Ambit Capital Takeaways From London Conf

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Ambit India Access

POST CONFERENCE NOTE June 30, 2014

Key financials

Mcap 6M ADV P/E (X) P/B (X) RoE (%)

Name Stance (US$ mn) (US$ mn) FY15 FY16 FY15 FY16 FY14 FY15 FY16

Somany Ceramics NR 157 0.2 21.3 15.3 3.6 3.1 15.3 18.2 21.3

Thermax SELL 1,856 0.9 31.4 24.9 4.9 4.3 12.6 16.1 17.9

Shoppers St. NR 543 0.2 100.0 44.9 6.3 5.6 (1.7) 5.1 12.3

I D F C UR 3,245 20.5 9.9 9.0 1.2 1.1 12.6 12.7 12.4

L&T Fin.Holdings NR 2,089 11.0 16.4 12.8 1.8 1.6 9.2 11.8 13.5

City Union Bank BUY 679 1.2 10.2 8.4 1.8 1.5 18.9 17.9 18.6

Source: Bloomberg, Ambit Capital research; Note: NR = Not Rated; UR = Under Review

Analyst Details

Nitin Bhasin [email protected] +91 22 3043 3241

Bhargav Buddhadev [email protected] +91 22 3043 3252

Rakshit Ranjan, CFA [email protected] +91 22 3043 3201

Pankaj Agarwal, CFA [email protected] +91 22 3043 3206

Takeaways from London Conference Management teams at our London Conference highlighted improving sentiment but they are yet to see a change in on the ground business momentum. Whilst consumption oriented companies await industrial sector led job creation and income enhancement, the financial services companies remain concerned about the distressed assets from the recent past. Amongst the below discussed names, we prefer Somany Ceramics, Shoppers Stop and City union Bank for their strong franchises.

City Union Bank: In the near term, the management expects the balance sheet growth to be moderate but net interest margins and RoEs would be stable, at ~3.5% and ~20%, respectively. The bank continues to stick to its core competencies of MSME/trade-based lending. This is a segment, in which the bank has a competitive edge over its larger peers. The bank will continue to focus on its home geography where ample growth opportunities are still available, according to the management.

IDFC: The management suggested that getting a banking licence would not only help the company in diversifying its exposure, products and liability profile, but also help it become more comfortable from a regulatory and rating perspective. That said, IDFC would still be five years away from delivering RoEs north of 15%. In infra, the management believes that projects stuck with land acquisition and judiciary issues will take longer to resolve but roads could take off in the near term.

L&T Finance: The management suggested that LTFH has multiple levers to improve its RoEs in the future, such as: (i) improvement in margins; (ii) improvement in operational efficiency i.e. decline in the operating cost to asset ratio; (iii) decline in credit costs; and (iv) further improvement in its asset management business. However, reported earnings in the near term could be muted due to deterioration in the asset quality in the corporate loan book (from regulatory changes).

Shoppers Stop: Management suggests that modern retail in India faces significant challenges around retail space acquisition, limited penetration of catchment areas, threat from e-commerce and store-level operating inefficiencies. However, the firm has clear competitive advantages around long-term contracts for the retail space, tools to manage operating costs and a negative working capital cycle. Introduction of GST and revival in overall consumer spending are likely to be positive catalysts over the next 12-24 months. The stock is trading at consensus EV/sales multiple of 0.8x for FY15 and 0.7x for FY16.

Somany Ceramics: Management expects to grow higher than the industry rates, given continuous capacity expansions (55-57msm by FY16) and increasing ability to invest in branding/distribution. Furthermore, management highlighted that that: a)market share gain from unorganised and organised players, b) increasing share of vitrified tiles in portfolio (from 44% presently) and c) improving brand perception with users will aid PBT margin improvement and are the key RoCE expansion levers for the next 2-3 years.

Thermax: Management remains hopeful of improvement in order inflow driven by new government’s indicated initiatives. Revenue in FY15 should grow given the higher carry forward order book; 2HFY15 inflow momentum will determine FY16. Given domestic slowdown Thermax has expanded overseas and presently nearly 32-35% of its revenues originate from overseas geographies. Management expects the vacuum of inflows in IPPs to persist for another year; however, indicates that the true BTG manufacturing capacity in India could be lower than the stated capacities.

Ambit India Access

June 30, 2014 Ambit Capital Pvt. Ltd. Page 2

City Union Bank Steady performance to continue We hosted the management of City Union Bank at our London conference last week. The management highlighted that it continues to stick to its core competencies of MSME/trade-based lending. This is a segment, in which the bank has a competitive edge over its larger peers and the bank’s loan growth would improve as soon as the external climate improves. The bank will continue to focus on its home geography where ample growth opportunities are still available, according to the management. The bank is keen to maintain its individual existence away from any M&A developments. In the near term, the bank expects the asset quality environment to only gradually improve but is confident of substantial recoveries from NPAs. The balance sheet growth would be moderate but net interest margins and RoEs would be stable, at ~3.5% and ~20%, respectively. We reiterate our BUY stance with a target price of Rs76/share, implying a valuation of 1.75x FY15 BV.

We hosted the management team of City Union Bank at our London conference. Here are the key takeaways:

Status quo on external environment: Currently, the main economic concerns revolve around a bad monsoon that could fuel food inflation and, thus, lead to a tight monetary policy. However, the good news is that the RBI is committed to providing liquidity, and thus effective borrowing costs should hopefully remain restrained. The management also feels that the new Government is serious about reviving economic recovery and reining in the fiscal deficit. The management believes that the economy will begin responding to policy measures by 3QCY14.

Relatively protected on competitive intensity: Of late, competition in the banking system has been drifting towards retail and project finance, and CUBK does not traditionally chase borrowers. CUBK continues to enjoy increasing market share in its target areas, which are trading and small businesses. The management believes there will always be space for small regional banks. SSI (small scale industries) account for 25% of GDP. This segment (through trade and SME) forms 50% of CUBK’s loan book. The management believes that PSU banks have bigger things to worry about, such as capitalisation, staff accountability and morale, unions, and changing Chairmen, rather than focusing on niche customer segments, in which CUBK has a presence.

CUBK unlikely to be a candidate for M&A: The board of CUBK is very clear about wanting to maintain an individual identity, which is difficult to maintain with “strategic” partners. Hence, an acquisition of the bank looks unlikely. The management highlighted that, in the past, M&As in India have taken place either because the RBI forced it or because the seller’s owners wanted it (e.g. Centurion Bank of Punjab and Bank of Rajasthan). CUBK does not need to sell, as it is a profitable entity for its owners. The management feels that the market is large enough for CUBK to flourish independently.

Branch expansion strategy – South India focus to stay: The management plans to take its branch network from 400 currently to ~500 by the end of FY15. The bank continues to focus on Tamil Nadu (accounting for 50% of incremental branches), as the state accounts for 70% of their business. The branches in Tamil Nadu comfortably break even in a year. The rest of south India (15% of business) will account for 25% of incremental branches. These branches break even in ~2 years. The rest of India (15% of business) will account for 25% of incremental branches. These branches break even in ~3 years. In the last three years, CUBK has added 175 new branches which has put pressure on its cost-to-income ratio (now ~45%). Thus, the management will now be careful with its branch expansion, given that they want to control C/I. The management also highlighted that if the RBI moves to the 2011 consensus (currently

BUY Quick Insight Analysis Meeting Note News Impact

Stock Information Bloomberg Code: CUBK IN

CMP (Rs): 75

TP (Rs): 76

Mcap (Rs bn/US$ bn): 40/0.7

3M ADV (Rs mn/US$ mn): 123/2.0

Stock Performance (%)

1M 3M 12M YTD

Absolute 5 44 36 44

Rel. to Sensex 4 30 1 26

Source: Bloomberg, Ambit Capital research

Ambit Estimates - standalone

Rs bn FY14 FY15E FY16E

NII 7.6 8.6 10.1

PAT 3.5 3.9 4.8

EPS (Rs) 6.4 7.1 8.9


Analysts

Ravi Singh Tel: +91 22 3043 3181 [email protected]

Pankaj Agarwal, CFA Tel: +91 22 3043 3206 [email protected]

Aadesh Mehta Tel: +91 22 3043 3239 [email protected]

Ambit India Access


2001) for classification of banking centres, CUBK will need to reclassify some of its rural and semi-urban branches to higher categories.

Gold loan business to see stable growth: The gold loan book has come down from 22% (end-FY13) to 18% (end-FY14) due to some de-risking. The LTV (loan to value) on paper is ~65% but in economic terms it is effectively ~50%, as CUBK knocks off wastage (from melting down) whilst determining value of gold collateral. The gold loan book is secure and safe and NPLs are auctioned off regularly with effectively no losses. In the past, the bank has actually handed over the surplus to customers, when they have had to liquidate the collateral. CUBK does not intend to exit the business, as it remains a significant opportunity in south India. However, the contribution of the gold loan book will moderate over the next few years. The recent growth in the business was due to rising gold prices. However, the decline in gold prices in the last two years has led banks to rethink their focus. Further, the regulatory changes (cap in LTV) have also dampened the enthusiasm. If gold prices move up, it may fuel the demand, but otherwise CUBK expects the business to see a steady growth.

Retail not significant: CUBK’s retail book is currently at 4-6% of total book. It will always remain low, as CUBK cannot compete with larger banks (e.g. SBI) on the liability side and hence would find it hard to competitively price retail assets. However, the bank feels it does not need retail loans to grow its book. If economic activity picks up, its target customer base will provide enough growth opportunities.

Asset quality performance backed by strong recoveries track record: In the current economic climate, the bank’s customer base has suffered, but smaller businesses have fared better because their lives, in general, depend on credit. If they are classified as NPAs to CIBIL, their business dies overnight. Hence, they tend to go all out to repay, including liquidation of personal assets. The entire loan book of CUBK is backed by adequate collateral. CUBK is confident of recovering most of its dues on NPAs. CUBK expects the first few quarters of FY15 to see some stress, but the stress in likely to ease substantially by 3Q/4Q.

Near-term guidance stays cautious on growth: Continuing with the trends in the recent quarters, the management remained cautious on growth and is targeting a loan growth of 10-15% in FY15. Net interest margins are likely to be stable at ~3.5%. With 85% of the book being on floating rates, CUBK expects that it would be able to pass on any hikes in the cost of funding. The bank targets to sustain its RoEs above 20%.

Our view – profitability and long-term stability justify premium valuation: Over the past three month, the shares of City Union Bank (up 42% vs Sensex up 15% and Bankex up 20%) have significantly outperformed its peers. At Rs75/share, CUBK’s shares thus currently trade at 1.7x FY15 BV. This compares with the long-term trading band of 0.9x-1.8x. In comparison with its peer group (regional old private sector banks), CUBK is trading at a ~20% premium (P/B multiple). The premium, however, is justified on comparison with the gap in profitability (RoA for CUBK at 1.5% vs peers’ 1.1%; RoE for CUBK at 20% vs peers’ 15%). Having recorded a CAGR of 31% (FY10-13), CUBK has slowed down the loan book growth in FY14 (6% YoY as at end-FY14). We believe a cautious approach to growth is a prudent strategy not only due to credit quality risks but also due to the constraints the bank faces on its liability franchise in the current environment. Strong net interest margins and a core focus on collateralised lending are the key strengths of the bank in the current environment. We expect loan growth to improve after FY15E to 20-22% and RoA and RoE to remain strong at ~1.5% and 18-20% over FY15-16E. We are BUYers with a target price of Rs76/per share (implied 1.75x FY15BV).

Ambit India Access


Balance sheet (standalone)

Year to March (Rs mn) FY12 FY13 FY14 FY15E FY16E

Networth 12,431 16,407 20,249 23,427 27,425

Deposits 163,408 203,048 220,169 253,194 308,897

Borrowings 3,487 4,767 3,050 3,580 4,375

Other Liabilities 4,181 5,549 6,470 7,958 9,789

Total Liabilities 183,507 229,771 249,938 288,159 350,486

Cash & Balances with RBI & Banks 11,361 17,705 21,796 24,844 29,990

Investments 45,862 52,668 59,536 66,929 81,647

Advances 121,375 152,461 160,968 184,204 225,112

Other Assets 4,909 6,937 7,638 12,183 13,738

Total Assets 183,507 229,771 249,938 288,159 350,486

Source: Company, Ambit Capital research

Income statement (standalone)


Interest Income 16,968 21,888 25,459 28,142 32,652

Interest Expense 11,970 15,647 17,865 19,573 22,527

Net Interest Income 4,998 6,240 7,594 8,569 10,125

Total Non-Interest Income 2,071 2,736 3,012 3,417 4,031

Total Income 7,069 8,976 10,606 11,986 14,156

Total Operating Expenses 2,798 3,742 4,796 5,594 6,495

Employees expenses 1,223 1,509 1,856 2,214 2,607

Other Operating Expenses 1,575 2,233 2,940 3,381 3,888

Pre Provisioning Profits 4,271 5,234 5,810 6,391 7,661

Provisions 838 1,204 1,674 1,546 1,631

PBT 3,433 4,030 4,136 4,845 6,030

Tax 630 810 665 969 1,206

PAT - adjusted 2,803 3,220 3,471 3,876 4,824

Exceptionals 0 0 0 0 0

PAT - reported 2,803 3,220 3,471 3,876 4,824


Ratio analysis (standalone)


Credit-Deposit (%) 74.3% 75.1% 73.1% 72.8% 72.9%

CASA ratio (%) 18.2% 16.8% 17.8% 18.1% 18.4%

Cost/Income ratio (%) 39.6% 41.7% 45.2% 46.7% 45.9%

Gross NPA (Rs mn) 1,235 1,731 2,931 3,378 3,997

Gross NPA (%) 1.06% 1.16% 1.84% 1.82% 1.76%

Net NPA (Rs mn) 540 964 1,973 2,263 2,558

Net NPA (%) 0.45% 0.63% 1.23% 1.23% 1.14%

Provision coverage (%) 58.1% 46.0% 33.9% 33.0% 36.0%

NIMs (%) 3.12% 3.11% 3.27% 3.31% 3.30%

Tier-1 capital ratio (%) 11.7% 13.3% 14.5% 14.4% 13.6%


Ambit India Access


Du-pont analysis (standalone)


NII / Assets (%) 3.0% 3.0% 3.2% 3.2% 3.2%

Other income / Assets (%) 1.3% 1.3% 1.3% 1.3% 1.3%

Total Income / Assets (%) 4.3% 4.3% 4.4% 4.5% 4.4%

Cost to Assets (%) 1.7% 1.8% 2.0% 2.1% 2.0%

PPP / Assets (%) 2.6% 2.5% 2.4% 2.4% 2.4%

Provisions / Assets (%) 0.5% 0.6% 0.7% 0.6% 0.5%

PBT / Assets (%) 2.1% 2.0% 1.7% 1.8% 1.9%

Tax Rate (%) 18.4% 20.1% 16.1% 20.0% 20.0%

ROA (%) 1.7% 1.6% 1.4% 1.4% 1.5%

RoRWAs (%) 3.0% 2.8% 2.7% 2.7% 2.7%

Leverage 14.6 14.3 13.1 12.3 12.6

ROE (%) 24.9% 22.3% 18.9% 17.7% 19.0%


Valuation parameters (standalone)

Year to March FY12 FY13 FY14 FY15E FY16E

EPS (Rs) 6.9 6.8 6.4 7.1 8.9

EPS growth (%) 29% -1% -6% 12% 24%

BVPS (Rs) 30.5 34.6 37.3 43.2 50.5

P/E (x) 10.9 11.0 11.7 10.4 8.4

P/BV (x) 2.45 2.16 2.00 1.73 1.48


Ambit India Access


IDFC London conference takeaways We hosted the management of IDFC at our London conference last week. Mr. Limaye, the MD and CEO of IDFC, suggested that getting a banking licence was crucial for IDFC, as not only would it help the company in diversifying its exposure, products and liability profile, but also help it become more comfortable from a regulatory and rating perspective. That said, IDFC would still be five years away from delivering RoEs north of 15%. In infra, the management believes that projects stuck with land acquisition and judiciary issues will take longer to resolve but roads could take off in the near term (as early as in the second half of FY15).

Banking licence critical for IDFC: The management stated that the banking licence would help IDFC in the following ways: (i) asset diversification from risk and growth prospects; (ii) offer more products to even its existing infrastructure clients (eg LCs, managing escrow accounts, trade finance, FX, etc) i.e. diversification from a product perspective; (iii) diversify liability into retail liabilities from currently being only wholesale funded; and (iv) become more comfortable from a regulatory and rating perspective, as: (a) banks are viewed as ‘safer’ than NBFCs by rating agencies; (b) the RBI is clearly not comfortable with big NBFCs; (c) rating agencies do not allow IDFC to leverage more than 6x as an NBFC, putting a cap on RoE. Transitioning to be spread over 5 years: IDFC is currently putting up work processes, IT systems, etc for its banking operations. Its initial branch architecture will largely be concentrated in the top-50 cities wherein most of the business will be generated despite customers therein being amongst the most over-banked. IDFC will try to chip away PSU market share initially. That said, the management is still figuring out a lower cost delivery and a differentiated product service. RoEs in the first three years will be in the low single digits and in 3-5 years, it will be similar to today’s levels (~13%) and after 5 years will be north of 15%.

How infra creation could be different: The management highlighted that any process that requires administrative action from the Government/authorities should happen fairly soon. Whilst projects stuck with land acquisition issues will take a little longer, those stuck with the judiciary will take even longer, with no visibility on an outcome. All this will take time to play out. That said, roads could take off in the near term (as early as in the second half, whose impact could be seen in FY16). Problems plague both PSU and private infra creation except for land acquisition which is not applicable to PSUs. Railways could be a big opportunity for private players, as India is still hugely under invested in Railway infrastructure. So far only Metro projects have seen private participation. On the mining and coal situation, the Government will change things by hopefully allowing contract mining of coal and re-auctioning of coal blocks.

Valuations: IDFC’s near-term profitability would be under pressure due to slowdown in the infrastructure sector and conversion into a bank. However, we believe that these headwinds are largely factored into the price of the stock and rerating is contingent upon the company’s ability to build a successful banking franchise. Consequently, we would need clarity on a likely course of action on building a bank before we form an opinion on valuations.

UNDER REVIEW

Quick Insight Analysis Meeting Note News Impact

Stock Information Bloomberg Code: IDFC IN

CMP (Rs): 126

TP (Rs): NA


3M ADV (Rs mn/US$ mn): 1,598/26.6


1M 3M 12M YTD

Absolute (8) 10 (2) 15

Rel. to Sensex (9) (4) (37) (3)


Ambit Estimates - Consolidated

Rs mn FY12 FY13 FY14

NII 21,020 25,620 27,040

PAT (adj.) 14,177 18,371 18,374

EPS (Rs) 10.2 12.1 12.1


Analysts


Aadesh Mehta Tel: +91 22 3043 3239

[email protected]


Ambit India Access


Balance sheet (consolidated)

Year to March (Rs mn) FY12 FY13 FY14

Networth 122,850 136,830 150,675

Borrowings - on balance sheet 464,350 542,270 565,375

Borrowings - off balance sheet

Total liabilities 587,200 679,100 716,050

Fixed assets and goodwill 13,835 13,017 13,016

AUM 481,840 557,370 585,450

Cash and equivalents 96,050 122,180 124,030

Net Current Assets (4,525) (13,467) (6,446)

Total assets 587,200 679,100 716,050


Income statement (consolidated)


NII (inclu. Securitisation) 21,020 25,620 27,040

Other income 5,530 7,370 7,420

Total income 26,550 32,990 34,460

Operating expenditure 4,935 4,949 5,130

Pre-provisioning profit 21,615 28,041 29,330

Provisions 3,230 3,840 6,590

Profit before tax 18,385 24,201 22,740

Tax 6,219 7,511 7,511

Reported Consol PAT 15,529 18,371 18,374

Adjusted Consol PAT 14,177 18,371 18,374


Ratio analysis (consolidated)

Year to March FY12 FY13 FY14

NIM % (on AUM)- Calculated 4.4 4.2 4.2

AUM Growth 28.3 15.7 5.0

Opex as % of AUM 0.93 0.78 0.74

Credit costs as a % of AUM 0.65 0.66 1.08

CAR (%) 20.9 20.1 22.3


Return profile (consolidated)


Dil EPS – Consol (Rs) 10.2 12.1 12.1

BVPS (Rs.) 81.2 90.3 99.5

ROA (%) 2.9 2.9 2.6

ROE (%) 13.1 14.1 12.4


Ambit India Access


L&T Finance Holdings London conference takeaways We hosted the management of L&T Finance Holdings (LTFH) at our London conference last week. Our discussion with Mr. N Sivaraman, Director, LTFH, suggested that LTFH has multiple levers to improve its RoEs in the future, such as: (i) improvement in margins; (ii) improvement in operational efficiency i.e. decline in the operating cost to asset ratio; (iii) decline in credit costs; and (iv) further improvement in its asset management business. However, reported earnings in the near term could be muted due to deterioration in the asset quality in the corporate loan book (from regulatory changes).

Retail credit segment likely to increase its RoEs: The management believes that the retail business will end the year with RoEs of 15% driven by a 75-80bps improvement in RoAs and a leverage of 7x. RoAs in the retail business will improve due to: (i) margins improving to ~6.75% by end-FY15; (ii) the opex-to-asset ratio decreasing to 2.75% by end-FY15; and (iii) credit costs improving to 1% by 4QFY15, as asset quality has finally stabilised in this segment. The management has decided that no more capital will be allocated to the retail business, as the management wants this business to generate its own growth capital by improving its RoAs and RoEs. Wholesale credit RoEs to improve: The management expects RoEs in its wholesale credit business to improve up to 16-18% by FY15 driven by a 100bps improvement in RoAs and increasing leverage to 5x-6x. The RoA improvement will be driven by: (i) Improvement in margins – NIMs at 4.4% are currently under-emphasised despite close to Rs10bn-20bn assets not earning anything. A normalised book should earn NIMs closer to 4.5-4.6%. (ii) Fee income generation will improve, as the economy improves. It should move up by 30bps by 4QFY15 even as the normalised business would generate ~0.5% of fee income which would be lumpy in nature; (iii) Opex should drop marginally in a steady state. (iv) Credit costs should stabilise at the five-year average of 0.5% in FY15. Slippages to increase in near term: This quarter should see slippages due to regulatory changes like the RBI’s norms on early recognition of stressed assets (.i.e. SMA1, SMA2) and no forbearance on restructured assets from April 2015 onwards. With LTFH having a large exposure to consortium lending, it will also have to recognise such assets as NPAs/restructured assets if banks do so. The impact of restructuring will be felt on under-construction projects, which are currently at ~30% of the book.

Keen for a banking licence: The management highlighted that it is keen to become a bank either organically or inorganically even as it is waiting for the new differentiated licence guidelines before taking a firm decision. LTFH will not hesitate to acquire a bank (if the price is right). The management believes that becoming a bank is essential for the long-term strategy of LTFH, as: (i) it would be able to offer a more wide service offering, (ii) it would be in position to service a wider customer base (retail +wholesale), and (iii) it can increase growth without increasing risk exposures. Turnaround in asset management: Asset management has been a great turnaround story, as it has broken even from its earlier loss-making status. A presence in asset management will help LTFH in increasing its RoEs without any capital requirements and building a retail brand. The AMC business shows a lot of promise, as it is currently ranked #13 and has 6 equity funds in the top-2 quartiles and has mopped Rs2.5bn of new money despite intense competition from large fund houses who have strong distribution channels through their banking partners.

NOT RATED Quick Insight Analysis Meeting Note News Impact

Stock Information Bloomberg Code: LTFH IN

CMP (Rs): 73

TP (Rs): NA


3M ADV (Rs mn/US$ mn): 857/14.2


1M 3M 12M YTD

Absolute (1) 2 (6) (3)

Rel. to Sensex (2) (11) (41) (21)


Ambit Estimates - consolidated

Rs mn FY14 FY15E FY16E

NII 11,475 14,396 19,811

PAT (adj.) 4,548 5,125 5,969

EPS (Rs) 2.81 4.25 3.03


Analysts


Aadesh Mehta Tel: +91 22 3043 3239

[email protected]


Ambit India Access


Balance sheet (consolidated)


Networth 47,111 61,786 67,841

Borrowings - on balance sheet 211,813 284,792 358,536

Borrowings - off balance sheet 0 0 0

Total liabilities 258,924 346,578 426,377

Fixed assets 2820 9572 7287

AUM 251,904 324,501 388,936

Cash and equivalents 1,127 3,716 7,827

Net Current Assets 3,073 8,789 22,327

Total assets 258,924 346,578 426,377


Income statement (consolidated)


NII (inclu. Securitisation) 11,475 14,396 19,811

Other income 878 1,514 1,860

Total income 12,353 15,910 21,671

Operating expenditure 3,560 5,300 8,359

Pre-provisioning profit 8,794 10,610 13,312

Provisions 1,834 2,734 4,262

Profit before tax 6,842 9,899 8,269

Tax 2,295 2,594 2,300

Consol. PAT 4,548 7,305 5,969

Adjusted Consol. PAT 4,548 5,125 5,969


Ratio analysis (consolidated)


NIM % (on AUM)- Reported 5.51% 5.34% 5.47%

AUM Growth 45% 30% 20%

Opex as % of AAUM 1.70% 1.90% 2.50%

Credit costs as a % of AUM 0.86% 0.95% 1.19%

CAR (%) 18.10% 20.90% 18.20%


Return profile (consolidated)


NIM % (on AUM)- Reported 5.51% 5.34% 5.47%

AUM Growth 45% 30% 20%

Opex as % of AUM 1.70% 1.90% 2.50%

Credit costs as a % of AUM 0.86% 0.95% 1.19%

CAR (%) 18.10% 20.90% 18.20%


Ambit India Access


Shoppers Stop Expect EBITDA/PAT breakeven in FY15/FY16 We hosted the management team of Shoppers Stop at our London conference last week. The modern retail sector in India faces significant challenges around lack of retail space acquisition, limited penetration of catchment areas, threat from e-commerce and management of store-level operating inefficiencies. However, the firm has clear competitive advantages around long-term contracts for the retail space, tools to manage operating costs, and a negative working capital cycle. Introduction of GST and revival in overall consumer spending are likely to be positive catalysts over the next 12-24 months. The stock is trading at consensus EV/sales multiple of 0.8x for FY15 and 0.7x for FY16.

Prospects of modern retail in India According to the management, modern retail in India currently faces the following set of challenges:

Stagnation of new retail space: Developers across India are realising that it takes at least 10 years for a retail mall to recover its costs. As a result, they prefer to develop commercial properties rather than retail properties, resulting in a shrinking pipeline of new retail malls, especially in tier-2 cities of India.

Limited penetration of catchment areas: The management believes that the concept of ‘destination’ stores is unsuccessful in India. Instead, it is more important to have stores in ‘catchment’ areas. Catchment areas in India are only one-fifth of the US, for instance, currently. Hence, there is exists a substantial penetration potential in terms of the number of catchment areas. However, each catchment area can have maximum two modern retailers operating in it, and the management expects one to be a Shoppers Stop store vs a competitor’s store.

Threat from e-commerce: The management believes that its focus will remain on delivering a seamless experience across e-commerce and brick-and-mortar formats for its customers. Shoppers Stop will have a business model similar to Macy’s in the US, which is typically: (a) ‘order & pick-up’; or (b) ‘browse online and try in-store’. The company does not intend to operate as a discount retailer like Myntra/Jabong. It believes that the online threat to the brick-and-mortar format is more in categories like electronic goods and books. Shoppers Stop’s competition instead is more from other departmental stores.

The management expects the following aspects to help it address these challenges:

Competitive advantages around retail space acquisition: During FY12-14, Shoppers Stop has doubled its presence in terms of the number of cities i.e. from 20 cities to 36 cities. This has been achieved through a timely tie-up with retail developers 4-6 years ago as new retail projects were being launched by these developers. These tie-ups include long-term contracts signed at favourable rates of rentals for the company.

Introduction of GST: At present, Shoppers Stop cannot claim service tax input received on rental cost, professional service charges, etc., as it sells goods and not services, on which VAT (sales tax) is levied. With the introduction of GST, retailers will have a single and fungible tax that can be passed on by taking inputs against the tax payable to the Government.

Optimism about consumer demand revival in future: The management is optimistic about a demand revival albeit this is expected to take 2-3 more quarters to see it materially in retail footfalls. That said, the management believes that the company’s target demography will not be affected much even if it passes the incremental cost to consumers, evidence of which can be seen from the company’s stable average transaction size and selling price.


Stock Information Bloomberg Code: SHOP IN

CMP (Rs): 375

TP (Rs): NR

Mcap (Rs bn/US$ mn): 31/519



1M 3M 12M YTD

Absolute (6) (2) 4 (13)

Rel. to Sensex (8) (16) (31) (31)


Consensus Estimates (Rs mn)

FY14 FY15 FY16

Revenues 36,594 44,840 52,113

EBITDA 1,333 1.871 2,666

EPS (Rs) (1.0) 3.9 8.7


Analysts

Rakshit Ranjan, CFA [email protected] Tel: +91 22 3043 3201

Pratik Singhania [email protected] Tel: +91 22 3043 3264

Ambit India Access


Mergers and acquisitions: The retail space is going through a consolidation phase through mergers and acquisition to create synergies in costs whilst maintaining the pursuit of continued pan-India expansion. Albeit there are no internal strategies in place to expand through M&A, Shoppers Stop has evaluated offers from other players. According to the management, there are distressed players available for purchase but the valuation they seek are irrational and hence, nothing has materialised. Also, on the back of FDI in multi-brand retail, Shoppers Stop had been approached by potential strategic partners but nothing has materialised as of now.

Future growth potential of Shoppers Stop and HyperCity: The management believes that future growth would come from: (a) Revival in economy and hence, consumption; (b) Store expansion; and (c) Increase in share of private label contribution from 16% at present to 20% going forward.

Store expansion: The management has visibility to open at least 8 Shoppers Stop stores in FY15, out of which one store has already been opened and 4 stores will open each in FY16 and FY17. Store expansion would be a function of availability of quality mall space developed in a timely manner. At present, 90% of the stores are Shoppers Stop and HyperCity stores, and the management expects this share to increase to 95% in the next 4-5 years.

Tapping tier-2 cities potential: The company stated that there will be a different store format to tap the tier-2 potential which will be smaller and tighter. The management has gone through its learning curve to attain the right combination for tier-2 cities in the last few years. Some of the key learnings are: (a) For Shoppers Stop – (i) The population consists of self-employed individuals and housewives and very few professionals. As a result, casual and ethnic wear does well and not formals. (ii) Tier-2 cities’ customers are more sensitive to value and are not as adventurous. Hence, in such cases, an increase in the share of private labels helps them to cater to the needs of the customers by providing the desired product at a reasonable price. (b) For HyperCity - The management believes that having the right store format in terms of size and product offering is the key to operating a store profitably. It believes that 30-35k sq ft can sustain all the consumption in these cities.

Retail format: The company will adopt store sizes of 40-45k sq ft for HyperCity going forward. The new Shoppers Stop would be operated in 55-65k sq ft store sizes in metros and 30-40k sq ft in other cities.

Challenges around operating costs for the company Power cost and service tax: The management stated that most of the operational costs are manageable except for power cost and service taxes. For Shoppers Stop, the weighted average cost of power cost including the generator cost has increased from 1.8% of sales to 2.5% in the last five years. Globally, power cost as a percentage of sales is at 1.0-1.2%.

Deleveraging the balance sheet: The management wants to start capitalising on the scale and learning curve of HyperCity to make it debt-free as soon as possible. As on FY14, Shoppers Stop had ~Rs5.4bn of debt. The management believes that debt is at a comfortable level and will start to come down from 2HFY15 onwards. Average cost of debt at the consolidated level is 11.5% (and ~12.25% for HyperCity).

Other costs: According to the company, the remaining costs, which are predominantly rental cost and employees cost, are manageable and are always kept under control. Most of the rental agreements are on a revenue-sharing basis rather than making it as a fixed cost. The management expects employee costs to increase by 8-9% YoY despite high new store openings. Logistics costs are controlled by sourcing 20-25% of the stores supplies directly to the stores from the vendors.

Ambit India Access


Profitability: Shoppers Stop expects to achieve break-even at the consolidated-level EBITDA and PAT in FY15 and FY16 respectively. According to the management, this business can support an 80/20 spilt between profit-making and loss-making stores and Shoppers Stop will also fall under the same mix in the long run.

Working capital cycle: Shoppers Stop is the only retailer with negative working capital in India. Albeit the last two quarters saw an increase in the working capital cycle, which was a function of new store openings rather than any operating ‘throughput’ issues. With the current store format of 55-65K sq ft of Shoppers Stop stores in metros and 30-40K sq ft stores in other cities, Shoppers Stop’s combined working capital cycle is 16 weeks. Similarly, HyperCity’s combined working capital cycle is 6 weeks. Urban cities and tier-2 cities have similar working capital cycle requirements, as lower revenues from tier-2 cities stores are offset by smaller store sizes. As per the management, the company’s capital requirements are reducing and consequently cash flows are moving up. That said, company is still in an investment mode (a HyperCity store takes 24-36 months to break-even; currently 15 stores). Hence, the management expects that Shoppers Stop, on a consolidated level, will see free cash flows only by FY18.

Valuation Shoppers Stop is one of the best-run retail companies and will reap benefits in the future from its expansion strategy coupled with a revival in consumer discretionary spending. Currently, the operating losses of HyperCity and store expansion are leading to low profitability for Shoppers Stop at the consolidated level. We do not have a rating on Shoppers Stop currently. The stock is trading at a consensus EV/sales multiple of 0.8x for FY15 and 0.7x for FY16.

Ambit India Access


Balance sheet

Year to March (Rs mn) FY11 FY12 FY13 FY14

Share Capital 411 413 415 416

Reserves 4,598 4,748 4,594 4,489

Shareholders’ funds 5,009 5,160 5,009 4,905

Minority Interest 22 39 46 15

Debt / Loan Funds 2,630 4,357 4,982 *5,424

Total 7,661 9,556 9,762 10,344

Net Block + CWIP 6,295 7,467 7,727 10,063

Inventories 2,505 3,311 3,698 4,490

Trade receivables 214 263 322 480

Cash and Bank Balance 182 150 268 279

Other assets, loans and advances 2,397 2,870 3,356 3,576

Current Liabilities 3,824 4,405 5,221 *7,225

Provisions 108 100 113 120

Total 7,661 9,556 9,762 10,344

Source: Company, Ambit Capital research; Note: * Current portion of long-term borrowing is not available and the same forms part of current liabilities

Income statement

Year to March (Rs mn) FY11 FY12 FY13 FY14

Net Sales 21,784 29,448 33,603 39,614

EBITDA 1,311 1,032 961 1,333

Interest Expense 295 422 547 653

Depreciation 469 609 791 981

Profit Before Tax 571 78 (308) (240)

Tax 389 322 228 257

Profit After Tax 182 (244) (543) (497)

Minority Interest 250 434 430 420

Reported Net Profit 432 190 (113) (83)


Cash flow statement


Cash flow before WC changes 1,318 1,085 1,037

Investment in working capital 370 (812) 3

Taxes Paid (309) (325) (221)

Operating cash flow 1,379 (53) 869

Investing cash flow (2,137) (1,724) (1,216)

Financing cash flow 596 1,720 472

Net cash flow (163) (57) 125

Capex (1,449) (1,748) (1,100)

Dividend Paid (61) (72) (135)


Ratio analysis

Year to March FY11 FY12 FY13 FY14

Debt-Equity Ratio 0.53 0.84 0.99 1.11

EBITDA Margin (%) 6.0 3.5 2.9 3.2

Net Margin (%) 2.0 0.6 (0.3) (0.2)

ROCE (%) 9.9 5.5 2.5 3.4

RONW (%) 11.0 3.7 (2.2) (1.5)


Ambit India Access


Somany Ceramics London conference takeaways Whilst the present tiles demand scenario remains similar to the previous quarters, management indicated that it continues to grow ahead of the market (18-20% revenue growth YoY); given its continuous capacity additions plans (55-57msm by FY16-end using JVs) and increasing ability to invest in branding/distribution, it aims to become the 2nd largest player in value terms over next 2-3 years. Management did indicate that if required Greenfield plants could be considered in North and South India. Somany management expects that the recent regulatory changes in fuel usage will provide level playing field to organised vis-à-vis unorganised players. Management indicated that market share gain from unorganised and organised players, increasing share of vitrified tiles in portfolio (from 44% presently) and improving brand perception with users should enable it to expand PBT by 50-100bps on an annual basis over next 2-3 years in order to increase RoCE to high teens. Somany is trading at 16x FY16 consensus EPS (Rs15), a 25% discount to Kajaria.

Demand scenario remains muted but Somany growing ahead

According to the management, the demand for organised real estate units has not picked up in metro or tier-2/3 cities and remains muted thus impacting the overall tiles industry demand; management expects overall tiles industry revenues to grow in low-to-mid teens. However, Somany continues to grow ahead of the industry given that the company has recently expanded its retail outlets by more than 25% alongside expanding its dealer reach across the large-to-small sized cities. Management maintains its 18-20% revenue growth guidance and expect that volumes should continue to grow at 11-12% and the balance growth will come from realisation improvement as the brand perception further improves and product portfolio shifts more towards vitrified tiles.

Capacity additions to continue through JVs to support 10-15% volume growth

Management indicated that after adding nearly 10msm (million sq meters) of capacities in FY14, the company is considering another 10-12msm for each of the next two years. Over the next 5 years, if the demand environment improves, Somany could be reaching 80-100msm. However, most of these capcities will be set up under the JV arrangements, either through forming new JVs or expanding the existing JVs. The proportions of capacities under outsourcing arrangements will be relatively lower than present; however, own capacities (either greenfield or brownfield) will be dependent upon how the north and south Indian markets shape up. In case a greenfield capacity is required, the company may set up a 2.5-5msm capacity in either of the regions through raising debt and funding from internal accruals. Most of these capacity additions will be for vitrified tiles and not more than 25-30% of these capacity additions will be in the ceramic tiles.

Investments in branding and reach will be the key for expanding leadership

Somany management expects that it will continue to invest 1.5-2% of its sales in branding; whilst till now the company has been focussing on outdoor and indirect advertisement (through exhibitions, architect meets, etc), it will now invest in other modes of media advertisements like television and newspapers. The management expects to launch a television ad campaign in FY15; these investments will improve the unaided/aided recall ratio, which presently is 80/20 for the company. As per the management, this large investment in branding by Somany and other larger peers will further improve the market share for the larger players vis-à-vis other smaller players who cannot invest such large sums of money in branding. Somany’s


Stock Information Bloomberg Code: SOMC IN

CMP (Rs): 241

TP (Rs): NR

Mcap (Rs bn/US$ mn): 9.4/156



1M 3M 12M YTD

Absolute 12 45 251 114



Consensus Estimates (Rs mn)

FY14 FY15 FY16

Revenues 12,580 15,418 18,448

EBITDA 813.8 1,054 1,302

EPS (Rs) 8.2 11.4 15.8


Analysts

Achint Bhagat [email protected] Tel: +91 22 3043 3178

Nitin Bhasin [email protected] Tel: +91 22 3043 3241

Ambit India Access


advertisement costs recorded a 39% CAGR over FY09-13 as against 24% for Kajaria and 27% for Orient Bell. Somany’s unitary advertisement costs have increased to Rs4.5/msm as compared to Rs2/msm in FY09. Alongside the company will also invest in expanding retail outlets (225 at FY14-end vs 181 at FY13-end) and distribution reach in tier 2/3/4 cities and below. Whilst the company is building sub-brands within it overall offering, the ad spends will focus on the main brand ‘Somany’.

Depleting unorganised players’ advantages

Somany management indicated that whilst there wouldn’t be any let down in the capacity addition momentum by smaller/mid-sized unorganised players based out of Morbi, the fuel-based advantages of the unorganised players are nearly over and this puts the unorganised and organised players at level playing field. The recent allowing of use of coal-fired gasifiers using zero-discharge technology and prior permission from Gujarat Pollution Control Board (GPCB) is good for the organised players as unorganised players will have to adhere to similar benchmarks of operations as the former; management indicated that now all can use coal-based gasifiers but all will have to invest in pollution control. However, what remains unclear is the arbitrage with coal and gas pricing if coal demand suddenly shoots and how GSPL responds to dropping demand for gas.

Market share to shift towards large players; unorganised to lose value-based market share

Management indicated that the overall tiles market is presently Rs210bn of which organised accounts for nearly a little more than the 50%; the organised market is controlled by ~25 players and the unorganised players are around 650 mainly producing commodity products. Within the organised players, the company expects that it is set to become the 2nd largest player (presently 3rd largest) over the next 2-3 years as it continuously expands and improves product portfolio. As per the management, whilst the volume growth for organised vs unorganised will remain similar, the unorganised sector will lose out on the value-based market share as the product offering may remain more traditional or commoditised (on average the unorganised players sell at 25% discount to leading organised players). However, the management did indicate that a good numbers of unorganised players are more cost efficient vis-à-vis the organised in the manufacturing costs given the lower overheads, cluster-based/co-operative manufacturing practices and continuous involvement of the owners to reduce cost inefficiencies. Hence, organised players are tying up with these efficient unorganised players.

Our view – Somany, building strength

Premiumisation and a shift to branded/organised players are the key structural trends unfolding in the rapidly growing Indian tiles industry. Somany is building scale (doubled capacities in the last three years and adding 30% more over FY14-16), improvising its product mix (more vitrified) and fortifying its brand to participate effectually in this fast-growing industry. After 14% EBITDA CAGR and 25% PAT CAGR in FY09-14, consensus expects attainable 24% EBITDA CAGR and 44% PAT CAGR in FY14-16, implying 8x FY16 EBITDA and 16x FY16 eps, a material premium to its five-year average. We believe multiples can re-rate further, as the tiles industry and Somany/Kajaria undergo a discernible shift, similar to the paints industry in the late 90s.

Ambit India Access


Thermax London conference takeaways Thermax management remains hopeful that the sentiment change and the new government’s indicated initiatives will gradually improve inquiries and then corporate capex (steel, O&G and cement) and investments in power utilities. Given the higher carry forward order book, revenues should grow this year; 2HFY15 inflow momentum will determine FY16. Given the slowdown in domestic order awards over the last 2-3 years, the company expanded and acquired overseas and presently nearly 32-35% of its revenues originate from overseas geographies; exports account for 20%. Management indicated that combination of low-cost design employee-base in India alongside manufacturing capacities overseas is helping it expand footprint in Europe. In context of the large IPP BTG opportunity, the management expects the vacuum of inflows to persist for another year; however, indicates that the true BTG manufacturing capacity in India could be lower than the stated capacities of players and Chinese competition could be waning given rising indigenisation. We maintain our SELL on the stock as we find valuations rich at 23.6x FY16 P/E and 4.2x FY16 P/B.

Management indicates better FY15 for revenues and orders

According to the management, the topline of the company should grow in FY15, given the 23% higher carry forward order book from last year. Moreover, last year the company did not book revenues of Rs3bn as the customer clearances were not in place; this alongside the Reliance order execution should lead to higher revenues. Furthermore, the management indicated that the inquiries in the system should grow as industrial companies across sectors (cement, O&G and steel) should start considering capacity expansions with demand improving. Unlike the capacity additions announced in FY07-10, this time the environment could be muted but nonetheless it should be better than last couple of years. In order to broad base its revenues in India, across product offerings, the company expects strong momentum in its enviro business (standard packaged water treatment, industrial water treatment and air pollution equipment). In terms of the IPP-led BTG inflows, the management expects vacuum to persist for another one year unless client quality improves or the competition capacities get consumed faster-than-expected.

International revenues to remain high over the next 4-5 years

Management indicated that exports presently account for ~20% of revenues and the overall international revenues (including subsidiaries) are ~30-35% of revenues. Management expects this number to continue to remain at these levels or even higher despite the expected growth in the Indian business. Acquisition of manufacturing capacities in Europe, setting up manufacturing of air pollution capacities in India (Thermax is the only one in India) alongside low-cost design and bidding teams based out of India will help it expand its footprint to regions such as Middle East, South Africa and SE Asia. Even after offsetting losses in German subsidiary, the Danish subsidiary is making profits for the company. These international subsidiaries with manufacturing are important as these have the right automation and the supply chain for the products required in these regions. For most of its international subsidiaries the company is not chasing big markets. Moreover, in its Chinese subsidiary the losses are reducing and this should provide more funds for broad-basing growth there.

SELL Quick Insight Analysis Meeting Note News Impact

Stock Information Bloomberg Code: TMX IN

CMP (Rs): 935

TP (Rs): 528




1M 3M 12M YTD

Absolute 4 26 58 33



Estimates (Rs bn)

FY14 FY15 FY16

Revenues 44.7 68.6 79.1

EBITDA 4.4 7.1 8.1

EPS (Rs) 19.8 34.0 39.6


Analysts

Bhargav Buddhadev +91 22 3043 3252 [email protected]

Deepesh Agarwal +91 22 3043 3275 [email protected]

Ambit India Access


India’s utilities-focused BTG capacity not as excessive as thought out to be

Management indicated that the utilities-focused BTG manufacturing capacity is not as excessive as thought out to be. According to the management, BGR-Hitachi and Gammon-Ansaldo capacities are unlikely to come up in the country. Alongside, the Chinese competition is set to reduce given the appreciation in the Chinese currency, available capacities in India, quality concerns around Chinese equipment and dropping prices for Indian manufactured BTG given development of supply chain; however, Doosan remains the clear competitive threat given their approach and the capacities that they have in Korea. However, whether Doosan will put up capacities in India is yet to be seen. The management indicated that the companies do not actually approach the manufacturing capacity in terms of ‘installed MW capacity’ and depending upon the plant loading factor, the capacity for a same company can differ for different periods. As per the management, Thermax in one period can produce 3000MW and in another period can produce higher than that if the configuration was to be 660/800MW. The main machining centers which impact the true capacity are (a) panel making and (b) coiling capacity. Whilst Thermax and L&T have 2 panel making machines for their capacities, BHEL has only 4 numbers. Similarly, L&T and Thermax have one coil making machine whereas BHEL has 2 numbers. BHEL’s such low numbers of machineries for much higher capacities do not provide perfect clarity on the overall production capacity for BTG. Moreover, the site construction flexibility also impacts the true installed capacity base. Management expects that the orders for IPP-led boilers will take another 6-12 months and in case the JV partner B&W wins orders internationally then Thermax could be utilising the Indian facility for the same. Lastly, management indicated that R-ADAG group is already talking to Indian BTG manufacturers for procuring the balance orders, which if fructifies could be a boost for the Indian players, for whom indigenisation has increased to 80% from earlier 50%.

Our View: Operating environment tough

Fresh ordering may be weak given (a) the pipeline of ~81GW as per the CEA list of projects under construction; (b) lower PLFs (~66%) for existing operational capacity of ~243GW and (c) cumulative capacity addition of ~57GW which is operating at lower than India’s average PLF given the gestation period. Our discussion with industry experts suggests a per annum demand of ~15GW over the next ten years assuming a recovery in GDP to ~8% from FY17 onwards (and a correlation of 1x between power demand and India’s GDP), a recovery in average PLF to ~85% and timely commissioning of the pipeline (given significant capex has already been incurred). Note if India’s T&D losses of ~27% come off then the per annum ordering could further reduce. The NDA government has been focusing a lot to improve the T&D losses by implementing the Gujarat’s successful ‘Jyotigram Yojana” model of providing 24 hour power supply through feeders having specially designed transformers. Given domestic installed capacity of ~27GW (excludes BGR and GB Engineering) and rising share of Chinese and Korean manufactures in India’s under construction capacity (increased to ~40% of under construction capacity compared to 0% 5 years back); pricing for BTG capacity is likely to remain under pressure.

The benign pricing environment does not augur well for Thermax’s order book growth (declined by ~10% in FY14 after excluding the one off Reliance order of Rs17bn which was won by Thermax at aggressive pricing; a rare phenomenon for Thermax) as it is one of the few companies that does not participate in aggressive bidding. Consequently we do not expect any significant recovery in Thermax ROCE which has already declined to ~23% in FY13 (consolidated balance sheet for FY14 is not available) from 38% in FY11; note Thermax’s investment in the JV has already reached to ~17% of its capital employed which is earning negative returns given the fixed cost of Rs1bn.

Ambit India Access


Balance sheet

Year to March (Rs mn) FY13 FY14E FY15E FY16E

Networth 19,788 20,359 23,228 26,565

Loans 4,373 4,209 4,209 4,209

Other Liabilities 396 1,486 1,486 1,486

Sources of funds 24,557 26,054 28,923 32,260

Net block (incl. CWIP) 13,901 15,728 15,852 15,985

Net current assets 3,015 (4,414) 116 2,362

Investments 4,429 4,429 4,429 4,429

Cash 3,212 10,312 8,526 9,484

Application of funds 24,557 26,054 28,924 32,260


Income statement

Year to March (Rs mn) FY13 FY14E FY15E FY16E

Revenue 55,765 44,676 68,570 79,122

EBITDA 5,750 4,378 7,063 8,070

Depreciation 771 1,173 1,249 1,331

Interest expense 165 165 165 165

Other income - 557 524 603

PBT 4,814 3,597 6,173 7,178

Provision for taxation 1,772 1,234 2,117 2,462

Consolidated adj PAT 3,042 2,363 4,056 4,716

EPS diluted (Rs) 25.5 19.8 34.0 39.6


Cash flow statement

Year to March (Rs mn) FY13 FY14E FY15E

PBT 4,814 3,597 6,173

WC changes 4,968 7,254 (4,531)

CFO 8,747 10,956 939

Net capex (3,508) (3,000) (1,374)

Net Investments (1,902) - -

CFI (4,983) (3,165) (1,539)

Proceeds from borrowings 1,505 - -

Issue of equity - - -

CFF 346 (691) (1,186)

FCF 3,764 7,791 (599)


Ratio analysis

Year to March FY13 FY14E FY15E FY16E

Revenue growth (%) (8.5) (19.9) 53.5 15.4

EBITDA margin (%) 10.3% 9.8% 10.3% 10.2%

Net margin (%) 5.5% 5.3% 5.9% 6.0%

RoCE (%) 23.1 13.2 22.4 23.2

RoE (%) 16.9 11.8 18.6 18.9

Net debt / Equity (x) 0.1 (0.3) (0.2) (0.2)

P/E (x) 37.1 47.8 27.9 24.0

P/B(x) 5.7 5.5 4.9 4.3

EV/EBITDA(x) 18.6 24.4 15.1 13.2


Ambit India Access


Institutional Equities Team

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

Research

Analysts Industry Sectors Desk-Phone E-mail

Nitin Bhasin - Head of Research E&C / Infrastructure / Cement (022) 30433241 [email protected]

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

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

Aditya Khemka Healthcare (022) 30433272 [email protected]

Akshay Wadhwa Banking & Financial Services (022) 30433005 [email protected] Ashvin Shetty, CFA Automobile (022) 30433285 [email protected]

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

Dayanand Mittal, CFA Oil & Gas / Metals & Mining (022) 30433202 [email protected]

Deepesh Agarwal Power / Capital Goods (022) 30433275 [email protected] Gaurav Mehta, CFA Strategy / Derivatives Research (022) 30433255 [email protected]

Karan Khanna Strategy (022) 30433251 [email protected]

Krishnan ASV Real Estate (022) 30433205 [email protected]

Pankaj Agarwal, CFA Banking / Financial Services (022) 30433206 [email protected]

Paresh Dave Healthcare (022) 30433212 [email protected]

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

Pratik Singhania Retail (022) 30433264 [email protected]

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

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

Ritesh Vaidya Consumer (022) 30433246 [email protected] Ritika Mankar Mukherjee, CFA Economy / Strategy (022) 30433175 [email protected]

Ritu Modi Automobile (022) 30433292 [email protected]

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

Utsav Mehta Technology (022) 30433209 [email protected]

Sales

Name Regions Desk-Phone E-mail

Sarojini Ramachandran - Head of Sales UK +44 (0) 20 7614 8374 [email protected]

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

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

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

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

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

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

Production

Sajid Merchant Production (022) 30433247 [email protected]

Sharoz G Hussain Production (022) 30433183 [email protected]

Joel Pereira Editor (022) 30433284 [email protected]

Nikhil Pillai Database (022) 30433265 [email protected]

E&C = Engineering & Construction

Ambit India Access


Explanation of Investment Rating Investment Rating Expected return

(over 12-month period from date of initial rating)

Buy >5%

Sell <5%

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5. If this Research Report is received by any client of AMBIT Capital or its affiliate, the relationship of AMBIT Capital/its affiliate with such client will continue to be governed by the terms and conditions in place between AMBIT Capital/ such affiliate and the client.

6. This Research Report is issued for information only and should not be construed as an investment advice to any recipient to acquire, subscribe, purchase, sell, dispose of, retain any securities. Recipients should consider this Research Report as only a single factor in making any investment decisions. This Research Report is not an offer to sell or the solicitation of an offer to purchase or subscribe for any investment or as an official endorsement of any investment.

7. If 'Buy', 'Sell', or 'Hold' recommendation is made in this Research Report such recommendation or view or opinion expressed on investments in this Research Report is not intended to constitute investment advice and should not be intended or treated as a substitute for necessary review or validation or any professional advice. The views expressed in this Research Report are those of the research analyst which are subject to change and do not represent to be an authority on the subject. AMBIT Capital may or may not subscribe to any and/ or all the views expressed herein.

8. AMBIT Capital makes no guarantee, representation or warranty, express or implied; and accepts no responsibility or liability as to the accuracy or completeness or currentess of the information in this Research Report. AMBIT Capital or its affiliates do not accept any liability whatsoever for any direct or consequential loss howsoever arising, directly or indirectly, from any use of this Research Report.

9. Past performance is not necessarily a guide to evaluate future performance. 10. AMBIT Capital and/or its affiliates (as principal or on behalf of its/their clients) and their respective officers directors and employees may hold positions in any securities mentioned in this Research

Report (or in any related investment) and may from time to time add to or dispose of any such securities (or investment). Such positions in securities may be contrary to or inconsistent with this Research Report.

11. This Research Report should be read and relied upon at the sole discretion and risk of the recipient. 12. The value of any investment made at your discretion based on this Research Report or income therefrom may be affected by changes in economic, financial and/ or political factors and may go down as

well as up and you may not get back the full or the expected amount invested. Some securities and/ or investments involve substantial risk and are not suitable for all investors. 13. This Research Report is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied in whole

or in part, for any purpose. Neither this Research Report nor any copy of it may be taken or transmitted or distributed, directly or indirectly within India or into any other country including United States (to US Persons), Canada or Japan or to any resident thereof. The distribution of this Research Report in other jurisdictions may be strictly restricted and/ or prohibited by law or contract, and persons into whose possession this Research Report comes should inform themselves about such restriction and/ or prohibition, and observe any such restrictions and/ or prohibition.

14. Neither AMBIT Capital nor its affiliates or their respective directors, employees, agents or representatives, shall be responsible or liable in any manner, directly or indirectly, for views or opinions expressed in this Report or the contents or any errors or discrepancies herein or for any decisions or actions taken in reliance on the Report or inability to use or access our service or this Research Report or for any loss or damages whether direct or indirect, incidental, special or consequential including without limitation loss of revenue or profits that may arise from or in connection with the use of or reliance on this Research Report or inability to use or access our service or this Research Report.

Conflict of Interests 15. In the normal course of AMBIT Capital’s business circumstances may arise that could result in the interests of AMBIT Capital conflicting with the interests of clients or one client’s interests conflicting with

the interest of another client. AMBIT Capital makes best efforts to ensure that conflicts are identified and managed and that clients’ interests are protected. AMBIT Capital has policies and procedures in place to control the flow and use of non-public, price sensitive information and employees’ personal account trading. Where appropriate and reasonably achievable, AMBIT Capital segregates the activities of staff working in areas where conflicts of interest may arise. However, clients/potential clients of AMBIT Capital should be aware of these possible conflicts of interests and should make informed decisions in relation to AMBIT Capital’s services.

16. AMBIT Capital and/or its affiliates may from time to time have investment banking, investment advisory and other business relationships with companies covered in this Research Report and may receive compensation for the same. Research analysts provide important inputs into AMBIT Capital’s investment banking and other business selection processes.

17. AMBIT Capital and/or its affiliates may seek investment banking or other businesses from the companies covered in this Research Report and research analysts involved in preparing this Research Report may participate in the solicitation of such business.

18. In addition to the foregoing, the companies covered in this Research Report may be clients of AMBIT Capital where AMBIT Capital may be required, inter alia, to prepare and publish research reports covering such companies and AMBIT Capital may receive compensation from such companies in relation to such services. However, the views reflected in this Research Report are objective views, independent of AMBIT Capital’s relationship with such company.

19. In addition, AMBIT Capital may also act as a market maker or risk arbitrator or liquidity provider or may have assumed an underwriting commitment in the securities of companies covered in this Research Report (or in related investments) and may also be represented in the supervisory board or on any other committee of those companies.

Additional Disclaimer for U.S. Persons 20. The research report is solely a product of AMBIT Capital 21. AMBIT Capital is the employer of the research analyst(s) who has prepared the research report 22. Any subsequent transactions in securities discussed in the research reports should be effected through J.P.P. Euro-Securities, Inc. (“JPP”). 23. JPP does not accept or receive any compensation of any kind for the dissemination of the AMBIT Capital research reports. 24. The research analyst(s) preparing the research report is resident outside the United States and is/are not associated persons of any U.S. regulated broker-dealer and that therefore the analyst(s) is/are

not subject to supervision by a U.S. broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account.

Additional Disclaimer for Canadian Persons 25. AMBIT Capital is not registered in the Province of Ontario and /or Province of Québec to trade in securities nor is it registered in the Province of Ontario and /or Province of Québec to provide advice

with respect to securities. 26. AMBIT Capital's head office or principal place of business is located in India. 27. All or substantially all of AMBIT Capital's assets may be situated outside of Canada. 28. It may be difficult for enforcing legal rights against AMBIT Capital because of the above. 29. Name and address of AMBIT Capital's agent for service of process in the Province of Ontario is: Torys LLP, 79 Wellington St. W., 30th Floor, Box 270, TD South Tower, Toronto, Ontario M5K 1N2

Canada. 30. Name and address of AMBIT Capital's agent for service of process in the Province of Montréal is Torys Law Firm LLP, 1 Place Ville Marie, Suite 1919 Montréal, Québec H3B 2C3 Canada.

© Copyright 2014 AMBIT Capital Private Limited. All rights reserved.

Ambit Capital Pvt. Ltd. Ambit House, 3rd Floor 449, Senapati Bapat Marg, Lower Parel, Mumbai 400 013, India. Phone: +91-22-3043 3000 Fax: +91-22-3043 3100 CIN: U74140MH1997PTC107598 www.ambitcapital.com

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