IndiNivesh Best Sectors Stocks Post 2014

IndiaNivesh Securities Private Limited
e-mail: research@indianivesh.in | Website: www.indianivesh.in

IndiaNivesh Research June 2014
Q4FY14 Results Review
AUTO SECTOR
Volumes remained subdued (except strong
two wheeler growth) M&HCV and PV
segment on weak demand due to macro
headwinds
Auto companies posted mixed set of numbers. EBITDA margin expanded
due to better product mix , favorable currency movement and softening in
raw material prices. However, volumes remained subdued (except strong
two wheeler growth) due to macro headwinds.
Tata motors showed muted performance due to poor domestic business
performance. Maruti Suzuki number were below expectation due to higher
promotional spending and compensation paid to dealers owing to excise
duty cut. M&M showed moderation in automobile segment growth which
was compensated by tractor segment growth
In two wheeler segment, Bajaj Auto and Hero Motocorp EBITDA margin was
above consensus due to better product mix coupled with higher average
realization.
In Auto ancillaries, Exide Industries and Swaraj Engines reported Q4FY14
numbers (Standalone) above expectations due to higher sales volume and
capacity addition respectively.
Volume likely to pick up due to improved consumer
sentiment | Top Picks: Hero MotoCorp & Bajaj Auto
Source: BSE India (as on 5th June 2014)
EBITDA margin improved due to decrease
in raw material cost and favorable
currency movement.
Sensex VS BSE Auto
1m 3m 12m
BSE Auto 12.0% 18.8% 35.4%
Sensex 11.2% 16.3% 28.2%
IndiaNivesh Research June 6, 2014 | 2 Q4FY14 Results Review
AUTO SECTOR (contd)
Q4FY14 Review
In Q4FY14, growth in top-line was impacted by lower volume which was compensated by higher realization
On the EBITDA margin front, almost all (except Maruti and Hero MotoCorp ) the auto related companies witnessed an
improvement on YoY basis due to lower input cost, favorable product mix and exchange rate.
Though Consolidated EBITDA margin of Tata Motors expanded by 138 bps YoY to 15.6% led by margin expansion by
JLR, consolidated net profit de-grew 1% YoY and 18% QoQ to Rs.39.18 bn (dragged by loss of Rs. 8.1 bn from standalone
business).
Source: Company Filings; Indianivesh Research; * Q3CY13, All standalone numbers except Eicher and Tata Motors
Company Q4FY14 Margin %
Change in
EBITDA margin
(bps) QoQ % Change YoY % Change
Rs. Mn Sales EBITDA PAT EBITDA PAT Q-o-Q Y-o-Y Sales EBITDA PAT Sales EBITDA PAT C o m m e n t s
Ashok Leyland 30,768 1,839 3,634 6.0 11.8 1,094.0 66.0 57.5 -289.8 NA -17.5 -7.2 NA EBITDA margin expanded by better product mix, lower discounts
and operating leverage benefits
Bajaj Auto 49,323 9,314 7,626 18.9 15.5 -324.0 125.9 -3.9 -18.0 -15.7 3.9 11.3 -0.4 Domestic sales was compensated by better exports number
Eicher Motor* 19,242 2,220 1,391 11.5 7.2 161.8 164.8 14.6 33.3 44.5 11.6 30.2 42.0 In line with expectation, 2W perfromed well
Exide Ind 16,130 2,189 1,321 13.6 8.2 263.5 30.6 23.7 53.5 70.4 4.7 7.1 -9.8 Above street expectations due to higher sales volume for both
Automobile and industrial segment coupled with cost control
measures
Hero Moto 65,130 8,942 5,544 13.7 8.5 67.1 -9.8 -5.3 -0.4 5.7 6.0 5.2 -3.4 PAT above our expectation due to lower raw material cost and
higher other income
M&M 110,007 9,066 9,341 8.2 8.5 -485.4 -386.7 4.2 -34.4 - 4.9 -28.6 5.0 Strong performance in tractor segment offset by auto segment
due to merger of MTBL
Maruti Suzuki 121,014 12,475 8,000 10.3 6.6 -212.7 -472.1 11.1 -7.9 17.4 -9.0 -37.6 -35.5 Below our expectation due to higher promotional spending and
compensation paid to dealers owing to reduction in excise duty
Tata Motors 653,171 99,998 39,183 15.3 6.0 -28.6 137.9 2.3 0.4 -18.5 16.6 28.2 -0.7 PAT below street expectation due to poor performance from
domestic business
TVS Motor 21,557 1,387 521 6.4 2.4 43.5 115.1 4.8 12.4 -24.2 21.4 47.9 -259.3 lower other expenses and higher realization boosted EBITDA
margin
AUTO SECTOR (contd)
Valuation & Outlook
We believe good governance and faster reform would lead to higher employment/ disposable income that will improve consumer
sentiment. This will lead to revival in volume in automotive segment. We expect the new government would have more focus on rural
employment and development. Thus we expect rural market to be a key source of sustained automotive demand in coming years.
Rural demand and new launches would act as a positive trigger for two wheeler and PV segment. In our view, return of the first-time
buyer will be the trend in CY14. Further, marriage season will also drive the demand of 2w. In two wheeler Scooter segment is likely to
outperform Motorcycle M&HCV demand continues to be under pressure due to hike in diesel price and slow down in industrial
activities. We believe long term volume outlook of auto companies remain positive driven by lower penetration rate, new product
launches and exports potential.
Top Pick: We Prefer Hero Motocorp (product lifecycle turning favorable coupled with cost management benefits).Bajaj auto would be
beneficiary of increase in export sales. Exide industries would be benefited from higher capacity utilization due to revival in OEMs
segment demand.
Source: Company Filings; IndiaNivesh Research; CMP-05-06-2014; * CY14E; All consolidated numbers except Ashok Leyland and Hero Motocorp
Company Sales EBITDA PAT Mcap P/E(x) M cap/Sales(x) EBITDA% NPM% ROE % CMP Target Price Current Previous
Name FY16E FY16E FY16E FY16E FY16E FY16E FY16E FY16E FY16E Rs. Rs. Recom. Recom.
(Rs. Mn) (Rs. Mn) (Rs. Mn) (Rs. Mn)
Ashok Leyland 147264 12991 4612 90463 19.6 0.6 8.8 3.1 11.0 34 UR Neutral Neutral
Bajaj Auto 227297 47777 39132 578575 14.8 2.5 21.0 17.2 32.9 1999 2222.0 Buy Buy
Eicher Motor* 37642 8763 6695 193441 29.4 5.1 23.3 17.8 28.9 7140 UR Sell Sell
Exide 84989 13213 8362 126438 0.0 1.5 15.5 9.8 17.2 149 176 Buy Hold
Hero MotoCorp 301613 52027 23310 516542 17.6 1.7 17.2 7.7 42.6 2587 2660 Buy Buy
M&M 937451 119943 63382 741688 11.0 0.8 12.8 6.8 20.1 1204 UR Hold Buy
Maruti Suzuki 487937 53414 30374 719721 23.7 1.5 10.9 6.2 16.4 2383 1980.0 Hold Buy
Tata Motors 3108630 473725 198613 1301746 7.1 0.4 15.2 6.4 23.4 435 UR Neutral Neutral
TVS Motor 101297 6673 3547 62284 17.5 0.6 6.6 3.5 22.2 131 96.0 Hold Neutral
BANKING & FINANCIAL SERVICES
Healthy Advances and Deposits Growth
Banks from our (INSPL) coverage universe reported 17% y-o-y
average credit growth in Q4FY14, which was above the industry
average of 15%* y-o-y growth. In the similar line, average Deposits
growth of INSPL banking universe was at 16% y-o-y in Q4FY14 as
compared to industry average of 14%* y-o-y growth.
INSPLs PSBs and private sector banks universe delivered a healthy
loan growth of 17% and 19% y-o-y, respectively. Among all the
banks, Canara Bank and HDFC Bank reported the highest loan
growth of 24% and 26% y-o-y, respectively mainly led by high
growth in retail advances.
Moreover, deposits growth moderated in Q4FY14 as compared to
previous quarter due to closure of concessional swap window for
FCNR (B) deposits. INSPLs PSBs and private sector banks universe
reported 16% y-o-y deposits growth. Among all the banks, HDFC
Bank and BOB reported the highest growth of 24% and 20% y-o-
y, respectively led by high growth in current deposits.
Management of majority of the banks under our coverage
indicated that the growth in advances book will be driven by retail
(home, auto) advances in H1FY15E while fresh disbursals to large
corporates will be the least preferred and selective.
BANKING : Improved performance but asset quality
suspects for PSBs | Top Picks: SBI, BOB, Federal Bank &
DCB Bank
INSPL: IndiaNivesh Securities Private Limited; * Outstanding as on Mar. 21, 2014
Advances Deposits
YoY (%) QoQ (%) YoY (%) QoQ (%)
SBI 16 5 16 3
BOB 21 13 20 13
PNB 13 7 15 7
Canara 24 5 18 3
Allahabad 7 1 7 2
Corporation 15 11 16 9
PSU (Avg.) 17 7 16 6
ICICI 17 2 13 5
HDFC Bank 26 2 24 5
Axis 17 9 11 7
Federal -1 4 4 3
DCB 24 11 23 8
Private (Avg.) 19 4 16 5
Industry (Avg.) 17 6 16 6
Source: Company Filings, IndiaNivesh Research
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Advances Growth YoY (%) Deposits Growth YoY (%)
BANKING & FINANCIAL SERVICES (contd)
CASA ratio remains stable:
CASA ratio of INSPLs banking universe was almost stable on y-o-y basis
(+35 bps q-o-q) and stood at 34.6% in Q4FY14. However, sequential
increase in CASA ratio led to marginally decrease in the cost of
deposits for the banking industry. Private sector banks managed to
outperform their PSBs counterparts as PSBs universe witnessed 25 bps
y-o-y decline in CASA ratio to 32.0% whereas private sector banks
reported 25 bps y-o-y increase in CASA ratio to 37.7%.
Healthy NII growth and Stable NIMs:
The NIMs of INSPLs banking universe was almost stable as it
contracted marginally by 1 bp & 7 bps on q-o-q & y-o-y
basis, respectively.
Our private banks universe was successful in increasing their NIMs by
15 bps sequentially and stood at 3.8% as compared to 10 bps q-o-q
decline of PSBs.
On the NII front, while Private banks reported a healthy performance
with growth of 17% y-o-y, PSBs witnessed slightly slower growth of
14% y-o-y due to elevated asset quality pressures. Within INSPL
Universe, DCB and Allahabad Bank reported highest growth of 36%
and 28% y-o-y (due to low base) whereas Corporation Bank reported
negative growth of -3% y-o-y (due to reversal of interest income).
We expect NIMs of PSBs to improve slowly and steadily in FY15E due
to gradual improvement in asset quality. Banks with a stable CASA are
better positioned to sustain their NIMs.
CASA Ratio (%)
Q4FY14 Q4FY13
YoY
(bps)
Q3FY14
QoQ
(bps)
SBI 44.4 46.5 -207 43.9 54
BOB 31.8 30.4 138 32.3 -51
PNB 38.3 39.2 -87 40.4 -210
Canara 25.9 25.1 80 24.3 160
Allahabad 31.3 30.7 62 30.8 57
Corporation 20.3 21.7 -135 19.9 44
PSU (Avg) 32.0 32.3 -25 31.9 9
ICICI 42.9 41.9 100 43.3 -40
HDFC Bank 44.8 47.4 -263 43.7 111
Axis 45.0 44.0 100 43.0 200
Kotak Mah. 30.8 26.8 405 30.4 45
DCB 25.0 27.2 -216 24.8 20
Private (Avg) 37.7 37.5 25 37.0 67
Industry
(Avg)
34.6 34.6 -2 34.2 35
NII (Rs mn) NIM (%)
Q4FY14 Q4FY13 YoY (%) Q3FY14 QoQ (%) Q4FY14 Q4FY13 YoY (bps) Q3FY14 QoQ (bps)
SBI 129,028 110,784 16 126,405 2 3.2 3.3 -17 3.2 -2
BOB 31,243 28,140 11 30,571 2 2.3 2.5 -22 2.4 -8
PNB 40,018 37,765 6 42,211 -5 3.2 3.5 -31 3.6 -37
Canara 25,352 20,906 21 22,270 14 2.3 2.4 -13 2.2 6
Allahabad 13,528 10,560 28 13,377 1 2.7 2.3 37 2.8 -8
Corporation 9,075 9,308 -3 10,016 -9 1.9 2.3 -40 2.2 -27
PSU (Total) 248,244 217,463 14 244,850 1 2.9 3.1 -18 3.0 -10
ICICI 43,565 38,032 15 42,551 2 3.4 3.3 2 3.3 3
HDFC Bank 49,526 42,953 15 46,348 7 4.4 4.3 10 4.2 20
Axis 31,658 26,647 19 29,840 6 3.9 3.7 19 3.7 18
Kotak Mah. 6,251 4,798 30 5,456 15 3.7 3.1 63 3.3 41
DCB 913 670 36 831 10 3.6 3.5 7 3.6 4
Private (Total) 131,912 113,099 17 125,025 6 3.9 3.8 12 3.7 15
Industry (Total) 380,156 330,562 15 369,876 3 3.2 3.3 -7 3.2 -1
Healthy increase in other income:
Non Interest Income growth remained healthy for the entire INSPL
Bank universe as it reported 25% y-o-y growth. It was mainly due to
significant recoveries from written-off accounts and aided by sale of
advances to ARCs by PSBs. PSBs and private sector banks reported 29%
and 18% y-o-y growth, respectively. However, Corporation Bank
reported negative growth of 32% y-o-y due to lower treasury gains and
weak fee income.
Asset quality continued to deteriorate, albeit at a
slower pace sequentially:
PSBs asset quality improved slightly sequentially as many of the PSBs
sold their NPAs to asset reconstruction companies (ARCs) in Q4FY14.
However, if we exclude this one time sale to ARCs then the asset
quality of PSBs continue to deteriorate further but at a slower pace.
The private sector banks maintained a better asset quality and
performed relatively better as compared to PSBs.
Gross NPAs of PSBs and private sector banks decreased 10 bps and 30
bps sequentially and stood at 4.1% and 1.9%, respectively. Within our
coverage, Corporation Bank reported 34 bps and 17 bps q-o-q increase
in its Gross and Net NPAs to 3.4% and 2.3%, respectively.
However, DCB surprised positively with 108 bps q-o-q decline in its
Gross NPA to 1.7%.
Provision Coverage Ratio (PCR) was almost stable sequentially for both
PSBs and private sector banks universe. Overall, PCR of PSBs and
private banks stood at 58% and 77%, as of Q4FY14 respectively.
Other Income (Rs mn)
Q4FY14 Q4FY13 YoY (%) Q3FY14 QoQ (%)
SBI 65,857 41,903 57 55,467 19
BOB 13,263 11,909 11 9,321 42
PNB 13,969 11,762 19 9,384 49
Canara 10,700 10,065 6 8,514 26
Allahabad 4,262 5,245 -19 5,423 -21
Corporation 3,883 5,674 -32 3,386 15
PSU
(Total)
111,933 86,559 29 91,495 22
ICICI 29,761 22,082 35 28,010 6
HDFC Bank 20,014 18,036 11 21,483 -7
Axis 22,134 20,072 10 16,444 35
Kotak Mah. 1,784 1,969 -9 1,563 14
DCB 334 331 1 328 2
Private
(Total)
74,028 62,489 18 67,828 9
Industry
(Total)
185,960 149,048 25 159,323 17
Provision Coverage Ratio (%)
During Q4FY14, fresh addition to restructuring books for PSBs and
private sector banks remained elevated. Amongst our coverage, SBI
witnessed the highest restructuring during the quarter at Rs 76 bn
followed by PNB at Rs 32 bn and ICICI Bank at Rs 12 bn.
We sense that going forward, given the stress in the economy, the
increase in addition of restructuring advances may continue in H1FY15E
for both PSBs and private sector banks.
Overall, we dont expect any immediate improvement in asset quality
for the entire banking system in H1FY15. However, private sector banks
continue to maintain better asset quality as they have better credit
standards and their focus on retail lending as compared to their
nationalized counterparts.
GNPA (%)
Q4FY14 Q4FY13 YoY (bps) Q3FY14 QoQ (bps)
SBI 4.9 4.7 20 5.7 -78
BOB 2.9 2.4 54 3.3 -38
PNB 5.3 4.3 98 5.0 29
Canara 2.5 2.6 -8 2.8 -30
Allahabad 5.7 3.9 181 5.5 26
Corporation 3.4 1.7 170 3.1 34
PSU (Avg.) 4.1 3.3 86 4.2 -10
ICICI 3.0 3.2 -19 3.1 -2
HDFC Bank 1.0 1.0 1 1.0 -2
Axis 1.2 1.1 16 1.3 -3
Kotak Mah. 2.5 3.4 -98 2.8 -37
DCB 1.7 3.2 -149 2.8 -108
Private (Avg.) 1.9 2.4 2 2.2 -30
Industry (Avg.) 3.1 2.9 24 3.3 -19
NNPA (%)
Q4FY14 Q4FY13 YoY (bps) Q3FY14 QoQ (bps)
SBI 2.6 2.1 47 3.2 -67
BOB 1.5 1.3 24 1.9 -36
PNB 2.9 2.4 50 2.8 5
Canara 2.0 2.2 -20 2.4 -41
Allahabad 4.1 3.2 96 4.2 -4
Corporation 2.3 1.2 113 2.2 17
PSU (Avg.) 2.6 2.0 52 2.8 -21
ICICI 1.0 0.8 20 0.9 3
HDFC Bank 0.3 0.2 10 0.3 0
Axis 0.4 0.3 8 0.4 -2
Kotak Mah. 0.7 1.0 -24 0.9 -12
DCB 0.9 0.8 16 0.8 14
Private (Avg.) 0.7 0.6 6 0.7 1
Industry (Avg.) 1.7 1.4 31 1.8 -11
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Q4FY13 Q3FY14 Q4FY14
Increase in provisions continued across all the banks:
Net profitability of INSPL banking universe improved marginally by 2% y-o-y only as it was dragged by the 13% y-o-y decrease in
profitability of PSBs. This decrease was mainly on account of 29% y-o-y increase in provisions to Rs 117 bn due to increase in loan loss
provisions and restructured loan provisions. It had a significant impact on the bottom-line of the PSBs. On other hand, net profitability
of private sector banks universe increased 19% y-o-y due to only 8% y-o-y increase in provisions.
Given the fall in net profits of the PSBs, ROE and ROA has also come down to 8.5% (from 13.1% in Q4FY13) and 0.5% (from 0.8% in
Q4FY13) y-o-y, respectively. However, ROE and ROA of private sector banks increased by 86 bps and 5 bps to 17.1% and 1.7% y-o-y
respectively. Notably, banks with superior ROE / ROA profile include HDFC bank (21.3 %/ 2.0%) and Axis Bank (19.3% / 2.0%) in
Q4FY14.
ROE / ROA (%)
Pre Pro. Profit (Rs mn) Provisions (Rs mn) Net Profit (Rs mn)
Q4FY14 Q4FY13 YoY (%) Q4FY14 Q4FY13 YoY (%) Q4FY14 Q4FY13 YoY (%)
SBI 106,278 77,606 37 58,911 41,810 41 30,408 32,992 -8
BOB 25,640 21,447 20 11,532 15,984 -28 11,573 10,289 12
PNB 31,734 28,517 11 21,387 14,777 45 8,064 11,308 -29
Canara 18,821 16,977 11 10,913 7,524 45 6,108 7,254 -16
Allahabad 8,352 7,673 9 6,393 6,225 3 1,578 1,262 25
Corporation 6,366 9,225 -31 8,245 4,599 79 416 3,555 -88
PSU (Total) 197,191 161,446 22 117,381 90,919 29 58,145 66,659 -13
ICICI 44,535 36,041 24 7,138 4,600 55 26,520 23,041 15
HDFC Bank 37,793 29,627 28 2,861 3,005 -5 23,265 18,898 23
Axis 32,477 27,997 16 5,052 5,954 -15 18,423 15,552 18
Kotak Mah. 4,200 3,645 15 550 932 -41 2,773 2,219 25
DCB 502 430 17 110 89 24 391 341 15
Pvt. (Total) 119,507 97,740 22 15,712 14,580 8 71,372 60,051 19
Ind. (Total) 316,698 259,186 22 133,093 105,498 26 129,517 126,710 2
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ROA (%)-Q4FY14 ROA (%)-Q4FY13
Valuation and recommendation:
The earnings growth remained weak for the PSBs (-13% y-o-y growth) in Q4FY14 while the private sector banks fared better in this
period by posting an 19% y-o-y growth in the profit. A sharp increase in the provisions due to asset quality stress, higher opex and
deferred tax provisions affected the profit growth of the PSBs. However, the NII growth was relatively better (up 14% y-o-y for the
PSBs). Private sector banks have outperformed PSBs despite the continued stress in the economy. We dont expect any immediate
improvement in asset quality for the entire banking system. However, with improving capacity utilization rates and revival in stalled
projects, we believe that cash flow of the leverage companies is likely to improve which will result in upgradation of these accounts
from sub standard to standard assets. Overall, any significant and sustainable recovery in the banking sector depends on overall long
termgrowth in the economy.
With valuations of stocks in our banking universe being attractive, we maintain our positive/buy stance on some of the PSU Banks.
We maintain Buy rating on SBI, BOB, Federal and DCB whereas sell rating on Allahabad.
Source: IndiaNivesh Research
P/ABV (x) CMP (Rs.)
Target
Price (Rs.)
FY14E FY15E Latest Recom
SBI 2.1 2.0 2,683 BUY 3,003
BOB 1.1 1.0 891 BUY 1,058
PNB 1.3 1.2 997 HOLD 860
Canara 1.0 0.9 451 HOLD 319
Allahabad 1.2 1.1 138 SELL 77
Corporation 0.9 0.8 365 UR UR
ICICI 2.2 2.0 1,469 HOLD 1,431
HDFC Bank 3.8 3.2 817 HOLD 830.0
Axis 2.1 1.9 1,925 HOLD 1641.0
Federal 1.4 1.3 122 BUY 137.0
DCB 1.4 1.2 72 BUY 81.0
Source: Bloomberg, IndiaNivesh Research; UR: Under Review
SBI
BOB
PNB
Canara
Allahabad
Corporation
ICICI
HDFC Bank
Axis
Federal
DCB
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FY16E P/ABV
Given the diversified business models of stocks under our coverage, we have discussed themindividually.
Max India
Gross Written PremiumIncome (GWPI) of Life Insurance and Health Insurance business grew 17% and 38%
y-o-y, respectively. GWPI fromLife Insurance business contributed 65% of total revenues in Q4FY14.
Gross revenue from Max healthcare increased 19% y-o-y to Rs 3.7 bn and it represents 10% of total
revenues in Q4FY14. Higher avg. occupancy rates (74.3% vs 70.6% y-o-y) and increase in avg. operational
beds (1544 vs 1376 y-o-y) contributed to its healthcare business overall top-line to grow. EBITDA margin
also increased to 8.8% (+184 bps y-o-y).
Consolidated PBT of Max India increased 71% y-o-y to Rs 770 mn mainly due to healthy growth across all
the business segments.
LIC Housing Finance Limited (LICHFL)
Loan book grew 17% y-o-y (+6% q-o-q) to Rs 913 bn primarily led by 18% y-o-y growth in individual loan
book.
Net Interest Income (NII) of LIC HFL increased at a healthy pace of 16% y-o-y to Rs 5.3 bn in Q4FY14.
NIMs also improved by 24 bps q-o-q to 2.4% mainly due to lower cost of funds (calc) by 32 bps q-o-q to
9.4%. Overall spreads on loan book improved by 25 bps q-o-q to 1.45% from1.21% in Q3FY14.
Overall, net profit increased 17% y-o-y (+13% q-o-q) to Rs 3.7 bn.
Asset quality surprised positively, as both, Gross & Net NPAs decreased 14 and 12 bps q-o-q to 0.7% and
0.4%(vs. 0.8% & 0.5% in Q3FY14).
FINANCIAL SERVICES: Healthy Performance
continues.. | Top Pick: Care
Credit Analysis and Research Limited (CARE)
Despite challenging macroeconomic environment, CAREs income fromoperations (rating income) increased 20%
y-o-y (+41% q-o-q) to Rs 757 mn.
EBITDA increased 17% y-o-y (+58% q-o-q) to Rs 513 mn and superior EBITDA margin of 68% in Q4FY14.
Net profit increased 16% y-o-y (+47% q-o-q) to Rs 413 mn and net profit margin was also healthy at 49.4%.
Healthy dividend payout as it declared Rs 10 per share dividend in Q4FY14(Rs 28 per share in FY14).
Bajaj Finance Limited
Assets under Management (AUM) grew at a healthy pace of 37% y-o-y (+7% q-o-q) to Rs 241 bn, while
disbursements increased at a slight faster pace of 38% y-o-y (-7% q-o-q) to Rs 70 bn on a/c of healthy growth
across consumer & SME segments.
NII increased 22% y-o-y (-11% q-o-q) to Rs 5.5 bn. However, NIMs (calc) decreased 217 bps q-o-q (-105 bps y-o-y)
to 9.5% mainly due to higher disbursements to low yielding segments.
Overall, net profit jumped 11% y-o-y to Rs 1.8 bn due to higher operating expenses in Q4FY14.
L&T Finance Holdings Limited
LTFHs (cons) loan book growth remained healthy as it increased 21% y-o-y (+6% q-o-q). L&T Infra Finance (LTIF)
registered 19% y-o-y loan growth, while L&T Finance (LTF) witnessed 14% y-o-y loan growth.
Asset quality (cons) deteriorated further as GNPA and NNPA increased 25/23 bps q-o-q to 2.9%/1.9%
respectively.
NIMs surprised positively as it increased by 29 bps and stood at 5.6%. NII increased 24% y-o-y (+22% q-o-q) to Rs
5.8 bn.
Valuation
Outlook
Overall, the stock under our NBFC space continue to perform well in Q4FY14. Even in the current challenging
macro environment, LIC housing and Bajaj finance maintained their asset quality whereas L&T finances asset
quality deteriorated due to higher slippages in L&T finance subsidiary. We expect stable asset quality for most of
these NBFCs fromcurrent levels and reversals in slippages to commence fromH2FY15E.
For Max India (insurance player), life insurance premium continued to report healthy growth of 11% y-o-y and we
expect better outlook for growth in insurance business in FY15E as compared to FY14. CARE ratings also reported
healthy numbers in FY14 under the challenging period for the economy. We believe that CARE is well positioned to
take the advantage of economic turnaround and revival in debt market by delivering rapid growth in its ratings
business.
Within our NBFCs universe, we have BUY rating on CARE and Hold rating on LIC Housing, Bajaj Finance, L&T
Finance and Max India.
P/ABV (x) CMP (Rs.)
Target Price
(Rs.)
FY15E FY16E Latest Recom
LIC Housing 2.0 1.7 337 HOLD 350
Bajaj Finance 2.3 1.9 2,114 HOLD 2,205
L&T Finance* 1.7 1.5 75 HOLD 77
Max India* 2.8 2.6 326 HOLD 315
CARE 4.8 4.1 940 BUY 1,014
Source: Bloomberg, IndiaNivesh Research;*Consolidated
CAPITAL GOODS SECTOR
CG stocks from our coverage in last 1-year
have delivered 33.2% to 155.4% returns vs.
28.2% returns for Sensex
Capital Goods stocks under our coverage have given impressive 33.2-155.4% return in past one year, in comparison to 28.2% returns
for Sensex. Even though ground realty does not warrant the recent rally in Capital goods stocks. It is more of a hope rally, where
investors expect new government to announce reforms, which in-turn would lead to revival in the Capex cycle.
Over 100% run-up at CG & Voltas in last 12 months, is owing to expectations of turn around in the company fundamentals.
Capital (izing) on hopes | Top Pick: Alstom T&D
Source: BSE; IndiaNivesh Research
Cap-Good stocks Vs Sensex
1m 3m 12m
Sensex 12.1% 18.0% 28.2%
Ingersoll Rand 46.6% 82.2% 68.6%
Greaves Cotton 25.8% 77.0% 55.0%
Crompton Greaves 26.5% 62.4% 127.5%
Voltas 36.8% 60.7% 155.4%
BHEL 44.4% 55.7% 35.5%
Kirloskar Oil Engines 19.7% 36.2% 35.9%
Alstom T&D India
13.3%
65.6% 96.9%
Siemens
40.0%
56.3% 65.6%
ABB India
13.6%
32.4% 49.3%
BGR Energy Systems
59.5%
110.6% 33.2%
Thermax
24.5%
28.8% 54.6%
CAPITAL GOODS SECTOR (contd)
Company Q4FY14 Margin % QoQ % YoY %
Comments
Rs. Mn Sales EBITDA Adj. PAT EBITDA Adj. PAT Sales EBITDA Adj. PAT Sales EBITDA Adj. PAT
Ingersoll Rand 1,303 162 214 12.4 16.4 (21.2) 305.0 62.8 1.0 759.6 17.0
Slow-down in Air Compressors segment continues to put
pressure on top-line growth (1% y/y growth); 52% y/y
decrease in other expenses led to multi-fold y/y EBITDA
growth; 11.4% decline in Other Income, 82.4% y/y increase
in depreciation expenses, higher effective tax rate restricted
y/y PAT growth to 17.0%
Greaves Cotton 4,305 416 182 9.7 4.2 1.8 (10.8) (53.5) (13.0) (33.2) (52.8)
10.4% y/y decline in Engine revenues, led to 13% y/y decline
in Q4 sales; 6.5% increase in staff expense & 9% increase in
other expenses led to 33.2% y/y EBITDA de-growth; This
when coupled with increase in depreciation & interest
expenses led to 52.8% y/y decline in y/y Adj. PAT
Crompton
Greaves
37,665 1,881 638 5.0 1.7 12.4 12.6 2.9 11.2 141.4 152.6
11.2% y/y sales growth in Q4 was driven by 34.5% increase
in International Power Systems; Just 3.5% y/y increase in
raw material expenses led to EBITDA growth; PAT grew
152.6% y/y owing to multi-fold growth in other income;
Order Book at Q4FY14-end stood at Rs 92.9 bn.
Voltas 14,504 929 830 6.4 5.7 30.1 45.3 44.0 (8.9) 20.8 15.0
Despite 11.8% y/y growth across UCP segment, 22.4% de-
growth across EMP segment led to 8.9% y/y top-line de-
growth; 7.9% decline in raw material expenses and 30.1%
decline in purchase of traded goods led to 20.8% increase in
EBITDA; Better operating performance coupled with decline
in interest expenses and lower tax rate led to 15.0% y/y
increase in Adj. PAT; EMPS Order Book at Q4FY14-end stood
at Rs 36.1 bn.
BHEL 1,47,549 24,568 18,446 16.7 12.5 74.4 202.0 165.5 (21.7) (42.8) (43.0)
21.4% y/y de-growth across Power segment led to 21.7% y/y
Q4 top-line de-growth; Higher raw material expenses led
BHEL report 42.8% y/y EBITDA de-growth; This when
coupled with 18.3% y/y increase in interest expenses &
higher effective tax rate led to 43% PAT de-growth; OB
stood at Rs 1,157 bn
Kirloskar Oil
Engines
6,323 733 496 11.6 7.8 12.4 2.9 9.7 7.6 (10.4) (16.1)
15.5% and 16.0% y/y revenue growth across Industrials &
Large Engines business segments led to 7.6% y/y top-line
growth; Sharp increase in y/y purchase of traded goods &
3.3% increase in Other exp. led to EBITDA de-growth; In
addition to EBITDA de-growth, 8.1% increase in depreciation
expense & increase in effective tax rate led to 16.1% y/y PAT
de-growth.
Note: GC, I-Rand, BHEL numbers are Standalone; Source: Company filings, IndiaNivesh Research
Comments
Rs. Mn Sales EBITDA Adj. PAT EBITDA Adj. PAT Sales EBITDA Adj. PAT Sales EBITDA Adj. PAT
Alstom T&D 13,130 1,316 622 10.0 4.7 54.8 82.4 228.7 19.8 17.9 29.2
On back of better project mix and better execution,
company was able to report robust top-line and better
margins. Income from operations grew 19.8% y/y.
Control over other expenses helped Alstom report
17.9% y/y EBITDA growth. Current Order Book stands at
Rs 64.6 bn.
Siemens 27,063 1,863 883 6.9 3.3 13.1 25.0 35.5 (8.4) 147.3 194.7
20% and 25% decline in Infra/Cities and Energy
segments led to 8% decline in company's Q2SY14
topline. y/y margin improvement across all segment
(except for Infra/Cities segment) led to 147.3% y/y
EBITDA growth. Current Order Book stood at Rs 121.8
bn.
ABB India 18,277 1,257 517 6.9 2.8 (17.1) (15.9) (11.8) (7.7) 17.3 20.0
Lower Order Book at the beginning of year, led to 7.7%
y/y decline in Q1CY14 top-line. Internal cost
optimisation and higher contribution from exports led
to 17.3% y/y EBITDA growth. Except Discreet
Automation segment, all other segments reported
margin expansion on y/y basis. Current Order Book
stands at Rs 78.8 bn.
BGR Energy
Systems
8,122 857 191 10.6 2.4 (2.8) (15.9) (37.5) (23.6) (38.2) (64.5)
Poor execution during the quarter led to 23.6% & 64.5%
y/y decline in topline and bottom-line, respectively.
Slower execution also led to 38.2% y/y EBITDA de-
growth. Current debt is Rs 20 bn (8.6% less than
previous year). Current Order Book stands at Rs 115.2
bn.
Thermax 13,825 1,339 1,059 9.7 7.5 36.7 47.4 58.9 (5.8) (20.0) (8.2)
3.7% y/y drop in Energy Segment and 15% drop in
Environment segment led to 5.8% y/y decline in topline.
Sharp contraction in environment segment margins led
to 20.0% y/y EBITDA de-growth. Current Order Book
stands at Rs 61.2 bn.
ABB is Dec year ending co; Siemens is Sep year ending;
What was recent quarter performance in Capital Goods (CG) Sector?
Q4FY14 performance for companies in Cap Goods sector has been a mix bag.
Power generation companies BHEL,BGR Energy Systems and Thermax have shown y/y decline in topline and bottom line due to
slower execution pace, whereas, companies from Power Transmission space like Crompton Greaves, Alstom T&D, Siemens and ABB
have shown better topline and margins (due to better execution). In non-Power Capital Goods space, Air Compressor and Gensets
continued to be under pressure. In Engines space, both, GC and KOEL showed negative performance. Greaves Cotton reported
negative growth owing to weak Auto demand. KOELs de-growth in Engines space was offset up to certain extent by Industrial and
Large Engines segment.
Top-line growth across key sub-sectors:
Power generation companies reported wide range of numbers (from 5.8% de-growth to 23.6% growth); Similarly Power
Transmission sector top-line has shown wide growth range (fromnegative 8.4% to positive 19.8%).
Non-power companies topline growth have varied fromnegative 13% to positive 7.6%.
Profitability Analysis
Better operating performance across companies fromPower space has led to better profitability growth.
For Non-Power companies, barring GC & KOEL, reported PAT growth on the back of better execution efficiencies.
Valuation
Outlook
On expectation of reform announcements, we are of view that Capital goods stocks would gain from uptick in capex cycle (inc. of
commencement of stalled projects). We classify our coverage in to Power & Non-Power Cap-Good stocks.
Power Generation/ Transmission stocks have been under pressure for last few quarters. Whereas, non-power based Cap-Good stocks
in a weaker economy were reporting decent growth on back of higher engine sales (inc. of GC, KOEL). With focus shifting towards
Power sector reforms, we expect stocks from this space to see maximum gains (vs. Non-Power good stocks). As a result, delta would
now turn favorable towards Power Generation/ Transmission stocks (vs. earlier higher multiples enjoyed by Engine based Non-Power
Cap-Good stocks).
Further Compressors players (like I-Rand) would benefit the most for any revival in Industrial Capex cycle.
Note: Consolidated financials; Source: Company filings, IndiaNivesh research
Company Name
M-Cap Sales (Rs mn) EBITDA (Rs mn) Adj. PAT (Rs mn) NPM P/E CMP as of
Rating
Price
Target
Rs Mn FY16E FY16E FY16E % FY16E (x) 05-Jun-14 Rs
Ingersoll Rand 20,991 6,539 542 857 13.1% 24.5 667 HOLD 596
Greaves Cotton 25,507 19,605 2,333 1,563 8.0% 16.3 105 SELL 83
Crompton Greaves 1,33,847 1,54,587 11,125 5,218 3.4% 25.7 209 EXIT NR
Voltas 70,975 56,566 3,624 3,111 5.5% 22.8 216 HOLD 167
BHEL 6,37,233 4,22,196 42,642 37,998 9.0% 16.8 260 HOLD 233
Kirloskar Oil Engines 34,628 24,725 3,274 2,153 8.7% 16.1 240 HOLD 223
Alstom T&D 78,696 42,616 4,834 2,453 5.8% 32.1 307 BUY 366
Siemens 3,44,315 1,37,539 13,616 7,080 5.1% 48.6 968 NR NR
ABB India 2,00,932 83,811 7,962 4,129 4.9% 48.7 950 NR NR
BGR Energy Systems 15,764 38,809 4,332 1,490 3.8% 10.6 218 HOLD 216
CEMENT SECTOR
Cement stocks in last 1-year delivered 19.1-
81.7% returns vs. 28.2% returns for Sensex
In last 3 months top 3 players (ACC, Ambuja & Ultratech) delivered 19.0%-34.2% absolute returns. Mid-Cap stocks
(Mangalam& Prismdelivered 101.9-123.1%) outperformed their large cap peers.
Recent run-up across Cement stocks is on expectation of continuation in reforms process. Reform announcements
would benefit Infra & Real Estate sector, which in turn would lead to better cement demand (demand uptick to be
seen from H2FY15E onwards). Realizations are likely to be on northward trend from here-on (recently prices in
South were raised ~Rs 60/bag). On the back of improved top-line growth, there is a case for margin expansion
getting built fromhere-on.
Cementing Bright Future | Top Picks: Ultratech, Prism
& Mangalam Cement
Sensex Vs Cement stocks
1m 3m 12m
Sensex 11.2% 16.3% 28.2%
ACC 11.1% 19.0% 19.1%
Ambuja Cem. 15.5% 32.2% 31.4%
Ultratech 29.7% 34.2% 38.4%
Mangalam Cem. 65.8% 101.9% 81.7%
Prism Cem. 56.1% 123.1% 59.9%
CEMENT SECTOR (contd)
Q1CY14/Q4FY14 Results Review
Company Q1CY14/Q4FY14 Margin % QoQ % YoY %
Comments
Rs. Mn Sales EBITDA
Adj.
PAT
EBITDAAdj. PAT Sales EBITDA Adj. PAT Sales EBITDA Adj. PAT
ACC 29,671 3,653 3,999 12.3 13.5 10.4 39.1 15.7 2.1 (18.2) (10.3)
0.9% y/y increase in dispatches & 1.2% increase in Avg.
Blended realization led to 2.1% increase in revenues;
34.4% y/y increase in raw material costs and 8.5%
increase in freight expenses led to 18.2% y/y decline in
EBITDA;
Amb. Cem. 26,398 5,776 3,983 21.9 15.1 20.5 98.4 98.1 3.7 6.8 16.2
Dispatches & Avg. Blended realization increased 1.7%
& 2.0% y/y, respectively; 3.7% y/y top-line growth
coupled with 2% de-growth across other expenses led
to 6.8% y/y EBITDA growth.
Mangalam
Cements
2,137 240 78 11.2 3.7 33.1 nmf 1,531.7 18.1 38.0 (11.3)
Despite 6.8% y/y decline in avg. blended realizations,
26.6% y/y increase in dispatches led to 18.1% y/y
increase in sales; 7.9% and 7.8% y/y decline in Selling,
Distribution & Other expenses led to 38.0% y/y EBITDA
growth;
Prism
Cement
15,191 1,140 110 7.5 0.7 33.0 nmf nmf 10.8 12.4 (23.0)
17.8% y/y growth across TBK segment led to 10.8% y/y
top-line growth; Power & Fuel cost savings led to
12.4% y/y EBITDA growth; Despite y/y EBITDA growth,
lower other income and higher interest expenses led
to 23.0% y/y PAT de-growth
Ultratech 58,319 11,430 8,380 19.6 14.4 21.8 49.6 2.3 8.2 (4.7) 100.8
10.8% y/y increase in dispatches & 2.4% decrease in
Avg. Blended realization led to 8.2% increase in top-
line; 12.4% & 14.2% y/y increase in Power & Fuel and
Freight expenses led to 4.7% on y/y EBITDA de-growth.
Note: ACC & Ambuja reported Q1CY14 and Ultratech< Prism & Mangalam reported Q4FY14 results; Source: Company filings, IndiaNivesh research
CEMENT SECTOR (contd)
Valuation
Outlook
Despite higher cost base for cement players in our coverage, larger players (except ACC) reported y/y Adj. PAT
growth, reflecting benefits of tax reversals seen during the quarter.
With new government to continue reforms, we expect demand recovery to be seen fromH2FY15E onwards. This
recovery would bring pricing discipline, already some of these signs are indicating the same (recently prices in
South were raised by ~Rs 60/bag). On the back of y/y top-line growth, we expect margin recovery to be seen.
Considering the recent run-up across all cement stocks, Large cap stocks in our view have limited scope for
further re-rating (except Ultratech), as they are trading at higher end of valuation. However, there is still lot of
steam left across mid-cap cement stocks. We continue to maintain our positive view towards our recently
identified mid-cap ideas, Mangalam& PrismCements.
Amongst cement universe, we maintain our BUY on Ultratech, Mangalam& PrismCements.
Company Name M-Cap (Rs Mn.)
Sales
FY16E/CY15E
EBITDA
FY16E/CY15E
Adj. PAT
FY16E/CY15E
EV/EBITDA
FY16E/CY15E
$ EV/tonne
FY16E/CY15E (x)
CMP (as of
05/06/14)
Rating
Price Target
(Rs.)
ACC 269,950 143,733 22,612 13,108 11.2 171 1,438 HOLD 1,476
Amb. Cem. 354,537 113,897 25,242 16,013 12.1 148 230 HOLD 229
Mangalam 5,767 12,983 1,988 979 4.2 43 216 BUY 276
Prism Cem. 36,015 56,178 5,983 1,816 7.0 NA 72 BUY 85
Ultratech Cem. 720,545 246,325 52,738 27,707 9.8 150 2,628 BUY 2,723
Note: NA- Not Applicable (Prism Cement being a diversified business model); Assumed $= Rs 60
INFRA SECTOR
In last 1-year Infra stocks from our universe
delivered 24.4-156.8% returns vs. 28.2% return
for Sensex
After underperforming for last few years, companies in our infra universe delivered positive 24.4-156.1% returns
in last 12 months. This run-up is owing to expectations of fortune revival of these companies.
On back of expected reforms, investors expect revival in award activity environment. Such revival would arrest
concerns over declining Order Book of Infra companies (L&T & IRB Infra reported y/y growth in Order Book) and
later contribute to top-line growth. Strong execution would lead to absorption of fixed costs and better margins.
Also, expectations of lower interest rate cycle in FY16E is leading to re-rating of these asset developers.
Reforms to drive future growth, leading to re-rating
of the sector| Top picks: JPA & IRB Infra
Source: BSE
Sensex Vs Infra stocks
1m 3m 12m
Sensex 11.2% 16.3% 28.2%
IRB 80.6% 141.6% 79.5%
IL&FS Tran. (ITNL) 49.8% 80.0% 24.8%
R-Infra 51.7% 95.2% 103.8%
Engineers India 29.1% 95.8% 89.9%
L&T 29.2% 47.1% 76.4%
JP Associates 54.8% 90.7% 24.4%
GPPL 34.3% 61.4% 156.1%
INFRA SECTOR (contd)
Comments
Rs. Mn (* Rs. Bn) Sales EBITDA Adj. PAT EBITDA Adj. PAT Sales EBITDA Adj. PAT Sales EBITDA Adj. PAT
IRB 8,829 4,420 1,092 50.1 12.4 0.6 1.6 0.6 -6.9 4.5 -29.1
Consol. revenues de-grew 6.9% y/y as Construction revenues de-grew 16.5% y/y;
Shift in sales mix towards high margin Toll business contributed to 4.5% y/y
EBITDA growth; Despite EBITDA growth, higher interest & tax expenses led to
29.1% y/y PAT de-growth; OB at Rs 119.7 bn
IL&FS Tran. (ITNL) 18,293 3,826 1,174 20.9 6.4 -6.9 -21.6 6.9 -5.2 -18.9 -34.2
18.4% y/y decline in Construction income led to 5.2% y/y decline in consolidated
revenues; 66% and 44.5% y/y increase in raw material and other expenses led to
18.9% y/y de-growth across Q4 EBITDA; This when coupled with 21.7% y/y
increase in interest expenses led to 34.2% y/y decline in PAT
R-Infra 46,612 6,279 6,214 13.5 13.3 22.2 6.7 38.0 -23.8 -18.9 -13.0
Decline in EPC & Electricity segment revenues led to 23.8% y/y decline in
revenues; In-line with revenue de-growth, EBITDA also declined 18.9% y/y; EBITDA
de-growth also reflects 39.9% y/y increase in cost of fuel; Sharp 56.2% y/y increase
in other income restricted adj. PAT de-growth to 13.0% on y/y basis; OB declined
to Rs 66 bn
Engineers India 4,948 727 1,036 14.7 20.9 17.7 -27.2 -23.3 -3.6 -46.0 -42.7
12.9% de-growth across Consultancy business led to 3.6% y/y revenue de-growth;
Shift in revenues mix towards low margin Turnkey business led to 46.0% y/y
EBITDA de-growth; In-line with EBITDA de-growth, PAT also reported 42.7% y/y
de-growth; OB stood at Rs 39.3 bn
L&T* 201 29 27 14.4 13.6 39.6 73.2 119.5 11.1 36.2 69.2
17.7% & 41.5% y/y growth across Infra & Heavy Eng. segment led to 11.1% y/y
increase in revenues; Change in job mix, efficient execution and prov. write-backs
led to 36.2% y/y EBITDA growth; 27.2% y/y increase in other income and lower tax
rates led to impressive 69.2% y/y PAT growth; OB at Rs 1,712 bn
JP Associates 34,026 8,718 1,004 25.6 3.0 8.4 21.3 -213.2 -11.9 2.8 -18.7
57% y/y de-growth in Real Estate business led to 11.9% y/y decline in Q4
Revenues; 16.1% y/y decline in Operating Expenses led to 2.8% growth in EBITDA;
37.8% increase in interest expenses led to 18.7% y/y decline in PAT
Gujarat Pipavav Port 1,441 794 742 55.1 51.5 12.1 19.0 17.9 26.3 70.4 109.6
16.1% increase in Container Volumes along-with Rs 146 mn of take-or-pay income
led to 26.3% y/y growth in Q4 revenues; 21.3% y/y decline in operating expenses
led to 70.4% EBITDA growth; EBITDA growth coupled with 42.2% y/y decline in
interest expenses led to 109.6% y/y growth in Adj. PAT
Note: GPPL, JP Associates & L&T Standalone Numbers; Source: Company filings, IndiaNivesh research
Recent quarter performance in Infra Sector?
Same as in the previous quarter, most of the Infra players failed to win any major orders in Q4. Companies with international exposure
such as EIL, L&T reported international order wins. Whereas, pure play Road asset developers (such as IRB & ITNL) won road projects
which gives thembetter revenue visibility.
Despite challenging environment, diversified geographical as well as sub-verticals mix helped L&T report 0.4% y/y order inflow growth.
Amongst road developers, IRB reported new road project wins. With better order book visibility, ITNL maintained cautious approach
and reported no major order wins. Now, both these developers have large order books, which gives revenue visibility of 2+ years. On
Other hand, R-Infra, JP Associates continue to be impacted by lower Order Book visibility across their EPC businesses.
Excluding L&T, all companies from our coverage universe reported y/y slow-down in EPC segment revenues. Revenue growth across
Road Asset developers was mostly owing to y/y toll hikes, commencement of new projects and less due to traffic growth
Shift in mix resulting from y/y de-growth seen across EPC segment revenues at ITNL, IRB & R-Infra arrested margin decline up to
certain extent.
Stretched working capital & funding of new BOT projects, led to increase in borrowings and as a result interest expenses on y/y basis
increased for most companies in our coverage universe. Except L&T & GPPL, all companies witnessed y/y PAT margin compression.
Valuation
Outlook
Developers from our coverage universe were impacted due to weak macro indicators such as slow-down in award activity, delays in
obtaining approvals (leading to slower execution), stretch in working capital cycles (leading to higher interest expense). With new
government at helm of affairs, we expect focus to shift on reforms, which would revive Infra cycle as well as capex spending.
Companies with strong parentage, balance sheet strength would benefit the most from any resumption of award activity. With interest
rate cycle to turn southwards (from somewhere ~FY16), we expect highly levered companies (such as JP Associates, ITNL, IRB) to see
bigger gains at profitability level. EPC players (like L&T) and asset light businesses (such as EIL) could benefit from revival in award
activity.
All stocks have seen strong run-up on hope of changes in Industry fundamentals. Unless the eco-system (of the industry) improves, we
expect this hope rally to be unsustainable in long-run. On other hand, in scenario of continuation of reform announcements (this
scenario has stronger possibility), we expect Infra stocks to see further upward movement.
Company Name M-Cap (Rs Mn.)
Sales
CY/FY15/16E
EBITDA
CY/FY15/16E
PAT
CY/FY15/16E
NPM (%)
EV/EBITDA
CY/FY15/16E (x)
CMP (as of
05/06/14)
Rating
Price Target
(Rs.)
IRB 69,531 57,491 25,529 5,971 10.4% 8.4 209 BUY 226
IL&FS Tran. (ITNL) 51,194 76,410 23,840 5,220 6.8% 9.5 208 UR UR
R-Infra 204,777 187,392 36,219 20,212 10.8% 10.6 779 EXIT NR
Engineers India 101,974 21,864 5,267 6,350 29.0% 13.1 303 HOLD 301
L&T 1,556,657 789,016 90,786 61,281 7.8% 17.4 1,679 NR NR
JP Associates 184,295 291,923 101,386 13,992 4.8% 10.4 83 BUY 94
Gujarat Pipavav. 58,061 6,862 3,202 3,040 44.3% 18.1 120 HOLD UR
Note: ITNL no's are FY15E; GPPL is a Calendar year ending co; Source: IndiaNivesh Research, BSE Filings
IT SECTOR
IT index outperform the Sensex by 9.1% over
last 12Mdriven by improved demand outlook.
On absolute basis IT Index went up 36.0% in
last 12Mled by solid performance.
Tier-I IT companies reported in-line performance & sounded equally positive on future
revenue outlook. TCS, HCLT, TechM and Wipro delivered healthy $-revenue growth.
Despite below average revenue guidance, Infosys sounded positive and expect FY15 to
be better than FY14. Wipros next quarter revenue guidance remains muted but overall
FY15 outlook remain robust. TechM reported leading $-rev growth and also sounded
positive about overall FY15 revenue outlook on back of strong order backlog.
Conference call key takeaway:
TCS: Robust outlook expect $-rev growth ahead of Industry growth.
HCLT: Positive revenue & margin outlook on back of $1 bn of TCV.
Infosys: FY15 $-revenue growth guidance range between 5.6-7.6% Y/Y.
Wipro: Guided $-rev growth in the range of -0.3% to 2.0% Q/Q in Q1FY15.
TechM: Solid deal pipeline on back of existing four prong growth strategy
TechMs Top 10 account grew by 8.6% Q/Q growth, followed by Wipro (+3.7%) and HCLT
(+3.6%Q/Q). However, INFY top-10 account de-grew by 0.4%mQ/Q.
Robust FY15 revenue outlook | Top Picks:
ThinkSoft, TCS, Infosys, Wipro & HCLTech
IT v/s Sensex Return %
1 Months 3 Months 1 Year
IT
-4.9 13.1 36.0
Sensex
11.2 16.3 28.2
Companies
QoQ Growth %
$-Revenue Volume Pricing
Infosys -0.4 0.4 -0.8
TCS 1.1 2.6 -1.5
Wipro 2.5 NA NA
HCLT 3.0 NA NA
KPIT 3.6 3.1 0.5
NIIT Tech* 0.2 NA NA
TechM 4.3 4.6 0.3
Average 2.0 2.7 -0.4
Geo-Wise Performance (Q/Q Growth %)
Q4FY14 HCLT INFY TCS Wipro
U.S 0.3 -0.8 -1.6 2.7
Europe 4.6 5.5 6.3 3.9
RoW 11.7 5.0 1.9 1.1
Source: BSE India (as on 5th Jun. 2014)
Source: Company Filings; IndiaNivesh Research
IT SECTOR (contd)
In mid-tier space performance was mixed-bag: (1) NIIT Tech (+0.2% Q/Q) and Mastek (-6.8% Q/Q) reporting below consensus
performance, and (2) KPIT (+3.6% y/y) and Thinksoft (+2.7% y/y) reporting inline revenue growth performance.
Conference call key take away:
KPIT: On back of strong deal pipeline KPIT guided inline industry performance in FY15E ($-rev growth 12 -14% y/y).
NIIT Tech: Positive outlook on back off robust demand fromU.S, BFSI, Travel and IMS space (12MExec Order Book +15.1% y/y to $290 mn).
Mastek: Muted FY15 revenue outlook due to anticipated shortfall in revenue ($2.4 mn) frominsurance client.
Thinksoft: SQS and TGSL together brings huge capacity expansion along with cross-selling and up-scaling opportunity.
On back of robust deal pipeline and strong order intake our major Tier-II coverage companies revenue outlook remains strong. Going-
ahead we expect further expansion in NIIT Techs EBITDA margin, as new deal wins are high margin in nature. The revival in Europe &
US should bode well for KPIT.
Source: Company Filings; IndiaNivesh Research Note : * Q3FY14 June ending
Rs. Mn
Sales EBITDA PAT EBITDA PAT Sales EBITDA PAT Sales EBITDA PAT
C o m m e n t s
INFY 1,28,750 41,320 29,920 32.1 23.2 -1.2 3.6 4.1 23.2 31.8 25.0
Expect upward revision in FY15 revenue guidance
TCS 2,15,511 74,099 53,576 34.4 24.9 1.2 0.5 0.5 31.2 46.4 48.2
In-line Performance; Strong FY15 revenue outlook
WIPRO 1,17,036 32,649 22,265 27.9 19.0 3.3 7.6 10.5 21.7 35.1 28.8
In-line performance; muted guidance
HCL TECH* 83,490 22,120 16,240 26.5 19.5 2.0 7.4 8.6 29.8 48.0 59.1
Software Services segment delivered revenue growth
TECHM 50,581 10,718 6,142 21.2 12.1 3.3 -5.7 -39.2 34.3 39 -3.7
Above expectation performance; Solid Deal Pipeline
KPIT 7,001 1,047 613 14.9 8.8 3.3 -0.6 0.9 22.9 13.8 19.8
FY15 $-rev guidance of 12-14% in-line with street estimate
NIIT 2,329 131 140 5.6 6.0 -0.3 -8.4 1066.7 5.1 84.5 418.5
IT revival could provide respite; patience will pay-off
NIIT Tech 5,885 871 618 14.8 10.5 0.2 -1.8 16.4 9.5 -2.1 9.2
In-line performance; expect uptick on margin front
IT SECTOR (contd)
Sector Outlook
On back of improving global economic situation, positive management commentary, moderate valuation and strong order intake we
maintain our positive view on overall sector. Further, revival in discretionary budget, inorganic expansion and diversification in new
age IT services could foster revenue growth going-ahead.
Valuation
Source: Company filings; Bloomberg ; IndiaNivesh Research Note: CMP and MCap 5/06/2014
Revisiting the past.....
Company CMP Previous Previous Current Current
Name Rs. Target Rating Target Rating
Infosys 2,977 3,630 BUY 3,952 BUY
TCS 2,108 2430 BUY 2,609 BUY
Wipro 500 546 BUY 611 BUY
HCL 1,330 1006 HOLD 1,697 BUY
TechM 1,884 1,868 HOLD 2,151 BUY
NIIT Tech 389 345 HOLD 480 BUY
KPIT 161 145 HOLD 190 BUY
Mastek 181 250 BUY 230 BUY
NIIT Ltd 57 45 BUY 54 BUY
Thinksoft 352 NA NA 494 BUY
Source: IndiaNivesh Research Note: CMP 5/06/2014
Company Mcap P/E (x) P/Sales (x) EV/EBITDA (x) PBV (x) EBITDA % ROE % CMP Current Current
Name Rs. Mn FY16E FY16E FY16E FY16E FY16E FY16E Rs. Target Rating
Infosys 17,09,903 12.6 2.9 8.0 2.6 30.6 21.3 2,977 3,952 BUY
TCS 41,28,998 16.5 3.9 12.8 4.9 29.5 30.2 2,108 2,609 BUY
Wipro 12,34,691 14.5 2.3 9.6 2.6 23.4 20.0 500 611 HOLD
HCL 9,30,632 13.0 2.3 8.7 3.8 24.2 31.9 1,330 1,697 BUY
TechM 4,40,123 11.7 1.8 7.7 2.8 22.1 24.3 1,884 2,151 BUY
NIIT Tech 23,653 7.7 0.9 4.5 1.4 17.3 18.3 389 480 BUY
KPIT 31,424 9.7 1.0 5.6 1.5 17.6 17.5 161 190 HOLD
Mastek 4,017 5.5 0.3 2.1 0.5 10.0 10.0 181 230 BUY
NIIT Ltd 9,413 11.6 0.8 10.0 1.1 8.0 10.3 57 54 BUY
Thinksoft 3,623 9.7 1.3 4.6 2.2 20.5 27.7 352 494 BUY
OIL & GAS SECTOR
In Q4FY14, oil subsidy burden of
upstream companies stood at Rs. 353.28
bn for the quarter out of which upstream
companies has provided Rs.190.5 bn
(47% of total subsidy) as compensation.
Oil & Gas sector posted mixed set of performance. Benefit of Rupee
depreciation was offset by higher sharing of under recoveries by upstream
companies. Gross under recovery for OMCs stood at Rs. 353.28 bn for the
quarter out of which upstream companies has provided Rs.190.5 bn (47% of
total subsidy) as compensation.
ONGC and Oil India reported Q4FY14 PAT number below our estimates due to
higher subsidy burden. However, on operational front ONGC showed significant
improvement as crude oil production grew by 6% QoQ. Though, Cairn India
profitability was boosted by strong production from RJ field, management
guidance of flat production for FY15 weigh on investors sentiment. RILs EBITDA
margin surpassed the consensus on the back of better than expected petchem
and refining margin. GAIL profitability was impacted by lower than expected
margin in natural gas trading and petchembusiness.
Benefit of Rupee depreciation was offset
by higher sharing of under recoveries
by upstream companies.
Diesel price hike and proposed natural gas price hike
are positives for the sector | Top Picks:
Reliance, ONGC, GAIL, Cairn India and OIL India
Sensex vs. Oil& Gas Sector
1m 3m 12m
Sensex 11.2% 16.3% 28.2%
BSE OiL & Gas 16.7% 30.6% 33.5%
OIL & GAS SECTOR (contd)
In Q4FY14, Brent average crude price declined by 2% QoQ/YOY to Rs. USD107.5/bbl due to receding winter demand and
improvement in supply of crude oil boosted by easing of geo-political concerns in Iran.
Upstream companies revenue supported by significant INR depreciation (average at INR 60.1/USD, +14% YoY down 3% QoQ)
offset by higher under recovery Q4FY14.
Refiners earning was boosted by jump in GRM. Singapore GRM witnessed 45% QoQ jump to USD 6.2/bbl in Q4FY14 primarily
driven by increased cracks of gasoline, naphtha and partially of middle distillates helped by refinery shutdowns
Petchem margins was mixed. The polymer spreads over Naphtha were up 8-11% in PE/PP while integrated polyester margins
were down 7-9%.
Q4 FY14 Review
Source: Company Filings; IndiaNivesh Research, All standalone numbers except Cairn India
Company
Q4FY14 Margin % QoQ % Change YoY % Change
Rs. Mn Sales EBITDA PAT EBITDA PAT Sales EBITDA PAT Sales EBITDA PATComments
Cairn India 50,489 36,831 30,354 72.9 60.1 1.0 2.5 5.2 15.7 27.3 18.4 Strong production growth from RJ field booted the profitability
GAIL 145,672 14,399 9,720 9.9 6.7 -9.2 -37.1 -42.1 16.8 20.1 57.2 Numbers below expectation due to lower than expected
margin in natural gas trading and petchem business
OIL 19,482 4,774 5,656 24.5 29.0 -28.6 -63.0 -37.4 -21.2 -51.1 -26.0 Revenue impacted by lower crude oil Production
ONGC 208,809 91,859 48,889 44.0 23.4 0.1 -12.6 -31.4 -4.3 10.1 44.3 On operational front, crude oil production up 6% QoQ (flat
YoY) to 6.5 MMT
Reliance 951,930 83,310 56,310 8.8 5.9 -8.0 9.3 2.2 13.1 6.5 0.8 EBITDA margin surpassed the consensus on the back of better
than expected petchem and refining margin
OIL & GAS SECTOR (contd)
Valuation
Outlook
Indian oil & gas sector has been heavily dependent on government policies which have been ad-hoc and detrimental to the sectors
health. A reform-oriented government would change the course of the sector and hasten policy reforms. We believe
that, governments move to hike diesel prices and increase in natural gas prices are key positive and boost the profitability of
upstream companies from FY15. Likely doubling of gas price, lowering of subsidy to give remunerative oil realization will help drive
earnings growth of ONGC/OIL. Further ONGC marginal field monetization and cairn India s aggressive exploration activity in
Rajasthan block would benefited from ease in norms resulted in higher domestic production growth in coming years. Favorable
government policies (higher gas prices, faster approvals) to drive valuation of RIL. GAIL would be benefited from higher natural gas
production in country. Ongoing reforms have the potential to transform OMCs to a structural investment. Earnings predictability of
OMCs will improve due to rationalization of subsidy sharing, that will help to save in huge interest cost.
Top Pick
Among Oil & Gas space we prefer Reliance, ONGC, GAIL, Cairn India and OIL India due to stable business, strong balance sheet and
low valuations.
Source: Company Filings; IndiaNivesh Research; Bloomberg (CMP-05-06-2014) All consolidated numbers
Company
Sales
(Rs. mn)
EBITDA
(Rs. mn)
PAT(Rs. mn)
Mcap
(Rs mn)
P/E(x) Mcap/Sales(x) EBITDA% NPM(%)
EV/
EBITDA(x)
ROE % CMP Target Reco
Name
FY16e FY16e FY16e FY16e FY16e FY16e FY16e FY16e FY16e FY16e Rs. Rs.
Rs.
Cairn India 209,141 143386 122004 699,051 5.74 3.34 68.56 58.34 4.12 14.38 366 384 BUY
GAIL 775,022 83815 54626 497,243 9.10 0.64 10.81 7.05 7.15 13.57 392 456 BUY
OIL 125,757 63586 42790 344,000 7.85 2.74 50.56 34.03 4.96 18.90 572 720 BUY
ONGC 2,030,930 759031 350877 3,580,472 10.20 1.76 37.37 17.28 4.92 17.27 419 451 BUY
Reliance 4,450,015 475189 261024 3,524,782 13.50 0.79 10.68 5.87 8.82 12.22 1091 1274 BUY
PHARMA SECTOR
Performance in Q4FY14:
INSPL Pharma universe growth was almost steady at
21.2% y-o-y in Q4FY14, primarily on the back of
healthy growth from exports business. Linked with
implementation of new pricing policy & trade margins
issues, domestic market remained muted at 12.7% y-
o-y growth. However there was gradual improvement
in growth (11.9% in the previous quarter).US market
maintained growth momentum and our coverage
universe grew 48% y-o-y.
On yearly basis, EBITDA margins increased ~240 bps (
down ~120 bps q-o-q) to 25.9% level.
Aurobindo, Torrent & Shilpa Medicare were top
performer during the quarter.
Mid sized to carry on momentum | Top Picks:
Shilpa Medicare, Cadila Healthcare & JB Chemicals
Coverage Pharma universe growth (%):
Coverage Pharma universe Margins (%):
26.0
29.3
23.9
20.3
21.0
17.6
20.9 21.0 21.2
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
Sales growth (y-o-y in %)
23.2
24.7
24.1 23.8
24.3
22.6
24.6
26.1 25.9
16.3 16.2
15.8
14.9
16.0
15.3
16.0
18.5 18.8
10.0
15.0
20.0
25.0
30.0
EBITDA Margins (%) PAT Margins (%)
Performance
1 Months 3 Months 1 year
Healthcare -5.6% -4.0% 14.6%
Sensex 11.2% 16.3% 28.2%
Source; Bse India (as on 05th June 2014)
Coverage universes Domestic market trend:
Company wise growth in domestic market in Q4FY14 (%)
Coverage universes US market trend (in %):
Company wise growth in US market in Q4FY14 (%)
PHARMA SECTOR (contd)
1.8
7.9
9.4 9.5
9.9
10.2
14.5
17.4
17.8
21.3
0.0
5.0
10.0
15.0
20.0
25.0
16.2%
9.3%
11.0%
11.9%
12.7%
0.0%
5.0%
10.0%
15.0%
20.0%
-
10,000
20,000
30,000
40,000
50,000
60,000
Mar-13 Jun-13 Sep-13 Dec-13 Q4FY14E
Revenue (in Rs Mn) y-o-y
48.1%
31.6%
56.7%
63.3%
48.1%
0.0%
20.0%
40.0%
60.0%
80.0%
-
20,000
40,000
60,000
80,000
100,000
Mar-13 Jun-13 Sep-13 Dec-13 Q4FY14
Revenue (in Rs Mn) y-o-y
16.7
28.2 31.1
36.7
74.7
129.6
334.8
-
50.0
100.0
150.0
200.0
250.0
300.0
350.0
400.0
Individual companys performance in Q4FY14
Sources: Company fillings; IndiaNivesh Research
Company
Rs. Mn Sales EBITDA PAT EBITDA PAT Sales EBITDA PAT Sales EBITDA PAT Comments
Ajanta Pharma 3,011 1,024 719 34.0 23.9 2.9 12.5 11.6 20.8 48.8 159.6 Healthy growth across the markets continues.
Aurobindo 23,059 7,430 4,661 32.2 20.2 8.0 15.4 12.6 48.5 209.5 328.4 Robust peformance backed by US (gCymbalta Launch) and
injectable business.
Alembic Pharma 4,633 913 613 19.7 13.2 -4.5 -10.7 -7.0 23.0 39.2 40.3 Robust show continues
Biocon 7,233 1,701 1,129 23.5 15.6 3.2 0.3 7.5 14.8 61.8 141.8 Lower R&D expenses boosting profitability
Cadila 19,163 3,742 2,407 19.5 12.6 5.5 26.6 34.2 22.4 22.5 -12.2 US revived, margins improving
Cipla 24,293 4,093 2,207 16.8 9.1 -4.8 -12.4 -9.7 26.7 -3.9 -14.6 Higher staff cost & other expenses, pressurizing margins
Divi's Lab 7,380 2,772 2,111 37.6 28.6 7.4 -4.7 -5.8 13.6 6.4 10.2 Muted current quarter but outlook seems positive
Dr Reddy 34,809 5,630 4,816 16.2 13.8 -1.5 -33.5 -22.1 4.2 -2.9 18.0 Muted quarter manily due to higher R&D expenses, we
remain positive on stock
Glenmark 16,788 3,569 2,359 21.3 14.1 25.0 21.9 15.0 4.8 -2.1 9.1 Inline with estimates, approvals from USFDA would be key
triggers
Ipca Lab 7,398 1,824 1,188 24.7 16.1 -9.2 -16.1 -16.0 12.3 28.2 75.5 Almost inline, seems in better shape to grab the future
JB Chemicals Ltd 2,236 218 252 9.7 11.3 -4.5 -47.0 -51.8 13.1 14.7 33.3 Almost inline, we remain bullish
Jubilant LifeScience 15,516 2,351 564 15.2 3.6 8.7 0.3 -57.6 11.8 0.9 -14.8 Pharma remained muted, LSI is stabilizing
Lupin 30,516 8,080 5,530 26.5 18.1 2.3 10.0 24.6 20.3 32.4 35.5 Inline with estimates, maintain HOLD
Shilpa Medicare Ltd 1,674 355 247 21.2 14.8 8.5 6.3 -13.3 69.9 108.8 96.0 Robust show continues, USFDA approval for Raichur plant
would be key trigger
Sun Pharma 40,436 17,856 15,871 44.2 39.2 -5.7 -9.6 3.7 31.6 41.7 56.9 Inline with estimates, struggling to grow due to higher
base
Torrent 12,070 3,320 2,340 27.5 19.4 21.9 74.7 48.1 50.3 118.4 67.1 Surprising continousely, domestic market at the verge of
long term healthy growth
Total 250,215 64,878 47,014 25.9 18.8 2.4 -2.1 2.2 21.2 33.8 42.4
YoY % Mar-14 Margin % QoQ %
Key inferences fromrecent quarter performance.
INSPL Pharma universe's (Shilpa Medicare added & Shasun was removed) top line grew ~21.2% y-o-y (2.4% q-o-q ) in
Q4 FY14 led by healthy performance of ~48% y-o- y growth from US market (partially supported by favorable
currency & exclusivity launches (g Cymbalta)), linked with key launches in last one year. Europe remain critical for
Indian Pharma companies, except Torrents subsidiary in Germany i.e Heumann won few orders & surprised
positively. Due to JPY depreciation (on y-o-y basis), Japanese market remained muted for Lupin. Cadila withdrew its
operations from Japan. Growth in domestic market was muted related to last 4-5 years average perforamce. But it
improved gradually on sequential basis to 12.7% y-o-y compared to 11.9% in previous quarter. Exports to Brazilian
market also remained muted.
INSPL Pharma universes EBITDA grew 33.8% y-o-y in Q4FY14. Overall EBITDA margins were up by ~240 bps on yearly
basis but down ~120 bps sequentially to 25.9% level. Adjusted net profit of INSPL Pharma universe grew 42.4% y-o- y
(2.2% q-o-q) in Q4FY14.
Most of the big players are struggling to maintain growth on higher base. R&D expenses were up for most of the
players , which impacted their margins during the quarter.
Performance of CRAMS players in our universe remained muted.
Valuations & Recommendations:
*CMP as on 5
th
June 2014
Sources: Company filings; IndiaNivesh Research
Company Name Rs CMP Rs TP Reco FY14 FY15E FY16E FY14 FY15E FY16E FY14 FY15E FY16E FY14 FY15E FY16E FY15E FY16E
Ajanta Pharma 1,199 1,385 BUY 11,783 13,935 16,466 3,688 4,208 4,989 2,339 2,727 3,262 66.2 77.2 92.3 15.5 13.0
Aurobindo Pharma 647 UR UR 80,385 116,340 130,712 21,328 20,753 19,449 11,729 8,066 10,653 40.2 40.7 36.6 15.9 17.7
Alembic Pharma 242 345 BUY 18,607 22,694 26,585 3,577 4,614 5,593 2,355 3,135 3,824 12.5 16.6 20.3 14.6 11.9
Biocon 467 427 HOLD 28,527 33,263 38,970 5,183 7,810 8,883 4,137 3,998 5,033 20.7 21.9 25.2 21.3 18.5
Cadila 925 1,228 BUY 70,601 84,145 98,321 12,001 15,902 19,538 8,036 10,085 12,901 39.3 49.3 63.0 18.8 14.7
Cipla 394 379 HOLD 97,528 112,444 127,742 21,331 22,686 27,520 13,884 12,965 16,433 17.3 16.1 20.5 24.5 19.2
Divis Lab 1,268 1,507 BUY 25,254 31,786 38,011 10,145 13,570 16,400 7,733 10,001 11,962 58.3 75.3 90.1 16.8 14.1
Dr Reddy 2,342 3,006 BUY 132,170 150,048 169,910 25,465 33,909 37,807 21,515 22,044 24,412 126.0 129.4 143.3 18.1 16.3
Glenmark 556 636 HOLD 59,839 68,482 78,605 13,101 14,427 16,649 5,423 8,608 10,054 20.0 31.9 37.3 17.4 14.9
Jubilant Life Science 198 191 HOLD 57,216 62,022 70,639 10,076 10,034 11,701 1,090 2,269 3,288 6.9 14.2 20.6 14.0 9.6
Lupin 949 1,192 BUY 110,866 129,978 153,813 30,028 32,924 39,121 18,364 22,293 26,717 40.8 49.7 59.6 19.1 15.9
Sun Pharma 596 638 HOLD 160,044 184,581 199,976 71,956 78,457 81,584 32,044 58,032 62,928 15.5 28.4 30.4 21.0 19.6
Ipca Lab 815 930 BUY 31,994 37,126 42,176 8,106 8,948 9,889 4,785 6,207 6,900 37.9 48.7 58.2 16.7 14.0
Torrent Pharma 630 758 BUY 40,360 55,329 65,883 9,520 12,707 15,389 6,640 8,314 10,490 39.2 49.1 62.0 15.7 10.2
JB Chemical 143 186 BUY 10,006 11,282 12,734 1,536 1,817 2,113 615 1,559 1,784 7.3 18.4 21.1 7.8 6.8
Shilpa Medicare 418 544 BUY 5,714 7,441 9,421 1,160 1,539 1,978 757 994 1,306 18.9 27.0 36.0 15.5 11.6
EBITDA PAT EPS (Rs) P/E (x) Sales
Sector Outlook
We continue to maintain our view that domestic formulation business is likely to witness revenue CAGR of 13-15% for next 2 -3
years mainly lead by chronic therapies. Increase in affordability, infrastructure & insurance penetration are the key drivers. New
pricing policy impact is likely to be over in the current quarter. Most of the companies have taken appropriate price hike on eligible
drug portfolio in the range of 6-8% (in WPI range) from April -2014 onwards. This price hike on lower base would help to report
healthy growth going forward.
Inline with our view, complex molecule launches by many big players has started paying dividend in US market. More complex
launches in the same market are on the cards & key moniterable going forward. Cash rich balance sheet of major players (like, Sun &
Lupin ) & ambition of achieving revenue milestones would lead to offshore acquisition by Indian companies. Inline with same, Cipla
completed acquisition for Medpro SA, Torrent acquired Elder Pharma & Sun proposed to acquire Ranbaxy durig the year.
Regulatory approvals, ramp up in new manufacturing facilities & improvement in productivity would improve efficiencies, for the
companies like Alembic Pharma, Ipca labs, Shilpa Medicare & Divis lab. In line with our earlier view, R&D expenses linked with
complex filings are likely to remain at higher level for the companies like DRL, Lupin, Glenamrk etc.
Increasing cost pressure on MNCs would drive Contract Research & Manufacturing Services (CRAMS) & API businesses.
Strategic deals & formation of JVs with Pharma majors would help in expanding wings for Indian companies.
Inline with our earlier view, big pharma players took a gentle pause in H2FY14 due to higher base , higher R&D expenses & lack of
block buster opportunities. But at the same time, mid sized pharma companies reported healthy growth. We sense that complex
filings in the past & R&D efforts would start to pay dividends from second half of FY15E. Small payers & mainly API players may
continue to surprise positively due to increasing demand worldwide & operating leverage coming into play.
Peferred BUY
Shilpa Medicare, Cadila Healthcare & JB Chemicals are our preferred picks..
Concerns
Unfavorable currency movement.
Delays in ANDA approvals.
Failure in R&D efforts.
POWER SECTOR
Sound growth was seen on top line
due to capacity addition and tariff
hike, however bottom line was
impacted by depreciation and
interest cost
Power sector posted a mixed performance in Q4FY14. The rupee dollar movement and
international coal prices were favorable during the quarter leading to lower fuel prices.
Among PSUs, higher coal availability coupled with sustained demand by SEBs is key
positives for NTPC. PGCIL showed strong revenue growth on the back of higher
capitalization of assets while NHPC showed subdued performance due to decline in
volume and one offs due to stoppage of work in its projects Subansiri lower and TLDP 4.
Among IPPs JSW Energy PAT was below estimate led by lower volumes and higher
interest expenses. CESCs EBITDA margin was supported by lower power purchase from
outside along with lower fuel cost. Adani power earnings were boosted by
compensatory tariff while Tata powers earning were impacted due to non recognition
of Rs 10.19 bn revenue towards compensatory tariff. Coal India adjusted PAT was above
expectation due to higher realization.
Strong growth ahead | Top Picks: Tata Power, Power
Grid, RPower, Coal India and NTPC
The rupee dollar movement was
favorable for independent power
producers
Sensex VS Power Sector
1m 3m 12m
BSE power 38.5% 46.0% 33.0%
Sensex 11.2% 16.3% 28.2%
POWER SECTOR (contd)
Imported coal prices remain weak, ST prices muted: Average Imported coal prices during the quarter) stood at USD 79/ton v/s
USD85/ton in Q4FY13 and USD83/ton in Q3FY13. The short term (ST) prices have remained flat sequentially and range below Rs.
3/unit in Q4FY14.
Appreciation of INR favorable for IPPs: The rupee dollar movement and international coal prices were favorable sequentially for
independent power producers like Tata Power, JSWEnergy and Adani power. These companies have higher exposure on imported
coal and large dollar-denominated debt.
Tata power non recognition of compensatory tariff: Tata Power reported numbers (Consolidated) below street expectation.
Revenue for the quarter decreased 2% y-o-y (up 1.7% q-o-q) to Rs 88.4 bn mainly due to non recognition of Rs 10.19 bn revenue
towards compensatory tariff (as per CERC decision) of the past periods for Mundra plant.
Q4FY14 Review
Source: Company Filings; Indianivesh Research, All consolidate numbers except CESC, NHPC, NTPC and Power Grid
Company Q4FY14 Margin % QoQ % Change YoY % Change
Rs. Mn Sales EBITDA PAT EBITDA PAT Sales EBITDA PAT Sales EBITDA PAT Comments
Adani Power 59,965 27,510 25,286 45.9 42.2 43.1 180.3 NA
217.4
NA NA Revenue and net profit boosted by compensatory tariff, however
adjusted number below expectation
CESC 12,460 4,540 2,430 36.4 19.5 3.2 54.9
127.1
-
17.6
-0.7 -5.1 EBITDA margin expanded YoY due to lower power purchase cost
along with lower fuel cost
Coal India 199,980 51,076 44,342 25.5 22.2 18.1 24.5 13.9 0.5 -16.5 -18.1 Above our expectations due to higher than estimated realization
JSW Energy 20,583 6,913 1,849 33.6 9.0 -4.3 -13.5 -
12.0
-
10.5
-13.1 NA PAT was below consensus due to lower top-line and higher interest
expenses
NHPC 11,228 -3,745 -7,074 -33.4 -63.0 -1.9 -158.1 -372.8 11.1 -161.1 -326.9 Revenue below expectation dragged by lower than expected volume
and one offs
NTPC 210,388 45,426 30,935 21.6 14.7 11.7 -2.4 8.1 21.1 -5.6 -29.7 Revenue grew due to higher production (due to capacity addition)
coupled with higher PAF
Power Grid 39,863 34,032 11,758 85.4 29.5 8.2 9.6 12.8 17.9 19.9 6.0 Above our expectation; Total Revenue increased due to higher
income from transmission business and consultancy income
Rpower 13,587 5,357 2,689 39.4 19.8 -1.0 7.1 0.6 8.9 15.8 1.1 EBITDA margin improved due to lower fuel cost
Tata Power 88,445 18,215 -1,453 20.6 -1.6 1.7 2.0 NA -2.1 -21.7 NA PAT below expectation; Non recognition of compensatory tariff for
Mundra hurt the profitability
POWER SECTOR (contd)
Valuation
Outlook
While the capacity addition and the private participation have been encouraging developments in the sector, there have been several
problems plaguing the sector. The inadequate domestic fuel availability and the weak financial condition of the state electricity
boards (which own more than 90% of the distribution in the country) are the key investment deterrents. Most private producers
projects are jeopardized due to non-availability of fuel, both coal and gas. Most power units are operating at below optimal plant load
factors, leading to bleeding profit and loss accounts and debt-laden balance sheets. We expect new government will come up with
policy measures to address the key issues plaguing the growth of power sector and the same could help kick-start the weak
investment cycle. Likely policy actions by new government would be 1)Ensure availability of fuel, both coal and gas. 2) Easing of
environment norms to help in ramp up coal and gas production and 3)Restructuring of SEBs to make themprofitable.
Top Pick
We prefer utilities with I) Assured regulated business model vs. Merchant and competitive business model, II) Fuel Linkages and lower
dependency on import for coal, III) Strong Balance Sheet and IV) Low Valuation & Low-risk business models. Considering the above
factors our TOP Picks are, Tata power, Power Grid, RPower ,Coal India and NTPC.
Source: Company Filings; IndiaNivesh Research; Bloomberg CMP- 05-06-2014, ALL consolidated except CESC Ltd.
Sales (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn)
Mcap
(Rs mn)
P/E(x) Mcap / Sales (x) EBITDA% NPM(%) PBV(x) ROE % CMP Target Reco
Name
FY16e FY16e FY16e FY16e FY16e FY16e FY16e FY16e FY16e FY16e Rs.
Rs.
Rs.
Adani Power 199076 69772 6502 182941 27 0.92 35.05 3.3 2.8 9.0 64 50.0 HOLD
CESC Ltd. 64106 15728 7121 77704 9 1.21 24.53 11.1 1.1 13.2 622 NR NR
Coal India 907849 240101 208341 2470330 12 2.72 26.45 22.9 4.5 36.8 391 422 BUY
JSW Energy 92530 29302 10190 134485 13 1.45 31.67 11.0 1.7 13.2 82 NR NR
NHPC 79195 51828 25262 295033 12 3.73 65.44 31.9 0.9 8.0 27 UR NR
NTPC 883935 209348 107765 1356379 13 1.53 23.68 12.2 1.4 11.3 165 190 BUY
Power Grid 210265 180051 66617 665720 10 3.17 85.63 31.7 1.6 14.7 127 136 BUY
Rpower 89011 39784 19735 302673 22 3.40 44.70 22.2 1.4 7.0 108 118 BUY
Tata Power 394477 86767 19057 297509 15 0.75 22.00 4.8 1.7 12.3 110 115 BUY
REAL ESTATE SECTOR
In last 1-year realty stocks under our
coverage delivered 0.2-30.8% returns vs.
28.2% returns for Sensex
Nesco in last 1-year outperformed Sensex. Nesco and Oberoi Realty delivered 30.8% & 12.7% absolute returns on
a/c of company specific issues.
Oberois performance was impacted due to slow-down in home bookings, lack of visibility on project
launches, whereas, Nesco benefitted from commencement of occupancy at IT Building III. Phoenix Mills stock was
under pressure owing to their levered balance sheet (in a high interest rate environment).
Future hinges on new bookings|
Top Picks: Nesco, ORL & PML
Source: BSE
Sensex Vs Real Estate stocks
1m 3m 12m
Sensex 11.2% 16.3% 28.2%
Oberoi Realty 25.2% 33.2% 12.7%
Phoenix Mills 11.9% 20.8% 0.2%
Nesco 13.6% 27.5% 30.8%
REAL ESTATE SECTOR (contd)
Recent quarter performance....
Inventory exhaustion of older projects, new projects not reaching threshold level, led to y/y revenue de-growth for
ORL. Higher trading density and rental rates at HSP led to revenue growth for Phoenix Mills; Strong revenues from
Exhibition business and occupancy at IT Building III led to 19.8% y/y revenue growth at Nesco.
Slow-down in ORL top-line led to PAT level de-growth.
Comments
Rs. Mn Sales EBITDA PAT EBITDA PAT Sales EBITDA PAT Sales EBITDA PAT
Oberoi
Realty
2,194 1,254 770 57.2 35.1 29.8 39.7 13.2 (27.5) (29.5) (46.9)
39.8% y/y de-growth across revenue from projects led to 27.5% y/y top-
line de-growth; 57.7% and 31.3% y/y increase in other expenses and
employee costs led to 29.5% y/y EBITDA de-growth; Decline in y/y other
income, higher effective tax rate led to 46.9% y/y decline in PAT
Phoenix
Mills
787 480 364 61.0 46.2 4.1 (3.5) (3.8) 9.0 0.2 0.7
~9% y/y increase in consumption and higher rentals led to 9.0% y/y
increase in revenues; 66.1% increase in y/y other expenses led to just
0.2% EBITDA growth; this coupled with 53.5% y/y increase in other
income and 7.6% decline in depreciation expenses led to 0.7% y/y PAT
growth
Nesco 516 314 245 60.8 47.5 12.0 (2.8) 14.1 19.8 9.5 2.3
28.9% y/y increase in Exhibition & IT Building segment revenues led to
19.8% y/y top-line growth; 109.5% y/y increase in other expenses
restricted y/y EBITDA growth to 9.5%; however, 24.8%% y/y increase in
depreciation expenses and higher effective tax rate restricted y/y PAT
growth to 2.3%
Note: Phoenix Mills numbers are standalone; Source: Company filings, IndiaNivesh Research
REAL ESTATE SECTOR (contd)
Valuation
Outlook
With GDP revival on cards, we expect sentiment towards residential real estate market to improve. On same
lines we expect new launches to be made in Mumbai Residential real estate market in next 3-6 months. On the
back of new launches from Oberoi and existing projects reaching threshold level, we expect performance of
Oberoi to improve fromhere-on.
Already 7 of 11 floors are leased at IT Building III at Nesco, as a result, revenues would increase in FY15E.
Commercial lease rental market has slightly improved at Mumbai, reflected in the lease rental streams of PML
& Nesco.
On the back of predictable stable revenue model, we expect Nesco & PML to report continued growth.
Traction across Worli & Other projects would lead to revenue growth at Oberoi, fromhere-on.
PML with levered balance sheet should benefit from (1) commencement of debt repayment at individual
MarketCity project levels, and (2) decline in interest rates (possibly in FY16E).
Company Name
M-Cap (Rs
Mn.)
Sales
FY15E/16E
EBITDA
FY15E/16E
PAT
FY15/16E
NPM (%)
EV/EBITDA
FY15/16E (x)
CMP (as of
05/06/14)
Rating
Price
Target
(Rs.)
Oberoi Realty 83,076 13,435 7,295 5,199 38.7% 8.4 253 BUY 274
Phoenix Mills 40,557 17,168 9,322 3,221 18.8% 7.5 280 BUY 329
Nesco 14,219 2,402 1,732 1,351 56.2% 4.2 1,009 BUY 1,109
Note: Nesco no's are FY15E numbers; Source: Company Filings, IndiaNivesh Research
TELECOM SECTOR
Telecom sector outperformed the Sensex
by ~5.5% in past 12M. On absolute basis
Telecom Index went up 32.4% in last 12M
due to rational initiatives from telcos and
regulators.
During the quarter, on back of seasonal
uptick, telcos delivered strong ARPU
growth. The subscriber addition remains
highest for Idea followed by Bharti
Company
Q4FY14
Q/Q Growth % No's (mn)
ARPU MOU ARPM Net Subscribers Adds (Q/Q)
BHARTI 0.9 0.6 -0.2 7,006
IDEA 2.4 5.6 -2.9 7,100
RCOM
2.4 2.8 -0.7 -6,400
Telecom v/s Sensex Return %
1 Months 3 Months 1 Year
Telecom 1.6 -7.3 32.4
Sensex 11.2 16.3 28.2
Risk of increase in competitive intensity
Top Picks: Bharti & Idea
Source: BSE India (as on 5th Jun. 2014)
Source: Company filings; IndiaNivesh Research
TELECOM SECTOR (contd)
Q4FY14 Performance
Bharti Airtel Ltd: Q4FY14 performance was mixed-bag. Revenue growth was driven by 3.4% Q/Q increase in India business, partially
offset by 2.2% Q/Q decline in the international segment. The companys net-debt during the quarter stood at Rs.647 bn (v/s Rs.620
bn in Q3FY14). Finance cost (Incl forex) went down 7.2%Q/Q to Rs.9.9bn. VAS (non-voice) share stood at 17.6% (v/s 17.2% in
Q3FY14) led by decline in messaging revenue. Zain Africas revenue stood at Rs.64.1bn, up 17.2% Q/Q, led by 6.8% Q/Q increase in
the ARPU, partially offset by 0.4% Q/Q decline in total minutes on the network.
Idea Cellular Ltd: Q4FY14 result was ahead of our estimates on all fronts. top-line grew by 6.5% Q/Q to Rs.70.4bn due to 8.6% Q/Q
increase in volume (Total MoU) and 5.5% Q/Q increase in subscriber addition. ARPM declined to 43.6 paisa (v/s 44.9 paisa in
Q4FY14). VAS share increased sequentially to 16.5% v/s 16.1% in Q3FY14 led by increase in data subscribers, partially offset by
decline in messaging business. The companys forex loss stood at Rs.19mn (v/s Rs.34mn in Q3FY14). During the quarter, the
consolidated net debt stood at Rs.192bn (v/s 89 in Q3FY14). ARPU during the quarter went up by 2.4% Q/Q to Rs.173 (v/s Rs.169 in
Q3FY14).
Reliance Communication Ltd: Q4FY14 performance was largely in-line with street expectations on revenue (Inc. other income) and
EBITDA front. Revenue (Inc other income) grew by 5.0% Q/Q to Rs.56.7 bn. Other income during the quarter stood at Rs.2,660 mn
(v/s Rs.2,460 mn in Q3FY14). Sequentially, Rcom reported higher ARPU (Rs.128 v/s Rs.125), and MoU (296 mints v/s 288mints). VAS
revenues share increased sequentially to 23.5% (as % of rev) relative to 23.0% in Q3FY14 on back of increase in data traffic. Net debt
stood at Rs.413 bn v/s Rs.412bn in Q3FY14. Finance charges increased 21.1% Q/Q to Rs.9.1bn.
Source: Company filings; IndiaNivesh Research
Rs. Mn
Sales EBITDA PAT EBITDA PAT Sales EBITDA PAT Sales EBITDA PAT
Comments
Bharti 2,22,193 71,497 9,616 32.2 4.3 1.3 -0.2 57.6 13.5 18.0 89.1
In-line performance Africa business de-grew
Idea 69,747 22,302 5,898 32.0 8.5 5.6 8.5 26.1 15.7 33.3 91.4
Above expectation performance
Rcom 53,710 17,960 1,560 33.4 2.9 6.2 -2.7 44.4 7.7 -19.0 -48.5
Results largely in-line with street forecast
TELECOM SECTOR (contd)
Revisiting the past.....
Sector Outlook
Outlook: Industry wide rational decision making like - (I) increase in headline tariffs, and (II) curtailment of freebies remains positive for
the overall sector. Further, the softened stance from regulators towards telcos should resolve various unfavourable pending issues
(one-time penalty). However, Reliance-JIO 4G launch may increase in the competitive intensity, which may lead to price war in high
margin data business. We continue to maintain BUY rating on Bharti & Idea.
Valuations
Source: Company Filings; IndiaNivesh Research; Bloomberg Note: MCAP 5/06/2014
Company Mcap P/E (x) P/Sales (x) EV/EBITDA (x) PBV (x) EBITDA % ROE %
CMP Target Reco
Name Rs. Mn FY16E FY16E FY16E FY16E FY16E FY16E
Rs. Rs. Rs.
Bharti 14,28,071 37.0 1.4
6.1 2.0 34.1 9.5 357 405 BUY
Idea 4,54,185 15.9 1.3
6.0 2.1 32.0 13.6 137 166 BUY
Rcom 3,01,142 20.7 1.2
7.8 0.9 34.0 4.2 146 UR NR
Company CMP
Previous
Target Previous Rating
Current
Target
Current
Rating
BHARTI 336 368 BUY 405 BUY
IDEA 172 156 SELL 166 BUY
Rcom 135 UR NR UR NR
Source: Company Filings; IndiaNivesh Research; Bloomberg; UR Under Review ; CMP 5/06/2014
RESEARCH TEAM
Daljeet S. Kohli
Head of Research
Mobile: +91 77383 93371, 99205 94087
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daljeet.kohli@indianivesh.in
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Research Analyst
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IndiaNivesh Research NiveshDaily June 9, 2014 | 4
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