ambit insights - 6 august 2013

8/22/2019 Ambit Insights - 6 August 2013

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AMBIT INSIGHTS6 August 2013

DAILY

Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit

Capital may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.

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

Analyst Notes: Derivatives: Reiterating Nifty changes expectationsGaurav Mehta, +91 22 3043 3255

As we near the semi-annual review of the Nifty, which is usually announced around

mid-August, we reiterate our expectation that United Spirits and Wipro are strongly placed to be included in the Nifty (replacing Reliance Infrastructure and Ranbaxy)based on the various replacement criteria, including free-float market cap andliquidity.

Amongst other contenders, if either United Spirits or Wipro do not make it in for somereason, Zee and Yes Bank will be closely tied for the third position. On exclusions,although Sesa Goa fulfills the technical criteria for a Nifty exit, we believe it shouldsurvive owing to the impending merger with Sterlite which could potentially triple itsfree-float market cap from current levels.

Empirically , in the run-up to the actual changes, inclusions tend to outperformexclusions (click here for further details) Source: Ambit Capital research

Results Update

Ambuja Cements (SELL)Experts raise several red flags

Engineers India Ltd (BUY) Fifth consecutive quarter of disappointment

Results Expectation

Tata Power (BUY, 35% upside)

Crompton Greaves (SELL, 15% upside)

Bajaj Electricals (BUY, 41% upside)

Ashoka Buildcon (BUY, 53% upside)

Derivatives

Alpha This Week An alternative take on markets

(Click here for detailed note)

Coverage stocks with more than

25% upside/(downside)BUYs

TP(Rs)

Upside(%)

FY14P/E

Torrent Power 272 292 7

Adani Power 81 152 12

J Kumar 375 148 5

Union Bank 285 137 3

JSW Energy 75 111 4

Ashok Leyland 25 105 10

HPCL 381 100 5

Ashoka Buildcon 108 98 3

Tata Steel 406 95 7

IOCL 376 93 6

Motilal Oswal 143 91 7LIC Housing Fin 310 81 6

Sadbhav 133 81 67

VA Tech 703 79 9

NALCO 44 77 10

Greaves Cotton 106 76 9

GSPL 88 76 9

Oberoi Realty 305 74 8

Engineers India 220 64 8

Sobha 482 68 11

BPCL 470 67 10

Gujarat Pipavav* 72 61 17

Bank of Baroda 810 61 4

Federal Bank 565 59 5IDFC 167 58 9

TVS Motor 48 58 6

Magma Fincorp 123 54 6

Petronet LNG 184 53 9

Voltas 113 51 10

Prestige Estate 185 50 11

Balkrishna Inds 300 44 6

ICICI Bank 1,295 43 11

ONGC 394 43 9

Bajaj Electrical 251 41 13

South Indian Bnk 29 38 5

Larsen & Toubro 1,113 37 17

GAIL 415 36 10City Union Bank 63 34 4

Tata Power 111 33 14

eClerx 958 29 10

Maruti Suzuki 1,700 27 14

Persistent Syst 677 25 9

Cummins India 488 25 18

SELLsTP

(Rs)Downside

(%)FY14

P/E

Jubilant Food 856 (25) 48

Source: Company, Ambit Capital research,Note: * indicates December ending

http://webambit.ambit.co/reports/Ambit_Derivatives_NiftyIndex_26Jul2013.pdf



http://webambit.ambit.co/reports/Ambit_AlphaThisWeek_06Aug2013.pdf







AMBIT INSIGHTS

Ambit Capital Pvt Ltd 6 August 2013

Ambuja CementsExperts raise several red flags

In an expert call hosted by us yesterday with Institutional Investor Advisory Services (IIAS), the experts highlighted that Holcim’s rearrangement of itsIndian entities is unfair on the minority investors, as: (a) such a merger

will not achieve any significant synergies and Holcim should have done acomplete merger; (b) minority shareholders are not given the right toparticipate in the Rs35bn payout by Ambuja to Holcim; and (c) theproposed post-merger Greenfield expansion of Ambuja at Rs45bn isnearly 2x the cost at which it was originally planned in CY06-07. Our post-event Ambuja valuation will be reduced to Rs155—Rs111 for its cementbusiness (implying 9.0x one-year forward EBITDA) and Rs44 for its ACCownership—factoring in gradual synergy benefits, a 20% holding company discount and a higher WACC of 14%. We expect market share losses for

Ambuja and pressure on profitability from weak price recovery.

The key questions raised by the experts (one of whom is a former CEO of Ambuja) are:

Why not a complete merger with a share swap? The experts believed that amerger through a share swap which does not involve cash would have been anefficient method of combining the operations, both from a valuation (as there would be no holding company discount and the market would ascribe a commonmultiple to the combined entity) and cost optimisation/synergies point of view.They stated that the brands can co-exist as is the case with multiple companies inIndia and abroad; in India, Shree Cement and UltraTech (UltraTech and BirlaSuper) have more than one brand. Furthermore, concerns around a “culturemismatch” seem strange as both these companies have been operating under Holcim (which has operations in several countries with different cultures) since

CY05/06. What synergies is the management talking about? The managementsuggests Rs9bn of cost savings through optimisation of supply chain and fixedcosts. We believe that the company would be able to, at best, realise half theoutlined savings; however, the experts did not see any such synergies. They argued that the companies have been in common control of Holcim since CY06and any potential synergies would have already been already realised.Furthermore, other transactions like clinker-swap are a regular feature in theindustry and it does not need combined operations.

What is new about the re-investment? Holcim affirms its commitment towards Ambuja by highlighting the re-investment of Rs45bn in capacity expansion (overallexpansion of 4.5mn tonnes in Marwar-Mundwa, Rajasthan). The experts

highlighted that this is nothing new and has been in the pipeline for several years.Furthermore, Ambuja already had the land and mining lease for this expansion (ascited in several previous annual reports). Furthermore, the expert believes that hadthe expansion been done according to the original plan, the overall cost wouldhave been much lower (~Rs25bn as compared to the Rs45bn highlighted now).

Why invest further in ACC?: Ambuja’s board has approved a 10% acquisition of ACC’s shares in a phased manner for Rs30bn. This appears strange as whilst itdoes not add significant value to Ambuja, it would result in leveraging its balancesheet. We believe that the company can meet the capital requirement for theaforementioned expansion with internal accruals with only some cash to spare;hence, the investment in ACC would require debt intake (Our CFO estimate over

CY13-15 is Rs5.8 bn).

SELL

Result Update

Stock Information

Bloomberg Code: ACEM IN

CMP ( ` ): 177

TP ( ` ): 163

Mcap ( ` bn/US$ bn): 274/4.5

3M ADV ( ` mn/US$ mn): 546/8.9

Stock Performance (%)

1M 3M 12M YTD

Absolute (7) (6) (3) (12)

Rel. to Sensex (5) (4) (14) (10)

Source: Bloomberg, Ambit Capital research

Ambit Estimates (` bn)

CY12 CY13 CY14

Revenues 97.3 100.8 110.1

EBITDA 24.7 22.1 24.6

EPS ( ` ) 8.5 7.7 9.9


Analysts

Nitin [email protected]: +91 22 3043 3241

Achint [email protected]: +91 22 3043 3173



AMBIT INSIGHTS


Why did Ambuja SELL its stake in ACC during CY07-C08? Ambuja CementIndia Limited (ACIL) (an associate company of Ambuja Cement — 33% stake) held42.8% in ACC. Over CY07-08, Ambuja’s 33% stake was sold to Holcim for acombined value of Rs 16bn (~Rs620 share), which raises a question that if Ambujahad to anyway acquire ACC in the future why did it sell its holding in the firstplace?

Why would Holcim continue to hold 0.29% in ACC through Holderind?

Whilst Holcim would cede its entire shareholding in ACC through Holcim India, it would continue to hold 0.29% in ACC through Holderind. Whilst the rationale for this is unknown, the experts believe it could be to continue receiving royalty fromboth ACC and Ambuja. After the 0.5% royalty increase in December 2012, Holcimcharges 1.0% of overall sales as royalty to both ACC and Ambuja (without brandor any significant technology transfer). Holcim received Rs1bn from ACC and Ambuja as royalty in CY12 which is likely to go up to Rs2bn-2.5bn in CY13. Giventhat Holcim would not be the holding company of ACC after the re-organisation, itis important for investors to understand the future royalty arrangement.

The deal in its entirety:

As it stands, the proposed restructuring is a twin transaction and should be

construed in its entirety; the relevant provisions of the Companies Act, 1956, thatapply in this case are:

(a) Rs 35bn for acquisition of Holcim 24% stake in Holcim India: In this case,section 372A of the Companies Act,1956 is applicable. This section conferspower to the board (with a unanimous approval) to invest or give loans to another body corporate. The important thing to note is that a ’special resolution‘ is notrequired if the investment/loan is less than 60% of the paid-up capital and freereserves or 100% of free reserves. As on CY12, Ambuja’s paid-up capital andfree reserves sum up to Rs86bn and hence the proposed investment of Rs35bn is well within the cap.

What does it mean for the minority shareholders?From the reading of the aforementioned section and the discussion with theexperts, it appears that Holcim can validate the entire transaction withoutresorting to minority votes since an ordinary resolution (~50% ofshareholders vote in favour as against 75% required in case of a specialresolution) would be enough for the deal to pass through. This will bedetrimental for the minority as it wipes out Rs35bn of cash from Ambuja’s balancesheet for a 24% stake in Holcim India.

(b) Merger of Holcim India into Ambuja by issuing 450mn fresh shares toHolcim: In this case, section 80 (1A) of the companies act is applicable. The saidsection requires a “special resolution” in case of increase in the subscribed capitalof the company.

What does it mean for the minority?

The minority will have a say and can refute the transaction with >50% of theminority shareholders voting against it. However, it would not make sense, sinceafter the first transaction, it would be more beneficial for them to accept the entiretransaction and in turn a majority stake in ACC (for Rs35bn cash and 28% dilution;the value of both being broadly equivalent to ACC’s current market cap). Whilstinvestors would likely ascribe a holding company discount, it is still better than anon-controlling interest in ACC, which we believe is value-destructive to a higher extent.



AMBIT INSIGHTS


The management has indicated in media interviews as well as investor conferencecalls that it is keen to go ahead with the transaction in its entirety and if the secondleg of the transaction does not go through, it will not pursue the primary leg of cash pay-out. It appears to us apart from the Companies Act,1956 and the SEBIguidelines, certain RBI guidelines may also be applicable as suggested by thefollowing media article—http://goo.gl/8C5T8U

Our view:

Our discussions with several investors suggests that the transaction is not asdetrimental as it is made out to be. Investors highlight that the cash extraction of Rs35bn should be seen in light of Ambuja’s recent history of low re-investmentgiven Holcim’s global financial position. This means that the cash would anyway not be available to the minority shareholders (either by share buybacks or dividend). Hence, even after factoring in the holding company discount, theinvestment in ACC is broadly value-neutral. Whilst we did not approve of thetransaction, we held a similar view (highlighted in our note—one-sided transaction ) that the current transaction is value-neutral or marginally value-destructive for Ambuja’s shareholders. We believe investor’s interest would be served better if the

companies merge in the future, as it removes the holding company discount andincreases the valuation of the combined entity.

Valuation and recommendation

The partial synergy benefits increase our cement business valuation for Ambujaand ACC despite considering a higher WACC of 14% (from 13.5%) for inaptcorporate governance behaviour. Incorporating the revised capital structure of Ambuja (29% dilution, near all cash holding outflow) and a well-deserved holdingcompany discount for its holding in ACC, our post-event valuation of Ambuja willbe Rs155 (Rs163 currently)—Rs111 for its cement business (implying 9.0x one-year forward EBITDA) and Rs44 for ACC. We continue to expect market share losses for Ambuja and pressure on profitability from weak price recovery and continuinghigher costs.

http://webambit.ambit.co/reports/Ambit_AmbujaCement_CompanyUpdate_25Jul2013.pdf







AMBIT INSIGHTS


Income Statement

Profit and Loss CY12 CY13E CY14E CY15E

Revenue 97,303 100,873 110,151 123,182

Total expenses 72,572 78,783 85,455 94,399

EBITDA 24,731 22,090 24,696 28,783

Depreciation 5,653 5,770 6,382 7,482

EBIT 19,078 16,320 18,314 21,301PBT 19,019 19,069 21,556 24,483

Provision for taxation 6,048 7,228 6,467 7,345

Adjusted PAT 15,744 13,012 15,089 17,138

EPS (Rs) 8.5 7.7 9.9 11.2

Source: Company, Ambit Capital research

Balance Sheet (numbers subject to downward revision)

Balance Sheet CY12 CY13E CY14E CY15E

Total Networth 88,050 96,371 105,786 116,088

Loans 428 - - -

Sources of funds 93,961 101,853 111,268 121,571

Net block 58,624 66,909 79,004 90,553

Capital work-in-progress 5,201 5,201 5,201 5,201

Investments 43,863 45,184 45,094 46,778

Total Current Assets 30,298 31,010 33,601 36,531

Current liabilities and provisions 13,566 14,174 11,494 10,247

Net current assets 93,961 101,854 111,269 121,571

Application of funds 88,050 96,371 105,786 116,088


Cash flow statement (numbers subject to downward revision)

Cash Flows CY12 CY13E CY14E CY15E

PBT 19,019 19,069 21,556 24,483

Depreciation 5,653 5,770 6,382 7,482

CFO before change in WC 25,394 22,091 24,696 28,783

Change in working capital (417) 1,685 (456) (794)

CFO 18,578 16,549 17,772 20,644

Capex (6,870) (14,055) (18,477) (19,031)

CFI (3,929) (9,753) (15,234) (15,849)

Proceeds from borrowings 94 (428) - -

CFF (5,044) (4,502) (5,675) (6,835)

Net change in cash 9,605 2,294 (3,137) (2,041)


Ratios and Valuations

Performance ratios (%) CY12 CY13E CY14E CY15E

EBITDA margin 25.4 21.9 22.4 23.4

RoCE 17.0 13.8 14.2 14.7

RoE 15.4 12.8 14.9 15.4

RoIC 29.2 24.7 23.6 22.7

P/E (x) 17.3 20.9 18.0 15.9

EV/EBITDA (x) 9.2 10.3 9.3 7.9

EV/tonne (US$) 167 148 148 148




AMBIT INSIGHTS


Engineers India LtdFifth consecutive quarter of disappointmentEngineers India’s (EIL) significant revenue miss (24% lower than ourestimates) was yet again due to materially lower revenues in the lumpsumturnkey projects (LSTK) segment (49% lower than our estimates). WhilstEBITDA growth continued to disappoint, EBITDA margins improved due tohigher share of the consulting business. The revenue decline in the LSTK segment would decelerate to 9% in 2HFY14, as EIL executes the largeRs6.7bn order won in August 2013. We have further cut our revenue andEBITDA estimates for FY14-15 by 5% due to slow LSTK execution. We expectrevenues and PAT to decline by 10% and 4% in FY14 respectively. Anoperational recovery catalyst will remain absent but a special dividendand FPO over the next 3-4 months could be catalysts for the stock. Thestock is currently trading at 8.0x FY14 EPS and 4.4x FY14 EBITDA. We retainour BUY stance.

1QFY14 performance - lower LSTK revenues despite a reasonable order

book is a concern: EIL’s 1QFY14 reported topline was disappointing; revenuedeclined by 38% YoY (24% below our estimates). The sharp decline in revenues was mainly due to a 67% YoY decline in lumpsum turnkey projects (LSTK). Webelieve the closing order book in the LSTK segment was Rs14bn at end-FY13.However, EIL booked revenues of only Rs1.44bn in 1QFY14. Revenues from theConsulting business increased 3% YoY, in line with our estimates. Whilst EBITDA was 14% below our estimates due to lower LSTK revenues, EBITDA margins were319bps above our estimates due to: (a) higher share of the Consulting segment,and (b) higher-than-expected LSTK margins. The PAT decline was lower than thesales decline due to lower tax expenses. During 1QFY14, EIL booked deferred tax assets of Rs115mn. (For details please see Exhibit 1 on the next page.)

Business diversification to mitigate slowdown in Indian oil and gas sector:

To reduce its dependency on the Indian oil and gas sector, EIL is trying to diversify its business by targeting (a) emerging markets and (b) new sectors. During FY13,EIL won orders in new markets such as Bangladesh, Indonesia and Nigeria.Further, EIL won consulting projects in diverse sectors such as LNG, fertiliser, solar power, waste water treatment and nuclear power in addition to its main expertisearea: oil and gas. In FY13, other income increased by 36% YoY due to a one-off increase in provisions written back to Rs701mn vs Rs147mn in FY12. Workingcapital continues to increase due to a simultaneous increase in receivables daysand decrease in advances from customers. Unless the LSTK order inflow improvesmaterially, we do not see an improvement in working capital. However, workingcapital still remains negative.

Where do we go from here? We were negatively surprised by the sharp decline

in revenues of the lumpsum turnkey projects segment in 1QFY14. Thus, we willhave to model slower execution of the remaining order book of Rs14bn. We expectthe slippage in LSTK revenue to decelerate, as EIL has won a large LSTK order of Rs6.7bn from Chennai Refinery. Hence, we have estimated a revenue decline of 11% YoY in LSTK for the last nine months of FY14 (significantly lower than the 67% YoY decline in 1QFY14). As a result, our consolidated revenues estimates aredowngraded by 5% YoY for both FY14 and FY15. We have reduced our EBITDA estimates in line with the cut in revenue growth. However, we have further revisedour EBITDA margins estimates to account for the higher share of the Consultingbusiness. The increased proportion of the Consulting business is due to lower LSTK revenues; we have not changed our consulting revenues. We expect workingcapital turnover of the company to further deteriorate due to lower advances from

customers in the current scenario where revenues are declining and liquidity islow. Due to lower EBITDA and increase in working capital days, our operating cashflow estimates have been revised downwards by 4%.

BUY Result Update

Stock Information

Bloomberg Code: ENGR INCMP ( ` ): 134

TP ( ` ): 220

Mcap ( ` bn/US$ bn): 45/0.7

3M ADV ( ` mn/US$ mn): 18/0.3

Stock Performance (%)

1M 3M 12M YTD

Absolute (5) (25) (44) (42)

Rel. to Sensex (4) (23) (55) (41)


Ambit Estimates (` mn)

FY14 FY15 FY16

Revenues 21,861 20,081 24,225

EBITDA 5,508 5,440 6,446

EPS ( ` ) 16.7 17.0 19.0


Analysts

Nitin [email protected]: +91 22 3043 3241

Tanuj Mukhija

[email protected]: +91 22 3043 3203



AMBIT INSIGHTS


Valuation and recommendation: EIL’s stock is currently trading at 8.0x our revised FY14 EPS of Rs16.7 (earlier Rs17.0/share). The stock is currently trading at4.4x FY14 EV/EBITDA. Our expectation of lower revenues, stable/declining EBITDA margins and near-term order inflow concerns will limit any material re-rating inthe near term. Whilst we see limited upside in the near term, we continue tobelieve that most companies in the E&C sector have lost their competitiveness onaccount of higher debt. However, EIL has the competitiveness and flexibility to bid

competitively against Indian and international peers for hydrocarbon contracts(awarded on lowest-cost basis), thanks to the company’s strong balance sheet (noleverage), cash flow generation profile, large talent pool and governmentrelationships. Whilst near-term revenue visibility is poor, the long-term opportunity will be driven by the 5-7% demand CAGR in petroleum products and 10-11%demand CAGR in petrochemicals. Near-term catalysts for the stock will be thepossible large dividend payouts ahead of the follow-on public offering (FPO). Wereduce our target price to Rs220 (from Rs227 earlier) and maintain our BUYstance.

1QFY14 quarterly financials (Rs mn unless specified)

Particulars 1QFY14 1QFY13 4QFY13 YoY (%) QoQ (%) Ambit estimates deviation Comments

Revenue 4,432 7,200 5,135 -38% -14% 5,837 -24%

Revenue below our estimates

due to 49% YoY decline in LSTK revenues; Consulting revenues were in line.

Total operating expense 3,267 5,691 3,789 -43% -14% 4,489

% of sales 73.7% 79.0% 73.8% 76.9%

EBITDA 1,165 1,509 1,346 -23% -13% 1,348 -14%

EBITDA margin 26.3% 21.0% 26.2% 532bps 6bps 23.1% 319bps

Whilst EBITDA declined, EBITDA margins were higher due tohigher proportion of Consultingrevenues.

Depreciation 25 25 25 -1% -2% 37 -34%

EBIT 1,140 1,485 1,321 -23% -14% 1,311 -13%

EBIT margin 25.7% 20.6% 25.7% 511bps 0bps 22.5% 327bps

Other income 680 733 1,053 -7% -35% 766 -11%

Interest 0 0 (1)

PBT 1,821 2,217 2,375 -18% -23% 2,077 -12%

PBT margin 41.1% 30.8% 46.2% 1028bps -517bps 35.6% 550bps

Below our estimate due to lower revenues and lower other income.

Tax Expenses 527 674 640 -5% 0% 667 -4%

Tax rate 29.0% 30.4% 26.9% 32.1%

PAT 1,293 1,543 1,807 -16% -28% 1,410 -8%

PAT margin 29.2% 21.4% 35.2% 775bps -601bps 24.2% 503bps

PAT was approximately in linedue to lower taxes.




AMBIT INSIGHTS


1QFY14 segment-wise performance (Rs mn unless specified)

Particulars 1QFY14 1QFY13 4QFY13 YoY (%) QoQ (%) Ambit estimates deviation

Revenues

Consultancy and engineering 2,991 2,892 3,027 3% -1% 3,036 -1%

Lumpsum turnkey projects 1,440 4,308 2,108 -67% -32% 2,800 -49%

Total Income4,432

7,200 5,135 -38% -14% 5,836 -24%

% share of revenues

Consultancy and engineering 67% 40% 59% 52%

Lumpsum turnkey projects 33% 60% 41% 48%

Total Income 100% 100% 100% 100%

PBIT

Consultancy and engineering 1,172 1,203 1,336 -3% -12% 1,275 -8.0%

Lumpsum turnkey projects 103 450 152 -77% -32% 182 -43.4%

Total PBIT1,275

1,653 1,488 -23% -14% 1,457 -12.5%

PBIT margins (%)

Consultancy and engineering 39.2% 41.6% 44.1% -240bps -494bps 42.0% -280bps

Lumpsum turnkey projects 7.1% 10.4% 7.2% -330bps -5bps 6.5% 65bps

Total PBIT margin 28.8% 23.0% 29.0% 582bps -19bps 25.0% 381bps


Consistent de-rating in one-year forward P/E due todisappointing results

5

7

9

11

13

A p r / 1 2

J u n / 1 2

A u g / 1 2

O c t / 1 2

D e c / 1 2

F e b / 1 3

A p r / 1 3

J u n / 1 3

1 year forward PE

Average 1 year fwd PE (x)


EIL trades at a 21% discount to 30-month average one- year forward EV/EBITDA

3

4

5

6

7

8

9

A p r - 1 2

J u n - 1 2

A u g - 1 2

O c t - 1 2

D e c - 1 2

F e b - 1 3

A p r - 1 3

J u n - 1 3

1 year forward EV/EBITDA Average 1 year forward EV/EBITDA




AMBIT INSIGHTS


Key changes in assumptions (Rs mn, unless mentioned otherwise)

Key assumptions Old estimates New estimates% change in

estimates

Particulars FY14E FY15E FY14E FY15E FY14E FY15EComments

Order book 31,377 35,778 32,648 38,067 4% 6%

YoY growth (%) -9.1% 14.0% -5.4% 16.6% 369bps 257bps

Order flow 20,000 25,500 20,000 25,500 0% 0%

YoY growth (%) 39.1% 27.5% 39.1% 27.5% 0bps 0bps

Consultancy Segment 10,000 13,500 10,000 13,500 0% 0%

LSTK segment 10,000 12,000 10,000 12,000 0% 0%

We have kept our order inflow estimatesunchanged. Our order book estimates haveincreased ~5% due to delay in execution of LSTK order backlog

Revenues 23,133 21,098 21,861 20,081 -5% -5%

YoY growth (%) -8% -9% -13% -8% -507bps 65bps

Consultancy segment 12,959 12,959 12,959 12,959 0% 0%

YoY growth (%) 5% 0% 5% 0% 0bps 0bps

LSTK segment 10,174 8,139 8,902 7,122 -13% -13%

YoY growth (%) -20% -20% -30% -20% -1000bps 0bps

We have further downgraded our LSTK revenueestimates to a 30% decline YoY in FY14 (vs the 20%

YoY decline earlier). We have kept our Consultingsegment revenues unchanged

EBITDA 5,759 5,660 5,508 5,440 -4% -4%

EBITDA margin 24.9% 26.8% 25.2% 27.1% 30bps 27bps

Whilst we have cut our EBITDA estimates, our EBITDA margins have increased by ~30bps due tohigher proportion of higher-margin Consultingbusiness

PBT before EO 8,584 8,404 8,294 8,415 -3% 0%

PBT margin 37.1% 39.8% 37.9% 41.9% 83bps 207bps

Adjusted PAT 5,843 5,721 5,630 5,712 -4% 0%

Net margin 25.3% 27.1% 25.8% 28.4% 49bps 133bps

EPS (Rs.) 17.3 17.0 16.7 17.0 -4% 0%

PBT margins are higher than EBITDA margins dueto high other income earned on the cash balanceof ~Rs19bn as on FY13. However, lower EBITDA margin leads to a decline in our PBT estimate

Gross block turnover 4.0 4.0 2.8 2.1 Working capital turnover will deteriorate due tolower advances from customers

CFO 7.4 5.6 9.6 6.0Lower revenue growth and EBITDA will lead tolower CFO as compared to earlier estimates


Ambit vs consensus (` mn, unless mentioned)

Consensus Ambit Divergence Comments

Revenue (Rs mn)

FY2014 25,580 21,861 -14.5%

FY2015 27,145 20,081 -26.0%

We are bearish than consensus estimates on revenue growth,as we expect lumpsum turnkey projects revenues to decline by 30% YoY in FY14 and 20% YoY in FY15.

EBITDA (Rs mn)

FY2014 6,170 5,508 -10.7%

FY2015 6,426 5,440 -15.3%

Although our EBITDA forecasts are lower than consensus, our EBITDA margins are higher than consensus. We believe that the share of consultation projects will increase, thereby increasing margins.

EPS (adjusted) (Rs)

FY2014 17.4 16.7 -4.0%

FY2015 18.3 17.0 -7.4%

Our PAT estimates are below consensus despite higher-than-consensus other income.




AMBIT INSIGHTS


Profit and loss (consolidated) (` mn, unless mentioned)

Y/E March (Rs mn) FY12 FY13 FY14E FY15E FY16E

Operating Income 37,234 25,290 21,861 20,081 24,225

% growth 30.7% -32.1% -13.6% -8.1% 20.6%

EBITDA 7,201 5,986 5,508 5,440 6,446

EBITDA margin 19.3% 23.7% 25.2% 27.1% 26.6%

Other income 2,322 2,668 2,913 3,178 3,336

Adjusted PBT 9,291 8,529 8,294 8,415 10,299

% growth 15.5% -8.2% -2.8% 1.5% 22.4%

Adjusted consolidated PAT 6,427 5,869 5,630 5,712 6,413

% growth 17.3% 23.2% 25.8% 28.4% 26.5%

EPS (Adjusted) (Rs.) 19.1 17.4 16.7 17.0 19.0


Balance Sheet (consolidated) (` mn, unless mentioned)

Particulars (Rs mn) FY12 FY13 FY14E FY15E FY16E

Share capital 1,685 1,685 1,685 1,685 1,685

Reserves and surplus 17,303 21,268 24,403 26,785 28,711

Total Networth 18,988 22,952 26,088 28,469 30,396

Sources of funds 18,988 22,952 26,088 28,469 30,396

Net block 565 536 1,011 2,306 2,331

Investments 6,285 6,474 6,474 6,474 6,474

Cash and bank balances 16,870 18,908 21,145 24,329 27,522

Sundry debtors 3,158 3,439 3,294 3,081 3,982

Inventories 141 679 319 328 446

Loans and advances 2,437 1,141 1,495 1,435 1,780

Total Current Assets 28,520 28,335 30,756 33,411 38,791

Current liabilities and provisions 19,048 16,121 15,881 16,154 19,634

Net current assets 9,472 12,214 14,875 17,256 19,157

Application of funds 18,988 22,952 26,088 28,469 30,396


Cash flow statement (consolidated) (` mn, unless mentioned)

Particulars FY12 FY13 FY14E FY15E FY16E

Cash flow from operations 1,135 3,421 1,106 2,749 3,636

Capex (401) (799) (600) (200) (300)

Cash flow from investment 694 (658) 2,313 2,929 2,887

Cash flow from financing (2,350) (2,741) (1,183) (2,495) (3,330)

Free cash flow 737 2,625 506 2,549 3,336


Key ratios

Particulars FY12 FY13 FY14E FY15E FY16E

Net debt/Equity (0.9) (0.8) (0.8) (0.9) (0.9)

Working capital turnover (x) 11.8 4.5 2.8 2.1 2.3

ROCE 28.6% 19.7% 14.9% 13.0% 14.2%

ROE 37.9% 28.0% 23.0% 20.9% 21.8%

P/E (x) 7.0 7.7 8.0 7.9 7.0

P/B (x) 2.4 2.0 1.7 1.6 1.5 Source: Company, Ambit Capital research



AMBIT INSIGHTS


Crompton Greaves: 1QFY14 results expectation(CRG IN, mcap US$1.1bn, SELL, TP Rs94, 15% upside)Analyst: Bhargav Buddhadev, [email protected], Tel: +91 22 3043 3252

Crompton Greaves will announce its 1QFY14 results today. We expect the company’s topline to increase by only 10% YoY to Rs31bn, as the problems in the domestic and overseas power businesses have continued to persist.EBITDA margins would likely decline by 90bps YoY to 5% due to a gross margin decline of 230bps YoY.Consequently, we expect EBITDA to decline by 7% YoY to Rs1.5bn. Further, due to the higher interest burden, PBTwould likely decline 17% YoY to Rs1,068mn. However, we expect PAT to remain flat at Rs855mn on account of lower tax provision (20% vs 34.4% in 1QFY13). The stock is currently trading at 10.5x FY14E earnings.

Results expectation (Rs mn, unless specified)

Particulars 1QFY14E 1QFY13 4QFY13 YoY(%) QoQ(%)

Sales 30,968 28,111 33,873 10% -9%

EBITDA 1,548 1,668 779 -7% 99%

EBITDA margin (%) 5.0% 5.9% 2.3% (90)bps 270bps

PBT 1,068 1,294 169 -17% 532%

PAT 855 849 253 1% 238%


Tata Power: 1QFY14 results expectation(TPWR IN, mcap US$3.2bn, BUY, TP Rs111, 35% upside)Analyst: Bhargav Buddhadev, [email protected], Tel: +91 22 3043 3252

Tata Power will announce its 1QFY14 results today, which will be followed by a conference call at 4:30pm IST. Atthe consolidated level, we expect revenue of Rs86bn (up 20% YoY), which is likely to be primarily driven by higher

revenue from the commissioning of the Mundra UMPP. Further, we expect EBITDA to increase by 19% YoY toRs16.2bn. However, margins are likely to decline by 180bps YoY due to fall in coal realisation at Mundra (asIndonesian coal prices have declined by 16% YoY). Higher interest cost (of Rs7.2bn in 1QFY14 vs Rs5.4bn in1QFY13) are likely to result in a flat PBT of Rs4.2bn in 1QFY14. PAT however is expected to increase 14% YoY toRs1.6bn on account of lower tax provision at 50% compared to 54% in 1QFY13 due to lower profits at Bumi.

The stock is currently trading at 1.5x FY14 P/B. We retain our BUY stance.



Sales 86,305 71,976 90,324 20% -4%

EBITDA 16,168 13,566 18,554 19% -13%

EBITDA margin (%) 18.7% 18.8% 20.5% (180)bps (620)bps

PBT 4,253 4,214 7,543 1% -44%

PAT 1,660 1,459 1,813 14% -8%




AMBIT INSIGHTS


Bajaj Electricals: 1QFY14 results expectation(BJE IN, mcap US$293mn, BUY, TP Rs251, 41% upside)Analyst: Bhargav Buddhadev, [email protected], Tel: +91 22 3043 3252

Bajaj Electricals will announce its 1QFY14 results today. We expect revenues to increase by 25% YoY to Rs10.8bnled by revenue growth of 13% YoY in the lighting segment and revenue growth of 26% YoY in the consumer

durables segment. However, EBITDA margins would likely decline by 130bps YoY to 3.9%, as the Engineering andProjects (E&P) division would likely report an EBIT loss of Rs250mn (as compared to the Rs76mn loss in 1QFY13).For the consumer durables segment, margins would likely improve 100bps YoY to 5.8%. Consequently, after interest and depreciation expenses, we expect the company to report a profit of Rs107mn in 1QFY14 as comparedto Rs120mn in 1QFY13.



Sales 8,351 6,662 11,137 25% -25%

EBITDA 322 346 132 -7% 144%

EBITDA margin (%) 3.9% 5.2% 1.2% (130)bps 270bps

PBT 162 183 10 -11% 1520%

PAT 107 120 6 -11% 1683%Source: Company, Ambit Capital research

Ashoka Buildcon: 1QFY14 results expectation(ASBL IN, mcap US$125mn, BUY, TP Rs108, 53% upside)Analyst: Nitin Bhasin, [email protected], Tel: +91 22 3043 3241

Ashoka Buildcon will report its 1QFY14 results today. We expect construction business revenue to decline materially on

a QoQ basis as the company booked a majority of BOT projects’ construction revenue in 4QFY13. We expect a 600bps QoQ expansion in consolidated EBITDA margin (22.7% in 1QFY14 against 16.7% in 4QFY13) as the share of highmargin BOT revenue is expected to increase. The interest and depreciation cost is also likely to move up on account of the booking of interest and depreciation on the assets getting operational in 4Q. Thus, despite the expansion in EBITDA margin, PBT will decline both a YoY and a QoQ basis.

We maintain BUY as we believe the present valuations of 0.5x consensus FY14 book are at a significant discountfor a financially-disciplined-prudent-asset developer like Ashoka. As ~75% of the BOT asset portfolio becomesoperational by end-FY14, we expect 49% CFO CAGR over FY13-16E. Our calculation indicates an SOTP value of Rs108/share, implying 1.3x FY14E book. Post the earnings call we may revisit our BOT assets valuation for lower trafficgrowth assumptions given poor economic recovery.

Result expectations (standalone, Rs mn, unless specified)

Particulars Jun-13 Jun-12 Mar-13 YoY QoQ Comment

Sales 4,424 4,664 6,502 -5% -32%Revenue is likely to decline significnatly on a QoQ basis as thecompany booked a large part of construction income on BOT projectsin the previous quarter

EBITDA 1,004 1,024 1,085 -2% -7%

EBITDA margin (%) 22.7% 22.0% 16.7% 74 bps 600 bps

Increasing share of BOT revenue will lead to significant YoY and QoQimprovement in EBITDA margin

PBT 284 409 333 -31% -15%

PAT 297 412 259 -28% 14%

High interest and depreciation expenses will lead to a significant YoYdecline in PAT

Source: Company, Ambit capital research



AMBIT INSIGHTS


Institutional Equities Team

Saurabh Mukherjea, CFA CEO, Institutional Equities (022) 30433174 [email protected]

Research

Analysts Industry Sectors Desk-Phone E-mail

Aadesh Mehta Banking / NBFCs (022) 30433239 [email protected]

Achint Bhagat Cement / Infrastructure (022) 30433178 [email protected]

Ankur Rudra, CFA Technology / Telecom / Media (022) 30433211 [email protected]

Ashvin Shetty Automobile (022) 30433285 [email protected]

Bhargav Buddhadev Power / Capital Goods (022) 30433252 [email protected]

Dayanand Mittal Oil & Gas (022) 30433202 [email protected]

Gaurav Mehta Strategy / Derivatives Research (022) 30433255 [email protected]

Jatin Kotian Metals & Mining / Healthcare (022) 30433261 [email protected]

Karan Khanna Strategy (022) 30433251 [email protected]

Krishnan ASV Banking (022) 30433205 [email protected]

Nitin Bhasin E&C / Infrastructure / Cement (022) 30433241 [email protected] Jain Technology (022) 30433291 [email protected]

Pankaj Agarwal, CFA NBFCs (022) 30433206 [email protected]

Pratik Singhania Real Estate / Retail (022) 30433264 [email protected]

Parita Ashar Metals & Mining (022) 30433223 [email protected]

Rakshit Ranjan, CFA Consumer / Real Estate (022) 30433201 [email protected]

Ravi Singh Banking / NBFCs (022) 30433181 [email protected]

Ritika Mankar Mukherjee Economy / Strategy (022) 30433175 [email protected]

Ritu Modi Healthcare (022) 30433292 [email protected]

Shariq Merchant Consumer (022) 30433246 [email protected]

Tanuj Mukhija E&C / Infrastructure (022) 30433203 [email protected]

Utsav Mehta Telecom / Media (022) 30433209 [email protected]

Sales

Name Regions Desk-Phone E-mail

Deepak Sawhney India / Asia (022) 30433295 [email protected]

Dharmen Shah India / Asia (022) 30433289 [email protected]

Dipti Mehta India / USA (022) 30433053 [email protected]

Nityam Shah, CFA USA / Europe (022) 30433259 [email protected]

Parees Purohit, CFA USA (022) 30433169 [email protected]

Praveena Pattabiraman India / Asia (022) 30433268 [email protected]

Sarojini Ramachandran UK +44 (0) 20 7614 8374 [email protected]

Production

Sajid Merchant Production (022) 30433247 [email protected]

Joel Pereira Editor (022) 30433284 [email protected]

E&C = Engineering & Construction



AMBIT INSIGHTS

Ambit Capital P t Ltd 6 A t 2013

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Investment Rating Expected return(over 12-month period from date of initial rating)

Buy >5%

Sell <5%

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ambit insights - 6 august 2013

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