INDIA DAILY
May 24, 2013 India 23-May 1-day1-mo 3-mo Sensex 19,674 (1.9) 2.6 1.8
Nifty 5,967 (2.1) 2.2 2.0
Contents Global/Regional indices Special Reports Dow Jones 15,295 (0.1) 4.2 9.2 Nasdaq Composite 3,459 (0.1) 5.8 9.4
Strategy FTSE 6,697 (2.1) 4.1 5.7 Strategy: E-governance Nikkie 14,922 3.0 7.8 31.1 Hang Seng 22,767 0.4 2.6 (0.1) Strategy: Rush to comply with MPS norms KOSPI 1,975 0.3 2.1 (2.2) Daily Alerts Value traded – India Cash (NSE+BSE) 173 127 129 Results Derivatives (NSE) 2,653 2,129 1,205
State Bank of India: Can growth solve key problems? Deri. open interest 1,668 1,570 1,576
Bharat Heavy Electricals: Ordering revival necessary for stock re-rating; not visible yet on sectoral issues
Tata Steel: Excellent overall performance Forex/money market JSW Steel: Volume-led beat Change, basis points 23-May 1-day 1-mo 3-mo Thermax: Negative outlook on broader capex scenario; seeing few large Rs/US$ 55.7 (4) 135 163 enquiries 10yr govt bond, % 7.5 1 (36) (47) Net investment (US$mn) Results, Change in Reco 22-May MTD CYTD DishTV: Weak 4QFY13 on expected lines but operating metrics surprise yet FIIs 294 3,175 14,509 again MFs (38) (491) (2,061)
Sector Top movers -3mo basis Change, % Cement: 4QFY13 - disappointing on volume and pricing Best performers 23-May 1-day 1-mo 3-mo RCOM IN Equity 106.0 (3.5) 12.1 50.4 UNSP IN Equity 2411.0 (3.0) 14.8 33.1 HUVR IN Equity 585.3 0.0 22.1 28.5 UNTP IN Equity 157.3 1.1 21.9 25.5 LPC IN Equity 747.8 (2.7) 10.0 24.5 Worst performers MMTC IN Equity 228.5 (7.0) 3.0 (57.7) WLCO IN Equity 47.8 (3.1) (5.9) (43.1) SUEL IN Equity 13.4 (4.3) (7.0) (42.5) EDSL IN Equity 63.6 (4.4) (3.4) (41.0) IVRC IN Equity 19.2 (7.7) (7.3) (35.0)
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INDIA Strategy
GameChanger MAY 24, 2013 NEW RELEASE
BSE-30: 19,674
E-governance. Indian Government’s interaction with its citizens (G2C) and businesses (G2B) is increasingly going electronic. Proposed laws on time-bound delivery via electronic platforms are imparting speed, timeliness and accuracy in important areas: (1) land, civil and judicial records, (2) benefits transfer and tax compliance, (3) procurement, auctioning and corporate affairs, among others. Transparency, accountability will reduce corruption; increase speed of doing business.
E-expressway: G2B and G2C interactions are increasingly electronic India, which works as the hub of global IT industry, has been a latecomer to leveraging IT for local governance. As India moves into an era of rights, Indians are waking up to a government that needs to be more accessible and accountable. These traits are difficult to obtain in a paper-based QUICK FACTS world; a virtual world where both interaction and money are digitized makes the task of making • Interactions the government accountable much easier. Most important, it dispenses with the regime of the ’maai-baap sarkaar‘ (a poor translation: paternalistic government). between Government and E-records of you, your rights and your fights citizens is now State governments now offer electronic registration and records of birth, citizenship, education, digital, increasing marriage and death, among other civil records. States are also implementing digitization of land speed and efficiency records with the ultimate aim of moving to a Torrens land record system. As revenue departments of business get digitized and property tax becomes an important source of revenue, records of land and property are becoming available online. Judicial records are now also online. The missing piece, • Big-data is helping thankfully (?), is the interaction between the various databases. government E-tax and e-cash: Government takes and gives the e-way enforce compliance whether in tax or in The digitization of direct and indirect tax functions has simplified the filing of records, maintaining land records compliance and getting refunds. Electronic filings also make it easier to track non-compliance and evasion by mixing and matching various databases. Considerable effort is being put in designing • More open data will the GST portal and its IT infrastructure. On the tax-spending side, the UID-Aadhar based payments lead to rigorous system is being created as a platform on which various applications of benefit transfer will rest. analysis – and E-marketplaces: India’s success stories better outcomes India has embraced the National e-governance plan, which aims to bring government services to the doorstep of its citizens. We study the model of top-down planning and execution and also detail a few case studies across various sectors where digitization has made a marked impact. A transparent world governed by rule of law
The government, as part of its National e-governance Plan, proposes to digitize various facets of its interaction with its citizens and businesses. Bills like ‘Electronic Delivery of Service Bill, 2011’, ‘Right of Citizens for Time Bound Delivery of Goods and Services and Redressal of their Grievances Bill, 2011’ and ‘Public Procurement Bill, 2012’ are creating the legal framework for time-bound electronic service delivery.
GameChangers: Increase bandwidth; free data; involve citizens
Digitizing India has the potential of reducing bureaucratic hurdles in starting and running businesses in India. Making interfaces more customer friendly, introducing and publicizing penal actions taken and consolidating the data across platforms will make governing India easier and possibly a lot cheaper. More important, the data that is generated needs to be made public in a format that can be understood by both humans and machines: high-quality data coupled with in- depth analysis can lead to significantly improved outcomes.
For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Strategy India
Exhibit 1: The digital interaction between the citizen/business and Government has improved meaningfully A digital device in the middle makes for a rule-based system
Source: Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 3 India Strategy
Exhibit 2: G2B and G2C interactions have changed meaningfully for the better Sample list of G2B and G2C interactions
Interaction Portal or authority G2B interactions Starting a company Online process at Ministry of Corporate Affairs website to register a company, get www.mca21.gov.in a name, etc. Filing taxes Online tax filing for both direct and indirect taxes Different portals for direct and indirect taxes Resource auctions Auctions are now electronic and anonymous Various portals/systems for different ministries like coal, telecom Procurement Government procurement now takes place via online bidding www.eprocure.gov.in G2C interactions Voting Electronic voting machines (EVMs) mean quicker, more accurate and tamper-proof EVMs run by an independent Election Commission counting of votes Filing taxes Online filing of income tax; quicker processing and refund https://incometaxindiaefiling.gov.in Land records Digitized agri-land records including ownership, cropping patterns, encumbrances, Various state portals etc Railway tickets State of the art website with easy booking and cancellation options www.irctc.co.in LPG cylinders Online/IVR booking of LPG gas cylinders Transparency portals of the three leading PSUs: BPCL, HPCL, IOCL Passports Online application and appoitment management system www.passportindia.gov.in Various civil records Birth, residency, marriage, caste, etc certificate can now be applied for and paid Each state/city has a separate portal online
Source: Kotak Institutional Equities
Exhibit 3: Various state governments are progressing briskly towards land records digitization Status of land record digitization across Indian states
Whether hand Whether legal sanctity Whether ROR Whether map written record given to computerized available on available on State name discontinued ROR web Website address web Date Assam Yes Yes Yes http://10.177.15.67/webdharitree No Jan 18, 2012 Bihar No No No No Jan 18, 2012 Chhattisgarh No Yes Yes http://cg.nic.in/cglrc Yes Mar 28, 2012 Goa Yes No Yes http://dslr.goa.nic.in No Jan 18, 2012 Gujarat Yes Yes No No Jan 18, 2012 Haryana No Yes Yes http://www.jamabandi.nic.in No Jan 18, 2012 Himachal Pradesh Yes Yes Yes http://admis.hp.nic.in/himbhoomilmk No Jan 09, 2012 Karnataka Yes Yes Yes http://bhoomi.karnataka.gov.in/landrecordsonweb No Jan 18, 2012 Kerala No No No No Jan 19, 2012 Maharashtra No Yes Yes http://mahabhulekh.maharashtra.gov.in No Jan 18, 2012 Sikkim Yes Yes No No Jan 18, 2012 Tamilnadu Yes Yes Yes http://taluk.tn.nic.in/eservicesnew/home.html No Jan 31, 2012 Tripura Yes Yes Yes tsu.trp.nic.in/jami No Feb 03, 2012 Uttarakhand Yes Yes Yes http://devbhoomi.uk.gov.in No May 26, 2012 Uttar Pradesh Yes Yes Yes http://bhulekh.up.nic.in No Jan 18, 2012 West Bengal Yes Yes No No Feb 16, 2012 Total 11 13 11 1
Source: National Land Records Modernization Programme, Department of Land Resources
4 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India
Exhibit 4: Digitized land records are more legible - and also reduce the importance of the local patwari Land records before and after Bhoomi implementation in Karnataka
Source: Bhoomi project, Karnataka
Exhibit 5: Online tax filers have increased 10X over the past five years Number of online returns filed, March fiscal year-ends, 2008-13 (mn)
25
20
15
10
5
0
2008 2009 2010 2011 2012 2013
Source: Income Tax Department, Government of India
KOTAK INSTITUTIONAL EQUITIES RESEARCH 5 India Strategy
Exhibit 6: Profiling of an individual by the tax department now draws from various databases Various databases in use by Government of India in profiling its taxpayers and citizens
Director in companies? Partner in firms?
Other matters of interest
Lineal ascendants / PAN Identity particulars? PAN descendants?
Start from PAN or PAN Siblings? Income details? AST Name or Mobile
Persons with common PAN Prepaid taxes? OLTAS address?
Investments / e-TDS Expenditure
Investments / Investments / AIR data CIB data STT Expenditure Expenditure
Source: Income Tax Department
6 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy.dot
INDIA Strategy
MAY 24, 2013 NEW RELEASE
BSE-30: 19,674
Rush to comply with MPS norms. The Indian market has seen 44 OFSs (offer for sale) and eight IPPs (institutional placement program) worth US$9 bn since the announcement of an amendment in the minimum public shareholding (MPS) norms. We estimate a further sale of around US$1.9 bn over the next few days (by June 3, 2013) as 75 private-sector companies have yet to comply with the 25% MPS norm. Another 12 PSUs have to comply with the MPS requirement of 10% by August 9, 2013; we estimate the sale amount at US$680 mn at current prices.
QUICK NUMBERS • 87 companies (75 private and 12 PSU) Minimum public shareholding: 10% for PSUs, 25% for private companies are yet to comply with the revised On June 4, 2010, the finance ministry amended the Securities Contracts (Regulation) Rules, 1957 minimum public (SCRR), raising the minimum public shareholding (MPS) requirement to 25% for listed companies shareholding norms or those that proposed to list. Listed companies that did not meet the MPS norm would be required to increase public shareholding by at least 5% a year until they met the norm. On August • US$1.9 bn supply of 9, 2010, the SCRR was amended again to revise public-sector companies’ MPS norms to 10% paper is expected (from 25%) within three years from August 2010. over the next few 87 companies yet to comply with revised MPS norms days
Many large-capitalization companies have complied with the MPS norms (see Exhibits 1-3). 87 • 30 companies in the actively traded companies (12 public and 75 private companies) have yet to comply with the BSE-500 Index have revised MPS norms (see Exhibits 4-5). So far, the market has seen 44 OFSs (offer for sale) and eight yet to comply with IPPs (institutional placement program) worth US$9 bn. Other private companies are hurrying to the MPS norms comply with the MPS norms before the June 2013 deadline (for public companies the deadline is August 2013). SEBI has allowed companies to take either one of the routes—FPO (follow-on public offer), OFS, IPP or bonus/rights issues—to comply with the revised norms. A company wanting to take any other route must take SEBI’s permission before doing so.
SEBI to levy penalties on non-compliant companies
According to media reports, SEBI is working on penalties for companies that may be unable to meet the revised MPS norms, but would be lenient with companies that made an effort to meet them. The regulator also stated it would try to ensure that any action taken would not harm the interests of minority shareholders.
For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. India Strategy
Exhibit 1: US$8 bn has been raised through the OFS route to comply with revised minimum public shareholding norms Dilution of promoter holdings through the OFS route
Pre-offer Post-offer Amount promoter holding Stake diluted promoter holding Company Month (Rs mn) (%) (%) (%) Oil & Natural Gas Corp. Mar-12 127,668 74.1 4.9 69.2 Wipro Mar-12 7,510 80.5 0.8 79.8 DB Corp. May-12 1,764 86.4 4.9 81.5 Parag Shilpa Investment Jun-12 1 78.9 3.9 75.0 Jaiprakash Power Ventures Jun-12 974 76.1 1.1 75.0 Uttam Sugar Mills Jul-12 23 78.1 3.1 75.0 Muthoot Capital Services Aug-12 28 77.5 2.5 75.0 Sical Logistics Sep-12 11 75.3 0.3 75.0 Adani Power Oct-12 1,934 76.6 8.3 68.3 Fresenius Kabi Oncology Oct-12 1,139 90.0 9.0 81.0 Pioneer Distilleries Oct-12 2 82.0 0.4 81.6 Xchanging Solutions Oct-12 9 75.6 0.6 75.0 DB Corp. Nov-12 2,456 81.5 6.5 75.0 Disa India Nov-12 453 86.5 11.5 75.0 Blue Dart Express Nov-12 2,791 81.0 6.0 75.0 Hindustan Copper Nov-12 8,079 99.6 5.6 94.0 STI India Dec-12 157 93.7 18.7 75.0 NMDC Dec-12 59,798 90.0 10.0 80.0 Honeywell Automation India Dec-12 1,388 81.2 6.2 75.0 Reliance Power Dec-12 14,445 80.4 5.4 75.0 Eros International Media Dec-12 522 77.8 2.9 75.0 Adani Enterprises Dec-12 6,518 80.0 2.1 77.9 MPS Dec-12 25 76.3 1.3 75.0 Oil India Feb-13 31,450 78.4 10.0 68.4 Adani Enterprises Feb-13 1,754 77.9 0.6 77.2 NTPC Feb-13 114,694 84.5 9.5 75.0 Elantas Beck India Feb-13 510 88.6 13.6 75.0 Sam Leaseco Feb-13 1 82.6 7.6 75.0 Adani Enterprises Mar-13 1,891 77.2 0.8 76.5 Aroni Commercials Mar-13 19 89.1 14.1 75.0 Mahindra Holidays & Resorts India Mar-13 923 82.7 4.0 78.7 Rashtriya Chemicals & Fertilisers Mar-13 3,105 92.5 12.5 80.0 Kennametal India Mar-13 1,479 88.2 13.2 75.0 National Aluminium Co. Mar-13 6,285 87.2 6.1 81.1 3M India Mar-13 447 76.0 1.0 75.0 SAIL Mar-13 15,162 85.8 5.8 80.0 Polylink Polymers (India) Mar-13 2 77.9 2.9 75.0 Berger Paints India Apr-13 346 75.5 0.5 NA Surat Textile Mills May-13 18 80.9 5.9 NA Linde India May-13 2,839 89.5 14.5 NA Styrolution ABS May-13 867 87.3 12.3 NA Omaxe May-13 740 89.1 2.9 NA JSW Energy May-13 1,736 76.7 1.7 NA Oracle Financial Services May-13 10,079 80.3 5.3 NA
Source: Prime Database, Kotak Institutional Equities
8 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India
Exhibit 2: US$700 mn has been raised through the IPP route Dilution of promoter holdings through IPP routes
Pre-offer Post-offer Amount promoter holding Stake diluted promoter holding Company Month (Rs mn) (%) (%) (%) Godrej Properties Mar-12 4,707 83.8 8.8 75.0 Godrej Industries Jul-12 3,705 79.1 4.1 75.0 Prestige Estates Projects Jan-13 3,640 80.0 5.0 75.0 Timken India Apr-13 512 80.0 5.0 75.0 Mahindra Holidays & Resorts India Apr-13 1,056 78.7 3.9 75.0 Thomas Cook (India) May-13 1,839 87.1 12.1 75.0 Fortis Healthcare May-13 3,219 81.5 6.5 75.0 DLF May-13 18,634 78.6 3.6 75.0
Source: Prime Database, Kotak Institutional Equities
Exhibit 3: Some companies followed the bonus and rights issue routes to comply with the minimum public shareholding norms Dilution of promoter holdings through bonus and rights issues
Pre-offer Post-offer promoter holding Stake diluted promoter holding Company Month (%) (%) (%) Westlife Development Dec-12 85.7 10.7 75.0 Pentokey Organy (India) Dec-12 83.2 8.4 74.7 Gammon Infrastructure Projects Jan-13 75.5 0.5 75.0
Source: Prime Database, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 9 India Strategy
Exhibit 4: We expect US$1.9 bn equity issuance to comply with minimum public shareholding norms Equity issuance to meet minimum public shareholding norms of 25% for private-sector companies (sorted on market cap.)
Mcap. Promoter (%) Promoter selling Company (Rs mn) Foreign Indian Total % stake to dilute (Rs mn) Adani Ports & Special Economic Zone 305,417 — 77.5 77.5 2.5 7,635 Adani Enterprises 240,913 8.6 67.9 76.5 1.5 3,517 Sun TV Network 161,476 — 77.0 77.0 2.0 3,230 L&T Finance Holdings 133,656 — 82.5 82.5 7.5 10,078 Oberoi Realty Ltd 78,316 — 78.5 78.5 3.5 2,733 Mangalore Refinery And Petrochemicals 73,346 — 88.6 88.6 13.6 9,960 Gillette India 69,939 41.1 47.7 88.8 13.8 9,617 Tata Communications 60,919 — 76.2 76.2 1.2 701 Muthoot Finance 53,192 — 80.1 80.1 5.1 2,723 Jaypee Infratech 51,946 — 83.3 83.3 8.3 4,296 Jet Airways (India) 50,626 80.0 — 80.0 5.0 2,531 Alstom T&D India 40,779 6.9 73.4 80.3 5.3 2,169 Bajaj Corp. 39,220 — 84.8 84.8 9.8 3,824 Essar Ports 37,483 66.5 13.8 80.3 5.3 1,987 Bombay Rayon Fashions 32,452 37.9 55.3 93.2 18.2 5,890 Omaxe 24,742 — 86.3 86.3 11.3 2,786 Fresenius Kabi Oncology 19,731 81.0 — 81.0 6.0 1,184 D P S C 19,086 — 93.0 93.0 18.0 3,436 Schneider Electric Infrastructure 18,411 4.4 73.7 78.1 3.1 576 Puravankara Projects 18,120 — 90.0 90.0 15.0 2,711 Astrazeneca Pharma India 17,864 90.0 — 90.0 15.0 2,680 Tata Teleservices (Maharashtra) 16,126 12.1 65.6 77.7 2.7 440 Novartis India 16,070 76.4 — 76.4 1.4 228 Chettinad Cement Corporation 14,717 — 94.5 94.5 19.5 2,867 BGR Energy Systems 13,722 — 81.1 81.1 6.1 841 Hubtown 10,238 — 82.5 82.5 7.5 767 Hindustan Media Ventures 9,794 — 76.9 76.9 1.9 190 Wheels India 7,801 35.9 49.7 85.6 10.6 828 Plethico Pharmaceuticals 6,922 — 77.7 77.7 2.7 187 Sundaram Clayton 5,922 — 80.0 80.0 5.0 296 Fairfield Atlas 5,832 83.9 — 83.9 8.9 520 Jyothy Consumer Products 4,844 — 83.7 83.7 8.7 419 Suashish Diamonds 4,298 — 89.4 89.4 14.4 620 Essar Shipping 4,135 79.7 4.0 83.7 8.7 360 Jolly Board 3,730 — 89.9 89.9 14.9 555 Cinemax India 3,080 — 93.2 93.2 18.2 560 Sharda Motor Industries 2,970 — 79.7 79.7 4.7 140 Marathon Nextgen Realty 2,370 — 89.1 89.1 14.1 335 Khoday India 2,235 — 89.5 89.5 14.5 325 Wendt India 2,170 39.9 39.9 79.7 4.7 103 EICL 1,860 — 77.9 77.9 2.9 54 Modern India 1,746 — 86.2 86.2 11.2 195 Madras Fertilizers 1,667 25.8 59.5 85.3 10.3 171 Shree Digvijay Cement Co. 1,600 75.3 — 75.3 0.3 4 Nitta Gelatin India 1,516 46.4 34.1 80.5 5.5 83 Saint-Gobain Sekurit India 1,353 61.3 24.5 85.8 10.8 146 Transformers & Rectifiers India 1,256 — 76.8 76.8 1.8 23 Dalmia Bharat Sugar & Industries 1,137 — 78.6 78.6 3.6 41 Indag Rubber 1,133 2.0 75.1 77.0 2.0 23 GMM Pfaudler 1,131 51.0 24.6 75.6 0.6 6 Rama Phosphates 870 72.9 8.5 81.5 6.5 56 Sah Petroleums 836 62.1 24.8 86.9 11.9 99 Vippy Industries 804 — 95.7 95.7 20.7 167 Pioneer Distilleries 794 — 81.6 81.6 6.6 52 Nagarjuna Agrichem 639 — 78.3 78.3 3.3 21 Joonktolle Tea & Industries 537 — 83.1 83.1 8.1 44 Sharp India 466 80.0 — 80.0 5.0 23 Bhagyashree Leasing & Finance 431 — 84.0 84.0 9.0 39 Dr Agarwals Eye Hospital 361 — 78.2 78.2 3.2 12 Mudra Lifestyle 346 65.8 20.0 85.8 10.8 37 Remi Metals Gujarat 335 — 87.3 87.3 12.3 41 Vintron Informatics 313 — 93.6 93.6 18.6 58 Trade-Wings 308 — 75.9 75.9 0.9 3 JCT Electronics 276 — 82.8 82.8 7.8 21 Monnet Sugar 271 — 76.6 76.6 1.6 4 Batliboi 270 — 81. 7 81.7 6.7 18 Polson 253 — 84.3 84.3 9.3 24 Gujarat Themis Biosyn 186 26.5 58.3 84.8 9.8 18 RDB Realty & Infrastructure 159 — 78.2 78.2 3.2 5 Steelco Gujarat 147 — 78.3 78.3 3.3 5 Blue Blends (India) 144 — 78.6 78.6 3.6 5 W H Brady & Co 138 — 81.8 81.8 6.8 9 Macro International Exports 97 — 83.5 83.5 8.5 8 India Cements Capital 67 — 85.7 85.7 10.7 7 Parshwanath Corporation 51 — 82.4 82.4 7.3 4 Notes: (a) Bharti Infratel has been excluded from the list.
10 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India
Exhibit 5: We expect US$680 mn equity issuance from Government companies Equity issuance to meet the minimum public shareholding norms of 10% for PSUs (sorted on market cap.)
Mcap. Promoter Promoter selling Company (Rs mn) (%) % stake to dilute (Rs mn) MMTC 228,500 99.3 9.3 21,319 Neyveli Lignite Corp. 108,883 93.6 3.6 3,876 India Tourism Development Corp. 104,064 92.1 2.1 2,196 Hindustan Copper 90,070 94.0 4.0 3,612 State Bank of Mysore 26,400 92.3 2.3 615 HMT 23,569 98.9 8.9 2,093 National Fertilizer 21,635 97.6 7.6 1,653 State Trading Corp. 10,173 91.0 1.0 104 Fertilizers & Chemicals Travancore 7,965 98.6 8.6 682 ITI 5,198 93.0 3.0 155 Andrew Yule & Company 4,449 93.3 3.3 147 Scooters India 946 95.4 5.4 51 Total 36,502
Source: Bloomberg, Capitaline, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 11
ADD State Bank of India (SBIN)
Banks/Financial Institutions MAY 24, 2013 RESULT Coverage view: Cautious
Can growth solve key problems? SBI’s move to grow its corporate loan portfolio Price (Rs): 2,178 aggressively (40% yoy) is raising new concerns on the outcome of such a strategy as it Target price (Rs): 2,430 has hurt its NIM profile, even as the weak economic environment suggests that chunky BSE-30: 19,674 loan impairment could surface in a shorter time-frame. Further, the bank is trading at a premium that could be tested over the next few quarters. While we do not derive comfort from this strategy, we believe the alternative option to shift to other public banks could be risky. SBI’s tier-1 ratio, liability profile and retail business offer comfort. Maintain ADD.
Company data and valuation summary State Bank of India Stock data Forecasts/Valuations 2013 2014E 2015E QUICK NUMBERS 52-week range (Rs) (high,low)2,552-1,815 EPS (Rs) 206.2 210.4 227.0 Market Cap. (Rs bn) 1,489.5 EPS growth (%) 18.2 2.0 7.9 • Earnings decline Shareholding pattern (%) P/E (X) 10.6 10.4 9.6 Promoters 62.3 NII (Rs bn) 443.3 507.1 561.6 19% yoy; NIM FIIs 13.2 Net profits (Rs bn) 141.1 143.9 155.2 decline >10 bps qoq MFs 4.9 BVPS 1,127.3 1,252.0 1,403.1 Price performance (%) 1M 3M 12M P/B (X) 1.9 1.7 1.6 • Gross NPLs at 4.8%; Absolute (4.8) (0.8) 11.4 ROE (%) 15.4 13.8 13.4 restructured loans Rel. to BSE-30 (7.2) (2.6) (9.7) Div. Yield (%) 1.9 2.0 2.1 at 3.1% of loans
A bold move to grow large corporate loan portfolio as the shift is hurting near-term performance • Maintain ADD with TP of `2,430 (from SBI reported a weak revenue growth as NII declined 5% yoy despite a strong loan growth of 21% `2,420 earlier) yoy and using the balance sheet as effectively as possible (CD ratio >80%). Revenue growth saw limited contribution from non-interest income, especially treasury gains, while fee income declined 8% yoy. FY2013 saw NII growth at <3% yoy while balance sheet expanded 17% yoy.
Large corporate loans grew 40% yoy (12% qoq) led by infrastructure, iron and steel and textiles. However, to reduce risk of strong growth, management has opted for loan takeover and/or choosing companies with strong balance sheet. On the other hand, the bank is building its retail portfolio (15% yoy) through aggressive pricing, in portfolios where the stress is not as large as the corporate portfolio. The shift is hurting NIM, which has declined ~15 bps qoq (~70 bps yoy).
Loan impairment ratios showed mixed trends. NPLs declined on the back of lower slippages (2.4% of loans) and higher upgradation (2% of loans). However, upgradation was driven primarily by higher restructuring (3.5% of loans). Restructured loans increased 70 bps qoq to 3% of loans.
Multiple headwinds appearing in the short term; maintain ADD
We believe the outperformance witnessed against its peers in recent quarters is likely to be challenged in the medium term. The bank is trading at a significant premium to BoB and PNB— both have slowed their balance sheet growth to focus on reducing their loan impairment ratios. The strong growth in low-yielding, low-risk loans could result in further margin adjustment and/or rise in NPLs in some of these exposures. However, these banks are in a phase of consolidation of their respective business and have skewed balance sheet that is positioned for investment cycle.
We take a cautious approach to our earnings estimates as NIM compression has scope for reduction but keep credit costs elevated to factor (1) chunky loan impairment, (2) improvement in coverage ratio and (3) dynamic provisions. Our positive rating is driven by the bank’s strong liability profile (CASA ratio >40%), healthy tier-1 ratio (9.5%) and flexible model that allows growth in retail. We maintain our ADD rating with TP at `2,430/share (standalone at ~1.8X FY2014E adjusted book and its banking subsidiaries at 1X book).
For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
State Bank of India Banks/Financial Institutions
Delinquencies high; improvement in provision coverage provides comfort
Fresh impairments remained high at 6% of loans, 2.4% of fresh slippages and 3.6% of fresh restructuring. Slippages for the quarter were largely driven by the corporate portfolio (~50%). Gross NPLs decreased 4% on an absolute basis driven by high upgradation (1.9% annualized). However, ~45% of these upgradations were led by approval of restructuring packages for the borrowers, which led to a commensurate increase in the restructured portfolio (24% of the fresh restructuring came from upgradation in the NPL portfolio). Decline in slippages and overall NPLs in the agriculture, SME and retail segments are encouraging but these are driven by seasonal factors. Performance in 1HFY14 would be crucial to understand the NPLs of these portfolios.
Outstanding restructured loans increased to 4% of overall loans from 3.4% in Dec 2012, the standard restructured advances being 3.1% of loan book. Of the `87 bn of fresh restructuring (3.6% annualized), 40% belongs to three accounts in the power sector. The management highlighted that the pipeline for restructured loans continues to remain high. The bank has `40 bn of SEB exposure to 3 SEBs, 90% (2 accounts) of which has been restructured recently and would be reflected in 1QFY14.
We derive some comfort from the additional provisions made to improve the provision coverage ratio during the quarter, 67% (500 bps qoq). However, we remain cautious on high stress (NPL and restructured loans) in the corporate portfolio: textiles (11%), engineering (11%) and iron and steel (14%). We factor slippages at 3-3.2% of loans and credit costs to remain at 1.4% for FY2014-15E.
Exhibit 1: Corporate and agri sectors have seen higher slippages in the current quarter Slippages from various sectors, March fiscal year-ends, 4QFY11-4QFY13 (` bn)
Loans - Slippages (%, 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 FY2012 annualised) Corporate (mid and top) 19 17 25 39 26 36 23 44 28 2,941 4.5 International 5 1 1 6 2 9 1 2 1 1,357 1.0 SME 14 20 22 21 8 31 29 21 16 1,691 5.7 Agri 13 14 20 11 5 19 10 9 10 863 5.6 Retail 6 9 12 4 4 14 9 6 3 1,824 1.7 Total 56 62 80 82 46 108 71 82 59 8,676 3.7
Source: Kotak Institutional Equities
Exhibit 2: NPLs in mid-corporate loans have increased significantly in the recent quarters Sectoral break-up of credit and stressed assets, March fiscal year-ends, 4QFY12-4QFY13 (%)
Gross NPL (%) Restructured loans (%) 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 Corporate 0.4 0.2 0.2 0.5 0.6 6.7 5.8 6.0 3.8 — Mid-corporate 7.4 9.9 10.0 11.1 9.0 13.1 13.4 14.7 7.1 — International 1.9 2.0 1.9 1.6 1.7 1.2 1.1 0.9 —— SME 7.1 10.0 9.9 9.0 7.9 1.3 1.4 1.8 2.1 — Agri 9.0 7.3 8.1 9.9 9.3 0.3 0.1 0.1 —— Retail 2.3 2.6 2.6 2.4 2.0 0.0 0.0 0.0 —— Total 4.4 5.0 5.2 5.3 4.8 4.2 3.9 4.2 2.4 3.0
Notes: (a) Gross NPL has been calculated based on outstanding NPL in each category to the reported advances. These ratios differ from those reported by the bank (exposures have been reclassified between various segments). (b) Restructured loans restated as per recent RBI guidelines (restructured loans performing satisfactorily moved out of restructured category).
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 13 Banks/Financial Institutions State Bank of India
Exhibit 3: Gross NPLs increased sharply on the back of higher slippages across large corporate portfolio Movement of NPLs, March fiscal year-ends, 4QFY11-4QFY13 (` bn)
4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 Opening 234.4 253.3 277.7 339.5 401.0 396.8 471.6 492.0 534.6 Addition 56.5 61.2 82.7 81.6 43.8 108.4 71.1 81.8 58.7 Cash recoveries 26.6 12.0 7.4 10.3 16.0 12.5 14.3 9.6 11.3 Upgradation 0.1 18.8 10.4 9.4 31.2 20.3 16.6 18.4 45.9 Write-off 10.9 6.0 3.2 0.4 0.8 0.8 19.8 11.2 24.2 Closing Gross NPL 253.3 277.7 339.5 401.0 396.8 471.6 492.0 534.6 511.9
Source: Company, Kotak Institutional Equities
Exhibit 4: Gross NPLs and restructured assets across major industries March fiscal year-end, 2013 (` bn)
NPL Restructured NPA+ % of % of Restructured Exposure Outstanding advances Standard NPL Outstanding advances (%) Infra 1,145 9 0.8 16 5 22 1.4 2.2 Iron & Steel 641 37 5.8 53 16 68 8.2 14.0 Textiles 458 24 5.3 28 15 43 6.1 11.4 Engineering 263 21 8.1 8 3 11 2.9 11.1
Source: Company, Kotak Institutional Equities
Exhibit 5: Coverage ratio at about 67% is one of the best among PSU banks Coverage ratio, March fiscal year-end, 4QFY13 (%)
Inc write-off Ex write-off 100
80
60
40
20
- BoI IOB SBI BoB PNB OBC Union Indian Corpn Canara Andhra
Source: Company, Kotak Institutional Equities
14 KOTAK INSTITUTIONAL EQUITIES RESEARCH State Bank of India Banks/Financial Institutions
Exhibit 6: Slippages as a percentage of restructured book increased significantly Restructured loans and slippages, March fiscal year-ends, 1QFY12-4QFY13 (` bn)
1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 Accounts restructured (gross) 349 354 376 427 433 478 506 593 % of loans 4.4 4.4 4.3 4.8 4.6 5.0 5.0 5.5 Slippages 60 78 97 110 123 126 109 109 % Slippages 17.2 21.9 25.7 25.8 28.4 26.4 21.6 18.3 Accounts restructured (net) 313 372 369 405 348 431 % of loans 3.7 4.3 4.0 4.4 3.6 4.1 Standard restructured advances (net) 139 162 141 163 164 219 238 322 % of loans 1.8 2.0 1.7 1.9 1.8 2.4 2.4 3.1
Notes: (a) Definition for restructured loans has been revised in 3QFY13 making it non comparable with previous quarters. However, the bank in 3QFY13 provided restructured loans (standard) as per the new guidelines for the past few quarters to give a trend line of this portfolio.
Source: Company, Kotak Institutional Equities
NIM decline >10 bps qoq led by decline in lending yields and flat cost of funds
Overall NIM declined >10 bps qoq to 3.2% led by similar decline in domestic margins to 3.4%. International margins declined by ~10 bps to 1.5%. Yield on advances (KS-calc) declined >50 bps qoq as the impact of aggressive pricing done on asset side for high rated accounts started to reflect while cost of deposits remained relatively flat. The bank’s CD ratio is on the higher side (CD ratio moved up 300 bps qoq to 82%) with limited scope for further expansion from current levels.
We expect margins to remain under pressure and decline by ~10-15 bps by FY2015E as incremental growth is likely to be driven by refinancing opportunities and retail loans, where yields are lower, should exert a downward pressure on margins.
CASA ratio improved 100 bps qoq to 47% of domestic deposits. Overall growth in savings deposits remains healthy at 15% yoy, and current deposits grew 12% yoy. Contribution from wholesale deposits is less than 1% of the overall deposits.
Exhibit 7: Credit/deposit ratio increased during the quarter Exhibit 8: Margins to remain under pressure March fiscal year-ends, 4QFY10-4QFY13 (%) March fiscal year-ends, 4QFY10-4QFY13 (%)
90 4.2 4.1 4.0 86.9 87 3.8 3.8 3.6 3.7 84.5 84.6 3.7 84 3.4 3.4 3.4 82.7 83.183.1 3.4 3.2 81.0 3.2 81 81.2 81.8 3.1 80.1 81.1 3.0 79.6 3.0 78.6 78 2.6
75 2.2 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13
Source: Kotak Institutional Equities, Company Source: Kotak Institutional Equities, Company
KOTAK INSTITUTIONAL EQUITIES RESEARCH 15 Banks/Financial Institutions State Bank of India
Exhibit 9: Stable NIMs driven by slower loan re-pricing Exhibit 10: Deposit rates remain high in >1-year bucket Change in base rate and PLR (%) Change in term deposit rates for deposits less than `10 mn (%)
Date PLR Base rate Mar-12 Apr-12 Jun-12 Jul-12 Aug-12 Sep-12 Mar-13 7-14 days 8.00 7.25 7.00 7.00 7.00 6.50 6.50 21-Oct-10 12.50 7.60 15-30days 8.00 7.25 7.00 7.00 7.00 6.50 6.50 3-Jan-11 12.75 8.00 31-45days 8.00 7.25 7.00 7.00 7.00 6.50 6.50 46 -90 days 8.00 7.25 7.00 7.00 7.00 6.50 6.50 14-Feb-11 13.00 8.25 91-120days 8.00 7.25 7.00 7.00 7.00 6.50 6.50 25-Apr-11 13.25 8.50 120-180 days 7.00-8.00 7.25 7.00 7.00 7.00 6.50 6.50 181-270 days 8.00 7.50 7.25-7.50 7.25-7.50 7.0-7.50 6.50 6.50 12-May-11 14.00 9.25 271 days-1year 8.00 7.50 7.50 7.50 7.50 6.50 6.50 7-Jul-11 14.25 9.50 1 year-2year 9.25 9.00 9.00 9.00 9.00 8.50 8.75 2 year-3year 9.25 9.00 9.00 9.00 9.00 8.50 8.75 13-Aug-11 14.75 10.00 3 years-5 years 9.25 8.75 8.75 9.00 9.00 8.50 8.75 20-Sep-12 14.50 9.75 5 years-8 years 9.25 8.75 8.75 8.75 8.50 8.50 8.75 8years-10 years 9.25 8.75 8.75 8.75 8.50 8.50 8.75 30-Jan-13 14.45 9.70
Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities
Exhibit 11: CA ratio to overall deposits is declining sharply in recent years CASA ratio break-up across banks, March fiscal year-ends, 2007-13 (%)
Current Savings 60
48
36 29.7 28.7 32.0 35.4 26.7 35.4 34.5 24
12 18.8 18.3 14.9 15.2 14.0 9.4 9.2 -
2007 2008 2009 2010 2011 2012 2013
Source: Company, Kotak Institutional Equities
Growth above industry average, high exposure to stressed sectors
Overall loans grew 21% yoy, much ahead of industry average, driven by strong growth in large corporate loans (40% yoy) and international loans (25% yoy). Large corporate loans grew 40% yoy, the fastest pace in past four quarters, led by capitalizing on refinancing opportunities and short-term lending. Loans to mid-corporate and SME segments grew at a subdued pace of 18% yoy and 9% yoy respectively, in line with management’s strategy as the bank witnessed elevated stress in these categories in the past few quarters. We are disappointed by the traction in retail loans, 15% yoy despite strong management focus. Housing loans grew 16% yoy compared to system (banks and NBFCs) average of 19% yoy, resulting in marginal decline in market share, 40 bps to 15.7% in housing loans.
The bank continues to show strong growth in exposures to stressed sectors (infrastructure, iron and steel, textiles and engineering), which is disappointing, 26% yoy (9% qoq, 24% of overall loans). Overall exposure to infrastructure stands at 11% (power 5.5%), iron and steel 6% and textiles 4% of total loans.
16 KOTAK INSTITUTIONAL EQUITIES RESEARCH State Bank of India Banks/Financial Institutions
Exhibit 12: Infrastructure, especially power and telecom, has seen a significant rise in exposure Break-up of loans, March fiscal year-ends, 4QFY12-4QFY13 (%)
4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 (Rs bn) (%) (Rs bn) (%) (Rs bn) (%) (Rs bn) (%) (Rs bn) (%) YoY (%) QoQ (%) Net advances 8,676 9,168 9,269 9,781 10,456 20.5 6.9 Infrastructure 884 10.2 873 9.5 985 10.6 1,052 11.3 1,145 12.4 29.6 8.9 Power 395 4.6 422 4.6 479 5.2 499 5.4 578 6.2 46.1 15.8 Roads & ports 122 1.4 120 1.3 131 1.4 139 1.5 144 1.6 18.1 3.7 Telecom 151 1.7 179 1.9 185 2.0 228 2.5 230 2.5 52.1 1.0 Iron & Steel 481 5.5 438 4.8 498 5.4 565 6.1 641 6.9 33.2 13.3 Textiles 384 4.4 304 3.3 386 4.2 420 4.5 458 4.9 19.3 9.0 Engineering 247 2.9 293 3.2 257 2.8 262 2.8 263 2.8 6.2 0.3 Total 1,996 23.0 1,907 20.8 2,126 22.9 2,299 24.8 2,506 27.0 25.6 9.0
Notes: (a) SBI has made changes in the outstanding exposure to respective sectors for previous quarters. We have taken the latest update wherever available.
Source: Company, Kotak Institutional Equities
Other key financial highlights for the quarter
` Cost-income ratio increased 600 bps qoq to 53% compared to 47% in Dec 2012. Staff expenses increased 30% qoq (8% yoy) as the bank made high provisions for the new wage settlement in the current quarter; no provisions were made in the previous two quarters. Retirement-related expenses grew 21% qoq (declined 14% yoy on a high base) while non-staff expenses increased 22% qoq (68% yoy). We note that SBI had changed its retirement accounting policy in 1QFY13 and values the impact of these costs on a quarterly basis as compared to an annual exercise done earlier.
` Non-interest income increased 52% qoq, 5% yoy on a high base, driven by sharp rise in treasury gains (`2 bn). Ex-treasury gains, other income was flat compared to 4QFY12. Core fee income reported a decline of 8% yoy, while income from forex increased 42% yoy. Income from dividends increased 24% yoy. We expect fee income growth at 3% CAGR for FY2012-14E.
` Consolidated earnings declined 31% yoy to `39 bn. SBI Life reported a profit of `2 bn, while SBI Capital Markets posted a profit of `840 mn.
` Overall tier-1 ratio stands at 9.5% and overall capital adequacy at 12.92%.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 17 Banks/Financial Institutions State Bank of India
Exhibit 13: Cost-income ratio has increased 600 bps qoq Exhibit 14: Slippages from SME and mid-corporate loans led to Operating costs and cost-income ratio, March fiscal year-ends, rise in NPL 4QFY12-4QFY13 (%) Gross NPL for SBI and associates, March fiscal year-ends, 4QFY12- 4QFY13 (` mn) Operating costs (LHS) (Rs bn)Cost-income (RHS) (%) SBI SBI Associates 75 70 600
60 62 480
45 54 360
30 46 240
15 38 120
0 30 - 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13
Source: Kotak Institutional Equities, Company Source: Kotak Institutional Equities, Company
Exhibit 15: Consolidated net profit shows muted performance across all subsidiaries Net profit of subsidiaries, March fiscal year-ends, 4QFY11-4QFY13 (` mn) Growth 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 YoY (%) Subsidiary banks Standalone 209 15,836 28,104 32,630 40,503 37,517 36,581 33,961 32,992 4.1 State Bank of Bikaner and Jaipur 1,878 1,280 1,122 1,639 2,479 1,677 1,692 2,151 1,782 31.2 State Bank of Hyderabad 4,503 2,839 2,321 3,013 4,810 3,352 2,134 3,217 3,799 6.8 State Bank of Mysore 1,638 643 778 1,110 1,162 398 1,453 1,547 762 39.5 State Bank of Tranvancore 2,383 1,392 1,169 1,012 1,530 1,814 1,356 1,320 1,660 30.4 State Bank of Patiala 2,244 1,203 1,554 2,442 2,766 2,240 1,377 1,815 1,236 (25.7) Total 12,855 23,193 35,048 41,845 53,249 46,998 44,594 44,011 42,230 5.2 SBI Life 650 1,440 560 650 2,910 1,630 1,580 1,010 2,000 55.4 Others 1,187 (219) (200) 1,784 (527) 1,622 582 2,586 (5,614) 45 Consolidated net profit 14,692 24,414 35,408 44,279 55,632 50,250 46,757 47,607 38,617 7.5
Source: Company, Kotak Institutional Equities
18 KOTAK INSTITUTIONAL EQUITIES RESEARCH State Bank of India Banks/Financial Institutions
Exhibit 16: Key changes to our estimates for FY2014-15E Old and new estimates, March fiscal year-ends, 2014-15E (` mn)
New estimates Old estimates % change 2014E 2015E 2014E 2015E 2014E 2015E Net interest income 507,112 561,649 511,482 567,010 (0.9) (0.9) Loan growth 12.8 13.2 13.2 14.2 NIM (%) 3.1 3.0 3.3 3.1 Loan loss provisions 150,212 169,793 149,420 169,983 0.5 (0.1) Other income 184,410 205,921 182,395 203,563 1.1 1.2 Fee income 128,618 144,052 128,647 144,085 (0.0) (0.0) Treasury income 16,000 17,000 16,000 17,000 —— Operating expenses 334,011 377,306 335,991 375,018 (0.6) 0.6 Employee expenses 214,619 245,604 219,604 244,847 (2.3) 0.3 Investment depreciation (1,000) (1,000) 1,000 1,000 (200.0) (200.0) PBT 208,552 221,775 206,766 223,732 0.9 (0.9) Tax 64,651 66,532 62,030 67,120 4.2 (0.9) Net profit 143,901 155,242 144,736 156,612 (0.6) (0.9) PBT - treasury+LLP 341,764 373,568 341,186 377,715 0.2 (1.1)
Source: Kotak Institutional Equities
Exhibit 17: SBI forecasts and valuation March fiscal year-ends, 2010-15E
Net int. BVPS incl banking P/B Cons banking income PAT EPS P/E ABVPS P/B subs. book RoE (Rs bn) (Rs bn) (Rs) (X) (Rs) (X) (Rs) (X) (%) 2010 237 92 144 15.1 858 2.5 1,158 1.7 14.8 2011 325 83 130 16.7 791 2.8 1,121 1.8 12.6 2012 433 117 174 12.5 988 2.2 1,417 1.4 15.7 2013 443 141 206 10.6 1,127 1.9 1,610 1.2 15.4 2014E 507 144 210 10.4 1,252 1.7 1,694 1.2 13.8 2015E 562 155 227 9.6 1,403 1.6 1,900 1.0 13.4
Source: Kotak Institutional Equities, Company
Exhibit 18: State Bank of India: Rolling PER and PBR Exhibit 19: SBI is trading at a significant premium to peers May 2005 - May 2013 SBI trading premium to PSU banks, May 2006 – May 2013
25.0 3.6 1.8 Rolling PER (X) (LHS) Rolling PBR (X) (RHS) 20.0 2.9 1.6
15.0 2.2 1.4
10.0 1.4 1.2
5.0 0.7 1.0
0.0 0.0 0.8 May-06 May-07 May-08 May-09 May-10 May-11 May-12 May-13 May-05 May-06 May-07 May-08 May-09 May-10 May-11 May-12 May-13
Source: Company, Bloomberg, Kotak Institutional Equities Source: Company, Bloomberg, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 19 Banks/Financial Institutions State Bank of India
Exhibit 20: SBI quarterly results March fiscal year-ends, 4QFY12 - 4QFY13 (` mn)
4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 % chg 4QFY13E Actual Vs KS Income earned 286,955 289,167 296,068 303,436 307,842 7 303,035 2 Income on advances 221,411 221,346 225,381 228,032 230,642 4 233,639 (1) Income on investments 62,049 63,732 67,147 70,720 70,350 13 66,231 6 Interest on balance with RBI 3,495 4,089 3,541 4,685 6,849 96 3,165 116 Interest expense 169,918 177,979 186,330 191,892 197,058 16 187,236 5 Net interest income (NII) 117,038 111,189 109,738 111,545 110,784 (5) 115,799 (4) Other income 52,640 34,989 33,466 36,485 55,467 5 55,802 (1) Fees, commission 42,161 26,027 24,492 25,587 38,732 (8) Invt. income (263) 2,210 2,302 4,178 2,292 (970) 4,310 (47) Forex income 3,348 4,566 3,198 4,401 4,751 42 Dividend 5,154 180 666 — 6,367 Other income excl. treasury 52,904 32,779 31,165 32,307 53,175 1 51,492 3 Total income 169,678 146,178 143,204 148,030 166,251 (2) 171,602 (3) Operating expenses 73,710 64,410 69,668 70,122 88,645 20 85,168 4 Staff expenses 43,777 34,561 35,790 36,081 47,075 8 49,182 (4) Other retirement contributions 10,533 6,810 7,012 7,431 9,049 (14) 11,147 Other operating expenses 19,400 23,039 26,866 26,610 32,521 68 24,839 31 Pre-provision operating profit 95,968 81,768 73,536 77,908 77,606 (19) 86,433 (10) Provisions and extraordinaries 31,404 24,563 18,256 26,679 41,810 33 40,112 4 Loan loss provisions 28,368 27,903 18,372 27,662 39,742 40 38,705 3 Standard assets 3,749 1,693 2,502 632 2,669 (29) Investment depreciation 274 (5,207) (2,601) (1,290) (516) (288) Other provisions (987) 174 (17) (325) (85) (91) 867 (110) PBT 64,564 57,205 55,280 51,228 35,796 (45) 46,321 (23) Less tax 24,061 19,688 18,699 17,268 2,804 (88) 11,556 (76) Profit after tax 40,503 37,517 36,581 33,961 32,992 (19) 34,765 (5) Fees to PBT (%) 65.3 45.5 44.3 49.9 108.2 Treasury income/PBT (%) (0.8) 13.0 8.9 10.7 7.8 Cost income ratio (%) 43.4 44.1 48.6 47.4 53.3 Tax rate (%) 37.3 34.4 33.8 33.7 7.8 Key balance sheet data (Rs bn) Advances gross 8,936 9,458 9,560 10,091 10,786 21 Advances net 8,676 9,168 9,269 9,781 10,456 21 Deposits 10,436 11,029 11,336 11,567 12,027 15 Low cost deposits (%) 46.6 46.1 45.0 45.5 46.5 Investments 3,122 3,328 3,716 3,600 3,509 12 Yield management ratios (%) Cost of deposits 6.0 6.2 6.3 6.3 6.3 Yield on advances 11.1 10.9 10.9 10.8 10.5 Yield on resources 7.5 7.5 7.5 7.5 7.5 Net interest margin (YTD) 3.9 3.6 3.5 3.4 3.3 Net interest margin (Reported, Qtly) 3.9 3.6 3.3 3.3 3.2 Asset quality details Gross NPLs (Rs bn) 397 472 492 535 512 29 Gross NPLs (%) 4.4 5.0 5.2 5.3 4.8 Net NPLs (Rs bn) 158 203 226 254 220 39 Net NPLs (%) 1.8 2.2 2.4 2.6 2.1 Slippages 43.8 108.4 71.1 81.8 58.7 Provision Coverage (%) 60.1 56.9 54.0 52.5 57.1 Provision coverage (inc tech w/o, %) 68.1 64.3 62.8 61.5 66.6 Restructured loans (gross) 427 433 478 506 593 % of loans 4.9 4.7 5.2 5.2 5.7 NPA-restructured (%) 25.8 28.4 26.4 21.6 18.3 Capital adequacy details (%) CAR 13.9 13.2 12.6 12.2 12.9 Tier I 9.8 9.4 9.0 8.7 9.5
Source: Kotak Institutional Equities
20 KOTAK INSTITUTIONAL EQUITIES RESEARCH State Bank of India Banks/Financial Institutions
Valuation methodology
Exhibit 21: SBI SOTP valuation based on FY2014E
SBI holding NW Multiple Value Value per Methodology adopted FY2014E assumed FY2014 share FY2014 (%) (Rs mn) (X) (Rs mn) (Rs) SBI standalone 1,870 Residual income model Non banking subsidiaries and investments SBI Life 77,855 116 Based on appraisal value SBI MF 63% 14,969 22 4% of AUM- Rs600 bn (10% CAGR - AUM) NSE 8% 13,200 20 NSE value at Rs130 bn (last transaction)
UTI MF 17% 5,236 8 4% of Rs730 bn AUM (10% CAGR - AUM) SBI Caps 86% 23,650 35 10X FY2014E PAT SBI DFHI 72% 7,872 12 1X FY2014 networth Non-bank subsidiaries 214 SBI Associate banks State Bank of Bikaner and Jaipur 75% 36,071 1.0 36,071 ABV multiple based on RoE State Bank of Hyderabad 100% 76,005 1.0 76,005 ABV multiple based on RoE State Bank of Mysore 92% 37,517 1.0 37,517 ABV multiple based on RoE State Bank of Patiala 100% 46,832 1.0 46,832 ABV multiple based on RoE State Bank of Travancore 75% 29,027 1.0 29,027 ABV multiple based on RoE Banking subsidiaries and associates 225,452 225,452 post discount of 10% 202,907 202,907 302 Value of all subsidiaries 516 Total value of the bank 2,386
Source: Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 21 Banks/Financial Institutions State Bank of India
Exhibit 22: SBI SOTP valuation based on FY2015E
SBI holding NW Multiple Value Value per Methodology adopted FY2014E assumed FY2015 share FY2015 (%) (Rs mn) (X) (Rs mn) (Rs) SBI standalone 2,009 Residual income model Non banking subsidiaries and investments SBI Life 85,640 128 Based on appraisal value SBI MF 63% 16,466 25 4% of AUM- Rs650 bn (10% CAGR - AUM) NSE 8% 14,520 22 NSE value at Rs130 bn (last transaction)
UTI MF 17% 5,760 9 4% of Rs850 bn AUM (10% CAGR - AUM) SBI Caps 86% 26,015 39 10X FY2015E PAT SBI DFHI 72% 8,659 13 1.1X FY2015 networth Non-bank subsidiaries 235 SBI Associate banks State Bank of Bikaner and Jaipur 75% 38,030 1.0 38,030 ABV multiple based on RoE State Bank of Hyderabad 100% 89,575 1.0 89,575 ABV multiple based on RoE State Bank of Mysore 92% 42,378 1.0 42,378 ABV multiple based on RoE State Bank of Patiala 100% 55,677 1.0 55,677 ABV multiple based on RoE State Bank of Travancore 75% 29,910 1.0 29,910 ABV multiple based on RoE Banking subsidiaries and associates 255,569 255,569 post discount of 10% 230,012 230,012 343 Value of all subsidiaries 578 Total value of the bank 2,587
Source: Kotak Institutional Equities
22 KOTAK INSTITUTIONAL EQUITIES RESEARCH State Bank of India Banks/Financial Institutions
Exhibit 23: Valuation comparison with assumption on 20% slippages from restructured loans shows SBI (consolidated) at similar multiple to peers March fiscal year-ends, 2014-15E (` bn)
2014E 2015E Reported net worth (stand-alone) 1,098 1,217 Net NPL (adjusted for tax benefit) 171 186 Restructured loans (20% CAGR on FY2013; 20% slipping into NPL and adjusted for tax benefit) 72 87 Reported net worth (stand alone adjusted for NPL) 855 943 Investments in subsidiaries 71 71 Reported net worth (stand alone adjusted for NPL and investments in subsidiaries) 784 873 Net worth in banking subsidiaries (adjusted for SBI's share and 10% discount) 238 263 Net NPL (adjusted for tax benefit) 37 40 Net worth in banking subsidiaries (adjusted for SBI's share, net NPL and 10% discount) 201 224 Net worth in bank and banking subsidiaries (adjusted for SBI's share, net NPL and 10% discount) 985 1,096
Multiple for the banking business 1.0 1.0 Value of the banking business of subsidiaries (Rs mn) 201 224 Value of the non-banking business of subsidiaries (Rs mn) 143 158 Combined value of the non-banking and subsidiary banking business (B) 345 381 Market value adjusted for subsidiaries (A-B) 1,145 1,108
Comparison with peers Punjab National Bank Reported net worth adjusted for revaluation reserves 341 381 Net NPL (adjusted for tax benefit) 65 63 Restructured loans (20% CAGR on FY2013; 20% slipping into NPL and adjusted for tax benefit) 54 65 Reported net worth (stand alone adjusted for NPL) 222 253
Bank of Baroda Reported net worth adjusted for revaluation reserves 346 384 Net NPL (adjusted for tax benefit) 44 46 Restructured loans (20% CAGR on FY2013; 20% slipping into NPL and adjusted for tax benefit) 38 46 Reported net worth (stand alone adjusted for NPL) 265 293
Multiples of peers - Price to adjusted book SBI - consolidated for all banking subsidiaries 1.4 1.2 SBI - standalone 1.5 1.3 Punjab National Bank 1.2 1.1 Bank of Baroda 1.1 1.0
KOTAK INSTITUTIONAL EQUITIES RESEARCH 23 Banks/Financial Institutions State Bank of India
Exhibit 24: SBI—growth rates and key ratios March fiscal year-ends, 2010-15E (%)
2010 2011 2012 2013 2014E 2015E Growth rates (%) Net loan 16.5 19.8 14.7 20.5 12.8 13.2 Total Asset 9.2 16.2 9.1 17.3 15.6 14.4 Deposits 8.4 16.1 11.7 15.2 15.9 14.2 Current 10.7 7.0 (25.0) 12.3 17.2 15.5 Savings 29.9 28.3 11.8 12.4 14.3 12.6 Fixed (2.1) 11.4 21.9 17.6 16.8 15.0 Net interest income 13.4 37.4 33.1 2.4 14.4 10.8 Loan loss provisions 92.9 86.9 28.2 (3.3) 24.0 13.0 Total other income 17.9 5.7 (9.3) 11.8 15.0 11.7 Net fee income 26.6 19.9 4.6 (5.0) 12.0 12.0 Net capital gains (17.5) (56.5) (199.9) (219.4) 45.7 6.3 Net exchange gains 34.6 (7.8) (2.2) 18.1 15.0 10.0 Operating expenses 29.8 13.3 13.3 12.3 14.1 13.0 Employee expenses 30.9 19.3 11.6 8.3 16.8 14.4 Key ratios (%) Yield on average earning assets 7.4 7.5 8.8 8.6 8.1 7.9 Yield on average loans 8.6 8.6 10.0 9.5 9.0 8.7 Yield on average investments 6.5 7.0 8.2 8.5 7.9 7.6 Average cost of funds 5.3 4.9 5.6 5.8 5.4 5.3 Interest on deposits 5.6 5.0 5.6 6.0 5.5 5.4 Difference 2.1 2.7 3.2 2.8 2.7 2.6 Net interest income/earning assets 2.5 3.0 3.6 3.2 3.1 3.0 New provisions/average net loans 0.9 1.4 1.5 1.3 1.4 1.4 Interest income/total income 61.3 67.3 75.1 73.4 73.3 73.2 Fee income to total income 25.0 23.9 21.0 19.0 18.6 18.8 Operating expenses/total income 52.6 47.6 45.2 48.5 48.3 49.2 Tax rate 34.2 44.7 36.7 29.3 31.0 30.0 Dividend payout ratio 23.4 26.0 22.6 20.1 20.7 20.0 Share of deposits Current 15.2 14.0 9.4 9.2 9.3 9.4 Fixed 52.7 50.6 55.2 56.3 56.7 57.1 Savings 32.0 35.4 35.4 34.5 34.0 33.5 Loans-to-deposit ratio 78.6 81.0 83.1 86.9 84.6 83.9 Equity/assets (EoY) 6.3 5.3 6.3 6.3 6.1 5.9 Asset quality trends (%) Gross NPL (%) 3.0 3.3 4.5 4.7 4.7 4.3 Net NPL (%) 1.4 1.6 1.8 2.1 2.2 2.1 Slippages (%) 2.2 2.9 3.3 3.7 3.3 3.0 Provision coverage (%, ex write-off) 55.6 51.2 60.1 57.1 55.7 53.4 Dupont analysis (%) Net interest income 2.3 2.9 3.4 3.1 3.0 2.9 Loan loss provisions 0.5 0.9 1.0 0.8 0.9 0.9 Net other income 1.5 1.4 1.1 1.1 1.1 1.1 Operating expenses 2.0 2.0 2.0 2.0 2.0 1.9 Invt. depreciation (0.1) — — (—) (—) (—) (1- tax rate) 65.8 55.3 63.3 70.7 69.0 70.0 ROA 0.9 0.7 0.9 1.0 0.9 0.8 Average assets/average equity 16.3 17.4 17.2 15.9 16.2 16.8 ROE 14.8 12.6 15.7 15.4 13.8 13.4
Source: Kotak Institutional Equities
24 KOTAK INSTITUTIONAL EQUITIES RESEARCH State Bank of India Banks/Financial Institutions
Exhibit 25: SBI—P&L and balance sheet March fiscal year-ends, 2010-15E (` mn)
2010 2011 2012 2013 2014E 2015E Income statement Total interest income 709,939 813,944 1,065,215 1,196,513 1,319,514 1,470,785 Loans 506,326 599,760 810,777 905,401 997,853 1,099,808 Investments 177,363 198,264 239,491 271,949 303,188 354,544 Total interest expense 473,225 488,680 632,304 753,258 812,402 909,136 Net interest income 236,714 325,264 432,911 443,255 507,112 561,649 Loan loss provisions 52,279 97,687 125,247 121,174 150,212 169,793 Net interest income (after prov.) 184,435 227,577 307,664 322,081 356,900 391,856 Other income 149,682 158,246 143,514 160,407 184,410 205,921 Net fee income 96,409 115,633 120,909 114,837 128,618 144,052 Net capital gains 21,168 9,210 (9,197) 10,981 16,000 17,000 Net exchange gains 15,871 14,640 14,322 16,916 19,454 21,399 Operating expenses 203,187 230,154 260,690 292,844 334,011 377,306 Employee expenses 127,546 152,116 169,740 183,809 214,619 245,604 Depreciation on investments (9,880) 6,468 6,637 (9,613) (1,000) (1,000) Other Provisions 1,549 (341) (981) (253) (253) (303) Pretax income 139,261 149,542 184,833 199,510 208,552 221,775 Tax provisions 47,600 66,897 67,760 58,459 64,651 66,532 Net Profit 91,661 82,645 117,073 141,050 143,901 155,242 % growth 0.5 (9.8) 41.7 20.5 2.0 7.9 PBT - Treasury + Provisions 162,041 244,145 324,933 299,836 341,511 373,265 % growth 5.6 50.7 33.1 (7.7) 13.9 9.3
Balance sheet Cash and bank balance 861,887 1,228,741 971,632 1,148,202 1,314,804 1,424,011 Cash 68,410 74,766 111,864 128,643 147,940 147,940 Balance with RBI 544,499 869,189 428,896 632,352 766,905 876,112 Balance with banks 21,559 39,806 106,273 127,527 140,280 140,280 Net value of investments 2,957,852 2,956,006 3,121,976 3,509,273 4,365,741 5,216,531 Govt. and other securities 2,267,060 2,307,414 2,558,336 2,945,694 3,802,163 4,652,953 Shares 71,994 88,646 33,376 33,376 33,376 33,376 Debentures and bonds 161,274 151,341 129,991 129,991 129,991 129,991 Net loans and advances 6,319,142 7,567,194 8,675,789 10,456,166 11,797,450 13,357,072 Fixed assets 44,129 47,642 54,665 70,050 81,465 83,103 Other assets 351,128 437,778 531,130 478,920 550,758 633,372 Total assets 10,534,137 12,237,362 13,355,192 15,662,610 18,110,218 20,714,090
Deposits 8,041,162 9,339,328 10,436,474 12,027,396 13,943,725 15,929,311 Current 1,225,794 1,311,953 984,503 1,105,810 1,295,943 1,496,414 Fixed 4,240,765 4,724,114 5,760,407 6,772,516 7,907,358 9,097,083 Savings 2,574,603 3,303,261 3,691,563 4,149,070 4,740,424 5,335,814 Borrowings and bills payable 1,241,122 1,412,725 1,475,104 1,872,270 2,076,610 2,296,909 Other liabilities 592,361 835,449 604,102 774,108 991,957 1,271,112 Total liabilities 9,874,645 11,587,502 12,515,680 14,673,774 17,012,291 19,497,332 Total shareholders' equity 659,492 649,860 839,512 988,837 1,097,927 1,216,758
Source: Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 25
SELL Bharat Heavy Electricals (BHEL)
Industrials MAY 24, 2013 RESULT Coverage view: Cautious
Ordering revival necessary for stock re-rating; not visible yet on sectoral issues. Price (Rs): 196 4QFY13 results were marginally better than flash results (revenues of Rs188 bn; margin Target price (Rs): 175 revised up to 22.8%; PAT of Rs32.3 bn, down 4% yoy). BHEL believes that slowdown/ BSE-30: 19,674 ordering has bottomed out (although FY2013 was supported by bulk tender wins; a support absent in FY2014E). Scale-up in industrial business remains unclear. Working capital has deteriorated on higher debtors (half are not collectible on milestones, retentions, etc.) and lower advances. Reiterate SELL on potential decline trajectory.
Company data and valuation summary Bharat Heavy Electricals Stock data Forecasts/Valuations 2013 2014E 2015E 52-week range (Rs) (high,low)272-174 EPS (Rs) 27.1 21.1 16.2 Market Cap. (Rs bn) 479.0 EPS growth (%) (6.0) (22.0) (23.2) Shareholding pattern (%) P/E (X) 7.2 9.3 12.1 Promoters 67.7 Sales (Rs bn) 476.4 440.8 396.6 FIIs 14.8 Net profits (Rs bn) 66.2 51.7 39.7 MFs 1.0 EBITDA (Rs bn) 86.4 68.8 48.4 Price performance (%) 1M 3M 12M EV/EBITDA (X) 4.8 5.6 6.8 Absolute 3.7 (4.2) (6.3) ROE (%) 23.7 16.0 11.1 Rel. to BSE-30 1.1 (6.0) (24.0) Div. Yield (%) 3.0 2.3 1.8
4QFY13: Results marginally better than provisional numbers; margin revised upwards by 60 bps
` Revenues at Rs188 bn, down 2% yoy. BHEL reported 4QFY13 revenues of Rs188 bn, broadly in line with the provisional numbers, down 2% yoy. Core power segment reported flat revenues of Rs155 bn, while the industry segment recorded a 7% yoy revenue decline to Rs43 bn.
` EBITDA margin revised upwards to 22.8%; ahead of our estimates. EBITDA margin of 22.8% (100 bps yoy decline) was better than provisional 22.2% and ahead of our 22% estimate. Power segment EBIT margin declined 130 bps yoy although was flat for the full year. Industry segment margin though declined ~900 bps in 4QFY13 and ~800 bps for the full year.
` PAT at Rs32.3 bn, down 4% yoy; 4% ahead of provisional number. BHEL reported a net PAT of Rs32.3 bn for 4QFY13, marginally higher (by about 4%) versus the provisional number reported (at Rs31 bn) and down 4% yoy (from reported net PAT of Rs33.8 bn in 4QFY12).
Expects power cycle to have bottomed out but less confident on pace of recovery
While BHEL cited some operational improvements (flattish adjusted full-year employee cost, 15% higher cash collection, establishment of super critical value chain), business revival would still depend on order inflows picking up. BHEL believes that power capex cycle has bottomed out (expects next year’s inflows to be better), although was less confident on the pace of recovery (refrained from sharing MoU revenue target, unlike previous years). Working capital has further deteriorated (127 days of sales) primarily on (1) higher debtors (50% are not yet collectible on milestones issues, retentions, etc.) and (2) lower advances.
Revise estimates on higher margin and inflow assumption; reiterate SELL with TP of Rs175
We revise our estimates to Rs21 and Rs16.2 from Rs19 and Rs16.4 for FY2014E-15E on (1) higher FY2014E margin estimate (80 bps revision) and (2) marginal higher inflows (2-5% revision). We retain our SELL rating (TP: Rs175) as valuations do not provide comfort with potential earnings decline on the back of inadequate backlog, slower execution and negative operating leverage.
For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
Industrials Bharat Heavy Electricals
4QFY13 results: Marginally better than provisional numbers
` Revenues record marginal decline (led by industrials; power segment remain flat. BHEL reported net revenues of Rs188.5 bn in 4QFY13, a small decline of 2% on a yoy basis (broadly in line with provisional numbers reported in April). For the full-year FY2013, BHEL reported net revenues of Rs476 bn, relatively flat on a yoy basis (from Rs472 bn in FY2012).
` EBITDA margin contracts 100 bps on negative operating leverage. EBITDA margin contracted by about 100 bps on a yoy basis in 4QFY13 to 22.8% against our estimate of about 22% EBITDA margin. The yoy contraction/expansion was primarily led by negative operating leverage (on higher employee and other expenses as a percentage of sales), while contribution margins in fact expanded by about 140 bps yoy. We believe that BTG/EPC price has fallen significantly in the Indian market in recent tenders, as bidders are desperate for orders, and thus even contribution margins would also start coming under pressure.
` Net PAT at Rs32.4 bn, down 4% yoy. BHEL reported a 4QFY13 net PAT of Rs33.4 bn, down 4% yoy from Rs33.8 bn in 4QFY12; FY2013 net PAT at Rs66 bn was down 6% yoy (form Rs70.4 bn in FY2012). For the full-year FY2013, EBITDA margin contracted to 18% (against 19.3% in FY2012).
Exhibit 1: BHEL 4QFY13 results - key numbers (Rs mn)
%change 4QFY13 4QFY13-flash 4QFY12 3QFY13 vs flash yoy qoq FY2013 FY2012 % change Gross Sales 198,668 197,253 202,495 105,395 (1.9) 88.5 501,565 495,098 1.3 Less: Excise duty (10,166) (10,166) (9,899) (4,979) 2.7 104.2 (25,388) (22,819) 11.3 Net Sales 188,502 187,087 192,595 100,417 0.8 (2.1) 87.7 476,177 472,279 0.8 (Inc)/Dec in WIP (9,666) (5,298) (1,486) (1,162) 8,232 (114.1) Raw material cost (96,624) (106,052) (55,878) (8.9) 72.9 (272,396) (282,399) (3.5) Staff cost (14,391) (14,781) (14,373) (2.6) 0.1 (57,528) (54,658) 5.2 Other items (24,850) (20,387) (14,119) 21.9 76.0 (59,267) (52,084) 13.8 Total Expenditure (145,532) (145,635) (146,517) (85,857) (0.7) 69.5 (390,353) (380,909) 2.5 EBITDA 42,970 41,452 46,078 14,560 3.7 (6.7) 195.1 85,824 91,370 (6.1) Other income 6,466 5,995 7,283 5,104 7.9 (11.2) 26.7 19,287 20,166 (4.4) Interest (405) (430) (183) (509) (5.8) 121.0 (20.4) (1,253) (513) 144.3 Depreciation (2,889) (2,889) (2,541) (2,198) (0.0) 13.7 31.4 (9,534) (8,000) 19.2 PBT 46,142 44,127 50,637 16,957 4.6 (8.9) 172.1 94,324 103,023 (8.4) Tax (13,766) (13,049) (16,838) (5,139) 5.5 (18.2) 167.9 (28,177) (32,623) (13.6) PAT 32,375 31,078 33,798 11,819 4.2 (4.2) 173.9 66,147 70,400 (6.0)
Key ratios (%) Raw material/sales 56.4 57.8 57.1 57.4 58.1 Staff cost/sales 7.6 7.7 14.3 12.1 11.6 Other exp./sales 13.2 10.6 14.1 12.4 11.0 EBITDA margin 22.8 22.2 23.9 14.5 18.0 19.3 PBT margin 24.5 23.6 26.3 16.9 19.8 21.8 Effective tax rate 29.8 29.6 33.3 30.3 29.9 31.7 PAT margin 17.2 16.6 17.5 11.8 13.9 14.9 EPS (Rs) 13.2 12.7 13.8 4.8 27.0 28.8
Order (Rs bn) Order backlog 1,147 1,158 1,350 1,137 (15.1) 0.9 1,147 1,350 (15.1) Order inflow 208 208 68 14 205.4 1,345 315 221 42.7
Source: Company, Kotak Institutional Equities
28 KOTAK INSTITUTIONAL EQUITIES RESEARCH Bharat Heavy Electricals Industrials
Segmental: Margin decline sharper for industrial segment
` Power. Power segment revenues remained relatively flat on a yoy basis at Rs155.4 bn in 4QFY13. We believe BHEL’s revenue growth trajectory may face further downside risk in the coming quarters on the back of sluggish order inflows. Power segment reported an EBIT margin of 26.1% in 4QFY13, a contraction of 130 bps yoy versus 27.4% in 4QFY12 (18.3% in 3Q).
` Industry. Industry segment revenues declined by 7% yoy to Rs43.4 bn. Industrial segment EBIT margins also contracted to 21.6% for the quarter from very high margins of 30.4% in 4QFY12 (18.3% in 3Q).
Exhibit 2: BHEL 4QFY13 segmental result - key numbers (Rs mn)
% change 4QFY13 4QFY12 3QFY13 yoy qoq FY2013 FY2012 % chg. Revenues Power 155,392 155,738 83,076 (0.2) 87.0 395,767 378,629 4.5 Industry 43,409 46,789 22,365 (7.2) 94.1 106,040 116,589 (9.0) EBIT Power 40,616 42,601 15,224 (4.7) 166.8 85,595 81,838 4.6 Industry 9,363 14,201 4,088 (34.1) 129.0 21,966 33,424 (34.3) Revenue mix (%) Power 78.2 76.9 78.8 78.9 76.5 Industry 21.8 23.1 21.2 21.1 23.5 EBIT margin (%) Power 26.1 27.4 18.3 21.6 21.6 Industry 21.6 30.4 18.3 20.7 28.7
Source: Company, Kotak Institutional Equities
Takeaways from the conference call
` Cites operational improvements. BHEL cited operational improvements in terms of (1) containment of FY2013 employee cost (flat yoy adjusted for increase in dearness allowance and actuarial revisions), (2) higher cash collection from debtors (up 15% yoy) and (3) establishment of super critical value chain. While these developments are positive, we believe business revival would still depend on order inflows picking up.
` Expects power cycle to have bottomed out. BHEL believes that power capex cycle has bottomed and expects higher inflows in FY2014E. It was less confident on the pace of revival. We note that the company has refrained from sharing MoU revenue target this time (usually declares this information publicly on its website). Higher inflows in FY2014E are debatable as FY2013 order inflows were supported by large bulk tender order wins as well.
Strong order inflows of Rs208 bn in 4Q against low inflows in 9M
BHEL reported relatively strong order inflows of Rs316 bn in FY2013 against only Rs107 bn reported in 9MFY13 (though significantly lower than guidance at the start of the year). This implies order inflows to the tune of about Rs208 bn in 4QFY13.
For the full year, Rs316 bn of order inflows comprised Rs256 bn from power (~7.8 GW), Rs41 bn from industry and Rs20 bn from international markets (~1.8 GW).
KOTAK INSTITUTIONAL EQUITIES RESEARCH 29 Industrials Bharat Heavy Electricals
Exhibit 3: Segmental order inflow mix, March fiscal year-end, 2013
FY2013 order inflow mix (Rs315 bn)
Industrials 13%
International 6%
Spares 9%
Power 72%
Source: Company, Kotak Institutional Equities
Backlog provides limited visibility for a 3-year execution period business
BHEL reported a year-end order backlog of Rs1.15 tn of which power contributed 81% share. This provides limited 2.6-year visibility on one-year forward revenues (already assume 12% decline) for a 3-year execution period business (3.5 years for power, 1.5 years for industry segment).
Exhibit 4: BHEL - order backlog provides visibility under 2.6 years on forward four-quarter revenues Order booking, order backlog & visibility trend for BHEL
30 KOTAK INSTITUTIONAL EQUITIES RESEARCH Bharat Heavy Electricals Industrials
Balance sheet – debt at Rs14 bn on working capital deterioration
BHEL reported a gross year-end debt of Rs14 bn against almost nil debt (of Rs1.2 bn) at the start of the year. This is primarily on the back of deterioration in working capital levels – net working capital (excluding cash) has increased to about 127 days of sales at end-FY2013 against 86 days at end-FY2012; note that this is versus low levels of only 26 days at end- FY2011. Working capital has primarily deteriorated on (1) higher debtors (Rs400 bn out of which 50% are receivables that are not due as yet, such as retention money, revenue recognized on percentage completion but milestones for recognition not yet in place) and (2) lower advances (declined Rs30 bn yoy to Rs130 bn).
Exhibit 5: Balance sheet of BHEL, March fiscal year-ends, 2011-13 (Rs mn)
2011 1HFY12 2012 1HFY13 2013 Shareholders funds 201,538 223,814 253,732 275,679 304,441 Share capital 4,895 4,895 4,895 4,895 4,895 Reserves & surplus 196,643 218,919 248,837 270,784 299,546 Loan funds 1,634 14,801 1,234 17,968 14,152 Total sources of funds 203,172 238,615 254,966 293,646 318,593
Net fixed assets 51,631 53,793 56,444 55,707 56,301 Investments 4,392 4,617 4,617 5,617 4,292 Cash & bank balance 96,302 79,491 66,720 53,077 77,321 Current assets 418,646 474,467 524,517 548,072 547,865 Inventories 109,630 131,586 134,445 140,764 117,638 Debtors 273,546 305,693 358,448 366,564 398,882 Loans & advances 32,373 3,087 30,118 38,538 29,345 Other current assets 3,096 34,102 1,506 2,206 2,000 Current liabilities & provisions 389,434 397,410 412,794 383,295 382,692 Current liabilities 313,466 328,381 336,380 309,224 293,270 Provisions 75,968 69,029 76,414 74,071 89,421 Net current assets (ex cash) 29,212 77,057 111,723 164,778 165,173 Deferred tax assets (net) 21,636 23,656 15,462 14,468 15,507 Total application of funds 203,172 238,615 254,966 293,646 318,593
WCap (days of sales) Current assets 368 392 405 412 420 Inventories 96 109 104 106 90 Debtors 240 252 277 276 306 Loans & advances 28 3 23 29 22 Other current assets 3 28 1 2 2 Current liabilities & provisions 342 328 319 288 293 Current liabilities 275 271 260 233 225 Provisions 67 57 59 56 69 Net current assets 26 64 86 124 127
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 31 Industrials Bharat Heavy Electricals
Marginally revise estimates on higher inflow assumption; retain SELL
We revise our estimates to Rs21 and Rs16.2 from Rs19 and Rs16.4 on the back of (1) increase in FY2014 EBITDA margin (80 bps revision on better-than-expected execution of current projects) and (2) marginal higher inflows (2-5% revision).
We retain our cautious stance (SELL, TP: Rs175) as valuations do not provide comfort with potential earnings decline on the back of inadequate backlog, slower execution and negative operating leverage.
Exhibit 6: Revised estimates for BHEL, March fiscal year-ends, 2014E-15E (Rs mn)
New estimates 2013E 2014E 2015E 2014E 2015E 2014E 2015E Order inflows 315,280 309,868 338,539 303,739 322,908 2.0 4.8 Power 274,420 252,664 269,895 252,664 262,895
32 KOTAK INSTITUTIONAL EQUITIES RESEARCH Bharat Heavy Electricals Industrials
Exhibit 7: Segment-wise inflow and execution for BHEL, March fiscal year-ends, 2008-15E (Rs bn)
2008 2009 2010 2011 2012 2013 2014E 2015E Inflows have remained buoyant at about 15 Power GW for the past 4 years Utility order inflow (GW) 14.6 17.0 16.5 15.1 2.8 7.8 7.0 7.0 Realization (Rs mn / MW) 26.6 26.1 24.3 29.4 41.7 28.9 28.0 29.0 Utility order inflow 387 444 401 443 118 226 196 203 Build average 7 GW inflows over the next Spare orders 24 28 19 21 23 29 35 42 three years International orders 23 33 36 37 2 20 22 25 Order inflows 434 504 456 502 142 274 253 270 % growth 46.4 16.3 (9.7) 10.3 (71.6) 12.0 10.0 10.0 Revenues 159 213 269 332 379 396 389 347 % growth 14.9 34.1 25.8 23.5 14.2 4.5 (1.7) (10.8) Order backlog 770 1,074 1,271 1,456 1,175 1,053 917 839 Bill to book ratio (%) 23 21 21 22 25 30 33 33 Industry Order inflows 79 103 135 104 79 41 57 69 % growth 19.9 30.5 31.5 (23.1) (24.3) (47.9) 40.0 20.0 Revenues 60 72 79 102 117 106 75 71 % growth 11.8 20.6 8.7 29.6 14.1 (9.0) (29.2) (5.8) Order backlog 106 141 200 206 176 116 102 103 Bill to book ratio (%) 50 46 38 41 48 54 52 52 FY2012E inflows of Rs207 bn is net of Total cancellation to the tune of about Rs50 bn Order inflows 512 607 590 606 221 315 310 339 % growth 41.6 18.4 (2.7) 2.7 (63.5) 42.7 (1.7) 9.3 Expect revenues to decline over the next 3 Revenues 219 286 347 434 495 502 464 418 years on sedate order inflows % growth 14.0 30.4 21.5 24.9 14.2 1.3 (7.5) (10.0) Order backlog 876 1,215 1,471 1,661 1,350 1,169 1,018 943 Bill to book ratio (%) 27 24 23 24 28 33 35 35 EBITDA margin Estimates already build improved Net revenues 193 262 329 416 472 476 441 397 execution rate Direct costs (113) (168) (201) (234) (286) (287) (267) (242) Gross profit 80 94 128 182 186 190 174 154 Contribiution margin (%) 41.6 32.9 36.7 41.8 37.6 37.8 37.4 37.0 Employee expenses (26) (30) (52) (54) (55) (58) (60) (63) Expect EBITDA margin contraction on rising Other fixed costs (21) (27) (22) (48) (40) (46) (44) (43) fixed costs even as contribution margins EBITDA 33 37 54 79 91 86 69 48 remains relatively flat EBITDA margin (%) 17.2 14.1 16.5 19.0 19.3 18.1 15.6 12.2 Net profit Other income 14 15 16 17 20 19 18 22 Depreciation (3) (3) (5) (5) (8) (10) (10) (11) PBT 44 48 66 90 103 94 75 58 Tax expenses (16) (17) (23) (30) (33) (28) (24) (18) Stagnant revenues and margin contraction to Net PAT 2931436070665240lead to declining EPS over FY2014-15E EPS (Rs) 11.7 12.8 17.6 24.6 28.8 27.1 21.1 16.2
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 33 Industrials Bharat Heavy Electricals
Exhibit 8: BHEL income statement, balance sheet and cash flow, March fiscal year-ends, 2008-15E (Rs mn)
2008 2009 2010 2011 2012 2013E 2014E 2015E Income Statement Total net revenues 193,046 262,123 328,614 415,661 472,279 476,419 440,771 396,581 Cost of goods sold (159,868) (225,078) (274,348) (336,609) (380,909) (390,061) (371,999) (348,191) EBIDTA 33,178 37,046 54,266 79,052 91,370 86,358 68,771 48,390 Other income 14,448 14,974 16,483 17,011 20,166 18,815 18,274 22,047 Interest (354) (307) (335) (547) (513) (1,253) (1,415) (1,415) Depreciation (2,972) (3,343) (4,580) (5,441) (8,000) (9,534) (10,198) (11,108) Pre-tax Profit 44,299 48,370 65,834 90,074 103,023 94,386 75,432 57,914 Tax (15,711) (17,106) (22,800) (29,945) (32,623) (28,177) (23,761) (18,243) PAT 28,589 31,263 43,034 60,130 70,400 66,209 51,671 39,671 Balance sheet Shareholders' equity 107,742 129,388 159,174 201,538 253,732 304,441 343,195 372,948 Loan funds 952 1,494 1,278 1,634 1,234 14,152 14,152 14,152 Total source of funds 108,694 130,882 160,451 203,172 254,966 318,593 357,347 387,100 Net block 9,813 14,704 24,154 34,009 42,968 43,434 43,236 42,128 WIP 6,580 11,570 15,296 17,622 13,246 13,246 13,246 13,246 Investments 83 523 798 4,392 4,617 4,292 4,292 4,292 Net current assets (excl cash) (5,021) (17,465) 7,030 29,212 111,723 165,174 180,570 154,038 Cash and bank balance 83,860 103,147 97,901 96,302 66,720 76,940 100,495 157,888 Deferred Tax Assets 13,379 18,403 15,272 21,636 15,462 15,507 15,507 15,507 Total applications 108,694 130,882 160,451 203,172 254,966 318,593 357,347 387,100 Cash flow statement Net cashflow from operating activites 40,894 42,026 26,250 37,026 2,062 22,248 46,473 77,311 Net cashflow from investing activites (6,639) (13,244) (17,554) (20,616) (12,648) (9,675) (10,000) (10,000) Free cash flow 34,255 28,782 8,696 16,410 (10,587) 12,572 36,473 67,311 Net cashflow from financing activites (8,670) (9,194) (13,465) (17,391) (18,605) (2,582) (12,918) (9,918) Cash generated /utilised 25,584 19,707 (4,768) (999) (29,192) 9,990 23,555 57,393 Net cash at end of year 83,860 103,147 97,901 96,302 66,720 76,940 100,495 157,888 Ratios (%) EBITDA margin 17.2 14.1 16.5 19.0 19.3 18.1 15.6 12.2 PAT margin 14.8 11.9 13.1 14.5 14.9 13.9 11.7 10.0 RoE 29.2 26.4 29.8 33.3 30.9 23.7 16.0 11.1 RoCE 29.2 26.3 29.7 33.3 30.9 23.4 15.6 10.9 Net current assets (excl cash) as days of sales (9.5) (24.3) 7.8 25.7 86.3 126.5 149.5 141.8 EPS (Rs) 11.7 12.8 17.6 24.6 28.8 27.1 21.1 16.2
Source: Company, Kotak Institutional Equities estimates
34 KOTAK INSTITUTIONAL EQUITIES RESEARCH
ADD Tata Steel (TATA)
Metals & Mining MAY 24, 2013 RESULT Coverage view: Neutral
Excellent overall performance. Tata Steel reported 4QFY13 consolidated EBITDA of Price (Rs): 300 Rs43.7 bn, 41% ahead of our estimate. Results were excellent, led by (1) solid EBITDA Target price (Rs): 370 generation in Tata Steel Europe and (2) the benefit of higher volumes, lower forex BSE-30: 19,674 losses and favorable power rates, which drove a 10% standalone EBITDA beat. Tata Steel took an impairment charge of Rs83.5 bn, largely on European operations. Strong 4QFY13 performance offers some comfort in execution and outlook in a challenging steel market. We maintain our ADD rating but cut target price to Rs370 from Rs400.
Company data and valuation summary Tata Steel Stock data Forecasts/Valuations 2013 2014E 2015E 52-week range (Rs) (high,low) 456-293 EPS (Rs) 46.2 40.0 49.7 Market Cap. (Rs bn) 291.0 EPS growth (%) 168.1 (13.4) 24.2 Shareholding pattern (%) P/E (X) 6.5 7.5 6.0 Promoters 31.4 Sales (Rs bn) 1,347.1 1,399.9 1,399.3 FIIs 16.1 Net profits (Rs bn) 44.9 38.9 48.3 MFs 3.4 EBITDA (Rs bn) 123.2 163.1 167.1 Price performance (%) 1M 3M 12M EV/EBITDA (X) 7.0 5.8 5.8 Absolute (3.1) (17.8) (24.9) ROE (%) 0.9 11.0 12.6 Rel. to BSE-30 (5.5) (19.3) (38.0) Div. Yield (%) 2.7 4.0 4.0
4QFY13 results: Strong operational quarter, Europe turns EBITDA positive
` Standalone EBITDA of Rs33 bn (+30.8% qoq, 10.4% yoy) was 10% ahead of our estimate. The beat was led by (1) a US$16/ton decline in power costs. This was a function of 6% decline in power tariffs from Tata Power and a reversal of provisions and (2) a Rs1.3 bn of forex swing sequentially and the benefit of higher volumes. EBITDA increased by 8% qoq to US$267/ton. Realization declined by 4.8% to US$872/ton possibly due to a weak mix and exports.
` Tata Steel Europe reported EBITDA of US$113 mn, a significant improvement over US$78 mn EBITDA loss in 3QFY13 and far higher than our estimate. The Improvement was led by a lag benefit of lower iron ore and coking coal prices. We understand EBITDA includes a one-off provision reversal of ~US$50 mn. EBITDA/ton for the quarter was US$33. EBITDA may however decline in the next quarter on a lag impact of higher iron ore costs.
` Tata Steel took an extraordinary charge of Rs83.5 bn. This comprises goodwill impairment of Rs47.5 bn and Rs36 bn of write-down of other assets. These write-downs pertain largely to European assets. Additionally, the company wrote down assets in the ferro-chrome business in South Africa and the mini blast furnace in Tata Steel Thailand. Tata Steel reported an extraordinary gain of Rs9.43 bn comprising sale of shares in Titan Industries. Consolidated net income before extraordinary items was Rs7.3 bn against our estimate of Rs0.7 bn.
FY2014E could be a better year, control on leverage a must for returns; We retain ADD
Growth drivers in FY2014E (after a disastrous FY2013) could be (1) better absorption of cost and incremental volumes from the Jamshedpur expansion and 2) value accretion from multiple cost savings initiatives and raw material projects. However, Tata Steel’s high leverage worries us (net debt/EBITDA of 4.5X and 3.9X in FY2013 and FY2014E). We maintain our ADD rating but incorporate cyclical and leverage risks through a cut in target multiple, resulting in an 8 % cut in target price to Rs370.
For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
Metals & Mining Tata Steel
Exhibit 8 summarizes key changes to our estimates. We expect steel realizations to be muted from these levels (with a marginal decline) due to continued overcapacity, lack of supply discipline and muted demand in major steel consuming regions. We cut our HRC price by 3% to US$605/ton. We also incorporate our revised hard coking coal price forecast of US$170/ton. We maintain our ADD rating.
Conversion costs appear to be finally under control
After continued increase in conversion costs (Rs6,100/ton over the past two years), conversion costs appear to be declining. Conversion cost declined Rs4,260/ton qoq to Rs19,095/ton. This can be attributed to better absorption of fixed costs related to commissioning of new capacity. Sustainability of the decline in conversion costs remains a question mark, though.
Net debt declines marginally on a sequential basis but will rise over two years
The company’s net debt in 4QFY13 declined marginally to Rs554 bn from Rs580 bn in 3QFY13. This was due to significant inventory liquidation, sale of stake in Titan Industries and strong EBITDA generation. Tata Steel spent Rs152 bn on capex in FY2013; FY2014 guidance stands at ~Rs135 bn (US$2.5 bn). We expect net debt to increase to Rs633 bn and Rs668 bn in FY2014 and FY2015 due to Odisha capex (Rs230 bn in the first phase). While media reports indicate possible (partial) sale of European assets, we highlight that depressed valuations in the region could provide only marginal relief.
Net debt/EBITDA of 4.5X FY2014E and 3.9X FY2015E offer no comfort. Net debt/equity, after the impairment charge of Rs83.5 bn, increased to 1.6X, 1.7X and 1.7X in FY2013, FY2014E and FY2015E. The management indicated that it did not have consolidated debt/equity-linked debt covenants.
More details on the impairment charge and asset write-down
The Tata Steel management indicated that most of the impairment provisions were in the long products portfolio in Europe. Impairment charge was also taken for the ferro-chorme business in South Africa in the standalone and consolidated books. The company also took a charge on a mini blast furnace in Thailand.
The management indicated that it used a scientific process to assess the impairment charge. Essentially, Tata Steel allocated the GBP2.2 bn goodwill (acquisition consideration in excess of book value) at the time of acquisition to different business units, based on expected valuation of each unit. In a review, done in 4QFY13, the impairment charge to the extent of Rs83.6 bn was (1) first set off against the goodwill allocated to the assets found to be impaired and (2) if the impairment charge was higher than the allocated goodwill, the residual portion was set off against the PPE of the impaired asset.
The impairment charge of Rs83.6 bn comprises goodwill impairment of Rs47.51 bn and Rs36.04 bn of write-down of other assets. Write-down of assets will reduce the recurring deprecation charge.
Highlights from the analyst meet
` South East Asia operations reported EBITDA of US$41 mn (+59%qoq, +97% yoy). Performance was aided by robust construction demand in the region.
` Odisha project. The company expects project commissioning to commence from October 2014. The company has spent Rs83 bn on the project; FY2014 spend on Odisha is estimated at Rs80 bn. Total capex for the first phase (3 mtpa) is budgeted at Rs240 bn. Note that capex spent during the first phase will be higher as higher auxiliary facilities will be commissioned in the first phase to cater to phase II, as well; the management expects 65% of the project commissioning to be complete in phase I, itself.
36 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Steel Metals & Mining
` The company will procure ~500 kt of external coke in FY2014. After the commissioning of its coke oven battery 11, the external purchase is expected to be discontinued (in FY2015).
` Tata Steel Europe does not plan to sell carbon credits in the near future.
Exhibit 1: Interim results of Tata Steel (consolidated), March fiscal year-ends (Rs mn)
(% chg.) 4QFY13 4QFY13E 4QFY12 3QFY13 4QFY13E 4QFY12 3QFY13 Net sales 346,505 352,969 339,986 321,071 (1.8) 1.9 7.9 Expenditure (302,815) (322,072) (308,197) (298,682) (6.0) (1.7) 1.4 Consumption of raw materials (150,684) (150,111) (165,645) (139,209) 0.4 (9.0) 8.2 Staff Cost (48,593) (51,081) (47,221) (47,372) (4.9) 2.9 2.6 Power and fuel (13,468) (15,561) (12,743) (14,431) (13.5) 5.7 (6.7) Freight and handling (20,311) (20,188) (17,611) (18,722) 0.6 15.3 8.5 Other Expenditure (69,760) (85,131) (64,977) (78,949) (18.1) 7.4 (11.6) EBITDA 43,689 30,896 31,788 22,389 41.4 37.4 95.1 Other income (679) 567 2,220 559 (219.6) (130.6) (221.5) Interest (9,947) (10,270) (11,280) (10,323) (3.1) (11.8) (3.6) Depreciation (14,696) (14,547) (10,931) (14,628) 1.0 34.4 0.5 Pretax profits 18,368 6,646 11,798 (2,003) 176.4 55.7 NM Extraordinaries (74,128) - - (198) Tax (11,015) (6,116) (9,766) (5,685) 80.1 12.8 93.7 Net income (66,775) 530 2,032 (7,886) NM NM NM Minority interest 99 82 301 80 20.8 (67.0) 24.4 Share of profit from associates 1,391 181 2,002 176 667.6 (30.5) 690.6 PAT after minority interest (65,285) 793 4,335 (7,631) NM NM 755.6 Adjusted PAT 7,353 530 2,032 (7,689) NM 261.9 (195.6) Ratios EBITDA margin (%) 12.6 8.8 17.3 7.0 ETR (%) (19.8) 92.0 82.8 (258.3) EPS (Rs) (67.2) 0.8 4.5 (7.9) Segment revenue Steel business 329,221 - 322,727 302,540 - 2.0 8.8 Others 33,273 - 38,663 37,900 - (13.9) (12.2) Segment EBIT Steel business 30,986 - 27,034 9,092 - 14.6 240.8 Others 1,223 - 708 1,392 - 72.7 (12.2) Segment capital employed Steel business 835,569 - 810,945 861,208 - 3.0 (3.0) Others 51,237 - 42,636 51,865 - 20.2 (1.2) Per ton analysis Realisations 975 1,038 1,119 1,017 (6) (12.9) (4.1) EBITDA 123 91 105 71 35 17.5 73.3
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 37 Metals & Mining Tata Steel
Exhibit 2: Interim results of Tata Steel (standalone), March fiscal year-ends (Rs mn)
(% chg.) 4QFY13 4QFY13E 4QFY12 3QFY13 4QFY13E 4QFY12 3QFY13 Net sales 107,705 108,377 94,794 93,703 (0.6) 13.6 14.9 Expenditure (74,665) (78,455) (64,878) (68,441) (4.8) 15.1 9.1 Consumption of raw materials (31,128) (27,546) (23,988) (24,308) 13.0 29.8 28.1 Staff Cost (10,355) (10,017) (9,363) (8,839) 3.4 10.6 17.2 Power and fuel (5,613) (7,189) (4,603) (6,244) (21.9) 21.9 (10.1) Freight and handling (6,993) (6,599) (4,636) (5,633) 6.0 50.8 24.2 Other Expenditure (20,576) (27,105) (22,288) (23,418) (24.1) (7.7) (12.1) EBITDA 33,040 29,922 29,916 25,262 10.4 10.4 30.8 Other income 4,747 368 1,829 357 1,190.3 159.5 1,229.1 Interest (4,594) (5,090) (5,140) (5,090) (9.7) (10.6) (9.7) Depreciation (4,608) (4,361) (2,900) (4,339) 5.7 58.9 6.2 Pretax profits 28,586 20,839 23,706 16,190 37.2 20.6 76.6 Extraordinaries (6,841) - - - Tax (8,652) (6,147) (8,101) (5,726) 40.7 6.8 51.1 Net income 13,092 14,691 15,605 10,464 (10.9) (16.1) 25.1 Ratios EBITDA margin (%) 30.7 27.6 31.6 27.0 ETR (%) 39.8 29.5 34.2 35.4 EPS (Rs) 13.5 15.1 16.1 10.8 Segment revenue Steel business 101,175 - 86,815 85,644 16.5 18.1 Ferro Alloys 6,080 - 7,202 7,961 (15.6) (23.6) Others 5,463 - 5,375 4,942 1.6 10.5 Segment EBIT Steel business 28,900 - 28,103 20,392 2.8 41.7 Ferro Alloys 786 - 1,292 1,730 (39.1) (54.5) Others 113 - 190 95 (40.7) 18.2 Per ton analysis Realisations 872 920 1,066 915 (5.2) (18.2) (4.8) EBITDA 267 254 336 247 5.3 (20.5) 8.4
Source: Company, Kotak Institutional Equities
Exhibit 3: Interim results of Tata Steel International operations, 1QFY12-4QFY13 (Rs mn)
1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 Net Sales 251,399 245,860 247,212 245,191 249,132 249,822 227,368 238,799 Expenditure 238,202 246,057 256,345 243,319 242,897 251,883 230,241 228,150 Stock adjustment (21,367) 11,069 (2,593) 7,239 (21,765) 15,062 4,456 20,482 Raw materials 154,582 132,195 156,331 134,418 152,231 126,115 110,445 99,075 Employee costs 35,446 32,904 35,607 37,858 39,234 37,094 38,533 38,237 Power and fuel 7,500 7,487 7,991 8,141 8,428 8,171 8,187 7,855 Freight and handling 11,873 12,950 12,767 12,975 12,539 12,789 13,089 13,318 Other expenditure 50,169 49,453 46,242 42,689 52,229 52,653 55,531 49,184 EBITDA 13,197 (197) (9,133) 1,872 6,235 (2,061) (2,873) 10,649 Other Income 405 969 1,646 391 1,375 (379) 201 (5,426) Interest (net) 5,104 4,818 5,049 6,140 5,146 5,182 5,233 5,353 Depreciation 8,655 8,217 8,749 8,031 9,536 9,437 10,289 10,088 Profit Before Extra-ord Items (156) (12,264) (21,286) (11,908) (7,072) (17,059) (18,193) (10,218) Extra-ord items 32,891 - - - - 331 (198) (67,287) Profit Before Tax 32,734 (12,264) (21,286) (11,908) (7,072) (16,728) (18,391) (77,504) Tax 1,992 1,298 (200) 1,665 1,323 913 (41) 2,363 Reported net earnings 30,742 (13,562) (21,086) (13,573) (8,395) (17,641) (18,350) (79,868) Adjusted net profit (2,148) (13,562) (21,086) (13,573) (8,395) (18,000) (18,153) (9,859) Notes: (1) The quarterly results for other operations have been derived by reducing standalone Tata Steel India from Tata Steel consolidated financials. Source: Company, Kotak Institutional Equities
38 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Steel Metals & Mining
Exhibit 4: Interim results of Tata Steel International operations, 1QFY12-4QFY13 (Rs mn)
1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 Intermational operations Revenues 251,399 245,860 247,212 245,191 249,132 249,822 227,368 238,799 EBITDA 13,197 (197) (9,133) 1,872 6,235 (2,061) (2,873) 10,649
South East Asia Revenues 33,383 29,194 29,886 31,195 32,724 36,542 34,637 34,860 EBITDA 895 229 (102) 1,057 918 220 1,717 2,240
Tata Steel Europe Revenues 205,577 198,031 197,370 197,029 198,180 209,020 178,549 191,660 EBITDA 12,216 4,720 (7,497) 1,459 5,994 (400) (4,288) 6,130
Others Revenues 12,440 18,634 19,956 16,968 18,228 4,259 14,182 12,279 EBITDA 85 (5,147) (1,534) (643) (677) (1,882) (301) 2,279
Source: Company, Kotak Institutional Equities
Exhibit 5: Tata Steel, quarterly analysis of cost-structure and profitability, 1QFY12-4QFY13 (US$/ton)
1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 Tata Steel India Realization (Rs/ ton) 49,342 49,769 51,676 53,617 56,167 52,893 49,578 47,239 Other operating income 427 423 476 586 554 659 539 733 Raw material cost 9,874 11,477 13,180 13,568 12,630 13,754 12,861 13,653 Employee cost 4,313 4,187 4,520 5,296 5,417 4,798 4,677 4,542 Power and fuel cost 2,883 2,618 2,787 2,603 3,454 3,397 3,304 2,462 Freight and handling 2,551 2,364 2,737 2,622 3,038 2,984 2,980 3,067 Other expenditure 10,242 12,337 12,234 12,606 14,100 13,416 12,390 9,024 Conversion cost 19,989 21,505 22,278 23,128 26,010 24,595 23,351 19,095 EBITDA/ ton (Rs/ ton) 19,480 16,786 16,218 16,921 17,527 14,545 13,366 14,491
Tata Steel (Consolidated) Realization (US$/ ton) 1,209 1,173 1,111 1,119 1,103 1,020 1,017 975 Raw material cost 546 580 588 545 491 493 441 424 Employee cost 155 142 144 155 156 136 150 137 Power and fuel cost 44 42 42 42 45 42 46 38 Freight and handling 58 60 58 58 57 54 59 57 Other expenditure 244 250 222 214 243 227 250 196 EBITDA/ ton 162 98 58 105 111 69 71 123
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 39 Metals & Mining Tata Steel
Exhibit 6: Tata Steel Europe EBITDA/ton quarterly trend, 1QFY12-4QFY13
1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 Tata Steel Europe Deliveries (mn tons) 3.5 3.5 3.4 3.6 3.2 3.4 3.0 3.4 Turnover (US$ mn) 4,594 4,321 3,870 3,916 3,670 3,843 3,297 3,537 Adjusted EBITDA (US$ mn) 427 103 (4) 29 111 (8) (78) 113 Adjusted EBITDA/ton 78 30 (1) 8 35 (2) (26) 33
Source: Company, Kotak Institutional Equities
Exhibit 7: Tata steel group quarterly net debt trend, 1QFY11-3QFY13 (Rs bn)
Net Debt (Rs bn) 600 580 550 552 554 540 500 505 481 528 477 450 466 451 400 408 350
300 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13
Source: Company, Kotak Institutional Equities
40 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Steel Metals & Mining
Exhibit 8 : Tata Steel, changes in estimates, March fiscal year-ends, FY2014-15E
Revised estimates Old estimates % change 2014E 2015E 2014E 2015E 2014E 2015E Earnings (consolidated) Net sales 1,399,868 1,399,334 1,437,092 1,464,900 (2.6) (4.5) EBITDA 163,112 167,117 162,740 169,525 0.2 (1.4) Adj. PAT 38,896 48,293 38,318 49,184 1.5 (1.8) EPS (Rs) 40.0 49.7 39.4 50.6 1.5 (1.8) Volumes India (mn tons) 8.6 9.6 8.6 9.6 — (0.1) International operations (mn tons) 13.9 14.3 13.6 14.0 2.2 2.2 Pricing HRC price India (US$/ton) 605 574 625 598 (3.3) (3.9) Corus Realization (US$/ton) 1,080 1,025 1,090 1,070 (0.9) (4.2) Re/US$ rate 54.0 53.5 54.0 53.5 — — Tata Steel India Net sales 424,371 447,553 434,147 460,329 (2.3) (2.8) EBITDA 130,812 126,102 129,841 127,630 0.7 (1.2) Adj. PAT 62,644 57,846 60,358 57,213 3.8 1.1 EBITDA/ton 282 246 280 248 0.7 (1.1) Re/US$ rate 54.0 53.5 54.0 53.5 — — Tata Steel Europe Net sales 809,733 783,977 799,785 800,897 1.2 (2.1) EBITDA 24,369 30,227 24,436 32,103 (0.3) (5.8) GBP/USD 1.51 1.51 1.58 1.57 (4.4) (3.8) EBITDA/ton 33 40 33 43 (2.4) (7.9)
Source: Kotak Institutional Equities estimates
Exhibit 9 :Tata Steel, key assumptions, March fiscal-year ends, FY2010-2016E (Rs mn)
2010 2011 2012 2013E 2014E 2015E 2016E Tata Steel (India) Average HRC Price (US$/ton) 635 735 753 635 605 574 572 Crude Steel capacity (mn tons) 6.8 6.8 6.8 9.7 9.7 9.7 12.7 Volume (mn tons) 6.2 6.5 6.6 7.5 8.6 9.6 10.2 EBITDA margin (%) 35.8 39.1 34.0 29.1 30.8 28.2 26.8 EBITDA/ton (US$/ton) 307 387 363 273 282 246 233
Corus Average HRC Price (US$/ton) 981 1,102 1,225 1,105 1,080 1,025 1,025 Premium over HRC Price (US$/ton) 394 343 430 415 410 375 375 Crude Steel capacity (mn tons) 21.4 18.4 17.8 17.8 17.8 17.8 17.8 Volume (mn tons) 14.2 14.7 14.0 13.1 13.9 14.3 14.7 EBITDA margin (%) (2.1) 5.7 0.9 1.0 3.0 3.9 4.3 EBITDA/ton (US$/ton) (20) 63 10 11 33 40 44
Re/US$ rate 47.3 45.6 47.9 54.5 54.0 53.5 52.9
KOTAK INSTITUTIONAL EQUITIES RESEARCH 41 Metals & Mining Tata Steel
Exhibit 10 : Tata Steel, valuation, March fiscal year-ends, 12-month forward basis (Rs mn)
EBITDA Multiple Enterprise value EV (Rs mn) (X) (Rs mn) (Rs/share) Tata Steel standalone 130,812 6.3 817,576 842 Tata Steel Europe 24,369 5.0 123,059 127 Tata Steel Thailand and other businesses 5,336 5.0 26,946 28 Total Enterprise Value 160,517 967,581 996 Consolidated group net debt 633,291 Total borrowings 633,291 652 Arrived market capitalization 334,290 344 Add: Value of investments 25,098 26 Arrived market capitalization 359,388 370
Target price (Rs) 370
Source: Kotak Institutional Equities estimates
42 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Steel Metals & Mining
Exhibit 11 : Tata Steel (consolidated), profit model, balance sheet and cash flow model, March fiscal year-ends, 2010-2015E (Rs mn)
2010 2011 2012 2013E 2014E 2015E 2016E Profit model (Rs mn) Net sales 1,023,931 1,187,531 1,328,997 1,347,115 1,399,868 1,399,334 1,439,082 EBITDA 80,427 160,583 115,592 123,212 163,112 167,117 172,675 Other income 11,859 6,800 15,730 4,792 6,786 6,636 6,636 Interest (30,221) (39,558) (42,501) (39,681) (43,892) (44,641) (45,006) Depreciation (44,917) (44,148) (45,167) (55,753) (61,216) (62,254) (62,889) Profit before tax 17,147 83,677 43,654 32,569 64,790 66,857 71,416 Extraordinaries (16,837) 30,459 33,619 (73,899) - - - Taxes (21,518) (32,459) (36,365) (32,294) (29,155) (22,063) (23,567) Profit after tax (21,208) 81,677 40,909 (73,624) 35,634 44,795 47,849 Minority interest (152) 603 1,731 2,145 2,359 2,595 2,854 Share in profit/(loss) of associates 1,269 664 2,681 903 903 903 903 Reported net income (20,092) 82,943 45,321 (70,576) 38,896 48,293 51,606 Adjusted net income (3,255) 66,693 25,321 3,323 38,896 48,293 51,606 Fully diluted EPS (Rs) (3.5) 69.5 26.1 (72.7) 40.0 49.7 53.1
Balance sheet (Rs mn) Equity 230,208 355,639 430,436 341,723 366,981 401,635 439,602 Deferred tax liability 16,541 20,126 24,424 31,185 31,185 31,185 31,185 Total Borrowings 531,004 620,771 620,719 660,952 675,740 690,740 690,740 Current liabilities 309,678 347,702 385,297 418,147 418,449 419,042 428,437 Minority interest 8,841 8,889 10,912 16,694 14,335 11,740 8,885 Total liabilities 1,096,272 1,353,127 1,471,787 1,468,699 1,506,688 1,554,341 1,598,849 Net fixed assets 365,252 365,685 421,003 544,735 550,019 541,015 515,626 Capital work in progress 92,706 135,508 200,397 147,397 224,397 293,147 343,147 Goodwill 145,418 152,982 173,546 130,650 130,650 130,650 130,650 Investments 54,178 78,473 40,213 32,577 33,480 34,383 35,286 Cash 68,151 108,591 108,016 98,597 34,526 14,014 21,441 Other current assets 370,566 511,887 528,613 514,744 533,617 541,132 552,699 Miscellaneous expenditure ------Total assets 1,096,272 1,353,127 1,471,787 1,468,699 1,506,688 1,554,340 1,598,849
Free cash flow (Rs mn) Operating cash flow excl. working cap 23,343 87,095 66,314 60,277 90,064 100,413 104,102 Working capital changes 49,017 (77,508) 11,590 38,284 (18,571) (6,922) (2,172) Capital expenditure (69,472) (93,360) (119,586) (152,240) (143,500) (122,000) (87,500) Free cash flow 2,889 (83,772) (41,682) (53,678) (72,006) (28,509) 14,430
Ratios EBITDA margin (%) 7.9 13.5 8.7 9.1 11.7 11.9 12.0 EBIT margin (%) 3.5 9.8 5.3 5.0 7.3 7.5 7.6 Debt/equity (X) 2.3 1.7 1.4 1.9 1.8 1.7 1.6 Net debt/equity (X) 1.9 1.4 1.2 1.6 1.7 1.7 1.5 Net debt/EBITDA (X) 5.5 3.0 4.3 4.5 3.9 4.0 3.8 RoAE (%) (1.5) 22.8 6.4 0.9 11.0 12.6 12.3 RoACE (%) (34.8) 9.6 4.9 7.6 6.6 7.0 7.0
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 43
SELL JSW Steel (JSTL)
Metals & Mining MAY 24, 2013 RESULT Coverage view: Neutral
Volume-led beat. JSW Steel reported 4QFY13 consolidated EBITDA of Rs17.3 bn, 18% Price (Rs): 688 higher than our estimate, led by strong steel deliveries and cost efficiencies. JSW’s Target price (Rs): 585 guidance indicates 10% growth in steel deliveries for FY2014, which we believe is a tad BSE-30: 19,674 aggressive. We believe iron ore sourcing challenges may continue in FY2014 and lead to sub-optimal utilization and/or result in elevated costs. Weak domestic demand is expected to put pressure on realization and profitability. High leverage does not help, either. We maintain SELL with an unchanged 12-month forward target price of Rs585.
Company data and valuation summary JSW Steel Stock data Forecasts/Valuations 2013 2014E 2015E 52-week range (Rs) (high,low) 939-566 EPS (Rs) 43.2 58.0 86.2 Market Cap. (Rs bn) 153.5 EPS growth (%) 79.1 34.4 48.6 Shareholding pattern (%) P/E (X) 15.9 11.9 8.0 Promoters 38.0 Sales (Rs bn) 382.1 388.9 411.6 FIIs 19.7 Net profits (Rs bn) 13.3 12.9 19.2 MFs 1.2 EBITDA (Rs bn) 65.0 64.1 72.5 Price performance (%) 1M 3M 12M EV/EBITDA (X) 5.7 6.0 5.4 Absolute (5.1) (11.0) 19.1 ROE (%) 7.8 7.3 10.0 Rel. to BSE-30 (7.5) (12.7) (3.4) Div. Yield (%) 1.5 1.5 1.5
Good operational performance drives a handsome beat
JSW reported standalone EBITDA of Rs17.0 bn (+29.2% qoq, +2.8% yoy), 19% higher than our estimate. The beat was led by (1) 12% qoq growth in steel deliveries to 2.43 mn tons, 13% higher than our estimate and (2) a lag benefit of lower coking coal and power costs. Net income of Rs5.7 bn (-23.8 % yoy) was 45.4% higher than our estimate mainly due to the EBITDA beat and Rs0.7 bn forex gain. Steel realization was flattish at US$702/ton. EBITDA/ton increased 15.3% qoq to US$129.
Strong standalone drives consolidated performance; overall debt increases
JSW reported consolidated EBTIDA of Rs17.3 bn (+31.6% qoq, -8.2% yoy), 18% ahead of our estimate. The US plate mill disappointed again with marginal EBITDA generation and heavier losses. Increase in iron ore prices led to Chilean iron ore mines reporting EBITDA of US$6.6 mn after reporting a loss in 3QFY13. Overall leverage is a concern with net debt before acceptances increasing to Rs195 bn; net debt/ EBITDA stands at 3X on FY2013 and 3.7X on FY2014E numbers.
Management’s FY2014 volume guidance has downside risk
JSW’s guidance indicates 10% growth in crude steel production and steel deliveries to 9.25 mn tons and 9.75 mn tons respectively. JSW’s confidence in steel volumes is predicated on procuring 75-80% out of 24 mn tons of iron ore production (in Karnataka), broken up into (1) 10 mn tons by NMDC, (2) 5 mn and 5 mn tons by Category A and B mines and (3) dumps that have iron ore concentrate equivalent to 4 mn tons. We believe JSW’s iron ore procurement target appears aggressive due to the slow and gradual ramp-up of Category B mines. Procurement prices may stay elevated, which is an additional headwind.
High leverage and expensive valuations drive our SELL rating
Capex plans of Rs90 bn over the next two years means debt is unlikely to decline. Concerns about profitability, iron ore for production, high leverage and expensive valuations leave a lot of scope for downside. We maintain our SELL rating with a 12-month unchanged fair value of Rs585/share.
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Metals & Mining JSW Steel
Exhibit 1: Interim results of JSW Steel (consolidated), March fiscal year-ends (Rs mn)
(% chg.) 4QFY13 4QFY13E 4QFY12 3QFY13 4QFY13E 4QFY12 3QFY13 FY2013 FY2012 (%chg) Net sales 98,515 88,972 101,527 88,662 10.7 (3.0) 11.1 380,950 341,237 11.6 Operating other income 466 217 2,083 217 (77.6) 114.8 1,147 2,444 Total expenditure (81,650) (74,526) (84,737) (75,569) (3.6) 8.0 (317,057) (283,347) 11.9 Inc/(Dec) in stock (5,935) (186) (2,204) (189) 169.3 NM 1,524 4,437 (65.6) Raw materials (55,896) (56,782) (64,014) (57,576) (12.7) (2.9) (243,209) (224,104) 8.5 Power & Fuel (4,836) (5,054) (5,141) (5,125) (5.9) (5.6) (20,410) (18,306) 11.5 Staff cost (2,210) (2,283) (2,258) (2,315) (2.1) (4.6) (9,803) (8,464) 15.8 Other expenditure (12,774) (10,220) (11,120) (10,363) 14.9 23.3 (45,160) (36,910) 22.4 EBITDA 17,332 14,662 18,873 13,310 18.2 (8.2) 30.2 65,039 60,333 7.8 Other income 28 83 243 82 (65.9) (88.4) (65.6) 697 784 (11.0) Interest (5,074) (5,219) (4,550) (5,167) (2.8) 11.5 (1.8) (19,675) (13,804) 42.5 Depreciation (5,947) (5,683) (5,276) (5,627) 4.6 12.7 5.7 (22,375) (19,201) 16.5 Pretax profits 6,340 3,843 9,290 2,599 64.9 (31.8) 143.9 23,687 28,113 (15.7) Extraordinaries 702 160 2,001 (2,685) — — — (3,694) (14,796) Tax (3,761) (1,240) (3,097) 172 203.3 21.4 NM (8,453) (5,002) 69.0 Net income 3,280 2,763 8,194 86 18.7 (60.0) NM 11,541 8,315 38.8 Minority interest 57 168 (115) 165 (66.2) (149.4) (65.5) 444 (189) Share of profit from associates (378) 200 (382) (988) (289.0) (1.1) (61.7) (2,355) (2,749) PAT after minority interest 2,959 3,131 7,697 (737) (5.5) (61.6) (501.5) 9,630 5,377 79.1 Ratios ETR (%) 53.4 31.0 27.4 200.9 72.4 94.7 (73.4) 35.7 17.8 EPS (Rs) 13.3 14.0 34.5 (3.3) (5.5) (61.6) (501.5) 43.2 24.1
Source: Company estimates, Kotak Institutional Equities
Exhibit 2: Interim results of JSW Steel (standalone), March fiscal year-ends (Rs mn)
(% chg.) 4QFY13 4QFY13E 4QFY12 3QFY13 4QFY13E 4QFY12 3QFY13 FY2013 FY2012 (%chg) Net sales 92,488 82,524 95,112 82,749 12.1 (2.8) 11.8 353,876 320,605 10.4 Other operating income 420 175 335 175 — 25.7 139.7 1,042 622 Total expenditure (75,936) (68,437) (78,929) (69,788) 11.0 (3.8) 8.8 (291,830) (265,283) 10.0 Inc/(Dec) in stock (5,340) — (3,452) (158) — 54.7 3,284.1 1,725 2,978 (42.1) Raw materials (52,796) (51,882) (58,947) (53,379) 1.8 (10.4) (1.1) (226,004) (209,589) 7.8 Power & Fuel (4,636) (4,945) (4,827) (4,926) (6.3) (4.0) (5.9) (19,641) (17,626) 11.4 Staff cost (1,606) (1,720) (1,528) (1,604) (6.7) 5.1 0.1 (6,710) (6,259) 7.2 Other expenditure (11,559) (9,890) (10,176) (9,721) 16.9 13.6 18.9 (41,200) (34,788) 18.4 EBITDA 16,973 14,261 16,518 13,136 19.0 2.8 29.2 63,088 55,944 12.8 OPM (%) 18.8 17.3 17.7 16.1 17.8 17.4 Other income 537 577 483 566 (6.9) 11.2 (5.1) 2,609 1,028 153.7 Interest (4,425) (4,637) (3,677) (4,546) (4.6) 20.3 (2.7) (17,245) (10,806) 59.6 Depreciation (5,274) (5,075) (4,720) (4,975) 3.9 11.7 6.0 (19,739) (17,082) 15.6 Profit before tax 7,811 5,128 8,604 4,181 52.3 (9.2) 86.8 28,713 29,085 (1.3) Extraordinaries (1,299) (506) (1,992) 3,274 — — — (3,672) (8,139) Tax (3,377) (1,690) (3,074) 460 99.8 9.9 (834.2) (7,029) (4,687) 50.0 Net income 5,732 3,944 7,522 1,367 45.4 (23.8) 319.2 18,012 16,259 10.8 Ratios ETR (%) 37.1 30.0 29.0 (50.7) 28.1 22.4 EPS (Rs) 25.3 17.7 33.4 5.8 74.4 67.2 Per ton analyis (US$/ton) Realization 702 708 818 704 (0.8) (14.2) (0.2) 732 857 (14.5) Other operating income 3 2 3 1 112.6 10.9 113.9 2 2 29.8 Stock adjustment - — - - ——— —— Raw material consumption 442 445 537 456 (0.9) (17.8) (3.1) 464 560 (17.1) Power & Fuel 35 42 42 42 (17.1) (15.2) (16.0) 41 47 (13.7) Staff cost 12 15 13 14 (17.4) (7.3) (10.7) 14 17 (17.0) Other expenditure 88 85 88 83 3.4 0.3 6.1 85 93 (8.3) EBITDA 129 122 142 112 5.3 (9.3) 15.3 131 142 (7.7) Steel deliveries ('000 ton) 2,430 2,150 2,310 2,170 13.0 5.2 12.0 8,879 7,814 13.6
Source: Company, Kotak Institutional Equities
46 KOTAK INSTITUTIONAL EQUITIES RESEARCH JSW Steel Metals & Mining
Exhibit 3: JSW Steel, change in estimates, March fiscal year-ends, 2013E-14E (Rs mn)
Revised estimates Old estimates % change 2014E 2015E 2014E 2015E 2014E 2015E Consolidated Net sales 388,905 411,642 383,221 419,826 1.5 (1.9) EBITDA 64,144 72,545 61,789 75,233 3.8 (3.6) PAT 12,947 19,236 12,571 20,977 3.0 (8.3) EPS (a) 58.0 86.2 56.3 94.0 3.0 (8.3)
Saleable steel volumes ('000 ton) 9,185 10,500 8,684 10,318 5.8 1.8 HRC price (US$/tonne) 609 574 626 594 (2.8) (3.3) Iron ore cost (US$/tonne) 60 57 56 50 7.4 14.0 EBITDA/tonne (US$/tonne) 126 126 123 128 2.7 (1.3)
ispat Net sales 100,809 102,194 103,528 105,461 (2.6) (3.1) EBITDA 12,397 14,928 11,840 14,670 4.7 1.8 PAT (27) 3,375 (584) 3,112 (95.3) 8.5
Source: Kotak Institutional Equities estimates
Exhibit 4: JSW Steel, key assumptions, March fiscal year-ends, 2010-16E (Rs mn)
US$/ ton 2010 2011 2012 2013 2014E 2015E 2016E Average HRC Price (US$/ton) 647 744 738 628 609 574 572 Average realization (Rs/ton) 31,905 37,978 41,103 43,394 43,128 39,637 38,333 Crude steel capacity ('000 tons) 7,800 7,800 11,000 11,000 11,000 11,000 12,000 Steel deliveries ('000 tons) 5,705 6,099 7,815 8,869 9,185 10,500 11,492 Steel ASP (US$/ ton) 695 833 858 735 725 681 671 Raw material cost (US$/ ton) 399 513 554 465 456 412 406 Conversion cost (US$/ ton) 132 156 154 140 142 144 148 EBITDA/ ton (US$) 163 165 150 131 126 126 117 Re/US$ rate 45.9 45.6 47.9 54.4 54.0 53.5 52.9
Source: Company, Kotak Institutional Equities estimates
Exhibit 5: JSW Steel, valuation details, March 2014E basis (Rs mn)
EBITDA Multiple Value Value (Rs mn) (X) (Rs mn) (Rs/share) Consolidated EBITDA 64,144 6 379,735 1,571 Net debt 230,981 956 Arrived market capitalization for JSW 148,754 615 Ispat 12,397 6 73,760 305 Net debt 81,114 336 Value of Ispat per share of JSW (7,354) (30) Target price (Rs) 585
Source: Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 47 Metals & Mining JSW Steel
Exhibit 6: JSW Steel (consolidated), profit model, balance sheet and cash flow model, March fiscal year-ends, 2010-2016E (Rs mn)
2010 2011 2012 2013 2014E 2015E 2016E Profit model (Rs mn) Net sales 190,738 239,002 343,681 382,097 388,905 411,642 436,784 EBITDA 41,873 46,627 61,019 65,039 64,144 72,545 73,511 Other income 4,194 2,840 769 697 2,329 3,799 4,127 Interest (11,080) (9,454) (14,273) (19,675) (21,089) (22,557) (22,270) Depreciaiton (12,987) (15,597) (19,332) (22,375) (26,041) (28,185) (29,706) Miscellaneous expenditure w/o ------Profit before tax 22,000 24,417 28,183 23,687 19,343 25,602 25,662 Extra-ordinary items - - (8,249) (3,694) - - - Current tax (2,286) (3,855) 2,731 (4,684) (3,689) (5,945) (6,290) Deferred tax (4,182) (3,968) (7,732) (3,769) (3,015) (2,412) (1,930) Net profit 15,533 16,594 14,932 11,541 12,639 17,245 17,441 Minority interest 332 239 (189) 343 322 327 333 Share of earnings from associates 111 707 (9,366) (2,253) (14) 1,664 1,333 PAT 15,976 17,540 5,377 9,631 12,947 19,236 19,108 Adjusted PAT 15,976 17,540 11,556 11,763 12,947 19,236 19,108 Earnings per share (Rs) 80.4 78.6 24.1 43.2 58.0 86.2 85.6
Balance sheet (Rs mn) Equity 92,572 165,293 167,496 173,437 183,448 199,747 215,918 Deferred tax liability 16,848 20,494 27,250 32,720 35,735 38,147 40,077 Total Borrowings 161,730 164,744 199,091 229,364 309,832 307,108 302,032 Current liabilities 80,727 106,014 143,120 137,635 130,343 125,109 119,874 Minority interest 2,187 2,358 2,177 1,972 1,650 1,322 989 Total liabilities 354,063 458,903 539,133 575,128 661,007 671,434 678,890 Net fixed assets 284,090 323,183 353,998 393,004 418,341 430,481 418,628 Goodwill on consolidation 8,992 10,932 12,440 13,143 13,143 13,143 13,143 Investments 6,282 29,138 20,896 17,500 17,486 19,150 20,483 Cash 3,030 20,480 30,470 16,534 78,851 73,326 83,036 Other current assets 51,669 75,169 121,330 134,948 133,186 135,334 143,600 Miscellaneous expenditure ------Total assets 354,063 458,903 539,133 575,128 661,007 671,434 678,890
Free cash flow (Rs mn) Operating cash flow excl. working capital 38,323 41,439 45,746 37,685 41,695 47,842 49,077 Working capital changes (4,710) (13,137) (10,622) (27,621) (5,531) (7,382) (13,500) Capital expenditure (27,245) (52,994) (40,660) (51,356) (51,378) (40,325) (17,853) Free cash flow 6,368 (24,691) (5,536) (41,292) (15,214) 135 17,724
Ratios Debt/equity (X) 1.7 1.0 1.2 1.3 1.7 1.5 1.4 Net debt/equity (X) 1.7 0.9 1.0 1.2 1.3 1.2 1.0 RoAE (%) 18.7 13.6 3.2 5.6 7.3 10.0 9.2 RoACE (%) 9.5 8.3 10.0 8.6 7.2 7.4 7.2
Source: Company, Kotak Institutional Equities estimates
48 KOTAK INSTITUTIONAL EQUITIES RESEARCH
REDUCE Thermax (TMX)
Industrials MAY 24, 2013 RESULT Coverage view: Cautious
Negative outlook on broader capex scenario; seeing few large enquiries. TMX Price (Rs): 597 remains cautious on business recovery in FY2014E (hopes for double-digit growth in Target price (Rs): 575 order inflows/execution and stable margin). Its near-term outlook remains very weak BSE-30: 19,674 with few large prospects (still citing Kochi/Reliance with few enquiries in cement, steel and power) and lower visibility on medium-sized prospects. TMX still expects to grow order inflows in FY2014E on small-to-medium-sized and overseas orders.
Company data and valuation summary Thermax Stock data Forecasts/Valuations 2013 2014E 2015E 52-week range (Rs) (high,low) 691-419 EPS (Rs) 26.4 31.6 37.0 Market Cap. (Rs bn) 71.1 EPS growth (%) (19.7) 19.4 17.3 Shareholding pattern (%) P/E (X) 22.6 18.9 16.1 Promoters 62.0 Sales (Rs bn) 55.0 59.0 65.0 FIIs 14.3 Net profits (Rs bn) 3.1 3.8 4.4 MFs 5.1 EBITDA (Rs bn) 4.9 5.6 6.4 Price performance (%) 1M 3M 12M EV/EBITDA (X) 12.7 10.4 8.6 Absolute 2.8 3.7 38.3 ROE (%) 18.0 18.9 19.5 Rel. to BSE-30 0.3 1.8 12.1 Div. Yield (%) 1.5 1.5 1.8
Company remains cautious on business recovery in FY2014E
` Order inflows to grow double digit at best. Thermax expects modest order inflow growth in FY2014E on (1) no new long opportunities (still citing Kochi, Reliance projects) and (2) lower visibility on medium-sized projects (versus the same time last year). The company is thus banking on (1) small-to-medium-sized orders (renewables, food, pharma) and (2) overseas orders.
` Revenue growth to be constrained by marginally better starting backlog. TMX’s starting backlog has marginally grown 3% yoy (5-6% adjusting for Rs1 bn of orders taken out). It thus hoped for double-digit growth in FY2014E but part of it depends upon short-cycle orders.
` Aims to sustain contribution margin. Post 170 bps increase in FY2013 contribution margin (which compensated for negative operating leverage), TMX aims to sustain the contribution margin in FY2014E (EBITDA margin may decline without support of strong execution).
On-ground feedback continues to be weak for key sectors (not enough enquiries)
The company cited that even inquiries are very weak from key sectors (cement, steel and power). The expectation of recovery in cement in 2H has not played out as the industry still has underutilized capacities (below 85% threshold). Large opportunities are limited to Reliance refinery project (yet to be tendered) and Kochi (recently got tendered). The company remains bearish on power, citing virtually no private-sector project being conceptualized.
Results surprise on strong margin; retain REDUCE on weak capex outlook and high valuations
TMX reported higher-than-expected PAT in 4QFY13 of Rs1.15 bn (13% beat; down 11% yoy) on positive margin surprise (11.4%, up 40 bps yoy) even as top-line declined by 13% yoy. Order inflows also maintained Rs11-12 bn quarterly rate, leading to Rs44 bn backlog (provides limited 0.9X visibility). Working capital increased, though still remains healthy, at 18 days of sales. We marginally revise our consolidated estimates to Rs31.6 and Rs37 from Rs31.4 and Rs38.3 for FY2014-15E. We retain REDUCE rating (TP revised to Rs575 from Rs550) on (1) a weak capex cycle, (2) full valuations (19X FY2014E P/E, 11X EV/EBITDA) and (3) potential margin risks.
For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
Industrials Thermax
Remains cautious on business recovery in FY2014E
` Order inflows to grow double digit at best. The company refrained from giving specific guidance in order inflows although does see double-digit growth as the best case scenario as of now. There are only a couple of large-sized orders in the pipeline and there is also lower visibility on medium-sized projects (versus the same time last year). The company is thus banking on (1) small-to-medium-sized orders (renewables, food, pharma) and (2) overseas orders (value engineering and currency have improved competitiveness), especially in ME (has opened local offices) and SE Asia (demand expected to pick up). Note that company’s full-year order inflows have grown 20% yoy (supported by strong overseas orders) versus mid-teens growth targeted by the company.
` Revenue growth to be constrained by marginally better starting backlog. Thermax has improved its starting backlog marginally by about 3% (5-6% growth accounting for Rs1 bn of orders taken out of backlog). It thus does not expect a significant double-digit growth in FY2014E. Key risks to execution of (1) client-specific delays and (2) tight liquidity would continue to constrain near-term execution. Over a longer 3-year period (2010-13), the company cited EPC contribution coming down (Rs11 bn in FY2013 versus Rs15 bn in FY2010) which has been covered up by increasing contribution from (1) services (Rs6.5 bn+ in FY2013, up 15% yoy), (2) standard products (25%+ growth in FY2013) and (3) renewable. The company expects these segments to support growth even in FY2014E.
` Margin: Aims to maintain at contribution level. The company has been able to broadly maintain overall margin at EBITDA level in FY2013 (10.8% versus 11% in FY2012) on the back of value engineering and other cost reduction focused initiatives as well as declining commodity prices (170 bps yoy increase in FY2013 contribution margin). Incrementally it aims to maintain margin at contribution level (focus is on winning orders). EBITDA margin profile in FY2014E would now depend on revenue growth (else negative operating leverage would drag margin down).
On-ground feedback continues to be weak for key sectors (cement, steel, power)
The company cited that even inquiries are minimal from key sectors of cement, steel and power. Tendering for the Reliance petrochemical project is yet to start while Kochi refinery orders have recently got tendered. Barring these two, there is no other large opportunity coming up. Cement was expected to revive in 2H (players have strong balance sheet and profitability), although weak capacity utilization for major players (lower than consider 85% threshold for new capacities) may further delay fresh investments. Some other opportunities which may come up later on are (1) Bhushan Steel and (2) JSPL (to invest in power if not in steel).
Current capacity can support 25% growth in business
Thermax cited share capacities in most of its segment (projects, EPC, air pollution, water) barring chemicals (full) and chillers (full in India, capacity available in China). It expects current capacity to be capable of supporting 25% business growth and thus does not intend to incur new capacity-related capex in FY2014E (below Rs1 bn primarily used for maintenance capex). It has done a capex of Rs1.2 bn in FY2013 (partly on new Baroda facility).
TBW: Capacity close to commissioning; expects no near-term orders
The 3 GW supercritical boiler facilities (TMX-B&W JV) are now ready although the company does not expect to win orders for the facility in the near future. It cited only 1-2 orders in the pipeline as of now (NLC-3X 660 in UP, Tamil Nadu state project). The company has qualified and would be bidding for both (1) BTG and (2) EPC projects (to be more selective here). It would bid for both modes in consortium although would not be the lead partner in EPC projects.
50 KOTAK INSTITUTIONAL EQUITIES RESEARCH Thermax Industrials
Subsidiary performance
` Dan stoker reports profit in 4QFY13. Dan stoker has marginally improved its top-line in FY2013 although has reported far superior growth in order inflows (bodes well for FY2014E). The company had earlier reported a loss for one quarter in FY2013 although has returned to positive territory in the fourth quarter. Thermax expects the subsidiary profitability to improve further as it benefits from the recently completed value engineering exercise.
` Chinese power construction subsidiary may remain in losses. In contrast, the Chinese power construction subsidiary continues to be in losses on weak FY2013 business (impacted by election). With the new government now being formed, order inflows have improved in the fourth quarter. The subsidiary, though, is expected to report losses in the near term.
Exhibit 1: Standalone and subsidiary financials for Thermax, March fiscal year ends, 2009- 14E (Rs mn)
2009 2010 2011 2012 2013E 2014E Business Standalone Sales 32,644 31,855 48,524 53,041 46,909 50,055 PBT 4,178 3,920 5,730 6,009 5,156 5,397 PAT 2,859 2,563 3,824 4,061 3,500 3,670 Subsidiaries Sales 1,959 1,848 4,848 7,872 8,065 8,970 PBT 68 116 7 (44) (318) 270 PAT 30 49 (7) (26) (311) 242 Thermax Inc (USA) Sales 750 671 582 652 685 787 Key businesses include that of PBT 6 55 8 24 14 31 absorption chillers and ion exchange PAT 543210920resins Thermax Europe Ltd (UK) Sales 408 258 310 407 447 492 Focusses on cooling business in PBT 56 41 41 47 36 44 Europe PAT 40 30 29 35 27 33 Thermax Engg Const. Co. Ltd (TECC) Sales 999 968 1,201 1,710 1,710 1,881 Construction arm for boiler and PBT 30 51 94 105 34 94 heater business PAT 15 30 64 71 23 63 Thermax Instrumentation Ltd (TIL) Sales 1,032 1,291 2,365 2,495 2,495 2,744 Construction arm for power business PBT 9 35 51 (116) (249) 69 PAT 4 20 34 (104) (249) 91 Thermax (Zhejinag) Cooling & Heating Engg Co. Ltd, China Sales 20 136 213 492 541 677 Supports global cooling business PBT (88) (81) (8) (70) (54) (20) PAT (88) (81) (8) (70) (54) (20) Danstoker (includes Omnical) Sales — — — 3,387 3,488 3,837 Danstoker - renewable fuel based PBT — — — 146 70 192 heating systems PAT — — — 113 52 144 Omnical - waste recovery boilers
Note (1) Danstoker (including Omnical) financials represent proportional financials based on data for Sep-10-Mar-12
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 51 Industrials Thermax
4QFY13 results: Margin surprises positively despite double-digit execution decline
` Double-digit revenue decline continues in 4QFY13 as well, decline broadly spread across both energy and environment segments. Thermax reported 4QFY13 standalone revenues of Rs14.7 bn, registering a 13% yoy decline; broadly in line with our estimate of Rs14.5 bn. For the full-year FY2013, standalone revenues have declined by about 11.6% yoy to Rs47 bn. This decline was expected on the backlog of a lower starting order backlog at the beginning of the FY. The revenue decline was led by both the segments with energy segment revenues declining by 13.7% yoy (to Rs11.4 bn) and environment segment declining 16.9% yoy (to Rs3.5 bn). For the full year, both segments have reported about 12% yoy revenue decline.
` High contribution margin (potentially on favorable mix) offsets negative operating leverage. Thermax reported 4QFY13 EBITDA margin of 11.4%, expanding by about 40 bps yoy (versus our estimate of a 90 bps yoy contraction). The margin expansion was led by the contribution margin which expanded by about 100 bps yoy (possibly on favorable revenue mix with lower contribution from large project revenues as proportion to sales). At the EBIT level, energy segment reported a small 30 bps yoy margin expansion (to 10.5%) while the environment segment margin in fact declined by 120 bps yoy (to 11.8%) in 4QFY13. Note a high non-allocable income of Rs168 mn in the quarter (at Rs61 mn last year) leading to the net EBIT-level margin expansion.
` Higher-than-expected margin leads to PAT-level beat. Higher-than-expected EBITDA margin led to a net PAT of Rs1.15 bn for 4QFY13, about 13% higher than our estimate (of Rs1.02 bn) and down 11% yoy. For the full-year FY2013, Thermax reported a net PAT of Rs3.5 bn, a decline of 14% yoy.
Exhibit 2: PAT beat on higher EBITDA margin Thermax (standalone) - 4QFY13 - key numbers (Rs mn)
% change 4QFY13 4QFY13E 4QFY12 3QFY13 vs est. yoy qoq FY2013E FY2012 % change Total income 14,682 14,489 16,868 10,468 1.3 (13.0) 40.3 46,909 53,041 (11.6) Expenses (13,009) (13,025) (15,015) (9,350) (0.1) (13.4) 39.1 (41,837) (47,202) (11.4) Raw material (9,977) (9,925) (11,492) (6,984) (13.2) 42.9 (31,764) (36,842) (13.8) Employee (1,078) (999) (942) (981) 14.4 9.8 (4,016) (3,874) 3.7 Other expenses (1,905) (2,101) (2,366) (1,386) (19.5) 37.4 (6,085) (6,519) (6.7) EBITDA 1,672 1,464 1,853 1,119 14.3 (9.7) 49.5 5,071 5,839 (13.1) Other income 244 131 272 124 85.8 (10.2) 97.4 730 705 3.6 PBDIT 1,917 1,595 2,125 1,243 20.2 (9.8) 54.3 5,801 6,544 (11.3) Interest (5) 25 (34) (20) (118.6) (86.1) (76.2) (96) (66) 47.3 Depreciation (145) (123) (121) (133) 18.1 20.3 9.4 (549) (470) 16.8 PBT 1,767 1,498 1,971 1,090 18.0 (10.3) 62.1 5,156 6,009 (14.2) Tax (614) (479) (673) (326) 28.1 (8.8) 88.0 (1,657) (1,940) (14.6) Net profit 1,153 1,018 1,298 764 13.2 (11.2) 51.0 3,500 4,069 (14.0)
Order details Order booking 11,550 8,090 12,840 42.8 (10.0) 48,590 40,320 20.5 Order backlog 43,870 42,300 46,670 3.7 (6.0) 43,870 42,300 3.7
Key ratios (%) Raw material /sales 68.3 68.5 69.4 66.7 67.7 69.4 Contribution margin 31.7 31.5 30.6 33.3 32.3 30.6 Employee ex)-2751(()-x0121 7a(y)13e8..153(((3)-100T1_21(()-x9)-100(3)-1(()-x639-1(()-x4660(35-25-1(()-x6)-100(31.e)8()-x0057 Tc T* [01 Tw 0 -1.234 TD [(R42)-7(e)-10(r i)-13(nc)6287(6()-13(6287(6n2396(6(t)-12396(/(t)-12396(5(e)-17(s)-6287(68.)558(2)-2155( -8(0.)-10(0)-7())])-7(9.)-10(0)-7())]TJ (9.)-13(2))-2156()-8(2.)-10(1)-7())]TJ (9.)-12(3)-3034(9)- 1 Tf -0.0058 Tc 0.0105 Tw 0 -82364 TD [(C)-14(o)-ET)-12142(7(D)6(A)-80425(1)-2r)-6(g1-6(i)-10(n)-4767831)-735.)-10(8(3668(66)-7(.)-102751(()-(0.)-10(8)-3698(3,)-10.)-10(6)]TJ /T17)-8(2.)-10(6)]TJ /T18)-10.)-10(6)-3698(3,) 1 Tf -0.0055 Tc 0.0102 Tw 0 -1.349 TD [(47218(BD)-11(7(BT11(7(-10(te)-17(rir)9(3-9055(()-160-1022155( -8(0.)-10(0)03668(3)-8(0.)-10(0)-3698(37)-7(.)-10(4)-4249(()-8(2.)-10(1)-3698(3,)-10.)-11(3)-3034(9)- 1 T 0 -8357 TD [(P)-18(BD)-11(I)A6(g1-T034(9-10()-5( /8ir)i0(te)n034(033)-36688x9)-1088x73698(3,)-10(6)-3668(69)-10(6)-3668(63660(370)-3668(65)-1088x7(7)-17812(6) 1 T 0 -1.234 1(e)-T11(7(13011(()-2i)-911(7()-5(a-1.)-1436688x7-8(0.)-10(7)-3668(30-8(0.)-10(0)-7())]1-8(0.)-20(4)]TJ /T19)-8(2.)-10(7)-3698(5,)-10.)-12(3)-3034(9)- 1 Tf -0.0058 T 0 -8357 TD [(2)7(r)7(dE(3)-PS()R(n)-s()-2i()-1-103)-3668869)-1088683660(3)-8(0.)-10(0)03668(39)-10(6)64249(()-8(2.)-20(4)-3668(66)-7(.)-10(0)-7())]1- 1 TETT 07)-10.)9(10.)76 scn 124.86 377.78 44.04 1.86 re 7 TDTDTD SCNT 0 6 7 TDj TDJ []0 d q005TDTD1 0(1.62 379.22 cm TDTDm -1.30 l S Q TDTDTD scn 0(1.62 378.26 -1.0 6 0.9 re 7 T07)-10.)9(10.)76 scn 14356 367.16 7.08 1.86 re 7 55.74 367.16 8(Em 1.86 re 7 78.24 367.16 8(Em 1.86 re 7 4(0.8 367.16 8(Em 1.86 re 7 44.46 367.16 2.8231.86 re 7 67.1.3367.16 2.8231.86 re 7 89.5.3367.16 2.8231.86 re 7 1022083367.16 2.8231.86 re 7 50.)3367.16 2.8231.86 re 7 72.66 367.16 2.7m 1.86 re 7 95.16 367.16 2.8231.86 re 7 107.7.3367.16 2.8231.86 re 7 124.86 367.16 6.9m 1.86 re 7 445.92 367.16 8(Em 1.86 re 7 4143643367.16 2.8231.86 re 7 157.143367.16 2.8231.86 re 7 140.283367.16 2.8231.86 re 7 162.78 367.16 2.8231.86 re 7 168.9 367.16 7.98 1.86 re 7 )1(.98 367.16 8(Em 1.86 re 7 2)-254 367.16 8(Em 1.86 re 7 236.)3367.16 8(E 1.86 re 7 258.6 367.16 8(Em 1.86 re 7 281.16 367.16 8(Em 1.86 re 7 103.7.3367.16 8(Em 1.86 re 7 126.22 367.16 8(Em 1.86 re 7 148.78 367.16 8(Em 1.86 re 7 17[(O) 367.16 [(O8 1.86 re 7 )79.7 367.16 2.8231.86 re 7 21.026 367.16 2.8231.86 re 7 224.8.3367.16 2.8231.86 re 7 247.3.3367.16 2.8231.86 re 7 269.88 367.16 2.8231.86 re 7 292.443367.16 2.8231.86 re 7 3153367.16 2.8231.86 re 7 337.53367.16 2.8231.86 re 7 36 0 6 367.16 2.8231.86 re 7 185(O) 367.16 2.8231.86 re 7 217.9 367.16 2.8231.86 re 7 230.46 367.16 2.8231.86 re 7 252.9m 367.16 2.8231.86 re 7 275.5.3367.16 2.8231.86 re 7 2982083367.16 2.8231.86 re 7 320.583367.16 2.8231.86 re 7 343.143367.16 2.8231.86 re 7 365.7 367.16 2.8231.86 re 7 q005TDTD1 072.7.3368.12 cm TDTDm 37.4430 l S Q TDTDTD scn 072.7.3367.94337.530.12 re 7 q005TDTD1 40220.3368.12 cm TDTDm 42.-830 l S Q 4022083367.94342.-230.12 re 7 T07)-10.)9(10.)76 scn 14356 356.48 7.08 1.92 re 7 55.74 356.48 8(Em 1.92 re 7 78.24 356.48 8(Em 1.92 re 7 4(0.8 356.48 8(Em 1.92 re 7 44.46 356.48 2.8231.92 re 7 67.1.3356.48 2.8231.92 re 7 89.5.3356.48 2.8231.92 re 7 1022083356.48 2.8231.92 re 7 50.)3356.48 2.8231.92 re 7 72.66 356.48 2.7m 1.92 re 7 95.16 356.48 2.8231.92 re 7 107.7.3356.48 2.8231.92 re 7 124.86 356.48 6.9m 1.92 re 7 145.92 356.48 8(Em 1.92 re 7 4143643356.48 2.8231.92 re 7 157.143356.48 2.8231.92 re 7 140.283356.48 2.8231.92 re 7 162.78 356.48 2.8231.92 re 7 168.9 356.48 7.98 1.92 re 7 )1(.98 356.48 8(Em 1.92 re 7 2)-254 356.48 8(Em 1.92 re 7 236.)3356.48 8(E 1.92 re 7 258.6 356.48 8(Em 1.92 re 7 281.16 356.48 8(Em 1.92 re 7 103.7.3356.48 8(Em 1.92 re 7 126.22 356.48 8(Em 1.92 re 7 148.78 356.48 8(Em 1.92 re 7 17[(O) 356.48 [(O8 1.92 re 7 )79.7 356.48 2.8231.92 re 7 21.026 356.48 2.8231.92 re 7 224.8.3356.48 2.8231.92 re 7 247.3.3356.48 2.8231.92 re 7 269.88 356.48 2.8231.92 re 7 292.443356.48 2.8231.92 re 7 3153356.48 2.8231.92 re 7 337.53356.48 2.8231.92 re 7 36 0 6 356.48 2.8231.92 re 7 185(O) 356.48 2.8231.92 re 7 217.9 356.48 2.8231.92 re 7 230.46 356.48 2.8231.92 re 7 252.9m 356.48 2.8231.92 re 7 275.5.3356.48 2.8231.92 re 7 2982083356.48 2.8231.92 re 7 320.583356.48 2.8231.92 re 7 343.143356.48 2.8231.92 re 7 365.7 356.48 2.8231.92 re 7 q005TDTD1 072.7.3357.443cm TDTDm 37.4430 l S Q TDTDTD scn 072.7.3357.3.337.530.12 re 7 q005TDTD1 40220.3357.443cm TDTDm 42.-830 l S Q 4022083357.3.342.-230.12 re 7 q005TDTD1 03.6 346.823cm TDTDm 89.430 l S Q 03.66 346.7 89.O) 0.12 re 7 q005TDTD1 124.86 346.823cm TDTDm 42.-230 l S Q 124.86 346.7 42.-830.12 re 7 q005TDTD1 168.9 346.823cm TDTDm 241026 0 l S Q 168.9 346.7 24103230.12 re 7 q005TDTD1 40220.3346.823cm TDTDm 42.-830 l S Q 4022083346.7 42.-230.12 re 7 q005TDTD1 03.6 336.23cm TDTDm 89.430 l S Q 03.66 336.08389.O) 0.12 re 7 q005TDTD1 124.86 336.23cm TDTDm 42.-230 l S Q 124.86 336.08342.-830.12 re 7 q005TDTD1 168.9 336.23cm TDTDm 241026 0 l S Q 168.9 336.08324103230.12 re 7 q005TDTD1 40220.33
52 KOTAK INSTITUTIONAL EQUITIES RESEARCH Thermax Industrials
Segmental: Energy holds on to margin; environment margin declines sharply
` Energy—sustains margin despite business contraction. Energy segment sales declined 14% yoy in 4QFY13 to Rs11.4 bn. EBIT margin though was stable sequentially and improved on a yoy basis to 10.5%. Full-year energy sales have also declined yoy (12% drop) while segment margin has been broadly flat at 10.5%.
` Environment—gives away margin with lower business volumes. Environment segment sales declined 17% yoy in 4QFY13 to Rs3.5 bn. EBIT margin has declined 200 bps yoy 11.8%. Full-year energy sales have also declined yoy (12% drop) while segment margin has declined by 190 bps yoy 10.5%.
Exhibit 3: Segmental revenues and margins of Thermax for 4QFY13 (Rs mn)
% change 4QFY13 4QFY12 3QFY13 yoy qoq FY2013 FY2012 % change Revenues Energy 11,391 13,206 7,993 (13.7) 42.5 36,383 41,509 (12.4) Environment 3,500 4,211 2,627 (16.9) 33.2 11,310 12,851 (12.0) Less Intersegment (209) (549) (151) (61.9) 38.3 (784) (1,320) (40.6) Total 14,682 16,868 10,468 (13.0) 40.3 46,909 53,041 (11.6) PBIT Energy 1,191 1,314 862 (9.4) 38.2 3,797 4,426 (14.2) Environment 413 582 265 (29.1) 56.0 1,188 1,596 (25.6) Net unallocable income 168 109 (16) 267 52 Total PBIT 1,772 2,004 1,110 (11.6) 59.6 5,253 6,074 (13.5) EBIT margin (%) Energy 10.5 9.9 10.8 10.4 10.7 Environment 11.8 13.8 10.1 10.5 12.4 Total PBIT 12.1 11.9 10.6 11.2 11.5
KOTAK INSTITUTIONAL EQUITIES RESEARCH 53 Industrials Thermax
Working capital deteriorates yoy, though still at low levels of 18 days Thermax working capital deteriorated on a yoy basis though still at relatively low levels of 18 days of sales (from 7 days at end-FY2012; relatively flat sequentially from 15 days at end-1H). This is reflected in higher yoy capital employed in the energy (up 29% yoy to Rs5.4 bn) and environment (up 33% yoy to Rs2.7 bn) segments.
Exhibit 5: Thermax balance sheet, March fiscal year-ends, 2010-13 (Rs mn)
Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Shareholders funds 11,935 12,923 14,630 16,012 17,819 18,693 Share capital 238 238 238 238 238 238 Reserves & surplus 11,696 12,685 14,392 15,774 17,581 18,454 Loan funds - 480 902 1,664 1,366 123 Deferred tax liability 165 201 194 230 218 247 Total sources of funds 12,100 13,605 15,726 17,906 19,404 19,063.217
Fixed assets 5,080 5,163 5,331 5,736 6,030 6,455 Investments 1,874 4,044 4,233 5,527 6,616 8,040 Cash & bank balances 7,324 6,566 5,707 5,698 4,634 2,226 Current assets 17,875 20,155 19,378 22,737 21,789 24,320 Inventories 3,265 2,823 3,027 2,792 2,566 2,103 Sundry debtors 7,915 10,013 10,143 12,456 11,793 14,239 Loans & advances 3,674 3,094 3,125 1,883 2,030 1,512 Other current assets 3,022 4,225 3,084 5,606 5,400 6,466 Current liabilities & provisions 20,053 22,323 18,923 21,791 19,666 21,978 Current liabilities 19,741 20,756 18,547 19,334 18,443 19,421 Provisions 312 1,566 376 2,457 1,222 2,557 Net working capital (excl. cash) (2,177) (2,168) 455 946 2,123 2,342 Miscellaneous expenditure Total application of funds 12,100 13,605 15,726 17,906 19,404 19,063
Last 4-qtr revenues 38,489 48,832 53,594 53,041 51,320 46,909
As days of sales Current assets 170 151 132 156 155 189 Inventories 31 21 21 19 18 16 Sundry debtors 75 75 69 86 84 111 Loans & advances 35 23 21 13 14 12 Other current assets 29 32 21 39 38 50 Current liabilities & provisions 190 167 129 150 140 171 Current liabilities 187 155 126 133 131 151 Provisions 3 12 3 17 9 20 Net working capital (excl. cash) (21) (16) 3 7 15 18
Source: Company, Kotak Institutional Equities
Revise estimates, retain REDUCE We marginally revise our consolidated estimates to Rs31.6 and Rs37 from Rs31.4 and Rs38.3 for FY2014-15E. We retain REDUCE rating (TP revised to Rs575 from Rs550) on (1) a weak capex cycle, (2) full valuations (18X FY2014E P/E, 10X EV/EBITDA) and (3) potential margin risks.
Exhibit 6: Change in estimates for Thermax, March fiscal year-ends, 2014E-15E (Rs mn)
` New estimates Old estimates Revision (%) FY2013 FY2014E FY2015E FY2014E FY2015E FY2014E FY2015E Order inflows (standalone) 48,570 52,514 60,391 53,255 61,243 (1.4) (1.4) Revenues 54,973 59,025 64,957 59,705 66,202 (1.1) (1.9) Standalone 46,909 50,055 54,968 50,296 55,723 (0.5) (1.4) Subsidiaries 8,065 8,970 9,989 9,409 10,479 (4.7) (4.7) EBITDA 4,876 5,628 6,395 5,555 6,605 1.3 (3.2) EBITDA margin (%) 8.9 9.5 9.8 9.3 10.0 Standalone 10.8 10.7 10.8 10.3 10.8 Subsidiaries (2.4) 3.1 4.4 4.0 5.5 PAT 3,150 3,736 4,411 3,736 4,566 - (3.4) EPS 26.4 31.6 37.0 31.4 38.3 0.7 (3.4)
Growth (%) Order inflows 8.1 15.0 9.6 15.0 Revenues (9.8) 7.4 10.0 8.6 10.9
Source: Company, Kotak Institutional Equities estimates
54 KOTAK INSTITUTIONAL EQUITIES RESEARCH Thermax Industrials
Exhibit 7: Standalone balance sheet, profit model and cash flow statement of Thermax, March fiscal year-ends, 2008-15E (Rs mn)
2008 2009 2010 2011 2012 2013E 2014E 2015E Balance sheet Shareholders funds 7,361 9,619 10,508 12,923 16,012 18,693 21,075 23,766 Loan funds — — — 480 1,664 123 123 123 Total sources of funds 7,672 9,981 10,944 13,872 18,235 19,063 21,445 24,137 Net block 2,786 4,399 4,939 4,866 5,316 6,108 6,245 6,383 CWIP 476 177 112 297 420 347 370 406 Net fixed assets 3,262 4,576 5,050 5,163 5,736 6,455 6,614 6,789 Investments 5,797 1,765 3,782 4,044 5,527 8,040 6,777 6,777 Cash balances 279 3,408 6,056 6,566 5,698 2,226 6,203 8,538 Net current assets excluding cash (1,826) 51 (4,207) (2,168) 946 2,342 1,851 2,033 Total application of funds 7,672 9,981 10,944 13,872 18,235 19,063 21,445 24,137 Profit model Total operating income 32,042 32,644 31,855 48,524 53,041 46,909 50,055 54,968 Total operating costs (27,946) (28,499) (28,013) (43,172) (47,202) (41,837) (44,701) (49,010) EBITDA 4,096 4,144 3,841 5,352 5,839 5,071 5,353 5,958 Other income 418 388 498 831 705 730 669 815 PBDIT 4,514 4,532 4,339 6,183 6,544 5,801 6,022 6,772 Financial charges (13) (33) (15) (22) (66) (96) (12) (12) Depreciation (218) (321) (404) (432) (470) (549) (613) (661) Pre-tax profit 4,283 4,178 3,920 5,730 6,009 5,156 5,397 6,099 Taxation (1,496) (1,319) (1,356) (1,906) (1,948) (1,657) (1,727) (1,952) Adjusted PAT 2,787 2,859 2,563 3,824 4,061 3,500 3,670 4,147 Extraordinary items, net of tax 21 14 (1,149) ————— Reported PAT 2,808 2,873 1,415 3,824 4,061 3,500 3,670 4,147 Cash flow statement Cashflow from operating activities Operating profit before working capital changes 3,061 3,210 2,959 4,285 4,559 4,048 4,283 4,808 Change in working capital / other adjustments (498) (1,796) 4,428 (2,040) (3,114) (1,396) 491 (182) Net cashflow from operating activites 2,563 1,414 7,387 2,246 1,446 2,652 4,774 4,627 Fixed Assets (1,783) (1,635) (879) (545) (1,042) (1,268) (772) (836) Investments (21) 4,033 (2,017) (262) (1,483) (2,513) 1,263 — Cash (used) / realised in investing activities (1,805) 2,398 (2,896) (807) (2,525) (3,781) 491 (836) Dividend paid (1,115) (697) (695) (1,246) (973) (1,220) (1,288) (1,456) Cash (used) /realised in financing activities (1,115) (697) (695) (766) 211 (2,761) (1,288) (1,456) Cash generated /utilised (346) 3,129 2,648 510 (868) (3,471) 3,976 2,335 Net cash at begn of year 625 279 3,408 6,056 6,566 5,698 2,226 6,203 Net cash at end of year 279 3,408 6,056 6,566 5,698 2,226 6,203 8,538 Margins for standalone business (%) Raw material / sales 68.0 64.3 64.6 70.4 69.4 67.7 68.9 68.5 Other expenses / sales 11.6 15.2 14.1 11.0 12.3 13.0 11.5 11.4 Employee expense / sales 7.5 7.8 9.2 7.6 7.3 8.6 8.8 9.2 EBITDA magin 12.8 12.7 12.1 11.0 11.0 10.8 10.7 10.8 PAT margin 8.7 8.8 8.0 7.9 7.7 7.5 7.3 7.5 RoE 43.1 33.0 25.2 31.9 27.4 18.0 18.9 19.5 RoCE 43.2 33.2 25.2 30.2 24.5 16.7 18.1 18.7 EPS (standalone) (Rs) 23.4 24.0 21.5 32.1 34.1 29.4 30.8 34.8
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 55 Industrials Thermax
Exhibit 8: Energy segment revenues for Thermax, March fiscal year-ends, 2008-15E (Rs mn)
2009 2010 2011 2012 2013E 2014E 2015E Energy segment Revenue 25,173 24,082 39,082 41,509 36,383 37,197 40,768 Assume moderate growth in order inflows Growth (%) (3.9) (4.3) 62.3 6.2 (12.4) 2.2 9.6 in FY2014E-15E Order inflow 35,510 46,352 41,013 28,730 36,540 39,281 45,173 Growth (%) 71.0 30.5 (11.5) (29.9) 27.2 7.5 15.0 Order backlog 24,509 44,889 46,724 32,490 32,750 34,833 39,238 Build in strong execution based on Growth (%) 26.7 83.2 4.1 (30.5) 0.8 6.4 12.6 absence of large order wins Bill to book ratio (%) 67.9 50.5 59.8 67.9 71.7 71.0 71.0 EBIT 3,315 2,873 3,889 4,465 3,797 3,906 4,383 EBIT Margin (%) 13.2 11.9 10.0 10.8 10.4 10.5 10.8 Environment segment Revenue 8,113 8,410 11,472 12,851 11,310 13,077 14,403 Growth (%) 24.6 3.7 36.4 12.0 (12.0) 15.6 10.1 Assume moderate growth in order inflows Order inflow 7,310 11,578 12,157 11,580 12,030 13,233 15,218 in FY2014E-15E Growth (%) (1.5) 58.4 5.0 (4.7) 3.9 10.0 15.0 Order backlog 4,461 7,922 9,336 9,810 10,820 10,976 11,791 Growth (%) (10.8) 77.6 17.9 5.1 10.3 1.4 7.4 Bill to book ratio (%) 93.7 82.0 81.9 85.0 71.5 75.0 77.5 EBIT 1,140 1,173 1,437 1,606 1,188 1,504 1,728 EBIT Margin (%) 14.0 14.0 12.5 12.5 10.5 11.5 12.0 Sum of Segments Revenues 32,111 31,855 48,843 53,040 46,909 49,269 54,068 Growth (%) 1.7 (0.8) 53.3 8.6 (11.6) 5.0 9.7 EBIT 4,211 3,935 5,442 6,122 5,253 5,410 6,111 Margin (%) 13.1 12.4 11.1 11.5 11.2 11.0 11.3 Order inflow 42,820 57,930 53,170 40,310 48,570 52,514 60,391 Growth (%) 51.9 35.3 (8.2) (24.2) 20.5 8.1 15.0 Order backlog 28,970 52,810 56,060 42,300 43,570 45,809 51,029 Growth (%) 19.0 82.3 6.2 (24.5) 3.0 5.1 11.4
Source: Company, Kotak Institutional Equities estimates
56 KOTAK INSTITUTIONAL EQUITIES RESEARCH Thermax Industrials
Exhibit 9: Consolidated balance sheet, profit model and cash flow statement of Thermax, March fiscal year-ends, 2008-15E (Rs mn)
2008 2009 2010 2011 2012 2013E 2014E 2015E Balance sheet Shareholders funds 7,595 9,924 10,782 13,149 16,293 18,663 21,175 24,168 Loan funds — 41 80 1,479 2,708 1,167 1,167 1,167 Total sources of funds 7,908 10,331 11,396 15,736 20,850 21,368 23,879 26,873 Net block 2,878 4,911 5,369 7,853 8,441 9,039 8,983 8,929 CWIP 607 177 115 354 2,466 2,393 2,416 2,452 Net fixed assets 3,485 5,088 5,484 8,208 10,907 11,433 11,399 11,381 Investments 5,601 1,443 3,703 2,415 2,395 4,908 3,645 3,645 Cash balances 580 3,696 6,702 7,496 7,002 5,537 10,160 13,354 Net current assets excluding cash (1,977) (103) (4,790) (2,672) 188 (541) (1,355) (1,538) Total application of funds 7,908 10,331 11,396 15,736 20,850 21,368 23,879 26,873 Profit model Total operating income 34,815 34,603 33,703 53,371 60,912 54,973 59,025 64,957 Total operating costs (30,528) (30,371) (29,731) (47,632) (54,993) (50,097) (53,397) (58,562) EBITDA 4,288 4,232 3,972 5,739 5,920 4,876 5,628 6,395 Other income 439 404 519 579 830 867 820 981 PBDIT 4,727 4,636 4,491 6,318 6,749 5,743 6,448 7,375 Financial charges (17) (38) (21) (41) (122) (153) (69) (69) Depreciation (232) (351) (434) (540) (663) (742) (806) (854) Pre-tax profit 4,478 4,247 4,036 5,737 5,965 4,849 5,574 6,453 Taxation (1,571) (1,357) (1,423) (1,967) (2,043) (1,699) (1,813) (2,041) Adjusted PAT 2,907 2,889 2,612 3,770 3,922 3,150 3,761 4,411 Extraordinary items, net of tax — — (1,149) — — — — — Reported PAT 2,907 2,889 1,464 3,817 4,035 3,150 3,761 4,411 Cash flow statement Cashflow from operating activities Operating profit before working capital changes 3,061 3,210 2,959 4,285 4,559 4,048 4,283 4,808 Change in working capital / other adjustments (498) (1,796) 4,428 (2,040) (3,114) (1,396) 491 (182) Net cashflow from operating activites 2,563 1,414 7,387 2,246 1,446 2,652 4,774 4,627 Fixed Assets (1,783) (1,635) (879) (545) (1,042) (1,268) (772) (836) Investments (21) 4,033 (2,017) (262) (1,483) (2,513) 1,263 — Cash (used) / realised in investing activities (1,805) 2,398 (2,896) (807) (2,525) (3,781) 491 (836) Dividend paid (1,115) (697) (695) (1,246) (973) (1,220) (1,288) (1,456) Cash (used) /realised in financing activities (1,115) (697) (695) (766) 211 (2,761) (1,288) (1,456) Cash generated /utilised (346) 3,129 2,648 510 (868) (3,471) 3,976 2,335 Net cash at begn of year 625 279 3,408 6,056 6,566 5,698 2,226 6,203 Net cash at end of year 279 3,408 6,056 6,566 5,698 2,226 6,203 8,538 Margins for standalone business (%) Raw material / sales 63.8 60.1 60.1 67.9 63.1 60.7 61.4 60.9 Other expenses / sales 16.2 19.3 18.3 12.7 18.0 19.8 18.3 18.2 Employee expense / sales 7.7 8.3 9.8 8.6 9.2 10.6 10.7 11.0 EBITDA magin 12.3 12.2 11.8 10.8 9.7 8.9 9.5 9.8 PAT margin 8.4 8.4 7.8 7.1 6.4 5.7 6.4 6.8 RoE 43.1 33.0 25.2 31.9 27.4 18.0 18.9 19.5 RoCE 43.2 33.2 25.2 30.2 24.5 16.7 18.1 18.7 EPS (consol) (Rs) 24.4 24.3 21.9 32.0 33.9 26.4 31.6 37.0
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 57
ADD DishTV (DITV)
Media MAY 24, 2013 RESULT, CHANGE IN RECO. Coverage view: Neutral
Weak 4QFY13 on expected lines but operating metrics surprise yet again. Dish Price (Rs): 64 TV reported weak 4QFY13 EBITDA of Rs1.2 bn (-7% yoy, -13% qoq), below our Target price (Rs): 75 expectation; the negative variance resulted from (1) full impact of renewed MediaPro BSE-30: 19,674 deal, (2) weak ARPUs yet again and (3) lower-than-expected rental income. FY2013 performance was robust (+16% yoy subs growth; +18% yoy EBITDA growth). However, trends in operating metrics are either (1) against strategic direction of the company (and industry) or (2) churn policy of the company; we suggest the latter. Retain positive bias (ADD; BUY previously) with FY2014E FV of Rs75 (Rs80 previously); fair valuation at ~10.5X FY2014E EBITDA and ~29X FCF given fair accounting.
Company data and valuation summary DishTV Stock data Forecasts/Valuations 2013 2014E 2015E 52-week range (Rs) (high,low) 85-54 EPS (Rs) (1.3) 0.4 1.5 Market Cap. (Rs bn) 68.4 EPS growth (%) 31.8 (128.5) 299.5 Shareholding pattern (%) P/E (X) (48.1) 169.0 42.3 Promoters 63.6 Sales (Rs bn) 21.7 24.6 27.9 FIIs 21.3 Net profits (Rs bn) (1.4) 0.4 1.6 MFs 4.4 EBITDA (Rs bn) 5.7 6.9 8.4 Price performance (%) 1M 3M 12M EV/EBITDA (X) 13.5 10.8 8.7 Absolute (6.1) (3.3) 11.4 ROE (%) 112.2 (29.0) (160.9) Rel. to BSE-30 (8.4) (5.1) (8.1) Div. Yield (%) 0.0 0.0 1.6
Weak 4QFY13 but robust FY2013; reconciling surprising trends in operating metrics
Dish TV’s reported operating metrics include: (1) ARPU growth of 4% yoy, (2) gross adds of 2.2 mn subs in FY2013E, (3) net adds of 1.1 mn subs (implying churn of ~10.5%), (4) SAC of Rs1,996 (-6% yoy) and (5) content cost at 35% of revenues (32% on adjusted basis, excluding ~Rs200 mn prior-period impact of renewed MediaPro deal). The trends in ARPU and churn operating metrics are surprising (also versus industry; see Exhibit 1). The pass-through of hike in pack prices to ARPU (+3% yoy) has been weak (Exhibit 2) and against strategic focus of the company on pricing versus subs (net adds +11% yoy). Churn policy is the differential, in our view. The ARPU trends do not reflect the ramp-up in HD subs over the past 2 years (HD channels launch in FY2012) at high ARPUs (>Rs350 after tax). Addition of ~0.3 mn subs from Phase-I DAS areas (~15% contribution higher versus historic trends) has also not contributed. The company (as well as industry) has also eliminated the free viewing period of subs (versus 3-4 months 2 years back). The company noted sharp down-trading by subs (from premium to base packs) but it has not impacted churn (in fact, improvement in FY2013) despite >50% of subs in base pack and option of analog cable (>70% of subs). Finally, the company has noted increase in subs in 0-120 churn period (suspension rate) from ~0.5 mn to ~1.5 mn over time.
Retain positive bias (ADD with FY2014E FV of Rs75); fair valuations given strong cash flows
Weak 4QFY13 financials, notably moderating growth in subscription revenues and weak traction in carriage + advertising income, result in 5-7% cut in FY2014E-15E EBITDA with FY2014E FV of
Rs75 (Rs80 previously). Retain positive bias (ADD; BUY previously) led by robust growth, cash flow business model and valuations (~10.5X FY2014E EBITDA but more important, ~29X FY2014E FCF).
We highlight that Dish TV has gone through its large investment phase garnering >9 mn subs (adjusted for 0-120 day churn, as above), with continued (moderate) growth in volumes and pricing resulting in robust revenue growth and operating leverage (relatively stable cost structure). Strong cash flows were further supported by (1) negative working capital (pre-paid model of operation) and (2) tax credits (>Rs20 bn of accumulated losses).
For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
DishTV Media
Exhibit 1: Trends in key operating metrics of Airtel DTH and Dish TV, 4QFY11-4QFY13
4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 Airtel DTH Gross ARPU (Rs/month) 161 163 161 160 166 166 177 186 184 Annualized churn (%) 8 9 14 14 15 20 23 16 13 Dish TV Gross ARPU (Rs/month) 178 176 177 175 178 179 180 181 175 Net ARPU (Rs/month) 150 150 152 152 151 156 159 160 157 Annualized churn (%) 11 13 14 19 13 12 11 13 8
Source: Company data, Kotak Institutional Equities
Exhibit 2: Changes in Dish TV package pricing (Rs/sub-month)
Prior Sep-10 Jun-11 Nov-11 Mar-12 (b) Jul-12 Apr-13 Standard definition Silver Saver 150 160 165 165 (a) Super Family 175 180 200 220 Super Gold 210 225 225 225 235 255 280 Super World 275 285 305 320 Gold Saver 270 270 285 285 (a) Super Platinum 325 325 350 350 360 380 400 Paradise Pack 400 400 (a) Effective ARPU (d) 139 142 152 151 156 160
Notes: (a) Discontinued; not available to new consumers. (b) Increase in service tax rate by 2%, pass-through to consumer. (c) Does not include 20-22% subs on special South India packages. (d) Reported ARPU for the next quarter after the hike.
Source: Company data, Kotak Institutional Equities
Exhibit 3: Availability of HD content in India, FY2011-12
FY2011 FY2012 Channel Genre Channel Genre Discovery HD Infotainment Nat Geo Wild HD Infotainment Nat Geo HD Infotainment NG Adventure HD Infotainment Movies Now HD English Cinema Star Movies HD English Cinema Travel XP HD Niche Star World HD English GE Star Plus HD Hindi GE Star Gold HD Hindi Cinema ESPN HD Sports Star Cricket HD Sports MTunes HD Hindi Music Colors HD Hindi GE TV18 HD Prime Business News History HD Infotainment News Express HD Hindi News UTV Stars HD Hindi Cinema Ten HD Sports Zee TV HD Hindi GE Zee Cinema HD Hindi Cinema Zee Café HD English GE Sony SIX HD Sports/IPL
Source: Industry data, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 59 Media DishTV
Exhibit 4: Proxy variables for FCF trends in Dish TV, 4QFY10-4QFY13
EBITDA (Inflow) Gross adds * SAC (Outflow) 2,500
2,000
1,500
1,000
500
- 4QFY10 2QFY11 4QFY11 2QFY12 4QFY12 2QFY13 4QFY13
Source: Company data, Kotak Institutional Equities
Exhibit 5: Trend in growth of subs revenues and lease rentals, 4QFY10-4QFY13
Subs growth (%) Rental growth (%) 60
40
20
- 4QFY10 2QFY11 4QFY11 2QFY12 4QFY12 2QFY13 4QFY13 (20)
(40)
Source: Company data, Kotak Institutional Equities
Exhibit 6: Free cash flow dynamics of media companies, FY2014E (Rs bn)
Mcap PAT FCF PAT/FCF (%) P/E (X) P/FCF (X) C&S TV Zee Entertainment 239 8.4 6.0 71 29 40 Sun TV Network 161 8.1 5.5 69 20 29 Dish TV India 68 0.4 2.3 574 169 29 Print DB Corp 45 2.6 1.9 72 17 24 Jagran 29 2.1 1.6 79 14 18 FMCG HUL 1,266 34.1 32.6 96 37 39 Dabur 271 9.5 7.8 82 29 35 Marico 144 4.4 3.5 79 32 41
Notes: (a) Dish TV will pay nil tax in FY2014E and has large depreciation and -ve working capital.
Source: Kotak Institutional Equities estimates
60 KOTAK INSTITUTIONAL EQUITIES RESEARCH DishTV Media
4QFY13 results analysis (contd.)
Exhibit 7: Interim results of Dish TV India (DITV), March fiscal year-ends (Rs mn)
(% chg) 4QFY13 4QFY13E 4QFY12 3QFY13 4QFY13E 4QFY12 3QFY13 FY2013 FY2012 (% chg) Total revenues 5,554 5,800 5,097 5,578 (4) 9 (0) 21,668 19,428 12 DTH service revenues 5,321 5,500 4,848 5,323 (3) 10 (0) 20,817 18,697 11 --Subscription 5,001 5,100 4,338 4,943 (2) 15 1 19,227 16,637 16 --Rental Income 320 400 510 380 (20) (37) (16) 1,590 2,060 (23) Bandwidth/Advertising revenue 160 225 210 190 (29) (24) (16) 580 565 3 Other operating revenues 73 75 39 65 (3) 86 12 271 166 63 Total expenditure (4,354) (4,400) (3,805) (4,201) (1) 14 4 (15,978) (14,595) 9 Direct operating costs (3,183) (3,150) (2,632) (2,846) 1 21 12 (11,155) (10,025) 11 --Content and other cost (1,967) (1,950) (1,468) (1,627) 1 34 21 (6,525) (6,100) 7 --Other direct cost (1,216) (1,200) (1,165) (1,219) 1 4 (0) (4,631) (3,925) 18 Advertising expenses (166) (225) (268) (237) (26) (38) (30) (760) (797) (5) Distribution expenses (576) (550) (460) (661) 5 25 (13) (2,276) (2,112) 8 Employee expenses (209) (225) (191) (207) (7) 9 1 (822) (710) 16 Overhead expenses (218) (250) (253) (250) (13) (14) (12) (964) (951) 1 EBITDA 1,200 1,400 1,292 1,377 (14) (7) (13) 5,690 4,834 18 OPM (%) 21.6 24.1 25.4 24.7 26.3 24.9 Other income 157 150 94 175 5 67 (10) 518 401 29 Interest expense (344) (250) (348) (288) 37 (1) 19 (1,421) (1,793) (21) Depreciation (1,450) (1,700) (1,358) (1,713) (15) 7 (15) (6,208) (4,860) 28 Pretax profits (436) (400) (320) (449) 9 36 (3) (1,422) (1,419) 0 PBTM (%) (7.9) (6.9) (6.3) (8.0) (6.6) (7.3) Extraordinaries - - (170) - 764 (170) Tax provision - - - - —— Minority interest - - - - —— Net income (436) (400) (490) (449) 9 (11) (3) (657) (1,589) (59)
Operational data Gross subscribers (mn) 15.1 15.3 12.9 14.7 (1) 17 3 Net paying subscribers (mn) 10.7 10.6 9.6 10.5 1 11 2 Subs ARPU (Rs/sub/month) 157 161 151 160 (2) 4 (2) Annualized churn rate (%) 8 19 13 13 (60) (44) (41) Subscriber acquisition cost (Rs) 1,996 2,127 2,201 (6) (9)
Source: Company data, Kotak Institutional Equities estimates
` Dish TV reported weak 4QFY13 EBITDA of Rs1.2 bn (-7% yoy, -13% yoy), much below our Rs1.4 bn expectation. The impact of renewed MediaPro deal (including prior period) on content costs (+34% yoy) was in line with expectations. However, subs revenue growth of only 1% qoq and 16% yoy decline in rental income disappoint. The latter is just a factor change in accounting policy for lease rentals by the company at the start of FY2013 and does not have any real (cash) impact. Additionally, carriage + advertising income also declined 16% qoq, below our expectations.
` Dish TV reported 4QFY13 subs revenues of Rs5 bn (+15% yoy but only +1% qoq). Gross subs adds at 0.4 mn were below our 0.6 mn expectation whereas net subs adds at 0.2 mn were above our expectation of 0.1 mn. Consequently, annualized churn rate at ~8% was significantly below our expected ~19%; the company noted win-back of subs from Phase-I DAS areas; we note the company’s limited presence in Mumbai (Delhi is substantial) for any large visible impact. Dish TV reported ARPU of Rs157/month (+4% yoy, -2% qoq); the company noted reduced number of billing days in 4Q (90 days versus 92 days in 3Q), but ARPU growth disappointed on a yoy basis as well despite positive triggers discussed above (rate hikes, HD, reduced free viewing period).
` Bandwidth (carriage) + advertising revenues declined 24% yoy and 16% qoq. The decline in advertising on a qoq basis is understandable (4Q is weak advertising quarter versus 3Q), but yoy and qoq decline in carriage income surprised.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 61 Media DishTV
Exhibit 8: Bandwidth + advertising income of Dish TV, FY2010-13 (Rs mn)
800
580 600 556
400 310
178 200
- 2010 2011 2012 2013
Source: Company data, Kotak Institutional Equities
` Dish TV reported 4QFY13 rental income at Rs320 mn (-37% yoy, -16% qoq), much below expectation. The decline is on account of (1) change in accounting policy at the start of FY2013 (booking of rental income generated from subs over 5 years versus 3 years previously), (2) completion of booking of rental advances from 5-year old subs (rental income of Rs400/annum versus Rs200-300/annum for subs over past 2-3 years) as well as (3) lower accelerated rental booking from subscriber >500 days old, as per the churn recognition policy of Dish TV. The impact of the latter was also seen on depreciation expenses, which declined on a qoq basis.
` Dish TV 4QFY13 SAC at Rs1,996 declined 10% qoq. Reduced 4QFY13 ad spends (the company believes it had done enough marketing activities during 3QFY13 festival season) contributed but the larger impact was from price hikes taken during the quarter. The impact would be further visible in 1QFY14 (price hike in middle of 4QFY13). Dish TV and other DTH players increased entry prices by >Rs300. The decline in SAC is commendable in light of Rupee depreciation yoy and higher customs duty, and is likely to result in faster payback period from new subs. However, DTH is a scale model and 10% yoy decline in gross adds in FY2013 is an area of concern; stable SAC with some more focus on gross adds may be a more balanced approach.
Exhibit 9: Trends in subscriber acquisition cost (SAC) of Dish TV, 4QFY10-4QFY13 (Rs/sub)
2,500
2,300
2,100
1,900
1,700
1,500 4QFY10 2QFY11 4QFY11 2QFY12 4QFY12 2QFY13 4QFY13
Source: Company data, Kotak Institutional Equities
62 KOTAK INSTITUTIONAL EQUITIES RESEARCH DishTV Media
` Dish TV reported incremental gains in gross adds still coming through from Phase-I DAS markets (Delhi-Mumbai) as well as 3-4X increase in gross adds from Phase-II markets in April. The trailing impact of Phase-I DAS was hardly visible in 4QFY13 gross adds. Nonetheless, we highlight a key issue with DTH companies with regard to DAS; given the limited deadlines, it is difficult for DTH companies to increase capacity to match demand (since the additional capacity becomes somewhat redundant after digitization in a city). Thus, we expect gains for DTH companies (in comparison to cable MSOs, where affiliate LCOs manage the seeding of STBs) to be somewhat muted.
` Content and other costs increased 34% yoy and 21% qoq, largely on account of renewed MediaPro deal (including prior-period impact). The company had already taken some provisions on this account in 3QFY13. As per the company, the prior-period impact was ~Rs200 mn (related largely to 2QFY13). 7% inflation in content and other costs in FY2013 was well within the guidance of 10-12%. One benefit of MediaPro deal is that the company has become the leader in HD content.
` The company (and we) expects the content cost as percentage of revenues to stabilize at 30-32%, below 35% in 4QFY13, but in line with 30% reported in FY2013. We agree with this assessment since broadcasters already derive >50% of their subscription revenues from DTH with ~30% share of paying subscribers. The incremental gains for broadcasters need to come from digital, also it’s necessary to bridge the large pricing gap (retail/wholesale) between DTH and digital cable.
Exhibit 10: Availability of HD content across DTH platforms currently
Channels Dish TV - new Dish TV - old Tata Sky Videocon D2H Airtel Digital Hathway Discovery HD Yes Yes Yes Yes Yes Yes Nat Geo HD Yes Yes Yes Yes Yes Yes Movies Now HD Yes Yes Yes Yes Yes Travel XP HD Yes Yes Yes Nat Geo Wild HD Yes Yes Yes NG Adventure HD Yes Yes Fox Traveller HD Yes Yes Star Movies HD Yes Yes Yes Yes Yes Star World HD Yes Yes Yes Yes Yes Star Plus HD Yes Yes Yes Yes Yes Star Gold HD Yes Yes Yes Yes Yes ESPN HD Yes Yes Star Cricket HD Yes Yes Ten HD YesYes YesYesYes MTunes HD Yes Yes Yes Yes Yes Colors HD Yes Yes Yes Yes Yes Yes TV18 HD Prime Yes Yes Yes Yes History TV18 HD YesYes YesYesYes UTV Stars HD Yes Yes Yes Zee TV HD Yes Yes Yes Yes Yes Yes Zee Cinema HD Yes Yes Yes Yes Zee Studio HD Yes Yes Yes Yes Life OK HD Yes Yes Yes Sony TV HD Yes Yes Yes Yes Yes Sony SIX HD Yes Yes Yes Yes HBO Defined HD Yes SD only HBO Hits HD Yes SD only Count (#) 241612211519
Source: Company data, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 63 Media DishTV
` Other costs were largely in line or below our expectation. The company did not feel the need for advertising much in 4QFY13 since the trailing benefit of 3QFY13 festival advertising was available. Employee and overhead expenses were also under control. Distribution expenses were marginally ahead of estimates.
` Net interest expenses increased 65% qoq despite relatively stable net debt (~Rs9.5 bn at end-FY2013). The company is going to pay back ~Rs7.5 bn of debt over the next one year and new credit facilities have resulted in higher finance charges.
` Depreciation expenses increased a modest 7% yoy and declined 15% qoq. The negative variance was largely due to limited accelerated depreciation in 4QFY13 (versus 3QFY13, which likely bore the brunt of recognized churn subs in 2QFY12). Dish TV recognizes churn in financials if a sub has been inactive for >500 days. The reporting of churn in operating metrics happens beyond 120 days.
` Dish TV reported robust free cash flows to firm in FY2013 (~Rs650 mn). However, free cash flows to equity were negative due to large ~Rs9.8 bn of net debt in the balance sheet (net interest expenses of Rs904 mn reported in the P&L but higher interest paid, part of which is capitalized along with fixed assets). As discussed previously, the company will repay ~Rs7.5 bn of gross debt in FY2014E, funded from cash on balance sheet as well as rising free cash flows (expected ~Rs2 bn in FY2014E).
` Dish TV reported a reasonable balance sheet in FY2013. Net debt increased to ~Rs9.8 bn in FY2013 from ~Rs8.7 bn in FY2012, but largely on account of interest payments on the debt itself (as firm operations were FCF-positive). Net current liabilities (given negative working capital) increased to ~Rs6 bn from ~Rs5.4 bn in FY2012. However, ~Rs2.8 bn increase in net fixed assets surprised (and needs to be clarified).
Exhibit 11: Balance sheet of DITV, FY2011-1HFY13 (Rs mn)
FY2011 1HFY12 FY2012 1HFY13 FY2013 yoy (%) Sources of funds Share capital 1,063 1,063 1,064 1,064 1,065 0 Reserves and surplus (436) (1,088) (2,002) (1,763) (2,621) 31 Borrowings 6,485 12,089 12,145 10,200 8,760 (28) Current debt 4,277 NA 1,859 NA 7,500 303 Trade payables 2,291 - 795 671 2,138 169 Other liabilities 9,916 10,063 7,482 10,718 8,031 7 Other provisions 3,272 3,422 4,997 5,328 6,674 34 Total liabilities 26,868 25,549 26,340 26,218 31,547 20 Application of funds Net fixed assets 18,058 18,775 18,088 18,284 20,875 15 Net investments 2,002 1,500 1,500 2,002 2,782 85 Cash and balances 3,074 2,514 3,851 2,824 3,645 (5) Inventories 44 59 69 79 86 25 Sundry debtors 215 223 286 382 304 6 Loans and advances 3,317 2,441 2,393 2,503 3,706 55 Other current assets 158 37 153 144 150 (2) Total assets 26,868 25,549 26,340 26,218 31,548 20 Net current assets (8,517) (5,445) (6,009) 10 Operating assets 9,541 12,643 14,866 18 EBITDA 2,388 4,834 5,690 18
Source: Company data, Kotak Institutional Equities
64 KOTAK INSTITUTIONAL EQUITIES RESEARCH DishTV Media
Exhibit 12: Key operating metrics of Dish TV, FY2009-16E
2009 2010 2011 2012 2013E 2014E 2015E 2016E Gross subscriber addition (mn) 2.1 1.8 3.5 2.5 2.2 2.3 2.5 2.3 Net subscriber addition (mn) 1.8 1.4 2.8 1.1 1.1 0.8 0.8 0.6 Gross subscriber base (mn) 5.1 6.9 10.4 12.9 15.1 17.4 19.9 22.2 Net paying subs base (mn) 4.3 5.7 8.5 9.6 10.7 11.5 12.3 12.9 Churn (%) 9 9 14 10 13 13 13 growth (%) 71 33 50 13 11 7 7 4
Net paying ARPUs (Rs) 145 140 140 153 158 166 175 187 growth (%) (3) 0 9 3 5 6 7
Revenues (Rs bn) 7.4 10.8 14.4 19.6 21.7 24.6 27.9 31.8 Content costs (Rs bn) 3.8 4.6 5.2 6.1 6.5 7.2 7.9 8.6 Gross margin (%) 49 58 64 69 70 71 72 73 EBITDA (Rs bn) (1.4) 0.9 2.4 5.0 5.7 6.9 8.4 10.6 EBITDA margin (%) (18) 9 17 25 26 28 30 33 EBIT (Rs bn) (3.5) (2.1) (1.3) (0.2) (0.5) 0.6 2.1 4.7 Operating margin (%) (48) (19) (9) (1) (2) 3 8 15
Source: Company data, Kotak Institutional Equities estimates
Exhibit 13: Sensitivity of Dish TV's valuation to subscribers, ARPUs and content costs
DCF value Change from base case (Rs/share) (%) Change in monthly subscription fees (%) 5% 85 12 Base case 76 -5% 67 (11)
Change in average content costs (%) -5% 80 5 Base case 76 5% 72 (5)
Change in # of paying subscribers (%) 5% 79 4 Base case 76 -5% 73 (4)
Change in churn rate (%) -1% 81 7 Base case 76 1% 71 (7)
Source: Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 65 Media DishTV
Exhibit 14: Revised and previous estimates for DITV, FY2013E-15E (Rs mn)
Revised Previous Change (%) 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E Subscription revenues 19,227 22,003 24,995 19,305 22,451 26,009 (0.4) (2.0) (3.9) Other revenues 2,441 2,630 2,894 2,519 2,699 2,983 (3.1) (2.5) (3.0) Total revenues 21,668 24,634 27,889 21,824 25,150 28,992 (0.7) (2.1) (3.8) Operating cost (11,156) (12,383) (13,772) (11,154) (12,620) (14,182) 0.0 (1.9) (2.9) Advertising cost (760) (880) (900) (869) (898) (910) (12.5) (2.0) (1.2) Other expenses (4,063) (4,424) (4,832) (3,976) (4,356) (4,891) 2.2 1.6 (1.2) Total expenditure (15,979) (17,687) (19,503) (15,999) (17,873) (19,983) (0.1) (1.0) (2.4) EBITDA 5,689 6,947 8,386 5,824 7,277 9,009 (2.3) (4.5) (6.9) D&A expenses (6,208) (6,330) (6,285) (6,464) (6,489) (6,539) (4.0) (2.4) (3.9) Operating Income (519) 617 2,101 (640) 788 2,470 (18.8) (21.7) (15.0)
Source: Kotak Institutional Equities estimates
Exhibit 15: Financial summary of Dish TV, March fiscal year-ends, 2009-15E (Rs mn)
2009 2010 2011 2012 2013E 2014E 2015E Profit model Net revenues 7,377 10,848 14,366 19,578 21,668 24,634 27,889 EBITDA (1,350) 947 2,388 4,984 5,689 6,947 8,386 Other income 96 642 807 386 519 539 571 Interest (expense)/income (1,103) (1,216) (1,511) (1,268) (1,421) (1,278) (1,143) Depreciation (2,144) (3,038) (3,654) (5,180) (6,208) (6,330) (6,285) Amortization (10) — — — — — — Pretax profits (4,511) (2,666) (1,970) (1,079) (1,422) (122) 1,529 Extraordinary items (244) 44 73 (510) 764 — — Tax (7) — — — — — (305) Deferred taxation — — — — — 527 392 Net income (4,518) (2,666) (1,970) (1,079) (657) 405 1,616 Earnings per share (Rs) (6.6) (2.5) (1.9) (1.0) (0.6) 0.4 1.5
Balance sheet Total equity (6,241) 4,003 627 (938) (1,596) (1,191) (819) Deferred taxation liability — — — — — (527) (919) Total borrowings 11,311 9,178 10,763 14,003 15,203 13,203 12,203 Current liabilities 15,899 15,560 15,478 13,275 14,611 15,997 17,991 Total liabilities and equity 20,969 28,741 26,868 26,340 28,218 27,482 28,456 Cash 540 5,422 3,202 3,921 6,540 6,360 7,529 Other current assets 8,297 8,412 3,447 2,831 2,558 2,575 2,593 Total fixed assets 11,187 12,401 18,218 18,088 17,620 17,047 16,834 Intangible assets — 1,561 2,000 1,500 1,500 1,500 1,500 Investments 945 945 2 — — — — Total assets 20,969 28,741 26,868 26,340 28,218 27,482 28,456
Free cash flow Operating cash flow, ex. working capital (1,788) 978 2,408 5,035 6,691 7,255 8,430 Working capital changes (883) 999 1,144 (305) 1,609 1,369 1,977 Capital expenditure (5,102) (4,870) (10,048) (6,553) (5,978) (6,065) (6,421) Investments 14 (3,726) 2,919 690 — — — Other income 11 327 712 345 519 539 571 Free cash flow (7,748) (2,893) (6,496) (1,823) 2,322 2,559 3,985
Ratios (%) Debt/equity (181) 229 1,715 (1,493) (953) (1,109) (1,490) Net debt/equity (173) 94 1,205 (1,075) (543) (575) (571) ROAE (%) 84 238 (85) 694 52 (24) (94) ROACE (%) (118) (16) (4) 2 (0) (30) 26
Source: Company data, Kotak Institutional Equities estimates
66 KOTAK INSTITUTIONAL EQUITIES RESEARCH
CAUTIOUS Cement
India MAY 24, 2013 UPDATE
BSE-30: 19,674
4QFY13—disappointing on volume and pricing. Cement companies had a disappointing March quarter with volumes dropping by 3% yoy, pricing remaining flat, and production cost (10% yoy) offering no respite. Recent uptick in cement prices coupled with news flows on potential transactions (at rich valuations) have spurred stock performance—though continued earnings risk from lower volumes without valuation comfort prevents us from taking a constructive stance.
Exhibit 1: Cement companies have underperfomed the broader markets in the past 3 months
Absolute and relative performance of cement companies under coverage (%)
Change (%) Relative change (%) 1-mo 3-mo 6-mo 1-year CYTD 1-mo 3-mo 6-mo 1-year Ambuja Cements (0.6) (6.8) (9.0) 34.0 (7.9) (3.1) (8.5) (14.4) 8.6 ACC (0.9) (7.4) (12.8) 6.6 (15.9) (3.4) (9.1) (17.9) (13.6) Grasim Industries 2.1 (2.9) (7.9) 23.0 (7.5) (0.5) (4.7) (13.3) (0.3) UltraTech Cement 4.7 0.7 3.1 42.7 (1.6) 2.1 (1.1) (3.1) 15.7 India Cements (11.0) (14.3) (12.4) (2.4) (20.1) (13.3) (15.9) (17.6) (20.8) Shree Cement 13.9 12.9 16.1 93.0 6.5 11.1 10.8 9.2 56.5 Cement 3.0 (1.8) (3.0) (13.9) (5.8) 0.5 (3.6) (8.8) (30.2)
Source: Bloomberg, Kotak Institutional Equities Volume decline accompanied by weak pricing, profitability erodes with firm cost inflation
Our coverage universe registered a 3% yoy fall in volumes accompanied by weak pricing (3% yoy, -2% qoq). Firm cost-side inflation (10% yoy, -7% qoq) was led by higher freight (11% yoy) and raw material cost (9% yoy), leading to a sharp drop in profitability (-14% yoy, 5% qoq). We currently factor a less onerous cost inflation accruing benefits of low imported coal prices and moderated increase in railway freight; continued weakness in cement volumes could put to risk our earnings assumptions.
Spurt of price increases over the last week, partially rolls back sharp decline over the recent past
Cement prices in South India have increased by Rs10-40/bag over the past week. A similar spurt has been seen in markets outside of South as well—North (Rs10-35/bag) and East (Rs20-30/bag).
The current price increase partially rolls back the sharp decline in cement prices seen over the past few months, and offers some cushion to our price assumption. We do not also rule out industries’ ability to absorb the current price hike in the absence of demand, as has been seen in the recent past.
Price increase and potential transactions spurred stock performance
Recent stock performance was spurred by price increases announced over the week as well as acquisitions at potentially rich valuations (>US$150/ton). We highlight that continued weakness in volumes (-4% yoy) and price volatility could still put to risk our modest earnings assumptions—
7-10% revenue growth in CY2013E/FY2014E. Valuations being the benchmark for a largely homogenous business profile among coverage companies, we prefer Grasim Industries (5X EV/EBITDA) over UltraTech (9X EV/EBITDA), ACC (8X EV/EBITDA) and Ambuja (9X EV/EBITDA).
For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
India Cement
Potential deals could spark off re-rating of multiples
Capital markets have been abuzz with potential deals in the cement sector—aside from the recently concluded equity infusion by Barings in Lafarge’s India business, the Street continues to speculate on potential stake sale by Jaiprakash and Heidelberg. Interestingly, these deals are being speculated to be at significant premiums (see Exhibit 5) to current trading multiples/replacement cost. We do not rule out incremental safeguards/covenants for private equity stake sale that we are not privy to, and may have influenced the valuation of stake sale.
COMPAT order gives a breather, extends stay on payment of penalties
The Competition Appellate Tribunal (COMPAT) upheld the stay on imposition of penalties— restricting them to 10% payment within the next month, but has raised fresh questions on the adjudicatory (and penalty imposing) powers of the Competition Commission of India (CCI).
The grounds of argument brought out by cement companies before the COMPAT—denial of cross examination, chairman’s absence in oral hearing and procedural defects—have not found acceptance by COMPAT. However, raising concerns on the right of CCI to impose penalties, although clearly specified in the Competition Act, point towards a more prolonged judicial process.
Exhibit 1: Cement companies reported a decline in profitability in March 2013 quarter Operational metrics for cement companies, March fiscal year-end, 4QFY13
ACC Ambuja Cements Mar-13 Mar-12 Dec-12 % (yoy) % (qoq) Mar-13 Mar-12 Dec-12 % (yoy) % (qoq) Sales, mn tons 6.4 6.7 5.9 (4) 9 5.8 6.1 5.1 (4) 13 Realization (Rs/ton) 4,323 4,256 4,341 2(0) 4,388 4,353 4,501 1(3) Operating costs (Rs/ton) 3,838 3,340 4,707 15 (18) 3,455 3,122 3,606 11 (4) Profitability (Rs/ton) 695 917 564 (24) 23 933 1,231 895 (24) 4
UltraTech Cement India Cements Mar-13 Mar-12 Dec-12 % (yoy) % (qoq) Mar-13 Mar-12 Dec-12 % (yoy) % (qoq) Sales, mn tons 11.1 11.5 9.9 (4) 12 2.8 2.6 2.4 715 Realization (Rs/ton) 4,855 4,624 4,921 5(1) 4,298 4,292 4,482 0(4) Operating costs (Rs/ton) 3,775 3,529 3,884 7(3) 3,692 3,465 3,684 70 Profitability (Rs/ton) 1,080 1,095 1,038 (1) 4 606 828 798 (27) (24)
Source: Company, Kotak Institutional Equities
Exhibit 2: Cement volume growth has been dismal in FY2013 Cement volumes for companies under our coverage, March fiscal year-ends, 2011-14E (mn tons)
Growth (%) FY2011 FY2012 FY2013 FY2014E 4QFY13 FY2012 FY2013 FY2014E 4QFY13 ACC 24.0 24.6 24.8 26.0 6.7 2.8 0.8 4.6 (4.5) Ambuja Cements 21.4 21.4 21.7 23.3 6.1 (0.1) 1.4 7.1 (4.1) India Cements Ltd 10.0 9.5 9.9 10.3 2.6 (4.4) 3.6 4.9 0.0 Shree Cement Ltd 10.5 12.2 12.5 13.1 3.3 16.2 2.9 4.6 (6.1) UltraTech Cement 34.8 41.6 41.2 43.1 11.5 19.7 (1.0) 4.4 0.0 Total 100.6 109.4 110.2 115.7 30.2 8.7 0.7 5.0 (3.5)
Source: Company, Kotak Institutional Equities
68 KOTAK INSTITUTIONAL EQUITIES RESEARCH Cement India
Exhibit 3: Cement prices underwent a sharp ~5% hike in May 2013 Quarterly average bag (of 50 kg) prices of cement across various regions, March fiscal year-ends, 1QCY12-1QCY13 (Rs/bag)
1QCY12 2QCY12 3QCY12 4QCY12 1QCY13 Apr-13 May-13 Regional bag prices (Rs/bag) Northern 279 297 291 284 278 276 292 Central 268 275 272 272 279 276 289 Eastern 272 289 301 312 331 331 352 Western 282 293 292 300 295 287 285 Southern 295 309 305 297 283 277 303 All India 282 295 293 293 290 286 302
KOTAK INSTITUTIONAL EQUITIES RESEARCH 69 India Cement
Exhibit 4: Sedate quarter with muted volume growth and weak pricing Reported financials of companies under KIE coverage universe, March fiscal year-end, 4QFY13 (Rs mn)
Change (%) Mar-12 Dec-12 Mar-13E Mar-13 yoy qoq ACC Net sales 28,602 30,989 32,883 29,111 1.8 (6.1) EBITDA 6,161 3,172 5,650 4,468 (27.5) 40.9 EBIT 4,855 1,597 4,148 3,085 (36.5) 93.2 PBT 5,487 2,792 4,942 4,452 (18.9) 59.5 PAT 3,859 2,392 3,706 2,969 (23.1) 24.1 Extraordinaries (2,306) — — 1,408 PAT-reported 1,554 2,392 3,706 4,377 181.7 83.0 Ambuja Cements Net sales 26,333 23,133 28,999 25,448 (3.4) 10.0 EBITDA 7,445 4,600 7,326 5,410 (27.3) 17.6 EBIT 6,236 3,024 5,844 4,206 (32.6) 39.1 PBT 7,215 3,881 6,780 5,690 (21.1) 46.6 PAT 5,075 2,717 4,746 3,707 (27.0) 36.5 Extraordinaries (1,953) (611) — 1,172 PAT-reported 3,122 2,106 4,746 4,879 56.3 131.7 Grasim Industries Net sales 72,058 67,175 74,055 75,525 4.8 12.4 EBITDA 15,261 12,564 14,519 14,585 (4.4) 16.1 EBIT 12,257 9,373 11,298 11,299 (7.8) 20.6 PBT 15,025 10,833 14,089 13,762 (8.4) 27.0 PAT 11,219 7,803 10,039 9,064 (19.2) 16.2 Extraordinaries — — — 2,044 PAT-reported 8,088 5,492 7,058 8,176 1.1 48.9 India Cements Net sales 11,160 10,824 12,086 11,906 6.7 10.0 EBITDA 2,152 1,927 2,242 1,679 (22.0) (12.9) EBIT 1,506 1,219 1,518 958 (36.4) (21.4) PBT 935 542 825 403 (56.9) (25.6) PAT 649 373 602 263 (59.5) (29.4) Extraordinaries - (111) — — PAT-reported 649 261 602 263 (59.5) 0.6 Shree Cement Net sales 14,778 14,281 15,201 14,568 (1.4) 2.0 EBITDA 3,730 3,717 3,766 4,054 8.7 9.1 EBIT 1,384 2,899 2,832 2,789 101.5 (3.8) PBT 1,747 2,659 2,769 2,918 67.0 9.7 PAT 1,171 2,294 2,215 2,741 134.1 19.5 Extraordinaries (28) (120) — (1) PAT-reported 1,143 2,174 2,215 2,741 139.9 26.1 UltraTech Cement Net sales 53,366 48,574 56,747 53,892 1.0 10.9 EBITDA 12,641 10,243 11,986 11,993 (5.1) 17.1 EBIT 10,309 7,854 9,548 9,533 (7.5) 21.4 PBT 11,723 8,545 10,932 10,888 (7.1) 27.4 PAT 8,673 6,008 7,452 7,262 (16.3) 20.9 Extraordinaries - - - - PAT-reported 8,673 6,008 7,452 7,262 (16.3) 20.9
Source: Kotak Institutional Equities, Company
70 KOTAK INSTITUTIONAL EQUITIES RESEARCH Cement India
Exhibit 5: Recently rumored cement transactions seem to have hit new peaks Details of M&A activity in cement in India
Equity Value Net Debt Capacity EV/Ton EV/Ton Date Buyer Seller (Rs mn) (Rs mn) (mtpa) (Rs) (US$) May-13 Baring Asia Lafarge India 101,429 - 8.4 12,075 219.5 Apr-13 Ultratech Cement* Jaiprakash Associates 23,000 18,000 4.8 8,542 155.3 Sep-12 Dalmia cements Adhunik cements 5,600 5,250 1.5 7,233 134.0 May-10 KKR Dalmia cements 34,483 26,752 9.0 6,804 154.6 Apr-10 Vicat Bharathi cement 22,000 - 2.5 8,800 200.0 Jun-09 Grasim L&T- Ultratech 88,947 20,382 23.1 4,733 98.5 Mar-08 CRH My home industries 36,571 - 3.2 11,429 285.0 Dec-07 Cimpor Shree Digvijay Cements 6,009 900 1.1 6,457 164.7 Dec-07 Holcim Ambuja 114,641 (3,128) 18.5 8,878 193.0 Jul-06 Heidelberg Mysore Cements 8,549 2,649 2.3 4,977 106.0 Jan-05 Holcim ACC 65,823 13,504 17.6 7,480 166.2 Dec-03 ACC Idcol Cement (Orissa state govt) 2,023 270 1.0 2,293 50.4 Jun-03 Grasim Larsen & Toubro Cement 42,990 18,600 16.5 3,733 79.4 Jan-02 Italcementi India Cements/Sri Vishnu 3,850 - 1.2 3,208 66.8 Nov-01 Grasim 10% in L&T (a) 76,650 42,634 16.0 4,837 100.8 May-00 Italcementi Zuari Cement 3,612 3,788 1.7 4,353 99.6 Apr-00 Lafarge Raymond 7,850 - 2.2 3,504 80.2 Dec-99 Gujarat Ambuja Tata's stake in ACC 62,639 13,859 11.9 6,428 147.8 Dec-99 Gujarat Ambuja DLF Cement 3,111 2,286 1.4 3,855 88.7 Oct-99 India Cements Sri Vishnu 1,660 518 1.0 2,179 50.7 Apr-99 Lafarge Tisco 2,800 2,800 1.7 3,294 77.1 Jan-99 Larsen & Toubro Narmada Cement 2,322 836 1.4 2,255 53.0 Sep-98 Grasim Shree Digvijay 1,062 520 0.7 2,260 53.8 Sep-98 Grasim Indian Rayon 3,399 4,370 3.0 2,590 61.2 Jun-98 Gujarat Ambuja Modi Cement 1,660 990 1.0 2,650 62.6 Jun-98 India Cements Raasi Cement 4,500 946 1.8 3,026 71.5 Jan-98 Grasim Dharani (b) 320 210 0.1 - - Jan-98 India Cements CCI-Yerraguntla (b) 1,980 - 0.4 - - Sep-97 India Cements Visaka Cement 1,200 1,600 0.9 3,111 86.2
Notes: (a) EV/EBITDA of 6X is assumed for E&C to calculate EV/tonne of capacity of cement. (b) In these transactions, value was based on limestone reserves than value of cement plants. (c) EV/ton value in US$ uses exchange rates prevailing at the time of the deal. (d) The UltraTech-Jaiprakash deal is still rumored and not confirmed by any of the companies.
Source: News reports (various sources), Kotak Institutional Equities estimates
Exhibit 6: Jaiprakash seems to have borne the highest brunt as a proportion of FY2013 profits Impact of penalty levied by CCI on cement companies (%)
PAT (Rs mn) Penalty FY2013 PAT Impact Deposit 2010 2011 (Rs mn) (Rs/share) (Rs mn) (%) (%) ACC 9,699 13,253 11,476 61 13,853 82.8 8.3 Ambuja Cements 10,642 12,626 11,634 8 15,741 73.9 7.4 India Cements 3,069 681 1,875 6 2,136 87.8 8.8 UltraTech Cement 9,467 14,042 11,755 43 27,747 42.4 4.2 Jaiprakash Associates 14,794 11,678 13,236 6 15,056 87.9 8.8
Note: (a) The PAT numbers for 2010 and 2011 are as considered by CCI and not the actual reported numbers. (a) The CCI has considered the profits of just UltraTech cement (and not the pre-merger profits of Sammrudhi). (b) For Jaiprakash, the CCI has considered the standalone profits and not just the cement profits.
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 71 India Cement
Exhibit 7: Comparative valuation summary of cement companies under KIE coverage
Market cap. CMP (Rs) Target EPS (Rs) P/E (X) Company (US$ mn) 23-May price (Rs) Rating 2012 2013E 2014E 2015E 2012 2013E 2014E 2015E ACC 4,195 1,205 1,170 REDUCE 57 74 68 80 21 16 18 15 Ambuja Cements 5,217 185 175 REDUCE 7.8 10.3 10.1 12.3 24 18 18 15 Grasim Industries 4,979 2,931 3,500 ADD 289 273 326 377 10 11 9 8 India Cements 413 73 95 ADD 9 7 9 10 8 11 8 8 Jaiprakash Associates 2,649 67 100 BUY 2.9 4.0 9.9 17.5 23 17 7 4 Shree Cement 3,194 4,948 3,700 SELL 160 281 303 336 31 18 16 15 UltraTech Cement 9,923 1,954 1,700 SELL 89 101 114 136 22 19 17 14
EV/EBITDA (X) EV/ton of production (US$) EV/ton of capacity (US$) Company 2012 2013E 2014E 2015E 2012 2013E 2014E 2015E 2012 2013E 2014E 2015E ACC 12.0 10.1 10.0 8.1 157 149 149 138 130 127 127 124 Ambuja Cements 13.3 10.1 10.0 8.7 219 211 205 191 172 165 157 149 Grasim Industries 6.9 5.9 4.8 3.5 NA NA NA NA NA NA NA NA India Cements 5.6 5.6 5.0 4.4 102 101 89 78 67 68 63 977 Jaiprakash Associates 12.6 9.9 6.8 5.1 NA NA NA NA NA NA NA NA Shree Cement 9.7 10.5 8.4 7.3 199 241 222 201 244 250 240 405 UltraTech Cement 13.4 11.7 9.6 7.3 244 237 221 190 200 197 191 3344
Source: Company reports, Kotak Institutional Equities estimates
72 KOTAK INSTITUTIONAL EQUITIES RESEARCH 73 73
March 2013: Results calendar
Mon Tue Wed Thu Fri Sat 20-May 21-May 22-May 23-May 24-May 25-May Adani Enterprises Astrazeneca Phar Geojit BNP BHEL Britannia Industries Bharat Forge Akzo JSW Ispat L&T DishTV Crompton Greaves Container Corp Apollo Hospitals Prestige Estates NCC Hindustan Copper Gammon Infra Bayer Corp Tech Mahindra Redington India Indraprastha Gas Jet Airways City Union Bank Thermax JSW Steel Karur Vysya Bank Coal India Zee Entertainment NIIT Manglore Refinery Divi's Laboratories State Bank of India Oil India IFCI Tata Steel Spicejet 27-May 28-May 29-May 30-May 31-May 1-Jun Balaji Telefilms CESC Aditya Birla Nuvo Aurobindo Pharma Bhushan Steel Colgate Palmolive BPCL Bharat Electronics Mcleod Russel Dishman Pharma Cadila Healthcare National Aluminium Engineers India Cipla Financial Technologies Tata Chemicals GAIL India GSPL GMR Infra Wockhardt Gitanjali Gems HDIL Indian Hotels GMDC Max India Indian Oil Corp. Godrej Indsutries MCX IPCA Lab Havells Mphasis Mahindra & Mahindra Hindalco NMDC MMTC HPCL ONGC Power Finance Corp. Jain Irrigation Tata Motors SAIL India Daily Summary - May 24, 2013India DailySummary-May24, Neyveli Lignite Torrent Power Suzlon Energy NHPC Tata Power Power Grid Corp. Unitech Rural Electrification United Breweries Sun Pharma Tata Communications Tata Global Beverages KOTAK INSTITUTIONAL EQUITIES RESEARCH
Source: BSE, NSE, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Daily2013India Summary-May24,
O/S Target ADVT- 23-May-13 Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) Price/BV (X) Dividend yield (%) RoE (%) price Upside 3mo Company Price (Rs) Rating (Rs mn) (US$ mn) (mn) 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E2015E 2013E 2013E 2014E 2014E 2015E (Rs) (%) (US$ mn) Automobiles Amara Raja Batteries 244 SELL 41,712 748 171 16.8 17.1 17.8 33.3 1.8 4.1 14.5 14.3 13.7 8.2 8.5 7.7 3.9 3.3 2.8 1.0 1.4 1.5 30.4 24.9 21.7 240 (1.7) 1.6 Apollo Tyres 87 BUY 43,679 784 504 12.3 13.9 14.5 51.6 13.1 4.3 7.0 6.2 6.0 4.6 4.1 4.2 1.1 1.0 0.8 0.8 0.9 1.0 19.9 18.8 16.6 110 26.9 3.2 Ashok Leyland 23 ADD 61,063 1,096 2,661 0.5 0.9 2.6 (74.5) 60.7 196.7 42.3 26.4 8.9 12.0 10.1 6.5 1.2 1.2 1.1 2.6 2.3 5.1 12.6 6.4 18.0 24 4.6 1.9
Bajaj Auto 1,813 ADD 524,812 9,417 289 105.2 119.2 139.1 1.3 13.4 16.7 17.2 15.2 13.0 13.1 11.6 10.1 6.5 5.3 4.4 2.5 2.6 3.1 43.2 38.6 36.9 2,000 10.3 15.0 Bharat Forge 226 REDUCE 53,677 963 237 10.9 14.0 19.3 (37.4) 28.4 38.1 20.8 16.2 11.7 9.6 8.4 6.6 2.0 1.8 1.6 0.4 0.4 0.4 13.0 10.5 12.5 200 (11.6) 1.3 Exide Industries 137 SELL 116,365 2,088 850 6.2 7.3 8.6 13.4 18.9 17.0 22.3 18.7 16.0 14.6 12.8 11.1 3.4 3.0 2.7 1.0 1.4 1.6 16.1 17.1 17.7 120 (12.3) 3.1
Hero Motocorp 1,652 ADD 329,835 5,918 200 106.1 117.1 146.9 (10.9) 10.4 25.5 15.6 14.1 11.2 11.8 9.5 7.2 6.4 5.0 3.9 1.9 2.1 3.1 44.0 39.6 39.0 1,900 15.0 10.2 Mahindra & Mahindra 959 ADD 588,918 10,567 614 49.6 49.9 58.7 9.9 0.6 17.7 19.3 19.2 16.3 14.0 13.7 11.5 4.0 3.5 3.1 1.6 1.6 1.8 23.1 20.2 20.7 950 (1.0) 22.7 Maruti Suzuki 1,648 SELL 497,677 8,930 302 79.2 101.7 118.4 39.9 28.5 16.4 20.8 16.2 13.9 13.6 9.7 7.9 2.6 2.3 2.0 0.5 0.7 0.8 13.3 14.6 14.9 1,480 (10.2) 19.1 Motherson Sumi Systems 214 BUY 125,803 2,257 588 7.6 13.6 18.3 71.2 80.4 33.9 28.3 15.7 11.7 9.5 7.1 5.6 5.5 4.2 3.1 0.9 1.9 2.6 26.8 29.3 30.7 235 9.8 2.1 Tata Motors 291 BUY 936,554 16,805 3,218 28.9 41.4 49.2 (35.2) 43.5 18.8 10.1 7.0 5.9 5.4 4.2 3.8 2.2 1.7 1.4 1.6 0.8 1.3 24.8 27.8 25.8 335 15.1 48.1 Automobiles Neutral 3,320,096 59,575 (12.2) 21.4 20.3 14.3 11.8 9.8 8.5 6.9 5.9 3.1 2.6 2.1 1.5 1.4 1.9 21.7 21.7 21.6 Banks/Financial Institutions Andhra Bank 87 ADD 48,879 877 560 23.0 22.0 23.6 (4.1) (4.3) 7.0 3.8 4.0 3.7 — — — 0.7 0.6 0.5 5.7 5.5 5.9 16.2 13.9 13.4 110 25.9 2.3 Axis Bank 1,455 ADD 680,961 12,219 468 110.7 113.4 123.5 7.8 2.4 8.9 13.1 12.8 11.8 — — — 2.1 1.9 1.7 1.2 1.3 1.4 18.5 15.0 14.5 1,540 5.8 47.4 Bajaj Finserv 670 ADD 106,547 1,912 159 99.0 79.0 90.0 4.4 (20.2) 13.8 6.8 8.5 7.4 — — — 1.4 1.2 1.0 2.0 2.0 2.0 24.6 15.1 15.0 810 21.0 1.1
Bank of Baroda 690 REDUCE 284,501 5,105 412 109.3 115.5 119.2 (10.0) 5.7 3.2 6.3 6.0 5.8 — — — 1.0 0.9 0.8 3.1 3.3 3.4 15.7 14.5 13.5 740 7.3 12.0 Bank of India 308 ADD 183,497 3,293 597 46.1 55.4 58.3 (1.1) 20.2 5.1 6.7 5.6 5.3 — — — 1.0 0.9 0.8 3.3 3.9 4.1 12.9 13.7 13.1 365 18.7 6.0 Canara Bank 425 REDUCE 188,120 3,376 443 64.8 69.8 79.4 (12.5) 7.7 13.8 6.5 6.1 5.3 — — — 1.0 0.9 0.8 3.1 2.8 2.8 12.1 11.9 12.2 415 (2.3) 8.0 Corporation Bank 405 BUY 61,936 1,111 153 93.8 102.3 108.7 (7.7) 9.0 6.3 4.3 4.0 3.7 — — — 0.7 0.7 0.6 4.9 5.4 5.7 16.1 15.4 14.6 480 18.5 1.0 Federal Bank 449 ADD 76,874 1,379 171 49.0 49.4 58.0 7.9 0.7 17.5 9.2 9.1 7.7 — — — 1.3 1.1 1.0 2.0 2.0 2.4 13.9 12.6 13.4 530 17.9 4.2 HDFC 903 SELL 1,383,372 24,823 1,532 31.4 37.1 43.3 12.3 18.3 16.8 28.8 24.3 20.8 — — — 5.5 4.9 4.4 1.4 1.7 1.9 22.0 21.6 22.4 760 (15.9) 42.4 HDFC Bank 699 REDUCE 1,662,249 29,827 2,379 28.3 35.0 43.7 28.4 23.7 25.1 24.7 20.0 16.0 — — — 4.6 3.9 3.3 0.8 1.0 1.2 20.3 21.1 22.3 650 (7.0) 40.4 ICICI Bank 1,172 BUY 1,357,617 24,361 1,158 71.9 74.0 78.4 28.2 2.9 6.0 16.3 15.8 14.9 — — — 2.1 1.9 1.8 1.7 1.9 2.0 13.1 12.3 12.1 1,290 10.0 74.7 IDFC 154 BUY 233,282 4,186 1,512 12.1 14.0 16.3 18.1 15.1 16.4 12.7 11.0 9.5 — — — 1.7 1.5 1.4 1.5 1.8 2.1 14.2 14.6 15.2 180 16.7 18.5 India Infoline 64 ADD 19,545 351 304 9.2 10.9 13.1 102.9 17.7 20.3 7.0 5.9 4.9 — — — 1.0 0.9 0.8 4.8 2.9 3.5 15.1 16.4 16.2 75 16.7 0.3 Indian Bank 153 BUY 65,690 1,179 430 35.8 35.4 37.3 (9.5) (1.1) 5.4 4.3 4.3 4.1 — — — 0.7 0.7 0.6 4.3 4.2 4.4 15.4 13.6 13.0 230 50.5 0.8 Indian Overseas Bank 61 REDUCE 56,139 1,007 924 6.1 16.5 19.4 (53.3) 169.0 17.2 9.9 3.7 3.1 — — — 0.6 0.5 0.4 3.3 6.4 7.5 4.5 10.9 11.7 65 7.0 1.6 IndusInd Bank 491 ADD 256,781 4,608 523 20.3 23.6 27.2 18.3 16.2 15.3 24.2 20.8 18.1 — — — 3.5 3.1 2.7 0.6 0.7 0.8 18.0 15.6 15.8 490 (0.2) 15.9 J&K Bank 1,268 REDUCE 61,505 1,104 48 217.6 199.3 187.5 31.4 (8.4) (5.9) 5.8 6.4 6.8 — — — 1.3 1.1 1.0 3.9 3.6 3.4 23.6 18.5 15.4 1,320 4.1 1.2 LIC Housing Finance 268 ADD 135,074 2,424 505 20.3 25.4 30.8 11.9 25.3 21.3 13.2 10.5 8.7 — — — 2.1 1.9 1.6 1.5 1.9 2.3 16.8 18.4 19.3 — — 13.0 L&T Finance Holdings 78 SELL 133,494 2,395 1,715 4.3 4.7 5.3 60.3 10.1 12.8 18.3 16.6 14.7 — — — 2.4 2.1 1.8 — — — 14.1 13.4 13.2 60 (22.9) 3.6 Magma Fincorp 97 BUY 18,364 330 190 6.5 11.0 13.8 100.6 69.3 25.0 14.8 8.8 7.0 — — — 1.3 1.2 1.0 1.2 1.8 2.2 10.1 13.6 15.4 130 34.5 0.5 Mahindra & Mahindra Financial 243 REDUCE 138,053 2,477 568 15.5 18.9 21.8 28.6 21.6 15.2 15.6 12.9 11.2 — — — 3.2 2.7 2.3 1.5 1.8 2.1 23.8 22.2 21.8 220 (9.4) 6.2 Oriental Bank of Commerce 256 REDUCE 74,618 1,339 292 45.5 53.7 56.7 16.3 17.9 5.6 5.6 4.8 4.5 — — — 0.7 0.6 0.6 3.6 4.2 4.5 10.7 11.7 11.4 280 9.5 4.8 PFC 190 ADD 250,211 4,490 1,319 32.2 35.0 39.8 40.1 8.5 13.8 5.9 5.4 4.8 — — — 1.1 1.1 0.9 4.4 4.8 5.5 19.2 18.3 18.3 240 26.5 8.2 Punjab National Bank 772 REDUCE 272,773 4,895 353 134.3 132.8 147.0 (6.7) (1.1) 10.7 5.7 5.8 5.2 — — — 1.1 0.8 0.7 3.5 3.5 3.8 16.7 14.5 14.4 830 7.6 12.0 Reliance Capital 337 ADD 83,005 1,489 246 26.9 23.4 28.5 27.5 (13.0) 21.7 12.5 14.4 11.8 — — — 0.7 0.7 0.7 2.4 2.1 2.5 5.9 4.9 5.8 500 48.3 38.2 Rural Electrification Corp. 225 REDUCE 222,607 3,994 987 38.2 41.6 45.9 33.7 9.0 10.2 5.9 5.4 4.9 — — — 1.3 1.3 1.1 3.8 4.2 4.6 23.4 21.6 20.4 255 13.1 8.2 Shriram Transport 786 ADD 175,477 3,149 223 61.0 73.1 84.9 8.2 20.0 16.0 12.9 10.8 9.3 — — — 2.5 2.0 1.8 1.6 0.1 2.2 20.6 20.4 19.9 775 (1.4) 13.4 State Bank of India 2,178 ADD 1,489,544 26,728 684 206.2 210.4 227.0 18.2 2.0 7.9 10.6 10.4 9.6 — — — 1.9 1.7 1.6 1.9 2.0 2.1 15.4 13.8 13.4 2,430 11.6 95.4 Union Bank 227 ADD 135,173 2,425 597 36.0 36.4 37.4 11.5 1.3 2.6 6.3 6.2 6.1 — — — 1.0 0.9 0.8 3.5 3.6 3.7 15.0 13.1 12.3 285 25.8 7.3 Yes Bank 497 REDUCE 178,124 3,196 359 36.3 36.9 41.0 31.0 1.8 11.1 13.7 13.5 12.1 — — — 3.1 2.6 2.2 1.2 1.2 1.4 24.8 20.9 19.7 450 (9.4) 20.0 Banks/Financial Institutions Cautious 10,155,135 182,220 15.2 8.3 11.4 11.9 11.0 9.9 ——— 2.0 1.8 1.6 1.8 2.0 2.2 16.6 16.0 15.8
Cement India Daily Summary - May ACC 1,206 REDUCE 226,621 4,066 188 73.7 68.1 79.6 29.1 (7.7) 16.9 16.4 17.7 15.2 10.1 10.0 8.1 2.9 2.6 2.4 2.9 1.9 1.9 19.5 16.4 17.1 1,170 (3.0) 7.5
Ambuja Cements 185 REDUCE 281,563 5,052 1,522 10.3 10.1 12.3 32.8 (2.3) 21.3 17.9 18.3 15.1 10.1 10.0 8.7 3.0 2.8 2.6 1.5 1.5 2.3 17.8 16.1 17.7 175 (5.4) 7.8 Grasim Industries 2,931 ADD 268,790 4,823 92 272.6 326.4 376.8 (5.6) 19.7 15.4 10.8 9.0 7.8 5.9 4.8 3.5 1.4 1.2 1.1 0.8 1.2 1.2 13.7 13.9 14.0 3,500 19.4 4.1 India Cements 73 ADD 22,301 400 307 6.8 8.9 9.5 (24.4) 31.2 7.2 10.7 8.2 7.6 4.6 4.0 3.5 0.5 0.5 0.5 2.9 4.4 4.4 5.2 6.6 6.6 95 30.9 1.5 Shree Cement 4,948 SELL 172,381 3,093 35 281.2 303.0 336.2 76.1 7.7 11.0 17.6 16.3 14.7 10.5 8.4 7.3 5.0 4.0 3.3 0.4 0.4 0.4 32.2 27.3 24.4 3,700 (25.2) 1.5 UltraTech Cement 1,954 SELL 535,789 9,614 274 101.3 114.2 136.3 13.4 12.8 19.4 19.3 17.1 14.3 11.7 9.6 7.3 3.1 2.6 2.2 0.5 0.5 0.5 18.9 18.8 18.8 1,700 (13.0) 8.5
Source: Company, Bloomberg, Kotak Institutional Equities estimates
74
2 75 75
Kotak Institutional Equities: Valuation summary of KIE Universe stocks
O/S Target ADVT- 23-May-13 Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) Price/BV (X) Dividend yield (%) RoE (%) price Upside 3mo Company Price (Rs) Rating (Rs mn) (US$ mn) (mn) 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E2015E 2013E 2014E 2015E (Rs) (%) (US$ mn) Consumer products Asian Paints 4,800 SELL 460,416 8,262 96 116.1 137.4 163.2 12.7 18.3 18.7 41.3 34.9 29.4 26.2 21.7 18.2 13.0 10.8 9.0 1.0 1.2 1.5 37.8 36.8 36.6 3,850 (19.8) 10.1 Bajaj Corp. 266 BUY 39,220 704 148 11.3 13.7 16.0 39.4 20.3 17.0 23.4 19.5 16.6 21.7 17.2 13.8 8.1 7.2 6.4 — — — — — — 280 5.3 0.3 Colgate-Palmolive (India) 1,438 SELL 195,544 3,509 136 37.7 44.3 50.8 14.7 17.6 14.6 38.2 32.5 28.3 31.9 27.0 22.8 37.0 32.4 28.4 1.8 2.3 2.6 106.3 106.6 107.2 1,150 (20.0) 2.9 Dabur India 155 ADD 270,847 4,860 1,743 4.4 5.4 6.4 19.1 23.3 17.8 35.5 28.8 24.4 27.8 22.2 18.6 12.7 10.3 8.3 1.0 1.4 1.6 40.0 39.8 37.9 160 3.0 3.4 GlaxoSmithkline Consumer 4,953 SELL 208,307 3,738 42 103.8 124.9 149.0 20.7 20.2 19.3 47.7 39.7 33.2 41.6 35.1 29.4 15.3 13.0 11.1 0.9 1.2 1.5 34.9 35.4 36.1 3,500 (29.3) 1.8 Godrej Consumer Products 825 REDUCE 280,833 5,039 340 19.6 26.8 32.4 26.7 36.5 21.2 42.1 30.8 25.5 30.2 22.1 17.3 7.9 6.5 5.3 0.6 0.7 0.7 21.8 24.9 24.9 795 (3.7) 3.0 Hindustan Unilever 585 REDUCE 1,265,603 22,710 2,163 14.7 15.8 17.3 23.9 6.9 9.6 39.7 37.1 33.9 36.7 31.4 27.0 40.4 36.9 30.3 3.2 1.8 2.0 103.1 111.7 98.3 550 (6.0) 27.1 ITC 333 ADD 2,627,349 47,144 7,902 9.4 11.1 13.0 19.7 18.4 17.0 35.4 29.9 25.6 25.1 20.9 17.6 11.2 10.0 8.9 1.6 1.9 2.3 36.1 37.1 38.5 350 5.3 42.3 Jubilant Foodworks 1,084 SELL 71,816 1,289 66 19.9 25.0 34.0 21.7 25.4 35.8 54.4 43.4 31.9 29.6 23.0 16.7 16.7 12.7 9.7 — — — — — — 900 (17.0) 9.4 Jyothy Laboratories 184 ADD 30,205 542 165 1.1 4.3 8.3 (53.3) 290.2 91.2 165.0 42.3 22.1 27.6 18.0 13.5 4.7 4.4 3.8 1— 1— 1— - - - 200 8.9 0.3 Marico 224 REDUCE 144,212 2,588 645 5.6 6.7 7.9 8.1 19.5 17.3 39.8 33.3 28.4 23.9 20.7 17.8 7.2 6.1 5.3 0.4 0.6 0.9 23.2 20.2 20.4 210 (6.1) 0.9 Nestle India 5,271 SELL 508,259 9,120 96 110.8 126.6 142.7 5.9 14.3 12.8 47.6 41.6 36.9 28.1 23.6 20.8 28.3 21.5 17.1 0.9 1.1 1.3 71.6 60.3 52.9 4,050 (23.2) 3.5 Speciality Restaurants 170 ADD 8,002 144 47 5.4 8.1 9.7 11.1 48.0 20.0 31.3 21.2 17.6 20.2 13.4 10.2 5.3 4.2 3.4 — — — 12.3 11.8 12.5 190 11.5 0.2 Tata Global Beverages 139 BUY 85,803 1,540 618 6.3 7.6 8.1 16.9 20.1 6.6 22.0 18.3 17.2 12.8 10.7 9.3 1.4 1.3 1.3 1.5 1.8 1.9 8.3 9.5 9.5 165 18.9 6.6 Titan Industries 270 ADD 239,258 4,293 888 8.2 9.3 11.1 20.9 13.4 20.1 33.0 29.1 24.2 22.5 19.3 15.7 12.2 9.6 7.6 0.8 1.0 1.2 42.3 36.8 34.9 295 9.5 16.0 United Breweries 714 SELL 188,746 3,387 264 8.7 12.9 17.8 81.1 48.1 38.6 82.2 55.5 40.0 36.5 25.6 19.5 12.8 10.9 9.0 0.2 0.4 0.5 15.7 20.6 23.9 700 (1.9) 6.2 United Spirits 2,411 ADD 350,385 6,287 145 36.8 64.8 80.9 133.6 75.8 24.9 65.5 37.2 29.8 26.8 21.1 17.9 4.3 3.9 3.5 0.3 0.2 0.3 7.3 11.0 12.3 2,380 (1.3) 67.2 Consumer products Cautious 6,974,803 125,153 21.6 20.3 16.9 39.3 32.7 28.0 27.6 22.8 19.2 11.5 10.0 8.7 1.5 1.5 1.8 29.1 30.7 31.2 Constructions NCC 31 ADD 8,031 144 257 2.4 2.4 2.5 67.8 1.9 3.2 13.3 13.1 12.6 7.1 7.7 7.3 0.3 0.3 0.3 1.9 3.2 3.2 2.5 2.5 2.5 55 75.7 0.8 Punj Lloyd 46 REDUCE 15,571 279 340 (0.9) 1.2 4.2 (125.9) 236.3 257.6 (53.5) 39.3 11.0 6.5 6.0 5.4 0.6 0.5 0.5 (0.0) 0.2 0.8 (1.0) 1.4 4.9 45 (1.9) 5.3 Sadbhav Engineering 108 BUY 16,210 291 150 3.3 7.9 10.3 (64.8) 140.1 30.5 32.8 13.7 10.5 11.6 7.3 6.1 2.0 1.7 1.5 0.6 0.6 0.6 6.0 12.7 14.4 180 66.9 0.2 Construction Cautious 39,812 714 (72.0) 172.3 63.8 49.3 18.1 11.1 7.1 6.7 6.0 0.7 0.6 0.6 0.6 1.0 1.2 1.3 3.5 5.5 Energy Aban Offshore 306 RS 13,298 239 44 43.2 79.4 84.6 (36.7) 83.6 6.7 7.1 3.9 3.6 7.4 6.5 6.3 0.5 0.4 0.4 1.5 1.6 1.6 8.9 12.9 12.0 — — 2.1 Bharat Petroleum 380 BUY 274,698 4,929 723 38.8 21.8 24.6 111.4 (43.8) 12.6 9.8 17.4 15.5 6.4 9.3 8.3 1.5 1.4 1.3 3.1 1.7 2.0 15.4 8.0 8.5 465 22.4 7.6 Cairn india 278 BUY 530,187 9,513 1,910 63.1 56.9 48.2 51.7 (9.9) (15.3) 4.4 4.9 5.8 3.5 3.5 3.9 1.2 1.0 0.9 4.1 4.0 4.0 25.4 22.1 16.8 340 22.5 14.9 Castrol India 340 SELL 168,373 3,021 495 9.0 10.0 10.8 (4.4) 10.8 7.8 37.6 34.0 31.5 26.1 22.8 21.0 28.8 27.3 25.6 2.1 2.3 2.5 79.0 82.6 83.8 220 (35.4) 0.9 GAIL (India) 324 ADD 411,368 7,381 1,268 31.0 29.0 32.5 7.7 (6.6) 12.1 10.4 11.2 10.0 7.0 6.8 6.0 1.5 1.4 1.3 2.8 2.8 3.1 15.0 12.5 12.6 380 17.2 6.1 GSPL 59 ADD 33,367 599 563 8.8 8.3 8.1 (5.1) (6.2) (2.9) 6.7 7.1 7.4 4.0 3.8 3.7 1.0 0.9 0.8 1.7 1.7 2.7 16.4 13.3 11.5 83 40.0 0.8 Hindustan Petroleum 285 REDUCE 96,550 1,732 339 5.2 20.7 23.5 (80.5) 295.5 13.2 54.4 13.7 12.1 11.3 8.8 7.4 0.6 0.6 0.5 0.6 2.2 2.5 1.0 4.0 4.4 340 19.4 4.8 Indian Oil Corporation 287 ADD 695,850 12,486 2,428 16.5 24.9 26.7 (49.6) 50.5 7.2 17.3 11.5 10.7 8.9 7.3 5.9 1.1 1.0 1.0 1.4 2.6 2.8 6.2 8.8 8.9 345 20.4 3.3 Oil India 585 BUY 351,388 6,305 601 56.5 62.5 67.5 (1.5) 10.7 7.9 10.4 9.3 8.7 4.5 3.5 2.8 1.6 1.5 1.4 3.6 3.9 4.4 15.0 15.1 14.8 700 19.8 4.3 Oil & Natural Gas Corporation 328 BUY 2,807,494 50,377 8,556 29.4 33.0 36.5 (10.5) 12.2 10.6 11.2 10.0 9.0 4.7 3.9 3.3 1.5 1.4 1.2 3.0 3.4 3.8 13.3 13.5 13.5 375 14.3 22.2 Petronet LNG 140 BUY 104,663 1,878 750 15.3 12.8 14.6 8.7 (16.5) 14.0 9.1 10.9 9.6 6.2 7.3 5.8 2.2 1.8 1.5 1.8 1.8 2.1 25.6 17.5 16.8 175 25.4 2.6 India Daily Summary - May 24, 2013India DailySummary-May24, Reliance Industries 784 REDUCE 2,303,145 41,327 2,936 65.0 63.3 67.4 6.2 (2.6) 6.4 12.1 12.4 11.6 7.9 8.1 7.2 1.2 1.1 1.0 1.1 1.1 1.3 11.3 10.2 9.9 855 9.0 52.8 Energy Attractive 7,790,381 139,788 (1.4) 3.9 5.5 10.4 10.0 9.5 6.2 5.7 4.9 1.3 1.2 1.1 2.3 2.5 2.8 12.8 12.1 11.7 Industrials ABB 630 SELL 133,502 2,396 212 6.7 17.0 24.5 (23.6) 155.6 44.3 94.7 37.1 25.7 55.5 22.9 17.0 5.1 4.6 4.0 0.5 0.5 0.6 5.5 13.1 16.8 425 (32.5) 1.8 BGR Energy Systems 190 REDUCE 13,721 246 72 24.9 27.3 40.3 (19.7) 9.6 47.4 7.6 7.0 4.7 4.1 3.9 3.4 1.1 1.0 0.8 2.6 2.9 4.2 15.2 14.8 19.2 280 47.3 0.6 Bharat Electronics 1,252 REDUCE 100,144 1,797 80 110.7 125.7 138.7 4.1 13.5 10.4 11.3 10.0 9.0 4.9 3.6 2.7 1.5 1.4 1.2 2.4 2.4 2.4 14.3 14.6 14.5 1,300 3.9 0.4 Bharat Heavy Electricals 196 SELL 478,995 8,595 2,448 27.1 21.1 16.2 (6.0) (22.0) (23.2) 7.2 9.3 12.1 4.8 5.6 6.8 1.6 1.4 1.3 3.0 2.3 1.8 23.7 16.0 11.1 175 (10.6) 11.7 Crompton Greaves 97 ADD 62,418 1,120 642 1.9 8.4 10.9 (67.3) 347.9 30.1 51.9 11.6 8.9 13.7 6.8 5.4 1.7 1.5 1.3 1.3 1.5 1.7 3.3 13.9 16.1 130 33.6 3.6 Cummins India 465 REDUCE 128,843 2,312 277 28.5 26.9 29.6 29.1 (5.3) 10.0 16.3 17.2 15.7 16.0 14.9 13.2 5.4 4.8 4.3 3.1 2.9 3.1 34.5 28.1 27.6 520 11.9 2.0 Kalpataru Power Transmission 76 BUY 11,639 209 153 8.8 13.1 15.3 (34.1) 49.0 17.6 8.7 5.8 4.9 5.9 4.2 3.6 0.6 0.6 0.5 2.0 2.0 2.0 6.6 9.2 9.9 120 58.2 0.1 KEC International 45 BUY 11,492 206 257 2.5 6.5 9.3 (63.1) 154.7 44.4 17.6 6.9 4.8 7.0 5.3 4.3 1.0 0.9 0.7 0.8 2.2 3.1 5.5 13.0 16.6 70 56.6 0.3
KOTAK INSTITUTIONAL EQUITIES RESEARCH Larsen & Toubro 1,418 ADD 872,760 15,661 615 78.5 78.5 96.5 4.2 (0.0) 23.0 18.1 18.1 14.7 14.9 13.8 12.4 2.6 2.1 1.8 1.0 1.0 1.0 15.2 12.8 13.3 1,600 12.8 50.6 Maharashtra Seamless 232 BUY 16,328 293 71 33.9 39.1 41.2 (22.6) 15.3 5.4 6.8 5.9 5.6 3.4 2.7 2.9 0.6 0.5 0.5 2.9 3.4 3.6 8.3 9.2 9.5 400 72.8 0.3 Siemens 571 SELL 201,150 3,609 352 10.0 18.6 23.2 (27.4) 86.6 24.8 57.4 30.8 24.6 24.1 14.4 11.9 5.1 4.7 4.3 0.9 1.0 1.0 8.8 15.9 18.3 425 (25.6) 4.3 Suzlon Energy 13 RS 23,728 426 1,777 (3.7) (0.4) 1.9 6.0 88.1 533.8 (3.6) (30.1) 6.9 7.7 6.2 5.5 0.5 0.6 0.5 1.5 1.5 1.5 (13.7) (1.8) 8.0 — — 8.5 Thermax 597 REDUCE 71,089 1,276 119 26.4 31.6 37.0 (19.7) 19.4 17.3 22.6 18.9 16.1 14.4 12.1 10.1 3.8 3.4 2.9 1.5 1.5 1.8 18.0 18.9 19.5 575 (3.6) 0.7 Voltas 84 REDUCE 27,812 499 331 5.9 7.9 9.5 (37.6) 33.7 20.5 14.3 10.7 8.9 9.6 7.0 5.4 1.7 1.5 1.4 2.1 2.8 3.4 12.5 15.1 16.5 100 18.9 2.5 Industrials Cautious 2,137,294 38,351 (5.5) 3.2 9.1 15.3 14.9 13.6 10.8 10.1 9.6 2.2 1.9 1.7 1.6 1.5 1.5 14.5 13.1 12.7
Source: Company, Bloomberg, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Daily2013India Summary-May24,
O/S Target ADVT- 23-May-13 Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) Price/BV (X) Dividend yield (%) RoE (%) price Upside 3mo Company Price (Rs) Rating (Rs mn) (US$ mn) (mn) 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E2015E 2013E 2014E 2015E (Rs) (%) (US$ mn) Infrastructure Adani Port and SEZ 152 BUY 307,560 5,519 2,017 8.1 9.8 12.6 48.7 20.4 28.6 18.8 15.6 12.1 17.4 12.2 9.7 4.7 3.5 2.8 0.8 1.1 1.3 28.5 25.8 25.8 180 18.1 5.4 Container Corporation 1,118 ADD 145,379 2,609 130 74.2 82.6 94.2 9.9 11.3 14.0 15.1 13.5 11.9 11.0 9.7 8.1 2.3 2.0 1.8 1.5 1.7 1.9 16.2 16.0 16.2 1,150 2.8 2.6 GMR Infrastructure 21 RS 81,351 1,460 3,892 (1.9) (0.3) (0.3) (69.5) 86.9 (37.1) (10.9) (82.9) (60.4) 20.9 9.4 6.4 1.1 1.0 1.0 — — — (10.4) (1.5) (2.0) — — 3.7 Gujarat Pipavav Port 47 BUY 22,480 403 483 1.5 3.1 3.4 29.7 104.0 7.6 30.4 14.9 13.9 12.8 10.4 8.8 1.9 1.6 1.5 — — — 7.6 14.0 11.9 60 29.0 0.6 GVK Power & Infrastructure 9 RS 13,581 244 1,579 (1.1) 0.2 0.5 (385.3) 118.8 138.5 (7.7) 41.3 17.3 21.9 9.5 7.9 0.4 0.4 0.4 — — — (5.2) 1.0 2.3 — — 1.3 IRB Infrastructure 122 BUY 40,449 726 332 16.7 16.6 13.7 11.1 (0.8) (17.5) 7.3 7.3 8.9 6.6 5.6 5.8 0.9 0.8 0.7 — — — 15.1 11.8 8.8 170 39.7 4.4 Infrastructure Cautious 610,801 10,960 7.1 59.4 17.3 26.4 16.6 14.1 15.8 9.5 7.6 2.1 1.8 1.6 0.8 1.0 1.1 7.8 11.0 11.6
Media DB Corp 249 BUY 45,653 819 183 11.9 14.0 17.5 8.0 18.0 24.9 20.9 17.7 14.2 11.7 10.1 8.2 4.5 4.1 3.8 2.4 3.2 4.0 22.4 24.2 27.7 280 12.4 0.3 DishTV 64 ADD 68,389 1,227 1,064 (1.3) 0.4 1.5 (31.8) 128.5 299.5 (48.1) 169.0 42.3 13.5 10.8 8.7 (42.9) (57.4) (84) — — 1.6 112.2 (29.0) (161) 75 16.6 3.8 Eros International 159 ADD 14,582 262 92 15.8 20.1 23.5 (4.0) 27.2 16.5 10.0 7.9 6.8 6.8 5.5 4.7 1.5 1.2 1.0 — — — 15.9 17.0 16.6 230 44.7 0.9 Hindustan Media Ventures 133 BUY 9,794 176 73 11.1 12.1 13.2 25.0 8.6 9.0 12.0 11.0 10.1 6.2 5.2 4.5 1.9 1.7 1.6 1.5 3.0 4.5 17.3 16.7 16.6 200 49.9 0.0 Jagran Prakashan 91 BUY 28,842 518 316 5.4 6.5 8.4 (4.5) 20.4 29.0 16.9 14.1 10.9 9.3 8.0 6.3 3.3 3.1 2.8 3.8 4.4 4.9 21.0 22.9 27.1 130 42.5 0.2 Sun TV Network 410 REDUCE 161,474 2,897 394 18.0 20.5 24.0 2.4 13.7 17.2 22.8 20.0 17.1 14.3 12.3 10.5 5.5 5.1 4.7 2.4 2.9 3.9 26.5 27.5 29.8 420 2.5 9.8 Zee Entertainment Enterprises 244 REDUCE 231,943 4,162 950 7.6 8.8 10.7 25.6 16.1 21.8 32.2 27.8 22.8 22.7 18.7 15.2 4.7 4.4 4.2 0.7 0.9 1.0 15.3 16.6 19.2 220 (9.9) 11.6 Media Neutral 583,633 10,473 7.7 27.0 25.5 28.2 22.2 17.7 14.3 11.9 9.8 4.6 4.2 3.9 1.5 1.8 2.6 16.2 18.9 22.0 Metals & Mining Coal India 308 BUY 1,946,072 34,920 6,316 25.9 28.9 33.3 11.4 11.4 15.4 11.9 10.7 9.3 6.5 5.3 3.8 3.6 3.0 2.4 2.5 2.8 3.2 34.2 30.6 29.0 404 31.1 13.7 Hindalco Industries 109 REDUCE 208,554 3,742 1,915 14.5 9.9 8.1 (18.1) (31.8) (18.4) 7.5 11.0 13.5 9.1 8.6 8.0 0.6 0.6 0.6 1.4 1.4 1.4 8.4 5.4 4.2 100 (8.2) 15.6 Hindustan Zinc 114 ADD 479,749 8,608 4,225 16.4 14.6 14.7 24.2 (11.1) 1.1 6.9 7.8 7.7 4.1 3.7 3.1 1.5 1.3 1.2 2.7 2.7 2.7 23.5 17.8 15.9 150 32.1 1.7 Jindal Steel and Power 291 ADD 272,120 4,883 935 31.1 34.4 38.3 (26.6) 10.4 11.5 9.4 8.5 7.6 7.7 8.3 7.0 1.3 1.1 1.0 0.6 0.6 0.6 14.9 14.2 13.9 385 32.3 15.9 JSW Steel 688 SELL 153,484 2,754 223 43.2 58.0 86.2 79.1 34.4 48.6 15.9 11.9 8.0 5.7 6.0 5.4 0.9 0.8 0.8 1.5 1.5 1.5 7.8 7.3 10.0 585 (15.0) 15.6 National Aluminium Co. 34 REDUCE 86,595 1,554 2,577 2.1 2.6 3.0 (38.1) 25.4 14.1 16.1 12.9 11.3 4.8 4.4 4.6 0.7 0.7 0.7 3.0 3.0 3.0 4.5 5.5 6.1 38 13.1 0.5 NMDC 117 BUY 462,482 8,299 3,965 17.0 16.8 17.5 (8.0) (1.1) 4.3 6.9 6.9 6.7 3.2 3.1 2.8 1.6 1.4 1.2 4.3 4.3 4.3 25.3 21.5 19.6 175 50.0 8.9 Sesa Goa 157 ADD 136,145 2,443 869 26.2 25.8 24.9 (15.4) (1.8) (3.5) 6.0 6.1 6.3 38.8 26.9 17.9 0.8 0.7 0.6 0.1 0.1 0.1 3.3 (0.3) 1.5 180 14.9 5.3 Sterlite Industries 92 ADD 309,230 5,549 3,361 18.4 14.9 15.5 16.6 (19.1) 4.5 5.0 6.2 5.9 3.8 3.9 3.6 0.6 0.6 0.5 2.5 2.5 2.5 12.7 9.4 9.1 110 19.6 9.4 Tata Steel 300 ADD 290,986 5,221 971 46.2 40.0 49.7 168.1 (13.4) 24.2 6.5 7.5 6.0 7.0 5.8 5.8 0.9 0.8 0.7 2.7 4.0 4.0 0.9 11.0 12.6 370 23.5 29.4 Metals & Mining Neutral 4,345,418 77,973 9.0 (3.7) 10.1 8.5 8.8 8.0 6.1 5.7 5.0 1.4 1.3 1.1 2.5 2.7 2.9 16.9 14.6 14.3 Pharmaceutical Apollo Hospitals 950 SELL 132,129 2,371 139 21.4 27.6 33.4 35.7 28.7 21.2 44.3 34.5 28.4 22.7 18.4 15.0 4.8 4.4 3.9 0.6 0.7 0.9 11.3 13.3 14.6 850 (10.5) 6.2 Biocon 277 ADD 55,420 994 200 25.4 19.3 22.6 48.7 (24.2) 17.3 10.9 14.4 12.3 9.6 7.9 7.0 2.1 1.9 1.7 2.7 2.2 2.5 20.5 13.7 14.7 295 6.5 1.9 Cipla 415 ADD 333,092 5,977 803 19.7 20.0 23.3 40.8 1.6 16.3 21.1 20.7 17.8 14.7 13.3 11.1 3.7 3.2 2.8 0.7 0.7 0.8 17.0 16.7 16.9 440 6.1 9.5 Cadila Healthcare 789 ADD 161,476 2,897 205 25.4 41.8 53.3 (20.2) 64.4 27.4 31.0 18.9 14.8 19.4 13.1 10.5 5.5 4.5 3.7 0.8 1.3 1.7 18.9 26.3 27.7 840 6.5 1.2 Divi's Laboratories 980 REDUCE 129,980 2,332 133 45.4 51.4 61.0 12.9 13.3 18.7 21.6 19.0 16.1 15.6 13.3 11.0 5.2 4.4 3.8 1.5 1.7 2.0 26.0 25.1 25.4 1,060 8.2 3.2 Dr Reddy's Laboratories 2,051 BUY 348,336 6,250 170 96.3 111.8 125.6 14.6 16.0 12.4 21.3 18.4 16.3 14.5 12.2 10.8 4.8 4.0 3.3 0.7 0.8 0.9 24.1 22.5 21.9 2,230 8.7 12.4 GlaxoSmithkline Pharmaceuticals 2,282 SELL 193,444 3,471 85 81.4 84.5 97.5 9.7 3.8 15.5 28.0 27.0 23.4 21.3 20.4 17.0 9.6 8.9 8.0 2.2 2.4 2.6 28.5 34.2 36.0 1,920 (15.9) 1.2 Glenmark Pharmaceuticals 572 REDUCE 154,840 2,778 271 22.7 27.7 32.3 3.8 22.0 16.6 25.2 20.6 17.7 17.9 14.1 12.2 5.6 4.5 3.7 0.3 0.6 0.7 23.8 24.3 23.1 520 (9.1) 6.1 Lupin 748 ADD 334,267 5,998 447 29.4 32.4 37.4 51.0 10.3 15.4 25.4 23.1 20.0 15.3 13.6 11.8 6.4 5.2 4.3 0.5 0.7 0.9 28.5 25.1 23.8 760 1.6 12.2 Ranbaxy Laboratories 394 REDUCE 166,755 2,992 423 21.8 16.5 28.6 217.7 (24.4) 73.0 18.1 23.9 13.8 9.8 16.5 8.5 4.1 3.0 1.9 — — — 26.5 12.8 14.8 430 9.1 9.1 Sun Pharmaceuticals 1,006 REDUCE 1,041,786 18,693 1,036 28.6 35.1 39.9 14.4 22.7 13.7 35.2 28.7 25.2 19.2 18.1 15.7 6.4 5.3 4.4 0.5 0.6 0.7 20.0 20.2 19.0 750 (25.4) 16.4 Pharmaceuticals Attractive 3,051,525 54,756 42.4 12.0 19.1 26.2 23.4 19.6 16.4 15.0 12.4 5.3 4.4 3.7 0.7 0.9 1.0 20.3 19.0 18.6 Real Estate HDIL 51 NR 21,223 381 419 16.9 15.6 22.3 (13.5) (7.3) 42.5 3.0 3.2 2.3 5.4 5.8 4.2 0.2 0.2 0.2 — — — 6.6 5.8 7.7 — — 26.6 Oberoi Realty 239 ADD 78,316 1,405 328 14.5 28.9 42.1 9.2 99.4 45.4 16.4 8.2 5.7 11.6 5.7 3.6 1.9 1.5 1.2 0.8 0.8 0.8 12.1 20.6 24.0 307 28.7 0.3 Prestige Estates Projects 164 ADD 57,348 1,029 350 8.2 13.1 17.1 224.5 60.9 30.1 20.1 12.5 9.6 13.1 8.3 6.9 2.1 1.8 1.5 — — — 11.7 15.6 17.4 200 22.1 0.8 Sobha Developers 406 BUY 39,858 715 98 22.1 23.2 36.5 5.4 4.7 57.5 18.4 17.5 11.1 9.6 9.6 7.1 1.9 1.7 1.5 1.7 1.2 1.2 10.5 10.2 14.6 500 23.0 1.4 Real Estate Cautious 599,217 10,752 (1.5) 30.3 64.5 21.7 16.7 10.1 15.7 11.6 7.8 1.2 1.1 1.0 0.6 0.5 0.5 5.6 6.9 10.3
Source: Company, Bloomberg, Kotak Institutional Equities estimates India Daily Summary - May
76
2 77 77
Kotak Institutional Equities: Valuation summary of KIE Universe stocks
O/S Target ADVT- 23-May-13 Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) Price/BV (X) Dividend yield (%) RoE (%) price Upside 3mo Company Price (Rs) Rating (Rs mn) (US$ mn) (mn) 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E (Rs) (%) (US$ mn) Technology HCL Technologies 737 REDUCE 523,900 9,401 711 53.9 55.9 59.7 55.8 3.9 6.6 13.7 13.2 12.4 8.8 8.2 7.4 3.9 3.1 2.6 1.1 1.4 1.6 31.7 26.1 23.4 650 (11.8) 24.5 Hexaware Technologies 76 REDUCE 22,354 401 293 11.2 10.2 10.1 22.8 (8.7) (1.1) 6.8 7.5 7.6 5.0 4.5 4.3 1.9 1.7 1.5 7.1 6.7 6.6 29.5 23.6 21.3 90 18.1 3.6 Infosys 2,360 REDUCE 1,348,418 24,196 571 164.9 163.1 178.8 13.3 (1.1) 9.6 14.3 14.5 13.2 9.8 9.2 8.1 3.5 3.1 2.7 2.0 2.4 2.6 27.2 22.9 21.9 2,450 3.8 69.3 Mahindra Satyam 110 ADD 129,360 2,321 1,176 11.3 10.8 11.6 10.7 (3.8) 7.1 9.8 10.2 9.5 6.1 5.9 4.9 3.1 2.5 2.1 1— 2.0 2.1 37.5 27.8 24.4 125 13.6 6.7 Mindtree 802 ADD 33,274 597 41 81.7 87.6 96.7 53.2 7.2 10.5 9.8 9.2 8.3 6.6 6.0 5.0 2.5 2.1 1.7 1.5 1.6 1.8 30.2 24.8 22.6 900 12.2 0.9 Mphasis 436 SELL 91,801 1,647 211 37.6 35.8 35.3 (3.7) (4.7) (1.4) 11.6 12.2 12.3 8.6 8.7 8.3 2.1 1.9 1.8 3.9 4.1 4.1 19.1 16.5 15.2 350 (19.7) 0.9 Polaris Financial Technology 100 REDUCE 9,920 178 100 21.1 18.7 19.4 1.9 (11.4) 3.7 4.7 5.3 5.1 2.1 1.8 1.5 0.7 0.6 0.6 4.1 4.3 4.5 15.8 12.6 11.9 120 20.6 0.6 TCS 1,493 REDUCE 2,921,512 52,423 1,957 71.3 79.6 87.4 31.2 11.7 9.8 20.9 18.7 17.1 15.6 13.1 11.7 7.1 5.9 5.0 1.5 2.1 2.3 38.0 34.5 31.8 1,350 (9.6) 41.9 Tech Mahindra 953 ADD 122,015 2,189 128 98.3 106.6 105.7 17.6 8.5 (0.9) 9.7 8.9 9.0 9.0 8.5 8.6 2.2 2.0 1.8 0.5 0.8 1.0 27.2 24.1 21.4 1,050 10.2 9.3 Wipro 337 REDUCE 830,277 14,898 2,463 24.9 26.2 28.4 9.9 5.1 8.6 13.5 12.9 11.9 9.1 8.2 7.2 2.9 2.5 2.2 2.1 2.4 2.7 21.6 21.1 19.9 350 3.8 15.3 Technology Cautious 6,032,833 108,251 22.1 5.3 7.2 15.9 15.1 14.0 11.2 10.1 9.2 4.2 3.6 3.2 1.7 2.2 2.4 26.7 24.0 22.8 Telecom Bharti Airtel 300 ADD 1,140,229 20,460 3,798 6.0 11.9 17.5 (46.6) 99.1 46.4 50.1 25.2 17.2 7.4 6.4 5.2 2.3 2.1 1.9 0.3 0.4 1.2 4.5 8.7 11.7 350 16.6 31.0 Bharti Infratel 170 ADD 321,107 5,762 1,889 5.3 6.8 7.6 23.0 28.4 12.1 32.1 25.0 22.3 9.2 8.4 7.5 1.9 1.8 1.7 2.3 1.7 2.0 6.3 7.3 7.9 207 21.8 — IDEA 130 ADD 430,255 7,720 3,303 3.1 5.5 8.9 39.8 81.3 60.5 42.6 23.5 14.6 9.6 7.2 5.7 3.1 2.8 2.4 — — 0.5 7.5 12.4 17.4 142 9.0 9.2 Reliance Communications 106 SELL 218,681 3,924 2,064 3.3 9.3 8.6 (27.5) 186.7 (8.3) 32.5 11.3 12.4 9.2 6.7 6.5 0.8 0.7 0.7 — — — 0.4 6.5 5.6 65 (38.7) 45.3 Tata Communications 214 REDUCE 60,919 1,093 285 (27.0) (19.4) (12.9) 3.3 28.1 33.6 (7.9) (11.0) (16.6) 8.1 7.2 6.5 4.0 6.4 10.6 — — — (40.3) (44.7) (48.2) 220 2.9 0.9 Telecom Neutral 2,171,191 38,959 (37.9) 147.8 37.6 59.6 24.1 17.5 8.2 6.8 5.7 1.9 1.8 1.7 0.6 0.5 1.0 3.3 7.6 9.6 Utilities Adani Power 55 SELL 131,271 2,355 2,393 (9.0) (1.9) 4.5 (2,023.1) 79.2 341.0 (6.1) (29.2) 12.1 46.4 12.1 8.3 3.1 3.4 2.7 — — — (41.7) (11.0) 24.7 35 (36.2) 3.5 CESC 313 REDUCE 39,130 702 125 18.0 34.7 33.6 (17.2) 92.6 (3.1) 17.4 9.0 9.3 10.2 5.9 5.2 0.6 0.6 0.6 1.3 1.8 1.8 3.7 6.8 6.1 306 (2.3) 1.5 JSW Energy 59 SELL 96,268 1,727 1,640 6.7 7.5 6.0 232.1 12.3 (20.0) 8.7 7.8 9.7 6.7 5.5 5.7 1.6 1.3 1.1 — — — 18.5 18.1 12.5 61 3.9 1.7 Lanco Infratech 10 RS 22,563 405 2,223 (0.7) 1.0 7.7 (39.2) 233.2 696.7 (13.9) 10.5 1.3 10.1 6.8 3.6 0.5 0.5 0.4 — — — (3.6) 4.8 31.2 — — 1.8 NHPC 20 ADD 239,864 4,304 12,301 1.9 2.1 2.4 (25.2) 10.6 14.9 10.5 9.5 8.2 10.2 8.5 6.7 0.8 0.8 0.7 2.5 2.8 3.3 7.8 8.2 8.8 26 33.3 7.5 NTPC 149 ADD 1,224,451 21,971 8,245 13.0 13.3 14.2 20.8 2.3 6.3 11.4 11.1 10.5 10.2 8.8 8.2 1.5 1.4 1.3 4.5 2.7 2.9 14.0 13.1 12.8 175 17.8 19.8 Power Grid 110 BUY 507,418 9,105 4,630 9.3 10.7 12.8 32.0 14.8 19.8 11.8 10.2 8.5 10.7 8.6 7.3 1.9 1.7 1.5 2.6 3.0 3.6 17.4 17.8 18.9 140 27.7 6.3 Reliance Infrastructure 367 BUY 96,427 1,730 263 70.9 68.1 74.7 17.5 (4.0) 9.8 5.2 5.4 4.9 9.1 6.5 7.0 0.4 0.3 0.3 2.0 3.1 3.1 11.0 11.2 9.3 810 120.9 27.1 Reliance Power 73 SELL 203,652 3,654 2,805 3.6 3.7 3.9 16.7 2.4 5.1 20.1 19.7 18.7 24.7 19.3 12.9 1.1 1.0 1.0 — — — 5.6 5.4 5.4 75 3.3 12.7 Tata Power 88 ADD 217,214 3,898 2,468 4.2 5.6 5.8 (9.3) 34.2 2.5 21.1 15.7 15.3 7.9 6.5 6.2 1.7 1.6 1.5 1.9 1.9 1.9 7.8 10.4 9.9 113 28.4 4.7 Utilities Attractive 2,778,260 49,852 5.5 19.0 21.1 13.7 11.5 9.5 11.1 8.7 7.3 1.3 1.2 1.1 2.9 2.3 2.5 9.4 10.4 11.5 Others Carborundum Universal 130 BUY 24,343 437 187 5.7 9.6 13.7 (50.7) 67.5 43.4 22.7 13.6 9.5 11.1 7.4 5.4 2.1 1.8 1.6 0.8 1.3 1.8 10.3 15.7 19.1 180 38.6 0.2 Coromandel International 184 SELL 51,979 933 283 18.1 18.1 20.4 (19.7) 0.0 12.4 10.1 10.1 9.0 8.9 6.9 6.3 1.9 1.8 1.6 4.0 4.2 4.2 18.8 16.9 17.3 150 (18.5) 0.4 Havells India 678 REDUCE 84,535 1,517 125 31.7 37.3 41.1 0.8 17.6 10.1 21.4 18.2 16.5 12.2 10.5 9.4 5.7 4.6 3.8 1.1 1.2 1.3 31.8 28.2 25.3 580 (14.4) 2.1 Jaiprakash Associates 67 BUY 147,431 2,645 2,191 2.0 9.6 17.1 (32.1) 383.4 78.3 33.9 7.0 3.9 9.4 6.9 5.2 1.2 1.0 0.8 — — — 3.7 16.0 23.7 100 48.6 30.3 Jet Airways 586 SELL 50,624 908 86 1.2 26.0 32.0 100.6 2,095 23.3 495.9 22.6 18.3 10.4 8.8 8.4 35.9 13.9 7.9 — — — 7.5 88.5 54.9 400 (31.8) 31.1
MCX India 913 ADD 46,338 831 51 58.1 44.3 49.9 (2.4) (24) 12.7 15.7 20.6 18.3 10.2 15.3 12.2 4.0 3.8 3.4 2.6 2.6 2.6 27.4 18.9 19.7 990 8.5 4.6 2013India DailySummary-May24, Rallis India 138 BUY 26,915 483 194 6.3 8.6 10.0 22.9 38 15.6 22.1 16.1 13.9 13.0 8.9 7.7 4.3 3.6 3.0 1.6 1.6 1.6 19.6 24.5 23.9 155 12.0 0.6 SpiceJet 37 BUY 17,850 320 484 0.4 3.5 5.1 103.2 679.1 47.5 83.2 10.7 7.2 21.4 7.0 4.9 (55.5) 13.2 4.7 — — — (23) 325.1 95.5 60 62.8 2.4 Tata Chemicals 307 ADD 78,242 1,404 255 33.6 37.7 40.7 2.2 12.2 8.0 9.1 8.1 7.5 5.6 4.8 4.3 1.0 0.9 0.8 3.3 3.3 3.3 11.1 11.2 10.9 370 20.5 2.0 United Phosphorus 157 REDUCE 72,619 1,303 462 15.0 17.3 18.2 24.9 15.4 5.2 10.5 9.1 8.6 6.1 5.5 5.1 1.5 1.3 1.2 1.6 1.6 1.6 16.0 16.2 15.0 125 (20.5) 5.0 Others 600,874 10,782 135.3 68.3 36.9 17.4 10.4 7.6 8.9 7.0 5.7 1.9 1.6 1.4 1.4 1.5 1.5 10.8 15.8 18.2 KIE universe 52,698,718 945,608 7.8 10.1 13.1 14.7 13.3 11.8 9.6 8.3 7.2 2.2 2.0 1.8 1.8 1.9 2.1 15.1 14.9 15.0 KIE universe ex-energy 44,908,337 805,820 10.5 11.7 15.0 15.8 14.1 12.3 10.8 9.2 7.9 2.5 2.2 2.0 1.7 1.7 2.0 15.8 15.7 16.0 KIE universe ex-energy & ex-commodities 39,055,473 700,798 10.7 15.2 15.8 17.4 15.1 13.0 12.2 10.1 8.6 2.7 2.4 2.1 1.6 1.7 1.9 15.6 16.0 16.4
Notes: (a) For banks we have used adjusted book values. (b) 2012 means calendar year 2011, similarly for 2013 and 2014 for these particular companies.
KOTAK INSTITUTIONAL EQUITIES RESEARCH (c) EV/Sales & EV/EBITDA for KS universe excludes Banking Sector. (d) Rupee-US Dollar exchange rate (Rs/US$)= 55.73 Source: Company, Bloomberg, Kotak Institutional Equities estimates
Disclosures
Kotak Institutional Equities Research coverage universe Distribution of ratings/investment banking relationships Percentage of companies covered by Kotak Institutional Equities, 70% within the specified category.
60% Percentage of companies within each category for which Kotak Institutional Equities and or its affiliates has provided investment 50% banking services within the previous 12 months.
40% * The above categories are defined as follows: Buy = We expect 34.3% this stock to deliver more than 15% returns over the next 12 30% months; Add = We expect this stock to deliver 23.1% 24.3% 5-15% returns over the next 12 months; Reduce = We expect this 18.3% stock to deliver -5-+5% returns over the next 12 months; Sell = 20% We expect this stock to deliver less than -5% returns over the next 12 months. Our target prices are also on a 12-month horizon 10% basis. These ratings are used illustratively to comply with applicable 2.4% regulations. As of 31/03/2013 Kotak Institutional Equities 1.8% 1.2% 0.6% Investment Research had investment ratings on 169 equity 0% securities. BUY ADD REDUCE SELL
Source: Kotak Institutional Equities As of March 31, 2013
Ratings and other definitions/identifiers
Definitions of ratings
BUY. We expect this stock to deliver more than 15% returns over the next 12 months.
ADD. We expect this stock to deliver 5-15% returns over the next 12 months.
REDUCE. We expect this stock to deliver -5-+5% returns over the next 12 months.
SELL. We expect this stock to deliver <-5% returns over the next 12 months.
Our target prices are also on a 12-month horizon basis.
Other definitions
Coverage view. The coverage view represents each analyst’s overall fundamental outlook on the Sector. The coverage view will consist of one of the following designations: Attractive, Neutral, Cautious.
Other ratings/identifiers
NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s) and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances.
CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.
NC = Not Covered. Kotak Securities does not cover this company.
RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon.
NA = Not Available or Not Applicable. The information is not available for display or is not applicable.
NM = Not Meaningful. The information is not meaningful and is therefore excluded.
79 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Corporate Office Overseas Offices
Kotak Securities Ltd. Kotak Mahindra (UK) Ltd Kotak Mahindra Inc Bakhtawar, 1st Floor 8th Floor, Portsoken House 50 Main Street, Ste. 890 229, Nariman Point 155-157 Minories Westchester Financial Centre Mumbai 400 021, India London EC3N 1LS White Plains, New York 10606 Tel: +91-22-6634-1100 Tel: +44-20-7977-6900 Tel:+1-914-997-6120
Copyright 2013 Kotak Institutional Equities (Kotak Securities Limited). All rights reserved.
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This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. We are not soliciting any action based on this material. It is for the general information of clients of Kotak Securities Limited. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any advice or recommendation in this material, clients should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the investments referred to in this material and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Kotak Securities Limited does not provide tax advise to its clients, and all investors are strongly advised to consult with their tax advisers regarding any potential investment.
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