Annual Report Analysis Compendium-FY10-EDEL

Introduction

Edelweiss Securities Limited

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Annual report analysis


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Introduction

Annual report analysis provides vital information on companies’ overall performance and helps

developing outlook on them based on historical events. It highlights the true economic profit

against companies’ reported profit as well as the health of the balance sheet.

To analyse annual reports, we have covered the following aspects:

Income statement analysis:

• Economic profits vis-à-vis reported profits

• Direct debit to reserves

• Break up profitability into operating activities, financing activities (ROE analyser)

• Analysing contribution of subsidiaries as well as parent, to the overall profitability of

the consolidated entity.

Balance sheet analysis:

• Non-operational risks

• Capital structure

• Break up into operating and financial assets

• Intangibles and off BS items

• Working capital analysis

• Net worth analysis

Cash flow analysis

Key insights from MD&A

Segmental information analysis.

Accounting policy analysis:

• A framework, wherein accounting policies adopted by a company are analysed and

compared with globally accepted policies. The likely impact on convergence with more

logical accounting practices (IFRS) is highlighted.

• Change in accounting policy/ estimates by the company and its impact on the

profitability.

Content


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List of Companies

Metals and Mining

Hindalco Industries

JSW Steel

Sterlite Industries

Tata Steel

Oil and Gas Petrochemicals

Aban Offshore

Reliance Industries

Pharmaceuticals

Dr. Reddy’s Laboratories

Ranbaxy Laboratories

Strides Arcolab

Pipes

Welspun Corp

Real Estate

DLF

Unitech

Telecommunications

Bharti Airtel

Automobiles

Ashok Leyland

Bharat Forge

Escorts

Mahindra & Mahindra

Tata Motors

Capital Goods

Punj Llyod

Suzlon Energy

Education

Educomp Solutions

FMCG

United Spirits

Information Technology

HCL Technologies

Infrastructure

C&C Constructions

Hindustan Construction Company

IL&FS Transportation

IRB Infrastructure Developers

IVRCL Infrastructure

Lanco Infratech

Reliance Infrastructure

Key Highlights


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Key Highlights Automobiles

Ashok Leyland

• Revenues and margins improve; new ventures to propel future revenue growth.

• Sale of revalued assets reduces book profits and MAT outflow.

• Change in deprecation policy; write back of provisions and profit of sale of division contributed 4.7% to PBT.

Bharat Forge

• Performance of subsidiaries deteriorates further; going concern assumption still doubtful in overseas subsidiaries.

• Amortisation of FCCB redemption premium through P&L will result in FY10 PBT dipping by INR 383 mn (395% of PBT before exceptional item).

• Standalone operating performance improves despite dip in sales. Escorts

• Escorts created a business reconstruction reserve (BRR) of INR 11.1 bn (net) via transfers, primarily from revaluation and amalgamation reserve.

• BRR has been used to write off losses/diminution in value of various assets aggregating INR 5.1 bn.

• Doubtful debts/ advances/ deposits aggregate INR 1.6 bn, which is 20% of total debts/ advances/ deposits of INR 7.8 bn.

Mahindra & Mahindra

• Post IFRS, elimination of treasury shares will lead to 10% increase in EPS and 15% reduction in net worth.

• Provision of certain expenses directly through reserves and routing divesture gains through P&L increases PBT by 5%.

Tata Motors

• PBT for FY10, adjusted for write back of provisions (INR 4.4 bn), interest cost and pension loss which has been kept off P&L (INR 7 bn), amounts to INR 8.9 bn vis-à-vis reported PBT of INR 20.3 bn (excluding investment gains).

• INR 29.4 bn rise in acceptances triggered increase in creditor days (from 86 in FY09 to 108 in FY10); this, together with improved operations, boosted operating cash flow. Also, discounting charges have increased to INR 6.7 bn in FY10 from INR 4.8 bn in FY09.

Capital Goods

Punj Lloyd

• Revenue includes claim of INR 2.4 bn pending to be approved by ONGC; liquidated damages of INR 0.7 bn deducted by customer have not been provided for.

• Increased working capital stretches cash flows; QIP and divestment offered respite. Operating cash flow was at INR (16.2) bn despite PBT of INR 210 mn.

• Auditors have highlighted breach of loan (INR 5 bn) covenant by subsidiary.



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Suzlon Energy

• Cash flows stretched; debt restructuring, Hansen stake sale and fresh issue offered some respite.

• Suzlon paid INR 2.6 bn towards refinancing arrangement which will be amortised over loan tenure.

• FCCB interest cost continues to skirt P&L and balance sheet; however, gain on restructuring of FCCBs has been recognised as exceptional income.

Education

Educomp Solutions

• QIP money of INR 5 bn utilised towards stake hike by 8.8% in EISML (69% subsidiary) EISML’s net worth (ex-retained earnings) stands at INR 5.43 bn, of which, Educomp has invested INR 5.4 bn cumulatively for 78% stake; other stakeholders own 22%.

• Reinvestment of QIP money has resulted in further addition to net worth by INR 4.6 bn with corresponding addition to goodwill.

• IFRS adoption will lead to elimination of inter-group profits and significant increase in D/E.

• Debtor days increased from 112 in FY09 to 146 in FY10.

FMCG

United Spirits

• Operating cash flow includes addition of INR 5.7 bn towards forex adjustment, of which, INR 2.9 bn is adjusted for translation losses and INR 1.9 bn realised on repayment of forex loans. Increase in debtors further stretches cash flow. Operating cash flow also includes gain on treasury shares of INR 8.9 bn.

• USL has reported derivative loss of INR 1.4 bn (FY09: INR 1.4 bn).

• Pension losses for W&M continue at INR 0.6 bn (FY 09: INR 1.7 bn). Goodwill, at INR 42.4 bn, is 118% of net worth.

Information Technology

HCL Technology

• Reduced derivative exposure may positively impact profitability.

• Creditors at 85 days (FY09: 84 days) in our view are high.

• Goodwill stands at INR 35.2 bn as at FY10 end (FY09: INR 37.3 bn), 56.0% of net worth.

Infrastructure

C&C Construction

• Re-classification of Afghanistan JV as integral contributed 11% to PAT.

• Significant portion of revenues contributed from WIP inventory pending to be billed to customers.


• Leverage moderated but still at 4x.

• Working capital requirement increased with 2.5x increase in debtors to 2.5 bn. Also, cheques on hand aggregate INR 378.6 mn, ~15.2% of March 31, 2010, debtors.

Key highlights


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IL&FS Transportation Networks

• The company follows IFRS principles for accounting of service concession arrangements (SCA); consequently, construction income in SCA is recognised upfront on POCM basis. Margins built on construction income look aggressive.

• Operating cash flow post interest, however, remained subdued despite including unrealised profit from construction income in SCA.


• Margins booked on in-house contracts increased from 27.0% in FY09 to 32.7% in FY10. PBT margins on non-captive transactions have dipped from 18.6% in FY09 to 16.9% in FY10, indicating aggressive assumptions for captive EPC contracts (IFRS accounting).

• Operating cash flow (post interest) was at INR 6.6 bn, however, this includes INR 2.7 bn towards unrealised profits for EPC work executed for BOT SPV which gets offset by contra investing cash outflows.


• Cash conversion cycle deteriorated further, primarily on account of increase in debtor days. Debtors more than six months remained high for FY10, at 27.8% of total debtors.

• Provision for doubtful debts, advances, and deposits and bad debt written off increased from INR 120.2 mn in FY09 to INR 428.5 mn (11.3% of PBT) in FY10.

Lanco Infratech

• Related party transactions contribute 47% to revenue; IFRS convergence may result in consolidation of SPVs that will result in elimination of inter-group profits and increase in D/E ratio from 2.5x to 4.4x.

• Lanco allotted 9.2 mn ESOPs, exercisable at wt. avg. price of INR 0.24 each; ESOP cost will be amortised over six years; charge for FY10 was INR 570.8 mn (6.1% of PBT).


• Investment book comprises INR 34 bn of investments in promoter group companies.

• Loans and advances, at INR 85.9 bn (FY09: INR 55.9 bn), include inter-corporate deposit of INR 27.7 bn (FY09: INR 15.9 bn).

• Operating cash flow remains subdued on increased working capital requirement and revenue recognised under the tariff adjustment account.

Metals and Mining

Hindalco Industries

• Reversal of derivative losses as well as inventory gains contributed a significant proportion of profitability.

• Operating cash flow (supported by acceptances) and QIP facilitate capex. The company has huge capex plans (~INR 414 bn) over the next three years.

• High court approval helped keep interest on Novelis acquisition off P&L.

• Goodwill of INR 44.3 bn and customer relationship of INR 17.8 bn constituted 28.8% of net worth.



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JSW Steel

• Acceptances as at FY10 end stood at INR 54.6 bn (FY09: INR 50.5 bn). During FY09, JSW had reported that acceptances were short term and issued primarily for project expenditure and raw material purchase.

• Despite the company raising a loan of INR 6.4 bn (net of repayment), its FY10 loan book dipped to INR 161.7 bn (FY09: INR 165.5 bn), primarily on account of exchange gain that stood at INR 10.2 bn. Consequently, adjusted debt/equity for FY10 improved to 2.4x (FY09: 3.0x).

Sterlite Industries

• Exposure to group companies increased ~2x to INR 115.4 bn.

• Guarantee commission and interest income from group companies aggregates INR 3.9 bn, ~ 5.6% of reported PBT.

Tata Steel

• Working capital efficiency and depreciation has facilitated operating cash flows at INR 72 bn despite low PBT of INR 0.3 bn.

• Cost control measures and backward integration on track to enhance savings.

• Actuarial losses on pension liabilities of INR 35.4 bn (FY09 INR 54.9 bn) continue for the second year; consolidated net worth down.

Oil and Gas Petrochemicals

Aban Offshore

• Forex movement on consolidation imbibed in cash flow statement; hence, loans/capex/investments do not reflect actual cash flows.

• Derivative losses continued despite the appreciating rupee; also, quantum of derivative losses is same in consolidated and standalone operations despite varying derivative positions.

Reliance Industries

• Significant transaction with related party and investments in group companies.

• Significant increase in currency derivative book of INR 1.23 tn (FY09: INR 0.6 tn), primarily contributed by increase in currency options to INR 449 bn from INR 25 bn in FY09.

• RIL accounts E&P activities on the basis of full cost method. IFRS implementation mandates successful effort method, leading to increase in recurring E&P expenses and one-time impact on net worth.

• Average borrowing cost for FY10 was down at 4.4% (FY09: 8.3%) on account of lower interest rates and INR appreciation. Lower borrowing cost, coupled with higher treasury income, results in significant addition to ROE.

Pharmaceuticals

Dr Reddy’s Laboratories

• Subsidiary performance and one timers subdued profitability.

• Operating cash flow, however, continues to remain strong.

Key highlights


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• Operating concerns loom large; recovery of derivative losses on currency options sold and MTM gains on forex loans drive profitability.

• Ranbaxy reported negative operating cash, despite PBT of INR 10 bn, on account of above non-cash items.

• Ranbaxy had derecognised deferred tax assets of INR 2.5 bn on the basis of virtual certainty test in respect of future profitability, leading to high effective tax rate of 69%.

Strides Acrolab

• Business reconstruction reserve created on amalgamation of subsidiaries used to adjust losses / expenses aggregating INR 4.2 bn, ~5.1x of adjusted PBT before exceptional items.

• Gains on FCCB option component routed through P&L as per amended AS-30; however, part of redemption premium is charged to security premium as permitted by the Companies Act.

Pipes

Welspun Corp

• Advance from customers, at INR 15.5 bn (FY09: 2.2 bn), is 24% of order book. This, in our view, is not sustainable and thus requires appropriate adjustment while deriving enterprise value.

Real Estate

DLF

• Net worth includes INR 132 bn on account of unrealised profits on DLF-DAL transactions (INR 66.4 bn till FY09; now carried at sale price of DLF) and also due to redeemable preference shares (due on BS date) and capital reserve forming part of net worth. Reported D/E was 0.7 versus adjusted at ~1.6.

• Promoters were issued 9% fully convertible preference shares in lieu of 40% stake in DCCDL (instead of equity), which will entitle them additional 9% dividend as well as 40% share in undistributed profits. This will also result in higher net worth and reported profits to the extent of minority share in DCCDL.

• Debtors > 6 months have catapulted from INR 9.8 bn in FY09 to INR 13.0 bn in FY10. Unitech

• Operating cash flow was at INR (13.2) bn vis-à-vis PBT of INR 9.2 bn. Debtors O/S more than six months doubled to INR 5.7 bn due to drop in property prices.

• Disproportionate drop in interest expense charged to P&L from INR 5.5 bn to INR 2.2 bn. Details of interest capitalised not disclosed.

• Security premium indicates direct write-off of INR 2.1 bn; goodwill on consolidation has jumped from INR 11.7 bn to INR 15.3 bn (15% of net worth).

Telecommunications

Bharati Airtel

• Forex-driven margins: PBT margin improved from 21.1% in FY09 to 24.6% in FY10. Excl. forex impact, the company’s PBT margin dipped from 25.8% in FY09 to 22.8%.

• Funds amounting to INR 6.5 bn raised on short-term basis have been used for long-term investments.

Analysis beyond Consensus (ABC) is our initiative to provide a differentiated perspective to our clients on various non-routine and intricate issues. This unit of

research works independent of the sector/stock research team and views expressed in this report may vary with that of respective sector/stock analyst.

Revenues and margins improve; new ventures to propel future revenue growth

Ashok Leyland’s (ALL) revenues jumped 21.1%, from INR 59.8 bn in FY09 to INR 72.4 bn in FY10, due to increased sales volume of commercial vehicles (CV).

EBITDA margin also increased from 7.8% to 10.5%, primarily on the back of improved realisation and reduction in excise duty rates.

ALL invested INR 1.5 bn in joint ventures (JVs) and associates during FY10. Of these, investments in Nissan and John Decree JVs amount to INR 0.9 bn; these are likely to start commercial production FY11 onwards.

In March 2010, the company commissioned a new plant in Pantnagar (Uttarakhand), which enjoys income tax exemptions and has an installed capacity of 50,000 vehicles (nearly half of ALL’s existing capacity).

Sale of revalued assets reduces book profits and MAT outflow

ALL’s land and building assets amount to INR 21.4 bn as at FY10 end (FY09: INR 19.1 bn), of which, INR 13.3 bn is on account of revaluation of assets.

Of the revalued assets the company sold few residential flats and recognized a gain of INR 13.3 bn (in excess of revalued carrying value) while balance in revaluation reserve pertaining to these assets of INR 13.5 have been transferred to the general reserve.

The company is operating under MAT FY09 onwards. Consequent to the above transaction the book profit of the company was lower by INR 13.5 mn leading to reduced MAT outflow.

One timers aid PBT rise

Up to FY09, ALL charged depreciation for full year on addition to fixed assets made in the first half of the year, for six months on additions during second half and no depreciation on deletions during the year. During FY10, the company however changed its accounting policy of charging depreciation on pro-rata basis. This resulted in higher net profit of INR 208.1 mn (~3.8% of PBT).

During FY10, ALL demerged its defiance technology division and integrated it with Defiance Technologies, an associate. Total proceeds from this demerger amounted to INR 66.8 mn and profit on sale of division was INR 39.5 mn.

In FY10, diminution in investments and provision for doubtful debts/advances written back was INR 43.2 mn (FY09: provision of INR 46.6 mn), ~0.8% (FY09: 2.1%) of PBT (before exceptional items).

ANALYSIS BEYOND CONSENSUS ... the new ABC of research

Ashok Leyland Annual Report Analysis January 17, 2011


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Market Data

52-week range (INR): 81 / 45

Share in issue (mn): 1,330.3

M cap (INR bn/USD mn): 79 / 1,740

Avg. Daily vol. BSE (’000): 5,426.6 Share Holding Pattern (%)

Promoters : 38.6

MFs, FIs & Banks : 17.8

FIIs : 15.1

Others : 28.5 * Promoters pledged shares : 17.8 (% of share in issue)



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Other financial highlights

Unrealised exchange loss on translation of foreign currency loans has reduced from INR 2.6 bn in FY09 to INR 0.7 bn in FY10. Of the total loan book of INR 22.0 bn as at FY10 end (FY09 end: INR 19.6 bn), INR 13.7 bn (FY09: 15.8 bn) is foreign currency denominated.

Net unhedged foreign outstanding payable is INR 8.2 bn at FY10 end (FY09 end: INR 16.7 bn). With INR appreciating against the USD by 1.1% since FY10 end, the company will stand further benefitted.

In FY09, ALL availed the option of capitalising/deferring foreign exchange difference on long-term monetary items provided by the Ministry of Company Affairs. Accordingly, it capitalised exchange gain of INR 1.5 bn (FY09: exchange loss of INR 2.1 bn), which is ~3.5% (FY09: ~6.3%) of net fixed assets.

During FY10, ALL amortised the final tranche of expenses on voluntary retirement scheme of INR 32.7 mn (FY09: INR 134.9 mn) as an exceptional item.

ALL has made an impairment provision of INR 112.7 mn (~2.1% of PBT) on plant and machinery, technical know-how and building.

Research and development expenditure charged to P&L account amounts to INR 1.5 bn (FY09: 1.3 bn), ~2.1% (FY09: 2.2%) of the turnover.

Export sales (on FOB basis) reduced from INR 8.6 bn in FY09 to INR 6.0 bn in FY10, despite increase in sales to Sri Lankan associate company from INR 0.8 bn to INR 1.8 bn.

The company amortised debenture issue expenses/expenses on raising loans of INR 14.6 mn during FY10 (FY09: 12.4 mn) over the period of borrowings.

ROE analyser

ROE Tree

Source: Company’s annual report, Edelweiss research

Particulars

A. Return on net operating assets (RNOA)(OPATO x NOPAT margin) (%)

8.5 8.6

OPATO (operating asset turnover) (x) 1.6 1.4

NOPAT margin (%) 5.3 6.3

B. Return from leverage (FLEV x spread) (%) (1.6) 2.8

FLEV (financial leverage) (x) 0.3 0.4

NBC (net borrowing cost) (%) 14.6 1.9

Net financial spread (RNOA -NBC) (%) (6.1) 6.7

ROE Derived (A+B) (%) 6.8 11.4

FY09 FY10

2.8

11.4

8.6

0.0

2.4

4.8

7.2

9.6

12.0

RNOA Return from leverage ROAE

(%)

Ashok Leyland


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ROE has jumped, primarily on the back of:

1) Increase in NOPAT margin, from 5.3% in FY09 to 6.3% in FY10, due to improved realisations.

2) Decrease in net borrowing costs, from 14.6% in FY09 to 1.9% in FY10, on account of:

• increase in interest capitalised from INR 162.9 mn in FY09 to INR 361.3 mn in FY10;

• increase in investment income from INR 407.9 mn in FY09 to INJR 620.9 mn in FY10

• INR appreciation on forex loans Sources of funds


Application of funds


0.0

20.0

40.0

60.0

80.0

100.0

FY06 FY07 FY08 FY09 FY10

(

%)

Equity shareholders' funds Loan funds Deferred tax liability

Current liabilities Provisions

0.0

20.0

40.0

60.0

80.0

100.0


(

%)

Fixed assets Investments InventoriesSundry debtors Cash and bank Loans and advances

Increase in proportion of current liabilities is primarily

due to higher creditors at FY10 end

Decline in fixed assets is owing to

reduction in CWIP on capitalisation of

Uttarakhand plant



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Profitability ratios

Fixed assets turnover ratio

Capacity utilisation


0.0

2.0

4.0

6.0

8.0

10.0

12.0

0

1,400

2,800

4,200

5,600

7,000


(%)

(IN

R m

n)

PBT (before exceptional items) EBITDA margin (%)PBT margin (%) PAT margin (%)

0.0

1.4

2.8

4.2

5.6

7.0

0

10,000

20,000

30,000

40,000

50,000


(%)

(IN

R m

n)

Fixed Assets excl. CWIP (LHS) CWIP (LHS) Fixed Assets Turnover (RHS)

-

15,000

30,000

45,000

60,000

75,000

90,000

0

30,000

60,000

90,000

120,000

150,000


(IN

R m

n)

(Units)

Commercial vehicles (in nos.) (LHS)Installed capacity at year end (Two shifts) (LHS)Revenue (Gross sales) (RHS)

Improved

realisations, coupled with reduction in

excise duty rates, led to increase in EBITDA margin from 7.8% in

FY09 to 10.5% in FY10

Fixed assets turnover ratio slipped in FY10 due to capitalisation of Uttarakhand plant

in March 2010

Uttarakhand plant increased installed capacity by 50,000

units

Ashok Leyland


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Summary financials (INR mn)


* - Adjusted for interest received on bills receivables and deposits and cash discounts earned as part of ‘

Particulars FY06 FY07 FY08 FY09 FY10

Sales 52,477 71,682 77,426 59,811 72,447

Total income 53,048 72,625 78,268 60,723 73,359

EBITDA 5,401 7,027 8,204 4,694 7,628

EBITDA margin (%) 10.3 9.8 10.6 7.8 10.5

Depreciation 1,260 1,506 1,774 1,784 2,041

Financial costs 406 288 763 1,603 1,019

Net profit 3,273 4,413 4,693 1,900 4,237

Equity shareholders' funds 14,051 18,702 21,267 34,681 36,511

Loan funds 6,919 6,404 8,875 19,581 22,039

Net fixed assets 10,847 15,445 20,548 43,974 48,110

Current assets loans and advances 22,324 26,977 28,753 31,656 41,397

Current liabilities and provisions 14,085 17,559 22,719 21,369 29,608

Net current assets 8,239 9,419 6,033 10,287 11,789

Cash flow from operating activities 3,220 5,000 10,657 (5,256) 10,902

Cash flow from investing activities (1,336) (7,222) (8,097) (6,642) (7,832)

Cash flow from financing activities (2,576) (2,908) 3,645 4,592 1,233

Net cash flows (692) (5,131) 6,205 (7,306) 4,303

CAPEX (2,647) (6,813) (6,209) (7,641) (6,947)

Working capital investments (1,291) 372 3,749 (9,131) 4,339



Performance of subsidiaries deteriorates further

During FY10, Bharat Forge’s (BF) subsidiaries on an aggregate incurred operating losses of ~INR 0.8 bn (FY09 operating profits of INR 0.9 bn) on the back of ~45.8% dip in subsidiaries’ revenue contribution from INR 27.1 bn in FY09 to INR 14.7 bn in FY10.

Going concern assumption still doubtful in overseas subsidiaries

Bharat Forge America (BFA), a wholly owned subsidiary, has registered losses that have substantially eroded its net worth. Auditors of BFA, have drawn attention to the appropriateness of going concern assumption used for preparing their respective financial statements. In CY09, the company had reported net loss of INR 234.5 mn (CY08: INR 264.3 mn) on a turnover of INR 993.2 mn (CY08: INR 1.7 bn).

The impairment review carried out by the management did not indicate any impairment loss considering the diminution in value of investment to be temporary in nature. BF has further invested USD 3.5 mn in equity shares of BFA, taking its total equity investment in the company to INR 0.9 bn.

Bharat Forge Scottish Stampings, Scotland, a step-down subsidiary, continued to incur losses; its net worth stood at INR (190.2) mn as at FY10 end. Auditors have opined that the going concern assumption is not valid for the subsidiary. Its commercial operations have ceased and assets have been transferred to another subsidiary.

Standalone operating performance improves despite dip in sales

BF’s standalone revenues dipped 9.8% to INR 18.6 bn in FY10 from INR 20.6 bn in FY09 on the back of weak exports (declined to INR 7.1 bn in FY10 from INR 10.0 bn in FY09).

During FY10, standalone EBIDTA rose 15.5% to INR 4.2 bn (FY09 INR 3.6 bn) as margins expanded from 17.5% in FY09 to 22.4% in FY10, primarily on account of lower raw material cost as a percentage of sales and lower forex losses vis-a-vis previous year (refer page 2 for details).

Accounting policy highlights

BFA changed the method for calculating depreciation from years of service to units of production method, resulting in lower depreciation of INR 70.8 mn (USD 1.6 mn), ~73.2% of reported consolidated FY10 PBT before exceptional items.

BF had FCCBs of four tranches aggregating USD 183.4 mn o/s on the balance sheet date (refer page 5 for details). The company had earlier not provided for the redemption premium on these FCCBs either through reserves or the P&L account during earlier years. Had the company amortised the redemption premium on YTM basis through P&L, PBT would have been lower by INR 383 mn (~395.4% of PBT before exceptional item).

Of the above, two tranches amounting to USD 103.5 mn were maturing in April 2010. Redemption premium on these aggregating INR 1,460.5 mn (including tax amounting to INR 154.9 mn), since crystalised, has been adjusted to the securities premium account, net of deferred tax asset amounting to INR 485.1 mn.


Bharat Forge Annual Report Analysis November 25, 2010


1

Market Data


Share in issue (mn): 232.8

M cap (INR bn/USD mn): 86.0 / 1,883.6

Avg. Daily vol. BSE (’000): 679.4 Share Holding Pattern (%)

Promoters : 42.1


FIIs : 14.8

Others : 24.2 * Promoters pledged shares : Nil (% of share in issue)



2

In FY09, BF availed the option of capitalising/deferring foreign exchange difference on long-term monetary items provided by Accounting Standard 11. In FY10, as per the relevant GAAP, exchange gains aggregating INR 1.0 bn were deducted from the carrying value of fixed assets (FY09 exchange loss INR 1.4 bn). Exchange gains, aggregating INR 321.9 mn, were adjusted against the “foreign currency monetary translation difference account” (FY09: loss of INR 340.2 mn).


Exceptional items (expenditure/ loss, net) aggregate INR 742.1 mn (FY09: INR 298.9 mn), ~7.7x (FY09: ~21.3%) reported FY10 PBT (before exceptional items). Exceptional items include:

• Restructuring and redundancy cost related to overseas subsidiaries aggregating INR 874.1 mn.

• Profit on sale of land by a subsidiary aggregating INR 132.0 mn.

Consolidated cash flow for FY10 reveals unrealised forex gain on INR 0.3 bn included in PBT (FY09: unrealised forex loss of INR 0.7 bn).

Standalone – Subsidiary operating performance analysis (INR mn) Particulars

FY09 (%) FY10 (%) FY09 (%) FY10 (%) FY09 (%) FY10 (%)

Sales 20,586 100 18,564 100 27,154 100 14,712 100 47,740 100 33,276 100

Raw materials consumed 9,805 47.6 8,224 44.3 14,263 52.5 8,103 55.1 24,068 50.4 16,327 49.1

Operating and mfg. exp. 3,377 16.4 3,161 17.0 4,346 16.0 2,742 18.6 7,723 16.2 5,903 17.7

Personnel cost 1,392 6.8 1,436 7.7 5,700 21.0 3,803 25.8 7,092 14.9 5,239 15.7

Administrative and other exp. 2,415 11.7 1,588 8.6 1,914 7.0 880 6.0 4,328 9.1 2,468 7.4

EBITDA 3,598 17.5 4,156 22.4 931 3.4 (816) (5.5) 4,529 9.5 3,340 10.0

Depreciation 1,494 7.3 1,644 8.9 1,025 3.8 807 5.5 2,519 5.3 2,451 7.4

EBIT 2,104 10.2 2,512 13.5 (94) (0.3) (1,623) (11.0) 2,010 4.2 889 2.7

Financial charges 1,004 4.9 1,028 5.5 288 1.1 275 1.9 1,291 2.7 1,303 3.9

EBT 1,100 5.3 1,484 8.0 (381) (1.4) (1,898) (12.9) 719 1.5 (414) (1.2)

ConsolidatedStandalone Subsidiary (Derived)

Source: Company annual report, Edelweiss research

Standalone entity

• Despite a dip in sales revenue, on account of sluggish exports, operating metrics have improved.

• Operating metrics improved, primarily on account of reduced raw material cost (as a percentage of sales) and lower forex losses (other than on long-term loans), from INR 0.9 bn in FY09 to INR 0.2 bn in FY10.

Subsidiaries

• Subsidiaries were a negative drag on the overall performance; on aggregate basis, they posted losses at the operating level.

Bharat Forge


3

Subsidiary analysis (INR mn) % shareholding

Subsidiary company as on FY10 Networth Turnover PAT Networth Turnover PAT

CDP Bharat Forge, Germany 100.0 4,884 10,176 92 4,196 5,307 (901)

Bharat Forge Holding, Germany 100.0 21 36 (12) 85 84 74

Bharat Forge Aluminiumtechnik & Co. KG, Germany 100.0 417 2,669 145 317 2,062 10 Bharat Forge Aluminiumtechnik Verwaltungs, Germany 100.0 4 0 0 4 0 0

Bharat Forge America. U.S.A. 100.0 36 1,660 (264) 229 993 (235)

Bharat Forge Beteiligungs, Germany 100.0 2,550 38 (26) 2,929 111 68

Bharat Forge Kilsta, Sweden 100.0 1,535 7,046 (336) 963 2,685 (611)

Bharat Forge Scottish Stampings, Scotland 100.0 (192) 2,566 (423) (190) 714 (11)

Bharat Forge Hong Kong, Hong Kong 100.0 1,449 0 (6) 1,281 0 (2)

FAW Bharat Forge (Changchun) Company, China 52.0 2,139 3,377 (347) 1,609 3,398 (315)

Bharat Forge Daun, Germany 100.0 242 1,148 32 217 614 -

BF New Technologies, Germany 100.0 106 - (99) 95 0 -

BF-NTPC Energy Systems. 51.0 1 - - 21 - -

Total 28,718 (1,246) 15,970 (1,923)

PAT margin (%) (4.3) (12.0)

FY09 FY10

Subsidiary performance dipped further

Geographical revenue breakup

0

12

24

36

48

60


(lIN

R b

n)

Outside India Within India

Fixed asset turnover ratio

0.0

0.8

1.6

2.4

3.2

4.0

0

6

12

18

24

30


(x)

(IN

R b

n)

Fixed assets excl. CWIP Fixed assets turnover ratio (Ex CWIP) Source: Company annual report, Edelweiss research

Sales outside India dipped sharply…

… impacting fixed asset turnover ratios

adversely



4

Cash conversion cycle

30

44

58

72

86

100


(Days)

Inventory days Receivable days Payable days Cash conversion cycle


Cash conversion cycle increased from 71 days in FY09 to 94 days in FY10, primarily on account

of increase in inventory days and debtor days from 71 in FY09 to 96 in FY10 and 46 in FY09 to

57 in FY10, respectively. This was partially offset by increase in creditor days from 46 in FY09

to 59 in FY10.

Cash flow analysis (INR mn) Particulars FY10

Profit before tax (645)

Non operating (profit)/Loss 1,065

Non cash adjustments (Incl. tax provision) 2,154

Direct taxes paid (494)

Cash profit after tax 2,080

Decrease in inventories 1,342

Decrease in sundry debtors 289

Increase in other current assets asd loans and advances (4)

Increase in liabilities 1,582

Decrease in working capital 3,210

Net cash from operating activities 5,290

Interest paid (1,310)

Net cash from operating activities post interest 3,980 Source: Company annual report, Edelweiss research

*Decrease in working capital requirement lead to healthy cashflows from operations

Cash flow from operations remained positive, primarily on

account of reduced working capital

requirements

Bharat Forge


5

Movement in shareholders’ fund (INR mn) Particulars FY10

Opening shareholders' fund 16,435

Add (182)

Profit for the year (634)

Reserve arising on adoption of IFRS by subsidiaries 10

Hedging fund arising during the year 172

Investment revaluation reserve written off thru P&L 24

Change in FCMITDA 247

Less 1,611

Proposed Dividend and tax thereon 271

Premium on redemption of FCCBs 975

Debenture issue expenses 27

Change in foreign currency transalation reserve 288

Adjustment related to prior year 49

Closing shareholders fund 14,642


Leverage analysis

0.0

0.4

0.8

1.2

1.6

2.0

0

5

10

15

20

25


(x)

(IN

R b

n)

Debt Debt /equity


FCCB details

Particulars Coupon

rate (%) FCCB O/S (USD mn )

Redemption premium (%)

Conversion price (INR)

Maturity date

Tranch 1 0.5 44 26.8 336 Apr' 10

Tranch 2 0.5 60 29.9 384 Apr' 10

Tranch A - 40 42.6 604 Apr' 12

Tranch B - 40 56.5 690 Apr' 13

Total 183 Source: Company annual report, Edelweiss research

• Post March 2010, BF’s tranch 2 FCCBs of FV USD 1.25 mn were converted into equity

shares and the balance o/s FCCB of tranch 1 and tranch 2 were redeemed.

• The company raised QIP of USD 140 mn in April 2010.

Redemption premium on FCCBs due in April 2010

directly charged to reserves

Despite net loans of INR 1.9 bn availed during

the year, the net increase in loan book

was contained by exchange gains on forex

loans



6

Profitability analysis (ROE analyser)

ROE analyser analyses profitability on the scale of operating efficiency and capital allocation efficiency (detailed concept explained in Annexure A). We have analysed the profitability of BF for FY08, FY09 and FY10; results and key findings are given below:

ParticularsA. Return on net operating assets (RNOA)(OPATO x NOPAT margin) (%)

12.7 3.7 1.2

OPATO (operating asset turnover) (x) 1.8 1.5 1.0

NOPAT margin (%) 7.2 2.5 1.3

B. Return from leverage (FLEV x spread) (%) 4.6 (0.3) (3.0)

FLEV (financial leverage) (x) 0.6 0.9 1.1

NBC (net borrowing cost) (%) 4.7 4.0 4.0

Net financial spread (RNOA -NBC) (%) 7.9 (0.3) (2.8)

C. Return from other funding (%) 1.0 1.2 0.9

ROE Derived (A+B+C) (%) 18.3 4.6 (0.9)

FY08 FY09 FY10


Note: *Excluding exceptional items

RoE tree

1.2

(3.0)

0.9

(0.9)

(2.1)

(1.4)

(0.7)

0.0

0.7

1.4

RNOA Return from leverage

Return from other funding

ROAE

(%)


• ROE dipped on account of dip in NOPAT margins primarily attributable to subsidiary operation.

• NBC cost was lower on account of non-charging of interest on FCCB. NBC, excluding FCCB, stands at 8% (FY09 8.9%).

Bharat Forge


7

Sources of funds

0.0

20.0

40.0

60.0

80.0

100.0


(%)

Equity shareholders' funds Loan funds Minority interestDeferred tax liability Current liabilities Provisions

Source: Company annual report, Edelweiss research Application of funds

0.0

20.0

40.0

60.0

80.0

100.0


(%)

Fixed assets (incl goodwill) Investments Deferred tax asset

Inventories Sundry debtors Loans and advances

Other current assets Source: Company annual report, Edelweiss research

FCCB redemption premium, sundry

creditors and acceptances

increased current liabilities

Mutual fund investments

increased significantly



8

Summary financials (INR mn) Particulars FY06 FY07 FY08 FY09 FY10

Sales 30,189 41,783 46,523 47,740 33,276

Total income 30,850 42,752 47,516 48,427 33,787

EBITDA 5,230 6,466 7,047 4,529 3,340

EBITDA margin (%) 17.3 15.5 15.1 9.5 10.0

Depreciation 1,283 1,883 2,273 2,519 2,451

Financial costs 683 1,067 1,269 1,291 1,303

Net profit 2,505 2,906 3,015 583 (634)


Loan funds 11,693 17,996 16,544 21,908 22,527

Net fixed assets 14,814 19,449 23,611 27,902 26,065




Cash flow from operating activities 2,646 3,771 4,284 2,835 5,422


Cash flow from financing activities 9,223 4,159 (3,106) 843 (168)

Net cash flows 5,481 3,457 (6,206) 1,700 1,093

CAPEX (4,180) (5,592) (7,045) (5,393) (1,350)

Working capital investments (4,125) (4,126) (2,361) 574 3,210 Source: Company annual report, Edelweiss research

Revaluation and amalgamation used to clean up the balance sheet

Escorts revalued all its land and buildings by INR 6.7 bn during the year (FY09 opening balance: INR 4.7 bn).

Also, it amalgamated Escorts Agri Machinery, a wholly-owned subsidiary with investments in other overseas operational companies. The amalgamation is accounted under pooling of interest method w.e.f 1st April 2009 on the basis of unaudited financial statements. A reserve of INR 1.8 bn created thereupon is used to adjust accumulated losses.

Pursuant to the high court approved scheme, Escorts created a business reconstruction reserve of INR 11.1 bn (net) by transfers, primarily from revaluation and amalgamation reserve.

This reserve is used to write off losses/ diminution in value of fixed assets, investments, receivables, loans and advances, accumulated losses, etc aggregating INR 5.1 bn. (Refer business reconstruction reserve table on page 2).

Consequently, PBT is higher by INR 3.5 bn, ~3.7x of reported PBT before exceptional items. As on 30th September 2009, the business reconstruction reserve aggregates INR 6.0 bn, ~42.6% of net worth; revaluation reserves aggregates INR 750.0 mn, ~5.3% of the net worth.

Other accounting policy highlights

~11.2% of the issued share capital (Escorts proportionate share) is held by joint venture partners, suggesting an element of treasury shares. These shares are excluded in calculating consolidated EPS.

The financial statement of Farmtrac North America, a subsidiary in liquidation, has not been consolidated. Investments in Farmtrac North America stands at INR nil in the standalone financial statements.

Financial highlights

Escorts reported PAT of INR 286.0 mn vis-à-vis net losses of INR 372.4 mn, INR 55.1 mn and INR 474.1 mn in FY08, FY07 and FY06, respectively.

Operating cash flows (inflows) increased to INR 2.5 bn vis-à-vis INR 838.5 mn in FY08 and outflows of INR 2.0 bn in FY07.

Borrowings decreased by INR 4.4 bn. However, as per the cash flow statement, net repayments aggregate INR 1.7 bn only, suggesting exchange rate restatements of INR 2.7 bn.

Provisions written back aggregate INR 74.7 mn, ~8.0% of PBT before exceptional items.

Doubtful debts/ advances/ deposits aggregate INR 1.6 bn on total debts/ advances/ deposits of INR 7.8 bn, ~20.5%. Provisions aggregating INR 1.2 bn are adjusted against business reconstruction reserve and provisions of INR 337.9 mn are treated as exceptional items.

Escorts follow the period from 01 October to 30 September as its financial year


Escorts Annual Report Analysis April 20, 2010


1

Market Data



M cap (INR bn/USD mn): 16.4 / 366.6


Promoters : 30.1


FIIs : 15.5


Analysis beyond Consensus (ABC) is our initiative to provide a differentiated perspective to our clients on various non-routine and intricate issues. This unit of research works independent of the sector/stock research team and views expressed in this report may vary with that of respective sector/stock analyst.



2

Escorts exercised the put option on bonds received from Idea Cellular in connection with the sale of telecom business in FY04 and received INR 966.9 mn vis-à-vis the book value of INR 1.2 bn. It appears that the resulting loss of INR 211.9 mn is adjusted in reserves (through business reconstruction reserves).

Escorts disposed a subsidiary (Cellnext Solutions) for INR 67.9 mn and recognised a gain of INR 15.4 mn.

Older issues

The net owned fund of Escorts Automotive, a wholly owned subsidiary (an NBFC), are below the prescribed limit under NBFC regulation since the past seven years.

Advances include INR 680 mn paid to ICICI Bank in March 2004 for buy back of shares in Escorts Motors as per a buy back clause in a relevant agreement. The transfer of share is awaited, pending final settlement.

Loans and advances include INR 320 mn (in the form of 3.4 mn shares @ INR 94 per share) deposited in connection with an arrangement with fixed deposit holders.

Cash and bank balance include INR 649.9 mn placed in escrow account in connection with some dispute related to the sale of Escorts stake in Escorts Heart Institute and Research Center.

Business reconstruction reserve (INR mn)

Sources Amount Application Amount

Capital redemption reserve 8.0 P&L account accumulated losses 1,567.3

Share forfeiture reserve 32.2 Provisions/ write offs 1,982.4

Amalgamation reserve 484.6 Dimunition/ impairment of

investments/ assets Revaluation reserve (net) 10,621.4 Depreciation on revalued assets 69.8

Balance 6,044.2

Total 11,146.2 Total 11,146.2

1,482.5


Movement in shareholders’ funds (INR mn)

Particulars AmountBalance on 1st October 2008 9,353.0

Add:

FY09 PAT 286.0 Revaluation of fixed assets 6,727.2

Consolidation adjustments 1,774.1

Other miscellaneous additions 21.6

Sub total 8,808.9 Less:

Dividend 124.2

Provisions/ write offs 1,982.4 Dimunition/ impairment of investments/ assets 1,482.5

Depreciation on revalued assets 90.2

Utilisation per scheme of arrangement 231.4 Sub total 3,910.7

Balance on 30th September 2009 14,251.2 Source: Company annual report, Edelweiss research

Business reconstruction

reserve used to clean up balance

sheet

Revaluation drives shareholders’ fund

increase

Escorts


3


ROE analyser analyses profitability on the scale of operating efficiency and capital allocation efficiency (detailed concept explained in Annexure A). We have analysed the profitability of Escorts for FY08 and FY09; results and key findings are given below:

ParticularsA. Return on net operating assets (RNOA)* 4.1 6.4 OPATO (operating asset turnover) (x) 1.9 1.7


B. Return from leverage (FLEV x spread) (%) (5.7) (2.2)



Net financial spread (RNOA -NBC) (%) (11.4) (8.1)

C. Return from other funding (%) 0.2 0.2

ROE* Derived (A+B+C) (%) (1.4) 4.4

FY09FY08


* Excluding exceptional items ROE tree

6.4

(0.2)

0.2 4.4

(5.0)

(2.5)

0.0

2.5

5.0

7.5



ROAE

(%)


Sources of funds

0.0

20.0

40.0

60.0

80.0

100.0


(%)

Equity shareholders' funds Loan funds Minority interest

Deferred tax liabilities Current liabilities Provisions


Better operating margin and lesser

leverage make ROAE positive

Debt continues to recede



4


0.0

20.0

40.0

60.0

80.0

100.0


(%)

Fixed assets Investments Inventories

Sundry debtors Cash and bank balance Other current assets

Deferred tax assets

Source: Company annual report, Edelweiss research Utilisation of income

(10.0)

12.0

34.0

56.0

78.0

100.0


(%)

Material cost Personnel cost Other operating expenses

Depreciation Interest Other items

Taxes Dividends Retained earnings

Source: Company annual report, Edelweiss research Leverage and borrowing cost

0.0

5.0

10.0

15.0

20.0

25.0

0.0

0.6

1.1

1.7

2.2

2.8


(%)

(X)

Net debt/ equity ratio (x) Debt/ equity ratio (x) Cost of borrowing (%) Source: Company annual report, Edelweiss research

Lower material cost and direct

adjustment of losses in reserves help

post PAT

Revaluation of fixed assets, better

working capital management and

provisions increase fixed assets’ share

Revaluation and healthy operating

cash flows help decrease leverage.

Borrowing cost continue to remain

above 10%

Escorts


5


0

25

50

75

100

125


(Days)


Source: Company annual report, Edelweiss research Profitability and return ratios

(15.0)

0.0

15.0

30.0

45.0

60.0


(%)

EBITDA marginPAT margin (excluding exceptional items)PAT marginROCE (pre tax)ROE (excluding exceptional items)ROE


Better working capital management and provisioning of

doubtful debtors help shorten cash conversion cycle

Better EBITDA margin help better

profitability and returns; returns

partly diminished by revaluation



6


Sales 21,431 23,956 27,756 26,820 26,180

Total income 27,242 25,378 28,261 27,667 26,639

EBITDA 121 1,309 1,257 769 1,792

EBITDA margin (%) 0.6 5.5 4.5 2.9 6.8

Depreciation 1,025 489 533 508 480

Financial costs 1,817 1,113 935 721 717

Net profit 1,208 (474) (55) (372) 286


Loan funds 8,868 6,495 8,300 8,402 4,020

Net fixed assets 6,022 9,530 9,375 9,674 15,720

Investments 2,479 2,465 2,453 2,382 1,067




Cash flow from operating activities (714) 2,979 (1,963) 839 2,504

Cash flow from investing activities 3,749 1,000 (662) (955) 504

Cash flow from financing activities (2,642) (3,485) 2,277 (186) (2,462) Source: Company annual report, Edelweiss research

Analysis beyond Consensus (ABC) is our initiative to provide a differentiated perspective to our clients on various non-routine and intricate issues. This unit

of research works independent of the sector/stock research team and views expressed in this report may vary with that of respective sector/stock analyst.

Direct debit to reserves and exceptional income boosts profitability

Mahindra & Mahindra (M&M) adjusted provision for diminution in investments of INR 0.7 bn against investment fluctuation reserve; otherwise, PBT would have been lower by INR 0.7 bn (~1.9%). The investment fluctuation reserve stood at INR 6.2 bn as at FY10 end.

The company has FCCBs outstanding of USD 189.5 mn convertible at INR 461.0/share on or before March 7, 2011. M&M adjusts the redemption premium payable on bonds against the securities premium account in the year of issue. Had the same been charged through P&L on YTM basis, FY10 PBT would have been lower by INR 533 mn (1.3%).

ESOPs have been accounted on the intrinsic value basis. Had the company accounted the same on fair value basis, PAT would have been lower by INR 264.4 mn (~1.1%).

Net exceptional gains for FY10 stood at INR 2.5 bn [FY09: INR (0.8) bn], of which, INR 1.8 bn pertains to the profit realised on sale of investments; and INR 0.8 bn, ~2% of PBT, is deemed divestiture gain on account of effective dilution of its investments (refer table on page 2 for details).

The company accounts deemed divesture gain as exceptional income instead of the conventional practice of adjusting it against reserves.

Accounting Tech Mahindra as JV and consolidation of Satyam to impact financials

Tech Mahindra (TML) ceased to be a subsidiary of M&M w.e.f. March 22, 2010 on acquisition of stake by AT&T. Post acquisition, M&M’s share (including stake through subsidiary) has reduced from 48.6% to 44.0%.

Accordingly, TML has been accounted as a joint venture as at BS date and was proportionately consolidated based on the JV accounting principles, which impacted M&M’s consolidated financials.

Investments have jumped from INR 33.8 bn as at FY09 end to INR 48.1 bn at FY10 end, primarily due to investments in Satyam Computer Services (SCSL), which was not consolidated as at FY10 end, since it is in the process of restating its financials.

Post BS date, SCSL financials have been restated and reported a net loss of INR 1.2 bn in FY10, with M&M’s share of INR 234 mn, ~0.9% of consolidated PAT.

Automotive and farm equipment boost revenue/margins; IT and Systech dampeners

ROAE has jumped from 21.3% in FY09 to 25.5% in FY10, primarily on the back of higher NOPAT margin (up from 6.9% to 9.5%). The increase was contributed by the following factors:

• Rise in automotives and farm equipment revenues from INR 150.4 bn in FY09 to INR 202.7 bn in FY10 due to robust sales in domestic and export market. Lower commodity prices aided increase in EBIT margins from 6.2% to 13.2%.

• Poor sales due to global recession and margin pressure, resulting in IT services’ EBIT proportion dipping to 23.5% from 42.8%.

• Systech revenues slipping to INR 25.5 bn from INR 36.2 bn due to lower sales of auto-components in European countries due to recessionary conditions.


Mahindra & Mahindra Annual Report Analysis January 17, 2011


1

Market Data





Promoters : 25.8


FIIs : 23.1




2


During FY10, outstanding fully convertible debentures (FCD), aggregating INR 7 bn to Golboot Holdings (owned by Goldman Sachs Group), were converted into 9.4 mn equity shares of INR 10 at premium of INR 735/share. Consequently, securities premium has increased by INR 6.9 bn and share capital by INR 94 mn.

The company, through M&M Benefit Trust, holds ~51.8 mn treasury shares (~9.5% of equity capital) at book value of INR 14.6 bn (14.3% of net worth). Post IFRS from FY12, the treasury shares will be consolidated, which will increase the reported EPS of INR 42.2/share in FY10 to INR 46.2/share.

The company has received an order for payment of differential excise duty (including penalty) of INR 3.3 bn. M&M has reflected the above amount along with interest of INR 1.7 bn as contingent liability as at FY10 end (FY09 end: Nil).

Loans and advances jumped from INR 88.6 bn in FY09 to INR 107.7 bn in FY10, of which loans against assets increased from INR 66.2 bn to INR 79.7 bn.

M&M applies hedge accounting principles as per AS 30 for derivative transactions. Hedge reserve balance of INR 0.8 bn as at FY10 end (FY09: INR (4.8) bn) (net of tax) is on account of mark-to-market gains/(losses) on cash flow hedges outstanding at the year end.

Unhedged foreign currency exposure as at FY10 end is INR 8.2 bn (FY09 end: INR 11.2 bn), primarily on account of USD exposure on zero coupon convertible bonds.

Profit on sale of investments (INR mn)


Company name

Profit/(loss) on sale of

investment

Deemed divestiture gain/(loss) Others

Total gain / (loss)

Mahindra Holidays & Resorts India 908 1,126 - 2,033

Mahindra Forgings - 129 - 129

Tech Mahindra 950 (452) - 498

Others - - (14) (14)

Total 1,857 802 (14) 2,646

Mahindra & Mahindra


3

Major subsidiary details (INR bn)


ROE analyser


% shareholding

as on FY10 Networth Turnover PAT Networth Turnover PAT

Mahindra & Mahindra Financial Services 60.68 14.7 13.8 2.1 17.3 15.5 3.4

Mahindra Life Space Developers 51.08 9.0 1.9 0.5 9.6 3.4 0.8

Mahindra Forgings 50.68 6.7 2.7 (0.4) 7.9 3.3 (0.9)

Mahindra Vehicle Manufacturers 100.00 4.8 - (0.1) 5.6 1.0 (0.2)

Mahindra Forgings International 50.68 4.6 0.2 (0.0) 4.5 0.0 (0.2)

Mahindra Holidays and Resorts India 84.03 2.0 4.1 0.8 4.4 5.0 1.2

Mahindra Navistar Automotives 51.00 3.2 5.0 (0.3) 4.0 6.0 (0.3)

Mahindra Yueda (Yancheng) Tractor 51.00 2.0 1.2 (0.0) 2.7 5.7 (0.1)

Mahindra Gears Global 53.34 2.9 - (0.0) 2.6 - (0.0)

Mahindra Gears Cyprus 53.34 2.9 - (0.0) 2.6 - (0.0)

Mahindra Overseas Investment (Mauritius) 100.00 2.2 0.0 (0.0) 2.6 0.0 (0.0)

Metalcastello S.p.A. 51.00 2.7 6.1 0.3 2.1 2.3 (0.5)

Mahindra Forgings Global 50.68 2.2 0.0 (0.0) 2.0 - 0.0

Mahindra World City (Jaipur) 37.80 1.7 0.8 0.1 1.8 0.5 0.1

Mahindra Ugine Steel Company 50.69 1.7 12.1 (0.2) 1.7 11.8 0.0

Mahindra Intertrade 100.00 1.3 9.0 0.4 1.7 9.5 0.5

Mahindra Navistar Engines Private 51.00 0.3 0.0 (0.1) 1.4 0.0 (0.1)

Mahindra-BT Investment (Mauritius) 57.00 1.8 0.1 0.1 1.4 0.9 0.7

Mahindra Gears International 100.00 1.6 - (0.0) 1.4 - (0.0)

Schöneweiss & Co. GmbH 50.68 1.9 6.1 (0.0) 1.2 2.7 (0.5)

Mahindra Castings 64.94 0.3 0.0 0.0 1.2 3.2 (0.1)

Gesenkschmiede Schneider GmbH 50.68 1.3 8.2 (0.1) 1.1 3.5 (0.5)

Mahindra World City Developers 42.21 1.0 1.0 0.3 1.1 0.3 0.1

Mahindra Engineering Services 100.00 0.6 1.6 0.2 0.8 1.4 0.3

Bristlecone 81.97 0.7 0.0 (0.1) 0.5 0.0 (0.1)

Mahindra Residential Developers 24.85 0.5 - (0.0) 0.5 0.1 (0.0)

Mahindra Renault Private 51.00 2.0 7.4 (4.9) (3.6) 7.4 (4.9)

Total 76.5 81.4 (1.3) 80.0 83.5 (1.3)

PAT 14.1 24.8

Subsidiary companyFY09 FY10

Particulars


13.4 10.5 15.5


NOPAT margin (%) 8.3 6.9 9.5

B. Return from leverage (FLEV x spread) (%) 17.9 10.9 9.8


NBC (net borrowing cost) (%) (1.0) 0.9 3.8

Net financial spread (RNOA -NBC) (%) 14.4 9.6 11.8

C. Return from other funding (%) 0.2 (0.1) 0.2

ROE Derived (A+B+C) (%) 31.4 21.3 25.5

FY08 FY09 FY10



4

ROAE tree

Segmental analysis

Segmental revenue

Automobile segment


9.8

0.2

15.5

25.5

0.0

6.0

12.0

18.0

24.0

30.0



ROAE

(%)

0.0

20.0

40.0

60.0

80.0

100.0


(%)

Automotive Farm equipment IT servicesFinancial services Steel trading and Processing InfrastructureHospitality Systech Others

0.0

8.0

16.0

24.0

32.0

40.0

0.0

24.0

48.0

72.0

96.0

120.0


(%)

(IN

R b

n)

Segmental revenue Segmental resultSegment net assets Segmental EBIT marginsReturn on segment net assets

ROE improved from 21.3% to 25.5% on

the back of improved margins in

automobiles and farm equipment segment,

resulting in higher NOPAT margin

Proportion of automobiles and farm

equipment segment has increased from

56.2% to 64.2% on the back of increased

sales volume

Robust growth in domestic utility

vehicle volumes, augmented by

decrease in commodity prices,

result in margin growth

Mahindra & Mahindra


5

Farm equipment segment

IT services segment

Systech segment


0.0

24.0

48.0

72.0

96.0

120.0

0.0

20.0

40.0

60.0

80.0

100.0


(%)

(IN

R b

n)


0.0

30.0

60.0

90.0

120.0

150.0

0.0

12.0

24.0

36.0

48.0

60.0


(%)

(IN

R b

n)


(8.0)

(1.0)

6.0

13.0

20.0

27.0

0.0

8.0

16.0

24.0

32.0

40.0


(%)

(IN

R b

n)


Rise in domestic and export sales of

tractors result in higher sales and

margins

EBITDA margins down due to global recession and poor

outsourcing demand

EBIT margins dipped due to lower sales of

auto ancillaries to export markets



6

Balance sheet analysis

Sources of funds


Movement in shareholders’ funds (INR bn)


Summary financials

0.0

20.0

40.0

60.0

80.0

100.0


(%)

Equity shareholders' funds Loan funds Minority interestDeferred income Deferred tax Liability Current liabilitiesProvisions

0.0

20.0

40.0

60.0

80.0

100.0


(%)

Fixed assets (incl goodwill) Investments Deferred tax assetInventories Sundry debtors Cash and bankOther current assets

Particulars FY10

Opening shareholders' fund 70.3

Add

Conversion of FCD to equity shares 7.0

Profit for the year (including share in JV) 24.8

Change in hedge reserve account 5.6

Adjustment pertaining to prior period in repect of Minority interest 0.5

Others 0.7

38.5

Less

Proposed Dividend and tax thereon (Equity and Preference) 6.4

Investment fluctuation reserve utilised 0.7

7.1

Closing shareholders fund 101.8

Proportion of loan funds reduced and

shareholders’ funds increased, primarily due to conversion of

fully convertible debentures of INR 7

bn

Proportion of investments is up

from 10.8% to 16.7% due to investment in SCSL of INR 29.7 bn

New issuances and profits boost

shareholders’ fund

Mahindra & Mahindra


7

Summary Financials (INR mn)


* - FY10 balance sheet figures have been adjusted, assuming Tech Mahindra to be a subsidiary and not joint venture for the purpose of

comparability.

-Loan funds of M&M Financial Services have been deducted from M&M consolidated loan book for the purpose of D/E ratio and average

borrowing costs.

-Financial expenses of M&M Financial Services have been reduced from the financial cost of M&M consolidated financials and treated as part of

operating expenses.


Sales 125,087 178,002 241,872 267,564 315,685

Total income 127,134 179,868 245,713 270,275 318,287

EBITDA 16,872 26,077 32,562 31,557 50,109

EBITDA margin (%) 13.5 14.7 13.5 11.8 15.9

Depreciation 2,833 3,799 5,822 7,493 8,735

Financial costs 650 931 2,598 3,470 6,178

Net profit 12,697 14,972 15,711 14,054 24,786


Loan funds 52,713 78,290 98,810 121,903 134,859

Net fixed assets 26,055 47,868 76,255 91,418 105,203

Current assets, loans and advances 97,253 140,397 169,285 185,749 203,162



Cash flow from operating activities (4,589) (1,624) 6,989 34,015 27,988


Cash flow from financing activities 14,682 21,199 16,902 12,066 18,428

Net cash flows 1,275 8,360 (3,806) 11,647 (842)

CAPEX (5,253) (13,746) (19,723) (29,413) (26,999)

Working capital investments (17,412) (17,113) (13,505) 9,261 (11,475)

Improved operations and one offs drive profitability

Tata Motors’ (TML) revenues jumped 30.6% from INR 708.3 bn in FY09, to INR 925.2 bn in FY10. PBT* for the year stood at INR 37.8 bn (FY09 loss of INR 17.9 bn).

Other income includes profit on sale of investments of INR 17.5 bn (46.3% of PBT*), of which, INR 6.9 bn pertains to sale of TATA Steel shares and the balance INR 10.6 bn to 20% stake sale in Telco Construction Equipment Company (former subsidiary).

The company had reversed provision of INR 4.4 bn (11.6% of PBT*) towards residual risk on vehicles sold, made during earlier years.

Auditors have highlighted that during the year, INR 2.6 bn (FY09: INR 14.6 bn) of actuarial losses on pension plan of one of the subsidiaries have been charged to shareholders’ fund in accordance with IFRS (as it is not practical to convert it into IGAAP). This led to accumulated pension reserve of INR (17.2) bn; had the company charged the same through P&L, PBT* would have been lower by 6.9%.

During FY10, TML raised INR 45 bn through NCD, of which, INR 42 bn is 2% NCDs with premium payable on redemption. The company has charged the entire redemption premium of INR 17.5 bn to shareholders’ fund as permitted by the Companies Act, 1956. Had the company charged the same on YTM basis through P&L, PBT would have been lower by INR 2.3 bn (14.5% of PBT excl. one timers; refer page 4 for details).

TML, as per accepted general practice, has written off the entire redemption premium on FCCBs through reserves in the year of issue. IFRS, however, requires the redemption premium on FCCBs to be charged through P&L on YTM basis. This would lead to an additional charge of INR 2.1 bn (13.2% of PBT excl. one timers; refer page 4 for details).

Acceptances boost operating cash flow

Operating cash flow post interest stood at INR 64.7 bn, primarily on account of improved operations and decrease in working capital requirements (on the back of INR 29.4 bn jump in acceptances).

TML’s cash conversion cycle improved from (32) days in FY09 to (38) days in FY10, primarily on account of rise in creditor days from 86 in FY09 to 108 in FY10, partly offset by increase in debtor days from 18 to 24 and inventory days from 37 to 46.

Accounting and financial highlights

TML has revalued certain fixed assets of Jaguar and Land Rover during FY10, resulting in revaluation reserve of INR 1.3 bn (FY09: INR 2.4 bn).

Fiat India Automobiles, a 50% JV, has incurred a loss of INR 2.7 bn during FY10 (FY09 loss: INR 6.1 bn); accumulated losses post acquisition stood at INR 9.7 bn. TML, during the year, invested INR 2.8 bn in the JV, resulting in total investment of INR 10 bn.

CWIP includes INR 3.1 bn towards an under construction building for manufacturing automobiles. Consequent to the decision to relocate the same at another location, TML is evaluating several options, under all of which, no adjustment to the carrying amount of the building is considered necessary based on the information available at the BS date.

TML exercised the existing call option to acquire 79% shares in Tata Hispano Motors Carrocera (to acquire 100% stake) for EUR 2 mn (INR 137.1 mn). The company’s net worth as at FY10 end stood at INR (1.8) bn.

Based on consolidated financials unless specified otherwise


Tata Motors Annual Report Analysis August 18, 2010


1


Market Data

52-week range (INR): 1,031 / 422




Promoters* : 37.0


FIIs : 22.4




2

The company, during FY10, issued 4% convertible notes (due in October 2014) aggregating USD 375 mn, convertible into shares, at INR 621.49 per share. These, unless converted earlier, will be redeemed at a premium of 8.5%. TML has adjusted the entire redemption premium through reserves.

INCAT Holdings, INCAT KK, and Lemmerpoort BV (subsidiaries of Tata Technologies) and Jaguar & Land Rover Asia Pacific Company (subsidiary of Jaguar Land Rover), were liquidated.

Discounting charges has increased from INR 4.8 bn in FY09 to INR 6.7 bn in FY10.

Improved profitability, equity dilution and exchange gains lower D/E

Despite the company raising net loans of INR 41.3 bn, loan book increased by a meager INR 2.2 bn, primarily on account of exchange gains and FCCB conversion of USD 345 mn (~INR 15.5 bn).

TML, during the year, extended an early conversion offer to non-US note holders of outstanding 0% JPY 11,760 mn (due in 2011) and 1% USD 300 mn (due in 2011) convertible notes. Note holders, representing 93.62% of JPY notes (i.e. JPY 10,710 mn) and 76.54% of USD notes (i.e. USD 229.63 mn), opted to convert their notes into ordinary shares. The offer resulted in allotment of 26.6 mn equity shares to note holders who exercised the option. This has resulted in issue of additional 8.3 mn equity shares.

The company has issued 29.9 mn global depository shares (GDS) each representing one share at a price of USD 12.54 per GDS, aggregating USD 375 mn (INR 17.9 bn).

Consequently, gross D/E improved from 6.7x in FY09 to 4.2x in FY10. Standalone

Other highlights from standalone financials

During the year, TML Holdings (holding company of Jaguar-Land Rover), Singapore, a wholly-owned subsidiary, redeemed preference shares of face value of USD 195.1 mn at a discount of USD 189.2 mn. Consequently, TML (standalone) recognised a loss of INR 8.5 bn as an exceptional item. This shall however have no impact on consolidated financials.

Auditors have highlighted that, short-term funds of INR 66.9 bn have been used during the year for long-term investments.

TML as at FY10 end had granted loans of INR 2.5 bn to companies, firms or other parties covered in the register maintained under section 301 of the companies act. Auditors have highlighted that some of these companies have delayed repaying the interest. This shall however have no impact on consolidated financials.

Tata Motors


3

Profitability analysis (ROAE analyser)

ROAE analyser analyses profitability on the scale of operating efficiency and capital allocation efficiency (detailed concept explained in Annexure A). We have analysed Tata Motor’s profitability for the year ended FY08, FY09, and FY10 (refer table below). Results and key findings of same are as follows:

The ROAE improved on account of improved operating performance, with RNOA jumping to 8.6% in FY10 from a negative 4.9% in FY09. The company’s leverage further propelled the ROAE.

Increase in NOPAT margins primarily attributable to:

(a) Material cost as percentage of net turnover decreased as increase in input price during the year was offset by cost reduction programme through value engineering and other measures.

(b) Significant reduction provision towards residual risk on vehicles sold by Jaguar Land Rover leading to a decrease in operating and other expenses as percentage of net turnover.

Low NBC, primarily on account of profit on sale of investment of INR 17.2 bn.


17.6 (4.9) 8.6


NOPAT margin (%) 9.3 (2.2) 4.1

B. Return from leverage (FLEV x spread) (%) 6.5 (25.7) 28.7



Net financial spread (RNOA -NBC) (%) 5.9 (8.0) 5.7

C. Return from other funding (0.8) (0.1) (0.1)

ROAE derived (A+B+C) (%) 23.3 (30.7) 37.2

FY08 FY09 FY10


ROAE tree

8.6

28.7

(0.1)

37.2

0.0

8.0

16.0

24.0

32.0

40.0


Return fromother

funding

ROAE

(%)




4

Profitability analysis (INR bn)

Particulars FY10

Reported PBT before exceptional items (A) 37.8

Less:

One time income (B) 21.9

Reversal of Provision 4.4

Profit on sale of investment 17.5

PBT excluding one timers (C=A-B) 15.9

Less :

Expenses kept off P&L (D) 7.0

Acturial Loss 2.6

Debenture premium (YTM charge) 2.3

FCCB redemption premium (YTM charge) 2.1

Adjusted PBT (C-D) 8.9 Source: Company annual report, Edelweiss research

Debenture issue analysis (INR bn)

Particulars Redeemable on Principal Redemption

premium Total

repaymentYTM (%) Full Yr For FY10

2% NCD March 31, 2011 8.0 0.7 8.7 2.0 6.8 0.4 0.3

2% NCD March 31, 2013 3.5 1.0 4.5 2.0 8.4 0.2 0.2

2% NCD March 31, 2014 18.0 6.6 24.6 2.0 8.5 1.2 1.0

2% NCD March 31, 2016 12.5 9.2 21.7 2.0 10.0 1.0 0.8

Total 42.0 17.5 59.5 2.8 2.3

Exp kept off P&LRate charged to P&L (%)


Redemption premium on debentures issued has been directly charged in the shareholders’ fund. The same will lead to a lower interest cost being charged in the P&L. Cash flow analysis (INR bn)

Particulars FY10

Profit after tax 25.7

Non operating adjustments 7.0

Non cash adjustments (Incl. tax provision) 8.1

Depreciation 38.8

Direct taxes paid (12.3)

Cash profit after tax 67.3

Increase in trade and other receivables (48.6)

Increase in inventory (12.4)

Increasein current liabilities and provisions 87.1

Decrease in working capital 26.0

Net cash from operating activities 93.3

Interst expenses paid 28.6

Net cash from operating activities post interest 64.7 Source Source: Company annual report, Edelweiss research

Operating cash flow was healthy on

account of improved operations and

decrease in working capital requirements

(on the back of increase in

acceptances)

Tata Motors


5


(90)

(45)

0

45

90

135


(Days)

Debtor days Creditor days Inventory days Cash conversion cycle

Source: Company annual report, Edelweiss research Note: Creditor days incl acceptances

Cash conversion cycle improved from (32)days in FY09 to (38) days in FY10 primarily on account of increase in creditor days from 86 days in FY09 to 108 days in FY10, partly offset by increase in debtor days from 18 to 24 and inventory days from 37 to 46 during the same period. Movement in shareholders’ fund (INR bn)

Particulars FY10


Add

Profit for the year 25.7

Reversal of hedging reserve 0.9

Revaluation of assets 0.7

Issue of shares (net off expenses) 32.0

Adjustment on conversion of FCCB 3.2

Forex gain on long term liabilities 8.3

Others 1.1

71.9

Less

Dividend (incl. tax) 10.0

Exchange loss on non integral foreign operations 5.6

Premium on redemption of NCD (incl expenses) 21.2

Actuarial losses on pension liability 2.7

Others 0.7

40.1

Closing shareholders' fund 84.0 Source: Company annual report, Edelweiss research

Increase in shareholders’ fund

primarily on account of FCCB conversion

and GDS issue



6

Balance sheet analysis Sources of fund

0.0

20.0

40.0

60.0

80.0

100.0


(%)

Shareholder's Fund Minority interest Loan Funds

Deferred Tax liability Current liabilities Provisions Source: Company annual report, Edelweiss research

Application of fund

0.0

20.0

40.0

60.0

80.0

100.0


(%)

Fixed Assets Investments Inventories Debtors Cash & bank Other current assets

Source: Company annual report, Edelweiss research Borrowing cost analysis

0.0

1.6

3.2

4.8

6.4

8.0

4.0

5.6

7.2

8.8

10.4

12.0


(%)

(x)

Avg. borrowing cost (RHS) Debt /Equity


Proportion of loan funds has

reduced primarily on account of exchange

gains and FCCB conversion

D/E dipped on back of exchange gains

and equity dilution

Tata Motors


7



Sales 237,613 322,907 355,604 708,302 925,193

Total income 240,766 325,736 360,972 719,196 945,380

EBITDA 29,828 38,930 50,585 17,980 81,160

EBITDA margin (%) 12.6 12.1 14.2 2.5 8.8

Depreciation 6,233 6,881 7,821 25,068 38,871

Adjusted financial costs 3,096 4,651 9,127 21,706 24,653

Net profit 17,281 21,700 21,677 (25,053) 25,711


Loan funds 33,791 73,019 115,849 349,739 351,924

Net fixed assets 58,481 79,572 134,296 394,520 419,292




Cash flow from operating activities 1,105 (8,755) 55,956 7,498 93,269


Cash flow from financing activities (6,237) 30,536 24,869 177,631 25,119

Net cash flows (9,606) (2,284) 26,850 (3,035) 43,058

CAPEX (12,592) (27,588) (52,804) (99,708) (84,754)

Working capital investments (23,440) (41,370) 20,422 (13,441) 26,609 Source: Company annual report, Edelweiss research



Subdued operating performance; losses contained by adjustments and one offs

Punj Lloyd’s (PL) FY10 revenue dipped 12.0% to INR 104.5 bn from INR 118.8 bn in FY09. However, EBIDTA margins increased marginally from 3.4% in FY09 to 3.5% in FY10.

FY10 loss after tax stood at INR 1.1 bn after providing for INR 1.6 bn towards liquidated damages levied by Ensus (in FY09, it was at INR 2.3 bn after providing for SABIC’s increase in cost estimates and encashment of bank guarantee /performance bond of INR 5.2 bn).

During the year, PL agreed to divest 19.4% of Pipavav Shipyard’s paid up share capital for INR 6.6 bn, subject to the satisfaction of certain conditions precedent; the company booked a gain of INR 3.1 bn as other income for this purpose.

Auditors have highlighted that the company, during the year, sold investments of INR 2.5 bn, recognising profit of INR 1.2 bn. This, it observed, is not in line with AS 9 “revenue recognition” as the sale of investment was subject to fulfillment of certain conditions, which have been complied with post the closure of the financial year.

During FY09, PL had filed a claim for INR 5.1 bn for increase in cost estimates by INR 3.6 bn with ONGC for Heera project, which we believe were not accounted for in FY09.

In FY10, PL has included in revenue a claim of INR 2.4 bn pending to be approved by ONGC, while taking a charge of INR 3.0 bn on account of cost overrun on the above contract.

Liquidated damages amounting to INR 0.7 bn deducted by one of the customers during the year have not been provided.

Increased working capital stretch cash flows; QIP and divestment offered respite

Cash from operations for FY10 stood at INR (16.2) bn despite PBT of INR 209.9 mn. This is primarily on account of increased working capital requirements (refer pg 4 for details).

Cash conversion cycle increased from 109 days in FY09 to 174 days in FY10, as inventory days rose from 125 to 185 during the same period. Inventory carrying value in absolute terms increased from INR 36.7 bn in FY09 to INR 46.5 bn in FY10.

Auditors have highlighted that one of the company’s subsidiaries has breached certain covenants of bank loans amounting to INR 5.0 bn as at FY10 end. The bank is contractually entitled to request immediate repayment of the outstanding loan amount in the event of breach of covenant.

FCCBs worth USD 49.7 mn due in 2011 were outstanding as at FY10 end (effective conversion price INR 343). During the year, PL had provided INR 451.4 mn out of the securities premium towards outstanding FCCBs. However, adoption of IFRS/AS30 requires it to be charged to P&L on YTM basis, leading to dip in PAT by INR 87.3 mn.

During the year, PL issued 27.9 mn shares @ 240.2/ share via QIP, raising INR 6.7 bn.

Loan book (incl. bank overdraft) rose 19.2% from INR 37.4 bn in FY09 to INR 44.6 bn in FY10, which has been primarily utilised for the increased working capital requirements.


Punj Lloyd Annual Report Analysis August 20, 2010


Market Data





Promoters* : 37.3


FIIs : 11.9


1



2

Financial and other highlights

During the year, PL was subject to a search and seizure operation by the IT department. During the operation, statements of the company’s officials were recorded, in which, they were made to offer some unaccounted income of the company for FY10.

Despite 12% dip in revenue during the year, consultancy/professional charges jumped 39.3% from INR 2.3 bn in FY09 to INR 3.2 bn in FY10.

PL accounts for long-term construction revenues on POCM basis. Contract revenues earned in excess of billing reflect under inventory.

Auditors have highlighted deductions made/ amounts withheld by some customers aggregating INR 587.9 mn (previous year INR 605.1 mn) on various accounts which are being carried as sundry debtors. The company is also carrying work-in-progress inventory of INR 31.5 mn (previous year INR 95.5 mn) related to these customers. PL is of the view that such amounts are recoverable and, hence, no provision is required.

Unexecuted order book as at FY10 end stood at INR 277.7 bn (FY09 INR 206.8 bn), offering revenue visibility of more than 2.5 years.


ROE analyser analyses profitability on the scale of operating efficiency and capital allocation efficiency (detailed concept explained in Annexure A). We have analysed PL’s profitability for years ended FY08, FY09, and FY10; results and key findings of the same are as follows:

ROE analyser ParticularsA. Return on net operating assets (RNOA)(OPATO x NOPAT margin) (%)

14.6 (1.3) (0.3)


NOPAT margin (%) 5.4 (0.5) (0.2)





C. Return from other funding (%) 0.1 0.2 (0.1)

ROE Derived (A+B+C) (%) 17.7 (8.6) (3.9)

FY08 FY09 FY10


Punj Lloyd


3

ROE tree

(0.3)

(3.5)

(0.1)

(3.9)

(5.0)

(4.0)

(3.0)

(2.0)

(1.0)

0.0



ROAE

(%)


ROAE has improved from (8.6)% in FY09 to (3.9)% in FY10, primarily on account of non-

accounting of liquidated damages and revenue booking for claims filed pending acceptance. Adjusted for the same, ROAE for FY10 stood at ~(15.1)%.

Net borrowing cost dipped to 2.4%, primarily on account of INR 3.1 bn profit on divestment in Pipavav Shipyard.

Parent / subsidiary operating profitability analysis (INR mn) Particulars

FY09 % FY10 % FY09 % FY10 % FY09 % FY10 %

Sales 68,520 100.0 71,167 100.0 50,241 100.0 33,311 100.0 118,761 100.0 104,478 100.0

Material 23,818 34.8 32,532 45.7 13,688 27.2 5,169 15.5 37,505 31.6 37,701 36.1

Operating expenses 23,901 34.9 18,955 26.6 32,534 64.8 21,618 64.9 56,436 47.5 40,573 38.8

Personnel cost 5,702 8.3 6,983 9.8 7,220 14.4 6,469 19.4 12,922 10.9 13,452 12.9

Other expenses 8,099 11.8 8,854 12.4 (245) (0.5) 253 0.8 7,853 6.6 9,107 8.7

EBIDTA 7,000 10.2 3,843 5.4 (2,956) (5.9) (197) (0.6) 4,044 3.4 3,645 3.5

Depreciation 1,195 1.7 1,327 1.9 576 1.1 943 2.8 1,771 1.5 2,270 2.2

EBIT 5,805 8.5 2,516 3.5 (3,532) (7.0) (1,141) (3.4) 2,274 1.9 1,375 1.3

SABIC 5,153 5,153

ENSUS 1,630 1,630

EBIT ex-SABIC & ENSUS 5,805 8.5 2,516 3.5 1,621 3.2 489 1.5 7,427 6.3 3,005 2.9

Standalone Subsidiary Consolidated


Standalone entity

• On standalone basis, operating profits dipped significantly, which is primarily on account of increase in material cost.

• On a standalone basis PL during FY10 has taken a charge of INR 3.0 bn on account of cost overrun in the Heera project during FY09. The company has also recognized a revenue of INR 2.4 bn towards claims filed, which are pending to be accepted.

• Liquidated damages of INR 0.7 bn deducted by one of the customers has not been provided.

Subsidiaries

• Subsidiaries continued to be an overhang on the company. After adjusting for one offs (Ensus during FY10 and SABIC during FY09), the EBIT level profitability has dipped. The same is primarily on account of dip in revenues.



4

Cash flow analysis (INR mn)

Particulars FY10

Profit before tax 210

Non operating (profit)/Loss (261)

Non cash adjustments 2,490

Direct taxes paid (1,617)

Operating profit before working capital changes 822

Increase in inventory (9,775)

Decrease in debtors 4,071

Increase in other current assets 245

Increase in loans and advances (1,309)

Decrease in current liabilities and provision (9,413)

Increase in working capital (16,181)

Net cash from operating activities (15,359)

Interest paid (2,690)

Net cash from operating activities post interest (18,049) Source: Company’s annual report, Edelweiss research

Movement in shareholders fund (INR mn) Particulars FY10


Add

Forex gain on long term liabilities 274

Issue of shares (Net of issue espenses) 6,556

Ammortisation of forex losses of previous yr 225

7,055

Less

Loss for the year 1,084

Exchange difference in Non Integral operations 391

Proposed dividend (incl tax) 58

Premium on redemption of FCCB 81

Others 3

1,617

Closing shareholders fund 30,283 Source: Company’s annual report, Edelweiss research

Unexecuted order book versus revenues

0

60

120

180

240

300


(IN

R b

n)

Unexecuted order book Revenue


Increased working capital requirements stretched operating

cash flows….

… QIB issue offered some respite

Unexecuted order book continued to expand during the

year; though revenues have dipped

Punj Lloyd


5

Sources of funds

0.0

20.0

40.0

60.0

80.0

100.0


(%)

Shareholder's fund Minority interest Loan funds

Deferred tax liability Current liabilities Provisions



0.0

20.0

40.0

60.0

80.0

100.0


(%)

Fixed Assets Investments Inventories

Debtors Cash & bank Other current assets


Borrowing cost analysis

0.0

3.0

6.0

9.0

12.0

15.0

0

10

20

30

40

50


(%)

(IN

R b

n)

Loan funds Borrowing cost Source: Company’s annual report, Edelweiss research

Proportion of funds invested in

inventories increased during the year

Loan book (incl. bank overdraft) increased from INR 37.4 bn in FY09 to INR 44.6 bn

in FY10



6


0

50

100

150

200

250


(days)



Cash conversion cycle has increased from 109 days in FY09 to 174 days in FY10, primarily on account of increase in inventory days from 125 days in FY09 to 185 in FY10, and decrease in payable days from 99 days to 88 days, partly compensated by decrease in receivable days from 82 days in FY09 to 76 in FY10.



Sales 16,846 51,266 77,529 118,761 104,478

Total income 17,166 52,059 78,711 120,019 108,748

EBITDA 1,909 4,103 6,922 4,044 3,645

EBITDA margin (%) 11.3 8.0 8.9 3.4 3.5

Depreciation 604 1,062 1,462 1,771 2,270

Adjusted financial costs 794 1,185 1,806 3,519 5,435

Net profit 555 1,969 3,584 (2,253) (1,084)


Loan funds 5,565 16,992 16,077 37,393 44,567

Net fixed assets 7,176 13,622 16,233 21,727 23,382




Cash flow from operating activities 2 614 (5,183) (7,694) (15,359)

Cash flow from investing activities (2,572) (8,083) (7,348) (7,701) 896


Net cash flows 705 3,159 (3,514) 1,839 (766)

CAPEX (2,556) (5,124) (4,996) (7,946) (3,161)

Working capital investments (1,752) (2,912) (11,612) (10,219) (16,181) Source: Company’s annual report, Edelweiss research

Margins dip on rising material cost and quality management expenses

Suzlon Energy’s (Suzlon) revenues dipped 20.9% to INR 206.2 bn in FY10 from INR 260.8 bn in FY09. EBIDTA margins slipped to 5.1% in FY10 from 10.7% in FY09, primarily owing to rise in raw material prices and high quality management expenses.

Expenses related to high quality management continue to be an overhang; increased from INR 9.7 bn (3.8% of revenues) in FY09 to INR 10.1 bn (4.9% of revenues) in FY10 (refer page 2 for details).

On standalone basis, revenues halved to INR 34.9 bn in FY10. The company incurred cash losses during the year.

Restructuring, Hansen stake sale, fresh issues offer respite to stretched cash flows

During the year, Suzlon (standalone) had delayed repayment of its financial liabilities amounting to INR 10.8 bn (refer page 3 for details). However, as at FY10 end, all delays had been rectified.

The company, entered a debt consolidation and refinance arrangement with a consortium of banks and FIs. Also, loan of INR 38.4 bn raised by foreign subsidiaries for Hansen and RE Power acquisition has been refinanced by raising fresh loans of USD 465 mn and partly through Hansen stake sale (refer page 3 for details).

Consultancy charges of INR 2.6 bn (30.6% of PBT) had been incurred on account of the above refinancing arrangements that have been deferred to be amortised over the tenure of the respective facilities.

FCCB due in June 2012 and October 2012 has been restructured, and a net gain of USD of INR 2.5 bn has been recognised. The company has also incurred an expense of INR 1.3 on restructuring of other loans. Net gains of INR 1.2 bn have been recognised as exceptional income.

Suzlon disposed 35.2% stake in Hansen Transmission International (Hansen), reducing its holding to 26.1%; Hansen is classified as an associate (against a subsidiary earlier). Residual investment in Hansen is stated at INR 10 bn and profit on sale of part stake aggregating INR 2.5 bn is disclosed as an exceptional item.

In FY10, Suzlon issued ZCCB of USD 90.0 mn (due in 2014). The conversion makes economic sense at INR 121.3.

In FY10, the company raised USD 108.0 mn (INR 5.2 bn) through issuance of 14.6 mn GDRs representing 58.4 mn equity shares at a price of INR 89.6 per equity share.

Cash conversion cycle has increased to 109 days in FY10 (FY09: 79 days), primarily on account of increase in inventory days and receivable days, partly offset by rise in payable days.

Debtor days increased to 75 in FY10 (FY09: 60) primarily on account of extended deferred credit of INR 10.4 bn given to a US based sticky debtor at FY09 end.

Cash flow statement shows net debt of INR 3.8 bn, however, loan book has dipped to INR 126.7 bn from INR 148.7 bn, primarily owing to exchange gains and exclusion of debt in the books of Hansen. Average borrowing cost increased to 8.8% in FY10 (FY09: 7.6%).


Suzlon Energy Annual Report Analysis September 30, 2010


1


Market Data




Avg. Daily vol. BSE (’000): 28,712 Share Holding Pattern (%)

Promoters* : 53.1


FIIs : 10.4




2

Accounting policy and other highlights

In FY09, Suzlon availed the option of capitalising/deferring foreign exchange difference on long-term monetary items provided by Accounting Standard 11. In FY10, net exchange losses of INR 0.9 bn have been deferred and exchange losses aggregating INR 2.3 bn were amortised. Consequently, pre tax losses reported in FY10 are higher by 22.1% (INR 1.4 bn). Unamortised exchange losses as on March 31, 2010, aggregate INR 2.5 bn and will be amortised in FY11.

No provision is made for redemption premium on FCCBs. Consequently, pre tax losses reported in FY10 (before exceptional items) are lower by INR 1.5 bn, at ~17.9%.

ESOPs are accounted as per the intrinsic value method. Had they been valued as per fair value method, FY10 reported pre-tax losses (before exceptional items) would have been higher by INR 181.5 mn at ~2.1%.

Bank charges increased from INR 1.5 bn in FY09 to INR 2.6 bn in FY10 due to rise in processing fees and expenses in connection with the refinancing of debt.

Unhedged foreign currency exposure stands at INR 41.6 bn (net liabilities).

Standalone subsidiary analysis (INR bn) Particulars

FY09 (%) FY10 (%) FY09 (%) FY10 (%) FY09 (%) FY10 (%)

Sales 72.4 100.0 34.9 100.0 188.5 100.0 171.3 100.0 260.8 100.0 206.2 100.0

Raw materials consumed 45.4 62.8 25.2 72.2 123.1 65.3 111.1 64.9 168.6 64.6 136.3 66.1

Operating and mfg. exp. 9.5 13.1 6.7 19.1 10.4 5.5 13.3 7.8 19.9 7.6 20.0 9.7

Personnel cost 2.0 2.8 1.8 5.2 19.7 10.4 19.6 11.5 21.7 8.3 21.5 10.4

Admin. and other exp. 7.5 10.4 3.1 8.9 15.3 8.1 14.9 8.7 22.8 8.7 18.0 8.7

EBITDA 7.9 10.9 (1.8) (5.3) 20.0 10.6 12.3 7.2 27.9 10.7 10.5 5.1

Depreciation 1.0 1.4 1.3 3.6 4.7 2.5 5.4 3.1 5.7 2.2 6.6 3.2

EBIT 6.9 9.5 (3.1) (8.9) 15.3 8.1 6.9 4.1 22.2 8.5 3.8 1.9

Financial charges 4.3 6.0 7.3 21.0 6.2 3.3 7.3 4.2 10.5 4.0 14.6 7.1

EBT 2.6 3.5 (10.4) (29.9) 9.1 4.8 (0.3) (0.2) 11.6 4.5 (10.7) (5.2)


Source: Edelweiss research

Standalone performance dips significantly, incurs cash losses during the year Quality management expenses (INR mn) Particulars FY08 FY09 FY10

Provision for operation, maintenance and warranty 689 3,667 5,287

Provision for performance guarantee 1,563 2,809 2,033

Liquidated damages 245 2,843 2,151

Quality assurance expenses 76 476 605

Quality management expenses 2,572 9,795 10,076

Sales 136,794 260,817 206,197

% of sales 1.9 3.8 4.9 Source: Edelweiss research

Quality management expenses continue to

increase

Suzlon Energy


3

FCCB restructuring (USD mn)

Particulars Original Restructured Original Restructured

New bond issued (3:5) 59.3 35.6 34.7 20.8

Buy back (54.6%) 29.4 44.0

Option not excercised 211.3 211.3 121.4 121.4

Total 300.0 246.9 200.0 142.2

Cash paid on buy back 16.0 24.0

Consent fee paid 11.8 1.9

Gain 25.3 31.9

Bond series I Bond series II


FCCB outstanding

ParticularsMaturity

dateFace value(USD mn)

Face value(INR bn)

Coupon rate (%)

Conversionprice (INR)

Redemption premium (%)

Effective conversion price (INR)

Phase I Jun-12 211.3 9.9 - 97.3 45.2 141.3

Phase II Oct-12 121.4 5.7 - 97.3 44.9 140.9

Phase I (new) Jun-12 16.6 0.8 7.5 74.0 50.2 111.2

Phase II (new) Oct-12 20.8 1.0 7.5 74.0 57.7 116.8

Phase III Jul-14 90.0 4.2 - 90.4 34.2 121.3

Total 460.1 21.5 Source: Edelweiss research

Note: Conversion price as revised in April 2010

Conversion price has been reduced for original as well as restructured bonds. Fixed exchange rate has been revised to 1 USD – INR 44.60 from INR 40.83 for Phase I bonds and INR 39.87 for Phase II bonds. Restructured bonds carry higher fixed coupon along with redemption premium.

Delay in repayment of loans Particulars (INR bn) Period of delays

Letters of credit/Buyers' credit 5.7 Up to 90 days

Term loan 0.1 Up to 36 days

Working capital demand loan 3.0 Up to 125 days

Short-Term loan 1.0 Up to 12 Days

Interest liabilities 1.0 Up to 24 days

Total 10.8 Source: Edelweiss research

Loan restructuring (INR bn) Type of facility Amount sanctioned Amount of drawdown

Term loans 32.1 29.4

Term loans (Acquisition loans) 20.9 20.9

Working capital term loan 8.4 4.7

Fund based working capital 17.6 20.6

Non-Fund based facilities 39.9 19.5 Total 98.0 74.2


Restructuring option not exercised by ~ 66.5% of bond

holders, though covenants have been

modified with payment of consent

fee

Loan repayment delays were rectified as at FY10 end, with loans of INR 98.0 bn

sanctioned under the restructuring scheme

Revision in conversion price and

exchange rate will lead to higher

dilution



4


ROAE analyser analyses profitability on the scale of operating efficiency and capital allocation efficiency (detailed concept explained in Annexure A). We have analysed Suzlon’s profitability for the year ended FY08, FY09 and FY10; results and key findings of same are as follows:

Particulars


14.9 8.5 (1.0)


NOPAT margin (%) 10.9 5.9 (0.9)

B. Return from leverage (FLEV x spread) (%) 5.3 2.1 (14.1)



Net financial spread (RNOA -NBC) (%) 8.4 2.2 (8.9)

C. Return from other funding (%) 0.6 (0.6) (0.3)

ROE Derived (A+B+C) (%) 20.7 10.0 (15.4)

FY08 FY09 FY10

RoE tree

(14.1)

(0.3)

(1.0)

(15.4)

(16.0)

(12.8)

(9.6)

(6.4)

(3.2)

0.0


return from other funding

ROAE

(%)


ROAE dipped significantly primarily on account of:

Dip in NOPAT margin on the back of higher raw material price and quality management expenses.

Increase in net borrowing cost from 6.4% in FY09 to 7.9% in FY10.

Suzlon Energy


5

Sources of funds

0.0

20.0

40.0

60.0

80.0

100.0


(%)


Deferred Tax Liability Current liabilities Provisions Source: Company annual report, Edelweiss research


0.0

20.0

40.0

60.0

80.0

100.0


(%)

Fixed assets Investments Deferred Tax Asset Inventories

Sundry debtors Cash and bank Other current assets Source: Company annual report, Edelweiss research

Leverage and borrowing costs

0.0

0.5

1.0

1.5

2.0

2.5

0.0

2.7

5.4

8.1

10.8

13.5


(x)

(%)

Avg. borrowing cost Debt /equity (RHS)


Proportion of loan funds continues to

rise

Re-classification of Hansen as an

associate decreases the proportion of fixed assets and

increases investments

Leverage and borrowing costs

head North



6


0

40

80

120

160

200


(Days)



Debtor days increased from 60 days in FY09 to 75 in FY10 primarily on account of sales towards FY09 end to a US based customer, on which Suzlon had agreed to extend deferred credit of INR 10.4 bn, payable on achievement of performance milestone by the WTGs or at the end of the agreed credit period, whichever is earlier.


Sales 38,410 79,857 136,794 260,817 206,197

Total income 39,155 80,899 139,474 265,305 208,487

EBITDA 8,792 13,123 20,840 27,915 10,465

EBITDA margin (%) 22.9 16.4 15.2 10.7 5.1

Depreciation 716 1,718 2,894 5,731 6,630

Financial costs 648 2,763 5,969 10,539 14,580

Net profit 7,595 8,640 10,301 2,365 (9,826)


Loan funds 4,657 51,620 99,346 148,696 126,679

Net fixed assets 6,409 40,732 56,877 152,654 105,741




Cash flow from operating activities (3,540) 7,372 12,043 (12,238) 22,343


Cash flow from financing activities 11,315 (39,695) 88,141 33,966 (6,546)

Net cash flows 3,970 (69,522) 53,817 (46,717) 7,347

CAPEX (4,060) (10,218) (21,287) (33,308) (10,906)

Working capital investments (13,329) (7,335) (12,196) (41,931) (393) Source: Company annual report, Edelweiss research

Inventories and receivables lengthen

cash conversion cycle; partially offset

by higher payables



Stake hike in subsidiary led to increase in goodwill and reserves

Educomp Solutions (Educomp) held 69.4% stake in Educomp Infrastructure and School Management (EISML) for INR 500 mn. During FY10, it invested additional INR 4.9 bn in EISML towards incremental 8.8%, hiking its stake to 78.2%. The balance 22.8% is owned by the promoter and third party.

EISML’s valuation, which hosts K12 business, has been computed by independent valuers. Its imputed valuation, based on consideration paid by Educomp towards incremental stake, is INR 16.4 bn (refer page 3 for details).

Cumulatively, Educomp has infused INR 5.40 bn in EISML towards equity till FY10. EISML’s net worth (ex-retained earnings) stands at INR 5.43 bn (refer page 3 for details).

Goodwill has jumped from INR 1.2 bn to INR 6.0 bn (36.6% of net worth), out of which INR 4.6 bn is towards the EISML transaction. Goodwill written off through reserves was INR 0.8 bn.

Increase in security premium is INR 4.6 bn higher than premium received on equity issuances by Educomp, which is on account of increase in EISML’s goodwill.

Educomp has given corporate guarantee of INR 6.3 bn against loan extended to EISML. Loans outstanding as at FY10 end stood at INR 3.6 bn.

BOOT to outright sale advances revenue/cash flow…

During the year, Educomp changed the smart class business model from BOOT to outright sale and transferred all existing BOOT projects to EduSmart Services. This will advance revenue booking as well as cash flows through securitisation which is backed by corporate guarantee from Educomp.

Corporate guarantee given to banks for secured loans obtained by third parties (primarily Edusmart) stood at INR 6.6 bn.

The company’s revenue jumped 63.2% from INR 6.4 bn in FY09 to INR 10.4 bn in FY10. However, EBIDTA margins dipped from 48.1% in FY09 to 46.9% in FY10.

…. IFRS may lead to Edusmart’s consolidation

Post migration to IFRS, in our view, considering the nature of transaction between Educomp and EduSmart, the latter is likely to be consolidated with the former, leading to elimination of revenues, profitability, and other inter-company transactions.

This will also lead to consolidation of outstanding loans and receivables in Edusmart’s balance sheet.

Increasing debtor stretches cash conversion cycle; debtors > six months surge

Debtors increased ~100% from INR 2.8 bn in FY09 to INR 5.6 bn in FY10, which, as a percentage of sales, stood at 53.2% (FY09:43.4%). However, debtors exceeding six months jumped from INR 0.8 bn in FY09 to INR 1.3 bn in FY10.

The increase in debtors is primarily on account of amount to be received from Edusmart pending securitisation.


Educomp Solutions Annual Report Analysis October 20, 2010


1

Market Data



M cap (INR bn/USD mn): 58.2 / 1,310


Promoters : 49.8


FIIs : 38.5




2

The company’s cash conversion cycle increased from 62 days in FY09 to 106 days in FY10, primarily on account of increase in debtor days from 112 in FY09 to 146 in FY10.

FCCB maturing in July 2012; redemption premium not provided for

The company has FCCBs outstanding of USD 78.5 mn convertible at INR 589.9 per share on or before July 2012 (conversion makes economic sense at INR 832.4). Educomp has not provided for the redemption premium, but shown it as a contingent liability of INR 1.5 bn on FCCBs. Had the same been charged through P&L on YTM basis, FY10 PAT would have been lower by 6.3% (INR 173.3 mn).

Increase in net worth on QIP/consolidation leads to reduction in D/E ratio

Net worth has increased due to :

• INR 6.0 bn (net of issue expenses) raised through QIP.

• Additional increase of INR 4.6 bn to security premium on consolidation (refer page 3 for details).

Loan book increased from INR 8.9 bn in FY09 to INR 10.5 bn in FY10. The company’s average borrowing cost also increased to 9.8% (FY09: 9.3%).

Debt equity reduced to 0.6x (FY09: 2.3x) primarily on account of the above.

Educomp, during the year, acquired the business of Zaptive Internet Services for an aggregate consideration of INR 60.2 mn. The consideration has been discharged partly through cash of INR 18.5 mn and balance by issue of 52,616 equity shares.


Other income increased from INR 0.3 bn in FY09 to INR 1.3 bn in FY10 due to profit on sale of business/ investment of INR 0.9 bn (20.6% of PBT).

Performance of subsidiaries dampened the company’s overall performance. Of the 43 subsidiaries, only 17 are operational and six profit making at the PBT level (refer page 5 for details).

Cash & bank and investments increased from INR 2.6 bn in FY09 to INR 8.2 bn in FY10.

Fixed assets (excluding goodwill) increased 31.1% due to rise in freehold land to INR 3.9 bn (FY09 INR 472.9 mn), which has been partially set off by decrease in computers to INR 377 mn (FY09: INR 2.6 bn) and furniture to INR 131 mn (FY09: INR 518 mn). Decrease in assets is due to transfer of BOOT projects and vocational business.

Educomp has invested in non convertible redeemable preference shares of INR 200 mn in EduSmart.

Net assets invested in K12 business increased from INR 2.3 bn in FY09 to INR 11.3 bn in FY10.

EISML growth track (INR mn) Year Capital Reserve Networth Turnover PAT

Cummulative Incremental

FY07 0.2 251.8 252.1 - 2.0 250.1 250.0 250.0* 69.4

FY08 0.3 508.0 508.3 16.6 6.2 500.1 500.0 250.0 69.4

FY09 10.8 580.7 591.5 316.6 108.9 474.4 500.0 - 69.4

FY10 247.2 5,401.8 5,649.0 564.0 176.1 5,429.9 5,397.5 4,897.5 78.2

Networth ex-retained earnings

Educomp's stake (%)

Cash infusion for equity by Educomp

Source: Company Annual Report, Edelweiss research

Note : * Partly paid shares issued . Fully paid in FY08

Commulatively, Educomp has invested INR 5.4 bn in EISML towards equity till FY10. EISML’s net worth stands at INR 5.7 bn.

Educomp Solutions


3

EISML equity share movement analysis Equity shares (mn) EMISL Educomp Others

Stake holding FY09 (%) 69.4 30.6

Opening 1.1 0.8 0.3

Bonus (1:15) 16.2 11.2 5.0

Fresh Issue 7.5 7.4 0.1

Closing 24.8 19.4 5.4

Stake holding FY10 (%) 78.2 21.8 Source: Company Annual Report, Edelweiss research

EISML imputed valuation based on incremental shares purchased Particulars

Shares acquired by Educomp (mn) 7.4

Consideration Paid by Educomp (INR mn) 4,897.5

Consideration paid per share (INR) 664.4

Total Shares outstanding (mn) 24.7

Imputed valuation of ESIML (INR mn) 16,424.9

Share premium reconciliation statement Particulars (INR mn)

Share premium addition as per BS schedule 10,814

Share premium on issue of equity shares 6,159

ESOPs 67

QIP 6,051

Issued to Zaptive Internet services for business acquisition 42

Difference 4,654 Source: Company Annual Report, Edelweiss research


ROE analyser analyses profitability on the scale of operating efficiency and capital allocation efficiency (detailed concept explained in Annexure A). We have analysed Educomp’s profitability for FY08, FY09, and FY10; results and key findings are given below:

ROE analyser Particulars FY08 FY09 FY10


24.5 19.4 14.7


NOPAT margin (%) 22.8 23.4 23.2



NBC (net borrowing cost) (%) (10.0) 3.0 (8.1)



ROE Derived (A+B+C) (%) 34.4 39.0 26.7 Source: Company Annual Report, Edelweiss research

Educomp paid INR 4.9 bn @ 664/ share

towards incremental 8.8% stake

Difference is on account of increase in

goodwill on EISML consolidation



4

RoE tree

10.6

1.4

14.7

26.7

0.0

6.0

12.0

18.0

24.0

30.0



ROAE

(%)


RoAE dipped on account of Decrease in RNOA, primarily attributable to low operating asset turnover for incremental

investment in K12 business segment yet to reap result.

Dip in financial leverage, primarily on account of fresh issue of equity under QIP / ESOP.

NBC was negative due to profit on sale of investment of INR 725.5 mn recognised during the year and non charging FCCB redemption premium through P&L.

Parent-subsidiary operating performance analysis

(INR mn) Particulars

FY09 (%) FY10 (%) FY09 (%) FY10 (%) FY09 (%) FY10 (%)

Sales 5,012 100.0 8,322 100.0 1,359 100.0 2,073 100.0 6,371 100.0 10,395 100.0

Raw materials consumed 1,033 20.6 1,481 17.8 77 5.7 122 5.9 1,110 17.4 1,603 15.4Operating and manufacturing 121 2.4 310 3.7 62 4.6 218 10.5 183 2.9 528 5.1

Personnel cost 611 12.2 999 12.0 544 40.0 794 38.3 1,155 18.1 1,793 17.2

Administrative andother expenses

496 9.9 904 10.9 362 26.6 689 33.2 858 13.5 1,593 15.3

EBITDA 2,749 54.9 4,627 55.6 391 28.8 372 17.9 3,064 48.1 4,877 46.9

Depreciation 752 15.0 907 10.9 62 4.6 235 11.3 814 12.8 1,142 11.0

EBIT 1,997 39.8 3,720 44.7 329 24.2 137 6.6 2,249 35.3 3,735 35.9

Financial Charges 140 2.8 372 4.5 162 11.9 217 10.5 302 4.7 590 5.7

EBT 1,857 37.1 3,348 40.2 167 12.3 (80) (3.9) 1,947 30.6 3,145 30.3



• Despite of change in business model from BOOT to outright sale, EBIDTA margins on a

standalone basis increased marginally from 54.9% in FY09 to 55.6% in FY10.

• Subsidiaries dampened the company’s overall profitability.

Educomp Solutions


5

Subsidiary analysis

(INR mn)

Subsidiary company

Networth Turnover PBT Networth Turnover PBT

Educomp Asia Pacific Pte. 100.0 360.1 - (4.4) 1,155.6 - 696.7 Educomp Infrastructure and School 78.2 591.5 316.6 152.8 5,649.0 564.0 267.6

Learning Internet Inc. USA 54.7 919.9 541.5 86.6 862.5 722.4 70.7

EuroKids International 50.0 352.5 103.6 21.2 512.6 292.5 55.4

Educomp Learning 51.0 72.8 61.9 27.7 80.4 61.9 11.6

Singapore Learning.com Pte. 100.0 6.3 9.6 5.8 8.8 10.9 2.8

A Plus Education Solutions - 43.3 1.9 (11.5) 0.0 - 0.0

Educomp Software 100.0 (0.4) 1.6 (0.9) (0.4) 2.6 (0.0)

Wheitstone Productions 51.0 (1.8) - - (1.9) - (0.1)

Evergreen Realtech 77.9 - - - 65.6 - (0.1)

Zeta Buildcon 78.1 - - - 120.7 - (0.1)

Boston Realtech 77.9 - - - 68.6 - (0.1)

Onega Infrastructure 78.0 - - - 85.7 - (0.1)

Grider Infratech 78.0 - - - 106.6 - (0.1)

Euroschool International 50.0 - - - 0.7 - (0.2)

Educomp IntelProp Ventures Pte 100.0 - - - 40.1 - (0.3)

Educomp Infrastructure Services 78.2 0.1 - - (0.2) - (0.3)

Good Luck Structure 77.9 - - - 56.6 - (0.3)

Newzone Infrastructure 77.9 - - - 69.3 - (0.4)

Leading Edge Infratech 78.0 - - - 76.3 - (0.4)

Crosshome Developers 78.0 - - - 75.4 - (0.4)

Rockstrong Infratech 78.0 - - - 87.2 - (0.4)

Reverie Infratech 78.0 - - - 157.2 - (0.5)

Strotech Infrastructure 78.0 - - - 94.7 - (0.5)

Markus Infrastructure 78.0 - - - 104.4 - (0.5)

Growzone Infrastructure 78.0 - - - 107.2 - (0.5)

Orlando Builders 78.0 - - - 109.5 - (0.5)

Herald Infra 78.1 - - - 171.1 - (0.5)

Hidream Constructions 78.1 - - - 263.0 - (0.5)

Falcate Builders 78.0 - - - 187.1 - (0.5)

Educomp Online Supplemental Services 100.0 - - - (0.1) - (0.6)

Educomp School Management 68.0 108.6 72.2 53.8 108.4 5.1 (0.6)

Sikhya Solutions Inc. 72.0 (0.1) 6.1 (5.6) 0.6 11.4 (0.7)

Wiz Learn Pte 100.0 26.7 6.2 (5.8) 23.9 6.1 (1.0)

Pave Education Pte. 100.0 23.6 41.5 5.9 19.4 28.1 (3.1)

EuroKids India 50.0 46.1 24.7 2.4 57.5 52.8 (3.6)

Ask N Learn Pte. 100.0 105.0 189.1 (0.5) 349.2 217.1 (6.2)

Edumatics Corporation Inc. USA 100.0 4.2 48.3 (8.0) 10.7 48.4 (10.9)

Educomp Professional Education 100.0 325.3 1.9 (11.5) 576.0 - (12.3)

Educomp Child Care 100.0 - - - 79.0 29.8 (19.6)

Educomp APAC Services Ltd. BVI 78.2 925.9 - - 897.9 - (27.8)

Educomp Learning Hour 76.3 (5.6) 10.0 (22.1) 41.5 11.6 (32.9)

Authorgen Technologies 72.0 16.4 0.7 (31.8) 39.6 4.5 (36.3)

Savvica Inc., Canada 72.6 8.9 2.4 (27.1) (5.6) 10.2 (52.8)

FY09 FY10% shareholding

FY10


Of the 43 subsidiaries:

• Only 17 are operational.

• Only six are profit making at the PBT level.



6

Segmental analysis

Segment FY09 FY10 FY09 FY10

Higher learning solution 310 265 29.6 (42.0)

School learning solution 4,322 8,068 48.6 55.8

K-12 621 997 44.2 32.3

Online & retail 1,118 1,066 18.3 (14.7)

6,371 10,395 41.9 43.8

Revenue (INR mn) EBIT margins(%)

Segment FY09 FY10 FY09 FY10

Higher learning solution 561.4 457.8 16.3 (24.3)

School learning solution 5,777.1 5,486.8 36.4 82.1

K-12 2,252.5 11,314.0 12.2 2.8

Online & retail 1,144.6 1,755.3 17.8 (8.9)

9,735.6 19,013.9 27.4 24.0

Net assets (INR mn) Return on net assets (%)


Goodwill on consolidation

(INR mn) Particulars FY09 FY10

Educomp Learning 0.7 0.7

Edumatics Corporation Inc. 26.0 26.0

Wheitstone Productions 3.4 3.4

Educomp Infrastructure & School Management 152.4 4,754.6

Educomp School Management 10.0 10.0

Educomp Learning Hour 5.2 85.0

Authrorgen Technologies 12.0 73.0

Educomp Asia Pacific 727.4 727.4

A Plus Education Solutions 26.6 0.0

Savvica Inc 41.7 75.9

Educomp Higher Initiative 0.0 33.7

Educomp Professional Education 0.0 21.7

Eurokids International 223 223

Total 1,228 6,034 Source: Company Annual Report, Edelweiss research

Goodwill on consolidation increased significantly, primarily on account of hiking its stake in Educomp Infrastructure and School Management to 78.2% (FY09 69.4%) by investing INR 4.9 bn.

Net assets in K12 business segment have jumped from

INR 2.3 bn in FY09 to INR 11.3 bn in FY10

Increasing stake in EISML led to goodwill

jumping to INR 4.8 bn

Educomp Solutions


7

Movement in shareholders’ fund (INR mn) Particulars FY10


Add

Issue of shares on QIP, ESOP and business acquisition (as reported net of issue exp.) 10,664

Profit for the year* 2,771

Change in Foreign Currency Monetary Items Translation Diff A/c 350

Others 4.0

13,789

Less

Proposed Dividend (incl tax) 333

Change in Foreign Currency Translation reserve 29

Adj to goodwill on further investment 793

1,154

Closing shareholders' fund 16,479 Source: Company Annual Report, Edelweiss research

* excl. amortisation of misc/ prelim.exp. Goodwill write off directly adjusted through reserves


Profit before tax 4,392

Non operating (profit)/Loss (686)


Direct taxes paid (909)


Increase in trade and other receivables (1,680)

Increase in Loans and Advances (473)

Increase in trade and other payables 277

Increase in inventories (34)



Interest Paid (411)

Net cash from operating activities post interest 1,784 Source: Company Annual Report, Edelweiss research

Net cash flow from operating activity stood at INR 2.2 bn despite a PBT of INR 4.4 bn primarily on account of increase in debtors by INR 1.7 bn.



8


Sources of funds

0.0

20.0

40.0

60.0

80.0

100.0


(%)

Shareholders' funds Loan funds Minority interest

Deferred Tax Liability Current liabilities Provisions Application of funds

0.0

20.0

40.0

60.0

80.0

100.0


(%)

Goodwill Fixed assets Investments Inventories

Sundry debtors Cash and bank Other current assets


0

35

70

105

140

175


(Days)

Inventory days Receivable days Payable days Cash conversion cycle Source: Company Annual Report, Edelweiss research

Debt equity improved primarily on account of issuance of fresh

equity

Proportion of funds invested in goodwill

increased while proportion of fixed

assets dipped

Cash conversion cycle increased from 62

days in FY09 to 106 days in FY10 due to

increase in receivable days from 112 to 146

during the same period

Educomp Solutions


9

Summary financials


Sales 555 1,101 2,861 6,371 10,395

Total income 570 1,160 3,038 6,598 11,650

EBITDA 270 516 1,281 3,064 4,877

EBITDA margin (%) 48.7 46.9 44.8 48.1 46.9

Depreciation 56 96 331 814 1,142

Financial costs 8 21 65 302 590

Net profit 139 287 706 1,329 2,759

Equity shareholders' funds 894 1,147 2,883 3,844 16,479

Loan funds 110 1,255 3,773 8,895 10,478

Net fixed assets 252 831 2,714 8,126 10,656

Current assets loans and advances 930 1,761 4,639 6,153 15,816

Current liabilities and provisions 182 242 610 2,251 3,963

Net current assets 748 1,519 4,029 3,903 11,853

Cash flow from operating activities 134 165 505 1,914 2,195

Cash flow from investing activities (167) (719) (2,102) (6,751) (3,722)

Cash flow from financing activities 616 1,088 3,393 3,826 7,462

Net cash flows 583 534 1,796 (1,011) 5,936

CAPEX (162) (675) (2,224) (5,786) (6,855)

Working capital investments (99) (225) (730) (1,023) (1,910) Source: Company Annual Report, Edelweiss research



Operating cash flow remains subdued

United Spirits’ (USL) operating cash flow during FY10 remained under pressure due to increased working capital requirement. Non-cash adjustment in respect of unrealised forex loss however supported the strained operating cash flows.

Debtors jumped 50.9%, from INR 8.9 bn in FY09 to INR 13.4 bn in FY10, and were at 21.1% of sales (FY09: 16.2%).

Cash flow states that, during FY10, the company incurred unrealized foreign exchange losses of INR 5.7 bn; however, net forex losses charged to the P&L stood at INR 3.1 bn.

Un-realised forex loss of INR 5.7 bn adjusted in the cash flow comprises of INR 2.9 bn on account of amortisation of forex losses incurred on debt (of which INR 1.9 bn is for debt repaid during the year), and INR 2.5 bn and INR 0.3 bn of account of movement in goodwill and fixed assets, respectively.

Treasury sale/QIP trims debt; borrowing cost may rise on shift to domestic debt

During FY10, USL, through its subsidiary, sold 10.3 mn treasury shares for INR 8.9 bn. The same has been shown as exceptional and non-recurring items under cash from operations.

USL also raised INR 16.2 bn by issuing 17.7 mn equity shares via QIP.

During Q4FY10, ~INR 14.5 bn domestic debt was raised in the standalone entity, which along with funds raised above, were utilised to extend interest free loans of INR 32.1 bn to its wholly owned subsidiary, USL Holdings, UK (USLH), to repay the W&M acquisition debt.

Consequently, the company’s D/E dipped from 4.2x in FY09 to 1.5x in FY10.

Interest free loan extended to USLH are likely to be converted into equity share of the subsidiary in the near future.


USL’s sales increased 16.4%, from INR 54.7 bn in FY09 to INR 63.6 bn in FY10. EBIDTA margin rose from 14.1% in FY09 to 16.2%, primarily on account of lower actuarial loss on pension fund. Ex-pension, EBIDTA loss was flat at 17.1% (FY09: 17.3%).

During the year, W&M has provided INR 0.6 bn (FY09: INR 1.7 bn) on account of actuarial loss on pension fund. Present value of the obligation and fair value of plan assets as at FY10 end stood at INR 8.2 bn and INR 7.3 bn, respectively. Further details in respect of assumptions and investment book break up for defined pension fund are not available.

USL has also reported derivative loss of INR 1.4 bn in FY10 (FY09 INR 1.4 bn), which, in our view, is primarily on account of interest rate swaps. MTM charge of the same is included in interest expenses.

Goodwill stands at INR 42.4 bn, at ~118% of net worth. Treasury shares included in net worth stand at INR 1.2 bn (3.3% of net worth).


United Spirits Annual Report Analysis November 10, 2010


1

Market Data

52-week range (INR): 1,683 / 1,057




Promoters : 29.2


FIIs : 48.9




2

Miscellaneous expenditure (yet to be amortised) stands at INR 448 mn (FY08: INR 733 mn), which has been incurred for raising loans.

As at FY10 end, the company held 8.4 mn treasury shares (FY09: 13.8 mn), of which, 4.9 mn treasury shares had been issued during the year to its subsidiaries, pursuant to the scheme of amalgamation with Shaw Wallace & Company.

USL has still reported a loss after tax, primarily on account of higher tax expenses. Effective tax rate for the year stood at 113.7%.

During the year, the company acquired 100% stake in Tern Distilleries, engaged in the business of alcoholic beverages, for a sum of INR 139.5 mn.


Profit before tax and exceptional & non recurring items 1,000


Unrealised exchange loss (net) 5,743

Other non cash adjustments 1,355




Increase in trade payables 1,093

Decrease in inventories 42


Net cash from operating activities before exceptional & non recurring items

7,002

Interst expenses paid 5,801

Net cash from operating activities before exceptioanl & non recurring items post interest

1,201


Parent-subsidiary financial analysis (INR mn) Particulars

FY09 % FY10 % FY09 % FY10 % FY09 % FY10 %

Sales 40,895 100.0 49,289 100.0 13,785 100.0 14,334 100.0 54,681 100.0 63,623 100.0

Raw materials consumed 23,118 56.5 27,469 55.7 3,791 27.5 4,310 30.1 26,909 49.2 31,778 49.9

Operating expenses 1,344 3.3 1,706 3.5 1,377 10.0 1,654 11.5 2,721 5.0 3,360 5.3

Personnel cost 2,592 6.3 2,904 5.9 3,902 28.3 2,405 16.8 6,495 11.9 5,310 8.3

Administrative expenses 7,565 18.5 9,470 19.2 3,287 23.8 3,390 23.6 10,852 19.8 12,860 20.2

EBITDA 6,277 15.3 7,740 15.7 1,427 10.4 2,576 18.0 7,704 14.1 10,315 16.2

Pension liability - - - - 1,746 12.7 577 4.0 1,746 3.2 577 0.9

EBITDA ex- pension liability 6,277 15.3 7,740 15.7 3,173 23.0 3,152 22.0 9,450 17.3 10,892 17.1



EBIDTA margin improved from 14.1% in FY09 to 16.2% in FY10 primarily on account of reduced charge on account of pension liability . Excluding pension liability charge EBIDTA margins dipped marginally from 17.3% in FY09 to 17.1% in FY10

Operating cash flow remained subdued on account of increase in

debtors

Unrealised exchange losses included INR

2.5 bn on account of movement in

goodwill

United Spirits


3

Subsidiaries financials

(INR mn) Subsidiary company % shareholding

as on FY10 Networth Turnover PAT Networth Turnover PAT

Whyte and Mackay Group 100.0 4,691 12,793 258 5,591 11,913 1,185

Bouvet Ladubay S.A.S. 100.0 891 1,087 18 840 1,108 46

Royal Challengers Sports 100.0 (64) 502 (56) (117) 913 (53)

United Spirits Nepal 82.5 68 432 39 55 665 56

Chapin Landais S.A.S. 100.0 12 200 1 12 178 0

Tern Distilleries 100.0 - - - (8) 176 (2)

Four Seasons Wines 51.0 (75) 23 (79) 49 127 (69)

Montrose International S.A 100.0 35 89 13 34 103 3

Liquidity 51.0 (48) 27 (67) (230) 29 (56)

United Spirits (Shanghai) 100.0 5 22 (26) (1) 14 (5)

United Vintners 100.0 (24) 6 (13) (30) 2 (6)

Shaw Wallace Breweries 100.0 5,001 - 227 5,171 - 170

USL Holdings 100.0 1,587 - 478 912 - 458

Palmer Investment Group 100.0 823 - (0) 731 - 3

RG Shaw & Company 100.0 81 - 18 79 - 3

McDowell & Co. (ScotLand) 100.0 46 - (35) 36 - (8)

Shaw Wallace Overseas 100.0 14 - 1 35 - 0

Shaw Scott & Company 100.0 14 - 5 14 - 1

Shaw Darby & Company 100.0 14 - 3 14 - 1

Thames Rice Milling Company 100.0 13 - 2 13 - 1

JIHL Nominees 100.0 9 - 2 9 - 1

Spring Valley Investments Holdings 100.0 2 - (0) 2 - 0

Herbertsons 100.0 1 - (0) 1 - (0)

United Alcobev 100.0 0 - (0) 0 - (0)

McDowell Beverages 100.0 0 - (0) 0 - (1)

McDowell and Company 100.0 0 - (0) 0 - (0)

Jasmine Flavours and Fragrances 100.0 (0) - (0) (0) - (0)

United Spirits (UK) 100.0 (0) - (0) (1) - (0)

Daffodils Flavours & Fragrances 100.0 (1) - 1 (1) - 0

Ramanretti Investments & Trading 100.0 (6) - (0) (6) - (0)

Asian Opportunities & Investments 100.0 155 - (61) (14) - (97)

United Spirits (Great Britain) 100.0 (2,216) - (1,251) (2,768) - (687)

USL Holdings (UK) 100.0 (14,423) - (6,403) (11,019) - (4,572)

Total 15,182 (6,925) 15,228 (3,629)

FY10FY09


Repyament of debt will lead to improvement in profitability margin



4


ROE analyser analyses profitability on the scale of operating efficiency and capital allocation efficiency (detailed concept explained in Annexure A). We have analysed USL’s profitability for year ended FY08, FY09, and FY10, results and key findings of the same are as follows:

ROE analyser Particulars FY08 FY09 FY10


11.4 3.4 5.6


NOPAT margin (%) 13.8 5.6 8.2





C. Return from other funding (%) (0.4) 0.2 0.0

ROE Derived (A+B+C) (%) 15.3 (21.5) (3.0) Source: Company annual report, Edelweiss research

RoE tree

5.6

(8.7) (3.0)

(4.0)

(2.0)

0.0

2.0

4.0

6.0


(%)


Expansion in NOPAT margin and lower

leverage led to improvement in ROAE

for the year

United Spirits


5


Sources of funds

0.0

20.0

40.0

60.0

80.0

100.0


(%)

Equity shareholders' funds Loan fundsMinority interest Term laibility towards frachisee rightsDeferred tax liability Current liabilitiesProvisions


0.0

20.0

40.0

60.0

80.0

100.0


(%)

Fixed assets (incl goodwill) Investments Deferred tax asset

Inventories Sundry debtors Cash and bank

Other current assets Loans and advances Debtor analysis

0.0

5.0

10.0

15.0

20.0

25.0

0

3

6

9

12

15


(%)

(IN

R b

n)

Total Debtors (LHS) Debtors as % of revenue (RHS) Source: Company annual report, Edelweiss research

QIB issue and treasury share sale

led to increase in shareholders’ fund

Proportion of debtors increased from 7.9% in FY09 to 11.9% in

FY10

Debtors as % of revenue has

increased from 16.2% in FY09 to

21.1% in FY10



6

Leverage analysis

0.0

3.0

6.0

9.0

12.0

15.0

0.0

1.0

2.0

3.0

4.0

5.0


(%)

(x)

Debt /Equity Avg. borrowing cost (RHS)

Derivative Exposure Category Currency Cross currency

FY09 FY10

Swap USD USD - INR 35 35

Interest rate swap GBP 171 171

Forward contract Euro EURO - GBP 1.0 -

MTM loss on derivatives INR 1,350 1,374

Amount (mn)


Sales 21,485 29,618 46,275 54,681 63,623

Total income 22,328 30,851 47,772 55,921 64,590

EBITDA 2,108 4,358 10,699 7,704 10,315

EBITDA margin (%) 9.8 14.7 23.1 14.1 16.2

Depreciation 426 338 741 926 950

Financial costs 1,772 1,231 5,881 7,377 6,187

Net profit 1,254 5,670 2,721 (4,084) (227)


Loan funds 15,431 14,802 66,041 73,605 55,062

Net fixed assets 15,700 16,515 64,422 61,296 60,638




Cash flow from operating activities 520 5,301 2,673 2,354 15914*

Cash flow from investing activities (9,935) (940) (38,628) 865 (3,719)

Cash flow from financing activities 7,596 (2,195) 35,615 (4,166) (8,999)

Net cash flows (1,819) 2,167 (340) (948) 3,196

CAPEX (371) (403) (2,642) (952) (2,866)

Working capital investments (1,237) (1,860) (6,599) (4,754) (4,577) Source: Company, Edelweiss research

*Including trasury share sale of INR 8,912 mn

D/E dipped as QIB and treasury share sale proceeds were used for repayment

of debt

Derivative losses primarily on account

of interest rate swaps



Reduced derivative exposure may positively impact profitability

HCL Technologies (HCL Tech) uses hedge accounting principles for accounting of derivatives. Opening balance of derivative losses was at INR 7.8 bn, of which, INR 4.8 bn has been recognised in P&L during FY10, which is 32.5% of PBT (FY09: INR 2.4 bn; 15.2% of PBT). INR appreciation has led to MTM gains of INR 2 bn during FY10, while derivative losses of INR 1.0 bn (FY09: INR 7.8 bn) have been carried forward in reserves.

HCL Tech has reduced its derivative exposure from INR 38.9 bn as at FY09 end to INR 20.6 bn as at FY10 end.

Net un-hedged foreign currency exposure is INR 24.4 bn as at FY10 end (FY09 end: INR 20.7 bn).

Acquisitions at premium to fair value lead to substantial addition of goodwill

Goodwill stands at INR 35.2 bn as at FY10 end (FY09: INR 37.3 bn), at 56.0% (FY09: 75.5%) of net worth.

Goodwill and intangible assets for various acquisitions is higher than net consideration paid for acquisition, implying negative net tangible assets of the target companies (refer table on page 2 for details).

Healthy operating cash flow on the back of reduced working capital requirements

During FY10, HCL Tech reported strong operating cash flows of INR 17.9 bn (FY09: INR 11.2 bn) on account of reduced working capital requirements. This is despite reduction in PBT from INR 16.0 bn in FY09 to INR 14.7 bn in FY10.

Working capital investment has reduced from INR 5.8 bn in FY09 to INR (1.7) bn in FY10, primarily on account of increase in deferred revenue by INR 3.7 bn. Unbilled revenue stands at INR 5.3 bn as at FY10 end (FY09: INR 5.5 bn).

Creditors stand at INR 17.9 bn as at FY10 end (FY09: INR 20.1 bn). Average payable days at 85 days (FY09: 84 days), in our view, are high considering major operating expenses are in the form of employee expenses (51.5% of FY10 revenue).

Tax implications may affect profitability

HCL Tech’s effective tax rate has reduced to 14.8% in FY10 (FY09: 16.4%), primarily on account of reversal of income tax provision relating to SEZs of INR 0.3 bn and abolition of fringe benefit tax. This has resulted in increase in PAT by INR 0.6 bn (~4.6% of PAT).

The company may incur additional tax burden from 2012 due to expiry of the tax holiday period.


The company had issued ESOPs to its employees, which have been accounted on the intrinsic value basis. Had the company accounted the same on fair value, profit for the year would have been lower by INR 337 mn, ~2.3% of PBT.


HCL Technologies Annual Report Analysis December 23, 2010


1

Market Data





Promoters : 65.2


FIIs : 21.0




2

Upfront non-recurring costs of INR 4.1 bn in FY10 (FY09: INR 3.9 bn), arising on initial

phase of outsourcing contract and contract acquisition, are amortised on straight line basis over the term of contract.

Sluggish demand in BPO and cost pressure in software services drag margins

HCL Tech’s EBIT margins slipped from 14.2% in FY09 to 12.5% in FY10, primarily on account of negative margins from the BPO segment and higher employee/outsourcing costs under the software services segment.

EBIT in the BPO segment has decreased from INR 12.0 bn in FY09 to INR (6.1) bn, primarily on account of reduced sales volume due to recession. Correspondingly, EBIT margins have also dipped to -6.4% in FY10 (FY09: 10.7%).

Employee costs have increased from INR 51.9 bn in FY09 to INR 62.5 bn in FY10 due to increase in head-count of employees during FY10 and increase in proportion of on-site employees.

Outsourcing costs have almost doubled from INR 4.9 bn in FY09 to INR 8.9 in FY10. EBIT margins for software services have reduced from 18.8% to 15.3% (refer table).

Other highlights

During FY10, profit on sale of investments is INR 55.9 mn (FY09: INR 1,177.6 mn), which has resulted in profit realisation of 0.1% (FY09: 5.6%) on investments sold. During FY10, total proceeds from sale of mutual funds are INR 98.7 bn (FY09: INR 21.2 bn).

HCL borrowed foreign currency bridge loan of INR 24.9 bn in December 2008 to fund the Axon Group acquisition. During FY10, the company substituted the bridge loan by a long-term foreign currency loan of INR 12.1 bn and redeemable debentures of INR 10 bn.

Interest expenses on the above loans have increased from INR 0.5 bn in FY09 to INR 1.6 bn in FY10 due to full year impact of borrowings in the current year.

Movement in cash flows (INR bn)


Net worth of companies/divisions acquired from FY09 to FY10 (INR bn)

*As per the US GAAP consolidated financials. Included under goodwill in Indian GAAP financials

Particulars

Profit before tax 16.0 14.7

Non operating (profit)/Loss (2.1) 0.2

Non cash adjustments (Incl. tax provision) 4.7 4.7

Direct taxes paid (1.6) (3.4)

Cash profit after tax 17.0 16.2

Increase in trade and other receivables (5.9) (4.5)

Increase in trade and other payables 1.1 5.1

Decrease in inventories (1.0) 1.0

Decrease in working capital (5.8) 1.7

Net cash from operating activities 11.2 17.9

FY09 FY10

Name of the companyCash

considerationGoodwill

Intangible assets *

Net tangible assets

HCL Insurance BPO Services 0.2 0.2 0.3 (0.4)

HCL Expense Management Service Inc. 1.1 0.7 0.1 0.3

Axon Group 33.0 28.3 5.9 (1.2)

UCS Solutions Holding (Pty) 0.8 0.7 0.1 (0.0)

RKV Technologies 0.2 0.1 0.1 -

Total 35.3 30.1 6.5 (1.3)

During FY10, increase in unearned revenue

contributed to healthy operating

cash flows, despite increase in receivables

HCL Technologies


3

Standalone – Subsidiary analysis (INR bn)


Effective EBIT margins at the subsidiary level have reduced from 9.0% in FY09 to 6.2% in FY10 despite increase in subsidiary sales from INR 55.5 bn to INR 70.6 bn, vis-à-vis marginal increase in EBIT margins at the standalone level from 20.5% to 21.3%.


ROAE analyser analyses profitability on the scale of operating efficiency and capital allocation efficiency (detailed concept explained in Annexure A). We have analysed HCL Tech’s profitability for the year ended FY08, FY09 and FY10; results and key findings of same are as follows:

ROAE Analyser


ROAE tree


Particulars

FY09 (%) FY10 (%) FY09 (%) FY10 (%) FY09 (%) FY10 (%)

Sales 46.8 100.0 50.8 100.0 55.5 100.0 70.6 100.0 102.3 100.0 121.4 100.0

Raw materials consumed - - 0.9 1.7 2.1 3.7 3.6 5.1 2.1 2.0 4.4 3.7

Operating and manufacturing exp. 8.2 17.6 7.7 15.2 2.4 4.3 7.0 10.0 10.6 10.4 14.8 12.2

Personnel cost 19.3 41.3 21.9 43.1 32.6 58.8 40.7 57.6 51.9 50.8 62.5 51.5

Administrative and other exp. 7.1 15.3 6.7 13.3 12.2 22.0 13.5 19.1 19.4 19.0 20.2 16.7

EBITDA 12.1 25.8 13.6 26.7 6.2 11.2 5.8 8.3 18.3 17.9 19.4 16.0

Depreciation 2.5 5.4 2.7 5.4 1.2 2.2 1.4 2.0 3.8 3.7 4.2 3.4

EBIT 9.6 20.5 10.8 21.3 5.0 9.0 4.4 6.2 14.5 14.2 15.2 12.5

Standalone Subsidiary (Derived) Consolidated

Particulars


35.5 23.9 18.6


NOPAT margin (%) 11.9 11.7 10.9

B. Return from leverage (FLEV x spread) (%) (11.1) 4.2 3.6

FLEV (financial leverage) (x) (0.4) 0.1 0.3

NBC (net borrowing cost) (%) 8.5 (35.6) 4.4


ROE Derived (A+B) (%) 24.4 28.1 22.1

FY08 FY09 FY10

3.6

22.1

18.6

0.0

6.0

12.0

18.0

24.0

30.0


(%)

ROAE has reduced due to lower NOPAT

margin on the back of higher personnel and

outsourcing costs



4

Subsidiary analysis (INR mn)


Subsidiary company % shareholding

as on FY10 Networth Turnover PAT Networth Turnover PATHCL Comnet Systems and Services 99.9 5,418 7,084 2,030 6,960 6,674 1,542 HCL America Inc. 100.0 3,460 37,923 990 4,301 48,497 946 HCL Australia Services Pty. 100.0 441 3,469 328 535 4,447 637 HCL BPO Services (NI) 100.0 635 2,015 (123) 307 1,359 334 HCL Singapore Pte 100.0 913 2,074 271 843 2,479 245

Axon Solutions Inc, 100.0 2,476 15,614 (857) 3,145 8,388 152 Capital Stream Inc. 100.0 1,708 883 (121) 1,791 679 135 HCL Great Britain 100.0 615 9,957 (330) 882 9,666 125 HCL (New Zealand) 100.0 54 610 54 59 563 114 HCL Bermuda 100.0 4,254 355 89 14,795 1,051 85 HCL Technologies Canada Inc. 100.0 9 25 0 85 398 75

HCL Hong Kong SAR 100.0 (55) 201 (45) 38 388 71 HCL Comnet 99.9 1,079 4,475 47 1,145 4,706 66 HCL Axon (Proprietary) 100.0 0 34 0 56 901 54 HCL Japan 100.0 91 1,976 27 165 2,298 30 HCL (Malaysia) Sdn. Bhd 100.0 63 254 24 94 325 27 HCL Sweden AB 100.0 39 747 17 62 1,045 25

Intelicent India 100.0 229 35 25 251 34 22 HCL (Netherlands) BV 100.0 74 1,056 97 65 875 3 HCL Poland Sp.z.o.o. 100.0 (12) 79 (6) 12 244 1 Bywater 100.0 135 5 4 119 - 1 Axon Solutions (Shanghai) Co. 100.0 18 71 2 18 149 0 Axon Solutions Schweiz GmbH 100.0 4 3 0 4 - 0

HCL Hungary 100.0 - - - 2 8 (0) JSP Consulting Sdn. Bhd. 100.0 136 - (1) 144 - (0) JSPC i-Solutions Sdn Bhd 100.0 454 3 387 468 - (0) HCL Latin America Holding LLC 100.0 - - - 211 - (0) HCL Technologies Romania s.r.l. 100.0 - - - 1 5 (1) DSI Financial Solutions Pte 100.0 4 - (0) 3 - (1)

HCL Argentina s.a. 100.0 - - - 3 1 (1) Aspire Solutions Sdn. Bhd. 100.0 2 - (0) 3 - (3) HCL Technologies (Shanghai) 100.0 21 53 (18) 82 94 (6) HCL Jones Technologies LLC 51.0 39 - (8) 156 - (8) HCL Technoparks 100.0 (4) 0 (13) 10 - (8) HCL EAI Services 100.0 98 111 22 85 56 (13)

HCL Italy SLR 100.0 (37) 4 (17) 3 55 (18) Axon Group . 100.0 7 - (2) 6,499 - (25) Axon Solutions Singapore Pte 100.0 3 36 (5) 3 143 (27) HCL Belgium NV 100.0 (23) 190 (6) 4 187 (30) HCL GmbH 100.0 (102) 772 (21) 30 770 (39)

HCL (Brazil) Technologia da informacao 100.0 - - - 100 67 (87) Axon Solution (Canada) Inc. 100.0 (115) 482 (123) - 580 (98) Axon Solutions Australia Pty 100.0 (81) 287 (86) 26 251 (184) HCL Holdings GmbH 100.0 5,771 155 103 4,627 - (185) Axon Solutions 100.0 2 15 1 1,734 8,358 (223) HCL Insurance BPO Services 100.0 90 2,619 51 231 2,722 (238)

Axon Solutions Sdn. Bhd. 100.0 851 2,244 (325) 629 1,743 (267) HCL Expense Management Services 100.0 1,050 1,838 (82) 718 883 (300) HCL EAS 100.0 9,296 23 (987) 6,209 - (1,039)

Total 97,775 1,395 111,089 1,889 PAT margin (%) 1.4 1.7

FY09 FY10

HCL Technologies


5

Segment analysis

Segment revenue

Segment EBIT

Segment EBIT margin


0

180

360

540

720

900


(IN

R b

n)

Software services Business process outsourcing services Infrastructure services

(20.0)

15.0

50.0

85.0

120.0

155.0


(IN

R b

n)

Software services Business process outsourcing services Infrastructure services

(15.4)

(7.7)

0.0

7.7

15.4

23.1


(%)

Software services Business process outsourcing services

Infrastructure services

EBIT margins for BPO have gone down due

to poor demand owing to global

recession and higher operational costs in

software services



6

Margin analysis



Sources of funds



0.0

5.0

10.0

15.0

20.0

25.0

0

7

14

21

28

35


(%)

(IN

R b

n)

Debt PBT margin (%) EBITDA margin (%)

0.0

20.0

40.0

60.0

80.0

100.0


(%)


Deferred Tax Liability Current liabilities Provisions

0.0

20.0

40.0

60.0

80.0

100.0


(%)

Goodwill Fixed assets (excl goodwill) Investments

Deferred Tax Asset Inventories Sundry debtors

Cash and bank Other current assets

Goodwill, as a

proportion to total funds is 27.9%,

primarily on acquisition of Axon

Group at a significant premium

Proportion of loan funds dips, primarily

on account of repayment of bridge

loan borrowed for acquisitions made

during FY09

Drop in PBT margin is more than

proportionate to the decrease in EBITDA

margin on account of incremental finance

costs

HCL Technologies


7




Sales 45,716 60,687 75,628 102,294 121,363

Total income 46,809 65,246 77,539 104,916 122,904

EBITDA 9,113 12,340 13,083 18,295 19,406

EBITDA margin (%) 19.9 20.3 17.3 17.9 16.0

Depreciation 2,031 2,539 2,988 3,755 4,181

Financial costs 81 80 177 1,124 2,041

Net profit 6,907 13,183 10,514 13,196 12,592


Loan funds 591 769 550 30,162 27,242

Net fixed assets 9,514 11,191 15,587 54,049 54,488





Cash flow from investing activities (447) (3,408) (4,062) (25,316) (10,141)

Cash flow from financing activities (6,307) (3,822) (6,179) 22,632 (7,278)

Net cash flows 786 3,568 3,252 8,494 492

CAPEX (4,106) (3,897) (5,543) (6,388) (6,468)

Working capital investments (1,749) (5,880) 1,254 (5,830) 1,706



Re-classification of JV as integral; led to higher profitability

During FY10, C&C Constructions (C&C) reclassified its JV operations in Afghanistan from non-integral to integral. This led to PAT for the year being higher by INR 68.6 mn (11% of PAT).

WIP forms significant portion of working capital; includes unrealised profits

WIP is valued on net realisable value basis (NRV); hence, the carrying value includes the unrealised profit. WIP increased sharply by 3.4x, from INR 2.1 bn in FY09 to INR 7.2 bn in FY10.

C&C follows percentage of completion method for recognising the contract revenues. However, the company does not specify any threshold stage for commencement of recognition of revenues.

Revenue and EBIDTA growth robust; operating cash flow subdued on increase in WC

C&C’s FY10 revenue jumped 56.6% to INR 11.6 bn (FY09 INR 7.4 bn) and EBIDTA catapulted 75% to INR 2.1 bn (FY09 INR 1.2 bn).

Despite reported FY10 PBT of INR 1.0 bn (FY09: INR 0.5 bn), cash from operating activity (post interest) remained subdued at INR (0.6) bn [FY09: INR (13.0) bn], mainly due to higher working capital requirement.

Cash conversion cycle deteriorated from 181 days in FY09 to 215 days in FY10, primarily owing to rise in inventory days from 177 in FY09 to 251 in FY10. It was, however, partially compensated by decrease in receivable days from 109 in FY09 to 69 in FY10.

Capex augmented by mix of debt and equity; D/E improves on new issuances

C&C’s net block increased from INR 4.7 bn in FY09 to INR 6.3 bn in FY10. This was primarily on account of pursuing BOT projects represented by CWIP that increased from INR 1.5 bn in FY09 to INR 2.6 bn in FY10.

During FY10, C&C raised INR 0.8 bn through QIP and INR 0.5 bn through preferential allotment of equity shares to promoter group on conversion of warrants.

Loan book increased from INR 6.7 bn in FY09 to INR 8.3 bn in FY10. D/E improved marginally, from 1.9x in FY09 to 1.6x in FY10.

Average borrowing cost charged to P&L (excl. interest capitalised) was 10.3% in FY10. The company capitalises the interest cost to carrying cost of CWIP/inventory. Details on interest capitalised have not been disclosed.

Revenue mix to undergo a rejig as company ventures into new businesses

C&C intends to expand its presence across infrastructure segments; besides developing roads, it is also undertaking projects for buildings, railways and water & sewerage projects.

The company’s order book, as at FY10 end, stood at INR 26.1 bn (FY09 INR 34.2 bn); of this, INR 13.8 bn (FY09 22.5 bn) comprises roads and the balance other new ventures.

Note: Based on consolidated financials


C&C Constructions Annual Report Analysis December 22, 2010


1

Market Data





Promoters : 63.4


FIIs : 6.8




2


Profit before tax 1,015.6

Depreciation 455.3

Interest/Finance Charges 735.2

Non cash adjustments (Incl. tax provision) (75.3)


Cash profit after tax 1,904.7

Decrease in debtors 1,581.3

Increase in inventories (5,248.9)

Decrease in loans and advances 837.3

Increase in current liabilities 1,029.5

Increase in provisions 48.6

Increase in working capital (1,752.3)


Interest Paid (735.2)

Net cash from operating activities post interest (582.8) Source: Company Annual Report, Edelweiss research


0

60

120

180

240

300

FY07 FY08 FY09 FY10

(Days)



Cash conversion cycle deteriorated from 181 days in FY09 to 215 days in FY10, primarily on account of rise in inventory days from 177 in FY09 to 251 in FY10; this was, however, partially compensated by decrease in receivable days from 109 in FY09 to 69 in FY10

Operating cash flow subdued, primarily

due to rise in inventory

C&C Constructions


3

Inventory analysis

0.0

1.0

2.0

3.0

4.0

5.0

0.0

2.0

4.0

6.0

8.0

10.0


(x)

(IN

R b

n)

Raw materials and consumables WIP Inventory Turnover ratio (RHS) Sources of funds

0.0

20.0

40.0

60.0

80.0

100.0

FY07 FY08 FY09 FY10

(%)


Deferred Tax Liability Current liabilities Provisions Application of funds

0.0

20.0

40.0

60.0

80.0

100.0

FY07 FY08 FY09 FY10

(%)

Fixed assets CWIP Investments Deferred Tax Asset

Inventories Sundry debtors Cash and bank Other current assets Source: Company Annual Report, Edelweiss research

Proportion of shareholders’ fund

improved, largely on account of fresh equity issuances

Increase in inventory levels primarily led by

WIP

WIP valued at NRV; it includes unrealised

profits

Proportion of funds invested in inventory

has increased significantly during

the year



4


0.0

3.0

6.0

9.0

12.0

15.0

0.0

2.0

4.0

6.0

8.0

10.0

FY07 FY08 FY09 FY10

(%)

(IN

R b

n)

Loan Book Avg. borrowing cost (excl int. capitalised)

Margin analysis

0.0

5.0

10.0

15.0

20.0

25.0

FY07 FY08 FY09 FY10

(%)

EBITDA margin PAT margin ROCE (pre tax) ROE

Order book analysis

Roads 66%

Buildings22%

Railways11%

Water and sewerage

1%

FY09


Increase in loan funds primarily to

finance new capex plans

Margins better on the back of change in

accounting policy and valuation of WIP at

NRV

Order book mix changes with focus

on new businesses …

C&C Constructions


5

Roads 53%

Buildings27%

Railways14%

Water and sewerage

5%

Transmission1%

FY10

Revenue analysis

0.0

20.0

40.0

60.0

80.0

100.0

FY07 FY08 FY09 FY10

(%)

Roads Buildings Railways Water and sewerage Source: Company Annual Report, Edelweiss research

…leading to a change in revenue mix



6

Summary financial (INR mn) Particulars FY06 FY07 FY08 FY09 FY10

Sales 2,117 3,304 5,333 7,419 11,621

Total income 2,145 3,376 5,449 7,526 11,738

EBITDA 568 667 862 1,218 2,131

EBITDA margin (%) 26.8 20.2 16.2 16.4 18.3

Depreciation 149 160 155 258 455

Financial costs 46 162 300 580 778

Net profit 309 332 408 330 624


Loan funds 982 1,374 2,708 6,743 8,341

Net fixed assets 884 1,555 2,227 4,706 6,347


Current liabilities and provisions 833 1,320 1,816 4,668 5,762


Cash flow from operating activities (38) (381) (378) (819) 152

Cash flow from investing activities (475) (1,742) (311) (2,412) (2,318)

Cash flow from financing activities 567 2,204 952 3,541 2,191

Net cash flows 53 81 263 309 25

CAPEX (520) (932) (875) (2,476) (2,119)

Working capital investments (539) (985) (1,240) (2,017) (1,752) Source: Company Annual Report, Edelweiss research

June

Migration to IFRS will advance revenue recognition on BOT contracts

Hindustan Construction Company (HCC), currently, follows the accounting treatment prescribed by Indian GAAP for BOT contracts, wherein construction costs are capitalised as intangible assets and amortised over the estimated useful life as per the BOT contract. Revenue is recognised post completion of construction over the contract period.

Post migration to IFRS, from FY12, the treatment prescribed by IFRS will be applicable, which will effectively advance revenue recognition. Refer our thematic report, IFRS: The big switch, dated June 09, 2010, for detailed explanation of IFRS adoption accounting treatment and consequent impact on profits and returns.

FCCB redemption premium, 3.1x adjusted FY10 PAT, adjusted against reserves

HCC adjusts redemption premium on FCCBs against the securities premium account. In FY10, redemption premium aggregated INR 152.2 mn (net of tax), ~3.1x of adjusted PAT.

In FY10, the company bought back FCCBs with face value of USD 3.4 mn and reversed the redemption premium provided on them (through adjustments to the securities premium account) aggregating INR 24.1 mn.

Elimination of inter-consolidated entities transactions increased effective tax rate

During the consolidation process, transactions (and resulting gains/ losses) amongst consolidated entities are eliminated, but tax provisions of all consolidated entities are aggregated. Consequently, effective tax rate (excluding fringe benefit tax) stands at 98.8% (FY09: 31.4%) of reported PBT. At the standalone level, the effective tax rate (excluding fringe benefit tax) stands at 33.2%.

Leverage moderated, but still at 4x

In FY10, HCC’s adjusted debt/ equity ratio* decreased 50bps. However, leverage continues to be at 4.0x (FY09: 4.5x). Adjusted net debt-to-equity ratio* stands at 3.5x (FY09: 4.1x). Of the consolidated debt, INR 9.0 bn (INR 4.7 bn in FY09) is in the form of Deep Discount Convertible Debentures (DDCDs) for Lavasa, while another ~INR 7.0 bn is for BOT projects of the company which typically are long-gestation projects with upfront investments and back-ended returns.

The company’s adjusted debt* jumped INR 13.2 bn (32.9%) to INR 53.5 bn in FY10 (FY09: INR 40.3 bn).


Market value of HCC’s quoted investments was INR 2,999.0 mn vis-à-vis book value of INR 3,040.1 mn. The unrealised loss on quoted investments was INR 41.1 mn. Currently, under the Indian GAAP regime, FY10 profits are not impacted, but post adoption of IFRS, such unrealised losses may impact profits depending upon their classification.

Note 1: All details are consolidated unless stated otherwise.

Note 2: * 6% redeemable preference shares treated as debt and preference dividend (including dividend

distribution tax) payable thereon treated as finance cost.


Hindustan Construction Company Annual Report Analysis July 07, 2010


1


Market Data





Promoters : 39.9


FIIs : 28.7




2

The company’s sundry debtors increased 2.5x to INR 2.5 bn (FY09: INR 1.0 bn). Receivable days (based on year end balances) also increased 2.1x to 22.9 days sales (FY09: 10.7 days sales). Also, cheques on hand aggregate INR 378.6 mn, ~15.2% of March 31, 2010, debtors.

Loss on sale of assets was INR 186.7 mn, ~15.2% of adjusted PBT*.

HCC repriced the exercise price of ESOPs to INR 104.1 per share (earlier: INR 132.5). The revised exercise price is the market price on the grant date and as per Indian GAAP, FY10 profits will not be impacted. However, post IFRS adoption, such repricing will impact profits.

High tax dents operating margin; low operating margin, asset turnover depress RoE

Return on average equity (RoAE) for FY10 dipped 590bps to 0.4% (FY09: 6.3%), primarily due to lower operating margin, courtesy higher effective tax rate and operating assets turnover, resulting in lower returns on operating assets (RNOA). Decrease in RNOA blunted gains from higher leverage and lower borrowing costs:

• RNOA decreased 300bps to 3.3% (FY09: 6.3%) due to lower operating margin that dipped 280bps (36.7%) to 4.7% (FY09: 7.5%) and lower operating assets turnover that decreased 10bps (17.3%) to 0.7x (FY09: 0.8x).

• Return from leverage decreased 730bps (3.7%) (FY09: positive, 3.6%), despite higher leverage and lower borrowing costs, due to lower RNOA (lower than borrowing costs).

• Had the effective tax rate been constant at FY09 level, FY10 adjusted RoE* would have been 7.9% vis-à-vis the current 0.4%.


ROE analyser analyses profitability on the scale of operating efficiency and capital

allocation efficiency (detailed concept explained in Annexure A). We have analysed HCC’s

profitability for FY09 and FY10; results and key findings are given below:

ROE analyser

Particulars


6.3 3.3



B. Return from leverage (FLEV x spread) (%) 3.6 (3.7)



Net financial spread (RNOA -NBC) (%) 1.1 (0.9)

C. Return from other funding (%) (3.7) 0.8

ROE Derived (A+B+C) (%) 6.3 0.4

FY09 FY10




3

RoE tree

3.3

(3.7)

0.8 0.4

(6.0)

(4.0)

(2.0)

0.0

2.0

4.0

RNOA Return from

leverage

Return from other

funding

ROAE

(%)

FY10


Sources of funds

0.0

20.0

40.0

60.0

80.0

100.0


(%)

Adjusted equity shareholders' funds* Adjusted loan funds*Minority interest Deferred tax liability (net)Current liabilities Provisions



0.0

20.0

40.0

60.0

80.0

100.0


(%)


Sundry debtors Cash and bank balance Other current assets Source: Company annual report, Edelweiss research

Higher tax rate dents RoE

6.3 3.6

(3.7)

6.3

(6.0)

(3.0)

0.0

3.0

6.0

9.0

RNOA Return from

leverage

Return from other

funding

ROAE

FY09

Borrowings dominate sources of funds

Inventories continue to decline for third

successive year



4

Utilisation of income

0.0

20.0

40.0

60.0

80.0

100.0


(%)

Construction expenses Personnel costOperating and other expenses DepreciationAdjusted finance charges* Other itemsTaxes DividendRetained earning


Leverage and borrowing cost

0.0

1.6

3.2

4.8

6.4

8.0

0.0

1.0

2.0

3.0

4.0

5.0


(x)

Adjusted debt/ equity ratio* (x) Adjusted net debt/ equity ratio* (x)Adjusted cost of borrowing* (%)



0

88

176

264

352

440


(Days)

Inventory days Receivable days

Payable days Cash conversion cycle Source: Company annual report, Edelweiss research

Higher other operating expenses

and taxes offset savings in

construction expenses


decreased

Higher inventory and payable days offset

better payables management;

marginally lengthen cash conversion cycle



5

Profitability and return ratios

0.0

2.0

4.0

6.0

8.0

10.0

0.0

3.2

6.4

9.6

12.8

16.0


(x)

(%)

EBITDA margin (%) ROCE (pre tax) (%)

Adjusted PAT margin* (%) Adjusted ROE* (%) Source: Company annual report, Edelweiss research



Sales 19,581 23,007 29,947 35,603 39,752

Total income 19,715 23,434 30,407 35,823 39,950

EBITDA 1,853 2,255 3,459 5,143 5,257

EBITDA margin (%) 9.5 9.8 11.5 14.4 13.2

Depreciation 542 804 974 1,259 1,405

Adjusted financial costs* 487 847 1,594 2,480 2,815

Adjusted net profit* 794 320 880 584 50

Adjusted equity shareholders' funds* 8,417 8,762 9,345 9,044 13,402

Adjusted loan funds* 12,144 19,502 27,029 40,286 53,534

Net fixed assets 6,247 10,232 13,652 28,753 38,599

Investments 720 172 441 953 3,056




Cash flow from operating activities (1,128) (10,767) (679) 5,698 (753)



Net cash flows 9,148 (7,460) 738 (1,199) 915

CAPEX (2,315) (4,695) (5,096) (15,670) (13,097)

Working capital investments (2,532) (12,771) (3,874) 831 (5,432) Source: Company annual report, Edelweiss research

Higher tax expense triggers adjusted

PAT* and RoE* decline



IFRS accounting for concession arrangement boosts construction revenue/profit …

IL&FS Transportation Networks’ (ITNL) FY10 revenue jumped 96.1% to INR 24.0 bn (FY09 INR 12.3 bn) and PBT catapulted 5.5x to INR 5.2 bn (FY09 INR 0.8 bn). PBT margins soared from 6.6% in FY09 to 21.8% in FY10.

The company follows IFRS principles for accounting of service concession arrangements (SCA); consequently, construction income in SCA is recognised on POCM basis upfront during construction phase.

Construction income, the primary revenue driver, jumped ~ 7x from INR 1.7 bn in FY09 to INR 11.6 bn during the year.

Rights under SCA have increased from INR 6.9 bn in FY09 to INR 14.8 bn in FY10 and receivables under SCA catapulted from INR 7.3 bn in FY09 to INR 12.0 bn in FY10. (with corresponding impact on investing cash flows)

IFRS adoption, however, is limited to accounting of SCA while other transactions are accounted as per IGAAPs.

… operating cash flow, however, subdued

ITNL’s FY10 cash from operating activities post interest stood at INR 0.2 bn [FY09 INR (1.6 bn)] despite a PBT of INR 5.2 bn (FY09 INR 0.8 bn).

Operating cash flow also includes unrealised profit from construction income in SCA which gets offset by contra investing cash outflows.

Segmental analysis

During FY10, geographical revenue mix shifted from outside India to within India, with increase in the latter’s revenue share from ~34% in FY09 to ~ 59% in FY10.

Business segment revenues increased sharply for surface transport business from INR 9.1 bn in FY09 to INR 22.2 bn in FY10, with margins in the segment soaring from 13.7% in FY09 to 32.8% in FY10.

Loan book rise to facilitate new projects; D/E maintained

ITNL’s loan book increased from INR 19.0 bn in FY09 to INR 33.7 bn in FY10 primarily to finance new road projects.

D/E was, however, maintained at 2.0x (FY09 2.1x) on the back of INR 5.9 bn raised by the company by issuing 22.8 mn fresh equity shares of INR 10 each at a premium of INR 248 /share.


The company considers infrastructure construction/ upgrading services cost incurred to be exchanged against toll collection rights. Thus, gains/ losses on intra group transactions are treated as realised and not eliminated on consolidation.


IL&FS Transportation Networks Annual Report Analysis December 27, 2010


1

Market Data



M cap (INR bn/USD mn): 57.7 / 1,299.7


Promoters : 75.1


FIIs : 4.9




2

Subsidiary analysis (INR mn) Subsidiary company % shareholding

as on FY10 Networth Turnover PAT

Elsamex SA 100.0 3,013.0 7,144.4 120.6

North Karnataka Expressway 74.5 795.5 1,129.3 146.2

Gujarat Road and Infrastructure Company 83.6 2,397.0 756.6 181.8

Grusamar Ingenieria y Consulting SL 100.0 217.8 736.5 4.0

Intevial-Gestao Integral Rodoviaria, S.A. 100.0 (16.6) 681.9 0.1

West Gujarat Expressway 49.0 375.8 387.1 (166.1)

Atenea Seguridad y Medio Ambiente S.A 95.0 40.4 376.9 5.1

Elsamex Internacional SRL 100.0 686.5 364.7 3.2

Vansh Nimay Infraprojects 80.0 (7.3) 283.5 (36.1)

Centro De Investigacion Elpidio Sanchez Marcos S.A. 100.0 10.7 239.9 0.7

Mantenimiento Y Conservacion De Vialidades SA DE C.V 64.0 27.7 201.2 0.2

Control 7, S.A 100.0 35.4 167.7 0.3

Elsamex Portugal SA 70.0 56.6 157.9 8.6

Elsamex India 70.0 (4.1) 128.2 11.3

Yala Construction Company 70.0 24.1 104.8 0.5

Instituto Tecnico de la Vialidad y del Transporte, S.A. 100.0 2.7 102.1 0.5

ITNL Enso Rail Systems 70.0 131.2 77.8 (5.1)

Senalizacion Viales E Imagen SA 100.0 (62.6) 60.4 (15.2)

ITNL International Pte. 100.0 1,051.7 51.5 (247.3)

ESM Mantenimiento Integral SA DE C.V 100.0 18.4 23.9 (0.4)

Geotecnia 7 100.0 1.1 17.3 (3.6)

Proyectos de Gestion, Sistemas, Calculo y Analisis, S.A 100.0 (47.8) 14.6 (2.7)

Grusamar Albania SHPK 51.0 (1.2) 2.8 (1.3)

Sanchez Marcos Senalizacion e Imagen, S.A 100.0 3.6 0.0 (3.9)

Rapid Metrorail Gurgaon 100.0 (4.1) 0.0 (4.6)

ITNL Road Infrastructure Development Company 100.0 399.2 - (0.7)

East Hyderabad Expressway 74.0 289.5 - (3.6)

Inversiones Tyndrum S. A. 100.0 10.2 - (0.5)

Hazaribagh Ranchi Expressway 73.9 - - (0.5)

Pune Sholapur Road Development Company 99.9 (1.0) - (1.5)

Ecoasfalt Construction Company 70.0 (4.7) - (0.4)

Proyectos Y Promociones Inmobilarias Sanchez Marcos SL 100.0 (34.9) - (1.8)

Total 9,403.69 13,210.77 (12.31)

FY10


Note : The figures mentioned above are based on financials prepared under IGAAP

The figures used for consolidated financials may differ due to different accounting policy used.



3

Cash flow analysis (INR bn) Particulars FY09 FY10

Profit before tax 0.8 5.2

Interest and finance expense 1.7 2.9

Depreciation 0.4 0.6

other non operating adjustments (0.7) (0.6)

other non cash adjustments (0.1) (0.1)

Direct taxes paid (0.6) (1.9)

Cash profit after tax 1.5 6.2

Decrease in receivables 0.2 1.2

Increase in loans and advances (0.4) (3.7)

Decrease in trade and other payables (1.1) (0.5)

Increase in working capital (1.3) (3.0)

Net cash from operating activities 0.2 3.2

Interest expenses (1.8) (2.9)

Net cash from operating activity post interest (1.6) 0.2

Cash flow analysis

(16.4)

(8.2)

0.0

8.2

16.4

24.6


(IN

R b

n)

Cash flow from operating activities Cash flow from investing activities

Cash flow from financing activities

Operating revenue analysis

0.0

6.0

12.0

18.0

24.0

30.0


(IN

R b

n)

Fee income Operation & maintainance income

Toll revenues Construction income

Traded product Source: Company’s annual report, Edelweiss research

Despite reporting high PBT, cash from operating activities

post interest remained subdued

Construction revenue primary growth

driver

Operating cash flow also includes

unrealised profit element from

construction income in SCA



4

Business Segment analysis

57.6 56.4

13.7

32.8

- -

10.9 9.9

0.0

12.0

24.0

36.0

48.0

60.0

0.0

5.0

10.0

15.0

20.0

25.0

FY07 FY08 FY09 FY10

(%)

(IN

R b

n)

Revenue - surface transportation business

Revenue - Building maintenance

Segmental margin - surface transport (RHS)

Segmental margin - building maintenance (RHS)

Geographical segment—Revenue analysis

0.0

20.0

40.0

60.0

80.0

100.0

FY07 FY08 FY09 FY10

(%)

In India Outside India

Sources of funds

0.0

20.0

40.0

60.0

80.0

100.0


(%)

Equity shareholders' funds Loan funds

Minority interest Deferred Tax Liability

Current liabilities & provisions Source: Company’s annual report, Edelweiss research

Margins in surface transport segment

jumped sharply from 13.7% in FY09 to

32.8% in FY10

Revenue mix has shifted to India in

FY10 with recognition of surface transport

revenues…



5

Applications of funds

0.0

20.0

40.0

60.0

80.0

100.0


(%)

Fixed assets (incl goodwill) Investments Inventories



Summary Financial (INR mn)


Sales 420 1,887 3,617 12,254 24,029

Total income 432 1,981 4,376 13,320 24,873

EBITDA 127 969 1,831 1,933 7,942

EBITDA margin (%) 30.2 51.3 50.6 15.8 33.1

Depreciation 5 33 76 353 603

Financial costs 49 215 1,070 1,743 2,941

Net profit 50 514 933 263 3,444


Loan funds* 1,148 10,846 16,636 18,996 33,665

Net fixed assets 14 8,048 11,675 11,469 18,947


Current liabilities and provisions 229 1,069 8,451 7,250 7,868


Cash flow from operating activities 12 331 2,065 175 3,189

Cash flow from investing activities (662) (3,895) (2,563) (184) (14,586)

Cash flow from financing activities 583 3,755 1,726 (300) 15,226

Net cash flows (67) 191 1,228 (308) 3,829

CAPEX (9) (556) (631) (214) (5,423)

Working capital investments (82) (361) 622 (1,321) (3,008)


*Includes advance towards capital received by subsidiary and intended to convert into subordinated debt.

Proportion of funds invested in loans &

advances catapulated in FY10



IFRS accounting w.r.t. BOT projects gives additional surge to revenue/profit

IRB Infrastructure Developers’ (IRB) FY10 revenue jumped 71.9% to INR 17.0 bn (FY09 INR 9.9 bn), and PBT catapulted 93.8% to INR 4.2 bn (FY09 INR 2.2 bn). PBT margins increased from 21.7% in FY09 to 24.4% in FY10.

Complying with IFRS principles, IRB’s consolidated FY10 revenue and PBT include INR 8.1 bn (47.6 % of revenue) and INR 2.7 bn (64.3 % of PBT), respectively (FY09: INR 3.7 bn and INR 1.0 bn), on account of work executed by EPC arm for BOT SPVs.

This implies that margins booked on in-house contracts increased from 27.0% in FY09 to 32.7% in FY10.

Excluding the captive work executed, FY10 revenue jumped 42.8% to INR 8.9 bn (FY09 INR 6.3 bn), while PBT increased 30.1% to INR 1.5 bn (FY09 INR 1.2 bn). PBT margins, on the other hand, dipped from 18.6% in FY09 to 16.9% in FY10.

IFRS adoption, however, is limited to accounting of BOT projects, while other transactions are accounted as per IGAAPs.

Operating cash flow healthy, but includes unrealised profit element for BOT SPVs

Cash from operating activities post interest remained healthy at INR 6.6 bn, despite reported PBT of INR 4.2 bn. Operating cash flow, however, includes profit element of INR 2.7 bn for EPC work executed for BOT SPV which gets offset by contra investing cash outflows.

Income from BOT projects jumped 61%, from INR 4.5 bn in FY09 to INR 7.2 bn, primarily on account of 8.4% hike in toll rates, full year operation of Surat-Dahisar project and commencement of toll collection in Bharuch-Surat BOT project.

IRB’s cash conversion cycle improved from 50 days in FY09 to 47 days in FY10 on account of dip in inventory days, from 91 in FY09 to 79 in FY10, partially compensated by decrease in payable days from 45 in FY09 to 37 in FY10.

Investment gain adds to profitability

IRB sold investments of INR 976.1 mn (FY09 INR 111,2.9 mn) in FY10, realising a gain of INR 140.3 mn (FY09 loss of INR 14.5 mn). Also, the company has written back provision for diminution on value of investment of INR 5.2 mn (FY09 provided INR 24.7 mn). Together, these form 3.5% of PBT (FY09: 1.8%).

Loan book rises to facilitate new projects; execution picked up on Surat-Dahisar

During FY10, IRB was granted new BOT road projects worth ~INR 55.0 bn in addition to the Sindhudurg greenfield airport project. Also, execution on Surat–Dahisar project gathered steam during the year.

Consequently, the company’s loan book increased from INR 24.9 bn in FY09 to INR 29.2 bn in FY10, primarily to facilitate the construction of new BOT projects. However, D/E was maintained at 1.4x.


IRB Infrastructure Developers Annual Report Analysis December 8, 2010


1

Market Data



M cap (INR bn/USD mn): 63.3 / 1,411.3


Promoters : 74.9


FIIs : 12.7




2

Interest cost jumps on low capitalisation

Interest cost jumped 69.5%, from INR 1.5 bn in FY09 to INR 2.5 bn in FY10, primarily due to low capitalisation as Surat–Bharuch BOT project became operational during the year.


IRB considers that the construction cost incurred by BOT operator is in exchanged for toll collection rights. Thus, for BOT projects awarded to group companies, where EPC is subcontracted to fellow subsidiaries, the profit on intra group transaction is not eliminated and is included in toll collection rights.

Toll collection rights have increased from INR 17.2 bn in FY09 to INR 31.6 bn in FY10.


as on FY10 Networth Turnover PBT Networth Turnover PBT

Ideal Road Builders 100.0 1,545.41 5,342.3 484.6 2,050.7 3,501.0 539.8

Modern Road Makers 100.0 1,730.31 5,802.9 548.7 2,465.7 10,208.9 1,098.7

Thane Ghodbunder Toll Road 100.0 379.03 269.6 78.0 465.4 278.2 76.1

IDDA Infrastructure 100.0 1,779.00 - - 1,594.6 850.5 (384.9)

Mhaiskar Infrastructure 100.0 1,426.94 2,934.4 564.1 1,496.0 3,122.5 664.6

IRB Infrastructure 100.0 297.39 70.5 25.2 347.4 68.1 15.2

MMK Toll Road 100.0 141.04 65.8 39.9 186.2 63.1 40.5

NKT Road & Toll 100.0 287.46 114.4 8.0 359.7 134.6 67.1

ATR Infrastructure 100.0 692.24 164.0 114.6 847.9 180.8 134.9

Aryan Toll Road 100.0 609.80 129.4 62.3 706.0 133.0 92.1

Aryan Infrastructure Investment 66.0 888.17 - - 888.2 - -

IRB Surat Dahisar Tollway 90.0 2,971.76 208.4 149.1 4,766.6 2,068.4 1,777.8

IRB Kolhapur Integrated Road Dev. Co 100.0 443.81 - - 772.3 - -

Aryan Hospitality 100.0 0.10 - - 0.1 - -

IRB Pathankot Amritsar Toll Road 100.0 - - - 394.0 - -

IRB Sindhudurg Airport 100.0 - - - 147.9 - -

IRB Talegaon Amravati Tollway 100.0 - - - 197.0 - -

IRB Jaipur Deoli Tollway 100.0 - - - 526.8 - (0.2)

IRB Goa Tollway 100.0 - - - 346.0 - -

Total 15,102 2,075 20,609 4,122

FY09 FY10




3

Cash flow analysis (INR bn) Particulars FY10

Profit before tax 4.2

Interest 2.4

Other Non operating (profit)/Loss (0.4)

Depreciation / Amortisation 1.8



Decrease in trade and other receivables 0.1

Increase in trade and other payables 1.4

Decrease in inventories 0.4

Increase in working capital 1.8


Interest paid (2.5)

Net cash from operation post interest 6.6 Operating cash flow includes INR 2.7 bn of captive EPC profit, which is offset by higher investing cash outflow towards toll collection rights capitalised Cash conversion cycle

(120)

(60)

0

60

120

180

FY07 FY08 FY09 FY10

(Days)


Operating revenue analysis

0.0

4.0

8.0

12.0

16.0

20.0

FY07 FY08 FY09 FY10

(IN

R b

n)

Contract revenue Income from BOT Projects Others Source: Company’s annual report, Edelweiss research

Income from BOT projects increased, leading to healthy

operating cash flow

Cash conversion cycle improved from 50 days

in FY09 to 47 days in FY10 on account of dip

in inventory days, partially compensated

by decrease in payable days

Operating cash flow includes INR 2.7 bn

towards captive EPC profit



4

Sources of funds

0.0

20.0

40.0

60.0

80.0

100.0

FY07 FY08 FY09 FY10

(%)




0.0

20.0

40.0

60.0

80.0

100.0

FY07 FY08 FY09 FY10

(%)

Fixed assets CWIP Investments Inventories



Proportion of toll collection right

increased, primarily due to capitalisation

of Surat-Bharuch BOT project



5

Summary Financials Particulars FY07 FY08 FY09 FY10

Sales 3,057 7,327 9,919 17,049

Total income 3,287 7,896 10,307 17,558

EBITDA 1,654 4,119 4,388 7,990

EBITDA margin (%) 54.1 56.2 44.2 46.9

Depreciation 526 1,016 1,144 1,819

Financial costs 913 2,006 1,483 2,514

Net profit 225 1,139 1,758 3,854

Equity shareholders' funds 3,595 16,191 17,291 20,390

Loan funds 25,180 20,212 24,859 29,152

Net fixed assets 24,420 27,737 34,707 43,477

Current assets loans and advances 7,366 9,589 10,180 11,477

Current liabilities and provisions 2,313 2,600 3,065 4,816

Net current assets 5,053 6,989 7,116 6,661

Cash flow from operating activities 2,472 2,119 2,615 9,033

Cash flow from investing activities (11,680) (5,288) (6,047) (10,223)

Cash flow from financing activities 8,790 4,077 3,308 1,431

Net cash flows (418) 908 (123) 241

CAPEX (6,664) (4,288) (8,114) (10,657)

Working capital investments 1,035 (1,586) (1,401) 1,849 Source: Company’s annual report, Edelweiss research



Increase in working capital stretches cash flow

During the year, IVRCL Infrastructures (IVRCL) reported net cash flow from operation of INR (539.9) mn [FY09: INR (934.2)] mn, despite PBT of INR 3780.9 mn (FY09: INR 3107.9 mn), primarily on account of higher working capital requirement.

Cash conversion cycle deteriorated from 159 days in FY09 to 173 days in FY10, primarily on account of increase in debtor days (including unbilled revenue and retention money) from 169 in FY09 to 205 in FY10. This was, however, partially offset by increase in creditor days and advances from contractee.

Debtors more than six months remain high for FY10, at INR 5.5 bn, which is 27.8% of the total debtors (excluding unbilled revenues and retention money; FY09: 27.3%).

Low subcontracting drives EBIDTA; however, provision/interest cost dampens profit

IVRCL’s sales increased 15.1%, from INR 50.6 bn in FY09 to INR 58.3 bn in FY10, primarily on account of income from transmission business, sale to sub-contractors and sale of systems, equipment, services and spares.

Blended EBIDTA margin improved from 9.5% in FY09 to 11.3% in FY10, primarily due to reduction in sub-contracting activities, which, in turn, lowered the construction and manufacturing costs from 83.6% of sales in FY09 to 81.4% of sales in FY10.

PBT margin, however, increased meagerly from 6.1% in FY09 to 6.5% in FY10 as net interest cost increased from INR 1.7 bn in FY09 to INR 2.4 bn in FY10.

Provision for doubtful debts, advances and deposits and bad debt written off increased from INR 120.2 mn in FY09 to INR 428.5 mn (11.3% of PBT) in FY10.

Auditors have highlighted that during the year provision of INR 1.4 bn on account of withdrawal of the tax relief u/s 80IA availed in earlier years, has directly been adjusted from special reserve, which constitutes 65.5% of PAT.

Average borrowing cost (excluding interest capitalised) for the year stood at 8.1% (FY09: 8.0%), details on interest capitalised have not been disclosed.

Subsidiary analysis

During the year, IVRCL A&H, a subsidiary, has capitalised interest amounting to 1.1 bn under expenditure incurred during construction period pending allocation (EDCPA); year end balance of EDPCA account is INR 2.4 bn. IVRCL A&H has done capital expenditure of 7.0 bn during the year.

During the year, IVR Strategic Resources & Services (ISRSL) and IVRCL Water Infrastructure (IWIL), two wholly-owned subsidiaries, amalgamated with IVRCL A&H. Accordingly, IVRCL A&H has issued 59.5 mn shares to IVRCL, raising IVRCL’s shareholding in it from 62.4% to 80.5%.


IVRCL Infrastructures Annual Report Analysis November 30, 2010


1

Market Data

52-week range (INR): 197 /110




Promoters : 9.5


FIIs : 57.7




2

Analysis of major operating entities (INR mn)

FY09 FY10 FY09 FY10# FY09 FY10Gross work bills / other operational income 49,492 53,659 - - - -

Share of (loss) / profit from joint ventures 101 (160) - - - -

Sale of products to sub-contractors 211 1,423 - - - -

Sale of land and development rights - - - 579 - -

Sale of flats, villas and plots (net of cancellations) - - 457 (376) - -

Construction revenue - - 0 1,188 - -

Sewage treatement revenue - - - 17 - -

Income from toll collection - - - 184 - -

Sale of system, equipments, spares and services - - - - 5,155 8,775

Total sales 49,804 54,923 457 1,590 5,155 8,775

EBITDA margin (%) 8.5 9.7 7.1 12.1 10.3 12.0

Hindustan Dorr-Oliver *

IVRCL Assets & Holdings *IVRCL (Standalone)


Note: *consolidated entities

#amount not comparable with FY09 as ISRSL and IWIL is amalgamated



Depreciation 803

Bad debts written off 429

Other non cash adjustments (68)

Interst expenses 2,137

Other non operating (profit)/Loss (134)



Increase in debtors (4,705)

Increase in other current assets (4,449)

Increase in Loans and advances (1,056)

Increase in inventory (1,178)

Increase in current liabilities and provisions 5,508


Net cash from operating activities (540)

Interst expenses paid (2,121)

Net cash from operating activities post interest (2,661) Source: Company’s annual report, Edelweiss research

Increase in working capital requirement

stretches cash flows



3

(11)

(5)

1

7

13

19


(IN

R b

n)



Sources of funds

0.0

20.0

40.0

60.0

80.0

100.0


(%)


Deferred tax liability Current liabilities Provisions Application of funds

0.0

20.0

40.0

60.0

80.0

100.0

FY05 FY06 FY07 FY08 FY09 FY10

(%)


Debtors Cash & bank Other current assets Source: Company’s annual report, Edelweiss research

D/E increases from 1.0x in FY09 to 1.2x

in FY10

Proportion of fixed assets increased,

primarily on account of completion of road

project during the year

Operating and investing cash flows

continue to be supported by cash

from financing activities



4

Cash conversion analysis

0

44

88

132

176

220


(Days)

Debtor days Creditor days

Inventory days Advances from contractee days


Debtor analysis

0.0

8.0

16.0

24.0

32.0

40.0

0

5

10

15

20

25


(%)

(IN

R b

n)

Debtors exceeding six month Other debtors

Debtors as % of revenue (RHS)


Increase in debtor days stretched cash

conversion cycle

Debtors exceeding six months have

increased 29.7%, from INR 4.3 bn in

FY09 to INR 5.5 bn in FY10



5

Summary financial (INR mn)


Sales 16,871 24,962 38,496 50,645 58,312

Total income 17,082 25,227 38,937 51,196 58,675

EBITDA 1,532 2,887 5,541 4,792 6,583

EBITDA margin (%) 9.1 11.6 14.4 9.5 11.3

Depreciation 123 247 371 537 803

Adjusted financial costs 378 541 762 1,698 2,353

Net profit (Report) 1,078 1,631 2,834 2,250 2,156


Loan funds 7,804 7,905 17,249 24,996 33,064

Net fixed assets 4,201 6,604 15,451 21,660 28,133




Cash flow from operating activities (1,738) 2,127 (6,704) (934) (540)



Net cash flows (349) (1,205) 3,616 (878) 446

CAPEX (1,299) (10,528) (9,282) (9,635) (7,006)

Working capital investments (3,012) (14) (10,002) (4,406) (5,882) Source: Company’s annual report, Edelweiss research



Related party transactions boost revenue; IFRS convergence may impact financials

Lanco Infrastructure’s (Lanco) sales jumped 33.7% from INR 60.0 bn in FY09 to INR 80.3 bn in FY10. The rise was on account of increase in construction segment’s contribution from 52% in FY09 to 55.6% in FY10.

The company’s EPC and construction order book as at FY10 end catapulted ~ 147.4% to INR 257.1 bn (FY09: INR 103.9 bn), imparting it ~ 3 years’ revenue visibility. However, most of the orders are from related parties.

Lanco generates ~ 47% of its revenue from related parties, of which two associates- Udupi Power (UPCL) and Lanco Anpara Power (LAnPL), contribute ~43.9%. The company also holds cumulative compulsorily convertible preference shares in these companies, which when exercised will lead to them becoming subsidiaries. Lanco’s current holding in UPCL and LAnPL is 26.2% and 26.1%, respectively.

During the year, the company earned INR 35.3 bn as contract service revenue from these companies, which is 43.9% of total sales. While consolidating, Lanco has eliminated INR 755.3 mn as unrealised profit to the extent of its holding in these companies.

The outstanding term loans and net assets of these entities as at FY10 end are INR 63.6 bn and INR 84.7 bn, respectively. Corporate guarantee given for UPCL is at INR 33.8 bn, which is 100.9% of the company’s net worth.

IFRS will lead to consolidation of SPVs which will lead to elimination of intergroup revenues and profitability and also will increase debt by 76.1% to INR 147.2 bn; correspondingly, D/E will jump from 2.5x to 4.4x.

The management has, however, guided that post IFRS, select power projects will qualify under build-operate-transfer (BOT). Hence, revenue and profit related to EPC activity of such projects will continue to be recognised on POCM basis and will not be eliminated.

Lanco has also invested INR 6.0 bn in share application money in a few other associates and companies where it or key management personnel have significant influence. If, in the future, shares of these companies are allotted to Lanco its relationship with them may change.

Margins improved despite higher ESOP cost; debtors ageing a concern

PBT margin increased from 8.2% in FY09 to 9.1% in FY10 despite a rise in employee cost on account of ESOPs and higher depreciation charge.

During the year, Lanco allotted 9.2 mn ESOPs exercisable at weighted avg. price of INR 0.24 each pursuant to which the company has taken an additional charge of INR 570.8 mn during the year (6.1% of PBT). Total outstanding ESOPs as at FY10 end are 53.3 mn.

Since ESOP cost is amortized over vesting period (6 years for Lanco); the higher ESOP charge will continue over next 5 years.

LAPL, one of the subsidiary, has, during FY10, changed the method of providing depreciation from the straight line method (SLM) to the written down value method (WDV), which led to INR 1.2 bn dip in PBT (12.9% of PBT). We believe the change in depreciation will result in lower tax outgo under MAT.


Lanco Infratech Annual Report Analysis September 15, 2010


Market Data





Promoters* : 67.9


FIIs : 19.6


1



2

Income from the property development segment, dipped significantly from INR 1,574.5 mn in FY09 to INR (256.7) mn in FY10, primarily on account of reversal of revenue of INR 1.1 bn towards cancellation and the price discounts offered to existing as well as prospective customers.

Other income increased from INR 0.5 bn in FY09 to INR 1.8 bn (19.7% of PBT) in FY10 primarily on account of interest received on deposits, gain on forex fluctuation, and profit on sale of long-term investments.

Debtors outstanding increased two folds to INR 22.3 bn (FY09: INR 11.9 bn) as debtors exceeding six months doubled from INR 4.3 bn in FY09 to INR 8.1 bn in FY10.

Financial and other highlights

Despite rise in the company’s debt from INR 55.9 bn in FY09 to INR 83.6 bn, the D/E has reduced from 2.7x in FY09 to 2.5x in FY10, primarily on account of Lanco’s QIP issue.

During the year, the company raised INR 7.3 bn through QIP of 18 mn shares of INR 10 each at INR 394.9, which is primarily invested in mutual funds and preference shares of associates, leading to increase in investment by 106% from INR 9.8 bn in FY09 to INR 20.2 bn in FY10.

Total borrowing cost capitalised during FY10 is at INR 5.1 bn. Average borrowing cost incl. interest capitalised is at 12.0% (FY09: 13.9%).

Related party analysis (INR mn)

Particulars Relation

Lanco Anpara Power Associate 19,041

Udupi Power Corporation Associate 16,269

Others ESI 3,009

Total 38,319

47.3% of sales

Contract service rendered

(INR mn)

Particulars Relation Guarantee share appl. ICD Loans Others ICD others

given money

Lanco Anpara Power Associate 2,103 2,941

Udupi Power Corporation Associate 33,773 8,788 2,000 474

Lanco Hoskote Highway Associate 246

Lanco Devihalli Highway Associate 133 361

Belinda Properties Associate 543

Ananke Properties Associate 548

Tethys Properties Associate 538

Bianca Properties Associate 548

Lanco Babandh Power Associate 2,500 1,830 1,210 311 2,452

Portia Properties Associate 328

Lanco Group KMPSI 1,540

Others ESI 87 843

Others KMPSI 61 12

Total 36,405 6,022 1,210 311 11,747 2,000 6,485

108.8% of networth

Closing balance recievable Closing balance payable


Allotment of shares by related parties for share application money pending allotment may change the relationship to subsidiaries

Substantial portion of revenue comes from

related parties

Lanco Infratech


3








Increase in trade and other payables 3,420

Increase in inventories (3,044)



(35,000)

(20,000)

(5,000)

10,000

25,000

40,000





Lanco has been generating positive cash from operations which together with funds from financing activities have been deployed in capex plans. The group has a power projects portfolio of 9,311 MW, of which about 1,349 MW is in operation and the balance under construction. Lanco’s power generation capacity is expected to jump to 3,957 MW over the next 12 months with the additional capacity of 133 MW from Kondapalli II, 1,200 MW from Udupi and Anpara each, 70 MW from Lanco Green and 5 MW from Vamshi Industrial.

Significant increase in working capital

requirements led by increase in debtors



4

Sources of funds

0.0

20.0

40.0

60.0

80.0

100.0


(%)

Equity shareholders' funds Loan funds Minority interest Current liabilities Provisions

Applications of funds

0.0

20.0

40.0

60.0

80.0

100.0


(%)

Fixed assets CWIPInvestments Expenditure during constructionInventories DebtorsCash and bank Other current assets


0.0

0.6

1.2

1.8

2.4

3.0

8.0

9.5

11.0

12.5

14.0

15.5

FY07 FY08 FY09 FY10

(x)

(%)

Avg. borrowing cost Debt /equity (RHS)


Average borrowing cost dipped from 13.9% in FY09 to

12.0% in FY10

Proportion of loan funds increased from

48.5% in FY09 to 52.2% in FY10

Rise in fixed assets is primarily on account

of capitalisation of plant and machinery

on commencement of power plants which were lying as CWIP

Lanco Infratech


5


0

24

48

72

96

120

0

22

44

66

88

110


(Days)

(Days)



Cash conversion cycle deteriorated from 44.2 days in FY09 to 50 days in FY10, primarily on account of increase in debtor days from 58.3 to 77.7 and inventory days from 77.7 to 83.0, which is partly compensated by increase in creditor days from 91.8 to 110.8 during the same period.


Sales 1,421 15,944 32,334 60,062 80,320

Total income 1,484 16,473 33,287 60,614 82,160

EBITDA 117 4,084 6,916 8,236 14,515

EBITDA margin (%) 8.3 25.6 21.4 13.7 18.1

Depreciation 19 656 776 1,073 3,479

Financial costs 36 829 921 2,185 3,554

Net profit 171 1,880 3,542 2,804 4,585


Loan funds 1,398 17,099 31,650 55,970 83,614

Net fixed assets 268 22,875 33,488 45,345 64,058

Expenditure during construction 141 1,515 3,560 8,793 5,956




Cash flow from operating activities (125) 3,805 5,450 2,383 1,557

Cash flow from investing activities (525) (32,033) (15,260) (17,447) (28,410)

Cash flow from financing activities 705 29,936 13,188 17,119 26,959

Net cash flows 54 1,707 3,379 2,054 106

CAPEX (211) (24,636) (13,692) (13,207) (15,383)

Working capital investments (223) (82) (718) (5,849) (12,544) Source: Company’s annual report, Edelweiss research



Significant investment book, primarily in promoter group companies

Reliance Infrastructure’s (Rinfra) investments continue to be high, at INR 136.6 bn as at FY10 end, (FY09: INR 159.4 bn). Of this, INR 99.5 bn is invested in promoter group companies and INR 34.9 bn in liquid funds. Together, they form 66% (FY09: 94.3%) of the company’s net worth.

Investment in promoter group companies includes:

• INR 65.1 bn in Reliance Power (RePL), an associate, [cost of equity (INR 17.2 bn) + capital reserve on dilution (INR 43.2 bn) and balance as profits for the year).

• Investment of INR 34.3 bn in preference shares of non-associate promoter group companies (INR 11.0 bn in Sonata Investments and INR 23.3 bn Reliance Infra Projects International).

Further, current assets include INR 5.1 bn towards premium receivable on redemption of the aforementioned preference shares.

Loans and advances surge (including inter-corporate deposits)

Loans and advances jumped from INR 55.5 bn as at FY09 end to INR 85.9 bn as at FY10 end, of which, inter-corporate deposits increased from INR 15.8 bn to INR 27.7 bn.

Of the total inter-corporate deposits, INR 1.4 bn (FY09: INR 1.4 bn) constitutes deposits given to Reliance Infrastructure and Consultants, an associate. Details of other parties to whom inter-corporate deposits have been given are not available.

During FY10, interest income on inter-corporate deposits was INR 2.2 bn yielding an average return of 9.9%.

Revenue gap and adjustments add to revenue growth

Rinfra revenues stood at INR 146.3 bn in FY10 (FY09: INR 126.3 bn). Of this, INR 11.0 bn recognised as asset under tariff adjustment account is on account of:

• Revenue gaps of INR 9.7 bn, i.e., shortfall in actual returns over assured returns; which are to be recovered from customers, and carried forward as unbilled revenue.

• Income towards payment of wage revision arrears of INR 1.3 bn.

The outstanding balance of tariff adjustment account as at FY10 end is INR 16.0 bn (FY09: INR 10.3 bn), indicating that the company received INR 5.3 bn in FY10.

Operating cash flow remains subdued on increased working capital requirement

Cash flows from operations stood at INR 1.7 bn in FY10 (FY09: INR 9.2 bn), despite PBT of INR 13.5 bn (FY09: INR 13.4) on the back of increased working capital requirement.

Working capital requirement increased on the back of:

• Tariff adjustment, arising due to revenue gaps, jumped by INR 5.7 bn during FY10.

• Increase in debtors from INR 19.3 bn in FY09 to INR 22.5 bn in FY10.

• Rise in advances recoverable in cash or kind by INR 7.6 bn.


Reliance Infrastructure Annual Report Analysis January 17, 2011


1

Market Data

52-week range (INR): 1,225 / 751




Promoters : 42.7


FIIs : 15.5




2

IFRS compliance to boost construction revenues on BOT projects

Rinfra recognised toll collection rights of INR 7.7 bn as at FY10 end (FY09: Nil), at actual cost incurred on BOT projects and amortised it over the concession period.

Migration to IFRS (FY12 onwards) is likely to effectively advance revenue recognition. Refer our report, ‘IFRS: The big switch’, dated June 09, 2010, for detailed explanation of IFRS adoption accounting treatment.

Erstwhile warrants forfeited; fresh warrants/shares to promoters boost net worth

Rinfra had issued 4.3 crore warrants of INR 7.8 bn in FY08 to AAA Project Ventures (AAAPVL), promoter, convertible into equivalent number of equity shares @ INR 1,812/ share.

During FY10, these warrants were forfeited and the amount of INR 7.8 bn was credited to capital reserve as promoters did not opt to exercise the warrants.

Rinfra’s net worth jumped from INR 169.0 bn in FY09 to INR 207.0 bn in FY10, primarily due to fresh issue of 4.3 crore warrants @ INR 929/warrant to AAAPVL, of which, 2.0 crore warrants were converted to equivalent equity shares.

On January 7, 2011, AAAPVL has exercised the balance 2.3 crore warrants which have been converted into equivalent equity shares.

Increased average borrowing cost, despite lower D/E

Average borrowing cost (including capitalised) jumped from 6.5% in FY09 to 8.1% in FY10, primarily due to repayment of low-cost foreign currency borrowing.

Rinfra’s D/E ratio dipped from 0.6 to 0.4, primarily due to repayment of loan funds out of the amount received from issue of share warrants.

Related party transactions

Of the current liabilities of INR 70.4 bn as at FY10 end (FY09: INR 59.1 bn), amount payable to related parties for rendering services stood at INR 20.5 bn (FY09: INR 17.3 bn), ~29.1% (FY09: 29.3%) of current liabilities.

During FY10, advances received towards contracts from joint ventures/associates aggregate INR 8.0 bn (FY09: INR 18.0 bn), 9.3% (FY09: 32.4%) of total loans and advances.

Corporate guarantees and collaterals for related parties stood at INR 3.2 bn as at FY10 end (FY09: INR 6.2 bn), ~1.5% (FY09: 3.7%) of net worth.

Other highlights

ROAE reduced from 8.1% in FY09 to 8.0% in FY10, primarily due to lower return on net financial income.

Other current assets include retentions on contracts which have increased from INR 5.8 bn in FY09 to INR 7.6 bn in FY10, 24.4% (FY09: 45.3%) of net current assets.

Provision for disputed matters/contingencies for electricity business and other corporate matters stood at INR 6.3 bn as at FY10 end (FY09 end: INR 5.6 bn), ~3.0% (FY09: 3.3%) of net worth.

Post BS date, the company sold investments in two wholly-owned subsidiaries (BSES Kerela Power and Reliance Energy Generation) to RePL. The turnover of these subsidiaries as at FY10 end was INR 4.5 bn with a net worth of INR 1.9 bn.



3

During FY10, unrealised gain on fair valuation of foreign exchange derivative transactions was INR 0.8 bn (FY09: unrealised loss, INR 1.7 bn) ~ 5.9% (FY09: - 12.7%) of PBT.

Net unhedged foreign currency exposure stood at INR 16.4 bn as at FY10 end (FY09 end: 7.9 bn).

During FY10, Rinfra bought back and extinguished 0.7 mn equity shares aggregating INR 431.5 mn through open market transactions at average price of INR 616/share.

Cash flow from operations (INR bn)


Shareholders’ fund movement (INR bn)


Particulars FY10


Depreciation 4.7

Interest and finance charges 5.3

Non operating (profit)/Loss (7.6)

Non cash adjustments (Incl. tax provision) (0.5)





Increase in trade payables 10.7

Increase in working capital (13.3)


Interest expenses paid (6.6)

Net cash from operations post interest (4.9)

Particulars FY10


Add Issue of share warrants to AAA Project Ventures Private 23.6

Grants received 1.4

Increase in capital reserve on forfeiture of share warrants 7.8

Increase in share in reserves of JV's 1.3


Others (1.0)

48.4

Less

Proposed Dividend and tax thereon (Equity and Preference) 2.0

Forfeiture of equity share warrants 7.8

Buyback of equity shares 0.4

10.3

Closing shareholders fund 207.0

Cash flow subdued due to increase in unbilled revenue and debtors.

Higher interest expense resulted in negative

cash from operations, post interest

Warrants/ equity shares issued to promoters result in increase in shareholders’ funds



4

ROE analyser


ROAE Tree


Profitability analysis



10.2 6.8 7.2


NOPAT margin (%) 9.1 7.0 8.2

B. Return from leverage (FLEV x spread) (%) (1.2) 1.2 0.8

FLEV (financial leverage) (x) (0.4) (0.2) (0.1)




ROE Derived (A+B+C) (%) 9.0 8.1 8.0

FY08 FY09 FY10

7.2

0.8

8.0

0.0

1.8

3.6

5.4

7.2

9.0

Return on net operating assets

Return from leverage ROAE

(%)

0

3,000

6,000

9,000

12,000

15,000

0.0

4.0

8.0

12.0

16.0

20.0


(IN

R m

n)

(%)

PBT (before exceptional items) EBITDA margin (%)PBT margin (%) EBIT margin (%)

Return from leverage slipped due to lower net financing income. Better

operating margins resulted in increased

NOPAT margin

PBT margin decreased (from 10.6% in FY09 to

9.2% in FY10) despite increase in EBIT margin

(from 3.9% to 5.3%), due to lower net financial income



5

Average borrowing cost

Note: Borrowing cost capitalised details are not available for FY06 and FY07


Sources of funds



0

25

50

75

100

125

0.0

1.8

3.6

5.4

7.2

9.0


(IN

R b

n)

(%)

Debt (RHS) Debt /Equity (LHS) Avg. borrowing cost (incl capitalised) (LHS)

0.0

20.0

40.0

60.0

80.0

100.0


(%)



0.0

20.0

40.0

60.0

80.0

100.0


(%)



Loans and advances

Average borrowing costs increased from

6.5% to 8.1%, primarily due to replacement of

low-cost foreign currency borrowing

Proportion of loan funds reduced from 29.3% to

22.5%, primarily due to funds received from

issue of share warrants

Proportion of loans and advances increased due

to jump in inter-corporate deposits from

INR 15.8 bn in FY09 to INR 27.7 bn in FY10



6




Sales 40,335 68,489 83,429 126,320 146,286

Total income 45,790 77,584 97,005 139,180 157,240

EBITDA 7,765 5,664 5,880 8,213 12,498

EBITDA margin (%) 19.3 8.3 7.0 6.5 8.5

Depreciation 3,486 3,032 3,074 3,304 4,724

Financial costs 1,919 3,130 4,021 4,394 5,251

Net profit 6,503 8,345 11,782 13,532 15,194


Loan funds 42,669 66,256 59,036 101,054 85,839

Net fixed assets 28,737 43,878 50,186 90,277 112,185







Net cash flows (3,925) (34,810) (21,175) 3,286 (103)

CAPEX (3,828) (6,146) (9,775) (24,453) (22,108)

Working capital investments (2,768) 5,218 (5,736) (2,530) (13,265)



Subsidiaries led by Novelis steered turnaround

Hindalco Industries’ (Hindalco) consolidated revenues dipped 7.9% from INR 659.6 bn in FY09 to INR 607.2 bn in FY10 on the back of lower aluminium prices, 2% reduction in shipment of Novelis and change in the status of Idea Cellular to associate from joint venture w.e.f. from January 01, 2009.

The company reported EBIDTA of INR 97.5 bn (FY09 29.7 bn), of which, subsidiaries contributed INR 68.0 bn [FY09 INR (0.7) bn].

Unrealised derivative gains supported improved operations

Unrealised derivative gains for FY10 stood at INR 27.0 bn (43.7% of PBT), primarily on account of reversal of derivative losses incurred by Novelis (INR 23.8 bn) during FY09.

Hindalco, on a standalone basis, was not providing for MTM losses on derivative contracts till FY09. During FY10, Hindalco’s standalone entity early adopted AS 30 and adjusted the net loss of INR 2.3 bn (net of deferred tax of INR 1.2 bn) arising from fair valuation of outstanding derivatives as at FY09 end against general reserve. INR 1.8 bn of derivative gains for FY10 have been routed through the P&L.

Derivative driven profit variability likely to reduce

Derivatives in Novelis, which caused huge losses in FY09, were primarily taken to hedge the customer fixed price contracts. Last of such contracts expired on CY09 end. The new agreement does not contain such metal price ceiling. Going forward, variability in profitability on account of derivative will not be substantial.

Inadequate provisioning for copper purchase in FY09 hits profitability

Raw material consumed for copper business during FY10 includes INR 2.6 bn (4.2% PBT) of additional liability for copper concentrate purchased during FY09 for which price and quantity was not finalised in earlier years. The company has made a fresh provision of INR 1.1 bn for FY10 for similar contracts.

High court approvals keep interest expenses off P&L

Interest and finance charges of INR 3.0 bn incurred on loans taken by AV Minerals (Netherlands) B.V, a subsidiary for Novelis, have been charged to the business reconstruction reserve (BRR), which has resulted in profit for FY10 being higher by INR 3.0 bn (7.6% of PAT). BRR had been formed in FY09 by seeking a court approval for transferring the balance in share premium account to BRR.

Operating cash flows supported by acceptances and QIP facilitate capex

Cash from operation post interest paid stood at INR 32.5 bn, supported by increase in acceptances by ~INR 17 bn.

The company is pursuing aggressive capex plans. Net cash outflow for capex during FY10 stood at INR 41.7 bn (FY09 INR 25.9 bn)

Interest capitalised for FY10 stood at INR 3.4 bn (FY09 INR 3.3 bn)


Hindalco Industries Annual Report Analysis September 20, 2010


Market Data





Promoters* : 32.1


FIIs : 27.0


1



2

Improved operations, coupled with exchange fluctuation and dilution reduced D/E

During FY10, Hindalco’s loan book reduced by 43.1 bn, to INR 240 bn (FY90 INR 283.1 bn), primarily on account of exchange fluctuation. Net loan repaid as per cash flow stands at INR 3.2 bn.

Hindalco raised INR 27.9 bn by issuing 213.2 mn equity shares of INR 1 each at a premium of INR 129.9/share through QIP.

Consequently, the D/E of the company reduced from 1.8x in FY09 to 1.1x in FY10.

Other highlights

The company had issued ESOPs to its employees, which have been accounted on the intrinsic value basis. Had the company accounted the same on fair value basis, profit for the year would have been lower by INR 18.4 mn.

Cash conversion cycle increased from 44 days in FY09 to 45 in FY10, primarily due to increase in inventory days from 57 in FY09 to 71 in FY10; impact partly offset by rise in creditor days from 50 in FY09 to 66 in FY10

Inventory has increased 32.4% from INR 85.2 bn in FY09 to INR 112.8 bn in FY10 primarily on account of increase in base metal prices.

Hindalco has an investment of INR 344.5 mn in trident trust which holds 16.3 mn treasury shares in the company.

Goodwill of INR 44.3 bn and customer relationship of INR 17.8 bn constituted 28.8% of the net worth.

Book value per share of the company on a consolidated basis stood at INR 112.5 Vis a vis INR 145.8 on a standalone basis primarily on account of losses incurred in Novelis charged to BRR.

Movement in shareholder's funds (INR bn) Particulars FY10

Opening shareholder's fund 157.6

Add:


Issue of share capital (net of expenses) 27.5

Exchange translation losses 1.9

68.7

Less:

Proposed dividend including tax 3.0

Net Loss on fair valuation of derivatives 2.3

Others 0.8

Interest on loan taken for Novelis (BRR) 3.0

Unreconciled decrease in securities premium 1.7

10.9

Closing shareholder's fund 215.4 Source: Company’s annual report, Edelweiss research

Un-reconciled decrease in securities

premium of INR 1.7 bn

Hindalco Industries


3

Base metal movement

0

800

1,600

2,400

3,200

4,000

0

3,000

6,000

9,000

12,000

15,000

Jun-0

4S

ep-0

4D

ec-

04

Mar-

05

Jun-0

5S

ep-0

5D

ec-

05

Mar-

06

Jun-0

6S

ep-0

6D

ec-

06

Mar-

07

Jun-0

7S

ep-0

7D

ec-

07

Mar-

08

Jun-0

8S

ep-0

8D

ec-

08

Mar-

09

Jun-0

9S

ep-0

9D

ec-

09

Mar-

10

Jun-1

0

(US

D/t

onne)

(US

D/t

onne)

Copper Aluminium (RHS)

Source: Bloomberg, Edelweiss research

Summarised asset liability position of derivatives

(INR bn)

Particulars Liability Asset Net fair value Liability Asset Net fair value

Commodity contracts (6.8) 7.1 0.3 (29.4) 7.5 (21.9)

Foreign currency contracts (2.8) 3.4 0.6 (5.2) 2.8 (2.5)

Interest rate contracts (0.7) 0.0 (0.7) (0.9) - (0.9)

Total (10.3) 10.5 0.2 (35.5) 10.3 (25.2)

FY10 FY09


Significant derivative gains on the commodity contracts.

Cash flow analysis

(INR bn) Particulars FY10


Non operating (profit)/Loss 8.0

Depreciation 27.8

Gains on derivative transaction net (27.0)

Non cash adjustments (9.0)




Increase in inventory (31.1)

Increase in current liabilities and provisions 31.6



Interest paid 16.8

Net cash from operating activities post interest 32.5 Source: Company’s annual report, Edelweiss research

Reversing of commodity cycle led to recouping unrealised MTM commodity

derivative losses

Operating cash flows improves on the back of increase in current

liabilities primarily comprising of

acceptances



4

Balance sheet and income statement analysis

Parent / subsidiary operating profitability analysis (INR bn)

Particulars FY09 % FY10 % FY09 % FY10 % FY09 % FY10 %

Sales 182.2 100.0 195.4 100.0 477.4 100.0 411.9 100.0 659.6 100.0 607.2 100.0

Material cost 109.6 60.2 125.4 64.2 322.9 67.6 239.3 58.1 432.5 65.6 364.7 60.1

Manufacturing expenses 19.0 10.4 19.4 9.9 17.4 3.6 14.1 3.4 36.4 5.5 33.5 5.5

Personnel cost 8.2 4.5 8.8 4.5 45.2 9.5 41.9 10.2 53.4 8.1 50.7 8.3

Other expenses 15.0 8.2 12.3 6.3 92.6 19.4 48.6 11.8 107.6 16.3 60.9 10.0

EBIDTA 30.4 16.7 29.5 15.1 (0.7) (0.1) 68.0 16.5 29.7 4.5 97.5 16.0

Depreciation 6.7 3.7 6.5 3.3 23.7 5.0 21.4 5.2 30.4 4.6 27.8 4.6

EBIT 23.7 13.0 23.0 11.8 (24.4) (5.1) 46.6 11.3 (0.7) (0.1) 69.6 11.5

Unrealised derivative gain/ (losses) - 1.8 (23.8) 25.2 (23.8) 27.0

EBIDTA excluding derivative gains 30.4 16.7 27.7 14.2 23.2 4.9 42.7 10.4 53.5 8.1 70.5 11.6



Standalone performance

Y-o-Y revenues increased 7.2%.

EBIDTA margins dipped from 16.7% in FY09 to 15.1% in FY10, despite an unrealised derivative gain of INR 1.8 bn, as:

• In aluminum business, lower Rupee-LME eroded profit by ~INR 7.5 bn.

• Higher coal cost led to an extra cost of INR 1.0 bn at Renusagar Power.

• Copper business, which benefitted from higher contracted TcRc (Treatment charges and Refining charges), lost INR 7.5 bn on lower by-product credit, in terms of sulphuric acid realisation and lower fertiliser subsidy.

Subsidiary performance

Novelis

• Despite declined sales owing to decrease in the average LME prices and 2% lower shipments, adjusted EBITDA increased 55% Y-o-Y, to USD 754 mn, primarily due to price increases negotiated in specific contracts across regions and cost reduction and restructuring initiatives.

Aditya Birla Minerals

• Aditya Birla Minerals reported profit after tax of AUD 61.4 mn against a loss of AUD 76.0 mn in the previous year, on the back of sustained cost management.

• Lower production was mainly due to loss of production of copper in concentrate at Mt. Gordon and cathode production at Nifty oxide operations, which were put under maintenance. Drop in overall production was partly offset by 13.8% increase in Nifty’s production of copper in concentrate.

Hindalco Industries


5


ROE analyser analyses profitability on the scale of operating efficiency and capital allocation efficiency (detailed concept explained in Annexure A). We have analysed Hindalco’s profitability for the year ended FY08, FY09 and FY10; results and key findings of same are as follows:

Table 1: ROE analyser ParticularsA. Return on net operating assets (RNOA)(OPATO x NOPAT margin) (%)

11.6 1.3 11.6

OPATO (operating asset turnover) (x) 2.2 1.6 1.5 NOPAT margin (%) 5.3 0.8 7.8 B. Return from leverage (FLEV x spread) (%) 3.4 0.5 10.4 FLEV (financial leverage) (x) 0.7 1.4 1.1 NBC (net borrowing cost) (%) 7.0 0.9 2.0 Net financial spread (RNOA -NBC) (%) 4.6 0.4 9.7 C. Return from other funding (0.5) 1.1 (1.3) ROAE derived (A+B+C) (%) 14.5 2.9 20.7

FY08 FY09 FY10


ROE tree

11.6

10.4

(1.3 )

20.7

0.0

7.0

14.0

21.0

28.0


Return fromother

funding

ROAE

(%)


ROAE improved significantly on the back of Increase in NOPAT margins from 0.8% in FY09 to 7.8% in FY09



6

Segmental revenues

0

120

240

360

480

600


(IN

R b

n)

Alluminium Copper Others Source: Company’s annual report, Edelweiss research

Segmental EBIT share

(7)

9

25

41

57

73


(IN

R b

n)

Alluminium Copper Others Segmental EBIT margins

(12.0)

0.0

12.0

24.0

36.0

48.0

FY04 FY05 FY06 FY07 FY08 FY09 FY10

(%)

Alluminium Copper Source: Company’s annual report, Edelweiss research

Aluminum revenue dipped on the back of lower avg.LME prices

Significant improvement in EBIT

contribution from aluminum

Margins improved for both segments

Hindalco Industries


7

Sources of funds

0.0

20.0

40.0

60.0

80.0

100.0


(%)

Provisions Current liabilities Deferred tax liability

Loan funds Minority interest Shareholder's fund Application of funds

0.0

20.0

40.0

60.0

80.0

100.0


(%)

Fixed assets Investments Inventories Debtors Cash & bank Other current assets

Efficiency ratio analysis

0.0

0.6

1.2

1.8

2.4

3.0

0

70

140

210

280

350


(x)

(IN

R b

n)

Fixed assets excl. CWIP (LHS) Fixed assets turnover ratio excl. CWIP (RHS)


Proportion of loan funds have reduced

primarily on account of exchange

fluctuation

Proportion of investments in

inventories increased during the year



8


0

34

68

102

136

170


(Days)

Debtor days Creditor days Inventory days Cash conversion cycle

Debt analysis

0.0

2.0

4.0

6.0

8.0

10.0

0.0

0.4

0.8

1.2

1.6

2.0


(x)

(x)

Debt /Equity Interest coverage (RHS) Source: Company’s annual report, Edelweiss research

Cash conversion cycle increased from 44

days in FY09 to 45 in FY10, primarily due

to increase in inventory days from

57 in FY09 to 71 in FY10; impact partly

offset by rise in creditor days from 50 in FY09 to 66 in FY10

D/E improved on the back of improved

operations, exchange fluctuation and equity

dilution

Hindalco Industries


9

Summary financial (INR mn)


Sales 121,197 193,161 600,128 659,630 607,221

Total income 124,002 197,252 606,689 666,543 610,448

EBITDA 28,449 44,306 66,351 29,695 97,458

EBITDA margin (%) 23.5 22.9 11.1 4.5 16.0

Depreciation 7,959 8,646 24,883 30,378 27,836

Financial costs 3,014 3,135 18,491 12,280 11,041


Loan funds 62,790 84,429 323,524 283,098 239,987

Net fixed assets 98,834 111,533 371,638 347,651 348,013

Investments 31,632 78,741 140,077 103,893 112,455





Cash flow from investing activities (19,435) (63,940) (180,724) 32,188 (54,368)

Cash flow from financing activities 12,953 29,031 129,145 (67,313) 4,284

Net cash flows 5,645 (650) 2,421 7,778 (764)

CAPEX (27,287) (28,809) (27,858) (26,747) (42,756)

Working capital investments (12,156) (5,347) 7,583 2,591 (5,984) Source: Company’s annual report, Edelweiss research

Improved standalone operations; subsidiaries a drag

Revenue for standalone entity rose 30%, from INR 140 bn in FY09 to INR 182 bn in FY10. Also, EBIT margin improved from 14.3% to 17.3%, primarily owing to low material cost and operational efficiencies.

Operating losses from JSW Steel’s (JSW) subsidiaries aggregated INR 2 bn in FY10 (FY09: operating profit INR 1.5 bn) which dragged down EBIT margins from 17.3% (standalone) to 14.6% (consolidated). Also, their revenues dipped 60.9% from INR 19.3 bn in FY09 to INR 7.5 bn in FY10.

On consolidated basis, JSW’s revenue increased from INR 159.3 bn in FY09 to INR 189.6 bn in FY10 as volumes jumped 67% together with a 21% dip in blended sales realisation (due to drop in steel prices).

Exchange fluctuation led to higher profits, lower debts

JSW posted forex gain of INR 4.1 bn as other income (~18.5% of PBT) in FY10; however, in FY09, it had reported forex loss of INR 7.9 bn as an exceptional item.

Despite the company raising a loan of INR 6.4 bn (net of repayment), its FY10 loan book dipped to INR 161.7 bn (FY09: INR 165.5 bn), primarily on account of exchange gain, which stood at INR 10.2 bn.

Consequently, adjusted*debt/equity for FY10 improved to 2.4x (FY09 3.0x).

Net unhedged payable position as at FY10 end stood at INR 83.5 bn (FY09 INR 96.9 bn).

The company has restated borrowing cost capitalised for FY09 from INR 0.6 bn to INR 2.5 bn. The average borrowing cost for FY09 thus increased from 8.6% (as per last annual report) to 9.9%; in FY10 it stood at 8.4%.

Accounting and other highlights

During FY10, drilling of second mining concession did not yield any positives. Since JSW follows the successful effort method for E&P activities, there could be a one-time hit for cost of unsuccessful concession.

As at FY10 end, the company has FCCB outstanding of USD 274.4 mn, convertible at INR 953.4 per share on or before June 2012 (conversion makes economic sense at INR 1361.5). Currently, redemption premium on FCCB is charged through security premium. If the same is charged to P&L, PAT would have been lower INR 704.2 mn (4.4% of PAT).

Acceptances as at FY10 end stood at INR 54.6 bn (FY09: INR 50.5 bn). During FY09, JSW had reported that the acceptances were short term and issued primarily for project expenditure and raw material purchase.

During Q1FY11, the company issued 17.5 mn warrants at INR 1,210 to Sapphire Technologies, a promoter group company. Post conversion of these warrants, the promoter holding will increase from 45.0% to 49.7%.

The number of JSW Shoppe outlets rose to 174 (FY09: 50). Retail sales for the current fiscal, through JSW Shoppe, accounted for 16% of domestic sales (excluding semis).

*Adjusted for preference shares, FCCB redemption premium and acceptances


JSW Steel Annual Report Analysis July 20, 2010


1

Market Data

52-week range (INR): 1,350 / 588




Promoters : 45.0


FIIs : 28.8





2


ROAE analyser analyses profitability on the scale of operating efficiency and capital allocation efficiency (detailed concept explained in Annexure A). We have analysed JSW’s profitability for the year ended FY08, FY09, and FY10; results and key findings of same are as follows:


11.3 6.1 6.7


NOPAT margin (%) 14.9 9.9 10.6





C. Return from other funding 0.1 0.4 0.6

ROAE derived (A+B+C) (%) 23.0 11.9 19.1

FY08 FY09 FY10


ROAE tree

6.7

11.8

0.6

19.1

0.0

4.0

8.0

12.0

16.0

20.0


Return fromother

funding

ROAE

(%)


ROAE improved during the year on account of exchange gains:

1. RNOA improved on the back of better operating margins.

2. Return from leverage was high primarily due to foreign exchange gain, which may not be sustainable. Ex-forex gain, return from leverage stood at 7.4% in FY10.

JSW Steel


3

Cash flow analysis (INR mn)

Particulars FY10

Profit before tax and exceptional item 22,000



Direct tax paid (4,594)



Decrease in inventory 578

Decrease in current liabilities and provisions (1,038)

Decrease in working capital (4,710)

Net cash from operating activities 33,613 Source: Company annual report, Edelweiss research

Parent - Subsidiary operating profit analysis (INR mn) Particulars

FY09 % FY10 % FY09 % FY10 % FY09 % FY10 %

Sales 140,013 100.0 182,025 100.0 19,336 100.0 7,547 100.0 159,348 100.0 189,572 100.0

Material 84,501 60.4 104,607 57.5 11,692 60.5 7,706 102.1 96,193 60.4 112,312 59.2

Operating exp. 24,293 17.4 31,037 17.1 3,858 20.0 720 9.5 28,151 17.7 31,757 16.8

Personnel cost 2,888 2.1 3,652 2.0 2,298 11.9 1,143 15.2 5,186 3.3 4,795 2.5

EBIDTA 28,331 20.2 42,729 23.5 1,487 7.7 (2,022) (26.8) 29,818 18.7 40,707 21.5

Depreciation 8,277 5.9 11,234 6.2 1,601 8.3 1,753 23.2 9,878 6.2 12,987 6.9

EBIT 20,055 14.3 31,495 17.3 (114) (0.6) (3,775) (50.0) 19,941 12.5 27,720 14.6



Subsidiaries dragged down overall operations

1. Revenue from subsidiaries dipped 60.9%, from INR 19.3 bn in FY09 to INR 7.5 bn in FY10.

2. On EBIDTA basis, subsidiaries reported losses. They have not been able to recoup even raw material costs, which in our opinion is primarily on account of inventory write downs.


Sources of funds

0.0

20.0

40.0

60.0

80.0

100.0


(%)


Deferred tax liability Current liabilities Provisions Source: Company annual report, Edelweiss research

Proportion of loan funds has reduced primarily on account of exchange gains

Healthy operating cash flows helped

finance the expansion plans

Debt equity improved primarily on account

of exchange fluctuation



4


0.0

20.0

40.0

60.0

80.0

100.0


(%)

Fixed assets CWIP Goodwill Investments

Inventories Sundry debtors Current assets Source: Company annual report, Edelweiss research



Sales 62,155 85,544 124,567 159,348 189,572

Total income 66,032 87,069 126,629 162,190 195,001

EBITDA 17,505 27,774 34,780 29,818 40,707

EBITDA margin (%) 28.2 32.5 27.9 18.7 21.5

Depreciation 4,058 4,983 7,419 9,878 12,987

Financial costs 3,687 4,069 6,256 11,681 11,149

Net profit (reported) 8,565 13,039 16,400 2,749 15,976


Loan funds 40,961 41,730 121,362 165,502 161,730

Net fixed assets 83,799 102,059 215,848 286,775 293,082

Investments 851 2,450 4,696 3,966 6,282



Net current assets 4,253 1,985 (5,857) (31,699) (26,027)



Cash flow from financing activities (2,650) (3,844) 66,956 11,169 (5,762)

Net cash flows 59 1,941 1,719 (122) (1,471)

CAPEX (15,971) (23,564) (52,439) (59,735) (27,537)

Working capital investments 2,636 3,145 1,570 26,781 (4,710) Source: Company annual report, Edelweiss research

Commissioning of crude steel capacity

expansion and hot strip mill during

FY10, increased the proportion of fixed

assets

Group companies: Exposure increases ~ 2.0x to INR 115.4 bn

Sterlite Industries’ (Sterlite) exposure (investments and loans & advances) to group companies (associates, fellow subsidiaries and companies under same management) increased 2.0x to INR 115.4 bn (FY09: INR 38.5 bn), ~ 18.9% of total assets (FY09: 8.6%), in FY10.

• Loans and advances to associates (Vedanta Aluminium) jumped ~9.1x to INR 85.5 bn (FY09: INR 8.5 bn; includes overdue interest of INR 595.7 mn). Also, Sterlite guaranteed Vedanta Aluminium’s liabilities aggregating INR 48.4 bn (FY09: INR 35.8 bn).

• Loans and advances to fellow subsidiaries (Konkola Copper Mines) increased ~ 21.1% to INR 6.8 bn during the year (FY09: INR 5.6 bn).

• Investments (long term and current) in associates dipped 5.5% to INR 22.9 bn in FY10 (FY09: INR 24.2 bn).

Income (guarantee commission and interest) received from group companies was at INR 3.9 bn (FY09: INR 683.8 mn), ~ 5.6% of reported PBT before exceptional items (FY09: 1.2%), and share in associates’ profits stood at INR 587.7 mn (FY09: loss, INR 1.5 bn).

Cash conversion cycle shortens ~ 71.5%

Sterlite’s cash conversion cycle dipped by 31.8 days (71.5%) to 12.7 days (FY09: 44.5 days) in FY10. All the three components, viz., inventory, receivables, and payables, contributed ~10 days each in shortening the cash conversion cycle.


The company opted for early adoption of AS 30–financial instruments, recognition and measurement FY08. Consequently:

• Financial assets and liabilities are valued at fair values, resulting in lower FY10 PBT by INR 32.6 mn (FY09: Lower, INR 2.7 bn; FY08: Higher, INR 2.7 bn).

• The option component embedded in convertible senior notes is valued at fair value through income statement, resulting in higher PAT of INR 345.5 mn.

Financial highlights

Exceptional items aggregate loss, INR 3.0 bn (FY09: Gain, INR 553.1 mn), ~ 4.3% of reported PBT before exceptional items (FY09: 1.0%) comprising:

• INR 2.7 bn provision in respect of payments to ASARCO and legal expenses.

• Voluntary retirement scheme expenses of INR 234.3 mn.

In FY10, the company posted exchange loss (including forward premium) of INR 1.4 bn (FY09: Gain, INR 2.0 bn), 2.1% of reported PBT before exceptional items (FY09: Gain, 3.5%).

As per the companies law, share issue expenses of INR 817.2 mn have been adjusted against the securities premium account, 1.2% of reported PBT before exceptional items.


Sterlite Industries Annual Report Analysis June 23, 2010


1


Market Data





Promoters : 52.1


FIIs : 14.3




2

Derivatives exposure

Unhedged foreign currency exposure in respect of liabilities stood at INR 86.3 bn (net) in FY10.

Sterlite has entered into forex forward contracts aggregating INR 25.5 bn to hedge currency risk. It has also entered into commodity derivative contracts to buy (net) 425 MT of copper and sell (net) 95,892 oz of gold, 890,229 oz of silver, and 2,200 MT of zinc.


ROE analyser analyses profitability on the scale of operating efficiency and capital allocation

efficiency (detailed concept explained in Annexure A). We have analysed Sterlite’s

profitability for FY09 and FY10; results and key findings are given below:


21.1 17.7



B. Return from leverage (FLEV x spread) (%) (6.9) (3.9)

FLEV (financial leverage) (x) (0.5) (0.4)


Net financial spread (RNOA -NBC) (%) 13.3 9.6

C. Return from other funding (%) 0.2 (1.2)

ROE Derived (A+B+C) (%) 14.4 12.6

FY09 FY10


RoE tree

21.1

(6.9) (0.2)

14.4

(5.0)

0.8

6.6

12.4

18.2

24.0

RNOA Return from

leverage

Return from other

funding

ROAE

(%)

FY09


Lower operating assets turnover ratio

offset better operating margin, higher

financial yield, and lower financial

leverage

17.7

(3.9 )( 1.2 )

12.6

(5.0)

0.8

6.6

12.4

18.2

24.0

RNOA Return from

leverage

Return from other

funding

ROAE

(%)

FY10

Sterlite Industries


3

Sources of funds

0.0

20.0

40.0

60.0

80.0

100.0

FY06 FY07 FY08 FY09 FY10 (%

)


Deferred tax liability (net) Current liabilities Provisions

Source: Company annual report, Edelweiss research Application of funds

0.0

20.0

40.0

60.0

80.0

100.0


(%)



Source: Company annual report, Edelweiss research Utilisation of income

(25.0)

0.0

25.0

50.0

75.0

100.0


(%)

Material cost Personnel cost Other operating expenses

Depreciation Finance charges Exceptional items

Other items Taxes Dividends

Retained earning Source: Company annual report, Edelweiss research

Shareholders’ funds continue to dominate

sources of funds; leverage comfortable

Current assets soar on back of loans and

advances to group companies

Lower material costs marginally offset

lower other income



4


0

18

36

54

72

90


(Days)


Source: Company annual report, Edelweiss research Profitability, returns, and efficiency ratios

0.0

0.7

1.4

2.1

2.8

3.5

0.0

16.0

32.0

48.0

64.0

80.0


(x)

(%)

EBITDA margin (%) PAT margin (%)ROCE (pre tax) (%) ROE (%)Asset turnover ratio (x) Equity turnover ratio (x)


Better inventory, receivables, and

payables management contribute to shorten cash conversion cycle

Lower material cost boost EBITDA margin;

lower asset turnover depresses ROCE (pre

tax). Lower other income and higher

taxes dent PAT margin and RoE

Sterlite Industries


5

Summary financials (INR bn) Particulars FY06 FY07 FY08 FY09 FY10

Sales 131.3 243.9 247.1 211.4 244.1

Total income 134.6 250.7 262.7 233.0 263.7

EBITDA 34.4 94.1 78.6 47.0 60.7

EBITDA margin (%) 26.2 38.6 31.8 22.2 24.9

Depreciation 5.3 8.0 5.9 7.0 7.5

Adjusted financial costs 2.4 3.8 3.1 4.0 3.4

Exceptional items gains/ (losses) (0.1) (1.6) (0.5) 0.6 (3.0) Net profit 16.8 44.8 44.0 35.4 37.4

Equity shareholders' funds 61.5 100.0 226.5 259.3 374.1

Loan funds 51.9 46.2 51.2 70.9 93.5

Net fixed assets 85.5 97.2 124.4 172.1 233.5

Current assets loans and advances 60.4 90.6 88.2 116.4 175.1

Current liabilities and provisions 33.0 48.4 28.0 38.1 44.4

Net current assets 27.4 42.2 60.2 78.2 130.7

Cash flow from operating activities 22.1 56.9 63.8 58.4 41.8

Cash flow from investing activities (16.2) (43.1) (136.4) (77.2) (132.7)

Cash flow from financing activities (3.1) (13.9) 81.0 3.7 88.2

Net cash flows 2.8 (0.0) 8.4 (15.1) (2.6)

CAPEX (11.9) (10.9) (30.2) (40.2) (62.1)

Working capital investments (8.3) (18.6) 2.0 13.6 (8.5) Source: Company annual report, Edelweiss research

Lower capacity utilisation, higher costs in subsidiaries drag profitability

Tata Steel’s (TSL) FY10 consolidated revenue dipped 30.5% to INR 1.0 tn from INR 1.5 tn in FY09, along with a dip in EBIDTA margin from 12.3% in FY09 to 7.9% in FY10.

Standalone operations were muted as revenues grew marginally by 2.9% from INR 243.2 bn in FY09 to INR 250.2 bn in FY10, along with a dip in EBITA margin from 37.3% in FY09 to 36.0% in FY10.

Subsidiaries, primarily led by Corus, displayed dismal performance as their average capacity utilisation remained low ~66% (~ 53% in H1FY10 and 80% in H2FY10).

At the EBIDTA level, subsidiaries reported loss. The company ascribed the losses primarily to sudden and unilateral termination of a 10-year offtake agreement by four international customers of the slab produced in Teesside. Further, being a non integrated manufacturer, EBIDTA margin at Corus remains low vis-a-vis Indian operations.

Healthy cash flows augment debt repayment; facilitates domestic capex

Despite low PBT of INR 0.3 bn in FY09, TSL reported cash from operations post interest of INR 72.0 bn primarily owing to dip in working capital due to reduced level of operation and depreciation. This has been utilised for repayment of debt and part finance capex.

Loan book reduced from INR 599 bn in FY09 to INR 531 bn in FY10, mainly due to debt repayment of INR 26.9 bn and exchange gains; this implies enhanced future profitability.

Jamshedpur capacity expansion 2.9 mtpa, along with new blast furnace “I”, to commence operation from Q3FY12. This will further improve the productivity of Indian operations, which are already one of the cheapest in terms of cost of production.

TSL, during FY10, under an exchange offer swapped 1% CARs of USD 493 nm (YTM 5.15%) with 4.5% FCCB of USD 546.9 mn. Though the YTM charge to the company’s balance sheet will reduce, the charge to P&L will increase as earlier redemption premium on CARs was directly routed through reserves (refer page 7 for details).

Cost control measures on track to enhance savings

‘Weathering the storm’ program helped cost savings of GBP 866 mn.

The Teesside facility has partially mothballed in February 2010 to contain losses. However, disposal of assets may lead to onetime losses.

Efforts on securing captive raw material for Corus:

A) DSO project, Canada, is expected to commence 4 MTPA sinter fines from Q3CY11, for which Tata Steel has 100% offtake rights.

B) Benga coal project, Mozambique, feasibility study has revealed production of 10.6 mtpa ROM, of which, 5.3 mtpa ROM is expected to commence by Q2CY11, for which Tata Steel has 40% offtake right.


The company, during the year, had charged actuarial losses on pension liabilities of Corus of INR 35.4 bn (FY09 INR 54.9 bn) directly to reserves. IGAAPs, however, requires the actuarial gains/ losses to be routed through the P&L.


Tata Steel Annual Report Analysis July 27, 2010


1


Market Data





Promoters : 31.3


FIIs : 15.5




2

TSL had opted to account the exchange fluctuation on long-term monetary items as per amendment in AS 11; consequently, at the end of FY10, TSL had a credit balance of INR 2.1 bn in the FCTDA (FY09: debit balance of INR 4.7 bn) pending to be amortised.

Unhedged loans payable for the standalone entity as at the end of FY10 stood at USD 1135.9 mn (FY09 USD 1160.7 mn)


ROAE analyser analyses profitability on the scale of operating efficiency and capital allocation efficiency (detailed concept explained in Annexure A). We have analysed Tata Steel’s profitability for the year ended FY08, FY09, and FY10; results and key findings of same are as follows:

Particulars FY08 FY09 FY10A. Return on net operating assets (RNOA)(OPATO x NOPAT margin) (%)

21.4 12.1 0.7


NOPAT margin (%) 8.2 7.0 0.5

B. Return from leverage (FLEV x spread) (%) 8.5 12.3 (4.1)



Net financial spread (RNOA -NBC) (%) 8.6 7.5 (2.1)

C. Return from other funding (%) 0.1 0.5 (0.0)

ROE Derived (A+B+C) (%) 29.9 24.8 (3.4) Source: Company annual report, Edelweiss research

ROAE tree

0.7

(4.1) (3.4)

(4.0)

(3.0)

(2.0)

(1.0)

0.0

1.0


(%)

RNOA dipped significantly on the back of weak product demand, resulting in:

1. dip in capacity utilisation

2. shrink in operating margins

Net borrowing cost dipped on account of profit on sale of investment of INR 12.9 bn (FY09 INR 2.5 bn).Ex profit on sale of investment NBC stood at ~5.2%

ROE dipped significantly due to

low margins and capacity utilisation,

partially compensated by

increase in profit on sale of investment

Tata Steel


3

Parent - Subsidiary operating profitability analysis (INR bn) Particulars

FY09 % FY10 % FY09 % FY10 % FY09 % FY10 %

Sales and operating income 243 100.0 250 100.0 1,230 100.0 774 100.0 1,473 100.0 1,024 100.0

Material expenses 57 23.6 59 23.5 691 56.2 390 50.4 749 50.8 448 43.8

Personnel expenses 24 9.7 23 9.2 156 12.7 142 18.3 180 12.2 165 16.1

Operating expenses 59 24.1 65 26.2 288 23.4 212 27.4 347 23.6 277 27.1

other expenses 13 5.2 13 5.1 4 0.3 41 5.2 16 1.1 53 5.2

EBIDTA 91 37.3 90 36.0 91 7.4 (10) (1.2) 181 12.3 80 7.9

Depreciation 10 4.0 11 4.3 33 2.7 34 4.4 43 2.9 45 4.4

EBIT 81 33.3 79 31.7 58 4.7 (44) (5.7) 139 9.4 36 3.5

SubsidiaryStandalone Consolidated


Note : Expense capitalised have been adjusted against the operating expenses Analysis of performance Standalone Consolidated Key Highlights Key Highlights

Remained profitable Revenue from subsidiaries dipped 37.1% on the back of low demand

Operating profitability resonably maintained Sudden termination of 10-year Offtake Agreement by 4 international slabs customers of Teeside facility

Modest operating revenue growth of 2.9% Proportion of material cost continued to be high on account of non captive RM sourcing

Capaicity utilisation remained high Underutilisation of capacity dents profitability on account of fixed costs

Subsidiaries report EBIDTA losses

Positive triggers for future Positive triggers for future

Capacity expansion at Jamshedpur of 2.9 MTPA in Q3FY12 Demand on a Uptick in H2FY10 led to better capacity utilisation

Blast furnace "I" to commence in Q3FY12 Teeside facility partially mothballed in Feb' 10 to contain cost

Decrease in RM cost as it replaces blast furnaces A , B, D, E Weathering the storm program helped bringing in cost saving of £ 866 mn

Dharma port commencement in Q2FY11 to integrate logistic cost & consolidate supply chain

Management hopeful of making corus partially capive with RM in future

DSO Project in Canada where Tata Steel will have 100% offtake rights of sinter fines expected to commence production of 4 mtpa in Q3CY11

Benga coal project, Mozambique, to commence production of of 5.3 mtpa ROM in Q2CY11 (1st phase); in this, TSL has has 40% offtake right



4

Capacity utilisation analysis

0.0

0.6

1.2

1.8

2.4

3.0

0

140

280

420

560

700


(x)

(IN

R b

n)

Fixed assets CWIP Fixed assets turnover ex CWIP

Q-o-Q cost and realistation analysis

Tata Steel India

0

300

600

900

1,200

1,500

0.0

0.4

0.8

1.2

1.6

2.0

Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10

(US

D)

(mn tonne)

Production Delivery Revenue /Tonne Operating Cost/ Tonne

Corus

600

750

900

1,050

1,200

1,350

2.0

3.0

4.0

5.0

6.0

7.0

Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10

(US

D)

(mn tonne)

Production Delivery Revenue /Tonne Operating Cost/ Tonne


Significant drop in overall capacity

utilisation during FY10

CWIP is primarily attributable to

ongoing expansion in India

Capacity utilisation remains robust

Margins improving Q2FY10 onwards

Volumes picked up since Q2FY10…

…however EBIDTA turns positive only in Q3FY10 on the back

of improved realisations

Tata Steel


5


0

20

40

60

80

100


(Days)





Non cash adjustments 48.3



Decrease in trade and other receivables 20.9

Decrease in inventory 18.8

Increase in current liabilities and provisions 6.7



Interest paid 32.7

Net cash from operations post interest 72.0

Movement in shareholder fund (INR bn) Particulars FY10

Opening balance 271.4

Add:

Profit for the year (20.1)

Issue of share capital 24.2

Forex gain on long term monetary liabilities 6.8

Gains on effective cash flow hedges 0.6

Premium on CARs written back 1.7

capital expenditure contributuion 0.2

Others 1.2

Less:

Proposed dividend (equity & preference) incl. tax 9.1

Acturial loss 35.4

Exchange translation losses on non integral foreign operations 11.3

Closing balance 230.2 Source: Company annual report, Edelweiss research

On a standalone basis, shareholders’ fund as at the end of FY10 stood at INR 371.7 bn. The difference with the consolidated net worth is primarily on account of actuarial losses of INR 31.3 bn, foreign currency translation difference on non integral operations of INR 59.9 bn and losses in subsidiary post acquisition.

Healthy cash flows utilised for financing

capex and repayment of loans

Cash conversion cycle increased marginally

Actuarial losses has directly debited to shareholder’s fund



6


Sources of fund

0.0

20.0

40.0

60.0

80.0

100.0


(%)

Equity shareholders' funds Loan funds Minority interestDeferred tax liability (net) Current liabilities ProvisionsOther Liabilities

Application of fund

0.0

20.0

40.0

60.0

80.0

100.0


(%)


Sundry debtors Cash and bank balance Other current assets Borrowing cost analysis

0.0

3.0

6.0

9.0

12.0

15.0

0.0

150.0

300.0

450.0

600.0

750.0


(%)

(IN

R b

n)

Loan funds Avg borrowing cost Source: Company annual report, Edelweiss research

Loan book reduced during FY10,

primarily on account of repayment and

exchange gains

Average borrowing cost dipped during

the year

Proportion of other current assets has

decreased primarily on account of

reduction in advances

Tata Steel


7

CAR restructuring analysis

Issue date Aug ' 07 Nov ' 09

Type of instrument CARS FCCB

Amount 493.0 549.9

YTM (%) 5.2 4.5

Coupon rate 1.0 4.5

Conversion price / share 733.1 605.5

Maturity period Sept ' 12 Nov ' 14

Benefits Adverse Impacts Lower YTM implies lower charge to net worth

Higher charge on P&L

Lower conversion price and higher tenure to facilitate easy conversion

Under IFRS accounting the reduction in conversion price/increase in maturity period leads to higher option valuation resulting in higher interest (YTM) charge to P&L



Sales 203,221 252,124 1,315,336 1,473,293 1,023,931

Total income 206,148 258,733 1,324,635 1,480,954 1,040,512

EBITDA 63,455 74,513 177,842 181,294 80,443

EBITDA margin (%) 31.2 29.6 13.5 12.3 7.9

Depreciation 8,604 10,110 41,370 42,654 44,917

EBIT 54,851 64,403 136,472 138,640 35,525

Adjusted financial costs 2,076 6,341 45,394 37,907 34,943

Net profit 37,346 41,773 123,500 49,509 (20,092)


Loan funds 33,774 249,255 536,247 599,005 531,004

Net fixed assets 109,021 144,402 600,163 606,708 603,377






Cash flow from financing activities (9,451) 204,803 205,426 (27,548) (51,350)

Net cash flows 2,902 96,951 (122,622) 21,192 6,396

CAPEX (19,328) (29,751) (84,197) (84,337) (71,495)

Working capital investments (5,742) 2,541 (22,227) 2,848 46,465 Source: Company annual report, Edelweiss research



Forex movements on consolidation imbibed in cash flow

Aban Offshore’s (Aban) net loan repaid as per cash flow stood at INR 24.3 bn in FY10. However, the reported loan book dipped by a mere INR 24.8 bn. Considering that INR 88.4 bn (~62.4%) of the loan book as at FY10 end (FY09: INR 100 bn ~ 60.1% of loan book) is foreign currency denominated and the INR appreciated 11.4% against USD during the year, it can be implied that forex gains on revaluation of loans have been included in repayment of loans in the cash flow.

FY10 cash flow statement states a net sale of investment of INR 8.1 bn on which the company has recognised a profit of INR 0.2 mn. Despite the sale, Aban reported increase in gross investment book by INR 0.4 bn (refer page 3 for details).

Derivative losses continued despite appreciating rupee

Surprisingly, the company has incurred derivative loss of INR 555.5 mn in FY10 (FY09: loss of INR 396.2 mn) despite appreciation of the INR against a depreciation in FY09. Also, the quantum of losses in standalone and consolidated financials is same despite varying derivative positions (refer table for derivative analysis on page 3).

INR appreciation impacts translation reserve on consolidation

During FY10, balance in foreign currency translation reserve (FCTR) dipped by INR 5.2 bn on 11.4% appreciation of the INR. However, during FY09 the balance in the FCTR had increased by INR 4.2 bn on 27.5% depreciation of INR (refer page 3 for details).

Operating metrics improved, but overall margins dipped

Aban’s consolidated sales increased 10.1% from INR 30.5 bn in FY09 to INR 33.6 bn in FY10.

EBIDTA margin improved from 56.8% in FY09 to 59.0% in FY10. However, PBT margins dipped from 22.3% in FY09 to 13.2% in FY10 primarily owing to INR 1.2 bn provision towards diminution in value of long-term investment towards equity investment by a foreign subsidiary and increase in finance charges.

Interest cost continued to be an overhang on the company and jumped 14.2% (from INR 8.6 bn in FY09 to INR 9.8 bn in FY10) primarily on account of low interest capitalisation.

CWIP dipped from INR 47.0 bn in FY09 to INR 0.1 bn in FY10, primarily due to commencement of new rigs.

The company’s loan book* dipped from INR 169.7 bn in FY09 to INR 144.9 bn in FY10. Consequently, its D/E* improved 12.0x in FY09 to 7.8x of FY10.

Other financial and accounting highlights

FCCB of JPY 5.4 bn are outstanding as at FY10 end (effective conversion price of INR 3,397.4), and will mature in April 2011. Currently, the company is neither providing for redemption premium nor showing it as contingent liability. Had the company provided for redemption premium from P&L, PBT for the year would have been lower by INR 138.4 mn (3.1% of PBT). Since FY10 end, the JPY has appreciated ~10.7% against INR which may lead to further increase in liability.

*including preference shares


Aban Offshore Annual Report Analysis October 4, 2010


1

Market Data

52-week range (INR): 1,679 / 637


M cap (INR bn/USD mn): 37 / 830


Promoters* : 53.1


FIIs : 5.0




2

During the year, INR 25.8 bn loan extended to Aban Holding, Singapore, the company’s wholly-owned subsidiary, has been converted into equity shares. Accordingly, the subsidiary has issued 526.4 mn equity shares to Aban.

Goodwill as at FY10 end stood at INR 49.6 bn (227.3% of net worth).

During the year, the company de-capitalised INR 21.8 bn from fixed assets towards the exchange difference of non-integral operations (FY09: INR 35.7 bn capitalised) and deducted INR 489.1 mn from depreciation (FY09: INR 700.8 mn added).


ROE analyser analyses profitability on the scale of operating efficiency and capital allocation efficiency (detailed concept explained in Annexure A). We have analysed Aban’s profitability for years ended FY08, FY09, and FY10; results and key findings of same are as follows:

RoE analyser

Particulars


5.7 5.6 6.7


NOPAT margin (%) 30.6 27.6 32.8





ROE Derived (A+B) (%) 59.6 30.3 29.0

FY08 FY09 FY10


Note:* excluding the impact of diminution in value of investment, forex items and derivative contracts cancellation expenses

RoE tree

6.7

22.3

29.0

0.0

6.0

12.0

18.0

24.0

30.0

RNOA Return fromleverage

ROAE

(%)


• NBC increased from 3.9% in FY09 to 4.3% in FY10, primarily on account of lower

interest capitalisation during the year.

• Including forex items, derivatives and diminution in value of investments, ROAE dipped from 55.4% in FY09 to 18.8% in FY10.

The company has high financial

leverage and hence financing will have

high propelling impact

Aban Offshore


3

Investment book analysis (INR mn) Particulars FY10

Opening gross investments reported (A) 5,756

Increase 629

Mutual funds 95

Joint venture (Venture drilling ASA) 534

Decrease 224

Trade investment (Petrojack ASA) 224

Closing gross investments reported (B) 6,161

Net sale of investment as per cash flow statement (C) 8,097

Profit recognised on sale of investment (D) 0.2

Calculated closing gross investments (E= (A-C+D)) (2,341)

Difference between reported and calculatedgross investment (B-E)

8,502


Cost analysis (INR mn)

FY09 % of sales FY10 % of sales

Personnel cost 3,442 11.3 2,884 8.6

Consumption - stores and spares 1,735 5.7 1,033 3.1

Rental charges for machinery 1,111 3.6 463 1.4

Drilling services and management fees 1,002 3.3 472 1.4

Travelling and transportation expenses 1,659 5.4 1,582 4.7

Provision for dimunition value oflong term investment

- - 1,205 3.6

Foreign exchange loss - - 1,203 3.6

Other expenses 743 2.4 1,754 5.2

Administration and misc expenses 3,482 11.4 4,395 13.1

13,174 43.2 14,991 44.6 Source: Company’s annual report, Edelweiss research

Foreign exchange translation reserve analysis (INR mn) FY08 FY09 FY10

Exchange gain/ (loss) adjusted in fixed assets (7,044) 34,980 (21,278)

Exchange gain/ (loss) adjusted in net liabilities 6,675 (30,791) 16,061

Movement in translation reserve (369) 4,189 (5,217)

INR appreciation/(depreciation) (%) 8.3 (27.5) 11.4 Source: Company’s annual report, Edelweiss research

Aban classifies all its subsidiaries as non integral, consequently all assets and liabilities have been restated at the closing exchange rates while P&L items are translated at the exchange rates on the date of transaction. The difference on account of the above are held in foreign currency translation difference account till the disposal of investment in the subsidiary.

Derivative analysis (INR mn)

Particulars FY09 FY10 FY09 FY10Currency Forward contracts/options 10,376 6,722 22,932 9,910

Interest swaps 1,139 611 2,407 611

Loss on forex contracts 396 556 396 556

Standalone Consolidated


Other expenses increased

substantially on account of

deployment of rigs during the year

Dip in translation reserve was higher

despite lower currency appreciation

Derivative losses have remained same

on standalone and consolidated levels

despite varying exposures



4

Cash flow analysis (INR mn) Particulars FY09 FY10

Profit before tax 6,802 4,430

Non operating (profit)/Loss 8,353 9,717

Non cash adjustments (Incl. tax provision) 6,015 6,607

Direct taxes paid (2,406) (2,584)

Cash profit after tax 18,764 18,170

Increase in trade and other receivables (2,841) (1,970)

Increase in trade and other payables 5,782 4,304

Increase in inventories (628) (203)

Decrease in working capital 2,313 2,131

Net cash from operating activities 21,077 20,301 Source: Company’s annual report, Edelweiss research

Movement in shareholders fund (INR mn) Particulars

Opening shareholders' fund 8,119 17,440

Add

Issue of Preference shares 200 -

Issue of ESOP's 3 7

Issue of shares on QIP - 6,975

Profit for the year 5,407 3,110

5,610 10,092

Less

Proposed Dividend and tax 478 510

Change in Translation reserve (4,189) 5,217

Others - (0)

(3,711) 5,726

Closing shareholders fund 17,440 21,806

FY09 FY10


Sources of funds

0.0

20.0

40.0

60.0

80.0

100.0


(%)

Equity shareholders' funds Loan funds Deferred tax liability

Current liabilities Provisions Source: Company’s annual report, Edelweiss research

Funds raised through QIP led to increase in

proportion of shareholders’ fund

Cash from operations remains positive and

was used for repayment of debts

Aban Offshore


5


0.0

20.0

40.0

60.0

80.0

100.0


(%)

Fixed assets Goodwill CWIP Investments

Inventories Debtors Cash and bank Other current assets

Leverage analysis

0

5

10

15

20

25

0

40

80

120

160

200


(x)

(IN

R m

n)

Preference shares Debt Debt /Equity Source: Company’s annual report, Edelweiss research

Rise in proportion of fixed assets is

primarily on account of capitalisation of

rigs which were lying as CWIP

Repayment of loans and favourable forex movement led to fall

in D/E



6



DDI Holding AS Norway 100 17,097 28 (756) 10,235 48 (3,102)

Aban Holdings,Singapore 100 14,319 6 (1,737) 34,535 0 (1,765)

Aban International, Norway 100 (171) 0 (1,576) (1,582) 0 (1,511)

Aban Singapore, Singapore 100 2,508 663 (1,366) 16,571 6,536 (1,049)

Deep Drilling 6, Singapore 100 2,204 1 (318) 1,226 21 (670)

Aban 7, Singapore 100 1,958 1 (508) 1,106 0 (583)

Sinvest AS,Norway 100 15,115 948 3,325 25,233 261 (386)

Deep Drilling 1,Singapore 100 11,543 3,337 2,164 10,023 580 (60)

Venture Drilling, Singapore 100 (2) - (0) (2) 0 (0)

Sinvest Cyprus,Cyprus 100 (2) - - (2) 0 -

Aban Energies, India 100 (9) 14 1 (7) 15 4

Beta Drilling, Singapore 100 (3,283) 872 (3,510) 0 15 16

Deep Drilling Invest, Singapore 100 32,522 206 197 28,268 83 56

Deep Drilling 4, Singapore 100 3,994 3,569 1,699 3,575 1,620 327

Deep Drilling 7, Singapore 100 3,148 1,088 500 3,213 1,239 374

Aban Abraham, Singapore 100 2,602 105 78 2,836 2,526 758



Deep Drilling 8, Singapore 100 1,382 2 (26) 2,343 2,116 1,287

Aban 8, Singapore 100 2,352 2,838 1,431 3,561 2,963 1,753

Deep Drilling 3, Singapore 100 11,232 3,467 2,045 11,530 3,001 2,006

Aban Pearl,Singapore 100 2,945 29 4 4,637 2,798 2,154

Total 23,192 4,783 27,703 1,366

PBT margin (%) 20.6 4.9

FY09 FY10

Profitability of subsidiaries declined further. During Q1FY11, a rig owned by Aban Peal, Singapore, sunk, which will further dampen performance of subsidiaries.

Aban Offshore


7


Sales 4,902 7,187 20,470 30,501 33,587

Total income 5,041 8,068 21,350 34,544 33,805

EBITDA 2,812 3,474 10,725 17,327 18,596

EBITDA margin (%) 57.4 48.3 52.4 56.8 55.4

Depreciation 1,014 1,266 3,140 6,015 4,616

Financial costs 436 2,686 6,658 8,553 9,768

Net profit 823 (140) 1,230 5,407 3,110

Equity shareholders' funds* 2,804 2,248 5,059 14,180 18,547

Loan funds* 12,598 111,585 133,494 169,713 144,901

Net fixed assets 7,158 75,203 83,529 128,601 153,514



Net current assets 400 12,241 6,573 3,063 5,288


Cash flow from investing activities (8,254) (87,734) (32,566) (48,183) 4,211

Cash flow from financing activities 4,914 97,676 17,413 26,599 (28,080)

Net cash flows (842) 13,131 (6,812) (507) (3,569)

CAPEX (8,405) (35,745) (32,647) (50,799) (3,935)

Working capital investments 211 (200) (1,654) 2,313 2,131 Source: Company’s annual report, Edelweiss research

*adjusted for non-convertible redeemable preference shares considered as debt

Loan book and interest cost dip on exchange gains

Reliance Industries’ (RIL) loan book in FY10 dipped by INR 116.5 bn (15.3%), to INR 646.1 bn. Of this decrease, INR 58.2 bn was on account of debt repayment (net) and INR 58.3 bn owing to exchange rate fluctuation (~83% of the company’s loan book is foreign currency denominated).

Exchange gains adjusted to fixed assets were INR 53.1 bn vis-à-vis exchange loss of INR 121.2 bn during FY09.

The company’s FY10 gross interest expense decreased from INR 52.1 bn in FY09 to INR 30.4 bn. Average gross borrowing cost was significantly lower at 4.4% vis-à-vis 8.3% during FY09, on account of lower interest rates and INR-USD appreciation by 11.4% during FY10. Since the balance sheet date, the INR has depreciated 3.4%, which will lead to reversal of exchange gains as well as higher interest cost during FY11.

Interest charged to P&L jumped 13.4% from INR 18.2 bn in FY09, to INR 20.6 bn in FY10, on account of lower capitalisation during the year.

Operating cash flow includes exchange rate adjustment of INR 18 bn, which may be on account of non cash exchange gain included in the P&L.

The company’s ROAE and RNOA have dipped consistently over past two years despite lower net borrowing cost, primarily due to decline in GRMs (refer ROE analyser).


RIL has a drilling success ratio of 54% and it follows the full cost method for accounting of oil & gas E&P activities. Shift to IFRS will require adoption of the successful effort method, which entails charging of expenses pertaining to unsuccessful wells. This will lead to lower profitability and net worth.

The company’s cash conversion cycle increased from 18 days in FY09 to 22 days in FY10 on the back of decrease in creditor days from 51 to 47 during the same period.

Expenses paid to related parties increased significantly from INR 38.2 bn in FY09 to INR 51.4 bn in FY10 (refer table 4), which we believe is due to doubling of refining capacity post commissioning of the SEZ refinery.

Derivative exposure, both in currency and commodity, has increased substantially over the past two years.

Unhedged foreign currency exposure at FY10 end stood at INR 504.9 bn.

Investments include investment of INR 20 bn in 9% preference shares of Reliance Gas Transportation Infrastructure (classified as an associate) and INR 7 bn invested during the year through one of the subsidiaries in 10% preference shares of Shinano Retail (not an associate).


Reliance Industries Annual Report Analysis June 8, 2010


1

Market Data

52-week range (INR): 1,186 / 840


M cap (INR bn/USD mn): 3,301/69,817


Promoters : 44.8


FIIs : 17.6





2

Operating performance and other highlights

RIL’s revenue increased 34.7% from INR 1,512.2 bn in FY09 to INR 2,037.4 bn in FY10 with 50% increase in volume and 13% decrease in prices.

The company, during FY10, had an average utilisation of 98.3%, significantly higher than that of refineries globally.

The company’s EBIT margins dipped from 11.8% in FY09 to 9.8% in FY10, primarily on account of lower GRMs in the refining segment and higher depreciation cost.

Petrochemicals emerged as the largest EBIT contributing segment with an increase in segmental EBIT margin from 13.3% in FY09 to 15.4% in FY10.

Gross block of assets jumped 42.6% from INR 1,571.8 bn in FY09 to INR 2,241.3 bn in FY10, primarily on account of commissioning of the SEZ refinery and KG-D6 block. This increase is despite the write down in gross block of INR 53.1 bn due to exchange gains on forex loans.

With commencement of the SEZ refinery, the inventory of finished goods and crude increased 101.8% to INR 95.3 bn. However, inventory for stock in process rose only 21.6% to INR 68.3 bn (refer table 2).

During FY10, RIL through the Petroleum Trust sold 88.8 mn shares (adjusted for bonus) for INR 93.3 bn and realised an exceptional gain of INR 86.1 bn. The company, through its subsidiaries / trust, further holds 292.3 mn equity shares which have been eliminated on consolidation.

ROE analyser


ROE analyser analyses profitability on the scale of operating efficiency and capital allocation efficiency (detailed concept explained in Annexure A). We have analysed the profitability of RIL for FY08, FY09 and FY10; results and key findings of which are given below:

Table 1: ROE analyser

FY08 FY09 FY10


14.3 9.8 9.4

OPATO (Operating asset turnover) (x) 1.2 1.0 1.1

NOPAT margin (%) 11.5 9.8 8.4



NBC (Net borrowing cost) (%) 1.0 (0.1) 0.1



ROAE derived (A+B+C) (%) 19.9 14.2 12.9 Source: Company’s Annual Report, Edelweiss research

Reliance Industries


3

Chart 1: ROE tree

9.4

3.4

0.1

12.9

0.0

3.0

6.0

9.0

12.0

15.0



ROAE

(%)

Source: Company’s Annual Report, Edelweiss research

ROAE dips significantly despite commissioning of significant CWIP projects

The company’s RNOA, during FY08 and FY09, was muted on account of high CWIP. RNOA for FY08, FY09 and FY10 (excluding CWIP) stood at 22.2%, 16.5% and 12.5%, respectively.

Higher yield on cash and investment @ 7.5%, lower gross interest cost @ 4.4% (due to exchange rate gains and lower borrowing cost), and capitalisation of interest cost have caused almost NIL effective borrowing cost charged to the P&L.

Poor GRMs during FY10 further dragged NOPAT margins, resulting in lower ROAE.

Table 2: Loan book reconciliation statement (INR bn) Opening balance 762.6

Net debt repaid (58.2)

Exchange gain capitalised (53.1)

Closing calculated 651.2

Closing reported 646.1

Difference 5.2 Source: Company’s Annual Report, Edelweiss research

Operating cash flow includes exchange rate adjustment of ~INR 18 bn, which may be on

account of non cash exchange gain included in the P&L.

Table 3: Inventory analysis (INR bn) Inventory FY09 FY10 increase (%)

Raw material 61.7 150.9 144.5

FG/traded goods 47.3 95.5 101.8

Stock in progress 56.1 68.3 21.6 Source: Company’s Annual Report, Edelweiss research

Difference may be exchange gains on

loans recognised in P&L

Inventory for raw material and finished

goods increased by more then 100%

during FY10. However, stock in

progress increased by only ~22%.



4

Table 4: Related party expense transaction (Standalone) (INR mn) Related party FY08 FY09 FY10

Reliance Ports and Terminals 12,050 12,553 27,737

Reliance Utilities 0 3,959 6,745

Gujarat chemical Port Terminal 621 500 574

Reliance Europe 103 216 202

Reliance Utilities and Power 3,188 2,899 2,858

Reliance Industrial Infrastructure 315 383 528

Reliance Gas Transportation Infrastructure 0 71 3,490

Others 9,898 17,647 9,290

Total 26,174 38,227 51,424 Source: Company’s Annual Report, Edelweiss research

Table 5: Investment book details (INR bn)

FY08 FY09 FY10

In Associates 2.5 26.0 24.0

In Others

Long Term

. Unquoted 30.2 7.3 22.0

. Quoted 2.1 2.3 0.4

Current 60.5 28.7 84.7

Total 95.2 64.4 131.1 Source: Company’s Annual Report, Edelweiss research

Current investments have increased, primarily on account of additional investment of

INR 30.6 bn in mutual funds.

Unquoted long-term investments have increased, primarily owing to investment in preference shares of Shinano Retail and non-convertible redeemable debentures of Citi Financial Consumer Finance of INR 7 bn each.


Table 6: Parent/subsidiary operating profitability analysis (INR bn) Particulars

FY09 % FY10 % FY09 % FY10 % FY09 % FY10 %

Sales 1,418 100.0 1,925 100.0 94 100.0 113 100.0 1,512 100.0 2,037 100.0

Material 1,032 72.8 1,457 75.7 64 68.0 78 69.3 1,096 72.5 1,536 75.4

Operating expenses 72 5.1 74 3.8 15 15.6 14 12.7 87 5.8 88 4.3

Personnel cost 24 1.7 24 1.2 6 6.6 4 3.9 30 2.0 28 1.4

Other expenses 57 4.0 64 3.3 8 8.6 13 11.4 65 4.3 77 3.8

EBIDTA (adj.) 233 16.4 306 15.9 1 1.2 3 2.8 234 15.5 309 15.2

Depreciation 52 3.7 105 5.5 5 4.9 4 4.0 57 3.7 109 5.4

EBIT (adj.) 181 12.8 201 10.4 (3) (3.7) (1) (1.2) 178 11.8 199 9.8

Subsidiary (derived)Standalone Consolidated


Subsidiary operations continue to be margin dampeners; however, margins have improved over the years.

Reliance Industries


5

Chart 2: Sources of funds

0.0

20.0

40.0

60.0

80.0

100.0


(%)


Deferred tax liability Current liabilities Provisions Chart 3: Application of funds

0.0

20.0

40.0

60.0

80.0

100.0


(%)


Debtors Cash & bank Other current assets Chart 4: Debt analysis

0.0

2.0

4.0

6.0

8.0

10.0

0

170

340

510

680

850


(%)

(IN

R b

n)

Loan book Avg. borrowing cost Source: Company’s Annual Report, Edelweiss research

Balance sheet strength improves

further on reduction of loan book; D/E

stands at 0.6x

Commissioning of SEZ refinery and KG-D6

projects has increased fixed assets

Repayment of debt, coupled with

exchange gains on forex loans, reduced

the loan book

Interest cost dipped on account of INR appreciation and

lower cost of short-term borrowings

through CP



6

Chart 5: Cash conversion cycle

(20)

0

20

40

60

80


(Days)

Debtor days Creditor days Inventory days Cash conversion cycle Table 7: Currency derivative exposure (INR bn) Particulars FY08 FY09 FY10

Interest Rate Swaps 146.1 232.2 483.6

Currency Swaps 20.9 44.4 42.0

Options (net) 21.8 24.9 448.5

Forward Contracts 190.8 303.8 262.3

Total 379.6 605.2 1,236.5

Table 8: Commodity derivative exposure

Particulars Petroleum Crude Oil Petroleum Crude Oil Petroleum Crude Oil

products sales purchases products sales purchases products sales purchases

(in Kbbl) (in Kbbl) (in Kbbl) (in Kbbl) (in Kbbl) (in Kbbl)

Forward swaps (net) 236 3,457 2,985 6,157 1,900 8,185

Futures - 1,470 256 2,689 5,772 4,967

Spreads 475 6,345 1,908 13,424 10,306 32,141

Options (net) 18,725 1,575 9,387 10,800 1,800 12,175Margin hedginig 15,820 - 30,650 72,700

Total 35,256 12,847 45,186 33,070 92,478 57,468

FY10FY09FY08

Chart 6: Margin hedging

0.0

22.0

44.0

66.0

88.0

110.0

0.0

6.0

12.0

18.0

24.0

30.0


(US

D/b

bl)

(%)

Hedgining as % of production EBIDTA margin Average crude prices (RHS)


Note: Avg crude price is wrt last 15 days of respective FY

RIL’s cash conversion cycle increased from

18 days in FY09 to 22 days in FY10 on the back of decrease in

creditor days from 51 to 47

Hedging positions have increased

significantly in the past two years, led by

options

Margin hedging as a % of production was

lowest in FY08, when avg. crude price was ~USD 97/bbl; since

then, hedge position has increased

Reliance Industries


7

Segmental analysis Chart 7: Segmental revenue

0.0

20.0

40.0

60.0

80.0

100.0

FY08 FY09 FY10

(%)

Refining Petrochemicals Oil & Gas Others

Chart 8: Segmental EBIT

0.0

20.0

40.0

60.0

80.0

100.0

FY08 FY09 FY10

(%)

Refining Petrochemicals Oil & Gas Others

Chart 9: Segmental EBIT margin

(20.0)

0.0

20.0

40.0

60.0

80.0

FY08 FY09 FY10

(%)

Refining Petrochemicals Oil & Gas Others Source: Company’s Annual Report, Edelweiss research

Petrochemicals contributed to

significant proportion of EBIT

Petrochemical margins grew from

13.3% in FY09 to 15.5% in FY10,

offering respite to overall EBIT margin



Subsidiaries and one offs drag margin…

Dr. Reddy’s Laboratories’ (DRL) consolidated FY10 revenues rose marginally by 1% to INR 70.3 bn (INR 69.0 bn in FY09) despite 7.5% increase in standalone revenues to INR 45.1 bn (INR 41.9 bn in FY09). The difference is primarily on account of continued dismal performance of Betapharm and other subsidiaries. Also, the higher revenue base from Sumatriptan drug during FY09 was a drag.

On standalone basis, DRL reported operating profit margin of 25.2% in FY10 (FY09; 20.3%). However, on consolidated basis, operating margins reduced to 20.2% in FY10 (FY09: 18.9%).

Cash flow statement shows that inventory write-down for FY10 is at INR 1.0 bn (FY09: INR 0.8 bn), (9.4% of PBT) primarily on account of Betapharm and Sumatriptan.

During the year, DRL recorded one-time charge of INR 912 mn i.e. 8.5% of PBT, related to termination benefits payable to employees.

The company has impaired its goodwill and intangibles by INR 4.6 bn i.e. 42.6% of PBT (FY09: INR 14.6 bn) towards the acquisition of Betapharm. However under IFRS, company has recognised impairment loss of INR 8.5 bn, the higher write off under IFRS is primarily on account of higher intangible recognised at the time of acquisition.

… operating cash flow continues to remain strong

Cash from operating activities has increased from INR 6.0 bn in FY09 to INR 18.5 bn in FY10 (working capital change in FY09 had dragged cash from operations by INR 8.2 bn). Cash generated from operations is partly used to pay off long-term debts and the remaining amount is parked in short-term investments.


DRL’s return on average equity for FY10 is at 21.3% (FY09; 13.3%), while return on net operating assets (RNOA) stood at 16.2% (ROE analyser analyses the difference).

Cash conversion cycle has improved slightly from 52 days in FY09 to 51 days in FY10. Increase in creditor days from 81 in FY09 to 102 in FY10 is offset by increase in debtor days from 55 to 67 and inventory days from 78 to 86 during the period.

Revenue share of North America and Europe in DRL’s total revenues has dipped from 60.9% in FY09 to 54.4% in FY10; it has increased in case of Russia and other CIS countries, from 10.9% in FY09 to 13.2% in FY10.

During the year, the company acquired a unit of the Dow Chemical for INR 1.3 bn and manufacturing facilities of BASF Corporation in Shreveport, Louisiana, USA and related pharmaceutical contract manufacturing business for INR 1.6 bn; consequently, it recognised goodwill of INR 478 mn and INR 153, respectively.

Foreign currency translation reserve for FY10 is at INR 2.5 bn (FY09: INR 2.2 bn).

Note: All numbers are as per Indian GAAP and on consolidated basis, unless stated otherwise


Dr. Reddy’s Laboratories Annual Report Analysis August 3, 2010


Market Data

52-week range (INR): 1,515 / 696




Promoters* : 25.7


FIIs : 28.5


1



2


ROAE analyser analyses profitability on the scale of operating efficiency and capital allocation efficiency (detailed concept explained in Annexure A). We have analysed DRL’s profitability for the year ended FY08, FY09 and FY10; results and key findings of same are as follows:

Particulars


8.7 10.7 16.2


NOPAT margin (%) 8.7 8.3 11.4





ROAE derived (A+B) (%) 10.2 13.3 21.3

FY08 FY09 FY10


ROAE Tree

16.2

5.1

21.3

0.0

5.0

10.0

15.0

20.0

25.0


(%)


Improved operating margins and low borrowing cost drive ROAE

1. NOPAT margin has improved from 10.7% in FY09 to 16.2% in FY10.

2. Lower net borrowing cost is primarily on account of significant proportion of foreign currency denominated loans supported by favourable currency movement whereas investment book is mainly represented by domestic assets yielding higher returns.



3

Subsidiary analysis (INR mn)

Subsidiry name Networth Turnover PBT Networth Turnover PBT

Betapharm Arzneimittel GmbH 100.0 3,207 9,770 70 1,856 7,288 (1,635)

Reddy Holding GmbH 100.0 580 32 (3,404) 4,425 40 (892)

Promius Pharma 100.0 415 289 (494) (955) 521 (852)

Dr. Reddy’s Laboratories Louisiana 100.0 1,806 1,842 (206) 1,112 1,475 (513)

OOO Dr. Reddy’s Laboratories 100.0 489 5,243 53 161 7,110 (405)

Dr. Reddy’s Farmaceutica do Brasil 100.0 (681) 79 (357) (838) 157 (200)

Reddy Pharma Iberia SA 100.0 (216) 60 (184) (340) 56 (164)

Dr. Reddy’s SRL 100.0 (202) 92 (207) (328) 123 (161)

Dr. Reddy’s Laboratories (Australia) 100.0 (50) - (42) (200) 15 (152)

Reddy Pharmaceuticals Hong Kong 100.0 95 - 23 8 - (88)

Reddy US Therapeutics 100.0 85 - 1 (8) - (63)

Chirotech Technology 100.0 (64) 755 21 (102) 729 (43)

Reddy Pharma Italia SPA 100.0 10 15 1 13 - (14)

Aurigene Discovery Technologies (Malaysia) 100.0 (7) - (8) (19) - (12)

Reddy Netherlands B.V. 100.0 (11) - (4) (22) - (11)

OOO DRS 100.0 153 - 4 143 - (10)

Beta Healthcare Solutions GmbH 100.0 (31) - (9) (27) - (9)

Reddy Antilles N.V. 100.0 196 - (3) 192 - (5)

DRL Investments 100.0 1 - - (2) - (3)

Aurigene Discovery Technologies Inc. 100.0 431 - 3 (11) - (1)

Eurobridge Consulting B.V. 100.0 152 - - 150 - (1)

Trigenesis Therapeutics 100.0 21 - (1) 20 - (1)

Beta Institute 100.0 6 - - 6 - -

Cheminor Investments 100.0 1 - - 1 - -

Dr. Reddy’s Bio–Sciences 100.0 208 - - 208 - -

Dr. Reddy’s Laboratories ILAC TICARET 100.0 - - - - - -

Dr. Reddy’s Laboratories International SA 100.0 - - 4 - -

Dr. Reddy’s Pharma SEZ 100.0 - - 1 - -

Macred India Private 100.0 1 - - 1 - -

Reddy Cheminor S.A. 100.0 (10) - (1) - - 10

Dr. Reddy’s Laboratories (Proprietary) 60.0 (70) 286 (33) (40) 444 22

Dr. Reddy’s New Zealand 100.0 60 141 (1) 84 351 28

OOO JV Reddy Biomed 100.0 (10) - (9) 27 - 37

Dr. Reddy’s Laboratories (U.K.) 100.0 173 1,999 (24) 212 1,965 57

Aurigene Discovery Technologies Ltd. 100.0 496 599 92 719 754 77

Kunshan Rotam Reddy Pharmaceutical 51.3 164 612 45 312 788 115

Dr. Reddy’s Laboratories (EU) 100.0 934 701 102 1,078 771 235

Industrias Quimicas Falcon de Mexico SA de CV 100.0 437 1,926 (75) 613 2,513 241

Lacock Holdings* 100.0 15,058 - 588 16,753 - 399

Dr. Reddy’s Laboratories Inc. 100.0 3,916 22,561 2,953 5,315 18,655 1,492

Dr. Reddy’s Laboratories SA 100.0 4,674 3,023 2,131 7,439 8,649 3,393

Total 32,417 50,025 1,025 37,961 52,404 871

PBT margin (%) 2.0 1.7

PBT margin ex- German generic subsidiaries(%) 10.8 7.5

FY09 FY10% shareholding

FY10


*holding company of Reddy Holding GmbH, Reddy Pharma Italia SPA

1. Of the total 41 subsidiaries, only 12 were profitable during the year.

2. Aggregated PBT margin, ex – Betapharm and Reddy’s Holding, dipped from 10.8% in FY09 to 7.5% in FY10.

3. Total amount of intangibles including goodwill, at FY10-end, is INR 6.1 bn (FY09: INR 12.9 bn).



4

Inventories write-down analysis (INR mn)


Parent 14 155 345 486 1077*

Subsidiaries 1 209 213 347 (66)

Consolidated 16 364 558 833 1,011

% of PBT before exceptional item 0.8 2.9 10.2 10.3 9.4 Source: Company annual report, Edelweiss research

* as per cash flow Cash flow analysis (INR mn)

Particulars FY09 FY10

Profit before tax (6,563) 6,183

Non operating (profit)/Loss 471 40

Non cash adjustments 5,702 6,301

Impairment of Goodwill and Intangibles 14,628 4,583

Direct taxes paid (2,791) (2,831)

Cash profit after tax 11,447 14,276

(Increase)/ decrease in trade and other receivables

(7,935) 1,391

Increase in inventory (2,556) (1,154)

Increase in current liabilities and provisions 5,035 3,997

Increase in working capital (5,456) 4,234

Net cash from operating activities 5,991 18,510 Source: Company annual report, Edelweiss research


Sources of fund

0.0

20.0

40.0

60.0

80.0

100.0


(%)


Deferred tax liability Current liabilities Provisions Source: Company annual report, Edelweiss research

Repayment of long-term debts led to dip in proportion of loan funds from 27.4% in

FY09 to 20.3% in FY10

Inventory write-down remains high

Healthy cash flow from operations during the year



5


0.0

20.0

40.0

60.0

80.0

100.0


(%)

Fixed assets Investments Inventories Debtors Cash & bank Loans and advances

Source: Company annual report, Edelweiss research Cash conversion cycle

50

64

78

92

106

120

20

30

40

50

60

70


(Days)

(Days)

Debtor days Cash conversion cycle Creditor days Inventory days Source: Company annual report, Edelweiss research

Excess cash generated from operation partly

parked under current investments

Cash conversion cycle improved slightly



6



Sales 23,627 65,256 49,918 69,006 70,310

Total income 24,814 66,418 51,955 70,000 71,324

EBITDA 3,135 16,641 8,407 13,020 14,195

EBITDA margin (%) 13.3 25.5 16.8 18.9 20.2

Depreciation 1,617 3,791 4,019 4,977 4,131

EBIT 1,518 12,850 4,388 8,043 10,064

Adjusted financial costs 644 1,526 958 972 312

Net profit 1,467 9,659 4,381 (9,172) 3,515


Loan funds 31,169 24,907 19,684 19,976 14,840

Net fixed assets 35,315 38,252 41,809 33,566 31,144






Cash flow from financing activities 26,884 233 (7,754) (2,651) (5,317)

Net cash flows 375 8,673 (10,730) (1,710) 731

CAPEX (1,894) (4,621) (5,092) (6,419) (9,665)

Working capital investments 2,314 2,975 4,024 5,456 (4,234) Source: Company annual report, Edelweiss research

Operating concerns loom large; MTM gains drive profitability

In CY09, Ranbaxy Laboratories (Ranbaxy) reported profit before tax of INR 10.1 bn, post net forex gains of INR 3.4 bn. However, in our view, adjusted loss before tax will be at INR 0.7 bn considering unrealised foreign exchange gain of INR 10.8 bn (as per cash flow statement), representing dismal operating performance.

The exchange gain on derivatives during CY09 represents recovery of MTM loss on currency option sold (MTM loss during CY08 was INR 26.8 bn). During the year, outstanding derivative option has been reduced from USD 1.4 bn to USD 1.0 bn, indicating realisation of partial exchange loss.

During CY09, Ranbaxy has recognised MTM exchange gain of INR 1.5 bn on forex loan. Unhedged foreign currency loans for CY09 end stood at INR 31.5 bn (CY08; INR 33.3 bn).

USFDA issue continues to hover for the second consecutive year. During the year, the company has received warning letter for its manufacturing facility in Gloversville and Paonta Sahib and import alert issued by USFDA.

Other income includes write back of provision made earlier of INR 937.8 mn (9.3% of PBT).

Dismal cash flow; warrant cancellation; FCCB redemption to keep liquidity stretched

During the year, cash from operating activities stood at INR (1.6) bn (CY08; INR (1.5) bn) vis-à-vis profit before tax of INR 10.1 bn.

Cash & bank balance dipped from INR 23.9 bn in CY08 to INR 12.4 bn in CY09 primarily on account of acquisition of fixed assets of INR 5.2 bn and repayment of loans of INR 4.5 bn.

During Q1CY10, Daiichi Sankyo, holding company has not opted for conversion of entire 23.8 bn warrants to equity shares convertible at INR 737/share.

FCCBs are due for redemption in March 2011, total amount payable is USD 557.8 mn. Refinancing the same will lead to additional interest cost in the P&L, currently charged to reserves.


Write off/ reversal of deferred tax asset led to higher effective tax rate of 69.2%, despite the company paying MAT.

Currently, the company charges redemption premium on FCCB through security premium account. However, adoption of IFRS/AS30 requires it to charge the same to P&L, which will lead to dip in PAT by INR 801.3 mn (27% of PAT).

The company has valued ESOP by using the intrinsic value method; had it followed the fair value method, which is more logical, profit for the year would have been down INR 105.9 mn (1.1% of PAT).


Ranbaxy Laboratories Annual Report Analysis June 7, 2010


1

Market Data





Promoters : 63.9


FIIs : 11.6





2

New product launch offers some respite…

Ranbaxy’s sales in CY09 grew ~2.5% to INR 75.6 bn (CY08 INR 74.1 bn), primarily on account of launch of first to file (FTF) products in the US in H2CY09. Operating margins for the year dipped slightly from 35.1% in CY08 to 34.8% in CY09.

The cash conversion cycle improved from 128 days in CY08 to 120 days in CY09, primarily on account of increase in creditor days from 70 in CY08 to 89 in CY09, partly compensated by increase in debtor days from 70 to 76 during the same period.

Other highlights

During the year, Ranbaxy disposed its joint venture company, Nihon Pharmaceutical and subsidiary company, Ranbaxy (Guangzhou China), for INR 847 mn and INR 646.3 mn, respectively. Pursuant to this, it has recognised a gain of INR 413.7 mn.

During the year, Ranbaxy has exercised available call option and acquired the remaining 25% stake in Be-Tabs Pharmaceuticals and Be-Tabs Investments for INR 739.5 mn and recognised goodwill of INR 541.3 mn.

Goodwill as at CY09 end stood at INR 20.9 bn, comprising ~48.2% of the net worth.


ROAE analyser analyses profitability on the scale of operating efficiency and capital allocation efficiency (detailed concept explained in Annexure A). We have analysed Ranbaxy’s profitability for the year ended CY07, CY08 and CY09; results and key findings of same are as follows:

ROE analyser CY07 CY08 CY09

A. Return on net operating assets (RNOA)(OPATO x NOPAT margin) (%) 9.2 (5.1) 2.6

OPATO (Operating asset turnover) (x) 1.0 0.9 1.1

NOPAT margin (%) 9.0 (5.5) 2.3

B. Return from leverage (FLEV x spread) (%) 17.6 (20.5) 4.5


NBC (Net borrowing cost) (%) (3.8) 18.7 (4.9)

Net financial spread (RNOA -NBC) (%) 13.0 (23.8) 7.5

C. Return from other funding (%) (0.3) (0.3) (0.2)

ROAE derived (A+B+C) (%) 26.5 (25.9) 6.9 Source: Company annual report, Edelweiss research

Negative borrowing cost, which has contributed significantly to ROAE, is due to:

1. Exchange gains of forex loans and FCCBs credited to profit and loss.

2. Redemption premium on FCCBs, representing ~56.4% of the loan book, has not been charged to profit and loss account.



3

ROAE tree

(2.0)

4.6

1.8

2.7

(0.2 )

6.9

(2.5)

0.0

2.5

5.0

7.5

10.0

RNOA excl. forex

derivative gain

Forex derivative

gain

Return from leverage

Forex gainon leverage

Return fromother

funding

ROAE

(%)


Cash flow analysis

(INR mn)

Particulars CY09

Profit before tax and exceptional item 10,098

Non operating (profit)/Loss (1,076)


Fair valuation loss/(gain) on derivatives (8,932)

Unrealised foreign exchange loss/ (gain) (2,014)

Foreign exchange loss/(gain) on integral operations 161


Cash profit after tax (1,892)


Decrease in inventory 865

Increase in current liabilities and provisions 3,924

Decrease in working capital 271

Net cash from operating activities (1,621) Source: Company annual report, Edelweiss research


Capital structure and leverage analysis (INR bn)

CY05 CY06 CY07 CY08 CY09

Shareholder's fund 24.5 25.9 28.0 43.0 43.4

Loan Funds* 20.0 39.6 41.4 69.6 53.0

D/E* (x) 0.82 1.53 1.48 1.62 1.22

Avg Borrowing cost (%) 4.7 3.5 3.5 4.9 1.8 Source: Company annual report, Edelweiss research

Note: * Adjusted to liability on fair valuation of derivatives

Average borrowing cost remains low on

account of FCCBs and repayment of high

cost short-term debts

Negative operating cash flow due to MTM

forex gain of INR 10.8 bn

Main drivers of profitability are MTM gains on derivatives

and forex loans which we believe are not

sustainable



4


0.0

20.0

40.0

60.0

80.0

100.0


(%)

Goodwill Fixed Assets Investments Inventories

Debtors Cash and bank Other current assets Source: Company annual report, Edelweiss research


60

68

76

84

92

100

100

116

132

148

164

180


(Days)

(Days)

Inventory days Cash conversion cycle

Debtor days (RHS) Creditors days (RHS) Source: Company annual report, Edelweiss research

Deferred tax assets (INR mn)

Particulars CY08 CY09

Deferred tax assets on:

Tax loss carried forward 12,749 7,222

FCCB redemption premium 1,227 0

Others 1,514 694

Total deferred tax assets 15,490 7,917

Deferred tax liabilities 3,261 3,171

Net deferred tax assets 12,229 4,746 Source: Company annual report, Edelweiss research

Deferred tax assets (DTA) dipped by INR 7.5 bn, primarily on account of write-off of tax

losses carried forward, DTA on FCCB redemption premium and reversal of derivative losses. This has led to high effective tax rate of 69.2%, despite the company paying MAT.

Ranbaxy had de-recognised DTA amounting INR 2.5 bn on the basis of virtual certainty test in respect of future profitability, of which, INR 1.3 bn is towards carried forward losses and INR 1.2 bn towards redemption premium payable on FCCB.

Goodwill forms a substantial portion of

assets

Cash conversion cycle continues to improve

Effective tax rate is at 69.2%, despite the

company paying MAT



5

Revenue growth analysis (INR bn)

Geography

CY08 CY09 CY08 CY09

North America 19.7 19.6 12.8 (0.9)

Europe 18.2 15.9 7.9 (12.6)

India 15.8 19.4 (5.0) 22.6

Asia pacific 5.7 6.9 19.9 21.4

Others 14.7 14.2 22.0 (3.4)

Total 74.1 76.0 9.3 2.5

Revenue (INR bn) Growth (%)


Derivative exposure

Category Currency Cross Buy/

Currency CY08 CY09 Sell

Forward contract USD mn USD INR 218.4 20.0 Sell

Forward contract USD mn EUR USD 35.3 1.4 Sell

Forward contract USD mn GBP USD 0.2 - Sell

Forward contract USD mn USD BRL 5.3 - Buy

Currency options USD mn USD INR 1,403.0 1,038.5 Sell

Currency swap JPY bn JPY USD 10.4 10.4 Buy

Interest rate swap JPY bn JPY 11.8 11.8

(JPY LIBOR)

Amount


India and Asia Pacific helped maintain

volumes; growth maintained in North

America, despite import alerts by

USFDA, on account of launch of FTF product

Reduction in currency options indicate

realisation of partial exchange loss

incurred earlier

Key takeaways

Amalgamation of subsidiaries used to create business reconstruction reserve. Losses/ expenses aggregating INR 4.2 bn, ~5.1x of adjusted PBT* before exceptional items adjusted against the reserve.

Early adoption of AS-30 in CY08. Up to CY09, INR 838.2 mn income, net (CY09: expense, INR 41.1 mn) recognised under exceptional items on the option component embedded in FCCBs.

Taking shelter of companies law, redemption premium aggregating INR 348.7 mn adjusted against securities premium account.

Business reconstruction reserve helps moderate leverage; would have increased 4.2x to 19.3x (CY08: 3.7x) otherwise.

Related party transactions aggregate 11.2% of sales, 10.6% of receivables.

ESOPs repriced; repricing expenses aggregating INR 10.0 mn adjusted against business reconstruction reserve.

Exceptional items aggregate INR 575.3 mn (gains, net), ~ 70.2% of adjusted PBT* before such items.

Sundry debtors outstanding for more than six months and considered good increased 5.2x.

Business reconstruction reserve created on amalgation of subsidiaries used to

adjust losses against reserves

Strides Arcolab (Strides) amalgamated three subsidiaries (Global Remedies, Grandix Pharmaceuticals, and Grandix Laboratories) with effective from January 1, 2009.

As per the scheme of amalgamation approved by high courts of respective judicature, Strides created a business reconstruction reserve of INR 7.0 bn by revaluing investment in a 100% subsidiary (Strides Specialties), land, machinery, and transferring the capital reserve created on amalgamation.

This reserve has been used to write off losses/ diminution in value of fixed assets, investments, intangible assets, current assets, employee compensation, restructuring, and other expenses aggregating INR 4.2 bn (refer business reconstruction reserve table on page 4).

Consequently, CY09 PBT is higher by INR 4.2 bn, ~ 5.1x of adjusted PBT* before exceptional items and ~ 3.9x of adjusted PAT*. As on December 31, 2009, the reserve aggregates INR 2.9 bn, ~ 36.5% of adjusted net worth*.

Note 1: Strides Arcolab follows January 1-December 31 as its financial year Note 2: * 6% redeemable preference shares are treated as debt, and preference dividend (including dividend distribution tax) payable thereon is treated as finance cost.


Strides Arcolab Annual Report Analysis June 11, 2010


1


Market Data





Promoters : 30.8


FIIs : 8.5




2


Strides opted for early adoption of AS 30–Financial instruments, recognition and measurement in CY08. As per AS 30:

• FCCBs are segregated in two components:

a) Option component representing the value of conversion option to FCCB holder. The option component is valued using the Black Scholes and Merton valuation model, and the annual change in the fair value of option is recognised in the income statement. In CY09, INR 41.1 mn (CY08: Gain, INR 452.2 mn; CY07: Gain, INR 427.1 mn) representing annual change in the fair value of the embedded option, has been charged to the income statement as an exceptional item. Up to CY09, Strides has recognised net gains of INR 838.2 mn due to change in the fair value of option component embedded in FCCBs; the value of FCCBs on December 31, 2009, is stated at INR 6.3 bn.

b) Debt component representing the debt redeemable, if the conversion option is not exercised. The debt component is valued at amortised cost and the interest charge is determined based on effective yield. However, as per the provisions of companies law, Strides adjusted a significant portion of effective yield, attributable to redemption premium, against the securities premium reserve. In CY09, INR 348.7 mn (CY08 INR 443.2 mn; CY07: INR 546.1 mn), 42.5% of adjusted PBT* before exceptional items and 67.5% of FCCB interest charge, has been adjusted against securities premium reserves and INR 168.1 mn has been charged to the income statement.

• Investments in foreign operations of a subsidiary company with USD as the

functional currency have been designated as hedged items and certain FCCBs and ECBs denominated in USD have been designated as hedging instruments, to hedge the foreign exchange risk arising out of the INR–USD foreign exchange rate fluctuation and the resulting exchange difference has been recognised in the hedging reserve. In CY09, INR 154.0 mn has been credited to the hedging reserve. As on December 31, 2009, the hedging reserve aggregates negative INR 1.0 bn (CY08: Negative INR 1.2 bn).

Business reconstruction reserve helps moderate leverage

Strides adjusted debt* increased by INR 1.6 bn (11.5%) to INR 15.1 bn in CY09 (CY08: INR 13.5 bn) comprising incremental debt (net) of INR 1.4 bn, AS-30 adjustments of INR 41.1 mn, gain of INR 292.2 mn on FCCBs repurchased, and exchange loss restatements of INR 377.4 mn.

The company’s adjusted debt equity ratio* moderated 180bps to 1.9x (CY08: 3.7x) due

to creation of business reconstruction reserve (discussed earlier). Had the business reconstruction reserve not been created and had the losses adjusted against the said reserve been charged to the income statement, the debt equity ratio would have increased 4.2x to 19.3x.

Related party transactions: 11.0% of sales, 10.6% of receivables

Net sales to related parties aggregated INR 1.4 bn in CY09 (CY08: INR 1.1 bn), ~ 11.2% (CY08: 10.5%) of total revenues.

As on December 31, 2009, receivables from related parties stood at INR 440.3 mn (December 31, 2008: INR 303.9 mn), 10.6% of receivables on that date (December 31, 2008: 9.0%).

Strides Arcolab


3

ESOPs valued at intrinsic value and costs adjusted against reserves; re-priced

ESOPs have been valued at intrinsic value and the ESOP cost adjusted against the business reconstruction reserve as per high court approved amalgamation scheme. Had the ESOPs been valued at fair value and expenses charged to the income statement, CY09 PBT would have been lower by INR 10.1 mn.

In CY09, Strides revised the pricing date of options. Additional expense of INR 10.0 mn due to repricing has been adjusted against the business reconstruction reserve.

ESOPs granted and outstanding on December 31, 2009, aggregate 1.7 mn, ~4.4% of equity shares outstanding.

Agreement with the Aspen Group

In CY08, Strides entered into a put and call option agreement with the Aspen Group to dispose of its 49% holding in Pharmalatina Holdings, operating in Latin America, and recognised an impairment loss of USD 38.1 mn (INR 1.7 bn). As per the agreement, Strides will exit at a consideration based on a specified EBITDA multiple for the period ended June 30, 2009.

Strides is currently negotiating terms of exit and as per the agreement, the company is

not entitled to dividends or profits attributable to its 49% interest and consequently Pharmalatina Holdings have not been consolidated.

The company has also provided a guarantee of USD 75 mn to the Aspen Group, which

will, subject to approval of the appropriate authority, be further increased to USD 152.5 mn.

A subsidiary entered into a share purchase agreement with the Aspen Group for

acquisition of Co Pharma, UK. The agreement provides for a put and call option, wherein the Aspen Group has a put option to sell its 49% holding to the subsidiary at 7x EBITDA adjusted for net debt during July 2009 to December 2011. The minimum consideration payable as per the agreement is GBP 8.0 mn (INR 566.1 mn).


Exceptional items aggregate INR 575.3 mn (gains, net), ~ 70.2% of adjusted PBT* before such items.

• Profit on buyback of FCCBs of INR 291.2 mn.

• Redemption premium for CY09 provided on FCCBs bought back reversed aggregating INR 80.0 mn.

• Profit of INR 113.7 mn on sale of a plant owned by a US-based subsidiary.

• Exchange gain of INR 131.6 mn (excluding exchange losses of INR 90.4 mn, treated as routine item).

• Change in fair value of option component of FCCBs of INR (41.1) mn.

Sundry debtors outstanding for more than six months and considered good increased 5.2x to INR 862.8 mn in CY09 (CY08: 138.5 mn). Provision for doubtful debts charged to income statement was nil (CY08: INR 96.9 mn).

Other income in CY09 stood at INR 235.7 mn (CY08: INR 3.1 bn), ~ 28.8% (CY08: 123.2%) of adjusted PBT* before exceptional items. The 92.4% decrease is primarily due to profit on sale of investments/ assets of INR 2.5 bn and exchange gains of INR 407.5 mn recognised in CY08. In CY09, Strides recognised exchange loss of INR 90.4 mn and profit on sale of investments/ assets of INR 0.1 mn.

Goodwill on consolidation stood at INR 10.1 bn, ~ 1.3x of adjusted net worth*.



4

Strides recognised licensing income of INR 290.0 mn, ~ 2.2% of total revenues, for the first time in CY09.

Net gains on derivative contracts recognised in income statement stood at INR 117.9 mn (CY08: Loss INR 454.3 mn, net).

Loans and advances include INR 24.4 mn representing excess managerial remuneration for earlier years due to the managing director and whole time director pending central government’s approval. In CY09, the company received central government’s approval for excess managerial remuneration pertaining to CY07 aggregating INR 27.1 mn.

Financial statements of some subsidiaries and joint ventures, with total net assets of INR 1.8 bn, ~ 7% of consolidated net assets and total revenues of INR 1.3 bn, ~ 10.3% of consolidated revenues have not been audited but certified by the management.

Net unhedged foreign currency exposure for liabilities as on December 31, 2009, stood at INR 148.5 mn (December 31, 2008: INR 124.4 mn, liabilities, net), representing 1.9% of adjusted net worth*. Strides also has short positions aggregating AUD 2.1 mn in currency forward contracts and USD 10.0 mn (put, net) in currency option contracts.

Post balance sheet date developments

Strides entered in to a licensing and supply agreement with Pfizer to address new market and product segments. Currently, the company has collaboration with Pfizer for 45 products.

Business reconstrcution reserve (INR mn)

Sources Amount Application AmountRevaluation of: Impairment of:

Investment in Strides specialities 5,856 Fixed assets 73

Land 754 Goodwill 1,935

Machineries 281 Current Assets 903

Capital reserve on Amalgamation 147 Amortisation of brands 115

Compensation related to product returns and early termination of procurement contract

365

Long term employee compensation 678

Restructuring and other expenses 117

Balance 2,854

Total 7,039 Total 7,039



ROE analyser analyses profitability on the scale of operating efficiency and capital allocation efficiency (detailed concept explained in Annexure A). We have analysed the profitability of Strides for CY08 and CY09; results and key findings are given below:

Strides Arcolab


5

ROE analyser ParticularsA. Return on net operating assets (RNOA)(OPATO x NOPAT margin) (%)

3.2 6.0



B. Return from leverage (FLEV x spread) (%) (11.2) 3.6

FLEV (financial leverage) (x) @ 4.3 2.5


Net financial spread (RNOA -NBC) (%) (2.6) 1.5

C. Return from other funding (%) 2.4 0.3

ROE Derived (A+B+C) (%) (5.7) 10.0

CY08 CY09


Note 3: @ gains on sale of investments aggregating INR nil (CY08: INR 2.5 bn) excluded.

ROE tree

3.2

(11.2)

2.4

(5.7)

(12.0)

(9.0)

(6.0)

(3.0)

0.0

3.0

6.0

RNOA Return from

leverage

Return from other

funding

ROAE

(%)

CY08


Sources of funds

0.0

20.0

40.0

60.0

80.0

100.0


(%)

Adjusted equity shareholders' funds* Adjusted loan funds*Minority interest Deferred tax liability (net)Current liabilities Provisions

Business reconstruction reserve

boosts equity shareholders’ fund

Better operating margin and lower net borrowing cost drove

RoE growth; turns positive 6.0

3.6

0.3

10.0

0.0

2.4

4.8

7.2

9.6

12.0

RNOA Return from

leverage

Return from other

funding

ROAE

(%)

CY09



6


0.0

20.0

40.0

60.0

80.0

100.0


(%)

Fixed assets Goodwill Investments

Inventories Sundry debtors Cash and bank balance

Other current assets Source: Company’s Annual Report, Edelweiss research

Utilisation of income

(25.0)

0.0

25.0

50.0

75.0

100.0


(%)

Materials consumed Personnel costOperating and other expenses DepreciationAdjusted finance charges* Exceptional itemsOther items TaxesDividend Retained earning


0.0

2.0

4.0

6.0

8.0

10.0

0.0

5.0

10.0

15.0

20.0

25.0


(%)

(x)

Adjusted debt/ equity ratio (x)*

Adjusted debt/ equity ratio (excluding credits to BRR) (x)*

Adjusted net debt/ equity ratio (x)*

Adjusted cost of borrowing (%)*

Goodwill on consolidation

constitutes one third of total assets, 1.3x of

adjusted shareholders’ fund

Exceptional items propel CY09 PAT,

unlike in CY08 when they had depressed

PAT

Business reconstruction reserve

helps decrease leverage. Borrowing costs dip marginally

Strides Arcolab


7


0

28

56

84

112

140


(Days)

Inventory days Receivable days Payable days Cash conversion cycle Source: Company’s Annual Report, Edelweiss research

Profitability and return ratios

(28.0)

0.0

28.0

56.0

84.0

112.0


(%)

EBITDA marginAdjusted PAT margin*Adjusted PAT margin* (excluding exceptional items)ROCE (pre tax)Adjusted ROE*Adjusted ROE*(excluding exceptional items)


Higher receivable days partially offset

the gains from better inventory

management; lengthens cash

conversion cycle marginally

EBITA margin and ROCE (pre tax)

increased for second consecutive year.

Non-operating and exceptional items

make PAT margin and RoE extremely volatile

Higher receivable days partially offset

the gains from better inventory

management; lengthens cash

conversion cycle marginally



8


Particulars CY05 CY06 CY07 CY08 CY09Sales 5,237 7,430 7,443 10,203 13,048

Total income 5,312 7,640 8,696 13,312 13,283

EBITDA 1,113 1,237 (202) 710 1,961

EBITDA margin (%) 21 17 (3) 7 15

Depreciation 211 309 364 399 492

Adjusted financial costs* 384 481 733 881 794

Exceptional items gains/ (losses) - - (299) (1,409) 575

Adjusted net profit* 451 368 (536) 1,045 1,062

Adjusted equity shareholders' funds* 2,588 3,280 2,268 3,662 7,819

Adjusted loan funds* 4,861 6,010 13,266 13,512 15,060 Net fixed assets 3,837 5,816 7,428 6,385 9,319 Investments 0 15 19 3,464 3,414




Cash flow from operating activities 790 1,079 893 1,177 639


Cash flow from financing activities 2,050 879 6,646 134 916

Net cash flows 766 (625) 1,625 (877) 79

CAPEX (1,465) (1,584) (2,513) (3,028) (1,311)

Working capital investments (428) (205) 368 (68) (1,130) Source: Company’s Annual Report, Edelweiss research



Cash conversion cycle improves, but may not be sustainable

Welspun Corporation’s (Welspun) cash conversion cycle decreased from (22) days in FY09 to (32) days in FY10. It, however, looks unsustainable as was the case in FY09 when cash conversion was low primarily due to steep increase in acceptances. With acceptances paid off in FY10, advances from customers have increased substantially from INR 2.2 bn in FY09 to INR 15.5 bn in FY10.

Order book reduced from INR 77.4 bn in FY09 to INR 64.0 bn in FY10. However, the company has guided that the order book, in quantitative terms, has increased to 791,000 MT FY10 (FY09: 781,000 MT) and the reduction in value is due to lower metal prices.

Net finance cost increases on lower interest income and capitalisation

Net finance cost increased from INR 1.8 bn in FY09 to INR 2.1 bn, as interest income dipped from INR 1.0 bn in FY09 to INR 0.2 bn in FY10. This is despite the increase in cash and investment from INR 10.6 bn in FY09 to INR 18.6 bn in FY10, which, we believe, is on account of cash received at FY10 end.

Interest capitalised dipped from INR 571 mn in FY09 to INR 81 mn in FY10 on account of commissioning of US spiral mill and coil mill at Anjarin FY09 end.

Borrowing cost dips as FCCBs replace high-cost debt

High cost debt was replaced by FCCBs, which reduced average borrowing cost from 14.2% in FY09 to 9.3% in FY10.

Operating margins rise, supported by reversal of forex provisioning

During FY10, the company’s revenues increased 28.1%, from INR 57.4 bn in FY09 to INR 73.5 bn in FY10.

EBIDTA margins grew from 11.1% in FY09 to 17.9% in FY10. This was primarily on account of lower raw material (RM) costs and reversal of forex provisioning of INR 1,256 mn on asset liability mismatch booked during FY09. Excluding forex provisioning, EBIDTA margins improved from 13.3% in FY09 to 16.2% in FY10.

FCCB redemption premium/ESOP discounts charged through reserves

During FY10, Welspun raised USD 150 mn (INR 6.9 bn) through issue of 4.5% FCCBs, convertible at INR 300/share, maturing on October 2014. Unless previously converted/ redeemed, the bonds will be redeemed at a premium of 2.8%.

Premium payable on redemption of FCCB, aggregating INR 16 mn, has been adjusted against securities premium account.

During the year, 1.1 mn equity shares were issued at a price of INR 80 each, on exercise of ESOPs. Discount allowed, aggregating INR 30 mn in respect of shares allotted, is adjusted in the securities premium account.

Welspun accounts ESOPs on intrinsic value basis. Had the company used the fair value model, PAT for FY10 would have been lower by INR 10.1 mn.


Welspun Corp Annual Report Analysis November 22, 2010


1

Market Data



M cap (INR bn/USD mn): 49 /1,090


Promoters : 40.8


FIIs : 19.5




2

Accounting and financial highlights

During FY09, Welspun adopted amended AS11. Accordingly, during FY10, it adjusted forex gain of INR 348 mn (FY09 loss of INR 616 mn) to the cost of fixed assets. Also, it transferred exchange gains of INR 94 mn (FY09 loss of INR 533 mn) to "foreign currency monetary item translation difference account", to be amortised over the balance period of such long term assets / liabilities, but not beyond FY11.

Of the above, gain of INR 18 mn (FY09 loss of INR 178 mn) has been adjusted in the current year and gain of INR 75 mn (loss of INR 355 mn) has been carried over.

Welspun also raised INR 4.7 bn via QIP issue during the year.

It has early adopted AS-30 and, accordingly, loss of INR 32 mn (INR 2.0 bn) related to foreign exchange difference on cash flow hedges for certain firm commitments and forecasted transactions is recognised in shareholders' funds and shown as hedging reserve account.

During FY10, the company acquired 99.97% in Welspun Trading for a consideration of INR 50.2 mn, recognising a capital reserve on acquisition of INR 152.9 mn.

Welspun Infratech, a wholly owned subsidiary of the company has entered into share purchase agreement with the existing promoters and other shareholders of MSK Projects to transfer 5.3 mn equity shares (23.13% stake) at a price of INR 130.50 per share. Further, it also entered into a share subscription agreement to subscribe to 17.1 mn equity shares of the said company at INR 123/share (to increase the stake to 56.15%. Moreover, it made an open offer to acquire 20% of post preferential issue equity share capital of MSK Projects at INR 130.5/share.


ROAE analyser analyses profitability on the scale of operating efficiency and capital allocation efficiency (detailed concept explained in Annexure A). We have analysed Welpun’s profitability for the year ended FY08, FY09 and FY10; results and key findings of same are as follows:


15.2 9.8 20.5


NOPAT margin (%) 9.7 5.6 10.1





ROE Derived (A+B) (%) 30.0 13.5 27.1

FY08 FY09 FY10


Welspun Corp


3

ROAE tree

6.5

27.1

20.5

0.0

6.0

12.0

18.0

24.0

30.0


(%)


• ROE improved primarily on account of increase in NOPAT margins on the back of efficient raw material utilisation and reversal of forex provisioning of INR 1,256 mn on asset liability mismatch booked during FY09.

• NBC increased, primarily on account of low interest income.

Movement in shareholder fund (INR bn) Particulars FY10


Add

Issue of shares 4.7


Change in Hedging reserve 2.0

Capital reserve on consolidation 0.2

Increase in FCMTA 0.4

Increase in Translation reserve 1.0

14.4

Less

Proposed Dividend and tax thereon 0.5

0.5

Closing shareholders fund 29.1 Source: Company annual report, Edelweiss research

Shareholders’ fund has increased on the back

of fresh equity issuance, profits and

exchange fluctuations



4


(60)

0

60

120

180

240


(Days)

Inventory days Receivable days

Advances from customers Payable days


Order book analysis

0.2 2.6

2.8

24.1

0.0

6.0

12.0

18.0

24.0

30.0

0

18

36

54

72

90

FY07 FY08 FY09 FY10

(%)

(IN

R b

n)

Revenue Order book Trade advances/ order book (RHS)




Depreciation 2.1

Foreign exchange adjustments (1.3)

Other non cash adjustments (Incl. tax provision) 0.1




Decrease in acceptances (24.7)

Increase in trade and other payables 11.2




Interest paid (2.0)

Net cash from operating activity post interest 1.8 Source: Company annual report, Edelweiss research

Healthy cash flows utilised for financing

capex and repayment of loans

Trade advances have increased significantly

from INR 2.2 bn in FY09 to INR 15.5 bn in

FY10

Cash conversion cycle decreased from (22) days in FY09 to (32)

days in FY10

Welspun Corp


5


Sources of fund

0

20

40

60

80

100


(%)



Application of fund

0

20

40

60

80

100


(%)

Fixed assets (incl goodwill) Investments Deferred Tax Asset

Inventories Sundry debtors Cash and bank

Other current assets Borrowing cost analysis

0.0

0.5

1.0

1.5

2.0

2.5

0.0

6.0

12.0

18.0

24.0

30.0


(x)

(IN

R b

n)

Debt (INR bn) Avg. borrowing cost (%) Debt /equity (RHS) Source: Company annual report, Edelweiss research

Loan book reduced in FY10, primarily on

account of repayment and exchange gains

Average borrowing cost dipped during the year as high-cost borrowing

were replaced by FCCBs

Proportion of inventories have

reduced, largely on account of lower steel

prices and better inventory management

Proportion of current liabilities has decreased

on account of repayment of acceptances



6



Sales 18,298 26,834 39,945 57,395 73,503

Total income 18,428 26,895 40,466 58,603 73,947

EBITDA 1,655 3,384 6,555 6,348 13,186

EBITDA margin (%) 9.0 12.6 16.4 11.1 17.9

Depreciation 352 476 609 1,433 2,061

Financial costs 530 779 1,232 2,787 2,329

Net profit 614 1,425 3,408 2,135 6,104


Loan funds 8,027 15,146 20,677 26,538 25,476

Net fixed assets 10,113 16,493 26,807 36,804 38,333




Cash flow from operating activities 132 (265) 2,855 13,195 3,821



Net cash flows 606 507 (870) 6,767 2,725

CAPEX (5,325) (6,298) (12,229) (10,708) (3,783)

Working capital investments (1,076) (2,601) (2,794) 5,058 (6,117) Source: Company annual report, Edelweiss research



CARAF/DAL consolidation impact

DLF promoters were issued 9% compulsory convertible preference shares (CCPS) of INR 16.0 bn in DLF Cyber City Developers (DCCDL), convertible into equity shares of DCCDL at any time within five years from the date of issue at holder(s) option. Conversion will lead to promoters’ equity stake in DCCDL to 40%.

DCCDL will be under obligation to pay dividends @ INR 1.4 bn/annum on preference shares till the date of conversion. In FY10, the company posted PAT of INR 3.0 bn and paid no dividend on equity shares.

Till the date of conversion, there will not be any charge in P&L for minority stake and, hence, consolidated profits will be higher to that extent. Post conversion, 40% of accumulated undistributed profits will get subsumed in minority interest.

The increase in shareholders’ funds includes INR 29.3 bn on account of consolidation of preference shares in DLF Assets (DAL) held by DSIPL. Post balance sheet date, Caraf (DAL’s holdco/DLF subsidiary) has acquired 90% of the preference shares for INR 30.9 bn, which will have corresponding adjustment to equity and net debt.

DLF’s capital reserve jumped from INR 16.8 bn in FY09 to INR 28.3 bn in FY10 (up INR 11.5 bn) on account of consolidation of DAL. (refer table 1 for details).

DAL earns rental income from leasing of properties purchased from DLF at a value arrived at by assuming a rental and capitalising the same at a rate of 9%. Post consolidation, the aforesaid properties are stated at sales price of DLF which includes profit of INR 66.4 bn on transactions till FY09.

Redemption of preference shares may impact future cash flows/debt

DLF has redeemable non-convertible preference shares (NCPS) of INR 19.7 bn, which were due for redemption as on balance sheet date including redemption premium of INR 5.9 bn. The said NCPS will be redeemed in the next FY at a reduced premium of INR 3.8 bn (refer table 2 for details).

If one were to consider redeemable preference shares and preference shares in DAL held by DSIPL as debt instead of equity, as prudence would suggest, the revised D/E would be 1.07x vis-à-vis the reported 0.71x.

The redemption premium on preference shares has not been amortised through the P&L (INR 2.1 bn YTM; 12.3% of FY10 PAT) as would have been a prudent accounting policy, in our view. The Companies Act, 1956, allows the same to be charged as a one-time charge against the securities premium account.

DAL consolidation leads to reduction in debtors; debtors > 6 months has gone up

Debtors exceeding six months increased from INR 9.8 bn in FY09 to INR 13.0 bn in FY10, though overall debtors declined due to consolidation of DAL (refer chart 5).

During FY10, DLF forfeited INR 320.3 mn (FY09 INR 73.8 mn) on account of non-payment of dues from customers included in revenues.

Interest charged to customers increased from INR 0.9 bn in FY09 to INR 1.1 bn in FY10. Interest accrued from customers increased to INR 1.4 bn (FY09: INR 0.7 bn).


DLF Annual Report Analysis October 12, 2010


1

Market Data




Avg. Daily vol. BSE (’000): 9.680.4 Share Holding Pattern (%)

Promoters* : 78.6


FIIs : 15.1




2

Operating metrics dip

DLF’s revenues dipped 24.7% from INR 104.3 bn in FY09 to INR 78.5 bn in FY10 on account of reduced sales to DAL.

PBT margins declined from 51.8% in FY09 to 32.5% in FY10 as EBIT margins dipped from 55.7% to 46% and finance charges increased from INR 5.5 bn to INR 11.1 bn.

Divestment of non-core assets

The company’s loans and advances slipped 21.8% from INR 97.1 bn in FY09 to INR 75.9 bn in FY10, primarily on account of divestment of non-core assets comprising advances to be received from the government for integrated township projects and convention centres, advance licence fee refunds, and disposal of select land parcels held for hotel development under the hotel business.

DLF Brands (DBL), the retail arm, ceased to be a subsidiary of DLF by preferential allotment of a majority stake to a promoter entity. DBL had accumulated losses of INR 424.1 mn; however, pending approval no effect has been given in financial statements.

Other highlights

DLF’s revenue recognition policy is based on the percentage completion method (PoCM) and is determined as a proportion of actual project costs incurred to date (including cost of land) to the total estimated project cost (including cost of land). The project becomes eligible for revenue recognition when the percentage of completion exceeds 30%.

There are certain claims of existing and previous shareholders of Silverlink (Silverlink Holdings), a subsidiary, with regard to repurchase of shares held by shareholders in exchange of secured convertible notes to be issued by Silverlink. These claims originated in the years prior to the acquisition of Silverlink by DLF. The Court in Singapore has passed an interim order that Silverlink was in breach of its contract. However, the court has not quantified any amount. Management has assessed the liability as contingent in nature and no provision has been made.

The book value of long-term quoted investments is INR 2.5 bn at FY10 end and the market value is INR 1.7 bn. However, no provision for diminution on investments was made during FY10. As on the date of this report, the market value is INR 1.8 bn.

DLF has capital commitments of INR 58.4 bn at FY10 end (3x compared to FY09) which will result in incremental cash outflow.

The company has reduced retained earnings on account of an amalgamation adjustment of INR 7.4 bn. This had no impact on profits for the year.

Note: All numbers are on consolidated basis, unless stated otherwise

DLF follows PoCM which includes cost of

land

DLF


3

Table 1: Balance sheet showing impact of DAL consolidation (INR bn)

ParticularsMovement

during FY10Impact of

DALBalance Reason for change

Share capital 45.2 45.2 - CCPS of INR 29.3 bn held by DSIPL in DAL and INR 16 bn issued by DCCDL to promoters

Reserves and surplus 17.5 11.5 6.0 Increase in capital reserve

Minority interest (0.1) - (0.1)

Loan funds 53.6 21.2 32.4

Deferred tax liability 2.5 - 2.5

Goodwill (10.0) - (10.0)

Fixed assets 86.5 76.0* 10.5

CWIP 54.4 53.0 1.4

Deferred tax asset (0.4) - (0.4)

Investments 41.0 0.0 41.0

Inventory 15.5 - 15.5

Current assets (58.7) (35.5) (23.2)Elimination on consolidation of DAL and balance is primarily on account of divestment of non-core assets

Current liabilties (5.0) (6.1) 1.2

Provisions (4.6) 0.0 (4.6)

At sale price of DLF. Includes profit of INR 66.4 bn till FY09


* - Stated at gross block

Table 2: Redeemable preference shares (INR bn) Name of subsidiary company

Due for redemption on

BS dateAmount (A)

Redemption amount (B)

Revised redemption amount (C)

Reduction in redemption premium

(D = B-C)

YTM Charge

FY10

Shivaji Marg Properties Yes 4.8 6.9 5.9 1.0 0.6

DLF Southern Homes Yes 4.6 6.7 5.6 1.1 0.6

DLF New GurgaonHome Developers

Yes 4.5 6.1 6.1 - * 0.9

Total 13.8 19.7 17.6 2.1 2.1 Source: Company annual report, Edelweiss research

* - Subsequent to balance sheet date, the Company has issued redeemable preference shares of INR 6.6 bn, the proceeds of which will be used to

redeem the preference shares

Table 3: Major subsidiary details (INR mn) FY09 FY10

Networth Turnover PBTPBT as

% of TONetworth Turnover PBT

PBT as % of TO

Caraf Builders & Constructions * 100.0 NA NA NA NA 43,999 4 (17) (475)

DLF Assets (DAL) * 100.0 NA NA NA NA 58,331 172 17 10

DLF Commercial Complexes 100.0 4,041 7,353 3,710 50 3,773 6,917 (399) (6)

DLF Commercial Developers 100.0 19,058 7,052 2,464 35 20,967 3,902 1,705 44

DLF Cyber City Developers * 100.0 28,323 14,426 11,945 83 47,209 6,400 3,715 58

DLF Home Developers 100.0 13,194 19,757 7,614 39 24,734 24,698 12,133 49

DLF Info City Developers (Chennai) 100.0 27,621 14,038 10,206 73 30,262 4,683 2,983 64

DLF Retail Developers 100.0 1,910 4,409 (906) (21) 1,942 15,019 107 1

DLF New Gurgaon Homes Developers 82.7 5,146 3,071 360 12 5,257 1,574 196 12

DLF Southern Homes 51.0 7,895 1,795 295 16 7,742 988 (230) (23)

DLF Hotel Holdings 100.0 11,654 276 (70) (25) 12,362 143 (124) (87)

DLF Global Hospitality 100.0 3,850 12 (740) (6,324) 5,245 24 (486) (1,990)

Silverlink Holdings 89.9 1,568 164 (634) (386) 87 63 (1,279) (2,041)

Shivajimarg Properties 100.0 4,871 4 2 46 4,960 924 142 15

Overseas Hotels 100.0 11,837 310 210 68 11,964 359 314 88

Subsidiary company%

shareholding as on FY 10


* - Effective holding @ 60% considering CCPS held by promoters



4


Chart 1: Sources of fund

0.0

20.0

40.0

60.0

80.0

100.0


(%)



Chart 2: Application of fund

0.0

20.0

40.0

60.0

80.0

100.0


(%)

Fixed assets (incl goodwill) Investments Deferred Tax AssetInventories Sundry debtors Cash and bankOther current assets


Chart 3: Profitability analysis

0.0

16.0

32.0

48.0

64.0

80.0

0

30

60

90

120

150


(%)

(IN

R b

n)

Revenue (LHS) NP margins (RHS) EBIDTA margins

The mix has remained the same other than a slight increase in loan

funds

The mix has changed significantly due to acquisition of DAL.

Integration of DAL led to significant dip

in revenues. NP margins dipped more than proportionate to EBIDTA on account of

incremental finance charges

DLF


5

Chart 4: Analysis of WIP, advance extended, and realisations from agreement to sell

0

30

60

90

120

150


(IN

R b

n)

Work in progress Advance recoverable Realisation under agreement to sell Chart 5: Debtors analysis

0.0

20.0

40.0

60.0

80.0

100.0

0

22

44

66

88

110


(%)

(IN

R b

n)

Debtors (incl. unbilled revenue) (LHS)


Table 4: Movement in shareholders’ funds (INR bn) Particulars FY10


Add/(Less)

Impact of DAL acquisition and amalgamation

Compulsory convertible preference shares 45.2

Increase in capital reserve 11.6

Amalgamation adjustment (7.4)

49.4

P&L impact


Change in translation reserve (0.1)

Proposed dividend and tax thereon (Equity and preference) (4.2)

Employee stock option scheme 0.3

Others 0.2

13.4


Area under constructed

properties has increased; however,

realization under agreement to sell has

declined

Consolidation of DAL leads to elimination

of debtors. However, debtors exceeding six

months as a percentage of revenue have

increased

Shareholders’ funds increased on account

of consolidation of DAL and profits



6

Table 5: Summary financials (INR mn) Particulars FY06 FY07 FY08 FY09 FY10

Sales 18,357 26,374 140,414 100,354 74,229

Total income 19,602 40,533 146,839 104,314 78,509

EBITDA 7,508 14,908 93,177 55,914 34,174

EBITDA margin (%) 40.9 56.5 66.4 55.7 46.0

Depreciation 358 578 901 2,390 3,249

Financial costs 1,685 3,076 3,100 5,548 11,100

Net profit 4,110 19,336 78,120 44,696 17,198


Loan funds 41,320 108,825 131,583 177,161 230,726

Net fixed assets 33,298 50,786 120,962 158,657 289,548




Cash flow from operating activities (8,730) (65,635) (17,809) 1,743 86,278

Cash flow from investing activities (20,844) 2,364 (60,142) (35,901) (163,060)


Net cash flows 908 1,323 18,258 (9,724) (2,607)

CAPEX (6,467) (20,307) (47,831) (33,783) (139,076)

Working capital investments (15,785) (74,808) (97,656) (45,213) 57,432 Source: Company annual report, Edelweiss research

Equity shareholders’ fund excludes redeemable preference shares issued by the Company which are treated as part of loan funds.

Operating cash flows strained further on increased working capital requirement …

Unitech’s debtors increased from INR 9.3 bn in FY09 to INR 12.7 bn in FY10. However, debtors outstanding for more than six months increased to INR 5.7 bn in FY10 (FY09: INR 2.6 bn). Management has attributed reasons for increase in debtors to drop in property prices during 2009.

Project-in-progress rose to INR 171.7 bn in FY10 (FY09: INR 157.4 bn), more than proportionate to the increase in advances from customers from INR 74.5 bn in FY09 to INR 80.2 bn in FY10.

During FY10, cash flow from operations was INR (13.2) bn, though, profits before tax were INR 9.2 bn, primarily on account of increase in receivables and projects in progress (refer table 2 for details).

… QIP and warrant issue offered some respite

Unitech has raised INR 44.1 bn through two rounds of Qualified Institutional Placements (QIP) issues and additional INR 2.9 bn through issue of share warrants to the promoter group company (refer table 3 for details).

Loan book has reduced from INR 90.6 bn in FY09 to INR 60.1 bn in FY10, which led to reduction in debt/equity from 1.8x to 0.6x.

Finance expenses have reduced significantly from INR 5.5 bn in FY09 to INR 2.0 bn in FY10. The average borrowing cost charged through P&L (excl. interest capitalised) dipped from 6.3% in FY09 to 2.7% in FY10. Details of interest capitalised on projects are not available.

Operational highlights and adjustments to reserves

Revenue has marginally increased from INR 28.9 bn in FY09 to INR 29.3 bn in FY10. However, EBIT decreased from INR 15.7 bn in FY09 to INR 10.3 bn in FY10 primarily on account of increase in input costs for real estate projects.

Revenue includes income on sale of investments in real estate projects, which decreased significantly from INR 14.5 bn (50% of FY09 sales) in FY09 to INR 8.7 bn (30% of FY10 sales) in FY10.

Movement in shareholders’ funds includes write-off of securities premium of INR 3.1 bn (46% of FY10 PAT) (refer table 5 for details) and increase in capital reserve of INR 2.2 bn. Further details in respect of these adjustments are not available.

Unitech adjusted INR 166 mn (2.5% of FY10 PAT) during FY10 from opening reserves. The company has prior period expenses (including taxes paid for earlier years) of INR 13 mn during FY09, which has increased to INR 160 mn (2.4% of FY10 PAT) during FY10.

Goodwill on consolidation increased from INR 11.7 bn (23% of net worth) in FY09 to INR 15.3 bn (15% of net worth) in FY10.

Fixed assets include office vehicles of INR 1.2 bn towards aircraft purchased. As informed to us, post BS date, the Company has exited the transaction.


Unitech Annual Report Analysis October 27, 2010


1

Market Data



M cap (INR bn/USD mn):11,261 / 5,018


Promoters : 46.6


FIIs : 34.6





2

Segment highlights

EBIT margins for real estate segment dipped from 66.8% in FY09 to 41% in FY10 on account of increase in input costs. Consequently, Unitech’s EBIT margins declined from 54% in FY09 to 35% in FY10.

Return on net assets of real estate segment decreased from 37.7% in FY09 to 12.5% in FY10.

Revenue from overseas operations declined to INR 3.0 bn (FY09: 5.3 bn). Overseas assets have also reduced from INR 31.9 bn in FY09 to INR 18.8 bn in FY10.

Other highlights

Unitech has delayed repayment of dues of INR 0.3 bn to certain debenture holders, banks and financial institutions. Approval for rescheduling/restructuring of the same has been received from lenders.

The minority interest share was INR (31.4) mn during FY10 against INR 21.5 mn during FY09 on account of losses in subsidiaries.

Unitech has accounted revenue for liquidated damages of INR 0.5 bn during FY10.

Consolidated financial statements include revenue of INR 1.0 bn (3.4% of revenue) and total assets of INR 23.3 bn (8.2% of assets) from unaudited financial statements of subsidiaries/joint ventures.

Distinctive accounting policies

Unitech recognises revenue from real estate projects undertaken on or after April 1, 2004, on the ‘percentage of completion method’ (PoCM) and is determined as a percentage of actual project costs incurred (including proportionate cost of land) to the total estimated project cost under execution. Revenue is recognised when the percentage of completion exceeds 20%. (refer table 1 for details)

‘Project in progress’ (PIP) (~ 61% of total assets) includes the profit element on real estate projects of INR 11.5 bn in FY10 (FY09: INR 10.8 bn). However, as per the accounting policy PIP is valued at cost.

PIP results in boosting the balance sheet size since the amount received from customers is shown separately as part of current liability. Amount received from customers increased from INR 74.5 bn in FY09 to INR 80.2 bn in FY10.

Unitech accounts for revenue from sale of land/land rights and sale proceeds of investments held in subsidiaries, joint ventures and associates as ‘sales and other receipts’, net of cost. Revenue on sale of land/land rights decreased to INR 52.5 mn in FY10 (FY09: INR 646.1 mn).

Debtors for real estate business are accounted with corresponding credit to advance from customers. Thus, advance from customers includes amount in respect of which no money is received from the customers. Debtors also include amount outstanding on direct sale of land/land rights and other non project business.

Note: All numbers are on consolidated basis, unless stated otherwise

Dip in real estate revenues and margins

Revenue recognised on PoCM including

proportionate land cost with threshold of 20%

Amount received from customers not netted off

against PIP, inflating balance sheet size

Advance from customers include non cash

adjustment

Unitech


3

Table 1: Accounting treatment as per Unitech versus industry

Transactions

On receipt of advances

Cash and bank Increase 20 Increase 20

Advance from customers Increase 20 Increase 20

Expenses incurred for construction

Work in progress/ Project in progress Increase 40 Increase 40

Cash and bank Decrease 40 Decrease 40

On revenue booking

Sales Increase 50 Increase 50

Debtors / unbilled revenue - Increase 30

Advance from customers - Decrease 20

Project in progress Increase 50

On cost booking

Profit and loss Decrease 40 Decrease 40

Work in progress/ project in progress Decrease 40 Decrease 40 On debtors dueDebtors Increase 30 Advance from customers Increase 30

Unitech Industry

Summary of accounts

Unitech Industry practice Project in progress WIP Particulars Amount Particulars Amount Particulars Amount Particulars AmountExpenses incurred (Cash and bank)

40.0 Expnses booked (P&L)

40.0 Expenses incurred (Cash and bank)

40.0 Expenses booked (P&L)

40.0

Sales (P&L) 50.0 C losing balance 50.0

Total 90.0 90.0 Total 40.0 40.0 Profit accumulated in project in progress

Debtors Debtors Particulars Amount Particulars Amount Particulars Amount Particulars AmountAdvance from customers 30.0 Closing balance 30.0 Sales (P&L) 30.0 Closing balance 30.0 Total 30.0 30.0 Total 30.0 30.0

For real estate projects business, debtors are not recognized on sales recognition

Advance from customers Advance from customers

Particulars Amount Particulars Amount Particulars Amount Particulars AmountClosing balance 50.0 Cash and bank 20.0 Sales (P&L) 20.0 Cash and bank 20.0

Debtors 30.0

Total 50.0 50.0 Total 20.0 20.0 Advance from customers is not adjusted against sales/debtors

Assumptions: Total cost of contract INR 80

Margin 25%

Project completion 50%

Debtors due as per the terms of agreement 50%




4

Chart 1: Cash flow analysis: Funds deployed in project in progress financed by debtors

40.0

48.0

56.0

64.0

72.0

80.0

0

40

80

120

160

200


(%)

(IN

R b

n)

Project in progressAdvance from customersProfit element


Chart 2: Cash flow analysis

(35.0)

(15.0)

5.0

25.0

45.0

65.0


(IN

R b

n)

Operating activities Investing activities Financing activities Source: Company annual report, Edelweiss research

Table 2: Cash flow from operating activities (INR bn)

Particulars FY10

Profit before tax and minority interest 9.2

Non operating and non-cash adjustments 1.5


Cash profit before tax 9.5

Increase in trade receivables (3.4)

Increase in project-in-progress (14.4)

Decrease in loans and advances and other assets 2.8

Decrease in trade and other payables (6.3)


Net cash from operating activities (11.6)

Interest expenses paid (1.6)

Net cash from operating activities post interest (13.2) Source: Company annual report, Edelweiss research

No major change in advances from

customers

Positive cash flows from financing activities from

QIP/warrants issued. Operating cash flows

negative

Substantial increase in receivables and project-

in-progress. Also, creditors have

decreased resulting in negative cash from operating activities

Unitech


5

Table 3: Proceeds from issue of shares/warrants

Particulars

No. of shares

/warrants (mn)

Issue price (INR)

Amount (INR bn)

Remarks

QIP Issue I 421.1 38.5 16.2 Includes securities premium of INR 36.5/share

QIP Issue II 344.4 81.0 27.9 Includes securities premium of INR 79.0/share

Warrants converted to shares

50.0 50.8 2.5 Includes securities premium of INR 48.75. Issued to promoter holding company

Warrants o/s on BS date 177.5 12.7 2.3 Issued to promoter holding company

Proceeds from issue of shares/warrants

48.9 Source: Company annual report, Edelweiss research

Table 4: Movement of shareholders’ funds (INR bn) Particulars FY10


Add/(Less):

Issue of shares/warrants

Issue of shares via QIP (incl securities premium) 44.1

Issue of shares via conversion of share warrants (including securities premium)

2.5

Issue of share warrants pending conversion 2.3

48.9

Movement in reserves


Increase in capital reserve 2.2

Securities premium account written off (3.1)

Movement in foreign currency translation reserve (1.6)

Opening adjustment in reserves (0.2)

4.2

Other adjustments

Dividend (incl tax) (0.9)

Others 0.2

(0.7)


Shareholders’ funds increased on account of issue of QIP/share warrants, securities premium netted off and increase in capital reserve on consolidation.

Table 5: Movement of securities premium balance (INR bn) Particulars FY10

Opening securities premium balance 7.2

Add: Premium on issue of shares/warrants 45.0

Total 52.2

Closing securities premium balance 49.2

Difference 3.1 Source: Company annual report, Edelweiss research

Of the above difference, INR 0.9 bn is likely on account of share issue expenses written off and balance INR 2.2 bn indicates direct write-off

Increase in shareholders’ funds

primarily on account of QIP/share warrants

issue

Difference in securities

premium statement indicate direct write-off

of INR 2.2 bn



6

Chart 3: Balance sheet analysis Sources of funds

0.0

20.0

40.0

60.0

80.0

100.0


(%)

Shareholder's Fund Minority interestLoan Funds Deferred liability against landDeferred Tax liability Current liabilitiesProvisions


Chart 4: Application of funds

0.0

20.0

40.0

60.0

80.0

100.0


(%)

Fixed Assets Investments Inventories Project in progress

Debtors Cash & bank Loans and advances Source: Company annual report, Edelweiss research

Chart 5: Debtors analysis

0.0

10.0

20.0

30.0

40.0

50.0

0

3,000

6,000

9,000

12,000

15,000


(%)

(IN

R m

n)

Total Debtors (LHS)Debtors as % of revenue (RHS)Debtors exceeding six months as % of revenue (RHS)


Proceeds from increase in shareholders’ funds

used to repay loan funds resulting in change in

mix

No major change in the mix

Project in progress

forms almost 61% of the balance sheet

Debtors as a percentage

of revenue increased from 32% to 43%.

However, debtors more than six month jumped

more than proportionate from 9.1% to 19.4%

Unitech


7

Chart 6: Segment revenue

0

9,000

18,000

27,000

36,000

45,000


(IN

R m

n)

Construction Real Estate Consultancy Hospitality Transmission towers Others Chart 7: Segment EBIT

0.0

20.0

40.0

60.0

80.0

100.0


(%)

Construction Real Estate Consultancy Hospitality Transmission towers Others

Chart 8: Segment EBIT margin

(30.0)

0.0

30.0

60.0

90.0

120.0


(%)

Construction Real Estate ConsultancyHospitality Transmission towers Others


Real estate segment EBIT share reduced

during FY10 on account of increase in

consultancy share.

Segment EBIT margin for real estate dipped

substantially



8

Table 6: Major subsidiary details (INR mn)

Networth Turnover PAT Networth Turnover PAT

Unitech Realty 100 3 33 (15) 119 2,891 122

Bengal Unitech Universal Infrastructure 90 327 1,968 55 556 2,297 229

Unitech Power Transmission 100 200 1,018 (46) 300 1,044 (1)Unitech Property Management (Formerly Unising Projects)

100 180 794 71 298 778 118

Unitech Developers & Hotels 100 257 1 1 622 530 366

Unitech Global 100 3,032 443 (405) 1,975 378 (681)

Unitech Holdings 100 4,375 12 7 4,383 10 8

Aditya Properties 100 2,235 0 (0) 2,235 0 (0)

Coleus Developers 100 0 0 0 205 0 (0)

Technosolid 100 NA NA NA 647 - 976

Vectex 100 13 - (0) 7 - 716

Zimuret 100 3,515 3,116 3,131 3,061 - 28

Unitech Overseas 100 3,332 - (5) 2,875 - (1)

Unitech Hotels 100 3,341 867 869 2,883 - (1)

Firisa Holdings 100 2,286 - (0) 1,970 - (3)

Unitech Comm. & Res. Projects 100 1,649 0 (16) 1,637 - (6)

Unitech Hi-Tech Builders 100 1,711 0 (17) 1,698 - (7)

Unitech Realty Builders 100 1,734 0 (17) 1,721 - (7)

Empecom 100 (230) - (205) 130 - (162)

Unitech Residential Resorts 100 100 - (404) 100 - (170)

Name of the subsidiary companyExtent of

Holding (%)

FY10FY09

Source: Company annual report, Edelweiss research The dip in the net worth of few subsidiaries (highlighted in bold) is higher than the reported losses in the consolidated financial statements. Table 7: Summary financials (INR mn) Particulars FY06 FY07 FY08 FY09 FY10

Sales 9,267 32,898 41,152 28,897 29,313

Total income 9,545 33,881 42,801 33,156 30,153

EBITDA 1,689 18,296 22,038 15,888 10,690

EBITDA margin (%) 18.2 55.6 53.6 55.0 36.5

Depreciation 112 73 205 209 341

Adjusted financial costs 465 1,287 2,804 5,546 2,000

Net profit 841 13,061 16,613 11,964 6,751


Loan funds 10,449 40,397 85,524 90,558 60,078

Net fixed assets 5,711 9,274 32,567 44,930 48,844




Cash flow from operating activities (2,247) (20,745) (10,342) (54) (13,170)



Net cash flows 1,182 6,328 3,855 (7,634) (353)

CAPEX (4,000) (5,212) (24,810) (20,141) (5,346)

Working capital investments (3,575) (38,113) (26,985) (9,403) (21,156) Source: Company annual report, Edelweiss research



Increased customer base and forex gains drive profitability

Bharti Airtel’s (Bharti) subscriber base increased substantially from 97 mn in FY09 to 131 mn in FY10. This rise catapulted the company’s revenues 11.9% to INR 418.3 bn in FY10 (FY09: INR 373.5 bn) despite 20.8% dip in ARPU on back of stiff tariff war in the sector.

PBT margin improved from 21.1% in FY09 to 24.6% in FY10, primarily on account of foreign exchange gain of INR 7.9 bn (FY09: loss INR 17.9 bn). Excluding forex impact, the company’s PBT margin dipped from 25.8% in FY09 to 22.8% in FY10 primarily on account of increase in network operating expenditure and new business ventures, currently under gestation period, making losses.

Bharti’s network operation expenditure increased significantly from INR 62.5 bn in FY09 to INR 89.1 bn in FY10 (from 16.7% of sales to 21.3%) which was partially offset by decrease in access charges from INR 52.9 bn in FY09 to INR 44.8 bn in FY10 (from 14.2% in FY09 to 10.7% in FY10).

During the year, provision for doubtful debts increased to INR 12.5 bn (28.1% of debtors) from INR 9.8 bn in FY09 (25.3% of debtors).

Bharti provided INR 277.9 mn (FY09: INR 60.6 mn) in FY10 towards dimunition in the value of inventory which is 36.5% of inventory (FY09: 5.9%).

Auditors have highlighted that funds amounting to INR 6.5 bn raised on short-term basis (primarily represented by capital creditors) have been used for long-term investments (primarily represented by fixed assets).

During FY10, the company had revised estimates for assets retirement obligations (ARO) and consequently, reversed provision of INR 5.8 bn with corresponding reversal from fixed assets. The change in estimate led to INR 269.6 mn increase in PBT.

Segmental analysis

Mobile services segment continued to be the highest revenue and segmental EBIT contributor. However, EBIT margins were the highest and continued to grow in the enterprise services segment.

Revenue share from passive infrastructure segment increased from 3.4% in FY09 to 8.4% in FY10.

Other highlights

In FY10, Bharti Infratel converted interest free unsecured convertible debentures of INR 32.0 bn into 40.3 mn equity shares at an average price of INR 793.9. Consequently, Bharti’s stake in Bharti Infratel dipped from 92.5% to 86.1%. The imputed valuation for Bharti Infratel on this basis stands at INR 461.2 bn.

The company acquired 55% stake in Bharti Telemedia for INR 73.8 mn from Bharti Enterprises. This led to its stake in Bharti Telemedia increasing to 95%. Also, the company extended an INR 14.9 bn (FY09: INR 6.4 bn) interest free loan to Bharti Telemedia.

As at FY10 end, accumulated losses of a few subsidiaries including Bharti Telemedia, Bharti Airtel Lanka, etc., exceed the networth of respective companies.

During the year, the company remitted USD 311.5 mn (INR 14.1 bn) to its subsidiary Bharti Airtel Holdings (Singapore) for acquisition of 70% stake in Warid Telecom, Bangladesh.


Bharti Airtel Annual Report Analysis October 5, 2010


1

Market Data



M cap (INR bn/USD mn):1,365 / 30,760


Promoters* : 67.9


FIIs : 16.7




2


ROAE analyser analyses profitability on the scale of operating efficiency and capital allocation efficiency (detailed concept explained in Annexure A). We have analysed Bharti’s profitability for years ended FY08, FY09, and FY10; results and key findings of same are as follows:

Particulars

A. Return on net operating assets (RNOA) (OPATO x NOPAT margin) (%)

31.5 28.7 20.3


NOPAT margin (%) 25.5 26.1 21.3 B. Return from leverage (FLEV x spread) (%)

6.5 1.4 5.3


NBC (net borrowing cost) (%) 9.6 23.9 (6.3)



ROE Derived (A+B+C) (%) 38.5 30.6 26.2

FY08 FY09 FY10


ROAE tree

5.3

0.6

20.3

26.2

0.0

6.0

12.0

18.0

24.0

30.0



ROAE

(%)


ROAE dipped primarily on account of:

• Dip in NOPAT margin from 26.0% in FY09 to 21.4% in FY10 primarily on account of increase in network operating expenses.

• Bharti generated net financing income on the back of foreign exchange gain earned during the year which pushed return from leverage North. Excluding foreign exchange gains, NBC stood at 3.6% (FY09: 0.8%).

Healthy operating cash flow

Net borrowing cost (NBC) negative on

account of forex gains

Bharti Airtel


3

Subsidiary analysis (INR mn) Name of Subsidiary company % of Shareholding


Bharti Telemedia 95.0 (2,374) 74 (2,230) (7,046) 2,870 (4,672)

Bharti Airtel Lanka 100.0 538 95 (1,585) (2,456) 955 (3,056)

Bharti Airtel (Holding) Singapore Pte 100.0 1,156 - 56 14,729 - (531)

Bharti International Singapore Pte 100.0 - - - (502) - (511)

Warid Telecom International 70.0 - - - 10,929 407 (231)

Bharti Airtel (Canada) 100.0 (25) 4 (22) (35) 12 (13)

Bharti Airtel (Hongkong) 100.0 (3) 0 (14) (13) 12 (10)

Bharti Infratel Ventures 100.0 (0) - (0) (0) - (0)

Bharti Airtel Intl. (Netherlands) B.V 100.0 - - - 1 - (0)

Bharti Infratel Lanka 100.0 - - - - - -

Bharti Airtel (USA) 100.0 (266) 906 (228) (258) 799 8

Bharti Airtel (UK) 100.0 66 46 (17) 157 145 64

Bharti Airtel (Singapore) 100.0 6 312 12 102 979 125

Bharti Airtel Services 100.0 (147) 4,926 (19) 5 4,215 251

Network i2i 100.0 717 1,095 585 1,041 1,474 295

Bharti Infratel 86.1 104,506 26,154 4,374 136,708 24,530 3,208

Bharti Hexacom 70.0 15,136 22,876 5,616 21,379 26,415 7,361

FY09 FY10


New business ventures currently under gestation period are making losses




Non cash adjustments (Incl. tax provision) 63.0



Increase in debtors (5.7)

Decrease in other receivables 13.4

Decrease in inventory 0.3

Decrease in trade and other payables (5.5)


Net cash from operating activities 154.6 Source: Company annual report, Edelweiss research

Movement in shareholders’ fund (INR bn) Particulars FY10


Add 114.4


Issue of shares 0.4

Increase in Employees stock options outstanding 1.3

Reserve arising on dilution of Equity in Subsidiary 21.1

Less 6.9

Decrease in Foreign currency translation reserve 0.1

Proposed dividend (incl tax) 4.5

Net depeciation on Fair value assets 2.0

Minority share 0.3

Closing shareholders fund 398.8 Source: Company annual report, Edelweiss research

Increase in shareholders’ fund

primarily on account of profit earned and

conversion of interest free convertible

debentures of Bharti Infratel during the

year

Healthy operating cash flow



4

Efficiency analysis

(9.0)

(7.2)

(5.4)

(3.6)

(1.8)

0.0

0.0

0.3

0.5

0.8

1.0

1.3


(x)

(x)

Fixed asset turnover ratio (excl. CWIP) Working capital turnover ratio (RHS) Source: Company annual report, Edelweiss research

Debtor analysis

2.0

2.5

3.0

3.5

4.0

4.5

15.0

19.0

23.0

27.0

31.0

35.0


(%)

(%)

Provision for doubtful debts as a % of total debtors

Provision for doubtful debts as a % of sales (RHS) Source: Company annual report, Edelweiss research

Increased competition and new

business ventures dragged down

operating efficiency

Substantial increase in provision for doubtful debts

Bharti Airtel


5

Segmental analysis

Segmental revenue

0

70

140

210

280

350


(IN

R b

n)

Mobile services Telemedia services Enterprise services Passive infrastructure Others Segmental EBIT share

(60.0)

(30.0)

0.0

30.0

60.0

90.0


(%)

Mobile services Telemedia services Enterprise services Passive infrastructure Others

50.0

65.0

80.0

95.0

110.0

125.0

15.0

18.5

22.0

25.5

29.0

32.5

FY08 FY09 FY10

(%)

(%)

Mobile services Telemedia services

Passive infrastructure Enterprise services -RHS Source: Company annual report, Edelweiss research

Mobiles services continued to

dominate. However, its revenue share

dipped from 78.9% in FY09 to 75.9% in FY10, which was

offset by increase in revenue share from

passive infrastructure segment (from 3.4%

in FY09 to 8.4% in FY10)

EBIT share from passive infrastructure increased from 3.7%

in FY09 to 5.8% in FY10. However, EBIT

margins of all segments, expect

enterprise services segment, dipped

Segmental EBIT margins of the

enterprises group increased, while they

dipped for other segments



6


Sources of fund

0.0

20.0

40.0

60.0

80.0

100.0


(%)


Deferred tax liability (net) Current liabilities Provisions


Application of fund

0.0

20.0

40.0

60.0

80.0

100.0


(%)




Proportion of shareholders’ fund inches up primarily

on account of conversion of

debentures of Bharti Infratel and profitability

Bharti Airtel


7


Sales 116,641 184,202 270,122 373,521 418,295

Total income 117,541 185,917 273,723 379,496 423,066

EBITDA 41,528 74,359 113,700 152,638 168,292

EBITDA margin (%) 35.6 40.4 42.1 40.9 40.2

Depreciation 16,419 26,190 38,102 49,639 65,544

Financial costs 2,555 3,100 6,083 23,064 (1,483)

Net profit 20,279 40,621 63,954 78,590 91,631


Loan funds 47,728 52,859 96,017 135,171 102,881

Net fixed assets 162,551 229,753 361,194 480,923 532,850



Net current assets (40,718) (59,172) (83,160) (65,958) (50,198)



Cash flow from financing activities 3,698 3,771 59,987 20,648 (13,749)

Net cash flows (631) 5,010 (1,096) 6,010 (6,216)

CAPEX (55,343) (86,169) (136,376) (168,590) (125,077)

Working capital investments 4,755 10,387 14,391 (7,524) 2,558 Source: Company annual report, Edelweiss research



8

ANNEXURES

Annexure


9

Annexure A: ROE analyser

ROE analyser analyses the profitability on the scale of operating efficiency and capital allocation efficiency. While operating efficiency is a measure of how efficiently the company is making use of operating assets, capital efficiency is the measure of balance sheet efficiency. The above analysis involves: 1. Dissection of profitability along two major drivers:

a. Return from operating activities (RNOA: return on net operating assets).

b. Return from financing activities (leveraging effect on ROE).

ROE = Return from operating activities (RNOA) + Return from leverage

Or

ROE = Operating margin x Operating assets turnover + Leverage spread x Leverage multiplier

Whereas:

RNOA = NOPAT/Average operating assets

Operating margin = NOPAT/Operating revenue

Operating assets turnover = Operating revenue/Average operating assets

Leverage spread = RNOA – Net borrowing cost

Leverage multiplier = Average net financial obligation/Average common shareholders’ equity

2. Reformulation of balance sheet, wherein, we have regrouped assets and liabilities into operating and financing categories (against traditional current and non-current categorisation).

3. Reformulation of income statement, wherein, we have regrouped income and expenses into

operating and financing activities.

Notes

NOTES:

xx xxxxx


200



2

Vikas Khemani Head Institutional Equities [email protected] +91 22 2286 4206

Nischal Maheshwari Head Research [email protected] +91 22 6623 3411

Edelweiss Securities Limited, 14th Floor, Express Towers, Nariman Point, Mumbai – 400 021, Board: (91-22) 2286 4400, Email: [email protected]

Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

201

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Annual Report Analysis Compendium-FY10-EDEL