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EQUITIES
IT SERVICES
INDRA OUTPERFORM FROMUNDERPERFORM
EUR10.4 TARGET PRICE EUR14 (UPSIDE 35%)
TARGET PRICE EPS 15e EPS 16e
75% 8% 7%
With Abril comes spring
27 MARCH 2015 Indra: the perfect candidate for a sizeable turnaround
Previous management prioritized rapid international expansion at the expense of profitability and
FCF. The consequences for debt of this bold strategy have been compounded by the decline in the
domestic business (-27% in revenues since 2008), with record net debt end-2014 (EUR663m; 2.5x
EBITDA) largely triggered by a 30-day rise in DSO in six years. We see real potential for a
turnaround with a new CEO, raise our TP to EUR14.0 and upgrade Indra to Outperform (from U/P),
New Executive Chairman since January 2015 has strong track record in turnarounds The appointment of Mr Fernando Abril-Martorell as Executive Chairman is the key pillar of our
rating change as: 1) Mr Abril-Martorell achieved strong turnarounds at similar Spanish companies
(Telefonica, PRISA); 2) he has the full support of key shareholders (SEPI & Telefonica) to lead his
plan; 3) he brings much-needed fresh blood to a company that has been presided over by the
same management for 23 years; 4) he starts with a clean slate after a EUR313m ‘kitchen sinking’.
Our 4 recommendations for a sharp turnaround – plan expected next June 2015 Indra’s first CMD should take place this June. We expect it to feature Mr Abril-Martorell’s
turnaround plan. We see four low-hanging fruit that could produce handsome returns: 1) a
restructuring plan, mainly in Spain where Indra now looks oversized; 2) divestments of unprofitable
or easy-to-sell businesses for a company too thin on the ground (138 countries, 47 with operating
centres); 3) an overhaul of IT project delivery (sizeable returns possible after EUR231m
provisions); 4) lowering DSO (selective business development, action on unbilled revenues).
Upgrade to Outperform (from Underperform) – TP raised to EUR14.0 (from EUR 8.0) Ahead of the CMD and plan presentation, we have made a DCF-based scenario analysis to
simulate potential benefits (mainly on operating margin starting 2018 and WCR starting 2016). Our
central case leads to a new TP of EUR14.0, offering significant upside in the light of a share price
that remains 43% below its 2007 level. We have decided to wait for the plan before reviewing our
short-term estimates (beyond c.8% technical impact on EPS coming from changed CB treatment).
Brice Prunas (+44) 207 039 9539 [email protected]
Antoine Hucher (+44) 203 430 8516 [email protected]
itservices&[email protected]
Specialist sales
Nav Sheera (+44) 207 039 9458
Available on
Price (26 March 2015) EUR10.4 Performance(1) 1w 1m 3m 12m
Market cap (EURbn) 1.7 Absolute(%) 3 13 25 (25)Free float (EURbn) 1.2 Rel. IT Services(%) 4 9 9 (38)EV (EURbn) 2.6 Rel. MSCI SMID(%) 5 12 7 (38)3m avg volume (EURm) 16.3 Reuters / Bloomberg IDR.MC / IDR SMCountry Spain
Financials 12/14p 12/15e 12/16e 12/17e Valuation metrics(2) 12/14p 12/15e 12/16e 12/17e
EPS, Adjusted (EUR) (0.34) 0.52 0.59 0.70 P/E (x) - 19.9 17.6 14.8EPS, IBES (EUR) 0.58 0.70 0.78 0.86 Net yield (%) 2.9 3.3 2.2 2.7Net dividend (EUR) 0.34 0.34 0.23 0.28 FCF yield (%) 2.1 0.7 4.1 4.8 EV/Sales (x) 1.0 0.9 0.9 0.8Sales (EURm) 2,938 2,990 3,069 3,170 EV/EBITDA (x) 55.5 11.8 11.1 9.9EBITA, Adj. (EURm) (4.6) 166 180 204 EV/EBITA (x) - 15.8 14.6 12.7Net profit, Adj.(EURm) (55.2) 87.3 99.7 120 EV/CE (x) 1.9 1.8 1.9 1.9ROCE (%) (0.3) 9.2 10.2 11.7 Net Debt/EBITDA, Adj. (x) 17.1 4.1 3.9 3.4
Source: Exane BNPP (estimates), Thomson Reuters (consensus) (1) In listing currency, with dividend reinvested (2) Yearly average price for FY ended 12/14
See Appendix (on p23) for Analyst Certification, Important Disclosures and Non-US Research Analyst disclosures.
Exane BNP Paribas Research Indra 27 March 2015 page 2
An unfavourable track record
“The perfect storm” over 2008-2014
Between 2008 and 2014, Indra suffered a rare combination of negative factors
The crisis resulted in a collapse of the Spanish business
The global financial crisis and the European sovereign debt crisis resulted in the collapse in operating margin of the group’s Spanish business (the Spanish government had always been one of the group’s key clients).
The economic difficulties of the group’s Spanish clients also led to a significant deterioration of payment terms for the group.
Management struggled to deliver in this difficult period.
We believe the recurring conflicts between Javier Monzon (the group’s founder who had led Indra since 1992) and the Spanish government (which owns 20% of the company through the SEPI) have been a source of significant management distraction.
The group’s track record in terms of M&A has been particularly weak. The acquisition of Politec in particular has been a disappointment. We understand that after being purchased by Indra in July 2011 for approximately EUR100m (implying an EV/Sales of close to 0.9x), Politec has never performed up to expectations and continued to suffer from low profitability. This led the group to reverse the provisions for the payment of the earn-outs in 2014 and to make a goodwill impairment of EUR21m in January 2015 (o/w EUR17m were related to Latam).
Sharp deterioration of the group’s operating performance
Since 2008 and the emergence of macroeconomic difficulties in the group’s core Spanish market, Indra has had a very disappointing operating performance.
– The group’s recurring operating margin (as defined by Indra) declined by more than 400bp to a low of 6.9% in 2014. Based on the operating margin run rate of Q4 2014 (we estimate 5.7%), the decline is even steeper.
– At the same time, the group has faced significant delays in client payments, in particular in Spain (one can see the increase in the group’s DSO of working capital in figure 2). Combined with the decline in the group’s profitability, this has resulted in a significant deterioration of cash flow generation.
Exane BNP Paribas Research Indra 27 March 2015 page 3
Figure 1: The group’s operating margin has collapsed since 2010 Top line performance since 2010 Operating margin performance since 2010
Source: Indra, Exane BNP Paribas estimates
Figure 2: …and cash generation has significantly deteriorated FCF evolution since 2008 Days of working capital (in annualised revenues) since 2008
Source: Indra, Exane BNP Paribas estimates
2,5572,689
2,941 2,914 2,938 2,990
1.7%
5.1%
9.4%
-0.9%
0.8%
1.8%
(2%)
0%
2%
4%
6%
8%
10%
-500
0
500
1000
1500
2000
2500
3000
2010 2011 2012 2013 2014 2015eSales (EURm) Sales growth y/y (%)
2,5572,689
2,941 2,914 2,938 2,990
11.2%
10.0%
8.5%7.8%
6.9%6.3%
0%
2%
4%
6%
8%
10%
12%
0
500
1000
1500
2000
2500
3000
2010 2011 2012 2013 2014 2015eSales (EURm) Indra recurring EBIT margin (%)
115 115
7-57
35
4942
13
4.8%4.6%
0.3%
(2.1%)
1.2%1.7%
1.4%
0.4%
(3%)
(2%)
(1%)
0%
1%
2%
3%
4%
5%
6%
-75
-25
25
75
125
2008 2009 2010 2011 2012 2013 2014 2015eFCF (EURm) FCF/Sales (%)
7680
9398
104109
106
0
20
40
60
80
100
120
2008 2009 2010 2011 2012 2013 2014NWC in days of annualised revenues
Exane BNP Paribas Research Indra 27 March 2015 page 4
The right set up for the perfect turnaround
Indra’s recent track record has clearly been unfavourable. However, we believe the conditions for a turnaround have finally been met, with: 1) Indra significantly lagging behind its peers; 2) a new CEO in place since January 2015 with a strong turnaround track record in comparable Spanish companies and full support of shareholders and Spanish government; and 3) Spain showing signs of (finally) bottoming out.
Condition No.1: Indra has fallen below peers in margin and working capital consumption
On almost all the main operating metrics, Indra is significantly lagging behind its peers in the IT space.
1) Sudden drop in Indra’s operating margin
In 2014, the group had the lowest operating margin in the European sector at 6.9% (restated for non-recurring items). It is also worth underlining that:
– These results were of poor quality. The operating profit is likely to include significant R&D capitalisation. On top of that, below the recurring operating profit line, the group reported gross restructuring charges of EUR313m.
– The operating margin trend has constantly trended downward in 2014. Thus the operating margin run rate in Q4 2014 was closer to 5.7% than 6.9%.
Figure 3: Indra reported the lowest operating margin of the sector in 2014 2014 operating margin performance in European IT Services
Source: Company data, Exane BNP Paribas
However, we see this underperformance as evidence that there is plenty of room for margin improvement in the medium-term.
The example of Capgemini has already shown us that margin turnaround stories can be very strong in the IT Services space provided that management executes well. In H1 2004, the group was in the red with an operating margin of -1.5%. Four years later, in 2008, the group’s operating margin run rate had reached 8-9%. The turnaround of Capgemini was hastened by establishing a peak for project overruns in H1 2004. This bore a striking resemblance to Indra’s overrun peak in H2 2014. The new CEO has decided to book EUR231m on provisions, impairments and project overruns, which we consider a sound starting point for a turnaround.
9.6% 9.4%
7.8%
8.9%
6.9%
8.4%
0%
2%
4%
6%
8%
10%
12%
14%
Altran Alten Atos Capgemini Indra SopraSteria
Run rate in Q4 14 was closer to 5.7%
Exane BNP Paribas Research Indra 27 March 2015 page 5
Capgemini is currently in the middle of a strategic plan that should see its operating margin reach 10% in 2016 (this plan is fully in line with our estimates and consensus).
Figure 4: The example of Capgemini shows that margin turn-around can be very strong in IT Services Capgemini – Operating margin since 2004
Source: Capgemini
2) Indra has the highest working capital in the sector
In terms of working capital management, Indra is also doing significantly worse than peers. Working capital at end 2014 represented 109 days of annualised revenues. In contrast, Atos and Capgemini reported a DSO of 64 days and 38 days respectively for 2014.
Figure 5: Indra has one of the highest working capitals in the sector DSO for Capgemini and Atos vs. days of working capital for Indra
Source: Company data, Exane BNP Paribas
-1.5%
0.6%
1.8%
4.7% 4.8%
6.8%6.1%
8.6%
7.6%
9.5%
6.6%
7.7%
5.8%
7.6%
6.1%
8.7%
6.4%
9.8%
7.3%
9.7%
7.9%
10.4%
(2%)
0%
2%
4%
6%
8%
10%
12%
H1
20
04
H2
20
04
H1
20
05
H2
20
05
H1
20
06
H2
20
06
H1
20
07
H2
20
07
H1
20
08
H2
20
08
H1
20
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H2
20
09
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20
10
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20
10
H1
20
11
H2
20
11
H1
20
12
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20
13
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20
14
H2
20
14
64
38
109
0
20
40
60
80
100
120
Capgemini Atos Indra
Exane BNP Paribas Research Indra 27 March 2015 page 6
On this topic, the IT Services sector provides many examples of good management teams that can by simple actions save many days of receivables, which turn into millions of EUR of cash:
– Just by taking over Siemens SIS and Bull, the finance team of Atos has managed to save dozens of EUR millions, showing that the same assets run by different finance teams can produce very different DSO.
– Alten’s finance team managed to reduce the group DSO by 20 days between 2009 and 2013 (from 115 days to 95 days) just by reorganising the cash collection of the group and by starting from the very beginning; helping clients to issue the bills.
Condition No.2: a new CEO with full power
In the last few months, Indra has taken (badly-needed in our view) actions to clarify its corporate governance. The group has further stabilised its shareholding structure with the entry of Telefonica to the group’s capital. Telefonica owned 3% of Indra at the end of January 2015 with options to buy a further 3% stake.
Figure 6: Telefonica has become one of the group’s reference shareholders Indra’s new shareholding structure
Source: Exane BNP Paribas
At the same time, the conflict between the Spanish government (which is also Indra’s main shareholder with a 20% stake) and the group’s former CEO, Javier Monzon, finally came to a head with the departure of the latter in January 2015. To replace Mr. Monzon, Indra’s board of directors appointed Fernando Abril-Martorell as the group’s new CEO. From our understanding, Mr Abril-Martorell is a well-regarded manager in Spain. He already has some experience with turnaround situations and leveraged companies. At PRISA, he was able to restructure the group’s debt and led an ambitious divestment programme.
– In December 2013, he was able to sign a comprehensive refinancing agreement with PRISA’s 35 lending banks. Under the terms of the agreement, the group extended the maturity of its financial debt by 5/6 years and obtained an additional credit line of EUR353m.
– In 2014, under the leadership of Mr. Abril-Martorell, PRISA made further progress on an ambitious programme of divestments with the sales of: 1) a 3.7% stake in Mediaset Espana for EUR121m; 2) its 56% stake in DTS (Canal + pay-TV platform in Spain) for EUR750m; and 3) its trade business for EUR55m.
SEPI (Spanish government)
20%
Alba Participaiones11%
Telefonica's current stake3%
Telefonica's additional stake post
option exercise3%
Other investors63%
Exane BNP Paribas Research Indra 27 March 2015 page 7
We believe that the new CEO’s decision to thoroughly clean up Indra’s balance sheet (with provisions and impairments of EUR231m booked in Q4 alone) was a sensible decision as it will enable the new management to focus fully on the group’s restructuring going forward.
Figure 7: A quick look at Indra’s new Executive Chairman Short biography of Fernando Abril-Martorell
Source: Company data, Exane BNP Paribas
Exane BNP Paribas Research Indra
Figure 8: Fernando Abril-Martorell’s achievements during his 3-year tenure at PRISA Significant events at PRISA since the appointment of Abril Martorell as CFO in April 2011
Source: PRISA, Exane BNP Paribas
July 2012: Fernando Abril Martorell is appointed CEO and Juan Luis Cebrian (the former CEO) is appointed chairman of the group
January 2011: Fernando Abril Martorell is appointed CFO and deputy CEO (starting on 1 April 2011)
Feb 2011: Prisa sells a 10% stake in Grupo Media Capital to Portquay for EUR35m. Prisa keeps a controlling 84% stake in the entity.
July 2012: In the AGM, shareholders approve a bond issue to convert part of the group debt into shares for EUR334m. Prisa also launches the second tranche of a EUR100m bond, fully subscribed by Telefonica
Dec 2011: Abril Martorell achieves an agreement with 35 banks to extend the group’s current loans
July 2014: Fernando Abril Martorellannounces he will leave the group at end September 2014 following rumors of disagreements between himself and Prisa’s chairman, Juan Luis Cebrian
December 2013: The group reaches an agreement to extend the maturity of its financial debt by 5‐6 years and also obtained an additional credit line of EUR353m and a significant reduction in interests payments in cash. The agreement also includes the issuance of warrants to lending banks. Prisasecures a timeline of 3 years for the sales of non‐strategic assets
June 2014: Prisa sells its 56% stake in DTS (Canal + pay‐TV platform in Spain) to Telefonica for EUR750m
April 2014: Prisa places 15m shares of Mediaset Espana in the market (3.7% of the company) for EUR121m
July 2014: Prisasells its trade business for EUR55m to Penguin Random House
Exane BNP Paribas Research Indra 27 March 2015 page 9
Condition No.3: Spain is finally bottoming out
Feedback from companies in our coverage indicates that Spain may be finally bottoming out. Companies like Capgemini, Alten and SopraSteria have hinted that business momentum is improving in the country.
Figure 9: Comments from companies in our sector suggest continued improvement in Spain Latest results and comments from the companies in our sector on Spain
Company Comments
Alten - Organic growth has accelerated throughout the entire year and reached +16.5% in Q4 2014 (+5.2% for FY14) - Growth driven by change in business mix with a continued decline in the finance and tertiary sectors but a strong growth in manufacturing, life sciences, security, energy and auto
Altran - Economic growth reached (organic growth restated for the number of working days) reached 6.6% in Q4 14 after +5.1% in H1 14 and +5.2% in Q3 14
Atos - The group mentioned the signing if a large deal with a leading Spanish bank group in system integration in Q4
Capgemini - The group mentioned that Spain had "another positive quarter" in Q4 2014 and sees this as "positive news going in 2015"
Indra - The group reported its second quarter of positive evolution in Spain in Q4 2014 - The recovery is led by the public sector whereas the weak demand persists in the private sector
SopraSteria - Sopra standalone reported "strong growth" in its Spanish subsidiary(+19.8% organically in 2014)
Source: Company data, Bloomberg conference call transcripts, Exane BNP Paribas
Indra’s recent results are also encouraging as, in the last two quarters Spain has finally returned to positive territory.
Note that in Q4 14, sales were artificially boosted by the consolidation of entities that were previously not inside the scope of consolidation (in its conference call, Indra hinted at a EUR20m impact).
Figure 10: Since the trough reached at the end of 2012, Spain has been steadily improving for Indra Indra Spain - Sales and sales growth y/y (%) by quarters
Source: Indra, Exane BNP Paribas
We acknowledge there may be some hurdles to the Spanish recovery. 2015 is an important election year in Spain and the public sector is one of Indra’s main clients. However, we believe that as far as Spain is concerned, things are clearly going in the right direction.
10%8%
5%4%
5%4%
1% 2%
-4%-6%
-3%
2%
-1%0%
-5% -5%
-8%
-17%
-25%
-21%
-12%-11%
-8%
-10%-10%-8%
3%
27%
(30%)
(20%)
(10%)
0%
10%
20%
30%
0
50
100
150
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300
350
400
450
500
1Q08
2Q08
3Q08
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1Q09
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1Q10
2Q10
3Q10
4Q10
1Q11
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2Q12
3Q12
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1Q13
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4Q13
1Q14
2Q14
3Q14
4Q14
Sales (EURm) Sales growth y/y (%)
Exane BNP Paribas Research Indra 27 March 2015 page 10
Our top recommendations for the new CEO
Indra has announced that the new management team will present its new strategic vision for Indra during a Capital Markets Day in June 2015. We believe a plan to lift margin and FCF is likely to be announced at this event.
We see several steps that the new management could make in the next few months in order to improve the operating margin and the financial solidity of the company. We have listed below what we view as the top 4 priorities at this stage.
Priority No.1: Launch a restructuring programme
Despite its significant decline in operating performance, Indra has not launched any restructuring programme. As a result, the revenue and operating profit generated by employee have fallen by 53% and 48% respectively since 2008 (see left-hand chart in figure 8).
Spain should be the natural target for an upcoming restructuring programme. We believe that after several years of significant top line decline in Spain, the group’s cost base is no longer suited to the scale of its activity in its region. Since 2008, sales in Spain have declined by 27%. In the same period, the group’s headcount in the area grew by 12%.
Figure 11: A restructuring programme would seem like a logical next step for Indra Sales and EBIT per employee (RHS) have fallen since 2008 Headcount has continued to grow in Spain despite a collapse
in revenues in the region
Source: Exane BNP Paribas estimates
Priority No.2: Divestment of non-profitable activities
We believe there are several smart divestments Indra could make in non-core and unprofitable activities with a twofold objective: 1) achieve a rapid deleveraging of the group and remove the need for a rights issue (that the new management has already deemed unlikely); 2) improve the margin profile of the group.
Currently, Indra seems to be very thinly spread both in terms of sector (the group is present in six very different verticals from Security/Defence to Healthcare) and in terms of geographical presence (the group is present in 138 countries with operating centres in 47 of them). Thus we believe it should not be too difficult for management to find potential non-core entities for divestment.
24,80626,175
28,608
35,73038,577 38,548 38,548
63,182 61,631
54,740
42,709
32,61029,184 29,755
10,168 10,088 9,9737,495 6,449 5,868 5,292
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
0
5,000
10,000
15,000
20,000
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45,000
2008 2009 2010 2011 2012 2013 2014Number of employees
Sales / employee (EUR)
Operating profit / employee (EUR)
19,101 19,37021,170 21,081 21,550 20,702 21,461
7%
3%
-3% -3%
-18%
-11%
2%
4%
1%
9%
0%
2%
-4%
4%
(20%)
(15%)
(10%)
(5%)
0%
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20%
-25,000
-20,000
-15,000
-10,000
-5,000
0
5,000
10,000
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25,000
2008 2009 2010 2011 2012 2013 2014Headcount in Spain
Sales growth y/y (%) in Spain
Headcount growth y/y (%) IN Spain
Exane BNP Paribas Research Indra 27 March 2015 page 11
Priority No.3: overhaul of IT project delivery
Indra has been a mismanaged company as illustrated by the fact that: 1) the company has a unique industrial positioning in IT Services (with two thirds of revenues derived from solutions) which means the group is able to deliver unique turnkey projects in the framework of consortiums for example, but; 2) is reporting the lowest operating margin in the sector.
We believe a large part of the mismanagement stems from the project management function. It seems as though Indra: 1) has too often become involved in unprofitable projects; 2) has been unable to control the costs of its projects once initiated; 3) sometimes had complex contract revenue recognition. These issues were highlighted by the EUR231m charge recognized in Q4 2014 for “inventories, clients and project overruns”.
In this context, we believe one of the first tasks of the new management should be to completely reorganize the project delivery function and to introduce more discipline: both in terms of: 1) initial project selection (give up on low-profitability contracts) and; 2) project cost.
There are low hanging fruit in such situations, i.e.: 1) discontinuing or downsizing the most loss-making projects; 2) creating internal processes leading to a full review of the finance, starting from a certain threshold (we would point to the Rainbow process at Atos); 3) creating teams of top experts that step into the riskier projects to repair their profitability as early as possible (Capgemini successfully did this post 2004).
Priority No.4: Make quick wins on DSO
We believe it is possible to make some quick fixes to the group’s working capital management issues: 1) Indra should become more selective in terms of new project and business development (selection of geographies and client payment scoring); 2) in contrast with the previous CEO, we would expect the new management team to adopt a more “hands-on approach” to unbilled revenues (with the reorganisation of the group’s cash collection function).
Exane BNP Paribas Research Indra 27 March 2015 page 12
Valuation
Recent share price performance
Indra’s share price has appreciated sharply since the appointment of Mr. Abril-Martorell as CEO. However the share price remains 43% below its 2007 level (vs. 11% for the MSCI Europe).
Figure 12: Despite the recent recovery, the stock is still far below its pre-crisis levels Indra Sistemas share price vs MSCI Europe
Source: Exane BNP Paribas, Factset Estimates, MSCI
Figure 13: The share price has performed strongly since the appointment of Mr Abril-Martorell but is still sharply down on a 12m view
Indra – share price performance in last 12m Indra – share price performance YTD
Source: Exane BNP Paribas estimates, share price rebased to 100
30%
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90%
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130%
150%
170%
7.0
9.0
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Dec06
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Rel. Price (rhs) Indra Sistemas (lhs) MSCI Europe rebased (lhs)
Price Rel. Price
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Indra MSCI Europe MSCI Europe IT Services
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Indra MSCI Europe MSCI Europe IT Services
29 January 2015: press articles mention AbrilMartorell is to be appointed as new CEO of Indra
Exane BNP Paribas Research Indra 27 March 2015 page 13
Our DCF scenario analysis
Our 2015-2017e underlying growth and margin assumptions remain unchanged as we prefer to wait for the full details of the plan to be disclosed before making changes to our short-term forecasts. The 8% upward revision of our 2015e EPS estimates only corresponds to the changed treatment of the CB (previously, we had not added back the related financial cost to our net profit despite using a fully diluted number of shares to compute our EPS).
We have revisited our longer-term DCF assumptions in order to fully account for Indra’s potential for margin and working capital improvement
In our base case, we assume that Indra’s new management can take the group’s operating margin to 10% in 2021e. A 10% operating margin may seem like a demanding objective (commensurate with a very well-run company like Capgemini) but seems realistic to us as Indra has very distinctive positioning and it is still below the 2010 level (11.2%). In our base case, we also assume that management’s discipline and the improvement of the macroeconomic situation in Spain will result in a sharp improvement of payment terms with clients. Our base case assumes management can reduce days of working capital by 20 (from 106 currently to 86, a level more in line with the group’s historical track record) resulting in a cash inflow of EUR120m in the next three years. Our base case points to a TP of EUR14.0 (35% upside).
In our bull case, we have a slightly more optimistic assumption on the group’s turnaround plan. We assume the group can reach an operating margin of 11% in 2021 and can reduce days of working capital by 30 (cash inflow of EUR180m) in 2016-2018e. Our bull case points to a TP of EUR16.2 (56% upside).
In our bear case, we only give little credibility to the new management’s ability to turn around the group. Our bear case estimates point to a 2021e operating margin of 8%, only slightly above current levels, and to stable trends in working capital. Our bear case points to a TP of EUR9.0 (13% downside).
Exane BNP Paribas Research Indra 27 March 2015 page 14
Figure 14: Our bull/bear case points to a favourable risk/reward Our bull/bear case analysis
Source: Exane BNP Paribas estimates
Figure 15: Overview of our three valuation scenarios
Bear Case Base Case Bull Case
Implied Equity Value 1,478 2,303 2,940
DCF Valuation per share EUR 9.0 EUR 14.0 EUR 16.2
Upside/Downside -13% 35% 56%
Implied EV/EBITA 15e 13.9x 18.8x 21.2x
Source: Exane BNP Paribas estimates
Our net debt is adjusted for EUR187m of non-recourse factoring lines at the end of 2014 and for the equity component of the CB (EUR17m).
We have included the full calculations behind our DCF analysis in the next pages.
Bull Case EUR 16.2
- Turnaround is more successful than expected and thanks to its differentiated positioning, Indra reaches a best-in-class margin of 11% in 2021e- Days of working capital reduced by 30 between 2016 and 2018 leading to a cash inflow of EUR180m in the period
Base Case(our TP)
EUR 14.0
- Following a successful turn-around, the company reaches an operating margin of 10% in 2021e (in line with the target of a company like Capgemini)- Days of working capital reduced by 20 between 2016 and 2018 leading to a cash inflow of EUR120m in the period
Bear Case EUR 9.0- Turnaround is not successful and Indra reaches an operating margin of 8% in 2021e- Working capital trends remain roughly stable
Exane BNP Paribas Research Indra 27 March 2015 page 15
Our DCF base case
Figure 16: Our DCF base case YE 31 Dec Indra FY FY FY FY FY FY FY FY FY FY FY FY
EURm 2010 2011 2012 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e 2021e Normalised
Revenues 2,557 2,689 2,941 2,914 2,938 2,990 3,069 3,170 3,265 3,347 3,431 3,499 3,569% change (organic) 0.3% 0.9% 0.8% 2.0% 5.2% 1.8% 2.6% 3.3% 3.0% 2.5% 2.5% 2.0% 2.0% EBITDA 298 258 230 151 51 221 237 262 302 342 384 434 443as a % of sales 11.7% 9.6% 7.8% 5.2% 1.7% 7.4% 7.7% 8.3% 9.2% 10.2% 11.2% 12.4% 12.4% Depreciations 43 42 50 51 55 56 57 58 62 67 72 84 86as a % of sales 1.7% 1.6% 1.7% 1.7% 1.9% 1.9% 1.8% 1.8% 1.9% 2.0% 2.1% 2.4% 2.4% EBITA 255 216 180 101 -5 166 180 204 240 275 313 350 357as a % of sales 10.0 8.0 6.1 3.4 -0.2 5.5 5.9 6.4 7.3 8.2 9.1 10.0 10.0 Tax -56 -48 -40 -22 1 -36 -40 -45 -57 -72 -81 -91 -100Tax rate (%) 22% 22% 22% 22% 22% 22% 22% 22% 24% 26% 26% 26% 28% NOPAT 217 162 107 78 -4 129 141 159 182 204 231 259 257Restructuring cash out -33 0 -32 -28 -17 -24 -25 -25 -26 -27 -27 -28 -29Restructuring cash out (%of sales) -1.3% 0.0% -1.1% -1.0% -0.6% -0.8% -0.8% -0.8% -0.8% -0.8% -0.8% -0.8% -0.8%Restructuring cash out post tax -26.1 0.0 -24.6 -21.8 -13.3 -18.7 -19.2 -19.8 -19.9 -19.8 -20.3 -20.7 -20.6 Cash out related to the EUR231m of provisions, impairments booked in Q4 14
- - - - - -70 -70 -70 - - - - -
Working Cap - - - - 742 748 705 669 628 606 595 590 584Change in NWC -145 -152 -56 -63 -28 -6 42 36 42 21 11 6 6 Capex -92 -126 -74 -56 -57 -63 -65 -71 -75 -79 -82 -84 -86Capex (% of Sales) 3.6% 4.7% 2.5% 1.9% 1.9% 2.1% 2.1% 2.3% 2.3% 2.4% 2.4% 2.4% 2.4% Free Cash Flow (FCF) -2 -74 2 -12 -46 28 85 93 191 193 211 244 242 WACC 8.5 Terminal Growth 2.0 Year 0.00 0.75 1.75 2.75 3.75 4.75 5.75 Discount Rate 1.0 0.9 0.9 0.8 0.7 0.7 0.6 Present Value (PV) FCF 28 80 80 153 143 144 153
Source: Exane BNP Paribas estimates
Figure 17: Our DCF base case Sum of PV of FCF 780
Terminal Value 2,339Implied Enterprise Value 3,119Net (Debt)/Cash (2014e) 867Other liabilities and commitments (2014e); excluding restructuring 64Minorities (2014e) 26Tax Assets / Associates (2014e) 90Implied Market Capitalisation 2,303Shares in Issue FD 164Implied share price (EUR) 14.0
Source: Exane BNP Paribas estimates
Exane BNP Paribas Research Indra 27 March 2015 page 16
Our DCF bull case
Figure 18: Our DCF bull case YE 31 Dec Indra FY FY FY FY FY FY FY FY FY FY FY FY
EURm 2010 2011 2012 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e 2021e Normalised
Revenues 2,557 2,689 2,941 2,914 2,938 2,990 3,069 3,170 3,265 3,347 3,431 3,499 3,569% change (organic) 0.3% 0.9% 0.8% 2.0% 5.2% 1.8% 2.6% 3.3% 3.0% 2.5% 2.5% 2.0% 2.0% EBITDA 298 258 230 151 51 221 237 262 310 359 410 469 478as a % of sales 11.7% 9.6% 7.8% 5.2% 1.7% 7.4% 7.7% 8.3% 9.5% 10.7% 12.0% 13.4% 13.4% Depreciations 43 42 50 51 55 56 57 58 62 67 72 84 86as a % of sales 1.7% 1.6% 1.7% 1.7% 1.9% 1.9% 1.8% 1.8% 1.9% 2.0% 2.1% 2.4% 2.4% EBITA 255 216 180 101 -5 166 180 204 248 292 338 385 393as a % of sales 10.0 8.0 6.1 3.4 -0.2 5.5 5.9 6.4 7.6 8.7 9.9 11.0 11.0 Tax -56 -48 -40 -22 1 -36 -40 -45 -59 -76 -88 -100 -110Tax rate (%) 22% 22% 22% 22% 22% 22% 22% 22% 24% 26% 26% 26% 28% NOPAT 217 162 107 78 -4 129 141 159 188 216 250 285 283Restructuring cash out -33 0 -32 -28 -17 -24 -25 -25 -26 -27 -27 -28 -29Restructuring cash out (%of sales) -1.3% 0.0% -1.1% -1.0% -0.6% -0.8% -0.8% -0.8% -0.8% -0.8% -0.8% -0.8% -0.8%Restructuring cash out post tax -26.1 0.0 -24.6 -21.8 -13.3 -18.7 -19.2 -19.8 -19.9 -19.8 -20.3 -20.7 -20.6 Cash out related to the EUR231m of provisions, impairments booked in Q4 14
- - - - - -70 -70 -70 - - - - -
Working Cap - - - - 742 748 685 669 608 576 560 552 543Change in NWC -145 -152 -56 -63 -28 -6 62 56 62 32 16 8 8 Capex -92 -126 -74 -56 -57 -63 -66 -70 -73 -77 -81 -84 -86Capex (% of Sales) 3.6% 4.7% 2.5% 1.9% 1.9% 2.1% 2.2% 2.2% 2.3% 2.3% 2.4% 2.4% 2.4% Free Cash Flow (FCF) -2 -74 2 -12 -46 28 104 114 219 218 237 272 270 WACC 8.5 Terminal Growth 2.0 Year 0.00 0.75 1.75 2.75 3.75 4.75 5.75 Discount Rate 1.0 0.9 0.9 0.8 0.7 0.7 0.6 Present Value (PV) FCF 28 98 99 175 160 161 171
Source: Exane BNP Paribas estimates
Figure 19: Our DCF bull case Sum of PV of FCF 892
Terminal Value 2,613Implied Enterprise Value 3,505Net (Debt)/Cash (2014e) 617Other liabilities and commitments (2014e); excluding restructuring 64Minorities (2014e) 26Tax Assets / Associates (2014e) 90Implied Market Capitalisation 2,940Shares in Issue FD 181Implied share price (EUR) 16.2
Source: Exane BNP Paribas estimates
Exane BNP Paribas Research Indra 27 March 2015 page 17
Our DCF bear case
Figure 20: Our DCF bear case YE 31 Dec Indra FY FY FY FY FY FY FY FY FY FY FY FY
EURm 2010 2011 2012 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e 2021e Normalised
Revenues 2,557 2,689 2,941 2,914 2,938 2,990 3,069 3,170 3,265 3,347 3,431 3,499 3,569% change (organic) 0.3% 0.9% 0.8% 2.0% 5.2% 1.8% 2.6% 3.3% 3.0% 2.5% 2.5% 2.0% 2.0% EBITDA 298 258 230 151 51 221 237 262 286 309 333 364 371as a % of sales 11.7% 9.6% 7.8% 5.2% 1.7% 7.4% 7.7% 8.3% 8.7% 9.2% 9.7% 10.4% 10.4% Depreciations 43 42 50 51 55 56 57 58 62 67 72 84 86as a % of sales 1.7% 1.6% 1.7% 1.7% 1.9% 1.9% 1.8% 1.8% 1.9% 2.0% 2.1% 2.4% 2.4% EBITA 255 216 180 101 -5 166 180 204 223 242 261 280 286as a % of sales 10.0 8.0 6.1 3.4 -0.2 5.5 5.9 6.4 6.8 7.2 7.6 8.0 8.0 Tax -56 -48 -40 -22 1 -36 -40 -45 -54 -63 -68 -73 -80Tax rate (%) 22% 22% 22% 22% 22% 22% 22% 22% 24% 26% 26% 26% 28% NOPAT 217 162 107 78 -4 129 141 159 170 179 193 207 206Restructuring cash out -33 0 -32 -28 -17 -24 -25 -25 -26 -27 -27 -28 -29Restructuring cash out (%of sales) -1.3% 0.0% -1.1% -1.0% -0.6% -0.8% -0.8% -0.8% -0.8% -0.8% -0.8% -0.8% -0.8%Restructuring cash out post tax -26.1 0.0 -24.6 -21.8 -13.3 -18.7 -19.2 -19.8 -19.9 -19.8 -20.3 -20.7 -20.6 Cash out related to the EUR231m of provisions, impairments booked in Q4 14
- - - - - -70 -70 -70 - - - - -
Working Cap - - - - - 748 752 759 764 769 774 778 782Change in NWC -145 -152 -56 -63 -28 -6 -5 -6 -6 -5 -5 -4 -4 Capex -92 -126 -74 -56 -57 -63 -66 -70 -73 -77 -81 -84 -86Capex (% of Sales) 3.6% 4.7% 2.5% 1.9% 1.9% 2.1% 2.2% 2.2% 2.3% 2.3% 2.4% 2.4% 2.4% Free Cash Flow (FCF) -2 -74 2 -12 -46 28 37 52 133 144 159 183 181 WACC 8.5 Terminal Growth 2.0 Year 0.00 0.75 1.75 2.75 3.75 4.75 5.75 Discount Rate 1.0 0.9 0.9 0.8 0.7 0.7 0.6 Present Value (PV) FCF 28 35 45 106 106 108 114
Source: Exane BNP Paribas estimates
Figure 21: Our DCF bear case Sum of PV of FCF 543
Terminal Value 1,751Implied Enterprise Value 2,294Net (Debt)/Cash (2014e) 867Other liabilities and commitments (2014e); excluding restructuring 64Minorities (2014e) 26Tax Assets / Associates (2014e) 90Implied Market Capitalisation 1,478Shares in Issue FD 164Implied share price (EUR) 9.0
Source: Exane BNP Paribas estimates
Exane BNP Paribas Research Indra 27 March 2015 page 18
Peer Multiples
Arguably, Indra trades at a significant premium to the sector. However, one should bear in mind that: 1) these multiples are computed on depressed earnings that do not yet factor in any turnaround plan; and 2) Indra is a truly unique company in the sector (2/3 of revenues derived from solutions, strong presence in the defence space) which we believe warrants a significant premium to peers.
Figure 22: Indra trades at a premium to the sector (for good reasons) Valuation multiples in the European IT Services space
Source: Exane BNP Paribas estimates
Figure 23: Indra Sistemas vs IT Services on 12m fwd EV/EBIT
Source: Exane BNP Paribas, Factset Estimates, MSCI
26/ 03/ 2015 R at ing P riceM arket
capT arget price
Upside
lo cal EUR m lo cal 2015e 2016e 2015e 2016e 2015e 2016e 2015e 2016e 12M YT D
IT Services Euro pe
Capgemini + 75.1 12,282.3 72.0 (4%) 17.8 16.8 9.8 8.8 0.92 0.86 5.2 5.6 37 24
Atos + 64.7 6,535.7 78.0 21% 12.6 10.8 9.3 7.6 0.75 0.65 5.6 7.6 -2 -2
Indra + 10.4 1,704.9 14.0 35% 19.9 17.6 15.8 14.6 0.88 0.86 0.7 4.1 -22 31
Alten - 42.5 1,370.2 37.0 (13%) 14.4 13.3 8.9 7.9 0.86 0.79 7.0 7.9 19 20
Sopra Steria Group = 70.1 1,403.6 70.0 (0%) 12.0 9.6 9.9 8.0 0.59 0.56 0.1 5.2 -19 11
Altran - 9.2 1,593.0 7.9 (14%) 11.8 10.7 8.4 7.1 0.85 0.77 7.4 8.4 15 18
A verage Euro pe (weighted by market cap) 4% 15.5 14.1 9.9 8.6 0.84 0.77 5.1 6.4 5 16
P / E EV/ EB IT AF ree C ash F lo w Yield
EV/ SalesA bso lute
perfo rmance
90%
100%
110%
120%
130%
140%
150%
160%
170%
180%
190%
4.0
6.0
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10.0
12.0
14.0
16.0
Dec05
Jun06
Dec06
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Dec07
Jun08
Dec08
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Dec09
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Jun11
Dec11
Jun12
Dec12
Jun13
Dec13
Jun14
Dec14
Rel. 12m EV/EBIT (rhs) Indra Sistemas (lhs) IT Services (lhs)
12m EV/EBIT Rel. 12m EV/EBIT
Exane BNP Paribas Research Indra 27 March 2015 page 19
Figure 24: Indra Sistemas vs IT Services on 12m fwd P/E
Source: Exane BNP Paribas, Factset Estimates, MSCI
60%
80%
100%
120%
140%
160%
180%
200%
220%
5.0x
7.0x
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Rel. 12m P/E12m P/E
Rel. 12m P/E Indra Sistemas (lhs) IT Services (lhs)
Exane BNP Paribas Research Indra 27 March 2015 page 20
Risk analysis
Risk No.1. The company could book further one-off charges in the next quarters
Following the arrival of the new management, Indra booked a gross non-recurrent charge of EUR313m in Q4 2014 including EUR231m for inventories, clients and project overruns.
In the conference call following the results, management did not completely rule out the possibility of booking further one-off charges in the coming quarters.
Risk No.2. Uncertainty around the cash out related to these one-off charges; particularly the inventories part
To what extent, the Executive Chairman and his finance team will be comfortable with the accounting of inventories and WIP made by the previous team remains to be seen. One could argue it is already reflected in the EUR139 m booked at the end of 2014; but may be not fully.
Risk No.3: Spanish enters an election year in 2015
In 2015, Spanish will hold general elections. We believe this could significantly disrupt Indra’s business. As a reminder, the Spanish government is one of the group’s most important clients.
Risk No.4: Exposure to large deals
Indra is exposed to some large deals that could significantly weigh on top line growth when they come to an end or if they are cancelled. For instance, in 2014 the expiry of a very large contract related to the Iraqi elections significantly weighed on top line growth.
Risk No.5: Volatility in Asia and Latam
In the past, Indra’s performance in these two regions has been highly volatile.
Exane BNP Paribas Research Indra 27 March 2015 page 21
Funding Analysis
Source: Exane BNP Paribas estimates
INDRAGro ss cash po sit io n at 31 Dec. 13 70
E UR m D e c . 14 D e c . 15 D e c . 16 D e c . 17
FCF 42 13 72 83
Gro ss debt reimbursements ¹ (56) (100) (150) (150)
New funds (debt, capital, divestment)
Other cash o utf lo ws (acquisitio ns etc) (13) (20) (20) (20)
Dividend base case (56) (56) (56) (38)
Share buybacks
S UR P LUS / ( S H O R T F A LL)
A nnual (13) (163) (154) (125)
C um ula t iv e (13 ) ( 17 6 ) ( 3 3 0 ) ( 4 5 6 )
A nnual if div is 0 na (107) (98) (87)
C um ula t iv e if div is 0 na ( 12 0 ) ( 2 19 ) ( 3 0 6 )
A v a ila ble c re dit line s
C o v e na nt ( s ) : No t displayed
Excluding no n-reco urse facto ring (EUR187m in 2014), Indra has repo rted a net debt o f EUR663m at the end o f2014 i.e., 2.5x EB ITDA 14e.
Indra had guided fo r a 2014 FCF o f abo ve EUR100m, but has just delivered EUR 47m fo r FY 2014
In Octo ber 2013, Indra issued a 2018 OCEA NE , yielding 1.75% annual co upo n with a co nversio n premium o f 30%(co nversio n price at EUR 14.29). The issue o f this co nvertible bo nds has allo wed Indra to extend its debtmaturity pro file ; which is aro und 3.5 years.
In Octo ber 2014, Indra has disclo sed to us to have mo re than EUR 1.3 B n credit facilit ies (including the 2018OCEA NE) o /w EUR 1.0 B n is drawn . We are no w mo re co ncerned by the liquidity questio n o f Indra as theo perating margin has go ne do wn to 7.0% in Q3 2014. The co mpany has disclo sed that 85% o f the to tal financingused is LT; wtih no relevant maturity in 2015. There are no co venants asso ciated to these credit lines.
(Co mment updated o n 26 M ar. 15)
¹ Gro ss debt reimbursement po st Dec.17: EUR900m
Exane BNP Paribas Research Indra 27 March 2015 page 22
Investment case, valuation and risks
Indra (Outperform, Target Price EUR14)
Investment case Indra’s recent track record has arguably been very poor. The group is lagging behind
peers both in terms of profitability and working capital management. However, we believe that the conditions for a turnaround have finally been met: 1) Indra offers favourable comps ahead of turnaround initiatives (low-hanging fruit); 2) a new management team is in place since January 2015 with the full support of the key shareholders; 3) the new Executive Chairman has strong track record of turnarounds at comparable Spanish companies and has started well with a EUR 313m kitchen-sinking last January; 4) we have already identified 4 priorities for the turnaround plan announced next June; 5) Spain has started to bottom out since Q3 2014.
Valuation methodology Our TP is DCF-based. We then challenge our DCF by looking at the implied multiples,
comparing it with sector peers and with the group’s historical average.
Risks to rating and target price Key risks to our rating and TP include: 1) the new management may fail to sufficiently
transform the company; 2) timing of the upgrade; business trends at Indra can be quitevolatile between quarters and Q1 may well be weak again; 3) historically, accountingassumptions have often been too optimistic which could lead the new management team to book further one-off charges in the coming quarters (with a gross non-recurring charge of EUR313m already recorded in Q4 2014; 4) Spain (Indra’s main market) hasan election in 2015 which could disrupt the business; 5) Latam (particularly Brazil) may not be yet out of the woods.
Exane BNP Paribas Research Indra 27 March 2015 page 23
DISCLOSURE APPENDIX Analyst Certification We, Antoine Hucher, Brice Prunas, (authors of or contributors to the report) hereby certify that all of the views expressed in this report accurately reflect our personal view(s) about the company or companies and securities discussed in this report. No part of our compensation was, is, or will be, directly, or indirectly, related to the specific recommendations or views expressed in this research report.
Non-US Research Analyst Disclosure The research analysts named below were involved in preparing this research report. Research analysts at Exane Ltd and Exane SA are not associated persons of Exane Inc. and thus are not registered or qualified in the U.S. as research analysts with the Financial Industry Regulatory Authority (FINRA) or the New York Stock Exchange (NYSE). These non-U.S. analysts are not subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Antoine Hucher Exane Ltd Brice Prunas Exane Ltd Exane SA is regulated by the Autorité des Marchés Financiers (AMF) in France, Exane Ltd is authorised and regulated by the Financial Conduct Authority (FCA) in the United Kingdom, and Exane Inc. is regulated by FINRA and the U.S. Securities and Exchange Commission in the United States.
Research Analyst Compensation The research analyst(s) responsible for the preparation of this report receive(s) compensation based upon various factors including overall firm revenues, which may include investment banking activities.
Research Analyst-Specific Disclosures The research analyst(s) responsible for the preparation of this report (or members of their household) may have a relationship with the companies covered by this research report, as described in the numbered disclosures below. The table immediately below indicates which, if any, of these disclosures apply to the research analyst(s) responsible for preparation of this research report. Research Analyst(s) Companies Disclosures NONE 1 – The research analyst(s) responsible for the preparation of this report or a member of his/her household has/have a financial interest in the securities of the subject company/ies, as indicated in the previous table. 2 – The research analyst(s) responsible for the preparation of this report or a member of his/her household serve(s) as an officer, director or advisory board member of the subject company/ies indicated in the previous table. 3 – The research analyst(s) responsible for the preparation of this report received compensation from the subject company/ies indicated in the previous table in the past twelve months.
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BNP Paribas-related disclosures BNPP may have a relationship with the companies covered by this research report, as described in the numbered disclosures below. The table immediately below indicates which, if any, of these disclosures apply to BNPP’s relationship with the subject company/ies. Companies Disclosures NONE 1 – BNPP beneficially owns 1% or more of any class of common equity securities of the subject company/ies 2 – BNPP managed or co-managed an offering of Equity securities for the subject company/ies in the past 12 months 3 – BNPP acted as Advisor in a Public Offer involving the subject Company/ies in the past 12 months. 4 – BNPP received compensation for investment banking services from the subject company/ies in the past 12 months 5 – BNPP expects to receive or intends to seek compensation for investment banking services from the subject company/ies in the next 3 months 6 – A member of senior BNPP management is a member of the Board of the subject company
Exane BNP Paribas Research Indra 27 March 2015 page 24
Explanation of Research Ratings Stock Rating Exane’s Ratings are relative ratings defined against the performance of the MSCI Index sectors. Outperform (O/P): The stock is expected to outperform the stock’s MSCI sector over a 12-month investment horizon. Neutral: The stock is expected to perform in line with the performance of the stock’s MSCI sector over a 12-month investment horizon. Underperform (U/P): The stock is expected to underperform the stock’s MSCI sector over a 12-month investment horizon. Under review: The rating of the stock has been placed under review after significant news. Any possible change will be confirmed as soon as possible in the form of a new broadly disseminated report Restricted (RS): The stock is covered by Exane but there is no Rating and no Target Price because Exane is involved in an equity capital market transaction relating to the subject company. Not Rated (NR): The stock is covered by Exane but there is no Rating and no Target Price at this time. Not Covered (NC): Exane does not cover this company.
Definitions For an explanation of definitions used in Exane research reports, please see the glossary at https://www.exane.com/jsp/action/commun/JSPacLexique.jsp Distribution of Exane BNP Paribas’ equity recommendations
As at 05/01/2015 Exane BNP Paribas covered 592 stocks. The stocks that, for regulatory reasons, are not accorded a rating by Exane BNP Paribas are excluded from these statistics. For regulatory reasons, our ratings of Outperform, Neutral and Underperform correspond respectively to Buy, Hold and Sell; the underlying signification is, however, different as our ratings are relative to the sector.
42% of stocks covered by Exane BNP Paribas were rated Outperform. During the last 12 months, Exane acted as distributor for BNP Paribas on the 3% of stocks
with this rating for which BNP Paribas acted as manager or co-manager on a public offering. BNP Paribas provided investment banking services to 14% of the companies accorded this rating*.
38% of stocks covered by Exane BNP Paribas were rated Neutral. During the last 12 months, Exane acted as distributor for BNP Paribas on the 2% of stocks with
this rating for which BNP Paribas acted as manager or co-manager on a public offering. BNP Paribas provided investment banking services to 12% of the companies accorded this rating*.
20% of stocks covered by Exane BNP Paribas were rated Underperform. During the last 12 months, Exane acted as distributor for BNP Paribas on the 2% of
stocks with this rating for which BNP Paribas acted as manager or co-manager on a public offering. BNP Paribas provided investment banking services to 4% of the companies accorded this rating*.
* Exane is independent from BNP Paribas. Nevertheless, in order to maintain absolute transparency, we include in this category transactions carried out by BNP
Paribas independently from Exane. For the purpose of clarity, we have excluded fixed income transactions carried out by BNP Paribas.
Price and Ratings Chart
Indra
Historical closing price & target price (as of 26/03/2015) Historical of Rating & target price changes
Source: Exane BNP Paribas
The latest company-specific disclosures, valuation methodologies and risks to investment case are available on www.exane.com/toolbox/compliance if they are not in this document.
Exane BNP Paribas Research Indra 27 March 2015 page 25
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Exane BNP Paribas Research Indra 27 March 2015 page 26
INDRA (Outperform) Price at 26 Mar. 15 / Target Price
IT Services - Spain EUR10.4 / EUR14 +35%
21 Apr. 15 Atos : Q1 2015 Sales
22 Apr. 15 Econocom : Q1 Trading Statement
28 Apr. 15 Alten: Q1 2015 Sales (Post Mkt)
Sopra Steria: Q1 2015 Sales (Pre Mkt)
29 Apr. 15 Capgem ini: Q1 2015 Sales (Pre Mkt)
30 Apr. 15 Altran: Q1 2015 Sales
Altran: AGM
06 May 15 Capgem ini: AGM
19 May 15 Econocom : AGM
Fernando Abril-Martorell, Chairman 27 May 15 Atos : AGM
Javier De Andrès, Managing Director 28 May 15 Capgem ini: Analyst Meeting
Juan Carlos Baena, CFO 11 Jun. 15 Sopra Steria: AGM
Javier Marín, Investor Relations 18 Jun. 15 Alten: AGM
26 Jun. 15 Indra: AGM
24 Jul. 15 Econocom : Q2 Trading Statement
28 Jul. 15 Atos : H1 2015 Results
29 Jul. 15 Alten: Q2 2015 Sales
SEPI 20.1% 30 Jul. 15 Altran: Q2 2015 Sales
Corporacion Financiera Alba 11.3% Capgem ini: H1 2015 Results (Pre Mkt)
Telefonica 3.0% 03 Sep. 15 Altran: H1 2015 Results
Other Shareholders 65.6% Econocom : H1 2015 Results
23 Sep. 15 Alten: H1 2015 Results
21 Oct. 15 Econocom : Q3 Trading Statement
28 Oct. 15 Alten: Q3 2015 Sales
29 Oct. 15 Altran: Q3 2015 Sales
Brice Prunas (+44) 207 039 9539
Indra is Spain's largest IT services company w ith a market share of 11% and around 38,548 employees. Indra's business model dif fers markedly f rom those of traditional IT Services companies, as 65% of its revenues come f rom solutions, tw o thirds of w hich are developed by Indra in-house. The acquisition of Politec in 2011 made Indra a Top 10 player in Brazil. The company is 30%-exposed to the Spanish public sector (20% public, 9% government agencies w ith ow n budget).
Management
Ownership structure
2014 sales by region
39%
27%
21%
13%
39% Spain
27% Latin America
21% Europe & North America (ex Spain)
13% Rest of World
64%
36%
64% Solutions
36% Services
Analyst
Peer group YTD performanceSector calendar
LONDON (+44) 207 039 9400
FRANKFURT (+49) 69 42 72 97 300
MADRID (+34) 91 114 83 00
NEW YORK (+1) 212 634 4990
STOCKHOLM (+46) 8 5629 3500
PARIS (+33) 1 44 95 40 00
GENEVA (+41) 22 718 65 65
MILAN (+39) 02 89 63 17 13
SINGAPORE (+65) 6212 9059
Price at 26 Mar. 15 / 12m Target Price
EUR10.4 / EUR14 +35%Analys t: Brice Prunas (+44) 207 039 9539 IT Services - Spain
Com pany Highlights EURm
Enterprise value 2,623
Market capitalisation 1,705
Free f loat 1,170
3m average volume 16
Perform ance (*) 1m 3m 12m
Absolute 13% 25% (25%)
Rel. Sector 9% 9% (38%)
Rel. MSCI SMID 12% 7% (38%)
12m Hi/Lo (EUR) : 14.8 -30% / 7.6 +37%
CAGR 2002/2014 2014/2017
EPS restated (**) NC NC
CFPS 3% (4%)
Price (yearly avg from Dec. 04 to Dec. 14) 10.9 15.4 16.5 18.7 16.9 15.8 14.2 12.8 8.5 10.6 11.8 10.4 10.4 10.4
PER SHARE DATA (EUR) Dec. 04 Dec. 05 Dec. 06 Dec. 07 Dec. 08 Dec. 09 Dec. 10 Dec. 11 Dec. 12 Dec. 13 Dec. 14p Dec. 15e Dec. 16e Dec. 17e
No of shares year end, basic, (m) 154.289 146.188 146.188 164.133 164.133 164.133 164.133 164.133 164.133 164.133 164.133 164.133 164.133 164.133
Avg no of shares, diluted, excl. treasury stocks (m) 154.289 147.242 143.575 161.437 160.101 161.053 162.445 162.641 162.594 167.682 164.133 181.345 181.345 181.345
EPS, company definition 0.52 0.70 0.78 0.91 1.12 1.18 1.16 1.11 0.82 0.69 (0.51) 0.49 0.56 0.67
EPS restated, fully diluted 0.56 0.70 0.77 0.94 1.05 1.11 1.17 0.86 0.63 0.22 (0.34) 0.52 0.59 0.70
% change (7.2%) 24.5% 10.5% 22.2% 11.2% 5.3% 6.0% (26.6%) (26.3%) (64.6%) NS NS 13.2% 18.9%
CFPS 0.73 0.94 1.03 1.09 1.59 1.60 1.50 1.36 1.02 0.98 0.77 0.48 0.56 0.68
Book value (BVPS) (a) 2.6 1.9 2.4 4.2 4.8 5.7 6.0 6.4 6.6 6.8 5.7 5.9 6.2 6.7
Net dividend 0.52 0.39 0.43 0.50 0.61 0.67 0.68 0.68 0.34 0.34 0.34 0.34 0.23 0.28
STOCKMARKET RATIOS Dec. 04 Dec. 05 Dec. 06 Dec. 07 Dec. 08 Dec. 09 Dec. 10 Dec. 11 Dec. 12 Dec. 13 Dec. 14p Dec. 15e Dec. 16e Dec. 17e
P / E (P/ EPS restated) 19.5x 22.1x 21.3x 19.8x 16.1x 14.3x 12.1x 14.9x 13.5x 47.1x NC 19.9x 17.6x 14.8x
P / E relative to MSCI Small Cap 56% 117% 353% 163% 32% 8% 24% 38% 130% NC 116% 117% 111%P / CF 15.0x 16.4x 16.1x 17.2x 10.6x 9.9x 9.4x 9.4x 8.4x 10.8x 15.4x 21.5x 18.7x 15.2x
FCF yield 5.3% 2.2% 4.0% 2.1% 4.0% 4.3% 0.3% (2.7%) 2.4% 2.7% 2.1% 0.7% 4.1% 4.8%
P / BVPS 4.21x 7.97x 6.97x 4.41x 3.56x 2.78x 2.35x 2.01x 1.29x 1.55x 2.07x 1.75x 1.68x 1.55x
Net yield 4.8% 2.5% 2.6% 2.7% 3.6% 4.2% 4.8% 5.3% 4.0% 3.2% 2.9% 3.3% 2.2% 2.7%
Payout 92.8% 55.8% 55.7% 53.0% 58.1% 60.4% 58.0% 78.6% 53.6% NS NC 65.2% 39.5% 39.8%
EV / Sales 1.49x 1.95x 1.85x 1.54x 1.25x 1.12x 1.02x 1.01x 0.71x 0.84x 0.96x 0.88x 0.86x 0.82x
EV / Restated EBITDA 12.0x 14.7x 14.1x 12.5x 10.1x 9.0x 8.7x 10.5x 9.1x 16.2x 55.5x 11.8x 11.1x 9.9x
EV / Restated EBITA 14.0x 16.6x 16.2x 14.5x 11.8x 10.6x 10.2x 12.6x 11.7x 24.3x NS 15.8x 14.6x 12.7x
EV / OpFCF 14.2x 30.0x 17.7x 24.5x 17.7x 14.2x 35.0x 59.3x 16.4x 18.7x 20.7x 28.5x 17.1x 15.6x
EV / Capital employed (incl. gross goodw ill) 10.7x 9.1x 5.9x 3.7x 3.2x 2.6x 2.1x 1.5x 1.1x 1.4x 1.9x 1.8x 1.9x 1.9x
ENTERPRISE VALUE (EURm ) 1,610 2,345 2,598 3,330 2,965 2,806 2,599 2,711 2,096 2,446 2,808 2,623 2,628 2,604
Market cap 1,689 2,272 2,368 3,025 2,710 2,539 2,302 2,084 1,389 1,736 1,940 1,705 1,705 1,705
+ Adjusted net debt (205) (54) 59 150 149 135 275 514 633 623 867 918 922 898
+ Other liabilities and commitments 5 3 21 9 3 50 20 141 103 116 64 65 66 67
+ Revalued minority interests 151 158 180 183 146 124 53 43 43 43 26 24 25 25
- Revalued investments 30 34 30 37 43 41 50 71 72 72 90 90 90 90
P & L HIGHLIGHTS (EURm ) Dec. 04 Dec. 05 Dec. 06 Dec. 07 Dec. 08 Dec. 09 Dec. 10 Dec. 11 Dec. 12 Dec. 13 Dec. 14p Dec. 15e Dec. 16e Dec. 17e
Sales 1,079 1,202 1,407 2,168 2,380 2,513 2,557 2,689 2,941 2,914 2,938 2,990 3,069 3,170
Restated EBITDA (b) 134 159 184 265 293 311 298 258 230 151 51 221 237 262
Depreciation (20) (18) (23) (35) (41) (47) (43) (42) (50) (51) (55) (56) (57) (58)
Restated EBITA (b) (**) 115 141 160 230 252 264 255 216 180 101 (5) 166 180 204
Reported operating prof it (loss) 115 142 161 222 267 280 252 268 217 198 (43) 165 179 202
Net f inancial income (charges) 4 4 (1) (13) (23) (25) (19) (38) (54) (64) (54) (50) (48) (46)
Af f iliates (6) (1) 1 2 3 (0) 1 3 (0) 12 (0) 0 0 0
Other (2) (1) (1) (0) 0 0 0 0 0 0 0 0 0 0
Tax (23) (38) (44) (57) (65) (63) (46) (52) (36) (30) 7 (25) (29) (34)
Minorities (5) (3) (4) (7) (4) (2) 1 (0) 5 (1) (2) (1) (1) (1)
Goodw ill amortisation (4) - - - - - - - - - - - - -
Net attributable prof it reported 80 104 111 147 179 190 188 181 133 116 (92) 89 101 121
Net attributable profit restated (c) 83 103 111 152 168 178 190 140 103 38 (55) 87 100 120
CASH FLOW HIGHLIGHTS (EURm ) Dec. 04 Dec. 05 Dec. 06 Dec. 07 Dec. 08 Dec. 09 Dec. 10 Dec. 11 Dec. 12 Dec. 13 Dec. 14p Dec. 15e Dec. 16e Dec. 17e
EBITDA (reported) 134 160 187 259 313 334 297 313 268 250 43 230 246 272
EBITDA adjustm ent (b) 0 (1) (3) 6 (19) (23) 2 (55) (38) (99) 8 (9) (9) (10)
Other items (0) 7 13 (13) 19 32 13 66 28 99 169 (61) (61) (60)
Change in WCR (5) (70) (11) (46) (78) (66) (145) (152) (56) (63) (28) (6) 42 36
Operating cash flow 129 96 185 207 235 277 166 172 202 187 192 155 218 238
Capex (15) (18) (38) (71) (67) (80) (92) (126) (74) (56) (57) (63) (65) (71)
Operating free cash flow (OpFCF) 113 78 147 136 168 197 74 46 128 131 136 92 153 167
Net f inancial items + tax paid (16) (24) (44) (69) (52) (83) (67) (102) (93) (82) (94) (79) (82) (84)
Free cash flow 98 55 103 67 115 115 7 (57) 35 49 42 13 72 83
Net f inancial investments & acquisitions (9) (24) (149) (39) (15) (20) (46) (45) (53) (14) (13) (20) (20) (20)
Other 6 (1) (11) 9 5 8 12 (22) 1 35 0 0 0
Capital increase (decrease) 0 (103) 0 1 (21) 13 (6) (4) 7 (3) (7) 0 0 0
Dividends paid (27) (78) (56) (129) (82) (101) (107) (111) (109) (56) (56) (56) (56) (38)
Increase (decrease) in net financial debt (68) 151 113 92 (1) (15) 140 239 120 (11) 34 63 4 (25)
Cash flow , group share 112 138 147 176 254 257 244 222 165 164 126 80 94 117
BALANCE SHEET HIGHLIGHTS (EURm ) Dec. 04 Dec. 05 Dec. 06 Dec. 07 Dec. 08 Dec. 09 Dec. 10 Dec. 11 Dec. 12 Dec. 13 Dec. 14p Dec. 15e Dec. 16e Dec. 17e
Net operating assets 142 191 308 619 658 714 824 1,035 1,089 1,033 1,038 1,003 1,020 1,042
WCR 8 67 132 297 305 420 493 650 721 714 742 748 705 669
Restated capital em ployed, incl. gross goodw ill 151 257 438 906 937 1,091 1,245 1,765 1,838 1,752 1,443 1,438 1,402 1,377
Shareholders' funds, group share 402 283 346 697 781 932 991 1,045 1,089 1,124 941 974 1,019 1,101
Minorities 36 20 26 42 42 45 23 21 21 11 13 14 15 16
Provisions/ Other liabilities 32 68 75 98 66 94 130 313 302 247 383 249 174 101
Net f inancial debt (cash) (205) (54) 59 150 149 135 275 514 633 623 657 720 724 699
FINANCIAL RATIOS (%) Dec. 04 Dec. 05 Dec. 06 Dec. 07 Dec. 08 Dec. 09 Dec. 10 Dec. 11 Dec. 12 Dec. 13 Dec. 14p Dec. 15e Dec. 16e Dec. 17e
Sales (% change) 10.0% 11.4% 17.0% 54.1% 9.8% 5.6% 1.7% 5.1% 9.4% (0.9%) 0.8% 1.8% 2.6% 3.3%
Organic sales grow th 10.6% 9.4% 9.7% 10.9% 10.2% 6.3% 0.3% 0.9% 0.8% 2.0% 5.2% 1.8% 2.6% 3.3%
Restated EBITA (% change) (**) 5.2% 22.9% 13.6% 43.7% 9.5% 4.7% (3.5%) (15.2%) (16.7%) (44.1%) NC NC 8.9% 13.3%
Restated attributable net prof it (% change) (**) (7.1%) 18.8% 7.8% 37.4% 10.3% 6.0% 6.9% (26.5%) (26.3%) (63.5%) NC NC 14.3% 20.3%
Personnel costs / Sales 29.3% 29.3% 32.6% 38.8% 41.1% 40.1% 41.0% 44.4% 47.5% 49.9% 47.8% 50.0% 47.8% 50.0%
Restated EBITDA margin 12.4% 13.2% 13.1% 12.2% 12.3% 12.4% 11.7% 9.6% 7.8% 5.2% 1.7% 7.4% 7.7% 8.3%
Restated EBITA margin 10.6% 11.7% 11.4% 10.6% 10.6% 10.5% 10.0% 8.0% 6.1% 3.4% (0.2%) 5.5% 5.9% 6.4%
Tax rate 20.5% 26.2% 27.7% 27.2% 26.2% 24.6% 19.6% 22.4% 21.9% 20.4% NC 22.0% 22.0% 22.0%
Net margin 7.8% 8.9% 8.2% 7.1% 7.7% 7.7% 7.3% 6.7% 4.3% 4.0% (3.1%) 3.0% 3.3% 3.8%
Capex / Sales 1.4% 1.5% 2.7% 3.3% 2.8% 3.2% 3.6% 4.7% 2.5% 1.9% 1.9% 2.1% 2.1% 2.3%
OpFCF / Sales 10.5% 6.5% 10.4% 6.3% 7.0% 7.8% 2.9% 1.7% 4.3% 4.5% 4.6% 3.1% 5.0% 5.3%
WCR / Sales 0.8% 5.6% 9.4% 13.7% 12.8% 16.7% 19.3% 24.2% 24.5% 24.5% 25.2% 25.0% 23.0% 21.1%
Capital employed (excl. gdw ./intangibles) / Sales 6.6% 10.9% 15.7% 19.1% 17.4% 20.5% 22.2% 33.2% 30.9% 29.0% 30.2% 30.8% 29.6% 28.5%
ROE 21.6% 36.4% 32.1% 21.9% 21.5% 19.1% 19.2% 13.4% 9.5% 3.4% (5.9%) 9.0% 9.8% 10.9%
Gearing (47%) (18%) 16% 20% 18% 14% 27% 48% 57% 55% 91% 93% 89% 80%
EBITDA / Financial charges NC NC NS 20.8x 12.8x 12.7x 15.7x 6.8x 4.3x 2.4x 0.9x 4.4x 4.9x 5.7x
Adjusted f inancial debt / EBITDA NC NC 0.3x 0.6x 0.5x 0.4x 0.9x 2.0x 2.8x 4.1x 17.1x 4.1x 3.9x 3.4x
ROCE, excl. gdw ./intangibles NS 79.3% 52.5% 40.4% 44.9% 38.6% 36.0% 18.7% 15.4% 9.5% (0.4%) 14.3% 15.7% 17.9%
ROCE, incl. gross goodw ill 60.1% 40.5% 26.4% 18.5% 19.8% 18.3% 16.4% 9.4% 7.6% 4.6% (0.3%) 9.2% 10.2% 11.7%
WACC 8.2% 7.3% 7.2% 7.4% 7.1% 9.0% 8.3% 9.8% 11.6% 8.0% 7.4% 6.5% 6.5% 6.5%
Latest M odel update: 27 Mar. 15
(a) Intangibles: EUR891.80m, or EUR5 per share. (b) adjusted for capital gains/losses, impairment charges, exceptional restructuring charges, capitalized R&D, pension charge replaced by service cost
(c) adj.for capital gains losses, imp.charges, capitalized R&D, am. of intangibles f rom M&A, exceptional restructuring, (*) In listing currency, w ith div. reinvested, (**) also adjusted for am. of intangibles f rom M&A, or for am. of gw ill for pre IFRS year
Reuters / Bloom berg: IDR.MC / IDR SM
INDRA (Outperform)
Price 12.0*CFPS Relative to MSCI SMID5.5
24.0
10.0
14.0
18.0
Target Price