India Daily, July 23, 2015 · per tower per annum remained around the `65,000 mark. We expect this...
Transcript of India Daily, July 23, 2015 · per tower per annum remained around the `65,000 mark. We expect this...
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL.
Contents
Daily Alerts
Results
Bharti Infratel: 1QFY16 - marginal miss; surprise element to support rich valuations missing
IDEA: Retain estimates and remain positive
Bajaj Finserv: Bajaj Finance remains strong; Bajaj Life a tad better
JSW Energy: Demand weakness comes to the fore
Muthoot Finance: Growth on track, NIM weak
SKS Microfinance: Strong performance
PVR: Blockbuster quarter
Company alerts
Vedanta: Cairn merger - minorities in majority?
Sector alerts
Infrastructure: Rail operators - moving into sweet spot
INDIA DAILY July 23, 2015 India 22-Jul 1-day 1-mo 3-mo
Sensex 28,505 1.1 2.5 2.8
Nifty 8,634 1.2 3.0 2.8
Global/Regional indices
Dow Jones 17,851 (0.4) (1.6) (1.1)
Nasdaq Composite 5,172 (0.7) 0.2 2.3
FTSE 6,667 (1.5) (2.5) (5.5)
Nikkei 20,677 0.4 (0.6) 2.4
Hang Seng 25,415 0.5 (7.0) (8.7)
KOSPI 2,062 (0.1) (0.9) (5.1)
Value traded – India
Cash (NSE+BSE) 188 186 194
Derivatives (NSE) 3,093 3,854 3,856
Deri. open interest 2,550 2,459 2,445
Forex/money market
Change, basis points
22-Jul 1-day 1-mo 3-mo
Rs/US$ 63.7 13 9 42
10yr govt bond, % 8.1 1 13 31
Net investment (US$ mn)
21-Jul MTD CYTD
FIIs (25) 1,099 7,283
MFs (33) 237 5,125
Top movers
Change, %
Best performers 22-Jul 1-day 1-mo 3-mo
EIM IN Equity 21109.7 (1.1) 9.5 43.1
HPCL IN Equity 901.8 3.4 22.3 39.8
BJAUT IN Equity 2618.9 3.0 8.5 31.5
ABNL IN Equity 2033.4 3.8 15.3 26.5
UPLL IN Equity 546.2 0.6 (2.4) 24.9
Worst performers
UT IN Equity 7.2 2.1 (11.2) (56.3)
JPA IN Equity 11.5 1.8 (7.6) (53.0)
JSP IN Equity 77.3 (0.3) (17.6) (49.8)
VEDL IN Equity 136.1 (0.2) (22.9) (35.7)
HDIL IN Equity 88.6 1.9 (6.7) (26.9)
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
1QFY16 results marginally below estimates
Headline consolidated results missed our estimates marginally, with EBITDA and PAT lower than
estimated by around 2.5% each. The miss was marginal in terms of numbers, yet somewhat
material in the context of the steady business that BHIN is. Revenues of `30.2 bn, +6% yoy,
were in line with our expectations, with service rental revenues growing 9% yoy and energy
revenues growing by a muted 1.3% yoy. Muted growth in energy revenues, in our view,
reflects – (1) impact of lower diesel prices on pass-through contracts, and (2) likely downward
revision in contracted fixed charges (annual revision as new fiscal kicked in) on the fixed energy
contracts. We had expected muted energy revenue growth and hence, this did not come as a
surprise.
EBITDA grew 10% yoy but declined 3% qoq to Rs13 bn missing our estimated `13.3 bn by
2.5%. EBITDA margins, that were propped up by some one-off cost write backs and higher-
than-normal energy spread in 4QFY15, normalized to 43%, down 240 bps qoq but up 150 bps
yoy. Ex-energy margins were stable at around 66% while energy margins normalized to 5%
from 11% in 4QFY15. Recurring PAT of `5.76 bn (up 24% yoy) came in 2.4% below our
expected `5.9 bn, despite higher than expected other income.
Solid asset, but valuations too rich for our liking
BHIN’s results, despite the marginal miss on EBITDA, were broadly in sync with our view of the
business – (1) BHIN is a high-single-digit EBITDA growth story in the medium term; near-term
growth may be propped up by R-Jio network rollout but will normalize soon, and (2) tenancy
growth for the next 2-3 years will be driven primarily by 2G network expansion of Idea/
Vodafone and fresh 4G tenancy accretion from R-Jio, and (3) bulk of 3G/4G expansion by
incumbents (Bharti, Vodafone, and Idea) will show up in the form of loading for BHIN;
incremental tenancy addition on this count will likely be immaterial for the next 2-3 years and
by the time it becomes material, 2G expansion will likely stop being a source of fresh tenancies.
The last aspect of the above is where we differ from the Street. We continue to find BHIN a
solid, but over-valued, asset. We do not see any scope for meaningful upgrades to our FCF
forecasts in the DCF nor are we comfortable ascribing a sub-10% WACC to this net cash
company. We therefore see the CMP as overstretched already. Our SELL rating on the stock
stays. We shall update our earnings model post the earnings call.
Bharti Infratel (BHIN) Telecom
1QFY16 – marginal miss; surprise element to support rich valuations missing.
BHIN’s 1QFY16 headline numbers were marginally below our expectations, with
services revenue and EBITDA increasing by 9.2% and 10% respectively. Free cash
generation was strong at 63.8% of EBITDA aided by a swing in working capital and
lower taxes. We continue to find the asset strong on fundamentals but overvalued. We
still do not see any strong reason to change our stance. Reiterate SELL.
SELL
JULY 23, 2015
RESULT
Coverage view: Cautious
Price (`): 458
Target price (`): 350
BSE-30: 28,505
Bharti Infratel
Stock data Forecasts/Valuations 2015 2016E 2017E
52-week range (Rs) (high,low) EPS (Rs) 10.5 13.5 16.2
Market Cap. (Rs bn) EPS growth (%) 31.0 28.1 20.0
Shareholding pattern (%) P/E (X) 43.6 34.0 28.3
Promoters 71.7 Sales (Rs bn) 116.7 128.8 144.9
FIIs 24.3 Net profits (Rs bn) 19.9 25.5 30.6
MFs 0.1 EBITDA (Rs bn) 50.0 56.4 64.7
Price performance (%) 1M 3M 12M EV/EBITDA (X) 16.9 15.0 13.0
Absolute (5.0) 24.6 71.0 ROE (%) 11.4 14.8 17.2
Rel. to BSE-30 (7.6) 22.0 56.1 Div. Yield (%) 2.4 2.0 2.5
Company data and valuation summary
505-243
868.9
Bharti Infratel Telecom
KOTAK INSTITUTIONAL EQUITIES RESEARCH 3
Operational and financial performance
Tower and tenancy additions – At a consolidated (100% of BHIN standalone + 42% of
Indus) level, tower base grew 3% yoy (to 86,397) while tenancy base grew 8.7% yoy (to
185,215). Tenancy ratio inched up marginally to 2.14 from 2.12 at end-4QFY15 and 2.03
at end-1QY15.
Tower expansion was in line with our expectations; however, tenancies fell 1.4% short of
estimates. We understand that R-Jio tenancy accretion was slow relative to the past two
quarters; this may not be a reflection of R-Jio’s overall rollout pace and may just be a
function of lower BHIN share of these tenancies in 1QFY16.
Rentals – Consolidated rentals were up 0.6% qoq and 0.3% yoy at `34,201 per tenant
per month, reflecting benefits of strong incremental 3G/4G loading revenues during the
quarter.
Tenancy and rental movements were both in line with our broad construct – that
the bulk of 3G/4G network expansion by the incumbents would be in the form of loading
and not fresh sites for the next 2-3 years (Idea management too corroborated our
view on this aspect in their 1QFY16 earnings call).
Capex – capex for 1QFY16 stood at `5 bn, broadly in line with quarterly capex levels seen
over the past six quarters. Maintenance capex was `1.4 bn as implied maintenance capex
per tower per annum remained around the `65,000 mark. We expect this number to
trend up over time to a `80,000-90,000 level, if not slightly higher. Implied upgrade
capex per incremental tenancy (upgrade capex defined as total capex less reported
maintenance less estimated new tower capex) was a meaningful `0.72 mn for the
quarter. This number has hovered in the `0.5-0.8 mn vicinity with the variance driven
perhaps by the extent of incremental loading in a quarter.
FCF – FCF generation was strong at `8.3 bn (63.8% of EBITDA), aided by positive swing
in net working capital (of `2.23 bn) and lower cash taxes. 4QFY15 had a negative
working capital swing of nearly the same magnitude; we understand that these swings
are on account of the company paying municipal and other taxes for the month of March
in March itself unlike other months when it pays in the following month. 4Q FCF is
understated and 1Q FCF is overstated to that extent; over a two-quarter time frame,
working capital change was marginal. On a TTM basis, FCF/EBITDA stood at 39%, good
but sub-par, in our view. Net cash, adjusted for unpaid dividends, stood at `36.3 bn, an
increase of roughly `9 bn qoq.
Telecom Bharti Infratel
4 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Exhibit 1: Bharti Infratel - 1QFY16 review, March fiscal year-ends (Rs mn)
Source: Company, Kotak Institutional Equities
Rs mn 1QFY15 4QFY15 1QFY16 QoQ YoY 1QFY16E vs KIE (%)
Revenues 28,427 29,467 30,157 2.3 6.1 30,211 (0.2)
Costs
Power and fuel (10,566) (9,835) (10,733) 9.1 1.6 (10,600) 1.3
Rent (2,255) (2,496) (2,556) 2.4 13.3 (2,400) 6.5
Employee expenses (973) (1,033) (1,017) (1.5) 4.5 (1,060) (4.1)
Others (2,843) (2,734) (2,880) 5.3 1.3 (2,850) 1.1
Total (16,637) (16,098) (17,186) 6.8 3.3 (16,910) 1.6
EBITDA 11,790 13,369 12,971 (3.0) 10.0 13,301 (2.5)
Net revenues (ex power and fuel) 17,861 19,632 19,424 (1.1) 8.8 19,611 (1.0)
EBITDA margin (%, on gross) 41.5 45.4 43.0 44.0
EBITDA margin (%, on net) 66.0 68.1 66.8 67.8
D&A - net (5,253) (5,608) (5,571) (0.7) 6.1 (5,500) 1.3
EBIT 6,537 7,761 7,400 (4.7) 13.2 7,801 (5.1)
Net finance costs and other income 388 1,040 1,493 43.6 284.8 1,200 24.4
PBT 6,925 8,801 8,893 1.0 28.4 9,001 (1.2)
Provision for taxes (2,297) (3,226) (3,136) (2.8) 36.5 (3,105) 1.0
PAT 4,628 5,575 5,757 3.3 24.4 5,896 (2.4)
Exceptional items — —
Net income 4,628 5,575 5,757 3.3 24.4 5,896 (2.4)
# of shares 1,889 1,894 1,896 1,894
EPS (Rs/share) 2.45 2.94 3.04 3.2 23.9 3.11
Margins (%)
EBITDA (on gross) (%) 41.5 45.4 43.0 44.0
EBITDA (on net) (%) 66.0 68.1 66.8 67.8
EBIT (on gross) (%) 23.0 26.3 24.5 25.8
EBIT (on net) (%) 36.6 39.5 38.1 39.8
PAT (on gross) (%) 16.3 18.9 19.1 19.5
PAT (on net) (%) 25.9 28.4 29.6 30.1
Effective tax rate (%) 33.2 36.7 35.3 34.5
Key operating metrics
Consol revenue break-up (Rs mn)
Service revenues 17,271 18,419 18,854 2.4 9.2 18,911 (0.3)
Energy reimbursements 11,156 11,048 11,303 2.3 1.3 11,300 0.0
Gross revenues 28,427 29,467 30,157 2.3 6.1 30,211 (0.2)
Consolidated metrics
Total towers (#) 83,778 85,892 86,397 0.6 3.1 86,535 (0.2)
Total tenants (#) 170,320 182,294 185,215 1.6 8.7 187,838 (1.4)
Tenancy ratio (end-period) 2.03 2.12 2.14 1.0 5.4 2.17 (1.2)
Sharing revenue per tower (Rs/month) 68,886 71,828 72,955 1.6 5.9 72,845 0.2
Sharing revenue per operator (Rs/month) 34,113 34,011 34,201 0.6 0.3 33,559 1.9
Bharti Infratel - standalone
Total towers (#) 36,112 37,196 37,486 0.8 3.8 37,500 (0.0)
Total tenants (#) 70,544 75,819 77,292 1.9 9.6 78,000 (0.9)
Tenancy ratio (end-period) 1.95 2.04 2.06 1.2 5.5 2.08 (0.9)
Sharing revenue per tower (Rs/month) 72,159 74,382 75,270 1.2 4.3 75,678 (0.5)
Sharing revenue per operator (Rs/month) 37,204 36,630 36,714 0.2 (1.3) 36,750 (0.1)
Indus towers
Total towers (#) 113,490 115,942 116,454 0.4 2.6 116,750 (0.3)
Total tenants (#) 237,562 253,513 256,960 1.4 8.2 261,520 (1.7)
Tenancy ratio (end-period) 2.09 2.19 2.21 0.9 5.4 2.24 (1.5)
Sharing revenue per tower (Rs/month) 66,706 70,370 71,311 1.3 6.9 71,160 0.2
Sharing revenue per operator (Rs/month) 32,075 32,371 32,465 0.3 1.2 32,150 1.0
Change (%)
Bharti Infratel Telecom
KOTAK INSTITUTIONAL EQUITIES RESEARCH 5
Exhibit 2: BHIN – key operational metrics
Source: Company
Exhibit 3: BHIN – condensed cash-flow statement
Source: Company, Kotak Institutional Equities
Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15
Consolidated financial metrics (Rs mn)
Service revenues 16,084 16,218 16,552 16,936 17,271 17,583 17,988 18,419 18,854
Energy reimbursements 10,136 10,619 10,759 10,963 11,156 11,718 11,500 11,048 11,303
Gross revenues 26,220 26,837 27,311 27,899 28,427 29,301 29,488 29,467 30,157
EBITDA 10,463 10,729 11,283 11,526 11,790 12,151 12,731 13,369 12,971
EBIT 4,935 5,403 6,031 6,373 6,537 6,731 7,165 7,761 7,400
PBT 5,447 4,637 6,156 6,708 6,925 7,104 7,685 8,801 8,893
PAT 3,576 2,774 4,105 4,440 4,628 4,652 5,069 5,575 5,757
Total capex 3,062 2,906 3,669 5,631 4,798 4,601 5,758 5,651 5,037
Maintenance capex 1,028 899 983 1,161 1,491 1,243 1,065 1,317 1,426
Simple FCF 6,640 7,367 7,076 5,388 6,469 7,249 6,729 7,464 7,828
Adjusted funds from operations (AFFO) 8,674 9,374 9,762 9,858 9,776 10,607 11,422 11,798 11,439
Bharti Infratel - Standalone
Total towers (#) 35,288 35,376 35,515 35,905 36,112 36,381 36,747 37,196 37,486
Towers added 169 88 139 390 207 269 366 449 290
Total tenants (#) 64,345 65,391 66,871 69,137 70,544 72,597 74,331 75,819 77,292
Gross tenancy addition 823 1,046 1,480 2,266 1,407 2,053 1,734 1,488 1,473
Net tenancy addition 772 1,046 1,480 2,266 1,407 2,053 1,734 1,488 1,473
Tenancy ratio (end-period) 1.82 1.85 1.88 1.93 1.95 2.00 2.02 2.04 2.06
Sharing revenue per tower (Rs/month) 67,399 68,720 70,982 71,119 72,159 73,202 73,825 74,382 75,270
Sharing revenue per operator (Rs/month) 37,097 37,430 38,046 37,346 37,204 37,073 36,744 36,630 36,714
Indus towers
Total towers (#) 111,983 112,144 112,615 113,008 113,490 114,101 115,040 115,942 116,454
Towers added 164 161 471 393 482 611 939 902 512
Total tenants (#) 223,078 225,252 229,760 233,488 237,562 242,079 248,611 253,513 256,960
Gross tenancy addition 1,809 2,769 4,508 3,728 4,074 4,517 6,532 4,902 3,447
Net tenancy addition 1,567 2,174 4,508 3,728 4,074 4,517 6,532 4,902 3,447
Tenancy ratio (end-period) 1.99 2.01 2.04 2.07 2.09 2.12 2.16 2.19 2.21
Sharing revenue per tower (Rs/month) 63,717 63,283 63,745 66,001 66,706 67,554 68,802 70,370 71,311
Sharing revenue per operator (Rs/month) 32,075 31,636 31,488 32,145 32,075 32,055 32,129 32,371 32,465
1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16
EBITDA 10,463 10,759 11,298 11,598 11,851 12,201 12,761 13,295 13,021
- capex (3,062) (2,906) (3,669) (5,631) (4,798) (4,601) (5,758) (5,651) (5,037)
- revenue equalization (861) (600) (619) (606) (632) (407) (341) (261) (223)
+ rent equalization 100 114 66 27 48 56 67 81 67
Simple FCF 6,640 7,367 7,076 5,388 6,469 7,249 6,729 7,464 7,828
Change in NWC (453) 1,820 285 (492) 1,378 (861) 182 (2,049) 2,232
Taxes (152) (1,352) (1,076) (1,765) (1,647) (2,022) (2,361) (2,389) (1,751)
FCF 6,035 7,835 6,285 3,131 6,200 4,366 4,550 3,026 8,309
FCF/EBITDA (%) 57.7 72.8 55.6 27.0 52.3 35.8 35.7 22.8 63.8
Telecom Bharti Infratel
6 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Exhibit 4:BHIN – energy spread trends
Source: Company
Exhibit 5: BHIN Tower economics
Source: Company, Kotak Institutional Equities
Rs mn Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15
Energy reimbursements 10,136 10,619 10,759 10,963 11,156 11,718 11,500 11,048 11,303
Power and fuel costs (9,990) (10,407) (10,302) (9,921) (10,566) (11,009) (10,540) (9,835) (10,733)
Spread 146 212 457 1,042 590 709 960 1,213 570
Incremental energy spread (356) 66 245 585 (452) 119 251 253 (643)
Incremental EBITDA 414 266 554 243 264 361 580 638 (398)
Incremental spread as % of
incremental EBITDA(86.0) 24.8 44.2 240.7 (171.2) 33.0 43.3 39.7 161.6
Pure service (ex-energy) EBITDA
margin (%)64.1 64.8 65.4 61.9 64.8 65.1 65.4 66.0 65.8
Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15
Rs '000/tower
Revenue 319 326 330 336 340 349 348 345 350
Service revenues 196 197 200 204 207 209 212 215 219
Energy reimbursements 123 129 130 132 133 139 136 129 131
Overall costs (192) (195) (194) (197) (199) (204) (198) (188) (200)
Power and fuel expenses (122) (126) (125) (119) (126) (131) (124) (115) (125)
Rental cost (26) (27) (28) (27) (27) (28) (28) (29) (30)
Employee expenses (11) (11) (11) (11) (12) (12) (12) (12) (12)
Other expenses (33) (31) (31) (39) (34) (34) (33) (32) (33)
EBITDA 127 130 137 139 141 145 150 156 151
Depreciation (67) (65) (64) (62) (63) (64) (66) (66) (65)
Finance charges 6 (9) 2 4 5 4 6 12 17
PBT 66 56 74 81 83 85 91 103 103
PAT 44 34 50 53 55 55 60 65 67
Maintenance capex (13) (11) (12) (14) (18) (15) (13) (15) (17)
AFFO 106 114 118 119 117 126 135 138 133
Simple FCF 81 89 86 65 77 86 79 87 91
Bharti Infratel Telecom
KOTAK INSTITUTIONAL EQUITIES RESEARCH 7
Exhibit 6: Bharti Infratel - standalone interim financials, March fiscal year-ends (Rs mn)
Source: Company, Kotak Institutional Equities
Rs mn 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 QoQ YoY
Revenues 13,229 13,693 13,594 13,373 13,875 3.8 4.9
Costs
Power and fuel (5,000) (5,269) (5,010) (4,564) (5,012) 9.8 0.2
Rent (647) (683) (686) (715) (725) 1.4 12.1
Employee expenses (603) (598) (616) (627) (643) 2.6 6.6
Others (1,285) (1,309) (1,203) (1,134) (1,333) 17.5 3.7
Total (7,535) (7,859) (7,515) (7,040) (7,713) 9.6 2.4
EBITDA 5,694 5,834 6,079 6,333 6,162 (2.7) 8.2
Net revenues (ex power and fuel) 8,229 8,424 8,584 8,809 8,863 0.6 7.7
EBITDA margin (%, on gross) 43.0 42.6 44.7 47.4 44.4
EBITDA margin (%, on net) 69.2 69.3 70.8 71.9 69.5
D&A - net (2,736) (2,757) (2,851) (2,878) (2,864) (0.5) 4.7
EBIT 2,958 3,077 3,228 3,455 3,298 (4.5) 11.5
Net finance costs and other income 10,289 3,493 861 5,376 1,904 (64.6) (81.5)
PBT 13,247 6,570 4,089 8,831 5,202 (41.1) (60.7)
Provision for taxes (1,180) (1,298) (1,350) (1,657) (1,825) 10.1 54.7
PAT 12,067 5,272 2,739 7,174 3,377 (52.9) (72.0)
Exceptional items — —
Net income 12,067 5,272 2,739 7,174 3,377 (52.9) (72.0)
# of shares 1,889 1,890 1,891 1,894 1,896
EPS (Rs/share) 6.39 2.79 1.45 3.79 1.78 (53.0) (72.1)
Margins (%)
EBITDA (on gross) (%) 43.0 42.6 44.7 47.4 44.4
EBITDA (on net) (%) 69.2 69.3 70.8 71.9 69.5
EBIT (on gross) (%) 22.4 22.5 23.7 25.8 23.8
EBIT (on net) (%) 35.9 36.5 37.6 39.2 37.2
PAT (on gross) (%) 91.2 38.5 20.1 53.6 24.3
PAT (on net) (%) 146.6 62.6 31.9 81.4 38.1
Effective tax rate (%) 8.9 19.8 33.0 18.8 35.1
Change (%)
Telecom Bharti Infratel
8 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Exhibit 7: Indus Towers - interim financials, March fiscal year-ends (Rs mn)
Source: Company, Kotak Institutional Equities
Exhibit 8: Upgrade capex is a meaningful part of total capex
Source: Company, Kotak Institutional Equities
Rs mn 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 QoQ YoY
Revenues 36,200 37,176 37,843 38,319 38,767 1.2 7.1
Costs
Power and fuel (13,252) (13,667) (13,167) (12,550) (13,621) 8.5 2.8
Rent (3,829) (3,895) (4,057) (4,240) (4,360) 2.8 13.9
Employee expenses (881) (933) (917) (967) (890) (7.9) 1.1
Others (3,724) (3,640) (3,864) (3,810) (3,683) (3.3) (1.1)
Total (21,686) (22,136) (22,005) (21,567) (22,555) 4.6 4.0
EBITDA 14,514 15,040 15,838 16,752 16,212 (3.2) 11.7
Net revenues (ex power and fuel) 22,948 23,510 24,676 25,769 25,145 (2.4) 9.6
EBITDA margin (%, on gross) 40.1 40.5 41.9 43.7 41.8
EBITDA margin (%, on net) 63.2 64.0 64.2 65.0 64.5
D&A - net (5,993) (6,340) (6,464) (6,500) (6,445) (0.8) 7.5
EBIT 8,521 8,700 9,374 10,252 9,767 (4.7) 14.6
Net finance costs and other income (931) (1,017) (812) (312) (979) 213.7 5.1
PBT 7,590 7,683 8,562 9,940 8,788 (11.6) 15.8
Provision for taxes (2,660) (2,748) (3,014) (3,736) (3,121) (16.4) 17.4
PAT 4,931 4,936 5,548 6,205 5,667 (8.7) 14.9
Exceptional items — — — — —
Net income 4,931 4,936 5,548 6,205 5,667 (8.7) 14.9
# of shares 1,888 1,888 1,888 1,888 1,888
EPS (Rs/share) 2.61 2.61 2.94 3.29 3.00 (8.7) 14.9
Margins (%)
EBITDA (on gross) (%) 40.1 40.5 41.9 43.7 41.8
EBITDA (on net) (%) 63.2 64.0 64.2 65.0 64.5
EBIT (on gross) (%) 23.5 23.4 24.8 26.8 25.2
EBIT (on net) (%) 37.1 37.0 38.0 39.8 38.8
PAT (on gross) (%) 13.6 13.3 14.7 16.2 14.6
PAT (on net) (%) 21.5 21.0 22.5 24.1 22.5
Effective tax rate (%) 35.0 35.8 35.2 37.6 35.5
Change (%)
Rs mn 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16
Total Capex (Rs mn) 4,798 4,601 5,758 5,651 5,037
Of which, maintenance capex (Rs mn) 1,491 1,243 1,065 1,317 1,426
Implied 'growth' capex (Rs mn) 3,307 3,358 4,693 4,334 3,611
# of towers added (#) 409 526 761 828 505
Assumed capex per new tower (Rs mn) 3.00 3.00 3.00 3.00 3.00
Capex on new towers (Rs mn) 1,228 1,577 2,283 2,484 1,515
Implied 'upgrade capex' 2,079 1,781 2,410 1,850 2,096
Upgrade capex per upgrade tenancy (Rs mn) 0.67 0.45 0.54 0.52 0.72
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
Management commentary reassuring; concerns on Jio and spectrum valid, but overdone
In a detailed post-earnings call, Idea management (1) was candid about its disappointment on
slight deceleration in data revenue growth trajectory in 1QFY16, (2) took pains to explain the
drivers for the increase in capex guidance, (3) reiterated its higher-than-peers confidence on the
still substantial volume growth potential in the voice market, and (4) detailed the reasons for
the company’s confidence in its ability to participate strongly in the evolving solid hi-speed data
growth story. We have been believers in the Idea story for long and see no reasons to change
our stance, despite Street’s concerns on R-Jio launch and on Idea’s data spectrum footprint.
On concerns over R-Jio entry, we strongly believe that the medium to long-term interests of R-
Jio (assuming it wants a viable business case within a reasonable timeframe) are closely aligned
to that of the incumbents (Bharti, Vodafone, and Idea). As for spectrum footprint (weak data
worries), we do not concur with some sections of the Street who see this as a cause of concern.
Idea’s spectrum footprint has to be viewed in the context of the company’s skewed revenue
footprint (top-10 circles contribute 79% of revenues) and analysis has to be done circle-wise.
We believe Idea has its fair share of 3G/4G spectrum in circles that matter and future will
provide ample opportunities (auctions, spectrum trading as and when permitted) to shore up
spectrum footprint.
Idea has smartly executed its just-in-time investment approach (on spectrum and network) in
the past and proved naysayers wrong (remember the voice capacity crunch concerns of 2012?).
There is of course the risk of execution slippage. However, this is a risk that applies to
companies in all sectors; more importantly, if asked to pick one Indian telco from an execution
standpoint, we would have no second thoughts on picking Idea.
Broadly retain estimates; reiterate BUY
Exhibit 1 shows the key changes to our FY2016-18E forecasts for Idea. We have raised our
revenue and capex forecasts and broadly retained our EBITDA and PAT forecasts. Our DCF-
based target price on the stock (adjusted for one-time retrospective spectrum payout demand)
stays unchanged at `220/share. BUY rating and preferred pick status stays.
IDEA (IDEA) Telecom
Retain estimates and remain positive. Idea management’s commentary on 1QFY16
earnings call was reassuring on nearly all counts. The company remains the best bet on
improving fundamentals of the Indian wireless industry, in our view. We expect Idea to
garner its fair share of the expected data market growth, Street’s concerns on the
company’s data spectrum footprint notwithstanding. We broadly retain our forecasts
and reiterate BUY with an unchanged target price of `220/share.
BUY
JULY 23, 2015
RESULT
Coverage view: Cautious
Price (`): 179
Target price (`): 220
BSE-30: 28,505
IDEA
Stock data Forecasts/Valuations 2015 2016E 2017E
52-week range (Rs) (high,low) EPS (Rs) 8.8 9.1 6.3
Market Cap. (Rs bn) EPS growth (%) 48.6 3.6 (31.0)
Shareholding pattern (%) P/E (X) 20.3 19.6 28.4
Promoters 42.3 Sales (Rs bn) 315.7 363.3 415.8
FIIs 24.4 Net profits (Rs bn) 31.7 32.8 22.6
MFs 1.9 EBITDA (Rs bn) 107.9 133.3 155.8
Price performance (%) 1M 3M 12M EV/EBITDA (X) 9.9 8.1 7.0
Absolute 2.2 (3.8) 22.0 ROE (%) 16.0 13.4 8.5
Rel. to BSE-30 (0.6) (5.9) 11.4 Div. Yield (%) 0.4 0.6 0.9
Company data and valuation summary
204-138
644.2
Telecom IDEA
10 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Exhibit 1: Key changes to Idea earnings model, March fiscal year-ends, FY2016-18E (Rs mn)
Source: Kotak Institutional Equities estimates
Detailed takeaways from the earnings call
Idea’s management, as usual, was highly responsive in addressing analyst/investor queries. It
discussed at length the thought process behind recent decisions taken by them. Below are a
few key aspects discussed.
LTE rollout and increased capex: The management emphasized that Idea is and was an
ROI focused company and based on its observations in the past few months it saw a
business case in advancing LTE rollouts. It cited the rapid uptake of 4G devices,
convergence between prices of 3G and 4G equipment and increasing willingness of
consumers as key drivers for advancing LTE rollout.
Cannibalization of legacy voice and SMS revenue streams: The company said that it
was witnessing SMS cannibalization due to OTT applications. However, voice
cannibalization is insignificant and is expected to remain at the same level. The
management indicated that only about 0.1-0.2% of the total voice traffic were carried on
VoIP. It also pointed out that even in developed markets (offering limited bundled
services), only about 1.5-2.5% of traffic was on VoIP. We also do not see VoIP becoming
a meaningful threat to traditional voice at least in the near future.
Data revenue trajectory: The management indicated that data volume growth
trajectory was broadly intact and marginal slowdown in upward data revenue growth
was due to lower data realizations. This was majorly driven by the increase in service
charge to 14% (as the company found it difficult to pass these through), lowering
breakage, and increased uptake of promotional packs.
Loading vs. new site rollouts for 3G/4G network expansion: The company said 3G
sites would largely be co-located for the next few years and did not see the need for
more than 1-2% standalone 3G sites. 4G sites would be100% co-located for a few years.
VAS/other revenues: The management said the sharp uptick in VAS revenue trajectory
was mostly a one-off and driven by additional revenue from IPL-related VAS and gaming.
Increase in ICR revenue also contributed to an extent.
2016E 2017E 2018E 2016E 2017E 2018E 2016E 2017E 2018E
Consolidated
Revenues (Rs mn) 363,314 415,786 468,791 351,720 402,578 447,933 3.3 3.3 4.7
EBITDA (Rs mn) 133,292 155,788 178,015 131,624 154,768 175,898 1.3 0.7 1.2
EBIT (Rs mn) 66,255 69,425 81,775 65,239 69,480 82,088 1.6 (0.1) (0.4)
Net income (Rs mn) 32,830 22,639 29,718 33,813 23,286 29,907 (2.9) (2.8) (0.6)
EPS (Rs/share) 9.13 6.29 8.26 9.40 6.47 8.31 (2.9) (2.8) (0.6)
EBITDA margin (%) 36.7 37.5 38.0 37.4 38.4 39.3 -74 bps -98 bps -130 bps
Capex (Rs bn) 108 114 95 100 101 77 8.0 13.1 24.3
Ex-spectrum capex (Rs bn) 68 74 75 60 61 57 13.4 21.7 32.9
Wireless metrics
Volumes (bn min) 788 855 898 762 806 838 3.4 6.1 7.1
RPM (paise/min) 0.455 0.481 0.517 0.455 0.493 0.528 0.1 (2.5) (2.1)
ARPU (Rs/sub/month) 180 190 203 173 182 191 4.1 4.5 5.8
Revised Earlier Change (%)
IDEA Telecom
KOTAK INSTITUTIONAL EQUITIES RESEARCH 11
New circles: The management said that for any circle to be profitable Idea would need at
least 10% revenue market share which it has not been able to achieve in its new circles.
Moreover, there was up-fronting of investments in these circles in 2014 which led to
losses at the EBITDA level. It also mentioned that although it was gaining traction in
voice-centric markets like West Bengal, it was facing issues in some non-3G emerging
circles which are changing from voice-centricity to voice-data centricity.
Network infrastructure: The company said that it was deploying 2G BTS which are
capable of running two or more technologies at minimal incremental cost. On the fiber
side, it is increasing investments by increasing the number of fiber hops from 1 hop for 8
sites to 1 for 4 sites. It indicated that while about 13-14% of the total sites are fiberized,
in the next two years almost all 3G/4G sites would be fiberized. It also mentioned that the
current capacity utilization of data sites was in the range of 50-60%.
Exhibit 2: Idea Cellular's condensed financial statements, March year ends, 2013-2018E
Source: Company, Kotak Institutional Equities estimates
2013 2014E 2015E 2016E 2017E 2018E
Profit model (Rs mn)
Revenue 224,575 265,187 315,709 363,314 415,786 468,791
EBITDA 60,044 83,335 107,934 133,292 155,788 178,015
EBIT 25,266 38,141 54,898 66,255 69,425 81,775
Net interest income / (expense) (9,495) (7,700) (5,822) (15,747) (34,596) (36,054)
Tax (5,664) (10,764) (17,397) (17,678) (12,190) (16,002)
Recurring Net profit 10,107 19,676 31,679 32,830 22,639 29,718
Fully diluted EPS 3.05 5.93 8.81 9.13 6.29 8.26
Balance sheet (Rs mn)
Cash 11,709 4,036 130,804 21,974 14,053 39,865
Other current assets 51,660 51,324 67,061 79,837 91,876 105,145
Fixed assets 225,091 332,827 548,661 562,761 334,919 326,346
Other long term assets 75,320 77,387 142,261 169,258 424,723 432,467
Short tem debt 22,391 25,065 — — — —
Other current liabilities 69,110 75,823 86,769 103,300 118,876 136,045
Long term debt 118,047 181,284 552,711 452,711 452,711 452,711
Other long term liabilities 11,180 18,133 19,015 19,015 19,015 19,015
Shareholders funds (incl. minorities) 143,053 165,270 230,292 258,805 274,968 296,051
Free cash flow (Rs mn)
EBITDA 60,044 83,335 107,934 133,292 155,788 178,015
Change in working capital 92 7,049 (4,790) 3,755 3,538 3,900
Cash tax (paid) (3,864) (10,764) (17,397) (17,678) (12,190) (16,002)
Capex on PP&E and intangibles (49,131) (68,421) (347,675) (108,135) (113,985) (95,411)
Miscellaneous items 5,664 13,489 13,679 — — —
Free cash flow 12,804 24,688 (248,250) 11,234 33,151 70,501
Ratios (%)
Sales growth 14.9 18.1 19.1 15.1 14.4 12.7
EBITDA growth 17.9 38.8 29.5 23.5 16.9 14.3
EPS growth 39.6 94.4 48.6 3.6 (31.0) 31.3
FCF growth NM 92.8 (1,105.5) (104.5) 195.1 112.7
EBITDA margin 26.7 31.4 34.2 36.7 37.5 38.0
Net margin 4.5 7.4 10.0 9.0 5.4 6.3
RoAE 7.4 12.8 16.0 13.4 8.5 10.4
ROAE (excl. cash and int. income) 7.1 11.9 16.9 15.2 8.1 10.1
RoACE 6.9 8.9 10.9 9.5 9.6 11.1
ROACE (excl. cash and int. income) 6.9 8.9 11.1 10.0 9.7 11.3
Net debt/EBITDA (X) 2.1 2.4 3.9 3.2 2.8 2.3
Net debt/equity (X) 0.9 1.2 1.8 1.7 1.6 1.4
Total debt/capital (X) 1.0 1.2 2.4 — — —
Telecom IDEA
12 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Exhibit 3: Our Mar 2017 DCF-based fair value for Idea's core business is Rs229/share
Source: Kotak Institutional Equities estimates
Exhibit 4: Target price derivation for Idea
Source: Kotak Institutional Equities estimates
2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E
EBITDA 83.3 107.9 133.3 155.8 178.0 206.2 237.6 271.4 309.4 351.0 396.1 447.8 507.2
Tax (13.5) (19.5) (23.2) (24.3) (28.6) (35.9) (44.8) (54.9) (66.6) (78.4) (92.7) (109.3) (128.7)
Change in working capital 7.0 (4.8) 3.8 3.5 3.9 3.9 4.5 5.0 5.6 6.3 6.9 7.5 8.3
Post-tax operating cash flow 76.9 83.7 113.9 135.0 153.3 174.2 197.4 221.5 248.4 278.9 310.3 345.9 386.7
Capex (68.4) (347.7) (108.1) (114.0) (95.4) (75.1) (78.7) (149.5) (86.4) (92.0) (98.1) (104.8) (250.4)
Free cash flow 8.5 (264.0) 5.7 21.0 57.9 99.1 118.7 72.0 162.0 186.8 212.1 241.2 136.3
WACC and terminal growth assumptions
PV of cash flows 717.2 Calculation of weighted average cost of capital (WACC) 12.0
PV of terminal value 562.2 Equity/Capital (%) 55.0
EV 1,279.4
Net debt 438.7
Terminal year spectrum capex charge (17.8)
Equity value (Rs bn) 822.9
Equity value (US$ bn) 14.2
Shares outstanding (bn) 3.6
Equity value (Rs/Idea share) 229
Exit FCF multiple (X) 11.4
Exit EBITDA multiple (X) 4.6
Key assumptions (%)
Revenue growth 18.1 19.1 15.1 14.4 12.7 13.1 12.7 12.7 12.5 12.3 11.8 11.7 11.4
EBITDA growth 38.8 29.5 23.5 16.9 14.3 15.8 15.2 14.2 14.0 13.4 12.8 13.1 13.3
EBITDA margin 31.4 34.2 36.7 37.5 38.0 38.9 39.8 40.3 40.8 41.3 41.6 42.2 42.8
Capex/sales 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Effective tax rate 35.4 35.4 35.0 35.0 35.0 35.0 35.0 35.0 35.0 35.0 35.0 35.0 35.0
Rs/share
Core business value 229
Regulatory impact
One-time excess charge (6)
Target price 222
IDEA Telecom
KOTAK INSTITUTIONAL EQUITIES RESEARCH 13
Exhibit 5: Key assumptions driving Idea model, March fiscal year-ends, 2013-2018E
Source: Kotak Institutional Equities estimates
2013 2014 2015 2016E 2017E 2018E
Subscriber base ('000s) 121,607 135,788 157,808 174,008 186,008 195,608
Net adds per month ('000s) 740 1,182 1,835 1,350 1,000 800
Voice traffic (bn mins) 532 588 683 788 855 898
Change(%) 17.4 10.5 16.3 15.3 8.5 5.0
Voice RPM (Rs/min) 0.350 0.370 0.356 0.331 0.340 0.346
Change(%) (4.2) 5.8 (3.8) (7.0) 2.5 2.0
Overall RPM (Rs/min) 0.412 0.442 0.455 0.455 0.481 0.517
Change(%) (2.4) 7.3 2.9 0.1 5.6 7.5
Data revenues (Rs mn) 12,144 23,105 45,404 70,985 97,998 130,554
Change(%) 82.6 90.3 96.5 56.3 38.1 33.2
SMS & VAS revenues (Rs mn) 20,669 18,914 21,758 26,545 22,578 22,260
Change(%) 9.2 (8.5) 15.0 22.0 (14.9) (1.4)
ARPU (Rs/sub/month) 156 168 176 180 190 203
Change(%) (1.1) 7.9 4.9 2.1 5.6 6.5
MOU (min/sub/month) 378 381 388 396 396 392
Change(%) 1.3 0.6 1.9 2.0 0.0 (0.9)
EBITDA per minute (Rs/min) 0.101 0.126 0.143 0.154 0.166 0.181
Change(%) 1.3 24.5 13.5 8.1 7.7 8.9
Capex (Rs mn)
Standalone (ex-spectrum) 31,836 35,282 40,500 63,862 69,584 71,132
As % of revenues 14.1 13.3 12.8 17.6 16.7 15.2
Consolidated (including spectrum) 49,131 68,421 347,675 108,135 113,985 95,411
As % of revenues 21.9 25.8 110.1 29.8 27.4 20.4
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
Strong growth trajectory continues.
Bajaj Finance reported 30% growth in earnings to `2.75 bn, 2% ahead of estimates, on the back
of 35% growth in loan book (`355 bn). Calculated NIM was stable yoy. The benefit of recent
warrants and QIP issuance (June 2015) will be fully reflected in 2QFY16. Consumer finance loan
book (up 40% yoy) was the clear business driver; consumer business loans were up 25% yoy.
Investment returns support earnings; premium growth moderate at Bajaj General Insurance
Bajaj General Insurance reported 8% premium growth (12% yoy in 4QFY15) in net premium.
Underwriting profits remained low at `280 mn (17% yoy) and the majority of the earnings were
driven by investment book of `82 bn (up `4 bn qoq). The company reported PAT of `1.47 bn,
up 13% yoy.
Momentum picks up in line insurance
Bajaj Life reported 71% growth in new business premium. APE was up 22% yoy; gross premium
growth was driven by group business. Conservation ratio was stable at 69% yoy. The company
reported PAT of `2.4 bn after policyholders’ surplus of `990 mn was transferred to the
shareholders’ account; such transfer was not done in 1QFY15 and hence the 1QFY16 earnings
are not comparable with the historic figures.
Bajaj Finance add maximum value
We retain ADD rating on Bajaj Finserv with revised price target of `1,720 (up from `1,650).
Bajaj Finance (valued at 2.7X PBR FY2017E) is the largest contributor at 45% of SOTP- we
continue to believe in superior execution of Bajaj Finance and its ability to toggle across product
lines and innovate distribution channels. The life and general insurance businesses add 27%
and 26% respectively to the SOTP. We value the general insurance business at 2.6X PBR
FY2017E (medium-term RoE of 25%) and life insurance business at 1X EV (assuming 10% near-
term operating RoEV).
Bajaj Finserv (BJFIN) Banks/Financial Institutions
Bajaj Finance remains strong; Bajaj Life a tad better. Bajaj Finance continued to
deliver robust performance during 1QFY16 driven by buoyancy in consumer finance.
Bajaj Life Insurance reported 22% APE growth on the back of high momentum in unit
linked policies while Bajaj General Insurance had a muted quarter. We retain ADD
rating on the stock with a price target of `1,720 (`1,650 earlier).
ADD
JULY 23, 2015
RESULT
Coverage view: Attractive
Price (`): 1,677
Target price (`): 1,720
BSE-30: 28,505
QUICK NUMBERS
Bajaj Finance
reported 30%
earnings growth
Bajaj General
Insurance reported
8% growth in
premium
22% APE growth for
Bajaj Life
Bajaj Finserv
Stock data Forecasts/Valuations 2015 2016E 2017E
52-week range (Rs) (high,low) EPS (Rs) 106.3 121.5 139.5
Market Cap. (Rs bn) EPS growth (%) 10.3 14.3 14.8
Shareholding pattern (%) P/E (X) 15.8 13.8 12.0
Promoters 58.4 NII (Rs bn) 32.9 43.0 51.7
FIIs 7.2 Net profits (Rs bn) 24.2 28.4 32.8
MFs 5.0 BVPS 689.1 855.9 1,001.4
Price performance (%) 1M 3M 12M P/B (X) 2.4 2.0 1.7
Absolute 10.5 26.6 78.6 ROE (%) 16.7 15.7 15.0
Rel. to BSE-30 7.5 23.9 63.1 Div. Yield (%) 0.8 0.8 0.8
Company data and valuation summary
1,799-912
266.9
Bajaj Finserv Banks/Financial Institutions
KOTAK INSTITUTIONAL EQUITIES RESEARCH 15
Exhibit 1: Bajaj Finserv - consolidated earnings Profits of various group companies, 1QFY15- 1QFY16 (` mn)
Source: Company, Kotak Institutional Equities
Exhibit 2:Bajaj General Insurance - quarterly trends March fiscal year-end, 1QFY13 – 1QFY15 (` mn)
Source: Company, Kotak Institutional Equities
Exhibit 3: Bajaj Allianz Life Insurance - quarterly trends March fiscal year-end, 1QFY14 – 1QFY15 (` mn)
Source: Company, Kotak Institutional Equities
Exhibit 4: We value Bajaj Finserv at `1,720/ share Sum-of-the-parts-based valuation of Bajaj Finserv, March fiscal year-end, 2017E (`/share)
Source: Company, Kotak Institutional Equities estimates
1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 YoY (%)
Standalone 80 600 141 438 136 71
Bajaj Life 2,860 2,430 1,750 1,720 2,410 (16)
Policyholders surplus 1,710 1,400 760 1,010
Shareholders surplus 1,150 1,030 990 710 2,410 110
Bajaj General Insurance 1,300 1,450 1,430 1,440 1,470 13
Bajaj Finance 2,114 1,972 2,584 2,310 2,756 30
Consolidated PAT 3,190 3,159 3,470 7,071 4,669 46
Adj cons PAT (1) 4,392 4,136 3,955 7,749 4,669 6
1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 YoY (%)
Standalone 80 600 141 438 136 71
Bajaj Life 2,860 2,430 1,750 1,720 2,410 (16)
Policyholders surplus 1,710 1,400 760 1,010
Shareholders surplus 1,150 1,030 990 710 2,410 110
Bajaj General Insurance 1,300 1,450 1,430 1,440 1,470 13
Bajaj F inance 2,114 1,972 2,584 2,310 2,756 30
Consolidated PAT 3,190 3,159 3,470 7,071 4,669 46
Adj cons PAT (1) 4,392 4,136 3,955 7,749 4,669 6
Notes:
(1) The company trasferred surplus in policyholders account to shareholders account in 1QFY16; in the past,
this was done at the end of the year.
1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 YoY(%)
Gross business premium 7,960 14,010 14,420 23,790 10,820 36
New business premium 3,940 6,100 5,720 11,270 6,740 71
Non-single 1,865 4,130 4,115 4,912 NA
Single/ group 2,075 1,970 1,605 6,358 NA
Renewal premium 4,020 7,910 8,700 12,520 4,080 1
Conservation (%) 69 78 85 78 69 1
AUMs (Rs bn) 406 409 422 436 432 6
Value Value per share
(Rs mn) (Rs) Comments
Bajaj Allianz Life Insurance 109,659 74 458 1X EV
Bajaj Allianz General 106,146 74 443 2.7X PBR for 25% medium-term RoE
Bajaj Finance 237,900 58 782 2.7X PBR for 18-20% RoE
Net cash 6,000 100 38 1X cash
Total 1,722
Share
(%)
Banks/Financial Institutions Bajaj Finserv
16 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Bajaj Finance: Consumer business drives growth
Bajaj Finance delivered 30% yoy growth in PAT to `2.75 bn driven by 31% NII growth. Loan
book growth remained strong at 32% yoy, driven by loans to consumers (up 42% yoy) and
small businesses (up 32% yoy). NIM (calculated) was stable yoy at 10%. Gross NPLs were
higher at 1.7% as compared to 1.13% in 1QFY15 largely due to a shift to 150 dpd NPL
norm from 180 dpd earlier.
We expect Bajaj Finance to report 19-20% RoE and 28% PAT CAGR between FY2015 and
FY2018E, driven by 26% CAGR growth in loans; EPS growth will be lower at 25% post the
recent capital issuance.
We conservatively build NIM compression due to eventual shift to business loans though
consumer loans have been the key growth driver for the past few quarters. We expect
overall operating expenses to decline due to (1) higher share of business loans and (2)
increase in cross selling/ loans to existing borrowers. Fee income from distribution of
insurance products of the group and a wealth management vertical remain upsides.
Exhibit 5: Bajaj Finance - quarterly financial statements March fiscal year-ends, 1QFY15-1QFY16 (` mn)
Source: Company, Kotak Institutional Equities
Multiple segments drive loan growth
Growth momentum remained strong. Bajaj Finance reported 32% yoy growth in loans
under management to `356 bn, driven by strong growth in consumer loans (39% yoy) and
business loans (26% yoy). We factor loan growth at 30% in FY2016E, and 26% CAGR
between FY2016 and FY2018E. Focus on new segments and distribution channel which
improves profitability are key strengths of its business model - the trends during the quarter
reinforce this thesis. Over the medium term, the management envisages a loan mix of –
35% consumer, 45% small business, 7-10% rural and 13-10% commercial.
(% chg.)
1QFY16 1QFY16E 1QFY15 4QFY15 1QFY16E 1QFY15 4QFY15
Next 9
months
2016
Next 9
months
2015 (% chg.)
Operational income 15,716 15,320 11,801 13,531 (3) 33 16 52,009 39,398 32
Interest expenses 6,771 6,495 4,996 6,118 (4) 36 11 21,540 17,487 23
Net operational income 8,946 8,824 6,805 7,413 (1) 31 21 30,469 21,911 39
Provisions/ write-offs 1,033 1,150 829 1,137 11 25 (9) 4,339 3,016 44
Recovery commission 554 600 469 558 8 18 (1) 2,204 1,575 40
Net operational income (post provisions)7,359 7,074 5,507 5,718 (4) 34 29 23,926 17,320 38
Operating expenses 3,976 3,700 2,960 3,191 (7) 34 25 10,933 9,281 18
Other operational income 746 700 635 762 (6) 17 (2) 1,470 1,983 (26)
Other income 96 40 24 156 (58) 310 (38) 464 341 36
Profit before tax 4,224 4,114 3,206 3,445 (3) 32 23 14,927 10,363 44
Tax 1,468 1,399 1,092 1,136 (5) 34 29 5,043 3,498 44
Profit after tax 2,756 2,716 2,114 2,310 (1) 30 19 9,884 6,865 44
EPS (Rs) 55 54 43 46 (1) 30 19 182 137 33
Other operational data
AUM
Consumer finance 149 107 132 39 13
Small business loans 166 132 171 26 (3)
Commercial 35 29 17 19 99
Rural 5 1 3 587 57
Total AUMs 356 269 324 32 10
CAR (%) 20.7 18.0 18.0
Tier I (%) 17.4 15.2 14.5
Gross NPL(%) 1.7 1.1 1.5
Net NPLs (%) 0.6 0.3 0.5
NIM incl fees (KS - calc- %) 11.4 11.7 10.3
Cost to income (%) 46.8 46.6 45.8
RoAUM - annualised (%) 3.2 3.3 2.9
Bajaj Finserv Banks/Financial Institutions
KOTAK INSTITUTIONAL EQUITIES RESEARCH 17
High growth in consumer business. Bajaj Finance delivered 39% yoy and 13% qoq
loan growth in the consumer finance segment to `149 bn. Consumer durable finance
and personal loans have been the key drivers. Consumer durables had another quarter of
strong growth with disbursements (# accounts) up 31% yoy and loan growth of 48%
yoy. Promotion efforts and electronic goods sales driven by IPL and extended summer
helped keep the momentum. Personal loan growth was also very strong at 73% yoy with
higher contribution (57%) coming from D2C channel. Digital and lifestyle finance
business grew strongly 2.5X from a low base. The company has around 20% market
share in consumer durable loans. As for the digital loan portfolio (i.e. mobile phone
financing), it is the largest lender for Apple phones and higher-ticket Samsung phones.
Auto and infra finance remain sluggish. Two-wheeler and three-wheeler loans
declined 8% yoy on the back of slowing sales and lower penetration of Bajaj Auto in
2W/3W market. Infra segment continues to be weak with 10% yoy decline.
LAP: Slowing down; concerns on loans against plot. Bajaj Finance has been slowing
down in the LAP business, in line with recent trends; this segment delivered 13% loan
growth - significantly lower than 32% AUM growth. Bajaj Finance was one of the early
entrants in this segment. With rising competition and declining profitability, the company
is now smartly slowing down. Management highlighted that within LAP, loans against
plot had high delinquency and they have already ceased new disbursements in this
segment. There is an effort to increase the share of direct originations (as compared to
distributors) as the churn rates tend to be much lower along with lower cost of
acquisition. Home loan growth was strong at 26% on a low base.
Rural business grows from a low base. Rural lending business was in the pilot stage till
3QFY15 and scaled up in 4QFY15. 1QFY16 loan growth was over 50% qoq.
Management expects the share of this segment to increase to 6% over the next three
years from 1% currently. 15 new branches were opened across Karnataka, Gujarat and
Maharashtra. The focus here is on the affluent rural customers by offering them working
capital and LAP products.
Ecommerce financing tie-up with Flipkart. Bajaj Finance launched a ‘seller finance’
venture with Flipkart last quarter and with disbursement of `39.6 mn. Bajaj will also
launch a ‘consumer finance’ scheme with select ecommerce companies in the Jul-Sep
quarter.
NIM declines 180bps qoq due to seasonality; stable yoy
Bajaj Finance’s NIM (calculated) improved ~120bps qoq to 10.0% which is explained by
seasonally higher NIM in the first and third quarters during which income is booked upfront,
thus inflating margins. NIM was flat yoy.
NPLs slightly up qoq
Gross NPLs increased 18 bps qoq and 52 bps yoy to 1.7%. Marginally higher NPLs were due
to reporting change from 180 days-past-due (dpd) to 150 dpd. Provision expenses grew
25% yoy to `1.0 bn during the quarter but this is ‘business-as-usual’ and does not reflect
change in NPL recognition policy. Provision coverage ratio stood at 68%.
Banks/Financial Institutions Bajaj Finserv
18 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Exhibit 6: Bajaj Finance - Change in estimates March fiscal year-ends, 2016-17E (` mn)
Source: Company, Kotak Institutional Equities estimates
Old versus new (%)
2016E 2017E 2018E 2016E 2017E 2018E 2016E 2017E 2018E
Net interest income 41,631 50,317 61,488 40,151 49,069 59,453 4 3 3
Loan growth (%) 30 24 24 28 24 24
NIM (%) 11.4 10.9 10.7 11.1 10.8 10.5
NPL provisions 5,372 6,352 7,905 5,332 6,270 7,807 1 1 1
Operating expenses 17,668 21,531 25,823 17,668 21,531 25,823 - - -
Employee 5,859 7,441 9,301 5,859 7,441 9,301 - - -
Others 11,809 14,090 16,522 11,809 14,090 16,522 - - -
PBT 19,151 23,072 28,400 17,711 21,905 26,463 8 5 7
Tax 6,511 7,844 9,656 6,022 7,448 8,998 8 5 7
PAT 12,640 15,227 18,744 11,689 14,457 17,466 8 5 7
Old estimatesNew estimates
Bajaj Finserv Banks/Financial Institutions
KOTAK INSTITUTIONAL EQUITIES RESEARCH 19
Exhibit 7: Bajaj Finance – key growth rates and ratios March fiscal year-ends, 2013-18E (%)
Source: Company, Kotak Institutional Equities estimates
2013 2014 2015 2016E 2017E 2018E
Income statement growth (%)
Total interest income 43.0 30.3 33.5 30.0 22.4 23.5
Total interest expense 61.6 30.5 42.9 25.9 24.6 25.3
Net interest income 33.2 30.3 27.5 32.9 20.9 22.2
Loan loss provisions 17.8 41.8 103.0 2.6 18.2 24.5
Income post provisions 35.1 29.0 24.9 31.9 21.3 21.9
Net pre-prov income 33.6 31.2 26.8 33.1 20.8 21.9
Operating expenses 27.4 35.1 24.1 23.7 21.9 19.9
Employee expenses 28.8 39.0 32.2 30.0 27.0 25.0
Other Expenditure 23.9 29.8 20.3 20.0 20.0 20.0
Balance sheet growth (%)
Net loans 33.6 37.4 34.7 29.6 23.6 23.7
Investments (4.0) 436.3 1,077.6 10.0 11.0 11.0
Current Assets 247.1 (15.6) (35.1) 5.4 6.4 7.3
Net fixed assets 27.0 24.8 13.3 5.0 5.0 5.0
Total assets 43.2 33.0 33.3 28.4 23.8 23.8
Total borrowings 53.1 43.0 34.2 24.8 24.8 25.6
Shareholders funds 65.6 18.5 20.3 54.2 22.0 18.1
Asset management measures (%)
Yield on assets 21.3 20.3 19.9 19.5 18.9 18.7
Yield on loans 20.1 19.2 18.9 18.8 18.2 18.1
Average cost of funds 10.4 9.2 9.5 9.3 9.3 9.3
Difference 11.0 11.1 10.3 10.2 9.6 9.4
Net interest income/earning assets 12.8 12.0 11.3 11.4 10.9 10.7
Tax rate 33.0 33.0 34.0 34.0 34.0 34.0
Profitability measures (%)
Interest income/total income 99.1 98.3 98.9 98.7 98.7 99.0
Operating expenses/NII 44.7 46.0 45.1 41.9 42.3 41.6
Operating expenses/assets 5.4 5.3 5.0 4.7 4.6 4.4
Credit cost/average loans 1.3 1.3 1.4 1.5 1.4 1.4
Payout ratio 12.6 11.2 10.0 11.0 11.0 11.0
Equity/assets (EoY) 18.2 16.2 14.6 17.6 17.3 16.5
Debt equity ratio (X) 4.2 5.0 5.6 4.6 4.7 5.0
Du Pont analysis
% of average assets
Net interest income 12.0 11.4 10.9 11.1 10.7 10.5
Adj. net interest income 12.0 11.4 10.9 11.1 10.7 10.5
Loan loss provisions 1.2 1.2 1.3 1.4 1.3 1.4
Operating expenses 5.4 5.3 5.0 4.7 4.6 4.4
(1- tax rate) 67.8 65.9 66.2 66.0 66.0 66.0
RoA 3.8 3.3 3.1 3.4 3.2 3.2
Average assets/average equity 5.8 5.9 6.5 6.1 5.7 5.9
RoE 21.9 19.5 20.4 20.7 18.5 19.0
Banks/Financial Institutions Bajaj Finserv
20 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Exhibit 8: Bajaj Finance – income statement and balance sheet March fiscal year-ends, 2013-2018E (` mn)
Source: Company, Kotak Institutional Equities estimates
2013 2014 2015 2016E 2017E 2018E
Income statement
Total interest income 30,931 40,315 53,817 69,941 85,583 105,668
Total interest expense 12,059 15,732 22,483 28,310 35,266 44,180
Net interest income 18,872 24,582 31,334 41,631 50,317 61,488
Provisions and write/off 1,818 2,578 3,845 5,372 6,352 7,905
Net interest income (after prov.) 17,054 22,004 27,489 36,259 43,965 53,583
Net income pre loan loss provision 19,049 25,001 31,698 42,191 50,955 62,128
Operating expenses 8,523 11,511 14,285 17,668 21,531 25,823
Employee expense 2,451 3,408 4,507 5,859 7,441 9,301
Other expenditure 4,725 6,133 7,378 8,854 10,624 12,749
Pretax income 8,708 10,912 13,568 19,151 23,072 28,400
Tax provisions 2,803 3,722 4,591 6,511 7,844 9,656
Net Profit 5,905 7,191 8,977 12,640 15,227 18,744
Dividends 747 802 900 1,390 1,675 2,062
Dividend tax 127 136 153 236 285 351
Adj. shares outstanding (mn) 50 50 50 53 54 54
EPS (Rs) 119 145 180 237 281 346
BPS (Rs) 677 802 960 1,389 1,666 1,967
Balance sheet
Net loans 167,434 229,710 312,000 404,203 503,181 626,168
Investments 53 282 3,322 3,654 4,056 4,502
Current Assets 14,930 12,598 8,177 8,616 9,170 9,839
Deferred tax assets 904 1,392 2,122 2,122 2,122 2,122
Net fixed assets 1,762 2,199 2,491 2,616 2,746 2,884
Total assets 185,082 246,180 328,112 421,211 521,275 645,515
Liabilities
Total borrowings 140,857 201,374 270,218 337,303 421,100 529,008
Current liabilities 8,981 2,533 7,533 7,533 7,533 7,533
Provisions 1,575 2,365 2,365 2,365 2,365 2,365
Total liabilities 151,413 206,271 280,115 347,201 430,997 538,906
Share capital 497 498 500 533 542 542
Reserves 33,173 39,411 47,497 73,477 89,736 106,067
Shareholders funds 33,670 39,909 47,997 74,010 90,278 106,609
Bajaj Finserv Banks/Financial Institutions
KOTAK INSTITUTIONAL EQUITIES RESEARCH 21
Exhibit 9: Low RoEV for Bajaj Allianz Life RoEV movement, March fiscal year-ends, 2015-2018E (Rs bn)
Source: Company, Kotak Institutional Equities estimates
Exhibit 10: We expect Bajaj Life to deliver pre-overrun margin of 18% NBAP margins, March fiscal year-ends, 2015-2018E (Rs bn)
Source: Company, Kotak Institutional Equities estimates
Exhibit 11: Bajaj Finserv - key financial ratios and growth rates March fiscal year-ends, 2013-2018E (%)
Source: Company, Kotak Institutional Equities estimates
2015 2016E 2017E 2018E Comments
Opening Embedded value (EV) 76.0 93.0 100.5 109.2
Methodology changes 0.7 0.5 0.5 0.5 Better-than-expected mortality experience
Assumption change
NBV (before over-run) 1.8 2.0 2.3 2.7 Individual business and group business
Acquisition expense overrun (2.6) (2.0) (1.8) (0.5) We expect expense overruns to remain high
Expected return in force 5.5 7.0 7.5 8.2 Unwinding at 7.5%
Operating variance 1.0 Better-than-expected renewal business experience
Tax changes 0.0
Investment varinace 10.6 We don’t factor any investment variance
Dividend payout 0.0 We don't factor any dividend payout
Closing EV 93 101 109 120
EVOP 6 8 9 11
RoEV (%) 22 8 9 10
Operating RoEV (%) 8 8 9 10
2015 2016E 2017E 2018E Comments
APE 9.9 11.3 13.0 15.0 We assume 15% APE growth
NBV 1.8 2.0 2.3 2.7
NBAP margins pre overrun (%) 18.1 18.0 18.0 18.0
NBV post overrun (0.8) 0.0 0.6 2.2
NBAP margins post overrun (%) (8.3) 0.4 4.6 14.7 Post over-run margin at 15%
2013 2014 2015 2016E 2017E 2018E
Growth in key parameters (%)
Total income 32 14 14 17 18 18
Premium (1) (6) 6 17 19 19
Investment income 530 53 13 6 13 14
Expenses 35 16 14 16 19 19
PBT 22 3 15 21 15 17
PAT (post minority interest) 20 (7) 10 14 15 15
PBT before surrender premium 34 - - - - -
EPS 9 (7) 10 14 15 15
Loan book 36 37 36 30 24 24
Investments 3 (1) 35 15 15 12
Total assets 13 12 11 15 15 15
Policyholders funds (7) (1) 2 4 7 11
Shareholders funds 55 19 18 24 17 (2)
Key ratios (%)
PBT margin 17 16 16 16 16 16
Debt-equity (X) 1.8 2.2 2.5 2.5 2.6 3.4
RoA 3.6 3.1 3.1 3.2 3.2 3.2
RoE 25.6 17.9 16.7 15.7 15.0 16.2
Banks/Financial Institutions Bajaj Finserv
22 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Exhibit 12: Bajaj Finserv - consolidated P&L and Balance Sheet March fiscal year-ends, 2013-2018E (` mn)
Source: Company, Kotak Institutional Equities estimates
2013 2014 2015 2016E 2017E 2018E
Profit and loss (Rs mn)
Total income 171,035 195,266 222,738 259,764 307,019 363,116
Interest income 31,968 41,393 55,419 71,341 87,015 105,668
Bajaj Finance 30,931 40,315 53,817 69,941 85,583 105,668
Others 1,037 1,079 1,602 1,400 1,432 -
Insurance premium 98,168 92,683 98,487 115,538 137,636 164,033
Investment income 39,397 60,399 68,018 72,160 81,643 93,114
Other income 1,502 791 814 725 725 300
Expenses 141,534 164,766 187,665 217,281 258,012 305,887
Interest expenses 12,059 15,732 22,483 28,310 35,266 44,180
Provisions 1,818 2,578 3,845 5,372 6,352 7,905
Operating expenses 32,993 35,262 39,567 46,962 56,063 66,162
Commission expenses 3,795 2,834 3,264 4,677 5,543 6,607
Depreciation 13 13 25 40 40 -
Benefits paid 114,249 110,071 112,034 117,974 128,416 141,234
Change in reserve (23,393) (1,725) 6,446 13,946 26,333 39,799
PBT 29,501 30,501 35,073 42,484 49,007 57,228
Tax 6,613 8,562 10,827 14,067 16,211 18,887
PAT 22,888 21,938 24,245 28,417 32,796 38,341
Minority interest 6,472 6,603 7,328 9,076 10,597 12,759
PAT post minority interest 16,416 15,336 16,918 19,341 22,199 25,582
Shares (mn) 159 159 159 159 159 159
EPS (Rs) 103.2 96.4 106.3 121.5 139.5 160.8
BVPS (Rs) 490 585 689 856 1001 985
Balance sheet
Fixed assets 8,825 9,846 10,795 11,579 12,473 12,857
Loan book 167,434 229,710 312,000 404,203 503,181 626,168
Investments 470,347 464,529 627,140 719,176 828,621 930,864
Other current assets 23,061 43,104 (118,035) (176,509) (237,335) (301,711)
Total assets 669,667 747,189 831,900 958,449 1,106,940 1,268,178
Borrowings 140,857 201,374 270,218 337,303 421,100 529,008
Policyholders funds 333,194 331,469 337,915 351,861 378,194 417,993
Funds for future appropriation 13,175 1,839 19,228 23,084 27,770 33,420
Other liabilities 76,136 83,976 58,282 55,282 55,282 54,486
Total liabilities 563,361 618,658 685,643 767,531 882,346 1,034,907
Shareholders funds 78,014 93,115 109,646 136,190 159,341 156,713
Equity capital 7,956 7,956 7,956 7,956 7,956 7,956
Reserves 70,058 85,159 101,690 128,234 151,385 148,757
Minority interest 28,317 35,415 42,250 54,728 65,253 76,557
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
Weak headline numbers alone do not fully reflect underlying operating challenges
JSW Energy’s consolidated earnings declined 15% yoy to `2.7 bn, not fully reflecting the extent
of underlying weakness as earnings were boosted by `432 mn of non-recurring accruals
pertaining to settlement of tariffs for the transmission business. Adjusted for the non-recurring
accruals (`432 mn) and adjusting the base for earnings contribution from banked energy,
adjusted profit of `2.4 bn was down 20% yoy. Weakness in earnings was on account of (1)
11% yoy decline in net generation at 4.5 BU, (2) drop in blended realizations by 1% yoy to
`4.18/kwh, and (3) losses of `210 mn attributable to the joint venture with Toshiba for power
equipment manufacture. Impact on earnings was cushioned by (1) decline in blended fuel cost
by 7% yoy to `2.17/kwh, and (2) higher other income of `1 bn (compared to `750 mn factored
by us).
Demand moderation yields lower PLFs pressures merchant realizations
The lowered energy deficit across regions yielded a 17% yoy decline in adjusted standalone net
profits at `1.7 bn. Earnings weakness reflects (1) 10% yoy decline in net generation at 3 BU,
and (2) blended realizations at `4.2/kwh (-5% yoy). We note that reported earnings for the
preceding quarter include the sale of banked energy that contributed `2.2 bn to the revenues
and `330 mn of EBITDA. Management attributed the lower generation to (1) weakness in
demand, and (2) shut-down of 300 MW plant at Ratnagiri. We expect the weakness in
generation to continue in the coming quarter owing to lower demand in the monsoon season
as well as shut-down of 300 MW capacity at Vijaynagar for a large part of 2QFY16.
Maintain SELL rating—leverage, equity dilution may weigh even as positives are priced in
We see limited upside from likely moderation in prices of imported coal from hereon, even as
the risk of lower merchant realizations in South India could weigh on blended realizations of
standalone operations. Incremental equity raising and stabilization of potential coal-based
power capacities coupled with risk of yet-to-be finalized tariff order for Barmer could further
weigh on stock performance. Our estimates do not factor the earnings from hydro assets that
could contribute Rs0.4/share. Maintain SELL rating with target price of Rs81/share.
JSW Energy (JSW) Utilities
Demand weakness comes to the fore. JSW Energy reported weak earnings with
adjusted net income of `2.4 bn reflecting 20% yoy decline compared to the same
period last year. Weak earnings performance was led by 11% yoy decline in generation,
even as some moderation in fuel cost was off-set by continued benefit of declining fuel
cost. Demand environment for operational merchant capacities appears challenging,
even as acquisition of hydro assets could necessitate incremental capital raising.
Maintain SELL rating and target price of `81/share.
SELL
JULY 23, 2015
RESULT
Coverage view: Attractive
Price (`): 99
Target price (`): 81
BSE-30: 28,505
JSW Energy
Stock data Forecasts/Valuations 2015 2016E 2017E
52-week range (Rs) (high,low) EPS (Rs) 8.4 10.9 11.1
Market Cap. (Rs bn) EPS growth (%) 22.2 29.5 1.6
Shareholding pattern (%) P/E (X) 11.7 9.1 8.9
Promoters 75.0 Sales (Rs bn) 92.4 91.4 88.6
FIIs 8.5 Net profits (Rs bn) 13.8 17.9 18.2
MFs 0.7 EBITDA (Rs bn) 34.8 38.6 36.1
Price performance (%) 1M 3M 12M EV/EBITDA (X) 6.8 5.4 5.1
Absolute (3.8) (14.0) 21.9 ROE (%) 19.6 21.3 17.8
Rel. to BSE-30 (6.4) (15.9) 11.3 Div. Yield (%) 0.0 0.0 0.0
Company data and valuation summary
126-64
162.2
Utilities JSW Energy
24 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Monnet—project cost, negative bid in coal auction may weigh on valuations
JSW Energy has entered into a non-binding memorandum of understanding to acquire
1,050 MW of coal-based capacity belonging to Monnet Ispat and Energy. Monnet Power
had up to March 2014 incurred capex of `49 bn against a debt of `40 bn and an estimated
project cost of `71 bn. Monnet has PPAs in place and also won a coal block in the recently
concluded coal block auction.
MPC won the coal block Utkal C at a negative bid of `770/ton to fuel its power plant. Utkal
C (in proximity to the plant) has a production capacity of 3.4 mtpa and reserves of 124 mn
which if ramped up could well take care of the needs of the power plant. We highlight
however, that extant PPAs may not make the negative bid in the coal auction a viable option
for the coal plant and the consideration to be paid by JSW Energy should be seen in the
context of the negative spread on coal auction.
JPVL—hydro asset acquisition an interest-rate arbitrage for annuity cash flows
JSW Energy has agreed to acquire the hydro assets of Jaiprakash Power Ventures
aggregating 1,391 MW for an enterprise value of `97 bn—comprising debt of Rs58 bn and
equity value of `39 bn compared to KIE estimate of `37 bn. We note that of the debt of
`58 bn, regulated debt is `45 bn with debtor’s securitization accounting for the balance `13
bn. JSW Energy is looking to fund the acquisition by incremental borrowing of `39 bn at the
parent entity that will also bring with it the additional tax shield on interest cost for
acquisition debt.
JSW Energy will likely accrue incremental profits of `0.6 bn (`0.4/share) as it looks to enjoy
the arbitrage between a 20% regulated return project (13% RoE on premium paid), funded
by acquisition cost post-tax interest cost of 9%.
The two hydro projects have a regulated equity of `26 bn and regulated debt of `45 bn,
implying that the current consideration paid for the asset reflects a P/B multiple of 1.7X.
While we concede that the acquired assets enjoy a superior return profile, with RoE in excess
of 20% owing to a higher base return (16-16.5%) and lucrative incentives, part of the cash
flows have already been securitized.
JSW Energy Utilities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 25
Exhibit 1:Headline revenue decline was impacted by lower generation as well as sale of banked energy during the same period last year Interim results for JSW Energy (Consolidated), March fiscal year-ends (Rs mn)
Source: Company, Kotak Institutional Equities estimates
Exhibit 2:Standalone earnings were impacted by lower generation during the quarter owing to weak demand Interim results for JSW Energy (Standalone), March fiscal year-ends (Rs mn)
Source: Company, Kotak Institutional Equities estimates
(% Chg.)
1QFY16 1QFY16E 1QFY15 4QFY15 1QFY16E 1QFY15 4QFY15 FY2016 FY2015 (% chg.)
Net sales 20,694 20,182 25,215 21,511 3 (18) (4) 91,418 92,359 (1)
Operating costs
Cost of fuel (9,739) (10,124) (11,748) (10,467) (44,837) (46,811)
Purchase of power (1,323) (1,306) (1,251) (537) (2,248) (2,248)
O&M (1,835) (1,760) (1,602) (1,981) (5,733) (6,588)
(Decrease)/increase in banking energy — — (1,921) — 0 (1,921)
EBITDA 7,797 6,992 8,694 8,527 12 (10) (9) 38,599 34,792 11
EBITDA margin (%) 38 35 34 40 42 38
Other income 1,067 752 787 683 3,622 3,743
Interest & finance charges (2,640) (2,746) (2,931) (2,713) (10,502) (11,375)
Depreciation (1,984) (1,998) (1,948) (1,962) (7,898) (7,898)
PBT 4,239 3,000 4,601 4,534 41 (8) (7) 23,822 19,263 24
Provision for tax (net) (1,155) (750) (1,248) (1,269) (5,844) (5,150)
Net profit before minority interest 3,084 2,250 3,353 3,265 37 (8) (6) 17,978 14,113 27
Minority interest/share in profit of associates (310) — (99) (13) (63) (276)
Net profit 2,775 2,250 3,255 3,252 23 (15) (15) 17,915 13,837 29
Extraordinary — — — — - (342)
EBITDA margin (%) 38 35 34 40 42 38
Tax rate (%) 27 25 27 28 25 27
Key operating parameters
Net generation (mn units) 4,480 4,452 5,007 4,698 1 (11) (5) 20,938 20,308 3
Average realization (Rs/kwh) 4.18 4.25 4.21 4.37 (2) (1) (4) 4.32 4.23 2
Fuel cost (Rs/kwh) 2.17 2.27 2.35 2.23 (4) (7) (2) 2.14 2.31 (7)
O&M (Rs/kwh) 0.41 0.40 0.32 0.42 4 28 (3) 0.27 0.32 (16)
Contribution (Rs/kwh) 1.60 1.58 1.54 1.72 1 3 (7) 1.91 1.60 19
(% Chg.)
1QFY16 1QFY15 4QFY15 1QFY15 4QFY15 FY2016 FY2015 (% chg.)
Net sales 12,492 16,909 13,817 (26) (10) 59,948 61,899 (3)
Operating costs
Fuel costs (7,511) (9,251) (7,940) (33,711) (36,929)
O & M (988) (910) (1,070) (3,567) (3,444)
(Decrease)/increase in banking energy — (1,920) — — (1,920)
EBITDA 3,994 4,828 4,807 (17) (17) 22,670 19,607 16
EBITDA margin (%) 32 29 35 38 32
Other income 925 898 844 5,364 4,357
Interest & finance charges (1,364) (1,529) (1,396) (5,331) (5,856)
Depreciation (1,068) (1,030) (1,046) (4,208) (4,208)
PBT 2,487 3,168 3,210 (21) (23) 18,495 13,899 33
Provision for tax (net) (772) (781) (867) (4,177) (3,611)
Net profit 1,715 2,387 2,343 (28) (27) 14,318 10,288 39
Extraordinary — — — — (342)
EBITDA margin (%) 32 29 35 38 32
Tax rate (%) 31 25 27 23 26
Key operating parameters
Net generation (mn units) 2,979 3,320 3,059 (10) (3) 14,051 13,752 2.2
Average realization (Rs/kwh) 4.19 5.09 4.52 (18) (7) 4.27 4.50 (5.2)
Fuel cost (Rs/kwh) 2.52 2.79 2.60 (10) (3) 2.40 2.69 (10.7)
O&M (Rs/kwh) 0.33 0.27 0.35 21 (5) 0.25 0.25 1.4
Contribution (Rs/kwh) 1.34 2.03 1.57 (34) (15) 1.61 1.57 3.1
Utilities JSW Energy
26 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Exhibit 3: For every US$10/ton change in coal prices target price can change by Rs15/share Sensitivity of JSW SOTP to coal prices and merchant tariffs
Source: Kotak Institutional Equities estimates
Exhibit 4:Valuation of power project portfolio of JSW Energy
Source: Kotak Institutional Equities estimates
81 45 55 60 70 80
3.00 62 46 38 22 9
3.50 90 75 67 51 36
3.75 104 89 81 66 50
4.00 118 103 95 80 64
4.50 147 131 124 108 93
FOB Coal price of SA coal (US$/ton)
Merc
han
t
Tari
ff
(Rs/
kw
h)
Sensitivity of JSW SOTP to coal prices and merchant tariffs
Capacity Cost Ownership Value
Project Type (MW) (Rs bn) (Rs mn / MW) (%) (Rs bn)
JSWEL-SBU I Thermal 260 11 42 100 11
JSWEL-SBU II Thermal 600 19 31 100 19
Barmer I Thermal 1,080 69 64 100 19
Ratnagiri I Thermal 1,200 57 47 100 47
Jaigadh Power Transco Transmission 6 34 74 2
Sum of power assets 3,140 161 51 97
Cash 36
Total 133
No. of shares (bn) 2
Value per share 81
JSW Energy Utilities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 27
Exhibit 5:Profit model, balance sheet, cash model of JSW Energy Ltd, March fiscal year ends, 2011-2018E (Rs mn)
Source: Company, Kotak Institutional Equities estimates
2011 2012 2013 2014 2015 2016E 2017E 2018E
Profit model
Net revenues 41,936 58,860 86,916 85,520 92,359 91,418 88,571 81,845
EBITDA 14,634 12,149 25,505 30,980 34,792 38,599 36,086 29,478
Other income 2,339 2,852 3,655 3,556 3,743 3,622 4,922 10,539
Interest (expense)/income (4,325) (7,172) (9,628) (12,059) (11,375) (10,502) (9,442) (8,381)
Depreciation (2,668) (5,033) (6,615) (8,100) (7,898) (7,898) (7,898) (7,898)
Pretax profits 9,980 2,796 12,917 14,377 19,263 23,822 23,669 23,738
Tax (1,839) (690) (2,439) (2,408) (4,121) (5,458) (4,948) (5,207)
Deferred taxation 276 271 (294) (428) (1,029) (386) (445) (703)
Minority interest 1 (6) (88) (217) (276) (63) (69) (75)
Net income 8,418 2,371 10,096 11,324 13,837 17,915 18,207 17,755
Extraordinary items — (1,613) (1,966) (3,777) (342) — — —
Reported profit 8,418 758 8,130 7,547 13,495 17,915 18,207 17,755
Earnings per share (Rs) 5.1 1.4 6.2 6.9 8.4 10.9 11.1 10.8
Balance sheet
Paid-up common stock 16,401 16,401 16,401 16,401 16,401 16,401 16,401 16,401
Total shareholders' equity 56,765 57,001 62,038 65,712 75,180 93,095 111,302 129,056
Deferred taxation liability 1,562 1,292 1,524 1,933 2,930 3,316 3,761 4,464
Minority interest 724 500 452 503 547 1,006 1,075 1,150
Total borrowings 96,376 99,947 103,766 101,065 92,941 82,998 72,979 63,164
Total liabilities and equity 155,427 158,739 167,780 169,212 171,598 180,415 189,117 197,834
Net fixed assets 64,214 109,450 138,969 136,241 131,810 123,913 116,015 108,117
Capital work-in progress 77,080 43,268 9,772 6,146 4,536 6,420 6,420 6,420
Investments 4,842 4,971 9,550 8,877 16,188 16,188 16,188 16,188
Goodwill 171 294 280 106 97 97 97 97
Cash 9,779 6,686 3,990 5,675 3,515 19,301 36,405 53,619
Net current assets (excl. cash) (659) (5,929) 5,219 12,168 15,452 14,496 13,991 13,392
Net current assets (incl. cash) 9,120 757 9,209 17,843 18,967 33,797 50,397 67,011
Total assets 155,427 158,739 167,780 169,212 171,598 180,415 189,117 197,834
Ratios
Net debt/equity (%) 150.6 162.2 159.7 144.1 118.1 67.7 32.5 7.3
Return on equity (%) 16.1 4.2 17.0 17.7 19.6 21.3 17.8 14.8
Book value per share (Rs) 35.6 35.5 38.8 41.2 47.6 58.8 70.2 81.4
ROCE (%) 7.2 2.0 7.7 8.3 10.7 13.3 12.6 11.9
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
Moderate growth in earnings
Muthoot Finance (Muthoot) reported PAT of `1.83 bn, up 2% yoy and 11% qoq. NII was flat
qoq as loan growth (up 4% qoq to Rs244 bn) offset 40bps NIM compression to 9.3%. Opex
ratio was down to 4.7% from 5.1% in 4QFY15 as Muthoot retained focus on cost reduction.
Gradual growth in loans; interim pressure on NIM
Muthoot Finance is making concerted efforts to market gold loans and exit from a transaction-
oriented approach followed earlier. The company recently launched gold loan products catering
to the middle class like home loan margin funding facility, gold overdraft facility etc. To push
the product to the middle-class, Muthoot dropped gold loan rates recently. While banks have
reduced base rates, the benefit was not fully passed on leading to NIM pressure (down 30 bps
to 9.3%). We expect pressure on NIM to be lower here on but nevertheless remain high.
Gold price reduction is a risk, Muthoot well placed
Shielded by currency depreciation, gold prices in India have corrected by 12% since Jan 2015;
30% from its peak as compared to 70% in global gold prices. Muthoot reported negligible NPL
throughout the transition, demonstrating the virtue of its risk management systems. Its loan
book declined by 21% from peak to a high base i.e. 80-100% yoy growth in the previous three
years. With a low base (yoy decline in last two years), we find limited impact as compared to the
previous down-cycle. Muthoot’s concerted efforts to market its products to the middle class will
reduce the impact, in our view. We factor 12% growth in gold loan book during FY2015 (as
compared to 10% over the past six months).
Improving trends ignored by the street; retain BUY
While volatile gold prices could hamper near-term growth trajectory, innovative product
marketing and gradual decline in lending will help offset this. Gold loan is a short term product
and hence growth acceleration is gradual and does not follow a linear pattern. Exhibit 2
highlights that loan and earnings growth reduced to 50-80% in FY2012 from over 100% in the
previous two years and gradually moved into negative trajectory in FY2014.
Muthoot Finance (MUTH) Banks/Financial Institutions
Growth on track, NIM weak. Muthoot’s loan growth remains on track (loan book up
4% qoq) as its marketing efforts yielded results. However, the company has reduced
lending rates ahead of base rate reduction by banks leading to pressure on NIM. We
remain positive of the gold loan opportunity in India; Muthoot’s concerted efforts to
grow the business will reduce the likely impact of decline in gold prices. We revise
estimates to factor lower near-term NIM. Retain BUY with price target of `250.
BUY
JULY 23, 2015
RESULT
Coverage view: Attractive
Price (`): 202
Target price (`): 250
BSE-30: 28,505
QUICK NUMBERS
Loan book up 4%
qoq and 14% yoy
PAT up 2% qoq
NIM down 30 bps
qoq
Muthoot Finance
Stock data Forecasts/Valuations 2015 2016E 2017E
52-week range (Rs) (high,low) EPS (Rs) 16.9 18.8 23.9
Market Cap. (Rs bn) EPS growth (%) (19.5) 11.3 27.3
Shareholding pattern (%) P/E (X) 12.0 10.7 8.4
Promoters 74.8 NII (Rs bn) 21.6 23.1 27.5
FIIs 11.1 Net profits (Rs bn) 6.7 7.5 9.5
MFs 5.2 BVPS 128.0 140.2 155.7
Price performance (%) 1M 3M 12M P/B (X) 1.6 1.4 1.3
Absolute 7.4 5.7 12.9 ROE (%) 14.3 14.0 16.2
Rel. to BSE-30 4.5 3.4 3.1 Div. Yield (%) 2.9 2.8 3.6
Company data and valuation summary
255-166
80.3
Muthoot Finance Banks/Financial Institutions
KOTAK INSTITUTIONAL EQUITIES RESEARCH 29
Exhibit 1: Muthoot Finance - quarterly financial statements March fiscal year-ends, 1QFY15- 1QFY16 (` mn)
Source: Company, Kotak Institutional Equities estimates
14% yoy loan growth
Muthoot reported 4% qoq growth in loan book (14% yoy growth) to `244 bn. Average
gold price was down 1% qoq, but in July alone prices corrected by 4.6%.
We factor loan book growth at 12% in FY2016E (10% in the past six months) which will
likely improve to 19% by FY2017-18E. Volatility in gold prices can hamper growth to some
extent. We think any pick-up in business momentum is likely to be sharp rather than gradual
and linear.
Exhibit 2: Business trending up YoY movement in NII, loan book and EPS, March fiscal year-ends, 2010-18E (%)
Source: Company, Kotak Institutional Equities estimates
(% chg.)
1QFY16 1QFY16E 1QFY15 4QFY15 1QFY16E 1QFY15 4QFY15 (% chg.) FY2016E
Income statement
Interest income 11,255 — 10,762 10,870 — 5 4 34,186 31,861 7 45,441
Interest expenses 5,669 — 5,354 5,332 — 6 6 16,681 15,709 6 22,350
Net interest income 5,586 5,789 5,407 5,538 (4) 3 1 17,505 16,152 8 23,091
Provisions (including
standard assets)105 100 80 216 5 31 (51) 250 292 (14) 355
NII post provisions 5,481 5,689 5,327 5,322 (4) 3 3 17,255 15,860 9 22,736
Other income 170 150 158 148 13 7 15 530 465 14 700
Operating expenses 2,815 3,000 2,756 2,897 (6) 2 (3) 9,229 8,777 5 12,044
Admin expenses 1,069 1,200 1,029 1,110 (11) 4 (4) 3,476 3,358 4 4,545
Employee expenses 1,606 1,600 1,523 1,578 0 5 2 5,075 4,781 6 6,681
Depreciation 140 200 203 210 (30) (31) (33) 678 638 6 818
PBT 2,836 2,839 2,730 2,572 (0) 4 10 8,557 7,549 13 11,392
Tax 1,003 994 928 921 1 8 9 2,927 2,645 11 3,930
PAT 1,833 1,845 1,802 1,652 (1) 2 11 5,629 4,903 15 7,462
EPS (Rs) 5 5 4 2 11 14 12 15 19
Key highlights
Total AUMs (Rs mn) 244,080 243,412 214,640 234,050 14 4
Average AUMs (Rs mn) 239,065 216,630 227,466 10 5
Borrowings (Rs mn) 204,800 186,270 194,640 10 5
Yield of loans (KS - %) 18.8 19.9 19.1
Borrowings cost (KS - %) 11.4 11.1 11.0
Spread (KS - %) 7.5 8.7 8.1
NIM (KS - %) 9.3 10.0 9.7
Opex/ average assets (%) 4.7 5.1 5.1
RoA (%) 3.1 3.3 2.9
RoE (%) 14.2 15.8 13.1
Asset quality
Gross NPL (Rs mn) 5,195 3,968 5,117 31 2
Net NPLs (Rs mn) 4,443 3,243 4,392 37 1
Gross NPLs (%) 2.1 1.9 2.2
Net NPLs (%) 1.8 1.5 1.9
Operational highlights
Branches (#) 4,242 4,271 4,245 (1) (0)
Gold (weight in tons) 138 116 131 19 5
Value of gold (Rs mn) 371,220 330,600 349,115 12 6
Employees (#) 22,785 24,140 22,882 (6) (0)
LTV (calc) 0.66 0.65 0.67
Loan per gram (Rs) 1,769 1,850 1,787 (4) (1)
Average gold loan per
branch (Rs mn)57 50 55 15 4
Next
9MFY16E
Next
9MFY15
2010 2011 2012 2013 2014 2015 2016E 2017E 2018E
Loan growth 120 113 55 5 (16) 7 12 19 19
NII growth 104 110 73 15 (10) (5) 7 19 18
EPS growth 133 108 52 13 (22) (20) 11 27 20
Banks/Financial Institutions Muthoot Finance
30 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Exhibit 3: Loan growth has been weak in the past; now picking up Quarterly data, 1QFY13-1QFY156
Source: Company, Kotak Institutional Equities
Exhibit 4: Gold prices have declined 9% CYTD and 6% July-to-date Domestic gold price (`/gm)
Source: Bloomberg, Kotak Institutional Equities
NIM declined ~40bps qoq
NIM increased 40bps qoq to 9.3% on a calculated basis. Calculated spreads were down
60bps to 7.5%. Decline in NIM and spreads have come from decline in interest rates without
benefit from lower cost of funds fully flowing through in this quarter.
We expect spreads to improve as borrowing costs moderate by ~10 bps in FY2016E.
Reduction in bank base rates will drive down borrowing cost hereon. Incremental
borrowings are low in the backdrop of moderate loan growth; as such lower marginal
borrowings cost has limited impact on average borrowings cost.
(10)
(6)
(2)
2
6
10
0
70
140
210
280
350
1Q
FY1
3
2Q
FY1
3
3Q
FY1
3
4Q
FY1
3
1Q
FY1
4
2Q
FY1
4
3Q
FY1
4
4Q
FY1
4
1Q
FY1
5
2Q
FY1
5
3Q
FY1
5
4Q
FY1
5
1Q
FY1
6
Loans (LHS) YoY growth (RHS)(Rs bn) (%)
-
500
1,000
1,500
2,000
2,500
3,000
3,500
Jul-1
0
Oct
-10
Jan
-11
Apr-
11
Jul-1
1
Oct
-11
Jan
-12
Apr-
12
Jul-1
2
Oct
-12
Jan
-13
Apr-
13
Jul-1
3
Oct
-13
Jan
-14
Apr-
14
Jul-1
4
Oct
-14
Jan
-15
Apr-
15
Jul-1
5
Muthoot Finance Banks/Financial Institutions
KOTAK INSTITUTIONAL EQUITIES RESEARCH 31
Exhibit 5: We forecast NIM to expand to 9.5% by FY2016-18E Yield on loans, cost of funds and NIMs, March fiscal year-ends, 2010-2017E (%)
Source: Company, Kotak Institutional Equities estimates
Operating expenses below estimates
Muthoot continues to deliver well on the cost front as total operating expenses raised only
2% yoy to `2.8 bn, 6% below our estimates. Both staff cost and admin expenses growth
were controlled at 4-5% yoy as there was marginal reduction in employee headcount and
number of branches qoq.
We factor cost-to-average assets ratio to decline to 4.2% in FY2016E (compared to 4.4% in
FY2015) as higher loan growth outpaces ~4% yoy increase expected in FY2016E. We factor
cost-to-average assets to further decline to 3.9% by FY2018E as business volumes increase.
Exhibit 6: Operating expenses to assets ratio expectedly peaked in FY2015 Operating expenses to average AUMs, March fiscal year-ends, 2010-18E
Source: Company, Kotak Institutional Equities
7
8
9
10
11
12
13
0
5
10
15
20
25
2010 2011 2012 2013 2014 2015 2016E 2017E 2018E
Yield on loans (LHS-%) Cost of borrowings (LHS-%) NIM (RHS-%)
3.0
3.4
3.8
4.2
4.6
5.0
-
0.5
1.0
1.5
2.0
2.5
2010 2011 2012 2013 2014 2015 2016E 2017E 2018E
Staff expenses (LHS) Non-staff expenses (LHS) Operating expenses (RHS)
Banks/Financial Institutions Muthoot Finance
32 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Asset quality stable
Muthoot’s gross NPLs were nearly flat at `5.2 bn, 2.1% of loans compared to 2.2% in
4QFY15. Muthoot’s provision expenses declined to `105 mn from `216 mn qoq. This was
driven by lower credit losses of `30 mn. The company maintained its provision coverage at
50bps.
Exhibit 7: Muthoot has been able to control its NPL during down-cycle Key performance metrics, March fiscal year-end, 2011-15 (%)
Source: Company, Kotak Institutional Equities
Exhibit 8: Muthoot is trading at 1.4X one-year forward book One-year forward trading PER and PBR, 2012-2015
Source: Company, Bloomberg, Kotak Institutional Equities estimates
Exhibit 9: Muthoot Finance – change in estimates New and old estimates, March fiscal year-ends, 2016-2018E (` mn)
Source: Kotak Institutional Equities estimates
2011 2012 2013 2014 2015
Gross NPLs (%) 0.3 0.6 2.0 1.9 2.2
Loans (Rs bn) 159 247 260 218 234
Growth 113 55 5 -16 7
-
0.5
1.0
1.5
2.0
2.5
0.0
2.8
5.6
8.4
11.2
14.0
Jul-1
2
Oct
-12
Jan
-13
Apr-
13
Jul-1
3
Oct
-13
Jan
-14
Apr-
14
Jul-1
4
Oct
-14
Jan
-15
Apr-
15
Jul-1
5
Rolling PER (X) (LHS) Rolling PBR (X) (RHS)
2016E 2017E 2018E 2016E 2017E 2018E 2016E 2017E 2018E
Loans under management 262,574 311,386 370,548 262,574 311,386 370,548 — — —
NIM (%) 9.3 9.6 9.5 9.9 10.1 10.0 — — —
Interest income 45,441 51,656 61,374 46,683 52,517 62,397 (3) (2) (2)
Interest expenses 22,350 24,157 28,867 22,112 23,587 28,149 1 2 3
Net Interest income 23,091 27,500 32,507 24,571 28,931 34,248 (6) (5) (5)
Provisions 355 488 576 355 488 576 — — —
Operating expenses 12,044 13,206 15,214 12,309 13,505 15,556 (2) (2) (2)
Profit before tax 11,392 14,505 17,416 12,607 15,638 18,816 (10) (7) (7)
Tax 3,930 5,004 6,009 4,350 5,395 6,491 (10) (7) (7)
Profit after tax 7,462 9,501 11,408 8,258 10,243 12,324 (10) (7) (7)
EPS (Rs) 19 24 29 21 26 31 (10) (7) (7)
BVPS (Rs) 140 156 174 142 158 178 (1) (2) (2)
New estimates Old estimates New vs old (%)
Muthoot Finance Banks/Financial Institutions
KOTAK INSTITUTIONAL EQUITIES RESEARCH 33
Exhibit 10: Muthoot Finance – key financial ratios and growth rates March fiscal year-ends, 2013-2018E (%)
Source: Company, Kotak Institutional Equities estimates
2013 2014 2015 2016E 2017E 2018E
Growth in key parameters (%)
Profit and loss statement - yoy (%)
Interest income 18 (9) (13) 7 14 19
Interest costs 21 (7) (20) 6 8 20
Net interest income 15 (10) (5) 7 19 18
Net total income 16 (9) (4) 7 19 18
Provisioning expenses 107 (50) (15) (4) 37 18
Net income (post provisions) 14 (8) (4) 7 18 18
Operating expneses 14 12 6 4 10 15
Staff expenses 30 9 7 6 13 14
Other operating expenses (4) 19 (1) 4 6 18
Depreciation expenses 38 5 77 (3) 7 6
PBT post extraordinaries 14 (21) (14) 11 27 20
Tax 15 (18) (14) 10 27 20
PAT 13 (22) (14) 11 27 20
Balance sheet - yoy (%)
Gold loans 22 (16) 7 12 19 19
Gold loans (incl sell down) 5 (16) 7 12 19 19
Fixed assets 13 8 (19) 29 7 6
Other current assets 76 11 (9) 22 14 15
Total assets 26 (13) 5 14 18 18
Borrowings 56 (18) (2) 17 19 20
Current liabilities (70) 5 51 (5) 20 20
Total liabilities 25 (16) 2 14 19 20
Share capital 0 0 7 0 0 0
Reserves and surplus 32 16 20 10 12 13
Shareholders funds 34 9 19 10 11 12
Key ratios (%)
Interest yield (incl loans sold down) 21.1 20.4 18.8 18.3 18.0 18.0
Interest cost (incl loan sold down) 13.2 11.9 10.7 10.6 9.7 9.7
Spreads 8 8 8 8 8 8
NII/ loans under management 10 9 10 9 10 10
Operating costs/ net income (post provisions) 38.9 47.6 52.9 51.4 47.7 46.6
Cash/ total assets + loan sold down 4.6 8.0 6.5 6.3 5.9 5.5
Tax rate 33.6 34.6 34.8 34.5 34.5 34.5
Debt/ equity (X) 6.1 4.7 3.8 4.1 4.4 4.7
Du Pont analysis
(% of average assets including loans sold down)
Net interest income 9.0 8.2 8.2 8.1 8.3 8.3
Other income 0.1 0.2 0.2 0.2 0.2 0.2
Credit costs 0.3 0.2 0.1 0.1 0.1 0.1
Operating expenses 3.4 3.9 4.4 4.2 4.0 3.9
PBT post extraordinaries 5.4 4.3 3.9 4.0 4.4 4.5
1-tax rate 0.7 0.7 0.7 0.7 0.7 0.7
RoA 3.6 2.8 2.6 2.6 2.9 2.9
Average assets / average equity (X) 8.2 6.7 5.6 5.4 5.6 6.0
RoE 29.3 19.0 14.3 14.0 16.2 17.4
Banks/Financial Institutions Muthoot Finance
34 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Exhibit 11: Muthoot Finance – income statement and balance sheet March fiscal year-ends, 2013-2018E (` mn)
Source: Company, Kotak Institutional Equities estimates
2013 2014 2015 2016E 2017E 2018E
Income statement (Rs mn)
Interest income 53,523 48,934 42,623 45,441 51,656 61,374
Interest costs 28,253 26,259 21,064 22,350 24,157 28,867
Net interest income 25,271 22,675 21,559 23,091 27,500 32,507
Other income 347 540 624 700 700 700
Net total income 25,618 23,215 22,183 23,791 28,200 33,207
Provisioning expenses 868 438 371 355 488 576
Net income (post provisions) 24,750 22,777 21,811 23,436 27,712 32,631
Operating expneses 9,638 10,841 11,533 12,044 13,206 15,214
Staff expenses 5,453 5,917 6,304 6,681 7,538 8,629
Other operating expenses 3,731 4,448 4,387 4,545 4,797 5,660
Depreciation expenses 454 476 841 818 872 926
PBT post extraordinaries 15,112 11,936 10,279 11,392 14,505 17,416
Tax 5,071 4,135 3,573 3,930 5,004 6,009
PAT 10,041 7,801 6,705 7,462 9,501 11,408
No of shares (mn) 372 372 397 397 397 397
EPS - adjusted for bonus (Rs) 27 21 17 19 24 29
BVPS - adjusted for bonus (Rs) 106 115 128 140 156 174
Balance sheet (Rs mn)
Assets
Gold loans 260,004 218,620 234,050 262,574 311,386 370,548
Investments 825 354 385 385 385 385
Fixed assets 3,030 3,269 2,642 3,409 3,634 3,859
Current assets 30,304 33,695 30,616 37,483 42,810 49,053
Cash and bank balances 13,420 20,489 17,366 19,103 21,013 23,114
Other cash balance 13,420 13,420 17,366 19,103 21,013 23,114
Other current assets 16,884 13,206 13,250 18,380 21,797 25,938
Total assets 294,163 255,938 267,693 303,851 358,215 423,845
Liabilities
Borrowings 240,889 198,620 194,640 227,053 271,024 324,180
Current liabilities 13,975 14,673 22,226 21,129 25,355 30,426
Total liabilities 254,864 213,293 216,866 248,182 296,379 354,605
Share capital 3,717 3,717 3,971 3,971 3,971 3,971
Reserves and surplus 33,639 38,928 46,855 51,698 57,865 65,269
Shareholders funds 39,299 42,645 50,826 55,669 61,836 69,240
Aggregate loan book (incl sell down)
Loans under management 260,004 218,620 234,050 262,574 311,386 370,548
Total assets under management 294,163 255,938 267,693 303,851 358,215 423,845
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
Long term loans and non-fund based activities are key drivers.
SKS reported strong performance during 1QFY16 with 24% growth in PAT to `610 mn (our
estimate of `480 mn) largely driven by 72% yoy and 15% qoq loan growth, 60% growth in
other income. SKS’s focus on long tenure products (driving 73% of the qoq loan growth) and
increasing its non-fund based income (BC origination and third party distribution) were the key
drivers.
SKS Bank: A strong model but tall task ahead.
We believe that SKS’s small finance bank, if granted a license, will provide a banking platform
for microfinance loans, raise micro deposits and distribute third-party products aided by local
touch points/ BCs. Large equity infusion (Rs29 bn, 43% of current market cap) to comply with
shareholding requirements of RBI and costs of local touch points will temper SKS’s profitability
in the initial years. We however believe that improvement in productivity of the sales force will
partially offset the same. Cost of regulatory compliance will be negligible as SKS’s loan book
qualifies to be PSL and likely lower borrowings cost from debt markets/ interbank will offset the
carry of CRR and SLR.
Raise price target; factor in prospects of the bank
We are revising our price target for SKS to `580/ share. At our price target, SKS will trade at
4.5X PBR FY2017E. The valuation is undoubtedly rich despite the high growth trajectory of SKS.
We however take cognizance of likely conversion of SKS into a bank. Our price target reflects
40% probability of SKS Bank and 60% as MFI. At the fair value estimate, SKS (MFI) will trade at
3.5X PBR FY2017E. At its fair value, SKS’s banking model will trade at 3X PBR FY2017E. Exhibit
2 shows the sensitivity of the price target to the valuation multiple for the bank and probability
assigned for conversion to the banking format.
SKS Microfinance (SKSM) Banks/Financial Institutions
Strong performance. SKS reported stellar results with 15% qoq and 72% yoy loan
growth driving 60% growth in earnings before tax. Focus on higher ticket loans and fee
income (distribution income and loan origination fee for banks) provides the icing on its
strong business momentum. We believe that SKS is one of the most deserving
candidates to get a small bank license and is well placed to migrate to a bank. We
revise estimates and discuss the likely banking model of SKS. Our revised price target
(`580 versus `460 earlier) factors SKS’s high growth trajectory and prospects of a bank.
ADD
JULY 23, 2015
RESULT
Coverage view: Attractive
Price (`): 537
Target price (`): 580
BSE-30: 28,505
QUICK NUMBERS
Loan growth of
72% yoy and 15%
qoq
24% yoy PAT
growth
Retain ADD; price
target `580
SKS Microfinance
Stock data Forecasts/Valuations 2015 2016E 2017E
52-week range (Rs) (high,low) EPS (Rs) 14.9 20.1 27.7
Market Cap. (Rs bn) EPS growth (%) 130.8 34.6 37.7
Shareholding pattern (%) P/E (X) 36.0 26.7 19.4
Promoters 9.2 NII (Rs bn) 4.0 6.0 8.2
FIIs 42.7 Net profits (Rs bn) 1.9 2.5 3.5
MFs 13.5 BVPS 83.0 102.5 130.3
Price performance (%) 1M 3M 12M P/B (X) 6.5 5.2 4.1
Absolute 16.2 16.7 91.0 ROE (%) 25.0 21.6 23.7
Rel. to BSE-30 13.0 14.2 74.4 Div. Yield (%) 0.0 0.0 0.0
Company data and valuation summary
544-260
67.9
Banks/Financial Institutions SKS Microfinance
36 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Exhibit 1: SKS Microfinance – Quarterly trends March fiscal year-ends, 1QFY15-1QFY16 (` mn)
Source: Company, Kotak Institutional Equities
(% chg.)
1QFY16 1QFY16E 1QFY15 4QFY15 1QFY16E 1QFY15 4QFY15
2QFY16-
4QFY16
2QFY15-
4QFY15
Interest income 1,950 1,600 1,030 1,517 22 89 29 6,785 4,630 47
Income on loans sold down 220 250 240 250 (12) (8) (12) 632 430 47
Interest expenses 1,010 700 480 854 44 110 18 3,270 2,310 42
Net interest income 1,160 1,150 790 913 1 47 27 4,147 2,750 51
Credit cost 72 50 (19) 107 44 (479) (33) 289 119 143
NII (post credit cost) 1,088 1,100 809 806 (1) 34 35 3,858 2,631 47
Other income 653 270 410 494 142 59 32 1,892 1,300 46
Loan processing fees 150 100 100 130 50 50 15 586 360 63
Income on investments 210 140 90 140 50 133 50 440 350 26
Recovery against written off loans 40 30 90 40 33 (56) - 120 170 (29)
Others- distribution fees 252 120 130 180 110 94 40 748 420 78
Operating expenses 952 770 740 836 24 29 14 3,336 2,470 35
Administration expenses 233 210 190 225 11 23 4 691 650 6
Employee expenses 709 550 540 600 29 31 18 2,598 1,780 46
Depreciation 10 10 10 11 (1) (1) (11) 48 40 19
PBT 790 600 493 464 32 60 70 2,414 1,447 67
Tax 180 120 - 59 50 493 59
PAT 610 480 493 405 27 24 51 1,921 1,388 38
EPS (Rs) 5 4 3 24 51 15 11 38
Other operational highlights
Total AUM (Rs mn) 48,110 29,280 41,840 64 15
Non-AP 47,970 43,900 27,830 41,710 9 72 15
AP 140 1,450 130 (90)
Disbursements (Rs mn) 23,770 11,600 24,940 105 (5)
Disbursements ('000) 1,778 1,089 1,857 63 (4)
Ticket size (Rs) 13,369 10,652 13,430 26 (0)
Yeild measurement (%)
Reported ratios
Gross y ields 22.1 22.1 24.2
Portfolio y ield 16.6 16.6 18.9
F inancial cost 6.3 6.2 9.1
Borrow ings cost 11.6 12.6 11.8
Calculated ratios
Yields (non-AP book) 23.1 23.1 21.5
Borrow ings cost 11.9 12.0 11.7
Costs/ income 52.5 61.7 59.4
NIM (incl. income from securitisation) 10.3 11.2 9.9
Asset quality (non-AP, %)
Gross NPL (%) 0.2 0.2 0.1
Net NPLs (%) 0.2 0.2 0.1
Collection efficiency (%) - 99.9 99.8
CAR (%) 27.2 39.6 31.7
Debt+loans sold down/ equity (X) 4.0 2.7 4.3
(% chg.)
SKS Microfinance Banks/Financial Institutions
KOTAK INSTITUTIONAL EQUITIES RESEARCH 37
Exhibit 2: We assume 40% probability for SKS's conversion to a bank Sensitivity to valuation multiples and probability for SKS Bank, March fiscal year-ends, 2017E (Rs/ share)
Notes: (a) We value SKS Microfinance at 3.5X PBR.
Source: Kotak Institutional Equities estimates
Key highlights of 1QFY16 results
LTL loans drive loan growth
SKS’s average ticket size increased to Rs13,369, up 26% yoy but flat qoq. Long term loans
(LTL), loan with tenure of 104 weeks for borrowers who have completed at least two loan
cycles contributed to 73% of the qoq loan growth; the average loan size in LTL is
Rs29,641.Despite increase in loan size, SKS’s average ticket remains lower than peers (see
Exhibit 3 and 4) and provides significant scope for growth.
SKS increased its concentration in Maharashtra but declined in West Bengal. It reported a
strong growth in loan book across states, however growth has been particularly high in
Maharashtra (120bps qoq increase in share in SKS’s loan book to 12.8%). West Bengal’s
share decreased 80bps to 9.4%. Top three states in terms of concentration are Orissa
(17.1%), Karnataka (14.9%) and Maharashtra (12.3%).
We forecast loan book of `61 bn by March 2016 and `84 bn by March 2017. We believe
that SKS’ growth will be driven by branch expansion of about 10% yoy leading to 25%
growth in active borrowers and increase in average ticket size of 15% in FY2016E followed
by 10% annual growth in FY2017E and FY2018E.
Exhibit 3: SKS’s average loan disbursement is lower than peers Average disbursement per loan, March fiscal year-end, 1QFY14-1QFY16 (Rs)
Source: MFIN, Company
Exhibit 4: SKS’s average loan size is lower than peers Average loan per borrower, March fiscal year--end, 1QFY14-1QFY16 (Rs)
Source: MFIN, Company
Probability of conversion to bank (%)
15% 25% 40% 50% 100%
2.0 464 469 477 482 508
2.5 483 501 528 546 635
3.0 502 533 578 609 762
3.5 521 564 629 673 889
4.0 540 596 680 736 1,016 Valu
ati
on
mu
ltip
le (
X)
1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16
Bandhan 16,128 16,883 17,508 17,524 18,971 NA 22,340 21,886 NA
Equitas 11,766 12,169 12,713 12,844 13,889 13,780 13,714 14,116 NA
Janalaxmi 18,440 18,763 19,396 19,677 19,678 20,162 20,295 20,682 NA
SKS 11,194 10,998 11,998 11,829 10,653 12,052 12,146 12,259 13,369
Ujjvan 17,825 18,300 19,236 19,738 19,917 18,245 20,469 19,918 NA
Total 13,584 13,337 14,780 14,359 14,926 15,736 16,194 16,327 NA
1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16
Bandhan 9,322 9,277 10,146 11,289 11,078 11,324 12,693 14,598 NA
Equitas 8,009 8,025 8,206 8,253 8,621 9,068 8,985 9,342 NA
Janalaxmi 13,545 13,748 13,838 14,532 14,239 14,473 14,678 16,098 NA
SKS 5,283 5,209 7,775 6,272 5,968 8,524 9,024 11,434 13,014
Ujjvan 11,330 11,646 11,886 12,468 12,667 15,017 15,064 14,908 NA
Total 8,430 8,662 8,927 9,955 9,848 10,313 11,600 13,160 NA
Banks/Financial Institutions SKS Microfinance
38 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Exhibit 5: Loan book growth is getting diversified Loan book break-up (ex-Andhra Pradesh), March fiscal year-ends, 1QFY13-1QFY15 (%)
Source: Company, Kotak Institutional Equities
Higher investment income and distribution income boost other income
SKS’s other income was high at `653 mn (our estimate of `270 mn),the key reason for
earnings increase.
Higher loan growth has driven higher loan processing fees.
Higher cash on balance sheet (accumulated towards end of March post loan sell down)
has driven high investment income; this will moderate down over the next few months.
Distribution income was driven by (1) fees on distribution of third party products (the
company distributed 0.4 mn worth products in 1QFY16 as compared to 0.26 mn in
4QFY15) and (2) higher fees for originating loans for banks (Rs120 mn versus Rs70 mn
qoq).
Recovery from AP loans was however low.
We are raising our estimates to factor the higher trajectory of fee income from distribution
and loan origination for banks.
NIM improves, SKS will reduce lending rates from July 2015
Margin (calculated, including loan securitization) expanded 40 bps qoq 10.3%. Spread on
balance sheet assets expanded to 11.2% from 9.2% due to higher asset yields qoq as a
consequence of high loan growth in the beginning of the period. SKS had high cash on
balance sheet (Rs17 bn) on March 2015 which declined to Rs10 bn in June 2015. Higher
balance during the quarter boosted investment income; this will decline over the next few
quarters.
The company is clearly in a sweet spot on NIM and has proposed to reduce its lending rates
(for new loans) by 150 bps from 2QFY16. Unlike 3QFY15, SKS is reasonably confident of
handling the transition of change in interest rates after the implementation of its new IT
system.
Other highlights for the quarter
SKS paid tax at MAT rate of 21%. Large write-off of AP loans 1QFY15 and hence did not
provide for any tax liability.
NPL remained low 0.2% of loan book despite high growth at SKS.
1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16
State-wise loan book break up (%)
Karnataka 17.6 17.3 15.8 17.2 16.9 15.7 15.4 15.2 14.9
Orissa 15.3 16.1 15.6 14.7 14.9 15.8 17.5 16.8 17.1
Bihar 11.0 10.8 12.5 11.9 11.6 11.7 10.7 11.2 10.6
Maharashtra 12.8 11.3 9.4 11.4 11.7 10.0 9.2 11.6 12.8
West Bengal 9.2 10.4 11.1 11.7 12.2 13.7 12.5 10.9 9.4
Uttar Pradesh 8.8 9.2 9.2 8.3 8.3 8.4 8.9 8.7 9.3
Madhya Pradesh 6.1 6.3 6.5 6.1 5.8 5.7 5.4 5.3 5.3
Kerala 6.2 5.4 6.0 5.5 5.2 5.5 6.3 5.8 6.1
Rajasthan 5.2 4.6 4.6 4.4 4.5 4.3 4.8 4.8 5.0
Jharkhand 3.2 3.4 3.7 3.7 3.8 3.9 3.6 4.1 3.7
Punjab 1.5 1.6 1.9 1.8 1.8 1.8 1.9 1.8 1.7
Haryana 1.3 1.3 1.4 1.3 1.3 1.2 1.4 1.5 1.6
Uttranchal 1.0 1.1 1.3 1.1 1.1 1.0 1.1 1.2 1.2
Chattisgarh 0.9 0.9 1.0 1.0 1.0 1.1 1.2 1.2 1.2
SKS Microfinance Banks/Financial Institutions
KOTAK INSTITUTIONAL EQUITIES RESEARCH 39
Exhibit 6: SKS Microfinance – key operational highlights March fiscal year-ends, 1QFY14-1QFY16
Source: Company, Kotak Institutional Equities
1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16
Other operational highlights
Total AUM (Rs mn) 23,030 22,880 25,830 30,300 29,280 31,300 32,190 41,840 48,110
Non-AP 20,030 20,290 23,640 28,370 27,830 30,430 31,950 41,710 47,970
AP 3,000 2,590 2,190 1,930 1,450 870 240 130 140
Non-AP 20,030 20,290 23,640 28,370 27,830 30,430 31,950 41,710 47,970
On books 16,110 15,750 17,500 17,210 21,860 28,800 27,480 29,230 38,440
off books 3,920 4,540 6,140 11,160 5,970 1,630 4,470 12,480 9,530
Securitization (%) 20 22 26 39 21 5 14 30 20
Disbursements (Rs mn) 8,300 9,780 13,990 15,810 11,600 16,930 15,440 24,940 23,770
Disbursements ('000) 742 889 1,166 1,336 1,089 1,404 1,271 1,857 1,778
Ticket size (Rs) 11,186 11,001 11,998 11,834 10,652 12,058 12,148 13,430 13,369
Operational highlights
Employees 9,959 9,173 8,958 8,932 8,914 8,943 9,089 9,698 10,110
Branches 1,225 1,254 1,256 1,255 1,268 1,268 1,268 1,268 1,268
Centres (total) 213,114 212,895 212,895 228,188 226,856 228,494 229,172 227,125 220,485
Centres (non-AP) 142,534 142,218 150,907 157,511 156,176 157,911 158,451 156,457 149,797
Members (`000) 5,074 5,182 5,491 5,783 5,796 6,091 6,196 6,402 6,391
Members ('000) (non-AP) 3,154 3,262 3,571 3,864 3,877 4,171 4,274 4,482 4,471
Acrtive borrowers ('000) 4,439 4,507 4,744 4,963 5,042 5,268 5,228 5,325 5,351
Acrtive borrowers ('000) (non-AP) 2,729 2,801 3,041 3,262 3,342 3,570 3,540 3,684 3,686
Key operational ratios (non-AP)
Centres/ branch 129 125 132 138 136 144 145 143 137
Borrowers/ branch ('000) 2 2 3 3 3 3 3 3 3
Borrowers/ centre 19 20 20 21 21 23 22 24 25
Banks/Financial Institutions SKS Microfinance
40 KOTAK INSTITUTIONAL EQUITIES RESEARCH
SKS BANK: HIGHER SALES PRODUCTIVITY, OPERATIONAL CHALLENGES ON MANAGING
LOCAL TOUCH POINTS
SKS Bank will likely migrate loan disbursements to the banking format i.e. loans will be
credited to borrower’s bank account. The banking platform will also permit SKS to mobilize
savings at the bottom of the pyramid (though not very significant) into retail deposits.
However, SKS’s microfinance model entails limited branches and hence it will need support
from local touch point/ banking correspondents to convert the loan/ bank deposits to cash
and/or collect weekly cash installments. SKS’s ability to improve the productivity of its sales
force (wherein cash handling will be now be lower) and managing efficiency of local touch
points will drive its profitability. Prospects and challenges of SKS Bank are discussed in
further detail in our note ‘Understanding the small finance bank model’ dated March 05, 2015.
Low regulatory cost for SKS Bank
The entire loan book of SKS qualifies to be PSL and 30% of the book is deployed in
agriculture and animal husbandry, much higher than the required exposure of 18% to
agriculture. Hence, the cost of compliance for its small finance banks is primarily for
maintaining CRR and SLR. Reduction in SKS’s borrowing’s cost (11-12% currently) on
migration to the interbank window, decline in cash on balance sheet (currently due to loan
sell down and surplus liquidity) will largely offset the aforesaid cost, in our view. Its retail
deposits (from microfinance borrowers and beyond) will however likely remain low; CASA
ratio will be almost negligible in the initial years.
Large capital issuance to comply with promoter shareholding requirements
SKS, if granted a license, will likely float the small finance bank as a 100% subsidiary. The
company will transfer its lending business to the subsidiary. RBI guidelines mandate
promoter to be a domestic entity. SKS has 70% foreign shareholding. It would therefore
need to raise capital from domestic entities to bring down foreign shareholding to 49%. A
back of the envelope calculation suggests that SKS will need to raise `30 bn from domestic
investors.
Exhibit 7: SKS has around 70% foreign shareholding Shareholding pattern of SKS, December 2014 (%)
Source: BSE
Exhibit 8: SKS will need to issue 56 mn share to comply with 49% foreign shareholding cap
Source: Company, Kotak Institutional Equities estimates
Foreign shareholders 70
Promoters 9
FII 46
FDI 2
NRI 5
Others 8
DII 15
Other domestic holders 15
CMP (Rs) 537
Shares (mn) 126
Market capitalization (Rs bn) 68
Value of foreign holding (Rs bn) 48
Domestic capital issuance (Rs bn) 30
Issuance price (Rs/ share) 530
Shares issued (# mn) 56
Foreign holding post money (%) 49
Market cap post money (Rs bn) 97
SKS Microfinance Banks/Financial Institutions
KOTAK INSTITUTIONAL EQUITIES RESEARCH 41
Exhibit 9: SKS bank - Key parameters, ratios and financials March fiscal year-ends, 2015-2022E
Source: Company, Kotak Institutional Equities estimates
2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E Comments
Key growth rates ( YoY %)
Balance sheet
Loans 64.8 51.3 124.0 43.0 34.5 32.9 31.0 29.1 We expect loan growth to be high
Investments — 10.0 69.5 46.4 41.0 36.8 33.0 We expect strong growth in investments in FY2017E
to reflect SLR requirements
Fixed assets (16.7) 15.0 200.0 25.0 25.0 25.0 25.0 25.0
High growth in fixed assets in FY2017E to roll out
the bank infrastructure; growth to in line with loan
growth thereafter
Current assets 135.0 10.0 (70.3) 53.4 40.1 35.5 32.9 30.3
We factor decline in cash on balance sheet as (1)
SKS stops loan sell down, (2) reduces liquidity on
balance sheet and (3) trasanctions move to
electronic format
Total assets 89.6 32.6 92.2 47.4 36.7 34.5 32.2 29.9
Income statement
NII 53.1 48.6 98.3 60.1 26.0 24.1 23.7 26.4
PAT 168.7 36.0 140.4 46.1 24.6 19.5 18.3 23.3
Key ratios and parameters (%)
Yield on loans 25.5 24.3 24.0 23.0 21.5 20.7 20.0 19.8 We factor decline in yields, as SKS trasfers benefit of
lower costs of funds
Borrowings cost 10.2 10.2 10.0 10.0 9.0 8.8 8.6 8.4 We factor a lower borrowings costs for the bank as
SKS shifts to inter-bank borrowings
Spread 15.3 14.2 14.0 13.0 12.5 12.0 11.5 11.4
NIM 8.2 8.6 13.4 14.5 13.0 11.8 10.9 10.4 Lower leverage improves NIM
Cost-to-income 61.1 54.9 40.9 34.7 35.9 37.7 39.9 40.8
Cost-to- assets 8.9 7.8 6.4 5.2 4.8 4.6 4.6 4.5
Tax rate 3 19 21 33 33 33 33 33
ROA 5.2 4.7 6.8 6.1 5.4 4.7 4.2 4.0
AUM/equity 4.8 4.7 3.1 3.0 3.7 4.4 5.1 5.8 Leverage to decline substantially post capital infusion
ROE 25.0 21.8 20.7 18.2 20.0 20.9 21.6 23.0
Cash/borrowings 50.6 40.1 5.0 5.0 5.0 5.0 5.0 5.0 This reflects cash to meet CRR
SLR 0.0 0.0 24.0 24.0 24.0 24.0 24.0 24.0
Income statement (Rs mn)
Interest income 5,660 8,753 16,690 26,874 34,665 44,580 56,785 72,861
Off-balance sheet 670 852 506 — — — — — We expect SKS to stop securitization
Others 440 650 660 1,778 2,754 3,943 5,463 7,353 This reflects Interest income on SLR securities
Interest costs 2,790 4,343 6,130 9,875 13,770 19,169 25,949 34,314
Net interest income 3,980 5,912 11,725 18,776 23,649 29,354 36,299 45,899
Other income 1,270 1,896 2,520 3,220 4,453 5,491 6,779 8,350 This primarily reflects loan procesing fee at 1.5% of
disbursements
Net total income 5,250 7,808 14,245 21,996 28,102 34,845 43,078 54,249
Provisioning expenses 100 361 630 935 1,290 1,723 2,271 2,951
Operating expneses 3,210 4,288 5,827 7,641 10,096 13,138 17,171 22,154
Staff expenses 2,320 3,306 4,546 6,095 8,229 10,885 14,451 18,869
Other operating expenses 840 924 1,109 1,331 1,597 1,916 2,299 2,759
Depreciation expenses 50 58 173 216 270 337 421 526
PBT before extraordinaties 1,940 3,159 7,788 13,421 16,717 19,984 23,635 29,144
Tax 59 600 1,636 4,429 5,516 6,595 7,800 9,617 We factor full tax rate from FY2018E
PAT 1,881 2,559 6,153 8,992 11,200 13,389 15,836 19,526
Dividend - - 1,846 2,698 3,360 4,017 4,751 5,858 We factor dividend payout at 30%
EPS (Rs) 15 20 34 49 62 74 87 107
BPS (Rs) 83 103 256 288 328 376 433 502
Balance sheet (Rs mn)
Assets
Loans 28,370 42,931 96,152 137,535 184,935 245,786 322,060 415,770 We expect SKS to retain focus on microfinance loans
post conversion to a bank
Investments 2 2 17,591 29,810 43,630 61,525 84,152 111,930 Reflects investments in SLR
Fixed assets 100 115 345 431 539 674 842 1,053
Current assets 17,528 19,281 5,728 8,790 12,314 16,687 22,175 28,891
Cash and bank 16,590 18,249 3,665 6,210 9,090 12,818 17,532 23,319 We factor cash on balance sheet to decline as
trasanctions move to electronic format
Other current assets 938 1,032 2,064 2,580 3,224 3,869 4,643 5,572
Total assets 46,990 62,329 119,816 176,566 241,417 324,673 429,229 557,644
Liabilities
Borrowings 32,800 45,494 73,295 124,209 181,791 256,356 350,635 466,377 CASA ratio will be low
Total liabilities 36,530 49,310 73,295 124,209 181,791 256,356 350,635 466,377
Share capital 1,260 1,260 1,817 1,817 1,817 1,817 1,817 1,817 We factor large dilutiion to bring foreign holding
down to 49%
Reserves and surplus 9,200 11,759 44,704 50,540 57,810 66,500 76,777 89,451
Shareholders funds 10,460 13,019 46,521 52,357 59,626 68,316 78,594 91,267
Banks/Financial Institutions SKS Microfinance
42 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Exhibit 10: SKS Microfinance – key growth rates and financial ratios March fiscal year-ends, 2013-18E (%)
Source: Company, Kotak Institutional Equities estimates
2013 2014 2015 2016E 2017E 2018E
Growth in key parameters
Profit and loss statement
Interest income (39) 79 44 54 37 30
Income on loan securitization 68 (4) 20 27 41 36
Interest costs (29) 50 30 53 32 29
Net interest income (26) 73 53 50 38 30
Other income (13) 21 76 49 24 25
Net total income (26) 58 58 50 34 29
Provisioning expenses (79) (94) (33) 261 61 36
Net income (post provisions) (96) (1,017) 62 45 33 29
Operating expneses (38) (6) 30 34 30 32
Staff expenses (34) (4) 40 43 33 35
Other operating expenses (45) (8) 9 10 20 20
Depreciation expenses (36) (38) 25 15 15 15
PBT before extraordinaties (77) (124) 177 65 38 25
Tax (100) — — — — —
PAT (78) (124) 169 35 38 25
EPS (Rs) (85) (124) 131 35 38 25
BPS (Rs) (39) 18 96 24 27 26
Balance sheet statement
Loans 41 28 38 47 37 35
Investments — — — 10 10 10
Fixed assets (45) 6 (17) 15 15 15
Current assets 36 (23) 135 10 10 10
Total assets 49 (1) 90 33 28 28
Borrowings 58 (5) 114 39 30 30
Current liabilities 18 41 16 10 10 10
Total liabilities 69 (5) 81 35 29 29
Share capital 50 — 16 — — —
Reserves and surplus (21) 24 162 28 30 29
Shareholders funds (9) 18 128 24 27 26
Yield on loans (incl AP), %)
Yield on loans on AUM (ex-AP, %) 26.7 28.5 25.5 24.3 23.5 22.5
Yield on loans on BS (ex-AP, %) 26.7 28.5 25.5 24.3 23.5 22.5
Yield on loans including securitized loans (%) 13.8 16.7 17.5 18.6 18.1 17.4
Cost of borrowings (%) 9.4 11.7 10.2 10.0 10.0 10.0
Spread (%) 17.2 16.8 15.3 14.3 13.5 12.5
NIM -KS (%) 4.6 7.4 8.2 8.6 8.7 8.4
NIM incl. securitized loans (%) 8.1 9.7 10.1 10.3 10.3 10.0
Yield on securtized loans (%) 6.9 5.4 5.2 5.5 5.5 5.5
Cost-income (%) 125.1 74.4 61.1 54.6 52.7 53.7
Cost-assets (%) 12.5 9.9 8.9 7.8 7.8 8.0
RoE break-up (percentage of AUM ex-AP)
NII 7.5 9.6 11.0 11.5 11.3 10.8
Other income 3.0 2.7 3.5 3.7 3.3 3.0
Fee income 1.1 1.3 1.3 1.4 1.5 1.5
Provisioning expenses 12.1 0.6 0.3 0.7 0.8 0.8
Operating expenses 13.0 9.2 8.9 8.3 7.7 7.4
Staff expenses 8.6 6.2 6.4 6.4 6.0 6.0
RoA pre-tax (14.8) 2.6 5.4 6.2 6.1 5.6
Tax rate 1.0 1.0 1.0 0.8 0.8 0.8
RoA (14.8) 2.6 5.2 4.9 4.8 4.4
AUM/equity 4.9 6.3 4.8 4.4 4.9 5.3
RoE (72.4) 16.5 25.0 21.6 23.7 23.4
SKS Microfinance Banks/Financial Institutions
KOTAK INSTITUTIONAL EQUITIES RESEARCH 43
Exhibit 11: SKS Microfinance – key financial statements March fiscal year-ends, 2013-18E (` mn)
Source: Company, Kotak Institutional Equities estimates
2013 2014 2015 2016E 2017E 2018E
Income statement
Interest income 2,199 3,930 5,660 8,735 11,944 15,511
Income on loan securitization 583 560 670 852 1,198 1,625
Other interest income 148 250 440 650 700 800
Interest costs 1,427 2,140 2,790 4,280 5,646 7,270
Net interest income 1,504 2,600 3,980 5,957 8,196 10,667
Other income 595 720 1,270 1,896 2,360 2,958
Loan origination fees 230 340 460 736 1,090 1,470
Net total income 2,098 3,320 5,250 7,853 10,556 13,625
Provisioning expenses 2,444 150 100 361 581 788
Net income (post provisions) (346) 3,170 5,150 7,492 9,975 12,837
Operating expneses 2,626 2,470 3,210 4,288 5,563 7,319
Staff expenses 1,727 1,660 2,320 3,306 4,388 5,913
Other operating expenses 835 770 840 924 1,109 1,331
Depreciation expenses 64 40 50 58 66 76
PBT before extraordinaties (2,971) 700 1,940 3,204 4,412 5,517
Tax — — 59 673 927 1,159
PAT (2,971) 700 1,881 2,531 3,486 4,359
Tax rate (%) — — 3 21 21 21
Dividend — — — — — —
Dividend tax — — — — — —
Outstanding shares (# mn) 108 108 126 126 126 126
EPS (Rs) (27) 6 15 20 28 35
BPS (Rs) 36 42 83 103 131 165
Balance sheet
Loans 15,310 17,210 28,370 42,931 58,716 79,161
Investments 2 2 2 2 2 3
Fixed assets 113 120 100 115 132 152
Current assets 9,688 7,458 17,528 19,281 21,209 23,330
Total assets 25,110 24,790 46,990 62,329 80,060 102,645
Liabilities
Borrowings 16,180 15,310 32,800 45,522 59,385 77,192
Current liabilities 2,106 2,978 3,469 3,816 4,197 4,617
Provisions 2,920 1,910 261 — — —
Total liabilities 21,206 20,198 36,530 49,338 63,583 81,810
Share capital 1,082 1,082 1,260 1,260 1,260 1,260
Reserves and surplus 2,822 3,510 9,200 11,731 15,217 19,576
Shareholders funds 3,904 4,592 10,460 12,991 16,477 20,836
Loans under management
Loans on balance sheet 15,310 17,210 28,370 42,931 58,716 79,161
Loans outside balance sheet 8,280 13,090 13,470 18,399 25,164 33,926
Total loans under management 23,590 30,300 41,840 61,330 83,881 113,087
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
1QFY16—a strong quarter on all counts
PVR reported an excellent quarter on all counts—(1) footfalls grew 25% yoy to 19 mn (KIE 17.9
mn) powered by the box office success of a number of Bollywood and Hollywood movies (Tanu
weds Manu returns, PIKU, ABCD 2, Fast & Furious 7, Avengers 2, etc.), (2) F&B spends per head
(SPH) increased 16% yoy to `74 and F&B gross margin improved to 73% from 69%. (3)
average ticket price (ATP) was up 4% yoy, and (4) ad revenues grew 27% yoy (18% for
comparable properties). Strong all round performance resulted in EBITDA margin expansion of
800 bps yoy to 23% aided by 600 bps yoy increase in occupancy to 38%. EBITDA at `1.13 bn
was up 106% yoy. Net profit at `580 mn was higher than that reported for full year FY2015.
We note that multiplex business has high operating leverage—a 200 bps increase in occupancy
impacts EBITDA by 20-25%.
1Q content performance can’t be extrapolated, but we like the blueprint
The solid performance of PVR highlights: (1) there is strong latent demand for good content.
Comparable properties’ footfalls grew 16% yoy, (2) a big-star (with one of the three Khans)
blockbuster movie is not ‘must’ for a good quarter, (3) four of the top 5 movies were sequels,
all of which grossed higher collections than the original movie/previous sequel, and (4) English
content contributed 30% to PVR’s revenues in 1Q (versus 18-20% in FY2015) boosted by the
success of sequels. 1Q doesn’t necessarily insure stable content performance in the future, but
we believe it should not be dismissed as one-off. It demonstrates that Bollywood can reduce
content volatility over time with more sequels. Further, better traction for English content would
add stability to multiplex businesses. We believe this theme would play out gradually over time.
We continue to like the PVR story; retain our BUY rating
PVR, India’s largest multiplex chain, exhibits leadership on all fronts—premium location
presence and branding, organic expansion, monetization of footfalls (F&B/ad revenues) and
profitability. It is well positioned to participate in the strong multi-year growth of multiplexes
supported by demographics, rising income levels, propensity for movies and huge supply of
content. We raise FY2016-17E EBITDA estimates by 19-21% and TP to `900 from `800, valuing
it at 12X EV/EBITDA.
PVR (PVRL) Media
Blockbuster quarter. PVR delivered a historic quarter on all counts – more remarkable
as this was without any help from blockbuster Bollywood movies (scheduled over 2Q-
3Q). Since content continues to rule (not necessarily from Bollywood), its
unpredictability constrains us from extrapolating PVR’s YTD FY2016E performance
beyond FY2016. We incorporate 1Q, build a strong 2Q, incorporate DT cinemas
acquisition and raise FY2016-17E EBITDA estimates by 19-21% and TP to `900 (12X
FY2017E EV/EBITDA) from `800. Retain BUY.
BUY
JULY 23, 2015
RESULT
Coverage view: Neutral
Price (`): 858
Target price (`): 900
BSE-30: 28,505
PVR
Stock data Forecasts/Valuations 2015 2016E 2017E
52-week range (Rs) (high,low) EPS (Rs) 3.6 25.8 34.1
Market Cap. (Rs bn) EPS growth (%) (72.0) 618.2 32.1
Shareholding pattern (%) P/E (X) 238.6 33.2 25.1
Promoters 29.5 Sales (Rs bn) 14.8 18.7 23.2
FIIs 21.9 Net profits (Rs bn) 0.1 1.2 1.6
MFs 8.9 EBITDA (Rs bn) 2.1 3.4 4.1
Price performance (%) 1M 3M 12M EV/EBITDA (X) 20.9 12.9 10.6
Absolute 30.3 37.1 32.4 ROE (%) 3.7 18.9 17.0
Rel. to BSE-30 26.8 34.2 20.9 Div. Yield (%) 0.1 0.3 0.4
Company data and valuation summary
872-572
35.6
PVR Media
KOTAK INSTITUTIONAL EQUITIES RESEARCH 45
Key takeaways from 1QFY16 and conference call highlights
There is strong latent demand for good content. A 16% yoy growth in footfalls of
comparable properties’ (same stores) is the highest in the past 3 years. It affirms that
there is strong demand notwithstanding the lackluster consumer discretionary spend. We
note that Bollywood movies released in 1Q were neither blockbusters nor exceptionally
good yet did good business. Additionally, PVR’s success at taking a 16% increase in F&B
spends per head is commendable
Growing penchant for English movies: Three English movies delivered strong box
office performance in 1Q (Fast & Furious 7, Avengers 2 and Jurassic World 2).
Interestingly, these three movies grossed between `700 mn and `1bn. We are pleasantly
surprised by the collections of English movies. Note that each of these movies have more
than doubled its box office collections in India as compared with its previous sequel. This
is encouraging and augurs well for PVR as we expect a steady supply of Hollywood
movies.
Success of Bollywood sequels. 1Q saw the success of two sequels ‘Tanu weds Manu
returns’ and ABCD 2. The net box office collections (NBOC) of these movies were almost
4X/3X that of their original versions. We believe the success of these sequels would
trigger more producer and investment interest in sequels. We note that Hollywood has
succeeded in reducing content volatility by producing sequels that now contribute
disproportionately to Hollywood box office. Sequels have the benefit of tried and tested
premises that have loyal audiences and hence can generate recurring revenue streams.
Strong start to 2QFY16. The management indicated that July 2015 has been the
strongest month in the history of Indian box office powered by the success of mega
hits—Bahubali and Bajrangi Bhaijaan.
Impressive improvement in F&B spends. PVR’s F&B spends per head (SPH) increase
16% yoy to `74. PVR has demonstrated strong growth in SPH on a consistent basis led by
new food offerings, innovative packaging and increased convenience in ordering food. In
addition to this, the company has increased gross margin of F&B business by about 400
bps to 73% at consolidated level. The management indicated that this was driven by
better negotiations with vendors and moving production of few food offerings in house,
such as pizza, corn etc.
Smart growth in ad revenues. PVR’s ad revenues grew 27% yoy led by 18% growth in
comparable properties’ (same store) ad revenues and balance from screen additions. The
growth in comparable properties was driven by yields, volumes and innovations such as
increase in off-screen advertising. The management has guided 18-20% growth in ad
revenues in FY2016.
DT Cinemas acquisition. The management indicated that it would take 90-120 days to
procure approvals for DT Cinemas acquisition.
Summary of changes to estimates
We raise our FY2016E revenues/EBITDA estimates by 4/19% as we incorporate 1Q
outperformance of estimates and build in a strong 2QFY16. We have also incorporated the
DT Cinemas acquisition (expected early 4QFY16) and factored in the equity dilution (5 mn
shares issued to Multiples Private Equity at `700/share). We build EBITDA of `350 mn from
DT Cinemas in FY2017E as against management guidance of about `450 mn. The
contribution of DT Cinemas to FY2016 financials would be negligible as 4Q is a seasonally
weak quarter. An increase in our margin estimate is driven by a marginal increase in
occupancy forecast, higher gross margin on F&B sales and impact of acquisition (DT Cinemas
margins expected to be higher than PVR after synergy benefits).
Media PVR
46 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Exhibit 1: Interim results of PVR Limited (PVRL), March fiscal year-ends (` mn)
chg (%)
1QFY16 1QFY16E 1QFY15 4QFY15 1QFY16E 1QFY15 4QFY15
Total revenues 4,860 4,461 3,623 2,996 9 34 62
Ticket sales 2,742 2,524 2,032 1,579 9 35 74
F&B sales 1,298 1,164 890 692 12 46 88
Advertising 457 423 358 381 8 27 20
Other operating revenues 364 350 343 344 4 6 6
Total expenditure (3,736) (3,533) (3,075) (2,888) 6 21 29
Film hire costs (1,137) (1,073) (875) (630) 6 30 81
F&B consumption (346) (355) (276) (211) (3) 25 64
Employee expenses (417) (390) (341) (358) 7 22 17
Rent (774) (690) (661) (678) 12 17 14
Repairs and maintenance (137) (150) (121) (142) (9) 13 (4)
Electricity & CAM (548) (450) (486) (416) 22 13 32
Movie production and distribution — — (33) —
Other expenses (377) (425) (282) (454) (11) 34 (17)
EBITDA 1,125 928 547 108 21 106 946
EBITDA Margin (%) 23.1 20.8 15.1 3.6
Other income 8 15 12 20 (45) (31) (58)
Finance costs (218) (210) (192) (203) 4 13 7
Depreciation (292) (330) (291) (253) (12) 0 15
Exceptional items (33) — — (22)
Pretax profits 590 403 75 (351) 685
Taxes (6) — (1) (5)
Net profit before minorities 584 403 75 (356)
Minority interest (4) — 2 (1)
Net profit 580 403 77 (357) 658
EPS (Rs/share) 14.0 9.7 1.8 (8.6)
Key operational metrics
Screens (#) 467 467 444 464
Footfalls (mn) 19.0 17.9 15.2 12.2 6 25 56
Average ticket price (ATP) (Rs) 183 182 176 168 0 4 9
F&B spends per head (SPH) (Rs) 74 72 64 62 3 16 19
Ad revenues/screen (annualized) (Rs mn) 3.9 3.6 3.3 3.3 8 18 18
Film hire costs as % of ticket sales 41.5 42.5 43.1 39.9
Rent as % of sales 15.9 15.5 18.3 22.6
F&B COGS as % F&B sales 26.7 30.5 31.1 30.4
Comparable properties (same store) growth (%)
Footfalls 15.9 (13.9) (18.5)
Average ticket price (ATP) 5.0 4.1 6.0
F&B spends per head (SPH) 16.0 18.5 11.0
Source: Company, Kotak Institutional Equities
PVR Media
KOTAK INSTITUTIONAL EQUITIES RESEARCH 47
Exhibit 2: Revised earnings estimates of PVR, FY2016E-17E (` mn)
2016E 2017E 2016E 2017E 2016E 2017E
Ticket sales (net) 10,356 12,666 10,085 11,821 2.7 7.2
F&B sales 4,924 6,468 4,651 5,762 5.9 12.2
Ad revenues 2,056 2,535 1,936 2,248 6.2 12.8
Other operating income 1,414 1,577 1,451 1,642 (2.6) (4.0)
Total revenues 18,750 23,247 18,123 21,473 3.5 8.3
Film hire charges (4,401) (5,510) (4,296) (5,112) 2.4 7.8
F&B consumption (1,354) (1,779) (1,395) (1,700) (2.9) 4.6
Employee costs (1,722) (2,249) (1,680) (1,971) 2.5 14.1
Rent (3,312) (4,032) (3,355) (4,063) (1.3) (0.7)
Other operating costs 26,133 32,725 25,979 30,929 0.6 5.8
Total operating costs (15,344) (19,156) (15,253) (18,083) 0.6 5.9
EBITDA 3,406 4,091 2,870 3,390 18.7 20.7
PAT 1,201 1,587 642 977 87.1 62.4
EPS (Rs/share) 25.8 34.1 15.5 23.5 67.0 45.0
Key assumptions
EBITDA margin (%) 18.2 17.6 15.8 15.8
Screen additions (#) 89 75 65 65
Footfalls (mn) 71 81 68 76 3.1 6.4
ATP gross (Rs) 187 200 187 196 — 1.9
SPH gross (Rs) 75 85 73 81 2.7 5.5
Ad revenue growth (%) 22 23 15 16
Revised Previous Change (%)
Source: Company, Kotak Institutional Equities estimates
Media PVR
48 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Exhibit 3: Net box office collections (NBOC) of promising movies, March fiscal year-ends
Movie NBOC (Rs mn) Movie NBOC (Rs mn) Movie NBOC (Rs mn)
Yeh Jawaani hai Deewani 1,830 Holiday - A Soldier is Never Off Duty 1,100 Tanu Weds Manu Returns 1,510
Aashique 2 780 2 States 1,020 ABCD 2 1,042
Raanjhnaa 589 Ek Villan 989 Fast And Furious 7 979
Shootout At Wadala 540 Humshakals 557 Gabbar Is Back 788
Iron Man 3 480 The Amazing Spider-Man 2 510 Piku 778
Fast & Furious 6 420 Heropanti 507 Jaurassic World 767
Mein Tera Hero 506 Dil Dhadakne Do 763
The Amazing Spider-Man 2 510 The Avengers: Age of Ultron 731
X-Men: Days of Future Past 420
Total 4,639 Total 6,119 Total 7,357
Fukrey 340 Bhoothnath Returns 355 Hamari Adhuri Kahani 323
Ghanchakkar 310 Revolver Rani Detective Byomkesh Bakshy! 251
Yamla Pagla Deewana 2 270 Bombay Velvet 221
Go Goa Gone 260
Ek Thi Dayaan 250
Nautanki Saala 215
Chashme Baddoor 420
Total 2,065 Total 355 Total 795
Chennai Express 2,185 Kick 2,140 Bahubali
Bhaag Milkha Bhaag 1,089 Singham Returns 1,397 Bajrangi Bhaijaan
Grand Masti 938 Humpty Sharma ki Dulhania 752 Terminator Genisys (3D / Imax 3D)
Satyagraha 620 Entertainment 628 Mission Impossible : Rogue Nation (Imax)
Once upon a time in Mumbai Again 556 Mary Kom 559 The Fantastic Four (Imax)
Total 5,389 Total 5,476 Brothers
Suddh Desi Romance 452 Mardaani 350 Bangistaan
Madras Café 418 Finding Fanny 276 All Is Well
Phata Poster Nikla Hero 365 Daawat-e-Ishq 248 Kya Kool Hain Hum 3
Lootera 230 Khoobsurat 248 Katti Batti
Total 1,465 Total 1,122
Dhoom 3 2,613 PK 3,243 Wazir (Farhan Akhtar, Amitabh Bachchan)
Krrish 3 1,987 Happy New Year 1,884 Singh Is Bling (Akshay Kumar)
Goliyon Ki Raas-leela Ram-Leela 1,056 Bang Bang 1,449 Jazba
R Rajkumar 661 Action Jackson 576 Shaandaar
Besharam 540 Haider 501 Spectre (Imax)
Boss 524 Prem Ratan Dhan Payo (Salman Khan)
Tamasha (Ranbir Kapoor, Deepika)
Total 7,381 Total 7,652 Dilwale (SRK, Kaajol)
Bullet Raja 363 The Shaukeens 210 Hera Pheri 3
Singh Saab The Great 267 Star Wars : The Force Awakens (3D / Imax 3D)
Bajirao Mastaani (Deepika, Ranveer Singh)
Total 629 Total 210
Gunday 729 Baby 788 Airlift (Akshay Kumar)
Jai Ho 1,081 MSG: The Messenger 672 Fitoor (Aditya Roy Kapoor, Katrina Kaif)
Queen 564 Baadshaho (Ajay Devgan)
Total 2,373 Total 1,460
Shaadi ke Side effects 374 Roy 406
Yaariyan 369 Tevar 372
Haasi to Faasi 352 Badlapur Don't Miss The Beginning 356
Highway 288 NH 10 293
Ragani Mms 2 459
Total 1,841 Total 1,425
FY2016
4Q
Hits
Flops
FY2014 FY2015
2Q
Hits
Flops
3Q
Hits
Flops
Hits
1Q
Flops
Source: Company, Kotak Institutional Equities
PVR Media
KOTAK INSTITUTIONAL EQUITIES RESEARCH 49
Exhibit 4: Net box office collections (NBOC) (` mn)
365
731
0
200
400
600
800
Avengers 1 (2012) Avengers 2 (2015)
NBOC (Rs mn)
Source: Company, Kotak Institutional Equities
Exhibit 5: Net box office collections (NBOC) (` mn)
420
979
0
200
400
600
800
1000
1200
Fast and Furious 6 (2013) Fast and Furious 7 (2015)
NBOC (Rs mn)
Source: Company, Kotak Institutional Equities
Exhibit 6: Net box office collections (NBOC) (` mn)
380
1,510
-
200
400
600
800
1,000
1,200
1,400
1,600
Tanu weds Manu (2011) Tanu weds Manu returns(2015)
NBOC (Rs mn)
Source: Company, Kotak Institutional Equities
Exhibit 7: Net box office collections (NBOC) (` mn)
360
1,042
0
200
400
600
800
1000
1200
ABCD (2013) ABCD 2 (2015)
NBOC (Rs mn)
Source: Company, Kotak Institutional Equities
Media PVR
50 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Exhibit 8: Footfalls grew 25% yoy in 1QFY16 and 16% yoy for comparable properties Trends in PVR's footfalls, March fiscal year-ends (mn)
7.5
9.1 9.1
11.5
15.1
16.6
14.3 13.915.2 15.7 16.0
12.2
19.0
0
4
8
12
16
20
1Q
FY13
2Q
FY13
3Q
FY13
4Q
FY13
1Q
FY14
2Q
FY14
3Q
FY14
4Q
FY14
1Q
FY15
2Q
FY15
3Q
FY15
4Q
FY15
1Q
FY16
Notes: (1) Cinemax acquisition consolidated in 4QFY13.
Source: Company, Kotak Institutional Equities
Exhibit 9: ATP grew 4% yoy and 5% yoy on comparable properties in 1QFY16 Trends in PVR's average ticket price (ATP), March fiscal year-ends
160.1
167
174
164
168.6 169
175
160
176
180
184
168
183
(3)
0
3
6
9
12
15
140
150
160
170
180
190
1Q
FY13
2Q
FY13
3Q
FY13
4Q
FY13
1Q
FY14
2Q
FY14
3Q
FY14
4Q
FY14
1Q
FY15
2Q
FY15
3Q
FY15
4Q
FY15
1Q
FY16
ATP (LHS, Rs) Growth (RHS, yoy %)
Notes: (1) Cinemax acquisition consolidated in 4QFY13.
Source: Company, Kotak Institutional Equities
PVR Media
KOTAK INSTITUTIONAL EQUITIES RESEARCH 51
Exhibit 10: PVR reports a sharp 16% growth in SPH in 1QFY16 Trends in PVR's F&B spends per head (SPH), March fiscal year-ends
48.446
48 48
54 54 5456
64 64
67
62
74
0
5
10
15
20
25
30
40
45
50
55
60
65
70
75
1Q
FY13
2Q
FY13
3Q
FY13
4Q
FY13
1Q
FY14
2Q
FY14
3Q
FY14
4Q
FY14
1Q
FY15
2Q
FY15
3Q
FY15
4Q
FY15
1Q
FY16
SPH (LHS, Rs) Growth (RHS, yoy %)
Notes: (1) Cinemax acquisition consolidated in 4QFY13.
Source: Company, Kotak Institutional Equities
Exhibit 11: Ad revenues grew 27% yoy and 18% on comparable properties Trends in PVR's ad revenues, March fiscal year-ends
9 14
23
66
122
89 80
48
15 14
28
16
27
-
25
50
75
100
125
100
200
300
400
500
600
1Q
FY13
2Q
FY13
3Q
FY13
4Q
FY13
1Q
FY14
2Q
FY14
3Q
FY14
4Q
FY14
1Q
FY15
2Q
FY15
3Q
FY15
4Q
FY15
1Q
FY16
Ad revenues (LHS, Rs mn) Growth (RHS, yoy %)
Notes: (1) Cinemax acquisition consolidated in 4QFY13.
Source: Company, Kotak Institutional Equities
Media PVR
52 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Exhibit 12: Condensed consolidated financials for PVR, March fiscal year-ends (` mn), 2012-2018E
2012 2013 2014 2015 2016E 2017E 2018E
Profit model
Revenues 5,177 8,064 13,475 14,813 18,750 23,247 27,377
EBITDA 761 1,169 2,117 2,050 3,406 4,091 4,872
Other income 123 91 113 46 75 100 125
Depreciation (365) (560) (944) (1,168) (1,363) (1,598) (1,803)
Interest expense (185) (368) (795) (783) (858) (862) (792)
Pretax profits 310 319 523 124 1,259 1,731 2,402
Tax (57) 124 (19) (8) (63) (138) (480)
PAT before minority interest 253 443 504 116 1,196 1,592 1,921
Minority interest 1 2 57 11 5 (5) (10)
PAT 254 445 561 128 1,201 1,587 1,911
Diluted EPS (Rs) 9.5 14.9 13.7 3.1 25.8 34.1 41.1
Balance sheet
Total equity 2,791 6,427 3,993 4,092 8,652 10,053 11,740
Deferred taxation liability 106 (10) 4 11 11 11 11
Total borrowings 2,035 6,566 6,134 7,475 8,875 8,375 7,875
Minority interest 139 854 771 383 378 383 393
Current liabilities 986 1,939 2,600 2,304 2,770 3,459 3,930
Total liabilities and equity 6,126 15,852 13,533 14,288 20,710 22,304 23,972
Cash and cash equivalents 211 732 495 261 523 786 1,056
Other current assets 2,038 3,229 3,763 4,605 5,240 6,019 6,902
Tangible fixed assets 2,621 5,710 6,990 7,076 8,556 9,059 9,519
Goodwill and Intangibles 374 4,712 1,466 1,525 5,570 5,620 5,675
CWIP 876 1,453 806 806 806 806 806
Total assets 6,126 15,852 13,533 14,289 20,710 22,305 23,972
Cash flow
Operating cash flow, excl. w-capital 679 1,429 2,003 2,021 3,343 3,952 4,391
Working capital changes (193) (239) 128 (1,138) (169) (90) (412)
Capital expenditure (1,160) (7,704) (1,273) (1,684) (6,887) (2,151) (2,318)
Other income (90) 37 80 44 75 100 125
Interest expense (net) (207) (430) (812) (783) (858) (862) (792)
Free cash flow (971) (6,907) 127 (1,540) (4,497) 949 994
Key ratios and assumptions
Footfalls (mn) 24.7 37.2 59.9 59.1 70.6 81.4 90.1
Average ticket price (ATP) (Rs) 156 163 168 178 187 200 210
Screens (#) 166 360 421 464 553 628 693
EBITDA margin (%) 14.7 14.5 15.7 13.8 18.2 17.6 17.8
Net debt/equity (X) 0.7 0.9 1.4 1.8 1.0 0.8 0.6
RoAE (%) 8.2 9.7 10.8 3.2 18.9 17.0 17.5
RoACE (%) 7.0 10.0 10.3 7.9 13.7 13.2 13.6
Notes:
(a) DT Cinemas acquisition built in estimates from 4QFY16E.
Source: Company, Kotak Institutional Equities estimates
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
Cairn merger – majority approval from minorities difficult without support of major minorities
Unauthenticated media reports indicate that large minority shareholders of Cairn India including
(1) LIC (9.1% stake), and (2) Cairn Energy, UK (9.8% stake) may vote against a merger with
Vedanta. The merger requires an approval from a majority of minority shareholders of Cairn
India (minority stake is 40.1%) and a veto by these two shareholders (whose combined stake is
18.9%) could jeopardize the deal; media reports also indicate that another shareholder, United
India Insurance (small stake), does not approve of merger either. The common disagreement
appears to be Cairn’s valuation and expectations of a sweeter deal, though we note that Cairn
Energy prefers direct crude exposure through a continued holding in Cairn India instead of
getting exposure to diversified resources group, i.e. Vedanta.
Cairn merger critical for Vedanta to short out tight liquidity at parent(s) level
The merger with Cairn India is critical to Vedanta (and Vedanta Resources Plc) as it will
substantially improve tight liquidity at the parent entities given the large debt and limited cash
flows. Exhibit 3 compares net debt levels and EBITDA at Vedanta’s standalone balance sheet
(including wholly-owned subsidiaries) in a no-merger and merger scenario with Cairn. Net
debt/EBITDA for the parent (including wholly-owned subsidiaries) will improve on merger to
4.4X/3.4X for FY2016/17E from 11.7X/8.5X in a no-merger scenario.
Sweetened deal can be via preferential shares; merger failure may result in holdco discount
If Vedanta decides to sweeten the deal, it may only do so with a higher amount of preference
shares rather than an increase in the equity share swap ratio of 1:1 (Cairn: Vedanta). At the
proposed swap ratio, the promoter’s holding in Vedanta will fall to 50.1%, just enough for
Vedanta Resources Plc to maintain its premium listing in London. An additional increase of
`10/share in preference shares would increase the Cairn’s valuation by `7.5 bn (or ~1.5% of
market capitalization).
Vedanta’s strategic investment in Cairn was a part of its strategy to become a diversified major
natural resources major; the proposed merger has fueled Street expectations of a simplified
corporate structure in the new unified entity. The failure to merge Cairn will make difficult for
Vedanta to access the former’s cash flows unless through tax inefficient dividends and may
warrant a holding company discount.
Vedanta (VEDL) Metals & Mining
Cairn merger–minorities in majority? Unauthenticated media reports indicate that
two large minority shareholders of Cairn India may vote against the merger. The
concerns appear to hinge of valuation. If Vedanta does indeed sweeten the deal for
minority shareholders, every `10/share increase in Cairn valuation through preference
shares will impact Vedanta’s fair value by `2/share. The failure to merge Cairn with
Vedanta would make it difficult for the latter to access Cairn’s cash flows unless
through tax inefficient dividends and may warrant a holding company discount.
BUY
JULY 23, 2015
UPDATE
Coverage view: Cautious
Price (`): 136
Target price (`): 235
BSE-30: 28,505
Sesa Sterlite
Stock data Forecasts/Valuations 2015 2016E 2017E
52-week range (Rs) (high,low) EPS (Rs) 17.1 22.5 29.6
Market Cap. (Rs bn) EPS growth (%) 0.8 31.7 31.9
Shareholding pattern (%) P/E (X) 8.0 6.1 4.6
Promoters 59.5 Sales (Rs bn) 737.1 822.7 975.3
FIIs 17.4 Net profits (Rs bn) 50.6 83.5 110.2
MFs 1.4 EBITDA (Rs bn) 220.4 215.1 263.0
Price performance (%) 1M 3M 12M EV/EBITDA (X) 5.1 5.2 4.0
Absolute (22.9) (35.5) (54.2) ROE (%) 8.0 13.8 15.3
Rel. to BSE-30 (25.0) (36.9) (58.2) Div. Yield (%) 3.0 2.4 2.4
Company data and valuation summary
306-130
403.5
Metals & Mining Vedanta
54 KOTAK INSTITUTIONAL EQUITIES RESEARCH
We note that the Vedanta and Cairn India shareholder’s meetings to vote on the merger are
scheduled for 4QCY15.
Exhibit 1: Merger expected to be complete by 4QFY16 Various approvals required for the Cairn merger and their indicative timelines
Source: Company, Kotak Institutional Equities
Exhibit 2: LIC and Cairn Energy, UK are major minority shareholders Shareholding pattern of Cairn India, June 30, 2015 (%)
Source: BSE, Kotak Institutional Equities
Cairn merger with Vedanta would improve net debt status for the latter
(standalone)
Exhibit 3 compares pre-merger net debt levels and EBITDA at Vedanta’s standalone balance
sheet (including wholly-owned subsidiaries) with the same post its merger with Cairn. On
the Cairn merger, the debt position in the parent entity will improve materially. Vedanta had
net debt of `778 bn as of March 2015 in its standalone balance sheet (including wholly
owned subsidiaries) with cash reserves of `517 bn lay with HZ, Cairn India. On assuming
Cairn’s merger, net debt at standalone level (and wholly owned subsidiaries) will decline to
`597bn/`577 bn for FY2016/17E compared to `830 bn/`826 bn in a pre-merger scenario.
Net debt/EBITDA post-merger entity will improve to 4.4X/3.4X for FY2016/17E from
11.7X/8.5X in a pre-merger scenario.
Key events/approvals Indicative timeline
BSE, NSE and SEBI approvals 2QFY16
Vedanta Plc posting of UK Circular 2QFY16
Application to High Court in India 2QFY16
Vedanta Plc EGM 2QFY16
Vedanta Ltd and Cairn India shareholder meetings 3QFY16
Foreign Investment Promotion Board approval 3QFY16
High Court of India approval 4QFY16
Ministry of Petroleum & Natural Gas 4QFY16
Transaction completion 4QFY16
Twin Star Mauritius
Holdings, 34.4
Vedanta Limited, 23.7
Sesa Resources, 1.7
Cairn UK Holdings, 9.8
LIC India, 9.1
FIIs, 13.5
Others, 7.7
Vedanta Metals & Mining
KOTAK INSTITUTIONAL EQUITIES RESEARCH 55
Exhibit 3: Merger with Cairn can significantly improve Vedanta's high leverage at standalone level (including wholly owned subsidiaries) Scenario analysis of Cairn merger on Net debt, EBITDA and leverage ratios of Vedanta, March fiscal year-ends, (` mn)
Source: Company, Kotak Institutional Equities estimates
Promoter’s stake in the merged entity to decline to 50.1% from 62.9%
At a 1:1X swap ratio (in favor of Cairn’s minorities), the promoter shareholding will fall to
50.1% from 62.9% at present (Exhibit 3). Note that Vedanta will issue 752 mn new shares
to minority shareholders of Cairn India, thereby taking total shares outstanding to 3,717 mn
from 2,965 mn shares. The minority shareholders of Cairn India will own 20.2% of Vedanta
Ltd, while 29.7% will be owned by minority shareholders of Vedanta Limited in the merged
entity.
2014 2015 2016E 2017E 2018E 2016E 2017E 2018E
Net debt (Rs mn)
Standalone, wholly owned subsidiaries
Sesa Sterlite Standalone* 670,480 710,920 752,133 747,692 730,082 752,133 747,692 730,082
Talwandi Sabo 50,060 63,890 78,025 74,564 65,986 78,025 74,564 65,986
Zinc International (12,040) (8 ,570) (18,210) (14,842) (7,136) (18,210) (14,842) (7,136)
Others 10,940 11,940 18,900 18,900 18,900 18,900 18,900 18,900
Cairn India (233,861) (248,942) (265,519)
Sub total 719,440 778,180 830,848 826,314 807,833 596,987 577,372 542,314
Other subsidiaries
Zinc India (239,430) (271,920) (347,551) (395,482) (447,111) (347,551) (395,482) (447,111)
Cairn India (230,170) (245,400) (233,861) (248,942) (265,519)
Balco 47,850 54,540 54,298 49,754 45,914 54,298 49,754 45,914
Sub total (421,750) (462,780) (527,114) (594,670) (666,716) (293,253) (345,728) (401,197)
Total 297,690 315,400 303,734 231,644 141,116 303,734 231,644 141,116
EBITDA (Rs mn)
Standalone, wholly owned subsidiaries
Sesa Sterlite Standalone* 23,119 46,295 54,408 76,437 77,973 54,408 76,437 77,973
Talwandi Sabo (469) 982 6,921 12,635 15,574 6,921 12,635 15,574
Zinc International 12,821 10,820 8 ,822 6,369 6,837 8 ,822 6,369 6,837
Others 7,564 (11,559) 609 1,240 1,200 609 1,240 1,200
Cairn India 63,903 75,210 77,203
Sub total 43,036 46,537 70,760 96,681 101,585 134,663 171,891 178,788
Other subsidiaries
Zinc India 69,615 74,196 71,443 79,868 82,681 71,443 79,868 82,681
Cairn India 140,840 96,207 63,903 75,210 77,203 - - -
Balco 3,160 3,506 8 ,947 11,275 10,599 8 ,947 11,275 10,599
Sub total 213,615 173,909 144,293 166,353 170,482 80,390 91,143 93,279
Total 256,650 220,446 215,052 263,033 272,067 215,052 263,033 272,067
Leverage ratios (X)
Standalone & wholly owned subsidiaries
Net debt/EBITDA (X) 16.7 16.7 11.7 8 .5 8 .0 4.4 3.4 3.0
Consolidated
Net debt/EBITDA (X) 1.2 1.4 1.4 0.9 0.5 1.4 0.9 0.5
Pre-merger Post-merger
Metals & Mining Vedanta
56 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Exhibit 4: Promoter shareholding at Vedanta will reduce to 50.1% from 62.9% on Cairn merger at
swap ratio of 1X Computation of revised promoter stake on merger with Cairn India, (%)
Source: Company, Kotak Institutional Equities estimates
Merger can facilitate debt repayment to Vedanta Resources Plc
We note that the Vedanta Ltd.’s, parent entity, Vedanta Resources Plc had net debt of
US$7.7 bn as of March 2015 on its balance sheet while solely relying on the cash flows from
Indian subsidiaries for debt servicing as its Zambian copper operations struggle with low
profitability (Exhibit 4).
Vedanta Resources Plc has debt maturity of US$2.4 bn due in FY2016/17E. Vedanta
Resources Plc had earlier loaned US$2.7 bn to TSMHL (wholly-owned subsidiary of Vedanta
Ltd (India) and debt pertains to the Cairn India acquisition. We believe the merger can
facilitate loan repayment by TSMHL to Vedanta Resources Plc, thereby easing the high
leverage at the parent entity.
No. of shares
(mn)
Swap ratio (X) - (A) 1.0
Vedanta shares outstanding 2,965
Promoter's stake in Vedanta 62.9% 1,864
Cairn shares outstanding 1,875
Cairn India shareholding
Promoter stake (Vedanta) 59.9% 1,123
Minority stake (B) 40.1% 752
New Vedanta shares to be issued (A x B) - (C) 752
Vedanta - new shareholding
Existing shares 2,965
New shares to Cairn minorities 752
Total shares outstanding 3,717
Shares with promoters 1,864
Promoter stake (%) 50.1
Vedanta Metals & Mining
KOTAK INSTITUTIONAL EQUITIES RESEARCH 57
Exhibit 5: High debt at parent Vedanta Resources Plc offers limited scope to reduce debt if not
through subsidiaries Net debt at the parent Vedanta Resources Plc and its various subsidiaries, March fiscal year-ends, (US$ mn)
Note: The debt numbers mentioned are only external. Hence the net debt at TSMHL does not include (a) US$2.7 bn payable to Vedanta Resources Plc, and (b) US$1.25 bn payable to Cairn India.
Source: Company, Kotak Institutional Equities
Exhibit 6: Vedanta Resources Plc has US$2.4 bn of debt maturing over next 2 years Debt maturity profile of Vedanta Plc and its subsidiaries, March fiscal year-ends, (US$ mn)
Source: Company, Kotak Institutional Equities
Mar-13 Sep-13 Mar-14 Sep-14 Mar-15
Net debt (US$ mn)
Vedanta Resources Plc 6,334 8,005 8,307 7,473 7,673
KCM 751 711 723 813 738
Vedanta (India) 4,748 4,518 4,585 4,889 4,439
Zinc International (197) (188) (169) (189) (137)
Zinc India (4,045) (3,886) (4,345) (4,478) (4,937)
Cairn India (3,102) (3,299) (3,912) (2,732) (2,857)
Balco 687 619 679 734 766
Talwandi Sabo 705 721 831 939 1,013
TSMHL 2,628 1,173 1,181 1,514 1,670
Others 103 97 53 100 90
Vedanta (India) Consolidated 1,526 (245) (1,097) 777 48
Total 8,616 8,463 7,920 9,055 8,460
2013 2014 2015
EBITDA (US$ mn)
Vedanta Resources Plc - 1 (1)
KCM 257 156 (4)
Vedanta (India) 577 510 795
Zinc International 1,203 214 181
Zinc India 295 1,173 1,220
Cairn India 2,440 2,347 1,477
Balco 62 53 60
Talwandi Sabo - (1) 22
TSMHL - - -
Others 54 26 (7)
Vedanta (India) Consolidated 4,631 4,334 3,745
Total 4,888 4,491 3,741
US$ mn Total 2016 2017 2018 2019 2020 Beyond 2020
Debt at Vedanta Plc 7.8 0.4 2.0 1.0 2.6 0.3 1.5
Debt at Subsidiaries 8.4 2.1 1.3 1.7 1.7 0.7 0.9
Total debt 16.2 2.5 3.3 2.7 4.3 1.0 2.4
Metals & Mining Vedanta
58 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Exhibit 7: Vedanta, Key assumptions, March fiscal year ends 2014-18E (` mn)
Source: Company, Kotak Institutional Equities estimates
Exhibit 8: SOTP-based target price of Vedanta is `235/share SOTP-based target price of Vedanta, March fiscal year-ends, March 2017E basis (` mn)
Source: Kotak Institutional Equities estimates
2014 2015 2016E 2017E 2018E
Volumes (tons)
Zinc 750,766 736,000 774,223 782,403 783,034
Lead 121,120 127,143 134,080 163,483 167,760
Copper 297,000 361,658 367,984 374,059 384,184
Aluminum - Balco 252,172 300,135 500,225 559,075 559,075
Aluminum - Jharsuguda 542,000 534,000 846,500 1,487,500 1,550,000
Refined silver 347 328 365 417 397
Power (mn units) 7,530 8,419 14,310 16,742 19,161
Iron ore sales (dmt) 1,198 1,500 1,500 1,500
Cairn India net production (O+OEG) (000's b/d) 218 213 210 208 210
Average realization (Rs/ton)
Zinc 130,493 150,761 160,551 169,549 174,760
Lead 143,907 140,314 142,603 146,892 149,935
Copper cathode 442,810 416,584 396,744 402,992 406,116
Aluminium ingots 134,733 149,158 146,494 152,344 153,524
Silver (Rs mn/ton) 43 36 36 37 38
Power (Rs/unit) 3.3 3.1 3.8 4.0 4.1
Base assumptions (US$/ton)
Zinc 1,909 2,176 2,250 2,350 2,400
Lead 2,092 2,021 1,950 2,000 2,050
Copper 7,108 6,558 6,000 6,000 6,000
Aluminium (all in) 2,030 2,290 2,100 2,150 2,150
Dated Brent crude price (US$/bbl) 108 86 65 73 80
EBITDA Multiple EV Net debt
Implied
M Cap
Sesa's
stake
Attributable
M Cap Contribution
(Rs bn) (X) (Rs bn) (Rs bn) (Rs bn) (%) (Rs bn) Rs/ share
BALCO 11 6 71 50 21 51 11 3
Zinc business
Hindustan Zinc 80 6 503 (433) 936 64.9 608 163
Zinc International 6 5 29 (15) 44 100 44 12
Cairn India (fair value of KIE's energy team) 114
Debt from Cairn India acquisition 331 (89)
Standalone (ex-power, iron ore) 67 6 420 358 62 100 62 17
Iron ore business 4
Power business 10
Sesa Sterlite share price (Rs/ share) 235
Target price of Sesa Sterlite (Rs/ share) 235
Vedanta Metals & Mining
KOTAK INSTITUTIONAL EQUITIES RESEARCH 59
Exhibit 9: Vedanta Ltd, Proforma (Cairn merger) Profit model, balance sheet and cash flow model, March fiscal year-ends, 2014-2018E (`
mn)
Source: Company, Kotak Institutional Equities estimates
2014 2015 2016E 2017E 2018E
Profit model (Rs mn)
Net sales 722,341 737,095 822,718 975,261 1,020,566
EBITDA 256,650 220,446 215,052 263,033 272,067
Other income 24,460 29,772 36,863 43,325 47,904
Interest (61,110) (56,588) (62,426) (66,599) (62,224)
Depreciaiton (55,840) (51,096) (54,910) (61,841) (61,393)
Goodwill amortization (28,400) (20,496) - - -
Profit before tax 135,760 122,039 134,579 177,918 196,353
Extraordinaries (2,290) (221,289) - - -
Current tax (10,000) (27,736) (20,945) (35,591) (36,551)
Deferred tax - 13,253 (3,075) (2,155) (5,960)
Net income before minorities 123,470 (113,734) 110,560 140,172 153,843
Minority interest (73,420) (42,764) (27,023) (29,992) (30,729)
Net income 50,050 (156,498) 83,537 110,181 123,113
Adjusted net income 50,200 50,601 83,537 110,181 123,113
EPS adjusted (Rs) 16.9 17.1 22.5 29.6 33.1
EPS (ex-goodwill amortization) (Rs) 26.5 24.0 22.5 29.6 33.1
Balance sheet (Rs mn)
Shareholder's funds 730,087 538,753 675,110 769,055 873,763
Borrowings 805,660 777,523 802,898 782,447 746,996
Minority Interest 337,975 355,297 122,267 137,955 153,653
Deferred tax liability 27,352 33,297 36,371 38,526 44,486
Current liabilities 240,110 197,942 190,701 213,490 217,907
Total liabilities 2,141,183 1,902,812 1,827,349 1,941,473 2,036,804
Net fixed assets 479,671 523,181 752,497 852,691 868,896
Capital work-in-progress 431,277 387,480 181,033 98,622 101,122
Goodwill 392,383 177,897 0 0 0
Cash and cash equivalents 507,970 462,126 499,164 550,803 605,880
Current assets 329,882 352,128 394,653 439,356 460,906
Total assets 2,141,183 1,902,812 1,827,348 1,941,473 2,036,804
Free cash flow (Rs mn)
Operating cash flow excl. working capital 119,495 140,498 131,681 160,843 173,292
Working capital changes (10,239) (25,345) (49,766) (21,914) (17,132)
Capital expenditure (72,317) (105,742) (77,779) (79,623) (80,098)
Free cash flow 36,939 9,411 4,135 59,305 76,061
Ratios
Debt/equity (X) 1.1 1.4 1.2 1.0 0.9
Net debt/equity (X) 0.4 0.6 0.4 0.3 0.2
RoE (%) 7.2 8.0 13.8 15.3 15.0
RoACE (%) 9.0 10.7 8.3 9.8 9.9
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
Understanding the source and destination of container traffic important to gauge the shift
In Exhibit 1/2, we highlight 11 major industrial clusters in India which constitute around 85% of
the cargo traded by India globally (around 60% is concentrated in North and West based
states). The source and destination of container traffic is getting concentrated either closer to
the ports (industrial clusters in Gujarat and Maharashtra, where DFC will have limited impact) or
close to the hinterlands (NCR, Punjab, Haryana, etc., where DFC will have a positive impact).
The shorter lead distances to and from inland destinations may not necessitate rail
transportation. Also in certain longer lead distance, lower volumes or the lack of two-way traffic
inhibits introducing container train services, in the present pricing scheme.
Feedback from industry participants suggests that around 65-70% of traffic is already being
handled by rail from western based ports, to key hinterland markets in the National Capital
Region (NCR). At present, of the ~2.7 mn TEUs of EXIM trade carried by Indian rail, around 0.9
mn TEUs is captured by north based ICDs (Appendix I). These points indicate that the benefit for
a container rail operator, post commissioning of DFC, will be gradual (though yearly growth
rates should improve meaningfully) vs. a sharp spurt that is widely expected.
Higher growth in major north-based cargo centres only post commissioning of DFC and DMIC
Any major shift or higher growth in trade at the existing major cargo centres can only happen
post commissioning of the DFC and supplemented by the DMIC project. We note that in
anticipation of DFC/DMIC commissioning and medium-term demand increase, a large amount
of capacity addition (eventual capacity) has already materialized or work is already under
progress in north India (Exhibit 4). Our analysis indicates an overall quantum (eventual capacity)
of ~5.3 mn TEUs of which about 20% is utilized presently. These ICDs are strategically located
to cover growing industrial hubs in NCR (Gurgaon, Manesar, Faridabad, Ghaziabad, Bhiwadi,
Rewari, Dharuhera, Neemrana, Hisar, Panipat, Sonepat). With better rail connectivity, post DFC
commissioning, these industrial hubs are likely to blossom providing good long-term growth
opportunities for container train operators. Benefits from DFC for a rail operator would flow
through higher efficiency/productivity gains (higher double-stacking, lesser investment in
wagons, faster turnaround- 360 containers per train in around 24 hours from JNPT to NCR vs.
90 containers in around 40-50 hours, at present).
No major improvement in cost economics for road operator vs. improving rail economics
Implementation of GST will benefit both rail/road operators in terms of time and cost related
savings. For rail cum ICD operators the hub and spoke model will gain more prominence on the
implementation of GST/DFC. For road operators, implementation of electronic toll collection will
reduce operating costs while gradual reduction in overloading on stricter monitoring and
implementation will be a negative. Overall, in the emerging scenario, it is difficult to envisage
improvement in cost economics of road operators vs. improving economics for rail operators.
Infrastructure India
Rail operators—moving into sweet spot. Our recent visit to three ICDs in the
National Capital Region (NCR), concurrent discussion with industry participants and
analysis embeds the view of superior long-term volume growth economics for container
rail operators. While commissioning of the DFC project will be an important variable in
the journey of shift (higher share) from road to rail, other variables (source and
destination of container based on industrial cluster, GST, truck operators emerging
economics) too need to be kept in mind while envisioning the shift. Concor and
Gateway Distriparks are well placed to capture the opportunity.
ATTRACTIVE
JULY 23, 2015
UPDATE
BSE-30: 28,505
Infrastructure India
KOTAK INSTITUTIONAL EQUITIES RESEARCH 61
Commissioning of DFC may be an important variable towards higher container
rail share, though other variables too need to be kept in mind:
Our recent visit to three ICDs in the National Capital Region (NCR), concurrent discussion
with industry participants and subsequent analysis embeds the view of superior long-term
volume growth economics for container rail operators. While commissioning of the
Dedicated Freight Corridor (DFC) project will be an important variable in the journey of shift
(higher share) from road to rail, other variables (important to gauge the shift) too needs to
be kept in mind while envisioning the shift (overall shift difficult to quantify).
Key monitorables to gauge the extent of shift are (1) Source and destination of container
traffic based on existing industrial clusters, (2) Shift or higher growth in major cargo centres
(especially north) post commissioning of DFC and DMIC, (3) DFC led efficiency/productivity
improvement and higher containerization, (4) GST led positives for both road and rail
operators, (4) changing economics of road operators with respect to gradual reduction in
overloading (improving monitoring and implementation), implementation of electronic toll
collection, movement in fuel prices, etc. We elucidate on each of the points below:
Source and destination of container traffic: In Exhibit 1 and 2, we highlight eleven
major industrial clusters in India which constitute around 85% of the cargo traded by
India globally (around 60% is concentrated in North and West based states). As can be
seen below, the source and destination of container traffic is getting concentrated either
closer to the ports (industrial clusters in Gujarat and Maharashtra, where DFC will have
limited impact) or close to the hinterlands (NCR, Punjab, Haryana, etc., where DFC will
have a positive impact). The shorter lead distances to and from inland destinations may
not necessitate rail transportation. Also in certain longer lead distances, lower volumes or
the lack of two-way traffic inhibits introducing container train services, in the present
pricing scheme.
Feedback from industry participants suggests that around 65-70% of traffic is already
getting handled by rail, from western based ports, to key hinterland markets in the
National Capital Region (NCR). At present, of the ~2.7 mn TEUs of EXIM trade carried by
Indian rail, around 0.9 mn TEUs is captured by north based ICDs (Appendix I). These
points indicate that the benefit for a container rail operator, post commissioning of DFC,
will be gradual (though yearly growth rates should improve meaningfully) vs. a sharp
spurt that is widely expected.
India Infrastructure
62 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Exhibit 1: Key export cluster in India (share, %)
Source: Drewry, Kotak Institutional Equities
Exhibit 2: Key Import cluster in India (share, %)
Source: Drewry, Kotak Institutional Equities
Shift or higher growth in major cargo centres (especially north) only post
commissioning of DFC and DMIC: Any major shift or higher growth in trade at the
existing major cargo centres can only happen post commissioning of the DFC and
supplemented by the Delhi-Mumbai Industrial Corridor (DMIC) project.
We note that in anticipation of DFC/DMIC commissioning and medium-term demand
increase, a large amount of capacity addition (eventual capacity) has already materialized
or work is already under progress, driven by (1) Kathuwas (300 acres, eventual capacity of
1.5 mn TEUs) and supported by (2) JM Baxi’s Delhi International Cargo Terminal (DICT)
(65 acres, 0.25 mn capacity) and GDPL’s Faridabad (70 acres, 0.35 mn eventual capacity).
Our analysis indicates an overall quantum (eventual capacity) of ~5.3 mn TEUs (Exhibit 4)
of which about 20% is utilized presently.
The aforesaid ICDs are strategically located to cover growing industrial hubs in NCR
(Gurgaon, Manesar, Faridabad, Ghaziabad, Bhiwadi, Rewari, Dharuhera, Neemrana,
Hisar, Panipat, Sonepat). With better rail connectivity, post DFC commissioning, these
industrial hubs are going to blossom providing good long-term growth opportunities for
container train operators.
12
14
3
13
9
3
16
3
3
3
4
12
18
3
15
8
2
20
2
3
3
6
Infrastructure India
KOTAK INSTITUTIONAL EQUITIES RESEARCH 63
Exhibit 3: Key ICDs in the NCR market
Exhibit 4: The northern hinterland ICDs eventual
capacities at ~5.3 mn TEUs
Eventual
capacity Area
ICD Owner (mn TEUs) (acres)
Tughlakabad Concor 0.40 109
Kathuwas Concor 1.50 300
Dadri (Concor + JVs) Concor 0.50 271
Rewari Concor 0.10 20
Barhi Concor 0.50 117
Sonepat+Surnasi Concor 0.18 NA
Gaurhi Harsaru GRFL 0.50 90
Piyala, Faridabad GRFL 0.35 70
Modinagar Kribhco Infra 0.50 100
DICT JM Baxi 0.25 65
Patli Adani 0.20 73
Loni WWIL 0.17 28
ACTL ACTL 0.16 24
Total 5.31 #####
Notes:
(a) Barhi acreage is based on 37 acres given from
Harayana State and Concor buying additional 80 acres of
land
(b) Sonepat and Surnasi ICD capacity is based on initial
capacity (eventual capacity may be higher)
(c) Modinagar ICD capacity estimated based on a ratio of
0.5 mn TEU per 100 acre of area
Source: GRFL, Kotak Institutional Equities
Notes:
(a) Numbers in brackets indicate annual handling capacity in TEUs
Map not to scale
Source:GRFL, Kotak Institutional Equities
Exhibit 5: Key demand centers in NCR
Source: GRFL, Kotak Institutional Equities
Exhibit 6: Distance between key demand centers from key
northern ICDs
Source: GRFL, Kotak Institutional Equities
Delhi
Shahdara
Key locations
Concor ICDs
GRFL ICDs
Other ICDs
Loni (WW)10 Km
44 Km
Chandigarh(NH 1)
Ghaziabad
Dadri (0.12)
17 Km
Bulandshahr(NH 91)
TKD (0.4 mn)
Ballabgarh
ACTL
25 Km
Piyala, Faridabad(0.15 mn)
Agra(NH 2)
53 Km
8 Km
GarhiGurgaon (0.5 mn)
Hisar(NH 10)
Patli (Adani)
8 Km
Rewari
40 Km
Alwar
Jaipur(NH 8)
Dehradun(NH 24)
37 Km
Kathuwas (1.5 mn)
DICT (0.5 mn)
Neemrana
178 Km
20 Km
18 Km
18 Km
22 Km
5 Km
175 Km
84 Km 175 Km37 Km
Pali10 Km
Modinagar (~0.5 mn)
25 Km
GatewayRail ICD Gurgaon
ICD Tughlakabad
Manesar
Bhiwadi
Bawal
Rewari
Sonepat
Panipat
Karnal
Bhiwani
Jaipur
Kathuwas
DICT
Neemrana
Location
Distance from
ICD Gurgaon
Distance
from TKD
Distance from
Kathuwas
Distance
from DICT
Manesar 9 Km 33 Km 73 Km 80 Km
Bhiwadi 45 Km 67 Km 54 Km 105 Km
Rewari 49 Km 87 Km 31 Km 120 Km
Neemrana 92 Km 116 Km 29 Km 160 Km
Bawal 67 Km 97 Km 39 Km 150 Km
Bhiwani 117 Km 141 Km 93 Km 120 Km
Hisar 165 Km 189 Km 154 Km 165 Km
Jaipur 233 Km 263 Km 178 Km 310 KmICD Tughlakabad
India Infrastructure
64 KOTAK INSTITUTIONAL EQUITIES RESEARCH
In the long-term we will see emergence of new industrial corridors as initial work has
already begun on the Delhi-Mumbai Industrial corridor (DMIC). The DMIC project aims to
develop industrial zones spanning six north-western states in India over a period of 30
years. The project influence includes parts of Uttar Pradesh, Haryana, Rajasthan, Gujarat,
Maharashtra and Madhya Pradesh. A band of 150 km to 200km has been chosen on
both the sides of the western DFC to be developed as the DMIC. In addition to the
influence region, DMIC will also include development of requisite feeder rail and road
connectivity to the hinterland and markets and select ports along the western coast. At
present work on two industrial nodes, Dholera in Gujarat and Shendra in Maharashtra
has started and the Phase-I will be completed by FY2020. We note that three of the
seven nodes being developed in the Phase-I (to be completed by FY2020) are in
the NCR belt (Exhibit 8).
Exhibit 7: DMIC- Seven nodes being developed in Phase-I
Source: DMIC, Kotak Institutional Equities
Exhibit 8: Three of the seven nodes being developed in Phase-I are in the NCR belt
Source: DMIC, Kotak Institutional Equities
Regions State
Nodal
Agency Master planner
Total Area
(sq km)
Development
Area (sq km)
Planned
population
(mn)
Planned
employment
(mn)
Ahmedabad-Dholera Gujarat GIDB Halcrow, UK 903 540 2.00 0.80
Dadri-Noida-Ghaziabad Uttar Pradesh UPSIDC Halcrow, UK 210 100 1.50 1.20
Manesar-Bawal Haryana HSIIDC Jurong, Singapore 800 402 3.88 1.17
Khushkhera-Bhiwadi-Neemrana Rajasthan RIICO Kuiper Campagnons, Netherlands 165 101 1.28 0.55
Pitampura-Dhar-Mhow Madhya Pradesh TRIPAC LEA Associates, Canada 372 100 1.20 0.17
Shendra Bidkin Mega Industrial Park Maharashtra MIDC AECOM Asia 84 32 0.56 0.40
Dighi Port Industrial Area Maharashtra MIDC AECOM Asia 253 55 1.90 1.10
Infrastructure India
KOTAK INSTITUTIONAL EQUITIES RESEARCH 65
DFC led efficiency/productivity improvement and higher containerization: Benefits
from DFC for a rail operator would flow through higher efficiency/productivity gains
(higher double-stacking, lesser investment in wagons, faster turnaround- 360 containers
per train in around 24 hours from JNPT to NCR vs. 90 containers in around 40-50 hours,
at present). Higher double stacking would also help capture light-weight cargo from road
on better price competitiveness. Freeing up of capacity by DFC, coupled with increase in
port-handling capacity and ICD handling capacity would also support higher
containerization (present at around 52% vs. around 75% for developing economies).
The pricing of DFC network to be charged by Indian Railways (IR) to rail operators has not
been revealed, so far. Based on past experience, pricing can be initially stiff leaving lower
benefits for rail operators and multiple iterations are likely by IR before an ideal price mix
is found that balances the overall objectives of IR and rail operators.
Exhibit 9: Salient features of DFC project
Source: DFCC, Kotak Institutional Equities
Improvement in Exim imbalance. Increased instance of imbalance leads to de-stuffing
of excess imports at the container freight stations (CFS). Double-stacking has to some
extent reduced the impact of exim imbalance on rail operators. Still continued weakness
in exports versus imports would lead to fluid movement of traffic between road and rail.
GST would improve offering of both roads and railways. Implementation of Goods
& Services tax (GST) will remove multiple points of taxation and help improve the overall
logistics chain of the country.
For rail operators, domestic transportation is a big opportunity once DFC (capacity added,
double stacking takes out imbalance) and GST (bundling of throughput, warehousing
facilities) resolves the problem of return traffic for the domestic leg (north-east traffic).
Also once GST becomes a reality, the hub and spoke model would become the
mainstream mode of warehousing. As for trailer operators, implementation of GST would
also benefit in terms of time and related-cost savings. Transport Corporation of India
Limited (TCIL) estimates that 40% of the time lost by trailer operators is due to stoppages
at state border check-posts.
India Infrastructure
66 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Road operators- cost savings possible once electronic tolling becomes mainstream.
To expedite the toll collection process, India should gradually move towards electronic toll
collection (ETC). Implementation of ETC will not only reduce congestions and long queues
at toll plazas, but also reduce operating costs for toll operators and plug revenue leakage.
Presently most toll plazas are operated on a manual basis. Related stoppages add almost
5% to the time of an average trip (based on TIL study for Delhi-Mumbai route). This time
delay has two cost components: (1) time and (2) fuel. From a time perspective, the cost
impact is a 2% addition to trip expenses. The second cost element is related to the
additional fuel consumption at such check-posts. While it is difficult to quantify this
impact, a sensitivity of mileage to trip expenses suggests the potential of improvement in
the range of 5-10% on this count.
Exhibit 10: Time-related cost delays of~2% Trip expenses and contribution margins including the costs of delay
Source: TCIL, , Kotak Institutional Equities
Exhibit 11: 5-10% reduction in trip expenses is possible on lower
idling time Improvement in trip expenses with increase in mileage
Source: TCIL, , Kotak Institutional Equities
Road operators- Reduction in instances of overloading to be a negative. NHAI has
been focusing on reducing overloading in the backdrop of increasing number of road
accidents and fatalities on national highways. It asked select key toll plazas to install
weighing machines in March 2012 and in October 2013, enforced strict penalties for
overweight vehicles (10X of base fare +unloading of excess cargo). Our analysis of select
road assets suggest that road operators have started levying such penalties against
oversized vehicles, though their collections do not reflect the large share of such over-
sized vehicles getting penalized. There is also a proposal to invoke the “Prevention of
Damage to Public Property Act, 1984” to seize the vehicle and arrest the driver of
oversized vehicles. The above steps taken suggest seriousness of the Indian government
to reduce overloading. As this happens, the competitiveness of truck drivers would
reduce, relative to rail operators. This should help railways gain market share from road
operators for long-distance container transport.
Parameter Unit Average
Cost of delay Rs / hour 122.79
Trip expenses Rs / tonne-Km 1.11
Increase in trip expenses % 1.82
Mileage (kmpl)
Average trip
expenses
4.15 1.09
4.30 1.07
5.00 0.98
5.50 0.92
Infrastructure India
KOTAK INSTITUTIONAL EQUITIES RESEARCH 67
Exhibit 12: Estimated road traffic death rate per 100,000
population
Source: WHO report - 2013, Kotak Institutional Equities
Exhibit 13: Large share of national highways Number of Accidents, Persons Killed & Injured as per Road Classification, 2011
Source: MoRTH, Kotak Institutional Equities
Road operators more levered to fuel cost changes. As per TCIL, fuel accounts for
about 47% of the cost of operating a trailer (including overhead). Costing (and thus
pricing) for roads thus may remain fluid on the basis of changes in fuel price. This can
impede/support shift of traffic to rail from roads. No major growth witnessed in Road
Freight Index (weighted average freight rates compiled across various routes) over the
past several years despite increasing diesel price trend indicates low demand and lack of
pricing power for the industry. Accordingly, rail operator increasingly becoming more cost
competitive isn’t great news for road operators.
Exhibit 14: Fuel accounts for half of the total cost Break-up of cost of operation of trailers
Source: TCIL, Kotak Institutional Equities
31.9
22.520.5
18.9 18.6 17.7
11.4
6.45.2 4.7 3.7
0
5
10
15
20
25
30
35
Sou
th A
fric
a
Bra
zil
Chin
a
Ind
ia
Ru
ssia
Ind
on
esia US
France
Jap
an
Ger
many
UK
Road classification
National
Highways
State
Highways Other Roads
No. of accidents 149,732 122,239 225,715
Share in total accidents (%) 30.1 24.6 45.3
No. of persons killed 52,924 39,033 50,528
Share in total no. of persons killed (%) 37.1 27.4 35.5
No. of persons injured 156,008 133,435 221,951
Share in total no. of persons injured (%) 30.5 26.1 43.4
Fuel
47
Time-specific
overheads16
Distance-specific
overheads14
Others
23
India Infrastructure
68 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Exhibit 15: The Indian Road Freight Index reveals subdued growth over the last several years
Notes:
(a) Diesel price is the average retail price of diesel across 4 metro cities in India – Delhi, Mumbai, Kolkata and
Chennai
Source: TCIL, Kotak Institutional Equities
Gateway Rail: Improving EXIM offering when it matters; has sufficient capacity
to reap benefits
As a part of our Delhi visit, we interacted with the management of Gateway Rail on business
prospects and followed it up with a visit to their Garhi Harsaru ICD terminal. The
management was confident of capturing overall business growth opportunities as well as
any potential shift of traffic (from Tughlakabad, especially for the traffic not
consumed/originating from NCR) based on (1) it having sufficient capacities, (2) superior
customer relationship and technological offerings and (3) improving double-stacking
offering (once Virangam becomes operational).
Shift of traffic in NCR to happen: Concor’s Tughlakabad ICD volume may gradually
reduce NGT pressure; especially for the traffic not consumed/originating from NCR. Also
increase in relevance of Concor’s Kathuwas as an ICD terminal would be a function of
ramp-up in local demand and establishment of an ecosystem. Both may take time. GDPL
may thus benefit from growth in NCR region (Garhi Harsaru has 10% market share and
has capacity to grow volumes 4X).
….at a time when GDPL is improving its double-stacking offering. The offering of
GDPL for double-stacking would improve for traffic from Garhi Harsaru to western ports
(Mundra/Pipavav/JNPT) once Virangam terminal (near Ahmedabad) gets set up. The
terminal with railway siding and container yard will be constructed over 35 acres of land
acquired and is expected to be operational within a year. Then GDPL can avail the
benefits of double-stacking for all key port traffic over a distance of 850 km. Concor’s
Swaroopgunj (linked to Kathuwas) would provide the same flexibility minus the benefits
of hub-and-spoke pricing (distance between Swaroopgunj and Kathuwas at less than 750
km does not satisfy minimum distance between hubs required for hub-and-spoke
pricing). Still benefits of double-stacking (50% of haulage cost for second stack) would
help improve Concor’s offering.
107 110 114 123 127
140
165 167 171 172 174 175 176 179 182 17 18 21
23
28
33 34 34 35 36 40
43 47
55 59
-
10
20
30
40
50
60
70
50
100
150
200
250
300
350
400
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
Indian road freight index (IRFI) (LHS) Diesel price (Rs/litre) (RHS)
Takeaways from
Gateway Rail
management
meeting
Infrastructure India
KOTAK INSTITUTIONAL EQUITIES RESEARCH 69
Exhibit 16: Gurgaon-Ahmedabad-JNPT route (Concor)
Source: Indian railways, Kotak Institutional Equities estimates
Exhibit 17: Kathuwas-Swaroopganj-JNPT route (GDPL)
Source: Kotak Institutional Equities estimates
GDPL can multiply volumes 4X from current levels to 1.2 mn TEUs. (1) Garhi
Harsaru, Gurgaon- it has 90 acres of land, capable of supporting 500,000 TEUs
capacities. Present capacity is 250,000 TEUs and throughput is 125,000 TEUs. (2)
Sahnewal, Ludhiana- it has 60 acres of land at Sahnewal, capable of supporting 350,000
TEU capacities. Present capacity is 200,000 TEUs and throughput is 125,000 TEUs. (3)
Faridabad- It has 70 acres of land at Faridabad, capable of supporting 350,000 TEU
capacities. Present capacity is 150,000 TEUs and throughput is negligible.
Exhibit 18: GRFL can do 4X current throughput Key statistics for GRPL (TEU)
Source: Company, Kotak Institutional Equities
Increasing instance of double-stacking. While double stacking is happening at
present, its incidence would increase once the loading permissible on wagons and track
gets increased. Eventually all container traffic would start getting double-stacked against
the present case of 30-40% share of double-stacking. The key to increasing amount of
double-stacking is to increase wagon load to 68 tons and eventually to 75 tons (once DFC
starts) from 61.2 tons at present. At 61.2 tonne wagon load threshold, light-weight FEUs
are essential to a double-stack combination. On the DFC track and with new rail
infrastructure, more such combinations would be possible, increasing the share of
For 26-30 tonne category
Section Length (Km) Electrification status Typical freight rate per TEU (Rs)
Gurgaon-Ahmedabad 913 In progress 21,426
Ahmedabad-JNPT 555 Electrified 13,772
Total 1,468 35,198
Single Journey cost 1,468 33,453
Savings (%) through single journey 5.0
For 26-30 tonne category
Section Length (Km) Electrification status Typical freight rate per TEU (Rs)
Kathuwas-Swaroopganj 620 In Progress 14,865
SwaroopGanj-JNPT 780 In Progress 18,145
Total 1,400 33,010
Single Journey cost 1,400 na
Savings (%) through single journey —
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
GDPL ICD/Rail throughput 10,200 17,078 36,666 66,521 112,444 131,337 180,473 233,566 212,317 250,347
ICD Current capacity (TEUs)
ICD Gurgaon - Garhi Harsaru 260,000
ICD Ludhiana - Sahnewal 300,000
ICD Faridabad 150,000
Total 710,000
Current throughput 250,347
Throughput (%) 35.3
India Infrastructure
70 KOTAK INSTITUTIONAL EQUITIES RESEARCH
double-stacking. GDPL believes that this can double the amount of cost savings for the
company to 20%.
Profiling of the NCR market. This market is around 100,000 TEUs per month
throughput with a large proportion coming from Concor (50-60% combined share from
Tughlakabad and Dadri), followed by GDPL (10% share), Loni (10% share) and
ACTL+Patli (7-8% combined). GDPL is better placed versus competition given its
technology oriented and customer specific solutions.
Exhibit 19: Key ICDs in and around NCR market
Source: GRFL, Kotak Institutional Equities
Gurgoan ICD: Large capacity; limited scale helps improve offering
Location and markets served. The terminal is located in Gurgaon district of Haryana,
near the Garhi Harsaru railway station. It is spread over 90 acres of land and can presently
handle around 250,000 TEUs of container per annum. It is strategically located to cover
the industrial hubs in NCR (Gurgaon, Manesar, Faridabad, Ghaziabad, Bhiwadi, Rewari,
Dharuhera, Neemrana, Hisar, Panipat, Sonepat).
0.5million in first phase
Total 1 million at Dadri
http://www.thehindubusinessline.com/2004/07/17/stories/2004071701460900.htm
http://www.cclog-park.com/why_dadri.html
Delhi
Shahdara
Key locations
Concor ICDs
GRFL ICDs
Other ICDs
Loni (WW)10 Km
44 Km
Chandigarh(NH 1)
Ghaziabad
Dadri (0.12)
17 Km
Bulandshahr(NH 91)
TKD (0.4 mn)
Ballabgarh
ACTL
25 Km
Piyala, Faridabad(0.15 mn)
Agra(NH 2)
53 Km
8 Km
GarhiGurgaon (0.5 mn)
Hisar(NH 10)
Patli (Adani)
8 Km
Rewari
40 Km
Alwar
Jaipur(NH 8)
Dehradun(NH 24)
37 Km
Kathuwas (1.5 mn)
DICT (0.5 mn)
Neemrana
178 Km
20 Km
18 Km
18 Km
22 Km
5 Km
175 Km
84 Km 175 Km37 Km
Pali10 Km
Modinagar (~0.5 mn)
25 Km
Takeaways from site
visit to Garhi Harsaru
ICD
Infrastructure India
KOTAK INSTITUTIONAL EQUITIES RESEARCH 71
Exhibit 20: Key demand centers in NCR
Source: GRFL, Kotak Institutional Equities
Exhibit 21: Distance between key demand centers from key
northern ICDs
Source: GRFL, Kotak Institutional Equities
Throughput. The terminal handles around 125,000 TEUs of traffic on an annual basis as
compared to a capacity of 250,000 TEUs. Eventual capacity is higher at about 500,000
TEUs
Railway services. The terminal runs 3-4 rains per week to JNPT, 4-5 trains each to
Mundra and Pipavav and regular reefer services to Kalamboli, Navi Mumbai. The terminal
runs double-stack services to Mundra and Pipavav and single-stack services to JNPT.
Road connectivity. The ICD is about 9 kms away from the key NH-8 highway and thus is
well connected to key industrial hubs.
Infrastructure. The ICD has four full length rail lines and one sick line (for repair of
affected rail). All its trailers are fitted with GPS. The RFID trackers help customer access
the exact location of containers. All containers within the ICD premises get tracked on a
regular basis (through night-vision binoculars in the night). It has 150,000 sq meters of
container yards and 15,000 square meters of bonded warehouse.
Container contents. Exports consist of automobile parts, specialty chemicals, steel coils,
frozen meat, fisheries, grapes, copper strips. Imports are shredded scraps, steel coils, auto
parts, white goods, ply board, etc.
Kathuwas to support shift of traffic from TKD; can eventually become a logistics
hub
As part of our Delhi visit, we also visited Concor’s ICD terminals: (1) Kathuwas and (2)
Tughlakabad. Tughlakabad has for long been the bastion of Concor in the northern
hinterland. It is unique in terms of (1) scale, (2) location for capturing the NCR market and
(3) a well-established eco-system. As claims of pollution caused by diesel trailers and limited
land capacity limit further growth at the terminal, Concor has started operationalizing
alternate ICD capacities (Kathuwas, Sonepat, Surnasi). Key among these is Kathuwas, 3X the
acreage of Tughlakabad and situated on the DFC. While the ICD would come up in phases,
the current capacity at Kathuwas would support shift of traffic from Tughlakabad and thus
add to Concor’s ICD capacity in the northern hinterland. Over the next six months,
GatewayRail ICD Gurgaon
ICD Tughlakabad
Manesar
Bhiwadi
Bawal
Rewari
Sonepat
Panipat
Karnal
Bhiwani
Jaipur
Kathuwas
DICT
Neemrana
Location
Distance from
ICD Gurgaon
Distance
from TKD
Distance from
Kathuwas
Distance
from DICT
Manesar 9 Km 33 Km 73 Km 80 Km
Bhiwadi 45 Km 67 Km 54 Km 105 Km
Rewari 49 Km 87 Km 31 Km 120 Km
Neemrana 92 Km 116 Km 29 Km 160 Km
Bawal 67 Km 97 Km 39 Km 150 Km
Bhiwani 117 Km 141 Km 93 Km 120 Km
Hisar 165 Km 189 Km 154 Km 165 Km
Jaipur 233 Km 263 Km 178 Km 310 KmICD Tughlakabad
Concor investing for
the longer term
India Infrastructure
72 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Kathuwas would also start supporting new traffic from nearby industrial belts. Eventually,
Kathuwas has the potential to become hub for industrial activity in key sectors.
Tughlakabad ICD: Unique in scale; limited growth potential
Location and market served. ICD Tughlakabad (TKD), flagship terminal of Concor, is
situated near Okhla Industrial Area (southeast of Delhi) and is spread over 109 acres of
land. Its hinterland comprises of all states of Northern and Western India. It has a well-
developed ecosystem housing offices of customs, bank, shipping Lines, CHAs and
surveyors.
Throughput. Tughlakabad’s average throughput is around 38,500 TEUs per month, and
the ICD is operating at its peak volumes. There are four rail lines and on an average 15
trains are handled daily.
Exhibit 22: Static volumes at the Tughlakabad port Container volumes at key terminals (TEUs)
Source: Company, Kotak Institutional Equities
Railway services. The ICD handles rail containers through daily train services to the
Gateway ports (Mumbai, Nhava Sheva, Pipavav, Mundra, Chennai). The ICD also caters to
containers brought by roads from other ports such as Haldia, Calcutta and Kandla, etc.
Road connectivity. The ICD touches NH-2 and is conveniently located, having approach
to major roads in Delhi connecting all National Highways leading out of the state.
Infrastructure. The ICD has four full length rail lines in the customs area. It is equipped
with modern facilities such as rail mounted gantry of 40 metric ton empty lifting capacity,
rubber tyre diesel powered cranes, billoties and lift trucks. It has two covered sheds, one
for import (6,000 square meters) and another for export (10,000 square meters) with a
total area of 16,000 sq. mts. In addition, there are two bonded warehouses spread over
8,500 square metres.
406 410 409 384
413 428 440 447 438
463
-
100
200
300
400
500
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Concor-Tughlakabad('000 TEUs)
Takeaways from the
Tughlakabad visit and
meeting
Infrastructure India
KOTAK INSTITUTIONAL EQUITIES RESEARCH 73
Exhibit 23: Terminal profile of Inland Container Depot, Tughlakabad, New Delhi
Source: Company, Kotak Institutional Equities
Container contents. On the export side, major items include leather garments and
leather products, readymade garments, machinery and agricultural products etc.
Commodities being imported include chemicals, accessories of motors, plastics and
articles, copper rods, copper wire etc.
Static throughput constrained by rail capacity. Tughlakabad’s average throughput is
38,500 TEUs per month, and ICD is operating at over 100% land capacity. It is trying to
free some more land. Rail capacity remains a bottle-neck and that would get relieved
once DFC comes about (as transportation time would reduce).
Some potential for increase in Concor’s northern throughput. Once Kathuwas
becomes operational, 30% of non-NCR traffic would shift there and thus lead to growth
in Concor’s northern throughput. Concor would also be able to shift some of its traffic to
other upcoming ICDs (Sonepat and Surnasi).
Limited rail share at ports may not be the case for hinterland locations. We note a
25:75 mix of rail:road freight at ports. Within ports, this mix is even more in favor of
roads at JNPT and slightly more balanced at Mundra and Pipavav. This is reflected in
Concor having a market share (rail+road) of 15% and 45% at Pipavav. The share is lower
at Mundra at 15% due to other considerations (Adani Logistics has material share). In
contrast, the mix of freight in the hinterland is likely to be more in favor of rail with roads
having a minority share. For such long distances, road is an inferior mode of transport
(chances of theft, pricing is more expensive, Mumbai clearing for Delhi cargo is also
difficult).
Kathuwas ICD: Behemoth in the making; key beneficiary of DFC
Location and markets served. The terminal is located in Rajasthan, about 29 km from
Neemrana and 35 km from Rewari. It is spread over 290 acres and can handle an
eventual capacity of 1.5 mn TEUs. It is strategically located to cover the industrial hubs in
Rajasthan (Bhiwadi, Rewari, Dharuhera, Neemrana). Apart from Japanese and South
Korean industrial belt coming near Neemrana, the terminal can benefit from potential
hubs coming around Kathuwas (steel, fertilizers, cement, oil).
Throughput. The management expects the terminal to get custom notified as an ICD in
coming few weeks. It then aims to handle new export traffic of 2,000-3,000 TEUs per
month and import traffic of 1,500-2,000 TEUs per month in FY2016.
Infrastructure Value Unit
Full length rail lines 4 nos
Covered Export warehouse 10,000 sq. m
Covered Import warehouse 6,000 sq. m
2 Bonded warehouses 8,500 sq. m
Dedicated area for LCL export cargo 3,500 sq. m
Open stack space - loaded 12,000 TEU
Open stack space - empty 2,000 TEU
Separate empty parks - stacking of empty containers 8,000 TEU
Parking area 66,000 sq. m
Parking area 750+ trailers
BLCA rakes of base depot at ICD/TKD 84 nos
each of 45 High Speed wagons (1000 kmph)
for carrying containers
Fully computerised Export & Import documentation
Administrative building - builtup area 8,000 sq. m
housing offices of CONCOR, Customs, Bank,
ATMs, Canteen, Shipping Lines, CHAs,
Transporters, Surveyors & Business Centre etc
Computerised weigh bridges 2 nos
Takeaways from the
Kathuwas visit and
meeting
India Infrastructure
74 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Connectivity. The ICD is about 25 kms away from the key NH-8 highway and touches
state highway 26.
Services. The present services at the ICD are limited as it is being used as a transshipment
terminal at present. Double-stacked traffic comes from/goes to Mundra and Pipavav. The
second stack of traffic gets off-loaded/loaded at Kathuwas ICD. Apart from exim services,
the ICD also handles domestic cargo for cars (from Maharashtra) and Copper (to Ooty)
where its warehousing service is also being used.
Infrastructure. The ICD has two full length existing rail lines and aims to add three more
lines over time. It has three warehouses, one each for exports, imports and domestic
cargo. The domestic warehouse is spread over 3,000 square meters. Key USP for the
terminal is that it is located on the western DFC and thus can handle 360 TEU capacity
trains. Its 1.3 km rail siding is appropriate for handling long, double-stacked trains.
Container contents. Exports include auto parts (Hero), chemicals, electronics, stones
and diapers. Imports include polyester yarn, chemicals, air conditioner parts, coils,
television parts.
Infrastructure India
KOTAK INSTITUTIONAL EQUITIES RESEARCH 75
APPENDIX I
Exhibit 24: Rail volumes are concentrated in the north-west-central belt Spread of rail container volumes, March fiscal year-ends (%)
Source: Indian railways, Kotak Institutional Equities
Exhibit 25: Imported container traffic split, 2013
Source: CRISIL, Kotak Institutional Equities
Exhibit 26: Exported container traffic split, 2013
Source: CRISIL, Kotak Institutional Equities
North31%
West16%
Central45%
South6%
East2%
FY2010 - 25 mn tonnes
North33%
West32%
Central26%
South6%
East3%
FY2015 - 38 mn tonnes
CFS55
ICD28
Direct17
CFS34
ICD26
Direct40
India Infrastructure
76 KOTAK INSTITUTIONAL EQUITIES RESEARCH
APPENDIX II
Exhibit 27: SME business clusters along western DFC gets concentrated either close to ports or in the northern hinterland No. and size of SME clusters in various states - North and West part of India
Source: Ministry of micro, small and medium enterprises, Kotak Institutional Equities
State Cluster location Size category Products Distance from JNPT exact(Km) Distance bucket
Maharashtra Bhiwandi A Powerloom 65 <100
Malegaon A Powerloom 211 100-300
Mumbai A Electronic Goods 56 <100
Mumbai A Readymade Garments 56 <100
Nagpur(Butibori) A Readymade Garments 816 700-1000
Pune A Auto Components 141 100-300
Tarapur, Thane-Belapur A Pharmaceuticals- Bulk Drugs 147 100-300
Gujarat Ahmedabad A Pharmaceuticals 555 500-700
Alang A Ship Breaking 684 500-700
Chotila A Sanitary Fittings 697 500-700
Rajasthan Alwar,S. Madhopur Bharatpur belt A Oil Mills 1,323 1300-1600
Haryana Faridabad A Engineering Cluster 1,466 1300-1600
Gurgaon A Auto Components 1,433 1300-1600
Gurgaon A Electronic Goods 1,433 1300-1600
Gurgaon A Readymade Garments 1,433 1300-1600
Infrastructure India
KOTAK INSTITUTIONAL EQUITIES RESEARCH 77
APPENDIX III
Exhibit 28: Railway electrification map as of 31st March 2015
Source: Indian railways, Kotak Institutional Equities
KO
TA
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June 2015: Results calendar
Mon Tue Wed Thu Fri Sat Sun
20-Jul 21-Jul 22-Jul 23-Jul 24-Jul 25-Jul 26-Jul
Hindustan Zinc Asian Paints Bajaj Finance Alstom T&D India ABB India Havells India
LIC Housing Finance Cairn India Bajaj Finserv Bajaj Auto Axis Bank
UltraTech Cement Eicher Motors Bharti Infratel Bajaj Holdings & Investment Bharat Electronics
HDFC Bank Container Corporation Biocon Crompton Greaves
Hindustan Unilever JSW Energy Dew an Housing Finance GAIL (India)
Idea Cellular Muthoot Finance GAIL (India) Mahindra & Mahindra Financial Services
Indiabulls Housing Finance PVR L&T Finance Holdings Reliance Industries
Infosys SKS Microfinance Lupin Supreme Industries
Whirlpool of India TV18 Broadcast Rallis India TVS Motor
United Brew eries United Spirits
Wipro
27-Jul 28-Jul 29-Jul 30-Jul 31-Jul 1-Aug 2-Aug
Ambuja Cements Dish TV India Allahabad Bank Colgate Palmolive (India) CESC JK Cement
Century Textiles HDFC Castrol India Dr. Reddy's Laboratories Cholamandalam Investment
Coromandel International Maruti Suzuki Dabur India Exide Industries GlaxoSmithKline Pharmaceuticals
Info Edge (India) PI Industries Godrej Consumer Products Gujarat Pipavav Port ICICI Bank
Jagran Prakashan Pidilite Industries JSW Steel IDFC Karur Vysya Bank
Just Dial PNB MphasiS IPCA Laboratories Larsen & Toubro
KEC International Shriram City Union Vedanta ITC Titan Company
Mahindra CIE Automotive Tata Communications WABCO India Jyothy Laboratories
MRF Thermax Yes Bank Kotak Mahindra Bank
Tech Mahindra Union Bank of India NTPC
Torrent Pharmaceuticals Oriental Bank of Commerce
Petronet LNG
3-Aug 4-Aug 5-Aug 6-Aug 7-Aug 8-Aug 9-Aug
Bharat Forge Bharti Airtel Emami Motherson Sumi Systems Grasim Industries Jaiprakash Associates
Carborundum Universal Britannia Industries Shree Cements Mahindra & Mahindra
HCL Technologies Godrej Properties Siemens
Hexaw are Technologies Tata Chemicals
Orient Cement
10-Aug 11-Aug 12-Aug 13-Aug 14-Aug 15-Aug 16-Aug
Godrej Industries Ashok Leyland Page Industries Amara Raja Batteries
Apollo Tyres The India Cements Tata Pow er Bharat Petroleum Corporation
Source: BSE, NSE, Kotak Institutional Equities
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Kotak Institutional Equities: Valuation summary of KIE Universe stocks
Target O/S
Price (Rs) price Upside Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) ADVT-3mo
Company Rating 22-Jul-15 (Rs) (%) (Rs mn) (US$ mn) (mn) 2015 2016E 2017E 2015 2016E 2017E 2015 2016E 2017E 2015 2016E 2017E 2015 2016E 2017E 2015 2016E 2017E 2015 2016E 2017E (US$ mn)
Automobiles
Amara Raja Batteries SELL 870 620 (28.7) 148,539 2,335 171 24.1 27.8 30.9 11.8 15.7 10.8 36.2 31.2 28.2 20.8 17.8 15.7 8.7 7.2 6.0 0.5 0.6 0.7 26.8 25.3 23.3 2.7
Apollo Tyres BUY 193 250 29.4 98,344 1,546 509 19.8 21.6 22.7 (6.9) 9.4 5.0 9.8 8.9 8.5 5.2 5.5 5.4 1.8 1.5 1.3 1.0 1.2 1.2 20.1 18.6 16.8 7.4
Ashok Leyland SELL 81 60 (26.2) 231,512 3,639 2,846 0.9 2.3 3.6 150.7 151.6 56.6 89.6 35.6 22.7 25.1 17.3 13.0 4.5 4.2 3.7 0.6 0.8 1.3 5.4 12.2 17.4 15.0
Bajaj Auto ADD 2,619 2,470 (5.7) 757,823 11,912 289 109.0 115.2 136.2 (2.8) 5.7 18.2 24.0 22.7 19.2 18.5 17.3 14.9 7.1 6.1 5.2 2.0 1.8 2.1 31.1 28.8 29.2 15.9
Balkrishna Industries BUY 682 850 24.7 65,907 1,036 97 48.9 58.3 66.0 (0.4) 19.2 13.2 13.9 11.7 10.3 8.2 7.0 6.0 2.9 2.3 1.9 0.4 0.4 0.4 22.7 22.2 20.5 0.9
Bharat Forge ADD 1,095 1,200 9.6 254,945 4,007 237 32.1 39.2 50.5 53.0 22.0 28.9 34.1 27.9 21.7 19.0 15.7 12.6 7.5 6.2 5.1 0.3 0.7 0.9 24.9 24.4 25.8 25.0
Eicher Motors SELL 21,110 10,100 (52.2) 572,968 9,006 27 227.1 396.3 500.8 55.9 74.5 26.4 93.0 53.3 42.2 51.0 30.7 23.8 22.7 16.4 12.0 0.2 0.1 0.1 26.9 35.7 32.9 44.2
Exide Industries REDUCE 153 170 11.4 129,668 2,038 850 6.4 8.0 8.8 40.9 24.9 10.0 23.8 19.0 17.3 14.1 11.4 10.2 3.2 2.9 2.6 1.2 1.6 1.6 14.0 16.0 15.9 5.0
Hero Motocorp BUY 2,711 3,000 10.7 541,353 8,509 200 127.2 150.8 183.9 20.5 18.6 21.9 21.3 18.0 14.7 16.1 13.7 11.2 9.3 7.7 6.4 2.2 2.8 3.4 44.5 47.0 47.4 25.4
Mahindra CIE Automotive BUY 253 285 12.6 81,748 1,285 323 7.4 8.1 11.6 - 8.7 43.5 34.0 31.3 21.8 21.8 13.7 10.7 4.3 3.8 3.2 — — — 12.6 12.9 16.0 0.9
Mahindra & Mahindra ADD 1,342 1,370 2.1 833,661 13,104 562 54.9 55.6 71.1 (19.9) 1.2 27.8 24.4 24.1 18.9 18.3 13.9 11.2 3.8 3.4 3.0 1.1 1.0 1.3 16.8 14.9 17.0 17.7
Maruti Suzuki BUY 4,191 4,500 7.4 1,266,063 19,900 302 122.9 188.4 246.4 33.4 53.4 30.8 34.1 22.2 17.0 18.9 13.8 10.9 5.3 4.5 3.7 0.6 0.9 1.2 16.6 22.0 24.1 22.6
Motherson Sumi Systems REDUCE 523 425 (18.8) 461,367 7,252 882 11.0 15.0 21.4 8.2 36.0 43.4 47.6 35.0 24.4 15.4 12.7 9.4 13.9 11.0 8.5 0.6 0.9 1.2 30.9 35.1 39.5 12.6
Tata Motors BUY 390 600 54.0 1,246,745 19,597 3,395 41.7 54.8 63.5 (5.4) 31.3 15.9 9.3 7.1 6.1 4.3 4.0 3.4 2.4 1.6 1.3 0.5 0.5 0.5 23.3 27.0 23.4 53.5
WABCO India ADD 5,400 6,400 18.5 102,425 1,610 19 63.6 107.4 158.4 2.7 68.9 47.4 84.9 50.3 34.1 49.2 31.2 21.3 11.9 9.8 7.8 0.1 0.2 0.3 14.9 21.4 25.6 0.8
Automobiles Attractive 6,793,065 106,776 4.4 28.0 21.4 21.2 16.6 13.6 10.5 9.0 7.5 4.6 3.6 3.0 0.9 1.0 1.2 21.8 21.9 21.9 249.7
Banks/Financial Institutions
Axis Bank ADD 590 600 1.7 1,401,245 22,025 2,371 31.0 35.8 40.9 17.3 15.2 14.4 19.0 16.5 14.4 — — — 3.1 2.7 2.3 0.8 0.9 1.1 17.8 17.6 17.4 61.7
Bajaj Finserv ADD 1,677 1,720 2.6 266,853 4,194 159 106.3 121.5 139.5 10.3 14.3 14.8 15.8 13.8 12.0 — — — 2.4 2.0 1.7 0.8 0.8 0.8 16.7 15.7 15.0 1.6
Bank of Baroda ADD 153 210 37.5 337,695 5,308 2,218 15.3 21.4 28.3 (27.3) 39.5 32.4 10.0 7.1 5.4 — — — 0.9 0.8 0.7 2.1 3.0 4.0 9.2 11.7 14.0 15.7
Bank of India ADD 172 220 27.8 114,431 1,799 666 25.7 47.8 52.5 (39.5) 86.3 9.7 6.7 3.6 3.3 — — — 0.4 0.3 0.3 2.9 5.4 5.9 6.3 11.0 11.1 9.0
Canara Bank REDUCE 285 320 12.5 146,599 2,304 515 56.9 49.1 65.8 7.6 (13.7) 34.0 5.0 5.8 4.3 — — — 0.5 0.4 0.4 3.7 3.2 4.3 8.8 7.5 9.3 11.4
Cholamandalam ADD 695 620 (10.8) 99,908 1,570 155 30.2 34.4 41.6 17.8 13.8 21.0 23.0 20.2 16.7 — — — 4.0 3.0 2.6 0.7 0.8 0.9 17.5 17.0 16.7 0.4
City Union Bank ADD 100 110 9.9 59,687 938 597 6.6 7.2 8.3 3.5 9.4 15.1 15.1 13.8 12.0 — — — 2.2 2.0 1.7 1.1 1.2 1.4 16.7 15.1 15.3 1.1
DCB Bank BUY 131 150 14.2 37,204 585 282 6.8 7.2 8.3 12.1 6.4 15.0 19.4 18.2 15.8 — — — 2.3 2.1 1.8 — — — 14.4 12.4 12.6 3.9
Dewan Housing Finance BUY 473 570 20.5 68,961 1,084 146 46.3 54.6 64.5 11.8 17.9 18.1 10.2 8.7 7.3 — — — 1.5 1.3 1.2 1.3 1.3 1.5 16.3 15.7 16.1 5.6
Federal Bank BUY 70 83 17.1 120,812 1,899 1,713 5.9 6.5 7.9 19.7 10.8 21.2 12.0 10.8 8.9 — — — 1.6 1.4 1.3 1.7 1.9 2.3 13.7 13.6 14.8 7.1
HDFC ADD 1,346 1,410 4.8 2,121,415 33,345 1,575 40.4 46.8 55.4 15.6 15.9 18.5 33.3 28.8 24.3 — — — 6.8 6.3 5.8 1.1 1.4 1.7 21.2 21.8 23.0 55.2
HDFC Bank ADD 1,114 1,150 3.2 2,798,769 43,992 2,507 40.8 50.6 59.6 15.3 24.2 17.7 27.3 22.0 18.7 — — — 4.0 3.9 3.4 0.7 0.9 1.0 18.2 18.0 19.3 28.1
ICICI Bank BUY 317 400 26.3 1,838,816 28,903 5,798 19.3 21.9 24.8 13.5 13.6 13.2 16.4 14.5 12.8 — — — 2.3 2.1 1.9 1.6 2.1 2.3 14.5 15.0 15.4 66.3
IDFC BUY 157 210 33.8 250,084 3,931 1,593 10.8 8.2 11.8 (10.2) (23.8) 43.6 14.5 19.1 13.3 — — — 1.4 1.3 1.2 1.2 0.5 0.6 10.4 7.4 9.8 13.2
IIFL Holdings BUY 195 235 20.3 60,782 955 310 14.4 17.5 21.2 54.0 21.0 21.1 13.5 11.2 9.2 — — — 2.4 2.0 1.6 1.6 0.0 0.0 20.1 20.0 19.9 0.7
IndusInd Bank ADD 957 1,020 6.6 557,370 8,761 581 33.9 37.8 45.7 26.5 11.5 20.9 28.2 25.3 21.0 — — — 5.2 3.3 2.9 0.4 0.5 0.6 19.0 16.4 15.1 15.4
J&K Bank ADD 105 120 14.7 50,708 797 485 10.5 16.9 18.0 (57.0) 61.1 6.8 10.0 6.2 5.8 — — — 0.8 0.8 0.7 2.0 3.2 3.5 8.7 12.8 12.4 1.2
Karur Vysya Bank BUY 474 630 32.9 57,301 901 122 37.5 57.8 69.0 (6.5) 54.3 19.4 12.7 8.2 6.9 — — — 1.4 1.2 1.1 2.7 3.0 3.6 12.0 15.6 16.7 1.1
L&T Finance Holdings ADD 73 80 9.5 125,697 1,976 1,718 5.0 5.0 6.0 43.0 0.9 20.3 14.8 14.6 12.2 — — — 2.0 1.8 1.6 1.0 0.7 0.7 13.9 12.6 13.5 5.0
LIC Housing Finance ADD 486 525 8.0 245,418 3,858 505 30.0 35.9 43.3 15.2 19.7 20.6 16.2 13.5 11.2 — — — 3.1 2.7 2.3 1.1 1.3 1.5 18.8 19.4 20.0 16.4
Magma Fincorp ADD 90 130 44.5 21,296 335 236 8.8 10.1 11.3 22.3 14.8 12.3 10.3 8.9 8.0 — — — 1.3 0.9 0.8 0.9 1.1 1.9 10.7 11.7 11.0 0.4
Mahindra & Mahindra Financial BUY 267 320 20.0 151,633 2,383 564 14.8 16.4 19.9 (6.2) 11.0 21.5 18.1 16.3 13.4 — — — 2.6 2.4 2.1 1.5 1.6 1.9 15.5 15.4 16.7 5.7
Max India ADD 548 520 (5.0) 145,981 2,295 266 10.5 10.5 13.9 100.4 0.4 31.9 52.1 51.9 39.4 — — — 4.4 3.5 3.0 1.3 1.3 1.7 8.8 7.5 8.1 2.3
Muthoot Finance BUY 202 250 23.9 80,336 1,263 397 16.9 18.8 23.9 (19.5) 11.3 27.3 12.0 10.7 8.4 — — — 1.6 1.4 1.3 2.9 2.8 3.6 14.3 14.0 16.2 0.9
Oriental Bank of Commerce ADD 175 270 54.2 52,489 825 300 16.6 52.2 62.8 (56.4) 214.7 20.4 10.6 3.4 2.8 — — — 0.4 0.4 0.3 1.9 5.9 7.1 3.7 10.9 12.0 7.0
PFC ADD 263 320 21.5 347,633 5,464 1,319 45.2 44.0 48.9 10.0 (2.7) 11.3 5.8 6.0 5.4 — — — 1.1 0.9 0.8 3.5 3.4 3.7 20.0 16.8 16.5 7.2
Punjab National Bank REDUCE 139 155 11.5 257,876 4,053 1,855 16.5 24.3 28.1 (10.6) 47.5 15.6 8.4 5.7 4.9 — — — 0.7 0.6 0.6 2.4 3.5 4.0 8.5 11.5 12.1 11.8
Rural Electrification Corp. ADD 292 350 19.8 288,536 4,535 987 53.3 54.2 56.8 12.3 1.7 4.7 5.5 5.4 5.1 — — — 1.2 1.0 0.9 3.7 4.0 4.2 23.1 19.9 18.0 9.8
Shriram City Union Finance REDUCE 1,663 1,775 6.7 109,613 1,723 66 84.7 102.4 122.9 (3.9) 20.9 20.0 19.6 16.2 13.5 — — — 2.6 2.3 2.0 0.6 0.7 0.8 15.8 15.1 15.8 0.7
Shriram Transport ADD 880 1,050 19.3 199,657 3,138 223 55.5 66.1 80.2 (2.1) 19.1 21.4 15.9 13.3 11.0 — — — 2.1 1.9 1.6 1.1 1.1 1.3 14.1 15.0 16.0 14.9
SKS Microfinance ADD 537 580 8.0 67,910 1,067 126 14.9 20.1 27.7 130.8 34.6 37.7 36.0 26.7 19.4 — — — 6.5 5.2 4.1 — — — 25.0 21.6 23.7 10.7
State Bank of India ADD 269 320 19.2 2,031,905 31,938 7,566 17.5 21.2 25.6 20.3 21.1 20.3 15.3 12.6 10.5 — — — 1.6 1.4 1.3 1.3 1.4 1.5 10.6 11.8 12.7 65.0
Union Bank ADD 165 170 2.8 105,158 1,653 636 28.0 34.6 48.2 4.8 23.4 39.5 5.9 4.8 3.4 — — — 0.5 0.5 0.4 3.6 3.4 4.8 10.1 11.4 14.4 10.7
YES Bank ADD 823 850 3.3 344,144 5,409 418 48.0 54.2 63.9 7.0 13.0 17.8 17.1 15.2 12.9 — — — 2.9 2.6 2.2 1.1 1.2 1.5 21.3 18.0 18.4 45.9
Banks/Financial Institutions Attractive 14,963,919 235,208 8.6 19.0 18.2 16.5 13.8 11.7 2.1 1.9 1.7 1.3 1.5 1.7 12.7 13.6 14.3 512.9
Price/BV (X) Dividend yield (%) RoE (%)
Source: Company, Bloomberg, Kotak Institutional Equities estimates
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Kotak Institutional Equities: Valuation summary of KIE Universe stocks
Target O/S
Price (Rs) price Upside Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) ADVT-3mo
Company Rating 22-Jul-15 (Rs) (%) (Rs mn) (US$ mn) (mn) 2015 2016E 2017E 2015 2016E 2017E 2015 2016E 2017E 2015 2016E 2017E 2015 2016E 2017E 2015 2016E 2017E 2015 2016E 2017E (US$ mn)
Cement
ACC SELL 1,437 1,450 0.9 269,828 4,241 188 45.7 49.9 82.7 (2.3) 9.2 65.7 31.4 28.8 17.4 20.3 17.0 9.2 3.3 3.1 2.8 1.6 1.6 1.6 10.7 11.2 17.0 7.4
Ambuja Cements SELL 247 235 (4.7) 382,620 6,014 1,550 8.5 10.9 13.7 28.0 28.0 25.2 28.9 22.6 18.1 19.3 14.0 10.7 3.6 3.4 3.0 1.2 1.7 1.7 12.7 15.4 17.6 6.6
Dalmia Bharat BUY 590 550 (6.8) 47,894 753 81 1.1 13.1 44.5 208.9 1,061.9 239.2 522.3 45.0 13.3 17.6 7.3 5.1 1.6 1.5 1.4 0.3 0.3 0.3 0.3 3.4 10.9 0.6
Grasim Industries ADD 3,738 4,200 12.3 343,378 5,397 92 191.2 260.4 333.7 (9.9) 36.2 28.1 19.6 14.4 11.2 8.9 5.5 3.9 1.5 1.4 1.2 1.0 1.0 1.0 7.8 9.9 11.5 3.6
India Cements REDUCE 85 95 11.7 26,126 411 307 (0.1) 5.1 9.2 97.2 4,857.9 79.2 NM 16.6 9.3 7.8 7.3 5.8 0.8 0.7 0.7 - 2.5 2.5 (0.1) 4.5 7.5 4.5
J K Cement BUY 604 785 30.1 42,191 663 70 18.1 30.7 62.0 63.9 69.8 102.0 33.4 19.7 9.7 15.4 8.9 6.3 2.6 2.4 1.9 0.7 0.8 0.8 7.5 12.6 21.8 0.2
JK Lakshmi Cement BUY 331 435 31.2 39,002 613 118 14.8 23.1 32.7 54.6 56.6 41.4 22.5 14.3 10.1 15.2 8.4 6.2 2.9 2.5 2.0 0.6 0.6 0.6 13.1 18.6 21.8 0.8
Orient Cement BUY 184 200 8.5 37,768 594 205 9.5 11.9 17.7 92.8 25.0 49.1 19.4 15.5 10.4 15.8 9.8 6.6 3.9 3.2 2.5 0.9 1.1 1.1 21.6 22.7 27.4 0.4
Shree Cement SELL 10,760 7,768 (27.8) 374,862 5,892 35 161.3 277.9 396.5 (15.0) 72.4 42.7 66.7 38.7 27.1 26.5 17.4 13.0 7.2 6.2 5.1 0.2 0.2 0.2 11.3 17.2 20.5 6.7
UltraTech Cement SELL 3,258 2,500 (23.3) 894,058 14,053 274 73.4 89.8 140.1 (1.7) 22.3 56.0 44.4 36.3 23.3 23.6 19.0 13.1 4.7 4.3 3.6 0.3 0.3 0.3 11.2 12.3 16.8 14.9
Cement Cautious 2,457,726 38,631 4.2 34.7 45.9 35.1 26.0 17.8 17.0 11.9 8.5 3.2 2.9 2.6 0.7 0.8 0.8 9.2 11.3 14.5 45.8
Consumer products
Asian Paints REDUCE 843 800 (5.1) 808,891 12,714 959 14.8 19.8 22.9 15.8 33.7 15.5 56.9 42.5 36.8 35.7 27.1 23.4 17.1 14.2 11.9 0.7 1.0 1.1 32.4 36.4 35.1 20.1
Bajaj Corp. BUY 468 510 9.0 69,030 1,085 148 14.9 18.4 21.0 23.7 23.8 14.0 31.4 25.4 22.3 27.7 21.8 18.0 14.1 12.5 10.9 2.5 1.9 2.6 43.6 52.1 52.2 1.1
Britannia Industries ADD 2,857 2,500 (12.5) 342,759 5,388 120 48.1 64.3 77.2 45.8 33.7 20.2 59.4 44.4 37.0 39.1 29.5 24.7 27.5 20.0 15.1 0.6 0.7 0.9 56.4 52.1 46.5 8.6
Colgate-Palmolive (India) REDUCE 2,073 2,000 (3.5) 281,845 4,430 136 41.1 49.1 57.1 13.9 19.5 16.4 50.4 42.2 36.3 34.0 27.5 22.9 36.6 29.7 24.4 1.2 1.4 1.7 81.6 77.7 73.9 5.4
Dabur India ADD 299 280 (6.2) 524,586 8,246 1,757 6.1 7.6 8.7 16.8 24.6 15.5 49.2 39.5 34.2 40.0 31.7 27.2 15.6 12.6 10.4 0.7 0.9 1.0 35.5 35.3 33.2 5.3
GlaxoSmithKline Consumer REDUCE 6,347 6,300 (0.7) 266,927 4,196 42 138.8 165.8 191.7 (13.5) 19.5 15.6 45.7 38.3 33.1 33.4 27.3 22.7 12.6 10.8 9.2 0.9 1.0 1.2 29.7 30.3 29.9 1.2
Godrej Consumer Products ADD 1,225 1,270 3.7 417,153 6,557 340 26.3 33.8 40.9 17.7 28.4 21.1 46.6 36.3 30.0 31.8 25.0 20.9 9.7 8.1 6.8 0.4 0.6 0.7 22.1 24.4 24.8 3.1
Hindustan Unilever REDUCE 921 825 (10.4) 1,991,789 31,308 2,164 17.4 20.3 23.1 5.8 16.9 13.7 52.9 45.3 39.8 38.0 31.7 27.3 53.5 47.1 41.3 1.6 1.6 1.8 107.5 110.6 110.6 21.2
ITC ADD 315 360 14.5 2,520,881 39,624 8,132 11.5 12.9 14.6 7.4 12.2 13.0 27.4 24.4 21.6 17.7 16.1 13.9 8.3 7.4 6.6 2.0 2.2 2.6 28.3 28.7 29.4 35.7
Jubilant Foodworks SELL 1,853 1,250 (32.5) 121,590 1,911 66 16.9 25.9 36.6 10.0 53.4 41.5 109.8 71.6 50.6 47.2 33.1 24.2 18.9 15.5 12.3 0.1 0.2 0.3 18.6 23.8 27.2 8.3
Jyothy Laboratories REDUCE 313 260 (16.9) 56,633 890 181 5.8 8.7 11.0 47.0 50.6 27.2 54.4 36.1 28.4 31.6 23.7 19.9 7.3 6.7 7.0 1.3 1.6 1.9 19.6 24.7 29.4 0.6
Marico ADD 430 420 (2.4) 277,645 4,364 645 8.9 11.8 13.8 20.9 32.6 16.8 48.4 36.5 31.3 31.9 24.1 20.9 15.2 12.2 9.9 0.6 0.9 1.0 36.0 37.1 34.9 8.3
Nestle India REDUCE 5,991 5,800 (3.2) 577,588 9,079 96 122.1 160.4 186.1 6.7 31.3 16.0 49.0 37.4 32.2 27.7 21.1 18.7 20.4 16.4 13.5 1.1 1.3 1.5 47.9 51.1 48.2 11.2
Page Industries SELL 14,737 10,000 (32.1) 164,378 2,584 11 175.7 221.8 281.7 27.4 26.2 27.0 83.9 66.4 52.3 52.1 41.7 32.9 42.4 31.3 22.6 0.5 0.6 0.6 58.0 54.3 50.2 3.1
Pidilite Industries REDUCE 548 510 (7.0) 281,144 4,419 513 10.1 13.4 15.9 13.4 32.7 18.5 54.3 40.9 34.5 36.1 27.0 22.8 12.4 10.4 8.8 0.5 0.7 0.9 24.5 27.6 27.5 3.2
Speciality Restaurants REDUCE 152 165 8.4 7,149 112 47 2.0 3.4 5.4 (50.0) 69.9 59.0 75.6 44.5 28.0 21.6 14.3 10.1 2.3 2.2 2.0 0.7 0.7 0.8 3.1 5.1 7.6 0.1
Tata Global Beverages REDUCE 140 155 11.1 87,972 1,383 631 5.4 6.7 7.7 (1.0) 23.4 15.5 25.7 20.8 18.0 12.3 11.4 10.0 1.6 1.5 1.5 1.6 1.8 2.2 6.0 7.5 8.3 4.6
Titan Company REDUCE 338 350 3.6 300,072 4,717 888 9.3 10.4 12.4 10.1 12.2 18.9 36.4 32.4 27.3 26.0 22.4 18.5 9.7 8.1 6.7 0.7 0.8 0.9 29.4 27.2 26.8 4.8
United Breweries SELL 1,009 700 (30.6) 266,864 4,195 264 9.8 13.9 17.7 14.3 41.6 27.9 103.2 72.8 57.0 44.4 34.6 28.9 14.5 12.4 10.5 0.1 0.2 0.3 14.6 18.3 20.0 3.5
United Spirits BUY 3,578 4,000 11.8 519,910 8,172 145 (11.7) 40.4 84.8 (30.6) 445.0 110.0 NM 88.6 42.2 92.6 40.2 24.3 57.6 25.6 13.7 0.1 0.3 0.4 (8.6) 40.0 42.3 16.2
Consumer products Cautious 9,884,807 155,373 9.7 23.6 17.8 44.2 35.7 30.3 28.8 23.7 20.0 13.8 11.8 10.1 1.2 1.4 1.6 31.1 32.9 33.2 165.6
Energy
Aban Offshore RS 305 — — 17,810 280 58 89.5 97.4 99.9 6.7 8.8 2.6 3.4 3.1 3.1 6.6 6.0 5.8 0.3 0.3 0.3 2.8 1.9 2.0 11.0 9.8 9.5 8.1
BPCL ADD 972 920 (5.4) 702,874 11,048 723 70.3 67.3 68.1 25.2 (4.3) 1.2 13.8 14.4 14.3 8.9 8.4 8.0 3.1 2.8 2.5 2.3 2.3 2.3 24.3 20.3 18.3 20.6
Cairn India RS 167 — — 313,007 4,920 1,875 34.9 20.5 20.8 (46.5) (41.1) 1.1 4.8 8.1 8.0 3.1 4.4 3.5 0.5 0.5 0.5 5.5 4.2 4.2 11.2 6.4 6.3 8.5
Castrol India SELL 496 410 (17.4) 245,500 3,859 495 9.6 12.8 13.8 (3.8) 32.9 7.9 51.7 38.9 36.1 33.7 25.5 23.6 49.4 46.8 47.0 1.5 2.1 2.3 76.0 123.5 130.0 1.8
GAIL (India) ADD 369 450 21.9 468,385 7,362 1,268 26.0 26.2 32.5 (20.2) 0.8 23.8 14.2 14.1 11.4 10.9 9.6 7.7 1.6 1.5 1.4 1.6 2.2 3.0 11.8 11.0 12.7 6.9
GSPL ADD 132 130 (1.8) 74,520 1,171 563 6.5 8.1 9.0 (13.4) 25.5 10.7 20.5 16.3 14.8 9.1 7.9 7.1 2.1 1.9 1.8 0.9 1.5 2.3 10.5 12.0 12.3 1.0
HPCL REDUCE 902 700 (22.4) 305,374 4,800 339 80.6 77.8 77.7 57.7 (3.5) (0.1) 11.2 11.6 11.6 8.6 8.1 7.8 1.9 1.7 1.6 2.7 2.6 2.6 17.6 15.6 14.2 17.5
IOCL ADD 448 415 (7.3) 1,087,237 17,090 2,428 17.2 38.6 40.3 (29.0) 124.4 4.5 26.1 11.6 11.1 13.4 7.2 6.2 1.6 1.5 1.3 1.5 2.9 3.0 6.2 13.1 12.5 8.4
ONGC ADD 285 365 28.1 2,437,031 38,306 8,556 21.8 32.9 36.5 (29.6) 50.6 11.0 13.0 8.7 7.8 5.1 3.7 3.3 1.3 1.2 1.1 3.3 4.2 4.6 10.5 14.9 15.2 19.6
Oil India BUY 436 600 37.5 262,276 4,123 601 41.8 57.5 60.2 (15.8) 37.7 4.6 10.4 7.6 7.3 6.8 4.4 4.1 1.3 1.2 1.1 4.6 5.3 5.5 12.1 15.8 15.3 2.3
Petronet LNG ADD 196 200 2.3 146,663 2,305 750 9.7 11.2 14.3 2.6 14.8 28.4 20.1 17.5 13.6 12.4 11.1 9.1 2.6 2.3 2.1 1.0 1.5 2.0 16.5 14.0 16.3 3.0
Reliance Industries BUY 1,050 1,050 (0.0) 3,088,316 48,543 3,236 70.2 75.8 83.6 3.2 7.9 10.3 15.0 13.9 12.6 12.4 11.2 8.6 1.6 1.4 1.3 0.9 1.0 1.2 11.0 10.8 10.9 60.9
Energy Attractive 9,148,992 143,807 (16.8) 21.5 9.0 13.5 11.1 10.2 8.3 6.7 5.7 1.5 1.3 1.2 2.1 2.6 2.8 10.8 12.1 12.1 158.7
Price/BV (X) Dividend yield (%) RoE (%)
Source: Company, Bloomberg, Kotak Institutional Equities estimates
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Kotak Institutional Equities: Valuation summary of KIE Universe stocks
Target O/S
Price (Rs) price Upside Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) ADVT-3mo
Company Rating 22-Jul-15 (Rs) (%) (Rs mn) (US$ mn) (mn) 2015 2016E 2017E 2015 2016E 2017E 2015 2016E 2017E 2015 2016E 2017E 2015 2016E 2017E 2015 2016E 2017E 2015 2016E 2017E (US$ mn)
Industrials
ABB SELL 1,390 750 (46.0) 294,584 4,630 212 10.8 16.7 25.7 29.2 54.5 54.2 128.9 83.4 54.1 53.3 41.2 30.3 10.5 9.6 8.4 0.3 0.3 0.3 8.3 12.0 16.5 1.1
Bharat Heavy Electricals SELL 285 220 (22.8) 697,444 10,963 2,448 5.8 9.5 15.3 (59.0) 64.1 61.3 49.1 30.0 18.6 24.1 16.6 9.2 2.0 1.9 1.8 0.4 0.7 1.2 4.2 6.7 10.1 14.4
Crompton Greaves BUY 196 200 2.1 122,811 1,930 627 2.9 5.9 8.7 (24.7) 100.9 47.6 66.7 33.2 22.5 22.3 15.8 13.3 3.2 3.0 2.7 0.4 0.5 0.5 4.9 9.3 12.5 8.0
Cummins India REDUCE 988 750 (24.1) 273,915 4,305 277 27.1 26.0 32.7 25.1 (3.9) 25.7 36.5 38.0 30.2 36.6 33.3 25.6 9.5 8.6 7.7 1.4 1.3 1.7 27.5 23.7 26.8 2.8
Kalpataru Power Transmission ADD 269 250 (7.0) 41,243 648 153 7.9 6.5 11.2 (1.0) (17.0) 71.0 34.1 41.1 24.0 10.5 9.0 7.7 1.9 1.8 1.7 0.6 0.6 0.6 5.6 4.5 7.3 0.9
KEC International BUY 151 135 (10.6) 38,833 610 257 6.3 7.1 12.1 89.4 14.1 69.3 24.1 21.2 12.5 11.5 8.9 6.9 2.9 2.6 2.3 0.8 1.0 1.6 12.8 13.1 19.5 3.9
Larsen & Toubro ADD 1,854 1,750 (5.6) 1,725,193 27,117 930 36.9 50.5 69.3 (23.9) 36.7 37.2 50.2 36.7 26.8 25.8 20.0 16.0 4.8 4.4 3.9 0.9 0.7 0.9 9.8 12.5 15.4 49.8
Siemens SELL 1,469 650 (55.7) 523,052 8,221 356 16.8 21.9 28.0 170.4 31.0 27.6 87.7 66.9 52.5 51.2 40.1 31.5 10.8 9.8 8.7 0.6 0.4 0.6 12.9 15.4 17.6 7.4
Thermax REDUCE 1,061 850 (19.9) 126,431 1,987 119 21.8 29.3 32.4 5.4 34.6 10.8 48.8 36.2 32.7 27.9 22.7 20.4 5.9 5.3 4.7 0.7 0.7 0.7 12.4 15.4 15.3 0.8
Voltas ADD 308 315 2.2 101,979 1,603 331 11.6 11.8 15.0 56.6 1.3 27.6 26.5 26.2 20.5 24.6 21.5 16.1 4.8 4.3 3.7 0.7 1.0 1.2 19.6 17.4 19.5 12.8
Industrials Cautious 3,945,484 62,016 (23.9) 36.3 41.7 52.3 38.4 27.1 27.2 21.0 16.0 4.3 4.0 3.6 0.7 0.7 0.9 8.2 10.3 13.2 101.9
Infrastructure
Adani Port and SEZ ADD 325 350 7.9 672,024 10,563 2,084 11.1 15.1 19.7 33.0 35.9 30.9 29.2 21.5 16.4 20.9 14.9 12.3 6.3 5.0 4.0 0.8 0.7 0.9 23.7 26.0 27.1 18.0
Container Corporation REDUCE 1,744 1,510 (13.4) 339,977 5,344 195 53.7 62.0 75.1 6.5 15.4 21.2 32.5 28.1 23.2 24.2 19.8 15.8 4.5 4.0 3.6 0.8 0.9 1.1 14.3 15.0 16.3 8.5
Gujarat Pipavav Port REDUCE 229 205 (10.3) 110,490 1,737 483 7.5 9.6 12.1 150.4 28.9 25.7 30.6 23.7 18.9 26.5 20.5 16.4 6.2 4.9 4.0 — — 1.1 22.6 22.9 23.4 2.6
IRB Infrastructure ADD 244 265 8.7 85,648 1,346 351 15.4 19.4 20.9 18.2 25.6 7.4 15.8 12.6 11.7 8.8 8.5 7.3 2.0 1.8 1.6 1.6 1.6 1.6 13.7 14.8 14.2 5.2
Sadbhav Engineering BUY 310 350 12.7 53,242 837 172 6.6 7.3 11.7 (0.3) 9.3 61.3 46.8 42.8 26.5 20.7 17.0 12.0 3.9 3.6 3.2 — — — 10.0 8.8 12.9 1.4
Infrastructure Attractive 1,261,381 19,827 27.8 28.4 26.2 28.8 22.4 17.8 18.4 14.3 11.7 4.9 4.1 3.5 0.7 0.7 1.0 16.9 18.4 19.5 35.8
Internet
Info Edge BUY 889 1,000 12.5 107,038 1,682 120 2.0 9.1 13.7 (75.6) 354.2 50.0 443.4 97.6 65.1 437.7 198.6 64.8 7.6 7.6 7.6 0.1 0.4 0.5 2.3 7.8 11.7 1.8
Just Dial BUY 1,107 1,500 35.5 78,018 1,226 71 19.7 25.4 41.6 14.6 28.7 63.9 56.2 43.7 26.6 41.3 29.8 17.0 11.6 10.0 8.2 0.6 0.8 1.3 23.0 24.7 34.1 10.9
Internet Attractive 185,056 2,909 (22.5) 77.3 59.1 113.5 64.0 40.3 86.3 59.2 30.1 8.9 8.5 7.8 0.3 0.5 0.9 7.8 13.2 19.5 12.8
Media
DB Corp. ADD 320 375 17.3 58,744 923 184 17.2 20.5 24.6 3.2 18.7 19.9 18.5 15.6 13.0 10.2 8.7 7.3 4.6 4.0 3.6 2.4 3.0 4.0 26.0 27.4 29.2 0.2
DishTV BUY 119 112 (5.8) 126,653 1,991 1,066 0.0 1.4 3.2 102.0 4,663.4 129.5 NM 84.7 36.9 18.5 14.0 11.2 7.6 7.6 7.6 — — — 0.2 9.0 20.6 16.7
Jagran Prakashan ADD 132 145 9.5 43,299 681 317 8.0 9.4 10.9 6.6 17.5 16.2 16.6 14.1 12.1 9.3 7.7 6.7 3.7 3.4 3.1 3.0 3.8 4.5 24.2 25.2 26.8 0.3
PVR BUY 858 900 4.9 35,643 560 47 3.6 25.8 34.1 (72.0) 618.2 32.1 238.6 33.2 25.1 20.9 12.9 10.6 9.8 4.6 4.0 0.1 0.3 0.4 3.7 18.9 17.0 1.4
Sun TV Network ADD 258 430 66.6 101,694 1,598 394 19.9 22.1 26.6 4.9 11.1 20.4 13.0 11.7 9.7 8.0 7.2 5.8 3.0 2.8 2.6 4.4 5.1 5.9 24.4 25.1 27.7 9.9
Zee Entertainment Enterprises BUY 407 420 3.1 391,143 6,148 961 8.7 9.3 12.7 (5.7) 8.0 36.3 47.0 43.6 32.0 29.9 26.9 20.0 7.1 6.4 5.7 0.9 1.1 1.4 16.2 15.4 18.9 17.1
Media Neutral 757,175 11,902 6.8 23.1 31.7 34.3 27.9 21.2 17.0 14.3 11.4 5.7 5.1 4.6 1.2 1.5 1.9 16.5 18.2 21.7 45.5
Metals & Mining
Coal India ADD 432 420 (2.9) 2,730,880 42,925 6,316 21.7 28.1 28.9 (9.1) 29.3 2.9 19.9 15.4 14.9 13.0 10.0 9.7 6.8 5.7 4.9 4.8 3.3 3.3 32.2 40.4 35.4 25.8
Hindalco Industries REDUCE 108 120 11.4 222,399 3,496 2,065 12.5 10.7 14.4 0.2 (14.4) 34.6 8.6 10.1 7.5 8.6 7.2 6.1 0.6 0.6 0.5 1.3 1.3 1.3 6.5 5.6 7.1 11.4
Hindustan Zinc BUY 164 205 25.0 693,164 10,895 4,225 19.4 18.1 19.4 17.6 (6.4) 7.3 8.5 9.1 8.4 5.2 4.9 3.8 1.6 1.4 1.3 2.7 2.7 2.7 20.3 16.6 15.9 2.6
Jindal Steel and Power RS 77 - - 70,722 1,112 915 6.9 2.4 4.8 (66.8) (64.6) 97.6 11.2 31.6 16.0 9.4 7.9 6.9 0.3 0.3 0.3 - 2.4 2.4 2.9 1.1 2.1 11.7
JSW Steel BUY 859 1,200 39.7 207,651 3,264 242 75.6 70.4 125.5 14.3 (6.9) 78.2 11.4 12.2 6.8 6.0 6.1 4.9 0.9 0.9 0.8 1.4 1.4 1.4 8.1 7.2 11.8 10.4
National Aluminium Co. SELL 38 40 5.1 98,064 1,541 2,577 4.7 3.8 3.9 81.3 (20.3) 3.5 8.0 10.1 9.7 2.5 3.5 3.2 0.8 0.7 0.7 4.6 4.6 2.6 9.8 7.5 7.4 0.8
NMDC SELL 115 110 (3.9) 453,960 7,135 3,965 16.5 10.4 10.3 3.3 (36.7) (1.4) 6.9 11.0 11.1 3.5 6.5 6.9 1.4 1.4 1.4 7.5 7.5 7.5 21.0 12.8 12.6 3.5
Tata Steel REDUCE 280 300 7.0 272,329 4,281 971 0.0 10.7 22.0 (99.9) 33,033.0 104.8 NM 26.1 12.7 8.0 7.4 6.3 0.9 0.9 0.8 2.9 2.9 2.9 0.0 3.3 6.7 27.2
Vedanta BUY 136 235 72.7 403,495 6,342 3,717 17.1 22.5 29.6 0.8 31.7 31.9 8.0 6.1 4.6 5.1 5.2 4.0 0.9 0.7 0.7 3.0 2.4 2.4 8.0 13.8 15.3 17.2
Metals & Mining Cautious 5,152,664 80,991 (9.2) 10.8 16.2 13.0 11.7 10.1 7.5 7.1 6.0 1.7 1.6 1.4 4.1 3.4 3.4 13.4 13.5 14.3 110.7
Pharmaceutical
Biocon SELL 461 375 (18.6) 92,130 1,448 200 24.8 21.9 25.4 40.4 (11.8) 15.8 18.6 21.0 18.2 14.4 12.1 10.4 2.8 2.6 2.3 1.5 1.7 1.9 15.6 12.8 13.4 5.3
Cipla BUY 675 695 3.0 541,774 8,516 805 14.7 24.5 29.4 (15.2) 66.9 20.2 46.0 27.6 22.9 25.6 17.1 14.4 4.9 4.3 3.8 0.4 0.7 0.9 11.2 16.8 17.6 19.3
Dr Reddy's Laboratories REDUCE 3,848 3,130 (18.7) 655,987 10,311 170 135.6 143.1 153.8 7.8 5.5 7.5 28.4 26.9 25.0 18.5 17.0 15.3 5.9 4.9 4.2 0.5 0.6 0.6 22.8 20.0 18.2 17.1
Lupin REDUCE 1,824 1,650 (9.5) 820,567 12,898 450 53.4 57.1 71.7 30.9 7.0 25.5 34.2 31.9 25.4 22.0 20.0 15.6 9.1 7.3 5.9 0.4 0.5 0.6 30.0 25.4 25.6 48.3
Sun Pharmaceuticals SELL 835 790 (5.3) 2,008,231 31,566 2,406 19.9 23.8 35.3 (27.9) 19.7 48.1 41.9 35.0 23.7 25.1 23.7 16.9 7.6 6.3 5.1 0.5 0.7 1.1 21.3 19.7 23.9 136.0
Pharmaceuticals Cautious 4,118,689 64,739 (2.3) 17.6 30.9 36.9 31.3 23.9 22.8 20.3 15.8 6.8 5.7 4.7 0.5 0.7 0.9 18.3 18.2 19.8 225.9
Price/BV (X) Dividend yield (%) RoE (%)
Source: Company, Bloomberg, Kotak Institutional Equities estimates
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Kotak Institutional Equities: Valuation summary of KIE Universe stocks
Target O/S
Price (Rs) price Upside Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) ADVT-3mo
Company Rating 22-Jul-15 (Rs) (%) (Rs mn) (US$ mn) (mn) 2015 2016E 2017E 2015 2016E 2017E 2015 2016E 2017E 2015 2016E 2017E 2015 2016E 2017E 2015 2016E 2017E 2015 2016E 2017E (US$ mn)
Real Estate
DLF BUY 107 210 97.0 189,994 2,986 1,798 3.0 6.7 8.4 (16.4) 120.2 25.8 35.2 16.0 12.7 12.0 9.4 6.9 0.7 0.6 0.6 2.7 1.9 1.9 1.9 4.1 5.0 14.6
Godrej Properties REDUCE 270 245 (9.3) 53,847 846 199 9.6 8.6 12.6 19.1 (9.9) 46.5 28.2 31.3 21.4 31.0 20.1 13.7 2.9 2.7 2.5 0.7 0.9 0.9 10.5 9.0 12.3 0.6
Oberoi Realty BUY 271 325 19.8 89,045 1,400 339 8.8 21.2 23.1 (6.2) 140.2 9.0 30.7 12.8 11.7 19.5 7.8 6.0 2.0 1.6 1.5 0.7 0.7 0.7 6.4 14.1 13.2 1.4
Prestige Estates Projects ADD 223 265 18.6 83,756 1,317 375 8.9 11.5 14.0 (14.4) 29.6 22.1 25.2 19.4 15.9 11.6 10.3 8.0 2.2 2.0 1.8 0.7 0.7 0.9 9.8 10.8 11.9 1.5
Sobha BUY 361 545 51.0 35,391 556 98 24.3 27.5 35.8 (2.7) 13.2 30.2 14.9 13.1 10.1 8.7 7.1 6.1 1.5 1.4 1.2 1.9 1.9 1.9 10.1 10.7 12.7 0.9
Sunteck Realty ADD 298 410 37.6 18,758 295 60 11.4 33.1 95.9 (54.9) 191.0 190.1 26.2 9.0 3.1 21.2 7.0 1.6 1.2 1.1 0.8 3.7 3.7 — 6.5 12.7 29.7 0.2
Real Estate Attractive 470,790 7,400 (11.4) 80.2 33.7 28.4 15.7 11.8 13.4 9.5 6.8 1.1 1.0 1.0 1.4 1.4 1.3 3.8 6.5 8.1 19.3
Technology
HCL Technologies REDUCE 983 850 (13.5) 1,382,147 21,725 1,414 51.5 55.9 59.7 14.1 8.7 6.8 19.1 17.6 16.5 14.2 12.5 11.0 5.4 4.4 3.7 1.3 1.6 1.8 31.4 27.4 24.3 27.7
Hexaware Technologies SELL 273 220 (19.4) 82,246 1,293 302 10.8 13.8 15.2 (14.4) 27.4 10.3 25.2 19.8 17.9 16.2 13.6 12.1 6.4 5.9 5.4 3.5 3.0 3.3 26.2 30.9 31.2 6.6
Infosys ADD 1,103 1,215 10.1 2,533,875 39,828 2,286 53.9 55.2 65.6 13.5 2.4 18.9 20.5 20.0 16.8 15.0 13.6 11.2 5.0 4.4 3.9 2.0 2.0 2.4 25.9 23.4 24.6 71.7
Mindtree REDUCE 1,288 1,300 0.9 107,901 1,696 84 63.7 68.8 80.4 18.7 8.0 16.8 20.2 18.7 16.0 13.9 12.6 10.2 5.4 4.5 3.8 1.3 1.4 1.7 29.4 26.2 25.7 4.3
Mphasis REDUCE 430 375 (12.8) 90,403 1,421 210 32.3 35.2 37.6 119.3 9.2 6.6 13.3 12.2 11.5 7.9 6.9 6.2 1.6 1.6 1.5 3.7 4.1 4.4 12.8 13.1 13.3 0.7
TCS ADD 2,528 2,700 6.8 4,951,762 77,833 1,959 100.3 119.6 137.5 2.8 19.2 15.0 25.2 21.1 18.4 19.2 15.1 12.9 8.6 7.1 5.9 3.1 1.9 2.2 34.8 36.8 35.1 49.6
Tech Mahindra ADD 510 600 17.6 490,586 7,711 865 30.1 32.3 40.1 (6.1) 7.3 24.2 17.0 15.8 12.7 11.3 10.5 8.3 3.6 3.1 2.6 1.2 1.2 1.2 24.3 20.9 21.9 31.8
Wipro ADD 585 630 7.8 1,443,655 22,692 2,467 35.1 37.0 41.8 10.8 5.6 12.8 16.7 15.8 14.0 11.5 10.4 8.9 3.5 3.1 2.7 2.1 2.4 2.7 23.0 21.0 20.8 16.4
Technology Attractive 11,082,575 174,200 8.5 10.7 14.7 21.3 19.2 16.8 15.6 13.3 11.3 5.7 4.8 4.2 2.4 1.9 2.2 26.6 25.1 24.8 208.8
Telecom
Bharti Airtel BUY 439 450 2.4 1,756,458 27,609 3,997 15.1 14.0 17.4 81.6 (7.2) 24.0 29.1 31.3 25.2 8.1 7.5 6.1 2.8 2.7 2.5 0.9 0.6 1.0 9.9 8.8 10.4 37.7
Bharti Infratel SELL 458 350 (23.6) 868,888 13,657 1,894 10.5 13.5 16.2 31.0 28.1 20.0 43.6 34.0 28.3 16.9 15.0 13.0 5.1 5.0 4.8 2.4 2.0 2.5 11.4 14.8 17.2 22.1
IDEA BUY 179 220 22.9 644,169 10,125 3,598 8.8 9.1 6.3 48.6 3.6 (31.0) 20.3 19.6 28.4 9.9 8.1 7.0 2.8 2.5 2.3 0.4 0.6 0.9 16.0 13.4 8.5 14.6
Reliance Communications SELL 69 50 (27.5) 171,615 2,698 2,488 2.9 5.1 6.7 (11.7) 78.0 31.4 24.1 13.5 10.3 7.2 7.0 6.2 0.5 0.5 0.5 — — — 2.4 3.8 4.8 11.1
Tata Communications ADD 470 455 (3.2) 134,007 2,106 285 3.6 6.3 10.9 193.2 73.3 74.3 129.8 74.9 43.0 8.0 7.1 6.4 12.9 10.9 8.6 - - - 11.2 15.7 22.3 3.9
Telecom Cautious 3,575,137 56,195 60.0 7.2 10.6 29.7 27.7 25.1 9.1 8.2 6.9 2.6 2.5 2.4 1.1 0.9 1.2 8.9 9.0 9.4 89.4
Utilities
Adani Power SELL 29 40 39.6 84,112 1,322 2,872 (4.0) (3.2) 0.5 (292.8) 19.8 116.2 (7.2) (9.0) 55.6 8.4 6.8 5.9 1.4 1.7 1.7 — — — (18.6) (17.4) 3.0 4.9
CESC REDUCE 585 600 2.5 77,579 1,219 133 15.0 41.8 54.3 (62.0) 179.2 30.0 39.1 14.0 10.8 11.0 6.7 6.1 1.0 0.9 0.9 1.3 1.0 1.1 2.5 6.7 8.3 4.1
JSW Energy SELL 99 81 (18.1) 162,201 2,550 1,640 8.4 10.9 11.1 22.2 29.5 1.6 11.7 9.1 8.9 6.8 5.4 5.1 2.2 1.7 1.5 — — — 19.6 21.3 17.8 3.2
NHPC REDUCE 19 22 15.5 210,896 3,315 11,071 2.3 2.2 2.2 45.6 (5.2) (0.2) 8.2 8.7 8.7 6.4 6.2 6.3 0.7 0.7 0.6 4.2 3.1 3.1 8.7 7.7 7.3 0.8
NTPC ADD 138 156 13.4 1,134,164 17,827 8,245 12.5 12.3 14.6 (2.5) (1.4) 18.3 11.0 11.2 9.4 11.6 9.8 8.0 1.4 1.3 1.2 2.7 2.7 3.2 12.3 11.9 13.0 10.3
Power Grid BUY 143 175 22.5 747,071 11,743 5,232 9.6 12.3 15.6 11.3 28.3 26.7 14.9 11.6 9.1 11.1 9.1 7.7 2.0 1.8 1.6 2.0 2.6 3.3 13.8 16.0 18.2 6.1
Reliance Power SELL 45 44 (2.8) 126,932 1,995 2,805 3.7 3.6 5.3 (0.1) (1.6) 46.3 12.3 12.5 8.6 16.7 10.1 7.6 0.6 0.6 0.5 — — — 5.1 4.8 6.6 4.5
Tata Power ADD 73 90 23.3 197,438 3,103 2,800 0.5 4.1 5.5 (75.9) 701.7 32.5 141.5 17.7 13.3 8.8 6.9 6.2 1.4 1.4 1.3 1.6 1.6 1.6 1.1 7.9 9.8 4.1
Utilities Attractive 2,740,393 43,074 (1.1) 16.1 25.1 14.1 12.1 9.7 10.2 8.4 7.2 1.3 1.2 1.1 2.2 2.2 2.6 9.4 10.2 11.7 38.0
Others
Astral Poly Technik BUY 376 455 21.0 44,505 700 118 6.4 10.3 14.2 (8.7) 60.4 38.0 58.6 36.6 26.5 27.2 18.4 13.5 7.2 6.2 5.2 0.1 0.2 0.4 16.2 18.3 21.4 0.7
Carborundum Universal ADD 171 200 17.0 32,189 506 188 5.2 8.6 11.7 6.5 64.9 37.0 32.9 20.0 14.6 13.0 9.9 7.7 2.7 2.4 2.1 1.1 1.0 1.4 8.4 12.7 15.6 0.1
Dhanuka Agritech BUY 600 750 25.0 30,012 472 50 21.7 25.8 32.6 16.4 19.0 26.5 27.7 23.3 18.4 21.7 17.4 13.5 7.3 5.9 4.8 0.8 0.9 1.2 29.1 28.0 28.6 0.2
Godrej Industries ADD 404 380 (5.8) 135,532 2,130 336 12.0 17.2 22.4 21.6 43.1 30.9 33.7 23.5 18.0 37.5 20.1 14.8 4.2 3.6 3.1 0.4 0.4 0.4 13.5 16.5 18.5 2.7
Havells India ADD 300 300 (0.0) 187,439 2,946 624 8.1 9.6 11.4 (4.6) 18.2 18.7 37.0 31.3 26.4 20.7 18.4 15.5 10.0 8.6 7.4 0.8 1.2 1.5 28.6 29.5 30.0 5.3
Jaiprakash Associates RS 12 — — 27,973 440 2,432 (9.3) 0.2 0.8 (66.6) 102.4 247.0 (1.2) 51.5 14.9 10.4 9.2 8.9 0.3 0.3 0.3 0.0 0.0 0.0 (22.0) 0.5 1.9 6.3
PI Industries ADD 655 750 14.5 89,485 1,407 136 16.6 21.8 28.6 20.0 31.7 31.2 39.6 30.0 22.9 24.2 19.1 15.1 9.9 7.8 6.1 0.4 0.5 0.6 28.3 29.0 29.8 2.4
Rallis India BUY 256 260 1.6 49,745 782 194 8.1 10.3 13.3 3.5 27.8 28.6 31.6 24.8 19.2 18.3 14.7 11.5 6.1 5.3 4.4 1.0 1.2 1.3 20.5 22.8 24.9 1.1
Tata Chemicals BUY 519 560 7.9 132,206 2,078 255 28.1 40.6 45.8 84.3 44.4 12.8 18.5 12.8 11.3 9.2 7.5 6.5 2.3 2.0 1.8 1.9 1.9 1.9 12.5 16.7 16.7 3.7
UPL ADD 546 550 0.7 234,082 3,679 429 26.9 31.5 35.7 10.4 17.1 13.4 20.3 17.4 15.3 10.9 10.0 8.7 4.0 3.4 2.9 0.9 0.9 1.0 20.7 21.1 20.2 24.6
Whirlpool ADD 748 790 5.7 94,862 1,491 127 16.6 19.9 23.7 71.3 20.0 19.1 45.1 37.6 31.5 27.0 22.3 19.0 10.4 8.1 6.8 - - 0.6 25.4 24.2 23.4 1.0
Others 1,058,029 16,630 (21.7) 242.3 22.5 75.9 22.2 18.1 13.3 11.1 9.9 3.3 3.0 2.7 0.8 0.9 1.0 4.4 13.5 14.8 48.1
KIE universe 77,595,883 1,219,677 (0.2) 19.8 18.1 20.8 17.4 14.7 12.3 10.4 8.7 2.8 2.5 2.3 1.6 1.6 1.9 13.6 14.6 15.4
KIE universe (ex-energy) 68,446,890 1,075,871 4.4 19.4 20.2 22.5 18.8 15.7 13.4 11.5 9.6 3.2 2.9 2.6 1.5 1.5 1.7 14.4 15.3 16.3
Notes:
(a) We have used adjusted book values for banking companies.
(b) 2015 means calendar year 2014, similarly for 2016 and 2017 for these particular companies.
(c) Exchange rate (Rs/US$)= 63.62
Price/BV (X) RoE (%)Dividend yield (%)
Source: Company, Bloomberg, Kotak Institutional Equities estimates
Disclo
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83 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Disclosures
Kotak Institutional Equities Research coverage universeDistribution of ratings/investment banking relationships
Source: Kotak Institutional Equities As of June 30, 2015
Percentage of companies covered by Kotak Institutional
Equities, within the specified category.
* The above categories are defined as follows: Buy = We
expect this stock to deliver more than 15% returns over the
next 12 months; Add = We expect this stock to deliver 5-15%
returns over the next 12 months; Reduce = We expect this stock
to deliver -5-+5% returns over the next 12 months; Sell = We
expect this stock to deliver less than -5% returns over the next
12 months. Our target prices are also on a 12-month horizon
basis. These ratings are used illustratively to comply with
applicable regulations. As of 30/06/2015 Kotak Institutional
Equities Investment Research had investment ratings on 166
equity securities.
Percentage of companies within each category for which Kotak
Institutional Equities and or its affiliates has provided
investment banking services within the previous 12 months.
26.5%
37.3%
19.3%16.9%
3.6%1.8% 2.4%
0.6%
0%
10%
20%
30%
40%
50%
60%
70%
BUY ADD REDUCE SELL
Ratings and other definitions/identifiers
Definitions of ratings
BUY. We expect this stock to deliver more than 15% returns over the next 12 months.
ADD. We expect this stock to deliver 5-15% returns over the next 12 months.
REDUCE. We expect this stock to deliver -5-+5% returns over the next 12 months.
SELL. We expect this stock to deliver <-5% returns over the next 12 months.
Our target prices are also on a 12-month horizon basis.
Other definitions
Coverage view. The coverage view represents each analyst’s overall fundamental outlook on the Sector. The coverage view will consist of one of the following
designations: Attractive, Neutral, Cautious.
Other ratings/identifiers
NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s)
and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction
involving this company and in certain other circumstances.
CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.
NC = Not Covered. Kotak Securities does not cover this company.
RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient
fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock
and should not be relied upon.
NA = Not Available or Not Applicable. The information is not available for display or is not applicable.
NM = Not Meaningful. The information is not meaningful and is therefore excluded.
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