Trade advisory services for Today Buy Stock of Hindustan Zinc LTD

Hindustan Zinc LTD : Good gains ahead "BUY" 21th Jan 2014

Hindustan Zinc’s (HZL) Q3FY14 performance was inline to our estimates on the back of healthy zinc sales volumes and higher metal premiums.

Total operating income for Q3FY14 stood at Rs. 3450.1 crore higher by 8.6% YoY but lower by 3.1% QoQ. Total zinc sales in Q3FY14 came in at

196,000 tonne, up 17% YoY and 2% QoQ . Being an integrated & dominant player in the domestic industry with low cost of production, the

company is poised to benefit in the long run. We reaffirm our positive stance on HZL and assign a BUY rating to the stock with a target price of

Rs. 148/-. .................................................. ( Page : 2-4)

HCLTECH : "Retain confidence" "BUY" 17th Jan 2014

HCL tech beats expectations with a sustained momentum in volumes and proved its consistency to maintain its margin at 26% mark; Sales grew

by 2.8% (QoQ) in INR term and 4% (QoQ) in USD term led by 4.6% of growth from Infrastructure services and BPO services. Considering the

increasing discretionary spends across the geographies like US and Europe, we expect healthy earnings performance ahead. At a CMP of Rs

1392, stock trades at 17.5x of FY14E earnings, We retain BUY on the stock and revised our target price from Rs 1194 to Rs1560.

............................................... ( Page : 24-26)

ITC : " Accessing the growth" "BUY" 20th Jan 2014

Strong set of numbers, sales grew by 13.1% (YoY) led by robust sales across its FMCG and Paper and Packaging divisions. Cigarette volume

declined by 2%(YoY) because of price hike by 18% in premium brand. PAT up by 16.3%, YoY. ITC offers the best earnings visibility in the sector

especially when sector peers are confronting multiple challenges. The premium valuations enjoyed by ITC, at the CMP of Rs 325, the stock trades

at 8.2x FY15E P/BV seems justified from a growth point of view. We maintain ” BUY” with a price target of Rs 380.

........................................................................... ( Page : 21-23)

21th Jan, 2014

Edition : 188

IEA-Equity

Strategy

DB CORP : "On Strong Footing" "BUY" 20th Jan 2014

Considering its long-term growth story with favorable earning scenario and leadership position in key market, we are positive on the stock. We

maintain “BUY” view on the stock with the target price of Rs 340. At a CMP of Rs 301, stock trades at 4.1x of FY15E P/BV.

.............................................................. ( Page : 18-20)

FEDERAL BANK : "BUY" 20th Jan 2014

Federal bank’s profitability grew by 9.2% YoY on the back of lower provisions led by improving asset quality and comfortable high provision

coverage ratio. But bank’s operating and financials metrics remained muted, this has resulted of negative growth at operating profit level. We

slightly tweak our book value estimate to Rs.82.2 from earlier of Rs.78. We value bank at Rs.98/share which is 1.2 times of FY14E’s book value

and 8.5 times of forward earnings........................................... ( Page : 13-17)

"BUY" 20th Jan 2014

HDFC Bank’s profit growth of 25% YoY lowers than its previous quarters growth trajectory that it had witnessed but remain very impressive in

challenging macro environment. Bank is well poised in most of operating parameters like CASA ratio of 45%+, higher than industry credit

growth, best asset quality among peers, better utilization of cash in form of higher CAR ratio for further growth, consistent delivered margin

above of 4%. We continue to believe bank would enjoy valuation premium. We value bank at Rs.760/share which is 4 times of one year FY14E’s

book value ...................................... ( Page : 8-12)

TCS :" Strong Fundamentals" "BUY" 20th Jan 2014

TCS witnessed inline set of numbers with 1.5%(QoQ)of consolidated sales growth led by 1.8% volume growth.We continue to believe that TCS

will be star performer in growth sense than other peers. Hence, we are maintaining 18% revenue growth in dollar term for FY14E because of

improved demand environment, while NASSCOM expects 12-14% for the Industry.We maintain" BUY" view on the stock and we revised our

target price from Rs 2360 to Rs 2510. ...................................... ( Page : 5-7)

HDFC Bank

Narnolia Securities Ltd,

India Equity AnalyticsDaliy Fundamental Report on Indian Equities

Hindustan Zinc LTD.

135

148

143

10%

3%

500188

56133 Q3FY14 Performance :5613

6291

1M 1yr YTD

Absolute 4.3 -1.7 -3.4

Rel. to Nifty 0.0 9.2 11.3

3QFY14 2QFY14 1QFY14

Promoters 64.9 64.9 64.9

FII 1.8 1.8 1.5

DII 31.4 31.4 31.5

Others 1.8 1.8 2.1

Investment Concern

Financials : Q3FY14 Y-o-Y % Q-o-Q % Q3FY13 Q2FY14

Net Revenue 3450 8.6 -9.8 3178 3826

EBITDA 1824 22.1 -3.1 1494 1883

Depriciation 210 18.6 12.9 177 186

Tax 305 50.2 20.1 203 254

PAT 1723 6.8 5.1 1613 1640(In Crs)

2

Change from Previous

CMP

Target Price

BUY

Market Data

Average Daily Volume (Nos.)

BSE Code

HINDZINCNSE Symbol

52wk Range H/L

Mkt Capital (Rs Crores)

143/94

Upside

Disruptions in mining due to equipment failures, unexpected maintenance problems ,

non-availability of raw materials of appropriate price, quantity and quality for our energy

requirements, disruptions to or increased cost of transport services or strikes and

industrial actions or disputes.Lower than expected demand by galvanizing industries for

zinc and industrial batteries, car batteries industries for lead would affect the company

estimates.

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

Stock Performance-%

Share Holding Pattern-%

1 yr Forward P/B

Source - Comapany/EastWind Research

Hindustan Zinc’s (HZL) Q3FY14 performance was inline to our estimates on the back of

healthy zinc sales volumes and higher metal premiums. Total operating income for

Q3FY14 stood at Rs. 3450.1 crore higher by 8.6% YoY but lower by 3.1% QoQ. Total zinc

sales in Q3FY14 came in at 196,000 tonne, up 17% YoY and 2% QoQ . The company

realised premium on metal sales amounting to ~US$241/tonne for zinc (Zn) &

~US$305/tonne for lead (Pb) . Lead sales volume for the quarter stood at 23500 tonnes

(lower by 24% QoQ and 22% YoY), while silver sales volumes stood at 78500 kg (lower by

31% YoY and 14% QoQ) . EBITDA came in at Rs.1823.8 crore and inline to our estimate of

Rs. 1829.6 crore. Subsequently, net profit stood at Rs. 1722.7 crore . Being an integrated

& dominant player in the domestic industry with low cost of production, the company is

poised to benefit in the long run. We reaffirm our positive stance on HZL and assign a

BUY rating to the stock with a target price of Rs. 148/-.

Nifty

Good gains ahead

The attorney-general’s clearance for the Centre’s proposal to divest its residual stake in

Hindustan Zinc Ltd (HZL) lifted the Street’s mood. As the government holds 29.5 per cent

(minority) stake in HZL, the attorney-general said HZL was no longer a public sector

company. With the majority 64.92 per cent stake with Vedanta, the group will be eyeing

the government’s stake as well as the remaining 5.58 per cent owned by others.

HZL’s revenues are directly linked with the global market for products essentially, Zinc

and Lead which are priced with reference to LME prices and Silver to LBMA (London

Bullion Metal Association) prices.

Previous Target Price

A reason to wait and watch , is since the government is looking at auction, how much will

Vedanta be able to garner and what price it is willing to pay is not known. In the past it

has said it wanted majority control when Vedanta had earlier offered Rs 149 a share (13.7

per cent more than the current price). If this is any benchmark, investors stand to gain.

Result Update

"BUY"21st Jan' 14


0

50

100

150

200

250

300

350

400

450

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Lower Production Guideline LME Price/Ton

From the Management Corner :

Outlook and valuation: LME Price/Ton

LME Price/Ton

FY11 FY12 FY13 FY14E

9912 11405 12700 13577

979 1543 2032 1787

10891 12948 14732 15364

1023 1228 1070 1291

492 568 696 707

4417 5336 6218 6484

5496 6069 6482 7093

475 611 647 718

19 14 29 37

1059 1419 921 1097

4900 5526 6899 6967

22.0 21.0 21.0 19.0

3

HZL has marginally downward revised its mined metal production guidance for FY14

from 950,000 tonnes earlier to 900,000 tonnes. This reflects slower-than-expected

ramp up of underground mining projects and some changes in mining sequence

wherein preference has been given to primary mine development during this period.

With a cash-rich balance sheet and strong visibility over production growth of zinc, lead

and silver over FY2013-15, we are positive on HZL.The Rampura Agucha underground

mine project is operational via ramps (tunnel driven downward from the surface) and

commercial production already ramp up in Q3 and will in Q4 of FY14 . The Kayad mine

project will also commence commercial production in the current fiscal year. A cash-rich

balance sheet, low cost of production and inexpensive valuations make HZL an

attractive bet at the current price levels.HZL’s integrated business model ensures steady

cash flow, which reiterates our positive stance on the company.we Valuing the stock at

this level, we recommend BUY rating on HZL with a target price of Rs.143-148 for FY14.

Volatile Desel Price and high Sulphuric acid price affecting the company,s PAT

adversly.Company is tracking on 95% capacity utilization.Captive plants enjoy the lower

Tax rate and company enjoys zero tax from tax free geographycal areas. Smelting Plants

are improvised and management is confident that the smelting plants will maintain

their stance for the coming quarters also.

Power, fuel & water

Repairs

Expenditure

EBITDA

Interest Cost

Net tax expense / (benefit)

Depriciation

PAT

ROE%

Hindustan Zinc LTD.

P/L PERFORMANCE

Net Revenue from Operation

Other Income

Total Income





0200400600800

10001200140016001800

Jan

-13

Fe

b-1

3

Ma

r-1

3

Ap

r-1

3

Ma

y-1

3

Jun

-13

Jul-

13

Au

g-1

3

Se

p-1

3

Oct

-13

No

v-1

3

De

c-1

3

Silver(rs/ounce)

020000400006000080000

100000120000140000160000

Jan

-13

Fe

b-1

3

Ma

r-1

3

Ap

r-1

3

Ma

y-1

3

Jun

-13

Jul-

13

Au

g-1

3

Se

p-1

3

Oct

-13

No

v-1

3

De

c-1

3

Lead

90000

95000

100000

105000

110000

115000

120000

125000

Jan

-13

Fe

b-1

3

Ma

r-1

3

Ap

r-1

3

Ma

y-1

3

Jun

-13

Jul-

13

Au

g-1

3

Se

p-1

3

Oct

-13

No

v-1

3

De

c-1

3

Zinc

FY10 FY11 FY12 FY13

423 845 845 845

17701 21688 26036 31431

18124 22533 26881 32276

0 0 0 0

60 0 0 0

0 0 0 0

478 475 410 484

340 567 504 825

20238 25053 29485 35465

109 109 47 10

6071 7145 8466 8474

1113 875 445 1082

361 594 876 1898

452 762 798 1111

152 209 332 403

928 5633 5255 6942

96 158 233 373

20238 25053 29485 35465

FY10 FY11 FY12 FY13

3.2 2.2 2.1 1.7

95.6 11.6 13.1 16.3

1.9 2.1 2.9 3.2

6.0 4.8 3.6 3.8

0.6 0.8 0.7 0.9

FY10 FY11 FY12 FY13

4001 4483 4553 4935

77 -212 -61 -183

4077 4272 4492 4752

-3881 -3658 -3499 -3234

-187 -363 -1242 -1257

8 250 -248 262

4

Trade payables

Short-term provisions

Total liabilities

Intangibles

Tangible assets

Capital work-in-progress

Reserve & Surplus

Total equity

Long-term borrowings

Short-term borrowings

Hindustan Zinc LTD.

Long-term provisions

B/S PERFORMANCE

Trading At :

RATIOS

CASH FLOWS

Share capital


EBIDTA & Margin :


ZinC Productions:

Short-term loans and advances

Total Assets

P/B

EPS

Debtor to Turnover%


Long-term loans and advances

Inventories

Trade receivables

Cash and bank balances

Cash From Investment

Cash from Finance

Net Cash Flow during year

Creditors to Turnover%

Inventories to Turnover%

Cash from Operation

Changes In Working Capital

Net Cash From Operation


0

20

40

60

80

100

120

140

160

0

1000

2000

3000

4000

5000

6000

7000 NIFTY HINDZINC

43 43 41

49

42

49 47

0

10

20

30

40

50

60

0

500

1000

1500

2000

2500EBIDTA

EBIDTA %

0

50000

100000

150000

200000

250000

Zinc Production (tons)

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

0

500

1000

1500

2000

2500

3000

3500

4000

4500 NetRevenuefromOperation

RevenueGrowth

TCS

1M 1yr YTD

Absolute 9.8 64.4 67.2

Rel. to Nifty 8.1 60.1 57.1

Current 2QFY14 1QFY14

Promoters 73.9 73.96 73.96

FII 16.33 16.09 15.67

DII 5.26 5.58 5.90

Others 4.51 4.37 4.47

Financials3QFY14 2QFY14 (QoQ)-% 3QFY13 (YoY)-%

Revenue 21294 20977.2 1.5 16069.93 32.5

EBITDA 6686.76 6633.0 0.8 4660.49 43.5

PAT 5333.43 4633.3 15.1 3549.61 50.3

EBITDA Margin 31.4% 31.6% (20bps) 29.0% 240bps

PAT Margin 25.0% 22.1% 290bps 22.1% 290bps

5

Average Daily Volume 1011877

Change from Previous 6% We continue to believe that TCS will be star performer in growth sense than other

peers. Hence, we are maintaining 18% revenue growth in dollar term for FY14E

because of improved demand environment, while NASSCOM expects 12-14% for the

Industry. We continue to be positive on demand prospect for TCS.

In US dollar terms, revenue was $3438mn compared with USD 3337 mn in Q2FY14. Net

profit was at USD 858 mn, compared with USD 748 mn in Q2FY14.

▪ Strong growth across segments: On segmental front, Manufacturing grew by 6.1%

(QoQ), and Telecom (including media and entertainment) by 5.1% (QoQ), while, BFSI

and Retail (including consumer-packaged goods) reported strong below 1% growth,

sequentially. Even, the telecom sector posted excellent quarter than before but still wait

to change view on the sector.

▪Steady Margin growth: On margin front, EBITDA down by 20bps and EBIT 30bps on QoQ

basis to 31.4% and 29.8%, during the quarter. The company attributed this fall to

reinvestment of gains from margin into the business. Management is very confident to

maintain EBITDA margin at a range of 26-28% ahead.

▪ Lower volume and stable pricing growth: The volume growth of 1.8% was lower than

expectations and what the company has been delivering over the last few quarters. The

company attributed this fall to de-growth in India business. The third quarter is generally

slow due to holidays, and furloughs. The pricing is expected to be stable overall but

expects variability across the quarters going forward.

52wk Range H/L 2384/1300

Mkt Capital (Rs Crores) 433985

Previous Target Price 2360

Upside 13%

Market DataBSE Code 532540

NSE Symbol TCS

Street stunned with inline set of number, management is confident to see better

growth in near future;

TCS witnessed inline set of numbers with 1.5%(QoQ)of consolidated sales growth led

by 1.8% volume growth and1.2% pricing growth. This volume growth dampened

because of holidays and furlough effects. PAT grew by 15.1% (QoQ).

" Strong Fundamentals"

CMP 2216

Target Price 2510

Results update Buy

1 year forward P/E

Rs, Crore

(Source: Company/Eastwind)


▪ Growth across the geographies: Among growth markets, Latin America, APAC and

MEA registered strong growth. India business suffered from volatility and declined

sequentially. Further, US grew by 2.6%, Europe by 2.6% and RoW by 7.1% QoQ. USA

contributes 55%, Europe 29.1% and RoW 15.9% of its revenue.

View and Valuation: We continue to remain positive on demand outlook and margin

profile, the management expects for robust deal pipeline going forward and also expects

to materialize its emerging space like Digital as well as Cloud, Mobility, Analytics and Big

data. Based on initial discussions with customers, Management believes for stronger

2014 than 2013. We continue to be positive on demand environment and company’s

strength of efficient deal execution. We advise that TCS now seem to be trading ahead

of fundamentals; At a price of Rs 2216, it is trading at 20.3x FY15E earnings, We

maintain" BUY" view on the stock and we revised our target price from Rs 2360 to Rs

2510.


Nifty 6262

Stock Performance

"BUY"20th Jan' 14


6

TCS.

Revenue and growth in INR term-(QoQ)

Margin-%

Volume and Pricing Growth (QoQ)-%


The Company remains confident to clock

better growth in FY14 than FY13 and

aims to exceed upper end of industry

body NASSCOM’s guidance at 12-14% in

FY14. We expect better revenue growth

than its peer like Infy



(4) The company has maintained hiring target of 55,000 gross employees for FY14,

(5) Demand environment from Domestic market for next 2Qtrs will be adversly impacted

because of fortcong general election.

The outlook on margins, it indicated that

is comfortable in the current level and

will be in the range of 26-28% range

going forward.


Key Facts from Conference Call (attended on 16th Jan,2014):

(1)TCS, which does not provide detailed revenue forecasts, The Company remains

confident to clock better growth in FY14 than FY13 and aims to exceed upper end of

industry body NASSCOM’s guidance at 12-14% in FY14. And continued to reiterate its

stand that FY15 will be a better year than FY14.

(2) The management stated that pricing would be stable for next 12 months. Realization

seeing minor fluctuations, but (3) The outlook on margins, it indicated that is comfortable in the current level and will be

in the range of 26-28% range going forward.

The volumes were strong across the

board during the quarter. The pricing is

expected to be stable overall but expects

variability across the quarters going

forward.The volume growth could be

improve further because of better

demand environment across all

geogrpahies and space.


7

TCS.


Financials

Attrition is low in the Industry – Expects to improve Utilizations to 85% and beyond:: At

the end of 3QFY14, TCS continued its uptick in hiring and upped the numbers to 55,000

from its earlier stated 50,000. This is reflective of the demand environment. The

utilization rate (excluding trainees) was at 84.3% and that including trainees was 77.5 %.

The attrition rate in IT was at 10.3 %, while BPS attrition fell to 13.4 %. The attrition rate

(LTM) was stable at 10.9% including BPS.

Sound clients metrics: TCS sees a robust demand pipeline across markets and a unique

opportunity to strategically partner and participate with clients. TCS' USD added total 8

large clients(net).



Rs, Cr FY10 FY11 FY12 FY13 FY14E FY15E

Net Sales-USD 6339.0 8187.0 10171.0 11569.0 13660.8 16393.8

Net Sales 30029.0 37325.1 48894.3 62989.5 81964.9 97543.1

Employee Cost 10879.6 13850.5 18571.9 24040.0 30327.0 36578.7

Overseas business expenses 4570.1 5497.7 6800.5 8701.9 11680.0 14143.7

Services rendered by business associates and others 1262.0 1743.7 2391.3 3763.7 4917.9 6340.3

Operation and other expenses 4622.8 5054.3 6694.8 8443.9 10655.4 12680.6

Total Expenses 21334.4 26146.2 34458.5 44949.6 57580.4 69743.3

EBITDA 8694.6 11178.9 14435.8 18040.0 24384.6 27799.8

Depreciation 601.8 686.2 860.9 1016.3 1282.9 1526.7

Amortisation 59.1 49.1 57.1 63.7 57.5 76.7

Other Income 272.0 604.0 428.2 1178.2 1434.4 1950.9

EBIT 8033.7 10443.6 13517.9 16960.1 23101.7 26273.1

Interest Cost 16.1 26.5 22.2 48.5 35.9 33.8

PBT 8289.6 11021.2 13923.8 18089.8 24500.2 28190.2

Tax 1197.0 1830.8 3399.9 4014.0 5880.0 6765.6

PAT 7092.7 9190.3 10524.0 14075.7 18620.2 21424.5

PAT ((Reported PAT)) 7000.6 9068.6 10414.0 13917.4 18620.2 21424.5

Growth-%

Sales-USD 29.2% 24.2% 13.7% 18.1% 20.0%

Sales 8.0% 24.3% 31.0% 28.8% 30.1% 19.0%

EBITDA 21.3% 28.6% 29.1% 25.0% 35.2% 14.0%

PAT 31.8% 29.6% 14.5% 33.7% 32.3% 15.1%

Margin -%

EBITDA 29.0% 30.0% 29.5% 28.6% 29.8% 28.5%

EBIT 26.8% 28.0% 27.6% 26.9% 28.2% 26.9%

PAT 23.6% 24.6% 21.5% 22.3% 22.7% 22.0%

Expenses on Sales-%

Employee Cost 36.2% 37.1% 38.0% 38.2% 37.0% 37.5%

Overseas business expenses 15.2% 14.7% 13.9% 13.8% 14.3% 14.5%

Services rendered by business associates and others 4.2% 4.7% 4.9% 6.0% 6.0% 6.5%

Operation and other expenses 15.4% 13.5% 13.7% 13.4% 13.0% 13.0%

Tax rate 14.4% 16.6% 24.4% 22.2% 24.0% 24.0%

Valuation

CMP 780.8 1182.5 1322.0 1563.0 2216.0 2216.0

No of Share 195.7 195.7 195.7 196.0 196.0 196.0

NW 18466.7 24504.8 29579.2 38645.7 49594.4 62192.0

EPS 36.2 47.0 53.8 71.8 95.0 109.3

BVPS 94.4 125.2 151.1 197.2 253.0 317.3

RoE-% 38.4% 37.5% 35.6% 36.4% 37.5% 34.4%

Dividen Payout ratio 28.1% 50.8% 37.5% 41.2% 41.2% 41.2%

P/BV 8.3 9.4 8.7 7.9 8.8 7.0

P/E 21.5 25.2 24.6 21.8 23.3 20.3

HDFC Bank

668

760

720

14

6

1M 1yr YTD

Absolute 0.1 0.0 0.0

Rel.to Nifty -0.6 -3.4 -3.4


3Promoters 22.7 22.7 22.7

FII 34.9 33.6 34.9

DII 9.3 9.8 6.6

Others 33.1 33.8 34.2

Financials Rs, Cr

2011 2012 2013 2014E 2015E

NII 10543 12885 15811 18713 22944

Total Income 14878 18668 22664 26604 30835

PPP 7725 9391 11428 14516 15572

Net Profit 3926 5167 6726 8453 9119

EPS 84.4 22.0 28.7 36.0 38.9

8


HDFC Bank Vs Nifty


4.17 lakhs

Nifty 6261



Stock Performance

52wk Range H/L

Cost to income ratio declined to 42.7% from 46% in 3QFY14 largely due to employee

expenses. In 3QFY14, employee cost was declined by 3.1% YoY due to hiring soften

strategy taken by bank. At the end of quarter, bank has total 68200 employees as

against 69700 employees in last quarter. Other operating cost increased by 12.5%

YoY largely due to addition of new branches and ATMs. At the end of December

quarter, bank’s added 274 branches taking total network to 3336 branches against

2776 branches in 3QFY13. With the support of healthy NII growth, non interest

income and control cost measurement; bank’s operating profit grew by 28.6% YoY.

160030

Result update BUY

CMP

Target Price

HDFC Bank’s profit growth of 25% YoY lowers than its previous quarters

growth trajectory that it had witnessed but remain very impressive in

challenging macro environment. Bank is well poised in most of operating

parameters like CASA ratio of 45%+, higher than industry credit growth, best

asset quality among peers, better utilization of cash in form of higher CAR

ratio for further growth, consistent delivered margin above of 4%. We continue

to believe bank would enjoy valuation premium. We value bank at

Rs.760/share which is 4 times of one year FY14E’s book value.


Declined CI ratio along with healthy revenue growth led operating profit growth

Market Data

Upside

727/528

BSE Code 500180

NSE Symbol HDFCBANK

Mkt Capital (Rs Cr)

Profit growth of 25% YoY, quite impressive in present economy scenario

Average Daily Volume

HDFC bank’s profitability grew by 25% YoY to Rs.2326 cr against our expectation of

Rs.2289 cr. Growth in profit was due to higher growth in revenue, lower cost income

ratio and stable asset quality. But growth trajectory of the bank was lower if we

compare it from past as bank has been witnessing 30% growth previously. In

previous quarter bank reported 27% YoY growth in profit and this quarter reported

lower from previous quarter. We believe to maintain 30%+ growth would be tough in

present challenging macro environment.

Healthy NII growth on the back of stable margin and higher CD ratio

HDFC Bank reported another good set of numbers with NII grew by 22% YoY to

Rs.4635 cr better than our expectation due to healthy loan growth, stable margin,

higher credit deposits ratio and controlled cost of deposits. Total revenue of the bank

grew by 21.2% YoY to Rs.6783 cr. Non- interest income registered growth of 19.4%

YoY to Rs.2148 cr. Other income comprises fees & commissions of Rs 1,575.0 cr

(Rs 1,413.5 cr in 3QFY13), foreign exchange & derivatives revenue of Rs.333.2 cr

(Rs 258 cr in 3QFY13), gain on revaluation / sale of investments of Rs 50.9 cr (gain

of Rs. 135.8 cr in 3QFY13) and miscellaneous income including recoveries of Rs

189.1 cr (Rs 120.4 cr in 3QFY13).

"BUY "20th Jan.,2014


9

Sequentially stable asset quality despite of challenging macro environment

Despite of challenging macro environment, bank reported stable asset quality with GNPA

in absolute term grew by mere 3% on sequential basis. As a percentage to gross

advance, GNPA stood at 1.02% versus 1.1% in previous quarter. Loan loss provisions

were Rs.389 cr versus Rs.386 cr in previous quarter. Consequently net NPA increased

by 4% QoQ and in percentage to net advance, it stood at 0.27% versus 0.29%. Provision

coverage ratio with technical write-off was stable on sequential basis to 73.8%.

Valuation Band

Advance grew by 23% YoY and deposits grew by 23% led by FCNR deposits

Total advance increased by 23% to Rs.2967 bn. Loan growth was driven by 13.6% YoY

increased of retail loan and 22.1%YoY increased of corporate loan. Composition of retail

and corporate loan stood at 54:46 ratios. Deposits increased by 23% to Rs.3492 bn in

which saving deposits increased by 16% and current deposits grew by 23% taking overall

CASA ratio of 43.7%. Deposits growth of 23% included US$3.4 bn of FCNR deposits

raised through RBI’s special window. Adjusted with same, deposits grew by 15.5% YoY.

Credit deposits ratio during quarter stood at 85% which was by and large same in both

quarter on quarter and year on year basis.

Valuation & View

HDFC Bank’s profit growth of 25% YoY lowers than its previous quarters growth

trajectory that it had witnessed but remain very impressive in challenging macro

environment. Bank is well poised in most of operating parameters like CASA ratio of

45%+, higher than industry credit growth, best asset quality among peers, better

utilization of cash in form of higher CAR ratio for further growth, consistent delivered

margin above of 4%. We continue to believe bank would enjoy valuation premium. We

value bank at Rs.760/share which is 4 times of one year FY14E’s book value.

HDFC BANK



10

HDFC BANK

Source: Eastwind/ Company


Fundamental Through Graph

NII growth of 22% led by healthy loan

growth, stable margin, higher credit deposits

ratio and controlled cost of deposits

Declined CI ratio along with healthy revenue

growth led operating profit growth

Profit growth of 25% YoY due to higher

growth in revenue, lower cost income ratio

and stable asset quality


11



HDFC BANK

Quarterly Performance


Quarterly Performance 3QFY14 2QFY14 3QFY13 % YoY Gr % QoQ Gr 3QFY14E Variation

Interest/discount on advances / bills 8183 7692 6722 21.7 6.4 8524 4.2

Income on investments 2309 2292 1893 22.0 0.8 2354 1.9

Interest on balances with Reserve Bank of India 85 84 68 25.7 1.2 97 14.2

Others 13 25 25 -48.3 -48.4 18 35.7

Total Interest Income 10591 10093 8708 21.6 4.9 10993 3.8

Others Income 2148 1844 1799 19.4 16.5 1885 -12.3

Total Income 12739 11938 10507 21.2 6.7 12878 1.1

Interest Expended 5956 5617 4909 21.3 6.0 5798 -2.7

NII 4635 4477 3799 22.0 3.5 5195 12.1

Other Income 2148 1844 1799 19.4 16.5 1885 -12.3

Total Income 6783 6321 5598 21.2 7.3 7080 4.4

Employee 973 1036 1004 -3.1 -6.1 1115 14.6

Other Expenses 1922 1899 1570 22.4 1.2 2071 7.7

Operating Expenses 2895 2934 2574 12.5 -1.3 3186 10.0

PPP( Rs Cr) 3888 3387 3024 28.6 14.8 3894 0.2

Provisions 389 386 307 26.6 0.8 426 9.6

PBT 3499 3001 2716 28.8 16.6 3468 -0.9

Tax 1173 1018 857 36.9 15.2 1179 0.5

Net Profit 2326 1982 1859 25.1 17.3 2289 -1.6

Balance Sheet( Rs Cr)

Net Worth 42891 40485 35436 21.0 5.9 42774 -0.3

Deposits 349215 313011 284119 22.9 11.6 331291 -5.1

Borrowings 43848 39340 31585 38.8 11.5 44639 1.8

Investment 110616 101850 95979 15.3 8.6 108215 -2.2

Loan 296742 268617 241493 22.9 10.5 284134 -4.2

Asset Quality

GNPA( Rs Cr) 3017.84 2941.71 2432.2 24.1 2.6

NPA(Rs Cr) 797 767 496 60.8 3.9

GNPA(%) 1.0 1.1 1.0

NPA(%) 0.3 0.3 0.2

PCR(w/o tech write-off)(%) 74 74 80

12

HDFC BANK

Financials




P/L 2011 2012 2013 2014E 2015EInterest/discount on advances / bills 15085 21124 26822 32002 40213

Income on investments 4675 6505 7820 9311 10952

Interest on balances with Reserve Bank of India 148 137 282 373 373

Others 20 108 141 65 65

Total Interest Income 19928 27874 35065 41751 51603

Others Income 4335 5784 6853 7891 7891

Total Income 24263 33658 41917 49642 59494

Interest on deposits 8028 12690 16321 20281 24337

Interest on RBI/Inter bank borrowings 1336 2253 2889 4571 4278

Others 20 47 44 44 44

Interest Expended 9385 14990 19254 23038 28659

NII 10543 12885 15811 18713 22944

NII Growth(%) 25.7 22.2 22.7 18.4 22.6

Other Income 4335 5784 6853 7891 7891

Total Income 14878 18668 22664 26604 30835

Total Income Growth(%) 20.3 25.5 21.4 17.4 15.9

Employee 2836 3400 3965 4231 5342

Other Expenses 4317 5878 7271 7857 9921

Operating Expenses 7153 9278 11236 12087 15263

PPP( Rs Cr) 7725 9391 11428 14516 15572

Provisions( Incl tax provision) 3799 4224 4701 1751 6453

Net Profit 3926 5167 6726 8453 9119

Net Profit Growth(%) 33.2 31.6 30.2 25.7 7.9

Key Balance Sheet DataDeposits 208586 246706 296247 355496 426596

Deposits Growth(%) 24.6 18.3 20.1 20 20

Borrowings 14394 23847 33007 50785 47529

Borrowings Growth(%) 11.4 65.7 38.4 54 -6

Loan 159983 195420 239721 299651 365574

Loan Growth(%) 27.1 22.2 22.7 25 22

Investment 70929 97483 111614 114580 156461

Investment Growth(%) 21.0 37.4 14.5 3 37

Eastwind CalculationYield on Advances 9.4 10.8 11.2 10.7 11.0

Yield on Investments 6.6 6.7 7.0 8.1 7.0

Yield on Funds 7.7 8.9 9.3 10.1 9.9

Cost of deposits 4.3 5.6 6.0 6.5 6.2

Cost of Borrowings 9.4 9.6 8.9 9.0 9.0

Cost of fund 4.2 5.5 5.8 5.7 6.0

ValuationBook Value 545.5 127.5 154.3 189.4 222.3

P/BV 4.3 4.1 4.1 3.5 3.0

P/E 27.8 23.6 21.8 18.7 17.3

FEDERAL BANK

80

98

87

23

13

1M 1yr YTD

Absolute -0.6 -24.3 -24.3

Rel.to Nifty -1.3 -27.7 -27.7


3Promoters - - -

FII 42.4 44.1 44.4

DII 21.6 20.6 20.8

Others 36.1 35.3 34.8

Financials Rs, Cr

2011 2012 2013 2014E 2015E

NII 1747 1953 1975 2206 2543

Total Income 2263 2486 2639 2893 3230

PPP 1427 1506 1460 1520 1777

Net Profit 902 734 803 799 1012

EPS 6.5 8.6 9.4 9.3 11.8

13

Operating profit de-growth by 9.7% YoY led by flat revenue growth and high CI

ratio

Cost Income ratio increased by 550 bps YoY to 49.3% but operating leverage

(operating cost to total assets) remain flat at 0.45%, indicating comfortable cost

management. Employee cost and other operating cost increased by 8.1% and 17.7%

respectively. During quarter bank opened 18 new branches and 47 ATMs. Operating

profit de-grew by 9.7% YoY on account of muted NII growth and lower other income.

Federal bank continued to deliver moderate growth in net profit on the back of muted

growth in operating as well as financial metrics. During quarter bank’s net growth

grew by 9.2% YoY largely due to lower provisions led by improving asset quality. This

quarter bank reported improvement in asset quality when most of banks reported

deteriorating or stable stress in assets which surprise us positively. Despite of lower

loan loss provisions, bank’s provision coverage ratio remained high against

regulatory requirement. Therefore we take it positive as bank’s strategy to make

lower provision in order to inflate profit. But muted growths in balance sheet remain

a cause of concern.

CMP

Target Price

Change from Previous( Rs)

FEDERAL Bank Vs Nifty


9.78 lakh

Nifty 6261

Market Data

Profit growth on the back of lower provision led by improving asset quality

Stock Performance

52wk Range H/L 104.75/44.25

BSE Code

Mkt Capital (Rs Cr)


Bank reported net profit growth of 9.2% YoY largely due to lower provision led

by improving asset quality. Making lower provision in order to inflate profit is

not too bad in our sense as bank has high provision coverage ratio and

sequentially improved gross NPA. However at operating profit level, bank

reported negative growth of 9.7% due to muted performance all around. We

revised our book value estimate to Rs.82.2 from earlier of Rs.78. We believe

bank to trade at 1.2 times of book value of FY14E. We value bank at

Rs.98/share which is 1.2 times of FY14E’s book value and 8.5 times of full year

earnings

Result update BUY


Upside

500469

NSE Symbol FEDERALBNK


6792


Flat revenue growth because of negative growth in other income

During this quarter bank’s NII grew by 9.7% on account of muted loan growth along

with continuous fall in credit deposits ratio. However bank able to maintain cost of

deposits under control. Other income de-grew by 23.4% YoY taking flat revenue

growth on year on year basis and quarterly basis.

"BUY"20th Jan, 2014


14

FEDERAL BANK


NIM declined sequentially due to higher cost of fund than deposits

NIM on sequential basis declined by 6 bps to 3.24% due to higher cost of fund (in

absolute term) than yield on loan (in absolute term). Higher cost of fund largely came

from cost of borrowing than deposits. Borrowings as a percentage of NDTL, sequentially

increased to 9.2% from 8.1% taking overall interest expenses up in absolute term. Loan

yield improved by 18 bps QoQ to 12.2% from 12% but muted growth in loan, increased

interest income by 0.1% QoQ whereas interest expenses increased by 2.4% QoQ.

Despite of lower increased in cost of fund (6 bps QoQ), NIM declined sequentially.

Loan & deposit grew by moderate pace

Federal Bank’s balance sheet grew by 15% YoY in which loan grew by 5.4% YoY. SME

and retail loan registered growth of 38.4% and 11.5% YoY respectively but corporate

loan de-grew by 14.4% YoY. Share of corporate loan declined to 33% from 40% in

3QFY14 whereas share of SME and retail loan increased to 24% and 32% from 18% and

30% respectively. Despite of reported higher growth in SME and retail loan, overall loan

grew by 5.4% YoY. Deposits witnessed growth of 12% YoY led by CASA growth of 15%

YoY while term deposits de-grew by 10% YoY. In percentage term CASA improved by 90

bps YoY to 30.4%.

Valuation & View

Provision lower to Rs.7 cr but PCR remain high

Bank reported net profit growth of 9.2% YoY largely due to lower provision led by

improving asset quality. Making lower provision in order to inflate profit is not too bad in

our sense as bank has high provision coverage ratio and sequentially improved gross

NPA. However at operating profit level, bank reported negative growth of 9.7% due to

muted performance all around. We revised our book value estimate to Rs.82.2 from

earlier of Rs.78. We believe bank to trade at 1.2 times of book value of FY14E. We value

bank at Rs.98/share which is 1.2 times of FY14E’s book value and 8.5 times of full year

earnings

In 3QFY14, Federal bank made total provisions of Rs.7 cr versus Rs.11 cr in previous

quarter and Rs.74 cr in last quarter. Lower provision was due to improving asset quality.

Gross NPA improved by 18% QoQ to Rs.1201 cr in absolute term whereas as a

percentage to total advance, it stood at 2.88% versus 3.47% in previous quarter. Loan

loss provisions were lower by 20% QoQ, taking PCR ratio to 70.3% (without technical

write-off). This has resulted net NPA declined to 0.9% versus 1% in previous quarter.


15

Fundamental Through Graph

FEDERAL BANK

Source: Eastwind/Company


Valuation Band


16



FEDERAL BANK

Quarterly Result


Quarterly Performance(Rs Cr) 3QFY14 2QFY14 3QFY13 % YoY Gr % QoQ Gr 3QFY14E Variation

Interest/discount on advances / bills 1266 1265 1151 10.0 0.1 1348 6.4

Income on investments 461 438 358 28.7 5.3 434 -6.0

Interest on balances with Reserve Bank of India 11 11 11 -8.2 -5.2 12 15.6

Others 2 1 1 48.7 151.5 -100.0

Total Interest Income 1740 1714 1522 14.3 1.5 1793 3.1

Others Income 156 143 204 -23.4 9.0 180 14.9

Total Income 1896 1858 1726 9.9 2.0 1973 4.1

Interest Expended 1194 1166 1024 16.6 2.4 1184 -0.8

NII 546 548 497 9.7 -0.5 609 11.6

Other Income 156 143 204 -23.4 9.0 180 14.9

Total Income 702 692 701 0.1 1.5 789 12.4

Employee 177 170 163 8.1 3.7 189 7.0

Other Expenses 169 167 144 17.7 1.1 182 7.3

Operating Expenses 346 338 307 12.6 2.4 371 7.1

PPP( Rs Cr) 356 354 394 -9.7 0.6 418 17.4

Provisions 7 11 74 -90.2 -33.6 90 1132.4

PBT 349 343 320 9.1 1.7 328 -5.9

Tax 118 117 109 8.9 1.2 98 -16.9

Net Profit 230 226 211 9.2 1.9 230 -0.2

Balance Sheet(Rs Cr)

Net Worth 6872 6696 6323 8.7 2.6 6926 0.8

Deposits 57737 56794 51607 11.9 1.7 59221 2.6

Borrowings 5850 5033 3562 64.2 16.2 5197 -11.2

Investment 25028 22794 19433 28.8 9.8 23124 -7.6

Loan 41640 42220 39494 5.4 -1.4 44922 7.9

Asset Quality

GNPA(Rs Cr) 1201 1466 1564 -23.2 -18.1 -

NPA(Rs Cr) 356 411 363 -1.9 -13.4 -

GNPA(%) 2.9 3.5 4.0 -

NPA(%) 0.9 1.0 0.9 -

PCR(w/o tech write-off)(%) 70 72 77 -

17



FEDERAL BANK

Financials & View


Income Statement 2011 2012 2013 2014E 2015EInterest Income 4052 5558 6168 6989 7707

Interest Expense 2305 3605 4193 4783 5164

NII 1747 1953 1975 2206 2543

Change (%) 23.8 11.8 1.1 11.7 15.3

Non Interest Income 517 532 664 687 687

Total Income 2263 2486 2639 2893 3230

Change (%) 16.6 9.8 6.2 9.6 11.7

Operating Expenses 836 979 1180 1372 1454

Pre Provision Profits 1427 1506 1460 1520 1777

Change (%) 12.8 5.6 -3.1 4.2 16.9

Provisions 525 335 297 335 331

PBT 902 1172 1162 1186 1445

PAT 902 734 803 799 1012

Change (%) 94.1 -18.6 9.4 -0.5 26.7

Balance SheetDeposits( Rs Cr) 43015 48937 57615 66257 76196

Change (%) 19 14 18 15 15

of which CASA Dep 11554 13476 15652 19111 22360

Change (%) 22 17 16 22 17

Borrowings( Rs Cr) 1888 4241 5187 5361 6272

Investments( Rs Cr) 14538 17402 21155 23453 26656

Loans( Rs Cr) 31953 37756 44097 47624 55244

Change (%) 19 18 17 8 16

RatioAvg. Yield on loans 9.9 11.1 10.5 10.9 10.5

Avg. Yield on Investments 6.0 7.6 6.9 7.4 6.9

Avg. Cost of Deposit 5.0 6.8 6.7 6.6 6.6

Avg. Cost of Borrowimgs 7.6 6.5 6.9 7.0 7.0

Valuation

Book Value 60 67 74 83 85

CMP 84 85 96 80 80

P/BV 1.4 1.3 1.3 1.0 0.9

DB CORP

1M 1yr YTD

Absolute 10 28.74 -0.003

Rel. to Nifty 8 25.06 -0.002


Promoters 74.96 74.97 74.98

FII 17.73 16.46 14.66

DII 2.95 4.00 5.34

Others 4.36 4.57 5.02


Revenue 518.2 438 18.3 438.9 18.1

EBITDA 153.8 112.5 36.7 122.8 25.2

PAT 93.57 63.2 48.0 73.2 27.9

EBITDA Margin 29.7% 25.7% 400bps 28.0% 170bps


18

Mkt Capital (Rs Crores)


NSE Symbol

"On Strong Footing"

DBCORP beats the street with 18% (YoY) revenue growth led by healthy Ad- revenue

positively impacted by festive and election season during the quarter. PAT (excluding

EOI) grew by 28 %(YoY) because of growth in other Income. Consistency on earning performance led by regional growth and strategy on judicious

mix of price and promotion energize its strong visibility in near future. Management is

also committed for cost control and yield improvement, it will continue its strong

market positioning in all aspect.

CMP 301

Target Price 340

Result update

Previous Target Price -

Upside 13%


Buy

Stock Performace with Nifty

Rs, Crore



According to management, Company will maintain a pragmatic approach towards

operational controls and higher efficiency. DBCORP will continue to capitalize its

consumption potential of Tier 2 and 3 cities. And they are studying on marketing

strategies of niche brands in Tier 2 and 3 cities. Company is expected to launch its Bihar

edition on 19 Jan, 2014, and we expect to see some part of additional revenue from

Bihar edition by 4QFY14E and also expect to see breakeven in 3 to 4 years.

View and Valuation:

In view of upcoming general election, we expect government ad spending to go up

substantially. Provision of TRAI’s 12 minutes ad cap would provide revenue visibility to

print media players, being one of the largest players DB Corp will be strong beneficiary

in near future. Company’s continuous efforts towards yield improvement and cutting

discounts will lead to margin improvement in future. Considering its long-term growth

story with favorable earning scenario and leadership position in key market, we are

positive on the stock. We maintain “BUY” view on the stock with the target price of Rs

340. At a CMP of Rs 301, stock trades at 4.1x of FY15E P/BV.


Company witnessed impressive ramp up in margin front because of cost controlling

efforts, EBITDA margin up by 170bps (YoY) to 29.67% and PAT margin improved by

140bps (YoY) to 18.1%. Management stated to maintain its margin going forward and

clearly indicated for thrust on yield improvement. For few quarters company has been

consciously working on improvement of yield and cutting discount.

Robust Margin:

DBCORP

52wk Range H/L 321.50/210

5521


Nifty 6261.65

Stock Performance During the quarter, company has seen 18.2% revenue growth from its advertisement,

14% from circulation and 25% from Radio business on YoY basis. Management

expressed its interest regarding inorganic expansion in near future to maintain its

healthy growth across all segments.

Segmental Performance:

Management Commentary:

25750

"BUY"20th Jan' 14


19


DB CORP

Margin-%



Sales and Sales growth(%)(yoy)


PAT and PAT growth(%)(yoy)



Margin Change

3QFY14 2QFY14 3QFY13 (YoY)-% (QoQ)-% YoY QoQ

Printing & Publishing newspaper 488.63 416.17 416.83 17% 17% 28% 200bps 500bps

Radio 23.82 17.09 19.08 25% 39% 36% 1200bps 2100bps

Event 1.12 1.76 0.89 26% -36% -66% (3500bps) (7900bps)

Sales GrowthMargin-%Segments

20


Financials;

DB CORP

Revenue Geography-wise Revenue Segments



Rs,cr FY10 FY11 FY12 FY13 FY14E FY15E

Sales 1062.1 1265.18 1451.51 1592.32 1861.91 2176.94

RM Cost 327.87 383.91 508.04 544.54 623.74 740.16

WIP -0.0016 -0.06 -0.04 0.03 -1.86 -2.18

Employee Cost 131.81 184.56 242.93 279.5 307.21 380.97

Ad Spend 12.98 12.52 15.04 17.21 22.34 23.95

Other expenses 161.24 185.2 216.06 234.07 260.67 315.66

Total expenses 720.03 862.13 1105.03 1210.25 1371.5 1656.7

EBITDA 342.07 403.05 346.48 382.07 490.5 520.3

Depreciation and Amortisation 37.83 43.28 50.57 58.06 64.5 75.4

Other Income 11.15 14.18 24.02 21.34 27.9 28.3

EBIT 304.24 359.77 295.91 324.01 426.0 444.9

Interest 35.69 15.3 9.23 7.99 8.0 5.1

PBT 279.70 358.65 310.7 337.36 445.9 468.1

Tax Exp 105.72 99.97 98.32 113.18 156.1 163.8

PAT 173.98 258.68 212.38 224.18 289.8 304.3

Growth-% (YoY)

Sales 10.5% 19.1% 14.7% 9.7% 16.9% 16.9%

EBITDA 132.2% 17.8% -14.0% 10.3% 28.4% 6.1%

PAT 265.4% 48.7% -17.9% 5.6% 29.3% 5.0%

Expenses on Sales-%

RM Cost 30.9% 30.3% 35.0% 34.2% 32.0% 34.3%

Employee Cost 12.4% 14.6% 16.7% 17.6% 16.6% 17.0%

Ad Spend 1.2% 1.0% 1.0% 1.1% 1.2% 1.1%

Event Expenses 1.1% 1.3% 1.0% 0.8% 0.8% 1.0%

consumption of store & spare 4.8% 4.6% 5.8% 6.0% 6.0% 6.2%

Distribution expenses 2.1% 1.7% 1.7% 1.8% 1.8% 1.9%

Other expenses 15.2% 14.6% 14.9% 14.7% 14.0% 14.5%

Tax rate 10.0% 7.9% 6.8% 7.1% 8.4% 7.5%

Margin-%

EBITDA 32.2% 31.9% 23.9% 24.0% 26.3% 23.9%

EBIT 28.6% 28.4% 20.4% 20.3% 22.9% 20.4%

PAT 16.4% 20.4% 14.6% 14.1% 15.6% 14.0%

Valuation:

CMP 239 246 219 212.1 301 301

No of Share 18 18 18 18.33 18.33 18.33

NW 649 829 927 1029 1180 1344

EPS 9.6 14.1 11.6 12.2 15.8 16.6

BVPS 36 45 51 56 64 73

RoE-% 27% 31% 23% 22% 25% 23%

P/BV 6.7 5.4 4.3 3.8 4.7 4.1

P/E 24.9 17.4 18.9 17.3 19.0 18.1

ITC

325

380

320

17%

19%

1M 1yr YTD

Absolute 3.7 14.5 13.8

Rel. to Nifty 2.0 10.2 9.3


Promoters - - -

FII 19.3 19.3 19.6

DII 34.3 34.3 33.8

Others 46.4 46.1 46.6

Financials Rs, Cr

3QFY14 2QFY14 (QoQ)-% 3QFY13 (YoY)-%

Revenue 8623.11 7775.79 10.9% 7627 13.1%

EBITDA 3284.3 3173.3 3.5% 2857.7 14.9%

PAT 2385.3 2227.98 7.1% 2051.8 16.3%


PAT Margin 27.7% 28.7% (100bps) 26.9% 80bs21


1 yr Forward P/B


3497040

Nifty 6262

Volume growth: This was the third consecutive quarter when the company’s cigarettes

volume fell. Because of increased prices of cigarette, and volume growth declined by 2%

YoY. We expect, Volumes will retain its growth by next quarter, but the latest hike would

ensure better margins for the company.

Sound response from new launches: Its newer launches Sunfeast Delishus gourmet

cookies and Candyman confectionery during the quarter grew rapidly.

Products strategy: ITC continues to enjoy dominant market share in cigarette while ban

on Gutkha by most of state govt- has provided a strong demand. FMCG business is

expected to maintain momentum led by distribution linked growth, expected the price

hikes to aid cigarettes revenue.

380/281

BSE Code 500875

NSE Symbol



257784

Margin status: The Company’s EBITDA Margin inched up by 50bps to 37.6% on YoY basis.

On segment wise, FMCG margin was positive to 0.5%, Cigarette Margin (EBIT) improved

to 64.4% from 61.1% (3QFY13), Hotel business margin up by 170bps to 19.7% and Agri-

Business up by 90bps to 11.5% on YoY basis. While Paper & Paper Product Business

margin down by 310bps to 18.4%, and Agri Business margin remains on negative

respectively.

Win- win performance across all Segments: Cigarettes (47.7% of Sales) up by 12.6% ,

FMCG-others (24.1% of sales up by 16.1%, Hotels (3.7% of sales) up by 2%, Agri

business (20.7% of sales) up by 10% and Paper and packaging (15% of sales) up by 19%.

FMCG business outside of cigarettes has broken even operationally despite consumers

slowing their discretionary spending.

View and Valuation: ITC’s cigarette volume decline to arrest towards Q4FY14 and

recover in FY15E, while non-cigarette business to report EBIT breakeven in FY14E. We

are positive on long-term demand growth in cigarette business due to rising affordability

and huge demand potential in small towns and rural areas. ITC offers the best earnings

visibility in the sector especially when sector peers are confronting multiple

challenges. The premium valuations enjoyed by ITC, at the CMP of Rs 325, the stock

trades at 8.2x FY15E P/BV seems justified from a growth point of view. We maintain ”

BUY” with a price target of Rs 380.

52wk Range H/L

" Accessing the growth "

CMP

Market Data

Upside

Target Price

Result update BUY ITC posted better growth ahead of street expectations, Cigarette business on a strong

footing, long-term growth outlook remains strong;

Strong set of numbers, sales grew by 13.1% (YoY) led by robust sales across its FMCG

and Paper and Packaging divisions. Cigarette volume declined by 2%(YoY) because of

price hike by 18% in premium brand. PAT up by 16.3%, YoY.


Stock Performance

Further, with ITC being the market leader in cigarettes, higher pricing power in

Cigarette would continue to maintain higher margins. However, volume growth on

cigarette would be on the way of recovery position, previously impacted by price hike

on cigarette (king and 74mm size). Price rises in the cigarettes business drove margin,

revenue and profit growth.

Mkt Capital (Rs Cr)

ITC

"BUY"20th Jan' 14


22


Sales and its Growth(%)




Cigarette Volume Growth-%

ITC

These cost pressures were, however,

mitigated through a combination of

improvements in product and process

efficiencies, smart sourcing and supply

chain initiatives.

ITC clocks 2% volume decline in

cigarettes,

Margin-%


RM Cost improved by 130bps because

of higher prices of Cigarette leaves and

imported paper products

Cigarette sales have grown by 13%

YoY. However, ITC attributed its

performance to the strategy of creating

multiple drivers of growth.


23

ITC

Segment-wise Performance-%

Double digit growth in Cigarette, FMCG,

Agri and Paper & Packaging, but

single digit growthon Hotel business

Financials




Segments Sales Contribution Sales Gr-YoY EBIT Margin Margin Change(YoY)

Cigarettes 47.7% 12.6% 64.4% 330bps

FMCG - Others 24.1% 16.6% 0.5% 180bps

Hotels 3.7% 1.9% 19.7% 180bps

Agri business 20.7% 9.7% 11.5% 90bps

Paper and packaging 14.6% 18.5% 18.4% (310bps)

Rs in Cr, FY10 FY11 FY12 FY13 FY14E FY15E

Sales 19302.1 22575.0 26552.2 31627.5 35368.9 40349.1

RM Cost 6045.5 7136.9 7810.5 9069.8 10433.8 11903.0

Purchases of stock-in-trade 826.0 1296.8 1921.2 3305.2 2829.5 3227.9

WIP 100.5 -272.7 -86.4 -256.8 -247.6 -322.8

Employee Cost 1464.0 1708.5 1944.3 2145.6 2475.8 3026.2

Ad Spend 544.9 654.6 710.1 834.2 919.6 1089.4

Other expenses 3830.9 4381.9 5042.4 5355.1 6647.6 7583.6

Total expenses 12811.8 14905.9 17342.0 20453.2 23058.8 26507.3

EBITDA 6490.3 7669.1 9210.1 11174.3 12310.2 13841.8

Depreciation and Amortisation 643.9 699.1 745.5 859.1 943.2 968.4

Other Income 452.7 536.1 784.3 877.6 1061.1 1210.5

EBIT 6299.1 7506.1 9249.0 11192.8 12428.1 14083.9

Interest 53.4 70.9 80.5 87.2 12.9 17.9

PBT 6245.7 7435.2 9168.5 11105.7 12415.1 14065.9

Tax Exp 2034.9 2365.5 2845.8 3412.1 3910.8 4430.8

PAT 4210.8 5069.7 6322.7 7693.6 8504.4 9635.2

Growth-% (YoY)

Sales 15.7% 17.0% 17.6% 19.1% 11.8% 14.1%

EBITDA 24.7% 18.2% 20.1% 21.3% 10.2% 12.4%

PAT 25.4% 20.4% 24.7% 21.7% 10.5% 13.3%

Expenses on Sales-%

RM Cost 31.3% 31.6% 29.4% 28.7% 29.5% 29.5%

Ad Spend 2.8% 2.9% 2.7% 2.6% 2.6% 2.7%

Employee Cost 7.6% 7.6% 7.3% 6.8% 7.0% 7.5%

Other expenses 19.8% 19.4% 19.0% 16.9% 18.8% 18.8%

Tax rate 32.6% 31.8% 31.0% 30.7% 31.5% 31.5%

Margin-%

EBITDA 33.6% 34.0% 34.7% 35.3% 34.8% 34.3%

EBIT 32.6% 33.2% 34.8% 35.4% 35.1% 34.9%

PAT 21.8% 22.5% 23.8% 24.3% 24.0% 23.9%

Valuation:

CMP 263.2 181.5 256.5 335.0 325.0 325.0

No of Share 381.8 773.8 779.6 790.2 790.2 790.2

NW 14458.3 16489.9 19458.6 23157.9 26808.9 31128.5

EPS 11.0 6.6 8.1 9.7 10.8 12.2

BVPS 37.9 21.3 25.0 29.3 33.9 39.4

RoE-% 29.1% 30.7% 32.5% 33.2% 31.7% 31.0%

P/BV 6.9 8.5 10.3 11.4 9.6 8.2

P/E 23.9 27.7 31.6 34.4 30.2 26.7

HCLTECH

1M 1yr YTD

Absolute 17.8 109.4 149.1

Rel. to Nifty 15.4 105.1 131


Promoters 61.84 61.92 61.99

FII 26.01 24.45 24.32

DII 5.70 6.49 6.56

Others 6.45 7.14 7.13


Revenue 8184 7961 2.8 6273.8 30.4

EBITDA 2125 2093 1.5 1417 50.0

PAT 1495 1416 5.6 965 54.9



24

Segmental Performance: Infrastructure Services (contributes 34% of sales) continued to

lead with growth at 4.6%, and BPO services (contributes 5% of sales) grew by

10%(QoQ)followed by Enterprise Application at 1.6%, Custom Application Services at

1.4% and Engineering/ R&D Services at 1%, respectively.

Stable Margin: During the quarter, its EBITDA Margin was almost flat at 26% and good

thing is, company has been able to maintain its range of 25-26% for its margin. PAT

margin improved by 50bps to 18.3%, sequentially.

Following the successive 10th quarter, again company witnessed healthy growth in

2QFY14 than street expectation. Sales grew by 2.8% (QoQ) in INR term and 4% (QoQ)

in USD term led by 4.6% of growth from Infrastructure services and BPO services.

During the quarter, the company has crossed the landmark of USD5bn. PAT grew by

5.6 %(QoQ) in INR term and 7.1% (QoQ) in USD term.

Mixed performance across verticals: The Company contributed strong growth in the

Retal and manufacturing verticals. Retail & CPG and Manufacturing’s revenue growth up

by 6.5% and 3.7% respectively and Financial Services up by 2.4%. While growth from

Healthcare and Other services declined by 5.2% and 16.1% respectively.

Healthy deal pipeline: During the quarter, HCL Tech reported an addition of 15

transformational deals in the US and Europe for the December quarter. These wins have

been in the momentum markets of manufacturing and Financial Services as well as the

emerging momentum markets of life sciences & Healthcare and Public Services. Across

the geographies, USA and Europe remain best to drive deal wins during the quarter

because of healthy scenario of demand environment.

The company continues to lead the industry in profitable growth, with 11 successive

quarters of net income margin expansion, having reported 55% growth in Net Income

on Yearly basis. Management is confident to focus on vendor consolidation and cost

control activities to maintain its growth story.


Nifty 6319

Stock Performance

Average Daily Volume 1193062

Previous Target Price 1194

Upside 12%


1 year forward P/E

Rs, Crore



View and Valuation: HCL tech’s decent level of utilization, focused on cost control and

utilization of new market opportunities through vendor’s consolidation would provide a

new shape to the company in near future. On performance front, it continues to be

bullish on the rebid market and bullish on short-term to medium term, momentum on

deals pipeline also looking robust. Considering the increasing discretionary spends

across the geographies like US and Europe, we expect healthy earnings performance

ahead. At a CMP of Rs 1392, stock trades at 17.5x of FY14E earnings, We retain BUY on

the stock and revised our target price from Rs 1194 to Rs1560.

"Retain confidence"

CMP 1392

Target Price 1560

Result update Buy HCL tech beats expectations with a sustained momentum in volumes and proved its

consistency to maintain its margin at 26% mark;

30.7%

52wk Range H/L 1398/653

97287Mkt Capital (Rs Crores)


NSE Symbol HCLTECH

"BUY"17th Jan' 14


25

Clients Metrics

Employee Metrics



HCLTECH

Sales(USD term) and Sales growth-%(QoQ)

Margin-%

Utilization rate



Utilization down from 84.9% to 84.1%.

Further, it's Utilization are at decent

levels, indicated can still derive more

efficiency .

In dollar terms, the revenues grew by

4% QoQ (cc terms 3.1%) to USD 1321mn

and net profit grew by 7.1% QoQ to

USD 241.6mn.

Tha company expects to maintain EBIT

margin at 18.5-19.5% in FY14


. 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14

Top 5 Clients 15.3% 15.8% 16.0% 16.4% 16.2% 15.7% 15.4% 15.4% 15.1% 14.8%

Top 10 Clients 24.1% 24.2% 24.3% 24.7% 24.5% 24.2% 24.0% 23.8% 23.8% 23.8%

Top 20 Clients 34.2% 33.9% 33.9% 34.1% 33.6% 33.3% 32.8% 33.0% 33.2% 33.6%

Clients Contribution

. 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14

No of Employee 70321 72055 72474 74675 75621 75226 74226 74912 87196 88332

Gross Addition 6927 4931 3303 5274 4479 3291 2933 4316 8061 7593

Attrition 15.9% 15.7% 15.0% 14.0% 13.6% 13.6% 14.2% 14.9% 16.10% 16.6%

26


Financials;

HCLTECH

Key facts from Con-CallThe company is expecting to catch up more deal from US and Europe because of better

demand environment ahead. Clients are looking vendor’s consolidation, and company will

try to turn this opportunity into deal.

The company expects to see margin at a range of 21-22% in near term. The wage hike is

spread over two quarters or rather more than two quarters. Q3 and Q4 margin could be

impact be 30bps.

The infrastructure business is largely under penetrated globally, less than 5% from an

Indian (vendor's) standpoint. They expect to see significant growth over there, in that

business and expect to raise infrastructure services margins by supporting customers

migrating to cloud computing.



Rs, Cr FY10 FY11 FY12 FY13 FY14E FY15E

Net Sales-USD 2704.6 3545.3 4151.5 4686.5 5379.7 6492.2

Net Sales 12136.3 15730.3 20830.6 25581.1 32278.2 38628.3

Raw Materials Cost 443.6 522.1 612.0 959.3 968.3 1158.8

Employee Cost 6253.7 8589.6 11104.6 12574.2 16139.1 19507.3

Operation and other expenses 3498.5 4163.2 5418.8 6386.4 7101.2 8691.4

Total Expenses 10195.7 13274.9 17135.3 19919.9 24208.6 29357.5

EBITDA 1940.6 2455.4 3695.2 5661.2 8069.5 9270.8

Depreciation 418.1 459.7 549.2 636.8 748.6 903.4

Other Income 154.1 299.7 206.5 306.6 511.6 645.6

Extra Ordinery Items 0.0 0.0 0.0 44.5 -484.2 77.3

EBIT 1522.5 1995.7 3146.0 5024.4 7320.9 8367.3

Interest Cost 204.1 142.6 142.6 105.6 79.2 59.4

PBT 1472.4 2152.8 3209.8 5269.9 7269.1 9030.8

Tax 213.4 488.5 782.7 1225.3 1744.6 2212.5

PAT 1259.0 1664.3 2427.1 4044.6 5524.5 6818.2

Sales-USD 24.1% 31.1% 17.1% 12.9% 14.8% 20.7%

Sales 18.6% 29.6% 32.4% 22.8% 26.2% 19.7%

EBITDA 5.9% 26.5% 50.5% 53.2% 42.5% 14.9%

PAT -4.6% 32.2% 45.8% 66.6% 36.6% 23.4%

Margin -%

EBITDA 16.0% 15.6% 17.7% 22.1% 25.0% 24.0%

EBIT 12.5% 12.7% 15.1% 19.6% 22.7% 21.7%

PAT 10.4% 10.6% 11.7% 15.8% 17.1% 17.7%

Expenses on Sales-%

Employee Cost 51.5% 54.6% 53.3% 49.2% 50.0% 50.5%

RM Cost 3.7% 3.3% 2.9% 3.8% 3.0% 3.0%

Operation and other expenses 28.8% 26.5% 26.0% 25.0% 22.0% 22.5%

Tax rate 14.5% 22.7% 24.4% 23.3% 24.0% 24.5%

Valuation

CMP 364.9 493.5 490.0 759.5 1392.0 1392.0

No of Share 67.9 68.9 69.3 69.6 69.6 69.6

NW 6288.8 7653.0 9837.9 13164.0 17548.4 23226.5

EPS 18.5 24.2 35.0 58.1 79.4 97.9

BVPS 92.6 111.1 141.9 189.1 252.1 333.7

RoE-% 20.0% 21.7% 24.7% 30.7% 31.5% 29.4%

Dividend Payout ratio 25.0% 31.5% 33.1% 24.2% 20.6% 16.7%

P/BV 3.94 4.44 3.45 4.02 5.52 4.17

P/E 19.68 20.43 13.99 13.07 17.54 14.21

Growth-%

Narnolia Securities Ltd402, 4th floor 7/ 1, Lords Sinha Road Kolkata 700071, Ph

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email: [email protected],

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