First Call Feb 10- 2015-EDEL.pdf

8/9/2019 First Call Feb 10- 2015-EDEL.pdf

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1 Edelweiss Securities Limited

CONTENTSLatest Research

• Chambal Fertilisers and Chemicals - Delivering on expectations; Hold

• Ipca Laboratories - Big miss, recovery to take time; Hold

• Jet Airways - Turnaround plan in progress; Buy

• Kalpataru Power - Matches expectations; Bright prospects; Buy

• 'BRAVEHEART SERIES' Larsen & Toubro - Profitability takes a breather;

domestic recovery holds key; Buy

• VA Tech Wabag - One offs pinch, but growth drivers in place; Buy

• Tata Steel

• Brigade Enterprises - Firing on all cylinders; company update; Buy

• IT - Best time to buy; sector update

• GDP - Growth recovery puzzle continues

• Securities Lending Borrowing (SLB) Daily

• Bond Vector - Gilts hold steady; Auction cutoffs in line

FIRST CALL DAILY

India Equity Research

February 10, 2015

Sectoral Movements % ChangeTicker 9-Feb-15 1 D 1 M 3 M 1 Y

Banking 21093 -2.1 -1.2 6.8 80.6IT 12249 -0.2 7.5 6.8 27.3Pharmaceuticals 15180 -0.3 3.3 1.5 46.0Oil 9986 -1.0 1.5 -8.5 19.1Power 2071 -1.6 0.5 -3.8 34.1Auto 18620 -2.3 -1.1 1.9 57.4Metals 9901 -2.5 -5.6 -12.6 7.1Real Estate 1699 -2.7 10.9 3.6 39.3FMCG 8192 -1.2 4.5 5.8 26.0Capital Goods 16002 -4.3 3.5 1.4 69.2

India Change in %9-Feb-15 1-d 1-mo 3-mo

Nifty 8,526 (1.6) 2.9 2.2 Sensex 28,227 (1.7) 2.8 1.3 CNX 500 6,922 (1.5) 2.1 2.9

Global Indices9-Feb-15 1-d 1-mo 3-mo

DJIA 17,729 (0.5) (0.0) 0.7 NASDAQ 4,726 (0.4) 0.5 1.6 Hang Seng 24,452 (0.3) 2.2 3.0 Nikkei 225 17,601 (0.6) 2.3 4.9

Net Inv (INR Bn)6-Feb-15 Buy Sell NetFII Cash 41.5 41.9 (0.4) FII F&O 220.5 235.4 (14.9) MF Cash 7.0 6.1 0.9

Value Traded - India ( INR Bn) Change in %9-Feb-15 1-d 1-mo 3-mo

BSE Cash 29.6 (7.4) (10.0) (25.1) NSE Cash 152.8 (11.8) (20.2) (31.3) NSE F&O 1,912.1 (30.5)

Forex/Money Market Change in %9-Feb-15 1-d 1-mo 3-mo

INR/USD 62.2 (0.8) 0.3 (1.1) USD/EUR 1.1 0.0 (4.3) (8.8) USD/YEN 0.0 (0.2) 0.0 3.1 10 Yr G-Sec 7.8 - (2.9) (6.4)

Commodities (USD/Mt ton) Change in %9-Feb-15 1-d 1-mo 3-mo

Copper 5,688 0.3 (7.8) (16.2) Aluminium 1,859 0.1 3.9 (9.7) *Gold 1,241.4 0.2 1.5 7.8 *Silver 17.1 0.3 3.4 9.3 **NYMEX 53 2.3 9.3 (32.8) *USD/Troy Ounce **USD/bbl

Volume 9-Feb-15 8-Feb-15 % Change

Futures 949,564 962,747 (1.4)Call 686,521 662,510 3.6Put 539,014 518,335 4.0Total 2,175,098 2,143,592 1.5

Put Call RatiosVolume 9-Feb-15 8-Feb-15 % ChangePCR 0.7 0.7 (0.1) WPCR 0.7 0.7 0.3 OI PCR 0.8 0.8 0.9 Total OI/ 1.1 1.2 (2.5) Nifty IVs at 19 - 20% levels.FII Activity* (INR Mn) (6-Feb)


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First Call

Regular Features

• Sales Trader’s Commentary• Insider Trades & Bulk Deals• Technical Updates• Eye catchers

RESULTS FOR THE DAY

STOCKS IN NEWSMRPL to raise stake in ONGC Mangalore petrochemicals (MINT)

Adani Enterprises signs solar deal (MINT)

DoTpanel on net-neutrality likely to meet on Feb 12 (DNA)

Cipla UK arm forms JV with two Moroccan cos (ET)

Name of company Q3FY15E Q3FY14 Y-o-Y Q2FY15 Q-o-Q

Cadilla Healthcare 3,100 2,174 42.6 2779 12

Zuari Agro Chemicals 172 171 0.6 220 (22)

Triveni Turbines 262 207 26.6 239 10

Motherson Sumi Systems 2,774 2,228 24.5 3278 (15)

Jain Irrigation 246 158 55.7 -31 (894)

Hexaware 965 1,032 (6.5) 860 12

ABB 685 586 16.8 450 52

CARE 336 280 19.9 524 (36)

PAT


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First Call

SALES TRADERS COMMENTARY

Indian equities settled lower on Monday led by losses in capital goods, realty, metal and autostocks.

While the Sensex lost 490 points to 28227, Nifty fell 134 points to 8526.

Major gainers were Dr Reddy's Laboratories (2.01%), Bajaj Auto (1.76%), Oil & Natural GasCorporation (1.51%), Sun Pharmaceutical (1.37%), Wipro (1.06%) and Infosys (0.94%).

Major losers were Larsen & Toubro (6.61%), Tata Steel (5.79%), Sesa Sterlite (4.53%), G A I L(India) (4.52%), Cipla (3.90%) and State Bank of India (3.65%).

The BSE mid and small caps larger counterparts declining 1.41% and 1.50%, respectively.

The Capital Goods index was down 4.31% Major losers were L&T (6.61%), BEML (5.01%), FAGBearing (3.12%), BEL (2.98%) and Wabag (2.79%).

The Realty Index fell 2.73%. Major losers were NBCC (12.24%), Unitech (6.23%), HDIL (4.71%)and DLF (4.00%).

The Metal Index fell 2.54% Major losers were Tata Steel (5.79%), SSLT (4.53%), SAIL (3.61%) andJSW Steel (2.57%).

Globally, Asia was trading mixed - while the Nikkei jumped 63 points to 17711, Hang Seng wasdown 158 points at 24521; European indices were trading lower.

CONFERENCE CALLS

Conference call details company Date Time

Premier Explosives Ltd. 10-Feb-15 11.00 AM IST

ABB India Limited. 10-Feb-15 2.30 PM ISTIFB Industries 10-Feb-15 3.30 PM IST

Cadila Healthcare Ltd. 10-Feb-15 4.00 PM ISTHexaware Technologies Limited 10-Feb-15 4.00 PM IST


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Edelweiss Research is also available on www. edelresearch.com,Bloomberg EDEL , Thomson First Call, Reuters and Factset. Edelweiss Securities Limited

Chambal Fertilisers and Chemicals’ (Chambal) standalone Q3FY15 salesand EBITDA came in line with our estimates. However, PAT beat estimateon account of higher other income. The company received dividend ofINR0.44bn from its IMACID JV during the quarter, which led to higherother income. Key positives were: (i) 26% YoY jump in trading volume; (ii)19.6% QoQ fall in interest cost; and (iii) shipping business continued toperform well. Key negatives were: (i) 2% YoY dip in urea volume; (ii)180bps YoY EBITDA margin decline, which we believe was on account ofhigher trading sales; and (iii) increase in subsidy by INR13.1bn QoQ toINR28bn. Chambal is actively considering new brown field urea plantpost clarity on the new investment policy. However, the government has

continued to delay urea pricing and import parity price linked volumepolicy. We believe the stock has consistent/good dividend yield.However, persistent uncertainty over urea policies, lack of growth driversand rising working capital will be overhangs. Maintain ‘HOLD’.

Robust trading volumes drive the quarterNet sales jumped 19.7% YoY predominantly owing to higher trading volumes (up 26%YoY). EBITDA margin fell 180bps YoY to 8.1% due to higher contribution of tradingsales. Chambal has merged manufactured and trading segments w.e.f. Q1FY15. Hence,revenue and profitability are not ascertainable separately for the businesses.Depreciation fell 23.5% YoY to INR0.45bn led by revised useful life of assets as per theCompanies Act (lower by INR158mn). Other income jumped 192% YoY on account ofdividend income of INR0.4bn from its JV, IMACID. PAT rose 60.3% YoY to INR1.45bnversus estimate of INR1.2bn.

Outlook and valuations: Awaiting policy actions; maintain ‘HOLD’The stock has a consistent and good dividend yield. However, persistent uncertaintyover urea policies, lack of growth drivers and rising working capital will be overhangs. We are rolling forward our target price to FY17E EPS. We maintain ‘HOLD’ with arevised target price of INR70 (earlier INR60) based on 7x FY17E EPS. The stock istrading at 6.3x FY16E and 6.1x FY17E EPS. Favourable policy and business restructuringactions are key risks to our rationale.

RESULT UPDATE

CHAMBAL FERTILISERS AND CHEMICALS Delivering on expectations

EDELWEISS RATINGS

Absolute Rating HOLD

Investment Characteristics Growth

MARKET DATA(R: CHMB.BO, B: CHMB IN)

CMP : INR 61

Target Price : INR 70

52-week range (INR) : 71 / 36

Share in issue (mn) : 416.2

M cap (INR bn/USD mn) : 25 / 408

Avg. Daily Vol. BSE/NSE (‘000) : 976.3

SHARE HOLDING PATTERN (%)

Current Q2FY15 Q1FY15Promoters * 56.8 56.8 56.8

MF's, FI's & BKs 10.8 12.9 10.8

FII's 6.5 6.4 6.5

Others 25.9 24.0 25.9* Promoters pledged shares

(% of share in issue): NIL

PRICE PERFORMANCE (%)

BSE Midcap

IndexStock

Stock over

Index1 month 6.8 1.5 (5.3)

3 months 15.2 2.7 (12.5)

12 months 64.7 59.4 (5.2)

Manish Mahawar+91 22 6623 [email protected]

Manoj Bahety, CFA+91 22 6623 [email protected]

I n d i M i d c a p s

India Equity Research| Fertilisers

February 9, 2015

Financials (standalone) (INR mn)Year to March Q3FY15 Q3FY14 % change Q2FY15 % change FY14* FY15E* FY16E*

Net rev. 28,246 23,599 19.7 25,082 12.6 89,106 97,039 102,845

EBITDA 2,288 2,332 (1.9) 2,479 (7.7) 6,739 9,236 9,313

Adj profit 1,447 903 60.3 1,148 26.1 1,842 3,847 4,033

Dil. EPS (INR) 3.5 2.2 0.0 2.8 0.0 4.4 9.3 9.7

Diluted P/E (x) 13.7 6.6 6.3ROAE (%) 9.4 17.5 16.1

* Annual numbers are on consolidated basis


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Fertilisers


Q3FY15 conference call: Key highlights• Management highlighted that Chambal has shut its Gadepan, Kota, plant from Feb 8, 2015,

as manufacture of urea beyond 100% utilisation is unviable for the company on account ofdelay in policy regarding production beyond cut off volume. The company will carry outroutine maintenance activities during the shutdown and the plant is expected to resumeoperations during last week of March or first week of April 2015.

• The company has increased DAP prices from INR22,700/MT to INR23,300 /MT in Q4FY15.

• Subsidy outstanding as on Dec 31, 2014, was INR28bn (INR14.9bn as on Sept 30, 2014).

• Gross debt stood at INR38.9bn for the quarter ended Dec 31, 2014 (INR27.3bn as onSept 30, 2014.)

• IT business incurred loss of USD9.3mn in CY14 at PAT level. Chambal is planning torestructure its IT business.


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Chambal Fertilisers and Chemicals


Q2FY15 conference call: Key highlights• Post announcement and notifcation of the new urea investment policy, Chambal is actively

considering new brown field urea plant in Gadepan, Kota (Rajasthan). The company hasalready shortlisted the technical partner. However, Chambal will announce the project postfinancial closure. Management highlighted that capex is expected to be ~INR50bn.

• Management has indicated that gas price hike from November 1, 2014, will lead to increasein working capital going forward.

• The government is continuing to delay the urea policy regarding import parity-linkedproduction. Chambal believes that if the government will not clear this policy in thenear term, then the company will cut production of urea beyond cut-off quantity.

• Government is actively looking for implementation of gas pooling in the sector. Chambalhighlighted that gas cost for the company is higher than peers. Hence, it is likely to bebenefitted on account of gas pooling. Gas cost for the quarter stood at USD13/mmbtufor the company.

• Subsidy outstanding as on Sept 30, 2014, was INR14.9bn (June 30, 2014, was

INR25.8bn).

• IT business incurred loss of USD8-9mn in CY15 so far at PAT level. Management expectsCY14 loss of USD10m in IT business.

• Gross debt stood at INR27.3bn, as on Sept 30, 2014.

• Shipping business outlook has improved. However, it continues to remain challenging.Chambal has 1 ship at contracted rate and balance 4 are at spot rates.

• The company has invested INR0.3bn in 12% non-convertible preference shares ofUpper Ganges Sugar & Industries.

Table 1: Fertiliser sales volume

Source: Department of Fertilisers, Edelweiss research

Sales volume (MT) Q3FY15 Q3FY14 Y-o-Y (%) Q2FY15 Q-o-Q (%) YTDFY15 YTDFY14 Y-o-Y (%) FY14Urea 519,784 532,835 536,583 1,530,841 1,704,263 2,096,452SSP 50,439 17,269 54,211 146,331 57,732 82,353DAP imported 248,835 241,040 175,890 548,579 511,556 586,283Imported DAP Lite 286 2,455 583 1,014 7,372 26,231Imported MAP lite 0 0 0 0 0 0Imported NPK 20:20:0 0 0 0 0 0 0Imported NPK 10:26:26 0 0 0 0 5,086 5,086

MOP 59,409 1,677 74,993 170,645 35,406 42,488Total 878,753 795,276 10.5 842,260 4.3 2 ,397 ,410 2,321 ,415 3.3 2,838,893

Manufactured 570,223 550,104 3.7 590,794 (3.5) 1,677,172 1,761,995 (4.8) 2,178,805Traded 308,530 245,172 25.8 251,466 22.7 720,238 559,420 28.7 660,088Total 878,753 795,276 10.5 842,260 4.3 2 ,397 ,410 2,321 ,415 3.3 2,838,893


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Fertilisers


Table 2: Operational performance (Standalone)

Source: Company, Edelweiss research

Segment revenue Q3FY15 Q3FY14 % change Q2FY15 % change FY14 YTD15Manufactured & Traded Fertiliser 25,157 21,195 18.7 22,399 12.3 69,932 65,038Shipping 2,064 1,467 40.6 1,773 16.4 5,893 5,197Textiles/Others 1,025 937 9.4 910 12.7 3,994 3,060Net revenue from operations 28,246 23,599 19.7 25,082 12.6 79,819 73,294Net profit before interest and taxManufactured & Traded Fertiliser 2,011 2,069 (2.8) 2,106 (4.5) 5,544 5,874Shipping 157 119 NA 223 NA (135) 438Textiles/Others 32 54 (40.2) 18 83.8 262 92Total 2,200 2,242 (1.9) 2,346 (6.2) 5,671 6,405Less: Interest 339 576 (41.2) 443 (23.6) 1,935 1,217Less: Other unallocable exp (231) 301 165 278 131Total profit before tax 2,093 1,365 53.2 1,739 20.3 3,459 5,057PBIT margin (%)Manufactured & Traded Goods 8.0 9.8 9.4 7.9 9.0Shipping 7.6 8.1 12.6 (2.3) 8.4Textiles/Others 3.1 5.8 1.9 6.6 3.0Capital employed

Manufactured & Traded Fertiliser 41,715 49,401 34,193 48,248 41,715Shipping 15,063 15,645 15,391 15,174 15,063Textiles/Others 1,715 1,739 1,821 2,260 1,715Unallocated (33,354) (43,893) (27,712) (43,821) (33,354)Total (INR mn) 25,139 22,892 23,693 21,862 25,139


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Financial snapshot (INR mn)Year to March Q3FY15 Q3FY14 % change Q2FY15 % change YTD15 FY15E FY16E

Net revenues 28,246 23,599 19.7 25,082 12.6 73,294 97,039 102,845Raw material 17,432 14,019 24.3 14,913 16.9 43,874 55,137 59,798Staff costs 399 365 9.2 410 (2.9) 1,200 3,514 3,867Other expenses 8,127 6,883 18.1 7,280 11.6 21,641 29,152 29,867

Total expenditure 25,958 21,267 22.1 22,603 14.8 66,716 87,803 93,533EBITDA 2,288 2,332 (1.9) 2,479 (7.7) 6,579 9,236 9,313Depreciation 445 583 (23.5) 456 (2.3) 1,338 2,595 2,735Other income 611 209 192.0 166 267.9 1,068 1,000 1,100Interest 362 593 (39.1) 450 (19.6) 1,251 1,793 1,545Profit before tax 2,093 1,365 53.2 1,739 20.3 5,057 5,848 6,133Tax 645 463 39.5 591 9.2 1,654 2,026 2,130Core profit 1,447 903 60.3 1,148 26.1 3,404 3,822 4,003Extraordinary itemsPAT 1,447 903 60.3 1,148 26.1 3,404 3,822 4,003Minority interest (26) (30)Profit after tax and min. int. - - - 3,404 3,847 4,033

Equity capital (FV INR 10) 4,162 4,162 4,162 4,162 4,140 4,140No. of shares (mn) 416 416 416 416 414 414Diluted EPS (INR) 3.5 2.2 60.3 2.8 26.1 8.2 9.3 9.7As % of net revenuesRaw material 61.7 59.4 59.5 59.9 56.8 58.1Employee cost 1.4 1.5 1.6 1.6 3.6 3.8Other expenses 28.8 29.2 29.0 29.5 30.0 29.0EBITDA 8.1 9.9 9.9 9.0 9.5 9.1Reported net profit 5.1 3.8 4.6 4.6 4.0 3.9

Change in Estimates FY15E FY16E

New Old % change New Old % change CommentsNet Revenue 97,039 95,240 1.9 102,845 96,533 6.5 On account of higher traded

volumes

EBITDA 9,236 8,627 7.1 9,313 8,568 8.7 On account of higher traded

volumes

EBITDA Margin 9.5 9.1 9.1 8.9

Core profit 3,822 3,348 14.1 4,003 3,703 8.1 On account of higher traded

Volumes and lower depreciation

PAT Margin 3.9 3.5 3.9 3.8

Capex (651) (669) (2.7) 1,438 1,374 4.6


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Fertilisers


Company DescriptionChambal was promoted by Zuari Industries in 1985. It is India's largest producer of urea inthe private sector. The company has three divisions, namely, agri-inputs, shipping andtextiles. It is a diversified conglomerate with interests in fertilisers, phosphoric acid, agri-inputs & seeds, biotechnology, textiles, information technology, food processing andshipping. The company operates two nitrogenous fertiliser plants. The company markets

urea under the ‘Uttam Veer’ brand, primarily in North and West India. Chambal has 33.33%ownership interest in Indo Maroc Phosphore S.A. IMACID, which is engaged inmanufacturing of phosphoric fertilisers. The remaining stake in IMACID is owned equally byTata Chemicals and OCP, Morocco.

Chambal has three subsidiaries:

Chambal Infrastructure Ventures: For development of power projects

CFCL Overseas, Cayman Islands: For consolidation of its software business

India Steamship Pte., Singapore: Engaged in shipping business

Investment ThemeChambal is the largest manufacturer of urea in the private sector in India, with an installedcapacity of 1.73mnMT. With the government planning to ease regulations in the urea spaceand make it lucrative to urea manufacturers to boost investment, Chambal is poised to be akey beneficiary. Moreover, the company has also announced plans to set up a 1.2mnMTurea manufacturing facility at Gadepan, but is awaiting more clarity on the policy. Onaccount of nutrient-based subsidy (NBS) scheme (which has freed non-urea fertilisers’ pricing)and also due to good monsoons, Chambal is expected to enhance the trading of complexfertilisers significantly, which will add to its profitability. The company has a vast marketingnetwork, comprising 11 regional offices, 1,500 dealers and 20,000 village level outlets, throughwhich it caters to farmers in ~10 states in northern, central and western regions of India. ThoughChambal is poised to be one of the biggest beneficiaries of the expected new urea policy, its

software division is expected to be a drag on profitability for few years.

Key RisksPoor monsoon could hit fertiliser demand Indian agriculture is largely dependent on monsoon. Poor monsoon could, therefore, be adampener on demand.

Regulatory riskThe fertiliser sector, especially urea, has always been subject to stringent governmentpolicies. Any change in policies could significantly impact our earnings estimates. As part ofthe policy risk, in the event of urea getting decontrolled, upside risk exists for our earnings

estimates.

Delay in payment of fertiliser subsidies by governmentAny delay in the payment of subsidies by the government or payment of the same viafertiliser bonds, could strain the company’s working capital cycle. The finance minister has,however, assured that the entire subsidy amount will be paid in cash and not bonds. WithChambal investing in a variety of businesses – both related and unrelated, there is a risk ofmisallocation of capital, resulting in sub-optimal value realisation.


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Financial Statements

Income statement (INR mn)

Year to March FY14 FY15E FY16E FY17E

Net revenue 89,106 97,039 102,845 104,387

Materials costs 49,948 55,137 59,798 60,674Gross profit 39,158 41,902 43,047 43,713

Employee costs 4,098 3,514 3,867 3,918

Other Expenses 28,321 29,152 29,867 30,484

EBITDA 6,739 9,236 9,313 9,311

Depreciation and amortisation 2,824 2,595 2,735 2,767

EBIT 3,915 6,642 6,578 6,544

Other income 1,050 1,000 1,100 1,210

Interest expenses 2,074 1,793 1,545 1,440

Profit before tax 2,891 5,848 6,133 6,314

Provision for tax 1,145 2,026 2,130 2,181

Net profit 1,746 3,822 4,003 4,133

Extraordinary income/ (loss) 600 - - -

Profit After Tax 2,345 3,822 4,003 4,133

Minority interest (96) (26) (30) (23)

Profit after minority interest 2,441 3,847 4,033 4,156

Shares outstanding (mn) 414 414 414 414

Diluted EPS (INR) 4.4 9.3 9.7 10.0

CEPS (INR) 11.3 15.6 16.3 16.7

Dividend per share (INR) 1.9 1.9 1.9 1.9

Dividend payout (%) 42.7 20.4 19.5 18.9

Common size metrics


Cost of goods sold 43.9 43.2 41.9 41.9

EBITDA margins 7.6 9.5 9.1 8.9EBIT margins 4.4 6.8 6.4 6.3

Net profit margins 2.0 3.9 3.9 4.0

Growth ratios (%)


Revenues 8.6 8.9 6.0 1.5

EBITDA (1.5) 37.1 0.8 -

Net profit (12.8) 118.9 4.7 3.2

EPS (18.3) 108.9 4.8 3.0

Key Assumptions


Macro

GDP(Y-o-Y %) 4.7 5.4 6.3 7.3 Inf la tion (Avg) 9 .5 6 .8 5.5 5.5

Repo rate (exit rate) 8.0 7.8 6.8 6.3

USD/INR (Avg) 60.5 61.0 62.0 62.0

Company

Urea sales (mn MT) 2 2 2 2

Traded fer ti liser sales volume (MT) 1 1 1 1

Shipping sale s growth (%) 90.3 20.0 - -

P2O5 sales growth (%) 5.0 10.0 - -

Other Subsidiaries sales growth (%) 5 .0 5 .0 - -

Staff costs as % of sales 4.6 3.6 3.8 3.8

Raw Material Cost as % Net Revenue 56.1 56.8 58.1 58.1

Other expenses as % of net revenues 31.8 30.0 29.0 29.2

Financial assumptions

Net borrowings (INR mn) 42,589 24,817 22,012 19,543

Capex (INR mn) (1,548) (651) 1,438 1,453

Debtor days 146 112 88 92

Inventory days 71 49 50 51

Payable days 55 63 66 69

Cash conversion cycle (days) 162 97 71 75

Depreciation as % of gross block 5.0 4.8 4.9 4.8

Interest rate as % of average gross debt 4.4 5.0 6.0 6.0


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Fertilisers


Peer comparison valuation

Market cap Diluted PE (X) EV/EBITDA (X) ROAE (%)

Name (USD mn) FY15E FY16E FY15E FY16E FY15E FY16E

Chambal Fertilisers and Chemicals 408 6.6 6.3 5.5 5.1 17.5 16.1

Coromandel International 1,281 18.1 12.6 10.0 7.3 17.7 21.9

Deepak Fertilizer Ltd 194 20.2 5.0 6.5 3.3 4.1 15.8

Zuari Agro Chemicals 166 19.6 6.3 8.4 6.4 5.1 14.4

Median - 18.8 6.3 7.4 5.8 11.3 15.9

AVERAGE - 16.1 7.5 7.6 5.5 11.1 17.0

Source: Edelweiss research

Cash flow metrics


Operating cash flow 7,409 18,833 5,604 5,070

Investing cash flow 2,598 1,651 (338) (243)

Financing cash flow (7,477) (19,811) (2,898) (3,183)

Net cash flow 2,531 673 2,368 1,644

Capex 1,548 651 (1,438) (1,453)

Dividends paid (917) (917) (917) (917)

Profitability and efficiency ratios


ROAE (%) 9.4 17.5 16.1 14.7

ROACE (%) 5.5 10.6 11.8 11.5

ROA 2.4 6.1 7.2 7.2

Inventory day 71 49 50 51

Debtors days 146 112 88 92



Current ratio (x) 4.8 3.3 3.4 3.5Debt/EBITDA (x) 6.6 2.9 2.7 2.5

Debt/Equity (x) 2.2 1.1 0.9 0.8

Operating ratios


Total asset turnover 1.2 1.6 1.8 1.8

Fixed asset turnover 3.2 3.7 4.2 4.5

Equity turnover 4.6 4.4 4.1 3.7

Valuation parameters


Diluted EPS (INR) 4.4 9.3 9.7 10.0

Y-o-Y growth (%) (18.3) 108.9 4.8 3.0

CEPS (INR) 11.3 15.6 16.3 16.7

Diluted PE (x) 13.7 6.6 6.3 6.1

Price/BV (x) 1.2 1.1 0.9 0.8

EV/Sales (x) 0.8 0.5 0.5 0.4

EV/EBITDA (x) 10.2 5.5 5.1 4.9

Dividend yield (%) 3.1 3.1 3.1 3.1

Balance sheet (INR mn)

As on 31st March FY14 FY15E FY16E FY17E

Equity capital 4,140 4,140 4,140 4,140

Reserves & surplus 16,424 19,354 22,470 25,709

Shareholders funds 20,563 23,494 26,610 29,849

Minority intere st (BS) 715 689 659 636

Short term debt 34,370 17,000 16,500 14,500

Long term debt 10,194 9,500 8,500 8,500

Total Borrowings 44,564 26,500 25,000 23,000

Deferred tax (net) 4,172 4,172 4,172 4,172

Sources of funds 70,016 54,855 56,442 57,657

Gross block 53,682 55,062 56,499 57,952

Accumulated depreciation 29,329 31,924 34,658 37,426

Tangible assets 24,353 23,138 21,841 20,527

Intangible assets 2,219 2,219 2,219 2,219

CWIP (incl. intangible) 4,274 2,243 2,243 2,243

Total net fixed assets 30,846 27,600 26,303 24,989

Investments 1 - - -

Non current investments 1 - - -Cash and equivalents 1,975 1,683 2,988 3,457

Inventories 6,855 7,824 8,462 8,582

Sundry debtors 35,595 24,027 25,538 27,232

Loans and advances 4,366 4,718 5,105 5,531

Other assets 775 828 828 828

Total current assets (ex cash) 47,591 37,396 39,933 42,174

Trade payable 8,765 10,365 11,323 11,503

Other current liabilities and 1,633 1,461 1,461 1,461

Total current liabilities & 10,398 11,826 12,783 12,963

Net current assets (ex cash) 37,193 25,571 27,150 29,210

Uses of funds 70,016 54,855 56,442 57,657

Book value per share (INR) 49.7 56.8 64.3 72.1

Free cash flow (INR mn)


Net profit 2,441 3 ,847 4 ,033 4,156

Depreciation 2,824 2,595 2,735 2,767

Others 329 768 415 207

Gross cash flow 5,594 7,210 7,183 7,130

Less: Changes in WC (1,815) (11,622) 1,579 2,060


Less: Capex (1,548) (651) 1,438 1,453

Free cash flow 8,958 19,483 4,166 3,617


12/93



Holding Top -10Perc. Holding Perc. Holding

Life Insurance Corp of India 6.71 Govt Pension Fund Global 1.27

Earthstone Holding 3.28 Dimension Fund Advisors LP 1.09

Earthstone Invst & Fin 2.02 UTI Asset Management Co Ltd 0.85

DSP Blackrock Investment Manager 1.88 Reliance Capital Asset Management 0.7

Norges Bank 1.27 IDFC Mutual Fund 0.66

*as per last available data

Insider Trades Reporting Data Acquired / Seller B/S Qty Traded27 Aug 2014 Simon India Limited Sell 830000.0027 Aug 2014 Jyotsna Poddar Buy 830200.00


Bulk Deals Data Acquired / Seller B/S Qty Traded Price

No Data Available


Additional Data Directors Data S.K. Poddar Chairman Shyam S. Bhartia Co-ChairmanAnil Kapoor Managing Director R.N. Bansal Independent DirectorDipankar Basu Independent Director K.N. Memani Independent Director

C.S. Nopany Non Executive Director Radha Singh Independent DirectorMarco Wadia Independent Director

Auditors - S.R. Batliboi & Co.


13/93

Edelweiss Research is also available on www.edelresearch.com,Bloomberg EDEL , Thomson First Call, Reuters and Factset. Edelweiss Securities Limited

Ipca Laboratories’ (Ipca) Q3FY15 adjusted PAT of INR483mn was waybelow our INR1.2bn estimate as revenue remained muted (16% below) andnegative operating leverage played its part. EBITDA margin (@16.4%) wasthe lowest in the past 5 years. We expect recovery from FY16 (HCQSdriven) and forecast 25% EPS CAGR over FY15-17 on a low base of FY15E.Sharpened management focus on USFDA resolution (import alert, Form483s), additional costs (remediation, more quality/regulatory staff,overheads) and uncertainty around USFDA resolution could possibly hurtthis recovery. We maintain Ipca as our least preferred mid-cap stock postour recent downgrade (refer, Ratlam import ban: US plans derailed, onceagain , dated January 27, 2015). Maintain ‘HOLD’ with TP of INR690.

Ratlam facility import alert resolution may take considerable timeIpca expects to approach FDA for reinspection of its Ratlam API facility by March 2015.Although it is difficult to predict USFDA’s next move, we believe the resolution maytake 18-24 months as: (a) FDA has exempted a few critical products (possibly shortageones) and may not be in a hurry to approve this facility; and (b) historically, importalert resolutions have taken close to 2 years. We have not built in any resolution tillFY17 in our estimates. Ipca believes resolution can be achieved faster given that theremediation plan is on since the Form 483 was issued (July 2014). Moreover, thecompany’s confidence has been bolstered by a recent successful inspection of thesame unit by 3 regulators (EMA, WHO, TGA-Australia).

Q3FY15 conference call: Key highlights(a) US shipments of exempted products (HCQS and Propranolol) will begin soon; expectIpca to benefit from HCQS price hikes in the market; (b) Form 483s at Silvassa andIndore facilities have been responded to–no feedback as yet from USFDA; (c) thoughmost of its sales are denominated in USD/ GBP/ EUR (65%/ 20%/ 10%), it has to bearsome of the pressure borne by its partners in struggling EM economies like CIS; (d)FY15 institutional malaria sales guidance lowered to ~INR3.2bn (INR4.0bn earlier); (e)R&D expense at 4.6% of sales for 9mFY15 (INR1.1bn versus INR940mn in 9mFY14).

Outlook and valuations: Multiple challenges; maintain ‘HOLD’We believe the road ahead will be challenging on multiple accounts. With core

investment thesis shaken and rich valuations (13x FY17E), we maintain ‘HOLD/SU’.

RESULT UPDATE

IPCA LABORATORIESBig miss, recovery to take time

EDELWEISS 4D RATINGS

Absolute Rating HOLD

Rating Relative to Sector Underperformer

Risk Rating Relative to Sector High

Sector Relative to Market Overweight

MARKET DATA(R: IPCA.BO, B: IPCA IN)

CMP : INR 615


52-week range (INR) : 907 / 599


M cap (INR bn/USD mn) : 78 / 1,257Avg. Daily Vol.BSE/NSE(‘000) : 227.9


Current Q2FY15 Q1FY15

Promoters * 45.9 45.9 45.9

MF's, FI's & BK’s 11.6 11.6 11.0

FII's 24.2 24.2 25.3

Others 18.3 18.3 17.9* Promoters pledged shares

(% of share in issue): NIL


Stock Nifty

EW PharmaIndex

1 month (2.0) 4.0 4.6

3 months 1.3 9.9 11.9

12 months (8.1) 36.6 48.2

Anshuman Gupta+91 22 6623 [email protected]

Rahul Solanki+91 22 6623 [email protected]

India Equity Research| Pharmaceuticals

February 9, 2015

Financials (Consolidated) (INR mn)

Year to March Q3FY15 3FY14 % change 2FY15 % change FY14 FY15E FY16E

Net revenue 7,407 8,290 (10.7) 7,806 (5.1) 24,572 33,872 39,366

EBITDA 1,211 2,133 (43.2) 1,348 (10.1) 4,868 6,667 8,081

Adj. net profit 483 1,380 (65.0) 678 (28.7) 2,599 3,972 5,209

Adj. dil. EPS (INR) 3.8 10.9 5.4 20.6 31.5 41.3

Dil. P/E (x) 15.3 20.3 15.5

Core EV/EBITDA (x) 10.5 13.1 10.4

ROAE (%) 29.0 19.1 21.3

https://www.edelresearch.com/showreportpdf-28122/IPCA_LABORATORIES_-_COMPANY_UPDATE-JAN-15-EDELhttps://www.edelresearch.com/showreportpdf-28122/IPCA_LABORATORIES_-_COMPANY_UPDATE-JAN-15-EDELhttps://www.edelresearch.com/showreportpdf-28122/IPCA_LABORATORIES_-_COMPANY_UPDATE-JAN-15-EDELhttps://www.edelresearch.com/showreportpdf-28122/IPCA_LABORATORIES_-_COMPANY_UPDATE-JAN-15-EDELhttps://www.edelresearch.com/showreportpdf-28122/IPCA_LABORATORIES_-_COMPANY_UPDATE-JAN-15-EDEL


14/93

Pharmaceuticals


Further call details:• Last week, 3 regulatory agencies--EMEA, WHO Geneva and TGA Australia--inspected

the Ratlam API plant and there were no critical observations (no data integrity as well).Ipca expects to get a clearance soon.

• Clearance from WHO Geneva would imply normalisation of institutional businesssupplies from Q1FY16. Currently, the Global Fund has advised all shipments to betested / routed through Vietnam, which has led to disruptions in the business.

• EU has currently exempted ~23 products from Ipca’s facilities.

• Status of facilities :

Ratlam API (US Import Alert): Ipca has been taking corrective steps all along sincethe receipt of Form 483 and plans to invite the USFDA by Mar 2015 for areinspection of the facility. Ipca has already sent updates as per its remediationplan to the USFDA since Form 483.

Indore SEZ and Silvassa facility Form 483s: Both Form 483s have been respondedto in the stipulated time. No response has been received as yet from USFDA.

Athal facility (for EU): MHRA is due for inspection anytime, but difficult to predicttimeline.

• Ipca believes only 2 out of the 4 exempted products (from import ban) are notcommercially viable and it will begin manufacturing only for those 2- HCQS andPropanolol HCl.

• US business could get a boost with reinitiation of supplies for HCQS and Propanolol HCl.Ipca currently has 3 months’ inventory for HCQS, which was manufactured prior to thevoluntary halting of supplies.

• HCQS (estimated market USD400-500mn): Interesting product as prices have beenhiked by almost 20x after Ipca’s voluntary stoppage of manufacturing. The companyused to hold 80%+ share (still holds 40%) and expects to gain share on relaunch, butthat will be at the expense of prices.

• Total products under development stand at 75 ANDAs. Of which, 42 have been filedwith 24 awaiting approval.

• CIS market declined drastically from INR500mn to INR200mn as Ipca stopped shippingproducts given the macro and currency situation. The good part is that most productsare out of price control and the billing is in USD (no local currency). Distributors havehiked prices but given the situation Ipca will need to share the brunt of currency hitwith distributors.

• The management believes they may be close to securing an alternate supplier for APIsafter evaluating several (>10) suppliers

• Clopidogrel 505b2’s clinical studies will take another 3-4 months to finish

• IPCA is incurring some drag on margins as Alpa and Tarapur facilities (~INR40mn) arenot contributing to revenues yet.


15/93

Ipca Laboratories


Table 1: Actual versus estimate (INR mn)


Table 2: Revenue mix by segment (INR mn)


Year to March Actual

Q3FY15

Y-o-YGrowth

(%)Estimates

Q3FY15

Y-o-YGrowth

(%)

Deviationfrom Actual

(%) CommentsNet Revenue 7,407 (10.7) 8,800 6.2 (15.8) Net Revenue (excl other op. inc.) 7,341 (9.9) 8,740 7.2 (16.0)

Raw material costs 2,726 (1.9) 3,234 16.3 (15.7) Gross profit 4,615 5,506 (9.1) (16.2) Gross margin(%) 62.9 63.0 Employee costs 1,344 8.1 1,311 5.5 2.5

Other expenses 2,125 (0.3) 2,229 4.5 (4.7) Remedial procedures have led tounder-utilization of facilities

Total operating expenses 3,469 2.8 3,540 10.0 (2.0) EBITDA 1,211 (43.2) 2,027 (5.0) (40.2) EBITDA margin (%) 16.4 23.0 (667.2) Hit in margin mainly attributable to

under-utilizationEBITDA margin (ex. op inc) (%) 15.6 22.5

Net finance expense (income) 59 8.3 60 10.3 (1.8) Depreciation 420 64.2 400 56.4 5.0 D&A slightly higher than estimatesdue to new facilities (Alpa Labs,Tarapur)

Other income 64 18.8 60 10.7 7.3 PBT 797 (57.5) 1,627 (13.4) (51.0) Income tax expense 270 (46.2) 392 (22.0) (31.0) PAT 527 (61.7) 1,235 (10.2) (57.3) Adj. PAT 483 (65.0) 1,235 (10.5) (60.9) Adjusted diluted EPS (INR) 3.8 (65.0) 9.8 (10.5) (60.9)

Q3FY15 Q3FY14 % chg Q2FY15 % chg CommentsFormulations 5,838 6,281 (7.1) 6,341 (7.9)Domestic 2,787 2,463 13.1 3,279 (15.0)

Export 3,051 3,818 (20.1) 3,062 (0.4)Institutional anti-malaria 820 1,360 (39.7) 353 132.4 Shipments affected due to Ratlam

plant issuesEx-anti-malaria exports 2,231 2,459 (9.3) 2,709 (17.7) - Branded generic 740 1,001 (26.1) 951 (22.2) EM currency has led to some pain

- Generic 1,491 1,455 2.4 2,709 (45.0)

API 1,504 1,870 (19.6) 1,407 6.8Domestic 370 419 (11.6) 445 (16.9)International 1,134 1,451 (21.9) 962 17.8Net sales (excl Other Oper Inc) 7,341 8,152 (9.9) 7,749 (5.3)


16/93

Pharmaceuticals


Chart 1: Growth affected by a host of issues

Chart 2: Topline miss affects Margin

Chart 3: Domestic market growth

Source: AIOCD, Company, Edelweiss research

0.0

7.0

14.0

21.0

28.0

35.0

4,489

5,623

6,758

7,892

9,027

10,161

Q 3 F Y 1 3

Q 4 F Y 1 3

Q 1 F Y 1 4

Q 2 F Y 1 4

Q 3 F Y 1 4

Q 4 F Y 1 4

Q 1 F Y 1 5

Q 2 F Y 1 5

Q 3 F Y 1 5

G r o w t h

( % )

( I N R

m n

)

Net Revenue Revenue growth

6.0

10.6

15.2

19.8

24.4

29.0

534

949

1,365

1,780

2,196

2,611

Q 3 F Y 1 3

Q 4 F Y 1 3

Q 1 F Y 1 4

Q 2 F Y 1 4

Q 3 F Y 1 4

Q 4 F Y 1 4

Q 1 F Y 1 5

Q 2 F Y 1 5

Q 3 F Y 1 5

( % )

( I N R m n

)

EBITDA Adj. PAT EBITDA margin PAT margin

(2.0)

4.8

11.6

18.4

25.2

32.0

J a n - 1

4

F e b

- 1 4

M a r - 1

4

A p r - 1 4

M a y - 1

4

J u n - 1

4

J u l - 1 4

A u g - 1 4

S e p - 1

4

O c t - 1

4

N o v - 1 4

D e c - 1 4

( % )

Secondary growth

Company growth Industry growth

4.0

8.2

12.4

16.6

20.8

25.0

1,181

1,608

2,035

2,461

2,888

3,315

Q 3 F Y 1 3

Q 4 F Y 1 3

Q 1 F Y 1 4

Q 2 F Y 1 4

Q 3 F Y 1 4

Q 4 F Y 1 4

Q 1 F Y 1 5

Q 2 F Y 1 5

Q 3 F Y 1 5

G r o w t h

( % )

( I N R m n

)

Primary growth

India YoY growth


17/93


18/93

Pharmaceuticals


Chart 7: Branded generics markets affected by currency movements


0.0

16.8

33.6

50.4

67.2

84.0

363

531

699

866

1,034

1,202

Q 3 F Y 1 3

Q 4 F Y 1 3

Q 1 F Y 1 4

Q 2 F Y 1 4

Q 3 F Y 1 4

Q 4 F Y 1 4

Q 1 F Y 1 5

Q 2 F Y 1 5

Q 3 F Y 1 5

G r o w t h

( % )

( I N R

m n

)

Branded generics YoY growth


19/93

Ipca Laboratories


Financial snapshot (INR mn)Year to March Q3FY15 Q3FY14 % change Q2FY15 % change YTD15 FY15E FY16E

Net revenues 7,407 8,290 (10.7) 7,806 (5.1) 24,572 33,872 39,366Net Revenue (excl other operating income) 7,341 8,152 (9.9) 7,749 (5.3) 24,372 33,016 38,404Raw material costs 2,726 2,781 (1.9) 2,710 0.6 8,862 12,051 14,209Gross profit 4,680 5,509 (15.0) 5,096 (8.2) 15,710 21,821 25,156

Employee expenses 1,344 1,243 8.1 1,375 (2.3) 4,108 5,478 6,026Other expenses 2,125 2,132 (0.3) 2,373 (10.5) 6,734 9,676 11,049Total expenditure 3,469 3,376 2.8 3,749 (7.5) 10,842 15,154 17,075EBITDA 1,211 2,133 (43.2) 1,348 (10.1) 4,868 6,667 8,081Operating margin (%) 16.4 25.7 17.3 19.8 19.7 20.5EBITDA margin (excl other operating income) (%) 15.6 24.5 16.7 19.3 17.6 18.5Depreciation 420 256 64.2 396 6.0 1,195 1,286 1,480Other income 64 54 18.8 87 (26.1) 214 100 100Net finance expense 59 54 8.3 57 2.6 174 185 150Profit before tax 797 1,877 (57.5) 981 (18.8) 3,714 5,296 6,552Tax 270 502 (46.2) 275 (1.6) 1,048 1,324 1,343Core profit 527 1,375 (61.7) 707 (25.4) 2,666 3,972 5,209

Extraordinary items (112) 16 NA (94) NA (183) - -Net profit 415 1,391 (70.1) 613 (32.3) 2,483 3,972 5,209Adjusted net profit 483 1,380 (65.0) 678 (28.7) 2,599 3,972 5,209Adj. EPS (INR) 3.8 10.9 5.4 20.6 31.5 41.3

As % of net revenuesCOGS 36.8 33.5 34.7 36.1 35.6 36.1Gross profit 63.2 66.5 65.3 63.9 64.4 63.9Employee cost 18.1 15.0 17.6 16.7 16.2 15.3Other expenses 28.7 25.7 30.4 27.4 28.6 28.1Total expenses 46.8 40.7 48.0 44.1 44.7 43.4EBITDA 16.4 25.7 17.3 19.8 19.7 20.5Reported net profit 5.6 16.8 7.9 10.1 11.7 13.2Tax rate 33.9 26.7 28.0 28.2 25.0 20.5


20/93

Pharmaceuticals


Company DescriptionFrom a company which was known for anti-malarials and an API manufacturer in the past,its business has evolved into a full-fledged global Pharma company with multiple segmentsspanning multiple countries. IPCA is a vertically integrated company with a diverse presenceacross geographies including India, Africa, Asia, Australia, Europe and the US. It boasts ofhigh level of vertical integration that has enabled leadership in various segments and

delivered good profitability at the same time. India business is its largest business where ithas consistently beaten market growth over the years. Exports formulations account foralmost 50% of its revenues with branded generics business accounting for 1/4th of exports.While branded generics continues to register steady growth, the growth in exports will bedriven by the generics business (US, EU and Institutional malaria).

Investment ThemeWe believe a focused management and superior execution capabilities will continue toenhance shareholder returns as in the recent past. Ipca has a strong execution track recordand has delivered sales/PAT CAGR of ~20%/28% in the past five years along with

maintaining healthy balance sheet (low net D/E). We believe that bounce back in India,steady Institutional malaria business and other emerging markets should lead to steadygrowth. However, its decision to stop supplies to the US will pull down near term growthand profitability. We forecast 5% earning CAGR (FY14-17E) assuming limited ramp up in USand higher costs (related to remediation). While the overhang on slower/delay in ramp up inUS will limit stock price movement, early resolution will expedite rerating. We have a “HOLD”rating on the stock with a TP of INR690 based on 14xFY17E.

Key Risks• Escalation of form 483 to its Indore/ Silvassa plants to any adverse action

• Currency appreciation to hurt earnings: Currency realisations have high beta on thecompany’s margins, as ~60% of its revenue comes from exports.

• Potential funding risks to Institutional anti-malarial business


21/93


Ipca Laboratories

Financial StatementsIncome statement (INR mn)


Gross revenues 32,315 33,397 38,847 45,872

Excise duties 373 381 443 524

Net revenue 31,942 33,016 38,404 45,349

Other Operating Income 823 856 962 1,079

Income from operations 32,765 33,872 39,366 46,427

Materials costs 11,366 12,051 14,209 16,326

Employee costs 4,980 5,478 6,026 7,050

R&D Cost 1,265 1,863 2,165 2,786

Total SG&A expenses 7,102 7,813 8,884 10,489

Total operating expenses 24,712 27,205 31,284 36,650

EBITDA 8,053 6,667 8,081 9,777

Core EBITDA 8,053 6,667 8,081 9,777

Depreciation & Amortization 1,031 1,286 1,480 1,569

EBIT 7,022 5,380 6,602 8,208

Other income (500) 100 100 100

Interest expenses 269 185 150 61Profit before tax 6,253 5,296 6,552 8,247

Provision for tax 1,524 1,324 1,343 2,062

Adjusted PAT 5,276 3,972 5,209 6,186

Basic EPS (INR) 37.4 31.5 41.3 49.0

Shares outstanding (mn) 126 126 126 126

Diluted EPS (INR) 41.8 31.5 41.3 49.0

Core EPS 41.8 31.5 41.3 49.0

CEPS (INR) 45.6 41.7 53.0 61.4

Dividend per share (INR) 6.4 5.6 7.4 8.8

Dividend payout (%) 15.3 17.9 17.9 17.9

Common size metrics


Operating expenses 75.4 80.3 79.5 78.9

Materials costs 34.7 35.6 36.1 35.2

Employee expenses 15.2 16.2 15.3 15.2

SG&A expenses 21.7 23.1 22.6 22.6

R & D cost 3.9 5.5 5.5 6.0

Depreciation 3.1 3.8 3.8 3.4

Interest expenditure 0.8 0.5 0.4 0.1

EBITDA margins 24.6 19.7 20.5 21.1

Net profit margins 14.8 12.0 13.6 13.6

Growth ratios (%)

Year to March FY14 FY15E FY16E FY17ERevenues 16.8 3.4 16.2 17.9

EBITDA 29.2 (17.2) 21.2 21.0

PBT 20.9 (15.3) 23.7 25.9

Net profit 42.8 (24.7) 31.1 18.8

EPS 42.8 (24.7) 31.1 18.8

Key Assumptions


Macro

GDP(Y-o-Y %) 4.8 5.4 6.3 7.3

Inf la tion (Avg) 6 .2 6.8 5.5 6.5

Repo ra te (exi t ra te) 8 .0 7.8 6.8 6.3

USD/INR (Avg) 60.5 60.0 60.0 60.0

Sector

India pharma market growth (Y-o-Y) % 10.0 15.0 15.0 15.0

Company

India sales (INR mn) 9,694 11,439 13,384 15,659

% change 10.4 18.0 17.0 17.0

Cardiovascular and Diabetics 2,312 2,651 3,060 3,580

% change 5 .3 14.7 15.4 17.0

Pain management 3,485 4,282 5,179 6,060

% change 24.0 22.9 21.0 17.0

Anti Malaria 1,381 1,556 1,725 2,018

% change (7.5) 12.6 10.9 17.0 Anti- infect ives 555 608 656 767

% change 5.3 9.5 7.9 17.0

Institutional anti-malaria (INR mn) 4,370 3,500 4,000 4,750

% change 11.6 (19.9) 14.3 18.8

AL 3,970 - - -

AS-AQ 400 - - -

US generics (USD mn) 38 13 15 23

Growth (YoY)% 6.1 (65.7) 15.4 50.0

No of launches 8 13 20 30

Branded generics exports (INR mn) 3,631 5,026 5,918 7,129

% change 26.0 38.4 17.7 20.5

EBITDA margins (%) 24.6 19.7 20.5 21.1

Domestic formulations 24.0 26.0 26.0 26.0

Institutional malaria 26.5 26.5 26.5 26.5

Branded generics exports 27.5 27.7 27.7 27.7

Domestic- API 8 8 8 8

API exports 18.5 18.5 18.5 18.5

US 28.0 30.0 30.0 30.0

EU 14.0 14.0 14.0 14.0

R&D (% of sales) 3.9 5.5 5.5 6.0

ANDA fil ings (per annum) 12 15 16 17

USD/INR (Avg) 60.5 60.0 60.0 60.0

Capex (USD mn) 62 83 25 25

Net debt to equity ratio(x) 0.3 0.2 0.2 0.1


22/93


Pharmaceuticals

Peer comparison valuation

Market cap Core EV/EBITDA (X) PE based on core EPS ROAE (%)

Name (USD mn) FY15E FY16E FY15E FY16E FY15E FY16EIpca Laboratories 1,257 12.6 10.0 19.5 14.9 18.8 21.1

Cadila Healthcare 4,865 17.9 13.0 25.9 18.4 29.5 31.7

Glenmark Pharmaceuticals 3,253 14.2 12.0 22.2 18.2 25.7 24.6

Torrent Pharmaceuticals 2,957 17.6 12.4 29.0 19.9 33.8 32.6

Median - 15.9 12.2 24.0 18.3 27.6 28.2

AVERAGE - 15.6 11.9 24.1 17.9 27.0 27.5


Cash flow metrics



Investing cash flow (3,770) (5,000) (1,500) (1,500)

Financing cash flow (7,012) 1,307 (4,594) (1,299)

Net cash flow (3,640) (368) (505) 823

Capex (3,774) (5,000) (1,500) (1,500)

Dividends paid (947) (834) (1,094) (1,299)



ROAE (%) 27.0 18.8 21.1 21.2

ROACE (%) 29.0 19.1 21.3 24.3

Inventory day 133 125 135 135

Debtors days 54 55 55 55



Current ratio (x) 2.5 2.9 2.5 3.4

Debt/EBITDA (x) 0.5 1.0 0.4 0.3Debt/Equity (x) 0.2 0.3 0.1 0.1

Adjusted debt/equity 0.2 0.3 0.1 0.1

Operating ratios


Total asset turnover 1.3 1.2 1.2 1.3

Fixed asset turnover 2.4 2.0 2.1 2.4

Equity turnover 1.8 1.6 1.5 1.5



Diluted EPS (INR) 41.8 31.5 41.3 49.0

Y-o-Y growth (%) 42.8 (24.7) 31.1 18.8

CEPS (INR) 45.6 41.7 53.0 61.4

Diluted PE (x) 14.7 19.5 14.9 12.5

Price/BV (x) 4.0 3.4 2.9 2.4

PE based on core EPS 14.7 19.5 14.9 12.5

EV/Sales (x) 2.6 2.6 2.1 1.8

EV/EBITDA (x) 10.1 12.6 10.0 8.3

Core EV/EBITDA (x) 10.1 12.6 10.0 8.3

Dividend yield (%) 1.0 0.9 1.2 1.4


As on 31st March FY14 FY15E FY16E FY17E

Equity capital 252 252 252 252

Reserves & surplus 19,344 22,482 26,597 31,483

Shareholders’ funds 19,597 22,734 26,849 31,736

Short term debt 1,439 1,500 1,000 1,000

Long term debt 2,940 5,020 2,020 2,020

Total Borrowings 4,379 6,520 3,020 3,020

Deferred tax liability (net) 1,484 1,484 1,484 1,484

Sources of funds 25,460 30,738 31,353 36,240

Tangible assets 13,354 17,068 17,088 17,019

Intangible a ssets 344 344 344 344

CWIP (incl. intangible) 1,486 1,486 1,486 1,486

Total net fixed assets 15,185 18,898 18,919 18,850

Investments 90 90 90 90

Non current investments 90 90 90 90

Cash and equivalents 764 157 (643) (192)

Inventories 8,476 9,317 11,571 13,556

Sundry debtors 4,495 5,104 5,932 6,996Loans and advances 1,386 1,554 1,932 2,481

Other assets 1,708 1,708 1,708 1,708

Total current assets (ex cash) 16,065 17,683 21,143 24,741

Trade payable 3,413 2,860 4,926 4,020

Other current liabilities and 3,230 3,230 3,230 3,230

Total current liabilities & 6,643 6,090 8,156 7,249

Net current assets (ex cash) 9,421 11,593 12,988 17,492

Uses of funds 25,460 30,738 31,353 36,240

Book value per share (INR) 155.3 180.1 212.8 251.5



Net profit 4,726 3 ,972 5 ,209 6,186

Depreciation 1,031 1,286 1,480 1,569

Others 171 238 295 371

Gross cash flow 5,928 5,497 6,983 8,126

Less: Changes in WC (1,215) 2,171 1,394 4,504


Less: Capex 3,774 5,000 1,500 1,500

Free cash flow 3,369 (1,674) 4,089 2,122


23/93


Ipca Laboratories

Insider Trades Reporting Data Acquired / Seller B/S Qty Traded

No Data Available

*in last one year


No Data Available

*in last one year

Holding – Top10 Perc. Holding Perc. Holding

Kaygee Investments Pvt Ltd 21.41 Exon Laboratories Pvt Ltd 6.56Chandurkar Investments 5.53 Paschim Chemicals Pvt Ltd 3.99HDFC Asset Management 3.53 Lavender Investments 2.64Dendana Investments 2.24 Norges Bank Investment Mgmt 2.23Govt Pension Fund Global 2.23 Godha Premchand 2.13

*in last one year

Additional Data Directors Data Premchand Godha Chairman & Managing Director A K Jain Joint Managing DirectorPranay Godha Executive Director Prashant Godha Executive DirectorBabulal Jain Director Anand T Kusre DirectorDev Parkash Yadava Director Dr Ramakanta Panda Director

Dr Manisha Premnath Director

Auditors - Natvarlal Vepari & Co*as per last annual report


24/93

Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL , Thomson First Call, Reuters and Factset. Edelweiss Securities Limited

I n d i M i d c a p s

Jet Airways (JAL) reported Q3FY15 net profit of INR631mn led by INR698mn one ‐off gain from ‘lessors towards maintenance’. Operational performance improved as standalone gross margin jumped 25% YoY to INR28.5bn. The improvement was due to 11% YoY revenue surge and 11% YoY fuel cost dip. Average fuel rate for it was lower ~10% versus ~21% drop in ATF prices due to lag of a month and most of the benefits will accrue in Q4FY15. Other expense (includes MRO expenses) rose 18% YoY and expected to remain high as JAL tries to standardise its maintenance contracts. Maintain ‘BUY’ with TP of INR590.

Passenger surge, fuel prices key growth levers

JAL’s passenger traffic surged 13.8% YoY (14.7% QoQ), which led to 12% jump in passenger revenue. However, the company sharpened focus on domestic business in Q3FY15 to take advantage of seasonality in domestic traffic and hike market share 210bps to 22.3%. Growth in passenger traffic, increase in outbound traffic from India, preference of JAL over other full cost carriers, lower fuel prices and measured pass on of fuel benefits to customers will further improve profitability.

Rise in PLF propels RASK The company reported passenger load factor (PLF) of 82.0% versus quarterly average of 78.7% over past 6 years as passenger growth had averaged 9% (over past 6 quarters), significantly higher than ASKM growth of 7.9% (over same period). Increased PLF led to 2% YoY increase in revenue/ASKM. We expect JAL to maintain high PLF as it focuses on route rationalisation and network efficiency.

Outlook and valuations: Play on strategy; maintain ‘BUY’ We expect FY16 to be better due to pick up in traffic led by overall improvement in macros, outbound traffic uptick and progression of JAL’s 3‐year turnaround plan. Over the long term, higher yields, asset utilisation and lower costs should boost profitability. We value JAL at 7.0x EV/EBITDAR by capitalising lease expenses at 7x. We maintain ‘BUY’ with a target price of INR590.

RESULT UPDATE

JET AIRWAYS INDIA Turnaround plan in progress

EDELWEISS RATINGS

Absolute Rating BUY Investment Characteristics Growth

MARKET DATA (R: JET.BO, B: JETIN IN)

CMP : INR 445


52‐week range (INR) : 544 / 203


M cap (INR bn/USD mn) : 51 / 813

Avg. Daily Vol. BSE/NSE (‘000) : 2,250.0


Current Q2FY15 Q1FY15

Promoters * 51.0 51.0 51.0

MF's, FI's & BKs 5.8 5.8 4.7

FII's 3.3 3.3 3.2

Others 39.9 39.9 41.1 * Promoters pledged shares

(% of share in issue) : NIL


BSE Midcap

Index Stock

Stock over

Index

1 month 6.8 8.5 1.7

3 months 15.2 93.3 78.1

12 months 64.7 63.5 (1.1)

Niraj Mansingka, CFA +91 22 6623 3315 [email protected]

India Equity Research| Aviation

February 9, 2015

Financials (Standalone) (INR mn)Year to M arc h Q 3FY 15 Q 3FY 14 Yo Y Q2FY15 QoQ FY14 FY15E FY16ERevenue 50,510 45,359 11.4 47,723 5.8 173 ,019 193,851 201,721

EBITDAR 7,202 4,270 68.7 3,967 81.5 1 ,9 15 2 6,5 25 3 7,2 06

Net profit 631 (2,679) NA 69 8 (9.6) (2 9, 45 9) (1 ,9 10 ) 6 ,8 35Diluted EPS (INR) 5.6 (23.6) NA 6.1 (9.6) (322.9) 19.6 60.2Diluted P/E (x) (1 .4) 23.5 7.7EV/EBITDAR (x) 67.4 5.1 3.3

ROACE (%) (24.7) 1.0 15.0


25/93

Aviation


Chart 1: Domestic ASKM – Passenger traffic growth leads to all time high PLF

Chart 2: International ASKMs ‐ Focus on adding capacity; PLF drops marginally

Chart 3: Jetlite ‐ Capacity reduction continues; but PLF in line with domestic growth


60.0

65.0

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Q 1 F Y 1 1

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( % )

( m n )

Jet Lite ASKM Jet Lite PLF (%)


26/93

Jet Airways (India) Ltd


Chart 4: Jet increases domestic capacity marginally to take advantage of seasonality


Chart 5: International PLF drops while domestic PLF increases


Table 1: JAL ‐ Target Price at INR590


0

1,600

3,200

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8,000

Q 1 F Y 1 0

Q 2 F Y 1 0

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Q 2 F Y 1 5

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( N o s . )

Intl. ASKM Domestic ASKM Jet Lite ASKM

50.0

60.0

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Q 1 F Y 1 0

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Q 2 F Y 1 5

Q 3 F Y 1 5

( % )

Intl. PLF (%) Domestic PLF (%) Jet Lite PLF (%)

INR mn INR/shareStandalone FY17e EBITDAR 40,819 359Jet Lite EBITDAR 1,277 11Consol EBITDAR 42,096 371EV/EBITDAR (x) 7.0EV 294,674 2,594

Aircraft lease rentals capitalised at 7x 150,957 1,329FY17E Net debt 76,690 675Equity value 67,028 590Market Cap / CMP 52,482 462% upside 27.7 27.7


27/93

Aviation


Financial snapshot (INR mn) Year to March Q3FY15 Q3FY14 % change Q2FY15 % change YTD FY15 FY15E FY16E

Total operating income 50,510 45,359 11.4 47,723 5.8 98,233 193,851 201,721 Aircraft Fuel Expenses 17,011 19,148 (11.2) 18,460 (7.8) 35,470 64,738 53,572 Employee expenses 5,281 4,837 9.2 5,039 4.8 10,321 21,513 24,740 Selling and Distribution Expenses 5,021 3,507 43.2 4,966 1.1 9,986 19,200 21,181

Other expenses 15,996 13,596 17.6 15,291 4.6 31,287 61,874 65,021 EBITDAR 7,202 4,270 68.7 3,967 81.5 11,169 26,525 37,206 Aircraft Lease Rentals 4,913 4,237 4,698 9,611 18,016 17,356 Depreciation 1,923 2,296 (16.2) 1,933 (0.5) 3,857 7,740 8,233 EBIT 365 (2,262) (116.2) (2,664) (113.7) (2,298) 769 11,618 Other income 1,832 1,675 9.4 2,435 (24.8) 4,267 5,756 3,852 Interest 2,264 2,303 (1.7) 2,123 6.7 4,387 8,435 8,635 Profit before tax 631 (2,679) (123.6) 698 (9.6) 1,329 2,229 6,835 Total Tax Core profit 631 (2,679) (123.6) 698 (9.6) 1,329 2,229 6,835 Diluted EPS (INR) 5.6 (23.6) (123.6) 6.1 (9.6) 11.7 19.6 60.2

As % of net revenues Aircraft fuel expenses 34 42 39 36 33 27 Employee cost 10.5 10.7 10.6 10.5 11.1 12.3 Selling and distribution expenses 9.9 7.7 10.4 10.2 9.9 10.5 Other operating expenses 31.7 30.0 32.0 31.8 31.9 32.2 EBITDAR 14.3 9.4 8.3 11.4 13.7 18.4 Depreciation 3.8 5.1 4.1 9.8 4.0 4.1 Aircraft lease rentals 9.7 9.3 9.8 3.9 9.3 8.6 Interest expenditure 4.5 5.1 4.4 4.3 4.4 4.3 Reported net profit 1.2 (5.9) 1.5 1.4 1.1 3.4


28/93



Company Description Jet Airways (JAL) is one of India’s largest private sector airlines with market share of ~24% in domestic market. JAL was incorporated as an air taxi operator in April 1992. It began its commercial airline operations in May 1993 and international operations in March 2004. It acquired Sahara Airlines (rebranded as Jet Lite, JLL) in April 2007. JAL in May 2009 introduced Jet Airways Konnect (JAK), an all economy service to serve routes where the

traffic is predominately price sensitive and demand for high service oriented product is limited.

JAL received an investment of INR 20,580mn from Etihad Airways in 2014 for 24% equity stake. Etihad Airways invested an additional amount of INR 8,590mn for 50.1% equity investment in JetPrivilege, JAL’s Frequent Flyer Program. Partnership with Etihad will enable JAL to have combined network of more than 130 routes and would bring additional feeder traffic to Jet.

JAL as of FY 14 has a fleet of 101 aircrafts of which 8 aircrafts are subleased to Turkish Airlines (3) and Etihad Airways (5). As of FY14 JAL flew to 56 domestic destinations (includes flights operated by JLL) and 20 international destinations. In FY14, international operations contributed ~53% to the total revenues and more than 51% to the operating profit of the company at consolidated level.

Investment Theme Low oil prices: Low crude oil prices would improve margins due to low Aviation Turbine Fuel (ATF) prices. Fuel expenses accounted for ~43% of total expenses in FY14.

Demand ‐ supply mismatch: Demand growth is expected to outpace the supply growth leading to better yields. Domestic traffic in India is expected to increase at CAGR of 11%, while international passenger traffic is expected to increase at CAGR of 7.5% over the next decade. The growth of supply is expected to be lower as currently there is oversupply in

market.

Aircrafts on operating lease: JAL sells some of its own aircrafts and takes back those aircrafts on and operating lease basis after 5‐7 years of their operations. This not only releases equity from sale of aircraft but also adds to bottom ‐line as depreciation over the period of operations is higher than drop in realizable value of aircraft.

Key Risks Strong capacity addition: Capacity addition by other airlines especially low cost carrier could pose a risk for increase in market share. Currently there is over capacity in the market however growth in capacity addition is expected to lag demand growth.

Passenger traffic growth: Growth in passenger traffic is expected to be high single digit/low double digit for international/ domestic traffic over next decade. Any slowdown in growth of traffic will impact profitability.

Leverage: JAL has negative reserves of INR 42,885mn as of FY14. Though JAL’s leverage has improved post investment from Etihad and borrowings have decreased in FY14, its forward sales have increased 33% leading to increase in current liabilities.


29/93

Aviation


Financial Statements

Income statement (INR mn)

Year to March FY14 FY15E FY16E FY17ENet revenue 190,358 207,542 212,541 224,210Aircraft fuel expenses 81,253 71,318 58,610 60,514Employees Remuneration and 20,778 23,119 26,426 30,221Selling and Distribution Expenses 15,304 20,182 21,938 23,221Operating expenses 72,069 65,653 67,185 68,157Total operating expenses 189,404 180,272 174,160 182,114EBITDA 954 27,271 38,381 42,096Aircraft Lease Rentals 19,549 20,114 19,505 21,565Depreciation and amortisa tion 8,778 7,770 8,259 8,601EBIT (27,373) (613) 10,617 11,930Other income 4,095 5,855 3,971 1,813Interest expenses 10,836 8,951 9,148 7,852Profit before tax (41,288) 312 5,440 5,892Provision for tax (1) ‐ ‐ ‐

Extraordinary income/ (loss) (7,174) 4,022 ‐ ‐Profit After Tax (41,287) 312 5,440 5,892Extraordinaries (7,174) 4,022 ‐ ‐

Adjusted PAT (34,113) (3,709) 5,440 5,892Shares outstanding (mn) 114 114 114 114Diluted EPS (INR) (300.3) (32.7) 47.9 51.9CEPS (INR) (223.0) 35.7 120.6 127.6

Common size metrics

Year to March FY14 FY15E FY16E FY17EAircraft fuel expenses 43 34 28 27Non ‐fuel expenses 56.8 52.5 54.4 54.2EBITDAR margins 0.5 13.1 18.1 18.8EBIT margins (14.4) (0.3) 5.0 5.3Net profit margins (17.9) (1.8) 2.6 2.6

Growth ratios (%)

Year to March FY14 FY15E FY16E FY17ERevenues 1.0 9.0 2.4 5.5EBITDAR Growth (96) 2,757 41 10Net profit ‐ ‐ 1,641.5 8.3EPS ‐ ‐ ‐ 8.3

Key Assumptions

Year to March FY14 FY15E FY16E FY17EMacro

GDP(Y‐o‐Y %) 4.7 5.4 6.3 7.3

Inflation (Avg) 9.5 6.8 5.5 5.5 Repo rate (exit rate) 8.0 7.8 6.8 6.3 USD/INR (Avg) 60.5 61.0 62.0 62.0Company

Domestic

ASKMs (mn) 38,064 41,558 45,298 46,204 RPKMs (mn) 29,747 33,820 37,874 39,889 PLF (%) 78 81 84 86 Fuel rate (INR/lt) 59.3 50.8 42.4 40.1 SG&A expenses as % of revenues 8.4 9.9 10.5 10.5 Other operating expenses (INR/ASKM) 1.7 1.5 1.4 1.4 Financial assumptions

Employee expense

(%yoy

inc)

23.0

13.3

15.0 15.0 Other income as % of Cash + Investments 41.5 127.1 858.8 40.0

Forward tickets % revenues 14.8 14.0 14.0 14.0 Debtor days 26 26 26 26 Inventory days 17 18 18 18 Payable days 103 103 103 105 Interest Cost (% of Debt) 9.2 8.4 9.2 8.0 Depreciation as % of gross block 5.5 4.8 5.1 5.2


30/93



Cash flow metrics

Year to March FY14 FY15E FY16E FY17EOperating cash flow (2,523) (2 ,522) 17,259 23,285Investing cash flow 277 3,855 1,671 (587)Financing cash flow 1,460 (14,217) (14,648) (13,352)Net cash flow (785) (12,884) 4,283 9,347Capex 2,670 (2,000) (2,300) (2,400)


Year to March FY14 FY15E FY16E FY17EROACE (%) (29.1) 8.5 24.7 23.2Inventory day 31 38 48 18Debtors days 25 24 25 25Payable days 192 205 231 82Cash conversion cycle (days) (136) (143) (158) (39)Net Debt/Equity (2.1) (2.3) (2.4) (2.3)

Operating ratios

Year to March FY14 FY15E FY16E FY17ETotal asset turnover 2.4 3.4 3.6 3.8Fixed asset turnover 1.6 2.0 2.1 2.4Equity turnover (6.3) (5.0) (5.5) (6.8)


Year to March FY14 FY15E FY16E FY17EDiluted EPS (INR) (300.3) (32.7) 47.9 51.9Y ‐o‐Y growth (%) ‐ ‐ ‐ 8.3CEPS (INR) (223.0) 35.7 120.6 127.6EV/Sales (x) 0.8 0.7 0.7 0.5EV/EBITDA (x) 98.2 3.7 2.4 1.8


As on 31st March FY14 FY15E FY16E FY17EEquity capital 1,136 1,136 1,136 1,136Reserves & surplus (42,885) (42,572) (37,132) (31,240)Shareholders’ funds (41,749) (41,436) (35,996) (30,104)Short term debt 40,305 35,500 30,000 24,500Long term debt 65,461 65,000 65,000 65,000Total Borrowings 105,765 100,500 95,000 89,500Sources of funds 64,017 59,064 59,004 59,396Total net fixed assets 108,170 102,401 96,442 90,241Non current investments 6,657 6,657 6,657 6,657Cash and equivalents 12,065 (819) 3,463 12,810Inventories 8,594 10,235 10,481 11,057Sundry debtors 12,872 14,371 14,814 15,695Loans and advances 22,743 24,590 25,208 26,574Total current assets (ex cash) 44,208 49,196 50,503 53,326Trade payable 52,283 50,260 48,691 51,734Other current liabilities and 54,801 48,111 49,370 51,904

Total current liabilities & 107,084 98,371 98,062 103,638Net current assets (ex cash) (62,876) (49,175) (47,559) (50,313)Uses of funds 64,017 59,064 59,004 59,396Book value per share (INR) (367.5) (364.8) (316.9) (265.0)


Year to March FY14 FY15E FY16E FY17ENet profit (41,287) 312 5,440 5,892Depreciation 19,549 20,114 19,505 21,565Others (3,762) (9,248) (6,070) (6,926)Gross cash flow (25,499) 11,178 18,876 20,531Less: Changes in WC (22,977) 13,701 1,616 (2,754)Operating cash flow (2,523) (2,522) 17,259 23,285Less: Capex (2,670) 2,000 2,300 2,400Free cash flow 147 (4,522) 14,959 20,885


31/93

Aviation


Insider Trades Reporting Data Acquired / Seller B/S Qty Traded No Data Available



No Data Available


Holding – Top10 Perc. Holding Perc. Holding

Goyal naresh k 51 Etihad airways pjsc 24Reliance capital tru 2.34 Life insurance corp 2.07Parvest equity india 1.41 Tata asset managemen 1.4Birla sun life asset 1.29 Bnp paribas asset ma 0.99Sbi funds management 0.67 Prudential icici ass 0.36


Additional Data Directors Data Naresh Goyal Chairman, Non ‐executive Promoter Director Javed Akhtar Non ‐executive Independent DirectorI M Kadri Non ‐executive Independent Director Aman Mehta Non ‐executive Independent DirectorGaurang Shetty Whole ‐time Director and Manager James Hogan Director

James Rigney Director

Auditors ‐ Deloitte Haskins & Sells, Chaturvedi & Shah *as per last available data


32/93

Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL , Thomson First Call, Reuters and Factset. Edelweiss Securities Limited

Kalpataru Power’s (KPP) overall Q3FY15 performance was broadly in line with our estimates with ~9% revenue and 20% PAT surge led by 60bps margin expansion in the T&D business. However, 60% dip in order intake was a key negative, due to which order book also shrunk 20%. While the company has revised down its FY15 order intake guidance from INR40‐45bn to INR35‐40bn, it continues to maintain 12‐15% revenue growth guidance. Management expects order book position (including L1) to be at INR72bn at FY15 end. We continue to remain positive on KPP as we perceive it to be amply equipped to tap the emerging growth opportunities in the T&D business. We introduce and roll forward our valuations to FY17E with revised SOTP‐based target price of INR242

(INR197 earlier). Maintain ‘BUY’.

Order intake disappointing; revenue growth guidance maintained KPP’s revenue surged 9% led by robust growth in the infra business, though T&D growth was moderate at ~5%. However, margin expanded 80bps on account of better performance in the T&D business (up 70bps). The company has maintained its revenue growth guidance of 12 ‐15% for FY15, implying ~6‐13% growth in Q4FY15. Order intake plummeted 60% to INR5.6bn, as a result, order book fell 20% to INR55bn. The company expects INR17‐22bn order intake in Q4FY15 riding on INR10bn L1 position.

JMC revenue tepid, but lower expenses prop up margin

JMC Projects’ (JMC) revenue declined 17% YoY in Q3FY15 due to weak traction across projects. Revenue growth is likely to remain muted in FY15. But margin improved 20bps YoY to 6.2% due to lower construction expenses. Management estimates 100bps margin expansion over the next 3‐4 quarters.

Outlook and valuations: Improving; maintain ‘BUY’ We believe structural drivers are in place to spur T&D spending, which augurs well for KPP given its strong positioning. While order intake growth will catch up in subsequent quarters, margin improvement in KPP and JMC over the next 2 years will propel the company’s growth. We cut our consolidated core PAT by ~6% each for FY15E and FY16E factoring in lower order intake in KPP and lower revenue growth in JMC. At CMP, the stock is trading at 17x and 13x on FY16E and FY17E consolidated EPS, respectively. We maintain `BUY/SO’.

RESULT UPDATE

KALPATARU POWERMatches expectations; Bright prospects

EDELWEISS 4D RATINGS

Absolute Rating BUY Rating Relative to Sector Outperformer Risk Rating Relative to Sector Medium Sector Relative to Market Overweight

MARKET DATA (R: KAPT.BO, B: KPP IN)

CMP : INR 229


52‐week range (INR) : 252 / 71


M cap (INR bn/USD mn) : 35 / 565 Avg. Daily Vol.BSE/NSE(‘000) : 407.0


Current Q2FY15 Q1FY15 Promoters * 59.5 59.5 59.5

MF's, FI's & BK’s 22.8 22.4 22.8

FII's 9.4 9.0 9.4

Others 8.4 9.2 8.4 * Promoters pledged shares

(% of share in issue) : 6.0


Stock Nifty EW

Capital Goods Index

1 month 20.7 4.0 6.5

3 months 77.0 9.9 15.1

12 months 175.2 36.6 69.2

Amit Mahawar

+91 22 4040 7451 [email protected]

Rahul Gajare +91 22 4063 5561 [email protected]

Swarnim Maheshwari +91 22 4040 7418 [email protected]

India Equity Research| Engineering and Capital Goods

February 9, 2015

Financials (Standalone)Year to March Q3FY15 3FY14 % change Q2FY15 % change FY14 FY15E FY16ENet rev. (INR mn) 11,4 71 1 0, 51 3 9.1 11,408 0.6 40,553 45,738 51,021EBITDA (INR mn) 1,118 940 18.8 1,038 7.7 3 ,8 63 4 ,4 09 5 ,1 78Net profit (INR mn) 410 337 21.6 427 (4.0) 1, 46 4 1 ,7 69 2 ,1 33Diluted EPS (INR) 2.7 2.2 21.7 2.8 (4.0) 9.5 11.5 13.9Diluted P/E (x) 24.0 19.9 16.5ROAE (%) 7.7 8.7 9.7


33/93

Engineering and Capital Goods


Q3FY15 conference call: Key highlights Outlook: Management expects domestic order book to improve from H2FY16. International business continues to be strong. Expects T&D margin to be ~10% going ahead.

Weak order intake in 9mFY15: KPP recorded more than 40% decline in order intake due to weaker finalisation of orders. The company is L1 in projects worth INR10bn, which are

expected to be ordered out in Q4FY15. It expects order book position (including L1) to be at INR72bn at Q4FY15 end.

Update on infra business: Total infra order book currently stands at INR8.5bn, of which railway is ~INR1bn and pipeline projects ~INR7.5bn. In the infra business, KPP expects profitable growth from H2FY16. In legacy projects, of the 6 railway projects, 5 are almost completed. Legacy order book stands at ~INR1.4bn. The company continues to be conservative in terms of bidding for new orders. Outlook for the pipeline business has improved. Margins in pipeline business are lower than T&D margins. Also, L1 position is INR1.5bn in the pipeline business .

Update on JMC: JMC continues to focus on better margin contracts as evident in the EBITDA

margin as well. Execution was low primarily due to lower road BOOT sales. Revenues are expected to rise from FY16 led by higher B&F sales. Order intake growth in JMC business was due to commercial and residential buildings as well as some government contracts. It continues to maintain stronghold in Southern markets. JMC’s debt had jumped to INR7.5bn due to investments in road BOT projects and expects another INR400‐500mn of debt by FY15 end. Debt is expected to remain at INR80bn over FY16. On ballpark number basis, it expects ~5‐10% revenue growth in FY16. Average execution period is ~30 ‐36 months. Margin is expected to improve further by another 70 ‐75bps in FY16E on a base of ~6.3 ‐6.5%. ~INR2.5bn legacy order forms part of the current order book. ~25% of the current order book comes from government contracts.

Other key points Forex loss of INR15mn during the quarter.

Pending equity requirement in road projects—INR0.5bn (~INR0.25bn towards cost over runs). The company till now has invested INR4.6bn equity in road projects. Cost of debt in JMC business is ~11%.

The company has received second provisional COD in the Agra‐Aligarh project recently. Consolidated debt of 4 BOOT projects is ~INR13bn. Potential annual revenues from these projects ~INR2bn.

Green energy corridor opportunity: KPP expects ~INR200bn T&D opportunity in the green energy corridor in FY16.

Huge

potential

of

hydel

eletricity

in

Nepal

&

Bhutan

of

~30GW,

while

the

requirement

over there is ~1GW. Government can look forward to tap that opportunity.

Real estate project : Expected to launch the project in the next 2 quarters. On Thane land parcel, 15% of the project is already leased out and talks are on to sell/ lease some more portion of it.


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Kalpataru Power


Table 1: Segmental snapshot (INR mn)


Chart 1: Revenue visibility on a declining spree due to sharp fall in order intake


Year to March Q3FY15 Q3FY14 % change 9 MFY15 9MFY14 % changeRevenues (INR mn)Transmission & distribution 10,583 10,072 5.1 31,316 27,204 15.1Others 164 161 1.8 486 443 9.8Infrastructure EPC 725 281 158.4 1,731 1,385 25.0Total 11,471 10,513 9.1 33,533 29,031 15.5Segment rev. mix (%)Transmission & distribution 92.3 95.8 93.4 93.7Others 1.4 1.5 1.4 1.5Infrastructure EPC 6.3 2.7 5.2 4.8EBIT (INR mn)Transmission & distribution 1,013 895 13.2 2,955 2,593 14.0Others 25 18 36.1 44 35 25.2 Infrastructure EPC (126) (152) NM (384) (365) NMTotal 912 761 19.9 2,615 2,263 15.6Segment EBIT margin (%)Transmission & distribution 9.6 8.9 9.4 9.5Others 15.0 11.2 9.0 7.9Infrastructure EPC (17.4) (54.3) (22.2) (26.3)Total EBIT margins 7.9 7.2 7.8 7.8Segment EBIT mix (%)Transmission & distribution 111.1 117.7 113.0 114.6Others 2.7 2.4 1.7 1.5

0.0

0.6

1.2

1.8

2.4

3.0

0

11,000

22,000

33,000

44,000

55,000

Q 3 F Y 0 9

Q 1 F Y 1 0

Q 3 F Y 1 0

Q 1 F Y 1 1

Q 3 Y 1 1

Q 1 F Y 1 2

Q 3 F Y 1 2

Q 1 F Y 1 3

Q 3 F Y 1 3

Q 1 F Y 1 4

Q 3 F Y 1 4

Q 1 F Y 1 5

Q 3 F Y 1 5

( x )

( I N R m n )

Sales OB/Sales (x)


35/93

Engineering and Capital Goods


Chart 2: T&D margins led to overall improvement in operating profitability


Chart 3: Break up of INR107bn consolidated order book (JMC proportion on a rise)


8.0

9.2

10.4

11.6

12.8

14.0

0

240

480

720

960

1,200

Q 3 F Y 0 9

Q 1 F Y 1 0

Q 3 F Y 1 0

Q 1 F Y 1 1

Q 3 Y 1 1

Q 1 F Y 1 2

Q 3 F Y 1 2

Q 1 F Y 1 3

Q 3 F Y 1 3

Q 1 F Y 1 4

Q 3 F Y 1 4

Q 1 F Y 1 5

Q 3 F Y 1 5

( % )

( I N R

m n )

EBITDA EBITDA margins (%)

Transmissionoverseas

25%

Transmissiondomestic

13%JMC

54%

Infra8%


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Kalpataru Power


Table 2: SOTP based target price

Source: Company

Kalpataru standaloneValuation Methodology P/EPAT ‐ FY17E (INR mn) 2,642 Multiple (x) 12 Implied value (INR mn) 32,890 No of shares 154 Value per share (INR) 214

JMC ‐ 67% stakeValuation Methodology P/EPAT ‐ FY17E (INR mn) 433 Multiple (x) 6 Implied value (INR mn) 1,758 No of shares 154 Value per share (INR) 11

Shree Shubham Logistics ‐ 70% stakeValuation Methodology P/EPAT ‐ FY17E (INR mn) 366 Multiple (x) 10.0 Implied value (INR mn) 2,564 No of shares 154 Value per share (INR) 17

Total value

Documents

First Call Feb 10- 2015-EDEL.pdf