Midcaps - India Infoline With Two Years Target - Excellent Portpolio

India Strategy
Midcaps
June 2014
Double your stake, quadruple your money
India Strategy
Midcaps
Nifty:
Sensex:
CompanyName
Sector
M.Cap
Rscrore
5,071
CMP
Rs
269
Target
Rs
550
Upside
%
104
14,163
608
1,250
106
AlembicPharma
Pharma
BharatForge
AutoAncillary
DhanukaAgritech
Agriculture
1,990
397
800
101
FinolexCables
CapitalGoods
2,694
176
352
100
GreavesCotton
AutoAncillary
2,786
115
232
102
12,801
383
771
101
2,475
210
433
106
IndiabullsHousingFin Financials
JKLakshmiCement
Cement
JyotiStrucutres
CapitalGoods
487
59
120
102
KirloskarOilEngines
CapitalGoods
3,450
238
485
104
LGBalakrishnan
AutoAncillary
693
883
1,878
113
MagmaFincorp
Financials
1,857
98
198
102
PTCIndiaFinServices
Financials
1,773
32
65
103
SREIInfraFinance
Financials
2,465
48
97
102
Source:IndiaInfolineResearch
Niftychart
8,000
7,000
6,000
5,000
1Apr10
1Oct10
1Apr11
1Oct11
1Apr12
1Oct12
1Apr13
1Oct13
1Apr14
4,000
Sensexvisvismidcapand
smallcapindices
Sensex
Midcap
Smallcap
150
125
100
75
Oct13
Apr14
Oct12
Apr13
Oct11
Apr12
Apr11
50
Oct10
Onlybuysomethingthatyou'dbeperfectlyhappytoholdifthemarketshut
downfor10yearsWarrenBuffett
AfterfivetumultuousyearsforIndianequitiesasanassetclass,weareatthe
onset of a new multiyear Bull Market. In this phase, we assign high
probability to Nifty delivering 60% returnor even doubling in 4 years. Many
individual stocks, in the meanwhile, could double in much smaller periods.
Whilemanywouldbeskepticaloftakingfreshpositionsgiventhenewhighs
that benchmark indices and stocks have hit, our belief is that it is just the
beginning. Our premise for this belief is purely tectonic given that India has
achieved political stability and is on the course of repairing its macro
economic situation. Moreover, valuations are nowhere close to the highs
achieved in the previous Bull run and are near long term historical average
levels.
Globally too, things are getting better with macro factors in US (except Q1
CY14 GDP, which was a blip) showing signs of recovery. Euro Zone has also
shown stability post the financial crisis. With Japan and Euro Zone likely to
easemonetarypolicy,liquidityisexpectedtobebenignandwillchasegrowth
in emerging nations leading to strong FII inflows. India, for the
aforementionedfactorsisoneofthemostattractivedestinations.
Empirically,duringBullmarkets,midcapsoutperformlargecaps.Tomakethe
mostoftheensuingBullrun,wehavehandpickedseveralinterestingmidcap
stockshavingpotentialtodoubleintwoyears.Allstocksrankhighintermsof
earnings growth potential, balance sheet strength, future cash flows,
managementbandwidthandvaluationappeal.
BUYrecommendationsummary
PriceasonJune27,2014
Apr10
Double your stake, quadruple your money
7,509
25,100
AmarAmbani
research@indiainfoline.com
June30,2014
ThisreportispublishedbyIIFLIndiaPrivateClientsresearchdesk.IIFLhasotherbusinessunitswithindependentresearchteamsseparated
by'Chinesewalls'cateringtodifferentsetsofcustomershavingvaryingobjectives,riskprofiles,investmenthorizon,etc.Theviewsand
opinionsexpressedinthisdocumentmayattimesbecontraryintermsofrating,targetprices,estimatesandviewsonsectorsandmarkets.
ThemeReport
Midcaps
Onset of a new multiyear Bull Market
Astronggovernmentwillbringaboutmuchneededreforms
After1984,itsthefirsttimethatanypoliticalpartyhasachievedanabsolute
majorityintheLokSabhaelectionswithBJPwinning282seatsoutofthe574
seats. Along with its allies the tally was higher at 336 seats. The thumping
victory will ensure implementation of tough reforms, which the past
government,beingacoalitionone,founddifficulttoexecute.Duringtheone
monthinpower,thenewgovernmenthasgottheballrollingwith measures
suchas1)railwaypassengerandfreighttariffhikes,2)continueddieselprice
hikes.
AstrongmandateforBJP
450
400
350
BLD
295
ThethumpingvictoryforBJPwill
ensureimplementationoftough
reforms
OneineverythreevotersoptedforBJP
INC
INC 404
353
300
250
INC
197
200
INC
232
150
BJP
BJP
282
31%
35%
Congress
BSP
INC
BJP BJP
206
BJP 182
182 INC
161
145
SP
ADMK
AITC
100
50
19%
4%
3%
0
1977 1980 1984 1989 1991 1996 1998 1999 2004 2009 2014
Source:ElectionCommission,IndiaInfolineResearch
Others
4% 4%
Source:ElectionCommission,IndiaInfolineResearch
ModisexemplarytrackrecordinGujarat
The preelection period saw high debates about the Gujarat model of
development and whether the same can be replicated at the national level.
While spatial, cultural, demographic and topographic disparities exist, we
believe a part of Gujarat model can be applied at the national level. This
includes faster clearances of projects, ensuring power availability for all,
building robust infrastructure, deeper penetration of irrigation facilities and
turningaroundofPSUs.Withproperexecution(NarendraModisforte)these
stepscanaddtotheimprovingGDPgrowth.
Whilespatial,cultural,
demographicandtopographic
disparitiesexist,webelieveapart
ofGujaratmodelcanbeappliedat
thenationallevel
KeyachievementsofGujaratgrowthmodel
GDP
Agri
Tourism
10YrCAGR
@11.2%
10YrCAGR
@8.9%
13.5%yoy
growth
StatePSU
Turnaroundof
GSFC,GACLand
GEB
Solar
57%Indiastotal
capacity
Highways
24,000kms of
nationaland
statehighways
Midcaps
Economyinamuchbettershape
Overthepastoneyear,markedimprovementhasbeenseeninIndiasmacro
economicvariables.GDPgrowthwhichhaddwindledfrom6%+tolessthan5%
inamatterof4quarters,hasbottomedoutandhasbeenstableat4.5%4.7%
rangeinthepastfewquarters.RBIthenwasraisinginterestratesbuthasnow
maintainedstatusquoforpasttwomonetarypoliciesindicatingpeakingoutof
interest rates. Inflation, which was mounting then, has now seen downward
trajectoryinthepastfewmonths,notwithstandingneartermriskfromweak
monsoon. Fiscal and current account deficits have been well reigned in
through measures such as curbs on gold imports and postponement of
subsidies to next year. Rating agencies, a year ago, were considering a
downgrade in rating for India with a negative outlook on the economy. The
outlookforratingshasnowbeenrevisedtostable.Currency,whichwasona
depreciatingspreeandhadreachedRs68/US$,hasnowstabilizedinarangeof
Rs5861/US$.
With regards to investment cycle, steps were taken by the UPA government
which shallfructifyin the mediumterm. These steps include 1) setting up of
CCI(CabinetCommitteeonInvestment)whichhasclearedbottlenecksof210
projectsworthmorethanRs3.8tnacrossvarioussectors.2)Around8590%of
173FSAshavebeensigned;fullcompletionwouldensurefuelsupplyto78,000
MW worth of power capacity. 3) Partial mining ban reversals. Furthermore,
announcements from the new government have also been encouraging
towards this space. With regards to the asset quality in the banking system,
afteraperiodofsustaineduptrendinNPAs,Q4FY14resultsindicatedstable
trend.
Intermittently,issuessuchascurrentgeopoliticaltensionsinIraqandRussia
Ukraine tussle can pose short term risks to the economy as these results in
high crude oil prices. With India importing more than 80% of its crude oil
requirements, firm crude oil prices have a cascading impact on macro
economicvariablessuchascurrentaccountdeficit,fiscaldeficit,inflationand
GDP growth. Nevertheless, India will still remain one of the most attractive
destinations for FIIs given that most emerging economies face similar risks
whileIndiahasatrackrecordofmanagingtheserisksbetter.
EconomicvariablessuchasGDP
growth,inflation,fiscalandcurrent
accountdeficitshaveseenamarked
improvementinthepastoneyear
Stepstowardsrevivalofinvestment
cyclehavebeentaken,whileasset
qualityinthebankingsystemhasseen
stabilityinQ4FY14
SummarizingtheshiftinIndianeconomy
MacroIndicators
EconomicGrowth
OneYearBack
Slowingdownsteeply
CurrentStatus
Consolidating
Inflation
FirmandInchingup
Moderating
InterestRate
Rising
Peakedout
SystemLiquidity
Tight
Comfortable
CAD
UncomfortablyHigh
SubstantiallyReduced
FiscalDeficit
HighRiskofSlippage
Incontrol
Currency
WeakandVolatile
Stabilized&WorstBehind
SovereignRating
DownwardBias
Stableoutlook
Policy&Reforms
Chaos&Paralysis
Brightprospects
InvestmentCycle
Frozen
StillinInertia
BankingAssetQuality Deteriorating
Stabilizing
Midcaps
Earningsmomentumtopickup
We expect strong traction in earnings for India Inc in the next three years.
Corporate revenue growth and GDP growth have a strong correlation. With
GDPgrowthexpectedtorevivefromthecurrentlevelsof4.7%to6.06.5%in
the next couple of years, India Inc having built capacities in the past three
years is well placed to service the expected rise in demand. Benefits of
operatingleveragewilltranslateintomarginexpansionwhileinterestsavings
willcomeontwocounts1)expecteddeclineininterestratesand2)lowerdebt
positions serviced by strong cash flow generation. Conservatively, we expect
Sensex earnings to witness 15%+ CAGR over the next three years. A point
worthnotinghereisthat,inthepreviousBullrunSensexearningsCAGRwasat
25%.
TrendinSensexEPS
2,000
1,800
Rs
1,600
1,400
1,200
1,000
800
600
400
200
FY16E
FY15E
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY02
FY01
FY00
Source:Bloomberg,IndiaInfolineResearch
IndiaIncRoEtoimprovefurther
India, over the years, has outperformed emerging nations as well as the
developedworldintermsofRoE.Webelievethegapissettowidenfurther
fortwomajorreasons:
1) Asset Turnover: With capacity expansion in place, we believe revenue
generatedperrupeeofincrementalcapitalinfusionwillbemuchhigherwhen
comparedwiththepreviousfewyears
Whileeconomicgrowthwilldrive
revenuegrowthforIndiaInc,operating
leverageandlowerinterestcostswill
driveearningsgrowth
Improvementinassetturnoverand
marginimprovementtodriveRoEsfor
Indiaincreasingitsdifferentialwith
restoftheworld
2) Operating Margins: With fixed costs getting distributed over a larger

numberofunitsales,marginsareexpectedtoinchhigher.
Midcaps
Valuationsinexpensive,Nifty4yeartargetof12,000
BasedonFY16EEPS,NiftyistradingataP/Emultipleof14.5x,whichismuch
lower than the highs achieved during the previous Bull run. While earnings
upgradeshavejuststarted,weseeupsidestoourearningsassumptions.Soin
termsofPEG,wearecurrentlyjustbelow1x.Ifearningsseematerialtraction
(higher than our estimates) we believe valuation rerating will follow.
Considering,thisweseeNiftyat12,000infouryears.
Valuationsclosertohistoricalaverage
P/E
2SD
1SD
Average
+1SD
+2SD
30
25
20
15
10
5
Apr14
Apr13
Apr12
Apr11
Apr10
Apr09
Apr08
Apr07
Apr06
Apr05
Apr04
Apr03
Apr02
Apr01
Apr00
FIIflowstorise
FIIshaveinvestedonlyUS$10bnYTDinIndianequities.Webelievetheflows
willpickupas:
US10yrTreasuryYieldlikelytoremaininmodestrangeof2.52.8%
BenigngloballiquidityasEurope&Japanexpectedtoeasemonetarypolicy
StrongprospectsforIndianeconomyGDPgrowthtoreach7%byFY17
CorporateearningsgrowthtorecoversharplyMarketvaluationattractive
inthatcontext
HighrelativeattractivenessofIndiaisvisvisChina,RussiaandBrazil
Stronggovernmentinplacereformenvironmentexpectedtoimprove
ExcessivevolatilitybehindfortheRupeelikelytostabilizeintherangeof
Rs5862/US$
Whileearningsupgradeshavejust
started,weseeupsidestoourearnings
assumptions
FIIflowstoincreaseoverthenextfew
years
FIIFlowsinIndia
29.3
US$bn
24.5
18.5
10.9
19.8
17.6
9.8
8.3
(0.5)
2014YTD
2013
2012
2011
2010
2009
2008
2007
2006
(12.9)
2005
35
30
25
20
15
10
5
0
(5)
(10)
(15)
(20)
Midcaps
Timetopickmorequalitymidcaps
At the end of March 2014, we had recommended 10 midcaps with 1year
upsides of 18.4%27.3%. 8 stocks have already hit the targets within three
months. We believe that in a Bull run, quality midcaps can outperform large
capssubstantiallyandinvestorsshouldincreaseweightagetomidcapsintheir
long term portfolio. For making most of the ensuing Bull run, we have
handpicked several interesting mid cap stocks having potential to double in
twoyears.Allstocksrankhighintermsofearningsgrowthpotential,balance
sheet strength, future cash flows, management bandwidth and valuation
appeal.
BUYrecommendationsummary
M.Cap
Rscrore
5,071
CMP
Rs
269
Target
Rs
550
Upside
%
104
14,163
608
1,250
106
Agriculture
1,990
397
800
101
CapitalGoods
2,694
176
352
100
AutoAncillary
2,786
115
232
102
12,801
383
771
101
2,475
210
433
106
CompanyName
Sector
AlembicPharma
Pharma
BharatForge
AutoAncillary
DhanukaAgritech
FinolexCables
GreavesCotton
IndiabullsHousingFin Financials
JKLakshmiCement
Cement
JyotiStrucutres
CapitalGoods
487
59
120
102
KirloskarOilEngines
CapitalGoods
3,450
238
485
104
LGBalakrishnan
AutoAncillary
693
883
1,878
113
MagmaFincorp
Financials
1,857
98
198
102
PTCIndiaFinServices
Financials
1,773
32
65
103
SREIInfraFinance
Financials
2,465
48
97
102
InaBullrun,qualitymidcapscan
outperformlargecapssubstantially
andinvestorsshouldincrease
weightagetomidcapsintheirlong
termportfolio

Alembic
Pharmaceuticals
Rising star
Alembic Pharmaceuticals offers opportunity to play the growing domestic

branded formulations market combined with its UScentric international
generics business. The latter has posted ~39% cagr over FY1214 and we
expectrobustUSledmomentumininternationalgenericstocontinuewhile
domesticbrandedformulationsgrowthwouldbecloserto20%overnext2
3years.Ourconfidenceonstrongrevenuevisibilitystemsfromrampupin
FY15 capex guidance while margin expansion would be back ended,
supported by enhanced focus on specialty therapies within domestic
market. Expect stock to rerate on back of impressive RoEs and free cash
flowsevenasneartermvaluationsappearcompelling;recommendBUY.
Expanding focus on specialty therapies
Alembic has increased the proportion of specialty products within its

domestic formulation business from 39% in FY10 to ~54% in FY14; the
specialtysegmentgrewby17%inthepreviousfiscalvsdegrowthof3%for
the acute segment which comprises the cough and cold and anti infective
businesses.Companywouldattempttoreducefocusonlowmarginareasin
domestic formulations and look to consolidate its presence in specialty
segment with the launch of a third cardio division, up gradation of legacy
respiratorytherapyandexpansionofgastroenterology.
Rating:
Target(2years):
CMP:
Upside:
Sector:
Sector view:
FY15E
22,228
19.3
4,312
19.4
2,778
18.0
14.7
18.3
1.1
2.7
0.2
35.6
35.8
FY16E
26,996
21.5
5,426
20.1
3,605
29.8
19.1
14.1
0.9
2.0
0.1
34.9
38.1
FY17E
33,020
22.3
6,967
21.1
4,729
31.2
25.1
10.7
0.6
1.2
0.0
34.1
38.4
316/118
Marketcap(Rscr):
5,071
3mAvgvol(000Nos):
227
Bloombergcode:
ALPMIN
BSEcode:
533573
NSEcode:
APLLTD
FV(Rs):
Companyratinggrid
LowHigh
1
EarningsGrowth
CashFlow
B/SStrength
Valuationappeal
Risk
Sharepricetrend
250
Alembic
Sensex
200
150
100
50
Jun13
Source:Company,IndiaInfolineResearch
25,100
52Weekh/l(Rs):
Financialsummary
FY14
18,632
22.6
3,577
19.2
2,355
42.5
12.5
21.5
1.5
3.1
0.2
40.0
39.7
Pharmaceuticals
Positive
Y/e31Mar(Rsm)
Revenues
yoygrowth(%)
Operatingprofit
OPM(%)
ReportedPAT
yoygrowth(%)
EPS(Rs)
P/E(x)
P/BV(x)
EV/EBITDA(x)
Debt/Equity(x)
ROE(%)
ROCE(%)
Rs550
Rs269
104%
Sensex:
Capex ramp up indicates mgmt confidence on revenue visibility
Alembic has guided for FY15 capex of Rs2.5bn spread across international
APIs and generics as well domestic branded formulations and R&D and is
muchhigherthanitstypicalrunrateofRs11.2bnseeninthepreviousyears.
Capex ramp up was necessitated by sharp growth in international generics
business which has posted ~39% cagr over FY1214 and consequently
company needs to augment its APIs and formulations capacities. Viewed
alternately, we believe the capex ramp up from ~4.4% of sales to an
estimated11%ofcurrentyearrevenuesindicateanextremelystrongvisibility
onrevenuepipelineoncemostofthecapexiscompletedbyendofFY15.
BUY
Dec13
Jun14
Shareholdingpattern
Others
100
FIIs
Promoters
80
60
40
20
0
Jun13 Sep13 Dec13 Mar14
Research Analyst:
BhaveshGandhi
Alembic Pharmaceuticals
Robust growth likely to continue in international generics
International generics sales nearly doubled yoy in FY14 with US being the
mainfocusareaaccountingfor6570%oftotalexportsthoughthisincluded
salesfrompreviousyearbacklogs.Internationalmarketgrowthwouldcome
through new filings (para IV, NDA and technically complex products) and
launches.Companyhasfiled61ANDAsallintheoralsolidswithfocusonUS
market.
Althoughcompanyfiledonly4ANDAsinFY14(duetomorecomplexproducts
leadingtohigherfailureratesandcapacityconstraints),ithopesforagradual
rampupinfilingsinnexttwoyears;Alembicwouldhave68productlaunches
inUSeveryyear.Moreover,capacityinoralsolidtabletshasbeenexpanded
to 5bn and through debottlenecking would again increased it to 7bn which
takecareofcapacityconstraintsseeninpreviousyear.
Impressive RoEs, free cash flows and compelling valuations; BUY
Overall India branded formulations business grew by 14% in FY14 impacted

bydegrowthinantiinfectivebusinessbutweexpectabetterrunratefrom
currentyearonthebackofnewformulationcapacitybeingputfordomestic
market as also new prices come in to effect from Q2. Increased capex in
current fiscal is likely to reduce free cash generation though we expect
healthycashgenerationinFY16andbeyond.Companysreturnratiostooare
expected to remain impressive with both RoE and RoCE in the range of 35
38%.Robust26%earningscagroverFY1417islikelytobeaccompaniedbya
strongbalancesheetasleverageratiosremainwithincomfortablelimits.
Our earnings forecasts factor in a ~18.5% growth in domestic branded

formulations while international generics are projected to grow at ~30%
compoundedovernextthreeyears.Weexpectthestocktorerateonbackof
strong growth visibility, margin upsides and robust balance sheet; current
valuationsprovideanattractiveentrypointandwerecommendBUYwitha2
yearpricetargetofRs550.
Impressivereturnratiosdespitehighupfrontcapex
%
RoCE
RoE
HealthyfreecashgenerationinFY16andbeyond
5.0
40.0
OpCF
Rs bn
Capex
FreeCF
4.0
35.0
3.0
30.0
2.0
25.0
FY17E
FY16E
(3.0)
FY17E
0.0
FY16E
(2.0)
FY15E
5.0
FY14
(1.0)
FY13
10.0
FY12
0.0
FY11
15.0
FY15E
1.0
20.0
FY14
45.0
Alembichaslinedup68product
launchesinUSeveryyearwhilepaceof
annualANDAfilingsisalsolikelytoramp
upfromFY14levels
Astrongrevenuevisibility,scopefor
marginexpansionandimpressive
financialmetrics(RoEs,cashflows)
woulddrivestockrerating;recommend
BUY
Marginexpansionseeninthemediumterm
25.0
OPM
PaceofANDAfilingstorampupfromcurrentfiscal
20
EBITmargin
20.0
16
15.0
12
ANDAsfiled
DMFsfiled
10.0
5.0
FY14
FY13
FY12
FY11
FY17E
FY16E
FY15E
FY14
FY10
Upto
FY09
0.0
Note:DrugMasterFile(DMF)containschemistry,mfgetcofdrugcomponentandisrequiredtosupplybulkdrugstoUS
About Alembic Pharma: stellar earnings cagr over FY12-14
Establishedin1907,AlembicPharmaceuticals(erstwhilepartofAlembicLtd)
possessmanufacturingandmarketingcapabilitiesacrossthevaluechainfrom
bulk drugs and intermediaries to branded formulations. Company is the
market leader in the Macrolides segment of antiinfective drugs in India. It
owns manufacturing facilities in Vadodara (APIs and formulationsboth US
FDA approved) and Baddi (formulations for domestic and nonregulated
markets) in Himachal Pradesh. It posted FY1214 revenue/PAT cagr of
13%/35%drivenbydoublingofinternationalgenericssalesinFY14;exports
accountedfor~44%ofFY14sales.Withinoverallrevenues,domesticbranded
formulations share stood at ~45% while international generics (majority US
bound) accounted for ~25%. Alembic has filed for 61 ANDAs (Abbreviated
New Drug Application) out of which it has received approvals for 31
applicationsplusone505(b)(2)(avariationoftypicalNDAapproval).
5
Indiabranded
46
Indiagenerics
Focusonspecialtysegmentwithindomestic
brandedbusiness
1
18
Alembicposted35%profitcagroverpast
twoyearsdrivenbystrongmomentumin
internationalgenericsbusiness
2 2
Antiinfectives
34
10
Cough&cold
Gastrology
Cardiology
Internationalbranded
Gynecology
Internationalgenerics
Orthopedics
11
25
General
Specialty
FY14sales:domesticbrandedformulationsaccount
for46%share
AntiDiabetics
API
Nephrology/Urology
12
Exportincentives
4
Opthalmology
19
Financials
Incomestatement
Y/e31Mar(Rsm)
Revenue
Operatingprofit
Depreciation
Interestexpense
Otherincome
Profitbeforetax
Taxes
Netprofit
Keyratios
FY14
18,632
3,577
(405)
(98)
32
3,106
(751)
2,355
FY15E
22,228
4,312
(562)
(128)
33
3,655
(877)
2,778
FY16E
26,996
5,426
(657)
(61)
35
4,744
(1,139)
3,605
FY17E
33,020
6,967
(751)
(31)
37
6,222
(1,493)
4,729
Y/e31Mar(Rsm)
Equitycapital
Reserves
Networth
Debt
Def.taxlia
Totalliabilities
FY14
377
6,379
6,756
1,309
227
8,292
FY15E
377
8,495
8,872
1,709
227
10,808
FY16E
377
11,438
11,816
809
227
12,852
FY17E
377
15,506
15,883
409
227
16,519
Fixedassets
Investments
Networkingcap
Inventories
Sundrydebtors
Cash
Othercurrassets
Sundrycreditors
Othercurrentlia
Totalassets
4,176
33
4,083
3,108
2,734
240
1,887
(2,884)
(1,001)
8,292
6,114
33
4,662
3,715
3,289
123
2,223
(3,471)
(1,216)
10,808
6,957
33
5,862
4,512
3,994
350
2,700
(4,216)
(1,477)
12,852
7,705
33
8,781
5,518
4,885
2,039
3,302
(5,157)
(1,807)
16,519
FY15E
3,655
562
(877)
(695)
2,645
(2,500)
145
400
(662)
(117)
FY16E
4,744
657
(1,139)
(974)
3,289
(1,500)
1,789
(900)
(662)
227
FY17E
6,222
751
(1,493)
(1,230)
4,250
(1,500)
2,750
(400)
(662)
1,689
Balancesheet
Cashflowstatement
Y/e31Mar(Rsm)
Profitbeforetax
Depreciation
Def.taxlia
Taxpaid
Workingcapital
OperatingCF
Capitalexp
FreeCF
Equityraised
Debtfin/disp
Dividends
Netincash
FY14
3,106
405
88
(751)
(638)
2,210
(816)
1,394
33
(686)
(662)
79
Y/e31Mar
Growthmatrix(%)
Revenuegrowth
Opprofitgrowth
EBITgrowth
Netprofitgrowth
FY14
FY15E
FY16E
FY17E
22.6
42.0
45.0
42.5
19.3
20.6
18.1
18.0
21.5
25.8
27.0
29.8
22.3
28.4
30.1
31.2
Profitabilityratios(%)
OPM
EBITmargin
Netprofitmargin
RoCE
RoNW
RoA
19.2
17.2
12.6
41.5
40.0
20.8
19.4
17.0
12.5
39.6
35.6
20.1
20.1
17.8
13.4
40.6
34.9
21.2
21.1
18.9
14.3
42.6
34.1
22.5
Pershareratios
EPS
Dividendpershare
CashEPS
Bookvaluepershare
12.5
3.0
14.6
35.8
14.7
3.0
17.7
47.1
19.1
3.0
22.6
62.7
25.1
3.0
29.1
84.3
Valuationratios(x)
P/E
P/BV
MCap/Sales
EV/EBIDTA
21.5
7.5
2.7
14.5
18.3
5.7
2.3
12.1
14.1
4.3
1.9
9.4
10.7
3.2
1.5
7.0
Payout(%)
Taxpayout
Dividendpayout
24.2
24.0
24.0
23.8
24.0
18.4
24.0
14.0
54
61
57
54
61
57
54
61
57
54
61
57
32.7
0.2
0.3
29.5
0.2
0.4
79.1
0.0
0.1
203.7
(0.1)
(0.2)
Y/e31Mar(Rsm)
Taxburden(x)
Interestburden(x)
EBITmargin(x)
Assetturnover(x)
Financialleverage(x)
FY14
0.76
0.97
0.17
1.64
1.92
FY15E
0.76
0.97
0.17
1.61
1.77
FY16E
0.76
0.99
0.18
1.59
1.65
FY17E
0.76
1.00
0.19
1.57
1.52
RoE(%)
40.0
35.6
34.9
34.1
Liquidityratios
Debtordays
Inventorydays
Creditordays
Leverageratios
Interestcoverage
Netdebt/equity
Netdebt/op.profit
DuPontAnalysis
Bharat Forge
Growth engine cranked
Bharat Forge Ltd (BFL) is an indirect play on the expected resurgence in

domestic commercial vehicle demand, improvement in overall investment
climate and gradual global economic recovery. In the down cycle, both
domestic and global, seen in the past three years, BFL has emerged as a
companywithmorediversifiedbusiness,strongerbalancesheetandbetter
productionefficiency.Withcapacityutilizationratesatbelow55%,recovery
in revenues would translate into earnings CAGR of 28% over FY1417E led
by benefits of operating leverage. With superior earnings growth, we
believethevaluationsshouldinchtowardsitspreviousbullcyclemultiples.
Rating:
Target(2Years):
CMP:
Upside:
BUY
Rs1,250
Rs608
106%
Sector:
Auto Ancillary
Sector view:
Positive
Sensex:
25,100
52Weekh/l(Rs):
611/186
Marketcap(Rscr):
14,163
6mAvgvol(000Nos):
892
Bloombergcode:
BHFCIB
Revenue base much more diversified
BSEcode:
500493
High dependence on the domestic CV business had hit BFL hard during the
down cycle of the past couple of years. However, during this phase the
companyhasdiversifiednotonlyoutsideofautobusinessbutalsowithinthe
auto business. Non automotive sector contribution has risen from 27% in
FY12 to 37% in FY14. Amongst auto sector, while contribution of passenger
cars to total revenues has risen from 10% to 15%, CV proportion has fallen
from63%to48%.Alsointermsofgeographies,thecontributionofIndiahas
declinedfrom53%inFY12to46%inFY14,whilethatofUSandEuropehas
increasedby5%and2%respectively.Thismakesthebusinesslesscyclical.
NSEcode:
BHARATFORG
Domestic automotive business to gain traction
Pasttwoyearshavebeendifficultfortheautomotiveplayersinthedomestic
marketduetotheweakeconomicbackdrop,risingfuelprices,highinterest
rates and weak consumer sentiment. CVs were the worst hit being most
closely linked to economic growth. With a stable government and the
anticipated reforms, we expect strong overall economic recovery in the
medium term which eventually translates into a strong demand for
automobiles. BFL being a supplier of critical components and having
expanded its capacity is well poised to garner the ensuing business
opportunities.Weexpecta20%revenueCAGRinBFLsautomotivebusiness
duringFY1417E.
FV(Rs):
Companyratinggrid
LowHigh
EarningsGrowth
CashFlow
B/SStrength
Valuationappeal
Risk
Sharepricetrend
BharatForge
300
Sensex
250
200
150
100
50
Jun13
Oct13
Feb14
Jun14
Financialsummary
Y/e31Mar(Rsm)
Revenues
yoygrowth(%)
Operatingprofit
OPM(%)
ReportedPAT
yoygrowth(%)
EPS(Rs)
P/E(x)
Price/Book(x)
EV/EBITDA(x)
Debt/Equity(x)
RoE(%)
RoCE(%)
FY14
67,161
30.0
10,271
15.3
5,215
110.8
17.9
32.3
4.9
14.3
0.7
16.7
15.4
FY15E
77,948
16.1
13,166
16.9
6,018
15.4
25.8
22.4
4.0
10.5
0.5
19.7
20.2
FY16E
92,495
18.7
16,193
17.5
8,051
33.8
34.6
16.8
3.2
8.0
0.4
21.4
23.4
FY17E
112,628
21.8
20,518
18.2
10,961
36.1
47.1
12.3
2.6
5.6
0.2
23.3
27.1
Shareholdingpattern
Promoter
Institutions
Others
100%
80%
60%
40%
20%
0%
Research Analyst:
Prayesh Jain
Bharat Forge
International auto business also recovering
Following the financial crisis, automotive sales in the developed world had
seenamarkedslowdown.WithgrowthprospectsemerginginUSandstability
expectedinEurope,automotivevolumesareexpectedtorevive.Particularlyin
USCVmarket,fleethasagedandreplacementdemandisrising.Passengercar
salestherehavealsobeengainingstrength.Weexpectthistrendtocontinue
inthemediumtermandsee18%CAGRinitsBFLsinternationalautobusiness.
Non automotive business could see exponential growth
BFL,initsnonautobusiness,servicesdemandforcriticalcomponentsoffive
majorsegments1)oil&gas,2)unconventionalsourcesofpower,3)railways,
4) aerospace and 5) mining. Investments in all these sectors are expected to
rise substantially in India given the strong focus of the new government on
buildinginfrastructure,improvingenergysecurityandprovidingpowertoall.
Nonautocurrentlycontributesabout40%ofthestandalonerevenuesandBFL
plans to increase it to 60% over the medium term. To achieve this, it has
entered into tieups with global leaders such as Alstom, Areva, David Brown
etc. Also it has set up dedicated manufacturing locations. We expect a 30%
revenueCAGRinBFLsnonautorevenues.
Risingcontributionofnonautoandpassengercars
100%
PassVehicle
CommercialVehicle
WithgrowthprospectsemerginginUS
andstabilityexpectedinEurope,
automotivevolumesareexpectedto
revive
Nonautocurrentlycontributesabout
40%ofthestandalonerevenuesand
BFLplanstoincreaseitto60%overthe
mediumterm
ReducingdependenceonIndia
Nonauto
India
US
Europe
Others
100%
90%
90%
80%
80%
70%
70%
60%
60%
50%
50%
40%
40%
30%
30%
20%
20%
10%
10%
0%
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
0%
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Operating leverage, value addition and favorable product mix to

drive margins
1) Operatingleverage:CapacityutilizationlevelsforBFLwasat65%initsauto
and nonauto business across domestic and international facilities at the
end of FY14 leaving substantial scope for operating leverage. To add to
this,thecompanyhasbroughtdownbreakevenlevelsacrossitsfacilities.
2) Valueaddition:Overtheyearsthecompanyhasincreasedvalueaddition
byaddingmachiningcapacityutilizationofwhichstoodat50%attheend
ofFY14.Marginsonmachiningaresubstantiallyhigher.
Improvementincapacityutilization,
lowerbreakevenlevels,higher
machiningcontributiontorevenues
andhighernonautocontributionwill
drivemarginexpansion
3) Favorable product mix: Nonauto business proportion is set to rise

significantly and we note here that nonauto segment requiring more
technologicallyadvancedcomponentscommandbettermarginsthanauto.
The aforementioned factors could result in substantial improvement in
marginsforBFLevenfromthecurrentlevels.
2
Bharat Forge
Financials to gain further strength
Driven by robust growth across segments and geographies and capacity in

place,weexpectBFLtoreportaFY1417ErevenueCAGRof19%.Asoutlined
above, OPM is expected to expand by 300bps during the same period.
Resultantly, earnings CAGR is expected to be much higher at 29%. RoE and
RoCEareexpectedtoimprovemeaningfully.Withnomajorcapexplansinthe
near future (given low capacity utilization) free cash flows are expected to
surgeduringthisperiod.
Strongfreecashflowgeneration
Operatingcashflow
ImprovedRoEandRoCE
Capitalexpenditure
Freecashflow
RoE(%)
5,000
RoCE(%)
30
Rsmn
4,000
25
3,000
20
2,000
15
1,000
10
(1,000)
(2,000)
0
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E
Valuations below historical average
BFLtradesatoneyearforwardP/Emultipleof16.8xcomparedtoitshistorical
average of 24x. Given the top quartile earnings growth expected in the next
threeyearswebelievethestockshouldreratetothehistoricalaveragelevels.
Reduced cyclicality in business also supports our thesis of rerating. We
maintainourBUYratingwitha2yearpricetargetofRs1,250.
Giventhetopquartileearningsgrowth
expectedinthenextthreeyearswe
believethestockshouldreratetothe
historicalaveragelevels
TradingsubstantiallybelowhistoricalP/Evaluations
80
70
60
50
40
30
20
10
May14
Jul13
Dec13
Feb13
Sep12
Apr12
Nov11
Jun11
Jan11
Aug10
Mar10
Oct09
Dec08
May09
Jul08
Feb08
Sep07
Apr07
Nov06
Jan06
Jun06
Aug05
Mar05
Bharat Forge
Financials
Incomestatement
Y/e31Mar(Rsm)
Revenue
Operatingprofit
Depreciation
Interestexpense
Otherincome
Profitbeforetax
Taxes
Minoritiesand
other
Adj.profit
Exceptionalitems
Netprofit
Keyratios
FY14
67,161
10,271
(3,579)
(1,692)
1,249
6,250
(2,100)
FY15E
77,948
13,166
(3,768)
(1,506)
1,000
8,892
(3,050)
FY16E
92,495
16,193
(3,896)
(1,326)
1,000
11,971
(4,097)
FY17E
112,628
20,518
(4,024)
(1,146)
1,000
16,348
(5,563)
29
4,178
1,037
5,215
176
6,018
0
6,018
176
8,051
0
8,051
176
10,961
0
10,961
Y/e31Mar
Growthmatrix(%)
Revenuegrowth
Opprofitgrowth
EBITgrowth
Netprofitgrowth
OPM
EBITmargin
Netprofitmargin
RoCE
RoNW
RoA
Pershareratios
EPS
Dividendpershare
CashEPS
Bookvaluepershare
Valuationratios
P/E
P/CEPS
P/BV
EV/EBIDTA
Payout(%)
Dividendpayout
Taxpayout
Liquidityratios
Debtordays
Inventorydays
Creditordays
Leverageratios
Interestcoverage
Netdebt/equity
Netdebt/op.profit
Balancesheet
Y/e31Mar(Rsm)
Equitycapital
Reserves
Networth
Minorityinterest
Debt
Deferredtaxliab(net)
Totalliabilities
Fixedassets
Investments
Networkingcapital
Inventories
Sundrydebtors
Othercurrentassets
Sundrycreditors
Othercurrentliabilities
Cash
Totalassets
FY14
FY15E
FY16E
466
466
466
27,083 33,101 41,152
27,549 33,567 41,618
1,842
2,042
2,242
18,737 16,737 14,737
1,345
1,345
1,345
49,474 53,692 59,943
28,487 26,719 24,824

4,160
4,160
4,160
9,573
9,764
9,934
12,880 14,949 17,739
8,832 10,251 12,164
12,524 13,224 13,924
(22,080) (25,627) (30,409)
(2,583)
(3,033)
(3,483)
7,254 13,049 21,025
49,474 53,692 59,943
FY17E
466
52,113
52,579
2,442
12,737
1,345
69,104
22,800
4,160
10,074
21,600
14,811
14,624
(37,028)
(3,933)
32,070
69,104
Cashflowstatement
Y/e31Mar(Rsm)
Profitbeforetax
Depreciation
Taxpaid
Workingcapital
Operatingcashflow
Capitalexpenditure
Freecashflow
Equityraised
Debtfinancing/disposal
Dividendspaid
Otheritems
Netincash
FY14
6,250
3,579
(2,100)
(1,312)
6,416
3,324
9,741
696
(9,108)
(926)
1,266
1,668
FY15E
8,892
3,768
(3,050)
(191)
9,419
(2,000)
7,419
926
(2,000)
(926)
376
5,795
FY16E
11,971
3,896
(4,097)
(170)
11,600
(2,000)
9,600
926
(2,000)
(926)
376
7,976
FY17E
16,348
4,024
(5,563)
(140)
14,669
(2,000)
12,669
926
(2,000)
(926)
376
11,045
FY14
FY15E
FY16E
FY17E
30.0
29.8
36.0
98.2
16.1
28.2
30.9
44.0
18.7
23.0
27.9
33.8
21.8
26.7
31.6
36.1
15.3
11.8
6.2
15.4
16.7
5.6
16.9
13.3
7.7
20.2
19.7
7.7
17.9
4.0
33.3
118.3
17.6
11.8
3.4
8.4
15.4
34.3
48
70
120
12.9
9.4
2.7
6.0
11.5
34.2
48
70
120
47.1
4.0
64.4
225.8
34.6
4.0
51.3
178.7
23.5
14.5
4.2
11.0
22.2
33.6
18.2
15.5
9.7
27.1
23.3
10.8
17.5
14.4
8.7
23.4
21.4
9.1
25.8
4.0
42.0
144.2
33.9
18.2
5.1
14.9
8.4
34.0
48
70
120
48
70
120
4.7
0.4
1.1
6.9
0.1
0.3
10.0
(0.2)
(0.4)
15.3
(0.4)
(0.9)
FY14
0.67
0.79
0.12
0.90
2.96
16.7
FY15E
0.68
0.86
0.13
1.00
2.56
19.7
FY16E
0.67
0.90
0.14
1.05
2.34
21.4
FY17E
0.67
0.93
0.16
1.10
2.16
23.3
DuPontAnalysis
Y/e31Mar
Taxburden(x)
Interestburden(x)
EBITmargin(x)
Assetturnover(x)
RoE(%)
Dhanuka Agritech Ltd

Set to reap bumper harvest
Dhanuka Agritech Ltd (DAL) is a leading player in the agrochemical sector.

DALsinherentstrengthliesinitsassetlightbusinessmodelwhichhasled
to higher return on asset than the industry. Managements focus on
building strong distribution network while collaborating with major global
chemical players to introduce highmargin specialty products has paid rich
dividendsandwillcontinuetodosointheyearstocome.Debtfreebalance
sheet, sound financial backing and experienced management team are
someoftheotherthingsthatmakethisstockattractive.
New innovative products key to exponential growth

In April 2014, company has announced the receipt of approvals for its
innovativeproductregisteredunderthe9(3)sectionoftheInsecticideActof
India, which gives it exclusive rights to sell the product in Indian markets.
Theseproductswillbelaunchedinthiskharifseason.Managementhasfiled
for license for 6 new products and is confident of launching at least 2
productseachyearinthecoming3years.Ofthese6productsthreewillbe
herbicide which is a fast growing category in the agrochemical space.
Specialty products contribute twothird revenue while generic products
contributeonethirdrevenue.
Crop protection gaining importance; DAL direct beneficiary
According to estimates from Crop Care Federation of India (CCFI), 85% of

annualcroplossesareduetopestinfestation,diseasesandweeds.Pesticide
penetration is low in India (0.6kg/ha) vs. global peers (517 kg/ha). The
governmentsfocusonincreasingtheMSP(minimumsupportprices)forkey
crops like rice, wheat, maize, sugarcane etc will lead to higher farm income
andprovideanincentiveforfarmerstousemorepesticidestoimproveyields.
AllthisaugerswellforDAL.
Rating:
Target(2Years):
CMP:
Upside:
BUY
Rs800
Rs397
101.5%
Sector:
Agrochemicals
Sector view:
Positive
Sensex:
25,100
52Weekh/l(Rs):
408/125
Marketcap(Rscr):
1,990
6mAvgvol(000Nos):
143
Bloombergcode:
DAGRIIN
BSEcode:
507717
NSEcode:
DHANUKA
FV(Rs):
Companyratinggrid
LowHigh
EarningsGrowth
CashFlow
B/SStrength
Valuationappeal
Risk
Sharepricetrend
Dhanuka
Sensex
300
250
200
150
Financialsummary
Y/e31Mar(Rsm)
Revenues
yoygrowth(%)
Operatingprofit
OPM(%)
PreexceptionalPAT
ReportedPAT
yoygrowth(%)
EPS(Rs)
P/E(x)
Price/Book(x)
EV/EBITDA(x)
Debt/Equity(x)
RoE(%)
RoCE(%)
100
FY14
FY15E
FY16E
FY17E
7,395
27.0
1,216
16.4
931
931
44.5
18.6
21.5
6.0
16.9
0.2
31.3
34.9
9,317
26.0
1,540
16.5
1,151
1,151
23.5
11,745
26.1
1,961
16.7
1,405
1,405
22.1
14,877
26.7
2,499
16.8
1,806
1,806
28.5
50
Jun13
Oct13
Feb14
Jun14
Shareholdingpattern
Promoters
Institutions
Others
100
50
23.0
17.4
4.8
13.3
0.1
30.6
34.5
28.1
14.2
3.8
10.4
0.1
29.8
36.1
36.1
11.1
3.0
8.1
0.1
30.5
37.7
0
Research Analyst:
PratikTholiya

NewInLicensedProductslaunchedinFY14
ProductName
Maxyld
Danfuron
Protocol
Defend
Description
PlantGrowthRegulator;InLicensedproductlaunchedinFY14.
Application:Cotton&paddy
Insecticide;InLicensedproductfromBayerCropscience,launchedin
Q3FY14.Application:Chilli,Cotton,TeaPlantation
Fungicide;launchedinQ3FY14.
Application:Potato,Grapes,BlackGram
Insecticide;launchedinQ3FY14.
Application:Chilli,Cotton,Grapes
Source:Company,IILFResearch
DALs ability to source technicals from

MNCs has resulted in higher margins
thanindustry
Long standing International tie-ups gives the edge

DAL has long standing tie ups with leading chemical companies of the world
suchasNissan,Sumitomo,Chemtura,DuPont,FMCetc.Technicalsaresourced
from MNCs and the formulations are made in the companys manufacturing
plants. These products command higher margins which can be seen by DALs
superior EBITDA margins (~16%) compared to industry average (~14%). For
MNCs,DALcomesasapreferredchoiceduetoitsprofoundunderstandingof
the Indian agrochemical market, nationwide distribution network and strong
farmercontact.SofarDALhas25productsfromitspartnersoutofwhich6are
among the top 10 revenue contributors. Majority of the new products in the
pipelinewillbecomingfromsuchtieups.
Asset light model, marketing and distribution centric
DALs asset light business model has enabled it to achieve superior asset
turnoverratioaswellasreturnratioscomparedtoitspeers.Themorecapital
Asset light model, various marketing
intensive technical manufacturing process has been consciously avoided. initiatives and strong distribution
Managements priority remains on leveraging its marketing and distribution networkhasresultedinsuperiorratios.
network which is one of the largest in the country. It has also built a robust
teamofsalesandmarketingworkforcewhichhasfosteredstrongrelationship
withthefarmers.Lastyear,ithadropedinsuperstarAmitabhBachchanasits
brandambassador.ThismarketingexercisehasimprovedDALsbrandvisibility,
increased brand recognition and has had a positive influence on the target
audience.
ReturnRatioshigherthanpeers
SuperiorAssetTurnoverRatio
10
40%
ROE(%)
ROCE(%)
TotalAssetTurnover(x)
FixedAssetTurnover(x)
35%
8
30%
25%
20%
15%
10%
2
United
Phosphorus
RallisIndia
PIIndustries
Insecticides
(India)
ExcelCrop
Care
Dhanuka
Agritech
Bayer
CropScience
United
Phosphorus
RallisIndia
0%
PIIndustries
Insecticides
(India)
ExcelCrop
Care
Dhanuka
Agritech
Bayer
CropScience
5%
Source:Company,IIFLResearch

CategorywiseRevenuebreakup
RegionwiseRevenuebreakup
10%
44%
32%
27.0%
28.3%
Insecticides
NorthZone
Fungicides
EastZone
Herbicides
WestZone
SouthZone
Others
13.0%
31.7%
14%
Debt free balance sheet, strong operating cash flow and

experienced management team
Over the last few years management has taken measures to reduce the
workingcapitalwhichhasresultedinstronginoperatingcashflow.Debtfree
balancesheetcoupledwithhigherprofitabilitygivestheflexibilitytoinvestits
cash back into the business for further expansion or development of new
products. RoCE has consistently been maintained above 30% which is higher
than the industry. DAL is led by first generation entrepreneurs Mr. R G
Agarwal(Chairman)andMrMKDhanuka(MD)whohavebeeninstrumentalin
thesteadyriseofthecompany.Bothhaveover40yearsofexperienceinthe
agrochemicalbusiness.
RoCEabove30%duetostrongbalance
sheetandhigherprofitability
Outlook & Valuation

We are positive on the companys prospects in the coming years, given the
launch of new innovative products which command higher margins and will
helpinincreasingmarketshare.WeexpectDALtoreportrevenueCAGRof26%
duringFY201417E.EBITDAisexpectedtoclockaCAGRof27%whilemargins
aretoremainabove16.5%duringthisperiod.AtCMPofRs397,thestockis
tradingataP/Eof11xbasedonFY17EEPSofRs.36.WerecommendBuyon
thestockwithatargetpriceofRs800.
Company Background
NewDelhibasedDhanukaAgritechLtdisoneoftheleadingcompaniesinthe
agro chemical space. It has featured thrice in the prestigious 'Inc. India500'
list. It has a diversifiedportfolio of herbicide, insecticide and fungicide, along
withvarioustypesofplantgrowthnutrients.DALhas3formulationsfacilities
located at Jammu, Gurgaon and Gujarat. A fourth facility in Rajasthan will be
commissioned in FY15 that will double the existing capacity. Current product
portfoliocomprisesof85products,twothirdsofwhicharespecialtyproducts.
Top 5 products include Targa Super (herbicide), Marker, Calden (insecticide),
Omite(miticide)andDhanzymeGranules(plantgrowthregulator).

Financials (Consolidated)
Incomestatement
Keyratios
Y/e31Mar(Rsmn)
Revenue
Operatingprofit
Depreciation
Interestexpense
Otherincome
Profitbeforetax
Taxes
Adj.profit
Netprofit
FY14
7,395
1,216
(48)
(42)
37
1,163
(232)
931
931
FY15E
9,317
1,540
(79)
(43)
38
1,456
(306)
1,151
1,151
FY16E
11,745
1,961
(85)
(42)
39
1,873
(468)
1,405
1,405
FY17E
14,877
2,499
(89)
(42)
40
2,408
(602)
1,806
1,806
FY14
100
3,225
3,325
544
36
3,905
893
10
2,979
2,148
1,709
385
(1,115)
(148)
23
3,905
FY15E
100
4,086
4,186
559
36
4,781
965
10
3,699
2,664
2,144
511
(1,406)
(213)
108
4,781
FY16E
100
5,137
5,237
551
36
5,825
930
10
4,687
3,351
2,703
644
(1,769)
(241)
198
5,825
FY17E
100
6,489
6,589
543
36
7,168
941
10
5,894
4,239
3,424
774
(2,238)
(305)
323
7,168
Y/e31Mar
Growthmatrix(%)
Revenuegrowth
Opprofitgrowth
EBITgrowth
Netprofitgrowth
OPM
EBITmargin
Netprofitmargin
RoCE
RoNW
RoA
Pershareratios
EPS
Dividendpershare
CashEPS
Bookvaluepershare
Valuationratios
P/E
P/CEPS
P/B
EV/EBIDTA
Payout(%)
Dividendpayout
Taxpayout
Liquidityratios
Debtordays
Inventorydays
Creditordays
Leverageratios
Interestcoverage
Netdebt/equity
Netdebt/op.profit
Balancesheet
Y/e31Mar(Rsm)
Equitycapital
Reserves
Networth
Debt
Totalliabilities
Fixedassets
Investments
Networkingcapital
Inventories
Sundrydebtors
Othercurrentassets
Sundrycreditors
Cash
Totalassets
Cashflowstatement
Y/e31Mar(Rsmn)
Profitbeforetax
Depreciation
Taxpaid
Workingcapital
Operatingcashflow
Capitalexpenditure
Freecashflow
Equityraised
Debtfinancing/
disposal
Dividendspaid
Netincash
FY14
1,163
48
(232)
(764)
216
(303)
(87)
(0)
FY15E
1,456
79
(306)
(720)
509
(150)
359
FY16E
1,873
85
(468)
(988)
501
(50)
451

FY17E
2,408
89
(602)
(1,207)
688
(100)
588

207
(234)
(31)
15
(289)
85
(8)
(353)
90
(8)
(454)
126
FY14
27.0
48.5
45.9
44.5
16.4
16.3
12.6
34.9
31.3
19.9
18.6
4.0
19.6
66.5
21.5
20.4
6.0
16.9
25.2
19.9
84
127
66
28.9
0.2
0.4
FY15E
26.0
26.6
24.4
23.5
16.5
16.1
12.3
34.5
30.6
19.9
23.0
4.8
24.6
83.7
17.4
16.3
4.8
13.3
25.2
21.0
84
125
66
35.0
0.1
0.3
FY16E
FY17E
26.1
27.4
27.7
22.1
26.7
27.4
27.9
28.5
16.7
16.3
12.0
36.1
29.8
19.7
16.8
16.5
12.1
37.7
30.5
20.6
28.1
5.9
29.8
104.7
36.1
7.6
37.9
131.7
14.2
13.4
3.8
10.4
11.1
10.6
3.0
8.1
25.2
25.0
25.2
25.0
84
125
66
45.4
0.1
0.2
84
125
66
58.9
0.0
0.1
FY14
0.80
0.97
0.16
1.58
1.57
31.3
FY15E
0.79
0.97
0.16
1.61
1.54
30.6
FY16E
0.75
0.98
0.16
1.65
1.51
29.8
FY17E
0.75
0.98
0.16
1.70
1.48
30.5
DuPontAnalysis
Y/e31Mar
Taxburden(x)
Interestburden(x)
EBITmargin(x)
Assetturnover(x)
RoE(%)
Finolex Cables Ltd

Cabled for Growth
FinolexCablesLtd(FCL)standstobenefitfromtheexpectedrevivalinuser
industries such as construction, power, telecom and automobile. FCLs
dominant position in the cable industry can be attributed to its inherent
advantagessuchashighbrandrecognition,stronggoodwill,soundfinancial
backingandexperiencedmanagementteam.Asapartofitsdiversification
strategy, FCL has ventured into switchgears, electric motors and
transformers.FCLwilllaunchvarioustypesofcircuitbreakersandcabinets
inthemarketbyendofthisfiscal.Strongbalancesheet,positivefreecash
flowsowingtobetterworkingcapitalmanagement,higherprofitability,low
capex and debt along with robust ROE support our bullish stance on the
company.
Resurgence in the infrastructure industry to boost demand

With the new governments focus on reviving the economic activity, FCLs
revenue growth will be led by robust construction activity, significant
infrastructure improvement in power and telecom industries, and strong
automobile production. Positive outlook for the automotive industry also
bodes well for automotive wires and cables. Currently electrical and
communicationdatawireandcablecontributes94%oftherevenues.
NOFC project, 4G launch provide big opportunity
Indian governments ambitious project to connect 2.5 lac gram panchayats
acrossthecountrywithopticalfibercablenetworkundertheNationalOptic
Fiber Network (NOFN) project has significantly increased the demand for
opticalfibercables.InJan2014,FCLwasawardedanadvancepurchaseorder
of over Rs. 2 bn for Metal Free Optical Fibre Cable (OFC) under the NOFN
project. FCL is a front runner to win many more contracts. Rollout of 4G
serviceswillprovideampleopportunitiesforFCLscommunicationwiresand
cablesbusiness.
Revenues
yoygrowth(%)
Operatingprofit
OPM(%)
PreexceptionalPAT
ReportedPAT
yoygrowth(%)
EPS(Rs)
P/E(x)
Price/Book(x)
EV/EBITDA(x)
Debt/Equity(x)
RoE(%)
RoCE(%)
BUY
Rs352
Rs176
100%
Sector:
Capital Goods
Sector view:
Positive
Sensex:
25,100
52Weekh/l(Rs):
177/47
Marketcap(Rscr):
2,694
6mAvgvol(000Nos):
757
Bloombergcode:
FNXCIN
BSEcode:
500144
NSEcode:
FINCABLES
FV(Rs):
Companyratinggrid
LowHigh
EarningsGrowth
CashFlow
B/SStrength
Valuationappeal
Risk
Sharepricetrend
Finolex
Sensex
300
250
200
150
100
Financialsummary
Y/e31Mar(Rsm)
Rating:
Target(2Years):
CMP:
Upside:
FY14
FY15E
FY16E
FY17E
23,590
3.9
2,471
10.5
1,973
2,077
43.0
12.9
13.6
2.4
11.2
0.1
19.5
20.7
28,210
19.6
2,986
10.6
2,272
2,272
9.4
14.9
11.9
2.1
9.0
0.1
19.0
21.8
34,327
21.7
3,761
11.0
2,861
2,861
26.0
18.7
9.4
1.8
6.9
0.1
20.3
23.6
42,081
22.6
4,762
11.3
3,622
3,622
26.6
23.7
7.4
1.5
5.2
0.1
21.6
25.3
50
Jun13
Oct13
Feb14
Jun14
Shareholdingpattern
Promoters Institutions Others
100
50
0
Research Analyst:
PratikTholiya
Finolex Cables Ltd

Product mix change to drive margins
Thecompanyhasventuredintonewproductslikelightsandelectricalswitches.
NewrangeoflampsincludingLEDbasedlightingsystemsmeantforhomeuse,
street lighting and other commercial spaces were launched in FY14. The
company plans to enter the switchgear product segment and will launch a
series of products within the MCB, ELCB and MCCB range by FY15. For this
purposemanufacturingunithasbeensetupinGujarat.Apartfromswitchgears,
thecompanyalsoplanstoventureintomotorsandtransformerbusiness.The
noncable business of the company, which currently forms 1% of the total
sales, is expected to contribute 34% to the top line by FY1718 as per
management. With this, the company expects to significantly derisk the
businessandchangeitsimagefromacablemanufacturertoelectricalproduct
manufacturer.
Diversificationintoelectricalproducts
toaidmarginexpansion.
ProductPortfolio
Category
WiresandCables
PowerCables
Switches
CFLs
CopperRods
Product
LightDutyandCommunicationCables.
PowerandControlCables
BrandNameFinoswitchPremiumandClassic
BrandNameFinoglowRetrofitandnonretrofit
BasedonEssexConcast
Entering new geographies

FCLislookingatexploringnewerterritories.SomeoftheAfricancountriesare
on top the agenda of the management as they provide immense untapped
growth opportunity. Currently, it is present in the UK and Gulf Cooperation
Council(GCC)countries.Innext23years,FCLplanstodoubleitsrevenuefrom
exports.
Exportrevenuetodoublein23years.
Strong Balance sheet, positive cash flow can lead to higher

dividend payout ratio.
FortheperiodFY1417E,weexpectFCLtopoststrongpositivecashflowowing
to better working capital management, higher PAT, low capex and debt along
withrobustROEof21%.RoCEhasbeenconsistentlyimprovingfrom9%inFY10
to 17% in FY14 and is further expected to improve to 23% during FY1417E.
Dividendpayoutratiohasincreasedfrom10%inFY11to14%inFY14andcanbe
expectedtofurtherincreaseonaccountofhigherfreecashflowinthefuture.
NetSalesCAGR21%duringFY1417E
Marginstohoveraround11%duringFY1417E
30%
7,000
50,000
25%
6,000
40,000
20%
NetSales(RsMn)
60,000
Dividendpayoutcanincreasedueto
higherprofitabilityandlowdebt.
Growth(%)
EBITDA(RsMn)
EBITDAMargin(%)
11.4%
11.2%
5,000
11.0%
4,000
15%
30,000
10.8%
3,000
10.6%
10%
20,000
2,000
5%
10,000
0%
0
FY14
FY15E
FY16E
FY17E
FY18E
11.6%
10.4%
1,000
10.2%
10.0%
FY14
FY15E
FY16E
FY17E
FY18E
Finolex Cables Ltd

InternationalJVs
JVName
CorningFinolex
OpticalFibrePvtLtd.
FinolexJPower
SystemsPvtLtd
TechPartner
FCLsOwnership
Product
CorningSAS(USA)
JPowerSystems
Corp(Japan)
50%
OpticalFibre
ExtraHighVoltage
Cable
49%
CategorywiseRevenueBreakup
ElectricalCables
100%
90%
80%
0.9%
CommunicationCables
CopperRods
Others
1.3%
1.8%
2.5%
3.50%
3.37%
2.20%
1.43%
3.5%
0.92%
8.3%
9.2%
10.2%
11.1%
11.7%
87.3%
86.1%
85.9%
84.9%
83.8%
FY13
FY14E
FY15E
FY16E
FY17E
70%
Outlook & Valuation

Wearepositiveonthecompanysprospectsinthecomingyears,owingto(1)
expectation of robust growth in traditional user industries, (2) diversification
intononcableproducts,(3)retainingmarketshare.Weexpectthecompanyto
postaCAGRof21%intoplineoverFY201417E.EBITDAisexpectedtoclocka
CAGR of 24% while margins are to remain above 11% in FY1617E. With the
end of derivative contract losses, PAT is expected to grow at a CAGR of 20%
overFY201417E.AtCMPofRs176,thestocktradesataP/Eof7.4xbasedon
FY17EEPSofRs.23.7.WerecommendBuyonthestockwithatargetpriceof
Rs352.
Company Background
PunebasedFinolexCablesLtdisa56yearoldcablemanufacturingcompany.It
istheleadingmanufacturerofelectricalandcommunicationcables.Withover
3000 distributors FCL has one of the largest distribution networks in India.
Company has a market leadership position in West and South India and is
making efforts to expand its footprint in North and East India. FCL has Four
manufacturing plants which are located at Pune (Urse and Pimpri), Goa and
Uttarakhand (Roorkee). It has launched switches under the brand name
Finoswitch. It has also started manufacturing and marketing compact
fluorescent lamps under band name "Finoglow". Two types of CFLs are
currentlymanufacturedRetrofitLampsandNonRetrofitLamps.
Finolex Cables Ltd

Financials (Standalone)
Incomestatement
Y/e31Mar(Rsmn)
Revenue
Operatingprofit
Depreciation
Interestexpense
Otherincome
Profitbeforetax
Taxes
Adj.profit
Exceptionalitems
Netprofit
Keyratios
FY14
23,590
2,471
(484)
(134)
484
2,336
(363)
1,973
104
2,077
FY15E
28,210
2,986
(514)
(116)
484
2,840
(568)
2,272
0
2,272
FY16E
34,327
3,761
(552)
(116)
484
3,577
(715)
2,861
0
2,861
FY17E
42,081
4,762
(602)
(116)
484
4,528
(906)
3,622
0
3,622
FY16E
306
14,953
15,259
1,285
295
16,839
4,814
4,031
5,807
5,443
2,351
2,351
(2,931)
(1,408)
2,187
16,839
FY17E
306
17,952
18,258
1,285
295
19,838
5,212
4,031
7,299
6,646
2,882
2,882
(3,579)
(1,533)
3,294
19,838
Y/e31Mar
Growthmatrix(%)
Revenuegrowth
Opprofitgrowth
EBITgrowth
Netprofitgrowth
OPM
EBITmargin
Netprofitmargin
RoCE
RoNW
RoA
Pershareratios
EPS
Dividendpershare
CashEPS
Bookvaluepershare
Valuationratios(x)
P/E
P/CEPS
P/B
EV/EBIDTA
Payout(%)
Dividendpayout
Taxpayout
Liquidityratios
Debtordays
Inventorydays
Creditordays
Leverageratios
Interestcoverage
Netdebt/equity
Netdebt/op.profit
Balancesheet
Y/e31Mar(Rsm)
Equitycapital
Reserves
Networth
Debt
Totalliabilities
Fixedassets
Investments
Networkingcapital
Inventories
Sundrydebtors
Othercurrentassets
Sundrycreditors
Cash
Totalassets
FY14
306
10,728
11,034
1,285
295
12,614
5,065
4,031
2,868
3,524
1,452
919
(2,117)
(909)
649
12,614
FY15E
306
12,591
12,897
1,285
295
14,477
4,366
4,031
4,619
4,492
1,932
1,932
(2,419)
(1,319)
1,460
14,477
Cashflowstatement
Y/e31Mar(Rsmn)
Profitbeforetax
Depreciation
Taxpaid
Workingcapital
Operatingcashflow
Capitalexpenditure
Freecashflow
Debtfinancing/
disposal
Dividendspaid
Otheritems
Netincash
FY14
2,336
484
(363)
238
2,696
(1,071)
1,624
FY15E
2,840
514
(568)
(1,751)
1,035
185
1,221
FY16E
3,577
552
(715)
(1,188)
2,225
(1,000)
1,225
FY17E
4,528
602
(906)
(1,493)
2,731
(1,000)
1,731
(351)
(285)
54
151
(410)
812
(499)

726
(624)

1,108
FY14
3.9
7.6
19.2
17.2
10.5
10.5
8.4
20.7
19.5
13.3
12.9
1.6
16.1
72.1
13.6
11.0
2.4
11.2
14
15.6
22
61
37
18.4
0.1
0.3
FY15E
19.6
20.8
19.6
15.1
10.6
10.5
8.1
21.8
19.0
13.4
14.9
2.3
18.2
84.3
11.9
9.7
2.1
9.0
18
20.0
25
65
35
25.6
(0.0)
(0.1)
FY16E
21.7
25.9
24.9
26.0
11.0
10.8
8.3
23.6
20.3
14.5
18.7
2.8
22.3
99.8
9.4
7.9
1.8
6.9
17
20.0
25
65
35
31.9
(0.1)
(0.2)
FY17E
22.6
26.6
25.8
26.6
11.3
11.0
8.6
25.3
21.6
15.7
23.7
3.5
27.6
119.4
7.4
6.4
1.5
5.2
17
20.0
25
65
35
40.2
(0.1)
(0.4)
FY14
0.84
0.95
0.10
1.59
1.46
19.5
FY15E
0.80
0.96
0.10
1.67
1.41
19.0
FY16E
0.80
0.97
0.11
1.74
1.40
20.3
FY17E
0.80
0.98
0.11
1.82
1.38
21.6
DuPontAnalysis
Y/e31Mar
Taxburden(x)
Interestburden(x)
EBITmargin(x)
Assetturnover(x)
RoE(%)
Greaves Cotton
Firing all cylinders
GreavesCotton(GCL)iswellpoisedtogainfromtheexpectedbroadbased
economic recovery where we expect revival in auto sales, spurt in
infrastructure investments and sustained growth in agriculture. A leading
supplier of engines to threewheelers and small commercial vehicle
segment (SCV), GCL is also a supplier of gensets, farm equipments and
construction equipments. The company has built a strong balance sheet,
generatesrobustcashflowsandhasRoCEinexcessof20%.AtP/Eof13.6x
FY16E EPS of Rs7.2, the stock is relatively attractive when compared with
the industry leader. We believe the valuation gap will narrow down and
henceinitiatecoveragewithaBUYrecommendation.
Commercial vehicle industry set to revive
WhileM&HCVshaveseensharpfallindemandoverthepastcoupleofyears,
LCVshaveseenweaknessonlyinthepastoneyear.Webelievetheindustry
willrevivefromH2FY15asindustrialactivitypicksup,interestratesarecut
down and fuel price hikes are ceased. With the new government having an
agenda of building 100 cities, demand for LCVs should recover as
manufacturers seek last mile connectivity using the hub and spoke model.
GCL is the market leader in the three wheeler engines market, while it
graduallyincreasesitsshareinthe4WSCVmarket.Weexpect3Wdomestic
salestoremainstrongaspaceofurbanizationpicksupinthecountryleading
tohigherrequirementsofpublictransport.
Agri equipment business provides large opportunities
Penetration of mechanization in Indian agriculture is at substantially lower

levelswhencomparedwithotheremergingnations.Withincreasingfinance
availability and higher MSPs, farmers should resort to mechanization to
improve productivity. GCL manufactures engines in the 14 HP range and
portable gensets in the 1.4 KVA range which are popular for agriculture
applications. Also recently, GCL has launched Greaves Power Tiller,
manufactured by a leading manufacturer in China and customized to suit
Indianconditions.Impetusonirrigationdevelopmentbythenewgovernment
wouldprovideampleopportunitiesforGCLsproducts.
Financialsummary
BUY
Rs232
Rs115
102%
Sector:
Auto Ancillary
Sector view:
Positive
Sensex:
25,100
52Weekh/l(Rs):
116/53
Marketcap(Rscr):
2,786
6mAvgvol(000Nos):
446
Bloombergcode:
GRVIB
BSEcode:
501455
NSEcode:
GREAVESCOT
FV(Rs):
Companyratinggrid
LowHigh
EarningsGrowth
CashFlow
B/SStrength
Valuationappeal
Risk
Sharepricetrend
200
GreavesCotton
Sensex
150
100
50
Jun13
Oct13
Feb14
Jun14
Shareholdingpattern
Y/e31Mar(Rsm)
FY14
FY15E
FY16E
FY17E
Revenues
yoygrowth(%)
Operatingprofit
OPM(%)
ReportedPAT
yoygrowth(%)
EPS(Rs)
P/E(x)
Price/Book(x)
EV/EBITDA(x)
Debt/Equity(x)
RoE(%)
RoCE(%)
17,189
(8.2)
1,936
11.3
1,211
(18.0)
5.0
23.2
3.4
14.4
0.0
15.5
21.6
19,252
12.0
2,237
11.6
1,377
21.8
5.6
20.4
2.9
12.3
0.0
15.5
22.2
22,717
18.0
2,942
13.0
1,860
35.0
7.6
15.1
2.5
9.3
0.0
17.7
25.3
26,806
18.0
3,805
14.2
2,450
31.8
10.0
11.5
2.0
7.2
0.0
19.4
27.7
Rating:
Target(2Years):
CMP:
Upside:
Promoter
Institutions
Others
100%
80%
60%
40%
20%
0%
Research Analyst:
Prayesh Jain
Greaves Cotton
Promising outlook for the construction equipment business:
Constructionequipmentbusinessoverthepastcoupleofyearshasseentorrid
times owing to sharp slowdown in infrastructure activities. Given the past
trackrecordoftheNDAgovernment,infrastructureinvestmentsareexpected
tosurge.Infact,forthe12thFiveyearplan,infrastructureexpenditureoutlayis
planned to be doubled to US$1 trillion. GCL has built a portfolio of products
which include Transit Mixers, Concrete Pumps and Batching Plants. With
applications primarily in construction of roads, bridges, buildings and other
ready mix concrete activities, GCL is well placed to play the infrastructure
revivaltheme.
Industrial engines segment to see a multi-pronged growth
GCL has built flexibility at its manufacturing locations so as to enable it to

manufactureanyenginewhichisrequiredtopowerequipmentforpumping,
digging, pulling, pushing, carrying or moving. Hence, GCL products find
presence in marine equipments, fire fighting instruments, agriculture, mining
&construction,materialhandling,railcars,etc.Strongpickupisexpectedin
most of these areas in the near future. Fire fighting particularly could be a
major driving force as stricter safety norms will entail heavier investments
fromthecorporateworld.GCLwitha25%shareinthebusinessiswellplaced
tocapturetheensuinggrowthindemand.
Strategic initiatives for future growth
1) Expanding product plays: GCL facilities are ready for producing engines
andgensetscomplyingwithCPCBIInormsandBSIVnormsfor0.6TSCVand
3Wsegment.Thecompanyisworkingonproductssuchashighercapacity
automotiveengines,powertiller,otherlightagricultureequipments,diesel
enginesforpumpsetapplicationsandCNGvariantfor0.6TSCV(TataMagic
Iris).
2) Strengtheningmarketplay:AmongstOEMs,GCLisdevelopingproductsfor
TVS(3W),Piaggio(4WSCV),M&M(gensetengines),AshokLeyland(genset
engines) and international OEMs (nonautomotive applications). Also the
companyhasestablishedchannelsinSAARC,EastAfricaandMiddleEastto
develop GCL as a locally entrenched entity. It is also building similar
network in South East Asia. In the aftermarket, GCL is enhancing dealer
networkandisleveragingtheexistingnetworkfordistributionandsaleof
nontraditionalproducts.
3) Operational excellence: GCL, with a focus on improving gross margins,
initiatedacompanywideinitiativeProjectPROPEL.InFY14,theproject
helped improving the contribution by 1%. Exiting from non strategic
investments such as divestment of Greaves Farymann Diesel, closure of
Greaves Cotton Netherlands and closure of foundry unit in Pune has
provedbeneficial.
Robustoutlookforconstruction
equipmentbusinessgivenhuge
impetusoninfrastructureinvestments
expectedfromthenewgovernment
GCLsflexibilityinmanufacturingof
enginesputsingoodsteadtogain
fromtheensuingsurgeinindustrial
activity
Addingnewenginesandnew
customerstoitsprofile
Deepeningitsmarketreachboth
domesticallyandinternationally
Costcuttinginitiativestodrivemargins
alongwithoperatingleverage
4) Building functional capabilities: GCL has consolidated its automotive and

industrialenginesintounifiedenginesbusinesstoderivesynergybenefits
such as sourcing of RM and logistics. Consolidation of aftermarket for all
businesseshasenabledrapiddevelopmentofservicecapability.
Greaves Cotton
Trendinrevenuebreakup
Engines
OPMexpectedtoimprove
Equipments
18.0
Others
16.0
100%
14.0
95%
12.0
10.0
90%
8.0
85%
6.0
4.0
80%
2.0
75%
0.0
FY11
FY12
FY13
FY14
FY10
FY11
FY12
FY13
FY14
FY15E FY16E FY17E
Deserve previous bull cycle valuation multiple
GCLoverthepastthreeyears,whentheCVsalesandindustrialactivityinIndia
witnessed a sharp slowdown, saw a valuation derating. It was justified then
giventhedeclineinrevenuegrowth.However,intheyearstocome,weexpect
strong upsurge in CV sales, industrial activity and development of irrigation
infrastructure.ThisshouldtranslateintolargebusinessopportunitiesforGCL.
We expect 16% revenue CAGR for GCL during FY1417E. With benefits of
operating leverage, we see strong recovery in margins and resultantly a PAT
CAGRof29%duringFY1417E.InthepreviousbullcycleGCLhadtradedatan
average P/E multiple range of 1225x. We believe given the strong cash flow
generationandRoCEofabove20%,weexpectareratinginthestock.
InthepreviousbullcycleGCLhad
tradedatanaverageP/Emultiple
rangeof1225x.Webelievegiventhe
strongcashflowgenerationandRoCE
ofabove20%,weexpectareratingin
thestock
Substantiallybelowpreviousbullmarket1yearforwardP/Emultiple
35
30
25
20
15
10
5
Mar14
Sep13
Mar13
Sep12
Mar12
Sep11
Mar11
Sep10
Mar10
Sep09
Mar09
Sep08
Mar08
Sep07
Mar07
Sep06
Mar06
Sep05
Mar05
Company Background
Greaves Cotton manufactures various industrial engineering products like

diesel&petrolengines,gensets,agroequipmentandconstructionequipment.
Thebusinessisoperatedthroughfivemaindivisionsagriculturalequipment,
automotive,industrialengines,auxiliarypowerandconstructionequipments.
Inrecentyears,GCLhasmaderapidstridesintheexportmarkets.GCLhas11
manufacturing units located all over India, with overseas offices in UAE,
Tanzania and China. The Company's manufacturing plants are equipped with
stateoftheartproductionfacilities,backedbyinhouseR&D.
3
Greaves Cotton
Financials
Incomestatement
Y/e31Mar(Rsm)
Revenue
Operatingprofit
Depreciation
Interestexpense
Otherincome
Profitbeforetax
Taxes
Adj.profit
Exceptionalitems
Netprofit
Keyratios
FY14
17,189
1,936
(435)
(46)
268
1,723
(512)
1,211
(80)
1,131
FY15E
19,252
2,237
(465)
(46)
275
2,001
(623)
1,377
0
1,377
FY16E
22,717
2,942
(495)
(46)
300
2,701
(842)
1,860
0
1,860
FY17E
26,806
3,805
(525)
(46)
325
3,559
(1,109)
2,450
0
2,450
Y/e31Mar
Growthmatrix(%)
Revenuegrowth
Opprofitgrowth
EBITgrowth
Netprofitgrowth
OPM
EBITmargin
Netprofitmargin
RoCE
RoNW
RoA
Pershareratios
EPS
Dividendpershare
CashEPS
Bookvaluepershare
Valuationratios
P/E
P/CEPS
P/B
EV/EBIDTA
Payout(%)
Dividendpayout
Taxpayout
Liquidityratios
Debtordays
Inventorydays
Creditordays
Leverageratios
Interestcoverage
Netdebt/equity
Netdebt/op.profit
Balancesheet
Y/e31Mar(Rsm)
Equitycapital
Reserves
Networth
Debt
Totalliabilities
FY14
488
7,691
8,180
40
334
8,553
FY15E
488
9,069
9,557
40
334
9,930
FY16E
488
10,928
11,417
40
334
11,790
FY17E
488
13,379
13,867
40
334
14,240
Fixedassets
Investments
Networkingcapital
Inventories
Sundrydebtors
Othercurrentassets
Sundrycreditors
Cash
Totalassets
3,734
1,781
2,698
1,581
3,330
1,235
(1,864)
(1,584)
340
8,553
3,781
2,543
3,029
1,771
3,730
1,358
(2,088)
(1,742)
577
9,930
3,786
3,543
3,605
2,089
4,401
1,494
(2,464)
(1,916)
855
11,790
3,762
5,543
4,287
2,466
5,194
1,643
(2,908)
(2,108)
648
14,240
FY14
1,723
435
(512)
17
1,662
(408)
1,254
(307)
(842)
(21)
(65)
(94)
(74)
FY15E
2,001
465
(623)
(331)
1,511
(511)
1,000
(763)
237
FY16E
2,701
495
(842)
(576)
1,778
(500)
1,278
(1,000)
278
FY17E
3,559
525
(1,109)
(683)
2,292
(500)
1,792
(2,000)
(208)
Cashflowstatement
Y/e31Mar(Rsm)
Profitbeforetax
Depreciation
Taxpaid
Workingcapital
Operatingcashflow
Capitalexpenditure
Freecashflow
Equityraised
Investments
Dividendspaid
Otheritems
Netincash
FY14
FY15E
FY16E
FY17E
(8.2)
(20.1)
(19.2)
(22.2)
12.0
15.6
15.7
13.8
18.0
31.5
34.2
35.0
18.0
29.3
31.2
31.8
11.3
10.3
7.0
21.6
15.5
10.2
11.6
10.6
7.2
22.2
15.5
10.7
5.0
0.3
6.7
33.5
7.6
0.0
9.6
46.8
20.4
15.2
2.9
12.3
5.4
29.7
10.0
0.0
12.2
56.8
15.1
11.9
2.5
9.3
0.0
31.2
14.2
13.5
9.1
27.7
19.4
13.8
13.0
12.1
8.2
25.3
17.7
12.4
5.6
0.0
7.5
39.1
23.2
17.1
3.4
14.4
11.5
9.4
2.0
7.2
0.0
31.2
0.0
31.2
71
38
45
38.1
(0.0)
(0.2)
71
38
45
44.1
(0.1)
(0.2)
71
39
45
59.2
(0.1)
(0.3)
71
39
46
77.7
(0.0)
(0.2)
FY14
0.70
0.97
0.10
1.44
1.53
15.5
FY15E
0.69
0.98
0.11
1.49
1.45
15.5
FY16E
0.69
0.98
0.12
1.52
1.43
17.7
FY17E
0.69
0.99
0.13
1.51
1.40
19.4
DuPontAnalysis
Y/e31Mar
Taxburden(x)
Interestburden(x)
EBITmargin(x)
Assetturnover(x)
RoE(%)
Indiabulls Housing Finance Ltd.
Surfing smoothly
IHF is one of the fastest growing and most profitable housing finance
companies. Strong asset quality, liquidity and capitalization underlie its
robust balance sheet. Aided by sustained strong volume growth in
mortgages (market share at just ~2.5%) and stabletoincreasing property
prices,companyisexpectedtodeliver23%CAGRinloanassetsoverFY14
17. With CV book runningoff fast, the portfolio mix is moving towards
mortgages. On account of this, blended spreads are under pressure
currentlybutarelikelytostabilizeinthelongerterm.IHFsassetqualityhas
remained largely unscathed amid stressful macro; now with NPL accruals
and writeoffs to decline, credit cost should start moderating. This along
withhighersecuritizationwoulddrivefurtherRoEimprovement.Valuation
at 1.4x FY17 P/ABV is inexpensive given estimated average RoA and RoE
delivery of 4% and 32% respectively over FY1417. High dividend yield (8
9%)furthersweetensbuyingpropositionofthestock.
Rating:
Target(2Years):
CMP:
Upside:
BUY
Rs771
Rs383
101.3%
Sector:
Financials
Sector view:
Positive
Sensex:
25,100
52Weekh/l(Rs):
407/166
Marketcap(Rscr):
12,801
6mAvgvol(000Nos):
Bloombergcode:
IHFLIN
BSEcode:
535789
NSEcode:
IBULHSGFIN
2
FV(Rs):
AUM to witness 23% CAGR over FY14-17; market share to improve
Companyratinggrid
IndiabullsHousingFinance(IHF)haswitnessedarobustloanassetsgrowthof
28%paoverthepastthreeyears.WithanAUMofRs411bn,IHFiscurrently
thethirdlargestHFCwithashareof~2.5%incountrysexpandinghomeloan
market.About74%ofloanassetsismortgages(~50%homeloansand~24%
LAP), 21% is commercial credit (largely LDR/construction finance to
developers) and the residual 5% is CV financing. In retail home loans, IHFs
focusonthemiddleanduppermiddleclassandsalariedindividualshasbeen
driving market outperforming growth. In the LAP segment, companys
customers are selfemployed individuals and small enterprises having
established income records. With CV portfolio (company has quit the
business) expected to runoff completely over the next two years, the loan
mix is expected to shift towards mortgages. Despite shrinking CV book, the
company is confident of achieving 25% asset growth in the current year. In
ourview,IHFwoulddeliver23%CAGRinloanassetsoverFY1417aidedby1)
sustained volume growth in mortgages given its small share 2) stableto
increasingpropertypricesand3)increaseindistributionnetwork.
Financialsummary
Y/e31Mar(Rsm)
Totaloperatingincome
Yoygrowth(%)
Operatingprofit(preprovisions)
Netprofit
yoygrowth(%)
EPS(Rs)
Adj.BVPS(Rs)
P/E(x)
P/Adj.BV(x)
ROE(%)
ROA(%)
CAR(%)
FY14
26,789
23.0
22,678
15,642
24.3
47.0
166.4
8.2
2.3
28.8
3.7
19.1
FY15E
32,427
21.0
27,534
18,761
19.9
56.3
188.3
6.8
2.0
30.8
3.8
18.0
FY16E
40,439
24.7
34,421
23,691
26.3
65.6
222.0
5.8
1.7
32.3
4.0
18.8
FY17E
50,393
24.6
42,931
29,650
25.2
82.1
265.9
4.7
1.4
32.8
4.2
19.1
746
LowHigh
1
EarningsGrowth
RoAProgression
B/SStrength
Valuationappeal
Risk
Sharepricetrend
IndiabullsHousing
Sensex
150
125
100
75
50
Jul13 Oct13 Dec13 Mar14 Jun14
Shareholdingpattern
Others
100
80
60
40
20
Institutions
Promoters
Research Analyst:
RajivMehta
Thesecuritizationactivityhaswitnessedincreasedtractiontowardstheendof
FY14 thus aiding profitability and liquidity of the company. During FY14, IHF
solddownloansworthRs42bnandtheoutstandingstockofitstoodatRs57bn
at the end of year. Going forward, company intends to sell down 3040% of
incremental origination and therefore proportion of securitized loans is
expected to increase. Spreads of ~3.33.5% on these loans are recognized as
income over the life of the loan. IHF is currently wellcapitalized with Tier1
ratio at 15%. In our view, even if the company were to continue its high
dividend payout policy (4060%), robust internal capital generation and
conversion of warrants in FY16 (27.5mn @ Rs225/share) would ensure that
capitalpositionremainsstrongtillFY17.
AUMtodoublebyFY17;Securitizationtoincrease
LoanAssets(LHS)
Securitization%
800
24.0
(Rsbn)
Companyintendstoselldown3040%
ofincrementalorigination
CurrentlywellcapitalizedwithTier1
ratioat15%
Wellcapitalized(Tier1ratio)forrobustgrowth
20
(%)
(%)
18.2
18
600
18.0
16
400
12.0
200
6.0
0.0
FY12
FY13
FY14
FY15E
FY16E
FY17E
15.0
15.0
14.4
14.4
FY16E
FY17E
13.7
14
12
10
FY12
FY13
FY14
FY15E
Strong balance sheet; spreads to come-off
As a policy, IHF has been maintaining adequate liquidity in its balance sheet;
endFY14 cash & liquid investments stood at Rs74bn, ~18% of loan assets.
Though maintaining such high levels of liquidity is RoA dilutive, it reduces
liquidity risks substantially and immunes spread from high interest rate
volatility.Lastyear,companywasleastaffectedbytheexceptionalvolatilityin
liquidity conditions and consequent spike in borrowing rates. Across various
durationbuckets,companyhasacloselymatchedALMprofile.
IHFs spreads are expected to comeoff in the medium term as betterthan

average yielding CV portfolio (14.6% v/s 13.6% for overall book) runsoff
whereasincrementalyieldsinLAPsegmenthavebeenlower(14.5%v/s15.5%
for the existing portfolio). So the blended book yield is expected to correct
from 13.6% to 13.3% in FY15. On the other hand, the average cost of
borrowings (10.1%) is likely to remain firm for a couple of quarters before
starting to gradually decline. Currently, the borrowing mix is more skewed
towards bank loans (share at 62%) which the management intends to shift
towardsbonds(shareat30%),arelativelystableandcheapersource.Aidedby
strong asset growth, IHF has reaped significant efficiency gains over the past
threeyears.Thecost/incomeratiohasdeclinedfrom19%inFY12to15.4%in
FY14onthebackof1)improvingbusinessproductivityofcenters2)calibration
of network expansion (closure of CV loan centers) and 3) increasing inhouse
sourcingofloansleadingtolowerDSAcommissions.
Cash&liquidinvestmentsstandat
~18%ofloanassets;companyhasa
closelymatchedALMprofile
Spreadsareexpectedtocomeoffin
themediumterm
Managementintendstoshift
borrowingmixtowardsbonds
Aidedbystrongassetgrowth,IHFhas
reapedsignificantefficiencygainsover
thepastthreeyears
Withheadroomavailableforfurtherproductivityimprovementsandpersistent
increaseininhouseloansourcing(targeting80%inFY15v/s74%inFY14),the
cost/income ratio is estimated to be comfortably sustained at near current
levelsevenifthecompanyweretoexpandingitsnetworkatafasterpace.We
expectIHFtodeliver23%CAGRinpreprovisioningoperatingprofitoverFY14
17inlinewiththeassetgrowth
Asset quality has been resilient; credit cost to come down
Notwithstanding heightened stress in the economy over the past two years,
IHFs asset quality has remained largely unscathed as manifested in stable
grossandnetNPLratios.Assetqualityhasheldupparticularlywellinmainstay
mortgagessegmentwherethegrossNPLsstandatmarginal0.250.3%.Ithas
increasedintheCVsegment(~3.3%)whichislargelyattributabletodecreasing
sizeoftheportfolio.Commercialcreditportfoliohasbehavedresilientlydueto
exposuretolargeandreputeddevelopers.Withmacrorecoveryontheanvil,
managementisreasonablyconfidentofsustainingGrossNPLsintherangeof
7090bpsandNetNPLsintherangeof3050bps.InFY14,thecreditcostwas
higher at ~76bps due to higher provisioning on writtenoff accounts. Going
forward,itisexpectedtonormalizetowards50bps.
RoEs to improve further; inexpensive valuation and attractive

dividend yield
IHF is one of the fastest growing and the most profitable housing finance
companies.Strongassetquality,liquidityandcapitalizationunderlieitsrobust
balance sheet. Over the next three years, we dont expect any dilution in
companys performance both on growth and profitability front. Rather,
increasingsecuritizationshouldleadtofurtherimprovementinRoE.Withthe
companyestimatedtodeliveraverageRoAandRoEof4%and32%respectively
over FY1417, current valuation at 1.4x FY17 P/ABV appears extremely
attractive. High dividend yield on the stock further sweetens the buying
proposition. We expect IHF price to double from current levels over the next
coupleofyearsaidedbysubstantialgrowthinnetworthandasharprerating
invaluation.
Creditcosttomoderatesharply
CreditCost(LHS)
Cost/incomeratioisestimatedtobe
comfortablysustainedatnearcurrent
levelseven
Assetqualityhasheldupparticularly
wellinmainstaymortgagessegment
Managementconfidentofsustaining
GrossNPLsintherangeof7090bps
Increasingsecuritizationshouldleadto
furtherimprovementinRoE
EstimatedtodeliveraverageRoAand
RoEof4%and32%respoverFY1417
Profitabilitytoimprovefurther
GrossNPL
0.8
1.0
(%)
4.5
RoA(LHS)
RoE(RHS)
(%)
(%)
35.0
(%)
0.6
4.0
32.0
3.5
29.0
3.0
26.0
2.5
23.0
0.9
0.4
0.8
0.2
0.7
0.0
0.6
FY13
FY14
FY15E
FY16E
FY17E
20.0
2.0
FY13
FY14
FY15E
FY16E
FY17E
Financials
Incomestatement
Y/e31Mar(Rsmn)
IncomefromOperatns
Interestexpense
Netinterestincome
Noninterestincome
Totalopincome
Totalopexpenses
Opprofit(preprov)
Provisions
Profitbeforetax
Taxes
MinorityInterest
Netprofit
Keyratios
FY14
54,194
(32,824)
21,370
5,419
26,789
(4,111)
22,678
(2,860)
19,818
(4,133)
(44)
15,642
FY15E
65,307
(38,841)
26,466
5,961
32,427
(4,893)
27,534
(3,112)
24,422
(5,617)
(44)
18,761
FY16E
79,459
(45,876)
33,583
6,855
40,439
(6,018)
34,421
(3,190)
31,231
(7,495)
(44)
23,691
FY17E
95,096
(52,929)
42,167
8,226
50,393
(7,462)
42,931
(3,860)
39,071
(9,377)
(44)
29,650
FY15E
668
63,930
64,599
19
246,019
3
4,421
250,443
111,598
28
99,354
10,583
221,563
536,623
483
700
247
2,217
378,569
9,783
391,999
35,068
8
49,713
55,507
4,328
144,624
536,623
FY16E
723
81,594
82,317
19
292,763
3
5,305
298,071
132,802
34
118,231
12,699
263,766
644,173
502
700
247
2,660
454,283
11,740
470,133
42,082
9
60,147
66,609
5,194
174,040
644,173
FY17E
723
97,820
98,544
19
345,460
4
6,366
351,830
156,706
40
139,513
15,239
311,499
761,891
523
700
247
3,192
536,053
14,088
554,804
50,498
11
71,852
78,598
6,129
207,088
761,891
Y/e31Mar
Growthmatrix(%)
Netinterestincome
Totalopincome
Opprofit(preprov)
Netprofit
Advances
Borrowings
Totalassets
ProfitabilityRatios(%)
NIM
Nonintinc/Totalinc
ReturnonAvgEquity
ReturnonAvgAssets
Pershareratios(Rs)
EPS
Adj.BVPS
DPS
Valuationratios(x)
P/E
P/Adj.BVPS
Otherkeyratios(%)
Loans/Borrowings
Cost/Income
CAR
TierIcapital
GrossNPLs/Loans
CreditCost
NetNPLs/Netloans
Taxrate
Dividendyield
Balancesheet
Y/e31Mar(Rsmn)
EquityCapital
Reserves
Shareholder'sfunds
Minorityinterest
Longtermborrow
Otherlongtermliab
Longtermprovi
Totalnoncurrliab
ShortTermBorrow
Tradepayables
Othercurrentliab
Shorttermprov
Totalcurrentliab
Equity+Liab
FixedAssets
Goodwill
Noncurrentinv
Deferredtaxassets
Longtermloans/adv
Othernoncurrasset
Totalnoncurrasset
Currentinvestments
Tradereceivables
Cashandcashequiv
Shorttermloans
Othercurrentassets
TotalCurrentassets
TotalAssets
FY14
668
56,402
57,070
19
201,655
2
3,684
205,341
91,474
23
81,438
8,819
181,754
444,184
469
700
247
1,848
310,302
8,153
321,719
29,223
6
44,190
45,498
3,548
122,465
444,184
FY14 FY15E
12.2
23.8
23.0
21.0
27.5
21.4
24.3
19.9
14.8
22.5
13.6
22.5
13.5
20.8
5.7
5.7
20.2
18.4
28.8
30.8
3.7
3.8
47.0
56.3
166.4 188.3
29.0
29.0
8.2
6.8
2.3
2.0
1.0
1.0
15.3
15.1
19.1
18.0
15.0
13.7
0.8
0.8
0.8
0.6
0.4
0.3
20.9
23.0
7.9
7.9
FY16E
26.9
24.7
25.0
26.3
20.5
19.0
20.0
5.8
17.0
32.3
4.0
65.6
222.0
29.0
5.8
1.7
1.0
14.9
18.8
14.4
0.8
0.5
0.3
24.0
7.9
FY17E
25.6
24.6
24.7
25.2
18.0
18.0
18.3
6.0
16.3
32.8
4.2
82.1
265.9
32.0
4.7
1.4
1.0
14.8
19.1
14.4
0.8
0.5
0.3
24.0
8.8
JK Lakshmi Cement Ltd

Up-cycle on an anvil
Governmentemphasisona)housingforall,b)100newcities,c)connecting
majorriversandd)infrastructuredevelopmentlikebuildingportsandroads
is most likely to boost up cement demand in the coming year. As
incremental capacity addition for industry slows down and demand picks
up, it would lead to better capacity utilization for JK Lakshmi (JKLCE) and
thereby support improved realizations. Company is enhancing its capacity
from6.6mtpato10mtpainthecurrentyearandweexpectittobeamajor
beneficiaryoftheanticipatedvolumetractioninthenorthern,easternand
western regions; moreover supply surplus is at a minimum level in these
areas. We factor in 44% earning CAGR over FY1418 and recommend BUY
with2yrpricetargetofRs433.
Beneficiary of favourable market mix
JKLCEs capacity is located across Rajasthan, Haryana and Gujarat with

North/West regions accounting for 62%/38% of sales. Post Durg plant
expansion, each region (northern, western and eastern) is likely to account
foronethirdofthesales.PanIndiacementconsumptionislikelytogrow8
12%overthenexttwoyears;assumingevenlyspreadgrowthratesacrossthe
fiveregions,northandwesternregioncouldrunintoaminordeficitinFY17.
We believe the upcycle witnessed in FY13 could repeat itself post H2 FY15
where demand push can boost realizations and hence earnings of the
companiescateringtotheselowsurpluszones.
Rating:
Target(2Years):
CMP:
Upside:
JKLCEisenhancingitscapacityto~10mtpabyQ4FY15;thiswouldtranslatein
to 15% volume CAGR over FY13FY16. This expansion includes 1) 2.7mtpa
plantatDurg,ChhattisgarhbyQ2FY15,2)revivalofdefunctcementcapacity
(adding1.4mtpaby1HFY15)atUdaipurCementWorks(JKLCEislikelytohave
amajoritystake)and3)0.55mtpagrindingunitinSuratcomingupinH2FY15
to boost blending ratio. Volume traction along with improvement in
realizationislikelytotranslateinto18%/24%revenuegrowthinFY15/16.
Sector:
Cement
Sector view:
Positive
Sensex:
FY14
FY15E
FY16E
FY17E
20,567
0.1
3,021
14.7
1,115
1,115
(41.9)
24,265
18.0
4,482
18.5
1,315
1,315
17.9
30,272
24.8
6,577
21.7
2,329
2,329
77.1
35,706
18.0
8,605
24.1
3,862
3,862
65.9
9.5
22.2
1.9
11.6
1.1
8.7
7.7
11.2
18.8
1.7
8.8
1.3
9.6
9.5
19.8
10.6
1.5
5.9
1.2
15.0
13.4
32.8
6.4
1.2
4.3
0.9
20.8
17.5
248/49
Marketcap(Rscr):
2,475
6mAvgvol(000Nos):
352
Bloombergcode:
JKLCIN
BSEcode:
500380
NSEcode:
JKLAKSHMI
FV(Rs):
Companyratinggrid
LowHigh
1
EarningsGrowth
CashFlow
B/SStrength
Valuationappeal
Risk
Sharepricetrend
290
JKLakshmi
Sensex
240
190
140
90
40
May13
Financialsummary
Revenues
yoygrowth(%)
Operatingprofit
OPM(%)
PreexceptionalPAT
ReportedPAT
yoygrowth(%)
EPS(Rs)
P/E(x)
Price/Book(x)
EV/EBITDA(x)
Debt/Equity(x)
RoE(%)
RoCE(%)
25,100
52Weekh/l(Rs):
Y/e31Mar(Rsm)
Rs433
Rs210
106.2%
Volume traction to translate into strong revenue growth
BUY
Sep13
Jan14
May14
Shareholdingpattern
Others
100 %
Institutions
Promoters
80
60
40
20
Research Analyst:
HemantNahata

Cement demand likely to regain its historical average
Over the past three years, slowdown in the economy (3year avg GDP at
+5.3%) impacted growth in sectors like infrastructure and manufacturing
whichinturnloweredcementdemand.Cementdemand/GDPmultiplieralso
dippedbelow1xasagainstanaverageof1.3xseeninhighGDPgrowthphase
between 1999 and 2009. Post election, we expect a decisive focus on
infrastructuredevelopmentandhousingwhichwouldleadtoanimprovement
incementdemandinthemediumterm.WeexpecttheGDPgrowthmultiplier
toregain1.21.3xlevelsinthecomingyear,therebytranslatingintoacement
growthofapprox812%overthenextfiveyears.
Slow down in new capacity additions to support utilization
After adding ~121mtpa in last five years, the pace of incremental capacity
additionhassloweddownsignificantly.Accordingtotheannouncementmade
by the companies we are likely to see addition of ~16/19/15mtpa in
FY15/16/17.Inaddition,asub75%levelofcapacityutilizationfortheindustry
hasalsoledtodelayincapacityexpansionbycertainplayers.
AllIndiacementdemandsupplyscenario
Mntons
EffectiveCemCapacity
Cementdemandsupplyscenarioinnorthernregion
FY13E
FY14E
FY15E
FY16E
FY17E
306
322
338
357
372
yoygrowth(%)
4.8
5.2
5.0
5.6
4.2
Possibleproduction
296
311
328
342
362
CementDispatches
238
247
262
289
310
yoygrowth(%)
5.8
3.8
6.1
10.3
7.3
77.8
76.7
77.5
81.0
83.3
66.0
53.0
52.0
CapacityUtilization
Surplus/(Deficit)
58.0
64.0
CementdemandsupplyscenarioinWesternregion
Mntons
yoygrowth(%)
Possibleproduction
CementDispatches
yoygrowth(%)
CapacityUtilization
Surplus/(Deficit)
FY13E
FY14E
FY15E
FY16E
FY17E
45
2.3
44
38
5.6
84.4
6.0
44
(2.2)
47
39
2.6
88.6
8.0
47
6.8
49
41
5.1
87.2
8.0
49
4.3
46
44
7.3
89.8
2.0
49
49
48
9.1
98.0
1.0
Mntons
yoygrowth(%)
Possibleproduction
CementDispatches
yoygrowth(%)
CapacityUtilization
Surplus/(Deficit)
FY13E
FY14E
FY15E
FY16E
FY17E
67
1.5
64
61
8.9
91.0
3.0
74
10.4
69
65
6.6
87.8
4.0
79
6.8
76
69
6.2
87.3
7.0
85
7.6
82
76
10.1
89.4
6.0
90
5.9
87
85
11.8
94.4
2.0
Cementdemandsupplyscenarioinsouthernregion
Mntons
FY13E
FY14E
FY15E
FY16E
FY17E
119
115
118
121
124
yoygrowth(%)
Possibleproduction
CementDispatches
yoygrowth(%)
8.2
114
70
4.5
(3.4)
114
72
2.9
2.6
116
77
6.9
2.5
120
85
10.4
2.5
121
94
10.6
CapacityUtilization
58.8
62.6
65.3
70.2
75.8
Surplus/(Deficit)
44.0
42.0
39.0
35.0
27.0
Cementdemandsupplyscenarioincentralregion
Mntons
yoygrowth(%)
Possibleproduction
CementDispatches
yoygrowth(%)
CapacityUtilization
Surplus/(Deficit)
FY13E
FY14E
FY15E
FY16E
FY17E
40
11.1
37
34
3.0
85.0
3.0
44
10.0
43
37
8.8
84.1
6.0
49
11.4
46
38
2.7
77.6
8.0
50
2.0
46
42
10.5
84.0
4.0
51
2.0
46
45
7.1
88.2
1.0
CementdemandsupplyscenarioinEasternregion
Mntons
yoygrowth(%)
Possibleproduction
CementDispatches
yoygrowth(%)
CapacityUtilization
Surplus/(Deficit)
FY13E
FY14E
FY15E
FY16E
FY17E
39
5.4
38
35
9.4
89.7
3.0
41
5.1
42
38
8.6
92.7
4.0
48
17.1
44
41
7.9
85.4
3.0
52
8.3
45
41
78.8
4.0
60
15.4
56
44
7.3
73.3
12.0

Stock trades at discount to replacement cost - Compelling BUY
OnanEV/tonbasis,companytradesatFY16EV/tonofUS$70,representinga
discounttothereplacementcost.WebelieveJKLCEwillbeamajorbeneficiary
of improvement in key dynamics such as expansionled volume growth in a
deficit market and availability of fuel linkages. This would translate into 44%
earnings CAGR over FY1418. Stock trades at FY17 PER of 6.4x, at a deep
discounttomuchlargerplayerssuchasACC,UltratechandAmbujaCements,
which are trading at ~1418x. We recommend BUY for 2year target price of
Rs433.
Company Background
JKLCE, a Hari Shankar Singhania group company was incorporated in 1982

started operations by setting up a cement manufacturing plant in Sirohi,
Rajasthan. The company has its 6.6mtpa capacity in Rajasthan, Gujarat and
Haryana and 100% captive power capacity (54MW thermal power plant and
12MWwasteheatrecovery;JKLCEalsohasatieupwithVSLignitetosource
power).JKLCEusepetcokeforKILNandpowerproduction.

Financials
Incomestatement
Y/e31Mar(Rsmn)
Revenue
Operatingprofit
Depreciation
Interestexpense
Otherincome
Profitbeforetax
Taxes
PAT
Keyratios
FY14
20,567
3,021
(1,352)
(772)
442
1,339
(224)
1,115
FY15E
24,265
4,482
(1,830)
(1,180)
330
1,801
(486)
1,315
FY16E
FY17E
30,272
35,706
6,577
8,605
(2,195)
(2,220)
(1,560)
(1,480)
368
386
3,190
5,291
(861)
(1,429)
2,329 3,862
Y/e31Mar
Growthmatrix(%)
Revenuegrowth
Opprofitgrowth
EBITgrowth
Netprofitgrowth
OPM
EBITmargin
Netprofitmargin
RoCE
RoNW
RoA
Pershareratios
EPS
Dividendpershare
CashEPS
Bookvaluepershare
Valuationratios(x)
P/E
P/B
EV/EBIDTA
Payout(%)
Dividendpayout
Taxpayout
Liquidityratios
Debtordays
Inventorydays
Creditordays
Leverageratios
Interestcoverage
Netdebt/equity
Netdebt/op.profit
Balancesheet
Y/e31Mar(Rsm)
Equitycapital
Reserves
Networth
Debt
Totalliabilities
IntangibleAsset
Fixedassets
Investments
Networkingcapital
Inventories
Sundrydebtors
Othercurrentassets
Sundrycreditors
Cash
Totalassets
FY14
589
12,446
13,034
14,962
1,226
29,222
764
25,511
3,577
(1,407)
1,081
566
4,138
(6,768)
(423)
777
29,222
FY15E
589
13,488
14,077
18,462
1,226
33,764
FY16E
589
15,545
16,133
19,962
1,226
37,321
FY17E
589
19,135
19,724
18,962
1,226
39,911
30,511
3,577
(1,577)
1,279
701
4,851
(7,985)
(423)
1,253
33,764
32,511
3,577
(1,778)
1,617
918
6,072
(9,962)
(423)
3,011
37,321
35,011
3,577
(2,062)
1,901
1,136
7,073
(11,750)
(423)
3,386
39,911
Cashflowstatement
Y/e31Mar(Rsmn)
Profitbeforetax
Depreciation
Taxpaid
Workingcapital
Operatingcashflow
Capitalexpenditure
Freecashflow
Debtfinancing/
disposal
Dividendspaid
Netincash
FY14
1,339
1,352
(224)
1,463
3,930
(6,378)
(2,448)
FY15E
1,801
1,830
(486)
170
3,314
(6,066)
(2,752)
FY16E
3,190
2,195
(861)
201
4,725
(4,195)
530
FY17E
5,291
2,220
(1,429)
284
6,366
(4,720)
1,646
3,208
(275)
650
3,500
(272)
476
1,500
(272)
1,758
(1,000)
(272)
374
FY14
FY15E
FY16E
FY17E
0.1
(29.5)
(37.0)
(41.9)
14.7
10.3
5.4
7.7
8.7
3.3
18.0
48.4
41.2
17.9
18.5
12.3
5.4
9.5
9.7
3.3
24.8
46.8
59.3
77.1
21.7
15.7
7.7
13.4
15.4
5.2
18.0
30.8
42.5
65.9
24.1
19.0
10.8
17.5
21.5
7.7
9.5
2.0
21.0
110.7
11.2
2.0
26.7
119.6
19.8
2.0
38.4
137.1
32.8
2.0
51.7
167.6
9.5
1.9
11.6
24.7
16.7
10
19
120
2.7
1.1
4.7
11.2
1.8
8.6
20.7
27.0
11
19
120
2.5
1.2
3.8
19.8
1.5
5.8
11.7
27.0
11
19
120
3.0
1.1
2.6
32.8
1.3
4.3
7.0
27.0
12
19
120
4.6
0.8
1.8
FY14
0.83
0.63
0.10
0.61
2.65
8.7
FY15E
0.73
0.60
0.12
0.62
2.90
9.7
FY16E
0.73
0.67
0.16
0.67
2.98
15.4
FY17E
0.73
0.78
0.19
0.72
2.78
21.5
DuPontAnalysis
Y/e31Mar
Taxburden(x)
Interestburden(x)
EBITmargin(x)
Assetturnover(x)
RoE(%)

Jyoti
Structures Ltd
Worst is behind
JyotiStructuresLtd(JSL)isaleadingplayerinthedomestictransmissionand
distributionspace.Thecompanyhasbeenwideningitsreachintheexport
markettooffsetthedeclineindomesticorderflows.Companysorderbook
of Rs48.5bn (44% exports) provides revenue visibility over the next 18
months. Going forward order inflows would gain momentum as the new
governmentremainsfocusedonreducingtransmissionlossesandincrease
power supply to rural areas. Debtors are expected to decline as many
projects would be completed in H1 FY15. Project payments, which have
beenstuckonaccountofdependencyclausesandalsoretentionamounts,
willgetreleased.Asaresult,interestcostsasa%ofoperatingprofitwhich
stood at 84% in FY14 would decline and boost the companys bottomline
overthenexttwoyears.Marginstooareexpectedtoexpandaslegacylow
marginordersaregettingexecuted.Combinationoftheabovetwofactors
would drive PAT by 4.7x from Rs324mn in FY14 to Rs1.5bn in FY17. The
company is currently trading at a FY16E P/E of 4.7x, which is quite
inexpensive compared to its peers and largely discounts most of the
negatives. We believe recovery from debtors and faster execution of
projects would lead to a rerating of the company. We recommend a BUY
withatwoyearsperspectiveforapricetargetofRs120.
Rating:
Target:(2years)
CMP:
Upside:
BUY
Rs120
Rs59
102%
Sector:
Capital Goods
Sector view:
Neutral
Sensex:
25,100
52Weekh/l(Rs):
68/15
Marketcap(Rscr):
487
6mAvgvol(000Nos):
724
Bloombergcode:
JYSIN
BSEcode:
513250
NSEcode:
JYOTISTRUC
FV(Rs):
Companyratinggrid
LowHigh
1
EarningsGrowth
CashFlow
Order backlog remains steady at 1.6x BTB
B/SStrength
Valuationappeal
Risk
JSLattheendofQ3FY14hadanorderbookofRs48.5bn,implyingabookto
bill(BTB)ratioof1.6x,inspiteofthedearthofordersinthedomesticmarket.
The company, over the last two years has been focussing on widening its
reachgloballytoreducetheimpactofslowdowninthedomesticmarket.The
company has forayed into the many nations in Middle East and South
America. 36% of the total orders are from overseas customers and if we
includetheordersdeemedforexports,shareofexportsofoverallorderbook
hasincreasedto44%.Ofthetotalorderbook,transmissionlinesaccountfor
66% of total orders and substation and rural electrification is ~34%. Order
inflowfor9MFY14stoodatRs21.3bnlargelyonaccountofincreasedexport
orders.
Sharepricetrend
JSL
350
300
250
200
150
100
50
Jun13
Sensex
Dec13
Jun14
Financialsummary
Y/e31Mar(Rsm)
Revenues
yoygrowth(%)
Operatingprofit
OPM(%)
ReportedPAT
yoygrowth(%)
EPS(Rs)
P/E(x)
EV/EBITDA(x)
Debt/Equity(x)
RoE(%)
RoCE(%)
FY14
33,308
18.9
2,604
7.8
324
(50.1)
3.9
15.1
5.6
1.3
4.2
16.2
FY15E
35,111
5.4
2,931
8.3
509
57.1
6.2
9.6
4.6
1.1
6.4
16.0
FY16E
37,192
5.9
3,366
9.1
1,028
102.0
12.5
4.7
3.6
0.8
11.9
19.4
FY17E
41,910
12.7
4,027
9.6
1,523
48.2
18.5
3.2
3.0
0.7
15.5
22.7
Shareholdingpattern
Others
100%
Institutions
Promoter
80%
60%
40%
20%
0%
Research Analyst:
TarangBhanushali
Jyoti Structures Ltd
Order pipeline boosts confidence
The company is quite confident of obtaining large orders in H1 FY15. The

managementguidedthatthereareopportunitiesworthRs80bntobegrabbed
by the company in FY15. Of this, the company expects export orders worth
Rs28bntobereceivedlargelyfromregionsinSouthAmerica.Thecompanyis
targeting nations like Namibia, Uganda, Kenya, Zambia, Nigeria and Nepal,
whereinthecompetitionislesscomparedtotheMiddleEast.Inthedomestic
sector,thecompanyexpectsorderstojumpinH2FY15onthebackincreased
orderingfromPowerGrid.Italsoexpectsstateutilitiestoincreaseexpenditure
as the focus of the new regime continues to reduce transmission losses by
upgradingitsnetworksandincreasingtheavailabilityofpowertoruralareas.
WeexpectorderinflowstojumpfromH2FY15andexpectthecompanytoend
FY15 at Rs52bn, an increase of 6% yoy. We believe order inflows would be
quitestronginFY16andexpecttheorderbooktoendatRs54bn,anincrease
of13%yoy.
Themanagementhasguidedthat
thereareopportunitiesworthRs80bn
tobegrabbedbythecompanyinFY15
Orderinflowwouldbequitestrongin
FY16andweexpecttheorderbookto
endatRs54bn,anincreaseof13%yoy
Marginstorecovertoaveragelevelsas
legacylowmarginsordersare
executedandexecutionofexport
projectsgainsmomentum
Cashflowforthecompanyisexpected
toincreaseinH1FY15asproject
paymentswhichhavebeenstuckon
accountofdependencyclausesand
alsoretentionamountswillget
releasedastheprojectsarecompleted
Margins to improve
JSLsmarginsinFY14declinedsharplyto7.8%duetoexecutionoflowmargin
ordersduringtheyearandalsoonaccountofsomeforexlosses.Orderswhich
were bagged with low margins during the intense competition over the last
twoyearsandsomeslowmovementinordersbelongingtothestateutilities
are the major reasons behind the decline in the margins in FY14. We believe
thisimpactwouldlastinH1FY15andthenrecovertoaveragelevelsaslegacy
low margins orders are completed and execution of export projects gains
momentum. We expect margins to improve slightly in FY15 to 8.3% as the
companywouldremainfocusedonreducingitsreceivables.However,withthe
intensityofcompletionlowerinPowerGridorders,weexpectmarginswould
improveby80bpsto9.1%inFY16andafurtherexpansionof50bpsyoyinFY17
to9.6%.
Focus on reducing receivables a trigger for the company
JSLs profitability over the last two years has been severely impacted by the
increase in its interest costs, led by a jump in its debtors. Over the last two
years debtors have jumped sharply due to delay in payments from various
SEBs.DebtorsattheendofFY14stoodatRs28bn,ajumpof79%sinceFY12.As
perthecompany,thesharpbumpupindebtorsinQ4FY14wasduetodelayin
disbursalsbySEBs.ThecompanyexpectspaymentstoincreaseinQ1FY15,as
manyprojectsareexpectedtobecompletedduringthequarter.Cashflowfor
the company is expected to increase in H1 FY15 as project payments, which
havebeenstuckonaccountofdependencyclausesandalsoretentionamounts
will get released as the projects are completed. The company has indicated
thatdebtorsworthRs44.5bn,whereinpaymentsarecontention,haveshown
signs of easing out. The company has started to receive some payments in
additiontotheexecutionpickingupinsomeoftheprojects.Webelievethat
thecompanywouldbeabletoreducethedebtorsby17%,reducingthestress
onthecompanysbalancesheetandprofitability.
Margin expansion coupled with reducing debtors to boost bootline
JSLs profitability over the last two years has been impacted by increasing
interestcostsandadeclineinmargins.Interestcostsasa%ofoperatingprofit
stood at 84% in FY14 leading to a sharp decline in bottomline. The jump in
interestcostshasbeenlargelyduetoanincreaseinshorttermloanstakento
fund working capital. Over the next two years, we expect debtor days to
declineasmanyprojectsareexpectedtobecompleteinFY15andexecutionis
expectedtospeeduppostthechangeintheregimeatthecentre.Weexpect
interestcostsasa%ofoperatingprofittodeclinefrom84%inFY14to70%in
FY15and51.2%inFY16onthebackoflowerinterestcostsandrisingoperating
profit.Wealsoexpectoperatingprofittoincreaseby12.5%yoytoRs2.9bnand
by14.8%yoytoRs3.4bninFY16.Asaresultoftheabove,weestimatePATto
jumpfromRs324mninFY14toRs509mninFY15,Rs1bninFY16andRs1.5bnin
FY17. The company is currently trading at a FY16E P/E of 4.7x, which is quite
cheapcomparedtoitspeersandlargelydiscountsmostofthenegatives.We
believerecoveryfromdebtorsandfasterexecutionofprojectswouldleadtoa
reratingofthecompany.WerecommendaBUYwithatwoyearsperspective
forapricetargetofRs112.
Orderinflowstoincreaseonthebackofhigher
governmentspending
Orderinflow
60,000
PAT
(%)
50,000
1,400
100
25
1,200
80
10
10,000
FY11 FY12 FY13E FY14 FY15E FY16E FY17E
(Rsmn)
(%)
120
60
1,000
40
800
20
600
400
(20)
(5)
200
(40)
(60)
(10)
yoygrowth
30
20,000
Thecompanyiscurrentlytradingata
FY16EP/Eof4.7x,whichisquitecheap
comparedtoitspeersandlargely
discountsmostofthenegatives
1,600
15
30,000
35
20
40,000
Weexpectinterestcostsasa%of
operatingprofittodeclinefrom84%in
FY14to70%inFY15and51.2%inFY16
onthebackoflowerinterestcostsand
risingoperatingprofit
PATtojump4.7xoverFY1417E
yoygrowth
(Rsmn)
FY11 FY12 FY13E FY14 FY15E FY16E FY17E
Company Background
Jyoti Structures Ltd is among the leading player in the transmission

Engineering,ProcurementandConstruction(EPC)sectorinIndia.Thecompany
is a focused player in the Transmission & Distribution segment and provides
turnkey solutions in the field of Transmission lines, Substations and Rural
Electrification.Italsoundertakesturnkeyprojectsonaglobalscale,offeringa
completerangeofservicesinDesign,Testing,Manufacturing,Sourcing,Supply
andConstructionwithitsinhouseexpertise.IthasaninhouseTowerTesting
facilityatIgatpuriinIndia.JSLhasestablishedajointventurecompanyinDubai
in 2008, viz. Gulf Jyoti International LLC (GJI). This venture was formed
between Gulf Investment Corporation, Kuwait and JSL. It has also started a
subsidiarycompanynamedJyotiStructuresAfrica(JSA),whichisbasedoutof
JohannesburgandJyotiAmericasLLCintheUnitedStates.
Financials
Incomestatement
Y/e31Mar(Rsmn)
Revenue
Operatingprofit
Depreciation
Interestexpense
Otherincome
Profitbeforetax
Taxes
Netprofit
Keyratios
FY14
33,308
2,604
(270)
(2,203)
392
523
(199)
324
FY15E
35,111
2,931
(291)
(2,071)
196
765
(256)
509
FY16E
37,192
3,366
(311)
(1,724)
215
1,546
(518)
1,028
FY17E
41,910
4,027
(331)
(1,642)
237
2,291
(767)
1,523
FY14
FY15E
FY16E
164
164
164
7,621
8,027
8,952
7,786
8,191
9,116
10,465
8,965
7,465
1
1
1
18,252 17,157 16,582
1,890
1,817
1,756
866
866
866
14,674 14,192 13,681
4,562
3,705
3,901
27,951 23,087 22,926
5,968
5,830
6,171
(23,448) (18,068) (18,955)
(360)
(362)
(362)
823
282
280
18,252 17,157 16,582
FY17E
164
10,372
10,537
7,465
1
18,003
1,675
866
15,223
4,375
24,113
6,945
(19,847)
(362)
238
18,003
Y/e31Mar
Growthmatrix(%)
Revenuegrowth
Opprofitgrowth
EBITgrowth
Netprofitgrowth
OPM
EBITmargin
Netprofitmargin
RoCE
RoNW
RoA
Pershareratios
EPS
Dividendpershare
CashEPS
Bookvaluepershare
Valuationratios
P/E
P/CEPS
P/B
EV/EBIDTA
Payout(%)
Dividendpayout
Taxpayout
Liquidityratios
Debtordays
Inventorydays
Creditordays
Leverageratios
Interestcoverage
Netdebt/equity
Netdebt/op.profit
Balancesheet
Y/e31Mar(Rsmn)
Equitycapital
Reserves
Networth
Debt
Totalliabilities
Fixedassets
Investments
Networkingcapital
Inventories
Sundrydebtors
Othercurrentassets
Sundrycreditors
Cash
Totalassets
Cashflowstatement
Y/e31Mar(Rsmn)
Profitbeforetax
Depreciation
Taxpaid
Workingcapital
Operatingcashflow
Capitalexpenditure
Freecashflow
Equityraised
Dividendspaid
Otheritems
Netincash
FY14
523
270
(199)
(2,381)
(1,788)
(192)
(1,980)
77
2,579
(75)
(108)
493
FY15E
765
291
(256)
481
1,281
(219)
1,062
(0)
(1,500)
(103)
(0)
(541)
FY16E
1,546
311
(518)
511
1,851
(250)
1,601
(0)
(1,500)
(103)
(2)
FY17E
2,291
331
(767)
(1,543)
312
(250)
62
(0)
(103)
(42)
FY14
18.9
(6.6)
2.2
(50.1)
FY15E
5.4
12.6
4.0
57.1
7.8
8.2
1.0
16.2
4.2
0.9
8.3
8.1
1.4
16.0
6.4
1.3
3.9
0.8
7.2
94.7
3.2
2.6
0.5
3.0
10.0
33.5
240
39
188
1.2
1.2
3.7
4.7
3.6
0.5
3.6
20.3
33.5
306
50
257
18.5
1.1
22.6
128.2
12.5
1.1
16.3
110.9
9.6
6.1
0.6
4.6
23.2
38.1
9.6
9.4
3.6
22.7
15.5
4.1
9.1
8.8
2.8
19.4
11.9
2.9
6.2
1.1
9.7
99.6
15.1
8.2
0.6
5.6
FY17E
12.7
19.6
20.3
48.2
FY16E
5.9
14.8
15.3
102.0
6.8
33.5
225
38
186
210
38
173
1.4
1.1
3.0
1.9
0.8
2.1
2.4
0.7
1.8
FY15E
0.67
0.27
0.08
0.90
4.86
6.4
FY16E
0.67
0.47
0.09
1.04
4.13
11.9
FY17E
0.67
0.58
0.09
1.13
3.77
15.5
DuPontAnalysis
Y/e31Mar
Taxburden(x)
Interestburden(x)
EBITmargin(x)
Assetturnover(x)
RoE(%)
FY14
0.62
0.19
0.08
0.95
4.60
4.2
Kirloskar Oil Engines

Well oiled for the run
Kirloskar Oil Engines Ltd (KOEL) is well placed to gain from the countrys
powerdeficitsituationandanexpectedeconomicrevival.Whilethepower
deficit in the country is expected to improve over the longer term, we
believe,itwouldcontinuetobestrainedintheshorterterm.Ontheother
hand,industrialactivityisexpectedtoseestrongrevivalinthenearterm.
This would lead to strong demand for power gensets, where KOEL is a
leadingplayer.WithcapacityexpansioninplaceKOELisnotonlyexpected
to see strong revenue traction but also margin expansion translating into
earnings CAGR of 26% during FY1417E. Considering the robust earnings
growth,wefindthevaluationsattractiveatP/Eof12.7xFY16EEPS.
Rating:
Target(2Years):
CMP:
Upside:
BUY
Rs485
Rs238
104%
Sector:
Capital Goods
Sector view:
Neutral
Sensex:
25,100
52Weekh/l(Rs):
249/141
Marketcap(Rscr):
3,450
6mAvgvol(000Nos):
32
Bloombergcode:
KOELIB
BSEcode:
533293
Power situation not expected to change materially in the near term
NSEcode:
KIRLOSENG
India continues to see power deficit in many states. While the new
government,withitssuperiortrackrecordinGujarat,isexpectedtoimprove
the situation materially over the longer term, we believe the issues such as
fuelavailabilityandlandacquisitioncannotbesolvedovernight.Ontheother
hand,industrialactivityisexpectedtopickupintheneartermwhichwould
cause a surge in demand for gensets. With KOEL having wide range of
production capacity from 5kVA to 3,000kVA, it is well placed to service the
expectedriseindemand.
FV(Rs):
Agri business demand to recover
Powerdeficithasamajorimpactontheagrisectorwhichinturntranslates
into rise in demand for engines below 20hp. We believe that the new
governmentwilllayimpetusonimprovingagriculturalproductivityleadingto
marked improvement in demand for engines from the segment. Also KOEL
nowplanstomanufactureagricultureequipmentsandwillstartwithpower
tillers. With an established brand in pump sets and engines, KOEL hopes to
garner substantial market share. The power tillers market over the past
decadehasseenagrowthof1520%perannum,whichweexpecttosustain
overthemediumterm.
Financialsummary
Y/e31Mar(Rsm)
FY14
FY15E
FY16E
FY17E
Revenues
yoygrowth(%)
Operatingprofit
OPM(%)
ReportedPAT
yoygrowth(%)
EPS(Rs)
P/E(x)
Price/Book(x)
EV/EBITDA(x)
Debt/Equity(x)
RoE(%)
RoCE(%)
23,200
(1.6)
3,044
13.1
1,785
(10.3)
12.3
19.3
2.7
11.2
0.0
14.7
19.3
25,740
10.9
3,521
13.7
2,117
18.7
14.6
16.3
2.5
9.4
0.0
15.9
21.0
30,328
17.8
4,367
14.4
2,718
28.4
18.8
12.7
2.2
7.2
0.0
18.4
24.4
35,607
17.4
5,302
14.9
3,382
24.4
23.4
10.2
1.9
5.6
0.0
20.2
26.9
Companyratinggrid
LowHigh
EarningsGrowth
CashFlow
B/SStrength
Valuationappeal
Risk
Sharepricetrend
KOEL
150
Sensex
130
110
90
70
50
Jun13
Oct13
Feb14
Jun14
Shareholdingpattern
Promoter
Institutions
Others
100%
80%
60%
40%
20%
0%
Research Analyst:
Prayesh Jain

Consolidation post implementation of CPCB-2 norms to benefit KOEL
Thenewcentralpollutioncontrolboard(CPCB2)normsfordieselgeneration
sets and engines up to 800 KVA are expectedto be introduced in India from
July 01, 2014. Post implementation, the prices of engines and gensets are
expected to rise by 1520%, which will lead to prebuying in Q1 FY15. In the
longerrun,aconsolidationisexpectedassmallerplayerswouldfinditdifficult
tomeettherevisedparameterswhichwilleventuallybenefitlargerplayerslike
KOEL.
Aconsolidationisexpectedassmaller
playerswouldfinditdifficulttomeet
therevisedparameterswhichwill
eventuallybenefitlargerplayerslike
KOEL
Increasing focus on exports
Exports currently account for less than 10% of annual revenues for KOEL. To
diversify geographically and reduce cyclicality from the domestic business,
KOEL aims to increase its exports by 20% per annum. The markets to which
companycurrentlyexportsincludeSriLanka,Nepal,Tanzania,Zambia,Nigeria,
Kenya, Saudia Arabia, and South Africa. The company has set up dealership
and distributor network in these countries and plans to increase the same.
Post sales service responsibilities are also taken by these dealers and
distributors. In the near future, the company expects strong growth from
MiddleEastandAfrica.AlsointermsofnewmarketstheplanstoenterEurope
andNorthAmericanmarkets.
Diversified product base reduces earnings cyclicality
Inspite ofasharpslowdowninindustrialactivityinthepastcoupleofyears
KOEL reported a 1.3% growth in revenues in FY13 and a modest decline of
1.6%inFY14(muchlowerthanindustrydecline).Thishasbeenpossibleonthe
back of a diversified customer profile which includes the power industry,
agricultureandalliedactivitiesandindustrialsegment.Alsoitearnsrevenues
bysettinguplargeenginesandprovidingcustomersupporttoexistingengine
users. Going ahead a broad based economic recovery in India would drive
demandfromallsectorsKOELoperatesin.
Inthenearfuture,thecompany
expectsstronggrowthfromMiddle
EastandAfrica.Alsointermsofnew
marketstheplanstoenterEuropeand
NorthAmericanmarkets
Goingaheadabroadbasedeconomic
recoveryinIndiawoulddrivedemand
fromallsectorsKOELoperatesin
Reducingdependenceonpowersector
100%
90%
80%
70%
LargeEngines
60%
CustomerSupport
50%
Industrial
40%
Agricultural
30%
PowerGen
20%
10%
0%
FY11
FY12
FY13
FY14

Deserves re-rating
KOEL, since its listing in 2010, has been trading in the range of 10x16x one
year forward P/E. While this was in line with industry, we note here that
industrymultipleshadwitnessedaderatingasweakeconomicbackdroplaid
stress on revenues and profitability. In the previous bull cycle, the industry
average one year forward P/E range was 15x20x. With robust outlook for
industrial activity, sustained investments in mechanization of agriculture and
thrust on infrastructure investments, we see large business opportunities for
proxyplayssuchasKOEL.Weexpect15%revenueCAGRforKOELduringFY14
17E.Withcapacityutilizationat55%attheendofFY14,benefitsofoperating
leveragewillcausestrongrecoveryinmarginsandresultantlyaPATCAGRof
24% during FY1417E. Given the strong cash flow generation and healthy
balancesheet,KOELwillreratealongwiththeindustry.
Operatingcashflow
Giventhestrongcashflowgeneration
andhealthybalancesheet,KOELwill
reratealongwiththeindustry
ImprovedRoEandRoCE
Capitalexpenditure
Freecashflow
5,000
RoE(%)
RoCE(%)
30
Rsmn
4,000
25
3,000
20
2,000
15
1,000
10
(1,000)
(2,000)
0
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E
Company Background
Incorporatedin1946,KOEListheflagshipcompanyoftheKirloskargroup.It
hasfourstateoftheartmanufacturingunitsinIndia.Thecompanyalsohasa
sizable presence in international markets, with offices in Dubai, South Africa,
andKenya,andrepresentativesinNigeria.KOELalsohasastrongdistribution
network throughout the Middle East and Africa. It specializes in the
manufacturing of both aircooled and liquidcooled diesel engines and
generatingsetsacrossawiderangeofpoweroutputfrom5kVAto3000kVA.It
also offers engines operating on alternative fuels such as biodiesel, natural
gas, biogas and straight vegetable oil (SVO). KOELs large engines business
groupmanufacturesandmarketsdieselenginesfrom2,400hpto11,000hp.
Themainapplicationsoftheseenginesarecaptivepowerplants(baseload/
critical standby AMF or black start) and marine main propulsion. In the
agriculturemarket,companysellsproductstofarmerswhichrequireproducts
in 3 hp to 130 hp. Products include a variety of diesel pumpsets and agri
engines powering more than 25 applications across five sectors. In the
industrialenginebusinessgroupthecompanysupplies20hpto800hpwhich
findapplicationsinmorethan85segmentsacrosssevensectors.

Financials
Incomestatement
Y/e31Mar(Rsm)
Revenue
Operatingprofit
Depreciation
Interestexpense
Otherincome
Profitbeforetax
Taxes
Netprofit
Keyratios
FY14
23,200
3,044
(983)
(4)
378
2,434
(650)
1,785
FY15E
25,740
3,521
(1,032)
400
2,889
(771)
2,117
FY16E
30,328
4,367
(1,084)
425
3,708
(990)
2,718
FY17E
35,607
5,302
(1,138)
450
4,614
(1,232)
3,382
Y/e31Mar
Growthmatrix(%)
Revenuegrowth
Opprofitgrowth
EBITgrowth
Netprofitgrowth
OPM
EBITmargin
Netprofitmargin
RoCE
RoNW
RoA
Pershareratios
EPS
Dividendpershare
CashEPS
Bookvaluepershare
Valuationratios
P/E
P/CEPS
P/B
EV/EBIDTA
Payout(%)
Dividendpayout
Taxpayout
Liquidityratios
Debtordays
Inventorydays
Creditordays
Balancesheet
Y/e31Mar(Rsm)
Equitycapital
Reserves
Networth
Debt
Totalliabilities
FY14
289
12,383
12,672
131
303
13,106
FY15E
289
13,633
13,922
131
303
14,355
FY16E
289
15,339
15,628
131
303
16,062
FY17E
289
17,565
17,854
131
303
18,287
Fixedassets
Investments
Networkingcapital
Inventories
Sundrydebtors
Othercurrentassets
Sundrycreditors
Cash
Totalassets
5,850
6,077
655
1,668
1,774
2,617
(3,124)
(2,280)
524
13,106
5,299
6,827
723
1,851
1,968
2,878
(3,466)
(2,508)
1,506
14,355
4,716
7,577
823
2,181
2,319
3,166
(4,084)
(2,759)
2,946
16,062
4,328
8,327
936
2,560
2,722
3,483
(4,795)
(3,034)
4,697
18,287
FY14
2,434
983
(650)
921
3,689
(649)
3,040
68
(1,901)
(169)
(723)
(38)
277
FY15E
2,889
1,032
(771)
(68)
3,081
(482)
2,599
(750)
(868)
982
FY16E
3,708
1,084
(990)
(100)
3,702
(500)
3,202
(750)
(1,012)
1,440
FY17E
4,614
1,138
(1,232)
(113)
4,407
(750)
3,657
(750)
(1,157)
1,751
Cashflowstatement
Y/e31Mar(Rsm)
Profitbeforetax
Depreciation
Taxpaid
Workingcapital
Operatingcashflow
Capitalexpenditure
Freecashflow
Equityraised
Investments
Dividendspaid
Otheritems
Netincash
FY14
FY15E
FY16E
FY17E
(1.6)
(12.0)
(16.7)
(18.1)
13.1
10.5
7.7
19.3
14.7
9.9
12.3
5.0
19.1
87.6
19.3
12.4
2.7
11.2
40.5
26.7
28
30
57
10.9
15.7
18.5
18.7
13.7
11.2
8.2
21.0
15.9
10.9
14.6
6.0
21.8
96.3
16.3
10.9
2.5
9.4
41.0
26.7
28
30
57
17.8
24.0
28.4
28.4
14.4
12.2
9.0
24.4
18.4
12.6
18.8
7.0
26.3
108.1
12.7
9.1
2.2
7.2
37.2
26.7
28
31
57
17.4
21.4
24.4
24.4
14.9
13.0
9.5
26.9
20.2
13.8
23.4
8.0
31.3
123.5
10.2
7.6
1.9
5.6
34.2
26.7
28
31
58
DuPontAnalysis
Y/e31Mar
Taxburden(x)
Interestburden(x)
EBITmargin(x)
Assetturnover(x)
RoE(%)
FY14
0.73
1.00
0.11
1.29
1.48
14.7
FY15E
0.73
1.00
0.11
1.33
1.46
15.9
FY16E
0.73
1.00
0.12
1.40
1.46
18.4
FY17E
0.73
1.00
0.13
1.45
1.46
20.2
LG Balakrishnan & Bros

Breaking the chains
LG Balakrishnan & Bros (LGB) is a proxy play on the sustained strong

momentum (which we expect to continue) in two wheeler sales. LGB will
not only benefit from a robust demand recovery from OEMs but will also
gain from a potent replacement market. Export growth is expected to
improve with increasing two wheeler sales in the emerging economies.
WithstocktradingataP/Emultipleof7.4xFY16EEPSofRs120muchlower
than the industry average in spite of robust cash flows, a clean balance
sheetandanexpected3yearearningsCAGRof23%,weexpectarerating
in the stock and hence recommend a BUY with a two year price target of
Rs1,878.
Rating:
Target(2Years):
CMP:
Upside:
BUY
Rs1,878
Rs883
113%
Sector:
Auto Ancillary
Sector view:
Positive
Sensex:
25,100
52Weekh/l(Rs):
905/152
Marketcap(Rscr):
693
6mAvgvol(000Nos):
24
Bloombergcode:
LGBBIB
BSEcode:
500250
Proxy play on the two-wheeler industry
NSEcode:
LGBBROSLTD
LGB is a major supplier of chains to the automotive industry especially the

twowheelersegment.IntheOEMmarket,havingtieupswithleadingplayers
suchasHondaMotors,BajajAuto,HeroMotocorp,TVSandYamahaMotors,
LGBisthemarketleaderwitha70%share.Hereweseeprotracteddemand
growth for LGB as two wheeler sales surge on back of improved economic
backdrop. LGB has also established a strong foothold in the replacement
marketwitha50%marketsharethroughitswidespreadmarketingnetwork.
This will benefit LGB in the near term as the robust two wheeler sales
(especially scooters) in the past couple of years will translate into strong
replacementdemand.
FV(Rs):
Diversifying in other segments
10
Companyratinggrid
LowHigh
B/SStrength
Valuationappeal
Risk
FY14
FY15E
FY16E
FY17E
Revenues
yoygrowth(%)
Operatingprofit
OPM(%)
ReportedPAT
yoygrowth(%)
EPS(Rs)
P/E(x)
Price/Book(x)
EV/EBITDA(x)
Debt/Equity(x)
RoE(%)
RoCE(%)
11,086
15.9
1,261
11.4
627
91.6
79.9
11.0
2.2
6.5
0.4
22.1
22.0
12,784
15.3
1,510
11.8
788
25.7
100.4
8.8
1.8
5.3
0.3
23.0
23.6
14,889
16.5
1,795
12.1
943
19.6
120.1
7.4
1.5
4.4
0.3
22.7
24.7
17,569
18.0
2,188
12.5
1,167
23.8
148.7
5.9
1.2
3.4
0.2
23.1
26.5
EarningsGrowth
Sharepricetrend
Y/e31Mar(Rsm)
CashFlow
While LGB is the market leader in supply of chains to the two wheeler
industry, it has presence in other automotive segments such as passenger
cars,LCVs,threewheelersandtractors.Thekeyproductsitsuppliestothese
segmentsarecoggedbelts,timingbeltsandPolyVbelts.Alsoithasforging
and machining operations, which can be extended to other products. It
supplies break shoes for mopeds, scooters and motorcycles as well. This
would bode well for the company as we see broad based recovery for the
domesticautomotivesectorinIndia.
Financialsummary
LGBala
450
Sensex
350
250
150
50
Jun13
Oct13
Feb14
Jun14
Shareholdingpattern
Promoter
Institutions
Others
100%
80%
60%
40%
20%
0%
Research Analyst:
Prayesh Jain

StrongcorrelationofLGBrevenueswithdomestic2Wsales
2WDomesticSalesgrowth
LGBQuarterlyrevenuegrowth
Mar14
Dec13
Sep13
Jun13
Mar13
Dec12
Sep12
Jun12
Mar12
Dec11
Sep11
Jun11
Mar11
Dec10
Sep10
Jun10
40%
35%
30%
25%
20%
15%
10%
5%
0%
5%
10%
Source:SIAM,Company,IndiaInfolineResearch
Large export opportunities
Exports accounted for just 10% of the standalone revenues in FY13. To

strengthen its position in international markets, LGB in FY13 acquired 100%
stake in GFM Corporation, USA through its 70% subsidiary LGB USA INC. For
FY12, GFM had posted a revenue of US$15mn for which LGB paid a sum of
US$5.5mn. GFM will add new products (precision metal stampings) and new
markets (USA) to LGBs existing international portfolio. Also it is yet to enter
major two wheeler markets in the emerging economies which have seen
strongpresenceofIndianOEMslikeBajajAutoandTVSMotors.
Vertically integrated operations
LGBhastheadvantageofverticalintegrationinallitsproductlines.Rightfrom
procurement of the raw material to the finished product, LGB has installed
comprehensive quality check cycles. Furthermore, to maintain control over
quality standards LGB has built facilities for manufacturing of all critical
components inhouse. This includes a steel rolling division to produce cold
rolled steel strips, wires and strips with profiles. LGB's tooling division is
equippedwithsophisticatedCNCwirecutting,sparkerosionandMikronCNC
Boringmachinesforprecisionandcomplicatedmachining.Thisnotonlyhelps
thecompanytocustomizeproductsaspertheOEMrequirementsbutalsoaids
inJustinTimedeliveryleadingtocomfortableworkingcapitalrequirements.
600
LGBisyettoentermajortwowheeler
marketsintheemergingeconomies
whichhaveseenstrongpresenceof
IndianOEMslikeBajajAutoandTVS
Motors
Rightfromprocurementoftheraw
materialtothefinishedproduct,LGB
hasinstalledcomprehensivequality
checkcyclesandhascapacityto
manufactureallmajorcomponents
ImprovedRoEandRoCE
RoE(%)
Rsmn
500
RoE(%)
30
%
400
25
300
20
200
15
100
10
(100)
(200)
0
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E

Robust financials and attractive valuations
LGB over the years has seen sustained growth in revenues, at times better
thantwowheelerindustrygrowth.InFY13,whenrevenuegrowthwassoftat
4.8%yoymarginsshrunk210bps.However,withstrongrecoveryinrevenues,
margins were back to FY12 levels in FY14. We expect therevenue growth to
remain strong given our belief of a strong recovery in two wheeler sales
growth led by scooters over the next 35 years which will also translate into
robustmarginexpansionforLGB.Thecompanyonbackofstrongcashflows
hasbuiltahealthybalancesheetwithD/Eof0.4xattheendofFY14.Inspite
ofrobustfundamentalsandoutstandinggrowthprospectsthestocktradesat
a substantial discount to the average valuation parameters of domestic auto
ancillary players. We believe this discount will narrow down over the next
coupleofyearsleadingtoneardoublingofthestockprice.
Inspiteofrobustfundamentalsand
outstandinggrowthprospectsthe
stocktradesatasubstantialdiscount
totheaveragevaluationparametersof
domesticautoancillaryplayers
SustainedimprovementinD/E
Steadydividendpayouttrackrecord
0.7
30
x
0.6
25
0.5
20
0.4
15
0.3
10
0.2
0.1
0.0
0
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E
FY10
FY11
FY12
FY13
FY14
Company Background
LGB was incorporated as a private limited company in March 1956 and was
convertedintoapubliclimitedcompanyinJanuary1975.Thecompanyispart
of the Elgi Group and was promoted by Late L G Varadarajulu and B
Vijaykumar.Thecompanyisarollerchainmanufacturer.Itmanufacturesboth
automotive and industrial chains like motorcycle and moped chains, heavy
duty chains, timing chains and automotive kits. The products are marketed
under the brand name 'Rolon'. The company also does metal forming, which
includesfineblanking,rolledstrips&profiles,hot&coldforgingandprecision
machineparts.Thecompanyhas17chainmanufacturingplants,allISO9001
certified by Underwriters Laboratories Inc., USA. Three of the manufacturing
facilitiesalongwiththecentralfunctionshavebeenregisteredtoISO/TS16949
byUL,USA.

Financials
Incomestatement
Y/e31Mar(Rsm)
Revenue
Operatingprofit
Depreciation
Interestexpense
Otherincome
Profitbeforetax
Taxes
Minoritiesandother
Netprofit
Keyratios
FY14
11,086
1,261
(328)
(179)
46
800
(149)
(24)
627
FY15E
12,784
1,510
(383)
(179)
50
998
(186)
(24)
788
FY16E
14,889
1,795
(432)
(179)
55
1,240
(273)
(24)
943
FY17E
17,569
2,188
(481)
(179)
60
1,589
(397)
(24)
1,167
FY14
78
3,011
3,089
97
1,295
170
4,651
FY15E
78
3,676
3,755
121
1,295
170
5,341
FY16E
78
4,472
4,551
145
1,295
170
6,161
FY17E
78
5,476
5,554
169
1,295
170
7,189
2,638
182
1,766
2,075
1,461
480
(1,464)
2,955
182
2,046
2,393
1,685
550
(1,688)
3,224
182
2,396
2,787
1,962
632
(1,966)
3,443
182
2,847
3,289
2,315
725
(2,320)
(786)
(894)
(1,019)
(1,162)
65
4,651
157
5,341
359
6,161
716
7,189
Y/e31Mar
Growthmatrix(%)
Revenuegrowth
Opprofitgrowth
EBITgrowth
Netprofitgrowth
OPM
EBITmargin
Netprofitmargin
RoCE
RoNW
RoA
Pershareratios
EPS
Dividendpershare
CashEPS
Bookvaluepershare
Valuationratios
P/E
P/CEPS
P/B
EV/EBIDTA
Payout(%)
Dividendpayout
Taxpayout
Liquidityratios
Debtordays
Inventorydays
Creditordays
Leverageratios
Interestcoverage
Netdebt/equity
Netdebt/op.profit
Balancesheet
Y/e31Mar(Rsm)
Equitycapital
Reserves
Networth
Minorityinterest
Debt
Totalliabilities
Fixedassets
Investments
Networkingcapital
Inventories
Sundrydebtors
Othercurrentassets
Sundrycreditors
Othercurrent
liabilities
Cash
Totalassets
Cashflowstatement
Y/e31Mar(Rsm)
Profitbeforetax
Depreciation
Taxpaid
Workingcapital
Operatingcashflow
Capitalexpenditure
Freecashflow
Equityraised
Investments
Dividendspaid
Otheritems
Netincash
FY14
800
328
(149)
(122)
857
(653)
204
(24)
5
(133)
(98)
9
(38)
FY15E
998
383
(186)
(280)
915
(700)
215
(123)
93
FY16E
1,240
432
(273)
(350)
1,048
(700)
348
(147)
201
FY17E
1,589
481
(397)
(451)
1,221
(700)
521
(163)
357
FY14
FY15E
FY16E
FY17E
15.9
41.2
54.8
91.6
15.3
19.7
20.2
25.7
16.5
18.9
20.5
19.6
18.0
21.9
24.6
23.8
11.4
8.8
5.7
22.0
22.1
9.6
11.8
9.2
6.2
23.6
23.0
10.6
79.9
12.0
121.7
393.6
120.1
18.0
175.1
579.8
8.8
5.9
1.8
5.3
15.6
18.6
148.7
20.0
209.9
707.7
7.4
5.0
1.5
4.4
15.5
18.6
12.5
10.1
6.6
26.5
23.1
11.8
12.1
9.5
6.3
24.7
22.7
11.0
100.4
15.0
149.2
478.5
11.0
7.3
2.2
6.5
5.9
4.2
1.2
3.4
15.6
22.0
14.0
25.0
48
77
54
5.5
0.4
1.0
48
77
55
6.6
0.3
0.8
48
78
55
7.9
0.2
0.5
48
78
55
9.9
0.1
0.3
FY14
0.78
0.82
0.09
1.69
2.31
22.1
FY15E
0.79
0.85
0.09
1.72
2.17
23.0
FY16E
0.76
0.87
0.10
1.74
2.06
22.7
FY17E
0.73
0.90
0.10
1.77
1.96
23.1
DuPontAnalysis
Y/e31Mar
Taxburden(x)
Interestburden(x)
EBITmargin(x)
Assetturnover(x)
RoE(%)

Magma
Fincorp Ltd.
Well positioned for better times
MagmaFincorphasdoneacommendablejobofdiversifyingandderisking
itsAUMthroughportfoliorebalancingandnewproductadditionsoverthe
past couple of years. With signs of revival in vehicle sales and
renouncement of self imposed caution in CV and CE segments, the
disbursement growth is set to improve from the current year. A strong
recovery in asset growth should follow from FY16. NIM is set to expand
further on the back of persistent improvement in spreads, higher
recognition of securitization income and NPLs upgradation/recovery.
Operatingleveragebenefitswouldmanifestinsharpdeclineincost/income
ratio. The improvement in collection efficiency in recent months indicate
thatNPLstressisstabilizing;socreditcostislikelytocomeoffsignificantly
ascollectionsimprovefurther.Drivenbycyclicalandstructurallevers,RoA
will improve from current suboptimal 1.2% to healthy 2.2% by FY17.
Consequently,weexpectasharpvaluationrecoveryinthemediumterm.
Rating:
Target(2Years):
CMP:
Upside:
BUY
Rs198
Rs98
102.7%
Sector:
Financials
Sector view:
Positive
Sensex:
25,100
52Weekh/l(Rs):
117/62
Marketcap(Rscr):
1,857
6mAvgvol(000Nos):
Bloombergcode:
MGMAIN
BSEcode:
524000
NSEcode:
MAGMA
2
FV(Rs):
Impressive execution on asset mix diversification
Companyratinggrid
MagmaFincorpisamidsizeNBFCswithanAUMofRs17.9bnattheendof
FY14. Over the past two years, company has diversified its loan assets
through 1) portfolio rebalancing deemphasizing CV and CE financing and
focusing on tractors and used assets financing 2) new product additions
mortgagesandgoldloans.Currently,noproductconstitutesmorethan30%
of companys AUM and regionally, no state contributes more than 10%.
Magmafocusesessentiallyontheruralandsemiruralmarketsandhas~70%
ofits274branchesintheseareas.KeyproductmixtrendsoverFY1214have
been1)shareofCVandCEportfoliohassubstantiallydeclinedfrom53%to
27% 2) contribution of tractor financing and used assets financing (~60% is
usedCVs)hasincreasedfrom16%to27%3)mortgagescomprise9%ofthe
book post acquisition of GEs portfolio towards the end of FY13. While
steep slowdown in industrial activity and rural consumption has moderated
MagmasAUMgrowth(~1617%organicCAGRoverFY1214),managements
wellexecuted effort towards diversifying and derisking AUM is highly
laudable.
Financialsummary
Y/e31Mar(Rsm)
Yoygrowth(%)
Netprofit
yoygrowth(%)
EPS(Rs)
Adj.BVPS(Rs)
P/E(x)
P/Adj.BV(x)
ROE(%)
ROA(%)
CAR(%)
FY14
9,403
21.3
3,818
1,518
9.8
8.0
61.8
12.2
1.6
9.3
1.2
16.6
FY15E
11,659
24.0
5,124
2,403
58.3
12.6
71.4
7.7
1.4
13.8
1.7
16.9
FY16E
14,522
24.6
6,843
3,466
44.2
14.4
95.7
6.2
0.9
15.1
2.1
19.7
FY17E
18,307
26.1
9,169
4,664
34.6
19.4
110.0
4.6
0.8
15.8
2.2
17.8
175
LowHigh
1
EarningsGrowth
RoAProgression
B/SStrength
Valuationappeal
Risk
Sharepricetrend
Magma
Sensex
130
100
70
40
Jun13 Sep13 Dec13 Mar14 Jun14
Shareholdingpattern
Others
100
80
60
40
20
Institutions
Promoters
Research Analyst:
RajivMehta
Magma Fincorp Ltd.
AUM to grow by 20% pa over FY14-17
Though disbursement growth in tractor and SME financing is expected to

sharply moderate, overall disbursement growth for the year would still be
muchhigherthanFY14at1314%onaccountofimprovingtrendsinCV,CEand
Car/UV financing and sustained robust growth in mortgages. After purposely
runningdown the CV and CE portfolio since FY12, company now intends to
retain their current contribution in AUM. While the company believes that
poor monsoons would have little impact on tractor sales, the deceleration in
tractorfinancingbookwilllargelybeonaccountofhigherbase(portfoliogrew
by47%inFY14).GiventheunsecurednatureofSMEbook,Magmaintendsto
grow it slowly from here on. AUM growth in FY15 is likely to be only slightly
better than FY14 at 12% impacted by subdued disbursement growth in
preceding1215months.However,itshouldacceleratequitesignificantlyfrom
FY16onthebackofareasonablystrongeconomicrecovery.OverFY1417,we
estimate Magma to record a disbursement and asset growth of 24% pa and
20% pa respectively. Given modest Tier1 capital at 11.5% and RoE of 10%
currently,companywillneedtoraiseequitycapitalinearlyFY16.
DiversificationandderiskingofAUM
Cars/UVs
UsedAssets
100%
80%
CV
SME
CE
Mortgages
0.0
5.0
7.0
9.0
0.0
8.0
5.0
10.0
18.0
12.0
60%
Disbursementgrowthfortheyear
wouldstillbemuchhigherthanFY14at
1314%
AUMgrowthinFY15islikelytobeonly
slightlybetterthanFY14at12%
OverFY1417,estimatedisbursement
andassetgrowthof24%paand20%
parespectively
AssetgrowthtoacceleratefromFY16
Tractors
Others
AUM(LHS)
350
DisbGrowth
(Rsbn)
(%)
40.0
1.0
9.0
6.0
11.0
280
32.0
16.0
210
24.0
140
16.0
70
8.0
14.0
12.0
40%
35.0
24.0
17.0
26.0
27.0
28.0
FY12
FY13
FY14
20%
0%
0.0
0
FY12
FY13
FY14
FY15E
FY16E
FY17E
NIM and cost/income to improve substantially
Notwithstandingtheincreaseinborrowingcost,Magmasnetinterestspread
(NIS) improved significantly over the past two years aided by shift in product
mixandcustomermix.Asmentionedbefore,theshareofCVandCEfinancing
hasfallendramaticallywhereaveragelendingyieldsare1515.5%and1314%
respectively,whereasthecontributionoftractorandusedassetsfinancinghas
increased where average lending yields are 1920% and 1819% respectively.
Company has also been successful in optimizing the customer mix in CV
financing business by incrementally focusing on SRTOs and FTBs where yields
are ~2% higher as compared to large fleet operators. Magma expects NIS to
improvefurtherfrom5.8%inFY14to6.3%inFY15and6.5%inFY16aidedby
1)continuedproductmixshift2)runningdownoflowyieldingloansdisbursed
34yearsbackand3)softeningofborrowingcostfromendFY15.Expansionin
spreads, higher recognition of income on securitized portfolio (recognized on
cash basis, currently suppressed by weak collections) and NPLs
upgradation/recovery would drive a more dramatic improvement in NIMs
(~100bpsoverFY1416).NIIwouldwitnessastrong25%CAGRoverFY1417.
NISimprovedsignificantlyoverthe
pasttwoyearsaidedbyshiftinproduct
mixandcustomermix
MagmaexpectsNIStoimprovefurther
from5.8%inFY14to6.3%inFY15and
6.5%inFY16
Magma Fincorp Ltd.
Onthecostside,opexgrowthstoodat20%inFY14despitenoadditiontothe
branchnetworkasitlargelydrivenbyintensificationofrecoveryeffortsamid
challengingcollectionsenvironment.Whilefocusonrecoverieswillcontinuein
the medium term, robust income growth and improvement in branch
productivity should drive a significant decline in the cost/income ratio. We
estimatetheratiotofallto50%byFY17from59%inFY14.
Asset quality has seen the worst; credit cost to moderate
During FY14, Magmas asset quality deteriorated substantially with GNPLs

reaching3.6%.Thecollectionefficiencydeclinedfrom98%+inFY13to95.7%in
FY14.However,aftertouchingalow94%duringQ2CY13,ithasimprovedto
9798%inrecentmonthsleadingtostabilizationofgrossNPLlevels.Company
follows an aggressive NPL recognition policy of 120 dpd as against RBI
regulated 180dpd which is followed by peers. This not only leads to higher
reportedNPLs(grossNPLsat2.7%asperRBInorms)butalsodepressesincome
duetoassociatedinterestderecognition.MagmaalsowroteoffRs1bnworth
ofNPLsduringinthepreviousyearthusfurtherpushingcreditcostto108bps
as against 68bps in FY13. As economic activity recovers from H2 FY15,
collection efficiency should gradually improve towards 100% thus driving a
cycleofupgradation/recoveriesandlowfreshaccruals.GrossNPLlevels,asa
result, are expected to decline to 2.8% by FY17. This along with lower write
offsshouldleadtoamaterialdeclineincreditcost.
NIMandcostmetrictoimprovesharply
NIM(LHS)
7.0
(%)
60.1
6.0
5.0
5.9
5.3
56.1
4.9
65.0
50.0
3.0
45.0
40.0
2.0
FY16E
(%)
3.0
0.9
2.0
0.6
1.0
0.3
55.0
49.9
FY15E
1.2
(%)
60.0
52.9
FY14
CreditCost
4.0
6.3
4.0
FY13
GrossNPL(LHS)
(%)
59.4
Cost/incomeratiotofallto50%by
FY17from59%inFY14
Collectionefficiencyhasimprovedin
recentmonthsleadingtostabilization
ofgrossNPLlevels
GrossNPLlevelsareexpectedto
declineto2.8%byFY17.
Expectamaterialdeclineincreditcost.
NPLsandcreditcosthavepeakedout
Cost/Income
6.3
FY17E
0.0
0.0
FY13
FY14
FY15E
FY16E
FY17E
Profitability to recover sharply thus pushing valuation higher
A lethal combination of improving asset growth, significant NIM expansion,

decline in cost/income ratio and moderating credit cost would drive a
handsome 45% CAGR in Magmas earnings growth over FY1417. Thus RoA
wouldimprovefromthecurrentsuboptimallevelof1.2%tohealthy2.2%by
FY17.RoEisestimatedtoimprovefromsub10%to16%.Soweexpectasharp
recovery in valuation from 0.8x to 1.7x FY17 P/ABV over the next two years.
Consequently,webelievethatMagmacandelivermorethan100%returnover
thecoming24months.
Earningsgrowthtowitness45%CAGR
overFY1417
RoAtoimprovehealthy2.2%byFY17
Magma Fincorp Ltd.
Financials
Keyratios
Incomestatement
Y/e31Mar(Rsmn)
IncomefromOperatns
Interestexpense
Netinterestincome
Noninterestincome
Totalopincome
Totalopexpenses
Opprofit(preprov)
Provisions
Profitbeforetax
Taxes
MinorityInterest
Netprofit
FY14
20,813
(11,771)
9,042
361
9,403
(5,586)
3,818
(1,839)
1,979
(381)
(78)
1,521
FY15E
23,878
(12,653)
11,226
433
11,659
(6,535)
5,124
(1,658)
3,465
(936)
(126)
2,403
FY16E
28,450
(14,491)
13,959
563
14,522
(7,679)
6,843
(1,556)
5,287
(1,639)
(182)
3,466
FY17E
35,229
(17,711)
17,518
789
18,307
(9,138)
9,169
(1,949)
7,219
(2,310)
(245)
4,664
FY15E
380
17,936
18,316
398
36,374
313
1,725
38,412
59,130
2,975
27,776
1,447
91,329
148,456
2,079
2,920
83,752
1,946
90,697
1,209
171
9,512
45,508
1,359
57,759
148,456
FY16E
480
26,987
27,467
498
44,376
344
1,898
46,618
72,139
3,273
33,887
1,663
110,963
185,546
2,287
2,920
104,690
2,141
112,038
1,813
188
12,923
56,886
1,698
73,508
185,546
FY17E
480
31,061
31,541
623
57,689
379
2,088
60,155
93,781
3,600
44,054
1,913
143,347
235,666
2,515
2,920
136,097
2,355
143,888
1,250
207
14,163
73,951
2,208
91,778
235,666
Y/e31Mar
Growthmatrix(%)
Netinterestincome
Totalopincome
Opprofit(preprov)
Netprofit
Advances
Borrowings
Totalassets
NIM
Nonintinc/Totalinc
ReturnonAvgEquity
ReturnonAvgAssets
Pershareratios(Rs)
EPS
Adj.BVPS
DPS
Valuationratios(x)
P/E
P/Adj.BVPS
Otherkeyratios(%)
Loans/Borrowings
Cost/Income
CAR
TierIcapital
GrossNPLs/Loans
CreditCost
NetNPLs/Netloans
Taxrate
Dividendyield
Balancesheet
Y/e31Mar(Rsmn)
EquityCapital
Reserves
Shareholder'sfunds
Minorityinterest
Longtermborrow
DeferredTaxliab
Longtermprovi
Totalnoncurrliab
ShortTermBorrow
Tradepayables
Othercurrentliab
Shorttermprov
Totalcurrentliab
Equity+Liab
FixedAssets
Noncurrentinv
Longtermloans/adv
Othernoncurrasset
Totalnoncurrasset
Currentinvestments
Tradereceivables
Cashandcashequiv
Shorttermloans
Othercurrentassets
TotalCurrentassets
TotalAssets
FY14
380
16,156
16,536
332
32,189
285
1,568
34,042
52,328
2,705
24,581
1,258
80,871
131,782
1,980
2,920
74,117
1,769
80,786
1,099
155
8,266
40,273
1,202
50,995
131,782
FY14 FY15E
31.2
24.1
21.3
24.0
23.5
34.2
10.0
58.0
3.4
13.1
(0.9)
13.0
0.5
12.7
5.3
5.9
3.8
3.7
9.3
13.8
1.2
1.7
8.0
12.6
61.8
71.4
1.0
1.4
12.2
7.7
1.6
1.4
104.1 104.2
59.4
56.1
16.6
16.9
11.5
11.7
3.6
3.4
1.1
0.9
2.9
2.7
19.2
27.0
1.1
1.5
FY16E
24.3
24.6
33.6
44.2
24.8
22.0
25.0
FY17E
25.5
26.1
34.0
34.6
30.6
30.0
27.0
6.3
3.9
15.1
2.1
6.3
4.3
15.8
2.2
14.4
95.7
1.6
19.4
110.0
2.1
6.2
0.9
4.6
0.8
106.6 107.1
52.9
49.9
19.7
17.8
14.7
13.0
3.0
2.7
0.7
0.7
2.3
2.0
31.0
32.0
1.7
2.3
PTC India Fin Services Ltd.
Set for a rapid growth

PTC India Financial Services Ltd (PFS) is a niche play on revival in power
capex.Underthenewreformorientedgovernment,thepolicyenvironment
forpowersectorisexpectedtoimprovedistinctly.Sinceinception,PFShas
witnessed rapid expansion in its loan book. With huge sanctions in place
andlikelyimprovementinprojectexecutionaswellaspipeline,companyis
on course to triple its loan book by FY17. As funding cost is expected to
trend down, NIM will be comfortably sustained at higher levelsof 66.5%.
Thoughloanbookisunseasoned,itislikelytobehavewellinanimproving
environment.With PFS estimatedtodeliveraverageRoAandRoEof3.3%
and19%respectivelyoverFY1417,currentvaluationof0.9xFY17P/ABVis
extremelyattractive.
Rating:
Target(2years):
CMP:
Upside:
BUY
Rs65
Rs32
103.1%
Sector:
Financials
Sector view:
Positive
Sensex:
25,100
52Weekh/l(Rs):
36/9.5
Marketcap(Rscr):
1,773
6mAvgvol(000Nos):
4,978
Bloombergcode:
PTCIF
BSEcode:
533344
Loan book in a sweet spot to grow 3x by FY17
NSEcode:
Notwithstanding the investment cycle freeze in Indian power sector, PFS

grewitsloanbookbynearly4xoverthepasttwoyearsalbeitonaverysmall
base.Apartfromastrongpositioninginrenewableenergysegment,focuson
funding energy value chain activities enabled PFS to grow strongly when
thermal power activity had slowed down. Renewable energy generation
projects (80%+ is wind energy) and energy value chain funding currently
comprise35%and21%ofloanassetsrespectively.
FV(Rs):
PFS
10
EarningsGrowth
RoAProgression
B/SStrength
Valuationappeal
Risk
PFS has robust visibility to sustain rapid growth in the coming years;
outstanding sanctions stand at Rs103bn (2x of loan assets). Company also
periodicallyreviewsviabilityofsanctions;forinstance,itcancelledsanctions
worth Rs2025bn during FY14 due to lack of progress in developmental
activity.Sothemanagementisprettyconfidentaboutdrawdownsfromthe
currentoutstandingsanctions.Companyisalsohopefulthatsanctionpipeline
would start building quickly in thermal and hydro segment once the new
governmentaddressesissuesrelatedtolandacquisition,environment/forest
clearances and fuel linkages. Investment activity in the renewable energy
segment continues to move smoothly due to far lesser regulatory hiccups.
PFSisalsolookingatfundingothertypesofinfraprojects.
Companyratinggrid
LowHigh
1
PFS
Sensex
300
200
100
0
Financialsummary
Sharepricetrend
Y/e31Mar(Rsm)
Yoygrowth(%)
ExceptionalItem
Netprofit
yoygrowth(%)
EPS(Rs)
Adj.BVPS(Rs)
P/E(x)
P/Adj.BV(x)
ROE(%)
ROA(%)
CAR(%)
FY14
2,430
35.1
2,192
822
2,077
99.4
3.7
24.0
8.5
1.3
16.1
5.0
25.2
FY15E
3,973
63.5
3,652
0
2,210
6.4
3.9
26.5
8.0
1.2
15.4
3.3
19.5
FY16E
5,722
44.0
5,241
0
3,221
45.8
5.7
30.5
5.5
1.0
19.5
3.4
17.2
FY17E
7,988
39.6
7,315
0
4,543
41.0
8.1
36.2
3.9
0.9
23.2
3.4
16.1
Shareholdingpattern
Others
100
80
60
40
20
Institutions
Promoters
Research Analyst:
RajivMehta
PTC India Finance Ltd.
PFSwitnessedanaccelerationindisbursementgrowthduringFY14(Rs30.7bn,
up 130% yoy) as many of the sanctioned projects achieved developmental
milestones. Given huge sanctions in place, company is fairly confident of
disbursingahigheramountinthecurrentyear.Withsanctionpipelinelikelyto
increaseasoverallpower/infrainvestmentsimprove,thedisbursementgrowth
isestimatedtoremainstronginthelongertermalso.Soinalllikelihood,PFSs
loanbookwouldcontinuetogrowatrapidpace.Weestimateitsloanassetsto
increaseto~Rs150bnbyFY17(nearly3xthecurrentsize)representingarobust
CAGRof44%.
Outstandingsanctionsat2xloanassets
120
Others
(Rsbn)
100
Hydro
105
Renewable
101
Givenhugesanctionsinplace,
companyisconfidentofdisbursinga
higheramountinthecurrentyear
Estimateloanassetstoincreaseto
~Rs150bnbyFY17,nearly3xthe
currentsize
Loanbooktogrow3xinthreeyears
Thermal
105
150
149.0
(Rsbn)
103
120
107.1
90
54
54
53
49
43
90
75.5
60
30
31
31
25
27
26
13
9
13
13
13
10
10
12
17
Q4FY13
Q1FY14
Q2FY14
Q3FY14
Q4FY14
12
60
30
49.7
23.0
12.7
0
FY12
FY13
FY14
FY15E
FY16E
FY17E
NIM to remain comfortably above 6%
PFS has been earning handsome spreads and NIMs of 4.5% and 6.8%
respectively. Lending yield is generally at 1314% across various types of
generation projects and for energy value chain activities it is 15%+. With
averagedurationofloansatabout10years,PFStriestorunafairlymatched
liability profile. Of total borrowings, 50% is long term (810 years) loans from
banks,1112%isECBsandtherestislargelyshorttermloansfrombanks.Bank
borrowings are near Base Rate and are floating in nature. The projects loans
disbursedbycompanyarealsoatfloatingratesothatanyincreaseinfunding
costispassedonwithoutmuchlag.
Inourview,companysNIMwouldcomfortablyremainabove6%overFY1417
aidedby1)graduallydeclineinthecostofbankborrowingsasBaseRatesstart
moving lower and 2) shift in borrowing mix towards relatively cheaper non
banksourcesvizECBs,longtermloansfromdomesticandglobalDFIsandCPs.
Further, PFS has applied for being classified as a Public Financial Institution
whichwillgiveaccesstolongterminsuranceandpensionmoneyat89%.
Perceptible stress on asset quality to moderate
GiventhatPFShasarecentlygrown(unseasoned)loanbook,theassetquality
so far has remained spotless with negligible Gross NPLs. Execution on most
loans has been running smoothly and almost all loans are serving
interest/repayments on time. Of the generation loans (80% of book), 50% of
projects are currently operational and the rest 50% is scheduled to get
commissionedbyFY16.
EarnshandsomespreadsandNIMsof
4.5%and6.8%respectively
NIMtoremainabove6%overFY1417
aidedbydeclineincostofbank
borrowingsandshiftinmixtowards
cheapernonbanksources
Ofgenerationloans,50%ofprojects
arecurrentlyoperationalandtherest
willgetcommissionedbyFY16
As a measure of prudence, PFS does not act as a sole lender even in smaller
generationprojects.Further,landacquisitionandvariousotherclearancesare
generallyapreconditionbeforesanctioningofaloan.PFSscurrentloanbook
comprises of 7072 projects implying an individual project exposure of
Rs700mnonanaverage,whichisabout5%ofnetworth.Thisisariskwhichis
inherent in this business and therefore detailed loan appraisal and periodic
evaluationareofparamountimportance.
As per the management, a gas based power project in the Andhra region is
under stress where company has an exposure of ~Rs1bn. It is currently
classified as a standard asset by PFS and other lending banks as it has been
servingitscommitmentsalbeitwithalag.Companyhasstartedtoproactively
provide against this exposure and has cumulative provisions of ~5% as
comparedto0.5%provisioningheldforotherstandardassets.Apartfromthis,
we do not envisage any substantial delinquencies to come through as the
policyenvironmentisexpectedtosignificantlyimproveforthepowersector.
Robust earnings growth + superior RoE + compelling valuation
Onthebackofstronggrowthinloanbook,PFSisestimatedtodeliverrobust
50% CAGR in preexceptional PBT. With no visible threat to profitability, RoA
will remain in an impressive band of 3.23.5% and driven by improvement in
leverage, RoE would increase to 1820%. While PFS is wellcapitalized (Tier1
capitalat24%)forrobustbalancesheetgrowthinFY15,itwouldneedtoraise
capital by early next fiscal to sustain its growth momentum. For a company
poisedtodeliverrapidearningsgrowthandsuperiorreturnratios,valuationof
0.9xFY17P/ABVisextremelyattractive.WebelievePFSsvaluationwillrerate
towards 2x FY17 P/ABV over the coming two years and therefore expect the
stocktodelivermorethan100%returnovertheaforesaidtime.
PreexceptPBTtowitness50%CAGRoverFY1417
7.5
5.2
4.5
3.7
3.0
2.2
Estimatedtodeliverrobust50%CAGR
inpreexceptionalPBT
Valuationwillreratetowards2xFY17
P/ABVoverthecomingtwoyears
RoA(LHS)
5.0
6.0
Returnratiostoremainrobust
7.3
(Rsbn)
IndividualprojectexposureatRs700mn
onanaverage,~5%ofnetworth
Donotenvisageanysubstantial
delinquenciesasthepolicy
environmentisexpectedto
significantlyimprove
RoE(RHS)
(%)
(%)
25.0
4.0
20.0
3.0
15.0
2.0
10.0
1.0
5.0
1.6
1.5
0.8
0.0
0.0
FY12
FY13
FY14
FY15E
FY16E
FY17E
0.0
FY13
FY14
FY15E
FY16E
FY17E
Financials
Incomestatement
Y/e31Mar(Rsmn)
IncomefromOperatns
Interestexpense
Netinterestincome
Totalopincome
Totalopexpenses
Opprofit(preprov)
Provisions
ExceptionalItems
Profitbeforetax
Taxes
Netprofit
Keyratios
FY14
4,639
(2,210)
2,430
2,430
(238)
2,192
(166)
822
2,849
(772)
2,077
FY15E
8,052
(4,079)
3,972
3,973
(321)
3,652
(354)
0
3,298
(1,088)
2,210
FY16E
11,648
(5,926)
5,722
5,722
(481)
5,241
(433)
0
4,808
(1,586)
3,221
FY17E
16,212
(8,223)
7,988
7,988
(674)
7,315
(535)
0
6,780
(2,237)
4,543
FY16E
5,621
12,148
17,769
54,573
383
444
55,400
32,881
33
4,001
1,197
38,113
111,282
306
4,010
97,149
565
102,030
3
1,022
3,559
4,669
9,252
111,282
FY17E
5,621
15,705
21,325
76,948
536
622
78,106
46,363
33
5,641
1,557
53,594
153,025
337
4,010
135,037
678
140,062
3
1,524
4,947
6,490
12,963
153,025
Y/e31Mar
Growthmatrix(%)
Netinterestincome
Totalopincome
Opprofit(preprov)
Netprofit
Advances
Borrowings
Totalassets
NIM
Nonintinc/Totalinc
ReturnonAvgEquity
ReturnonAvgAssets
Pershareratios(Rs)
EPS
Adj.BVPS
DPS
Valuationratios(x)
P/E
P/Adj.BVPS
Otherkeyratios(%)
Loans/Borrowings
Cost/Income
CAR
TierIcapital
GrossNPLs/Loans
CreditCost
NetNPLs/Netloans
Taxrate
Dividendyield
Balancesheet
Y/e31Mar(Rsmn)
EquityCapital
Reserves
Shareholder'sfunds
Longtermborrow
Deferredtaxliab
Longtermprovi
Totalnoncurrliab
ShortTermBorrow
Tradepayables
Othercurrentliab
Shorttermprov
Totalcurrentliab
Equity+Liab
FixedAssets
Noncurrentinv
Longtermloans/adv
Othernoncurrasset
Totalnoncurrasset
Tradereceivables
Cash&equivalents
Shorttermloan/adv
Othercurrentassets
TotalCurrentassets
TotalAssets
FY14
5,621
7,868
13,489
23,523
249
288
24,060
14,173
33
1,724
658
16,589
54,138
253
4,010
45,308
392
49,963
3
334
1,660
2,177
4,174
54,138
FY15E
5,621
9,585
15,206
37,637
274
317
38,228
22,677
33
2,759
921
26,390
79,823
278
4,010
68,415
471
73,174
3
853
2,506
3,288
6,650
79,824
FY14 FY15E
35.2
63.5
35.1
63.5
36.6
66.6
99.4
6.4
116.6
51.7
144.9
60.0
87.7
47.4
6.7
6.3
0.0
0.0
16.1
15.4
5.0
3.3
3.7
3.9
24.0
26.5
1.0
0.8
8.5
8.0
1.3
1.2
1.3
1.2
9.8
8.1
25.2
19.5
24.8
18.5
0.1
0.7
0.5
0.6
0.0
0.4
27.1
33.0
1.0
1.3
FY16E
44.0
44.0
43.5
45.8
41.9
45.1
39.4
6.3
0.0
19.5
3.4
FY17E
39.6
39.6
39.6
41.0
39.1
42.1
37.5
6.2
0.0
23.2
3.4
5.7
30.5
1.0
8.1
36.2
1.5
5.5
1.0
3.9
0.9
1.2
8.4
17.2
15.2
1.0
0.5
0.6
33.0
1.6
1.2
8.4
16.1
13.1
1.0
0.4
0.6
33.0
2.0

SREI
Infra Finance Ltd.
Poised for strong comeback

SREI Infra is a proxy play on the expected revival in infra and industrial
capex.Withbusinessinterestsinprojectfinancing,equipmentfinancingand
banking, project advisory, etc, companys growth and profitability is
intrinsicallylinkedtothemacrocycle.Asweexpectcyclicalrecoveryinthe
economy to receive fillip from improvement in policy environment, Srei
Infraseemspoisedforastrongcomeback.Onconsolidatedbasis,weexpect
company to post robust 51% CAGR in earnings over FY1417 on a modest
AUM CAGR of 15%. Sharp recovery in profitability would be driven by
cyclical factors (spread expansion and moderation in credit cost) and
structural levers (liquidation of investments and product mix shift).
RoA/RoE is estimated to recover to 1.6%/11% by FY17. Valuation from
bargain levels (FY17 P/ABV at 0.6x and P/E at 5x) is expected to recover
aheadoftheactualprofitability.
Infra financing - growth troughing out, spreads to improve
Over the past two years, Sreis infra financing book has witnessed a steep
moderation in growth (13% CAGR over FY1214) on the back of muted
disbursements.Duetopolicyissuesandsteepmacroslowdown,companyhas
been cautious on releasing disbursements on sanctioned loans (almost
reappraising sanctions on draw downs). Srei has a reasonably sized book of
Rs114bn,welldiversifiedacrosspower(33%),transportation(30%),social&
commercial(20%),communications(8%)andothers(9%).Companyspower
exposure is largely to generation projects of which 60% is to operational
projects.Withinexposuretounderconstructionprojects,only~20%(ie~2.5%
of overall book) is to projects that are dependent on external coal/gas
linkages.Thoughcompanyscautiousgrowthapproachisunliketoreversein
thenearterm,itisexpectingacyclicalrevivalindisbursementgrowthfrom
fiscalend. Loan growth should follow the trend in disbursements and
thereforeacceleratepostFY15.
Financialsummary
Y/e31Mar(Rsm)
Yoygrowth(%)
ExceptionalItem
Netprofit
yoygrowth(%)
EPS(Rs)
Adj.BVPS(Rs)
P/E(x)
P/Adj.BV(x)
ROE(%)
ROA(%)
CAR(%)
FY14
8,130
(9.3)
4,320
0
1,389
(47.3)
2.8
57.7
17.4
0.8
4.0
0.6
22.6
FY15E
9,028
11.0
4,932
2,000
3,730
168.6
7.4
64.4
6.5
0.7
4.7
0.7
25.2
FY16E
11,175
23.8
6,424
0
3,257
(12.7)
6.5
69.2
7.4
0.7
8.3
1.3
23.5
FY17E
14,584
30.5
8,787
0
4,738
45.4
9.4
76.5
5.1
0.6
11.2
1.6
20.3
Rating:
Target(2Years):
CMP:
Upside:
BUY
Rs97
Rs48
102.1%
Sector:
Financials
Sector view:
Positive
Sensex:
25,100
52Weekh/l(Rs):
52.9/17.5
Marketcap(Rscr):
2,465
6mAvgvol(000Nos):
1,372
Bloombergcode:
SREI
BSEcode:
523756
NSEcode:
SREINFRA
10
FV(Rs):
Companyratinggrid
LowHigh
1
EarningsGrowth
RoAProgression
B/SStrength
Valuationappeal
Risk
Sharepricetrend
SREI
Sensex
300
200
100
0
Shareholdingpattern
Others
100
80
60
40
20
Institutions
Promoters
Research Analyst:
RajivMehta

With average tenure of loans at about four years and more than 50%
borrowingsbeingworkingcapitalloansfrombanks,thespreadsinthebusiness
are exposed to interest rate risk. Consequently, spreads contracted over the
past two years as funding cost escalated due to tight liquidity conditions and
rate upcycle. Therefore, spreads should start to improve from here on as
liquidity situation has already eased and rates are likely to come down.
Company intends to reduce the share of bank working capital loans in total
borrowings to 4045% over the next three years and replace it with longer
termcheaperfunds.
AdditionallyplannedliquidationofequityinvestmentsinVIOMNetworks(14%
stake purchased for Rs16bn) and BOT assets (Rs3.5bn across 8 projects) will
unlock substantial capital which will be deployed for lending therefore
improving loan/borrowings ratio and margins. The management intends to
bring down strategic investments to 25% of networth by FY17 from 65%
currently. As the company has already initiated the process of stake sale in
VIOM,wehavefactoreditinourprojections.Conservatively,wehavevalued
VIOM at discount to Bharti Infratel valuation (10x FY14 EBITDA) despite its
superior tenancy ratio/profitability (2.2x/54% EBITDA) and growth prospects
(robust order book). Consequently, we estimate SREI to realize ~Rs1617bn
fromthestakesale.ImprovingvaluationofBOTprojectsshouldalsohelpthe
companyinexitingfromitsfouroperationalprojectsprofitably.
Equipment financing business - to revert to mid/peak cycle RoAs
Srei BNP Paribas (a 50:50 JV) is the largest construction & mining equipment
financier in India with over ~30 % market share. Company has an AUM of
Rs183bnwhichiswelldistributedregionally.Onaccountofsharpslowdownin
the mainstay construction/mining equipment financing segment, Srei BNPs
AUMhasonlymarginallygrownoverthepasttwoyears(disbursementgrowth
has been in negative zone). In recent years, company has entered into new
segments such as financing of used equipments, IT products, medical
equipments,etctooffsetslowdowninnewequipmentfinancing.SreiBNPhas
been particularly focusing on used equipment financing due to better risk
returnascomparedtonewequipmentfinancing.ItsshareinAUMisat23%
andislikelytoreach1012%byFY17.LeveragingonBNPsrelationshipswith
global vendors, company is wellpoised to address the huge market
opportunityinhealthcarespace.
Though,weexpectgrowthinnewequipmentfinancingtorecoveraheadofthe
macro recovery, Srei BNPs product mix will continue to shift towards better
yielding used equipment financing (~19% v/s ~14% for new) and other
segments.Thisalongwithgradualdeclineinfundingcost(50%+borrowingsis
workingcapitalloansfrombanks)shouldleadtosteadyimprovementinNIM.
Intermsofassetquality,thebusinesshaslikelyseentheworstwithgrossNPLs
increasingsubstantiallyduringFY14(from2.8%to4.8%).CompanyexpectsNPL
levels to start coming off from H2 FY15 on the back of improvement in
economicactivityasmanyaccountswillgetupgraded.Reversalinprovisioning
onsuchaccountsalongwithmoderationinnewNPLaccrualrateshoulddrivea
material decline in credit cost over the next two years. Aided by margin
expansion and lower NPL provisioning, we believe that Srei BNPs RoA will
improvefromcurrent1.5%to2.53%byFY17.
SREI Infra Finance Ltd
Spreadstoimproveasliquidity
situationhasalreadyeasedandrates
arelikelytodecline
Plannedliquidationofequity
investmentsinVIOMNetworksand
BOTassetstofurtheraidmargin
EstimateSREItorealize~Rs1617bn
fromVIOMstakesale
SreiBNPParibasisthelargest
construction&miningequipment
financierinIndiawithover~30%
marketshare
Focusingonusedequipmentfinancing
duetobetterriskreturnascompared
tonewequipmentfinancing
Productmixshiftandgradualdecline
infundingcostshouldleadtosteady
improvementinNIM
CompanyexpectsNPLlevelstostart
comingofffromH2FY15ontheback
ofimprovementineconomicactivity
Valuation recovery to lead actual profitability recovery
On consolidated basis, we expect Srei Infra to post robust 51% CAGR in

earnings over FY1417 on a modest AUM CAGR of 15%. A sharp recovery in
profitability driven by cyclical factors (spread expansion and moderation in
credit cost) and structural levers (liquidation of investments and product mix
shift) will be the main story. We estimate consolidated RoE to improve from
currentlydepressed45%to1112%byFY17onthebackofsharpRoArecovery
from 0.6% to 1.6%. During such phases of turnaround, typically, valuation
recovers ahead of the actual profitability. Based on our FY17 estimates, Srei
Infrasvaluationisatabargainlevelof0.6xP/ABVand5xP/E.
SreiInfratopostrobust51%CAGRin
earningsoverFY1417onamodest
AUMCAGRof15%
ConsolRoEtoimproveto1112%by
FY17
ConsolAUM*towitness15%CAGRoverFY1417
AUM
SpreadsandNIMtomateriallyimprove
DisbGrowth
Spread
50.0
350
(Rsbn)
4.0
(%)
300
25.0
(%)
3.0
2.7
2.6
2.4
2.2
2.0
1.9
200
150
100
FY12
FY13
FY14
FY15E
FY16E
1.0
(50.0)
0.0
2.3
2.1
1.7
1.6
(25.0)
3.9
3.4
250
0.0
NIM
1.1
FY12
FY17E
FY13
FY14
FY15E
FY16E
FY17E
*ConsolAUM=SreiInfra+50%ofSreiBNPAUM
Assetqualitytoimprove;creditcosttotrendlower Steeprecoveryestimatedinprofitability
CreditCost(LHS)
1.0
GNPLSREIInfra
GNPLSREIBNP
(%)
(%)
2.0
0.8
6.0
1.0
0.4
3.0
0.0
0.0
0.4
0.2
FY15E
FY16E
15.0
9.0
3.0
FY14
(%)
1.2
0.6
FY13
RoE(RHS)
12.0
4.0
FY12
RoA(LHS)
(%)
1.6
0.8
0.0
2.0
5.0
FY17E
0.0
FY12
FY13
FY14
FY15E
FY16E
FY17E
StrategicEquityInvestments
Rsbn
TelecomInfraVIOM
15.98
BOTRoadAssets
3.49
RuralITSahaj
0.25
OtherInvestments
0.15
Total
19.87
VIOMTelecomInfra(FY14E)
TotalNoofTowers
Tenancy
Revenue(Rsbn)
EBIDTAMargin(%)
CashProfit(Rsbn)
41,689
2.2x
46.29
54.0
RoadBOTAssetPortfolio
TotalNoofProjects
NoofProjectsoperational
TotalLaneKms
LaneKmoperational
9.29 LaneKmnonoperational
8
4
3264
1190
2074
Financials
Incomestatement
Y/e31Mar(Rsmn)
IncomefromOperatns
Interestexpense
Netinterestincome
Noninterestincome
Totalopincome
Totalopexpenses
Opprofit(preprov)
Provisions
ForexMTM
ExceptionalItems
Profitbeforetax
Taxes
MinorityInterest
Netprofit
Keyratios
FY14
27,930
(23,120)
4,810
3,320
8,130
(3,810)
4,320
(1,680)
(380)
0
2,260
(881)
10
1,389
FY15E
28,776
(23,103)
5,673
3,356
9,028
(4,096)
4,932
(1,352)
(266)
2,000
5,315
(1,594)
10
3,730
FY16E
31,099
(23,475)
7,624
3,551
11,175
(4,751)
6,424
(1,364)
(213)
0
4,847
(1,599)
10
3,257
Y/e31Mar
Growthmatrix(%)
Netinterestincome
Totalopincome
Opprofit(preprov)
Netprofit
Advances
Borrowings
Totalassets
NIM
Nonintinc/Totalinc
ReturnonAvgEquity
ReturnonAvgAssets
Pershareratios(Rs)
EPS
Adj.BVPS
DPS
Valuationratios(x)
P/E
P/Adj.BVPS
Otherkeyratios(%)
Loans/Borrowings
Cost/Income
CAR
TierIcapital
GrossNPLs/Loans
CreditCost
NetNPLs/Netloans
Taxrate
Dividendyield
FY17E
37,763
(26,938)
10,825
3,759
14,584
(5,796)
8,787
(1,539)
(192)
0
7,056
(2,329)
10
4,738
Balancesheet
Y/e31Mar(Rsmn)
EquityCapital
Reserves
Shareholder'sfunds
Minorityinterest
Longtermborrow
Deferredtaxliab
Otherlongtermliab
Longtermprovi
Totalnoncurrliab
ShortTermBorrow
Tradepayables
Othercurrentliab
Shorttermprov
Totalcurrentliab
Equity+Liab
FixedAssets
Goodwill
Noncurrentinv
Deferredtaxassets
Longtermloans/adv
Othernoncurrasset
Totalnoncurrasset
Currentinvestments
Inventories
Tradereceivables
Cashandcashequiv
Shorttermloans
Othercurrentassets
TotalCurrentassets
TotalAssets
FY14
5,032
29,936
34,969
297
71,037
1,831
800
1,526
75,192
106,086
1,832
24,153
520
132,591
243,048
17,146
3,875
20,763
205
113,165
1,837
156,990
3,434
105
2,125
5,637
11,608
63,150
86,058
243,048
FY15E
5,032
32,939
37,972
341
68,195
2,059
899
1,678
72,832
101,842
2,015
23,187
520
127,564
238,710
18,004
3,875
4,783
246
114,297
2,204
143,408
3,777
105
2,337
6,849
12,769
69,465
95,301
238,709
FY16E
5,032
35,470
40,502
410
77,742
2,368
1,034
1,930
83,075
116,100
2,317
26,433
520
145,371
269,357
18,904
3,875
4,783
295
133,727
2,645
164,228
4,155
105
2,804
6,331
15,322
76,412
105,129
269,357
FY17E
5,032
39,335
44,367
492
94,846
2,724
1,190
2,219
100,978
141,642
2,665
32,248
520
177,076
322,912
19,849
3,875
4,783
354
171,171
3,174
203,205
4,570
105
3,365
7,695
19,919
84,053
119,707
322,912
FY14 FY15E
18.8
17.9
(9.3)
11.0
3.8
14.2
(47.3) 168.6
6.6
1.8
12.0
(3.9)
7.3
(1.8)
2.4
2.7
40.8
37.2
4.0
4.7
0.6
0.7
2.8
7.4
57.7
64.4
0.5
1.3
17.4
6.5
0.8
0.7
107.1
98.3
46.9
45.4
23.6
25.4
15.0
16.1
2.4
2.4
0.8
0.7
2.1
2.0
39.0
30.0
1.0
2.6
FY16E
34.4
23.8
30.2
(12.7)
17.3
14.0
12.8
FY17E
42.0
30.5
36.8
45.4
28.2
22.0
19.9
3.4
31.8
8.3
1.3
3.9
25.8
11.2
1.6
6.5
69.2
1.3
9.4
76.5
1.5
7.4
0.7
5.1
0.6
97.7
42.5
23.5
14.6
2.2
0.6
1.8
33.0
2.6
97.7
39.7
20.1
12.5
1.9
0.6
1.4
33.0
3.1
Recommendationparametersforfundamentalreports:
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India Strategy

Double your stake, quadruple your money

Double your stake, quadruple your money

2) Operating Margins: With fixed costs getting distributed over a larger

Alembic Pharmaceuticals offers opportunity to play the growing domestic

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