Professional Documents
Culture Documents
February 2018
Edelweiss
India Conference 2018
February 7-9, 2018 | Grand Hyatt, Mumbai Another Tryst with Destiny
February 15-17,
February 7-9, 2016
2018 Grand Hyatt,
St. Regis Mumbai
Hotel, Mumbai
Preface
We present key takeaways of Day 3 of the Edelweiss India Conference 2018 – India 2025: Another Tryst With Destiny.
The 3-day event (February 7-9) was a resounding success, which brought together over 150 corporates, 600 investors,
apart from a host of CEOs, policymakers and industry experts, resulting in over 5,000 meetings.
Day 3 schedule was lighter compared to the previous two days. It comprised primarily of investor-corporate meetings
with a higher corporate attendance. The mix of companies was also more varied with representation from a large
number of sectors—logistics, IT, agrochemicals, specialty chemicals, auto, retail, NBFCs, banks, insurance, consumers,
among others.
While IT companies perceive improved demand outlook and expanding customer wallets, financial sector companies
continued to dwell on the theme of democratisation of credit and financialisation of savings. The latter envisage
retail to be the vital piece on assets as well as liabilities fronts. Consumer staple companies are optimistic on the
hitherto languishing rural economy bouncing back given encouraging announcements by the government in Budget
2018. Consumer durables and auto companies also anticipate things to be better in FY19 as GST disruptions ebb.
The real stars of Day 3 were mid-cap companies. Agriculture inputs, building materials and logistics companies
evinced tremendous investor interest. Agrochemical companies stated that despite two consecutive good monsoons,
their top lines have been weak, perhaps owing to low food prices. However, they believe things are getting better
and sentiments will improve, especially given the finance minister’s announcement in budget speech that MSPs will
be at 50% of cost of production. Building material companies are betting on implementation of e-way bill, which they
expect to help wrest market share from unorganised players, and thus garner superior top-line growth. Logistics
companies highlighted the huge growth potential in the sector, especially post GST, given the dominant presence of
unorganised players in the space.
Apart from corporate-investor interactions, this year’s conference has been unique in terms of investor mood, investor
focus and corporate sentiments. It’s amazing how things change in a year’s time. Last year, this time was characterised
by gloom underpinned by demonetisation and Donald Trump’s election as US President. However, despite the
pessimism, Indian and global markets performed exceptionally well, with 2017 being one of the best years in a
decade in terms of performance as well as volatility. This time around, sentiments are much more constructive;
though investors anticipate global growth to sustain, they are a bit wary of volatility in asset prices. On the domestic
front as well, companies seemed a lot more optimistic about growth as disruptions from GST, RERA and demonetisation
fade and earnings outlook finally seems to be brightening.
The conference, apart from providing a platform for investors to interact with corporate, also saw the release of our
book—India 2025: Another Tryst With Destiny. We argue that defying all expectations, India has indeed achieved its
Tryst With Destiny on the political front over the past 70 years of independence, but performed below its potential on
the economic front. We believe, India will now have its Tryst With Economic Destiny, throwing up large investment
opportunities. It was a pleasure organising the conference and we hope investors ride this multi-hued journey with
us.
Team Edelweiss
CONTENTS
Aditya Birla Fashion & Retail ................................................................................................................................................................................. 4
Arvind ......................................................................................................................................................................................................................... 12
Bajaj Electricals ....................................................................................................................................................................................................... 14
Cipla ........................................................................................................................................................................................................................... 20
Cochin Shipyards ..................................................................................................................................................................................................... 22
2 Edelweiss
Edelweiss Securities Securities Limited
Limited
Profile of Participating Companies
Since the number of companis coverage is huge it is impossible to include all the price charts in one note. However, is a client request for a particular
price chart we can provide the same.
3 Edelweiss
Edelweiss Securities Securities Limited
Limited
Company Profile
GST disruption normalising and management believes the wholesale channel will Absolute Rating BUY
recover over the next few months. Rating Relative to Sector Performer
Risk Rating Relative to Sector Low
Wholesale channel contribution was relatively low in Q3FY18 compared to Sector Relative to Market Underweight
previous quarters. The channel has started to recover and is expected to return to
pre-GST levels over the next few months.
MARKET DATA (R : PNTA.BO, B: ABFRL IN)
Management believes that most markets have recovered, apart from South India.
Tamil Nadu and Andhra Pradesh have taken time to recover. CMP : INR 156
Target Price : INR 206
Lifestyle revenue grew 8.2% YoY in Q3FY18 with retail LTL at 4%. SSSG for 9mFY18 is 52-week range (INR) : 188 / 142
8.5% YoY, which is a trajectory the company wants to sustain going forward. Share in issue (mn) : 771.7
M cap (INR bn/USD mn) : 121 / 1,875
Pantaloons: The company is aiming high single digit to double digit SSSG by going Avg. Daily Vol. BSE/NSE (‘000) : 749.3
deeper into Tier-2 & 3 cities to get growth versus from price cut-led growth
previously.
Forever 21 business has closed/resized legacy stores, which led to decline in Share Holding Pattern (%)
revenue. LTL in legacy stores still under pressure. Restructuring is to be completed Current Q1FY18 Q4FY17
by FY19. Promoters * 59.2 59.3 59.3
MF's, FI's & BK’s 14.2 14.7 15.0
The company is planning to scale up People brand. It is almost achieving breakeven FII's 11.6 11.7 11.1
in this business. It is now confident of the business model. Others 14.9 14.4 14.5
* Promoters pledged shares : 0.1
Investment conclusion (% of share in issue)
Aditya Birla Fashion and Retail (ABFRL) is one of the largest branded clothing
players with 5 brands clocking >INR10bn sales each. The company has now
ventured into fast fashion via Forever 21 and innerwear under the Van Heusen PRICE Performance (%)
brand, thereby now housing full bouquet of segments in the apparel category. Stock Nifty EW Retail
Anchored by these potent growth boosters, we estimate ABFRL to post healthy Index
growth in sales and EBITDA. We maintain ‘BUY/SP’. 1 month (13.7) (0.6) (9.9)
3 months (0.6) 0.4 (3.0)
12 months 3.8 19.3 21.2
Abneesh Roy
+91 22 6620 3141
Financials abneesh.roy@edelweissfin.com
The company is likely to end FY18 with INR3.8-4.0bn revenue. Further, management Absolute Rating NOT RATED
has guided for INR10bn revenue over the next five years. Management also expects
margin to remain stable at ~42%.
While revenue from top customer is expected to grow at 7-8% in USD, unfolding
opportunities from new applications like animal nutrition (USD500mn market
potential), oil & fat processing (USD700mn market potential), bio-diesel (USD650mn MARKET DATA (R : NA.BO, B: ADVENZY IN)
market potential) and washing solutions (USD200mn market potential) are likely to
CMP : INR 254
drive growth for the company.
Target Price : NA
As these categories are new, the company may take longer to capitalise on some of 52-week range (INR) : 445 / 244
these opportunities and there could be some lumpiness in performance in the near Share in issue (mn) : 111.6
term. It is targeting meaningful contribution from these categories to commence from M cap (INR bn/USD mn) : 28 / 441
Avg. Daily Vol. BSE/NSE (‘000) : 533.3
FY20.
The focus remains on introduction of enzymes for new applications through sustained
investment in R&D and geographical expansion and deeper penetration in existing Share Holding Pattern (%)
geographies. Further, the company will continue to scout for inorganic growth Current Q1FY18 Q4FY17
opportunities as small players in this industry face limitations in scaling operations. Promoters * 71.3 71.3 70.1
MF's, FI's & BK’s 4.7 5.5 7.4
Recently, the company acquired Evoxx Technologies based in Germany. Evoxx has a
FII's 2.4 1.9 1.8
team of around 40 scientists and technicians and two R&D centres in Germany which
Others 21.5 21.3 20.7
will help the company strengthen its research and development capabilities.
* Promoters pledged shares : 21.3
(% of share in issue)
Current utilisation rate stands at ~55%. As these manufacturing facilities are largely
process-driven and not based on a particular product, any capacity constraint in the
medium term is unlikely.
Relative Performance (%)
Sensex Stock Stock over
Sensex
1 month (0.1) (18.1) (18.0)
3 months 3.5 (4.8) (8.3)
12 months 21.5 (30.5) (52.0)
Financials
APAR INDUSTRIES
Short-term disruption; improvement ahead
India Equity Research l Miscellaneous
Financials
APL APOLLO
Largest player in ERW steel tubes space
India Equity Research l Miscellaneous
Volume growth guidance: APL Apollo has maintained its volume growth guidance of Absolute Rating NOT RATED
20% CAGR over coming years. Further, in 9mFY18, the company has posted volume
growth of 19% YoY and is confident of achieving its guidance in FY18. Further, exports
will account for 15% of sales by FY20 compared to 5% currently. Exports also entail
higher realisations compared to the domestic business.
EBITDA per tonne: The company is seeing high demand for steel pipes even when MARKET DATA (R : APLA.BO, B: APAT IN)
steel prices continue to be high. It generally passes on the raw material cost fluctuation
CMP : INR 2,094
within a week and expects EBITDA per tonne to hover around INR3,300-3,400, plus-
Target Price : NA
minus INR200-300.
52-week range (INR) : 2,587 / 1,002
First company to introduce DFT: APL Apollo is the first company in India to introduce Share in issue (mn) : 23.7
direct forming technology (DFT). The company in Q3FY18 has already installed six M cap (INR bn/USD mn) : 50 / 772
Avg. Daily Vol. BSE/NSE (‘000) : 34.8
lines of DFT technology and more two lines are likely to be installed in the next two-
three months. The company has a three-year exclusivity contract with the DFT
technology provider. Through DFT, the company will further solidify its position in
the structural pipes and tubes segment since it will not only offer more customised Share Holding Pattern (%)
options, but also significantly cut the lead time to complete customised orders in Current Q1FY18 Q4FY17
comparison to the industry. Further, management remains focused on familiarising Promoters * 37.3 37.5 37.5
rising number of clients with the product the technology can offer and thus will focus MF's, FI's & BK’s 13.6 15.2 15.3
on providing advanced customised products at similar prices and margins as earlier FII's 0.0 0.0 0.4
and will benefit from higher margins in the long run. Others 49.1 47.3 46.8
* Promoters pledged shares : Nil
JV called off with Japanese company Daiwa: Recently, the company has called off a (% of share in issue)
joint venture with a Japanese company Daiwa as it restricted APL Apollo’s marketing
geography spread. This is not expected to materially impact company’s performance
as the intended JV was expected to account for marginal, around 3%, of current sales Relative Performance (%)
Sensex Stock Stock over
Focus on branding: Management envisages increasing adoption of steel pipes and Sensex
tubes in place of wooden structures. Hence, according to the management going 1 month (0.1) (6.9) (6.8)
forward APL Apollo as a brand will play a key role in the company’s growth. Towards 3 months 3.5 8.8 5.3
this end, management has guided for expense of INR250mn in the coming year. The 12 months 21.5 86.4 64.9
specified spend will be utilised to propagate the following brands—Apollo Costguard,
Apollo Fabritech, Apollo Agritech and Apollo Bheem.
Financials
ARVIND
Weaving a growth story
India Equity Research l Textiles
• Calvin Klein (CK) has been doing well. Average price point is ~INR3,000 plus.
• The distribution mix for Arvind for brands business among EBO:LFS:MBO:Online
is 40-:25:25:10.
MARKET DATA (R : ARVN.BO, B: ARVND IN)
• Arvind’s tenure of brand licenses is long and it has clauses built in to prevent any CMP : INR 399
losses arising from brand licences not being renewed. Target Price : INR 493
52-week range (INR) : 477 / 353
• While GAP was initially doing well, the imposition of CVD impacted business Share in issue (mn) : 258.6
expansion plans. However, now the issue has been resolved. M cap (INR bn/USD mn) : 103 / 1,602
Avg. Daily Vol. BSE/NSE (‘000) : 1,749.3
• Earlier, the entire collection was imported, but now only ~40% is imported.
• The specialty retail format reported loss of INR600mn last year. However, Unlimited
will turn positive this year.
PRICE Performance (%)
BSE Midcap Stock Stock Over
Index Index
1 month (9.9) (14.7) (4.8)
3 month (3.0) (13.0) (10.0)
12 month 21.2 0.9 (20.3)
Financials
BAJAJ ELECTRICALS
Steady progress
India Equity Research l Engineering and Capital Goods
28 to 18% is the reduction in fans and lighting GST. Appliances too are expected to Absolute Rating HOLD
be rationalised in the next GST review meeting now that a representation has been Rating Relative to Sector Performer
made by the industry. Risk Rating Relative to Sector Medium
Sector Relative to Market Overweight
There is no sales target at BJE given their Monday morning restocking model which
is working well. This gives retailer flexibility to stay light on BJE inventory versus
other companies. This approach of no target was initiated from April 17 and is
MARKET DATA (R : BJEL.BO, B: BJE IN)
helping dealer/retailer improve over RoCE. 70% of BJE’s sales were from
wholesalers, which have now been replaced with retailers. CMP : INR 537
Target Price : INR 390
Retailer bonding scheme: BJE initiated incentive structure which has no time limit 52-week range (INR) : 584 / 228
and is based in point system and incentives in kind. There is no special pricing for Share in issue (mn) : 101.9
large dealer and pan-India distributors are given uniform pricing. This has helped M cap (INR bn/USD mn) : 55 / 850
bring stability amongst dealers with respect to pricing behaviour. Avg. Daily Vol. BSE/NSE (‘000) : 455.2
The company expects 15-20% growth to sustain over two-three with potential
margin expansion as the company alters its fixed cost structure.
Share Holding Pattern (%)
BJE initially faced a lot of resistance from 80% of dealers ahead of RREP scheme
launch leading to market share loss to large players like Havells, Crompton, etc. Current Q1FY18 Q4FY17
Promoters * 63.0 63.3 63.4
By FY19-20, BJE is targeting to significantly ramp up its retail touch points from MF's, FI's & BK’s 4.9 5.3 6.8
135,000 to 2.0lacs. FII's 9.8 9.3 7.5
In Mumbai, BJE only had wholesalers and no distributors. Now it has eight-nine Others 22.3 22.2 22.2
distributors. The company has clearly missed on new SKU ramp up across key * Promoters pledged shares : Nil
(% of share in issue)
products and is now gearing up to improve this. It will not keep any budget for new
innovation as of now.
In the projects business, the company will have an upper limit of 40% of overall PRICE Performance (%)
sales and would not like to exceed the same.
Stock Nifty EW Capital
Goods Index
Investment conclusion
1 month (21.3) (0.6) (3.5)
With its consumer facing business growing steadily, BJE is now focused more on 3 month 13.6 0.4 3.6
growing its E&P division. The company is in the midst of significant operational 12 month 83.6 19.3 26.2
overhaul under RREP, which has had a bearing on its overall market positioning
over the past few quarters. We believe, given the yawning gap versus large peers,
it will be challenging for management to regain market positioning. We maintain
‘HOLD/SP’.
Financials Amit Mahawar
+91 22 4040 7451
Year to March FY16 FY17 FY18E FY19E amit.mahawar@edelweissfin.com
Revenues (INR mn) 45,903 42,617 45,136 51,764
Rev. growth (%) 7.8 (7.2) 5.9 14.7 Darshika Khemka
+91 22 4063 5544
EBITDA (INR mn) 2,642 2,428 2,463 3,155
darshika.khemka@edelweissfin.com
Net profit (INR mn) 1,103 1,077 1,274 1,757
EPS (INR) 10.9 10.7 12.6 17.4 Ashutosh Mehta
EPS growth (%) NM (2.4) 18.4 37.9 +91 22 6141 2748
P/E (x) 49.1 50.4 42.5 30.8 ashutosh.mehta@edelweissfin.com
ROAE (%) 23.4 24.3 23.7 18.6
15.3 13.2 13.9 17.0
February 9, 2018
CARE
Improving prospects
India Equity Research l Credit Rating
Key growth drivers include dual ratings for commercial papers (CPs), RBI’s
emphasis on structural shift towards the profitable bond market, further
strengthened by the Insolvency & Bankruptcy Code.
MARKET DATA (R : CREI.BO, B: CARE IN)
The upgrade/downgrade cycle has become balanced versus more downgrades CMP : INR 1,351
earlier. CARE expects to grow in double digits. Target Price : INR 1,704
52-week range (INR) : 1,800 / 1,293
RBI’s efforts to structurally shift towards the bond market: IBC is a key game Share in issue (mn) : 29.5
changer, which is likely to boost investor confidence and enhance penetration & M cap (INR bn/USD mn) : 40 / 618
demand for bond market. Avg. Daily Vol. BSE/NSE (‘000) : 74.1
Diversification efforts: CARE Africa is the only rating agency in Mauritius and the
company is looking to enter more countries in Africa. CARE Risk operates mainly
Share Holding Pattern (%)
in Sri Lanka and expects good growth. Its efforts in diversifying are shaping up and
the company expects strong growth. Current Q1FY18 Q4FY17
Promoters * 0.0 0.0 0.0
As structural transformation towards the corporate bond market plays out, CARE MF's, FI's & BK’s 24.6 28.7 38.2
expects the addressable market, in terms of volume of debt hitting capital markets, FII's 43.5 39.0 37.8
to expand significantly and competitive intensity to be moderate. Growth is highly Others 31.9 32.4 24.0
linked to the economy. The company expects to grow 1.7x growth rate of economy. * Promoters pledged shares : Nil
(% of share in issue)
CARE believes the growth story and margin are sustainable in the long run.
Investment conclusion
PRICE Performance (%)
On an improving macroeconomic and credit environment we estimate 12% sales
BSE Midcap Stock Stock Over
CAGR over FY18 20. We maintain ‘BUY’ led by CARE’s strong positioning (second
Index Index
largest player) factoring 15% growth in first two years, 14% in next five and 1 month (9.9) (1.8) 8.1
declining further to terminal rate of 5% and discount rate of 10.9%. 3 month (3.0) (14.0) (10.9)
12 month 21.2 (5.6) (26.9)
Financials
CESC
Muscling up
India Equity Research l Power
CESC is targeting INR9.0-9.5bn PAT in FY19 at the group level mainly led by reduction Absolute Rating BUY
of losses at the Chandrapur power plant. Investment Characteristics Value
Spencers’ balance sheet will be debt free and net worth is expected to be around
INR5bn with cash balance of INR2bn.
Spencers’ current EBITDA margin at 0.5% with the company targeting 4% margin
MARKET DATA (R : CESC.BO, B: CESC IN)
over the next two years. Area square feet can grow by 10% each year for the next
four-five years. CMP : INR 1,008
Target Price : INR 1,089
Regulated RoE is expected to dip by 1% in the upcoming new CERC norms as CERC 52-week range (INR) : 1,188 / 693
will not permit companies to enjoy higher spreads (RoE-15.5%, Gsec rates-7.0- Share in issue (mn) : 132.6
7.5%). M cap (INR bn/USD mn) : 134 / 2,075
Avg. Daily Vol. BSE/NSE (‘000) : 704.9
The distribution franchise business is expected to do well led by new circles
addition. Currently, there are four new bids in the Maharashtra circle. The company
is targeting INR1bn profit over the next three years. This business is expected to do
Share Holding Pattern (%)
capex of INR3.5bn over the next two years.
Current Q1FY18 Q4FY17
Listing of all the entities is expected by June 2018. Promoters * 49.9 49.9 49.9
MF's, FI's & BK’s 24.0 40.8 20.3
Investment conclusion FII's 14.8 0.0 21.1
CESC has an existing regulated book of ~INR40bn with steady RoE of 20%. In its Others 11.3 9.2 8.7
generation business, the only chink in its armour is the Dhariwal project which is * Promoters pledged shares : Nil
(% of share in issue)
currently incurring a loss of more than ~INR6bn annually due to PPA issues which
is funded by the patent company which, however, is now getting resolved. We
believe this plant can potentially improve the company’s cash flow generation
PRICE Performance (%)
over the next two-three years and incrementally provide cash flow comfort and
reinvestment opportunity. Though early to say, but if successful, the company’s BSE Midcap Stock Stock Over
Index Index
renewed focus on the distribution business (low capex) can add significant amount
1 month (9.9) (9.0) 0.9
of profitability in coming years. We maintain ‘BUY’.
3 month (3.0) (0.6) 2.5
12 month 21.2 28.1 6.9
Financials
CIPLA
Gaining scale in US
India Equity Research l Pharmaceuticals
Investment conclusion
Though domestic growth is a respite for Cipla, growth engines it has invested in
over the past three years remain subdued. The stock’s CMP factors in the optimism,
but not the challenging macro environment. We maintain ‘HOLD/SP’.
Deepak Malik
Financials
+91 22 6620 3147
Year to March FY16 FY17 FY18E FY19E deepak.malik@edelweissfin.com
COCHIN SHIPYARDS
Ruling the high seas
India Equity Research l Miscellaneous
Ship repairs: Excluding IAC, INR3.5bn was repair revenue last year. This year, the Absolute Rating NOT RATED
company expects to touch around INR6bn. 22-24% is the margin range on a
sustainable basis.
CSL expects to bag eight ASW orders by mid-year and is already L1. There is a
Share Holding Pattern (%)
significant synergy benefit in case CSL and GRC resort to joint sourcing.
Current Q1FY18 Q4FY17
Ship building profitability is likely to stay in the of 22-24% range largely driven by Promoters * 75.0 NA NA
IAC work part which has higher contribution. MF's, FI's & BK’s 10.9 NA NA
FII's 3.5 NA NA
Others 10.6 NA NA
* Promoters pledged shares : Nil
(% of share in issue)
Amit Mahawar
+91 22 4040 7451
Financials amit.mahawar@edelweissfin.com
DEEPAK FERTILISERS
Leading light
India Equity Research l Fertilisers
Financials
EICHER MOTORS
Premium play
India Equity Research l Automobiles
Demand outlook: Remains strong for Royal Enfield (RE). FY19 growth could be Absolute Rating BUY
subdued due to capacity constraint. Management believes it is a temporary rather Rating Relative to Sector Outperformer
than structural issue. If demand would have been an issue the company would not Risk Rating Relative to Sector Medium
have taken a price hike on Feb 1, 2018. Sector Relative to Market Underweight
Value growth can outstrip volume growth: With launch new 650cc twins, re-launch
of Himalayan and recent introduction of rear disc break (priced 8-10K) higher MARKET DATA (R : EICH.BO, B: EIM IN)
than normal classic, revenue growth to outstrip volumes.
CMP : INR 27,748
Capacity: Revised production capacity will be indicated along with Q4FY18 results Target Price : INR 34,945
as RE is in planning stage. Currently, rated capacity is at 900K. In the past, the 52-week range (INR) : 33,483/22,406
company has been able to debottleneck and increase capacity. Share in issue (mn) : 27.2
M cap (INR bn/USD mn) : 756 / 11,743
Customer profile: ~5% are repeat customers, 15% are first-time buyers; balance Avg. Daily Vol. BSE/NSE (‘000) : 49.1
80% equally split between upgrade from commuter segment and 150cc segment.
Exports: With the launch of 650cc twins, there will be renewed focus on exports
Share Holding Pattern (%)
markets as it is the right product (given 45HP vs current offerings of ~20HP). The
Current Q1FY18 Q4FY17
long-term aspiration is to be leader in the mid-size market; become a relevant
Promoters * 50.5 50.6 50.6
player in each country (for instance currently in India, RE has ~12% of motorcycle
MF's, FI's & BK’s 5.5 4.3 4.0
revenue market share).
FII's 32.1 31.9 32.5
RE dealer network: Current dealer network is ~825. The company intends to add Others 11.8 13.2 12.9
another 100 dealers in FY19. Addition will largely be in smaller towns. * Promoters pledged shares : Nil
(% of share in issue)
Investment conclusion
Eicher is a structural story on premiumisation theme in motorcycles given low
PRICE Performance (%)
penetration of >250cc motorcycles (3/1000 male) as compared to > 150cc
motorcycles (23/1000 male) as well as rising spending power of consumers. Stock Nifty EW Auto
Index
Support from new technology centre in UK and new launches (650cc) specifically
1 month (5.7) (0.6) (6.0)
targeted towards export markets can have a big delta on export markets. In
3 month (11.3) 0.4 (2.4)
M&HCVs, it is well positioned to take advantage of changing demand dynamics
12 month 15.8 19.3 12.0
post introduction of GST as well as stringent implementation of ban on overloading.
We maintain ‘BUY/SO’.
Financials
Valuation parameters
Year to March FY16 FY17 FY18E FY19E
Cash flow statement (INR mn) Adjusted Diluted EPS (INR) 438.2 613.8 874.3 1,278.9
Year to March FY16 FY17 FY18E FY19E Y-o-Y growth (%) 64.0 64.8 42.4 46.3
Reported Profit 11,901 16,671 23,745 34,735 Adjusted Cash EPS (INR) 438.1 625.1 894.3 1,304.4
Add: Depreciation 1,366 1,538 2,196 2,592 Diluted P/E (x) 63.2 45.1 31.7 21.7
Interest (Net of Tax) 15 24 19 19 Price to Book Ratio (P/B) (x) 20.6 14.1 10.3 7.4
Others 1,349 (392) (1,817) (1,545) Enterprise Value / Sales (x) 11.6 10.0 7.5 5.2
Less: Changes in WC 1,683 1,870 2,508 4,030 EV/Sales adj. for Volvo share(x) 6.4 6.0 5.0 3.7
Operating cash flow 14,631 17,841 24,144 35,801 Enterprise Value / EBITDA (x) 42.5 32.3 23.3 15.1
Less: Capex (25,587) 5,036 8,000 5,000 EV/EBITDA adj. for Volvo sh. (x) 33.8 27.3 21.1 14.0
Free cash flow 40,218 12,805 16,144 30,801 Dividend yield (%) 0.4 0.4 0.5 0.7
ESSEL PROPACK
Riding the non-oral wave
India Equity Research l Miscellaneous
• The company retains its intention to take the share of non-oral to 50%.
• Europe has been growing due to small base. MARKET DATA (R : ESSL.BO, B: ESEL IN)
• Issues in EAP were related to loss of market share to multinational firms. The CMP : INR 280
company has managed to tie up with a few local manufacturers as well. Target Price : INR 300
52-week range (INR) : 317 / 226
Mystik: Share in issue (mn) : 157.2
M cap (INR bn/USD mn) : 44 / 684
• Sales from Mystik not factored in from this year. Next year sales will depend on Avg. Daily Vol. BSE/NSE (‘000) : 98.6
stability tests with customers.
• Mystik was originally designed for hair colour. The company is looking at
Share Holding Pattern (%)
expanding this into food items as well.
Current Q1FY18 Q4FY17
Guidance: Promoters* 57.2 57.2 57.1
MF's, FI's & Banks 5.1 5.3 5.1
• Focus is on growing top line. The company remains committed to expanding
FII's 15.5 14.5 14.5
growth in all geographies.
Others 22.3 23.0 23.3
* Promoters pledged shares : Nil
Investment conclusion (% of share in issue)
We maintain ‘BUY’.
Financials
FIRSTSOURCE SOLUTIONS
Excellence delivered
India Equity Research l IT
Firstsource has divested its domestic business to Vertex BPO; just one PSU client in Absolute Rating NOT RATED
domestic business remains and it has good margin.
The company has consciously reduced telecom clients as the vertical is highly
competitive resulting in low margin; currently, has only one client in the space.
Outlook for healthcare payer business is good; this business has better margin.
MARKET DATA (R : FISO.BO, B: FSOL IN)
Firstsource expects revenue and profitability of healthcare business to improve going CMP : INR 44
forward. Target Price : NA
52-week range (INR) : 49 / 30
The company estimates to post high single digit growth in FY19 along with 13% plus
Share in issue (mn) : 685.3
margin.
M cap (INR bn/USD mn) : 30 / 468
The company would become debt-free from Q3FY19. Avg. Daily Vol. BSE/NSE (‘000) : 4,462.6
It has a contract of 10 years with largest customer Sky (~29% of total revenue). The
contract will expire in FY26 and the company does not perceive any risk in this Share Holding Pattern (%)
contract. Current Q1FY18 Q4FY17
Promoters * 54.6 54.8 54.9
Attrition in the US has dipped below 40% from 55%; attrition is at par with competitors.
MF's, FI's & BK’s 6.2 6.4 6.8
FII's 5.9 8.6 9.2
Others 33.3 30.2 29.1
* Promoters pledged shares : Nil
(% of share in issue)
Sandip Agarwal
Financials +91 22 6623 3474
sandip.agarwal@edelweissfin.com
Year to March FY14 FY15 FY16 FY17
Revenues (INR mn) 31,270 30,347 32,173 35,556 Pranav Kshatriya
+91 22 4040 7495
Rev. growth (%) 10.0 (3.0) 6.0 10.5
pranav.kshatriya@edelweissfin.com
EBITDA (INR mn) 3,622 3,872 3,984 4,465
Net profit (INR mn) 1,930 2,343 2,609 2,792
Nikunj Mandowara
EPS (INR) 1,930 2,343 2,609 2,792 +91 22 4040 7431
EPS growth (%) 31.2 20.2 10.2 5.8 nikunj..andowara@edelweissfin.com
Diluted P/E (x) 15.1 12.5 11.4 10.7
EV/EBITDA (x) 10.3 9.7 9.4 8.4
ROE (%) 10.2 11.2 13.5 14.8 February 9, 2018
FUTURE CONSUMER
The food specialist
India Equity Research l Media
Target is to achieve top line growth of 30% YoY and become PAT positive by FY19. Absolute Rating NOT RATED
Estimates to clock ~10% EBITDA margin by FY22.
The company can be considered a startup, building its business on the FMCG 2.0
platform – launching innovative products in emerging categories, leveraging digital MARKET DATA (R : NA.BO, B: FCON IN)
assets and focusing on consumer acquisition closer to the point of sale. CMP : INR 64
Target Price : NA
It can also build on opportunity to leverage Future Group’s store network, consumer 52-week range (INR) : 79 / 22
insights/data, which enables it to launch innovative products rather than pure Share in issue (mn) : 1,846
“me-too” products. M cap (INR bn/USD mn) : 107 / 1,670
Avg. Daily Vol. BSE/NSE (‘000) : 6.9
Currently, ~74% of sales are through Future Group’s retail outlets. The company is
incrementally trying to build brands in a few categories, which will help push
those brands in other modern and general trade formats.
Share Holding Pattern (%)
Current Q1FY18 Q4FY17
Promoters * 43.1 44.7 44.8
MF's, FI's & BK’s 1.1 1.0 1.0
FII's 19.6 18.3 9.7
Others 36.2 36.0 44.5
* Promoters pledged shares : Nil
(% of share in issue)
Abneesh Roy
+91 22 6620 3141
Financials abneesh.roy@edelweissfin.com
Demand outlook: Management believes GST is the best thing for the sector. Absolute Rating NOT RATED
Inefficient tax-based supply chain planning will move to efficient outsourced
solutions-led model. The transition can take two-three years, but the transition is
imminent. Already seeing signs of same.
Customer profile: Future Group remains the single-largest customer with ~2/3 rd of
revenue share. The share has been growing due to faster growth of Furture Group;
MARKET DATA (R : FUTE.BO, B: FSCSL IN)
rising share of FSC in Future Group (accounts for ~30-35% of Future Group’s
CMP : INR 677
logistics spends) and inorganic activities by Furture Group. Outside Future Group,
Target Price : NA
not a single customer is significant. Top 20 customers account for ~22% of revenue.
52-week range (INR) : 750 / 660
Bulk of the effort from hereon is to increase the share of non-Future Group revenue.
Share in issue (mn) : 40.1
Business segment: ~70% revenue comes from contract logistic, ~22% from express M cap (INR bn/USD mn) : 27 / 421
logistics and balance is cold chain & others. End-use segment basis: ~30-35% Avg. Daily Vol. BSE/NSE (‘000) : 307.2
revenue from fashion and food/FMCG each. E-commerce and automobiles also
have reasonable presence.
Share Holding Pattern (%)
Size of contract logistic: Various estimates peg the industry at ~INR110bn.
Current Q1FY18 Q4FY17
Automobiles account for the largest part as the industry was early adopted of just
Promoters * 52.5 NA NA
in time. Having said, there are many segments/industries that are not considered MF's, FI's & BK’s 16.2 NA NA
as yet for contract logistics. FII's 5.0 NA NA
Others 26.3 NA NA
Economies of scale: Economies of scale is a very important MOAT. Technology is
* Promoters pledged shares : Nil
the biggest enabler. For instance, for many customers, FSC has been able to increase (% of share in issue)
volume significantly, without increase in size of its warehouse.
Financials
GLENMARK PHARMACEUTICALS
Exciting play on novel pipeline
India Equity Research l Pharmaceuticals
Investment conclusion
Though Glenmark trades at a discount to peers, limited growth drivers, growing
costs, persistent pricing pressure in the US and a highly leveraged balance sheet
limit upside potential. We maintain ‘HOLD/SP’.
Deepak Malik
Financials
+91 22 6620 3147
Year to March FY16 FY17 FY18E FY19E deepak.malik@edelweissfin.com
Net revenues (INR mn) 76,496 91,857 94,050 105,202 Ankit Hatalkar
EBITDA (INR mn) 14,372 20,367 15,951 16,764 +91 22 2286 3097
Adjusted profit (INR mn) 8,854 11,689 8,322 8,594 ankit.hatalkar@edelweissfin.com
Adjusted diluted EPS (INR) 31.4 41.4 29.5 30.5
Diluted P/E (x) 17.0 12.9 18.1 17.6
EV/EBITDA (x) 12.2 9.2 12.1 11.9 February 9, 2018
GMR INFRASTRUCTURE
In turnaround mode
India Equity Research l Infrastructure - Construction
GMR follows the developer model for infrastructure projects across different Absolute Rating NOT RATED
verticals—airports, power, roads and urban infrastructure. The company has
identified airport segment as its growth driver going ahead. It intends to
consolidate its operations in the power segment while divesting its road assets in
the future.
The company will also continue to follow its ‘asset light, asset right’ strategy; as a
MARKET DATA (R : GMRI.BO, B: GMRI IN)
result, assets will be monetised to ensure leverage levels are contained.
CMP : INR 20
Strong traffic growth in the Indian aviation market is creating the need for Target Price : NA
expanding airport capacity. GMR is the premier airport developer in the country 52-week range (INR) : 25 / 12
and intends to maintain its leadership in this segment. The company will continue Share in issue (mn) : 6,035.9
to bid for airports which come up in the country. It won the bid to develop the M cap (INR bn/USD mn) : 118 / 1,883
greenfield Goa airport in 2016; construction is expected to commence soon. Avg. Daily Vol. BSE/NSE (‘000) : 43,495.7
While GMR’s existing airport in Delhi (DIAL) is nearing capacity, the Hyderabad
airport (HIAL) is already operating beyond capacity. Hence, the company intends Share Holding Pattern (%)
to undertake capacity expansion exercise in both these airports. It intends to
Current Q1FY18 Q4FY17
expand passenger handling capacity at DIAL from 62mn to 90mn at a cost of
Promoters * 61.7 61.7 61.7
~INR80bn, while HIAL is likely to witness capex of ~INR24bn which will expand its MF's, FI's & BK’s 7.9 6.1 7.8
capacity from 12mn to 26mn (in phases). Over the long run, while DIAL will have FII's 17.8 20.6 20.4
the capacity to handle ~119mn passengers HIAL’s capacity will stand at ~80mn. Others 12.7 11.6 10.1
* Promoters pledged shares : Nil
GMR has already monetised 68 acres (of 232) at DIAL. Going ahead, it intends to (% of share in issue)
monetise 15-20 acres every 12-18 months at the airport.
Indonesia. As a result, the company intends to divest its stake in these coal mines Sensex Stock Stock over
Sensex
going ahead. Through induction of strategic partner (Tenaga), refinancing of
1 month (0.1) (7.8) (7.7)
operational assets and restructuring of Chhattisgarh & Rajahmundry plants, the
3 months 3.5 9.8 6.3
company has reduced the cash flow stress in its power portfolio.
12 months 21.5 35.8 14.3
As far as its road portfolio is concerned, GMR has already divested three of its
nine projects. It is looking to exit the segment by selling the balance projects as
well.
Financials
GREENLAM INDUSTRIES
New growth avenues to boost fortunes
India Equity Research l Home Decor
Gap between unorganised and organised players narrowing: According to CMP : INR 1,195
Target Price : INR 1,477
management post the GST rate of 18%, the price gap between unorganised and
52-week range (INR) : 1,399 / 620
organised players has narrowed to just 8-10%. Further, some of the large organised
Share in issue (mn) : 24.1
players are also trying to work in an organised manner.
M cap (INR bn/USD mn) : 29 / 448
At EBITDA break even in new categories: Both the new segments—doors and Avg. Daily Vol. BSE/NSE (‘000) : 9.6
flooring—have seen improvement in utilisation rates and management expects to
break even in this segment by the year end. Further, the segments are envisaged to
reach PBT level break even at 25% utilisation rate. Going forward, Greenlam Share Holding Pattern (%)
Industries’ strategy for doors division is to focus on projects business and in Current Q1FY18 Q4FY17
flooring business to expand channel partners by adding more dealers, focus on Promoters * 54.7 54.7 54.7
projects and expand retail footprint. At 100% utilisation, flooring can clock INR2.0 MF's, FI's & BK’s 9.4 9.4 9.4
2.25bn revenues, doors INR0.8 1.0bn and veneer INR3bn. FII's 6.8 6.8 6.8
Others 29.0 29.1 29.1
Investment conclusion * Promoters pledged shares : Nil
Favourable GST rate is expected to drive market share gain for Greenlam Industries (% of share in issue)
in the domestic market. Further, the company being the largest player will benefit
from strong growth opportunity in exports market as well. The recent brownfield
PRICE Performance (%)
capacity expansion completed in Q1FY18 is likely to aid profitable growth. We
BSE Midcap Stock Stock Over
believe Greenlam Industries is well placed to leverage its vast distribution network Index Index
and strong brand equity to successfully expand product offerings in associate 1 month (9.9) (10.6) (0.7)
categories like engineered wood flooring and doors. It has invested heavily 3 month (3.0) 16.0 19.1
(INR1.3bn comprising 24% of capital employed) in associated product categories 12 month 21.2 69.1 47.9
even as profit contribution remained negative. With these businesses now set to
hit an inflection point, we estimate earnings to accelerate at 35% CAGR over FY17-
20 and RoCE to expand to 37% from 22%. We maintain ‘BUY’.
Financials
GREENPLY INDUSTRIES
Rising presence in MDF
India Equity Research l Home Decor
Launched new low segment brand to compete with unorganised players: In Q2FY18, CMP : INR 367
Target Price : INR 395
the company has launched low-end plywood segment brand Jansathi. This brand
52-week range (INR) : 401 / 245
provides the company entry in the INR54bn low-end plywood segment, which
Share in issue (mn) : 122.6
accounts for 30% of total market where only unoragnised players are present.
M cap (INR bn/USD mn) : 45 / 698
Demand for this product will be largely catered through by outsourcing, extending
Avg. Daily Vol. BSE/NSE (‘000) : 139.1
the asset light business model in the plywood segment.
MDF plant will be commissioned by Q2FY19: The company is targeting MDF plant
commissioning in Q2FY19 itself compared to Q3FY19 estimated earlier. It is also Share Holding Pattern (%)
targeting 50% utilisation in the first year of operation, which should scale up to Current Q1FY18 Q4FY17
60% capacity utilisation by FY20 with margin of around 17%. Lower margin in new Promoters * 51.0 51.0 51.0
plant will be on account of higher share of exports (30 40% compared to 10% MF's, FI's & BK’s 20.6 20.1 20.3
currently). Margin for overall MDF segment (including the current plant) should FII's 11.6 12.1 12.2
be around 22-23%. The company will also benefit from lower cost of transportation Others 16.8 16.7 16.5
since it will service South market from the new plant. Further, with rising proportion * Promoters pledged shares : Nil
(% of share in issue)
of revenue from the MDF segment, the company’s overall working capital days are
likely to fall.
PRICE Performance (%)
Investment conclusion
BSE Midcap Stock Stock Over
We believe, the plywood industry is going through structural changes—GST Index Index
triggered shift of market share from unorganised to organised players and 1 month (9.9) (15.0) (5.1)
challenges in raw material sourcing. We envisage augmentation of MDF capacity 3 month (3.0) 4.8 7.8
and pick up in plywood demand to trigger this spurt. Moreover, with completion of 12 month 21.2 12.0 (9.2)
investment phase, we expect earnings to register 21% CAGR over FY17-20 and the
company to start generating free cash flows (post capex) from FY20. We maintain
‘BUY’.
Financials
The company expects initial higher fixed costs in operating from Chennai to be
offset by cost savings in logistics and hence the plant will be EBITDA neutral from
day one. MARKET DATA (R : NA, B: GOLI IN)
CMP : INR 1,060
GOLI is confident of registering at least 2x industry growth. The company is planning
Target Price : INR 1,161
to continue to invest in brand building and customer acquisition. Further, with 52-week range (INR) : 1,098 / 645
spare capacity at Chennai plant, it is confident of expanding OEM customer base Share in issue (mn) : 49.7
as it can take large orders and also supply to export markets of OEMs. M cap (INR bn/USD mn) : 53 / 818
Avg. Daily Vol. BSE/NSE (‘000) : 43.5
Management is confident of sustaining growth as it expects OEM demand to be
strong in light of new policy norms.
EV impact: It expects lubricant market to continue to grow over the next 12-15 Share Holding Pattern (%)
years. The company is actively exploring other areas of application such as Current Q1FY18 Q4FY17
advanced mobility solutions in EV. Promoters * 72.9 69.9 69.9
MF's, FI's & BK’s 7.0 10.8 11.4
Investment conclusion FII's 7.8 5.3 4.4
GOLI’s expanding market share, benefits of GST, falling costs for consumers and Others 12.4 14.1 14.4
benefits from Chennai plant imply potential upside. We maintain ‘BUY’. * Promoters pledged shares : Nil
(% of share in issue)
Financials
Milann
Share Holding Pattern (%)
Plan to launch new center in Bengaluru to sustain leadership in the attractive
Current Q1FY18 Q4FY17
market. Promoters * 24.1 24.4 24.4
MF's, FI's & BK’s 28.1 27.8 28.3
Debt and capex
FII's 29.2 20.1 15.6
HCG has a capex pipeline of INR600mn, which is expected to be completed in Others 18.7 27.7 31.7
March 2019. 60% of this capex will be non-cash for medical equipment purchased * Promoters pledged shares : Nil
on 35 months’ credit. As of Q3FY18, the company has INR4.3bn debt on books. (% of share in issue)
Debt is expected to peak at INR5.5-5.7bn, of which half is bank debt and balance is
credit. HCG expects to service debt as and when the new facilities come online.
PRICE Performance (%)
National Health Protection Scheme
Stock Nifty EW Pharma
Government announcement of NHPS is a welcome move and is in line with HCG’s Index
expansion plans. With presence in tier 2 & 3 cities, the company is ready to cater 1 month (18.7) (0.6) (7.5)
to patients on pan-India level. HCG has been looking at schemes for a while now, 3 months (17.5) 0.4 (5.2)
starting with AP. Though the scheme will be launched in October, private hospitals 12 months 23.6 19.3 (10.7)
hope that government outsources management of the scheme to a private body.
Investment conclusion
HCG is poised to benefit from strong growth in therapy. Also, its hub-and-spoke
model is on the cusp of rapid EBITDA scale up. Hence, owing to strong therapy
tailwind and EBITDA margin levers, HCG is positioned for robust EBITDA growth.
We maintain ‘BUY/SO’.
Financials Deepak Malik
+91 22 6620 3147
Year to March FY16 FY17 FY18E FY19E deepak.malik@edelweissfin.com
HERITAGE FOODS
Leveraging moat to take the right stride
India Equity Research l Miscellaneous
Heritage Food is planning to increase milk processing capacity from current ~14lakh Absolute Rating BUY
litre per day (llpd) to ~28llpd, sales network from the current 10.5llpd to ~21llpd over Investment Characteristics Growth
the next five years. VADP sales are expected to touch ~8llpd.
Management has guided for revenue growth in the 20-25% range over the next five
years led by strong ~30% CAGR in VADP and ~15% CAGR in liquid milk. Margins are
likely to sustain at ~7%. MARKET DATA (R : HEFI.BO, B: HTFL IN)
Reliance Dairy: The company focuses on rationalising procurement (to avoid forced CMP : INR 706
conversion of excess supply into lower margin SMP) as it closed down 10 of 30 Target Price : INR 976
chilling centers it took over. It is also moving processing and packing activities in- 52-week range (INR) : 885 / 462
house (currently, these activities are outsourced due to lack of facilities) so as to Share in issue (mn) : 46.4
maintain quality consistency. Reorganisation and rationalisation efforts are on track. M cap (INR bn/USD mn) : 33 / 509
Avg. Daily Vol. BSE/NSE (‘000) : 62.7
VADP: Management still sees strong growth opportunity in packaged curd and has
added 1llpd curd manufacturing plant in Telangana and a new plant in Hyderabad
with 1.5-2.0llpd. Efforts are on selling the existing other VADP (paneer, flavoured milk Share Holding Pattern (%)
and butter milk) through other channels. It is also launching wider variants of existing Current Q1FY18 Q4FY17
VADP and is looking to revamp the entire range of ice cream portfolio from this Promoters * 39.9 39.9 39.9
summer season. MF's, FI's & BK’s 7.4 6.0 5.8
FII's 8.5 7.4 7.2
Management reiterated its target of increasing VADP contribution to 40% by 2022
Others 44.2 46.7 47.1
from current ~23%. It is confident of increasing contribution by ~3-4% every year.
* Promoters pledged shares : Nil
(% of share in issue)
Investment conclusion
We believe, the company’s effort in transitioning to a VADP dairy player is likely to
yield positive results and hence, estimate strong ~22% sales and 18% EBIT CAGR over Relative Performance (%)
FY17-20E and adjusted RoCE at ~42%. We maintain ‘BUY’.
Sensex Stock Stock over
Sensex
1 month (9.9) (15.6) (5.7)
3 month (3.0) (8.6) (5.5)
12 month 21.2 31.4 10.2
Financials
Focusing on creating new skills within the company. Absolute Rating NOT RATED
Has set up new team to turnaround UK business, which is currently EBITDA negative. MARKET DATA (R : HGSL.BO, B: HGSL IN)
CMP : INR 934
Focus is on high cash generation and debt reduction.
Target Price : NA
Will look for acquisitions to gain new capabilities; mostly focused on digital and 52-week range (INR) : 1,012 / 490
healthcare verticals. Share in issue (mn) : 20.8
M cap (INR bn/USD mn) : 19 / 302
Healthcare is a key focus area; may eye near-shore UK acquisitions. Avg. Daily Vol. BSE/NSE (‘000) : 53.3
Targeting revenue growth of 10-11% along with improving profitability over the next
five years.
Share Holding Pattern (%)
For winning new contracts, generally competing with Concentrix, Teleperformance, Current Q1FY18 Q4FY17
Cognizant, Genpact, etc. Promoters * 67.5 67.5 67.6
MF's, FI's & BK’s 2.2 2.0 3.0
FII's 7.3 7.9 7.4
Others 23.0 22.6 21.9
* Promoters pledged shares : Nil
(% of share in issue)
Sandip Agarwal
+91 22 6623 3474
Financials sandip.agarwal@edelweissfin.com
HINDUSTAN UNILEVER
Brand power
India Equity Research l Consumer Goods
Lever Ayush has done well in most geographies. Performance has been encouraging.
Share Holding Pattern (%)
Lever Ayush contributes minuscule proportion to overall revenue. More optimistic
on Ayush than Citra. MoM growth rate of Ayush category has been improving. Current Q1FY18 Q4FY17
Promoters * 67.2 67.2 67.2
For the past three years, HUL has been able to save cost of 6% of revenue. MF's, FI's & BK’s 6.3 5.6 5.7
FII's 12.9 13.5 13.3
Consolidation of depots will come over a period of time. Others 13.6 13.8 13.9
* Promoters pledged shares : Nil
Investment conclusion (% of share in issue)
HUL is a play on consumption growth in India. The company has proved its ability
to effect price hikes and grow ahead of market, which, combined with improved
outlook for S&D and personal care and strong growth in processed foods & PRICE Performance (%)
beverages, boosts our positive outlook on the company. We like its revenue growth
Stock Nifty EW Consumer
from a medium to long term perspective. Commodity price correction will aid Goods Index
gross margin expansion, though we expect partial benefit to be passed on to 1 month (2.3) (0.6) (2.0)
customers through promotional offers/select price cuts. We expect higher 3 month 6.8 0.4 1.6
investment in A&P to support brand equity and counter pick up in competitive 12 month 54.0 19.3 16.9
intensity (especially from regional players). However, with an anticipated recovery
in urban demand and commodity correction to aid EBITDA margin expansion, we
expect HUL to potentially benefit. We maintain ‘HOLD/SP’.
Abneesh Roy
Financials +91 22 6620 3141
abneesh.roy@edelweissfin.com
Year to March FY17 FY18E FY19E FY20E
Revenues (INR mn) 323,670 353,296 388,796 431,891 Alok Shah
Rev. growth (%) 2.9 9.2 10.0 11.1 +91 22 6620 3040
EBITDA (INR mn) 63,400 74,595 86,787 99,566 alok.shah@edelweissfin.com
Operating metrics: (1) 9mFY18 APE growth was 25% with protection APE growth at Absolute Rating NOT RATED
32% YoY (good business growth across business lines). Management expects growth
in protection business to sustain; (2) NBAP margins reported for 9mFY18 @ 13.7%
were largely a reflection of product mix & cost structures; incremental levers for
margin improvement are: a) protection growing faster than savings will feed into
higher margin; b) persistency 13th month is at 86% while in assumptions it is 82%,
so as it comes for review it will boost margin; and c) also, long-term persistency MARKET DATA (R : NA, B: IPRU IN)
itself is expected to structurally improve; (3) solvency trajectory has three elements CMP : INR 415
playing out: a) dividend payout at 60%; b) savings business is gaining traction & Target Price : NA
consuming capital; c) growth in protection business - capital for whole sum assured 52-week range (INR) : 507 / 337
& since premium is low, capital for same amount of premium is high; (4) most of Share in issue (mn) : 1,435.5
the protection business comes from retail - credit linked was merely INR0.38bn, of M cap (INR bn/USD mn) : 569 / 9,258
INR2bn of protection business. Avg. Daily Vol. BSE/NSE (‘000) : 1,269.2
Other highlights: (1) Since headline rate for insurance companies at 12.5% is
lower than prevailing corporate tax rate, the risk of increase in tax rate prevails. PRICE Performance (%)
However, how much it will be raised will depend on several factors; (2) in the short Sensex Stock Stock Over
term, insurance products are more expensive than MFs, but in the long term they Sensex
are at par or better than mutual funds; (3) 55-60% of assets get allocated to equity 1 month (0.1) 0.6 0.7
in ULIP & balance to debt funds. Insurance products help customers switch over 3 months 3.5 10.3 6.8
across asset class without tax implications. 12 months 21.5 17.1 (4.4)
Shareholders’ account
Year to March FY14 FY15 FY16 FY17
Valuation parameters
Tr. frm policyholders a/c 12,642 11,386 12,076 11,315
Income from invst. 3,711 5,364 6,019 6,956 Year to March FY14 FY15 FY16 FY17
Contrib. to pol.hol. fund 947 415 - 18 Price /EV (x) NA 4.3 4.3 3.7
PBT 15,292 15,854 17,713 17,844 ROEV (%) NA 17.4 0.8 16.1
Provision for taxation (374) (490) 1,212 1,028 ROA (%) NA 1.8 1.6 1.5
PAT 15,667 16,344 16,501 16,817 ROE (%) NA 31.9 31.2 28.7
INFO EDGE
Long-term play
India Equity Research l IT
INSECTICIDES INDIA
Emerging force
India Equity Research l Fertilisers
• The new 9(3) launches will be a combination of tie-ups and formulation mix.
MARKET DATA (R : ISIL.BO, B: INST IN)
• Glyphosate was a major technical two years ago. At its peak, it contributed CMP : INR 812
more than INR1bn. Target Price : NA
52-week range (INR) : 965 / 515
• Green Label: Currently, the company is clocking INR1bn revenue, of which
Share in issue (mn) : 20.7
INR300-400mn is from own brands. M cap (INR bn/USD mn) : 17 / 261
Avg. Daily Vol. BSE/NSE (‘000) : 68.4
Product rationalisation plans
• Currently, the company has 125 products and is looking at pruning the number
to 75 including new launches (~5 each year).
Share Holding Pattern (%)
• The company currently works in some generic products where gross margins Current Q1FY18 Q4FY17
are less than 20%. It is these products that the company will first let go of. It is Promoters * 68.7 68.7 68.7
looking at a two-year time line to prune such products. MF's, FI's & BK’s 11.2 11.4 12.2
FII's 3.9 4.9 4.2
• Insecticides India has already selected 30 products which will be discontinued Others 16.1 14.9 14.9
in the next two years. * Promoters pledged shares : Nil
(% of share in issue)
• On an average, it is targeting gross margin of at least 50%.
KEC INTERNATIONAL
Scaling up
India Equity Research l Engineering and Capital Goods
Order book of INR170bn: 74% is T&D, 24% railways. INR50bn is India T&D, of Absolute Rating BUY
which 45% is PGCIL, while Essel Infra accounts for 20%. Profitability in India and Rating Relative to Sector Performer
exports is broadly same. Risk Rating Relative to Sector Medium
Sector Relative to Market Overweight
General retention is 5-10%, except Saudi where it is 20%.
McKenzie was roped in a few years ago to help KEC devise strong process and
mechanism. This has helped deliver most projects either ahead or on time, driving MARKET DATA (R : KECL.BO, B: KECI IN)
better profitability as well better cash flow. CMP : INR 358
Target Price : INR 345
Railway
52-week range (INR) : 395 / 145
• KEC’s scope includes: OHL electrification and composite projects. In INR10 Share in issue (mn) : 257.1
mn/km OHL job, KEC’s scope is 60% and the average ticket size is INR1-3bn. The M cap (INR bn/USD mn) : 92 / 1,428
company has started manufacturing towers for railways with a nominal Avg. Daily Vol. BSE/NSE (‘000) : 796.7
INR50mn capex with more than INR1.5bn revenue potential. It competes with
Kalpataru, Tata Projects, L&T and Kalindee Rail for the composite business.
• Of the total 4,500km electrification done by Indian Railways last year, KEC had Share Holding Pattern (%)
25% share. Next year target stands at 6,000km and 8,000km thereafter. Current Q1FY18 Q4FY17
Promoters * 51.0 50.9 50.9
• Railway is still a mid-single digit EBITDA margin business with revenue of
MF's, FI's & BK’s 20.4 23.6 26.4
~INR7.5bn. FY19/20 is targeted to post INR15/20bn with much better profitability
FII's 10.3 7.2 6.1
given that the company has already built competitiveness in the railway
Others 18.3 18.3 16.7
business. KEC expects railway OPMs to merge in line with T&D.
* Promoters pledged shares : Nil
• SAE business: KEC is planning to leverage tower manufacturing and is taking (% of share in issue)
EPC jobs to tap growth potential. Given that Brazil is a closed market, the
company’s in-house plant provides significant competitive advantage.
PRICE Performance (%)
Investment conclusion Stock Nifty EW Capital
Strong 20% EPS growth over the next two years with stable margin of 9.5%. Goods Index
1 month (6.9) (0.6) (3.5)
KEC, over the past two years, has moved from being a mere TLT EPC contractor to a 3 month 9.9 0.4 3.6
sub-station player now, thus improving its addressable market opportunity. 12 month 126.1 19.3 26.2
With strong impetus on T&D spend by select states and PGCIL, the bid pipeline for
KEC remains healthy at INR120bn over the next two-three quarters.
Moving up the scale, the company is targeting higher ticket size projects in railways
EPC, solar and civil infra space, which could help it achieve higher growth rate. Swarnim Maheshwari
We maintain ‘BUY/SP’. +91 22 4040 7418
Financials (Consolidated) swarnim.maheshwari@edelweissfin.com
KEI INDUSTRIES
Potent growth catalysts intact
India Equity Research l Engineering and Capital Goods
KPIT TECHNOLOGIES
ER&D to drive growth
India Equity Research l IT
Engineering business: Embedded electronics for automotives Absolute Rating NOT RATED
Key focus areas in automotives vertical are: 1) electrical powertrain/ electric
vehicle; 2) infotainment/ connected cars; 3) autonomous car; 4) vehicle diagnostics;
and 5) AUTOSAR- industry standard.
Anticipates competition from Tata Elxsi in infotainment business and L&T Infotech
in powertrains. MARKET DATA (R : KPIT.BO, B: KPIT IN)
The main competition still remains from captives division of large automotives. CMP : INR 215
Target Price : NA
Volvo Eicher has announced a 9-metre long bus which will be powered by KPIT 52-week range (INR) : 213 / 104
Technologies. Share in issue (mn) : 197.5
M cap (INR bn/USD mn) : 43 / 661
Deal with BirlaSoft Avg. Daily Vol. BSE/NSE (‘000) : 1,841.7
The deal with BirlaSoft will focus on each business so that it can grow faster with
improving profitability.
Share Holding Pattern (%)
BirlaSoft has annual revenue of ~USD140mn and posted CAGR of ~14% in past two
Current Q1FY18 Q4FY17
years.
Promoters * 18.9 18.9 18.9
Expects high single-digit growth in business IT and high double-digit growth in MF's, FI's & BK’s 8.1 2.6 2.7
engineering business. FII's 44.1 50.9 51.6
Others 28.8 27.6 26.8
Management does not perceive any need, nor is there any intention of making * Promoters pledged shares : 9.5
large acquisitions. (% of share in issue)
Sandip Agarwal
+91 22 6623 3474
Financials sandip.agarwal@edelweissfin.com
MAHARASHTRA SEAMLESS
In the right place, at the right time
India Equity Research l Metals & Mining
With recent order win of INR530cr, total order backlog stands at INR1,000cr. Absolute Rating NOT RATED
Ordering remains strong from PSUs like ONGC/refineries and EPC players/
equipment manufacturers like L&T, Thermax, as well as dealers of seamless tubes.
Volumes of seamless pipes grew 47% YoY to 81,700tons, taking 9mFY18 volumes to
~2.22lakh tons. The company’s guidance for FY1E and FY19 stands at 3 lakh tons
and 3.6 lakh tons, respectively.
MARKET DATA (R : MHSM.BO, B: MHS IN)
The company is running Nagothane facility at 90% utilisation and planning to CMP : INR 492
ramp up Mangaon facility to 80,000tons in FY19E. Target Price : NA
52-week range (INR) : 550 / 262
In new orders, EBIDTA/ton is expected to be close to INR1,000. Share in issue (mn) : 67.0
M cap (INR bn/USD mn) : 33 / 512
ERW pipes production will be closer to 60,000tons in FY18E due to capacity
Avg. Daily Vol. BSE/NSE (‘000) : 103.2
constraints. The company is investing in balancing equipment to increase
production to 80,000tons in FY19E.
ERW pipes are expected to maintain EBIDTA/ton of INR4,000. Share Holding Pattern (%)
Current Q1FY18 Q4FY17
The company is hopeful of deploying a oil rig in next two months in the subsidiary.
Promoters * 60.3 59.8 59.8
Already three rigs are deployed in associate companies.
MF's, FI's & BK’s 8.2 6.4 6.2
FII's 4.4 7.0 7.6
MSL is working with lenders to restart iron ore mines in Brazil without further
Others 27.1 26.8 26.4
investments.
* Promoters pledged shares : Nil
(% of share in issue)
Financials
Valuation parameters
Year to March FY14 FY15 FY16 FY17
Cash flow statement (INR mn) Diluted EPS (INR) (3.6) 17.3 23.0 37.7
Year to March FY14 FY15 FY16 FY17 Y-o-Y growth (%) NA (586.8) 33.0 64.0
Net profit 64 63 40 116 CEPS (INR) 12 28 34 49
Add: Depreciation 37 31 71 71 Diluted P/E (x) (139.9) 28.7 21.6 13.2
Add: Misc expenses written off (10) 36 (11) 15 Price/BV(x) 1.1 1.2 1.2 1.1
Add: Deferred tax 3 8 7 147 EV/Sales (x) 2.6 2.3 1.6 1.3
Gross cash flow 93 137 108 349 EV/EBITDA (x) 67.7 14.4 11.3 6.9
Less: Changes in W. C. (8) 31 (50) (1) Diluted shares O/S 6.7 6.7 6.7 6.7
Operating cash flow 101 105 158 351 Basic EPS (3.6) 17.3 23.0 37.7
Less: Capex (108) 275 (0) 343 Basic PE (x) NA 28.7 21.6 13.2
Free cash flow 209 (169) 158 8 Dividend yield (%) 0.5 0.7 1.2 1.9
Operational metrics: Yields in general have not come off and, in fact, low yielding
MARKET DATA (R : MNFL.BO, B: MGFL IN)
12% product book is only INR1bn. In Q4FY18, it will increase bank borrowings as
it will come in at a lower cost of 8.1%; in Q1FY19 will resort to CPs again, once CMP : INR 104
Target Price : INR 120
liquidity stabilizes. There is still a lot of potential to increase the efficiency of
52-week range (INR) : 126 / 78
current branches and hence no big branch expansion plan.
Share in issue (mn) : 842.0
Other businesses: The new business is stablising—Ashirwad is present in 830 M cap (INR bn/USD mn) : 88 / 1,365
branches and the company has capacity to increase from 1.4mn to 2.0mn. Credit Avg. Daily Vol. BSE/NSE (‘000) : 7,017.6
cost of Ashirwad is 8% and in relation to which it has changed policies & processes.
It now disburses everything through bank accounts and since collection efficiency
for disbursements post demonetisation is more than 99%, it gives lends comfort Share Holding Pattern (%)
on growth. Growth in this segment should be ideally >25%. It plans to take housing Current Q1FY18 Q4FY17
finance business to INR10bn over the next two-three years (currently INR3.4bn). Promoters* 34.7 34.4 34.4
ATS – INR1.1mn. Loan against property is another segment which it is looking to MF's, FI's & Banks 42.7 40.3 38.1
venture into. FII's - - -
Others 22.7 25.3 27.4
Investment conclusion * Promoters pledged shares : Nil
With some green-shoots of growth seen in Q3FY18, we expect growth to pick up (% of share in issue)
pace and likely drive earnings going forward. Scale up in other businesses should
also provide a leg up. Given bottoming of gold loan portfolio, stabilising MFI book
and successful diversification, we expect MGFL’s performance to improve going PRICE Performance (%)
ahead. We maintain ’BUY/SO’. Stock Nifty EW BFSI
Index
1 month (14.5) (0.6) 0.9
3 month 0.7 0.4 0.7
12 month 11.8 19.3 25.0
Business growth: MAS Financial (MAS) has gone for calibrated & steady growth of Absolute Rating NOT RATED
35-40% over the years. AUMs as of Q3FY18 stand at INR36.6bn, of which INR22.7bn
is micro Enterprise (up to INR0.3mn), SME loans of INR9bn (up to INR5mn), two
wheelers at INR3.5bn and CV loans of INR1.4bn. It started off as an institutional
consumer durables and then for financing tied up with cooperative banks. Later, it
transformed from a consumer durable to two-wheeler to micro enterprise company.
It is a pioneer in small business loans and later added CVs in 2003-04 in MARKET DATA (R : MASF.BO, B: MASFIN IN)
partnership with HDFC Bank. MAS is largely present in Gujarat, Maharashtra, CMP : INR 615
Rajasthan, Madhya Pradesh and is now making inroads in Tamil Nadu & Karnataka. Target Price : NA
52-week range (INR) : 701 / 564
Operational metrics: MAS is focused on efficiency with cost to AUM ratio contained
Share in issue (mn) : 54.7
at 2.5%, which with better NIMs helps generate more than 4% RoA and around
M cap (INR bn/USD mn) : 34 / 522
2.75% of RoAUM. The company sources business equally between direct channel
Avg. Daily Vol. BSE/NSE (‘000) : 430.4
(of 77 branches) & indirect channel (through intermediaries & 106 NBFCs as BCs).
In indirect sourcing through 106 NBFCs, it provides onward lending credit lines to
NBFCs who after adjusting their cost of sourcing, cost of servicing, delinquency
Share Holding Pattern (%)
from lending rates hypothecate loans with MAS. So it’s more of a partnership
model & win-win situation for both. NBFCs get steady & consistent credit lines for Current Q1FY18 Q4FY17
their growth and MAS is able to leverage its product & assessment expertise. Asset Promoters * 73.2 NA NA
MF's, FI's & BK’s 8.8 NA NA
quality risks lie with the partner—100% recourse to them. Asset quality is holding
FII's 5.3 NA NA
in a good stead with GNPLs at 1.17% and NNPLs at 0.94%.
Others 12.6 NA NA
* Promoters pledged shares : Nil
(% of share in issue)
NITIN SPINNERS
Spinning the growth yarn
India Equity Research l Textiles
Despite fall in cotton prices, there has been a recent spike in cotton as there is a Absolute Rating NOT RATED
lack of availability of quality cotton
The company keeps average cotton inventory for two months; in season it is three
months (from September end).
The plan is to add processing capacity of 36mn mtr. Share Holding Pattern (%)
Current Q1FY18 Q4FY17
Promoters * 53.4 64.3 64.3
MF's, FI's & BK’s 13.0 0.1 0.1
FII's 1.1 0.9 0.8
Others 32.5 34.8 34.8
* Promoters pledged shares : Nil
(% of share in issue)
Financials
ORIENT REFRACTORIES
Opportunities galore
India Equity Research l Miscellaneous
The parent has set a target to double sales over four-five years from INR6bn in
FY18E.
ISO products of ORL, contributing 30% to sales, have grown at ~17-18% in the past
two years. Slidegate products, which contribute ~30% to sales, has been growing MARKET DATA (R : ORRE.BO, B: ORIENT IN)
at ~7-8%. CMP : INR 167
Target Price : INR 169
Tundish, which contributes ~20% to sales, is ORL’s forte, wherein 2,400MT additional 52-week range (INR) : 186 / 113
capacity (9,600MT earlier capacity) at INR150mn has been set up to capitalise on Share in issue (mn) : 120.1
the outsourcing opportunity to parent. This will expand the segment’s capacity by M cap (INR bn/USD mn) : 20 / 311
25% and begin production by May 2018. ORL estimates INR500mn of incremental Avg. Daily Vol. BSE/NSE (‘000) : 93.1
sales from this segment.
The company is strong among smaller steel players and believes it is favourably
Share Holding Pattern (%)
placed led by mere 30 days’ payment cycle and advances among some players
versus ~90-180 days’ receivable cycle from larger players. Current Q1FY18 Q4FY17
Promoters * 69.6 69.6 69.6
ORL hiked prices in May 2018, which covers the key raw material increase like MF's, FI's & BK’s 5.1 4.9 5.0
magnesia (up ~100%) and graphite (up 65%). FII's 4.9 5.6 5.7
Others 20.3 19.9 19.7
Management will look at incremental capacity in slide gates with INR150mn capex * Promoters pledged shares : Nil
and growth opportunity ahead. (% of share in issue)
Investment conclusion
Factoring improving domestic market share and strong exports opportunity (led PRICE Performance (%)
by rising sourcing by parent), we maintain ‘BUY. BSE Midcap Stock Stock Over
Index Index
1 month (9.9) (11.5) (1.6)
3 month (3.0) 3.7 6.7
12 month 21.2 35.0 13.8
Financials
ii) presence in high RoCE segments like whey consumer wherein management
believes it can gain ~3-5% market share of INR15-20bn market in FY19.
The company expects to grow sales by 13-15% over the next three years with ~10-
11% EBIDTA margin. Further, management expects to clock 20% plus RoCE by FY20E. MARKET DATA (R : NA.BO, B: PARAG IN)
CMP : INR 298
As the company is entering new markets, it is focusing on investing a large portion
Target Price : INR 340
of the reduction in procurement prices in marketing and advertisement. It is 52-week range (INR) : 318 / 203
focusing on increasing ATL (advertisement campaigns) and pruning BTL spends Share in issue (mn) : 84.1
(promotional discounts). Therefore, advertising spend as % of sales is expected to M cap (INR bn/USD mn) : 25 / 389
be same. Avg. Daily Vol. BSE/NSE (‘000) : 512.1
Avvatar
This is the first company to launch a product in whey protein powder segment with
Share Holding Pattern (%)
focus on sports nutrition. The product has been well received in the market.
Current Q1FY18 Q4FY17
Market size is estimated at INR15-20bn and the company expects the market to Promoters * 48.7 48.2 47.5
grow at ~20%. Parag expects sales from the product to reach INR200mn this year MF's, FI's & BK’s 13.0 8.7 2.3
and estimates to touch market share of ~3-5% next year (potentially indicated FII's 16.0 21.2 24.4
INR700mn sales). Others 22.4 21.9 25.9
* Promoters pledged shares : Nil
Management targets whey products to constitute 7% of sales. (% of share in issue)
Investment conclusion
PRICE Performance (%)
With strongest position in VADP, along with strong brands and innovative portfolio,
we have valued the stock at 24x FY20E EPS. We maintain ‘BUY’. BSE Midcap Stock Stock Over
Index Index
1 month (9.9) (12.0) (2.1)
3 month (3.0) (1.4) 1.6
12 month 21.2 (4.9) (26.1)
Financials
PERSISTENT SYSTEMS
Prescient investor
India Equity Research l IT
IBM IoT business grew 5% in CY17. Total CY17 revenue stood at ~USD49mn (USD15mn Absolute Rating BUY
in Q3FY18) with better profitability than last year. Management is confident of Rating Relative to Sector Performer
posting operating profit in the business going forward. Risk Rating Relative to Sector Low
Sector Relative to Market Overweight
Partnered IBM with an ideology of two-year of investment and eight years of
return. While two years of investments are over, return phase will commence from
CY18. Focus on penetrating digital services in European geography; PARX
MARKET DATA (R : PERS.BO, B: PSYS IN)
acquisition was to consolidate position in Europe.
CMP : INR 796
Will try to grow business in Europe riding IBM’s customer access. Target Price : INR 723
Will continue to invest in ISV market and expects positive growth therein. 52-week range (INR) : 818 / 558
Share in issue (mn) : 80.0
Currently, has digital solutions for healthcare and finance industries. M cap (INR bn/USD mn) : 64 / 990
Till now, the focus was on developing digital solutions; now it is on sales and Avg. Daily Vol. BSE/NSE (‘000) : 162.6
marketing. Investments will yield results in long term; continues to invest in new
emerging trends, especially in healthcare and financial services.
Share Holding Pattern (%)
Believes services and alliance can post growth of ~10% going forward.
Current Q1FY18 Q4FY17
Margin improvement in Q3FY18 was on account of higher IP revenue, increased Promoters * 30.6 30.7 35.0
utilisation and other operational efficiencies. Decline in margin was majorly on MF's, FI's & BK’s 14.5 14.1 14.3
account of shift to lower margin onsite business (from 8% to 18%), investment in FII's 24.0 22.3 20.8
acquisition and higher S&M expenses. Others 30.9 32.9 29.9
* Promoters pledged shares : Nil
Has certain levers for further margin expansion, e.g., higher onsite utilisation, (% of share in issue)
traction in IP deals, normalisation of S&M expenses, etc.
Investment conclusion
PRICE Performance (%)
Persistent has transitioned its business to enterprise and digital in just four
Stock Nifty EW IT
years. Contribution of the ISV business, which was 60.3%, is now down meaningfully
Index
to just 38.5%. We believe, now with ISV almost at par with the enterprise business 1 month 9.0 (0.6) 8.2
in revenue and higher growth trajectory sustaining in non-ISV business, Persistent’s 3 month 20.9 0.4 15.6
overall growth will jump meaningfully. Moreover, the company also expects some 12 month 30.8 19.3 24.8
growth in an otherwise falling ISV business going forward. We believe, both the
above factors—significant increase in proportion of non-ISV business and
stabilisation/some growth in ISV business—will mean good overall growth for
the company. We maintain ‘BUY/SP’.
Financials Sandip Agarwal
+91 22 6623 3474
Year to March FY16 FY17 FY18E FY19E sandip.agarwal@edelweissfin.com
Net revenue 23,123 28,784 30,953 35,103
Rev. growth (%) (19.7) 24.5 7.5 13.4 Pranav Kshatriya
+91 22 4040 7495
EBITDA 4,171 4,539 4,970 6,310
pranav.kshatriya@edelweissfin.com
Adjusted Profit 2,974 3,015 3,401 4,123
Basic shares outstanding (mn) 79 80 80 80
Nikunj Mandowara
Adjusted diluted EPS (INR) 37.2 37.7 42.5 51.5 +91 22 4040 7431
EPS Growth (%) (1.4) 1.4 12.8 21.2 nikunj..andowara@edelweissfin.com
Diluted P/E (x) 21.4 21.1 18.7 15.5
EV/EBITDA (x) 13.6 12.7 11.5 8.9
ROAE (%) 19.5 17.0 16.8 18.0 February 9, 2018
Valuation parameters
Cash flow statement (INR mn) Year to March FY16 FY17 FY18E FY19E
Year to March FY16 FY17 FY18E FY19E Adjusted Diluted EPS (INR) 37.2 37.7 42.5 51.5
Reported Profit 2,974 3,015 3,514 4,130 Y-o-Y growth (%) (1.4) 1.4 12.8 21.2
Add: Depreciation 965 1,490 1,575 1,748 Adjusted Cash EPS (INR) 49.9 56.3 62.1 73.4
Others 1,053 -702 -600 -536 Diluted P/E (x) 21.4 21.1 18.7 15.5
Less: Changes in WC 2,451 939 1,160 1,299 Price to Book Ratio (P/B) (x) 3.9 3.4 3.0 2.6
Operating cash flow 2,541 2,864 3,330 4,043 Enterprise Value / Sales (x) 2.4 2.0 1.8 1.6
Less: Capex 1,647 2,169 2,250 2,250 Enterprise Value / EBITDA (x) 13.6 12.7 11.5 8.9
Free Cash Flow 893 695 1,080 1,793 Dividend Yield (%) 0.9 1.1 1.3 1.5
PRAJ INDUSTRIES
Targeting higher echelons
India Equity Research l Aviation
Praj can benefit substantially from European Union policy of converting all first
generation plants to second generation. The company has already developed a
MARKET DATA (R : PRAJ.BO, B: PRJ IN)
bolt on plant. Currently, the union has invited demo plants with wood chips at
feedstock. CMP : INR 95
Target Price : INR 85
Management indicated that 2G plant (INR8/ litre as feedstock) compared to 1G 52-week range (INR) : 131 / 61
plant (as low as INR2/litre depending on government policy) is still not financially Share in issue (mn) : 180.4
viable. However, sustainability of 2G programme is likely to change the equation. M cap (INR bn/USD mn) : 17 / 266
Avg. Daily Vol. BSE/NSE (‘000) : 1,463.5
The high purity business continues to do well and expected to see 10-15% growth
over the next four–five years (current revenue of INR1.85bn).
Share Holding Pattern (%)
The critical process equipment business remains healthy with Gujarat plant
running at 100% capacity utilisation and Saswad plant at 60%. Execution of Current Q1FY18 Q4FY17
Petrobras Brazil order has been further delayed by atleast two quarters. Promoters * 33.4 33.6 33.6
MF's, FI's & BK’s 19.5 22.0 20.4
Investment conclusion FII's 12.3 9.6 9.8
Praj has diversified its revenue base over the past four-five years with core business Others 34.8 34.8 36.2
contribution moving from 100% to 72% currently; emerging businesses—critical * Promoters pledged shares : Nil
(% of share in issue)
process equipment, waste water, Neela—contribute the balance. The company
aims to further improve overall revenue mix to 50:50 by FY18E led by stable growth
in conventional and high growth (25% CAGR) in emerging businesses. Led by global PRICE Performance (%)
references and ethanol blending mandates in key export regions like US, Brazil, BSE Midcap Stock Stock Over
Columbia, Peru, Thailand, Malaysia etc, Praj has sustained a steady position in Index Index
the global ethanol market. Its brewery business recently bagged two large projects 1 month (9.9) (25.4) (15.5)
overseas and expects to sustain the increased momentum. We maintain ‘BUY’. 3 month (3.0) 17.6 20.7
12 month 21.2 11.2 (10.0)
Swarnim Maheshwari
+91 22 4040 7418
Financials swarnim.maheshwari@edelweissfin.com
SADBHAV INFRAPROJECTS
Road runner
India Equity Research l Infrastructure - Construction
Road projects worth INR1tn plus are at various stages of bidding and are expected
to be awarded over the next couple of quarters. This includes 80 plus HAM projects,
MARKET DATA (R : NA.BO, B: SINP IN)
spanning ~4,400km worth ~INR840bn. Considering such a large pipeline of projects,
management expects competitive intensity to be moderate going ahead. This is CMP : INR 136
Target Price : NA
likely to result in healthy IRRs for HAM projects.
52-week range (INR) : 157 / 89
Cash profit on the operational SPVs has increased from ~INR365mn in Q1FY18 to Share in issue (mn) : 352.2
INR418mn in Q2FY18 and INR579mn in Q3Y18. The company has already refinanced M cap (INR bn/USD mn) : 48 / 746
seven BOT projects over the past couple of years. It is in the process of refinancing Avg. Daily Vol. BSE/NSE (‘000) : 391.5
a couple of more projects; the cost of debt should dip to ~9.18%.
Management indicated that NHAI is rigorously following the practice of awarding Share Holding Pattern (%)
road projects only when 80% land has been acquired. In addition, NHAI is also
Current Q1FY18 Q4FY17
open to revision of scope of work in any project which is facing issues in acquiring
Promoters * 69.3 69.3 69.3
balance 20% land.
MF's, FI's & BK’s 6.0 6.0 6.0
FII's 10.8 10.8 10.8
All of the Sadbhav’s toll projects are already operational. Traffic on its BOT projects
Others 13.8 13.8 13.8
has improved in the current quarter. During Q3FY18, traffic growth in overall
* Promoters pledged shares : 15.6
portfolio stood at ~11.7%. (% of share in issue)
Toll rate for many of its projects will be hiked w.e.f. April 1, 2018. Importantly, the
Maharashtra Border Check Post will see an 18% toll revision. This will further PRICE Performance (%)
improve the company’s cash flow generation.
Sensex Stock Stock over
Sensex
Sadbhav has invested ~INR23bn equity in its BOT projects till date, of which
1 month (0.1) NA NA
~INR1.8bn has been infused in HAM projects. Going ahead, the company needs to
3 months 3.5 NA NA
infuse ~INR5bn equity in these HAM projects.
12 months 21.5 NA NA
Financials
In the Indian security services business, SIS is currently the second largest player Absolute Rating NOT RATED
with c4% market share, below the leader G4S Services. The latter’s market share is
at 5-6%, but it is growing at much slower rate, as per SIS management. The company
believes it can be the leader in India in the next to two-three years.
SIS will be on the lookout for acquisition target in the Indian security services and
facility management segments and the rationale is mainly for acquiring customer Relative Performance (%)
Financials
Shankara Building Products (SBPL) currently has 128 stores and is looking to add Absolute Rating NOT RATED
15-20 stores per year. Management believes this is a conservative estimate as the
format is evolving and the only challenge in growing can be execution risk.
Tiles, sanitaryware and fittings, which currently account for 10% of sales, are
gaining traction. Gross margins in these segments are also higher at 12-15%. The
company is planning to have higher number of SKUs for these categories in some
MARKET DATA (R : NA.BO, B: SHANKARA IN)
of its showrooms.
CMP : INR 1,771
Long-term sustainable SSSG can be 20% and on a conservative level it can be 10- Target Price : NA
15%. SSSG of matured stores is 12-15%. 52-week range (INR) : 2,365 / 545
Share in issue (mn) : 22.8
The criteria before any acquisitions is geographical expansion, new category M cap (INR bn/USD mn) : 40 / 629
presence, sizeable opportunity (topline of INR300-500mn), cultural fit and less Avg. Daily Vol. BSE/NSE (‘000) : 543.8
than three years of payback.
The biggest competition still continues to be mom and pops stores. However, SBPL
Share Holding Pattern (%)
differentiates itself by being a convenience store for one-stop shopping, by having
economies of scale and providing after-sales services. Current Q1FY18 Q4FY17
Promoters * 56.2 56.2 56.2
E-way bill is not expected to be a challenge for the company as it is already being MF's, FI's & BK’s 10.2 16.4 8.1
followed in Karnataka. Thus, the company does not expect any disruption with its FII's 14.3 7.3 4.7
implementation. Others 19.3 20.1 31.0
* Promoters pledged shares : Nil
The proportion of private labels in overall sales is likely to fall as the company (% of share in issue)
will add more third party brands.
SBPL is focussed on an asset light business model that leads to higher asset
Relative Performance (%)
turnover & consequently RoCE (45-50% without back-end infrastructure); payback
Sensex Stock Stock over
period for new retail store is three years. Sensex
1 month (0.1) 3.3 3.4
The company expects improvement in margin going forward as change in product
3 months 3.5 21.4 17.9
mix with growing contribution of tiles, sanitaryware etc ., is expected to rise. It is
12 months 21.5 NA NA
also planning to start spending on branding its stores which will attract higher
footfalls and create brand equity among customers for its stores.
Financials
SHARDA CROPCHEM
Differentiated play
India Equity Research l Midcap Agri
Key concerns have been on rising input cost from China as prices of many chemicals
have jumped sharply. This price increase is pressurising margin. However,
management is confident that prices will settle down going forward and supplies
MARKET DATA (R : NA, B: SHCR IN)
will resume from China in the medium term.
CMP : INR 382
SCC has higher dependency on China due to its asset-light business model and Target Price : INR 442
procures almost 100% of its input requirement from China. The key concern is that 52-week range (INR) : 567 / 419
there are no alternative suppliers for most products procured by the company, Share in issue (mn) : 90.2
except from China, which makes it more vulnerable to rising prices of such M cap (INR bn/USD mn) : 35 / 536
chemicals in China. Avg. Daily Vol. BSE/NSE (‘000) : 36.3
Due to increase in cost, margin may dip from ~22% to 18-20% over the medium
term. Share Holding Pattern (%)
SCC will continue to focus on new registrations and has spent ~INR1.7bn on Current Q1FY18 Q4FY17
registration by Dec 2017. Total spend registration for FY18/19 is likely to remain Promoters * 74.8 74.8 74.8
at ~INR2bn each year. MF's, FI's & BK’s 12.7 12.7 13.9
FII's 7.8 7.3 5.9
Given the company’s thrust on new registration, revenue contribution from top 10 Others 4.7 5.3 5.4
products has dipped to 52-55% from more than 60% earlier. * Promoters pledged shares : Nil
(% of share in issue)
Investment conclusion
We believe, SCC’s business has taken a hit in the near term due to: 1) rising raw
PRICE Performance (%)
material cost from China; and 2) inability to pass on the hike due to strong
BSE Midcap Stock Stock Over
competition from innovator companies. We maintain ‘HOLD’.
Index Index
1 month (9.9) (14.2) (4.3)
3 month (3.0) (8.1) (5.0)
12 month 21.2 (21.3) (42.6)
Financials
SHEELA FOAMS
Home comfort
India Equity Research l Miscellaneous
The total size of the industry is INR300bn with organised market at INR100bn. Absolute Rating NOT RATED
Sheela Foams has 20% market share.
No big shift of market share from unorganised to organised as yet. This will fructify
only post commencement of stringent implementation and tracking (along with e-
way bill).
From April 2016 till now, the company has effected 20% price hike. Last price MARKET DATA (R : NA.BO, B: SFL IN)
increase of 3.5% was in October. CMP : INR 1,604
Target Price : NA
Pricing for Sleepwell is ~5% higher than Kurl On. 52-week range (INR) : 1,850 / 926
Share in issue (mn) : 48.8
Starlight:
M cap (INR bn/USD mn) : 78 / 1,216
Feedback from the market has been considered and the product has been Avg. Daily Vol. BSE/NSE (‘000) : 16.2
repositioned.
Introduced two models, of which one did not evince favorable feedback—INR5,000/
pair is the cheapest mattress in this category. The unorganised segment is priced Share Holding Pattern (%)
at ~3.5-4K/pair, which has increased to ~4.0-4.5K post GST. Current Q1FY18 Q4FY17
Promoters * 85.7 85.7 85.7
The company is targeting this brand to comprise 20% of revenue in a couple of MF's, FI's & BK’s 8.6 8.1 7.9
years. FII's 2.6 3.0 2.8
Others 3.1 3.1 3.6
Sheela Foams is also planning to launch a mattress only for the online channel.
* Promoters pledged shares : Nil
(% of share in issue)
The company is looking at long-term volume growth of 7-8% with price hike of ~5%.
Currently, Sheela Foams has 2,800 EBOs and is looking to increase them to 4,000.
Relative Performance (%)
Sensex Stock Stock over
Sensex
1 month (0.1) (5.6) (5.5)
3 months 3.5 6.5 3.0
12 months 21.5 60.3 38.8
Financials
SHOPPERS STOP
Niche retailer
India Equity Research l Retail
The company will incur INR1,300mn capex in FY18. Similar capex will be expended
in FY19; will open five new stores in FY19. MARKET DATA (R : SHOP.BO, B: SHOP IN)
CMP : INR 535
Hike in customs duties from 10% to 20% on imported products likely to increase Target Price : INR 733
MRP by 15-20%; impact of same will reflect after four-five months. 52-week range (INR) : 602 / 280
Share in issue (mn) : 87.9
Private labels fetched gross margin of 46%.
M cap (INR bn/USD mn) : 47 / 731
Shoppers Stop is targeting private label contribution to improve to 12% by Q4FY18, Avg. Daily Vol. BSE/NSE (‘000) : 181.0
15% in FY19 and 18% in FY20.
Targeting INR400-500mn debt by Q4FY18 (currently at INR2,370mn). The company Share Holding Pattern (%)
will be completely debt free by FY19.
Current Q1FY18 Q4FY17
Investment conclusion Promoters * 63.7 67.1 67.1
MF's, FI's & BK’s 14.8 13.4 13.4
Shoppers Stop is a niche play with strong brand position in the lifestyle space.
FII's 8.0 4.3 4.2
Since 1991 it has assiduously positioned itself as a retailer of superior quality
Others 13.5 15.1 15.4
products and services, offering an international shopping experience. This strong
* Promoters pledged shares : 12.6
positioning and brand recall give the company a strategic advantage in light of (% of share in issue)
intensifying competition. With unwavering focus on systems and processes and
its ability to attract global brands as venture partners, the company is well placed
to emerge a leading departmental store player in the long run. We maintain ‘BUY/ PRICE Performance (%)
SO’.
Stock Nifty EW Retail
Index
1 month (2.6) (0.6) (9.9)
3 month (9.8) 0.4 (3.0)
12 month 78.6 19.3 21.2
Abneesh Roy
Financials +91 22 6620 3141
abneesh.roy@edelweissfin.com
Year to March FY17 FY18E FY19E FY20E
Revenues (INR mn) 49,101 54,875 49,988 55,439 Rajiv Berlia
Rev. growth (%) 10.8 11.8 (8.9) 10.9 +91 22 6623 3377
EBITDA (INR mn) 1,743 2,812 4,007 4,723 rajiv.berlia@edelweissfin.com
Adjusted Profit (INR mn) (655) 156 1,139 1,539
Alok Shah
No. of Shares outstanding (mn) 47 48 49 50
+91 22 6620 3040
Adjusted Diluted EPS (INR) (7.9) 1.8 13.0 17.5
alok.shah@edelweissfin.com
EPS growth (%) 62.7 (122.6) 629.7 35.1
Diluted P/E (x) (68.1) 300.9 41.2 30.5
EV/EBITDA (x) 31.0 19.6 13.6 11.3 February 9, 2018
SINTEX PLASTICS
Value unlocking
India Equity Research l Miscellaneous
Sintex has two subsidiaries: i) Sintex-BAPL (revenue FY17 – INR 34.4bn & EBITDA Absolute Rating NOT RATED
FY17 – INR5.0bn) includes custom moulding business; and ii) Sintex-Infra Projects
(revenue FY17 – INR33.5bn & EBITDA FY17 – INR 6.3bn) includes prefab, monolithic
and plastic business.
Financials
SKF INDIA
Moving up the value chain
India Equity Research l Bearing
Investment conclusion
We maintain ‘BUY’ led by SKF’s strong position fortified by new product
development, demand improvement in auto and industrial.
Financials
SOLAR INDUSTRIES
Overseas drives growth; defence execution key
India Equity Research l Miscellaneous
Offshore market offers huge potential with 3x revenue by FY20: Solar is confident
of strong growth in offshore markets as it expands its geographical reach. The
MARKET DATA (R : SLIN.BO, B: SOIL IN)
company is planning to add Australia and Ghana next year in addition to Turkey,
Zambia, Nigeria and has recently entered South Africa. Management is confident CMP : INR 1,035
Target Price : INR 842
of clocking revenue of INR10bn from offshore markets by FY20 with 20-22% EBITDA
52-week range (INR) : 1,232 / 695
margin.
Share in issue (mn) : 90.5
Defence revenue continues to remain muted, but spurt in order book: Revenue M cap (INR bn/USD mn) : 94 / 1,455
contribution from defence has been disappointing so far despite huge opportunity Avg. Daily Vol. BSE/NSE (‘000) : 44.5
in this segment due to delays in approvals from the government and lengthy
processes. However, management is confident of pick in defence revenue from
FY19 as orders have started flowing with current order book at INR1.6bn. Share Holding Pattern (%)
Management expects to achieve revenue of INR5bn by FY20 and with higher EBITDA Current Q1FY18 Q4FY17
margin of ~25%, the contribution to profitability remain significant. Promoters * 73.1 73.1 73.1
MF's, FI's & BK’s 20.0 20.7 18.3
Capex to be funded through internal cash flows: Solar expects capex of INR2bn per FII's 1.7 1.4 1.4
annum over the next two years, which includes ~INR800-1,000mn in domestic, Others 5.1 4.7 7.2
~INR500mn in overseas and INR700mn in defence. The company will continue to * Promoters pledged shares : 2.9
fund this capex through internal accrual and debt is likely to remain stable at (% of share in issue)
current level of ~INR5bn. The company has changed part of its forex loan to local
currencies (~INR2bn), which will help reduce hedging cost, but will increase interest
PRICE Performance (%)
cost.
BSE Midcap Stock Stock Over
Investment conclusion Index Index
1 month (9.9) (13.4) (3.5)
We believe Solar has a solid business model with strong entry barriers and offers
3 month (3.0) (4.2) (1.2)
robust growth opportunity on: 1) 15-18% growth in domestic market backed by
12 month 21.2 41.4 20.2
government push on infrastructure; 2) successful entry in offshore markets and
potential entry in new geographies; and 3) pick up in defence orders. We believe,
significant capex which in defence (INR3.5bn) will start contributing to profitability
and return ratios. We maintain ‘HOLD’.
Financials
STERLITE TECHNOLOGIES
Growth fiber
India Equity Research l IT
Looking at minimum double digit margin for services business, ideally 15-17%;
Share Holding Pattern (%)
possible to clock ~25% RoCE in services business even with 120 days’ WC.
Current Q1FY18 Q4FY17
Has set up a network lab in NCR for advanced networking research. Promoters * 54.1 54.3 54.5
MF's, FI's & BK’s 12.2 12.0 11.4
Investment conclusion FII's 7.1 7.9 7.0
We believe Sterlite will be key beneficiary of strong demand for fiber optic cables, Others 26.6 25.8 27.1
leveraging its capacity expansion. Its superior cost structure due to integrated * Promoters pledged shares : 19.4
operations will lead to high EBITDA margin improving return ratios, despite planned (% of share in issue)
capex. The company is strategically expanding its portfolio of services leveraging
its knowhow of complex network and relationships from the fiber business. We
maintain ‘BUY/SO’. PRICE Performance (%)
Stock Nifty EW IT
Index
1 month (6.1) (0.6) (16.9)
3 month 21.2 0.4 (15.0)
12 month 138.5 19.3 12.3
Sandip Agarwal
+91 22 6623 3474
Financials
sandip.agarwal@edelweissfin.com
Year to March FY16 FY17 FY18E FY19E
Pranav Kshatriya
Revenues (INR mn) 22,749 25,936 33,780 45,609
+91 22 4040 7495
Rev. growth (%) (30.4) 14.0 30.2 35.0 pranav.kshatriya@edelweissfin.com
EBITDA (INR mn) 4,067 5,161 7,399 10,103
Adjusted Profit (INR mn) 1,505 1,985 2,843 4,325 Nikunj Mandowara
PAT growth (%) NM 31.9 43.2 52.1 +91 22 4040 7431
Adjusted diluted EPS (INR) 3.7 4.9 7.0 10.6 nikunj..andowara@edelweissfin.com
Diluted P/E (x) 92.6 70.7 49.7 32.8
EV/EBITDA (x) 35.4 28.4 20.2 15.1
ROAE (%) 22.0 25.1 30.3 36.2 February 9, 2018 February 9, 2018
There are only three-four global companies which can deploy digital at scale—
competitive advantage for TCS. MARKET DATA (R : TCS.BO, B: TCS IN)
CMP : INR 2,972
Margin expectation of 26-28% needs currency support; adjusted for currency,
Target Price : INR 2,844
margin are at the lower end of expectations. 52-week range (INR) : 3,254 / 2,154
Share in issue (mn) : 1,914.3
Growth is strong in all sectors, except BFSI and retail.
M cap (INR bn/USD mn) : 5,690/88,406
No immediate visibility of turnaround in BFSI and expects macro improvement to Avg. Daily Vol. BSE/NSE (‘000) : 1,180.0
lead to recovery.
Retail seems to be turning around and may clock double digit growth in FY19. Share Holding Pattern (%)
Weakness in large retail banks in North America as they are in initial phases of Current Q1FY18 Q4FY17
investment in digital technologies. In the next one-two quarters these banks will Promoters * 73.6 73.6 73.3
be clear about their technology strategy and spending; TCS expects growth to MF's, FI's & BK’s 6.1 5.5 5.4
market models) are among the key rationales for TCS to sustain its long term hi- 12 month 33.8 19.3 24.8
Sandip Agarwal
Financials +91 22 6623 3474
sandip.agarwal@edelweissfin.com
Year to March FY16 FY17 FY18E FY19E
Revenues (INR mn) 1,086,416 1,181,606 1,224,865 1,336,074 Pranav Kshatriya
+91 22 4040 7495
Rev. growth (%) 14.8 8.8 3.7 9.1
pranav.kshatriya@edelweissfin.com
EBITDA (INR mn) 306,734 325,046 322,700 360,229
Net profit (INR mn) 242,102 264,836 254,547 278,689 Nikunj Mandowara
EPS (INR) 123.2 134.8 132.3 145.6 +91 22 4040 7431
EPS growth (%) 22.8 9.4 (1.9) 10.1 nikunj..andowara@edelweissfin.com
Diluted P/E (x) 24.1 22.0 22.5 20.4
EV/EBITDA (x) 18.1 16.6 16.7 14.5
ROE (%) 36.9 32.7 29.8 30.9 February 9, 2018 February 9, 2018
Valuation parameters
Cash flow statement (INR mn) Year to March FY16 FY17 FY18E FY19E
Year to March FY16 FY17 FY18E FY19E Adjusted Diluted EPS (INR) 123.2 134.8 132.3 145.6
Reported Profit 242,102 264,836 254,547 278,689 Y-o-Y growth (%) 22.8 9.4 (1.9) 10.1
Add: Depreciation 18,879 19,860 20,437 21,050 Adjusted Cash EPS (INR) 132.8 144.9 142.9 156.6
Others 51,724 (26,345) 5,981 (27,694) Diluted P/E (x) 24.1 22.0 22.5 20.4
Less: Changes in WC 103,541 (11,569) 43,735 3,982 Price to Book Ratio (P/B) (x) 8.0 6.6 7.0 5.8
Operating cash flow 209,164 269,920 237,230 268,063 Enterprise Value / Sales (x) 5.1 4.6 4.4 3.9
Less: Capex 19,673 19,530 14,881 22,665 Enterprise Value / EBITDA (x) 18.1 16.6 16.7 14.5
Free Cash Flow 189,492 250,390 222,349 245,399 Dividend Yield (%) 1.5 1.6 1.6 1.7
VEDANTA
Fecund resources
India Equity Research l Metals & Mining
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
108 Edelweiss
Edelweiss Securities Securities Limited
Limited
Profile of Participating Companies
ADITYA
Digitally signed by ADITYA NARAIN
DN: c=IN, o=EDELWEISS SECURITIES LIMITED,
Aditya Narain ou=HEAD RESEARCH, cn=ADITYA NARAIN,
serialNumber=e0576796072ad1a3266c27990f2
0bf0213f69235fc3f1bcd0fa1c30092792c20,
Head of Research
NARAIN
postalCode=400005,
2.5.4.20=6b7d777d3c8c77e0e2c454e91543f9f4
d9b8311cf0678cd975097fc645327865,
aditya.narain@edelweissfin.com st=Maharashtra
Date: 2018.02.10 02:12:02 +05'30'
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