D:VelsDaily Morning Brief 0OctMorning Insight 26 Oct 2010€¦ · Derivatives 160,796 14.3 Net inflows (Rs cr) 22 Oct 10 % Chg MTD YTD FII 1,379 41.2 22,430 110,714 Mutual Fund 179

OCTOBER 26, 2010

Economy News4 Exports continued to grow smartly in September while import growth

slowed, as a result of which the trade deficit shrunk to its lowest levelsince April, coming in at $9.12 billion (Rs. 40,492.80 crore). (Mint)

4 SEBI on Monday cleared the decks for IPOs by life insurance firms, butthe much-anticipated changes in the takeover code weren’t approved bythe watchdog as discussions at its board meeting remained“inconclusive”. (Mint)

4 The leaders of India and Japan signed a broad agreement on Mondayaimed at increasing trade and agreed to speed up talks towards a civiliannuclear energy deal—despite sensitivity in Japan over India’s past atomictests. (Mint)

4 Market regulator Sebi today doubled the investment limit for retailinvestors in an initial share sale offer (IPO) to Rs 2 lakh. (FE)

Corporate News4 Reliance Power has placed an order of Rs10,000 crore for turbines,

generators and other equipment with GE India for a 2,400-mw gas-basedpower plant, a company statement stated. (ET)

4 Reliance Industries (RIL) will achieve peak output of 80 millionstandard cubic metres per day (mmscmd) from its KG-D6 block in about12 months, bringing down the delay in its ramp up by a year, twogovernment officials with direct knowledge of the development told ET.(ET)

4 The government on Monday fixed the price of Coal India’s IPO at Rs245 per share. The issue will help the government rake in Rs 15,500crores. (ET)

4 NTPC on Monday said that it will invest about Rs 20,000 crore for settingup a coal-based power project in Madhya Pradesh. NTPC has executed aMoU with Madhya Pradesh and MP Power Trading Company for settingup a 3,960 MW thermal power project at Barethi in the state, thecompany informed the National Stock Exchange. (ET)

4 Parsvnath Developers Limited has raised Rs.1.2 bn by selling a 24.5%stake in its office complex project at Connaught Place to PE firm Red FortCapital Advisors. (Mint)

4 Dr Reddy's Laboratories (DRL) said it has entered into an agreementwith drug major Cipla and UK-based Vitabiotics to market over-the-counter (OTC) and prescription drugs, besides nutraceutical products, inRussia and CIS countries. (ET)

4 U.S.-based Wal-Mart Stores Inc. Monday said India is progressing in itsapproach to further relaxing foreign investment rules for the retailindustry. "Yes, I do see progress. I do think that the opening of dialogueon foreign direct investment (in retail) is very, very productive," chiefexecutive of the world's largest retailer, Mike Duke, told reporters. (WSJ)

Equity% Chg

25 Oct 10 1 Day 1 Mth 3 Mths

Indian IndicesSENSEX Index 20,303 0.7 1.3 12.0

NIFTY Index 6,106 0.7 1.5 12.1BANKEX Index 14,179 0.4 1.9 23.4BSET Index 6,111 (0.4) 2.3 11.6

BSETCG INDEX 16,120 0.3 1.8 5.1BSEOIL INDEX 11,049 0.6 3.8 4.9CNXMcap Index 9,501 0.5 2.9 12.8

BSESMCAP INDEX 10,826 1.0 5.4 14.7

World IndicesDow Jones 11,164 0.3 2.8 6.1

Nasdaq 2,491 0.5 4.6 8.5FTSE 5,752 0.2 2.7 7.5Nikkei 9,401 (0.3) (0.9) (1.3)

Hangseng 23,628 0.5 6.8 13.4

Value traded (Rs cr)25 Oct 10 % Chg - Day

Cash BSE 4,397 (20.0)

Cash NSE 14,941 (2.9)Derivatives 160,796 14.3

Net inflows (Rs cr)22 Oct 10 % Chg MTD YTD

FII 1,379 41.2 22,430 110,714Mutual Fund 179 260.1 (5,427) (28,183)

FII open interest (Rs cr)22 Oct 10 % Chg

FII Index Futures 16,983 11.3FII Index Options 64,687 0.7

FII Stock Futures 45,966 1.8FII Stock Options 1,372 (3.5)

Advances / Declines (BSE)25 Oct 10 A B S Total % total

Advances 133 1,041 248 1,422 56Declines 70 802 161 1,033 40

Unchanged 0 87 12 99 4

Commodity % Chg

25 Oct 10 1 Day 1 Mth 3 Mths

Crude (NYMEX) (US$/BBL) 82.2 (0.4) 7.5 4.1

Gold (US$/OZ) 1,335.5 0.9 3.4 13.2Silver (US$/OZ) 23.5 1.5 10.4 30.0

Debt / forex market25 Oct 10 1 Day 1 Mth 3 Mths

10 yr G-Sec yield % NA 8.14 7.87 7.68Re/US$ 44.36 44.59 45.02 47.05

Sensex

Source: ET = Economic Times, BS = Business Standard, FE = Financial Express,BL = Business Line, ToI: Times of India, BSE = Bombay Stock Exchange

15,100

16,475

17,850

19,225

20,600

Sep-09 Dec-09 Mar-10 Jun-10 Sep-10

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 2

MORNING INSIGHT October 26, 2010

TRACTORS INDIA LIMITED (TIL)PRICE: RS.730 RECOMMENDATION: BUYTARGET PRICE: RS.900 FY11E P/E: 10.8X

Tractors India Limited (TIL) is one of the leading players, specializing in themanufacturing of various material handling equipment and distributing awide range of infrastructure equipment used in construction, mining andpower industry.

Company has a long standing association of over 60 years with the worldleader in construction equipment - Caterpillar. TIL deals in a wide range ofequipment mainly classified into three broad categories 1) MHS (Materialhandling solutions) 2) CMS (Construction and mining solutions) and 3) PSS(Power system solutions). It enjoys a healthy market share in its keyproduct categories that translates into an operating margin of 11% andROE of 22% ROE. On back of its strong balance sheet, company is wellpoised to benefit from the USD500 bn worth of investments envisaged forvarious infrastructure projects in India pertaining to the 11th five year plan.

Company along with its subsidiaries, possesses an extensive distributionnetwork spread across more than 60 service locations in India, providingsuperior customer accessibility to the company. It enjoys long standingrelationships with renowned customers including Tata Steel, ONGC, CoalIndia, Hindustan Zinc, BHEL, L&T etc.

In our estimates, we project a 20% CAGR growth in revenues over FY10-12E from Rs. 10.6 bn in FY10 to Rs. 15.2 bn in FY12E mainly driven by theimprovement in infrastructure spending by government as well as byprivate sector in India and company's strong positioning in construction,mining and material handling space.

At current price the stock looks attractively valued on a multiple anddiscounted cash flow basis given the 15% CAGR in projected EPS overFY10-12E.

We initiate coverage on the TIL stock with a BUY rating and a DCF basedtarget price of Rs.900, over a 12-month horizon.

Key Investment Rationaleq Positive outlook for Infrastructure equipment industry. We expect Indian

Infrastructure Equipment Industry (IE) to grow at a 25% CAGR between FY10-12 on account of targeted investment of $500 bn on various infrastructureprojects under eleventh five year plan in India. CMIE (Center for monitoring In-dian economy) estimates a 9.2% growth in India's GDP for FY11 on back of 1)growth in industrial sector by 9.4% 2) 10.3% growth in manufacturing sector3) 10.3% growth in mining 4) 8.2% growth in services sector. Moreover, Gov-ernment has highlighted scaling up of infrastructure spending to 9% of GDP byFY12 from current 7% levels.

q Sanguine outlook for all business verticals. Company is well poised to growits consolidated revenues at CAGR of 20% over FY10-12E aided by strong per-formance in all the three business verticals viz. MHS, PSS and CMS. We believethat going ahead, company would immensely benefit from favourable macroenvironment, dominant brand perception of Caterpillar products and vivid geo-graphical presence in north/east India and neighboring countries like Nepal,Bhutan etc.

q Long standing association with Caterpillar (CAT). TIL shares a 65 year oldassociation with Caterpillar (CAT), the world's leading global constructionequipment manufacturer. Company enjoys exclusivity in north and east Indiaalong with surrounding countries like Bhutan, Nepal and Myanmar. CAT busi-ness contributes to over 70% of the company's top line and going forward weexpect the same trend to continue. From the historical view point, company'sCAT business has grown at a CAGR of 21% and we believe that this wouldsustain for next three years.

Stock details

BSE code : 505196

NSE code : 3484Market cap (Rs bn) : 6.1 bnFree float (%) : 49%

52-wk Hi/Lo (Rs) : 744/242Avg. daily volume (m) : 48069Shares o/s (m) : 10.0

Summary table

(Rs mn) FY10 FY11E FY12E

Sales 10,632 12,726 15,237Growth (%) 1.3 19.7 19.7

EBITDA 1,238 1,427 1,684EBITDA margin (%) 11.6 11.2 11.0Recurring PAT 594 677 790

Net debt (cash) 663 720 809EPS (Rs) 59.2 67.5 78.8Growth (%) 33.1 14.0 16.8

CEPS 78.5 93.6 112.1DPS (Rs) 6.0 6.7 7.9ROE (%) 23.3 22.1 21.3

ROCE (%) 18.1 17.6 17.4EV/Sales (x) 0.8 0.6 0.5EV/EBITDA (x) 6.5 5.6 4.8

P/E (x) 12.3 10.8 9.3P/Cash Earnings 2.7 2.2 1.8

P/BV (x) 9.3 7.8 6.5

Source: Company,Kotak Securities - Private Client Research

INITIATING COVERAGE

Ruchir [email protected]+91 22 6621 6448



q Extensive distribution network and state of the art design and manufac-turing facility in MHS segment. TILL has over the past six decades of experi-ence in the IE industry and constantly undertaken technology and skill enhance-ment initiatives. This facilitates the company to cope with current diverse prod-uct portfolio. TIL has an exclusive state of the art 'Component rebuilding center(CRC)' spread in 50,000 sq ft in Asansol, West Bengal. Company has also beenexpanding its distribution base and it currently has over 60 service centersacross India.

q New business alliance to expand product portfolio offering superior so-lution to wider cross section of customers. TIL have been consistently form-ing new business associations with world major IE manufacturers like NACCO,SEM, SITECH in order to expand its product portfolio. This positions the com-pany as a one stop solution for a wide variety of equipment needs.

q Financials & Valuations. We expect healthy fresh order flow driven by up-tickin government spending for executing 11th and 12th five year infrastructureprojects. Consistent business flow from existing customers expected, monetiza-tion of market gains across new product categories to enhance profitability.Economies of scale are likely to obviate upward tend in key input costs.

We project 20% CAGR growth in consolidated revenues between FY10-12Efrom Rs. 10 bn in FY10 to Rs. 15 bn in FY12E. Within the revenue streams, weexpect CMS to maintain its share of revenue pie and constitute over 50% ofbusiness mainly driven by pick up in infrastructure spending by government andupturn in capex cycle.

We also project a 20% CAGR in MHS mainly aided by the lower base of previ-ous year and successful commissioning of company's new plant at Khadagpur.We expect PSS segment to grow by 20% in FY11E against 17% growth in FY10on account of pickup in demand for diesel and natural gas generators.

Current valuations appear favorable vis-à-vis the potential growth inrevenues: At current price of Rs.730, company's stock is trading at 10.8x and9.3x P/E and 5.6x and 4.8x EV/EBITDA multiples for FY11E and FY12E respec-tively.

We value the company using DCF valuation methodology that derives a pricetarget of Rs.900 per share, implying an upside of 24% over a 12- month hori-zon. Our DCF model employs a WACC of 12.05%, beta of 0.9 and terminalgrowth of 3%. At our target price of Rs900, the stock would trade at 13.3xFY11 EPS and 11.4x FY12E EPS of Rs67 and Rs.79 respectively.

Key Concernsq Delays in government spending on infrastructure projects. Any delays or

slowdown in government spending on infrastructure projects in India w o u l dnegatively impact company's revenues and profit growth.

q Sharp increase in raw material prices. Any unusual increase in raw materialprices would affect the profitability of the company as there exists an inherentlag between the commodity price cycle and its pass-through to the end cus-tomer.

q Intensifying competition from Chinese and Korean manufacturers. Profit-ability could get affected with intensifying competition from Chinese manufac-turers offering lower cost equipment. Lately, company has lost significant busi-ness to these players in rough terrain cranes from FY08 levels of 90% to current60% market share.

q Sluggish demand for new products. Our estimates would pose downsiderisk if there arises any sluggishness in market development for newly launchedproducts in material handling space that has been attracting fresh capital infu-sion for capex by the company.

Analyst holding in stock: Ruchir Khare - Nil; Dipen Shah - 250 shares

We initiate coverage on TractorsIndia Ltd with BUY

recommendation with a pricetarget of Rs.900



GEOMETRIC LIMITED

PRICE: RS.69 RECOMMENDATION: ACCUMULATETARGET PRICE: RS.87 FY12E P/E: 6.5X

q The 2QFY11 results of Geometric came in above expectations.q Volumes grew by 7% QoQ, on the back of improving demand scenario

and better execution.q EBIDTA margins grew on a sequential basis as the impact of salary hikes

diminished. In 1Q, there was a one-time gratuity provision.q The management has indicated that, more discretionary budgets are be-

ing released and there is demand from both, OEMs and industrial cus-tomers.

q However, the amount of new orders booked fell for the second con-secutive quarter to $8.3mn v/s $9mn QoQ indicating some continuingchallenges. The company has invested more in business generation ac-tivities, and will continue to do so, we believe.

q Geometric is now focusing on verticalised services and solutions to in-crease relevance to customers. Value engineering and cost reduction forclients are the focus areas.

q We have adjusted earnings estimates to accommodate for 2QFY11 re-sults. For FY11E we expect a revival in volumes to drive a c20% revenuegrowth. We now introduce FY12 estimates, where we expect volumesto rise by about 23%.

q We have been indicating that, maintaining margins will be a challengefor Geometric due to the high capacity utilization ratio (about 90%) andneed to invest in S&M. Consequently, we have assumed margins tomove in a narrow band.

q In FY11E, we expect an EPS of Rs.9.7, which is expected to move up toRs.10.5 in FY12. For FY12, we expect tax rate to increase to 20% v/sabout 4% in FY11.

q Our DCF - based price target works out to Rs.86, based on FY12E earn-ings (v/s Rs.71 earlier). We upgrade the stock to ACCUMULATE. Our exitmultiple works out to 8x FY12E EPS.

2QFY11 results - better than estimates

(Rs mn) 2QFY11 1QFY11 QoQ (%) 2QFY10 YoY (%)

Income 1519.3 1354.5 12.2 1281.9 18.5

Expenditure 1312.3 1239.4 1052.0

Operating profit 207.0 115.1 79.9 230.0 -10.0

Depreciation 65.0 57.5 67.8

EBIT 142.0 57.6 146.5 162.1 -12.4

Interest 2.2 2.6 10.0

Other inc 20.2 81.6 -28.5

E.O items 0.0 2.3 0.0

PBT 160.0 134.4 19.1 123.7 29.3

Tax 3.5 -0.5 -9.8

PAT 156.5 134.8 133.5

Minority Interest 20.1 29.0 33.2

PAT after M I 136.4 105.8 28.8 100.3 36.0

EPS (Rs) 2.2 1.7 1.6

Margins (%)

Operating Profit 13.6 8.5 17.9

EBIT 9.3 4.3 12.6

Net Profit 10.3 10.0 10.4

Source : Company

Summary table

(Rs mn) 2010 2011E 2012E

Sales 5116 6146 7486Growth (%) -14.5 20.1 21.8EBITDA 878 807 995

EBITDA margin (%) 17.2 13.1 13.3Net profit 468 593 643Net debt (cash) -140 -210 -328

EPS (Rs)* 7.7 9.7 10.5Growth (%) - 26.8 8.4CEPS 11.9 13.8 15.0

DPS (Rs) 1.1 1.0 1.0ROE (%) 21.9 26.9 24.0ROCE (%) 21.9 27.9 27.8

M Cap /Sales (x) 0.8 0.7 0.6EV/EBITDA (x) 4.8 5.2 3.9P/E (x) 9.0 7.1 6.5

P/Cash Earnings 5.8 5.0 4.6P/BV (x) 2.3 1.8 1.4

Source: Company, Kotak Securities - PrivateClient Research

RESULT UPDATE

Dipen [email protected]+91 22 6621 6301



n Revenues during the quarter were higher by 12% QoQ. This was largely on theback of higher volumes, which grew by about 7% QoQ, according to the man-agement. This is on top of a 5.9% volume growth achieved in 1Q.

n Volumes grew on the back of higher wallet share from existing accounts. WhileGeometric's top client gave 4% more revenues QoQ, the top 5 accounts grewby a solid 32% QoQ.

n Management commentary indicates a degree of stability in top clients and cer-tain accounts which were sharply impacted by client ramp downs and pricingpressure in the earlier quarters.

n Of late, most of the revenue stability has come about on account of increasingtraction in accounts like Ford and Goodyear (largely on-site). Offsite revenuestoo have grown in USD terms as auto client accounts like Caterpillar and Volvogrew.

n Some OEMs, which have had management changes, are in the process of re-assigning work flow to vendors like Modern.

n Revenue traction was muted within Software ISV customers where revenuesgrew by 1% QoQ. Industrial customers reported a 14% QoQ rise in revenues.

n This is in line with the company's focus on industrial accounts. The company hasbeen de-focusing the ISVs.

n On a geographical basis, US revenues (73% of revenues) rose 11% QoQ, whileEurope grew by a faster 15%. This is the first quarter of growth in Europe afterreduction in revenues by nearly 50% in the past two quarters.

n Engineering services revenues are seeing traction as clients seek cost reductions.We note that, the US subsidiary reported profits of $3,40,000 during the quar-ter after achieving break-even in the previous quarter. However, 3Q is expectedto be soft, according to the management.

Margins up by 513bps QoQ (down by 618bps QoQ in 1Q)n Continuing with the significant volatility, EBITDA margins rose by 513bps to

13.6%, which was above estimates.

n Margins improved as revenues grew at a fast pace and impact of salary incre-ments moderated. In 1Q, margins were impacted to the extent of 150bps dueto one time gratuity expenses.

n While the significant volatility makes it difficult to forecast margins, we believethat, revenue growth will be the only major lever for the company to improveand sustain margins.

n Currently, Geometric has high utilization rates and also faces pressures fromsalary increases / rupee appreciation.

Financial prospects - Increase FY11 estimates and introduce FY12numbersn While still cautious on future prospects, most companies have indicated confi-

dence on volume growth for the current fiscal, based on their client interac-tions.

n With discretionary spends likely up, we believe Geometric should see higher vol-umes.

n The management in its interaction has said that the demand environment isbetter than 2Q ago and believes the outlook for IT spends has improved.

n Thus, we have incorporated a revenue growth of 20% for FY11 for Geometric.For FY12E, we have assumed a revenue growth of 22%, on the back of a 23%rise in volumes. Rupee is expected to remain strong at about 45 per USD inFY12E.



n Because of the factors mentioned above, we have assumed margins to remainrange-bound over FY12E.

n We have also assumed higher tax rates of about 20% in FY12 and conse-quently, net profit is expected to go up to 643mn, a moderate growth of about8%. Earnings are expected to be at Rs.10.5 per share in FY12E.

Valuationsn Our FY12E DCF - based price target for Geometric stands at Rs.86. At our TP,

our FY12E earnings will be discounted by 8.2x, which we believe is fair.

n Thus, we upgrade the stock to ACCUMULATE and will look at an improvementin the margin profile of Geometric, to become more bullish on the stock.

n INR appreciation beyond our assumed levels and slower revival in user econo-mies pose downside risks to our recommendation.

We now recommend toACCUMULATE on Geometric Ltd

with a revised price target ofRs.87



REDINGTON (INDIA) LTD

PRICE: RS.82 RECOMMENDATION: BUYTARGET PRICE: RS.95 CONS. FY12E P/E: 11.8X

q Redington reported good set of Q2FY11 results which are inline withour estimates

q Remain positive on medium to long term growth prospects due to in-crease share of higher margin non IT business like mobile phones andconsumer durables

q Working closely with Nokia, Blackberry, LG, Whirlpool, Godrej Consumer

q To acquire Turkey based IT distribution company - Arena - ~18% marketshare

q 1 lakh sq.ft. Dubai ADC operational, Kolkata ADC to be operational byMarch 2011

q Revise FY11 EPS to Rs.5.8 (up 0.3%)

q Introduce FY12 earning estimates with EPS of Rs.6.9

q Due to 16% upside potential we upgrade Redington to BUY with in-creased price target of Rs.95 (Rs.70 earlier)

Consolidated Results update - Redington

(Rs mn) Q2FY11 Q2FY10 YoY (%) Q1FY11 QoQ (%) H1FY11

Net Sales 38,885 34,443 12.9 35,274 10.2 74,159

COGS 36,790 32,743 12.4 33,348 10.3 70,138

Staff Cost 503 430 17.1 456 10.4 959

other expenditure 637 509 25.3 564 12.9 1,202

Total exp. 37,930 33,681 12.6 34,368 10.4 72,298

EBIDTA 955 761 25.4 905 5.5 1,860

Other income 24 34 (31.0) 39 (39.5) 63

Depreciation 61 41 49.3 53 15.2 113

EBIT 918 755 21.6 892 2.9 1,810

Interest 191 152 25.3 167 14.0 358

PBT 727 603 20.6 724 0.4 1,452

Tax & deferred tax 161 130 23.5 178 (9.5) 338

PAT 566 473 19.9 547 3.5 1,113

less Minority int 73 64 14.5 69 6.1 143

NPAT 493 408 20.7 478 3.2 971

Equity shares o/s (mn) 396 393 392 396

Ratios

Operting profit margin (%) 2.5 2.2 +30 bps 2.6 -10 bps 2.5

COGS / Sales (%) 94.6 95.1 94.5 94.6

Staff cost / Sales (%) 1.3 1.2 1.3 1.3

Other Exp. / Sales (%) 1.6 1.5 1.6 1.6

EPS (Rs) 1.2 1.0 1.2 2.5

CEPS (Rs) 1.4 1.1 1.4 2.7

Tax / PBT (%) 22.1 21.6 24.5 23.3

Source: Company

Cons. Summary table - FV Rs.2


Sales 137,578 161,534 185,745Growth (%) 8.6 17.4 15.0

EBITDA 3,448 4,227 4,963EBITDA margin (%) 2.5 2.6 2.7Net profit 1,843 2,302 2,742

Net debt 5,660 6,839 6,573EPS (Rs) 4.7 5.8 6.9Growth (%) 15.5 24.9 19.1

DPS (Rs) 1.0 1.5 2.0ROE (%) 17.1 19.9 20.7ROCE (%) 15.4 18.8 20.8

EV/Sales (x) 0.3 0.2 0.2EV/EBITDA (x) 11.0 9.3 7.9P/E (x) 17.5 14.1 11.8

P/CEPS (x) 15.5 12.7 10.4P/BV (x) 3.0 2.6 2.3


RESULT UPDATE

Apurva [email protected]+91 22 6621 6308



Segmental Table

Q2FY11 Q2FY10 YoY (%) Q1FY11 QoQ (%) H1FY11

Revenue (Rs mn)

India 20,415 16,801 21.5 17,644 15.7 38,059

Overseas 18,519 17,827 3.9 17,669 4.8 36,188

PBIT (Rs. mn)

India 567 459 23.6 567 (0.1) 1,134

Overseas 351 297 18.5 325 8.3 676

PBIT Margin (%)

India 2.8 2.7 1.7 3.2 (13.7) 3.0

Overseas 1.9 1.7 14.1 1.8 3.3 1.9

Source: Company

n Revenues for Q2FY11 were at Rs.38.9 bn which is up 12.9% YoY and up10.2% on QoQ basis. The Indian business recorded growth of 21.5% on YoYbasis and the overseas business recoded growth of 3.9% on YoY basis. Theoverseas business growth in constant currency terms is around 8% as the bal-ance is currency translation losses.

n The growth in revenues of the Indian operations was primarily due to sharpgrowth in distribution of non IT products like Blackberry mobile phones andconsumer durables.

n EBIDTA margin in Q2FY11 was at 2.5% up 30 bps on YoY basis due to in-creased contribution of the high margin services and non-IT business of thecompany like Nokia and Blackberry mobile phones and consumer durables busi-ness for LG.

n EBIDTA for Q2FY11 was at Rs.955 mn up by 25.4% YoY and up 5.5% on QoQbasis.

n The depreciation is up sharply 49.3% on YoY basis to Rs.61 mn as the companyhas changed the policy in terms of useful life of the asset.

n PBT for Q2FY11 was at Rs.727 mn up 20.6% YoY and up 0.4% on QoQ basis.

n PAT for Q2FY11 was up by 20.7% YoY and up 3.2% on QoQ basis to Rs.493mn thereby translating into quarterly EPS of Rs.1.2 and CEPS of Rs.1.4.

n For H1FY11 EPS stands at Rs.2.5.

Growth in core IT businessThe aggressive pace of both the Central and State Governments to drive their e-governance projects and increased budgetary allocation for the education andhealth sector is expected to stimulate demand for IT products. We are also seeingstrong traction in sale of personal computers and its related accessories due to con-tinued consumer confidence and a revival in IT spend. It is expected when mostbudget announcements are translated into actual expenditure, it would triggerhuge demand for IT products. We feel Redington is ideally poised to exploit allthese opportunities to its advantage with a clear focus on growth areas.

Nokia business leading to growth in overseas marketThe volumes of Nokia mobile phone distribution have been scaled up significantlyin Nigeria and Kenya through better reach and coverage. Redington has been hon-ored with the No.1 distributor position for Nokia products in Sub-Saharan Africaand has also been awarded the best distributor for Nokia products in East and WestAfrica. It has also been successful in obtaining a new distribution contract fromNokia for Ghana market. Considering the expected growth in telecom market andassociation with strong brand like Nokia is expected to lead to increased revenuesand profitability for Redington going forward.



Mobile phone distribution in India - Blackberry and LGIndia is now the second largest mobile market in the world after China, with about400 million mobile users. According to Cellular Operators Association of India's(COAI) projection, there will be 1240 Million mobile users in 2015, which meansone phone for every Indian. The demand for Blackberry Smart phones has beenencouraging and strong relationship with large retail store customers has enabledRedington to show consistent monthly growth both in terms of units sold and salesrevenue. Redington has also tied up with LG electronics for distribution of theirmobile phones in the Tamilnadu market. We feel that these two initiatives wouldgive Redington an entry into the high growth mobile handset space in India.

Strong growth in consumer durables - ties up with large playersRedington has successfully extended its experience in distribution of technologyproducts to consumer electronics products as well. This is due to the fact that Indiais a vast market with a strong consumer base and a growing interest in life-styleproducts. Within a short span from the start of consumer durable business it hasalready expanded its branch network for sale of consumer electronics products to14 cities with a market base of about 2500 channel partners. With an objective tobecome a one-stop shop for retailers, Redington has also entered into partnershipswith vendors like LG, Whirlpool, Godrej consumer appliances. We feel these part-nerships with large players would help to substantially improve the revenues fromthis segment.

Addition of new clients to sustain growth going forwardn We believe that the key to the growth of Redington lies in its ability to tie-up

with key vendors to complement the product bouquet. It has added several keyclients like Oracle, D-Link, LG-Nortel, RSA Security, Iomega, Citrix, Lifesize Com-munications, NComputing, NetApp, Array Network, Ricoh and Fujitsu.

n Redington has also signed new distribution contracts with vendors like Dell,Fujitsu and Lenovo in the systems space for select countries in Middle East andAfrica and also signed new contracts with vendors like Juniper Networks, Checkpoint Software, Netgear, Coral Telecom, Ascom and Molex in the value addeddistribution space.

n In 3PL space, Redington has tied up with key clients like Cadbury, Sonicwall,Vodafone and Kuehne & Nagel, IFB and Girias (large format retailer) for provid-ing value added 3PL services.

n In FY10, Redington has added more than 2,000 channel partners in India. As of31st March 2010, Redington along with its subsidiaries has more than 75brands, 23600 channel partners, 78 warehouses and 68 sales offices.

Dubai ADC has commenced operationsIn October 2010, Redington has successfully commissioned its state-of-the-art onelakh sq ft Automated Distribution Center (ADC) at Jebel Ali Free Zone, Dubai. Com-mencing operations from this ADC is expected to enhance productivity in through-put and enable tie-up for third party logistics services. The first ADC in Chennai hadstarted operations last year and is operating very efficiently. Going forward it islooking to set up an ADC in Kolkata and this is expected to be operational byMarch 2011.



To acquire Turkey based IT distribution company - Arenan Redington has signed a share purchase agreement with the existing promoters

of M/s. ARENA BILGISAVAR SANAYI VE TICARET ANONIM IRKETI ("Arena"), toacquire 49.4% stake for USD 42.464 mn. The deal is expected to be completedby December 2010.

n Arena is the second largest distributor of information technology products inTurkey with ~18% market share. Arena has recorded a turnover of USD 451mn and EBIT margin of 4.0% in CY09 and it is listed In the Istanbul Stock Ex-change.

n We believe that this acquisition will enhance its overseas business and will bevalue accretive for the Redington shareholders as it is EPS accretive. Howeverwe await further details from the management and thus we have not includedit in our earning estimates.

Cons. Earning Estimates - FY11E

(Rs mn) Old Revised Growth%

Revenues 155,793 161,534 3.7

EBIDTA (%) 2.7 2.6 -1.6

PAT 2,287 2,302 0.7

EPS (Rs.) 5.8 5.8 0.3

CEPS (Rs.) 6.3 6.5 2.2

Source: Kotak Securities - Private Client Research

Marginal revision in FY11 earning estimatesWe have revised FY11 earning estimates marginally to account for higher than ex-pected growth in its core IT distribution and Blackberry and consumer durablesbusiness. For FY11E, we expect revenues of Rs.161 bn (up 3.7% YoY), EBIDTAmargins of 2.6% (down 10 bps YoY) and PAT of Rs.2.3 bn (up 0.7% YoY). Accord-ingly we expect Redington to report EPS of Rs.5.8 and CEPS of Rs.6.5 in FY11E asagainst our earlier estimate of Rs.5.8 and Rs.6.3 respectively.

Cons. Earning Estimates

(Rs mn) FY11 FY12E Growth%

Revenues 161,534 185,745 15.0

EBIDTA (%) 2.6 2.7 2.1

PAT 2,302 2,742 19.1

EPS (Rs.) 5.8 6.9 19.1

CEPS (Rs.) 6.5 7.9 21.8

WACC (%) 12.9 12.9 -0.1

Terminal growth (%) 4.0 4.0 0.0

Target Price (Rs.) 70 95 35.8


Introduce FY12 earning estimatesn We are introducing FY12 earnings estimates on increased earnings visibility on

the back of sustained growth in the Global and Indian economy. The Indianeconomy has been resilient and is expected to continue to grow more then 8%going forward which is positive for its domestic business. The overseas businessis also picking up due to sustained recovery in Middle East and Africa where thecompany is present overseas.

n For FY12E, we expect revenues of Rs.185.7 bn (up 15.0% YoY), EBIDTA mar-gins of 2.7% (up 10 bps YoY) and PAT of Rs.2.7 bn (up 19.1% YoY).

Non IT revenues as % of total Rev-enues

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n The operating margins are expected to improve by 10 bps on YoY basis due togrowth in the higher margin non IT business like distribution of Nokia andBlackberry mobiles phones and expected growth in distribution of consumerdurables.

n Accordingly we expect Redington to report EPS of Rs.6.9 and CEPS of Rs.7.9 inFY12E.

n Over FY10 to FY12E the revenues of Redington are expected to grow at CAGRof 16.2% and PAT is expected to record CAGR of 22.0%.

Price target increased to Rs.95We continue to value Redington on DCF method of valuation with 12.9% WACCand 4.0% terminal growth rate. We have shifted the valuation base to FY12E. Thusthe price target is revised upwards from Rs.70 to Rs.95.

Valuation & recommendationn At the current market price of Rs.82, the stock is attractively valued at 2.3x P/

BV, 11.8x earnings and 10.4x cash earnings based on consolidated FY12E earn-ings estimates.

n We continue to remain positive on the medium to long term growth prospectsof Redington as we feel that Redington is poised to handle a greater share ofthe business in supply chain solution space with its unique business model,proven execution capabilities and its presence in potential markets.

n Due to 16% upside potential from current levels we upgrade Redington fromREDUCE to BUY with increased price target of Rs.95.

Cons. revenues (Rs bn)

Source: Capitaline, Kotak Securities - Private Client Research

Cons. EPS (Rs) - FV Rs.2

Source: Capitaline, Kotak Securities - Private Client Research

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of Rs.95



CONSOLIDATED FINANCIALS: REDINGTON (INDIA) LTD - FV RS.2Profit and Loss Statement (Rs mn)

(Year-end March) FY10 FY11E FY12E

Revenues 137,578 161,534 185,745% change YoY 8.6 17.4 15.0EBITDA 3,448 4,227 4,963% change YoY 9.6 22.6 17.4Other Income 209 225 250Depreciation 234 260 380EBIT 3,423 4,192 4,832% change YoY 8.0 22.5 15.3Net interest 664 806 800Profit before tax 2,759 3,386 4,032% change YoY 26.0 22.7 19.1Tax 916 1,083 1,290as % of PBT 33.2 32.0 32.0Net income 1,843 2,302 2,742% change YoY 15.5 24.9 19.1Shares outstanding (m) 393.2 395.6 395.6EPS (reported) (Rs) 4.7 5.8 6.9CEPS (Rs) 5.3 6.5 7.9DPS (Rs) 1.0 1.5 2.0

Source: Company, Kotak Securities - Private Client Research

Cash Flow Statement (Rs mn)


EBIT 3,423 4,192 4,832Depreciation 234 260 380Change in working capital (2,526) (1,996) (789)Changs in other net current assets (2,348) (54) (145)Operating cash flow (1,217) 2,401 4,278Interest (664) (806) (800)Tax (916) (1,083) (1,290)Cash flow from operations (2,796) 512 2,188Capex (738) (1,000) (1,000)(Increase)/decrease in investments 750 - -Dividends (367) (691) (922)Cash flow from investments (355) (1,691) (1,922)Proceeds from equity issue -Increase/(decrease) in debt 1,656 (1,486) -Deferred tax credit /other adj. 2,048 - -Cash flow from financing 3,703 (1,486) -Opening cash 5,274 5,826 3,161Closing cash 5,826 3,161 3,427


Balance sheet (Rs mn)


Cash and cash equivalents 5,826 3,161 3,427Accounts receivable 18,164 20,192 22,289Inventories 9,829 11,630 13,188Others 1,519 1,777 2,043Current assets 35,337 36,760 40,947Misc exp. - - -Investments - - -Net fixed assets 968 1,708 2,328Total assets 36,306 38,468 43,275Payables 11,090 12,923 15,788Others 604 808 929Current liabilities 11,694 13,730 16,717LT debt 11,486 10,000 10,000Other liabilities(deferred tax) 2,369 2,369 2,369Equity 786 791 791Reserves 9,971 11,577 13,398Total liabilities 36,306 38,468 43,275

BVPS (Rs) 27.2 31.3 35.9


Ratio Analysis


EBITDA margin (%) 2.5 2.6 2.7EBIT margin (%) 2.5 2.6 2.6Net profit margin (%) 1.3 1.4 1.5Adjusted EPS growth (%) 15.5 24.9 19.1Receivables (days) 48.2 43.3 41.7Inventory (days) 26.1 24.2 24.4Sales/assets (x) 142.1 94.6 79.8Interest coverage (x) 5.2 5.2 6.0

Debt/equity ratio (x) 1.1 0.8 0.7

ROE (%) 17.1 19.9 20.7ROCE (%) 15.4 18.8 20.8EV/ Sales (x) 0.3 0.2 0.2EV/EBITDA (x) 11.0 9.3 7.9Price to earnings (x) 17.5 14.1 11.8Price to book value (x) 3.0 2.6 2.3Price to Cash Earnings (X) 15.5 12.7 10.4




MUNDRA PORT & SEZ (MPSEZ)PRICE: RS.164 RECOMMENDATION: ACCUMULATETARGET PRICE: RS.176 CONS. FY12E P/E: 27.3X

q MPSEZ reported decent set of Q2FY11 results which are marginally be-low our estimates on account of one time charges of Rs.300 mn relatedto handling infrastructure which could not be capitalized.

q Port volumes up 24.4% on YoY basis to 12.6 MMT as against growth ofjust 1.2% for all the major ports in India

q Container volumes up sharply 37.8% on YoY basis to 3.1 lakh TEU

q Maintain FY11 earning estimates with EPS of Rs.4.6

q Introduce FY12 earning estimates with EPS of Rs.6.0

q Due to 7% upside potential from current levels we upgrade MPSEZ toACCUMULATE with increased SOTP based price target of Rs.176 (Rs.166earlier)

RESULT UPDATE

Apurva [email protected]+91 22 6621 6308

Q1FY10

Coal19%

Crude Oil23%

Container28%

Minerals & Others2%Steel

4%Fertilizer6%

V Oil Chem POL18%

Cargo handled (%)

Source: Company

Q1FY11

Coal24%

V Oil Chem POL14%

Fertilizer10%

Steel 4%

Minerals & Others5%

Container30%

Crude Oil13%

Cargo handled (MMT)

Q2FY11 Q2FY10 YoY (%) Q1FY11 QoQ (%) H1FY11

Bulk 5.4 3.2 69.6 5.2 4 10.5

Liquid 3.4 4.1 (17.1) 4.1 (16) 7.5

Container 3.8 2.8 37.8 3.4 12 7.2

Total 12.6 10.1 25.2 12.6 (0) 25.2

Source: Company

Cons. summary table: FV Rs.2


Sales 14,955 20,538 25,692

Growth (%) 25.2 37.3 25.1EBITDA 9,443 14,308 17,960EBITDA margin (%) 63.1 69.7 69.9

Net profit 6,760 9,122 12,022Net debt 27,066 38,326 32,516EPS (Rs) 3.4 4.6 6.0

Growth (%) 56.3 34.9 31.8DPS (Rs) 0.8 1.0 1.5ROE (%) 21.2 24.1 26.3

ROCE (%) 14.7 17.7 20.6EV/Sales (x) 23.8 17.9 14.1EV/EBITDA (x) 37.7 25.6 20.1

P/E (x) 48.6 36.0 27.3P/CEPS (x) 38.1 28.0 22.1P/BV (x) 9.5 7.9 6.6




Cargo Handled (MMT) - Detailed breakup

Q2FY11 Q2FY10 YoY (%) Q1FY11 QoQ% H1FY11

Coal 3.0 2.0 54.4 3.5 (14.5) 6.5

Container 3.8 2.8 37.8 3.4 12.5 7.2

Crude Oil 1.7 2.3 (28.1) 2.2 (22.8) 3.8

V Oil Chem POL 1.8 1.8 (3.3) 1.9 (8.3) 3.7

Steel 0.5 0.4 17.5 0.7 (27.7) 1.1

Minerals & Others 0.6 0.3 152.0 0.6 10.5 1.2

Fertilizer 1.3 0.6 101.6 0.4 190.7 1.7

Total 12.6 10.1 24.4 12.6 (0.3) 25.2

Source: Company

Container Volumes

Lakh TEU Q2FY11 Q2FY10 YoY (%) Q1FY11 QoQ% H1FY11

Container CT1 1.9 1.8 4.1 1.4 30.3 3.3

Container CT2 1.3 0.5 163.5 1.4 (5.3) 2.6

Total Container 3.1 2.3 38.4 2.8 12.9 5.9

RORO cars (Nos) 26,026 31,281 (16.8) 32,056 (18.8) 58,082

Source: Company

n MPSEZ handled 12.6 MMT of cargo in Q2FY11, up 24.4% YoY and flat on se-quential basis.

n The volume performance is commendable due to the fact that during Q2FY11,while the total traffic at major ports of India was up just 1.2% to 271.3 MMT,the traffic at Mundra Port grew by an impressive 24.4% on YoY basis to 12.6MMT.

n The ability of MPSEZ to handle multiple types of cargo has helped it to registersuperior volume growth rates than most other ports in India. As on date MPSEZis the largest private sector non-major port and is amongst the top seven portsin India in terms of total cargo handled. In terms of container cargo it is thethird largest port in India.

n Bulk cargo handling was up by 69.6% on YOY basis to 5.4 MMT primarily dueto higher handling of coal which is up 54.4% on YoY basis to 3.0 MMT. Alsothere was increased handling of fertilizers and minerals.

n The Liquid cargo handling was down 17.1% on YOY basis to 3.4 MMT. Thiswas primarily due to lower handling of crude oil.

n Due to pick up in EXIM trade the Container cargo handling increased sharply by37.8% on YOY basis to 3.8 MMT. The volumes at Adani Mundra ContainerTerminal AMCT i.e. CT2 increased sharply by 163.5% on YoY basis to 1.3 lakhTEU. The combined container volumes at Mundra port have grown sharply by38.4% on YoY basis as against major ports container growth of 11.0%

n However the automobile terminal handled 26026 cars down 16.8% YoY anddown 18.8% on QoQ basis.



MPSEZ - ResultsTable - Standalone

(Rs mn) Q2FY11 Q2FY10 YoY (%) Q1FY11 QoQ (%) H1FY11

Net Sales 4,135 3,274 26.3 4,157 (0.5) 8,292

Operating exp. 1,003 600 67.1 855 17.3 1,858

Staff cost 194 127 52.7 147 31.6 341

Other exp 202 210 (3.8) 259 (22.1) 461

Total Exp. 1,398 937 49.3 1,261 10.9 2,659

EBIDTA 2,737 2,337 17.1 2,895 (5.5) 5,633

Other income 320 374 (14.3) 256 24.9 576

Depreciation 485 389 24.6 476 1.8 961

EBIT 2,572 2,321 10.8 2,675 (3.8) 5,248

Interest 317 499 (36.5) 495 (36.0) 812

Extraordnary income - 22 - - - -

PBT 2,256 1,844 22.3 2,180 3.5 4,436

Tax & deferred tax 139 96 44.4 67 107.4 206

Net Profit 2,117 1,748 21.1 2,113 0.2 4,230

Equity shares o/s (mn) 400.7 400.7 400.7 400.7

Ratios

Operting profit margin (%) 66.2 71.4 -520 bps 69.7 -350 bps 67.9

Op. exp. / Sales (%) 24.2 18.3 20.6 22.4

Staff cost / sales (%) 4.7 3.9 3.5 4.1

Other Exp. / Sales (%) 4.9 6.4 6.2 5.6

Tax / PBT (%) 6.2 5.2 3.1 4.6

EPS (Rs) 5.3 4.4 21.1 5.3 0.2 10.6

CEPS (Rs) 6.5 5.3 6.5 13.0

Cargo Handled (MMT) 12.6 10.1 24.4 12.6 (0.3) 25.2

Avg Realizations / MT 329 324 1.5 329 (0.2) 329

Source: Company

n Revenues for Q2FY11 stood at Rs.4.1 bn up 26.3% on YoY basis. The growth isprimarily due to robust volume growth of cargo handled at the port especiallycontainers and coal.

n The operating margin during Q2FY11 was down by 520 bps on YoY basis to66.2% primarily due to sharp jump in operating expenditure. The operating ex-penditure as a percentage of revenues has risen sharply from 18.3% in Q2FY10to 24.2% in Q2FY11. However there is a one time charge of Rs.300 mn on ac-count purchase of some handling infrastructure which are not capitalized. If wewere to adjust for this than the operating margins would be above our esti-mates. Going forward we expect the operating margins to be around 70.0%

n EBIDTA for the Q2FY11 was at Rs.2.7 bn up 17.1% on YoY and down 5.5% onsequential basis.

n PBT for the Q2FY11 was up 22.3% YoY and up 3.5% on sequential basis toRs.2.2 bn.

n PAT for Q2FY11 stood at Rs.2.1 bn, up 21.1% YoY and up 0.2% on sequentialbasis. This translates into quarterly EPS of Rs.5.3 and quarterly CEPS of Rs.6.5.

n However PAT was positively impacted by forex derivative gain of Rs.11.1 mn.Tax provision is low as more area of the port is getting notified as SEZ and it iseligible for tax exemption till FY18 in the notified SEZ area.



Quarterly Cargo handled at Mundra Port & YoY growth


Annual Cargo handled at Mundra Port & YoY growth


Other positive developmentsn Container terminal handled largest container vessel called at any Indian port

with capacity of 8400 TEU, 332 meter length and 11500 DWT carrying capacityand the vessel draft was 14 meters while berthing. This is very encouraging asgoing forward we expect the container volumes to increase sharply at MundraPort.

n The port handled 110916 TEU in August 2010 as compared to 100825 TEU inJuly 2010.

n The port achieved a record of 501 moves in September 2010 as against 458moves in May 2010.

n Handled highest number of railway rakes i.e. 697 in September 2010 as against587 rakes in June 2010.

n The total number of railway rakes has grown by 46% YoY in H1FY11.

n Adani group has been selected to develop coal port in Queensland, Australia.However the process of finalization is expected to take around six months andpost that it would take another three years to make it operational.

n It has started doubling of 57 KM Mundra - Adipur railway line. This would helpto decongest the current railway line and would lead to increased capacity forincreased handling of rakes.

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Vision of having Global presence in ports - other growth plansn It has won the bid to operate coal terminal at Mormugao port and Non LNG

berth at Hazira Port.

n Regarding East coast it is planning to develop both green field as well as operat-ing an existing port. Thus Mundra port aims to be a pan India port operator incouple of year's time frame.

n It is also looking to built coal handling facilities in Australia and Indonesia andthis would make it a global port player. However these would take aroundthree years.

n MPSEZ is looking to set up MRO facilities at Mundra Airport.

n Along its long waterfront length, MPSEZ has developed a master plan that hasearmarked areas for constructing LNG facility, ship building facility as well asadditional berths.

n The dry cargo port at Dahej in JV with Petronet LNG has commenced commer-cial operations in second week of August 2010. It is expected to ramp up itsoperations over next two quarters.

n MPSEZ has Strategic investments in container train operations and inland con-tainer depots to ensure efficient and seamless movement of cargo

Maintain FY11 earning estimatesWe maintain our FY11 earning estimates and expect MPSEZ to handle 60 MMT ofcargo and sell 500 acres of SEZ land. Thus we expect it to report consolidated EPSof Rs.4.6 and CEPS of Rs.5.9 in FY11E.

Port Financials

(Rs mn) FY11E FY12E shift (%)

Port Volumes (MMT) 60.0 72.0 20.0

Avg. Reali. (Rs/MT) 300 300 -

Revenue 18,000 21,600 20.0

EBIDTA 11,880 14,040 18.2

EBIDTA (%) 66.0 65.0 (1.5)

PAT 7,038 8,807 25.1


Introduce FY12 earning estimatesn We are introducing FY12 earnings estimates on increased earnings visibility on

the back of sustained growth in the Global and Indian economy. The EXIMtrade is expected to pick up which would translate into increased revenues andprofitability for MPSEZ going forward. The Indian economy has been resilientand is expected to continue to grow more then 8% going forward which ispositive for MPSEZ.

n Port - In FY12E, we expect MPSEZ to handle 72 MMT of cargo as against 60MMT in FY11E thereby recording 20.0% YoY volume growth. The growth is onaccount of capacity expansion at the port.

n The growth is expected on the back of sustained growth in the Global and In-dian economy and increased handling of bulk cargo like container, coal andspecial cargo like cars, metro coaches and over dimensional cargo.

n We expect the port business to report revenues of Rs.21.6 bn (up 20.0%), oper-ating margin of 65% (down 100 bps), and PAT of Rs.8.8 bn (up 25.1%) inFY12E.



SEZ Financials

(Rs mn) FY11E FY12E shift (%)

SEZ sales (acres) 500 750 50.0

Revenue 1,617 2,538 57.0

EBIDTA 1,544 2,428 57.2

EBIDTA (%) 95.5 95.7 0.2

PAT 1,325 2,084 57.2


n SEZ - We expect the SEZ business to sell 750 acres (up 50.0%) of SEZ land inFY12E. The growth is expected on the back of sustained growth in Indianeconomy which is translating into expansion of capacities by various industries.

n We expect the SEZ business to report revenues of Rs.2.5 bn (up 57.0%), operat-ing margin of 95.7% (up 20 bps), and PAT of Rs.2.1 bn (up 57.2%) in FY12E.

Cons. earning estimates

Rs. mn FY11E FY12E shift %

Port Volumes (MMT) 60.0 72.0 20.0

Net sales 20,538 25,692 25.1

EBIDTA (%) 69.7 69.9 0.3

PAT 9,122 12,022 31.8

EPS (Rs.) 4.6 6.0 31.8

CEPS (Rs.) 5.9 7.4 26.9

SOTP Price Target (Rs.) 66 176 6.0


Consolidated Financialsn For FY12E, we expect revenues of Rs.25.7 bn (up 25.1% YoY), EBIDTA margins

of 69.9% (up 20 bps YoY) and PAT of Rs.12.0 bn (up 31.8% YoY).

n Accordingly we expect MPSEZ to report cons. EPS of Rs.6.0 and CEPS of Rs.7.4in FY12E.

n Over FY10 to FY12E, on consolidated basis the revenues of MPSEZ are expectedto grow at CAGR of 31.1% and PAT is expected to record CAGR of 33.4%.

SOTP Valuation - FY12E

Business Value (Rs./share)Old Revised Shift %

Mundra Port 140 148 6.0

SEZ 17 18 8.4

Dahej Port 4 4 -

Adani Logistics 2 2 -

Inland Conware 4 4 -

Target Price 166 176 5.9


Price target increased to Rs.176We continue to value MPSEZ on SOTP method of valuation. We have shifted thevaluation base to FY12E. Accordingly we have also revised SOTP based price targetupwards to Rs.176 (Rs.166 earlier).



Recommendation and Valuationn At the current market price of Rs.164, the stock trades at 6.6x book value,

27.3x earnings and 22.1x cash earnings based on FY12E.

n We feel the stock looks attractive if we consider it on SOTP. This is due to itsintegrated business model coupled with superior infrastructure consisting ofmulti cargo port, SEZ, Airport, Rail and Road connectivity. Also the industries inthe surrounding SEZ would provide steady flow of cargo to the port. This wouldensure steady growth in volume of cargo handled at the port.

n Due to 7% upside potential from current levels we upgrade MPSEZ from RE-DUCE to ACCUMULATE with revised SOTP based price target of Rs.176.

Cons. revenues (Rs. bn)


Cons. EPS (Rs.) FV Rs.2


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We now recommendACCUMULATE on Mundra Port& SEZ with an increased price

target of Rs.176



CONSOLIDATED FINANCIALS: MUNDRA PORT - FV RS.2Profit and Loss Statement (Rs mn)


Revenues 14,955 20,538 25,692% change YoY 25.2 37.3 25.1EBITDA 9,443 14,308 17,960% change YoY 28.7 51.5 25.5Other + Extra Income 1,939 1,850 2,001Depreciation 1,868 2,604 2,863EBIT 9,514 13,554 17,099% change YoY 29.8 42.5 26.2Net interest 2,177 2,697 2,438Profit before tax 7,336 10,857 14,661% change YoY 51.0 48.0 35.0Tax 576 1,735 2,639as % of PBT 7.9 16.0 18.0Net income 6,760 9,122 12,022% change YoY 56.3 34.9 31.8Shares outstanding (m) 2,003.4 2,003.4 2,003.4EPS (reported) (Rs) 3.4 4.6 6.0CEPS (Rs) 4.3 5.9 7.4DPS (Rs) 0.8 1.0 1.5


Cash Flow Statement (Rs mn)


EBIT 9,514 13,554 17,099Depreciation 1,868 2,604 2,863Change in working capital 1,765 510 799Changs in other net current assets (3,144) (1,376) (1,443)Operating cash flow 10,002 15,291 19,317Interest (2,177) (2,697) (2,438)Tax (85) (1,735) (2,639)Cash flow from operations 7,740 10,859 14,241Capex (19,144) (19,802) (5,000)(Increase)/decrease in investments (147) (31) -Dividends (1,404) (2,287) (3,431)Cash flow from investments (20,695) (22,120) (8,431)Proceeds from equity issue 0Increase/(decrease) in debt 8,105 2,938 (5,000)Deferred tax credit / Revenue 1,135 - -Other Adjustments 761Cash flow from financing 10,000 2,938 (5,000)Opening cash 12,951 9,997 1,674Closing cash 9,997 1,674 2,484


Balance sheet (Rs mn)


Cash and cash equivalents 9,997 1,674 2,484Accounts receivable 1,764 2,465 3,083Inventories 316 513 642Others 5,114 6,778 8,478Current assets 17,191 11,429 14,688Misc exp. 30 30 30Investments 2,219 2,250 2,250Net fixed assets 67,682 84,881 87,018Total assets 87,123 98,590 103,986Payables 4,754 6,161 7,708Others 740 1,027 1,285Current liabilities 5,494 7,188 8,992Deferred Revenue 6,291 6,291 6,291Debt 37,062 40,000 35,000Other liabilities(deferred tax) 3,737 3,737 3,737Equity share capital 4,007 4,007 4,007Pref share capital 28 28 28Reserves 30,504 37,339 45,930Total liabilities 87,123 98,590 103,986BVPS (Rs) 17.2 20.6 24.9


Ratio Analysis


EBITDA margin (%) 63.1 69.7 69.9EBIT margin (%) 63.6 66.0 66.6Net profit margin (%) 45.2 44.4 46.8Adjusted EPS growth (%) 56.3 34.9 31.8Receivables (days) 49.5 37.6 39.4Inventory (days) 7.1 7.4 8.2Sales/assets (x) 0.2 0.2 0.3Interest coverage (x) 4.4 5.0 7.0Debt/equity ratio (x) 1.1 1.0 0.7

ROE (%) 21.2 24.1 26.3ROCE (%) 14.7 17.7 20.6

EV/ Sales (x) 23.8 17.9 14.1EV/EBITDA (x) 37.7 25.6 20.1Price to earnings (x) 48.6 36.0 27.3Price to book value (x) 9.5 7.9 6.6Price to Cash Earnings (X) 38.1 28.0 22.1




CROMPTON GREAVES

PRICE: RS.323 RECOMMENDATION: REDUCETARGET PRICE: RS.322 FY12E P/E: 19.6X

q Crompton Greaves reported yet another robust set of nos. for 2QFY11.Results are broadly in line with our expectation with consolidated rev-enues at Rs 24 bn up 9.5% YoY on back of robust growth in the con-sumer business.

q EBITDA stood at Rs 3.3 bn for the company with operating marginsmaintained at 13.9% for the quarter. Other income of Rs 227 mn aidedPAT that stood at Rs 2134 mn.

q Overseas subsidiaries revenues are up by 3% YoY after several quartersof de-growth. Company reported sustained margins in the overseasbusiness.

q We maintain our 'REDUCE' rating on the company's stock with a pricetarget of Rs 322 (Rs 308 earlier) in lieu of limited upside due to rich valu-ations.

Quarterly performance Standalone financials

(Rs mn) Q2FY11 Q2FY10 YoY (%)

Gross sales 15291 13269 15.24

excise duty 844 583 44.68

Net Sales 14448 12686 13.89

RM costs 7478 6370 17.40

Purchase of traded goods 2380 2134 11.52

Staff costs 741 655 13.14

Other costs 1540 1432 7.48

Total Expenditure 12139 10591 14.61

PBIDT 2309 2094 10.26

Interest -7 0

Other Income 193 99 94.26

PBDT 2323 2095 10.88

Depreciation 195 129 50.89

PBT 2321 2065 12.39

Tax 729 703 3.68

Reported Profit After Tax 1592 1362 16.88

EPS (Rs) 2.5 2.1 16.88

Excise rate (%) 5.5 4.4

RM costs to sale (%) 48.9 48.0

staff costs (%) 4.8 4.9

other costs (%) 10.1 10.8

OPM (%) 15.1 15.8

Total tax rate (%) 0.3 0.3

Source: Company

Summary table


Sales 91409 105801 122899

Growth (%) 4.6 15.7 16.2EBITDA 12770 14177 16211EBITDA margin (%) 14.0 13.4 13.2

Net profit 8241 9130 10518Net cash (debt) 2567 9852 18097EPS (Rs) consolidated 12.8 14.2 16.4

Growth (%) 47.2 10.8 15.2ROE (%) 32.3 26.9 24.0ROCE (%) 42.9 38.5 35.2

EV/Sales (x) 2.2 1.9 1.5EV/EBITDA (x) 16.0 13.9 11.6P/E (x) 25.1 22.6 19.6

P/BV (x) 8.0 6.0 4.7


RESULT UPDATE

Ruchir [email protected]+91 22 6621 6448



Consolidated Quarterly financials

(Rs mn) Q2FY11 Q2FY10 YoY%

Gross sales 24826 22479 10.4

excise duty 847 588 44.0

Net Sales 23979 21890 9.5

RM costs 12202 11185 9.1

Purchase of traded goods 2434 2195 10.9

Staff costs 3093 2829 9.3

Other costs 2917 2615 11.6

Total Expenditure 20646 18823 9.7

PBIDT 3333 3067 8.7

Interest 49 52 -6.7

Other Income 228 153 48.9

PBDT 3512 3168 10.9

Depreciation 458 388 18.1

PBT 3055 2780 9.9

Tax 920 849 8.3

Reported Profit After Tax 2135 1931 10.6

EPS (Rs) 3.3 3.01 10.6

Excise rate (%) 3.4 2.6

RM costs to sale (%) 50.9 51.1

staff costs (%) 12.9 12.9

other costs (%) 12.2 11.9

OPM (%) 13.9 14.0

Total tax rate (%) 30.1 30.5

Source: Company

Result Highlightsn Standalone revenues grew by 15%yoy mainly driven by impressive growth in

consumer and industrial business.

n Power systems division posted flat growth a Rs 6.4 bn for the quarter. We be-lieve that muted order flows from Powergrid since past few quarters accountedfor this. Going forward, we believe that order bookings from Powergrid wouldbe the key variable to monitor.

n We also believe that growth in power system division has remained muted ascustomers have delayed taking deliveries. The situation should correct in thecoming quarters. Management believes this is a temporary phenomenon as thedemand growth as reflected by order intake is robust.

Standalone segment revenue

(Rs mn) Q2FY11 Q2FY10 YoY (%)

Power 6440 6043 6.6

Consumer 4634 3739 23.9

Industrial 3442.3 2926 17.6

Source: Company

n Consumer Product division sales grew by robust 24% YoY. Expanding real es-tate activity and increasing replacement demand auger well for the divisiongrowth. The company plans to expand in rural areas for sustaining growth mo-mentum.

n Industrial division observed 17.6% YoY revenue growth at Rs. 3.5 bn driven byupsurge in demand for motors and drives. The company intends to increase theshare of industrial segment in the coming years.



n On a consolidated basis revenue grew by 10% on back of domestic business.However international subsidiaries operations have shown signs of stability withrevenues up by 3%YoY.

n Company's overseas operations have been reporting revenue de-growth sincepast several quarters due to ongoing subdued demand scenario in Euro zoneand the US. We believe that any recovery in these areas would post an upsiderisk to our estimates.

Margins outlookn On a standalone basis operating margins for the Quarter remained almost flat

at 15.1% vis-à-vis 15.8% in Q2FY10

n On consolidated basis margins remained unchanged a 14%. Going forward weexpect company to sustain margins at 13% for FY11E.

PBIT% Consolidated

Q2FY11 Q2FY10 Q1FY11

Power 12.3 12.1 17

Consumer 14.8 14.0 15

Industrial 19.5 21.9 21

Source: Company

Business Outlook: Domestic market is expected to remain buoy-ant between FY11-12E; driven by pick up in Powergrid spendingin transmission space

CG 'Power Systems' segment is likely to grow by 13% YoY in FY11E and16% in FY12E mainly on back of robust demand in domestic T&D space.

n We expect company's domestic power business to grow by over 23% CAGRbetween FY10-12E due to meaningful increase in investments by Powergrid forsetting up of T&D infrastructure in India.

n The prime transmission utility has outlined its capex guideline worth Rs 400 bninvolving 19 substations with transformation capacity of 52565 MVA in 11thfive year plan.

n In addition to the 11th five year plan investment, PGCIL proposes to set upseven transmission corridors at an investment of about INR 500 bn over thenext five years. These corridors will act as pooling points for transfer of over55,000 MW from a number of private generation projects coming up in theeastern and southern states. The move is aimed at facilitating transfer of elec-tricity to the power-starved northern and western regions of the country.

n Currently company enjoys the leadership position in India along with growingpresence in other Asian countries manufacturing high quality power transform-ers, distribution transformers, extra high voltage (EHV) and medium voltage(MV) circuit breakers and gas insulated switchgear (GIS).

Power Segment revenue breakup

FY09 FY10 FY11E FY12E

CG Power (Domestic) 22240 25100 30873 38591

CG Power (overseas) 40340 37330 39197 43116

CG Power (Consol) 62580 62430 70070 81708




n While we expect the industrial systems segment to grow at a CAGR of 15%YoY between FY10-12E, we build 17% YoY growth in consumer product busi-ness in the same period given the up turn in industrial capex and real infrastruc-ture projects in the domestic market. We also opine that the company shallmaintain margins across the segments.

Financial outlook; we expect that the company would generate strongfree cash flow amidst stiff competition from domestic companies inlow KV segment and multinational players in 765+ KV segment;

n We expect company's revenues to grow at 16% CAGR between FY10-12Egiven higher growth across all the segments viz. power systems led by meaning-ful demand in power transformers, industrial systems and consumer products.

n We believe that the company would maintain its margins on back of increase involumes in increasing raw material prices scenario going ahead. We buildEBITDA% of 13.4% and 13.2% in FY11E and FY12E respectively.

LME Copper

Source: Bloomberg

n Given the lower working capital for the company for having limited presence inproject business compare to peer group, we expect that the company wouldgenerate significant free cash flows to fund its growth.

Listing of Avantha Power could be a possible trigger in the shorttermNear-term triggers to watch out for the stock would be the progress on listing ofAvantha Power, in which the company has a 32% stake. Management has statedthe red hearing filing of its 32% holding company-Avantha power and Infrastruc-ture limited (APIL) with SEBI for a public issue. Company has invested a sum of Rs2.27 bn in APIL at Rs 10 per share for the stake. APIL is an established power gen-eration company with 191 MW of operational thermal power capacity; 2,400 MWof generating capacity under various stages of implementation; and 1,320 MW ofgenerating capacity under planning spread across India. Once all the projects underimplementation and development have achieved commercial operation, the com-pany is expected to have a total installed capacity of 3,911 MW.

Valuationn Currently CGL is trading at 22.6x and 19.6x FY11E and FY12E consolidated

earnings respectively. On an EV/EBITDA basis, the stock is trading at 11.6xFY12E numbers.

n We value the stock based on 19x FY12E earnings for the core business and Rs10 per share for Avantha power and thus arrive at a price target of Rs 322 pershare (308 earlier).

n We maintain 'REDUCE' recommendation on the company stock.

We maintain REDUCE onCrompton Greaves with a

revised price target of Rs.322

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MAHINDRA & MAHINDRA FINANCIAL SERVICE (MMFS)PRICE: RS.703 RECOMMENDATION: ACCUMULATETARGET PRICE: RS.740 FY12E P/E: 12.0X; P/ABV:2.8X

q Strong traction in advances growth continues following steady rural de-mand; AUM grew by 32% yoy

q Net profit growth remained strong at Rs 11.6bn up by 69% yoy follow-ing improved interest margins

q Improving asset quality and healthy return ratios reinforce confidence inMMFS's overall performance, revising our earnings estimates and pricetarget.

Q2FY10 Performance

(Rs mn) Q2FY11 Q1FY11 Q2FY10 YoY (%) QoQ (%)

Income from operations 4,696 3,924 3,530 33.0 19.7

Interest Expenses 1,518 1,315 1,206 25.9 15.4

Net Interest Income 3,178 2,609 2,324 36.7 21.8

Other income 93 90 95

Total income 3,271 2,699 2,419 35.2 21.2

Operating cost 1,194 1,046 790 51.1 14.2

Employee cost 369 365 312

Other operating expenses 825 681 479

Operating profit 2,077 1,653 1,629 27.5 25.6

Provision and write offs 335 543 596 -43.8 -38.3

Profit before tax 1,742 1,110 1,033 68.6 56.9

Provision for taxes 577 368 342

Net profit 1,165 742 691 68.5 57.0

EPS (Rs) 12.2 7.7 7.2

Cost to income (%) 36.5 38.8 32.7

Effective Tax rate (%) 33.1 33.2 33.1

Advances (Rs bn) 102,965 91,488 77,206 33.4 12.5

Gross NPA 5.80% 6.9 9

Net NPA 1.1 1.3 2.8

Provision coverage (%) 82.5 82.45 71.2

Source: Company

Strong traction in advances growth continues following steadyrural demand; AUM grew by 32% yoy,n Following strong automobile demand and on the onset of healthy monsoon in

India, MMFS has registered a strong growth in its advances during Q2FY11. Ru-ral demand remained strong demand for tractors, passenger cars and utility ve-hicles aided traction in advances.

n AUM grew by 32% yoy and 12%qoq to Rs. 122.4bn. Advances book grew by31% yoy and 9% qoq to Rs. 108.9bn as compared to Rs.92.9bn in Q2FY10.Government rural support programme like rural employment guarantee haslead to improved cash flows in the hands of rural and semi urban demographicsin turn aiding traction in the advances.

n Disbursements during the Q2FY11 grew by 54% yoy to Rs.33 bn and 63.5%yoy for the H1FY11 to Rs. 62.2bn. Cars and used vehicles are the key growthdrivers, which forms 33% (29% in Q1FY11) and 9% (8% in Q1FY11) respec-tively. Increased branch network to 506 from 487 also supported businessgrowth during Q2FY11.

Summary table

(Rs bn) FY10 FY11E FY12E

Interest Income 15.3 19.6 24.9

Interest expenses 5.0 6.9 8.8NII 10.3 12.7 16.0Other Income 0.4 0.4 0.4

Total Income 10.7 13.1 16.4Optg Profit 7.4 9.4 12.2PAT 3.4 4.1 5.6

Gross NPA (%) 6.7 5.4 4.5Net NPA (%) 1.0 0.8 0.7NIM on Assets (%) 10.6 10.2 10.2

RoA (%) 4.6 4.4 4.7RoE (%) 21.4 21.8 23.5Divi. Payout (%) 25.0 25.0 25.0

EPS (Rs) 35.7 42.8 58.8BV (Rs) 180.1 212.4 256.7Adj. BV (Rs) 171.5 203.2 246.8

P/E (x) 19.7 16.4 12.0P/ABV (x) 4.1 3.5 2.8


RESULT UPDATE

Sarika [email protected]+91 22 6621 6313



Net profit growth remained strong at Rs 11.6bn up by 69% yoyfollowing improved interest marginsn Strong NIM for Q2FY11 and steady growth in advances lead to a strong growth

in earnings. NII for the Q2FY11 grew by 36.7% yoy to Rs. 3.2bn as comparedto Rs 2.3bn. Net profit grew by 68.5% yoy to Rs.1.16 bn, significantly aboveour expectation of Rs.940 mn.

n MMFS has reported gross spreads of 11.5% as compared to 11.1% in Q1FY11on the back of cost of funds advantage as close to 90% of its borrowing are onfixed rate. Improved recoveries also aided margin improvement during the quar-ter.

n Improved recoveries lead to lower provision requirement during the quarter, NetNPA ratio improved to 1.1% from 2.8% in Q1FY11 and coverage ratio im-proved to 82%. Improved asset quality will help fetch higher valuation multiple.

Improving asset quality and healthy return ratios reinforce con-fidence in MMFS's overall performance, revising our earnings es-timates and price target.n Improvement in asset quality with decline in gross NPA ratio to 5.8% from

6.9% in Q1FY11 and strong return ratios with ROE of 22% in FY11 and 23.5%in FY12 reinforces our confidence in the company's performance going for-ward.

n On the back of improved earnings growth following steady NIM and steady ad-vances growth we are revising our earnings estimates for MMFS for FY11-12.We expect a net profit growth of 20% yoy for FY11 to Rs 4.1bn and Rs 5.6bnin FY12.

n We are revising our price target to Rs. 740 (based on dividend discount model).At our price target the stock trades at 3x FY12 P/ABV, we reiterate our ACCU-MULATE recommendation for the stock.

We recommend ACCUMULATEon MMFS with a price target of

Rs.740



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Gainers & Losers Nifty Gainers & LosersPrice (Rs) chg (%) Index points Volume (mn)

Gainers

HDFC 707 2.1 6.4 3.2

Reliance Ind 1,090 0.8 4.9 4.1

TCS 1,067 2.6 4.6 2.6

Losers

Infosys Tech 3,019 (1.1) (5.5) 0.7

ITC 169 (1.2) (3.6) 6.9

Wipro 430 (4.1) (3.2) 4.6

Source: Bloomberg

Research TeamDipen ShahIT, [email protected]+91 22 6621 6301

Sanjeev ZarbadeCapital Goods, [email protected]+91 22 6621 6305

Teena VirmaniConstruction, Cement, Mid [email protected]+91 22 6621 6302

Apurva DoshiLogistics, Textiles, Mid [email protected]+91 22 6621 6308

Saurabh AgrawalMetals, [email protected]+91 22 6621 6309

Saday SinhaBanking, [email protected]+91 22 6621 6312

Sarika [email protected]+91 22 6621 6301

Arun [email protected]+91 22 6621 6143

Ruchir KhareCapital Goods, [email protected]+91 22 6621 6448

Jayesh [email protected]+91 22 6652 9172

Ritwik RaiFMCG, [email protected]+91 22 6621 6310

Sumit PokharnaOil and [email protected]+91 22 6621 6313

Shrikant ChouhanTechnical [email protected]+91 22 6621 6360

K. [email protected]+91 22 6621 6311

Forthcoming events Company/MarketDate Event

26-Oct Birla Corp, Blue Dart, Bosch, Deepak Fert, Dena Bank, Dish TV India, Gujarat Alk,HCL Infosys, Hinduja Vent, JB Chemicals, JSW Steel, Jindal Steel, Mangalore Ref,Marico, NTPC, Patni Comp, Raymond, SRF, Sterlite Ind, Swaraj Engines,TV Eighteen, Voltas earnings expected

27-Oct Asian Paints, Bata India, Cummins Inda, Dabur India, Everest Kanto, GATI, IFCI,India Infoline, Max India, Shriram Transport, Torrent Power, Union Bank,United Spirits, Zee News earnings expected

Source: Bloomberg

Documents

D:VelsDaily Morning Brief 0OctMorning Insight 26 Oct 2010€¦ · Derivatives 160,796 14.3 Net inflows (Rs cr) 22 Oct 10 % Chg MTD YTD FII 1,379 41.2 22,430 110,714 Mutual Fund 179