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Theme ReportAmar Ambani, research@indiainfoline.com
India Strategy
The Lucky 13
January 02, 2013
A major part of 2012 may not have been very exciting for the Indian stock market. Yet, the second half of the year brought hope of a promising 2013. Also, with 2012 behind us, the supposed ‘end of the world’ predictions would hopefully have been put to rest. Pessimists though, always manage to find a bagful of excuses to remain fearful and depressed. Bears in the stock market will cite the decelerating GDP growth and twin deficits to justify their case for a subdued performance in 2013. Although some merit in this argument, the positives will likely outweigh negatives in the coming 12 months.
Similarly, doomsday predictors may turn to the so called ominous number 13 in the New Year. However, you may be surprised to know that ‘13’ is considered lucky by many. Several successful sportspersons world over have gainfully donned this number on their T‐shirts, including the Olympic Hockey Gold winner for India, Balbir Singh. In numerology, ‘13’ has been termed lucky in many ways. Pronounced as tera, the number signifies a devotional pronouncement to God in Northern India.
In reality, it’s a case of seeing the proverbial glass ‘half full’ or ‘half empty’. Apollo 13, the failed US space program, can be considered blessed or cursed depending on how one looks at it. On one hand, the shuttle crashed and on the other, the entire crew returned home safe and sound. If the good and bad come intertwined with each other, it’s always better to live with the lesser evil and the larger gain. Given this frame of mind, one will invariably reckon luck as good alone.
We see good reason to be hopeful for equities in 2013. The Indian stock market received a fresh lease of life when the government swung into positive action following fear of an imminent country downgrade and another bout of quantitative easing announced by Central bankers around the world. We firmly believe the government policy measures will continue as downgrade fears have not been completely dispelled. Among other things, we expect it to remain focused on countering fiscal deficit through measures like direct subsidy via ‘Aadhaar’, disinvestment and introduction of Goods & Services Tax and Direct Tax Code.
Global growth trajectory is expected to be higher in 2013 compared to 2012. Coupled with expectations of benign inflation and the Fed’s intention of keeping interest rates low till 2014‐15, the environment looks largely conducive for continued money flow in Asian equities. The Rupee carry trade also favours FII flows into India. The FDI green signal in certain sectors may also help bring the much needed long term capital. We have reason to believe that the worst is over for INR; not to suggest that the Rupee is on a super appreciation spree but a major slide from here is surely ruled out.
A key market trigger is the peak out of the interest rate cycle. After two CRR cuts, we now expect a Repo rate cut of 25 basis points in the January 2013 policy review meet of RBI. There is a case for a 75‐100bps rate cut in 2013.
Some pundits reckon that the forthcoming elections may beget uncertainty. On the contrary, we are confident the elections will reset the system instead, either through a fresh mandate to Congress or by virtue of a change in mandate. The result can only be unlucky in the event of a third front assuming power.
Valuations are reasonably placed at 14.5x FY14E for the Nifty and the earnings downgrade momentum is waning. Whether the current market involves a ‘risk on’ trade or signals the start of a new bull run, the current situation presents a tactical opportunity for equities, certainly not to be missed. Let’s greet the ‘13’ in 2013 with renewed hope and measured confidence. Precisely why we recommend 13 growth stories for 2013 and beyond, in our special theme report titled ‘The Lucky 13’. Incidentally, the number is considered lucky in China and Italy; their economies could do with some luck. Coincidently, the number is considered lucky by our honourable President Pranab Mukherjee too. Let us hope the Indian economy turns better during his term.
Wishing you and your loved ones a Happy and Prosperous New Year!
Nifty: 5,951 Sensex: 19,581
The Lucky 13
2
Buy recommendation summary
Company Sector CMP (Rs)
18‐month Target (Rs)
Upside (%)
FY12‐15 PAT CAGR (%)
P/E (x) FY15E
RoE (%)FY15E
EV/EBIDTA (x) FY15E
ACC** Cement 1,432 1,755 22.6 18.5 12.4 21.5 7.1
DEN Networks Media 200 290 45.0 112.8 19.3 13.6 7.3
Dr Reddy's Pharma 1,834 2,358 28.6 21.8 13.2 26.8 8.1
Financial Tech IT 1,138 1,510 32.7 (18.7)* 16.6 10.4 18.8
ITC FMCG 287 353 23.0 18.3 21.8 40.5 15.6
Petronet LNG Oil & Gas 158 208 31.9 12.0 8.0 24.1 5.0
United Spirits Breweries 1,953 2,400 22.9 68.5 31.5 9.7 17.7
Wipro IT 397 495 24.7 12.8 12.1 19.7 7.4
Wockhardt Pharma 1,562 2,089 33.7 17.0 12.0 34.2 7.5 *FY12 included a one off large stake sale of MCX holding of Rs2.5bn ** Calendar year ending.
Financials
Company Sector CMP (Rs)
18‐month Target (Rs)
Upside (%)
FY12‐15 PAT CAGR (%)
P/BV (x) FY15E
ROA (%)FY15E
ROE (%)FY15E
HDFC Bank Financials 685 850 24.1 19.7 3.4 1.6 14.5
ICICI Bank Financials 1,159 1,500 29.4 23.5 1.7 1.7 21.7
LIC Housing Fin Financials 297 390 31.3 25.2 1.7 1.8 21.5
Shriram Trans Fin Financials 754 950 26.0 11.4 1.8 2.5 18.6 Source: India Infoline Research
Sector: Cement
Sector view: Positive
Sensex: 19,581
52 Week h/l (Rs): 1,545 / 1,082
Market cap (Rscr) : 26,851
6m Avg vol (‘000Nos): 308
Bloomberg code: ACC IS
BSE code: 500410
NSE code: ACC
FV (Rs): 10
Prices as on Jan 01, 2013
Company rating grid
Low High
1 2 3 4 5
Earnings Growth
Cash flow
B/S Strength
Valuation appeal
Risk
Share price trend
80
110
140
Dec‐11 Apr‐12 Aug‐12 Dec‐12
ACC Sensex
Share holding pattern
-
20
40
60
80
100
Dec-11 M ar-12 Jun-12 Sep-12
Promoters Institutions Others%
Rating: BUY Target (18 months): Rs1,755
CMP: Rs1,432
Upside: 22.6%
Research Analyst: Hemant Nahata
research@indiainfoline.com
ACC
Return of the up-cycle; ACC earnings set to soar Cement dispatch growth for the last four quarters has been strong bridging the gap between supply and demand which has been created since FY10. In addition, pace of order placement for new capacity has not picked up on account of 1) delays in securing the necessary clearances for limestone/land, 2) poor utilization of plants in south and 3) lower return on incremental capacity. Utilization rate, which dipped to 77% in FY12 (due to addition of 90mtpa over FY09‐12 from base of 210mtpa), is expected to recover to 81‐85% levels by FY15 as supply surplus declines. Historically, prices have improved during high utilization periods, indicating an up‐cycle in the sector. We believe ACC will be a key beneficiary of this up cycle with earnings set for an 18.5% cagr over CY11‐14 as against 4.4% cagr in CY08‐11.
Realisation to improve 12% over CY12-14 Cement realizations have improved after a small correction during the last week of November 2012. The price correction has been limited to north, west and central regions. South has surprisingly remained stable despite experiencing returning monsoon. We expect realizations to improve in north, west, east while remaining stable in south and central regions on account of supply surplus. With ~60% of ACC sales coming from high growth north, west and east regions (balance from central and south regions), we factor in a 6.3%/4.5% yoy jump in realizations in CY13/CY14.
Jamul 5mtpa plant to commence operation by H1 CY15 ACC is enhancing its capacity by 5mtpa to 35mtpa (by H1 CY15) by setting‐up a plant at Jamul, Chhattisgarh. The new capacity expansion, in our view, will be inadequate to bring market share back to CY08 levels. Going by current trends, most of the company’s plants (except south) will be running at 95% utilization levels by CY15, thereby limiting scope of further volume push. We believe up‐cycle in cement sector and strong balance sheet will prompt ACC to augment its capacity organically or inorganically in the near future. Valuation appear appealing at 13x CY14E; Recommend BUY ACC balance sheet continues to be strong with cash and cash equivalent at Rs32bn (as against 27bn a year before). Return ratios, which were on a declining mode, are expected to improve in CY13 and CY14. Debt/equity continues to remain low as most of the recent expansion has been funded through internal accruals. Despite a strong balance sheet, ACC trades at a 20% discount compared to its peers like Ultratech on EV/ton basis. We believe current valuation leaves enough room for upside and recommend BUY for an 18‐month target of Rs1,755.
Valuation summary Y/E Sales PAT EPS Change P/E EV/EBIDTA D/E RoE
March Rs mn Rs mn Rs % yoy (x) (x) (x) %
CY11 96,603 13,253 70.5 18.3 20.0 13.2 0.1 19.4
CY12E 112,282 15,068 80.2 13.7 17.6 10.5 0.1 20.0
CY13E 125,335 17,839 94.9 18.4 14.8 8.5 0.1 21.0
CY14E 138,550 21,359 113.6 19.7 12.4 7.1 0.1 21.5
Source: Company, India Infoline Research
ACC
4
Key risks Key risks to our projection remain: Fall in cement prices,
Government interference in the form of price caps, hike in duties etc and
Drought like situation leading to subdued demand.
Focus tables
Pan‐India ‐ Utilization to improve from FY13 North region to run into deficit in FY14 Mn tons FY11 FY12 FY13E FY14E FY15E
Effective Cement Cap. 271 293 310 327 349
yoy growth (%) 15.8 8.1 5.8 5.5 6.7
Possible production 251 285 297 317 336
Cement Dispatches 210 224 241 265 287
yoy growth (%) 5.5 6.7 7.6 10.0 8.3
Capacity Utilization 77.5 76.5 77.7 81.0 82.2
Surplus/(Deficit) 41.0 61.0 56.0 52.0 49.0
Mn tons FY11 FY12 FY13E FY14E FY15E
Effective Cement Cap 62 66 67 71 77
yoy growth (%) 21.6 6.5 1.5 6.0 8.5
Possible production 59 63 64 67 72
Cement Dispatches 51 56 61 69 75
yoy growth (%) 8.5 9.8 8.9 13.1 8.7
Capacity Utilization 82.3 84.8 91.0 97.2 97.4
Surplus/(Deficit) 8.0 7.0 3.0 (2.0) (3.0) Source: CMA, Companies, India Infoline research
South: Surplus to result into consolidation East : Supply to match demand in FY14 Mn tons FY11 FY12 FY13E FY14E FY15E
Effective Cement Cap. 102 110 119 123 125
yoy growth (%) 18.6 7.8 8.2 3.4 1.6
Possible production 95 111 114 121 124
Cement Dispatches 66 67 70 77 85
yoy growth (%) 3.1 1.5 4.5 10.0 10.4
Capacity Utilization 64.7 60.9 58.8 62.6 68.0
Surplus/(Deficit) 29.0 44.0 44.0 44.0 39.0
Mn tons FY11 FY12 FY13E FY14E FY15E
Effective Cement Cap. 35 37 39 41 48
yoy growth (%) 2.9 5.7 5.4 5.1 17.1
Possible production 31 37 38 39 45
Cement Dispatches 30 32 35 38 41
yoy growth (%) 3.4 6.7 9.4 8.6 7.9
Capacity Utilization 85.7 86.5 89.7 92.7 85.4
Surplus/(Deficit) 1.0 5.0 3.0 1.0 4.0 Source: CMA, Companies, India Infoline research
West : Utilization levels to remain robust Central : Stabilization of new plants to drag prices Mn tons FY11 FY12 FY13E FY14E FY15E
Effective Cement Cap. 39 44 45 48 50
yoy growth (%) 11.4 12.8 2.3 6.7 4.2
Possible production 37 41 44 47 49
Cement Dispatches 32 36 41 43 45
yoy growth (%) 6.7 12.5 13.9 4.9 4.7
Capacity Utilization 82.1 81.8 91.1 89.6 90.0
Surplus/(Deficit) 5.0 5.0 3.0 4.0 4.0
Mn tons FY11 FY12 FY13E FY14E FY15E
Effective Cement Cap. 33 36 40 44 49
yoy growth (%) 17.9 9.1 11.1 10.0 11.4
Possible production 29 33 37 43 46
Cement Dispatches 31 33 34 38 41
yoy growth (%) 6.9 6.5 3.0 11.8 7.9
Capacity Utilization 93.9 91.7 85.0 86.4 83.7
Surplus/(Deficit) (2.0) ‐ 3.0 5.0 5.0 Source: CMA, Companies, India Infoline research
ACC
5
Financials Income statement Y/e 31 Mar (Rs m) CY11 CY12E CY13E CY14E
Revenue 96,603 112,282 125,335 138,550
Operating profit 19,207 24,372 30,056 36,160
Depreciation (4,753) (5,377) (5,727) (6,588)
Interest expense (969) (1,174) (1,100) (1,020)
Other income 1,919 2,454 1,931 1,965
Profit before tax 15,404 20,276 25,160 30,517
Taxes (2,152) (5,208) (6,830) (8,465)
Minorities 0 0 (492) (693)
Adj. profit 13,253 15,068 17,839 21,359
Exceptional items 0 (3,354) 0 0
Net profit 13,253 11,714 17,839 21,359
Balance sheet Y/e 31 Mar (Rs m) CY11 CY12E CY13E CY14E
Equity capital 1,880 1,880 1,880 1,880
Reserves 70,043 76,699 89,480 105,782
Net worth 71,923 78,579 91,360 107,661
Debt 5,107 8,107 10,107 13,107
Deferred tax liab (net) 5,184 5,184 5,184 5,184
Total liabilities 82,214 91,869 106,650 125,952
Fixed assets 66,429 68,698 77,971 93,383
Investments 16,250 22,500 22,500 22,500
Net working capital (16,990) (16,531) (14,244) (12,840)
Inventories 10,997 13,785 17,369 21,135
Sundry debtors 2,604 3,178 3,725 4,529
Other current assets 6,053 7,387 9,070 10,528
Sundry creditors (26,104) (30,340) (33,868) (37,438)
Other current liabilities (10,540) (10,540) (10,540) (11,594)
Cash 16,526 17,202 20,423 22,909
Total assets 82,214 91,869 106,650 125,952
Cash flow statement Y/e 31 Mar (Rs m) CY11 CY12E CY13E CY14E
Profit before tax 15,404 20,276 25,160 30,517
Depreciation 4,753 5,377 5,727 6,588
Tax paid (2,152) (5,208) (6,830) (8,465)
Working capital ∆ (3,741) (459) (2,287) (1,404)
Operating cashflow 14,265 19,986 21,771 27,236
Capital expenditure (4,729) (7,647) (15,000) (22,000)
Free cash flow 9,536 12,339 6,771 5,236
Equity raised (967) ‐ ‐ ‐
Investments 777 (6,251) ‐ ‐
Debt financing/disposal (131) 3,000 2,000 3,000
Dividends paid (5,058) (5,058) (5,058) (5,058)
Other items 1,568 (3,354) (492) (693)
Net ∆ in cash 5,725 676 3,221 2,486
Key ratios Y/e 31 Mar CY11 CY12E CY13E CY14E
Growth matrix (%)
Revenue growth 25.2 16.2 11.6 10.5
Op profit growth 23.6 26.9 23.3 20.3
EBIT growth 7.8 31.0 22.4 20.1
Net profit growth 18.3 13.7 18.4 19.7
Profitability ratios (%)
OPM 19.9 21.7 24.0 26.1
EBIT margin 16.9 19.1 21.0 22.8
Net profit margin 13.7 13.4 14.2 15.4
RoCE 21.0 24.6 26.5 27.1
RoNW 19.4 20.0 21.0 21.5
RoA 11.5 12.0 12.6 13.1
Per share ratios
EPS 70.5 80.2 94.9 113.6
Dividend per share 23.0 23.0 23.0 23.0
Cash EPS 95.8 108.8 125.4 148.7
Book value per share 382.7 418.1 486.1 572.8
Valuation ratios (x)
P/E 20.0 17.6 14.8 12.4
P/CEPS 14.7 13.0 11.2 9.5
P/B 3.7 3.4 2.9 2.5
EV/EBIDTA 13.2 10.5 8.5 7.1
Payout (%)
Dividend payout 38.2 33.6 28.4 23.7
Tax payout 14.0 25.7 27.1 27.7
Liquidity ratios
Debtor days 10 10 11 12
Inventory days 42 45 51 56
Creditor days 99 99 99 99
Leverage ratios
Interest coverage 16.9 18.3 23.9 30.9
Net debt / equity (0.2) (0.1) (0.1) (0.1)
Net debt / op. profit (0.6) (0.4) (0.3) (0.3)
Du‐Pont analysis Y/e 31 Mar (Rs m) CY11 CY12E CY13E CY14E
Tax burden (x) 0.86 0.74 0.71 0.70
Interest burden (x) 0.94 0.95 0.96 0.97
EBIT margin (x) 0.17 0.19 0.21 0.23
Asset turnover (x) 0.84 0.89 0.88 0.85
Financial leverage (x) 1.68 1.67 1.67 1.64
RoE (%) 19.4 20.0 21.0 21.5
Sector: Media
Sector view: Positive
Sensex: 19,581
52 Week h/l (Rs): 210/47
Market cap (Rscr) : 2,644
6m Avg vol (‘000Nos): 512
Bloomberg code: DEN IN
BSE code: 532814
NSE code: DEN
FV (Rs): 10
Prices as on Jan 01, 2013
Company rating grid
Low High
1 2 3 4 5
Earnings Growth
Cash flow
B/S Strength
Valuation appeal
Risk
Share price trend
0
100
200
300
400
500
Dec‐11 Apr‐12 Aug‐12 Dec‐12
Den Networks Sensex
Share holding pattern
‐
20
40
60
80
100
Dec‐11 Mar‐12 Jun‐12 Sep‐12
Promoters Institutions Others
%
Rating: BUY Target (18 months): Rs290
CMP: Rs200
Upside: 45%
Research Analyst:
Bhavna Sinyal research@indiainfoline.com
Den Networks Ltd
Subscription ramp-up during Phase I; Phase II to be a bigger driver Digital subscription of Den Networks rose from ~0.5mn to 1.6mn during Phase I digitization (covering 4 Metros). With constant demand from Local Cable Operators (LCOs) for more Set Top Boxes (STB), the total number of subscribers in Phase I locations is expected to cross 2mn by Jan’2013. Out of the current subscribers of 1.6mn, Delhi is the core area of presence accounting for 1.1mn, followed by Mumbai (0.3mn) and Kolkata (0.2mn). The full impact of Phase I digitization on Den’s top line would be reflected from Q4 FY13. In Phase II locations, DEN has a subscriber base of 4‐4.5mn, of which 0.5mn are already digitized. With company’s strong foothold in Phase II locations (presence in 24 cities out of the total 38 cities) and lower penetration of digital cable (~10%) within its subscribers, revenue growth would likely be robust in the longer term. Ministry of Information & Broadcasting (MIB) is already in talks with industry on Phase II implementation. As digitization progresses, DEN’s subscriber base is expected to touch 15‐20mn from the current 11mn. MSOs better placed than DTH players to reap digitization benefits With relatively lower requirement for capex, ability to provide bundled services (video, broadband, telephone, etc), capacity to carry more HD channels and large LCO network, we expect MSOs to benefit significantly from digitization. From mid‐Sept to Phase I deadline, DTH players added subscribers to the tune of 0.17mn whereas MSOs added 1.7mn subscribers. DEN, being one of the leading MSO, has already received order for ~2mn STBs from Phase II locations signifying the phenomenal pace of digitization. In addition to increased demand for STBs, digitization will gradually eliminate the scope of under‐declaration of subscribers by the LCOs (Digital Addressable System identifying each subscriber). Resultantly, MSOs will have direct control over its subscribers and would share a legitimate portion of the revenue pie. Likely to deliver 100%+ earnings CAGR Digitization has resulted in complete turnaround of the cable industry. Backed by factual subscriber statistics and lower content cost, Den Networks being one of the leading cable distribution companies is likely to see a meaningful impact on its profitability. This was partially evident in sharp operating margin improvement during H1 FY13, from 7.3% in FY12 to 20.2%. Full impact of Phase I implementation, commencement of Phase II (a bigger opportunity), significant demand for STBs and margin improvement would drive exceptional earnings growth (100%+ CAGR) over FY12‐15. Valuation summary Y/E Revenue PAT EPS Change P/E EV/EBIDTA D/E RoE
March Rs mn Rs mn Rs % yoy (x) (x) (x) %
FY12 11,295 143 1.1 (61.9) 182.8 24.0 0.3 1.8
FY13E 9,827 588 4.4 304.5 45.2 12.9 0.5 7.1
FY14E 12,775 816 6.1 38.9 32.5 10.1 0.5 9.0
FY15E 15,969 1,376 10.4 68.7 19.3 7.3 0.6 13.6
Source: Company, India Infoline Research
Den Networks Ltd
7
Company Background Den Networks, one of the leading cable distribution companies, has strong foothold in Delhi, UP and Karnataka with presence also in Maharashtra, Gujarat, Rajasthan, MP, Haryana, Uttarakhand and Kerala. Recently, company entered in West Bengal, Jharkhand and Bihar. Den offers gamut of high quality services ‐ 300 digital channels with high‐quality picture and sound, micro‐blogging, 24x7 music, interactive gaming, restaurant/event search application, etc. It had entered a 50‐50 JV with News Corp's Star TV Group in 2008. In May 2011, Star DEN formed a 50‐50 JV with Zee Turner combining the distribution assets of the Star, Zee and Turner groups in India. Key risks If digitization does not progresses as expected, significant growth in revenue may not be realized within the
expected time frame. Fierce competition from DTH players (via better services at competitive price) may devour MSOs share in the
revenue pie. Focus charts Structural improvement in margins ….to drive robust growth in earnings
7.3
19.020.5
23.7
1.3
6.0 6.4
8.6
0
5
10
15
20
25
FY12 FY13E FY14E FY15E
(%)
OPM PATM
0
300
600
900
1,200
1,500
FY12 FY13E FY14E FY15E
(Rs mn)
CAGR 112.8%
Source: Company, India Infoline Research
Enhanced returns for equity shareholders Improvement in interest coverage ratio reinforces confidence
1.8
7.1
9.0
13.6
0
3
6
9
12
15
FY12 FY13E FY14E FY15E
(%)
2.1
3.4 3.6
4.5
0
1
2
3
4
5
6
FY12 FY13E FY14E FY15E
(x)
Source: Company, India Infoline Research
Den Networks Ltd
8
Financials - Consolidated Income statement Y/e 31 Mar (Rs m) FY12 FY13E FY14E FY15E
Revenue 11,295 9,827 12,775 15,969
Expenditure (10,473) (7,960) (10,156) (12,184)
Operating Profit 822 1,867 2,619 3,785
Other Income 271 311 343 377
EBIDTA 1,093 2,178 2,961 4,161
Dep/Amortization (538) (805) (1,087) (1,298)
Interest (269) (402) (527) (638)
PBT 286 972 1,348 2,225
Tax (100) (340) (472) (779)
PAT & before minority interest
186 632 876 1,446
Share of P/(L) in associates
(43) (44) (60) (70)
Net Profit 143 588 816 1,376
Balance sheet Y/e 31 Mar (Rs m) FY12 FY13E FY14E FY15E
Share Capital 1,305 1,327 1,327 1,327
Reserve & Surplus 6,716 7,303 8,119 9,496
Networth 8,021 8,630 9,447 10,823
Minority Interest 616 616 616 616
Pref. Sh issued by subsidiary to min.
25 25 25 25
S.loans 2,559 3,838 4,990 5,988
UnS.loans 38 46 55 66
Loan Funds 2,597 3,884 5,045 6,054
Deffered Tax Liability 26 26 26 26
Equity+Liabilities 11,285 13,182 15,159 17,544
Net Block 2,833 4,980 6,590 7,798
Capital W‐I‐P 755 906 1,132 1,359
Goodwill on Cons. 2,932 3,225 3,547 3,902
Investments 223 257 295 340
Deffered Tax Asset 228 251 276 303
Current Assets, Loans & Advances
8,235 6,918 7,608 9,115
Unbilled Revenue 243 215 245 306
S.Debtors 2,904 2,477 3,185 3,894
Cash & Bank Balance 3,076 2,476 1,938 2,203
Loans and Advances 2,012 1,750 2,240 2,712
Current Liab & Prov 3,921 3,355 4,290 5,272
C.L 3,861 3,285 4,200 5,162
Provisions 60 70 90 110
Net Current Assets 4,313 3,564 3,318 3,843
Total Assets 11,285 13,182 15,159 17,544
Cash flow statement Y/e 31 Mar (Rs m) FY12 FY13E FY14E FY15E
PBT 286 972 1,348 2,225
Depreciation 538 805 1,087 1,298
Interest Expense 269 402 527 638
Change in WC (149) 149 (292) (260)
Direct taxes Paid (100) (340) (472) (779)
Other Items (51) ‐ ‐ ‐
Op. Cash flows 793 1,988 2,197 3,123
Investments (1,567) (3,452) (3,309) (3,159)
Fin Cash flow 1,113 864 574 301
Net inc /dec in Cash 339 (601) (538) 265
Op Cash Balance 2,738 3,076 2,476 1,938
Cl Cash Balance 3,076 2,476 1,938 2,203
Key ratios Y/e 31 Mar FY12 FY13E FY14E FY15E
Growth matrix (%)
Revenue growth 10.5 (13.0) 30.0 25.0
Op profit growth (8.7) 127.0 40.3 44.5
EBITDA growth (13.5) 99.3 35.9 40.5
Net profit growth (61.9) 311.5 38.9 68.7
Profitability ratios (%)
OPM 7.3 19.0 20.5 23.7
EBITDA margin 9.7 22.2 23.2 26.1
Net profit margin 1.3 6.0 6.4 8.6
RoCE 1.4 4.8 5.8 8.4
RoE 1.8 7.1 9.0 13.6
RoA 1.0 3.7 4.5 6.5
Per share ratios
EPS 1.1 4.4 6.1 10.4
BVPS 61.5 65.0 71.2 81.5
Valuation ratios
P/E 182.8 45.2 32.5 19.3
P/B 3.3 3.1 2.8 2.5
EV/EBIDTA 24.0 12.9 10.1 7.3
Liquidity ratios
Debtor days 93.8 92.0 91.0 89.0
Creditor days 83.8 84.0 82.0 81.0
Leverage ratios
Interest coverage 2.1 3.4 3.6 4.5
Debt/Equity 0.3 0.5 0.5 0.6
Net debt / equity (0.1) 0.2 0.3 0.4
Net debt / op. profit (0.6) 0.8 1.2 1.0
Sector: Pharmaceutical
Sector view: Positive
Sensex: 19,581
52 Week h/l (Rs): 1,915/1,526
Market cap (Rscr) : 31,108
6m Avg vol (‘000Nos): 358
Bloomberg code: DRRD IN
BSE code: 500124
NSE code: DRREDDY
FV (Rs): 2
Prices as on Jan 01, 2013
Company rating grid
Low High
1 2 3 4 5
Earnings Growth
Cash Flow
B/S Strength
Valuation appeal
Risk
Share price trend
50
70
90
110
130
Dec‐11 May‐12 Oct‐12
Dr Reddy's Sensex
Share holding pattern
‐
20
40
60
80
100
Dec‐11 Mar‐12 Jun‐12 Sep‐12
Promoters Institutions Others%
Rating: BUY Target (18 months): Rs2,358
CMP: Rs1,834
Upside: 28.6%
Research Analyst:
Bhavika Thakker research@indiainfoline.com
Dr. Reddy’s Laboratories
One of the best bet to play on US business Dr. Reddy’s (DRDY) has strong presence in the US generics and OTC segment. The company has a sturdy track record of monetising one‐off (FTFs and PIVs) opportunities. We believe the trend will continue with niche generic launches in next two years. DRDY has a strong US drug portfolio of 63 ANDAs pending for approval with the USFDA, of which 33 are Para IVs and 7 have ‘First To File’ status. Within launched products, DRDY has ~24 Rx products ranking among the top 3 in the category. Unlike other generic players from India, DRDY has seen a good traction in OTC business with products like Ranitidine, Famotidine and Omeprazole. In US, the growth in H1FY13 has been better than expected. We believe new launches which include two undisclosed limited competition opportunities will help company to post robust growth in FY13. The launch of products like Quetiapine, Clopidogrel, Fexofenadine etc will help to sustain growth in FY14 and beyond.
Improving PSAI segment to abet growth DRDYs’ troubled PSAI segment (26% of revenue), is also reviving. The recent quarters’ stellar performance substantiate our belief that worst is over in the PSAI segment. We believe the growth in active Ingredients business will be led by strong order book and new customer orders. Additionally, growth would also aided by approval of Mexico facility which was under the import alert since June 2011. In past, the plant generated ~US$60m in annual revenue, of which 50‐60% was from the US market. Additionally, acquisition of OctoPlus (a service based specialty pharmaceutical company) will enhance specialty revenue. DRDY has ~560 cumulative DMF filings as on date.
Biologics; a long term growth driver In the long term, biologics is going to play major role in pharma sector. Dr Reddy's, an early mover in the biologic segment, is definitely at advantageous position to cash in the opportunity. Biologics contributed about 5% to DRDY’s domestic sales in FY12. The company has three major biological products in domestic market; Reditux, Grafeel and Cresp. We believe real value would be extracted after 7‐8 years of gestation period.
One of the attractive bet in large cap space In next two years, we believe the company will gain maximum from the patent cliff. Robust domestic and international generic market growth along with improving outlook of PSAI (muted growth in PSAI segment was a challenge in the past) provides us comfort. We expect Revenue and PAT to witness a CAGR of 17% and 21% over FY12‐15E, respectively. Valuation summary Y/E Sales PAT EPS Change P/E EV/EBIDTA D/E RoE
March Rs mn Rs mn Rs % yoy (x) (x) (x) %
FY12 98,145 13,009 76.7 30.2 23.9 12.9 0.3 28.8
FY13E 103,061 16,140 95.2 24.1 19.3 12.2 0.3 28.7
FY14E 120,785 18,868 111.2 16.9 16.5 10.1 0.2 26.8
FY15E 140,306 23,522 138.7 24.7 13.2 8.1 0.1 26.8
Source: Company, India Infoline Research
Dr Reddy’s
10
Key risks Forex risks: revenue except for India is dollar dominated
Legal risks associate with patent challenges and delay in product approval.
Risk associated with policy changes in domestic and international market.
Focus charts
Revenue: Impressive history of monetisisng one‐offs Revenue Break‐up
‐
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
FY07
FY08
FY09
FY10
FY11
FY12E
FY13E
FY14E
FY15E
(Rs mn) Revenue One offs
‐
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
FY08
FY09
FY10
FY11
FY12E
FY13E
FY14E
FY15E
(Rs mn)
Global generic PSAI Proprietory products
Source: Company, India Infoline Research
Generic business on constant push Improving PSAI outlook
‐
5,000
10,000
15,000
20,000
25,000
Q1FY11
Q2FY11
Q3FY11
Q4FY11
Q1FY12
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Q2FY13
(Rs mn)
‐
2,000
4,000
6,000
8,000
10,000
Q1FY11
Q2FY11
Q3FY11
Q4FY11
Q1FY12
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Q2FY13
(Rs mn)
Source: Company, India Infoline Research
North America is the biggest pie in Global Generics ANDA filing Trend
14%
17%
37%
15%
17%
North America
Europe
Russia & CIS
India
Others
‐
50
100
150
200
250
300
350
400
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13*
ANDA pending ANDA aprroved ANDA filed
Source: Company, India Infoline Research *till September 2013
Dr Reddy’s
11
Financials Income statement Y/e 31 Mar (Rs m) FY12 FY13E FY14E FY15E
Revenue 98,145 103,061 120,785 140,306
Operating profit 24,311 24,564 28,318 34,055
Depreciation (5,181) (5,617) (6,281) (6,735)
Interest expense (1,056) (1,031) (978) (800)
Other income 1,323 1,413 1,538 1,649
Profit before tax 19,397 19,330 22,596 28,170
Taxes (5,035) (3,189) (3,728) (4,648)
Adj. profit 14,362 16,140 18,868 23,522
Reported Net profit 13,009 16,140 18,868 23,522
Balance sheet Y/e 31 Mar (Rs m) FY12 FY13E FY14E FY15E
Equity capital 848 848 848 848
Reserves 49,042 61,761 77,088 97,070
Net worth 49,890 62,609 77,936 97,918
Non Current Liab 17,438 19,547 16,437 13,153
Current Liab 45,914 53,622 60,210 64,165
Total liabilities 113,242 135,778 154,583 175,236
Fixed assets 29,404 37,296 38,909 40,298
Intangible assets 13,848 10,562 12,668 14,544
Investments 9 9 9 9
Current Assets 53,929 57,450 61,191 70,677
Inventories 19,433 20,706 24,308 28,237
Sundry debtors 25,368 27,030 25,929 30,119
Other curr assets 7,058 7,643 8,884 10,250
Curr Investments 2,070 2,070 2,070 2,070
Cash 16,052 30,461 41,806 49,708
Total assets 113,242 135,778 154,583 175,236
Cash Flow Statement Y/e 31 Mar FY12 FY13E FY14E FY15E
Profit before tax 19,397 19,330 22,596 28,170
Depreciation 5,181 5,617 6,281 6,735
Tax paid (5,035) (3,189) (3,728) (4,648)
Working capital ∆ (10,381) (1,208) (1,765) (8,299)
Oper cashflow 9,162 20,549 23,384 21,957
Capital expenditure (6,952) (10,223) (10,000) (10,000)
Free cash flow 2,210 10,326 13,384 11,957 Debt financing/ disposal 12,891 7,505 1,501 (515)
Dividends paid (2,712) (3,422) (3,540) (3,540)
Other items (2,079) 0 0 0
Net ∆ in cash 10,310 14,409 11,344 7,902
Key ratios Y/e 31 Mar FY12 FY13E FY14E FY15E
Growth matrix (%)
Revenue growth 30.9 5.0 17.2 16.2
Op profit growth 56.5 1.0 15.3 20.3
EBIT growth 69.4 (0.5) 15.8 22.9
Net profit growth 30.2 24.1 16.9 24.7
Profitability ratios (%)
OPM 24.8 23.8 23.4 24.3
EBIT margin 23.5 22.4 20.6 20.6
Net profit margin 15.0 17.8 16.5 16.8
RoCE 20.2 16.4 16.2 17.6
RoNW 28.8 28.7 26.8 26.8
RoA 13.0 13.2 13.2 14.4
Per share ratios
EPS 76.7 95.2 111.2 138.7
Dividend per share 13.7 17.1 17.7 17.7
Cash EPS 107.3 128.3 148.3 178.4
Book value per share 294.2 369.2 459.5 577.3
Valuation ratios (x)
P/E 23.9 19.3 16.5 13.2
P/CEPS 17.1 14.3 12.4 10.3
P/B 6.2 5.0 4.0 3.2
EV/EBIDTA 12.9 12.2 10.1 8.1
Payout (%)
Dividend payout 20.8 21.2 18.8 15.1
Tax payout 26.0 16.5 16.5 16.5
Liquidity ratios
Debtor days 107 109 83 78
Inventory days 82 83 78 73
Creditor days 193 215 192 167
Leverage ratios
Interest coverage 19.4 19.8 24.1 36.2
Net debt / equity 0.0 (0.2) (0.3) (0.4)
Net debt / op. profit 0.1 (0.4) (0.9) (1.1)
Du-Pont Analysis Y/e 31 Mar FY12 FY13E FY14E FY15E
Tax burden (x) 0.67 0.84 0.84 0.84
Interest burden (x) 0.95 0.95 0.96 0.97
EBIT margin (x) 0.24 0.22 0.21 0.21
Asset turnover (x) 0.87 0.74 0.80 0.86
Financial leverage (x) 2.23 2.18 2.04 1.85
RoE (%) 28.8 28.7 26.8 26.8
Sector: IT
Sector view: Neutral
Sensex: 19,581
52 Week h/l (Rs): 1,224/ 522
Market cap (Rscr) : 5,245
6m Avg vol (‘000Nos): 455
Bloomberg code: FTECH.IB
BSE code: 526881
NSE code: FINANTECH
FV (Rs): 2
Price as on Jan 01, 2013
Company rating grid
Low High
1 2 3 4 5
Earnings Growth
Cash flow
B/S Strength
Valuation appeal
Risk
Share price trend
70
110
150
190
Dec‐11 Apr‐12 Aug‐12 Dec‐12
Financial Tech Sensex
Share holding pattern
0
20
40
60
80
100
Dec‐11 Mar‐12 Jun‐12 Sep‐12
Promoters FIIs Others
Rating: BUY Target (18 months): Rs1,510
CMP: Rs1,138
Upside: 32.7%
Research Analyst: Aniruddha Mehta
research@indiainfoline.com
Financial Technologies
Innovative business model focused on non-linear revenues Financial Technologies (FTIL) is the flagship business of the FT Group – a conglomerate of technology, exchange and various related ventures. Its key technologies for financial markets (viz. ODIN, DOME) have shown impressive growth over years with sustained market share (80%+ market share for ODIN). With a bid to participate in the India’s nascent but burgeoning financial intermediary markets, FT group has successfully ventured to develop exchanges a across asset classes with a unique revenue sharing model helping to develop a non‐linear revenue stream as the exchanges mature. This model has not only resulted in higher profitability but also has helped diversify risks.
Improving traction at key exchanges – strong growth driver With its expertise in financial markets technology, FTIL has built a strong eco‐system of exchanges and related ventures across asset classes and within multiple emerging market geographies. A good portion of these ventures have been highly successful growing multi‐folds and having substantial market share viz. MCX, MCX‐SX (currency segment), IEX, NSEL and NBHC. This has effectively ramped up FTIL’s non‐linear revenues resulting in higher revenue productivity. Recent regulatory approval for MCX‐SX to cater to equity, fixed income and interest rate derivatives is expected to bode well for FTIL providing additional fillip to both licenses sale as well as transaction revenues. Driven by operating leverage, OPM outlook is sanguine A key advantage of the non‐linear/revenue sharing business model of FTIL is the operating leverage that it lends as the volumes/revenues of these ventures grow. These non‐linear revenues which are in the form of variable AMC fees, come at marginal additional costs thus providing a boost to operating profitability. For instance, the variable AMC revenues from MCX have grown 2.5x over FY09‐12 driven by growing volumes. As volumes grow at its key exchanges, this revenue stream (with its inherent non‐linearity) should continue to improve operating profitability.
Stake sale in exchange ventures to help monetize investments Regulation mandated stake sale is expected to lead to equity sale of 5% (2.5% through MCX) in MCX‐SX and 8% in IEX within next 18 months. Established market leadership of these exchanges and their nascent growth stage are expected to help FTIL effectively monetize its investments in these ventures. Also, further stake sale in MCX‐SX and other incubating ventures can provide additional upsides. A diversified business model with established exchanges/ventures, improving profitability and investment monetization opportunity make FTIL an attractive play. Through SOTP valuation we arrive at a TP of Rs1510. Recommend BUY.
Valuation summary Y/E Sales PAT EPS Change P/E EV/EBIDTA D/E RoE
March Rs mn Rs mn Rs % yoy (x) (x) (x) %
FY12 4,256 4,780 103.7 420.0 11.0 26.0 0.1 21.2
FY13E 4,015 2,586 56.1 (45.9) 19.2 24.5 (0.0) 10.7
FY14E 4,502 2,773 60.2 7.2 18.2 21.2 (0.1) 10.3
FY15E 4,811 3,016 65.4 8.8 16.6 18.8 (0.1) 10.4
Souce: Company, India Infoline Research
Financial Technologies
13
Key Risks Failure to garner volumes at newly developed exchanges Inability to monetize investments done in various exchanges and related ventures Adverse regulatory ruling for any of the exchange ventures can be risk to our growth estimates Focus charts
Stable revenue growth over FY13‐15E Margin to expand over FY13‐15E
0
1.5
3
4.5
6
FY11 FY12 FY13E FY14E FY15E
(Rs bn)
30
35
40
45
50
55
FY11 FY12 FY13E FY14E FY15E
(%)
Source: Company, India Infoline Research
Impressive market share of key exchanges ventures MCX average daily turnover ‐ increasing trend
0 20 40 60 80 100
MCX
IEX
NSEL
MCXSX *
(%)
0
150
300
450
600
FY09 FY10 FY11 FY12 H1FY13
(Rs bn)
Source: Company, India Infoline Research, * MCX SX Currency segment market share
IEX average daily volumes‐ increasing trend ODIN licence growth profile
0
150
300
450
600
FY09 FY10 FY11 FY12 H1FY13
(MWh)*
0
200
400
600
800
1000
FY09 FY10 FY11 FY12
(000's)
Source: Company, India Infoline Research, * volumes for day ahead market
Financial Technologies
14
Financials Income statement Y/e 31 Mar (Rs m) FY12 FY13E FY14E FY15E
Revenue 4,256 4,273 4,691 5,036
Operating profit 2,083 2,123 2,364 2,554
Depreciation (173) (273) (293) (303)
Interest expense (304) (450) (370) (290)
Other income 3,689 2,252 2,148 2,244
Profit before tax 5,294 3,652 3,849 4,205
Taxes (514) (913) (962) (1,051)
Adj. profit 4,780 2,739 2,886 3,154
Balance sheet Y/e 31 Mar (Rs m) FY12 FY13E FY14E FY15E
Equity capital 92 92 92 92
Reserves 24,456 26,784 29,093 31,616
Net worth 24,548 26,876 29,185 31,708
Def tax liab (net) 137 137 137 137
Debt 5,627 5,627 4,627 3,627
Total liabilities 30,313 32,641 33,950 35,473
Fixed assets 4,705 4,832 4,939 5,035
Investments 17,380 17,380 17,380 17,380
Net working capital 8,227 10,429 11,631 13,057
Sundry debtors 363 364 400 429
Cash 3,990 6,175 6,961 8,043
Other curr assets 6,129 6,153 6,755 7,254
Sundry creditors (292) (293) (321) (345)
Other curr liabilities (1,963) (1,971) (2,164) (2,323)
Total assets 30,313 32,641 33,950 35,473
Cash flow statement Y/e 31 Mar (Rs m) FY12 FY13E FY14E FY15E
Profit before tax 5,294 3,652 3,849 4,205
Depreciation 173 273 293 303
Tax paid (514) (913) (962) (1,051)
Working capital ∆ (7,563) (17) (416) (344)
Operating cashflow (2,610) 2,995 2,763 3,113
Capital expenditure (808) (400) (400) (400)
Free cash flow (3,417) 2,595 2,363 2,713
Equity raised (405) 0 0 (0)
Investments 1,124 ‐ ‐ ‐
Debt raised/repaid 5,627 ‐ (1,000) (1,000)
Dividends paid (431) (411) (577) (631)
Other items 17 ‐ ‐ ‐
Net ∆ in cash 2,515 2,184 786 1,082
Key ratios Y/e 31 Mar FY12 FY13E FY14E FY15E
Growth matrix (%)
Revenue growth 19.0 0.4 9.8 7.4
Op profit growth 59.5 1.9 11.4 8.0
EBIT growth 114.0 (26.7) 2.8 6.5
Net profit growth 58.8 (42.7) 5.4 9.3
Profitability ratios (%)
OPM 49.0 49.7 50.4 50.7
EBIT margin 131.6 96.0 89.9 89.2
Net profit margin 112.3 64.1 61.5 62.6
RoCE 21.9 13.0 12.7 12.9
RoNW 21.2 10.7 10.3 10.4
RoA 15.9 8.1 8.1 8.5
Per share ratios
EPS 103.7 59.4 62.6 68.4
Dividend per share 9.4 8.9 12.5 13.7
Cash EPS 107.4 65.3 69.0 75.0
Book value per share 532.5 583.0 633.1 687.8
Valuation ratios (x)
P/E 11.0 19.2 18.2 16.6
P/B 2.1 2.0 1.8 1.7
EV/EBIDTA 26.0 24.5 21.2 18.8
Payout (%)
Dividend payout 9.0 15.0 20.0 20.0
Tax payout 9.7 25.0 25.0 25.0
Liquidity ratios
Debtor days 31 31 31 31
Creditor days 25 25 25 25
Leverage ratios
Net debt / equity 0.1 (0.0) (0.1) (0.1)
Net debt / op. profit 0.8 (0.3) (1.0) (1.7)
Du‐pont analysis Y/e 31 Mar (Rs m) FY12 FY13E FY14E FY15E
Tax burden (x) 0.90 0.75 0.75 0.75
Interest burden (x) 0.95 0.89 0.91 0.94
EBIT margin (x) 1.32 0.96 0.90 0.89
Asset turnover (x) 0.14 0.13 0.13 0.14
Financial leverage (x) 1.33 1.31 1.27 1.22
RoE (%) 21.2 10.7 10.3 10.4
Sector: Financials
Sector view: Positive
Sensex: 19,581
52 Week h/l (Rs): 706 / 419
Market cap (Rscr) : 162,094
6m Avg vol (‘000Nos): 2,564
Bloomberg code: HDFCB IN
BSE code: 500180
NSE code: HDFCBANK
FV (Rs): 2
Prices as on Jan 01, 2013
Company rating grid
Low High
1 2 3 4 5
Earnings Growth
Cash flow
B/S Strength
Valuation appeal
Risk
Share price trend
70
90
110
130
150
170
Dec‐11 Apr‐12 Aug‐12 Dec‐12
HDFC Bank Sensex
Share holding pattern
‐
20
40
60
80
100
Dec‐11 Mar‐12 Jun‐12 Sep‐12
Promoters Institutions Others
%
Rating: BUY Target (18 months): Rs850
CMP: Rs685
Upside: 24.1%
Research Analyst: Rajiv Mehta
Bhavna Sinyal research@indiainfoline.com
HDFC Bank
At top of the game in retail banking; robust quality corporate book HDFC Bank is unarguably the best bank in the country. Driven by ingenious strategy and exemplary execution, the bank continues to grow robustly on increasing base simultaneously preserving asset quality and generating superior profitability. Bank’s retail loan franchise contributing 53% of overall advances is the second largest in industry and the most diversified comprising 11‐12 products (none contributing >25%). In each product, bank is strongly positioned with significant market share. The corporate portfolio is largely working capital exposure to well‐known companies and the bank is least exposed to chunky infra/capex loans. Sturdy loan growth to continue; impressive command on margin Driven by an enviable credit profile and consistent market share gains, HDFC Bank has historically grown significantly ahead of the system. The retail book has grown nearly 2x in the past 2.5 years aided by strong demand across products, brisk mobilization of retail TDs and lower than priced‐in delinquencies. A wide bouquet of products lends resilience to retail segment growth as moderation in one or two products typically gets offset by robust growth in others. As exhibited in the past, HDFC Bank has a strong grip on NIMs (consistently above 4%) given its dominant market positioning in retail and corporate lending, sticky retail deposit franchise and flexibility to play with retail/corporate mix and product mix within retail segment. We expect strong loan growth to continue, supported by widened distribution (added 558 branches in FY12) and brisk traction in retail products. Margin would remain firm aided by favourable shift in loan mix and CASA improvement.
Nearly impregnable asset quality; cushion of counter-cyclical buffer Annualized slippage ratio since FY11 has been near 1%, lowest in bank’s history. Asset quality in the retail segment has been extremely resilient with actual losses materially lower than expected losses in most products. Corporate asset quality has held well due to largely working capital exposure and better quality project loans. Even if slippages were to normalize in medium term, the counter‐cyclical buffer (Rs16‐17bn on balance sheet) would lower incremental provisioning requirement. Therefore, we see RoAs sustaining above 1.6% comfortably notwithstanding substantial opex growth.
Sustained superior performance to guard premium valuation HDFC Bank’s trades at 4.1x 1‐yr rolling P/adj.BV, ~15% premium to 6‐year mean. With bank estimated to deliver 24% earnings CAGR over FY12‐15, valuation would continue to command premium both on absolute and relative basis. In our view, there is high probability of the bank outperforming equity market return over the next couple of years.
Valuation summary Y/E Tot Inc PAT Chg Adj.BV P/ABV RoA RoE Tier‐1
March (Rs mn) (Rs mn) (% yoy) (Rs) (x) (%) (%) (%)
FY12 175,405 51,671 31.6 126.0 5.4 1.7 18.7 11.6
FY13E 215,616 64,335 24.5 146.5 4.7 1.7 19.8 11.1
FY14E 261,312 78,320 21.7 171.6 4.0 1.7 20.6 10.5
FY15E 321,265 97,407 24.4 202.8 3.4 1.7 21.7 10.0
Source: Company, India Infoline Research
HDFC Bank
16
Key risks to our view A sharp slowdown in the consumption momentum could moderate bank’s loan growth
Onset of an adverse retail NPL cycle could affect the asset quality of the bank
Focus charts
Loan mix has shifted significantly towards retail Retail loan mix ‐ most diversified in the industry
0%
20%
40%
60%
80%
100%
Q1 FY11
Q2 FY11
Q3 FY11
Q4 FY11
Q1 FY12
Q2 FY12
Q3 FY12
Q4 FY12
Q1 FY13
Q2 FY13
Corporate Retail
7%
3%
13%
7%
1%
17%13%
2%
13%
24%Auto Loans
CV/CE
Two Wheelers
Personal Loans
Business Banking
LAS
Credit Cards
Home Loans
Gold
Others
Source: Company, India Infoline Research
NIM consistently above 4% mark Persistent improvement in asset quality
3.5
3.7
3.9
4.1
4.3
4.5
Q3 FY10
Q4 FY10
Q1 FY11
Q2 FY11
Q3 FY11
Q4 FY11
Q1 FY12
Q2 FY12
Q3 FY12
Q4 FY12
Q1 FY13
Q2 FY13
(%)
0.0
0.4
0.8
1.2
1.6
2.0
Q3 FY10
Q4 FY10
Q1 FY11
Q2 FY11
Q3 FY11
Q4 FY11
Q1 FY12
Q2 FY12
Q3 FY12
Q4 FY12
Q1 FY13
Q2 FY13
(%)Gross NPA Net NPA
Source: Company, India Infoline Research
Slippages to remain exceptionally low Superior RoA delivery to continue
0.0
0.5
1.0
1.5
2.0
2.5
FY10 FY11 FY12 FY13E FY14E FY15E
(%)
1.0
1.2
1.4
1.6
1.8
2.0
FY11 FY12 FY13E FY14E FY15E
(%)
Source: Company, India Infoline Research
HDFC Bank
17
Financials Income statement Y/e 31 Mar (Rs m) FY12 FY13E FY14E FY15E
Interest income 272,864 339,407 392,435 466,348
Interest expense (149,896) (191,029) (212,775) (243,923)
Net interest income 122,968 148,378 179,660 222,426
Non‐interest income 52,437 67,238 81,652 98,839
Total op income 175,405 215,616 261,312 321,265
Total op expenses (85,900) (106,516) (128,885) (154,662)
Op profit (pre‐prov) 89,505 109,100 132,428 166,603
Total provisions (14,367) (15,548) (18,538) (24,959)
Profit before tax 75,138 93,553 113,889 141,644
Taxes (23,466) (29,217) (35,569) (44,237)
Net profit 51,671 64,335 78,320 97,407
Balance sheet Y/e 31 Mar (Rs m) FY12 FY13E FY14E FY15E
Total cash & equivalents 209,377 292,068 299,477 318,203
Investments 974,829 1,091,809 1,375,679 1,747,112
Advances 1,954,200 2,364,582 2,932,082 3,723,744
Total int‐earning assets 3,138,407 3,748,459 4,607,238 5,789,059
Fixed assets 23,472 26,993 31,042 35,698
Other assets 217,216 260,660 312,792 375,350
Total assets 3,379,095 4,036,111 4,951,071 6,200,107
Net worth 299,247 350,656 411,092 486,488
Deposits 2,467,064 2,935,807 3,640,400 4,623,308
Borrowings 238,465 300,466 360,559 443,488
Total int‐bearing liabs 2,705,530 3,236,273 4,000,960 5,066,796
Non‐int‐bearing liabs 374,319 449,182 539,019 646,823
Total liabilities 3,079,848 3,685,455 4,539,978 5,713,619
Equity + Total liabilities 3,379,095 4,036,111 4,951,071 6,200,107
Key ratios Y/e 31 Mar FY12 FY13E FY14E FY15E
Growth matrix (%)
Net interest income 16.6 20.7 21.1 23.8
Total op income 17.9 22.9 21.2 22.9
Op profit (pre‐provision) 15.9 21.9 21.4 25.8
Net profit 31.6 24.5 21.7 24.4
Advances 22.2 21.0 24.0 27.0
Deposits 18.3 19.0 24.0 27.0
Total assets 21.8 19.4 22.7 25.2
Profitability Ratios (%)
NIM 4.3 4.3 4.3 4.3
Non‐int inc/Total inc 29.9 31.2 31.2 30.8
Return on Avg Equity 18.7 19.8 20.6 21.7
Return on Avg Assets 1.7 1.7 1.7 1.7
Per share ratios (Rs)
EPS 22.0 27.2 33.2 41.2
Adj.BVPS 126.0 146.5 171.6 202.8
DPS 4.3 5.2 6.5 8.0
Valuation ratios (x)
P/E 31.1 25.1 20.6 16.6
P/Adj.BVPS 5.4 4.7 4.0 3.4
Other key ratios (%)
Credit/Deposits 79.2 80.5 80.5 80.5
Cost/Income 49.0 49.4 49.3 48.1
CASA 48.4 48.0 50.0 51.0
CAR 16.5 15.5 14.3 13.1
Tier‐I capital 11.6 11.1 10.5 10.0
Gross NPLs/Loans 1.0 1.0 1.1 1.2
Credit Cost 0.8 0.7 0.7 0.8
Net NPLs/Net loans 0.2 0.2 0.2 0.2
Tax rate 31.2 31.2 31.2 31.2
Dividend yield 0.6 0.8 1.0 1.2
Sector: Financials
Sector view: Positive
Sensex: 19,581
52 Week h/l (Rs): 1,162 / 685
Market cap (Rscr) : 133,187
6m Avg vol (‘000Nos): 3,550
Bloomberg code: ICICIBC IN
BSE code: 532174
NSE code: ICICIBANK
FV (Rs): 10
Prices as on Jan 01, 2013
Company rating grid
Low High
1 2 3 4 5
Earnings Growth
RoA Progression
B/S Strength
Valuation appeal
Risk
Share price trend
90
110
130
150
170
Dec‐11 Apr‐12 Aug‐12 Dec‐12
ICICI Bank Sensex
Share holding pattern
‐
20
40
60
80
100
Dec‐11 Mar‐12 Jun‐12 Sep‐12
Institutions Others
%
Rating: BUY Target (18 months): Rs1,500
CMP: Rs1,159
Upside: 29.4%
Research Analyst: Rajiv Mehta
Bhavna Sinyal research@indiainfoline.com
ICICI Bank
Domestic lending to drive growth; FY12-15E loan CAGR at 19% The corporate lending environment has improved since the start of FY12 with a sharp decline in wholesale funding rates and relatively better pricing environment. Resultantly, ICICI Bank grew its corporate portfolio by robust 34% in H1 FY13. The retail growth momentum has also accelerated over the past three quarters aided by substantial disbursements of home loans and vehicle loans. The bank is looking at improving market share in both these segments. While the international book is expected to remain flat during FY13, domestic loan book is likely to grow by 20%. Over FY12‐15, we estimate ICICI Bank to witness a near system CAGR of 18‐19%.
Impressive NIM performance to continue; FY12-15E NII CAGR at 22% ICICI Bank has seen a material improvement in NIM over the past one year driven by significant asset re‐pricing and steep fall in wholesale funding rates. Margin is expected to stay comfortably above 3% in the medium term supported by CASA improvement, benign wholesale rates, favourable re‐pricing of retail TDs from FY14 and beneficial shift in loan mix towards domestic business. Based on expectation of firm NIMs, we estimate a strong NII CAGR of 22% over FY12‐15.
Asset quality to stay resilient; credit cost to remain at 75-80bps ICICI Bank’s absolute gross NPL has been flat over the past two years while substantially declining as a percentage from 5% to 3.5%. Bank’s retail gross NPL declined by 23% in aforementioned time aided by low slippages and significant upgrades/recoveries. Overall also, fresh delinquencies have been in a modest range of Rs7‐10bn (slippage ratio of 1.3‐1.6%) excluding the chunky Deccan Chronicle slippage of ~Rs5bn in Q2 FY13. Except for GTL and 3i infotech, ICICI Bank has not seen significant restructuring and the outstanding restructured book stand at marginal 1.6% of advances. Currently, its share in CDR referrals is negligible. Bank has been providing substantially against fresh NPLs maintaining PCR at 78‐80% and net NPLs at 0.6‐0.8%. Management continues to guide full‐year credit cost at 75bps (73bps in H1 FY13) implying stable asset quality in the near term. Longer term credit cost is estimated to be in the range of 75‐80bps even if delinquency ratio were to inch up.
Core RoA/RoE improving; structural re-rating impending ICICI Bank’s core RoA (excluding subsidiary dividends) has seen structural improvement of 15‐20bps. Notwithstanding weakness in fee income growth and some stress on asset quality, we expect core RoA to remain above 1.5% and RoE to impove on the back of increasing leverage. Amid stabilizing macro conditions, continuance of healthy asset quality performance would dispel exaggerated fears around the bank and drive a steep valuation re‐rating.
Valuation summary Y/E Tot Inc PAT Chg Adj.BV P/ABV RoA RoE Tier‐1
March (Rs mn) (Rs mn) (% yoy) (Rs) (x) (%) (%) (%)
FY12 182,369 64,652 25.5 507.9 2.3 1.5 11.2 12.7
FY13E 220,062 78,591 21.6 552.7 2.1 1.5 12.4 12.6
FY14E 256,125 91,118 15.9 605.8 1.9 1.5 13.2 11.9
FY15E 306,367 110,934 21.7 669.8 1.7 1.6 14.5 11.2
Source: Company, India Infoline Research
ICICI Bank
19
Key risks to our view Persistent weakness in corporate loan demand could hamper loan and fee income growth
Increase in wholesale rates would impair projected margin trajectory
A sharp deterioration in asset quality would impact earnings growth/projected RoAs Focus charts
Robust earnings growth in past eight quarters Structural improvement in NIM
0
10
20
30
40
50
Q1 FY11
Q2 FY11
Q3 FY11
Q4 FY11
Q1 FY12
Q2 FY12
Q3 FY12
Q4 FY12
Q1 FY13
Q2 FY13
(%)
1.5
1.9
2.3
2.7
3.1
Q1 FY11
Q2 FY11
Q3 FY11
Q4 FY11
Q1 FY12
Q2 FY12
Q3 FY12
Q4 FY12
Q1 FY13
Q2 FY13
(%)
Source: Company, India Infoline Research
Benign slippages driving asset quality improvement Net NPL/Networth ratio has consistently declined
90
93
96
99
102
105
Q1 FY11
Q2 FY11
Q3 FY11
Q4 FY11
Q1 FY12
Q2 FY12
Q3 FY12
Q4 FY12
Q1 FY13
Q2 FY13
(Rs bn)
3.0
3.5
4.0
4.5
5.0
5.5
Gross NPA GNPL%
(
2
4
6
8
10
Q3 FY10
Q4 FY10
Q1 FY11
Q2 FY11
Q3 FY11
Q4 FY11
Q1 FY12
Q2 FY12
Q3 FY12
Q4 FY12
Q1 FY13
Q2 FY13
(%)
Source: Company, India Infoline Research
Delinquencies unlikely to surprise negatively Improving trend in RoA/RoE to continue
0.0
0.7
1.4
2.1
2.8
3.5
FY10 FY11 FY12 FY13E FY14E FY15E
(%)
‐
50
100
150
200
250(bps)
Slippages Credit Cost
1.0
1.2
1.3
1.5
1.6
1.8
FY11 FY12 FY13E FY14E FY15E
(%)
6.0
8.0
10.0
12.0
14.0
16.0(%)
RoA RoE
Source: Company, India Infoline Research
ICICI Bank
20
Financials Income statement Y/e 31 Mar (Rs mn) FY12 FY13E FY14E FY15E
Interest income 335,427 403,372 442,838 497,016
Interest expense (228,085) (264,340) (279,897) (300,607)
Net interest income 107,342 139,032 162,941 196,410
Non‐interest income 75,028 81,030 93,184 109,957
Total op income 182,369 220,062 256,125 306,367
Total op expenses (78,505) (91,850) (106,547) (124,659)
Op profit (pre‐prov) 103,864 128,211 149,579 181,708
Total provisions (14,064) (20,552) (24,759) (29,743)
Profit before tax 89,801 107,659 124,819 151,965
Taxes (23,382) (29,068) (33,701) (41,031)
Net profit 66,419 78,591 91,118 110,934
Balance sheet Y/e 31 Mar (Rs mn) FY12 FY13E FY14E FY15E
Total cash & equi 362,293 331,114 383,983 434,810
Investments 1,595,600 1,866,853 2,193,552 2,621,294
Advances 2,537,277 2,943,241 3,487,740 4,237,605
Int‐earn assets 4,495,170 5,141,208 6,065,276 7,293,708
Fixed assets 46,147 53,069 61,029 70,184
Other assets 195,154 218,572 240,430 264,473
Total assets 4,736,471 5,412,849 6,366,734 7,628,365
Net worth 604,052 659,273 724,447 802,951
Deposits 2,555,000 3,014,899 3,617,879 4,395,723
Borrowings 1,401,649 1,541,814 1,803,922 2,182,746
Total int‐bear liab 3,956,649 4,556,713 5,421,802 6,578,469
Non‐int‐bearing liab 175,770 196,862 220,486 246,944
Total liabilities 4,132,418 4,753,576 5,642,287 6,825,413
Equity + Total liab 4,736,471 5,412,849 6,366,734 7,628,365
Key ratios Y/e 31 Mar FY12 FY13E FY14E FY15E
Growth matrix (%)
Net interest income 19.0 29.5 17.2 20.5
Total op income 16.4 20.7 16.4 19.6
Op profit (pre‐prov) 14.8 23.4 16.7 21.5
Net profit 25.5 21.6 15.9 21.7
Advances 17.3 16.0 18.5 21.5
Deposits 13.3 18.0 20.0 21.5
Total assets 16.6 14.3 17.6 19.8
Profitability Ratios (%)
NIM 2.6 2.9 2.9 2.9
Non‐int inc/Total inc 41.1 36.8 36.4 35.9
Return on Avg Equity 11.2 12.4 13.2 14.5
Return on Avg Assets 1.5 1.5 1.5 1.6
Per share ratios (Rs)
EPS 56.1 68.2 79.0 96.2
Adj.BVPS 507.9 552.7 605.8 669.8
DPS 16.0 18.0 20.0 25.0
Valuation ratios (x)
P/E 20.6 17.0 14.7 12.0
P/Adj.BVPS 2.3 2.1 1.9 1.7
Other key ratios (%)
Credit/Deposits 99.3 97.6 96.4 96.4
Cost/Income 43.0 41.7 41.6 40.7
CASA 43.5 43.0 44.5 46.0
CAR 18.5 17.9 16.6 15.1
Tier‐I capital 12.7 12.6 11.9 11.2
Gross NPLs/Loans 3.7 3.7 3.7 3.6
Credit Cost 0.4 0.8 0.8 0.8
Net NPLs/Net loans 0.7 0.8 0.8 0.7
Tax rate 26.6 27.0 27.0 27.0
Dividend yield 1.4 1.6 1.8 2.2
Sector: FMCG
Sector view: Positive
Sensex: 19,581
52 Week h/l (Rs): 307 / 197
Market cap (Rscr) : 225,949
6m Avg vol (‘000Nos): 5,996
Bloomberg code: ITC IB
BSE code: 500875
NSE code: ITC
FV (Re): 1
Prices as on Jan 01, 2013
Company rating grid
Low High
1 2 3 4 5
Earnings Growth
Cash flow
B/S Strength
Valuation appeal
Risk
Share price trend
50
100
150
200
Dec‐11 Apr‐12 Aug‐12 Dec‐12
ITC Sensex
Share holding pattern
-
20
40
60
80
100
Dec-11 M ar-12 Jun-12 Sep-12
Promoters Institutions Others%
Rating: BUY Target (18 months): Rs353
CMP: Rs287
Upside: 23.3%
Research Analyst: Vanmala Nagwekar
research@indiainfoline.com
ITC
Strong resilience in cigarette volumes Despite heavy tax burden and regulatory restrictions, ITC’s core cigarette business continues to display resilience with stable earnings growth and flat volume growth. In nine of the past ten years, ITC has registered EBIT growth in the range of 15‐20% p.a. despite steep excise and tax increases. ITC’s strong pricing power helps it take price hikes without loosing market share. In years of steep tax increases like FY08, FY09 and FY11, ITC focused on EBIT growth while witnessing a decline in volumes. This stability in cigarette EBIT growth is expected to continue driving consistent earnings growth for ITC. We expect ITC to witness 16.2% and 18.4% CAGR in revenues and net profit respectively over FY12‐14. Entry into the 64mm cigarette segment The new slab of lower excise duty for cigarettes below 65mm in length has provided ITC an opportunity to re‐enter this segment. ITC had exited the Rs2‐2.5/stick price point post the excise duty increase in FY11. The government has introduced a new slab of <65mm cigarettes with a lower excise rate of Rs0.66/stick (ITC was present in 69mm segment). We expect re‐entry in this segment with a 64mm offering at Rs2‐2.5/stick price point to help ITC improve its cigarette volume growth. Other-FMCG segment to break-even in current fiscal With improving profitability in the foods segment (60%+ of FMCG business) driven by higher margins in biscuits and staples segment, the other‐FMCG segment is emerging stronger. Personal care products are also gaining significant market share in key categories. ITC is investing heavily in brand building and plans to enter new categories (dairy, chocolates etc), which will further drive growth. The other‐FMCG division continues to record 20%+ revenue growth and is expected to break even at EBIT level in Q4 FY13 (78% yoy decline in loss at ~Rs692mn in H1 FY13). Dominance to continue… so would premium valuation ITC remains one of our top picks in the sector given the strong resilience in its core cigarette business. We believe with the ban on gutka and paan masala by almost thirteen states, some demand will shift from these tobacco products to cigarettes, which will partly help ITC improve cigarette volume growth. We see no major risks from plain packaging norms as India is primarily a single stick / loose cigarette market. ITC is gaining traction in non‐cigarette businesses as well, making it a well diversified growth company. Valuation summary Y/E Sales PAT EPS Change P/E EV/EBIDTA D/E RoE
March Rs mn Rs mn Rs % yoy (x) (x) (x) %
FY12 247,984 61,624 7.9 23.6 36.4 26.1 0.0 35.5
FY13E 287,827 72,901 9.3 18.3 30.7 22.0 0.0 36.6
FY14E 334,906 86,344 11.0 18.4 26.0 18.5 0.0 38.5
FY15E 390,688 102,572 13.1 18.8 21.8 15.6 0.0 40.5
Source: Company, India Infoline Research
ITC
22
Key risks Disruptive change in cigarette taxation structure could impact volumes and margins adversely. Significant decline in cigarette volumes on the back of price hikes could dent profitability and valuations. Delay in FMCG breakeven or rise in losses due to gestation for new ventures. Focus charts
Trend in cigarette revenues & EBIT margins Strong resilience in cigarette volumes
30,000
35,000
40,000
45,000
50,000
55,000
60,000
65,000
Q1 FY10
Q2 FY10
Q3 FY10
Q4 FY10
Q1 FY11
Q2 FY11
Q3 FY11
Q4 FY11
Q1 FY12
Q2 FY12
Q3 FY12
Q4 FY12
Q1 FY13
Q2 FY13
(Rs mn)
25.0
27.5
30.0
32.5
35.0(%)
Cigarette revenues EBIT Margins
(4)
(2)
0
2
4
6
8
10
Q1 FY10
Q2 FY10
Q3 FY10
Q4 FY10
Q1 FY11
Q2 FY11
Q3 FY11
Q4 FY11
Q1 FY12
Q2 FY12
Q3 FY12
Q4 FY12
Q1 FY13
Q2 FY13
(%)
Source: Company, India Infoline Research
Rising Other‐FMCG revenues Losses reduce… likely to break‐even in Q4 FY14E
5,000
8,000
11,000
14,000
17,000
20,000
Q1 FY10
Q2 FY10
Q3 FY10
Q4 FY10
Q1 FY11
Q2 FY11
Q3 FY11
Q4 FY11
Q1 FY12
Q2 FY12
Q3 FY12
Q4 FY12
Q1 FY13
Q2 FY13
(Rs mn)
5
10
15
20
25
30
35(yoy %)
(1,100)
(900)
(700)
(500)
(300)
(100)
Q1 FY10
Q2 FY10
Q3 FY10
Q4 FY10
Q1 FY11
Q2 FY11
Q3 FY11
Q4 FY11
Q1 FY12
Q2 FY12
Q3 FY12
Q4 FY12
Q1 FY13
Q2 FY13
(Rs mn)
Source: Company, India Infoline Research
Segment wise revenue mix Segment wise EBIT mix
Agri
15%
Cigarette
57%
Hotels
3%
FMCG
14%
Paper
11%
Hotels
3%Paper
11%
Cigarette
79%
Agri
7%
Source: Company, India Infoline Research
ITC
23
Financials Income statement Y/e 31 Mar (Rs m) FY12 FY13E FY14E FY15E
Revenue 247,984 287,827 334,906 390,688
Operating profit 84,732 100,452 118,892 140,648
Depreciation (6,985) (7,550) (8,315) (9,080)
Interest expense (779) (579) (579) (579)
Other income 12,007 14,102 16,052 18,752
Profit before tax 88,975 106,425 126,050 149,741
Taxes (27,352) (33,524) (39,706) (47,168)
Adj. profit 61,624 72,901 86,344 102,572
Balance sheet Y/e 31 Mar (Rs m) FY12 FY13E FY14E FY15E
Equity capital 7,818 7,818 7,818 7,818
Reserves 180,101 203,034 230,326 260,219
Net worth 187,919 210,853 238,145 268,037
Debt 791 791 791 791
Deferred tax liab (net) 8,727 8,727 8,727 8,727
Total liabilities 197,437 220,371 247,663 277,555
Fixed assets 113,759 126,210 142,895 158,815
Investments 63,166 64,533 64,533 64,533
Net working capital (7,678) (3,822) (1,052) 1,209
Inventories 56,378 70,971 82,580 96,334
Sundry debtors 9,860 11,434 13,304 15,520
Other current assets 18,311 22,311 24,311 27,811
Sundry creditors (14,248) (16,560) (19,269) (22,478)
Other current liab. (77,979) (91,979) (101,979) (115,979)
Cash 28,189 33,451 41,287 52,998
Total assets 197,437 220,371 247,663 277,555
Cash flow statement Y/e 31 Mar (Rs m) FY12 FY13E FY14E FY15E
Profit before tax 88,975 106,425 126,050 149,741
Depreciation 6,985 7,550 8,315 9,080
Tax paid (27,352) (33,524) (39,706) (47,168)
Working capital ∆ 1,350 (3,855) (2,770) (2,261)
Operating cashflow 69,959 76,596 91,889 109,391
Capital expenditure (23,959) (20,000) (25,000) (25,000)
Free cash flow 46,000 56,596 66,889 84,391
Equity raised 7,653 ‐ ‐ 0
Investments (7,620) (1,367) ‐ ‐
Debt financing/disposal (94) ‐ ‐ ‐
Dividends paid (40,890) (49,967) (59,052) (72,680)
Other items 709 ‐ ‐ ‐
Net ∆ in cash 5,757 5,261 7,836 11,711
Key ratios Y/e 31 Mar FY12 FY13E FY14E FY15E
Growth matrix (%)
Revenue growth 17.2 16.1 16.4 16.7
Op profit growth 19.0 18.6 18.4 18.3
EBIT growth 22.3 19.2 18.3 18.7
Net profit growth 23.6 18.3 18.4 18.8
Profitability ratios (%)
OPM 34.2 34.9 35.5 36.0
EBIT margin 36.2 37.2 37.8 38.5
Net profit margin 24.8 25.3 25.8 26.3
RoCE 49.1 51.2 54.1 57.2
RoNW 35.5 36.6 38.5 40.5
RoA 22.7 23.6 24.7 26.1
Per share ratios
EPS 7.9 9.3 11.0 13.1
Dividend per share 4.5 5.5 6.5 8.0
Cash EPS 8.8 10.3 12.1 14.3
Book value per share 24.0 27.0 30.5 34.3
Valuation ratios (x)
P/E 36.4 30.7 26.0 21.8
P/CEPS 32.7 27.9 23.7 20.1
P/B 11.9 10.6 9.4 8.4
EV/EBIDTA 26.1 22.0 18.5 15.6
Payout (%)
Dividend payout 66.4 68.5 68.4 70.9
Tax payout 30.7 31.5 31.5 31.5
Liquidity ratios
Debtor days 15 15 15 15
Inventory days 83 90 90 90
Creditor days 21 21 21 21
Leverage ratios
Interest coverage 115.2 184.7 218.6 259.5
Net debt / equity (0.15) (0.15) (0.17) (0.19)
Net debt / op. profit (0.3) (0.3) (0.3) (0.4)
Du‐pont analysis Y/e 31 Mar (Rs m) FY12 FY13E FY14E FY15E
Tax burden (x) 0.69 0.69 0.69 0.69
Interest burden (x) 0.99 0.99 1.00 1.00
EBIT margin (x) 0.36 0.37 0.38 0.38
Asset turnover (x) 0.91 0.93 0.96 1.00
Financial leverage (x) 1.57 1.55 1.55 1.55
RoE (%) 35.5 36.6 38.5 40.5
Sector: Financials
Sector view: Positive
Sensex: 19,581
52 Week h/l (Rs): 299 / 214
Market cap (Rscr) : 15,001
6m Avg vol (‘000Nos): 2,531
Bloomberg code: LICHF IN
BSE code: 500253
NSE code: LICHSGFIN
FV (Rs): 2
Price as on d Jan 01, 2013
Company rating grid
Low High
1 2 3 4 5
Earnings Growth
Cash flow
B/S Strength
Valuation appeal
Risk
Share price trend
90
100
110
120
130
140
Dec‐11 Apr‐12 Aug‐12 Dec‐12
LIC Housing Fin Sensex
Share holding pattern
‐
20
40
60
80
100
Dec‐11 Mar‐12 Jun‐12 Sep‐12
Promoters Institutions Others
%
Rating: BUY Target (18 months): Rs390
CMP: Rs297
Upside: 31.3%
Research Analyst: Rajiv Mehta
Bhavna Sinyal research@indiainfoline.com
LIC Housing Finance Ltd
Secular growth to continue for leading housing financier Driven by macro drivers of rising affordability and increasing urbanization and indigenous advantages of wide distribution, superior service quality, product improvisation and competitive pricing, LIC Housing Finance (LICHF) has witnessed an impressive 31.6% loan CAGR over FY09‐12. It is one of the leading housing finance companies currently with outstanding book at Rs691bn and market share of ~10%. Individual loan portfolio comprises 96% of the book and has witnessed robust 33.4% CAGR over FY09‐12. The residual 4% book is loans to project developers having shorter maturities but carrying significantly higher rates. Strong loan growth would likely continue underpinned by persistent traction in individual home loans and revival in project loan disbursals. NIM to witness cyclical recovery over medium term LICHF’s NIM has declined by 135bps over the past six quarters and stood at a multi‐quarter low of 2.1% in Q2 FY13. Margin compression was driven by steep increase in funding cost, partial inertia in loan yield (a large portion of disbursals over FY10‐12 came from products having fixed rate in initial years) and significant decline in contribution of project loans. We believe NIM is near its cyclical bottom and is set to improve in ensuing quarters aided by upward re‐pricing of Rs100‐120bn Fix‐o‐Floaty loans (by at least 200bps), decline in funding cost and increase in the share of project loans. Recent capital raising (Rs8.1bn) from parent and planned QIP (~Rs12bn) would also support margin. Asset quality intact; RoA delivery to improve LICHF enjoys superior asset quality with Gross NPA ratio at 0.6% at end‐Q2 FY13. In the individual loan segment, granularity in loan book (average ticket size of Rs1.5‐1.6mn), substantial exposure to salaried class/end‐user segment, lower average LTV (50‐60%) and stringent credit assessment underscore lower delinquency rates. Even in the developer portfolio, gross NPAs of LICHF are lower than the banking industry. Based on our presumption of brisk loan growth, material improvement in margin and stable operating and credit costs, we believe that RoA delivery would start improving from H2 FY13. Valuation at tipping point; stock set for substantial upside Aided by margin recovery, LICHF would revert back to high earnings growth trajectory over FY13‐15 (estimated 30% CAGR). This along with improving return ratios should drive a structural valuation re‐rating over the medium term. Further, the stock is currently trading at attractive discount (40‐45% on FY14 Adj.BV) to its larger peer HDFC. Valuation summary Y/E Tot Inc PAT Chg Adj.BV P/ABV RoA RoE Tier‐1
March (Rs mn) (Rs mn) (% yoy) (Rs) (x) (%) (%) (%)
FY12 16,240 9,142 (6.2) 110.8 2.7 1.6 18.6 11.0
FY13E 18,770 10,594 15.9 125.9 2.4 1.6 17.3 10.3
FY14E 24,066 13,861 30.8 146.7 2.0 1.7 19.6 9.8
FY15E 30,378 17,961 29.6 174.2 1.7 1.8 21.5 9.5
Source: Company, India Infoline Research
s
LIC Housing Finance Ltd
25
Key risks to our view Intensified competition in the home loan market would affect growth and profitability
A slower‐than‐anticipated decline in interest rates would elongate LICHF’s margin expansion
Focus charts
Loan growth remains strong at 20‐25% yoy Robust disbursements of individual home loans
10
15
20
25
30
35
40
Q3FY10
Q4FY10
Q1FY11
Q2FY11
Q3FY11
Q4FY11
Q1FY12
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Q2FY13
(%)
0%
20%
40%
60%
80%
100%
Q3FY10
Q4FY10
Q1FY11
Q2FY11
Q3FY11
Q4FY11
Q1FY12
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Q2FY13
Individual Others
Source: Company, India Infoline Research
NIM impacted by ALM issues, but set to recover Gross NPA % ‐ Assets quality has been intact
0.0
0.7
1.4
2.1
2.8
3.5
Q3FY10
Q4FY10
Q1FY11
Q2FY11
Q3FY11
Q4FY11
Q1FY12
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Q2FY13
(%)
0.2
0.4
0.6
0.8
1.0
1.2
Q4FY10
Q1FY11
Q2FY11
Q3FY11
Q4FY11
Q1FY12
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Q2FY13
(%)
Source: Company, India Infoline Research
Gradual recovery in RoA expected Earnings growth to bounce back in FY14/15
0.9
1.2
1.5
1.8
2.1
2.4
FY11 FY12 FY13E FY14E FY15E
(%)
‐10.0
0.0
10.0
20.0
30.0
40.0
50.0
FY10 FY11 FY12 FY13E FY14E FY15E
(%)
Source: Company, India Infoline Research
LIC Housing Finance Ltd
26
Financials Income statement Y/e 31 Mar (Rs m) FY12 FY13E FY14E FY15E
Interest income 59,827 74,165 89,753 107,053
Interest expense (45,911) (58,067) (68,627) (80,115)
Net interest income 13,916 16,097 21,126 26,938
Non‐interest income 2,324 2,673 2,940 3,440
Total op income 16,240 18,770 24,066 30,378
Total op expenses (2,371) (2,774) (3,190) (3,668)
Op profit (pre‐prov) 13,870 15,996 20,876 26,710
Total provisions (1,561) (1,680) (2,145) (2,438)
Profit before tax 12,309 14,316 18,731 24,271
Taxes (3,167) (3,722) (4,870) (6,311)
Net profit 9,142 10,594 13,861 17,961
Balance sheet Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E
Investments 14,034 14,736 15,472 16,246
Advances 630,802 769,578 946,581 1,173,761
Net current assets (27,715) (40,992) (51,685) (64,958)
Fixed assets 626 720 828 952
Total assets 617,747 744,042 911,197 1,126,001
Net worth 56,821 65,303 76,348 90,789
Secured loans 503,688 609,462 749,639 929,552
Unsecured loans 57,253 69,276 85,210 105,660
Total int‐bearing liabs 560,941 678,739 834,848 1,035,212
Equity + Total liabilities 617,762 744,042 911,197 1,126,001
Key ratios Y/e 31 Mar FY12 FY13E FY14E FY15E
Growth matrix (%)
Net interest income 1.4 15.7 31.2 27.5
Total op income (8.3) 15.6 28.2 26.2
Op profit (pre‐provision) (10.8) 15.3 30.5 27.9
Net profit (6.2) 15.9 30.8 29.6
Loans 23.5 22.0 23.0 24.0
Borrowings 24.2 21.0 23.0 24.0
Total assets 25.2 20.4 22.5 23.6
Profitability Ratios (%)
NIM 2.4 2.3 2.4 2.5
Non‐int inc/Total inc 14.3 14.2 12.2 11.3
Return on Avg Equity 18.6 17.3 19.6 21.5
Return on Avg Assets 1.6 1.6 1.7 1.8
Per share ratios (Rs)
EPS 18.1 21.0 27.5 35.6
Adj.BVPS 110.8 125.9 146.7 174.2
DPS 3.3 3.6 4.8 6.0
Valuation ratios (x)
P/E 16.4 14.1 10.8 8.3
P/Adj.BVPS 2.7 2.4 2.0 1.7
Other key ratios (%)
Loans/Borrowings 112.5 113.4 113.4 113.4
Cost/Income 14.6 14.8 13.3 12.1
CAR 16.7 14.8 13.5 12.5
Tier‐I capital 11.0 10.3 9.8 9.5
Gross NPLs/Loans 0.4 0.5 0.5 0.6
Total prov/Avg loans 0.3 0.2 0.3 0.2
Net NPLs/Net loans 0.1 0.2 0.2 0.2
Tax rate 25.7 26.0 26.0 26.0
Dividend yield 1.1 1.3 1.7 2.1
Sector: Oil & Gas
Sector view: Neutral
Sensex: 19,581
52 Week h/l (Rs): 180 / 122
Market cap (Rscr) : 11,850
6m Avg vol (‘000Nos): 1,301
Bloomberg code: PLNG IB
BSE code: 532522
NSE code: PETRONET
FV (Rs): 10
Prices as on Jan 01, 2013
Company rating grid
Low High
1 2 3 4 5
Earnings Growth
Cash Flow
B/S Strength
Valuation appeal
Risk
Share price trend
75
105
135
Jan‐12 May‐12 Sep‐12 Jan‐13
Petronet Sensex
Share holding pattern
‐
20
40
60
80
100
Dec‐11 Mar‐12 Jun‐12 Sep‐12
Promoters Institutions Others%
Rating: BUY Target (18 months): Rs208
CMP: Rs158
Upside: 31.6%
Research Analyst: Prayesh Jain Naman Jain
research@indiainfoline.com
Petronet LNG
Domestic LNG demand to remain strong India has been a gas starved country for long. The situation has only worsened with 1) declining production at RIL’s KG‐D6 field, 2) natural decline at ONGC’s high profile fields and 3) robust increase in natural gas demand. In such a scenario, LNG imports have partly met the supply deficit and Petronet LNG, country’s largest importer has been the biggest beneficiary of this. Demand for LNG is expected to remain strong in the country given 1) shortage of power supply, 2) our expectations of a fall in LNG prices on the back of rising global supply and weakening Japanese demand and 3) muted ramp up expected in domestic gas production.
Higher domestic gas prices benefit LNG demand As per media reports, Rangarajan Committee has recommended to raise the gas prices to US$8/mmbtu. This, if implemented, would improve the relative attractiveness of LNG as the gap between domestic price and LNG price would reduce by ~50% attracting demand from sectors using APM gas.
Petronet expanding capacity from 10mtpa to 25mtpa by 2017E To leverage on the rising demand for LNG, Petronet has embarked on an expansion program whereby 1) start of Kochi terminal with a capacity of 5mtpa in FY14, 2) expansion capacity at Dahej terminal in two phases a) marine facilities by end of FY14 and b) increase in regasification and storage capacities by H2 FY16, 3) new terminal at Gangavaram by FY17. Eventually, Petronet will have a capacity of 25mtpa by FY17E vis‐à‐vis 10mtpa currently.
Robust business model Amidst profound business prospects, Petronet has evolved a robust business model wherein it passes any fluctuations in currency and LNG to its customers, thereby protecting its earnings in a gyrating global LNG market. Furthermore, with substantial volumes being locked in through long term contracts with suppliers and consumers, revenue visibility is robust. On the customer side, it has offtake agreements with GAIL, IOC and BPCL. It charges a fixed re‐gasification margin (which rise 5% per annum) on the volumes handled and thereby operates in an annuity like business model.
Strong earnings growth FY15E onwards With complete ramp‐up in Kochi facility in FY15 along with higher operational capacity at Dahej, FY15E earnings are expected to jump 29.4% (following a flattish FY14). On FY15E EPS of Rs19.8, the stock trades at a P/E multiple of 8x, which we find attractive given robust earnings growth, healthy balance sheet and 20%+ return ratios.
Valuation summary Y/E Sales PAT EPS Change P/E EV/EBIDTA D/E RoE
March Rs mn Rs mn Rs % yoy (x) (x) (x) %
FY12 226,959 10,575 14.1 70.6 11.3 7.6 0.9 34.1
FY13E 291,360 11,735 15.6 11.0 10.2 7.0 0.7 29.2
FY14E 361,373 11,469 15.3 (2.3) 10.4 6.0 0.5 22.9
FY15E 479,148 14,845 19.8 29.4 8.0 5.0 0.4 24.1
Source: Company, India Infoline Research
Petronet LNG
28
Key risks Regulations over marketing margins could dent profitability
Incapability of increasing re‐gas tariffs at Dahej will dent earning estimates for the company
Higher than expected domestic gas production can negatively impact demand for LNG Focus charts
Domestic natural gas demand to far overshoot domestic gas supplies
0
100
200
300
400
500
600
FY13E FY14E FY15E FY16E FY17E FY20E FY30E
Estimated demand Domestic supply
mmscmd
Source: Company, India Infoline Research
US changing from large importer to exporter of LNG Petronet capacity expansion trend
‐4
‐2
0
2
4
6
8
10
12
14
2009 2011 2013 2015 2017 2019 2021 2023 2025
AEO 2012
AEO 2004
bcfd
0
5
10
15
20
25
30
FY09 FY10 FY11 FY12 FY13E FY14E FY15E FY16E FY17E
Gangavaram capacity
Kochi capacity
Dahej capacity
mtpa
Source: EIA Annual energy outlook, India Infoline Research Source: Company, India Infoline Research
Petronet re‐gas charges rise 5% p.a. Attractive valuations
0
5
10
15
20
25
30
35
40
45
CY04
CY05
CY06
CY07
CY08
CY09
CY10
CY11
CY12
CY13E
CY14E
Rs/mmbtu
0
50
100
150
200
250
300
Apr‐06
Oct‐06
Apr‐07
Oct‐07
Apr‐08
Oct‐08
Apr‐09
Oct‐09
Apr‐10
Oct‐10
Apr‐11
Oct‐11
Apr‐12
Oct‐12
Apr‐13
CMP 5.1x 8.2x
11.4x 14.5x 17.6x
Rs
Source: Company, India Infoline Research Source: Bloomberg, Company, India Infoline Research
Petronet LNG
29
Financials Income statement Y/e 31 Mar (Rs m) FY12 FY13E FY14E FY15E
Revenue 226,959 291,360 361,373 479,148
Operating profit 18,292 20,913 23,640 29,559
Depreciation (1,842) (2,578) (4,242) (4,762)
Interest expense (1,774) (1,820) (3,281) (3,641)
Other income 849 1,000 1,000 1,000
Profit before tax 15,525 17,514 17,117 22,156
Taxes (4,950) (5,780) (5,649) (7,312)
Adj. profit 10,575 11,735 11,469 14,845
Balance sheet Y/e 31 Mar (Rs m) FY12 FY13E FY14E FY15E
Equity capital 7,500 7,500 7,500 7,500
Reserves 27,698 37,707 47,451 60,571
Net worth 35,198 45,207 54,951 68,071
Debt 30,340 30,340 27,340 30,340
Def tax liab (net) 3,630 2,692 2,692 2,692
Total liabilities 69,168 78,239 84,983 101,102
Fixed assets 58,113 73,213 77,213 96,213
Investments 1,399 1,399 1,399 1,399
Net working cap (185) 256 529 1,934
Inventories 7,124 9,163 11,381 15,115
Sundry debtors 12,859 16,540 20,544 27,285
Other curr assets 2,775 3,179 3,642 4,176
Sundry creditors (12,686) (16,317) (20,267) (26,917)
Other curr liab (10,257) (12,309) (14,771) (17,725)
Cash 9,841 3,372 5,842 1,557
Total assets 69,168 78,239 84,983 101,102
Cash flow statement Y/e 31 Mar (Rs m) FY12 FY13E FY14E FY15E
Profit before tax 15,525 17,514 17,117 22,156
Depreciation 1,842 2,578 4,242 4,762
Tax paid (4,950) (5,780) (5,649) (7,312)
Working capital ∆ 386 (441) (274) (1,405)
Operating cash flow
12,803 13,872 15,436 18,202
Capex (10,902) (17,678) (8,242) (23,762)
Free cash flow 1,901 (3,806) 7,195 (5,560)
Equity raised (454) ‐ ‐ ‐
Investments 10,250 ‐ ‐ ‐
Debt raised/repaid (1,822) ‐ (3,000) 3,000
Dividends paid (1,725) (1,725) (1,725) (1,725)
Other items 150 (938) ‐ ‐
Net ∆ in cash 8,301 (6,469) 2,470 (4,285)
Key ratios Y/e 31 Mar FY12 FY13E FY14E FY15E
Growth matrix (%)
Revenue growth 72.0 28.4 24.0 32.6
Op profit growth 50.4 14.3 13.0 25.0
EBIT growth 57.3 11.8 5.5 26.5
Net profit growth 70.6 11.0 (2.3) 29.4
Profitability ratios (%)
OPM 8.1 7.2 6.5 6.2
EBIT margin 7.6 6.6 5.6 5.4
Net profit margin 4.7 4.0 3.2 3.1
RoCE 26.3 26.2 25.0 27.7
RoNW 34.1 29.2 22.9 24.1
RoA 12.7 11.8 10.1 11.2
Per share ratios
EPS 14.1 15.6 15.3 19.8
Dividend per share 2.0 2.0 2.0 2.0
Cash EPS 16.6 19.1 20.9 26.1
Book value per share 46.9 60.3 73.3 90.8
Valuation ratios
P/E 11.3 10.2 10.4 8.0
P/CEPS 9.6 8.3 7.6 6.1
P/B 3.4 2.6 2.2 1.8
EV/EBIDTA 7.6 7.0 6.0 5.0
Payout (%)
Dividend payout 16.3 14.7 15.0 11.6
Tax payout 31.9 33.0 33.0 33.0
Liquidity ratios
Debtor days 21 21 21 21
Inventory days 11 11 11 12
Creditor days 20 20 20 21
Leverage ratios
Net debt / equity 0.6 0.6 0.4 0.4
Net debt / op. profit 1.1 1.3 0.9 1.0
Du‐Pont analysis Y/e 31 Mar (Rs m) FY12 FY13E FY14E FY15E
Tax burden (x) 0.68 0.67 0.67 0.67
Interest burden (x) 0.90 0.91 0.84 0.86
EBIT margin (x) 0.08 0.07 0.06 0.05
Asset turnover (x) 2.72 2.93 3.19 3.61
Financial leverage (x) 2.69 2.47 2.27 2.16
RoE (%) 34.1 29.2 22.9 24.1
Sector: Financials
Sector view: Positive
Sensex: 19,581
52 Week h/l (Rs): 785 / 416
Market cap (Rscr) : 17,150
6m Avg vol (‘000Nos): 323
Bloomberg code: SHTF IN
BSE code: 511218
NSE code: SRTRANSFIN
FV (Rs): 10
Prices as on Jan 01, 2013
Company rating grid
Low High
1 2 3 4 5
Earnings Growth
RoA Progression
B/S Strength
Valuation appeal
Risk
Share price trend
90
110
130
150
170
190
Dec‐11 Apr‐12 Aug‐12 Dec‐12
STFC Sensex
Share holding pattern
‐
20
40
60
80
100
Dec‐11 Mar‐12 Jun‐12 Sep‐12
Promoters Institutions Others
%
Rating: BUY Target (18 months): Rs950
CMP: Rs754
Upside: 25.9%
Research Analyst: Rajiv Mehta
Bhavna Sinyal research@indiainfoline.com
Shriram Transport Finance Co
Largest CV financier with a niche business model Shriram Transport Finance Company (STFC) is the largest CV financier commanding ~25% market share in pre‐owned CV financing and 7‐8% market share in new truck financing. With 30+ years of experience and strong expertise in loan origination, used vehicle valuation and cash collection, STFC’s business model is difficult to replicate. Therefore, other organized players combined form only ~10% of the used CV financing market. STFC has pan‐india presence through a network of 502 offices, 8,200+ field officers and partnership with 500+ private financiers. Company has mainly focused on SRTOs operating on state highways ferrying essential commodities. Company’s product portfolio also includes financing of tractors, LCVs, 3Ws, passenger CVs and CEs.
Rural and Automall initiatives driving disbursement growth After being impacted by slowing economic activity and coal/iron ore mining issues, STFC’s disbursement growth has started to improve. The revival is largely attributable to company’s rural penetration drive and improving traction from Automalls. STFC is in the process of widening its rural reach by increasing the number of centres from 250 to 400 by the year end. The new low‐cost centers are generating substantial business and have added 35,000 new customers. Automall, a large transacting platform for buyers and sellers of pre‐owned CVs, currently contributes ~25% to company’s monthly disbursement volume. STFC has 10 big Automalls and 40 such smaller centres across the country. We believe that revival in economic activity, resolution of mining issues and expansion of rural and Automall initiatives would drive higher disbursements and healthy AUM growth over FY12‐15.
NIM to remain steady; NPLs to adjust higher to new norms Robust lending yields, strong credit rating and brand equity underpin STFC’s attractive NIMs in the range of 7‐9%. With nearly matching asset‐liability maturity profile, margins have moved in a narrow band. In the medium term, NIM is expected to inch up aided by loan mix shift towards used CVs and lower re‐pricing of bank loans. Given secured nature of business, ease in liquidation of asset, resilient customer segment and default‐linked incentive structure for field officers, STFC has traditionally seen moderate delinquencies across CV/rate cycles. Minning related NPLs which cropped up due to regulatory issues have been largely provided. Based on RBI’s draft guidelines on NPA recognition and standard asset provisioning, STFC’s GNPL ratio and credit cost would materially increase in the coming three years. This would however be a one‐time adjustment to comply with more stringent norms. Even after absorbing the full impact of new regulations, RoA/RoE would settle at healthy levels of 2.5‐2.7%/17‐19% in the longer term. Such return ratios should support at least the current level of valuation (2.1x 1‐yr fwd P/adj.BV).
Valuation summary Y/E Tot Inc PAT Chg Adj.BV P/ABV RoA RoE Div Yld
March (Rs mn) (Rs mn) (% yoy) (Rs) (x) (%) (%) (%)
FY12 34,343 12,591 2.2 260.4 2.9 2.8 23.1 0.9
FY13E 38,350 13,889 10.3 311.7 2.4 2.8 21.1 0.9
FY14E 46,244 16,258 17.1 371.1 2.0 2.9 20.6 1.1
FY15E 56,225 17,399 7.0 414.8 1.8 2.5 18.6 1.2
Source: Company, India Infoline Research
Shriram Transport Finance Co
31
Key risks to our view Elongation of CV recovery cycle and rate down cycle would impact company’s performance
NPLs could increase higher than estimated if company fails to respond effectively to new recognition norms Focus charts
AUM growth has started to improve Used CV disbursements have been robust
0
5
10
15
20
25
30
Q1 FY11
Q2 FY11
Q3 FY11
Q4 FY11
Q1 FY12
Q2 FY12
Q3 FY12
Q4 FY12
Q1 FY13
Q2 FY13
(%)
20
30
40
50
60
70
Q1 FY11
Q2 FY11
Q3 FY11
Q4 FY11
Q1 FY12
Q2 FY12
Q3 FY12
Q4 FY12
Q1 FY13
Q2 FY13
(Rs bn)
65.0
70.0
75.0
80.0
85.0
90.0
Disbursements Used CV share
(%)
Source: Company, India Infoline Research
NIM and Spread have moved in a narrow band Cost/income ratio to decline with opex leverage
6
7
8
9
10
11
12
Q1 FY11
Q2 FY11
Q3 FY11
Q4 FY11
Q1 FY12
Q2 FY12
Q3 FY12
Q4 FY12
Q1 FY13
Q2 FY13
(%)
NIM Gross Spread
16.0
18.0
20.0
22.0
24.0
26.0
FY11 FY12 FY13E FY14E FY15E
(%)
Source: Company, India Infoline Research
Gross NPLs and Credit Cost to increase RoA/RoE to moderate but remain healthy
0.0
1.0
2.0
3.0
4.0
5.0
FY11 FY12 FY13E FY14E FY15E
(%)
1.0
1.5
2.0
2.5
3.0
3.5
Gross NPL Credit Cost
(%)
1.5
1.9
2.3
2.7
3.1
3.5
FY11 FY12 FY13E FY14E FY15E
(%)
10.0
14.0
18.0
22.0
26.0
30.0
RoA RoE
(%)
Source: Company, India Infoline Research
Shriram Transport Finance Co
32
Financials Income statement Y/e 31 Mar (Rs mn) FY12 FY13E FY14E FY15E
Interest income 56,532 65,095 77,430 93,598
Interest expense (24,612) (29,652) (34,675) (41,560)
Net interest income 31,920 35,443 42,755 52,038
Non‐interest income 2,423 2,908 3,489 4,187
Total op income 34,343 38,350 46,244 56,225
Total op expenses (7,835) (8,853) (10,181) (11,607)
Op profit (pre‐prov) 26,508 29,497 36,063 44,618
Total provisions (7,683) (8,767) (11,798) (18,649)
Profit before tax 18,826 20,730 24,265 25,969
Taxes (6,235) (6,841) (8,007) (8,570)
Net profit 12,591 13,889 16,258 17,399
Balance sheet Y/e 31 Mar (Rs mn) FY12 FY13E FY14E FY15E
Total cash & equiv 53,812 45,838 45,330 46,018
Investments 39,544 14,544 23,271 30,252
Advances 220,821 313,186 390,438 484,144
Tot int‐earn assets 314,178 373,568 459,040 560,414
Net Curr Assets (25,920) (29,080) (32,622) (36,592)
Fixed assets 377 528 607 698
Other assets 2,562 2,562 2,562 2,562
Total assets 291,197 347,578 429,586 527,083
Net worth 59,923 71,975 86,000 101,036
Borrowings 231,274 275,604 343,586 426,046
Equity + Total liab 291,197 347,578 429,586 527,083
Key ratios Y/e 31 Mar FY12 FY13E FY14E FY15E
Growth matrix (%)
Net interest income 7.8 11.0 20.6 21.7
Total op income 8.7 11.7 20.6 21.6
Op profit (pre‐prov) 10.2 11.3 22.3 23.7
Net profit 2.2 10.3 17.1 7.0
Advances 11.2 41.8 24.7 24.0
Total assets 17.5 19.4 23.6 22.7
Profitability Ratios (%)
NIM 8.4 8.1 8.2 8.1
Non‐int inc/Total inc 7.1 7.6 7.5 7.4
Return on Avg Equity 23.1 21.1 20.6 18.6
Return on Avg Assets 2.8 2.8 2.9 2.5
Per share ratios (Rs)
EPS 55.6 61.4 71.8 76.9
Adj.BVPS 260.4 311.7 371.1 414.8
DPS 6.5 7.0 8.5 9.0
Valuation ratios (x)
P/E 13.5 12.2 10.4 9.8
P/Adj.BVPS 2.9 2.4 2.0 1.8
Other key ratios (%)
Loans/Borrowings 95.5 113.6 113.6 113.6
Cost/Income 22.8 23.1 22.0 20.6
Gross NPLs/Loans 2.9 3.0 3.1 4.8
Credit Cost 2.0 2.0 2.3 2.9
Net NPLs/Net loans 0.4 0.5 0.5 1.5
Tax rate 33.1 33.0 33.0 33.0
Dividend yield 0.9 0.9 1.1 1.2
Sector: Alcoholic Beverages
Sector view: Positive
Sensex: 19,581
52 Week h/l (Rs): 2,150/450
Market cap (Rscr) : 24,582
6m Avg vol (‘000Nos): 4,632
Bloomberg code: UNSP IB
BSE code: 532432
NSE code: MCDOWELL_N
FV (Rs): 10
Prices as on Jan 01, 2013
Company rating grid
Low High
1 2 3 4 5
Earnings Growth
Cash flow
B/S Strength
Valuation appeal
Risk
Share price trend
0
100
200
300
400
Dec‐11 Jun‐12 Dec‐12
UNSP Sensex
Share holding pattern
0
20
40
60
80
100
Dec‐11 Mar‐12 Jun‐11 Sep‐12
%Promoters FIIs Others
Rating: BUY Target (18 months): Rs2,400
CMP: Rs1,953
Upside: 22.9%
Research Analyst: Bhavesh Gandhi
research@indiainfoline.com
United Spirits
Diageo to support premiumization efforts at UNSP United Spirits would retain its focus on premiumization of spirits portfolio and in the process is not averse to take a hit on volumes so as to improve revenue mix and margins. After the preferential allotment, Diageo to hold 27.4% stake in United Spirits and would support fine tuning and segmentation around brands in order to facilitate premiumization. However, Diageo would not directly introduce its own brands in to UNSP stable though we would have preferred Diageo using UNSP distribution strength to promote its premium brands.
Margins to climb ~150bps over FY13-15E Diageo believes additional investments are required on marketing and selling (advertising spends from current 5% of sales to probably 6‐7%) to drive premiumization strategy. This would probably keep margin expansion under check than otherwise would have been possible, given the focus on improvement of revenue mix over next few years. We model in 156bps margin expansion over FY13‐15E though eventually Diageo expects UNSP margins to reach historical levels. On an EBIDTA/case basis too, UNSP has room for margin improvement considering much smaller players like Radico Khaitan enjoy ~15% premium on EBIDTA/case as compared to that for UNSP.
Diageo deal to help pare debt in FY14; co to turn FCF +ve After the sale of treasury shares and 10% pref allotment to Diageo, UNSP is expected to garner ~Rs33bn which is to be used for debt reduction; accordingly, we expect 32% savings in FY14 interest cost that would help UNSP turn free cash flow positive in the next fiscal. Working capital days is likely to hover around 175 days and improvement in operating cycle might take about two years. Rerating potential exists over medium term; BUY UNSP stock has had a stellar run over past two months on the back of the deal with Diageo which can probably result in a 25‐30% upgrade of FY14 EPS due to savings on interest expenses. Over the next 2‐3 years, United Spirits is likely to sharpen its focus on selling of premium brands while backward integration steps taken in past 1‐2 years could probably keep raw material cost inflation under control. We expect UNSP, the largest domestic player with dominant market share, to leverage its twin bulwarks of unmatched distribution strength and high entry barriers and be the biggest beneficiary of the secular demand in spirits market. We forecast ~2.6x jump in PAT driven by margin uptick and interest cost reduction over FY13‐15; at 17.5x FY15E EV/EBIDTA, we believe potential exists for rerating in the medium term. Recommend BUY for an 18‐month target of Rs2,400. Valuation summary Y/E Sales PAT EPS Change P/E EV/EBIDTA D/E RoE
March Rs mn Rs mn Rs % yoy (x) (x) (x) %
FY12 91,865 1,879 14.9 (67.0) 130.8 30.6 1.8 1.6
FY13E 103,675 3,464 27.5 84.3 71.0 24.0 1.7 7.2
FY14E 113,351 6,315 43.5 57.9 44.9 21.6 0.7 9.1
FY15E 125,678 9,009 62.0 42.7 31.5 17.7 0.5 9.7
Source: Company, India Infoline Research
United Spirits
34
Key risks Higher than estimated rise in ENA costs and working capital expenses could lead to margin pressures and rise in leverage and thus impact our EPS estimates adversely Focus charts
Revenue growth trend over next 3 years Margins to improve ~150bps over FY13‐15E
0.0
5.0
10.0
15.0
20.0
25.0
30.0
FY10
FY11
FY12
FY13E
FY14E
FY15E
% yoy
0.0
5.0
10.0
15.0
20.0
25.0
FY07
FY08
FY09
FY10
FY11
FY12
FY13E
FY14E
FY15E
%
Source: Company, India Infoline Research
UNSP to turn FCF +ve in FY14 Leverage to be in comfortable territory
(24)
(18)
(12)
(6)
0
6
FY09
FY10
FY11
FY12
FY13E
FY14E
FY15E
Rs bn
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
FY09
FY10
FY11
FY12
FY13E
FY14E
FY15E
x
Source: Company, India Infoline Research
1‐yr fwd EV/EBIDTA bands 1‐yr fwd P/BV bands
0
100
200
300
400
500
Apr‐05
Aug‐05
Dec‐05
Apr‐06
Aug‐06
Dec‐06
Apr‐07
Aug‐07
Dec‐07
Apr‐08
Aug‐08
Dec‐08
Apr‐09
Aug‐09
Dec‐09
Apr‐10
Aug‐10
Dec‐10
Apr‐11
Aug‐11
Dec‐11
Apr‐12
Aug‐12
Dec‐12
Rs bnEV 9 15 21 27 33
0
1,000
2,000
3,000
4,000
5,000
Apr‐05
Aug‐05
Dec‐05
Apr‐06
Aug‐06
Dec‐06
Apr‐07
Aug‐07
Dec‐07
Apr‐08
Aug‐08
Dec‐08
Apr‐09
Aug‐09
Dec‐09
Apr‐10
Aug‐10
Dec‐10
Apr‐11
Aug‐11
Dec‐11
Apr‐12
Aug‐12
Dec‐12
Rs Price 1.3 3.2 5.1 7.1 9.0
Source: Company, India Infoline Research
United Spirits
35
Financials Income statement Y/e 31 Mar (Rs m) FY12 FY13E FY14E FY15E
Revenue 91,865 103,675 113,351 125,678
Op.profit 10,603 13,671 15,299 18,537
Depreciation (1,474) (1,524) (1,574) (1,624)
Interest exp (7,773) (8,139) (5,574) (4,909)
Other income 814 895 985 1,083
PBT 2,169 4,904 9,136 13,087
Taxes (1,481) (1,569) (2,924) (4,188)
Minorities 7 130 102 110
Adj. profit 695 3,464 6,315 9,009
Extra items 1,184 ‐ ‐ ‐
Net profit 1,879 3,464 6,315 9,009
Balance sheet Y/e 31 Mar (Rs m) FY12 FY13E FY14E FY15E
Equity capital 1,259 1,259 1,453 1,453
Reserves 45,359 48,461 87,298 95,889
Net worth 46,618 49,720 88,751 97,342
Minority int. 146 146 146 146
Debt 81,870 85,670 58,670 51,670
IPL liability 2,804 2,311 1,819 1,327
Total liabilities 131,437 137,847 149,386 150,484
Fixed assets 21,481 20,496 19,942 19,338
Intangible assets 58,405 58,307 58,208 58,109
Investments 2,384 2,384 2,384 2,384
Net working cap 45,997 53,877 66,397 68,478
Inventories 27,548 31,245 34,161 37,875
Sundry debtors 19,729 22,155 24,223 26,857
Cash 3,632 3,877 11,731 7,867
Other curr assets 22,216 26,126 28,564 31,671
Sundry creditors (19,951) (21,303) (23,291) (25,824)
Other curr lia (7,177) (8,223) (8,990) (9,968)
Misc.expenditure 2,578 2,191 1,863 1,583
Total assets 131,437 137,847 149,386 150,484
Cash flow statement Y/e 31 Mar (Rs m) FY12 FY13E FY14E FY15E
PBT 2,169 4,904 9,136 13,087
Depreciation 1,474 1,524 1,574 1,624
Misc.exp w/o (2,130) 387 329 279
Def tax (asset)/lia (267) ‐ ‐ ‐
Tax paid (1,481) (1,569) (2,924) (4,188)
Working capital ∆ (6,418) (7,635) (4,666) (5,945)
Other op.items 1,191 130 102 110
Operating CF (5,461) (2,260) 3,551 4,968
Capital exp (16,616) (441) (921) (921)
Free cash flow (22,077) (2,701) 2,630 4,046
Equity raised 3,334 ‐ 33,134 ‐
Debt fin/disp 17,921 3,800 (27,000) (7,000)
IPL liability (492) (492) (492) (492)
Dividends paid (381) (362) (418) (418)
Net ∆ in cash (2,690) 245 7,854 (3,864)
Key ratios Y/e 31 Mar FY12 FY13E FY14E FY15E
Growth matrix (%)
Revenue growth 24.5 12.9 9.3 10.9
Op profit growth (7.3) 28.9 11.9 21.2
EBIT growth (10.6) 31.2 12.8 22.3
Net profit growth (67.0) 84.3 82.3 42.7
Profitability ratios (%)
OPM 11.5 13.2 13.5 14.7
EBIT margin 10.8 12.6 13.0 14.3
Net profit margin 0.8 3.3 5.6 7.2
RoCE 8.3 9.7 10.2 12.0
RoNW 1.6 7.2 9.1 9.7
RoA 0.5 2.2 3.7 5.0
Per share ratios
EPS 5.5 27.5 43.5 62.0
Dividend per share 2.6 2.5 2.5 2.5
Cash EPS 17.2 39.6 54.3 73.2
Book value per share 370.4 395.0 610.7 669.8
Valuation ratio (x)
P/E 130.8 71.0 44.9 31.5
P/CEPS 113.3 49.3 36.0 26.7
P/B 5.3 4.9 3.2 2.9
EV/EBIDTA 30.6 24.0 21.6 17.7
Payout (%)
Dividend payout 54.8 10.4 6.6 4.6
Tax payout 68.3 32.0 32.0 32.0
Liquidity ratios
Debtor days 78 78 78 78
Inventory days 109 110 110 110
Creditor days 79 75 75 75
Leverage ratios
Interest coverage 1.3 1.6 2.6 3.7
Net debt / equity 1.7 1.6 0.5 0.4
Net debt / op. profit 7.4 6.0 3.1 2.4
Du‐Pont analysis Y/e 31 Mar (Rs m) FY12 FY13E FY14E FY15E
Tax burden (x) 0.32 0.71 0.69 0.69
Interest burden (x) 0.22 0.38 0.62 0.73
EBIT margin (x) 0.11 0.13 0.13 0.14
Asset turnover (x) 0.65 0.65 0.66 0.69
Financial leverage (x) 3.21 3.32 2.48 1.95
RoE (%) 1.6 7.2 9.1 9.7
Sector: IT Services
Sector view: Neutral
Sensex: 19,581
52 Week h/l (Rs): 453 / 326
Market cap (Rscr) : 97,736
6m Avg vol (‘000Nos): 1,587
Bloomberg code: WPRO IB
BSE code: 507685
NSE code: WIPRO
FV (Rs): 2
Price as on Jan 01, 2013
Company rating grid
Low High
1 2 3 4 5
Earnings Growth
Cash flow
B/S Strength
Valuation appeal
Risk
Share price trend
50
70
90
110
130
Dec‐11 Apr‐12 Aug‐12 Dec‐12
Wipro Sensex
Share holding pattern
0
20
40
60
80
100
Dec‐11 Mar‐12 Jun‐12 Sep‐12
Promoters FIIs Others
Rating: BUY Target (18 months): Rs495
CMP: Rs397
Upside: 24.7%
Research Analyst: Aniruddha Mehta
research@indiainfoline.com
Wipro Ltd
Recent performance, deal pipeline show improving trends Wipro has over past 3‐4 quarters delivered improving revenue performance with stable margin and operating metrics pick up. Though the volumes have not outperformed expectations, improving underlying business momentum is becoming visible. Decent quarterly dollar revenue guidance (1.3‐3.2% qoq) in a seasonally weak December quarter, sustained hiring and relatively positive management commentary is comforting. Ramp up in S&M spending has also resulted in improving traction on the deal pipeline, better deal wins and client satisfaction.
Diversified portfolio, strategic initiatives to help maintain momentum The strategic business restructuring at Wipro more than six quarters back has effectively led to tangible improvements in key operating metrics. Focussed client engagement through CEM structure continues to result in increased client satisfaction and client mining. For instance Top 2‐10 clients have grown at 4.5% CQGR over past four quarters versus 1.1% CQGR for the IT services business. US$100mn+ clientele has also continued its uptrend. Increased delivery automation and thrust on IP/platforms has helped turn the needle on revenue productivity (+5.5% onsite, +4.5% offshore yoy). Wipro’s diversified portfolio with balanced vertical exposure, strong foot hold in services like Infrastructure services, Analytics and focussed client engagement should hold the company in good stead.
Headroom in various margin levers to help sustain OPM Wipro’s OPM performance has remained stable in the recent past despite correction in utilisation and salary hikes. This was largely on the back of weaker rupee, cost efficiency and improved revenue productivity. We believe, as growth slowly returns, headroom in margin levers of utilization and SG&A leverage should help sustain margin (if not improve). Additionally delivery automation, higher offshoring and broadening employee pyramid should continue to support the margin.
Valuation at 12.1x FY15E provides a decent entry While the business momentum at Wipro has been tepid compared to its faster growing peers like TCS, HCLT, valuations too have remained relatively cheap (~20% discount to TCS). Though the consensus growth expectations remain modest (at best), we believe headroom for surprise exists as Wipro’s IT services growth differential with peers is expected to narrow. Also, with the impending de‐merger, valuation for the standalone IT business would gradually improve. We expect dollar revenue/rupee EPS CAGR of 8%/9% over FY13‐15E. Valuation at 12.1x FY15E earnings provides a decent entry.
Valuation summary Y/E Sales PAT EPS Change P/E EV/EBIDTA D/E RoE
March Rs mn Rs mn Rs % yoy (x) (x) (x) %
FY12 371,971 56,063 22.8 4.5 17.4 12.9 0.2 21.4
FY13E 430,539 65,593 26.7 17.0 14.9 10.2 0.2 21.3
FY14E 466,464 70,214 28.6 7.0 13.9 9.1 0.2 19.7
FY15E 517,789 80,498 32.8 14.6 12.1 7.4 0.1 19.7
Source: Company, India Infoline Research
Wipro Ltd
37
Key Risks Significant slowdown in demand from key geographies of US and Europe
Sharp appreciation in rupee (vis‐à‐vis US$) can be a risk to our margin estimates
Adverse regulation on offshoring in key markets esp. US Focus charts
Diversified industry exposure Top 2‐10 clients growing faster than total IT services
Retail &
Transportation
Energy & Utilities
Financial services
Manufacturing &
Hitech
Global Media &
Telecom
Healthcare,
Lifesciences
‐4.0
0.0
4.0
8.0
12.0
Q2FY11
Q3FY11
Q4FY11
Q1FY12
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Q2FY13
Top 2‐10 Total IT services
(%)
Source: PPAC, India Infoline Research
Utilization be a major lever when volumes expand No. of US$100mn+ clientele on an up‐trend
70
72
74
76
78
80
Q2FY11
Q3FY11
Q4FY11
Q1FY12
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Q2FY13
(%)
‐
2
4
6
8
10
Q2FY11
Q3FY11
Q4FY11
Q1FY12
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Q2FY13
(nos)
Source: PPAC, India Infoline Research
1 yr forward P/E valuation P/E band
0
7
14
21
28
35
Dec‐06
Jun‐07
Dec‐07
Jun‐08
Dec‐08
Jun‐09
Dec‐09
Jun‐10
Dec‐10
Jun‐11
Dec‐11
Jun‐12
Dec‐12
(x)
0
250
500
750
1000
Dec‐06
Jun‐07
Dec‐07
Jun‐08
Dec‐08
Jun‐09
Dec‐09
Jun‐10
Dec‐10
Jun‐11
Dec‐11
Jun‐12
Dec‐12
31x
25x
19x
12x
7x
(Rs)
Source: PPAC, India Infoline Research
Wipro Ltd
38
Financials Income statement Y/e 31 Mar (Rs m) FY12 FY13E FY14E FY15E
Revenue 371,971 430,539 466,464 517,789
Operating profit 70,811 86,538 93,293 107,700
Depreciation (10,076) (11,292) (13,379) (15,897)
Interest expense (3,491) (3,000) (3,000) (3,000)
Other income 12,506 13,200 14,520 15,972
Profit before tax 69,750 85,446 91,434 104,775
Taxes (13,763) (19,653) (21,030) (24,098)
Minority, others 76 (200) (190) (179)
Adj. profit 56,063 65,593 70,214 80,498
Balance sheet Y/e 31 Mar (Rs m) FY12 FY13E FY14E FY15E
Equity capital 4,917 4,917 4,917 4,917
Reserves 280,397 326,199 375,209 433,088
Net worth 285,314 331,116 380,126 438,005
Minority Interest 849 849 849 849
Debt 58,958 58,958 58,958 58,958
Other NC* Liab 9,290 10,753 11,650 12,932
Total liabilities 354,411 401,676 451,583 510,744
Fixed assets 58,988 62,696 64,316 58,419
Intangible assets 74,410 74,410 74,410 74,410
Investments 3,232 3,232 3,232 3,232
Othr NC. assets 25,530 29,550 32,015 35,538
Net WC 192,251 231,789 277,609 339,145
Inventories 10,662 12,341 13,371 14,842
Sundry debtors 80,328 92,976 100,734 111,818
Cash 119,627 147,730 186,536 238,051
Other curr assets 62,871 72,770 78,842 87,517
Sundry creditors (47,258) (54,699) (59,263) (65,784)
Provisions (1,121) (1,298) (1,406) (1,560)
Other curr liabilities (32,858) (38,032) (41,205) (45,739)
Total assets 354,411 401,676 451,583 510,744
* NC – non current
Cash flow statement Y/e 31 Mar (Rs m) FY12 FY13E FY14E FY15E
Profit before tax 69,750 85,446 91,434 104,775
Depreciation 10,076 11,292 13,379 15,897
Tax paid (13,763) (19,653) (21,030) (24,098)
Working capital ∆ (18,308) (11,435) (7,014) (10,021)
Other Op. items (5,428) (2,557) (1,568) (2,241)
Operating cashflow 42,327 63,094 75,201 84,312
Capex (28,845) (15,000) (15,000) (10,000)
Free cash flow 13,482 48,094 60,201 74,312
Equity raised 6,535 - - -Investments (239) ‐ ‐ ‐
Debt raised/repaid 6,156 ‐ ‐ ‐
Dividends paid (16,964) (19,791) (21,205) (22,618)
Other items 234 (200) (190) (179)
Net ∆ in cash 9,204 28,103 38,806 51,515
Key ratios Y/e 31 Mar FY12 FY13E FY14E FY15E
Growth matrix (%)
Revenue growth 19.8 15.7 8.3 11.0
Op profit growth 8.2 22.2 7.8 15.4
EBIT growth 12.7 20.8 6.8 14.1
Net profit growth 4.5 17.0 7.0 14.6
Profitability ratios (%)
OPM 19.0 20.1 20.0 20.8
EBIT margin 19.7 20.5 20.2 20.8
Net profit margin 15.1 15.2 15.1 15.5
RoCE 22.3 23.4 22.1 22.4
RoNW 21.4 21.3 19.7 19.7
RoA 14.8 15.0 14.2 14.5
Per share ratios
EPS 22.8 26.7 28.6 32.8
Dividend per share 6.0 7.0 7.5 8.0
Cash EPS 26.9 31.3 34.0 39.2
Book value per share 116.1 134.8 154.7 178.3
Valuation ratios (x)
P/E 17.4 14.9 13.9 12.1
P/B 3.4 2.9 2.6 2.2
EV/EBIDTA 12.9 10.2 9.1 7.4
Payout (%)
Dividend payout 30.3 30.2 30.2 28.1
Tax payout 19.7 23.0 23.0 23.0
Liquidity ratios
Debtor days 79 79 79 79
Inventory days 10 10 10 10
Creditor days 46 46 46 46
Leverage ratios
Net debt / equity (0.2) (0.3) (0.3) (0.4)
Net debt / op. profit (0.9) (1.0) (1.4) (1.7)
Du‐pont analysis Y/e 31 Mar (Rs m) FY12 FY13E FY14E FY15E
Tax burden (x) 0.80 0.77 0.77 0.77
Interest burden (x) 0.95 0.97 0.97 0.97
EBIT margin (x) 0.20 0.21 0.20 0.21
Asset turnover (x) 0.98 0.98 0.94 0.93
Financial leverage (x) 1.45 1.42 1.39 1.36
RoE (%) 21.4 21.3 19.7 18.9
Sector: Pharmaceuticals
Sector view: Positive
Sensex: 19,581
52 Week h/l (Rs): 1,830 / 251
Market cap (Rscr) : 16,977
6m Avg vol (‘000Nos): 313
Bloomberg code: WPL.IN
BSE code: 532300
NSE code: WOCKPHARMA
FV (Rs): 5
Prices as on Jan 01, 2013
Company rating grid
Low High
1 2 3 4 5
Earnings Growth
Cash flow
B/S Strength
Valuation appeal
Risk
Share price trend
0
200
400
600
800
Dec‐11 May‐12 Oct‐12
Wockhardt Sensex
Share holding pattern
‐
20
40
60
80
100
Dec‐11 Mar‐12 Jun‐12 Sep‐12
Promoters Institutions Others%
Rating: BUY Target (18 months): Rs2,089
CMP: Rs1,562
Upside: 33.8%
Research Analyst: Bhavika Thakker
research@indiainfoline.com
Wockhardt
US business holds the key for future growth In the US the company has niche product portfolio consist of 60 products including two over the counter (OTC) products (Lansoprozole and Fexofinadine). The largest product is Toprol XL (US$140mn‐30% of the US revenue) followed by Bromfed, Amoxyclav, Azithromycin and Tamsulosin (~5% each of the US revenue). The company also has a strong pipeline of 32 ANDA pending for approval (includes 10 FTFs/PIVs). We expect continuous improvement in the pipeline as the company plans to file ~12‐15 products every year. We believe US business holds the key for future growth.
Domestic business to witness steady performance even after part sell-off of nutrition business Wockhardt has divested its few leading brands (Dexolac, Farex, Proteinx etc.) of nutrition business for Rs2.5bn to Danone to de‐leverage its balance sheet. We believe post sale, brands retained by the company like Bonestein, B.G.Prot etc. still have the potential to deliver growth. Wockhardt derives 25% of the revenue from domestic business. The therapies like Vitamins, Respiratory, Diabetes and Pain contribute 55% of the domestic portfolio. We believe growth would be sustained by robust prescription sales (sales force of 3,300 and 7 brands featuring in the top 300) and growth in nutrients biz.
EU Structural changes; Medium term profitability impact Wockhardt derives 27% of the revenue from EU. The company ventured into European market through various acquisitions. The company started of well in the region but generisation of ART 50 (Diacerein) and increased pricing pressure took a toll on profitability. Additionally, acquisitions cost burdened the balance sheet. Wockhardt has already taken significant restructuring initiatives and started focusing on noval and niche products (like insulin ‐biosimilars) to re‐gain profitability. We believe the company would stabilize in EU in 3‐4 years.
Turnaround in business and balance sheet to sustain further rally The company is now out of all debt traps, we believe turnaround in business and balance sheet to sustain further rally. The company had defaulted on FFCB worth US$110mn in 2009, but now, Wockhardt is out of debt trap as it has settled all its FCCB and forex derivative liabilities. Its debt to equity ratio as on Q2 FY13 stands at 0.5% compared to 5.5x in FY10. Wockhardt has also beaten the street expectations consequently for four quarter by delivering strong sales growth and margin expansion. Though stock has rallied ~5x in the last year, it still trades at deep discount to peers (12x FY15E EPS of Rs130.6). With better operating cash flows and balance sheet, Wockhardt is expected to witness a gradual valuation re‐rating henceforth. Valuation summary Y/E Sales PAT EPS Change P/E EV/EBIDTA D/E RoE
March Rs mn Rs mn Rs % yoy (x) (x) (x) %
FY12 46,373 8,924 81.5 67.0 19.2 14.0 5.3 58.5
FY13E 55,741 10,490 95.9 17.6 14.8 11.6 2.4 78.7
FY14E 66,047 12,428 113.6 18.5 12.5 9.2 1.2 49.0
FY15E 75,483 14,291 130.6 15.0 12.0 7.5 0.8 36.4
Source: Company, India Infoline Research
Wockhardt
40
Key risks Sharp price erosion in Toprol XL and other key molecules Unexpected competition in the key drugs and delay in launches and approvals in the US Amortisation of EU assets and Unfavourable currency
Focus charts
Clearly out of debt trap Increasing contribution from the US
Year Business divestments/settlement of contingent liabilities Rsbn
2009 German business Esparma GmbH to Mova GmbH 1.2
2009 Animal healthcare division to the French veterinary care Co. 1.7
2012 Nutrition business‐(brands like Farex, Dexolac,Nusobee and Protinex) 12.8
2010 Derivatives/ Hedging contracts (9.6)
2011 Derivatives/ Hedging contracts (3.7)
2011 Derivatives/ Hedging contracts (2.4) ‐
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
FY09 FY10 FY11 FY12 FY13E FY14E FY15E
(Rs mn)
India USA Europe Rest of the World & CIS
Source: Company, India Infoline Research
Strong ANDA pipeline Niche product portfolio in the US
32
87
119
10
0
20
40
60
80
100
120
140
Pending Launched Total Filings FTF with Para‐
IV
5%5% 5%
9%
37%
39%Troprol XL
Bromfed
AmoxyClav
Azitomycin
Flonase
Others
Source: Company, India Infoline research
Domestic business tilted towards Acute segment Therapeutic distribution
84%
16%
Acute
Chronic
6%4%
4%
7%
24%
13%
12%10%
10%
9%
Vitamins / Minerals /
NutrientsGastro Intestinal
Respiratory
Pain / Analgesics
Anti‐infective
Anti Diabetic
Derma
Hormones
Neuro / CNS
Others Source: Company,India Infoline Research
Wockhardt
41
Financials Income statement Y/e 31 Mar (Rs m) FY12 FY13E FY14E FY15E
Revenue 46,373 55,741 66,047 75,483
Operating profit 14,399 16,698 19,786 22,876
Depreciation (1,225) (1,473) (1,746) (1,995)
Interest expense (2,144) (2,219) (2,630) (3,167)
Other income 235 259 306 361
Profit before tax 11,264 13,265 15,717 18,075
Taxes (2,351) (2,786) (3,301) (3,796)
Extra Ordinary 5,497 0 0 0
Net profit 3,416 10,479 12,416 14,279
Adjustments & MI 5,508 11 11 11
Adj Net profit 8,924 10,490 12,428 14,291
Balance sheet Y/e 31 Mar (Rs m) FY12 FY13E FY14E FY15E
Equity capital 547 547 547 547
Preference capital and others 7,614 7,614 7,614 7,614
Reserves 6,549 17,039 29,467 43,758
Net worth 14,710 25,200 37,628 51,919
Debt 29,672 34,747 29,270 29,988
Def tax liab & others 1,855 1,767 2,140 2,568
Total liabilities 46,237 61,714 69,037 84,475
Fixed assets 11,039 13,239 15,989 18,739
Intangible assets 14,675 14,675 14,675 14,675
CWIP 9,023 9,023 9,023 9,023
Investments 908 908 908 908
Misc & Def Tax Ass 2,080 2,501 2,963 3,386
Net working capital 1,514 2,248 3,029 4,080
Inventories 8,886 10,794 12,877 14,963
Sundry debtors 7,587 9,217 10,995 12,776
Other cur. assets 1,343 1,615 1,913 2,186
Sundry creditors (5,408) (6,503) (7,706) (8,805)
Other cur liabilities (10,893) (12,875) (15,050) (17,040)
Cash 7,000 19,122 22,452 33,666
Total assets 46,237 61,714 69,037 84,475
Cash flow statement Y/e 31 Mar (Rs m) FY12 FY13E FY14E FY15E
Profit before tax 11,264 13,265 15,717 18,075
Depreciation 1,225 1,473 1,746 1,995
Tax paid (2,351) (2,786) (3,301) (3,796)
Working capital ∆ (2,610) (734) (781) (1,051)
Operating cashflow 7,528 11,218 13,381 15,223
Capital expenditure (1,532) (3,673) (4,496) (4,745)
Free cash flow 5,995 7,545 8,885 10,478
∆ Equity ‐ ‐ ‐ ‐
Investments (11) ‐ ‐ ‐
Debt financing/disposal (805) 4,987 (5,104) 1,147
Other items (3,008) (410) (451) (412)
Net ∆ in cash 2,171 12,122 3,330 11,214
Key ratios Y/e 31 Mar FY12 FY13E FY14E FY15E
Growth matrix (%)
Revenue growth 23.1 20.2 18.5 14.3
Op profit growth 57.2 16.0 18.5 15.6
EBIT growth 64.5 15.5 18.5 15.8
Net profit growth 256.9 206.8 18.5 15.0
Profitability ratios (%)
OPM 31.1 30.0 30.0 30.3
EBIT margin 28.9 27.8 27.8 28.1
Net profit margin 7.4 18.8 18.8 18.9
RoCE 30.5 28.7 28.1 27.7
RoNW 58.5 78.7 49.0 36.4
RoA 6.7 16.7 16.0 15.5
Per share ratios
EPS 31.2 95.8 113.5 130.5
Dividend per share 0.0 0.0 0.0 0.0
Cash EPS 42.4 109.2 129.4 148.7
Book value per share 64.8 160.7 274.3 404.8
Valuation ratios (x)
P/E 19.2 14.8 12.5 12.0
P/CEPS 36.8 13.1 11.1 10.5
P/B 24.1 9.2 5.3 3.7
EV/EBIDTA 14.0 11.6 9.2 7.5
Payout (%)
Dividend payout 0.0 0.0 0.0 0.0
Tax payout 20.9 21.0 21.0 21.0
Liquidity ratios
Debtor days 60 60 61 62
Inventory days 70 71 71 72
Creditor days 43 43 43 43
Leverage ratios
Interest coverage 6.3 7.0 7.0 6.7
Net debt / equity 4.1 1.3 0.5 0.1
Net debt / op. profit 2.0 1.3 0.7 0.1
Du‐pont analysis Y/e 31 Mar (Rs m) FY12 FY13E FY14E FY15E
Tax burden (x) 0.24 0.73 0.74 0.75
Interest burden (x) 0.84 0.86 0.86 0.85
EBIT margin (x) 0.29 0.28 0.28 0.28
Asset turnover (x) 0.91 0.89 0.85 0.82
Financial leverage (x) 11.23 5.09 3.25 2.48
RoE (%) 58.5 78.7 49.0 36.4
Recommendation parameters for fundamental reports:
Buy – Absolute return of over +10%
Market Performer – Absolute return between ‐10% to +10%
Sell – Absolute return below ‐10%
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