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Armoring India
July 09, 2014
Executive Summary
In the post cold war scenario, western nations have sizeably
dressed down their defence budgets. Moreover, global
economic downturn has put additional pressure on
governments to scale down their defence spending, impacting
the global armament market. India, on the other hand, has
(Click here for emerged the largest importer of defence arms and is likely to
video clip)
spend a whopping USD248bn over the next decade, as few
countries in the world face the range of security challenges, concerns and
threats that it doesterrorism, low-intensity conflict and nuclear weapons.
Ergo, global defence majors cannot afford to ignore one of the most
promising markets and are eager to step up their engagement with India.
Moreover, given the governments intent to enhance private sector
participation in defence, it has put in place the right policy framework
including enhanced FDI limit at 49% in order to develop the required
ecosystem. This is one opportunity that Indian companies cannot miss and to
this end have stepped up engagements with global majors to tap their
expertise. The offsets opportunity, whereby domestic companies get a chance
to tap into this large defence spending, is likely to exceed USD75bn.
L&T, Tata Group favourably placed to tap opportunity; prefer BEL, AMP
Domestic defence manufacturing is dominated by defence public sector undertakings
(DPSU) and Ordnance Factories Board (OFB) with 80-90% share in domestic defence
manufacturing. However, various private sector companies have been involved in a small
way with several defence projects over the past years. Larsen & Toubro (L&T), Tata Group,
Pipavav, amongst others, have tied up with global defence majors and have created
infrastructure required to take on bigger roles in the defence space. These companies are
yet to make a significant impact given the tardy processes involved in bagging defence
orders. We initiate coverage on Astra Microwave (AMP) with a BUY and prefer Bharat
Electronics (BEL) and AMP by virtue of them being pure defence play. Listed beneficiary
companies will include L&T, Bharat Forge, Tata Group companies, Mahindra & Mahindra,
Ashok Leyland, Bharat Earth Movers and Pipavav Defence. We believe defence could be the
sunrise industry of the next decade for Indian companies.
Contents
Executive Summary.................................................................................................................. 3
South Korea: North Korean hostility helped develop defence industry ............................ 71
Israel: French embargo drove Israel towards self sufficiency in defence .......................... 72
Companies
Ashok Leyland ........................................................................................................................ 75
CMC...................................................................................................................................... 159
1,800
15.8% CAGR
1,200 Make
600
9.7% CAGR Buy & Make with ToT
0
FY15E
FY17E
FY19E
FY21E
FY23E
FY97
FY99
FY01
FY03
FY05
FY07
FY09
FY11
FY13
Buy Global
USD163bn, of USD248bn, projects ripe for awarding Per capita defence spend globally India lags woefully
Defence Project 1,600
S. Korea
France
Israel
Nepal
China
Kuwait
India
Ukraine
Pakistan
Per-capita spending World average
Structural shift likely in India, in line with global model, where the integrator does ~20% of value add and relies on suppliers
Tier 1 suppliers
Tier 2 suppliers
Component suppliers
(Main private
Component suppliers companies)
(20% value addition)
Component suppliers (50% value addition)
Indias defence capital spending between FY96 and FY04 posted ~10% CAGR. However, over
With bottoming out of the Indian the past 10 years, capital spending in defence posted ~15% CAGR, broadly in line with the
economy, defence capex is likely nominal GDP growth. This shift is primarily due to two reasons: (1) increased impetus to the
to get a leg up given significant modernisation drive from FY05; and (2) increase in the proportion of capital expenditure
pent up ordering from ~30% of total defence budget to about ~40%.
Our analysis of historical GDP and defence capital spending pegs average defence capital
spending at 0.7% of GDP. In our base case assumption, we have estimated nominal GDP
growth of 12% over the next 10 years (real GDP at 6% and inflation at 6%). We did sensitivity
analysis for GDP growth and inflation estimates keeping the percentage of capex related
defence spending to overall GDP constant at 0.7% over the next 10 years.
Our top-down assumption makes a case for GDP (nominal) growth of 12% (real GDP at
6% and inflation at 6%). This entails total size of capital defence spending at
~INR14,409bn or USD248bn, thus throwing an annual run rate of ~USD25bn over the
next 10 years.
This is broadly in line with the projection made by the Ministry of Finance through the
Thirteenth Finance Commission, which projects 7% growth in defence revenue expenditure,
while capital expenditure is projected to grow by 10% per annum. The Finance Ministry also
noted that there exists considerable scope to improve the quality and efficiency of defence
expenditure through engagement of the private sector in the space.
Table 1: Sensitivity Analysis: Defence capital expenditure over the next decade
(INR bn) Real GDP Growth (USD bn) Real GDP Growth
4% 5% 6% 7% 8% 4% 5% 6% 7% 8%
4% 11,470 12,140 12,852 13,607 14,409 4% 198 209 222 235 248
Inflation
Inflation
5% 12,140 12,852 13,607 14,409 15,259 5% 209 222 235 248 263
6% 12,852 13,607 14,409 15,259 16,161 6% 222 235 248 263 279
7% 13,607 14,409 15,259 16,161 17,117 7% 235 248 263 279 295
8% 14,409 15,259 16,161 17,117 18,132 8% 248 263 279 295 313
Source: Edelweiss research
(INR bn)
1,800
capex has grown at ~15% during
the past decade. We expect it to 15.8% CAGR
1,200
sustain a 12% CAGR over the next
decade
600
9.7% CAGR
0
FY15E
FY17E
FY19E
FY21E
FY23E
FY97
FY99
FY01
FY03
FY05
FY07
FY09
FY11
FY13
Defence capital spending
Source: Ministry of Defence, Edelweiss research
During the past five-six years, the country spent close to INR1,927bn (USD38bn) on capital
USD 38bn spent during the past 5- expenditure with significant part spent towards equipment upgrade programmes. The
6 years spending over the next decade is likely to top USD248bn on purchase of equipment along
with upgrading programmes. This is likely to be a big opportunity for development of the
domestic defence industry via offsets requirement on defence purchases from global
players.
buying made in India would be accorded top priority. The offsets are likely to help develop
the required ecosystem for major private players to emerge.
Advantage India for exports low Given the cost advantage and highly skilled engineering talent base, India has already
cost and highly skilled carved a niche in frugal engineering. Coming at par with the global supply chain will be the
engineering talent base next logical move for domestic companies. We already have instances of such partnerships
where Tata Advance Systems is catering to the global market by supplying aero structures
from its manufacturing facilities in Hyderabad.
In the 11th Plan, average capital expenditure in land systems was 21% of total capital
expenditure. Major investments are planned in Bharat Dynamics (BDL) and OFB in the
12th Plan. Assuming the capital expenditure in land systems being maintained at the
same proportion of 21% of the overall capital expenditure in defence budget, the
volume of same is expected to be INR935bn during the 12th Plan period.
Table 2: Defence purchases expected to be undertaken by Indian Army over the next decade
Quantity Spending
Equipment/ Projects (Nos) (USD mn) Remarks / Comments
Ultra Light Howitzers 145 885 For Mountain Corps (mainly FMS route)
Wheeled Howitzers 185 1,000 Several domestic players have shown
Tracked Howitzers 100 2,000 interest to participate in artilery guns
Short Range Quick Response Surface to Air Missle (QRSAM) 78 1,400
T-90 Tanks EW System 1,657
T-90 Tanks 235 1,000
T-90 Tanks - Upgrade Missle System (Invar) 90 470
Robotic military vehicles / tactical unmanned vehicles (Daksh) 20 100
Future Main Battle Tanks 1,000 5,000
Futuristic Infantry Combat Vehicle 2,610 10,000 BMP-3 (Abhay) to be Buy & Make program
Float : ~80-90%
Move : ~50-60%
Fight : ~30%
As per Indian Navys vision, it expects to become a well equipped maritime force which
will include aircraft carriers and various types of combatants including submarines. In
43 warships under construction as
alignment with the Maritime Capability Perspective Plan (MCPP), currently there are 45
Indian shipyards
vessels on order, of which 43 have been placed with Indian shipyards with the latest P-
28 ASW Corvettes planned for an indigenous content of over 90%. Apart from
indigenous development, two warships are being built along with refitting and
refurbishment of aircraft carriers at Russian shipyards. In addition, the Indian Coast
Guard has also undertaken a massive plan to upgrade its capabilities to protect Indias
coast line more effectively. In the aftermath of Mumbai terrorist attack, nine more
Coast Guard stations are being added to the existing 30.
Table 3: Defence purchases expected to be undertaken by Indian Navy over the next decade
Quantity Spending
Equipment/ Projects (Nos) (USD mn) Remarks / Comments
Diesel Electric Submarines 6 7,920 Project 75i - 3 by MDL, 1 by HSL and 2
Foreign Technology Partners
Diesel Electric Submarines - Scorpene 6 8,000
Nuclear Power Submarines (On lease) 1 1,500
Nuclear Power Submarines 4 12,000
Barak I Missiles 262 142 MoD in Dec13 cleared it for Aircraft
Carriers - Virat & Vikramaditya
Anti-submarine warfare (ASW) shallow water craft 16 2,168 MoD approved purchase on 23Dec13.
Eurocopters NH-90 & Sikorsky's S-70
Bravo are in the race
MiG-29K 45 2,000
Patrol aircrafts P-8I Poseidon (From Boeing) 8 2,100
Patrol aircrafts P-8I Poseidon (From Boeing) 4 880
Aircraft Carriers (Vikramaditya & Vikraat). Viraat is due to retire 2 2,300
Warships - Frigates, Destroyers and Corvettes 46 20,000
Landing Platform Dock 4 2,600 Tendered in Dec'13. 2 to be built by pvt cos
and 2 by HSL.
Surface Surveillance Radars 31 300
Multirole Helicopter 123 8,000
Sub total 69,910
Source: Industry, Edelweiss research
Hindustan Aeronautics (HAL) has been a major producer of aircrafts for the Indian
650 new aircraft and helicopters armed forces. The companys FY14 turnover was ~INR153bn with an annual growth
expected during the 12th Plan rate of more than ~8%. The growth is expected to continue and improve during the
period 12th Plan. HALs turnover at 12th Plan end (FY17) is estimated at INR235bn. The new
programmes will create employment opportunities in HAL. Its manpower requirement
at 12th Plan end is estimated at 42,500 from the current 34,000.
Table 4: Defence purchases expected to be undertaken by Indian Air Force over the next decade
Quantity Spending
Equipment/ Projects (Nos) (USD mn) Remarks / Comments
Multi Role Medium Combat Aircraft (MMRCA) 126 10,000 Selected Dassault's Rafale (18 in fly away
condition, bal to mfg by HAL thru TT)
Fifth Generation Fighter Aircraft 144 15,000 Development cost could be higher and not
included
Light Combat Aircraft 200 5,000 Development cost could be higher and not
included
Sukhoi Fighter (SU-30MKI) Aircrafts 42 4,500
Medium Lift Transport Aircraft 56 2,400 16 to be bought and 40 to be made locally.
Airbus has proposed setting up assembly
line for its C295 aircraft.
Combat Helicopters 22 1,200 Boeing's Apache is in the reckoning for
this order
Heavy lift helicopters 15 1,400 Boeing'sCH-47 Chinook (most likely)
C-130J - Super Herculeus 6 1,100 6 were ordered out on 27 Dec 13 through
FMS. Intention is to add 6 more
C-17 Globemaster III 6 1,200 10 were ordered out on 27 Dec 13 through
FMS. Intention is to add 6 more. 30% offset
in place for this.
Light Combat Aircraft Engine (GE) 99 560
Mid-air refuelling aircraft (Airbus A330 MRTT ) 6 1,000 Govt asked Airbus to hold the price till
July'14.
MiG 29 upgrade 69 964
Advanced MRMR planes 6 1,000
Medium Light Helicopter 172 286
ASW Helicopter 391
KA 28 Helicopter upgrade 100
Unmanned Aerial Vehicle 7 71
Trasportable Radars 1,200
EL/M-2083 Aerostat Air Search Radars 9 2,700
Airborne Early Warning and Control Systems 400
Air Defence System 1,000
AFV Protection and Counter Measure System 270
Electronic warfare suites for fighter aircrafts
MMTA
Sub total 51,742
Source: Industry, Edelweiss research
Major products and systems planned for induction by the Defence Ministry during 12th
Plan are battlefield management systems, future infantry soldier as a system, long-
range surveillance radars, weapon locating radars, mountain radars, tactical
communication systems, software defined radios, electronic warfare systems for
different terrains, unmanned aerial vehicles and aerostats, electronic warfare suites for
fighter aircrafts, long range electro optical surveillance systems, thermal imager-based
sights for tanks and weapons, image intensifier based passive night vision devices and
weapon and missile systems.
Source: Media
Offset policy: How India has done so far and the way ahead
The key objective of the Defence Offset Policy is to leverage capital acquisitions to develop
the domestic defence industry. This has been the modus operandi followed by several
countries, which today have a fairly developed defence industry.
While the offset requirement is currently pegged at 30% of the total contract value, the
Offset at atleast 30% of the total
same could be increased or decreased by the Defence Acquisition Council (DAC) on case-to-
contract value
case basis. For the 126 Medium Multi-Role Combat Aircraft (MMRCA) contract, the offset
requirement stands at 50% of the contract value. The policy will apply to capital acquisition
under the Buy (Global) and Buy and Make with Transfer of Technology where the contract
value is INR3bn and above. The offset requirement will not apply to procurements under
the fast track procedure.
The offset obligations have to be discharged within the period that can extended by a
maximum two years from the conclusion of the main procurement including the warranty
period. There are some reservations which foreign OEMs have highlighted regarding
inability to discharge the offset requirement due to difficulty in identifying domestic
partners.
Indian companies vying for being part of global supply chain of OEMs
R&D centres of leading high tech
India has displayed excellence in several industries including auto/auto component, IT/ITES,
companies in India is a testimony
generic pharmaceuticals, amongst others. Today it is recognised as a hub for auto
to the countrys skills in cutting
components and small cars in particular, globally. Similarly, India is one of the serious
edge technology
players in the generic pharmaceutical industry globally.
In the defence industry, the private sectors role has been restricted to providing raw
material, semi-finished products and parts/ components to DPSUs and OFBs. With
developed nations defence budgets shrinking and global defence companies looking at
ways to reduce costs, manufacturing in India could be a logical choice for these companies.
Several leading technology companies have R&D centres in India, a testimony to the
countrys skills in the high technology industry. Several Indian companies are currently
working or exploring to work in the high tech defence industry. Experiences of a handful of
companies, currently part of the global supply chain, albeit on a small scale, see traction
improving with potential to significant scale up.
The DPP has evolved since 2002 with the latest being DPP 2013. While the private sector will
always angle for more benefits and concessions, the ones that emerge out of our
discussions with industry captains are listed below:
1) Permitting exports, the most important point 4) Infrastructure industry status for tax benefits
2) Balance nomination across public and private sectors 5) Better duty structure
3) R&D support from the government as is available in 6) Keep all duties, taxes out of L1 calculations, thus
other countries making like-to-like comparison with foreign players
Increased information
provided during issue of
RFPs
Offset penalty introduced
Through this policy: (1) domestic defence companies will get access to the militarys
long-term (15 years) equipment road map, providing them with the time needed for
developing the equipment that the armed forces need in the future; (2) it will also
provide a level playing field to private defence companies vis-a-vis DPSUs in terms of
time to develop equipment; (3) it simplifies the Buy & Make (Indian) procedure to
benefit domestic industry; and (4) finally, it defines ambiguous terms in DPP like
indigenous content.
Buy (Indian)
Buy Global
One disappointment in DPP 2013 was not simultaneously increasing FDI in defence from
26% currently. This would have fast tracked the process of domestic manufacturing through
tie up with foreign players given foreign collaborators would be unlikely to part with core/
critical technical know-how with just 26% stake. However, the private sector continues to
keep a vigil and is hopeful that FDI will be hiked in future to at least 49%.
Fig. 5: Process for Buy, Buy and Make with ToT and Buy & Make (Indian)
Commercial
SQR negotiations by Approval of CFA
CNC
Evaluation of
technical offer Field evaluation
by TEC
Design and
Defence
CFA Approval Development
Capability Plan
of Prototype
Acceptance of Contract
Detailed Design
Necessity Negotiations
Procurement of
Nomination of Budgetary and
Ship-borne
Shipyards Estimated Costs Equipment
Preliminary Liquidated
Monitoring of
Staff Build Strategy Damages, if
Requirements Projects applicable
Preliminary
Preliminary Closure of the
Build Revision of Cost
Design Specifications Project
For too long, India depended on foreign industries for its military hardware. Constraints of
technology and resources precluded self-reliance to the extent desired. The first phase was
characterised by state-led industrialisation. Since liberalisation in 1991, the role of private
sector and also that of competition, both domestic and international, is playing a much
greater role in the national economy to bring in overall efficiency.
We have elaborated the journey of these two sectors through case studies below. We
believe the defence industry is likely to draw parallels over the next decade, given the right
policy framework, which is likely to help develop the required ecosystem in the country. The
new BJP-led government is likely to provide the much needed catalyst based on its 2014
election manifesto spelling out not just self reliance, but also developing export capabilities.
What an Indian engineer The right policy framework and low cost and high quality engineering talent have helped
promises to do with one, my develop the right ecosystem which has aided the industry achieve the scale and size. The
engineer tells me we need five government has a rather ambitious and larger roadmap through Automotive Mission Plan
to complete 2006-16 to reach USD145bn (including both automobile and auto components) with
Carlos Ghosn, additional employment for over 25mn people as investment of USD35-40bn is envisaged
CEO Renault Nissan through this period.
Indigenisation has helped cut production cost from the early days when Maruti-Suzuki
launched its first small car Maruti 800 in 1983. It indigenised over 70% of the car in less than
five years. This helped incubate the auto component industry in India, in addition to the
right policy framework post liberalisation during 1990s.
576 72.0
(%)
288 36.0
144 18.0
0 0.0
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Exports from India Growth
Source: SIAM, Edelweiss research
1990
2000
2010
Premier Premier Hindustan Motors Hindustan Motors
Hindustan Motors Hindustan Motors Mahindra Mahindra
Mahindra Mahindra Tata Motors Tata Motors
Tata Motors Force Motors
GM GM
Fiat Fiat
Honda Honda
Toyota Toyota
Mercedes Benz Mercedes Benz
BMW
Renault Nissan
Skoda
Volkwagen
India is not just a low cost producer, but also a leader in engineering services. Other
advantages include better protection of intellectual property, being ranked 58 based on
International Property Rights Index 2013, and a strong auto component industry. While the
automotive industry provides employment directly to about 1mn, indirectly it employs over
17.5mn.
Auto component industry has
recorded 22% CAGR during the Export of auto components has posted 22% CAGR during the past five years to ~USD9bn
past five years currently. Further, continued improvement in policy work by the government helped shape
the Indian auto industry with special emphasis on small cars.
Chart 3: Export destination for auto components Chart 4: Product range in exports of auto components
South Others
Australia Electricals 7%
America
1% 9% Engine
Africa 4%
9% 31%
Equipment
Europe s
35% 10%
Asia Suspension
25% & Braking
12%
Transmissi
Body &
on &
Chassis
North Steering
12%
America 19%
26%
Source: ACMA, Edelweiss research
Today, the Indian automobile sector is one of the largest potential markets which no
major global player can ignore. From Ambassadors to top notch cars and an export
hub for small cars, the Indian auto sector has come a long way.
During 1980s, Indian companies arrived on the global map with exports of APIs and
subsequently formulations to global markets, primarily emerging. Towards late 1990s,
Indian companies started exporting to developed markets like US with APIs followed by
formulations. In 1994, the New Drug Policy gave further impetus by abolishing industrial
licensing for all bulk drugs, encouraging several players to join the pharmaceutical
manufacturing space. Exports from India have grown to USD14.8bn in FY14 from USD2.6bn
in FY02, ~17% CAGR during the past two decades. Exports during FY74 were a meagre
USD48mn.
Chart 5: Market share of domestic pharmaceutical industry Chart 6: Exports of the Indian pharmaceutical industry
100 16,000
80 12,800
60 9,600
(%)
40 6,400
20 3,200
0 0
1952
1970
1971
1978
1980
1991
1996
1998
2002
2003
2004
2006
2008
2010
2011
2012
2013
2014
FY74
FY77
FY80
FY83
FY86
FY89
FY92
FY95
FY98
FY01
FY04
FY07
FY10
FY13
MNCs Domestic Players Exports
Source: Industry, Edelweiss research
In accordance with WTO requirements, the Indian government in 1995 amended the
Patents Act, 1970, to recognise product patents with 20 years patents life, in line with the
requirements of the Trade-Related Aspects of Intellectual Property Rights (TRIPS)
agreement effective 2005. The Indian industry woke up to the challenges of post TRIPS
regime and thus truly became a knowledge-driven industry, thereafter increasing focus on
R&D.
During 30 years, the Indian pharmaceutical industry has come of age with some companies
Top 5 Indian companies feature
amongst the top generic companies in the world (5 Indian companies feature in top 10
amongst the top 10 global generic
generic companies by sales in 2012). Subsequently, Indian players moved up the value chain
companies
in terms of complexity given increased competition in the formulations market. The next leg
of growth, which includes innovations, will be the most challenging for the Indian industry
given significant costs involved in R&D with higher risk of failures.
Ultimately, global innovator companies did realise the benefits of generic players, evident
from the acquisition of Ranbaxy by Daiichi Sankyo in 2008 for over USD4.6bn. This was
subsequently followed by Abbot acquiring the Indian formulations business of Piramal
Healthcare for USD3.7bn in May 2010. Today, global players are looking at leveraging Indian
companies product development capabilities and low-cost manufacturing in their effort to
penetrate generics and emerging markets. The sector has attracted FDI worth USD11.4bn
between April 2000 and September 2013.
Defence industry to set out of the cradle; the next sunrise industry
Till recently, the Indian defence industry had been largely catered to by the public sector,
Right ecosystem to help defence with the private sector contributing little in terms of components etc. Given the emphasis
in India emerge as the next
on developing the domestic defence industry and indigenisation being the way to achieve
sunrise industry
this, DPP 2013 indicated the order of priority while buying armamentsIndian being at the
top and buying global being the last resort. Many domestic private companies perceive this
as a step in the right direction and are looking at significant opportunities from the defence
sector.
Given that the defence sector was catered to by the DPSUs and OFBs, the scope for private
sector was limited. With several purchases from DPSU being embroiled in delays, the
capability of armed forces has been adversely affected. To bridge this gap, the government
is looking at promoting private sector participation in the defence sector. While the private
sector has proved time and again across industry bringing in efficiency, improvement in
technology through R&D spend, the defence sector is likely to see major changes in the way
it functions as private sector contribution / involvement increases.
The early benefits of partnership between Indian companies and global majors where
defence ecosystems are being developed are evident. Today, albeit small, India has featured
on the map of global supply chain with certain aerospace structures being made in India for
the global market.
Thus, rightly, the defence industry in our view is the next sunrise industry in the making.
Unlike the global practice, India has a concentrated defence production model with
major scope (more than ~80%) covered by DPSUs and OFBs, right down to the
component level. Private sector, at best, is seen supplying raw material / components
to DSPU/ OFBs. This has two main disadvantages of such a model (1) limited or no
bandwidth for high tech R&D including product innovation and (2) limited or no head-
room for private sector to grow and evolve. As DPSU/OFB focus on the integration, the
scope for private sector is likely to improve on space vacated by DPSU/ OFBs.
Fig. 10: Global defence structure Current Indian defence structur Future Indian defence structure expected
Tier 1 suppliers
Tier 2 suppliers
Component suppliers
(Main private
Component suppliers companies)
(20% value addition)
Component suppliers (50% value addition)
4,800 28.0
3,600 21.0
(USD mn)
(USD mn)
2,400 14.0
1,200 7.0
0 0.0
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Imports value Exports value (RHS)
Source: SIPRI
Chart 8: India has one of the lowest wages among countries with large labour pool
Turkey
Brazil
Malaysia
Russia
Mexico
China
Philippines
Indonesia
India
Vietnam
Pakistan
Bangladesh
0 300 600 900 1,200 1,500
Wages in USD/month
Source: ILO
However, there was no major change in status and policies for few sectors like defence,
which we believe is a prime reason why India still remains a laggard w.r.t. its domestic
defence capabilities compared to global players.
Based on our discussion with various entities across defence value chain below is our thesis:
1. Government intent: The Kargil war triggered a major change in the governments
mindset as it realised the grave need for public-private partnership to facilitate
indigenisation in defence. As we understand, DRDO in partnership with select private
There are the DRDO, the OFB and
players like Bharat Forge, L&T etc., is planning to develop capabilities for 155mm
other excellent organisations that
artillery guns. DRDOs Pune arm (DRDE) is leading this project and will select an
have design talent and capability.
industrial partner. Thus, it is clear that the core of future procurement for artillery guns
What India lacks is the ability to
has to be via public-private partnership with substantial inputs from the private sector.
convert designs into manufactured
products.
2. Indian requirement: As per assessment by MoD, India needs more than 3,000 artillery
Mr Baba Kalyani
guns in the 155mm category across towed, mounted, tracked and wheeled gun systems
CMD - Bharat Forge
over the next 8-10 years to bridge the existing gaps in its artillery. These guns will
replace/add to existing dismal inventory of its artillery guns in service.
Fig. 11: Tata Power SEDs 155mm gun with range of over 52 kms
Bharat Forge with Elbit Systems (Israel): Bharat Forge (74%) and Elbit (26%) have set
up a JV to develop and assemble artillery guns. The gun is currently is in testing phase,
which is likely to be completed by 2014 end.
Tata Power SED Howtizer: The company, in December 2012, has displayed a 55%
indigenous 155mm/52 caliber mounted gun with a range of 50km entering a market
expected to top USD8bn.
Carriages, tracks
Hydraulics, engi , wheels &
ne & others saddle etc.
25% 25%
Source: Industry, Edelweiss research
0 0 0
Pakistan China India Pakistan China India Pakistan China India
An army General indicated in the media that the armys artillery requirement is so
huge and running so late that it would require multiple players and lines in order to
buy all the guns by 2022. Artillery gun is amongst the low hanging fruits and several
Indian players including, Tatas, L&T, Bharat Forge amongst other have made tangible
progress to tap the large opportunity that it presents.
Source: FAS
With indigenised nuclear Though India has significant capability in designing and building parts of ships and
submarine, India enters a submarines, its indigenisation levels are high in float at 65-70% even as it has enough
coveted club of nations ground to cover in other areas move and fight.
The ATV programme to build a nuclear-powered submarine began in 1974 and became
a serious effort only in 1985.
The symbolic launch ceremony for INS Arihant was held on July 26, 2009.
The 6,000 tonne vessel was built under the ATV project at the Ship Building Centre in
Visakhapatnam.
INS Arihant will be the first of the expected six in the class of submarines designed and
constructed as part of the Indian Navy's ATV project.
It will be commissioned into the Indian Navy after extensive sea acceptance trials (SATs)
having completed the harbour acceptance trials (HATs).
The completion of INS Arihant will make India one of six countries in the world with the
ability to design, build and operate its own nuclear submarines.
It has four vertical launch tubes, which can carry 12 (three per launch tube) smaller K-
15 missiles or four larger K-4 missiles. The K-4 has a longer range of 3,500km and is still
under development.
The launch of Arihant strengthens India's endeavour to build a credible nuclear triad
capability to fire nuclear weapons from air, land and sea.
Move: Propulsion system, propeller, rudders, aux motors, gear box, SG package & heat
exchangers, batteries, electronic submarine control system, turbine blades & shaft.
Of a typical submarine, hull, ballasts and internal structures form around 25% of the cost,
while 25% is for main propulsion system, motors, turbines system, submarine control
system etc. Missiles, torpedos sonar, radars and fire control system form the balance 50%.
With significant capability to design, fabricate and manufacture submarines, India has
achieved a significant 70% plus capability to manufacture what is termed at Float portion
of the submarine. However, with significant dependence on foreign technology and OEMs
for propulsion systems, sonar, torpedos & firing control systems etc., the level of
indigenisation for move and fight is still low at a dismal 20%. However, it was much
higher for INS Arihant, as we understand.
Chart 12: Cost mix of warship Chart 13: Current level of indigenisation
Fight
Float 18%
25%
Fight
50% Move
18%
Float
64%
Move
25%
Source: Media
INS Arihant indigenisation level at an impressive 40%; 50% plus next goal
While the ATV project was in existence much before 1990s, it gathered meaningful pace
50% indigenisation is the next only after 1998-2000. It was one of the most exhaustive co-ordinations and collaborations
goal for nuclear submarine among DRDO-BARC-Russian government-DPSUs-Indian private sector players like L&T, Tata
Power etc. As we understand, with a significant portion of the submarine manufactured in
India by local players, more than 40% of the USD2.9bn nuclear submarine components were
built and designed in the country.
Tejas has completed over 2,000 flights so far and continuing system performance and
evaluation towards reaching Final Operational Clearance (FOC).
One positive outcome is that the design and development of the LCA has helped
establish an entire ecosystem that will work as a platform for future aircraft
manufacturing in India.
Tejas airframe is made of advanced carbon composites covering ~90% of the aircraft
surface. This critical technology has been totally developed in house. A number of other
components like wheels, brakes, undercarriage, heat exchangers and actuators were
designed and developed within India.
It is capable of flying non-stop to destinations over 1,700km away and its radius of
action is up to 500km depending upon the nature and duration of actual combat.
Mark II will have better thrust, improved radar system and 120mm gun capable of firing
anti-tank guided missiles.
There are 358 LRUs (components) in Tejas, of which 53% are indigenously developed.
To reduce the balance 47% of import LRUs, ADA has initiated a development
programme for indigenisation of import LRUs.
In addition, 300 small and medium scale firms participated in the project. The LCA
programme, thus, is a national aeronautical endeavour encompassing all available talents
in the country across a wide spectrum availing services of institutions and industries, both
public and private.
HAL has quoted INR1.6bn a fighter as its latest price. Amortising the entire
development cost on the envisioned 344 fighters (IAF: 294; Navy: 50), Tejas will cost
INR2.1bn (USD33.5mn) per fighter.
o Project Definition Phase (PDP) for development of LCA was sanctioned in August
1983 at a cost of INR5.6bn.
o The total sanctioned cost for development of LCA, Tejas (PDP + FSED Phase-I +
FSED Phase-II) is INR79.7bn.
Tejas is 65% Indian right now. But Dr.V K Saraswat, Former Scientific Advisor to the
Defence Minister, has promised that by the time the aircraft gets Final Operational
clearance, indigenisation will reach 75%.
Dr. Saraswat disclosed that no country opts for 100% indigenisation as it is not cost
effective and needs huge infrastructure. Hence, he explained that the main structure
and sub-systems of the aircraft are indigenised and the balance parts are imported.
The import proportion in the indigenous defence products is not unique to India. Even
developed countries do not hesitate to import non-strategic components that are easily
available at a much cheaper rate. To reduce the cost of the system, it is essential to
import non-critical items from available sources, particularly when the demand is for
few numbers.
Lifecycle cost is expected to be ~50% lower than any acquired aircraft as maintenance
costs tend to spiral for acquired aircraft.
Air Frame
Composites Inward
Drop Tank (45% by weight Elevon
Bombs 90% by area)
Beyond Vishal
Range Missiles
GE Jet Engine
Close Combat
Missiles
Diverse topography
India has ~15,000km of land border with its neighbours and ~7,600km of coastline. The
diverse topology ranges from snow-clad Himalayas with peak of 28,000 feet to deserts, thick
jungles and vast plains.
Diverse topography makes The Siachen Glacier in the North is the worlds highest battlefield with a post located at
defence spending inevitable 21,000 feet. The western border runs through deserts, fertile plains and thickly forested
across all the wings of armed mountains. North-East includes steep and high mountain ranges along with dense tropical
forces forests. In the South, there are ranges close to the sea, inland plateaus interspersed with
river valleys, coastal plains and far-flung island territories such as Lakshadweep to the West
and the Andaman & Nicobar Islands to the East. The Indian peninsula starting from Gujarat
to West Bengal is surrounded by the Arabian Sea, Bay of Bengal and the Indian Ocean. The
Andaman & Nicobar islands located 1,300km away from the nearest point on the East coast
assume strategic importance with respect to entry to Malacca Straits. In the Arabian Sea,
Lakshadweep and Minicoy islands, situated on the sea-lanes of communication running
eastwards from the Persian Gulf and the Red Sea are 450km away from the nearest point on
the West coast.
Hostile neighbourhood
Along with diverse topography, India shares land borders with seven neighbouring
countriesPakistan, Afghanistan, Bangladesh, Bhutan, Nepal, Myanmar and China. It also
counts Sri Lanka as a neighbour in the South. The Indian sub-continent is amongst the
worlds most unstable areas on account of terrorism, civil war and other internal security
issues. Afghanistan and Sri Lanka have come out of long internal /civil wars /insurgency that
ravaged the countries for years.
South Asia is known as one of While China attacked India in 1962, with Pakistan India has faced three wars in 1965, 1971
the most militarised area in and 1999. With Pakistan, concerns arise due to undiminished activities of terrorist
the world organisations functioning from its territory. The unresolved border issue with China
continues to create disturbances. Further, Chinas drive towards modernisation of its large
armed forces along with rapid infrastructure development in Tibet and Xinijang region has
raised eyebrows in Indian forces. India continues to remain conscious and watchful of the
implication of Chinas military expansion, including that in the neighbourhood.
Fig. 16: South Asia considered as one of the worlds most unstable/ militarised areas
Table 13: Salient features of neighbouring countries and relations with India
Country India Afghanistan Pakistan Sri Lanka Nepal China Bangladesh Bhutan Myanmar
Govt Type Democratic Islamic Parliamenta Democratic Federal Communist Democratic Parliamenta Constitution
Republic Republic ry Republic Republic Republic Republic ry Monarchy al Republic
Source: Media
The string of pearls strategy adopted by China through economic and diplomatic efforts to
enhance its military and commercial facilities and relationships along the sea of
communication extends from Chinese port (mainly Hong Kong) to Port in Sudan and covers
shipping routes from Persian Gulf to Straits of Malacca. China essentially wants to challenge
US dominance in the Indian Ocean. This, however, has raised concerns among Indian policy
makers and increasingly India is likely to focus on enhancing its naval capability and capacity
to counter growing Chinese influence in Indias backyard. INS Vikrant, Indias indigenous
aircraft carrier, will add more muscle/ credibility to the naval force and domestic
manufacturing. This is in addition to the indigenously built nuclear submarine INS Arihant,
placing India in the select club of six nations with such capabilities which includes US, Russia,
France, China and UK. These two vessels are likely to join the Indian navy shortly.
While the trend in 2013 does indicate lower number of piracy, the lowest levels since 2006,
the threat of attack remains primarily in the waters off Somalia and Nigeria in the Gulf of
Guinea, a hotspot for violent piracy and ship hijacking. The fall in piracy is attributed to
increased patrolling and actions by naval forces.
400
(No of incidents).
The fall in piracy is attributed to 300
increased patrolling and actions
by naval forces 200
100
*2014
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Source: ICC International Maritime Bureau
Note: For 2014, number of incidents updated till May 2, 2014
Chart 15: Incidents of terrorist attacks Chart 16: Terrorist incidence break up
1,200 1,000
Iraq Religious
1,000
Index-based to 100 (x)
Pakistan 800
Index-based to 100 (x)
800
600
600 Political
India 400
400
Afghanistan 200 Nationalist/Separatist
200
Phillippiness 0
0
F Y02
FY03
FY 04
FY05
FY 06
F Y07
FY 08
F Y09
FY 10
F Y11
FY 02
FY 03
FY04
FY 05
FY06
FY07
FY08
FY 09
FY10
FY 11
In the post cold war international scenario and after the 9/11 terrorist attack in US, the
world has come closer on the issue of terrorism and has united to fight it. Emergence of
ideology linked terrorism has finally attracted the worlds attention, something which India
has tried to highlight at various world forums for a very long time. The chart below indicates
significant fatalities on account of terrorist attack worldwide.
('000)
3 Afghanistan Colombia
4 Yemen Israel 7.6
5 Somalia Indonesia
Source: Institute for Economics and Peace 4.8
2.0
FY91
FY92
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
Source: National Consortium for the Study of Terrorism and Responses to Terrorism
Unfortunately, the current global trend of terrorism is best described as plateauing rather
than decreasing with ~72 countries experiencing increase in terrorist activity against ~63
experiencing decrease in terrorist activity over the past decade. Further, over the past
decade, more than 125 countries have faced terrorist attacks, which indicate the global
spread of terrorism even though it is heavily concentrated in Iraq, Afghanistan, Pakistan and
India.
End of cold war forced India to The foreign policy adopted helped India achieve some successes by 1980s in carving out an
redefine its foreign policy independent international role. Regionally, India was the predominant power given its size
and population, in addition to growing military strength. However, emergence of coalition
governments at the national level since the early 1990s, the countrys federal structure,
weaknesses in Indias foreign policy institutions and lack of a strategic culture within the
country together affected Indias search for a post-Cold War foreign policy. Given that
Southeast Asia was less developed than India until the 1970s, the region was not an
attractive trading and economic partner. India subsequently realised that its perceptions
about the region were flawed. Launched in 1990s, after the end of the Cold War, the Look-
East Policy was a strategic shift in India's vision of the world and its place in the evolving
global economy.
Geopolitical equations are rapidly changing globally, with new power upheavals in many
strategic regions and economic crisis in the developed world. Indias size, strategic location,
trade interests and dynamic global security environment underpin the critical need to
bolster the countrys defence preparedness and infrastructure to safeguard security
interests. In todays dynamic world, foreign trade dominates foreign relations. Given below
are the details of Indias largest trading partners region wise.
Chart 18: Indias foreign trade details Import Chart 19: Indias foreign trade details - Export
600 350
480 280
360 210
(USD bn)
(USD bn)
240 140
70
120
0
0 FY09 FY10 FY11 FY12 FY13 FY14
FY09 FY10 FY11 FY12 FY13 FY14
Europe Africa America Asia CIS & Baltics Others
Europe Africa America Asia CIS & Baltics Others
Source: Ministry of Commerce & Industry, Edelweiss research
With crude oil import of USD144bn during FY14 and USD150bn likely in FY15E, Middle East
is a dominant trading partner. Further, Indias Look East Policy has significantly increased its
trade with Asian partners led by China.
Table 15: Indias top 5 trading partners for import and export
Rank Country Import (INR mn) Rank Country Export (INR mn)
1 China 51,049 1 USA 39,165
2 Saudi Arabia 36,536 2 UAE 30,498
3 UAE 29,114 3 China 14,829
4 USA 22,325 4 Hong Kong 12,734
5 Switzerland 19,430 5 Singapore 12,601
Source: Ministry of Commerce & Industry, Edelweiss research
in April 2013. India, China and Russia abstained from voting. The ATT lays down several
contentious issues as detailed below:
o ATT will enable arms exporting countries to impose unilateral conditions on
countries that import arms.
o The treaty has failed to address Indian concerns about illegal transfer of arms to
terrorist organisations, insurgent groups and other non-state actors who oppose
democratically elected governments.
o It does not ensure a balance of obligations between arms exporting states and
importers of arms.
While an initiative like ATT that seeks to establish a global benchmark, under normal
circumstances, would have been welcome and supported, the treaty has turned out to
be discriminatory. This, we believe, has been one of the catalysts to promote domestic
defence manufacturing and thus lower dependency on arms exporting nations.
India is party to the Geneva Convention, 1949, which has been ratified by 195 countries.
It comprises four treaties and three additional protocols establish the standards of
international law for humanitarian treatment of war. The Geneva Convention applies at
times of war and armed conflict to governments who have ratified its terms and hence,
governments have surrendered some of their national sovereignty by signing these
treaties.
To implement the same at the domestic level, the Indian parliament passed The Geneva
Convention Act, 1960. India follows the dualistic theory of international law; therefore,
international principles and norms do not by themselves become part of domestic law
and to invoke them in domestic courts they have to be incorporated in the domestic
As long as the world is law of the land.
constituted as it is, every country
will have to devise and use the The impact of the Geneva Convention on India has been regarding the reparation of the
latest devices for its protection. I prisoners of war whom India holds as a result of armed conflict in December 1971
have no doubt India will develop between India and Pakistan. This occasion has been widely seen as a failure on part of
her scientific researches and I both the state parties to the Geneva Conventions to act in full conformity with the
hope Indian scientists will use the obligations of the treaty.
atomic force for constructive
purposes. But if India is Non-aggressive stance weakened military; history of not attacking
threatened, she will inevitably try
India was heavily influenced by the Gandhian philosophy of non-violence during the
to defend herself by all means at
independence struggle and thereafter. Given its nonaggressive stance from the very
her disposal.
Jawaharlal Nehru beginning, India has faced several invaders, which led to India being under foreign rule for
First Prime Minister of India hundreds of years. Post independence in 1947, India continued to ignore military
considerations in dealing with foreign policy issues. The reason for this is the fact that in
early 1950s several countries in the neighbourhood, Africa and Europe were ruled by
military dictators. This led to an unnatural fear of the Armed Forces and instead of co-opting
them in the national foreign policy framework, attempts were made to keep them out of
the decision making process. Interestingly, India has a distinction of never attacking any
other nation. Further, India has always advocated worldwide nuclear disarmament and
accordingly has a stated policy of no-first-use (NFU), a sign of responsible nuclear nation. In
2010, India signalled a shifted in the policy to no first use against non-nuclear weapon
states.
Several private players of repute have demonstrated time and again their seriousness to
harness the potential that the defence industry throws up. India currently has several
private companies supplying components to DPSUs, OFBs and global companies, albeit on a
much smaller scale. With an aim to becoming self reliant, the country cannot afford to
remain dependent on foreign defence equipment for large part of its requirement.
DRDO has been entrusted primarily the responsibility for several high-tech projects for
armed forces. While it has led several flagship projects in India in the past, many of
them have been plagued by delays. We understand that the delays are due to a
combination of: (1) delays from DRDO; (2) changes in the specification by armed forces
during the development of a project/ equipment; and (3) delay in procurement of raw
material (which many times could be part of restricted items). It is primarily due to
these delays that the armed forces prefer to opt for foreign equipment based on the
criticality of the required equipment.
Kaveri Engine
Conceived in 1986 to power the LCA,
the engine fell short on certain
technical parameters and was thus
delinked from LCA programme.
Development continues on two
engines K9+ and K10. Kaveri is likely
to be used to power the future UAVs.
DPSUs contribute about 65-70% to Indias defence manufacturing output. Their output
has posted CAGR of 12% between FY01 and FY13. While they have enjoyed significant
protection from the government, it must also be acknowledged that their growth has
been constrained by this ownership. DPSUs have been unable to expand with the
orders placed and each has order books that extend well beyond 15-20 years.
DPSUs collectively registered healthy revenue CAGR of ~12% over FY01-13 and a
turnover of more than INR297bn in FY13 compared to INR77bn in FY01. Of the total
nine DPSU, HAL and BEL contribute more than 68% to total revenue of DPSUs; HAL
alone contributes 48% of this. The profit margin during the period for DPSUs has
increased from ~6% in FY01 to ~19% in FY13.
280 48.0
(INR bn)
(INR bn)
of ~12% from FY01-13
140 24.0
70 12.0
0 FY01 0.0
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
DPSU Sales DPSU PAT
Source: Ministry of Defence
120
OFB clocked revenue CAGR of
~8% from FY01-FY13 90
(INR bn)
60
30
FY13E
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
OF sales
Source: Ministry of Defence
OFBs are currently working on development of some important projects like Up-
Gunning of 130mm, M46 to 155mm/ 45 Caliber MK-IV, Development of 155mm X 52
Caliber FH mounted gun system with electronic modules, integration of 105mm LFG on
BMP, development of SRCWS (Stabilised Remote Control Weapons Station) with
12.7HMG for navy indigenisation of AK-630-M except the control system (D2 1950A)
and KAVACH-MOD-II through in-house manufacturing and assistance from the Indian
industry.
sector has been unable to direct its R&D efforts towards a required product/ project/
system. The military modernisation programme up to 202715-year Long-Term Integrated
Perspective Plan (LTIPP) from 2012 to 2027was approved by the Defence Acquisition
Council (DAC) in April 2012. The public version of LTIPP released is sketchy and lacks clear
direction in terms of requirements of the armed forces for the private sector to focus its
efforts on.
In 2010, the Defence Ministry invited three private players (Tata Motors, Mahindra Group
and L&T) and one public sector entity (Ordnance Factory Board) for the Future Infantry
Combat Vehicle (FICV) projectworth over INR500bn to replace ~2,600 units of the army's
BMP-2 infantry vehicles. But, after a lot of ground work by the three players, which included
spending ~INR1bn in the interim, in October 2012, the ministry withdrew its letter of intent
and the project is back on the drawing board.
Compared to the FICV project, the Tactical Communication System (TCS) project made more
progress. In June 2012, the government shortlisted two parties for this USD2bn project
where a consortium of L&T, Tata Power SED and HCL, and state-owned Bharat Electronics
competed. Almost a year has passed with little progress. Based on our discussions with
industry players, we understand that prototype designs will be submitted to MoD for
appraisal. The TCS project is the first off the block in the right direction in terms of
indigenisation. While delay/ deferrals are seen here as well, based on the success of this
project, the domestic private sector could be lured back to the defence industry.
Typically, globally, governments outline their requirements for the armed forces from the
private sector and provide financial support to private companies to develop prototypes;
the winning model (sometimes a combination of multiple prototypes) bags a massive
contract. TCS is the project in this direction, which unfortunately has been delayed. But it is
certainly a good start in line with global best practices.
Private sector companies spend significant amount of time and money to set up the process
and tie-up with foreign players to bid for defence projects. Complete about turns, as in the
FICV project, costs companies dear and shakes their confidence. This, in our view, is the
single biggest factor dissuading private sector companies from setting up capacity/
capability to cater to the Indian defence industry.
It cannot be emphasised enough for the need of private sector participation in the defence
industry as in our view they are likely to bring in more efficiency, quick turnaround and high
ability to absorb technology and indigenise the defence industry. This, in turn, could benefit
DPSUs/ OFBs as they can focus on being top level integrators. Similarly, promoting R&D in
the private sector will free up DRDOs bandwidth to focus on cutting-edge R&D. Thus, co-
opting the private sector will, over time, reduce the production and delivery period, help
DPSUs, OFB and DRDO and will also benefit the nation at large.
Solution: After significant deliberation on the policy front, it was decided to promote
domestic manufacturing of power generation equipment. The government through NTPC,
the state owned power utility, floated bulk tenders to purchase power generation
equipment for 14.5GW. The condition was that the winner (based on competitive bidding)
will need to have a phased manufacturing programme in place and supply the equipment
from a domestic facility, barring some initial imports. This encouraged private players and
thus saw several private companies like L&T, Thermax, BGR Energy, Alstom Bharat Forge,
JSW Toshiba gearing up to set up power generation equipment facilities in India, in a phased
manner. Given INR depreciation, imports are no longer as viable as earlier.
Conclusion: Thus, India today has, in addition to BHEL, several private sector players
including L&T and Thermax with capacity to produce power generation equipment
domestically. This, in the long run, will help the country tide over the lack of power
generation equipment capacity crisis and thus power generation capacity at large.
However, given that India is likely to be one of the largest importers of armaments over the
next decade, no major exporter would like to miss the opportunity that the country throws
up, especially in a scenario where defence expenditure in western nations is on the wane.
While India has had good experiences of co-development and co-production with Russia, US
has recently thrown its hat in the ring, offering co-development and co-production of
defence equipment including cutting-edge technology and next-generation armaments. To
begin with, it has offered to develop the next generation Javelin anti-tank missiles jointly
with India.
Between 2003-07 and 2008-12, Asia (up 35%) and Africa (up 104%) regions saw sharp uptick
in armaments imports. The global financial crisis has led to US and European nations
streamlining bureaucratic procedures and increased their willingness to engage in licensed
production, technology transfers and cooperative production arrangements.
In terms of global imports, top 5 importers accounted for ~32% of total global imports with
India topping the list with 12% share in 2012 in international arms imports against 9% at
2007 end. India, China, Pakistan, South Korea and Singapore were the top 5 importers
during 2008-12. Indias import rose 59% between 2003-07 and 2008-12 with 79% from
Russia, followed by UK at 6%, a distant second.
2008- 12
UK
4%
Others, 30% China
Bangladesh, 7% 5% France
Myanmar, 8% 9%
Pakistan, 55% France
6% Germany Russia
10% 24%
Germany
Others, 57% 7% Russia
Morocco, 10% 26%
China, 12%
Singapore, 21%
While US and Russia, including the western nations, have been at the forefront of
developing several defence platforms, most other countries have stepped up the curve
through offset arrangements. Today, amongst the top 100 defence companies, US has the
highest number of defence companies followed by Western Europe. The total sales of the
top 100 arms producing and military service companies in 2012 stood at USD395bn. US and
Western European companies accounted for 86.7% of sales through 73 companies from the
two regions.
Top 10 defence players sold During the past 10 years, sales of the top 10 defence players have clocked ~5% CAGR. US
armaments worth USD 205bn continues to dominate the group with 7 companies in the top 10. These companies spend
during 2012 with over USD20bn of significantly on R&D with the expenditure topping USD16.7bn in 2012, which is about 4% of
profits total sales.
2,000
(USD bn)
800
400
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Africa Americas Asia & Oceania Europe Middle East
Source: SIPRI, Edelweiss research
(%)
Cap Exp/ Total Exp
of GDP. 2,400 (FY96 -FY04 ) 27.4% 37.4
respectively.
FY96
FY98
FY00
FY02
FY04
FY06
FY08
FY10
FY12
FY14
With significant part of the current armament either redundant or outdated (in terms of
technology), India needs to spend for massive upgrades to its existing armaments and
include/ procure the latest high-tech weapon systems. Chart below indicates that almost
~15% of the defence budget on the capex front is underutilised. Perhaps, under spending is
one of the key reasons for obsoleteness of Indias weapons systems.
53.2
A sharp 60% rise in capital
expenditure during FY05 in 39.4
(%)
addition to usual delays in
procurement led to sharp rise in 25.6
underspending
11.8
(2.0)
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
% Underspending in capex
Source: Union Budget; MoD, Edelweiss research
Since FY08, the Indian government has spent close to INR1,927bn (USD38bn) on capital
expenditure. A significant part of this was towards equipment upgradation. Air Force and
Indian Navy have been at the forefront regarding new equipment thereafter.
The Indian government is likely to spend USD248bn over the next decade on purchase of
new defence equipment for modernisation of the armed forces, making India one of the
most lucrative markets globally for equipment manufacturers. The Planning Commission has
emphasised on domestic manufacturing for self reliance and offset is the way to start with.
Indian Army
The Indian Army, with an active strength of ~1.3mn, is the third largest land force in the
world. Although the armys budget is mostly revenue-intensive, its capital expenditure
has nonetheless increased ~14% CAGR over 10 years to INR~300bn in FY13. The
increase in capital budget has, however, not translated into a comprehensive
modernisation of the Indian Army.
280
210
(INR bn)
140
70
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
Army capex
Source: MoD, Industry, Edelweiss research
The army, in order to upgrade its armament, is likely to spend INR1,000bn over the
next 5-10 years. Further, given the reduced probability of a full fledged conventional
warfare, electronic warfare and spending on electronic warfare systems has become
imperative.
The increase has, however, not prevented the depletion of its combat force strength to
34 squadrons against the government authorised 42. Further, the number of squadrons
is likely to shrink to 31 during the 12th Plan period (2012-17) given the delay in
procuring new aircraft.
Nonetheless, the IAF has taken some major initiatives to increase its squadron strength
including induction of new fighter aircraft and upgradation of existing ones in its
armoury. It is hopeful that by the 15th Plan (2027-32) the number of fighter squadrons
will rise to 45.
200
150
(INR bn)
100
50
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
Airforce capex
Source: MoD, Industry, Edelweiss research
Indian Navy
The Indian Navy (IN), the fifth-largest maritime force in the world, is responsible for
protecting Indias maritime interests along the 7,516.6km coastline, the 2.01mn km
Exclusive Economic Zone (EEZ), distant islands and its vast Sea Lines of Communication
(SLOC). Among the three services, IN, however, has the lowest budget, although its
share in the defence budget is rising gradually. It now constitutes ~19% of the defence
budget, a noticeable increase from the less than 15% in early 2000s.
Over the years, IN is becoming increasingly capital intensive. From less than 50% in
FY00, capital expenditure in its total expenditure shot up to over 66% in FY13. Its total
budgeted capital expenditure touched INR152bn, a growing at a CAGR of 21% over the
last 10 years.
160
128
96
(INR bn)
64
32
0
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
Navy capex
Chart 30: Trends in defence expenditure Chart 31: Growth in defence expenditure
27.0 190 800
114 480
(USD bn)
(USD bn)
9.0
(%)
76 320
0.0
38 160
(9.0)
0 0
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
(18.0)
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
1,280
320
S. Korea
China
Kuwait
S. Arabia
India
Ukraine
Pakistan
France
Israel
Nepal
Per-capita spending World average
Source: Nation Master, Edelweiss research
Below are few instances of promising development involving domestic private players.
JV between Pipavav and Mazagaon Dock for building warships/ other naval vessels
Pipavav is the first Indian private shipyard to bag the licence to produce naval assets
including warships for the Indian Navy. Subsequently, the company also entered into
strategic tie ups/ alliances with global defence players. In May 2012, Mazagon Dock
(MDL) selected Pipavav to partner it in a JV to build warships and speed up execution of
large pending order book along with bidding for future naval projects. The JV partner
subsequently received nod from the Government of India. The company is currently
building offshore patrol vessels for the Indian Navy. While the JV does not give
exclusivity, it will certainly speed up clearing MDLs vast order backlog.
JV between Mazagon Dock and Larsen & Toubro for building naval vessels
MDL and L&T entered into a JV to primarily build submarines and warships. The JV does
not give any specific preference to L&T and for each contract it will have to bid. Given
that MDL has a huge unexecuted order book, such a JV is likely to push it to release
orders for naval vessels, which in turn is likely to help the company build warships and
thus utilise its facility at Katupalli.
Bharat Electronics and Larsen & Toubro to compete for project worth INR100bn
The Ministry of Defence (MoD) in June 2012, for the first time, pitted a private player
against an established PSU for defence deals for development programme of strategic
nature. MoD has chosen a L&T-led consortium to bid for developing Tactical
Communications System (TCS), a backbone communications network, worth INR100bn.
Bharat Electronics (BEL), a DPSU, was the only other bidder selected. This move is
significant as it could open up a new window of opportunity for Indian private sector
companies and set a trend for increased private participation in supply of defence
equipment.
In the first six months, the L&T-led consortium and BEL were to prepare a detailed
project report (DPR). The prototype, expected to be ready in 18 months, is likely to cost
INR2-3bn, of which the government will fund 80% and bidders will bear the balance. 6-
8 months thereafter, evaluation trials are expected, post which the ministry will choose
the developer. Thus, the deal was supposed to take about two years to materialise into
order flows for the chosen company. Further, the entity that indigenises technology
better is likely to have an advantage over the one that relies more on foreign
technologies/components. The deal may also be split between the two, with major
share going to the entity with better designs. The project however has been delayed.
Tata Power SED readies improvised indigenous Howitzer, eyes INR85bn order
Interestingly, Gun Carriage Factory (GCF), Indian Ordnance Factorys arm, was also
developing an upgraded/ superior version of the Swedish Bofors around the same time.
The Tata Group has developed the gun without any mandate / commitment from the
Defence Ministry, thus putting its own money at stake. This goes on to demonstrate
that the domestic private sector is ready to invest and deliver world-class defence
equipment. Tata is looking forward to the tender to purchase 814 mounted artillery
guns worth over INR85bn.
Indigenous aircraft to be reality as Defence Ministry invites tenders worth INR130bn
The Defence Ministry, for the first time in May 2013, issued a tender to develop an
indigenous aerospace industry as it looks to replace IAFs ageing Avro aircraft. The
ministry has invited tenders for 56 transport aircraft from eight foreign vendors where
they have to partner an Indian player to produce 40 aircraft within the country with
60% local content. The first 16 aircrafts, to be manufactured at the foreign vendors site,
are to have 30% local content. The deal value is expected to be about INR130bn. The
deal is likely to be delayed given concerns on exclusion of Indian players from the
tender.
The strategy adopted by India to bring defence manufacturing/ sourcing to India was to
have a foreign firm to tie up with one of the DPSUs or OFB where some portion/ quantity
would be manufactured locally through technology transfer or assistance from the foreign
vendor. It is pertinent to note that the first ordnance factory was set up in 1801 in Cossipore
by the British. This, however, has been a time consuming and longish route given the slower
turnaround at OFBs.
Indias dependence on DPSUs and OFBs has resulted in inordinate delays in several marquee
projects. While the Light Combat Aircraft (LCA) and Arjun main battle tank were delayed by
over a decade, the Kaveri aircraft engine (for LCA) and Advanced Technology Vessel
submarine have been delayed by two decades. Delays have been the reason why armed
forces prefer to buy foreign manufactured goods / products / equipment off the shelf.
Indian companies have lobbied for long to correct this inequality and put Indian private
sector companies on par for defence procurement. This has begun to bear fruits only during
the previous decade when smaller orders are being given to private companies in India.
Several private sector companies have invested in developing defence capabilities and are
prepared to invest more. But they face an uncertain policy environment and staunch
opposition from powerful unions at DPSUs/ OFBs who oppose any move by the government
to allow the private sector a leg in.
Powerful unions have been sabotaging any move by the government to allow private sector,
which in other sectors have ushered in better productivity, newer technology and overall
efficiency. Order books of most DPSUs are several times the annual execution, leading to
delays in delivery of products/ systems to the armed forces.
Average productivity of employees across DPSUs is just INR3.9mn with Hindustan Shipyard
being lowest at INR1.6mn per employee per year compared to Bharat Electronics where it is
at INR5.9mn. This is significantly lower compared to private companiesL&Ts FY14
employee productivity stood at INR10mn; The productivity per employee of companies in
BSE Capital Goods stands at INR10.4mn. The recently approved DPP 2013 is aimed at
tapping the domestic potential to harness domestic requirement.
Table 21: Employees productivity comparing DPSU and private sector companies
Sales No. of Productivity per employee
Defence PSUs
(INR mn) employees (INR mn/Employee)
Hindustan Aeronautics 142,010 32,644 4.4
Bharat Electronics 61,038 10,305 5.9
Bharat Earth Movers 28,012 11,005 2.5
Mazagon Dock 24,047 8,670 2.8
Garden Reach
15,290 3,491 4.4
Shipbuilder & Engineers
Goa Shipyard 5,087 1,602 3.2
Bharat Dynamics 10,747 3,300 3.3
Mishra Dhatu Nigam 5,374 976 5.5
Hindsutan Shipyards 4,838 3,065 1.6
Ordinance Factories 72,290 101,445 0.7
Total 368,734 176,503 2.1
Source: FY13 Annual reports, Industry, Edelweiss research
SWOT Analysis
Opportunity Threat
A way to self reliance is adding significant export capacity/ capability, which, in wartime can be
harnessed towards domestic requirements. Further, upgrading is likely to be quicker based on
the feedback received from international customers given timelines are paramount. India is
looking at building on its Look East policy having participated in ADEX 2013 (Seoul) to
showcase some of its defence capabilities. It is looking at expanding military engagement
including exports to select ASEAN members in addition to other friendly nations.
Policy issues
Decisions are taken by the Defence Acquisition Council to categorise a proposal as Buy
or Buy and Make or Make based on advice from the DRDO and the public sector. No
inputs are sought from the private sector. Its competence and potential are given no
consideration. In all deals where transfer of technology is negotiated, the nominated
recipient is always a DPSU, even if a private sector company is better placed in terms of
infrastructure and know-how to absorb the technology. A DPSU may have to establish
complete facilities ab initio, whereas a private sector company may need only
incremental technology.
Procedural issues
Requirements of the armed forces are not made known to the private sector
sufficiently in advance, with the result that it does not get adequate time, either to
scout for foreign tie ups or to establish the necessary facilities. The time given for
submission of technical and commercial proposals is grossly inadequate for a new
entrant in the field. Parameters for the equipment to be procured are formulated with
foreign equipment in mind, after referring to manufacturers brochures. The domestic
private sector is not consulted in this process, whereas minor acceptable changes in
parameters may make the Indian equipment eligible for consideration.
Functional issues
Every producer seeks economies of scale and assured continuous orders. Unfortunately,
Indian procurement regime precludes both. RFPs are issued for one-time piecemeal
quantities without indicating the envisaged total requirement over a period of time.
Additionally, no long-term commitment is made regarding regular flow of orders. This
deters Indian companies from committing resources for establishing production
facilities as the venture can prove both expensive and risky.
Foreign exchange rate variation (ERV) risk is another major bugbear for the private
sector in defence. Given the rupee's continuing volatility and the fact that most defence
contracts run five to ten years from signing to conclusion, an ERV hedge is essential. In
every category other than Buy (Global), private Indian companies compete at a
disadvantage against foreign vendors (that are not affected by ERV) and against DPSUs
that enjoy ERV protection in "nominated" manufacturing, which constitutes the bulk of
their portfolio. That gives DPSUs a buffer which mitigates their ERV risk on other
contracts where they do not enjoy protection.
Over the next 25 years since its establishment, the Undersecretariat for Defence Industries
made significant achievements in building the blocks for a modern national defence industry
in Turkey, with notable results in certain vital areas. As a result of government efforts and
policies in support of local industries, Turkeys procurement model underwent a gradual but
significant change throughout the 1990s to co-production and finally during the last decade
to local production (i.e., developing its own designs) and system integration.
From co-production in 1990s to its
own local production in last decade, In order to increase the local content ratio and optimise resources to improve the
turkeys defence industry has technological infrastructure, R&D expenditure had to increase. Accordingly, important R&D
matured over the last 10-15 years
projects were identified and prioritised based on the defence R&D roadmap.
Turkey has used the offset clause to develop its domestic defence industry. This has helped
develop products range across land platform, naval platform, air platform, sophisticated
defence electronics and high-tech rocket-missile and ammunition. Two Turkish companies
Aselsan, a leader in electronic defence products, and Turkish Aerospace Industries (TAI)
feature amongst the top 100 global defence companies, a significant feat in a short period.
Chart 33: Total R&D expenses by Turkey Chart 34: Growth in defence exports from Turkey
800 1,400
640 1,120
480
(USD mn)
(USD mn)
840
320
560
160
280
0
2007 2008 2009 2010 2011 2012 0
2004 2005 2006 2007 2008 2009 2010 2011 2012
Total R&D Expenditure Total Defence and Aerospace Exports
Source: Undersecretariat for Defence Industries, Edelweiss research
Turkish defence industry exports stood at USD196mn in 2004, which increased to USD1.2bn
in 2012. By 2016, the country is targeting USD4bn defence production with USD2bn exports,
a 10x increase in about a decade.
South Korea set about establishing an indigenous defence industry in the 1970s. By the late
1980s, a series of overseas and domestic developments moved the focus of South Korean
defence industry beyond licensed production of US-designed conventional weapons to the
requirements of military modernisation, including command and control. By the late 1990s,
South Koreas military modernisation had begun to assume many of the characteristics of
the Revolution in Military Affairs (RMA) pioneered in the US and had begun to effect
profound changes in the nations defence industry and associated defence exports.
3,200 210.0
South Korea is looking at tapping
a large export market
2,400 140.0
(USD mn)
(%)
1,600 70.0
800 0.0
0 (70.0)
1998
1999
2000
2001
2002
2003
2004
2005
2006
2008
2011
2012
2013
Exports Growth (%)
Source: The Korea Institute of Defence Analysis, Edelweiss research
Since the late 1990s, South Korea has focused on innovation and restructuring of its military
and has been elevated from third-tier to second tier arms producer by moving from the
stage of imitation and assembly to that of creative imitation and indigenisation.
While South Korea continues to import big-ticket hardware, it continues to take steps to
promote the domestic defence industry as it increases R&D spending and today competes
with major arms-supplying countries. It spent ~USD1.5bn on defence R&D last year. In
addition, the South Korean defence industry has made remarkable progress in RMA-related
areas mostly involving command, control, communication, intelligence, reconnaissance and
surveillance.
It is noteworthy to mention that Indias L&T has tied up with South Koreas Samsung
Techwin to develop an artillery system for the Indian Army. Also, Pipavav Defence has tied
up with Komac for designing and developing as it prepares to tap the large naval business.
Bedek, established in 1953 for maintaining and refurbishing aircrafts, later developed into
the Israel Aircraft Industry (IAI). Several refurbishing and maintenance centres were also
established in the army to maintain armoured and support vehicles. The sector was opened
to the private industry and several privately owned defence firms were established in the
1950s.
However, it was only after 1967, following the French embargo on arms, that Israel
embarked on an all-out policy of self-sufficiency, trying to develop and produce all its
defence needs. By 1981, Israel had unlimited potential in the military, industrial and security
fields and was able to produce everything it needed to protect itself.
Israel is known for its high tech Israels high-tech industry has experienced an unprecedented growth rate which began in
arms industry the early 1990s. This growth is evidenced in its total sales1997 sales totalled USD7.2bn, a
growth of 10.7% over 1996; USD5.6bn in 1997, a growth of 14.2% over 1996 in exports.
Moreover, advanced technologies developed in Israel are in great demand and many Israeli-
developed applications can now be found in the products of multi-national companies in
communications, computers, information systems, medicine, optics, consumer goods and
software sectors.
Today, three companies from Israel feature amongst the top 100 defence companies
globallyElbit Systems, Israel Aerospace Industries and Rafaelwith combined sales of
~USD7bn in 2012.
ISRO pre-empted such challenges and as a result of this foresight, it has been able to
continue with its design, development and execution uninterrupted. This is a study on
intelligence, pertinent strategy and timely action. The strategy and change management
process adopted by the leadership was to look into Indias inherent industrial capabilities. It
adopted a policy that ensured maximum utilisation of industrial capability in private and
public sectors. Over the years, the level of industry participation gradually increased, in sync
with requirements of the programme.
Apart from fabricating hardware for satellites, launching vehicles and participating in
building ground infrastructure, industries are being encouraged to engage in system-level
fabrication and integration activities, either independently or through a consortium. ISRO
continues to encourage cooperative ventures in Indian industries to enable them to achieve
self-sufficiency. This ensures that the intelligence developed in the country is used
effectively and in turn makes processes more secure from national security perspective.
More than 500 small, medium and large-scale companies participate in these programmes
in the form of hardware development and supply; they also provide software and other
services. Almost 60% of a launch vehicles cost flows to Indian industries. As for rockets, 80%
of the work involved was executed through industries compared to only 40% for satellites.
ISRO is working to enhance the participation of industries in the satellite area as well. The
private sector has assumed a role of paramount importance in satellite communication,
with a large array of services such as broadcasting, a V-Sat network, internet, ground system
and training/education services. The geo-spatial information services (GIS)/remote sensing
programme includes more than 200 companies and employs over 12,000 professionals. In
addition, around 20-30 SME firms join the GIS programme every year.
In its endeavour to develop new technologies, ISRO partners with appropriate industries by
outsourcing components and sub-assemblies. It provides in-house facilities, shares
knowledge and resources, and initiates joint investments and unique test facilities. In
addition, it transfers technology to private sector vendors and support through
documentation, training, provision of components, prototype testing, commissioning of
production as well as marketing and export promotion.
After establishing a close and effective relationship with the industry, ISRO now wants the
private sector to play a larger role in specialised services, improve the quality and reliability
of products and reduce time span in achieving project objectives in the most cost-effective
manner. The policy framework of the Indian space programme envisages effective industry
participation with higher levels of aggregates in system-/stage-level supply from the
industry, use of ISROs facilities by industry, technology transfer to the industry and
utilisation of ISRO expertise including its technical consultancy services.
Companies
ASHOK LEYLAND
Riding the growth Stallion
India Equity Research| Automobiles
Ashok Leyland Defence Systems (ALDS) is a pioneer in the design, EDELWEISS 4D RATINGS
development and manufacture of specialised defence vehicles for the
Absolute Rating HOLD
armed forces and other international customers. The company is the
Rating Relative to Sector Performer
largest supplier of logistics vehicles to the Indian Army70,000 vehicles Risk Rating Relative to Sector High
on Stallion platform are the armys veritable logistics backbone. It also Sector Relative to Market Overweight
supplies a large number of vehicles for various applications to the Indian
Air Force, Indian Navy and para-military forces like troop carriers, re-
fuellers, vehicles for gun mounting, fire-fighting, UAV support and MARKET DATA (R: ASOK.BO, B: AL IN)
recovery vehicles, flat-bed trucks and buses. Maintain HOLD. CMP : INR 35
Target Price : INR 36
52-week range (INR) : 39 / 12
Strategic partnerships with global players bolster capabilities
Share in issue (mn) : 2,845.9
ALDS has formed several strategic partnerships with global players to jointly develop M cap (INR bn/USD mn) : 100/ 1,671
advanced military vehicles and defence solutions for armed forces around the world. Avg. Daily Vol.BSE/NSE(000) : 14,645.5
Its strategic partnerships with Panhard General Defence (France), Paramount Group
(South Africa) and Krauss-Maffei Wegmann (Germany) leverage their strengths to offer SHARE HOLDING PATTERN (%)
Indian customers a superior choice of products and defence solutions.
Current Q3FY14 Q2FY14
Promoters * 41.5 40.9 38.6
Offers cost effective end-to-end solutions MF's, FI's & BKs 13.3 12.3 12.4
The company offers end-to-end solutions around its proven vehicle platforms, which FII's 12.7 13.2 16.0
includes modular packages for training, maintenance, electronic publications and a Others 32.5 33.6 33.0
fleet management system as a standard feature. This solution approach translates into * Promoters pledged shares : 17.8
(% of share in issue)
operational flexibility, high reliability and cost effectiveness for customers in the
defence industry. The solutions are available off-the-shelf and also on turnkey basis.
PRICE PERFORMANCE (%)
Stock Nifty EW Auto Index
Outlook and valuations: Positive; Maintain HOLD
1 month 6.3 4.7 8.4
We believe the company will be a key beneficiary of pick up in defence sales (~4% of
3 months 53.9 15.8 21.2
FY14 revenues). It has already signed a consortium agreement with Nexter Systems
12 months 94.6 32.8 48.8
(France) and L&T to participate in key artillery gun programme worth INR120-140bn.
We are factoring in strong volumes (28% FY16 growth in domestic truck sales) and
margin (up by 900bps to 10.7% over FY14-16E). However, post the recent rally, we
believe current valuations at 8.7x/15.2x EV-EBITDA/PE on FY16E are factoring in most
of the positives. Maintain HOLD/SP with SOTP based TP of INR36.
Financials (INR mn)
Year to March FY13 FY14 FY15E FY16E
Revenues (INR mn) 124,812 99,434 108,142 135,689
Rev. growth (%) (3.3) (20.3) 8.8 25.5
Chirag Shah
EBITDA (INR mn) 8,765 1,666 8,229 14,540 +91 22 6623 3367
Net profit (INR mn) 4,337 294 1,027 6,388 chirag.shah@edelweissfin.com
Shares outstanding (mn) 2,661 2,661 2,661 2,661
Siddhartha Bera
Diluted EPS (INR) 0.5 (1.6) 0.4 2.4 +91 22 6620 3099
EPS growth (%) (77.0) NA NA 521.9 siddhartha.bera@edelweissfin.com
Diluted P/E (x) 64.6 (21.9) 90.7 14.6
EV/EBITDA (x) 15.5 84.0 16.0 8.5
ROAE (%) 3.3 (9.6) 2.3 13.7 July 9, 2014
Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Automobiles
The companys most successful platform Stallion (6x6) was launched in 1997 for the Indian
Army. The Stallion range of trucks is a medium duty defence vehicle with multiple logistical
and tactical applications. This versatile platform has been used for various applications such
as general service roles, troop carriers, water bowsers, fuel bowsers, light recover vehicles
The company is the largest and others and has performed under the most demanding operating conditions with
supplier of logistics vehicles to the excellent results. Not only was the platform successful in India, it was highly successful in
Indian Army70,000 vehicles on Honduras Army, an American organisation for operation in Iraq and Afghanistan and more
Stallion platform are the armys recently in Thailand and South Africa.
veritable logistics backbone
Fig. 1: ALDS Evolving platform
In order to address the high mobility requirements of the Indian Army, ALDS launched its
new platform Super Stallion (8x8). It is an updated version of the Stallion.
Buses
Multi Barrel Rocket Launcher
Snow clearing vehicle
Special purpose vehicles
Multi fuel dispenser
Water browser
Refrigerated truck
Company Description
ALDS is the second-largest commercial vehicle manufacturer in India. Hinduja Group holds
51% stake in the company through the holding company, Hinduja Automotive (UK). The
company has six manufacturing plants at four locations in IndiaEnnore (Tamil Nadu),
Hosur (Tamil Nadu), Alwar (Rajasthan), Bhandara (Maharashtra) and Pantnagar
(Uttaranchal). It focuses on the M&HCV segment and has a significant presence in the bus
segment.
Investment Theme
ALDS is a pure play on the M&HCV segment. Post sharp volume decline in last two years, we
expect it to be the key beneficiary of any improvement in M&HCV demand. Also, ALDS has
initiated measures to lower debt levels and improve balance sheet, benefits, of which, are
yet to filter in.
Key Risks
Longer than expected delay in recovery of the CV cycle
We expect the CV cycle to recover only in H2FY15E on the back of higher infrastructure,
mining, construction activity. However, a potential delay in the recovery may keep financial
performance, and hence, the stock performance is subdued.
Financial Statements
Key Assumptions Income statement (INR mn)
Year to March FY13 FY14 FY15E FY16E Year to March FY13 FY14 FY15E FY16E
Macro Income from operations 124,812 99,433 108,176 136,462
GDP(Y-o-Y %) 5.0 4.8 5.4 6.3 Materials costs 91,231 76,026 77,819 95,664
Inflation (Avg) 7.4 6.2 5.5 6.0 Manufacturing expenses 2,131 1,721 1,893 2,378
Repo rate (exit rate) 7.5 8.0 7.5 7.0 Employee costs 10,755 9,997 10,366 11,756
USD/INR (Avg) 54.5 62.0 60.0 58.0 Total SG&A expenses 11,930 10,025 9,868 12,124
Sector Total operating expenses 116,047 97,768 99,947 121,923
MHCV - domestic vol (% YoY) (23.2) (28.0) 7.0 25.0 EBITDA 8,765 1,665 8,229 14,539
Steel prices (INR/t) 39,200 39,200 39,984 40,784 Depreciation & Amortization 3,808 3,770 3,850 3,919
Aluminium prices (USD/t) 2,300 2,400 2,448 2,497 EBIT 4,957 (2,106) 4,379 10,620
Company Non-Operational Income 624 665 712 760
MHCV - domestic vol (% YoY) (13.0) (26.7) 7.1 25.9 Interest expenses 3,769 4,529 3,863 3,086
Avg realisation (INR) 1,089,179 1,112,673 1,150,165 1,183,240 Profit before tax 1,812 (5,970) 1,229 8,295
Avg realisation (% YoY) (13.9) 2.2 3.4 2.9 Provision for tax 370 (1,206) 172 1,908
RM cost/vehicle 796,134 850,746 827,401 829,488 Net profit 1,442 (4,258) 1,057 6,387
Employee cost/vehicle 93,855 111,865 110,218 101,936 Extraordinary income/ (loss) 2,896 5,057 - -
Average salary 667,523 620,452 651,475 729,652 Profit After Tax 4,337 293 1,057 6,387
Promotion cost (% revenue) 2.8 2.9 2.9 2.9 Basic EPS (INR) 0.5 (1.6) 0.4 2.4
EBITDA/vehicle 76,488 18,628 87,495 126,068 Shares outstanding (mn) 2,661 2,661 2,661 2,661
Average Interest rate (%) 8.7 9.6 10.0 9.5 Diluted EPS (INR) 0.5 (1.6) 0.4 2.4
Average Depreciation rate (%) 5.7 5.3 5.3 5.3 CEPS (INR) 2.0 (0.2) 1.8 3.9
Tax rate (%) 7.9 132.0 14.0 23.0 Dividend per share (INR) 0.6 - 0.2 1.1
Dividend payout ratio (%) 36.8 - 42.0 45.0 Dividend payout (%) 36.8 - 42.0 45.0
Net borrowings (INR mn) 12,575 3,791 (6,000) (6,000)
Capex (INR mn) 7,503 2,309 1,500 1,500 Common size metrics
Debtor days 39 50 43 34 Year to March FY13 FY14 FY15E FY16E
Inventory days 83 74 54 48 Materials costs 73.1 76.5 71.9 70.1
Payable days 140 154 141 126 Employee expenses 8.6 10.1 9.6 8.6
Cash conversion cycle (days) (19) (31) (44) (44) EBITDA margins 7.0 1.7 7.6 10.7
Net profit margins 1.2 (4.3) 1.0 4.7
Additional Data
Directors Data
Dheeraj G. Hinduja Non Executive Chairman R. Seshasayee Non Executive Vice Chairman
Vinod K Dasari Managing Director Anuj Kathuria Executive Director
Anup Bhat Executive Director B. Venkat Subramaniam Executive Director
C. G. Belsare Executive Director Gopal Mahadevan Chief Financial officer
N V Balachandar Executive Director Nitin Seth Executive Director
Holding Top10
Perc. Holding Perc. Holding
Hinduja automotive l 38.82 Life insurance corp 8.45
Baytree investments 1.63 Hdfc life insurance 1.45
Dimensional fund adv 1.31 General insurance co 1.07
Matthews intl capita 1.04 Vanguard group inc 0.64
Dsp blackrock invest 0.52 Sundaram asset manag 0.46
*in last one year
Bulk Deals
Data Acquired / Seller B/S Qty Traded Price
28 Mar 2014 Hinduja Automotive Ltd Buy 16623958 22.70
11 Oct 2013 Hinduja Automotive Ltd Buy 26000000 16.55
11 Oct 2013 Lotus Global Investment Ltd Sell 26000000 16.55
10 Oct 2013 Hinduja Automotive Ltd Buy 26000000 15.80
10 Oct 2013 Lotus Global Investments Ltd Sell 26000000 15.80
*in last one year
Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
28 Apr 2014 Mr Vindo K Dasari, Managing Director Buy 100000.00
28 Feb 2014 Mr. R Sivanesan Buy 50000.00
18 Oct 2013 Hinduja Automotive Limited Buy 60785517.00
19 Aug 2013 Mr vinod K Dasari Buy 100000.00
*in last one year
Astra Microwave Products (AMP) is a leading player in designing and EDELWEISS RATINGS
manufacturing high value-added radio frequency (RF) and microwave- Absolute Rating BUY
based super components and sub-system finding applications in defence, Rating Relative to Sector Outperformer
space and civil communication systems. The company is in a sweet spot Risk Rating Relative to Sector High
to benefit from increased spending in defence, including offset contracts. Sector Relative to Market Overweight
Also, AMP has established itself as a part of the global supply chain for
OEMs, a testimony to its quality. We initiate coverage with BUY.
MARKET DATA (R: ASTM.BO, B: ASTM IN)
CMP : INR 133
Defence electronics opportunity pegged at USD13bn Target Price : INR 168
While Indias overall defence spending is likely to top USD248bn, the more relevant 52-week range (INR) : 156 / 30
market of defence electronics for AMP is pegged at USD13bn over the next 7-8 years. Share in issue (mn) : 81.8
Further, we anticipate projects worth INR100bn to be awarded over the next two M cap (INR bn/USD mn) : 11 / 182
years, where the company could be a significant beneficiary, improving its revenue Avg. Daily Vol.BSE/NSE(000) : 797.9
visibility from the current two years. Orders from overseas OEMs are likely to provide
further impetus. SHARE HOLDING PATTERN (%)
Current Q3FY13 Q2FY13
Strong order book provides visibility for next two years Promoters % 21.9 21.9 21.9
AMPs order backlog at INR9.8bn provides visibility for the next two years with half MF's, FI's & BKs 4.5 4.5 4.4
accounting for export orders. The company is well placed in certain orders to be FII's 0.5 0.5 2.8
released by the global OEMs over the next 12-18 months. It is also likely to benefit others 73.1 73.1 70.9
* Promoters pledged shares : NIL
from increased supply of Akash missiles by its key suppliers, BEL and Bharat Dynamics . (% of share in issue)
FCF to improve; 13% EPS CAGR over next 2 years RELATIVE PERFORMANCE (%)
We expect AMP to do cumulative free cash flow (FCF) of ~INR1bn over the next 2 years Stock over
Sensex Stock
led by improving profitability, stable working capital and lower capex. We also expect Sensex
13% EPS CAGR led by 8% revenue CAGR and 80bps margin expansion over next 2 years. 1 month 0.0 25.0 25.0
3 months 12.7 126.0 113.3
Outlook and valuations: Well geared; initiate with BUY 12 months 31.6 133.9 102.3
AMP is set to benefit from increased defence outlay given its tie-ups with several
global OEMs, which are in the reckoning for bagging large defence orders from India.
We like AMPs business model, which draws heavily from its sound R&D capability. We
initiate coverage with BUY/SO and target price of INR168, based on 21x FY16E EPS.
Financials
Year to March FY13 FY14 FY15E FY16E
Revenues (INR mn) 2,275 5,312 6,560 6,191 (Click on image
Rahul Gajare to view video)
Rev. growth (%) 11.6 133.5 23.5 (5.6) +91 22 4063 5561
EBITDA (INR mn) 644 838 1,048 1,040 rahul.gajare@edelweissfin.com
Net profit (INR mn) 372 515 635 656
Swarnim Maheshwari
EPS (INR) 4.6 6.3 7.7 8.0 +91 22 4040 7418
EPS growth (%) 20.2 37.4 23.8 3.4 swarnim.maheshwari@edelweissfin.com
Diluted P/E (x) 29.0 21.1 17.1 16.5
ROE (%) 20.1 23.2 23.8 20.7 July 09, 2014
Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Defence
Investment Rationale
(%)
Cap Exp/ Total Exp
cent of GDP 2,400 (FY96 -FY04 ) 27.4% 37.4
1,655
1,210
(INR mn)
766
321
(124)
FY15E
FY16E
FY09
FY10
FY11
FY12
FY13
FY14
OCF FCF
Source: Company; Edelweiss research
Valuation
AMP stands to benefit from rising defence outlay in India. The criticality and tolerance levels
for components in defence are very high owing to which the entry barriers are formidable.
Moreover, the several tie-ups with the global OEMs will aid AMP in its offset contracts.
Drawing from its sound R&D base, the company is a part of the global supply chain. This
ensures continued orders, given non-linear order flow in the defence industry. Overall, AMP
is well placed to tap opportunities both in India and globally over the long term. In the next
two years, we estimate earnings to increase at 13% CAGR, while return ratios are likely to
remain at above 20% levels.
The stock is currently trading at 17.1x and 16.5x its FY15E and FY16E earnings respectively.
We initiate coverage on AMP with BUY/ Sector Outperformer and target price of INR 168,
implying 26% upside from current levels and based on 21x FY16E EPS..
48.0
36.0
(x)
24.0
12.0
Average P/E at 21.x (FY06-FY14)
0.0
Dec-05
Dec-06
Aug-11
Aug-12
Oct-08
Oct-09
Apr-09
Nov-07
May-07
May-08
Sep-10
Feb-12
Jan-13
Jan-14
Mar-10
Mar-11
Jun-06
Jul-05
Jul-13
Jul-14
Average PE AMP 1 year trailing P/E
Source: Edelweiss research
Key Risks
Slowdown in defence spending: Any slowdown in the defence spending could impact
revenue and hence the companys profit.
Company Description
Overview
Astra Microwave Products develops, manufactures, and distributes wireless communication
solutions. AMP offers products in the areas of telecommunications, defense, and space,
and the product line includes amplifiers, base stations, dish antennas, filters, microwave
components, and switching equipment.
The companys products are widely used in VSAT operations, radars, navigational
equipment, public mobile trunk radio (PMTR), WLL and Cellular GSM/DCS or PCS networks.
The products meet ITU, MIL and Space standards, and bear testimony to its R&D
breakthroughs using ISO quality processes, world-class manufacturing facilities and
equipment, and trained manpower. AMP was incorporated in 1991 by a team of senior
professionals and eminent scientist. The manufacturing facilities are located at Bollarum
and Rangareddy in Andhra Pradesh
The defense segment, both domestic and exports, put together is the major contributor of
sales with over 90% of revenues coming from this business. While the production program
of missiles and radars sub-systems are driving the domestic business, defence offset
requirements drives exports. Business potential of this segment is likely to further improve
in the coming years.
Defence
26%
Sapce
Exports (Part of 10%
defence) Metrology/Civil
63%
Telecom
1%
AMP
Meteorological
Defence Sapce Telecom
Products
Key personnel
Strength Weakness
Strong R&D, experienced team and Declining margins due to change in
established track record provides an product profile and customer mix
edge Higher dependence on select
Strong execution track record with customers
sticky clients Working capital intensive business
SWOT
Opportunity
Threat
Equipped to supply sub systems to
Dassault in the MMRCA deal Downsizing defence expenditure
Key beneficiary of increased Emergence of new private players
indiginesation of defence Lumpy execution of orders
equipments
Source: Edelweiss research
Product offerings
AMPs business offerings product-wise are as follows:
Defence
A) Radar - TR modules, microwave sub-systems, microwave receivers, power limiters
B) Telemetry - Data and video telemetry transmitter systems, tracking systems, etc.
C) Ground-based surveillance- frequency synthesizer, antennae for ground
surveillance applications
Space
A) Ground based - Coherent frequency generators, modulators, etc.
B) On board transmitters, band receivers, etc.
Telecom
A) Repeaters
B) Jammers
C) Amplifiers
D) Boosters
E) Band pass and CDMA rejection filters
Meteorology
A) Automatic weather stations for remote data collection
B) Met towers
100.0
80.0
60.0
(%)
40.0
20.0
0.0
FY09 FY10 FY11 FY12 FY13 FY14
Defence Space Meteorological & Telecom Products
Source: Company, Edelweiss research
Industry
Per capita defence spend low
While Indias per capita defence spend is on the lower side given its large population, it is
among the largest defence importers and likely to be the third largest overall spender over
the next decade. However, going ahead, per capita defence spending is set to increase given
the huge spending lined up by the Indian defence establishment. The country is likely to
spend over USD248bn on defence equipment in the next decade.
1,280
960
(USD)
S. Korea
China
Kuwait
S. Arabia
India
Ukraine
Pakistan
France
Israel
Nepal
Per-capita spending World Average
Source: Nation Master, Edelweiss research
The DPP has evolved since 2002 with the latest being DPP 2013. While the private sector will
always seek more benefits and concessions, the ones that emerge out of our discussions
with industry captains include: (1) permitting exports; (2) infrastructure industry status for
tax benefits; (3) better duty structure; (4) R&D support from the government as is available
in other countries; (5) keeping all duties, taxes out of L1 calculations, thus making
comparison with foreign vendors on like-to-like basis; and (6) balancing nomination across
public and private sectors.
Given that the defence sector was catered to by DPSUs and OFBs, the scope for private
sector was limited. Further, with most purchases from DPSU being embroiled in delays, the
capability of armed forces has been adversely affected. To bridge this gap, the government
is looking at promoting private sector participation in the defence sector. While private
sector has proved time and again across industry of bringing in efficiency, improvement in
technology through R&D spend, the defence sector is likely to see major changes in the
way it functions as private sector contribution / involvement increases.
Since the introduction of offsets, contracts worth ~INR140bn have been concluded so far.
Thus, there are now tremendous opportunities available which will spur growth of the
indigenous defence industry, including the private sector, in the next plan period. The offset
model has been successful globally.
Financial Outlook
Revenue growth to be muted over next two years
We expect AMPs top line to remain muted over the next two years with 8% CAGR over
FY14-16E. While the company is expected to post 23% revenue growth in FY15 on increased
supplies for Aakash missiles and radars in addition to the large export order, FY16 revenues
are expected to decline impacted by reduced visibility given lower order intake. However,
the company is negotiating few orders like DRG subsystem Elta Systems, Israel, sub-
systems for MMRCA Thales, France and another order with Rafale, Israel. These orders
clubbed together could be worth USD700-800mn. The company expects these order awards
towards latter part of FY15 or early FY16. Thus, these are unlikely to contribute majorly to
FY16E revenues. However, beyond FY16, we expect revenues to pick strongly on big ticket
size orders to be won by the company as the government is likely to speed up defence
procurements.
180.0 6,000
90.0 4,500
(INR mn)
(%)
0.0 3,000
(90.0) 1,500
(180.0) 0
FY10 FY11 FY12 FY13 FY14E FY15E FY16E
Revenues (RHS) Defence Space Meterological & telecom
Source: Industry, Company, Edelweiss research
28.0 1,000
(INR mn)
(%)
expected to be led by change in the
business mix in favour of high- 14.0 500
margin domestic businesses
7.0 250
0.0 0
FY15E
FY16E
FY09
FY10
FY11
FY12
FY13
FY14
EBITDA (RHS) Margins
Source: Industry, Company, Edelweiss research
600 100.0
450 50.0
(INR mn)
(%)
300 0.0
150 (50.0)
0 (100.0)
FY14E
FY15E
FY16E
FY09
FY10
FY11
FY12
FY13
Financial Statements
Additional Data
Holding - Top 10
Perc. Holding Perc. Holding
L&T 9.7 HDFC AMC 8.1
Reliance LT fund 4.4 Reliance Capital AMC 4.2
Stategic Ventures , Mauritius 4.0 Axis AMC 3.4
DSC Blackrock 2.6 SBI Fund 1.6
Prudential ICICI AMC 1.4 Kotak Mahindra Prime 1.2
Bulk Deals
Date Acquirer/Seller B /S Qty Traded Price
6-Mar-13 Kusum Gupta Sell 675000 40.3
6-Mar-13 Sangitaben Rajeshbhai Vekaria Buy 700000 40.3
2-May-14 Hdfc Mf A/C Hdfc Growth Fund Buy 660000 75.8
2-May-14 Hdfc Mutual Fund Buy 470000 76.3
5-May-14 Hdfc Mutual Fund Buy 442000 78.5
14-May-14 Hdfc Mutual Fund Buy 900000 79.5
14-May-14 Skanda Aerospace Pvt Ltd Sell 900000 79.5
14-May-14 Hdfc Mutual Fund Buy 1457652 79.5
14-May-14 Skanda Aerospace Pvt Ltd Sell 1792139 79.5
15-May-14 Skanda Aerospace Pvt Ltd Sell 791487 83.0
15-May-14 Skanda Aerospace Pvt Ltd Sell 791487 83.0
30-May-14 Hdfc Mutual Fund Buy 450001 109.0
30-May-14 Param Capital Research Pvt Ltd Sell 500000 109.5
6-Jun-14 Astra Infonets Ltd Sell 542090 109.2
Insider Trades
Data Acquired / Seller B/S Qty Traded Price
No Data Available
*in last one year
BHARAT ELECTRONICS
Formidable player
India Equity Research| Engineering and Capital Goods
Bharat Electronics (BEL), established by the government under the EDELWEISS 4D RATINGS
Ministry of Defence (MoD) in 1954 to meet the specialised electronic Absolute Rating BUY
needs of the Indian defence services, has grown into a multi-product, Rating Relative to Sector Outperformer
multi-technology and multi-unit company, serving the needs of Risk Rating Relative to Sector High
customers in diverse fields in India and abroad. The company offers Sector Relative to Market Overweight
products and services in a wide spectrum of technology like radars,
military communications, naval systems, electronic warfare systems,
MARKET DATA (R: BAJE.BO, B: BHE IN)
telecommunications, sound & vision broadcasting, opto-electronics, tank CMP : INR 1,961
electronics, solar photovoltaic systems, embedded software and Target Price : INR 2,250
electronic components. It also provides turnkey systems solutions like 52-week range (INR) : 2,320 / 893
command control communication & computer intelligence (C4I), covering Share in issue (mn) : 80.0
requirements of all the three forces. Maintain BUY. M cap (INR bn/USD mn) : 157/ 2,624
Avg. Daily Vol.BSE/NSE(000) : 65.4
Well positioned to ride rising defence expenditure
SHARE HOLDING PATTERN (%)
With defence offsets, 49% FDI limit amendments to new DPP and increasingly obsolete
inventory of defence equipment, we expect Indias overall defence spending to be Current Q3FY14 Q2FY14
around USD248bn over the next decade. While most defence equipment procurement Promoters * 75.0 75.9 75.9
is from foreign vendors, the government targets to increase domestic share. BEL is well MF's, FI's & BKs 16.9 15.3 15.3
positioned to benefit on this front given its strong R&D capabilities and long standing FII's 3.7 4.5 4.3
relationships with Indian defence establishments. Others 4.4 4.3 4.6
* Promoters pledged shares : NIL
(% of share in issue)
Addressable business opportunity at more than USD13bn
As per our bottoms-up analysis of various defence projects, projects worth USD38bn PRICE PERFORMANCE (%)
are expected to be awarded over the next five-seven years, of which BELs scope is EW Capital
Stock Nifty
worth USD13.5bn. This provides ample revenue visibility to the company over the long Goods Index
term. We also understand that BEL has submitted bids in projects worth INR200bn 1 month 26.1 4.7 5.0
where it is favourably placed. 3 months 92.4 15.8 39.5
12 months 75.2 32.8 83.2
Outlook and valuations: Positive momentum; maintain BUY
We expect BELs dominant status to sustain and believe it will be amongst the prime
beneficiaries of opening up of the defence sector. With the new government likely to
speed up defence ordering and execution, we believe the company is well placed to
tap into this opportunity. We maintain BUY/SO with a target price of INR2,250. Rahul Gajare
+91 22 4063 5561
rahul.gajare@edelweissfin.com
Year to March FY13 FY14 FY15E FY16E
Revenues (INR mn) 61,038 62,755 68,361 77,729 Amit Mahawar
Rev. growth (%) 5.8 2.8 8.9 13.7 +91 22 4040 7451
amit.mahawar@edelweissfin.com
EBITDA (INR mn) 6,361 8,918 9,776 11,271
Net profit (INR mn) 8,899 9,316 9,955 11,257 Swarnim Maheshwari
+91 22 4040 7418
EPS (INR) 111.2 116.5 124.4 140.7
swarnim.maheshwari@edelweissfin.com
EPS growth (%) 7.2 4.7 6.8 13.1
P/E (x) 17.7 16.9 15.8 14.0
ROAE (%) 14.9 14.0 13.4 13.5 July 9, 2014
Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson 101 First Call, Reuters and Factset. Edelweiss
Edelweiss Securities
Securities Limited
Limited
Engineering and Capital Goods
7.0
(%)
2,268 5.9 5.6
5.2 5.2
124 2.0
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
Capital exp Revenue exp R&D Exp as % of Sales (RHS)
Source: Company; Edelweiss research
4,104 39.0
(No of employees)
3,565 33.0
((%))
3,027 27.0
2,488 21.0
1,949 15.0
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
Engineers / Scientist Engineers & Scientist as % of total employees
Source: Company; Edelweiss research
BEL has developed many new products in surveillance radars, communication equipment
and electronic warfare products. While these will continue to be focus areas, going forward,
Electronic
warfare system
for fighter
aircraft
(INR 30bn)
Source: Industry, Edelweiss research
Products
Electronic Voting Machines
Radars
Telecommunications
Opto-electronics
Semiconductors
Missiles (Akash)
Sonars
Fire-control system
Radar
Simulators
Defence Communications
Company Description
Established by GoI under the Ministry of Defence in 1954 to meet the specialised electronic
needs of the Indian defence services, BEL has grown into a multi-product, multi-technology
and multi-unit company, serving the needs of customers in diverse fields in India and
abroad. The company offers products and services in a wide spectrum of technology like
radars, military communications, naval systems, electronic warfare systems,
telecommunications, sound and vision broadcasting, opto-electronics, tank electronics, solar
photovoltaic systems, embedded software and electronic components. It also provides
turnkey systems solutions like command control communication & computer intelligence
(C4I), covering requirements of all the three forces.
Investment Theme
BEL, one of Indias largest defence public sector undertakings (PSU), specialises in
manufacturing defence electronics. It is emerging as a key beneficiary of increase in defence
capital expenditure. Further, domestic companies, including BEL, are likely to benefit from
key changes in government policies, notably the offset clause (at least 30% of an order must
be sub-contracted domestically for orders over INR3bn). Despite the entry of private
players, we believe BEL as a defence PSU is poised to benefit from increased defence capital
expenditure and the offset policy.
BEL has a strong order book, equivalent to nearly four years of revenue. Its order book is
slated to grow over the next few years because of steady demand for its existing product
range; potential orders from high value projects (e.g., tactical communication systems) and
growth opportunities in the non defence/ export segments.
Key Risks
Delay/lumpiness in execution of defence contracts
The defence market is monopolistic in nature with GoI being the sole buyer of defence
equipment, which puts suppliers such as BEL at a disadvantage. Further, defence
procurement procedures are complex and past experience suggests that they have tended
to move at an extraordinarily slow pace. This has a dual impact: the equipment flow may
not occur and it leads to a high degree of lumpiness in the order book.
Financial Statements
Key Assumptions Income statement (INR mn)
Year to March FY13 FY14 FY15E FY16E Year to March FY13 FY14 FY15E FY16E
Macro Income from operations 61,038 62,755 68,361 77,729
GDP(Y-o-Y %) 5.0 4.8 5.4 6.3 Materials costs 38,069 36,309 39,650 44,694
Inflation (Avg) 7.4 6.2 5.5 6.0 Employee costs 11,108 10,304 12,784 14,535
Repo rate (exit rate) 7.5 8.0 7.8 7.3 Other Expenses 5,500 7,224 6,153 7,229
USD/INR (Avg) 54.5 60.5 58.0 56.0 Total operating expenses 54,677 53,837 58,586 66,458
Company EBITDA 6,361 8,918 9,776 11,271
Defence CAPEX in Country (INR bn) 690 788 950 1100 Depreciation and amortisation 1,307 1,421 1,516 1,596
Order intake (INR bn) 53 45 78 102 EBIT 5,054 7,497 8,260 9,675
Burning rate (%) 19.6 21.3 22.2 22.9 Other income 6,100 4,285 4,667 4,942
Depreciation 6.5 6.5 6.5 6.5 Interest expenses 8 34 - -
Yield (%) 11.3 10.0 10.0 10.4 Profit before tax 11,146 11,748 12,927 14,617
Tax rate (%) 20.2 20.7 24.0 24.0 Provision for tax 2,248 2,431 2,973 3,362
Excise duty as a % of sales 1.0 1.0 1.0 1.0 Net profit 8,899 9,317 9,954 11,255
Capex (INR mn) 2,466 1,600 1,500 1,500 Profit After Tax 8,899 9,317 9,955 11,257
Shares outstanding (mn) 80 80 80 80
Diluted EPS (INR) 111.2 116.5 124.4 140.7
Dividend payout (%) 21.8 20.8 19.5 17.2
Additional Data
Directors Data
Anil Kumar Managing Director M S Ramachandran Part Time Independent Director
N Sitaram Part Time Independent Director R Venkata Rao Part Time Independent Director
V K Bhalla Part Time Independent Director SN Dash Part Time Independent Director
Anil Razdan Part Time Independent Director Anurag Kumar Part Time Independent Director
SP Kochhar Part Time Government Director Satyajeet Rajan Part Time Government Director
M L Shanmukh Whole Time Director Sunil Kumar Sharma Whole Time Director
Amol Newaskar Whole Time Director H N Ramakrishna Whole Time Director - Marketing
Ajit T Kalghatgi Director
Holding Top10
Perc. Holding Perc. Holding
Government of india 75.02 Life insurance corp 8.26
Prudential icici ass 1.69 Hdfc asset managemen 1.62
Uti asset management 1.12 Reliance capital tru 0.8
Vanguard group inc 0.63 Aviva life insurance 0.61
Dsp blackrock invest 0.58 Tata asset managemen 0.52
*in last one year
Bulk Deals
Data Acquired / Seller B/S Qty Traded Price
No Data Available
*in last one year
Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
*in last one year
BHARAT FORGE
Favourably positioned
India Equity Research| Engineering and Capital Goods
Bharat Forge (BHFC) is the second largest forging player in the world with EDELWEISS 4D RATINGS
the largest repository of metallurgical knowledge. The company grew Absolute Rating BUY
from primarily being an automotive ancillary to evolving into an Rating Relative to Sector Outperformer
engineering enterprise focused on technological excellence. It has gained Risk Rating Relative to Sector Medium
some ground in aerospace and defence having put together an Sector Relative to Market Overweight
indigenous artillery gun, which is currently at testing stage. Given BHFCs
focus on de-risking its business model, the company has been looking at
MARKET DATA (R: BFRG.BO, B: BHFC IN)
scaling up its non-auto business from the current 35% to 50-60% over the
CMP : INR 623
next few years. We maintain BUY with a target price of INR683. Target Price : INR 683
52-week range (INR) : 682 / 185
Tie-ups with global OEMs to fortify capabilities; high entry barriers Share in issue (mn) : 232.8
BHFC, in a joint venture (JV) with Elbit Systems Land (a US-based Israeli defence M cap (INR bn/USD mn) : 145 / 2,422
electronics company), is providing artillery and mortar system solutions to the Indian Avg. Daily Vol. BSE/NSE (000) : 753.6
armed forces. The JV offers solutions in artillery guns and mortars segment drawing
from Elbit Systems operationally proven portfolio. In aerospace, given criticality and SHARE HOLDING PATTERN (%)
high tolerance levels, barriers to entry are high. Also, with certain vital certifications Current Q3FY14 Q2FY14
(NADCAP and AS9100) in place, which is a precondition for aerospace component Promoters * 46.7 46.7 46.7
manufacturers/ suppliers, the company is well-poised to make significant progress over MF's, FI's & BKs 14.5 17.5 18.8
the next two years. It is closely working with some large global OEMs in aerospace for FII's 16.0 13.6 11.3
supplying critical components and expects revenue to flow from FY16. In artillery guns, Others 22.8 22.2 23.2
BHFC is readying to forge components of the gun. The company is best placed to * Promoters pledged shares : Nil
(% of share in issue)
undertake forging activities through given its vast capabilities.
RELATIVE PERFORMANCE (%)
Outlook and valuations: Improving; maintain BUY Stock Over
Sensex Stock
While BHFC is a leader in its key markets in the automotive segment, the company is Sensex
looking at significantly scaling up its non-auto business which will in turn bolster its 1 month 0.4 12.6 13.0
profitability. The stock is trading at 23.7x and 18.7x FY15E and FY16E earnings, 3 months 12.1 44.3 32.2
respectively. We maintain BUY/Sector Outperformer with a target price of INR683, 12 months 29.0 186.4 157.4
valuing the stock at 20.5x FY16E EPS.
Financials
Year to March FY13 FY14 FY15E FY16E
Revenues (INR mn) 57,022 67,161 66,017 78,876
Growth (%) (9.2) 17.8 (1.7) 19.5
Rahul Gajare
EBITDA (INR mn) 7,694 10,271 12,104 14,737 +91 22 4063 5561
Net profit (INR mn) 1,824 4,150 6,114 7,757 rahul.gajare@edelweissfin.com
Diluted EPS (INR) 5.9 17.7 26.3 33.3
Niraj Mansingka, CFA
EPS growth (%) (67.9) 201.1 48.3 26.9 +91 22 6623 3315
Diluted P/E (x) 106.0 35.2 23.7 18.7 niraj.mansingka@edelweissfin.com
Company Description
BHFC is the flagship company of Kalyani Group, which has significant presence in the
automotive components sector in India. It is one of the largest commercial forging
companies in the world in terms of capacity and revenue, with presence in automotive as
well as non-automotive component sectors with wide domain knowledge in design and
engineering of highly critical automotive and non-automotive components. It is one of the
worlds leading manufacturers and suppliers of forged and machined automotive chassis
and engine components such as crankshafts, front axle beams, connecting rods, steering
knuckles and other components to several of the worlds leading commercial and passenger
vehicle manufacturers. Through several strategic acquisitions, BHFC has established
presence in the European market Germany, Sweden, and developed dual-shore
manufacturing capacities for many of production facilities, full service supply capabilities,
strong design and engineering abilities and achieved greater access to customers and
markets outside of India.
Investment Theme
A well-diversified, de-risked business model: The promoters have been focusing on de-
risking BHFCs business model. Their strategy has been to diversify the auto and non-auto
segments through acquisitions/JVs across geographies.
Gearing up for demand revival in key markets US, Europe and India: With improving
macro economic outlook in both US and Europe, demand for class 8 truck in the US is likely
to improve. Change in emission norms to help with pre-buying in the US market. Similarly,
European market has bottomed out and it gives early signs of revival in passenger vehicles.
In India, growth in CVs is likely to return with higher share of multi-axle vehicles.
Non auto to scale up further: BHFC is looking at increasing the share of non-auto to 50-60%
over the next few years. The non-auto business have better margin given higher machining
proportion. The company is positive on energy, transportation (including railways and
aerospace) construction and defence sectors to scale up its non-auto business.
Key Risks
Delayed revival in key markets: FY14 has gone down as the worst year in more than a
decade for the Indian automotive industry with CVs declining ~25%. While industry is
expected to pick up in FY15, any delay in pick up will likely hurt auto ancillary players like
BHFC. Similarly, both the US and European market has seen lackluster growth last year. Any
delay in pick in these markets is likely to affect the exports from India for the company.
Additional investment/cash calls from subsidiaries: Return ratios were impacted due to
cash calls from subsidiaries/JVs. While the situation is expected improve going ahead with
the company exiting loss-making operations in US and China, additional investment/cash
calls from its other subsidiaries could impact overall return ratios of the company.
Slower ramp up in non-auto business: The company is focused on increasing share of non-
auto business in overall revenue mix to 50-60% over the next few years, which will help
improve its overall margin profile. Any delay in ramp up of non-auto business could weigh
on overall margin profile of company.
Financial Statements
Key assumptions (INR mn) Income statement (INR mn)
FY13 FY14 FY15E FY16E Year to March FY13 FY14 FY15E FY16E
Macros Revenues 57,022 67,161 66,017 78,876
GDP (Y-o-Y %) 5.0 4.8 5.4 6.3 Cost of materials consumed 26,072 32,241 32,214 38,969
Inflation (Avg) 7.4 6.2 5.5 6.0
Employee costs 8,013 7,901 9,026 10,750
Repo rate (exit rate) 7.5 8.0 7.8 7.3
Other expenses 15,243 16,748 12,673 14,421
USD/INR (Avg) 54.5 60.5 58.0 56.0
Total expenses 49,328 56,890 53,913 64,139
Key financial assumptions
Revenue Growth (%) EBITDA 7,694 10,271 12,104 14,737
Standalone (14.5) 7.9 17.2 17.1 Depreciation & amortization 3,360 3,579 3,368 3,650
Auto 5.8 21.2 19.6 23.0 EBIT 4,334 6,693 8,736 11,086
Non-Auto (10.7) 11.5 10.6 12.6 Interest expense 1,908 1,692 1,336 1,036
CDP Bharat Forge (7.1) 13.5 19.4 20.0 Other income 1,126 1,249 1,335 1,356
Bharat Forge Aluminiumtechnik 24.6 8.2 17.7 40.4 Exceptionals 366 1,037 - -
Bharat Forge Kilsta 3.7 18.7 21.0 21.0 Profit before tax 3,917 7,287 8,734 11,407
Shipment - Standalone (MT) 172,030 174,808 192,289 211,518 Tax 1,728 2,100 2,620 3,650
Realisation (INR/MT) 183,179 194,457 207,209 220,586
Core profit 1,824 4,150 6,114 7,757
Shipment - Consolidated (MT) 330,243 336,848 353,690 371,375
Extraordinary income/(loss) (168) (230) - -
Realisation (INR/MT) 172,666 199,381 186,652 212,389
Profit after tax 1,656 3,920 6,114 7,757
Tax rate (%) 44.1 28.8 30.0 32.0
Capex (INR mn) (5,605) 785 (4,500) (2,000) Minority int. & others-paid/(recd.) 455 29 - -
Net profit after minority interest 1,201 3,891 6,114 7,757
Shares outstanding (mn) 232.9 232.8 232.8 232.8
EPS (INR) basic 5.9 17.7 26.3 33.3
Diluted shares (mn) 232.9 232.8 232.8 232.8
EPS (INR) diluted 5.9 17.7 26.3 33.3
CEPS (INR) 20.3 33.1 40.7 49.0
Dividend per share 2.5 4.5 4.0 4.5
Dividend pay out (%) 42.5 25.4 15.2 13.5
Additional Data
Directors Data
Mr. B. N. Kalyani Chairman & Managing Director Mr. S.M. Thakore Independent Director
Mr. G. K. Agarwal Deputy Managing Director Mr. S.D. Kulkarni Independent Director
Mr. Amit B. Kalyani Executive Director Mr. P.G. Pawar Independent Director
Mr. B.P. Kalyani Executive Director Dr. Uwe Loos Independent Director
Mr. S. E. Tandale Executive Director Mrs. Lalita D. Gupte Independent Director
Mr. Sunil K. Chaturvedi Executive Director Mr. P.H. Ravikumar Independent Director
Mr. Vimal Bhandari Executive Director Mr. Naresh Narad Independent Director
Mr. P.C. Bhalerao Non-Executive Director Dr. T. Mukherjee Independent Director
Holding - Top 10
Perc. Holding Perc. Holding
Relaice Capital AM 3.5 LIC India 3.3
Copthall Mauritius 2.4 UTI AMC 2.3
Prudential ICICI AM 1.5 Vanguard Group of Companies 1.0
AGF Investments 0.9 William Blair 0.7
Dimensional Fund advisors 0.5 Touchstone advisors 0.5
Bulk Deals
Data Acquired / Seller B/S Qty Traded Price
12-Sep-13 Sundaram Trading & Investment Pvt Ltd Buy 8,431,225 250.10
12-Sep-13 Krutadnya Management & Trading Services Llp Sell 8,431,225 250.10
18-Sep-13 Sundaram Trading & Investment Pvt Ltd Buy 2,489,525 263.00
*in last one year
Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
16-Sep-13 Sundaram Trading and Investment Pvt. Ltd Buy 8,431,225
23-Sep-13 Sundaram Trading and Investment Pvt. Ltd. Buy 2,489,525
4-Oct-13 BF Investment Limited Buy 2,000,000
4-Oct-13 Sundaram Trading and Investment Pvt ltd Sell 2,000,000
9-Oct-13 Sundaram Trading and Investment Pvt. Ltd. Sell 2,000,000
12-Nov-13 Life Insurance Corporation of India Sell 3,728,804
23-Jan-14 Life Inusrance Corporation of India Sell 4,657,845
2-Apr-14 Life Insurance Corporation of India Sell 4,778,699
*in last one year
Outlook and valuations: Positive; maintain BUY 12 months 86.4 32.8 83.2
The company currently has four segments in defence namely, ships & submarines, field
guns, missiles & weapon systems and defence electronics. L&T would be one of the
biggest beneficiaries of privatisation in the defence sector. We maintain BUY/SO on
the stock with SOTP based target price of INR1,845.
Financials - Consolidated Amit Mahawar
Year to March FY13 FY14E FY15E FY16E +91 22 4040 7451
amit.mahawar@edelweissfin.com
Revenues (INR mn) 744,980 851,284 974,438 1,170,231
Rev. growth (%) 15.8 14.3 14.5 20.1 Rahul Gajare
EBITDA (INR mn) 98,592 107,543 124,130 152,127 +91 22 4063 5561
rahul.gajare@edelweissfin.com
Net profit (INR mn) 47,973 45,680 51,483 66,338
EPS (INR) 51.6 49.1 55.4 71.3 Swarnim Maheshwari
+91 22 4040 7418
EPS growth (%) 3.0 (4.8) 12.7 28.9
swarnim.maheshwari@edelweissfin.com
Diluted P/E (x) 32.0 33.6 29.8 23.1
ROE (%) 15.2 12.8 13.0 15.0 July 9, 2014
Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Engineering and Capital Goods
Weapon Systems Weapon launch system for Medium to long range missile launch systems
Source: Company
BLT T72
Sarvatra
Bridging systems Short Span 5m and 10m
Modular
Source: Company
Environment
control and fuel
monitoring
system controller
Ground Environment
refuel LCA control system
panel) control panel
Video cards
Source: Company
Powai, Mumbai
The Powai facility in suburban Mumbai is spread over 385,000 sq. m, with 37,500 sq. m.
dedicated to fabrication shops. The shops handle equipment of 6m x 55m long weighing
over 400MT. The defence prototype shop is also located at Powai and caters to firstoff
systems.
Ranoli, Vadodara
The Ranoli workshop sprawls over 32,000 sq.m, including production area of 15,400 sq.m.
The unit specialises in manufacture of equipment of special grade SS, aluminium, other
exotic materials and composites. The workshops are designed to manufacture components
for aerospace applications as well as missile components. This complex is certified with
AS9100 Quality Management Systems.
Coimbatore
The Coimbatore complex is spread over 79,941 sq. m., and has manufacturing facilities for
multiple systems. The precision manufacturing facility (PMF), spread over 10371 sq. m built-
up area, specialises in precision engineered systems & components for aerospace and
defence segments. PMF is equipped with state-of-the-art precision machining systems and
surface treatment plants. The complex is also certified with AS9100 Quality Management
Systems.
Talegaon, Pune
It is an assembly, integration and testing complex for defence systems and equipment. This
world-class facility spread over 120,000 sq m. in Talegaon has covered shop area of about
12,000 sq. m which caters to strategic requirements of defence sector. The facility also
houses an advanced electronics production and integration centre.
Kattupalli, Chennai
The company has constructed an ultra-modern green-field mega shipyard at Kattupalli near
Chennai. Spread over 1,200 acres and equipped with shiplift capacity of 21,050 tonnes, the
shipyard is capable of building two submarines, frigates and corvettes each per year. The
shipyard has dedicated lines for new-builds and refits/repairs. It has six dry and four wet
berths, each of 200m length. The shipyard also has dedicated design centers for defence
and commercial shipbuilding; it houses testing facility for PCB level testing, module/sub
system level testing, ESS and integrated system-level testing.
Hazira, Surat
The Hazira manufacturing complex, sprawled across 900,000 sq. m, comprises fabrication
workshops measuring 70,000 sq. m, a large-equipment manufacturing facility of 90,000 sq.
m and assembly and load-out area of 100,000 sq. m. Large size and over-dimensional
equipment can be directly loaded on oceangoing barges/vessels, as the facility has direct
access to the Arabian sea. The yard is equipped with infrastructure and facilities to build
vessels up to length of 150m and draught of 4m. Capable of modular construction through
well-planned pre-manufacturing activities and efficient outfitting and system integration,
the yard is equipped to build most demanding projects of the day.
Tactical Communication System (TCS): L&T-TP SED and HCL have formed an SPV for
this project, while BEL will be the competitor. Players will be submitting their designs to
the MoD within six months, and the best design will be selected for the project. We
believe the project may be awarded to both players with best design getting majority
(65%) share. The government will reimburse 80% of the designing cost, while 20% will
be borne by the players. The contract is for modules for the army worth INR15bn each.
While the project is delayed, it is the first project off the block where the government
has encouraged the private and public sectors to compete for the defence project. This,
we believe, is a step in the right direction in terms of indigenisation. The project is
worth USD2bn.
P-75 submarine programme: Under this programme of Indian Navy, six submarines will
be procured, of which four will be delivered by DPSUs, while the balance two are likely
to be given to the private sector. L&T remains hopeful of getting some share in the next
12-15 months given its existing capabilities, which could be a needle mover for existing
ship-building business. Estimated value of each submarine is INR80-85bn.
Stabilised launch platforms for missiles Degaussing systems Mobile radars Midgets
ASW systems Electrical switchboards/EDC/APMS Submarines
ASW rocket launcher (IRL)
Twin tube torpedo launcher (ITTL) for 21 torpedoes
Triple tube torpedo launchers (TTL) for 13 torpedoes
Winch & handling systems for towed array sonars
Combat management systems
Integrated platform management system (IPMS)
Dual multi function consoles
Stabilised platforms for radar systems
Source: Company
Company Description
L&T, headquartered in Mumbai, is a technology-driven engineering and Construction
Company, and one of the largest companies in Indias private sector. It has additional
interests in manufacturing, services, and information technology. A strong customer-
focused approach and constant quest for top-class quality has enabled the company attain
and sustain leadership in major lines of businesses over seven decades. L&T has
international presence with a global spread of offices. With factories and offices located
around the country, further supplemented by a wide marketing and distribution network,
L&Ts image and equity extend to virtually every district of India. L&Ts recent focus on
export market will help the company optimise its growth potential especially in
Hydrocarbons & Infrastructure.
Investment Theme
Bot Bottoms-up review imparts conviction despite top-down concerns
We have analyzed more than INR806bn worth of L&Ts domestic orders and factored in
delays therein in the backdrop of the sluggish GDP growth and its impact on the company.
Having factored potential delays post our appraisal, we remain confident on our revised
growth assumptions for L&T and do not for-see material down-side.
Diversified business dominance imparts unique flexibility: L&T has a dominant position and
market share in most operating verticals, be it oil & gas, process projects, roads, bridges, or
industrial structures. This imparts flexibility to cherry-pick projects across a wide range of
projects and thus helps optimize overall business profitability.
Transportation & Hydrocarbon to drive future growth: Strong projects pipeline over 2-3
years both in India and Middle East in verticals like Hydrocarbons and Transportation augurs
well for L&T. The company is set to see more than 30-35 % of FY14E-15E intake from these
verticals.
Key Risks
Economy slowdown: Any further weakness in domestic investment could impact our
current growth assumptions and thus pose a down-side risk.
Raw material costs and execution risks: While L&T builds in cushion against material price
movement and provisions for execution delays, the business profitability is exposed to sharp
variations in key raw material which could have an adverse impact on project cost estimates
and hence on profitability. Also, higher than expected delay in project execution might
impact profitability, especially in fixed price projects.
Additional Data
Directors Data
AM Naik Chairman K Venkataramanan Managing Director
S N Subrahmanyan Whole Time Director & Senior Executive Vice President Shailendra Roy Whole Time Director & Senior Executive Vice President
N Mohan Raj Nominee Director - LIC Thomas Mathew T Nominee Director - LIC
M V Kotwal Whole Time Director R Shankar Raman Whole Time Director
V K Magapu Whole Time Director AK Jain Nominee Director
M M Chitale Non Executive Director S N Talwar Non Executive Director
S Rajgopal Non Executive Director Subodh Bhargava Non Executive Director
Holding Top10
Perc. Holding Perc. Holding
Life insurance corp 16.98 L&t employ welfare f 12.03
Unit trust of india 8.18 General insurance co 1.99
Carmignac gestion 1.35 Hdfc asset managemen 1.33
Gic private limited 1.12 Abu dhabi investment 1.09
New india assurance 1.04 Prudential plc 1
*in last one year
Bulk Deals
Data Acquired / Seller B/S Qty Traded Price
No Data Available
*in last one year
Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
04 Apr 2014 Mr A M Naik Sell 55000.00
04 Apr 2014 Mr A M Naik Sell 55000.00
02 Apr 2014 Mr. A. M. Naik Sell 117500.00
28 Mar 2014 Mr. A. M. Naik Sell 225000.00
*in last one year
Mahindra & Mahindra (M&M) is the flagship company of the Mahindra EDELWEISS 4D RATINGS
Group. The company operates in the defence segment via subsidiaries Absolute Rating BUY
Defense Land Systems India (DLSI), Mahindra Defence Systems (MDS), Rating Relative to Sector Outperformer
Mahindra Defence Naval Systems (MDNL) and Mahindra Special Service Risk Rating Relative to Sector Medium
Sector Relative to Market Overweight
Groups (MSSG). It provides total solutions for the entire range of light
combat and armoured vehicles and their derivatives for defence and
security forces. Maintain BUY. MARKET DATA (R: MAHM.BO, B: MM IN)
CMP : INR 1,214
Manufactures world-class military vehicles and artillery systems Target Price : INR 1,395
M&M, via its subsidiary DLSI (formerly JV with BAE Systems), builds Special Military 52-week range (INR) : 1,279 / 740
Vehicles (SMV). The SMV facility has been set up to design, develop and manufacture Share in issue (mn) : 615.9
specialised military vehicles, armour light and medium category vehicles, mine M cap (INR bn/USD mn) : 748/ 12,497
Avg. Daily Vol.BSE/NSE(000) : 1,253.3
protected vehicles and vehicle conversions for defence forces, para-military forces,
central and state police forces. Currently, it is the largest manufacturer of light
SHARE HOLDING PATTERN (%)
armoured vehicles in the private sector.
Current Q3FY14 Q2FY14
Enhancing product base by manufacturing radars Promoters * 25.3 25.2 25.3
MF's, FI's & BKs 15.9 16.1 16.6
MDS entered the naval defence sector in 2007 through MDNL whose offerings include
FII's 36.9 36.7 35.9
sea mines, torpedo launchers and anti-torpedo decoy launchers to the Navy, as well as
Others 21.9 22.0 22.3
sophisticated components to the ordnance factories and DRDO. MDS has entered into
* Promoters pledged shares : 2.8
a JV with Telephonics Corporation of US for setting up a world-class facility in (% of share in issue)
Bengaluru to manufacture, repair and overhaul airborne radars, aircraft
communication systems and mobile surveillance systems. PRICE PERFORMANCE (%)
Stock Nifty EW Auto Index
Outlook and valuations: Positive momentum; Maintain BUY 1 month 0.8 4.7 8.4
M&M has spun off its defence business into primarily two fully-held units focusing on 3 months 23.1 15.8 21.2
land and naval systems. M&M expects most of the projects to come from artillery 12 months 25.3 32.8 48.8
systems and armoured vehicles. It hopes to ramp up revenues to USD430mn by FY16E
from the current USD51mn. The stock is currently trading at 6.2x/9.2x FY16 EV-
EBITDA/PE (adjusted for INR458 in subs). Our SOTP of INR1,395 implies 11x PE for
M&M+MVML and INR458 for subsidiaries. We maintain BUY/SO rating on the stock.
Financials
Year to March FY13 FY14 FY15E FY16E
Revenues (INR mn) 383,556 388,171 408,928 478,713
Rev. growth (%) 22.2 1.2 5.3 17.1
Chirag Shah
EBITDA (INR mn) 53,283 53,273 56,734 71,207 +91 22 6623 3367
Net profit (INR mn) 36,344 39,051 37,858 48,839 chirag.shah@edelweissfin.com
Shares outstanding (mn) 617 617 617 617
Siddhartha Bera
Dil. EPS (INR) 57.4 63.7 61.4 79.2 +91 22 6620 3099
EPS growth (%) 22.4 10.9 (3.7) 29.0 siddhartha.bera@edelweissfin.com
Diluted P/E (x) 21.1 19.1 19.8 15.3
EV/EBITDA (x) 14.3 14.0 12.9 10.1
ROAE (%) 26.0 24.3 20.3 22.4 July 9, 2014
Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Automobiles
Tie up with Telephonics Corp for radars and other critical systems
Mahindra Telephonics, a joint venture between Mahindra Defence and Telephonics
Corporation of the US, has opened (Feb 2014) the first private sector aerospace and
electronics joint venture manufacturing facility in Prithla, Faridabad. The facility is to
manufacture, repair and overhaul airborne radars, aircraft communication systems, and
mobile surveillance systems. The company will provide customised solutions for border
surveillance, critical infrastructure protection and air traffic management systems.
Telephonics long-standing OEM customer base has shown keen interest in partnering with
Mahindra Telephonics on the development and execution of offset programmes in India
Source: Company
Product Profile
Land
Axe
Marksman
Rakshak
Sea
Sea mines
Company Description
M&M operates in nine segmentsautomotive, which involves sales of automobiles, spare
parts and related services; farm equipment, which involves tractors, spare parts and related
services; financial services, which consists of services related to financing, leasing and hire
purchase of automobiles and tractors; steel trading & processing, which consists of trading
and processing of steel; infrastructure, which consists of operating of commercial
complexes, project management and development; hospitality, which involves sale of
timeshare; IT services, which involves services rendered for information technology (IT) and
telecom; Systech, which consists of automotive components and other related products and
services, and Others, which consists of logistics, after-market, two wheelers and investment.
The company has ventured into the M&HCV space through a JV with Navistar International,
US. It also acquired majority (70%) stake in Korea-based Ssangyong Motors Company in
FY11 to become a global SUV company.
Investment Theme
We believe M&M is set to witness a lot of excitement from FY16 onwards as it plugs gaps in
its product portfolio. A new family of products under compact platform and co-
development of engines with Ssangyong can potentially exceed our volume estimates in PVs.
Tractor demand can receive support from infra-related demand.
Key Risks
Losses in unlisted subsidiaries
M&M has ventured into two wheeler and commercial vehicle business and is incurring
losses at operational level. In the event of failure to turn around the business, company
might have to infuse more capital and thus dragging performance of core business.
Financial Statements
Key Assumptions Income statement (INR mn)
Year to March FY13 FY14E FY15E FY16E Year to March FY13 FY14 FY15E FY16E
Macro Income from operations 383,556 388,171 408,928 478,713
GDP(Y-o-Y %) 5.0 4.8 5.4 6.3 Materials costs 273,971 269,199 283,254 332,210
Inflation (Avg) 7.4 6.2 5.5 6.0 Manufacturing expenses 36,326 42,591 44,194 47,569
Repo rate (exit rate) 7.5 8.0 7.5 7.0 Employee costs 19,977 23,108 24,747 27,727
USD/INR (Avg) 54.5 62.0 60.0 58.0 Total operating expenses 330,273 334,898 352,195 407,506
Sector EBITDA 53,283 53,273 56,734 71,207
Tractor - dom. vol (% YoY) (6) 20 12 8 Depreciation & Amortization 8,178 9,760 11,647 13,396
UV - domestic vol. (% YoY) 30.4 (5.0) 8.0 10.0 EBIT 45,105 43,513 45,087 57,811
LCV - dom. vol. (% YoY) 15.9 (15.0) 10.0 20.0 Non-Operational Income 5,707 6,648 8,508 10,051
Steel prices (INR/t) 39,200 39,200 39,200 39,200 Interest expenses 2,964 3,611 3,118 2,743
Aluminium prices (USD/t) 2,300 2,400 2,400 2,400 Profit before tax 47,848 46,550 50,477 65,119
Company Provision for tax 12,410 7,235 12,619 16,280
3-wheeler (Goods) - dom. Vol. (% (3) (4) 3 3 Net profit 35,438 39,315 37,858 48,839
Tractor - dom. vol (% YoY) (5) 22 8 12 Extraordinary income/ (loss) 906 (264) - -
Revenue assumptions Profit After Tax 36,344 39,051 37,858 48,839
Volume growth (% YoY) Basic EPS (INR) 57.4 63.7 61.4 79.2
UV - domestic vol. (% YoY) 30.5 (17.1) 3.0 29.3 Shares outstanding (mn) 617 617 617 617
LCV - dom. vol. (% YoY) 14.1 1.9 2.0 11.9 Diluted EPS (INR) 57.4 63.7 61.4 79.2
Avg realisation (INR) 494,686 506,333 509,776 513,386 CEPS (INR) 70.7 79.5 80.2 100.9
Avg realisation (% YoY) 8.3 2.4 0.7 0.7 Dividend per share (INR) 13.5 14.0 14.8 19.3
Cost assumptions Dividend payout (%) 23.5 22.0 24.2 24.4
RM cost/vehicle 353,350 351,146 353,109 356,272
Employee cost/vehicle 25,764 30,142 30,850 29,735 Common size metrics
Average salary 1,070,294 1,067,957 1,058,997 1,061,117 Year to March FY13 FY14 FY15E FY16E
EBITDA/vehicle 68,721 69,489 70,725 76,364 Materials costs 71.4 69.4 69.3 69.4
Financial assumptions Employee expenses 5.2 6.0 6.1 5.8
Average Interest rate (%) 5.5 6.9 5.0 5.0 S G & A expenses 9.5 11.0 10.8 9.9
Average Depreciation rate (%) 7.9 8.0 8.0 8.0 EBITDA margins 13.9 13.7 13.9 14.9
Tax rate (%) 25.5 15.6 25.0 25.0 Net profit margins 9.2 10.1 9.3 10.2
Dividend payout ratio (%) 25.4 25.4 27.8 27.9
Balance sheet assumptions Growth ratios (%)
Net borrowings (INR mn) 669 1,556 (667) (2,000) Year to March FY13 FY14 FY15E FY16E
Capex (INR mn) 15,278 21,265 23,000 23,000 Revenues 22.2 1.2 5.3 17.1
Debtor days 18 21 20 18 EBITDA 28.0 - 6.5 25.5
Inventory days 35 37 36 35 PBT 30.1 (2.7) 8.4 29.0
Payable days 69 74 69 62 Net profit 22.7 10.9 (3.7) 29.0
Cash conversion cycle (days) (15) (16) (13) (9) EPS 22.4 10.9 (3.7) 29.0
Additional Data
Directors Data
Deepak S. Parekh Non-Executive Independent Directors Nadir B Godrej Non-Executive Independent Directors
M M Murugappan Non-Executive Independent Directors Narayanan Vaghul Non-Executive Independent Directors
A S Ganguly Non-Executive Independent Directors R K Kulkarni Non-Executive Independent Directors
Anupam Puri Non-Executive Independent Directors Arun Kanti Dasgupta Non-Executive Independent Directors
Dr. Vishakha N. Desai Non-Executive Independent Directors Vikram Singh Mehta Non-Executive Independent Directors
A K Nanda Other Non-Executive Directors Anand G Mahindra, Chairman and MD Executive Directors
Bharat Doshi Executive Directors
Holding Top10
Perc. Holding Perc. Holding
Prudential mgmt & se 11.49 Life insurance corp 11.38
M & m benefit trust 8.42 Commonwealth bank of 4.67
M & m employees stk 4.2 Jpmorgan chase & co 3.29
Golboot holdings ltd 3.05 Dodge & cox 2.68
Capital group compan 2.34 Gic private limited 1.74
*in last one year
Bulk Deals
Data Acquired / Seller B/S Qty Traded Price
No Data Available
*in last one year
Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
01 Jan 2014 Prudential Management and Services Private Limited (PMSL) Buy 324000.00
04 Dec 2013 First State Investment Management (UK) Limited & First State Investment International Limited Buy 658265.00
04 Oct 2013 Anuja Sharma Sell 24000.00
03 Oct 2013 Anuja P Sharma Sell 24000.00
*in last one year
RELIANCE INDUSTRIES
Making a big splash
India Equity Research| Oil, Gas and Services
With India government pushing hard for a massive arms purchase in EDELWEISS 4D RATINGS
order to modernise its armed forces, the Reliance Group (Reliance) set up Absolute Rating BUY
two defence subsidiariesReliance Aerospace Technologies and Reliance Rating Relative to Sector Outperformer
Security Solutionsin 2011. The group is gearing up to enter the defence Risk Rating Relative to Sector Medium
space by investing and signing new deals with global OEMs primarily Sector Relative to Market Underweight
towards offset arrangement of defence equipment. It recently inked an
agreement with Dassault Aviation (France) for Medium-Multirole Combat
MARKET DATA (R: RELI.BO, B: RIL IN)
Aircraft (MMRCA) towards the offsets clause. Reliance has also signed
CMP : INR 1,001
agreements with Raytheon (USA) and Siemens (Germany) for Homeland
Target Price : INR 1,064
Security Systems. It also inked a deal with Boeing (USA) for aerospace
52-week range (INR) : 1,145 / 764
related offset contracts. Maintain BUY. Share in issue (mn) : 3,232.7
M cap (INR bn/USD mn) : 3,236/ 54,130
Set to enter Indias bustling defence sector Avg. Daily Vol.BSE/NSE(000) : 3,604.4
In the backdrop of the growing thrust on indigenisation of defence equipment and
giving more prominence to private sector companies, Reliance has entered the Indian SHARE HOLDING PATTERN (%)
defence space by inking agreements with the worlds leading players like Dassault and Current Q3FY14 Q2FY14
Boeing in the aerospace segment. While Dassault plans to supply 126 MMRCA, Boeing Promoters * 45.3 45.3 45.3
has to supply 20-24 P-8 surveillance aircrafts. Reliance is likely to get offset contracts MF's, FI's & BKs 11.2 11.5 11.8
from both the companies by manufacturing equipment and components locally. It has FII's 18.6 18.3 17.7
already applied for a licence for the same. As per our understating, 30% offset for Others 24.8 25.0 25.2
these two deals will result in offset contracts in the INR200-250bn range. As per media * Promoters pledged shares : NIL
(% of share in issue)
reports, Reliance has further plans to incubate tier 2 and 3 companies that provide
components to tier-1 companies manufacturing the original equipment.
PRICE PERFORMANCE (%)
EW O & G
Likely to spend USD1bn in aerospace business Stock Nifty
Index
Unlike other Indian aerospace players who have tied up with foreign companies to 1 month (4.2) 4.7 0.3
compete for individual projects, Reliance intends to create a large manufacturing hub 3 months 9.3 15.8 17.3
of global scale. As per media reports, Reliance is expected to invest USD500-1,000mn 12 months 19.8 32.8 28.0
and hire over 1,500 employees to grow the aerospace business.
Company Description
RIL is the largest private player in the refining, petrochemical and E&P sectors in India. While
RILs refining complex in Jamnagar is the largest in the world and among the most complex,
it is also among the largest integrated petrochemical producers globally. Apart from E&P in
India, RIL has made significant investments in US shale gas. In terms of EBIT, Petrochemicals
contribute 38%, Refining 40% and E&P 22%. RIL is also expanding its presence in the areas
of consumer retailing and telecom, but EBIT contribution from these other businesses is
<1%. RIL has a weight of 9.1% in BSE Sensex and 7.5% in S&P CNX Nifty.
Investment Theme
RILs strength lies in its ability to build businesses of global scale and execute complex, time-
critical, and capital-intensive projects which will prove advantageous as it embarks on large
investments in all core segments.
We are positive on both refining and chemicals, as current refining margins are not
sustainable for upcoming capacity additions, and global utilization rates have bottomed out
in chemicals.
RIL is currently in a capex phase, investing in world-scale projects like petcoke gasification
and off-gas crackers, which are expected to drive future growth.
Its investment in US shale gas is already bearing fruit, and is expected to contribute ~12% of
EBITDA by FY15.
Key Risks
Slow down in global demand or larger than expected capacity additions could impact RILs
refining and chemical margins.
Delays in government approvals for India E&P or weak domestic gas prices could hamper
progress in upstream.
Weak US natural gas prices could lower the profitability of shale gas assets, though it could
be offset by the liquids-rich acreages which are currently highly profitable.
Rupee appreciation may impact negatively as RIL is positively leveraged to the depreciating
currency.
Financial Statements
Key Assumptions Income statement (INR mn)
Year to March FY13 FY14 FY15E FY16E Year to March FY13 FY14 FY15E FY16E
Macro Net revenue 3,970,620 4,348,957 4,317,070 4,423,403
GDP(Y-o-Y %) 5.0 4.8 5.4 6.3 Materials costs 3,322,500 3,624,801 3,401,422 3,432,987
Inflation (Avg) 7.4 6.2 5.5 6.0 Gross profit 648,120 724,157 915,648 990,416
Repo rate (exit rate) 7.5 8.0 7.5 7.0 Operating expenses 317,670 376,165 481,038 520,762
USD/INR (Avg) 54.4 60.5 60.0 58.0 EBITDA 330,450 347,992 434,611 469,653
Sector Depreciation & Amortization 112,320 112,008 134,879 151,455
Upstream EBIT 218,130 235,984 299,731 318,199
Brent Crude (USD/bbl) 111.4 107.6 105.0 105.0 Other income 78,670 90,006 104,856 113,914
India natural gas price (USD/mmbtu) 4.2 4.2 8.4 8.4 Interest expenses 34,630 38,361 51,266 55,330
Petchem Profit before tax 262,170 287,629 353,321 376,783
Edelweiss cracking margins (USD/mt) 655.7 723.7 766.2 765.0 Provision for tax 53,310 62,150 77,171 83,417
Polypropylene margins (USD/mt) 133.6 110.5 120.0 130.0 Net profit 208,860 225,479 276,150 293,365
Paraxylene margins (USD/mt) 567.9 460.1 450.0 450.0 Profit after minority interest 208,790 224,930 275,683 292,771
PTA margins (USD/mt) 137.4 141.4 140.0 145.0 Shares outstanding (mn) 2,936 2,936 2,936 2,936
MEG margins (USD/mt) 170.1 153.8 150.0 150.0 Diluted EPS (INR) 71.1 76.6 93.9 99.7
Company CEPS (INR) 109.4 114.8 139.4 151.0
Refining Dividend per share (INR) 9.0 9.5 10.0 11.0
Refining throughput (mmt) 69 69 70 70 Dividend payout (%) 12.7 12.4 10.7 11.0
GRM (USD/bbl) 9.2 8.1 9.0 9.0
Chemicals Common size metrics
Chemicals production (mmt) 17.2 17.1 19.5 22.2 Year to March FY13 FY14 FY15E FY16E
Chemicals EBITDA (USD/mt) 98.7 106.8 101.1 112.0 Gross margin 16.3 16.7 21.2 22.4
India E&P EBITDA margins 8.3 8.0 10.1 10.6
Gross gas production - PMT (mmscmd) 1.1 1.0 1.1 1.1 EBIT margins 5.5 5.4 6.9 7.2
Gross gas production - KG-D6 (mmscmd) 26.0 14.0 14.0 14.0 Net profit margins 5.3 5.2 6.4 6.6
Gross gas production - CBM (mmscmd) - 0.1 0.1 0.3
Total RIL net gas production (mmscmd) 18.1 10.6 11.0 11.5 Growth ratios (%)
KG-D6 gas price (USD/mmbtu) 4.2 4.2 8.4 8.4 Year to March FY13 FY14 FY15E FY16E
Shale Gas Revenues 10.8 9.5 (0.7) 2.5
RIL share of US shale gas production (mmscmd) 15.0 15.0 16.0 16.0 EBITDA (4.2) 5.3 24.9 8.1
US shale gas price (USD/mmbtu) 3.0 4.0 4.5 5.0 Net profit 5.9 7.7 22.6 6.2
Financial assumptions EPS 7.4 7.7 22.6 6.2
Average Interest rate (%) 3.8 3.9 4.8 5.5
Capex (INR bn) 307 559 441 440
Debt (INR bn) 1,072 1,518 1,612 1,685
Cash conversion cycle (days) 18 11 11 14
Additional Data
Directors Data
Mukesh D Ambani Chairman and Managing Director P M S Prasad Executive Director
Pawan Kumar Kapil Executive Director Hital R Meswani Executive Director
Nikhil R Meswani Executive Director Mahesh P Modi Non Executive Director
Mansingh L Bhakta Non Executive Director Ramniklal H Ambani Non Executive Director
Raghunath A Mashelkar Non Executive Director Dharam Vir Kapur Non Executive Director
Dipak C Jain Non Executive Director Yogendra P Trivedi Non Executive Director
Ashok Misra Non Executive Director
Auditors - Chaturvedi & Shah, Deloitte Haskins & Sells, Rajendra & Co
Holding Top10
Perc. Holding Perc. Holding
Life insurance corp 8.15 Kankhal inves & trad 4.59
Bhuvanesh enterprise 4.16 Badri commercials ll 3.93
Ajitesh enterprises 3.93 Trilokesh commercial 3.85
Abhayaprada enterpri 3.85 Petroleum trust 3.73
Farm enterprises ltd 3.68 Taran enterprises ll 3.29
*in last one year
Bulk Deals
Data Acquired / Seller B/S Qty Traded Price
No Data Available
*in last one year
Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
*in last one year
SOLAR INDUSTRIES
Scorching head
India Equity Research| Miscellaneous
EDELWEISS RATINGS
Solar Industries (SIL), market leader in the domestic industrial explosives Absolute Rating HOLD
segment and largest Indian exporter, is poised to sustain its fast-paced
Investment Characteristics Growth
growth riding its leadership position and high entry barriers in explosive
industry. The company commands 30% market share in domestic
explosive segment and 57% market share in the explosive exports MARKET DATA (R: SLIN.BO, B: SOIL IN)
market. A combination of superior product range, entry in defence CMP : INR 2,041
sector, diversification in newer geographies/products and increase in Target Price : INR 1,632
mining activities should spur growth over coming years. Maintain HOLD 52-week range (INR) : 2,250 / 735
Share in issue (mn) : 18.1
To reap benefits of indigenisation of defence products M cap (INR bn/USD mn) : 37 / 617
SIL is entering the defence segment to supply propellants and HMX to government Avg. Daily Vol. BSE/NSE (000) : 15.7
entities and will replace the imports going forward. The project is likely to commence
in Q4FY15/Q1FY16 and to be completed at a cost of INR2.2bn. This project is expected SHARE HOLDING PATTERN (%)
to garner revenue of ~INR8bn/p.a. at full capacity. SIL is expected to generate revenue Current Q3FY14 Q2FY14
of INR0.5-1bn, 1.5bn-2bn in FY15E/FY16E. Promoters * 72.8 72.7 72.1
MF's, FI's & BKs 18.1 18.3 18.7
Diversified product portfolio catering to explosive value chain FII's 1.2 1.2 1.2
Despite being a late entrant in the Indian explosives industry, over the years, SIL has Others 8.0 7.8 8.0
* Promoters pledged shares : NIL
become the leader by catering to the entire mining value chain with a diversified (% of share in issue)
product range. Demand shift from unorganised segments, superior off-take by
infrastructure & mining sectors and better exports to existing/newer market are likely PRICE PERFORMANCE (%)
to propel growth going forward. BSE Midcap Stock over
Stock
Index Index
Outlook and valuations: On growth path; maintain HOLD 1 month 7.7 28.4 20.8
We believe that pick up in mining /infrastructure activity, better export and defence 3 months 32.6 121.9 89.3
projects will put SIL into superior growth trajectory. We believe SIL is likely to post 12 months 59.6 116.4 56.8
sales/PAT CAGR of over 25%/30% in next two three years. However, we believe that
the stock is trading at peak valuations (traded at P/E of 5-15x during FY08-14) post
recent run up. Hence, we believe upside remains limited in near term. We maintain
HOLD with target price of INR1,632 based on 15x FY16E, EPS. We continue to be
positive on the stock over the long term.
Financials
Year to March FY13 FY14 FY15E FY16E
Net revenues (INR mn) 11,218 11,330 14,062 17,365
Revenue growth (%) 15.9 1.0 24.1 23.5
EBITDA (INR mn) 1,905 2,030 2,619 3,296
Net profit (INR mn) 1,268 1,284 1,498 1,969 Manish Mahawar
+91 22 6623 3481
Share outstanding (mn) 18 18 18 18 manish.mahawar@edelweissfin.com
EPS (INR) 70.1 70.9 82.8 108.8
Manoj Bahety, CFA
EPS growth (%) 23.8 1.3 16.6 31.5 +91 22 6623 3362
P/E (x) 29.1 28.8 24.7 18.8 manoj.bahety@edelweissfin.com
EV/EBITDA (x) 20.7 19.8 15.3 12.0
ROAE (%) 25.9 20.8 20.7 22.7 July 9, 2014
Company Description
Founded in 1984, SIIL (erstwhile Solar Explosives) is the largest manufacturer of industrial
explosives and explosive initiating systems in India. With a licensed explosives capacity of
over 250,000 MT/annum, the company has ~27% market share in India. It is the largest
supplier of explosives to Coal India and exports to over 20 countries in Middle-East, Africa
and South East Asia, with ~65% market share in exports from India.
SIIL has manufacturing facilities spread across 16 locations and eight states in India.
Economic Explosives, its 100% subsidiary, manufactures detonators. During FY11, SIIL
expanded its manufacturing base to Nigeria, Zambia and Turkey by partnering with local
trading companies. At FY12 end, SIIL has 55% stake in Nigachem Nigeria, 65% in Solar
Explochem Zambia and 74.5% in Turkish company ILCI Patlayici Maddeler Sanayi ve Ticaret
A.S.
Key top management personnel include Mr. Satyanarayan Nuwal (Chairman), Mr.
Kailashchandra Nuwal (Executive Director), Mr. Kundan Singh Talesra (Executive Director),
Mr. Roomie Dara Vakil (Executive Director), Mr. Manish Nuwal (Executive Director) and Mr.
Nilesh Panpaliya (CFO).
Investment Theme
Solar Industries is a market leader in the high entry barrier Indian industrial explosives
market with 27% market share in FY12. The company has grown its domestic revenue at an
impressive CAGR of 28% over FY06-12, which resulted in the surge of its market share from
10% in FY06 and during the same period, the profit surged at 30% CAGR. We expect the
company to continue growing at a strong pace of 20-21% over FY13-14 on the back of
domestic explosive growth, exports and expansion of overseas manufacturing operations.
The stake in the 2 coal mines might provide additional upside (which we are not considering
currently) and the defence project which is likely to be commissioned in H2FY15 (ROCEs of
over 40% envisaged in this project) is likely to provide the next phase of exponential growth
for Solar Industries.
Key Risks
Slow down in mining and infrastructure sectors
Regulatory risk - Explosives industry is heavily regulated by the government. Any adverse
change in these regulations may impact the companys operations.
High dependence on limited number of buyers - Over the years, while SIIL has been
widening its customer base, even currently the top three customers contribute over 30% to
the companys revenue.
Financial Statements
Key Assumptions Income statement (INR mn)
Year to March FY13 FY14 FY15E FY16E Year to March FY13 FY14 FY15E FY16E
Macro Net revenue 11,218 11,330 14,062 17,365
GDP(Y-o-Y %) 5.0 4.8 5.4 6.3 Materials costs 6,501 5,908 7,435 9,138
Inflation (Avg) 7.4 6.2 5.5 6.0 Gross profit 4,717 5,422 6,627 8,227
Repo rate (exit rate) 7.5 8.0 7.8 7.3 Employee costs 550 673 633 764
USD/INR (Avg) 54.5 60.5 58.0 56.0 Other Expenses 2,262 2,719 3,375 4,168
Company EBITDA 1,905 2,030 2,619 3,296
Raw Material Cost as % Net Revenue 58.0 52.1 52.9 52.6 Depreciation and amortisation 170 219 273 315
Manufacturing expenses % sales 4.5 4.3 4.3 4.3 EBIT 1,735 1,811 2,346 2,980
Employee cost as % of sales 4.9 4.6 4.5 4.4 Other income 200 112 150 200
Average Interest rate (%) 9.5 4.5 6.5 6.5 Interest expenses 309 179 288 288
Average Depreciation rate (%) 4.3 4.2 4.2 4.2 Profit before tax 1,626 1,744 2,208 2,893
Tax rate (%) 16.9 21.2 25.0 25.0 Provision for tax 257 349 552 723
Bulk explosives volume growth (%) 20.4 (6.4) 17.8 28.9 Net profit 1,369 1,395 1,656 2,169
Cartridge explosives volume growth (%) 19.9 (9.0) 16.6 11.9 Extraordinary income/ (loss) (100) (100) - -
Bulk explosive realisation (INR MT) 33,666 35,548 37,325 37,325 Profit After Tax 1,269 1,295 1,656 2,169
Cartridge explosives realisation (INR MT) 53,959 58,131 61,038 61,038 Minority interest 101 111 158 200
Capex (INR mn) 1,121 1,608 1,000 1,000 Profit after minority interest 1,168 1,184 1,498 1,969
Debtor days 48 55 51 51 Shares outstanding (mn) 18 18 18 18
Inventory days 74 89 75 68 Diluted EPS (INR) 70.1 70.9 82.8 108.8
Payable days 73 93 86 75 CEPS (INR) 79.5 83.0 97.9 126.2
Cash conversion cycle (days) 49 51 40 44 Dividend per share (INR) 11.0 12.0 13.0 15.0
Dividend payout (%) 15.7 16.9 15.7 13.8
Additional Data
Directors Data
Satyanarayan Nuwal Chairman & Executive Director Kailashchandra Nuwal Executive Director
Manish Nuwal Executive Director Kundan Singh Talesra Executive Director
Roomie Dara Vakil Executive Director Anant Sagar Awasthi Non-Executive Independent Director
Satish Chander Gupta Non-Executive Independent Director Dilip Patel Non-Executive Independent Director
Ajai Nigam Non-Executive Independent Director Amrendra Verma Non-Executive Independent Director
Bulk Deals
Data Acquired / Seller B/S Qty Traded Price
No Data Available
*as per last available data
Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
18 Dec 2013 Shri Satyanarayan Nuwal Buy 16723.00
18 Dec 2013 Shri Satyanarayan Nuwal Buy 16723.00
*as per last available data
It is the largest manufacturer of personnel armour products in India and the only Indian
manufacturer and exporter of composite parts for spacecraft and aircraft. Currently, TAML
partners in enhancing defence, paramilitary and police mobility in the SAARC and ASEAN
regions and Africa. The companys focus has been on nation-building and offers personal
armour manufacturing bullet proof jackets (BPJ), bullet proof helmets (BPH) and associated
solutions.
Aerospace division
The division is engaged in the design, manufacture and supply of composite components,
parts, sub-assemblies for application in aircraft, space and helicopters. It offers complete
end-to-end solutions from concept to product in composites. Its offerings include:
Aircraft Structural parts like control surfaces, wing parts, fuselage panels, radome,
interior parts, fairings (monolithic and sandwich).
Helicopters Structural parts like control surfaces, floor panels, cabins, rotary wings.
Some esteemed customers include: HAL, Pratt & Whitney, Boeing, Goodrich and Vikram
Sarabhai Space Centre.
TAML has also developed products for medical, wind energy and electrical power industries
using its design knowledge in composites. Some of the products developed include:
Various offerings
Fig. 1: Composites for missiles Fig. 2: Commando /tactical vests and jackets Fig. 3: Floatation jackets for naval force
Source: Company
Tara
Aerospace
Systems
Hela Nova
Systems Integrated
Pvt. Limited Systems
Source: Company
Unmanned
Aerial systems Mini and micro UAVs
Source: Company
Source: Company
TASL announced its JV with Lockheed Martin in February 2011. The JV will build aero-
structures for C-130 Hercules and C-130J Super Hercules in India. This 74:26 JV currently
assembles center wing boxes (CWB) and empennage (horizontal and vertical stabilisers).
As per the company, there exists export potential of USD200mn over a period of five years.
TASL delivered the first C-130 center wing box to Lockheed Martin in August 2012.
TASL announced its JV with AGT International called AVANA Integrated Systems in July
2010 to provide integrated solutions to the emerging homeland security market.
TASL recently entered into partnership with RUAG for Dornier 228
In yet another step towards manufacturing 100% indigenised aircraft, in June 2014 TASL
entered into a new partnership with RUAG Aviation (Switzerland) to manufacture fuselages
and wings for the Dornier 228 aircraft. This is the fourth such partnership that TASL has
entered in the aerospace sector. The facility will be set up in Hyderabad.
CMC
Solution provider par excellence
India Equity Research| IT
Company Description
CMC was incorporated on December 26, 1975, as Computer Maintenance Corporation.
Government of India held 100% of equity share capital. On August 19, 1977, it was
converted into a public limited company. In 1978, when IBM wound up its operations in
India, CMC took over the maintenance of IBMs installations at over 800 locations around
India, and subsequently, maintenance of computers supplied by other foreign
manufacturers as well. In 1992, the Indian government divested 16.69% of CMC's equity to
the General Insurance Corporation of India and its subsidiaries, who, in turn, sold part of
their stake to the public in 1996. In 1993, the companys shares were listed on the
Hyderabad Stock Exchange and the Bombay Stock Exchange (BSE). The following year,
government divested 51% of CMC's equity to Tata Sons through a strategic sale and the
company became part of the Tata Group. In 2004, the government divested its balance
26.5% stake in CMC to the public.
Investment Theme
CMCs unique solutions approach in the System integration space along with focus in the hi-
tech space has enabled it post robust growth in an uncertain environment and also ensures
revenue stickiness for future. The company has been working for last several years with
TRW a large automotive electronic player primarily due to its unique domain capabilities
and hi-tech approach. We believe that like other successful mid cap focused players CMCs
expertise has been the hi-tech space where competition has been limited which has enabled
significant revenue and client stickiness. The above solutions and technology approach
along with TCS parentage provides it with all advantages of a large player (inspite of being a
small player) right from capabilities to offer services across geographies to a large balance
sheet required to participate in huge projects like the Indian passport project
Key Risks
Delay in government spending could impact performance
Sensitivity to currency movement
Financial Statements
Key Assumptions Income statement (INR mn)
Year to March FY13 FY14E FY15E FY16E Year to March FY13 FY14 FY15E FY16E
Macro Net revenue 19,279 22,309 28,666 34,114
GDP(Y-o-Y %) 5.0 4.8 5.4 6.3 Direct costs 1,868 2,020 2,131 2,195
Inflation (Avg) 7.4 6.2 5.5 6.0 Employee costs 5,216 5,547 8,241 10,386
Repo rate (exit rate) 7.5 8.0 7.3 7.0 Subcontracting costs 6,797 8,879 9,913 11,845
USD/INR (Avg) 54.5 61.0 60.0 58.0 Other Expenses 2,229 1,977 3,320 3,923
Company Total operating expenses 16,110 18,422 23,605 28,348
Segment growth (YoY) EBITDA 3,168 3,887 5,061 5,766
Customer Services (%) 19.7 19.7 3.0 3.0 Depreciation & Amortization 232 270 487 487
Systems Integration (%) 35.0 35.0 18.0 25.0 EBIT 2,936 3,617 4,575 5,279
IT enabled services (%) 33.4 33.4 20.0 15.0 Other income 132 250 180 180
Education and Training (%) 1.3 1.3 10.0 15.0 Interest expenses 2 1 - -
Cost assumptions - - - 1 Profit before tax 3,066 3,867 4,755 5,459
Materials costs (%) 9.7 9.1 7.4 6.4 Provision for tax 764 1,069 1,082 1,198
Staff costs (%) 27.1 24.9 28.7 30.4 Net profit 2,302 2,798 3,672 4,262
Sub contracting cost (%) 35.3 39.8 34.6 34.7 Profit After Tax 2,302 2,798 3,672 4,262
Financial assumptions - - - 1 Profit after minority interest 2,302 2,798 3,672 4,262
Capex (INR mn) 847 2,300 1,400 1,450 Basic EPS (INR) 76.0 92.3 121.2 140.6
Debtor days 76 79 80 83 Shares outstanding (mn) 30 30 30 30
Payable days 52 57 58 59 Diluted EPS (INR) 76.0 92.3 121.2 140.6
Cash conversion cycle (days) 50 57 70 77 CEPS (INR) 83.6 101.2 137.3 156.7
Depreciation as % of gross block 6.1 5.0 6.4 5.4 Dividend per share (INR) 17.5 30.0 35.0 35.0
Dividend payout (%) 23.0 32.5 28.9 51.1
Additional Data
Directors Data
Mr S Ramadorai Chairman Mr R Ramanan MD & CEO
Ms Kalpana Morparia Director Mr S Mahalingam Director
Mr Sudhakar Rao Director
Prof M S Ananth Director Mr Ashok Sinha Director
Holding Top10
Perc. Holding Perc. Holding
Tata consultancy ser 51.12 Aberdeen 14.96
Hdfc asset managemen 7.93 Dsp blackrock invest 2.83
Commonwealth bank of 2.5 General insurance co 2.31
Govt pension fund gl 2.27 Norges bank 2.2
Scottish oriental sm 1.33 New india assurance 1.1
*in last one year
Bulk Deals
Data Acquired / Seller B/S Qty Traded Price
No Data Available
*in last one year
Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
No Data Available
*in last one year
TATA MOTORS
Potent shield
India Equity Research| Automobiles
EDELWEISS 4D RATINGS
Tata Motors (TML) has been a strategic partner of the Indian armed
forces since 1958. Over the years, the companys mobility-solutions Absolute Rating BUY
Rating Relative to Sector Outperformer
portfolio has beefed up to include all classes from light to heavy vehicles
Risk Rating Relative to Sector High
across the entire defence, paramilitary and police mobility spectrum.
Sector Relative to Market Overweight
Currently, TML partners in enhancing defence, paramilitary and police
mobility in the SAARC and ASEAN regions and Africa. The vehicle factory
at Jabalpur (OFB) has tie-ups with TML. The company has also bid for MARKET DATA (R: TAMO.BO, B: TTMT IN)
couple of defence ministry projects such as future infantry combat CMP : INR 470
vehicles and high-performance trucks. Maintain BUY. Target Price : INR 538
52-week range (INR) : 485 / 272
Enhancing scope of defence business to frontline combat Share in issue (mn) : 2,694.1
M cap (INR bn/USD mn) : 1,415/ 23,645
As part of the companys strategy to enhance scope of its defence business right up to
Avg. Daily Vol.BSE/NSE(000) : 7,217.9
frontline combat, it showcased two new combat vehicles at the DefExpo 2014. TML
displayed Kestrel, a wheeled armoured amphibious platform that provides mobility to
SHARE HOLDING PATTERN (%)
frontline soldiers. The LAMV (light armoured high mobility vehicle) is a recon vehicle
Current Q3FY14 Q2FY14
moving ahead of armoured columns. Both the vehicles will equip the Indian armed
Promoters * 34.3 34.3 34.3
forces with world-class indigenously developed frontline protected mobility vehicles.
MF's, FI's & BKs 9.8 10.0 12.0
FII's 27.1 27.6 26.4
Tender for light armoured MPV of INR25bn in offing
Others 28.8 28.1 27.3
Procurement of armoured and specialist vehicles by Indian army has opened up * Promoters pledged shares : 8.9
INR100bn opportunity for vehicle manufacturers like TML which is expected to bid for (% of share in issue)
Outlook and valuations: JLR key profit driver; maintain BUY Stock Nifty EW Auto Index
Management anticipates strong 15% CAGR in revenue in its defence business over 1 month 11.2 4.7 8.4
FY15/16 led by pick up in domestic orders and penetration into ASEAN countries. We 3 months 15.8 15.8 21.2
believe this would improve the share of non-cyclical business further and support 12 months 60.6 32.8 48.8
standalone performance which has been in doldrums for quite sometime now. With
M&HCV volumes recovering (17% CAGR FY14-16), we expect standalone margins to
improve to 5.6% in FY16E (-2.7% in FY14). However, JLR remains the key driver for our
SOTP of INR539 led by 16% volume CAGR on new launches. Maintain BUY/SO.
Financials (Consolidated)
Year to March FY13 FY14 FY15E FY16E
Revenues (INR mn) 1,888,176 2,328,337 2,624,759 3,085,825
Rev. growth (%) 14.0 23.3 12.7 17.6
Chirag Shah
EBITDA (INR mn) 247,739 348,378 397,140 455,298 +91 22 6623 3367
Adj net profit (INR mn) 93,932 147,400 157,095 199,284 chirag.shah@edelweissfin.com
Shares outstanding (mn) 3,190 3,219 3,219 3,219
Siddhartha Bera
Diluted adj EPS - (INR) 29.4 45.8 48.8 61.9 +91 22 6620 3099
EPS growth (%) (30.3) 55.5 6.6 26.9 siddhartha.bera@edelweissfin.com
Diluted P/E - (x) 16.0 10.3 9.6 7.6
EV/EBITDA (x) 7.4 5.4 4.1 3.4
ROAE (%) 26.5 29.0 21.5 22.0 July 9, 2014
Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Automobiles
Source: Company
Key features:
Kestrel is a wheeled armored amphibious platform designed and developed
indigenously with DRDO for optimised survivability, all-terrain performance and
increased lethality.
Occupant capacity of the hull is 12 members. The driver in combat mode has visibility
through three periscopes and a display catching vision through front and rear view
cameras, with day and night vision.
The back-to-back seating layout allows firing through three gun ports on each side, with
two big hatches for patrolling.
The fuel tanks are placed outside the crew compartment for additional safety.
The 8x8 independently suspended vehicle has high power-to-weight ratio for mountain
terrains.
The vehicle can accommodate different variety of weapon stations and turrets as the
application demands.
Source: Company
Key features
The LAMV is developed indigenously with technical inputs from Supacat of the UK, for
vital reconnaissance mobility, protection and firepower.
A light patrol vehicle, the LAMV, combines an integrated blast and ballistic protection
system, including a protected all-composite detachable crew pod and V-shaped hull,
providing all-round protection.
Carrying a crew of six (two plus four) and using latest composite and ceramic armour
systems, the crew pod is constructed as a separate module, sealed off from potential
secondary projectiles.
All seats are mine-blast protected.
The LAMV has exceptional all-terrain high mobility performance, high power-to-weight
ratio, automatic transmission, all-wheel independent suspension and can reach speeds
of up to 105kmph.
The vehicle has modern equipment for observation, surveillance and communication,
and is configured to also address urban warfare, engaging threat on all terrain.
TML, along with Lockheed Martin and General Dynamics (GD), has developed an infantry
combat vehicle that could compete for Indias FICV if the program is relaunched. The
wheeled armoured platform (WHAP) based on a vehicle developed by state-owned DRDO,
fits army requirements. For WHAP, Lockheed and GD are the technology partners. DRDO
developed basic frame of the vehicle, while TML has built the transmission, gear box and
integrated other systems.
Products
Tactical vehicles: Designed to support tactical manoeuvre of combat operations
o Troop carriers
o Ambulance
o Buses
o Water tankers
o Specialist vehicles
Company Description
TML is India's largest automobile company with a presence in commercial and passenger
vehicles. It is the leader in nearly all commercial vehicle segments and the third largest in
the passenger vehicles market with products in the compact and mid size car and utility
vehicle segments. Through subsidiaries and associate companies, the company has
operations in the UK, South Korea, Thailand and Spain. Among them is Jaguar Land Rover,
the business comprising two iconic British brands. It also has an industrial joint venture with
Fiat in India. It is also the world's fourth largest truck manufacturer and the second largest
bus manufacturer. TTMT cars, buses and trucks are being marketed in several countries in
Europe, Africa, the Middle East, South Asia, South East Asia and South America.
Investment Theme
We remain positive on the healthy product pipeline for JLR and believe platform
consolidation to accelerate model introduction over next five years. In the domestic market,
though CV volume recovery will improve financials, passenger cars will remain a drag
Key Risks
Weak premium demand
JLR has been the key beneficiary of healthy demand in the premium segment, mainly in
CHina. Any moderation can lead to downside risk to our estimate.
Execution risk
We expect the new launches to begin from Q3/Q4FY15. Any delay can pose a threat to our
volume estimates
Financial Statements
Key Assumptions Income statement (INR mn)
Year to March FY13 FY14 FY15E FY16E Year to March FY13 FY14 FY15E FY16E
Macro Income from operations 1,888,176 2,328,337 2,624,759 3,085,825
GDP(Y-o-Y %) 5.0 4.8 5.4 6.3 Materials costs 1,203,211 1,435,863 1,648,817 1,945,707
Inflation (Avg) 7.4 6.2 5.5 6.0 Manufacturing expenses 14,506 15,306 16,234 19,890
Repo rate (exit rate) 7.5 8.0 7.5 7.0 Employee costs 165,840 215,564 216,765 232,716
USD/INR (Avg) 54.5 62.0 60.0 58.0 Total SG&A expenses 358,801 448,604 444,300 524,674
Sector Expenses capitalised 101,920 135,379 98,498 82,460
Cars - domestic vol. (% YoY) (6.8) (6.0) 10.0 20.0 Total operating expenses 1,640,438 1,979,959 2,227,619 2,640,527
MHCV - domestic vol (% YoY) (23.2) (26.0) 7.0 25.0 EBITDA 247,739 348,378 397,140 445,298
Steel prices (INR/t) 39,200 39,200 39,592 39,988 Depreciation & Amortization 75,693 110,782 136,936 176,820
Aluminium prices (USD/t) 2,300 2,400 2,424 2,448 EBIT 172,046 237,597 260,204 268,479
Company Non-Operational Income 1,176 8,286 2,435 2,471
Revenue assumptions Interest expenses 35,534 47,338 47,338 18,379
Domestic vol growth (% YoY) Profit before tax 137,688 198,545 215,301 252,571
Cars - domestic vol. (% YoY) (32.3) (39.9) 6.8 15.0 Provision for tax 44,058 50,013 58,101 63,807
MHCV - domestic vol (% YoY) (30.7) (22.7) 5.0 24.1 Net profit 93,631 148,532 157,200 188,764
LCV - dom. vol. (% YoY) 13.2 (31.1) 4.7 18.1 Extraordinary income/ (loss) (4,179) (7,489) - -
Domestic avg. realisation (INR) 564,157.6 593,790.5 585,466.3 621,079.8 Profit After Tax 93,932 147,400 157,200 188,764
Domestic avg. realisation (% YoY) (5.9) 5.3 (1.4) 6.1 Minority interest 301 (1,132) - -
JLR sales volume (Nos) Profit after minority interest 89,753 139,911 157,200 188,764
Jaguar 57,799 80,899 109,638 159,337 Diluted EPS (INR) 29.4 45.8 48.8 58.6
Land Rover 314,236 356,483 386,579 430,649 Dividend payout (%) 6.8 4.4 2.5 2.1
Total 372,035 437,382 496,216 589,986
Cost assumptions Common size metrics
RM cost/vehicle 415,075 443,017 420,681 435,113 Year to March FY13 FY14 FY15E FY16E
Employee cost/vehicle 35,722 50,543 50,764 48,725 Materials costs 63.7 61.7 62.8 63.1
Average salary 1,046,323 1,067,249 1,120,612 1,255,085 S G & A expenses 13.6 13.5 13.2 14.3
Promotion cost (% revenue) 1.8 2.0 1.9 1.7 EBITDA margins 13.1 15.0 15.1 14.4
EBITDA/vehicle 24,540 (9,373) 8,106 38,960 Net profit margins 5.0 6.3 6.0 6.1
Financial assumptions
Average Interest rate (%) 9.0 8.8 8.0 8.0 Growth ratios (%)
Average Depreciation rate (%) 7.9 9.1 9.1 9.3 Year to March FY13 FY14 FY15E FY16E
Tax rate (%) 30.7 29.9 28.2 27.8 Revenues 14.0 23.3 12.7 17.6
Dividend payout ratio (%) 6.8 3.1 2.4 2.0 EBITDA 13.1 40.6 14.0 12.1
Balance sheet assumptions EPS (30.3) 55.5 6.6 20.1
Net borrowings (INR mn) 64,424 - (30,000) (30,000)
Capex (INR mn) 152,403 330,697 346,765 316,155
Debtor days 19 14 11 12
Inventory days 59 56 59 59
Payable days 165 155 157 147
Cash conversion cycle (days) (88) (85) (87) (75)
Currency (GBP/USD) 1.6 1.6 1.6 1.6
Currency (USD/INR) 55.4 61.0 60.0 58.0
Currency (GBP/INR) 87.0 97.0 97.2 92.2
Additional Data
Directors Data
N N Wadia Non-Executive Independent Directors S M Palia Non-Executive Independent Directors
R A Mashelkar Non-Executive Independent Directors S Bhargava Non-Executive Independent Directors
N Munjee Non-Executive Independent Directors V K Jairath Non-Executive Independent Directors
R Sen Non-Executive Independent Directors Cyrus P Mistry Non-Executive Independent Directors
Ratan N Tata, Chairman Other Non-Executive Directors Ravi Kant, Vice Chairman Other Non-Executive Directors
J J Irani Other Non-Executive Directors Ralf Speth Other Non-Executive Directors
Carl-Peter Forster Other Non-Executive Directors Ravindra Pisharody Executive Directors
Satish Borwankar Executive Directors
Holding Top10
Perc. Holding Perc. Holding
Tata sons ltd 26.07 Citibank na 16.56
Tata steel ltd 5.63 Life insurance corp 4
Capital group compan 3.28 Tata industries ltd 2.54
Vanguard group inc 1.5 Gic private limited 1.27
William blair & comp 1.17 Fil limited 1.11
*in last one year
Bulk Deals
Data Acquired / Seller B/S Qty Traded Price
No Data Available
*in last one year
Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
16 Aug 2013 Tata Investment Corporation Lt Sell 260000.00
30 Jul 2013 Tata Investment Corporation Lt Sell 240000.00
*in last one year
TATA POWER CO
Centre of excellence
India Equity Research| Power
Tata Power Company (TPC) is a pioneer in Indias power sector, with EDELWEISS 4D RATINGS
presence across industry encompassing generation, transmission, trading, Absolute Rating BUY
and distribution. The companys strategic engineering division (SED) has Rating Relative to Sector Performer
been a dominant private sector player in indigenous design, Risk Rating Relative to Sector Medium
Sector Relative to Market Underweight
development, production, integration, supply and lifecycle support of
mission-critical defence systems of strategic importance for over four
decades. TPC SED enjoys unique distinction of participating in defence MARKET DATA (R: TTPW.BO, B: TPWR IN)
programs through a dedicated R&D setup in Mumbai since 1974, and a CMP : INR 106
dedicated production facility at Bengaluru since 1982. The division has Target Price : INR 117
evolved into a systems integrator for programs of national importance 52-week range (INR) : 116 / 66
such as the Pinaka multi-barrel launcher, launchers for Aakash (air force Share in issue (mn) : 2,704.6
and army), electronic warfare program, command & control systems for M cap (INR bn/USD mn) : 287/ 4,787
air defence and naval combat. Avg. Daily Vol.BSE/NSE(000) : 5,456.3
Executing prestigious contract for modernisation of IAF airbases SHARE HOLDING PATTERN (%)
In April 2011, TPC SED won the prestigious defence contract entailing modernisation of Current Q3FY14 Q2FY14
Promoters * 33.0 32.5 32.5
thirty Indian IAF airbases across the country for USD243mn through competitive global
tenders and is the largest-ever defence contract bagged by a private player. The MF's, FI's & BKs 22.5 22.5 23.3
current contract has an option clause, which allows the ministry to invite TPC SED to FII's 25.8 26.0 25.1
Others 18.7 19.0 19.2
execute Phase II of MAFI at a pre-determined rate.
* Promoters pledged shares : 12.2
(% of share in issue)
The division has evolved into a systems integrator for programs of national importance such
as the Pinaka multi-barrel launcher, launchers for Aakash (air force and army), electronic
warfare program, command & control systems for air defence and naval combat. As a
leading domestic player in strategic electronics, the division is now globally recognised for
harnessing its Systems and Engineering capabilities and has been assessed at Maturity
Level 4 under the capability maturity model integration (CMMI-DEV L4 v1.3) required by
various departments of defence worldwide.
The companys core competency lies in indigenous design, development, production and
supply of state-of-the-art defence systems in five areas of operation which are as follows:
1) Weapon systems
a. Missile/rocket launchers and command posts for army and air force
b. Artillery and armour
The division has evolved into a a. At tactical level: Elements of NCO covers C2, spectrum/network management
systems integrator for systems, tactical exchanges, TETRA base stations, mobile communication nodes,
programmes of national missile/rocket launchers and command posts for army and air force.
importance such as the Pinaka b. At battalion level and below: Tactical field computers, data fusion, F-INSAS sub-
multi-barrel launcher, launchers systems covering night vision devices/TI sights and rugged data terminals
for Aakash (air force and army)
and electronic warfare program c. Software defined radio
The traditional command and control structure that governs the conventional battlefield has
been to evolve and deal with the phenomenon of information overload in this networked
era. Militaries across the world are engaged in developing their doctrines for this digital
world. TPC SED plays a key role in current days modern warfare by providing state-of-the-
art defence systems in various areas.
Precision Strike
Decision assist
Strategic Electronics
Decision assist systems
Strategic Electronic is the integrate the input from
embedded intelligence in the Surveillance Grid and
weapon systems for all facilitate appropriate
tactical operations. Weapon Assignment
Serv
Embedded real time software rid e Interfacing with Sensors
Data Fusion
lG
integration
nce id
control systems
Interfacing with legacy
Entity Engineering Exp Weapons & Sensors
cs and
isti En Ne
a tw or k s ing
L og bled i on th
se d Ope ra t of o e the
u per ater
Foc atio
Network Centric ns
Warfare Integrated network
management & signals
The expanding theatre of
command & control system
operations requires an
Modeling and Network Simulation
end-to-end manageable and
Edge of Battle field solution with
secure network for connecting
IP support Voice, V ideo, Data
sensors, weapons and logistics,
Ad-hoc Networks based RF comm
This is the information
backbone for the Decision
Assist Capability
2. State-of-of the-art network, centric warfare enablers (including tactical and strategic
communications), GPS-based navigation and tracking and GIS systems.
3. Avionics, airborne missiles, systems and equipment of aircraft, helicopters and UAVs.
4. Air defence/naval guns, filed artillery, tanks, combat vehicles, anti-tank weapon
systems, mortar, shell, missiles, rockets, etc.
5. Naval combat, air defence, artillery, border security and surveillance including sensors
voz., radars, sonars, thermal imaging, radiography, optronics and night vision sub-
systems.
6. Military grade products.
7. Weapon systems: Rocket and missile launchers for ground and naval applications.
Artillery ballistics.
Night vision devices and IR-based weapon sights.
Ballistic software for air defence guns, field artillery weapon systems,
Ballistics and
T-90 tank
Data Fusion
Data fusion
Network centric Systems for tactical communications and network centric operations
warfare enablers, Spectrum/network management system
communication systems Signal command and control system and others
Vehicle equipment EMI/EMC and EMP hardened mobile command and control posts
and trailers Payload retraction and hoist system
Company Description
Tata Power is a pioneer in India's power sector, with a presence in all spheres of the power
industry, encompassing generation, transmission, trading, and distribution. Tata Power has
demonstrated exceptional performance in its transmission and distribution JVs. The
company was also awarded the first UMPP at Mundra (Gujarat) due to its lowest levelised
tariff bid at INR 2.26 per unit.
Investment Theme
We believe TPC is poised to play an important role in the Indian power sector. The company
in the past has exhibited expertise in project execution. The company has an installed
capacity of 8GW+ at FY13 end. The company has 30% stake in two coal mines of Bumi
Resources with proven reserves of ~1.9bn tonnes. With rising coal prices, we believe, Tata
Power will have significant profits from these assets.
Key Risks
TPC fully commissioned two key projects at Mundra4,000MW and Maithon1,050MW.
The dynamics of Indian electricity market have undergone a sea change due to higher
imported coal prices, weak customer finances, changing fiscal norms at coal exporting
countries and now, a depreciating rupee. Hence, balancing between contractual supplies
(both volume and price) and maximizing earnings has become a key determinant/risk.
The company had restated stripping costs by ~15% to 11.5 in 2010 which should have lead
to upward restatement of reserves from 2.1bn tonnes. However, recently the restatement
was only to the extent of 20mn tonnes. Unless another round of restatement is done or
costs are brought down the value of coal mines could be suppressed.
Financial Statements
Key Assumptions Income statement (INR mn)
Year to March FY13 FY14 FY15E FY16E Year to March FY13 FY14 FY15E FY16E
Macro Income from operations 330,254 356,487 366,370 372,214
GDP(Y-o-Y %) 5.0 4.8 5.4 6.3 Direct costs 201,743 215,590 209,506 213,415
Inflation (Avg) 7.4 6.2 5.5 6.0 Employee costs 13,230 13,494 14,676 14,910
Repo rate (exit rate) 7.5 8.0 7.8 7.3 Other Expenses 50,834 50,339 56,393 57,293
USD/INR (Avg) 54.5 60.5 58.0 56.0 Total operating expenses 265,807 279,423 280,576 285,618
Sector EBITDA 64,447 77,065 85,794 86,596
Merchant prices (INR/kWh) 4.0 4.0 4.0 4.0 Depreciation & Amortization 20,517 27,296 25,933 26,358
New Castle 6700 Kcal (USD/t FoB) 89 80 80 80 EBIT 43,930 49,768 59,861 60,239
Melawan 5400 Kcal (USD/t FoB) 70 64 64 64 Other income 3,692 (5,619) 2,980 3,397
Capacity Addition (MW) 17,956 14,878 15,632 15,632 Interest expenses 26,355 34,399 26,003 26,040
Company Expenditure from provisions 8,500 - - -
Standalone PAT (INR mn) 10,247 9,541 9,893 10,036 Profit before tax 12,767 9,751 36,838 37,595
Powerlinks PAT (INR mn) 1,191 1,064 1,064 1,064 Provision for tax 11,780 10,084 11,724 11,972
Maithon PAT (INR mn) (862) 2,520 2,520 2,520 Net profit 987 (333) 25,114 25,623
Delhi Dist PAT (INR mn) 3,097 3,320 3,354 3,317 Extraordinary income/ (loss) 8,500 8,568 - -
IEL PAT (INR mn) 787 616 616 616 Profit After Tax 987 (333) 25,114 25,623
Mundra units sale (MUs) 11,565 25,965 25,965 26,036 Minority interest (2,081) (2,720) (2,926) (2,908)
Mundra Capacity charges (INR mn) 11,641 26,156 26,185 26,233 Share in profit of associates 239 454 - -
Mundra avg tariff (INR/kwh) 2.4 2.3 2.3 2.2 Profit after minority interest 7,646 5,968 22,188 22,715
Mundra fuel cost (INR/kwh) 1.4 1.4 1.3 1.2 Basic EPS (INR) (0.4) (1.1) 8.2 8.4
Mundra PAT/kwh (INR/kwh) (0.7) - 0.2 0.2 Shares outstanding (mn) 2,470 2,373 2,705 2,705
BUMI coal sales (MT) 68.0 85.0 60.0 64.0 Diluted EPS (INR) (0.3) (1.1) 8.2 8.4
BUMI avg realisation (USD/t) 81.5 60.0 68.0 68.0 Dividend per share (INR) 1.2 1.3 2.9 3.0
BUMI PAT/t (USD) 11.4 3.5 5.5 5.5 Dividend payout (%) 35.7 35.7 35.7 35.7
Consol Regulated Equity (INR mn) 64,228 67,394 70,559 35,830
Consol Regulated RoE 19 19 19 18 Common size metrics
Dividend payout ratio (%) 35.7 35.7 35.7 35.7 Year to March FY13 FY14 FY15E FY16E
Net borrowings (INR mn) 354,150 332,812 285,554 263,495 Operating expenses 80.5 78.4 76.6 76.7
Capex (INR mn) 45,603 51,931 22,132 12,843 Depreciation 6.2 7.7 7.1 7.1
Debtor days 31 40 40 40 Interest expenditure 8.0 9.6 7.1 7.0
Inventory days 28 27 27 27 EBITDA margins 19.5 21.6 23.4 23.3
Payable days 64 77 77 77 Net profit margins 0.3 (0.1) 6.9 6.9
Additional Data
Directors Data
Mr. Cyrus P. Mistry Chairman, Non-Independent, Non-Executive Mr R Gopalakrishnan Non-Independent, Non-Executive
Dr H S Vachha Independent, Non-Executive Mr N H Mirza Independent, Non-Executive
Mr D M Satwalekar Independent, Non-Executive Mr P G Mankad Independent, Non-Executive
Mr A K Basu Independent, Non-Executive Mr Thomas Mathew T Independent, Non-Executive
Mr Anil Sardana, Managing Director, Executive Mr S Ramakrishnan Executive Director
Mr S Padmanabhan Executive Director Ms. Vishakha V. Mulye Independent,Non-Executive
Holding Top 10
Perc. Holding Perc. Holding
Life Insurance Corp Of India 14.12 First State Investments Icvc 5.81
Matthews International Capital 4.66 JSH Mauritius Ltd 2.93
General Insurance Corp Of India 2.70 New India Assurance Co Ltd 2.70
Aberdeen Asset Management Plc 1.73 Vanguard Group Inc 1.00
Blackrock Fund Advisors 0.69 First State Investments 0.52
*as per last available data
Bulk Deals
Data Acquired / Seller B/S Qty Traded Price
No Data Available
*in last one year
Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
20 Sep 2013 Mr. Cyrus P. Mistry Buy 64000.00
16 Aug 2013 Matthews International Funds d/b/a Matthews Asia Funds Buy 1358608.00
*in last one year
BHARAT DYNAMICS
Leading light
India Equity Research| Defence
Bharat Dynamics (BDL), a Mini Ratna category-I company, is a pioneer in NOT LISTED
the manufacture of Anti-Tank Guided Missiles (ATGM). It has evolved to
become a conglomerate in manufacturing ATGMs of latest generations,
surface-to-air weapon systems, strategic weapons, launchers,
underwater weapons, decoys and test equipment. BDL has plans in place
to emerge as an effective and viable outsourcing hub to global missile
manufacturers for precision components/ sub-systems at competitive
pricing. The company is also ramping up its current production capacities
(to be completed within the next three to five years) for all types of
missiles to cater to anticipated orders.
INCOME :
Amit Mahawar
Sales 6,273 9,392 9,592 10,741 +91 22 4040 7451
% change 35.0 49.7 2.1 12.0 amit.mahawar@edelweissfin.com
EBITDA 3,646 3,902 2,841 3,179
Swarnim Maheshwari
Margins (%) 58.1 41.5 29.6 29.6
+91 22 4040 7418
No. of employees 2,894 2,897 3,142 3,300 swarnim.maheshwari@edelweissfin.com
PAT 2,230 2,275 1,723 1,857
PAT margins (%) 35.5 24.2 18.0 17.3 July 09, 2014
Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Defence
Keeping pace with the modernisation of the Indian armed forces, BDL is poised to enter new
avenues of manufacturing covering a wide range of weapon systems such as surface to air
missiles, air defence systems, heavy weight torpedoes, air-to-air missiles etc., making it a
world-class defence equipment manufacturer. The company has also entered into new area
of refurbishment of vintage missiles, which is one more feather in its cap.
Invar
Invar is weapon fired from the Gun barrel of T 90 Tank. The missile
has a semi-automatic control system, tele orienting in the laser beam.
Its a high velocity jamming immune missile
Akash
Medium range surface-to-air missile.
IMultiple target tracking capability
Financial Statements
Bharat Earth Movers (BEML), a Mini Ratna, serves Indias core sectors EDELWEISS RATINGS
like defence, rail, power, mining and infrastructure. The company is one Absolute Rating NOT RATED
of the eight DPSUs in India and earns ~20% of its turnover from defence.
It manufactures and supplies defence ground support equipment such as
Tatra-based high mobility trucks, recovery vehicles, bridge systems,
vehicles for missile projects, tank transportation trailers, mil rail wagons,
mine ploughs, crash fire tenders, snow cutters, aircraft towing tractors
MARKET DATA (R: BEML.BO, B: BEML IN)
and aircraft weapon loading trolleys. BEML is likely to benefit from Indias CMP : INR 736
growing defence spending (especially capital expenditure), modernisation Target Price : NA
of military equipment, focus on indigenous production and offset policy. 52-week range (INR) : 878 / 126
The stock is Not Rated. Share in issue (mn) : 41.6
M cap (INR bn/USD mn) : 31 / 512
Expanding product range to tap growing opportunities Avg. Daily Vol.BSE/NSE(000) : 554.8
BEML operates in the aerospace segment supplying ground support equipment such as
SHARE HOLDING PATTERN (%)
aircraft towing tractors (ATT), multi-purpose weapon loaders (MPWL- Bheema) and
crash fire tenders (CFT). To effectively exploit the e-engineering services potential in Current Q3FY13 Q2FY13
the aerospace domain, the company launched an aerospace vertical in 2007. Its Promoters % 54.0 54.0 54.0
ultimate objective is to manufacture fixed wing and rotary wing aircraft, assemble MF's, FI's & BKs 26.2 25.7 25.6
UAVs from kits and upgrade aircraft and helicopters. The other areas of concentration FII's 1.5 1.2 1.2
will be manufacture of gears and hydraulic aggregates to aeronautical standards as the others 18.3 19.1 19.2
* Promoters pledged shares : NIL
company has core strength in these spheres. Also, BEML and Combat Vehicles (% of share in issue)
Research and Development Establishment (CVRDE) are working together with a foreign
firm to build and supply 155mm 52-calibre tracked guns to the armed forces. RELATIVE PERFORMANCE (%)
Stock over
Sensex Stock
Outlook and valuations: Positive; Not Rated Sensex
BEMLs current order book stands at more than INR60bn with railways contributing 1 month 0.0 (0.4) (0.4)
~INR30bn and defence INR20bn, lending strong near-term revenue visibility. Robust 3 months 12.7 128.4 115.7
revenue visibility (2x FY14 revenue), opportunities from Indias rising defence 12 months 31.6 379.4 347.8
spending, and offset & indigenisation plans present a strong case for the companys
defence business. Moreover, opportunities in Field Artillery Rationalisation Plan (FARP)
and Future Infantry Combat Vehicle (FICV) could lend additional fillip to the company.
The stock is Not rated
Rahul Gajare
Financials +91 22 4063 5561
Year to March FY11 FY12 FY13 FY14 rahul.gajare@edelweissfin.com
Net profit (INR mn) 1,469 281 (935) (98) Swarnim Maheshwari
EPS (INR) 35.3 6.7 (22.4) (2.4) +91 22 4040 7418
swarnim.maheshwari@edelweissfin.com
EPS growth (%) (34.6) (80.9) NM NM
P/E (x) 20.9 109.1 NM NM
ROAE (%) 7.0 1.3 (4.4) (0.5) July 09, 2014
Fig. 1: Products
Snow Cutter
Armoured recovery Vehicle
Ballistics and Aircraft Towing Tractor
Data Fusion Self Propelled Gun
Wagons
Financial Statements
Income statement (INR mn) Balance sheet (INR mn)
Year to March FY11 FY12 FY13 FY14 As on 31st March FY11 FY12 FY13 FY14
Income from operations 26,438 27,150 28,013 29,037 Equity capital 418 418 418 418
Direct costs 15,879 15,200 17,120 16,938 Reserves & surplus 21,006 21,336 20,380 20,393
Employee costs 6,888 7,317 7,452 7,227 Shareholders funds 21,424 21,753 20,798 20,810
Other expenses 2,837 3,211 3,758 3,918 Long term borrowings 1,297 2,477 4,981 4,652
Total operating expenses 25,604 25,728 28,331 28,083 Short term borrowings 6,729 6,971 7,177 4,413
EBITDA 834 1,423 (318) 954 Other long term liabilities 820 4,170 4,060 3,794
Depreciation and amortisation 344 447 510 543 Loan funds 8,026 9,448 12,158 9,065
EBIT 490 976 (829) 411 Deferred tax liability/asset (445) (619) (1,039) (992)
Interest expenses 706 1,113 1,620 1,107 Sources of funds 29,826 34,753 35,978 32,677
Other income 2,056 509 1,094 637 Tangible assets 4,009 5,399 5,406 6,878
Profit before tax 1,840 371 (1,355) (59) Intangible assets 286 -
Provision for tax 371 90 (420) 39 CWIP (incl. intangible) 796 240 1,132 -
Extraordinary items gain/(loss) - 288 101 159 Total net fixed assets 4,804 5,638 6,824 6,878
Reported profit 1,469 569 (834) 61 Non Current Investments 54 1 1 0
Adjusted net profit 1,469 281 (935) (98) Cash and equivalents 483 1,943 785 175
Equity shares outstanding (mn) 42 42 42 42 Inventories 18,970 24,354 24,681 21,608
EPS (INR) basic 35 6.7 (22.4) (2.4) Sundry debtors 11,680 7,917 8,615 9,774
Diluted shares (mn) 42 42 42 42 Loans and advances 4,796 6,809 6,474 5,204
EPS (INR) fully diluted 35.3 6.7 (22.4) (2.4) Other current assets 1,385 2,291 3,801 3,066
CEPS (INR) 44 17 (10) 11 Total current assets (ex cash) 36,831 41,370 43,572 39,652
Dividend per share 11.8 11.7 5.8 1.0 Sundry creditors and others 9,138 10,993 11,743 11,485
Provisions 3,206 3,203 3,458 2,541
Common size metrics- as % of net revenues Total CL & provisions 12,344 14,196 15,201 14,026
Year to March FY11 FY12 FY13 FY14 Net current assets 24,487 27,174 28,370 25,625
Direct costs 60.1 56.0 61.1 58.3 Others - - - -
Employee costs 26.1 27.0 26.6 24.9 Uses of funds 29,826 34,753 35,978 32,677
Other expenses 10.7 11.8 13.4 13.5 Book value per share (BV) 514 522 499 500
Operating expenses 96.8 94.8 101.1 96.7
Depreciation 1.3 1.6 1.8 1.9 Free cash flow
Interest expenditure 2.7 4.1 5.8 3.8 Year to March FY11 FY12 FY13 FY14
EBITDA margins 3.2 5.2 (1.1) 3.3 Net profit 1,469 569 (834) 61
Net profit margins (adjusted) 5.6 1.0 (3.3) (0.3) Add: Depreciation 344 447 510 543
Add: Deferred tax
Growth metrics (%) Add: Others (7,512) (1,251) (2,235) 6,438
Year to March FY11 FY12 FY13 FY14 Gross cash flow (5,699) (235) (2,558) 7,042
Revenues (6.9) 2.7 3.2 3.7 Less:Changes In Working Capital (4,141) (2,687) (1,196) 2,745
EBITDA (70.6) 70.5 (122.4) (399.6) Opertaing cash flow (1,559) 2,452 (1,362) 4,297
PBT (42.9) (79.8) (464.9) (95.7) Less: Capex 1,971 1,280 1,697 54
Net profit (34.6) (80.9) (432.7) (89.5) Free cash flow (3,530) 1,172 (3,059) 4,243
EPS (34.6) (80.9) (432.7) (89.5)
BRAHMOS AEROSPACE
Wings of fire
India Equity Research| Defence
Brahmos Aerospace (BA) was formed as a JV in February 1998 (50.5% NOT LISTED
India share) between DRDO of India and NPO Mashinostroyenia, Russia
(NOPM). It is responsible for designing, developing, producing and
marketing the Brahmos supersonic cruise missiles with active
participation of consortium of Indian and Russian industries. Both the
partners have shared and combined their technological strength, which
enabled birth of the missile. While DRDO had developed crucial systems
like inertial navigation systems, mission software, mobile launchers for
Prithvi and Agni missiles, NPOM has expertise in ramjet engines, launch
vehicles and cruise missiles.
BA has produced the best supersonic cruise missile system BRAHMOS and achieved
Amit Mahawar
innumerous 'Firsts' in the world, making the missile an ultimate weapon of choice for +91 22 4040 7451
the Indian armed forces. There is a significant interest in the world in BrahMos cruise amit.mahawar@edelweissfin.com
missiles and various active inquiries are already in place. Swarnim Maheshwari
+91 22 4040 7418
swarnim.maheshwari@edelweissfin.com
Brahmos
Ship based weapon complex system
o INS Rajput
o INS Ranvir
Fig. 1: MBL, Submarine launch version, Ship based weapon system, air launch system (under construction)
COCHIN SHIPYARD
Sailing the high seas
India Equity Research| Defence
Cochin Shipyard (CSL), a fully owned Government of India company, has NOT LISTED
emerged as a frontrunner in the Indian ship building and ship repair
industry. Its yard has facilities to build vessels up to 1,10,000DWT and
repair ships up to 1,25,000DWT, the largest such facility in India. CSL is
currently building India's first indigenous aircraft carrier. The Vikrant-
class aircraft carrier will be the first to be designed and built in India and
the largest warship built by CSL. The yard has also delivered two of Indias
largest double hull Aframax tankers each of 95,000DWT.
Strength Weakness
SWOT Analysis
Opportunity Threat
Better opportunities in shiprepair Lack of level playing grounds Vis a Vis
owing to growing Indian fleet and foreign yards by way of government
ships calling at Indian Ports. support, level of taxation etc.
Financial Statements
Garden Reach Shipbuilding & Engineers (GRSE) is a Mini Ratna Category I NOT LISTED
PSU. It is recognised as a leading ship building yard and manufacturer of
high value ships embedded with most advanced technologies. The
company is under the Ministry of Defences (MOD) administrative
control. GRSEs business profile includes ship building & repairing, engine
assembling & testing and engineering products. Its engine division
develops cost and fuel effective engines for the Indian Navy, Cost Guard,
mining industries and power sector in collaboration with MTU, Germany.
The companys major achievements include keel laying of the Mauritius
Offshore Patrol vessel, inshore patrol vessels for the Indian Coast Guard
(IPV Rajdoot, Rajkamal Rajkiran,Rajtarang).
Frigate
Anti Submarine Warfare
Missile Corvette
Shipbuilding & Repair Landing ship tank ,craft facility
Survey Vessel
Fleet replenishment tanker
Offshore & Inshore patrol vessel
Fast Interceptor boat
Fast attack & Craft raft
Portable bridges
Engineering Deck Machinery Items
Pumps
Financial Statements
HINDUSTAN AERONAUTICS
Jewel in the crown
India Equity Research| Defence
Hindustan Aeronautics (HAL) is a Nav Ratna company and the largest NOT LISTED
DPSU. It primarily designs, develops, manufactures, repairs and overhauls
aircraft, helicopters, engines and their accessories, navigation and related
communication equipment, as well as operates airports. It has positioned
itself as a comprehensive solutions provider to the Indian defence
services in aviation, spanning fighter aircraft, trainer aircraft and light
helicopters. The company is also manufacturer of the home grown Light
Combat Aircraft (LCA) Tejas.
Company background
HAL came into existence on October 1, 1964. The company was formed by the merger of
Hindustan Aircraft with Aeronautics India and Aircraft Manufacturing Depot, Kanpur. HAL
traces its roots to the late Seth Walchand Hirachand, who set up Hindustan Aircraft at
Bengaluru in association with the erstwhile princely State of Mysore in December 1940. The
Government of India became a shareholder in March 1941 and took over the management
in 1942. Today, HAL has been successful in numerous R&D programmes developed for both
defence and civil aviation sectors. The company has played a significant role in India's space
programmes by participating in the manufacture of structures for Satellite Launch Vehicles
like PSLV (Polar Satellite Launch Vehicle), GSLV (Geo-synchronous Satellite Launch Vehicle) ,
IRS (Indian Remote Satellite) and INSAT (Indian National Satellite).
The companys turnover during FY14 was around INR153bn. The government is planning to
disinvest 10% of its shareholding in the equity capital of the company. HAL has strategic
HAL has strategic partnerships partnerships with several global aviation majors. It is also involved in the manufacture of
with several global aviation structures for Satellite Launch Vehicles (SLV) for India's space programmes. The company
majors. The company exports its also supplies transport aircraft and helicopters to airlines as well as state governments. HAL
products to more than 30 has 19 production divisions and 10 R&D centres located in Bengaluru, Nasik, Hyderabad,
countries. Lucknow, Kanpur, Korwa, Koraput and Barrackpore. The company exports its products to
more than 30 countries.
Aircraft division
Enfgine division
Banglore complex Industrial & Marine Gas turbine division
Foundry & forge division
Aerospace division
HAL has made substantial progress in its current projects: Advanced Light Helicopter
Weapon System Integration (ALH-WSI), Tejas - Light Combat Aircraft (LCA), Intermediate Jet
Trainer (IJT) and Light Combat Helicopter (LCH). LCH, a dedicated helicopter, designed and
developed by HAL made its maiden flight in March 2010. This is the first craft in the attack
helicopter category to be designed and developed in India indigenously. It will be suitable
for close air support and attack roles with air to air/ air to ground missiles, rockets, turret
gun, electronic warfare suite and NBC sensors.
helicopter. This JV has become a centre of excellence for the manufacture of key
components and assemblies of aero-engines.
Source: Company
Source: Company
Financial Statements
HINDUSTAN SHIPYARD
Turbulent waters
India Equity Research| Defence
Hindustan Shipyard (HSL) is the largest shipyard under the Department of NOT LISTED
Defence Production on the East cost of India. HSL was transferred from
the Ministry of Shipping to the Department of Defence Production during
2009-10 for strengthening Indias naval defence capabilities for
manufacture of warships and submarines. The company has successfully
diversified into ship repairs, offshore and onshore structural fabrication.
Since inception, the yard has delivered 169 vessels of various types and
repaired over 1,900 vessels. It is capable of building ships up to
80,000DWT.
fig. 1: HSLProducts
Cargo Liners (including multipurpose vessels) Drill Ship
Bulk Carriers & survey Vessel Dredger
Mooring Vessel Oil Recovery and Pollution control vessel
Shipbuilding HSD Oiler Passenger Ferry / Ships
Landing Ship Tank (Large) Landing Crafts (HSL)
Offshore & Inshore patrol vessel Off Shore Wellhead Platforms
Ship repairs
Submarine refit
Financial Statements
Key P&L items (INR mn) Key Balance Sheet items (INR mn)
Year to March FY10 FY11 FY12 FY13 As on 31st March FY10 FY11 FY12 FY13
INCOME : Net worth (6,830) (6,280) (7,140) (7,692)
Sales 6,620 6,379 6,043 5,625 Net fixed assets 688 768 754 760
% change 32.9 (3.6) (5.3) (6.9)
PBT 251 (2,655) (662) (295)
PAT 23 550 (860) (552)
% change NM NM NM NM
MAZAGON DOCKS
Seasoned player
India Equity Research| Defence
Mazagon Docks (MDL), Mumbai, an ISO 9001:2008 company is one of the NOT LISTED
leading shipbuilding and offshore fabrication yards in India. It has grown
from a single unit and small ship repair company to a multi-unit and
multi-product company, with significant rise in production, use of
modern technology and sophistication of products. The companys main
activities include ship building, ship repair and fabrication of offshore
structures with facilities situated at Mumbai and Nhava. The company
has capability to build warships, submarines, merchant ships up to 30,000
DWT and fabrication of well head platforms, process and production
platforms and jack up rigs.
business opportunities for shipbuilding companies across the country. Amit Mahawar
+91 22 4040 7451
Financials (INR mn) amit.mahawar@edelweissfin.com
Year to March FY10 FY11 FY12 FY13
Value of Production 28,561 26,114 25,236 22,906 Swarnim Maheshwari
+91 22 4040 7418
% change 11.2 (8.6) (3.4) (9.2) swarnim.maheshwari@edelweissfin.com
No. of employees 8,072 8,090 8,325 8,670
PAT 2,402 2,435 4,943 4,127
% change (11.3) 1.4 103.0 (16.5) July 09, 2014
Background
MDL Mumbai, an ISO 9001:2008 company, is one of the leading shipbuilding and offshore
fabrication yards in India. It was incorporated as a public limited company in 1934. After its
takeover by the government in 1960, MDL grew rapidly to become the premier war-
shipbuilding yard in India, producing sophisticated warships for the navy and offshore
structures for the ONGC. It has grown from being a single unit and small ship repair
company to becoming a multi-unit and multi-product player with significant rise in
production, use of modern technology and sophistication of products.
Main activities of the company are ship building, ship repair and fabrication of offshore
structures with facilities situated at Mumbai and Nhava. The company has the capability to
build warships, submarines, merchant ships up to 30,000 DWT and fabrication of well-head
platforms, process and production platforms and jack up rigs. For outfitting work, it has
many workshops with sophisticated equipment and machine specific to hull fabrication and
ship construction work. Repair work is also undertaken using available facilities. The
company has qualified manpower to implement CAD/CAM/CIM using the latest ship design
software, operating from a number of work stations equipped with latest computer
hardware to provide up-to-date design and production support, commensurate with the
yards capabilities. The yard is currently engaged in construction of state-of-the-art stealth
frigates (Shivalik Class), missile destroyers (Kolkata Class) and Scorpene submarines, and is
striding forward to attain Indias self-reliance goals in construction of warships and
submarines.
The company has developed a wide range of products in the offshore shipbuilding sector. It
has constructed ships like diving support vessels, multipurpose support vessels, harbour
utility vessels, tugs, dredgers, passenger-cum-cargo vessels and an assortment of support
vessels, trawlers, barges and floating cranes.
Strength Weakness
SWOT Analysis
Opportunity Threat
Indian Navy plans of acquiring 30 to 35 It may not be commercially viable
ships for the next decade. to continue with telescopic
designing of warship.
MDL will be front runner to win orders
for the P75 (I) submarine programme The company will have to prepare
in Navy's bid to lays emphasis on for an era beyond the nomination
indigenization. era with the emergence of private
sector ship builders.
To cut down overalltime by entering into
JV's with emergence of private shipyard.
Delhi class destroyers Under the Project-15, MDL designed and built three Delhi class guided-missile
destroyers. These were powered by gas turbines and displaced 6,200 tonnes.
Shivalik class frigates Under Project-17 these frigates are the first warships with stealth features to be
designed
Kolkata class destroyers Three of these next-generation guided-missile destroyers in the 6,800 tonnes
range are being designed and built at MDL.
Shishumar class submarine The Indian variant German HDW Type 209 diesel-electric submarine. Two
vessels of this class were constructed at MDL in 1992-94 under a technology
transfer agreement.
Scorpene class submarine MDL is currently building six diesel-electric submarines of the Scorpene class
under a technology-transfer agreement with DCNS, France.
Shipbuilding
(Merchant Ships)
Corvettes
Nilgiri
Missile boats
Godavari class frigates
Shipbuilding
Patrol vessels
(Navy Ships)
Destroyers
Type 1500 (SSK) submarines
Leander class frigates
Submarines
Refit of submarines
Web frame machines
INS Shalki
INS Shankul
Scorpene submarines
Financial Statements
Mishra Dhatu Nigam (MIDHANI) was established in 1973 as a PSU under NOT LISTED
the administrative control of the then Department of Defence Production
& Supplies (Ministry of Defence) to achieve self reliance in the
manufacture of a wide range of super alloys, titanium alloys, special
purpose steels etc., for critical sectors like defence, space, atomic energy,
aeronautics, among others, with technical knowhow from foreign
collaborators. Since then, MIDHANI has developed, manufactured and
supplied more than 105 grades of high performance alloys in different
shapes, sizes, forms towards programmes of national importance in the
defence and atomic energy sectors. The company was accorded Mini
Ratna Category I status in November 2008.
Outlook: Scaling up
MIDHANI has come a long way from 2-3% sales growth to sales CAGR of more than
20% over the past 10 years by implementing holistic plans for appropriate
development. The modernisation and upgradation programme has given a major Rahul Gajare
boost to the companys operations. Order book at FY13 end stood at INR13bn which +91 22 4063 5561
rahul.gajare@edelweissfin.com
provides sufficient revenue visibility for the next three years.
Financials (INR mn) Amit Mahawar
+91 22 4040 7451
Year to March FY10 FY11 FY12 FY13 amit.mahawar@edelweissfin.com
Sales 3,712 4,179 5,090 5,586
% change 20.1 12.6 21.8 9.7 Swarnim Maheshwari
+91 22 4040 7418
No. of employees 1,191 1,121 1,052 976 swarnim.maheshwari@edelweissfin.com
PAT 446 509 685 825
PAT margins 12.0 12.2 13.4 14.8 July 09, 2014
Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Defence
Fig. 1: SWOT analysis
Strength Weakness
SWOT Analysis
Opportunity Threat
Diversification into armour products, Adverse import duty structure
bio medical implants, fastners for for some of the compnay's products
aerospace volatile prices of critically imported
raw material.
Long term tie ups with customers and
making stategic alliances. Risk of obsolescence in processes
and procedure.
Synergisation and integration with other
PSU's for processing part of materials.
Products
Super alloys
Special Steels
Electric alloys
Biomedical Implants
Armour Products
Financial Statements
increasing automation. OFB will play a pivotal role in Indias quest of upgrading and Amit Mahawar
indigenising its defence equipment. +91 22 4040 7451
amit.mahawar@edelweissfin.com
Swarnim Maheshwari
+91 22 4040 7418
swarnim.maheshwari@edelweissfin.com
Introduction
OFB is the largest and oldest departmentally run defence production enterprise in India. The
history of the organisation dates back to British rule in India when the first factory, i.e., the
Gun Carriage Agency (currently known as the Gun & Shell Factory) was established in 1801
at Cossipore, in Kolkata. Over the years, the number of factories has grown, with the focus
of expansion post 1962. The war with China and subsequent desire for self-reliance in
defence production led to the establishment of 16 new factories, compared to five factories
that were set up between 1949 and 1962. Apart from 39 factories that are in operation at
24 different locations all over India, two more factories are being set up. The 40th factory is
being set up in Nalanda (Bihar) for the production of Bimodular charges; the 41st at Korwa
(Uttar Pradesh) for the production of new generation carbines (see Annexure I for state-
wise distribution of OFs and their main items of production and sales). The existing OFs are
divided into the following five operating divisions based on the main products/technologies
employed:
Ordnance Factories
(39 factories)
Pipavav Defence and Offshore Engineering (Pipavav) is Indias first integrated EDELWEISS RATINGS
defence company engaged in building defence warships. It also builds Absolute Rating NOT RATED
commercial ships and provides ship repair and offshore services. Pipavav is
promoted by SKIL Group which is a leading green-field infrastructure focused
group in India. The company is strategically located near international
maritime route. It has entered into alliances and strategic partnerships with
global defence players including DCNS of France, SAAB of Sweden, Babcock
of UK and Northrop Grumman of USA. Not Rated. MARKET DATA (R: PIPA.BO, B: PIPV IN)
CMP : INR 63
Target Price : NA
First-mover advantage in high-entry barrier industry 52-week range (INR) : 74 / 31
Pipavav is ahead of any new player by ~8-10 years in terms of setting up infrastructure Share in issue (mn) : 736.2
and capabilities. The entry barriers are high as setting up infra facilities is not only time M cap (INR bn/USD mn) : 46 / 776
consuming (~ five years), but highly capital intensive as well. Once infra facilities are in Avg. Daily Vol.BSE/NSE(000) : 1,197.9
place, it takes another five years for various strategic tie-ups and production of warships.
SHARE HOLDING PATTERN (%)
Proximity to port, a great locational advantage Current Q3FY13 Q2FY13
Pipavav is situated on West coast of India on the Dubai-Singapore sea route, ~150 Promoters % 44.5 44.5 44.5
nautical miles from Mumbai, and is one of the busiest international maritime ports in MF's, FI's & BKs 15.1 15.2 15.4
India. It is also close to offshore oil fields on Indias West coast as well as the Middle FII's 2.2 2.2 2.3
East owing to which it is best suited to tap offshore construction/repairs market. others 38.2 38.1 37.8
* Promoters pledged shares : NIL
(% of share in issue)
JV with Mazagon Dock in a bind
The company is the first private sector player to get license from the Government of RELATIVE PERFORMANCE (%)
India to build submarines and warships. Pipavav has formed an equal JV with state-run Stock over
Sensex Stock
MDL to implement part existing orders of the latter, which amounts to over Sensex
USD20.5bn. However, recently the government had said that Pipavav will have to 1 month 0.0 (3.0) (3.0)
participate in tenders to get business. 3 months 12.7 69.2 56.5
12 months 31.6 0.4 (31.2)
Outlook and valuations: Positive; Not Rated
Global aspirations of economically strong India, with ever-increasing geo-political
challenges have made the Indian government realise imperatives of strengthening its
defence capabilities. With its 'Buy Indian, Make Indian' initiative, the MoD is increasing
stress on indigenisation. The ministry also envisages greater role for the private sector,
which should benefit Pipavav. The stock is Not rated Rahul Gajare
+91 22 4063 5561
rahul.gajare@edelweissfin.com
Year to March FY11 FY12 FY13 FY14
Revenues (INR mn) 8,599 18,671 25,865 25,337 Amit Mahawar
Rev. growth (%) 36.6 117.1 38.5 (2.0) +91 22 4040 7451
amit.mahawar@edelweissfin.com
EBITDA (INR mn) 1,618 4,202 5,443 6,256
Net profit (INR mn) 438 214 311 27 Swarnim Maheshwari
EPS (INR) 0.6 0.3 0.5 0.0 +91 22 4040 7418
swarnim.maheshwari@edelweissfin.com
EPS growth (%) - (51.1) 45.1 (91.4)
P/E (x) NM NM NM NM
ROAE (%) 2.6 1.1 1.5 0.1 July 09, 2014
Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Defence
Locational advantage
Pipavav is situated on the West coast of India on the Dubai-Singapore sea route, ~150
nautical miles from Mumbai and is one of the busiest international maritime ports in India.
It is also close to offshore oil fields on the West coast of India as well as in the Middle East.
Thus, it is well suited to tap the offshore construction/repair/refurbishment markets. The
company avails all infrastructure benefits of being in close to proximity to the Pipavav port.
Being a highly capital intensive business. Almost five years are needed to carry out site
surveys, land acquisition, environment clearances, shipyard designing, project financing
and construction of dry dock.
Once infra facilities are in place, it takes another two years for various strategic tie-ups
to demonstrate execution capabilities to identify partners to secure higher value orders
through tie-ups and demonstrate growth.
After the strategic tie-ups and securing orders, production of warship may take another
three years as it involves securing warship production license and smooth execution of
first order.
Fit-out berths
Source: Company
There is also huge demand for offshore supply vessels such as drill ships and floating
production storage platforms, which throws up additional opportunity of ~USD25-30bn.
Pipavav is rightly poised to benefit Huge demand in offshore oil and gas sector
from the growing opportunities in In India, demand for high-end offshore facilities such as drill ships and floating production
Indian defence industry, offshore
storage platforms amounts to approximately USD20-40bn. With oil prices on the rise, the
oil & gas sector and replacement
sector is gaining importance. The increase in demand for offshore assets will see
demand
consequential rise in demand for offshore supply vessels (OSVs) required to service them.
Furthermore, higher production cost of OSVs in other countries such as Japan, Korea etc.,
may result in diversion of orders to India, consequently creating huge prospects for Pipavav.
The company is well-established in this area through its construction programme of OSVs.
Defence Offshore
Sembcorp Scope : Technical support , ship repair, ship building, ship conversion, rig
building, offshore engineering and construction.
(Singapore)
Partner Profile: Global leader in marine & offshore engineering business
SAAB Scope : Product services and solutions for military defence and civil security
(Europe) Partner Profile :Sweden-based industrial and technology giant
Source: Company
Key risk
Though in recent times Pipavav turned around and has been clocking profits in past few
quarters, increasing debt and tardiness in launching ships could exert pressure on
profitability.
Despite robust order book and world-class infrastructure, the company is yet to prove
itself on execution front given its limited track record in the space.
The company confronts several macro-economic hurdles like rising input cost, lack of
transparent policy, uncertainty in approvals, etc.
Outlook
The Indian government has encouraged indigenisation of defence hardware with
introduction of the Buy Local in its DPP 2013. It is aimed at promoting production of
defence equipment by capable Indian companies. In view of global aspirations of
economically strong India, ever-increasing geo-political challenges and the need for anti-
piracy operations in the Indian Ocean, the Indian Navy and Coast Guard are being
modernised to safeguard the countrys maritime interests. Scope of naval defence is further
widened by providing support to maritime neighbours during natural disasters. This will
require substantial as well as rapid expansion of Indias naval and coast guard fleet.
There is huge replacement/refurbishment demand for defence vessels. About 40% of the
commercial fleet is more than 20 years old and the Indian ship owners are expected to
spend ~USD4bn to replace these over the next five years.
In India, the demand for high-end offshore facilities such as drill ships and floating
production storage platforms amounts to ~USD20-40bn. With oil prices on the rise,
importance of this sector is only building up.
We see India spending over USD248bn on defence equipment over the next decade,
presenting significant offset opportunity expected to top USD70bn. Not Rated
Financial Statements
Income statement (INR mn) Balance sheet (INR mn)
Year to March FY11 FY12 FY13 FY14 As on 31st March FY11 FY12 FY13 FY14
Income from operations 8,599 18,671 25,865 25,337 Equity capital 6,658 6,912 7,012 7,362
Direct costs 2,828 4,988 13,521 9,971 Reserves & surplus 10,831 12,971 13,767 16,068
Employee costs 277 462 536 574 Shareholders funds 17,489 19,883 20,779 23,430
Other expenses 3,876 9,018 6,366 8,536 Long term borrowings 9,350 10,018 22,038 22,447
Total operating expenses 6,981 14,468 20,422 19,081 Short term borrowings 7,599 17,233 22,819 27,041
EBITDA 1,618 4,202 5,443 6,256 Loan funds 16,949 27,251 44,857 49,488
Depreciation and amortisation 520 1,103 1,272 1,665 Deferred tax liability/asset 116 672 810 986
EBIT 1,098 3,099 4,170 4,591 Sources of funds 34,554 47,806 66,446 73,904
Interest expenses 1,193 2,577 3,988 4,775 Total fixed assets 28,383 29,172 50,481 60,725
Other income 636 244 266 390 Goodwill 102 102 102 102
Profit before tax 541 767 449 207 Current investments 230 108 63 19
Provision for tax 103 553 138 180 Inventories 2,453 3,391 1,628 2,309
Core profit 438 214 311 27 Sundry debtors 2,050 9,094 8,960 13,956
PAT before Minority Interest 438 214 311 27 Cash and equivalents 4,277 2,783 3,756 3,844
PAT after Minority Interest 438 214 311 27 Othe current assets 4,345 6,776 8,428 7,966
Adjusted net profit 438 214 311 27 Loans and advances 3,674 8,474 8,426 11,907
Basic shares outstanding (mn) 680 680 680 685 Total current assets (ex cash) 12,522 27,735 27,442 36,138
EPS (INR) basic 0.6 0.3 0.5 0.0 Sundry creditors and others 10,060 11,842 12,906 21,725
Diluted equity shares (mn) 680 680 680 685 Other current liabilities & prov. 900 251 2,491 5,198
EPS (INR) fully diluted 0.6 0.3 0.5 0.0 Total current liabilities & prov. 10,961 12,093 15,397 26,923
CEPS (INR) 1.5 2.8 2.3 2.5 Net current assets 1,561 15,642 12,045 9,215
Uses of funds 34,554 47,806 66,446 73,904
Common size metrics- as % of net revenues Adjusted BV per share (INR) 26 29 31 34
Year to March FY11 FY12 FY13 FY14
Direct cost 32.9 26.7 52.3 39.4 Free cash flow
Employee expenses 3.2 2.5 2.1 2.3 Year to March FY11 FY12 FY13 FY14
S G &A expenses 45.1 48.3 24.6 33.7 Net profit 438 214 311 27
Operating expenses 81.2 77.5 79.0 75.3 Depreciation 520 1,103 1,272 1,665
Depreciation and Amortization 6.0 5.9 4.9 6.6 Deferred tax 80 556 0 0
Interest expenditure 13.9 13.8 15.4 18.8 Others 102 1,571 3,988 4,774
EBITDA margins 18.8 22.5 21.0 24.7 Gross cash flow 1,140 3,444 5,571 6,466
EBIT margins 12.8 16.6 16.1 18.1 Less:Changes in WC 6,052 9,597 (3,597) (2,830)
Net profit margins (adjusted) 5.1 1.1 1.2 0.1 Operating cash flow (4,912) (6,153) 9,167 9,296
Less: Capex 3,371 5,266 27,086 10,244
Growth metrics (%) Free cash flow (8,283) (11,419) (17,919) (948)
Year to March FY11 FY12 FY13 FY14
Revenues 36.6 117.1 38.5 (2.0)
EBITDA NM 159.7 29.5 14.9
PBT NM 41.8 (41.5) (53.9)
Net profit NM (51.1) 45.1 (91.3)
EPS - (51.1) 45.1 (91.4)
Year to March FY11 FY12 FY13 FY14 Y-o-Y growth (%) (51.1) 45.1 (91.4)
ROAE (%) (on adjusted profits) 2.6 1.1 1.5 0.1 CEPS 1.5 2.8 2.3 2.5
Debtors days 45 109 127 165 Price/BV (x) 2.4 2.2 2.1 1.8
Inventory days 244 214 68 72 EV/Sales (x) 6.4 3.6 3.2 3.5
Fixed assets t/o (x) - 0.6 0.6 0.5 EV/EBITDA (X) 34.2 16.0 15.4 14.2
ROLTA INDIA
Secure bet
India Equity Research| Defence
Rolta India (Rolta) offers a complete range of solutions for efficient defence EDELWEISS RATINGS
operations that are vital for the safety of a nation. The company has Absolute Rating NOT RATED
transformed its business from a services-centric model into one that is
solutions oriented, with a large repository of its own intellectual property
(IPR). As a dominant market leader for defence geospatial solutions in India
for over two decades, the company has a deep understanding of the
operational environment of defence forces and continues to design
MARKET DATA (R: ROLT.BO, B: RLTA IN)
innovative solutions. Roltas strength lies in its level of commitment, as was
CMP : INR 107
demonstrated by its participation in the Armys Operation Vijay, Operation Target Price : NA
Parakram and in several other major exercises. The company is one of the 52-week range (INR) : 122 / 53
select vendors under the stringent `Make India categorisation. Not Rated. Share in issue (mn) : 161.3
M cap (INR bn/USD mn) : 17 / 289
Strong presence in GIS segment; impressive client base Avg. Daily Vol.BSE/NSE(000) : 1,168.7
Demand for GIS (Geographic Information System) application is growing at a fast pace.
Rolta enjoys strong leadership in the GIS segment with a market share of over 70% in SHARE HOLDING PATTERN (%)
India and is well placed to capture a large chunk of various GIS requirements in the Current Q3FY13 Q2FY13
future. The company enjoys long-term relationships with its customers, many of whom Promoters % 50.5 50.3 49.1
have been with the company for over two decades. MF's, FI's & BKs 2.5 2.5 2.5
FII's 16.8 17.2 19.7
Addressable defence market close to USD20bn others 30.2 30.0 28.7
* Promoters pledged shares : NIL
The market Rolta hopes to address has increased many folds due to its IP and (% of share in issue)
numerous strategic partnerships. Key defence programmes which are of interest to the
company are primarily military communications, battle field management system, RELATIVE PERFORMANCE (%)
digital solider system, C4ISTAR, optronics vehicle systems, and homeland security Stock over
Sensex Stock
which together amount to ~USD20bn addressable market. The company also expects Sensex
~USD10bn offset market potential in the long term as it delivers solutions in 1 month 0.0 (1.9) (1.9)
partnership with foreign vendors. 3 months 12.7 43.7 31.0
12 months 31.6 88.0 56.4
Outlook and valuations: Positive; Not Rated
Rolta has a deep understanding of the operational environment of the defence forces
and continues to design innovative solutions. It is one of the select vendors under the
stringent `Make India categorisation and is favourably placed to tap the opportunity as
India hikes spending on defence acquisitions. The stock is Not Rated.
Rahul Gajare
Financials +91 22 4063 5561
Year to March FY10 FY11 FY12 FY13 rahul.gajare@edelweissfin.com
Source: Company
Financial Statements
Income statement (INR mn) Balance sheet (INR mn)
Year to March FY10 FY11 FY12 FY13 As on 31st March FY10 FY11 FY12 FY13
Income from operations 15,327 18,056 18,288 21,788 Equity capital 1,612 1,613 1,613 1,613
Software development 2,854 3,693 2,663 4,577 Reserves & surplus 14,479 17,376 17,584 17,731
Employee costs 4,859 5,237 5,427 6,187 Shareholders funds 16,091 18,990 19,198 19,344
Other expenses 1,725 1,878 2,017 2,154 Long term borrowings 12,588 7,309 19,132 33,140
Total operating expenses 9,439 10,809 10,107 12,918 Short term borrowings 1,479 4,441 1,406
EBITDA 5,888 7,247 8,181 8,870 Loan funds 12,588 8,788 23,573 34,546
Depreciation and amortisation 2,679 3,300 4,433 3,726 Other long term liabilities 18 187
EBIT 3,209 3,947 3,748 5,144 Deferred tax liability/asset 353 380 506 549
Interest expenses 471 652 1,252 2,348 Sources of funds 29,032 28,176 43,277 54,625
Other income 279 308 362 390 Tangible assets 19,540 23,494 34,304 50,577
Profit before tax 3,017 3,603 2,857 3,186 CWIP (incl. intangible) 2,428 2,825 3,112 196
Provision for tax 406 625 435 41 Total net fixed assets 21,969 26,319 37,415 50,773
Extraordinary items gain/(loss) 1,037 (11,537) Non Current Investments 0
Reported profit 2,612 4,014 2,423 (8,392) Investments 551 961 266 12
Adjusted net profit 2,612 2,978 2,423 3,145 Cash and equivalents 504 401 260 1,662
Equity shares outstanding (mn) 165 165 161 161 Inventories 39
EPS (INR) basic 16 18 15.0 19.5 Sundry debtors 6,248 6,926 6,024 6,219
Diluted shares (mn) 165 165 161 161 Loans and advances 784 716 2,066 1,729
EPS (INR) fully diluted 15.8 18.0 15.0 19.5 Other current assets 1,288 1,096 336 1,737
CEPS (INR) 32 38 43 43 Total current assets (ex cash) 8,359 8,737 8,425 9,685
Dividend per share 8.6 10.7 10.7 10.7 Sundry creditors and others 1,246 7,104 1,786 6,586
Dividend payout (%) 54.4 59.5 71.3 54.9 Provisions 1,105 1,139 1,302 920
Total CL & provisions 2,351 8,243 3,088 7,506
Common size metrics- as % of net revenues Net current assets 6,008 495 5,337 2,178
Year to March FY10 FY11 FY12 FY13 Others - - - -
Direct costs 18.6 20.5 14.6 21.0 Uses of funds 29,031.3 28,176 43,277 54,625
Employee costs 31.7 29.0 29.7 28.4 Book value per share (BV) 98 115 119 120
Other expenses 11.3 10.4 11.0 9.9
Operating expenses 61.6 59.9 55.3 59.3 Free cash flow
Depreciation 17.5 18.3 24.2 17.1 Year to March FY10 FY11 FY12 FY13
Interest expenditure 3.1 3.6 6.8 10.8 Net profit 2,612 4,014 2,423 (8,392)
EBITDA margins 38.4 40.1 44.7 40.7 Add: Depreciation 2,679 3,300 4,433 3,726
Net profit margins (adjusted) 17.0 16.5 13.2 14.4 Add: Deferred tax
Add: Others (2,948) (894) 2,680 18,230
Growth metrics (%) Gross cash flow 2,343 6,420 9,536 13,564
Year to March FY10 FY11 FY12 FY13 Less:Changes In Working Cap. (1,706) (507) 119 2,849
Revenues 11.6 17.8 1.3 19.1 Opertaing cash flow 4,049 6,927 9,417 10,715
EBITDA 26.0 23.1 12.9 8.4 Less: Capex 4,748 3,384 9,029 15,017
PBT (9.5) 19.4 (20.7) 11.5 Free cash flow (699) 3,543 388 (4,302)
Net profit (10.9) 14.0 (18.6) 29.8
EPS (10.9) 14.0 (16.6) 29.8
WALCHANDNAGAR INDUSTRIES
Glad tidings
India Equity Research| Defence
Walchandnagar Industries (WIL) is an ISO 9001: 2008 certified Indian EDELWEISS RATINGS
company with global presence and diversified business portfolio in Absolute Rating NOT RATED
projects, products and high-tech manufacturing. Boasting of more than
100 years of engineering excellence legacy, the company has established
its name as one of the best in its operational areas. WIL is known for
pioneering achievements in Indian engineering industry and for its
contribution to nation building activities. It has successfully developed
MARKET DATA (R: WALC.BO, B: WI IN)
indigenously critical manufacturing technologies for the defence sector. CMP : INR 101
Over the past three decades, WIL has manufactured and supplied critical Target Price : NA
equipment such as Combustion Chambers, Al. Alloy Bridges, Launching 52-week range (INR) : 123 / 41
Systems, Motor casings, etc. It has supplied critical and core equipment Share in issue (mn) : 38.0
and successfully integrated main power plant on board Indias first M cap (INR bn/USD mn) : 4 / 64
indigenous nuclear submarine INS-Arihant. WIL has recently set up an Avg. Daily Vol.BSE/NSE(000) : 243.5
exclusive infrastructure and facilities for production of combustion
chambers for Akash missile. Not Rated. SHARE HOLDING PATTERN (%)
Current Q3FY13 Q2FY13
Partnering with DCNS for critical submarine component Promoters % 55.0 55.0 55.0
DCNS (France) signed an MoU with WIL in February 2010 for the manufacture of critical MF's, FI's & BKs 4.9 5.2 5.5
components for the Scorpne contract, termed Project 75 by the Indian Navy. WIL is FII's 0.0 0.0 0.0
already a subcontractor of MDL for some high-end structural requirement of Scorpne. others 40.1 39.8 39.5
* Promoters pledged shares : NIL
Its partnership with DCNS puts it in a prominent position in the manufacture of some (% of share in issue)
of the main equipment for Scorpne. DCNS is already working with WIL for
manufacturing complex cradle-gearbox for the navys first anti-submarine warfare RELATIVE PERFORMANCE (%)
(ASW) corvette Project 28. Stock over
Sensex Stock
Sensex
Outlook and valuations: Positive winds; Not Rated 1 month 0.0 (10.2) (10.2)
The Indian Navy is reportedly looking to upgrade its submarines with advanced sonar 3 months 12.7 66.8 54.1
and torpedoes in the near future. We believe the DCNS partnership is likely to extend 12 months 31.6 80.7 49.1
to other projects in DCNS naval business from Indian or even overseas markets. The
upgradation and launch of various submarines/ aircraft carrier is likely to present
ample business opportunities to WIL in the future. The stock is Not Rated.
Rahul Gajare
Financials +91 22 4063 5561
Year to March FY10 FY11 FY12 FY13 rahul.gajare@edelweissfin.com
Revenue (INR mn) 6,724 9,577 8,788 7,265
Amit Mahawar
Rev. growth (%) 31.2 42.4 (8.2) (17.3) +91 22 4040 7451
EBIDTA (INR mn) 244 432 563 (233) amit.mahawar@edelweissfin.com
Net profit (INR mn) 223 128 121 (383) Swarnim Maheshwari
EPS (INR) 6.1 3.3 4.6 (20.9) +91 22 4040 7418
EPS growth (%) 0.1 (45.3) 36.1 NM swarnim.maheshwari@edelweissfin.com
Financial Statements
Income statement (INR mn) Balance sheet (INR mn)
Year to September FY10 FY11 FY12 FY13 Year to September FY10 FY11 FY12 FY13
Income from operations 6,724 9,577 8,788 7,265 Equity capital 76 76 76 76
Direct costs 5,254 7,425 6,252 5,338 Reserves & surplus 4,034 3,994 3,935 6,988
Employee costs 601 784 937 965 Shareholders funds 4,110 4,070 4,011 7,064
Other expenses 624 936 1,035 1,195 Long term borrowings 1,039 371 213 1
Total operating expenses 6,480 9,145 8,224 7,498 Short term borrowings 998 1,654 2,357
EBITDA 244 432 563 (233) Loan funds 1,039 1,370 1,867 2,358
Depreciation and amortisation 134 159 180 182 Other long term liabilities 2,276 1,329 852
EBIT 110 273 384 (414) Deferred tax liability/asset 59 48 34 (190)
Interest expenses 93 170 299 417 Sources of funds 5,208.4 7,764 7,240 10,085
Other income 213 66 137 56 Tangible assets 2,814 2,944 3,011 6,383
Profit before tax 230 170 222 (775) CWIP (incl. intangible) 585 438 230 204
Provision for tax (4) 42 48 25 Total net fixed assets 3,400 3,382 3,242 6,587
Extraordinary items gain/(loss) (11) - (53) 417 Non Current Investments 468 14 14 102
Reported profit 223 128 121 (383) Investments 173 185 207
Adjusted net profit 234 128 174 (800) Cash and equivalents 347 295 185 123
Equity shares outstanding (mn) 38 38 38 38 Inventories 2,231 2,897 3,144 2,627
EPS (INR) basic 6 3 4.6 (20.9) Sundry debtors 3,573 3,977 4,391 4,172
Diluted shares (mn) 277 277 277 277.2 Loans and advances 1,687 1,620 829 1,458
EPS (INR) fully diluted 0.8 0.5 0.6 (2.9) Other current assets 3 163 545 394
CEPS (INR) 10 8 9 (16) Total current assets (ex cash) 7,493 8,658 8,909 8,651
Dividend per share 8.6 10.7 10.7 10.7 Sundry creditors and others 6,435 4,384 5,197 5,395
Dividend payout (%) 140.7 320.7 235.7 (51.3) Provisions 64 81 98 190
Total CL & provisions 6,500 4,466 5,295 5,585
Common size metrics- as % of net revenues Net current assets 994 4,192 3,615 3,066
Year to September FY10 FY11 FY12 FY13 Others - - - -
Direct costs 78.1 77.5 71.2 73.5 Uses of funds 5,208.5 8,056 7,241 10,085
Employee costs 8.9 8.2 10.7 13.3 Book value per share (BV) 107 106 105 185
Other expenses 9.3 9.8 11.8 16.5
Operating expenses 96.4 95.5 93.6 103.2 Free cash flow
Depreciation 2.0 1.7 2.0 2.5 Year to September FY10 FY11 FY12 FY13
Interest expenditure 1.4 1.8 3.4 5.7 Net profit 223 128 121 (383)
EBITDA margins 3.6 4.5 6.4 (3.2) Add: Depreciation 134 159 180 182
Net profit margins (adjusted) 3.5 1.3 2.0 (11.0) Add: Deferred tax
Add: Others 165 (1,517) (1,215) (328)
Growth metrics (%) Gross cash flow 521 (1,230) (914) (529)
Year to September FY10 FY11 FY12 FY13 Less:Changes In Working Capital 149 (809) (754) (152)
Revenues 31.2 42.4 (8.2) (17.3) Opertaing cash flow 372 (421) (160) (378)
EBITDA (43.1) 77.2 30.4 (141.3) Less: Capex 235 267 161 54
PBT (34.9) (26.4) 30.9 (449.1) Free cash flow 138 (688) (321) (432)
Net profit 0.1 (45.3) 36.1 (559.3)
EPS 0.1 (45.3) 36.1 (559.3)
Annexure 1
Early days
The Indian Army has its roots in the beginning of the British rule over India. During the past
250 years, it has undergone humungous changes, accomplished many commendable feats
and fought countless battles at home and abroad on different continents. Winston Churchill
referred to the over 2mn strong Indian Army during World War II as the largest volunteer
army known to history. Even today at around 1.3mn personnel, the Indian Army is one of
the largest volunteer armies in the world.
Post independence, it was China's belligerence in 1962 that shook the nation. This was
defeat, pure and simple, born of short-sightedness and bad decisions. India was outclassed
and outsmarted by masters of real geopolitics. This rude awakening in the Himalayas,
caused by the failure of the political and military leadership, brought about a great national
I believe that the stability of humiliation. The Army, however, soon recovered from this trauma. The glorified battles of
the Indian Army may perhaps the war with Pakistan three years later in 1965 helped partly heal the wounds. But honour
be a deciding factor in the was not really restored until the resounding victory in the 1971 Indo-Pak war, with tales of
future of India impossible victories won in places like Longewala with scores of Pakistani tanks destroyed. A
- Lord Wavell, decisive victory like this had not materialised in centuries.
Former Viceroy of India
(In his farewell speech) Thought process towards defence industry
Independence brought about a huge change in formation, structure and size of the Indian
armed forces. The defence industry was practically non-existent with most military
hardware of British make. Given that takeover by military was the norm around the time of
Indias independence, as seen in several African and Asian countries, the Indian government
chose to moderate the military and hence was slow to develop it. The governments intent
was to keep military out of strategic decision making from the geo-political perspective. The
break up of Soviet Union in 1990s, a partner for major defence procurement, led to a
strategic shift in Indias defence policy with emphasis on domestic manufacturing. With over
39 ordnance factories (two more in pipeline) and over nine defence public sector
undertaking (DPSU), India today has one of the largest defence industrial complexes in
developing nations, all in the government fold, with minimal private participation.
Impact of post cold war on Indian defence mindset; nuclear aspiration seeded
India chose to go with USSR over US-led West given that the former was weaker amongst
Nuclear power ambition
the two Super Powers and hence unlikely to dominate smaller countries like India. While the
gathered pace under the aegis
seeds of atomic energy were sown by Indias first Prime Minister Jawaharlal Nehru, it was
of Indira Gandhi
only under the aegis of Indira Gandhi that the nuclear power ambition gathered pace. Ms.
Gandhi was impressed during the 1971 war when USSR sent nuclear powered vessels which
prevented joint British-American attack on India. This essentially fast tracked Indias nuclear
aspirations.
India was heavily dependent on USSR for both military hardware and political support on
the global platform. However, with the fall of the Soviet Union, globalisation of the world
commenced with US being the sole Super Power. India subsequently improved relations
with US and continues to work towards deepening the strategic relation.
During the past decade, India has stepped up engagement with US with rapid
transformation. Total defence orders bagged by the US during the period increased from nil
to USD8-9bn and likely to add another USD5-6bn during the next one-two years, which is
likely to include the C-130J Super Hercules aircraft, M777 155mm ultra-light Howitzers,
Apache helicopters and Chinook heavy-lift helicopters. The US government has further
indicated co-development of armament as the way forward to deepen the strategic and
defence relationship.
China continued to remain assertive after the war and there have been numerous instances
India would spend INR647bn to
setup the new Mountain Strike of intrusion by Chinese Army into the Indian Territory during the years. In the past two
Corps eventually deploying 90,000 decades, China has intensified patrolling along the Line of Actual Control including
soldiers. modernisation of border infrastructure and thus it becomes imperative for India to balance
the equation. India in order to address these intrusions is stepping presence along the Indo-
Tibetan border.
India currently has three Strike Corps, based in Mathura, Ambala, and Bhopal to deal with
any offense from Pakistan. Similarly, the Government has approved a new Mountain Strike
Corps deploying about 40,000 - 50,000 soldiers to counter Chinese military build-up along
the border. The unit is likely to be scaled up to over 90,000 soldiers subsequently. This new
unit is likely to cost over INR647bn and be setup by 2016-17. The Strike Corps will be
headquartered at Panagarh, West Bengal along with two divisions in Bihar and Assam and
other units from Ladakh in Jammu and Kashmir to Arunachal Pradesh.
Lessons from wars with Pakistan; Kargil war with Pakistan a turning point
Although the Indian Army comprehensively won the Kargil war, it was due to more of
aggressive strategy and perseverance rather than having equipped with modern arms.
Private sector encouraged in Weapons and equipment were obsolete in the absence of modernisation in more than a
defence sector after learnings decade. The obsolesce has only increased over time. Kargil war was indeed a turning point
from Kargil war. for the Indian defence industry. The government set up the Kelkar Committee to suggest
changes in the acquisition procedure so as to encourage private sector participation and set
up domestic manufacturing for defence equipment. With most of the suggestions accepted,
came the first Defence Procurement Policy, 2002, a huge milestone for encouraging private
sector participation in the defence industry with offset policy introduced in 2005. The policy
has only evolved with more clarity over the period with encouragement to private sector to
enter the defence sector.
Annexure 2
World moving towards fifth generation fighter aircraft; India upgrades to fourth
After a delay of several years, India in January 2012 has finally shortlisted Dassault Rafale of
France over Eurofighter Typhoon to provide it with 126 Medium Multi-Role Combat Aircraft
(MMRCA) from amongst six contenders. The other four in the fray included American Boeing
F-18 and Lockheed Martin F-16, Swedish JAS 39 Gripen and Russian MiG-35. The deal, worth
about USD10-12bn, makes it the single largest defence deal so far.
While Indian Air Force is likely to receive the first squadron of the fourth generation Rafale
fighter planes by 2016, China is preparing to induct its home grown fifth generation stealth
fighter Chengdu J-20 by 2017. China will thus join US and Russia as the fifth generation
fighter jet owner, where stealth is the main feature.
Meanwhile, India has tied up with Russia to jointly develop and co-produce the fifth
generation fighter aircraft (Sukhoi T-50) and thus enter the coveted club of fifth generation
fighter aircraft owners. This, however, is at least a decade away with prototype of the same
expected earliest by 2016-17.
Robotics
The importance of robots for armed forces is immense. Unmanned aerial vehicles
(UAVs) and unmanned ground vehicles (UGVs) are examples of robots increasingly
being used by countries both for reconnaissance and attack. Robots are used in a
variety of applications where the job is either too tedious or dangerous for human
beings. DRDO is developing an unmanned combat air vehicle (UCAV) called Rustom for
the Indian military. It has the potential to be used for reconnaissance in Naxalite
infested areas which will give troops a clear idea of dangers.
submarines bought from the French company DCNS may also be fitted with AIP
technology.
Venture between India and Russia for fifth generation fighter aircraft
In October 2007, India and Russia agreed to jointly develop and produce Fifth
Generation Fighter Aircraft (FGFA), the largest joint project of the Indo-Russian military
and technical cooperation. Under the project, India will modify and customise the
prototype Russia has developed independently.
Four Russian prototypes of the fifth-generation fighter codenamed T-50 or PAK-FA have
performed more than 200 test flights since January 2010. Sukhoi Company and HAL will
work jointly on this project. While the Russian Air Force plans to begin inducting the
planes in 2015, HAL is to receive three Russian prototypes for redesign and testing in
2015, 2016 and 2017, and will hand over the first series produced aircraft to the IAF in
2019.
Annexure 3
Russia
Russia embarked on a major restructuring exercise of its defence industry in the early
1990s. One of the major steps was to create new corporate structures to undertake the
complete gamut of research, design and production of defence systems. In a way,
Russia wanted to follow the highly successful Western model. It privatised a large
number of defence production facilities. However, major research/design
establishments and production facilities falling under strategic disciplines were kept
under the governments direct control.
UK
As per the UK Ministry of Defence Policy Paper No 5 on Defence Industrial Policy, a
thriving, innovative and competitive defence industry is essential for the defence of UK.
The UK defence industry embraces all defence suppliers that create value, employment,
technology or intellectual assets in the country. UKs innovative science base supports
the defence industrys high levels of technology development, and this brings benefits
to other industry sectors through the application of military technology to civil products.
The UK government works closely with industry and is committed to public/private
partnerships. As a matter of fact, intense consultations are held with Defence
Manufacturers Association before formulating government policies.
Australia
The Australian government recognises the role of defence industry and considers it to
be partner in the development of indigenous capability. It wants the industry to be
aware of long-term defence plans to be able to identify and exploit emerging business
opportunities.
Pakistan
Pakistan has also realised that private sector has to be dovetailed in the overall effort to
produce defence equipment indigenously. Defence Production Division has been
created in the Ministry of Defence Production to involve local industry in defence
production. It has been made responsible to identify, integrate and utilise the industrial
potential available both in public and private sectors for production and procurement
of defence stores. It also tries to attain economies of scale by optimum utilisation of
available production capacities in both sectors.
Annexure 4
Annexure 5
Presence of Indian companies across submarine value chain
Fight FLOAT MOVE
Electro
Missile optic Ballistics/missil Communication Design material(steel Steam/gas Alternator/ge Pumps/mot
Companies Radars system systems es/torpedos and electronics engineering Fabrication Hull plates) turbines Dieses engine nerator/HVAC ors
BEL
Astra Microwave
Tata advanced system
Rolta
ECIL Hyd
Avantel Softech, Hyd
L&T
Godrej & Boyece
Data Pattern
Nova integrated sys
Punj Llyod
Tata Power SED
HAL
BHEL
BDL
SAIL
Wartsila
Caterpillar
MAN
MDL
Garden reach
Goa shipyard
Cochin shipyard
Pipavav Shipyard
NOTES:
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
Sector return is market cap weighted average return for the coverage universe
within the sector
SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return
Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai 400 098.
Board: (91-22) 4009 4400, Email: research@edelweissfin.com
Nischal Maheshwari Co-Head Institutional Equities & Head Research nischal.maheshwari@edelweissfin.com +91 22 4063 5476
Rating Distribution* 149 40 12 202 Buy appreciate more than 15% over a 12-month period
* 1 stocks under review
Hold appreciate up to 15% over a 12-month period
> 50bn Between 10bn and 50 bn < 10bn
Reduce depreciate more than 5% over a 12-month period
Market Cap (INR) 139 57 6
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