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PC Jeweller Ltd
Initiating Coverage
CRISIL IERIndependentEquityResearch
Assessment
Excellent fundamentals Superior fundamentals Good fundamentals Moderate fundamentals Poor fundamentals
Assessment
Strong upside (>25% from CMP) Upside (10-25% from CMP) Align (+-10% from CMP) Downside (negative 10-25% from CMP) Strong downside (<-25% from CMP)
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Analyst Disclosure
Each member of the team involved in the preparation of the grading report, hereby affirms that there exists no conflict of interest that can bias the grading recommendation of the company.
Disclaimer:
This Company commissioned CRISIL IER report is based on data publicly available or from sources considered reliable. CRISIL Ltd. (CRISIL) does not represent that it is accurate or complete and hence, it should not be relied upon as such. The data / report is subject to change without any prior notice. Opinions expressed herein are our current opinions as on the date of this report. Nothing in this report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The subscriber / user assume the entire risk of any use made of this data / report. CRISIL especially states that, it has no financial liability whatsoever, to the subscribers / users of this report. This report is for the personal information only of the authorised recipient in India only. This report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person especially outside India or published or copied in whole or in part, for any purpose.
PC Jeweller Ltd `
Spreading the sheen
Fundamental Grade Valuation Grade Industry 3/5 (Good fundamentals) 5/5 (CMP has strong upside) Speciality retail
150 87
Fundamental Grade
Jewellery retailer PC Jeweller Ltd (PCJ) has entrenched itself firmly in North India based on a strong brand recall and successful branch expansion (from one to 36 showrooms in the past seven years). Increasing market share of organised players along with companys focus on diamond jewellery augurs well for the company. However, intensifying competition, weakening consumer sentiment and stringent regulations on gold imports are key risks. We initiate coverage on PCJ with a fundamental grade of 3/5. Strong foothold in NCR; retail expansion at a fast pace National Capital Region (NCR) dominates its domestic sales with 60%+ contribution. Aggressive expansion (2.5x increases in retail space) over FY10-13 to 166k sq ft and further expansion lined over the next two years is expected to lower PCJs dependence on NCR. Focus on high-margin diamond jewellery In a bid to better its margins, PCJ has been increasing its focus on high-margin diamond jewellery. Its share increased from 18% of FY10 domestic sales to 31% in FY13, improving EBITDA margin from 10% to 12.5% during the same period. Going ahead, we expect PCJs diamond jewellery to hover around 30-32% of domestic sales. Gold jewellery demand to be steady, organised players to gain market share Domestic gold jewellery market grew 24% y-o-y to 2,125 bn, mainly led by a 17% rise in gold price during FY13; the jewellery industry grew by 15% during the same period owing to strong demand for jewellery during festivals/weddings. For FY14, we expect demand for jewellery to increase with marginal decline in gold prices (2-3% y-o-y). Further, shift in consumer preference towards branded jewellery is expected to increase the share of organised players from the current ~18%. Ability to withstand competition; regulatory concerns - key monitorable PCJ plans to add 20 more showrooms (100k sq ft more) in FY14 and ~12 more showrooms in FY15 across India; it is looking at new markets in southern and western India. With aggressive expansion plans of many regional and national players, along with weak consumer demand, competition is expected to intensify. Given the lower pick-up in stores outside NCR, PCJs ability to successfully penetrate these regions and establish a brand is a key monitorable. Also, changes in the Reserve Bank of Indias (RBIs) regulations to curb gold imports may lead to difficulty in getting a metal loan; this is a monitorable too. Expect two-year revenue CAGR of 18.7%; EBITDA margins to decline We expect revenues to register a two-year CAGR of 18.7% to 56 bn in FY15 driven by new store openings and consumers demand for jewellery. We expect EBITDA margin to decline marginally to 10.5% in FY15 owing low profitability of new stores. Valuations: Current market price has strong upside We have used the price-to-earnings ratio (P/E) method to value PCJ. We assign a P/E multiple of 8x to FY15 EPS of 18.8 and arrive at a fair value of 150 per share. At the current market price of 87, our valuation grade is 5/5.
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Poor Fundamentals
Valuation Grade
Strong Downside Strong Upside
SHAREHOLDING PATTERN
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Dec-12 Pro moter 13-Mar FII DII 13-Jun Others 70.02% 70.02% 70.02% 14.8% 3.95% 11.3% 13.0% 3.58% 13.4% 13.7% 3.46% 12.9%
KEY FORECAST
( mn) FY11 FY12 Operating income 19,772 30,419 EBITDA 1,965 3,314 Adj net income 1,453 2,334 Adj EPS ( ) 32.6 17.4 EPS growth (%) 96.5 (46.5) Dividend yield (%) RoCE (%) 53.3 40.8 RoE (%) 57.8 53.3 PE (x) P/BV (x) EV/EBITDA (x) 0.6 1.5 NM: Not meaningful; CMP: Current market price Source: Company, CRISIL Research estimates FY13 40,184 4,825 2,937 16.4 (5.9) 0.9 34.4 30.3 7.0 1.5 3.2 FY14E 49,403 5,319 3,305 18.5 12.5 4.3 29.6 21.5 3.8 0.7 1.3 FY15E 56,628 5,918 3,368 18.8 1.9 4.3 29.0 18.2 3.7 0.6 0.9
ANALYTICAL CONTACT
Mohit Modi (Director) Pooja Bandekar Vishal Rampuria Client servicing desk +91 22 3342 3561 clientservicing@crisil.com mohit.modi@crisil.com pooja.bandekar@crisil.com vishal.rampuria@crisil.com
For detailed initiating coverage report please visit: www.ier.co.in CRISIL Independent Equity Research reports are also available on Bloomberg (CRI <go>) and Thomson Reuters.
CRISIL IERIndependentEquityResearch
Dominant player in North India 59% 22.7% Sustained demand for gold jewellery in India, especially for weddings Shift in consumers preference for organised jewellery players (players with multiple stores) from the unorganised ones (single store players) due to better designs and quality assurance through hallmarking Opening of 20 new showrooms pan-India in FY14 and 12 more by FY15
Joyalukkas Jewellery, Tara Jewels, Titan Industries, Thangamayil , Tribhovandas Bhimji Zaveri (TBZ) High geographical concentration Regulatory concerns Aggressive expansion by organised players
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Grading Rationale
A dominant player in NCR with strong brand recall
PCJ, promoted by brothers Padam Chand Gupta and Balram Garg, has emerged as one of the leading retail jewellery players in Delhi. It has gradually expanded from one (flagship) showroom in Karol Bagh, Delhi in 2005 to 36 stores as of Q1FY14 across North and Central India. A strong in-house design team and five manufacturing facilities support its retail expansion. With promoters two-decade-plus experience in the jewellery industry, PCJ has been able to create a strong brand recall in the NCR.
Strong foothold in NCR, which includes Delhi and 19 districts in Haryana, Uttar Pradesh and Rajasthan
58%
34% 25%
CRISIL IERIndependentEquityResearch
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Consumption to increase
Q1FY14 witnessed increase in gold jewellery sales volume aided by lower gold prices which fell by 12% in April 2013 but subsequently has rebounded; current gold price being 30,230 per 10 gms. Domestic gold prices are expected to decline further in line with a fall in international prices (see the following chart) as India almost entirely meets its gold requirement through imports. However, the decline in domestic gold prices will not be severe as the rupee continues to weaken y-o-y in 2013-14. Moreover, the increase in import duty on gold to 10% from 6% will further widen the gap between international and domestic prices. Consequently, CRISIL Research expects domestic gold prices to decline by 2-3% in 2013-14. This marginal decline in gold prices is expected to lead to higher jewellery sales volume in
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FY14. Based on this, we expect PCJs revenues to grow at a CAGR of 18.7% over FY13-15. Moreover, due to the cultural underpinnings in India, there will be sustained demand for wedding jewellery. Over the long term, jewellery demand is expected to record stable growth driven by changing lifestyle, expected improvement in economic conditions and increase in demand from rural and semi-urban markets.
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CRISIL IERIndependentEquityResearch
PCJ opened 26 stores in the past three years; currently has 36 stores
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We believe the relatively low penetration of the organised sector, particularly in the metro, tier I and tier II cities and towns in India, provides significant growth opportunities for PCJ. The company plans to further expand its retail network across various cities in North and Central India and in certain key markets in the rest of India. PCJ plans to add 20 showrooms in FY14 and 20 more in FY15. Addition of stores will not only aid the company to garner more revenues but also increase the brand visibility and geographical presence, thereby leading to higher market share.
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the decline in EBITDA margin will be marginal. Compared to other organised retail players, PCJ had average revenues/sq ft/month of ~15,000 in FY13 due to the high proportion of diamond jewellery. Despite the aggressive retail expansion, PCJ was able to maintain RoCE at around 35% in FY13. The increasing share of high-margin diamond jewellery in sales has contributed to better return ratios over the past few years. However, diamond jewellery poses a high risk of inventory obsolescence and higher inventory days as compared to gold jewellery. Even with the exposure to this risk, PCJ has been able to maintain its margins over the years.
Figure 8: Increased focus of competitors on diamond Figure 7: Increase in diamond jewellery sales
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% FY10 Gold Jewellery FY11 FY12 FY13 Other Jewellery Diamond Jewellery 81.20% 76.40% 72.60% 68.50% 0.90% 17.90% 0.70% 22.90% 0.70% 0.72%
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Titan
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Procures 100% of its gold requirement under the gold loan schemes
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quota. The impact of these norms on PCJ would not be significant as it has both SEZ and non-SEZ units that can cater to the export market. At the same time, many local players, who trade only in the domestic market might witness tight supplies.
Competitive landscape
Compared to other large traditional/regional players, PCJ has expanded at a faster pace and has been able to break even within one-two years of operations of new stores. Also, PCJ has better profit margins and has been able to maintain these margins despite aggressive retail expansion.
Source: Company, CRISIL Research The shift from unbranded jewellery to branded jewellery should provide some room for the players to co-exist and compete on customer loyalty and variety, underlined by quality assurance. On the flip side, this will likely lead to higher spending on advertising, lower volumes and realisations and/or suppressed margins on gold jewellery. Given, the lower pickup in stores outside Delhi, PCJs ability to successfully penetrate these regions and establish a brand is a key monitorable.
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Peer comparison
Growth rate (%) FY09-13 Revenue CAGR PCJ Tara Jewels Ltd Thangamayil Jewellery Ltd Titan Industries Ltd TBZ 59% 20.2% 58% 27% 25% FY11 9.9 9.8 9.0 9.4 7.3 EBITDA margin (%) FY12 10.9 9.4 10.4 9.5 8.8 FY13 12 9.8 9.0 9.4 7.3 FY11 7.4 3.6 4.8 6.7 3.3 PAT margin (%) FY12 7.6 3.9 5.3 6.8 4.1 FY13 7.2 4.5 2.7 7.2 5.1 FY11 114 130 129 101 130 Inventory days FY12 166 146 135 133 132 FY13 182 145 123 148 225 FY11 2.2 1.4 3.2 2.2 2.8 Net asset turnover (x) FY12 2.0 1.3 3.1 2.1 2.5 FY13 1.5 1.4 2.9 1.9 1.9 FY11 101 30 45.8 39.7 35 Operating income FY12 54 29 71.9 35.4 16 FY13 32 18 34.8 14.4 19.1 FY11 100 42 89.2 65.2 85 EBITDA FY12 69 35 99.4 35.6 40 FY13 52 17 (18.1) 21.5 21 Adjusted PAT FY11 119 77 95.0 70.9 133 FY12 59 30 90.6 38.9 45 FY13 26 37 (30.3) 18.8 25.6
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Key Risks
Sector under scanner due to high CAD
At 920 tonnes in 2012-13, India's gold consumption (Jewellery and Bars and Coins) is the largest globally. It meets most of its requirements through imports. Gold accounts for about 10% of India's overall imports in value terms. Robust demand and high prices of the yellow metal weigh heavily on the country's current account deficit (CAD), especially at times when export growth is decelerating. In FY13 CAD was high at 5.1% of GDP. This necessitated stronger measures to control gold imports. The government hiked the import duty from 2% (a year ago) in phased steps to 10% and the RBI has put further curbs on gold import mandating that banks and nominated agencies should retain 20% (or one-fifth) of every lot of gold imports in the customs bonded warehouses. Going ahead, with stringent restrictions on imports to control CAD, the availability of gold supplies will be in question. This could raise domestic gold premiums, driving up raw material costs and, thus, affecting profitability of jewellery retailers.
Inventory Risk
PCJ has been increasing its focus on high-margin diamond jewellery. Its share increased from 18% of FY10 domestic sales to 31% in FY13. In case of old/unsold diamond jewellery inventory, the cost in terms of time spent in removing small-sized diamonds from jewellery is high. Also, it is difficult to use recycled small diamonds for new jewellery due to the different size, shapes and cuts of small diamonds.
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Financial Outlook
Sales to grow at a CAGR of 18.7% over FY13-15
( mn) 60,000 101 50,000 40,000 30,000 20,000 10,000 19,772 FY11 FY12 FY13 FY14E FY15E Revenues Growth (%) (RHS) 30,419 40,184 49,403 54 32 23 15 56,628 100 80 60 3,000 40 20 2,000 1,000 1,965 FY11 FY12 EBIDTA FY13 FY14E FY15E EBIDTA Margin (RHS) 3,314 4,825 5,319 5,918 0.0 6.0 4.0 2.0 120
EPS to be steady
() 35.0 30.0 25.0 20.0 15.0 10.0 5.0 FY11 FY12 FY13 Adj EPS FY14E FY15E 32.6 18.8
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Management Overview
CRISIL's fundamental grading methodology includes a broad assessment of management quality, apart from other key factors such as industry and business prospects, and financial performance. Overall, we believe that the management has an established track record and strong understanding of the jewellery business.
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Corporate Governance
CRISILs fundamental grading methodology includes a broad assessment of corporate governance and management quality, apart from other key factors such as industry and business prospects, and financial performance. In this context, CRISIL Research analyses the shareholding structure, board composition, typical board processes, disclosure standards and related-party transactions. Any qualifications by regulators or auditors also serve as useful inputs while assessing a companys corporate governance. Overall, corporate governance at PCJ meets the minimum levels supported by reasonably good board practices and an independent board.
Board composition
The board comprises four directors, of which two are independent directors. The independent directors have been on the board since September 2011. This is in keeping with SEBIs Clause 49. Based on our interaction with the independent directors, we believe they possess a fair understanding of the companys business and processes.
Boards processes
The companys quality of disclosure can be considered good judged by the level of information and details furnished in the annual report, websites and other publicly available data. The company has all the necessary committees audit, remuneration and investor grievance - in place to support corporate governance practices. The audit committee is chaired by an independent director, Mr Manohar Lal Singla.
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Valuation
multiple of 8x to EPS of 18.8 to arrive at a fair value of 150 per share.
Grade: 5/5
We have used the price-to-earnings ratio (P/E) method to value PCJ. We have applied a P/E
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Median PE
Peer comparison
M Cap Companies PC Jewellers Tara Jewels Thangamayil Titan Industries TBZ mn 17,543 2,929 2,799 198,021 13,070 FY11 58.3 20.3 36.2 49 55.4 RoE (%) FY12 52.2 21.7 48.3 48.2 42.9 FY13 30.3 19.1 28.1 42.3 30 FY12 NA NA 4.1 33.7 NA P/E (x) FY13 7 5.2 6.3 23.7 12 FY14E 4.19 3.22 7.17 27.69 11.85 FY15E NA NA 5.76 22.9 8.27 FY12 NA NA 1.6 13.9 NA P/B (x) FY13 1.5 0.74 1.6 9.9 2.6 FY14E 1.07 0.46 1.37 7.7 2.57 FY15E NA NA 1.17 6 2
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Company Overview
PCJ was established in 2005 after a split between the two promoter families of PP Jewellers. PP Jewellers was set up in 1993 by Mr Padam Chand Gupta and Mr Kamal Gupta; after the business was split in 2005, Mr PC Gupta retained the flagship showroom in Karol Bagh under PCJ. PCJ (Delhi-based) is promoted by brothers Mr Padam Chand Gupta and Mr Balram Garg. The company is largely a domestic retail player well established in North India. In 2012, PCJ was listed on the NSE and the BSE through an IPO of 6,000 mn.
Business profile
Retailing of gold and diamond-studded jewellery: PCJ manufactures jewellery made of gold, diamond and other precious stones, platinum and silver. It retails gold jewellery and diamond-studded jewellery under the PC Jeweller brand. In FY13, domestic operations accounted for 75% of total revenues. As of FY13 it has 30 showrooms in 23 cities in North and Central India totalling ~166k sq ft. The company intends to add 20 new showrooms in FY14 (133,000 sq ft) using the proceeds from the IPO. In Q1FY14, PCJ opened six stores adding 33,000 sq ft, expanding its reach in 28 cities in 10 states.
Manufacturing facilities
Location Noida SEZ, Uttar Pradesh Noida SEZ, Uttar Pradesh Selaqui, Dehradun, Uttarakhand Noida, Uttar Pradesh Source: CRISIL Research Export: PCJ exports gold and diamond jewellery to international distributors in Dubai, Singapore and Hong Kong. The export sales contribution to total revues was 25% in FY13. Going forward, the focus on export will be lower. Commissioning date 20-Nov-07 3-Mar-11 30-Mar-10 17-Nov-11 Purpose Jewellery for exports Jewellery for exports Jewellery for domestic market Jewellery for domestic Area in sq ft 36,570 3,938 8,611 34,000
Key Milestones
2005 2007 2008 2009 2010 2011 2012 The company was incorporated as P Chand Jewellers Private Ltd Showroom in Karol Bagh (New Delhi) opened Showrooms in Noida and Panchkula (New Delhi) opened Export operations from the manufacturing unit in the Noida SEZ commenced Showrooms in Faridabad and Dehradun opened Operations at the manufacturing unit in Selaqui, Dehradun commenced Showrooms in Pitampura (New Delhi) and Chandigarh opened Operations at the second manufacturing unit in Selaqui, Dehradun commenced Showrooms opened in Preet Vihar (New Delhi), Ghaziabad, Gurgaon, Lucknow, Indore, Bhopal, Raipur, Jodhpur and Bhilwara Converted from private limited to public limited Operations from the second export unit in the Noida SEZ commenced Showrooms opened in Ludhiana, Haridwar, Bilaspur, Pali, South Extension (New Delhi), Beawar, Ajmer and Amritsar Operations at the manufacturing unit in Noida commenced Showrooms opened in Kanpur, Rohtak, Indirapuram (Ghaziabad), Rajouri Garden (New Delhi), Kingsway Camp (New Delhi) and Greater Kailash-I (New Delhi)
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Annexure: Financial
Income statement
( m n) Operating incom e EBITDA EBITDA m argin Depreciation EBIT Interest Operating PBT Other income Exceptional inc/(exp) PBT Tax provision Minority interest PAT (Reported) Less: Exceptionals Adjusted PAT FY11 19,772 1,965 9.9% 30 1,935 369 1,566 77 14 1,657 189 1,467 14 1,453 FY12 30,419 3,314 10.9% 66 3,248 751 2,497 174 (21) 2,650 337 2,313 (21) 2,334 FY13 40,184 4,825 12.0% 100 4,725 1,251 3,474 202 (411) 3,265 739 2,527 (411) 2,937 59% FY13 32.1 45.6 25.9 (5.9) FY14E 49,403 5,319 10.8% 142 5,177 1,305 3,872 594 4,467 1,161 3,305 3,305 FY15E 56,628 5,918 10.5% 206 5,712 1,503 4,208 536 4,744 1,376 3,368 3,368
Balance Sheet
( m n) Liabilities Equity share capital Reserves Minorities Net w orth Convertible debt Other debt Total debt Deferred tax liability (net) Total liabilities Asse ts Net fixed assets Capital WIP Total fixed ass ets Investm ents Current assets Inventory Sundry debtors Loans and advances Cash & bank balance Marketable securities Total curre nt assets Total curre nt liabilities Net curre nt assets Intangibles/Misc. expenditure Total assets FY11 447 2,807 3,254 1,396 1,396 (4) 4,645 317 50 366 5,501 4,248 467 223 10,439 6,160 4,279 4,645 FY12 1,340 4,162 5,502 5,783 5,783 (4) 11,280 566 219 784 0 11,724 6,985 929 791 20,430 9,944 10,486 10 11,280 FY13 1,791 12,097 13,888 2,331 2,331 (50) 16,169 628 292 919 1 17,137 6,762 2,659 2,846 4,429 33,833 18,595 15,239 10 16,169 FY14E 1,791 15,128 16,919 1,822 1,822 (50) 18,691 986 292 1,277 1 22,333 8,314 2,470 3,157 4,429 40,702 23,299 17,403 10 18,691 FY15E 1,791 18,217 20,008 1 599 600 (50) 20,558 1,279 292 1,571 1 24,513 9,530 2,831 3,298 4,429 44,601 25,625 18,976 10 20,558
Ratios
FY11 Grow th Operating income (%) EBITDA (%) Adj PAT (%) Adj EPS (%) Profitability EBITDA margin (%) Adj PAT Margin (%) RoE (%) RoCE (%) RoIC (%) Valuations Price-earnings (x) Price-book (x) EV/EBITDA (x) EV/Sales (x) Dividend payout ratio (%) Dividend yield (%) B/S ratios Inventory days Creditors days Debtor days Working capital days Gross asset turnover (x) Net asset turnover (x) Sales/operating assets (x) Current ratio (x) Debt-equity (x) Net debt/equity (x) Interest coverage 114 125 78 75 61.9 75.5 63.7 1.7 0.4 0.4 5.2 166 126 84 116 55.9 69.0 52.9 2.1 1.1 0.9 4.3 0.6 0.1 1.5 0.2 100.5 99.5 118.5 96.5 FY12 53.9 68.7 60.6 (46.5)
Cash flow
( m n) Pre-tax profit Total tax paid Depreciation Working capital changes Net cas h from operations Cash from inves tm e nts Capital expenditure Investments and others Net cas h from investm ents Cash from financing Equity raised/(repaid) Debt raised/(repaid) Dividend (incl. tax) Others (incl extraordinaries) Net cas h from financing Change in cash position Closing cash FY11 1,643 (186) 30 (2,122) (636) (141) (141) 270 561 (248) 583 (194) 223 FY12 2,671 (337) 66 (5,639) (3,239) (494) (0) (494) 668 4,387 (754) 4,301 568 791 FY13 3,676 (785) 100 1,730 4,722 (235) (4,429) (4,665) 5,633 (3,452) (210) 26 1,997 2,054 2,846 FY14E 4,467 (1,161) 142 (1,854) 1,594 (500) (500) (509) (537) 263 (783) 311 3,157 FY15E 4,744 (1,376) 206 (1,432) 2,143 (500) (500) (1,222) (537) 258 (1,501) 141 3,298
Quarterly financials*
( m n) Net Sales Change (q-o-q) EBITDA Change (q-o-q) EBITDA m argin PAT Adj PAT Change (q-o-q) Adj PAT m argin Adj EPS Q1FY13 Q2FY13 Q3FY13 10,185 1,132 11% 669 669 7% 3.7 Q4FY13 11,442 12% 1,323 17% 11.6% 825 825 23% 7% 4.6 Q1FY14 13,790 21% 1,552 17% 11.3% 900 900 9% 6.5% 5.0
Per share
Adj EPS ( ) CEPS Book value Dividend ( ) Actual o/s shares (mn) FY11 32.6 33.2 72.9 44.7 FY12 17.4 17.9 41.1 133.9 FY13 16.4 17.0 77.5 1.0 179.1 FY14E 18.5 19.2 94.5 3.0 179.1 FY15E 18.8 20.0 111.7 3.0 179.1
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Focus Charts
Revenue and growth trends
( mn) 60,000 101 50,000 40,000 30,000 20,000 10,000 19,772 FY11 FY12 FY13 FY14E FY15E Revenues Growth (%) (RHS) 30,419 40,184 49,403 54 32 23 15 56,628 100 80 60 120
(%) 12.0 10.9 9.9 10.8 10.5 14.0 12.0 10.0 8.0 6.0 4.0 2.0 1,965 3,314 FY12 EBIDTA 4,825 FY13 5,319 FY14E 5,918 0.0 FY11 FY15E EBIDTA Margin (RHS)
2,000 1,000 -
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Stock performance
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-Indexed to 100 Source: Company, CRISIL Research Source: Company, CRISIL Research
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CRISIL Research Team
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