New Year Picks - 2018 New Year Picks – 2018
Company CMP Target Potential Upside
SBI Life Insurance 702 850 21%
InterGlobe Aviation 1199 1505 26%
Endurance Technologies 1355 1550 14%
Godrej Agrovet 568 648 14%
CMP as on 26th Dec 2017
2 CMP: Rs 702 | Target price: Rs 850 SBI Life Insurance Upside: 21%
Unmatched potential SBI Life with its unparalleled distribution network, leadership in New Business Premium (NBP) among private insurers, strong management team and top quartile service ratios is a proxy play to the huge opportunity in India’s life insurance space. The company is yet to harness benefits from a large part of State Bank of India’s (SBIN) unmatched branch network – a single factor that itself can drive exponential growth in NBP in ensuing years.
Robust premium growth along with increasing share of high-margin products and operating leverage to drive return on Embedded Value (EV) of ~19% by FY20E. We expect 19.5% EV CAGR over FY17-20E to Rs 282 bn driven by ~30% CAGR in Value of New Business (VNB) to Rs 22.7 bn in FY20E.
We initiate coverage with BUY rating and TP of Rs 850 (~30% upside from CMP).
In a sweet spot for growth Consistent market leadership Unparalleled distribution network
♦ Insurance penetration, density and protection ♦ India’s largest private life insurer (in NBP) ♦ Bancassurance with SBIN (23,000+ gap indicates India is still significantly under since FY10 branches), P&S Bank (1,500+ branches), insured SIB (850+ branches) and 17 RRBs ♦ Second largest in terms of Individual Rated ♦ Under insured market = room for growth Premium (IRP) ♦ Largest network of 96,000+ agents (~23% NBP CAGR over FY17-FY20E) ♦ 808 offices across 29 states and 7 UTs
Strong customer service metrics Significant brand equity Risks to investment thesis
♦ Top quartile claim settlement ratio (98% in ♦ JV between India’s largest bank (State Bank ♦ Changes in tax regime and regulatory FY17) of India) and the leading global insurance framework company BNP Paribas Cardif (BNPCC) ♦ Lowest mis-selling rate (0.2%) and grievance ♦ Termination/adverse change in ratio (0.61%) in FY17 among private life ♦ Recognized as 'Most Trusted Brands' by The bancassurance arrangements with SBIN insurers in India Economic Times Brand Equity
3 SBI Life Insurance Valuations: Insurance – a long-term business BANKS & FINANCIAL SERVICES
We have used Appraisal Value (AV) based Bull, base and bear case methodology to compute the valuation for SBI Life. APE CAGR VNB FY19E VNB FY20 AV TP Appraisal Value = EV (FY19E) + Structural value growth margin EV multip le Assumptions (Rs b n) (Rs) (FY20E VNB * NB multiple) (FY17-20E - %) (%) (Rs b n) (x) Bull case 31.0 17.5 253.8 31 1,050 1,050 SBI Life reported an EV of Rs 180.8 bn in H1FY18, Base case 26.9 16.8 236.9 27 850 850 while for FY17, EV was Rs 165.4 bn (up 31.8% YoY). Bear case 19.9 14.8 221.2 23 600 600 We expect EV to rise to Rs 282.1 bn by FY20E, Source: Axis Securities; Target price (TP) is Rs/ share growing at 19.5% CAGR over FY17-20E. EV growth will be primarily driven by VNB CAGR at 29.8% to Rs 22.7 bn in FY20E on the back of strong operational performance. We expect further expansion in VNB Our bull case value is 60% above the CMP margin by FY20 to 16.8% (15.4% in FY17) aided by 1200 increased share of protection and better persistency. 1100 Rs 1050 (60%) 1000 Operating RoEV was highest amongst private peers in 900 Rs 850 (30%) FY17 at ~23%; however, we expect some gradual 800 moderation to 19.8% by FY20 700 600 Rs 600 (-9%) We give an FY20 NBP multiple of 27x to arrive at a 500
structural value of ~Rs 613 bn. Hence, AV post FY19E
Jul-17
Jun-17
Jan-18
Oct-17
Sep-17
Dec-17 Aug-17 EV of Rs 236.9 bn is ~Rs 850 bn, which translates into Nov-17 target price of Rs 850 (upside of ~30% from CMP) Source: Company, Bloomberg, Axis Securities
NB multiple is an implied multiple based on key assumption of long term average growth rate of 12%, terminal growth rate of 3% and discounting factor of 12.5%
4 Multiple structural growth levers; private plays SBI Life Insurance to outgrow industry BANKS & FINANCIAL SERVICES
Growth trajectory of life insurance products is expected Expected growth in NBP over FY22 to be significantly stronger over the next five years led 3,500 by gradual growth in economy and structural drivers like (Rs bn) 3,000 rising life expectancy, increase in share of working 2,500 population, healthcare spending, and pension needs 2,000 1,500 India’s large working population, rapid urbanization 1,000
and rising affluence are expected to aid India’s life 500
1,142 1,142 1,070 1,131 1,750 3,100 1,196 1,196 1,387 insurance space. In addition, improving economic 0
growth and rising awareness of insurance as investment
FY12 FY13 FY14 FY15 FY17 FY16
FY18E FY19E FY20E FY22E and savings product are expected to be the key growth FY21E drivers of life insurance products
CRISIL research expects India’s new business premium / Expected growth in total premium over FY22 total premium of life insurance industry to post CAGR of 10,000 11-13%/13-15% over FY17-FY22 (Rs bn) 8,000
Market share of private life insurers has been rising over 6,000 the past two years and expected to grow at a faster clip 4,000 than the industry average in the coming years
2,000 874
,
2,869 2,869 3,136 3,279 3,667 8,000 2 4,181
0
FY13 FY15 FY16 FY17 FY12 FY14
FY18E FY20E FY21E FY22E FY19E
Source: IRDAI, CRISIL Research 5 SBI Life Insurance Superior metrics – #1 on NBP, #2 on IRP BANKS & FINANCIAL SERVICES
SBI Life is India’s largest private life insurer in terms of New Business Premium (NBP) since FY10 and the second largest player in terms of Individual Rated Premium (IRP) (largest being ICICI Pru Life)
NBP posted CAGR of 14.7% over FY07-FY17 --- faster than that of private life insurance industry in India; whereas, SBI Life posted CAGR growth at 35.5% over FY15-17 -- the highest among Top 5 private insurers in India
We expect its market share to improve given its aggressive stance on utilization of SBIN branches for sourcing and improving agent productivity. We have factored in NBP CAGR of ~23% over FY17-FY20
It has issued ~1.28 mn individual life policies annually -- the highest among private life insurers in India since FY14 -- CAGR of 6.4% over FY15-FY17 leading to a more granular book
NBP to continue rising significantly over FY17-20E Growth rates of NBP of Top 5 private players FY13 FY14 FY15 FY16 FY17 H1FY18 200 188 (Rs bn) SBI LIFE (20.7) (2.2) 9.1 28.5 4 2.7 (7.7) 154 160 IPRU LIFE 8.3 (21.8) 41.8 26.9 16.2 34.5 123 HDFC LIFE 15.7 (9.0) 36.1 18.1 34.0 30.4 120 101 MAX LIFE (0.5) 19.0 13.8 12.0 27.3 15.5 71 80 BALIC 10.1 (13.2) 4.2 6.8 14.1 43.5 52 51 55 40
0 The decline in H1FY18 for SBI Life growth was due to conscious
effort of management to go slow in low margin group savings
FY14 FY15 FY16 FY17
FY13 product (fund management)
FY18E FY19E FY20E
6 Source: Companies, IRDAI, Axis Securities Superior distribution model – twin engines of SBI Life Insurance Banca and agency… BANKS & FINANCIAL SERVICES
SBI Life’s New Business Premium – channel-wise mix SBI Life over the years has developed unparalleled distribution network among private insurance players (%) Individual agents Banks Others 100 well supported by its twin engines of growth 9.3 24.7 19.1 19.3 18.1 24.7 (bancassurance partnership with SBIN and large and 80 productive individual agent network) 60 40.2 48.1 47.8 54.4 66.1 53.0 Agency and Banca are prominent channels providing a 40 well-diversified distribution model supported by 20 35.1 32.8 32.8 additional branches (from 750 offices as of FY15 to 27.5 22.3 24.6 801 offices as of FY17), increasing the number of sales 0 and customer support employees FY13 FY14 FY15 FY16 FY17 H1FY18
As of H1FY18, SBI Life had 808 offices, located across Comparision of channel-wise mix for NBP (H1FY18) 29 states and seven union territories, and (%) Individual Agents Banks Others 12,910 employees 100 9.3 14.8 30.3 SBI Life’s diversified distribution network reduces the risk 80 64.6 of dependence on any particular channel, leverages 60 73.8 66.1 60.5 economies of scale, and allows it access to a wide 45.9 range of customer segments 40 1.6 20 29.2 24.6 23.9 24.7 24.6 0 6.2 NBP through SBIN represented 38.3%, 42.7% and SBILIFE IPRULIFE HDFCLIFE MAXLIFE BALIC 41.5% of its NBP in FY15, FY16 and FY17
Source: Companies, Axis Securities Others includes brokers, corporate agents, micro agents, direct business, referrals etc. 7 Developing multi-channel distribution to scale SBI Life Insurance up, cut concentration BANKS & FINANCIAL SERVICES
Company has been building one of the largest multi-channel distribution networks among private life insurers in India, which not only enables it to reduce the risk of dependence on any particular channel, but also ensures economies of scale and easy access to a larger number of customer segments
Apart from twin channel, SBI Life is also working on expanding its other distribution channels primarily direct sales, including online sales, sales by non-bancassurance corporate agents, brokers, micro-agents, common service centres and insurance marketing firms (currently contributes >2% of NBP)
SBI Life has tied up with more than 50 corporate agents and 120 insurance brokers, which are supported by dedicated sales team of business development managers and area managers
SBI Life is in the process of developing new sales partners through the appointment of micro-agents and Common Service Centres (CSCs). These partners have wide geographical presence especially in rural parts of India Geographical distribution of Top 5 private insurers (FY17)
(%) Top three states Top five states Top 10 states 100 81 80 On a relative basis, concentration from top 77 73 80 67 5 and 10 states in FY17 was 38.3% and 59 56 60 50 51 67.2%, respectively, which remains lower 45 42 38 36 40 34 vs. other private peers 25 20
0 SBILIFE HDFCLIFE IPRULIFE MAXLIFE BALIC
Source: Companies, Axis Securities 8 Comprehensive, balanced product mix – SBI Life Insurance growth plus protection BANKS & FINANCIAL SERVICES
SBI Life’s product portfolio is well diversified with Linked (55.9% of NBP), Participating (19.5% of NBP) and Non-participating products (24.7% of NBP) in H1FY18
It has a comprehensive product portfolio of 29 individual life insurance products (37 individual and group products). The diversified product portfolio is an important contributing factor to SBI Life’s business growth (serves across customer segments & geographies)
Balanced product mix helps insulate against regulatory risks to product designs. The previous ULIP regulations caused severe turmoil in the industry – with several players witnessing negative growth for many years
Healthy share of traditional products and ULIPs helps reduce balance sheet risk and improve new business margin. Protection share of 6% (including individual protection and group pure term products but excluding PMJJBY) helps boost margin
Trend in product portfolio FY15 FY16 FY17 Q1FY18
Other products Group Group Group Group NBP NBP 72.3% Fund Management NBP 87.6% NBP 82.9% 32% 74.2% 30% 36% 32% Other protection
11.4% 11.3% Credit Life
49.9% 64.1% ULIP 79.0% 73.4% Individual Individual PAR Individual Individual NBP 38.7% NBP Non PAR NBP NBP 68% 70% 29.5% 64% 68% Protection 16.9% 22.8% FY15 FY16 FY17 Q1FY18 Q1FY18
Source: Company, Axis Securities 9 ‘Customer First’ helps sustain #1 among private SBI Life Insurance players BANKS & FINANCIAL SERVICES
SBI Life endorses customer satisfaction as one of its utmost growth parameters; this also helps it have an edge over competitors
Prompt and efficient services to customer through vast network of 808 offices across 29 states and seven union territories along with 43,864 CIFs at branches of its various bancassurance partners
Serious initiatives for online presence has led to sevenfold increase in the number of policies (from 13,008 customers in FY15 to 90,390 in FY17) issued through digital mode and customers paying their renewal premium (from 3,231 in FY15 to 35,771 in FY17)
Continuous efforts to cultivate customer relationships and improve customer satisfaction have surely helped sustain leadership amongst private life insurers in India
Best in class mis-selling ratio… Trend in grievance ratio…
1.2 0.6 (%) (%) 1.1 0.5 0.5 1.0 0.7 0.4 0.8 0.6 0.3 0.3 0.6 0.2 0.2 0.4
0.1 0.2
0.0 0.0 FY15 FY16 FY17 FY15 FY16 FY17
Customer focus has made SBI Life one of the most efficient players in industry
Source: Companies, Axis Securities 10 SBI Life Insurance Profit & Loss BANKS & FINANCIAL SERVICES
Policyholders’ Account Y/E March (Rs mn) FY17 FY18E FY19E FY20E Gross premium 210,151 261,481 332,196 419,534 -First Year Premium 62,072 81,315 104,083 129,063 -Renewal Premium 108,713 138,336 177,917 231,240 -Single Premium 39,366 41,830 50,196 59,231 Net premium (net of reinsurance) 208,525 259,389 329,538 416,178 Income from investments 92,950 109,155 131,295 158,584 Other income 1,301 1,496 1,690 1,876 Total income 302,775 370,040 462,524 576,638 Commission 7,833 10,089 12,925 16,284 Operating expenses 18,688 22,588 27,708 33,744 Operating profit 276,254 337,363 421,891 526,610 Net benefits paid 95,502 116,725 148,292 187,280 Change in reserves 172,410 210,629 261,396 325,600 Provision for tax 1,798 2,002 2,441 2,746 Surplus/ (Deficit) after Tax 6,544 8,007 9,762 10,984 Shareholders’ Account Y/E March (Rs mn) FY17 FY18E FY19E FY20E Transfer from policyholders' account 6,546 8,007 9,762 10,984 Income from investments 4,016 4,747 5,660 6,823 Other income 82 88 94 101 Total income 10,644 12,841 15,516 17,908 Ex-insurance expenses 275 303 318 334 Contribution to Policyholders' A/c 623 685 719 755 Profit before tax 9,746 11,854 14,479 16,819 Tax 199 356 724 841 Profit after tax 9,547 11,498 13,755 15,978 Source: Company, Axis Securities
11 SBI Life Insurance Balance sheet BANKS & FINANCIAL SERVICES
Y/E March (Rs mn) FY17 FY18E FY19E FY20E Sources of Funds 992,252 1,232,066 1,525,092 1,873,000 Shareholders' funds: 55,521 64,251 73,867 84,076 - Share Capital 10,000 10,000 10,000 10,000 - Reserve & Surplus 44,648 53,378 62,994 73,203 - Fair Value Change 873 873 873 873 Borrowings - - - - Deferred Tax Liability - - - - Policyholders' Funds 491,001 613,438 763,128 941,730 - Provision for Linked Liabilities 426,461 532,091 661,631 816,104 - Funds for discontinued policies 19,270 22,287 26,465 31,090 - Funds for Future Appropriation - - - -
Application of Funds 992,252 1,232,066 1,525,092 1,873,000 Investments/AUM 958,303 1,196,160 1,492,602 1,848,955 - Shareholders' 42,955 51,976 62,371 75,469 - Policyholders' 469,617 587,022 733,777 909,884 - Assets held against ULIPs 445,730 557,163 696,454 863,603 Loans 1,782 2,406 3,007 3,609 Fixed Assets 5,385 6,407 7,930 9,740 Net Current Assets 26,783 27,093 21,553 10,697 Source: Company, Axis Securities
12 SBI Life Insurance Ratios BANKS & FINANCIAL SERVICES
Y/E March FY17 FY18E FY19E FY20E Valuations: EPS (Rs) 9.5 11.5 13.8 16.0 BV (Rs) 55.5 64.3 73.9 84.1 EV (Rs bn) 165.4 198.6 236.9 282.1 P/E (x) 68.7 57.1 47.7 41.1 P/BV (x) 11.8 10.2 8.9 7.8 P/EV (x) 4.0 3.3 2.8 2.3 Dividend: DPS (Rs.) 1.5 2.3 3.4 4.8 Dividend yield (%) 0.2 0.4 0.5 0.7 Dividend payout (%) 18.9 24.1 30.1 36.1 Yields: Policy holder fund (%) 6.2 6.1 6.0 5.9 Share holders fund (%) 10.2 10.0 9.9 9.9 Capital: Solvency (x) 2.0 2.1 2.0 1.9 Franchisee Strength: Conservation ratio (%) 81.4 81.0 81.0 82.0 Persistency: 13th month (%) 81.1 81.6 82.5 83.1 25th month (%) 73.9 73.0 73.4 74.3 37th month (%) 67.4 66.5 65.7 66.1 49th month (%) 62.5 60.6 59.8 59.1 61st month (%) 67.2 56.2 54.6 53.8 Efficiency: VNB Margin (%) 15.4 16.0 16.4 16.8 Op. RoEV (%) 23.0 19.0 19.3 19.8 RoA (%) 1.1 1.1 1.0 1.0 RoE (%) 18.6 19.2 19.9 20.2 Commission ratio (%) 3.7 3.9 3.9 3.9 Insurance Expense ratio (%) 7.8 7.6 7.3 7.0 Expense ratio (%) 11.5 11.5 11.2 10.9 Growth: New Business Premium (%) 42.7 21.4 25.3 22.0 Net Earned Premium (%) 33.1 24.4 27.0 26.3 APE (%) 35.3 29.5 27.6 23.7 AUM (%) 23.1 24.8 24.8 23.9 PAT (%) 13.1 20.4 19.6 16.2
Source: Company, Axis Securities 13 CMP: Rs 1,199 | Target price: Rs 1,505 InterGlobe Aviation (Indigo) Upside: 26%
Best placed to fly
Best placed to capitalize on domestic passenger traffic growth: Indian aviation industry is the fastest growing in the world domestic passenger traffic posted CAGR of ~13% over last decade (grew at 17% YoY in CY17 YTD). Despite strong growth, air traffic penetration rates are one of the lowest. This offers long term growth potential. Airbus estimates India’s domestic traffic to post ~9% CAGR over 2017-36 – fastest globally
Large order book of ~450 aircrafts (includes order of 50 ATRs) to lend strong visibility for growth: Indigo’s capacity expansion plans though its sizeable orders from Airbus lends greater visibility vs. its peers who have a stated plan of keeping their fleet sizes similar to current levels until FY18 (Indigo’s order book > cumulative order book of its peers). With ASK growth of 20% expected in FY18, higher capacity will help it capture further market share (currently 40%).
Indigo consistently gaining market share Indigo’s expansion plans far exceeds its peers Current fleet Order book Indigo's fleet size Fleet size of other carriers Indigo 141 451 500 (no. of 45% aircrafts) Indigo's market share (RHS) Jet Airways + JetLite 113 74 400 Go Air 23 144 30% 300 Air India 118 18
200 Spicejet 55 151 15% Air Asia 10 12 100 Vistara 14 7 0 0%
Others 21 4
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY17 FY16 Total 4 95 861
Source: DGCA Source: Companies as on 30th June (Indigo as on 30th September)
14 InterGlobe Aviation (Indigo) …Continued AVIATION
Indigo’s key moat is its low operating cost Bulk orders help in negotiating significantly lower purchase prices for aircrafts which generate cash incentives – key driver for its cash flows and earnings Indigo’s key cost controls include (1) operating a no-frill Low cost Carrier (LCC) model (low operating cost; low fares and thus high load factors), (2) single-aircraft/ young fleet (low maintenance cost) and (3) lean balance sheet (due to operating leases of aircrafts) New fuel efficient A320neos (~15% cost savings) to further lower cost (fuel cost is ~40% of revenue)
Strong balance sheet: Indigo’s large aircraft orders coupled with its asset-light strategy of sale and lease back (operating leases) has helped the company maintain a healthy balance sheet (net cash of Rs 50 bn)
Lowest CASK ex-fuel vs peers… …has led Indigo to have the highest unit profitability (per ASK)
6.0 (Rs) Indigo Jet Airways Spicejet 1.0 (Rs) Indigo Jet Airways Spicejet 5.0 0.5 4.0
3.0 0.0
2.0 (0.5) 1.0 (1.0) 0.0 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Source: Companies, Axis Securities Source: Companies, Axis Securities
Lowest cost of operations makes Indigo least susceptible to fuel price changes
15 InterGlobe Aviation (Indigo) Domestic traffic CAGR of ~13% over last 10 years AVIATION
India passenger traffic reported strong growth over last decade Demand is growing at a higher pace than supply
International Passengers Domestic Passengers Total Domestic ASKs Total Domestic RPKs Load factor (RHS) 120 (mn) Domestic traffic grew at a CAGR of ~13% over last 10 years 140 As demand growing at higher pace 100% 100 (bn) 120 than supply load factors are improving 80 80% 100 60 80 60% 60 CAGR of 9% over 40 last 10 years 40% 40 20 International traffic grew CAGR of ~13% 20% at CAGR of ~9% 20 over last 10 years 0 0 0%
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
FY01 FY03 FY04 FY05 FY07 FY08 FY09 FY11 FY12 FY13 FY15 FY16 FY17 FY02 FY06 FY10 FY14 Source: DGCA, Axis Securities Source: DGCA, Axis Securities India has one of the lowest air travel penetration in the world
(domestic seats Developed countries Domestic passenger traffic has posted CAGR of Developing countries 5 per capita) ~13% over last 10 years, which includes rapid 4 growth of ~20% over the last 3 years India has significantly lower air 3 travel penetration compared to even some of the developing Supply growth has lagged demand growth resulting 2 countries in rise in load factor (increased from ~60% to ~85%) 1 0 Despite such growth, air traffic penetration rates in
India are significantly lower than other emerging
Italy
USA
India
Brazil
Spain
Japan
China Russia
Turkey markets, which offers long term growth potential
France
Mexico
Canada
Norway
Thailand
Australia
Malaysia
Germany
Indonesia
Colombia Philippines Source: CAPA Low penetration levels offer significant growth potential for India
16 Indian airline industry is the fastest growing in InterGlobe Aviation (Indigo) the world AVIATION
India to be the fastest growing economy globally Strong economic growth to drive passenger volumes
10% GDP growth over 2017-2022 GDP Multiplier for passenger growth In FY13, Kingfisher 2.6x @ Crude < USD 90 shut down, resulting 8% 12% 50% 1.4x @ Crude > USD 90 -115 a significant but 6% 10% temporary in decline 40% 4% 9/11 attacks in passenger traffic 30% 8% in the US 20% 2% 6% 10% 0% 4% Economic slowdown led 0%
2% by global -10% India
China financial crisis
MENA 0% -20%
and…
Advanced
economies
Developing…
FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY16 FY17 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
Latin America Latin
Emerging Emerging and
Emerging Emerging and
European UnionEuropean Developing Asia
Emerging Emerging market Real GDP growth Domestic Passengers growth (RHS)
Source: IMF, Axis Securities Source: DGCA, Bloomberg, Axis Securities
India is the fastest growing airline industry 10% RPK CAGR over 2017-2036 Domestic passenger air traffic in India is expected to 8% post CAGR of 9% over the next 20 years 6% Government has set a target to reach 300 mn domestic 4% passengers by 2022 and 500 mn by 2027 (up from 2% 870 mn in 2016-17) 0%
CIS With strong economic outlook, domestic passenger
India
Brazil
China Turkey
Mexico growth of 15-20% (GDP multiplier of 2.6x) should be
Africa Sub Sahara Sub
South Africa achievable in the mid term
Asia Asia emerging South America Source: Airbus 2017 Global Market Forecast (Flying by Numbers 2015-2034) Within the fast growing industry, LCCs are growing at a much faster pace than FSCs
17 InterGlobe Aviation (Indigo) LCCs have changed the face of aviation industry AVIATION
LCCs gaining market share Domestic market share trend
FSC market share LCC market share Indigo Jet Airways AirIndia Spicejet Go Air Kingfisher Others 80% 100% 16% 0.0% 70% 23% 20% 80% 28% 19% 19% 15% 12.3% 12.7% 60% 15% 13% 17% 16.1% 14.2% 50% 60% 10% 13% 17% 17% 15% 15% 18% 40% 15% 16% 22% 22% 40% 26% 24% 30% 26% 27% 28% 26% 20% 20% 37% 40% 27% 30% 34% 10% 12% 14% 18% 20% 0% 0% FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Source: Indian Railways, DGCA, Axis Securities Source: DGCA, Axis Securities
Reduction of costs is at the core of the low-cost business model, which aims to offer lower fares and eliminate some comfort and services that were traditionally offered
Most domestic travel in India is short haul and is ideal for a no-frill, LCC model
Since 2003, several LCCs have entered the Indian air travel market, stirring price competition through their low-cost business models that appeal to the price-conscious middle-income segment in India
LCCs’ share of the Indian air travel market increased to 67% in FY17 from 40% in FY10
LCC model has proved successful with price-sensitive Indian consumers
18 InterGlobe Aviation (Indigo) Indigo’s key moat is its low operating cost AVIATION
Comparison of cost structure of Indian airline operators
Average of last 5 years (Common-size) Average of last 5 years (per ASK) Healthy utilization levels of Indigo Indigo Jet Airways Sp icejet Indigo Jet Airways Sp icejet despite steady capacity addition Load factor (%) 81.4% 81.5% 77.8% 81.4% 81.5% 77.8% Utilization level (hours) 11.3 11.5 10.7 11.3 11.5 10.7 Ownership cost is lower vs. Jet Airways, as they own most of their Revenue 100.0% 100.0% 100.0% 3.72 4.48 3.60 fleet (vs. operating leases for Expenses Indigo), which is a capital- Fuel cost 40.3% 34.3% 40.6% 1.50 1.54 1.46 intensive strategy Fleet ownership cost 18.8% 21.8% 25.0% 0.70 0.98 0.90 Maintenance cost 3.2% 10.0% 11.1% 0.12 0.45 0.40 Airport charges 6.5% 8.3% 8.1% 0.24 0.37 0.29 Lowest for Indigo due to its Employee cost 9.1% 11.3% 9.9% 0.34 0.51 0.36 single-aircraft fleet strategy Selling & distribution cost 6.2% 9.5% 4.4% 0.23 0.43 0.16 Other operating cost 5.9% 15.0% 7.0% 0.22 0.67 0.25 Total expenses (before tax) 90.1% 110.3% 106.1% 3.35 4.94 3.82 Indigo has one of the lowest PBT 9.9% -10.3% -6.1% 0.37 (0.46) (0.22) operating costs due to its LCC PBT margin 9.9% -10.3% -6.1% 9.9% -10.3% -6.1% model, focus on domestic routes,
Source: Companies, Axis Securities young fleet, etc.
Indigo’s low cost is the key reason behind its consistent profitability, which differentiates it from other operators
19 InterGlobe Aviation (Indigo) Steady ramp up and lowest cost drive earnings AVIATION
Strong volume growth led by steady capacity addition Maintained healthy load factor despite cyclical downturns
ASK (Capacity) RPK (Volume) Load factor Average crude price (RHS) 100,000 88% 150 (mn) (USD/ bbl) 80,000 Median load factor of ~82% 120 84% 60,000 CAGR of 28% 90 80% 40,000 60 76% 20,000 30
0 72% 0 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E
Source: Company, Axis Securities Source: Company, Axis Securities
Has the lowest cost structure in the Industry Consistently profitable, even during high crude price regime
Indigo Spicejet Jet Airways EBITDAR Net profit Average crude price (RHS) 4.0 100 150 (Rs per ASK) (Rs bn) (USD/ bbl) 3.0 80 120 60 90 2.0 40 60 1.0 20 30
0.0 0 0 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E Source: Companies, Axis Securities Source: Company, Axis Securities Indigo is the only airline which has been consistently profitable despite cyclicality
20 InterGlobe Aviation (Indigo) Strong cash flows and consistent dividends AVIATION
Strong and consistent FCF generation… …has supported rich dividend payout Cash flow from operations FCF Dividends paid Dividend payout (% of FCFE) - RHS 50 (Rs bn) 20 80% (Rs bn) 40 Median payout of ~58% 16 60% 30 12 20 40% 8 10 20% 4 0 0 0% (10) FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E Source: Company, Axis Securities Source: Company, Axis Securities
Liability servicing is comfortable Healthy asset turn and return ratios
Effective net debt/ EBITDAR Rentals and interest coverage (RHS) Asset Turnover RoCE (RHS) 10 2.5 4.0 30% (x) (x) (x) (%) Median of 1.6x 8 2.0 25% 3.0 20% 6 1.5 2.0 15% 4 1.0 10% 2 Median of 4.8 years which is less than 0.5 1.0 the avg. lease tenure of ~7 years 5% 0 0.0 0.0 0% FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E Source: Company, Axis Securities Note: Net debt includes capitalized aircraft rental Source: Company, Axis Securities expense at 7x (average lease tenure is typically 7 years) Strong cash flows aid in liability servicing, high dividend payout
21 InterGlobe Aviation (Indigo) Valuation: BUY with TP of Rs 1,505 AVIATION
Indigo’s stock valuation At EV/ EBITDAR of 8.5x, Indigo would trade at premium to Particulars (Rs mn) (Rs) global profitable peers such as Ryan Air (8x), Air Arabia (8.4x) EBITDAR (FY20E) 108,072 and Allegiant Travel (6.3x) EV/ EBITDAR 8.5 EV 918,609 2,393 We believe Indigo deserves to trade at a premium as the Less: Net debt (FY20E) (37,499) (98) underlying passenger traffic growth for the industry is Less: Capitalized leases at 7x 378,492 986 significantly higher at CAGR of 9% over the next 20 years vs. Equity Value 577,616 1,505 Europe (4%), Middle East (6%) and US (2%) Source: Axis Securities
DCF sanity check: Our DCF (FCFE) based equity value is Rs 1,455; in line with our TP of Rs 1,505 Key assumptions in our 2-stage DCF approach . Cost of equity of 12% . 1st stage: FY19-38 . Terminal growth rate of 4% (beyond FY38)
22 Proven management track record and InterGlobe Aviation (Indigo) experienced promoters AVIATION
Name Designation Qualification and background
♦ He is a US citizen and holds a bachelor’s degree in mechanical engineering from the IIT, Kanpur and a MBA from the Wharton School, University of Pennsylvania. Promoter and Rakesh Gangwal ♦ He has more than 31 years of experience in the aviation industry. Non-executive Director ♦ Between 1984 and 1994, he held various positions at United Airlines before leaving as Senior Vice President. ♦ Between 1994-2007, he held leadership positions in Air France, US Airways and Worldspan Technologies Inc.
♦ He holds a degree in electrical engineering from University of Waterloo in Ontario, Canada. Promoter and Rahul Bhatia ♦ He was instrumental in formation of InterGlobe Enterprises (IGE) in 1989, an air transport management business. Non-executive Director ♦ He is a member of the board of directors of multiple companies, including various InterGlobe companies.
♦ He has the overall managerial and operational responsibility of the company. ♦ He holds a bachelor’s degree in history and a bachelor’s degree in law from the University of Delhi. President and Whole Aditya Ghosh ♦ He is a key member of the executive committee of the InterGlobe Group, which is responsible for the management Time Director of the IGE's various businesses, and a member of the executive committee which oversees the investment decisions of the InterGlobe Group.
♦ He holds a bachelor’s degree in law, a master’s degree in economics and a post-graduate diploma in business Chief Commercial Sanjay Kumar administration from Meerut University. Officer ♦ Previously, he worked at Air Sahara, Spicejet and Royal Airways.
Chief Aircraft ♦ He holds a Bachelor of Science degree from Bombay University, majoring in chemistry. Riyaz Haider Peer Acquisition and ♦ He is a member of the Institute of Chartered Accountants of India and the Institute of Chartered Financial Analysts. Mohamed Financing Officer ♦ Previously, he worked at Emirates Airlines.
♦ He holds a MBA from Cornell University and is a mathematics graduate from University of Mumbai. ♦ Prior to joining Indigo, he served as Corporate VP & Treasurer at Xerox Corp. based in Norwalk, USA. Rohit Philip Chief Financial Officer ♦ He had worked at United Airlines for 17 years where he was Senior VP, Corporate Strategy and Business Development.
Executive Vice President, ♦ He holds a bachelor of commerce degree from Delhi University and a post-graduate diploma in personnel Sanjeev Ramdas Customer Service and management and industrial relations from Young Men Christian Association. Operations Control ♦ He previously worked with Cambata Aviation Private Limited and InterGlobe Air Transport.
23 InterGlobe Aviation (Indigo) Company financials (Consolidated) AVIATION
Profit & loss (Rs mn) Balance sheet (Rs mn) Y/E March FY17 FY18E FY19E FY20E Y/E March FY17 FY18E FY19E FY20E Net sales 185,805 233,259 286,480 353,103 Paid-up capital 3,615 3,839 3,839 3,839 Other operating income - 1,481 1,490 811 Reserves & surplus 34,177 69,681 82,308 97,630 Total operating income 185,805 234,740 287,970 353,914 Net worth 37,792 73,520 86,147 101,469 Cost of goods sold (64,651) (86,229) (106,362) (131,700) Borrowing 25,962 31,667 45,852 51,756 Gross profit 121,154 148,511 181,608 222,215 Other non-current liabilities 41,278 38,218 37,145 37,452 Gross margin (%) 65.2 63.7 63.4 62.9 Total liabilities 105,032 143,405 169,144 190,677 Total operating expenses (99,722) (113,024) (137,732) (168,213) Gross fixed assets 54,998 64,703 84,593 104,682 EBITDA 21,433 35,487 43,877 54,001 Less: Depreciation (17,060) (22,404) (29,081) (37,557) EBITDA margin (%) 11.5 15.2 15.3 15.3 Net fixed assets 37,938 42,299 55,512 67,125 Depreciation (4,573) (5,345) (6,677) (8,476) Add: Capital WIP 252 252 252 252 EBIT 16,860 30,142 37,200 45,526 Total fixed assets 38,190 42,550 55,764 67,377 Net interest (3,308) (3,170) (4,264) (5,368) Other Investment 0 0 0 0 Other income 7,891 8,803 10,367 12,387 Inventory 1,632 2,164 3,301 4,047 Profit before tax 21,443 35,775 43,303 52,544 Debtors 1,587 2,597 3,961 4,857 Total taxation (4,852) (10,017) (12,125) (14,712) Cash & bank 83,460 125,840 146,745 169,175 Tax rate (%) 22.6 28.0 28.0 28.0 Loans & advances 4,141 4,141 4,141 4,141 Profit after tax 16,591 25,758 31,178 37,832 Current liabilities 47,065 56,977 67,856 82,009 Minorities - - - - Net current assets 47,399 81,411 93,937 103,856 Profit/ Loss associate co(s) - - - - Other non-current assets 19,443 19,443 19,443 19,443 Adjusted net profit 16,591 25,758 31,178 37,832 Total assets 105,032 143,405 169,144 190,677 Adj. PAT margin (%) 8.9 11.0 10.9 10.7 Net non-recurring items - - - - Reported net profit 16,591 25,758 31,178 37,832
Source: Company, Axis Securities
24 InterGlobe Aviation (Indigo) Company financials (Consolidated) AVIATION
Cash flow (Rs mn) Key ratios Y/E March FY17 FY18E FY19E FY20E Y/E March FY17 FY18E FY19E FY20E Profit before tax 21,443 35,775 43,303 52,544 OPERATIONAL Depreciation & Amortisation 4,573 5,345 6,677 8,476 FDEPS (Rs) 45.9 67.1 81.2 98.6 Chg in working capital 21,135 5,308 7,305 12,818 CEPS (Rs) 58.6 81.0 98.6 120.6 Cash flow from operations 37,821 30,778 39,057 52,107 DPS (Rs) 15.0 33.6 40.6 49.3
Capital expenditure 3,760 (9,705) (19,890) (20,089) Dividend payout ratio (%) 32.7 50.0 50.0 50.0 Cash flow from investing (30,379) (902) (9,523) (7,702) GROWTH Equity raised/ (repaid) 11 25,296 - - Net sales (%) 15.7 25.5 22.8 23.3 Debt raised/ (repaid) (6,850) 5,705 14,185 5,904 EBITDA (%) (31.3) 65.6 23.6 23.1 Dividend paid (6,526) (15,326) (18,551) (22,510) Adj net profit (%) (16.5) 55.2 21.0 21.3 Cash flow from financing (14,012) 12,505 (8,630) (21,974) FDEPS (%) (16.5) 46.2 21.0 21.3 Net chg in cash (6,570) 42,381 20,904 22,431 PERFORMANCE RoE (%) 59.1 46.3 39.1 40.3 RoCE (%) 25.4 31.4 30.4 32.2 Valuation ratios EFFICIENCY Y/E March FY17 FY18E FY19E FY20E Sales/ total assets (x) 1.3 1.3 1.3 1.4 PE (x) 24.7 16.9 13.9 11.5 Working capital/ sales (x) (0.2) (0.2) (0.2) (0.2) EV/ EBITDA (x) 16.4 9.6 7.6 5.9 Receivable days 3.1 4.1 5.0 5.0 EV/ Net sales (x) 1.9 1.5 1.2 0.9 Inventory days 3.6 4.0 4.9 4.9 PB (x) 10.8 5.9 5.0 4.3 Payable days 17.2 17.4 17.3 17.2 Dividend yield (%) 1.3 3.0 3.6 4.4 FINANCIAL STABILITY Free cash flow yield (%) 10.2 4.9 4.4 7.4 Total debt/ equity (x) 0.9 0.6 0.6 0.6 Source: Company, Axis Securities Net debt/ equity (x) (2.0) (1.7) (1.3) (1.3) Current ratio (x) 2.0 2.4 2.4 2.3 Interest cover (x) 5.1 9.5 8.7 8.5
25 CMP: Rs 1,355 | Target price: Rs 1,550 Endurance Technologies Upside: 14%
Ticks all boxes
Investment summary Endurance Technologies Ltd (ETL) ticks all the boxes of what we like in an auto component firm – (1) high economies of scale – given that it’s the largest 2W auto component player; (2) one-stop-shop for OEMs – given its strong presence in 4 key products; (3) diversified in terms of products/geography ; (4) consistently outperformed underlying industry – historically outgrown motorcycles by 800 bps; (4) low hanging fruits for further outperformance – inroads into relatively untapped OEMs (Hero/Honda); (5) structural increase in content per bike – going into new regulations (ABS/CBS) and premiumization; (6) highly profitable Europe business (~18% margin; 22% RoCE) – getting EV ready We see ETL as the best way to play 2Ws in India. Given its unmatched scale (revenue ~2x the next largest player in the 2W supply chain), strong R&D (~2x more than peers), and 4 key products under 1 roof (castings, suspension, transmission, and brakes), it’s a one-stop-shop for OEMs that anyway strive to consolidate their vendor base Our target price of Rs 1,550 values the company at 15x FY20 EV/EBITDA - a slight premium to its leading auto comp peers
Sustainable competitive advantage: Over FY10-17, ETL has outperformed the 2W industry by 400 bps and the motorcycle industry by 800 bps (a better representation of ETL’s revenue base). ETL’s revenue CAGR of 14% over FY10-17 is commendable given that its largest customer (Bajaj Auto at ~55% of India FY17 revenue) has posted only 4% volume CAGR over the same period We believe ETL can continue outpacing the industry growth over the next 3-5 years . Volume outperformance would be driven by market share gains, as it starts supplies to Hero and makes further inroads with Honda . Value outperformance would be driven by increase in content per vehicle on premiumization and upcoming safety regulations (ABS/CBS)
26 Attractive industry dynamics: Inroads with Hero ENDURANCE TECHNOLOGIES and Honda – addressable market up 60%! AUTO
HMSI – Plant-wise capacity (mn units)
Harayana Honda: 25% of 2W production; 13% of ETL’s India revenue Gujarat 1.6 ♦ ETL started business with Honda 2W (HMSI) with casting 1.8 (2005). Won business in suspension for Haryana and Karnataka plants in 2013 ♦ Selected as strategic supplier for Honda’s new Gujarat plant for suspension and casting; currently joint development on Rajasthan clutch and disc brake system for the same plant 1.2 Karnataka 1.8
Hero – Plant-wise capacity (mn units)
Hero: 35% of 2W production; <1% of ETL’s India revenue Gujarat ♦ ETL leveraged its R&D to position itself favorably with Hero 0.8 Gurgaon 2.0 post split. Successfully developed suspension for Maestro Edge Rajasthan scooter despite existing single source long-term suppliers 1.2 ♦ Selected as single source supplier for Hero’s new Gujarat plant – started regular supplies of suspension and casting on existing and new platforms. Now in final development stages Dharuhera of transmission (clutches for motorcycles, CVTs for scooters) 2.0 Haridwar 3.0
Post-split, Honda reduces dependence on Hero group vendors; while Hero prefers suppliers with strong R&D
Source: Company, Axis Securities 27 Supplying to all major 2W OEMs ENDURANCE TECHNOLOGIES (ex-TVS Motors) AUTO
Product-wise, customer-wise penetration Bajaj Auto Honda 2W Hero Royal Enfield TVS Motor Yam aha Production market share 16% 25% 33% 3% 14% 5% Contribution to ETL India revenue 48% 13% 1% 10% 0% 5%
Casting a a a a a Suspension a a a a a Transmission a a a a Brakes Source: Company, Axis Securities a a a = Supplies to start soon = Future potential to supply
ETL already had high market share with Bajaj Auto (>70%) and Royal Enfield (90-100%…recently started supplying brakes to RE; the only product not being supplied to them earlier)
Low hanging fruits were entry into Hero Motocorp and deeper inroads with Honda 2W:
ETL is now the largest supplier for suspension and castings to Honda’s Sanand (Gujarat) plant – the largest scooter plant for Honda
It is now the single source supplier for suspension products to Hero Motocorp’s Halol (Gujarat) plant
It has won new orders in transmission with both Hero & Honda – will start supplying from FY18
28 ENDURANCE TECHNOLOGIES Structural drivers for proprietary businesses AUTO
Even without market share gains, ETL’s India revenue likely to outperform underlying 2W industry volumes
Product Structural change Increase in content per bike
Before (Rs) After (Rs) (%)
Suspension:
Scooter front Shift from conventional shock absorber to front fork 550 1,100 100
>125cc Motorcycle rear Shift from conventional spring to mono shock absorber 700 1,000 43
<125cc Motorcycle rear Shift from hydraulic shock absorber to gas 575 750 30
High-end bikes Shift from conventional fork to inverted front fork 2,000 10,000 400
Brakes:
<125cc Mandatory CBS from April 2018/19 - 500 -
>125cc Mandatory ABS from April 2018/19 - 5,000 -
All 2Ws Shift from drum brake to disc brake post ABS/CBS 200 1,200 500
Transmission:
Scooters Rising share of scooters (CVT) vs. motorcycles 600 1,050 75
Motorcycles Rising share of Paper-based friction plates vs. Cork-based 100 150 50
Source: Company, Axis Securities
29 ENDURANCE TECHNOLOGIES Valuation methodology AUTO
Capital efficiency With increasing share of proprietary products (suspension, brakes & transmission) and aftermarket revenues, we expect ETL’s operating margin to structurally improve from current levels ETL has closed down plants with lower efficiency levels to improve overall profitability of the company. With strict capital policy (net debt to equity <0.5x), we expect ROCE to improve to 34% in FY20 from 21% currently
DCF sanity check We assume strong growth for FY20-23, driven by implementation of ABS/CBS and premiumization in the domestic 2W business Assuming a stable growth of 10% over DCF period and terminal value of 5%, discounted at WACC of 11.2% (cost of equity at 12.8%), DCF-based value comes to Rs 1,475/sh
30 ENDURANCE TECHNOLOGIES Company financials (Consolidated) AUTO
Profit & loss (Rs mn) Balance sheet (Rs mn) Y/E March FY17 FY18E FY19E FY20E Y/E March FY17 FY18E FY19E FY20E Net sales 54,639 62,799 74,324 96,702 Paid-up capital 1,407 1,407 1,407 1,407 Other operating income 1,100 1,256 1,435 1,640 Reserves & surplus 15,887 19,537 24,288 31,057 Total operating income 55,739 64,055 75,759 98,341 Net worth 17,293 20,943 25,694 32,463 Cost of goods sold (32,280) (36,990) (43,951) (58,273) Borrowing 6,793 5,802 4,776 3,943 Gross profit 23,459 27,065 31,808 40,068 Other non-current liabilities (182) (182) (182) (182) Gross margin (%) 42.9 43.1 42.8 41.4 Total liabilities 23,905 26,564 30,289 36,225 Total operating expenses (16,066) (18,169) (21,022) (25,964) Gross fixed assets 20,052 24,002 27,702 31,402 EBITDA 7,393 8,896 10,787 14,104 Less: Depreciation (5,070) (8,043) (11,275) (14,821) EBITDA margin (%) 13.5 14.2 14.5 14.6 Net fixed assets 14,982 15,958 16,427 16,581 Depreciation (2,905) (2,974) (3,231) (3,546) Add: Capital WIP 438 438 438 438 EBIT 4,488 5,922 7,555 10,558 Total fixed assets 15,420 16,397 16,865 17,019 Net interest (323) (285) (227) (181) Total Investment 327 525 1,774 3,397 Other income 481 547 623 709 Inventory 4,438 5,206 6,070 7,650 Profit before tax 4,646 6,184 7,951 11,086 Debtors 7,609 7,837 9,193 11,737 Total taxation (1,343) (2,041) (2,624) (3,658) Cash & bank 2,199 3,637 4,711 7,010 Tax rate (%) 28.9 33.0 33.0 33.0 Loans & advances - - - - Profit after tax 3,303 4,144 5,327 7,427 Current liabilities 11,005 12,310 13,988 16,683 Minorities - - - - Net current assets 6,802 8,287 10,295 14,454 Profit/ Loss associate co(s) - - - - Other non-current assets 1,355 1,355 1,355 1,355 Adjusted net profit 3,303 4,144 5,327 7,427 Total assets 23,905 26,564 30,289 36,225 Adj. PAT margin (%) 6.0 6.6 7.2 7.7 Net non-recurring items - - - - Reported net profit 3,303 4,144 5,327 7,427
Source: Company, Axis Securities
31 ENDURANCE TECHNOLOGIES Company financials (Consolidated) AUTO
Cash flow (Rs mn) Key ratios Y/E March FY17 FY18E FY19E FY20E Y/E March FY17 FY18E FY19E FY20E Profit before tax 4,646 6,184 7,951 11,086 OPERATIONAL Depreciation & Amortisation 2,905 2,974 3,231 3,546 FDEPS (Rs) 23.5 29.5 37.9 52.8 Chg in working capital (890) (47) (934) (1,860) CEPS (Rs) 44.1 50.6 60.8 78.0 Cash flow from operations 5,410 6,808 7,229 8,586 DPS (Rs) 2.5 3.0 3.5 -
Capital expenditure (3,804) (3,950) (3,700) (3,700) Dividend payout ratio (%) 10.6 10.2 9.2 - Cash flow from investing (3,607) (3,601) (4,326) (4,614) GROWTH Equity raised/ (repaid) - - - - Net sales (%) 6.6 14.9 18.4 30.1 Debt raised/ (repaid) (900) (991) (1,026) (833) EBITDA (%) 8.8 20.3 21.3 30.8 Dividend paid - - - - Adj net profit (%) 10.3 25.5 28.6 39.4 Cash flow from financing (1,262) (1,770) (1,829) (1,673) FDEPS (%) 10.3 25.5 28.6 39.4 Net chg in cash 541 1,438 1,074 2,299 PERFORMANCE RoE (%) 20.8 21.7 22.8 25.5 RoCE (%) 21.4 25.6 28.8 33.9 Valuation ratios EFFICIENCY Y/E March FY17 FY18E FY19E FY20E Asset turnover (x) 2.6 2.8 3.2 3.9 PE (x) 55.3 44.1 34.3 24.6 Sales/ total assets (x) 1.6 1.7 1.8 2.0 EV/ EBITDA (x) 25.3 20.7 16.8 12.5 Working capital/ sales (x) 0.1 0.1 0.1 0.1 EV/ Net sales (x) 3.4 2.9 2.4 1.8 Receivable days 50.8 45.5 45.1 44.3 PB (x) 10.6 8.7 7.1 5.6 Inventory days 33.5 34.4 34.1 33.1 Dividend yield (%) 0.2 0.2 0.3 - Payable days 65.2 64.4 62.8 59.1 Free cash flow yield (%) 0.0 0.0 0.0 0.0 FINANCIAL STABILITY Source: Company, Axis Securities Total debt/ equity (x) 0.4 0.3 0.2 0.1 Net debt/ equity (x) 0.3 0.1 (0.1) (0.2) Current ratio (x) 1.6 1.7 1.7 1.9 Interest cover (x) 13.9 20.8 33.3 58.3
32 CMP: Rs 568 | Target price: Rs 648 Godrej Agrovet Upside: 14%
One of its kind We rarely see companies where all factors align, viz: (1) secular business with deep moat; (2) attractive industry dynamics; (3) strong corporate governance; and (4) excellent management team under a great leader. Godrej Agrovet (GAVL) is one such opportunity.
What makes Agrovet a valuable company? GAVL to continue its multi-year secular growth; tremendous growth potential in each segment as each business segment GAVL operates in is either under-penetrated (animal feed) or in high growth areas (dairy, poultry, agri-inputs) Leader in animal feed with customer stickiness. 5-7x growth opportunity as industry shifts from non-compound to compound feed. Benefits from strong brand, R&D, sales on cash & carry and pan-India distribution Agri Inputs: A renewed focus led by 3 pronged strategy to drive 2.5x revenue growth over FY17-21. Strategy revolves around (1) launch of rice herbicide; (2) in-license agreements; and (3) acquisition-led growth (Astec). GAVL aims to be among the top 10 agri-chem companies in India over the next 3 years 1/3rd of India’s palm oil plantations under GAVL’s command -- a restricted monopoly. Steady cash generating business which can organically compound revenue at over 15% for the next decade as (1) 2/3rd of GAVL’s ~62,000 hectares mature and (2) annual addition of 3-5,000 hectares. R&D initiatives have ensured 20% gross, PBT margin Dairy: 20% revenue CAGR as GAVL focuses on (1) higher proportion of revenue from value added products, and (2) deepening its geographic reach Strong financials: 40%+ PAT CAGR over past 7 years, minimal working capital requirement, RoCE of ~20%, high asset turn (~5x). We expect 20% PAT CAGR over FY17-21 Initiate coverage with BUY rating and TP of Rs 648
Great business segments + strong management + robust financials
33 Godrej Agrovet Agrovet to emulate GCPL’s success MIDCAPS
GCPL displayed ~25% PAT CAGR and ~40% M-Cap Godrej Agrovet well placed to report 20% earnings CAGR CAGR since listing in FY01 over next decade
Rs 660 bn Rs 15 bn
Rs 13 bn
FY01 FY17 FY17 FY27
Over the past decade and half, growth has been Unlike GCPL, given the immense domestic opportunity, we don’t driven by: foresee GAVL going international. Growth to be led by: M&A across verticals 3x3 strategy Vertical integration - Farm to Fork company Premiumization Margin expansion through R&D initiatives Demand drivers in place as enumerated below: Cross pollination of products Under-penetrated animal feed mkt (~15% is compound feed) Domestic demand Agri-inputs: In-licensing to drive growth Palm oil: Only 1/3rd of 62,000 hectares mature Godrej Tyson: Shift from live bird to more hygienic processed chicken along with demand for ready-to-eat food Dairy: Geographic expansion and higher revenue from value added products
34 Godrej Agrovet Portfolio of star businesses... MIDCAPS
Animal feed Godrej Tyson Agri inputs Palm oil plantation Dairy
♦ Leader with 8-10% ♦ One of the largest ♦ Niche molecules in ♦ Restricted monopoly ♦ Agrovet recently market share players in herbicides and where GAVL has increased its stake ♦ Strong distribution processed chicken, plant growth access to ~1/3rd of in Creamline Dairy Business ♦ Consistent quality frozen foods regulators India's palm oil to 51% (26% positioning along with a trusted ♦ Major supplier to plantations earlier) and acquire brand name QSRs like KFC, ♦ Annual addition of management control leading to customer McDonalds ~5,000 hectares ♦ Lucrative industry stickiness
♦ To maintain market ♦ Demand for frozen ♦ Astec integration, ♦ Revenue to increase ♦ Geographic leadership as foods to explode as in-licensing as plantations expansion and farmers turn yield lifestyle change and opportunities and mature and yield increase the share conscious income increase new product improves of value-added Future ♦ Extensive use of ♦ Shift in consumer launches to drive ♦ R&D to convert fiber products prospects R&D to improve preferences to growth into biomass which ♦ GILAC* to use its yield and also processed broiler ♦ ~Rs 20 bn of will improve EBIT vast FMCG lower cost meat potential revenue margin experience to drive over next 5 years growth
Revenue EBIT Revenue EBIT Revenue EBIT Revenue EBIT Revenue EBIT FY17 (Rs mn) 26,208 1,657 4,460 301 7,647 1,692 5,066 1,026 10,099 375 FY20E (Rs mn) 32,098 2,183 7,707 555 12,113 2,544 7,664 1,380 14,024 631 FY22E (Rs mn) 37,439 2,621 11,098 832 17,443 3,663 12,300 2,214 18,547 1,020
FY17 RoCE 55% 42% 59% 8%
…each having the potential of being a USD 1 bn entity over the next 5 years
Note: * GILAC: Godrej Industries and associate companies 35 Godrej Agrovet Vision 2022 MIDCAPS
Rs 100 bn revenue by FY22 (20% CAGR ) ♦ Animal Feed: ~15% revenue CAGR ♦ Dairy: Geographic expansion and led by 8-10% p.a. volume growth, Animal Feed Agri-Inputs Palm Oil Tyson Dairy greater focus on marketing and 120 as yield conscious farmers shift to branding to drive 15-20% growth compound feed coupled with 90 ♦ Poultry: As disposable incomes increase in price realization increase, preference shifts towards ♦ Agri Inputs: 3x increase in revenue 60 organized players and frozen foods on (1) growth in current business, ♦ Palm Oil Plantation: Growth to 30 (2) launch of rice herbicide, (3) in- continue on yearly addition of new licensed molecules and (4) growth acreage and maturity of ~66% 0 in Astec as it adds manufacturing juvenile plantations which will start capabilities FY17 Animal Agri- Palm Oil Tyson Dairy FY22E Feed Inputs to yield fruit
20% EBIT CAGR over FY17-22E to help GAVL achieve Rs 6 bn PAT by FY22
Animal Feed Agri-Inputs Palm Oil Tyson Dairy ♦ Dairy: Higher proportion of value- ♦ Animal Feed: Margin 12,500 added products and better improvement due to (Rs mn) management practices to improve 10,000 uptrading margin ♦ GAVL’s R&D ability to use 7,500 ♦ Poultry: Higher proportion of packaged unconventional and cheap 5,000 foods RMs ♦ Palm Oil Plantation: Fixed contribution 2,500 ♦ Agri Inputs: Steady margin margin business. Using bio mass as a 0 value-added product can aid additional FY17 Animal Agri- Palm Oil Tyson Dairy FY22E margin expansion Feed Inputs We estimate FY22 consolidated PAT of ~Rs 6 bn. 30x 1-yr fwd multiple implies m-cap of ~Rs 180 bn in FY21
36 Godrej Agrovet Transforming from good to great MIDCAPS
FY10-16: Animal feed was the dominant business coupled with steady revenue stream from palm oil division FY16-21: All businesses transforming into stars
Animal feed Animal feed Agri-inputs Dairy Godrej Tyson Agri-inputs Godrej Tyson
Palm oil Palm oil plantation plantation
Until recently (prior to Astec acquisition), GAVL was a GAVL: 20% PAT CAGR over FY17-21E marginal player in agri-inputs. Other divisions viz: Godrej Tyson and Creamline Dairy were option values Revenue (Rs bn) Adj. PAT (Rs bn) Agri input division had a few niche molecules and was not 80,000 6,000 5,000 a dominant player in its industry unlike animal feed and oil 60,000 plantations division. With the acquisition of Astec, in- 4,000 licensing fructifying, and probable launch of bispyribac 40,000 3,000 sodium, we expect the overall agri segment to report 2,000 revenue of Rs 20 bn by 2020-21 20,000 1,000 Acquisition of majority stake in Creamline Dairy and 0 0
renewed focus on Godrej Tyson (both consumer facing
FY10 FY11 FY13 FY14 FY15 FY16 FY12 FY17
FY18E FY19E FY21E and high valuation businesses), GAVL is on the path to FY20E become a farm to fork company
37 Godrej Agrovet Company financials (Consolidated) MIDCAPS
Profit & loss (Rs mn) Balance sheet (Rs mn) Y/E March FY17 FY18E FY19E FY20E Y/E March FY17 FY18E FY19E FY20E Net sales 49,264 52,679 59,030 66,202 Paid-up capital 1,851 1,851 1,851 1,851 Other operating income - - - - Reserves & surplus 8,237 10,925 14,185 18,186 Total operating income 49,264 52,679 59,030 66,202 Net worth 10,088 12,776 16,036 20,037 Cost of goods sold (37,961) (40,563) (45,453) (50,975) Borrowing 6,634 6,334 6,834 4,334 Gross profit 11,303 12,116 13,577 15,226 Other non-current liabilities 1,596 1,596 1,596 1,596 Gross margin (%) 22.9 23.0 23.0 23.0 Total liabilities 20,859 23,497 27,557 29,458 Total operating expenses (6,922) (7,323) (7,773) (8,471) Gross fixed assets 14,109 16,609 19,609 21,609 EBITDA 4,380 4,793 5,804 6,755 Less: Depreciation (1,329) (2,326) (3,502) (4,799) EBITDA margin (%) 8.9 9.1 9.8 10.2 Net fixed assets 12,779 14,283 16,106 16,810 Depreciation (747) (997) (1,177) (1,297) Add: Capital WIP 504 500 500 500 EBIT 3,634 3,796 4,628 5,458 Total fixed assets 13,284 14,783 16,606 17,310 Net interest (863) (713) (799) (714) Total Investment 1,801 1,800 1,800 1,800 Other income 499 400 400 400 Inventory 7,381 8,335 9,340 10,474 Profit before tax 3,269 3,483 4,228 5,144 Debtors 5,220 5,773 6,469 7,255 Total taxation (991) (1,045) (1,269) (1,543) Cash & bank 623 723 1,012 1,307 Tax rate (%) 30.3 30.0 30.0 30.0 Loans & advances 405 433 485 544 Profit after tax 2,278 2,438 2,960 3,601 Current liabilities 11,218 11,996 12,141 13,626 Minorities 187 250 300 400 Net current assets 3,825 4,965 7,202 8,399 Profit/ Loss associate co(s) - - - - Other non-current assets 1,949 1,949 1,949 1,949 Adjusted net profit 2,465 2,688 3,260 4,001 Total assets 20,859 23,497 27,557 29,458 Adj. PAT margin (%) 5.0 5.1 5.5 6.0 Net non-recurring items 270 - - - Reported net profit 2,735 2,688 3,260 4,001
Source: Company, Axis Securities
38 Godrej Agrovet Company financials (Consolidated) MIDCAPS
Cash flow (Rs mn) Key ratios Y/E March FY17 FY18E FY19E FY20E Y/E March FY17 FY18E FY19E FY20E Profit before tax 3,269 3,483 4,228 5,144 OPERATIONAL Depreciation & Amortisation 747 997 1,177 1,297 FDEPS (Rs) 13.3 14.5 17.6 21.6 Chg in working capital 5,145 (758) (1,608) (495) CEPS (Rs) 18.8 19.9 24.0 28.6 Cash flow from operations 8,973 3,790 3,728 5,517 DPS (Rs) - - - -
Capital expenditure (1,949) (2,504) (3,000) (2,000) Dividend payout ratio (%) - - - - Cash flow from investing (868) (2,503) (3,000) (2,000) GROWTH Equity raised/ (repaid) 8 - - - Net sales (%) 31.2 6.9 12.1 12.1 Debt raised/ (repaid) (7,027) (300) 500 (2,500) EBITDA (%) 47.7 9.4 21.1 16.4 Dividend paid - - - - Adj net profit (%) 48.2 9.0 21.3 22.7 Cash flow from financing (7,881) (1,013) (299) (3,214) FDEPS (%) (25.9) 9.0 21.3 22.7 Net chg in cash 224 274 429 303 PERFORMANCE RoE (%) 27.5 23.5 22.6 22.2 RoCE (%) 17.9 18.9 19.7 20.6 Valuation ratios EFFICIENCY Y/E March FY17 FY18E FY19E FY20E Asset turnover (x) 2.3 2.6 2.6 2.6 PE (x) 41.5 38.1 31.4 25.6 Sales/ total assets (x) 1.6 1.6 1.6 1.6 EV/ EBITDA (x) 26.2 23.9 19.8 16.7 Working capital/ sales (x) 0.1 0.1 0.1 0.1 EV/ Net sales (x) 2.3 2.2 2.0 1.7 Receivable days 38.7 40.0 40.0 40.0 PB (x) 10.2 8.0 6.4 5.1 Inventory days 60.0 63.5 64.0 64.3 Dividend yield (%) - - - - Payable days 89.1 89.1 80.8 81.2 Free cash flow yield (%) 0.1 0.0 0.0 0.0 FINANCIAL STABILITY Source: Company, Axis Securities Total debt/ equity (x) 0.6 0.4 0.4 0.2 Net debt/ equity (x) 0.5 0.4 0.3 0.1 Current ratio (x) 1.3 1.4 1.6 1.6 Interest cover (x) 4.2 5.3 5.8 7.6
39 Disclaimer
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40 Disclaimer
DEFINITION OF RATINGS Ratings Expected absolute returns over 12 months BUY More than 10% HOLD Between 10% and -10%
Disclaimer: SELL Less than -10%
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