INDIA DAILY
February 15, 2017 India 14-Feb 1-day 1-mo 3-mo Sensex 28,339 (0.0) 4.0 7.7 Nifty 8,792 (0.1) 4.7 8.4 Contents Global/Regional indices Dow Jones 20,504 0.5 3.1 8.4 Special Reports Nasdaq Composite 5,783 0.3 3.7 9.6 Strategy FTSE 7,269 (0.1) (0.9) 7.0 Nikkei 19,436 1.0 0.8 10.0 Strategy: Day 2 of KIE's Chasing Growth 2017 Hang Seng 23,703 (0.0) 3.3 6.2 Daily Alerts KOSPI 2,080 0.2 0.1 5.7 Value traded – India Results Cash (NSE+BSE) 224 260 123 Sun Pharmaceuticals: Work in progress Derivatives (NSE) 3,166 2,813 4,776 Deri. open interest 3,232 2,806 2,814 Tata Motors: JLR disappoints as incentives increase sequentially
Vedanta: Earnings on an improving trajectory Forex/money market
Adani Port and SEZ: Lone ranger Change, basis points
14-Feb 1-day 1-mo 3-mo Britannia Industries: Healthy and ahead-of-estimates quarter Rs/US$ 66.8 (5) (132) (96)
PFC: Concerns remain 10yr govt bond, % 7.3 4 53 30
Net investment (US$ mn) Petronet LNG: Strong volumes offset by weak spot margins 13-Feb MTD CYTD (1,170 FIIs 47 2,903 DLF: 3QFY17 (first cut) - still caught in the debt trap ) MFs (2) 882 6,951 Container Corporation: Some pull-back; more challenges ahead Top movers
Mahanagar Gas: In-line results; rich valuation Change, %
Best performers 14-Feb 1-day 1-mo 3-mo Jindal Steel and Power: A good quarter JPA IN Equity 13.0 (1.1) 32.0 56.6 Results, Change in Reco IDEA IN Equity 109.9 2.5 59.7 54.0 IOCL IN Equity 374.4 (1.4) 6.5 31.0 CESC: Positives in the price TTAN IN Equity 428.4 0.0 19.5 30.0 Economy alerts DLFU IN Equity 147.5 (0.2) 18.8 28.9 Worst performers Economy: Uptrend in WPI continues DIVI IN Equity 724.5 (2.1) (2.9) (37.6)
RCOM IN Equity 34.5 2.8 10.0 (12.5)
CRG IN Equity 66.3 (0.8) 3.0 (12.1)
DRRD IN Equity 2941.5 (0.9) (1.3) (11.2)
ARBP IN Equity 658.4 (0.5) (6.5) (10.3)
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL. INDIA Strategy FEBRUARY 15, 2017 NEW RELEASE BSE-30: 28,339
Day 2 of KIE’s Chasing Growth 2017 took a hard look at growth drivers in several sectors, current political events and what they portend and the impact of a changing global order on India. Keynotes for the day were delivered by Rahul Bharti, Ajay Piramal, Swaminathan Aiyar, Rajdeep Sardesai, Pratap Bhanu Mehta, Viren Rasquinha and Hormazd Sorabjee.
Day 2 – February 14 companies at KIE’s Chasing Growth conference
1. ACC 21. Info Edge
2. Adani Transmission 22. JSW Energy
3. Ashoka Buildcon 23. Mahindra & Mahindra
4. Axis Bank 24. Marico
5. Balkrishna Industries 25. Maruti Suzuki India
6. Bharat Petroleum Corporation 26. Navin Fluorine
7. Bharti Airtel 27. Oberoi Realty
8. Century Plyboards 28. Oil India
9. CESC 29. ONGC
10. Cholamandalam Investment & Finance Company 30. Piramal Enterprises
11. Dalmia Bharat 31. PNB Housing Finance
12. DCB Bank 32. Punjab National Bank
13. Global Consumer Products 33. Sadbhav Infrastructure
14. HCL Technologies 34. Sobha
15. HDFC 35. SRF
16. HDFC Bank 36. Tata Consultancy Services
17. HDFC Standard Life Insurance 37. TeamLease Services
18. Hexaware Technologies 38. Techno Electric
Sanjeev Prasad 19. Indo Count Industries 39. Tribhovandas Bhimji Zaveri
20. Indoco Remedies 40. Wipro
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Strategy India
SPEAKER SESSIONS: GOLCONDA, TRIDENT
AJAY PIRAMAL: TRANSFORMING CONSISTENTLY. DELIVERING VALUE
Chairman, Key takeaways Piramal Enterprises Delivering value is the core of the group. Mr Piramal highlighted the successful acquisition and sale of its generic pharmaceutical business. The Piramal Group acquired an MNC pharmaceutical company (ranked 48 in 1988) manufacturing generics and sold the same in 2010 (ranked 3) to Abbot after a successful transition as the management realized that the industry was peaking in terms of pricing and valuations along with rising price controls.
The group distributed some of the cash from the sale of the generic business and reinvested some of it in other businesses where the management was confident that it could create value. In 2011, the company decided to get into two new areas—(1) financial services with a start in real estate financing and (2) information management. The company has created significant value since 1998 (28% CAGR).
Financial services. (1) Real estate financing business has evolved over the past few years from pure equity financing in the initial stages. It covers debt, mezzanine and promoter funding now. Gross NPLs currently stands at 0.5% and RoE on the lending business is 25%. (2) Piramal Group invested in Shriram Group, which marked the entry of Piramal Group into the retail space. Shriram has 11 mn customers currently.
Mr Piramal sees his role as the chief risk officer. The risk and legal department reports directly to the board, which has resulted in better risk control for the group. The Group has several partnerships with CPPIB, Bain for real estate investment, distressed debt.
Pharmaceuticals business. The focus is on production and delivery of specialty products and services after the sale of the branded generic business in 2010 to Abbot. The Group has spent ₹30 bn on seven acquisitions in the past two years. The focus is on complex products (difficult to make or difficult to market). For example, the inhaler anesthesia is a complex segment and the Group is ranked #3 in the world. The pharmaceutical business has high focus on quality and has had no issues with the FDA in the past several years. In the domestic segment, the company has grown its OTC segment and now this business has grown to be ranked #6 versus 40 in 2010.
Data and information management. They acquired a US company in 2012. The company analyses data related to the healthcare segment. The Group may list this business in the US in the future.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 3 India Strategy
SWAMINATHAN AIYAR: INIDA’S CHALLENGES IN A CHANGING WORLD ORDER
Economic Analyst and Key takeaways Consulting Editor, Falling productivity. The big mega-trend is falling productivity, especially in the western The Economic Times world, which in turn is leading to rising discontent. This has resulted in stagnant wages and job losses and has exploded into ‘Brexit’ and ‘Trump’. This has translated into very different economic and politics. At the economic level, we are seeing rising anti- globalization and protectionism. At the political level, the ‘center’ parties are in trouble and people are moving to extreme left and right. 20th century liberalization is no longer benefiting all. This won’t restore productivity though.
Challenges on productivity. US productivity is down from 1.7% per year to 0.7% per year over the past few decades. The same problem exists in EU and Japan and could extend to China also. There are no fresh inventions such as electricity and internal combustion engine that are driving productivity. Productivity peaked in 1972 and there was a brief revival in 1990s and early 2000s driven by communication and internet progress.
The growth after that has been led by (1) consumption boom due to rapid growth in credit in the 2000s and (2) rising asset prices led by loose monetary policies of global central banks. The big challenge is that the number of ‘losers’ of globalization and trade has become quite large now and social security programs in the western world cannot take care of the ‘losers’.
It is interesting to know that the world as a whole has become more equal with the rise of incomes in China, India and the rest of the developed world. However, the paradox is that there is rising inequality in each country.
Tighter environment norms led by climate change concerns have also contributed to delays in investment.
Where India stands today. GDP was slowing down even before demonetization. For FY2017, the growth may be around 6%, which would be much lower than current estimates. The GDP estimates of IMF and RBI do not capture the negative impact of demonetization on the SMEs and casual labor segment. For FY2018, growth may recover but the impact of demonetization may linger into FY2018.
Private investment is low despite more FDI and more public investment cannot offset it. Also, bank credit is falling and stressed loans stand at 20% in PSU banks. There is no resolution so far and haircuts are politically impossible. The bank capitalization amount of ₹100 bn for FY2018 is quite low. The power sector is still a mess and low tariffs have made the sector fundamentally unviable. PLFs have fallen to below 60%.
Inflation is down to below 4% but the RBI is worried about sticky core inflation. The pause in the rate cuts by the RBI is being interpreted as the decline in interest rate cuts is largely over and the support from monetary policy may be largely over.
Central fiscal deficit is falling but state deficits are rising and the combined deficit of 6- 7% of GDP is among the highest in the world. India debt-to-GDP ratio at 65% is also very high.
Exports have fallen 19 months after January 2015. Current account deficit is 1% of GDP but exporters are worried about a strong rupee. Invisibles, FDI, FII inflows have driven REER up 10%. The formal employment is nor rising at all with maximum 150,000 job creation per year compared to 20 mn people reaching the employment age every year.
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Is India in a sweet spot? Some people may want to look at it that way. However, in the ‘new normal’ of -3.3% global GDP growth, the fastest-growing country cannot grow beyond 6-7%. India will struggle to grow beyond 6-7% given all the challenges.
Among the positive factors, GST is a major reform but there would be glitches. The states may not have incentive to implement GST fast as they are guaranteed full compensation by the central government. Government tried to shift food subsidy to cash transfers in Chandigarh and Puducherry but the results were quite discouraging. The projects have been re-launched given poor financial infrastructure even in the cities.
Financial savings rate is low, which could change. Mutual funds are seeing large flows that can support the market even if the economy is not doing too well. Demographic dividend will play out over a longer period (1.6 workers/dependents in India at peak versus 2.3 in China and 2.1 in Korea). However, there is a problem of (1) women opting out of the workforce and (2) there are more kids in college, which will push back the dividend demographic story. Lastly, most graduates are unemployable.
Key challenges—pervasive ‘incrementalism’ and globalization. Mr Aiyar’s worry is that the government will go back to incremental policies and doesn’t have the stomach for radical reforms such as privatization of PSUs. India will face challenges from the growing anti-globalization. India’s trade-to-GDP ratio is quite high at 40%, which is above China’s incidentally. Also, India will face the brunt of US’s changed trade policy with issues around H1B visas, patents and high agriculture tariffs.
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RAJDEEP SARDESAI: INDIA 2017: POLITICAL PULSE AND PROGNOSIS
Senior Journalist and Key takeaways Consulting Editor, Key state elections. Mr Sardesai discussed the likely outcomes of the ongoing state India Today Group elections, the results of which will come out on March 11.
Punjab is quite fascinating. For the Congress, it desperately needs one major North Indian state. The position of Rahul Gandhi is at stake. For the AAP, it needs one more state to consolidate its position. The party-wise vote and seat-wise share shows Congress will form the government with 60-65 seats out of 117 seats. There is 78% voter turnout with 83% turnout in Malwa with 69 seats; AAP is quite strong in Malwa region. The anti-Akali vote may go to the Congress. In a ‘normal’ election, Congress should win. However, in a ‘silent wave’ election, AAP will win. It is possible that Punjab may head for a hung assembly.
In Uttarakhand, BJP should win based on the poll results, which show a strong lead for the BJP. In Goa, it is a key state for BJP to send out the right message in a state with a large minority population. Congress needs to recover in a traditionally strong state. BJP may win 22-25 seats out of 40. AAP will erode Congress vote. There may be a hung assembly with BJP emerging the largest party.
UP is important for BJP to consolidate its position ahead of the 2019 general elections and also get closer to its goal of a majority in the Rajya Sabha by 2018. It is important for Congress to get a toe-hold in UP to stay relevant in 2019 and also for Rahul Gandhi’s future.
BJP may win 178-188 out of 404 seats. Congress + SP will win 169-179 seats. In the first round of polls in UP, BJP may win 28 out of 70 seats. The X-factors are the Muslim vote, which is 18% of the total vote. If the vote goes to Congress + SP, then that combination may win. The other issue is the youth vote, which numbers 141 mn voters or 24% of the total voters. The other factors are the (1) performance of Congress and whether it could pull back SP’s performance and (2) demonetization, but the latter is not a big issue in UP.
UP could see a hung assembly. Akhilesh has a good image but the organization is not strong on the ground. BJP has a strong presence in the state and will be single-largest party in the state. However, it will suffer from (1) lack of a chief ministerial candidate and (2) excessive focus on old-style ‘Hindu’ politics.
National elections in 2019. Mr Sardesai gave his prognosis for the 2019 national elections.
In 12 months’ time, Mr Modi will eye 2019 re-election. Mr Modi will be less inclined to take risks unless he loses UP by a wide margin. If BJP wins Gujarat and UP then it would be difficult to stop the ‘Modi’ juggernaut. Mr Modi will continue to see the national agenda. He will push for one big pro-poor scheme, which could possibly be Universal Basic Income. At this point in time, it looks BJP will still win the 2019 national elections with at least 275 seats.
Mr Modi is not as strong as he was nationally in 2014 but he will benefit from the TINA factor. Economic recovery holds the key to Modi’s invincibility. Low inflation will work in his favor but lack of jobs and slow agrarian & manufacturing growth will work against him. Congress is in disarray and regional parties have limited base out of their respective states. Some sort of a ‘Maha-Gatbandhan’ model like Bihar may stop Mr Modi but there is no clear leader to this grouping. Mr Modi’s popularity is higher than that of BJP. So, he remains in pole position to retain power.
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PRATAP BHANU MEHTA: DEMOCRACY’S FAULT LINES
President, Centre for Key takeaways Policy Research India is the least volatile experiment in emerging markets. India has a very stable political environment. The country has been quite stable politically versus several other emerging market countries that have had more volatile and even violent experiences. Most Indian political parties have similar economic policies and governments through the decades have more or less followed similar macroeconomic policies.
Emerging trends are different though versus what happened in the 1990s/2000s. Two things were expected from India’s liberalization process—(1) increasing role of the private sector in the economy with the transition of the economy to well-regulated markets from a crony socialist system; India took a detour via a crony capitalist system and (2) independent private sector without major linkages to the state.
(1) The role of the state is increasing in markets though even in the western world and voters want assurance that a government is in charge of the economy. (2) The social capital of Indian business is diminishing as the economy and its participants are not seeing the big benefits of economic growth. (3) Big Indian capitalism benefited disproportionately from the economy—cheap credit and resources being the most visible ones. One of the reasons for the NPA problem not getting resolved is the fear that any haircut on bad loans will be seen as a deal between big business and the government. In the process, the government will face political criticism.
The problems with Indian capitalism.
. Relationship between Indian capitalism and state. The Indian capitalism is losing legitimacy as it is not comfortable with the idea of proper regulations. It may not also be relevant for politicians as it no longer provides for funds for elections. There is also an issue between Indian capitalism and the government. It is possible that Mr Modi does not see Indian capitalism as delivering the jobs that is important for him from a political perspective. Thus, it is possible that Mr Modi may become more pro-poor for his political gains.
. Relationship between informal and formal economy. The other big trend that India has to grapple is the transition of the informal economy to the formal economy. India has to think through a proper path to formalization. Demonetization may have given this an unnecessary push, which may create challenges for the informal economy. The entry barriers to participating in the economy may go up too much for informal players to stay relevant in the economy.
. Social immobility. India has underinvested in education and healthcare. Indian public universities are also losing their relevance. Even in the US, this is a big problem as education has actually become an architect of inequality rather than a catalyst for equality in society. Elite universities are ‘reproducing’ social inequality.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 7 India Strategy
VIREN RASQUINHA: YES, WE CAN
CEO, Key takeaways Olympic Gold Quest Preparing for crunch times. It is important for everybody to prepare for that one big moment and it requires several thousands of hours of practice to produce the right outcome at the right time. Viren gave two examples from his hockey career that inspired him to take up the challenge of preparing Indians for Olympics. He has played 180 international matches for India in hockey but couldn’t achieve his dream of getting an Olympic medal. Also, India has had a poor sporting history. India has 1.2 bn people but won two medals at the Rio Olympics. Hungary with 10 mn people won 15 medals including eight gold medals.
Indian sport needs more heroes. Almost all of India’s non-cricket sports icons are women. According to Viren, women will probably do better if they are provided the same facilities and training.
Challenges. (1) Coaching. Coaching is a big problem in India. Indian coaches are underpaid and of average quality. Most of India’s international teams have foreign coaches. (2) Infrastructure. Infrastructure is another problem in India. The club in Stuttgart where Viren played for one year after his retirement from international hockey has six astro-turf fields while Mumbai has one. (3) Sports Science. The lack of sports scientists and doctors is another big issue. (4) Sports federations. The quality of sports federations in India is another big issue. There are 66 recognized sports federations in India. The ethics, electoral norms are quite pathetic in these organizations. (5) Attitudes. Sports are still treated as an extracurricular activity.
OGQ. OGQ has supported five out of the eight Olympic medal winners. The firm provides (1) medical/diet/injury rehabilitation, (2) funding for taking part in international tournaments and (3) world class training/coaching/equipment. The group is involved with six individual sports. Viren’s guiding philosophy for life is “the greatest pleasure in life is to do something that people say you cannot do”.
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HORMAZD SORABJEE: WHEELS: INDIA 2020
Editor, Autocar India Key takeaways
Current state of the industry and the future state. The potential of the market is huge. Demand is skewed at the bottom-end of the market but margins are thin. Almost no one is making profits. Infrastructure is still a big bottleneck but is changing. Lastly, barriers to entry are still high.
Automatic penetration is growing thanks to proliferation of low-cost AMT. MPVs are losing appeal. Crossover body styles are becoming a differentiator. Diesel is no longer the preferred fuel in many segments.
The Indian market will be third-largest market by 2020. Government of India aims to make automobiles manufacturing the main driver of its ‘Make in India’ initiative. India will be a low-margin product. All segments will grow but SUVS sill see maximum growth. Semi-autonomous driving will come in faster than we think. Policies and regulatory environment will be volatile in the short term, stability expected after 2020.
Key segments are (1) hatchback; becoming more SUV-like, (2) compact sedan; not build to global standards, (3) compact SUVs split into two segments—sub-four meter and over- four meter; SUV mix of styling, road presence and space and practicality gives it unbeatable appeal; OEMs focusing on above-four meter compact SUVS, which works in other markets too and (4) compact MPVs; utilitarian character makes it popular with fleet operators.
India customers’ preference. Top-priority issues for Indian customers are (1) styling, (2) fuel economy & ownership costs, (3 performance and (4) features and connectivity. Medium-priority issues are NVH, ride comfort and interior space. Low-priority issues are safety and ride & handling.
Core business drivers. Personal mobility is still a privilege and not a basic right. The government sees the industry as a tool for the rich; successive governments have made it the whipping boy. Taxes are quite high and this will not change with GST. Tougher regulations will push up the costs of the car.
Car of 2020. The new car will have to be some sort of an SUV, crossover as customers are showing distinct preference for SUVs. April 2020 will see the introduction of BS VI and 2020 will also see the implement of Paris Climate Agreement. The Bharat New Vehicle Safety Vehicle Program mandates all cars will have to meet certain safety standards and this will come into play by October 2017.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 9 India Strategy
COMPANIES
ADANI TRANSMISSION: FEBRUARY 14, 2017
Key takeaways
Adani Transmission is the largest private sector player in the transmission sector with 5,447 ckt km of operating transmission assets, 3,521 ckt km of transmission assets under acquisition and 1,927 ckt km of transmission assets under construction.
ATL is looking to be a 20,000 ckt km transmission assets company with assets worth Rs500 bn by FY2021.
ATL has a mix of assets under the cost-plus tariff regime as well as the competitively bid route.
ATL’s operating assets earned a revenue of Rs20 bn in FY2016 with EBITDA margin of 85- 90%.
ATLs existing assets have operated at over 99% availability, comfortably above the 98% prescribed under regulations.
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ASHOKA BUILDCON: FEBRUARY 14, 2017
Key takeaways
Strong revenue growth guidance for FY2018 on healthy backlog. The management has guided for 20-25% revenue growth for FY2018 on the back of strong order backlog and low share of slow-moving orders. The company is targeting to win additional orders worth ~₹20 bn in 4QFY17 (₹10 bn each in EPC and HAM projects, not much in T&D). The company will also participate in 3,000 km road awards pipeline by MSRDC for select projects (barring trans-harbor link and coastal roads for lack of qualification) and may put bids worth more than ₹10 bn. Overall EBITDA margins would eventually improve to 12.5- 13% as per the management.
Valuation for SBI-Macquarie’s stake may be much higher than 12% IRR. The company expressed confidence that as it searches for a replacement investor for the SBIMacquarie stake, the valuation sought for the stake may be much higher than the one implied by a committed 12% IRR to SBI-Macquarie. If such an attempt fails, then secondary options such as InvIT or IPO may be considered. The consortium has an equity investment of ₹7.9 bn in ACL.
Large benefit may accrue from MCLR-linked interest rates. The company has recently refinanced outstanding debt on several projects linked to the MCLR that has an annual reset date in the month of May every year. In the upcoming reset, the company expects an average rate reduction of ~60 bps to less than 9.5% given that several banks have reduced MCLR by 60-75 bps. Such a reduction can provide large savings on interest expense for the company.
No clarity on compensation for toll suspension post demonetization. The management highlighted that NHAI has proposed to pay highway toll operators ~₹9.2 bn in total as compensation for the suspension of toll from Nov 9, 2016 to Dec 2, 2016 due to demonetization. Out of this quantum, Ashoka Buildcon has claimed ₹400 mn as cash compensation for the entire portfolio of ACL and ₹300 mn of interest. However, the company mentioned that the fund release requires cabinet approval and NHAI has stressed on the extension of concession agreement in the cabinet note circulated. Thus the final decision on mode of payment is yet unknown. However, the management expressed preference for getting cash components to help infrastructure companies manage the cash flows.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 11 India Strategy
BALKRISHNA INDURTRIES: FEBRUARY 14, 2017
Key takeaways
The company was reasonably positive on volume recovery going ahead as there are early signs of recovery in mining and construction segments. Volume growth for the company in US has particular improved over the past few months led aided by the launch of new products in the mining segment. Demand from OEM segment is also picking up well; supplies to Caterpillar have started and will ramp up further over the next few quarters.
The US regulators have found no evidence of dumping by BKT in its preliminary determination, but have imposed a countervailing duty of 5.4% on BKT’s OTR tires. This will impact EBITDA margin by 70-100 bps going ahead.
Over the medium term, the management believes that sustainable level of EBITDA margin range for the company would be 25-29%.
In the Indian market, the company has around 60-70 distributors and is largely focused in Northern states currently. The company will expand its presence in southern and central regions and will likely have a pan India presence within the next one year.
BKT’s products are priced around 20% lower as compared to Tier 1 players such as Michelin, Bridgestone, etc. and around 5-7% lower as compared to other players. BKT has around 5% market share currently and the share can increase to around 8% based on full utilization of existing capacity.
Given strong operating cash flows and limited capex requirements, FCF generation will be quite strong over the next 2-3 years. The company will pay off entire debt in next 1-1.5 years and the decision of increase in dividend payout ratio would be taken in due course by the Board of Directors.
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BPCL: FEBRUARY 14, 2017
Key takeaways
Gradual improvement in margins on auto fuels. BPCL management expects a gradual increase in margins on auto fuels led by (1) implementation of dynamic pricing mechanism at a wider scale, which has already helped them gain incremental margins on 10p/liter on diesel and 25p/liter on gasoline and (2) improvement in product mix led by increasing share of branded premium fuels. The company indicated that the share of branded fuels have increased to 8% for gasoline post realignment of excise duties by the government a year ago; although it is still lower than 15% share across both fuels achieved a few years ago and thus, has the scope to grow meaningfully.
Minor delays in ramp-up of Kochi expansion project. BPCL management indicated minor delays in ramp-up schedule of Kochi expansion project with full commissioning now expected by April-May instead of 4QFY17. The company expects expanded capacity to operate at 80% utilization in FY2018 and contribute US$1.5/bbl of incremental gains across entire crude throughput post stabilization.
MDR charges and digital discounts. BPCL (and other OMCs) are trying to finalize mechanism with banks and the government to recover MDR charges on payments via debit cards and discounts on digital transactions and are currently bearing the incremental costs pertaining to the same.
US$25-30 mn of contribution from Russian upstream assets. The company expects US$100 mn of dividends, US$40 mn of capex and US$25-30 mn of net cash profits annually from upstream assets acquired in Russia over the next 2-3 years until production from new fields stabilizes and capex reduces.
Delay in Mozambique development. The company acknowledged delays in the development of Area 1 block in Mozambique, as it awaits (1) certain approvals from Mozambique government, (2) financial closure and (3) finalization of gas sales agreements. The consortium has signed non-binding MoUs, with a pricing formula linked to crude oil and Henry Hub gas prices, for 8 mtpa of LNG volumes with customers in Asia. Negotiations are currently underway to convert these MoUs to long-term contracts; the consortium will keep aside 4 mtpa of capacity for spot markets or short-term contracts. The capital expenditure is expected to be lower in the current pricing environment and the first gas production is expected to start by 2022.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 13 India Strategy
BHARTI AIRTEL: FEBRUARY 14, 2017
Key takeaways
Africa strategy. The company’s philosophy is to be present in only those markets where they are either number one or two, case in point is Bangladesh where Bharti decided to merge with Axiata as they were not among the top two. Bharti could look at following the same strategy in Africa as well.
Africa business performance. Airtel’s performance in Africa has been improving substantially over the past few quarters despite macro headwinds. Over the past two years, Airtel has improved financial performance while also doing well in terms of deleveraging the balance sheet.
Consolidation in the industry. The company sees the industry evolving into a 3+1 structure. Telenor is up for sale and they have put a complete cap on investments. Tata is making large losses. Once the industry gets shaped into the 3+1 structure, the company believes that pricing discipline would increase and sanity would come into the market.
Idea-Vodafone merger. The company believes that the Idea-Vodafone combine may not be a 1+1=2 situation, as there would be significant overlaps especially from a network perspective. Moreover, the combined entity would need to shed down spectrum and revenue market share in order to become complaint from a regulatory perspective. And hence, the combination would be beneficial for other players in the industry, especially Bharti.
Unlimited bundled pricing plan. These are not really denting ARPUs too much currently. In the long term also, the company does not believe these would be ARPU dilutive, as incremental usage would take care of dilution in realizations.
Capex guidance. Although the company would give formal capex guidance after the end of the current fiscal, capex spends are expected to go down if one were to use the project LEAP guidance; 60% of the budgeted spending has already been done. And hence the US$2.5 bn run rate seen currently might go down closer to US$2 bn.
War on waste savings. The company believes that there is still some juice left to take out and hence there are cost savings to be had. However, the incremental impact might not be as visible as before because of the current rather tumultuous environment in the industry.
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CENTURY PLYBOARDS: FEBRUARY 14, 2017
Key takeaways
Demand environment. The Company expects the current 10-15% growth should continue, 25%+ growth will come when macro demand recovers. Demonetization has not had a huge impacted currently, although procurement has suffered a bit.
Price hike by the unorganized segment. No price hike has been taken by any of the players because of the current environment.
GST impact. (1) Post GST the unorganized segment would have to pay taxes, to that extent price hikes might need to be taken by this segment thereby increasing competiveness of the organized segment. Century ply’s pricing is currently 60% higher than unbranded which might come down to 25-28% post GST, (2) also, logistics will change; the company currently has about 32 warehouses which will come down once GST comes into effect and (3) the company also believes that they would need to increase manufacturing as well to cater to increase in demand.
Unorganized segment contribution. The organized segment currently has lesser than 15% market share in terms of volume. Currently close to 3,200 out of 3,400 don’t pay taxes at all, with GST coming in a lot of relatively non-serious players will exit the market.
MDF and particle board. India is learning to use MDF and particle board, the company believes that the two segments should grow 15-20% which however will cannibalize the cheapest quality of plywood. The company is in the process of developing the ecosystem for the same.
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CESC: FEBRUARY 14, 2017
Key takeaways
CESC expects the Chandrapur plant to achieve 50% PLF, with sale of 100 MW to Tamil Nadu and 170 MW to Noida. It highlighted that sale of 34 MW to Noida has already commenced.
CESC has signed the Distribution Franchisee Agreement (DFA) for both Kota and Bharatpur on 17th June 2016 for distribution and supply of electricity for a term of 20 years each. The two distribution circles have revenue potential of Rs7.5 bn with a peak load of 240 MW.
Spencer saw sales increase from Rs. 1623/sq. ft per month in 3QFY16 to Rs1714/ sq. ft per month in 3QFY17 with store level EBITDA of Rs121 sq. ft per month
Spencer’s opened five stores in 3QFY17 and is scheduled to open one more store in 4QFY17.
16 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India
CHOLAMANDALAM: FEBRUARY 14 2017
Key takeaways
Cholamandalam expects 15-20% growth in vehicle loans but slowdown in LAP. The CV business will be back on track (pre-November levels) by March though it is not clear how strong the CV cycle is. MSME and home loans are new business segments. The company has also started trip credit, which can be a large business over a period of time. The average credit here is ₹0.15 mn. The loader will service the loans and hence risk is low.
The biggest concern in CVs is the ban on older vehicles (10 year+ loans CVs). This has lesser impact on Chola as compared to some of the other NBFCs.
Chola has taken over a company called ‘Biodata converter’. This company is engaged in identifying freight demand and supply and matching the same. This is done through the GPRS system and hence and can be done very optimally than done in the past. There is large funding in this segment from the unorganized sectors.
According to the company, the impact of GST may not be very significant. This is because of the fact that saving in time and consequent overcapacity in the system may not be significant. There may be some uncertainly in the interim.
The impact of emission norms is a bit tricky. Near-term sales may pick up but it may lead to weakness in later months. Thus, strong sales in the initial months may not necessarily indicate anything on the underlying strength/weakness in the system.
Tractor portfolio NPLs is higher than other segments – about 5% as compared to 3.5% in overall vehicle finance business.
In LAP, the company has seen higher pain in higher ticket and DSA sourced loans. The company operates out of 120 cities; it plans to add 20 cities. As such, ticket size will go down.
Cost-to-asset ratio is reported at 3.7%; the company has committed to reduce this ratio. Cost of recoveries and slowdown in LAP has pushed expenses in last nine months. Technology implementation has also been a bit slower than expected.
Recovery process in three segments (1) delinquency in first 18 month – this is covered by sales team, (2) a monitoring team in case early delinquencies are high and (3) a team that handles chronic files.
Tier I CAR is current at 13.7%; the company is comfortable on capitalization front if growth is about 17-18%. It may look at issuance at FY2018.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 17 India Strategy
DALMIA BHARAT: FEBRUARY 14, 2017
Key takeaways
Volume growth ahead of peers’. In 9MFY17, Dalmia’s volumes increased 20% yoy compared to ~2.8% for the industry; in 3QFY17 Dalmia’s volumes increased by 20% yoy despite a marginal decline in industry volumes. The demand in south markets has grown strongly at ~15% while east was flat and North East had seen some decline in 3QFY17. The demand as of now is subdued including for February. The company expects South markets to grow by 7-8%, North by 6-7% and East by 5-6%.
Market share. Dalmia has a market share of ~8% in south markets, 15% in east and ~21% in north-east. The company’s premium brand DSP has about 8-9% market share in the east and has seen strong acceptance by customers. Of the total trade sales in the east, the share of DSP will be higher at 16%. DSP commands good premium in the market due to its good quality, packaging, etc.
Lead distance. The company’s average lead distance in 3QFY17 was ~300 kms and this is not expected to increase. The cement-to-clinker ratio is at 1.75X.
Pet—coke usage. The company buys imported pet-coke from Saudi Arabia and domestic from Mangalore. It also procures some high ash coke which is economical. A large portion of its fuel requirement is met through imported pet-coke (~64%), while ~10% was procured from domestic sources in last quarter. The company has been able to keep its pet-coke purchase costs lower than market rates over last few quarters due to good sourcing strategies by their procurement and technical team.
High effective tax rates. The current tax rates for the consolidated entity is higher as few of their subsidiaries in north–east are still making losses at PBT levels. This does not get offset for tax purposes with the parent’s tax liability. Once corporate restructuring takes place, these anomalies will be taken care of. Besides tax savings, the company also expects overhead cost savings and other synergies from restructuring.
Debt repayment. The company repaid gross debt of Rs6 bn from Rs88.3 bn in March 2016 to Rs82.4 bn in December 2016. Net-debt declined by Rs3 bn over this period to Rs57 bn. The company continues to focus on debt reduction.
18 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India
DCB BANK: FEBRUARY 14, 2017
Key takeaways
Growth: The management indicated that there are no major concerns on growth and it would work towards growing the loan portfolio at current levels of ~25-30% CAGR. (1) The bank has been looking at building a granular portfolio in the retail/SME segment. The focus continues on small ticket lending and it is not too excited on large ticket loans in the retail or corporate segment. (2) The majority of their customer segment is in the self- employed segment which gives it better pricing power.
Cost-income: (1) The focus would be to complete branch expansion as per its stated policy. (2) Performance has been broadly closer to expectations and hence the cost- income ratio should not see any major negative outcomes. (3) The approach towards branch expansion remains the same and would look to have a mix of asset and liability products led model. Given the size and customer profile the asset mix has a higher favor. (4) The break-even timelines is not deviating from initial expectation across most branches which is giving comfort for pursuing its current strategy (5) Regionally, there is wide variance across branches with the South showing higher preference for lending while North has a higher share of deposits and West/Central/East have a mix of both. East/Central provides the critical PSL loans for the bank. (5) The bank is working towards keeping NIM at close to current levels but its guidance is lower ~25-30bps. There was a lot of pressure in select products such as LAP but most of this competition is at the higher end of ticket sizes.
Others: (1) The management was quite pleased with the bank’s performance on demonetization. There was a lot of effort spent on the ground to the field staff that ensured that employees understand their responsibilities and duties. (2) Frontline staff attrition remains a bit of an issue but this is not too different from the sector. The bank continues to look at innovative hiring that helps in faster engagement with newer customers. (3) Broad targets of branch managers are dependent on CASA, fees and assets but tweaked towards branch locations. (4) The bank would look to raise capital over the next few quarters with no defined timelines.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 19 India Strategy
GLOBAL CONSUMER PRODUCTS: FEBRUARY 14, 2017
Key takeaways
Product portfolio. The company is engaged into 4 main categories – (1) chocolates with the brand Luvit (present in both molded and wafer segment), (2) beverages with brand Cheerios (present in all 3 packaging formats; the brand as 3X pulp content versus other comparable brands), (3) household insecticides with the brand DND (key differentiating factor is a LV machine with built-in fan – this gives 5X efficacy versus other brands; the company has built the fan mechanism internally and patented it) and (4) personal care with ayurvedic brand Ved Rasa (premium product). Excluding Ved Rasa (currently South based), all the other three brands have already been launched pan-India. Combined market size potential of the four categories stands at ₹150 bn+ and 40-50% of the market is unorganized.
Funding. The company received initial investment of US$80 mn from two key investors Goldman Sachs and Mitsui Japan (US$55 mn upfront, balance is available as a draw down). The company has already used US$30 mn so far and will take another couple of years to use the balance as it grows. However, it continues to explore inorganic route of expansion which may accelerate usage of funds.
Financials. In its first full year of operations the company has generated US$15-20 mn revenues and is targeting to double this over next 2-3 years. It derives ~60% of its revenues currently from chocolates.
Core strategy. (1) The company is largely built as a synthetic startup; however, it has system/processes of a large company and governance/technological capabilities are comparable to larger peers, (2) the company has positioned all of its brands in the mid-premium segment targeting largely millennials and (3) its A&SP strategy remains aggressive; the company’s SOV to SOM (targeted) ratio is 5X from day 1 itself.
Infrastructure. It has 600-700 employees, a distribution network of 150,000 outlets (direct reach; total reach would be ~30% higher) and asset-light manufacturing setup (bulk of manufacturing is outsourced; however, formulation and R&D is done in-house).
20 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India
HCL TECHNOLOGIES: FEBRUARY 14, 2017
Key takeaways
HCLT intends to build product revenue stream, a core growth strategy. It is attempting this through buyout of IPs with ready client base in areas of strength such as Engineering and R&D services (ERD). It has entered into three IP licensing partnerships with IBM in the past 6-9 months:
. Deal details. HCLT has done three IP licensing partnerships with IBM in 9MFY17 for a consideration of US$555 mn. As per these partnerships, (1) IBM retains the IPs but grants HCLT rights for modernization and enhancement of IPs, (2) HCLT gets revenue share in existing license fees as well as future license fees of the IP, (3) HCLT will take over several employees of IBM as a part of the deal; at the outset IBM sales team will continue to sell these IP licenses but in future HCLT sales team may also carry out sales, (4) At current run rate, HCLT’s share in license fees of the three IPs is about US$160 mn, (5) HCLT management indicated that this partnership would be EBIT accretive suggesting that its EBIT margin on US$160 mn of revenues from these three partnerships would be more than 20%, (6) HCLT will make incremental investments for enhancement and modernization of IP, (7) HCLT will amortize the deal consideration of US$555 mn over 15 years.
. Opportunities. HCLT management indicated that besides revenue share in existing license fee stream of the associated IPs, it has exclusive rights to provide IT services around it. That said, it looks like services opportunity is not meaningful and the big opportunity is potential to enhance the scope of IPs and modernize it to significantly increase revenue stream. All incremental investments in the IP would be made by HCLT. IBM retains IPs, will not make any incremental investments, and will participate in upside in event of successful modernization/enhancement of IP and subsequent expansion in license fee revenue stream.
. Risks. HCLT’s base case scenario assumes that existing IP license fee revenues remain flat for 15 years (i.e. its revenue share of US$160 mn/year stays flat for 15 years). HCLT’s IRR calculations are based on this base case. Upside of HCLT hinges on its success in enhancing revenues of IPs. The key risk in our view is shrinkage in the existing license fee revenue stream in event of any technological disruption.
Guidance. HCLT management reiterated its guidance of c/c revenue growth of 13%; it implies US$ revenue growth guidance of about of 10-12% at Dec 31, 2016 exchange rates. This guidance included about US$200 mn of inorganic revenues (3.2% growth from inorganic contribution). In addition to this guidance, the manage expects 0.6-1% growth in FY2017 from acquisitions announced after Sep 30, 2016 and not included in the earlier guidance (Geometric, Butler America Aerospace acquisition and second and third licensing deals with IBM); it implies inorganic revenues of about US$37-62 mn in 4QFY17. We note that organic c/c revenue growth would be about 9.5% in FY2017E.
The management indicated that acquisitions and IP partnership remain core part of its growth strategy. We note that HCLT has acquired eight companies in the past 18 months in addition to the three IP buyouts (cumulative investment of more than US$1 bn) . Majority of these acquisitions are in engineering services space— Geometric (US$195 mn), Butler America Aerospace (US$85 mn), P2P (US$ 10 mn) and C2SIS (US$ 2 mn).
IMS growth (yoy) has slowed down partly due to high base post Volvo deal. The management expects steady incremental revenues from IMS even as growth could be lower than historical growth rate of 25%+.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 21 India Strategy
HDFC LTD.: FEBRUARY 14, 2017
Key takeaways
According to HDFC, the impact of demonetization is much lower than expected. Initial reaction was that real estate prices will come down, but real estate developers have decided that they will not cut rates; the cash component in these transactions will go down.
In 3QFY17, the lease rental discounting business picked up. Blackstone picked 10% in a project of Raheja. GIC-DLF deal is also in the news. The NBFC will come in to finance till the REIT takes over. The trend is broadly encouraging more commercial investment and hence is positive for NBFCs.
New business inflows to retail business were back in Jan (just about 10% below peak). The number of enquires have increased significantly, thus it would be fair to assume that 90% of the business is back. However, 4QFY17 growth may be a bit of challenge as the base was high; 4QFY16 was one of the strongest quarters. As such, overall growth for 4Q may be weak for HDFC and the entire housing finance system.
Re-pricing of liabilities has helped HDFC to increase its spread by 15 bps qoq to 2.46% in 3QFY17. This supported the company to cut its lending rates on the entire book by 15 bps.
RBI rates were kept unchanged last week; this will mean that there will not be any home loan rate cut triggered as a consequence of reduction in home loan rates. Thus, counter- intuitively this may be positive for the housing finance sector.
HDFC Bank provides 0.95% spread for HDFC. The bank will provide parameters for the pool like vintage of one year etc. The pool is evaluated on credit and KYC basis. HDFC retains 10% in the pool on a pari passu basis. In the past, the company earned spread of 1.35% but provided first loss of 7% to the pool.
HDFC has increased focus on small branches and on the self-employed segment. The company will increase conversion of service centers into branches. Recent branches are Laudhiana, Kanpur, Madurai and Bhopal. There are various channels of lending viz. (1) builder lending and contacts from these builders, (2) HDFC Bank, (3) other DSAs including HDFC sales and (4) builder desk. The company has 6,000 employees of which 1,000 are in financial services (like sale of insurance) in the sales subsidiary.
The budget announced several sops to housing finance. Apart from PMAY (subsidy on low-ticket housing), there are lower cost lines of funding as well (rate lower by about 1%). Infrastructure status means that they get 80 IA benefits on Income Tax and provide access to more funding. For example: these companies will get access to masala bonds without RBI approval. The details of the scheme are not yet available. The announcement of the scheme will possibly be done after the election code of conduct get over.
22 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India
HDFC BANK: FEBRUARY 14, 2017
Key takeaways
Performance update on branches: The bank has been doing well in execution of its branches in tier-2/3 centers. The bank has opened nearly all its products (assets and liabilities) in this market as it has built reasonable amount of intelligence having spent time/effort in the past few years. Market opportunity appears to be fairly large and the bank is reasonably confident to grow above industry average for an extended period in time. RoRWA is not materially different in these markets as compared to urban areas. Branch expansion would increase in 4QFY17 but the focus is more towards improving productivity as compared to expansion of branches.
Growth: (1) There is not much of a change in strategy between retail and corporate loans. The bank is driving towards a major change in its internal approach towards retail products. (2) There is greater emphasis on average revenue/customer as compared to product approach. This would result in higher engagement with the customer, especially within their high net worth individuals. (3) The steady increase in the share of personal loans or credit card receivables is not too much of a concern. There are no internal ceilings but the bank looks at early warning signals to understand growth opportunity. Currently there are no alarming trends in the portfolio. (4) Demonetization has resulted in higher competition in the shorter end of the corporate loan market. However, as liquidity comes off, one could possibly see an improvement in pricing environment of corporate loans. The large exposure guidelines is creating a bit of difficulty as a few borrowers are actively looking to raise capital in the bond market given their ceilings within the banking system. (5) With Ind-AS accounting starting soon, the management has indicated that it would be an appropriate time to look at loans and credit substitutes together rather than separately. (6) The SME/business banking book would continue to see higher growth given the opportunity that demonetization has provided which gives greater insight to their business as compared to the financials provided by these borrowers in earlier years.
Others: (1) The management indicated that cost-income ratio has the scope for further improvement. It has taken a call that the push towards digitization should not co-exist with heavy investments in infrastructure (physical or human). Hence, the recent reduction in headcount merely represents natural attrition rather than forced attrition. (2) Discussions on new life insurance partners continue and one can expect an announcement on this topic quite soon. The timelines and contours of the deal are still in the making. (3) BHIM/UPI is starting to bring in better payment mechanisms. There appears to be a lot of push from the government to public banks to increase acceptance levels of the product. By design, this product should be able to replace competition. (4) No major concerns on impairment across all product portfolios.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 23 India Strategy
HEXAWARE: FEBRUARY 14, 2017
Key takeaways
Financial performance under the new CEO. HCLT has grown faster than almost all tier I and tier II IT companies over the past two years on organic basis. Constant currency revenue growth of 9% in CY2016 was perhaps weaker as against very high expectations at the beginning of the year but it was still higher than peers. From profitability perspective as well, margin performance was better than most peers especially in mid-tier IT. The company has seen improvement in client metrics and progression in client buckets. A net new client (new logo added in the past 2 years or so) would soon enter top 10 account demonstrating ability to add and mine new clients.
Growth outlook and guidance. Hexaware has guided 10-12% c/c revenue growth in CY2017 after factoring about 1.5% impact on account of decision of a top-5 client to insource some work. The management is confident about the guidance and has been cautious given it has resumed guidance policy after 5 years. Hexaware expects growth to be well-balanced across onsite and offshore and across top-10 and non-top-10 accounts. Hexaware’s healthcare portfolio has limited exposure to segments that will be impacted by likely changes of the new administration in US. There is some headwind in insurance vertical in US following Brexit. 1QCY17 will be slightly weak due to extended furloughs while 2Q and 3Q will be strong quarters.
Hexaware is comfortable of maintaining flat margins in CY2017. A near-term headwind would be conscious drop in utilization from peak (unsustainable) level of 4QCY17
Hexaware’s strategy of Shrink IT and Grow digital has been consistent over the past couple of years. Hexaware is focusing on building strength and capabilities in two digital service offerings (1) User experience expertise, and (2) Cloud market access. The former would be through organic route whereas it is scouting acquisitions for building latter capabilities.
Capital allocation. Recent reduction in quarterly dividend to Rs1/share was to conserve cash for acquisitions. If not used on acquisitions it will consider returning excess cash to shareholders from time to time. In case of acquisitions, company would raise debt, use internal accruals and raise equity in the same order depending on the size of acquisition.
The new CTO (hired in Jan 2017) comes with solid technological background and products experience.
24 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India
INDOCO REMEDIES: FEBRUARY 14, 2017
Key takeaways
Indoco expects domestic portfolio to grow at 15-16%. At present, acute contributes to 90% of the portfolio, which the management aims to bring down to 85% in 2 years and to 80% over next 5 years. Field force productivity has improved post restructuring exercise. EBITDA margin in domestic business is ~19-20% and management expects improvement in these with operating leverage benefits.
US remains a key focus area. Current contribution of US is only 10% of revenues (`1.25 bn in absolute terms). Indoco sees its US business ramping up to US$100 mn with strong ramp up in opthal portfolio. The company currently has 9 products in the US. Pipeline includes 18 filings in opthalmics (partnered with Teva with a profit sharing agreement) and 10 ANDAs (oral solids) filed on its own. Indoco remains optimistic on its strength in opthalmics and has >20% market share in 2 opthal products, which it sells in the US.
RoW (ex SA) contributes `700 mn to revenues and management expects 18-20% growth in this segment with operating leverage benefits post ramp up in scale. Despite having a small portion of revenues from RoW, margins are >20% in this segment.
R&D at present is ~6-7% of overall sales, of which 4-5% is expensed in P&L while 2% is capitalized. Management expects P&L to increase moving forward, but remain at steady levels at these levels in terms of % of sales..
Management expects EIR for Goa facility by March or April and expects 2 approvals in oral solids and 3 approvals in ophthalmic immediately post EIR.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 25 India Strategy
INFO EDGE: FEBRUARY 14, 2017
Key takeaways
Naukri business momentum remains stable, albeit growth headwinds in the form of slowdown in IT hiring, and slower economic growth in general exist. None of the other competitors present any meaningful threat as they don’t have either the traffic or corporate relations in place. LinkedIn has been present for the last five years in a largely complementary space of professional networking, where the intent of job seeking is not very clear. However, INFOE remains focused on competitor activity and new product offerings. At this point of time, there is no intent of adding other HR services to Naukri’s product offering.
Naukri is currently the only cash generating entity within INFOE, and generates ~US$30- 40 mn of cash annually (pre-tax). Some of this cash goes towards funding other businesses and investee companies, while the rest results in accretion of cash (US$20-30 mn annually).
Competitive intensity has come down meaningfully in the real estate classifieds vertical. Management believes that this vertical can scale meaningfully with time, despite weak near-term outlook for real estate demand. Of the ₹12-13 bn of cash that INFOE currently has, ~₹7 bn is earmarked towards future development of 99acres.
Zomato’s business momentum remains strong with stable advertising business and strong month-on-month growth in the food delivery business. There is practically nil cash burn in India, as Zomato is not spending significantly on customer acquisition costs in any of the businesses. Current cash burn levels of US$1.0-1.5 mn can be sustained for ~15-20 months of future operations, although revenue growth and accompanying operating leverage can bring these burn levels down further. Zomato’s management remains focused on India, Canada, Australia and South Africa as key growth geographies. As an investor, INFOE provides strategic and technical guidance; day-to-day operations and expansion plans are worked upon by the founders/managers of the investee companies themselves.
INFOE will continue to evaluate investments in new businesses based on quality of team and value proportion; often traffic growth and the path towards monetization of the same become clear only after the first round of investments. While Zomato has been a success and Policybazaar has also gathered scale, none of the other businesses have scaled up very meaningfully. Meritnation and Canvera are still fine tuning business models, while some of the recent investments are still very nascent. Management believes that a portfolio approach, in some cases, may provide short-term losses as businesses which scale up meaningfully will be fewer and will take time to become large; INFOE’s case is a little different given Zomato has created disproportionately high value.
26 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India
JSW ENERGY: FEBRUARY 14, 2017
Key takeaways
JSW Energy is looking to capitalize on low fixed cost advantage in upcoming Case I bids. Eventually, the company is looking at increasing the share of long-term PPAs to 85%.
JSW Energy is viewing the renewable energy space with more caution and is not participating in any of the bids for renewable energy projects.
JSW Energy expects utilizations for the power plant at Vijaynagar to improve over the coming months, helped by short-term PPA entered into with Karanataka.
On National Electricity Plan, it highlighted that 70-80 GW of power capacities are over 25 years old, with a larger quantum of inefficient capacities with the state. They expect these capacities to be gradually phased out.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 27 India Strategy
MAHINDRA & MAHINDRA: FEBRUARY 14, 2017
Key takeaways
The company expects 8-10% yoy growth in tractor industry volumes in 4QFY17 and 16- 17% yoy for FY2017.
The company will launch a new MPV (code named U321) over the next one year; this product will be manufactured in Nashik plant. The company has announced expansion of production capacity in Nashik to 210,000 units from 160,000 units currently; total capex will be `15 bn, which includes some capex on intangibles. The company will launch one product on Tivoli platform (S201) by 2HFY19. The company will launch petrol models of Scorpio and XUV5oo in FY2018E. All new 1.5 liter petrol engine will be launched in FY2019. The company will also launch two new tractors (sub 30 HP and 50 HP) over the next 12 months.
Dealer inventory levels in both tractor and auto segments are lower than normal levels currently.
Auto EBIT margin has come down as new products are lower margin and some high margin model volumes have fallen drastically.
Ssangyong. The company has been profitable in all three quarters of CY2016 so far. The company will launch one new model every year for the next three years. Y400 (large SUV) will be launched in May 2017 and other two models will be launched in early CY2018E and mid-CY2019E.
28 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India
MARICO: FEBRUARY 14, 2017
Key takeaways
Confident of speedy recovery Management indicated that demonetization impacted the quarter performance, especially in rural markets and wholesale channel; north and eastern markets were worst hit (this commentary has been similar across most companies). Overall, management did highlight that December has started seeing some recovery (off-take growth was ahead of primary in 3Q) and it expects rural/wholesale (still under pressure) to recover only gradually (impact to continue for a few more months); however, it has guided for 6-8% volume growth in 4QFY17 with low single-digit value growth (as price cuts anniversarize).
Pricing strategy. Pricing for Marico remains a source to maintain a certain threshold margin level (currently at 17.5-18%, at corporate level); beyond that the company doesn’t believe in retaining pricing advantage as that gives competition a gap to enter the category with disruptive pricing.
Take on Saffola oats. Marico entered the category in 2012 – started with plain oats and then ventured in flavored oats. Marico is the leader in flavored oats with 70%+ market share and has 28% share in oats (No2 player). Growth has tapered this year to single-digits due to category fatigue and Maggi relaunch; however, ₹2 bn revenue target over next few years remains intact (the franchise crossed ₹1 bn topline in FY2016). The company is exploring more variants and formats to revive growth including noodles, soups etc.
NPDs. Marico is working on several NPDs in near-term including – (1) variants/formats in oats within foods space, (2) premium edible oils (exploring super premium variant targeting olive/canola oil users, likely in 1-2 quarters) and (3) value-added mustard hair oil under Nihar brand (ongoing prototype; already achieved 6% share).
KOTAK INSTITUTIONAL EQUITIES RESEARCH 29 India Strategy
MARUTI SUZUKI: FEBRUARY 14, 2017
Key takeaways
Waiting period on Baleno (24 weeks), Brezza (18 weeks) and Ignis (10 weeks) remains quite good, which should aid double-digit volume growth for Maruti Suzuki in FY2018.
Current capacity for Baleno model is 15,000 per month and for Vitara Brezza is 9,000 per month. The company will first increase capacity of Baleno from the Gujarat plant.
The company’s stretched capacity is 1.65 mn currently in Gurgaon and Manesar plants. The company will commission the first phase of Gujarat plant in 4QFY17, which will add 0.25 mn capacity over a period of 12-18 months.
The company expects export volumes to remain flat yoy in FY2017.
The company indicated that they have renegotiated steel contracts in 3QFY17 and they don’t see any major hike in steel costs in 4QFY17. The company has thus decided not to take any price increase in January 2017.
50% of NEXA customers have come from competition according to the management’s assessment.
Company will maintain its dividend payout of 18-30%.
30 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India
NAVIN FLUORINE: FEBRUARY 14, 2017
Key takeaways
The management aims to establish Navin Fluorine as a prominent player in the fluorine- based pharma CRAMS market, which has a huge room for growth, and offers robust margins. Demand for fluorine-based pharma molecules is on a consistent rise; over 40% of the newly launched pharma molecules contain fluorine due to its desirable qualities.
Navin management believes that while there are large number of players offering CRAMS in the global pharma space, the number of players offering it in fluorine-based chemistries are much lower and the number of players who can offer CRAMS under cGMP compliant environment are even less. Navin, with its long-standing presence in the fluorine-based chemistries (manufacturing refrigerant gases), focused approach in developing fluorination capabilities for pharma molecules, and cGMP compliant plants, has a significant competitive edge in the global market.
The ability to win trust of global innovators, through dedicated investments in building R&D capabilities, bench strength, infrastructure and by meeting the stringent plant audit requirements are keys to scale-up presence in the global pharma CRAMS space, as per the management. Navin acquired Manchester Organics to gain front-end access with global pharma majors, and has established strong relationships with the top quartile of global innovators through meeting their demand for quality on a consistent basis.
The management believes that the global R&D budget for fluorine-based pharma molecules will continue to increase at a healthy pace, providing a multi-billion dollars and growing target market for CRAMS players like Navin. It plans to initially focus more on the customs research part of the pharma CRAMS, where it sees earning revenues of ₹2.5 bn in FY2019E (₹0.9 bn in 9MFY17).
The management aims to significantly increase the pipeline of under-development molecules in the medium to long term, by continuously investing in enabling infrastructure. It has over 100 scientists on its payroll in India and UK, most of which have pharma industry background and experience of API manufacturing.
R22, a major product of Navin, is facing sunset date by CY2030. However, the management believes it will be able to increase its usage as a feedstock for its agro- chemical and pharma molecules over this period, and will be able to avoid shutting down a significant part of the capacity by the sunset date.
The usage of both R22 and R134a will be phased out over the next 10-15 years, though as of now, it’s not clear which gas (HFOs, R32 or blends) will replace these gases. Navin management is working with Honeywell under a JV to manufacture HFO1234yf in India.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 31 India Strategy
OBEROI: FEBRUARY 14, 2017
Key takeaways
Highlights from client queries and discussions during the meetings
Demonetization and current status around sales: Enquiries continue to remain high in November and December, but sales dropped in anticipation of price correction. With three months of stable pricing, transactions are beginning to happen, but are still to return to normal run-rate. Management believes it will take another quarter before the pace of conversions will normalize to pre-demonetization period.
. Oberoi’s projects in Mulund saw better than average sales post December 2016 and management believes demonetization will benefit its projects here more. Amongst projects, Sky City continues to have strong footfalls.
Land acquisitions: Oberoi has been an active player in scouting for land and participates in almost all large deals in the market. But as per the management, as land sellers are still stuck at a particular price, most deals become unviable.
. Post the budget announcement on affordable housing, Oberoi could also explore 60 sq. m. unit projects in the Mumbai Metropolitan Region.
Annuity business: Oberoi plans to commence construction of a mall in Borivali in the next 6-9 months. Worli mall is also in planning stage, but will have to wait till the Development Plan for Mumbai is cleared. Part of the land in Worli is likely to be given for Mumbai Metro. On Commerz 2-Phase 1, management intends to complete leasing by March 2018. Phase 2 is likely to commence construction once +70% of the office building is leased out. Fit-outs at the Ritz Carlton hotel will commence in four months and will likely be completed by March 2019.
Three Sixty West: Oberoi is expecting the height to be cleared in the next three months. Delivery of the project is estimated by March 2019 and ideally hotel operations should commence before the residential project is handed over.
32 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India
OIL INDIA: FEBRUARY 14, 2017
Key takeaways
Guidance of flat crude production and higher gas production. OIL management indicated production targets of (1) 3.28 mn tons of crude oil in FY2018E versus 3.24 mn tons in FY2017E and (2) 3.2 bcm of natural gas in FY2018E versus 2.95 bcm in FY2017E. Crude oil production volumes are unlikely to increase given inherent decline in mature fields. Natural gas off-take will increase from BCPL, which has started taking its entire commitment of 1.35 mcm/d from last month.
Likely to be exempted from subsidy up to crude price of US$65/bbl. OIL management expects the government to exempt upstream companies from sharing any subsidies up to a crude price of US$65/bbl, given adequate provision in budget assuming continuation of regular hikes in retail price of LPG and kerosene. The company ruled out any relief on crude cess and domestic gas price formula.
Accelerated conversion of 2P reserves to 1P reserves in 2-3 years. The company expects accelerated conversion of 2P reserves to 1P reserves in 2-3 years led by IOR/EOR activities, which are likely to start in a year. The company has appointed third-party consultant to conduct a detailed feasibility study, before undertaking the project.
Provision of pay revision from 4QFY17. The company will start making provision for employee pay revision, effective from January 1, 2017, in 4QFY17. The management expects 15-20% increase in salaries, which is likely to be approved by the government based on a committee report in the coming months.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 33 India Strategy
ONGC: FEBRUARY 14, 2017
Key takeaways
Optimistic on production targets. ONGC management remained optimistic on growth in production volumes over the next few years. The company indicated standalone production targets of (1) 26.2 mn tons of crude oil in FY2018-19E versus 25.8 mn tons in FY2017E and (2) 25.6 bcm of natural gas in FY2018E and 29.5 bcm in FY2019E versus 23.3 bcm in FY2017E. Crude oil production volumes will increase from WO-16, Vasai East, Ratna Series, B-127 and Assam, partially offset by inherent decline in mature fields. Incremental natural gas production volumes will come from Vasistha, S-1, Daman, C-26, WO-16 and enhanced recovery from Bassein fields.
Likely to be exempted from subsidy up to crude price of US$65/bbl. ONGC management expects the government to exempt upstream companies from sharing any subsidies up to a crude price of US$65/bbl, given adequate provision in Budget assuming continuation of regular hikes in retail price of LPG and kerosene. The company ruled out any relief on crude cess and domestic gas price formula.
Operating costs may increase in 4QFY17. The company indicated that operating costs may increase in 4QFY17 from 9MFY17 levels accounting for annual provisions. ONGC will also make a provision for pay revision effective from January 1, 2017. The company expects at least 15% increase in salaries, expected to be approved by the government in the coming months.
Capex guidance of `300 bn in FY2018. The company maintained its guidance of `300 bn on capital expenditure (excluding inorganic acquisitions) in FY2018E as compared to `190 bn spent in 9MFY17 and `290 bn expected in FY2017E. ONGC ruled out any significant increase in capex from proposed investments in KG offshore block, given completion on ongoing projects.
34 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India
PIRAMAL ENTERPRISES: FEBRUARY 14, 2017
Key takeaways
Global pharma business continues to be driven by a strong product portfolio, steady performance of different facilities as well as acquisitions. Products in inhalation anesthesia as well as pain management have high entry barriers due to complexity in manufacturing as well as distribution. Piramal Enterprises (PEL) will look to leverage global distribution as well as target global generic hospital drug market to continuously grow revenues from these verticals.
Consumer product portfolio in India registered a growth of 16% on an organic basis, and 44% overall in 9MFY17. Strong organic growth is being supported by branded products in the OTC segment where distribution reach is significantly higher versus competitors who are still operating with a prescription-based model. The consumer portfolio overall has achieved EBITDA break-even, with margins expected to expand to ~20% by FY2020.
In the financial services vertical, total loan book stood at ₹227 bn as of Dec 2016; of this ₹202 bn comprised the real estate loan book. Construction finance is ~56% of real estate loan book with lease rent discounting for commercial assets and housing finance being the two new verticals which PEL has entered. For housing finance, PEL has applied for the license; it does not expect any significant overlap with Shriram’s offering in the space. Shriram is focused more on rural/semi-rural population with typically low ticket-size of properties; PEL, on the other hand, would be typically present in urban areas with exposure to top-tier builders with whom PEL anyway has a prior relationship. Returns profile management with a continuous focus on NPA would be a continuous monitored against future loan book growth. PEL has the ability to take on further leverage for future loan book growth; lower interest rates will continue to drive overall returns profile of the business.
Overall, the company is looking to demerge the financial services business over the medium term (~2 years). PEL will look to list the information management business in the US to unlock value potential. Operating leverage in the Indian consumer products portfolio, winding down of the current loss making imaging business and stable returns profile of the financial services business will act as margin levers over the medium term.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 35 India Strategy
PNB HOUSING FINANCE: FEBRUARY 14 2017
Key takeaways
PNBHF has delivered 60% CAGR in loan book and guided for about 30% growth over the medium term. Business was a bit weak post demonetization with November (down 15-20%) being all time strong month. Volumes will remain a tad lower in March as compared to November.
DSA drive 40% of the business. DST supports the company to originate home loan business. DSAs are paid up to 1.5% while cost of DSTs is 30-80 bps. The payout was 0.85% on an overall basis in 9MFY17.
Spread was 2.08% in 9MFY17; the company has guided spread at 2-2.5%. The NIM for 9MFY17 was 2.89% and 2.99% at 3QFY17. The company proposes NIM at 3-3.5%.
Competition is biggest near-term headwind. Customers are shifting to bank. SBI offers loans at 8.65% as compared to 8.8% headline rate for PNBHF. Balance transfer and NIM is one of the key challenges for PNBHF at this stage. Typically, prepayment rate is about 15%. PNBHF has not reduced back book rates. Even the market leader has cut lending rates by 10-15 bps. The company has seen that the customers get concerned only if rate difference is more than 50 bps.
The company has maintained low NPLs. 90 days+ delinquencies (in the overall book) with 2-year lag were 0.15%. About 40% of current NPLs come from per-BPR period. In this segment, the NPL ratio is 3% or so.
PNBHF is not worried about asset quality post demonetization. It has not yet issued any cautions as yet and does not subscribe to the view that real estate prices will crash. LTV of 50-60% on LAP and maximum 80% on HL is not much of a concern. About 70% of LAP is backed by self-occupied properties with CIBIL score over 700.
Cost-to-income ratio (excluding origination costs) will go down to 23-24% for 9MFY17 and the ratio will go down to late-teens.
The agreement with PNB is that the company can be used till its stake falls to 30%. As per the estimate of the management, this can be up to seven years or so.
36 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India
PUNJAB NATIONAL BANK: FEBRUARY 14, 2017
Key takeaways
Asset quality: (1) SMA-2 book is showing gradual reduction. There are a fair amount of chunky corporate loans in this portfolio. However, there is a likelihood of resolution which should result in lower slippage from the portfolio. (2) Directionally, one should expect a firm reduction in slippages on qoq basis as we have seen in recent quarters. (3) Recent events in the sector have slowed down resolutions decision making but one is expecting closures of many M&As in the next two quarters. (4) The bank would need to make higher provision if the pace of deals does not increase due to ageing of NPLs. (5) The bank is not too worried on its power exposure it has a strong portfolio of assets which have been given to state as well as relatively strong promoter companies or balance sheets. (6) There is a daily mechanism of monitoring recovery at every level of the management. The focus is not only on large tickets but also on small ticket loans. The bank is actively engaging with its borrowers on settlements or recovery of unpaid installments. The management is confident that it would be able to reach its internal goal of Rs200 bn of cash recovery/upgrade in FY2017.
Growth: There are not too many large ticket proposals in the market. The strong deposit flow has picked up activity in the shorter end of the loan market. The bank is not too excited to grow this loan portfolio as the focus has shifted to retail, agriculture and MSME.
Others: (1) Strong momentum on deposits during the period of demonetization. The bank has been able to retain a large share of these deposits. (2) Margin would continue to remain at current levels. There is a lot of pressure at the shorter end. (3) The bank is reasonably well protected at current levels of interest rates. However, any spike of ~20bps should start hurting the bank as it would have to make MTM provisions. (4) The bank has already made higher provision for AS-15 in 9MFY17. At current levels of interest rates, further additions do not seem to be a likely outcome.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 37 India Strategy
SADBHAV INFRASTRUCTURE: FEBRUARY 14, 2017
Key takeaways
Lenders’ support required to make HAM a success. The acceptance of HAM as the default business model for NHAI depends more on banks starting to lend to winning bidders. There has been movement in this direction with public sector banks starting to match/better rates offered by private sector for projects pending financial closure. This would pave the way for larger sized HAM projects. Note that of the 39 projects awarded so far, a few have received financial closure and three projects have been terminated for delay in getting financial closure. Of the 23 HAM projects on offer at present, more than 10 projects have project size in excess of `15 bn.
Limited competition increases prospects for SIPL to win several HAM orders. Given the limited 7-8 bidders for HAM projects, Sadbhav is aiming for getting another 5-7 projects over the next one year. It highlighted being L2 in majority of the 31 projects it has bid for, of which it has won five projects. It continues to maintain a threshold of 18% post tax return on equity investment (ex of EPC returns) in its bids. Note that this is more than the 15% return on equity which is the benchmark for NHAI when deciding on mode of project awards, which reflects limited competition for such projects.
Proceeds from potential monetization to pay down internal and external standalone debt. SIPL intends to repay the `3.9 bn of internal debt of SEL as and when, it is able to monetize its assets. It would aim to use remaining proceeds of such monetization, if any, to repay the `7 bn of external standalone debt. Such debt has a staggered coupon with an average 10.5% rate.
Other takeaways
. Presently there are about `160-170 bn of EPC projects and `220-230 bn of HAM projects tendered by NHAI.
. For Sadbhav, the share of payments by ETC/cards/mobile wallets is at 22%. The company shared new developments with new commercial vehicles getting mandated an ETC tag and more lanes for commercial vehicles getting set up with ETC facility.
38 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India
SOBHA: FEBRUARY 14, 2017
Key takeaways
Highlights from client queries and discussions during the meetings
Demonetization and current status around sales: Enquiries continue to remain high in November and December, but sales dropped in anticipation of price correction. With three months of stable pricing, transactions are beginning to happen, but it is still to return to normal run-rate. Management believes that in another 3-4 months the pace of conversions will normalize to pre-demonetization period.
. Impact on land prices: Land prices will come down with more focused implementation of ‘Benami Property Act’.
New business development: Sobha has tied up with two real estate private equity funds on platform basis for investments in new land. Sobha is looking to add new land for immediate development across the four metros where it is present. Further, management is also actively looking at land in Hyderabad.
. Questions around existing land bank: Certain land parcels are still to be sanitized and will take time to get into development. Sobha hasn’t done land banking post 2008 and all new projects added post 2012 are being brought under development immediately.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 39 India Strategy
SRF: FEBRUARY 14, 2017
Key takeaways
The management stressed that the slowdown in global agro-chemicals market has impacted only (1) the offtake of commercialized molecules and (2) the commercial launch schedule of new molecules, from global innovators, as they await better demand sentiments. The pace of order enquiries from their end hasn’t been impacted and remains strong, leading to growing pipeline of molecules under exploration stage at SRF’s end.
SRF’s chemicals business team is using this time to attain approvals of new molecules from the global innovators, which will enable fast ramp-up in orders as the products get launched in the market.
Increasing confidence of global innovators on SRF’s fluorination capabilities has boosted management’s confidence to continue with its capex program, despite slowdown in revenue growth in the specialty chemicals business in the near term. The management is in the process of setting up (1) its third multi-purpose plant in the specialty chemicals segment, (2) a dedicated cGMP compliant pharma molecules plant and (3) R134a pharma grade refrigerant gas plant. Apart from this, the management also intends to setup a pilot plant for the HFO 1234yf in FY2018.
The management believes that SRF’s learning from over a decade of investments in R&D in the fluorine-based molecules is its biggest competitive advantage in the global fluorochemicals space. It sees no competition for its specialty business in India and other developing world markets.
The management sees its positioning in the packaging films industry as that of a premium supplier, with strong ties with large institutional customers. It notes that while the capacity utilization in the Indian packaging films industry has fallen below 70% in 9MFY17, SRF’s plants are operating at peak utilization levels. SRF is adding capacities in this space at the behest of its customers, who are looking for high quality and value- added products. The management is confident of reaching optimum utilization level in its new capacities in a short period, as the demand from customers is pretty strong.
SRF management believes that having a diversified presence across three major businesses is its strength, and lends stability to the overall business profitability and cash flows, in the event of downturn in one or more segments. It doesn’t intend to list its businesses separately.
40 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India
TCS: FEBRUARY 14, 2017
Key takeaways
TCS grew 15% in c/c terms in FY2015. Growth decelerated in FY2016 due to challenges in Diligenta, Japan and Latin America; aggregate impact of these drags was 300 bps resulting in deceleration of growth to about 11.9% in FY2016. Most markets (excluding LatAM, Japan) and most verticals (Excluding Insurance) grew in mid-teens in FY2016. Further deceleration of growth to say about 9% in c/c terms in FY2017E is largely due to weak exit of FY2016 and cyclical issues in BFSI and retail. With these issues (fundamental and arithmetic) behind the company, there is potential for acceleration of growth in c/c terms in FY2018E.
The initial conversations with customers give positive vibes on IT demand in CY2017/FY2018.
There is no pricing pressure. Deflationary pressure on revenue stream on renewal of large contracts is a natural function of technology.
IT spends of most banks and large customers have not declined in the past 10 years. At a ball park level, if a large US banking client is spending US$ 5 bn on IT spends annually, only 20% of it is outsourced spends. IT services companies may have some saturated in the outsourced spends pie in large clients but there is room for increase in outsourcing spends (say 20% in some industries whereas 60% in select industries such as manufacturing).
A lot of CIOs are working towards containing usage of cloud services such as AWS. The ease of usage of Amazon web services and the likes of it have resulted in excess consumption (more than required) of some of these services in an organization
Even in this captive shift cycle (wave), the fundamental argument and reason for shift of work to captives is compelling costs and desire to have control on certain process and data.
Due to uncertainty and volatility following change in administration in the US, clients are closing deals in a discreet manner. Economic benefits continue to drive deal decision but clients are more careful of not making any unwarranted noises or announcements pertaining to large outsourcing deals.
Minimum wages if at all will apply on incremental H-1B applications and renewals. Impact of about 300 bps on margins would be phased out over three years. TCS is confident of maintaining margins at current levels in the medium term after absorbing any changes in minimum wages of visa workers. TCS managed with a fourth of visas in FY2017 as against a year earlier without any impact on execution. TCS’ ability to execute even with a lower number of visas is underappreciated.
Capital allocation. Board reviews it annually and excess cash is typically flushed out once in three years. The board is open to buyback and there are no technical constraints.
Chandra will continue to be brand ambassador of TCS in the current role as company’s Chairman. The new COO has solid client relationships especially in BFSI vertical. Lack of client exposure of the new CEO will not be a constraint for the company. With Chandra as Chairman of the company, the transition process will be smooth. TCS also has very strong business-head level relationships. The management does not expect any major attrition at senior management level.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 41 India Strategy
TEAMLEASE SERVICES: FEBRUARY 14, 2017
Key takeaways
The Indian staffing industry differs meaningfully from global peers as: (1) majority of temporary jobs are still with unorganized companies as opposed to organized companies abroad, (2) Indian staffing companies work on a cost plus basis (per person fixed margin), as opposed to gross margin payment method globally, which also involves part funding of working capital, and (3) most Indian staffing companies do not source all employees on their own; most temp staff is identified by clients themselves.
GST will be a game-changer for the staffing industry. Currently, companies employing temporary staff can claim service tax input even if there is no service tax paid by the staffing company. GST would correct this anomaly by tracking taxes paid across the value chain. Hence, unorganized companies whose business models rely a lot on non-payment of taxes and employee dues would be forced to pivot to a compliant model, which may render them unprofitable.
FMCG and allied sectors contribute to ~20-22% of associate employee count. Overall, TeamLease has a fairly diversified exposure to various sectors. TeamLease sources nearly 20% of the temp staff on its own, while the rest are identified by clients themselves.
IT staffing companies in India follow global staffing practices and margins: they earn gross margins of ~10% and net margins of ~3%, and fund ~2 months of salaries of employees. Management does not see any slowdown in IT staffing businesses (ASAP, NichePro and Keystone) as all these companies provide experienced staff for specific roles, which are still seeing decent demand. Entry level IT jobs are seeing a slowdown, but TeamLease has limited exposure to that category.
Management remains confident of future revenue CAGR of 25%, with margin expansion aided by multiple levers: (1) operating leverage driven by increasing employee efficiency and technology adoption, (2) increasing proportion of salary linked commissions as opposed to cost plus payment (currently 28:72), and (3) higher contribution from higher margin businesses such as payroll outsourcing, permanent recruitment, consulting and IT staffing.
42 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India
TECHNO ELECTRIC & ENGINEERING: FEBRUARY 14, 2017
Key takeaways
Share of substations to increase in PGCIL ordering. The company mentioned that the share of substation orders in overall PGCIL ordering currently stands at 30% which is a substantial jump from 20% a few years back. The company feels that this share is set to go up even further given the requirements for modernization of existing network as well as need for greater transmission capacity for renewable projects (especially renewable power from South India to North India).
State ordering to become a bigger pie incrementally. The management mentioned that state ordering in T&D sector has picked up and is expected to go up even further. State utilities orders are collectively as big as PGCIL’s annual ordering and can become even larger. T&D network in many states is in urgent need of technological upgradation. Further, deep penetration of such network is needed to buy cheap power from spot market. Several states with strong renewables capacity such as Rajasthan, Tamil Nadu, Madhya Pradesh, Andhra Pradesh and Jharkhand are collectively undertaking capex to the tune of `250 bn. Most substation orders are in the range of 400 kv and above. The competitive intensity is moderate with 6-7 bidders for 400 kV and 4-5 bidders for 765 kv projects.
Jointly won a project with KPTL in North-East. The company jointly bid for the Nagaland Transmission BOOT-BOOM project that includes a 400 kV, 1,000 MVA substation at new Kohima. The project worth `11.5-12 bn would have TEE’s share of `2.5-3 bn with an equity requirement of ~`800 mn for 26% stake in the JV. The project is to be completed in 3.5 years from zero date (zero date 4-5 months from now).
Strong order book as of Dec-2016, growth guidance intact. The management mentioned an order book of `23 bn as of Dec-2016 with participation tenders worth `30 bn. The company has received order inflow of ~`11 bn in YTD FY2017 and is confident of getting additional `10 bn of orders in the near-future. Tender delays may impact timing, but the management retains the guidance of 15-20% revenue CAGR over FY2017-20E.
Renewables remains an unviable business. The company cited its own exit from wind power projects to stress that renewable power projects remain unviable. Especially given the coal price decline as well as decline in spot power prices, there is no real incentive to power utilities to purchase renewable power over thermal power.
EPC for FGD installation may be a big opportunity. The company mentioned that it has the necessary EPC experience to carry out and FGD system installation at a power plant for complying with SOx emission norms. The company does not have associated technology and the same would be licensed / contributed by a partner. But the company sees a large opportunity to leverage its EPC experience in this area.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 43 India Strategy
TRIBHOVANDAS BHIMJI ZAVERI: FEBRUARY 14, 2017
Key takeaways
Multiple growth levers. Company is working on multiple growth levers including – (1) expansion via franchise model, (2) investing in web-based platform (though it is still in initial stage of development) and (3) investing behind changing perception from just wedding jeweler to a complete jeweler (all occasions/classes); the contribution of wedding jewelry has already reduced to 65% versus 80-90%+ 5 years ago.
Network expansion plans. TBZ currently has 110,000 sq. ft of retail space and is planning to take this up to 150,000 sq. ft over next 3 years; bulk of this expansion will come via franchise mode (75-80%) while another 20-25% will come via own stores. Overall, it is looking to add 6-8 franchises and 2-3 own stores during the next 2-3 years. In terms of zones – (1) it has opened several stores in East and is planning to add a few more, (2) it is looking to foray into Delhi (looking at owns stores) and other northern markets including western UP, (3) it will add a few stores in western India including Ahmedabad and Mumbai and (4) in South, it is exploring Karnataka and Hyderabad as potential markets (currently has limited presence in South).
Franchise model. TBZ is very selective in choosing franchise partners (has strict screening criteria) and prefers players with retail experience (ex-jewelry). It works on margin sharing model, i.e. if TBZ makes blended margin of 15%, franchise store gets 10% margin, which will help them cover their cost and make a RoE of 16-18% in year 1 (can go up to 24-28% RoE in year 3-4 as the store scales up, on steady state basis).
Longer term trends in jewelry. (1) Traditionally the market has been skewed towards heavy jewelry but this is changing drastically towards smaller pieces. Detachable jewelry is becoming increasingly popular and (2) the market is largely shifting towards diamond; however, there are pockets in the country where gold jewelry is still prominent.
Trends in gold jewelry demand. The decision driver for buying gold jewelry is changing from being largely investment-centric to usage-centric, perceptions have changed. Gold coins segment in particular has declined and is expected to remain under stress.
44 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India
WIPRO: FEBRUARY 14, 2017
Wipro has been on a transformational journey for the past few years. During this course, it has carried several steps for improvement in growth trajectory and client mining. The most recent initiative was to train 700 delivery managers to make delivery more sales oriented. It intends to cover 1,000 delivery managers. The company has also augmented front end (sales) over past few years by externally hiring several global client partners. The company hopes that some of these initiatives will start reflecting on financial performance.
The management partly attributed weakness in client mining in the past to lack of alignment between delivery and sales, weak global client partners and delivery issues in a few cases. Additionally, it was also somewhat impacted by some of its large customers facing their own internal issues and decline in oil prices. Wipro’s top two oil & gas accounts have shrunk to US$50-100 mn each from US$150-200 mn earlier; Wipro has maintained its market share in these accounts.
Growth outlook in key verticals. (1) Healthcare. HPS provides platform based services for large players. Out of 22 mn people with individual insurance, Wipro covers about 5-6 mn. Demand has frozen in select areas following change in administration. Replacement of Obamacare with a new healthcare policy could be an opportunity in the medium term. Until then, its healthcare practice could see challenges particularly in HPS, (2) BFSI. There is a lot of optimism in client base on the back of expectations of reduced regulations. (3) Oil and gas. Wipro expects to see some pick up in IT spends after two years of massive cuts led by stability in oil prices.
Wipro engaged with 60 industry analysts in 2014 and was rated in leadership zone in 15 out of the 60 in 2015. It engaged with 75 analysts in 2015 and featured in 43 leadership quadrants in 2016. The management expects further improvement on this count in 2017 and it also expects its improved positioning to help business.
India business is going through a sizeable restructuring which could take 2-3 quarters
Capital allocation. Wipro’s net cash is about US$2.3 bn as at Dec-16 end; it is comfortable with this cash balance. The management indicated that in the event of surplus cash accumulation above current levels, it will consider return to investors. Wipro has a policy of returning 40-45% of profits through dividends and buyback. Wipro has spent US$1 bn on acquisition in the past one year or so.
Acquisitions. Wipro would continue to look at scout acquisitions. Key areas of focus is (1) localized design capabilities in US; we note that Designit has strength in Europe, (2) Cloud capabilities, and (3) platform based services, (4) capabilities in healthcare space , (5) Government business in Australia, and (6) captives.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 45 REDUCE Sun Pharmaceuticals (SUNP) Pharmaceuticals FEBRUARY 14, 2017 RESULT Coverage view: Cautious
Work in progress. SUNP reported disappointing 3QFY17 with revenues, EBITDA and Price (`): 649 PAT all missing our estimates. Gleevec impact hurt US sales, while domestic growth Target price (`): 685 disappointed again, impacted by demonetization. SUNP’s US base continues to face BSE-30: 28,339 challenges given lack of meaningful launches, our expectations of Taro price erosion and an elongated Halol approval timelines, while the impact from specialty roll-out, including BromSite, Seciara and MK-3222, is some time away. REDUCE with revised target price of `685/share.
Company data and valuation summary Sun Pharmaceuticals Stock data Forecasts/Valuations 2017E 2018E 2019E 52-week range (Rs) (high,low) 898-572 EPS (Rs) 30.3 32.3 36.1 Market Cap. (Rs bn) 1,557.8 EPS growth (%) 35.0 6.5 11.8 Shareholding pattern (%) P/E (X) 21.4 20.1 18.0 Promoters 55.0 Sales (Rs bn) 325.9 348.7 386.7 FIIs 22.4 Net profits (Rs bn) 72.9 77.7 86.8 MFs 4.3 EBITDA (Rs bn) 110.7 115.8 131.9 Price performance (%) 1M 3M 12M EV/EBITDA (X) 12.4 11.2 9.2 Absolute (0.6) (5.6) (23.4) ROE (%) 20.9 18.6 17.7 Rel. to BSE-30 (4.4) (10.7) (37.8) Div. Yield (%) 0.9 1.0 1.1
Gleevec effect hits US, while domestic falters
SUNP’s 3QFY17 revenues at ₹83 bn were 4% lower than our estimates, largely due to a miss in ex-Taro US and domestic formulations. Domestic growth was extremely weak at 4% and has now disappointed for seven out of past eight quarters, though, we suspect this quarter had an impact of demonetization in the RBXY portfolio, even as SUNP should have grown in line with the market. US missed our estimates by ~4%, largely driven by ex-Taro US, which, at ~US$307 mn, was lower by ~8% (~US$23 mn), where price and share loss in Gleevec more than offset the incremental sales from olmesartan AG. EMs showed 13% growth, though RoW growth was strong at 33% yoy, given the addition of Novartis portfolio sales in Japan. Marked deterioration in US product mix (lower Gleevec and higher olmesartan) and addition of Novartis portfolio in Japan mean that gross margins contracted by 250 bps with gross profits missing our estimates by ~10%, and despite lower R&D and SG&A spend compared to our estimates, EBITDA missed by ~11%, given the operating leverage, with PAT miss at ~17%. Encouragingly, on an ex-Taro basis, SUNP’s SG&A spend continues to decline on an absolute basis, demonstrating evidence of RBXY synergies, though the quantum of synergies is not clear, given the management commentary of reinvestments in specialty business. Competitive pressure intensifying; specialty franchise now critical for long-term growth
For the past four quarters, Taro has now started to show steady decline in its US base, and while Gleevec offered solid support in 4QFY16 and 1HFY17, we believe the US base is likely to get unmasked in the coming quarters given our expectations of significant pricing pressure in Gleevec, continued price erosion in Taro (we highlight ~250 ANDAs pending approval in topicals) and lack of meaningful US approvals. We believe the specialty roll-out, particularly, Chirag Talati, CFA Odomzo, MK-3222 and Seciara are now critical for long-term growth, though we see challenges for MK-3222 from competition (please see Competitive activity intensifying in psoriasis) as well as reimbursement hurdles (please see Pricing power set to decline in psoriasis). Kumar Gaurav REDUCE with revised target price of `685/share.
We cut our FY2017 EPS estimates by ~5% though our FY2018/19 numbers remain largely unchanged. Following a series of downgrades over the past few quarters and following the recent sharp correction, SUNP is now trading at ~20X FY2018E and~18X FY2019E EPS. We revise our target price to `685/share (19X FY2019) from `715/share. REDUCE.
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Sun Pharmaceuticals Pharmaceuticals
Exhibit 1: Sun Pharma - consolidated interim results March fiscal year-ends (Rs mn)
(% chg.) yoy 3QFY17 3QFY17E 3QFY16 2QFY17 3QFY17E 3QFY16 2QFY17 9MFY17 9MFY16 (% chg.) FY2017E Sales 79,222 82,685 70,821 82,651 (4.2) 11.9 (4.1) 244,323 206,469 18.3 325,915 Cost of sales (22,487) (19,844) (17,554) (18,399) 13.3 28.1 22.2 (59,355) (50,050) 18.6 (83,626) Gross profit 56,735 62,841 53,267 64,253 (9.7) 6.5 (11.7) 184,968 156,419 18.3 242,288 Staff costs (12,151) (12,231) (11,483) (11,991) (0.7) 5.8 1.3 (36,535) (35,923) 1.7 (48,833) R&D (5,362) (7,028) (5,759) (5,530) (23.7) (6.9) (3.0) (16,068) (15,545) 3.4 (21,629) SG&A (14,596) (15,876) (14,335) (15,055) (8.1) 1.8 (3.0) (46,831) (46,589) 0.5 (61,173) EBITDA 24,627 27,706 21,690 31,677 (11.1) 13.5 (22.3) 85,533 58,362 46.6 110,653 Depreciation (3,068) (3,450) (2,508) (3,038) (11.1) 22.3 1.0 (9,266) (7,621) 21.6 (12,514) Interest expense (1,665) (1,250) (1,170) (537) (3,548) (3,999) (5,085) Other income 1,149 1,250 2,122 1,026 3,987 5,746 5,345 Exceptionals — — — — 0 (6,851) — Pretax profits (adjusted) 21,043 24,256 20,134 29,128 (13.2) 4.5 (27.8) 76,395 52,419 45.7 98,000 Tax (3,729) (3,881) (2,020) (4,417) (11,673) (6,503) (15,208) Minority interest (2,299) (2,332) (3,747) (2,159) (7,200) (8,616) (9,857) Net income (adjusted) 14,814 17,841 14,166 22,351 (17.0) 4.6 (33.7) 57,522 37,300 54.2 72,935 EPS (Rs) 6.2 7.4 5.9 9.3 (17.0) 4.6 (33.7) 23.9 15.5 54.2 30.3 Tax rate (%) 17.7 16.0 10.0 15.2 15.3 12.4 15.5
Divisional sales US (US $ mn) 507 530 486 555 (4.3) 4.3 (8.6) 1,671 1,485 12.6 2,158 - Taro US 200 200 238 209 0.0 (15.9) (4.0) 623 626 - Ex-Taro US 307 330 248 346 (7.0) 23.8 (11.4) 1,048 859 Domestic formulations (Rs. mn) 19,694 21,735 18,900 20,090 (9.4) 4.2 (2.0) 58,326 54,324 7.4 78,803 RoW (Rs mn) 19,201 18,494 14,318 16,559 3.8 34.1 16.0 51,696 42,546 21.5 72,489 API 3,657 4,631 4,410 3,670 (21.0) (17.1) (0.3) 12,026 10,270 17.1 15,848
% margin Gross margin 71.6 76.0 75.2 77.7 -440 bps 80 bps -250 bps 75.7 75.8 74.3 R&D 6.8 8.5 8.1 6.7 -170 bps 40 bps 140 bps 6.6 7.5 6.6 SG&A 33.8 34.0 36.5 32.7 -20 bps -250 bps 370 bps 34.1 40.0 33.8 EBITDA 31.1 33.5 30.6 38.3 -240 bps 290 bps -770 bps 35.0 28.3 34.0
Source: Company, Kotak Institutional Equities estimates
Exhibit 2: Changes to estimates March fiscal year-ends (Rs mn)
New estimates Old estimates Changes % 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E Sales 325,915 348,723 386,733 338,012 360,051 403,890 (3.6) (3.1) (4.2) Gross profits 242,288 257,276 287,608 259,672 271,993 297,015 (6.7) (5.4) (3.2) EBITDA 110,653 115,835 131,885 114,899 118,758 132,528 (3.7) (2.5) (0.5) PBT 98,000 103,061 117,258 100,929 104,135 117,470 (2.9) (1.0) (0.2) PAT 72,935 77,674 86,849 76,693 78,854 88,856 (4.9) (1.5) (2.3) EPS 30.3 32.3 36.1 31.9 32.8 36.9 (5.0) (1.6) (2.2)
Source: Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 47 Pharmaceuticals Sun Pharmaceuticals
Halol resolution likely towards the end of CY2017
At the conference call, management guided that the company has submitted its corrective action plan to the FDA, and is working its way through the remediation process, though the exact timelines for completion of resolution remain unclear. We believe resolution of Halol facility will likely happen in towards the end of CY2017, given the nature of the observations, which we have detailed below:
Stability testing and non-conforming results. Post commercialization, companies are required to conduct long-term stability (up to 36 months, and in this specific case, 24 months) of commercial batches to establish expiry protocols. Typically, dissolution studies should pass in first iteration, though in case of failure in first iteration, re-testing is required using larger samples, and in case of the second dissolution studies also yield failing results, a third round of testing is required using larger samples. Failure in L3 is typically deemed as non-conforming, and companies are required to conduct investigations in the manufacturing product and initiate CAPA’s while possibly issuing recalls. In this specific case, SUNP had issues with dissolution testing of bupropion SR, a marketed product, where multiple instances of dissolution failures were identified, with inadequate investigations, late field alert reports and/or protocol changes.
Media fill and sterility assurance. Using data as recent as Sept/Oct 2016, the FDA has highlighted various instances of personnel trend monitoring resulting in over-action limit recoveries of colony factor units from various samples including gram stain negative, gram stain positive as well as staphylococcus cohnii organisms. Staph cohnii has not been used as a test organism in the evaluation of sterility assurance programs, including disinfectant testing. Moreover, excursions from as recently as Mar-May 2016 reveal 233 contaminants, of which 107 isolates could not be identified, further 25, which could not be identified to species level, and presence of staph cohnii from various sampling locations.
Documentation control. The FDA highlighted issues in control over log book records in the existing form management system ‘FMS’ implemented by the company. In order to overcome issues related to over-writing of data in log books, SUNP has implemented controlled logbooks with perforated and serially numbered, watermarked pages. However, the FDA raised questions over potential for distinguishing between controlled and ‘uncontrolled’ copies of the original logbook pages. For instances before July 2015, raw data BMR’s were not stored, though, the FDA observation does seem to indicate that the same are captured in the updated BMS system.
Laminal air flow integrity. Due to leakages and velocity consistency issues identified in multiple HEPA filers, in Dec 2014, SUNP implemented a partial corrective action by altering the frequency of HEPA filter integrity testing. However, as per the FDA, latest SOP’s do not incorporate the changed to testing frequency, thereby leading to potential risks in case of failures, as no mitigating factors are required under the current protocol.
48 KOTAK INSTITUTIONAL EQUITIES RESEARCH Sun Pharmaceuticals Pharmaceuticals
Odomzo is a natural extension of DUSA franchise
SUNP announced the acquisition of Odomzo, a branded oncology product from Novartis for US$175 mn. Odomzo, is a novel, oral drug approved in the US for the treatment of laBCC (locally advanced basal cell carcinoma), in patients cases where laBCC has recurred following surgery or radiation therapy, or those who are not candidates for surgery or radiation therapy. We believe the acquisition is a right fit for its dermatology specialty strategy in the US:
Strong competitive profile in a niche market: There are currently two approved oral treatments for laBCC, Erivedge (Roche) and Odomzo. Both the treatments target the Hedgehog pathway, and both have shown impressive data with largely similar profile, though cross comparisons are not relevant given the different efficacy measures (mRECIST and RECIST) and heterogeneity of BCC population. On a stand-alone basis, Odomzo has strong data with an ORR of 56% for the 200mg dose, median DOR of 26 months and median PFS of ~23 months for mBCC sub-set. We do note the serious adverse event profile associated with Odomzo (and Erevidge), particularly, musco-skeletal adverse events that have likely restricted a more rapid penetration of the class of drugs.
Leveraging DUSA and MK-3222: SUNP’s Levulan drug/device combination actinic keratosis, a form of pre-cancerous cells, giving it access to dermatologists who account for 70% of prescriptions for laBCC. Combined with MK-3222, we believe Odomzo will help raise SUNP’s brand profile amongst dermatologist and help leverage field force to drive prescription share.
Fairly valued transaction: We do note that Roche has emerged as a clear leader with Erevidge on schedule to cross US$200 mn sales in FY2016. Our preliminary read of the data suggests that despite a slow initial pick-up (~US$1 mn / quarter sales), Odomzo has the potential to achieve ~US$80 mn sales by FY2020/21, with peak potential of US$120- 150 mn.
Exhibit 3: SUNP and Taro have spent ~US$1.2 bn on various Exhibit 4: Erivedge and Odomzo uptake curves specialty acquisitions and Taro buyback Sales after quarters of launch (US$ mn) Value 60 Time In-licensing/acquisition (US$ mn) Erivedge Odomzo Sept'14 MK-3222 in-licensing (upfront) 80 Mar'16 Taro buyback 250 50 Mar'16 Novartis Japan brands acquisition 293 Sept'15 Insite Vision acquisition 48 40 Oct'16 Ocular Therapeutics acquisition 40 Nov'16 Taro buyback 250 Nov'16 BioSintez acquisition 60 30 Dec'16 Acquisition of Odomzo 175 Total 1,196 20
Source: Company 10
0
Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9
Q11 Q12 Q13 Q14 Q15 Q16 Q10
Source: Company
KOTAK INSTITUTIONAL EQUITIES RESEARCH 49 Pharmaceuticals Sun Pharmaceuticals
MK-3222 filing likely in FY2018, but competitive positioning weak
At the EADV conference in Sept 2016, SUNP presented data for tildrakizumab from reSURFACE 1 and 2 phase III trials. The efficacy data presented was in-line with our expectations and suggestive of a modest efficacy profile when compared to other IL-23’s such as guselkumab and BI655066 as well as the IL-17 class of drugs. PASI-90 at week-12 ranged 36-37% and at week-28 ranged 54-59% for 100mg and 200mg respectively. PGA- 0/1 scores at week-12 ranged 57-59% and 66-69% for 100mg and 200mg respectively, suggesting limited dose differential at 200 mg. The emerging data suggests tildrakizumab might suffer from a significantly slower onset of action versus IL-17’s as well as guselkumab (as measured by median time to PASI-75 or PASI-90).
Importantly, given the continued delays to its NDA filing, we believe tildrakizumab has lost its critical headstart over guselkumab, with guselkumab now likely to be filed before tildrakizumab, with increasing probability of it also losing its time advantage over AbbVie’s BI655066. When compared with the existing and pipeline assets in both IL-23 and IL-17 class, we believe tildrakizumab phase III data falls short of having a competitive profile that would enable it to have significant differentiation to drive prescription. A slower onset of action will likely offset tildrakizumab’s dosing convenience, particularly given that 95% of Cosentyx usage is in self-administered setting using pen devices. However, we see it as a low-clinical risk program, and we expect the product to be filed in 4QCY16 and potentially receive an approval with a single-cycle review in 3QCY17.
In Sept 2016, Express Scripts came out with a plan advocating indication specific pricing for inflammatory biologics such as TNF-α’s (e.g. Humira) rather broad label-based coverage. As per Express Scripts, these biologics represented 9.8 percent of all US pharmacy spending, with spending on these projected to almost double from CY2015 to CY2018. We expect the Express Scripts value plan to accelerate the switch of patients away from TNF’α’s, as we expect targeted and more efficacious treatments, including IL-17A’s and IL’23’s to receive better formulary coverage. However, the switch is likely to come at the cost of pricing and formulary exclusions, and we note that despite having perhaps the strongest label, Express Scripts excluded Lilly’s Taltz in favor of Novartis’ Cosentyx, most likely due to pricing. We expect HRQoL and head-to-head data to increasingly play a critical role, and expect coverage requirements to get more stringent resulting in an increase in denial rates (please see Pricing power set to decline in psoriasis).
Exhibit 5: Otezla & Cosentyx have shown strong TRx progression Exhibit 6: Cosentyx sales benefitting from TRx and better pricing Weekly US TRx Quarters after launch, US$ mn
Cosentyx Stelara Otezla Taltz
350
300
250
200
150
100
50
0
Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9
Q11 Q12 Q13 Q14 Q15 Q16 Q10 Source: Celgene, Kotak Institutional Equities Source: Company, Kotak Institutional Equities
50 KOTAK INSTITUTIONAL EQUITIES RESEARCH Sun Pharmaceuticals Pharmaceuticals
Signs of an emerging ophthalmics strategy
SUNP has high hopes from the upcoming launch of BromSite and hopes to achieve reasonable market share given the differentiating label claim (prevention of ocular pain vs reduction in ocular pain), though we see limited clinical differentiation to enable a meaningful switch from Prolensa and Nevanac/Ilevro. SUNP’s acquisition of Ocular Technologies gives it access to Seciera, a re-formulated nanomicelle form of cyclosporine, the active ingredient also used in Allergan’s Restasis. Seciera is currently in Phase III for dry eye treatment, with an NDA filing targeted in 1HCY17. Seciera will compete directly with Allergan’s Restatis, which was recently also launched in a preservative free multi-dose container, and with Shire’ sXiidra (lifitegrast), an LFA-1 antagonist with a superior label covering both the signs and symptoms of dry eye (vs Restasis, which is only indicated for tear production), which is now rapidly gaining market share. While we expect Xiidra to gain significant market share, we like SUNP’s entry in dry eye, which we believe has structural growth drivers:
Structural growth market (volumes). Volumes in the opthalmics segment grew by ~8% CAGR from FY2010-15 as compared to US pharma market volume growth of ~5% over the same time period. An aging US population and chronic nature (retina, glaucoma and dry eye) further underpin the volume growth potential of the segment. Further, dry eye has a high untreated patient population with almost 3/4th of patients treated using conventional OTC artificial tears, and we expect continued shift towards Xiidra and cyclosporine (Restasis as well as Seciara).
Exhibit 7: Global ophthalmics market split Exhibit 8: Global ophthalmics market size (pharma segment) Calendar year-ends, 2014-19E (US$ mn) Calendar year-ends, 2014-19E (US$ mn)
60 Pharma Surgical Vision Care 14 2014 2019 12 50 11.8 10 8 40 9.7 11.2 6 30 4 8.8 2 20 0 29.9
10 22.6
Dry eye
Glaucoma
Infection/ Allergy/Otic
0 inflammation
2014 2019 Retina(biologics)
Source: Novartis, Kotak Institutional Equities Source: Novartis, Kotak Institutional Equities
High concentration among existing players. Top-7 companies control ~55% of global ophthalmics pharma market, with Novartis being the global leader and three companies having a single product portfolio (Shire, Roche and Regeneron). The situation is similar in the US where top-5 companies account for ~90% of the ophthalmics pharma market. While this raises the barriers to entry for new companies, it also provides meaningful pricing power to the successful players.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 51 Pharmaceuticals Sun Pharmaceuticals
Low clinical risk and potential for lifecycle management. Except for the retinal diseases (AMD, DME, etc.), most of the drugs are essentially reformulations involving combinations or different strengths/formulations of existing drugs, which along with the predictable regulatory strategy creates a low clinical risk for branded drugs in the ophthalmics market. Given that the reformulations are typically used as a lifecycle management strategy, it creates a need for the generics to continually challenge IP on new formulations (similar to OC market). However, given that many of the products are more complex sterile forms (polymer based solution in case of BromSite and nanomicelle colloid solution in case of Seciera), non-infringement is challenging, thereby reducing the potential generic competition when compared to oral solid dosages.
Exhibit 9: SUNP ANDA filing trend 1QFY14 – 3QFY17, March fiscal year-ends
1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 Approvals ANDA approvals - during the period 9 9 4 4 6 4 0 0 4 4 1 5 7 6 1 Cumulative ANDA approvals 320 333 337 341 350 354 358 437 442 445 435 440 417 423 424 Filings ANDA filed - during the period 4 10 5 10 14 1 4 0 6 6 5 11 1 3 9 Cumulative ANDA's filed 453 463 468 478 521 484 489 597 601 599 591 572 567 567 573 Pending ANDA -pending approval 4 10 5 134 140 130 131 159 154 154 156 159 150 144 144 - of which tentative approvals 19 15 14 14 12 11 11 16 12 12 10 13 15 13 13
Source: Company, Kotak Institutional Equities
Exhibit 10: Taro ANDA filing trend 1QFY14 – 3QFY17, March fiscal year-ends
1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 2QFY17 3QFY17 Approvals ANDA approvals - during the quarter 2 2 0 1 1 1 1 0 2 0 1 4 4 1 1 1 NDA approvals - during the quarter 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 Filings ANDA filings - during the quarter 1 1 6 3 5 0 1 5 0 2 2 6 2 3 1 1 NDA filings - during the quarter 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 Pending approval ANDA 20 19 25 27 31 30 30 35 32 34 35 36 34 36 36 36 NDA 1 1 1 1 1 1 0 1 1 0 0 0 0 0 0 0
Source: Company, Kotak Institutional Equities
52 KOTAK INSTITUTIONAL EQUITIES RESEARCH Sun Pharmaceuticals Pharmaceuticals
Exhibit 11: Sun Pharma – consolidated profit and loss, balance sheet, cash model March fiscal year-ends, 2012-19E (Rs mn)
2012 2013 2014 2015 2016E 2017E 2018E 2019E Net revenues 80,198 112,999 160,784 275,390 287,953 325,915 348,723 386,733 Gross Profit 63,785 92,265 132,990 207,998 223,121 242,288 257,276 287,608 Staff costs (11,877) (15,345) (20,744) (45,026) (47,971) (48,833) (51,471) (56,401) R&D expenses (4,449) (7,042) (10,153) (18,373) (23,025) (21,629) (26,732) (30,178) Other expenses (15,069) (20,916) (30,158) (64,462) (63,630) (61,173) (63,238) (69,144) EBITDA 32,390 48,963 71,936 80,136 88,494 110,653 115,835 131,885 Depreciation & amortisation (2,912) (3,362) (4,094) (11,947) (10,135) (12,514) (13,054) (16,503) EBIT 33,578 49,482 72,923 68,189 78,359 98,139 102,781 115,382 Net Interest (282) (432) (442) (5,790) (4,769) (5,085) (5,118) (5,024) Other income 4,099 3,881 5,081 4,008 914 5,345 5,797 7,300 Exceptional items — — (25,174) (2,378) (6,852) — — — Profit before tax 33,296 49,050 72,481 63,904 74,486 98,000 103,061 117,258 Tax & Deferred Tax (3,826) (8,456) (7,908) (9,147) (9,349) (15,208) (17,102) (22,041) Less: minority interest (3,855) (4,863) (7,375) (9,363) (11,126) (9,857) (8,285) (8,368) Net Income (adjusted) 25,614 35,732 57,198 45,394 54,011 72,935 77,674 86,849 EPS adjusted (Rs) 12.4 17.2 27.6 18.9 22.4 30.3 32.3 36.1 Balance sheet Equity 133,278 166,248 204,461 293,582 354,901 432,964 511,673 597,887 Total borrowings 2,650 1,982 24,890 75,963 83,381 81,881 80,381 78,881 Deferred tax liability 3,113 2,054 2,757 985 616 616 616 616 Other liabilities 23,563 30,568 35,493 92,561 80,263 97,656 101,226 106,131 Total liabilities 162,604 208,812 293,708 490,279 542,196 636,151 716,930 806,549 Net fixed assets 32,742 50,771 58,242 110,201 133,606 133,093 129,039 120,036 Investments 5,890 11,064 7,876 5,989 5,933 5,933 5,933 5,933 Cash 49,911 53,639 95,886 131,155 147,045 217,300 291,989 379,139 Other current assets 68,550 84,882 121,192 215,576 225,287 249,501 259,645 271,116 Total assets 162,604 208,812 293,708 490,279 542,196 636,151 716,930 806,549 Cashflow statement Operating profit before working capital 35,782 44,812 45,410 71,765 84,923 114,443 118,943 139,143 Tax paid (2,268) (10,735) (7,889) (17,404) (19,885) (15,208) (17,102) (22,041) Change in working capital (10,033) (448) 2,071 1,796 2,656 (10,752) (9,401) (11,949) Capital expenditure (7,129) (8,455) (9,060) (23,419) (33,825) (12,000) (9,000) (7,500) Free cash flow 16,353 25,174 30,532 32,739 33,869 76,484 83,440 97,652 Margins and ratios Gross profit margin (%) 79.5 81.7 82.7 75.5 77.5 74.3 73.8 74.4 EBITDA margin (%) 40.4 43.3 44.7 29.1 30.7 34.0 33.2 34.1 Tax rate (%) 11.5 17.2 10.9 14.3 12.6 15.5 16.6 18.8 RoAE (%) 23.7 26.3 19.1 20.2 16.3 20.9 18.6 17.7 RoACE (%) 38.1 40.0 52.9 33.4 29.8 36.3 37.4 42.2
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 53 BUY Tata Motors (TTMT) Automobiles FEBRUARY 14, 2017 RESULT Coverage view: Neutral
JLR disappoints as incentives increase sequentially. Tata Motors reported weak Price (`): 482 3QFY17 results with 42% yoy decline in EBITDA due to lower-than-estimated Target price (`): 550 profitability in both JLR and standalone business led by significant increase in variable BSE-30: 28,339 and fixed incentives. We expect gradual improvement in JLR EBITDA margin as forex hedge rate comes closer to spot rates in next two years. Volume growth will likely remain strong led by a fresh and young model line-up. We maintain BUY rating on attractive valuations but revise our target price to `550 (from `600 earlier).
Company data and valuation summary Tata Motors Stock data Forecasts/Valuations 2017E 2018E 2019E 52-week range (Rs) (high,low) 598-290 EPS (Rs) 20.7 41.5 55.1 Market Cap. (Rs bn) 1,543.2 EPS growth (%) (46.4) 100.1 32.9 Shareholding pattern (%) P/E (X) 23.2 11.6 8.7 Promoters 33.0 Sales (Rs bn) 2,760.5 3,003.8 3,288.4 FIIs 44.8 Net profits (Rs bn) 70.4 140.9 187.2 MFs 4.0 EBITDA (Rs bn) 288.3 405.3 489.5 Price performance (%) 1M 3M 12M EV/EBITDA (X) 6.5 4.7 3.8 Absolute (6.4) (5.0) 61.6 ROE (%) 8.4 14.9 16.8 Rel. to BSE-30 (10.0) (10.1) 31.1 Div. Yield (%) 0.0 0.0 0.0
Profitability of JLR business disappoints again in 3QFY17
JLR reported revenues of GBP611 mn (down 27% yoy), which was 26% below our estimates due to lower-than-expected EBITDA margin (9.3% versus our estimate of 13%). Revenues increased by 13% yoy; while volumes were down 5% yoy, ASPs are up 19% on yoy basis (up 4.2% qoq) largely due to the benefit of GBP depreciation versus USD and Euro. However, we note that despite currency benefits on ASPs, gross margin has improved by just 130 bps on yoy basis and remain flat on sequential basis. Adjusted for realized forex losses, EBITDA margin have remained around 16-16.5% levels over the past four quarters. In our view, JLR has decided to largely pass on the currency benefit to customers particularly in the US in the form of higher incentives and additional features to gain market share. Additionally, gross margin was also impacted by (1) weaker product mix due to decline in Range Rover and RR Sport volumes (highest margin models) and (2) impact of run-down of old Discovery model. The profitability of the China JV remained strong with JLR’s share of profit at GBP35 mn in 3QFY17.
Standalone business reported an EBITDA of `0.8 bn (KIE ₹2.1 bn) and EBITDA margin of 0.7% (KIE 2.1%); down 230 bps qoq due to (1) deterioration in gross margin (on expected lines) and (2) 6% qoq increase in other expenses despite 2% qoq decline in overall volumes.
JLR volume growth remain strong; EBITDA margin recovery will be more gradual
We expect JLR to deliver 10% volume CAGR over FY2017-19E led by led by strong demand for F-Pace and Discovery Sport, launch of all-new Discovery and mid-sized Range Rover models. We believe that EBITDA margin will improve 14-14.5% levels in FY2018E due to (1) reduction in Hitesh Goel incentives in Discovery post launch of new model in 4QFY17 and (2) operating leverage benefits as volumes were on lower side in this quarter. Nishit Jalan Lower our earnings estimates; maintain BUY with revised target price of `550 (from `600)
We cut our FY2017E consolidated EBITDA estimates by 17% as we factor in weaker 9MFY17 performance in both JLR and standalone business. For FY2018/19E, we have cut our EBITDA estimates by 10%/6% on 50-100 bps cut in JLR EBITDA margin estimates and also lower our standalone estimates. We maintain our BUY adding with revised TP of `550 (from `600 earlier).
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Tata Motors Automobiles
JLR: Profitability disappoints due to lower gross and higher other expenses
JLR reported revenues of GBP6.5 bn (+13% yoy), which was 3% above our estimates due to higher-than-expected realizations. Volumes were down 5% yoy but ASPs are up 19% on yoy basis (up 4.2% qoq), which is largely due to the benefit of GBP depreciation versus USD and Euro. However, we note that despite currency benefits on ASPs, gross margin has improved by just 130 bps on yoy basis and remain flat on sequential basis (KIE up 170 bps yoy). In our view, the company has decided to largely pass on the currency benefit to customers particularly in the US in the form of higher incentives and additional features. Additionally, gross margin was also impacted by (1) weaker product mix as Range Rover and RR Sport volumes (highest margin models) have declined by 13-23% yoy in 3QFY17 and (2) impact of run-down of old Discovery model.
The company reported 3QFY17 EBITDA of GBP611 mn (down 27% yoy), which was 26% below our estimate of GBP829 mn. Reported EBITDA margin was 9.3% versus our estimate of 13%. The miss in EBITDA margin compared to our estimates is due to (1) 170 bps lower-than-expected gross margin due to weaker product mix, increase in incentives (50 bps) and impact of run-down of Discovery (100 bps), (2) 80 bps due to higher hedge losses, (3) 90 bps due to higher other expenses possibly due to higher fixed marketing expenses (advertisement and publicity) and (4) 30 bps due to higher employee cost. Going ahead, we believe that reported EBITDA margin will likely to improve around 14-14.5% levels in FY2018E due to (1) run-down impact of Discovery will not continue as the new model will get launched in 4QFY17 and (2) operating leverage benefits as volumes were on lower side this quarter. We expect volumes of Range Rover and Range Rover Sport models to improve particularly in 2HFY18 post the launch of new refresh models.
The profitability of the China JV remained strong with JLR’s share of profit at GBP35 mn in 3QFY17 (GBP33 mn in 2QFY17). Adjusted PAT came in at GBP152 mn (down 65% yoy) which was significantly below our estimates due to miss at EBITDA level.
Other key highlights of JLR performance in 3QFY17
JLR wholesale volumes increased by only 1% yoy in 3QFY17 including sales in China joint venture. JLR volumes excluding China declined by 5% yoy in 3QFY17; discontinuation of Defender and run-down of Discovery volumes impacted volumes by around 11-12% on yoy basis. Newly launched Jaguar F-Pace continue to do well but Range Rover and Range Rover Sport volumes were quite weak and declined by 23% and 13% yoy respectively. Jaguar XF volumes declined by 48% yoy despite launch of new model which is quite disappointing, in our view.
On the geographical front, China volumes (including China JV) increased by 30% yoy in 3QFY17. In the UK P&L, China volumes were up just 2% yoy while Europe and UK volumes declined by 14% and 9% yoy respectively. North America volumes were extremely strong with 23% yoy growth in 3QFY17; in our view, the company has passed on most of the currency benefits to customers (in the form of higher incentives and additional features) to gain market share.
China JV volumes came in at around 21,335 units; up 66% yoy and up 42% qoq. This is led by the commencement of production of Jaguar XF and potentially further ramp-up of local production of Discovery Sport. We expect the company to maintain monthly volume run-rate at around 6,000 units in China JV.
The company will launch all-new Discovery, which is based on lightweight aluminum platform of the company and is 480 kg lighter than the earlier model. Wholesale dispatches of this model will start in this quarter.
There was a positive free cashflow of GBP54 mn in 2QFY17 largely due to GBP195 mn reduction in working capital requirements.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 55 Automobiles Tata Motors
Total R&D spend was GBP475 mn and capex spend was GBP451 mn in 3QFY17.
Exhibit 1: 3QFY17 results were below expectations due to lower-than-expected gross margin, higher forex losses and other expenses JLR interim financial results, March fiscal year-ends (GBP mn)
(% chg.) 3QFY17 3QFY17E 3QFY16 2QFY17 3QFY17E 3QFY16 2QFY17 9MFY17 9MFY16 Yoy (%) FY2017E Volumes (units) 130,910 130,910 137,631 124,200 - (4.9) 5.4 375,886 359,391 536,800 Average realization 49,935 48,698 42,004 47,931 2.5 18.9 4.2 47,757 43,446 48,005 Net sales 6,537 6,375 5,781 5,953 2.5 13.1 9.8 17,951 15,614 15.0 25,769 Total expenditure (5,926) (5,546) (4,947) (5,338) 6.9 19.8 11.0 (16,053) (13,370) (22,766) Raw materials (3,869) (3,666) (3,496) (3,527) 5.5 10.7 9.7 (10,623) (9,318) (15,152) Staff cost (648) (610) (582) (585) 6.2 11.3 10.8 (1,838) (1,673) (2,520) Other expenditure (952) (860) (786) (894) 10.7 21.1 6.5 (2,596) (2,168) (3,644) Forex losses (realized hedge book and revaluation of WC) (457) (410) (83) (332) 11.5 450.6 37.7 (996) (211) (1,450) Revaluation of CA/CL Hedge book (gain)/loss EBITDA 611 829 834 615 (26.3) (26.7) (0.7) 1,898 2,244 (15.4) 3,003 Associate Income (China JV) 35 35 22 33 113 15 Interest (5) (10) (10) (7) (24) (41) (30) Depreciation (409) (420) (357) (410) (2.6) 14.6 (0.2) (1,207) (1,040) (1,618) Pretax profits 232 434 489 231 (46.6) (52.6) 0.4 780 1,178 (33.8) 1,355 Tax expense (88) (109) (59) (36) (18.9) (219) (140) (379) Exceptional gains/(losses) 23 — 10 49 154 (200) 140 Reported profit after tax 167 326 440 244 (48.7) (31.6) 715 838 (14.7) 1,115 Adjusted PAT 152 326 431 201 (53.3) (64.8) (24.5) 595 927 (35.8) 975 JLR wholesale volume mix (units) Jaguar 44,000 45,000 27,024 41,900 62.8 5.0 120,472 69,913 72.3 173,800 Land Rover 86,910 85,910 110,607 82,300 (21.4) 5.6 255,414 289,478 (11.8) 363,000 China JV 21,335 21,335 12,830 15,043 66.3 41.8 49,936 22,267 124.3 66,000 Total volumes (including China JV) 152,245 152,245 150,461 139,243 1.2 9.3 425,822 381,658 11.6 602,800 Product Mix (%) Jaguar 28.9 29.6 18.0 30.1 28.3 18.3 28.8 Land Rover 57.1 56.4 73.5 59.1 60.0 75.8 60.2 China JV 14.0 14.0 8.5 10.8 11.7 5.8 10.9 Geographical Mix - Wholesale Volumes (units) China (Only JLR P&L, excludes China JV volumes) 16,100 14,400 15,800 14,400 1.9 11.8 43,200 46,021 (6.1) 58,000 Europe 32,100 29,200 37,200 29,200 (13.7) 9.9 96,800 89,339 8.4 145,104 North America 37,600 31,100 30,500 31,100 23.3 20.9 98,400 78,023 26.1 136,125 United Kingdom 23,700 28,900 26,000 28,900 (8.8) (18.0) 75,300 74,674 0.8 117,766 Rest of World 21,410 27,310 28,131 20,600 (23.9) 3.9 62,186 71,334 (12.8) 79,805 Modelwise wholesale volumes (units) XE 12,500 10,500 11,400 12,100 9.6 3.3 33,400 29,090 14.8 49,000 XF 5,200 10,000 10,000 6,700 (48.0) (22.4) 18,800 23,780 (20.9) 28,000 XJ 2,600 2,600 2,700 1,900 (3.7) 36.8 7,000 7,475 (6.4) 9,500 XK - - - - - 81 (100.0) - F-Pace 20,900 20,000 - 18,600 12.4 52,900 - 76,000 Others (incl. F Type) 2,800 1,900 2,924 2,600 (4.2) 7.7 8,372 9,487 (11.8) 11,300 Jaguar 44,000 45,000 27,024 41,900 62.8 5.0 120,472 69,913 72.3 173,800 Defender 100 50 5,700 100 (98.2) - 500 16,986 (97.1) - Discovery 5,700 7,000 15,300 10,400 (62.7) (45.2) 28,500 37,028 (23.0) 45,000 Freelander/Discovery Sport 22,600 24,950 25,100 18,200 (10.0) 24.2 59,600 62,880 (5.2) 84,000 Range Rover 13,400 13,000 17,500 12,700 (23.4) 5.5 38,800 44,840 (13.5) 55,000 Range Rover Evoque 25,110 19,910 23,907 21,200 5.0 18.4 68,214 63,908 6.7 95,000 Range Rover Sport 20,000 21,000 23,100 19,700 (13.4) 1.5 59,800 63,836 (6.3) 84,000 Land Rover 86,910 85,910 110,607 82,300 (21.4) 5.6 255,414 289,478 (11.8) 363,000 Currency Movement (average) GBPUSD 1.25 1.25 1.52 1.31 (17.5) (4.8) GBPEUR 1.16 1.16 1.38 1.18 (16.4) (1.6) GBPCNY 8.52 8.52 9.69 8.76 (12.1) (2.7) GBPINR 85.0 85.0 99.9 87.9 (14.9) (3.3) Ratios (%) EBITDA margin (%) 9.3 13.0 14.4 10.3 10.6 14.4 11.7 Raw material exp to sales 59.2 57.5 60.5 59.2 59.2 59.7 58.8 Staff cost to sales 9.9 9.6 10.1 9.8 10.2 10.7 9.8 Other expenses to sales 21.6 19.9 15.0 20.6 20.0 15.2 19.8 Tax rate (%) 37.9 25.0 12.1 15.6 28.1 11.9 28.0
Source: Company, Kotak Institutional Equities estimates
56 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Motors Automobiles
Exhibit 2: Average GBP depreciated by 5% qoq versus USD in 3QFY17 Average quarterly currency movement, March fiscal year-ends, 2015-17
1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 GBP-USD Average 1.68 1.67 1.58 1.51 1.53 1.55 1.52 1.43 1.44 1.31 1.24 Period-end 1.71 1.62 1.56 1.49 1.57 1.51 1.47 1.44 1.33 1.30 1.24 EUR-USD Average 1.37 1.33 1.25 1.13 1.11 1.11 1.10 1.10 1.13 1.12 1.08 Period-end 1.37 1.27 1.22 1.10 1.12 1.12 1.09 1.14 1.11 1.12 1.05 GBP-CNY Average 10.5 10.3 9.7 9.5 9.5 9.8 9.7 9.4 9.4 8.8 8.5 Period-end 10.6 10.0 9.7 9.3 9.8 9.6 9.6 9.3 8.8 8.7 8.6 GBP-RUB Average 58.9 60.0 75.3 95.7 80.8 97.9 100.3 107.1 94.4 84.9 78.2 Period-end 58.1 63.6 83.2 84.9 87.7 98.8 106.3 96.1 85.5 82.3 75.6
Source: Bloomberg, Kotak Institutional Equities
Exhibit 3: The company generated marginal positive free cashflow in 3QFY17 due to reduction in working capital JLR's cash-flow summary statement, March fiscal year-ends, 2015-17 (GBP mn)
1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 Cash from operating activities 1,087 911 1,056 1,016 821 589 822 903 672 615 611 Working capital changes and tax paid (467) 278 (293) 39 (886) (123) 376 1,114 (726) 141 195 Cash flow from operations 620 1,189 763 1,055 (121) 466 1,198 2,017 (54) 756 806 Investment in tangible and intangible assets (629) (701) (825) (738) (712) (700) (765) (640) (607) (696) (830) Other (including finance income) 14 9 16 18 15 9 21 16 28 10 78 Free cash flow 5 497 (46) 335 (818) (225) 454 1,393 (633) 70 54 Investment in financial deposits (225) (48) 364 104 — — — — — — Changes in debt 4 (13) 333 18 5 (27) 18 (107) (92) 60 (24) Dividends paid (150) — — — (150) — — — (150) Finance expenses and fees paid (26) (41) (30) (133) (25) (50) (24) (43) (27) (42) (26) Net change in cash and cash equivalents (392) 395 621 324 (988) (302) 448 1,243 (902) 88 4
Source: Company, Kotak Institutional Equities
Exhibit 4: JLR expensed ~20% of R&D in P&L in 3QFY17 Break-up of JLR R&D and capex spend, March fiscal year-ends, 2015-17 (GBP mn)
1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 R&D expense Capitalized 273 274 303 308 315 306 323 298 322 371 379 Expensed 53 62 65 73 64 75 77 102 85 88 96 Total R&D expense 326 336 368 381 379 381 400 400 407 459 475 Investment in tangible and other intangible assets 356 427 522 430 397 394 442 342 285 325 451 Total product and other investment 682 763 890 811 776 775 842 742 692 784 926 R&D capitalized as % of total R&D 83.7 81.5 82.3 80.8 83.1 80.3 80.8 74.5 79.1 80.8 79.8
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 57 Automobiles Tata Motors
Exhibit 5: China share will increase in FY2017-18E as JV production ramps up Geography-wise volume mix, March fiscal year-ends, 2012-19E (units, %)
2012 2013 2014 2015 2016 2017E 2018E 2019E Geography N.A 58,327 64,885 71,000 79,000 108,900 136,125 152,460 170,755 UK 61,796 68,054 76,000 88,100 111,100 117,766 131,898 147,726 Europe (excl Russia and UK) 71,580 78,781 70,000 89,700 124,200 139,104 155,796 174,492 Russia 15,201 16,721 13,000 10,400 6,000 6,000 6,000 6,000 China 54,532 79,441 104,000 119,300 98,651 124,000 141,200 151,260 Asia Pac (excl China) 14,467 18,289 23,000 27,100 29,810 32,791 36,070 39,677 Rest of World 38,530 45,891 73,000 56,900 65,376 47,014 48,631 46,606 Total Volumes 314,433 372,062 430,000 470,500 544,037 602,800 672,055 736,516 Yoy growth (%) 29.1 18.3 15.6 9.4 15.6 10.8 11.5 9.6 Geographical mix (%) N.A 18.5 17.4 16.5 16.8 20.0 22.6 22.7 23.2 UK 19.7 18.3 17.7 18.7 20.4 19.5 19.6 20.1 Europe (excl Russia and UK) 22.8 21.2 16.3 19.1 22.8 23.1 23.2 23.7 Russia 4.8 4.5 3.0 2.2 1.1 1.0 0.9 0.8 China 17.3 21.4 24.2 25.4 18.1 20.6 21.0 20.5 Asia Pac (excl China) 4.6 4.9 5.3 5.8 5.5 5.4 5.4 5.4 Rest of World 12.3 12.3 17.0 12.1 12.0 7.8 7.2 6.3 Total Volumes 100 100 100 100 100 100 100 100
Source: Company, Kotak Institutional Equities estimates
58 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Motors Automobiles
Exhibit 6: New model launches to drive double-digit volume growth for JLR in FY2017-18E JLR model-wise volume mix assumptions, March fiscal year-ends, 2012-19E (units, %)
2012 2013 2014 2015 2016 2017E 2018E 2019E Model XF 33,651 37,984 47,000 45,900 36,200 38,000 41,400 44,070 XJ 15,843 15,816 19,000 16,300 12,200 9,500 10,640 10,640 XK 4,545 4,012 3,000 2,100 100 — — — F type — — 10,000 12,200 12,600 11,300 11,865 12,458 Small Jaguar — — — — 39,200 49,000 48,000 48,000 F Pace — — — — 1,806 76,000 84,000 84,000 Jaguar 54,039 57,812 79,000 76,500 102,106 183,800 195,905 199,168 Defender 19,290 15,089 17,000 20,000 20,200 — — 20,000 Discovery 46,466 43,579 44,000 50,600 53,700 45,000 70,000 84,000 Freelander 46,977 52,150 57,000 38,700 — — — — Discovery Sport — — — 13,600 97,800 116,000 120,000 128,640 Range Rover 31,209 29,835 46,000 61,400 60,100 55,000 57,750 60,638 RRSport 56,235 57,485 66,000 85,800 90,300 84,000 88,200 92,610 Evoque 60,217 116,112 121,000 123,900 119,831 119,000 120,200 121,460 New Range Rover SUV — — — — — — 20,000 30,000 Land Rover 260,394 314,250 351,000 394,000 441,931 419,000 476,150 537,348 Total Volumes 314,433 372,062 430,000 470,500 544,037 602,800 672,055 736,516 Model mix (%) XF 10.7 10.2 10.9 9.8 6.7 6.3 6.2 6.0 XJ 5.0 4.3 4.4 3.5 2.2 1.6 1.6 1.4 XK 1.4 1.1 0.7 0.4 0.0 — — — F type — — 2.3 2.6 2.3 1.9 1.8 1.7 Small Jaguar — — — — 7.2 8.1 7.1 6.5 F Pace — — — — 0.3 12.6 12.5 11.4 Defender 6.1 4.1 4.0 4.3 3.7 — — 2.7 Discovery 14.8 11.7 10.2 10.8 9.9 7.5 10.4 11.4 Freelander 14.9 14.0 13.3 8.2 — — — — Discovery Sport — — — 2.9 18.0 19.2 17.9 17.5 Range Rover 9.9 8.0 10.7 13.0 11.0 9.1 8.6 8.2 RRSport 17.9 15.5 15.3 18.2 16.6 13.9 13.1 12.6 Evoque 19.2 31.2 28.1 26.3 22.0 19.7 17.9 16.5 New Range Rover SUV — — — — — — 3.0 4.1 Total Volumes 100 100 100 100 100 100 100 100
Source: Company, Kotak Institutional Equities estimates
Standalone business: Another quarter of disappointment
Net sales increased by 2% yoy to `102.2 bn, which was largely in line with our estimates. Volumes increased by 8% yoy but gross realizations declined by 6% yoy due to weaker product mix (lower share of MHCV volumes) and potentially some increase in discount levels.
Standalone business reported an EBITDA of `0.8 bn (KIE ₹2.1 bn) and EBITDA margin of 0.7% (KIE 2.1%); down 230 bps qoq due to (1) deterioration in gross margin (on expected lines) and (2) 6% qoq increase in other expenses despite 2% qoq decline in overall volumes. Gross margin declined by 130 bps qoq due to increase in revenue mix of PV segment (lower margin business) and adverse impact of higher commodity prices.
The company reported net loss of ₹10.5 bn in the quarter (KIE net loss of `7.3 bn) due to decline in profitability.
Standalone net debt was ₹230 bn as of December 2016; up from ₹137 bn as of March 2016.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 59 Automobiles Tata Motors
Company expects 4QFY17 volume growth for domestic MHCV industry to remain flat on a yoy basis driven by pre-buying impact ahead of change in emission norms. We believe outlook for FY2018 for MHCV industry is also clouded given by uncertainty related to implementation of GST.
The company highlighted annual capex will likely remain around `35-40 bn over the next few years; 55% of the capex will be towards passenger vehicle segment due to focus on new model launches
Exhibit 7: Standalone 3QFY17 results were significantly below estimates on lower gross margin and higher other expenses Tata Motors standalone interim financial results, March fiscal year-ends (` mn)
(% chg.) 3QFY17 3QFY17E 3QFY16 2QFY17 3QFY17E 3QFY16 2QFY17 9MFY17 9MFY16 Yoy (%) FY2017E Volumes (units) 132,657 132,657 122,397 134,869 8.4 (1.6) 391,255 364,966 7.2 539,724 Gross realization (Rs) 845,913 845,720 903,230 845,720 0.0 (6.3) 0.0 871,363 911,031 (4.4) 866,448 Gross sales 112,216 112,191 110,553 114,061 0.0 1.5 (1.6) 340,925 332,495 2.5 467,643 Excise duty (10,018) (10,770) (10,135) (10,837) (7.0) (1.2) (7.6) (32,307) (31,898) 1.3 (45,660) Net sales 102,199 101,421 100,418 103,225 0.8 1.8 (1.0) 308,619 300,597 2.7 421,982 Raw materials (74,791) (74,000) (70,395) (74,225) 1.1 6.2 0.8 (217,881) (207,544) 5.0 (300,159) Staff cost (8,454) (8,800) (8,250) (8,817) (3.9) 2.5 (4.1) (26,253) (24,027) 9.3 (35,544) Other expenditure (18,189) (16,500) (16,799) (17,121) 10.2 8.3 6.2 (54,915) (51,573) 6.5 (73,228) EBITDA 765 2,121 4,974 3,062 (63.9) (84.6) (75.0) 9,569 17,453 13,051 Other income 940 1,500 4,939 1,460 (37.4) (81.0) (35.7) 8,645 12,915 (33.1) 10,000 Interest (4,137) (3,700) (3,572) (3,728) 11.8 15.8 11.0 (11,266) (11,593) (2.8) (15,525) Depreciation (7,290) (7,186) (5,910) (7,186) 1.4 23.3 1.4 (21,598) (17,632) 22.5 (28,670) Profit before tax before exceptional (9,723) (7,265) 432 (6,391) (14,649) 1,143 (21,144) Extraordinary income — — - — - 3,245 (1,500) Extraordinary exp (593) - (1,824) 302 (1,378) (5,181) — Pretax profits (10,316) (7,265) (1,393) (6,089) (16,027) (793) (22,644) Tax expense (143) - 24 (218) (483) (565) 500 Profit after tax (10,459) (7,265) (1,368) (6,308) (16,510) (1,358) (22,144) Adjusted PAT (10,014) (7,265) (1,368) (6,534) (15,476) (7,137) (21,019) EPS (Rs) (2.9) (2.1) (0.4) (1.9) (4.6) (2.1) (6.2) Segmental volume breakdown (units) MHCV 40,995 40,995 40,763 39,345 0.6 4.2 121,128 122,419 (1.1) 170,766 LCV 50,698 50,698 49,550 52,835 2.3 (4.0) 154,189 143,446 7.5 215,493 Passenger cars 36,348 36,348 27,802 37,618 30.7 (3.4) 102,973 84,646 21.7 136,035 Utility vehicles 4,616 4,616 4,282 5,071 7.8 (9.0) 12,965 14,455 (10.3) 17,430 Product Mix (%) MHCV 30.9 30.9 33.3 29.2 31.0 33.5 31.6 LCV 38.2 38.2 40.5 39.2 39.4 39.3 39.9 Passenger cars 27.4 27.4 22.7 27.9 26.3 23.2 25.2 Utility vehicles 3.5 3.5 3.5 3.8 3.3 4.0 3.2 Ratios (%) Excise duty as a % of gross sales 8.9 9.6 9.2 9.5 9.5 9.6 9.8 Raw material cost as % of net sales 73.2 73.0 70.1 71.9 70.6 69.0 71.1 Staff cost as % of net sales 8.3 8.7 8.2 8.5 8.5 8.0 8.4 Other expenses as % of net sales 17.8 16.3 16.7 16.6 17.8 17.2 17.4 EBITDA margin (%) 0.7 2.1 5.0 3.0 3.1 5.8 3.1
Source: Company, Kotak Institutional Equities estimates
Consolidated EBITDA was 30% below estimates
The company reported consolidated EBITDA of ₹51.6 bn (down 42% yoy), which was 30% below our estimates. The miss was due to weaker-than-expected profitability in both JLR and standalone business. Performance of Tata Motor Finance remained weak in 3QFY17; revenues declined by 5% yoy and the company posted net loss of ₹30 mn. Performance of other major subsidiaries such as Tata Drivelines, Tata Technologies and Tata Daewoo was reasonably strong in this quarter (see Exhibit 10 for details).
60 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Motors Automobiles
Exhibit 8: Tata Motors reported consolidated EBITDA was below estimates due to miss in both JLR and standalone businesses Tata Motors consolidated interim financial results, March fiscal year-ends (` mn)
(% chg.) 3QFY17 3QFY17E 3QFY16 2QFY17 3QFY17E 3QFY16 2QFY17 9MFY17 9MFY16 Yoy (%) FY2017E Net sales 675,313 662,559 705,921 659,004 1.9 (4.3) 2.5 1,993,267 1,925,171 3.5 2,760,519 Raw materials (400,123) (434,634) (392,758) (7.9) 1.9 (1,183,789) (1,169,217) Staff costs (70,446) (73,753) (67,939) (4.5) 3.7 (213,049) (211,591) Other expenses (153,132) (108,989) (135,482) 40.5 13.0 (405,862) (280,561) Total expenses (623,701) (617,376) (596,179) 1.0 4.6 (1,802,700) (1,661,369) EBITDA 51,612 73,856 88,545 62,826 (30.1) (41.7) (17.8) 190,567 263,802 (27.8) 288,327 Other income 1,674 1,928 1,794 (13.2) (6.7) 5,204 6,736 Interest expense (8,707) (11,383) (10,249) (23.5) (15.0) (30,650) (35,106) Depreciation (42,300) (42,620) (44,540) (0.8) (5.0) (132,348) (123,653) Exceptional 3,706 (2,332) 162 8,719 (29,404) Profit before tax 5,986 20,656 34,139 9,993 (71.0) (82.5) (40.1) 41,493 82,375 (49.6) 77,923 Tax expense (8,670) (6,690) (4,246) 29.6 104.2 (20,116) (18,884) Minority interest/associates 3,621 1,892 2,537 10,208 544 Profit after tax 938 17,373 29,341 8,284 (94.6) (96.8) (88.7) 31,585 64,035 (50.7) 70,431 Adjusted profit after tax (1,842) 17,373 31,673 8,162 (105.8) (122.6) 25,046 86,671 (71.1) 70,431 EPS (Rs) (0.5) 5.1 9.3 2.4 (105.8) (122.6) 7.4 25.5 (71.1) 20.7 Ratios (%) Raw material as % of sales 59.2 61.6 59.6 59.4 60.7 Staff costs as % of sales 10.4 10.4 10.3 10.7 11.0 Other expenses as % of sales 22.7 15.4 20.6 20.4 14.6 EBITDA margin (%) 7.6 11.1 12.5 9.5 9.6 13.7 Tax rate (%) 144.8 - 19.6 42.5 48.5 22.9 Diluted no. of shares 3,395 3,395 3,395 3,395 3,395 3,395 3,395
Source: Company, Kotak Institutional Equities estimates
Exhibit 9: Performance of Tata Motors Finance was weak in 2QFY17; performance of TML Drivelines also deteriorated Key financials of Tata Motors subsidiaries, March fiscal year-ends, 1QFY14-2QFY17
Change (%) 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 yoy qoq Tata Motors Finance (Rs mn) Net sales 7,129 7,538 7,245 5,518 8,904 6,660 7,212 7,854 7,120 7,080 6,880 (4.6) (2.8) Operating margin (%) (20.4) (5.9) (16.4) (92.5) 14.2 NA NA NA NA NA NA Profit after tax (993) (330) (819) (3,968) 908 (640) 334 2,068 190 (70) (30) Tata Technologies (Rs mn) Net sales 5,939 6,356 6,632 7,015 6,251 6,551 6,911 7,149 6,708 7,006 6,840 (1.0) (2.4) Operating margin (%) 16.3 15.9 15.8 19.6 16.2 18.3 20.3 19.2 15.3 15.4 17.7 Profit after tax 754 794 786 1,011 808 900 1,024 1,085 750 784 790 (22.9) 0.8 Tata Daewoo (KRW bn) Net sales 222 232 233 301 193 223 226 238 267 238 269 19.0 13.1 Operating margin (%) 6.2 4.9 15.3 7.2 10.2 9.7 9.3 7.1 8.1 7.3 8.6 Profit after tax 4.0 4.5 32.0 13.5 11.8 13.5 12.3 8.0 13.1 7.6 15.0 22.0 97.4 TML Drivelines Ltd. (Rs mn) Net sales 1,177 1,297 1,282 1,501 1,349 1,400 1,226 1,476 1,501 1,044 1,240 1.1 18.8 Operating margin (%) 29.5 28.2 29.1 30.0 28.1 24.2 14.7 28.7 24.0 6.9 22.6 Profit after tax 38 104 172 154 164 148 28 208 160 (34) 140
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 61 Automobiles Tata Motors
Exhibit 10: We expect strong performance of China JV to sustain in FY2017-18E Summary projected financials of JLR China JV venture, March fiscal year-ends, 2016-19E (GBP mn)
2016 2017E 2018E 2019E Sales volumes (units) Discovery Sport 8,000 32,000 36,000 39,600 Evoque 26,751 24,000 25,200 26,460 Jaguar XF — 10,000 12,000 13,200 Total sales volumes 34,751 66,000 73,200 79,260 Net sales 1,106 2,241 2,494 2,705 Raw material cost (702) (1,401) (1,559) (1,690) Staff cost (60) (83) (91) (95) Royalty (66) (123) (130) (141) Other expenses (111) (224) (249) (270) Total expenses (939) (1,831) (2,029) (2,196) EBITDA 167 411 465 508 Interest expense (3) (10) (10) (10) Depreciation expense (30) (40) (40) (40) Profit before tax 134 361 415 458 Tax (10) (108) (125) (137) Profit after tax 124 252 291 321 Ratios Raw material cost as % of net sales 63.5 62.5 62.5 62.5 Staff cost as % of net sales 5.4 3.7 3.6 3.5 Royalty cost as % of net sales 6.0 5.5 5.2 5.2 Other expenses cost as % of net sales 10.0 10.0 10.0 10.0
EBITDA margin (%) 15.1 18.3 18.7 18.8
Source: Company, Kotak Institutional Equities estimates
62 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Motors Automobiles
Exhibit 11: We expect standalone volumes to increase by 5% yoy in FY2017E; MHCV volumes will likely decline 3% yoy Tata Motors standalone volume assumptions, March fiscal year-ends, 2011-19E (units)
2011 2012 2013 2014 2015 2016 2017E 2018E 2019E M&HCVs 209,522 221,298 152,505 122,498 142,737 176,573 170,766 184,428 210,117 M&HCVs-domestic 192,127 207,014 143,381 110,225 127,011 157,226 144,648 156,220 179,653 M&HCVs-exports 17,395 14,284 9,124 12,273 15,726 19,347 26,118 28,208 30,465 LCVs 287,463 363,756 428,643 298,799 221,818 205,231 215,493 247,816 277,554 LCVs-domestic 77,558 95,791 113,520 85,140 59,598 41,719 43,805 50,375 56,420 Ace 177,096 227,179 280,242 183,059 131,533 129,015 135,466 155,786 174,480 LCVs-exports 32,809 40,786 34,881 30,600 30,687 34,497 36,222 41,655 46,654 UVs 43,063 56,464 48,617 32,400 25,617 18,881 17,430 19,992 21,976 UVs-domestic 42,297 55,744 47,454 31,268 24,609 18,138 16,687 19,190 21,109 UVs-exports 766 720 1,163 1,132 1,008 743 743 802 867 Passenger vehicles 263,274 265,254 180,355 112,894 111,982 111,072 136,035 149,568 164,449 Passenger vehicles-domestic 185,767 183,439 120,845 85,648 92,569 92,808 116,010 127,611 140,372 Passenger vehicles-exports 7,075 7,288 5,663 5,707 2,512 3,264 3,525 3,807 4,112 Small car 70,432 74,527 53,847 21,539 16,901 15,000 16,500 18,150 19,965 Total domestic sales 745,277 843,694 759,289 516,879 452,221 453,906 473,116 527,332 591,999 Total export sales 58,045 63,078 50,831 49,712 49,933 57,851 66,608 74,473 82,097 Total vehicle sales 803,322 906,772 810,120 566,591 502,154 511,757 539,724 601,805 674,096 Volume growth (yoy %) M&HCVs 24.8 5.6 (31.1) (19.7) 16.5 23.7 (3.3) 8.0 13.9 M&HCVs-domestic 23.8 7.7 (30.7) (23.1) 15.2 23.8 (8.0) 8.0 15.0 M&HCVs-exports 37.1 (17.9) (36.1) 34.5 28.1 23.0 35.0 8.0 8.0 LCVs 23.0 26.5 17.8 (30.3) (25.8) (7.5) 5.0 15.0 12.0 LCVs-domestic (10.1) 23.5 18.5 (25.0) (30.0) (30.0) 5.0 15.0 12.0 Ace 34.0 28.3 23.4 (34.7) (28.1) (1.9) 5.0 15.0 12.0 LCVs-exports 115.6 24.3 (14.5) (12.3) 0.3 12.4 5.0 15.0 12.0 UVs 26.2 31.1 (13.9) (33.4) (20.9) (26.3) (7.7) 14.7 9.9 UVs-domestic 26.1 31.8 (14.9) (34.1) (21.3) (26.3) (8.0) 15.0 10.0 UVs-exports 29.2 (6.0) 61.5 (2.7) (11.0) (26.3) - 8.0 8.0 Passenger vehicles 27.2 0.8 (32.0) (37.4) (0.8) (0.8) 22.5 9.9 9.9 Passenger vehicles-domestic 8.6 (1.3) (34.1) (29.1) 8.1 0.3 25.0 10.0 10.0 Passenger vehicles-exports 25.5 3.0 (22.3) 0.8 (56.0) 29.9 8.0 8.0 8.0 Small car 132.1 5.8 (27.7) (60.0) (21.5) (11.2) 10.0 10.0 10.0 Total domestic sales 22.5 13.2 (10.0) (31.9) (12.5) 0.4 4.2 11.5 12.3 Total export sales 70.0 8.7 (19.4) (2.2) 0.4 15.9 15.1 11.8 10.2 Total vehicle sales 25.0 12.9 (10.7) (30.1) (11.4) 1.9 5.5 11.5 12.0
Source: Company, Kotak Institutional Equities estimates
Exhibit 12: We value Tata Motors at `550/share based on SOTP methodology Tata Motors SOTP valuation
Book value/Net Value per profit Multiple Value share (Rs mn) (X) (Rs mn) (Rs) Comments Standalone business
Standalone book value 179,124
Less: Dividends received from JLR 69,068
Adjusted book value of standalone business 110,056 1.0 110,056 32 based on 1X March 2019E book value JLR JLR UK 170,465 9.0 1,534,189 452 based on 9X December 2018 EPS
JLR China JV valuation 44 based on 6X EV/EBITDA December 2018
Total standalone + JLR 528 Value of subsidiaries 22 SOTP-based value 550 Target price 550
Source: Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 63 Automobiles Tata Motors
Cut FY2017-19E consolidated EBITDA estimates by 6-17%
We cut our FY2017E consolidated EBITDA estimates by 17% due to (1) 150 bps cut in EBITDA margin assumption in JLR as we build in higher incentives due to phasing out of Discovery and increase in discounts in RR/RR Sport models and (2) cut in EBITDA margin assumptions for the standalone business as the company will struggle to pass impact of higher commodity prices due to tough industry growth conditions. For FY2018/19E, we have cut our consolidated EBITDA estimates by 11%/6% on cut in EBITDA margin estimates for JLR (as the company has increased incentives to pass on the currency benefits) and also lower our standalone estimates.
Exhibit 13: We cut our FY2017-19E consol EPS estimates due to cut in profitability estimates in JLR and standalone business Earnings revision table, March fiscal year-ends, FY2017-19E (₹ mn, %)
New estimates Old estimates % change 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E Standalone (Rs mn) Volumes (units) 539,724 601,805 674,096 539,724 601,805 674,096 - - - Net sales 421,982 480,476 559,200 421,982 480,476 559,200 - - - EBITDA 13,051 21,851 35,924 15,646 24,919 39,411 (16.6) (12.3) (8.8) EBITDA margin (%) 3.1 4.5 6.4 3.7 5.2 7.0 Adjusted net profit (21,019) (15,760) (8,314) (13,167) (11,351) (3,378) EPS (6.2) (4.6) (2.4) (3.9) (3.3) (1.0) JLR (GBP mn) Volumes (units) 538,800 598,855 657,256 550,831 606,326 654,519 (2.2) (1.2) 0.4 Average realization 47,827 48,095 47,406 47,392 47,874 47,344 0.9 0.5 0.1 Net sales 25,769 28,802 31,158 26,105 29,027 30,987 (1.3) (0.8) 0.6 EBITDA 3,003 4,195 5,039 3,452 4,599 5,214 (13.0) (8.8) (3.4) EBITDA margin (%) 11.7 14.6 16.2 13.2 15.8 16.8 Product development 360 360 360 347 360 440 Depreciation 1,618 1,868 2,118 1,668 1,918 2,168 Reported net profit 1,115 1,700 2,139 1,424 1,950 2,221 (21.7) (12.8) (3.7) EPS (GBP) 0.33 0.50 0.63 0.42 0.57 0.65 (21.7) (12.8) (3.7) Consolidated (Rs mn) Net sales 2,760,519 3,003,815 3,288,426 2,815,840 3,051,776 3,305,092 (2.0) (1.6) (0.5) EBITDA 288,327 405,267 489,481 348,695 452,617 519,346 (17.3) (10.5) (5.8) EBITDA margin (%) 10.4 13.5 14.9 12.4 14.8 15.7 Adjusted net profit 70,431 140,914 187,064 115,949 168,761 201,935 (39.3) (16.5) (7.4) EPS 20.7 41.5 55.1 34.1 49.7 59.5 (39.3) (16.5) (7.4) GBPINR 87.0 84.0 84.0 88.0 85.0 85.0 (1.1) (1.2) (1.2)
Source: Company, Kotak Institutional Equities
64 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Motors Automobiles
Exhibit 14: We expect JLR’s EBITDA margin to improve in FY2018-19E as forex losses come off Jaguar Land Rover (ex-China JV) income statement, March fiscal year-ends, 2011-19E (GBP mn)
2011 2012 2013 2014 2015 2016 2017E 2018E 2019E Volumes (000s) 244 314 372 430 467 509 537 599 657 Sales 9,871 13,512 15,784 19,386 21,866 22,197 25,769 28,802 31,158 Cost of sales 8,286 11,373 13,254 15,750 17,475 18,743 22,406 24,246 25,759 Materials 6,178 8,733 9,904 11,904 13,185 13,303 15,152 16,849 18,072 Labor 789 1,011 1,333 1,654 1,977 2,321 2,520 2,968 3,429 Manufacturing costs and SG&A 1,319 1,629 2,017 2,192 2,313 3,119 4,734 4,429 4,258 D&A 396 466 622 875 1,051 1,418 1,618 1,868 2,118 Product dev 119 149 198 236 253 318 360 360 360 EBIT 1,069 1,524 1,710 2,525 3,087 1,718 1,385 2,327 2,921 EBITDA 1,465 1,989 2,331 3,400 4,138 3,136 3,003 4,195 5,039 Other income 36 38 71 — — — — — — Interest 23 69 (3) 154 94 52 30 30 30 PBT 1,082 1,492 1,784 2,371 2,993 1,666 1,355 2,297 2,891 Tax 79 26 460 622 576 245 379 597 752 Forex gains (33) (14) (108) 137 (373) (184) 140 — — PAT 1,036 1,481 1,216 1,886 2,044 1,237 1,115 1,700 2,139
EBITDA margin (%) 14.8 14.7 14.8 17.5 18.9 14.1 11.7 14.6 16.2
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 65 Automobiles Tata Motors
Exhibit 15: We done expect significant improvement in EBITDA margin in FY2018E Tata Motors standalone profit and loss, balance sheet and cash flow statement, March fiscal year-ends, 2011-19E (` mn)
2011 2012 2013 2014 2015 2016 2017E 2018E 2019E Profit model (Rs mn) Net sales 468,577 543,066 447,657 342,881 362,947 423,698 421,982 480,476 559,200 EBITDA 44,344 41,776 17,180 (9,112) (12,375) 23,155 13,051 21,851 35,924 Other income 4,140 2,104 17,046 18,669 18,814 21,329 10,000 8,000 8,000 Interest (11,440) (8,550) (10,041) (13,375) (16,117) (14,811) (15,525) (17,721) (19,326) Depreciaton (13,608) (16,067) (18,176) (20,703) (26,032) (24,538) (28,670) (31,830) (34,990) Profit before tax 23,436 19,263 6,008 (24,521) (35,710) 5,136 (21,144) (19,699) (10,392) Extra ordinary income/(expenses) 1,471 5,852 (8,642) 14,263 (4,038) (3,632) (1,500) — — Tax expense (84) — 6 13,603 (7,642) 885 500 3,940 2,078 Net profit 18,118 12,422 (1,354) 3,346 (47,390) 2,342 (22,144) (15,760) (8,314) Adjusted net profit 19,148 16,519 (3,031) (27,276) (52,240) 5,974 (21,019) (15,760) (8,314) Adjusted Diluted EPS (Rs) 5.6 4.9 (0.9) (8.0) (15.4) 1.8 (6.2) (4.6) (2.4) Balance sheet (Rs mn) Equity 6,377 6,348 6,381 6,438 6,438 6,792 6,792 6,792 6,792 Reserves and Surplus 193,756 189,913 187,118 185,328 142,188 216,889 196,245 180,486 172,172 Deferred tax liability 20,232 21,054 19,639 431 — — — — — Total borrowings 159,154 158,806 167,990 150,528 211,344 158,873 193,873 208,873 228,873 Current liabilities 162,386 169,073 142,871 154,619 139,462 141,709 146,208 152,163 165,575 Total liabilities 541,905 545,193 523,998 497,344 499,432 524,263 543,118 548,313 573,411 Net fixed assets 172,161 190,562 202,085 215,956 218,240 222,449 233,778 241,948 246,958 Investments 226,242 204,936 199,344 184,584 169,670 169,755 169,755 169,755 169,755 Cash 24,289 18,410 4,629 2,262 9,650 21,881 17,994 3,941 4,007 Other current assets 119,212 128,702 115,790 94,542 101,872 110,179 121,590 132,669 152,691 Miscellaneous expenditure — 2,584 2,150 — — — — — — Total assets 541,905 545,193 523,998 497,344 499,432 524,263 543,118 548,313 573,411 Free cash flow (Rs mn) Operating cash flow excl. working capital 41,519 39,671 17,557 (9,949) (6,972) 27,195 23,551 33,791 46,003 Working capital changes (26,463) (3,135) 5,028 34,583 (15,171) (3,733) (6,913) (5,124) (6,610) Capital expenditure (23,817) (28,355) (25,884) (30,941) (30,548) (29,820) (40,000) (40,000) (40,000) Free cash flow (21,737) (6,642) (21,394) (23,805) (71,140) (26,487) (38,887) (29,053) (19,934) Ratios EBITDA margin (%) 9.5 7.7 3.8 (2.7) (3.4) 5.5 3.1 4.5 6.4 Debt/equity (X) 0.8 0.8 0.9 0.8 1.4 0.7 1.0 1.1 1.3 Net debt/equity (X) 0.7 0.7 0.8 0.8 1.4 0.6 0.9 1.1 1.3 RoAE (%) 10.9 8.3 (1.6) (14.2) (30.7) 3.2 (9.9) (8.1) (4.5) Book value/share (X) 58.9 57.8 57.0 56.5 43.8 65.9 59.8 55.1 52.7
Source: Company, Kotak Institutional Equities estimates
66 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Motors Automobiles
Exhibit 16: We expect consolidated earnings to grow at 19% CAGR over FY2016-19E Tata Motors consolidated profit and loss, balance sheet and cash flow statement, March fiscal year-ends, 2011-19E (` mn)
2012 2013 2014 2015 2016 2017E 2018E 2019E Profit model (Rs mn) Net sales 1,656,545 1,888,176 2,328,337 2,627,963 2,755,611 2,760,519 3,003,815 3,288,426 EBITDA 223,112 245,473 348,377 392,387 367,562 288,327 405,267 489,481 Other income 6,618 8,115 8,286 8,987 9,817 7,854 8,246 8,659 Interest (29,822) (35,533) (47,338) (48,615) (46,234) (42,454) (46,338) (49,900) Depreciaton (56,254) (75,693) (110,782) (133,886) (170,142) (175,805) (195,111) (219,271) Profit before tax 143,654 142,362 198,544 218,873 161,004 77,923 172,065 228,969 Extra ordinary income/(expenses) (8,315) (6,027) (9,854) (1,847) (21,196) — — — Tax 400 (37,710) (47,648) (76,429) (28,726) (17,624) (42,519) (54,529) Minority Interest + Associate income (574) 301 (1,132) (734) (845) 10,133 11,369 12,624 Net profit 135,165 98,926 139,910 139,863 110,238 70,431 140,914 187,064 EPS (Rs) 39.8 29.1 41.2 41.2 32.5 20.7 41.5 55.1 Balance sheet (Rs mn) Equity 6,348 6,381 6,438 6,438 6,792 6,792 6,792 6,792 Reserves and Surplus 325,152 381,331 649,597 556,181 801,035 871,466 1,012,380 1,199,444 Deferred tax liability 21,651 20,195 15,723 13,432 31,661 31,661 31,661 31,661 Minority Interest 3,071 3,705 4,207 4,333 8,883 9,728 10,573 11,418 Total borrowings 471,490 535,914 606,423 736,104 704,685 724,766 748,747 786,840 Current liabilities 626,116 764,078 917,596 1,070,091 1,139,921 1,134,460 1,168,608 1,216,267 Total liabilities 1,453,826 1,711,603 2,199,983 2,386,580 2,692,976 2,778,872 2,978,760 3,252,422 Net fixed assets 562,125 694,836 973,754 1,124,226 1,288,507 1,417,182 1,551,031 1,660,721 Goodwill 40,937 41,024 49,788 46,970 48,365 48,365 48,365 48,365 Investments 89,177 90,577 106,867 153,367 12,532 12,532 12,532 12,532 Cash 182,381 211,127 297,118 321,158 520,929 456,704 443,018 529,934 Other current assets 574,691 662,701 748,986 717,389 795,379 816,824 896,550 973,607 Miscellaneous expenditure 4,514 11,339 23,471 23,471 27,264 27,264 27,264 27,264 Total assets 1,453,826 1,711,603 2,199,983 2,386,580 2,692,976 2,778,872 2,978,760 3,252,422 Free cash flow (Rs mn) Operating cash flow excl. working capital 206,644 221,302 303,768 388,547 366,152 289,535 383,208 457,080 Working capital changes (22,801) (680) 57,744 (36,718) 25,515 (26,906) (45,578) (29,397) Capital expenditure (138,756) (187,570) (269,252) (315,396) (326,232) (304,480) (328,960) (328,960) Free cash flow (including finance business debt) 11,351 (13,508) 30,554 (26,637) 8,396 (84,305) (37,668) 48,823 Ratios EBITDA margin (%) 13.5 13.0 15.0 14.9 13.3 10.4 13.5 14.9 Debt/equity (X) 1.4 1.4 0.9 1.3 0.9 0.8 0.7 0.7 Net debt/equity (X) 0.9 0.8 0.5 0.7 0.2 0.3 0.3 0.2 Book value (Rs per share) 84 99 172 145 216 236 278 333 ROAE (%) 54.8 29.2 28.7 23.3 19.2 8.4 14.9 16.8
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 67 ADD Vedanta (VEDL) Metals & Mining FEBRUARY 15, 2017 RESULT Coverage view: Cautious
Earnings on an improving trajectory. Vedanta’s consolidated EBITDA of `60 bn Price (`): 254 (+93% yoy, +29% qoq) was higher than our estimates. Improved contribution from Target price (`): 290 aluminum, iron-ore and energy business on higher volumes and lower costs aided BSE-30: 28,339 EBITDA outperformance. Vedanta offers a comparatively inexpensive play on global zinc shortage. The improving capital structure from Cairn merger and earnings growth from ramp-up of idled projects also drives our positive view on the stock. We maintain ADD with revised TP of `290 (`235). The stock trades at 8.4X/7.4X FY2018-19E earnings.
Company data and valuation summary Vedanta Stock data Forecasts/Valuations 2017E 2018E 2019E 52-week range (Rs) (high,low) 262-66 EPS (Rs) 21.1 30.3 34.3 Market Cap. (Rs bn) 751.8 EPS growth (%) 168.3 43.9 13.2 Shareholding pattern (%) P/E (X) 12.0 8.4 7.4 Promoters 62.9 Sales (Rs bn) 761.5 903.8 1,002.9 FIIs 24.1 Net profits (Rs bn) 78.3 112.7 127.6 MFs 1.9 EBITDA (Rs bn) 211.7 261.4 286.2 Price performance (%) 1M 3M 12M EV/EBITDA (X) 6.7 5.1 4.3 Absolute 6.4 10.4 300.9 ROE (%) 14.6 16.7 16.4 Rel. to BSE-30 2.3 4.4 225.2 Div. Yield (%) 1.1 1.1 1.1
A strong quarter led by higher aluminum, iron-ore and energy earnings
Vedanta‘s 3QFY17 earnings were higher than our estimate—EBITDA increased 29% qoq to `60 bn (+93% yoy, KIE: `57 bn) and net income 49% qoq to `18.7 bn (`243 mn in 3QFY16, KIE: `16.8 bn). EBITDA outperformance was led by strong contribution from aluminum, iron-ore and oil & gas businesses. (1) Aluminum EBITDA increased 55% qoq to `6.5 bn led by higher operating margins from lower costs (-2% qoq) and higher aluminum prices (+6% qoq), (2) iron- ore EBITDA increased to `4.7 bn (from `1.1 bn in 2QFY17) led by higher sales of 3.7 mn tons (0..8 mn tons in 2QFY17) and higher iron-ore prices , and (3) Oil & gas EBITDA was 10% ahead of our estimate at ₹10.9 bn, benefiting from low blended operating cost for Rajasthan block to US$6.3/bbl. Power earnings increased 10% qoq to `4.4 bn from higher plant availability at Talwandi Sabo (77% in 3QFY17).
Volume ramp-up of aluminum & iron-ore to drive standalone earning growth over next 2 years
Vedanta’s aluminum production increased 8% qoq to 319,000 tons in 3QFY17 led by ramp-up of Jharsuguda II and Balco smelters. The company expects FY2017E aluminum production at 1 to 1.1 mn tons, but the run rate by mid-FY2018 will be significantly higher as it plans to commission 3 smelter pot lines at Jharsuguda (938 ktpa) and Balco’s new smelter of 325 ktpa--- the total operational capacity by mid FY2018E will increase to 2 mtpa. Improved coal availability in India has benefitted aluminum producers from lower costs, but the company remains hopeful of allocation of bauxite and is working with the state government. We expect strong EBITDA growth from aluminum operations to `30-38 bn by FY2018-19E from `19 bn in FY2017E on assuming EBITDA/ton of US$270-280. Besides, aluminum, Vedanta will also be able to increase iron-ore mining in Goa by 3 mtpa on revised approvals.
We maintain positive view with ADD rating and revised TP of `290 (`235 earlier) Abhishek Poddar Our positive view on Vedanta is based on (a) strong zinc pricing outlook due to global mine production shortage, (b) asset sweating of idled aluminum and power assets helps especially given Vedanta’s high financial leverage, and (c) Cairn-merger reduces leverage stretch in the standalone balance sheet. We incorporate higher zinc, aluminum price assumption in Vedanta model and raise earnings by 2-17% for FY2017-19E. We raise TP to `290 (`235/share) and maintain ADD. Part of the TP increase is led by rollover to December 2018E.
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Vedanta Metals & Mining
Exhibit 1: Interim results of Vedanta (consolidated) , March fiscal year-ends (Rs mn)
(% chg.) 3QFY17 3QFY17E 3QFY16 2QFY17 3QFY17E 3QFY16 2QFY17 9MFY17 9MFY16 (%chg) FY2017E* Net sales 194,171 185,489 148,766 158,596 5 31 22 497,138 484,309 3 761,505 Total expenditure (134,207) (128,564) (117,708) (111,964) 4 14 20 (355,477) (367,791) (3) (549,795) Inc/(Dec) in stock 7,753 1,094 3,060 953 13,621 (1,566) (970) Raw materials (61,714) (56,145) (55,394) (48,896) (165,258) (165,416) (0) (264,384) Staff cost (6,188) (6,324) (6,490) (5,508) (17,481) (19,245) (9) (23,868) Power and fuel (27,817) (25,937) (21,406) (22,588) 7 30 23 (72,473) (71,422) (110,647) Other expenditure (46,241) (41,252) (37,479) (35,926) (113,887) (110,143) 3 (150,896) EBITDA 59,964 56,925 31,057 46,632 5 93 29 141,660 116,518 22 211,711 OPM (%) 30.9 30.7 20.9 29.4 28.5 24.1 27.8 Other income 9,160 9,903 7,154 12,563 32,658 33,274 (2) 44,230 Interest (15,082) (14,938) (13,906) (14,503) 1 8 4 (44,184) (42,438) 4 (59,847) Depreciation (15,203) (15,900) (17,704) (15,289) (4) (14) (1) (45,411) (47,489) (4) (60,132) Pretax profits 38,840 35,990 6,602 29,403 8 488 32 84,723 59,864 42 135,961 Extraordinaries - - - - - (1,394) - Tax (8,968) (8,278) (1,606) (6,623) (20,505) (11,338) 81 (29,217) Net income before 29,872 27,712 4,996 22,780 8 498 NM 64,218 47,133 36 106,744 Minority interest (11,188) (10,903) (4,818) (10,261) 3 132 9 (26,866) (23,929) 12 (28,405) Share of associates (20) - 0 2 (18) (1) 1,318 PAT after minority interest 18,663 16,810 178 12,521 11 NM 49 37,334 23,203 61 78,339 Adjusted PAT 18,663 16,810 243 12,521 11 NM 49 37,334 24,151 55 78,339 Ratios EBITDA margin (%) 31 31 21 29 28 24 28 ETR (%) 23 23 24 23 24 19 21 EPS reported (Rs) 6.3 5.7 0.1 4.2 12.6 8.1 21.1 Volume details ('000 tons) Copper cathode 102 101 89 97 1 15 5 299 281 6 388 Balco - aluminum 103 96 84 115 8 23 (10) 305 248 23 412 Zinc & Lead - mined metal content 276 250 228 192 10 21 44 595 700 (15) 887 Refined Zinc 211 201 206 150 5 2 41 463 576 (20) 706 VAL - aluminum 180 182 138 161 (1) 30 12 486 439 11 775 Silver (tons) 117 125 116 108 (6) 1 8 314 232 35 482 Wheeled units (mn units) 3,413 3,640 2,934 3,030 (6) 16 13 9,452 8,722 8 12,098 EBITDA (Rs mn) Copper 4,480 4,428 5,920 3,700 1 (24) 21 12,590 16,640 (24) 17,096 Aluminium 6,520 5,773 1,520 4,200 13 NM 55 13,380 2,420 18,886 Zinc and lead 27,834 27,513 14,783 20,767 1 88 34 59,909 54,789 9 96,787 Power 4,380 4,004 3,190 4,000 9 37 10 11,810 8,920 32 14,707 Zinc International 2,020 2,457 (410) 3,390 (18) (593) (40) 7,900 2,960 167 11,923 Others (835) (500) (1,942) (865) 67 (57) (4) (2,604) (1,034) 152 3,444 Iron Ore 4,710 3,374 610 1,050 40 NM 349 9,490 920 8,208 Cairn India 10,855 9,877 7,386 10,390 10 47 4 29,185 30,903 (6) 40,659 Production costs Copper TC/RC margins (US$c/lb) 22.2 23.5 20.5 (5) 8 Net CoP (US$c/lb) 3.9 4.4 5.3 (11) (26) Alumiunum Jharsuguda (Rs/ton) 93,600 97,900 94,600 (4) (1) Alumiunum Balco (Rs/ton) 101,100 105,400 103,500 (4) (2) Zinc International (US$/ton) 1,615 1,579 1,446 2 12 Zinc India ex-royalty (US$/ton) 861 795 809 8 6 Zinc India with royalty (US$/ton) 1,198 1,008 1,106 19 8 Power - average cost (Rs/unit) 2.1 2.2 2.1 (5) 0 Power - average realization (Rs/unit) 2.8 2.9 3.1 (4) (10) Note: (a) Our FY2017E estimates are based on pro-forma Cairn merger financials. Hence, the minority interest is higher as well number of shares count for computation of EPS.
Source: Company, Kotak Institutional Equities estimates
Changes in our estimates
Exhibit 8 highlights key changes in our estimates.
We incorporate our revised (a) zinc price assumption of US$2,400/ton, US$2,750/ton and US$2,750/ton for FY2017E, FY2018E and FY2019E, and (b) aluminum (all-in) price assumption of US$1,775/ton, US$1,800/ton and US$1,825/ton for FY2017E, FY2018E and FY2019E. Our consolidated EBITDA estimate for FY2017E increases by 3% and for FY2018- 19E by 6-11%. We raise our EPS estimate by 2-17% for FY2017-19E.
We estimate EPS of `21.1, `30.3 and `34.3 for FY2017E, FY2018E and FY2019E.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 69 Metals & Mining Vedanta
Earnings, valuation sensitivity to changes in metal prices
Exhibits 2 and 3 highlight earnings and fair value sensitivity of Vedanta to changes in zinc and aluminum prices. Our fair value of `290 is based on zinc prices of US$2,750/ton and aluminum prices (LME) of US$1,700/ton. The fair value, EPS changes by 0.8-1% for every 1% change in zinc price.
Exhibit 2: VEDL's EPS changes by 1% for 1% change in zinc Exhibit 3: VEDL's fair value changes by 0.8% for 1% in zinc prices prices EPS sensitivity of VEDL to zinc, aluminum prices, FY2018E (Rs) Fair value sensitivity of VEDL to zinc, aluminum prices, Dec 2018E (Rs)
FY2018E EPS Zinc prices (US$/ton) Fair value (Rs/share) Zinc prices (US$/ton) 2,250 2,500 2,750 3,000 3,250 2,250 2,500 2,750 3,000 3,250 1,500 22.5 24.6 26.7 28.9 31.0 1,500 215 235 255 275 296 Aluminum 1,600 24.3 26.4 28.5 30.7 32.8 Aluminum 1,600 232 252 272 293 313 prices 1,700 26.1 28.2 30.3 32.4 34.6 prices 1,700 249 269 290 310 330 (US$/ton) 1,800 27.9 30.0 32.1 34.2 36.4 (US$/ton) 1,800 266 287 307 327 347 1,900 29.7 31.8 33.9 36.0 38.2 1,900 284 304 324 344 364
Source: Kotak Institutional Equities estimates Source: Kotak Institutional Equities estimates
Exhibit 4: Volume ramp-up in aluminum, power, iron ore and higher zinc prices has aided strong improvement in Vedanta's EBITDA Volumes, cost details and EBITDA break-up of Vedanta ('000 tons, Rs mn)
1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 Volume details ('000 tons) Copper cathode 66 100 99 97 98 94 89 102 100 97 102 Balco - aluminum 71 84 85 84 80 84 84 83 87 115 103 Zinc & Lead - mined metal content 163 213 242 269 232 240 228 188 127 192 276 Refined Zinc 141 181 196 217 187 211 206 154 102 150 211 VAL - aluminum 132 138 138 145 152 149 138 142 145 161 180 Silver (tons) 82 80 85 81 75 112 116 122 89 108 117 Wheeled units (mn units) 2,599 2,028 2,420 2,547 3,070 2,718 2,934 3,391 3,009 3,030 3,413 EBITDA (Rs mn) Copper 900 4,660 5,350 5,440 5,230 5,490 5,920 5,410 4,410 3,700 4,480 Aluminium 5,300 5,810 8,010 6,470 90 810 1,520 3,550 2,660 4,200 6,520 Zinc and lead 13,524 19,996 20,892 19,784 18,365 21,641 14,783 13,081 11,308 20,767 27,834 Power 3,380 2,590 2,540 210 2,770 2,960 3,190 4,070 3,430 4,000 4,380 Zinc International 2,320 3,290 3,960 1,250 2,570 800 (410) 840 2,490 3,390 2,020 Others (2,231) (1,933) (1,577) (5,874) (3,103) (1,533) (1,942) (218) (904) (865) (835) Iron Ore 470 960 450 (540) 270 40 610 2,640 3,730 1,050 4,710 Cairn India 33,070 27,896 21,841 13,400 13,728 9,789 7,386 5,347 7,940 10,390 10,855 Consolidated EBITDA (Rs mn) 56,734 63,269 61,466 40,140 39,920 39,998 31,057 34,720 35,064 46,632 59,964 Production costs Copper TC/RC margins (US$c/lb) — 20.8 22.6 22.7 22.9 25.2 23.5 24.8 22.9 20.5 22.2 Net CoP (US$c/lb) — 3.1 3.3 3.3 2.5 2.2 4.4 3.4 5.9 5.3 3.9 Alumiunum Jharsuguda (Rs/ton) 97,800 105,500 99,100 96,300 101,400 103,900 97,900 94,300 97,700 94,600 93,600 Alumiunum Balco (Rs/ton) 109,600 126,500 123,800 112,000 116,700 112,000 105,400 100,500 100,700 103,500 101,100 Zinc International (US$/ton) 1,272 1,376 1,364 1,505 1,409 1,477 1,579 1,242 1,226 1,446 1,615 Zinc India ex-royalty (US$/ton) — 903 812 820 802 771 795 853 918 809 861 Zinc India with royalty (US$/ton) — 1,107 1,034 1,091 1,170 1,013 1,008 1,071 1,168 1,106 1,198 Power - average cost (Rs/unit) 1.9 2.3 2.3 2.1 2.2 1.8 2.2 2.0 2.0 2.1 2.1 Power - average realization (Rs/unit) 3.2 3.5 3.4 2.9 3.0 2.6 2.9 2.6 2.8 3.1 2.8
Source: Company, Kotak Institutional Equities estimates
70 KOTAK INSTITUTIONAL EQUITIES RESEARCH Vedanta Metals & Mining
Business-wise performance is as follows:
Copper EBITDA increases by 21% qoq. Copper EBITDA increased 21% qoq to `4.5 bn (-24% yoy). TC/RC margin improved 8% qoq to US$c22.2/lb (-5% yoy). Copper CoP (net) also declined 26% qoq to US$c3.9/lb (-11% yoy) led by steady by-product prices (acid realizations). Copper volumes increased by 5% qoq to 102,000 tons (+15% yoy). Vedanta expects FY2017E TC/RC’s to be lower at US$c21/lb
Aluminum earnings improve strongly. Aluminum EBITDA at Jharsuguda increased 50% qoq to `4.8 bn (+191% yoy) aided by 12% qoq increase in aluminum production to 180,000 tons, lower costs and higher realizations. The production cost at Jharsuguda declined by 1% qoq to `93,600/ton from a decline in power & fuel costs and other conversion costs. Balco reported EBITDA of `1.8 bn (`1 bn in 2QFY17) aided by lower costs of `101,100/ton (-2% qoq).
The company expects production costs to increase to US$1,450-1,475/ton in 4QFY17 from US$1,429/ton in 3QFY17 due to higher imported alumina costs.
Zinc International—EBITDA declines. EBITDA declined by 40% qoq to `2 bn (`410 mn EBITDA loss in 3QFY16) due to lower production at Skorpion mines due to wet ore. Zinc volumes declined 18% qoq to 32,000 tons (-37% yoy) and costs also increased 12% qoq to US$1,615/ton due to lower volumes. The company expects production costs in 4QFY17 at US$1,200-1,250/ton and FY2017E volumes of 160,000 tons (114,000 tons in 9MFY17).
At Gamsberg project, the order for mining and concentrator plant placed in 3QFY17---- 75% of project capex is already committed. The company expects first ore production in mid-2018E with full ramp-up over 9-12 months there on. The company will achieve full production capacity of 250,000 tons by end- FY2019E with an expect CoP of US$1,000- 1,150/ton.
Power—higher earnings aided by Talwandi Sabo. Power EBITDA increased 10% qoq to `4.4 bn (+37% yoy) aided by higher contribution from Talwandi Sabo (TSPL); the plant availability at TSPL was 77% and the company expects 80% availability in 4QFY17.
Hindustan Zinc—strong quarter led by higher mined metal volumes. Hindustan Zinc’s 3QFY17 EBITDA of ₹27.8 bn (+88% yoy, +34% qoq) was in line with our estimate. Higher mined metal volumes (276,000 tons, +44% qoq) and increase in zinc prices (+12% qoq) aided earnings in the quarter. The full benefit of higher mined volumes though was not reflected in refined metal sales – zinc metal volume increased by 37% qoq to 205,000 tons and lead metal volumes increased 26% qoq to 39,000 tons; the inventory build-up will result in higher metal sales in ensuing quarters. The production costs (ex-royalty) increased 6% qoq to US$861/ton (+8% yoy) due to increase in waste stripping ratio, underground mine development costs and coal costs. Net income increased 22% qoq to ₹23.2 bn (+28% yoy).
KOTAK INSTITUTIONAL EQUITIES RESEARCH 71 Metals & Mining Vedanta
Exhibit 5: Vedanta' aluminum production costs declined US$33/ton qoq led by lower power & other conversion costs Aluminum realization, cost break-up and EBITDA on per ton basis, 3QFY15- 3QFY17 (US$/ton)
3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 Vedanta's aluminum cost and margins LME aluminum price 1,966 NA 1,765 1,591 1,495 1,516 1,572 1,620 1,710 Ingot premium 415 NA 133 169 155 134 127 82 56 Value addition 67 NA 95 75 55 65 53 72 72 Total realizations 2,448 - 1,993 1,835 1,705 1,715 1,752 1,774 1,838 Less: Costs (1,812) NA (1,816) (1,737) (1,609) (1,492) (1,545) (1,527) (1,494) - Alumina costs (715) NA (683) (648) (607) (554) (540) (560) (560) - Power costs (682) NA (661) (680) (608) (570) (622) (593) (571) - Other hot metal costs (362) NA (345) (319) (312) (307) (313) (309) (298) - Ingot conversion costs (59) NA (55) (43) (82) (61) (70) (65) (65) - Value addition conversion costs (5) NA (30) (40) - Others 11 NA (42) (7) EBITDA 636 NA 177 99 96 223 207 247 342
Jharsuguda CoP (US$/ton) 1,597 1,548 1,597 1,599 1,485 1,397 1,459 1,412 1,388 Balco CoP (US$/ton) 2,000 1,795 1,837 1,725 1,599 1,489 1,504 1,545 1,499 Blended CoP (US$/ton) 1,753 1,642 1,689 1,648 1,528 1,431 1,476 1,462 1,429
Source: Company, Kotak Institutional Equities estimates
Exhibit 6: Power EBITDA increased led by higher generation/plant availability at TSPL (77%); target availability of 80% in 4QFY17 Quarterly power generation and financials of Vedanta's various power plants, 3QFY15-3QFY17 (mn units, Rs/unit)
3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 Jharsuguda 2,400 MW Sales (mn units) 1,873 1,525 2,266 1,554 1,593 1,906 892 605 879 Realization (Rs/unit) 3.1 2.6 2.8 3.0 2.6 2.3 2.3 2.5 2.5 Cost (Rs/unit) 2.1 2.0 2.1 2.3 2.2 1.9 1.9 2.2 2.0 Derived EBITDA (Rs mn) 1,873 915 1,496 1,041 717 762 330 133 387 Talwandi Sabo Sales (mn units) 259 690 384 693 839 869 1,272 1,679 1,792 Realization (Rs/unit) 4.9 NA 5.8 5.3 5.5 6.5 5.2 5.2 5.8 Cost (Rs/unit) 3.7 NA 4.5 3.8 3.6 3.6 3.7 3.7 4.1 Derived EBITDA (Rs mn) 311 NA 499 1,026 1,544 2,520 1,933 2,502 3,082 Others Sales (mn units) 288 332 419 471 502 616 845 746 742 Total Sales (mn units) 2,420 2,547 3,069 2,718 2,934 3,391 3,009 3,030 3,413 Realization (Rs/unit) 3.4 2.9 3.0 3.3 3.6 3.6 3.8 4.3 4.4 Cost (Rs/unit) 2.3 2.1 2.2 2.3 2.6 2.4 2.7 3.0 3.2 Derived EBITDA (Rs mn) 2,662 1,961 2,547 2,666 2,947 4,033 3,271 3,853 4,168 Reported EBITDA (Rs mn) 2,540 210 2,770 2,960 3,190 4,070 3,430 4,000 4,380
Source: Company, Kotak Institutional Equities estimates
72 KOTAK INSTITUTIONAL EQUITIES RESEARCH Vedanta Metals & Mining
Exhibit 7: Vedanta's attributable debt post Cairn-merger at Rs290 bn in December 2016 Net debt break up of Vedanta, December 2014 - 2016 (Rs mn)
Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 (qoq change) Standalone, wholly owned subsidiaries Sesa Sterlite Standalone 377,870 367,960 389,010 372,000 395,900 409,000 441,060 391,710 419,210 27,500 Talwandi Sabo 63,230 63,890 67,170 67,010 74,320 72,490 74,300 75,870 77,270 1,400 Cairn acquisition debt 270,290 267,960 254,890 261,760 248,870 221,680 145,480 102,100 83,920 (18,180) Zinc International (13,980) (8,570) (10,760) (10,410) (6,090) (6,420) (6,000) (9,090) (6,780) 2,310 Others 13,190 11,940 8,640 9,330 NA NA NA NA NA NA Sub total 710,600 703,180 708,950 699,690 713,000 696,750 654,840 560,590 573,620 13,030 Debt including Cairn ICD 788,100 781,068 788,455 781,640 795,773 781,125 738,465 644,278 657,870 13,593 Other subsidiaries Zinc India (263,550) (271,920) (275,190) (304,040) (282,140) (352,770) (229,280) (252,580) (253,730) (1,150) Cairn India (179,210) (170,400) (166,390) (181,160) (186,430) (219,270) (235,650) (243,390) (259,750) (16,360) Balco 55,060 54,540 57,020 56,560 59,240 57,830 56,640 54,990 55,010 20 Sub total (387,700) (387,780) (384,560) (428,640) (409,330) (514,210) (408,290) (440,980) (458,470) (17,490) Cash Including Cairn ICD (465,200) (465,668) (464,065) (510,590) (492,103) (598,585) (491,915) (524,668) (542,720) (18,053) Buyer's credit 102,760 112,560 Total net debt 322,900 315,400 324,390 271,050 303,670 182,540 246,550 222,370 227,710 5,340 Net attributable debt (pre-merger) 491,315 483,628 491,591 455,500 481,567 399,717 427,257 415,188 427,708 12,520 Net attributable debt assuming Cairn merger 299,228 284,030 289,764 5,734
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 73 Metals & Mining Vedanta
Exhibit 8: Merger with Cairn will significantly ease leverage at Vedanta's standalone operations (including wholly owned subsidiaries) Scenario analysis of Cairn merger on Net debt, EBITDA and leverage ratios of Vedanta, March fiscal year-ends, (Rs bn)
Pre-merger Post merger 2016 2017E 2018E 2019E 2017E 2018E 2019E Net debt (Rs bn) Standalone, wholly owned subsidiaries Vedanta Standalone* 745 675 698 685 675 698 685 Talwandi Sabo 73 70 65 57 70 65 57 Zinc International (6) (5) (5) (13) (5) (5) (13) Others 19 — — — — — — Cairn India* — — — — (323) (352) (376) Sub total 830 740 757 728 418 405 352 Other subsidiaries Zinc India (352) (284) (362) (444) (284) (362) (444) Cairn India* (280) (323) (352) (376) — — — Balco 55 60 59 56 60 59 56 Sub total (578) (547) (655) (764) (224) (303) (387) Total 253 194 102 (35) 194 102 (35) EBITDA (Rs bn) Standalone, wholly owned subsidiaries Vedanta Standalone* 39 44 56 63 44 56 63 Talwandi Sabo 5 11 15 15 11 15 15 Zinc International 4 12 13 10 12 13 10 Others 2 2 2 2 2 2 2 Cairn India — — — — 41 45 55 Sub total 50 69 86 90 110 131 145 Other subsidiaries Zinc India 66 97 124 132 97 124 132 Cairn India 36 41 45 55 — — — Balco (1) 5 7 9 5 7 9 Sub total 101 142 176 196 102 131 141 Total 152 212 261 286 212 261 286 Leverage ratios (X) Standalone & wholly owned subsidiaries Net debt/EBITDA (X) 16.5 10.7 8.8 8.1 3.8 3.1 2.4 Consolidated Net debt/EBITDA (X) 1.7 0.9 0.4 (0.1) 0.9 0.4 (0.1)
Source: Company, Kotak Institutional Equities estimates
74 KOTAK INSTITUTIONAL EQUITIES RESEARCH Vedanta Metals & Mining
Exhibit 9: Vedanta Ltd (pro-forma post Cairn merger), change in estimates, March fiscal year-ends, 2017-19E (Rs mn)
Revised estimate Old estimate % change 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E Prices (US$/ton) Aluminium (all- in) 1,775 1,800 1,825 1,700 1,750 1,800 4 3 1 Zinc 2,400 2,750 2,750 2,275 2,500 2,600 5 10 6 Lead 2,025 2,300 2,350 1,900 2,000 2,050 7 15 15 Crude brent (US$/bbl) 50 58 60 50 55 60 (1) 5 - Vedanta Consolidated Net sales 761,505 903,785 1,002,874 763,371 869,498 977,232 (0) 4 3 EBITDA 211,711 261,390 286,156 205,608 236,323 268,815 3 11 6 EPS (Rs) 21.1 30.3 34.3 20.7 26.0 31.3 2 17 10 Standalone Net sales 327,905 401,233 456,272 334,372 391,425 447,749 (2) 3 2 EBITDA 43,993 55,655 62,555 43,363 52,337 60,530 1 6 3 Talwandi Sabo Revenues 50,089 64,037 64,366 50,089 64,037 64,366 — — — EBITDA 11,439 15,208 15,065 11,439 15,208 15,065 — — — Hindustan Zinc Revenues 177,732 214,698 231,257 173,098 197,691 218,657 3 9 6 EBITDA 96,787 123,882 132,104 92,338 109,170 121,309 5 13 9 BALCO Revenues 62,390 74,532 92,438 61,872 73,640 92,482 1 1 (0) EBITDA 4,885 6,761 8,816 4,879 6,169 8,825 0 10 (0) Zinc International Net sales 26,657 24,587 22,529 25,260 22,401 21,329 6 10 6 EBITDA 11,923 12,960 10,286 10,527 10,773 9,086 13 20 13 Cairn India Net sales 82,997 90,962 102,276 84,944 86,569 98,915 (2) 5 3 EBITDA 40,659 44,899 55,305 41,036 40,641 51,973 (1) 10 6
Re/ US$ rate 67.5 69.0 69.0 67.5 69.0 69.0 — — —
Source: Kotak Institutional Equities estimates
Exhibit 10: Vedanta, Key assumptions, March fiscal year ends 2014-19E (Rs mn)
2014 2015 2016 2017E 2018E 2019E Volumes (tons) Zinc 750,766 735,783 760,436 706,247 748,793 778,244 Lead 121,120 134,898 145,417 146,110 155,402 168,891 Copper 297,000 361,658 383,434 388,234 392,284 396,334 Iron-ore (mn tons) - 1.2 5.3 7.8 10.8 10.8 Aluminum - Balco 252,172 300,135 308,144 411,950 500,225 559,075 Aluminum - Jharsuguda I 542,000 534,000 516,000 525,000 550,000 550,000 Aluminum - Jharsuguda II — — 25,000 250,000 625,000 937,500 Refined silver 347 328 426 482 512 552 Power (mn units) 7,530 8,419 10,111 15,812 18,917 18,917 Cairn-net production (O+OEG) (000's b/d) 218 213 204 192 186 176 Average realization (Rs/ton) Zinc 130,493 150,805 133,581 180,835 210,377 207,068 Lead 143,907 132,248 129,696 154,295 175,829 177,154 Copper cathode 442,810 416,584 361,311 355,581 377,572 398,704 Aluminium ingots 134,733 149,158 123,553 132,068 139,641 141,581 Silver (Rs mn/ton) 43 36 33 38 40 41 Base assumptions (US$/ton) Zinc 1,909 2,176 1,833 2,400 2,750 2,750 Lead 2,092 2,021 1,770 2,025 2,300 2,350 Copper 7,108 6,558 5,228 5,000 5,200 5,500 Aluminium (all in) 2,030 2,290 1,719 1,775 1,800 1,825 Dated Brent crude price (US$/bbl) 108 86 48 50 58 60
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 75 Metals & Mining Vedanta
Exhibit 11: SOTP-based target price of Vedanta is Rs290/share SOTP-based target price of Vedanta, March fiscal year-ends, December 2018E basis (Rs mn)
Implied Vedanta's Attributable EBITDA Multiple EV Net debt M Cap stake M Cap Contribution (Rs bn) (X) (Rs bn) (Rs bn) (Rs bn) (%) (Rs bn) Rs/ share BALCO 8 6.5 54 57 (3) 51 (1) (0) Zinc business Hindustan Zinc 130 6 780 (442) 1,222 64.9 793 213 Zinc International 11 5 55 (26) 81 100 81 22 Cairn India (fair value of KIE's energy team) 141 Standalone (ex-power, iron ore) 44 6 267 695 (428) 100 (428) (115) Iron ore business 16 Power business 12 Vedanta share price (Rs/share) 290 Target price of Vedanta (Rs/share) 290
Source: Kotak Institutional Equities estimates
76 KOTAK INSTITUTIONAL EQUITIES RESEARCH Vedanta Metals & Mining
Exhibit 12: Vedanta Ltd, Pro-forma (Cairn merger) Profit model, balance sheet and cash flow model, March fiscal year-ends, 2014-2019E (Rs mn)
2014 2015 2016 2017E 2018E 2019E Profit model (Rs mn) Net sales 722,341 737,095 644,415 761,505 903,785 1,002,874 EBITDA 256,650 220,446 151,510 211,711 261,390 286,156 Other income 24,460 29,772 45,050 44,230 45,506 52,079 Interest (61,110) (56,588) (57,820) (59,847) (59,999) (58,884) Depreciation (55,840) (51,096) (61,340) (60,132) (56,728) (62,164) Goodwill amortization (28,400) (20,496) — — — — Profit before tax 135,760 122,039 77,400 135,961 190,170 217,186 Extraordinaries (2,290) (221,289) (138,620) — — — Current tax (10,000) (27,736) (20,914) (29,395) (37,803) (49,236) Deferred tax — 13,253 1,975 178 (4,104) (2,032) Net income before minorities 123,470 (113,734) (80,160) 106,744 148,263 165,918 Minority interest (73,420) (42,764) (29,150) (28,405) (35,530) (38,317) Net income 50,050 (156,498) (109,310) 78,339 112,733 127,601 Adjusted net income 50,200 50,601 23,290 78,339 112,733 127,601 EPS adjusted (Rs) 16.9 17.1 7.9 21.1 30.3 34.3 EPS (ex-goodwill amortization) (Rs) 26.5 24.0 7.9 21.1 30.3 34.3 Balance sheet (Rs mn) Shareholder's funds 730,087 538,753 446,723 627,128 723,959 835,105 Borrowings 805,660 777,523 779,520 753,880 778,429 767,979 Preference shares — — — 30,085 30,085 — Minority Interest 337,975 355,297 329,674 144,802 168,315 192,303 Deferred tax liability 27,352 33,297 31,959 31,781 35,885 37,917 Current liabilities 240,110 197,942 291,895 233,301 228,989 245,152 Total liabilities 2,141,183 1,902,812 1,879,772 1,820,977 1,965,663 2,078,455 Net fixed assets 479,671 523,181 673,741 780,870 817,824 868,336 Capital work-in-progress 431,277 387,480 269,911 166,338 134,050 81,750 Goodwill 392,383 177,897 56,327 — — — Cash and cash equivalents 507,970 462,126 526,661 568,032 683,473 776,942 Current assets 329,882 352,128 353,132 305,737 330,314 351,428 Total assets 2,141,183 1,902,812 1,879,772 1,820,977 1,965,663 2,078,455 Free cash flow (Rs mn) Operating cash flow excl. working capital 135,554 156,086 91,512 166,698 209,094 230,114 Working capital changes (10,239) (25,345) 63,674 (11,199) (28,890) (4,951) Capital expenditure (72,317) (105,742) (53,758) (63,689) (61,394) (60,375) Free cash flow 52,999 25,000 101,428 91,810 118,811 164,788 Ratios Book value (Rs/share) 246 182 151 169 195 225 Debt/equity (X) 1.1 1.4 1.7 1.2 1.1 0.9 Net debt/equity (X) 0.4 0.6 0.6 0.3 0.1 (0.0) RoE (%) 7.2 8.0 4.7 14.6 16.7 16.4 RoACE (%) 9.0 10.7 7.5 7.7 10.3 10.0
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 77 ADD Adani Port and SEZ (ADSEZ) Infrastructure FEBRUARY 15, 2017 RESULT Coverage view: Attractive
Lone ranger. ADSEZ continues to grow ahead of sector, improves its enviable margin Price (`): 307 profile and makes inroads into the logistics business. Notwithstanding the risks to Target price (`): 335 guidance for volume growth (Maersk, declining bulk volumes) and reduction in L&A BSE-30: 28,339 (impending Kattupalli acquisition), we are impressed by its ability to substitute for declining coal volumes and ability to leverage port portfolio for pricing/business gains as demand revives. Marginally increase TP to ₹335 (from ₹325 earlier) on March 2019 basis.
Company data and valuation summary Adani Port and SEZ Stock data Forecasts/Valuations 2017E 2018E 2019E 52-week range (Rs) (high,low) 317-170 EPS (Rs) 18.0 13.6 14.0 Market Cap. (Rs bn) 635.8 EPS growth (%) 31.0 (24.6) 3.0 Shareholding pattern (%) P/E (X) 17.0 22.6 21.9 Promoters 58.9 Sales (Rs bn) 85.4 92.7 97.9 FIIs 27.9 Net profits (Rs bn) 37.6 28.3 29.2 MFs 3.4 EBITDA (Rs bn) 55.5 58.9 60.4 Price performance (%) 1M 3M 12M EV/EBITDA (X) 15.0 14.3 13.8 Absolute 4.4 10.9 72.4 ROE (%) 25.2 16.0 14.6 Rel. to BSE-30 0.3 5.0 39.9 Div. Yield (%) 0.5 0.7 0.8
3QFY17 marked by cargo rebalancing and continued improvement in recurring port margin
Adani Port reported consolidated 3QFY17 revenues of ₹22 bn, up 32% yoy and 8% above estimates. The revenue growth for the ports business (excluding SEZ, Logistics, Abbott Point) adjusted for project advisory income was in low double digit, more reflective for the 8% blended volume growth. This print was still ahead of 6% growth by all India ports. The growth in containers (up 26% yoy) and liquids/others (up 19% yoy) implies a sharp double-digit decline in bulk volumes. Key positive was seen in the flat 69-70% port EBITDA margin with better mix compensating for increase in cost structure (2-3% impact, most of which is transient). Lower other income and higher tax rate led to PAT of ₹9 bn, up 40% yoy and 5% above estimates.
Guidance would be tested on both counts of volume growth and reduction in L&A by year-end
ADSEZ has maintained 10-15% volume growth guidance for FY2017 led by the cargo diversification into containers, liquids and other bulk (non-coal). Further, it also expressed confidence on reducing the related party L&A by ₹10 bn by end-FY2017. Limited capex spends and strong operating cash flows bode well for the latter, though limited signs of decline in 3QFY17 and impending capex/investments for 4QFY17 (Kattupalli acquisition, Dhamra) pose risks. The risks on volume growth are more evident with (1) declining bulk volumes in 3QFY17 and (2) uncertainty related to Maersk’s volumes based on realignment of business interests.
Revise estimates led by miss on volumes, long-term story intact
We revise our estimates downwards by 3-5% for FY2017-19E factoring in the 3QFY17 miss on volumes (build in lower end of growth guidance). We revise our SoTP-based target price to Aditya Mongia ₹335 (₹325 previously), primarily on higher realizations for Dhamra and roll-forward to March- 2019.We like ADSEZ given its strong portfolio of ports along the coastline of India, the resultant pricing power and good outlook shared by shipping liners (to ADSEZ) for overall India volumes Ajinkya Bhat over the next year. This would give further leeway to ADSEZ, to build up on realization increases taking over the past year.
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Adani Port and SEZ Infrastructure
Results marked by diversification of volumes towards high-value cargo
Strong growth in container and liquid volumes pulled down by bulk. Adani Ports reported total volumes handled at 41 mn tons in 3QFY17, up 8% yoy vs all India ports volume growth of 6% as per the company (12% growth for major ports in the quarter). The company continued to report a sharp growth in containers (up 26% yoy) and liquid/other cargo (up 19% yoy) in the quarter. 9MFY17 volumes handled stood at 126 mn tonnes, up 11% yoy (containers up 28%, liquids/other up14% yoy).
An analysis of the total volume growth vs container and liquid/other cargo growth implies a sharp double-digit decline in bulk volumes (15-20% yoy decline in 3QFY17 and 8-10% decline in 9MFY17). While the company has a stated goal of handling more of non-coal bulk volumes such as rock-phosphate, the same is yet to be reflected meaningfully in reported numbers.
Containers account for 36% and liquids account for 28% of total volumes in 9MFY17, up from 32% for containers and 27% for liquids in FY2016. Coal share has declined to 36%in 9MFY17 from 41% in FY2016.
Revenues up 32% yoy led by volume growth and SEZ income. The company reported 3QFY17 revenues of ₹22 bn, up 32% yoy and 8% above estimates led by the strong volume growth, shift of volume mix towards high-value cargo such as containers and liquids as well as SEZ income. Excluding SEZ and Logistics businesses, the revenues growth for the ports business was lower at 19%, although still very strong. In 9MFY17, the revenues were ₹62 bn, up 20% yoy (up 21% yoy for ports only) which should also be seen in light of large ₹1.9 bn project advisory services revenues booked in CT-4 in the last quarter i.e. 2QFY17. SEZ business has firmed up land lease for more than 50 acres in YTD FY2017 boosting consolidated revenues in this fiscal year.
Port EBITDA margin flat yoy. The company reported consolidated EBITDA of ₹14.4 bn in 3QFY17 up 35% yoy and 8.4% above estimates. Overall EBITDA margin improved 160 bps yoy to 64.4% (40 bps above estimates). The port EBITDA margin was flat yoy in the quarter at 69%. However, the management explained that when adjusted for certain one-off costs and overheads worth ~₹700 mn, the comparable port EBITDA margin was 73% (up from 70% in 3QFY16) clearly reflecting the benefits from mix change towards high-value cargo.
In 9MFY17, EBITDA for the company was ₹41 bn, up 21% yoy and margin was 65.2%, up 80 bps yoy. Port EBITDA margin was flat yoy at 70%.
Lower other income and higher tax reduce PAT outperformance. The company reported 3QFY17 PAT of ₹9 bn, up 40% yoy and 5% above estimates. The 8% outperformance from EBITDA level was partially suppressed by lower than expected other income and higher than expected tax rate. The management however clarified that the higher tax rate has been taken as a conservative measure since Mundra port would be out of the 10-yr tax incentive period from this year. However, the latest union budget has extended the tax incentive window to 15 years instead of 10 years which will allow the company to return to MAT rate. This process is under review with tax experts at the moment.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 79 Infrastructure Adani Port and SEZ
Exhibit 1: Adani Port and SEZ, consolidated - 3QFY17 - key numbers (Rs mn)
% change 3QFY17 3QFY17E 3QFY16 2QFY17 vs est. yoy qoq 9MFY17 9MFY16 % change FY2017E FY2016 % change Net operating income 22,358 20,769 16,960 21,831 7.7 31.8 2.4 62,454 52,190 19.7 85,424 72,557 17.7 Operating expenses (5,523) - (4,713) (5,530) 17.2 (0.1) (15,612) (13,241) - (17,918) Employee costs (1,118) - (675) (805) 65.6 38.9 (2,697) (2,052) - (2,822) Admin and other exp. (1,310) - (920) (887) 42.4 47.8 (3,431) (3,292) - (5,312) Total expenditure (7,951) (7,477) (6,308) (7,221) 6.3 26.0 10.1 (21,740) (18,585) 17.0 (29,879) (26,052) 14.7 EBITDA 14,407 13,292 10,652 14,610 8.4 35.2 (1.4) 40,714 33,604 21.2 55,545 46,505 19.4 Other income 1,938 2,261 1,802 2,271 (14.3) 7.5 (14.7) 6,781 4,857 39.6 8,550 6,848 24.9 Interest expense (3,005) (3,180) (2,569) (2,948) (5.5) 17.0 1.9 (8,857) (9,385) (5.6) (12,284) (10,990) 11.8 Depreciation (2,943) (3,009) (2,798) (2,823) (2.2) 5.2 4.3 (8,576) (8,012) 7.0 (11,494) (10,794) 6.5 PBT 10,396 9,363 7,087 11,110 11.0 46.7 (6.4) 30,062 21,065 42.7 40,317 31,569 27.7 Tax expense (1,316) (711) (621) (822) 85.0 111.9 60.1 (2,747) (1,759) 56.2 (2,898) (3,269) (11.3) PAT 9,080 8,652 6,466 10,289 4.9 40.4 (11.7) 27,315 19,306 41.5 37,419 28,299 32.2 Extraordinary items (684) - 210 495 42 210 42 - Share of minority interest 102 4 77 (37) 244 403 148 374 Reported PAT 8,498 8,656 6,753 10,747 (1.8) 25.8 (20.9) 27,601 19,919 38.6 37,609 28,674 31.2 Other comprehensive income (16) - (6) (15) 181.8 2.6 (36) (17) 117.5 - - Total comprehensive income 8,482 8,656 6,748 10,732 (2.0) 25.7 (21.0) 27,565 19,902 38.5 37,609 28,674 31.2
Key ratios (%) Operating exp./ sales 24.7 - 27.8 25.3 25.0 25.4 - 24.7 Employee costs/ sales 5.0 - 4.0 3.7 4.3 3.9 - 3.9 Admin and other exp./ sales 5.9 - 5.4 4.1 5.5 6.3 - 7.3 EBITDA margin 64.4 64.0 62.8 66.9 65.2 64.4 65.0 64.1 PBT margin 46.5 45.1 41.8 50.9 48.1 40.4 47.2 43.5 PAT margin 40.6 41.7 38.1 47.1 43.7 37.0 43.8 39.0 Effective tax rate 12.7 7.6 8.8 7.4 9.1 8.4 7.2 10.4 EPS (Rs) 4.1 4.2 3.2 5.2 13.2 9.6 18.0 13.8
Source: Company, Kotak Institutional Equities estimates
Exhibit 2: Strong volume growth in newer ports except Dahej while Mundra showed consistent volumes in the quarter Quarterly trajectory of volumes of Adani’s port assets, March fiscal year-ends (mn tons)
1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 Yoy (%) Mundra Port 28.9 26.6 28.7 26.8 29.9 27.0 26.1 26.0 28.9 28.3 28.0 7.3 Dahej port 2.9 3.3 3.5 2.8 2.5 1.5 2.4 1.8 1.5 2.0 1.0 (58.3) Hazira port 1.6 1.5 1.6 2.6 2.9 2.9 3.3 3.2 3.4 4.0 4.0 21.2 Dhamra port 0.4 3.6 4.4 3.2 3.2 3.8 3.8 3.9 5.4 5.2 5.0 31.6 Others 0.1 0.3 0.7 1.0 1.0 1.3 2.4 2.7 3.2 3.6 3.0 27.1 Total 33.8 35.2 38.9 36.4 39.5 36.5 38.0 37.5 42.4 43.0 41.0 8.0 YoY(%) 26.8 25.3 33.3 26.1 16.8 3.8 (2.3) 3.2 7.3 17.9 8.0
Source: Company, Kotak Institutional Equities
Exhibit 3: Adani ports’ volumes growth at 8% in 3QFY17 outperformed all India ports (+6%) but underperformed the major ports (+12%) Volumes handled at major ports in the country
Total cargo (MMT) Container ('000 TEUs) Total cargo (MMT) Container ('000 TEUs) Total cargo (MMT) Container ('000 TEUs) 3QFY17 3QFY16 % chg. 3QFY17 3QFY16 % chg. 9MFY17 9MFY16 % chg. 9MFY17 9MFY16 % chg. FY2016 FY2015 % chg. FY2016 FY2015 % chg. Kolkata 4 4 (8.8) 148 142 4.2 12 13 (8.9) 479 424 13.0 17 15 9.2 577 528 9.3 Haldia 9 8 11.6 40 20 100.0 25 25 (0.3) 89 63 41.3 34 31 8.1 85 102 (16.7) Paradip 22 19 16.7 - 1 NA 65 55 17.8 1 4 (75.0) 76 71 7.6 5 4 25.0 Visakhapatnam 15 15 4.7 90 76 18.4 46 42 8.8 278 210 32.4 57 58 (1.7) 293 248 18.1 Ennore 7 7 4.3 - - NA 22 23 (3.4) - - NA 32 30 6.5 - - NA Chennai 12 12 4.3 375 365 2.6 38 37 1.6 1,123 1,170 (4.0) 50 53 (4.7) 1,565 1,552 0.9 Tuticorin (Chidambarnar) 10 9 5.5 147 135 8.9 29 28 4.2 472 445 6.1 37 32 13.7 612 560 9.3 Cochin 6 5 22.3 125 105 19.3 18 16 10.6 367 306 20.0 22 22 2.3 421 366 15.0 New Mangalore 12 8 38.6 23 15 53.3 29 25 15.0 67 54 24.1 36 37 (2.7) 76 63 20.6 Mormugao 10 6 64.6 9 7 28.6 23 14 62.5 23 19 21.1 21 15 41.2 26 25 4.0 Mumbai 17 15 10.3 10 13 (23.1) 48 46 2.7 33 33 - 61 62 (0.9) 43 45 (4.4) J.N.P.T 15 16 (3.7) 1,121 1,113 0.7 46 48 (4.3) 3,382 3,357 0.7 64 64 0.4 4,491 4,467 0.5 Kandla 27 23 15.0 - - NA 81 74 9.6 4 1 NA 100 92 8.2 3 - NA Major ports total 166 147 12.4 2,088 1,992 4.8 481 447 7.5 6,318 6,086 3.8 606 581 4.3 8,197 7,960 3.0 Mundra 28 26 7.3 NA 710 NA 85 83 2.5 NA 2,190 NA 113 111 2.1 2,990 2,719 10.0
Source: Company, Indian Ports Association, Kotak Institutional Equities
80 KOTAK INSTITUTIONAL EQUITIES RESEARCH Adani Port and SEZ Infrastructure
Exhibit 4: Sharp decline in volumes at Dahej indicating continued weakness in bulk cargo Quarterly trend of volumes at Dahej port, March fiscal year-ends, 1QFY13-3QFY17 (mn tons)
(mn tonnes) Dahej Port 4.0 3.5 3.5 3.3 3.0 2.9 2.8 2.6 2.5 2.5 2.4 2.5 2.2 2.0 2.0 2.0 1.8 1.7 1.8 1.5 1.5 1.5 1.5 1.2 1.0 1.0 0.5
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1QFY13 3QFY13 4QFY13 2QFY14 3QFY14 4QFY14 2QFY15 3QFY15 2QFY16 3QFY16 1QFY17 2QFY17 3QFY17 1QFY14 1QFY15 4QFY15 1QFY16 4QFY16 2QFY13
Source: Company, Kotak Institutional Equities
Exhibit 5: Hazira port volumes increased 21% yoy on container and liquids Quarterly trend of volumes at Hazira port, March fiscal year-ends, 1QFY13-3QFY17 (mn tons)
(mn tonnes) Hazira Port 4.5 4.0 4.0 4.0 3.4 3.5 3.3 3.2 3.0 2.9 3.0 2.6 2.5
2.0 1.6 1.5 1.6 1.5 0.9 1.0 1.0 0.9 1.0 0.8
0.5 0.1 0.1
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1QFY13 3QFY13 4QFY13 2QFY14 3QFY14 4QFY14 2QFY15 3QFY15 2QFY16 3QFY16 1QFY17 2QFY17 3QFY17 1QFY14 1QFY15 4QFY15 1QFY16 4QFY16 2QFY13
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 81 Infrastructure Adani Port and SEZ
Exhibit 6: Going forward, Dhamra will show even faster growth with the impending capacity expansion (bulk – coal and non-coal) and cargo diversification (liquids) Quarterly trend of volumes at Dhamra port, March fiscal year-ends, 1QFY13-3QFY17 (mn tons)
(mn tonnes) Dhamra cargo volumes 6.0 5.4 5.2 5.0 5.0 4.4 3.9 3.9 4.0 3.9 3.6 3.8 3.8 4.0 3.4 3.3 3.3 3.1 3.2 3.2 3.0 2.3 2.2 2.0
1.0
-
1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 4QFY14 2QFY15 4QFY15 2QFY16 4QFY16 2QFY17 1QFY15 3QFY15 1QFY16 3QFY16 1QFY17 3QFY17 3QFY14
Source: Company, Kotak Institutional Equities
3QFY17 earnings call takeaways
Containers going strong, adding new services. The management has previously mentioned the focus on non-bulk, high-value cargo such as containers. The strong presence of Adani Ports across the coastline of India has allowed the company to add more and more shipping services to its client base. In YTD FY2017, the company added several new services at three container ports namely at Mundra (KMTC, Cosco, Evergreen, Wanhai), Kattupalli (Maersk shifting from Chennai and Goldstar service) and Hazira (new Galex service of Emirates / KMTC/ RCL). While the Maersk line is currently doing double call with Chennai and Kattupalli ports, the management mentioned that the line will completely shift to Kattupalli in ~6 months. Further, the company does not see any threat of losing volumes due to the focus of AP Moller Group on supporting Maersk terminals (Pipavav and JNPT).
Update on new ports. The management provided the status update on new port projects currently underway as follows:
. Kattupalli port. The demerger process for the port operations (demerger from shipyard) is currently ongoing at L&T. The company expects to complete the transaction in 4QFY17 or latest by mid-FY2018.
. Vizhinjam port. The company is likely to award a contract for construction of jetty in 2-3 weeks. The project is going as per the schedule and is well on track to be completed by end-CY2018. The initial capacity would be 1.2 mn TEUs.
. Bhavnapadu port. The company is awaiting government response on the same.
. Dhamra expansion. The company is expanding bulk handling capacity at the port to cater to the demand as well as diversify bulk handling (thermal coal, coking coal and rock phosphate). Further, the company will start handling containers at Dhamra from 4QFY17 and will ramp up based on demand. Future plans including handling of liquids and agricultural commodities at the port.
82 KOTAK INSTITUTIONAL EQUITIES RESEARCH Adani Port and SEZ Infrastructure
Guidance remains unchanged, more confidence on outperforming market. The company has maintained volume growth guidance of 10-15% for the full year FY2017. On a relative scale, the management cited the trend in recent few quarters and expressed confidence in achieving faster growth than all India ports. The company’s string of ports across the Indian coastline (both west and east coasts) allows the company to offer flexible/superior facilities and accords the company good pricing power.
Consistent development of SEZ. The company has booked large SEZ income of over ₹4 bn in YTD FY2017. The company is developing various clusters at the SEZ such as textiles, chemicals, electronics, solar, ceramics, etc. As a result of this approach and government’s make-in-India push, the company is witnessing increased enquiries from diverse sectors such as ancillary manufacturing, packaging, battery, inverter & solar panels etc. The land- leasing model and a large land bank (8,000 hectares) would provide consistent revenue visibility for the next 15-20 years as per the management.
Marine business demerged, will save on tax. The company mentioned that after acquisition of Dhamra port, they had to pay for marine services at the port to a company under Tata Group (note that Dhamra was jointly owned by L&T and Tata Steel). The company has now acquired the marine services company from Tata Group for Rs1.1 bn along with the three tugs used to provide services at Dhamra. After this acquisition, the company has demerged the marine services business as a wholly owned subsidiary under the group. The acquired entity is registered under tonnage tax regime allowing for negligible tax to be paid on marine activity. Coupled with Adani Port’s marine services in the other portfolio ports, this reorganization could save tax of ~₹1.5 bn in FY2017 as per management estimates.
Capex peaking out, related party L&A will be reduced as planned. The company mentioned that after the set of ongoing new ports / expansion or acquisition projects currently ongoing, the capex will peak out by mid-FY2018 and no new projects are being planned as of now. The capex for FY2017 is expected to be ~₹34 bn. Further, the planned reduction of related party L&A by ~₹10 bn is well on track and will be done by end-FY2017. Thus, the balance sheet may not require further external support and would gradually bring leverage in check. The net interest cost also remains low at ~2.5% as of now, largely led by forex debt of the company.
Exhibit 7: Volumes for Mundra and other related ports, March fiscal year-ends, 2014-20E
2014 2015 2016 2017E 2018E 2019E 2020E Volumes (mn tons) Mundra port Bulk 47 52 46 41 42 42 41 Coal 36 39 34 30 30 29 28 Other bulk 10 13 11 11 12 13 13 Crude / POL / Liquid 23 22 26 28 29 30 33 Container ('000 TEUs) 2,391 2,718 3,035 3,387 3,946 4,474 4,977 Container (mn tons) 33 37 42 46 54 62 69 Mundra volumes 103 111 113 116 125 134 143 Other port assets Dahej port 8 12 8 7 7 8 9 Hazira port 4 7 12 15 18 20 21 Mormugao port — 1 2 3 3 4 4 Vizag port — 1 1 1 1 2 2 Kandla port — 0 4 6 7 9 10 Dhamra port 14 15 15 21 26 31 38 Ennore port — — — 3 4 6 7 Total of key ports 129 148 155 172 192 211 233
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 83 Infrastructure Adani Port and SEZ
Exhibit 8: Change in estimates for Adani Ports and SEZ, March fiscal year-ends, 2016-19E
New estimates Previous estimates % revision 2016 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E Volumes (mn tons) Mundra volume 113 116 125 134 120 132 141 (3.9) (4.8) (5.3) Dahej port 8 7 7 8 8 9 10 (20.0) (20.0) (20.0) Hazira port 12 15 18 20 15 18 20 (0.2) (0.1) (0.0) Mormugao port 2 3 3 4 3 3 4 - - - Vizag port 1 1 1 2 1 1 2 - - - Kandla port 4 6 7 9 6 7 9 - - - Dhamra port 15 21 26 31 21 26 31 3.4 (0.6) 0.2 Ennore — 3 4 6 1 3 4 100.0 50.0 50.0 Consolidated volumes 155 172 192 211 176 199 219 (2.4) (3.4) (3.5)
Consolidated financials Revenues 72,557 85,424 92,683 97,901 83,495 93,888 99,108 2.3 (1.3) (1.2) EBITDA 46,505 55,545 58,933 60,439 53,823 59,772 61,612 3.2 (1.4) (1.9) EBITDA margin (%) 64.1 65.0 63.6 61.7 64.5 63.7 62.2 56 bps -8 bps -44 bps Net PAT 28,299 37,419 28,331 29,339 35,323 29,428 30,997 5.9 (3.7) (5.4) EPS (Rs) 13.6 17.9 13.6 14.1 16.9 14.1 14.9 5.9 (3.7) (5.4)
Source: Company, Kotak Institutional Equities estimates
Exhibit 9: We arrive at an SoTP-based target price of Rs335/share for ADSEZ Mar-2018 based Sum-Of-Total-Parts valuation of Adani Ports & SEZ
Entity EV (Rs mn) Net debt Implied equity value Stake (%)Equity Value of stake Value/share Method Mundra Port (excl. SEZ) 282,051 11,377 270,673 100% 270,673 130 FCFF SEZ 77,984 — 77,984 100% 77,984 37 FCFF CT3 66,951 30,599 36,352 50% 18,176 9 FCFF CT4 30,415 16,290 14,126 50% 7,063 3 FCFF Vizag 2,478 3,591 (1,113) 100% (1,113) (1) FCFF Ennore 14,206 7,122 7,083 100% 7,083 3 FCFF Dhamra 193,849 47,009 146,840 100% 146,840 70 FCFF Dahej 47,541 2,265 45,277 74% 33,505 16 FCFF Hazira 131,390 14,741 116,649 100% 116,649 56 FCFF Vizhinjam 13,811 6,773 7,038 100% 7,038 3 FCFF Kandla 13,473 12,427 1,045 74% 774 0 FCFF Murmugao 8,547 3,990 4,558 74% 3,373 2 FCFF Adani Logistics 16,257 2,294 13,963 100% 13,963 7 15X EV/EBIDTA Total 898,953 158,477 740,476 702,008 337
Source: Company, Kotak Institutional Equities estimates
84 KOTAK INSTITUTIONAL EQUITIES RESEARCH Adani Port and SEZ Infrastructure
Exhibit 10: Consolidated financials of Adani Ports & SEZ, March fiscal year-ends, 2012-19E (Rs mn)
2012 2013 2014 2015 2016 2017E 2018E 2019E Income statement Net sales 32,708 35,766 48,240 61,520 72,557 85,424 92,683 97,901 Total operating costs (12,056) (12,007) (19,036) (22,497) (26,052) (29,879) (33,750) (37,462) EBITDA 20,653 23,760 29,204 39,023 46,505 55,545 58,933 60,439 EBITDA margin (%) 63.1 66.4 60.5 63.4 64.1 65.0 63.6 61.7 Other income 596 2,644 6,836 6,856 6,848 8,550 8,207 8,174 Depreciation (4,630) (4,220) (6,495) (9,117) (10,794) (11,494) (13,242) (14,764) Financial charges (4,796) (5,418) (9,768) (11,751) (10,990) (12,284) (14,088) (13,800) Pre-tax profit 11,822 16,766 19,777 25,012 31,569 40,317 39,809 40,048 Taxation (896) (1,231) (2,367) (12,715) (3,269) (2,898) (11,478) (10,710) Adjusted PAT (before exceptional items) 10,927 15,535 17,410 12,297 28,299 37,419 28,331 29,339 Reported PAT post-minority interest 11,021 16,232 17,396 12,196 28,674 37,609 28,328 29,179 EPS (Rs) 5.3 7.8 8.3 5.8 13.8 18.0 13.6 14.0 Balance sheet Shareholders funds 48,385 63,963 87,681 107,679 132,236 165,983 188,745 211,515 Share capital 4,035 4,035 4,168 4,168 4,170 4,170 4,170 4,170 Reserves and surplus 44,350 59,928 83,513 103,511 128,066 161,813 184,575 207,345 Loan funds 175,650 115,858 128,895 177,313 228,328 217,806 231,789 233,952 Received/ receivable under LT lease 5,905 5,190 7,336 7,188 5,796 — — — Deferred tax liability (net) 15,179 5,286 6,744 8,590 10,665 13,465 14,465 15,465 Total sources of funds 246,467 191,720 232,093 302,359 378,454 398,535 436,282 462,375 Total fixed assets 217,825 146,065 160,893 195,361 216,312 240,734 276,986 295,709 Investments 11,823 2,619 1,038 25,997 25,997 25,997 25,997 25,997 Cash and bank balance 11,184 8,306 4,694 8,940 16,354 18,222 23,936 37,995 Net current assests excl cash 5,635 34,730 65,468 72,061 119,791 113,582 109,362 102,674 Total application of funds 246,467 191,720 232,093 302,359 378,454 398,535 436,282 462,375 Cash flows Cash flow from operations 11,997 13,791 11,319 30,651 25,786 61,698 52,675 57,418 Cash flow from investing activities (138,760) (46,898) (25,100) (24,931) (46,556) (27,366) (41,288) (25,313) Free cash flows (33,475) (24,523) 297 18,361 664 25,782 3,180 23,931 Cash flow from financing activities 129,763 42,111 7,725 (2,366) 24,472 (32,465) (5,672) (18,046) Cash generated /utilised 3,000 9,004 (6,056) 3,353 3,702 1,868 5,715 14,059 Net cash at start of year 748 3,747 7,558 1,502 4,855 8,557 10,425 16,139 Net cash at end of year (excl. other cash) 3,747 12,752 1,502 4,855 8,557 10,425 16,139 30,198
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 85 ADD Britannia Industries (BRIT) Consumer Products FEBRUARY 14, 2017 RESULT Coverage view: Cautious
Healthy and ahead-of-estimates quarter. BRIT’s 3QFY17 performance was healthy Price (`): 3,224 and ahead-of-estimates as demonetization impact wasn’t as bad as expected. Tight cost Target price (`): 3,550 control and A&SP rationalization helped negate GM pressure despite no incremental BSE-30: 28,339 price hikes this quarter. We continue to like BRIT’s ahead-of-market volume delivery and expect margin pressure to subside in a few quarters aided by judicious price hikes. Distribution expansion, entry into new category (s) and market share gains in Hindi- belt/value-segment remain key medium-term growth levers. ADD stays.
Company data and valuation summary Britannia Industries Stock data Forecasts/Valuations 2017E 2018E 2019E 52-week range (Rs) (high,low) 3,584-2,519 EPS (Rs) 75.0 92.5 113.2 Market Cap. (Rs bn) 386.9 EPS growth (%) 7.9 23.2 22.5 Shareholding pattern (%) P/E (X) 43.0 34.9 28.5 Promoters 50.7 Sales (Rs bn) 91.6 105.4 122.6 FIIs 18.7 Net profits (Rs bn) 9.0 11.1 13.6 MFs 5.9 EBITDA (Rs bn) 12.9 15.8 19.3 Price performance (%) 1M 3M 12M EV/EBITDA (X) 29.5 23.7 19.1 Absolute 9.7 4.7 25.7 ROE (%) 44.2 41.9 39.8 Rel. to BSE-30 5.4 (0.9) 2.0 Div. Yield (%) 0.8 0.9 1.1
3QFY17 results print – healthy performance in a challenging environment
Britannia (BRIT) 3QFY17 results was ahead-of-our estimates on all fronts as demonetization impact wasn’t as bad as expected – consolidated net revenues grew 6% yoy to ₹22.8 bn (4% ahead of our estimates), EBITDA was flat yoy at ₹3.13 bn (17% ahead of our estimate) and recurring PAT grew 5% yoy to ₹2.2 bn (20% above our estimate). EBITDA margin contracted 70 bps yoy to 13.8% dragged by 230 bps yoy contraction in GM (up 20 bps qoq); however, 30 bps drop in staff costs (down 2% yoy in absolute terms) and 130 bps dip in other expenses (down 1% yoy, partly aided by A&SP rationalization) helped limit margin contraction. We note double-digit inflation in overall RM index, lag in price hikes and conscious strategy to focus on sustaining/gaining market share led to sharp GM contraction (in line with our expectation).
Modest volume growth in base business despite demonetization
Standalone net operating revenues grew 7% yoy, EBITDA grew 1% yoy and recurring PAT grew 7% yoy; revenue growth was driven by 2% volume growth in base business (flat volumes overall) and 4%+ price/mix-led growth. EBITDA margin contracted 70 bps yoy to 13.9% dragged by 210 bps yoy drop in GM (up 30 bps qoq). Growth in recurring PAT was aided by 25% yoy jump in other income and 290 bps yoy drop in ETR to 31.5%. Subsidiary business performance (international business + dairy) remained weak – revenues declined 2% yoy (fourth quarter of consecutive decline) dragged by weak international business performance and Anand Shah demonetization impact on dairy business. EBITDA declined 10% yoy and PAT declined 30%+ yoy dragged by sharp jump in ETR (as dairy business shifted to normal tax from MAT earlier). Rohit Chordia Raise estimates by 2-4%; retain ADD with revised TP of ₹3,550 (from ₹3,300)
We have raised our EPS estimates for FY2017-19 by 2-4% as we bake in 3QFY17 outperformance Abhas Gupta and lower ETR. We continue to like several tenets of BRIT’s narrative – (1) ahead-of-market volume growth, (2) strong innovation funnel, (3) huge headroom for growth via market share gains and distribution expansion, especially in both Hindi belt and value-segment and (4) strong growth potential in non-biscuits portfolio (cakes/rusks, international business and dairy). Retain ADD with revised TP of ₹3,550 (from ₹3,300) as we roll over to Dec 2018E (33X target P/E).
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Britannia Industries Consumer Products
Exhibit 1: Key changes to consolidated estimates (as per Ind-AS), Britannia, March fiscal year-ends, 2017-19E
Revised Earlier Change (%) 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E Net operating revenues (Rs mn) 91,581 105,398 122,555 90,830 106,242 123,191 0.8 (0.8) (0.5) EBITDA (Rs mn) 12,864 15,819 19,302 12,599 15,879 19,069 2.1 (0.4) 1.2 EBITDA margin (%) 14.0 15.0 15.7 13.9 14.9 15.5 17 bps 6 bps 27 bps Net income (Rs mn) 9,004 11,097 13,590 8,620 10,930 13,268 4.5 1.5 2.4 EPS (Rs/share) 75.0 92.5 113.2 71.8 91.1 110.6 4.5 1.5 2.4 Other assumptions Gross margin (%) 38.3 38.7 39.1 38.6 39.2 39.4 Volume growth - Biscuits (%) 5.5 9.5 11.5 4.3 12.0 11.0 120 bps -251 bps 49 bps Realisation growth - Biscuts (%) 4.5 5.5 4.5 4.5 5.0 4.5 0 bps 49 bps 0 bps
Source: Company, Kotak Institutional Equities estimates
Exhibit 2: Interim consolidated results of Britannia (as per Ind-AS), March fiscal year-ends (Rs mn)
(% chg.) 3QFY17 3QFY17E 3QFY17 2QFY17 KIE Est yoy qoq 9MFY17 9MFY16 (% chg.) Net sales 22,648 21,750 21,444 23,612 4 6 (4) 67,322 62,133 8 Other operating income 172 215 166 258 (20) 4 (33) 775 502 54 Net operating income 22,820 21,965 21,610 23,870 4 6 (4) 68,097 62,635 9 Material cost (14,190) (13,720) (12,945) (14,902) 3 10 (5) (41,971) (37,250) 13 Gross profit 8,629 8,245 8,665 8,967 5 (0) (4) 26,126 25,386 3 Gross margin (%) 37.8 37.5 40.1 37.6 27 bps -229 bps 24 bps 38.4 40.5 -217 bps Employee cost (882) (897) (899) (880) (2) (2) 0 (2,630) (2,541) 4 Other expenditure (4,622) (4,686) (4,655) (4,699) (1) (1) (2) (13,820) (13,608) 2 Total expenditure (19,694) (19,303) (18,499) (20,481) 2 6 (4) (58,421) (53,398) 9 EBITDA 3,126 2,662 3,111 3,389 17 0 (8) 9,676 9,237 5 OPM (%) 13.8 12.2 14.5 14.4 156 bps -71 bps -56 bps 14.4 14.9 -50 bps Other income 389 387 315 412 0 23 (6) 1,195 885 35 Interest (11) (16) (12) (15) (30) (7) (28) (41) (34) 22 Depreciation (303) (300) (281) (289) 1 8 5 (871) (826) 5 Pretax profits 3,201 2,733 3,134 3,496 17 2 (8) 9,959 9,263 8 Tax (997) (902) (1,027) (1,156) 11 (3) (14) (3,224) (3,009) 7 PAT 2,204 1,831 2,107 2,340 20 5 (6) 6,736 6,254 8 Minority interest/share of associates 1 (1) 1 (1) — 2 Recurring PAT 2,205 1,830 2,108 2,340 20 5 (6) 6,736 6,256 8 Extraordinary items — — — — — — Net profit (reported) 2,205 1,830 2,108 2,340 20 5 (6) 6,736 6,256 8 Recurring EPS (Rs) 18.4 15.3 17.6 19.5 20 5 (6) 56.1 52.1 8 Income tax rate (%) 31.1 33.0 32.8 33.1 -186 bps -163 bps -192 bps 32.4 32.5 -12 bps Costs as a percentage of sales Material cost 62.2 62.5 59.9 62.4 -28 bps 228 bps -25 bps 61.6 59.5 216 bps Employee cost 3.9 4.1 4.2 3.7 -22 bps -30 bps 18 bps 3.9 4.1 -20 bps Other expenditure 20.3 21.3 21.5 19.7 -109 bps -129 bps 56 bps 20.3 21.7 -144 bps
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 87 Consumer Products Britannia Industries
Exhibit 3: Interim standalone results of Britannia (as per Ind-AS), March fiscal year-ends (Rs mn)
(% chg.) 3QFY17 3QFY17E 3QFY17 2QFY17 KIE Est yoy qoq 9MFY17 9MFY16 (% chg.) Net sales 20,926 20,080 19,686 22,009 4 6 (5) 62,428 57,128 9 Other operating income 234 225 182 215 4 28 9 805 547 47 Net operating income 21,160 20,305 19,868 22,224 4 7 (5) 63,233 57,675 10 Material cost (13,154) (12,690) (11,929) (13,874) 4 10 (5) (38,985) (34,465) 13 Gross profit 8,006 7,614 7,939 8,350 5 1 (4) 24,248 23,210 4 Gross margin (%) 37.8 37.5 40.0 37.6 33 bps -213 bps 26 bps 38.3 40.2 -190 bps Employee cost (602) (617) (572) (605) (2) 5 (1) (1,797) (1,611) 12 Other expenditure (4,461) (4,496) (4,458) (4,516) (1) 0 (1) (13,294) (13,082) 2 Total expenditure (18,217) (17,804) (16,959) (18,995) 2 7 (4) (54,076) (49,158) 10 EBITDA 2,943 2,501 2,909 3,229 18 1 (9) 9,157 8,517 8 OPM (%) 13.9 12.3 14.6 14.5 159 bps -74 bps -62 bps 14.5 14.8 -29 bps Other income 379 375 303 403 1 25 (6) 1,158 854 36 Interest (4) (4) (3) (3) (4) 6 6 (10) (9) 5 Depreciation (243) (240) (213) (231) 1 14 5 (691) (628) 10 Pretax profits 3,076 2,632 2,995 3,398 17 3 (9) 9,614 8,733 10 Tax (968) (869) (1,028) (1,122) 11 (6) (14) (3,127) (3,003) 4 PAT 2,108 1,764 1,967 2,276 20 7 (7) 6,487 5,730 13 Extraordinary items — — — — — — Net profit (reported) 2,108 1,764 1,967 2,276 20 7 (7) 6,487 5,730 13 Recurring EPS (Rs) 17.6 14.7 16.4 19.0 20 7 (7) 54.1 47.8 13 Income tax rate (%) 31.5 33.0 34.3 33.0 -153 bps -286 bps -155 bps 32.5 34.4 -187 bps Costs as a percentage of sales Material cost 62.2 62.5 60.0 62.4 -34 bps 212 bps -27 bps 61.7 59.8 189 bps Employee cost 2.8 3.0 2.9 2.7 -20 bps -4 bps 12 bps 2.8 2.8 4 bps Other expenditure 21.1 22.1 22.4 20.3 -107 bps -136 bps 75 bps 21.0 22.7 -166 bps
Source: Company, Kotak Institutional Equities
Key takeaways from the earnings call
Demand recovery to be gradual. Management highlighted that 3QFY17 was a challenging quarter due to demonetization impact – (1) November sales declined 10% mom versus October 2016 and (2) revenues in December improved mom but was still lower versus initial targets. Overall, it expects full recovery to be gradual (will take another 3-6 months).
Pricing action. The company did not take any fresh price hikes in 3QFY17 due to weak demand environment post demonetization. Overall, it has taken 5.5-6% price hike during 9MFY17 and may additionally look at 1.5-2% hike over next few quarters to mitigate input cost inflation. However, it will identify the right SKUs, territories and brands where it can take price hike without getting uncompetitive.
Multiple growth levers beyond biscuits. The company continues to work on multiple growth opportunities beyond core biscuits category including –
. Cakes/rusks – BRIT has established in-house manufacturing line for rusks in TN (currently bulk of rusks manufacturing is done via co-packers), which will help develop value-added rusks. It is also working on indulgent/differentiated offerings in both cakes and rusks.
. Dairy – supply chain integration plan remains under review. BRIT continues to focus on current business and is evaluating potential partnership opportunity.
. International business – the company continues to focus on expansion in countries with large Indian diaspora and markets where it can create a reasonably large business (Nepal is one such market, BRIT is looking to establish local infrastructure in Nepal).
88 KOTAK INSTITUTIONAL EQUITIES RESEARCH Britannia Industries Consumer Products
. NPDs – BRIT continues to work aggressively on entry into new categories; it has already evaluated potential partnership in value-added products in one of the categories (a launch is likely over next few months itself) – it highlighted that the category is a fairly large and exciting category with good gross margins and focused on youth market and will be a JV partnership will the partner will bring in its technology, recipe and years of experience in the category.
Dairy business performance. The management said that the dairy segment topline growth slowed down due to demonetization impact and bottom line was impacted due to increase in milk prices. However, profitable portfolio (cheese and dairy whitener) continues to grow while other parts of portfolio like ghee have seen a downtrend.
International business. The exports business continued to do well albeit growth has slowed down to low double-digit versus 20%+ growth earlier. International business continues to remain under stress in the Middle East and Africa market, where they have had to shut down operations in certain regions such as Syria, Libya, Yemen etc. due to political unrests while in some, there has been adverse currency volatility.
Capex plans. Britannia will continue to invest in capacity expansion (and is looking at three locations – North East, Mundra and Maharashtra) with bulk of the investment in new manufacturing facility. The Maharashtra facility will house a large factory and a distribution center and potential expansion area for dairy business in future. It has guided for an overall capex of ₹3.5-4 bn in FY2018.
Exhibit 4: BRIT delivered a modest volume growth of 2% in a challenging environment
14 12.0 12 11.0 10.0 10.0 10.0 10 8.0 8.0 8.0 8 7.0 6.0 5.5 6 5.0 4.0 4.0 3.5 4 2.5 2 -
0
3QFY13 4QFY13 3QFY14 4QFY14 1QFY15 2QFY15 1QFY16 2QFY16 3QFY16 4QFY16 3QFY17 2QFY14 3QFY15 4QFY15 1QFY17 2QFY17 1QFY14
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 89 Consumer Products Britannia Industries
Exhibit 5: Price/mix-led growth remained stable at 4%+
12 11.3 9.5 9.9 9.7 10 7.6 8 7.0 6.5 6.0 6.3 5.3 5.6 6 4.1 4 1.4 2 - - - 0 (2.0) (2)
(4)
1QFY14 2QFY14 3QFY14 4QFY14 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 2QFY17 3QFY17 4QFY13 1QFY15 2QFY15 4QFY16 1QFY17 3QFY13
Source: Company, Kotak Institutional Equities estimates
90 KOTAK INSTITUTIONAL EQUITIES RESEARCH Britannia Industries Consumer Products
Exhibit 6: Key revenue growth assumptions (pre A&SP netting off, gross revenues as per IGAAP), March fiscal year-ends, 2013-19E (Rs mn)
2013 2014 2015 2016 2017E 2018E 2019E Standalone Revenue breakup Product-wise revenue (Rs mn) Biscuits and high protein food 46,758 53,145 60,520 67,122 74,000 85,487 99,607 Bread 6,018 6,774 7,637 8,567 8,790 10,056 11,482 Cake and rusk 3,108 3,043 4,022 4,757 5,594 6,807 8,417 Others 613 517 515 533 551 571 591 Total gross revenue 56,497 63,479 72,693 80,978 88,935 102,920 120,097 Growth yoy (%) Biscuits and high protein food 11.5 13.7 13.9 10.9 10.2 15.5 16.5 Bread 21.5 12.6 12.7 12.2 2.6 14.4 14.2 Cake and rusk 14.5 (2.1) 32.2 18.3 17.6 21.7 23.7 Others 31.4 (15.8) (0.4) 3.5 3.5 3.5 3.5 Total gross revenue 12.9 12.4 14.5 11.4 9.8 15.7 16.7 Product-wise volumes (MT) Biscuits and high protein food 628,617 653,762 709,331 787,358 830,663 909,576 1,014,177 Bread 145,661 151,487 162,091 176,680 167,846 184,630 203,093 Cake and rusk 26,034 24,732 29,678 34,130 38,226 44,342 52,323 Total product volumes 800,311 829,981 901,101 998,168 1,036,734 1,138,548 1,269,593 Growth yoy (%) Biscuits and high protein food 5.0 4.0 8.5 11.0 5.5 9.5 11.5 Bread 9.0 4.0 7.0 9.0 (5.0) 10.0 10.0 Cake and rusk 12.0 (5.0) 20.0 15.0 12.0 16.0 18.0 Total product volumes 5.9 3.7 8.6 10.8 3.9 9.8 11.5 Product-wise realisation (Rs/MT) Biscuits and high protein food 74,382 81,291 85,319 85,249 89,085 93,985 98,214 Bread 41,312 44,719 47,115 48,491 52,370 54,465 56,535 Cake and rusk 119,376 123,031 135,506 139,364 146,332 153,502 160,870 Total realisation 69,827 75,860 80,100 80,593 85,252 89,894 94,129 Growth yoy (%) Biscuits and high protein food 6.2 9.3 5.0 (0.1) 4.5 5.5 4.5 Bread 11.5 8.2 5.4 2.9 8.0 4.0 3.8 Cake and rusk 2.3 3.1 10.1 2.8 5.0 4.9 4.8 Total realisation 6.4 8.6 5.6 0.6 5.8 5.4 4.7 Subsidiary revenue breakup (Rs mn) Britannia Dairy 3,095 3,043 3,334 3,223 3,449 3,894 4,370 Daily Bread 233 201 158 99 84 80 76 Strategic Food International 2,323 2,722 3,379 4,306 4,091 4,255 4,680 Al Sallan (65%) 1,254 1,356 1,637 2,088 1,983 2,063 2,269 Total subsidiary revenue 6,904 7,323 8,508 9,716 9,608 10,291 11,395 Less: Intersegmental (1,182) (1,346) (1,759) (2,939) (2,906) (3,113) (3,447) Consolidated gross revenues (Rs mn) 62,218 69,455 79,442 87,755 95,636 110,098 128,044 Growth yoy (%) Britannia Dairy 5.4 (1.7) 9.5 (3.3) 7.0 12.9 12.2 Daily Bread (3.3) (13.8) (21.2) (37.6) (15.0) (5.0) (5.0) Strategic Food International 23.3 17.2 24.1 27.4 (5.0) 4.0 10.0 Al Sallan (65%) 16.8 8.2 20.7 27.5 (5.0) 4.0 10.0 Total subsidiary revenue 12.6 6.1 16.2 14.2 (1.1) 7.1 10.7 Consolidated revenues 12.7 11.6 14.4 7.7 9.0 15.1 16.3
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 91 Consumer Products Britannia Industries
Exhibit 7: Britannia: Consolidated P&L, balance sheet, and cash flow statement (as per Ind-AS), 2013-2019E, March fiscal year-ends (Rs mn)
2013 2014 2015 2016E 2017E 2018E 2019E Profit model (Rs mn) Net sales 61,359 68,293 77,751 83,254 90,540 104,200 121,162 Other operating income 495 834 833 718 1,041 1,198 1,393 Net operating income 61,854 69,127 78,584 83,972 91,581 105,398 122,555 EBITDA 4,206 6,272 8,639 12,247 12,864 15,819 19,302 Other income 522 336 880 1,244 1,643 1,824 2,299 Interest (413) (83) (39) (49) (54) (47) (40) Depreciation (732) (832) (1,445) (1,134) (1,188) (1,411) (1,599) Pretax profits 3,584 5,693 8,035 12,308 13,265 16,185 19,962 Tax (986) (1,736) (2,611) (3,961) (4,262) (5,090) (6,374) Minority Interest/share of net loss of associated (4) (4) 2 2 2 2 2 Extraordinary items — — 1,461 (103) — — — Net income 2,595 3,953 6,886 8,245 9,004 11,097 13,590 Recurring net income 2,595 3,953 5,426 8,349 9,004 11,097 13,590 Earnings per share (Rs) 21.7 33.0 45.2 69.6 75.0 92.5 113.2 Balance sheet (Rs mn) Total shareholder's equity 5,579 7,981 12,451 17,693 23,087 29,851 38,385 Total borrowings 3,799 1,497 1,402 1,270 1,120 970 820 Deferred tax liability 128 89 (234) (277) (277) (277) (277) Minority interest 23 24 24 25 23 21 19 Total liabilities and equity 9,528 9,590 13,644 18,711 23,952 30,564 38,947 Net fixed assets 7,849 8,477 7,818 9,244 10,703 12,957 14,405 Goodwill 992 1,070 1,107 1,159 1,159 1,159 1,159 Investments 1,082 1,979 5,179 7,529 7,529 7,529 7,529 Cash 1,029 1,091 2,263 877 4,554 8,795 15,486 Net Current assets (1,425) (3,026) (2,723) (98) 7 125 369 Total assets 9,528 9,590 13,644 18,711 23,952 30,564 38,947 Free cash flow (Rs mn) Operating cash flow, excl. working capital 3,359 4,453 5,591 8,258 9,374 11,417 13,663 Working capital (161) 2,262 253 1,356 (105) (117) (244) Capital expenditure (2,154) (995) 463 (2,494) (2,647) (3,665) (3,047) Free cash flow 1,044 5,720 6,308 7,120 6,622 7,635 10,372 Growth Revenue growth 12.8 11.8 13.7 6.9 9.1 15.1 16.3 EBITDA growth 35.3 49.1 37.7 41.8 5.0 23.0 22.0 EPS growth 30.0 52.4 37.2 53.9 7.9 23.2 22.5 Ratios (%) Gross margin (%) 37.6 39.7 40.3 40.3 38.3 38.7 39.1 EBITDA margin (%) 6.8 9.1 11.0 14.6 14.0 15.0 15.7 Net profit margin (%) 4.2 5.7 6.9 9.9 9.8 10.5 11.1 ROE (%) 53.7 58.3 53.1 55.4 44.2 41.9 39.8 ROCE (%) 30.5 51.9 60.7 67.6 54.0 52.2 50.4 Key assumptions (%) Biscuits Volume growth (%) 5.0 4.0 8.5 11.0 5.5 9.5 11.5 Biscuits Realisation growth (%) 6.2 9.3 5.0 (0.1) 4.5 5.5 4.5
Source: Company, Kotak Institutional Equities estimates
92 KOTAK INSTITUTIONAL EQUITIES RESEARCH REDUCE / ADD PFC / REC (POWF / RECL) NBFCs FEBRUARY 15, 2017 RESULT Coverage view: Neutral
Concerns remain. REC and PFC reported marginal improvement in impaired loans, but Price (`): 132 /145 concerns on asset quality stay. Reduction of loans due to Uday scheme and weak near- Target price (`): 135 /160 term growth prospects will lead to anemic growth. Decline in bulk borrowing rates will BSE-30: 28,339 augur well for NIM, but for both lower scope of capital-gain bond status for REC is a headwind. Retain REDUCE on PFC (TP `135 from `120) and ADD on REC (TP `160 from `145).
Company data and valuation summary PFC Stock data Forecasts/Valuations 2017E 2018E 2019E 52-week range (Rs) (high,low) 140-70 EPS (Rs) 27.6 23.1 24.9 Market Cap. (Rs bn) 348.5 EPS growth (%) 19.2 (16.4) 7.8 QUICK NUMBERS Shareholding pattern (%) P/E (X) 4.8 5.7 5.3 Promoters 67.8 NII (Rs bn) 117.6 108.6 116.4 PFC PAT up 23% yoy FIIs 13.2 Net profits (Rs bn) 72.9 60.9 65.6 MFs 1.5 BVPS 149.3 119.7 138.4 REC PAT up 28% Price performance (%) 1M 3M 12M P/B (X) 0.9 1.1 1.0 Absolute (3.5) 11.6 80.6 ROE (%) 17.7 13.2 12.8 yoy Rel. to BSE-30 (7.2) 5.6 46.5 Div. Yield (%) 4.2 3.5 3.8 Company data and valuation summary PFC loan book up Rural Electrification Corp. 3% yoy; REC’s loan Stock data Forecasts/Valuations 2017E 2018E 2019E book flat yoy 52-week range (Rs) (high,low) 152-76 EPS (Rs) 32.5 22.1 19.6 Market Cap. (Rs bn) 285.5 EPS growth (%) 14.2 (32.2) (11.4) Shareholding pattern (%) P/E (X) 4.4 6.5 7.4 Promoters 60.6 NII (Rs bn) 99.2 79.3 71.6 FIIs 16.5 Net profits (Rs bn) 64.3 43.6 38.6 MFs 2.5 BVPS 141.7 138.3 155.8 Price performance (%) 1M 3M 12M P/B (X) 1.0 1.0 0.9 Absolute 3.6 8.7 78.4 ROE (%) 21.4 13.1 10.7 Rel. to BSE-30 (0.4) 2.9 44.7 Div. Yield (%) 4.8 3.3 2.9
Loan book flat, some relief on impaired loans
PFC/ REC reported qoq weak business momentum; PFC’s loan book was flat qoq but up 3% yoy to `2.37 tn while REC reported loan book of `2 tn, up 3% qoq but flat yoy; this was likely due to weak disbursements and higher repayments as a consequence of Uday scheme- a trend, we believe, will continue in the medium-term.
PFC reported 2% decline in restructured/rescheduled loans and 4% decline in GNPLs likely due to upgrades. This led to reduction in impaired loans to 15.5% of total from 15.9% qoq; impaired loans in private sector declined to 70% from 72% in 2QFY17 and 76% in 1QFY17.
REC reported 3% decline in GNPLs due to upgrade of a hydel project while two loans - a gas- based and biomass project slipped into NPLs. A large public-sector impaired loan (`45 bn,2% of Nischint Chawathe loans) was upgraded to standard on completing two years post CoD. Thus, overall impaired loans were down to 12% of loans from 14.2% qoq even as private sector impaired loans M B Mahesh CFA increased to 46% from 44% qoq.
Revise estimates; ADD PFC, REDUCE REC Abhijeet Sakhare Recent rally in bond markets will support near-term NIMs even as growth remains weak. We await visibility on reduction in impaired loans and continue to factor in a stressed scenario in our adjusted book estimates (impaired loans at 40%/72% of private book for REC/ PFC respectively) leading to 25-45%difference in their respective reported and adjusted books. We value REC/PFC at 1X FY2019E book, on building in low-teens RoE reflecting stress in its books.
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. NBFCs PFC
High growth in reported earnings
Key highlights of PFC’s 3QFY17 performance
PAT up 23% yoy to `19.5 bn.
NII was flat yoy on the back of 3% yoy loan growth to `2.37 tn and compression in calculated NIM by 33 bps to 3.36%. 50 bps decline in calculated asset yield was partially offset by decline in borrowings cost.
Impaired loans declined to 15.5% of total from 15.9% qoq as GNPL was down 4% qoq to 3.07%. Restructured/ rescheduled loans were down 2% qoq.
Key highlights of REC’s 3QFY17 performance
PAT up 28% yoy to `17.5 bn.
NII was up 9% yoy on the back of flat yoy loan book at `2 tn. Calculated NIM expanded to 5.07% from 4.54% yoy even as calculated spreads compressed 17 bps to 3.11%. This is likely due to lower leverage as a consequence of flat loan book and high RoE. While yield compressed 86 bps yoy, borrowing cost was down 70 bps yoy.
GNPLs declined 3% qoq to 2.32% due to upgrade of a hydel project even as two other accounts slipped into NPLs. Overall impaired loans were down to 12% of loans from 14.2% qoq.
94 KOTAK INSTITUTIONAL EQUITIES RESEARCH PFC NBFCs
Exhibit 1: PFC - quarterly data March fiscal year-ends, 3QFY16-3QFY17 (` mn)
(% chg.) 3QFY17 3QFY17E 3QFY16 2QFY17 3QFY17E 3QFY16 2QFY17 9MFY17 9MFY16 (% chg.) FY2017E Profit and Loss statement Net interest income 28,270 27,500 28,700 28,670 3 (1) (1) 86,280 86,030 0 117,421 Loan loss provisions 1,200 1,500 4,830 3,010 (20) (75) (60) 5,950 11,120 (46) 8,131 Net interest income (after provisions) 27,070 26,000 23,870 25,660 4 13 5 80,330 74,910 7 109,290 Net operating income 27,600 26,700 23,900 26,410 3 15 5 82,170 75,120 9 118,771 Other income 1,170 700 (190) 650 (716) 80 580 (1,650) (135) 0 Forex gajns 1,170 700 (190) 650 (716) 80 580 (1,650) (135) 0 Total income 28,770 27,400 23,710 27,060 5 21 6 82,750 73,470 13 118,771 Total income (after provisioning) 28,770 27,400 23,710 27,060 5 21 6 82,750 73,470 13 110,640 Operating expenses 580 400 360 420 45 61 38 3,021 2,559 18 3,454 PBT 28,190 27,000 23,350 26,640 4 21 6 79,729 70,911 12 107,156 Tax 8,690 8,100 7,530 7,910 7 15 10 24,380 22,370 9 34,290 PAT 19,500 18,900 15,820 18,730 3 23 4 55,349 48,541 14 72,866 PBT (adjusted) 27,020 26,300 23,540 25,990 3 15 4 70,746 72,561 (3) 107,156 Other detajls Approvals (Rs bn) 320 195 366 64 (12) Disbursements (Rs bn) 122 108 144 13 (16) Loan assets (Rs bn) 2,374 2,412 2,297 2,341 (2) 3 1 Yield on Assets (%) 11.6 12.0 11.8 Cost of funds (%) 8.4 8.6 8.4 Spreads (%) 3.2 3.4 3.3 Net interest margins- KS calc (%) 4.8 5.1 5.0 Capital adequacy ratio (%) 22.3 20.4 21.8 Key balance sheet items (Rs mn) Loan Assets 2,355 2,290 2,342 3 1 Loans and borrowings 1,934 1,917 1,947 1 (1) Asset quality (Rs bn) Gross NPAs 73 44 76 67 (4) Net NPAs 54 36 57 49 (6) Gross NPAs (%) 3.1 1.9 3.2 Net NPAs (%) 2.3 1.6 2.4 Restructured/ rescheduled loans 294.3 241.9 299.0 Total impajred loans 367.2 285.4 374.8 Impajred loans (% of total) 15.5 12.4 15.9 Impajred loans (% of private sector loans) 70.1 68.7 71.5
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 95 NBFCs PFC
Exhibit 2: REC – quarterly financial data March fiscal year-ends, 3QFY16-3QFY17 (` mn) (% chg.) 3QFY17 3QFY17E 3QFY16 2QFY17 3QFY17E 3QFY16 2QFY17 9MFY17 9MFY16 (% chg) 2017E Income statement Interest income 55,730 57,500 59,873 57,559 (3) (7) (3) 172,184 174,553 (1) 220,152 Other income 3,114 1,500 195 1,517 108 1,497 105 5,602 979 472 Interest costs 33,730 35,000 37,066 34,255 (4) (9) (2) 103,518 105,292 (2) 123,911 Net interest income 25,114 24,000 23,001 24,821 5 9 1 74,268 70,239 6 99,241 Other operational income 735 1,500 307 2,010 (51) 139 (63) 3,386 1,190 184 3,460 Net total income 25,849 25,500 23,308 26,831 1 11 (4) 77,654 71,430 9 102,701 Provisioning expenses 153 1,250 3,732 1,214 (88) (96) (87) 4,933 6,260 (21) 6,936 Net income (post provisions) 25,696 24,250 19,577 25,617 6 31 0 72,721 65,170 12 95,765 Operating expenses 954 1,120 781 1,150 (15) 22 (17) 2,985 2,447 22 3,966 Staff expenses 397 400 327 416 21 (4) 1,181 1,017 16 1,649 Other operating expenses 543 700 441 716 23 (24) 1,766 1,389 27 2,250 Depreciation expenses 13 20 13 18 (1) (28) 37 41 (9) 67 PBT post extraordinaries 24,742 23,130 18,795 24,467 7 32 1 69,736 62,723 11 91,799 Tax 7,195 6,708 5,097 6,954 7 41 3 20,468 18,043 13 27,540 PAT 17,547 16,422 13,699 17,513 7 28 0 49,268 44,681 10 64,259 PBT before provisions 17,700 17,672 17,431 18,727 0 2 (5) 54,201 50,940 6 71,195 EPS (Rs) 9 17 7 9 (47) 28 0 25 23 10 33 Balance sheet Assets Loans 2,006,360 1,992,927 2,021,850 1,953,850 1 (1) 3 Investments 27,140 9,160 30,340 196 (11) Fixed assets 1,780 840 1,620 Current assets 50,470 24,770 46,500 104 9 Total assets 2,085,750 2,056,620 2,032,310 1 3 Liabilities Borrowings 1,676,120 1,690,770 1,620,770 (1) 3 Current liabilities and provisions 74,100 85,710 93,760 (14) (21) Total liabilities 1,750,220 1,776,480 1,714,530 (1) 2 Shareholders funds 335,530 280,140 317,780 20 6
Key operating parameters (%) Approvals (Rs bn) 173 122 342 42 (49) Disbursements (Rs mn) 116 119 142 (3) (19) Interest yield (KS - calc) 11.10 12.08 11.86 Interest cost (KS- calc) 7.99 8.75 8.05 Spreads (KS- calc) 3.11 3.34 3.81 NIMs (KS- calc) 5.07 4.64 5.19
Yield on loans 11.39 12.05 11.95 Borrowings cost 8.12 8.46 8.18 NIMs 4.54 4.59 4.84 Reported spreads 3.27 3.59 3.77
Gross NPLs (Rs mn) 46,910 34,680 48,240 Net NPLs (Rs mn) 33,900 27,680 35,570 Gross NPLs (%) 2.32 1.71 2.45 Net NPLs (%) 1.68 1.36 1.81 Restructured/ rescheduled loans (Rs mn) 195,390 231,593 Total impaired loans (Rs mn) 242,300 279,833 Impaired loans (% of total) 12.0 14.2
Source: Company, Kotak Institutional Equities estimates
Loan growth impacted by Uday scheme
PFC: 3% yoy loan growth. PFC’s loan book grew 3% yoy to ₹2.4 tn, due to impact of Uday scheme. PFC has redeemed ~₹240 bn of discom loans so far and has scope to reduce by ₹45 bn relating to states that have signed the MoU This represents 10% drag to current loan book.
REC: Loan book stable yoy and 4% qoq. Implementation of Uday scheme has led to modest yoy loan growth for REC. Sequential loan growth was higher at 3%, largely on back of lending to SEBs on transmission and distribution side. Loan growth is supported by short-term loans (up 5X yoy) to SEBs which act as bridge loans to meet working capital requirements. These loans are generally guaranteed by state governments. Disbursements declined 3% yoy due to decline in T&D disbursements from a high base. Approvals stood at ₹174 bn, up ~40% yoy; but this remains a fairly volatile number to reflect any trend.
96 KOTAK INSTITUTIONAL EQUITIES RESEARCH PFC NBFCs
Update on Uday scheme. About `310 bn of discom loans have been redeemed till 3QFY17 and further `120 bn is expected to be redeemed in 4QFY17/1QFY18 from states such as Tamil Nadu, Telangana and Madhya Pradesh. Qualitatively, REC highlighted that states which have joined the scheme have witnessed improvement (still early days) in parameters such as aggregate technical and commercial (AT&C) losses and gap between the aggregate cost of supply and average revenue realized.
At the analyst meet REC outlined that over the medium to long-term it sees lending opportunities emerging from (1) renewable energy projects undertaken by the state entities, (2) modernization of old thermal power plants of close to 25 GW capacity, (3) modernization of transmission and distribution network across the country.
Higher loan growth for REC. We expect REC to deliver modest 3% loan CAGR over FY2017-19E, compared to 3-5% decline in FY2017-18E and recovery to 6% loan growth in FY2019E for PFC. Our loan growth forecast reflect higher drag from Uday on PFC compared to REC.
NIMs shrink for both PFC and REC
PFC. NIM for PFC declined ~20 bps qoq to 4.7%, led by ~20 bps decline in loan yields whereas cost of decline was relatively lower at <10 bps. We continue to forecast spread compression to reflect decline in yields on loan to SEBs and disposal of discom loans. We expect interest spreads could decline by ~130 bps in FY2017-19E. Reduction in leverage due to discom loan redemption will result in optically higher NIM. Higher-than-expected growth due to refinancing of bank loans can lead to further compression.
REC. Similar to PFC, NIMs shrank ~30 bps qoq to 4.5%, led by ~50 bps decline in loan yields and marginal benefit on funding cost. We believe NIM pressures as REC will need to pass on the benefit to its borrowers. More importantly, SEB will likely start aggressively negotiating with REC on reducing their funding costs. This will lead to NIM compression for REC. We hence build in 140 bps spread compression for REC.
On the funding cost, REC has historically enjoyed funding cost benefit to ability to raise funds from tax free bonds at 6%. The last Union Budget indicated expanding the scope of such instruments beyond the current issuers (NHAI and REC) – this may reduce the share of REC and may impact cost of funds.
Decline in gross NPLs for PFC and REC
PFC. PFC reported gross NPL of ₹73 bn, down 4% qoq, while GNPL ratio declined ~10 bps qoq to 3.1% due to qoq loan book growth. Restructured loans declined 2% qoq to ₹294 bn. Overall impaired ratio declined to 15.5% from 15.5% qoq. Provisions in the quarter were at ₹1.2 bn, compared to ₹3.0 bn in 2QFY17, reflecting fall in NPL and restructured loans.
We expect credit costs to rise to remain elevated at 0.60-0.65% of loans in FY2018-19E as compared to 0.4% in FY2015 and 0.7% in FY2016. Reduction in loan book will release standard asset provisions.
We assume 12.5% GNPLs by FY2018 in our forecasts, which work out to nearly ~70% of the existing private sector loan book. We model increasing 15-25% coverage on these NPLs over FY2018-19E and provide for the balance in our adjusted book value estimates.
REC. GNPL declined 3% qoq at ₹47 bn and declined ~20 bps qoq to 2.3%. Total impaired loans, including rescheduled loans declined 13% qoq to ₹242 bn and ~200 bps qoq to 12.0% of loans. Decrease in gross NPL reflects upgrade of hydro power project loan of `5.7 bn, leading to provision release of `570 mn. Slippages were `4.4 bn in the quarter spread across 2 accounts.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 97 NBFCs PFC
Restructured loans declined to 10% of loans, 200 bps lower qoq. Impaired loans in the private sector (`150 bn) are about 46% of its current private sector loan book (`324 bn). Provisioning expenses declined sharply qoq to ₹150 mn. Reduction in the restructured loans and provision is due to upgrade of `46 bn loan to state entity on achieving completion of project leading to `1.8 bn provision reversal.
Exhibit 3: Large impaired loans for PFC; REC better placed March fiscal year-end, 3QFY15-3QFY17 (Rs bn) 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 PFC Gross NPLs 20 24 28 28 44 75 76 76 73 Rescheduled/ restructured loans 175 205 219 223 242 323 335 299 294 Total impaired loans 195 229 246 251 285 398 411 375 367 (% of loan book) 10 11 11 11 12 17 18 16 15 Private sector impaired loans 180 214 231 236 248 284 297 284 276 (% of private sector loan book) 53 59 63 66 69 74 76 72 70
REC Gross NPLs 13 13 16 21 35 34 48 48 47 Rescheduled/ restructured loans 95 164 188 193 200 211 216 232 195 Total impaired loans 108 178 203 214 235 245 265 280 242 (% of loan book) 6 10 11 11 12 12 14 14 12 Private sector impaired loans 13 61 84 91 111 120 139 146 149 (% of private sector loan book) 5 19 26 31 37 39 44 44 46
Notes: PFC (1) If the commission date of a project is postponed by a single day, the loan is classified as 'rescheduled'. (2) If the loan repayment scheudule is revised due to change in cash flow forecasts, the loan is classified as 'restructured'. REC (3) If the commission date of a private/ public sector project is postponed by over two years or loan repayment schedule is revised, the loans is classified as 'restructured'.
Source: Company, Kotak Institutional Equities
98 KOTAK INSTITUTIONAL EQUITIES RESEARCH PFC NBFCs
Exhibit 4: PFC - Loan book break-up Exhibit 5: PFC - SEB exposure remains high March fiscal year-end, 2010-17 (Rs bn) March fiscal year-end, 2010-17 (Rs bn)
(Rs bn) Distribution Transmission (Rs bn) (%) Others Private SEB (%) Generation Others 2,800 2,800 537 586 74 67 71 583 2,400 67 2,400 504 548 71 146 156 157 150 411 2,000 70 135 2,000 61 118 308 210 224 1,600 1,600 179 209 224 57 111 240 204 1,717 1,7911,770 1,200 47 99 1,590 1,730 1,200 148 246 34 76 1,447 107 247 800 1,268 800 203 1,4921,642 1,508 1,551 1,567 63 1,074 150 1,274 843 1,051 400 670 400 645 815 452 541 255 379 319 346 376
0 32 30 72 164 0
2010 2011 2012 2013 2014 2015 2016 2010 2011 2012 2013 2014 2015 2016
2QFY17 3QFY17 1QFY17 2QFY17 3QFY17 1QFY17
Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities
Exhibit 6: REC- Loan book break-up Exhibit 7: REC- SEB exposure remains high March fiscal year-end, 2010-17 (Rs bn) March fiscal year-end, 2010-17 (Rs bn)
(Rs bn) Generation T&D Short term loan (%) State Central Private 2,200 2,200
305 329 324 1,760 317 1,760 313 62 151 158 64 178 1,159 1,014 1,058 211 1,320 1,013 1,320 1,022 166 66 821 61 107 880 653 880 57 78 1,646 1,537 499 59 1,420 1,394 1,486 418 1,209 916 1,047 440 764 834 836 903 440 850 555 654 681 346 452
- -
2015 2011 2012 2013 2014 2016
2012 2011 2013 2014 2015 2016
1QFY17 2QFY17 3QFY17
2QFY17 3QFY17 1QFY17
Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 99 NBFCs PFC
Exhibit 8: PFC - we forecast NIM compression for PFC Exhibit 9: PFC - bonds dominate PFC's borrowing mix Yields and cost of borrowings March fiscal year-ends, 2010-2019E Break-up of borrowings, December 2016 (% of total)
Yield on advances Cost of funds Spread 15 12.1 12.2 11.7 12.0 11.5 12 10.9 10.9 11.0 4.5 10.8 10.3 9.2 9.1 8.5 8.5 8.6 Term loans 9 8.3 8.3 7.9 8.0 8.0 3.0 , 4.7% Short term Bonds, 6 loans , 91.9% 3.4% 1.5 3
0 -
2013 2010 2011 2012 2014 2015 2016
2017E 2018E 2019E
Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities
Exhibit 10: REC - we forecast NIM compression Exhibit 11: REC - bonds dominate REC's borrowings Yields and cost of borrowings March fiscal year-ends, 2010-2019E Break-up of borrowings, 3QFY17 (% of total)
Foreign Yield on advances Cost of funds NIM currency, Capital 15.0 5.5 13.1% gains , Banks, 19.2% 12.3 12.3 12.4 11.7 0.4% 12.0 10.9 10.9 11.3 11.1 5.0 10.0 9.4 8.4 8.5 8.9 9.0 7.9 8.1 4.5 7.8 7.7 7.4 7.5 7.5
6.0 4.0
3.0 3.5
Institutional - 3.0 bonds,
66.1%
2010 2011 2012 2013 2014 2015 2016
2018E 2019E 2017E
Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities
100 KOTAK INSTITUTIONAL EQUITIES RESEARCH PFC NBFCs
Exhibit 12: PFC – Change in estimates Old and new estimates, March fiscal year-ends, 2017-19E (` mn)
New estimates Old estimates % change 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E Net interest income 117,571 108,577 116,393 109,788 103,359 119,499 7 5 (3) Loan growth (%) (2) (5) 6 (2) (5) 10 NIM (%) 4.9 4.7 5.0 4.6 4.5 5.0 NPL provisions 8,131 14,159 15,196 14,667 15,049 15,975 (45) (6) (5) Operating expenses 3,454 3,372 3,384 3,454 3,372 3,453 - - (2) Employee 556 639 735 556 639 735 - - - PBT 107,156 87,016 93,782 92,837 80,908 96,041 15 8 (2) Tax 34,290 26,105 28,135 29,708 24,272 28,812 15 8 (2) PAT 72,866 60,911 65,647 63,129 56,636 67,229 15 8 (2)
Source: Company, Kotak Institutional Equities estimates
Exhibit 13: REC – change in estimates New and old estimates, March fiscal year-ends, 2017E-19E (Rs mn) New estimates Old estimates % change 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E Loan book (Rs bn) 2021 2067 2171 2021 2119 2211 - (2) (2) YoY (%) 1 2 5 1 5 4 NIM (%) 4.9 3.9 3.4 4.9 3.6 3.7 Net interest income 99,241 79,329 71,609 98,071 74,553 79,424 1 6 (10) NPL provisions 6,936 14,460 13,388 15,686 16,180 14,840 (56) (11) (10) Operating expenses 3,966 4,488 5,029 3,966 4,488 5,029 - - - Employee 1,649 1,979 2,217 1,649 1,979 2,217 - - - PBT 91,799 62,264 55,169 81,879 55,767 61,531 12 12 (10) Tax 27,540 18,679 16,551 24,564 16,730 18,459 12 12 (10) PAT 64,259 43,585 38,618 57,315 39,037 43,072 12 12 (10)
Source: Company, Kotak Institutional Equities estimates
Exhibit 14: PFC trading at 0.7X one-year forward rolling book One-year forward rolling trading multiples, 2012-2017 (X)
Rolling PER (X) (LHS) Rolling PBR (X) (RHS) 25 1.4
20 1.1
15 0.7 10
0.4 5
0 -
Feb-14 Feb-15 Feb-16 Feb-17 Feb-13
Nov-13 Nov-15 Nov-12 Nov-14 Nov-16
Aug-13 Aug-15 Aug-14 Aug-16
May-14 May-15 May-16 May-13
Source: Company, Bloomberg, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 101 NBFCs PFC
Exhibit 15: REC is trading at 0.9X one-year forward book One-year forward rolling PER and PBR, 2013 – 2017 (X)
Rolling PER (X) (LHS) Rolling PBR (X) (RHS) 15.0 3.0
12.0 2.4
9.0 1.8
6.0 1.2
3.0 0.6
0.0 -
Feb-14 Feb-15 Feb-17 Feb-13 Feb-16
Aug-14 Aug-16 Aug-13 Aug-15
Source: Bloomberg, Company, Kotak Institutional Equities estimates
102 KOTAK INSTITUTIONAL EQUITIES RESEARCH PFC NBFCs
Exhibit 16: PFC : Key financial ratios and growth rates March fiscal year-ends, 2014-19E (%)
2014 2015 2016 2017E 2018E 2019E Growth rates (%) Net interest income 35.1 16.4 13.1 5.3 (7.6) 7.2 Loan loss provisions 446.5 79.6 102.0 (52.3) 74.1 7.3 Other income 0.0 0.0 0.0 0.0 0.0 0.0 Operating expense 60.9 (4.5) 35.1 19.0 (2.4) 0.4 PBT 26.6 10.9 8.1 18.3 (18.8) 7.8 PAT 22.6 10.0 2.5 19.2 (16.4) 7.8 PBT- forex gajns 29 13 5 15 (15) 7 Net loans 18 15 9 (2) (5) 6 Unsecurued loans (liabilities) 14 18 7 (8) (16) (11) Net worth 14 18 19 15 11 10 Yield measures (%) Yield on earnings assets 11.7 11.8 11.5 11.0 10.2 9.8 Yield on loans 12.1 12.2 12.0 11.5 10.8 10.3 Cost of funds 8.5 8.6 8.3 7.9 8.0 8.0 Spread 3.6 3.6 3.7 3.6 2.8 2.3 Net interest margin 4.8 4.8 4.9 4.9 4.7 5.0 Total provisions/net loans (EoY) 0.25 0.39 0.72 0.35 0.64 0.65 Tax rate 28 29 33 32 30 30 Dividend payout ratio 22 20 20 20 20 20 Profitability measures (%) Interest income/total income 102.7 104.6 101.0 99.0 103.8 103.6 Other income / total income (2.7) (4.7) (2.2) - (3.8) (3.6) Operating expenses/total income 2.7 2.3 2.6 2.9 3.2 3.0 Payout ratio 22.0 20.2 60.0 20.2 20.2 20.2 LT Debt- Equity Ratio (X) 5.8 5.8 5.2 4.2 3.2 2.6 CAR (%) 14.5 14.8 16.2 19.0 22.1 23.0 Loan loss provisions/ ave loan assets 0.3 0.4 0.8 0.3 0.6 0.7 ROA decomposition - % of avg. assets Net interest income 4.7 4.7 4.7 4.8 4.5 4.8 Interest restructuring premium (0.1) (0.2) (0.1) - (0.2) (0.2) Loan loss provisions 0.3 0.4 0.7 0.3 0.6 0.6 Adj. Net interest income 4.4 4.3 4.0 4.4 3.9 4.2 Other income (0.1) (0.2) (0.1) - (0.2) (0.2) Operating expenses 0.1 0.1 0.1 0.1 0.1 0.1 Other expenses & extraordinaries 0.0 0.0 0.0 0.0 0.0 0.0 (1- tax rate) 71.7 71.1 67.5 68.0 70.0 70.0 ROA 3.0 2.8 2.6 3.0 2.5 2.7 Average assets/average equity 7.1 7.1 6.7 6.0 5.2 4.7 ROE 21.1 20.0 17.3 17.7 13.2 12.8
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 103 NBFCs PFC
Exhibit 17: PFC : Key financial statements March fiscal year-ends, 2014-2019E (` mn) 2014 2015 2016 2017E 2018E 2019E Income statement (Rsmn) Total interest income 211,200 248,280 272,590 269,870 244,710 234,251 Adj. interest (after rebate for timely payment) 211,225 248,280 272,590 269,720 244,560 234,101 Total interest expense 126,410 149,560 160,910 152,299 136,132 117,858 Net interest income 84,790 98,720 111,680 117,571 108,577 116,393 Loan loss provisions 4,700 8,440 17,050 8,131 14,159 15,196 Other income (2,210) (4,470) (2,440) - (4,000) (4,000) Net total income 82,580 94,410 110,590 118,771 104,577 112,393 Operating expenses 2248 2147 2902 3454 3372 3384 Depreciation 49 15 30 30 30 30 PBT 75,583 83,808 90,608 107,156 87,016 93,782 Tax 21,404 24,197 29,480 34,290 26,105 28,135 PAT 54,179 59,611 61,128 72,866 60,911 65,647 PBT + provisions-interest on restruction premium 82,833 96,718 110,098 115,287 105,175 112,978 EPS (Rs) 20.5 22.6 23.2 27.6 23.1 24.9 % growth 22.6 10.0 2.5 19.2 (16.4) 7.8 DPS(Rs) 4.5 4.6 13.9 5.6 4.6 5.0 BPS (incl def tax Rs) 104 122 146 167 185 204 ABVPS (incl def tax Rs) 101 117 129 149 120 138
Balance sheet (Rs mn) Fixed Assets (Net) 710 640 641 743 743 743 Total Loan Assets 1,892,310 2,170,420 2,374,622 2,319,282 2,202,324 2,332,813 Total Current Assets, Loans & Advances 45,100 112,110 64,330 115,518 107,360 105,523 Total Assets 1,941,640 2,286,640 2,466,368 2,467,674 2,348,983 2,485,345 Unsecured Loans 1,592,150 1,877,720 2,004,826 1,845,900 1,553,903 1,386,833 Total current liabilities 69,987 80,810 112,415 175,627 302,050 554,896 Deferred tax liability 870 870 870 870 870 870 Total liabilities 1,667,890 1,964,450 2,082,307 2,027,919 1,862,672 1,948,858 Paid up capital 13,193 13,193 26,401 26,401 26,401 26,401 Reserves & surplus 260,557 308,997 357,660 413,354 459,910 510,087 Total equity 273,750 322,190 384,061 439,755 486,311 536,487
Source: Company, Kotak Institutional Equities estimates
104 KOTAK INSTITUTIONAL EQUITIES RESEARCH PFC NBFCs
Exhibit 18: REC - key financial ratios and growth rates March fiscal year-ends, 2014-2019E (%) 2014 2015 2016 2017E 2018E 2019E Growth in key parameters (%) Interest income 26.6 19.3 16.7 -5.4 -8.4 -2.6 Interest costs 23.5 19.8 20.6 -13.2 1.0 1.9 Net interest income 31.3 18.7 11.3 6.6 -20.1 -9.7 PAT 22.7 12.3 7.0 14.2 -32.2 -11.4 Disbursements -9.5 20.5 7.5 30.6 -21.0 17.3 Loans 16.7 20.6 11.7 0.9 2.3 5.0 Borrowings 17.1 19.6 12.0 -1.1 0.2 3.8 Shareholders funds 18.4 20.3 15.1 10.2 10.4 8.3 Key ratios (%) Interest yield 12.27 12.32 12.43 11.09 10.00 9.40 Interest cost 8.45 8.54 8.92 7.37 7.47 7.47 Spreads 3.82 3.78 3.51 3.72 2.53 1.93 NIMs 5.11 5.10 4.90 4.93 3.88 3.38 Tax rate 28 29 30 30 30 30 Debt/ equity+DTL (X) 6.1 6.1 5.9 5.3 4.8 4.6
Du Pont analysis (% of average assets) Net interest income 5.0 5.0 4.8 4.8 3.8 3.3 Other income 0.1 0.1 0.1 0.2 0.1 0.1 Credit costs 0.22 0.48 0.56 0.33 0.68 0.61 Operating expneses 0.3 0.2 0.2 0.2 0.2 0.2 PBT post extraordinaries 4.6 4.4 4.1 4.4 2.9 2.5 1-tax rate 0.7 0.7 0.7 0.7 0.7 0.7 RoA 3.3 3.1 2.9 3.1 2.1 1.8 Average assets / average equity (X) 7.4 7.4 7.3 6.9 6.4 6.0 RoE 24.6 23.1 21.0 21.4 13.1 10.7
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 105 NBFCs PFC
Exhibit 19: REC - key financial statements March fiscal year-ends, 2014-2019E (` mn) 2014 2015 2016 2017E 2018E 2019E Income statement (Rs mn) Interest income 169,302 202,054 235,889 223,152 204,425 199,098 Interest costs 98,850 118,447 142,828 123,911 125,096 127,490 Net interest income 70,452 83,607 93,061 99,241 79,329 71,609 Other income 1,902 1,822 1,678 3,460 1,883 1,977 Fees 947 1,200 1,260 3,000 1,400 1,470 Net total income 72,355 85,429 94,739 102,701 81,211 73,585 Provisioning expenses 3,120 8,032 10,904 6,936 14,460 13,388 Net income (post provisions) 69,235 77,397 83,835 95,765 66,752 60,197 Operating expneses 3,928 3,133 3,386 3,966 4,488 5,029 PBT before extraordinaties 65,306 74,264 80,450 91,799 62,264 55,169 Tax 18,473 21,665 24,169 27,540 18,679 16,551 PAT 46,834 52,599 56,281 64,259 43,585 38,618 EPS (adding back DTL) (Rs) 24 27 28 33 22 20 BVPS (adding back DTL) (Rs) 105 126 145 160 176 191 ABVPS (adding back DTL) (Rs) 103 122 135 142 138 156
Balance sheet (Rs mn) Assets Loans 1,486,410 1,792,820 2,002,650 2,021,171 2,067,325 2,170,515 Investments 17,080 16,130 24,670 28,371 32,626 37,520 Fixed assets 820 810 1,500 1,725 1,984 2,281 Current assets 24,220 21,990 34,710 35,303 35,955 36,673 Total assets 1,528,530 1,831,750 2,063,530 2,086,570 2,137,890 2,246,989
Liabilities Borrowings 1,262,400 1,510,240 1,691,060 1,672,056 1,675,803 1,738,820 Deferred tax liability ------Current liabilities and provisions 59,436 72,940 86,290 99,234 114,119 131,236 Total liabilities 1,321,840 1,583,180 1,777,350 1,771,289 1,789,922 1,870,057 Share capital 9,874 9,874 9,874 19,748 19,748 19,748 Reserves and surplus 200,498 240,407 257,212 295,532 328,221 357,185 Shareholders funds 206,690 248,570 286,180 315,280 347,969 376,932
Source: Company, Kotak Institutional Equities estimates
106 KOTAK INSTITUTIONAL EQUITIES RESEARCH ADD Petronet LNG (PLNG) Energy FEBRUARY 15, 2017 RESULT Coverage view: Attractive
Strong volumes offset by weak spot margins. PLNG’s 3QFY17 EBITDA was in line Price (`): 385 with our estimate at `6.1 bn, as higher volumes at 191 tn BTUs were offset by lower Target price (`): 425 spot margins; net income at `4 bn was boosted by lower effective tax rate at 22%. We BSE-30: 28,339 maintain our positive view on the stock with a revised DCF-based target price of ₹425 (₹415 previously), noting robust growth in earnings and free cash flows driven by increasing volumes over the next several years.
Company data and valuation summary Petronet LNG Stock data Forecasts/Valuations 2017E 2018E 2019E 52-week range (Rs) (high,low) 411-230 EPS (Rs) 21.2 25.5 27.8 Market Cap. (Rs bn) 288.6 EPS growth (%) 88.9 20.3 8.9 Shareholding pattern (%) P/E (X) 18.1 15.1 13.9 Promoters 50.0 Sales (Rs bn) 255.7 316.7 370.5 FIIs 21.7 Net profits (Rs bn) 15.9 19.1 20.8 MFs 5.9 EBITDA (Rs bn) 25.9 30.6 33.7 Price performance (%) 1M 3M 12M EV/EBITDA (X) 11.6 9.4 8.1 Absolute 4.4 6.6 59.4 ROE (%) 22.9 23.4 22.1 Rel. to BSE-30 0.3 0.9 29.3 Div. Yield (%) 1.3 1.8 2.3
In-line operating performance driven by continued strength in volumes
PLNG’s EBITDA was in line with our estimate at ₹6.1 bn (-16% qoq, +114% yoy), as higher re- gasification volumes at 191 tn BTUs (+1.3% qoq, +34% yoy) versus our assumption of 183 tn BTUs, was offset by seemingly lower implied spot margins. We note that spot volumes have become less relevant for the company, with its share declining to sub-5% driven by higher tolling volumes, presumably due to off-take from tolling contracts. Net income at `4 bn (-14% qoq, +133% yoy) was 13% above our estimate, boosted by lower effective tax rate at 22% due to one-time benefit on income tax exemptions from commissioning of expansion project at Dahej. PLNG’s EPS has increased 85% yoy to `16.5 in 9MFY17 reflecting (1) 28% jump in LNG volumes aided by capacity expansion at Dahej terminal, (2) 5% annual escalation in re- gasification tariffs and (3) lower other expenditure and interest costs.
Dahej off-take increases to 3.7 mn tons; Kochi utilization remains low at 6%
Re-gasification volumes increased further to 191.4 tn BTUs from 188.9 tn BTUs in the previous quarter and 142.4 tn BTUs in 3QFY16, reflecting continued strong demand environment for LNG in domestic markets. Tolling volumes increased to 75.3 tn BTUs from 60.7 tn BTUs in the previous quarter, as spot volumes declined to 8.6 tn BTUs (4.5% share of overall volumes) from 25.2 tn BTUs in 2QFY17. LNG import volumes at Dahej terminal increased to 187.6 tn BTUs (3.7 mn tons) with a robust utilization at 98% on expanded capacity of 15 mtpa; Kochi utilization remained low at 6%. GAIL’s recent award of contracts for Kochi to Mangalore pipeline sections provides comfort on pickup in volumes from Kochi terminal in 12-18 months.
Fine tune estimates; retain ADD with a revised TP of `425
We revise our FY2017-19 EPS estimates to `21.2 (-1%), `25.5 (-2%) and `27.8 (-3%) to factor in (1) modest changes in operating costs and spot margins and (2) other minor changes. Our Tarun Lakhotia DCF-based TP increases to ₹425 from ₹415 previously as we rollover to September 2018E. We model tariffs for Dahej (ex-tolling contracts) and Kochi to increase by 5% annually in CY2018- 19E to ₹49/mn BTU and ₹83/mn BTU respectively, and remain flat thereafter. Our assumptions yield a reasonable 20-22% RoE in the long term factoring in potential competitive/regulatory risks to the LNG re-gasification business.
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Energy Petronet LNG
Key takeaways from the conference call
Commencement of long-term tolling contracts from October. Long-term tolling contracts have commenced from October, post full commissioning of expansion project; the volumes have already ramped up in the recent months.
Further expansion at Dahej. PLNG on track to further expand Dahej terminal by 2.5 mtpa, which is expected to be commissioned by end-CY2019 at a cost of ~₹12 bn.
Visibility on off-take from Kochi. LNG off-take from Kochi is expected to increase by ~0.5 mtpa post stabilization of BPCL’s refinery expansion likely by April 2017. Further, expected completion of Kochi-Mangalore pipeline in about 18 months will likely increase utilization to 45-50%—GAIL has now awarded contract for both sections of pipeline.
Gorgon volumes to ramp by July 2017. LNG imports from Gorgon contract has started from January and are expected to ramp up fully by July 2017; a portion of volumes maybe diverted to Dahej given the lack of off-take at Kochi. PLNG is also trying to renegotiate the pricing formula.
Exhibit 1: Interim results of PLNG, March fiscal year-ends (` mn)
(% chg.) yoy 3QFY17 3QFY17E 3QFY16 2QFY17 3QFY17E 3QFY16 2QFY17 9MFY17 9MFY16 (% chg.) FY2017E Net sales 62,993 65,194 51,460 66,144 (3.4) 22.4 (4.8) 182,510 210,682 (13.4) 255,656 Total expenditure (56,922) (58,987) (48,619) (58,880) (3.5) 17.1 (3.3) (162,750) (199,784) (18.5) (229,789) Raw material (55,569) (57,679) (47,165) (57,613) (3.7) 17.8 (3.5) (158,949) (195,830) (18.8) (224,588) Staff cost (194) (187) (229) (180) 4.2 (15.1) 7.8 (558) (523) 6.7 (774) Other expenditure (1,159) (1,121) (1,225) (1,086) 3.4 (5.4) 6.7 (3,243) (3,432) (5.5) (4,427) EBITDA 6,071 6,207 2,841 7,264 (2.2) 113.7 (16.4) 19,760 10,898 81.3 25,867 Other income 550 547 814 915 0.5 (32.4) (39.9) 1,959 1,760 11.3 2,526 Interest (517) (538) (612) (554) (4.0) (15.6) (6.8) (1,627) (1,852) (12.1) (2,115) Depreciation (1,009) (1,053) (807) (860) (4.1) 25.0 17.4 (2,675) (2,416) 10.7 (3,779) Profit before tax 5,095 5,164 2,236 6,765 (1.3) 127.8 (24.7) 17,417 8,390 107.6 22,498 Extraordinary/prior-period items — — — — — — — Current tax (1,121) (1,653) (527) (2,170) (5,068) (1,710) (4,716) Deferred tax — — — — — — (1,880) Profit after tax 3,975 3,512 1,709 4,596 13.2 132.5 (13.5) 12,349 6,679 84.9 15,903 Adjusted profit after tax 3,975 3,512 1,709 4,596 13.2 132.5 (13.5) 12,349 6,679 84.9 15,903 Adjusted EPS (Rs) 5.3 4.7 2.3 6.1 16.5 8.9 21.2 Other comprehensive income — — — — — Total comprehensive income 3,975 1,709 4,596 132.5 (13.5) 12,349 6,679 Tax rate (%) 22.0 32.0 23.6 32.1 29.1 20.4 29.3
Volumes (tn BTU) Overall 191.4 182.6 142.4 188.9 4.8 34.4 1.3 548.4 427.0 28.4 734.1 Dahej utilization (%) 98 94 109 109 110 109 106 Kochi utilization (%) 6 6 7 7 6 5 6 Dahej 187.6 178.6 138.2 184.4 5.0 35.7 1.7 537.2 417.6 28.6 717.7 Contracted 107.5 109.0 37.7 103.0 315.8 167.8 422.5 Spot 4.8 11.4 21.1 20.7 35.3 62.9 38.2 Tolling 75.3 58.2 79.5 60.7 186.1 186.9 257.0 Kochi 3.8 4.0 4.2 4.5 (5.0) (9.7) (15.6) 11.2 9.4 19.1 16.4 Spot 3.8 4.0 4.2 4.5 11.2 9.4 12.7 Tariffs (Rs/mn BTU) Implied blended tariffs 38.8 41.2 30.2 45.2 (5.7) 28.6 (14.1) 43.0 34.8 23.5 42.3 Dahej re-gasification tariffs 42.6 42.6 40.5 42.6 42.6 40.5 43.1 Kochi re-gasification tariffs 71.8 71.8 68.4 71.8 71.8 68.4 72.7 Estimated marketing margins (US$/mn BTU) (0.4) 0.3 (0.2) 0.4 0.3 0.1 0.3
Source: Company, Kotak Institutional Equities estimates
108 KOTAK INSTITUTIONAL EQUITIES RESEARCH Petronet LNG Energy
Exhibit 2: Dahej utilization was robust at 98% on expanded capacity Quarterly volumes for PLNG, 1QFY15 onwards (tn BTU)
1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 Dahej 138.0 149.1 140.4 93.2 125.4 153.9 138.2 148.5 165.2 184.4 187.6 Contracted 96.4 93.9 94.3 60.0 67.1 63.0 37.7 109.4 105.3 103.0 107.5 Spot 16.8 24.4 18.1 12.4 23.1 18.8 21.1 12.5 9.9 20.7 4.8 Tolling 24.8 30.9 28.0 20.8 35.3 72.1 79.5 26.5 50.1 60.7 75.3 Kochi 0.7 1.3 1.0 2.4 2.5 2.7 4.2 5.1 2.9 4.5 3.8 Contracted — — — — — — — — — — — Spot 0.6 1.3 1.0 2.4 2.5 2.7 4.2 5.1 2.9 4.5 3.8 Tolling 0.0 — — — — — — — — — — Total re-gasification volumes 138.7 150.5 141.4 95.6 127.9 156.6 142.4 153.6 168.1 188.9 191.4 Reload volumes — — — 6.9 3.6 — — — — — — Utilization (%) Dahej 108 117 110 73 99 121 109 117 130 109 98 Kochi 1 2 2 4 4 4 7 8 5 7 6
Source: Company, Kotak Institutional Equities estimates
Exhibit 3: We model moderate ramp up in PLNG's re-gasification volumes Key assumptions for Petronet LNG, March fiscal year-ends, 2012-20E
2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E Volume assumptions (mn tons) Contract LNG volumes 7.3 7.4 7.4 6.8 5.4 8.4 9.1 9.6 9.8 Spot LNG volumes 2.0 2.0 1.3 1.5 1.8 1.0 0.4 0.6 1.1 Tolling volumes 1.4 0.9 1.1 2.1 4.1 5.1 6.8 7.0 7.5 Total volumes 10.8 10.3 9.7 10.3 11.3 14.4 16.3 17.2 18.4 Dahej 10.8 10.3 9.6 10.2 11.0 14.1 15.5 16.0 16.5 Kochi — — 0.1 0.1 0.3 0.3 0.8 1.2 2.0 Total volumes 10.8 10.3 9.7 10.3 11.3 14.4 16.3 17.2 18.4 Price assumptions (US$/mn BTU) LNG purchase price (FOB) 8.1 10.2 12.3 13.3 9.4 6.2 7.5 8.2 8.7 Landed cost (incl. import tariff) 8.9 11.1 13.4 14.5 10.3 6.9 8.3 9.0 9.6 Re-gasification charges for Dahej 0.70 0.65 0.62 0.64 0.63 0.64 0.66 0.67 0.68 Re-gasification charges for Dahej (Rs/mn BTU) 33.8 35.5 37.2 39.1 41.0 43.1 45.2 47.5 49.3 Tolling contract charges for Dahej 0.61 0.62 0.63 0.65 Tolling contract charges for Dahej (Rs/mn BTU) 41.0 42.5 44.7 46.9 Re-gasification charges for Kochi 1.04 1.08 1.06 1.08 1.11 1.14 1.15 Re-gasification charges for Kochi (Rs/mn BTU) 62.8 65.9 69.2 72.7 76.3 80.1 83.1 Blended sales price 9.7 11.8 14.0 15.1 10.9 7.6 9.0 9.7 10.4 Marketing margins on spot LNG 0.90 1.23 0.85 0.29 (0.01) 0.28 0.25 0.25 0.25 Other assumptions Exchange rate (Rs/US$) 47.9 54.4 60.5 61.1 65.5 67.4 69.0 70.5 72.0
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 109 Energy Petronet LNG
Exhibit 4: Our DCF-based fair value for PLNG is `425 Calculation of equity value of PLNG using discounted cash flow valuation (` mn)
2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E EBITDA 30,616 33,729 39,476 45,187 50,378 53,826 57,255 59,593 59,812 60,036 Adjusted tax expense (5,533) (8,501) (10,850) (13,088) (15,115) (16,505) (17,852) (18,796) (18,993) (19,171) Change in working capital (1,311) (432) (1,389) (1,480) (2,041) (1,643) (1,845) (2,041) (1,797) (2,098) Operating cash flow 23,772 24,796 27,237 30,619 33,222 35,678 37,558 38,755 39,021 38,767 Capital expenditure (4,500) (5,750) (4,500) (1,285) (1,298) (1,311) (1,324) (1,337) (1,351) (5,774) Free cash flow 19,272 19,046 22,737 29,334 31,924 34,367 36,234 37,418 37,671 32,994 Discounted cash flow-now 18,295 16,289 17,513 20,355 19,957 19,355 18,379 17,099 15,509 12,237 Discounted cash flow-1 year forward 18,081 19,445 22,594 22,152 21,484 20,407 18,980 17,215 13,583 Discounted cash flow-2 year forward 21,584 25,087 24,589 23,848 22,652 21,074 19,108 15,077
Now +1-year +2-years Discount rate (%) 11.0% 11.0% 11.0% Total PV of free cash flow 174,988 186,178 198,838 Terminal value assumption Growth in perpetuity 0.0% 0.0% 0.0% Sensitivity of 12-month fair value to WACC and perpetual growth FCF in 2027E 32,994 32,994 32,994 Perpetual growth (%) Exit FCF multiple (X) 9.1 9.1 9.1 424 -2.0% -1.0% 0.0% 1.0% 2.0% Exit EV/EBITDA multiple (X) 5.0 5.0 5.0 10.0% 431 446 464 486 513 Terminal value 299,942 299,942 299,942 10.5% 414 427 443 462 486 PV of terminal value 111,246 111,246 111,246 11.0% 398 410 424 441 461 Total company value 286,234 297,424 310,084 11.5% 384 394 406 421 439 WACC(%) 12.0% 370 380 390 403 419 Net debt 11,978 (1,897) (14,337) Equity value 274,256 299,321 324,420 Shares outstanding (mn) 750 750 750 Equity value of regasification business (Rs) 366 399 433 Equity value of 26% stake in Dahej Port (Rs) 11 13 14 Fair value of PLNG, including dividends (Rs) 382 424 468
Source: Kotak Institutional Equities estimates
110 KOTAK INSTITUTIONAL EQUITIES RESEARCH Petronet LNG Energy
Exhibit 5: Profit model, balance sheet, cash model March fiscal year-ends, 2012-20E (` mn)
2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E Profit model (Rs mn) Net sales 226,959 314,674 377,476 395,010 271,334 255,656 316,658 370,484 435,456 EBITDA 18,292 18,436 14,984 14,390 15,903 25,867 30,616 33,729 39,476 Other income 849 1,817 838 1,548 1,704 2,526 2,734 3,092 3,439 Interest (1,774) (1,184) (2,196) (2,935) (2,388) (2,115) (1,592) (994) (448) Depreciation (1,842) (1,866) (3,081) (3,154) (3,216) (3,779) (4,219) (4,271) (4,583) Pretax profits 15,525 17,203 10,545 9,849 12,004 22,498 27,539 31,556 37,884 Extraordinary items — — — 1,436 724 — — — — Tax (4,800) (5,430) (1,806) (720) (2,147) (4,716) (5,772) (9,106) (11,780) Deferred taxation (150) (280) (1,620) (1,740) (1,440) (1,880) (2,639) (1,620) (1,097) Adjusted net profits 10,575 11,493 7,119 7,389 8,417 15,903 19,127 20,830 25,007 Earnings per share (Rs) 14.1 15.3 9.5 9.9 11.2 21.2 25.5 27.8 33.3
Balance sheet (Rs mn) Total equity 35,198 44,497 49,861 56,886 63,764 75,167 87,995 100,725 114,483 Deferred taxation liability 3,630 3,910 5,530 7,270 8,710 10,590 13,229 14,849 15,945 Total borrowings 32,762 30,342 35,669 35,541 37,738 34,846 26,800 20,759 12,718 Currrent liabilities 20,521 32,080 28,066 11,538 14,267 13,356 15,057 16,581 18,363 Total liabilities and equity 92,110 110,828 119,127 111,236 124,480 133,959 143,081 152,914 161,509 Cash 9,839 12,685 12,327 3,621 21,829 22,868 28,697 35,096 40,603 Current assets 22,758 29,860 34,450 29,820 18,141 21,822 24,833 26,790 29,960 Total fixed assets 58,115 66,884 71,450 76,895 83,610 88,369 88,650 90,129 90,047 Investments 1,399 1,399 900 900 900 900 900 900 900 Total assets 92,110 110,828 119,127 111,236 124,480 133,959 143,081 152,914 161,509
Free cash flow (Rs mn) Operating cash flow, excl. working capital 10,378 11,094 11,341 10,291 12,032 19,035 23,252 23,628 27,248 Working capital (985) 4,037 (3,527) (4,451) 19,323 (4,592) (1,311) (432) (1,389) Capital expenditure (10,979) (8,406) (8,761) (8,279) (9,724) (8,538) (4,500) (5,750) (4,500) Investments 10,381 — 116 1,105 941 — — — — Free cash flow 8,794 6,725 (830) (1,334) 22,572 5,905 17,441 17,447 21,359 Other income 803 721 617 520 245 2,526 2,734 3,092 3,439
Ratios (%) Debt/equity 84 63 64 55 52 41 26 18 10 Net debt/equity 59 36 42 50 22 14 (2) (12) (21) RoAE 30.6 26.3 13.7 14.8 13.4 20.1 20.5 19.2 20.3 RoACE 39.6 45.4 17.8 10.8 11.1 18.6 19.3 20.9 23.8 Adjusted CROCI 34.5 38.5 13.2 10.9 12.9 16.0 18.2 18.9 19.7
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 111 BUY DLF (DLFU) Real Estate FEBRUARY 15, 2017 RESULT Coverage view: Attractive
3QFY17 (first cut)–still caught in the debt trap. DLF’s debt increased by `12.6 bn Price (`): 147 during 3Q, much higher than expected. This will continue to dilute the impact of the Target price (`): 160 stake sale, which has already got delayed and fund infusion will now be in FY2018 only. BSE-30: 28,339 Sales continue to remain dismal and so too the guidance for the next 12 months. We expect more clarity on the `7.9 bn of cancellations /upgradations in 9MFY17 and unsold stock so that we can better estimate sales from existing projects.
Company data and valuation summary DLF Stock data Forecasts/Valuations 2017E 2018E 2019E 52-week range (Rs) (high,low) 170-82 EPS (Rs) 3.7 1.6 1.9 Market Cap. (Rs bn) 263.0 EPS growth (%) 18.7 (55.2) 14.2 QUICK NUMBERS Shareholding pattern (%) P/E (X) 40.3 90.0 78.8 Promoters 75.0 Sales (Rs bn) 86.0 91.0 94.7 Net debt has FIIs 17.0 Net profits (Rs bn) 6.5 2.9 3.3 MFs 0.9 EBITDA (Rs bn) 33.9 32.0 32.1 increased by `12.6 Price performance (%) 1M 3M 12M EV/EBITDA (X) 15.4 16.2 15.9 bn in 3QFY17 Absolute 18.8 28.9 64.5 ROE (%) 2.2 1.0 1.1 Rel. to BSE-30 14.2 19.6 36.7 Div. Yield (%) 1.4 1.4 1.4
Results review: Debt increased by `12.6 bn!
Net debt has increased by `12.6 bn in 3QFY17 (versus `16 bn in 1HFY17). The results presentation shows losses on derivatives and other items, but we await more clarity from the management on payments to customers /cancellations /cost inflation, in addition to the high interest component in the negative OCF.
Operations review: Nearly 5 mn sq. ft completed in 3Q; sales remain weak and confusing
DLF completed 4.95 mn sq. ft of residential projects in 3QFY17, totaling 11 mn sq. ft in 9MFY17. The area under development is now down to 18.5 mn sq. ft, 70% of which will be completed in the next 12 months. DLF reported gross sales of `6.6 bn during 3QFY17 and yet again reported cancellations and ‘upgradations’ of `3.9 bn, thus indicating net sales of `2.7 bn. The management should clarify on (a) unsold area at its completed projects, (b) projects with consistent cancellations and upgradations and (c) the stressed sale of 5% as mentioned in the presentation, in order to better estimate sales from its existing projects (including those that are ready).
Highlights from presentation disclosures
The management believes that the primary market will improve only after the secondary market stabilizes. As the focus remains on execution and delivery of projects, consistent weak sales will cause stress in operating cash flow for the next four quarters.
. The management has now pegged the quarterly operation shortfall to `7.5bn – `10 bn. Interest cost has a large bearing on this. With most projects nearing completion, we expect clarity from the management on the increase in deficit from `5-`6 bn/quarter to over `7.5 bn. Unless asset monetization and infusion takes place, debt is unlikely to come down with the current pace of operations. Samar Sarda
Leasing demand remains stable and DLF has started construction of 1.6 mn sq. ft office building in Chennai (2.5 mn sq. ft property already under-construction in Gurgaon).
Stake sale update: Discussion is at an advanced stage and is likely to be presented to independent directors shortly. The deal has taken longer than expected given the size and complexities involved. Delay and increase in debt will impact debt dynamics.
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. DLF Real Estate
Exhibit 1: Debt has increased by over Rs12 bn in 3QFY17 DLF (I-GAAP): Gross and net debt, March fiscal year-ends, 2012-3QFY17 (Rs bn)
2012 2013 2014 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 Gross debt 251 248 223 240 251 239 245 245 250 254 269 275 285 291 Equity shown as debt (10) (12) (11) (11) (10) (10) (10) (4) (4) (3) (13) (13) (13) (13) Gross debt 240 236 213 229 241 230 235 241 247 251 256 262 272 278 Pref shares 18 18 18 18 18 18 18 18 18 16 16 16 16 16 Gross debt 258 254 231 247 259 248 253 259 265 267 272 278 288 294 Cash in hand (15) (21) (29) (40) (43) (28) (28) (27) (23) (36) (34) (37) (37) (31) Exch. fluctuation —— (1) (1) —————————— Net debt 243 233 201 207 215 219 226 232 241 231 238 241 251 263 (Reduction)/Addition 13 (10) (32) 5 9 4 6 6 9 (10) 7 3 10 12 Asset sales 18 32 56 2 ———— 1 17 — 3 2 —
Source: Company, Kotak Institutional Equities estimates
Exhibit 2: Debt increases by Rs12.6 bn in 3QFY17 DLF (under Ind-AS): Gross and net debt, March fiscal year-ends, 1QFY17-3QFY17 (Rs bn)
1QFY17 2QFY17 3QFY17 Opening gross debt 256.2 262.1 272.2 (less) Repayment during the quarter (7.7) (6.8) (6.5) (add) New loans 13.6 16.9 12.4 Gross debt at the end of the quarter 262.1 272.2 278.2 (less) Equity shown as debt /JV co debt (0.0) (0.0) (0.0) (less) Ind-AS impact (3.6) (3.9) (3.5) Gross debt 258.4 268.3 274.7 (less) cash in hand (37.2) (36.9) (30.7) Net debt 221.2 231.4 244.0 Increase /(Decrease) 10.2 12.6
Source: Company, Kotak Institutional Equities
Exhibit 3: DLF: 3QFY17 and 9MFY17 results snapshot, March fiscal year-ends (Rs mn)
(%) change 3QFY17 3QFY17E 3QFY16 2QFY17 KIE est. yoy qoq 9MFY17 9MFY16 % change Net sales 20,579 23,324 29,495 20,707 (12) (30) (1) 59,961 73,791 (19) Operating costs (11,001) (14,461) (15,695) (10,502) (24) (30) 5 (32,730) (40,947) (20) EBITDA 9,578 8,863 13,800 10,204 8 (31) (6) 27,231 32,844 (17) Other income 1,200 1,244 1,601 1,550 (4) (25) (23) 4,331 4,852 (11) Interest costs (7,586) (7,257) (6,706) (7,351) 5 13 3 (22,416) (20,330) 10 Depreciation (1,420) (1,496) (3,421) (1,441) (5) (58) (1) (4,323) (6,166) (30) PBT 1,771 1,354 5,274 2,963 31 (66) (40) 4,823 11,199 (57) Taxes (516) (474) (2,389) (690) 9 (78) (25) (1,756) (3,997) (56) PAT 1,256 880 2,885 2,273 43 (56) (45) 3,067 7,203 (57) Consolidated PAT 976 901 1,907 1,939 8 (49) (50) 2,237 5,889 Excecptional /Extra-ordinary 976 901 1,752 61 3,352 (785) PAT post exceptional 1,951 1,801 3,660 2,000 8 (47) (2) 5,589 5,104 9 EPS (Rs/share) 1.1 1.0 2.1 1.1 3.1 2.9 Key ratios EBITDA margin (%) 46.5 38.0 46.8 49.3 45.4 44.5 PAT margin (%) 6.1 3.8 9.8 11.0 5.1 9.8 Effective tax rate (%) 29.1 35.0 45.3 23.3 36.4 35.7
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 113 Real Estate DLF
Exhibit 4: Sales remain weak (and confusing) DLF: Gross and net sales, March fiscal year-ends, 2QFY14-3QFY17
2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 Sales (mn sq. ft) Gurgaon-Phase 5 0.09 0.11 0.01 0.04 0.20 0.24 0.74 0.31 0.22 0.19 0.30 0.07 0.10 0.15 Gurgaon-Rest of Gurgaon 0.21 0.07 0.10 0.03 0.02 0.02 0.02 0.02 (0.02) 0.07 0.22 0.06 (0.03) (0.09) Rest of India 0.61 0.43 0.32 0.31 0.30 0.10 0.14 (0.17) 0.05 (0.05) NA (0.04) 0.01 (0.11) Total 0.91 0.61 0.43 0.39 0.52 0.36 0.90 0.16 0.25 0.21 0.52 0.09 0.08 (0.05) Sales value (Rs mn) Gurgaon-Phase 5 2,470 3,240 480 1,310 6,750 5,750 18,590 10,120 5,800 4,680 8,800 2,600 2,600 5,600 Gurgaon-Rest of Gurgaon 2,060 612 850 240 120 120 120 200 (250) 670 2,080 900 1,050 250 Rest of India 2,780 2,376 1,750 1,533 2,330 630 1,040 40 200 (1,300) 400 1,200 750 750 Cancellations /upgradations (2,650) (1,350) (3,900) Total 7,310 6,228 3,080 3,083 9,200 6,500 19,750 10,360 5,750 4,050 11,280 2,050 3,050 2,700
Source: Company, Kotak Institutional Equities
Exhibit 5: DLF delivered 5 mn sq. ft in 3QFY17 DLF: Dev Co - area under construction, March fiscal year-ends, 2013-3QFY17 (mn sq. ft)
2013 2014 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 Sales Opening balance 54.5 47.5 47.1 45.6 39.3 37.3 36.7 35.6 33.0 28.8 25.5 21.9 19.6 Area sold 2.0 3.8 0.4 0.6 0.4 0.9 0.2 0.2 0.2 0.5 (0.0) 0.1 (0.1) Deliveries (9.0) (4.2) (1.8) (7.0) (2.3) (1.5) (1.2) (2.8) (4.5) (3.8) (3.6) (2.3) (5.0) Closing balance 47.5 47.1 45.6 39.3 37.3 36.7 35.6 33.0 28.8 25.5 21.9 19.6 14.6 Under construction Opening balance 55.0 50.0 55.5 53.7 46.7 45.0 43.5 42.3 39.4 34.9 31.2 26.1 23.8 Area sold 4.0 9.6 — — 0.6 — — — — — — — (—) Deliveries/ suspension (9.0) (4.2) (1.8) (7.0) (2.3) (1.5) (1.2) (2.8) (4.5) (3.8) (5.1) (2.3) (5.0) Closing balance 50.0 55.4 53.7 46.7 45.0 43.5 42.3 39.4 34.9 31.2 26.1 23.8 18.5
Source: Company, Kotak Institutional Equities
114 KOTAK INSTITUTIONAL EQUITIES RESEARCH DLF Real Estate
Exhibit 6: Debt has increased more than estimated in 3QY17 DLF: Profit model, balance sheet, cash flow model, March fiscal year-ends, 2013-19E (Rs mn)
2013 2014 2015 2016 2017E 2018E 2019E Profit model Net sales 77,728 82,980 76,487 92,599 86,029 91,036 94,674 EBITDA 26,262 24,852 30,237 38,664 33,911 32,002 32,147 Other income 13,229 14,916 5,194 5,593 5,619 5,715 5,642 Interest (23,140) (24,633) (23,039) (26,154) (29,343) (27,010) (26,526) Depreciation (7,962) (6,629) (5,448) (7,778) (6,227) (6,609) (6,512) Pre-tax profits 8,388 8,506 6,945 10,325 3,961 4,098 4,752 Tax (5,147) (3,662) (6,502) (9,034) (1,188) (1,229) (1,426) Deferred taxation 3,896 4,498 4,921 4,840 — — — Net income 7,137 9,342 5,364 6,131 2,772 2,869 3,326 Extraordinary items 330 (3,299) (679) (786) 3,352 — — Adjusted net income 7,623 9,979 5,663 6,498 3,170 2,922 3,337 Earnings per share (Rs) 4.7 3.7 2.8 3.2 3.7 1.6 1.9 Balance sheet Total equity 275,277 291,941 291,681 289,571 291,908 290,645 289,797 Minority interests 4,020 2,023 1,747 1,118 1,118 1,118 1,118 Non-current liabilities 178,471 158,491 201,938 246,114 235,439 232,603 218,917 Current liabilities 188,500 192,568 167,257 138,821 149,832 158,960 157,337 Total liabilities and equity 646,268 645,024 662,623 675,624 678,296 683,326 667,169 Non-current assets Net fixed assets 276,829 248,133 253,871 256,198 280,631 283,046 276,139 Other non-current assets and advances 44,008 48,907 62,732 72,458 63,647 63,647 63,647 Current assets 312,094 339,071 339,786 337,263 324,314 326,928 317,679 Investments 13,337 8,912 6,234 9,704 9,704 9,704 9,704 Total assets 646,268 645,024 662,623 675,624 678,296 683,326 667,169 Free cash flow Operating cash flow excl. w orking capital 12,528 9,477 5,930 8,381 11,497 9,531 9,849 Working capital changes (7,911) (13,522) (10,027) (4,337) (24,101) 6,515 3,034 Capital expenditure 8,525 22,066 (11,185) (10,105) (30,659) (9,024) 395 Investments (2,069) 4,425 2,678 (3,470) — — — Free cash flow 11,072 22,447 (12,604) (9,532) (43,264) 7,023 13,278 Ratios (%) Debt/equity 96 82 89 98 107 109 104 Net debt/equity 89 73 79 86 102 102 99 RoE (%) 2.9 2.4 1.7 2.0 2.2 1.0 1.1 RoCE (%) 2.3 3.6 0.4 0.7 3.4 3.2 3.2 Book value per share (Rs) 151 154 154 153 155 154 154
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 115 REDUCE Container Corporation (CCRI) Infrastructure FEBRUARY 14, 2017 RESULT Coverage view: Attractive
Some pull-back; more challenges ahead. Concor has underperformed the market over Price (`): 1,278 9MFY17 though has reversed some market share loss in 3QFY17. Market has continued Target price (`): 1,200 to contract due to sustenance of well-known sectoral ills in YTD FY2017. Defending BSE-30: 28,339 market share may prove difficult, especially post hub-and-spoke benefits in Ludhiana for GRFL. Margin could improve with several real (double-stacking) and potential (peer pricing rationalizing, correcting imbalance) levers yet to play out. The stock trades at 31X core March-2019E EPS on revised estimates. Retain REDUCE; TP ₹1,200 (from ₹1,150).
Company data and valuation summary Container Corporation Stock data Forecasts/Valuations 2017E 2018E 2019E 52-week range (Rs) (high,low) 1,540-1,055 EPS (Rs) 35.1 40.0 47.6 Market Cap. (Rs bn) 254.2 EPS growth (%) (13.2) 14.2 18.9 Shareholding pattern (%) P/E (X) 37.2 32.6 27.4 Promoters 56.8 Sales (Rs bn) 54.9 61.9 71.4 FIIs 28.7 Net profits (Rs bn) 6.8 7.8 9.3 MFs 6.3 EBITDA (Rs bn) 10.0 12.2 14.9 Price performance (%) 1M 3M 12M EV/EBITDA (X) 23.5 19.2 15.6 Absolute 8.1 (3.5) 20.7 ROE (%) 8.2 8.9 10.0 Rel. to BSE-30 3.8 (8.7) (2.2) Div. Yield (%) 0.9 1.0 1.2
Revenues: Journey from 11% exim volume growth to 7% exim revenue decline
Concor’s 11% volume growth is a combination of 2% tonnage growth, propped up by larger share of empties/light-weight cargo (~5% growth impact) and potential instances of double- counting (~4% impact). Revenues declined 7% yoy due to (1) shift of volumes to low lead distance journeys and (2) pass-through of double-stacking benefits. Given such potential variations, we consider revenues a better metric to track performance of the company. Concor has underperformed the market on revenues in 9MFY17 and done marginally better in 3QFY17. Market continues to contract as past issues (weak demand, exim imbalance, fierce competition from roads) sustain. While rail coefficient may improve going forward, Concor will face a stiff competition, especially post the hub-and-spoke benefits extended by Indian Railways to Gateway Distriparks in the Ludhiana market (5% cost savings). We assume 15% revenue CAGR for Concor over FY2017E-19E versus flattish revenues over the past two years.
Margin: Double-stacking benefit mitigates impact of other ills
Double-stacked volumes have grown 3X yoy in 3QFY17 (2X yoy over 9MFY17, now 6% of exim volumes) also leading to margin benefit from haulage cost savings and lower empty running costs. Lower discounts supported a yoy flat EBITDA margin at 19.6% in 3QFY17, negating ills of (1) keen competition and (2) higher land-lease charges. Margin improvement has large potential from (1) double-stacking at 2X current volumes, (2) demand uptick easing pricing pressure, as peers have limited double-stacking cost benefits and (3) exports growth correcting exim imbalance. We estimate a ~300 bps increase in margin over FY2017E-19E. Aditya Mongia MMLP: To become more relevant portion of business
Currently Concor has started operations at 5 MMLPs out of the eventual plan of 15 MMLPs Ajinkya Bhat over the next 5 years. The first phase of all such facilities will start by FY2018. The MMLP’s look to gain revenues from 5 streams, viz. (1) ICD operations, (2) warehousing, (3) commodity handling, (4) automobile handling and (5) railway rakes (private freight terminal). The eventual ramp-up will depend on market demand, advent of GST and commissioning of DFC.
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Container Corporation Infrastructure
No respite from falling lead distance and realizations
Revenues in 3QFY17 declined 5.3% yoy to ₹13.3 bn despite overall 10% volume growth due to falling lead distance while margins were flat yoy. 9% outperformance on PAT at ₹1.9 bn could have been lower if not for higher other unallocable income. We increase volume estimates but factoring in continued weak realizations, revise EPS estimates by 1-2% over FY2017-19E. Revise March 2019E target price to ₹1,200 (versus ₹1,150 previously) and retain REDUCE.
Revenues down 5% yoy as exim remains weak. Container Corporation reported 3QFY17 revenues of ₹13 bn, down 5.3% yoy and 1.5% above estimates. The decline was led by 6.6% yoy decline in exim revenues (3% above estimates) while domestic revenues were flat yoy in the quarter (3% below estimates). In 9MFY17, net revenues were ₹40 bn, down 6% yoy (exim down 7% yoy, domestic down 4% yoy).
Revenues showed a sharp decline despite growth in volume handling for both exim and domestic segments. The company reported exim volumes of 666,000 TEUs in 3QFY17, up 11% yoy and 116,000 TEUs in domestic, up 5% yoy. The reported exim growth of 11% yoy is to be considered in light of (1) 4% impact from double counting of volumes at hubs (7% yoy growth in originating volumes in 3QFY17) and (2) actual tonnage growth of ~2% yoy for the quarter. Domestic volume growth was largely on account of timetable trains.
The revenue decline in the quarter was on account of (1) low tonnage growth versus the reported volume growth and (2) a sharp 16% decline in exim realizations as volumes kept shifting from JNPT to Mundra port (decline in lead distance to 799 km for the quarter versus 901 km in 3QFY16). Another reason for decline in lead distance was increased share of volumes from the east coast that typically has shorter journeys. Domestic realizations were moderately down 4% yoy.
EBITDA margins remain stable. The company reported 3QFY17 EBITDA of ₹2.6 bn, down 5.5% yoy (4.5% above estimates) with EBITDA margins flat at 19.6% (50 bps above estimates) in the quarter. In 9MFY17, reported EBITDA was ₹7.5 bn, down 14% yoy and margins at 18.6%, down 150 bps yoy. We note that the rail freight expenditure has declined faster than revenues in both 3QFY17 and 9MFY17 on account of double- stacking from Kathuwas (42,300 TEUs in 3QFY17, up 184% yoy). The associated savings on rail haulage charges have compensated for increase in other expenses.
On a segmental basis, exim EBIT margin at 17.1% was down 100 bps yoy in the quarter and at 17.1% was down 150 bps yoy in 9MFY17. Domestic EBIT was reported at near- zero for the quarter largely on account of depreciation expense for newly commissioned facilities (MMLPs) that are yet to ramp up on volumes. Domestic EBIT margin for 9MFY17 was 1.5%, down 30 bps yoy.
Other income boosts PAT outperformance. The reported other income for the quarter was 15% above estimates for the quarter and compensated for higher depreciation and tax rate magnifying the outperformance at the PAT level. The company reported 3QFY17 PAT of ₹1.9 bn, down 10% yoy and 9% above estimates. 9MFY17 PAT stood at ₹5.2 bn, down 19% yoy.
We note that the container volume handling at major ports has grown at 5% yoy in 3QFY17 and 4% yoy in YTD FY2017. Further, in YTD FY2017, container tonnage growth across major ports was only 1% versus TEU growth of 4% indicating continued exim imbalance that would be pushing up empties repositioning cost for rail operators. Concor has been able to keep the empties repositioning costs under control on account of double-stacking in the export direction.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 117 Infrastructure Container Corporation
Exhibit 1: Revenue decline led by decline in lead distance and realizations despite volume growth Container Corporation – 3QFY17 results, March fiscal year-ends (Rs mn)
% change 3QFY17 3QFY17E 3QFY16 2QFY17 vs est. yoy qoq 9MFY17 9MFY16 % change FY2017E FY2016 % change Net sales 13,304 13,097 14,044 13,786 1.6 (5.3) (3.5) 40,482 43,266 (6.4) 54,897 57,426 (4.4) Staff cost (414) (394) (404) (405) 5.0 2.5 2.3 (1,199) (1,161) 3.3 (1,631) (1,539) 6.0 Rail freight expenditure (8,111) (8,054) (8,848) (8,497) 0.7 (8.3) (4.5) (25,101) (27,267) (7.9) (34,380) (36,447) (5.7) Other expenses (2,167) (2,148) (2,028) (2,597) 0.9 6.9 (16.5) (6,664) (6,116) 9.0 (8,934) (8,625) 3.6 Total expenditure (10,692) (10,597) (11,280) (11,498) 0.9 (5.2) (7.0) (32,964) (34,543) (4.6) (44,945) (46,610) (3.6) EBITDA 2,612 2,500 2,764 2,288 4.5 (5.5) 14.2 7,519 8,723 (13.8) 9,952 10,815 (8.0) Other Income 845 736 820 763 14.9 3.0 10.8 2,300 2,491 (7.7) 3,076 3,447 (10.8) Depreciation (927) (876) (852) (873) 5.8 8.8 6.2 (2,641) (2,587) 2.1 (3,628) (3,646) (0.5) PBT 2,529 2,359 2,730 2,175 7.2 (7.4) 16.3 7,173 8,625 (16.8) 9,400 10,616 (11.5) Tax (669) (646) (674) (596) 3.4 (0.8) 12.2 (1,950) (2,179) (10.5) (2,566) (2,740) (6.4) Prior period — — — — — — — (6) PAT 1,860 1,713 2,057 1,578 8.6 (9.6) 17.8 5,223 6,446 (19.0) 6,834 7,869 (13.2) EPS (Rs) 9.5 8.8 10.5 8.1 26.8 33.1 35.1 40.4 Key ratios (%) Rail freight expenses/sales 61.0 61.5 63.0 61.6 62.0 63.0 62.6 63.5 Other expenses/sales 16.3 16.4 14.4 18.8 16.5 14.1 16.3 15.0 Employee expenses/sales 3.1 3.0 2.9 2.9 3.0 2.7 3.0 2.7 EBITDA margins 19.6 19.1 19.7 16.6 18.6 20.2 18.1 18.8 PBT margin 19.0 18.0 19.4 15.8 17.7 19.9 17.1 18.5 Effective tax rate 26.4 27.4 24.7 27.4 27.2 25.3 27.3 25.8 PAT margin 14.0 13.1 14.6 11.4 12.9 14.9 12.4 13.7
Source: Company, Kotak Institutional Equities
Exhibit 2: Shift of volumes from JNPT to Mundra and associated lead distance decline led to a sharp 16% drop in EXIM realizations Container Corporation – 3QFY17 results – segmental key numbers (Rs mn)
% change 3QFY17 3QFY17E 3QFY16 2QFY17 vs est. yoy qoq 9MFY17 9MFY16 % change FY2017E FY2016 % change Segmental Volumes (TEUs) Exim 6,66,000 6,11,496 5,99,506 6,78,000 8.9 11.1 (1.8) 19,75,918 18,62,325 6.1 26,73,937 24,75,868 8.0 % 85.2 84.0 84.4 86.7 85.9 85.2 85.4 84.7 Domestic 1,16,000 1,16,357 1,10,816 1,04,000 (0.3) 4.7 11.5 3,23,142 3,22,836 0.1 4,57,142 4,48,176 2.0 % 14.8 16.0 15.6 13.3 14.1 14.8 14.6 15.3 Sales (Rs mn) Exim 10,581 10,293 11,327 11,298 2.8 (6.6) (6.3) 32,789 35,257 (7.0) 43,890 46,372 (5.4) (% of total) 79.5 78.6 80.7 81.9 81.0 81.5 79.9 80.8 Domestic 2,723 2,804 2,717 2,488 (2.9) 0.2 9.4 7,693 8,008 (3.9) 11,007 11,054 (0.4) (% of total) 20.5 21.4 19.3 18.1 19.0 18.5 20.1 19.2 EBIT (Rs mn) Exim 1,811 1,698 2,059 1,769 6.6 (12.0) 2.4 5,616 6,602 (14.9) 7,505 8,092 (7.2) Margin (%) 17.1 16.5 18.2 15.7 17.1 18.7 17.1 17.4 Domestic 3 50 43 70 (93.7) (92.5) (95.4) 112 146 (23.2) 110 200 (45.0) Margin (%) 0.1 1.8 1.6 2.8 1.5 1.8 1.0 1.8 per TEU realization (Rs) Exim 15,887 16,832 18,894 16,663 (5.6) (15.9) (4.7) 16,595 18,932 (12.3) 16,414 18,729 (12.4) Domestic 23,476 24,096 24,515 23,927 (2.6) (4.2) (1.9) 23,807 24,806 (4.0) 24,078 24,665 (2.4) Total 17,013 17,993 19,771 17,629 (5.4) (13.9) (3.5) 17,608 19,800 (11.1) 17,533 19,639 (10.7)
Source: Company, Kotak Institutional Equities estimates
118 KOTAK INSTITUTIONAL EQUITIES RESEARCH Container Corporation Infrastructure
Exhibit 3: Quarterly volumes for Concor's businesses, March fiscal year-ends, 1QFY10-3QFY17
EXIM volumes Domestic volumes Previous year (LHS) Previous year (LHS) ('000 TEUs) (%) ('000 TEUs) (%) Current year (LHS) Current year (LHS) yoy growth (RHS) 180 40 700 30 yoy growth (RHS) 30 600 20 150 500 20 10 120 400 10 - 90 300 - 60 (10) (10) 200 30 (20) 100 (20) - (30)
- (30)
1QFY10 3QFY10 1QFY11 3QFY11 1QFY12 3QFY12 1QFY13 3QFY13 1QFY14 3QFY14 1QFY15 3QFY15 1QFY16 3QFY16 1QFY17 3QFY17
3QFY10 1QFY11 3QFY11 1QFY12 3QFY12 1QFY13 3QFY13 1QFY14 3QFY14 1QFY15 3QFY15 1QFY16 3QFY16 1QFY17 3QFY17 1QFY10
Source: Company, Kotak Institutional Equities
Exhibit 4: Container TEU growth has been faster than tonnage growth at major ports in FY2017 indicating continued exim imbalance… Container tonnage and TEU growth on a yoy basis for major ports, March fiscal year-ends, 4QFY15-3QFY17 (%)
Container cargo tonnage growth (%) Container cargo TEU growth (%)
10.0 8.0 8.0 6.9 6.2 6.0 4.8
4.0 2.5 2.7 2.8 1.8 1.8 1.7 2.0 1.5 1.1 0.4 0.8 0.5 -
(2.0) (1.3)
1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY15
Source: Indian Ports Association, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 119 Infrastructure Container Corporation
Exhibit 5: …however, Concor has controlled the cost of empties repositioning on the back of double- stacking started in the export direction as well Empties positioning costs as % of sales for Concor, March fiscal year-ends, 2011-3QFY17
(%) 7.0 5.8 6.0 5.7 5.1 5.1 4.6 4.6 5.0 4.4 4.3 4.4 4.5 4.2 4.0 4.0 3.6 3.6 3.4 3.4
3.0
2.0
1.0
0.0
2012 2013 2014 2015 2011
1QFY15 2QFY15 4QFY15 2QFY16 4QFY16 2QFY17 3QFY17 3QFY15 1QFY16 3QFY16 1QFY17
Source: Company, Kotak Institutional Equities
Exhibit 6: Concor’s revenue performance has been weaker than Indian Railways’ NTKM in YTD FY2017 despite volume outperformance Yoy growth in activity for IR and revenues for Concor, March fiscal year-ends, 2011-16 (%)
2011 2012 2013 2014 2015 2016 1QFY17 2QFY17 3QFY17 Exim mn tn kms - Indian railways (1.5) 5.8 7.5 (4.1) 10.6 (5.4) (0.1) (6.2) (7.9) Revenues - Concor 3.5 9.0 8.4 9.2 14.9 4.4 (5.7) (8.6) (6.6) Volumes - Concor 7.2 5.8 0.8 9.7 11.0 (5.6) 2.9 4.6 11.1 Domestic mn tn kms - rail 9.8 (5.1) 6.3 15.9 (5.3) (18.6) (16.8) 1.1 13.0 Revenues - Concor 2.9 (4.2) 8.9 29.1 1.2 (2.4) (5.9) (6.2) 0.2 Volumes - Concor 0.9 (13.9) (7.4) 17.0 (3.5) (8.4) (4.3) (0.3) 4.7 Total mn tn kms - rail 1.8 2.4 7.2 1.7 5.4 (9.3) (4.8) (4.3) (2.5) Revenues - Concor 3.3 6.1 8.5 13.1 11.8 3.0 (5.7) (8.2) (5.3) Volumes - Concor 5.8 1.6 (0.7) 10.9 8.4 (6.0) 1.8 3.9 10.1
Source: Company, Indian Railways, Kotak Institutional Equities
Exhibit 7: The hub and spoke model is leading to 5% savings on haulage cost for key competitor GDL leading to market share loss for Concor in the key Ludhiana market Comparison of rail haulage cost for Concor and GDL on key routes to Ludhiana market
Distance Rate (Rs) Company Route (km) (20-26 ton) Concor Dhandari Kalan to Kathuwas 373 8,446 Kathuwas to Pipavav 1,085 22,087 Total 1,458 30,533 Gateway Distriparks Sahnewal to Garhi Harsaru 329 7,471 Garhi Harsaru to Pipavav 1,154 24,035 Total 1,483 31,506 Total rate without break 1,483 29,881 Savings 5%
Source: Company, Kotak Institutional Equities
120 KOTAK INSTITUTIONAL EQUITIES RESEARCH Container Corporation Infrastructure
Exhibit 8: Trend in annual volumes at Dhandharikalan and Tughlakabad ICDs of Concor, March fiscal year-ends, 2006-16
Dhandharikalan ICD ('000 TEU) % share of Concor's volumes
200 8.2 9.0 180 7.5 8.0 6.9 7.1 6.8 160 6.2 7.0 140 5.4 5.0 6.0 120 4.8 4.7 4.7 5.0 100 4.0 80 173 158 148 127 131 127 134 125 3.0 60 111 120 119 40 2.0 20 1.0 - - 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Tughlakabad ICD ('000 TEU) % share of Concor's volumes
500 30.0 450 24.0 25.0 400 21.5 20.7 350 19.1 18.6 18.8 18.3 18.2 18.4 17.6 17.9 20.0 300 250 15.0 463 428 440 447 438 450 200 406 410 409 384 413 10.0 150 100 5.0 50 - - 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: Company, Kotak Institutional Equities
3QFY17 earnings call takeaways
Hopeful of achieving 8% volume growth guidance. The management remains hopeful of achieving 8% volume growth for FY2017 as guided previously. However, we note here that reported volume growth number for the company is less relevant now given (1) double counting at hubs like Kathuwas and (2) net negative impact on revenues from continued decline in lead distance.
All 15 MMLPs to be partially commissioned by FY2018. Concor mentioned that they have started operations from 5 MMLPs so far and would commission phase 1 of all 15 MMLPs by FY2018. MMLPs largely focus on 5 revenue streams (or subset/combinations of those) namely (1) ICD operations, (2) warehousing, (3) commodity hubs, (4) automobile hubs and (5) handling of railway rakes. Further ramp-up of facilities and remaining phases depends on factors such as market demand, advent of GST and commissioning of DFC. DFC is expected to be partially commissioned by the start of FY2019 and fully commissioned by end-FY2019 as per the management. Full operationalization of MMLPs is planned in phases over the next five years.
Current focus would be on ramp up of Kathuwas. The company mentioned that in 9MFY17, handling at Kathuwas has been 110,000 TEUs, up over 100% yoy. The management targets to achieve 250,000-300,000 TEUs of handling at the terminal in
KOTAK INSTITUTIONAL EQUITIES RESEARCH 121 Infrastructure Container Corporation
FY2018. Double stacking at the terminal was at 541 rakes in 9MFY17 versus 301 rakes in 9MFY16.
Ludhiana market remains a challenge. The management mentioned that the hub-and- spoke route benefit from Indian Railways is availed depending on the requirement. However, Ludhiana market remains a challenge to the company in terms of market share while the share in NCR and Dadri regions is improving. The management targets to achieve 78% market share in the medium term (versus 73.5% currently).
3rd party logistics would be the next growth avenue. The company is exploring avenues for venturing into asset-light 3rd party logistics services. In such a model, the company would act as service provider and aggregator while outsourcing the actual logistics operation. The company already has some experience in the area (done for IOCL last year) and is currently working with Nestle, HUL and Patanjali for a potential service.
Working on DPD, modalities still unclear. Concor is working with the government and shipping lines to get better results from direct port delivery (DPD) model. The company however feels that there is still a lack of clarity on modalities for DPD and the associated infrastructure and ecosystem needs to evolve further.
Exhibit 9: Change in estimates for Concor, March fiscal year-ends, 2016-19E (Rs mn)
Revised estimates Old estimates % revision 2016 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E Key operating numbers Volumes ('000 TEUs) 2,924 3,131 3,534 3,988 2,980 3,364 3,796 5.1 5.1 5.1 Exim 2,476 2,674 3,022 3,414 2,550 2,882 3,256 4.9 4.9 4.9 Domestic 448 457 512 573 430 482 540 6.3 6.2 6.3
Realization(Rs/TEU) 19,639 17,533 17,528 17,907 18,175 18,551 18,942 (3.5) (5.5) (5.5) Exim 18,729 16,414 16,361 16,755 17,176 17,567 17,974 (4.4) (6.9) (6.8) Domestic 24,665 24,078 24,417 24,765 24,096 24,436 24,784 (0.1) (0.1) (0.1)
Revenues 57,426 54,897 61,937 71,410 54,168 62,398 71,903 1.3 (0.7) (0.7) Exim 46,372 43,890 49,436 57,209 43,801 50,623 58,527 0.2 (2.3) (2.3) Domestic 11,054 11,007 12,502 14,201 10,368 11,775 13,376 6.2 6.2 6.2 EBITDA 10,815 9,952 12,166 14,863 10,158 12,415 14,715 (2.0) (2.0) 1.0 EBITDA margin (%) 18.8 18.1 19.6 20.8 18.8 19.9 20.5 -63 bps -26 bps 34 bps Depreciation (3,646) (3,628) (4,235) (4,822) (3,505) (4,091) (4,659) 3.5 3.5 3.5 Tax rate (%) 25.8 27.3 27.3 28.0 27.5 27.5 28.0 -20bps -20bps 0bps Net PAT 7,876 6,834 7,805 9,280 6,957 7,972 9,194 (1.8) (2.1) 0.9 EPS (Rs) 40.4 35.1 40.0 47.6 35.7 40.9 47.2 (1.8) (2.1) 0.9
Yoy growth (%) Volumes (6.0) 7.1 12.9 12.9 1.9 12.9 12.9 Exim (5.6) 8.0 13.0 13.0 3.0 13.0 13.0 Domestic (8.4) 2.0 12.0 12.0 (4.0) 12.0 12.0 Realization 9.6 (10.7) (0.0) 2.2 (7.5) 2.1 2.1 Exim 10.6 (12.4) (0.3) 2.4 (8.3) 2.3 2.3 Domestic 6.6 (2.4) 1.4 1.4 (2.3) 1.4 1.4 Revenues 3.0 (4.4) 12.8 15.3 (5.7) 15.2 15.2 Exim 4.4 (5.4) 12.6 15.7 (5.5) 15.6 15.6 Domestic (2.4) (0.4) 13.6 13.6 (6.2) 13.6 13.6 EPS (24.8) (13.2) 14.2 18.9 (11.7) 14.6 15.3
Source: Company, Kotak Institutional Equities estimates
122 KOTAK INSTITUTIONAL EQUITIES RESEARCH Container Corporation Infrastructure
Exhibit 10: DCF-implied target price analysis for Concor, March fiscal-year-ends, 2016-30E (Rs mn)
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2030 Revenue model Handling at Terminals (mn TEUs) Exim 2.5 2.7 3.0 3.4 3.9 4.7 5.7 6.8 8.1 9.0 13.2 Domestic 0.4 0.5 0.5 0.6 0.6 0.7 0.8 0.9 0.9 1.0 1.5 Total 2.9 3.1 3.5 4.0 4.6 5.4 6.4 7.6 9.1 10.0 14.7
TEU growth (%) Exim (5.6) 8.0 13.0 13.0 15.0 20.0 20.0 20.0 20.0 10.0 8.0 Domestic (8.4) 2.0 12.0 12.0 12.0 10.0 10.0 10.0 10.0 10.0 8.0 Total (6.0) 7.1 12.9 12.9 14.6 18.6 18.7 18.8 18.9 10.0 8.0
EBIT margin (%) Exim 17.4 17.1 18.0 19.0 20.0 19.5 20.0 20.5 20.5 20.5 20.5 Domestic 1.8 1.0 3.0 4.0 4.0 5.0 5.5 6.0 6.0 6.0 6.0 Unallocable as % of total EBIT 13.5 17.0 14.5 12.2 10.3 8.7 7.1 5.8 4.8 4.4 3.0 Total 12.5 11.5 12.8 14.1 15.2 15.4 16.4 17.2 17.6 17.7 18.0
FCFF calculation Operating Cash flow (before Wcap changes) 8,965 8,225 10,000 12,052 14,290 16,674 20,050 24,411 29,214 32,525 52,378 Cash flow from change in working capital (655) (300) 1,034 1,075 724 (1,361) - - - - - Operating Cash flow 8,310 7,926 11,035 13,127 15,014 15,313 20,050 24,411 29,214 32,525 52,378 Capex (change) (7,646) (10,697) (9,880) (10,032) (10,193) 4 (9,479) (8,533) (12,844) (5,469) (19,936) Free Cash flow to the firm 664 (2,771) 1,155 3,095 4,821 15,317 10,572 15,878 16,369 27,055 32,442
Terminal Valuation Terminal Growth rate 4% 4% 4% 4% Cash flow in terminal year 25,012 27,644 30,544 33,740 Terminal Value 333,493 368,583 407,253 449,868
Valuation 2017 2018 2019 2020 NPV of FCF for explicit period 68,417 84,080 100,543 118,208 PV of terminal value 112,289 124,104 137,125 151,473 EV 180,706 208,184 237,668 269,681 Net Debt (20,413) (20,464) (21,873) (24,366) Value to Equity holders 201,119 228,648 259,541 294,048 No of Shares (mn) 195 195 195 195 Target Price (Mar-2019) 1,173 WACC 11.5%
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 123 Infrastructure Container Corporation
Exhibit 11: Income statement of Container Corporation, March fiscal year-ends, 2011-19E (Rs mn)
2011 2012 2013 2014 2015 2016 2017E 2018E 2019E Income statement Net revenues 38,281 40,609 44,062 49,846 55,737 57,426 54,897 61,937 71,410 Total operating cost (28,267) (30,372) (33,586) (38,827) (42,772) (46,610) (44,945) (49,772) (56,547) Terminal+service charges (26,124) (27,762) (30,570) (35,128) (38,308) (42,105) (39,960) (45,085) (50,994) Employee cost (874) (999) (1,072) (1,235) (1,579) (1,539) (1,631) (1,946) (2,319) Repairs & maintenance (259) (425) (485) (504) (712) (843) (806) (909) (1,048) Other S, G & A (1,009) (1,187) (1,459) (1,960) (2,173) (2,124) (2,548) (1,831) (2,186) EBIDTA 10,014 10,237 10,476 11,019 12,965 10,815 9,952 12,166 14,863 Other income 2,021 3,165 3,372 3,717 3,707 3,447 3,076 2,805 2,847 Depreciation (1,452) (1,585) (1,727) (1,893) (3,727) (3,646) (3,628) (4,235) (4,822) Pre tax profits 10,583 11,818 12,121 12,843 12,946 10,616 9,400 10,736 12,889 Tax (1,798) (3,039) (2,721) (2,995) (2,469) (2,740) (2,566) (2,931) (3,609) PAT 8,785 8,779 9,400 9,848 10,477 7,876 6,834 7,805 9,280
Volume handled ('000 TEUs) Exim 2,019 2,136 2,152 2,361 2,621 2,476 2,674 3,022 3,414 Domestic 544 468 434 507 489 448 457 512 573 Total volumes 2,562 2,604 2,586 2,869 3,111 2,924 3,131 3,534 3,988
Yoy growth (%) Volumes 5.8 1.6 (0.7) 10.9 8.4 (6.0) 7.1 12.9 12.9 Sales 3.3 6.1 8.5 13.1 11.8 3.0 (4.4) 12.8 15.3 EBITDA 4.1 2.2 2.3 5.2 17.7 (16.6) (8.0) 22.2 22.2 Net PAT 11.7 (0.1) 7.1 4.8 6.4 (24.8) (13.2) 14.2 18.9
Key ratios (%) EBITDA margin 26.2 25.2 23.8 22.1 23.3 18.8 18.1 19.6 20.8 Net PAT margin 22.9 21.6 21.3 19.8 18.8 13.7 12.4 12.6 13.0 Efffective tax rate 17.0 25.7 22.4 23.3 19.1 25.8 27.3 27.3 28.0 EPS (Rs) 45.1 45.0 48.2 50.5 53.7 40.4 35.1 40.0 47.6
Source: Company, Kotak Institutional Equities estimates
124 KOTAK INSTITUTIONAL EQUITIES RESEARCH Container Corporation Infrastructure
Exhibit 12: Balance sheet and cash flows of Container Corporation, March fiscal year-ends, 2011-19E (Rs mn)
2011 2012 2013 2014 2015 2016 2017E 2018E 2019E Balance sheet Networth 49,778 56,064 62,811 69,853 76,357 81,058 85,141 89,804 95,348 Share capital 1,300 1,300 1,300 1,950 1,950 1,950 1,950 1,950 1,950 Reserves & surplus 48,478 54,764 61,512 67,903 74,407 79,109 83,192 87,854 93,398 Total liabilities 49,778 56,064 62,811 69,853 76,357 81,058 85,141 89,804 95,348 Net fixed assets 26,462 28,659 32,283 38,037 40,479 44,601 51,670 57,316 62,526 Investments 2,440 2,931 4,822 8,640 11,548 13,550 13,550 13,550 13,550 Cash & Bank balance 22,957 27,615 29,162 25,451 25,879 23,699 20,413 20,464 21,873 Net current assets 206 (703) (712) 775 518 1,173 1,473 439 (636) Net deferred tax asset (2,286) (2,438) (2,743) (3,050) (2,067) (1,965) (1,965) (1,965) (1,965) Total assets 49,778 56,064 62,811 69,853 76,357 81,058 85,141 89,804 95,348
Key ratios Net debt to equity (0.5) (0.5) (0.5) (0.4) (0.3) (0.3) (0.2) (0.2) (0.2) RoE (%) 18.9 16.6 15.8 14.8 14.3 10.0 8.2 8.9 10.0 RoCE (%) 18.9 16.6 15.8 14.8 14.3 10.0 8.2 8.9 10.0
Cash flows Operating cash flows 8,300 8,796 8,672 9,152 9,956 8,355 7,386 9,235 11,255 Working capital changes (1,400) (756) 524 (1,696) 1,108 (1,663) (300) 1,034 1,075 Op. cash adj for WCap 6,900 8,040 9,196 7,456 11,064 6,693 7,086 10,269 12,330 Net capex (3,079) (2,373) (5,855) (5,209) (8,022) (6,522) (10,697) (9,880) (10,032) Free cash flow 3,821 5,667 3,340 2,247 3,043 171 (3,611) 389 2,298 Net finance cash flow (2,349) (2,342) (2,568) (3,042) (3,081) (3,145) (2,751) (3,142) (3,736) Net cash generated 3,062 4,658 1,587 (3,649) 368 (2,050) (3,286) 52 1,409 Cash at start of year 19,895 22,957 27,615 29,202 25,553 25,921 23,699 20,413 20,464 Year-end cash 22,957 27,615 29,202 25,553 25,921 23,871 20,413 20,464 21,873
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 125 SELL Mahanagar Gas (MAHGL) Energy FEBRUARY 14, 2017 RESULT Coverage view: Attractive
In-line results; rich valuation. MGL’s 3QFY17 net income at `990 mn was in line with Price (`): 916 our estimate, as modestly better operating performance was offset by higher DD&A Target price (`): 775 and tax rate. We like the long-term growth prospects and high FCF generation of CGD BSE-30: 28,339 business, although we fail to appreciate the high level of margins, sustaining currently due to policy oversight and lack of competition. We find the valuations expensive at 21X FY2019E EPS and reiterate SELL with a revised TP of ₹775 (₹730 previously).
Company data and valuation summary Mahanagar Gas Stock data Forecasts/Valuations 2017E 2018E 2019E 52-week range (Rs) (high,low) 956-487 EPS (Rs) 39.9 42.5 44.9 Market Cap. (Rs bn) 90.5 EPS growth (%) 27.8 6.5 5.6 Shareholding pattern (%) P/E (X) 22.9 21.5 20.4 Promoters 65.0 Sales (Rs bn) 20.2 22.3 24.9 FIIs 6.4 Net profits (Rs bn) 3.9 4.2 4.4 MFs 3.8 EBITDA (Rs bn) 6.4 6.8 7.1 Price performance (%) 1M 3M 12M EV/EBITDA (X) 13.6 12.7 11.9 Absolute 8.7 22.5 0.0 ROE (%) 24.5 23.6 22.7 Rel. to BSE-30 4.5 16.0 0.0 Div. Yield (%) 2.2 2.3 2.5 Robust results driven by 5% yoy growth in volumes and 5% qoq increase in margins MGL reported EBITDA at ₹1.67 bn (+31% yoy, +4% qoq) and net income at ₹990 mn (+30% yoy, -3% qoq), broadly in line with our estimates, driven by (1) moderate 5% growth in overall volumes to 2.56 mcm/d, 2% down sequentially due to seasonality and demonetization and (2) a further increase in unit EBITDA margins to ₹7.1/scm from `6.8/scm in the previous quarter. 4% growth in CNG volumes. CNG volumes grew by 4% yoy to 173 mscm, slower than 8% yoy growth seen in 1QFY17. CNG vehicle population increased by 18k in 3QFY17, a tad lower than 19k added in the previous quarter. CNG realizations declined to ₹20.4/scm from `21.1/scm qoq in 2QFY17, reflecting revision in prices during 3QFY17. 7% growth in PNG volumes. Overall PNG volumes grew 7% yoy driven by 9% yoy increase in domestic PNG volumes and 5% yoy increase in industrial/commercial PNG sales. PNG realizations increased to `23.7/scm, reflecting higher LNG prices. Unit profitability increases further. Gross margins and per-unit EBITDA margins increased further by 5% qoq to ₹11.1/scm and `7.1/scm in 3QFY17. Fine-tune EPS estimates; revise DCF-based TP to ₹775 We revise our EPS estimates to ₹39.9 (+0.5%) in FY2017, ₹42.5 (+1%) in FY2018 and ₹44.9 (+1%) in FY2019, to factor in (1) modest changes in margin assumptions and (2) other minor changes. We have factored in a reasonable 6-7% growth in volumes and near-peak levels of unit EBITDA margins at `6.4-6.8/scm in FY2017-20. Our target price increases to ₹775 from ₹730 previously, as we roll over DCF model to September 2018E. Concerns remain on high unit margins—unsustainable, in our view We remain cautious on high unit margins given the possibility of competition, particularly from OMCs who operate a significant portion (over 70%) of CNG stations for MGL, as it may lead to loss of volumes and/or threaten margins in the medium term—MGL management has ruled out Tarun Lakhotia any material risk given restricted allocation of domestic gas to authorized entities and unattractive economics of commercial/industrial volumes. In our view, IOCL (and other OMCs) may possibly bargain for higher commissions, at the minimum, once their existing contracts with MGL expire in March 2018. Our strategy team has also highlighted the policy discrepancy between low-risk, high-return structure of CGD sector and vice versa for domestic E&P business, in their recent note, The curious case of the Indian gas sector.
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Mahanagar Gas Energy
Exhibit 1: Interim results of MGL, March fiscal year-ends (` mn)
(% chg.) yoy 3QFY17 3QFY17E 3QFY16 2QFY17 3QFY17E 3QFY16 2QFY17 9MFY17 9MFY16 (% chg.) FY2017E Net sales 5,043 4,957 5,150 5,209 1.7 (2.1) (3.2) 15,086 15,681 (3.8) 20,183 Total expenditure (3,372) (3,356) (3,871) (3,594) 0.5 (12.9) (6.2) (10,276) (11,940) (13.9) (13,746) Raw material (2,430) (2,420) (3,015) (2,692) 0.4 (19.4) (9.7) (7,576) (9,476) (20.0) (10,058) Staff cost (143) (153) (125) (150) (6.1) 14.4 (4.6) (440) (406) 8.4 (591) Other expenditure (798) (783) (731) (752) 1.9 9.2 6.2 (2,260) (2,058) 9.8 (3,097) EBITDA 1,672 1,601 1,279 1,615 4.4 30.7 3.5 4,810 3,741 28.6 6,437 Other income 124 124 103 150 (0.4) 20.2 (17.2) 397 332 19.8 540 Interest (5) (5) (9) (1) (4.4) (46.5) 318.2 (11) (17) (36.8) (19) Depreciation (247) (230) (207) (231) 7.5 19.4 7.0 (695) (616) 12.8 (952) Pre-tax profits 1,544 1,490 1,167 1,533 3.6 32.3 0.7 4,502 3,440 30.9 6,006 Tax (554) (507) (406) (511) (1,562) (1,175) (2,060) Net income 990 983 761 1,022 0.7 30.2 (3.2) 2,940 2,265 29.8 3,946 EPS (Rs) 10.0 10.0 7.7 10.4 0.7 30.2 (3.2) 29.8 22.9 29.8 39.9 Other comprehensive income 2 (0) (12) (23) 3 Total comprehensive income 992 760 1,010 2,917 2,268 Tax rate (%) 35.9 34.0 34.8 33.3 34.7 34.1 34.3
Operational details Volumes (mcm/d) 2.56 2.53 2.44 2.60 1.2 4.8 (1.6) 2.55 2.42 5.7 2.58 Volumes (mscm) 235 233 225 239 1.2 4.8 (1.6) 702 664 5.7 941 CNG 173 173 166 178 0.2 4.1 (2.7) 520 493 5.5 697 PNG 62 60 58 61 3.9 6.9 1.7 182 171 6.1 243 Industrial/commercial 34 32 34 5.0 (1.7) 100 96 4.7 134 Domestic PNG 29 26 27 9.1 6.1 82 76 7.9 110 Net realisation (Rs/scm) 21.4 21.3 22.9 21.8 0.6 (6.6) (1.7) 21.5 23.6 (8.9) 21.5 Raw material cost (Rs/scm) 10.3 10.4 13.4 11.3 (0.8) (23.1) (8.3) 10.8 14.3 (24.3) 10.7 Gross margin (Rs/scm) 11.1 10.9 9.5 10.5 1.8 16.8 5.4 10.7 9.3 14.5 10.8 Other operating costs (Rs/scm) 4.0 4.0 3.8 3.8 (0.6) 5.0 6.0 3.8 3.7 3.7 3.9 Operating profit (Rs/scm) 7.1 6.9 5.7 6.8 3.2 24.7 5.1 6.9 5.6 21.7 6.8
Source: Company, Kotak Institutional Equities estimates
Exhibit 2: We assume gradual moderation in volume growth and per-unit margins over the next few years Key assumptions for MGL, March fiscal year-ends, 2012-20E
2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E Sales volume (mcm) CNG 523 555 605 645 657 697 741 781 818 PNG 191 203 219 225 230 243 261 282 307 Domestic 74 80 88 95 102 110 119 129 139 Commercial 46 49 53 53 55 57 60 63 66 Industrial 71 74 78 77 73 77 82 91 102 Total volumes 714 758 824 870 887 941 1,002 1,064 1,126 Average daily volumes (mcm/d) 2.0 2.1 2.3 2.4 2.4 2.6 2.7 2.9 3.1 Growth in volumes (%) 11.4 6.2 8.7 5.6 1.9 6.1 6.5 6.2 5.8
Operating metrics (Rs/scm) Gross margin 9.1 9.3 9.0 9.2 9.6 10.8 10.7 10.7 10.6 Operating cost 2.7 2.9 3.1 3.6 3.8 3.9 4.0 4.1 4.1 Operating profit 6.4 6.4 5.9 5.6 5.8 6.8 6.7 6.6 6.4
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 127 Energy Mahanagar Gas
Exhibit 3: A significant majority of MGL’s outlets are operated by OMCs Operators of CNG stations in Mumbai, December 2016
Mumbai Company 14 PSU OMCs 140 Others 43 Total 197
Source: Companies, Kotak Institutional Equities
Exhibit 4: IOCL’s comments indicate keenness in CGD marketing business Excerpts from IOCL’s comments on PNGRB’s draft regulations for CGD transportation tariffs
Source: Company, Kotak Institutional Equities
128 KOTAK INSTITUTIONAL EQUITIES RESEARCH Mahanagar Gas Energy
Exhibit 5: Our DCF-based fair value for MGL is `775 Calculation of equity value of MGL using discounted cash flow valuation (` mn)
2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E EBITDA 6,756 7,056 7,239 7,396 7,691 8,037 8,407 8,794 9,094 9,416 Adjusted tax expense (1,763) (1,824) (1,836) (1,841) (1,896) (1,972) (2,057) (2,149) (2,211) (2,281) Change in working capital 578 592 506 538 523 513 442 465 491 513 Operating cash flow 5,571 5,825 5,910 6,093 6,318 6,578 6,792 7,111 7,374 7,649 Capital expenditure (2,048) (2,140) (2,097) (1,873) (1,718) (1,518) (1,514) (1,502) (1,483) (1,455) Free cash flow 3,523 3,685 3,813 4,219 4,600 5,060 5,278 5,609 5,891 6,194 Discounted cash flow-now 3,344 3,151 2,937 2,928 2,875 2,850 2,677 2,563 2,425 2,297 Discounted cash flow-1 year forward 3,498 3,261 3,250 3,192 3,163 2,972 2,845 2,692 2,550 Discounted cash flow-2 year forward 3,619 3,608 3,543 3,511 3,299 3,159 2,988 2,830
Now +1-year +2-years Discount rate (%) 11.0% 11.0% 11.0% Total PV of free cash flow 28,048 29,812 31,696 Terminal value assumption Growth in perpetuity 4.0% 4.0% 4.0% Sensitivity of 12-month fair value to WACC and perpetual growth FCF in 2027E 6,194 6,194 6,194 Perpetual growth (%) Exit FCF multiple (X) 14.9 14.9 14.9 776 2.0% 3.0% 4.0% 5.0% 6.0% Exit EV/EBITDA multiple (X) 9.8 10.1 10.1 10.0% 766 816 883 976 1116 Terminal value 92,022 92,022 92,022 10.5% 728 770 825 901 1009 PV of terminal value 34,130 34,130 34,130 11.0% 693 730 776 838 924 Enterprise value 62,178 63,942 65,826 11.5% 663 694 733 784 854 Net debt (7,078) (8,650) (10,353) WACC(%) 12.0% 635 662 696 739 796 Equity value 69,257 72,592 76,179 Shares outstanding (mn) 99 99 99 Fair value of MGL, including dividends (Rs) 721 776 835
Source: Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 129 Energy Mahanagar Gas
Exhibit 6: Profit model, balance sheet, cash model, March fiscal year-ends, 2012-20E (` mn)
2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E Profit model (Rs mn) Net sales 13,090 15,144 18,852 20,949 20,789 20,183 22,296 24,936 26,410 EBITDA 4,603 4,816 4,882 4,897 5,130 6,437 6,756 7,056 7,239 Other income 194 319 345 407 427 540 650 784 926 Interest (3) (11) (2) (12) (29) (19) (15) (15) (15) Depreciation (638) (711) (807) (799) (841) (952) (1,027) (1,105) (1,209) Pretax profits 4,155 4,413 4,418 4,493 4,686 6,006 6,364 6,721 6,942 Extraordinary items 385 10 — — — — — — — Tax (1,395) (1,292) (1,355) (1,331) (1,446) (1,891) (1,979) (2,085) (2,145) Deferred taxation (67) (146) (90) (152) (154) (169) (184) (199) (214) Adjusted net profits 2,817 2,978 2,972 3,010 3,087 3,946 4,201 4,436 4,582 Adjusted EPS (Rs) 28.5 30.1 30.1 30.5 31.3 39.9 42.5 44.9 46.4
Balance sheet (Rs mn) Total equity 10,670 11,826 12,970 14,075 15,280 16,950 18,662 20,437 22,270 Deferred taxation liability 651 797 887 1,027 1,181 1,350 1,534 1,734 1,948 Borrowings 105 98 80 156 138 26 8 — — Customer deposits 1,443 1,841 2,160 2,664 3,093 3,638 4,188 4,733 5,228 Currrent liabilities 2,594 3,267 3,646 3,735 3,871 4,147 4,402 4,758 4,932 Total liabilities and equity 15,463 17,830 19,743 21,656 23,563 26,111 28,794 31,661 34,378 Cash 510 660 888 1,449 1,721 3,222 4,776 6,471 8,224 Current assets 1,742 1,744 2,065 2,056 2,075 2,044 2,153 2,289 2,364 Total fixed assets 10,855 12,405 13,369 14,436 15,885 16,962 17,984 19,019 19,907 Investments 2,355 3,021 3,421 3,715 3,882 3,882 3,882 3,882 3,882 Total assets 15,463 17,830 19,743 21,656 23,563 26,111 28,794 31,661 34,378
Free cash flow (Rs mn) Operating cash flow, excl. working capital 3,924 3,453 3,671 3,599 3,768 4,527 4,762 4,956 5,079 Working capital 352 930 301 660 471 852 697 765 594 Capital expenditure (2,135) (2,266) (1,768) (1,976) (2,211) (2,029) (2,048) (2,140) (2,097) Free cash flow 2,141 2,117 2,204 2,284 2,028 3,350 3,410 3,581 3,576 Investments (1,280) (851) (502) (940) (345) — — — — Other income 158 246 271 308 269 540 650 784 926
Ratios (%) Debt/equity 1.0 0.8 0.6 1.1 0.9 — — — — Net debt/equity (3.8) (4.8) (6.2) (9.2) (10.4) (18.9) (25.5) (31.7) (36.9) RoAE 29.2 24.9 22.5 20.8 19.6 22.7 21.8 20.9 19.8 RoACE 23.7 21.8 19.4 17.7 16.5 19.0 18.2 17.3 16.3 Adjusted CRoCI 27.4 26.1 22.9 20.8 19.3 21.3 19.9 18.7 17.5
Source: Company, Kotak Institutional Equities estimates
130 KOTAK INSTITUTIONAL EQUITIES RESEARCH SELL Jindal Steel and Power (JSP) Metals & Mining FEBRUARY 15, 2017 RESULT Coverage view: Cautious
A good quarter. Jindal Steel & Power’s consolidated EBITDA increased 51% qoq to Price (`): 88 `13 bn (+128% yoy) and was higher than our estimate. The better-than-expected Target price (`): 60 earnings was led by (a) improved operating margins in India steel and power businesses BSE-30: 28,339 and (b) higher earnings from overseas mining operations aided by global coal price increase. Part of the earnings recovery in mining operations may reverse after recent softening of coal prices, but volumes in steel business can improve post commissioning of the blast furnace in March 2017. We will review estimates post the earnings call.
Company data and valuation summary Jindal Steel and Power Stock data Forecasts/Valuations 2017E 2018E 2019E 52-week range (Rs) (high,low) 96-52 EPS (Rs) (24.8) (10.1) (2.8) Market Cap. (Rs bn) 80.6 EPS growth (%) (36.4) 59.4 72.3 Shareholding pattern (%) P/E (X) (3.5) (8.7) (31.4) Promoters 61.9 Sales (Rs bn) 209.8 270.0 313.6 FIIs 18.2 Net profits (Rs bn) (22.7) (9.2) (2.6) MFs 1.1 EBITDA (Rs bn) 42.5 60.1 69.0 Price performance (%) 1M 3M 12M EV/EBITDA (X) 13.2 9.2 7.7 Absolute 12.2 17.6 58.8 ROE (%) (8.5) (2.7) (0.7) Rel. to BSE-30 7.9 11.2 28.8 Div. Yield (%) 0.0 0.0 0.0
Higher EBITDA aided by improved operating margins in India and higher overseas earnings
Jindal Steel & Power’s consolidated EBITDA increased 51% qoq to `13 bn (+128%yoy) and was much higher than our estimate. EBITDA outperformance was from across businesses and (1) standalone steel EBITDA increased 45% qoq to `7.8 bn (+83% yoy) despite only 4% growth in volumes to 840 kt. Blended EBITDA/ton for steel business improved 40% qoq to `9,300/ton (+63% qoq). The steel earnings were also supported by higher pellet sales of 0.71 mn tons, (b) Jindal Power EBITDA increased 66% qoq to `3bn (+62% yoy) despite only 2% increase in power generation to 2,356 mn units (-9% yoy). The earnings improvement in power business is largely led 14% qoq increase in realizations to `4/unit. The company has stated improved power earnings are led by lower fuel cost, auxiliary consumption and selective sale to National exchange though we await more clarity on the extent of increase in power realizations. Overseas subsidiaries reported better earnings with EBITDA of (1) US$21.1 mn at Oman, (2) US$7 mn in Mozambique and South Africa coal mines, and (3) AUD 4.8 mn of EBITDA in Australian mines. The company reported net loss of `4.1 bn (`7.5 bn net loss in 2QFY17).
Power business—PLF remains weak at 34% for 2,800 MW capacity
The PLF at 1,000 MW Tamnar 1 was 52% in 3QFY17 while at 1,800 MW PLF was only at 28%. Power generation increased only 2% qoq to 2,356 mn units. Overall, the company’s plants operated at 34% PLF or ~1,100 MW of the operational capacity of 2,800 MW. JSP has PPA of 870MW with Tamil Nadu, Kerala and Chhattisgarh states of which 150 MW is yet to be operational. The remaining current sales are largely through short term arrangements and merchant sales. The new opportunities continue to be from UP, Bangladesh, Railways though process for award of PPA remains slow.
Net debt at similar levels to last quarter; BF to be commissioned by March 2017 Abhishek Poddar JSP’s net debt remains at earlier levels of ~`460 bn. The company will commission 3.2 mtpa blast furnace at Angul by end-FY2017 which should aid steel volumes ramp-up after an almost flat FY2017. However, the increase in earnings in mining operations was largely dependent on higher coal prices which have softened recently. We will review our estimates post the earnings call.
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Metals & Mining Jindal Steel and Power
Exhibit 1: Interim results of Jindal Steel & Power (consolidated), March fiscal year-ends (Rs mn)
(% chg.) 3QFY17 3QFY17E 3QFY16 2QFY17 3QFY17E 3QFY16 2QFY17 9MFY17 9MFY16 (%chg) Net sales 55,812 50,547 45,690 48,609 10 22 15 151,383 143,701 5 Total expenditure (42,822) (41,519) (39,985) (40,005) 3 7 7 (119,872) (117,834) 2 Inc/(Dec) in stock (1,080) (202) (2,730) (836) (1,014) (134) Raw materials (17,456) (16,018) (13,226) (14,014) 9 32 25 (46,073) (47,798) (4) Stores and spares consumed (3,923) (4,099) (3,674) (4,148) (4) 7 (5) (11,811) (11,485) 3 Power & Fuel (9,919) (11,738) (11,500) (11,604) (15) (14) (15) (32,272) (31,415) 3 Staff cost (2,388) (2,228) (1,564) (2,222) 7 53 7 (6,879) (7,031) (2) Other expenditure (8,055) (7,234) (7,292) (7,181) 11 10 12 (21,823) (19,972) 9 EBITDA 12,990 9,028 5,706 8,604 44 128 51 31,511 25,866 22 Other income 3 10 50 7 321 917 Interest (8,575) (8,981) (8,350) (8,836) (5) 3 (3) (26,016) (24,564) 6 Depreciation (10,274) (10,007) (9,954) (9,986) 3 3 3 (29,431) (28,355) 4 Pretax profits (5,856) (9,950) (12,549) (10,212) (41) (53) (43) (23,615) (26,136) (10) Exceptional item — — (910) — (6,257) (3,484) Tax 1,306 3,237 2,822 2,739 5,454 5,355 2 Net income (4,550) (6,712) (8,818) (7,473) (32) (48) (39) (24,418) (24,265) 1 Share of profit from associates 18 10 16 11 43 (25) Minority Interest 458 50 105 2 2,019 1,074 88 Net income (4,074) (6,652) (8,697) (7,460) (39) (53) (45) (22,356) (23,217) (4) Adjusted net income (4,074) (6,652) (9,607) (7,460) (16,098) (19,732) Ratios EBITDA margin (%) 23.3 17.9 12.5 17.7 20.8 18.0 ETR (%) 22.3 32.5 24.2 26.8 23.1 20.5 EPS (Rs) (4.5) (7.3) (10.5) (8.2) (17.6) (21.6) (18) Segmental revenue Iron & Steel 45,777 — 32,855 36,241 39 26 114,863 107,104 7 Power 15,543 — 14,636 13,703 6 13 48,139 42,701 13 Others 2,633 — 1,548 2,540 5,782 3,689 57 Segmental PBIT Iron & Steel 1,338 — (1,112) 702 (220) 91 6,415 4,401 46 Power 2,989 — 6,376 (95) 2,840 13,409 Others (73) — (261) (996) (2,657) (402) 561 Segmental PBIT (%) Iron & Steel 2.9 (3.4) 1.9 5.6 4.1 Power 19.2 43.6 (0.7) 5.9 31.4
Source: Company, Kotak Institutional Equities estimates
132 KOTAK INSTITUTIONAL EQUITIES RESEARCH Jindal Steel and Power Metals & Mining
Exhibit 2: Interim results of Jindal Steel & Power (standalone), March fiscal year-ends (Rs mn)
(% chg.) 3QFY17 3QFY17E 3QFY16 2QFY17 3QFY17E 3QFY16 2QFY17 9MFY17 9MFY16 (%chg) Net sales 36,923 34,400 31,504 33,210 7 17 11 101,736 100,943 1 Total expenditure (29,112) (28,864) (27,238) (27,839) 1 7 5 (81,934) (83,361) (2) Inc/(Dec) in stock (1,493) — (2,037) (642) (1,665) (141) Raw materials (12,838) (13,631) (11,896) (11,719) 5 3 16 (35,913) (40,803) (12) Stores and spares consumed (3,322) (3,507) (3,099) (3,579) (5) 7 (7) (10,001) (10,138) (1) Power & Fuel (5,240) (5,880) (5,477) (5,972) (11) (4) (12) (16,737) (15,821) 6 Staff cost (1,426) (1,366) (498) (1,394) 4 187 2 (4,167) (3,814) 9 Other expenditure (4,794) (4,480) (4,232) (4,533) 7 13 6 (13,451) (12,646) 6 EBITDA 7,810 5,535 4,266 5,371 41 83 45 19,802 17,582 13 Other income — — 9 — — 376 Interest (5,371) (6,634) (6,645) (6,601) (19) (19) (19) (18,010) (20,184) (11) Depreciation (5,421) (5,211) (5,701) (5,237) 4 (5) 4 (15,550) (16,169) (4) Pretax profits (2,982) (6,310) (8,070) (6,468) (53) (63) (54) (13,758) (18,395) (25) Exceptional item - - - - - Tax 1,117 2,145 2,880 2,396 (48) (61) (53) 5,054 6,386 (21) Net income (1,865) (4,165) (5,190) (4,072) (55) (64) (54) (8,704) (12,009) (28) Adjusted net income (1,865) (4,165) (5,190) (4,072) (8,704) (12,009)
Ratios EBITDA margin (%) 21.2 16.1 13.5 16.2 31 56 31 19.5 17.4 ETR (%) 37.5 — 35.7 37.0 36.7 34.7 EPS (Rs) (2.0) (4.6) (5.7) (4.5) (55) (64) (54) (9.5) (13.1) Volumes (mn tons) Steel Products 0.84 0.80 0.74 0.81 5 14 4 2.43 2.34 4 Segmental revenue Iron & Steel 37,205 — 25,818 30,040 44 24 97,266 86,299 13 Power 6,983 — 6,997 6,363 (0) 10 19,742 21,170 (7) Others 876 — 1,534 683 2,168 2,797 (23) Segmental PBIT Iron & Steel 740 — (2,817) 467 (126) 59 2,908 258 1,026 Power 3,342 — 2,592 998 29 235 5,388 6,121 (12) Others (653) — 263 (206) (950) 269 Segmental PBIT (%) Iron & Steel 2.0 — (10.9) 1.6 3.0 0.3 - Power 47.9 — 37.0 15.7 27.3 28.9 - Others (74.5) — 17.1 (30.2) (43.8) 9.6 -
Source: Company, Kotak Institutional Equities estimates
Exhibit 3: Jindal Power EBITDA increased 66% qoq led by 14% qoq increase in blended realizations Jindal Power, Interim results, 1QFY15 - 3QFY17, (mn units, Rs mn)
(Change %) 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 yoy qoq Jindal Power Sales (Rs mn) 7,020 9,270 8,250 7,740 6,160 8,890 8,150 6,920 6,680 7,340 8,540 5 16 Power generation (mn units) 2,446 2,799 2,699 2,742 1,875 2,728 2,580 2,358 2,171 2,313 2,356 (9) 2 JPL realizations (Rs/unit) 3.2 3.7 3.4 3.1 3.7 3.6 3.5 3.3 3.4 3.5 4.0 15 14 EBITDA 4,270 5,220 4,140 3,350 1,800 1,680 1,860 1,190 1,820 1,820 3,020 62 66 Cost/unit (Rs/unit) 1.2 1.6 1.7 1.8 2.6 2.9 2.7 2.7 2.5 2.7 2.6 (4) (2) EBITDA/unit (Rs/unit) 1.9 2.1 1.7 1.4 1.1 0.7 0.8 0.6 0.9 0.9 1.4 78 63
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 133 Metals & Mining Jindal Steel and Power
Exhibit 4 : JSP's steel EBITDA increased 45% qoq aided by increase in steel realizations and better volumes JSP's domestic steel sales and realizations, 1QFY15 - 3QFY17, (mn tons, Rs/ton)
(Change %) 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 yoy qoq Segment revenue (Rs mn) Iron & Steel (Rs mn) 32,969 32,831 32,784 32,486 29,757 30,699 26,334 32,202 30,022 30,040 37,205 41 24 Power (Rs mn) 6,454 6,132 7,772 6,919 7,037 7,136 6,997 6,906 6,396 6,363 6,983 (0) 10 Others (Rs mn) 895 219 539 626 676 587 1,534 1,553 609 683 876 Sub-total 40,318 39,181 41,095 40,030 37,470 38,423 34,864 40,661 37,026 37,086 45,064 29 22 Less: Intersegment revenue 4,479 4,905 5,685 6,745 6,132 6,698 5,420 6,043 5,791 5,829 9,874 82 69 Net segment revenue 35,839 34,276 35,410 33,286 31,339 31,725 29,444 34,618 31,235 31,257 35,190 20 13 Steel product sales (tons) 737,471 688,911 714,048 779,274 820,000 780,000 740,000 1,000,000 780,000 810,000 840,000 14 4 Steel EBITDA 11,575 9,645 10,000 6,222 7,104 6,331 4,230 5,992 6,621 5,371 7,810 85 45 EBITDA/ton 15,695 14,000 14,005 7,984 8,663 8,117 5,716 5,992 8,488 6,630 9,298 63 40
Source: Company, Kotak Institutional Equities estimates
134 KOTAK INSTITUTIONAL EQUITIES RESEARCH SELL CESC (CESC) Utilities FEBRUARY 14, 2017 RESULT, CHANGE IN RECO. Coverage view: Attractive Positives in the price. We downgrade CESC to SELL (from ADD) post the near-doubling Price (`): 866 of stock over the past 12 months, and strong 45% rally over the past three months. The stock already appears to be pricing in positives from potential restructuring of the Target price (`): 785 retail business and contribution from recently won distribution circles in Rajasthan. Our BSE-30: 28,352 revised target price of `785/share (from `650 previously) factors in no negative value for the retail business.
Company data and valuation summary CESC Stock data Forecasts/Valuations 2017E 2018E 2019E 52-week range (Rs) (high,low) 869-409 EPS (Rs) 53.7 75.6 96.8 Market Cap. (Rs bn) 114.8 EPS growth (%) 92.1 40.8 28.2 Shareholding pattern (%) P/E (X) 16.1 11.5 8.9 Promoters 49.9 Sales (Rs bn) 138.5 147.3 160.9 FIIs 23.2 Net profits (Rs bn) 7.1 10.0 12.8 MFs 17.2 EBITDA (Rs bn) 32.0 34.1 37.3 Price performance (%) 1M 3M 12M EV/EBITDA (X) 8.2 7.5 6.6 Absolute 28.4 46.0 107.9 ROE (%) 7.8 10.3 12.1 Rel. to BSE-30 23.4 38.1 68.6 Div. Yield (%) 1.2 1.3 1.4
Weak unit sales off-set by higher tariffs; yields 36% yoy growth in net income CESC reported net income of `1.5 bn (+36% yoy), 10% lower than our estimate of `1.7 bn on account of weak unit sales at 2090 MU (-7% yoy, -21% qoq) and higher effective tax rate of 35% compared to 25% factored in by us. Blended realizations improved 11% yoy to `7.5/kwh even as cost of generation (`2.2/kwh) and power purchased cost (`5.1/kwh) saw little variation. Generation during the quarter was poor at 1,170 MU (-27% yoy,-32% qoq) yielding a PLF of 47%, and this was offset by external purchases of 1,290 MU (+23% yoy).
Firstsource reports steady growth in net income, retail estimated to have finally broken-even Firstsource reported 13.5% yoy growth in net income at `768 mn, on account of 7.3% yoy growth in net sales at `8.6 bn and improvement in PAT margin at 8.9% (8.4% in 3QFY16 and 8.3% in 2QFY17). Earnings were aided by 41% yoy growth in other income at `267 mn even as EBITDA margins were under pressure at 10.3% (10.5% in 3QFY16). Spencer appears to have made strong improvement during the quarter, with store sales improving 15% yoy to `1,714/sq. feet per month and store level EBITDA improving 36% yoy to `121/sq. feet per month. We estimate the retail business to have made a modest EBITDA of `49 mn during the quarter compared to average losses of `66 mn per quarter in the preceding four quarters. Haldia (600 MW) operated at a healthy utilization of 77% in 3QFY17 and supplied 934 MU to the licenced area accounting for 72% of the power purchased by the standalone entity. Chandrapur continues to operate at low utilizations (29% in 3QFY17) and sold 352 MU during the quarter. Chandrapur has commenced sales of 34 MW to Noida from November 2016 that will likely be ramped up to 170 MW by April 2017.
Downgrade to SELL, positive from carving out of retail business already seen in the price We downgrade CESC to SELL noting near-doubling of the stock since our upgrade twelve Murtuza Arsiwalla months ago, as we believe that current stock price already builds in the positives from the potential carving out of the retail business—we have removed the negative value assigned Ajinkya Bhat previously, though still assign no positive value. Our consolidated earnings estimates factor in EBITDA of `230 mn and net loss of `804 mn in FY2019, marked improvement from EBITDA loss of `596 mn and net loss of `1.4 bn in FY2016. Accordingly, our target price stands revised to `785/share (from `650 previously) with earnings estimates revised upwards by 4.4% for FY2017E and 6.7% for FY2018 noting improved performance from the retail business as well as Firstsource.
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Utilities CESC
Exhibit 1: Strong PAT growth despite modest unit sales growth as the company has managed to contain fuel cost under-recovery Quarterly results for CESC (standalone), March fiscal year-ends (Rs mn)
(% chg.) 3QFY17 3QFY17E 3QFY16 2QFY17 3QFY17E 3QFY16 2QFY17 9MFY17 9MFY16 (% chg.) 2017E Net sales 15,740 16,286 15,230 19,530 (3.4) 3.3 (19.4) 50,452 49,690 1.5 69,332 Operating costs Cost of electrical energy purchased (6,600) (5,940) (5,400) (6,950) 11.1 22.2 (5.0) (17,203) (16,220) (24,043) Cost of fuel (2,550) (2,723) (3,480) (3,680) (6.4) (26.7) (30.7) (9,768) (11,950) (14,188) Personnel costs (1,930) (2,057) (1,890) (2,000) (6.2) 2.1 (3.5) (6,218) (5,670) (8,148) Other expenses and provisions (1,010) (1,827) (1,630) (2,220) (44.7) (38.0) (54.5) (5,262) (5,080) (7,082) Total operating expense (12,090) (12,547) (12,400) (14,850) (3.6) (2.5) (18.6) (38,452) (38,920) (53,462) EBITDA 3,650 3,739 2,830 4,680 (2.4) 29.0 (22.0) 12,000 10,770 11.4 15,870 EBITDA margin (%) 23.2 23.0 18.6 24.0 23.8 21.7 22.9 Depreciation (980) (991) (890) (990) (1.1) 10.1 (1.0) (2,956) (2,700) (3,916) EBIT 2,670 2,748 1,940 3,690 (2.8) 37.6 (27.6) 9,044 8,070 12.1 11,954 Other income 760 646 580 950 17.6 31.0 (20.0) 2,335 1,380 2,835 Interest (1,080) (1,149) (1,050) (1,160) (6.0) 2.9 (6.9) (3,279) (3,410) (4,429) PBT 2,350 2,245 1,470 3,480 4.7 59.9 (32.5) 8,100 6,040 34.1 10,360 Tax (830) (561) (350) (1,060) 47.9 137.1 (21.7) (2,487) (1,450) (3,007) Net profit 1,520 1,684 1,120 2,420 (9.7) 35.7 (37.2) 5,613 4,590 22.3 7,353 Extraordinary income/ (expenses) ———— —— — EPS (Rs/share) 11 13 8 18 42 35 55 Key operating parameters Units sold (MU) 2,090 2,231 2,239 2,654 (6.3) (6.7) (21.3) 6,788 7,367 (7.9) 9,570 Units generated - gross (MU) 1,170 1,261 1,598 1,716 (7.2) (26.8) (31.8) 4,513 5,648 (20.1) 6,425 Units purchased (MU) 1,290 1,200 1,047 1,398 7.5 23.2 (7.7) 3,422 3,188 7.3 4,831 Overall PLF (%) 47 — 64 69 59 T&D loss (%) 12 — 12 12 11 Tax rate (%) 35 25 24 30 31 24 29 Tariff (Rs/kwh) 7.53 7.30 6.80 7.36 3.2 10.7 2.3 7.43 6.74 10.2 7.24 Fuel cost(Rs/kwh) 2.18 2.16 2.18 2.14 0.9 0.1 1.6 2.16 2.12 2.3 2.21 Power purchased (Rs/kwh) 5.12 4.95 5.16 4.97 3.4 (0.8) 2.9 5.03 5.09 (1.2) 4.98
Source: Company, Kotak Institutional Equities estimates
Exhibit 2: Retail operating metrics have shown a consistent improvement over the past few quarters Store-level sales and EBITDA for Spencer Retail (Rs/sq. ft per month)
Sales (LHS) EBITDA (RHS) 1,750 130 121 1,700 120 1,650 108 110 1,600 97 100 1,550 92 89 1,500 83 85 90
1,450 80 70 1,400 70 1,350 59 61 59 62 1,300 60 1,305 1,340 1,363 1,388 1,349 1,477 1471 1492 1452 1,578 1,588 1714 1,250 50 FY2014 FY2015 FY2016 1QFY15 2QFY15 3QFY15 1QFY16 2QFY16 3QFY16 1QFY17 2QFY17 3QFY17
Source: Company, Kotak Institutional Equities
136 KOTAK INSTITUTIONAL EQUITIES RESEARCH CESC Utilities
Exhibit 3: Quarterly results for Firstsource (consolidated), March fiscal year-ends (Rs mn)
% change 3QFY17 3QFY16 2QFY17 3QFY16 2QFY17 9MFY17 9MFY16 % change 2017 Sales 8,601 8,016 8,572 7.3 0.3 25,925 23,091 12.3 34,287 Expenses (7,712) (7,173) (7,718) 7.5 (0.1) (23,173) (20,689) 12.0 (30,371) Employee expenses (5,901) (5,579) (5,950) 5.8 (0.8) (17,668) (15,920) 11.0 (23,315) Other expenses (1,812) (1,594) (1,768) 13.7 2.5 (5,505) (4,769) 15.5 (7,056) EBITDA 888 844 854 5.3 4.0 2,752 2,403 14.5 3,916 Other income 267 190 275 40.7 (2.9) 744 462 61.1 900 PBIDT 1,156 1,034 1,130 11.8 2.3 3,496 2,865 22.0 4,816 Interest (99) (124) (109) (20.6) (9.0) (339) (398) (14.8) (467) Depreciation (156) (160) (160) (2.6) (3.0) (479) (515) (7.0) (617) PBT 901 749 861 20.3 4.7 2,678 1,952 37.2 3,732 Tax (134) (73) (149) 83.3 (10.1) (465) (157) 195.2 (746) Net profit 768 676 712 13.5 7.8 2,213 1,795 23.3 2,985 Extraordinary items — — — — — — RPAT 768 676 712 13.5 7.8 2,213 1,795 2,985 Key ratios (%) Employee exp./ Sales 68.6 69.6 69.4 68.1 68.9 68.0 Other exp./ Sales 21.1 19.9 20.6 21.2 20.7 20.6 EBITDA margin 10.3 10.5 10.0 10.6 10.4 11.4 PBT Margin 10.5 9.3 10.0 10.3 8.5 10.9 PAT Margin 8.9 8.4 8.3 8.5 7.8 8.7 Tax rate 14.8 9.7 17.3 17.4 8.1 20.0 EPS 1.1 1.0 1.1 3.3 2.7 4.4
Source: Company, Kotak Institutional Equities
Exhibit 4: Our fair value estimate for CESC is Rs650/share Sum-of-the-parts valuation for CESC
Per share value Methodology (Rs) The business enjoys very high predictability of cash flows, regular reinvestments and high Standalone DCF-to-equity 453 profitability (>20% RoE) from operational efficiencies and incentives. Cash Book value Marketable securities & cash on books (Rs bn) 7 51 Chandrapur DCF-to-equity 287 MW tied-up so far with Tamil Nadu and Noida Power 36 Haldia DCF-to-equity 600 MW sold to Kolkatta distribution business 111 Crescent Power DCF-to-equity 40 MW capacity based on coal rejects available for merchant sale and 15 MW solar plant 11 Firstsource Solutions Market Price 30% discount to CMP of Firstsource 101 CESC Properties DCF-to-equity 425,000 sq.ft of mall area leased out at a rental of Rs130/sq/ft 21 Total 785
Source: Company, Kotak Institutional Equities estimates
Exhibit 5: Change in estimates for CESC, March fiscal year-ends, 2017-19E (Rs mn)
Revenues EBITDA Net profit Old New (% chg) Old New (% chg) Old New (% chg) 2017E 136,031 138,504 1.8 31,859 32,050 0.6 6,812 7,114 4.4 2018E 145,248 147,314 1.4 33,869 34,056 0.6 9,387 10,016 6.7 2019E 158,774 160,940 1.4 37,082 37,265 0.5 12,200 12,838 5.2
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 137 Utilities CESC
Exhibit 6: Profit model, balance sheet and cash model of CESC, March fiscal year-ends, 2011-19E (Rs mn)
2011 2012 2013 2014 2015 2016 2017E 2018E 2019E Profit model (Rs mn) Net sales 49,425 58,131 74,968 100,647 109,726 117,740 138,504 147,314 160,940 EBITDA 8,121 9,581 12,167 15,764 18,004 27,228 32,050 34,056 37,265 Other income 2,143 2,109 2,036 2,195 2,431 3,446 4,381 4,491 4,689 Interest (3,583) (4,097) (4,304) (5,660) (9,565) (14,856) (15,258) (14,391) (13,811) Depreciation (3,165) (3,401) (3,645) (4,714) (5,889) (7,725) (8,309) (8,666) (9,002) Pretax profits 3,516 4,193 6,253 7,585 4,981 8,092 12,864 15,491 19,141 Minority interest 10 14 (215) (813) (1,004) (1,301) (1,305) (1,378) (1,615) Tax (530) (1,492) (1,758) (1,856) (1,992) (3,087) (4,445) (4,096) (4,688) Net profits 2,996 2,716 4,281 4,916 1,985 3,704 7,114 10,016 12,838 Extraordinary items (212) (257) 313 — — (40) — — — Earnings per share (Rs) 24.0 21.7 34.3 39.3 15.0 27.9 53.7 75.6 96.8 Balance sheet (Rs mn) Total equity 47,008 48,423 51,436 56,350 60,290 62,677 68,179 76,423 87,395 Total borrowings 36,067 57,868 95,308 126,401 142,020 149,053 152,980 151,422 146,331 Consumer security deposits 9,348 10,509 11,388 12,795 14,077 15,746 16,972 17,145 18,047 Advance against depreciation 5,143 5,660 7,142 7,769 8,596 10,097 8,356 6,616 4,875 Deferred tax liability (3,215) (3,216) (2,820) 332 832 795 751 707 663 Minority interest 21 27 7,425 9,079 10,004 11,497 12,801 14,180 15,794 Total liabilities and equity 94,371 119,271 169,879 212,726 235,819 249,865 260,039 266,492 273,105 Cash 7,079 13,433 13,336 12,099 10,492 11,977 16,992 23,466 30,206 Net current assets (6,365) (7,565) (5,804) 1,338 5,843 11,943 16,673 17,311 18,174 Total fixed assets 89,419 111,590 160,223 198,228 212,789 218,939 219,367 218,708 217,719 Investments 4,174 1,764 2,123 1,060 6,696 7,007 7,007 7,007 7,007 Deferred Expenditure 64 50 — — — — — — — Total assets 94,371 119,271 169,879 212,726 235,819 249,865 260,039 266,492 273,105 Free cash flow (Rs mn) Operating cash flow, excl. working capital 5,186 5,845 8,594 10,421 19,168 28,304 16,683 20,016 23,410 Working capital (1,078) 1,200 (1,761) (7,143) (10,274) (4,025) (4,730) (638) (863) Capital expenditure (10,546) (26,028) (58,872) (43,135) (19,403) (12,249) (8,737) (8,007) (8,013) Investments 200 2,410 (359) 1,063 (5,552) (134) — — — Free cash flow (6,237) (16,573) (52,398) (38,793) (16,060) 11,896 3,216 11,371 14,535
Source: Company, Kotak Institutional Equities estimates
138 KOTAK INSTITUTIONAL EQUITIES RESEARCH INDIA Economy Inflation FEBRUARY 14, 2017 UPDATE BSE-30: 28,352
Uptrend in WPI continues. WPI inflation surged to the highest level since August 2014 weighed by higher commodity prices and adverse base effect. Higher WPI inflation along with benign CPI inflation is likely to further widen the wedge between retail and wholesale inflation, with the latter significantly overshooting the former. High core WPI and CPI inflation continues to weaken the case for a rate cut in the foreseeable future even as our March 2018 headline inflation estimates remain around 60 bps lower than RBI’s projections.
WPI inflation continues to inch higher; food prices help cap upsurge QUICK NUMBERS January WPI inflation surged to 5.25% (Kotak: 4.6%) compared to 3.39% in December. January WPI Continuing the trend of upward revisions, November inflation was lifted by 23 bps to 3.38%. inflation at 5.25%; Mirroring the downward trend in CPI, WPI food inflation decelerated to (-) 0.5% compared to (-) 0.7% in December, primarily led by sequential deceleration in prices of pulses ((-) 12%mom), Core inflation at egg ((-) 3%) and fruits and vegetables ((-) 2%). On the other hand, fuel inflation continued its 2.7% uptrend (4.7%yoy), led by higher price of coking coal (84%mom), aviation turbine fuel (10%), Average FY2017 furnace oil (8%), high speed diesel (4.8%), petrol (4.7%), bitumen (3%) and kerosene (2%). headline WPI Core inflation remains the sore point expected at 3.6%; 4% in FY2018 Manufactured inflation saw broad-based acceleration to 3.99% owing to higher prices of food products, sugar and core inflation. Core inflation picked up to the highest level since October RBI to maintain 2014, printing 2.7% compared to 2.1% earlier. Apart from the adverse base effect, sequential status quo at least upward momentum in prices of ‘Iron & Semis (4.2%mom)’, ‘Basic Metals Alloys & Metal through 1HFY18 Product’(2.3%), ‘Cotton textiles’(0.9%) and ‘Paper’ (0.5%) further accelerated the pace of core inflation. Overall, the core inflation increased by 0.5%mom, the highest pace witnessed in nine- months.
WPI inflation trajectory to continue to trend higher
Going ahead, the divergence between the WPI and CPI inflation is likely to further widen in 1HCY17 owing to higher commodity prices and adverse base effect, before settling in a narrow range in 2HCY17. We expect WPI inflation to average 5.5% in 4QFY17 and 3.6% in FY2017. We remain cautious on the upward momentum of prices of oil and other base metals. We expect WPI inflation to average ~4% in FY2018.
No more rate cuts for now
With the recent hawkish stance of RBI despite benign headline CPI inflation, the upturn in WPI Upasna Bhardwaj inflation further reiterates the case for limited scope for further monetary accommodation. With simmering global risks emanating from reversal in commodity cycle and uncertainty from the US monetary and fiscal policy likely to worsen the tradable inflation trajectory and core CPI inflation Suvodeep Rakshit expected to remain persistently sticky we expect RBI to maintain status quo through at least 1HFY18.
Madhavi Arora
For Private Circulation Only. India Economy
Exhibit 1: WPI to average 5.5% in 4QFY17 Trends in headline and core WPI inflation (% yoy)
WPI inflation Core inflation 12
10
8 5.5 6
4
2 2.3 0
(2)
Sep-13 Sep-14 Sep-15 Sep-16 Sep-12
Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 (4)
(6)
Source: CEIC, Kotak Economic Research
140 KOTAK ECONOMIC RESEARCH India Daily Summary - February 15, 2017 2.2 2.2 1.2 1.2 7.3 7.3 1.2 2.7 5.7 5.7 2.1 2.1 2.3 2.3 3.9 3.9 7.6 7.6 5.6 5.6 0.3 0.5 0.5 0.2 0.5 0.5 2.4 2.4 1.0 7.4 7.4 2.6 2.6 1.9 1.9 0.4 0.4 8.0 8.0 0.9 0.9 4.6 4.6 8.0 8.0 8.9 8.9 13.7 13.7 21.5 21.5 17.2 13.2 13.2 27.3 27.3 12.7 25.1 51.7 51.7 11.1 12.1 12.1 12.3 12.3 11.0 11.0 19.3 19.3 57.4 57.4 54.5 54.5 24.5 24.5 11.6 11.6 22.0 22.0 10.1 14.0 14.0 29.0 29.0 60.1 60.1 10.9 67.6 14.8 14.8 67.0 67.0 50.6 50.6 49.9 49.9 252.6 431.5 431.5
(US$ mn) (US$ ADVT-3mo
8.8 RoE RoE (%) 21.1 16.2 21.1 28.9 20.6 18.4 36.7 20.9 38.2 14.7 15.4 24.8 20.4 23.4 16.8 16.8 21.1 22.6 30.3 20.4 19.1 11.3 11.8 18.6 16.1 11.5 15.4 12.0 13.6 11.5 11.5 9.6 15.3 12.7 14.8 11.4 8.8 18.6 19.1 12.1 12.1 19.0 12.6 18.7 20.8 16.7 20.1 17.3 20.3 14.0 10.0 18.0 12.8 10.7 16.8 15.6 15.7 3.5 10.7 9.2 9.8 12.1 9.3 9.3 9.9 9.0 11.0 11.9 14.9 11.7 7.1 10.5 17.4 10.5 25.4 21.9 15.0 19.9 29.0 21.5 17.1 19.6 46.4 14.8 15.5 25.5 19.1 22.9 16.1 20.8 20.9 31.0 20.2 18.5 18.7 15.9 11.3 15.2 11.0 12.2 9.4 18.4 20.2 19.0 18.0 20.6 13.9 19.5 20.1 10.5 17.7 13.2 13.1 15.8 14.1 15.8 39.2
21.9 23.9 8.4 15.8 17.1 17.9
16.8 20.1 29.5 14.5 17.2 47.2 15.0 40.4 15.4 25.4 18.8 26.5 15.3 20.6 18.1 30.9 20.0 16.3 18.5 4.7 9.9 10.2 (22.1) 6.3 (1.5) 14.7 7.4 12.4 16.0 4.2 6.8 21.2 2.5 7.5 21.3 11.6 21.2 9.0 19.4 9.5 10.9 19.0 17.7 21.4 13.4 13.9 17.3 3.1 0.9 1.4 1.8 2.6 0.6 1.5 1.0 0.1 1.4 3.4 1.5 1.5 0.7 1.4 1.4 1.0 - 1.3 1.0 0.3 1.3 1.1 2.5 2.1 2.7 0.6 4.3 1.4 5.4 1.1 1.8 3.7 0.3 3.3 1.2 1.1 0.4 2.9 1.5 0.8 1.7 0.7 1.1 2.0 1.5 1.6 0.5 3.5 3.8 2.9 1.0 1.4 1.6 ——— ——— ——— ——— Dividend yield (%) yield Dividend 0.1 0.5 0.5 0.5 0.8 1.2 1.5 2.2 0.6 0.8 0.8 0.1 1.4 3.1 1.4 1.3 0.6 1.2 1.2 0.8 - 0.3 0.9 0.2 1.1 1.0 2.1 1.9 2.0 0.5 3.0 0.9 1.0 1.3 2.8 0.3 2.6 1.1 0.9 0.4 2.0 1.2 0.7 1.4 0.6 0.9 1.7 1.3 1.3 0.5 3.1 3.5 3.3 0.8 1.1 1.4 0.7 1.2 1.3 2.0 0.5 0.3 0.6 1.2 2.8 1.2 1.0 0.6 1.0 1.0 0.7 - 0.2 0.7 0.2 0.9 0.9 0.9 1.5 1.7 0.5 (8.1) 0.5 (0.6) 0.9 1.0 2.6 0.4 1.0 1.0 0.9 0.4 0.9 0.6 1.3 0.8 0.7 1.2 0.9 2.5 4.2 0.6 1.0 1.4
4.8
4.3 1.0 3.2 2.3 4.5 3.1 5.0 2.4 3.9 2.1 4.7 3.5 1.4 5.0 5.8 2.8 3.0 1.1 1.5 1.6 3.1 1.8 2.1 2.3 1.2 1.0 1.6 2.5 0.7 1.0 1.1 2.9 2.9 2.9 1.4 2.9 0.6 1.9 2.0 1.7 2.4 1.7 1.0 0.9 2.0 1.6 2.0 4.1 3.6 3.7 6.5 0.7 0.7 0.6 3.9
9.0
Price/BV Price/BV (X) 1.3 3.3 3.7 5.2 2.1 2.3 1.1 1.5 1.3 2.1 1.3 1.5 1.1 1.7 5.5 2.5 2.5 2.3 2.1 2.5 2.6 5.9 5.6 6.1 3.0 5.6 4.3 1.6 1.8 4.1 1.0 2.8 2.8 2.9 2.0 3.8 3.9 4.3 2.9 1.0 2.0 4.6 6.9 9.9 8.4 4.0 4.0 0.8 0.9 5.0 1.1 3.7 4.8 2.7 4.0 5.2 12.6 3.4 5.8 2.7 4.7 2.5 5.4 3.9 4.4 1.6 5.8 8.0 7.0 3.3 3.4 1.3 1.6 1.9 3.6 0.8 2.1 0.9 2.5 2.5 1.4 1.1 1.9 2.6 1.1 1.3 1.3 3.3 3.4 3.5 0.9 1.5 3.4 4.8 0.7 2.2 2.2 2.0 2.6 1.9 1.1 1.0 2.3 1.8 2.3 4.2 6.8 3.0 6.3 1.9 3.8
18.9
8.9 4.0 6.9 6.2 7.4 3.7 12.8 9.3 10.3 12.1 12.6 19.7 13.4 9.2 11.0 9.8 8.5 14.2 11.2 14.0 14.3 18.9
EV/EBITDA (X) EV/EBITDA —————— ————————— ——————————————— ————————— ——— ——— —————— ——————————————— ——— ——— ——— ——— ——— ——— —————— ——— ——— ——— ——— 5.6 8.7 6.3 14.4 5.2 11.1 12.6 8.5 15.0 15.2 10.2 12.2 11.8 24.2 14.8 7.4 10.1 16.7 13.0 4.6 17.6 17.0 23.3
16.8 12.2 15.0 10.6 19.3 18.8 11.8 13.7 15.1 29.5 16.1
12.0 19.6 15.1 24.8 20.7 28.4 11.4
5.1 6.5 3.7 4.7 5.4 5.0 7.6 6.1 3.4 5.3 7.4 6.4 8.1 6.8 6.6 21.8 16.3 15.3 12.0 20.6 23.1 14.6 16.3 17.1 27.5 22.1 11.1 21.5 22.1 19.1 8.8 23.7 23.6 31.0 14.6 11.3 17.1 11.4 12.0 20.2 11.3 14.2 13.1 19.4 28.5 8.1 15.6 11.0 16.7 15.6 16.7 21.1 11.9 12.1 9.9 10.0 16.0 11.7 9.9 12.7 83.6
PER (X) PER 8.1 8.1 8.0 9.7 9.7 9.0 4.8 4.8 5.7 4.4 4.4 6.5 (2.5) (2.5) 6.7 22.2 22.2 19.8 23.2 23.2 11.6 23.6 23.6 17.7 33.7 33.7 16.3 17.2 13.5 27.3 23.4 21.3 21.3 29.2 22.4 22.4 14.0 22.3 22.3 19.2 19.0 14.9 14.9 14.6 29.2 29.2 24.8 15.4 15.4 14.0 33.6 33.6 25.1 37.6 37.6 28.8 18.1 20.3 15.9 23.9 18.1 19.9 31.0 31.0 25.5 27.0 27.0 22.7 35.6 35.6 28.6 17.6 17.6 14.8 22.6 22.6 9.4 22.9 19.7 20.3 20.3 15.2 14.5 14.5 36.7 26.1 18.7 18.7 10.3 19.7 19.7 19.2 19.2 18.2 27.6 27.6 24.9 15.9 15.9 14.0 12.9 12.9 11.8 11.8 11.8 11.2 27.8 27.8 20.6 19.2 19.2 14.3 14.2 14.2 12.4 20.4 41.0 26.0 16.9 29.8 41.4 45.6 18.9 19.9 19.6 24.0 10.9 29.6 86.1 (32.7) 17.8 32.6 24.0 14.2 25.7 30.2 37.6
16.2 17.0
19.8 8.6 13.6 84.8 2.5 2.5 8.5 8.5 7.8 7.8 8.9 8.9 8.6 8.6 13.5 21.5 21.7 11.2 27.2 21.1 20.8 15.5 15.3 33.5 25.3 27.1 27.2 21.7 25.7 16.1 15.9 32.8 72.8 30.7 42.1 13.0 19.1
19.0
42.6
34.4
48.5
1.3 1.3 23.7 1.5 1.5 1.5 2.1 2.1 14.4 8.5 8.5 7.0 7.0 33.1 5.0 5.0 16.6 4.7 4.7 12.8 13.7 13.7 21.3 21.3 18.9 33.5 33.5 60.0 60.0 17.2 13.1 13.1 18.3 18.1 18.1 12.4 12.4 30.7 30.7 24.4 12.0 20.1 15.9 25.8 25.8 18.3 19.1 19.1 28.1 15.9 15.9 16.0 37.0 37.0 21.4 21.4 21.4 27.6 27.6 16.3 11.8 16.5 16.1 34.2 34.2 16.7 16.7 17.4 14.3 29.3 16.2 16.2 15.0 21.6 21.6 18.2 10.7 10.7 18.2 26.3 26.3 30.4 34.5 34.5 29.0 34.3 34.3 22.4 14.1 14.1 10.6 10.6 18.9 18.9 24.4 24.4 18.8 18.8 82.4 82.4 10.0 10.0 40.8 40.8 (32.2) (27.0) (16.4) 117.3 142.1 137.6 167.5 100.1 159.0 106.6 289.9
(11.4) EPS growth (%) 1.1 1.1 1.3 34.0 7.2 7.2 7.3 7.3 2.6 2.6 7.8 7.8 7.8 7.8 14.8 9.2 9.2 4.8 4.8 (1.4) (1.4) (2.5) (2.5) (0.5) (0.5) (1.0) (1.0) 31.3 31.3 12.1 12.1 13.3 13.3 12.5 12.5 66.0 66.0 25.1 22.1 22.1 33.7 33.7 23.2 23.2 27.1 27.1 20.6 11.4 11.4 39.5 39.5 50.2 50.2 74.7 74.7 17.8 26.7 14.5 14.5 57.6 57.6 19.2 19.2 14.2 14.2 19.0 19.0 29.6 29.6 10.9 10.9 64.5 19.0 19.0 18.0 18.0 94.7 94.7 606.6 26.0 26.0 16.4 16.4 40.2 40.2 62.8 62.8 (21.3) (21.3) (58.1) (58.1) (22.0) (22.0) (10.7) (10.7) (62.6) (62.6) (46.4) (46.4) 155.1 155.1 131.9 131.9 136.2 136.2 140.2 140.2 186.1 186.1 (414.9)
EPS (Rs) 39.4 27.2 5.7 181.5 98.9 196.3 44.9 216.2 80.0 346.5 919.0 9.7 8.4 16.5 64.5 10.8 55.1 26.3 17.4 180.2 76.9 25.2 13.9 42.6 20.8 34.4 6.9 65.9 5.5 14.4 60.6 10.6 10.3 9.2 23.8 15.0 33.4 50.1 42.6 64.7 93.2 214.9 66.4 8.3 28.9 9.3 55.3 18.5 33.6 7.2 24.9 19.6 162.2 96.3 5.5 7.5 3.1 7.3 5.1 4.2 4.7 8.2 8.9 6.6 7.6 9.1 18.0 4.1 19.0 7.4 28.7 6.4 3.8 8.3 7.0 7.1 9.8 4.8 8.0 6.8 4.9 10.4 (3.9) 19.9 6.2 9.3 7.9 6.9 57.3 32.5 11.4 20.7 16.2 50.7 27.6 34.7 22.0 85.4 36.1 72.0 13.8 41.5 20.7 14.3 66.7 19.3 14.4 29.9 56.8 55.8 14.4 14.6 26.3 43.5 53.1 79.9 56.2 24.4 46.5 14.3 29.8 23.1 22.1 132.5 76.6 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 55.6 10.2 156.3 161.3 198.6 299.0 777.1 148.4 181.8
— 17 27 53 97 19 68 66 77.2 120.4 617.7 48.0 122.2 171 29.4 237 27.6 131 127 37.5 317 21.6 223 67.1 270 101 156 159 284 687 609 O/S shares
21.7
136.1 174.7 64.3 249.0
15.1 11.5
48.7 (27.0) 20.8
20.1
45.3 76.1 149.5
42.2 10.6 28.4
98.7
575 291 209 756 636 854 495 485 406 898 1,337 509 1,723 1,312 1,594 2,515 565 3,231 3,935 2,846 3,623 2,720 850 7,422 1,323 1,128 2,917 475 2,031 817 2,142 1,719 3,170 1,728 2,362 2,955 1,754 5,218 2,640 4,275 1,975 1,871 2,200 9,457 200 1,584 5,824 2,310 2,4651,348 543 598 9,229 421 8,561 1,628 4,126 505 2,4202,002 267 399 1,008 4,590 1,964 1,494 Mkt cap. Mkt 75,315 27,121 (Rs mn) mn) (US$ (mn) 57,047 33,062 87,617 67,299 99,782 89,308 19,466 42,469 90,028 38,409 59,999 50,489 211,733 275,571 115,437 157,750 571,743 262,817 241,931 105,797 795,183 11,907 595 135,634 133,682 124,953 215,788 115,096 631,614 181,645 143,070 164,635 306,534 616,343 108,759 197,344 167,985 161,618 285,474 146,950 803,891 12,037 289 194,786 388,942 348,491 808,569 12,107 569 495,680 688,668 10,312 8,410,412 125,932 5,168,140 77,385 1,543,175 23,107 3,396 3,347,235 50,119 2,528 2,215,928 33,180 1,580 1,794,310 26,867 302 1,656,873 24,809 5,849 1,164,415 17,435 2,383 2,154,441 32,259 7,763 11,556,691 173,043 7.7 1.2 7.3 2.7 2.2 2.3 5.0 4.5 5.9 0.7 3.0 8.2 3.9 3.4 9.8 9.4 6.9 (3.7) (2.0) (4.2) (9.3) (2.8) (1.6) (8.0) 23.5 17.3 13.7 15.7 42.5 12.9 14.1 12.4 20.3 13.9 12.6 15.6 10.7 16.6 18.4 18.4 19.0 16.4 (11.1) (15.1) (12.2) (12.5) (13.7) (13.4) (18.1) (12.0) (18.8) (24.9) (36.6) (14.0)
75 75
65 80 90
175 275 375 135 765 250 105 550 320 170 150 145 185 320 720 165 350 130 595
300 190 670 260
100 500 140 140
650 260 390
160 900
1,275 1,275 1,575 1,250 1,350 1,150 2,025 3,050 3,200 1,360 3,100 1,100 5,000 1,400 6,100 6,400
price Upside 19,000 Target
55 92 93 83 62 68 94
175 353 151 135 112 335 132 214 207 207 625 625 285 285 129 303 303 179 427 427 270 837 837 145 145 343 343 295 295 145 145 951 951 482 410 410 169 487 169 144 144 546 546 605 860
1,311 1,311 2,778 2,778 1,191 3,163 3,163 1,302 1,302 5,578 5,578 1,330 1,330 1,457 1,457 3,593 1,039 1,039 1,428 1,428 1,010 1,010 1,398 1,398 1,895 1,895 4,050 4,050 5,940 25,315 25,315 Price (Rs)Price BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY SELL SELL ADD ADD SELL SELL SELL ADD ADD SELL ADD SELL ADD ADD ADD ADD ADD ADD ADD ADD ADD ADD ADD ADD ADD ADD ADD ADD ADD Rating 14-Feb-17 (Rs) (%) REDUCE REDUCE REDUCE REDUCE REDUCE REDUCE REDUCE REDUCE REDUCE REDUCE REDUCE REDUCE REDUCE REDUCE Neutral Attractive Neutral Company Automobiles Amara Raja Batteries Apollo Tyres Ashok Leyland Bajaj Auto Balkrishna Industries Bharat Bharat Forge Eicher Motors Exide Industries FAG Bearings Hero Motocorp Mahindra & Mahindra Maruti Suzuki Minda Corp. Motherson Sumi Systems SKF Suprajit Engineering Tata Motors Timken TVS Motor WABCO India Automobiles Automobiles ICICI Bank Banks Axis Bank Bank of Baroda Bank of India Federal Bank HDFC Bank IDFC Bank IndusInd Bank J&K Bank Karur Vysya Bank Canara Bank City Union Bank DCB Bank Equitas Holdings Punjab National Bank Ujjivan Financial Services State Bank of India Union Bank Banks Bharat Financial Inclusion Cholamandalam YES Bank NBFCs Bajaj Finserv HDFC IDFC IIFL Holdings L&T Finance Holdings LIC Housing Finance Mahindra & Mahindra Financial Max Financial Services Muthoot Finance PFC Rural Rural Electrification Corp. Shriram City Union Finance Shriram Transport NBFCs Source: Company, Bloomberg, Kotak Institutional Equities estimates Equities Institutional Kotak Bloomberg, Company, Source: Kotak Institutional Equities: Valuation summary of KIE Universe stocksValuation of KIEKotak Universe summary Equities: Institutional
141 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Daily Summary Daily Summary India Target O/S Price (Rs) price Upside Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) Price/BV (X) Dividend yield (%) RoE (%) ADVT-3mo Company Rating 14-Feb-17 (Rs) (%) (Rs mn) (US$ mn) (mn) 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E (US$ mn) KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Cement ACC SELL 1,466 1,290 (12.0) 275,212 4,121 188 34.3 47.1 70.7 (13.3) 37.3 50.0 42.7 31.1 20.7 21.5 16.4 11.6 3.2 3.0 2.7 1.2 1.2 1.2 7.5 9.9 13.8 9.9 Ambuja Cements REDUCE 238 210 (11.7) 472,186 7,070 1,552 5.5 7.9 11.5 (0.4) 41.9 45.7 42.9 30.3 20.8 16.1 11.1 7.9 3.4 3.2 3.0 1.4 1.4 1.4 8.8 10.9 14.9 9.3 Dalmia Bharat ADD 1,933 2,050 6.0 171,886 2,574 89 29.0 84.0 121.6 35.0 189.4 44.8 66.6 23.0 15.9 12.8 9.4 7.5 4.2 3.6 2.9 0.1 0.1 0.1 6.5 16.7 20.2 2.1 Grasim Industries ADD 1,011 1,060 4.8 471,936 7,066 467 73.0 84.2 98.8 32.8 15.4 17.4 13.9 12.0 10.2 7.1 5.5 4.2 1.6 1.4 1.3 0.4 0.4 0.4 12.4 12.7 13.2 14.0 India Cements SELL 157 110 (30.1) 48,350 724 307 6.2 8.8 11.2 35.1 42.5 27.1 NM 17.8 14.0 9.4 8.1 7.0 1.3 1.2 1.1 1.4 1.4 1.4 5.1 7.0 8.4 9.3 J K Cement ADD 841 895 6.4 58,826 881 70 28.7 66.1 87.1 236.0 130.4 31.8 29.3 12.7 9.7 12.6 8.4 6.8 3.3 2.6 2.1 0.5 0.5 0.5 11.7 23.0 24.3 0.9 JK Lakshmi Cement ADD 387 460 18.9 45,532 682 118 6.4 25.8 39.8 224.4 302.3 54.3 60.4 15.0 9.7 16.0 8.1 6.1 3.3 2.7 2.2 0.5 0.5 0.5 5.5 19.8 24.8 1.0 Orient Cement ADD 137 155 13.0 28,098 421 205 (0.8) 10.8 15.1 (126.9) 1,428.0 39.1 (168.0) 12.7 9.1 22.0 8.3 6.7 2.9 2.5 2.0 1.3 1.3 1.3 (1.7) 21.2 24.4 0.6
Shree Cement SELL 15,202 12,750 (16.1) 529,585 7,930 35 389.3 528.1 713.4 237.5 35.7 35.1 39.0 28.8 21.3 19.6 14.4 11.1 7.4 6.0 4.7 0.7 0.2 0.2 20.4 23.0 24.7 4.5 UltraTech Cement SELL 3,706 2,750 (25.8) 1,017,090 15,229 274 96.3 126.3 159.2 21.5 31.2 26.0 38.5 29.3 23.3 21.0 16.3 13.2 4.4 3.9 3.4 0.3 0.3 0.3 12.1 14.1 15.5 21.2 Cement Cautious 3,118,701 46,698 36.4 38.9 30.6 31.6 22.8 17.4 14.4 10.7 8.4 3.3 3.0 2.6 0.6 0.6 0.6 10.5 13.0 14.8 72.9 Consumer products
Asian Paints REDUCE 981 900 (8.2) 940,781 14,087 959 19.8 22.3 26.4 5.8 12.5 18.5 49.5 44.0 37.2 30.7 27.1 22.9 14.4 12.5 10.9 0.9 1.0 1.2 31.3 30.4 31.3 21.7 -
Bajaj Corp. BUY 372 450 21.0 54,848 821 148 16.8 18.8 21.0 5.9 11.8 11.7 22.1 19.8 17.7 18.8 16.2 13.8 10.8 9.9 9.0 3.1 3.5 3.9 50.0 52.0 53.2 0.3 February 15, 2017 Britannia Industries ADD 3,224 3,550 10.1 386,937 5,794 120 75.0 92.5 113.2 7.9 23.2 22.5 43.0 34.9 28.5 29.5 23.7 19.1 16.8 13.0 10.1 0.8 0.9 1.1 44.2 41.9 39.8 8.0 Coffee Day Enterprises ADD 234 255 8.8 48,266 723 206 2.3 6.6 9.8 151.1 188.9 47.9 102.1 35.3 23.9 13.7 11.7 10.3 2.2 2.1 1.9 — — — 2.2 6.0 8.3 0.8 Colgate-Palmolive (India) ADD 882 1,040 17.9 239,837 3,591 272 21.6 26.4 31.8 2.0 21.9 20.5 40.8 33.4 27.8 23.9 19.6 16.4 19.0 15.4 12.7 1.2 1.5 1.8 51.6 51.0 50.1 4.0
Dabur India REDUCE 269 270 0.2 474,466 7,104 1,759 7.2 7.9 9.1 2.0 10.7 14.6 37.7 34.0 29.7 31.8 28.1 24.2 9.9 8.6 7.5 1.0 1.2 1.4 28.1 26.9 26.9 4.3 GlaxoSmithKline Consumer ADD 5,103 5,700 11.7 214,599 3,213 42 146.3 169.1 192.8 (5.3) 15.5 14.0 34.9 30.2 26.5 23.8 20.1 17.0 8.1 7.4 6.8 1.6 1.9 2.2 24.1 25.6 26.9 3.1 Godrej Consumer Products REDUCE 1,602 1,420 (11.3) 545,489 8,168 341 38.1 45.7 52.3 12.0 19.7 14.6 42.0 35.1 30.6 30.2 25.2 21.9 9.4 7.7 6.4 0.4 0.4 0.4 23.8 24.2 22.9 4.8 Hindustan Unilever REDUCE 848 860 1.4 1,835,630 27,486 2,164 19.3 22.0 25.4 0.6 14.3 15.3 44.0 38.5 33.4 30.1 26.1 22.4 29.3 28.9 28.6 2.0 2.1 2.5 66.5 75.5 85.9 13.5 ITC ADD 271 280 3.4 3,282,465 49,150 12,104 8.4 9.5 10.7 8.5 13.1 12.6 32.3 28.6 25.4 21.4 18.8 16.6 9.3 8.7 8.3 2.0 2.3 2.8 27.0 29.7 32.6 41.1 Jubilant Foodworks SELL 988 850 (14.0) 65,183 976 66 13.1 20.8 30.5 (17.9) 59.4 46.3 75.7 47.5 32.5 24.4 17.4 13.2 8.2 7.3 6.4 0.3 0.5 0.9 11.3 16.3 21.1 8.6 Jyothy Laboratories NR 351 — — 63,656 953 181 9.5 10.7 11.1 31.6 12.3 3.9 36.7 32.7 31.5 25.7 22.0 19.2 8.0 7.4 7.0 1.4 1.7 2.0 26.5 23.5 22.8 0.5 Manpasand Beverages REDUCE 687 685 (0.3) 39,310 589 50 13.0 19.7 27.2 28.9 51.6 38.0 52.8 34.8 25.2 24.5 17.9 12.0 3.4 3.1 2.8 0.2 0.3 0.4 8.4 9.3 11.7 1.1 Marico REDUCE 268 260 (3.0) 345,755 5,177 1,290 6.0 6.9 8.0 7.6 15.5 15.1 44.6 38.6 33.5 30.5 26.5 23.1 14.4 12.5 10.9 1.1 1.3 1.5 34.4 34.6 34.8 5.5 Nestle India SELL 6,193 5,550 (10.4) 597,112 8,941 96 105.8 131.7 156.3 14.1 24.5 18.7 58.5 47.0 39.6 32.2 26.7 22.9 19.6 17.9 16.4 1.0 1.4 1.7 34.7 39.7 43.2 4.4
Page Industries REDUCE 14,403 13,000 (9.7) 160,650 2,405 11 250.3 310.6 388.8 20.0 24.1 25.2 57.6 46.4 37.0 36.4 29.7 23.8 24.5 18.6 13.9 0.7 0.7 0.7 48.0 45.6 43.0 2.5 PC Jeweller REDUCE 385 360 (6.4) 68,900 1,032 179 20.4 22.2 26.0 (5.0) 8.9 17.0 18.9 17.3 14.8 9.7 7.8 6.9 2.4 2.1 1.9 1.0 1.2 1.5 14.1 13.5 13.4 4.1 Pidilite Industries ADD 671 730 8.7 344,185 5,154 513 16.7 19.1 22.2 13.2 14.6 16.1 40.3 35.1 30.3 26.3 22.8 19.3 10.3 8.7 7.4 0.7 0.9 1.0 28.0 26.9 26.5 5.3 S H Kelkar and Company SELL 318 250 (21.5) 46,033 689 145 7.8 9.5 10.7 48.1 21.4 13.0 40.8 33.6 29.8 24.3 20.9 18.3 5.5 5.0 4.5 0.7 0.9 1.0 14.1 15.5 15.9 0.8 Tata Global Beverages ADD 141 150 6.2 89,116 1,334 631 6.9 7.9 9.0 39.1 13.5 14.9 20.4 18.0 15.6 10.6 9.5 8.3 1.5 1.4 1.3 1.6 1.8 2.1 7.4 8.0 8.8 3.2 Titan Company REDUCE 428 390 (9.0) 380,283 5,694 888 10.0 12.1 14.0 28.3 20.9 15.5 42.7 35.3 30.6 28.7 23.8 20.2 9.4 8.1 6.9 0.7 0.9 1.1 23.6 24.6 24.4 9.8 United Breweries SELL 781 680 (12.9) 206,395 3,090 264 10.8 14.3 18.3 (4.4) 32.4 27.8 72.3 54.6 42.7 29.4 24.7 20.9 8.8 7.8 6.8 0.2 0.3 0.4 12.8 15.1 17.0 3.0 United Spirits ADD 2,360 2,400 1.7 342,915 5,135 145 30.8 47.4 66.4 154.9 54.1 40.1 76.7 49.8 35.5 33.3 26.4 20.4 14.7 9.7 6.9 — — — 21.7 23.5 22.7 12.5 Consumer products Cautious 10,772,809 161,306 9.2 16.4 16.1 39.8 34.2 29.5 25.7 22.1 19.0 10.9 9.8 8.8 1.4 1.6 1.9 27.5 28.5 29.7 163.2 Energy BPCL SELL 692 640 (7.5) 1,000,821 14,986 1,446 53.1 50.6 55.1 3.2 (4.5) 8.9 13.0 13.7 12.5 9.4 8.5 7.8 3.2 2.8 2.4 2.8 2.2 2.4 26.2 21.7 20.6 26.6 Cairn India ADD 279 280 0.5 522,613 7,825 1,875 12.9 16.5 20.4 12.5 28.5 23.5 21.6 16.8 13.6 10.7 9.0 6.9 1.0 1.0 1.0 1.3 1.6 2.5 4.9 6.0 7.1 8.0 Castrol India ADD 416 470 12.9 205,812 3,082 495 13.5 14.8 16.0 12.0 9.5 8.1 30.9 28.2 26.1 19.8 18.5 17.1 31.7 28.4 24.7 2.4 2.6 2.8 108.9 106.2 101.3 4.5 GAIL (India) ADD 495 515 3.9 628,467 9,410 1,268 29.5 35.2 38.3 64.6 19.4 8.6 16.8 14.1 12.9 10.2 8.8 8.2 1.9 1.7 1.6 2.0 2.1 2.3 11.7 12.9 12.9 17.0 GSPL ADD 167 175 4.6 94,276 1,412 563 8.7 11.0 12.0 9.7 27.3 8.8 19.3 15.2 13.9 9.7 7.8 7.0 2.2 2.0 1.8 1.2 1.6 2.2 11.8 13.7 13.6 1.2 HPCL REDUCE 546 460 (15.8) 554,824 8,308 1,017 48.1 42.9 43.7 26.7 (10.8) 1.8 11.4 12.7 12.5 8.2 8.8 8.9 2.6 2.3 2.1 2.7 2.4 2.4 24.6 19.1 17.3 30.4 Indraprastha Gas SELL 1,024 970 (5.2) 143,304 2,146 140 45.6 51.0 55.9 37.7 11.8 9.5 22.4 20.1 18.3 13.5 12.0 10.9 5.2 4.6 4.1 1.2 1.6 1.9 24.6 24.1 23.5 10.4 IOCL BUY 374 440 17.5 1,818,051 27,222 4,856 41.8 38.7 40.7 114.3 (7.5) 5.2 8.9 9.7 9.2 5.7 5.9 5.6 2.1 1.9 1.7 3.7 3.7 3.9 25.6 20.8 19.6 24.9 Mahanagar Gas SELL 916 775 (15.4) 90,505 1,355 99 39.9 42.5 44.9 27.8 6.5 5.6 22.9 21.5 20.4 13.6 12.7 11.9 5.3 4.8 4.4 2.2 2.3 2.5 24.5 23.6 22.7 - ONGC SELL 196 190 (2.9) 2,511,464 37,605 12,833 16.6 19.0 20.3 22.6 14.6 7.1 11.8 10.3 9.6 5.2 4.5 4.1 1.3 1.2 1.1 3.1 3.3 3.6 11.1 11.9 11.9 24.6
Oil India SELL 337 320 (5.0) 270,070 4,044 802 Daily Summary India 27.6 31.1 33.8 (5.0) 12.5 8.8 12.2 10.9 10.0 6.9 5.9 5.4 1.2 1.1 1.0 3.3 3.7 4.0 9.7 10.3 10.6 4.5 Petronet LNG ADD 385 425 10.5 288,563 4,321 750 21.2 25.5 27.8 88.9 20.3 8.9 18.1 15.1 13.9 11.6 9.4 8.1 3.8 3.3 2.9 1.3 1.8 2.3 22.9 23.4 22.1 10.6 Reliance Industries ADD 1,050 1,160 10.5 3,092,177 46,300 3,240 96.7 100.8 107.7 14.2 4.3 6.8 10.9 10.4 9.7 10.4 8.5 7.6 1.3 1.2 1.1 1.1 1.3 1.5 12.4 11.7 11.3 51.4 Energy Attractive 11,220,947 168,016 30.2 4.5 7.2 11.5 11.0 10.3 7.6 6.8 6.2 1.5 1.4 1.3 2.4 2.5 2.7 13.4 12.8 12.6 214.0
Source: Company, Bloomberg, Kotak Institutional Equities estimates -
February 15, 2017 142
Kotak Institutional Equities: Valuation summary of KIE Universe stocks
Target O/S 143 Price (Rs) price Upside Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) Price/BV (X) Dividend yield (%) RoE (%) ADVT-3mo Company Rating 14-Feb-17 (Rs) (%) (Rs mn) (US$ mn) (mn) 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E (US$ mn)
Industrials ABB SELL 1,194 1,100 (7.8) 252,934 3,787 212 17.8 26.3 36.7 25.5 48.1 39.5 67.2 45.4 32.6 33.1 24.0 19.1 7.7 6.9 6.0 0.3 0.6 0.8 12.0 16.0 19.7 1.3 BHEL SELL 157 120 (23.8) 385,252 5,769 2,448 3.3 5.6 8.4 187.2 71.8 50.8 48.4 28.2 18.7 27.7 13.0 7.2 1.1 1.1 1.1 0.4 0.9 1.4 2.4 4.0 5.8 14.2 Carborundum Universal REDUCE 262 260 (0.8) 49,448 740 188 9.6 12.7 16.0 25.8 32.9 26.0 27.4 20.6 16.3 15.0 11.5 9.3 3.8 3.4 3.0 1.1 1.5 1.8 14.5 17.4 19.4 0.9 Crompton Greaves REDUCE 66 65 (1.9) 41,522 622 627 2.9 3.5 5.1 23.5 21.2 46.8 23.0 19.0 12.9 11.2 8.2 5.4 0.9 0.9 0.9 0.8 0.9 1.5 3.9 4.8 6.8 5.9 Crompton Greaves Consumer ADD 185 195 5.3 116,073 1,738 627 4.5 5.3 6.5 17.4 16.0 24.3 40.9 35.2 28.3 24.9 22.0 18.0 25.2 15.9 10.8 0.5 0.8 1.1 82.5 55.4 45.6 2.8 Cummins India REDUCE 886 915 3.3 245,474 3,676 277 28.6 32.5 36.6 8.1 13.7 12.5 31.0 27.2 24.2 28.2 23.8 20.9 7.0 6.4 5.7 1.7 1.9 2.1 23.8 24.5 24.9 2.8 Havells India REDUCE 428 400 (6.5) 267,219 4,001 624 9.6 11.5 13.2 23.2 19.8 15.1 44.7 37.3 32.4 30.1 24.5 20.8 8.4 7.5 6.8 0.9 1.1 1.4 19.8 21.2 22.0 8.8 Kalpataru Power Transmission BUY 289 300 3.8 44,350 664 153 10.2 13.5 20.2 33.0 32.5 49.9 28.4 21.4 14.3 8.6 7.6 6.2 1.8 1.7 1.5 0.5 0.5 0.5 6.5 8.1 11.2 0.4 KEC International BUY 164 170 3.9 42,047 630 257 9.6 12.7 15.6 29.2 31.5 23.4 17.0 12.9 10.5 7.8 6.9 6.0 2.4 2.1 1.8 0.8 1.0 1.3 15.3 17.5 18.6 0.9 L&T BUY 1,493 1,700 13.9 1,392,114 20,845 930 57.0 77.1 95.3 11.9 35.3 23.6 26.2 19.4 15.7 21.1 17.2 14.5 3.5 3.2 2.9 1.6 2.1 2.6 13.7 17.0 19.2 29.4 Siemens SELL 1,214 940 (22.6) 432,348 6,474 356 24.3 30.2 37.3 42.8 24.2 23.6 50.0 40.3 32.6 30.2 24.5 19.6 6.2 5.9 5.5 1.0 1.2 1.5 12.8 15.0 17.4 4.2 Thermax REDUCE 852 850 (0.3) 101,563 1,521 119 25.8 30.5 36.7 11.5 18.4 20.2 33.1 27.9 23.2 23.2 18.6 16.1 3.9 3.6 3.2 0.6 0.8 0.9 12.4 13.4 14.5 0.8 Voltas ADD 343 325 (5.2) 113,444 1,699 331 11.2 12.7 15.6 7.0 14.0 22.9 30.7 26.9 21.9 25.6 21.1 16.5 4.3 3.9 3.6 1.0 1.3 1.8 14.7 15.3 17.2 7.8 Industrials Cautious 3,483,788 52,164 41.2 32.9 26.5 33.3 25.1 19.8 22.0 17.4 14.2 3.3 3.1 2.8 1.1 1.5 1.9 9.8 12.2 14.2 80.2 Infrastructure Adani Port and SEZ ADD 307 335 9.1 635,782 9,520 2,085 18.0 13.6 14.0 31.0 (24.6) 3.0 17.0 22.6 21.9 15.0 14.3 13.8 3.9 3.4 3.0 0.5 0.7 0.8 25.2 16.0 14.6 15.4 Ashoka Buildcon BUY 189 235 24.3 35,371 530 188 5.9 5.5 5.9 88.8 (5.7) 6.9 32.2 34.1 31.9 10.4 9.0 8.1 1.8 1.8 1.7 1.0 1.3 1.5 5.8 5.3 5.5 0.4 Container Corporation REDUCE 1,277 1,200 (6.0) 248,933 3,727 195 35.1 40.0 47.6 (13.2) 14.2 18.9 36.4 31.9 26.8 23.0 18.8 15.3 2.9 2.8 2.6 0.9 1.0 1.2 8.2 8.9 10.0 5.2 Gateway Distriparks BUY 262 300 14.6 28,460 426 109 9.2 11.4 15.2 (9.2) 24.8 33.4 28.6 22.9 17.2 12.3 9.3 7.0 2.2 2.1 1.9 1.0 1.3 1.7 7.8 9.3 11.5 0.4 Gujarat Pipavav Port BUY 166 165 (0.5) 80,179 1,201 483 5.1 5.8 7.6 49.4 12.9 30.7 32.3 28.6 21.9 18.7 15.4 13.0 4.1 4.1 4.0 2.4 2.7 3.6 12.9 14.4 18.5 0.9 IRB Infrastructure BUY 231 270 17.1 81,027 1,213 351 20.8 25.6 35.3 15.0 23.2 38.1 11.1 9.0 6.5 7.8 7.1 6.2 1.3 1.1 1.1 2.0 2.5 3.4 13.3 13.2 16.7 5.9 Sadbhav Engineering ADD 283 300 6.1 48,512 726 172 10.5 12.7 14.7 33.9 20.8 16.6 27.0 22.4 19.2 16.7 13.3 11.7 3.0 2.7 2.4 — — — 11.6 12.6 13.1 0.4 Infrastructure Attractive 1,158,263 17,343 22.1 (9.8) 14.2 19.9 22.1 19.4 13.6 12.2 10.9 3.0 2.7 2.5 0.8 1.1 1.3 15.3 12.3 13.1 28.6 Internet Info Edge ADD 857 960 12.0 103,797 1,554 121 18.2 19.7 24.5 55.1 8.7 24.3 47.2 43.4 34.9 40.5 29.6 23.0 5.4 5.0 4.5 0.5 0.6 0.7 11.9 11.9 13.6 0.6 Just Dial REDUCE 426 400 (6.1) 29,612 443 69 18.6 16.5 19.5 (9.1) (11.0) 17.9 23.0 25.8 21.9 18.1 14.3 11.2 3.8 3.3 2.9 0.4 0.4 0.5 17.7 13.7 14.3 10.0 Internet Attractive 133,409 1,998 23.0 1.4 22.2 38.3 37.8 30.9 32.8 24.8 19.4 4.9 4.5 4.0 0.5 0.5 0.7 12.9 11.9 13.1 10.6 Media DB Corp. REDUCE 378 380 0.4 69,580 1,042 184 21.2 24.3 29.2 31.3 14.7 19.8 17.8 15.6 13.0 10.0 8.6 7.0 4.6 4.2 3.8 2.9 3.7 4.5 27.4 28.4 30.8 0.5 DishTV BUY 88 105 19.9 93,372 1,398 1,066 1.5 2.4 3.6 (76.9) 62.8 48.8 NM 35.9 24.1 9.5 7.8 6.4 5.6 5.6 5.6 — — 1.1 9.6 15.6 23.2 7.3 Jagran Prakashan REDUCE 188 190 1.1 61,459 920 327 11.3 12.9 15.0 8.8 14.3 16.1 16.6 14.5 12.5 9.7 8.1 7.0 3.6 3.3 3.0 3.2 3.7 3.7 22.4 23.6 24.9 0.6 Ortel Communications BUY 121 185 53.5 3,659 55 30 4.0 5.6 12.5 1.7 40.6 122.6 30.2 21.5 9.7 7.6 6.4 4.9 2.4 2.2 1.8 — — — 8.3 10.6 20.2 0.0 PVR ADD 1,288 1,350 4.8 60,197 901 47 24.8 34.3 45.6 (8.2) 38.4 33.0 52.0 37.6 28.2 18.2 14.7 12.1 6.2 5.4 4.6 0.2 0.3 0.4 12.6 15.4 17.7 3.5
Sun TV Network ADD 733 750 2.3 288,963 4,327 394 26.3 29.8 36.3 12.4 13.2 21.9 27.9 24.6 20.2 18.1 15.7 12.7 7.5 6.8 6.1 2.0 2.3 2.6 28.1 29.1 31.9 26.0 Daily Summary India Zee Entertainment Enterprises BUY 513 540 5.3 492,662 7,377 960 12.5 15.5 18.8 32.9 24.2 21.2 41.1 33.1 27.3 23.2 20.0 16.7 5.2 4.8 4.3 0.5 0.7 0.8 15.3 15.1 16.7 16.2 Media Attractive 1,069,892 16,020 (0.3) 20.9 23.4 32.6 26.9 21.8 16.4 14.0 11.6 5.5 5.1 4.6 1.2 1.4 1.7 17.0 18.9 21.1 54.1 Metals & Mining Coal India REDUCE 320 320 (0.1) 1,987,612 29,761 6,316 18.1 25.5 28.5 (20.0) 40.7 11.7 17.6 12.5 11.2 11.1 8.2 7.4 5.6 5.2 4.8 4.0 5.6 6.2 31.1 43.0 44.3 16.0 Hindalco Industries REDUCE 187 165 (11.9) 386,886 5,793 2,065 11.4 14.0 14.4 321.9 22.7 2.4 16.4 13.4 13.0 7.4 7.1 6.9 1.0 0.9 0.9 0.5 0.5 0.5 6.0 7.0 6.8 34.0 Hindustan Zinc REDUCE 303 290 (4.4) 1,281,962 19,195 4,225 19.7 24.4 25.8 1.6 23.9 5.5 15.4 12.4 11.8 10.3 7.4 6.3 2.9 2.5 2.1 1.5 1.5 1.5 20.6 21.7 19.5 9.6 Jindal Steel and Power SELL 88 60 (31.9) 80,603 1,207 915 (24.8) (10.1) (2.8) (36.4) 59.4 72.3 (3.5) (8.7) (31.5) 13.2 9.2 7.7 0.2 0.2 0.2 — — — (8.5) (2.7) (0.7) 12.7 JSW Steel ADD 182 225 23.7 439,572 6,582 2,417 14.6 19.5 22.1 1,487.5 33.5 13.4 12.4 9.3 8.2 7.0 6.1 5.4 2.0 1.7 1.4 0.5 0.5 0.5 16.2 19.4 18.4 15.4 National Aluminium Co. SELL 68 42 (37.8) 130,473 1,954 2,577 3.1 3.4 3.4 15.5 9.0 0.1 21.6 19.9 19.9 10.0 8.3 7.9 1.2 1.2 1.2 1.5 1.5 1.5 5.2 6.2 5.9 3.1 NMDC SELL 139 105 (24.4) 439,623 6,583 3,965 10.2 9.5 9.4 28.1 (6.8) (1.2) 13.6 14.6 14.8 9.6 9.6 9.6 1.9 1.8 1.8 4.3 4.3 4.3 12.1 12.7 12.2 8.5 Tata Steel ADD 472 515 9.0 458,802 6,870 971 10.3 51.7 60.7 144.1 400.6 17.4 45.7 9 7.8 9.0 6.7 6.1 1.8 1.6 1.3 1.7 1.7 1.7 3.7 18.5 18.6 36.8 Vedanta ADD 254 290 14.4 751,846 11,258 2,965 21.1 30.3 34.3 168.3 43.9 13.2 12.0 8.4 7.4 6.7 5.1 4.3 1.5 1.3 1.1 1.1 1.1 1.1 14.6 16.7 16.4 40.6 Metals & Mining Cautious 5,957,378 89,202 43.2 47.2 11.6 16.6 11.3 10.1 8.7 6.9 6.2 2.0 1.8 1.6 2.4 2.9 3.1 12.1 16.0 16.1 176.7 KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Pharmaceutical Apollo Hospitals REDUCE 1,247 1,325 6.3 173,482 2,598 139 23.9 33.6 43.0 10.4 40.4 28.1 52.1 37.1 29.0 23.8 19.4 16.5 4.7 4.3 3.9 0.5 0.7 0.9 9.3 12.1 14.2 3.4 Aurobindo Pharma ADD 658 770 17.0 385,246 5,768 584 41.8 46.3 51.5 23.3 10.6 11.2 15.7 14.2 12.8 11.2 9.8 8.5 4.1 3.2 2.6 0.3 0.4 0.4 29.5 25.2 22.4 22.5
Biocon SELL 1,075 605 (43.7) 215,080 3,220 200 32.6 25.7 29.2 63.5 (21.2) 13.6 32.9 41.8 36.8 20.5 18.9 15.7 4.4 4.1 3.8 1.1 0.8 1.0 14.2 10.2 10.7 12.1 -
Cipla BUY 576 650 12.8 463,382 6,938 805 19.0 27.2 35.4 13.3 43.2 30.4 30.3 21.2 16.3 17.9 12.9 10.1 3.5 3.1 2.7 0.7 1.0 1.3 12.1 15.6 — 10.2 February 15, 2017 Dr Lal Pathlabs SELL 1,048 1,000 (4.6) 86,730 1,299 83 19.6 23.6 27.8 23.0 20.6 17.9 53.5 44.4 37.6 33.3 26.9 22.6 13.6 10.9 8.8 0.3 0.3 0.4 28.5 27.3 25.8 1.1 Dr Reddy's Laboratories SELL 2,941 2,500 (15.0) 487,278 7,296 171 80.0 121.7 146.6 (42.6) 52.2 20.5 36.8 24.2 20.1 18.9 12.5 9.7 3.9 3.5 3.0 0.4 0.6 0.8 10.5 15.3 16.1 12.3 HCG BUY 243 270 11.3 20,644 309 85 2.3 2.5 4.5 1,502.4 7.8 79.9 103.9 96.4 53.6 23.6 18.6 14.3 3.7 3.6 3.4 — — — 3.6 3.8 6.5 0.4 Lupin REDUCE 1,431 1,600 11.8 646,169 9,675 450 66.6 72.8 84.3 31.9 9.3 15.9 21.5 19.7 17.0 13.6 12.4 10.3 4.7 3.9 3.3 0.7 0.8 0.9 24.4 21.9 21.1 20.2 Sun Pharmaceuticals REDUCE 649 685 5.5 1,557,807 23,326 2,406 30.3 32.3 36.1 35.0 6.5 11.8 21.4 20.1 18.0 12.4 11.2 9.2 4.1 3.5 2.9 0.9 1.0 1.1 20.9 18.6 17.7 42.9 Torrent Pharmaceuticals REDUCE 1,260 1,310 4.0 213,170 3,192 169 57.3 58.7 69.1 (44.0) 2.4 17.8 22.0 21.5 18.2 15.1 13.7 11.9 5.4 4.6 2.1 1.1 1.3 26.6 23.1 21.0 3.2 Pharmaceuticals Cautious 4,248,989 63,622 11.1 13.6 16.1 24.0 21.1 18.2 14.6 12.4 10.2 4.2 3.6 3.1 0.8 0.8 1.0 17.6 17.1 16.9 128.2
Source: Company, Bloomberg, Kotak Institutional Equities estimates
Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Daily Summary Daily Summary India Target O/S Price (Rs) price Upside Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) Price/BV (X) Dividend yield (%) RoE (%) ADVT-3mo Company Rating 14-Feb-17 (Rs) (%) (Rs mn) (US$ mn) (mn) 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E (US$ mn) KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Real Estate DLF BUY 147 160 8.5 263,050 3,939 1,784 3.7 1.6 1.9 18.7 (55.2) 14.2 40.3 90.0 78.8 15.4 16.2 15.9 0.9 0.9 0.9 1.4 1.4 1.4 2.2 1.0 1.1 19.2 Godrej Properties REDUCE 361 280 (22.4) 78,107 1,170 216 9.7 10.5 11.4 (9.3) 8.5 8.3 37.3 34.3 31.7 69.1 57.0 34.5 3.3 3.1 2.9 0.4 0.7 0.7 9.3 9.4 9.5 0.9 Oberoi Realty BUY 339 350 3.1 115,215 1,725 339 10.8 30.9 43.2 (13.7) 185.2 39.9 31.3 11.0 7.9 20.7 6.8 7.1 2.1 1.8 1.5 0.6 0.6 0.6 6.7 17.3 20.2 1.3 Prestige Estates Projects BUY 170 225 32.1 63,863 956 375 7.0 8.4 8.9 (24.8) 18.7 6.3 24.2 20.4 19.2 12.2 11.7 11.3 1.5 1.4 1.3 0.9 0.9 0.9 6.2 7.0 7.1 0.7 Sobha BUY 285 395 38.6 27,452 411 98 16.1 17.0 17.9 2.9 6.0 4.8 17.7 16.7 16.0 11.8 11.3 11.0 1.0 1.0 1.0 2.5 2.5 2.5 6.0 6.1 6.2 0.3 Sunteck Realty BUY 252 360 42.6 15,896 238 60 55.8 57.8 113.7 105.4 3.7 96.6 4.5 4.4 2.2 5.5 3.9 1.7 0.8 0.7 0.8 0.8 0.8 18.6 16.3 26.0 0.4 Real Estate Attractive 563,582 8,439 5.8 20.7 35.2 28.4 23.6 17.4 15.6 13.2 12.0 1.2 1.2 1.1 1.1 1.1 1.1 4.3 5.0 6.4 22.8 Technology HCL Technologies REDUCE 832 840 1.0 1,174,117 17,581 1,413 57.5 61.4 64.6 46.4 6.8 5.3 14.5 13.6 12.9 10.2 9.2 8.4 3.7 3.3 3.0 3.0 3.5 4.0 27.3 25.4 24.0 20.0
Infosys ADD 988 1,140 15.4 2,268,692 33,970 2,286 63.0 67.9 74.0 6.7 7.8 9.0 15.7 14.5 13.3 10.1 9.0 7.9 3.5 3.1 2.8 2.7 3.0 3.5 23.5 22.7 22.3 66.4 Mindtree REDUCE 455 490 7.7 76,453 1,145 168 26.0 32.5 39.3 (27.4) 24.8 20.8 17.5 14.0 11.6 9.8 7.8 6.3 2.8 2.5 2.2 1.5 1.9 2.3 17.2 19.0 20.1 4.3 Mphasis SELL 580 450 (22.3) 121,923 1,826 210 39.5 40.8 41.1 14.8 3.3 0.6 14.7 14.2 14.1 9.5 9.8 9.5 1.8 1.9 1.8 3.5 3.5 3.5 12.9 12.6 13.1 1.2 TCS REDUCE 2,406 2,415 0.4 4,741,342 70,994 1,970 134.7 143.2 156.4 9.6 6.3 9.2 17.9 16.8 15.4 13.1 11.7 10.4 5.5 4.7 4.0 2.2 2.4 2.6 33.1 29.9 28.1 47.7 Tech Mahindra BUY 505 510 1.1 491,038 7,353 872 34.0 38.2 43.4 (4.8) 12.2 13.7 14.8 13.2 11.6 10.4 8.5 7.1 2.7 2.3 2.0 2.4 1.2 1.4 19.5 19.1 18.6 18.0 -
Wipro REDUCE 477 500 4.9 1,158,797 17,351 2,467 34.5 37.8 40.8 (4.2) 9.4 8.0 13.8 12.6 11.7 8.4 7.4 6.2 2.3 2.0 1.8 1.0 1.0 1.0 17.2 16.9 16.3 8.8 February February 15, 2017 Technology Neutral 10,095,321 151,161 9.2 7.2 8.7 16.2 15.1 13.9 11.1 9.9 8.7 3.9 3.4 3.0 2.3 2.5 2.7 23.7 22.5 21.6 169.9 Telecom Bharti Airtel BUY 369 375 1.6 1,474,841 22,083 3,997 8.1 3.9 9.5 (17.0) (51.3) 141.8 45.5 93.5 38.7 7.3 7.8 6.6 2.2 2.2 2.1 0.6 0.3 1.0 4.8 2.3 5.6 17.1 Bharti Infratel REDUCE 319 335 5.1 589,563 8,828 1,897 14.5 15.8 17.5 15.3 8.9 10.7 22.0 20.2 18.3 9.7 8.9 8.3 3.5 3.4 3.3 3.3 3.5 3.9 15.3 17.3 18.5 12.7
IDEA RS 110 - - 395,785 5,926 3,601 (2.4) (10.2) (8.0) (127.5) (335.1) 22.2 (46.7) (10.7) (13.8) 9.1 12.1 9.7 1.7 2.1 2.4 - - - (3.5) (17.7) (16.3) 28.0 Tata Communications ADD 743 670 (9.9) 211,855 3,172 285 23.1 22.7 28.6 1,306.8 (1.9) 26.5 32.2 32.8 25.9 9.3 8.3 7.6 865.2 31.5 14.2 0.9 0.9 0.9 (334.2) 185.4 75.5 9.2 Telecom Cautious 2,672,043 40,010 (39.1) (74.6) 243.2 46.6 183.7 53.5 8.0 8.6 7.4 2.5 2.5 2.6 1.1 0.9 1.4 5.3 1.4 4.8 67.0 Utilities Adani Power SELL 36 24 (33.4) 126,207 1,890 3,334 (2.0) 4.2 4.2 (233.7) 315.3 (0.2) (18.4) 8.5 8.6 8.8 6.3 6.0 1.8 1.5 1.3 — — — (9.3) 18.9 15.9 5.7 CESC SELL 857 785 (8.4) 113,595 1,701 133 53.7 75.6 96.8 92.1 40.8 28.2 16.0 11.3 8.8 8.2 7.5 6.6 1.2 1.1 1.0 1.2 1.3 1.4 7.8 10.3 12.1 5.9 JSW Energy ADD 62 70 13.8 100,863 1,510 1,640 5.0 6.5 6.8 (33.6) 28.4 5.3 12.2 9.5 9.0 6.5 5.7 5.2 1.1 1.0 1.0 3.3 3.3 3.3 9.4 11.4 11.2 3.8 NHPC ADD 31 32 4.6 338,762 5,072 11,071 2.9 3.4 3.6 21.6 17.6 6.7 10.6 9.0 8.5 9.7 7.3 6.4 1.0 1.0 1.0 5.3 6.2 6.6 10.0 11.3 11.6 4.3 NTPC BUY 171 185 8.3 1,408,738 21,094 8,245 12.1 15.3 16.5 5.4 26.0 8.2 14.1 11.2 10.3 11.7 9.7 8.1 1.5 1.4 1.3 2.2 2.7 2.9 10.9 12.7 12.6 12.5 Power Grid BUY 201 230 14.5 1,050,765 15,734 5,232 14.3 15.7 17.7 25.9 9.2 13.2 14.0 12.8 11.3 9.7 8.5 7.4 2.2 1.9 1.7 1.4 1.6 1.8 16.5 15.9 15.9 16.3
Reliance Power SELL 44 37 (16.2) 123,846 1,854 2,805 4.2 4.5 5.1 (13.8) 7.7 13.8 10.5 9.8 8.6 8.7 7.9 7.6 0.6 0.5 0.5 — — — 5.5 5.6 6.0 1.8 Tata Power ADD 84 87 4.2 225,849 3,382 2,800 6.8 7.3 9.9 24.5 6.5 35.9 12.2 11.5 8.4 10.5 8.8 8.4 1.5 1.3 1.2 1.4 1.4 1.4 12.3 12.1 14.7 5.4 Utilities Attractive 3,488,625 52,237 6.9 27.0 11.5 14.1 11.1 10.0 10.0 8.4 7.4 1.5 1.3 1.2 2.0 2.4 2.6 10.3 12.0 12.3 55.8 Others Astral Poly Technik SELL 450 360 (20.0) 53,895 807 120 10.2 13.0 16.1 21.0 28.2 23.2 44.3 34.5 28.0 22.7 18.2 14.9 6.4 5.5 4.6 0.1 0.1 0.2 15.0 17.1 17.9 0.4 Cera Sanitaryware REDUCE 2,572 2,140 (16.8) 33,452 501 13 74.2 89.0 104.4 15.6 20.0 17.3 34.7 28.9 24.6 20.6 17.2 14.7 6.5 5.4 4.5 0.3 0.4 0.4 20.7 20.5 19.8 0.2 Dhanuka Agritech BUY 767 860 12.1 38,370 575 50 26.1 30.8 37.8 24.8 18.1 22.7 29.4 24.9 20.3 20.9 17.2 13.8 6.6 5.5 4.5 1.0 1.1 1.4 24.5 23.9 24.3 0.3 Godrej Industries REDUCE 517 390 (24.6) 173,767 2,602 336 17.6 20.6 21.7 22.4 17.0 5.0 29.3 25.0 23.8 21.9 19.6 19.7 4.3 3.8 3.3 0.3 0.3 0.3 15.8 16.1 14.7 2.8 HSIL ADD 288 325 12.7 20,839 312 72 16.1 19.1 22.0 30.5 18.9 15.2 17.9 15.1 13.1 8.1 6.8 6.1 1.4 1.3 1.2 1.4 1.4 1.4 8.2 9.1 9.8 0.4 InterGlobe Aviation ADD 819 1,060 29.5 295,916 4,431 351 46.6 66.8 85.2 (17.9) 43.4 27.5 17.6 12.3 9.6 13.0 8.2 6.3 12.4 8.8 6.4 2.8 4.1 5.2 82.5 84.0 77.2 2.7 Kaveri Seed BUY 463 540 16.5 32,000 479 69 25.9 35.8 43.8 3.1 38.5 22.2 17.9 12.9 10.6 14.8 10.0 7.8 3.1 2.7 2.4 1.7 2.3 3.3 18.5 22.5 23.8 4.7 PI Industries ADD 901 940 4.3 123,959 1,856 136 31.4 36.1 42.2 35.8 14.9 17.0 28.7 25.0 21.3 22.5 18.6 15.5 8.0 6.3 5.1 0.5 0.5 0.6 31.7 28.3 26.3 2.9 Rallis India ADD 240 250 4.2 46,663 699 194 9.7 12.2 15.3 32.3 25.9 24.7 24.7 19.6 15.7 16.4 12.8 10.1 4.1 3.6 3.1 1.3 1.4 1.5 18.6 19.6 21.2 0.9 SRF BUY 1,584 1,910 20.6 90,945 1,362 57 84.2 95.7 113.1 14.4 13.6 18.2 18.8 16.6 14.0 11.3 9.8 8.5 3.0 2.6 2.2 0.7 0.8 0.8 16.8 16.6 17.0 6.2 Tata Chemicals ADD 564 600 6.3 143,784 2,153 255 32.0 45.1 50.6 4.6 40.8 12.2 17.6 12.5 11.2 9.1 7.2 6.3 2.1 1.6 1.5 1.8 1.8 1.8 12.5 14.7 13.9 5.2 TeamLease Services ADD 865 1,200 38.8 14,785 221 16 21.9 25.9 34.8 37.6 18.3 34.5 39.5 33.4 24.8 29.2 18.9 13.8 4.2 3.8 3.3 — — — 11.3 11.9 14.1 0.2 UPL ADD 716 800 11.8 362,901 5,434 429 34.1 43.7 51.8 7.3 28.1 18.6 21.0 16.4 13.8 12.0 10.1 8.6 3.8 3.1 2.6 0.6 0.7 0.8 21.2 21.0 20.4 15.2 Whirlpool REDUCE 984 1,000 1.7 124,785 1,868 127 25.2 30.9 38.0 28.8 22.6 22.8 39.0 31.8 25.9 23.2 19.2 15.8 8.4 7.0 5.8 — 0.6 0.8 24.2 24.0 24.5 1.0 Others 1,584,480 23,725 9.8 28.1 18.8 21.4 16.7 14.1 13.2 10.7 9.0 4.2 3.5 3.0 1.1 1.5 1.7 19.8 20.8 21.0 43.6 KIE universe 84,757,762 1,269,112 20.7 20.5 16.2 19.6 16.3 14.0 11.2 9.6 8.4 2.6 2.3 2.1 1.5 1.7 2.0 13.1 14.4 15.0 KIE universe (ex-energy) 73,536,815 1,101,096 18.2 25.2 18.4 22.0 17.6 14.8 12.4 10.5 9.0 2.9 2.6 2.3 1.4 1.6 1.8 13.1 14.8 15.6 India Daily Summary Daily Summary India Notes: (a) We have used adjusted book values for banking companies. (b) 2017 means calendar year 2016, similarly for 2018 and 2019 for these particular companies. (c) Exchange rate (Rs/US$)= 66.79 Source: Company, Bloomberg, Kotak Institutional Equities estimates -
February 15, 2017 144
India Daily Summary - February 15, 2017
a sufficient India able regulation(s) of of the following Asof December 2016 31, KOTAK INSTITUTIONAL EQUITIES RESEARCH in an advisory capacity in a merger or strategic transaction
vestment and rating price target,if any, no longer are in effect for this stock Percentageof companies covered by Kotak Equities,Institutional within the specified category. Percentageof companies within each category whichfor Kotak Institutional Equities and or its affiliates has provided investment banking services within the previousmonths. 12 The * above categories are defined as follows:expect this = Buy We stock to deliver more than 15% returns theover next months; 12 Add = expectWe this stock to deliver5-15% returns over the next months; 12 Reduce =expectWe this stock to deliver -5-+5% returns over the next months; 12 =Sell expectWe this stock to deliver lessthan -5% returns over the next months. 12 targetOur prices are also on a 12-month horizon Thesebasis. ratings are used illustratively to comply with applicableregulations. As of 31/12/2016 Kotak InstitutionalEquities Investment Research had investmentratings on 190 equity securities.
SELL 2.1%
16.8%
his company. basis. +5% returns over the next 12 months. 2.1% 26.3%
- REDUCE 5 - is not meaningful and is therefore excluded. 15% returns over the next 12 months. 5% returns over the next months.12 The information is not available for display is not or applicable. - -
month horizon -
ADD 36.8% 4.2% Kotak SecuritiesKotak has suspended coverage of this company. to to deliver 5
Kotak SecuritiesKotak Research has suspended the investment and rating price target, if any,for this stock,because there is not
The information
Kotak SecuritiesKotak does not cover t
The investment and rating target price, any, if have been suspended temporarily. Such suspension is in compliance with applic
The coverage view represents each analyst’s fundamental overall outlook on the Sector.The coverage viewwill consist of one
Attractive, Neutral, Cautious. BUY 1.1% 20.0% We expect this stock to deliver We expect this stock We expect this to stock deliver < We expect this to stock deliver more than 15% returns over the next months.12
= Rated.Not 0% 20% 10% 60% 50% 40% 30% 70% Source:Kotak Institutional Equities Kotak Institutional Equities Research Equities KotakInstitutional coverage universe Distributionof ratings/investment banking relationships and shouldnot be relied upon. = NA AvailableNot or Applicable.Not = NM Meaningful.Not and/or and/or Kotak Securities policies in circumstances when Securities Kotak or its affiliates is acting involving this company and in certain other circumstances. CS = Coverage Suspended. = NC Covered.Not = RatingRS Suspended. fundamental basis for determining an investment rating or target. The previous in Other definitions Other Coverage view. designations: ratings/identifiers Other NR ADD. REDUCE. SELL. Our target prices are also on a 12 Ratings other and definitions/identifiers ratings of Definitions BUY.
145 Economy
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