635399884187812500_NiveshMonthly - July 2014

8/12/2019 635399884187812500_NiveshMonthly - July 2014

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NiveshMonthlyJuly 2014

Daljeet S. KohliHead of Research

Mobile: +91 77383 93371, 99205 94087

Tel: +91 22 [email protected]

MONTHLYRECOMMENDATIONSCMP RATING TP

Mastek Ltd. Rs.190 BUY Rs.230Sharon Bio-Medicine Ltd. Rs.49.5 BUY Rs.74

IndiaNivesh Securities Private Limited601 & 602, Sukh Sagar, N. S. Patkar Marg, Girgaum Chowpatty, Mumbai 400 007.


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Mastek Ltd.

Mastek Ltd (Masteks) positioning with modern web-based property & casualty (P&C) and life & annuity (L&A) insurance industry platform remains key growthdriver. Globally large number of insurers use 30+ year old platform, which becomehurdle for growth in changing industry environment. As a result, despite muted

performance during recent quarters the overall outlook for Mastek remainsbuoyant. Additionally, its strong product position offers huge penetrationopportunity, cross-selling and upscale opportunity. We maintain BUY on Mastek Ltd with target price of Rs.230.

Investment RationaleStrong positioning in US P&C insurance industry: MajescoMastek is rated amongstTop 3 P&C insurance platform vendors in North America with 7 of Top 25 insurancecarriers as customers. The company also remains the leading third party vendor inP&C billing solutions. The company has over 80 customers successfully moved overto its platform. On back of improving economic conditions there is strong interestin automating underwriting and new insurance business functions. These initiativeswould help insurers address growth; distribution mandates & reduces cost per policyissued. We believe on back of improved user interface along with proven testedtrack record of STGs billing platform, we believe MajescoMastek will continue toexpand their existing client base.

Source: Company, IndiaNivesh Research

Large underpenetrated market in P&C Insurance Industry: The P&C industries

annually spending on aging legacy systems and services is ~$15 billion ($5 bn onsoftware & $10 bn services), according to Gartner. In our view, nearly $6 to $7billion of that could be migrated third-party software and services vendors. Currentlyless than 10% of that opportunity is penetrated. Mastek remains one amongst theleader in this transition with solutions for claims, policy administration & billing inUS P&C industry.

Sticky Business Model: Once a customer moves over to the Mastek platform, it islikely to remain with it anywhere from 15 to 30 years before such a customer wouldrealistically consider another change. The reason is that the system becomes socore to client that the data migration and workflow changes necessary for the movemake it prohibitive to do it often. As a result, the companys visibility to the annualinsurance revenue is over 75% on day one of fiscal year. Higher recurring revenue

($88 mn from TTM) along with recent order book gives Mastek ~30% revenuevisibility at the company level revenue. As a result, we believe Mastek has solid andhighly predictable business model.

CMP : Rs.190

Rating : BUYTarget : Rs.230


Current Previous

Source: Company Filings; IndiaNivesh Research

Units Rs/Mn FY14A FY15E FY16E

Net Sales 9,096 9,556 11,011

EBITDA 726 849 1,074

EBITDA Margin (%) 8.0 8.9 9.7

PAT 518 636 806

PAT Margin (%) 5.7 6.7 7.3

EPS 23.4 28.7 36.4

ROE (%) 9.5 10.8 12.2

P/E 8.1 6.6 5.2

EV/EBITDA 6.1 5.2 4.1

Shareholding Pattern (%)Mar-14

Promoter 51.92FII 14.91DII 7.25Others 25.92

Source: BSE

MASTEK v/s SENSEX

Source: Capitaline; IndiaNivesh Research


Mobile: +91 77383 93371, 99205 94087Tel: +91 22 [email protected]

Amar MouryaResearch Analyst

Tel: +91 22 [email protected]


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IndiaNivesh Research NiveshMonthly July 3, 2014 | 3 of 7

Mastek Ltd. (contd..)

Elixir North America success remains a key trigger: The Company already completedend-to-end implementation of beta version of Elixir North America (L&A platform)with Foresters (Canada based life insurance player). Additionally, upgraded versionof Elixir North America is likely to be implemented by the end of CY14. Once theimplementation is through and tested, Foresters could be used as a referral modelwhile pitching to other life & pension insurers players in North America.

Value Unlocking Opportunity: Guidewire is currently trading at Mcap-to-Sales of 9.2x, which is at significant premium to Masteks 1.0x (Ex. Gov & IT Services businessrevenue & taking full Mcap) valuations. In terms of the client base Mastek has over80 customers (v/s 100 Guidewire) successfully moved over to its platform. However,Masteks presence in low end Government and IT services business reduces theoverall valuation of the Company (v/s Guidewire). In our view, this brings stakedivestment opportunity for the company in high margin insurance solution business.Even after assigning 80% haircut to the Guidewire valuations, Masteks valuationcould expand to Rs.8,181 mn (v/s Rs.4700 mn current).

Turnaround in Government Business: The Companys Government businesscontributes ~14% of the overall revenue in FY14. This is the third largest revenuesegment after insurance. However, the major business to segment is predominantly

from the UK government. Given the slight revival in UK economy we expect sometraction in large multi-year deals, which dried-up due to UK governments austeritymeasures. Further, the introduction of G-Cloud, which encourages smaller companiesto bid for deal directly rather than going through large system integrator also remainspositive.

Risk & ConcernsRecent loss of one key Insurance client in North America is likely to impact($2.4 mn per quarter) the overall revenue growth in FY15.

Higher dependency on few key verticals and client.

Higher SG&A and branding expenditure could impact margin.

ValuationsAt the CMP of Rs.190, Mastek is trading at a P/E of 6.6x FY15E and 5.2x FY16Eearnings estimates. We remain positive and believe in Masteks insurance segmentre-rating potential (in-line with Guidewire) on back of high client stickiness. Wesense that increased traction in license revenues from here-on should help Mastekto expand margin going ahead. Additionally, its greater focus on updating variousmodules of P&C should help Mastek to penetrate existing clients. We maintain BUYon stock with target price to Rs.230 (valuing 6.3x FY16E).


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Mastek Ltd. (contd..)

Consolidated Financials

Income StatementY E March (Rs m) FY12 FY13 FY14 FY15e FY16eNet sales 6,567 8,836 9,096 9,556 11,011Y/Y Ch % 7.3 34.5 2.9 5.1 15.2

COGS 6,426 7,661 7,862 8,195 9,348SG&A 306 466 507 512 590EBITDA -165 709 726 849 1,074Y/Y Ch % NM NM 2.5 16.9 26.5EBITDA Margin % -2.5 8.0 8.0 8.9 9.7

Interest 10 9 7 3 3Deprecaition 286 294 329 295 340

EBIT -461 406 391 550 730

EBIT Margin % -7.0 4.6 4.3 5.8 6.6

Other Income 234 251 286 287 330

Extra Ordinary Exps/(Income) 65 0 0 0 0PBT -293 657 677 837 1,060

Tax 2 107 160 201 254

Effective tax rate % -0.6 16.3 23.5 24.0 24.0

Adjusted PAT -295 550 518 636 806

Y/Y Ch % NM -286.6 -5.8 22.8 26.7

Minority - - - - -

Reported PAT (RPAT) -295 550 518 636 806

RPAT Margin % -4.5 6.2 5.7 6.7 7.3

Y/Y Ch %17.6 -286.6 -5.8 22.8 26.7

Balance SheetY E March (Rs m) FY12 FY13 FY14 FY15e FY16eShare Capital 135 123 111 111 111Reserves & Surplus 4,839 5,206 5,491 6,090 6,858

Net Worth 4,974 5,329 5,602 6,201 6,969Minority 0 0 0 0 0Long-term loans 62 12 14 14 14Others 0 360 248 256 263Total Liabilities 5,036 5,701 5,864 6,470 7,246

Gross Block 5,152 5,405 5,850 6,151 6,498Less Depreciation 2,616 2,910 3,239 3,534 3,874Net Block 2,536 2,495 2,612 2,618 2,624

Capital Work in Progress 2 0 0 0 0

Investments 0 27 26 26 26

Defered tax (net) 240 252 225 225 225

Others - 591 620 620 620

Current Assets 4,986 4,050 4,055 4,728 5,580Sundry Debtors 2,015 1,491 1,168 1,702 1,961

Cash & Bank Balance 1293 1221 897 977 1508

Loans & advances 1,678 212 236 243 250

Others 0 1,126 1,754 1,807 1,861

Current Liabilities 1,218 47 39 39 44Provisions 1,511 1,668 1,635 1,708 1,786

Net Current Assets 2,258 2,335 2,381 2,981 3,751

Total assets 5,036 5,700 5,864 6,470 7,246

Cash FlowY E March (Rs m) FY12 FY13 FY14 FY15e FY16e

PBT -228 657 677 837 1,060

Depreciation 286 294 329 295 340

Interest Exp 10 9 7 3 3

Changes in Working Capital -56 -150 -370 -521 -237

Cash Flow After Chang in WCapital 13 809 643 615 1,167

Tax -2 -107 -160 -201 -254

Others 230 -262 27 0 0Cash flow from operations 241 440 510 414 912

Ca pi ta l expendi tur e (net) -295 -253 -445 -301 -347

Free Cash Flow -54 187 65 113 565

Other income 0 0 -27 0 0

Investments 0 -618 -27 0 0

Cash flow from investment s -295 -871 -500 -301 -347

Interest Exp (net) 10 9 -7 -3 -3

Dividend paid (incl tax) 0 0 0 -37 -37

Debt Repayment & Others -71 350 -122 7 8

Cash flow from Financing -61 359 -129 -33 -33

Net change in cash -115 -72 -118 79 532

Cash at t he beginning of the year 1 ,408 1 ,293 1 ,221 1 ,103 1 ,182

Cash at the end of the year 1,293 1,221 1,103 1,182 1,714

Key RatiosY E March FY12 FY13 FY14 FY15e FY16e

EPS (Rs) -10.9 22.3 23.4 28.7 36.4

Cash EPS (Rs) -0.3 34.3 38.2 42.0 51.7

DPS (Rs) 0.0 0.0 0.0 3.0 3.0

BVPS 184.1 216.6 252.8 279.8 314.5

ROCE % -4.3 12.4 11.8 13.6 15.5

ROE % -5.9 10.7 9.5 10.8 12.2

ROIC % -5.8 9.6 8.8 9.3 10.6EBITDA Margin % -2.5 8.0 8.0 8.9 9.7

Net Margin % -4.5 6.2 5.7 6.7 7.3

PER (x) -17.4x 8.5x 8.1x 6.6x 5.2x

P/BV (x) 1.0x 0.9x 0.8x 0.7x 0.6x

P/CEPS (x) -626.1x 5.5x 5.0x 4.5x 3.7x

EV/EBITDA (x) -27.0x 6.3x 6.1x 5.2x 4.1x

Dividend Yield % 0.0 0.0 0.0 1.6 1.6

m cap/sales (x) 0.7x 0.5x 0.5x 0.5x 0.4x

net debt/equity (x) -0.3x 0.0x 0.0x 0.0x 0.0x

net debt/ebitda (x) 9.8x -0.3x -0.3x -0.3x -0.2x

Debtors (Days) 112 62 47 65 65

Creditors (Days) 82 3 2 2 2

Cash Conversion Cycle (Days) 30 59 45 63 63Source: Company, IndiaNivesh Research

5,700


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S h ar o n B io -M ed ic in e S en se x

Sharon Bio-Medicine Ltd.

CMP : Rs.49.5


Rating : NRTarget : NR

Current Previous

Note Year ending June 30Source: Company Filings; IndiaNivesh Research

Units Rs/Mn FY13A FY14E FY15E FY16E

Net Sales 10,735 12,882 15,459 18,550

EBITDA 1,222 1,456 1,932 2,504

EBITDA Margin (%) 11.4 11.3 12.5 13.5

PAT 537 636 986 1,376

PAT Margin (%) 5.0 4.9 6.4 7.4

EPS 5.1 6.0 9.3 13.0

P/E 9.7x 8.2x 5.3x 3.8x

Shareholding Pattern (%)Mar-14

Promoter 60.20FII --DII --Others 39.80

Source: BSE

SHARON BIO-MEDICINE v/s SENSEX

Source: Capitaline; IndiaNivesh Research


Mobile: +91 77383 93371, 99205 94087Tel: +91 22 [email protected]

CMP as on July 2, 2014. NR-Not Rated

Sharon Bio Medicine Booster dose of profits doubling in next 2 years

Sharon Bio Medicine (Sharon) is an integrated pharmaceutical company engaged into manufacture of API & formulations. The company has 3 plants out of which2 are API plants based out of Taloja in Maharashtra & 1 Formulations plant located at Dehradun, Uttrakhand. All the facilities are approved by UK, Latin Americaetc. but none by USFDA as of now. However the company is waiting for USFDAapproval for its formulation facility. USFDA has already inspected Dehradun facility but approval is pending. We have recently met the management & come out extremely positive from the meeting. We believe the company is poised for a very strong growth going ahead which would lead to doubling of profits over next couple of years. The company is changing its strategy from being API dominated company to Formulation driven. Approval from USFDA will be a strong reratingtrigger for the stock. We recommend BUY on the stock with target price of Rs 74in 1 year time period. Key rationales to BUY the stock are given hereunder:

Future growth will be driven by Formulations: Currently the companys

revenue mix is 67:33 in terms of API: Formulation. Going forward in next 2years the management intends to reverse this ratio. The growth in formulationwill come from approval from USFDA & launch of many products. Howeverwe are conservative on this count & we have modeled 50:50 mix of API &Formulation by June 2016.

Profit margins will expand due to increased contribution from formulations:Since the margins are far higher in formulation than in API we expect theblended margins at EBITDA level to increase by 120 bps in FY15 & another100 bps in FY16 reflecting total of 220 bps increase in margins in 2 years. Wewould highlight that this margin expansion can be even higher as we are takingcontribution of formulation at lesser rate than the company management.Also these formulations will use in-house API manufacturing which will againgive an edge in margins.

Fully integrated operations give competitive edge: Since company intendsto launch many products in formulations which will use in house producedAPIs, it will give immense competitive edge to company. Also backwardintegration up to API stage gives control over the supply chain in terms of quality & availability of raw material.

Captive API gives control over fluctuations in pricing thereby reduces issuesat the end of formulation customer. As of now about 10% of entire APIproduction is used for captive purposes. Over next 2 years we expect internalconsumption may go up to 15%. The segment wise results will show APIsegment stagnant or growing at lesser pace while formulation segment shallgrow at faster pace.

Gross fixed assets have increased 5x in last 5 years but sales have gone uponly 2x. Implying no more capex required for capacity expansion: TheCompany has been investing heavily in capacity expansion over last 5 yearsas a result of which the Gross Fixed assets have almost become 5 times in thisperiod. We believe the company was preparing to take the advantage of opportunity in formulation whenever it arrives. In our view that time hasnow come.

Company is poised to take off on sharp growth trajectory: On back of largeexisting capacities both in API as well as formulations the company is nowpoised for sharp growth. According to our understanding Sharon can grow itsrevenue at 20% CAGR over next 3-4 years without increasing capacity. In simpleterms it means all the investments in the past are now ready to start delivering

returns.The entire capex was funded by debt: Over last few years company has


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Sharon Bio-Medicine Ltd. (contd..)

invested in capex via borrowings. It has ECBs pending worth around 24 mndollars & another about Rs 4 bn debt on its balance sheet. The huge amountof debt is taking away large part of operating profit. In high interest ratescenario large debt has been a major drain. However we believe that goingforward as the high margin formulation business will contribute more theprofit margins will improve coupled with no expense on fixed assets would

lead to large free cash flows which can be used for repayment of debt.The company also provides services to the industry through a toxicity lab.This lab is state of art & has relevant certifications from Indian as well asglobal regulatory authorities. Through this center can cater to agro chemicals,other drug discovery companies etc. Although this is an 80% EBITDA marginbusiness we have not modeled it into our estimates as its size is small in termsof overall company & also not core activity.

Management is fully committed to the business & willing to invest more inthe business. Recently management has announced infusion of funds throughpreferential warrant issue at almost near the current stock price. This impliesmanagements confidence in the business.

The management is quite investor friendly. A few months back they announceda 1:1 bonus & a split from 5:1. Just a few days back promoters have subscribedto preferential allotment of 18 mn convertible warrants to themselves at nearthe market price

FinancialsThe company follows June year ending. In 9 months ended March 31, 2014 onconsolidated basis it has clocked turnover of Rs 9677.1 mn with EBITDA of Rs 1092.9mn. Interest expense was Rs 389.6 mn & PAT was at Rs 492.7 mn.

Over last 5 years from 2009 to 2013 June ending the company has doubled its netsales with top line growing at a CAGR of 26.4%. Historically the company haswitnessed high raw material costs & therefore low operating margins. On top of

that company expanded its capacity at all facilities resulting in debt going up sharply.Consequently the interest expenses have bloated to extent of almost eating away35% of operating profit. This coupled with high depreciation resulted in low PATwith PAT margin at measly 5%.

Going forward we think worst is behind & as mentioned above margins will improvein next 2 years which will result in wild swing on net profit. Taking a conservativeview that API & Formulation will become equal contributors over next 2 years &blended margins will improve by 120 bps in FY15 followed by 100 bps in FY16, Topline growth of 20% CAGR in next 2 years & interest costs remaining at current levelof Rs 550 mn per annum we expect the FY16E EBITDA to grow by 70% over FY14E &PAT to grow from Rs 635.5 mn to Rs 1376.2 mn a jump of 117% between FY14E toFY16E. In EPS terms it means a EPS of Rs 6 in FY14E to increase to Rs 13 in FY16E.

Valuation & RecommendationAt CMP of Rs 49.5 the stock is trading at PER of ~8x FY14E, 5.3x FY15E & 3.8x FY16E.We believe the company e the stock deserves a rerating which would happen oncethe numbers start showing. In nutshell we believe this company is at the point of inflexion, ready to take off. All the hard work done in last 5 years is likely to bearfruit in next few years. The stock can easily rerate to its peer multiples of around10x. However, for the rerating to come into effect the formulation business & USFDAapproval has to come. Conservatively as of now we are valuing this company at 8xFY15E EPS (which is just rolling the current multiple form FY14E to FY15E) yielding atarget of Rs 74.

We recommend strong BUY with target of Rs 74 with 1 year time period.


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Past Recommendations Review (CMP as on July 2, 2014)

Disclaimer: This document has been prepared by IndiaNivesh Securities Private Limited (IndiaNivesh), for use by the recipient as information onlyand is not for circulation or public distribution. This document is not to be reproduced, copied, redistributed or published or made available toothers, in whole or in part without prior permission from us. This document is not to be construed as an offer to sell or the solicitation of an offerto buy any security. Recipients of this document should be aware that past performance is not necessarily a guide for future performance andprice and value of investments can go up or down. The suitability or otherwise of any investments will depend upon the recipients particularcircumstances. The information contained in this document has been obtained from sources that are considered as reliable though its accuracy orcompleteness has not been verified by IndiaNivesh independently and cannot be guaranteed. Neither IndiaNivesh nor any of its affiliates, itsdirectors or its employees accepts any responsibility or whatever nature for the information, statements and opinion given, made available orexpressed herein or for any omission or for any liability arising from the use of this document. Opinions expressed are our current opinions as of the date appearing on this material only. IndiaNivesh directors and its clients may have holdings in the stocks mentioned in the report.

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Note: **Revised Target Price; ^Revised Rating.Please refer our past monthly reports for reviewing the earlier mentioned recommendations.

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IndiaNivesh Securities Private Limited601 & 602, Sukh Sagar, N. S. Patkar Marg, Girgaum Chowpatty, Mumbai 400 007.

Tel: (022) 66188800 / Fax: (022) 66188899e-mail: [email protected] | Website: www.indianivesh.in

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March 2014 (Investment Strategy Note Released in the month of March 2014)Investment Strategy...Regardless of Election Outcomes

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635399884187812500_NiveshMonthly - July 2014