INDIA DAILY
February 14, 2017 India 13-Feb 1-day 1-mo 3-mo Sensex 28,352 0.1 4.1 5.7 Nifty 8,805 0.1 4.8 6.1 Contents Global/Regional indices Dow Jones 20,412 0.7 2.6 8.2 Special Reports Nasdaq Composite 5,764 0.5 3.4 10.5 Strategy FTSE 7,279 0.3 (0.8) 7.8 Nikkei 19,452 (0.0) 0.9 10.0 Strategy: Day 1 takeaways from Chasing Growth 2017 Hang Seng 23,711 0.6 3.4 6.7 Daily Alerts KOSPI 2,076 (0.1) (0.0) 5.1 Value traded – India Results Cash (NSE+BSE) 232 260 119
Motherson Sumi Systems: SMRPBV growth still below par but standalone Derivatives (NSE) 3,613 2,813 4,776 showing strong growth Deri. open interest 3,170 2,806 2,814
NMDC: Weak due to one-offs
Forex/money market IDEA: Weak earnings print on expected lines Change, basis points
Hindalco Industries: In-line quarter; demonetization impacts marginally 13-Feb 1-day 1-mo 3-mo
Rs/US$ 66.9 (5) (118) (95) Tata Power: Underlying strength, distorted by one-offs 10yr govt bond, % 7.3 3 49 26
Muthoot Finance: Strong performance in a challenging environment Net investment (US$ mn)
10-Feb MTD CYTD National Aluminium Co.: Alumina prices aid improvement (1,170 FIIs 83 2,903 ) Balkrishna Industries: Robust quarter MFs (2) 881 6,951
Top movers SRF: Waiting for turnaround Change, %
Prestige Estates Projects: Demonetization leads to sales collapse; but Best performers 13-Feb 1-day 1-mo 3-mo
collections from past sales sustain IDEA IN Equity 107.3 (2.9) 55.9 53.3
Jagran Prakashan: Steady quarter JPA IN Equity 13.2 (1.9) 33.5 50.3 HPCL IN Equity 578.3 1.2 18.3 28.9
Company alerts TTAN IN Equity 428.4 (0.8) 19.5 27.9
DLFU IN Equity 147.8 (0.1) 19.1 26.9 Infosys: Takeaways from CEO's address at Kotak conference: Expect stable growth Worst performers DIVI IN Equity 740.4 (1.3) (0.8) (39.4)
Economy alerts RCOM IN Equity 33.6 (3.0) 7.0 (19.7)
Economy: Core inflation inches higher CRG IN Equity 66.8 (6.2) 3.8 (15.1) ARBP IN Equity 662.0 (2.6) (6.0) (14.3)
UBBL IN Equity 785.1 (0.8) (5.1) (10.0)
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 14, 2017 NEW RELEASE BSE-30: 28,352
Day 1 takeaways from Chasing Growth 2017. Mr Uday Kotak set the tone for KIE's 2017 edition of the Chasing Growth annual global investor conference with a chose look at growth in financial services. Keynote addresses for the 3-day conference were led by Vishal Sikka, Ireena Vittal, Rohit Kumar Singh, Prukalpa Sankar, Adi Godrej, Sanjiv Bajaj and an intrepid band of young women from the Dharavi Diary project.
Day 1 – February 13 companies at KIE’s Chasing Growth conference
1. Aurobindo Pharmaceuticals 19. IndusInd Bank
2. Axis Bank 20. Infosys
3. Bajaj Corp 21. JSW Steel
4. Bajaj Finserv 22. Jyothy Labs
5. Bharat Forge 23. L&T Finance Holdings
6. Blue Dart Express 24. L&T Infotech
7. CARE 25. Mindtree
8. City Union Bank 26. Pidilite Industries
9. Dish TV 27. PVR
10. Dr. Lal PathLabs 28. Raymond
11. Dr. Reddy's Laboratories 29. RBL Bank
12. Emami 30. Reliance Industries
13. Godrej Consumer Products 31. Shriram Transport Finance Company
14. Gujarat Pipavav 32. Skipper
15. Gulf Oil Lubricants India 33. Tata Steel
16. HSIL 34. Tech Mahindra
Sanjeev Prasad 17. ICICI Prudential Life Insurance 35. Ujjivan Financial Services
18. IDFC Bank 36. Zee Entertainment Enterprises
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
UDAY KOTAK: THE FUTURE OF FINANCIAL SERVICES IN INDIA
Executive Vice Key takeaways Chairman & Right financial services business model. The best business model in financial services is Managing Director, ‘Concentrated India Diversified Financial Business Strategy’. Focused NBFC plays can work Kotak Mahindra Bank but need adequate risk management. However, they have to ask the tough question— what happens if the concentration goes against them? Systemic risk can sound the death-knell for such players if they are inept at managing them. One of the most important trends in this regard is that the risk comes either because of the concentration itself or because of a structural shift in government policies.
How the financial service industry can be affected by technology. The impact will be felt in three areas.
. Transactions. At present, there is significant profitability in transaction services. This is one area where the threat of digital transformation can eat into the bottom-line of incumbents. Transaction services are most likely to get commoditized. The same phenomenon has already been seen in the brokerage industry. Similarly, the core area of execution in transaction is going to be commoditized. One comparable example can be seen in the telecom industry, which is an eye-opener on what people can get when they focus on driving huge volumes at the cost of value-addition services, whereby profitability of the entire eco-system faces a shock. There has been a huge growth in volume of transactions post demonetization. This growth has not come at a profitable way and margins are going to get lower.
. Risk. The key concept of credit had originated with taking money from the saver and giving it to the borrower. The intermediary made the spread by understanding the underlying risk. Mr Kotak is more optimistic about the future of financial services industry in this regard. He has seen countless examples of models going wrong and leveraged institutions face a huge threat to their survival when things go wrong. ‘Core of risk’ as the bedrock of financial services will sustain over a long period of time. His personal experience from the past 25-30 years is that all players made mistakes.
. Knowledge and skill. There is a role for financial services here. Discretionary, asset management, retail, wealth management, etc. are areas where the value addition happens through knowledge. Knowledge- and skill-led financial services will be able to maintain their dominance even under threat from digital.
Massive shift into formal financial savings (one impact of demonetization). For the past few years there has been a change in the savings pattern of Indian savers. Households had been shifting their savings from physical to financial. This has seen an impetus from the government move of demonetization. As households move money from real estate and gold, it is entering into the formal financial savings. This trend is very sustainable over the next 5-10 years and is going to be a mega-trend.
Within the industry, the sector that has benefitted the most is the mutual fund industry. It has been the fastest-growing part of financial services. If it manages its risk well, it is in a mature game. However, the industry will need to be very careful. There is a propensity to chase return at the cost of higher risk to beat one’s peers. As more and more retail money comes, the responsibility of the manager gets bigger. A growth rate of 30% CAGR (almost 3X the nominal GDP growth) is sustainable in India. However, every player has to be mature and responsible in not chasing marginal return at higher risk and put the savings of Indian households into jeopardy.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 3 India Strategy
Banking. Banking will continue to see increasing competition, primarily on transaction but less on risk and knowledge. The industry is at a crossroads given the uncertainty around 70% of the market with public banks who are suffering from stress in their assets. The needle has not moved enough despite efforts from successive governments.
There has been a plethora of restructuring mechanisms employed but all these different debt-restructuring schemes are unable to change the fact that money is not coming back from borrowers from those accounts. Recognition has got better in the past year and half but resolution has not yet seen satisfactory progress. Mr Kotak is of the view that the government is quite focused to find a solution to this problem and is discussing with all stakeholders to bring about a successful resolution to this problem.
Post demonetization there is a need to be careful about areas where insipient risk can come, especially from informal based sectors such as SME. A very large part of the industry has challenges and opportunities. With the banking industry poised to grow at 1.5-2X of the nominal GDP growth and some incumbents failing to make use of that growth opportunity, the growth opportunity becomes bigger for the rest of the competition. However, they have to be cautious about potential systemic risk while chasing the incremental growth opportunity.
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VISHAL SIKKA: INFOSYS AND THE FUTURE OF IT SERVICES
CEO, Infosys Key takeaways
Strategy for Infosys. Dr Sikka first articulated a three-pronged strategy in 3QCY14—(1) ‘renew’ the core of the company, (2) innovate into ‘new’ businesses and (3) reinvigorate the ‘culture’ of the firm. As a result of the efforts, INFO’s revenue growth has now caught up with average industry levels after trailing the industry numbers. In fact, for 9MFY17, INFO’s revenue growth at 8.3% has exceeded the industry’s growth. Other operating metrics have also shown significant improvement over the past three years and are now ahead of industry’s average parameters.
The core IT business has grown 9.2% in 9MFY17 versus the industry’s 5.9%. The products, platforms & others segment has growth at 17% versus 14.5% of the industry. However, the consulting business still trails the industry growth, pulled down by weak performance in 1QFY17.
The company has invested in talent over this period strengthening the top management over the past three years and also, empowered the middle and senior management of the company.
As part of the ‘renew’ strategy, the company has achieved >95% adoption for ‘zero distance’ initiative. The other strategy was ‘zero bench’ and that has achieved >95% coverage. These initiatives have resulted in client satisfaction at the highest level in 12 years.
As part of the ‘new’ strategy, the company has achieved good momentum in its acquisitions such as Panaya, Skava and Noah. Mana has seen tremendous progress for breakthrough business solutions. Skava has entered into new sectors such as financial services and telecom outside of its core retailing area.
As part of the ‘culture; strategy, the company’s focus is on (1) simplification for greater agility and (2) education of its professionals; ‘learnability’ will be a critical issue in the future. 130,000 Infoscions have been trained on design thinking.
The future—both challenging and interesting. The big trends are (1) end-user centricity and connectedness with new experiences powers by AI & digital, (2) intelligent infrastructure and Moore’s Laws and (3) the extreme efficiency of disintermediation. Dr Sikka gave some interesting examples of how Infosys is working with its customers on the user centricity and connectedness dimensions. He also highlighted how technological changes are accelerating in many areas such as AI, data centers, neuromorphic boards and how Infosys is working with its partners in each of these areas. As a result of the technological trends, the value chains are becoming more efficient and shorter, which will result in different forms of disintermediation.
Dr Sikka was quite emphatic on automation becoming more ingrained in IT services in the future. The reason for automation is to reduce workforce in ‘commoditized’ areas and release human potential for more innovative areas. The transformation has to be enabled through education and software.
The future is about finding a problem rather than finding a solution. A well-articulated problem will have its solution through automation!
KOTAK INSTITUTIONAL EQUITIES RESEARCH 5 India Strategy
Q&A. Dr Sikka addressed a question about his relationship with founders by saying that he has a very good relationship with Mr Murthy, whom he meets quite frequently (4-6 times a year) and discusses all sorts of technology-related issues with him. Dr Sikka believes that the 2020 vision is an aspiration (US$20 bn of revenues, 30% operating margin and US$80,000 productivity) and is quite happy with the progress achieved on ‘renew’ and ‘new’. To a question on employee morale from the issues in the media and threat of automation, Dr Sikka replied that communication is a very important tool. Also, continuity is also very important to achieve this transformation.
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IREENA VITTAL: CONSUMERS AND CONSUMPTION IN 21ST CENTURY INDIA
Consultant and Key takeaways Strategic Advisor Structure of consumption. India had 204 mn households in 2005 and the top-two segments of 11 mn contributed to the bulk of consumption. The ‘consumers’ segment (₹240,000-840,000) had 10 mn households in 2005, which stood at 28 mn by 2015 and 53 mn by 2020. The middle segment of 56 mn households (₹90,000-240,000) or ‘aspirers’ is the real segment for consumption. By 2015, the number of aspirers segment stood at 152 mn and will rise to 170 mn by 2020. The bottom segment of 136 mn households (<₹90,000 income) or ‘strugglers’ will not contribute for some time.
Mixed signals on consumption currently. Four factors drove consumption from 1992—(1) progressive and aligned political environment, (2) high focus on infrastructure growth, (3) continued participation by the private sector and (4) rising income driving consumption.
Citizens are happy with (1) ambitious economic agenda of the government, (2) no scams and scandals, (3) rule-based macroeconomic policy and (4) success in tackling issues. States are also focused on development/growth agenda. State development expenditure is higher by 25% compared to the central government. However, there is (1) growing deficit in Delhi in terms of working relationship with opposition parties, (2) execution is weaker than headline agenda and (3) there is some focus on populism.
The key challenges are the second and third points. The government has constraints on fiscal capacity to be able to spend aggressively on infrastructure and the private sector is still not able to spend. ICOR is still above 5 due to continued delays in project status. Capacity utilization is quite low at 72%. Also, there is growing deficit between the private sector and the government.
The above-mentioned factors have contributed to slowing consumption. Rural and urban wages are growing at lower rates due to lower inflation and NREGA spends have dropped over the past few years (except in FY2016-17). Finally, construction sector is struggling. However, the interesting thing is that premium segments are doing better. The 33 mn consuming households in the top-two segments (which will grow to 61 mn households by 2020) are consuming more premium products.
Consumption story of the next few years. It could play out in three ways—(1) business-as-usual and volatile scenario, which is based on 6.5-7% GDP growth and stable Gini Coefficient but with significant volatility in growth due to price/climate change issues, (2) business-as-usual scenario with 6.5-7% GDP growth and stable Gini Coefficient and (3) next S curve of jobs that is based on investment cycle being activated, reforms in city government, state capacity, agriculture and land.
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ROHIT KUMAR SINGH: ROADMAP FOR TRANS-INDIA GROWTH
Member, Finance, Key takeaways NHAI Key achievements of NHAI. India is #1 in PPP operational maturity as per ADB Infrascope 2014 report and over 700 PPP projects have been completed with an investment of US$36 bn. India has the second-largest road network with 5.23 mn kms and national highways of 100,000 kms. National highways carry 40% of freight.
In FY2016, the government awarded 10,098 kms and constructed 6,029 kms versus 7,980 kms and 4,340 kms in FY2015 and 3,169 kms and 4,225 kms in FY2014. The targets are stiffer for FY2018.
There are various modes of implementation of projects—(1) hybrid annuity model with 40% of project cost being provided by the government and 60% of the project cost being arranged by concessionaire for financial closure during the construction period; annuity payments are done biannually for 15 years and (2) asset recycling; there are 75+ operational highway projects of the government that can be leased to the private sector for an upfront payment.
Growth drives. Road freight will grow at 15% CAGR over the next 10 years. India will become a 4 mn passenger car market by 2020. The government has implemented several reforms to revive the PPP model in the country, including (1) enhanced delegation, (2) exit policy, (3) one-time fund infusion to revive stuck projects, (4) formation of Minsters’ Group on Infrastructure for improved inter-ministerial cooperation and (5) fast-track dispute resolution. Lastly, the government has focused on technology to achieve faster implementation of projects.
Strategy for the future. The key focus areas—(1) remove debottlenecks impacting throughput; there are 18 towns that act as bottlenecks on the North-South and East- West corridors, (2) augment freight corridors, (3) enable optimized transport and (4) monetize existing infrastructure to fund maintenance.
The key new initiatives are (1) Bharat Mala, which is a 44,000 km, US$106 bn project, (2) Setu Bharatam with 350 ROBs and US$8 bn investment, (3) 35 logistic parks and (4) economic corridors with US$22 bn investment and 25,000 kms. The overall opportunity size is US$150 bn over the next five years.
The total financing for the next three years is ₹5.35 tn with ₹2.1 tn from market borrowings, ₹1.7 tn coming from budgetary support, ₹800 bn from tolls and ₹600 bn from private sector participation. Toll revenues are growing at 20-25% every year.
Mr Singh emphasized that (1) there is significant focus on building institutional and state capacity, (2) there are frequent reviews by the PMO on a regular basis (monthly in the case of Ministry of Road Transport) and (3) there are surprise reviews on the progress of various projects by the government coordinating agencies. All these factors have contributed to greater efficiency in various government agencies and departments.
There is also increased focus on safety so that structures are built to facilitate movement of goods and people across villages that may be cut by a road. Also, 800 ‘blind’ spots have been identified for various highways that the government is working on to improve highway safety.
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PRUKALPA SANKAR: DATA, DEVELOPING WORLD AND DEVELOPMENT
Founder, Socialcops Key takeaways
Data collection is still on paper and unusable formats. A lot of government data is on formats that simply cannot be used digitally. There is a lot of problem with datasets in India—they are in different formats, large overlaps, wrong in cases and simply not usable for any real purpose.
Socialcops works with government to put together data in a more intelligent manner. The key focus is on data intelligence. As an example, Socialcops worked with the Ministry of Petroleum and Natural Gas to identify the areas where 10,000 new distribution centers needed to be opened. The company did the mapping of all the villages in India and also the mapping of the 17,000 LPG distribution centers in India. The company then used an algorithm to identify the best and the most-optimal locations of the new centers. Also, data is collected on delivery and tracked by the Union Minister for Petroleum and Natural Gas.
Use of data by government. Ms Sankar gave several examples of how governments at central and state levels are using real-time data to identify problems and provide solutions. The firm has seen very encouraging uptake by government departments to use ‘big data’ to solve social problems.
Socialcops—some details. The vision and mission of the firm is to use data to help people make better decisions. The company has 40 people and most of them are data scientists. The company deploys the platform for users and provides solution to the user, which is typically some government department or ministry. There is a fair amount of work done to collect the data in a standard form, verify the data through various means (read flags) and use machine-learning to remove bad data. The analysis from the algorithm is cross-verified by on-the-ground officials (field officials) of the government before a decision is taken.
The company charges deployment fees and software-licensing model for its revenues. 80% of the company’s work is with government bodies and philanthropic organizations.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 9 India Strategy
ADI GODREJ: ECONOMY AND CONSUMER SECTOR
Chairman, Key takeaways Godrej Group Economy. The negative impact of demonetization will be behind us once sufficient amount of re-monetization takes place over the next one month or so. The volumes of consumer staple companies have recovered by the end of December 2016. GST implementation may add a layer of uncertainty. However, the economy will start recovering from July 2017 and growth could head into double-digit territory by FY2018. Mr Godrej expects India’s economy to be ahead of US’s by 2040 in PPP terms and of China’s by 2050.
Godrej Group. About 750 mn consumers in India and 1.1 bn people globally use Godrej’s products. In the developing world, Godrej Group probably reaches the maximum number of consumers. The Group focuses on EVA as the key parameter from companies and for employees.
Q&A. Mr Godrej did not see major challenges in the implementation of GST. The government will address any outstanding issues before the implementation of GST and most issues will be resolved by the time GST is implemented. Mr Godrej sees Godrej Consumers benefiting in two ways from GST—(1) potentially lower GST rates compared to current effective indirect tax rates and (2) market share gains from informal companies.
Commenting on the recent slowdown in the consumer staple sector, Mr Godrej highlighted that the growth in consumer staple volumes has slowed down over the past few quarters. Demonetization has impacted volumes but topline growth has got impacted by slower nominal GDP growth compared to a few years back when nominal GDP growth was much higher due to high inflation. However, he is not worried by the short-term slowdown and expects demand to pick up on the back of improved demographics and increased incomes.
To a question on which of his businesses Mr Godrej was most positive on over the next five years, Mr Godrej replied that he was quite bullish on the real estate sector given the sheer size of the residential real estate market and the large fragmentation in the industry.
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SANJIV BAJAJ: A TRANSFORMATIVE JOURNEY
Managing Director, Key takeaways Bajaj Finserv Structure and success reasons. The company has given entrepreneurial freedom to its managers who head different business lines. The company is in 34 different lines. The company looks at it in terms of (1) types of customers such as retail, SME and corporate, (2) types of products such as lending, P&C insurance, life insurance and retirement solutions and (3) types of channels such as proprietary sales force, institutional channel partners, agents & intermediaries and online.
Opportunities. The opportunity in the financial services space is quite large. Consumer debt-to-GDP ratio is still quite low in India. Non-life penetration is 0.7% versus 1.6% in China and 1.8% in Brazil. In life insurance, penetration is 2.7% of GDP versus 3.1% in the US.
Core business drivers. These are (1) focus on long-term sustainable profits with extreme focus on profitability over cycle, (2) disruptive innovation; the company highlighted the use of CIBIL database when nobody else was using it. EMI finance time has dropped to three seconds in 2012 from three minutes in 2010 and 30 minutes in 2008, (3) lean operations; Mr Bajaj gave an example about how much processing cost per file has dropped for various segments over the past few years and (4) empowered teams.
Future focus—four key areas. The key areas are (1) digitizing Finserv in order to transform customer experience and provide products to a customer through his/her life cycle, (2) manage across customer life cycle; BF deals with 19 mn customers, BAGIC with 52 mn customers and BALIC with 18 mn customers; the data for 80 mn customers has been segregated by income categories in order to cross-sell products to customers through his/her lifecycle, (3) enabling talent; the company will launch group learning academy, group internal job placements program and joint leadership programs and (4) fintech partnerships for disruptive innovation. The company will focus on certain core functions and form partnerships with technology companies to have the right solution.
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DHARAVI DIARY: CHANGE MAKERS
Dharavi Diary, Key takeaways App Makers Dharavi Diary started as a concept to make an impact on the slum-dwellers in Dharavi, Asia’s largest slum. Children from underprivileged backgrounds have taken initiative to develop apps that can address various problems related to girls and women. There are 200 kids in the Mahim center to develop apps, 60% of who are girls.
Women’s security app. One of the young girl speakers highlighted the difference in treatment between girls and boys. Girls have serious challenges to do things that boys can do. Under Dharavi Diary, the girls do coding to solve problems. One of such apps is Women Fight Back that will help improve security for women. The app has four features. There is already a visible change in the safety of women as a result of the app.
Water availability app. Young girls spend a lot of time in queues to collect water in the Dharavi slum. The girls have developed an app such that there is orderly collection and distribution of water—the app creates a queue system for girls and women to collect water when their number comes. The app provides a message (call, SMS) to women whose turn to collect the water.
Girls’ education app. The app developed by the girls provides basic education on four subjects such as English, Hindi, mathematics and health. The eldest girls in a family at times have to take care of younger children in the family, which precludes them from attending schools and getting proper education.
Cleanliness app. The app has four features—(1) message, (2) information, (3) community drive and (4) geo tag. The app sends a photo of the dirt and garbage to the municipal corporation, which in turn cleans the place.
Women’s well-being app. The app (Women Well Being) provides inputs to girls and women on various important issues such as education, health.
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COMPANIES
AUROBINDO PHARMA: FEBRUARY 13, 2017
Key takeaways
3QFY17 was impacted by higher price erosion of 7% qoq on oral solids. Additionally, there was another US$10 mn one-off impact from shelf stock adjustments for Aripriprazole and Entecavir. However, oral solids such as Abilify and Entecavir have already reached base and the company does not expect additional pricing pressure in these products. Pricing on injectable front has largely remained steady.
The company is guiding to ~40 launches in FY2018 including Toprol XR (4QFY18), Wellbutrin XR, Epzicom (1QFY18), Prevacid ODT (2QFY18) and remains optimistic on Fortamet launch in FY2019.
Aurobindo has ventured into biosimilars with acquisition of TL Biopharma. The company’s biosimilar program is focused on regulated markets with EM opportunity to be addressed by out-licensing. The lead molecule Avastin is expected to go into clinical trials in CY2018.
EU business is shaping as expected. Management is focused largely on margin expansion and growth will continue in low double digits. EU business is currently operating in 5-6% EBITDA margins and management expects to achieve high single-digit margin in this business post Generis Pharma acquisition.
Management expects increase in R&D spend with addition of biosimilars and increasing focus on complex injectables.
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AXIS BANK: FEBRUARY 13, 2017
Key takeaways
Growth: Loan growth was impacted partly by demonetization and partly by internal factors. Growth in the corporate segment was partly led by refinancing in earlier quarters. However, these opportunities are much fewer currently given the extent of competition. There could be periods of lumpiness in growth in this portfolio but directionally, the focus would be more on the retail portfolio. The bank has slowed SME lending as the risk- reward ratio was not favorable and the overall slowdown in The economy was felt in this portfolio as well. Retail continues to remain the mainstay of loan growth in the medium term. There would be greater emphasis in higher return products like personal loans and cards as their contribution to the overall portfolio is quite negligible.
Asset quality: (1) The bank is working through its watchlist and believes FY2017 would reach the peak in terms of fresh stress formation. FY2018 should be lower but the bank will give an indicative outlook of the portfolio post FY2017. Power portfolio is the last frontier to tackle. (2) There are concerns on the recovery environment. Despite a lot of progress across many corporate groups/projects, deal closures are taking much longer time than anticipated which is making the problem worse. The bank is reasonably well covered on provision coverage ratio. Hence, the impact of many of these resolutions should not result in huge volatility in earnings. (3) The bank is not averse to solutions which includes loan takeover from smaller banks in the consortium or where fresh lending is required. However, this would be done only where the viability of the project is firmly established. (4) The bank would look to move its provision coverage ratio closer to 70%.
Others: (1) Fee income would be weak especially in the corporate segment. (2) NIM has been declining but it is still higher than where the management previously expected to end in FY2017. However, directionally it would still be declining in the short term. (3) There is greater movement of loans to MCLR which has its advantages as well as disadvantages. A large share of movement is currently happening in the corporate portfolio and for fresh disbursements in the retail portfolio.
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BAJAJ CORP: FEBRUARY 13, 2017
Key takeaways
Cautious on pace of recovery post demonetization. While management did indicate that momentum in December-January has picked up, it remains cautious on pace of recovery over the next few quarters as – (1) it expects the construct of wholesale channel to change; hence, the anticipated upstocking may not happen, (2) indirect coverage is likely to drop in interim as companies transition from indirect to more direct coverage which will take time and (3) GST implementation will drive another round of destocking.
GST impact. (1) Expect big disruption initially in June if GST is implemented from July due to destocking, (2) will look to trim down number of depots by 6-7 (current count at 29) and work on bigger depots – building 3-4 new depots including Varanasi, Nagpur and Guwahati and (3) while GST will drive some savings in logistics costs, bigger savings are likely to be on inventory reduction in system.
Acquisition policy. Prefer India versus abroad, prefer regional versus pan-India, prefer brand versus company and prefer mass distributed brands versus niche brands; also look at brands with higher GMs.
Strong focus to de-risk portfolio over next 3-5 years. Over the next five years, expect contribution from core ADHO brand to drop to ~60%; focus will remain on three core categories – hair care, skin care and new categories. Bajaj’s new R&D facility is likely to commence operations in 3 months in Mumbai and will accelerate innovation and entry into new categories.
International business remains a big focus area. This year will clock ₹700mn+ revenues (up 70%+). Big international markets include MENA (largest market, ~40% of international business revenues), Nepal, Bangladesh and SE Asia. Also, exploring markets like Egypt (for hair oils) and Indonesia (for skin care). NOMARKS remains a big focus area for international markets.
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BAJAJ FINSERV: FEBRUARY 13, 2017
Key takeaways
Bajaj Allianz (BALIC) has historically been an agency driven model. Bajaj Allianz will continue to invest in developing the agency channel even as it incurs high fixed costs. Regulatory on commission caps had impacted the profitability for the agent and making it difficult for the agent to make similar income every month.
BALIC missed out on growth opportunity due to higher focus on traditional business, but it has made several structural changes such as market segmentation, management reporting structure, having different kinds of agents depending on the nature of the market, etc. This will help it to build a stable agency business. Some of the recent regulations have also been favorable such as allowing incentives on top of commissions. These are not allowed in bancassurance channel.
Financial inclusion products have emerged as an important segment. BALIC has tie-ups with all major MFIs and SFBs to tap this growth opportunity. This is largely a group insurance product. It is trying to grow its share of individual business here but low ticket size remains a key challenge.
Bajaj general insurance (BAGIC) remains one of the largest players in the general insurance space. Growth here will be fundamentally driven by health insurance with focus on sharper customer selection. Bajaj as a group is engaged in a lot of analytics to generate cross-sell opportunities and benefit from the success of its NBFC, Bajaj Finance.
Crop insurance has emerged as an important growth driver for the general insurance industry. It is expected to contribute to 20% of the business compared to 5% last year. Government subsidy for crop loan has been doubled. Apart from the government-owned AIC, all major private players compete in this ~`200 bn market. It is a yield-based insurance model which makes it an attractive product for farmers. BAGIC can make around ~20% RoEs in this business through the cycle.
Status quo remains on Allianz’s stake in the business. All three businesses remain fairly well capitalized.
16 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India
BHARAT FORGE: FEBRUARY 13, 2017
Key takeaways
The company expects healthy double-digit revenue growth going ahead, which will be driven by (1) recovery in non-auto segments such as oil & gas, contribution and mining segments, (2) strong growth in passenger vehicle segment led by new order wins and new product introductions, (3) ramp-up of revenues from new CV customer in US and (4) scale-up of revenues from new verticals such as aerospace, defense and railways. Domestic CV segment is the only major headwind for revenue growth in FY2018E.
The company has won significant new orders across segments, which enhances medium-term revenue growth visibility. As per the management, there is a significant scope of increase in content per vehicle led by new product introductions. The company has developed new components for engine and powertrain.
The company is working closely with global OEMs to develop components for electric vehicles. We note that Bharat Forge is already supplying components for hybrid vehicles.
Revenue mix from passenger vehicle segment could increase to 20% of standalone revenues over the next few years from around 10-12% currently.
The company will continue its focus on R&D to expand its product portfolio and entry into newer segments. R&D spend is round 1-1.5% of sale, which will increase to 2-2.5% of sales in the medium term.
The company recently acquired Walker Forge in US, which has forging capacity of around 40,000 tons. Due to weak demand, current capacity utilization is around 50% capacity. The company is considering adding aluminum forging facility in the US; Walker Forge has enough spare land for this.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 17 India Strategy
BLUE DART EXPRESS: FEBRUARY 13, 2017
Key takeaways
E-commerce (B2C shipments) comprises ~25-26% of the company’s revenues currently, and has increased from 23-24% in FY2017 beginning. Blue Dart is working with all large e-commerce companies and catering to their shipment needs. In Oct 2016, due to the festive season spike, e-commerce proportion in overall revenues increased to 35-40%.
Blue Dart is a logistic partner to Amazon, Snapdeal, Flipkart, Ebay, etc. While all e- commerce companies have set up their own logistics companies and several third-party logistics companies catering specifically to e-commerce companies have emerged, the complexity of operations as well as underdeveloped infrastructure have led to heavy losses for all these companies. Blue Dart feels that the logistics space can see consolidation, much like the e-commerce space itself. However, it doesn’t see an imminent threat from captive logistics companies of e-tailers, as they are still to build a decent national footprint. In fact, the proportion of outsourcing for most e-commerce companies has been increasing, simply because they don’t want to sit on a high fixed- cost structure.
The company is continuously focusing on increasing its reach. It opened ~400-500 new locations in FY2017, and now caters to ~45% of total pin-codes serviced by the India Post. Top-6 cities of Delhi, Mumbai, Bangalore, Hyderabad, Chennai and Kolkata contribute 60-70% of revenues.
Future revenue growth may remain around 15% yoy levels, driven by faster growth in e- commerce, and more tepid growth in the remainder B2B business. EBITDA margins may trend upwards from 11.5% to 13-13.5%, driven by operating leverage. No major fleet additions are planned and capex of ₹600-700 mn annually is expected. Current fleet of six aircraft is posting ~78-80% utilization.
GST would be a huge positive for logistics companies as the time to make long, cross- country trips may reduce by 40%, leading to a similar improvement in asset utilizations. Currently, manufacturers maintain 15-17 warehouses in different states (either themselves or through agents); they pay local taxes through these agents, and then sell products to local distributors. Post GST, a manufacturer would be able to sell directly from mother hub to distributor, thus requiring to maintain lower inventory, as well as benefiting from faster goods transit times. GST would lead to higher costs for unorganized players, and should hence shrink their pie from ~45% of overall business to lower levels. The only challenge that GST poses is that pan-India operators like Blue Dart would need to register in each state, and ensure adequate accounting systems, which would enable correct tax computation.
Growth in B2B remains contingent on overall GDP growth. In 2004-09, B2B revenues grew at a CAGR of 33-34%, at ~2-2.5X nominal GDP growth. These growth rates can revive only if industrial activity picks up.
Blue Dart will continue to provide innovative solutions to customers, particularly for last- mile delivery of e-commerce packages. It is working on providing a digital locker facility for e-commerce deliveries in Gurgaon.
18 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India
CARE RATINGS: FEBRUARY 13, 2017
Key takeaways
Growth in bond markets over the medium to long-term remains an attractive growth opportunity. Bond market issuances are currently dominated by higher rated entities. But this will change once the bankruptcy code is fully operationalized and the market is able to see its merits. This will prompt higher investments in relatively lower rated paper by money managers due to better visibility of risk-return characteristics of these investments.
CARE highlighted that a major hindrance to greater commitment by banks towards development of bond markets viz bank loans is the requirement of mark-to-market on bond investments, unlike loans. A good template to build a corporate bond market is to follow the G-sec market where banks and primary dealers actively trade on a daily basis. One way to make this possible is to make banks hold part of their exposure to corporates in the form of bonds – but this will likely require regulatory interventions.
Even as bond ratings are more remunerative than bank loan ratings, CARE does not explicitly target any share of bond ratings in the overall mix as the focus is on building relationship and retaining or improving wallet share, irrespective of the mode of borrowing by the client.
CARE noted that threat from movement to internal model based rating (IRB) is not an immediate one and will play out over the medium-term. It noted that 7-8 banks have made application to RBI to rate internally. CARE thinks that RBI will be slow to give approvals as these models have not done well during the creation of current NPLs. Even as banks shift, there is an 18 months parallel run which may smoothen the impact.
CARE has been taking several small steps to grow alternate channels of revenue. The steps include providing expected loss rating, rating of REITS and advisory business which does TEV studies on behalf of clients. It also has subsidiaries/associates/JVs in Mauritius, Nepal and Malaysia which will start contributing to revenues a few years down the line.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 19 India Strategy
CITY UNION BANK: FEBRUARY 13, 2017
Key takeaways
Growth: There was a serious impact on growth caused by demonetization and hence loan growth slowed to 12-13% from 17% in the previous quarter. There seems to be a marked difference between sanctions and utilization over the past few quarters and the management hopes to see this trend reversing in the current/next few quarters. Anecdotal discussion with their clients indicates that the recent political turmoil has partly affected the state economy as various regulatory clearances have slowed. The focus of the business towards a higher share of lending in the SME portfolio would continue while the bank would continue with its policy of “tread-cautiously” in the mid and large corporate segment. Key belts in TN such as textiles appear are doing quite well despite a volatile input prices of raw materials such as cotton.
Asset quality: (1) The weak monsoon of FY2016 is yet to reflect in crop sowing patterns. However, one expects that the next agricultural crop season will have a higher impact either on output or impairment as compared to the last crop cycle. (2) Recovery environment was extremely weak in 3QFY17 in the wake of demonetization as the entire machinery of the bank had shifted from asset quality to handling customer traffic. Also, there was a marked slowdown in asset sales where land was involved. However, things appear to be moving in the right direction.
Cost-income: The bank continues with its long term infrastructure layout program. However, there is likely to be a bit of slowdown in the medium term. The focus would be to keep cost-income ratios closer to the long term average.
20 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India
DISH TV: FEBRUARY 13, 2017
Key takeaways
Dish TV expects some weakness in subscription revenue and subscriber growth in the current quarter. Net subscriber addition in 4Q would be around 1.1 mn. Subscription revenue / ARPU could be flat.
The management expect 3 mn gross adds in FY2018. ARPU growth would be muted over next 1-2 years during phase IV digitization; the company focus would be on driving subscriber growth. We note that the bulk of subscriber additions in rural markets are in base pack or low ARPU packs; it weighs on ARPU growth. Content cost would increase by 6-8% in FY2018.
Updates on the merger timelines. Dish TV expects completion of merger by 3QFY18 as indicated earlier. It has submitted applications to Competition Commission of India (CCI), SEBI and stock exchanges. Dish TV management remains confident of getting CCI approval (likely by May 2017). As per the company, DTH is a pan-India license and market share of the merged entity should be viewed in context of overall cable and DTH subscriber base in any market/geography. It doesn’t foresee any issue in CCI approval.
Potential cost savings from the merger. Dish TV management expects to complete the merger in 2HCY17. It expects cost synergies across a number of line items (1) Content cost. Dish TV’s content costs as % of revenues at 28% is about 10 percent points lower than VDTH. There is room for significant improvement in content sourcing and Dish TV management expect Videocon d2h’s content cost as % of revenues to converge with Dish TV over time, (2) Transponder costs. While technical nitty-gritties would be worked out post regulatory approvals, there is an opportunity to share transponder infra on merger; it can drive significant cost savings in the medium term, (3) Dish TV and Videocon D2h will continue to operate as separate brands. Thus cost savings in S&M would be negligible but there will be opportunity to drive cost savings by integration of corporate functions and back-end.
Updates on license fees. The management indicated that the Ministry of Information and Broadcasting (MIB) is working on a cabinet note for reduction in license fees to 8% of adjusted gross revenues from 10% as recommended by TRAI (management expect change by March 2017). Reduction in license fees to 8% would mean (1) further reduction in license fee provisioning and payout as Dish TV will likely continue with its structure of routing non-core revenues through Dish Infra (subsidiary) and providing/paying license fees on core revenues, (2) Dish will likely have to pay the difference between actual license fees paid (6% of revenues) and that to be paid at the new license fee rate of about 8% starting FY2014. Note that Dish TV is operating under deemed extension since FY2014. Reduction in license fee will likely pave the way for new license agreement (renewal) and the company will have to pay at revised license fee rate of 8% for the deemed extension period (FY2014 till renewal date), and (3) Court will decide on liability pertaining to government’s license fee claim for periods prior to FY2014. We note that Dish TV has made a provision of Rs11.9 bn towards license fee liability pertaining to claims until FY2015 and interest expense at 12% on the same. The company will likely have to pay out some of this provision in the coming 6-12 months
KOTAK INSTITUTIONAL EQUITIES RESEARCH 21 India Strategy
DR LAL PATHLABS: FEBRUARY 13, 2017
Key takeaways
Diagnostics sector is witnessing increased competitive intensity with increase in private equity investment in the sector. However, according to management, for newly set-up standalone diagnostics labs and small chains, expansion into non-core geographies will not be easy as every region has an already established dominant player. The company expects some pricing pressure in other geographies excluding North India.
Management highlighted that despite having a strong brand name, Delhi still remains a price-sensitive market, especially for routine tests. However, the company did not lose any market share post price hike in June while one of its competitors had lost some market share while taking price revision in 2015.
For expansion in South and West India, Dr Lal will prefer inorganic mode of expansion and is in lookout for good assets. Expansion in East India is going as per schedule with Kolkata reference lab set to be commissioned in September 2017. Additionally, the company will continue to add 15-20 clinical labs (`8-15 mn capex per lab) annually to sustain growth.
In terms of reagent costs, the company does not see any further scale benefits as rates are already quite low. As the company expands into low-priced eastern region of India, management expects some reduction in gross and EBITDA margins.
Post demonetization, volumes have seen rapid recovery. However, complete normalcy will take another 3-4 months to return.
22 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India
DR REDDY’S LABS: FEBRUARY 13, 2017
Key takeaways
Gross profit expansion in the recent quarter was driven by strong growth in EM markets. Margins for existing US business was stable qoq as decline in pricing for key products were offset by new launches and increased volumes in other products. However, it will be difficult to sustain these levels of gross margins and anything >55% meets company expectations.
Pricing impact led by Walmart-Mckesson joining hands is yet to play out completely. However, management remains optimistic as oncology injectables and other complex products such as Toprol XL will not see any significant impact of this.
Management acknowledged that higher focus on complex and proprietary products along with higher emphasis on vertical integration did not work out as planned as Dr Reddy’s did not have enough products in market to offset price decline in big products. Moving forward, Dr Reddy’s will increase focus on lower hurdle/less complex generics as well to de-risk competition/pricing pressure in larger/complex products.
The company expects proprietary products to reach good scale in 2019-20 with insurance coverage. EBIT losses in proprietary segment have remained largely flattish yoy. However, addition of R&D for Xenoport/Eisai asset will lead to increased R&D spend in this segment.
Plant inspection is scheduled for February and March 2017. The company expects to gain approvals of products that were impacted due to warning letter.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 23 India Strategy
EMAMI: FEBRUARY 13, 2017
Key takeaways
Recovery post demonetization. 3QFY17 was good on a relative basis and the company did pretty well – which came as a surprise. An important learning from the demonetization exercise has been that companies need to decide what to depend on – depend on macro or do something internally. The company has decided that for the next 3-4 years the focus will be on growth – double-digit volume growth. On the margin versus growth tradeoff, the company would focus on growth even if it comes at the expense of margins.
Distribution focus. The company has been very aggressive in expanding direct distribution, as companies with direct reach are going to benefit more in the post GST world. The company’s current direct distribution is 0.7 mn it and plans to expand this to 0.8 mn by 2018.
Impact on margins in the medium term. Expanding distribution, new launches and some more investments on the existing products is expected to impact margins by about 300 bps (including 100 bps due to raw material increase).
Strategic focus. The company would continue its focus on growing existing brands, as new brands cannot alone give a huge delta, especially when the aim is to grow at double-digit volumes. With respect to new categories, it will continue to identify niche categories mostly focused on Ayurveda; Kesh King is a good example for this.
Impact of GST. There would be a short-term impact, which will perhaps last for at least six months. Both Emami (as a company) and its distributors are will geared up in terms of infrastructure; however, preparedness at wholesaler and retailer level remains an issue. The company doesn’t expect material savings from logistics from GST.
Wholesale channel. Contribution from the wholesale channel is expected to reduce substantially in the long term. Punjab is a big example, where cash and carry has risen in prominence over the past 5 years, wholesale contribution is very low. Digitization will have a huge role to play in this.
Exports. MENA region (especially Saudi Arabia) has slowed down due to macro factors, over the long term, however, exports is expected to do well and grow a tad above domestic growth rates.
24 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India
GODREJ CONSUMER PRODUCTS: FEBRUARY 13, 2017
Key takeaways
India business post demonetization. The impact is too early to call out as the pickup data from agencies such as Nielson has a lag. Immediate assessment is that staples demand has not and would not be impacted. December was positive while January has been strong. Demonetization is largely behind us in the company’s categories unless there is a cascading effect because of demonetization. Wholesalers are back in market, continuing the way they were doing business earlier. The company may have gained market share in some categories.
Multiple levers for future margin expansion. (1) GM expansion in India business will be led by lower consumer offers, selective price hikes, continued savings from initiatives like Project Pie, a better portfolio (most recent innovations operate in premium space and enjoy higher GMs) and better analytics (will aid strategic price management) while IBD business will witness GM expansion drive by favorable geography mix and (2) other EBITDA margin levers include better deployment of advertising expenses and optimizing fixed overheads (scale benefits).
GST impact. As the rates are not currently out, it is difficult to provide a definitive view. However, directionally speaking the company expects rates to be lower than the current rates paid by the company. The company also expects savings in logistics by 10-15%.
Long-term strategy in terms of new categories. The company is working towards introducing new products, which will be either new categories altogether or adjacencies to current segments. For example, the company is planning to move from bar soap to skin cleansing to niche personal care, in HI the company plans to take the category out of home, increasing consumption, etc. The company is also looking aggressively at the air freshener category.
Strength of nature (SON) strategy. Close to 50% of the company’s business comes from America, 30-35% from Africa and about 10-15% from the Caribbean. The company plans to expand the brand’s reach further in the future, but is currently looking at solidifying the base and building local manufacturing in Africa.
Household insecticides in Africa. Execution has been a challenge as getting registrations in Africa takes a lot of time (typically 24-48 months). The company has received registration in four out of nine countries currently. However, the potential of the continent is huge and the company is optimistic about the continent in the longer term.
Darling acquisition. The relationship with the promoter group has been excellent, they currently hold about 5% of the business and are helping grow the business. Darling had operations in 14 countries, the plan was to expand in a structured way and today the company is present in 11 countries where it holds on an average 95% of the respective companies. For the remaining three countries, brand rights lie with the company.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 25 India Strategy
GUJARAT PIPAVAV: FEBRUARY 13, 2017
Key takeaways
Rail feeder to DFC to provide advantage over JNPT. GPPV would start on the project for electrification of the 269-km Pipavav-Surendranagar rail line very soon. This is related to the modernization of the feeder line to the DFC. With the DFC stretch with Mehsana ready, GPPV would be able to reach northern hinterland faster than JNPT. Currently, the journey from JNPT takes lower time given the electrified route taken.
Coastal ro-ro—an opportunity to be tracked. Coastal ro-ro can be a large opportunity for GPPV though the same would depend on (1) cost incentives to start with and (2) return cargo. The former depends on the government, where there have been a lot of flip-flops of late. The latter would get supported once Maruti’s Sanand plant starts production. Here, the new road connecting Bhavnagar to Pipavav bodes well for GPPV and adds to their superior offering (low tide, low coal movement). A potential rail siding and favorable rail pricing can help realize the ro-ro opportunity earlier.
JNPT CT-4 likely to support industry pricing. The impending overcapacity in the ports ecosystem may not lead to a large price correction as JNPT CT-4 would want to reap benefits of its large investments. There is a possibility of JNPT CT-4 actually supporting pricing from this perspective. We note that this terminal is still under the purview of TAMP (with relaxed conditions) and thus pricing is not autonomous.
Liquid opportunity dependent on the supply chain. The realization of the liquid opportunity would be driven by (1) how soon the rural supply chain can get set up for LPG (demand being seen) and (2) whether the permissions on rail transportation can lead to more liquid commodities coming to the port.
Trade protectionism is not a big worry. While acknowledging the risk from trade protectionism, the company did highlight the potential for exporting from India to counter that risk. It highlighted two points to defend this argument: (1) a major white- goods manufacturer redeploying its capacities from SE Asia into India and (2) the stated closeness of trade among the ASEAN countries having had limited impact on inter- regional trade.
26 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India
GULF OIL LUBRICANTS: FEBRUARY 13, 2017
Key takeaways
Gaining market share across key segments. Gulf management indicated that the company has gained market share across key business segments over the past several years. The company’s market share has increased to near 5% in overall lubricants, including industrial lubes and around 6.5% in the Bazaar segment for automotive lubes. Gulf has become number two in Bazaar for both commercial vehicle oils (7-9% market share) and motor cycle oils (8% market share). The company is now targeting to expand its presence in passenger cars and tractors segments, wherein it has 4-5% market share currently. Gulf has also established a good traction in infrastructure, mining and fleet segments with 9% market share.
Strategy to strengthen distribution channel. Gulf management emphasized on their focused strategy to improve distribution reach, in concurrence with the strengthening brand recall. The company has presence in over 56,000 retail outlets out of a total of 175,000 and planning to grow their reach at more than 10% annually over the next few years. Gulf has also been establishing its presence through bike stops (6,000+ currently) and car stops (750+ currently) by entering into low-investment-high-commission model.
Pricing power. Gulf has established a targeted pricing strategy across key segments and product categories, which have helped it improve realizations and profitability over the years. Gulf’s realizations on automotive lubricants are expected to further improve with product mix improvements also over next few years. The company also indicated that half of B2B segment is formula-linked to base oil prices. Gulf undertook a small price hike across few products categories in October 2016, ahead of the market, to pass on recent increase in base oil prices and then followed it up with another round of price increase across all products in January along with the industry.
Chennai plant on track. The management indicated that the new plant in Chennai is on track to commission by 3QFY18. The company expects a gradual improvement in margins from the new plant, as savings on logistic costs should offset incremental fixed charges and overheads. The capacity of Silvassa plant (90,000 kt) and Chennai plant (40,000- 50,000 kt) will adequately take care of next 5-6 years of incremental demand.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 27 India Strategy
HSIL: FEBRUARY 13, 2017
Key takeaways
Rationale on entry into the Consumer Product Divisions (CPD) and the pipes business? As per the management, they would want to have presence in certain segments of building materials and home appliances. The distribution network has reached nearly 20,000 touch points in the BPD division, which is near peak now.
. The basis of entering pipes over tiles, as this business requires less/no designing versus the later. Inventory is unlikely to get obsolete and dealers likely to pick branded quality product over the unorganized market. The target is to reach revenues of ₹4.5-5 bn over the next four-five years. HSIL is also investing into manufacturing molds for fittings (which is margin accretive versus tiles). The cost of setting up the plant is now ₹1.3 bn (versus ₹1.05 bn budgeted earlier) and will start commercial production by June-July 2017 (versus April 2017 earlier).
. CPD business is again a distribution-led business and people are getting brand conscious. HSIL wants to target gross margins of 35% and looking at selling premium products. Crossing ₹2 bn of revenue (targeting in FY2018), the vertical is likely to cash positive. Currently, HSIL has 275 distributors and around 450 retail touch points. The target is to set up up to 10,000 retail points over a period of five years.
Packaging products division (PPD). HSIL remains number two in the glass packaging business. The long-term debt is down to ₹1.2 bn (from ₹3 bn earlier) and utilization levels increased to 90% (pre-demonetization). The November 8, 2016 event has hit volumes and in addition to the certain political events in the south, 4QFY17 is likely to remain dull. The furnace four, which has been idle for the past few years had been realigned, but management held back the decision due to market conditions.
. The new security caps business will commence operations from March/April 2017, in phases. Phase 1 will see commencement of 660 mn pieces/year of small caps while phase 2 will see the remaining 60 mn pieces/year of capacity from large caps. The management is targeting to sell up to 500 mn pieces in FY2018. The market size of the security caps business in India is 3,700 mn pieces/year.
Building products division (BPD). Focus remains on increasing share of premium products. Acquired 40 acres of land in Rajasthan for a new plant, but new capacity addition plans still on hold. HSIL is 30% of the organized market in the sanitary ware business and around 9% of the organized market in the faucets business. They intend to grow market size in faucets to become second in FY2018. Current plant utilizations in the faucets business stands at 70% (on a 2.5 mn pieces/year capacity).
Legacy long-term debt is down to ₹1.2 bn, with additional capex debt at ₹1.8 bn. Total debt stands at ₹6.5 bn, including ₹3.5 bn of working capital debt.
28 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India
ICICI PRUDENTIAL LIFE INSURANCE: FEBRUARY 13, 2017
Key takeaways
Focus on persistency. Overall persistency experience in last two years has been better than what is built in its forecast. However for now it will not revise its assumptions but prefer to accrue the benefits as positive variance. Management believes that there is scope for improving its persistency. It has been carefully monitoring complaints to maintain persistency. The most important bucket is the 13th month; this is because the cost of surrender does not cover the initial costs of selling the policy.
Growth in protection business. The company has guided for doubling the ratio of protection in its portfolio. In the light of high growth in ULIP business, the company has not provided any target share of protection in its portfolio but nevertheless, growth in protection business will be high. In terms business, it is important to track early claims. Term book is long-dated book and in the initial years, claims experience will be volatile. Overall claims ratio is still positive as compared to the assumptions that the company has made. The company has sold more protection to customers of the bank and not necessarily at a higher ticket size.
Interest rate sensitivity. On the impact of interest rate movement on NBV and EV, the management highlighted that spread-based business (par and non-par) will be most affected by fall in interest business. ULIP is the least affected (only to the extent of growth in AUM, leading to lower AMC fees); there is some impact on protection business as well.
The group market consists of employee-employer, funds business and credit life. ICICI is not focused in the third segment. It is very sensitive on the pricing of the employer- employee segment. Guaranteed funds business (like pension) is most risky and hence the company does not do this as much. The competition in the third segment (compensation to NBFC/HFC) took a knock on profitability.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 29 India Strategy
IDFC BANK: FEBRUARY 13, 2017
Key takeaways
Recent restructuring in business. IDFC Bank has recently merged the mid-corporate and large corporate business into one; the SME business also merged into the consumer business also known as Bharat plus. The company has coverage duplication; this has to be rationalized. This is optimum from an organizational point of view and cost to savings ratio as well. The company expects cost to be saved by 2-3%.
Focus on mid-corporates and fee income. IDFC Bank highlighted focus on two key items- mid-corporates and fee income. Large corporates are increasingly moving to bond markets and hence IDFC Bank needs to focus on mid-corporates. The company may be the 5th or 6th bank dealing with mid-corporates and has limited negotiating power. As such, it is leveraging its large corporate relationships to gain traction with mid-corporates. IDFC proposes to target share of fees in the corporate segment to about 24-25% from 12% currently; this will be in line with those of larger banks.
Provisions in 3Q. IDFC Bank disappointed in 3QFY17 with 10X qoq rise in provisions. The management has cited three reasons for this – slippage in one of its new (banking) loans, higher provisions on two of its loans in the stressed (legacy/infrastructure) loan book and MTM loss in bond treasury. The company clarified that only a small part was from treasury MTM and from the balance about 50% due to provision in the infrastructure book and the balance 50% on fresh NPLs during the quarter.
In its infra book, the company has identified stressed loans of about Rs88 bn on which it has made Rs46 bn of specific provisions. As some of the specific provisions on some loans was lower than expected, the company has to make extra provisions. The management expects some part of the extra provisions to be reversed in the medium-term. Exposure to gas-based plants is the most challenging at this stage
Some data points: (1) Rural CASA is Rs3,000/ customer and urban CASA is Rs45,000/ customer; as such the overall number is weak with Rs9 bn (3% CASA). (2) IDFC Bank is acquiring 53,000 customers/ month of which 20,000 is urban and the balance rural. The MFI business was weak due to demonetization; the company expects to come back to 1.2 mn by March and 1.5 mn over the next few quarters (1.5 mn was its initial target for March 2017).
30 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India
INDUSIND BANK: FEBRUARY 13, 2017
Key takeaways
Growth: The management indicated that there are no major concerns on growth. (1) In the commercial vehicle portfolio, the bank has gained market share recently. Prima facie, it appears that select NBFCs/banks had gone slow on disbursements in 3QFY17. The bank was well positioned to capture this growth. Disbursements data indicate that they are back to pre-demonetization levels. Outlook appears to be promising where the average ticket size as well as volume growth appears to be strong. (2) The bank is working a lot on leveraging its existing customers as studies indicate that borrowers have multiple loans for different needs which the bank should be able to target over the next few years. This would include having a working capital/small business loan/LAP/personal loans, savings/current, transaction banking with most of its customers. (3) Corporate loan growth is reasonably de-risked from recent events in the sector. The bank continues to focus on working capital or transaction banking with its corporate clients. (4) MFI portfolio has not seen any major changes in underlying trends. The bank is looking to seriously scale up this business by over 3X in the medium term. Short term trends could be a bit weak given the disturbance witnessed in the sector.
Asset quality: (1) There is no major concern on impairment ratios. Most banks, including IndusInd Bank have reasonably strong early warning indicators. There does not seem to be any sign of concern at this stage. (2) The bank has not used any specific facilities such as first loss guarantee in its MFI portfolio and is reasonably well protected against unexpected fall in collection efficiencies. (3) LAP is not seeing any major changes in underlying trends. The focus on cash flow unlike asset price financing is to keep them in good stead. (4) Real estate portfolio is dominated by lease rental discounting and the risk of impairment is quite low as the bank focuses on the quality of customers as well financing. (5) Diamond financing portfolio continues to show limited signs of any kind of stress beyond internal benchmarks.
Others: (1) The bank continues to look at inorganic growth opportunities. However, it would only look at those transactions where the management is able to make a difference to its underlying business. The bank would look at acquisition to gain scale or size. It highlighted that its previous acquisitions in credit card and diamond financing business were positive acquisitions as it helped address gaps in product offerings or leverage the strength of their relationships to generate superior RoEs. (2) Nearly 50% of deposits collected during demonetization moved out of the bank. The bank is working towards retaining a higher share and looks to cross sell products to this customer segment. (3) It is working on leveraging its brand to enhance customer experience and would look at hiring people from non-banking sectors, if required.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 31 India Strategy
INFOSYS: FEBRUARY 13, 2017
Key takeaways
Infosys is optimistic on growth from Top 25 accounts and indicated that 3QFY17 weakness was an aberration due to high furloughs and RBS ramp down impact. The company indicated that FY2017 slowdown was due to a mix of RBS ramp down and attrition in consulting that not only impacted revenues but also impacted mining of existing clients. Infosys had assigned a consulting team with additional responsibility of managing high potential accounts; however, high attrition impacted mining effort and in turn revenue growth. The company indicated that better mining for same set services can lead to high single digit growth. However, growth beyond this level requires contribution from NEW.
Customer satisfaction. Infosys reiterated that the idea of Zero Distance program is to bring innovation at grass root level. It has been adopted across more than 95% of the projects. An outcome of this is visible in the success in customer satisfaction surveys which are at the peak. Infosys management indicated that it has made significant improvement in customer satisfaction over the past couple of years.
Profitability. Infosys expressed confidence of protecting profitability in the guided range of 24-26%. Efficiency drivers played a role in defending profitability up to now. While there is still scope for further cost optimization, future profitability will be determined by progress on automation. This is especially true against the backdrop of continued commoditization and decline in pricing. Infosys has released close to 8,500 people in the past twelve months in existing roles due to automation effort. It expects this trend to accelerate and offset the pricing pressure in traditional services.
Infosys highlighted three broad buckets of revenue streams- (1) Build—in which growth and margins are higher, (2) Maintain—in which growth is lower but margins are healthy and (3) Run—in which growth and margins are lower. In essence, Infosys’ argument is that Maintain and Run businesses are screaming for automation. The longer the time taken to address this, the more disruptive it would be to the business. The key is to release headcount in the Maintain and Run businesses and reskill them to be redeploy to the Build business. Infosys’s strengths in education and emphasis on automation+ innovation positions it well to manage the change
Capital allocation. Infosys has increased dividend payout twice in the past four years (from 30% to 40% and then to 50%). The management indicated that it considers a number of factors while deciding capital allocation policy such as strategic growth initiatives over the next 4-5 years, investments in infrastructure and acquisitions. It continues to review the capital allocation policy from time to time. The company is not opposed to a buyback. Acquisitions will continue to be a key priority area.
32 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India
JSW STEEL: FEBRUARY 13, 2017
Key takeaways
Cost improvement projects. JSW Steel is working on various cost improvement projects including installation of piped conveyor system in Vijaynagar from a central location outside the plant for iron-ore transportation. This project can reduce transportation cost of iron-ore from ~Rs400/ton to ~Rs200/ton. The project is expected to be complete by next year (CY2018).
Flat versus long steel prices. Long product prices remain weak due to subdued demand, scrap prices. There continues to be a large difference between flat steel product prices and long product prices.
Expansion projects. The company will prioritize brownfield expansion at Dolvi over Vijaynagar operations due to iron-ore mining cap in Karnataka which can increase production costs. JSW Steel has already secured required environmental clearances for such expansion. Brownfield expansion in these locations will require lower capital cost of ~US$500-600/ton (of capacity) compared to US$1,000-1,200/ton for peers in setting up greenfield projects.
On whether there will be sufficient demand for such an expansion project, the company estimates that even at 5-6% annual growth rate for steel demand, additional 15 mtpa of steel may be required in three years’ timeframe. Smaller and secondary producers are not in a position to ramp-up given their own issues and are becoming non-competitive. Among the larger players, top players are operating at 90% utilization or so while some others are lower at 70% rates. Given the potential of demand increase, there will be enough room for new capacity.
Leverage ratios are improving. JSW Steel expects net-debt/EBITDA will be less than 3.8X by March 2017.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 33 India Strategy
JYOTHY LABORATORIES: FEBRUARY 13, 2017
Key takeaways
Demonetization impact. Demonetization took everyone by surprise. Although, October was very good, November was a washout as the wholesale channel contributes 35-40% of overall sales, which completely shut down. The company did not extend credit as it did not want to dump more stock. In December, the company recovered quite a bit. Currently, there are problems in the North and the East, especially in the wholesale channel. 4QFY17, however, should be back to pre-demonetization levels. Retail channel is back to normal, wholesale does not hold too much stock.
Committed to investments. JYL remains committed to its innovation pipeline and will continue to invest behind its brands in FY2018 and hasn’t taken any course correction post demonetization. It plans to maintain A&SP at 15% of sales (as under IGAAP)
Urban versus rural demand. Urban was good, normal monsoon, pay commission etc. Rural can improve due to government initiatives but this segment has been hit more due to demonetization.
Henkel option. Henkel has the option to invest up to 26%. Jyothy and Henkel are in constant talks, but nothing has been finalized yet. Management indicated that a non-disclosure agreement has been signed with Henkel with respect to the call option.
Competition from Patanjali. Impact has been largely limited and that too in select states; maximum impact has been 1-2% market share loss in some overlapping categories.
Price increases. The company held back price increases last quarter and hence margins suffered slightly. Going forward the company should be able to maintain margins as they have already taken some increases in MRP in some brands while reducing grammage in others.
Modern retail share. Every company’s share increased in this segment in the 3Q, the current quarter should however become normalized now. E-commerce also did very well, although contribution is very low.
34 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India
L&T FINANCE HOLDINGS: FEBRUARY 13, 2017
Key takeaways
Commitment to top quartile RoE. Management re-iterated its targeted top-quartile i.e. 18% RoE amongst NBFCs by FY2020. The broad strategy was to focus on (1) right businesses, (2) right structure and (3) right people. The company has shown initial progress as RoEs have improved every quarter from ~9% in 1QFY17 to ~12% in 3QFY17.
Business outlook remains positive. LTFH expects loan growth to remain healthy with higher contribution from the rural and housing segment compared to the wholesale segment. Overarching philosophy is to grow the disbursements year after year, rather than focusing on loan growth with loan sell down being the key feature of the business.
LTFH has indicated that it wants to expand the current scope of loan sell down from the wholesale book to the other two verticals i.e. rural and housing and generate fee income in the process. Notably, LTFH has sold-down nearly 75% of the underwritten book in the recent quarters. There is good demand for such loans from banks, esp. PSU banks.
Cost management remains a key focus area for the company. It has been very active in cutting down on sub-scale branches and regional offices. The idea is to remain focused on segments that drive overall firm RoEs. For example, in the 2W financing, LTFH has reduced branches from 85 to 40 and is building relationships with stronger dealers – it insists on first right of refusal on all cases at these touchpoints. Payout ratios have been increased for dealers as well.
MFI business which had the highest impact of demonetization is returning to normalcy. LTFH’s focus on shifting to completely cashless disbursement model has led to slower recovery in disbursements growth but the company feels this change is a one-time in nature and will de-risk the business from operational risks.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 35 India Strategy
L&T INFOTECH: FEBRUARY 13, 2017
Key takeaways
L&T Infotech is confident of delivery above industry growth in FY2018 and being in the top quartile. It expects healthy growth in BFSI led by market share gain in top account and new logo wins. It expects robust growth from Manufacturing. Steady growth in the energy segment would continue although not as strong as 7% qoq reported in December quarter. It expects steady improvement in energy segment based on deal wins over the past two quarters
It reiterated net profit margin guidance of 14-15%.
The management indicated a deal pipeline of US$250 mn a couple of months ago on its analysts/investor day. Of this, about US$100 mn deal wins were reported in 3Q results. Decisions are yet to be made on the balance US$150 mn worth of deals. The company is confident of health deal wins and expect favorable outcome in 4QFY17/1QFY18.
Average compensation of visa workers in US is US$77,000. The company is working toward increasing local hiring to mitigate risks in the event of changes in visa rules.
36 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India
MINDTREE: FEBRUARY 13, 2017
Key takeaways
FY2018 growth outlook. Initial trends are encouraging and Mindtree expects higher growth in FY2018 even as it expects better clarity to emerge by April 2017. Growth will be led by record deal wins in the recent quarter and healthy pipeline. We note that Mindtree signed deals worth TCV of US$314 mn (+54% yoy) in 3Q of which US$144 mn was new (+180% yoy). The deal wins are impressive and will aid growth starting 1QFY18. Mindtree’s deep focus on advisory community over the past couple of year has begun to yield results.
Even as Mindtree is optimistic on FY2018, the company expects 4QFY17 to be weak and similar to 3QFY17 due to delays in budgeting process and weak spend from some of the larger clients—a large client in the insurance vertical is undergoing management changes and facing other internal issues. The company expects growth to be led by clients outside the top 10. The company expects sequential c/c revenue growth in 4QFY17E to be muted and similar to that in 3QFY17 (0.4% c/c). The management expects margins to be at similar level.
Restructuring in BlueFin operations is in progress. The sales team has been aligned with Mindtree’s sales team. The company is expanding operations to mainland Europe and North America. Magnet 360 has a weak Dec quarter due to furloughs and seasonal weakness. Mindtree expects strong growth rates in the future.
Mindtree is working on finding replacements for Radha (ex-head of digital) and Veera (ex- head of technology and media verticals). It is taking time as the company is considering external candidates for both the roles and in client geographies (US/ Europe). Additionally, there is high focus on cultural fit. The management indicated that it has filled a number of vacancies internally by elevating internal candidates however replacements of Radha and Veera would be through external hiring.
Breakeven of Bluefin and Magnet 360 would provide 150 bps tailwind to margin in the near term. Additionally, operating efficiencies can help margins in the near term. Increase in offshore leverage, improvement in productivity and yields are margin levers from the medium term perspective. The latter two are work in progress.
Visa rules. Mindtree management does not expect any extreme measures on this front. Potential changes to rules will take place over a year or so. The company has stepped up local hiring and is focused on mitigating risks. The lack of availability of skills continues to be the key issue with respect to local hiring.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 37 India Strategy
PIDILITE INDUSTRIES: FEBRUARY 13, 2017
Key takeaways
Demonetization impact. Management indicated that demonetization did lead to disruptions, especially in rural/wholesale channel and both November and December were impacted. However, it has witnessed some improvement mom but demand recovery is likely to be gradual. In line with commentary from other consumer companies, Pidilite too is exploring, expanding its direct distribution reach.
Consumer segment more impacted. In terms of segments, it highlighted that consumer segment has been relatively more impacted (a trend visible even before demonetization, due to stress in rural markets) while Bazaar (craftsman products) were relatively lesser impacted. Waterproofing subsidiaries had a reasonable quarter.
Key long-term strategic thrusts. (1) keep focusing on core – there is still sufficient headroom to grow (both via higher consumption and penetration-led); also if there is an acquisition available which strengthens position in core will do them, (2) drive core business into selected emerging countries – have achieved good success in Bangladesh, good start in Sri Lanka, good export business in Dubai/Middle East; key focus markets include SAARC, Middle East, Africa and some countries in SE Asia and (3) continue to strengthen technological leadership and have consistent and profitable growth in industrial business.
Comments on APNT’s entry into adhesives. APNT has launched a product similar to Fevikwik, M-Seal and Araldite (Huntsman product) a year ago; however, these products haven’t created much impact. Recently, they have launched product similar to Fevicol (called Truegrip). APNT’s offerings are priced 10-15% cheaper to Pidilite products.
38 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India
PVR: FEBRUARY 13, 2017
Key takeaways
The impact of demonetization is negligible in the current quarter. January 2017 was the best January month in the past five years thanks to solid content pipeline (Dangal, Raees and Kaabil)
Hollywood pipeline for FY2018 is better than FY2017 with a number of successful sequels lined up (Transformers, Fast and furious, Starwars, Spiderman). A better year from Hollywood could aid same store footfall growth by about 3% (same store footfalls down 6% in 9MFY17). FY2018 Bollywood pipeline is comparable to FY2017.
ARPU growth will resume starting March quarter. After several quarters of 4-6% yoy growth in ARPU, ARPU was flat in the December quarter. This was partly due to promotions after demonetization and conscious decision not to push price increase. PVR expects 4-5% ARPU growth to resume starting this quarter. ARPU growth would be led by three factors: (1) steady upgrade in properties allowing room for price increases, (2) like-to-like increase in prices, and (3) increase in prices of a few off-peak slots.
Competitive intensity. It has increased a bit due to aggressive bidding by one of its competitors in few properties. Per PVR, it is not sustainable and will likely moderate soon. Nonetheless, if doesn’t expect rentals as % of revenues to drop.
Vkaao--- PVR has recently launched an online (web and app) platform enabling consumers to watch any movie of their choice at their choice of the theatre as well as date and time. This concept is called Movies on Demand (MoD) at theatres and primarily works on the concept of crowdsourcing. The platform enables the consumer to invite enough people to join in for a show to be financially viable, and hence watch the movie of their choice at a theatre. Vkaao offers a library of over 500 movies (Hollywood, Bollywood, and regional movies) and it will be increased to more than 2,000 titles over time. PVR expects this initiative to improve occupancy in off-peak period
It is widely expected that PVR would benefit from GST—300-400 bps margin expansion almost entirely on account of set-off available against taxes paid on input costs under GST (at present it is not able to set-off entertainment tax and VAT paid ticket sales and F&B revenues against service tax paid on input costs). It is not clear whether companies would be able to retain such benefits in view of proposed anti-profiteering clause in the GST. PVR management indicated that it is awaiting details and clarity on the anti- profiteering clause.
Screen openings have missed timelines due to external issues. About 3-4 properties of PVR are fully fitted and ready to open but delayed due to pending licenses. Few properties that were to open in FY2017 will spill over to FY2018. The management is confident of 65 screen openings in FY2018 (versus about 53 in FY2017E)
KOTAK INSTITUTIONAL EQUITIES RESEARCH 39 India Strategy
RBL BANK: FEBRUARY 13, 2017
Key takeaways
Growth: The bank continues to do well on growth and has not had any major impact of demonetization. The focus remains unchanged. DB&FI (Development Banking and Financial Inclusion) banking will continue to lead growth along with BBB (Branch and Business Banking). The BBB portfolio has ~45% which is primarily into LAP, ~15% in the cards business and business loans each and the balance in personal loans. All segments continue to grow well. The bank is not seeing any major trends on applications or rejection rates. A relatively well capitalized position is helping the bank currently as it is not inhibited in growing at well above industry average. The bank should be in a position to grow at closer to current average given its size and scale of operations.
Asset quality: (1) The DB&FI book continues to do well during the period of demonetization as seen from the recent results and no major change in outlook is likely in the current quarter. 45% of the loans are given to Small Finance Banks/MFI. The bank is actively looking at the performance of these companies. The origination model through BC is working quite well and the bank is not expecting to make any changes to this model (2) The bank continues to monitor the portfolio in LAP. Delinquency is quite low currently and adequately captures the risk of this business. (3) There are no major changes to the early warning signals that the bank is monitoring.
Others: (1) The bank is on its way to improve its long term cost-income ratio which is currently at ~53-55%. (2) Liability profile is getting stronger, especially post demonetization. This is helping NIM which is currently at 3.4%. (3) The bank is working through a lot of products with its customers to build a fee income platform. (4) Attracting talent from private and foreign banks has not been much of a challenge to fill key gaps in business. Less than 10% of their employees are part of the IBA wage settlement platform. (5) Tier-1 ratio is currently at 12% and the bank would look at raising capital at an appropriate time looking at their medium term growth in business and profitability.
40 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India
SHRIRAM TRANSPORT FINANCE: FEBRUARY 13, 2017
Key takeaways
Scrapage of older vehicles. Shriram has already started focusing more on younger used CVs. The management highlighted that there is no scrap-age law across the world; it is not clear when the cabinet notice will be issued on this. The government may provide heavy incentives. Notably, the first overloading law came in FY2005, it took a couple of years for the industry to ban overloading. By now, about 90% of the vehicles don’t overload.
On NPL, credit cost will come down by 30-40 bps but may remain at these levels for the next 2-3 quarters. Prices of used vehicles have a bearing on crude prices; prices have gone up by about 10% since crude went down. This provides some comfort on NPLs. The company will bring down coverage policy by 10% for every bucket movement in GNPL. The coverage policy was 50% earlier; it increased to 80% due to the downcycle. Historically, LGD was 40% and hence 50-55% is more than sufficient.
Shriram has an app for loan collections in place for last one year – 30% of collections by cash post demonetization as compared 60% in the past. The management expects the share of cash collections to go up as cash in the system has increased but is lower than 60% earlier.
Collections have been steadily improving. During November, collections dropped by 9% from its normal levels, to 6% in December and 3% in January. This implies that collections are slowly trending back to normal. However, it is difficult to expect that borrowers, who did not pay in Nov-Jan, will be able to pay all pending installment now. As such, NPL bucket movement will be adverse.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 41 India Strategy
SKIPPER LIMITED: FEBRUARY 13, 2017
Key takeaways
Good visibility on revenues. Skipper currently has an order book of ₹21 bn with a revenue visibility of ~18 months. While no major orders were won in 9MFY17, a steady inflow of short-cycle orders ensured strong double-digit revenue growth and stable margins. The management mentioned that some of the cancelled PGCIL orders will be rebid in the coming months. The company currently has pending bids worth ₹10 bn and expects good success rate on the same.
One of the lowest cost producers of transmission towers. The manufacturing facilities of Skipper are located in the eastern part of the country and thus enjoy lower input cost for raw material (proximity to steel plants). Further, the company has backward integration with own rolling mills for steel angles, an advantage over competitors that have to procure the angles from third parties. As a result, while Skipper’s raw material cost accounts for 55-60% of total, the same for competitors amounts to 65-70% as per the management. The company is thus among the lowest cost producers of transmission towers in the country.
Large exposure to PGCIL. Out of the transmission towers business (88% of total revenues), 60% goes as a standalone supply to PGCIL (mostly for TBCB contracts) while ~20% is indirectly supplied to PGCIL via the EPC contractors (for turnkey projects). The direct-supply market is highly fragmented and even with 7-8% market share of Skipper in PGCIL’s ordering, the company was the largest supplier to PGCIL in the direct-supply category. The company currently has ~20% exposure to state ordering (mainly Uttar Pradesh, Telangana and Rajasthan).
Exports on a strong footing. The company had an exceptional year in FY2016 with 45% of T&D ordering being exported, largely led by their alliance agreement with a Columbian company in LatAm. The usual run-rate for exports stands at ~25% with exposure to LatAm and relatively smaller exposure to Middle East, Africa and South East Asia. The company prided itself in being selected as an alliance partner in LatAm despite being an L2 bidder behind Chinese players, largely on the strength of its credibility in long-term contract execution in India.
Other takeaways.
. The company has a manufacturing capacity of 200,000 tons for transmission towers, nearly 16% of all-India capacity of 1.2 mn tons across organized players. The expanded capacities would start commercial production by 1QFY18.
. The focus of the company is on supply of towers while EPC projects are taken up only selectively.
. The impact of demonetization on the PVC pipes business (~10% of total revenues) is not yet over and may spill over into 4QFY17.
42 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India
TECH MAHINDRA: FEBRUARY 13, 2017
Key takeaways
FY2018 growth outlook. Telecom segment revenue growth would accelerate in FY2018 led by large accounts. Tech M is walking away from a few projects in the telecom vertical including LCC in view of focus on profitability and yields. The aggregate impact could be up to US$100 mn in FY2018. Even after this drag, reported growth of telecom segment in FY2018 would be better than in FY2017. Enterprise segment will continue to grow in line or ahead of the industry aided by strength in manufacturing, retail and BFSI verticals.
There are several margin levers which the company is exploring, which should lead to margin expansion irrespective of growth profile. These include: (1) increase in utilization, (2) automation, (3) improvement in pyramid, and (4) exiting low return business in certain countries in Africa and Asia. These levers can boost margins by 50-100 bps FY2018.
LCC acquisition has enabled Tech M to win networking contracts. Network managed services solutions business remains a key focus area for Tech M. The idea is to win contracts from mid-sized telecom companies, and scale up those solutions even for larger telecom companies. Network as a capability presents interesting opportunities. Tech M has already won 3-4 large deals.
There shouldn’t be any wage hike impact in 4QFY17, as hikes would be given to only employees with less than six years of experience in June 2017 (effective Jul 2017); for other employees hikes would be decided in June post an evaluation.
IT recruiting has slowed at the mass hiring level, though demand for certain skill sets remains fairly high. Attrition for some of these skill sets also remains fairly high.
Impact of the US visa issue is currently unclear as there are several bills floating around, and the final outcome is awaited. Out of about 7,500 employees in the US, 6,200 is the workforce (the rest are sub-contracted). Of these 6,200, 4,000-4,100 are visa dependent, and of these ~3,400 are H1B dependent. These employees earn an average salary of US$77,000. The company feels that higher employee salaries due to local hiring will lead to sharp wage inflation for all companies, which would lead an eventual increase in pricing.
Capital allocation: US$200 mn for M&A (BFSI, healthcare, engineering services and digital are key focus areas). Treasury shares would be used to fund M&A only if the acquisition size is fairly large; in most other cases a combination of cash and debt would be used. 20% dividend payout will be maintained.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 43 India Strategy
UJJIVAN FINANCIAL SERVICES: FEBRUARY 13, 2017
Key takeaways
Growth: (1) It has been a mixed performance on growth across various states. The company is actively monitoring the performance across UP, Karnataka, MP and Maharashtra. Select states are going through state/local body elections. (2) Loan growth would be muted till the issues on the ground are settled as well. Also, the conversion to a bank was also expected to slow down business as the liability side of the balance sheet needs to be addressed as well. The bank is well funded currently and has adequate unutilized lines of credit. (3) It is looking at a flat AUM in the current quarter. There is greater emphasis to build the non-MFI portfolio.
Asset quality: (1) Most MFIs are not pursuing any aggressive strategies on collections. The situation is being monitored by MFIN which is making it easier to intervene in any specific village/town/urban center. They are working actively with local regulatory bodies to ensure that it is not being spread to other centers. (2) There has been an improvement in collection efficiency across most states. (3) The focus would be to gain confidence of the customer and actively engage with him to ensure that he does not worry over credit availability.
Conversion to SFB: (1) The bank has been launched recently and it is working to convert some of its existing branches to SFBs. The first 5 branches were launched in the previous fortnight. The management is looking at various gaps in systems and processes before there is acceleration in branch rollouts. (2) The customer segment is unlikely to change materially and the bank is not looking to compete with the customer segment of frontline private sector banks. (3) Retail term deposits, especially one that is goal based and focused on recurring deposits, would be the main driver of growth in deposits. Building a strong CASA deposit franchise would take a fair amount of time. There is a lot of opportunity to grow term deposits within its customer franchise. (4) The bank’s long term aspiration is to become a full-fledged bank that is not inhibited by regulations in lending. However, these changes are unlikely to happen before five years and the bank would focus on the current demand available.
Others: The bank’s opex cost structure would continue to remain high in the short term as the conversion to a bank is underway. The bank is hopeful that that the cost-income ratio would peak out at ~60-62% levels in this period which could be for 18-24 months before productivity and slowdown in branches would pull this ratio back to ~55% levels and ~50% levels in the long term. There is no pressure on NIM in the business currently. The bank would look to pass on the benefits from its liability side as and when they flow through.
44 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India
ZEE ENTERTAINMENT: FEBRUARY 13, 2017
Key takeaways
Zee‘s ad revenue growth in the month of January was flat yoy as against a decline in December. The management indicated that media agencies expect ad growth to normalize in 2-3 months. Zee is confident of 15% growth in ad revenues in the near to medium term.
Bulk of the gains associated with phase III digitization will be realized over the next 12-18 months. The company is confident of 15% growth in domestic subscription revenues in the near to medium term led by gains from phase III and phase IV digitization.
Content refresh and increase in original programming on Zee TV and &TV have begun. Zee TV and &TV account for about 50 out of 360 original programming hours per week. A 10-15% increase in OPH on Zee and &TV would result in material increase in programming costs (or impact on margins).
Zee management has guided 30%+ EBITDA margins in the medium term. We believe that the company is in position to deliver 33%+ EBITDA margin following the sale of sports business and in the absence of any large investment in new initiatives.
Sports business sale would be concluded in the current quarter.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 45 SELL Motherson Sumi Systems (MSS) Automobiles FEBRUARY 13, 2017 RESULT Coverage view: Neutral
SMRPBV growth still below par but standalone showing strong growth. Price (`): 351 Motherson Sumi reported 3QFY17 consolidated EBITDA of ₹11.1 bn (+23% yoy), which Target price (`): 300 was 9% above our estimates. Standalone business reported a strong 45% yoy EBITDA BSE-30: 28,352 growth in 3QFY17. While standalone business has done better than expectations because of new order wins in Maruti Suzuki, revenue growth in SMRPBV business was in line with Street estimates. Maintain SELL with revised target price of ₹300 (from ₹280 earlier) on rollover to December 2018E.
Company data and valuation summary Motherson Sumi Systems Stock data Forecasts/Valuations 2017E 2018E 2019E 52-week range (Rs) (high,low) 359-206 EPS (Rs) 11.4 13.8 16.5 Market Cap. (Rs bn) 492.5 EPS growth (%) 18.0 21.3 18.9 Shareholding pattern (%) P/E (X) 30.8 25.4 21.3 Promoters 63.1 Sales (Rs bn) 430.2 489.6 561.0 FIIs 19.6 Net profits (Rs bn) 16.0 19.4 23.1 MFs 6.3 EBITDA (Rs bn) 43.3 51.6 60.7 Price performance (%) 1M 3M 12M EV/EBITDA (X) 11.9 10.0 8.4 Absolute 7.4 16.4 55.6 ROE (%) 26.5 22.9 23.4 Rel. to BSE-30 3.2 10.1 26.1 Div. Yield (%) 1.0 1.2 1.4
Strong performance of standalone and SMR business leads to positive surprise
Motherson Sumi reported consolidated EBITDA of ₹11.1 bn (+23% yoy), which was 8% above our estimates due to (1) strong performance of the standalone business on both revenue growth and profitability and (2) higher-than-expected EBITDA margin in SMR business. Consolidated net profit came in at `4.2 bn (+34% yoy), which was 17% above our estimates largely due to higher other income.
The company reported standalone revenues of ₹15.7 bn (+23.9% yoy), which was 3% above our estimates, led by higher other operating revenues (which increased to `681 mn in 3QFY17 as compared to `317 mn in 3QFY16). The company reported standalone EBITDA of ₹3.3 bn (+45.4% yoy), which was 18% above our estimates. EBITDA margin came in at 21.2%, which was 270 bps higher than our estimates largely due to (1) 70 bps sequential improvement in gross margin (KIE 60 bps qoq decline), (2) forex gain of `170 mn (1.1% of sales) and (3) higher other operating income as highlighted above.
Revenues for SMR business were EUR407 mn (+15% yoy), which was in line with our estimate. EBITDA margin surprised positively at 11.8% (up 110 bps yoy and up 220 bps qoq) as compared to our estimate of 10%. Revenues for SMP business were EUR759 mn (+11% yoy), which was largely in line with our estimates. EBITDA margin came in at 5.9% (+10 bps yoy and down 60 bps qoq), which was lower than our estimate of 6.5%.
Fine-tune estimates; maintain SELL rating with revised target price of `300
Our FY2017-19E consolidated EBITDA estimates remain largely unchanged as increase in Hitesh Goel estimates for the standalone entity is offset by cuts in SMRPBV business. We have cut our consolidated EPS estimates by 2-5% due to lower other income and slight increase in tax rate (refer to Exhibit 7 for details). We have increased our FY2017-19E standalone EBITDA estimates Nishit Jalan by 3-9% to factor in stronger revenue growth and improvement in profitability over the past two quarters. We have revised our SoTP-based target price to ₹300 (from ₹280 earlier) due to (1) increase in standalone EBITDA estimates and (2) 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. Motherson Sumi Systems Automobiles
Consolidated EBITDA was 8% ahead of estimates
Motherson Sumi reported consolidated EBITDA of ₹11.1 bn (+23% yoy), which was 8% above our estimates due to (1) strong performance of the standalone business on both revenue growth and profitability and (2) higher-than-expected EBITDA margin in SMR business. Consolidated net profit came in at `4.2 bn (+34% yoy), which 17% above our estimates largely due to higher other income.
Standalone business: Strong quarter led by 24% yoy revenue growth
The company reported revenues of ₹15.7 bn (+23.9% yoy), which was 3% above our estimates. Other operating revenues increased to `681 mn in 3QFY17 as compared to `317 mn in 3QFY16. We note that the company is outperforming overall industry growth due to higher share in Maruti’s recent new model launches such as Baleno and Brezza.
The company reported EBITDA of ₹3.3 bn (+45.4% yoy), which was 18% above our estimates. EBITDA margin came in at 21.2%, which was 270 bps higher than our estimates largely due to (1) 70 bps sequential improvement in gross margin (KIE 60 bps qoq decline), (2) forex gain of `170 mn (1.1% of sales) and (3) higher other operating income as highlighted above. Employee expenses increased by 13% yoy leading to 120 bps margin benefit due to operating leverage. Other expenses were up 22% yoy, which is largely in line with overall revenue growth.
Reported PAT was ₹2.1 bn (+76% yoy), which was 28% above our estimates due to higher other income.
SMRPBV business: Decent quarter but SMP’s EBITDA margin remains flattish yoy
Revenues for SMR business were EUR407 mn (+15% yoy), which was in line with our estimate. EBITDA margin surprised positively at 11.8% (up 110 bps yoy and up 220 bps qoq) as compared to our estimate of 10%.
Revenues for SMP business were EUR759 mn (+11% yoy), which was largely in line with our estimates. EBITDA margin came in at 5.9% (+10 bps yoy and down 60 bps qoq), which was lower than our estimate of 6.5%. Start-up costs impacted EBITDA margin by 90 bps in this quarter. We note that despite revenue growth, SMP’s EBITDA margins have remained within 5.5-6.5% range over the past three years.
Net debt for the company was ₹25.4 bn as of December 2016 as compared to ₹21.8 bn as of June 2016. The company reiterated its capex guidance of `20 bn in FY2017; capex will likely remain around similar levels in FY2018 as well.
Change in estimates: Our FY2017-19E consolidated BITDA estimates largely unchanged
Our FY2017-19E consolidated EBITDA estimates remain largely unchanged as increase in estimates for the standalone entity is offset by cuts in SMRPBV business. We have cut our consolidated EPS estimates by 2-5% due to lower other income and slight increase in tax rate (refer to Exhibit 7 for details). We have increased our FY2017-19E standalone EBITDA estimates by 3-9% to factor in stronger revenue growth and improvement in profitability over the past two quarters.
For the SMRPBV business, we build in 15% revenue CAGR over the next two years and expect EBITDA margin to increase to around 9% by FY2019E from ~8% in FY2017E.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 47 Automobiles Motherson Sumi Systems
Exhibit 2: Standalone net sales growth was strong at 24% yoy in 3QFY17 Motherson Sumi's standalone net sales growth, March fiscal year-ends 2011-17 (%)
80 Yoy growth (%) 67 70 70 58 60 55 50 41 41 40 34 27 30 23 24 17 18 17 20 16 14 14 13 9 12 10 10 2 2 4 1 3 1 2
0
1QFY11
2QFY11
3QFY11
4QFY11
1QFY12
2QFY12
3QFY12
4QFY12
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17 2QFY17 3QFY17
Source: Company, Kotak Institutional Equities
Exhibit 3: Standalone EBITDA margin (ex-forex gain) was largely flat on qoq basis Standalone quarterly ex-forex EBITDA margin trend, March fiscal year-ends, 2011-17 (%)
24.0 Ex forex EBITDA margin (%) 22.0 20.0 18.0 16.0 14.0 12.0
10.0
1QFY11
2QFY11
3QFY11
4QFY11
1QFY12
2QFY12
3QFY12
4QFY12
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17 2QFY17 3QFY17
Source: Company, Kotak Institutional Equities
48 KOTAK INSTITUTIONAL EQUITIES RESEARCH Motherson Sumi Systems Automobiles
Exhibit 4: Consolidated EBITDA was 9% above estimates due to outperformance in standalone business; SMR’s EBITDA margin was also up qoq MSSL consolidated 3QFY17 results, March fiscal year-ends (` mn)
(%chg.) 3QFY17 3QFY17E 3QFY16 2QFY17 3QFY17E 3QFY16 2QFY17 9MFY17 9MFY16 % chg. FY2017E Net sales from operations 105,138 106,231 92,870 100,181 13.2 4.9 308,842 269,169 Other operating income 903 1,200 1,562 1,188 (42.2) (24.0) 3,072 4,445 Net sales 106,041 107,431 94,432 101,369 (1.3) 12.3 4.6 311,914 273,614 14.0 430,185 Raw materials (65,427) (66,219) (57,630) (61,312) 13.5 6.7 (190,466) (166,499) (258,789) Staff costs (19,964) (20,000) (17,905) (19,104) 11.5 4.5 (59,161) (52,029) (82,877) Other expenses (9,903) (11,000) (9,788) (10,983) 1.2 (9.8) (32,165) (29,283) (45,202) Exchange fluctuations 346 0 (79) 97 320 (274) 0 Total expenses (94,948) (97,219) (85,401) (91,301) 11.2 4.0 (281,472) (248,086) (386,868) EBITDA 11,093 10,211 9,031 10,068 8.6 22.8 10.2 30,442 25,528 19.2 43,317 Depreciation (2,733) (2,650) (2,705) (2,643) 3.1 1.0 3.4 (7,884) (7,510) (10,823) EBIT 8,360 7,561 6,326 7,424 10.6 32.2 12.6 22,558 18,018 25.2 32,494 Other income 433 45 37 45 865.3 1,068.2 865.3 516 337 1,163 Interest expense (1,084) (1,000) (913) (980) 8.4 18.8 10.6 (2,911) (2,754) (3,896) Profit before tax 7,710 6,606 5,450 6,489 16.7 41.5 18.8 20,163 15,601 29.2 29,761 Exceptional item 0 0 0 0 0 0 Tax expense (2,845) (2,050) (1,549) (2,105) 38.8 83.7 35.1 (6,905) (4,665) (9,915) Share of profit from associates 609 420 366 414 1,408 929 2,000 Minority interest 1,314 1,408 1,153 1,189 3,870 3,192 5,840 Profit after tax 4,159 3,569 3,115 3,610 16.5 33.5 15.2 10,795 8,673 24.5 16,006 Adj PAT 4,159 3,569 3,115 3,610 16.5 33.5 15.2 10,795 8,673 24.5 16,006 # of shares 1,404 1,404 1,323 1,404 1,404 1,323 1,404 EPS (Rs/share) 3.0 2.5 2.4 2.6 7.7 6.6 11.4 Tax rate (%) 36.9 31.0 28.4 32.4 34.2 29.9 33.3 As a % of revenues Raw material 61.7 61.0 60.5 61.1 60.9 60.2 Staff costs 18.8 19.0 18.8 19.0 19.0 19.3 Other expenses 9.3 10.4 10.8 10.3 10.7 10.5 EBITDA margin (%) 10.5 9.5 9.6 9.9 9.8 9.3 10.1 EBITDA margin (ex forex) 10.1 9.5 9.6 9.8 9.7 9.4 10.1 EBIT Margin 7.9 7.0 6.7 7.3 7.2 6.6 7.6
Source: Company, Kotak Institutional Equities estimates
Exhibit 5: MSSL consolidated net debt increased by `3.7 bn qoq MSSL consolidated net debt position, March fiscal year-ends, 2012-17 (` bn)
60 Net consolidated debt (Rs bn) 48.3 50 45.7 47.1 45.6 47.5 46.3 44.442.8 43.143.142.4 44.4 42 43.0 41.5 39.3 40 35.9 31.3 30 25.4 21.8 20 10
0
4QFY12
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17 2QFY17 3QFY17
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 49 Automobiles Motherson Sumi Systems
Exhibit 6: MSS will commission nine new plants (including one relocation) over the next two years List of recently commissioned plants and status of upcoming plants, March fiscal year-ends
Location Country Product Company Start of production Hyosang Ochang Plant II South Korea Exterior mirror SMR Started in 4QFY16 Marysvlle USA Exterior mirror SMR Started in 4QFY16 Ningbo China Exterior mirros SMR Started in 4QFY16 Walajabad India Wiring harness Motherson Sumi Started in 4QFY16 Beijing China Door panels SMP Started in 1QFY17 Noida India Exterior mirror SMR Started in 1QFY17 Zitlaltepec Mexico Bumpers and rocker panels SMP Started in 1QFY17 Sanand India Wiring harness Motherson Sumi 4QFY17 San Luis Potosi Mexico Exterior mirror SMR 4QFY17 Noida India Wiring harness Motherson Sumi 2QFY18 Túrkeve Hungary Polymer products MATE 3QFY18 Kecskemet Hungary Bumpers & Door panels SMP 4QFY18 Mosonszolnok Hungary Exterior mirror SMR 4QFY18 Pithampur India Wiring Harness Motherson Sumi FY2018 Incheon City Korea Mirror parts SMR FY2018 Tuscaloosa USA Bumpers & Door panels SMP 1QFY19
Source: Company
Exhibit 7: Our consolidated EBITDA estimates remain largely unchanged; PAT cut by 2-5% on lower other income and higher tax rate Earnings revision table, March fiscal year-ends, 2017-19E (` mn) New estimates Old estimates % change 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E Standalone Net sales 62,545 71,268 81,041 62,022 69,804 78,384 0.8 2.1 3.4 EBITDA 12,786 14,900 17,203 12,455 14,126 15,810 2.7 5.5 8.8 Margin (%) 20.4 20.9 21.2 20.1 20.2 20.2 Adj net profit 8,227 9,945 11,510 8,915 10,935 12,271 (7.7) (9.1) (6.2) Standalone EPS 5.9 7.1 8.2 6.4 7.8 8.7 (7.7) (9.1) (6.2) Consolidated Net sales 430,185 489,583 560,954 436,737 501,587 573,884 (1.5) (2.4) (2.3) EBITDA 43,317 51,554 60,662 42,394 51,290 60,566 2.2 0.5 0.2 Margin (%) 10.1 10.5 10.8 9.7 10.2 10.6 Adj net profit 16,006 19,422 23,094 16,352 20,559 24,306 (2.1) (5.5) (5.0) Consolidated EPS (Rs) 11.4 13.8 16.5 11.7 14.6 17.3 (2.1) (5.5) (5.0)
Source: Company, Kotak Institutional Equities estimates
Exhibit 8: We value MSSL at ₹300 on an SoTP basis Motherson Sumi sum-of-the-parts valuation methodology
EPS Multiple Value (Rs) (X) (Rs/share) December 2018 standalone EPS 7.9 22.0 174 December 2018 EPS of other subs (concern share) 7.9 16.0 126 Equity value 300 Target price 300
Source: Company, Kotak Institutional Equities estimates
50 KOTAK INSTITUTIONAL EQUITIES RESEARCH Motherson Sumi Systems Automobiles
Exhibit 9: We expect standalone earnings to grow at 18% CAGR during FY2017-19E Motherson Sumi standalone profit model, balance sheet and cash model, March fiscal year-ends, 2010-19E (` mn)
2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E Profit model (Rs mn) Net sales 17,049 28,236 35,718 43,041 45,245 49,850 53,120 62,545 71,268 81,041 EBITDA 2,334 4,303 5,184 7,570 8,448 8,754 9,602 12,786 14,900 17,203 Other income 857 756 881 865 990 763 2,083 1,528 1,662 1,823 Interest 252 284 548 485 324 208 222 350 - - Depreciation 646 830 1,172 1,453 1,530 2,071 2,008 1,954 2,149 2,344 Profit before tax 2,293 3,946 4,345 6,497 7,584 7,238 9,455 12,010 14,412 16,681 Current tax 814 979 1,188 1,801 2,295 2,348 2,515 3,783 4,468 5,171 Deferred tax 153 92 (15) - (62) (259) (179) - - - Net profit 1,326 2,875 3,172 4,696 5,351 5,149 6,870 8,227 9,945 11,510 Earnings per share (Rs) 1.6 2.2 2.4 3.5 4.0 3.9 5.2 5.9 7.1 8.2 Balance sheet (Rs mn) Equity 7,165 10,102 12,855 16,240 19,056 21,021 24,366 55,415 61,869 69,339 Deferred tax liability 135 225 214 177 115 - - - - - Total Borrowings 4,130 7,927 9,552 9,273 7,578 5,336 3,381 - - - Current liabilities 5,274 6,684 7,649 8,714 9,895 11,032 10,576 11,497 12,834 14,203 Total liabilities 16,705 24,937 30,270 34,404 36,644 37,389 38,323 66,913 74,703 83,543 Net fixed assets 7,528 10,584 13,432 15,057 14,863 15,017 14,740 15,786 16,637 17,293 Investments 2,355 3,427 3,704 5,132 5,821 7,320 7,473 7,473 7,473 7,473 Cash 365 381 202 658 191 1,461 185 25,933 30,297 35,678 Other current assets 6,438 10,545 12,912 13,547 15,769 13,591 15,925 17,720 20,296 23,099 Miscellaneous expenditure 18 - 19 10 ------Total assets 16,705 24,937 30,270 34,404 36,644 37,389 38,323 66,913 74,703 83,543 Free cash flow (Rs mn) Operating cash flow excl. working capital 2,498 3,824 5,364 6,488 7,044 7,093 7,566 9,353 10,739 12,296 Working capital changes (506) (2,498) (1,073) (488) (351) 1,115 (957) (874) (1,239) (1,434) Capital expenditure (2,048) (3,730) (3,673) (3,182) (1,526) (2,113) (1,731) (3,000) (3,000) (3,000) Free cash flow (56) (2,404) 618 2,818 5,167 6,095 4,878 5,479 6,499 7,863 Ratios EBITDA margin (%) 13.7 15.2 14.5 17.6 18.7 17.6 18.1 20.4 20.9 21.2 PAT margin (%) 7.8 10.2 8.9 10.9 11.8 10.3 13.4 13.2 14.0 14.2 Net debt/equity (X) 0.5 0.7 0.7 0.5 0.4 0.2 0.1 (0.5) (0.5) (0.5) Book value (Rs/share) 8.5 7.6 9.7 12.3 14.4 15.9 18.4 39.5 44.1 49.4 RoAE (%) 23.4 33.3 27.6 32.3 30.3 25.7 31.4 20.6 17.0 17.5 RoACE (%) 14.1 21.0 17.7 21.1 21.4 20.0 26.9 20.4 17.0 17.5
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 51 Automobiles Motherson Sumi Systems
Exhibit 10: We expect consolidated earnings to grow by 20% CAGR during FY2017-19E Motherson Sumi consolidated profit model, balance sheet and cash model, March fiscal year-ends, 2010-19E (` mn)
2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E Profit model (Rs mn) Net sales 67,022 81,756 147,141 256,170 307,210 350,319 386,769 430,185 489,583 560,954 EBITDA 3,271 6,932 8,301 17,778 26,873 32,027 37,360 43,317 51,554 60,662 Other income 3,331 2,341 2,070 170 176 177 392 1,163 1,189 440 Interest 573 497 1,649 2,495 2,944 3,178 2,706 3,896 3,345 2,108 Depreciation 2,601 2,465 3,796 7,145 8,172 9,206 11,357 10,823 12,275 13,727 Profit before tax 3,428 6,312 4,926 8,308 15,934 19,819 23,689 29,761 37,122 45,267 Current tax 1,237 1,859 2,060 3,805 5,169 5,218 5,836 9,915 12,337 15,021 Deferred tax (76) 29 93 31 (174) (846) (1,288) - - - Minority interest 91 (523) 631 (70) (3,316) (4,294) (4,823) (5,840) (7,563) (9,572) Adj Net profit 2,361 3,903 2,596 4,411 7,622 9,866 12,784 16,006 19,422 23,094 Earnings per share (Rs) 2.8 3.0 2.3 3.3 5.8 7.5 9.7 11.4 13.8 16.5 Balance sheet (Rs mn) Equity 11,649 16,087 18,717 22,890 29,593 33,238 42,456 78,554 91,159 106,147 Deferred tax liability 40 10 1,506 1,441 1,680 1,457 1,926 1,926 1,926 1,926 Total Borrowings 8,180 12,635 46,023 48,556 47,758 51,979 63,347 78,324 43,324 33,324 Current liabilities 15,921 19,633 49,289 52,175 66,696 78,892 85,091 93,400 104,350 117,842 Minority interest 2,027 2,276 5,027 4,025 7,896 10,142 14,411 14,411 14,411 14,411 Total liabilities 37,817 50,641 120,562 129,088 153,623 175,708 207,231 266,615 255,170 273,650 Net fixed assets 16,356 22,258 51,380 56,629 65,660 70,847 87,329 98,506 108,230 116,503 Investments 471 453 938 716 749 649 1,009 1,009 1,009 1,009 Cash 3,431 3,565 4,557 5,944 9,061 18,919 19,329 56,012 20,375 13,900 Other current assets 17,541 24,365 63,687 65,798 78,153 85,293 99,564 111,089 125,556 142,239 Miscellaneous expenditure 18 ------Total assets 37,817 50,641 120,562 129,088 153,623 175,708 207,231 266,615 255,170 273,650 Free cash flow (Rs mn) Operating cash flow excl. working capital 5,465 7,191 9,244 15,879 24,547 21,247 32,248 30,726 35,043 38,930 Working capital changes (661) (2,998) (3,357) (1,019) 2,403 12,650 (9,139) (3,215) (3,518) (3,191) Capital expenditure (4,129) (7,861) (10,758) (11,389) (14,120) (19,443) (22,452) (22,000) (22,000) (22,000) Free cash flow 674 (3,668) (4,871) 3,471 12,830 14,454 657 5,510 9,525 13,739 Ratios EBITDA margin (%) 4.9 8.5 5.6 6.9 8.7 9.1 9.7 10.1 10.5 10.8 PAT margin (%) 3.5 4.8 1.8 1.7 2.5 2.5 3.3 3.7 4.0 4.1 Net debt/equity (X) 0.4 0.6 2.2 1.9 1.3 1.0 1.0 0.3 0.3 0.2 Book value (Rs/share) 13.8 12.2 14.1 17.3 22.4 25.1 32.1 56.0 65.0 75.6 RoAE (%) 24.2 28.1 17.5 21.2 29.0 31.4 33.8 26.5 22.9 23.4 RoACE (%) 2.4 12.9 5.4 8.4 18.4 21.7 23.6 24.7 25.3 26.2
Source: Company, Kotak Institutional Equities estimates
52 KOTAK INSTITUTIONAL EQUITIES RESEARCH SELL NMDC (NMDC) Metals & Mining FEBRUARY 14, 2017 RESULT Coverage view: Cautious Weak due to one-offs. NMDC’s EBITDA of `10.3 bn (+215% yoy, +24% qoq) was lower than our estimate. A few one-off expenses amounting to a total of `3.9 bn led to Price (`): 145 earnings miss. The quarter aside, recent increase in global and domestic iron-ore prices Target price (`): 105 will aid near-term earnings. Domestic merchant miners though are unable to take full BSE-30: 28,352 advantage of global price rally due to domestic surplus and high export duty. We raise our TP to `105 (`95 earlier) but maintain SELL rating. Our cautious stance is due to weak fundamentals for global iron-ore market and domestic surplus.
Company data and valuation summary NMDC Stock data Forecasts/Valuations 2017E 2018E 2019E 52-week range (Rs) (high,low) 150-79 EPS (Rs) 10.2 9.5 9.4 Market Cap. (Rs bn) 458.3 EPS growth (%) 28.1 (6.8) (1.2) Shareholding pattern (%) P/E (X) 14.2 15.3 15.4 Promoters 80.0 Sales (Rs bn) 88.1 95.0 97.6 FIIs 3.4 Net profits (Rs bn) 32.2 30.0 29.7 MFs 0.5 EBITDA (Rs bn) 43.1 45.7 46.5 Price performance (%) 1M 3M 12M EV/EBITDA (X) 10.0 10.0 10.0 Absolute 0.6 15.1 84.2 ROE (%) 12.1 12.7 12.2 Rel. to BSE-30 (3.3) 8.9 49.3 Div. Yield (%) 4.1 4.1 4.1
Weak results due to a few one-off expenses
NMDC’s EBITDA of `10.3 bn (+215% yoy, +24% qoq) was lower than our estimate due to a few one-off expenses. The company’s other expenses increased 84% qoq to `5.2 bn and includes a few one-offs (1) `2 bn charge on expected credit loss on trade receivables of `25.6 bn, (2) `0.8 bn towards amount incurred for doubling of KK rail line as the ownership of this asset rests with the railways. Besides, the company’s royalty costs were also higher due to inclusion of `1.1 bn towards service tax liability (expected) on royalty payments. Iron-ore sales increased 39% yoy to 10.1 mn tons and included export sales of 0.78 mn tons (0.38 mn tons in 3QFY16). Besides higher export sales, the domestic sales too were robust (+36% yoy) led by increased off take by RINL (expanded capacity), Essar Steel, sponge iron units and KIOCL. Blended iron-ore realization increased 14% qoq led by price hikes in Chhattisgarh and higher export realizations. Net income (adjusted) increased by 3% qoq to `8 bn (+88% yoy).
Domestic miners unable to take full advantage of higher global prices due to domestic surplus
Domestic iron-ore prices have increased by 10-18% since October 2016 compared to 45% increase in global iron-ore prices (CFR China). Lower increase in domestic market prices is attributable to (1) surplus domestic merchant supply . Merchant iron-ore demand is ~90-95 mtpa against which current production is close to 120 mtpa. The major iron-ore producing states of Odisha, Chhattishgarh have 15-20 mtpa of excess production than domestic demand, (2) ~25 mtpa of such merchant iron-ore demand is from sponge iron units which operate with very thin margins as prices are in parity to scrap prices for common end use demand by the long product industry, and (3) domestic miners from Odisha (other than NMDC) have to pay export duty at 30% on iron-ore exports. Essentially, given domestic surplus, export parity realizations from Odisha is one of the key variables in deciding domestic prices.
Maintain cautious outlook; revise TP to ₹105 (₹95 earlier) Abhishek Poddar
Our cautious outlook is due to (1) our expectation of global iron-ore prices weakening due to increasing supplies from Australia, Brazil and (2) inability of Indian iron-ore miners to fully benefit from higher global prices, (3) weakening demand of merchant iron-ore as more mines are being auctioned by the government. We raise earnings estimates by 11-12% and TP to `105 (`95).
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Metals & Mining NMDC
Exhibit 1: Interim results of NMDC, March fiscal year-ends (Rs mn)
(% chg.) 3QFY17 3QFY17E 3QFY16 2QFY17 3QFY17E 3QFY16 2QFY17 9MFY17 9MFY16 (% chg.) 2017E Net revenues 24,979 24,465 15,176 17,392 2 65 44 59,577 49,271 21 88,125 Change in stock/Raw material 373 459 330 1,095 1,856 550 98 Stores and spares 820 893 853 571 (8) (4) 44 1,847 1,912 (3) 2,687 Employee costs 1,750 1,822 1,719 1,688 (4) 2 4 5,136 5,117 0 7,183 Royalty and cess 4,948 4,048 2,428 1,714 22 104 189 9,844 7,299 35 14,610 SGA 1,670 1,786 1,490 1,271 (6) 12 31 4,440 1,843 141 6,426 Other expenses 5,152 2,814 5,100 2,794 83 1 84 9,764 9,234 6 14,000 Total expenditure 14,712 11,822 11,920 9,133 24 23 61 32,888 25,956 27 45,004 EBITDA 10,266 12,643 3,257 8,258 (19) 215 24 26,689 23,316 14 43,121 Depreciation 551 550 563 544 0 (2) 1 1,655 1,504 10 2,577 EBIT 9,715 12,093 2,694 7,714 (20) 261 26 25,034 21,812 15 40,544 Other income 1,559 1,235 4,303 2,735 26 (64) (43) 7,745 13,650 (43) 8,429 Interest expense 53 0 (4) 15 149 1 1,198 Profit before taxes 11,221 13,328 7,001 10,434 (16) 60 8 32,630 35,461 (8) 47,775 Exceptional items 2,013 0 23 0 2,013 176 2,013 Current taxes 3,257 4,527 2,767 2,727 (28) 18 19 9,845 12,753 (23) 15,555 Net income 5,952 8,802 4,211 7,708 (32) 41 (23) 20,773 22,531 (8) 30,208 Adjusted net income 7,965 8,787 4,234 7,708 (9) 88 3 22,786 22,708 0 32,221
Ratios EBITDA margin (%) 41 52 21 47 — — — 45 47 — 49 ETR (%) 35 34 40 26 — — — 30 36 — 33 EPS (Rs) 2.5 2.8 1.3 2.4 (9) 88 3 7.2 7.2 0 10.2 Volume details (mn tons) Iron ore production 9.7 8.9 7.4 7.6 9 32 28 23.6 19.8 19 35.0 Iron ore sales 10.1 9.8 7.2 8.0 3 39 25 25.8 20.3 27 36.5 Realization/Cost (Rs/ton) Iron ore - blended 2,484 2,496 2,103 2,170 (0) 18 14 2,305 2,424 (5) 2,414 Cost 1,463 1,206 1,651 1,140 21 (11) 28 1,272 1,277 (0) 1,233 EBITDA/ton 1,021 1,290 451 1,031 (21) 126 (1) 1,033 1,147 (10) 1,181
Source: Company, Kotak Institutional Equities estimates
Changes in our estimates
Exhibit 6 highlights key changes in our estimates.
We raise our iron-ore volume assumption by 7-9% to 36.5 mn tons, 37.5 mn tons and 38 mn tons for FY2017E, FY2018E and FY2019E. The increase largely reflects higher sales through Chhattisgarh mines. We raise our EBITDA estimate for FY2017-19E by 10-11%. We estimate EBITDA of ₹43 bn in FY2017E, ₹45.7 bn in FY2018E and ₹46.5 bn for FY2019E.
We estimate EPS of ₹10.2, ₹9.5 and ₹9.4 for FY2017E, FY2018E and FY2019E. The higher EPS in FY2017E is due to higher other income from large cash reserves held by company during 1H2017.
Our TP of `105 is based on 5.5X December 2018E EBITDA. Besides we also value the CWIP for the steel plant at 0.4X of capital invested. The lower value assigned largely reflects delay in plant ramp-up, weak return profile of the steel plant investment, in our view.
54 KOTAK INSTITUTIONAL EQUITIES RESEARCH NMDC Metals & Mining
Exhibit 2: NMDC's Chhattisgarh sales increased 43% yoy for April- December 2017 aided by export sales, higher domestic volumes NMDC's iron ore production and sales details at Chhattisgarh and Karnataka mines (mn tons)
Apr-Dec 2016 Apr-Dec 2015 Change (mn tons) (mn tons) (%) Iron ore production (mn tons) Chhattisgarh 14.9 11.6 28 Karnataka 8.7 8.5 3 Total 23.6 20.1 18 Iron ore sales (mn tons) Chhattisgarh 16.5 11.5 43 Karnataka 9.4 8.8 7 Total 25.8 20.3 27 Export sales 2.1 0.4 Domestic sales - Chhattisgarh 14.4 11.1 29
Source: Company, Kotak Institutional Equities
Exhibit 3 compares iron-ore prices of NMDC with those of imports--- landed cost for the source for a west coast based steel mill in India. We highlight that while NMDC’s iron-ore now is at a large discount to imports, the company has taken measured price hikes due to domestic oversupply. The prices now are closer to net export realizations for Odisha miners.
Exhibit 3: NMDC's iron ore prices are now at significant discount to imports Comparison of iron ore cost from imports and NMDC's mines for west coast based steel mill, (Rs/ton)
Apr 16 May 16 June 16 July 16 Aug 16 Sep 16 Oct 16 Nov 16 Dec 16 Jan 17 Feb 16 NMDC's iron-ore prices (Rs/ton) Fines 1,860 1,660 1,460 1,460 1,460 1,460 1,760 1,760 1,860 1,985 2,085 Lumps (6-40 mm, 65% Fe) 2,100 2,000 1,800 1,700 1,700 1,700 2,100 2,100 2,100 2,225 2,325 Lumps (10-150 mm, 65% Fe) 1,890 1,800 1,620 1,530 1,530 1,530 1,930 1,890 1,890 2,015 2,100 DRCLO prices (10-40 mm, 67 Fe) 2,520 2,300 2,070 1,960 1,960 1,960 2,360 2,420 2,420 2,560 2,745 Imported ore cost for port based steel mill (West India) Fines 63.5% Fe, CFR India (US$/ton) 61 56 52 57 61 58 58 73 80 81 83 Add: Port charges 4 4 4 4 4 4 4 4 4 4 4 Add: Import duty 2 1 1 1 2 1 1 2 2 2 2 Net import costs (US$/ton) - (DMT basis) 66 61 57 62 67 63 63 79 86 87 89 Net import costs (Rs/ton) - (DMT basis) 4,391 4,111 3,854 4,192 4,451 4,232 4,232 5,336 5,831 5,926 5,986 Net import costs (Rs/ton) - (WMT basis) 4,128 3,864 3,623 3,941 4,183 3,978 3,978 5,016 5,481 5,571 5,627 NMDC's iron ore cost for port based steel mill (West India) NMDC's ex royalty iron ore fines prices (Rs/ton) 1,860 1,660 1,460 1,460 1,460 1,460 1,760 1,760 1,860 1,985 2,085 Add: royalty @ 15%, DMF Costs 363 324 285 285 285 285 343 343 363 387 407 NMDC's ex mine prices (Rs /ton) 2,223 1,984 1,745 1,745 1,745 1,745 2,103 2,103 2,223 2,372 2,492 Add: Inland freight cost 1,300 1,300 1,300 1,300 1,300 1,300 1,300 1,300 1,300 1,300 1,300 Add: Ocean freight from east to west coast 455 455 455 455 455 455 455 455 455 455 455 NMDC iron ore cost at west coast based steel mill (Rs/ton) 3,978 3,739 3,500 3,500 3,500 3,500 3,858 3,858 3,978 4,127 4,247 Premium/(Discount) of NMDC prices (Rs/ton) (150) (125) (123) (441) (684) (478) (120) (1,158) (1,503) (1,444) (1,380) INR:USD rate 66.4 67.0 67.3 67.2 66.9 66.7 66.7 67.7 67.8 68.1 67.2
Source: Bloomberg, CRU, Kotak Institutional Equities estimates
In exhibit 4, a comparison of net export realizations versus domestic prices of Odisha miners has been worked out. We estimate that Odisha miners will be better off by `400-500/ton by exporting iron-ore if global prices are higher than US$80/ton. As such, if global prices sustain at over US$80/ton over next few months, Odisha miners & NMDC may further hike iron-ore prices for domestic markets.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 55 Metals & Mining NMDC
Exhibit 4: At spot China iron-ore prices, we estimate Odisha miners net export realizations will be higher than domestic prices by Rs400/ton Estimate of Odisha miner's net export realizations versus domestic iron-ore prices (Rs/ton)
Apr 16 May 16 Jun 16 Jul 16 Aug 16 Sep 16 Oct 16 Nov 16 Dec 16 Jan 16 Export parity price computation Fines 63.5% Fe, CFR China (US$/ton) 61 56 52 57 61 58 58 73 81 83 Less: Port charges (US$/ton) (2) (2) (2) (2) (2) (2) (2) (2) (2) (2) Less: Ocean freight (US$/ton) (7) (8) (8) (7) (7) (7) (8) (8) (9) (9) Net export realizations (US$/ton) 52 46 42 48 52 49 48 63 70 72 Less; Export duty @ 30% for NMDC (16) (14) (13) (14) (16) (15) (14) (19) (21) (22) Net export realization - (DMT basis) (US$/ton) 36 32 30 33 36 34 33 44 49 50 Net export realization - (WMT basis) (US$/ton) 34 30 28 31 34 32 31 41 46 47 Net export realization - (WMT basis) (Rs/ton) 2,259 2,040 1,872 2,103 2,280 2,137 2,098 2,789 3,109 3,208 Less: Inland freight cost for Odisha miners (750) (750) (750) (750) (750) (750) (750) (750) (750) (750) Ex-mine realizations 1,509 1,290 1,122 1,353 1,530 1,387 1,348 2,039 2,359 2,458 Less: Royalty, DMF payments (327) (307) (307) (307) (307) (307) (307) (307) (307) (332) Net realizations—ex-mines (Rs/ton) 1,182 983 815 1,047 1,223 1,080 1,041 1,732 2,053 2,126
Odisha fines prices—ex-mines (Rs/ton) 1,650 1,550 1,550 1,550 1,550 1,550 1,550 1,550 1,550 1,675
Premium/(discount of export realizations (Rs/ton) (327) (470) (509) 182 503 451
Source: CRU, Bloomberg, Kotak Institutional Equities estimates
Merchant iron-ore supply is in India is in surplus
Exhibit 5 highlights iron-ore demand –supply balance in India.
India requires 145 mtpa of iron ore for 84 mtpa of steel production (FY2017E). Of this, ~45- 50 mtpa iron-ore is sourced from captive mines of Tata Steel, SAIL and JSPL. The balance quantity of ~95 mtpa is required by steel companies who do not have captive iron ore mines. Of this quantity the major buyers are (a) JSW Steel (~26 mtpa), (b) Essar about (~12 mtpa), (c) RINL (~7 mtpa), (d) JSPL (~4 mtpa) and other smaller units require ~45 mtpa. Of this quantity, ~20-25 mtpa is sourced by sponge iron units who produce steel through Electric Arc Furnaces, Induction furnaces.
Against the merchant iron-ore demand of ~95 mtpa, India’s iron-ore production is high at 120 mtpa (excluding Goa volumes which are entirely exported). The main states for merchant ore are (a) Odisha, (b) Chhattisgarh, and (c) Karnataka. And of these quantities, Karnataka ore can’t be exported (due to SC order)---so essentially Odisha & Chhattisgarh have surplus of ~20-25 mtpa iron-ore relative to demand.
56 KOTAK INSTITUTIONAL EQUITIES RESEARCH NMDC Metals & Mining
Exhibit 5: India's domestic iron ore production is in much excess of domestic demand State-wise iron ore production, March year ends 2010-17E (mn tons)
2010 2011 2012 2013 2014 2015 2016 2017E (mn tons) Odisha 81 76 67 64 76 48 75 85 Chattisgarh 26 29 30 28 30 33 29 31 Goa 38 37 34 11 — — 7 15 Jharkhand 23 23 20 18 23 21 19 19 Karnataka 43 38 13 11 18 22 24 27 Others 8 5 4 4 5 6 2 3 Iron ore production 219 208 170 136 152 129 156 180 Total Exports 117 98 62 19 15 1 6 24 Domestic Iron ore consumption 97 105 111 117 128 128 130 145 YoY growth in consumption (%) 12 9 5 6 9 — 2 12
Source: Ministry of Mines, Steelmint, Kotak Institutional Equities estimates
Exhibit 6: NMDC, changes in estimates, March fiscal year ends, FY2017-19E
Revised Estimate Previous Estimate Change (%) 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E Price - incling royalty (Rs/ton) Domestic lumps (blended) 2,784 2,993 3,028 2824 2993 3028 (1) 0 0 Domestic fines 2,006 2,061 2,096 2006 2061 2096 0 0 0 Blended 2,370 2,489 2,523 2397 2497 2531 (1) (0) (0) Export 3,476 3,657 3,692 3476 3657 3692 0 0 0 Iron-ore volumes (mn tons) Chhattisgarh 24.5 25.5 26.0 23.0 23.5 24.0 7 9 8 Karnataka 12.0 12.0 12.0 11.0 11.0 11.0 9 9 9 Total 36.5 37.5 38.0 34.0 34.5 35.0 7 9 9 Sales (tons) Lumps 11.8 12.1 12.3 10.9 11.0 11.2 9 10 9 Fines 21.9 22.4 22.8 20.2 20.5 20.8 9 10 9 Exports 2.8 3.0 3.0 3.0 3.0 3.0 (7) 0 0 Earnings estimates (Rs mn) Revenues 88,125 95,013 97,624 83,109 87,852 90,357 6 8 8 EBITDA 43,121 45,690 46,541 38,966 41,590 42,439 11 10 10 PAT 30,208 30,039 29,682 28,778 27,256 26,791 5 10 11 EPS (Rs) 10.2 9.5 9.4 9.1 8.6 8.5 12 10 11
Re/US$ rate 67.5 69.0 69.0 67.5 69.0 69.0 0 0 0
Source: Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 57 Metals & Mining NMDC
Exhibit 7: Key assumptions, March fiscal year-ends, 2014-19E
2012 2013 2014 2015 2016 2017E 2018E 2019E Iron-ore realization (Rs/ton) Domestic lumps (including royalty) 5,112 5,732 4,854 4,800 2,840 2,784 2,993 3,028 Domestic fines (Including royalty) 3,185 3,046 2,950 3,150 1,800 2,006 2,061 2,096 Blended (Including royalty) 4,091 4,019 3,901 3,994 2,192 2,370 2,489 2,523 Export 7,089 5,975 7,103 4,340 3,402 3,476 3,657 3,692 Iron-ore volumes (mn tons) Chhattisgarh 21.7 18.3 21.1 21.0 16.4 24.5 25.5 26.0 Karnataka 5.6 8.0 9.4 9.5 12.5 12.0 12.0 12.0 Total 27.3 26.3 30.5 30.5 28.9 36.5 37.5 38.0 Lumps 10 7 10 10 9 12 12 12 Fines 17 19 20 20 19 25 25 26 Cost per ton of ore (Rs/ton) Chhattisgarh - domestic 821 852 925 1,064 948 1,059 1,091 1,122 Karnataka (including SPV) - domestic 821 1,164 1,227 1,363 1,107 1,287 1,330 1,364 Exports 3,355 5,615 6,186 7,383 3,736 2,979 3,029 3,063 EBITDA/ton (Rs) 3,269 2,726 2,548 2,547 1,105 1,181 1,218 1,225
Source: Company, Kotak Institutional Equities estimates
Exhibit 8: Our fair value of Rs105 for NMDC implies 11X FY2018E earnings NMDC, Valuation details, December 2018E year-ends
Enterprise EBITDA EV/EBITDA Value Rs/share (Rs mn) (X) (Rs mn) (Rs) EBITDA 46,328 5.5 252,489 80 Net cash 12,354 4 CWIP (value of steel plant CWIP @ 40% investment) 71,529 23 Market capitalization 336,372 106 Target price (Rs) 105
Source: Kotak Institutional Equities estimates
58 KOTAK INSTITUTIONAL EQUITIES RESEARCH NMDC Metals & Mining
Exhibit 9: NMDC, Financial summary, March fiscal year ends, 2014-19E (Rs mn)
2014 2015 2016 2017E 2018E 2019E Profit model (Rs mn) Net sales 120,582 123,564 64,558 88,125 95,013 97,624 EBITDA 77,719 77,784 31,896 43,121 45,690 46,541 Other income 20,891 22,654 17,744 8,429 4,240 3,444 Depreciaton (1,507) (1,622) (2,078) (2,577) (2,827) (3,022) Interest (19) - (654) (1,198) (1,598) (1,998) Profit before tax 97,085 98,815 46,908 47,775 45,507 44,966 Extra-ordinary items 443 (1,130) (1,848) (2,013) — — Taxes (33,397) (33,462) (14,772) (15,555) (15,468) (15,284) Net profit 64,131 64,223 30,288 30,208 30,039 29,682 Earnings per share (Rs) 16.0 16.5 8.0 10.2 9.5 9.4 Balance sheet (Rs mn) Equity 299,468 323,317 301,110 233,185 240,368 247,194 Deferred tax liability 1,071 984 1,222 1,222 1,222 1,222 Current liabilities 13,899 20,397 16,154 17,321 17,672 17,807 Total liabilities 314,439 344,698 333,456 266,698 284,231 291,193 Net fixed assets 66,633 90,437 116,299 156,722 186,943 201,921 Investments 2,194 5,620 6,954 6,954 6,954 6,954 Cash 186,605 184,431 147,636 41,701 25,264 16,032 Other current assets 58,953 64,157 62,517 61,270 65,019 66,234 Miscellaneous expenditure 54 54 51 51 51 51 Total assets 314,439 344,699 333,456 266,697 284,231 291,192 Free cash flow (Rs mn) Operating cash flow excl. working capital 42,904 47,457 13,948 25,410 29,722 30,378 Working capital changes (5,687) (7,385) 19,798 2,431 (3,403) (1,084) Capital expenditure (23,002) (26,525) (26,855) (43,000) (33,048) (18,000) Free cash flow 14,216 13,547 6,891 (15,159) (6,729) 11,294 Ratios Book value (Rs/share) 76 82 76 74 76 78 Dividend (Rs/share) 8.5 8.6 11.0 6.0 6.0 6.0 Net debt/equity (X) (0.6) (0.6) (0.4) (0.1) (0.0) 0.0 RoAE (%) 22.3 20.6 9.7 11.3 12.7 12.2 RoACE (%) 22.3 20.6 9.6 11.0 12.1 11.5
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 59 RS IDEA (IDEA) Telecom FEBRUARY 13, 2017 RESULT Coverage view: Cautious
Weak earnings print on expected lines. Idea reported a weak 3QFY17 earnings Price (`): 107 print. This was on expected lines directionally though the extent of weakness was Target price (`): - higher than what we had anticipated. Prognosis for FY2018 is weak and trajectory on BSE-30: 28,352 recovery beyond that, both timing and extent, uncertain. Our estimates see sharp cuts. We suspend our rating and target price on the stock on account of compliance restrictions on valuation assessment of Vodafone India, explicit or implicit. Valuing Idea now needs a probabilistic assessment of the proposed merger’s impact, which would be half baked if we try and avoid even an implicit comment on Vodafone India valuation.
Company data and valuation summary IDEA Stock data Forecasts/Valuations 2017E 2018E 2019E 52-week range (Rs) (high,low) 128-66 EPS (Rs) (2.4) (10.2) (8.0) Market Cap. (Rs bn) 386.2 EPS growth (%) (127.5) (335.1) 22.2 Shareholding pattern (%) P/E (X) (45.6) (10.5) (13.5) Promoters 42.2 Sales (Rs bn) 356.9 338.4 379.1 FIIs 25.1 Net profits (Rs bn) (8.5) (36.8) (28.7) MFs 2.1 EBITDA (Rs bn) 98.6 77.0 98.3 Price performance (%) 1M 3M 12M EV/EBITDA (X) 9.1 12.0 9.6 Absolute 55.9 53.3 (2.2) ROE (%) (3.5) (17.7) (16.3) Rel. to BSE-30 49.8 45.0 (20.7) Div. Yield (%) 0.0 0.0 0.0
3QFY17 earnings – Jio impact shows up in the weakest-ever print on growth comps
A free offering is tough to fight for an incumbent and is bound to impact an incumbent’s performance. The impact of Jio’s free offering on Idea’s 3QFY17 turned out to be worse than our initial expectations. We would not read much into the versus-expectations performance given how tough it was to assess the impact of an event as material as a free service offering. That said, the absolute performance and growth comps reported by the two incumbents lend important insights into – (1) consumer response to the free offering and (2) likely shape of things to come.
Jio’s impact on Idea’s 3QFY17 was similar to its impact on Bharti’s – a 7% qoq revenue decline, sharp 550 bps qoq EBITDA margin decline and a sharp dip in net profits (to a loss of ₹3.84 bn, in Idea’s case). Revenue impact was felt on account of – (1) shift in data usage to the free offering; data volumes for Idea grew only 1.3% qoq despite sharp price cuts; no amount of price cut, except a 100% one, can match free, (2) material shift in voice volume mix to the lower-yield incoming minutes, and (3) sharp price cuts on both voice and data taken to retain customers and protect volumes as far as possible. Savings on ICR costs, on account of renegotiated ICR contracts, helped mitigate a sharper dip in EBITDA. A loss at the PBT/ PAT level was on expected lines; the net profit line is likely to be in the red for another few quarters.
Estimates see sharp downward revision; suspend rating and target price
Exhibit 1 captures the key changes to our model. Jio impact has turned out to be significantly Rohit Chordia worse than our initial assessment and we adjust our numbers to bake in the same. We do maintain that estimates on the sector are going to be extremely fluid for some time and the Abhas Gupta margin of forecasting errors is high, on both sides. We are now looking at a sharp 22% yoy decline in EBITDA in FY2018 and a recovery back to FY2017 levels in FY2019; FY2019 EBITDA would still be materially below FY2016 levels. As discussed earlier, we are suspending our rating and target price on the stock given our compliance-driven inability to comment on the economics and valuation impact of the proposed merger with Vodafone India. Our last published rating was a BUY with a target price of ₹100/share.
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. IDEA Telecom
Key takeaways from the earnings call
Providence stake in Indus. Idea is transferring Providence’s effective 4.85% stake in Indus through ABTL to Providence via a scheme of arrangement. This scheme would be effective from Feb 1, 2017 and would mean that Idea consolidates only 11.15% of Indus’ profits from this date. The company had been consolidating 16% of Indus’ profits thus far.
Capex outlook. Without mentioning any explicit capex guidance for FY2018E, the management indicated that it would likely be lower than the ₹75-80 bn guided spends for FY2017.
Cost optimization measures. The management stated that they are taking cost optimization measures on multiple fronts in order to drive profitability, including – (1) reducing network expenses by evaluating multiple options besides ICR arrangement, (2) considering active infrastructure sharing on all 2G,3G and 4G sites, (3) controlling G&A costs and (4) controlling manpower costs; the company indicated a complete freeze on hiring at this point.
Impact of R-Jio in 4QFY17 so far. Jio’s impact in November was a direct shift in usage while the impact in December was an indirect one as the company took sharp price cuts to protect volumes by announcing unlimited voice plans. The plan has given some stability in terms of customer retention and overall minutes are increasing.
Net debt. Consolidated net debt has increased to ₹491.4 bn as of end-4QFY17 including most of the liabilities arising from the Oct 2016 auctions except for 2 Mhz spectrum in the 1800 Mhz band that will be allocated to the company in Sep 2017, the liability is to the tune of ₹3.18 bn.
Unlimited plan uptake. The management stated that almost 70-80% of the customers who have adopted the unlimited ₹348 plan have come in from a lower ARPU band. Although they end up consuming much more overall and hence are rate dilutive, they however, end up being ARPU accretive – which is the more important metric.
Exhibit 1: Key changes to Idea earnings model, March fiscal year-ends, 2017-19E (Rs mn)
Revised Earlier Change (%) 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E Consolidated Revenues (Rs mn) 356,932 338,421 379,102 373,417 373,827 415,780 (4.4) (9.5) (8.8) EBITDA (Rs mn) 98,641 77,016 98,338 113,588 105,340 120,522 (13.2) (26.9) (18.4) Net income (Rs mn) (8,468) (36,846) (28,674) 1,737 (17,300) (10,864) NM NM NM EPS (Rs/share) (2.35) (10.23) (7.96) 0.48 (4.80) (3.02) NM NM NM
EBITDA margin (%) 27.6 22.8 25.9 30.4 28.2 29.0 -279 bps -543 bps -305 bps Capex (Rs bn) 206 71 69 205 71 64 0.4 (0.3) 8.3 Ex-spectrum capex (Rs bn) 78 71 69 77 71 64 1.2 (0.3) 8.3
Source: Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 61 Telecom IDEA
Exhibit 2: Key assumptions driving Idea model, March fiscal year-ends, 2014-19E
2014 2015 2016 2017E 2018E 2019E Subscriber base ('000s) 135,788 157,808 175,100 190,700 207,500 221,900 Net adds per month ('000s) 1,182 1,835 1,441 1,300 1,400 1,200 Voice traffic (bn mins) 588 683 786 825 900 963 Change (%) 10.5 16.3 15.0 5.0 9.0 7.0 Voice RPM (Rs/min) 0.370 0.356 0.327 0.311 0.248 0.229 Change (%) 5.8 (3.8) (8.3) (4.9) (20.3) (7.4) Overall RPM (Rs/min) 0.442 0.455 0.453 0.427 0.371 0.389 Change (%) 7.3 2.9 (0.5) (5.6) (13.1) 4.8 Data revenues (Rs mn) 23,105 45,404 69,163 70,277 85,599 128,699 Change (%) 90.3 96.5 52.3 1.6 21.8 50.4 Data volumes (bn MB) 79 173 298 416 790 1,324 Change (%) 112.4 117.3 72.7 39.6 89.9 67.7 Data realization (Rs/MB) 0.291 0.263 0.232 0.169 0.108 0.097 Change (%) (10.4) (9.6) (11.8) (27.2) (35.9) (10.3) SMS, VAS, ICR revenues (Rs mn) 18,914 21,758 29,669 25,812 25,400 24,997 Change (%) (8.5) 15.0 36.4 (13.0) (1.6) (1.6) ARPU (Rs/sub/month) 168 176 178 161 140 145 Change (%) 7.9 4.9 1.0 (9.8) (13.0) 4.0 MOU (min/sub/month) 381 388 393 376 377 374 Change (%) 0.6 1.9 1.4 (4.4) 0.1 (0.8) EBITDA per minute (Rs/min) 0.126 0.143 0.151 0.120 0.086 0.102 Change (%) 24.5 13.5 6.1 (21.1) (28.4) 19.3 Capex (Rs mn) Standalone (ex-spectrum) 35,282 40,500 77,700 77,898 71,028 69,404 As % of revenues 13.3 12.8 21.6 21.8 21.0 18.3 Consolidated (including spectrum) 68,421 347,675 82,401 210,435 75,229 73,128
As % of revenues 25.8 110.1 22.9 59.0 22.2 19.3
Source: Company, Kotak Institutional Equities estimates
62 KOTAK INSTITUTIONAL EQUITIES RESEARCH IDEA Telecom
Exhibit 3: Idea Cellular's condensed financial statements, March fiscal year-ends, 2016-19E
2016 2017E 2018E 2019E Profit model (Rs mn) Revenue 359,574 356,932 338,421 379,102 EBITDA 119,001 98,641 77,016 98,338 EBIT 56,679 20,132 (12,103) 4,776 Net interest income / (expense) (15,763) (36,402) (49,850) (55,039) Tax (15,837) 3,629 19,407 15,103 Recurring Net profit 29,624 (8,468) (36,846) (28,674) Fully diluted EPS 8.23 (2.35) (10.23) (7.96) Balance sheet (Rs mn) Cash 7,691 23,363 31,443 37,063 Other current assets 41,769 47,572 47,223 44,774 Fixed assets 218,495 248,140 267,305 280,403 Other long term assets 511,736 613,089 595,241 573,088 Short tem debt — — — — Other current liabilities 109,512 155,910 162,502 161,779 Long term debt 405,413 555,413 600,413 630,413 Other long term liabilities 19,539 19,539 19,539 19,539 Shareholders funds (incl. minorities) 235,504 227,036 190,190 161,516 Net debt 397,722 532,050 568,970 593,350 Free cash flow (Rs mn) EBITDA 119,001 98,641 77,016 98,338 Change in working capital 61,387 5,682 (12,465) (13,378) Cash tax (paid) (15,837) — — — Capex on PP&E and intangibles (69,944) (205,878) (71,028) (69,404) Miscellaneous items (39,848) 3,629 19,407 15,103 Free cash flow 54,759 (97,926) 12,930 30,659 Ratios (%) Sales growth 13.9 (0.7) (5.2) 12.0 EBITDA growth 10.3 (17.1) (21.9) 27.7 EPS growth (6.6) (128.6) 335.1 (22.2) FCF growth (122.1) (278.8) (113.2) 137.1 EBITDA margin 33.1 27.6 22.8 25.9 Net margin 8.2 (2.4) (10.9) (7.6) RoAE 12.7 (3.7) (17.7) (16.3) ROAE (excl. cash and int. income) 14.0 (4.0) (19.2) (19.3) RoACE 8.6 3.0 (1.2) 1.0 ROACE (excl. cash and int. income) 8.9 2.9 (1.4) 0.8 Net debt/EBITDA (X) 3.3 5.4 7.4 6.0
Source: Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 63 Telecom IDEA
Key highlights from Idea’s 3QFY17 earnings print
Consolidated results – Idea reported a weak set of results with consolidated (with associate accounting for Indus) revenue declining by 6.9% qoq and 3.8% yoy to ₹86.6 bn, 1.6% below our estimates. EBITDA margins contracted sharply coming in at 25% (versus 30.5% in 2QFY17) driven by the high operating leverage in the business. As a result, EBITDA for 3QFY17 declined 23.8% qoq and 24.4% yoy to ₹21.7 bn, 7.3% below our estimates. At the net profit (including share of Indus profits) level, the company (as expected) reported a loss of ₹3.8 bn versus a profit of ₹0.9 bn in 2QFY17.
Voice – revenues declined by 3.9% qoq on account of a 10.6% decline in voice realizations (driven by competitive pressure from R-Jio) partly offset by a 7.3% qoq growth in voice volumes (driven by a surge in incoming calls from other operators’ – largely R-Jio’s network). Voice revenue decline of 2% yoy was the weakest the company has reported in many years and we suspect the company may have grown below the industry (including Jio) on voice volumes and just about in line on voice revenues.
Data – data revenues declined 13.9% qoq on a reported basis. Data revenues declined 4.2% yoy on account of (1) data usage shift to the ‘free offering’ in the market, and (2) sharp realization decline as incumbents try out various ways of fighting free. Data volume growth was also weak at 1.3% qoq and 34.4% yoy. Data revenue per MB (ARMB) fell 15% qoq and 28.7% yoy, reflecting the impact of Idea’s response to Jio launch. Idea’s results although weak are largely in line with the results reported by Bharti, where data revenue declined by a similar proportion.
Network – accelerated network expansion continued with the company adding – (1) 1,729 2G sites to take EOP count to 132,362, (2) 6,194 3G sites to take EOP count to 66,661, and (3) 9,009 4G sites to take EOP count to 33,954. We note that Idea had launched its 4G services in only 11 circles as of end-Dec 2016 and any comparison of 4G site count to an R-Jio or Bharti should adjust for this. The company indicated that it would launch its 4G services and 20 (from 11 at end-Dec) and 3G services in 15 (from 13 at end- Dec) circles by April 2017.
Detailed data KPIs – total data subs (2G+3G+4G) base declined by 5.5 mn qoq to 48.6 mn at end-3QFY17. Data usage per sub grew to 703 MB/sub/month with 3G/4G subs using an average of 971 MB/month and 2G subs using an average of 362 MB/month. Total data volumes grew 1.3% qoq and 34.4% yoy to 108.8 bn MB. Data realizations (overall) corrected sharply (-15% qoq, -28.7% yoy) to 15.9 paise/MB (14.5 paise/MB for 3G/4G and 20.9 paise/MB for 2G data). Nearly 40.9% of Idea’s subs or just about 75.7 mn subs owned a smartphone at end-3QFY17 with 20.4 mn of these being 4G devices (+1.1 mn qoq). 4G subs base at end-3QFY17 was 2.5 mn, -0.5 mn qoq.
Balance sheet metrics – capex for the quarter was ₹20 bn taking 9MFY17 capex to ₹50.8 bn. The company reiterated its recently revised FY2017E capex guidance of ₹75-80 bn. Net debt at end-3QFY17 stood at ₹491.4 bn, up from ₹364 bn at end-2QFY17, nearly 5.7X 3QFY17 annualized EBITDA. Increase in net debt primarily reflects the ₹128 bn worth spectrum bids in the October 2016 auction.
64 KOTAK INSTITUTIONAL EQUITIES RESEARCH IDEA Telecom
Exhibit 4: Idea - 3QFY17 review, Indian GAAP, March fiscal year-ends (Rs mn)
Change 3QFY16 2QFY17 3QFY17 qoq (%) yoy (%) 3QFY17E Deviation (%) Consolidated Revenues 90,042 93,002 86,627 (6.9) (3.8) 88,047 (1.6) Costs (61,407) (64,601) (64,973) 0.6 5.8 (64,691) 0.4 EBITDA 28,635 28,401 21,655 (23.8) (24.4) 23,356 (7.3) EBITDA margin (%) 31.8 30.5 25.0 26.5 D&A (15,310) (19,543) (19,653) 0.6 28.4 (20,150) EBIT 13,325 8,858 2,002 (77.4) (85.0) 3,206 (37.6) Net interest income/(expense) (4,138) (8,753) (9,232) (9,200) PBT 9,187 105 (7,230) (5,994) Taxes (3,677) (247) 2,248 486 Minority loss/(income)/ Associate profit 1,084 1,057 1,143 1,131 PAT 6,594 915 (3,839) (520) (158) (4,376) NM Wireless metrics Wireless ARPU (Rs/sub/month) 176 173 157 (9.2) (10.8) 161 (2.5) Wireless MOU (min/sub/month) 393 368 385 4.6 (2.0) 388 (0.8) Wireless RPM (Rs/min) 0.448 0.470 0.408 (13.2) (8.9) 0.415 (1.8) Voice RPM (Rs/min) 0.318 0.331 0.296 (10.6) (6.9) 0.298 (0.7) Wireless EPM (Rs/min) 0.144 0.145 0.103 (29.0) (28.2) 0.112 (7.5) Wireless CPM (Rs/min) 0.304 0.324 0.305 (6.1) 0.2 0.304 Total minutes (bn min) 199.2 195.5 209.8 7.3 5.4 209.4 0.2 Churn (%) 5.0 5.4 6.0 5.8 Non-voice as % of revenues 29.0 29.5 27.4 28.2 Data as % of revenues 20.2 21.9 21.9 20.3 Data revenues 18,062 20,091 17,306 (13.9) (4.2) 17,680 (2.1)
Source: Company, Kotak Institutional Equities estimates
Exhibit 5: Quarterly wireless revenue break-up
3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 Revenues (Rs mn) Wireless 79,034 82,893 87,110 85,822 89,242 93,545 93,793 91,887 85,400 Voice 60,777 62,584 64,374 61,877 63,451 67,072 68,362 64,688 62,171 Data 12,395 14,009 15,419 16,851 18,062 18,832 18,374 20,091 17,306 Others 5,862 6,300 7,317 7,093 7,729 7,641 7,057 7,107 5,923 Contribution to revenues (%) Wireless 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Voice 76.9 75.5 73.9 72.1 71.1 71.7 72.9 70.4 72.8 Data 15.7 16.9 17.7 19.6 20.2 20.1 19.6 21.9 20.3 Others 7.4 7.6 8.4 8.3 8.7 8.2 7.5 7.7 6.9 Growth qoq (%) Wireless 6.0 4.9 5.1 (1.5) 4.0 4.8 0.3 (2.0) (7.1) Voice 3.3 3.0 2.9 (3.9) 2.5 5.7 1.9 (5.4) (3.9) Data 18.6 13.0 10.1 9.3 7.2 4.3 (2.4) 9.3 (13.9) Others 10.9 7.5 16.2 (3.1) 9.0 (1.1) (7.6) 0.7 (16.7)
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 65 Telecom IDEA
Exhibit 6: Key data KPIs shared by Idea
Growth (%) 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 QoQ YoY Data (2G & 3G) KPIs Subs ('000s) 34,155 33,424 37,156 41,334 41,351 44,019 49,050 54,063 48,583 (10.1) 17.5 ARPU (Rs/sub/month) 126 150 147 144 145 147 142 130 111 (14.6) (23.4) Data usage (MB/sub/month) 470 586 599 615 653 641 674 694 703 1.3 7.7 Total volumes (mn MB) 46,077 54,510 62,677 72,013 80,994 82,236 93,127 107,439 108,843 1.3 34.4 Realization per MB (paise) 26.9 25.7 24.6 23.4 22.3 22.9 21.1 18.7 15.9 (15.0) (28.7) Implied data revenue (Rs mn) 12,395 14,009 15,419 16,851 18,062 18,832 19,650 20,091 17,306 (13.9) (4.2) Data revenues as % of wireless rev 15.7 16.9 17.7 19.6 20.2 20.1 20.6 21.9 20.2 % of subs base with smartphones 18.7 23.1 25.6 29.2 32.3 34.5 34.8 39.4 40.9 # of subs with smartphones (mn) 28.1 36.5 41.5 48.6 55.5 60.4 61.4 70.4 75.7 7.5 36.4 3G + 4G KPIs 3G + 4G subs ('000s) 12,945 14,512 16,660 19,585 21,199 23,589 27,000 30,703 27,026 (12.0) 27.5 3G + 4G ARPU (Rs/sub/month) 197 209 203 202 196 191 174 160 141 (11.9) (28.1) 3G + 4G data usage (MB/sub/month) 705 777 778 802 866 857 889 922 971 5.3 12.1 3G + 4G data volumes (mn MB) 24,977 30,680 36,031 43,051 53,600 57,603 66,853 79,861 84,455 5.8 57.6 Realization per MB (paise) 27.8 28.1 26.3 25.5 22.4 22.3 19.8 17.3 14.5 (16.6) (35.4) Implied 3G + 4G revenues (Rs mn) 6,934 8,608 9,492 10,982 11,990 12,832 13,204 13,849 12,210 (11.8) 1.8 3G + 4G revenues as % of data rev 55.9 61.4 61.6 65.2 66.4 68.1 67.2 68.9 70.6 2G KPIs 2G subs ('000s) 21,210 18,912 20,496 21,749 20,152 20,430 22,050 23,360 21,557 (7.7) 7.0 2G ARPU (Rs/sub/month) 87 90 100 93 97 99 101 92 76 (17.5) (21.7) 2G data usage (MB/sub/month) 338 396 451 457 436 405 412 405 362 (10.6) (17.0) 2G data volumes (mn MB) 21,100 23,830 26,646 28,962 27,394 24,633 26,274 27,578 24,388 (11.6) (11.0) Realization per MB (paise) 25.9 22.7 22.2 20.3 22.2 24.4 24.5 22.6 20.9 (7.7) (5.7) Implied 2G revenues (Rs mn) 5,461 5,401 5,927 5,869 6,071 6,000 6,446 6,242 5,096 (18.4) (16.1) 2G revenues as % of data rev 44.1 38.6 38.4 34.8 33.6 31.9 32.8 31.1 29.4
Notes: (1) Data subs definition changed from 3QFY14, which were further tightened in 4QFY14, 4QFY15 and 3QFY16.
Source: Company
Exhibit 7: Break-up of costs: Idea Cellular (standalone)
1QFY16 2QFY16 3QFY16 1QFY17 2QFY17 3QFY17 Revenues 87,915 86,754 90,042 94,866 93,002 86,627 Costs Interconnection costs (11,554) (11,461) (11,944) (11,826) (11,521) (9,984) License fee and spectrum charges (10,217) (9,947) (10,348) (10,974) (10,792) (9,814) Network operating costs (22,464) (22,687) (23,741) (25,995) (26,202) (27,942) Employee costs (3,812) (4,145) (3,990) (4,334) (4,788) (4,487) SG&A expenses (10,074) (10,609) (11,384) (10,996) (11,299) (12,745) Total costs (58,122) (58,849) (61,407) (64,124) (64,601) (64,973) EBITDA 29,793 27,904 28,635 30,742 28,401 21,655 Costs as % of revenues Interconnection costs 13.1 13.2 13.3 12.5 12.4 11.5 License fee and spectrum charges 11.6 11.5 11.5 11.6 11.6 11.3 Network operating costs 25.6 26.2 26.4 27.4 28.2 32.3 Employee costs 4.3 4.8 4.4 4.6 5.1 5.2 SG&A expenses 11.5 12.2 12.6 11.6 12.1 14.7 Total 66.1 67.8 68.2 67.6 69.5 75.0 EBITDA margin (%) 33.9 32.2 31.8 32.4 30.5 25.0
Source: Company
66 KOTAK INSTITUTIONAL EQUITIES RESEARCH IDEA Telecom
Exhibit 8: Break-up of financials across established and new service areas (Rs mn)
Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Established service areas Revenues 75,543 78,995 82,466 81,045 84,063 88,132 88,051 86,112 80,163 EBITDA 26,741 29,577 31,456 29,548 30,295 34,369 31,882 29,825 23,283 EBITDA margin (%) 35.4 37.4 38.1 36.5 36.0 39.0 36.2 34.6 29.0 New service areas Revenues 4,605 5,170 5,449 5,754 6,026 6,686 6,815 6,890 6,464 EBITDA (1,881) (1,749) (1,663) (1,775) (1,782) (1,170) (1,140) (1,424) (1,628) EBITDA margin (%) (40.8) (33.8) (30.5) (30.8) (29.6) (17.5) (16.7) (20.7) (25.2)
Source: Company
Exhibit 9: RPM trends
Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Revenue per minute 0.463 0.448 0.445 0.453 0.448 0.464 0.471 0.470 0.407 Change (%) 0.9 (3.2) (0.7) 1.8 (1.1) 3.6 1.4 (0.1) (13.4) Voice RPM 0.356 0.338 0.329 0.327 0.319 0.333 0.343 0.331 0.296 Change (%) (1.7) (5.0) (2.8) (0.7) (2.5) 4.4 3.1 (3.5) (10.5) Non-voice RPM 0.107 0.110 0.116 0.126 0.129 0.131 0.128 0.139 0.111 Change (%) 10.4 2.6 5.8 8.8 2.4 1.4 (2.8) 9.0 (20.4) Pure data RPM 0.073 0.076 0.079 0.089 0.090 0.093 0.097 0.103 0.082 Change (%) 13.1 4.2 4.0 12.7 1.9 3.1 3.9 6.2 (20.1) SMS/VAS RPM 0.034 0.034 0.037 0.038 0.039 0.038 0.031 0.036 0.028 Change (%) 5.1 (0.6) 9.8 0.6 3.7 (2.4) (19.5) 18.1 (21.3) Cost per minute 0.317 0.298 0.294 0.306 0.305 0.299 0.316 0.325 0.304 Change (%) (1.7) (6.2) (1.3) 4.3 (0.5) (1.8) 5.7 2.6 (6.4) EBITDA per minute 0.146 0.150 0.151 0.147 0.143 0.165 0.154 0.145 0.103 Change (%) 6.8 3.3 0.6 (3.1) (2.4) 15.0 (6.3) (5.8) (29.0)
Source: Company, Kotak Institutional Equities
Exhibit 10: Per cell-site metrics
Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Wireless revenues (Rs mn) 74,584 74,566 79,034 82,893 87,110 85,822 89,242 93,545 93,793 91,887 85,400 Wireless EBITDA (Rs mn) 22,664 22,144 24,860 27,828 29,793 27,904 28,635 36,160 30,742 28,401 21,655 Voice traffic (mn mins) 165,239 162,454 170,700 185,028 195,752 189,452 199,200 201,606 199,307 195,504 209,828 Cell sites (#) 106,169 107,605 109,931 112,367 115,575 119,276 122,515 126,833 127,835 130,633 132,362 Per cell site metrics Revenues (Rs/month) 235,712 232,540 242,210 248,593 254,771 243,620 246,057 250,106 245,531 237,004 216,481 EBITDA (Rs/month) 71,626 69,057 76,187 83,456 87,137 79,212 78,952 96,680 80,477 73,255 54,892 Voice traffic (mins/month) 522,213 506,622 523,132 554,895 572,520 537,793 549,235 539,022 521,743 504,264 531,894
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 67 Telecom IDEA
Exhibit 11: Idea - condensed consolidated balance sheet, 4QFY16-3QFY17
Mar-16 Jun-16 Sep-16 Dec-16 Assets Net fixed assets 211,872 209,897 213,176 220,413 CWIP 6,623 7,101 9,709 9,272 Intangible assets 493,744 487,874 487,114 605,035 Goodwill 61 61 61 61 Non-current investments 21,405 17,976 18,960 20,002 Other financial assets 4,338 4,412 4,547 4,759 Other non-current assets 13,591 13,773 15,690 23,525 Total long-term assets 751,634 741,094 749,257 883,067 Current assets Current investments 13,305 39,619 44,247 13,789 Inventories 1,065 777 746 670 Receivables 11,424 11,116 11,670 11,668 Cash and equivalents 7,691 561 760 722 Other financial assets 5,642 5,580 480 568 Other current assets 10,335 6,507 5,375 10,577 Total current assets 49,462 64,160 63,278 37,994 Current assets ex-cash and investments 28,466 23,980 18,271 23,483 Assets held for sale 155 15 13 19 Current liabilities Payables 32,468 34,894 35,610 37,993 Other financial liabilities 52,624 47,256 53,310 60,485 ST provisions 926 210 772 291 Other current liabilities 23,494 32,221 32,360 30,963 Total current liabilities 109,512 114,581 122,052 129,732 Net current assets (60,050) (50,421) (58,774) (91,738) Net current assets ex-cash and investments (81,046) (90,601) (103,781) (106,249) Total Assets 691,739 690,688 690,496 791,348 Liabilities and shareholders' equity Share capital 36,005 36,008 36,010 36,017 Reserves and surplus 199,499 201,686 200,011 196,178 Total Equity 235,504 237,694 236,021 232,195 Borrowings 405,413 416,758 409,020 505,894 DTL 19,539 19,240 19,153 17,212 Other LT liabilities and provisions 31,283 16,996 26,302 36,047 Total liabilities and equity 691,739 690,688 690,496 791,348
Source: Company, Kotak Institutional Equities
68 KOTAK INSTITUTIONAL EQUITIES RESEARCH REDUCE Hindalco Industries (HNDL) Metals & Mining FEBRUARY 14, 2017 RESULT Coverage view: Cautious
In-line quarter; demonetization impacts marginally. Hindalco’s 3QFY17 EBITDA of Price (`): 185 ₹11.9 bn (+75% yoy, +2% qoq) was broadly in line with estimates. The full benefit of Target price (`): 165 increase in aluminum prices (+6% qoq) was not realized due to lower sales volumes BSE-30: 28,352 (logistics issues) and cost increases. The copper earnings were weak partially due to demonetization impact. Hindalco’s earnings have high sensitivity to aluminum prices— outlook for which will differ contingent on (1) China overcapacity and restarts and (2) government directives on shutdowns. Maintain REDUCE with TP of ₹165 (from ₹150).
Company data and valuation summary Hindalco Industries Stock data Forecasts/Valuations 2017E 2018E 2019E 52-week range (Rs) (high,low) 200-62 EPS (Rs) 11.4 14.0 14.4 Market Cap. (Rs bn) 382.2 EPS growth (%) 321.9 22.7 2.4 Shareholding pattern (%) P/E (X) 16.2 13.2 12.9 Promoters 37.7 Sales (Rs bn) 1,076.8 1,136.1 1,177.7 FIIs 33.0 Net profits (Rs bn) 23.6 29.0 29.7 MFs 1.2 EBITDA (Rs bn) 122.3 123.0 122.8 Price performance (%) 1M 3M 12M EV/EBITDA (X) 7.4 7.1 6.8 Absolute 7.4 7.4 203.8 ROE (%) 6.0 7.0 6.8 Rel. to BSE-30 3.2 1.6 146.3 Div. Yield (%) 0.5 0.5 0.5
Broadly in-line quarter—rising input costs and demonetization impact earnings marginally
Hindalco’s EBITDA of ₹11.9 bn (+75% yoy, +2% qoq) was broadly in line with our estimates. The aluminum EBITDA increased 8% qoq to ₹8.8 bn (+147% yoy) while copper EBITDA declined 10% qoq to ₹3.3 bn (-6% yoy). The increase in aluminum earnings was led by higher aluminum prices (+6% qoq) though partially offset by (1) higher costs on account of crude derivatives, increased coal costs & logistics costs, and (2) weaker sales volumes. The copper earnings declined sequentially due to lower acid prices, DAP realizations and lower domestic volumes post demonetization. Net income declined 14% qoq to ₹3.2 bn.
Aluminum outlook—China overcapacity or government policies can have different outcomes
The aluminum markets world ex-China remains in large deficit—1.2 mn tons of deficit in 2016 likely to increase in 2017E. If there was no China overcapacity and consequent large exports from China, aluminum prices would have been much stronger than the last year’s range of US$1,600-1,800/ton. The prices in fact increased to ~US$1,800/ton towards year-end from US$1,500/ton in March 2016 largely due to weaker Chinese production due to closures.
Aluminum production in China increased by 13% yoy in December 2016 and 17% yoy in January 2017 led by restarts and new projects. Due to new projects and restarts, the aluminum surplus in China can be as high as 3 mn tons in 2017 compared to a modest 850 kt in 2016. This can likely depress aluminum prices. However, the scenario can be different if China curtails aluminum capacity in 2017 on environmental grounds (continued on Page 2).
We expect a large aluminum surplus in 1H and possible decline in 2H; maintain REDUCE
The sharp increase in January 2017 production in China reflects ~5 mtpa of restarts/new projects coming on stream—this will likely result in large surplus on expected demand growth Abhishek Poddar of 5.5% in China (1.8 mn tons). We believe this can pressure aluminum prices in 1H2017. The bull case for aluminum based on environmental production cuts can play out later in the year (expected from November 2017) and are contingent on government orders of temporary output restriction. The stock (earnings, fair value) has high sensitivity to changes in aluminum prices given high leverage. We maintain our cautious outlook on the stock. We raise our aluminum price assumption by 1-3% and TP to ₹165 (from ₹150).
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Metals & Mining Hindalco Industries
Exhibit 1: Interim results of Hindalco (standalone), March fiscal year-ends (Rs mn)
(% chg.) 3QFY17 3QFY17E 3QFY16 2QFY17 3QFY17E 3QFY16 2QFY17 9MFY17 9MFY16 (% chg.) FY2017E Net sales 93,136 88,829 81,373 90,123 5 14 3 259,232 256,275 1 354,297 Total expenditure (81,283) (76,476) (74,618) (78,559) 6 9 3 (224,491) (234,690) (4) (307,409) Stock adjustment 6,851 1,693 3,044 1,739 12,679 (313) - Raw materials (58,413) (48,491) (48,339) (49,812) 20 21 17 (148,694) (146,881) 1 (192,352) Employee cost (4,445) (4,688) (4,386) (4,815) (5) 1 (8) (13,337) (12,612) 6 (18,836) Power and fuel cost (14,295) (14,430) (16,468) (14,823) (1) (13) (4) (43,966) (49,731) (12) (60,870) Other costs (10,982) (10,560) (8,469) (10,848) 4 30 1 (31,173) (25,154) 24 (35,352) EBITDA 11,852 12,353 6,755 11,564 (4) 75 2 34,741 21,585 61 46,888 Other income 2,200 2,206 1,834 3,364 (0) 20 (35) 7,748 7,794 (1) 9,755 Interest (5,879) (5,883) (5,852) (5,943) (0) 0 (1) (17,817) (18,166) (2) (23,480) Depreciation (3,580) (3,551) (3,120) (3,516) 1 15 2 (10,478) (9,416) 11 (13,961) Pretax profits 4,593 5,124 (383) 5,469 (10) NM (16) 14,194 1,797 690 19,202 Extraordinaries - - - 849 847 - - Tax (1,390) (1,589) 58 (1,929) (4,507) (271) 1,562 (6,145) Net income 3,206 3,536 (328) 4,389 (9) NM (27) 10,536 1,518 594 13,058 Adjusted net income 3,206 3,536 (328) 3,710 (9) NM (14) 9,858 1,518 549 13,058
Ratios ETR (%) 30.2 31.0 15.1 30.5 32 15 32.0 Adjusted EPS (Rs) 1.6 1.7 (0.2) 1.8 4.8 0.7 6.3 Operational details Aluminium metal production (tons) 320,000 320,000 296,000 320,000 - 8 - 948,000 829,000 14 1,250,225 Copper cathode production (tons) 94,000 90,617 94,000 106,000 4 - (11) 265,000 296,000 (10) 385,000 EBITDA (US$/ton) Aluminium 419 433 184 377 (3) 128 11 403 222 82 376 Copper 504 490 614 516 3 (18) (2) 541 587 (8) 583 Segmental EBITDA (Rs mn) Aluminium 8,758 9,345 3,540 8,076 (6) 147 8 25,545 11,803 116 31,740 Copper 3,295 3,007 3,522 3,659 10 (6) (10) 9,597 11,163 (14) 15,148 Segmental EBITDA margin (%) Aluminium 18.9 19.4 7.8 17.4 17.2 Copper 7.0 7.4 8.4 8.4 8.9
Source: Company, Kotak Institutional Equities estimates
Changes in our estimates
Exhibit 5 highlights key changes in our estimates.
We raise our all-in aluminum price assumption to US$1,775/ton, US$1,800/ton and US$1,825/ton from FY2017E, FY2018E and FY2019E from US$1,725/ton, US$1,800/ton and US$1,825/ton. This results in increase in our India EBITDA estimate (for standalone and Utkal) by 9-14% to ₹52 bn, ₹48 bn and ₹46 bn for FY2017E, FY2018E and FY2019E. The lower EBITDA in FY2018-19E despite higher aluminum price assumption in those years is due to increases in costs—especially of crude derivatives, coal. Our consolidated EBITDA estimate increases by 3-5% to ₹122 bn, ₹123 bn and ₹123 bn for FY2017E, FY2018E and FY2019E.
We estimate EPS of ₹11.4, ₹14 and ₹14.4 for FY2017E, FY2018E and FY2019E. Our TP of ₹165 is based on 6X India EBITDA and 6.5X for Novelis on December 2018E financials.
Ministry of Environmental Protection (MEP) may force production cuts
As per reports, China’s MEP is consulting production cuts in energy-intensive sectors, which may impact aluminum industry later this year. The solution of serious smog around Beijing, Tianjin and Hebei Province during winter may require production cutbacks from heavy industries. As per initial discussion, as much as 30% of aluminum capacity in the provinces of Shandong, Henan, Shanxi and Hebei may be forced to temporarily shut capacities between November 2017 and March 2018. The 4-month cut if implemented can impact production of about 2 mn tons from these provinces and can reduce the China surplus to 1.2 mn tons from 3 mn tons (per current projections). However, there are practical implementation challenges to this temporary shutdown approach given the high cost associated with temporary shutdown and restart of capacities. But if such cutbacks are implemented, it can start a medium-term bull market for aluminum prices.
70 KOTAK INSTITUTIONAL EQUITIES RESEARCH Hindalco Industries Metals & Mining
Exhibit 2: Interim results of Novelis, March fiscal year-ends (US$ mn)
(% chg.) 3QFY173QFY17E 3QFY16 2QFY17 3QFY17E 3QFY16 2QFY17 9MFY17 9MFY16 (% chg.) FY2017E Net sales 2,313 2,439 2,354 2,361 (5) (2) (2) 6,970 7,470 (7) 10,694 Expenditure (2,041) (2,176) (2,168) (2,102) (6) (6) (3) (6,178) (7,035) (12) (9,661) Cost of goods sold (1,924) (2,056) (2,051) (1,980) (5,834) (6,692) (9,166) SG&A (103) (106) (104) (108) (303) (304) (441) R&D (14) (14) (13) (14) (41) (39) (55) EBITDA 272 263 186 259 3 46 5 792 435 82 1,033 Restructuring expenses (1) (2) (10) (1) (4) (29) — Reported EBITDA 271 261 176 258 4 54 5 788 406 94 1,033 Depreciation (88) (90) (88) (90) (267) (264) (360) EBIT 183 171 88 168 7 108 9 521 142 267 673 Interest Expense (67) (78) (82) (81) (231) (244) (5) (290) Extraordinary income (loss) — — 0 — (111) (13) — (111) Affiliate income / (loss) (8) — — — (8) (2) (3) Other income (expenses) 3 (10) 16 (38) (62) 78 NM (62) Profit before tax 111 83 22 (62) 34 NM NM 109 (39) NM 207 Income tax (47) (25) (16) (27) (110) (28) NM (124) Profit after tax 64 58 6 (89) 10 967 (172) (1) (67) NM 83 Minorities (1) — Profit after tax 63 58 6 (89) 8 NM NM (2) (67) NM 83 Minorities (1) — — — — — — — — — — Net income 63 58 6 (89) 8 NM NM (2) (67) NM 83
Ratios (%) Gross profit margin 16.8 15.7 12.9 16.1 111 bps 395 bps 68 bps 16.3 10.4 588 bps 14.3 EBITDA (adjusted) 11.8 10.8 7.9 11.0 97 bps 386 bps 79 bps 11.4 5.8 554 bps 9.7 EBITDA (reported) 11.7 10.7 7.5 10.9 101 bps 424 bps 79 bps 11.3 5.4 587 bps 9.7 EBIT 7.9 7.0 3.7 7.1 90 bps 417 bps 80 bps 7.5 1.9 557 bps 6.3 PBT margin 4.8 3.4 0.9 (2.6) 139 bps 386 bps 742 bps 1.6 (0.5) 209 bps 1.9 Net income 2.7 2.4 0.3 (3.8) 34 bps 247 bps 649 bps (0.0) (0.9) 87 bps 0.8 Key metrics Rolled shipments (kt) 750 776 779 773 (3) (4) (3) 2,278 2,335 (2) 3,201 Average realization (US$/ton) 3,084 3,144 3,022 3,054 3,060 3,199 3,341 Adjusted EBITDA/ton (US$/ton) 335 349 272 331 (4) 23 1 335 223 50 322 Adjusted EBITDA (US$ mn) 251 271 212 256 (7) 18 (2) 762 521 46 1,030 EBITDA excluding metal lag (US$ mn) 255 271 238 268 (6) 7 (5) 793 686 16 1,062 EBITDA/ton exclduing metal lag (US$) 340 349 306 347 (3) 11 (2) 348 294 18 332
Source: Company, Kotak Institutional Equities estimates
Key highlights of the results and conference call
Utkal alumina EBITDA declines 18% qoq. The EBITDA for Utkal Alumina declined by 18% qoq to ₹1.4 b due to lower transfer pricing of alumina to standalone operations. As per policy, the company transfers alumina from Utkal at benchmark prices on Q1 basis (on Metal Bulletin quotation prices)---essentially at prices of 1 quarter prior to the current quarter. The company used 2QFY17 prices of US$234/ton for revenue booking in 3QFY17 which led to fall in Utkal EBITDA--- and consequently benefit of lower costs at standalone operations.
The production at Utkal Alumina was 393,000 tons (+6% qoq) in 3QFY17 and company sold 50,000 tons of bauxite externally. The external sales will be lower in 4QFY17 at ~30,000 tons as company cannot produce beyond 1.5 mtpa due to various approval limits. The company has also applied to increase the capacity to 2.25 mtpa—this has necessary clearances but requires consent to operate.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 71 Metals & Mining Hindalco Industries
Aluminum EBITDA increases 8% qoq. The standalone aluminum EBITDA increased 8% qoq to ₹8.8 bn (+147% yoy). The aluminum production volumes were flat qoq at 320,000 tons (+8% yoy) though sales volumes were lower at 310,000 tons. The lower volumes reflect logistical constraints in December 2016, which were mostly cleared in January 2017. We also highlight that Hindalco was not able to realize the full benefit of (1) higher aluminum prices (+6% qoq) translating into sequential increase in EBITDA of ₹1.9 bn, and (2) lower alumina prices from Utkal resulting in EBITDA potential of ₹0.3 bn at standalone operations.
The management attributed this to (1) lower sales volumes, (2) increase in coal costs after start of Gare Palma coal mines and some hardening in e-auction premiums on coal, and (3) higher logistics and crude derivatives costs. The management also stated uncertainty over favorable input costs benefitting earnings.
Hindalco’s aluminum production costs are now at 11th percentile of global cost curve.
Copper EBIDTA weakens. Copper EBITDA declined 10% qoq to ₹3.3 bn (-6% yoy) due to (1) lower volumes. The copper production declined by 11% qoq to 94,000 tons due to shutdown, (2) lower demand in domestic market post demonetization and higher export sales, (3) lower sulphuric acid prices. The copper sales volumes were 97,000 tons during the quarter.
Equity dilution and capex. The company stated that sole purpose of potential equity dilution is to deleverage the balance sheet. There are no plans for brownfield expansion and capex will be limited to downstream capacity addition for value added products. The company stuck to India capex guidance of ~₹10-12 bn including downstream capacity enhancement. The capex in downstream capacities will be limited to few 10s of billion rupees with short payback of 2-3 years.
The company plans to increase value added share in aluminum business to 50-55% of volumes (at ~700 kt). The company is also investing in copper rod plant which will increase total value added capacity in copper division to 90% of cathode production. This plant will likely be commissioned in 4QFY18 and start reflecting in earnings of FY2019E.
Prepayment of loans. The company prepaid ₹3.4 bn of project loans during the quarter; the total prepayment in FY2017E until now stands at ₹10.3 bn. The company expects further prepayment totaling up to ₹30 bn by FY2018E (including prepayments made). Deleveraging remains one of the key focus areas for the company.
Captive coal mines operational. The company started operations at Kathautia coal mines from February 2017 in additional to Gare Palma IV/4 and IV/5, which were operational from before. Of the total coal requirement of 15-16 mn tons, about 4-5 mn tons is still sourced through e-auctions.
72 KOTAK INSTITUTIONAL EQUITIES RESEARCH Hindalco Industries Metals & Mining
Exhibit 3: Leverage details of Hindalco, March fiscal year-ends (Rs mn)
2014 2015 2016 2017E 2018E 2019E Net debt - consolidated 530,436 565,386 553,738 523,802 491,274 454,983 EBITDA - consolidated 82,863 89,446 87,915 122,294 123,018 122,773 Net debt/EBITDA (X) 6.4 6.3 6.3 4.3 4.0 3.7 Total equity 423,798 392,846 388,026 401,671 428,160 455,348 Debt/Equity (X) 1.3 1.4 1.4 1.3 1.1 1.0
Source: Company, Kotak Institutional Equities estimates
Exhibit 4: Aluminum markets World ex-China are in deficit; China overcapacity overweighs aluminum fundamentals globally Aluminum demand supply for China and World ex-China ('000 tons)
2010 2011 2012 2013 2014 2015 2016 2017E China capacity 21,789 23,210 26,140 29,470 34,287 37,690 40,980 43,000 World ex-China capacity 30,413 31,357 31,881 33,132 33,751 33,402 32,691 33,500 Global capacity ('000 tons) 52,202 54,567 58,021 62,602 68,038 71,092 73,671 76,500 World ex-China production (000' tons) 24,965 26,395 25,758 25,685 25,834 26,294 26,950 27,758 World ex-China consumption (000' tons) 24,097 25,513 25,789 26,123 26,813 27,256 28,165 29,151 World ex-China Surplus/(Deficit) (000' tons) 869 882 (31) (438) (979) (962) (1,215) (1,392) China production (000' tons) 16,968 19,251 21,548 24,453 28,108 31,191 32,095 34,823 China consumption (000' tons) 16,834 19,421 21,153 23,904 26,864 28,990 31,246 33,121 China Surplus/(Deficit) (000' tons) 134 (170) 395 548 1,244 2,201 849 1,702 Global production (000' tons) 41,933 45,646 47,306 50,138 53,942 57,485 59,045 62,582 Global consumption (000' tons) 40,931 44,934 46,942 50,028 53,677 56,246 59,412 62,272 Global Surplus/(Deficit) (000' tons) 1,002 711 363 110 265 1,239 (367) 309 Utilization—world ex-China (%) 82 84 81 78 77 79 82 83 Utilization—China (%) 78 83 82 83 82 83 78 81
Source: CRU, Kotak Institutional Equities estimates
Exhibit 5: Hindalco, change in estimates, March fiscal year ends, 2017-19E (Rs bn)
Revised estimates Old estimates Change (%) 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E Hindalco standalone Aluminium metal sales (mn tons) 1.25 1.25 1.25 1.25 1.25 1.25 — — — Aluminium price (all-in) (US$/ton) 1,775 1,800 1,825 1,725 1,775 1,800 3 1 1 Net revenues (Rs bn) 354 374 389 348 371 386 2 1 1 EBITDA (includes Utkal) (Rs bn) 52 48 46 46 44 42 14 9 11 Novelis Shipments (tons) (inldg. Ingots) 3,201 3,249 3,301 3,201 3,249 3,314 — — -— Net revenues (Rs bn) 722 760 786 711 755 783 2 1 0 EBITDA (Rs bn) 70 75 77 70 75 77 (1) (0) (1) Adjusted EBITDA* (Rs bn) 72 76 77 72 76 78 0 (0) (1) Adjusted EBITDA* (US$ mn) 1,062 1,097 1,117 1,062 1,100 1,125 0 (0) (1) Consolidated Net revenues (Rs bn) 1,077 1,136 1,178 1,059 1,128 1,172 2 1 0 EBITDA (Rs bn) 122 123 123 116 119 119 5 3 3 PAT (Rs bn) 24 29 30 24 26 26 (3) 13 14 EPS (Rs) 11.4 14.0 14.4 11.8 12.4 12.6 (3) 13 14 INR:USD 67.5 69.0 69.0 67.5 69.0 69.0 0 0 0
Source: Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 73 Metals & Mining Hindalco Industries
Exhibit 6: Hindalco Industries, Key assumptions, March fiscal-year ends, 2014-2019E (Rs mn)
2014 2015 2016 2017E 2018E 2019E Aluminium Aluminium all-in price (US$/ton) 2,030 2,290 1,719 1,775 1,800 1,825 Metal sales volume (tons) 586,835 834,000 1,138,600 1,250,000 1,250,000 1,250,225 Blended realization (Rs/ton) 149,341 153,041 126,660 135,682 139,803 143,781 Alumina sales volume (tons) 368,492 369,720 368,880 294,000 294,000 299,568 Standalone EBITDA (including Utkal) (Rs mn) 24,919 36,770 40,320 52,420 47,816 46,023 Novelis Average realization (US$/ton) 3,373 3,655 3,161 3,341 3,391 3,450 Conversion premium (US$/ton) 1,595 1,765 1,567 1,666 1,691 1,725 Shipments ('000 tons) 2,895 3,050 3,123 3,201 3,249 3,301 Adjusted EBITDA/ton (US$/ton) 306 293 308 322 338 338 Adjusted EBITDA (US$ mn) 885 895 963 1,030 1,097 1,117 EBITDA (Rs mn) 47,937 53,602 44,752 69,706 75,034 76,582 Adjusted EBITDA (Rs mn) 53,498 54,702 63,006 69,504 75,688 77,077 Copper Copper cathode volumes (tons) 179,571 235,000 230,000 227,000 247,000 247,000 Copper rods volumes (tons) 147,935 151,000 158,000 156,420 156,420 156,420 TCRC margin (cents/lb) 13 22 23 19 18 18
Source: Company, Kotak Institutional Equities estimates
Exhibit 7: Hindalco Industries, Valuation, December 2018E basis (Rs mn)
Multiple Value (Rs mn) (X) (Rs mn) (Rs/share) Hindalco EBITDA 46,472 6 274,183 133 Novelis EBITDA 76,730 6.5 494,908 240 Total Enterprise Value 123,202 6.2 769,091 372 Add: Listed investments 38,321 19 Less: Net debt (464,056) (464,056) (225) Arrived market capitalization 165 Target price (Rs) 165
Source: Company, Kotak Institutional Equities estimates
74 KOTAK INSTITUTIONAL EQUITIES RESEARCH Hindalco Industries Metals & Mining
Exhibit 8: Hindalco (consolidated), 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 876,955 1,042,811 1,000,422 1,076,811 1,136,136 1,177,726 EBITDA 82,863 89,446 87,915 122,294 123,018 122,773 Other income 10,172 11,047 12,153 5,570 9,854 10,084 Interest (27,016) (41,784) (50,489) (47,850) (45,553) (44,407) Depreciation (35,528) (35,906) (42,872) (43,660) (44,042) (43,843) Profit before tax 30,491 22,803 6,707 36,355 43,276 44,606 Extraordinaries (3,960) (19,401) (7,350) (7,493) — — Taxes (5,249) (8,594) (6,411) (14,539) (16,110) (16,740) Profit after tax 21,282 838 (5,791) 14,323 27,166 27,866 Minority interest (200) 5,957 4,490 — — — Share in profit/(loss) of associates 668 1,747 1,749 1,784 1,784 1,784 Reported net income 21,750 8,542 448 16,107 28,950 29,650 Adjusted net income 25,710 20,632 5,593 23,600 28,950 29,650 Fully diluted EPS (Rs) 12.5 10.0 2.7 11.4 14.0 14.4 Balance sheet (Rs mn) Equity 405,992 383,285 384,138 397,783 424,272 451,460 Deferred tax liability 31,889 39,481 33,303 33,303 33,303 33,303 Total Borrowings 647,558 684,676 674,513 658,943 648,288 620,688 Current liabilities 276,713 314,385 305,771 322,926 332,123 340,592 Minority interest 17,806 9,561 3,888 3,888 3,888 3,888 Total liabilities 1,379,957 1,431,389 1,401,613 1,416,845 1,441,875 1,449,932 Net fixed assets 481,442 587,986 666,744 681,974 667,181 652,588 Capital work in progress 230,593 141,113 42,014 12,000 11,999 12,000 Goodwill 130,192 131,602 139,852 139,852 139,852 139,852 Investments 129,611 123,463 143,239 145,023 146,807 148,591 Cash 50,213 53,090 43,120 57,486 79,359 88,050 Other current assets 357,767 380,206 350,647 364,512 380,678 392,854 Deferred tax 139 13,930 15,998 15,998 15,998 15,998 Total assets 1,379,957 1,431,389 1,401,613 1,416,844 1,441,875 1,449,932 Free cash flow (Rs mn) Operating cash flow excl. working capital 28,479 26,781 36,383 57,982 71,209 71,708 Working capital changes 9,623 (863) 21,960 3,290 (6,969) (3,707) Capital expenditure (94,236) (59,776) (39,328) (28,875) (29,250) (29,250) Free cash flow (56,134) (33,858) 19,015 32,397 34,991 38,752 Ratios EBITDA margin (%) 9.4 8.6 8.8 11.4 10.8 10.4 EBIT margin (%) 5.4 5.1 4.5 7.3 7.0 6.7 Debt/equity (X) 1.6 1.8 1.8 1.7 1.5 1.4 Net debt/equity (X) 1.3 1.5 1.4 1.3 1.2 1.0 Net debt/EBITDA (X) 6.4 6.3 6.3 4.3 4.0 3.7 RoAE (%) 6.8 5.2 1.5 6.0 7.0 6.8 RoACE (%) 4.0 4.2 4.4 5.9 5.9 5.8
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 75 ADD Tata Power (TPWR) Utilities FEBRUARY 14, 2017 RESULT Coverage view: Attractive
Underlying strength, distorted by one-offs. Sharp spike in coal prices did improve Price (`): 83 contribution from coal subsidiaries, though a lagged impact in the tariff increase for Target price (`): 87 Mundra curtailed the benefit of earnings. Non-recurring profit on account of sale of BSE-30: 28,352 assets by an associated company further boosted earnings by ₹2.5 bn. A favorable outcome on the long-awaited judgment on Mundra, coupled with firm coal prices, augurs well for earnings, even as we note limited upside on revised target price of ₹87/share (from ₹85/share). Maintain ADD.
Company data and valuation summary Tata Power Stock data Forecasts/Valuations 2017E 2018E 2019E 52-week range (Rs) (high,low) 84-56 EPS (Rs) 6.8 7.3 9.9 Market Cap. (Rs bn) 225.6 EPS growth (%) 24.5 6.5 35.9 Shareholding pattern (%) P/E (X) 12.2 11.4 8.4 Promoters 33.0 Sales (Rs bn) 273.1 299.1 322.4 FIIs 26.2 Net profits (Rs bn) 19.2 20.4 27.7 MFs 3.1 EBITDA (Rs bn) 59.2 66.1 64.3 Price performance (%) 1M 3M 12M EV/EBITDA (X) 10.5 8.8 8.4 Absolute 5.2 15.7 47.1 ROE (%) 12.3 12.1 14.7 Rel. to BSE-30 1.0 9.4 19.3 Div. Yield (%) 1.4 1.4 1.4
Consolidated earnings boosted by higher coal contribution, sale of assets by associates
Tata Power reported modest revenue (-2% yoy) and EBITDA (+2% yoy) numbers on account of the drag on earnings from increased under-recovery at Mundra UMPP and despite the consolidation of ₹2.5 bn of EBITDA for the recently acquired renewable assets from Welspun (also reflected in higher interest and depreciation cost). However, strong contribution of ₹5 bn from associate companies helped yield a net income of ₹8 bn aided by lower effective tax rate of 15%. The contribution from associate companies was boosted by higher earnings from coal subsidiaries, and a non-recurring profit of ₹2.5 bn on sale of data centers by Tata Communications (associate company).
Dividend stream helps compensate for lower power sales, non-recurring provisions
Lower-than-estimated unit sales at 3,084 MU, absence of contribution from defense business, and write-off for early stage projects led to poor operational performance for Tata Power’s standalone business. However, substantial increase in other income owing to dividend from coal business as well as other subsidiaries and deferred tax reversal of `1.8 bn helped improve the standalone earnings. Increase in interest cost (38% yoy) reflects funding raised for the acquisition of renewable assets from Welspun. Standalone realizations declined 7% yoy, reflective of reversal of disallowance of ₹850 mn in 3QFY16.
Improving trajectory of coal realizations works favorably, though upside is limited
3QFY17 marked an inflection point in coal realizations for the mining business in Indonesia, Murtuza Arsiwalla which had been seeing a declining trend over the past few years with coal realizations having moved up to US$48/ton (14% yoy, 18% qoq). Operational performance for the quarter would have been better off, but for the lagged effect of tariff increase for Mundra UMPP. Ajinkya Bhat Incrementally, a settlement of the long-standing dispute for fuel cost under-recovery at Mundra could further catalyze stock performance, besides upside to earnings from inclusion of the renewable assets acquired from Welspun in Street estimates. We have revised our earnings estimates for FY2017 to factor higher contribution from coal subsidiaries as well as the non- recurring profits of ₹2.5 bn from sale of assets by Tata Communication.
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Tata Power Utilities
Mundra—increased production cost leads to lower profitability
CGPL sold 6.3 BU of energy in 3QFY17 (+5% yoy) yielding revenues of ₹15 bn (+7% yoy). The fuel cost under-recovery for the quarter increased to 70 paise/kwh versus 43 paise/kwh in 2QFY17 and 48 paise/kwh in 3QFY16.
Higher under-recovery is reflective of the increase in prices of imported coal, on account of which cost of production has increased to ₹2.3/kwh (+20% yoy) resulting in EBITDA falling 85% yoy to ₹0.1/kwh.
The current run-rate of realization and profitability will improve as the structure of the PPA takes into consideration rising prices of imported coal to be billed for escalable energy charge with a six-month lag.
Reported losses of ₹2.4 bn during the quarter includes forex loss of ₹1.7 bn and would have been worse off but for absence of interest cost owing favorable mark-to-market of interest rate swaps that resulted in negative interest cost of ₹140 mn against interest cost of ₹2 bn in preceding quarters.
Improved availability and higher generation aid earnings from Maithon
Maithon reported a 13% yoy increase in EBITDA at ₹2.1 bn owing to improved plant availability (97% in 3QFY17) on the entire 1,050 MW of capacity contracted under the cost-plus mechanism.
In 3QFY17, Maithon power plant sold 1.8 BU (+4% yoy, +25% qoq) at an average realization of ₹3.4/kwh. Maithon reported a PAT of ₹740 mn in 3QFY17 (+80% yoy, +40% qoq) taking the 9MFY17 PAT to ₹1.9 bn (+70% yoy).
On a regulated equity of ₹14 bn profit during the quarter translates into a return on regulated equity of 20.5%.
Exhibit 1: Losses in CGPL were compensated by higher contribution from coal mines in Indonesia Interim results for Tata Power (consolidated), March fiscal year-ends (Rs mn)
(% Chg.) 3QFY17 3QFY16 2QFY17 yoy qoq 9MFY17 9MFY16 (% chg.) FY2017E Net sales 68,302 69,480 68,841 (2) (1) 202,487 210,153 (4) 273,118 Employee cost (2,954) (2,983) (3,071) (9,140) (9,115) (12,060) Cost of power purchased (16,967) (21,030) (24,583) (64,530) (67,113) (81,236) Cost of fuel (22,841) (19,995) (21,161) (61,770) (60,016) (83,803) Cost of raw material and components (3,601) (4,074) (2,444) (8,590) (10,718) (12,000) Other expenditure (6,446) (6,213) (6,214) (18,278) (17,314) (24,822) EBITDA 15,493 15,186 11,369 2 36 40,178 45,876 (12) 59,197 Depreciation (5,318) (4,117) (4,476) (14,188) (12,077) (19,694) EBIT 10,175 11,069 6,892 25,990 33,799 39,503 Other income 1,459 1,649 1,898 4,794 4,721 5,336 Net interest (7,010) (6,506) (7,243) (22,167) (23,769) (29,969) PBT 4,625 6,212 1,547 (26) 199 8,618 14,751 (42) 14,870 Tax (706) (1,473) 1,117 (1,038) (5,605) (4,461) Minority interest and share of associates 4,266 3,587 1,383 6,973 3,286 8,747 Net profit 8,184 8,327 4,047 (2) 102 14,553 12,432 17 19,156 Extraordinary (2,192) (4,491) (685) (4,474) (6,523) (4,474) Reported profit after statutory appropriation 5,992 3,836 3,362 56 78 10,079 5,909 71 14,682 EPS (Rs/share) 2.9 3.0 1.4 5.2 4.4 6.8 EBITDA margin (%) 23 22 17 20 22 22 Effective tax rate (%) 15 24 (72) 12 38 30
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 77 Utilities Tata Power
Exhibit 2: Strong performance of the coal business and Maithon was offset by weakness at CGPL Subsidiary-wise key financial and operational metrics (Rs mn)
(% Chg.) 3QFY17 3QFY16 2QFY17 (yoy) (qoq) 9MFY17 9MFY16 (% chg.) Tata Power (Standalone) Net sales 13,284 15,671 14,038 (15) (5) 41,136 49,147 (16) EBITDA 7,002 2,270 11,135 208 (37) 24,655 20,679 19 PAT 3,063 3,133 4,603 (2) (33) 9,315 9,604 (3) Regulated equity 36,930 36,400 33,220 1 11 36,930 36,400 1 Tata Power Delhi Distribution Net sales 14,980 10,730 20,120 40 (26) 52,940 43,840 21 EBITDA 3,000 710 (1,340) 323 (324) 4,410 6,070 (27) PAT 1,130 (740) 690 (253) 64 2,640 710 272 Regulated equity 12,690 12,480 12,560 2 1 12,690 12,480 2 Coal Sales (mn tons) 24 21 23 15 6 67 59 13 Realization (US$/ton) 48 42 40 14 18 43 44 (4) Cost of Production (US$/ton) 27 26 24 4 11 26 29 (8) Coastal Gujarat Power Ltd (Mundra UMPP) Net sales 14,970 13,970 15,920 7 (6) 43,040 42,760 1 EBITDA 330 2,270 2,460 (85) (87) 4,980 6,420 (22) PAT (2,440) 22,290 (800) (111) 205 (7,070) 16,330 (143) Sales (MU) 6,304 5,996 6,629 5 (5) 17,920 17,285 4 Realization (Rs/kwh) 2.4 2.3 2.4 2 (1) 2.4 2.5 (3) Cost of Production (Rs/kwh) 2.3 2.0 2.0 19 14 2.1 2.1 1 EBITDA incl. other income (Rs/kwh) 0.1 0.4 0.4 (86) (86) 0.3 0.4 (25) Maithon Power Ltd Net sales 6,240 5,820 5,690 7 10 17,920 17,230 4 EBITDA 2,180 1,920 1,930 14 13 6,260 5,670 10 PAT 740 410 530 80 40 1,940 1,140 70 Sales (MU) 1,870 1,805 1,501 4 25 5,113 5,047 1 Realization (Rs/kwh) 3.4 3.0 3.6 12 (5) 3.5 3.4 3 Cost of Production (Rs/kwh) 2.2 2.0 2.3 12 (4) 2.3 2.3 (0) EBITDA (Rs/kwh) 1.2 1.1 1.3 13 (7) 1.2 1.1 9
Source: Company, Kotak Institutional Equities
Exhibit 3: Standalone revenues down due to low offtake, results cushioned by higher other income Interim results for Tata Power (standalone), March fiscal year-ends (Rs mn)
(% Chg.) 3QFY17 3QFY17E 3QFY16 2QFY17 3QFY17E 3QFY16 2QFY17 9MFY17 9MFY16 (% chg.) FY2017E Net sales 13,284 15,868 15,671 14,038 (16) (15) (5) 41,136 49,147 (16) 55,922 Cost of electrical energy purchased (1,038) (1,427) (1,980) (754) (27) (48) 38 (3,401) (6,371) (4,486) Cost of fuel (6,186) (5,428) (6,323) (5,864) 14 (2) 5 (18,032) (19,980) (24,435) Personnel costs, other expenses and provisions (5,566) (4,948) (5,097) (5,111) 12 9 9 (15,361) (16,467) (20,087) Total expenses (12,790) (11,803) (13,400) (11,728) 8 (5) 9 (36,794) (42,817) (49,007) EBITDA 494 4,065 2,270 2,310 (88) (78) (79) 4,342 6,330 (31) 6,914 Depreciation (1,613) (1,610) (1,514) (1,579) (4,742) (4,506) (6,430) EBIT (1,119) 2,456 757 732 (400) 1,824 484 Other income 6,508 4,615 5,991 8,825 41 9 (26) 20,313 20,340 25,405 Net interest (3,488) (3,339) (2,533) (3,202) 4 38 9 (9,333) (8,676) (12,802) PBT 1,901 3,732 4,215 6,354 (49) (55) (70) 10,580 13,489 (22) 13,088 Tax 1,162 (1,194) (1,082) (1,751) (1,265) (3,885) (1,963) Net profit 3,063 2,538 3,133 4,603 21 (2) (33) 9,315 9,604 (3) 11,125 Extraordinary (237) — (195) (130) (547) 233 (180) Reported PAT after statutory appropriation 2,826 2,538 2,938 4,473 11 (4) (37) 8,769 9,837 (11) 10,945 EPS (Rs/share) 1.1 0.9 1.1 1.6 3.3 3.4 4.0 EBITDA margin (%) 4 26 14 16 11 13 12 Effective tax rate (%) (61) 28 28 28 12 29 15
Key operating parameters Units generated (MU) 3,043 3,036 2,990 3,330 0 2 (9) 9,536 9,359 2 12,445 Units sold (MU) 3,084 3,403 3,310 3,228 (9) (7) (4) 9,682 10,362 (7) 13,159
Per unit price realization (Rs) 5.3 5.2 5.7 5.2 2 (7) 2 5.1 5.7 (10) 6.0 Fuel cost per unit sold (Rs) 2.3 2.0 2.4 2.0 16 (2) 13 2.1 2.3 (8) 2.2
78 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Power Utilities
Source: Company, Kotak Institutional Equities
Exhibit 4: Tata Power sum-of-the-parts valuation
Business Methodology Key assumptions/comments Value (Rs/share) Mumbai (Generation, transmission & Includes valuation of extant Mumbai business DCF-equity 20 distribution business) NDPL earns 16% RoE provided it meets cetain A,T&C loss Delhi Distcom (NDPL) DCF-equity reduction benchmarks. It is also incentivized by way of 12 higher returns in the event of bettering the benchmarks Mundra UMPP DCF-equity Levelized tariff of Rs2.26/unit for 25 years (15) 74% stake in 1,050 MW project; 300 MW to be sold to Maithon DCF-equity DVC, 300 MW to NDPL, 300 MW to Punjab and 150 MW 10 to West Bengal (regulated returns); Coal linkage allocated
Other generation assets (standalone) DCF-equity Jojobera + Belgaum + Haldia (629 MW) 6 IEL DCF-equity Jojobera Unit 5 + IEL Phase 6 - 240 MW 1 The project earns a regulated RoE of 15.5% as per the Powerlinks Transmission Ltd DCF-equity 1 CERC tariff guideline for inter-state transmission project Net economic interest - based on dividend discount model Coal DCF 28
Investments Various 20% discount to CMP/ KIE target price 8 Investible surplus on books Market value Marketable securities & cash on books 15 Total 87
Source: Kotak Institutional Equities estimates
Exhibit 5: Change in estimates for Tata Power, March fiscal year-ends, 2017-19E (Rs mn)
Revenues EBITDA Net profit Old New % Chg. Old New % Chg. Old New % Chg. 2017E 283,582 273,118 (3.7) 57,415 59,197 3.1 12,909 19,156 48.4 2018E 311,304 299,097 (3.9) 63,137 66,057 4.6 20,305 20,409 0.5 2019E 337,738 322,440 (4.5) 64,832 64,348 (0.7) 26,720 27,728 3.8
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 79 Utilities Tata Power
Exhibit 6: Tata Power: Profit model, balance sheet, cash model (consolidated), March fiscal year-ends, 2011-19E (Rs mn)
2011 2012 2013 2014 2015 2016 2017E 2018E 2019E Profit model (Rs mn) Net sales 194,508 258,689 328,361 354,702 341,851 362,862 273,118 299,097 322,440 EBITDA 45,956 51,927 64,430 75,279 67,587 78,167 59,197 66,057 64,348 Other income 2,671 4,013 5,586 4,058 5,341 6,388 5,336 5,388 5,357 Interest (8,684) (15,271) (26,355) (34,399) (36,993) (34,765) (29,969) (30,669) (28,258) Depreciation (9,802) (13,346) (22,715) (27,296) (21,742) (23,764) (19,694) (20,881) (21,084) Pretax profits 30,141 27,323 20,945 17,642 14,193 26,025 14,870 19,894 20,363 Tax (9,756) (14,755) (9,201) (10,084) (10,339) (8,693) (4,461) (7,958) (8,145) Minority interest & profit from associates (1,223) (1,194) (1,842) (2,267) (2,410) (1,940) 8,747 8,472 15,510 Net profits 19,162 11,374 9,903 5,291 1,444 15,392 19,156 20,409 27,728 Extraordinary items 1,719 (22,251) (10,757) (7,891) 234 (6,658) (4,474) — — Earnings per share (Rs) 7.8 4.6 4.0 2.1 0.5 5.5 6.8 7.3 9.9
Balance sheet (Rs mn) Total equity 137,442 124,001 118,852 118,662 137,072 142,996 153,747 170,225 194,022 Deferred taxation liability 4,753 6,387 10,005 11,229 13,955 14,758 14,758 14,758 14,758 Total borrowings 247,624 353,598 393,823 416,725 387,049 387,519 355,055 321,185 306,240 Currrent liabilities 95,087 85,494 124,733 139,135 185,251 198,882 137,560 145,188 155,452 Capital contribution from Consumers 3,823 4,013 4,506 5,348 6,117 6,980 6,980 6,980 6,980 Minority interest 14,143 16,313 20,646 22,733 24,926 25,814 28,314 30,592 32,781 Total liabilities and equity 502,871 589,807 672,565 713,833 754,370 776,948 696,415 688,928 710,233 Cash 22,066 36,941 19,899 15,550 15,009 12,108 38,361 41,617 73,861 Current assets 88,862 108,682 184,357 200,268 222,084 223,891 208,400 211,591 214,459 Total fixed assets 356,124 402,878 437,109 467,823 483,896 507,462 411,408 396,142 381,123 Investments 28,410 34,229 31,201 30,193 33,381 33,488 38,246 39,578 40,790 Deferred expenditure 7,409 7,076 — — — — — — — Total assets 502,871 589,806 672,565 713,833 754,370 776,948 696,415 688,928 710,233
Free cash flow (Rs mn) Operating cash flow, excl. working capital 31,888 9,256 26,081 26,511 27,149 35,538 36,726 43,717 51,057 Working capital (769) 62,667 (23,598) (964) 30,760 20,720 (45,411) 4,287 7,340 Capital expenditure (97,932) (63,323) (67,802) (55,969) (34,878) (66,821) 76,360 (5,615) (6,065) Investments (1,100) (5,486) 10,104 1,009 (3,189) (106) (4,759) (1,332) (1,212) Free cash flow (67,913) 3,113 (55,216) (29,413) 19,842 (10,669) 62,917 41,058 51,119
Key ratios Net debt / equity (X) 1.5 2.3 2.7 2.9 2.3 2.3 1.8 1.4 1.0 ROE (%) 14.9 8.7 8.2 4.5 1.1 11.0 12.9 12.6 15.2 ROCE (%) 7.1 4.3 5.0 4.0 2.4 7.1 5.5 5.5 5.3 BVPS (Rs) 58 52 50 50 51 53 57 63 72
Source: Company, Kotak Institutional Equities estimates
80 KOTAK INSTITUTIONAL EQUITIES RESEARCH ADD Muthoot Finance (MUTH) NBFCs FEBRUARY 13, 2017 RESULT Coverage view: Neutral
Strong performance in a challenging environment. Muthoot Finance’s high Price (`): 329 earnings growth (up 56% yoy) was largely driven by yoy NIM expansion and loan Target price (`): 390 growth over the preceding three quarters. The strength in its 3Q performance is BSE-30: 28,352 indicated by the fact that despite demonetization and 10% fall in gold prices, (1) qoq decline in loan book was moderate at 2% and (2) NIM compression was curtailed at 60 bps qoq. We revise estimates to factor strong NIM trajectory on the back of falling interest rates and superior expense management, retain ADD; TP ₹390 (₹375 earlier).
Company data and valuation summary Muthoot Finance Stock data Forecasts/Valuations 2017E 2018E 2019E 52-week range (Rs) (high,low) 407-170 EPS (Rs) 28.4 29.8 33.6 QUICK NUMBERS Market Cap. (Rs bn) 131.2 EPS growth (%) 40.2 4.7 12.8 Shareholding pattern (%) P/E (X) 11.6 11.0 9.8 PAT growth of 56% Promoters 74.6 NII (Rs bn) 29.5 32.3 36.5 yoy; 30% yoy NII FIIs 14.5 Net profits (Rs bn) 11.4 11.9 13.4 MFs 6.9 BVPS 159.3 176.9 196.7 growth Price performance (%) 1M 3M 12M P/B (X) 2.1 1.9 1.7 Absolute 10.6 (3.7) 81.4 ROE (%) 19.0 17.7 18.0 AUM growth of 8% Rel. to BSE-30 6.2 (8.9) 47.1 Div. Yield (%) 2.6 3.2 3.6 yoy; 2% decline qoq
Why we think 3Q performance was strong Gross NPL up ~70 bps qoq to 2.9% Despite two challenges, viz. 10% fall in gold prices qoq and demonetization that sucked out cash in the system and reduced the loan-servicing ability of its borrowers, Muthoot’s performance was impressive; here’s why:
Muthoot curtailed decline in loan book to 2% qoq as compared to 6% qoq growth over the past two quarters; this was largely due to constraints on cash. Notably, Muthoot disburses all loans up to ₹0.1 mn (over 70% of total disbursements) in cash. Removal of limits on cash withdrawal will likely ease the scenario and hence we expect growth to resume in February and March 2017.
Muthoot reported qoq compression in calculated asset yields by 77 bps and in overall NIM by 60 bps qoq. While the company has not dropped lending rates during the quarter, the decline in yield likely reflects non-accrual of income on (1) loans that slipped into NPLs during the quarter and (2) a part of the portfolio that may have remained standard but may be considered vulnerable due to higher LTV (on current gold prices) post adverse movement in the underlying. Notably, gold prices declined by 10% qoq in 3QFY17. Muthoot has not shared the details of its policy on interest accrual but we believe that the company stops income recognition on loans if LTV crosses its comfort levels. With 5% rise in gold prices since December, we believe that some of this will be reversed in 4QFY17. Nischint Chawathe GNPLs increased to 2.9% from 2.2% qoq; as seen in the past, movement in NPLs tends to be sharp but broadly technical in nature given strong and liquid security in gold loans. We hence believe that this will be reverse in the subsequent quarters. M B Mahesh CFA
Retain ADD with target price of ₹390 Abhijeet Sakhare We are revising our earnings by 6-12% to factor strong NIM as a consequence of falling interest rates, still retaining 70 bps NIM compression estimate during FY2017-19E. Post our revision in earnings, we expect the company to deliver 18% near-term RoE and 9-10% earnings CAGR during FY2017-19E. At our RGM-based target price, the stock will trade 2X FY2019E book. Volatility in gold prices remains key sensitivity to its earnings.
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. NBFCs Muthoot Finance
Exhibit 1: Muthoot Finance – quarterly financial statements March fiscal year-ends, 3QFY16- 3QFY17 (` mn) (% chg.)
3QFY17 3QFY17E 3QFY16 2QFY17 3QFY17E 3QFY16 2QFY17 9MFY17 9MFY16 (% chg.) FY2017E Income statement Interest income 13,280 11,248 13,497 18 (2) 39,529 33,729 17 52,519 Interest expenses 5,970 5,616 5,937 6 1 17,478 16,937 3 22,971 Net interest income 7,310 7,543 5,632 7,560 (3) 30 (3) 22,051 16,792 31 29,547 Provisions (including standard assets) 39 600 74 171 (94) (47) (77) 386 325 19 773 NII post provisions 7,271 6,943 5,558 7,389 5 31 (2) 21,665 16,467 32 28,774 Other income 184 250 164 365 (26) 12 (50) 805 507 59 1,130 Operating expenses 3,000 3,261 2,824 3,130 (8) 6 (4) 9,154 8,556 7 12,250 Admin expenses 1,100 1,250 1,099 1,123 (12) 0 (2) 3,236 3,320 (3) 4,346 Employee expenses 1,784 1,900 1,582 1,896 (6) 13 (6) 5,579 4,811 16 7,456 Depreciation 116 111 143 111 5 (19) 5 339 426 (20) 448 PBT 4,455 3,932 2,898 4,624 13 54 (4) 13,316 8,418 58 17,654 Tax 1,544 1,416 1,032 1,657 9 50 (7) 4,735 2,973 59 6,302 PAT 2,911 2,516 1,866 2,967 16 56 (2) 8,581 5,444 58 11,351 EPS (Rs) 7 5 7 55 (2) 21 14 57 28
Key highlights Total AUMs (Rs mn) 269,625 269,073 249,500 274,564 8 (2) Average AUMs (Rs mn) 272,095 249,115 266,395 9 2 Borrowings (Rs mn) 209,102 203,308 214,883 3 (3)
Yield of loans (KS - %) 19.5 18.1 20.3 Borrowings cost (KS - %) 11.3 10.8 11.1 Spread (KS - %) 8.3 7.2 9.2 NIM (KS - %) 10.7 9.0 11.4 Opex/ average assets (%) 4.4 4.5 4.7 RoA (%) 4.3 3.0 4.5 RoE (%) 18.4 14.0 19.7
Asset quality Gross NPL (Rs mn) 7,863 6,319 6,016 24 31 Net NPLs (Rs mn) 6,844 5,462 4,997 25 37 Gross NPLs (%) 2.9 2.5 2.2 Net NPLs (%) 2.5 2.2 1.8
Operational highlights Branches (#) 4,308 4,259 4,327 1 (0) Gold (weight in tons) 147 145 150 1 (2) Employees (#) 24,150 23,070 23,961 5 1 Loan per gram (Rs) 1,834 1,721 1,830 7 0 Average gold loan per branch (Rs mn) 62 59 63 7 (1)
Source: Company, Kotak Institutional Equities estimates
PAT up 56% yoy
Muthoot Finance reported PAT of ₹2.91 bn, up 56% yoy and 16% above estimates. The company reported 30% NII growth on the back of 8% loan growth and sharp NIM expansion on yoy basis. Opex/assets ratio moderated to 4.5% from 4.4% yoy. Provisions were down sharply (47% yoy) despite the fact that GNPLs ratio moved up to 2.9% from 2.5% in 3QFY16 (absolute NPLs up 24% yoy) and 2.2% in 2QFY17 (absolute GNPLs up 30% qoq). Coverage fell to 13% from 17% qoq.
AUM growth of 8% yoy and decline of 2% qoq
Gold prices in India declined by 10% qoq during 3QFY17 and have increased 3% in 9MFY17. This has likely driven 2% qoq decline and 11% YTD loan growth for Muthoot. In volume terms, the stock of gold with company has declined by 2% qoq and grown 4% YTD. Impact of demonetization is reflected in lackluster growth in the quarter.
While 3QFY17 has been weak largely on account of demonetization, we expect recovery in sentiments and cash circulation will lead to improvement in growth outlook. Historic trends suggest that gold loan growth is very volatile and has high linkages with gold price movements. With no strong directional view on gold prices, we model moderate growth of 14-15% in our forecasts.
82 KOTAK INSTITUTIONAL EQUITIES RESEARCH Muthoot Finance NBFCs
Exhibit 2: AUM growth has been quite volatile over the past decade AUM and yoy growth, March fiscal year-ends, 2006-19E (%)
(Rs bn) AUM Yoy growth (%) (%) 450 130 366 360 318 100 276 260 270 247 234 244 70 219
180 159 40
74 90 10 34 8 15 22
- (20)
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017E
2018E 2019E
Source: Company, Kotak Institutional Equities
Exhibit 3: Gold prices declined ~10% in 3QFY17 and have recovered ~5% since December-end Domestic gold price (`/gm) 3,500
3,000
2,500
2,000
1,500
1,000
500
-
Feb-11
Feb-12
Feb-13
Feb-14
Feb-15
Feb-16
Feb-17
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Nov-16
Aug-11
Aug-12
Aug-13
Aug-14
Aug-15
Aug-16
May-11
May-12
May-13
May-14
May-15 May-16
Source: Bloomberg, Kotak Institutional Equities
NIM declines ~70 bps likely due to high interest reversals
Muthoot reported NIM of 10.7% in 3QFY17, 11.4% in 2QFY17 as compared to 9.5% in 3QFY16.
Most gold loans of Muthoot have tenure of 12 months. In most cases, loan has a bullet repayment; assuming 150 dpd NPL norm, its accrued interest before a loan can be classified as NPL can be up to a period of 16 months. Muthoot may stop interest recognition if LTV (including accrued interest) crosses its comfort LTV levels. In certain cases, loan realization post auctions may not be sufficient to cover accrued interest for the entire period and some of the interest recognized in previous months may be reversed.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 83 NBFCs Muthoot Finance
The company increased interest rates on gold loans in 1QFY17, which was fully reflected in 2QFY17. Muthoot earns around 20% yield on average, the current calculated yield is slightly lower at 19.5% likely due to interest not being accrued as discussed above.
We believe that deficit in cash circulation post demonization provided an opportunity to the company to increase lending rates on loans disbursed in cash. Management has however highlighted that they have not raised lending rates.
Muthoot’s reported borrowing cost declined ~20 bps qoq to 10.6%. Share of bank loans for Muthoot stood at 46% of borrowings, higher than 42% in the last quarter. Muthoot has seen rundown in the share of gold bonds and listed NCDs over the past 12 months; this has partly been replaced by commercial papers and bank loans. Muthoot may not benefit immediately from cut in MCLRs as these were announced in January and we understand that most loans are given with 1-year reset. However, over the medium term there is scope for higher share of CPs and NCDs in the borrowing mix.
We believe NIMs are relatively high at current levels. We build in an NIM compression almost 70 bps between FY2017 and FY2019. As discussed above, correction in gold prices or longer loan durations can put pressure on NIM, as the company may pause interest accrual.
Exhibit 4: We forecast NIM compression over FY2018-19E after the expansion seen in FY2017 Yield on loans, cost of funds and NIMs, March fiscal year-ends, 2010-19E (%)
Yield on loans (LHS-%) Cost of borrowings (LHS-%) NIM (RHS-%) 25.0 22.3 13.0 21.1 19.9 19.7 20.4 20.1 20.2 19.7 20.0 18.8 18.9 12.0 11.2 11.4 10.9 10.9 11.0 15.0 10.8 13.2 10.7 10.7 13.4 11.9 11.8 11.3 10.0 10.7 11.0 10.2 10.0 10.0 8.4 8.8 9.5 9.5 9.0
5.0 8.0
- 7.0
2010
2011
2012
2013
2014
2015
2016
2017E
2018E 2019E
Source: Company, Kotak Institutional Equities estimates
Higher gross NPL; likely to be technical in nature
Reported GNPL ratio inched up ~70 bps qoq. Muthoot reported GNPLs of ₹7.9 bn (2.9% of loans) in 3QFY17, up from ₹6.0 bn (2.2% of loans) in 2QFY17. The company continues to follow 1% provisions on standard loans.
Demonetization has likely led to delay in repayments leading to higher NPLs. Recovery in gold prices by ~5% since December-end offers cushion on LTV. With improvement in cash circulation and business environment in general, part of the gross NPL may see reversal in 4QFY17.
According to the company, EMI loans may not be an accurate product as its borrowers don’t have steady monthly income. The company has now launched loans with periodic repayment and semi-annual repayment (launched in September 2016). This will reduce volatility in collections due to gold price movements even as it does not focus on an EMI product.
84 KOTAK INSTITUTIONAL EQUITIES RESEARCH Muthoot Finance NBFCs
Solid cost management
Operating costs increased 6% yoy, as staff costs increased 13% yoy (largely linked to incentive payouts) while non-staff expenses were stable yoy. Stable non-staff costs is largely due to decline in depreciation, advertising and other costs, whereas other cost items such as rent and repairs & maintenance costs have increased yoy.
Muthoot has been showing good level of cost control in recent quarters with cost ratios (% of AUM) around 4.4-4.7% range compared to 5.1-5.3% in FY2015. We expect expenses to increase by 10% over FY2017-19E, lower than loan growth.
Exhibit 5: Operating expenses to assets ratio expectedly peaked in FY2015 Operating expenses to average AUMs, March fiscal year-ends, 2010-19E Staff expenses (LHS) Non-staff expenses (LHS) Operating expenses (RHS) 2.6 5.0
2.1 4.6
1.6 4.2
1.0 3.8
0.5 3.4
- 3.0
2010
2011
2012
2013
2014
2015
2016
2017E
2018E 2019E
Source: Company, Kotak Institutional Equities
Exhibit 6: Muthoot Finance – old and new estimates March fiscal year-ends, 2017-19E (Rs mn)
New estimates Old estimates New vs old (%) 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E Loans under management 276,197 317,532 366,107 283,596 322,964 372,124 (3) (2) (2) NIM (%) 11.4 10.9 10.7 11.0 10.5 10.2 Interest income 52,519 58,482 64,604 51,420 57,623 63,601 2 1 2 Interest expenses 22,971 26,181 28,091 22,444 25,745 28,180 2 2 (0) Net Interest income 29,547 32,302 36,513 28,976 31,879 35,420 2 1 3 Provisions 773 848 1,053 847 925 1,121 (9) (8) (6) Operating expenses 12,250 13,668 15,314 12,379 14,657 16,677 (1) (7) (8) Profit before tax 17,654 18,486 20,846 16,650 16,997 18,323 6 9 14 Tax 6,302 6,599 7,442 5,944 5,864 6,321 6 13 18 Profit after tax 11,351 11,886 13,404 10,706 11,133 12,001 6 7 12 EPS (Rs) 28 30 34 27 28 30 6 7 12 BVPS (Rs) 159 177 197 158 176 196 1 0 0
Source: Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 85 NBFCs Muthoot Finance
Exhibit 7: Muthoot is trading at 1.9X one-year forward book One-year forward trading PER and PBR, 2014-2017 (X) Rolling PER (X) (LHS) Rolling PBR (X) (RHS) 14.0 2.5
11.2 2.0
8.4 1.5
5.6 1.0
2.8 0.5
0.0 -
Feb-14
Feb-15
Feb-16
Feb-17
Nov-14
Nov-15
Nov-16
Aug-14
Aug-15
Aug-16
May-14 May-15 May-16
Source: Company, Bloomberg, Kotak Institutional Equities estimates
86 KOTAK INSTITUTIONAL EQUITIES RESEARCH Muthoot Finance NBFCs
Exhibit 8: Muthoot Finance – key financial ratios and growth rates March fiscal year-ends, 2014-19E (%) 2014 2015 2016 2017E 2018E 2019E Growth in key parameters (%) Profit and loss statement - yoy (%) Interest income (9) (13) 13 9 11 10 Interest costs (7) (20) 7 2 14 7 Net interest income (10) (5) 19 16 9 13 Net total income (9) (4) 18 17 8 13 Provisioning expenses (50) (15) 337 (52) 10 24 Net income (post provisions) (8) (4) 13 22 8 12 Operating expneses 12 6 (1) 8 12 12 Staff expenses 9 7 2 16 (0) 17 Other operating expenses 19 (1) 0 (1) 23 6 Depreciation expenses 5 77 (34) (20) 96 6 PBT post extraordinaries (21) (14) 28 34 5 13 Tax (18) (14) 42 24 5 13 PAT (22) (14) 21 40 5 13 Balance sheet - yoy (%) Gold loans (16) 7 4 13 15 15 Gold loans (incl sell down) (16) 7 4 13 15 15 Fixed assets 8 (19) (19) 7 7 6 Other current assets 11 (9) (22) 60 12 13 Total assets (13) 5 1 18 15 15 Borrowings (18) (2) (4) 18 16 16 Current liabilities 5 51 25 20 15 15 Total liabilities (16) 2 (1) 19 15 16 Share capital 0 7 0 0 0 0 Reserves and surplus 16 20 11 14 12 12 Shareholders funds 9 19 11 13 11 11
Key ratios (%) Interest yield (incl loans sold down) 20.4 18.8 20.1 20.2 19.7 18.9 Interest cost (incl loan sold down) 11.9 10.7 11.8 11.3 11.0 10.2 Spreads 8 8 8 9 9 9 NII/ loans under management 9 10 11 11 11 11 Operating costs/ net income (post provisions) 47.6 52.9 46.4 41.0 42.5 42.4 Cash/ total assets + loan sold down 8.0 6.5 2.5 6.0 5.8 5.5 Tax rate 34.6 34.8 38.5 35.7 35.7 35.7 Debt/ equity (X) 4.7 3.8 3.3 3.5 3.6 3.8 Du Pont analysis (% of average assets including loans sold down) Net interest income 8.2 8.2 9.5 10.0 9.5 9.3 Other income 0.2 0.2 0.2 0.4 0.2 0.2 Credit costs 0.2 0.1 0.6 0.3 0.2 0.3 Operating expenses 3.9 4.4 4.2 4.2 4.0 3.9 PBT post extraordinaries 4.3 3.9 4.9 6.0 5.4 5.3 1-tax rate 0.7 0.7 0.6 0.6 0.6 0.6 RoA 2.8 2.6 3.0 3.9 3.5 3.4 Average assets / average equity (X) 6.7 5.6 5.0 4.9 5.1 5.2 RoE 19.0 14.3 15.1 19.0 17.7 18.0
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 87 NBFCs Muthoot Finance
Exhibit 9: Muthoot Finance – income statement and balance sheet March fiscal year-ends, 2014-19E (` mn) 2014 2015 2016 2017E 2018E 2019E Income statement (Rs mn) Interest income 48,934 42,623 48,130 52,519 58,482 64,604 Interest costs 26,259 21,064 22,577 22,971 26,181 28,091 Net interest income 22,675 21,559 25,553 29,547 32,302 36,513 Other income 540 624 620 1,130 700 700 Net total income 23,215 22,183 26,173 30,677 33,002 37,213 Provisioning expenses 438 371 1,624 773 848 1,053 Net income (post provisions) 22,777 21,811 24,549 29,904 32,154 36,160 Operating expneses 10,841 11,533 11,382 12,250 13,668 15,314 Staff expenses 5,917 6,304 6,419 7,456 7,428 8,690 Other operating expenses 4,448 4,387 4,405 4,346 5,363 5,693 Depreciation expenses 476 841 558 448 878 932 PBT post extraordinaries 11,936 10,279 13,167 17,654 18,486 20,846 Tax 4,135 3,573 5,071 6,302 6,599 7,442 PAT 7,801 6,705 8,096 11,351 11,886 13,404 No of shares (mn) 372 397 399 399 399 399 EPS - adjusted for bonus (Rs) 21 17 20 28 30 34 BVPS - adjusted for bonus (Rs) 115 128 141 159 177 197
Balance sheet (Rs mn) Assets Gold loans 218,620 234,050 243,355 276,197 317,532 366,107 Investments 354 385 982 982 982 982 Fixed assets 3,269 2,642 2,138 2,288 2,438 2,588 Current assets 33,695 30,616 24,012 38,437 43,240 48,742 Cash and bank balances 20,489 17,366 6,791 19,103 21,013 23,114 Other cash balance 13,420 17,366 - 19,103 21,013 23,114 Other current assets 13,206 13,250 17,221 19,334 22,227 25,628 Total assets 255,938 267,693 270,487 317,903 364,192 418,419 Liabilities Borrowings 198,620 194,640 186,409 220,881 255,131 295,670 Current liabilities 14,673 22,226 27,886 33,463 38,483 44,255 Total liabilities 213,293 216,866 214,295 254,344 293,614 339,925 Share capital 3,717 3,971 3,990 3,990 3,990 3,990 Reserves and surplus 38,928 46,855 52,202 59,569 66,589 74,504 Shareholders funds 42,645 50,826 56,192 63,559 70,579 78,494 Aggregate loan book (incl sell down) Loans under management 218,620 234,050 243,789 276,197 317,532 366,107 Total assets under management 255,938 267,693 270,487 317,903 364,192 418,419
Source: Company, Kotak Institutional Equities estimates
88 KOTAK INSTITUTIONAL EQUITIES RESEARCH SELL National Aluminium Co. (NACL) Metals & Mining FEBRUARY 14, 2017 RESULT Coverage view: Cautious
Alumina prices aid improvement. Nalco’s EBITDA increased 66% qoq to `2.85 bn Price (`): 66 (+102% yoy) aided by higher alumina prices (+30% qoq) and aluminum prices; the Target price (`): 42 alumina segment EBIT increased 40% qoq to `2 bn. The rally in alumina prices is led by BSE-30: 28,352 strong demand from China aluminum smelters and because production is lagging. The stock is expensive at 20X FY2018E earnings. We remain cautious due to the high cost of operations and concerns on cash usage. Maintain SELL with TP of `42.
Company data and valuation summary National Aluminium Co. Stock data Forecasts/Valuations 2017E 2018E 2019E 52-week range (Rs) (high,low) 79-31 EPS (Rs) 3.1 3.4 3.4 Market Cap. (Rs bn) 128.3 EPS growth (%) 15.5 9.0 0.1 Shareholding pattern (%) P/E (X) 21.3 19.5 19.5 Promoters 74.6 Sales (Rs bn) 70.4 76.7 78.7 FIIs 3.2 Net profits (Rs bn) 6.0 6.6 6.6 MFs 0.5 EBITDA (Rs bn) 9.9 11.7 11.7 Price performance (%) 1M 3M 12M EV/EBITDA (X) 9.8 8.1 7.7 Absolute (7.3) 30.7 113.8 ROE (%) 5.2 6.2 5.9 Rel. to BSE-30 (11.0) 23.6 73.4 Div. Yield (%) 1.5 1.5 1.5
Nalco’s alumina EBITDA increases 66% qoq to `2.9 bn aided by higher alumina prices
Nalco’s EBITDA increased 66% qoq to `2.85 bn (+102% yoy) but was lower than our estimate due to increased input costs. The alumina EBIT increased by 40% qoq to `2.1 bn (-20% yoy) while the aluminum segment reported EBIT of `115 mn against EBIT loss of `999 mn in 2QFY17; the improvement in alumina as well as aluminum EBIT is led by higher alumina prices (+30% qoq to US$308/ton) and aluminum prices (+6% qoq). The company’s alumina production increased 9% yoy to 559,000 tons (+26% qoq) and aluminum production increased 3% yoy to 98,640 tons (+6% qoq). Net income (adjusted) increased 39% qoq to `1.7 bn (+50% yoy) led by strong EBITDA increase but partially offset by lower other income (-45% qoq) due to lower cash reserves post buyback. The company also recognized `371 mn of exceptional charge on entry tax on imports.
Strong price rally in alumina supported by good demand from Chinese smelters
Alumina prices have rallied by 10% qoq in February 2017 to US$340/ton led by strong demand from Chinese smelters (due to restarts and new projects launched in recent months) and global alumina market likely to face a small deficit in 1Q2017. Also, higher input costs, especially due to increase in caustic soda prices has led to increased cost pressures.
Environmental shutdowns in Shandong, Henan, Shanxi and Hebei provinces in China may cover alumina refineries as well----this would mean large capacity shutdowns during winters between November 2017 and March 2018. The shutdowns are mostly driven by government directives and are uncertain.
Large project pipeline and high cost operations underpin our cautious stance
Nalco’s production cost is high despite low cost coal linkages due to high conversion costs including employees and other overheads. The returns in aluminum business are largely based Abhishek Poddar on cost efficiencies given China overcapacity and Nalco’s high cost increases the earnings volatility. Besides, the company plans to invest in a number of projects including on an alumina refinery (`55 bn) and an aluminum smelter (`100 bn) in Odisha. These projects have been in the planning stage for a while. We do not take comfort in such large project investments given the poor execution track record of metal PSUs and approval delays at Nalco even before project has commenced. We maintain our SELL rating on the stock with unchanged TP of `42.
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Metals & Mining National Aluminium Co.
Exhibit 1: Interim results of NALCO, March fiscal year-ends (Rs mn)
(% chg.) 3QFY17 3QFY17E 3QFY16 2QFY17 3QFY17E 3QFY16 2QFY17 9MFY17 9MFY16 (%chg) FY2017E Net sales 19,638 18,888 17,238 18,132 4 14 8 53,052 50,868 4 70,358 Other operating income 243 342 193 329 780 752 4 1,086 Total expenditure (17,029) (15,906) (16,015) (16,738) 7 6 2 (47,310) (44,426) 6 (60,448) Inc/(Dec) in stock 1,061 (343) 489 (361) 2,368 1,878 - Raw materials (3,362) (2,696) (3,044) (2,837) 25 10 19 (8,669) (8,175) 6 (11,412) Power & Fuel (5,913) (5,021) (5,084) (5,283) 18 16 12 (16,236) (14,266) 14 (19,316) Staff cost (3,559) (3,344) (3,558) (3,519) 6 0 1 (10,548) (10,576) (0) (13,827) Other expenditure (5,256) (4,502) (4,819) (4,738) 17 9 11 (14,227) (13,288) 7 (15,893) EBITDA 2,852 3,325 1,416 1,723 (14) 102 66 6,522 7,194 (9) 9,910 Other income 759 669 1,407 1,369 13 (46) (45) 3,463 4,273 (19) 4,035 Interest (6) (6) (5) (6) (17) (27) - Depreciation (1,177) (1,359) (1,073) (1,353) (13) 10 (13) (3,717) (3,153) 18 (4,815) Pretax profits 2,428 2,628 2,279 1,734 (8) 7 40 5,879 8,820 (33) 9,130 Extraordinaries (371) — 535 - (371) 535 — Tax (618) (894) (801) (521) (31) (23) 19 (1,878) (3,090) (39) (3,103) Net income 1,439 1,734 1,479 1,213 (17) (3) 19 4,002 5,731 (30) 6,027 Adjusted net income 1,684 1,734 1,126 1,213 (3) 50 39 4,247 5,378 (21) 6,027 Ratios EBITDA margin (%) 14.3 17.3 8.1 9.3 12.3 14.1 14.1 ETR (%) 30.0 34.0 35.1 30.1 31.9 35.0 34.0 EPS (Rs) 0.9 0.9 0.4 0.6 2.2 2.1 3.1 Production ('000 tons) Alumina 559,000 500,000 515,000 444,000 9 26 1,527,000 1,436,000 6 1,983,600 Aluminum 98,640 96,909 96,000 92,864 3 6 286,000 276,000 4 379,500 Segmental revenue Chemicals 9,622 — 9,337 8,644 3 11 26,572 27,384 Aluminium 13,946 — 11,224 12,965 24 8 37,179 34,242 Segmental PBIT Chemicals 2,065 — 2,565 1,475 (20) 40 5,687 7,691 Aluminium 115 — (1,324) (999) (109) (111) (1,944) (2,499) Segmental PBIT (%) Chemicals 21.5 — 27.5 17.1 21.4 28.1 Aluminium 0.8 — (11.8) (7.7) (5.2) (7.3)
Source: Company, Kotak Institutional Equities estimates
Exhibit 2: Alumina prices trading at US$340/ton (+10% qoq) in February 2017 Metallurgical grade alumina prices (US$/t, FOB), February 2013 - 2017
Metallurgical grade alumina prices (US$/t, FOB) 400
350
300
250
200
150
Feb-13 Feb-14 Feb-15 Feb-16 Feb-17
Nov-13 Nov-14 Nov-15 Nov-16
Aug-16 Aug-13 Aug-14 Aug-15
May-13 May-14 May-15 May-16
Source: CRU, Kotak Institutional Equities estimates
90 KOTAK INSTITUTIONAL EQUITIES RESEARCH National Aluminium Co. Metals & Mining
Exhibit 3: Alumina markets turned into deficit in 4QCY16 due to strong demand from China smelters, logistical constraints Global alumina demand-supply balance, 2007-2016 ('000 tons)
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E Production ('000 tons) Africa 526 593 530 597 574 142 — — — — Australasia 18,987 19,415 19,959 19,793 19,114 21,070 21,214 20,216 19,854 20,372 North America 5,280 5,277 3,540 4,446 4,823 5,227 5,525 5,167 5,475 3,131 South America 14,913 15,589 13,162 13,609 14,813 13,844 13,080 13,475 12,715 12,273 China 19,977 22,388 23,393 29,324 36,406 41,228 47,122 51,562 56,787 59,252 Asia - others 5,176 5,718 5,284 5,200 5,568 5,680 5,568 7,039 8,617 10,368 Europe 10,286 10,080 7,962 8,834 9,075 8,892 8,884 8,783 8,790 8,711 World production 75,145 79,061 73,829 81,803 90,374 96,083 101,394 106,241 112,238 114,107 Consumption ('000 tons) Africa 3,514 3,319 3,253 3,373 3,494 3,173 3,504 3,380 3,268 3,246 Australasia 4,481 4,445 4,280 4,408 4,464 4,232 4,074 3,954 3,862 3,890 North America 10,923 11,196 9,213 9,078 9,620 9,392 9,520 8,859 8,651 7,786 South America 4,948 5,150 4,854 4,462 4,230 3,973 3,688 2,987 2,551 2,649 China 24,949 27,156 27,154 33,750 38,008 43,729 48,773 55,473 60,395 62,796 Asia - others 7,751 8,195 9,059 10,846 12,539 13,079 13,713 16,089 17,355 18,991 Europe 17,949 18,999 15,842 16,311 16,975 16,185 15,424 14,979 15,365 15,750 World consumption 74,515 78,460 73,655 82,228 89,330 93,763 98,697 105,722 111,446 115,108 Surplus/(deficit) 629 600 174 (426) 1,044 2,321 2,697 519 792 (1,001) Net exports to China (5,124) (4,590) (5,141) (4,312) (1,852) (4,977) (3,549) (5,153) (4,359) (3,187)
Source: CRU, Kotak Institutional Equities estimates
Exhibit 4: Nalco, Key assumptions sheet, March fiscal year-ends, 2014-19E
2014 2015 2016 2017E 2018E 2019E ALUMINIUM Aluminium metal sales ('000 tons) 319,986 326,079 372,000 379,410 379,500 379,500 Average LME aluminium price (US$/ton) 2,030 2,280 1,719 1,725 1,775 1,800 ALUMINA Alumina production ('000 tons) 1,925,000 1,851,100 1,953,000 1,983,600 2,052,000 2,097,600 Alumina sales ('000 tons) 1,342,761 1,224,690 1,190,294 1,240,402 1,306,087 1,353,325 Average Alumina price (US$/ton) 316 335 295 284 285 289
Source: Company, Kotak Institutional Equities estimates
Exhibit 5: Nalco, Valuation details, December 2018E (Rs mn)
Multiple EV (Rs mn) (X) (Rs mn) Rs/share EBIT (post tax) 4,321 10 44,934 23 Net debt (36,903) (19) Equity value 81,837 42 Target price (Rs/share) 42
Source: Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 91 Metals & Mining National Aluminium Co.
Exhibit 6: NALCO, 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 67,809 73,828 68,160 70,358 76,704 78,737 EBITDA 9,343 17,060 9,380 9,910 11,665 11,675 Other income 5,577 6,726 5,366 4,035 3,295 3,443 Depreciaiton (5,247) (4,137) (4,241) (4,815) (5,012) (5,166) Profit before tax 9,672 19,650 10,493 9,130 9,948 9,953 Current tax (2,683) (5,964) (2,971) (2,583) (2,943) (3,037) Deferred tax (72) (1,951) (747) (520) (438) (346) Net profit 6,424 13,218 7,310 6,027 6,566 6,570 Adjusted net profit 6,750 12,239 6,957 6,027 6,566 6,570 Earnings per share (Rs) 2.6 4.7 2.7 3.1 3.4 3.4 Balance sheet (Rs mn) Equity 121,224 127,973 129,077 104,426 108,666 112,981 Deferred tax liability 9,101 11,053 11,101 11,621 12,059 12,405 Current liabilities 35,159 22,751 25,012 23,950 25,038 26,019 Total liabilities 165,485 161,777 165,190 139,998 145,762 151,406 Net fixed assets 75,607 71,952 71,289 72,580 73,918 73,705 Investments 12,440 9,500 8,771 8,771 8,771 8,771 Cash 40,483 46,280 49,335 22,783 25,067 29,154 Other current assets 36,955 34,045 35,795 35,864 38,007 39,776 Total assets 165,485 161,777 165,190 139,998 145,762 151,406 Free cash flow (Rs mn) Operating cash flow excl. working capital 6,434 9,612 6,944 7,327 8,721 8,639 Working capital changes 3,379 (4,690) 1,284 (474) (1,055) (715) Capital expenditure (6,187) (4,004) (5,963) (6,106) (6,350) (4,953) Free cash flow 3,627 918 2,266 747 1,317 2,971 Ratios Net debt/equity (X) (0.4) (0.4) (0.5) (0.3) (0.3) (0.3) RoAE (%) 5.6 9.8 5.4 5.2 6.2 5.9 RoACE (%) 2.4 6.2 2.6 2.9 4.1 3.9
Source: Company, Kotak Institutional Equities estimates
92 KOTAK INSTITUTIONAL EQUITIES RESEARCH ADD Balkrishna Industries (BIL) Automobiles FEBRUARY 13, 2017 RESULT Coverage view: Neutral
Robust quarter. BKT delivered strong 3QFY17 results with 26% yoy revenue growth Price (`): 1,170 and 71% yoy EBITDA growth on the back of (1) 22% volume growth aided by market Target price (`): 1,250 share gains and some early signs of recovery in mining and construction segments and BSE-30: 28,352 (2) continued margin expansion. While EBITDA margins will likely come off from current levels, we expect BKT to deliver 13% EPS CAGR over FY2017-19E led by further volume ramp-up in OEM segment and expansion of product portfolio in mining segment. We maintain our ADD rating with unchanged TP of `1,250.
Company data and valuation summary Balkrishna Industries Stock data Forecasts/Valuations 2017E 2018E 2019E 52-week range (Rs) (high,low) 1,286-547 EPS (Rs) 77.2 85.4 98.9 Market Cap. (Rs bn) 113.1 EPS growth (%) 29.6 10.6 15.9 Shareholding pattern (%) P/E (X) 15.2 13.7 11.8 Promoters 58.3 Sales (Rs bn) 37.2 45.6 53.7 FIIs 18.3 Net profits (Rs bn) 7.5 8.3 9.6 MFs 14.6 EBITDA (Rs bn) 11.3 13.2 14.9 Price performance (%) 1M 3M 12M EV/EBITDA (X) 10.5 8.4 6.8 Absolute 8.4 17.2 104.4 ROE (%) 23.9 21.5 20.6 Rel. to BSE-30 4.1 10.9 65.7 Div. Yield (%) 0.5 0.6 0.6
3QFY17 results surprise positively on higher EBITDA margin; volume growth strong at 22% yoy
Balkrishna reported 3QFY17 EBITDA of `2.8 bn (+71% yoy), which was 10% ahead of our estimates due to stronger-than-expected gross margin. Revenues increased by 26% yoy (in line) led by 22.4% volume growth and 3% increase in net realizations (flattish qoq). Volume growth was driven by recovery and continued market share gains across segments; US market, in particular, witnessed stronger growth led by some pick-up in mining and construction segments. EBITDA margin came in at 31.5% (up 820 bps yoy but down 150 bps qoq), which was 290 bps ahead of our estimates due to (1) higher-than-expected gross margin and (2) lower other expenses. Gross margin deteriorated by 130 bps (KIE 280 bps qoq decline); presence of low-cost inventory (90 days for natural rubber) and existing purchase contracts limited the impacted of cost increases. We believe gross margin will gradually come off in next couple of quarters; we are building in 200-250 bps decline in 4QFY17. Employee costs increased by 10% yoy but other expenses surprised positively with only 2% yoy increase despite 22% yoy volume growth. The company reported net profit of `1.86 bn (+94.2% yoy), which was 10% above estimates; other income was lower than our estimates but this was offset by lower-than-expected tax rate.
Expect the company to deliver EBITDA/EPS CAGR of 15%/13% over FY2017-19E
We expect BKT’s volumes to grow at 15% CAGR over FY2017-19E, which will be led by (1) continued market share gains, (2) expansion of product portfolio (higher-sized tires) in the mining tire segment and (3) ramp-up of volumes from new OEMs. We expect EBITDA margin to decline to around 28-29% levels in FY2018-19E (31.5% in 3QFY17); we expect the company to Nishit Jalan take some price increase to mitigate the impact of commodity cost increases. Overall, we expect BKT to deliver 13% EPS CAGR over FY2017-19E. Hitesh Goel
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Automobiles Balkrishna Industries
Fine-tune earnings estimates; maintain ADD with unchanged target price of `1,250
We have increased our FY2017E EPS estimates by 8% (EBITDA cut by 2%) led largely by increase in other income due to higher forex gains. Our FY2018-19E earnings estimates for the company remain largely unchanged. We maintain our ADD rating with unchanged target price of `1,250, valuing the company at 13X December 2018E EPS. Prolonged weakness in industrial segments and further increase in commodity prices are key risks to our investment thesis.
Key takeaways from the conference call
Strong volume growth in 3QFY17 was driven by recovery across segments. The company mentioned that volume growth was particularly strong in US led partly 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 company has received good response for its newly launched higher-sized mining tires and expects strong growth going ahead. Key target segments for the new products are India, US and other Asian markets and the industry size for these new products is around 10-15% of the current mining tires industry.
The management sounded upbeat on volume growth going ahead as there are early signs of recovery in mining and construction equipment segments globally. In the Indian market, the company will expand its presence in southern and central regions and will likely have a pan India presence within the next one year.
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 tyres, to balance the element of subsidy, as per their calculations. This will be applicable from end- Jan or early February 2017.
Natural rubber inventory for the company is around 90 days and inventory for crude derivative commodities is around 30-45 days. Due to higher RM inventory and advance contracts with suppliers, full impact of increase in rubber prices has no profitability yet. We expect gross margin to come off by 200-250 bps in 4QFY17. The company is contemplating price increase in 1QFY18 to offset part impact of higher RM prices.
EUR:INR realization would be closer to 77 in FY2017 due to the company’s hedging contracts. The company has partially hedged its FY2018 net Euro exposure to around 76-77 levels and USD exposure at 70-71 levels.
There are no major capex plans for the company going ahead; maintenance capex for the company would be around `1-1.5 bn.
In 3QFY17, realized forex loss for the company was `300 mn while unrealized forex loss was around `50 mn.
Production of the newly commissioned Bhuj plant was 15,000 tons in 3QFY17.
As of December 2016, gross long-term debt was `8.5 bn while short-term debt was `6 bn. Cash balance was closer to `12 bn leading to net debt of `2.5 bn.
94 KOTAK INSTITUTIONAL EQUITIES RESEARCH Balkrishna Industries Automobiles
Exhibit 1: 3QFY17 EBITDA was 10% ahead of estimates on stronger-than-expected gross margin Interim results of BKT, standalone, March fiscal year-ends (` mn)
Change (%) 3QFY17 3QFY17E 3QFY16 2QFY17 3QFY17E 3QFY16 2QFY17 9MFY17 9MFY16 (% chg.) FY2017E Volumes (tonnes) 40,415 40,608 33,010 42,550 (0.5) 22.4 (5.0) 126,271 107,097 17.9 170,109 Realizations per ton 218,273 219,159 211,651 219,159 (0.4) 3.1 (0.4) 217,211 220,673 218,615 Total Income 8,822 8,900 6,987 9,325 (0.9) 26.3 (5.4) 27,427 23,633 16.1 37,188 Total Expenditure (6,042) (6,374) (5,361) (6,250) (5.2) 12.7 (3.3) (18,973) (18,348) (25,911) Raw materials (3,584) (3,750) (3,026) (3,666) (4.4) 18.4 (2.2) (11,095) (10,552) (15,345) Employee expense (562) (549) (471) (540) 2.4 19.4 4.1 (1,648) (1,454) (2,439) Other expenditure (1,896) (2,075) (1,865) (2,045) (8.6) 1.7 (7.3) (6,230) (6,342) (8,127) EBITDA 2,780 2,526 1,625 3,075 10.1 71.0 (9.6) 8,455 5,286 60.0 11,277 EBITDA margin (%) 31.5 28.4 23.3 33.0 30.8 22.4 30.3 Depreciation (788) (761) (764) (725) 3.5 3.1 8.7 (2,288) (2,107) (3,105) Interest (49) (47) (143) (47) 4.5 (65.8) 4.5 (162) (329) (246) Other income 632 700 645 1,035 (9.8) (2.0) (39.0) 2,184 1,698 2,659 PBT 2,574 2,418 1,362 3,339 6.5 89.0 (22.9) 8,189 4,549 80.0 10,585 Exceptional items — — — — — — — Tax expense (718) (725) (406) (909) (1.1) 76.7 (21.1) (2,413) (1,514) (3,123) PAT 1,857 1,692 956 2,429 94.2 (23.6) 5,777 3,035 7,462 Adjusted PAT 1,857 1,692 956 2,429 9.7 94.2 (23.6) 5,777 3,035 90.3 7,462 EPS (Rs) 19.2 17.5 9.9 25.1 59.8 31.4 77.2 Key ratios (%) RM/sales 40.6 42.1 43.3 39.3 40.5 44.6 41.3 Employee cost/sales 6.4 6.2 6.7 5.8 6.0 6.2 6.6 Other expenditure/sales 21.5 23.3 26.7 21.9 22.7 26.8 21.9 Effective tax rate 27.9 30.0 29.8 27.2 29.5 33.3 29.5
Source: Company, Kotak Institutional Equities estimates
Exhibit 2: BKT’s volumes grew by 22% yoy in 3QFY17 Trend in yoy growth in BKT's volumes, March fiscal year-ends, 2014-17 (%)
25 21 22 20 20 13 12 13 15 12 11
10 5 5 (0) - (4) (6) (6) (5) (11) (10) (14) (15)
(20)
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17 2QFY17 3QFY17
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 95 Automobiles Balkrishna Industries
Exhibit 3: Global OHT makers continue to report decline in revenues, though the pace of declines has come down in recent quarters Quarterly revenues in USD, and yoy growth trend for key OHT players, December calendar year-ends (USD mn, %)
4QCY13 1QCY14 2QCY14 3QCY14 4QCY14 1QCY15 2QCY15 3QCY15 4QCY15 1QCY16 2QCY16 3QCY16 4QCY16
Michelin (a) 885 1,062 1,101 954 846 869 885 808 710 813 825 762 NA Trelleborg (b) 149 174 158 140 125 135 135 126 120 136 177 216 208 Titan International 494 539 524 450 383 402 376 309 308 322 330 306 NA BKT (c) 137 162 161 145 155 144 135 125 106 130 139 139 131 Yoy growth (%) Michelin (19) (2) (6) (6) (4) (18) (20) (15) (16) (6) (7) (6) Trelleborg 16 2 (5) (11) (16) (23) (15) (10) (4) 1 1 1 - Titan International 0 (7) (12) (10) (22) (25) (28) (31) (20) (20) (12) (1) BKT 5 11 8 12 13 (11) (16) (14) (32) (9) 3 12 23
Notes: (a) Data pertains to revenues from speciality tires division (b) Data pertains to revenues from wheel systems division (c) Data corresponds to March fiscal year-ends
Source: Company, Kotak Institutional Equities
Exhibit 4: Natural rubber prices have increased significantly over the past 1-2 months Trend in monthly price of Kottayam natural rubber RSS4, 2014-16 (` per ton)
17,000 16,000 15,000 14,000 13,000 12,000 11,000 10,000 9,000
8,000
Jun-14
Jun-15
Jun-16
Oct-14
Oct-15
Oct-16
Feb-15
Feb-16
Apr-15
Apr-16
Dec-14
Dec-15
Dec-16
Aug-14 Aug-15 Aug-16
Source: Bloomberg, Kotak Institutional Equities
Exhibit 5: Gains from lower input costs continue to come through strongly yoy although there was marginal decline on qoq basis Trend in operating parameters for the standalone business, BKT, March fiscal year-ends, 2014-17
2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 USD/INR 60.6 62.0 62.2 63.4 64.9 65.9 67.5 66.9 66.9 67.4 Euro/INR 80.3 77.2 70.1 70.3 72.3 72.2 74.4 75.5 74.7 72.6 Volumes (MT) 37,281 38,382 39,290 39,031 35,056 33,010 41,306 43,306 42,550 40,415 Sales (Rs mn) 8,813 9,603 8,935 8,559 8,088 6,987 8,796 9,281 9,325 8,822 EBITDA (Rs mn) 2,075 2,641 2,919 1,099 2,562 1,625 2,389 2,600 3,075 2,780 RMs (Rs mn) 4,613 4,826 4,841 4,180 3,347 3,026 3,662 3,846 3,666 3,584 Net sales per kg 236 250 227 219 231 212 213 214 219 218 RM per kg (Rs) 124 126 123 107 95 92 89 89 86 89 Gross margins (Rs per kg) 113 124 104 112 135 120 124 126 133 130 EBITDA per kg (Rs) 56 69 74 28 73 49 58 60 72 69 EBITDA (%) 23.5 27.5 32.7 12.8 31.7 23.3 27.2 28.0 33.0 31.5
Source: Company, Bloomberg, Kotak Institutional Equities
96 KOTAK INSTITUTIONAL EQUITIES RESEARCH Balkrishna Industries Automobiles
Exhibit 6: We increase our FY2017E consolidated EPS estimates by 8% on higher other income; FY2018-19E estimates largely unchanged Earnings revision table, consolidated numbers, March fiscal year-ends, 2017-19E (` mn)
New estimates Old estimates Change (%) 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E Revenues (Rs mn) 37,188 45,619 53,670 38,439 45,942 53,702 (3.3) (0.7) (0.1) EBITDA (Rs mn) 11,277 13,174 14,938 11,562 13,255 14,859 (2.5) (0.6) 0.5 EBITDA margin (%) 30.3 28.9 27.8 30.1 28.9 27.7 PAT (Rs mn) 7,462 8,250 9,559 6,931 8,260 9,589 7.7 (0.1) (0.3) EPS (Rs) 77.2 85.4 98.9 71.7 85.5 99.2 7.7 (0.1) (0.3)
Source: Kotak Institutional Equities estimates
Exhibit 7: We expect double-digit volume growth over FY2017-19E due to new products and continued market share gains Our assumptions for BKT, consolidated, March fiscal year-ends, 2011-19E
2011 2012 2013 2014 2015 2016 2017E 2018E 2019E Volumes (MT) 111,544 133,039 138,339 142,810 154,156 148,386 170,109 197,936 227,972 Sales (Rs mn) 21,921 30,166 33,939 37,719 38,168 32,587 37,188 45,619 53,670 EBITDA (Rs mn) 3,675 5,120 6,824 9,807 7,272 8,781 11,277 13,174 14,938 RMs (Rs mn) 13,249 18,174 18,947 18,219 19,784 14,223 15,345 19,932 24,042 Net sales per kg 196.5 226.7 245.3 264.1 247.6 219.6 218.6 230.5 235.4 RM per kg (Rs) 118.8 136.6 137.0 127.6 128.3 95.8 90.2 100.7 105.5 EBITDA per kg (Rs) 32.9 38.5 49.3 68.7 47.2 59.2 66.3 66.6 65.5 EBITDA margin (%) 16.8 17.0 20.1 26.0 19.1 26.9 30.3 28.9 27.8
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 97 Automobiles Balkrishna Industries
Exhibit 8: We expect BKT to deliver 15%/13% EBITDA/EPS CAGR over FY2017-19E Profit and loss model, cash flow statement and balance sheet for BKT, consolidated, March fiscal year-ends, 2012-19E (` mn)
2012 2013 2014 2015 2016 2017E 2018E 2019E Profit model (Rs mn) Sales 30,166 33,939 37,719 38,168 32,587 37,188 45,619 53,670 EBITDA 5,120 6,824 9,807 7,272 8,781 11,277 13,174 14,938 Other income 40 (90) (770) 2,800 2,949 2,659 2,220 2,424 Interest (292) (274) (272) (476) (343) (246) (175) (115) Depreciation (864) (1,122) (1,703) (2,437) (2,813) (3,105) (3,264) (3,395) Profit before tax 4,004 5,338 7,062 7,159 8,574 10,585 11,955 13,852 Tax expense (1,315) (1,839) (2,316) (2,408) (2,814) (3,123) (3,705) (4,293) Extraordinardy items — — — — — — — — PAT 2,689 3,499 4,747 4,751 5,760 7,462 8,250 9,559 Year-end no of shares 97 97 97 97 97 97 97 97 Fully diluted no of shares 97 97 97 97 97 97 97 97 EPS 27.8 36.2 49.1 49.2 59.6 77.2 85.4 98.9 Balance sheet (Rs mn) Equity 11,101 14,430 18,951 22,760 27,879 34,637 42,113 50,820 Total borrowings 17,092 21,640 24,385 23,578 19,144 13,644 9,644 5,644 Deferred tax liability/minority interest 2,277 2,041 2,212 1,887 2,382 2,382 2,382 2,382 Current liabilities and provisions 2,910 3,397 4,672 4,958 4,499 5,402 6,627 7,796 Total liabilites 33,379 41,507 50,221 53,184 53,905 56,066 60,766 66,643 Net fixed assets 13,497 23,478 29,546 30,494 30,854 28,749 26,735 24,590 Investments 4,082 2,910 2,236 2,254 6,971 6,971 6,971 6,971 Cash & cash equivalent 3,699 2,782 3,821 8,207 5,709 8,794 12,412 17,853 Other current assets and miscellaneous 12,101 12,337 14,618 12,228 10,371 11,551 14,648 17,229 Total assets 33,379 41,507 50,221 53,184 53,905 56,065 60,766 66,643 Free cash flow (Rs mn) Operating cash flow 3,374 4,938 7,089 7,405 8,306 7,908 9,294 10,530 Working capital changes (2,832) 273 (1,355) 1,959 2,084 (278) (1,872) (1,411) Capital expenditure (7,029) (10,126) (8,858) (3,699) (2,387) (1,000) (1,250) (1,250) Free cash flow (6,487) (4,915) (3,123) 5,665 8,003 6,630 6,172 7,869 Ratios EBITDA margin (%) 17.0 20.1 26.0 19.1 26.9 30.3 28.9 27.8 Net debt/equity (X) 1.21 1.31 1.09 0.68 0.48 0.14 (0.07) (0.24) Book value (Rs/share) 114.8 149.3 196.1 235.5 288.4 358.3 435.7 525.8 ROAE (%) 27.3 27.4 28.4 22.8 22.7 23.9 21.5 20.6 ROACE (%) 20.9 24.0 26.3 13.9 17.2 22.9 27.7 32.1
Source: Company, Kotak Institutional Equities estimates
98 KOTAK INSTITUTIONAL EQUITIES RESEARCH BUY SRF (SRF) Others FEBRUARY 13, 2017 RESULT Price (`): 1,601 Waiting for turnaround. SRF’s 3QFY17 results were muted, though along expected Target price (`): 1,910 lines, as weak near-term demand in chemicals business, in the midst of ongoing BSE-30: 28,352 investments to increase capabilities, impacted margins. The trend is likely to extend until 1HFY18E, though rising customer enquiries for agro-chemical and pharma intermediates keep the underlying business fundamentals robust, which should translate into strong earnings growth in the medium term, as demand recovers. Maintain positive stance. Company data and valuation summary SRF Stock data Forecasts/Valuations 2017E 2018E 2019E 52-week range (Rs) (high,low) 1,970-1,022 EPS (Rs) 84.2 95.7 113.1 Market Cap. (Rs bn) 100.6 EPS growth (%) 14.4 13.6 18.2 Shareholding pattern (%) P/E (X) 20.8 18.3 15.5 Promoters 52.4 Sales (Rs bn) 49.1 53.7 60.0 FIIs 18.0 Net profits (Rs bn) 4.8 5.5 6.5 MFs 10.3 EBITDA (Rs bn) 10.0 11.3 12.7 Price performance (%) 1M 3M 12M EV/EBITDA (X) 12.3 10.7 9.3 Absolute 8.1 3.6 60.1 ROE (%) 16.8 16.6 17.0 Rel. to BSE-30 4.0 (1.9) 29.9 Div. Yield (%) 0.6 0.7 0.8
Chemicals division continues to face order deferments in the specialty chemicals business
Consolidated revenues, at ₹12 bn, were up 3% yoy, ahead of estimates and led by 13% yoy growth in technical textiles, which was offset by a 4% decline in revenues from chemicals business; packaging film business revenues stayed flat yoy. Chemicals business revenues continue to get impacted due to decline in specialty chemicals revenues as high channel inventory in global ag-chem space, along with muted demand, is forcing global agro-chemical majors to defer orders; refrigerant gas segment reported steady growth. Consolidated EBITDA, at ₹2.3 bn, was flat yoy, 4% ahead of estimates; Chemicals business recorded a sharp 10.4 percentage points contraction in margins (yoy) due to negative operating leverage. The same was more than offset by an 800 bps yoy jump in margins in technical textiles business, which benefitted from low base, as floods in the Manali plant had impacted operations last year; packaging film businesses continued to record margins expansion due to lower input cost and high capacity utilization. Consolidated PAT, at ₹1.1 bn, (+8% yoy), was boosted by lower interest cost and tax rate.
Specialty chemicals growth to stay muted in near term, spend to augment capabilities continues
The slowdown in specialty chemicals business is likely to extend to 1HFY18, as inventory levels in global ag-chem market normalize gradually, as per the management. The medium-term outlook continues to stay promising; customer enquiries continue to rise, enabling SRF to prepare a rich pipeline of molecules under approvals from clients. Management intends to continue with its investments in R&D, headcount and capacities in the business, expecting strong revival in demand from agro-chemical and pharma clients as macro turns favorable. Margins, in the interim, are likely to stay weak on account of negative operating leverage.
Slightly reduce estimates, keep TP at ₹1,910 on valuation rollover, maintain BUY Mohan Lal We have cut our FY2017-19E EPS estimates by 2-4% to account for slower growth and lower margins in chemicals business in near term, even as we continue to expect better performance in chemicals business in the medium term as demand improves. Our SoTP-based target price has remained unchanged at ₹1,910, on account of valuation rollover to FY2019E earnings. Strong positioning in the fluorine space should support current valuations in our view, while likely turnaround in chemicals business from FY2018E onwards should trigger strong upsides.
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Others SRF
Exhibit 1: Chemicals business margins declined sharply Interim results of SRF, consolidated, March fiscal year-ends (Rs mn)
% change 3QFY17 3QFY17E 3QFY16 2QFY17 3QFY17E 3QFY16 2QFY17 9MFY17 9MFY16 Change (%) FY2017E Net sales 12,055 11,394 11,652 12,154 6 3 (1) 37,202 37,150 — 49,103 Op. costs (9,783) (9,203) (9,380) (9,756) 6 4 — (29,628) (29,817) (1) (39,148) EBITDA 2,272 2,190 2,272 2,398 4 — (5) 7,574 7,332 3 9,955 EBITDA margins (%) 18.8 19.2 19.5 19.7 20.4 19.7 20.3 Depreciation (744) (750) (714) (735) (1) 4 1 (2,213) (2,172) 2 (3,015) Interest(net) (270) (242) (312) (242) 12 (13) 12 (794) (989) (20) (989) Other income 61 97 47 70 (37) 28 (13) 186 161 15 250 Exceptionals — — — — — — — PBT 1,318 1,295 1,293 1,491 2 2 (12) 4,752 4,332 10 6,201 Tax (271) (298) (325) (298) (9) (16) (9) (1,070) (1,208) (11) (1,364) PAT 1,047 997 968 1,193 5 8 (12) 3,682 3,124 18 4,837 Adjusted PAT 1,047 997 968 1,193 5 8 (12) 3,682 3,124 18 4,837 Adjusted EPS (Rs) 18 17 17 21 5 8 (12) 64 54 84 Segmental sales Technical textiles business 4,892 3,764 4,319 4,805 30 13 2 12,681 12,384 2 Chemicals and polymers business 3,822 3,828 3,989 3,864 — (4) (1) 12,155 11,867 2 Packaging film business 3,352 3,173 3,360 3,494 6 — (4) 5,359 5,506 (3) Total 12,066 10,765 11,668 12,163 12 3 (1) 30,196 29,757 1 Segmental profits Technical textiles business 631 459 213 610 37 196 3 1,825 1,191 53 Chemicals and polymers business 613 689 1,053 676 (11) (42) (9) 2,407 2,854 (16) Packaging film business 474 470 431 527 1 10 (10) 772 823 (6) Total 1,718 1,618 1,697 1,813 6 1 (5) 5,004 4,868 3 Segmental margins Technical textiles business 12.9 12.2 4.9 12.7 796 20 14.4 9.6 478 Chemicals and polymers business 16.0 18.0 26.4 17.5 (1,036) (146) 19.8 24.1 (425) Packaging film business 14.2 14.8 12.8 15.1 133 (94) 14.4 15.0 (54) Overall margins 14.2 15.0 14.5 14.9 (31) (67) 16.6 16.4 21
Source: Company, Kotak Institutional Equities
Exhibit 2: Chemicals business revenues were down yoy, extending the slowdown seen in 1QFY17 Segment-wise revenues of SRF, consolidated, March fiscal year-ends (Rs mn)
1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 Technical textiles business 4,925 5,024 4,319 3,973 5,073 4,805 4,892 Chemicals and polymers business 3,798 3,852 3,989 4,320 4,466 3,864 3,822 Packaging films business 3,528 3,561 3,360 2,873 3,467 3,494 3,352 Total 12,231 12,417 11,652 11,150 12,994 12,154 12,055 Yoy growth (%) Technical textile division (8) (3) (14) (18) 3 (4) 13 Chemicals and polymers division 18 21 30 36 11 — (4) Packaging films division 17 1 10 1 (2) (2) (0)
Total 6 4 5 3 6 (2) 3
Source: Company, Kotak Institutional Equities
100 KOTAK INSTITUTIONAL EQUITIES RESEARCH SRF Others
Exhibit 3: Poor operating leverage in chemicals business impacted segment and overall company margins in 3QFY17 Segment-wise operating profit margins of SRF, consolidated, March fiscal year-ends (%)
1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 Technical textiles business 11.4 9.2 4.9 12.4 13.3 12.7 12.9 Chemicals and polymers business 24.8 22.2 26.4 24.1 25.0 17.5 16.0 Packaging films business 17.1 13.8 12.8 14.1 17.2 15.1 14.2 Overall margins 17.2 14.6 14.6 17.4 18.4 14.9 14.2 Revenue mix (%) Technical textile division 40 40 37 36 39 40 41 Chemicals and polymers division 31 31 34 39 34 32 32 Packaging films division 29 29 29 26 27 29 28 Total 100 100 100 100 100 100 100
Source: Company, Kotak Institutional Equities
Other highlights
The management expects no improvement in specialty chemicals orders in 2HFY17 as global innovators are struggling with poor demand and high channel inventory. However, it noted that there has been no slowdown in R&D spend from the customers’ side, where enquiries for new molecules continue to increase. SRF management stays bullish on medium-term growth prospects in this business, on account of growing customer enquiries and expanding product pipeline. It has decided to continue with expanding its capacities in both agro and pharma molecule segments, in order to be prepared with sufficient capacities as the demand picks up.
Gross margins in the specialty chemicals sub-segment remained intact, and the sharp deterioration in margins was on account of rising overheads and investments, even as revenues declined yoy. The management noted that investments into R&D (₹800 mn in 9MFY17, 50% of which was revenue expenditure), higher overheads due to capitalization of new multipurpose agro-chemical and dedicated pharma molecules plants, and manpower addition to support rising customer enquiries have impacted margins in the chemicals business in 9MFY17. The same is likely to continue, as the management continues to obtain approvals for new molecules from clients, which will aid swift recovery in segment revenues as client orders start coming through.
Refrigerant gas business continues to perform well; R134a and R32 product volumes grew strongly in 3QFY17; management expects R134a production volumes to touch ~10,000 tons in FY2017 (6,600 tons in 9MFY17), from 7,200 tons in FY2016. The management noted the US regulators have proposed preliminary anti-dumping duty on China made R134a and R32 refrigerant gases, which is likely to be finalized in March 2017. If the duty is imposed, it will enable scale-up of SRF’s R134a and R32 volumes in the US market in CY2017.
Packaging film business stayed under pressure in 3QFY17, on account of increasing supply, which has pushed down capacity utilization in the domestic industry. However, SRF’s packaging film capacities in India remain fully sold out due to focus on value-added products and strong ties with institutional customers. This has enabled the company to continue expanding margins in the business. SRF’ commissioned its BoPET line in the quarter, and its BoPP films is on track and is likely to be completed in early CY2017.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 101 Others SRF
Change in estimates
We have increased our FY2017E revenues estimates to account for 3QFY17 performance, leading to slightly higher revenues estimates in FY2018-19E as well. However, we have toned down our chemicals business margins assumptions for FY2017-18E, as the same are likely to remain under pressure till 1HFY18E, according to the management. But, we expect both revenue growth and margins in chemicals business to recover strongly in FY2018-19E as demand is unlikely to stay weak for longer given expanding product and client coverage of SRF, and likely recovery in global agro chemical demand post a two-year period of weakness.
Exhibit 4: Change in estimates for SRF, consolidated, March fiscal year-ends (Rs mn)
New Old Change (%) 2017 2018 2019 2017 2018 2019 2017 2018 2019 Revenues (Rs mn) 49,103 53,749 60,001 48,188 53,185 59,515 2 1 1 EBITDA (Rs mn) 9,955 11,338 12,674 10,418 11,941 13,129 (4) (5) (3) PAT (Rs mn) 4,836 5,492 6,493 4,938 5,874 6,753 (2) (6) (4) EPS (Rs) 84.2 95.7 113.1 86.0 102.3 117.6 (2) (6) (4)
Source: Company, Kotak Institutional Equities
Valuation
Our SoTP-based target price for SRF has remained unchanged at ₹1,910, on account of valuation rollover. Growth prospects in SRF’s consolidated earnings in FY2018-19E remain strong and intact, as strong expected rebound in chemicals business due to (1) recovery in specialty chemicals revenues and (2) continued growth in refrigerant gas segment should support high earnings growth trajectory in the medium term.
Exhibit 5: We value SRF at Rs1,910 Valuation table of SRF, consolidated FY2019E basis (Rs mn)
March 2019E EPS PE (X) Value per share Technical textiles business 26 8 203 Chemicals and polymers business 63 24 1,522 Packaging films business 24 8 182 Target price 1,907 Consolidated EPS (2019E) 113 Implied target P/E multiple (X) 16.9
Source: Company, Kotak Institutional Equities
102 KOTAK INSTITUTIONAL EQUITIES RESEARCH SRF Others
Exhibit 6: Summary financials: SRF Profit and loss account, balance sheet and cash flow statement for SRF, consolidated, March fiscal year-ends (Rs mn)
2012 2013 2014 2015 2016 2017E 2018E 2019E Profit model (Rs mn) Sales 40,010 37,829 40,181 45,398 46,001 49,103 53,749 60,001 EBITDA 8,314 6,143 5,053 7,175 9,610 9,955 11,338 12,674 Other income 312 420 235 646 273 250 225 367 Interest (1,172) (998) (961) (1,376) (1,283) (989) (929) (849) Depreciation (1,837) (2,089) (2,247) (2,450) (2,892) (3,015) (3,310) (3,534) Profit before tax 5,617 3,476 2,080 3,994 5,708 6,201 7,324 8,658 Tax expenses (1,829) (946) (455) (966) (1,478) (1,364) (1,831) (2,164) Extraordinary items — — — — — — — — Reported PAT 3,788 2,530 1,625 3,028 4,229 4,837 5,493 6,493 Adjusted PAT 823 618 1,625 3,027 4,229 4,836 5,492 6,493 Year-end number of shares 57 57 57 57 57 57 57 57 Fully diluted number of shares 57 57 57 57 57 57 57 57 Adjusted EPS-fully diluted (Rs) 14 11 28 53 74 84 96 113 Balance sheet (Rs mn) Equity 18,515 19,689 20,667 22,963 26,694 30,771 35,427 41,000 Total borrowings 12,284 17,040 21,753 24,349 25,222 24,222 22,222 20,222 Other long term liabilities 2,375 2,818 3,422 4,761 5,360 5,360 5,360 5,360 Current liabilities and provisions 6,648 6,343 9,344 7,466 8,200 8,787 9,625 10,723 Total liabilities 39,822 45,890 55,186 59,540 65,476 69,139 72,633 77,305 Net fixed assets 24,925 29,022 36,536 40,230 42,278 47,738 50,696 52,092 Investments/other long-term assets 1,511 1,856 1,499 2,147 3,043 3,043 3,043 3,043 Cash & cash equivalent 2,743 3,324 1,089 2,015 5,468 2,679 1,733 3,012 Current assets 10,643 11,687 16,062 15,148 14,687 15,679 17,163 19,158 Total assets 39,822 45,890 55,186 59,540 65,476 69,139 72,633 77,305 Free cash flow (Rs mn) Operating cash flow 5,540 4,674 3,705 5,058 7,385 7,602 8,578 9,661 Working capital changes (64) (1,484) (1,199) (1,011) 2,232 (404) (646) (897) Capital expenditure (5,541) (6,779) (7,900) (4,423) (5,728) (8,476) (6,267) (4,931) Free cash flow (65) (3,589) (5,394) (375) 3,889 (1,278) 1,665 3,833 Ratios (%) EBITDA margin 20.8 16.2 12.6 15.8 20.9 20.3 21.1 21.1 Net debt/equity (X) 0.5 0.7 1.0 1.0 0.7 0.7 0.6 0.4 Book value (R/share) 322.5 342.9 359.9 399.9 464.9 535.9 617.0 714.0 Adjusted RoAE 4.6 3.2 8.1 13.9 17.0 16.8 16.6 17.0 Adjusted RoACE 8.6 5.5 8.3 11.2 15.0 14.4 15.2 16.4
Source: Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 103 BUY Prestige Estates Projects (PEPL) Real Estate FEBRUARY 14, 2017 RESULT Coverage view: Attractive
Demonetization leads to sales collapse; but collections from past sales sustain. Price (`): 176 Prestige’s sales were down to `4.9 bn during 3QFY17, its lowest quarterly sales in five Target price (`): 225 years, clearly reflecting the impact of demonetization. Collections however were high BSE-30: 28,352 reflecting construction linked payments from high pre-sales done earlier. This has restricted any increase in debt. Rental income continues to support liabilities, but high base, slow market and extraordinary events have dented residential growth plans.
Company data and valuation summary Prestige Estates Projects Stock data Forecasts/Valuations 2017E 2018E 2019E 52-week range (Rs) (high,low) 224-130 EPS (Rs) 7.0 8.4 8.9 Market Cap. (Rs bn) 66.0 EPS growth (%) (24.8) 18.7 6.3 QUICK NUMBERS Shareholding pattern (%) P/E (X) 25.0 21.1 19.8 Promoters 70.0 Sales (Rs bn) 44.2 46.0 49.2 3QFY17 pre-sales at FIIs 24.6 Net profits (Rs bn) 2.6 3.1 3.3 `3.5 bn (Prestige’s MFs 4.4 EBITDA (Rs bn) 9.7 10.3 11.3 share) Price performance (%) 1M 3M 12M EV/EBITDA (X) 12.4 12.0 11.5 Absolute 2.0 6.1 10.0 ROE (%) 6.2 7.0 7.1 Rel. to BSE-30 (2.0) 0.4 (10.8) Div. Yield (%) 0.9 0.9 0.9 Consolidated net debt stable at `51.4 bn Results review: Collections still better, debt stable
Prestige’s consolidated debt increased by `428 mn to `51.4 bn in 3QFY17. Most of the increase 9MFY17 collections can be attributed to capex loans for hotels and other annuity projects. This shows that up by 4% to `25.1 operating cash flow from the residential business continues to remain positive (we await bn detailed cash flows from the management). Collections for the quarter stood at `8.2 bn (Prestige’s share), still reflecting a marginal growth of 4% yoy to `25 bn for 9MFY17. Rental income for 9MFY17 grew 26% to `4.05 bn.
Operations review: Another big impact from demonetization
Prestige completed three projects, but did not launch any new one in 3QFY17. Monetization had a big impact on sales. Total area sold stood at 0.7 mn sq. ft for `4.3 bn (Prestige’s share of 0.55 mn sq. ft for `3.5 bn). Blended average sales rate stood at `6,300 /sq. ft. No new business development was reported in 3QFY17. Gross cash flow from ongoing projects is estimated to be `68 bn, to be realized over the next three years.
What next?
With an estimated exit rental income of `5.9 bn by March 2017, around 80% of the total interest could be serviced, a drop from 100% 18 months back. As highlighted earlier, slowing sales (third year in a row), has halted new capex construction and new residential launches too. Third year of slowing sales will reflect on slower collections ahead as Prestige has not launched any new project in the past two quarters (on an already slow pace in FY2016). In the last four quarters’ sales run-rate, unsold inventory stands at 4.5 years; if sales picks up to the peak of FY2015 level, unsold inventory will be 1.6 years.
To tide over the slowdown, like most of its peers, Prestige has slowed down its launches and business development in the past few quarters. Prestige has launched interest subvention for Samar Sarda completed /near-completion projects in February 2017, to sell its unsold under-construction area. Such a deal from the market leader reflects its urgency to sell units, but the rate mark-up taken needs to be clarified by the management.
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Prestige Estates Projects Real Estate
Exhibit 1: Prestige: 3QFY17 and 9MFY17 results snapshot, March fiscal year-ends (Rs mn)
% change 3QFY17 3QFY17E 2QFY17 3QFY16 3QFY17E qoq yoy 9MFY17 9MFY16 % change Net sales 12,341 11,246 11,518 10,416 10 7 18 33,307 41,636 (20)
Operating costs (9,953) (8,910) (9,127) (8,142) 12 9 22 (26,824) (33,004) (19)
EBITDA 2,388 2,336 2,391 2,274 2 (0) 5 6,484 8,632 (25) Other income 195 177 217 2,108 10 (10) (91) 677 2,630 (74) Interest costs (730) (786) (771) (799) (7) (5) (9) (2,290) (2,483) (8) Depreciation (439) (475) (473) (313) (8) (7) 40 (1,247) (903) 38 PBT 1,413 1,253 1,365 3,271 13 4 (57) 3,623 7,877 (54) Taxes (433) (382) (487) (416) 13 (11) 4 (1,061) (2,082) (49) PAT 980 870 877 2,855 13 12 (66) 2,562 5,795 (56) Consolidated PAT 678 647 638 2,793 1,786 5,481 EPS 1.8 1.7 1.7 7.4 4.8 14.6
Key ratios EBITDA margin (%) 19.3 20.8 20.8 21.8 19.5 20.7 PAT margin (%) 7.9 7.7 7.6 27.4 7.7 13.9 Effective tax rate (%) 30.6 30.5 35.7 12.7 29.3 26.4
Source: Company, Kotak Institutional Equities estimates
Exhibit 2: Debt remains stable Prestige: Debt - standalone and consolidated, March fiscal year-ends, 2011-3QFY17 (Rs mn)
Standalone 2011 2012 2013 2014 2015 2016 1QFY17 2QFY17 3QFY17 Secured loans 9.9 11.6 14.6 17.9 23.0 30.8 31.4 31.3 31.0 Project and w orking capital 2.9 7.2 10.6 13.8 10.6 14.4 14.5 13.4 13.4 Capex loans - hotels 0.5 0.5 1.0 1.9 2.3 2.5 2.5 2.3 2.4 Capex loans - office — — — 0.8 1.4 2.0 2.0 2.0 2.0 Lease rent discounting (LRD) 2.7 2.1 1.5 1.2 1.9 3.5 3.4 3.4 3.3 Receivables discounting 3.8 1.8 1.6 0.3 6.7 8.5 9.0 10.3 9.9 Unsecured loans 0.2 0.2 0.1 — — — — — — Gross debt 10.1 11.7 14.8 17.9 23.0 30.8 31.4 31.3 31.0 Less: Cash and bank balances 3.1 1.4 4.8 4.2 4.6 3.7 3.2 2.7 1.5 Net debt 7.0 10.3 10.0 13.7 18.4 27.1 28.1 28.6 29.5
Consolidated Secured loan 14.7 18.1 23.7 30.7 38.1 56.8 55.8 55.0 55.3 Project and w orking capital 3.2 8.0 11.4 15.9 13.9 17.4 17.7 14.2 14.2 Capex loans - hotels 0.7 1.0 1.8 2.7 4.1 4.8 5.2 5.3 5.6 Capex loans - office — 0.7 2.3 3.0 1.4 2.0 2.0 2.9 3.1 Capex loans - retail mall — 0.7 0.3 1.0 0.3 0.9 0.6 0.8 0.8 Lease rent discounting (LRD) 7.0 5.9 6.3 7.9 11.7 23.3 21.3 21.6 21.8 Receivables discounting 3.8 1.8 1.6 0.3 6.7 8.5 9.0 10.3 9.9 Unsecured loan 0.5 0.3 0.2 — — — — — — Gross debt 15.2 18.4 23.9 30.7 38.1 56.8 55.8 55.0 55.3 Less: Cash and bank balances 3.7 2.5 6.0 5.4 5.9 5.7 5.2 4.0 3.9 Net debt 11.5 15.9 17.9 25.2 32.2 51.1 50.6 50.9 51.4
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 105 Real Estate Prestige Estates Projects
Exhibit 3: Collections up 4% yoy in 9MFY17 Prestige: Pre-sales, collections, realizations, March fiscal year-ends, 2011-3QFY17
1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 Sales (mn sq. ft) 1.8 1.8 1.6 1.0 2.1 2.2 1.1 1.3 0.8 1.0 0.9 1.5 0.8 1.0 0.6 Sales value (Rs mn) Mid-income resi. 7,298 7,723 6,543 4,505 11,819 10,345 4,244 5,828 4,320 4,690 3,928 6,975 3,735 4,911 2,321 Premium resi. 2,809 2,546 2,714 1,096 1,061 1,196 1,961 4,218 701 1,063 1,111 1,105 481 760 419 Commercial 122 416 145 406 193 1,353 1,389 17 245 298 83 1,809 882 317 725 Total sales 10,229 10,685 9,402 6,007 13,073 12,894 7,594 10,063 5,266 6,051 5,122 9,889 5,098 5,988 3,465 Realizations (Rs/sq. ft) 5,779 5,871 6,042 6,068 6,285 5,969 6,720 7,543 6,583 5,932 5,629 6,421 6,217 6,173 6,300 Collections 6,074 6,198 5,923 6,557 7,607 8,101 7,561 9,047 8,445 7,755 7,976 8,624 10,034 6,880 8,159 Avg. qrtly. collections 6,188 8,079 8,200 8,358
Source: Company, Kotak Institutional Equities
Exhibit 4: Lower launches reflects in sales value Prestige: Receivables profile from ongoing projects, March fiscal year-ends, 2012-3QFY17
Receivables profile 2012 2013 2014 2015 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 Area (mn sq. ft) Total area Developable 26.1 33.2 47.0 59.6 59.1 61.3 62.8 64.7 65.7 65.1 64.8 Car park 4.4 6.3 7.8 12.7 12.5 13.4 13.6 14.9 15.5 15.4 15.2 Saleable 21.7 26.9 39.2 46.8 46.7 47.9 49.2 49.7 50.2 49.7 49.6 Prestige's share Saleable area 18.5 21.5 30.5 35.7 35.6 36.4 36.6 38.0 38.1 37.8 37.6 Share (%) 85.2 80.2 77.8 76.2 76.3 76.0 74.4 76.4 75.9 76.0 75.9 Revenue (Rs bn) Estimated value 101 125 173 223 222 227 229 241 240 240 238 Sales achieved 51 72 102 140 143 148 149 155 155 160 162 Unsold area 50 52 71 84 80 79 80 86 85 80 77 Collections (Rs bn) Collected 21 30 49 74 81 88 93 97 101 106 112 Collections (%) 40 41 48 53 57 60 62 62 65 66 69 Costs (Rs bn) Budgeted 43 66 103 125 127 132 132 146 151 152 152 Incurred 7 22 40 52 57 65 65 78 84 88 93 Gross cash flow (Rs bn) (a) 44 51 61 76 72 72 70 76 72 71 68 Prices (Rs/sq. ft) Sales achieved 4,771 5,020 5,300 6,124 5,728 5,797 5,836 5,819 5,802 6,053 6,137 Unsold area 6,435 7,335 6,288 6,501 7,462 7,225 7,275 7,525 7,450 7,082 6,798 Costs estimated 1,661 1,983 2,183 2,104 2,146 2,150 2,098 2,260 2,292 2,333 2,350
Source: Company, Kotak Institutional Equities
Exhibit 5: Pre-sales likely to miss FY2017 guidance Guidance versus achieved
2012 2013 2014 2015 2016 2017 Guidance Achieved Guidance Achieved Guidance Achieved Guidance Achieved Guidance Achieved Guidance 9MFY17 Sales (Rs mn) (b) 15,000 21,127 25,000 31,221 43,000 44,348 50,000 50,135 57,500 31,498 35,000 18,231 Turnover (Rs mn) 7,500 7,992 15,000 16,064 20,000 21,525 27,000 35,134 40,000 46,344 40,000 33,984 Collections (Rs mn) (b) 12,000 13,354 15,000 19,695 23,000 24,753 29,000 32,317 37,500 32,800 40,000 29,688 Launches (mn sq. ft) (b) 10.0 12.9 8.0 10.4 14.0 15.7 15.0 14.6 12.0 8.4 10.0 2.0 Leasing (mn sq. ft) (b) 3.0 3.1 2.5 2.1 2.0 2.7 2.0 2.7 1.5 1.3 1.5 0.5 Exit rental (Rs mn) (a) 1,600 1,870 2,250 2,289 3,200 2,950 3,800 3,840 4,500 5,141 6,000 5,589 Avg selling price (Rs/sq. ft) 4,302 5,212 5,920 6,500 Consolidated Net D/E (c) 0.9 1.1 1.3 1.1
Notes: (a) Exit rental is not equal to yearly rental. (b) Gross, Prestige share is lesser. (c) Taken the lower end of the band for all but debt, where taken higher end of the band.
Source: Company, Kotak Institutional Equities estimates
106 KOTAK INSTITUTIONAL EQUITIES RESEARCH Prestige Estates Projects Real Estate
Exhibit 6: Lower pre-sales will reflect in lower collection and revenue recognition ahead Prestige: 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 19,476 25,492 34,198 46,344 44,154 46,041 49,241 EBITDA 5,849 7,203 9,939 10,424 9,678 10,340 11,289 Other income 636 975 986 838 719 806 788 Interest (1,489) (2,290) (3,214) (3,587) (4,180) (4,067) (4,367) Depreciation (682) (893) (1,397) (1,584) (1,864) (2,136) (2,401) Pre-tax profits 4,313 4,995 6,314 6,090 4,352 4,943 5,309 Tax (1,323) (1,798) (2,697) (2,142) (1,393) (1,582) (1,699) Net income 2,999 3,245 3,668 3,948 2,960 3,361 3,610 Adjusted net income 2,917 3,143 3,324 3,512 2,641 3,136 3,334 Earnings per share (Rs) 8.2 8.9 8.9 9.4 7.0 8.4 8.9 Balance sheet Total Equity 27,423 29,792 38,206 41,439 43,404 45,863 48,522 Minority interests 2,620 2,990 3,975 3,234 3,234 3,234 3,234 Non-current liabilities 11,604 13,684 19,235 38,716 25,499 27,159 32,175 Current liabilities 34,921 46,958 62,142 61,114 71,670 67,203 60,268 Total liabilities and equity 76,567 93,424 123,558 144,503 143,806 143,459 144,199 Non-current assets Net fixed assets 29,419 33,725 37,856 49,244 65,027 72,965 76,003 Other non-current assets and advances 9,700 12,073 12,301 14,931 11,699 11,740 11,612 Current assets 35,697 44,739 70,614 77,790 64,584 56,236 54,078 Investments 1,750 2,887 2,787 2,538 2,497 2,517 2,507 Total assets 76,567 93,424 123,558 144,503 143,806 143,459 144,199 Free cash flow Operating cash flow , excl. w orking capital 3,590 3,988 4,670 5,129 4,506 5,272 5,735 Working capital changes (845) (4,887) (12,359) (16,276) 18,201 1,820 (5,362) Capital expenditure (9,423) (5,198) (5,528) (12,972) (17,646) (10,075) (5,438) Investments (9) (1,137) 100 250 41 (20) 10 Free cash flow (6,688) (7,234) (13,117) (23,869) 5,100 (3,003) (5,055) Ratios (%) Debt/equity 93 106 106 157 133 134 137 Net debt/equity 75 94 92 145 128 129 134 RoE (%) 11.7 10.8 9.8 8.8 6.2 7.0 7.1 RoCE (%) 8.5 8.1 7.8 6.8 5.6 5.9 5.9 Book value per share (Rs) 78 85 102 111 116 122 129
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 107 REDUCE Jagran Prakashan (JAGP) Media FEBRUARY 14, 2017 RESULT Coverage view: Attractive
Steady quarter. Jagran reported 3.1% yoy growth in standalone print ad revenues (KIE Price (`): 186 2%). The key highlight of this quarter was swift reduction in cost structure to protect Target price (`): 190 profitability post demonetization. We roll over to Dec-18 and revise the target price to BSE-30: 28,352 `190 (`180 earlier). Retain REDUCE.
Company data and valuation summary Jagran Prakashan Stock data Forecasts/Valuations 2017E 2018E 2019E 52-week range (Rs) (high,low) 213-144 EPS (Rs) 11.3 12.9 15.0 Market Cap. (Rs bn) 60.9 EPS growth (%) 8.8 14.3 16.1 Shareholding pattern (%) P/E (X) 16.5 14.4 12.4 Promoters 60.8 Sales (Rs bn) 22.9 25.5 28.1 FIIs 15.7 Net profits (Rs bn) 3.7 4.2 4.9 MFs 12.6 EBITDA (Rs bn) 6.3 7.3 8.1 Price performance (%) 1M 3M 12M EV/EBITDA (X) 9.6 8.1 7.0 Absolute 1.2 2.5 20.6 ROE (%) 22.4 23.6 24.9 Rel. to BSE-30 (2.8) (3.0) (2.2) Div. Yield (%) 3.2 3.8 3.8
3QFY17—print ad revenue growth at 3.1% yoy, good management of costs
Jagran reported standalone financials (about 85-90% of consolidated). Consolidated financials (Consolidated = Standalone + Midday + Radio) are pending IPO of Radio subsidiary. Standalone print ad revenues grew 3.1% yoy (KIE 2%; DB Corp +2.4%, HMVL -6.8%) to `3.5 bn. Ad revenue growth was good, in context of demonetization, partly aided by high government advertising and UP elections. Circulation revenue grew 6.9% yoy. Digital ad revenue grew 84% yoy on a low base to `65 mn. Standalone EBITDA at `1.55 bn grew 11% yoy, impressive in view of weak ad growth. Net profit at `891 mn was up 26% yoy due to lower interest expense post amalgamation of SUVI. The key highlight of this quarter was swift reduction in variable costs to minimize the impact of demonetization.
Standalone performance broadly represents consolidated financials. The numbers are marginally better than our expectations. We estimated 3%/15% growth in consolidated EBITDA/PAT whereas standalone EBITDA/PAT grew 11%/26% yoy.
Corporate finance initiatives provide support to stock
Jagran has taken some good corporate finance decisions in the past 3-4 years (1) sale of surplus land assets (`350 mn) in FY2013, (2) sale of treasury shares (`2 bn) over FY2015-16, (3) acquisition of Nai Dunia at a small cost factoring tax savings, (4) acquisition of Radio City at valuations that appear inexpensive in hindsight (after phase III FM auctions)—a masterstroke, (4) upcoming IPO of Radio business, and (5) buyback of `3 bn announced this month for tax efficient distribution of profit. Such initiatives support stock price in an otherwise challenging environment.
Retain our cautious stance
We believe that continued shift of ad spends to digital from print (perhaps at an accelerated pace given the government’s push/incentives for digital adoption) will be a drag more than what can be offset by radio and digital businesses. We roll over to Dec-18 and revise target Jaykumar Doshi price to `190 (`180 earlier).
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Jagran Prakashan Media
Exhibit 1: Interim results of Jagran Prakashan (JAGP), March fiscal year-ends (Rs mn)
chg (%) Standalone financials 3QFY17 3QFY16 2QFY17 yoy % qoq % Total revenues 5,005 4,742 4,590 5.5 9.0 Print ad revenues 3,456 3,353 3,169 3.1 9.1 Circulation revenues 1,025 959 993 6.9 3.2 Other operating revenues 524 430 428 21.8 22.3 Total expenditure (3,454) (3,341) (3,377) 3.4 2.3 Raw material costs (1,590) (1,546) (1,544) 2.9 3.0 Employee expenses (686) (637) (681) 7.7 0.8 Other expenses (1,178) (1,159) (1,153) 1.6 2.2 EBITDA 1,551 1,401 1,213 10.7 27.9 EBITDA margin (%) 31.0 29.5 26.4 Other income 81 74 165 9.1 (50.8) Interest expense (50) (173) (89) (71.0) (43.5) D&A expenses (208) (222) (195) (6.3) 7.0 Pretax profits 1,373 1,079 1,094 27.2 25.5 Tax provision (482) (370) (339) 30.4 42.0 Reported PAT 891 710 755 25.6 18.1
Notes: (a) Jagran reported standalone financials as per Ind AS and couldn’t report consolidated financials pending approval of amalgamation scheme.
Source: Company, Kotak Institutional Equities
Exhibit 2: Trends in print ad revenue growth of JAGP (yoy %)
20 17 15 14 15 12 11 12 10 10 9 9 10 8 8 8 8 8 8 7 7 6 5 4 5 4 0
0
1QFY12
2QFY12
3QFY12
4QFY12
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17 3QFY17 Notes: (a) Standalone ad revenue grow th for 1QFY12-4QFY13 and 2Q-3QFY17 and consolidated (incl. Mid-Day) for rest of the quarters.
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 109 Media Jagran Prakashan
Exhibit 3: Trends in circulation growth of JAGP (yoy %)
20
15 15 15 14 12 12 12 12 11 10 11 10 9 9 10 8 7 7 7 7 6 5 5 5 4 2
0
1QFY12
2QFY12
3QFY12
4QFY12
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17 3QFY17
Notes: (a) Standalone circulation revenue grow th for 1QFY12-4QFY13 and 2Q-3QFY17 and consolidated (incl. Mid-Day) for rest of the quarters.
Source: Company, Kotak Institutional Equities
Exhibit 4: Financial summary of JAGP, March fiscal year-ends, 2012-19E (Rs mn)
2012 2013 2014 2015 2016 2017E 2018E 2019E Profit model Net sales 13,557 15,255 17,027 17,698 21,065 22,922 25,536 28,130 EBITDA 3,169 2,952 3,664 4,464 5,896 6,314 7,293 8,122 Other income 255 206 628 321 345 356 336 424 Interest (158) (307) (345) (369) (523) (345) (135) — Depreciation (709) (755) (789) (1,035) (1,044) (1,041) (1,139) (1,169) Pretax profits 2,556 2,096 3,158 3,380 4,674 5,283 6,354 7,377 Extraordinary items 0 949 (101) 803 1,163 0 0 0 Current tax (690) (497) (795) (1,102) (1,390) (1,585) (2,129) (2,471) Deferred taxation (83) 0 0 0 0 0 0 0 Net income 1,783 2,551 2,262 3,080 4,447 3,698 4,225 4,906 Adjusted net income 1,783 1,602 2,337 2,538 3,400 3,698 4,225 4,906 Adjusted EPS (Rs) 5.6 5.1 7.5 8.0 10.4 11.3 12.9 15.0
Balance sheet Total equity 7,519 9,324 9,616 11,342 15,812 17,149 18,619 20,769 Deferred taxation liability 701 701 851 707 726 726 726 726 Total borrow ings 6,676 4,840 4,897 6,480 5,120 3,000 — — Current liabilities 3,663 3,144 3,889 4,005 4,028 4,317 4,659 4,977 Total liabilities and equity 18,559 18,009 19,253 22,534 25,686 25,191 24,003 26,472 Cash 996 523 325 4,931 493 890 (532) 1,748 Other current assets 5,772 6,194 6,560 5,576 7,449 7,298 7,972 8,629 Total fixed assets 9,310 9,069 9,048 8,454 14,676 14,435 13,996 13,527 Investments (largely cash equivalent) 2,481 2,224 3,320 3,573 3,068 2,568 2,568 2,568 Total assets 18,559 18,009 19,253 22,534 25,686 25,191 24,003 26,472
Free cash flow Operating cash flow 2,293 3,655 3,681 4,819 5,669 5,065 5,164 5,650 Working capital changes (142) (692) (120) (506) (1,839) 439 (332) (339) Capital expenditure (1,489) (961) (497) (512) (7,670) (800) (700) (700) Other income 57 80 48 199 345 356 336 424 Free cash flow 719 2,082 3,112 3,999 (3,495) 5,060 4,468 5,036
Ratios (%) Debt/equity 81 48 47 54 31 17 — — Net debt/equity 39 21 12 (17) 9 (3) (11) (20) ROAE (%) 22 18 23 23 24 21 23 24 ROACE (%) 18 14 18 21 24 21 24 27
Source: Company, Kotak Institutional Equities
110 KOTAK INSTITUTIONAL EQUITIES RESEARCH ADD Infosys (INFO) Technology FEBRUARY 14, 2017 UPDATE Coverage view: Neutral Takeaways from CEO's address at Kotak conference: Expect stable growth. Price (`): 984 Dr Vishal Sikka, CEO talked about significant improvement in Infosys’ performance in the last 2.5 years and shared his views on the Future of IT Services in his Keynote Target price (`): 1,140 address at KIE’s conference before meeting investors along with Pravin Rao, COO. The BSE-30: 28,352 company shared views on growth prospects (steady), profitability (stable), journey in transformation (lot more work to be done) and capital allocation (status quo). We maintain our positive view on the stock.
Company data and valuation summary Infosys Stock data Forecasts/Valuations 2017E 2018E 2019E 52-week range (Rs) (high,low) 1,279-900 EPS (Rs) 63.0 67.9 74.0 Market Cap. (Rs bn) 2,261.0 EPS growth (%) 6.7 7.8 9.0 Shareholding pattern (%) P/E (X) 15.6 14.5 13.3 Promoters 12.7 Sales (Rs bn) 688.9 756.1 839.8 FIIs 56.4 Net profits (Rs bn) 143.9 155.2 169.2 MFs 6.8 EBITDA (Rs bn) 187.5 204.0 226.4 Price performance (%) 1M 3M 12M EV/EBITDA (X) 10.1 9.0 7.9 Absolute 0.9 6.8 (9.2) ROE (%) 23.5 22.7 22.3 Rel. to BSE-30 (3.1) 1.0 (26.4) Div. Yield (%) 2.7 3.0 3.6
Optimistic on growth prospects from large relationships
Infosys is optimistic on growth from Top 25 accounts and indicated that 3QFY17 weakness was an aberration due to high furloughs and the RBS ramp down impact. The company indicated that FY2017 slowdown was due to a mix of RBS ramp down and attrition in consulting that not only impacted revenues but also impacted mining of existing clients. Infosys had assigned a consulting team with additional responsibility of managing high potential accounts; however high attrition impacted mining effort and in turn revenue growth. The company indicated that better mining for same set services can lead to high single digit growth. However, growth beyond this level requires contribution from NEW. Infosys reiterated that the idea of Zero Distance program is to bring innovation at grass root level. It has been adopted across more than 95% of the projects. An outcome of this is visible in the success in customer satisfaction surveys which are at the peak. Infosys management indicated that it has made significant improvement on the customer satisfaction front over the past couple of years.
Confident of protecting profitability with automaton likely to play a bigger role in future
Infosys expressed confidence of protecting profitability in the guided range of 24-26%. Efficiency drivers played a role in defending profitability up to now. While there is still scope for further cost optimization, future profitability will be determined by progress on automation. This is especially true against the backdrop of continued commoditization and decline in pricing. Infosys has released close to 8,500 people in the past twelve months in existing roles due to the automation effort. Infosys expects this trend to accelerate and offset pricing pressure in traditional services. Kawaljeet Saluja
Capital allocation—no change for now Jaykumar Doshi Infosys has increased dividend payout twice in the past four years (from 30% to 40% and then to 50%). The management indicated that it considers a number of factors while deciding capital allocation policy such as strategic growth initiatives over next 4-5 years, investments in infrastructure and acquisitions. It continues to review the capital allocation policy from time to time. The company is not opposed to a buyback. Acquisitions will continue to be a key priority area.
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Technology Infosys
Acquisitions—slowed down due to high valuation expectations of targets
Infosys started off on a promising note with three acquisitions in the first year–and-a-half of Dr Sikka's tenure. However the company has not acquired anything in the last 12 months. The company cited three reasons for this—(1) nature of targets available, (2) high valuation expectations of targets and (3) integration—assimilating and integrating acquisitions takes time. In any case, Infosys has never been the most acquisitive company in the market
Build, Maintain or Run
Infosys highlighted three broad buckets of revenues stream- (1) Build—in which growth and margins are higher, (2) Maintain—in which growth is lower but margins are healthy and (3) Run—in which growth and margins are lower. In essence Infosys’ argument is that Maintain and Run business are screaming for automation; the longer the time taken to address this, the more disruptive it would be to the business. The key is to release headcount in the Maintain and Run business and reskill them to be redeploy to the Build business. Infosys’s strengths in education and emphasis on automation+ innovation positions it well to manage to the change
The future of IT services—challenging and exciting
The CEO highlighted three major trends— (1) end-user centricity and connectedness with new experiences powered by AI and digital. This is particularly pervasive in retail, BFSI and telecom industries, (2) intelligent infrastructure and (3) the extreme efficiency of disintermediation. The CEO shared a few interesting examples of how Infosys is working with its customers on the user centricity and connectedness dimensions. He also highlighted how technological changes are accelerating in many areas such as AI, data centers, neuromorphic boards and how Infosys is working with its partners in each of these areas. As a result of the technological trends, the value chains are becoming more efficient and shorter, which will result in different forms of disintermediation
Maintain positive view on the stock
We like Infosys given it is gaining share in large deals and wallets of large clients, and is positioned well to capture discretionary spends. Near-term volatility and risks pertaining to potential tightening of H-1B rules aside, Infosys is making right investments in automation and digital for sustained profitable growth. We value Infosys at 15X FY2019E earnings; we capture risks of potential changes in visa rules through lower PE multiple of 15X (as against 16.5X otherwise).
112 KOTAK INSTITUTIONAL EQUITIES RESEARCH Infosys Technology
Exhibit 1: Condensed consolidated financials for Infosys, March fiscal year-ends (Rs mn), 2013-2019E
2013 2014 2015 2016 2017E 2018E 2019E Profit model Revenues 403,520 501,330 533,190 624,410 688,898 756,133 839,823 EBITDA 115,600 136,340 149,010 170,780 187,461 203,961 226,387 Depreciation (11,310) (13,740) (10,690) (14,590) (16,962) (18,822) (20,686) Other income 23,590 26,690 34,270 31,250 31,090 32,105 32,743 Pretax profits 127,881 149,291 172,591 187,441 201,590 217,245 238,445 Tax (33,670) (40,620) (49,290) (52,520) (57,574) (61,914) (69,149) Profit after tax 94,211 108,671 123,301 134,921 144,016 155,330 169,296 Diluted earnings per share (Rs) 41.2 46.6 53.9 59.0 63.0 67.9 74.0 Balance sheet Total equity 379,940 445,300 507,360 578,260 648,156 721,124 794,324 Deferred taxation liability (4,690) (6,290) (5,360) (5,330) (5,330) (5,330) (5,330) Total borrow ings — — — — — — — Minority interest — — — — 65 145 245 Current liabilities 83,370 124,360 155,530 173,150 178,050 182,567 188,189 Total liabilities and equity 458,620 563,370 657,530 746,080 820,941 898,506 977,428 Cash 218,320 259,500 303,670 326,970 374,517 424,804 471,166 Other current assets 140,120 180,240 209,940 258,790 276,302 297,433 323,681 Goodw ill — — — — — — — Tangible fixed assets 82,790 93,390 121,220 141,400 151,202 157,349 163,660 Investments 17,390 30,240 22,700 18,920 18,920 18,920 18,920 Total assets 458,620 563,370 657,530 746,080 820,941 898,506 977,428 Free cash flow Operating cash flow , excl. w orking capital 81,390 93,920 91,610 120,090 129,667 142,047 157,238 Working capital changes (11,820) (2,810) (8,420) (21,460) (12,613) (16,614) (20,626) Capital expenditure (32,460) (27,450) (22,550) (27,230) (26,544) (24,969) (26,997) Acquistions — — (13,760) (7,470) — — — Other income 20,220 23,800 25,510 23,810 31,090 32,105 32,743 Free cash flow 57,330 87,460 72,390 87,740 121,600 132,568 142,358 Key ratios and assumptions Revenue growth (US$ terms) (%) 5.8 11.5 5.6 9.1 7.5 8.9 11.1 Re/US$ rate 54.5 60.8 61.2 65.7 67.5 68.0 68.0 EBITDA margin (%) 28.6 27.2 27.9 27.4 27.2 27.0 27.0 EBIT margin (%) 25.8 24.5 25.9 25.0 24.7 24.5 24.5 Debt/equity — — — — — — — Net debt/equity (0.6) (0.7) (0.6) (0.6) (0.6) (0.6) (0.6) RoAE 27.2 26.3 25.9 24.9 23.5 22.7 22.3 RoIC 52.1 48.3 47.4 45.7 43.1 43.3 44.2
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 113 INDIA Economy Inflation FEBRUARY 13, 2017 UPDATE BSE-30: 28,352
Core inflation inches higher. Even as the headline CPI inflation eased further in January, higher core inflation further cements RBI’s concerns in the near term. We continue to see headline inflation remaining benign under 4% for the next two quarters before adverse base effect and pickup in demand begin to push up the inflation trajectory. While the focus on core inflation trajectory clearly weakens any case for a rate cut, our March 2018 headline inflation estimates remain around 60 bps lower than RBI’s projections. However, firm core inflation along with global uncertainty definitely rules out any scope for a rate cut in 1HFY18.
QUICK NUMBERS CPI inflation continues its easing trajectory January CPI inflation CPI inflation expectedly eased further to 3.17% in January compared to 3.41% in December. at 3.17%; core The correction was largely on account of food inflation, which decelerated to a five-year low of inflation at 5% 0.5% ((-)1%mom) from 1.4% in December. On a sequential basis, the downtick was owing to contraction in vegetables ((-)4.7%), pulses ((-)5.5%) and egg ((-)0.7%). The high frequency data Average headline for mandi prices in February indicate a mixed picture, with deflation in pulses continuing while CPI inflation at vegetable prices have begun to inch higher, possibly as the effects of demonetization fade off. 3.8%; core inflation Energy inflation eased marginally to 3.4% from 3.8% in December. at 5.1%
Core inflation remains the sore point RBI to maintain Core inflation picked up to 5% from 4.8% in December, with the miscellaneous items inflation status quo at least rising 5.1% from 4.7% in the previous month. Within miscellaneous, transport and through 1HFY18 communication category surged the most by 0.9% mom (0.3% in December) followed by personal care and effect category surging by 0.5% ((-)1.2%mom in December). Sequentially, core inflation inched higher by 0.5% mom after a flat reading in December.
FY2018 core inflation trajectory to trend higher
Even as the high frequency indicators hint at a normalization of the deflationary trends in food inflation, we expect positive base effect and tepid demand to keep the headline CPI inflation comfortable at sub 4% levels until 1HFY18. However, adverse base effect and the narrowing of output gap are likely to cause inflationary pressures to rebound in 2HFY18. Core inflation is likely to remain sticky and inch up to an average of 5.1% in FY2018 from 4.7% in FY2017. Nonetheless, excluding the technical 7CPC impact, we expect March 2018 CPI inflation to undershoot RBI’s estimates of 5% by 60 bps.
No more rate cuts for now Upasna Bhardwaj The recent shift in RBI’s stance towards neutral from a long-held accommodative one has shifted the focus away from the headline print to the underlying trends in core inflation. RBI expects the persistence of core inflation to cap the downside to headline inflation and instead the Suvodeep Rakshit momentum to pick up in 2HFY18 as growth recovers and the output gap narrows. While we concur that there is limited downside to core inflation, we do not expect a sharp surge in core inflation either, given a more gradual pickup in growth (6.8% compared to RBI’s estimate of Madhavi Arora 7.4%), owing partly to demonetization effect and GST-led near-term negative impact. Clearly, with RBI’s focus having moved to core inflation, the bar for further policy accommodation has been significantly raised. We now expect RBI to maintain status quo through at least 1HFY18 and remain watchful of global volatility for any further actions.
For Private Circulation Only. Economy India
Exhibit 1: Headline inflation to remain benign but core inflation to inch higher Trends in headline and core CPI inflation (ex 7CPC, % yoy)
CPI Inflation Core CPI inflation 10 9 8 7
6 March 2018: 5.0% 5 4 March 2018: 4.3% 3
2
Jul-14
Jul-15
Jul-16
Jul-17
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Sep-14
Sep-15
Sep-16
Sep-17
Nov-14
Nov-15
Nov-16
Nov-17
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
May-14
May-15
May-16 May-17
Source: CEIC, Kotak Economic Research estimates
KOTAK ECONOMIC RESEARCH 115
December 2016: Results calendar Daily Summary India
KOTAK INSTITUTIONAL EQUITIES EQUITIES INSTITUTIONAL KOTAK Mon Tue Wed Thu Fri Sat Sun 13-Feb 14-Feb 15-Feb 16-Feb 17-Feb 18-Feb 19-Feb AIA Enggineering Adani Enterp. Britannia Industries Aditya Bir. Nuv. Container Corporation Apollo Hospitals GlaxoSmith C H L DLF GMR Infra. Fag Bearings H P C L Godrej Inds. Hindalco Industries H D I L
Minda Corp. Jain Irrigation Motherson Sumi Jindal Steel Muthoot Finance Kalpataru Power Transmission
Natl. Aluminium Natco Pharma -
RESEARCH
NMDC P I Inds. February 2017 14, Petronet LNG PC Jeweller Piramal Enterp. Rural Elec.Corp. Power Fin.Corpn. S H Kelkar and Company
Prestige Estates Projects Sun Pharma.Inds. Reliance Infra. Tata Motors Sadbhav Engineering Vedanta SKF Voltas Sunteck Realty Suprajit Engineering 20-Feb 21-Feb 22-Feb 23-Feb 24-Feb 25-Feb 26-Feb
Ambuja Cem. Castrol India Mahindra CIE Automotive
Source: NSE, Kotak Institutional Equities
India Daily Summary Daily Summary India
-
February 14, 2017
116
India Daily Summary - February 14, 2017 2.3 2.3 7.5 7.5 2.1 2.7 2.7 1.2 1.2 7.3 1.2 5.5 5.5 2.1 2.1 2.0 2.0 5.8 5.8 1.0 1.0 7.9 2.6 2.4 2.4 0.5 0.5 0.2 0.2 0.5 0.5 0.3 0.3 7.6 7.6 3.9 3.9 8.9 8.9 4.6 4.6 0.9 0.9 8.0 8.0 0.4 0.4 25.2 25.2 12.7 12.7 11.1 11.1 51.2 51.2 13.2 13.2 57.5 57.5 17.2 17.2 13.7 13.7 12.4 12.4 11.9 11.9 50.7 50.7 22.0 10.2 11.0 11.0 29.2 67.7 24.5 50.1 11.6 11.6 53.4 53.4 19.2 19.2 21.4 21.4 26.9 26.9 14.8 14.0 14.0 10.9 10.9 66.9 66.9 60.4 60.4 431.5 251.2 431.5
(US$ mn) (US$
ADVT-3mo
8.8 15.6 16.1 13.4 12.1 16.8 20.8 16.7 20.3 14.0 18.0 16.1 18.7 12.0 18.6 13.6 11.5 11.5 14.8 11.4 8.8 12.1 19.1 20.1 17.3 10.0 18.6 19.0 15.4 11.8 12.1 19.0 12.6 12.7 30.3 20.4 11.3 11.5 9.6 15.3 16.9 22.6 21.1 23.4 16.8 20.4 24.8 36.7 15.4 18.4 38.2 14.7 20.9 20.6 21.1 28.9 16.2 21.1 RoE RoE (%) 3.5 11.9 9.3 9.9 12.1 9.2 9.8 9.0 11.0 10.7 9.3 11.7 10.5 17.4 7.1 25.4 10.5 14.1 15.5 12.5 12.0 15.8 20.6 13.9 20.1 17.7 15.9 18.0 18.7 11.3 12.2 9.4 20.2 19.5 10.5 18.4 19.1 19.0 11.0 31.0 20.2 15.2 16.7 20.9 20.8 22.9 16.1 19.1 25.5 15.5 17.1 46.4 14.8 19.6 21.5 19.9 29.0 15.0 21.9
39.2
13.4 15.8 17.9 17.1 13.4 18.8 23.9 21.9 13.9 16.6 15.5 19.2 21.3 11.6 19.4 9.5 19.0 18.5 10.2 (22.1) 12.4 16.0 21.2 9.0 10.9 9.9 7.4 4.2 6.8 2.5 7.5 18.0 6.3 21.2 20.0 4.7 14.7 30.9 (1.5) 18.1
20.6 15.3 26.5
40.4 25.4 15.4 14.5 47.2 15.0 17.2
20.1 29.5 16.8
3.1 1.4 1.7 3.8 3.2 0.9 1.7 0.7 1.5 1.6 3.6 1.1 2.7 0.6 4.3 3.7 0.3 0.8 1.1 2.0 0.5 2.1 1.7 3.3 1.2 2.9 1.5 0.4 1.2 1.3 1.1 0.3 2.5 1.1 1.0 5.3 1.3 - 1.0 1.4 1.4 0.6 3.4 1.4 1.5 1.4 0.1 1.4 1.0 0.6 1.8 2.6 1.4 0.9 ——— ——— ——— ——— Dividend yield (%) yield Dividend 0.5 0.5 0.5 1.0 1.0 0.1 1.1 1.4 3.2 2.9 0.8 1.4 0.6 1.3 1.3 3.2 1.0 2.1 0.5 3.0 2.8 0.3 0.6 0.9 1.8 0.5 1.9 1.3 2.7 1.1 1.9 1.2 0.4 1.1 0.9 0.9 0.2 2.1 1.0 0.9 0.3 - 0.8 1.2 1.2 0.6 3.1 1.2 1.4 0.8 0.1 1.4 0.8 0.6 1.5 2.2 1.1 0.8 1.0 1.4 3.6 4.3 0.6 1.3 1.2 0.9 2.6 0.9 1.7 0.5 (8.1) 2.6 0.4 0.6 0.8 0.8 1.5 1.0 1.0 1.0 0.9 0.4 0.9 0.5 0.9 0.2 0.9 0.8 0.7 (0.6) 0.2 - 0.7 1.0 0.5 2.7 1.2 0.3 1.2 0.6 0.5 1.4 1.9 1.1 0.7
1.6 2.0 1.0 1.0 2.0 0.6 1.7 2.4 1.7 3.0 1.6 3.1 1.0 2.5 2.9 1.9 1.9 1.5 1.3 1.0 1.1 2.9 1.4 2.9 2.8 1.8 2.3 2.8 1.1 2.2 1.6 0.7 5.0 1.3 3.5 4.6 2.2 5.1 4.0 2.4 3.6 3.1 4.5 2.2 3.2 1.0 4.3 3.9 0.7 0.6 5.8 6.5 0.7 3.7 4.1
8.9
Price/BV Price/BV (X) 2.6 2.1 2.1 1.3 2.5 2.5 1.5 1.5 1.1 1.7 2.3 2.1 1.1 1.2 5.1 3.1 3.3 2.0 1.0 2.6 5.4 2.4 2.9 4.1 1.0 2.9 1.8 1.9 4.3 2.8 3.8 8.3 1.6 2.9 4.3 6.3 5.6 3.0 3.8 6.1 5.6 0.9 0.8 4.0 4.0 4.0 6.9 4.6 6.0 1.9 2.3 1.1 1.1 2.3 4.8 0.7 2.0 2.6 1.9 3.4 1.9 3.6 0.9 1.1 2.7 3.4 2.2 2.2 1.6 1.4 1.3 1.3 3.5 0.9 1.5 3.4 3.2 2.1 2.6 3.3 6.9 1.3 2.5 1.9 8.0 0.9 1.1 5.8 1.6 4.4 3.9 5.4 2.6 5.9 4.7 2.6 4.1 12.4 3.4 5.3 2.7 3.7 4.8 1.1 5.1 3.8 1.9 4.2 1.3
6.9
10.0
18.5
8.6 7.3 3.6 6.4 4.1 6.8 18.8 14.3 14.0 11.1 14.0 8.4 9.4 10.9 9.9 12.1 19.3 13.5 12.6 10.5 9.3 13.0
EV/EBITDA (X) EV/EBITDA ——— —————— ——— ——— ———————————— ——————————————— ————————— ——————————————— —————— ——— ——— ——— —————— ————————— —————— 5.7 9.0
23.2 17.0 17.7 4.2 12.9 16.5 10.0 7.7 10.5 12.2 12.0 15.0 14.9 23.7 15.2 12.8 8.4 11.1 5.3 14.6
5.4
10.7 28.3 20.8 24.8 15.0 19.3 11.9
12.1 13.7 15.3 19.4 16.3 28.9 18.9 15.2 10.5 12.1 16.9
7.5 5.1 6.6 5.3 4.7 8.7 6.7 6.0 3.4 6.5 5.4 3.7 5.0 6.6 6.8 8.1 10.0 12.6 11.9 21.0 16.0 10.0 84.4 9.8 20.3 11.8 11.8 11.2 28.6 8.1 12.2 17.0 11.5 16.6 15.7 11.0 11.5 19.9 15.6 16.9 14.5 14.5 13.0 30.8 23.7 23.8 8.5 19.0 21.9 21.3 11.7 14.9 16.2 17.4 20.7 22.3 27.1 23.2 15.5 11.8 16.2 22.0
PER (X) PER 5.0 5.0 7.3 5.6 5.6 6.3 9.7 9.7 9.0 8.2 8.2 8.1 (2.5) (2.5) 6.7 15.6 15.6 15.0 13.1 13.1 11.9 27.5 27.5 23.6 17.3 17.3 13.6 22.1 19.1 22.4 22.4 14.0 37.7 37.7 26.8 21.2 21.2 16.9 35.7 35.7 28.7 37.7 37.7 28.8 15.2 15.2 13.7 22.2 22.2 19.7 19.5 19.5 14.5 27.4 27.4 24.8 11.0 11.0 27.8 20.6 11.6 11.6 11.0 15.8 15.8 14.0 17.4 17.4 14.6 21.4 29.3 22.9 22.9 19.7 20.7 15.4 22.4 22.4 19.1 33.9 33.9 22.6 16.4 9.4 19.1 18.2 24.3 20.0 19.3 19.3 16.5 41.5 41.5 30.3 17.8 17.8 14.9 18.5 18.5 16.2 20.2 20.2 24.2 18.0 20.1 33.8 33.8 25.2 26.2 26.2 24.2 14.4 28.9 18.8 19.4 19.9 14.4 19.8 45.4 14.8 26.9 29.4 30.8 40.2 20.6 29.6 86.9 (32.7) 12.6 85.6 13.3 10.3
16.8 37.4 10.2 22.6 25.4 25.4 32.0 18.0 25.0 2.5 2.5 8.5 8.5 8.6 8.6 8.9 8.9 25.7 27.1 15.3 33.5 25.3 21.7 27.2 15.5 17.1 21.1 27.2 11.2 21.7 21.5 13.5 10.3 18.7 42.1 19.1 13.0 30.7 72.8 16.1 15.9
48.5
42.6 34.4
19.0
4.6 4.6 19.0 1.5 1.5 1.5 1.3 1.3 23.7 4.7 4.7 12.8 7.0 7.0 33.1 5.0 5.0 16.6 8.5 8.5 13.1 13.1 18.3 17.2 17.2 60.0 60.0 25.3 25.3 21.3 21.3 18.9 13.7 13.7 14.1 14.1 34.3 34.3 22.4 10.7 10.7 18.2 26.3 26.3 30.4 34.5 29.0 16.5 16.5 16.1 27.6 27.6 16.3 11.8 34.2 16.2 15.0 21.6 21.6 18.2 16.7 16.7 14.3 17.4 17.4 29.3 21.4 21.4 21.4 37.0 37.0 45.5 45.5 19.7 15.9 15.9 16.0 19.1 19.1 28.1 12.0 12.0 20.1 15.9 25.8 25.8 18.3 30.7 30.7 24.4 12.4 12.4 18.1 18.1 10.0 10.0 18.8 18.8 82.4 24.4 24.4 18.9 18.9 10.6 10.6 40.8 40.8 (27.0) 117.3 137.6 142.1 167.5 159.0 289.9 106.6
EPS growth (%) 7.3 7.3 3.3 (10.3) 7.2 7.2 1.3 1.3 34.0 1.1 1.1 1.8 1.8 (31.9) 9.2 9.2 7.8 7.8 14.8 7.8 7.8 2.6 2.6 4.8 4.8 (2.5) (2.5) (1.0) (1.0) (0.5) (0.5) 27.1 27.1 14.8 14.8 23.2 23.2 33.7 33.7 12.5 12.5 25.1 25.1 66.0 66.0 22.1 22.1 11.2 11.2 13.3 13.3 12.1 12.1 31.3 31.3 26.7 26.7 74.7 74.7 17.8 14.5 57.6 50.2 50.2 39.5 39.5 11.4 11.4 16.4 16.4 62.8 40.2 26.0 26.0 94.7 94.7 606.6 18.0 18.0 19.0 19.0 10.9 10.9 64.5 29.6 29.6 19.0 19.0 (21.3) (21.3) (10.7) (10.7) (22.0) (22.0) (58.1) (58.1) (11.8) (11.8) (62.6) (62.6) 155.1 155.1 136.2 136.2 131.9 131.9 186.1 186.1 140.2 140.2 (414.9)
96.3 162.2 21.8 66.4 25.5 14.4 13.9 8.3 55.3 18.5 7.2 33.6 28.9 65.9 33.4 9.3 25.2 6.9 76.9 5.5 23.8 15.0 42.6 50.1 64.7 42.6 20.8 93.2 214.9 9.2 34.4 60.6 10.6 10.3 180.2 17.4 26.3 59.5 10.8 64.5 16.5 8.4 80.0 346.5 216.2 196.3 9.7 919.0 44.9 181.5 98.9 5.7 27.2 EPS (Rs) 39.4 5.1 3.1 7.3 7.5 5.5 6.4 7.0 7.1 3.8 8.3 4.1 19.0 7.4 28.7 18.0 7.6 9.1 6.6 8.2 8.9 4.2 4.7 9.8 4.8 4.9 8.0 6.8 10.4 6.2 6.9 (3.9) 19.9 9.3 7.9 57.3 50.7 23.9 16.2 34.1 11.4 76.6 132.5 29.0 19.8 56.2 21.5 46.5 14.3 29.8 24.4 56.8 14.4 26.3 19.3 66.7 14.6 43.5 53.1 14.4 29.9 79.9 55.8 14.3 20.7 49.7 13.8 72.0 36.1 85.4 22.0 34.7 10.2 55.6 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 181.8 148.4 299.0 198.6 161.3 777.1 156.3
— 53 17 27 19 97 66 68 122.2 48.0 120.4 617.7 77.2 223 67.1 317 21.6 127 37.5 131 237 27.6 171 29.4 101 156 159 270 687 284 609 O/S shares
98.7
(27.0) 42.2 10.6 28.4
48.7 20.1 45.3 76.1 149.5
20.8 11.5 15.1
64.3 249.0 174.7
136.1
21.7
757 853 570 635 920 306 209 496 485 404 3,275 1,322 1,594 2,373 1,375 598 1,573 1,113 2,737 850 4,272 1,975 5,303 2,640 2,510 565 1,621 2,158 1,719 3,214 1,710 5,811 2,310 7,358 1,323 1,363 509 2,218 2,438 267 2,882 1,754 4,526 1,964 1,500 9,181 421 2,0292,441 817 543 2,920 475 1,010 3,620 3,916 2,846 1,896 4,186 505 1,960 399 9,626 200 1,690 8,648
Mkt cap. Mkt 33,183 57,077 38,152 42,531 92,032 27,010 20,502 91,243 (Rs mn) mn) (US$ (mn) 67,584 88,495 50,666 61,608 74,469 219,237 215,129 135,792 183,175 131,188 163,195 114,423 195,475 492,522 242,316 113,091 262,105 354,959 167,985 108,505 800,712 11,963 595 158,859 302,916 614,524 578,801 163,386 105,308 644,315 676,250 10,103 812,109 12,133 289 126,888 285,968 280,164 192,869 144,447 100,401 388,942 806,582 12,051 569 148,487 5,177,795 77,358 8,518,727 127,273 1,172,546 17,518 2,383 3,344,937 49,975 2,528 1,819,126 27,179 302 2,206,260 32,962 1,580 2,166,003 32,361 7,763 1,639,410 24,493 5,849 1,620,066 24,204 3,396 11,563,993 172,771 5.2 7.2 7.1 7.2 0.1 5.9 2.4 3.0 0.7 2.0 0.7 4.7 6.3 8.7 4.6 9.9 6.8 (1.7) (2.6) (5.8) (7.6) (4.8) (8.6) (0.9) (0.8) 13.1 17.2 17.1 13.1 13.8 17.8 18.3 13.6 13.0 16.5 18.7 22.9 39.5 16.9 18.6 18.4 (13.2) (12.5) (12.2) (13.5) (10.7) (12.0) (14.5) (23.6) (12.0) (14.8) (36.8) (18.8) (18.6)
75 75 65
80 90
375 275 175 145 120 350 595 320 130 720 320 165 170 185 150 145 105 250 765
100 650 260 390
140
500 140 260 670 190 300
600 900
1,575 1,275 1,275 2,025 1,350 1,150 1,250 1,100 3,100 1,360 3,200 3,050 6,100 1,400 5,000 6,400
price Upside 19,000 Target
55 63 92 68 94 84 98
555 272 351 145 145 134 342 342 295 611 329 110 282 282 142 301 129 301 154 134 411 411 625 625 505 505 216 179 830 830 429 429 146 169 169 184 184 206 206 966 490 869
5,552 5,552 3,227 3,227 1,392 1,392 1,310 1,310 1,017 1,453 1,453 3,637 1,412 1,412 1,170 1,170 1,924 1,924 1,340 1,340 1,299 1,299 6,022 1,041 1,041 2,807 2,807 4,067 4,067 24,859 24,859 Price (Rs)Price BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY ADD ADD ADD ADD ADD ADD ADD ADD ADD ADD ADD ADD ADD ADD ADD ADD ADD SELL ADD SELL ADD ADD SELL SELL SELL ADD ADD SELL SELL Rating 13-Feb-17 (Rs) (%) REDUCE REDUCE REDUCE REDUCE REDUCE REDUCE REDUCE REDUCE REDUCE REDUCE REDUCE REDUCE REDUCE REDUCE Neutral Attractive Neutral Shriram Transport NBFCs Rural Rural Electrification Corp. Shriram City Union Finance HDFC PFC J&K Bank Karur Vysya Bank IDFC IIFL Holdings LIC Housing Finance Mahindra & Mahindra Financial Max Financial Services Muthoot Finance IndusInd IndusInd Bank State Bank of India L&T Finance Holdings Federal Bank HDFC Bank ICICI Bank IDFC Bank Punjab National Bank Ujjivan Financial Services Union Bank Bharat Financial Inclusion Cholamandalam Banks Banks Axis Bank Bank of Baroda Equitas Holdings YES Bank NBFCs Bajaj Finserv Automobiles Automobiles Bank of India Canara Bank City Union Bank DCB Bank WABCO India TVS Motor Timken Tata Motors Suprajit Engineering SKF Motherson Sumi Systems Minda Corp. Mahindra & Mahindra Maruti Suzuki Hero Motocorp FAG Bearings Exide Industries Eicher Motors Bharat Bharat Forge Bajaj Auto Balkrishna Industries Ashok Leyland Apollo Tyres Automobiles Amara Raja Batteries Company Source: Company, Bloomberg, Kotak Institutional Equities estimates Equities Kotak Institutional Bloomberg, Company, Source: Kotak Institutional Equities: Valuation summary of KIE Universe stocksValuation of KIEKotak Universe summary Equities: Institutional
117 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 13-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 EQUITIES INSTITUTIONAL KOTAK Cement ACC SELL 1,488 1,290 (13.3) 279,343 4,174 188 34.3 47.1 70.7 (13.3) 37.3 50.0 43.3 31.6 21.0 21.9 16.7 11.8 3.2 3.1 2.8 1.1 1.1 1.1 7.5 9.9 13.8 9.9 Ambuja Cements REDUCE 239 210 (12.2) 474,966 7,096 1,552 5.5 7.9 11.5 (0.4) 41.9 45.7 43.2 30.4 20.9 16.2 11.2 8.0 3.4 3.2 3.0 1.4 1.4 1.4 8.8 10.9 14.9 9.4 Dalmia Bharat ADD 1,961 2,050 4.6 174,300 2,604 89 29.0 84.0 121.6 35.0 189.4 44.8 67.6 23.3 16.1 12.9 9.5 7.6 4.3 3.6 3.0 0.1 0.1 0.1 6.5 16.7 20.2 2.1 Grasim Industries ADD 1,000 1,060 6.0 466,942 6,976 467 73.0 84.2 98.8 32.8 15.4 17.4 13.7 11.9 10.1 7.1 5.4 4.1 1.6 1.4 1.3 0.4 0.4 0.4 12.4 12.7 13.2 13.8 India Cements SELL 160 110 (31.3) 49,164 735 307 6.2 8.8 11.2 35.1 42.5 27.1 NM 18.1 14.2 9.5 8.2 7.1 1.3 1.2 1.2 1.3 1.3 1.3 5.1 7.0 8.4 9.3 J K Cement ADD 850 895 5.3 59,427 888 70 28.7 66.1 87.1 236.0 130.4 31.8 29.6 12.9 9.8 12.7 8.4 6.9 3.3 2.7 2.1 0.5 0.5 0.5 11.7 23.0 24.3 0.9 JK Lakshmi Cement ADD 388 460 18.6 45,632 682 118 6.4 25.8 39.8 224.4 302.3 54.3 60.5 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 140 155 10.8 28,651 428 205 (0.8) 10.8 15.1 (126.9) 1,428.0 39.1 (171.3) 12.9 9.3 22.3 8.4 6.8 3.0 2.5 2.0 1.3 1.3 1.3 (1.7) 21.2 24.4 0.6
Shree Cement SELL 15,877 12,750 (19.7) 553,109 8,264 35 389.3 528.1 713.4 237.5 35.7 35.1 40.8 30.1 22.3 20.5 15.1 11.7 7.8 6.2 4.9 0.6 0.2 0.2 20.4 23.0 24.7 4.4 UltraTech Cement SELL 3,768 2,750 (27.0) 1,034,121 15,450 274 96.3 126.3 159.2 21.5 31.2 26.0 39.1 29.8 23.7 21.3 16.6 13.4 4.5 3.9 3.4 0.3 0.3 0.3 12.1 14.1 15.5 21.3 Cement Cautious 3,165,654 47,296 36.4 38.9 30.6 32.1 23.1 17.7 14.6 10.9 8.5 3.4 3.0 2.6 0.6 0.5 0.5 10.5 13.0 14.8 72.9 Consumer products
Asian Paints REDUCE 985 900 (8.6) 944,570 14,112 959 19.8 22.3 26.4 5.8 12.5 18.5 49.7 44.2 37.3 30.8 27.2 23.0 14.5 12.6 10.9 0.9 1.0 1.2 31.3 30.4 31.3 21.9 -
RESEARCH
Bajaj Corp. BUY 371 450 21.4 54,656 817 148 16.8 18.8 21.0 5.9 11.8 11.7 22.1 19.7 17.7 18.7 16.1 13.8 10.7 9.8 9.0 3.1 3.5 3.9 50.0 52.0 53.2 0.4 February 2017 14, Britannia Industries ADD 3,272 3,300 0.9 392,607 5,866 120 71.8 91.1 110.6 3.3 26.8 21.4 45.5 35.9 29.6 30.6 24.0 19.6 17.3 13.4 10.5 0.8 0.9 1.1 42.7 42.0 39.7 7.9 Coffee Day Enterprises ADD 238 255 7.0 49,101 734 206 2.3 6.6 9.8 151.1 188.9 47.9 103.9 36.0 24.3 13.9 11.8 10.4 2.2 2.1 1.9 — — — 2.2 6.0 8.3 0.8 Colgate-Palmolive (India) ADD 890 1,040 16.9 241,945 3,615 272 21.6 26.4 31.8 2.0 21.9 20.5 41.1 33.7 28.0 24.1 19.8 16.5 19.2 15.6 12.8 1.2 1.5 1.8 51.6 51.0 50.1 4.0
Dabur India REDUCE 269 270 0.3 474,201 7,085 1,759 7.2 7.9 9.1 2.0 10.7 14.6 37.6 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 5,124 5,700 11.2 215,495 3,220 42 146.3 169.1 192.8 (5.3) 15.5 14.0 35.0 30.3 26.6 23.9 20.2 17.1 8.1 7.5 6.9 1.6 1.9 2.1 24.1 25.6 26.9 3.1 Godrej Consumer Products REDUCE 1,554 1,420 (8.6) 529,294 7,908 341 38.1 45.7 52.3 12.0 19.7 14.6 40.7 34.0 29.7 29.4 24.5 21.2 9.1 7.5 6.2 0.4 0.4 0.4 23.8 24.2 22.9 4.7 Hindustan Unilever REDUCE 862 860 (0.3) 1,866,254 27,883 2,164 19.3 22.0 25.4 0.6 14.3 15.3 44.8 39.2 34.0 30.6 26.6 22.8 29.8 29.3 29.1 2.0 2.1 2.4 66.5 75.5 85.9 13.4 ITC ADD 271 280 3.5 3,280,040 49,005 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 41.2 Jubilant Foodworks SELL 1,012 850 (16.0) 66,726 997 66 13.1 20.8 30.5 (17.9) 59.4 46.3 77.5 48.6 33.2 24.9 17.8 13.5 8.4 7.5 6.6 0.2 0.5 0.9 11.3 16.3 21.1 8.6 Jyothy Laboratories NR 351 — — 63,765 953 181 9.5 10.7 11.1 31.6 12.3 3.9 36.8 32.7 31.5 25.8 22.0 19.3 8.0 7.4 7.0 1.4 1.7 2.0 26.5 23.5 22.8 0.5 Manpasand Beverages REDUCE 685 685 0.1 39,167 585 50 13.0 19.7 27.2 28.9 51.6 38.0 52.6 34.7 25.1 24.4 17.8 12.0 3.4 3.1 2.8 0.2 0.3 0.4 8.4 9.3 11.7 1.2 Marico REDUCE 270 260 (3.7) 348,207 5,202 1,290 6.0 6.9 8.0 7.6 15.5 15.1 44.9 38.9 33.8 30.7 26.7 23.2 14.5 12.6 11.0 1.1 1.3 1.5 34.4 34.6 34.8 5.6 Nestle India SELL 6,200 5,550 (10.5) 597,792 8,931 96 105.8 131.7 156.3 14.1 24.5 18.7 58.6 47.1 39.7 32.2 26.8 22.9 19.6 17.9 16.5 1.0 1.4 1.7 34.7 39.7 43.2 4.5
Page Industries REDUCE 14,346 13,000 (9.4) 160,013 2,391 11 250.3 310.6 388.8 20.0 24.1 25.2 57.3 46.2 36.9 36.3 29.6 23.7 24.4 18.6 13.9 0.7 0.7 0.7 48.0 45.6 43.0 2.5 PC Jeweller REDUCE 388 360 (7.2) 69,500 1,038 179 20.4 22.2 26.0 (5.0) 8.9 17.0 19.0 17.5 14.9 9.8 7.8 7.0 2.4 2.1 1.9 1.0 1.2 1.4 14.1 13.5 13.4 4.2 Pidilite Industries ADD 679 730 7.5 348,107 5,201 513 16.7 19.1 22.2 13.2 14.6 16.1 40.7 35.5 30.6 26.6 23.1 19.5 10.4 8.8 7.5 0.7 0.9 1.0 28.0 26.9 26.5 5.4 S H Kelkar and Company SELL 318 250 (21.5) 46,040 688 145 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 142 150 5.7 89,589 1,338 631 6.9 7.9 9.0 39.1 13.5 14.9 20.5 18.1 15.7 10.6 9.6 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 5,682 888 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 9.9 United Breweries SELL 785 680 (13.4) 207,584 3,101 264 10.8 14.3 18.3 (4.4) 32.4 27.8 72.7 54.9 42.9 29.6 24.8 21.0 8.9 7.8 6.8 0.2 0.3 0.3 12.8 15.1 17.0 3.0 United Spirits ADD 2,345 2,400 2.3 340,837 5,092 145 30.8 47.4 66.4 154.9 54.1 40.1 76.2 49.5 35.3 33.1 26.2 20.3 14.6 9.7 6.8 — — — 21.7 23.5 22.7 12.5 Consumer products Cautious 10,805,772 161,443 9.1 16.5 16.0 40.0 34.4 29.6 25.8 22.2 19.0 11.0 9.8 8.8 1.4 1.6 1.9 27.4 28.5 29.7 163.5 Energy BPCL SELL 715 640 (10.4) 1,033,360 15,439 1,446 53.1 50.6 55.1 3.2 (4.5) 8.9 13.5 14.1 13.0 9.7 8.8 8.0 3.3 2.9 2.5 2.8 2.1 2.3 26.2 21.7 20.6 26.7 Cairn India ADD 282 280 (0.7) 528,991 7,903 1,875 12.9 16.5 20.4 12.5 28.5 23.5 21.9 17.0 13.8 10.8 9.1 7.0 1.0 1.0 1.0 1.2 1.6 2.5 4.9 6.0 7.1 8.0 Castrol India ADD 415 470 13.2 205,342 3,068 495 13.5 14.8 16.0 12.0 9.5 8.1 30.8 28.1 26.0 19.8 18.5 17.1 31.7 28.3 24.7 2.4 2.6 2.8 108.9 106.2 101.3 4.5 GAIL (India) ADD 482 515 6.9 611,089 9,130 1,268 29.5 35.2 38.3 64.6 19.4 8.6 16.3 13.7 12.6 10.0 8.6 8.0 1.8 1.7 1.6 2.1 2.2 2.4 11.7 12.9 12.9 16.8 GSPL ADD 164 175 7.0 92,135 1,377 563 8.7 11.0 12.0 9.7 27.3 8.8 18.9 14.8 13.6 9.5 7.6 6.8 2.1 1.9 1.8 1.2 1.7 2.2 11.8 13.7 13.6 1.2 HPCL REDUCE 578 460 (20.5) 587,484 8,777 1,017 48.1 42.9 43.7 26.7 (10.8) 1.8 12.0 13.5 13.2 8.6 9.2 9.3 2.7 2.4 2.2 2.5 2.2 2.3 24.6 19.1 17.3 30.0 Indraprastha Gas SELL 1,013 970 (4.2) 141,827 2,119 140 45.6 51.0 55.9 37.7 11.8 9.5 22.2 19.9 18.1 13.4 11.9 10.8 5.1 4.5 4.0 1.2 1.6 1.9 24.6 24.1 23.5 10.2 IOCL BUY 380 440 15.8 1,844,758 27,561 4,856 41.8 38.7 40.7 114.3 (7.5) 5.2 9.1 9.8 9.3 5.8 6.0 5.7 2.2 1.9 1.7 3.7 3.6 3.8 25.6 20.8 19.6 24.9 Mahanagar Gas SELL 922 730 (20.8) 91,034 1,360 99 39.8 42.0 44.4 27.2 5.6 5.7 23.2 22.0 20.8 13.9 13.0 12.2 5.3 4.8 4.4 1.9 2.1 2.4 24.2 22.9 22.0 - ONGC SELL 192 190 (1.2) 2,467,189 36,861 12,833 16.6 19.0 20.3 22.6 14.6 7.1 11.6 10.1 9.5 5.1 4.4 4.1 1.2 1.2 1.1 3.1 3.4 3.6 11.1 11.9 11.9 24.5
Oil India SELL 335 320 (4.4) 268,267 4,008 802 Daily Summary India 27.6 31.1 33.8 (5.0) 12.5 8.8 12.1 10.8 9.9 6.9 5.8 5.3 1.1 1.1 1.0 3.3 3.7 4.0 9.7 10.3 10.6 4.5 Petronet LNG ADD 382 415 8.7 286,425 4,279 750 21.5 26.1 28.6 91.3 21.8 9.3 17.8 14.6 13.4 11.3 9.1 7.8 3.8 3.2 2.8 1.3 1.8 2.4 23.1 23.9 22.5 10.5 Reliance Industries ADD 1,030 1,160 12.6 3,033,414 45,320 3,240 96.7 100.8 107.7 14.2 4.3 6.8 10.7 10.2 9.6 10.3 8.4 7.5 1.3 1.1 1.0 1.1 1.3 1.5 12.4 11.7 11.3 51.0 Energy Attractive 11,191,316 167,203 30.2 4.5 7.2 11.5 11.0 10.2 7.6 6.8 6.2 1.5 1.4 1.3 2.4 2.5 2.7 13.4 12.8 12.6 212.7
Source: Company, Bloomberg, Kotak Institutional Equities estimates
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February 14, 2017
118
Kotak Institutional Equities: Valuation summary of KIE Universe stocks
Target O/S
119 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 13-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 1,221 1,100 (9.9) 258,645 3,864 212 17.8 26.3 36.7 25.5 48.1 39.5 68.7 46.4 33.3 33.9 24.5 19.5 7.9 7.1 6.1 0.3 0.6 0.7 12.0 16.0 19.7 1.3 BHEL SELL 155 120 (22.7) 379,745 5,674 2,448 3.3 5.6 8.4 187.2 71.8 50.8 47.7 27.7 18.4 27.2 12.7 7.0 1.1 1.1 1.1 0.4 0.9 1.4 2.4 4.0 5.8 14.1 Carborundum Universal REDUCE 260 260 0.0 49,033 733 188 9.6 12.7 16.0 25.8 32.9 26.0 27.1 20.4 16.2 14.9 11.4 9.2 3.8 3.4 3.0 1.1 1.5 1.9 14.5 17.4 19.4 0.9 Crompton Greaves REDUCE 67 65 (2.7) 41,867 626 627 2.9 3.5 5.1 23.5 21.2 46.8 23.2 19.1 13.0 11.3 8.3 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 187 195 4.1 117,452 1,755 627 4.5 5.3 6.5 17.4 16.0 24.3 41.3 35.6 28.7 25.2 22.2 18.2 25.5 16.1 11.0 0.5 0.8 1.1 82.5 55.4 45.6 2.8 Cummins India REDUCE 874 915 4.7 242,231 3,619 277 28.6 32.5 36.6 8.1 13.7 12.5 30.6 26.9 23.9 27.8 23.5 20.6 6.9 6.3 5.7 1.7 1.9 2.1 23.8 24.5 24.9 2.8 Havells India REDUCE 435 400 (8.1) 271,906 4,062 624 9.6 11.5 13.2 23.2 19.8 15.1 45.5 38.0 33.0 30.7 25.0 21.2 8.5 7.6 6.9 0.9 1.0 1.3 19.8 21.2 22.0 8.8 Kalpataru Power Transmission BUY 290 300 3.3 44,550 666 153 10.2 13.5 20.2 33.0 32.5 49.9 28.5 21.5 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 169 170 0.4 43,512 650 257 9.6 12.7 15.6 29.2 31.5 23.4 17.6 13.4 10.8 8.0 7.1 6.2 2.5 2.2 1.9 0.8 1.0 1.2 15.3 17.5 18.6 0.9 L&T BUY 1,500 1,700 13.3 1,399,155 20,904 930 57.0 77.1 95.3 11.9 35.3 23.6 26.3 19.5 15.7 21.2 17.2 14.6 3.5 3.2 2.9 1.6 2.1 2.5 13.7 17.0 19.2 29.5 Siemens SELL 1,197 940 (21.5) 426,169 6,367 356 24.3 30.2 37.3 42.8 24.2 23.6 49.3 39.7 32.1 29.7 24.1 19.3 6.2 5.8 5.4 1.0 1.3 1.6 12.8 15.0 17.4 4.2 Thermax REDUCE 861 850 (1.3) 102,576 1,533 119 25.8 30.5 36.7 11.5 18.4 20.2 33.4 28.2 23.5 23.4 18.8 16.3 4.0 3.6 3.2 0.6 0.7 0.9 12.4 13.4 14.5 0.8 Voltas ADD 340 325 (4.4) 112,468 1,680 331 11.2 12.7 15.6 7.0 14.0 22.9 30.4 26.7 21.7 25.4 20.9 16.3 4.3 3.9 3.6 1.0 1.3 1.8 14.7 15.3 17.2 7.8 Industrials Cautious 3,489,308 52,132 41.2 32.9 26.5 33.4 25.1 19.9 22.1 17.4 14.2 3.3 3.1 2.8 1.1 1.5 1.9 9.8 12.2 14.2 80.4 Infrastructure Adani Port and SEZ ADD 310 325 5.0 641,063 9,578 2,085 16.9 14.0 14.7 23.2 (17.2) 4.7 18.3 22.0 21.1 15.8 14.3 13.6 3.9 3.4 3.0 0.5 0.7 0.8 23.8 16.6 15.3 15.1 Ashoka Buildcon BUY 188 235 24.9 35,203 526 188 5.9 5.5 5.9 88.8 (5.7) 6.9 32.0 33.9 31.8 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 1,304 1,150 (11.8) 254,227 3,798 195 35.7 40.9 47.2 (11.7) 14.6 15.3 36.5 31.9 27.7 23.0 18.8 15.8 3.0 2.8 2.7 0.9 1.0 1.2 8.4 9.1 9.9 5.1 Gateway Distriparks BUY 276 300 8.7 30,004 448 109 9.2 11.4 15.2 (9.2) 24.8 33.4 30.1 24.2 18.1 13.0 9.8 7.4 2.3 2.2 2.0 1.0 1.2 1.7 7.8 9.3 11.5 0.4 Gujarat Pipavav Port BUY 165 165 - 79,768 1,192 483 5.1 5.8 7.6 49.4 12.9 30.7 32.1 28.5 21.8 18.6 15.3 12.9 4.1 4.1 4.0 2.4 2.7 3.6 12.9 14.4 18.5 0.9 IRB Infrastructure BUY 233 270 16.0 81,782 1,222 351 20.8 25.6 35.3 15.0 23.2 38.1 11.2 9.1 6.6 7.8 7.1 6.2 1.3 1.1 1.1 2.0 2.4 3.4 13.3 13.2 16.7 6.0 Sadbhav Engineering ADD 283 300 6.1 48,512 725 172 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 1,170,558 17,489 17.6 (4.4) 14.5 20.9 21.9 19.1 14.0 12.2 11.0 3.1 2.8 2.6 0.8 1.0 1.3 14.8 12.6 13.4 28.2 Internet Info Edge ADD 850 960 13.0 102,925 1,538 121 18.2 19.7 24.5 55.1 8.7 24.3 46.8 43.0 34.6 40.1 29.3 22.7 5.4 4.9 4.5 0.5 0.6 0.7 11.9 11.9 13.6 0.6 Just Dial REDUCE 423 400 (5.4) 29,390 439 69 18.6 16.5 19.5 (9.1) (11.0) 17.9 22.8 25.6 21.7 17.9 14.2 11.1 3.7 3.3 2.9 0.4 0.4 0.5 17.7 13.7 14.3 10.0 Internet Attractive 132,314 1,977 23.0 1.4 22.2 38.0 37.4 30.6 32.5 24.5 19.2 4.9 4.5 4.0 0.5 0.5 0.7 12.9 11.9 13.1 10.6 Media DB Corp. REDUCE 379 380 0.3 69,681 1,041 184 21.2 24.3 29.2 31.3 14.7 19.8 17.9 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 89 105 17.8 95,024 1,420 1,066 1.5 2.4 3.6 (76.9) 62.8 48.8 NM 36.5 24.5 9.6 7.9 6.5 5.7 5.7 5.7 — — 1.1 9.6 15.6 23.2 7.4 Jagran Prakashan REDUCE 186 190 2.1 60,855 909 327 11.3 12.9 15.0 8.8 14.3 16.1 16.5 14.4 12.4 9.6 8.1 7.0 3.5 3.3 2.9 3.2 3.8 3.8 22.4 23.6 24.9 0.6 Ortel Communications BUY 124 185 48.8 3,774 56 30 4.0 5.6 12.5 1.7 40.6 122.6 31.2 22.2 10.0 7.8 6.5 5.0 2.5 2.2 1.8 — — — 8.3 10.6 20.2 0.0 PVR ADD 1,298 1,350 4.0 60,676 907 47 24.8 34.3 45.6 (8.2) 38.4 33.0 52.4 37.9 28.5 18.4 14.8 12.2 6.3 5.5 4.7 0.2 0.3 0.4 12.6 15.4 17.7 3.5
Sun TV Network ADD 713 750 5.2 280,864 4,196 394 26.3 29.8 36.3 12.4 13.2 21.9 27.1 23.9 19.6 17.6 15.2 12.3 7.3 6.7 5.9 2.1 2.4 2.7 28.1 29.1 31.9 25.0 Daily Summary India Zee Entertainment Enterprises BUY 524 540 3.0 503,563 7,523 960 12.5 15.5 18.8 32.9 24.2 21.2 42.0 33.8 27.9 23.8 20.5 17.1 5.3 4.9 4.4 0.5 0.7 0.8 15.3 15.1 16.7 16.2 Media Attractive 1,074,438 16,053 (0.3) 20.9 23.4 32.7 27.1 21.9 16.5 14.0 11.6 5.6 5.1 4.6 1.2 1.4 1.7 17.0 18.9 21.1 53.1 Metals & Mining Coal India REDUCE 321 320 (0.3) 1,991,958 29,761 6,316 18.1 25.5 28.5 (20.0) 40.7 11.7 17.7 12.6 11.3 11.1 8.2 7.4 5.6 5.2 4.8 4.0 5.6 6.2 31.1 43.0 44.3 16.1 Hindalco Industries REDUCE 185 165 (10.8) 382,237 5,711 2,065 11.4 14.0 14.4 321.9 22.7 2.4 16.2 13.2 12.9 7.4 7.1 6.8 1.0 0.9 0.8 0.5 0.5 0.5 6.0 7.0 6.8 33.9 Hindustan Zinc REDUCE 315 290 (7.9) 1,329,919 19,870 4,225 19.7 24.4 25.8 1.6 23.9 5.5 16.0 12.9 12.2 10.8 7.8 6.7 3.1 2.6 2.2 1.4 1.4 1.4 20.6 21.7 19.5 9.4 Jindal Steel and Power SELL 89 60 (32.2) 80,969 1,210 915 (24.8) (10.1) (2.8) (36.4) 59.4 72.3 (3.6) (8.8) (31.6) 13.2 9.2 7.7 0.2 0.2 0.2 — — — (8.5) (2.7) (0.7) 12.7 JSW Steel ADD 188 225 19.8 453,833 6,780 2,417 14.6 19.5 22.1 1,487.5 33.5 13.4 12.9 9.6 8.5 7.2 6.2 5.5 2.1 1.7 1.4 0.5 0.5 0.5 16.2 19.4 18.4 15.3 National Aluminium Co. SELL 66 42 (36.7) 128,346 1,918 2,577 3.1 3.4 3.4 15.5 9.0 0.1 21.3 19.5 19.5 9.8 8.1 7.7 1.2 1.2 1.1 1.5 1.5 1.5 5.2 6.2 5.9 3.1 NMDC SELL 145 105 (27.5) 458,290 6,847 3,965 10.2 9.5 9.4 28.1 (6.8) (1.2) 14.2 15.3 15.4 10.0 10.0 10.0 2.0 1.9 1.9 4.1 4.1 4.1 12.1 12.7 12.2 8.4 Tata Steel ADD 473 515 9.0 458,996 6,858 971 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 256 235 (8.3) 759,406 11,346 2,965 20.7 26.0 31.3 163.8 25.4 20.4 12.4 9.9 8.2 7.0 5.8 4.8 1.5 1.3 1.2 1.1 1.1 1.1 14.4 14.5 15.4 40.2 Metals & Mining Cautious 6,043,955 90,299 42.7 43.3 12.9 16.9 11.8 10.5 8.9 7.2 6.4 2.0 1.8 1.7 2.3 2.9 3.1 12.0 15.6 15.9 176.0 KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Pharmaceutical Apollo Hospitals REDUCE 1,217 1,325 8.9 169,294 2,529 139 23.9 33.6 43.0 10.4 40.4 28.1 50.8 36.2 28.3 23.3 19.0 16.1 4.6 4.2 3.8 0.5 0.7 0.9 9.3 12.1 14.2 3.3 Aurobindo Pharma ADD 662 770 16.3 387,353 5,787 584 41.8 46.3 51.5 23.3 10.6 11.2 15.8 14.3 12.9 11.3 9.8 8.6 4.1 3.2 2.6 0.3 0.4 0.4 29.5 25.2 22.4 22.5
Biocon SELL 1,080 605 (44.0) 215,980 3,227 200 32.6 25.7 29.2 63.5 (21.2) 13.6 33.1 42.0 36.9 20.6 19.0 15.7 4.5 4.1 3.8 1.1 0.8 0.9 14.2 10.2 10.7 12.2 -
Cipla BUY 583 650 11.6 468,691 7,002 805 19.0 27.2 35.4 13.3 43.2 30.4 30.7 21.4 16.4 18.0 13.1 10.2 3.6 3.1 2.7 0.7 1.0 1.3 12.1 15.6 — 10.2 February 2017 14, Dr Lal Pathlabs SELL 1,058 1,000 (5.5) 87,599 1,309 83 19.6 23.6 27.8 23.0 20.6 17.9 54.1 44.8 38.0 33.7 27.2 22.8 13.8 11.0 8.9 0.3 0.3 0.4 28.5 27.3 25.8 1.1 Dr Reddy's Laboratories SELL 2,967 2,500 (15.7) 491,502 7,343 171 80.0 121.7 146.6 (42.6) 52.2 20.5 37.1 24.4 20.2 19.1 12.6 9.8 4.0 3.5 3.0 0.4 0.6 0.8 10.5 15.3 16.1 12.2 HCG BUY 243 270 11.3 20,644 308 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 1,448 1,600 10.5 653,459 9,763 450 66.6 72.8 84.3 31.9 9.3 15.9 21.7 19.9 17.2 13.8 12.5 10.4 4.8 4.0 3.3 0.7 0.8 0.9 24.4 21.9 21.1 20.2 Sun Pharmaceuticals REDUCE 655 715 9.2 1,570,763 23,468 2,406 31.9 32.8 36.9 44.5 2.6 12.7 20.5 20.0 17.7 12.0 11.0 9.3 4.1 3.5 2.9 1.0 1.0 1.1 22.0 18.8 18.0 42.9 Torrent Pharmaceuticals REDUCE 1,250 1,310 4.8 211,436 3,159 169 57.3 58.7 69.1 (44.0) 2.4 17.8 21.8 21.3 18.1 15.0 13.6 11.8 5.4 4.5 2.1 1.1 1.3 26.6 23.1 21.0 3.2 Pharmaceuticals Cautious 4,276,722 63,896 14.2 11.8 16.4 23.6 21.1 18.1 14.4 12.3 10.2 4.2 3.6 3.1 0.8 0.8 1.0 18.0 17.2 17.0 128.1
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 13-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 EQUITIES INSTITUTIONAL KOTAK Real Estate DLF BUY 148 160 8.3 263,585 3,938 1,784 3.7 1.6 1.9 18.7 (55.2) 14.2 40.4 90.2 79.0 15.4 16.2 15.9 0.9 0.9 0.9 1.4 1.4 1.4 2.2 1.0 1.1 18.9 Godrej Properties REDUCE 363 280 (22.9) 78,594 1,174 216 9.7 10.5 11.4 (9.3) 8.5 8.3 37.5 34.6 31.9 69.5 57.3 34.7 3.4 3.1 2.9 0.4 0.7 0.7 9.3 9.4 9.5 0.9 Oberoi Realty BUY 340 350 2.9 115,470 1,725 339 10.8 30.9 43.2 (13.7) 185.2 39.9 31.4 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 176 225 27.8 66,019 986 375 7.0 8.4 8.9 (24.8) 18.7 6.3 25.0 21.1 19.8 12.4 12.0 11.5 1.5 1.4 1.4 0.9 0.9 0.9 6.2 7.0 7.1 0.7 Sobha BUY 282 395 40.3 27,119 405 98 16.1 17.0 17.9 2.9 6.0 4.8 17.5 16.5 15.8 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 253 360 42.0 15,959 238 60 55.8 57.8 113.7 105.4 3.7 96.6 4.5 4.4 2.2 5.5 4.0 1.7 0.8 0.7 0.8 0.8 0.8 18.6 16.3 26.0 0.4 Real Estate Attractive 566,746 8,467 5.8 20.7 35.2 28.6 23.7 17.5 15.6 13.2 12.0 1.2 1.2 1.1 1.0 1.1 1.1 4.3 5.0 6.4 22.5 Technology HCL Technologies REDUCE 827 840 1.5 1,167,484 17,443 1,413 57.5 61.4 64.6 46.4 6.8 5.3 14.4 13.5 12.8 10.1 9.1 8.4 3.6 3.2 2.9 3.0 3.5 4.0 27.3 25.4 24.0 20.0
Infosys ADD 984 1,140 15.8 2,260,998 33,780 2,286 63.0 67.9 74.0 6.7 7.8 9.0 15.6 14.5 13.3 10.1 9.0 7.9 3.5 3.1 2.8 2.7 3.0 3.6 23.5 22.7 22.3 66.1 Mindtree REDUCE 468 490 4.7 78,646 1,175 168 26.0 32.5 39.3 (27.4) 24.8 20.8 18.0 14.4 11.9 10.1 8.0 6.5 2.9 2.6 2.2 1.5 1.9 2.3 17.2 19.0 20.1 4.4 Mphasis SELL 562 450 (20.0) 118,273 1,767 210 39.5 40.8 41.1 14.8 3.3 0.6 14.2 13.8 13.7 9.1 9.5 9.1 1.8 1.8 1.7 3.6 3.6 3.6 12.9 12.6 13.1 1.2 TCS REDUCE 2,414 2,415 0.0 4,757,106 71,073 1,970 134.7 143.2 156.4 9.6 6.3 9.2 17.9 16.9 15.4 13.1 11.7 10.5 5.5 4.7 4.0 2.2 2.4 2.6 33.1 29.9 28.1 47.8
Tech Mahindra BUY 500 510 2.1 486,221 7,264 872 34.0 38.2 43.4 (4.8) 12.2 13.7 14.7 13.1 11.5 10.2 8.4 7.0 2.7 2.3 2.0 2.5 1.2 1.4 19.5 19.1 18.6 17.9 -
RESEARCH
Wipro REDUCE 474 500 5.4 1,153,328 17,231 2,467 34.5 37.8 40.8 (4.2) 9.4 8.0 13.7 12.6 11.6 8.3 7.4 6.1 2.3 2.0 1.8 1.1 1.1 1.1 17.2 16.9 16.3 8.8 February February 2017 14, Technology Neutral 10,084,378 150,665 9.2 7.2 8.7 16.2 15.1 13.9 11.1 9.9 8.7 3.8 3.4 3.0 2.3 2.5 2.7 23.7 22.5 21.6 169.6 Telecom Bharti Airtel BUY 358 375 4.7 1,431,269 21,384 3,997 8.1 3.9 9.5 (17.0) (51.3) 141.8 44.2 90.7 37.5 7.1 7.6 6.5 2.1 2.1 2.1 0.7 0.3 1.0 4.8 2.3 5.6 17.0 Bharti Infratel REDUCE 321 335 4.5 592,799 8,857 1,897 14.5 15.8 17.5 15.3 8.9 10.7 22.1 20.3 18.4 9.8 9.0 8.3 3.6 3.5 3.3 3.3 3.4 3.9 15.3 17.3 18.5 12.7
IDEA RS 107 - - 386,242 5,771 3,601 (2.4) (10.2) (8.0) (127.5) (335.1) 22.2 (45.6) (10.5) (13.5) 9.1 12.0 9.6 1.7 2.0 2.4 - - - (3.5) (17.7) (16.3) 27.8 Tata Communications ADD 742 670 (9.6) 211,342 3,158 285 23.1 22.7 28.6 1,306.8 (1.9) 26.5 32.1 32.7 25.9 9.3 8.3 7.5 863.1 31.5 14.2 0.9 0.9 0.9 (334.2) 185.4 75.5 9.2 Telecom Cautious 2,621,652 39,169 (39.1) (74.6) 243.2 45.8 180.2 52.5 7.9 8.5 7.3 2.4 2.5 2.5 1.1 1.0 1.4 5.3 1.4 4.8 66.6 Utilities Adani Power SELL 36 24 (34.0) 127,257 1,901 3,334 (2.0) 4.2 4.2 (233.7) 315.3 (0.2) (18.6) 8.6 8.6 8.8 6.3 6.0 1.8 1.5 1.3 — — — (9.3) 18.9 15.9 5.7 CESC ADD 866 650 (24.9) 114,814 1,715 133 51.4 70.8 92.0 83.9 37.8 30.0 16.9 12.2 9.4 8.3 7.6 6.7 1.2 1.1 1.0 1.2 1.2 1.3 7.4 9.7 11.7 5.8 JSW Energy ADD 62 70 12.5 102,011 1,524 1,640 5.0 6.5 6.8 (33.6) 28.4 5.3 12.3 9.6 9.1 6.6 5.7 5.2 1.1 1.1 1.0 3.2 3.2 3.2 9.4 11.4 11.2 3.8 NHPC ADD 30 32 6.0 334,334 4,995 11,071 2.9 3.4 3.6 21.6 17.6 6.7 10.5 8.9 8.3 9.6 7.2 6.3 1.0 1.0 1.0 5.3 6.3 6.6 10.0 11.3 11.6 4.3 NTPC BUY 173 185 7.2 1,422,343 21,250 8,245 12.1 15.3 16.5 5.4 26.0 8.2 14.2 11.3 10.4 11.7 9.8 8.2 1.5 1.4 1.3 2.1 2.7 2.9 10.9 12.7 12.6 12.5 Power Grid BUY 203 230 13.3 1,062,274 15,871 5,232 14.3 15.7 17.7 25.9 9.2 13.2 14.2 13.0 11.4 9.8 8.5 7.5 2.2 1.9 1.7 1.4 1.6 1.8 16.5 15.9 15.9 16.2
Reliance Power SELL 44 37 (15.8) 123,285 1,842 2,805 4.2 4.5 5.1 (13.8) 7.7 13.8 10.5 9.7 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 83 87 4.3 225,578 3,370 2,800 6.8 7.3 9.9 24.5 6.5 35.9 12.2 11.4 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 3,511,898 52,469 6.8 26.9 11.5 14.3 11.2 10.1 10.0 8.4 7.4 1.5 1.3 1.2 2.0 2.4 2.6 10.3 12.0 12.2 55.5 Others Astral Poly Technik SELL 445 360 (19.1) 53,278 796 120 10.2 13.0 16.1 21.0 28.2 23.2 43.8 34.1 27.7 22.5 18.0 14.7 6.4 5.4 4.6 0.1 0.1 0.2 15.0 17.1 17.9 0.4 Cera Sanitaryware REDUCE 2,563 2,140 (16.5) 33,328 498 13 74.2 89.0 104.4 15.6 20.0 17.3 34.6 28.8 24.6 20.5 17.1 14.6 6.5 5.4 4.4 0.4 0.4 0.4 20.7 20.5 19.8 0.2 Dhanuka Agritech BUY 773 860 11.2 38,680 578 50 26.1 30.8 37.8 24.8 18.1 22.7 29.7 25.1 20.5 21.0 17.4 13.9 6.6 5.5 4.5 0.9 1.1 1.4 24.5 23.9 24.3 0.3 Godrej Industries REDUCE 516 390 (24.4) 173,499 2,592 336 17.6 20.6 21.7 22.4 17.0 5.0 29.3 25.0 23.8 21.9 19.6 19.6 4.3 3.7 3.3 0.3 0.3 0.3 15.8 16.1 14.7 2.8 HSIL ADD 291 325 11.7 21,027 314 72 16.1 19.1 22.0 30.5 18.9 15.2 18.1 15.2 13.2 8.2 6.9 6.2 1.4 1.3 1.2 1.4 1.4 1.4 8.2 9.1 9.8 0.4 InterGlobe Aviation ADD 831 1,060 27.6 300,199 4,485 351 46.6 66.8 85.2 (17.9) 43.4 27.5 17.8 12.4 9.7 13.2 8.4 6.4 12.6 8.9 6.5 2.8 4.0 5.1 82.5 84.0 77.2 2.7 Kaveri Seed BUY 477 540 13.3 32,922 492 69 25.9 35.8 43.8 3.1 38.5 22.2 18.4 13.3 10.9 15.4 10.3 8.1 3.2 2.8 2.4 1.6 2.3 3.2 18.5 22.5 23.8 4.8 PI Industries ADD 904 940 4.0 124,323 1,857 136 31.4 36.1 42.2 35.8 14.9 17.0 28.8 25.0 21.4 22.5 18.7 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 4.1 46,692 698 194 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 1.2 1.4 1.5 18.6 19.6 21.2 0.9 SRF BUY 1,601 1,910 19.3 91,913 1,373 57 84.2 95.7 113.1 14.4 13.6 18.2 19.0 16.7 14.2 11.4 9.9 8.6 3.0 2.6 2.2 0.7 0.8 0.8 16.8 16.6 17.0 6.1 Tata Chemicals ADD 564 600 6.4 143,644 2,146 255 32.0 45.1 50.6 4.6 40.8 12.2 17.6 12.5 11.1 9.1 7.2 6.3 2.1 1.6 1.5 1.8 1.8 1.8 12.5 14.7 13.9 5.3 TeamLease Services ADD 881 1,200 36.3 15,056 225 16 21.9 25.9 34.8 37.6 18.3 34.5 40.2 34.0 25.3 29.8 19.3 14.1 4.3 3.8 3.3 — — — 11.3 11.9 14.1 0.2 UPL ADD 730 800 9.6 370,125 5,530 429 34.1 43.7 51.8 7.3 28.1 18.6 21.4 16.7 14.1 12.2 10.3 8.8 3.9 3.2 2.6 0.6 0.7 0.8 21.2 21.0 20.4 15.3 Whirlpool REDUCE 985 1,000 1.5 124,950 1,867 127 25.2 30.9 38.0 28.8 22.6 22.8 39.0 31.8 25.9 23.2 19.3 15.8 8.4 7.0 5.8 — 0.6 0.8 24.2 24.0 24.5 1.0 Others 1,597,981 23,875 9.8 28.1 18.8 21.6 16.9 14.2 13.4 10.7 9.1 4.3 3.5 3.0 1.1 1.4 1.7 19.8 20.8 21.0 43.5 KIE universe 85,047,563 1,270,647 21.6 19.8 16.4 19.5 16.3 14.0 11.1 9.6 8.4 2.6 2.3 2.1 1.5 1.7 1.9 13.2 14.3 15.0 KIE universe (ex-energy) 73,856,247 1,103,444 19.3 24.2 18.6 21.9 17.6 14.9 12.3 10.5 9.0 2.9 2.6 2.3 1.4 1.6 1.8 13.2 14.8 15.7
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$)= 66.93 Source: Company, Bloomberg, Kotak Institutional Equities estimates
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February 14, 2017
120
India Daily Summary - February 14, 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% 10% 60% 50% 40% 30% 20% 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.
121 Economy
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