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Anand Rathi Shares and Stock Brokers Limited (hereinafter “ARSSBL”) is a full service brokerage and equities research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient and is to be circulated only within India and to no countries outside India. Disclosures and analyst certifications are present in Appendix. Anand Rathi Research India Equities

India I Equities Country

Daily

[email protected]

7 May 2014

India Morning Bell

All the latest research and data

HDFC - Sturdy lending business and asset quality; Buy. HDFC’s advances grew 15.9% yoy (20% on adjusting for a “sell-down” in loans), with retail loans growing 19.7% yoy (26% on adjusting for a “sell-down” in loans). Robust loan growth, coupled with stable, 2.29%, spreads, led to 10.8% yoy net interest income (NII) growth. We expect the RoE over FY15-16 to hold above 20%, supported by healthy business growth, stable spreads and the robust performance of subsidiaries. We value the mortgage business at `719 (3.5x 1HFY16e BV; earlier 3.5x FY15e BV) and the subsidiaries at `356. Our sum-of-parts-valuation target is `1,075. Hence, we maintain our Buy rating.

Heidelberg Cement - Improved 1Q; Continuity the key; Hold. Fuelled by capacity expansion, Heidelberg Cement’s volumes grew 8% yoy (up 10% qoq) to its highest ever, 1.02m tons, leading to better-than-estimated 8% revenue growth. On the greater volumes, EBITDA and PAT bettered our estimates. Operational savings from the ramp-up of the new capacity and the conveyor belt would be realised in the coming quarters. We expect 18% and 81% revenue and EBITDA CAGRs, respectively, over CY13-15, supported by the robust volume growth. We maintain a Hold, with a target price of `51, based on 7.5x Dec’15e EV/EBITDA; the implied PE is 20x and the EV/ton is US$60.

Sensex: 22508

Nifty: 6715

Five sectors posted mom growth

Source: GOI

Ch

art

of

the

da

y

Markets 6 May ’14 1 Day YTD Sensex 22508 0.3% 6.3%Nifty 6715 0.2% 6.5%Dow Jones 16401 -0.8% -1.1%S & P 500 1868 -0.9% 1.0%FTSE 6799 -0.3% 0.7%Nikkei* 14165 -2.0% -13.1%Hang Seng* 21790 -0.8% -6.5%

Volumes (US$m) 6 May ’14 1 Day Avg '14Cash BSE 326 -19.4% 399Cash NSE 1,734 -8.7% 1,985Derivatives (NSE) 9,066 -21.8% 24,041

Flows (US$m) 6 May ’14* MTD YTD FII – Cash Buy 283 1,118 35,919Sell 276 999 31,344Net 8 119 5,429FII - Derivatives Buy 1,335 4,593 266,272Sell 1,543 4,837 262,364Net -208 -245 3,215DII – Cash Buy 225 531 6,547Sell 234 645 8,248Net -9 -114 -1,584

Others 6 May ’14 1 Day YTD Oil Brent (US$/bbl)* 107.3 0.2% -2.0%Gold (US$/oz)* 1,311.7 0.3% 8.8%Steel (US$/MT) 590.0 0.0% 0.9%`/US$ 60.10 0.0% 2.8%US$/Euro* 1.39 0.0% -1.3%Yen/US$* 101.57 0.1% 3.7%Call Rate 7.25% .bps -150.bps10-year G-Secs 8.77% 3.7bps -5.2bpsEMBI spreads 313.76 -3.6bps -20.5bps@7:30am *Provisional Source: BSE, Bloomberg

7 May 2014 India Morning Bell

Anand Rathi Research India Equities

Market Data

Price Performance Price Performance Price Performance Top-5 gainers Top-5 gainers Top-5 gainersCompany CMP (INR) 1 wk (%) 1 Mth (%) Company CMP (INR) 1 wk (%) 1 Mth (%) Company CMP (INR) 1 wk (%) 1 Mth (%)

MARICO LTD 227 11.2 8.1 ATUL LTD 651 22.7 48.2 TATA SPONGE IRON 603 25.7 17.4

INDIAN OVERSEAS 60 8.7 15.2 TVS MOTOR CO LTD 100 15.2 9.0 HSIL LTD 182 23.3 31.8

WOCKHARDT LTD 775 7.3 27.7 SOLAR INDUSTRIES 1194 14.6 30.6 ASTRA MICROWAVE 77 22.8 41.1

TORRENT PHARMA 601 6.7 6.9 UNITED BK OF IND 35 12.3 12.1 PREMIER CAPITAL 195 20.1 80.0

ING VYSYA BANK 585 6.6 (3.6) ALSTOM INDIA LTD 463 11.4 12.9 FUTURE LIFESTYLE 94 12.9 43.2

Top-5 losers Top-5 losers Top-5 losersCompany CMP (INR) 1 wk (%) 1 Mth (%) Company CMP (INR) 1 wk (%) 1 Mth (%) Company CMP (INR) 1 wk (%) 1 Mth (%)

JUST DIAL LTD 1005 (19.5) (35.6) HEXAWARE TECHNOL 148 (13.7) (8.1) VIP INDS LTD 80 (17.6) (22.3)

RELIANCE COMMUNI 117 (11.1) (9.2) DELTA CORP LTD 88 (12.8) (13.5) KESORAM INDS LTD 62 (16.2) (17.0)

JINDAL STEEL & P 244 (10.9) (18.6) PIPAVAV DEFENCE 43 (12.7) 16.4 HCL INFOSYSTEMS 43 (13.1) 1.4

TATA COMMUNICATI 273 (10.3) (9.7) JET AIRWAYS IND 240 (12.6) (13.8) ACCELYA KALE SOL 665 (12.9) (16.5)

DLF LTD 139 (9.6) (21.0) DEWAN HOUSING 222 (12.1) (0.3) JK TYRE & IND LT 191 (12.8) 4.6

Volume Volume VolumeVolume spurts Volume spurts Volume spurtsCompany CMP (INR) 1 wk avg 1/4 wk (%) Company CMP (INR) 1 wk avg 1/4 wk (%) Company CMP (INR) 1 wk avg 1/4 wk (%)

KANSAI NEROLAC P 1,240 21,022 205.0 ALSTOM INDIA LTD 463 681,558 223.6 ASIAN STAR CO 556 11 285.5

INDIAN OVERSEAS 60 12,985,788 197.7 AJANTA PHARMA 1,061 386,814 188.8 CENTURY PLYBOARD 40 3,388,492 260.6

ALSTOM T&D INDIA 271 664,107 167.7 NATIONAL BUILDIN 207 1,542,374 185.2 TIME TECHNOPLAST 39 514,787 243.3

UPL LTD 279 14,835,853 137.8 3M INDIA LTD 3,750 3,750 177.1 CENTRUM CAP LTD 23 9,243 226.6

CENTRAL BK INDIA 54 2,614,703 114.9 HATSUN AGRO PROD 269 55,672 176.8 TATA SPONGE IRON 603 2,148,066 217.1

Technicals Technicals Technicals Above 200 DMA Above 200 DMA Above 200 DMACompany CMP (INR) 200D Avg (%) Company CMP (INR) 200D Avg (%) Company CMP (INR) 200D Avg (%)

ADANI ENTERPRISE 426 242 74.1 PRITI MERCANTILE 707 283 144.9 CHANNEL NINE ENT 502 135 258.0

AUROBINDO PHARMA 594 351 68.2 # AMTEK AUTO LTD 181 86 107.5 GREENCREST FINAN 197 58 226.6

APOLLO TYRES LTD 165 99 64.6 # SYMPHONY LTD 870 448 91.9 ECO FRIENDLY FOO 289 96 192.4

WOCKHARDT LTD 775 474 62.3 # PARAG SHILPA INV 525 273 90.7 ESTEEM BIO PROC 581 212 165.0

UPL LTD 279 175 58.7 MONSANTO INDIA 1735.4 929.0 84.8 MAA JAGDAMBE TRA 92 35 159.4

Below 200 DMA Below 200 DMA Below 200 DMACompany CMP (INR) 200D Avg (%) Company CMP (INR) 200D Avg (%) Company CMP (INR) 200D Avg (%)

IDEA CELLULAR 130 157 (16.8) STRIDES ARCOLAB 515 637 (19.1) INDIAN INFOTECH 6 26 (75.7)

NTPC LTD 114 134 (15.0) JET AIRWAYS IND 240 293 (18.3) GLOBAL INFRATECH 46 79 (41.0)

JUST DIAL LTD 1,005 1,183 (14.8) WESTLIFE DEVELOP 325 368 (11.5) LUMINAIRE TECH 25 42 (40.7)

JUBILANT FOODWOR 963 1,127 (14.3) WNS HOLDINGS-ADR 1,131 1,262 (10.5) UNNO INDUS LTD 19 29 (34.1)

RELIANCE COMMUNI 117 132 (11.0) BAJAJ CORP LTD 205 229 (10.4) JAYBHARAT TEXTIL 22 34 (33.6)

Small Caps(US$100m-250m)

Large Caps(>US$1bn)

Mid Caps(US$250m-1bn)

Source: Bloomberg


NBFCs

Result UpdateIndia I Equities

`

Rating: Buy Target Price: `1,075

Share Price: `878

Key data HDFC IN / HDFC.BO52-week high / low `933 / `632Sensex / Nifty 22508 / 67153-m average volume US$40.7m Market cap `1,369bn / US$22.8bnShares outstanding 1560.5m

Shareholding pattern (%) Mar ’14 Dec ’13 Sep ’13

Promoters - - - - of which, Pledged - - -Free Float 100.0 100.0 100.0 - Foreign Institutions 75.7 74.2 73.1 - Domestic Institutions 11.9 12.9 13.8 - Public 12.4 12.9 13.1

7 May 2014

HDFC

Sturdy lending business and asset quality; Buy

Key takeaways

Robust retail loan growth, stable spreads. HDFC’s advances grew 15.9% yoy (20% on adjusting for a “sell-down” in loans), with retail loans growing 19.7% yoy (26% on adjusting for a “sell-down” in loans). Robust loan growth, coupled with stable, 2.29%, spreads, led to 10.8% yoy net interest income (NII) growth. We estimate HDFC’s loans to record a 20.6% CAGR over FY14-16, led by healthy demand from retail customers.

Robust fees, modest dividend income, better productivity. While fees grew 34.5% yoy, their share in non-interest income rose 2,338bps yoy to 63%. While dividend income rose 12.6% yoy 20.1% qoq), Treasury profits rose 21.7% yoy and comprised 5.4% of profits before tax, compared to 5% in 4QFY13. Productivity improved, with cost-income down 11bps yoy to 5%, one of the lowest of its peers.

Stable asset quality, well-capitalized for growth. Asset quality is the best in class, with gross NPA at 0.69% of loans, down from 0.77% in 3QFY14. While non-performing loans for individuals fell 4bps qoq to 0.53% of loans, they decreased 17bps for non-individual loans, to 1.01%. We expect HDFC’s prudent growth and high NPA provisioning buffer to keep credit costs low over FY14-16. With 17.9% capital adequacy (15.4% tier-1), it is adequately capitalized for growth opportunities in housing finance.

Our take. We expect the RoE over FY15-16 to hold above 20%, supported by healthy business growth, stable spreads and the robust performance of subsidiaries. We value the mortgage business at `719 (3.5x 1HFY16e BV; earlier 3.5x FY15e BV) and the subsidiaries at `356. Our sum-of-parts-valuation target is `1,075. Hence, we maintain our Buy rating. Risks: Slowdown in the mortgage market, leading to lower-than estimated loan growth; more-than-expected NPA, leading to higher credit costs.

Financials (YE Mar) FY15e FY16e

Net interest income (`m) 85,658 101,362

Net profit (`m) 63,811 74,889

EPS (`) 40.5 47.0

Growth (%) 16.8 16.2

PE (x)* 21.7 18.7

PBV (x)* 4.7 4.2

RoE (%) 20.6 22.9

RoA (%) 2.4 2.6

Dividend yield (%) 2.0 2.3

Net NPA (%) 0.5 0.5 Source: Anand Rathi Research (*standalone)

Quarterly results (YE: Mar) 4QFY13 4QFY14 % yoy FY13 FY14 % yoy

Net interest income (`m) 20,399 22,605 10.8 64,706 73,091 13.0

Non-interest income (`m) 1,979 2,468 24.7 7,862 8,592 9.3

Operating expenses (`m) 1,132 1,241 9.7 5,389 6,281 16.5

Cost-to-income (%) 5.1 5.0 (11) bps 7.4 7.7 26 bps

Pre-provisioning profit (`m) 21,247 23,831 12.2 67,178 75,402 12.2

Provisions (`m) 250 300 20.0 1,450 1,000 (31.0)

PBT (`m) 20,997 23,531 12.1 65,728 74,402 13.2

Tax (`m) 5,445 6,300 15.7 17,245 20,000 16.0

PAT (`m) 15,552 17,231 10.8 48,483 54,402 12.2

EPS (`) 10.0 10.9 9.7 31.5 34.6 10.1

Source: Company

Change in Estimates Target Reco

7 May 2014 HDFC – Sturdy lending business and asset quality; Buy

Anand Rathi Research 2

Quick Glance – Financials and Valuations Fig 1 – Income statement (` m) Year-end: Mar FY12 FY13 FY14 FY15e FY16e

Net interest income 53,278 61,841 73,091 85,658 101,362 NII growth (%) 18.7 16.1 18.2 17.2 18.3 Non-interest inc 8,697 10,727 8,592 9,734 10,670 Total income 61,975 72,567 81,683 95,392 112,032 Total Inc growth (%) 16.5 17.1 12.6 16.8 17.4 Oper. expenses 4,519 5,389 6,281 6,876 8,111 Operating profit 57,456 67,178 75,402 88,516 103,921 Oper. profit growth (%) 16.4 16.9 12.2 17.4 17.4 Provisions 800 1,450 1,000 1,103 1,333 PBT 56,656 65,728 74,402 87,413 102,588 Tax 15,430 17,245 20,000 23,601 27,699 PAT 41,226 48,483 54,402 63,811 74,889 PAT growth (%) 16.6 17.6 12.2 17.3 17.4 FDEPS (`/sh) 27.9 31.4 34.6 40.5 47.0 DPS (`/sh) 11.0 12.5 12.5 17.5 20.5Source: Company, Anand Rathi Research

Fig 2 – Balance sheet (` m) Year-end: Mar FY12 FY13 FY14e FY15e FY16e

Share capital 2,954 3,093 3,121 3,155 3,186 Reserves & surplus 187,222 246,907 276,431 305,276 342,118 Deposits 574,881 795,215 947,680 997,803 1,088,004 Borrowings 453,466 273,739 329,520 672,937 680,003 Minority interests 362,928 519,328 565,780 649,732 952,004 Total liabilities 1,581,451 1,838,282 2,122,532 2,628,904 3,065,314 Advances 1,259,855 1,521,062 1,782,016 2,168,666 2,590,486 Investments 122,070 136,135 139,127 233,904 337,961 Cash & bank bal 190,904 172,411 190,084 212,947 121,071 Fixed & other assets 8,622 8,674 11,306 13,387 15,796 Total assets 1,581,451 1,838,282 2,122,532 2,628,904 3,065,314 No. of shares (m) 1,477 1,546 1,562 1,577 1,593 Deposits growth (%) n/a n/a n/a n/a n/aAdvances growth (%) 24.1 20.7 18.9 19.9 19.5 Source: Company, Anand Rathi Research

Fig 3 – Key ratios Year-end: Mar, % FY12 FY13 FY14e FY15e FY16e

NIM 4.0 3.9 3.7 3.7 3.7 Other inc. / total inc. 14.0 14.8 11.7 10.2 9.5 Cost-income 7.3 7.4 7.2 7.2 7.2 Provision coverage 39.4 39.9 43.6 43.3 43.6 Dividend payout 7.3 6.4 6.9 7.5 7.9 Credit-deposit 347.1 292.9 314.5 333.8 272.1 Investment-deposit 33.6 26.2 35.0 36.0 35.5 Gross NPA 0.8 0.8 0.7 0.7 0.7 Net NPA 0.6 0.6 0.5 0.5 0.5 BV (`) 128.8 161.7 177.2 195.5 216.7 Adj BV (`) 123.7 156.1 170.9 188.6 209.0 CAR 14.6 16.4 17.9 16.1 14.5 - Tier 1 11.7 13.9 15.4 13.9 12.5 RoE 22.7 22.0 20.4 21.8 22.9 RoA 2.8 2.8 2.7 2.6 2.6 Source: Company, Anand Rathi Research

Fig 4 – PE band

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HDFC

Source: Bloomberg, Anand Rathi Research

Fig 5 – Price-to-book band

HDFC

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Fig 6 – HDFC vs. Bankex

HDFC

Bankex

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Source: Bloomberg



Results Highlights Fig 7 – 4QFY14 Results vs Expectations (` m) 4QFY14 4QFY13e Var % 4QFY13 YoY % 3QFY14 QoQ %

Net interest income 22,605 22,497 0.5 20,399 10.8 18,291 23.6

Non-interest income 25,072 23,735 5.6 22,379 12.0 19,511 28.5

Pre-provisioning profits 23,831 22,483 6.0 21,247 12.2 17,827 33.7

PAT 17,231 16,584 3.9 15,552 10.8 12,777 34.9

Source: Company, Anand Rathi Research

Fig 8 – 4QFY14 Results 4QFY14 4QFY13 YoY 3QFY14 QoQ

Credit (` m) 197,100 170,046 15.9 192,266 2.5

Individuals (` m) 133,281 111,321 19.7 130,916 1.8

Corporate bodies + others (` m) 63,819 58,725 8.7 61,350 4.0

Borrowings (` m) 184,298 158,828 16.0 177,355 3.9

Net NPA % 0.7 0.7 (1) bp 0.8 (8) bps

Net NPA (individuals) % 0.5 0.6 (5) bps 0.6 (4) bps

Net NPA (non-individuals) % 1.0 0.9 10 bps 1.2 (17) bps

Capital adequacy % 17.9 16.4 150 bps 19.1 (120) bps

Tier-1 % 15.4 13.9 150 bps 16.6 (120) bps


Slower credit growth, loans to individuals rise faster

At 15.9% yoy, HDFC’s credit growth in 4QFY14 was slower than the past four-quarter 19.7% average. Credit growth was chiefly driven by loans to individuals, which rose a robust 19.7% yoy (1.8% qoq), compared to loans to corporate bodies (8.2% yoy, 4.3% qoq).

On adjusting for the loan “sell-downs”, advances grew 20% yoy, with retail loans rising 26% yoy. Over FY14, loans to individuals contributed 85% to HDFC’s incremental loan growth, compared to 15% from loans to corporate bodies. The lower proportion of growth in loans to corporate customers is likely to have been because of tight liquidity and the lack of inexpensive sources of credit in 4QFY14. We estimate a 20.6% CAGR in HDFC's credit over FY14-16, with a 21.1% CAGR in loans to individuals over the same period.

Fig 9 – In FY14, credit growth was modest

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Fig 10 – Share of loans to individuals has steadily risen

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Healthy loan growth and stable spreads drive NII growth

Interest spreads, at 2.29%, were flat yoy (up 4bps qoq). Net interest income (10.8% yoy) grew slower than credit (15.9% yoy) due to sluggish spreads and slower growth in loans to corporate bodies, where yields are better. NIM slipped from 4.2% in 4QFY13 to 4.1% in 4QFY14 due to the tilt in the loan mix towards lower-yielding loans to individuals - now comprising 67.6% of total loans, compared to 65.5% in 4QFY13.

Fig 11 – Share of bonds / debentures in borrowings has decreased qoq

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Fig 12 – Spreads have been stable in 4QFY14

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Fig 13 – The proportion of fees in non-interest income has improved

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Robust fees, lower income from dividends, better productivity

While fees grew 34.5% yoy, their share in non-interest income rose 2,338bps yoy to 63%. While dividend income rose 12.6% yoy 20.1% qoq), Treasury profits rose 21.7% yoy and comprised 5.4% of profits before tax, compared to 5% in 4QFY13. Productivity improved, with cost-income down 11bps yoy to 5%, one of the lowest of its peers.

Fig 14 – Sharp drop in operating expenses led to productivity improving qoq

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Source: Company

Stable asset quality, well-capitalised for growth

The asset quality is the best in class, with gross NPA at 0.69% of loans, down from 0.77% in 3QFY14. While non-performing loans for individuals fell 4bps qoq to 0.53% of loans, non-individual non-performing loans decreased 17bps, to 1.01%. HDFC’s provision for contingencies is `19.07bn, 0.96% of loans, and stands at `4.47bn more than the regulatory requisite.

We expect the prudent growth and high NPA provisioning buffer to keep credit costs low over FY14-16. With 17.9% capital adequacy (15.4% tier-1), the company is sufficiently capitalized for growth opportunities in housing finance. Even on reducing the investment in HDFC Bank from tier-1 capital, the NBFC is well-capitalised, with total capital adequacy of 14.6%, of which tier-1 capital is 12.1%.

Fig 15 – Asset quality stable (%) 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14

NPA 0.70 0.77 0.79 0.77 0.69

NPAs: individual loans 0.58 0.61 0.59 0.57 0.53

NPAs: non-individual loans 0.91 1.08 1.19 1.18 1.01

Source: Company



Valuations We have arrived at our price target based on a sum-of-parts valuation.

Core lending business – `719 a share at 3.5x 1HFY16e BV (earlier `687, 3.5x FY15e BV). In our two-stage DDM, we assume cost of equity at 14.6%.

Subsidiaries

HDFC Bank - `318 a share at 3.8x 1HFY16e BV.

Life insurance – based on appraisal value, at `91 a share.

HDFC AMC – based on 5% of equity AUM, 1.5% of debt AUM and 8% of PMS AUM, at `22 a share.

Gruh Finance – `10 a share at a 2.7x 1HFY16e BV.

HDFC Real Estate Fund - based on 10% of AUM, at `5 a share.

We have attributed a 20% holding-company discount to the subsidiaries, resulting in a value of `356 a share.

Fig 16 – Past one-year forward P/BV

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Mean


Risks

Slower-than-expected growth rate of the Indian economy

Aggressive monetary tightening, and measures that could further slow down the economy

More-than-expected increase in bad loans.



Financials We expect a 20.6% CAGR in the loan book over FY14-16. We estimate a 20.2% earnings CAGR in net profit over the same period.

Fig 17 – Income Statement Year-end: Mar (` m) FY12 FY13 FY14 FY15e FY16e

Net Interest Income 164,846 200,750 233,384 286,734 345,877

Growth (%) 111,568 138,909 160,294 201,076 244,515

Non-interest Income 53,278 61,841 73,091 85,658 101,362

Total Income 18.7 16.1 18.2 17.2 18.3

Non-interest inc. / Total inc. (%) 8,697 10,727 8,592 9,734 10,670

Operating Expenses 61,975 72,567 81,683 95,392 112,032

Pre-provisioning profit 14.0 14.8 10.5 10.2 9.5

Growth (%) 4,519 5,389 6,281 6,876 8,111

Provisions 57,456 67,178 75,402 88,516 103,921

Profit Before Tax 16.4 16.9 12.2 17.4 17.4

Taxes 800 1,450 1,000 1,103 1,333

Tax Rate (%) 56,656 65,728 74,402 87,413 102,588

Profit after tax 15,430 17,245 20,000 23,601 27,699

Growth (%) 27.2 26.2 16.0 18.0 17.4

Number of Shares (m) 41,226 48,483 54,402 63,811 74,889

Earnings per Share (`) 16.6 17.6 12.2 17.3 17.4

Source : Company, Anand Rathi Research

Fig 18 – Balance Sheet Year-end: Mar (` m) FY12 FY13 FY14e FY15e FY16e

Share Capital 2,954 3,093 3,121 3,155 3,186

Reserves and Surplus 187,222 246,907 276,431 305,276 342,118

Borrowings 190,176 250,000 279,552 308,430 345,304

Deposits 1,028,347 1,068,954 1,277,200 1,670,741 1,768,007

Other Liabilities & Provisions 362,928 519,328 565,780 649,732 952,004

Total Liabilities 1,581,451 1,838,282 2,122,532 2,628,904 3,065,314

Advances 1,259,855 1,521,062 1,782,016 2,168,666 2,590,486

Investments 122,070 136,135 139,127 233,904 337,961

Net current assets 190,904 172,411 190,084 212,947 121,071

Fixed & Other Assets 8,622 8,674 11,306 13,387 15,796

Total Assets 1,581,451 1,838,282 2,122,532 2,628,904 3,065,314

No. of shares (m) 1,477 1,546 1,562 1,577 1,593

Source : Company, Anand Rathi Research

Appendix Analyst Certification The views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. The research analysts are bound by stringent internal regulations and also legal and statutory requirements of the Securities and Exchange Board of India (hereinafter “SEBI”) and the analysts’ compensation are completely delinked from all the other companies and/or entities of Anand Rathi, and have no bearing whatsoever on any recommendation that they have given in the Research Report. Important Disclosures on subject companies Rating and Target Price History (as of 6 May 2014)

HDFC6

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1 5-Mar-10 Buy 619 517 2 4-May-10 Buy 671 561 3 18-Oct-10 Buy 835 724 4 22-Oct-12 Buy 873 751 5 22-Oct-13 Hold 873 821 6 23-Jan-14 Buy 965 840

The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.

Anand Rathi Ratings Definitions

Analysts’ ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described in the Ratings Table below:

Ratings Guide Buy Hold Sell Large Caps (>US$1bn) >15% 5-15% <5% Mid/Small Caps (<US$1bn) >25% 5-25% <5%

Anand Rathi Research Ratings Distribution (as of 4 March 2014) Buy Hold Sell Anand Rathi Research stock coverage (182) 64% 27% 9% % who are investment banking clients 4% 0% 0% Other Disclosures This report has been issued by ARSSBL which is a SEBI regulated entity, and which is in full compliance with all rules and regulations as are applicable to its functioning and governance. The investors should note that ARSSBL is one of the companies comprising within ANAND RATHI group, and ANAND RATHI as a group consists of various companies which may include (but is not limited to) its subsidiaries, its affiliates, its group companies who may hold positions, views, stakes and may service the companies covered in this report independent of ARSSBL. Investors are cautioned to be aware that there could arise a potential conflict of interest in the views held by ARSSBL and other companies of Anand Rathi who maybe affiliated, connected or catering to the companies mentioned in the Research Report; even though, ARSSBL and Anand Rathi are fully complaint with all procedural and operational regulatory requirements. Thus, investors should not use this as a sole basis for making their investment decision and should consider the recommendations mentioned in the Research Report bearing in mind the aforementioned.

Further, the information herein has been obtained from various sources which we believe is reliable, and we do not guarantee its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes an offer, or an invitation to make an offer, to buy or sell any securities or any options, futures or other derivatives related to such securities (hereinafter referred to as “Related Investments”). ARSSBL and/or Anand Rathi may trade for their own accounts as market maker / jobber and/or arbitrageur in any securities of the companies mentioned in the Research Report or in related investments, and may be on taking a different position from the ones which haven been taken by the public orders. ARSSBL and/or Anand Rathi and its affiliates, directors, officers, and employees may have a long or short position in any securities of the companies mentioned in the Research Report or in Related Investments. ARSSBL and/or Anand Rathi, may from time to time, perform investment banking, investment management, financial advisory or any other services not explicitly mentioned herein, or solicit investment banking or other business from, any entity and/or company mentioned in this Research Report; however, the same shall have no bearing whatsoever on the specific recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the other companies of Anand Rathi, even though there might exist an inherent conflict of interest.

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Additional information on recommended securities/instruments is available on request.


India I Equities Cement

Result Update

7 May 2014

Heidelberg Cement

Improved 1Q; Continuity the key; Hold

Key takeaways

Revenue beats our estimate. Fuelled by capacity expansion, Heidelberg Cement’s volumes grew 8% yoy (up 10% qoq) to its highest ever, 1.02m tons, leading to better-than-estimated 8% revenue growth. Realisations were flat yoy, to `3,860 a ton. Adjusted for volumes of the Raigad unit (sold on 3rd Jan’14), volumes grew a robust 29% yoy and revenues, 30% yoy.

EBITDA per ton at `585. EBITDA/ton was a good `585, vs `357 a year ago and `202 the prior quarter, chiefly because of the more-than-expected volumes and lower RM cost. EBITDA grew 77% yoy; adjusted for the Raigad unit sale, however, it rose more than 100%. Cost inflation in power & fuel was more than anticipated. Freight cost dipped due to a rise in incentives from the Railways and dispatches to closer markets. We expect a modest drop in profit in the next three quarters, driven by the assumption of cost inflation being higher than improved realisations. Adjusted profit of `74m came above our estimate, boosted by higher EBITDA and lower interest cost. Reported profit was `479m, fuelled by the extraordinary gain on the Raigad unit sale.

Capacity rejig in CY13. Heidelberg had enhanced its cement capacity from 3.1m tons to 6m tons in 1QCY13. This was followed by the sale of its 0.6m-ton Raigad unit to the JSW Group in Oct’13, for `1.66bn, which fructified in Jan’14. While the company continues to explore organic and inorganic growth options, it stated that its aim of reaching 15m-ton capacity by 2017 is not now plausible.

Our take. On the greater volumes, EBITDA and PAT bettered our estimates. Operational savings from the ramp-up of the new capacity and the conveyor belt would be realised in the coming quarters. We expect 18% and 81% revenue and EBITDA CAGRs, respectively, over CY13-15, supported by the robust volume growth. We maintain a Hold, with a target price of `51, based on 7.5x Dec’15e EV/EBITDA; the implied PE is 20x and the EV/ton is US$60. Risks. Cement-price decline.

Rating: Hold Target Price: `51 Share Price: `44

Key data HEIM IN / HEID.BO52-week high / low `51 / `28 Sensex / Nifty 22482 / 67353-m average volume US$0.1m Market cap `10.6bn / US$178m Shares outstanding 226.6m

Shareholding pattern (%) Mar’14 Dec’13 Sep’13

Promoters 69.4 68.9 68.5 - of which, Pledged - - -Free Float 30.6 31.1 31.5 - Foreign Institutions 4.8 4.9 5.3 - Domestic Institutions 6.6 6.8 6.8 - Public 19.2 19.4 19.4

Financials (YE: Dec) CY14e CY15e

Sales (`m) 16,429 18,872

Net profit (`m) 229 581

EPS (`) 1.0 2.6

Growth (%) (156.3) 153.4

PE (x) 43.5 17.2

EV/EBITDA (x) 9.3 7.0

EV/ton (US$) 56.8 55.7

RoE (%) 2.7 6.4

RoCE (%) 5.1 7.6

Net gearing (x) 1.2 1.1

Source: Anand Rathi Research

Quarterly results (YE: Dec) 1QCY13 1QCY14 % yoy CY12 CY13 % yoy

Sales (`m) 3,669 3,951 7.7 11,000 13,648 24.1

EBITDA (`m) 339 599 76.6 732 864 18.0

EBITDA margin (%) 9.2 15.2 591 6.7 6.3 (33)

EBITDA per ton (`) 357 585 63.7 255 239 (6.1)

Interest (`m) 137 271 97.4 105 1,059 905.2

Depreciation (`m) 170 265 56.1 315 970 208.1

Other income(`m) 35 101 187.7 145 358 147.8

PBT (`m) 67 164 143.4 457 (807) (276.7)

Tax (`m) 45 89 97.3 148 (399) (369.5)

PAT (`m) 22 74 238.3 308 (407) (232.1)


Change in Estimates Target Reco

Estimates revision (%) CY14e CY15e

Sales (15.5) -EBITDA (17.4) -EPS (61.2) -

7 May 2014 Heidelberg Cement – Improved 1Q; Continuity the key; Hold


Quick Glance – Financials and Valuations Fig 1 – Income statement (` m) Year-end: Dec CY11 CY12 CY13 CY14e CY15e

Net revenues 9,880 11,000 13,648 16,429 18,872 Revenue growth (%) 14.1 11.3 24.1 20.4 14.9 - Oper. expenses 9,222 10,267 12,784 14,230 16,027 EBIDTA 658 732 864 2,198 2,845 EBITDA margin (%) 6.7 6.7 6.3 13.4 15.1 - Interest expenses 39 105 1,059 1,219 1,300 - Depreciation 314 315 970 1,059 1,100 + Other income 118 145 358 422 422 - Tax 132 148 (399) 113 286 Effective tax rate (%) 31.1 32.5 49.5 33.0 33.0 Reported PAT 292 308 (407) 633 581 +/- Extraordinary items - - - (404) -+/- Minority interest - - - - -Adjusted PAT 292 308 (407) 229 581 Adj. FDEPS (`/sh) 1.3 1.4 (1.8) 1.0 2.6 Adj. FDEPS growth (%) (53.9) 5.7 (232.1) (156.3) 153.4 Source: Company, Anand Rathi Research

Fig 3 – Cash-flow statement (`m) Year-end: Dec CY11 CY12 CY13 CY14e CY15e

PAT 292 308 (407) 229 581 + Non-cash items 344 362 642 1,059 1,100 Cash profit 635 670 235 1,288 1,681 - Incr./(Decr.) in WC 237 920 1,758 33 100 Operating cash-flow 399 (250) (1,523) 1,255 1,581 - Capex 7,287 4,667 1,602 (401) 1,070 Free cash-flow (6,888) (4,917) (3,125) 1,656 511 - Dividend - - - - 101 + Equity raised 31 2 275 404 - + Debt raised 7,769 2,539 3,260 - - - Investments - - - - - - Misc. items - - - - (0) Net cash-flow 912 (2,375) 410 2,060 410 + Op. cash & bank bal. 2,195 3,107 732 1,141 3,201 Cl. cash & bank bal. 3,107 732 1,141 3,201 3,611 Source: Company, Anand Rathi Research

Fig 5 – EV/EBITDA band


Fig 2 – Balance sheet (` m) Year-end: Dec CY11 CY12 CY13 CY14e CY15e

Share capital 2,266 2,266 2,266 2,266 2,266Reserves & surplus 5,890 6,200 6,067 6,701 7,180Net Worth 7,999 8,323 8,224 8,857 9,336Minority interest - - - - -Total Debt 7,769 10,308 13,568 13,568 13,568Def. tax liab. (net) 331 378 50 50 50Capital employed 16,256 19,152 21,951 22,585 23,064Net fixed assets 14,559 18,911 19,543 18,083 18,053Investments - - - - - - of which Liquid - - - - -Net working capital (1,410) (491) 1,267 1,300 1,400Cash and bank balance 3,107 732 1,141 3,201 3,611Capital deployed 16,256 19,152 21,951 22,585 23,064Net debt 4,662 9,576 12,427 10,367 9,957WC days (56) (32) 10 29 26Book value (`/sh) 35 37 36 39 41Source: Company, Anand Rathi Research

Fig 4 – Ratio analysis @ `44 Year-end: Dec CY11 CY12 CY13 CY14e CY15e

P/E (x) 34.2 32.3 NA 43.5 17.2 P/B (x) 1.2 1.2 1.2 1.1 1.1 P/CEPS (x) 15.7 14.9 42.4 7.7 5.9 EV/EBITDA (x) 22.2 26.7 25.9 9.3 7.0 EV/Ton (US$) 79.5 54.6 62.6 56.8 55.7 RoE (%) 3.7 3.8 (4.9) 2.7 6.4 RoCE (%) 2.8 2.4 (0.5) 5.1 7.6 Net Debt / Equity (x) 0.6 1.2 1.5 1.2 1.1 Interest Coverage (x) 8.9 4.0 (0.1) 0.9 1.3 DPS (`) - - - - 0.4 Dividend yield (%) - - - - 0.9 Dividend payout (%) - - - - 15.0 NSR/ton (`) 3,431 3,827 3,778 3,900 4,150 EBITDA/ton (`) 228 255 239 522 626 Volumes (m tons) 2.9 2.9 3.6 4.2 4.5 Source: Company, Anand Rathi Research

Fig 6 – Quarterly per-ton NSR and EBITDA trend




Result Highlights Fig 7 – 1QCY14 Results vs Expectations

1QCY14 1QCY14e % Var 1QCY13 % yoy 4QCY13 % qoq

Sales (`m) 3,951 3,516 12.4 3,669 7.7 3,503 12.8 EBITDA (`m) 599 422 42.0 339 76.6 189 217.3 EBITDA margin (%) 15.2 12.0 (316) 9.2 591 5.4 977 EBITDA per ton (`) 585 468 25.0 357 63.7 202 189.4 Interest (`m) 271 359 (24.6) 137 97.4 359 (24.6)Depreciation (`m) 265 239 10.7 170 56.1 266 (0.4)Other income(`m) 101 80 25.9 35 187.7 112 (10.2)PBT (`m) 164 (97) (269.3) 67 143.4 (324) (150.5)Tax (`m) 89 (29) (408.0) 45 97.3 (258) (134.7)PAT (`m) 74 (68) (209.9) 22 238.3 (66) (212.3)


Fig 8 – Per-ton analysis (` per ton) Mar-14 Mar-13 % Chg Dec-13 % Chg

Realization 3,862 3,868 (0.2) 3,755 2.8 EBITDA 585 357 63.7 202 189.4 Sales Volumes (m tons) 1.0 0.9 7.8 0.9 9.6 Costs Raw Material 826 1,082 (23.7) 1,002 (17.6)Power & Fuel 1,168 1,149 1.6 1,008 15.8 Freight 528 622 (15.2) 560 (5.8)Staff 243 275 (11.8) 277 (12.3)Other Expenditure 608 620 (1.8) 647 (5.9)


Led by capacity expansion, Heidelberg Cement’s volumes grew 8% yoy (up 10% qoq) to the highest ever, 1.02m tons, leading to better-than-estimated 8% revenue growth. Realisations were flat yoy, to `3,860 a ton. Adjusted for volumes of the Raigad unit (sold on 3rd Jan’14), volumes grew a robust 29% yoy and revenues, 30% yoy.

Heidelberg clocked a good EBITDA/ton of `585 vs `357 a year ago and `202 the quarter prior, mainly on more-than-expected volumes and lower RM cost. EBITDA grew 77% yoy; adjusted for the sale of the Raigad unit, however, it rose more than 100%. Increases in the cost of power & fuel were more than anticipated. The cost of freight dipped due to a rise in incentives from the Railways and dispatches to closer markets. Adjusted profit of `74m was above our estimate, driven by higher EBITDA and lower interest cost. Reported profit was `479m, fuelled by the extraordinary gain on the sale of the Raigad unit.

We expect a modest decline in profitability in the next three quarters pulled down by the assumption of cost inflation coming higher than the improvement in realisations. The key risk on the pricing scenario would emanate from recent/coming capacity additions in central India (Reliance Cement from May’14), in the North (from Lafarge, Shree, Mangalam, JK Cement) and in the East (from Ultratech, Century, Shree).

Capacity rejig in CY13

In 1QCY13 Heidelberg had enhanced its cement capacity from 3.1m tons to 6m tons. This was followed by the sale of its 0.6m-ton Raigad unit to the JSW Group in Oct’13 for `1.66bn, fructifying in Jan’14. While it continues to explore organic and inorganic growth options, it stated that its aim of touching 15m-ton capacity by 2017 is not now possible.



Valuations Operational savings from the ramp-up of the new capacity and the conveyor belt would be realised over the coming quarters. We expect 18% and 81% revenue and EBITDA CAGRs, respectively, over CY13-15 bolstered by robust volume growth. We maintain a Hold (recommendation), with a target price of `51, based on 7.5x Dec’15e EV/EBITDA; the implied PE is 20x and the EV/ton is US$60.

Fig 9 – Twelve-month forward EV/EBITDA: Mean and Standard deviation

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Risks

Slow ramp-up of the new unit.

Drop in cement prices.

Appendix Analyst Certification The views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. The research analysts are bound by stringent internal regulations and also legal and statutory requirements of the Securities and Exchange Board of India (hereinafter “SEBI”) and the analysts’ compensation are completely delinked from all the other companies and/or entities of Anand Rathi, and have no bearing whatsoever on any recommendation that they have given in the Research Report. Important Disclosures on subject companies Rating and Target Price History (as of 6 May 2014)

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1 19-Oct-11 Hold 39 36 2 27-Aug-12 Buy 58 41 3 16-Oct-12 Hold 58 54 4 9-Apr-12 Buy 45 34 5 9-Oct-13 Hold 41 36

The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.



Ratings Guide Buy Hold Sell Large Caps (>US$1bn) >15% 5-15% <5% Mid/Small Caps (<US$1bn) >25% 5-25% <5%

Anand Rathi Research Ratings Distribution (as of 4 March 2014) Buy Hold Sell Anand Rathi Research stock coverage (182) 64% 27% 9% % who are investment banking clients 4% 0% 0% Other Disclosures This report has been issued by ARSSBL which is a SEBI regulated entity, and which is in full compliance with all rules and regulations as are applicable to its functioning and governance. The investors should note that ARSSBL is one of the companies comprising within ANAND RATHI group, and ANAND RATHI as a group consists of various companies which may include (but is not limited to) its subsidiaries, its affiliates, its group companies who may hold positions, views, stakes and may service the companies covered in this report independent of ARSSBL. Investors are cautioned to be aware that there could arise a potential conflict of interest in the views held by ARSSBL and other companies of Anand Rathi who maybe affiliated, connected or catering to the companies mentioned in the Research Report; even though, ARSSBL and Anand Rathi are fully complaint with all procedural and operational regulatory requirements. Thus, investors should not use this as a sole basis for making their investment decision and should consider the recommendations mentioned in the Research Report bearing in mind the aforementioned.



Appendix Analyst Certification The views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. The research analysts are bound by stringent internal regulations and also legal and statutory requirements of the Securities and Exchange Board of India (hereinafter “SEBI”) and the analysts’ compensation are completely delinked from all the other companies and/or entities of Anand Rathi, and have no bearing whatsoever on any recommendation that they have given in the Research Report. The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.



Ratings Guide Buy Hold Sell Large Caps (>US$1bn) >15% 5-15% <5% Mid/Small Caps (<US$1bn) >25% 5-25% <5% Anand Rathi Research Ratings Distribution (as of 4 March 2014) Buy Hold Sell Anand Rathi Research stock coverage (185) 64% 27% 9% % who are investment banking clients 4% 0% 0% Other Disclosures This report has been issued by ARSSBL which is a SEBI regulated entity, and which is in full compliance with all rules and regulations as are applicable to its functioning and governance. The investors should note that ARSSBL is one of the companies comprising within ANAND RATHI group, and ANAND RATHI as a group consists of various companies which may include (but is not limited to) its subsidiaries, its affiliates, its group companies who may hold positions, views, stakes and may service the companies covered in this report independent of ARSSBL. Investors are cautioned to be aware that there could arise a potential conflict of interest in the views held by ARSSBL and other companies of Anand Rathi who maybe affiliated, connected or catering to the companies mentioned in the Research Report; even though, ARSSBL and Anand Rathi are fully complaint with all procedural and operational regulatory requirements. Thus, investors should not use this as a sole basis for making their investment decision and should consider the recommendations mentioned in the Research Report bearing in mind the aforementioned.














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