequential basis despite increased

proportion of buses and the traded light commercial vehicle (LCV) Dost.

� Depreciation at Rs89 crore was below our estimates of Rs98 crore.

Negative surprises

� Employee costs increased on both, year-on-year (Y-o-Y) and quarter-on-quarter (Q-

o-Q) basis. The employee/sales at 8.9% was much above our expectation of 7.1%.

� Financial charges at Rs83 crore were higher on a sequential basis despite of it

being a seasonally lean period. This may be due to higher inventory levels at

the stockyard.

Valuation

In the recent analyst interaction of July 4, 2012, the company maintained its

volume guidance of 1.07 lakh units ex-Dost but lowered its FY2013 margin guidance

to 10%. We would seek further clarity on volume and margin expectations from the

conference call to be held tomorrow. We maintain our Hold recommendation on

the stock but may revise our estimates post an interaction with the management

in our subsequent note.

Results (Rs cr)

Particulars Q1FY13 Q1FY12 YoY % Q4FY12 QoQ %

Net sales 3007.3 2512.7 19.7 4311.0 -30.2

Operating profit 240.7 244.6 -1.6 469.9 -48.8

OPM (%) 8.0 9.7 10.9

Depreciation 89.3 84.7 5.4 95.6 -6.6

Interest 83.4 56.7 47.1 72.4 15.2

Other Income 12.9 7.4 72.9 10.9 18.3

PBT 80.9 110.7 -26.9 314.4 -74.3

Tax 10.0 16.8 -40.4 32.7 -69.5

Adjusted PAT 66.9 86.3 -22.4 258.7 -74.1

EPS 0.3 0.3 -22.4 1.0 -74.1

investor’s eye stock update

Institutions20%

FIIs16%

Promoters39%

Public & Others25%

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3Sharekhan July 24, 2012 Home Next

� Operating margins at 8% were below estimates on the

back of higher than expected employee expenses.

� Operating profit/vehicle declined on a Y-o-Y basis on

the back of margin contraction and increased

proportion of the traded LCV - the Dost.

� Realisation/vehicle has been on a declining trend on

account of increased proportion of the Dost.

� Contribution/vehicle at Rs3,22,278 remained flat on

a Q-o-Q basis despite an increase in LCV volumes and

the bus mix.

0

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Operating Prof it/ vehicle (Rs) OPM Margin (%)

ALL: Operating profit per vehicle and margin

ALL: Realisation and contribution per vehicle

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Realisation/vehicle (Rs) LHS Contribution/vehicle (Rs) RHS

Valuation

Particulars FY10 FY11 FY12 FY13E FY14E

Net sales (Rs cr) 7,244.7 11,117.7 12,780.9 14,747.6 17,075.0

YoY Chg (% ) 21.4 53.5 15.0 15.4 15.8

EBIDTA (Rs cr) 762.9 1,217.6 1,256.1 1,457.8 1,696.8

OPM (%) 10.5 11.0 9.8 9.9 9.9

Net profit (Rs cr) 425.1 636.2 595.0 656.4 717.4

EPS (Rs) 1.6 2.4 2.2 2.5 2.7

EPS growth (%) 123.6 49.7 (6.5) 10.3 9.3

P/E (x) 16.1 10.8 11.5 9.3 8.6

P/BV (x) 1.8 1.7 1.6 1.4 1.3

EV/EBITDA (x) 10.9 7.4 7.6 6.1 5.0

RoCE (%) 9.3 14.2 12.0 12.5 13.8

RoE (%) 11.9 16.5 14.4 14.8 14.9

ALL: Volume mix and growth

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� LCV volumes have seen steady increase on the back of

increasing penetration of the LCV- Dost.

� The medium and heavy commercial vehicle (MHCV)

volume growth has recovered from the negative

territory witnessed during H1FY2012 on the back of

better performance in the southern market, leading

to a market share gain for ALL.

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.



Company details

Price chart


Price performance

(%) 1m 3m 6m 12m

Absolute 8.8 4.5 31.1 26.7

Relative 9.0 4.7 28.5 38.3to Sensex

Lupin Apple Green

Stock Update

Q1FY2013 results: First-cut analysis Buy; CMP: Rs582

Price target: Rs597




BSE code: 500257

NSE code: LUPIN

Sharekhan code: LUPIN


Result highlights

� An impressive all-round performance; higher tax incidence affects profit:

Lupin reported better than expected revenues and profit for Q1FY2013 on a

good all-around performance during the quarter. Its net sales grew by 42.8%

year on year (YoY) to Rs2,219.2 crore during the quarter and its profit before

tax rose by 67.2% YoY to Rs405.8 crore. The profit growth was driven by a 158-

basis-point year-on-year (Y-o-Y) rise in the operating profit margin (OPM) to

19.1% and a 126% Y-o-Y growth in the other income during the quarter. However,

a sharp rise in the tax incidence (29.8% in Q1FY2013 vs 11.8% in Q1FY2012)

restricted the profit growth to 33.5% YoY at Rs280.39 crore. But even that is

impressive.

� US, Japan and India lead the growth: During the quarter the revenues from

the US market rose by 62.8% YoY to Rs802 crore while the revenues from the

Japanese market (excluding the newly acquired Irom Pharma) jumped by 36.7%

YoY to Rs227.8 crore. The revenues from Japan (including Irom Pharma) now

account for 15% of the total revenues of the company. Lupin continues to outpace

the domestic formulation market with a 25% Y-o-Y growth recorded during the

quarter. The growth in the other emerging markets was also impressive at 54%

YoY to Rs117.4 crore.

We have Buy rating on the stock with a price target of Rs597.

The company’s management is holding a teleconference call on July 25, 2012 at

11.30am. We will come out with a detailed note after the teleconference with the

management.


Results (Rs cr)

Particulars Q1FY13 Q1FY12 YoY % FY12 FY11 YoY %

Net sales 2219.2 1554.3 42.8 6959.7 5706.8 22.0

Expenditure 1796.1 1273.4 41.1 5638.2 4641.0 21.5

Operating profit 423.0 280.9 50.6 1321.5 1065.9 24.0

Other income 58.2 25.7 125.9 137.6 134.1 2.6

EBIDTA 481.2 306.6 56.9 1459.1 1200.0 21.6

Interest 10.1 5.8 74.4 35.5 32.5 9.3

Depreciation 65.4 47.1 38.7 227.5 171.2 32.9

PBT 405.8 253.7 59.9 1196.1 996.3 20.0

Tax 120.8 28.6 322.1 252.2 116.9 115.7

Adjusted PAT 280.4 210.1 33.5 924.0 862.5 7.1

Extraordinary items 0.00 0.0 56.3 0.0

Net profit (reported) 280.4 210.1 33.5 980.3 862.5 13.7

EPS (Rs) 6.3 4.7 19.4 19.3 0.5

OPM (%) 19.1 18.1 0.99 19.0 18.7 0.31

EBIDTA margin (%) 21.7 19.7 21.0 21.0

Net profit margin (%) 12.6 13.5 13.3 15.1

Effective tax rate 29.8 11.3 21.1 11.7

Promoters46%

Non-promoter corporate

1%Public and others8%

Institutions17%

Foreign28%

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Revenue break-up

Particualrs Q1FY13 Q1FY12 YoY % FY12 FY11 YoY%

Formulations 1988 1333 49.1 6111 4883 25.1

US 802 493 62.8 2530 2020 25.2

EU 47 42 13.4 198 181 8.9

Japan 333 167 99.8 861 621 38.5

Advanced markets 1183 701 68.6 3588 2823 27.1

India 621 497 25.0 1906 1551 22.9

South Africa 66 59 12.9 255 183 39.6

RoW 117 76 54.3 361 327 10.5

Emerging markets 805 632 27.4 2522 2060 22.4

API 232 210 10.2 849 859 -1.1

Others 0 0 0.0 0.0

Total 2219 1543 43.8 6960 5742 21.2

Valuations


Net sales (Rs cr) 4740.5 5706.8 6959.7 8098.7 9586.4

Adj. net profit (Rs cr) 681.6 862.5 924.0 1164.2 1474.7

Shares in issue (cr) 44.5 44.6 44.7 44.7 44.7

EPS (Rs) 15.2 19.3 20.7 26.1 33.0

PER (x) 38.2 30.1 28.1 22.3 17.6

Cash EPS (Rs) 18.4 23.5 26.2 31.9 39.5

Cash PER (x) 31.6 24.7 22.2 18.2 14.7

EV/EBIDTA (x) 31.4 25.1 20.5 16.5 12.7

Book value (Rs/share) 57.7 73.5 89.8 121.9 156.0

P/BV (x) 10.1 7.9 6.5 4.8 3.7

Mcap/sales 5.5 4.5 3.7 3.2 2.7

RoCE (%) 22.4 22.0 21.1 21.9 22.8

RoNW (%) 26.5 26.3 23.0 21.4 21.2



Company details

Price chart


Price performance

(%) 1m 3m 6m 12m

Absolute -10.0 -15.1 -13.0 -10.9

Relative -9.8 -15.0 -14.7 -2.8to Sensex

Wipro Apple Green

Stock Update

Downgrade to Hold Hold; CMP: Rs345

Price target: Rs360




BSE code: 507685

NSE code: WIPRO

Sharekhan code: WIPRO


Result highlights (IFRS)

� Performance below expectations, disappointing guidance: Wipro’s overall

performance for Q1FY2013 was below our expectation. The most disappointing

part was the Q2FY2013 guidance, which suggested a 0.3% to 2.3% sequential

growth to $1,520-1,550 million, much below our as well as the street’s

expectations. This is in spite of the September quarter being a traditionally

strong quarter for the IT sector.

� Soft volume growth: IT services revenues were down 1.4% quarter on quarter

(QoQ) to $1,514.8 million (our expectation was of $1,531 million). On a constant

currency basis, the revenues were up 0.3% QoQ to $1,540 million. The volume

growth came in at 0.8% QoQ. Onsite pricing was down by 0.9% QoQ (up 0.2% on

constant currency basis) and offshore pricing was down 2% (down 1% on constant

currency basis).

� Margins disappoint, incremental investments continue in S&M space: The IT

services’ earnings before interest and tax (EBIT) margins have shown an

improvement of 30 basis points to 21% (much below our expectations of 22.5%),

despite the rupee benefits (11.1% rupee depreciation) and absence of full quarter

impact of wage hikes (effective from June 1, 2012). The lower margin

performance has been attributed to incremental allocation to selling and

marketing (S&M), which has gone up by 22.9% to Rs533 crore (additional

investment of Rs100 crore on QoQ basis). As a matter of fact, on a trailing

Results (under IFRS) (Rs cr)

Particulars Q1FY13 Q1 FY12 Q4FY12 YoY % QoQ %

Net sales 10483.2 8492.9 9816.4 23.4 6.8

Direct costs 7287.0 6002.1 6847.0 21.4 6.4

Gross profit 3196.2 2490.8 2969.4 28.3 7.6

SG&A 1324.0 995.6 1275.1 33.0 3.8

EBIT 1872.2 1495.2 1694.3 25.2 10.5

Net other income 132.5 143.2 197.7 -7.5 -33.0

Affiliate profit/(loss) -10.2 11.0 0.7 -192.7 -1557.1

PBT 1994.5 1649.4 1892.7 20.9 5.4

Tax provision 404.6 309.6 401.5 30.7 0.8

PAT 1589.9 1339.8 1491.2 18.7 6.6

Minority interest 9.7 4.9 10.3 98.0 -5.8

Net profit 1580.2 1334.9 1480.9 18.4 6.7

EPS (Rs) 6.4 5.4 6.0

Margin (%)

GPM 30.5 29.3 30.2

EBIT margins 17.9 17.6 17.3

NPM 15.1 15.7 15.1

Tax rate 20.3 18.8 21.2


Foreign9% Institutions

3%


3%

Promoters79%

Public & Others

6%

300320340360380400420440460

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twelve month (TTM) basis, Wipro’s S&M investments

have gone up by 34% to Rs1,781 crore. Wipro is heavily

investing and strengthening its front end as a part of

its business transition. Thus the margins are expected

to continue to remain in a narrow range in the next

few quarters, as the benefits of investments will take

time to reflect.

� Net profit below expectation: The consolidated

revenues of the company for the quarter were up 6.8%

QoQ to Rs10,483.2 crore. The net other income was

down 33% QoQ to Rs132.5 crore driven by higher foreign

exchange (forex) losses pertaining to external

commercial borrowing (ECB) to the tune of Rs100.2

crore as compared to Rs33.7 crore in Q4FY2012. The

net profit was up 6.7% QoQ to Rs1,580.2 crore (below

our expectations of Rs1,708.9 crore).

� Performance/guidance does not favour revival

thesis: Wipro has failed to meet the upper end of its

revenue guidance in constant currency terms in four

of the last six quarters. Volume growth continues to

languish with an average 1.1% sequential growth in

the last three preceding quarters (lowest among the

peers). Further, a lackluster guidance for the seasonally

strong September quarter reflects at a slower than

anticipated ramp up in the clients’ accounts. We draw

comfort from the incremental investments in the S&M

area (130 people in the hunting team) and clients

mining ($100 million clients moved to 8 from 4 in one

year). However any meaningful benefit from the S&M

investments would take time to reflect in numbers

(management indicates at 8-12 months time frame).

Overall, looking at the current business traction and

increasing uncertainties in the macro environment, we

expect Wipro to take atleast three quarters to come

closer to match its peer companies’ (TCS, HCL

Technologies, Cognizant) growth levels.

� Outlook and valuation: We have reset our currency

estimates to Rs54.4 and Rs54 and have lowered our

earnings estimates by 4.7% and 5.8% on the back of

lower revenue estimates of 4.2% and 9.2% respectively

for FY2013E and FY2014E. In the last one month

Wipro’s stock price has corrected by close to 14% and

is trading at close to 12x FY2014E earnings. Though

any major downside from the current levels looks

unlikely, we remain circumspect on upside triggers.

With lack of positive investment triggers in the medium

term, we have downgraded our rating to Hold from

Buy and lowered the target price to Rs360.

Segmental performance (Rs cr)

Particulars Q1 Q1 Q4 YoY QoQFY13 FY12 FY12 % %

IT revenues ($ mln) 1514.8 1407.5 1535.6 7.6 -1.4

USD/INR 54.9 45.5 49.4 20.6 11.1

IT services 8314.3 6404.6 7589.7 29.8 9.5

IT products 953.3 1005.8 937.0 -5.2 1.7

IT services & products 9267.6 7410.4 8526.7 25.1 8.7

Con. care & lighting 979.8 754.5 906.7 29.9 8.1

Others 388.7 395.9 428.8 -1.8 -9.4

Eliminations 16.9 3.2 6.9

Total revenues 10653.0 8564.0 9869.1 24.4 7.9

EBIT

IT services 1744.3 1406.7 1573.1 24.0 10.9

IT products 21.1 42.3 43.8 -50.1 -51.8

IT services & products 1765.4 1449.0 1616.9 21.8 9.2

Con. Care & lighting 113.9 89.5 113.4 27.3 0.4

Others 9.7 -2.4 3.5 504.2 -177.1

Eliminations -16.8 -40.9 -39.5

Total EBIT 1872.2 1495.2 1694.3 25.2 10.5

EBIT margin (%)

IT services 21.0 22.0 20.7

IT products 2.2 4.2 4.7

IT services & products 19.0 19.6 19.0

Con. Care& lighting 11.6 11.9 12.5

Others 2.5 -0.6 0.8

Source: Company and Sharekhan Research

� Management seeing increasing delays in decision

making: The management continues to maintain that

the deal pipeline remains robust and growing, but it is

seeing increasing delays in decision making at the

clients’ end which is impacting performance and

revenue visibility. Specifically in the investment

banking space, on the discretionary side of the business

there are ramp downs happening in the existing

projects and delays are being witnessed in starting of

new projects. The retail industry is also starting to

see the impact of slower decision making because of

the macro uncertainties. The competitive intensity is

also increasing in select existing deals coming up for

renewal as well as new deals. Also, the India business

which contributes to about 1% of the quarterly volume

growth is seeing slowness in demand due to lack of

capital investment, delays in decision making and

uncertainty in the telecom vertical. The management

expects the India business to stabilise in the second

half of the fiscal year. On the pricing front, the

management maintains a stable pricing environment.


Segment-wise performance

IT products

The IT products segment’s revenue grew by 1.7%

sequentially whereas it was down 5.2% year on year (YoY)

to Rs953.3 crore in Q1FY2013. The Y-o-Y drop in revenues

could be attributable to sluggishness in the India & Middle

East business. The EBIT margin for the segment shrank

250 basis points QoQ and 200 basis points YoY to 2.2% in

the same period.

Consumer care and lighting business

The division’s revenues grew by 8.1% QoQ and 29.9% YoY

to Rs979.8 crore. The EBIT margin for the segment was

down 90 basis points QoQ and 30 basis points YoY to 11.6%.

Wipro signed an agreement with Lornamead Group to

acquire the Yardley business in the UK and the rest of

Europe (excluding Germany and Austria). This transaction

further expands the geographic reach of the Yardley

portfolio already owned by Wipro. Earlier, Wipro had

acquired the Yardley portfolio for Asia, Middle East, North

Africa and Australasia in December 2009. Wipro will also

acquire the “Woods of Windsor” business, another heritage

brand in the UK, which is well known for its floral fragrance

led portfolio in the personal care segment.

Other highlights

� During Q1FY2013, Wipro made a net addition of 2,632

employees in the IT services business. The total

headcount in the IT services business at the end of

Q1FY2013 stood at 138,552 people.

� The utilisation excluding trainees improved 180 basis

points to 77.9% and including trainees improved by

140 basis points to 75.5%.

� At the end of Q1FY2013, the voluntary quarterly

annualised attrition rate increased to 15.2% as

compared with 14.4% in Q4FY2012. On a trailing

twelve-month (TTM) basis, the attrition was down 190

basis points to 15.6%.

Operating matrix

Particulars Q1FY13 Q1FY12 Q4FY12 YoY % QoQ % Key comments

Geographic mix (%)

Americas 51.6 53.0 52.1 4.8 -2.3

Europe 28.1 28.6 27.7 5.7 0.1

Japan 1.3 1.1 1.1 27.2 16.6

India & Middle East 8.8 9.0 9.6 5.2 -9.6

APAC & others 10.2 8.3 9.5 32.3 5.9

Service offering (%)

Tech Infra. Services 22.8 21.7 22.6 13.1 -0.5

Analytics & Information Mgmt 7.1 6.4 6.8 19.4 3.0

Business application services 30.7 30.4 30.6 8.7 -1.0

BPO 8.4 9.3 8.2 -2.8 1.1

Product Engg. 8.5 8.3 8.2 10.2 2.3

ADM 22.5 23.9 23.6 1.3 -6.0

R&D business 12.0 12.5 12.0 3.3 -1.4

Consulting 2.5 3.1 2.9 -13.2 -15.0

Industry verticals (%)

Global Media & Telecom 14.9 16.8 14.9 -4.5 -1.4

Finance Solutions 26.4 26.7 26.6 6.4 -2.1

Manufacturing & Hitech 19.4 19.7 19.1 6.0 0.2

Healthcare, life sciences 10.1 10.2 10.0 6.6 -0.4

& services

Retail & Transportation 15.0 15.0 15.4 7.6 -3.9

Energy & Utilities 14.2 11.6 14.0 31.7 0.1

Client contribution (%)

Top client 3.5 3.3 3.5 14.1 -1.4

Top 5 clients 12.2 10.9 11.5 20.5 4.6

Top 10 clients 20.9 19.4 20.0 15.9 3.1

Others 79.1 80.6 80.0 5.6 -2.5

Source: Company & Sharekhan Research

America revenues were impacted by sluggishness in thefinancial services (investment banking) space. Europerevenues were impacted by cross currency headwinds andfinancial services.

India & Middle East revenues were down due to slow Indiabusiness, mainly in the government and telecom segments.

ADM revenues were down due to ramp down in investmentbanking space with no ramp ups and slower decision makingin the retail space.

BPO looks stable.

Telecom continues with its soft performance (in the telecomOEMs and India business space).

Energy & utilities and healthcare remain stable with decenttraction.

Growth in top 2-5 clients at 7.2% QoQ and clients with revenuesof $100 million and more increased by 1 to 8.



� The cash and cash equivalents at the end of Q1FY2013

stood at Rs5,985.2 crore and that including the

investments stood at Rs12,995.7 crore.

� The total hedge at the end of Q1FY2013 stood at $1.6

billion, down from $2 billion at the end of the previous

quarter.

� The DSO days were down to 69 from 71 days in the

previous quarter.

� Clients: The company added 37 new clients in the

quarter and the active number of clients for the quarter

was down to 919 (943 in the sequential previous

quarter). The clients contributing more than $100

million increased to eight from seven in the previous

quarter and four in the corresponding quarter of the

previous year.

� Deal wins: During the quarter, the company won a

few deals including a large multi-year contract from

Royal Philips Electronics; a leading retail bank and

insurance provider in the UK; a large developer,

manufacturer and marketer of medical devices and

from Power Grid.

� Outlook and valuation: We have reset our currency

estimates to Rs54.4 and Rs54 and have lowered our

earnings estimates by 4.7% and 5.8% on the back of

lower revenue estimates of 4.2% and 9.2% respectively

for FY2013E and FY2014E. In the last one month

Wipro’s stock price has corrected by close to 14% and

is trading at close to 12x FY2014E earnings. Though

any major downside from the current levels looks

unlikely, we remain circumspect on upside triggers.

With lack of positive investment triggers in the medium

term, we have downgraded our rating to Hold from

Buy and lowered the target price to Rs360.

Valuation

Particulars FY2011 FY2012 FY2013E FY2014E

Net sales (Rs cr) 31,054.2 37,197.1 43,492.0 48,238.9

Net profit (Rs cr) 5297.7 5573.0 6200.6 6840.5

EPS (Rs) 21.5 22.7 25.2 27.8

PER (x) 16.1 15.3 13.7 12.4

Price/BV (x) 3.5 2.9 2.5 2.2

EV/EBIDTA(x) 14.6 12.9 11.1 10.0

Dividend yield (%) 1.7 1.7 1.8 2.0

RoCE (%) 21.6 20.8 20.5 20.0

RoNW (%) 23.9 20.8 19.7 18.8

One-year forward PE band

30x

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Promoters53%

Domestic Institutions

10%

FIIs20%

Others17%


Company details

Price chart


Price performance

(%) 1m 3m 6m 12m

Absolute 2.9 7.2 13.0 35.2

Relative -2.7 7.4 10.7 47.5to Sensex

Hindustan Unilever Apple Green

Stock Update

Price target revised to Rs479 Hold; CMP: Rs476

Price target: Rs479




BSE code: 500696

NSE code: HINDUNILVR

Sharekhan code: HINDUNILVR


Result highlights

� Strong beginning to FY2013: Hindustan Unilever Ltd (HUL) began FY2013 on a

strong note by posting a strong operating performance in the first quarter of

the fiscal. Despite macro uncertainties and sustained high food inflation HUL

was able to maintain a strong growth in the domestic consumer business, which

grew by 19% year on year (YoY) in Q1FY2013. The sales volume growth stood at

9% (close to 10% volume growth in Q4FY2012). This was the fourth consecutive

quarter when HUL’s volume growth in the consumer business stood in the range

of 9-10%. The highlight of the quarter was close to a 220-basis-point year-on-

year (Y-o-Y) improvement in the gross profit margin (GPM).

� Performance snapshot: HUL’s net sales grew by 13.7% YoY to Rs6,250.2 crore

in Q1FY2013, driven by a 21% growth in the home and personal care (HPC)

business. The food business’ revenue growth remained at 11% YoY during the

quarter. The stand-alone business’ GPM improved by 216 basis points YoY to

46.1% and its operating profit margin (OPM) improved by 137 basis points YoY to

13.4%. Judicious price increases in the product portfolio, the benefits of a low-

cost inventory and effective buying of the key inputs at the global level helped

HUL to post a strong improvement in the GPM during the quarter. Hence, the

operating profit grew by 26.7% YoY to Rs837.9 crore. However a higher than

expected other income (including the other operating income) led to a 46% Y-o-Y

growth in the adjusted profit after tax (PAT) to Rs848.8 crore. The other income

(including income from other operations) stood at Rs347.2 crore in Q1FY2013

as against Rs126.1 crore in Q1FY2012. The surge in the other income was aided

by a Rs71.7-crore profit on the sale of long-term investments and the interest

on an income tax refund of Rs34.5 crore.

Results (stand-alone) (Rs cr)


Net sales 6250.2 5495.9 13.7 5660.5 10.4

Total expenditure 5412.3 4834.6 11.9 4932.5 9.7

Operating profit 837.9 661.3 26.7 728.0 15.1

Other income 347.2 143.6 141.9 175.4 98.0

EBIDTA 1185.1 804.9 47.2 903.3 31.2

Interest 5.3 0.0 - 0.2 -

PBDT 1179.8 804.9 46.6 903.1 30.6

Depreciation 57.6 56.2 2.5 57.1 1.0

PBT 1122.2 748.7 49.9 846.1 32.6

Tax 273.4 167.3 63.4 176.9 54.6

Adjusted PAT 848.8 581.3 46.0 669.2 26.8

Extra-ordinary items -482.4 -45.8 952.8 -17.4 2670.8

Reported PAT 1331.2 627.2 112.3 686.6 93.9

Adjusted EPS (Rs.) 3.9 2.7 47.4 3.1 26.8

GPM (%) 46.1 44.0 216bps 44.8 128bps

OPM (%) 13.4 12.0 137bps 12.9 54bps

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� Upward revision in estimates: We have revised

upwards our earnings estimates for FY2013 and FY2014

by 5.0% and 6.2% respectively to factor in the higher

than expected OPM and other income during the

quarter. With the prices of the key inputs showing a

softening trend, we expect the OPM to stand in the

range of 13.5-13.8% in the coming years.

� Outlook and valuation: Though the strong volume

growth momentum sustained in Q1FY2013, we believe

the volume growth has to be keenly monitored in the

coming quarters in view of the poor monsoon and the

persistent high food inflation. We believe HUL’s

portfolio of strong brands (catering to the masses as

well as the premium end of the market) will help

overcome the concerns and maintain the growth

momentum in the coming quarters. Also, banking on

the Indian consumer growth story the company has

maintained its thrust on innovation and enhanced its

distribution reach. These will be the key growth drivers

for the company in the long run. We expect HUL’s top

line and bottom line to grow at a compounded annual

growth rate (CAGR) of 17% and 19% respectively over

FY2012-14.

HUL has traded at an average one-year forward

multiple of 27x in the uncertain market environment

of the last twelve months. That is 6% above its four-

year average multiple of 25.5x. We have revised our

price target to Rs479 (valuing the stock at 27x its

FY2014E earnings of Rs17.7). However, with a limited

upside from the current level we maintain our Hold

recommendation on the stock. At the current market

price the stock is trading at 31.3x its FY2013E earnings

per share (EPS) of Rs15.2 and 26.8x its FY2014E EPS of

Rs17.7.

HPC business performance—strong growth along with

margin improvement

� Soap and detergent segment: Q1FY2013 was the

fourth consecutive quarter of above 20% Y-o-Y revenue

growth driven by the price increases effected in the

portfolio in the previous few quarters. The soap and

detergent segment registered a revenue growth of

23.7% YoY in Q1FY2013. The sales volume of the

segment grew in single digits during the quarter. The

laundry category maintained its strong performance

with the brands growing in double digits. The

upgradation in the category led to a strong growth in

the premium segment with both Surf and Rin delivering

a double-digit volume growth. In the skin-cleansing

category, all segments and the key brands grew in

double digits (driven by a healthy volume growth)

during the quarter. The PBIT margin of the segment

improved by 295 basis points YoY to 12.2% largely on

account of a higher sales realisation due to the price

increases undertaken in the product portfolio and an

improved revenue mix due to the higher sales of the

premium brands. The company is test marketing the

Magic water-saver laundry detergent in Andhra

Pradesh. The product was launched with the objective

to reduce the amount of water required by the end

consumer to wash clothes. It has extended the Lux

brand to female deodorants to tap the women’s

deodorant market.

� Personal care segment: The personal care segment

maintained the strong growth momentum of the

previous quarter. In Q1FY2013 its revenues grew by

16.7% YoY. The strong growth was driven by a double-

digit volume growth. All brands under the skin care

category maintained the double-digit growth, while

the hair care category recorded a double-digit growth

across formats during the quarter. Dove shampoo

sustained the strong growth momentum with a double-

digit growth in the sales volume. The oral care

segment’s growth improved to double digits during the

quarter. During the same quarter the company

launched the Pepsodent Expert Protection range of

toothpaste for sensitive teeth. The PBIT margin of the

segment remained flat YoY to 25.8% during the quarter.

HPC business’ performance


Revenue

Soaps & detergents 3163.1 2557.6 23.7 2834.4 11.6

Personal products 1847.1 1582.3 16.7 1710.9 8.0

Total 5010.1 4139.9 21.0 4545.3 10.2

PBIT

Soaps and detergents 385.2 236.1 63.2 320.1 20.4

Personal products 475.7 410.7 15.8 449.2 5.9

Total 860.9 646.8 33.1 769.3 11.9

PBIT margins (%)

Soaps and detergents 12.2 9.2 295 11.3 89

Personal products 25.8 26.0 -21 26.3 -50

Total 17.2 15.6 156 16.9 26

Food business—an improved performance

� Packaged food segment: The packaged food

segment’s revenues grew by 17.3% YoY to Rs437.0

crore. The revenue growth of above 15% is much better

than the ~10% revenue growth of Q4FY2012. The strong

growth was driven by the strong performance of the

core categories (Kissan Ketchups and Knorr soups grew

in double digits). Kwality Walls had the strongest

quarter on the back of an innovative product portfolio


Trend in raw material cost and advertisement spend

OPM improved to 13.4%

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and thrust on enhancing its distribution reach. The

margins of the packaged food segment improved by

100 basis points YoY to 5.7% during the quarter.

� Beverages segment: The beverages segment’s revenues

remained muted at 7.4% YoY during the quarter. The

coffee category performed well with both instant and

roast & ground coffee gaining good acceptance in the

domestic market. Moreover, the innovated Bru

continued the category premiumisation.

Food business’ performance (Rs cr)


Revenues

Packaged food 437.0 372.5 17.3 348.1 25.6

Beverages 654.1 609.2 7.4 683.2 -4.3

Total 1091.1 981.6 11.1 1031.2 5.8

PBIT

Processed foods 24.8 17.4 42.6 -3.7 -767.9

Beverages 95.0 75.4 25.9 98.4 -3.5

Total 119.7 92.8 29.0 94.7

PBIT margins (%)

Processed foods 5.7 4.7 100.4 -1.1 674

Beverages 14.5 12.4 213.9 14.4 12

Total 11.0 9.5 152.2 9.2 179

Volume growth in consumer business stood at 9%

Despite macro uncertainties and sustained high food

inflation HUL was able to maintain the strong volume

growth of the previous quarter in the domestic consumer

business, which grew by 9% YoY in Q1FY2013. This was

the fourth consecutive quarter when HUL’s volume growth

in the consumer business stood in the range of 9-10%.

The volume growth could be sustained due to innovations

in the product portfolio, enhanced distribution reach and

sustained good growth in the rural markets. However,

going ahead the monsoon has to be keenly monitored, as

a below-normal monsoon would affect the demand in the

rural as well as urban markets. This along with the

sustained high food inflation would moderate the volume

growth momentum of the consumer business in the coming

quarters. However, HUL has a portfolio of strong brands

(straddling the consumer pyramid) which will help in

mitigating the concerns that may show up in the coming

quarters.

Profitability improved YoY

The quarter saw a strong improvement of 216 basis points

YoY in the GPM to 46.1%. Though some of the key inputs

(including palm oil and coffee) corrected from their highs,

the rupee’s depreciation maintained the raw material

inflation during the quarter. Judicious price increases in

the product portfolio, the benefits of a low-cost inventory

and effective buying of the key inputs at the global level

helped HUL to post a strong improvement in the GPM

during the quarter. Some of the savings at the GPM level

were utilised for brand-building activities. Hence, the OPM

improved by just 137 basis points YoY to 13.4% in

Q1FY2013.

Revenue growth mix of volume and value

19.121.1

19.720.0

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Volume grow th (%) Price-led grow th (%) Topline grow th (%)

Upward revision in earnings estimates: We have revised

upwards our earnings estimates for FY2013 and FY2014

by 5.0% and 6.2% respectively to factor in the higher than


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expected OPM and other income during the quarter. With

the prices of the key inputs showing a softening trend,

we expect the OPM to stand in the range of 13.5-13.8% in

the coming years.

Revised estimates (Rs cr)

FY2013E FY2014E

Prev. Curr. Chg % Prev. Curr. Chg %

Net sales 26750.9 27006.7 1.0 30996.3 31485.0 1.6

Opt. profit 3563.7 3637.7 2.1 4156.5 4277.9 2.9

Adj. net profit 3130.0 3289.3 5.1 3612.7 3832.0 6.1

EPS 14.5 15.2 5.0 16.7 17.7 6.2

Outlook and valuation: Though the strong volume growth

momentum sustained in Q1FY2013, we believe the volume

growth has to be keenly monitored in the coming quarters

in view of the poor monsoon and the persistent high food

inflation. We believe HUL’s portfolio of strong brands

(catering to the masses as well as the premium end of

the market) will help overcome the concerns and maintain

the growth momentum in the coming quarters. Also,

banking on the Indian consumer growth story the company

has maintained its thrust on innovation and enhanced its

distribution reach. These will be the key growth drivers

for the company in the long run. We expect HUL’s top line

and bottom line to grow at a compounded annual growth

rate (CAGR) of 17% and 19% respectively over FY2012-14.

HUL has traded at an average one-year forward multiple

of 27x in the uncertain market environment of the last

twelve months. That is 6% above its four-year average

multiple of 25.5x. We have revised our price target to

Rs479 (valuing the stock at 27x its FY2014E earnings of

Rs17.7). However, with a limited upside from the current

level we maintain our Hold recommendation on the stock.

At the current market price the stock is trading at 31.3x

its FY2013E EPS of Rs15.2 and 26.8x its FY2014E EPS of

Rs17.7.

Valuations


Net sales (Rs cr) 17764.3 19691.0 22987.7 27006.7 31485.0

Net profit (Rs cr) 2108.2 2134.4 2712.5 3289.3 3832.0

Y-o-Y growth % - 1.2 27.1 21.3 16.5

OPM (%) 14.5 12.1 13.2 13.5 13.6

EPS (Rs) 9.7 9.9 12.5 15.2 17.7

PER (x) 49.3 48.2 37.9 31.3 26.8

P/BV (Rs) 38.9 37.6 28.0 19.8 14.2

EV/EBIDTA (x) 39.1 42.0 32.5 27.1 22.6

RoCE (%) 103.5 100.6 108.8 95.8 79.6

RoNW (%) 87.7 79.0 84.6 74.1 61.5

One year forward PE (x)

One year forward PE band

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Company details

Price chart


Price performance

(%) 1m 3m 6m 12m

Absolute 1.2 9.9 7.9 -23.9

Relative 1.4 10.1 5.7 -17.0to Sensex

Larsen & Toubro Evergreen

Stock Update

Price target revised to Rs1,584 Buy; CMP: Rs1,355

Price target: Rs1,584




BSE code: 500510

NSE code: LT

Sharekhan code: LT


Result highlights

� Results exceed expectations; forex loss hurts margins: Larsen and Toubro

(L&T)’s Q1FY2013 results were better than expected mainly on account of a

robust performance by its engineering and construction (E&C) division and a

higher other income. However, the good operating performance was shadowed

by a foreign exchange (forex) loss of Rs267 crore. The order inflow registered a

year-on-year (Y-o-Y) rise of 21% to Rs19,594 crore, led by the spill-over of the

delayed orders from FY2012. The company has maintained its guidance of a 15-

20% growth in both revenues and order inflow for FY2013.

� Order inflow boosted by spill over from FY2012: Of the total order intake of

Rs19,594 crore, about Rs5,000 crore (~25% of total intake) is attributable to

spillovers from the previous quarter; excluding which the order inflow for Q1

would show a de-growth of 10% on a yearly basis. The share of slow moving

orders in the order book has risen to 10% since FY2012. The current order book

stands at Rs1,53,095 crore (up 12% YoY and 5% quarter on quarter [QoQ]). The

majority of the orders were received from the private players in the

transportation, and building and factory segments. Going forward, the company

expects good traction from the new markets like West Asia and South-East Asia.

� Cautious in taking BOT projects: The management indicated that they would

be cautious in taking fresh build-operate-transfer (BOT) orders as their prime

focus now in executing current projects on hand and want to keep equity

Results (Rs cr)

Particulars Q1FY12 Q1FY13 YoY %

Net sales 9,482 11,955 26

Total expenditure 8,334 10,868 30

Operating profits 1,148 1,087 -5

Other income 270 606 125

PBIDT 1,418 1,693 19

Interest 157 228 45

PBDT 1,261 1,464 16

Depreciation 168 192 14

PBT 1,093 1,273 16

Tax 347 370 7

Adjusted PAT 746 902 21

Extraordinary items (38)

Reported PAT 746 864 16

Margins (%)

OPM 12.1 9.1

PATM 7.9 7.5

Tax rate 31.7 29.1


DIIs38%

Foreign14%

Others48%

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investment requirement under check. They have not

mentioned of any new projects in order inflows

expected in FY2013.

� Estimates marginally upgraded: In view of robust

execution and order inflow in Q1FY2013 along with

spectacular performance of “others” segment (mainly

integrated engineering services) we have upgraded our

earnings estimates by 4-5% for FY2013 and FY2014.

We expect the company’s stand-alone earnings to grow

at a compounded annual growth rate (CAGR) of 9%

over the next two years. Our revised consolidated

earnings per share (EPS) estimate stands at Rs97.9 and

Rs106.5 for FY2013 and FY2014 respectively. Its

overseas business (exports) has increased to 17% this

quarter from the past level of 11-12%, led by sound

execution of orders bagged in FY2012. With such

increasing contribution of its overseas business, we

feel that the impact of fluctuations in foreign

currencies on its performance could become more

unpredictable in the coming quarters.

� Price target revised to Rs1,584: While the company

reported overall robust results for the quarter, the

achievement of yearly order inflow guidance would

be highly subjective to an uptick in infrastructure

development activities in the country and in the Middle

East region. Moreover, excluding BOT projects might

limit the growth in order inflow, especially in the public

private partnership (PPP) projects. At the current

market price the stock is trading at 12.7x its FY2014

consolidated estimates. Our sum-of–the-parts (SOTP)

based price target stands revised upwards to Rs1,584

on account of revised estimate of the standalone

business. We continue to believe that L&T is the best

proxy play on India’s infrastructure growth theme and

hence maintain our Buy rating on the stock.

Valuation (standalone)

Particulars FY11 FY12E FY13E FY14E

Net sales (Rs cr) 44,295.2 53,737.8 61,822.9 69,545.3

Net profit (Rs cr) 3,404.4 4,412.4 4,785.4 5,232.0

EPS (Rs) 55.9 72.5 78.6 85.9

YoY growth (%) 12.2 29.6 8.5 9.3

PER (x) 24.2 18.7 17.2 15.8

P/B (x) 3.8 3.3 2.9 2.5

EV/EBIDTA (x) 13.0 11.9 10.6 9.3

RoCE (%) 20.9 22.4 21.9 21.4

RoNW (%) 17.0 18.8 17.7 17.0

Result highlights and analysis

� Stand-alone sales up 26%: L&T has reported a strong

rise of 26% in its revenues (stand-alone) for Q1FY2013.

The revenue growth was higher than our expectation

of a 13% Y-o-Y growth. This was mainly on account of

strong execution in the engineering and construction

(E&C) segment, which reported a 30% growth in

revenues. The electrical and electronics (E&E) division

reported a subdued 2% Y-o-Y growth in revenues while

the machinery and industrial product (MIP) division

disappointed with a 17% Y-o-Y fall in revenues. The

“others” segment reported a stunning 82% growth Y-

o-Y driven by the integrated engineering business.

SOTP valuation

Particulars Remarks Value (Rs cr) Per share

L&T’s core business At 14x FY2014E estimates 73,248.1 1,196

Subsidiaries

L&T Infotech At 10x FY2013earnings 5,144.8 84

L&T Finance Holdings--82.6% stake At 1.5x FY2012 Book Value 5891.5 96.2

IDPL At 1.5x equity invested 9,000.0 147

Other subsidiaries At Book Value 1,672.2 27

Associates and others 2,021 33

Total subsidiary valuation 23,729.2 387

Fair value 96,977.2 1,584

Robust growth in ‘‘others’’ segment in recent quarters

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Contribution to PBIT (%)- LHS Contribution to revenue (%)- RHS


� OPM marred by forex loss: The reported operating

profit margin (OPM) stood at 9.1%, much lower than

our expectation of 11.5%. But it included a one-time

foreign exchange (forex) related marked-to-market

(MTM) provision of Rs267 crore (Rs160 crore on

unhedged foreign currency loans) and Rs100 crore for

business related exposure like receivables, payables

as against a gain of Rs35 crore reported in Q1FY2012.

Adjusting for the same, the margin at 11.3% was largely

in line with our expectation for Q1FY2013. The

company maintained its margin guidance at FY2012

level with 50 basis points movement either side in

FY2013 on account of volatility in the input cost, mainly

metal prices.

Expenditure break-up (Rs cr)

Particulars Q1FY12 Q1FY13 YoY (%)

Purchase of finished goods 549.3 501.7 -9

Raw material consumed 2,196.1 3,720.1 69

Stock adjustment (293.7) (511.5) 74

Sub-contracting charges 1,906.9 2,490.5 31

Construction materials 2,023.0 2,089.1 3

Other manufacturing / 923.2 1,062.4 1

Operating expenses

Total material cost 7,304.9 9,352.3 28

As a % of sales 77.0 78.2

Employee expenses 747.9 947.4 27


Selling & administrative expenses 280.9 568.7 102


Total expenditure 8,334 10,868 30

� Other income and lower tax rate aid PAT growth: A

healthy other income, which doubled to Rs606 crore

led by higher treasury gains and dividends from

subsidiaries and associates (Rs292 crore), and a lower

tax rate of 29.1% boosted the adjusted net profit

(including forex losses) to Rs902 crore. This is a Y-o-Y

increase of 21% and higher than our as well as the

Street’s expectations. There was an exceptional item

(expense) of Rs38.3 crore pertaining to the

compensation paid under a voluntary retirement

scheme. The company is in the process of gradually

shifting its manufacturing activities from the high cost

region-Mumbai to its low-cost units in Ahmadnagar and

Baroda. This has led to an increase in expenses towards

voluntary retirement scheme (VRS) for employees.

� Order inflow boosted by spill-over from FY2012: Of

the total order intake of Rs19,594 crore, about Rs5,000

crore (~25% of total intake) is attributable to spill-

overs from the previous quarter; excluding which the

order inflow for Q1 would show a de-growth of 10% on

a yearly basis. The share of slow moving orders in the

order book has risen to 10% since FY2012. The current

order book stands at Rs1,53,095 crore (up 12% YoY and

5% QoQ). In Q1, the company saw better ordering from

the infrastructure space (up 16% YoY) including

transportation and buildings and factories construction,

which contributed 65% to the overall order intake. Of

the total order book, ~11% comprises of overseas

orders, primarily driven by a thrust in orders from the

Middle East region (up 69% YoY). However, the near-

term outlook for the domestic power sector remains

muted, indicated by a 2% fall in order backlog from

this sector as the ordering environment still faces

deferral of award decisions. The orders from the recent

deal signed by L&T with the Mazgaon Dock for the

manufacture of equipments in the defence sector, is

likely to go to the company’s subsidiary, L&T

Shipbuilding. Going forward, the company expects good

traction from the domestic infrastructure and

hydrocarbon segment and the overseas markets like

West Asia and South-East Asia.

Sector-wise order inflow trend- Infrastructure orders shone


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� Debt increased further: During the quarter, the total

debt liability of the company increased by 15% QoQ to

Rs11,373 crore, a majority of which was due to

additional short term loans taken by the company (up

71% QoQ) showing a stretch in its working capital cycle.

The average cost of debt in Q1 was 8.5%.

Key subsidiaries’ performance

L&T Infotech registered a top line growth of 19% in

Q1FY2013, led by growth across verticals and geographies.

The profit after tax (PAT) grew by 39% YoY for the same

period boosted by the rupee’s depreciation. The

performance of its public-listed financial service business-

L&T Finance Holdings has also been robust with a 37% YoY

growth in loans and advances and 25% YoY growth in net

profits.

Performance of L&T Infotech

Particulars Q1FY12 Q1FY13 YoY %

Revenues (Rs cr) 738 877 19

PAT (Rs cr) 95 132 39

PAT Margin (%) 12.9 15.1

Valuation (consolidated)


Net sales (Rs cr) 52,089.1 66,832.5 71,396.2 78,890.2

Net profit (Rs cr) 3,920.9 5,306.8 5,994.6 6,523.7

EPS (Rs) 64.5 86.7 97.9 106.5

Y-o-Y growth (%) -44.5 34.3 13.0 8.8

PER (x) 21.0 15.6 13.8 12.7

P/B (x) 3.3 2.8 2.4 2.1

EV/EBIDTA (x) 13.2 9.3 8.5 8.0

RoCE (%) 12.9 12.8 12.9 12.3

RoNW (%) 15.7 18.0 17.5 16.5




Company details

Price chart


Price performance

(%) 1m 3m 6m 12m

Absolute 5.7 -1.7 17.1 -3.6

Relative 5.9 -1.5 14.7 5.2to Sensex

Torrent Pharmaceuticals Ugly Duckling

Stock Update

Strong performance; forex loss spoils the show Buy; CMP: Rs662

Price target: Rs760



NSE volume: 44,304(no. of shares)

BSE code: 500420

NSE code: TORNTPHARM

Sharekhan code: TORNTPHARM


Result highlights

� Q1FY2013 results in line with expectations: During Q1FY2013 the net sales of

Torrent Pharmaceuticals (Torrent) grew by 20.4% year on year (YoY) to Rs736

crore on the back of a 33% year-on-year (Y-o-Y) rise in the international business

and a 13% Y-o-Y increase in the domestic formulation business. The operating

profit margin (OPM) excluding the foreign exchange (forex) loss was 82 basis

points higher YoY at 20.3%. Moreover, the other operating income jumped by

179% YoY to Rs31.2 crore, which included Rs15 crore of non-recurring revenues.

This led the profit before tax (PBT) to jump by 48.3% YoY to Rs165 crore. However,

the profit after tax (PAT) remained flat at Rs102 crore mainly due to a forex

loss of Rs24.7 crore. Excluding the forex loss the PAT would grow stronger by

53.4% to Rs127 crore. The revenues and profit are largely in line with our

expectations.

� Better rupee realisation and new launches in key markets drive growth:

During the quarter, the revenues from the USA jumped by 88% YoY to Rs78.9

crore while the revenues from Brazil, which witnessed three product launches

during the quarter, recorded a 26% growth YoY (from a high base due to the

spill-over effects in Q1FY2012) to Rs135.5 crore. The revenue growth in the

international market can partly be attributed to a 15% better rupee realisation

(Rs55/dollar in Q1FY2013 vs Rs47-48/dollar in Q1FY2012). However, new launches

in the US and emerging markets also played a vital role in driving the strong

revenue growth.

Results (Rs cr)


Net sales 736 611 20.4 2594.4 2122.0 22.3

Expenditure 586 492 19.2 2153.3 1817.3 18.5

Operating profit 149 119 25.4 441.1 304.7 44.8

Other operating income 31.3 11.2 179.3 101.5 82.5 23.0

Other income 14 11 22.2 44.5 8.1 450.2

EBITDA 194.7 142 37.4 485.7 312.8 55.3

Interest 9 10 (7.8) 39.45 12.06 227.1

Depreciation 20 20 (0.3) 81.7 62.6 30.6

PBT 165 111 48.3 364 238 53.0

Taxes 37 29 30.1 72.3 72.5 (0.3)

EO/forex loss (gains) (24.7) 20.0 -107.4 27.9

Adj. PAT 127 83 53.4 391.4 248.2 57.7

Reported PAT 102 102.5 (0.7) 284.0 270.2 5.1

EPS 15.0 9.8 53.4 46.3 29.3 57.7

Margins (%)

OPM 20.3 19.5 17.0 14.4

EBIDTA 26.5 23.2 18.7 14.7

PATM 17.2 13.5 15.1 11.7

Tax 22.6 25.8 19.8 30.4

Promoters72%

Foreign5%

Institutions12%

Public & others

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� We maintain our estimates, price target and

recommendation: The Q1FY2013 performance has

been in line with our expectations. Therefore, we

maintain our estimates for FY2013 and FY2014. We

maintain our Buy recommendation with the old price

target of Rs760 (implies 13x average earnings for

FY2013-14).

Strong revenue from international business powers the

growth: Torrent recorded a 20.4% Y-o-Y rise in net sales

to Rs735.6 crore from the pharmaceutical business and a

sharp 179% rise in the other operating income to Rs31.3

crore during Q1FY2013. The other operating income

included Rs15 crore as a milestone-based licencing

income, which is non-recurring in nature. Excluding the

non-recurring revenue, the other operating income

jumped by 45.5% YoY to Rs16.3 crore.

The growth during the quarter was mainly driven by the

international business, which enjoyed the benefits of a

favourable currency and a few new launches in the key

geographies.

Indian formulation business picks up but underperforms

industry: The revenues from the Indian formulation

business recorded a 13% Y-o-Y rise to Rs277.8 crore during

the quarter. The growth was better than that seen in the

previous five quarters. However, it was still lower than

the 15.3% growth in the addressable market. The company

is focusing more on expanding the revenues from the

products that have been launched already.

Contract manufacturing business declines on low

offtake: During the quarter, the revenues from the

contract manufacturing business declined by 20% YoY to

Rs64 crore mainly due to a low offtake from one of its

clients. However, the growth is expected to recover in

the coming quarters.

Trend in India formualation

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The company launched three new products in Brazil during

the quarter. This coupled with a favourable currency led

the revenue from the Brazilian market to go up by 26%

YoY to Rs135.5 crore. In Q1FY2012, the company had the

spill-over of sales from the previous quarter. Therefore,

the high base effect played a role in the Y-o-Y comparison

during current quarter. Discounting the spill-over

component of the sales, the Y-o-Y growth would have been

87% during the quarter.

With three products launched during Q1FY2013, the

company has now 34 products in the Brazilian market.

Robust growth in US market; turnaround in profits: The

revenues from the US market surged by 88% YoY to Rs783.9

crore. The growth was contributed by a 15% higher

realisation in the rupee against the dollar. Currently,

Torrent has 38 abbreviated new drug applications (ANDAs)

approved of which 19 are actively marketed. Besides, it

has 26 ANDAs pending approvals and 18 ANDAs under

development. During the quarter, the US business turned

profitable again.

Trend in revenue from CRAMS

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Heumann (Germany) continues to face pricing pressure:

During Q1FY2013, the revenues from Heumann (Germany)

declined by 6% YoY in rupee terms to Rs78.3 crore and by

9% in euro terms. The decline in the revenue can mainly

be attributed to the pricing pressure faced by the tender-

based business in Germany.

Revenue break-up (Rs cr)


India 345.7 326.1 6 1218 1059 15

Domestic form. 277.8 244.8 13 909 842 8

Contract mfg. 63.9 79.4 (20) 296 214 38

Others 4.0 1.9 111 13 4 260

International 421.2 316.0 33 1478 1063 39

Heumann (Germany) 78.3 83.4 (6) 349 297 18

Brazil + Mexico 140.3 110.2 27 493 346 42

Russia/CIS 21.3 11.3 88 70 58 21

Europe 53.2 38.3 39 193 125 54

Rest of world 49.2 30.9 59 157 128 23

USA 78.9 41.9 88 216 109 99

Gross sales 766.9 653.6 17 2696.1 2121.9 27

The other markets like the rest of Europe and the emerging

markets also recorded strong revenues during the quarter

on the back of geographical expansions and a favourable

currency.

Operating profit remains virtually flat: The OPM of the

company improved by 82 basis points YoY to 20.3% mainly

due to an improvement in the raw material cost, which

reduced by 216 basis points YoY to 29.9% of the net sales.

However, the employee costs and other expenses

increased during the quarter which resulted in a marginal

improvement in the OPM during the quarter.

Cost analysis (RS cr)

Particulars Q1 Q1 YoY FY FY YoY

FY13 FY12 % 12 11 %

Adj. material cost 220 196 12.3 863 697 23.9

% of sales 29.9 32.1 33.3 32.8

Employee expenses 153 126 21.6 534 390 37.0

% of sales 20.8 20.6 20.6 18.4

Other expenses 213 170 25.3 756 731 3.4

% of sales 29.0 27.8 29.2 34.5

Total 586 492 2153 1817

Forex loss spoils the show; ex forex net profit jumped

by 53%: Despite the impressive growth in the revenues

and an improvement in the OPM, the net profit remained

flat at Rs102 crore. This was mainly due to a forex loss of

Rs24.7 crore during the quarter against a forex gain of

Rs3 crore in the previous quarter. Excluding the forex gains

and the non-recurring items, the net profit would grow

by a strong 53% YoY.

The company has hedged all export revenues (net

exposure) at Rs53.50 per dollar for the next six months.

Therefore, the forex movement would be crucial for the

company.

Outlook: As expected, the company delivered a strong

performance in Q1FY2013 on most fronts. Although the

benefits of the depreciation in the local currency against

the other major international currencies contributed to

the performance, yet the strong volume growth on the

back of its key product launches is appreciable. The

company maintains its pace of product filing in most of

the geographies like the USA, Brazil and the emerging

markets which will drive its growth. It has hinted that

supply deals with AstraZeneca may take off in FY2014

which would be ramped up subsequently. However,

inconsistent revenues from the contract manufacturing

operations and volatility in the forex market are the key

causes for concerns. We continue to have a positive

outlook on the company’s growth prospects. We expect a

17% revenue compounded annual growth rate (CAGR) and

an 18% profit CAGR over FY2012-14E.

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Key growth drivers

Markets Growth strategies

Brazil 25-30 new products to be launched by

FY2014-15

USA 16 ANDAs and 8 DMFs under development;

26 ANDA pending approvals

Europe 30 new products to be launched by FY2014-

15; field force expansion

Heumann (Germany) New tenders; entry into new therapy and

shifting of manufacturing base to India

RoW Entry into newer geographies and increased

field force

Mexico Portfolio to grow to 30 products in 4 years

with field force of 200 people

Maintain price target of Rs760 and Buy

recommendation: We maintain our estimates for FY2013

and FY2014. We also maintain our price target of Rs760

(which implies 13x average earnings for FY2013-14) and

Buy recommendation. The stock is currently trading at

11x average earnings for FY2013 and FY2014.

Valuation


Net sales 1832.9 2122.0 2594.4 3098.9 3544.8

Adjusted net profit 219.2 248.2 391.4 436.7 545.1

Shares in issue (cr) 8.5 8.5 8.5 8.5 8.5

EPS (Rs) 25.9 29.3 46.3 51.6 64.4

PER (x) 25.5 22.5 14.3 12.8 10.3

EV/EBIDTA (x) 16.6 18.7 12.2 10.2 7.8

Book value (Rs/share) 98.2 120.8 141.1 190.8 248.4

P/BV (x) 6.7 5.5 4.7 3.5 2.7

Mcap/sales 3.1 2.6 2.2 1.8 1.6

RoCE (%) 27.1 21.8 30.1 30.9 31.3

RoNW (%) 29.6 26.8 35.3 31.1 29.3




Company details

Price chart


Price performance

(%) 1m 3m 6m 12m

Absolute -7.5 -24.9 -15.5 -35.8

Relative -7.3 -24.8 -17.1 -30.0to Sensex

Polaris Financial Technology Ugly Duckling

Stock Update

Price target revised to Rs163 Buy; CMP: Rs114

Price target: Rs163




BSE code: 532254

NSE code: POLARIS

Sharekhan code: POLARIS


Result highlights

� Revenues in line: In Q1FY2013, Polaris Financial Technology (Polaris)’s revenues

were up 3.9% quarter on quarter (QoQ) to $107.6 million (in line with our

expectations of $106.7 million). On a constant currency basis, the revenues

were up 5.6% QoQ to $109.3 million. IT services’ (including BPO) revenues were

up 3.2% QoQ to $83.1 million, whereas Intellect revenues were up 6.4% QoQ to

$24.5 million.

� Margins disappoint: The margins continued to disappoint; despite rupee benefits

for the quarter and absence of wage hikes. The EBITDA margins declined by 20

basis points to 12.2% in the quarter. Adjusting for hedging loss of Rs12.4 crore

in the revenue line (company has adopted Accounting Standard 30 with effect

from April 1, 2012), the EBITDA margins look more decent at 14.1%. Going

forward, the management expects margins to move in a narrow range in the

coming quarters as currency benefits would be offset by wage hikes and

incremental research and development (R&D) investments in the products space.

Results (Rs cr)

Particulars Q1FY13 Q1FY12 Q4FY12 YoY % QoQ %

USD/INR 52.9 44.7 50.3 18.4 5.3

Revenues 107.6 100.7 103.5 6.9 3.9

Net sales 569.3 450.2 520.3 26.5 9.4

Direct costs 394.7 308.5 356.7 27.9 10.7

Gross profit 174.6 141.7 163.6 23.3 6.7

SG&A 105.3 84.0 98.9 25.3 6.4

EBITDA 69.3 57.6 64.7 20.3 7.2

Depreciation & amortization 12.9 9.6 13.4 35.1 -3.8

EBIT 56.4 48.1 51.3 17.4 10.0

Other Income 13.6 8.0 21.6 70.2 -36.8

Forex gain/(loss) 8.0 5.6 -2.1 42.5 -471.6

Interest 0.8 0.2 0.6 231.9 17.3

PBT 77.3 61.5 70.1 25.7 10.3

Tax provision 16.3 16.9 9.0 -3.8 81.2

PAT 61.0 44.5 61.1 37.0 -0.1

Minority interest -0.2 0.0 -0.1

Net profit 61.2 44.5 61.1 37.4 0.0

EO 10.0 0.0 22.5

Net profit (Adj) 51.2 44.5 38.6 14.9 32.5

EPS (Rs) 6.2 4.5 6.1

EPS Adj. (Rs) 5.1 4.5 3.9

Margin (%)

GPM 30.7 31.5 31.4

EBITDA 12.2 12.8 12.4

EBIT 9.9 10.7 9.9

NPM 10.7 9.9 11.8

Tax rate 21.1 27.5 12.8

Public & Others35%

Promoters29%


4%

Institutions12%

Foreign20%

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� Net income in line, includes profit on real estate sale:

The adjusted net income for the quarter excluding one

offs stood at Rs51.2 crore, up by 32.5% QoQ. However,

the reported net income including profit on sale of real

estate of Rs10 crore and one offs of Rs22.5 crore in

Q4FY2012 (pertaining to sale of real estate of Rs15 crore

and tax benefit on merger of Optimus business of Rs7.5

crore) remained flat at Rs61.2 crore.

� Margins to remain in narrow range due to

investments in R&D and hedging losses in revenues

line: Polaris’ management indicates at stable EBITDA

margins for the coming quarters and for FY2013 despite

rupee benefits. The lower margins performance could

largely be attributed to hedging losses in the revenues

line (revenue of around $25 million hedged at around

Rs50.34 for the next eight quarters). Thus there will

be around Rs11-12 crore of hedging loss per quarter in

the revenue line. This coupled with incremental

investments of Rs95 crore towards product R&D for

FY2013E would restrict any meaningful margin

improvement in the coming quarters.

� Valuation and view: We reset our currency estimates

to Rs53.2 and Rs53.1 and also tweak our margins

estimates to 12.6% and 13.2% for FY2013 and FY2014

respectively. Consequently we have lowered our

earnings estimates by 5.2% and 8.6% respectively for

FY2013 and FY2014. We continue to remain optimistic

on Polaris’ Intellect side of the business. However

macro uncertainties might pose some hindrance in the

medium term. The stock has corrected close to 24% in

the last three months and at the current price of Rs114,

it is available at attractive valuation of 4.7x FY2013

and 4.2x FY2014 earnings estimates. We maintain our

Buy recommendation on the stock with a revised price

target of Rs163.

Focus on product led services business: As per Polaris’

management, the services outsourcing business has

reached a saturation stage and differentiation would be

the key for winning deals. The management expects that

with its product led services business, the company would

be able to garner incremental market share in the global

market place. The management is targeting a revenue

mix between services and products of 70:30 from the

current revenue mix of 77:23. Currently, the management

is looking at a sales funnel of $600 - 681 million. The

company is pursuing atleast six large opportunities across

the globe. Added to this, there are about 40 opportunities

in the US and about 25 in Europe. The company has

earmarked three segments for investment and growth,

core banking and credit cards; treasury and capital

markets, and insurance. The company would be investing

in these segments in FY2013 with results expected from

FY2014 onwards.

Operating matrix


Revenues 107.6 100.7 103.5 6.9 3.9

Intellect revenues 24.5 23.5 23.0 4.2 6.4

Services revenues 82.2 76.4 79.8 7.6 3.0

BPO 0.9 0.7 0.7 25.7 29.4

Delivery mix (%)

Onsite 43.1 43.3 42.2 6.4 6.2

Offshore 56.9 56.7 57.8 7.2 2.3

Client contribution (%)

Top 5 clients 39.3 40.8 39.0 2.9 4.8

Top 10 clients 52.7 54.8 52.8 2.8 3.8

Others 47.3 45.4 47.2 11.3 4.1

Employees (nos) 13718 11429 12886 2289 832

Utilisation (%) 80.5 81.0 81.0

DSO days 75 52 63

Client wins 14 15 17

Active clients 267 246 266

Intellect business matrix


Geographies

Americas 17.0 15.0 18.0 18.1 0.5

Europe 27.0 24.0 25.0 17.2 14.9

Rest of World 56.0 61.0 57.0 -4.3 4.6

Service lines

License 13.3 21.2 7.8 -34.6 81.5

Professional services 49.3 46.5 48.4 10.5 8.4

Support & maintenance 36.2 27.6 40.6 36.7 -5.1

System integration 1.2 4.7 3.2 -73.4 -60.1

Client wins 9 11 11

Services business mix


Geographies

Americas 53.0 53.0 52.0 7.6 5.0

Europe 23.0 25.0 25.0 -1.0 -5.2

Rest of world 24.0 22.0 23.0 17.3 7.5

Service lines

Application 38.5 35.0 38.1 18.3 4.1

maintenance

Application 39.2 44.0 40.7 -4.2 -0.8

development

Testing 20.7 19.2 19.7 16.0 8.2

Others 1.6 1.8 1.5 -4.4 9.9

Client wins 5 4 6


Other highlights:

� Polaris added 14 new clients in the quarter taking the

total active clients to 267. Of the new client wins, 9

were in Intellect and 5 in the services business.

� During Q1FY2013, Polaris made a net employee

addition of 832 people. The total headcount at the

end of Q1FY2013 stood at 13,718 employees. The

utilisation rate was down marginally to 80.5% on a

sequential basis.

� The DSO days increased to 75 days from 63 days in

Q4FY2012. The spike in the quarter can mainly be

attributable to delay in two clients on account of

internal operational errors. The company is taking steps

to reduce the DSO days.

� The cash and cash equivalents at the end of the quarter

stood at Rs329 crore down from Rs390 crore at the

end of the previous quarter. The drop in the cash was

mainly due to a capital expenditure of Rs17 crore,

Rs20 crore towards funding of employee trust and Rs73

crore towards employee annual payments.

� The company has hedges worth $193 million spread

across FY2013 to FY2015. These comprise of $75 million

at an average rate of Rs49.32 for FY2013, $100 million

at Rs50.24 for FY2014 and $18 million at Rs55.62 for

FY2015.

Valuation and view:

We reset our currency estimates to Rs53.2 and Rs53.1

and also tweak our margins estimates to 12.6% and 13.2%

for FY2013 and FY2014 respectively. Consequently we have

lowered our earnings estimates by 5.2% and 8.6%

respectively for FY2013 and FY2014. We continue to

remain optimistic on Polaris’ Intellect side of the business.

However macro uncertainties might pose some hindrance

in the medium term. The stock has corrected close to

24% in the last three months and at the current price of

Rs114, it is available at attractive valuation of 4.7x FY2013

and 4.2x FY2014 earnings estimates. We maintain our Buy

recommendation on the stock with a revised price target

of Rs163.

Valuation


Total revenue (Rs cr) 1586.3 2052.7 2443.3 2731.2

EBITDA margin (%) 13.5 14.2 12.6 13.2

Net profit ((Rs cr) 202.5 220.7 244.4 268.4

EPS (Rs) 20.4 22.2 24.6 27.1

P/E (x) 5.6 5.2 4.7 4.2

EV/EBITDA (x) 2.9 2.6 2.3 1.6

RoE (%) 20.1 17.2 18.3 18.4

RoCE (%) 23.8 23.6 23.4 23.3

Dividend yield (%) 3.9 4.4 4.8 5.3


One-year forward PE band

18x

15x

12x

9x

6x

3x

0.050.0

100.0150.0

200.0250.0

300.0350.0

400.0450.0

500.0

Jul-0

5N

ov-0

5M

ar-0

6Ju

l-06

Nov

-06

Mar

-07

Jul-0

7N

ov-0

7M

ar-0

8Ju

l-08

Nov

-08

Mar

-09

Jul-0

9N

ov-0

9M

ar-1

0Ju

l-10

Nov

-10

Mar

-11

Jul-1

1N

ov-1

1M

ar-1

2Ju

l-12

Source: Bloomberg



investor’s eye sector update

Telecommunications

Sector Update

Weak reported net adds; Bharti continues to lead

In June 2012 the GSM operators across India (excludingReliance Communications [RCom] and TataTelecommunications [Tata Tele]) added 4.64 million SIMcards, taking the overall base to approximately 677.3million. That is an increase of 0.7% over May 2012’s base.On the net additions front, the June net additions (ofabout 4.64 million) reported a 36.1% decline than thatreported in the previous month.

After May witnessing a robust growth in net adds, theindustry subscriber addition dipped again in June led byweak performance from the new players. The overallsubscriber base grew by a mere 0.7% month on month(MoM; on a restated basis) taking the aggregate GSMsubscriber base across India (excluding RCom and TataTele) to 677.3 million.

Bharti Airtel added over 2 million subscribers; contin-

ues to lead the net addition trend

In terms of players, Bharti Airtel (Bharti) added 2 millionsubscribers, in line with its last three month run rate. Itregistered a flat growth.

In the last quarter (Q4FY2012 which included January,February and March) Bharti had come back very strongly,in terms of subscribers as well as traffic growth, whilethe revenue market share had slipped by 50 basis points.With subscriber additions in April, May and June beingstrong, we believe that the traffic growth momentumwould sustain while the revenue market share is likely to

increase.

Idea net down 31.7% MoM; Vodafone reported a 1.5%

growth for the period

For the month under review Idea Cellular (Idea)’s net

additions were down 31.7% (from 1.76 million in May to

1.2 million). This comes on the back of a decent 18%

growth witnessed in May. Idea continues to gain revenue

market share. As per the latest release by the Telecom

Regulatory Authority of India (TRAI), Idea commands a

15% share in the total telecom revenue space. The impact

of low subscriber addition and a build up of competitive

pressure on tariffs was visible in Idea’s Q1FY2013

performance. On the other hand, Vodafone India

(Vodafone) reported 1.22 million net adds (+1.5% MoM).

Also, the traffic growth momentum continued to be strong

for Vodafone as is visible in its quarterly performance

report.

New players - Uninor, Aircel witness slowdown

New players like Uninor and Aircel posted a dismal

performance for the month, wherein Uninor’s net adds

fell to less than one third its usual run rate (from 1.52

million net adds in May to 0.5 million in June), while Aircel

saw a 40% decline on a M-o-M basis.

View: The Indian telecommunications space is plagued

with a myriad of policy issues and regulatory uncertainty.

We believe that constant media news on the sector with

regards issues like 2G spectrum auction, base pricing,

spectrum refarming, excess payment of spectrum charges

beyond 6.2 MHz and the new 4G spectrum are weighing

on the sector. Thus telecom stocks could be under pressure

in the near term. However, we remain positive on Bharti

from a long-term perspective in view of its valuation. We

maintain our Buy recommendation and price target of

Rs362 on Bharti.

GSM subscriber base

(in million) Total subscribers Net adds Share in net adds %May June Growth % May June MoM growth % May June

Bharti 185.3 187.3 1.1 2.01 2.00 -0.4 27.6 43.1

Vodafone 152.5 153.7 0.8 1.20 1.22 1.5 16.5 26.3

Loop Mobile 3.3 3.2 -3.4 0.48 0.49 0.2 6.7 10.4

BSNL 94.7 94.7 0.0 0.00 - -100.0 0.0 -

Idea 116.0 117.2 1.0 1.76 1.20 -31.7 24.1 25.8

MTNL 3.3 3.2 -3.4 0.01 (0.11) 0.1 (2.4)

Aircel 64.4 64.9 0.8 0.81 0.48 -39.9 11.1 10.4

Uninor 45.1 45.6 1.1 1.52 0.50 -67.1 21.0 10.8

Total Ex Rcom andTata Tele 672.7 677.3 0.7 7.3 4.6 -36.1 100.0 100.0


Idea Cellular

Viewpoint

Displays competitive intensity amid regulatory uncertainty CMP: Rs81

Idea Cellular (Idea)’s Q1FY2013 results were below our as

well as the street’s expectations on the revenue/margin

as well as the earnings front. The key performance

indicators showed a mixed trend. The volume growth came

in at 5.3% quarter on quarter (QoQ), while a strong

competitive environment continued to exert pressure on

the realised rate.

What happened in the quarter gone by?

� Muted top line growth; misses estimates: Idea’s

Q1FY2013 revenue showed a modest 2.5% sequential

growth that was lower than our as well as the street’s

expectations. We expected a 5.2% revenue growth.

The lower revenue growth was on account of pricing

pressure (the average revenue per minute [ARPM] saw

a 2.4% dip on a sequential basis) with no elasticity

(flat minutes of usage on a sequential basis; stood at

379 minutes per user).

� Reported operating profit up 5.8% QoQ; while on an

adjusted basis the same contracted 4.8%: The

leveraging advantage was missing in Idea’s Q1FY2013

performance; prima facie on a reported front though

the operating profit showed an uptick of 5.8% on a Q-

o-Q basis. The same was a result of an exceptional

expense of Rs150 crore booked in Q4FY2012. Adjusting

for the same, the operating profit showed a contraction

of 4.8%; consequently the adjusted margin too

contracted by 200 basis points.

� Earnings miss estimates as well: The net earnings too

missed expectations in line with the miss on revenue

and operating performance fronts. The net earnings

for Q1FY2013 came in at Rs234 crore (-2% QoQ; +32.1%

year on year [YoY]).

Key positives

� Traffic growth +5.3%; sequentially albeit lower than

expectation

� High court approves Spice, Idea amalgamation

� Net Debt/EBITDA at 2.2x

investor’s eye viewpoint

Key negatives

� ARR down 2.4% QoQ: In Q1FY2013 the average

realisation declined (from 42 paise to 41.2 paise;

ie -2.4% QoQ).

� Adjusted VAS share on decline: Though the reported

value added services (VAS) revenue share saw a mild

uptick from 14.3% to 14.5%, from the current quarter

the company has started booking SMS interconnect

charges in VAS. Adjusting for the same the VAS

contribution has contracted.

� Churn level continues to remain sticky

Results (consolidated) (Rs cr)

Particulars Q1FY13 Q1FY12 QoQ % Q4FY12 YoY %

Total revenue 5,504 5,370 2.5 4,521 21.7

Operating profit 1,436 1,357 5.8 1,204 19.2

OPM (%) 26.1 25.3 26.6

Adjusted OPM 1,436 1,507.1 -4.8 1,204 19.2

Adjusted OPM (%) 26.1 28.1 26.6

Depreciation & 832.5 784.4 6.1 702.6 18.5Amortisation

PBIT 603 655 -7.9 501 20.3

Finance & Treasury 267.0 227.5 17.4 246.3 8.4charges (Net)

PBT 336 345 -2.7 255 31.7

Prov. for taxation 101.9 106.3 -4.1 77.8 31.0(Net of MAT credit)

Effective tax rate (%) 30.3 30.8 30.5

PAT 234 239 -2.0 177 32.1

What were the management’s comments?

Competitive intensity in the market place remains high-

The management continued with its earlier stance that

the competitive intensity in the market place continues

to be at an elevated level, and rather than looking at pan

India basis, circle wise competition remains strong with

each circle still having 10-11 operators for subscribers to

choose from.

No call yet taken on loss making circles- In response to

the questioning on future growth and strategy on the loss

making circles (7 circles), and the probability of closing


investor’s eye viewpoint

the same, the management opined that it is still

maintaining its calibrated growth approach for these

circles and would not commit higher capex till it gains

substantial revenue market share in these segments.

Capex guidance maintained at Rs3,500 crore- The

management continued to guide for Rs3,500 crore of

capital expenditure (capex) in FY2013. It further

elucidated that the same would be back ended, that is in

line with the revenue and traffic growth which is generally

higher during festive season.

3G a key performance indicator- As on date, Idea has an

active 3G customer base of 3.1 million subscribers, with

an average usage of 375 megabyte per user per month.

The incremental average revenue per user (ARPU) from

3G subscribers is Rs88. The management confirmed that

the volume has been strong post the price reduction in

3G services.

Keenly watching the regulatory environment- In line

with all the other industry players, Idea too is keenly

watching the moves and the outcomes on the regulatory

front in order to undertake its future course of action

and strategy. The company remains hopeful on the 2G

spectrum pricing issue, wherein it has strongly opposed

the Telecom Regulatory Authority of India (TRAI)’s

recommendation (TRAI has recommended Rs18,000 crore

as a pan India reserve price), and has suggested a lower

reserve price for the same.

Our view- Idea’s Q1FY2013 quarterly performance

displayed strong competitive forces playing on the

industry. The same was visible from the limited elasticity

(2.4% QoQ decline in the realised rate); flat minutes of

usage (MoU) and a 2.5% decline in ARPU. Despite strong

execution capabilities, Idea failed to deliver on margin

expansion. In fact on an adjusted basis, the operating

profit margin (OPM) contracted by 200 basis points on a

sequential basis. Along with a challenging operating

environment, the regulatory risk and ambiguity continue

to plague the sector and Idea in specific. Thus we believe

that the stock’s performance is more likely to be directed

by regulatory moves and despite a decent valuation (at

13x 1 year forward price earning ratio [PER] and 5x EV/

EBITDA) we continue with our neutral stance on the stock.

Valuation (Rs cr)


Revenue 15,438 19,489 23,523 26,947

EBIDTA 3,791 5,092 6,434 7,576

EBIDTA margins (%) 24.6 26.1 27.4 28.1

Net profit 898.7 723.0 1338.6 1945.3

EPS 2.7 2.2 3.945 5.868

P/E 27.9 34.8 19.3 13.0

EV/EBIDTA 10.1 7.5 6.1 5.0

Consensus estimates



Evergreen

GlaxoSmithKline Consumer HealthcareHousing Development Finance CorporationHDFC BankInfosysLarsen & ToubroReliance IndustriesTata Consultancy Services

Emerging Star

Axis Bank (UTI Bank)Cadila HealthcareEros International MediaGateway DistriparksGreaves CottonIL&FS Transportation NetworksIRB Infrastructure DevelopersKalpataru Power TransmissionMax IndiaOpto Circuits IndiaThermaxYes BankZydus Wellness

Apple Green

Aditya Birla NuvoApollo TyresBajaj AutoBajaj FinServBajaj Holdings & InvestmentBank of BarodaBank of IndiaBharat ElectronicsBharat Heavy ElectricalsBharti AirtelCorporation BankCrompton GreavesDivi's LaboratoriesGAIL IndiaGlenmark PharmaceuticalsGodrej Consumer ProductsGrasim IndustriesHCL TechnologiesHindustan UnileverICICI BankIndian Hotels CompanyITCMahindra & MahindraMaricoMaruti Suzuki IndiaLupinOil IndiaPiramal Healthcare (Nicholas Piramal India)PTC IndiaPunj LloydSintex IndustriesState Bank of IndiaTata Global Beverages (Tata Tea)Wipro

Ugly Duckling

Ashok LeylandBajaj Corp

CESC

Deepak Fertilisers & Petrochemicals Corporation

Federal Bank

Gayatri Projects

India Cements

Ipca Laboratories

ISMT

Jaiprakash Associates

Kewal Kiran Clothing

Mcleod Russel India

NIIT Technologies

Orbit Corporation

Polaris Financial Technology

Pratibha Industries

Provogue India

Punjab National Bank

Ratnamani Metals and Tubes

Raymond

Selan Exploration Technology

Sun Pharmaceutical Industries

Torrent Pharmaceuticals

UltraTech Cement

Union Bank of India

United Phosphorus

V-Guard Industries

Vulture’s Pick

Mahindra Lifespace DevelopersOrient Paper and IndustriesTata ChemicalsUnity Infraprojects

Cannonball

Allahabad Bank

Andhra Bank

IDBI Bank

Madras Cements

Shree Cement

Sharekhan Stock Idea

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