Professional Documents
Culture Documents
Tactical Vehicles
Mine protected Vehicle
Light Armoured Vehicle
Special purpose vehicles
Buses
Multi Barrel Rocket Launcher
Snow clearing vehicle
Multi fuel dispenser
Water browser
Refrigerated truck
Automobiles
78
Edelweiss Securities Limited
Company Description
ALDS is the second-largest commercial vehicle manufacturer in India. Hinduja Group holds
51% stake in the company through the holding company, Hinduja Automotive (UK). The
company has six manufacturing plants at four locations in IndiaEnnore (Tamil Nadu),
Hosur (Tamil Nadu), Alwar (Rajasthan), Bhandara (Maharashtra) and Pantnagar
(Uttaranchal). It focuses on the M&HCV segment and has a significant presence in the bus
segment.
Investment Theme
ALDS is a pure play on the M&HCV segment. Post sharp volume decline in last two years, we
expect it to be the key beneficiary of any improvement in M&HCV demand. Also, ALDS has
initiated measures to lower debt levels and improve balance sheet, benefits, of which, are
yet to filter in.
Key Risks
Longer than expected delay in recovery of the CV cycle
We expect the CV cycle to recover only in H2FY15E on the back of higher infrastructure,
mining, construction activity. However, a potential delay in the recovery may keep financial
performance, and hence, the stock performance is subdued.
Rising competitive intensity in M&HCV space
Duopoly in the M&HCV space is under threat from key competitors like Eicher and
BharatBenz. South has been a traditional strong hold for ALDS and higher competition in
other regions can impact volumes.
Weak balance sheet
Investment in subsidiaries accounts for ~75% of adjusted net worth. Also, net debt/ equity is
near its peak. Any delay in demand recovery can impact free cash flows and deteoriate
balance sheet further
79
Edelweiss Securities Limited
Ashok Leyland
Financial Statements
Income statement (INR mn)
Year to March FY13 FY14 FY15E FY16E
Income from operations 124,812 99,433 108,176 136,462
Materials costs 91,231 76,026 77,819 95,664
Manufacturing expenses 2,131 1,721 1,893 2,378
Employee costs 10,755 9,997 10,366 11,756
Total SG&A expenses 11,930 10,025 9,868 12,124
Total operating expenses 116,047 97,768 99,947 121,923
EBITDA 8,765 1,665 8,229 14,539
Depreciation & Amortization 3,808 3,770 3,850 3,919
EBIT 4,957 (2,106) 4,379 10,620
Non-Operational Income 624 665 712 760
Interest expenses 3,769 4,529 3,863 3,086
Profit before tax 1,812 (5,970) 1,229 8,295
Provision for tax 370 (1,206) 172 1,908
Net profit 1,442 (4,258) 1,057 6,387
Extraordinary income/ (loss) 2,896 5,057 - -
Profit After Tax 4,337 293 1,057 6,387
Basic EPS (INR) 0.5 (1.6) 0.4 2.4
Shares outstanding (mn) 2,661 2,661 2,661 2,661
Diluted EPS (INR) 0.5 (1.6) 0.4 2.4
CEPS (INR) 2.0 (0.2) 1.8 3.9
Dividend per share (INR) 0.6 - 0.2 1.1
Dividend payout (%) 36.8 - 42.0 45.0
Common size metrics
Year to March FY13 FY14 FY15E FY16E
Materials costs 73.1 76.5 71.9 70.1
Employee expenses 8.6 10.1 9.6 8.6
EBITDA margins 7.0 1.7 7.6 10.7
Net profit margins 1.2 (4.3) 1.0 4.7
Growth ratios (%)
Year to March FY13 FY14 FY15E FY16E
Revenues (3.3) (20.3) 8.8 26.1
EBITDA (3.6) (16.7) 2.4 22.9
PBT 7.3 (19.2) 10.0 25.6
Net profit (77.0) (395.3) (124.8) 504.4
EPS (77.0) (395.3) (124.8) 504.4
Key Assumptions
Year to March FY13 FY14 FY15E FY16E
Macro
GDP(Y-o-Y %) 5.0 4.8 5.4 6.3
Inflation (Avg) 7.4 6.2 5.5 6.0
Repo rate (exit rate) 7.5 8.0 7.5 7.0
USD/INR (Avg) 54.5 62.0 60.0 58.0
Sector
MHCV - domestic vol (% YoY) (23.2) (28.0) 7.0 25.0
Steel prices (INR/t) 39,200 39,200 39,984 40,784
Aluminium prices (USD/t) 2,300 2,400 2,448 2,497
Company
MHCV - domestic vol (% YoY) (13.0) (26.7) 7.1 25.9
Avg realisation (INR) 1,089,179 1,112,673 1,150,165 1,183,240
Avg realisation (% YoY) (13.9) 2.2 3.4 2.9
RM cost/vehicle 796,134 850,746 827,401 829,488
Employee cost/vehicle 93,855 111,865 110,218 101,936
Average salary 667,523 620,452 651,475 729,652
Promotion cost (% revenue) 2.8 2.9 2.9 2.9
EBITDA/vehicle 76,488 18,628 87,495 126,068
Average Interest rate (%) 8.7 9.6 10.0 9.5
Average Depreciation rate (%) 5.7 5.3 5.3 5.3
Tax rate (%) 7.9 132.0 14.0 23.0
Dividend payout ratio (%) 36.8 - 42.0 45.0
Net borrowings (INR mn) 12,575 3,791 (6,000) (6,000)
Capex (INR mn) 7,503 2,309 1,500 1,500
Debtor days 39 50 43 34
Inventory days 83 74 54 48
Payable days 140 154 141 126
Cash conversion cycle (days) (19) (31) (44) (44)
80
Edelweiss Securities Limited
Automobiles
Peer comparison valuation
Market cap Diluted PE (X) EV/EBITDA (X) Price/BV (X)
Name (USD mn) FY15E FY16E FY15E FY16E FY15E FY16E
Ashok Leyland 1,671 88.5 14.6 15.8 8.5 2.9 2.7
Eicher Motors 3,775 32.8 20.5 18.2 11.1 8.8 6.6
Mahindra & Mahindra Ltd 12,497 19.8 15.3 12.9 10.1 3.7 3.2
Tata Motors Ltd 23,645 9.6 8.0 4.1 3.5 1.9 1.5
Median - 26.3 15.0 14.4 9.3 3.3 2.9
AVERAGE - 37.7 14.6 12.7 8.3 4.3 3.5
Source: Edelweiss research
Cash flow metrics
Year to March FY13 FY14 FY15E FY16E
Operating cash flow 7,283 8,451 16,835 15,488
Investing cash flow (11,643) (6,165) (3,188) (3,140)
Financing cash flow 4,170 (738) (10,382) (12,449)
Net cash flow (190) 1,548 3,265 (100)
Capex (7,503) (2,309) (1,500) (1,500)
Dividends paid 1,868 - 519 3,363
Profitability & efficiency ratios
Year to March FY13 FY14 FY15E FY16E
ROAE (%) 3.3 (9.6) 2.4 13.7
ROACE (%) 5.8 (2.2) 4.7 11.9
Inventory day 83 74 54 48
Debtors days 39 50 43 34
Payable days 140 154 141 126
Cash conversion cycle (days) (19) (31) (44) (44)
Current ratio 1.3 1.3 1.1 1.0
Debt/EBITDA 5.0 28.4 5.0 2.4
Fixed asset turnover (x) 2.4 1.9 2.1 2.8
Debt/Equity 1.0 1.1 0.9 0.7
Operating ratios
Year to March FY13 FY14 FY15E FY16E
Total asset turnover 1.5 1.1 1.2 1.5
Fixed asset turnover 2.2 1.7 1.9 2.5
Equity turnover 2.9 2.2 2.4 2.9
Valuation parameters
Year to March FY13 FY14 FY15E FY16E
Diluted EPS (INR) 0.5 (1.6) 0.4 2.4
Y-o-Y growth (%) (77.0) (395.3) (124.8) 504.4
CEPS (INR) 2.0 (0.2) 1.8 3.9
Diluted PE (x) 64.9 (22.0) 88.5 14.6
Price/BV (x) 3.0 3.0 2.9 2.7
EV/Sales (x) 0.8 1.0 0.9 0.6
EV/EBITDA (x) 15.5 84.0 15.8 8.5
Dividend yield (%) 1.7 - 0.5 3.1
Balance sheet (INR mn)
As on 31st March FY13 FY14 FY15E FY16E
Equity capital 2,661 2,661 2,661 2,661
Reserves & surplus 41,890 41,818 42,356 45,380
Shareholders funds 44,551 44,479 45,016 48,041
Short term debt 24,520 30,106 24,106 22,106
Long term debt 19,035 17,239 17,239 13,239
Borrowings 43,554 47,345 41,345 35,345
Deferred tax liability 5,274 4,068 4,068 4,068
Sources of funds 93,379 95,892 90,429 87,453
Tangible assets 52,819 53,048 50,698 48,279
CWIP (incl. intangible) 7,057 5,366 5,366 5,366
Total net fixed assets 59,876 58,414 56,064 53,645
Non current investments 22,377 26,897 28,898 30,898
Current Investments 1,000 1,000 1,400 1,800
Cash and equivalents 139 117 3,382 3,282
Inventories 18,960 11,887 11,015 13,921
Sundry debtors 14,194 12,990 12,588 13,125
Loans and advances 13,539 14,735 8,041 10,162
Other current assets 882 2,040 2,040 2,040
Total current assets (ex cash) 47,575 41,652 33,684 39,248
Trade payable 33,716 30,628 29,299 36,745
Others current liabilities 3,872 1,560 3,699 4,675
Total current liabilities &
37,588 32,188 32,998 41,419
Net current assets (ex cash) 9,987 9,464 686 (2,171)
Uses of funds 93,379 95,892 90,429 87,453
Book value per share (INR) 11.8 11.8 12.0 13.1
Free cash flow (INR mn)
Year to March FY13 FY14 FY15E FY16E
Net profit 1,442 (4,764) 1,057 6,387
Depreciation 3,808 3,770 3,850 3,919
Others (1,698) 9,968 20,707 8,038
Gross cash flow 3,551 8,974 25,614 18,344
Less: Changes in WC (3,732) 523 8,778 2,856
Operating cash flow 7,283 8,451 16,835 15,488
Less: Capex 7,503 2,309 1,500 1,500
Free cash flow (220) 6,142 15,335 13,988
81
Edelweiss Securities Limited
Ashok Leyland
Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
28 Apr 2014 Mr Vindo K Dasari, Managing Director Buy 100000.00
28 Feb 2014 Mr. R Sivanesan Buy 50000.00
18 Oct 2013 Hinduja Automotive Limited Buy 60785517.00
19 Aug 2013 Mr vinod K Dasari Buy 100000.00
*in last one year
Bulk Deals
Data Acquired / Seller B/S Qty Traded Price
28 Mar 2014 Hinduja Automotive Ltd Buy 16623958 22.70
11 Oct 2013 Hinduja Automotive Ltd Buy 26000000 16.55
11 Oct 2013 Lotus Global Investment Ltd Sell 26000000 16.55
10 Oct 2013 Hinduja Automotive Ltd Buy 26000000 15.80
10 Oct 2013 Lotus Global Investments Ltd Sell 26000000 15.80
*in last one year
Holding Top10
Perc. Holding Perc. Holding
Hinduja automotive l 38.82 Life insurance corp 8.45
Baytree investments 1.63 Hdfc life insurance 1.45
Dimensional fund adv 1.31 General insurance co 1.07
Matthews intl capita 1.04 Vanguard group inc 0.64
Dsp blackrock invest 0.52 Sundaram asset manag 0.46
*in last one year
Additional Data
Directors Data
Dheeraj G. Hinduja Non Executive Chairman R. Seshasayee Non Executive Vice Chairman
Vinod K Dasari Managing Director Anuj Kathuria Executive Director
Anup Bhat Executive Director B. Venkat Subramaniam Executive Director
C. G. Belsare Executive Director Gopal Mahadevan Chief Financial officer
N V Balachandar Executive Director Nitin Seth Executive Director
Auditors - Delloitte Haskins & Sells
*as per last annual report
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Edelweiss Securities Limited
Automobiles
THIS PAGE IS INTENTIONALLY LEFT BLANK
Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
Edelweiss Securities Limited
Astra Microwave Products (AMP) is a leading player in designing and
manufacturing high value-added radio frequency (RF) and microwave-
based super components and sub-system finding applications in defence,
space and civil communication systems. The company is in a sweet spot
to benefit from increased spending in defence, including offset contracts.
Also, AMP has established itself as a part of the global supply chain for
OEMs, a testimony to its quality. We initiate coverage with BUY.
Defence electronics opportunity pegged at USD13bn
While Indias overall defence spending is likely to top USD248bn, the more relevant
market of defence electronics for AMP is pegged at USD13bn over the next 7-8 years.
Further, we anticipate projects worth INR100bn to be awarded over the next two
years, where the company could be a significant beneficiary, improving its revenue
visibility from the current two years. Orders from overseas OEMs are likely to provide
further impetus.
Strong order book provides visibility for next two years
AMPs order backlog at INR9.8bn provides visibility for the next two years with half
accounting for export orders. The company is well placed in certain orders to be
released by the global OEMs over the next 12-18 months. It is also likely to benefit
from increased supply of Akash missiles by its key suppliers, BEL and Bharat Dynamics .
FCF to improve; 13% EPS CAGR over next 2 years
We expect AMP to do cumulative free cash flow (FCF) of ~INR1bn over the next 2 years
led by improving profitability, stable working capital and lower capex. We also expect
13% EPS CAGR led by 8% revenue CAGR and 80bps margin expansion over next 2 years.
Outlook and valuations: Well geared; initiate with BUY
AMP is set to benefit from increased defence outlay given its tie-ups with several
global OEMs, which are in the reckoning for bagging large defence orders from India.
We like AMPs business model, which draws heavily from its sound R&D capability. We
initiate coverage with BUY/SO and target price of INR168, based on 21x FY16E EPS.
INITIATING COVERAGE
ASTRA MICROWAVE PRODUCTS
Latent growth
EDELWEISS RATINGS
Absolute Rating BUY
Rating Relative to Sector Outperformer
Risk Rating Relative to Sector High
Sector Relative to Market Overweight
MARKET DATA (R: ASTM.BO, B: ASTM IN)
CMP : INR 133
Target Price : INR 168
52-week range (INR) : 156 / 30
Share in issue (mn) : 81.8
M cap (INR bn/USD mn) : 11 / 182
Avg. Daily Vol.BSE/NSE(000) : 797.9
SHARE HOLDING PATTERN (%)
Current Q3FY13 Q2FY13
Promoters %
21.9 21.9 21.9
MF's, FI's & BKs 4.5 4.5 4.4
FII's 0.5 0.5 2.8
others 73.1 73.1 70.9
* Promoters pledged shares
(% of share in issue)
: NIL
RELATIVE PERFORMANCE (%)
Sensex Stock
Stock over
Sensex
1 month 0.0 25.0 25.0
3 months 12.7 126.0 113.3
12 months 31.6 133.9 102.3
Rahul Gajare
+91 22 4063 5561
rahul.gajare@edelweissfin.com
Swarnim Maheshwari
+91 22 4040 7418
swarnim.maheshwari@edelweissfin.com
India Equity Research| Defence
July 09, 2014
Financials
Year to March FY13 FY14 FY15E FY16E
Revenues (INR mn) 2,275 5,312 6,560 6,191
Rev. growth (%) 11.6 133.5 23.5 (5.6)
EBITDA (INR mn) 644 838 1,048 1,040
Net profit (INR mn) 372 515 635 656
EPS (INR) 4.6 6.3 7.7 8.0
EPS growth (%) 20.2 37.4 23.8 3.4
Diluted P/E (x) 29.0 21.1 17.1 16.5
ROE (%) 20.1 23.2 23.8 20.7
(Click on image
to view video)
Defence
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Edelweiss Securities Limited
Investment Rationale
Defence electronics opportunity pegged at USD13bn
While the overall defence spending in India is likely to top USD248bn, the more relevant
market of defence electronics for AMP is pegged at USD13bn over the next 7-8 years.
Further, we understand that projects worth INR100bn are likely to be awarded over the
next two years, where the company could be a significant beneficiary. This is likely to
improve its revenue visibility from the current two years. Orders from overseas OEMs are
likely to provide further impetus.
Capital expenditure to improve in overall defence spending
With the worlds largest volunteer army, third largest active military base of ~1.3mn armed
forces personnel, along with the third largest paramilitary force, India has been spending
higher share (~70%) of its defence budget on upkeep of the extensive military base, leaving
smaller portion for capex (~30%). However, the situation seems to be improving now with
increase in the share of capex to ~40% of the total defence budget. This, we expect to
sustain or improve on account of ambitious targets in terms of acquisition of sophisticated
military equipment given the hostile neighbourhood and obsoleteness of the current
armament.
Chart 1: Defence expenditure and increasing proportion of capex
Source: Union Budget, Edelweiss research
.
19.0
28.2
37.4
46.6
55.8
65.0
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Revenue Exp Capital Exp Capital Exp/ Total Exp (RHS)
Cap Exp/ Total Exp
(FY96 -FY04 ) 27.4%
Cap Exp/ Total Exp improved
to 39.6% from FY05-14E
Cap Exp/ Total Exp expected
to be ~48% from FY015-25E
A
B
A: The shift in FY05 was driven by
modernisation drive across the
three service wings in addition to
the reduction in interest, as a per
cent of GDP
B: Based on MoF projections,
capex and revenue growth is
pegged at 10% and 7%,
respectively
Projects likely to be awarded
include (1) electronic warfare
systems for fighter aircraft worth
INR30bn and (2) air command
and control systems worth
INR70bn.
Astra Microwave Products
85
Edelweiss Securities Limited
Business opportunity to expand; high entry barriers
We expect bump up in defence orders, given that the new government has been vocal
about speeding up procurement of defence equipment. Also, there are significant pent up
orders from the armed forces which are likely to be released. In certain orders, the company
is already L1 and such orders are likely to get released shortly. The current suppliers, BEL
and BDL are scaling up to meet demand of the armed forces for Akash missiles, which
stands at 500 units a year. Currently, BEL and BDL are able to meet ~100 missiles a year.
Thus, there is significant upside to revenue visibility as they scale up over the next two years.
Similarly, the company is well placed to bag offset contracts for several marquee projects of
the armed forces.
AMP has been a dedicated vendor for several DPSUs and enjoys first-mover advantage,
given high entry barriers in this space. Entry can normally made at the R&D stage and the
company is in a sweet spot here. It has already tied up with several global OEMs and going
ahead in addition to offsets could look at meaningful participation in exports being a part of
the global supply chain.
FCF to improve; 13% EPS CAGR over next 2 years
We expect AMP to do cumulative free cash flow (FCF) of ~INR1bn over the next 2 years led
by improving profitability, stable working capital and lower CAPEX. We also expect 13% EPS
CAGR led by 8% revenue CAGR and 80bps margin expansion over next 2 years.
Chart 2: FCF to improve
Source: Company; Edelweiss research
(124)
321
766
1,210
1,655
2,100
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OCF FCF
BEL and BDL are scaling up to
meet demand of the armed
forces for Akash missiles,
which stands at 500 units a
year from the current ~100
missiles a year. This is
expected to benefit AMP
Defence
86
Edelweiss Securities Limited
Valuation
AMP stands to benefit from rising defence outlay in India. The criticality and tolerance levels
for components in defence are very high owing to which the entry barriers are formidable.
Moreover, the several tie-ups with the global OEMs will aid AMP in its offset contracts.
Drawing from its sound R&D base, the company is a part of the global supply chain. This
ensures continued orders, given non-linear order flow in the defence industry. Overall, AMP
is well placed to tap opportunities both in India and globally over the long term. In the next
two years, we estimate earnings to increase at 13% CAGR, while return ratios are likely to
remain at above 20% levels.
The stock is currently trading at 17.1x and 16.5x its FY15E and FY16E earnings respectively.
We initiate coverage on AMP with BUY/ Sector Outperformer and target price of INR 168,
implying 26% upside from current levels and based on 21x FY16E EPS..
Chart 3: One-year trailing PE
Source: Edelweiss research
0.0
12.0
24.0
36.0
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(
x
)
Average PE AMP 1 year trailing P/E
Average P/E at 21.x (FY06-FY14)
Astra Microwave Products
87
Edelweiss Securities Limited
Key Risks
Slowdown in defence spending: Any slowdown in the defence spending could impact
revenue and hence the companys profit.
Delays/lumpiness in execution of defence contracts
The defence market is monopolistic in nature with the Government of India (GoI) being the
sole buyer of defence equipment, which puts suppliers such as AMP at a disadvantage.
Further, defence procurement procedures are complex and past experience suggests that
they have tended to move at an extraordinarily slow pace. This has a dual impact: the
equipment flow may not occur and it leads to high degree of lumpiness in the order book.
Delays in obtaining necessary permissions for the offset clause
AMPs defence export business is driven by offset provisions of the GoI which is controlled
by export regulations where time delays could happen in granting necessary permissions.
High precision and special inputs can delay the execution
Defence exports entails high precision and is a skilled job involving specialised inputs from
across the globe, which has a bearing on timely execution and uniform billing.
Defence
88
Edelweiss Securities Limited
Company Description
Overview
Astra Microwave Products develops, manufactures, and distributes wireless communication
solutions. AMP offers products in the areas of telecommunications, defense, and space,
and the product line includes amplifiers, base stations, dish antennas, filters, microwave
components, and switching equipment.
The companys products are widely used in VSAT operations, radars, navigational
equipment, public mobile trunk radio (PMTR), WLL and Cellular GSM/DCS or PCS networks.
The products meet ITU, MIL and Space standards, and bear testimony to its R&D
breakthroughs using ISO quality processes, world-class manufacturing facilities and
equipment, and trained manpower. AMP was incorporated in 1991 by a team of senior
professionals and eminent scientist. The manufacturing facilities are located at Bollarum
and Rangareddy in Andhra Pradesh
The defense segment, both domestic and exports, put together is the major contributor of
sales with over 90% of revenues coming from this business. While the production program
of missiles and radars sub-systems are driving the domestic business, defence offset
requirements drives exports. Business potential of this segment is likely to further improve
in the coming years.
AMP present in four business verticals
Defence
Space
Telecom
Metrological products
Chart 4: Revenue break-up (FY14)
Source: Company, Edelweiss research
Defence
26%
Sapce
10%
Metrology/Civil
Telecom
1%
Exports (Part of
defence)
63%
Astra Microwave Products
89
Edelweiss Securities Limited
Fig. 1: Business model
Source: Company, Edelweiss research
AMP
Defence Sapce Telecom
Meteorological
Products
Radar
Electronic
Electronic
Warfare
Partner with
ISRO for RISAT
programs
Transmit/Receipt
Modules
Repeaters
Jammers
Antennas
Automatic rain
gauge Systems
Automatic
weather Systems
Telementry
Missile
Technology
Defence
90
Edelweiss Securities Limited
Key personnel
Mr. Shiban K Koul, Chairman
An international authority on microwave technology, Mr. Shiban K Koul is Professor at the
Centre for Applied Research in Electronics at the Indian Institute of Technology (IIT), Delhi.
Prof Koul is a BE (Electrical) from REC, Srinagar, and holds an MTech and PhD in microwave
engineering from IIT Delhi; he has held visiting assignments with several universities across
the world and authored/co-authored several research papers and books.
Mr. B Malla Reddy, Managing Director
In charge of overall business and strategy at Astra Microwave, Mr. B Malla Reddy is among
the companys core founders. Mr. Reddy worked for over two decades the Systems Division,
Indian Space Research Organisation (ISRO), Bangalore, and with Defence Research and
Development Laboratory, Hyderabad, before taking charge of software development and
R&D at OMC Computers, Hyderabad. Mr. Reddy holds a Master's in Engineering
(Automation) from the Indian Institute of Science, Bangalore.
Mr. P A Chitrakar , Director and COO
Head of operations at Astra Microwave, Mr. P A Chitrakar had been with the Defence
Electronics Laboratory, Hyderabad, as a scientist for over 20 years before co-founding AMP.
An MSc (Physics) from Mysore University and an MTech (Advanced Electronics) from JNTU,
Hyderabad, Mr Chitrakar is an expert in the design of microwave components, among
others.
Ms. C Prameelamma , Director (Technical)
Among the companys founders, Ms. C Prameelamma has had a distinguished career with
the Electronics Research and Development Establishment, Bangalore, and the Defence
Electronics Research Laboratory, Hyderabad. An expert in the manufacture and testing of
microwave components and computer-aided design, Ms Prameelamma is a Master's in
Engineering (Instrumentation & Control Systems) from SV University, Tirupati.
Astra Microwave Products
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Edelweiss Securities Limited
Fig. 2: SWOT analysis
Source: Edelweiss research
Product offerings
AMPs business offerings product-wise are as follows:
Defence
A) Radar - TR modules, microwave sub-systems, microwave receivers, power limiters
B) Telemetry - Data and video telemetry transmitter systems, tracking systems, etc.
C) Ground-based surveillance- frequency synthesizer, antennae for ground
surveillance applications
Space
A) Ground based - Coherent frequency generators, modulators, etc.
B) On board transmitters, band receivers, etc.
Telecom
A) Repeaters
B) Jammers
C) Amplifiers
D) Boosters
E) Band pass and CDMA rejection filters
Meteorology
A) Automatic weather stations for remote data collection
B) Met towers
Strength
Strong R&D, experienced team and
established track record provides an
edge
Strong execution track record with
sticky clients
Weakness
Declining margins due to change in
product profile and customer mix
Higher dependence on select
customers
Working capital intensive business
Opportunity
Equipped to supply sub systems to
Dassault in the MMRCA deal
Key beneficiary of increased
indiginesation of defence
equipments
Threat
Downsizing defence expenditure
Emergence of new private players
Lumpy execution of orders
SWOT
Defence
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Edelweiss Securities Limited
Appositely poised for offset based business
AMP has established itself as a reliable source for indigenous defence requirements and
become an active partner for defence offset requirements. It was the first among private
companies to bag an offset related export order way back in FY08, when the government
invited private sector in defence play. With an early mover advantage in terms of adherence
to quality monitoring systems specified by the importers, AMP is poised for noticeable
growth in offsets-based business exports.
Increasing focus on domestic, exports defence business
The companys business profile has changed over the past five years with defence (both
domestic and exports) contributing >95% of current turnover versus 50% earlier. The
change in business is mainly due to the government opening up the defence sector partially
for private sector players. AMP has been a participant in the production programs in
missiles and radar sub-systems, which are driving the domestic defence business. The
exports defence business is being driven by defence offset requirements. The business
potential of this segment is likely to further improve in coming years.
Chart 5: Changing business profile
Source: Company, Edelweiss research
Expansion to improve quality standards and timely delivery of products
In FY12, the company strengthened some of its production process related functions which
were earlier outsourced. The production process included advanced welding facility, laser
welding facility and EMI/EMC test facilities. While the addition of these facilities has not
contributed to volume growth, it has facilitated the company in meeting high-end quality
standards and timely delivery of right products.
0.0
20.0
40.0
60.0
80.0
100.0
FY09 FY10 FY11 FY12 FY13 FY14
(
%
)
Defence Space Meteorological & Telecom Products
AMP business profile is more
defence dominated now mainly
due to the government opening
up the defence sector partially
for private sector players.
Astra Microwave Products
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Edelweiss Securities Limited
Industry
Per capita defence spend low
While Indias per capita defence spend is on the lower side given its large population, it is
among the largest defence importers and likely to be the third largest overall spender over
the next decade. However, going ahead, per capita defence spending is set to increase given
the huge spending lined up by the Indian defence establishment. The country is likely to
spend over USD248bn on defence equipment in the next decade.
Chart 6: Per capita defence spend
Source: Nation Master, Edelweiss research
Evolution of DPP to encourage domestic defence industry
The Indian defence market was opened up to the private sector in 2002 through the first
Defence Procurement Procedure 2002 (DPP), which came into effect from December 30,
2002, applicable for procurement under Buy category. Its scope was further enlarged to
include Buy and Make procurements through imported transfer of technology decisions.
The DPP has evolved since 2002 with the latest being DPP 2013. While the private sector will
always seek more benefits and concessions, the ones that emerge out of our discussions
with industry captains include: (1) permitting exports; (2) infrastructure industry status for
tax benefits; (3) better duty structure; (4) R&D support from the government as is available
in other countries; (5) keeping all duties, taxes out of L1 calculations, thus making
comparison with foreign vendors on like-to-like basis; and (6) balancing nomination across
public and private sectors.
0
320
640
960
1,280
1,600
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(
U
S
D
)
Per-capita spending World Average
World average per-capita defence
spend stands at USD 249 or 2.5% of
global GDP
Defence
94
Edelweiss Securities Limited
Defence to set out of the cradle; the next sunrise industry
Till recently, the Indian defence industry had been largely catered to by the public sector,
with the private sector contributing little in terms of components, etc. Given the emphasis
on developing the domestic defence industry and indigenisation being the way to achieve
this, DPP 2013 indicated the order of priority while buying armamentsIndia is at the top
and buying global is the last resort. Many domestic private companies perceive this as a step
in the right direction and are looking at significant opportunities in the defence sector.
Given that the defence sector was catered to by DPSUs and OFBs, the scope for private
sector was limited. Further, with most purchases from DPSU being embroiled in delays, the
capability of armed forces has been adversely affected. To bridge this gap, the government
is looking at promoting private sector participation in the defence sector. While private
sector has proved time and again across industry of bringing in efficiency, improvement in
technology through R&D spend, the defence sector is likely to see major changes in the
way it functions as private sector contribution / involvement increases.
Opportunity over the next decade; readying for component exports
In view of the overall need to modernise their defence capabilities, Indias armed forces are
expected to increase purchase of new equipment and technology over coming years, in
addition to massive upgrade programmes. We have listed defence purchases of
~USD160bn expected over the next decade, which will open up a huge market for all
stakeholders including the global OEMs, DPSUs, OFBs and domestic private sector players.
Since the introduction of offsets, contracts worth ~INR140bn have been concluded so far.
Thus, there are now tremendous opportunities available which will spur growth of the
indigenous defence industry, including the private sector, in the next plan period. The offset
model has been successful globally.
Developing domestic defence manufacturing capability is high on the governments agenda,
demonstrated through DPP 2013, where imports will be the last resort for acquisitions and
buying made in India would be top priority. The offsets are likely to help develop the
required ecosystem for major private players to emerge. Given Indias cost advantage and
highly skilled engineering base, coming at par with the global supply chain will be the next
logical move for the Indian companies.
With most purchases from DPSU
being embroiled in delays, GOI is
looking at promoting private sector
participation in the defence sector
Astra Microwave Products
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Edelweiss Securities Limited
Financial Outlook
Revenue growth to be muted over next two years
We expect AMPs top line to remain muted over the next two years with 8% CAGR over
FY14-16E. While the company is expected to post 23% revenue growth in FY15 on increased
supplies for Aakash missiles and radars in addition to the large export order, FY16 revenues
are expected to decline impacted by reduced visibility given lower order intake. However,
the company is negotiating few orders like DRG subsystem Elta Systems, Israel, sub-
systems for MMRCA Thales, France and another order with Rafale, Israel. These orders
clubbed together could be worth USD700-800mn. The company expects these order awards
towards latter part of FY15 or early FY16. Thus, these are unlikely to contribute majorly to
FY16E revenues. However, beyond FY16, we expect revenues to pick strongly on big ticket
size orders to be won by the company as the government is likely to speed up defence
procurements.
Chart 7: Revenue growth to be moderate
Source: Industry, Company, Edelweiss research
Margin outlook: Stable to improving
We expect EBITDA margin to remain stable to improving and expect ~80bps expansion over
FY14-16. The improvement is expected to be led by change in the business mix in favour of
the high-margin domestic business (~25-27%). Margins in defence exports business is ~10%.
Revenue from the domestic business is expected to increase from the current 35% to ~45%
by FY16 in turn aiding margin expansion.
0
1,500
3,000
4,500
6,000
7,500
(180.0)
(90.0)
0.0
90.0
180.0
270.0
FY10 FY11 FY12 FY13 FY14E FY15E FY16E
(
I
N
R
m
n
)
(
%
)
Revenues (RHS) Defence Space Meterological & telecom
Defence
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Edelweiss Securities Limited
Chart 8: EBITDA margin to expand
Source: Industry, Company, Edelweiss research
Profit CAGR of 13%; RoE to remain upwards of 20%
With 8% revenue CAGR and 80bps margin expansion over FY14-16E, AMPs EPS is expected
to post 13% CAGR over the same period. We expect tax rate to be stable at 26% over the
next two years. We also expect RoE to be stable at ~20% led by consistency in profitability
and no capital expenditure requirements over the next two years. On current facilities, the
company is capable of achieving peak revenue of INR15-20bn.
Chart 9: Profit growth over next two years
Source: Industry, Company, Edelweiss research
0
250
500
750
1,000
1,250
0.0
7.0
14.0
21.0
28.0
35.0
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
F
Y
1
5
E
F
Y
1
6
E
(
I
N
R
m
n
)
(
%
)
EBITDA (RHS) Margins
(100.0)
(50.0)
0.0
50.0
100.0
150.0
0
150
300
450
600
750
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
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F
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1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
(
%
)
(
I
N
R
m
n
)
PAT (LHS) Growth (YoY)
80bps margin improvement is
expected to be led by change in the
business mix in favour of high-
margin domestic businesses
Astra Microwave Products
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Edelweiss Securities Limited
Financial Statements
Key Assumptions
Year to March FY13 FY14 FY15E FY16E
Macro
GDP (YoY %) 5.0 4.8 5.4 6.3
Inflation (Avg.) 7.4 6.2 5.5 6.0
repo rate (exit rate) 7.5 8.0 7.8 7.3
USD/INR (Avg) 54.5 62.0 60.0 58.0
Segmental revenues (INR mn)
Defence 1,717 1,860 2,191 2,677
Space , Meteroligical & telecom 125 156 172 189
Exports 541 3,420 4,400 3,517
Total revenues 2,383 5,436 6,763 6,383
Segmental OB (INR mn)
Defence 3,725 4,150 5,112 6,692
Space , Meteroligical & telecom 1,022 830 731 623
Exports 5,498 4,800 3,667 4,396
Total OB 10,245 9,780 9,510 11,711
Excise duty (%) 4.5 2.4 3.0 3.0
Income statement (INR mn)
Year to March FY13 FY14 FY15E FY16E
Income from operations 2,275 5,312 6,560 6,191
Materials costs 1,025 3,484 4,294 4,002
Employee cost 244 375 473 447
Other manufacturing expenses 362 616 744 702
Total operating expenses 1,631 4,474 5,511 5,151
EBITDA 644 838 1,048 1,040
Depreciation and amortisation 134 148 184 199
EBIT 511 690 864 842
Interest expense 74 67 78 88
Other income 69 78 71 133
Profit before tax 506 701 858 886
Provision for tax 133 188 223 230
Core profit 373 513 635 656
Profit after tax 372 515 635 656
Equity shares outstanding (mn) 82 82 82 82
EPS (INR) basic 4.6 6.3 7.7 8.0
Diluted shares (mn) 82 82 82 82
EPS (INR) fully diluted 4.6 6.3 7.7 8.0
CEPS (INR) 6.2 8.1 10.0 10.4
DPS 2.0 1.1 1.5 2.0
Dividend payout (%) 43.9 17.6 19.4 25.0
Common size metrics- as % of net revenues
Year to March FY13 FY14 FY15E FY16E
Operating expenses 71.7 84.2 84.0 83.2
Material cost 45.1 65.6 65.5 64.6
Employee cost 10.7 7.1 7.2 7.2
Other manufacturing expenses 15.9 11.6 11.3 11.3
Depreciation and amortisation 5.9 2.8 2.8 3.2
Interest expenditure 3.3 1.3 1.2 1.4
EBITDA margins 28.3 15.8 16.0 16.8
Net profit margins 16.4 9.7 9.7 10.6
Growth metrics (%)
Year to March FY13 FY14 FY15E FY16E
Revenues 11.6 133.5 23.5 (5.6)
EBITDA 6.5 30.1 25.1 (0.7)
Net profit 20.2 37.4 23.8 3.4
EPS 20.2 37.4 23.8 3.4
Defence
98
Edelweiss Securities Limited
Balance sheet (INR mn)
As on 31st March FY13 FY14 FY15E FY16E
Equity capital 164 164 164 164
Reserves & surplus 1,845 2,249 2,761 3,253
Shareholders funds 2,009 2,413 2,924 3,416
Secured loans 135.21 261.50 361.50 461.50
Borrowings 135 262 362 462
Deferred tax (net) 56 84 84 84
Sources of funds 2,200 2,758 3,369 3,961
Gross block 1,988 2,357 2,557 2,757
Depreciation 909 1,101 1,285 1,484
Net block 1,079 1,256 1,272 1,273
Capital work In progress 0 0 0 0
Investments 236 4 4 4
Inventories 738 1,465 1,824 1,699
Sundry debtors 1,434 1,313 1,667 1,574
Cash and bank balances 1,133 610 788 1,324
Loans and advances 299 933 1,026 1,077
Total current assets 3,603 4,321 5,305 5,675
Sundry creditors and others 2,355 2,407 2,824 2,631
Provisions 151 190 190 190
Total current liabilities & provisio 2,506 2,597 3,014 2,821
Net current assets 1,098 1,724 2,291 2,853
Uses of funds 2,412 2,984 3,568 4,131
Book value per share (BV) (INR) 24 29 36 42
Free cash flow
Year to March FY13 FY14 FY15E FY16E
Net profit 373 513 635 656
Add: Depreciation 134 148 184 199
Add: Deferred tax - - - -
Add: Others 18 36 78 88
Gross cash flow 525 697 896 943
Less:Changes in working capital (613) 987 393 29
Opertaing cash flow 1,138 (290) 504 914
Less: Capex 269 394 200 200
Free cash flow 869 (684) 304 714
Peer comparision valuation
Name of the companies CMP
Market cap
(INR mn)
2015E 2016E 2015E 2016E 2015E 2016E
BEL 1,970 157,600 15.8 14.0 2.0 1.8 13.4 13.5
Astra Mi cro 133 11,000 17.1 16.5 3.7 3.2 23.8 20.7
Source: Edelweiss research
PE (x) P/BV (x) ROE (%)
Cash flow metrics (INR mn)
Year to March FY13 FY14 FY15E FY16E
Operating cash flow 1,138 (290) 504 914
Financing cash flow (239) 5 (126) (177)
Investing cash flow (471) (117) (200) (200)
Net cash flow 429 (403) 178 536
Capex (269) (394) (200) (200)
Dividend paid (67) (77) (123) (164)
Profitability & Liquidity ratios
Year to March FY13 FY14 FY15E FY16E
ROAE (%) 20.1 23.2 23.8 20.7
ROACE (%) 23.0 26.8 26.4 21.9
Inventory (days) 264 115 140 161
Debtors (days) 185 94 83 96
Payable (days) 529 249 222 249
Cash conversion cycle (days) (80) (40) 0 7
Current ratio (x) 1.4 1.7 1.8 2.0
Interest cover (x) 6.9 10.3 11.1 9.5
Operating ratios
Year to March FY13 FY14 FY15E FY16E
Fixed assets turnover (x) 2.3 4.5 5.2 4.9
Total asset turnover(x) 1.0 2.0 2.0 1.6
Equity turnover(x) 1.2 2.4 2.5 2.0
Valuation parameters
Year to March FY13 FY14 FY15E FY16E
Diluted EPS (INR) 4.6 6.3 7.7 8.0
Y-o-Y growth (%) 20.2 37.4 23.8 3.4
CEPS (INR) 6.2 8.1 10.0 10.4
Diluted P/E (x) 29.0 21.1 17.1 16.5
Price/BV(x) 5.4 4.5 3.7 3.2
EV/Sales (x) 4.2 2.0 1.6 1.6
EV/EBITDA (x) 14.9 12.5 9.9 9.6
Dividend yield (%) 1.5 0.8 1.1 1.5
Astra Microwave Products
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Edelweiss Securities Limited
Holding - Top 10
Perc. Holding Perc. Holding
L&T 9.7 HDFC AMC 8.1
Reliance LT fund 4.4 Reliance Capital AMC 4.2
Stategic Ventures , Mauritius 4.0 Axis AMC 3.4
DSC Blackrock 2.6 SBI Fund 1.6
Prudential ICICI AMC 1.4 Kotak Mahindra Prime 1.2
Bulk Deals
Date Acquirer/Seller B /S Qty Traded Price
6-Mar-13 Kusum Gupta Sell 675000 40.3
6-Mar-13 Sangitaben Rajeshbhai Vekaria Buy 700000 40.3
2-May-14 Hdfc Mf A/C Hdfc Growth Fund Buy 660000 75.8
2-May-14 Hdfc Mutual Fund Buy 470000 76.3
5-May-14 Hdfc Mutual Fund Buy 442000 78.5
14-May-14 Hdfc Mutual Fund Buy 900000 79.5
14-May-14 Skanda Aerospace Pvt Ltd Sell 900000 79.5
14-May-14 Hdfc Mutual Fund Buy 1457652 79.5
14-May-14 Skanda Aerospace Pvt Ltd Sell 1792139 79.5
15-May-14 Skanda Aerospace Pvt Ltd Sell 791487 83.0
15-May-14 Skanda Aerospace Pvt Ltd Sell 791487 83.0
30-May-14 Hdfc Mutual Fund Buy 450001 109.0
30-May-14 Param Capital Research Pvt Ltd Sell 500000 109.5
6-Jun-14 Astra Infonets Ltd Sell 542090 109.2
Insider Trades
Data Acquired / Seller B/S Qty Traded Price
No Data Available
*in last one year
Additional Data
Auditors - AMAR & RAJU
*as per last annual report
Dr. Shi ban K Koul Chai rman Mr. B. Mal l a Reddy Managi ng Di rector
Mr. P.A. Chi trakar Chi ef operati ng offi cer Mrs. C. Prameel amma Di rector (techni cal )
Mr. J. Venkatadas Independent Di rector Mr. Ati m Kabra Non Executi ve Di rector
Mr. S. Gurunatha Reddy CFO & Whol e ti me Di rector Mr. M. Venkateshwar Reddy Di rector (Marketi ng & Operati ons)
Mr. T. Ramachandru Addi ti onal Di rector
100
Edelweiss Securities Limited
Engineering and Capital Goods
THIS PAGE IS INTENTIONALLY LEFT BLANK
Bharat Electronics
101
Edelweiss Securities Limited
Bharat Electronics (BEL), established by the government under the
Ministry of Defence (MoD) in 1954 to meet the specialised electronic
needs of the Indian defence services, has grown into a multi-product,
multi-technology and multi-unit company, serving the needs of
customers in diverse fields in India and abroad. The company offers
products and services in a wide spectrum of technology like radars,
military communications, naval systems, electronic warfare systems,
telecommunications, sound & vision broadcasting, opto-electronics, tank
electronics, solar photovoltaic systems, embedded software and
electronic components. It also provides turnkey systems solutions like
command control communication & computer intelligence (C4I), covering
requirements of all the three forces. Maintain BUY.
Well positioned to ride rising defence expenditure
With defence offsets, 49% FDI limit amendments to new DPP and increasingly obsolete
inventory of defence equipment, we expect Indias overall defence spending to be
around USD248bn over the next decade. While most defence equipment procurement
is from foreign vendors, the government targets to increase domestic share. BEL is well
positioned to benefit on this front given its strong R&D capabilities and long standing
relationships with Indian defence establishments.
Addressable business opportunity at more than USD13bn
As per our bottoms-up analysis of various defence projects, projects worth USD38bn
are expected to be awarded over the next five-seven years, of which BELs scope is
worth USD13.5bn. This provides ample revenue visibility to the company over the long
term. We also understand that BEL has submitted bids in projects worth INR200bn
where it is favourably placed.
Outlook and valuations: Positive momentum; maintain BUY
We expect BELs dominant status to sustain and believe it will be amongst the prime
beneficiaries of opening up of the defence sector. With the new government likely to
speed up defence ordering and execution, we believe the company is well placed to
tap into this opportunity. We maintain BUY/SO with a target price of INR2,250.
COMPANY UPDATE
BHARAT ELECTRONICS
Formidable player
EDELWEISS 4D RATINGS
Absolute Rating BUY
Rating Relative to Sector Outperformer
Risk Rating Relative to Sector High
Sector Relative to Market Overweight
MARKET DATA (R: BAJE.BO, B: BHE IN)
CMP : INR 1,961
Target Price : INR 2,250
52-week range (INR) : 2,320 / 893
Share in issue (mn) : 80.0
M cap (INR bn/USD mn) : 157/ 2,624
Avg. Daily Vol.BSE/NSE(000) : 65.4
SHARE HOLDING PATTERN (%)
Current Q3FY14 Q2FY14
Promoters *
75.0 75.9 75.9
MF's, FI's & BKs 16.9 15.3 15.3
FII's 3.7 4.5 4.3
Others 4.4 4.3 4.6
* Promoters pledged shares
(% of share in issue)
: NIL
PRICE PERFORMANCE (%)
Stock Nifty
EW Capital
Goods Index
1 month 26.1 4.7 5.0
3 months 92.4 15.8 39.5
12 months 75.2 32.8 83.2
Rahul Gajare
+91 22 4063 5561
rahul.gajare@edelweissfin.com
Amit Mahawar
+91 22 4040 7451
amit.mahawar@edelweissfin.com
Swarnim Maheshwari
+91 22 4040 7418
swarnim.maheshwari@edelweissfin.com
India Equity Research| Engineering and Capital Goods
July 9, 2014
Year to March FY13 FY14 FY15E FY16E
Revenues (INR mn) 61,038 62,755 68,361 77,729
Rev. growth (%) 5.8 2.8 8.9 13.7
EBITDA (INR mn) 6,361 8,918 9,776 11,271
Net profi t (INR mn) 8,899 9,316 9,955 11,257
EPS (INR) 111.2 116.5 124.4 140.7
EPS growth (%) 7.2 4.7 6.8 13.1
P/E (x) 17.7 16.9 15.8 14.0
ROAE (%) 14.9 14.0 13.4 13.5
Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
Edelweiss Securities Limited
Engineering and Capital Goods
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Edelweiss Securities Limited
Strong R&D capabilities aiding diversification into new segments
BEL has an impeccable execution track record and has increasingly invested in R&D. Besides
its own R&D facilities, the company undertakes joint development with DRDO (Defense
Research and Development Organization), which is the leading government agency
responsible for undertaking redevelopment of technology for military use. Over the past 10
years, BEL has increased its expenditure on R&D at a CAGR of 25% and currently spends
about 8.5% of its revenue on development of new products. The company plans to spend
over USD100mn over the next five years in developing electronic warfare products jointly
with DRDO.
Chart 1: R&D expenses, as a percentage of sales, has been increasing
Source: Company; Edelweiss research
Chart 2: Engineers/scientist, as a percentage of total employees , on the rise
Source: Company; Edelweiss research
BEL has developed many new products in surveillance radars, communication equipment
and electronic warfare products. While these will continue to be focus areas, going forward,
3.7
3.6
5.2
5.2
5.9
7.0
8.1
8.4
2.0
3.8
5.6
7.4
9.2
11.0
124
1,196
2,268
3,341
4,413
5,485
F
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9
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(
%
)
(
I
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R
m
n
)
Capital exp Revenue exp R&D Exp as % of Sales (RHS)
15.0
21.0
27.0
33.0
39.0
45.0
1,949
2,488
3,027
3,565
4,104
4,643
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
(
(
%
)
)
(
N
o
o
f
e
m
p
l
o
y
e
e
s
)
Engineers / Scientist Engineers & Scientist as % of total employees
Increasing expenditure on R&D
has helped BEL develop many new
products in surveillance radars,
communication equipment and
electronic warfare products
Bharat Electronics
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Edelweiss Securities Limited
the company is also looking at segments like homeland security, nuclear power
instrumentation and control and clean energy / energy efficiency solutions as growth
avenues. Over the course of the next two-three years, BEL expects to complete new product
development in areas of software defined radio (advanced communication equipment),
radio relays for military backbone networks, military wimax, battle-field surveillance
systems, combat management systems for different classes of ships and surface surveillance
radars.
Table 1: Manufacturing facilities
Source: Company; Edelweiss research
Twelfth Five Year Plan lays increased focus on defence electronics
The Twelfth Five Year Plan envisages increased expenditure on defence electronics like
Battle Filed Management System (BFMS), Future Infantry Soldier as a System (F-INSAS), long
range surveillance radars, weapon locating radar, mountain radars, TCS, UAVs, thermal
imager for tanks & weapons and passive night vision devices. BEL, being the domestic leader
in defence electronics, is expected to be a beneficiary of the rising spending in defence
electronics.
Strong order book executable over next five years
BELs order book has clocked 29% CAGR over the past five years and it currently shas an
INR232bn order book which provides revenue visibility for over next four-five years. With
rising share of weapon systems integration related orders, we believe incremental orders
are likely to be big ticket and estimate the companys order book to post 8-10% CAGR over
the next three years.
Addressable business opportunity at more than USD13bn
As per our bottoms-up analysis of various defence projects, projects worth USD38bn are
expected to be awarded over the next five-seven years, of which BELs scope is worth
USD13.5bn. This provides ample revenue visibility to the company over the long term. We
also understand that BEL has submitted bids in projects worth INR200bn where it is
favourably placed. These projects have achieved substantial progress and are expected to
be awarded in the next 12-18months.
Location Area of focus
Panchkul a Communi cati on Equi pment
Ghazi abad Radars, Antennae, Mi crowave Components
Kotdwara Tel ecommuni cati ons
Pune X-Ray Tubes, Batteri es, El ectro Opti cs
Hyderabad Communi cati on Equi pment , El ectroni c Warfare
Machi l i patnam El ectro Opti cs
Bangal ore Communi cati on, Radars, Naval Systems, El ectroni c Warfare
& Avi oni cs, Tel ecom & Broadcasti ng Systems, El ectroni c
Components
Chennai Tank El ectroni cs, Opti cal Fi re Control Systems
BEL, is expected to be a
beneficiary of the increase
spending in defence electronics.
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Chart 3: Imminent business opportunity
Source: Industry, Edelweiss research
Table 2: BEL long term (7-8 years) opportunities
Source: Industry, Company; Edelweiss research
Air command &
control system
(INR 70bn)
Electronic
warfare system
for fighter
aircraft
(INR 30bn)
commander
sighs
(INR 28bn)
weapn locating
radar
(INR 20bn)
Thermal Images
(INR 14bn)
Equipment/ Projects
Spending
(USD mn)
BEL's scope
(USD mn)
Ul tra Li ght Howi tzers 885 177
Wheel ed Howi tzers 1,000 200
Tracked Howi tzers 2,000 400
Short Range Qui ck Response Surface to Ai r Mi ssl e (QRSAM) 1,400 280
T-90 Tanks EW System
T-90 Tanks 1,000 200
T-90 Tanks - Upgrade Mi ssl e System (Invar) 470 94
Roboti c mi l i tary vehi cl es / tacti cal unmanned vehi cl es (Daksh) 100 20
Future Mai n Battl e Tanks 5,000 1,250
Futuri sti c Infantry Combat Vehi cl e 10,000 2,500
Ni ght vi si on equi pments 500 500
Battl efi el d Management Systems 5,000 2,000
Future Infantry Sol di er as a system (F-INSAS) - Phase I 5,000 1,500
Tacti cal Communi cati on Systems 2,000 2,000
Radars and Radi os etc 2,500 1,500
Ai r defence systems 900 900
Total 37,755 13,521
Bharat Electronics
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Edelweiss Securities Limited
Products
Electronic Voting Machines
Radars
o Weapon Locating Radar
o Battle Field Surveillance Radar
o Samyukta Electronic Warfare System
Telecommunications
Sound and Vision Broadcasting
Opto-electronics
Semiconductors
Missiles (Akash)
Sonars
Fire-control system
Radar
Simulators
Tank electronics (Combined day sight for Arjun MBT)
Defence Communications
Engineering and Capital Goods
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Company Description
Established by GoI under the Ministry of Defence in 1954 to meet the specialised electronic
needs of the Indian defence services, BEL has grown into a multi-product, multi-technology
and multi-unit company, serving the needs of customers in diverse fields in India and
abroad. The company offers products and services in a wide spectrum of technology like
radars, military communications, naval systems, electronic warfare systems,
telecommunications, sound and vision broadcasting, opto-electronics, tank electronics, solar
photovoltaic systems, embedded software and electronic components. It also provides
turnkey systems solutions like command control communication & computer intelligence
(C4I), covering requirements of all the three forces.
Investment Theme
BEL, one of Indias largest defence public sector undertakings (PSU), specialises in
manufacturing defence electronics. It is emerging as a key beneficiary of increase in defence
capital expenditure. Further, domestic companies, including BEL, are likely to benefit from
key changes in government policies, notably the offset clause (at least 30% of an order must
be sub-contracted domestically for orders over INR3bn). Despite the entry of private
players, we believe BEL as a defence PSU is poised to benefit from increased defence capital
expenditure and the offset policy.
BEL has a strong order book, equivalent to nearly four years of revenue. Its order book is
slated to grow over the next few years because of steady demand for its existing product
range; potential orders from high value projects (e.g., tactical communication systems) and
growth opportunities in the non defence/ export segments.
Key Risks
Delay/lumpiness in execution of defence contracts
The defence market is monopolistic in nature with GoI being the sole buyer of defence
equipment, which puts suppliers such as BEL at a disadvantage. Further, defence
procurement procedures are complex and past experience suggests that they have tended
to move at an extraordinarily slow pace. This has a dual impact: the equipment flow may
not occur and it leads to a high degree of lumpiness in the order book.
Increased competition from private players
The government has shown increased intent of involving private players in the defence
procurement process and to develop an active private sector supply to the armed forces.
We believe DPSUs have strong competitive advantages over the private sector in the near
to-medium term. However, incremental competition, particularly for offset contracts, could
make a negative impact on BELs margins.
Bharat Electronics
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Edelweiss Securities Limited
Financial Statements
Income statement (INR mn)
Year to March FY13 FY14 FY15E FY16E
Income from operations 61,038 62,755 68,361 77,729
Materials costs 38,069 36,309 39,650 44,694
Employee costs 11,108 10,304 12,784 14,535
Other Expenses 5,500 7,224 6,153 7,229
Total operating expenses 54,677 53,837 58,586 66,458
EBITDA 6,361 8,918 9,776 11,271
Depreciation and amortisation 1,307 1,421 1,516 1,596
EBIT 5,054 7,497 8,260 9,675
Other income 6,100 4,285 4,667 4,942
Interest expenses 8 34 - -
Profit before tax 11,146 11,748 12,927 14,617
Provision for tax 2,248 2,431 2,973 3,362
Net profit 8,899 9,317 9,954 11,255
Profit After Tax 8,899 9,317 9,955 11,257
Shares outstanding (mn) 80 80 80 80
Diluted EPS (INR) 111.2 116.5 124.4 140.7
Dividend payout (%) 21.8 20.8 19.5 17.2
Common size metrics
Year to March FY13 FY14 FY15E FY16E
Operating expenses 89.6 85.8 85.7 85.5
EBITDA margins 10.4 14.2 14.3 14.5
Net profit margins 14.6 14.8 14.6 14.5
Growth ratios (%)
Year to March FY13 FY14 FY15E FY16E
Revenues 5.8 2.8 8.9 13.7
EBITDA 4.2 40.2 9.6 15.3
EPS 7.2 4.7 6.8 13.1
Key Assumptions
Year to March FY13 FY14 FY15E FY16E
Macro
GDP(Y-o-Y %) 5.0 4.8 5.4 6.3
Inflation (Avg) 7.4 6.2 5.5 6.0
Repo rate (exit rate) 7.5 8.0 7.8 7.3
USD/INR (Avg) 54.5 60.5 58.0 56.0
Company
Defence CAPEX in Country (INR bn) 690 788 950 1100
Order intake (INR bn) 53 45 78 102
Burning rate (%) 19.6 21.3 22.2 22.9
Depreciation 6.5 6.5 6.5 6.5
Yield (%) 11.3 10.0 10.0 10.4
Tax rate (%) 20.2 20.7 24.0 24.0
Excise duty as a % of sales 1.0 1.0 1.0 1.0
Capex (INR mn) 2,466 1,600 1,500 1,500
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Peer comparision valuation
Name of the companies CMP
Market cap
(USD mn)
2015E 2016E 2015E 2016E 2015E 2016E
BEL 1,970 2,627 15.8 14.0 2.0 1.8 13.4 13.5
Thal es SA 45.0 6,350 12.2 11.2 1.9 1.6 15.0 13.1
Dassaul t systemes 92.0 8,950 22.9 20.6 3.6 3.4 16.4 16.1
Meggi t PLC 490 5,934 12.0 11.0 1.6 1.5 12.0 12.6
Source: Bloomberg, Edelweiss research
PE (x) P/BV (x) ROE (%)
Cash flow metrics
Year to March FY13 FY14 FY15E FY16E
Operating cash flow 2,922 3,538 3,857 4,138
Investing cash flow (2,446) (2,546) (1,300) (1,351)
Financing cash flow (2,474) (2,526) (1,526) (1,938)
Net cash flow (1,997) (1,534) 1,030 849
Capex (2,446) (2,546) (1,300) (1,351)
Dividends paid (1,938) (1,938) (1,938) (1,938)
Profitability & efficiency ratios
Year to March FY13 FY14 FY15E FY16E
ROAE (%) 14.9 14.0 13.4 13.5
ROACE (%) 8.8 11.8 11.6 12.1
Inventory day 196 220 216 211
Debtors days 180 217 228 218
Payable days 74 79 76 71
Cash conversion cycle (days) 302 358 367 359
Current ratio 1.7 1.8 1.9 2.0
Operating ratios
Year to March FY13 FY14 FY15E FY16E
Total asset turnover 1.1 1.0 1.0 1.0
Fixed asset turnover 11.2 10.3 11.0 13.4
Equity turnover 1.0 0.9 0.9 0.9
Valuation parameters
Year to March FY13 FY14 FY15E FY16E
Diluted EPS (INR) 111.2 116.5 124.4 140.7
Y-o-Y growth (%) 7.2 4.7 6.8 13.1
CEPS (INR) 127.6 134.2 143.4 160.6
Diluted PE (x) 17.6 16.8 15.8 14.0
Price/BV (x) 2.5 2.2 2.0 1.8
EV/Sales (x) 1.3 1.4 1.3 1.1
EV/EBITDA (x) 16.3 12.5 11.3 9.7
Balance sheet (INR mn)
As on 31st March FY13 FY14 FY15E FY16E
Equity capital 800 800 800 800
Reserves & surplus 62,429 69,498 77,926 87,244
Shareholders funds 63,229 70,298 78,726 88,044
Sources of funds 60,513 67,304 75,731 85,049
Tangible assets 5,693 6,382 5,905 5,554
Intangible assets 60 77 88 95
CWIP (incl. intangible) 1,615 2,019 2,269 2,369
Total net fixed assets 7,369 8,478 8,262 8,017
Non current investments 120 120 120 120
Cash and equivalents 53,023 45,642 46,672 47,523
Inventories 31,913 32,987 36,391 40,408
Sundry debtors 33,347 41,285 44,013 48,980
Loans and advances 14,382 12,164 13,014 13,864
Other current assets 1,590 1,600 1,600 1,600
Total current assets (ex cash) 81,232 88,036 95,018 104,852
Sundry creditors and others 74,071 68,979 69,432 70,164
Provisions 7,162 5,995 4,911 5,300
Total current liabilities &
81,233 74,974 74,342 75,463
Net current assets (ex cash) (1) 13,062 20,675 29,389
Net Deferred tax (2,716) (2,995) (2,995) (2,995)
Uses of funds 60,513 67,304 75,731 85,049
Book value per share (INR) 790.4 878.7 984.1 1,100.5
Free cash flow (INR mn)
Year to March FY13 FY14 FY15E FY16E
Net profit 8,899 9,317 9,955 11,257
Depreciation 1,307 1,421 1,516 1,596
Others - - - -
Gross cash flow 10,206 10,738 11,470 12,851
Less: Changes in WC 7,284 7,200 7,613 8,713
Operating cash flow 2,922 3,538 3,857 4,138
Less: Capex 2,446 2,546 1,300 1,351
Free cash flow 476 992 2,557 2,787
Bharat Electronics
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Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
*in last one year
Bulk Deals
Data Acquired / Seller B/S Qty Traded Price
No Data Available
*in last one year
Holding Top10
Perc. Holding Perc. Holding
Government of india 75.02 Life insurance corp 8.26
Prudential icici ass 1.69 Hdfc asset managemen 1.62
Uti asset management 1.12 Reliance capital tru 0.8
Vanguard group inc 0.63 Aviva life insurance 0.61
Dsp blackrock invest 0.58 Tata asset managemen 0.52
*in last one year
Additional Data
Directors Data
Anil Kumar Managing Director M S Ramachandran Part Time Independent Director
N Sitaram Part Time Independent Director R Venkata Rao Part Time Independent Director
V K Bhalla Part Time Independent Director SN Dash Part Time Independent Director
Anil Razdan Part Time Independent Director Anurag Kumar Part Time Independent Director
SP Kochhar Part Time Government Director Satyajeet Rajan Part Time Government Director
M L Shanmukh Whole Time Director Sunil Kumar Sharma Whole Time Director
Amol Newaskar Whole Time Director H N Ramakrishna Whole Time Director - Marketing
Ajit T Kalghatgi Director
Auditors - RGN Price & Co
*as per last annual report
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Edelweiss Securities Limited
Bharat Forge (BHFC) is the second largest forging player in the world with
the largest repository of metallurgical knowledge. The company grew
from primarily being an automotive ancillary to evolving into an
engineering enterprise focused on technological excellence. It has gained
some ground in aerospace and defence having put together an
indigenous artillery gun, which is currently at testing stage. Given BHFCs
focus on de-risking its business model, the company has been looking at
scaling up its non-auto business from the current 35% to 50-60% over the
next few years. We maintain BUY with a target price of INR683.
Tie-ups with global OEMs to fortify capabilities; high entry barriers
BHFC, in a joint venture (JV) with Elbit Systems Land (a US-based Israeli defence
electronics company), is providing artillery and mortar system solutions to the Indian
armed forces. The JV offers solutions in artillery guns and mortars segment drawing
from Elbit Systems operationally proven portfolio. In aerospace, given criticality and
high tolerance levels, barriers to entry are high. Also, with certain vital certifications
(NADCAP and AS9100) in place, which is a precondition for aerospace component
manufacturers/ suppliers, the company is well-poised to make significant progress over
the next two years. It is closely working with some large global OEMs in aerospace for
supplying critical components and expects revenue to flow from FY16. In artillery guns,
BHFC is readying to forge components of the gun. The company is best placed to
undertake forging activities through given its vast capabilities.
Outlook and valuations: Improving; maintain BUY
While BHFC is a leader in its key markets in the automotive segment, the company is
looking at significantly scaling up its non-auto business which will in turn bolster its
profitability. The stock is trading at 23.7x and 18.7x FY15E and FY16E earnings,
respectively. We maintain BUY/Sector Outperformer with a target price of INR683,
valuing the stock at 20.5x FY16E EPS.
COMPANY UPDATE
BHARAT FORGE
Favourably positioned
EDELWEISS 4D RATINGS
Absolute Rating BUY
Rating Relative to Sector Outperformer
Risk Rating Relative to Sector Medium
Sector Relative to Market Overweight
MARKET DATA (R: BFRG.BO, B: BHFC IN)
CMP : INR 623
Target Price : INR 683
52-week range (INR) : 682 / 185
Share in issue (mn) : 232.8
M cap (INR bn/USD mn) : 145 / 2,422
Avg. Daily Vol. BSE/NSE (000) : 753.6
SHARE HOLDING PATTERN (%)
Current Q3FY14 Q2FY14
Promoters *
46.7 46.7 46.7
MF's, FI's & BKs 14.5 17.5 18.8
FII's 16.0 13.6 11.3
Others 22.8 22.2 23.2
* Promoters pledged shares
(% of share in issue)
: Nil
RELATIVE PERFORMANCE (%)
Sensex Stock
Stock Over
Sensex
1 month 0.4 12.6 13.0
3 months 12.1 44.3 32.2
12 months 29.0 186.4 157.4
Rahul Gajare
+91 22 4063 5561
rahul.gajare@edelweissfin.com
Niraj Mansingka, CFA
+91 22 6623 3315
niraj.mansingka@edelweissfin.com
India Equity Research| Engineering and Capital Goods
July 9, 2014
Financials
Year to March FY13 FY14 FY15E FY16E
Revenues (INR mn) 57,022 67,161 66,017 78,876
Growth (%) (9.2) 17.8 (1.7) 19.5
EBITDA (INR mn) 7,694 10,271 12,104 14,737
Net profit (INR mn) 1,824 4,150 6,114 7,757
Diluted EPS (INR) 5.9 17.7 26.3 33.3
EPS growth (%) (67.9) 201.1 48.3 26.9
Diluted P/E (x) 106.0 35.2 23.7 18.7
EV/EBITDA (x) 17.6 13.0 11.1 9.0
ROAE (%) 5.4 15.8 20.8 22.1
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Company Description
BHFC is the flagship company of Kalyani Group, which has significant presence in the
automotive components sector in India. It is one of the largest commercial forging
companies in the world in terms of capacity and revenue, with presence in automotive as
well as non-automotive component sectors with wide domain knowledge in design and
engineering of highly critical automotive and non-automotive components. It is one of the
worlds leading manufacturers and suppliers of forged and machined automotive chassis
and engine components such as crankshafts, front axle beams, connecting rods, steering
knuckles and other components to several of the worlds leading commercial and passenger
vehicle manufacturers. Through several strategic acquisitions, BHFC has established
presence in the European market Germany, Sweden, and developed dual-shore
manufacturing capacities for many of production facilities, full service supply capabilities,
strong design and engineering abilities and achieved greater access to customers and
markets outside of India.
Investment Theme
A well-diversified, de-risked business model: The promoters have been focusing on de-
risking BHFCs business model. Their strategy has been to diversify the auto and non-auto
segments through acquisitions/JVs across geographies.
Gearing up for demand revival in key markets US, Europe and India: With improving
macro economic outlook in both US and Europe, demand for class 8 truck in the US is likely
to improve. Change in emission norms to help with pre-buying in the US market. Similarly,
European market has bottomed out and it gives early signs of revival in passenger vehicles.
In India, growth in CVs is likely to return with higher share of multi-axle vehicles.
Non auto to scale up further: BHFC is looking at increasing the share of non-auto to 50-60%
over the next few years. The non-auto business have better margin given higher machining
proportion. The company is positive on energy, transportation (including railways and
aerospace) construction and defence sectors to scale up its non-auto business.
Key Risks
Delayed revival in key markets: FY14 has gone down as the worst year in more than a
decade for the Indian automotive industry with CVs declining ~25%. While industry is
expected to pick up in FY15, any delay in pick up will likely hurt auto ancillary players like
BHFC. Similarly, both the US and European market has seen lackluster growth last year. Any
delay in pick in these markets is likely to affect the exports from India for the company.
Additional investment/cash calls from subsidiaries: Return ratios were impacted due to
cash calls from subsidiaries/JVs. While the situation is expected improve going ahead with
the company exiting loss-making operations in US and China, additional investment/cash
calls from its other subsidiaries could impact overall return ratios of the company.
Slower ramp up in non-auto business: The company is focused on increasing share of non-
auto business in overall revenue mix to 50-60% over the next few years, which will help
improve its overall margin profile. Any delay in ramp up of non-auto business could weigh
on overall margin profile of company.
Bharat Forge
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Financial Statements
Key assumptions (INR mn)
FY13 FY14 FY15E FY16E
Macros
GDP (Y-o-Y %) 5.0 4.8 5.4 6.3
Inflation (Avg) 7.4 6.2 5.5 6.0
Repo rate (exit rate) 7.5 8.0 7.8 7.3
USD/INR (Avg) 54.5 60.5 58.0 56.0
Key financial assumptions
Revenue Growth (%)
Standalone (14.5) 7.9 17.2 17.1
Auto 5.8 21.2 19.6 23.0
Non-Auto (10.7) 11.5 10.6 12.6
CDP Bharat Forge (7.1) 13.5 19.4 20.0
Bharat Forge Aluminiumtechnik 24.6 8.2 17.7 40.4
Bharat Forge Kilsta 3.7 18.7 21.0 21.0
Shipment - Standalone (MT) 172,030 174,808 192,289 211,518
Realisation (INR/MT) 183,179 194,457 207,209 220,586
Shipment - Consolidated (MT) 330,243 336,848 353,690 371,375
Realisation (INR/MT) 172,666 199,381 186,652 212,389
Tax rate (%) 44.1 28.8 30.0 32.0
Capex (INR mn) (5,605) 785 (4,500) (2,000)
Income statement (INR mn)
Year to March FY13 FY14 FY15E FY16E
Revenues 57,022 67,161 66,017 78,876
Cost of materials consumed 26,072 32,241 32,214 38,969
Employee costs 8,013 7,901 9,026 10,750
Other expenses 15,243 16,748 12,673 14,421
Total expenses 49,328 56,890 53,913 64,139
EBITDA 7,694 10,271 12,104 14,737
Depreciation & amortization 3,360 3,579 3,368 3,650
EBIT 4,334 6,693 8,736 11,086
Interest expense 1,908 1,692 1,336 1,036
Other income 1,126 1,249 1,335 1,356
Exceptionals 366 1,037 - -
Profit before tax 3,917 7,287 8,734 11,407
Tax 1,728 2,100 2,620 3,650
Core profit 1,824 4,150 6,114 7,757
Extraordinary income/(loss) (168) (230) - -
Profit after tax 1,656 3,920 6,114 7,757
Minority int. & others-paid/(recd.) 455 29 - -
Net profit after minority interest 1,201 3,891 6,114 7,757
Shares outstanding (mn) 232.9 232.8 232.8 232.8
EPS (INR) basic 5.9 17.7 26.3 33.3
Diluted shares (mn) 232.9 232.8 232.8 232.8
EPS (INR) diluted 5.9 17.7 26.3 33.3
CEPS (INR) 20.3 33.1 40.7 49.0
Dividend per share 2.5 4.5 4.0 4.5
Dividend pay out (%) 42.5 25.4 15.2 13.5
Common size metrics - as % of revenues
Year to March FY13 FY14 FY15E FY16E
Cost of revenues 45.7 48.0 48.8 49.4
Total expenses 86.5 84.7 81.7 81.3
EBITDA margin 13.5 15.3 18.3 18.7
EBIT margin 7.6 10.0 13.2 14.1
Net profit margins 3.2 6.2 9.3 9.8
Growth metrics (%)
Year to March FY13 FY14 FY15E FY16E
Revenues (9.2) 17.8 (1.7) 19.5
EBITDA (22.8) 33.5 17.8 21.8
EBIT (37.6) 54.4 30.5 26.9
PBT (34.7) 86.0 19.9 30.6
Net profit (56.6) 127.6 47.3 26.9
EPS (67.9) 201.1 48.3 26.9
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Engineering and Capital Goods
Balance sheet (INR mn)
As on 31st March FY13 FY14 FY15E FY16E
Equity share capital 466 466 466 466
Reserves 22,098 26,367 31,391 37,921
Total shareholders funds 22,564 26,832 31,857 38,387
Minority interest 1,642 170 170 170
Long term Borrowings 18,274 15,212 13,000 8,000
Short term Borrowings 5,052 4,862 5,100 3,500
Loan Funds 23,326 20,074 18,100 11,500
Deferred tax liability 1,345 1,645 1,645 1,645
Sources of funds 48,878 48,721 51,771 51,702
Tangible assets 28,918 24,310 25,442 23,791
Intangible assets 716 800 800 800
Capital WIP 5,755 6,000 6,000 6,000
Goodwill arising on consolidation 32 57 57 57
Non-current Investments 285 291 291 291
Cash & bank balances 5,553 4,227 2,539 3,607
Current Investments 3,874 7,721 8,721 8,721
Inventories 11,320 10,386 12,356 14,947
Debtors 6,114 8,660 9,043 10,805
Loans and advances 7,119 7,759 7,708 8,158
Other current assets 4,705 5,135 5,611 6,704
Total Current Assets (Ex Cash) 33,133 39,660 43,440 49,336
Trade payables 9,511 10,554 10,953 13,249
Other CL and provisions 16,005 16,070 15,844 18,930
Total CL and provisions 25,516 26,624 26,797 32,180
Net current assets (ex cash) 7,617 13,036 16,644 17,156
Uses of funds 48,878 48,721 51,771 51,702
Book value per share (BV) (INR) 97 115 137 165
Free cash flow
Year to March FY13 FY14 FY15E FY16E
Net profit 1,201 3,891 6,114 7,757
Depreciation 3,360 3,579 3,368 3,650
Others 2,629 921 (3,981) 911
Gross cash flow 7,190 8,391 5,501 12,318
Less:Changes in working capital (385) (932) (2,658) (63)
Operating cash flow 7,576 9,323 8,160 12,380
Less: Capex (5,605) 785 (4,500) (2,000)
Free cash flow 1,971 10,108 3,660 10,380
Peer comparision valuations
Market Cap
Name of the companies CMP (INR bn) FY15E FY16E FY15E FY16E FY15E FY16E
Bharat Forge 584 135,984 22.2 17.5 4.3 3.5 20.8 22.1
Thermax 958 114,188 32.4 24.0 5.0 4.3 16.2 19.2
Exide Industries 141 119,765 20.9 17.1 3.1 2.7 17.2 17.0
FAG Bearings (SA) 2,450 40,631 24.5 19.2 3.6 3.0 16.4 17.6
SKF Bearings (SA) 1,040 54,185 21.2 18.4 3.3 2.9 16.2 16.7
Source: Bloomberg, Edelweiss research
PE (x) P/BV (x) ROE (%)
Cash flow statement
Year to March FY13 FY14 FY15E FY16E
Cash flow from operations 7,576 9,323 8,160 12,380
Investments cashflow (2,102) (3,062) (5,449) (2,450)
Financing cash flow (3,513) (6,202) (4,399) (8,862)
Change in cash 1,960 59 (1,689) 1,068
Capex 5,605 (785) 4,500 2,000
Dividends Paid (949) (1,257) (1,090) (1,226)
Ratios
Year to March FY13 FY14 FY15E FY16E
ROAE (%) 5.4 15.8 20.8 22.1
ROACE (%) 9.7 15.6 20.8 25.8
Inventory (days) 156 123 129 128
Debtors (days) 46 40 49 46
Payable (days) 149 114 122 113
Cash conversion cycle (days) 52 49 56 60
Current ratio (x) 1.5 1.8 1.9 1.8
Debt/equity (x) 1.0 0.7 0.6 0.3
Interest coverage (x) 0.4 0.3 0.2 0.1
Debt/EBITDA 3.0 2.0 1.5 0.8
Adjusted debt/Equity (x) 0.8 0.6 0.5 0.2
Fixed assets turnover (x) 2.0 2.5 2.6 3.1
Total asset turnover(x) 1.2 1.4 1.3 1.5
Equity turnover (x) 2.6 2.7 2.2 2.2
Valuation parameters
Year to March FY13 FY14 FY15E FY16E
Diluted EPS (INR) 5.9 17.7 26.3 33.3
Y-o-Y growth (%) (67.9) 201.1 48.3 26.9
CEPS (INR) 20.3 33.1 40.7 49.0
Diluted P/E (x) 106.0 35.2 23.7 18.7
Price/BV(x) 6.4 5.4 4.6 3.8
EV/Revenues (x) 2.4 2.0 2.0 1.7
EV/EBITDA (x) 17.6 13.0 11.1 9.0
EV/EBITDA (x)+1 yr forward 13.2 11.0 9.1 7.5
Dividend yield (%) 0.4 0.7 0.6 0.7
115
Edelweiss Securities Limited
Bharat Forge
Holding - Top 10
Perc. Holding
Perc. Holding
Relaice Capital AM 3.5 LIC India 3.3
Copthall Mauritius 2.4 UTI AMC 2.3
Prudential ICICI AM 1.5 Vanguard Group of Companies 1.0
AGF Investments 0.9
William Blair
0.7
Dimensional Fund advisors 0.5 Touchstone advisors 0.5
Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
16-Sep-13 Sundaram Trading and Investment Pvt. Ltd Buy 8,431,225
23-Sep-13 Sundaram Trading and Investment Pvt. Ltd. Buy 2,489,525
4-Oct-13 BF Investment Limited Buy 2,000,000
4-Oct-13 Sundaram Trading and Investment Pvt ltd Sell 2,000,000
9-Oct-13 Sundaram Trading and Investment Pvt. Ltd. Sell 2,000,000
12-Nov-13 Life Insurance Corporation of India Sell 3,728,804
23-Jan-14 Life Inusrance Corporation of India Sell 4,657,845
2-Apr-14 Life Insurance Corporation of India Sell 4,778,699
*in last one year
Bulk Deals
Data Acquired / Seller B/S Qty Traded Price
12-Sep-13 Sundaram Trading & Investment Pvt Ltd Buy 8,431,225 250.10
12-Sep-13 Krutadnya Management & Trading Services Llp Sell 8,431,225 250.10
18-Sep-13 Sundaram Trading & Investment Pvt Ltd Buy 2,489,525 263.00
*in last one year
Additional Data
Directors Data
Mr. B. N. Kalyani Chairman & Managing Director Mr. S.M. Thakore Independent Director
Mr. G. K. Agarwal Deputy Managing Director Mr. S.D. Kulkarni Independent Director
Mr. Amit B. Kalyani Executive Director Mr. P.G. Pawar Independent Director
Mr. B.P. Kalyani Executive Director Dr. Uwe Loos Independent Director
Mr. S. E. Tandale Executive Director Mrs. Lalita D. Gupte Independent Director
Mr. Sunil K. Chaturvedi Executive Director Mr. P.H. Ravikumar Independent Director
Mr. Vimal Bhandari Executive Director Mr. Naresh Narad Independent Director
Mr. P.C. Bhalerao Non-Executive Director Dr. T. Mukherjee Independent Director
Auditors - S.R. Batliboi & Co. LLP
*as per last annual report
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Engineering and Capital Goods
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Edelweiss Securities Limited
Larsen & Toubro (L&T) is a technology-driven engineering and
construction player and one of the largest companies in Indias private
sector. The company has additional interests in manufacturing including
defence, services and information technology. In the defence sector, L&T
has industrial licenses for a wide-range of products after the Government
of Indias decision to open up defence production to the private sector.
The licenses cover design, development, construction/manufacturing and
assembly of warships, submarines, high-speed boats, radars, arms and
armament, etc. The company has been involved with development of
defence equipment and systems for over 20 years. Maintain BUY
Defence high-potential revenue source; to scale up 5x in 3-4 years
Management believes DPP has now evolved and is moving towards achieving its goal of
indigenised manufacturing. Key projects being targeted by the company include: 1)
towed gun programme (400 guns with project value of ~INR80-100bn); 2) tracked gun
programme (100 guns; INR20-30bn); 3) future inventory combat vehicles (FICV); 4)
tactical communication systems ((TCS); INR100-150bn); and 5) P-75 submarine
programme - of the six submarines, where two will be given to private sector (L&T is
eying this project for its Katupalli shipyard yard). It expects defence revenues to scale
up from current INR10bn to INR50bn in 3-4 years.
Ship-building: Heavy dependence on high-value defence projects
The Katupalli shipyard has 20,500 tonnes handling capacity and caters to high-value
defence projects. L&T does not propose to build large ships, but is targeting ships with
high-value addition like frigates for navy, commercial vessels, etc. It is already building
high-speed interceptor boats for the Indian Navy, for which it has tied up with
Mitsubishi Heavy Industries, Japan.
Outlook and valuations: Positive; maintain BUY
The company currently has four segments in defence namely, ships & submarines, field
guns, missiles & weapon systems and defence electronics. L&T would be one of the
biggest beneficiaries of privatisation in the defence sector. We maintain BUY/SO on
the stock with SOTP based target price of INR1,845.
COMPANY UPDATE
LARSEN & TOUBRO
Future ready
EDELWEISS 4D RATINGS
Absolute Rating BUY
Rating Relative to Sector Outperformer
Risk Rating Relative to Sector Medium
Sector Relative to Market Overweight
MARKET DATA (R: LART.BO, B: LT IN)
CMP : INR 1,652
Target Price : INR 1,845
52-week range (INR) : 1,777 / 677
Share in issue (mn) : 927.7
M cap (INR bn/USD mn) : 1,532/ 25,633
Avg. Daily Vol.BSE/NSE(000) : 2,635.3
SHARE HOLDING PATTERN (%)
Current Q3FY14 Q2FY14
Promoters *
- - -
MF's, FI's & BKs 36.6 36.6 37.4
FII's 18.5 17.9 15.3
Others 44.9 45.5 47.4
* Promoters pledged shares
(% of share in issue)
: NIL
PRICE PERFORMANCE (%)
Stock Nifty
EW
Construction
Index
1 month 4.1 4.7 5.0
3 months 36.5 15.8 39.5
12 months 86.4 32.8 83.2
Amit Mahawar
+91 22 4040 7451
amit.mahawar@edelweissfin.com
Rahul Gajare
+91 22 4063 5561
rahul.gajare@edelweissfin.com
Swarnim Maheshwari
+91 22 4040 7418
swarnim.maheshwari@edelweissfin.com
India Equity Research| Engineering and Capital Goods
July 9, 2014
Financials - Consolidated
Year to March FY13 FY14E FY15E FY16E
Revenues (INR mn) 744,980 851,284 974,438 1,170,231
Rev. growth (%) 15.8 14.3 14.5 20.1
EBITDA (INR mn) 98,592 107,543 124,130 152,127
Net profit (INR mn) 47,973 45,680 51,483 66,338
EPS (INR) 51.6 49.1 55.4 71.3
EPS growth (%) 3.0 (4.8) 12.7 28.9
Diluted P/E (x) 32.0 33.6 29.8 23.1
ROE (%) 15.2 12.8 13.0 15.0
Engineering and Capital Goods
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Licensed to manufacture several products across value chain
L&T has been issued industrial licenses for a wide range of products post Government of
Indias decision to open up defence production to the private sector. The licenses issued
cover design, development, construction/manufacturing and assembly of:
Fig. 1: List of licensed items
Source: Company, Edelweiss research
Integrated shiplift and transfer system: World-class facility
L&T's customised integrated solutions for shiplift projects extend from design, engineering,
manufacture and construction to commissioning, life-time support and upgrade. The
company designs shiplift projects to suit operational requirements of shipyards.
Construction meets its standards, and is approved and classified by Maritime Classification
societies. Turnkey advantage is of one over many. It is a single-point responsibility rather
than distributed authority entailing streamlining operations that can directly lead to saving
of time and money. Its offerings include:
Shiplift and transfer system design and detailed engineering
Manufacture and supply of shiplift equipment and ship transfer systems
Civil design and construction
Fabrication and erection of shiplift platform
Load testing and commissioning
Lifetime service support
Upgrade, calibration and life extension of old systems
Arms and armament
including weapon
launchers
Armoured and combat
vehicles including
associated systems,
sub-systems such as
turrets, turret mounts,
bridge laying systems
on tanks, etc
Electronic warfare
equipment , Radars
Warships
Submarines
Weapon platforms
High speed boats &
crafts
Radars, Sonar systems
Air-borne assembly
systems
Equipment for aircraft,
helicopters and
unmanned
aerial vehicles (UAV)
Equipment for aviation
sector
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Colossal contribution to the three wings
For over two decades L&T has been associated with a number of programs for indigenous
development and installation of multiple weapon delivery and control systems, engineering
systems, and has successfully conceptualised and developed state-of-the-art technologies
that form the building blocks of multiple systems for defence applications, with modular
integration capabilities. It has been at the forefront ever since the defence gates were
thrown open to the private sector. It has immensely contributed to the three forces of the
country, particularly navy and army.
Fig. 2: Key contribution to Indian Navy
Source: Company
Anti Submarine
warfare Systems
Missile launcher
systems
INS Arihant
Weapon Systems
Design engineering
3D modelling
Pressure hull, outer hull and structures
Special equipment and sub-assemblies
Outfitting equipment, piping and cabling
System integration and trials
Indigenous ASW rocket launcher (IRL)
Indigenous twin tube torpedo launcher (ITTL)
Triple tube launcher (TTL)
Weapon launch sytems for Anti submarine warfare
Weapon launch system for Medium to long range missile launch systems
Weapon launch system for Multi-barrel rocket launching systems
Dhanush jointly with DRDO
Brahmos - jointly with DRDO
WM-18
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Fig. 3: Key contribution to Indian Army
Source: Company
Key contribution to Indian Air Force(IAF)
Spectrum InfoTech Private (SIPL) is a wholly-owned Bengaluru-based subsidiary operating
under L&T Heavy Engineering IC as its avionics arm. SIPL is involved in design, development
and manufacture of military avionics for Indian defence aircraft and helicopter programs.
SIPLs contribution to light combat aircraft (LCA) includes:
Fig. 4: Contribution to IAF in LCA
Source: Company
Bridging systems
Upgrades
Weapon Systems
Rocket launcher sytems - Pinaka MBRL (in association with DRDO)
Missile launchers - Short range - Akash Air Force Launcher (AAFL) ,
Medium and long range - eight missile configuration
Universal launcher jointly with DRDO configured TATRA vehicle
Mobile launcher - Prithvi-II
Artilllery systems - 155mm/52 cal tracked self propelled (SP) gun,
155mm/ 52 cal towed gun system TRAJAN
BLT T72
Sarvatra
Short Span 5m and 10m
Modular
L-70 anti-aircraft gun upgrade
Zu-23 anti-aircraft gun upgrade
Environment
control and fuel
monitoring
system controller
Ground
refuel
panel)
Video cards
Environment
control system
control panel
LCA
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Key infrastructure facilities
Powai, Mumbai
The Powai facility in suburban Mumbai is spread over 385,000 sq. m, with 37,500 sq. m.
dedicated to fabrication shops. The shops handle equipment of 6m x 55m long weighing
over 400MT. The defence prototype shop is also located at Powai and caters to firstoff
systems.
Ranoli, Vadodara
The Ranoli workshop sprawls over 32,000 sq.m, including production area of 15,400 sq.m.
The unit specialises in manufacture of equipment of special grade SS, aluminium, other
exotic materials and composites. The workshops are designed to manufacture components
for aerospace applications as well as missile components. This complex is certified with
AS9100 Quality Management Systems.
Coimbatore
The Coimbatore complex is spread over 79,941 sq. m., and has manufacturing facilities for
multiple systems. The precision manufacturing facility (PMF), spread over 10371 sq. m built-
up area, specialises in precision engineered systems & components for aerospace and
defence segments. PMF is equipped with state-of-the-art precision machining systems and
surface treatment plants. The complex is also certified with AS9100 Quality Management
Systems.
Talegaon, Pune
It is an assembly, integration and testing complex for defence systems and equipment. This
world-class facility spread over 120,000 sq m. in Talegaon has covered shop area of about
12,000 sq. m which caters to strategic requirements of defence sector. The facility also
houses an advanced electronics production and integration centre.
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Bengaluru
L&T HE Bengaluru operations comprises the strategic electronics center (SEC) and Spectrum
InfoTech Pvt. Ltd. (SIPL), a wholly owned subsidiary of L&T. It has a 2,800 sq.m. state-of-the-
art facility in Bengaluru. The focus areas include military communication and C4I systems,
avionics, electronic warfare and special DRDO projects. The facility is AS 9100 and ISO
9001:2008 certified. The facility also has a modern assembly and integration centre spread
over 1,500 sq.m. A facility for PCB level testing, module/sub system level testing,
environmental stress screening (ESS) and integrated system-level testing are also housed in
this unit.
Kattupalli, Chennai
The company has constructed an ultra-modern green-field mega shipyard at Kattupalli near
Chennai. Spread over 1,200 acres and equipped with shiplift capacity of 21,050 tonnes, the
shipyard is capable of building two submarines, frigates and corvettes each per year. The
shipyard has dedicated lines for new-builds and refits/repairs. It has six dry and four wet
berths, each of 200m length. The shipyard also has dedicated design centers for defence
and commercial shipbuilding; it houses testing facility for PCB level testing, module/sub
system level testing, ESS and integrated system-level testing.
Hazira, Surat
The Hazira manufacturing complex, sprawled across 900,000 sq. m, comprises fabrication
workshops measuring 70,000 sq. m, a large-equipment manufacturing facility of 90,000 sq.
m and assembly and load-out area of 100,000 sq. m. Large size and over-dimensional
equipment can be directly loaded on oceangoing barges/vessels, as the facility has direct
access to the Arabian sea. The yard is equipped with infrastructure and facilities to build
vessels up to length of 150m and draught of 4m. Capable of modular construction through
well-planned pre-manufacturing activities and efficient outfitting and system integration,
the yard is equipped to build most demanding projects of the day.
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JV with Cassidian targets global defence electronics market
L&T entered into JV with Cassidian (global leader in security solutions and systems) in 2011
targeting the worlds defence electronics market. The JVs base operations are at Talegoan.
The unit is involved in manufacture, design, engineering, distribution and marketing of
systems used in electronic warfare, radars, avionics and mobile systems like bridges for
military applications. While L&T has 74% holding in the JV, Cassidian holds balance 26%. The
JV has potential to reach the USD0.5bn to USD1bn mark in business volumes in the next ten
years
JV with Thales to fortify capabilities
Recently, L&T Technology Services (L&Ts wholly-owned subsidiary) bought 74% equity
capital of Thales Software India, the Indian subsidiary of Thales, France. This development is
positive, as the JV will empower L&T to bag offset related orders and help it develop latest
trends in the avionics business. The JV is expected to enhance the companys competencies
by bolstering its expertise in the high-end avionics software. The JV will also help it bridge
gaps in its existing defence portfolio. Thales cutting edge technological superiority with
strong focus on emerging markets (30% of business) augurs well for L&T in the long run.
Defence programme focus: Major potential in the offing
Artillery gun programme: The company signed a consortium agreement for transfer of
technologies for sub-assemblies with Nexter Systems (France) in March 2012 to
participate in key artillery gun programme of Indian Army. This includes 155mm/52 cal
towed gun systems (TGS) and mounted gun systems (MGS) programme with Nexter
Systems as lead partner. These projects combined are worth INR120-140bn. In a bid to
take the engagement forward, recently, Ashok Leyland (AL), Nexter Systems and L&T
have signed a consortium agreement to collaborate for the MGS artillery programme of
the Indian Army. Under the pact, L&T will act as the prime contractor and Nexter will
transfer the final integration and production of the MGS in India to L&T. The system
proposed by the consortium for the MGS programme is a version of 'Caesar artillery
system' from Ashok Leyland.
Future infantry combat vehicles: L&T has submitted bids in tie-up with AL in
competition with TML and Bharat Forge. Successful bidder will be awarded a contract
to manufacture 2,600 plus FICVs worth INR500-600bn on long-term supply basis.
Tactical Communication System (TCS): L&T-TP SED and HCL have formed an SPV for
this project, while BEL will be the competitor. Players will be submitting their designs to
the MoD within six months, and the best design will be selected for the project. We
believe the project may be awarded to both players with best design getting majority
(65%) share. The government will reimburse 80% of the designing cost, while 20% will
be borne by the players. The contract is for modules for the army worth INR15bn each.
While the project is delayed, it is the first project off the block where the government
has encouraged the private and public sectors to compete for the defence project. This,
we believe, is a step in the right direction in terms of indigenisation. The project is
worth USD2bn.
P-75 submarine programme: Under this programme of Indian Navy, six submarines will
be procured, of which four will be delivered by DPSUs, while the balance two are likely
to be given to the private sector. L&T remains hopeful of getting some share in the next
12-15 months given its existing capabilities, which could be a needle mover for existing
ship-building business. Estimated value of each submarine is INR80-85bn.
L&T has entered into JV with
various global defence players to
bridge gap in its existing defence
portfolio
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Table 1: Product profile
Source: Company
Integrated naval combat systems
Integrated naval engineering
equipment & systems
Integrated land
based systems
Missile systems
Complete naval
vessels
Weapon delivery systems Steeri ng gear & fi n stabi l i sers wi th
associ ated control s
Weapon l aunch
systems
Composi te systems
and sub systems
OPV
Uni versal verti cal mi ssi l e l aunchers (BrahMos) Stern gear systems i ncl udi ng
propul si on/shafti ng systems
Bri dgi ng systems Metal l i c systems
and sub systems
Corvettes
Stabi l i zed mul ti -barrel rocket l aunchers (WM18A) Hel i copter l andi ng gri ds /traversi ng
systems/ hanger shutters
Ai r defence &
arti l l ery systems
Fri gates
Stabi l i sed l aunch pl atforms for mi ssi l es Degaussi ng systems Mobi l e radars Mi dgets
ASW systems El ectri cal swi tchboards/EDC/APMS Submari nes
ASW rocket l auncher (IRL)
Twi n tube torpedo l auncher (ITTL) for 21 torpedoes
Tri pl e tube torpedo l aunchers (TTL) for 13 torpedoes
Wi nch & handl i ng systems for towed array sonars
Combat management systems
Integrated pl atform management system (IPMS)
Dual mul ti functi on consol es
Stabi l i sed pl atforms for radar systems
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Company Description
L&T, headquartered in Mumbai, is a technology-driven engineering and Construction
Company, and one of the largest companies in Indias private sector. It has additional
interests in manufacturing, services, and information technology. A strong customer-
focused approach and constant quest for top-class quality has enabled the company attain
and sustain leadership in major lines of businesses over seven decades. L&T has
international presence with a global spread of offices. With factories and offices located
around the country, further supplemented by a wide marketing and distribution network,
L&Ts image and equity extend to virtually every district of India. L&Ts recent focus on
export market will help the company optimise its growth potential especially in
Hydrocarbons & Infrastructure.
Investment Theme
Bot Bottoms-up review imparts conviction despite top-down concerns
We have analyzed more than INR806bn worth of L&Ts domestic orders and factored in
delays therein in the backdrop of the sluggish GDP growth and its impact on the company.
Having factored potential delays post our appraisal, we remain confident on our revised
growth assumptions for L&T and do not for-see material down-side.
Diversified business dominance imparts unique flexibility: L&T has a dominant position and
market share in most operating verticals, be it oil & gas, process projects, roads, bridges, or
industrial structures. This imparts flexibility to cherry-pick projects across a wide range of
projects and thus helps optimize overall business profitability.
Transportation & Hydrocarbon to drive future growth: Strong projects pipeline over 2-3
years both in India and Middle East in verticals like Hydrocarbons and Transportation augurs
well for L&T. The company is set to see more than 30-35 % of FY14E-15E intake from these
verticals.
Key Risks
Economy slowdown: Any further weakness in domestic investment could impact our
current growth assumptions and thus pose a down-side risk.
Raw material costs and execution risks: While L&T builds in cushion against material price
movement and provisions for execution delays, the business profitability is exposed to sharp
variations in key raw material which could have an adverse impact on project cost estimates
and hence on profitability. Also, higher than expected delay in project execution might
impact profitability, especially in fixed price projects.
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Engineering and Capital Goods
Financial Statements (Consolidated)
Income statement (INR mn)
Year to March FY13 FY14 FY15E FY16E
Income from operations 744,980 851,284 974,438 1,170,231
Direct costs 546,930 616,948 720,833 873,331
Employee costs 62,242 80,276 83,023 93,907
Other Expenses 37,217 46,517 46,452 50,867
Total operating expenses 646,388 743,741 850,308 1,018,104
EBITDA 98,592 107,543 124,130 152,127
Depreciation & Amortization 16,371 14,458 18,791 19,616
EBIT 82,221 93,085 105,339 132,511
Other income 10,959 9,819 10,053 10,137
Interest expenses 20,950 31,414 38,366 43,463
Profit before tax 72,231 71,490 77,026 99,184
Provision for tax 23,920 26,284 25,034 32,235
Net profit 48,311 45,206 51,993 66,949
Extraordinary income/ (loss) 4,084 3,340 - -
Profit After Tax 52,395 48,546 51,993 66,949
Minority interest 722 (381) 936 1,205
Share in profit of associates 384 93 426 593
Profit after minority interest 52,057 49,020 51,483 66,338
Shares outstanding (mn) 930 930 930 930
Diluted EPS (INR) 51.6 49.1 55.4 71.3
Dividend per share (INR) 10.5 12.2 12.8 13.4
Dividend payout (%) 20.3 24.6 23.0 18.7
Common size metrics
Year to March FY13 FY14 FY15E FY16E
Operating expenses 86.8 87.4 87.3 87.0
EBITDA margins 13.2 12.6 12.7 13.0
Net profit margins 6.5 5.3 5.3 5.7
Growth ratios (%)
Year to March FY13 FY14 FY15E FY16E
Revenues 15.8 14.3 14.5 20.1
EBITDA 11.0 9.1 15.4 22.6
PBT 3.5 (4.8) 12.7 28.9
Net profit 3.0 (4.8) 12.7 28.9
Key Assumptions
Year to March FY13 FY14 FY15E FY16E
Macro
GDP(Y-o-Y %) 5.0 4.8 6.0 6.5
Inflation (Avg) 7.4 6.0 6.0 6.0
Repo rate (exit rate) 7.5 8.0 7.8 7.3
USD/INR (Avg) 54.5 60.5 58.0 56.0
Company
Domestic revenue growth (%) 3.8 7.6 10.8 14.9
Exports revenue growth (%) 95.0 22.1 20.7 15.2
Tax rate (%) 24.7 28.0 28.0 28.0
Excise duty as a % of sales 1.3 1.3 1.3 1.3
Total no. of employees 54,093 56,797 59,637 63,812
Employee cost per head(INR mn) 1 1 1 1
Net borrowings (INR mn) (5,595) 8,500 8,500 6,500
Customer advances a a % of OI 13.7 13.0 13.0 13.0
Capex (INR mn) 11,920 9,042 10,100 10,100
Depreciation as % of gross block 5.3 5.5 5.5 5.5
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Peer comparison valuation
Market cap Diluted PE (X) Price/BV (X) ROAE (%)
Name (USD mn) FY15E FY16E FY15E FY16E FY15E FY16E
Larsen & Toubro 25,633 29.8 23.1 3.7 3.2 13.0 15.0
BGR Energy 242 9.8 8.0 1.0 1.0 11.0 12.4
Bharat Heavy Electricals 9,968 18.8 18.3 1.7 1.6 9.3 9.0
Thermax 1,840 31.2 23.1 4.8 4.1 16.2 19.2
Median 24.3 20.7 2.7 2.4 12.0 13.7
AVERAGE 22.4 18.1 2.8 2.5 12.4 13.9
Source: Edelweiss research
Cash flow metrics
Year to March FY13 FY14 FY15E FY16E
Operating cash flow (37,601) 11,210 (58,551) (12,410)
Investing cash flow (69,115) (1,830) (21,500) (21,501)
Financing cash flow 107,807 6,540 90,593 34,901
Net cash flow 1,091 15,920 10,542 990
Capex (74,378) (21,220) (21,500) (21,501)
Dividends paid (9,803) (11,326) (11,892) (12,487)
Profitability & efficiency ratios
Year to March FY13 FY14 FY15E FY16E
ROAE (%) 15.2 12.8 13.0 15.0
ROACE (%) 9.0 8.4 8.2 9.1
Inventory day 31 32 31 31
Debtors days 106 106 107 108
Payable days 119 117 116 114
Cash conversion cycle (days) 19 20 22 25
Current ratio 2.5 2.5 2.8 2.8
Interest coverage 3.9 3.0 2.7 3.0
Operating ratios
Year to March FY13 FY14 FY15E FY16E
Total asset turnover 0.8 0.8 0.7 0.8
Fixed asset turnover 2.0 2.0 2.2 2.6
Equity turnover 2.4 2.4 2.5 2.6
Valuation parameters
Year to March FY13 FY14 FY15E FY16E
Diluted EPS (INR) 51.6 49.1 55.4 71.3
Y-o-Y growth (%) 3.0 (4.8) 12.7 28.9
CEPS (INR) 69.8 65.3 76.0 93.0
Diluted PE (x) 32.0 33.6 29.8 23.1
Price/BV (x) 4.5 4.0 3.7 3.2
EV/Sales (x) 2.8 2.7 2.5 2.2
EV/EBITDA (x) 5.4 6.7 6.9 6.2
Dividend yield (%) 0.6 0.7 0.8 0.8
Balance sheet (INR mn)
As on 31st March FY13 FY14 FY15E FY16E
Equity capital 1,231 1,854 1,854 1,854
Reserves & surplus 337,366 375,262 414,853 468,703
Shareholders funds 338,597 377,116 416,706 470,557
Minority interest (BS) 26,529 31,792 32,728 33,933
Short term debt 145,936 136,787 127,638 118,489
Long term debt 474,002 664,742 814,742 914,742
Borrowings 619,937 801,529 942,380 1,033,231
Deferred tax liability 39,540 - - -
Sources of funds 1,026,439 1,213,812 1,395,189 1,541,096
Tangible assets 210,947 257,959 263,769 268,779
Intangible assets 74,529 70,454 66,353 62,228
CWIP (incl. intangible) 110,675 115,986 116,986 117,986
Total net fixed assets 396,151 444,398 447,107 448,993
Goodwill on consolidation 21,198 21,362 21,362 21,362
Non current investments 12,630 14,328 14,328 14,328
Current Investments 75,046 66,762 66,762 66,762
Cash and equivalents 35,715 40,966 51,507 52,497
Inventories 51,695 55,275 67,146 81,351
Sundry debtors 230,149 263,846 307,739 385,917
Loans and advances 404,544 535,555 630,714 750,282
Other current assets 201,982 254,934 293,174 322,491
Total current assets (ex cash) 888,370 1,109,609 1,298,773 1,540,042
Sundry creditors and others 373,840 450,643 492,757 590,400
Provisions 28,830 32,969 11,892 12,487
Total current liabilities &
402,669 483,612 504,650 602,887
Net current assets (ex cash) 485,701 625,997 794,123 937,155
Net Deferred tax 1,837 3,375 3,375 3,375
Uses of funds 1,026,439 1,213,812 1,395,189 1,541,096
Book value per share (INR) 366.4 408.0 450.9 509.2
Free cash flow (INR mn)
Year to March FY13 FY14 FY15E FY16E
Net profit 52,057 49,020 51,483 66,338
Depreciation 16,371 14,458 18,791 19,616
Others (50,009) (3,478) (43,904) (55,178)
Gross cash flow 18,419 60,000 26,370 30,775
Less: Changes in WC 56,020 48,790 84,921 43,185
Operating cash flow (37,601) 11,210 (58,551) (12,410)
Less: Capex 74,378 21,220 21,500 21,501
Free cash flow (111,979) (10,010) (80,051) (33,911)
128
Edelweiss Securities Limited
Engineering and Capital Goods
Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
04 Apr 2014 Mr A M Naik Sell 55000.00
04 Apr 2014 Mr A M Naik Sell 55000.00
02 Apr 2014 Mr. A. M. Naik Sell 117500.00
28 Mar 2014 Mr. A. M. Naik Sell 225000.00
*in last one year
Bulk Deals
Data Acquired / Seller B/S Qty Traded Price
No Data Available
*in last one year
Holding Top10
Perc. Holding Perc. Holding
Life insurance corp 16.98 L&t employ welfare f 12.03
Unit trust of india 8.18 General insurance co 1.99
Carmignac gestion 1.35 Hdfc asset managemen 1.33
Gic private limited 1.12 Abu dhabi investment 1.09
New india assurance 1.04 Prudential plc 1
*in last one year
Additional Data
Directors Data
AM Naik Chairman K Venkataramanan Managing Director
S N Subrahmanyan Whole Time Director & Senior Executive Vice President Shailendra Roy Whole Time Director & Senior Executive Vice President
N Mohan Raj Nominee Director - LIC Thomas Mathew T Nominee Director - LIC
M V Kotwal Whole Time Director R Shankar Raman Whole Time Director
V K Magapu Whole Time Director AK Jain Nominee Director
M M Chitale Non Executive Director S N Talwar Non Executive Director
S Rajgopal Non Executive Director Subodh Bhargava Non Executive Director
Auditors - Sharp Tannan & Co.
*as per last annual report
Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
Edelweiss Securities Limited
Mahindra & Mahindra (M&M) is the flagship company of the Mahindra
Group. The company operates in the defence segment via subsidiaries
Defense Land Systems India (DLSI), Mahindra Defence Systems (MDS),
Mahindra Defence Naval Systems (MDNL) and Mahindra Special Service
Groups (MSSG). It provides total solutions for the entire range of light
combat and armoured vehicles and their derivatives for defence and
security forces. Maintain BUY.
Manufactures world-class military vehicles and artillery systems
M&M, via its subsidiary DLSI (formerly JV with BAE Systems), builds Special Military
Vehicles (SMV). The SMV facility has been set up to design, develop and manufacture
specialised military vehicles, armour light and medium category vehicles, mine
protected vehicles and vehicle conversions for defence forces, para-military forces,
central and state police forces. Currently, it is the largest manufacturer of light
armoured vehicles in the private sector.
Enhancing product base by manufacturing radars
MDS entered the naval defence sector in 2007 through MDNL whose offerings include
sea mines, torpedo launchers and anti-torpedo decoy launchers to the Navy, as well as
sophisticated components to the ordnance factories and DRDO. MDS has entered into
a JV with Telephonics Corporation of US for setting up a world-class facility in
Bengaluru to manufacture, repair and overhaul airborne radars, aircraft
communication systems and mobile surveillance systems.
Outlook and valuations: Positive momentum; Maintain BUY
M&M has spun off its defence business into primarily two fully-held units focusing on
land and naval systems. M&M expects most of the projects to come from artillery
systems and armoured vehicles. It hopes to ramp up revenues to USD430mn by FY16E
from the current USD51mn. The stock is currently trading at 6.2x/9.2x FY16 EV-
EBITDA/PE (adjusted for INR458 in subs). Our SOTP of INR1,395 implies 11x PE for
M&M+MVML and INR458 for subsidiaries. We maintain BUY/SO rating on the stock.
COMPANY UPDATE
MAHINDRA & MAHINDRA
In the fast lane
EDELWEISS 4D RATINGS
Absolute Rating BUY
Rating Relative to Sector Outperformer
Risk Rating Relative to Sector Medium
Sector Relative to Market Overweight
MARKET DATA (R: MAHM.BO, B: MM IN)
CMP : INR 1,214
Target Price : INR 1,395
52-week range (INR) : 1,279 / 740
Share in issue (mn) : 615.9
M cap (INR bn/USD mn) : 748/ 12,497
Avg. Daily Vol.BSE/NSE(000) : 1,253.3
SHARE HOLDING PATTERN (%)
Current Q3FY14 Q2FY14
Promoters *
25.3 25.2 25.3
MF's, FI's & BKs 15.9 16.1 16.6
FII's 36.9 36.7 35.9
Others 21.9 22.0 22.3
* Promoters pledged shares
(% of share in issue)
: 2.8
PRICE PERFORMANCE (%)
Stock Nifty EW Auto Index
1 month 0.8 4.7 8.4
3 months 23.1 15.8 21.2
12 months 25.3 32.8 48.8
Chirag Shah
+91 22 6623 3367
chirag.shah@edelweissfin.com
Siddhartha Bera
+91 22 6620 3099
siddhartha.bera@edelweissfin.com
India Equity Research| Automobiles
July 9, 2014
Financials
Year to March FY13 FY14 FY15E FY16E
Revenues (INR mn) 383,556 388,171 408,928 478,713
Rev. growth (%) 22.2 1.2 5.3 17.1
EBITDA (INR mn) 53,283 53,273 56,734 71,207
Net profi t (INR mn) 36,344 39,051 37,858 48,839
Shares outstandi ng (mn) 617 617 617 617
Di l . EPS (INR) 57.4 63.7 61.4 79.2
EPS growth (%) 22.4 10.9 (3.7) 29.0
Di l uted P/E (x) 21.1 19.1 19.8 15.3
EV/EBITDA (x) 14.3 14.0 12.9 10.1
ROAE (%) 26.0 24.3 20.3 22.4
Automobiles
130
Edelweiss Securities Limited
Acquired majority stake in Australian aerospace companies
M&M recently made two landmark aerospace deals with the acquisition of a majority stake
in two Australian companiesAerostaff Australia (AA) and Gippsland Aeronautics (GA)
marking strategic entry into the global aerospace components and general aviation markets.
This deal entails a total equity commitment of INR1.75bn. AA is a manufacturer of high-
precision close-tolerance aircraft components and assemblies for large aerospace OEMs.
This acquisition will catapult M&M into the burgeoning Defence Offset and Commercial
Aviation market. GA acquisition signals M&Ms entry into the 2-20 seater turbo prop aircraft
market, which is amongst the fastest growing segments in general aviation. M&M will retain
the existing managements of GA and AA, securing the services of the founders who
developed this technology.
A plant (25,000 sq mtr manufacturing facility) is being set up in Bengaluru to complement
these acquisitions and provide dual shoring cost benefits to customers. The facility will be
used for manufacturing metal components, aircraft assemblies and aero structures. Its
investment in component capability addresses the growing needs of both civil and defence
markets.
Aiming to be preferred choice of global aerospace and defence majors
The company is currently working to emerge as a partner of choice for global aerospace and
defence (A&D) majors where it will offer design-to-build capabilities along with financial
stability. Mahindra Aerospace is the only Indian aircraft player with a portfolio of light
aircraft for private-utility use, and has the GA8, GA10 and GA18 aircraft in addition to the
CNM5.
Tie up with Telephonics Corp for radars and other critical systems
Mahindra Telephonics, a joint venture between Mahindra Defence and Telephonics
Corporation of the US, has opened (Feb 2014) the first private sector aerospace and
electronics joint venture manufacturing facility in Prithla, Faridabad. The facility is to
manufacture, repair and overhaul airborne radars, aircraft communication systems, and
mobile surveillance systems. The company will provide customised solutions for border
surveillance, critical infrastructure protection and air traffic management systems.
Telephonics long-standing OEM customer base has shown keen interest in partnering with
Mahindra Telephonics on the development and execution of offset programmes in India
MDNS a leader in underwater armament applications
Mahindra Defence Naval Systems (MDNS) is a subsidiary of M&M is primarily engaged in
manufacturing products for Underwater Armament applications for Indian Navy involving
the fields of Composites, Mechanical and Electronics. Its main production facility is at Pune.
It has also partnered with various Ordnance Factories, PSUs and premier research
laboratories of DRDO assisting in development of highly specialized products requiring latest
technologies. The product range inter alia includes torpedo launchers, decoy launchers,
casings for various defence products in composites and alloys, components and sub systems
of AK 630 anti aircraft gun, large radar and sonar transparent composite structures,
components for use on submarines, transportation containers in composite and alloy
material.
Acquisitions done in commercial
aircraft space can catapult M&M
into the burgeoning defence
Offset and Commercial Aviation
market
Mahindra & Mahindra
131
Edelweiss Securities Limited
Fig. 1: Operational Companies
Source: Company
Product Profile
Land
Axe
Marksman
Mine Protected Vehicle
Rakshak
Sea
Sea mines
Torpedo Decoy launchers
Mahindra & Mahindra
Mahindra Defence Systems
(Division of M&M)
Defence Land Systems
India Pvt, Ltd.
MDNS Mahindra Defence
Naval Systems
MSSG (Mahindra Special
Service Group
Automobiles
132
Edelweiss Securities Limited
Company Description
M&M operates in nine segmentsautomotive, which involves sales of automobiles, spare
parts and related services; farm equipment, which involves tractors, spare parts and related
services; financial services, which consists of services related to financing, leasing and hire
purchase of automobiles and tractors; steel trading & processing, which consists of trading
and processing of steel; infrastructure, which consists of operating of commercial
complexes, project management and development; hospitality, which involves sale of
timeshare; IT services, which involves services rendered for information technology (IT) and
telecom; Systech, which consists of automotive components and other related products and
services, and Others, which consists of logistics, after-market, two wheelers and investment.
The company has ventured into the M&HCV space through a JV with Navistar International,
US. It also acquired majority (70%) stake in Korea-based Ssangyong Motors Company in
FY11 to become a global SUV company.
Investment Theme
We believe M&M is set to witness a lot of excitement from FY16 onwards as it plugs gaps in
its product portfolio. A new family of products under compact platform and co-
development of engines with Ssangyong can potentially exceed our volume estimates in PVs.
Tractor demand can receive support from infra-related demand.
Key Risks
Losses in unlisted subsidiaries
M&M has ventured into two wheeler and commercial vehicle business and is incurring
losses at operational level. In the event of failure to turn around the business, company
might have to infuse more capital and thus dragging performance of core business.
Managing a complex group structure
M&M is a conglomerate with interests in automotive, farm equipment, real estate, tech
services, and hospitality, among others. Managing such a complex structure could divert
focus away from the core business and could pose execution risk.
Weak performance of subsidiaries
Poor performance of subsidiaries can be a drag on overall stock performance. M&M drives
its valuation through core operations and subsidiaries. Any weak performance by any of its
subsidiaries can drag down its overall business performance.
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Edelweiss Securities Limited
Mahindra & Mahindra
Financial Statements
Income statement (INR mn)
Year to March FY13 FY14 FY15E FY16E
Income from operations 383,556 388,171 408,928 478,713
Materials costs 273,971 269,199 283,254 332,210
Manufacturing expenses 36,326 42,591 44,194 47,569
Employee costs 19,977 23,108 24,747 27,727
Total operating expenses 330,273 334,898 352,195 407,506
EBITDA 53,283 53,273 56,734 71,207
Depreciation & Amortization 8,178 9,760 11,647 13,396
EBIT 45,105 43,513 45,087 57,811
Non-Operational Income 5,707 6,648 8,508 10,051
Interest expenses 2,964 3,611 3,118 2,743
Profit before tax 47,848 46,550 50,477 65,119
Provision for tax 12,410 7,235 12,619 16,280
Net profit 35,438 39,315 37,858 48,839
Extraordinary income/ (loss) 906 (264) - -
Profit After Tax 36,344 39,051 37,858 48,839
Basic EPS (INR) 57.4 63.7 61.4 79.2
Shares outstanding (mn) 617 617 617 617
Diluted EPS (INR) 57.4 63.7 61.4 79.2
CEPS (INR) 70.7 79.5 80.2 100.9
Dividend per share (INR) 13.5 14.0 14.8 19.3
Dividend payout (%) 23.5 22.0 24.2 24.4
Common size metrics
Year to March FY13 FY14 FY15E FY16E
Materials costs 71.4 69.4 69.3 69.4
Employee expenses 5.2 6.0 6.1 5.8
S G & A expenses 9.5 11.0 10.8 9.9
EBITDA margins 13.9 13.7 13.9 14.9
Net profit margins 9.2 10.1 9.3 10.2
Growth ratios (%)
Year to March FY13 FY14 FY15E FY16E
Revenues 22.2 1.2 5.3 17.1
EBITDA 28.0 - 6.5 25.5
PBT 30.1 (2.7) 8.4 29.0
Net profit 22.7 10.9 (3.7) 29.0
EPS 22.4 10.9 (3.7) 29.0
Key Assumptions
Year to March FY13 FY14E FY15E FY16E
Macro
GDP(Y-o-Y %) 5.0 4.8 5.4 6.3
Inflation (Avg) 7.4 6.2 5.5 6.0
Repo rate (exit rate) 7.5 8.0 7.5 7.0
USD/INR (Avg) 54.5 62.0 60.0 58.0
Sector
Tractor - dom. vol (% YoY) (6) 20 12 8
UV - domestic vol. (% YoY) 30.4 (5.0) 8.0 10.0
LCV - dom. vol. (% YoY) 15.9 (15.0) 10.0 20.0
Steel prices (INR/t) 39,200 39,200 39,200 39,200
Aluminium prices (USD/t) 2,300 2,400 2,400 2,400
Company
3-wheeler (Goods) - dom. Vol. (%
(3) (4) 3 3
Tractor - dom. vol (% YoY) (5) 22 8 12
Revenue assumptions
Volume growth (% YoY)
UV - domestic vol. (% YoY) 30.5 (17.1) 3.0 29.3
LCV - dom. vol. (% YoY) 14.1 1.9 2.0 11.9
Avg realisation (INR) 494,686 506,333 509,776 513,386
Avg realisation (% YoY) 8.3 2.4 0.7 0.7
Cost assumptions
RM cost/vehicle 353,350 351,146 353,109 356,272
Employee cost/vehicle 25,764 30,142 30,850 29,735
Average salary 1,070,294 1,067,957 1,058,997 1,061,117
EBITDA/vehicle 68,721 69,489 70,725 76,364
Financial assumptions
Average Interest rate (%) 5.5 6.9 5.0 5.0
Average Depreciation rate (%) 7.9 8.0 8.0 8.0
Tax rate (%) 25.5 15.6 25.0 25.0
Dividend payout ratio (%) 25.4 25.4 27.8 27.9
Balance sheet assumptions
Net borrowings (INR mn) 669 1,556 (667) (2,000)
Capex (INR mn) 15,278 21,265 23,000 23,000
Debtor days 18 21 20 18
Inventory days 35 37 36 35
Payable days 69 74 69 62
Cash conversion cycle (days) (15) (16) (13) (9)
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Automobiles
Peer comparison valuation
Market cap Diluted PE (X) EV/EBITDA (X) Price/BV (X)
Name (USD mn) FY15E FY16E FY15E FY16E FY15E FY16E
Mahindra & Mahindra Ltd 12,497 19.8 15.3 12.9 10.1 3.7 3.2
Eicher Motors 3,775 32.8 20.5 18.2 11.1 8.8 6.6
Maruti Suzuki India Ltd 13,070 21.3 15.8 10.5 7.9 3.2 2.7
Median - 21.3 15.8 12.9 10.1 3.7 3.2
AVERAGE - 24.6 17.2 13.9 9.7 5.3 4.2
Source: Edelweiss research
Cash flow metrics
Year to March FY13 FY14 FY15E FY16E
Operating cash flow 40,439 42,025 52,384 56,593
Investing cash flow (29,477) (16,969) (49,000) (49,000)
Financing cash flow (5,644) (11,869) (11,196) (15,621)
Net cash flow 5,318 13,187 (7,812) (8,028)
Capex (15,278) (21,265) (23,000) (23,000)
Dividends paid 9,224 9,934 10,529 13,621
Profitability & efficiency ratios
Year to March FY13 FY14 FY15E FY16E
ROAE (%) 26.0 24.3 20.3 22.4
ROACE (%) 24.5 20.4 18.8 21.4
Inventory day 35 37 36 35
Debtors days 18 21 20 18
Payable days 69 74 69 62
Cash conversion cycle (days) (15) (16) (13) (9)
Current ratio 1.1 1.3 1.2 1.2
Debt/EBITDA 0.8 0.8 0.7 0.6
Fixed asset turnover (x) 5.2 4.6 4.2 4.5
Debt/Equity 0.3 0.2 0.2 0.2
Operating ratios
Year to March FY13 FY14 FY15E FY16E
Total asset turnover 2.1 1.8 1.7 1.8
Fixed asset turnover 5.2 4.6 4.2 4.5
Equity turnover 2.8 2.4 2.2 2.2
Valuation parameters
Year to March FY13 FY14 FY15E FY16E
Diluted EPS (INR) 57.4 63.7 61.4 79.2
Y-o-Y growth (%) 22.4 10.9 (3.7) 29.0
CEPS (INR) 70.7 79.5 80.2 100.9
Diluted PE (x) 21.1 19.1 19.8 15.3
Price/BV (x) 5.0 4.3 3.7 3.2
EV/Sales (x) 2.0 1.9 1.8 1.5
EV/EBITDA (x) 14.3 14.0 12.9 10.1
Dividend yield (%) 1.1 1.2 1.2 1.6
Balance sheet (INR mn)
As on 31st March FY13 FY14 FY15E FY16E
Equity capital 2,952 2,952 2,952 2,952
Reserves & surplus 147,601 170,272 197,601 232,819
Shareholders funds 150,553 173,224 200,553 235,771
Short term debt 1,210 7 7 7
Long term debt 40,313 43,071 42,404 40,404
Borrowings 41,523 43,078 42,412 40,412
Deferred tax liability 7,557 10,512 10,512 10,512
Sources of funds 199,632 226,814 253,476 286,694
Total net fixed assets 77,468 90,555 101,908 111,512
Non current investments 96,121 88,283 94,283 100,283
Current Investments 12,820 16,361 36,361 56,361
Cash and equivalents 18,227 31,414 23,602 15,574
Inventories 30,736 31,733 32,490 39,346
Sundry debtors 20,668 24,017 21,287 26,231
Loans and advances 33,886 43,767 35,472 42,072
Other current assets 7,420 7,337 7,466 7,597
Total current assets (ex cash) 92,709 106,853 96,715 115,247
Trade payable 62,078 63,655 60,499 68,200
Others current liabilities 35,634 42,997 38,894 44,083
Total current liabilities &
97,712 106,652 99,393 112,283
Net current assets (ex cash) (5,003) 201 (2,679) 2,963
Uses of funds 199,632 226,814 253,476 286,694
Book value per share (INR) 244.0 280.7 325.0 382.1
Free cash flow (INR mn)
Year to March FY13 FY14 FY15E FY16E
Net profit 36,344 39,051 37,858 48,839
Depreciation 8,178 9,760 11,647 13,396
Others (1,479) (1,582) - -
Gross cash flow 43,043 47,229 49,505 62,235
Less: Changes in WC 2,604 5,204 (2,880) 5,642
Operating cash flow 40,439 42,025 52,384 56,593
Less: Capex 15,278 21,265 23,000 23,000
Free cash flow 25,162 20,760 29,384 33,593
135
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Mahindra & Mahindra
Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
01 Jan 2014 Prudential Management and Services Private Limited (PMSL) Buy 324000.00
04 Dec 2013 First State Investment Management (UK) Limited & First State Investment International Limited Buy 658265.00
04 Oct 2013 Anuja Sharma Sell 24000.00
03 Oct 2013 Anuja P Sharma Sell 24000.00
*in last one year
Bulk Deals
Data Acquired / Seller B/S Qty Traded Price
No Data Available
*in last one year
Holding Top10
Perc. Holding Perc. Holding
Prudential mgmt & se 11.49 Life insurance corp 11.38
M & m benefit trust 8.42 Commonwealth bank of 4.67
M & m employees stk 4.2 Jpmorgan chase & co 3.29
Golboot holdings ltd 3.05 Dodge & cox 2.68
Capital group compan 2.34 Gic private limited 1.74
*in last one year
Additional Data
Directors Data
Deepak S. Parekh Non-Executive Independent Directors Nadir B Godrej Non-Executive Independent Directors
M M Murugappan Non-Executive Independent Directors Narayanan Vaghul Non-Executive Independent Directors
A S Ganguly Non-Executive Independent Directors R K Kulkarni Non-Executive Independent Directors
Anupam Puri Non-Executive Independent Directors Arun Kanti Dasgupta Non-Executive Independent Directors
Dr. Vishakha N. Desai Non-Executive Independent Directors Vikram Singh Mehta Non-Executive Independent Directors
A K Nanda Other Non-Executive Directors Anand G Mahindra, Chairman and MD Executive Directors
Bharat Doshi Executive Directors
Auditors - Deloitte Haskins & Sells
136
Edelweiss Securities Limited
Automobiles
THIS PAGE IS INTENTIONALLY LEFT BLANK
Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
Edelweiss Securities Limited
With India government pushing hard for a massive arms purchase in
order to modernise its armed forces, the Reliance Group (Reliance) set up
two defence subsidiariesReliance Aerospace Technologies and Reliance
Security Solutionsin 2011. The group is gearing up to enter the defence
space by investing and signing new deals with global OEMs primarily
towards offset arrangement of defence equipment. It recently inked an
agreement with Dassault Aviation (France) for Medium-Multirole Combat
Aircraft (MMRCA) towards the offsets clause. Reliance has also signed
agreements with Raytheon (USA) and Siemens (Germany) for Homeland
Security Systems. It also inked a deal with Boeing (USA) for aerospace
related offset contracts. Maintain BUY.
Set to enter Indias bustling defence sector
In the backdrop of the growing thrust on indigenisation of defence equipment and
giving more prominence to private sector companies, Reliance has entered the Indian
defence space by inking agreements with the worlds leading players like Dassault and
Boeing in the aerospace segment. While Dassault plans to supply 126 MMRCA, Boeing
has to supply 20-24 P-8 surveillance aircrafts. Reliance is likely to get offset contracts
from both the companies by manufacturing equipment and components locally. It has
already applied for a licence for the same. As per our understating, 30% offset for
these two deals will result in offset contracts in the INR200-250bn range. As per media
reports, Reliance has further plans to incubate tier 2 and 3 companies that provide
components to tier-1 companies manufacturing the original equipment.
Likely to spend USD1bn in aerospace business
Unlike other Indian aerospace players who have tied up with foreign companies to
compete for individual projects, Reliance intends to create a large manufacturing hub
of global scale. As per media reports, Reliance is expected to invest USD500-1,000mn
and hire over 1,500 employees to grow the aerospace business.
Outlook and valuations: Encouraging; maintain BUY
Reliance has been nurturing its ambitions in the defence space over the past few years
and is likely to be a formidable player in the aerospace business with several tie-ups in
place. The company is currently incubating the defence business, which looks
promising. We maintain BUY/SO with a target price of INR1,064.
COMPANY UPDATE
RELIANCE INDUSTRIES
Making a big splash
EDELWEISS 4D RATINGS
Absolute Rating BUY
Rating Relative to Sector Outperformer
Risk Rating Relative to Sector Medium
Sector Relative to Market Underweight
MARKET DATA (R: RELI.BO, B: RIL IN)
CMP : INR 1,001
Target Price : INR 1,064
52-week range (INR) : 1,145 / 764
Share in issue (mn) : 3,232.7
M cap (INR bn/USD mn) : 3,236/ 54,130
Avg. Daily Vol.BSE/NSE(000) : 3,604.4
SHARE HOLDING PATTERN (%)
Current Q3FY14 Q2FY14
Promoters *
45.3 45.3 45.3
MF's, FI's & BKs 11.2 11.5 11.8
FII's 18.6 18.3 17.7
Others 24.8 25.0 25.2
* Promoters pledged shares
(% of share in issue)
: NIL
PRICE PERFORMANCE (%)
Stock Nifty
EW O & G
Index
1 month (4.2) 4.7 0.3
3 months 9.3 15.8 17.3
12 months 19.8 32.8 28.0
Jal Irani
+91-22-6620 3087
jal.irani@edelweissfin.com
India Equity Research| Oil, Gas and Services
July 9, 2014
Financials (INR mn)
Year to March
FY13 FY14E FY15E FY16E
Net revenue 3,970,620 4,348,957 4,317,070 4,423,403
EBITDA 330,450 347,992 434,611 469,653
Net profit 208,860 225,479 276,150 293,365
Diluted EPS (INR) 71.1 76.6 93.9 99.7
Diluted PE (x) 14.1 13.1 10.7 10.0
EV/EBITDA (x) 9.8 9.9 7.8 7.1
Oil, Gas and Services
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Company Description
RIL is the largest private player in the refining, petrochemical and E&P sectors in India. While
RILs refining complex in Jamnagar is the largest in the world and among the most complex,
it is also among the largest integrated petrochemical producers globally. Apart from E&P in
India, RIL has made significant investments in US shale gas. In terms of EBIT, Petrochemicals
contribute 38%, Refining 40% and E&P 22%. RIL is also expanding its presence in the areas
of consumer retailing and telecom, but EBIT contribution from these other businesses is
<1%. RIL has a weight of 9.1% in BSE Sensex and 7.5% in S&P CNX Nifty.
Investment Theme
RILs strength lies in its ability to build businesses of global scale and execute complex, time-
critical, and capital-intensive projects which will prove advantageous as it embarks on large
investments in all core segments.
We expect non-regulated segments (refining, chemicals and shale) to contribute ~90% of
incremental EBITDA over the next few years.
We are positive on both refining and chemicals, as current refining margins are not
sustainable for upcoming capacity additions, and global utilization rates have bottomed out
in chemicals.
RIL is currently in a capex phase, investing in world-scale projects like petcoke gasification
and off-gas crackers, which are expected to drive future growth.
Its investment in US shale gas is already bearing fruit, and is expected to contribute ~12% of
EBITDA by FY15.
Key Risks
Slow down in global demand or larger than expected capacity additions could impact RILs
refining and chemical margins.
Delays in government approvals for India E&P or weak domestic gas prices could hamper
progress in upstream.
Weak US natural gas prices could lower the profitability of shale gas assets, though it could
be offset by the liquids-rich acreages which are currently highly profitable.
Rupee appreciation may impact negatively as RIL is positively leveraged to the depreciating
currency.
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Edelweiss Securities Limited
Reliance Industries
Financial Statements
Income statement (INR mn)
Year to March FY13 FY14 FY15E FY16E
Net revenue 3,970,620 4,348,957 4,317,070 4,423,403
Materials costs 3,322,500 3,624,801 3,401,422 3,432,987
Gross profit 648,120 724,157 915,648 990,416
Operating expenses 317,670 376,165 481,038 520,762
EBITDA 330,450 347,992 434,611 469,653
Depreciation & Amortization 112,320 112,008 134,879 151,455
EBIT 218,130 235,984 299,731 318,199
Other income 78,670 90,006 104,856 113,914
Interest expenses 34,630 38,361 51,266 55,330
Profit before tax 262,170 287,629 353,321 376,783
Provision for tax 53,310 62,150 77,171 83,417
Net profit 208,860 225,479 276,150 293,365
Profit after minority interest 208,790 224,930 275,683 292,771
Shares outstanding (mn) 2,936 2,936 2,936 2,936
Diluted EPS (INR) 71.1 76.6 93.9 99.7
CEPS (INR) 109.4 114.8 139.4 151.0
Dividend per share (INR) 9.0 9.5 10.0 11.0
Dividend payout (%) 12.7 12.4 10.7 11.0
Common size metrics
Year to March FY13 FY14 FY15E FY16E
Gross margin 16.3 16.7 21.2 22.4
EBITDA margins 8.3 8.0 10.1 10.6
EBIT margins 5.5 5.4 6.9 7.2
Net profit margins 5.3 5.2 6.4 6.6
Growth ratios (%)
Year to March FY13 FY14 FY15E FY16E
Revenues 10.8 9.5 (0.7) 2.5
EBITDA (4.2) 5.3 24.9 8.1
Net profit 5.9 7.7 22.6 6.2
EPS 7.4 7.7 22.6 6.2
Key Assumptions
Year to March FY13 FY14 FY15E FY16E
Macro
GDP(Y-o-Y %) 5.0 4.8 5.4 6.3
Inflation (Avg) 7.4 6.2 5.5 6.0
Repo rate (exit rate) 7.5 8.0 7.5 7.0
USD/INR (Avg) 54.4 60.5 60.0 58.0
Sector
Upstream
Brent Crude (USD/bbl) 111.4 107.6 105.0 105.0
India natural gas price (USD/mmbtu) 4.2 4.2 8.4 8.4
Petchem
Edelweiss cracking margins (USD/mt) 655.7 723.7 766.2 765.0
Polypropylene margins (USD/mt) 133.6 110.5 120.0 130.0
Paraxylene margins (USD/mt) 567.9 460.1 450.0 450.0
PTA margins (USD/mt) 137.4 141.4 140.0 145.0
MEG margins (USD/mt) 170.1 153.8 150.0 150.0
Company
Refining
Refining throughput (mmt) 69 69 70 70
GRM (USD/bbl) 9.2 8.1 9.0 9.0
Chemicals
Chemicals production (mmt) 17.2 17.1 19.5 22.2
Chemicals EBITDA (USD/mt) 98.7 106.8 101.1 112.0
India E&P
Gross gas production - PMT (mmscmd) 1.1 1.0 1.1 1.1
Gross gas production - KG-D6 (mmscmd) 26.0 14.0 14.0 14.0
Gross gas production - CBM (mmscmd) - 0.1 0.1 0.3
Total RIL net gas production (mmscmd) 18.1 10.6 11.0 11.5
KG-D6 gas price (USD/mmbtu) 4.2 4.2 8.4 8.4
Shale Gas
RIL share of US shale gas production (mmscmd) 15.0 15.0 16.0 16.0
US shale gas price (USD/mmbtu) 3.0 4.0 4.5 5.0
Financial assumptions
Average Interest rate (%) 3.8 3.9 4.8 5.5
Capex (INR bn) 307 559 441 440
Debt (INR bn) 1,072 1,518 1,612 1,685
Cash conversion cycle (days) 18 11 11 14
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Oil, Gas and Services
Peer comparison valuation
Market cap Diluted PE (X) EV/EBITDA (X) ROAE (%)
Name (USD mn) FY15E FY16E FY15E FY16E FY15E FY16E
Reliance Industries 54,130 10.7 10.0 7.8 7.1 12.8 12.2
Cairn India 11,225 5.7 6.4 3.2 3.2 19.2 15.0
Essar Oil 2,546 8.3 10.3 7.5 7.4 55.2 29.8
Indian Oil Corporation 13,880 - - 4.0 3.2 7.4 7.6
ONGC 57,957 - - 0.0 (0.1) 17.6 16.0
Median - 5.7 6.4 4.0 3.2 17.6 15.0
AVERAGE - 4.9 5.3 4.5 4.1 22.5 16.1
Source: Edelweiss research
Cash flow metrics
Year to March FY13 FY14 FY15E FY16E
Operating cash flow 369,670 253,003 398,103 458,796
Investing cash flow (276,500) (411,656) (252,845) (326,416)
Financing cash flow 4,080 372,092 5,415 (23,857)
Net cash flow 97,250 213,439 150,673 108,523
Capex (307,260) (559,173) (440,840) (440,330)
Dividends paid (30,750) (35,446) (37,188) (40,907)
Profitability & efficiency ratios
Year to March FY13 FY14 FY15E FY16E
ROAE (%) 11.9 11.7 12.8 12.2
ROACE (%) 10.8 10.2 11.1 10.8
Inventory day 56 56 60 60
Debtors days 12 8 10 12
Payable days 49 53 59 58
Cash conversion cycle (days) 18 11 11 14
Net Debt/Equity 0.2 0.2 0.2 0.2
Operating ratios
Year to March FY13 FY14 FY15E FY16E
Total asset turnover 1.4 1.3 1.1 1.1
Fixed asset turnover 2.3 2.1 1.8 1.6
Equity turnover 2.3 2.3 2.0 1.8
Valuation parameters
Year to March FY13 FY14 FY15E FY16E
Diluted EPS (INR) 71.1 76.6 93.9 99.7
Y-o-Y growth (%) 7.4 7.7 22.6 6.2
CEPS (INR) 109.4 114.8 139.4 151.0
Diluted PE (x) 14.1 13.1 10.7 10.0
Price/BV (x) 1.6 1.4 1.3 1.2
EV/EBITDA (x) 9.8 9.9 7.8 7.1
Dividend yield (%) 0.9 0.9 1.0 1.1
Balance sheet (INR mn)
As on 31st March FY13 FY14 FY15E FY16E
Equity capital 29,610 29,610 29,610 29,610
Reserves & surplus 1,790,940 1,999,914 2,241,154 2,496,189
Shareholders funds 1,820,550 2,029,524 2,270,764 2,525,799
Minority interest (BS) 9,490 8,610 9,076 9,671
Short term debt 362,480 296,339 301,839 304,339
Long term debt 709,600 1,221,980 1,310,349 1,380,229
Borrowings 1,072,080 1,518,318 1,612,188 1,684,568
Deferred tax liability 115,880 116,029 114,779 113,882
Sources of funds 3,018,000 3,672,481 4,006,807 4,333,920
Tangible assets 987,150 1,357,574 1,581,925 1,956,490
Intangible assets 347,720 411,347 418,963 564,619
CWIP (incl. intangible) 499,520 504,426 578,724 349,738
Total net fixed assets 1,834,390 2,273,347 2,579,613 2,870,847
Non current investments 139,790 85,870 2,730 2,730
Current Investments 288,690 285,100 285,100 285,100
Cash and equivalents 504,560 742,593 893,270 999,598
Inventories 546,010 556,720 552,994 566,913
Sundry debtors 97,500 90,936 141,471 143,635
Loans and advances 194,800 308,679 254,171 218,039
Other current assets 17,830 66,868 76,002 86,818
Total current assets 1,360,700 1,765,797 1,917,908 2,015,003
Trade payable 497,000 552,764 538,598 543,774
Others current liabilities 108,570 184,868 239,946 295,987
Total current liabilities &
605,570 737,632 778,544 839,761
Net current assets (ex cash) 250,570 285,571 246,094 175,645
Uses of funds 3,018,000 3,672,481 4,006,807 4,333,920
Book value per share (INR) 620.0 691.2 773.3 860.2
Free cash flow (INR mn)
Year to March FY13 FY14 FY15E FY16E
Net profit 208,790 224,930 275,683 292,771
Depreciation 112,320 112,008 134,879 151,455
Deferred tax 40 199 (1,251) (896)
Others (25,200) (49,133) (50,685) (54,982)
Gross cash flow 295,950 288,004 358,626 388,347
Less: Changes in WC (73,720) 35,001 (39,477) (70,449)
Operating cash flow 369,670 253,003 398,103 458,796
Less: Capex 307,260 559,173 440,840 440,330
Free cash flow 62,410 (306,170) (42,737) 18,467
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Edelweiss Securities Limited
Reliance Industries
Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
*in last one year
Bulk Deals
Data Acquired / Seller B/S Qty Traded Price
No Data Available
*in last one year
Holding Top10
Perc. Holding Perc. Holding
Life insurance corp 8.15 Kankhal inves & trad 4.59
Bhuvanesh enterprise 4.16 Badri commercials ll 3.93
Ajitesh enterprises 3.93 Trilokesh commercial 3.85
Abhayaprada enterpri 3.85 Petroleum trust 3.73
Farm enterprises ltd 3.68 Taran enterprises ll 3.29
*in last one year
Additional Data
Directors Data
Mukesh D Ambani Chairman and Managing Director P M S Prasad Executive Director
Pawan Kumar Kapil Executive Director Hital R Meswani Executive Director
Nikhil R Meswani Executive Director Mahesh P Modi Non Executive Director
Mansingh L Bhakta Non Executive Director Ramniklal H Ambani Non Executive Director
Raghunath A Mashelkar Non Executive Director Dharam Vir Kapur Non Executive Director
Dipak C Jain Non Executive Director Yogendra P Trivedi Non Executive Director
Ashok Misra Non Executive Director
Auditors - Chaturvedi & Shah, Deloitte Haskins & Sells, Rajendra & Co
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Oil, Gas and Services
THIS PAGE IS INTENTIONALLY LEFT BLANK
Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
Edelweiss Securities Limited
Solar Industries (SIL), market leader in the domestic industrial explosives
segment and largest Indian exporter, is poised to sustain its fast-paced
growth riding its leadership position and high entry barriers in explosive
industry. The company commands 30% market share in domestic
explosive segment and 57% market share in the explosive exports
market. A combination of superior product range, entry in defence
sector, diversification in newer geographies/products and increase in
mining activities should spur growth over coming years. Maintain HOLD
To reap benefits of indigenisation of defence products
SIL is entering the defence segment to supply propellants and HMX to government
entities and will replace the imports going forward. The project is likely to commence
in Q4FY15/Q1FY16 and to be completed at a cost of INR2.2bn. This project is expected
to garner revenue of ~INR8bn/p.a. at full capacity. SIL is expected to generate revenue
of INR0.5-1bn, 1.5bn-2bn in FY15E/FY16E.
Diversified product portfolio catering to explosive value chain
Despite being a late entrant in the Indian explosives industry, over the years, SIL has
become the leader by catering to the entire mining value chain with a diversified
product range. Demand shift from unorganised segments, superior off-take by
infrastructure & mining sectors and better exports to existing/newer market are likely
to propel growth going forward.
Outlook and valuations: On growth path; maintain HOLD
We believe that pick up in mining /infrastructure activity, better export and defence
projects will put SIL into superior growth trajectory. We believe SIL is likely to post
sales/PAT CAGR of over 25%/30% in next two three years. However, we believe that
the stock is trading at peak valuations (traded at P/E of 5-15x during FY08-14) post
recent run up. Hence, we believe upside remains limited in near term. We maintain
HOLD with target price of INR1,632 based on 15x FY16E, EPS. We continue to be
positive on the stock over the long term.
COMPANY UPDATE
SOLAR INDUSTRIES
Scorching head
EDELWEISS RATINGS
Absolute Rating HOLD
Investment Characteristics Growth
MARKET DATA (R: SLIN.BO, B: SOIL IN)
CMP : INR 2,041
Target Price : INR 1,632
52-week range (INR) : 2,250 / 735
Share in issue (mn) : 18.1
M cap (INR bn/USD mn) : 37 / 617
Avg. Daily Vol. BSE/NSE (000) : 15.7
SHARE HOLDING PATTERN (%)
Current Q3FY14 Q2FY14
Promoters *
72.8 72.7 72.1
MF's, FI's & BKs
18.1 18.3 18.7
FII's 1.2 1.2 1.2
Others 8.0 7.8 8.0
* Promoters pledged shares
(% of share in issue)
: NIL
PRICE PERFORMANCE (%)
BSE Midcap
Index
Stock
Stock over
Index
1 month 7.7 28.4 20.8
3 months 32.6 121.9 89.3
12 months 59.6 116.4 56.8
Manish Mahawar
+91 22 6623 3481
manish.mahawar@edelweissfin.com
Manoj Bahety, CFA
+91 22 6623 3362
manoj.bahety@edelweissfin.com
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India Equity Research| Miscellaneous
July 9, 2014
Financials
Year to March FY13 FY14 FY15E FY16E
Net revenues (INR mn) 11,218 11,330 14,062 17,365
Revenue growth (%) 15.9 1.0 24.1 23.5
EBITDA (INR mn) 1,905 2,030 2,619 3,296
Net profit (INR mn) 1,268 1,284 1,498 1,969
Share outstanding (mn) 18 18 18 18
EPS (INR) 70.1 70.9 82.8 108.8
EPS growth (%) 23.8 1.3 16.6 31.5
P/E (x) 29.1 28.8 24.7 18.8
EV/EBITDA (x) 20.7 19.8 15.3 12.0
ROAE (%) 25.9 20.8 20.7 22.7
Miscellaneous
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Company Description
Founded in 1984, SIIL (erstwhile Solar Explosives) is the largest manufacturer of industrial
explosives and explosive initiating systems in India. With a licensed explosives capacity of
over 250,000 MT/annum, the company has ~27% market share in India. It is the largest
supplier of explosives to Coal India and exports to over 20 countries in Middle-East, Africa
and South East Asia, with ~65% market share in exports from India.
SIIL has manufacturing facilities spread across 16 locations and eight states in India.
Economic Explosives, its 100% subsidiary, manufactures detonators. During FY11, SIIL
expanded its manufacturing base to Nigeria, Zambia and Turkey by partnering with local
trading companies. At FY12 end, SIIL has 55% stake in Nigachem Nigeria, 65% in Solar
Explochem Zambia and 74.5% in Turkish company ILCI Patlayici Maddeler Sanayi ve Ticaret
A.S.
Key top management personnel include Mr. Satyanarayan Nuwal (Chairman), Mr.
Kailashchandra Nuwal (Executive Director), Mr. Kundan Singh Talesra (Executive Director),
Mr. Roomie Dara Vakil (Executive Director), Mr. Manish Nuwal (Executive Director) and Mr.
Nilesh Panpaliya (CFO).
Investment Theme
Solar Industries is a market leader in the high entry barrier Indian industrial explosives
market with 27% market share in FY12. The company has grown its domestic revenue at an
impressive CAGR of 28% over FY06-12, which resulted in the surge of its market share from
10% in FY06 and during the same period, the profit surged at 30% CAGR. We expect the
company to continue growing at a strong pace of 20-21% over FY13-14 on the back of
domestic explosive growth, exports and expansion of overseas manufacturing operations.
The stake in the 2 coal mines might provide additional upside (which we are not considering
currently) and the defence project which is likely to be commissioned in H2FY15 (ROCEs of
over 40% envisaged in this project) is likely to provide the next phase of exponential growth
for Solar Industries.
Key Risks
Slow down in mining and infrastructure sectors
Regulatory risk - Explosives industry is heavily regulated by the government. Any adverse
change in these regulations may impact the companys operations.
Volatility of raw material prices may impact the companys profitability.
High dependence on limited number of buyers - Over the years, while SIIL has been
widening its customer base, even currently the top three customers contribute over 30% to
the companys revenue.
Any delay in overseas expansion or in defence venture
USD/INR volatility may impact export revenues as well as margins
Solar Industries
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Financial Statements
Income statement (INR mn)
Year to March FY13 FY14 FY15E FY16E
Net revenue 11,218 11,330 14,062 17,365
Materials costs 6,501 5,908 7,435 9,138
Gross profit 4,717 5,422 6,627 8,227
Employee costs 550 673 633 764
Other Expenses 2,262 2,719 3,375 4,168
EBITDA 1,905 2,030 2,619 3,296
Depreciation and amortisation 170 219 273 315
EBIT 1,735 1,811 2,346 2,980
Other income 200 112 150 200
Interest expenses 309 179 288 288
Profit before tax 1,626 1,744 2,208 2,893
Provision for tax 257 349 552 723
Net profit 1,369 1,395 1,656 2,169
Extraordinary income/ (loss) (100) (100) - -
Profit After Tax 1,269 1,295 1,656 2,169
Minority interest 101 111 158 200
Profit after minority interest 1,168 1,184 1,498 1,969
Shares outstanding (mn) 18 18 18 18
Diluted EPS (INR) 70.1 70.9 82.8 108.8
CEPS (INR) 79.5 83.0 97.9 126.2
Dividend per share (INR) 11.0 12.0 13.0 15.0
Dividend payout (%) 15.7 16.9 15.7 13.8
Common size metrics
Year to March FY13 FY14 FY15E FY16E
Gross margin 42.0 47.9 47.1 47.4
EBITDA margins 17.0 17.9 18.6 19.0
EBIT margins 15.5 16.0 16.7 17.2
Net profit margins 11.3 11.3 10.7 11.3
Growth ratios (%)
Year to March FY13 FY14 FY15E FY16E
Revenues 15.9 1.0 24.1 23.5
EBITDA 11.4 6.6 29.0 25.8
Net profit 29.3 1.3 16.6 31.5
EPS 23.8 1.3 16.6 31.5
Key Assumptions
Year to March FY13 FY14 FY15E FY16E
Macro
GDP(Y-o-Y %) 5.0 4.8 5.4 6.3
Inflation (Avg) 7.4 6.2 5.5 6.0
Repo rate (exit rate) 7.5 8.0 7.8 7.3
USD/INR (Avg) 54.5 60.5 58.0 56.0
Company
Raw Material Cost as % Net Revenue 58.0 52.1 52.9 52.6
Manufacturing expenses % sales 4.5 4.3 4.3 4.3
Employee cost as % of sales 4.9 4.6 4.5 4.4
Average Interest rate (%) 9.5 4.5 6.5 6.5
Average Depreciation rate (%) 4.3 4.2 4.2 4.2
Tax rate (%) 16.9 21.2 25.0 25.0
Bulk explosives volume growth (%) 20.4 (6.4) 17.8 28.9
Cartridge explosives volume growth (%) 19.9 (9.0) 16.6 11.9
Bulk explosive realisation (INR MT) 33,666 35,548 37,325 37,325
Cartridge explosives realisation (INR MT) 53,959 58,131 61,038 61,038
Capex (INR mn) 1,121 1,608 1,000 1,000
Debtor days 48 55 51 51
Inventory days 74 89 75 68
Payable days 73 93 86 75
Cash conversion cycle (days) 49 51 40 44
Miscellaneous
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Peer comparison valuation
Market cap Diluted PE (X) EV/EBITDA (X) ROAE (%)
Name (USD mn) FY15E FY16E FY15E FY16E FY15E FY16E
Solar Industries 617 24.7 18.8 15.3 12.0 20.7 22.7
Anhui Jiangnan Chemical Industry Co Ltd 676 11.5 9.9 - - 13.1 14.1
Guizhou Jiulian Industrial Explosive
550 11.7 9.5 - - 13.7 14.9
Hunan Nanling Industry Explosive
597 - - - - - -
Orica Ltd 7,132 11.4 7.4 15.4
Median - 11.5 9.9 - - 13.7 14.9
AVERAGE - 11.8 9.5 4.5 3.0 12.6 12.9
Source: Edelweiss research
Cash flow metrics
Year to March FY13 FY14 FY15E FY16E
Operating cash flow 1,272 1,978 1,781 1,945
Investing cash flow (1,288) (1,249) (850) (800)
Financing cash flow 752 449 (563) (605)
Net cash flow 736 1,179 368 539
Capex (1,121) (1,608) (1,000) (1,000)
Dividends paid (199) (217) (235) (271)
Profitability & efficiency ratios
Year to March FY13 FY14 FY15E FY16E
ROAE (%) 25.9 20.8 20.7 22.7
ROACE (%) 20.1 16.9 19.1 21.4
ROA 15.7 12.9 13.4 15.5
Current ratio 5.6 4.2 4.9 4.7
Debt/EBITDA 1.9 2.2 1.7 1.3
Debt/Equity 0.6 0.7 0.6 0.5
Operating ratios
Year to March FY13 FY14 FY15E FY16E
Total asset turnover 1.3 1.1 1.1 1.2
Fixed asset turnover 2.9 2.3 2.3 2.6
Equity turnover 2.3 1.8 1.9 2.0
Valuation parameters
Year to March FY13 FY14 FY15E FY16E
Diluted EPS (INR) 70.1 70.9 82.8 108.8
Y-o-Y growth (%) 23.8 1.3 16.6 31.5
CEPS (INR) 79.5 83.0 97.9 126.2
Diluted PE (x) 29.1 28.8 24.7 18.8
Price/BV (x) 6.4 5.6 4.7 3.9
EV/Sales (x) 3.5 3.5 2.8 2.3
EV/EBITDA (x) 20.8 19.8 15.3 12.0
Dividend yield (%) 0.5 0.6 0.6 0.7
Market Capitalisation 36,931 36,931 36,931 36,931
Balance sheet (INR mn)
As on 31st March FY13 FY14 FY15E FY16E
Equity capital 181 181 181 181
Reserves & surplus 5,546 6,435 7,657 9,309
Shareholders funds 5,727 6,616 7,838 9,490
Minority interest (BS) 405 381 539 740
Short term debt 2,873 2,904 2,904 2,904
Long term debt 673 1,524 1,524 1,524
Borrowings 3,545 4,427 4,427 4,427
Deferred revenue 207 270 270 270
Sources of funds 9,885 11,695 13,075 14,927
Tangible assets 3,658 5,039 5,766 6,450
Intangible assets 48 48 48 48
CWIP (incl. intangible) 624 632 632 632
Total net fixed assets 4,331 5,719 6,446 7,130
Non current investments 95 105 105 105
Current Investments 394 147 147 147
Cash and equivalents 922 1,330 1,698 2,237
Inventories 1,361 1,528 1,528 1,878
Sundry debtors 1,559 1,853 2,094 2,741
Loans and advances 1,448 1,425 1,325 1,325
Other current assets 969 1,417 1,417 1,417
Total current assets (ex cash) 5,732 6,371 6,511 7,508
Trade payable 231 385 1,528 1,878
Others current liabilities 964 1,445 156 175
Total current liabilities &
1,195 1,831 1,684 2,052
Net current assets (ex cash) 4,537 4,540 4,827 5,455
Uses of funds 9,885 11,695 13,075 14,927
Book value per share (INR) 316.4 365.6 433.1 524.3
Free cash flow (INR mn)
Year to March FY13 FY14 FY15E FY16E
Net profit 1,168 1,184 1,498 1,969
Depreciation 170 219 273 315
Others 406 377 296 288
Gross cash flow 1,744 1,780 2,067 2,573
Less: Changes in WC 472 (198) 287 628
Operating cash flow 1,272 1,978 1,781 1,945
Less: Capex 1,121 1,608 1,000 1,000
Free cash flow 151 371 781 945
Solar Industries
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Holding Top -10
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OMAN india Joint Inv Fund 4.28 SBI Funds Management 0.70
ICICI Pru Life Insurance 3.76 Prudential ICICI Asset Management 0.61
Birla Sunlife Asset Management 2.16 Kotak Mahindra 0.51
DSP Blackrock Investment Manager 1.43 Canara Robeco 0.20
*as per last available data
Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
18 Dec 2013 Shri Satyanarayan Nuwal Buy 16723.00
18 Dec 2013 Shri Satyanarayan Nuwal Buy 16723.00
*as per last available data
Bulk Deals
Data Acquired / Seller B/S Qty Traded Price
No Data Available
*as per last available data
Additional Data
Directors Data
Satyanarayan Nuwal Chairman & Executive Director Kailashchandra Nuwal Executive Director
Manish Nuwal Executive Director Kundan Singh Talesra Executive Director
Roomie Dara Vakil Executive Director Anant Sagar Awasthi Non-Executive Independent Director
Satish Chander Gupta Non-Executive Independent Director Dilip Patel Non-Executive Independent Director
Ajai Nigam Non-Executive Independent Director Amrendra Verma Non-Executive Independent Director
Auditors - M/s Gandhi Rathi & Co.
*as per last available data
Miscellaneous
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Edelweiss Securities Limited
As India pushes ahead with massive arms purchase programme to
modernise its armed forces, the Tata Group has further fortified its
presence in the defence space. The group's strong interest in the defence
sector is evident from Tata Power's Strategic Engineering Division (TPC
SED), which is engaged in a number of defence ministry projects,
including the nuclear-powered INS Arihant submarine and launchers for
Pinaka rockets. While Tata Motors (TML) supplies trucks to the Indian
Army, Tata Advanced System (TASL) has joint ventures (JVs) with a
number of overseas equipment manufacturers, such as helicopter maker
Sikorsky, Lockheed Martin and Israel's Elta Systems. The company has
also bid for couple of defence ministry projects such as future infantry
combat vehicles and high-performance trucks. Chairman, Mr. Cyrus
Mistrys strategy is to increase the Tata Groups footprint in the sectors
opened up by the government, namely, defence and aerospace.
Tata Advanced System: The lynchpin of defence business
TASL is a lead systems integrator and fully-owned subsidiary of Tata Sons, a holding
company for Tata Group. Through technology development, transfer and research, it is
engaged in providing diverse range of solutions related to defence, homeland security
and disaster management.
Tata Power SED: Centre for excellence in strategic electronics
TPC SED is a leading private sector player in indigenous design, development,
production, integration, supply and lifecycle support of mission-critical defence
systems of strategic importance. It has partnered the MoD, armed forces, DPSUs and
DRDOs in the development and supply of state-of-the-art systems and emerged a
prime contractor to the MoD for indigenous defence production (Pinaka multi-barrel
rocket launcher, Akash army launcher, etc).
Tata Motors: Consolidating position through constant innovations
TMLs tactical vehicles are designed to support tactical manoeuvre of combat
operations. The vehicles are beefed up with armoured personnel carriers, 6x6 and 8x8
platforms and much more.
Tata Advanced Materials: Leader in personnel armour products
Tata Advanced Materials (TAML) is engaged in designing, manufacturing and supply of
composite products for aerospace, defence, transportation and infrastructure sectors.
It is the largest manufacturer of personnel armour products in India and the only
domestic manufacturer and exporter of composite parts for spacecraft and aircraft.
TATA GROUP
Rich assorted play
India Equity Research| Defence
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Tata Advanced Materials: Leader in personnel
armour products
Introduction
TAML was incorporated in 1989 and started commercial production in 1993. It is a Tata
group company promoted by Tata Industries (99.9% stake), and is into the business of
polymer-based fibre composites which find use in aerospace and defence-related industries.
TAML is engaged in design, manufacture and supply of composite products for aerospace,
armour, transportation and infrastructure sectors. Its manufacturing facilities are located at
the Jigani industrial area, Bangalore, spread over an area of 16 acres.
It is the largest manufacturer of personnel armour products in India and the only Indian
manufacturer and exporter of composite parts for spacecraft and aircraft. Currently, TAML
partners in enhancing defence, paramilitary and police mobility in the SAARC and ASEAN
regions and Africa. The companys focus has been on nation-building and offers personal
armour manufacturing bullet proof jackets (BPJ), bullet proof helmets (BPH) and associated
solutions.
MoU with UK-based Strongfield Technologies for offset contracts
TAML had signed a Memorandum of Understanding (MoU) with the UK-based Strongfield
Technologies (STL), which is a specialist manufacturer and supplier of high-tech components
and equipment for defence and space applications and a provider of engineering, design
and consultancy support. STL intends to involve TAML in Indias defence industry with
respect to the offset requirements of the Indian governments acquisition program, namely
pilotless target aircraft.
Areas of business: Aerospace, defence, industrial composite
TAML has two business divisions: Aerospace and defence & industrial composite (DICD).
Aerospace division
The division is engaged in the design, manufacture and supply of composite components,
parts, sub-assemblies for application in aircraft, space and helicopters. It offers complete
end-to-end solutions from concept to product in composites. Its offerings include:
Design and analysis
Tool design and manufacturing
Manufacturing of composite components
Material testing and characterisation
The companys state-of-the-art facility located at Jigani, Bengaluru with infrastructure
(280,000 sq ft) of manufacturing area backed by critical process equipment. TAML caters to
the needs of commercial, military segments in space, helicopter and aircraft industries. The
company signed long-term contracts (worth ~USD85mn) with FACC, Austria on September
23, 2009 to manufacture composite parts for commercial aircraft engine programs. The
capability growth plan being pursued is backed by the Tata Groups strategic growth focus
on the aerospace segment.
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Current offerings of the division include:
Aircraft Structural parts like control surfaces, wing parts, fuselage panels, radome,
interior parts, fairings (monolithic and sandwich).
Helicopters Structural parts like control surfaces, floor panels, cabins, rotary wings.
Space vehicles Structural parts.
Some esteemed customers include: HAL, Pratt & Whitney, Boeing, Goodrich and Vikram
Sarabhai Space Centre.
Defence and industrial division
The DICD segment is engaged in the manufacture of armour products such as bulletproof
jackets, helmets and armoured panels for battle tanks, vehicles and special applications.
TAML was the first company in India to develop light-weight bullet proof jackets in close co-
ordination with the Indian Army that could not only stop AK 47 and SLR bullets, but also the
DRAGUNOV sniper rifle bullets. The company secured its first order for light-weight bullet
proof jackets from the Indian Army. TAML has this far supplied more than 160,000 light-
weight bullet resistant jackets to the Indian armed forces and more than 200,000 jackets,
50,000 bullet resistant helmets to the Indian and overseas defence and police forces
making it Indias largest supplier of body armour.
TAML has also developed products for medical, wind energy and electrical power industries
using its design knowledge in composites. Some of the products developed include:
Cradle pads for MR scanners (GE Med Systems)
MR coils for MR scanners (GE Med Systems)
Composite discs for wind turbines (RRB Vestas)
Various offerings
Fig. 1: Composites for missiles Fig. 2: Commando /tactical vests and jackets Fig. 3: Floatation jackets for naval force
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Fig. 4: Bullet-proof headgears Fig. 5: Ultra light weight headgears Fig. 6: Ballistic barriers
Source: Company
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Tata Advanced Systems: Lynchpin of defence business
Introduction
TASL is an India-based lead systems integrator and manufacturer of critical defence
technologies. A fully-owned subsidiary of Tata Sons, it is the holding company of the Tata
Group. Through technology development, transfer and research, it provides diverse range of
solutions related to defence, homeland security and disaster management. With its strong
partnerships with global the OEMs and Indian defence agencies and proven track record of
successful execution , TASL has firmly established itself as one of Indias leading aerospace
and defence companies in the private sector. The company's business activities are classified
into four reportable segments, namely defence, homeland security, disaster management
and offset business. TASL principally focuses on network centric warfare, aerospace and
avionics, electronic and information warfare, precision technologies, surveillance
technologies, unmanned aerial vehicles (UAVs) and marine applications. The company
operates from its centres in Hyderabad, Bangalore, Pune, Navi Mumbai and Jamshedpur. It
is headquartered in New Delhi.
Fig. 1: Structure of subsidiaries and joint ventures
Source: Company
Tara
Aerospace
Systems
Avana
Integrated
Systemss
Hela
Systems
Pvt. Limited
Nova
Integrated
Systems
Tata Lockheed
Martin
Aerostructures
Tata
Advanced
Systems
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Fig. 2: Seven strategic areas of operation
Source: Company, Edelweiss research
Missile parts assembly
Missile command control systems
Development centre for indigenising missile subsystems
Complete radar integration and supply opportunities
TR module manufacturing (joint venture (JV) with Elta)
Land systems
Maritime systems
Structural assembly of S-92 helicopter cabin assembly including wire
harness installation
Structural assembly of C130J empennage & centre wing assembly box
Mini and micro UAVs
Night vision devices (Gen 3 image intensifier-based devices)
EO payloads assembly, integration and testing
Critical asset protection for companies in automotive,
chemicals and steel sector
Missile systems and
sub systems
Radar systems and
sub systems
Command and
control systems
Aerospace and
Aero structures
Unmanned
Aerial systems
Optronic
systems
Homeland
security solutions
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Fig. 3: Infrastructure facility at Hyderabad plant
Source: Company
Aerospace: Towards becoming global supplier of choice
The Tata Group has identified aerospace as an area of strategic importance, and TASL has
been developed as a lead entity to achieve the groups interests. In a short span of time,
TASL has emerged a leading player with established capabilities and delivered programs for
leading global aerospace OEMs. With three programs operational and more than 1,500
trained resources, TASL is on its way to become a global supplier of choice to the aerospace
OEMs. The companys vision is to develop capabilities across the aerospace value chain
including design, engineering, detailed part manufacturing, major structural assembly,
maintenance and service life extension. Leading OEMs have forged strategic relationships
with TASL. The TASL Sikorsky JV has set up a world-class end-to-end detailed parts
manufacturing facility, while the TASL - Lockheed Martin JV is assembling structures for the
famous C-130J aircraft.
JVs with Sikorsky, Lockheed Martin and AGT International
TASL entered into a JV with Sikorsky Aircraft Corporation to manufacture Sikorsky S-92
helicopters cabin assembly and detailed parts manufacturing for S-92 cabin in India for the
domestic civil and military markets. It invested USD200mn in setting up the manufacturing
plant in Hyderabad. The first S-92 cabin was delivered in November 2010 and by end-May
2014, assembly of 70 cabins was completed. TASL now has capacity to manufacture up to
four cabins a month and is responsible for future design modifications. The JV with Sikorsky
has been expanded to include development of aerospace components for other OEMs. This
is done at its Tara facility in Hyderabad.
TASL has developed as a lead
entity to achieve Tata Groups
interest in aerospace business.
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Fig. 4: Assembly line and wire harness installed facility for S-92 helicopters
Source: Company
TASL announced its JV with Lockheed Martin in February 2011. The JV will build aero-
structures for C-130 Hercules and C-130J Super Hercules in India. This 74:26 JV currently
assembles center wing boxes (CWB) and empennage (horizontal and vertical stabilisers).
As per the company, there exists export potential of USD200mn over a period of five years.
TASL delivered the first C-130 center wing box to Lockheed Martin in August 2012.
TASL announced its JV with AGT International called AVANA Integrated Systems in July
2010 to provide integrated solutions to the emerging homeland security market.
TASL recently entered into partnership with RUAG for Dornier 228
In yet another step towards manufacturing 100% indigenised aircraft, in June 2014 TASL
entered into a new partnership with RUAG Aviation (Switzerland) to manufacture fuselages
and wings for the Dornier 228 aircraft. This is the fourth such partnership that TASL has
entered in the aerospace sector. The facility will be set up in Hyderabad.
UAVs, an area of strategic interest
TASL is bidding to develop and build (UAV) (drones) for the Indian armed forces for
surveillance. The company has agreements with the Israel Aircraft Industries (IAI) and Urban
Aeronautics (Israel) for cooperation and co-development of UAVs in India. UAV is one of
TASLs strategic areas of interest. The company has set up a design, development and
production facility to manufacture a range of mini UAVs from systems having basic
surveillance capabilities weighing few hundred grams to larger models that have advanced
intelligence, surveillance, target acquisition and reconnaissance (ISTAR) capabilities.
Nova Integrated Systems: Designs lifecycle support of military
equipment
Nova Integrated Systems (NISL), a fully-owned subsidiary of TASL, is a strategic initiative of
the Tata Group in the aerospace and defence sectors. It is engaged in the design,
development, manufacture, integration and lifecycle support of military equipment. It
provides customised technical solutions to Indian defence, paramilitary forces, civilian
requirements, international OEMs and system integrators. NISL has regulatory licences for
design and manufacture of radar systems, missile systems, UAVs and electro optic systems
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and sensors. It is qualified to be a prime partner to OEMs aiming at Indian procurement
programs as per the Indian defence procurement procedure (DPP), 2013.
Hela Systems: Complete solution for avionics, EW, radar systems
Hela Systems Private Limited is a JV between TASL and ELTA Systems, Israel, for defence
electronics development and manufacturing in India. Combining ELTA's state-of-the-art
technologies with TASL's experience and resources, HELA Systems provides solutions to the
Indian defence forces in radar, communications, electronic warfare, homeland and
surveillance systems.
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Edelweiss Securities Limited
A subsidiary of Tata Consultancy Services (TCS), a leading global
information technology consulting services and business process
outsourcing organisation, CMC is part of the Tata Group, one of the
India's best known business conglomerates. It is among leading systems
engineering and integration players in India, offering application design,
development, testing services and asset-based solutions in niche
segments through turnkey projects of national importance. The company
has developed cutting edge systems for the Indian defence forces,
helping them prepare for warfare in future. Maintain BUY.
Frontrunner in providing IT solutions and services
CMC executes large and complex turnkey projects and has built, managed and
supported customers' IT systems across the value chain of infrastructure, applications
and business processes. It is involved in developing defence applications since the late
1980s and its engagement with the Indian defence force has widened and deepened
over the years.
Caters to all the three wings of Indian defence
CMC provides solutions for futuristic automatic data handling system (FADHS) which is
a real-time command and control system for air defence applications. It also provides
solutions for vehicle electronics data acquisition system (VEDAS) which is a real-time
vehicle sensory system which continuously monitors health of all combat vehicles (such
as armoured vehicles and battle tanks in a battalion. It also provides solutions for end-
to-end online integrated system for defence production factories at OFBs.
Outlook and valuations: Positive; maintain BUY
We expect domestic IT spending to surge in the coming quarters, riding increased focus
on e-governance and in the defense sector. CMC with its domain expertise will be one
of the key beneficiaries of the same. We maintain BUY/Sector Outperformer
rating/recommendation on the stock.
COMPANY UPDATE
CMC
Solution provider par excellence
EDELWEISS 4D RATINGS
Absolute Rating BUY
Rating Relative to Sector Outperformer
Risk Rating Relative to Sector Low
Sector Relative to Market Underweight
MARKET DATA (R: CMC.BO, B: CMC IN)
CMP : INR 1978
Target Price : INR 1970
52-week range (INR) : 2,119 / 1,091
Share in issue (mn) : 30.3
M cap (INR bn/USD mn) : 60/ 1,005
Avg. Daily Vol.BSE/NSE(000) : 40.2
SHARE HOLDING PATTERN (%)
Current Q3FY14 Q2FY14
Promoters *
51.1 51.1 51.1
MF's, FI's & BKs 17.1 17.7 18.3
FII's 21.8 22.5 22.6
Others 9.9 8.7 8.0
* Promoters pledged shares
(% of share in issue)
: NIL
PRICE PERFORMANCE (%)
Stock Nifty
EW
Technology
Index
1 month 26.3 4.7 11.6
3 months 34.9 15.8 4.9
12 months 50.3 32.8 49.1
Sandip Agarwal
+91 22 6623 3474
sandip.agarwal@edelweissfin.com
Omkar Hadkar
+91 22 6620 3147
omkar.hadkar@edelweissfin.com
India Equity Research| IT
July 9, 2014
Financials (INR mn)
Year to March
FY13 FY14E FY15E FY16E
Net revenue 19,279 22,309 28,666 34,114
Revenues 31.2 15.7 28.5 19.0
EBITDA 3,168 3,887 5,061 5,766
Net profit 2,302 2,798 3,672 4,262
Shares outstanding (mn) 30 30 30 30
Diluted EPS (INR) 76.0 92.3 121.2 140.6
EPS 51.6 21.5 31.3 16.0
Diluted PE (x) 26.0 21.4 16.3 14.0
EV/EBITDA (x) 18.2 15.0 11.5 9.8
ROAE (%) 26.8 27.1 29.6 28.1
IT
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Company Description
CMC was incorporated on December 26, 1975, as Computer Maintenance Corporation.
Government of India held 100% of equity share capital. On August 19, 1977, it was
converted into a public limited company. In 1978, when IBM wound up its operations in
India, CMC took over the maintenance of IBMs installations at over 800 locations around
India, and subsequently, maintenance of computers supplied by other foreign
manufacturers as well. In 1992, the Indian government divested 16.69% of CMC's equity to
the General Insurance Corporation of India and its subsidiaries, who, in turn, sold part of
their stake to the public in 1996. In 1993, the companys shares were listed on the
Hyderabad Stock Exchange and the Bombay Stock Exchange (BSE). The following year,
government divested 51% of CMC's equity to Tata Sons through a strategic sale and the
company became part of the Tata Group. In 2004, the government divested its balance
26.5% stake in CMC to the public.
Investment Theme
CMCs unique solutions approach in the System integration space along with focus in the hi-
tech space has enabled it post robust growth in an uncertain environment and also ensures
revenue stickiness for future. The company has been working for last several years with
TRW a large automotive electronic player primarily due to its unique domain capabilities
and hi-tech approach. We believe that like other successful mid cap focused players CMCs
expertise has been the hi-tech space where competition has been limited which has enabled
significant revenue and client stickiness. The above solutions and technology approach
along with TCS parentage provides it with all advantages of a large player (inspite of being a
small player) right from capabilities to offer services across geographies to a large balance
sheet required to participate in huge projects like the Indian passport project
Key Risks
Delay in government spending could impact performance
Sensitivity to currency movement
A stiffer protectionist policy in US
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CMC
Financial Statements
Income statement (INR mn)
Year to March FY13 FY14 FY15E FY16E
Net revenue 19,279 22,309 28,666 34,114
Direct costs 1,868 2,020 2,131 2,195
Employee costs 5,216 5,547 8,241 10,386
Subcontracting costs 6,797 8,879 9,913 11,845
Other Expenses 2,229 1,977 3,320 3,923
Total operating expenses 16,110 18,422 23,605 28,348
EBITDA 3,168 3,887 5,061 5,766
Depreciation & Amortization 232 270 487 487
EBIT 2,936 3,617 4,575 5,279
Other income 132 250 180 180
Interest expenses 2 1 - -
Profit before tax 3,066 3,867 4,755 5,459
Provision for tax 764 1,069 1,082 1,198
Net profit 2,302 2,798 3,672 4,262
Profit After Tax 2,302 2,798 3,672 4,262
Profit after minority interest 2,302 2,798 3,672 4,262
Basic EPS (INR) 76.0 92.3 121.2 140.6
Shares outstanding (mn) 30 30 30 30
Diluted EPS (INR) 76.0 92.3 121.2 140.6
CEPS (INR) 83.6 101.2 137.3 156.7
Dividend per share (INR) 17.5 30.0 35.0 35.0
Dividend payout (%) 23.0 32.5 28.9 51.1
Common size metrics
Year to March FY13 FY14 FY15E FY16E
Direct material cost 9.7 9.1 7.4 6.4
Employee expenses 27.1 24.9 28.7 30.4
Subcontracting costs 35.3 39.8 34.6 34.7
EBITDA margins 16.4 17.4 17.7 16.9
EBIT margins 15.2 16.2 16.0 15.5
Net profit margins 11.9 12.5 12.8 12.5
Growth ratios (%)
Year to March FY13 FY14 FY15E FY16E
Revenues 31.2 15.7 28.5 19.0
EBITDA 41.2 22.7 30.2 13.9
EBIT 44.7 23.2 26.5 15.4
PBT 39.1 26.1 23.0 14.8
Net profit 51.6 21.5 31.3 16.0
EPS 51.6 21.5 31.3 16.0
Key Assumptions
Year to March FY13 FY14E FY15E FY16E
Macro
GDP(Y-o-Y %) 5.0 4.8 5.4 6.3
Inflation (Avg) 7.4 6.2 5.5 6.0
Repo rate (exit rate) 7.5 8.0 7.3 7.0
USD/INR (Avg) 54.5 61.0 60.0 58.0
Company
Segment growth (YoY)
Customer Services (%) 19.7 19.7 3.0 3.0
Systems Integration (%) 35.0 35.0 18.0 25.0
IT enabled services (%) 33.4 33.4 20.0 15.0
Education and Training (%) 1.3 1.3 10.0 15.0
Cost assumptions - - - 1
Materials costs (%) 9.7 9.1 7.4 6.4
Staff costs (%) 27.1 24.9 28.7 30.4
Sub contracting cost (%) 35.3 39.8 34.6 34.7
Financial assumptions - - - 1
Capex (INR mn) 847 2,300 1,400 1,450
Debtor days 76 79 80 83
Payable days 52 57 58 59
Cash conversion cycle (days) 50 57 70 77
Depreciation as % of gross block 6.1 5.0 6.4 5.4
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IT
Peer comparison valuation
Market cap Diluted PE (X) EV/EBITDA (X) ROAE (%)
Name (USD mn) FY15E FY16E FY15E FY16E FY15E FY16E
CMC 1,005 16.3 14.0 11.5 9.8 29.6 28.1
Cyient - 10.0 8.4 5.8 4.6 22.2 22.2
ECLERX SERVICES 620 13.3 11.4 8.5 7.4 45.7 44.4
HCL Technologies 17,278 16.1 14.8 10.6 9.2 29.3 25.6
Hexaware Technologies 738 13.0 11.0 8.2 7.2 26.3 26.8
Infosys 31,851 14.8 13.8 9.9 9.1 25.0 23.8
Persistent Systems 794 14.5 12.3 7.5 6.1 24.5 23.8
Tata Consultancy Services 78,707 21.6 18.5 15.6 13.8 34.1 31.9
Tech Mahindra 8,119 15.9 14.5 9.4 8.1 26.7 22.9
Wipro 22,543 15.6 14.1 11.4 10.0 23.3 21.7
Median - 15.2 13.9 9.6 8.6 26.5 24.7
AVERAGE - 15.1 13.3 9.8 8.5 28.7 27.1
Source: Edelweiss research
Cash flow metrics
Year to March FY13 FY14 FY15E FY16E
Operating cash flow 1,233 2,250 2,781 4,208
Investing cash flow (7) (2,150) (1,320) (1,370)
Financing cash flow (440) (1,056) (1,232) (1,232)
Net cash flow 786 (956) 229 1,605
Capex (847) (2,300) (1,400) (1,450)
Dividends paid (440) (1,056) (1,232) (1,232)
Profitability & efficiency ratios
Year to March FY13 FY14 FY15E FY16E
ROAE (%) 26.8 27.1 29.6 28.1
ROACE (%) 40.1 38.6 40.3 37.7
Debtors days 76 79 80 83
Payable days 52 57 58 59
Cash conversion cycle (days) 50 57 70 77
Current ratio 2.0 1.7 1.8 1.8
Operating ratios
Year to March FY13 FY14 FY15E FY16E
Total asset turnover 2.3 2.2 2.3 2.3
Fixed asset turnover 5.8 4.7 4.6 4.8
Equity turnover 2.2 2.2 2.3 2.3
Valuation parameters
Year to March FY13 FY14 FY15E FY16E
Diluted EPS (INR) 76.0 92.3 121.2 140.6
Y-o-Y growth (%) 51.6 21.5 31.3 16.0
CEPS (INR) 83.6 101.2 137.3 156.7
Diluted PE (x) 26.0 21.4 16.3 14.0
Price/BV (x) 6.3 5.3 4.4 3.6
EV/Sales (x) 2.3 2.0 1.5 1.3
EV/EBITDA (x) 18.2 15.0 11.5 9.8
EV/EBITDA (x)+1 yr forward 11.3 8.8 7.7 -
Dividend yield (%) 0.9 1.5 1.8 1.8
Balance sheet (INR mn)
As on 31st March FY13 FY14 FY15E FY16E
Equity capital 303 303 303 303
Reserves & surplus 9,160 10,902 13,342 16,371
Shareholders funds 9,463 11,205 13,645 16,674
Deferred tax liability (71) (71) (71) (71)
Sources of funds 9,392 11,134 13,574 16,603
Tangible assets 2,847 5,410 6,423 7,336
Intangible assets 20 20 20 20
CWIP (incl. intangible) 833 300 200 250
Current Investments 853 953 1,053 1,153
Cash and equivalents 1,374 418 648 2,253
Inventories 143 244 314 327
Sundry debtors 4,163 5,501 7,068 8,412
Loans and advances 2,028 2,434 2,891 3,434
Other current assets 2,094 1,834 2,592 3,178
Total current assets (ex cash) 8,428 10,013 12,865 15,351
Trade payable 2,915 4,055 5,002 6,090
Others current liabilities 2,049 1,926 2,633 3,671
Net current assets (ex cash) 3,464 4,032 5,230 5,591
Uses of funds 9,392 11,134 13,574 16,603
Book value per share (INR) 312.3 369.8 450.3 550.3
Free cash flow (INR mn)
Year to March FY13 FY14 FY15E FY16E
Net profit 2,302 2,798 3,672 4,262
Depreciation 232 270 487 487
Others (255) (249) (180) (180)
Gross cash flow 2,279 2,818 3,979 4,568
Less: Changes in WC 1,046 568 1,198 361
Operating cash flow 1,233 2,250 2,781 4,208
Less: Capex 847 2,300 1,400 1,450
Free cash flow 386 (50) 1,381 2,758
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Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
No Data Available
*in last one year
Bulk Deals
Data Acquired / Seller B/S Qty Traded Price
No Data Available
*in last one year
Holding Top10
Perc. Holding Perc. Holding
Tata consultancy ser 51.12 Aberdeen 14.96
Hdfc asset managemen 7.93 Dsp blackrock invest 2.83
Commonwealth bank of 2.5 General insurance co 2.31
Govt pension fund gl 2.27 Norges bank 2.2
Scottish oriental sm 1.33 New india assurance 1.1
*in last one year
Additional Data
Directors Data
Mr S Ramadorai Chairman Mr R Ramanan MD & CEO
Ms Kalpana Morparia Director Mr S Mahalingam Director
Mr Sudhakar Rao Director
Prof M S Ananth Director Mr Ashok Sinha Director
Auditors - Deloitte Haskins and Sells, Chartered Accountants
*as per last annual report
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IT
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Edelweiss Securities Limited
Tata Motors (TML) has been a strategic partner of the Indian armed
forces since 1958. Over the years, the companys mobility-solutions
portfolio has beefed up to include all classes from light to heavy vehicles
across the entire defence, paramilitary and police mobility spectrum.
Currently, TML partners in enhancing defence, paramilitary and police
mobility in the SAARC and ASEAN regions and Africa. The vehicle factory
at Jabalpur (OFB) has tie-ups with TML. The company has also bid for
couple of defence ministry projects such as future infantry combat
vehicles and high-performance trucks. Maintain BUY.
Enhancing scope of defence business to frontline combat
As part of the companys strategy to enhance scope of its defence business right up to
frontline combat, it showcased two new combat vehicles at the DefExpo 2014. TML
displayed Kestrel, a wheeled armoured amphibious platform that provides mobility to
frontline soldiers. The LAMV (light armoured high mobility vehicle) is a recon vehicle
moving ahead of armoured columns. Both the vehicles will equip the Indian armed
forces with world-class indigenously developed frontline protected mobility vehicles.
Tender for light armoured MPV of INR25bn in offing
Procurement of armoured and specialist vehicles by Indian army has opened up
INR100bn opportunity for vehicle manufacturers like TML which is expected to bid for
1,200 units of light armoured multi-purpose vehicles (MPV) worth ~INR25bn.
Outlook and valuations: JLR key profit driver; maintain BUY
Management anticipates strong 15% CAGR in revenue in its defence business over
FY15/16 led by pick up in domestic orders and penetration into ASEAN countries. We
believe this would improve the share of non-cyclical business further and support
standalone performance which has been in doldrums for quite sometime now. With
M&HCV volumes recovering (17% CAGR FY14-16), we expect standalone margins to
improve to 5.6% in FY16E (-2.7% in FY14). However, JLR remains the key driver for our
SOTP of INR539 led by 16% volume CAGR on new launches. Maintain BUY/SO.
COMPANY UPDATE
TATA MOTORS
Potent shield
EDELWEISS 4D RATINGS
Absolute Rating BUY
Rating Relative to Sector Outperformer
Risk Rating Relative to Sector High
Sector Relative to Market Overweight
MARKET DATA (R: TAMO.BO, B: TTMT IN)
CMP : INR 470
Target Price : INR 538
52-week range (INR) : 485 / 272
Share in issue (mn) : 2,694.1
M cap (INR bn/USD mn) : 1,415/ 23,645
Avg. Daily Vol.BSE/NSE(000) : 7,217.9
SHARE HOLDING PATTERN (%)
Current Q3FY14 Q2FY14
Promoters *
34.3 34.3 34.3
MF's, FI's & BKs 9.8 10.0 12.0
FII's 27.1 27.6 26.4
Others 28.8 28.1 27.3
* Promoters pledged shares
(% of share in issue)
: 8.9
PRICE PERFORMANCE (%)
Stock Nifty EW Auto Index
1 month 11.2 4.7 8.4
3 months 15.8 15.8 21.2
12 months 60.6 32.8 48.8
Chirag Shah
+91 22 6623 3367
chirag.shah@edelweissfin.com
Siddhartha Bera
+91 22 6620 3099
siddhartha.bera@edelweissfin.com
India Equity Research| Automobiles
July 9, 2014
Financials (Consolidated)
Year to March FY13 FY14 FY15E FY16E
Revenues (INR mn) 1,888,176 2,328,337 2,624,759 3,085,825
Rev. growth (%) 14.0 23.3 12.7 17.6
EBITDA (INR mn) 247,739 348,378 397,140 455,298
Adj net profi t (INR mn) 93,932 147,400 157,095 199,284
Shares outstandi ng (mn) 3,190 3,219 3,219 3,219
Di l uted adj EPS - (INR) 29.4 45.8 48.8 61.9
EPS growth (%) (30.3) 55.5 6.6 26.9
Di l uted P/E - (x) 16.0 10.3 9.6 7.6
EV/EBITDA (x) 7.4 5.4 4.1 3.4
ROAE (%) 26.5 29.0 21.5 22.0
Automobiles
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Enhancing scope of defence business to frontline combat
As part of the companys strategy to enhance scope of its defence business right up to
frontline combat, it showcased two new combat vehicles at the DefExpo 2014. TML
displayed Kestrel, a wheeled armoured amphibious platform that provides mobility to
frontline soldiers, carrying them into the battle zone with critical armour protection, backed
with adequate fire support. The LAMV is a recon vehicle moving ahead of armoured
columns. Both the Kestrel and LAMV will equip the Indian armed forces with world-class
indigenously developed frontline protected mobility vehicles.
Fig. 1: 8x8 Amphibious armoured vehicle
Source: Company
Key features:
Kestrel is a wheeled armored amphibious platform designed and developed
indigenously with DRDO for optimised survivability, all-terrain performance and
increased lethality.
Occupant capacity of the hull is 12 members. The driver in combat mode has visibility
through three periscopes and a display catching vision through front and rear view
cameras, with day and night vision.
The back-to-back seating layout allows firing through three gun ports on each side, with
two big hatches for patrolling.
The fuel tanks are placed outside the crew compartment for additional safety.
The 8x8 independently suspended vehicle has high power-to-weight ratio for mountain
terrains.
The vehicle can accommodate different variety of weapon stations and turrets as the
application demands.
Tata Motors
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Fig. 2: 4x4 armoured personal carrier
Source: Company
Key features
The LAMV is developed indigenously with technical inputs from Supacat of the UK, for
vital reconnaissance mobility, protection and firepower.
A light patrol vehicle, the LAMV, combines an integrated blast and ballistic protection
system, including a protected all-composite detachable crew pod and V-shaped hull,
providing all-round protection.
Carrying a crew of six (two plus four) and using latest composite and ceramic armour
systems, the crew pod is constructed as a separate module, sealed off from potential
secondary projectiles.
All seats are mine-blast protected.
The LAMV has exceptional all-terrain high mobility performance, high power-to-weight
ratio, automatic transmission, all-wheel independent suspension and can reach speeds
of up to 105kmph.
The vehicle has modern equipment for observation, surveillance and communication,
and is configured to also address urban warfare, engaging threat on all terrain.
Targeting 15% growth in defence business over next two years
TML is targeting ~15% revenues from its defence business over FY15 and FY16. The
company is trying to penetrate the ASEAN countries, particularly Thailand, Malaysia and
Indonesia. It recently signed a distributorship agreement with Indonesia for defence
vehicles.
Tender for light armoured multi-purpose vehicle of INR25bn in offing
Procurement of armoured and specialist vehicles by India Army has opened up a INR100bn
opportunity for vehicle manufacturers like TML, Mahindra & Mahindra (M&M), Asia Motor
Automobiles
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works (AMW) and Ashok Leyland (ALDS). TML is expected to bid for the army order of 1,200
units of light armoured multi-purpose (LAM) vehicles worth ~INR25bn.
Hopes pinned on revival of FICV segment; TML ready with model
Possible revival of the INR600bn futuristic inventory combat vehicle (FICV) segment makes
the defence sector an interesting battle ground for the automobile manufacturers. TML is
one of the four companies which has received expressions of interest to supply ~2,600 units
to the army. Under the FICV program (languishing for more than three years), 2,600 combat
vehicles would replace ~1,400 Russian BMP vehicles at a cost of more than USD10bn. The
project would be in the Make India category, wherein only domestic companies can serve
as prime contractors. If TML bags the order, Indias largest auto maker by sales, plans to set
up a facility at Dharwad, Karnataka, for manufacturing tracked vehicles, prototype for which
is ready. While the mobility platform will come from TML, TPCs strategic electronic division
will manufacture the fire control system, TAMSL will be engaged in protection and TCS will
aid in design and lifecycle management of the vehicle.
TML, along with Lockheed Martin and General Dynamics (GD), has developed an infantry
combat vehicle that could compete for Indias FICV if the program is relaunched. The
wheeled armoured platform (WHAP) based on a vehicle developed by state-owned DRDO,
fits army requirements. For WHAP, Lockheed and GD are the technology partners. DRDO
developed basic frame of the vehicle, while TML has built the transmission, gear box and
integrated other systems.
Fig. 3: Artistic impression of FICV
Source: Defence Forum India
Tata Motors
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Products
Tactical vehicles: Designed to support tactical manoeuvre of combat operations
o Troop carriers
o Ambulance
o Buses
o Water tankers
o Trucks and tippers
o Specialist vehicles
Armoured vehicles: Designed for ultimate precision and reliability in terms of
protection and safety
o Tata light armoured vehicles (TLAV)
o Tata light armoured troop carriers
o Tata mine protected vehicles
Automobiles
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Company Description
TML is India's largest automobile company with a presence in commercial and passenger
vehicles. It is the leader in nearly all commercial vehicle segments and the third largest in
the passenger vehicles market with products in the compact and mid size car and utility
vehicle segments. Through subsidiaries and associate companies, the company has
operations in the UK, South Korea, Thailand and Spain. Among them is Jaguar Land Rover,
the business comprising two iconic British brands. It also has an industrial joint venture with
Fiat in India. It is also the world's fourth largest truck manufacturer and the second largest
bus manufacturer. TTMT cars, buses and trucks are being marketed in several countries in
Europe, Africa, the Middle East, South Asia, South East Asia and South America.
Investment Theme
We remain positive on the healthy product pipeline for JLR and believe platform
consolidation to accelerate model introduction over next five years. In the domestic market,
though CV volume recovery will improve financials, passenger cars will remain a drag
Key Risks
Weak premium demand
JLR has been the key beneficiary of healthy demand in the premium segment, mainly in
CHina. Any moderation can lead to downside risk to our estimate.
Execution risk
We expect the new launches to begin from Q3/Q4FY15. Any delay can pose a threat to our
volume estimates
Adverse Currency movement
Unfavorable currency movement (GBP vs other currencies) remains a key headwind. ~80%
of its revenues comes from exports and any adverse currency can impact margins
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Tata Motors
Financial Statements
Income statement (INR mn)
Year to March FY13 FY14 FY15E FY16E
Income from operations 1,888,176 2,328,337 2,624,759 3,085,825
Materials costs 1,203,211 1,435,863 1,648,817 1,945,707
Manufacturing expenses 14,506 15,306 16,234 19,890
Employee costs 165,840 215,564 216,765 232,716
Total SG&A expenses 358,801 448,604 444,300 524,674
Expenses capitalised 101,920 135,379 98,498 82,460
Total operating expenses 1,640,438 1,979,959 2,227,619 2,640,527
EBITDA 247,739 348,378 397,140 445,298
Depreciation & Amortization 75,693 110,782 136,936 176,820
EBIT 172,046 237,597 260,204 268,479
Non-Operational Income 1,176 8,286 2,435 2,471
Interest expenses 35,534 47,338 47,338 18,379
Profit before tax 137,688 198,545 215,301 252,571
Provision for tax 44,058 50,013 58,101 63,807
Net profit 93,631 148,532 157,200 188,764
Extraordinary income/ (loss) (4,179) (7,489) - -
Profit After Tax 93,932 147,400 157,200 188,764
Minority interest 301 (1,132) - -
Profit after minority interest 89,753 139,911 157,200 188,764
Diluted EPS (INR) 29.4 45.8 48.8 58.6
Dividend payout (%) 6.8 4.4 2.5 2.1
Common size metrics
Year to March FY13 FY14 FY15E FY16E
Materials costs 63.7 61.7 62.8 63.1
S G & A expenses 13.6 13.5 13.2 14.3
EBITDA margins 13.1 15.0 15.1 14.4
Net profit margins 5.0 6.3 6.0 6.1
Growth ratios (%)
Year to March FY13 FY14 FY15E FY16E
Revenues 14.0 23.3 12.7 17.6
EBITDA 13.1 40.6 14.0 12.1
EPS (30.3) 55.5 6.6 20.1
Key Assumptions
Year to March FY13 FY14 FY15E FY16E
Macro
GDP(Y-o-Y %) 5.0 4.8 5.4 6.3
Inflation (Avg) 7.4 6.2 5.5 6.0
Repo rate (exit rate) 7.5 8.0 7.5 7.0
USD/INR (Avg) 54.5 62.0 60.0 58.0
Sector
Cars - domestic vol. (% YoY) (6.8) (6.0) 10.0 20.0
MHCV - domestic vol (% YoY) (23.2) (26.0) 7.0 25.0
Steel prices (INR/t) 39,200 39,200 39,592 39,988
Aluminium prices (USD/t) 2,300 2,400 2,424 2,448
Company
Revenue assumptions
Domestic vol growth (% YoY)
Cars - domestic vol. (% YoY) (32.3) (39.9) 6.8 15.0
MHCV - domestic vol (% YoY) (30.7) (22.7) 5.0 24.1
LCV - dom. vol. (% YoY) 13.2 (31.1) 4.7 18.1
Domestic avg. realisation (INR) 564,157.6 593,790.5 585,466.3 621,079.8
Domestic avg. realisation (% YoY) (5.9) 5.3 (1.4) 6.1
JLR sales volume (Nos)
Jaguar 57,799 80,899 109,638 159,337
Land Rover 314,236 356,483 386,579 430,649
Total 372,035 437,382 496,216 589,986
Cost assumptions
RM cost/vehicle 415,075 443,017 420,681 435,113
Employee cost/vehicle 35,722 50,543 50,764 48,725
Average salary 1,046,323 1,067,249 1,120,612 1,255,085
Promotion cost (% revenue) 1.8 2.0 1.9 1.7
EBITDA/vehicle 24,540 (9,373) 8,106 38,960
Financial assumptions
Average Interest rate (%) 9.0 8.8 8.0 8.0
Average Depreciation rate (%) 7.9 9.1 9.1 9.3
Tax rate (%) 30.7 29.9 28.2 27.8
Dividend payout ratio (%) 6.8 3.1 2.4 2.0
Balance sheet assumptions
Net borrowings (INR mn) 64,424 - (30,000) (30,000)
Capex (INR mn) 152,403 330,697 346,765 316,155
Debtor days 19 14 11 12
Inventory days 59 56 59 59
Payable days 165 155 157 147
Cash conversion cycle (days) (88) (85) (87) (75)
Currency (GBP/USD) 1.6 1.6 1.6 1.6
Currency (USD/INR) 55.4 61.0 60.0 58.0
Currency (GBP/INR) 87.0 97.0 97.2 92.2
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Automobiles
Peer comparison valuation
Market cap Diluted PE (X) EV/EBITDA (X) Price/BV (X)
Name (USD mn) FY15E FY16E FY15E FY16E FY15E FY16E
Tata Motors Ltd 23,645 9.6 8.0 4.1 3.5 1.9 1.5
Ashok Leyland 1,671 88.5 14.6 15.8 8.5 2.9 2.7
Eicher Motors 3,775 32.8 20.5 18.2 11.1 8.8 6.6
Mahindra & Mahindra Ltd 12,497 19.8 15.3 12.9 10.1 3.7 3.2
Median - 26.3 15.0 14.4 9.3 3.3 2.9
AVERAGE - 37.7 14.6 12.7 8.3 4.3 3.5
Source: Edelweiss research
Cash flow metrics
Year to March FY13 FY14 FY15E FY16E
Operating cash flow 220,622 281,862 637,530 443,827
Investing cash flow (234,126) (397,704) (332,039) (353,629)
Financing cash flow (16,558) 57,683 (81,909) (52,950)
Net cash flow (30,062) (58,158) 223,582 37,247
Capex (152,403) (389,700) (334,474) (356,100)
Dividends paid (7,440) (7,358) (4,572) (4,572)
Profitability & efficiency ratios
Year to March FY13 FY14 FY15E FY16E
ROAE (%) 26.5 29.0 21.5 21.0
ROACE (%) 20.6 21.7 19.1 17.9
Inventory day 59 61 61 59
Debtors days 19 17 13 12
Payable days 165 161 157 147
Cash conversion cycle (days) (88) (83) (83) (76)
Current ratio 1.1 1.2 1.1 1.1
Debt/EBITDA 2.2 1.9 1.6 1.3
Fixed asset turnover (x) 4.1 3.7 3.1 3.0
Debt/Equity 1.4 1.0 0.8 0.6
Operating ratios
Year to March FY13 FY14 FY15E FY16E
Total asset turnover 2.3 2.1 1.9 2.1
Fixed asset turnover 3.0 2.8 2.4 2.4
Equity turnover 5.4 4.5 3.6 3.4
Valuation parameters
Year to March FY13 FY14 FY15E FY16E
Diluted EPS (INR) 29.4 45.8 48.8 58.6
Y-o-Y growth (%) (30.3) 55.5 6.6 20.1
CEPS (INR) 53.1 80.6 91.4 113.6
Diluted PE (x) 16.0 10.3 9.6 8.0
Price/BV (x) 4.0 2.3 1.9 1.5
EV/Sales (x) 0.8 0.7 0.5 0.4
EV/EBITDA (x) 7.4 5.4 4.1 3.5
Balance sheet (INR mn)
As on 31st March FY13 FY14 FY15E FY16E
Equity capital 6,381 6,438 6,438 6,438
Reserves & surplus 369,992 649,597 802,225 986,417
Shareholders funds 376,373 656,035 808,663 992,855
Minority interest (BS) 3,705 4,207 4,207 4,207
Short term debt 169,810 169,810 159,810 149,810
Long term debt 366,104 478,426 458,426 438,426
Borrowings 535,914 648,236 618,236 588,236
Deferred tax liability (24,094) (7,748) (7,748) (7,748)
Sources of funds 891,897 1,300,729 1,423,357 1,577,550
Tangible assets 204,228 338,157 478,331 607,700
Intangible assets 306,431 418,895 476,259 526,171
CWIP (incl. intangible) 185,737 218,263 218,263 218,263
Total net fixed assets 696,397 975,315 1,172,853 1,352,134
Goodwill on consolidation 41,024 49,788 49,788 49,788
Non current investments 90,577 106,867 106,867 106,867
Cash and equivalents 211,127 297,118 520,700 557,947
Inventories 209,690 272,709 286,458 349,998
Sundry debtors 109,427 105,742 86,458 116,088
Loans and advances 297,734 368,973 187,435 124,701
Total current assets (ex cash) 616,851 747,425 560,350 590,787
Trade payable 603,361 674,174 761,983 818,347
Others current liabilities 160,717 201,610 225,217 261,625
Total current liabilities &
764,078 875,783 987,201 1,079,973
Net current assets (ex cash) (147,227) (128,359) (426,850) (489,186)
Uses of funds 891,897 1,300,729 1,423,357 1,577,550
Book value per share (INR) 118.0 203.8 251.2 308.4
Free cash flow (INR mn)
Year to March FY13 FY14 FY15E FY16E
Net profit 93,932 147,400 157,200 188,764
Depreciation 75,693 110,782 136,936 176,820
Gross cash flow 269,241 262,994 936,022 506,162
Less: Changes in WC 48,618 (18,868) 298,492 62,336
Operating cash flow 220,622 281,862 637,530 443,827
Less: Capex 152,403 389,700 334,474 356,100
Free cash flow 68,219 (107,838) 303,057 87,726
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Tata Motors
Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
16 Aug 2013 Tata Investment Corporation Lt Sell 260000.00
30 Jul 2013 Tata Investment Corporation Lt Sell 240000.00
*in last one year
Bulk Deals
Data Acquired / Seller B/S Qty Traded Price
No Data Available
*in last one year
Holding Top10
Perc. Holding Perc. Holding
Tata sons ltd 26.07 Citibank na 16.56
Tata steel ltd 5.63 Life insurance corp 4
Capital group compan 3.28 Tata industries ltd 2.54
Vanguard group inc 1.5 Gic private limited 1.27
William blair & comp 1.17 Fil limited 1.11
*in last one year
Additional Data
Directors Data
N N Wadia Non-Executive Independent Directors S M Palia Non-Executive Independent Directors
R A Mashelkar Non-Executive Independent Directors S Bhargava Non-Executive Independent Directors
N Munjee Non-Executive Independent Directors V K Jairath Non-Executive Independent Directors
R Sen Non-Executive Independent Directors Cyrus P Mistry Non-Executive Independent Directors
Ratan N Tata, Chairman Other Non-Executive Directors Ravi Kant, Vice Chairman Other Non-Executive Directors
J J Irani Other Non-Executive Directors Ralf Speth Other Non-Executive Directors
Carl-Peter Forster Other Non-Executive Directors Ravindra Pisharody Executive Directors
Satish Borwankar Executive Directors
Auditors - Deloitte Haskins & Sells
*as per last annual report
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Automobiles
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Edelweiss Securities Limited
Tata Power Company (TPC) is a pioneer in Indias power sector, with
presence across industry encompassing generation, transmission, trading,
and distribution. The companys strategic engineering division (SED) has
been a dominant private sector player in indigenous design,
development, production, integration, supply and lifecycle support of
mission-critical defence systems of strategic importance for over four
decades. TPC SED enjoys unique distinction of participating in defence
programs through a dedicated R&D setup in Mumbai since 1974, and a
dedicated production facility at Bengaluru since 1982. The division has
evolved into a systems integrator for programs of national importance
such as the Pinaka multi-barrel launcher, launchers for Aakash (air force
and army), electronic warfare program, command & control systems for
air defence and naval combat.
Executing prestigious contract for modernisation of IAF airbases
In April 2011, TPC SED won the prestigious defence contract entailing modernisation of
thirty Indian IAF airbases across the country for USD243mn through competitive global
tenders and is the largest-ever defence contract bagged by a private player. The
current contract has an option clause, which allows the ministry to invite TPC SED to
execute Phase II of MAFI at a pre-determined rate.
Award of seven defence production licenses, a key milestone
The MoD awarded TPC SED seven defence production licenses in 2006. As a result, the
division is empowered to design, develop, manufacture, assemble and upgrade mission
critical systems in seven core areas of defence strategic electronics. These production
licenses have opened up a vast domestic addressable market including upgrade of
existing weapon systems and platforms.
Outlook and valuations: Positive; maintain BUY
TPC SED plays a key role in current days modern warfare by providing state-of-the-art
defence systems in various areas. TPC SED had an order backlog of ~INR28bn at FY13
end. Though currently (on FY13 basis) it contributes only ~1% of total consolidated
sales of TPC, given govt thrust on indigenisation, the contribution may improve going
forward. We maintain BUY/SO rating on the stock with a target price of INR117.
COMPANY UPDATE
TATA POWER CO
Centre of excellence
EDELWEISS 4D RATINGS
Absolute Rating BUY
Rating Relative to Sector Performer
Risk Rating Relative to Sector Medium
Sector Relative to Market Underweight
MARKET DATA (R: TTPW.BO, B: TPWR IN)
CMP : INR 106
Target Price : INR 117
52-week range (INR) : 116 / 66
Share in issue (mn) : 2,704.6
M cap (INR bn/USD mn) : 287/ 4,787
Avg. Daily Vol.BSE/NSE(000) : 5,456.3
SHARE HOLDING PATTERN (%)
Current Q3FY14 Q2FY14
Promoters *
33.0 32.5 32.5
MF's, FI's & BKs 22.5 22.5 23.3
FII's 25.8 26.0 25.1
Others 18.7 19.0 19.2
* Promoters pledged shares
(% of share in issue)
: 12.2
PRICE PERFORMANCE (%)
Stock Nifty
EW Power
Index
1 month 1.2 4.7 4.6
3 months 28.6 15.8 37.5
12 months 29.8 32.8 46.4
Shankar.K
+91 22 4040 7412
shankar.k@edelweissfin.com
Santosh Hiredesai
+91 22 6620 3027
santosh.hiredesai@edelweissfin.com
India Equity Research| Power
July 9, 2014
Financials (Consolidated)
Year to March FY13 FY14 FY15E FY16E
Revenue (INR mn) 330,254 356,487 366,370 372,214
EBITDA (INR mn) 64,447 77,065 85,794 86,596
Net profit (INR mn) 7,646 5,968 22,188 22,715
Diluted P/E (x) NA (93.9) 12.5 12.2
P/B(x) 1.8 1.8 1.6 1.5
ROAE (%) 5.4 4.3 14.3 12.7
Power
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Tata Power SED: Dominant private player in critical defence systems
TPC is a pioneer in Indias power sector, with presence across industry encompassing
generation, transmission, trading, and distribution. The companys strategic engineering
division (SED) has been a dominant private sector player in indigenous design, development,
production, integration, supply and lifecycle support of mission-critical defence systems of
strategic importance for over four decades.
The division has evolved into a systems integrator for programs of national importance such
as the Pinaka multi-barrel launcher, launchers for Aakash (air force and army), electronic
warfare program, command & control systems for air defence and naval combat. As a
leading domestic player in strategic electronics, the division is now globally recognised for
harnessing its Systems and Engineering capabilities and has been assessed at Maturity
Level 4 under the capability maturity model integration (CMMI-DEV L4 v1.3) required by
various departments of defence worldwide.
The companys core competency lies in indigenous design, development, production and
supply of state-of-the-art defence systems in five areas of operation which are as follows:
1) Weapon systems
a. Missile/rocket launchers and command posts for army and air force
b. Artillery and armour
2) Network Centric Operations (NCO)
a. At tactical level: Elements of NCO covers C2, spectrum/network management
systems, tactical exchanges, TETRA base stations, mobile communication nodes,
missile/rocket launchers and command posts for army and air force.
b. At battalion level and below: Tactical field computers, data fusion, F-INSAS sub-
systems covering night vision devices/TI sights and rugged data terminals
c. Software defined radio
d. Trusted compute platforms with integrated security sub-systems
e. Mobile communication nodes
3) Electronic warfare: Command centers, counter measure control centres, voice
recognition & analysis systems, etc.
4) Modernisation of airfield infrastructure (MAFI)
The division has evolved into a
systems integrator for
programmes of national
importance such as the Pinaka
multi-barrel launcher, launchers
for Aakash (air force and army)
and electronic warfare program
Tata Power Co.
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Contemporary warfare and its importance
The efficacy of contemporary warfare is derived from an expanding theatre of engagement,
precision strikes and the ability to manage logistics for rapid and optimal delivery of
resources across the globe. Expanding engagements necessitate extreme mobility of forces
across diverse regions. In this context, it is much more than fire power and sheer numbers
of a fighting force that will determine success in today's battlefield.
Information superiority is the backbone of modern warfare with electronic warfare
capabilities and is a key force multiplier. All this is networked across existing and new
sensors and weapon systems over land, air and sea.
The traditional command and control structure that governs the conventional battlefield has
been to evolve and deal with the phenomenon of information overload in this networked
era. Militaries across the world are engaged in developing their doctrines for this digital
world. TPC SED plays a key role in current days modern warfare by providing state-of-the-
art defence systems in various areas.
Fig. 1: Modern warfare
Source: Company, Edelweiss research
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Decision assist
Decision assist systems
integrate the input from
the Surveillance Grid and
facilitate appropriate
Weapon Assignment
Interfacing with Sensors
Data Fusion
Threat Evaluation &
Weapon Selection
Command & Control
systems
Interfacing with legacy
Weapons & Sensors
Strategic Electronics
Strategic Electronic is the
embedded intelligence in
weapon systems for all
tactical operations.
Embedded real time software
INS-based positioning &
integration
Ballistics
Servo & MEMS-based
control
Entity Engineering
Network Centric
Warfare
The expanding theatre of
operations requires an
end-to-end manageable and
secure network for connecting
sensors, weapons and logistics,
This is the information
backbone for the Decision
Assist Capability
Integrated network
management & signals
command & control system
Modeling and Network Simulation
Edge of Battle field solution with
IP support Voice, Video, Data
Ad-hoc Networks based RF comm
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Power
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Harnessing cutting edge technology
The company has consistently harnessed cutting edge technology. It ventured into defence
in 1974 and supplied systems for air defence ground equipment systems. Towards mid-80s,
it contributed to development and supply of Akash launchers (army and air force versions),
missile interface units for Agni launchers, on-board computers and launcher electrical
systems for Prithvi launchers. TPC SED has now evolved into a systems integrator for
programs of national importance such as the Pinaka MBRL System, launchers for the Akash
air force and army programs, electronic warfare program, command & control systems for
air defence and naval combat. It has also built control systems for submarines.
Award of seven defence production licenses, a key milestone
The Government of India (GoI), Ministry of Defence (MoD) awarded TPC SED seven defence
production licenses in 2006. As a result, the division is empowered to design, develop,
manufacture, assemble and upgrade mission critical systems in seven core areas of defence
strategic electronics. Though now, the license requirement is diluted, these production
licenses received earlier opened up a vast domestic addressable market including upgrade
of existing weapon systems and platforms. Additionally, business opportunities through
Offsets for system designs, engineering and testing services will also be targeted by the
division, thus opening up the export market as well. The seven licenses received are in the
areas of:
1. Electronic warfare systems (standalone and integrated).
2. State-of-of the-art network, centric warfare enablers (including tactical and strategic
communications), GPS-based navigation and tracking and GIS systems.
3. Avionics, airborne missiles, systems and equipment of aircraft, helicopters and UAVs.
4. Air defence/naval guns, filed artillery, tanks, combat vehicles, anti-tank weapon
systems, mortar, shell, missiles, rockets, etc.
5. Naval combat, air defence, artillery, border security and surveillance including sensors
voz., radars, sonars, thermal imaging, radiography, optronics and night vision sub-
systems.
6. Military grade products.
7. Weapon systems: Rocket and missile launchers for ground and naval applications.
Executing prestigious contract for modernisation of IAF airbases
In April 2011, TPC SED won the prestigious defence contract entailing modernisation of
thirty Indian Air Force (IAF) airbases across the country for USD243mn through competitive
global tenders and is the largest-ever defence contract bagged by a private player. This
contract was to be completed in 42 months. Modernisation includes: 1) supply, testing,
integration and sustenance of instrument landing system (ILS); 2) distance measuring
equipment (DME); 3) digital VHF omni range (DVOR); 4) tactical air navigation system
(TACAN); 5) air traffic management system (ATM); and 6) CAT 2 airfield lighting systems on
turnkey basis. According to the MoD, modernisation of the IAF airbases by TPC SED will be
followed by MAFI Phase II contract for refurbishing another 28 airbases. The current
contract has an option clause, which allows the ministry to invite TPC SED to execute Phase
II of MAFI at a pre-determined rate. However, the ministry has still to announce award of
this contract.
Tata Power Co.
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State-ofthe-art production facilities
To meet requirements of large volume production orders, the company has implemented an
integrated design to manufacturing facility meeting the system engineering requirements
and quality standards for defence equipment. TPC SED provides comprehensive solutions in
strategic electronics of embedding intelligence in sensors and weapon systems and has core
strengths in the following areas:
Engineering and packaging of large structural payloads for launch platforms up to
compact electronic units for airborne applications.
Robust and real-time software for embedded applications.
Rapid prototyping and simulation.
Development of advanced algorithms for platform servo control, target data
processing/tracking/fusion for radars and other sensors.
Artillery ballistics.
Night vision devices and IR-based weapon sights.
Fig. 2: Product profile
Rocket/ Missile lauchers - Pinaka, Akash, TCT A5, Medium range SAM
105, 155/52mm Mountain Gun system & self propelled guns
Weapon delivery systes, remote weapon stations
Advanced hull electrical systems for armoured vehicles
Thermal imager fire control systems
Ballistic software for air defence guns, field artillery weapon systems,
T-90 tank
Data fusion
Systems for tactical communications and network centric operations
Spectrum/network management system
Signal command and control system and others
EMI/EMC and EMP hardened mobile command and control posts
Payload retraction and hoist system
Thermal imaging/night vision systems
Electro optical payloads & Tadpole sonobuoys
Unmanned aerial vehicles, aerial reconnaissance equipment,
PTA & air-ground data link , MAFI etc.
Upgradation of tanks,
armoured vehicles &
related equipment
Ballistics and
Data Fusion
Network centric
warfare enablers,
communication systems
Vehicle equipment
and trailers
Sensors/underwater
sensors
Others
Weapon systems and
their upgradation for
ground forces
Power
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Company Description
Tata Power is a pioneer in India's power sector, with a presence in all spheres of the power
industry, encompassing generation, transmission, trading, and distribution. Tata Power has
demonstrated exceptional performance in its transmission and distribution JVs. The
company was also awarded the first UMPP at Mundra (Gujarat) due to its lowest levelised
tariff bid at INR 2.26 per unit.
Investment Theme
We believe TPC is poised to play an important role in the Indian power sector. The company
in the past has exhibited expertise in project execution. The company has an installed
capacity of 8GW+ at FY13 end. The company has 30% stake in two coal mines of Bumi
Resources with proven reserves of ~1.9bn tonnes. With rising coal prices, we believe, Tata
Power will have significant profits from these assets.
Key Risks
TPC fully commissioned two key projects at Mundra4,000MW and Maithon1,050MW.
The dynamics of Indian electricity market have undergone a sea change due to higher
imported coal prices, weak customer finances, changing fiscal norms at coal exporting
countries and now, a depreciating rupee. Hence, balancing between contractual supplies
(both volume and price) and maximizing earnings has become a key determinant/risk.
The company had restated stripping costs by ~15% to 11.5 in 2010 which should have lead
to upward restatement of reserves from 2.1bn tonnes. However, recently the restatement
was only to the extent of 20mn tonnes. Unless another round of restatement is done or
costs are brought down the value of coal mines could be suppressed.
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Tata Power Co.
Financial Statements
Income statement (INR mn)
Year to March FY13 FY14 FY15E FY16E
Income from operations 330,254 356,487 366,370 372,214
Direct costs 201,743 215,590 209,506 213,415
Employee costs 13,230 13,494 14,676 14,910
Other Expenses 50,834 50,339 56,393 57,293
Total operating expenses 265,807 279,423 280,576 285,618
EBITDA 64,447 77,065 85,794 86,596
Depreciation & Amortization 20,517 27,296 25,933 26,358
EBIT 43,930 49,768 59,861 60,239
Other income 3,692 (5,619) 2,980 3,397
Interest expenses 26,355 34,399 26,003 26,040
Expenditure from provisions 8,500 - - -
Profit before tax 12,767 9,751 36,838 37,595
Provision for tax 11,780 10,084 11,724 11,972
Net profit 987 (333) 25,114 25,623
Extraordinary income/ (loss) 8,500 8,568 - -
Profit After Tax 987 (333) 25,114 25,623
Minority interest (2,081) (2,720) (2,926) (2,908)
Share in profit of associates 239 454 - -
Profit after minority interest 7,646 5,968 22,188 22,715
Basic EPS (INR) (0.4) (1.1) 8.2 8.4
Shares outstanding (mn) 2,470 2,373 2,705 2,705
Diluted EPS (INR) (0.3) (1.1) 8.2 8.4
Dividend per share (INR) 1.2 1.3 2.9 3.0
Dividend payout (%) 35.7 35.7 35.7 35.7
Common size metrics
Year to March FY13 FY14 FY15E FY16E
Operating expenses 80.5 78.4 76.6 76.7
Depreciation 6.2 7.7 7.1 7.1
Interest expenditure 8.0 9.6 7.1 7.0
EBITDA margins 19.5 21.6 23.4 23.3
Net profit margins 0.3 (0.1) 6.9 6.9
Growth ratios (%)
Year to March FY13 FY14 FY15E FY16E
Revenues 27.0 7.9 2.8 1.6
EBITDA 31.5 19.6 11.3 0.9
PBT 151.7 (23.6) 277.8 2.1
Net profit (49.0) (21.9) 271.8 2.4
EPS (92.1) 216.7 (848.7) 2.4
Key Assumptions
Year to March FY13 FY14 FY15E FY16E
Macro
GDP(Y-o-Y %) 5.0 4.8 5.4 6.3
Inflation (Avg) 7.4 6.2 5.5 6.0
Repo rate (exit rate) 7.5 8.0 7.8 7.3
USD/INR (Avg) 54.5 60.5 58.0 56.0
Sector
Merchant prices (INR/kWh) 4.0 4.0 4.0 4.0
New Castle 6700 Kcal (USD/t FoB) 89 80 80 80
Melawan 5400 Kcal (USD/t FoB) 70 64 64 64
Capacity Addition (MW) 17,956 14,878 15,632 15,632
Company
Standalone PAT (INR mn) 10,247 9,541 9,893 10,036
Powerlinks PAT (INR mn) 1,191 1,064 1,064 1,064
Maithon PAT (INR mn) (862) 2,520 2,520 2,520
Delhi Dist PAT (INR mn) 3,097 3,320 3,354 3,317
IEL PAT (INR mn) 787 616 616 616
Mundra units sale (MUs) 11,565 25,965 25,965 26,036
Mundra Capacity charges (INR mn) 11,641 26,156 26,185 26,233
Mundra avg tariff (INR/kwh) 2.4 2.3 2.3 2.2
Mundra fuel cost (INR/kwh) 1.4 1.4 1.3 1.2
Mundra PAT/kwh (INR/kwh) (0.7) - 0.2 0.2
BUMI coal sales (MT) 68.0 85.0 60.0 64.0
BUMI avg realisation (USD/t) 81.5 60.0 68.0 68.0
BUMI PAT/t (USD) 11.4 3.5 5.5 5.5
Consol Regulated Equity (INR mn) 64,228 67,394 70,559 35,830
Consol Regulated RoE 19 19 19 18
Dividend payout ratio (%) 35.7 35.7 35.7 35.7
Net borrowings (INR mn) 354,150 332,812 285,554 263,495
Capex (INR mn) 45,603 51,931 22,132 12,843
Debtor days 31 40 40 40
Inventory days 28 27 27 27
Payable days 64 77 77 77
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Power
Cash flow metrics
Year to March FY13 FY14 FY15E FY16E
Operating cash flow 32,796 119,666 80,406 65,662
Investing cash flow (42,863) (56,541) (19,152) (9,446)
Financing cash flow (5,867) (44,940) (33,628) (41,803)
Net cash flow (15,933) 18,184 27,626 14,413
Capex (45,603) (51,931) (22,132) (12,843)
Dividends paid (3,193) (3,520) (9,039) (9,254)
Share issuance/(buyback) 3,606 19,602 19,934 -
Profitability & efficiency ratios
Year to March FY13 FY14 FY15E FY16E
ROAE (%) 5.4 4.3 14.3 12.7
ROACE (%) 8.9 9.8 11.9 11.7
Debtors days 31 40 40 40
Current ratio 1.7 1.2 1.3 1.4
Debt/EBITDA 5.9 4.6 3.9 3.7
Average working capital turnover 4.2 6.2 9.1 6.1
Average capital employed
0.6 0.7 0.7 0.7
Debt/Equity 2.7 2.5 1.9 1.7
Adjusted debt/equity 2.7 2.5 1.9 1.7
Operating ratios
Year to March FY13 FY14 FY15E FY16E
Total asset turnover 0.6 0.7 0.7 0.7
Fixed asset turnover 1.0 0.8 0.8 0.8
Equity turnover 2.3 2.6 2.4 2.1
Valuation parameters
Year to March FY13 FY14 FY15E FY16E
Diluted EPS (INR) (0.3) (1.1) 8.2 8.4
Y-o-Y growth (%) (92.1) 216.7 (848.7) 2.4
CEPS (INR) 10.0 12.7 20.0 20.3
Diluted PE (x) (306.3) (96.7) 12.9 12.6
Price/BV (x) 1.8 1.8 1.7 1.5
EV/Sales (x) 1.9 1.7 1.6 1.5
EV/EBITDA (x) 9.7 7.9 7.0 6.7
Dividend yield (%) 1.1 1.2 2.8 2.8
Balance sheet (INR mn)
As on 31st March FY13 FY14 FY15E FY16E
Equity capital 2,373 2,373 2,705 2,705
Reserves & surplus 135,985 136,638 169,388 182,849
Shareholders funds 138,358 139,011 172,093 185,554
Minority interest (BS) 20,646 22,733 25,659 28,568
Short term debt 35,472 47,068 47,068 47,068
Long term debt 343,351 304,699 285,068 277,421
Borrowings 378,823 351,767 332,136 324,489
Deferred tax liability 10,005 11,229 11,229 11,229
Sources of funds 547,832 524,740 541,117 549,840
Tangible assets 353,953 390,634 386,683 373,019
Intangible assets 59,580 65,659 65,659 65,659
CWIP (incl. intangible) 23,576 11,530 11,680 11,830
Total net fixed assets 437,109 467,823 464,022 450,507
Non current investments 26,427 26,787 26,787 26,787
Current Investments 4,774 3,405 3,405 3,405
Cash and equivalents 19,899 15,550 43,176 57,589
Inventories 20,265 20,733 20,904 21,481
Sundry debtors 33,050 45,426 35,226 46,713
Loans and advances 49,038 48,561 48,561 48,561
Other current assets 82,004 85,548 85,548 85,548
Total current assets (ex cash) 189,131 203,673 193,644 205,708
Trade payable 35,409 45,740 43,158 47,399
Others current liabilities 89,325 143,353 143,353 143,353
Total current liabilities &
124,733 189,093 186,511 190,751
Net current assets (ex cash) 64,398 14,580 7,133 14,957
Uses of funds 547,832 524,740 541,117 549,840
Book value per share (INR) 58.3 58.6 63.6 68.6
Free cash flow (INR mn)
Year to March FY13 FY14 FY15E FY16E
Net profit 7,646 5,968 22,188 22,715
Depreciation 20,517 27,296 25,933 26,358
Deferred tax 3,618 1,224 - -
Others 28,029 35,360 24,837 24,414
Gross cash flow 59,810 69,848 72,958 73,486
Less: Changes in WC 27,013 (49,817) (7,448) 7,824
Operating cash flow 32,796 119,666 80,406 65,662
Less: Capex 45,603 51,931 22,132 12,843
Free cash flow (12,806) 67,734 58,274 52,819
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Tata Power Co.
Holding Top 10
Perc. Holding Perc. Holding
Life Insurance Corp Of India 14.12 First State Investments Icvc 5.81
Matthews International Capital 4.66 JSH Mauritius Ltd 2.93
General Insurance Corp Of India 2.70 New India Assurance Co Ltd 2.70
Aberdeen Asset Management Plc 1.73 Vanguard Group Inc 1.00
Blackrock Fund Advisors 0.69 First State Investments 0.52
*as per last available data
Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
20 Sep 2013 Mr. Cyrus P. Mistry Buy 64000.00
16 Aug 2013 Matthews International Funds d/b/a Matthews Asia Funds Buy 1358608.00
*in last one year
Bulk Deals
Data Acquired / Seller B/S Qty Traded Price
No Data Available
*in last one year
Additional Data
Directors Data
Mr. Cyrus P. Mistry Chairman, Non-Independent, Non-Executive Mr R Gopalakrishnan Non-Independent, Non-Executive
Dr H S Vachha Independent, Non-Executive Mr N H Mirza Independent, Non-Executive
Mr D M Satwalekar Independent, Non-Executive Mr P G Mankad Independent, Non-Executive
Mr A K Basu Independent, Non-Executive Mr Thomas Mathew T Independent, Non-Executive
Mr Anil Sardana, Managing Director, Executive Mr S Ramakrishnan Executive Director
Mr S Padmanabhan Executive Director Ms. Vishakha V. Mulye Independent,Non-Executive
Auditors - Deloitte Haskins & Sells
*as per last annual report
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Power
THIS PAGE IS INTENTIONALLY LEFT BLANK
Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
Edelweiss Securities Limited
Bharat Dynamics (BDL), a Mini Ratna category-I company, is a pioneer in
the manufacture of Anti-Tank Guided Missiles (ATGM). It has evolved to
become a conglomerate in manufacturing ATGMs of latest generations,
surface-to-air weapon systems, strategic weapons, launchers,
underwater weapons, decoys and test equipment. BDL has plans in place
to emerge as an effective and viable outsourcing hub to global missile
manufacturers for precision components/ sub-systems at competitive
pricing. The company is also ramping up its current production capacities
(to be completed within the next three to five years) for all types of
missiles to cater to anticipated orders.
World-class defence equipment manufacturer
BDL is the prime production agency for second and third generation ATGMs. Keeping
pace with modernisation of the Indian armed forces, the company started
manufacturing surface-to-air missiles (SAM) and is also the prime production agency
for all classes of (SAM) required by the Indian armed forces. The company is a lead
integrator for some of the SAM systems.
Strong order book at INR170bn
The companys order book (FY13) stood at ~INR170bn, which we believe will get a
boost once it joins a major joint development programme of short range surface-to-air
missile required by IAF and IN, and underwater weapons. BDL could be a beneficiary of
co-development and co-production of future missile systems being pursued by India.
Outlook and valuations: Humungous potential
Modernisation with state-of-the-art equipment is currently the mantra of the Indian
armed forces. This has given rise to tremendous increase in the business potential for
BDL. It also entails a challenge to shift to manufacturing and supplying more advanced
and complex weapon systems and adherence to quality and delivery commitments.
DPP 2013 stresses on increasing the indigenous share and prioritising indigenous
production in defence acquisitions. However, we believe government policy of
encouraging private enterprises in weapon production may help the company meet
the growing needs of the armed forces with BDL assuming the role of lead integrator
with several key components coming from capable private sector companies.
COMPANY PROFILE
BHARAT DYNAMICS
Leading light
NOT LISTED
Rahul Gajare
+91 22 4063 5561
rahul.gajare@edelweissfin.com
Amit Mahawar
+91 22 4040 7451
amit.mahawar@edelweissfin.com
Swarnim Maheshwari
+91 22 4040 7418
swarnim.maheshwari@edelweissfin.com
India Equity Research| Defence
July 09, 2014
Financials (INR mn)
Year to March FY10 FY11 FY12 FY13
INCOME :
Sales 6,273 9,392 9,592 10,741
% change 35.0 49.7 2.1 12.0
EBITDA 3,646 3,902 2,841 3,179
Margins (%) 58.1 41.5 29.6 29.6
No. of employees 2,894 2,897 3,142 3,300
PAT 2,230 2,275 1,723 1,857
PAT margins (%) 35.5 24.2 18.0 17.3
Defence
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Exploring new growth avenues
In its quest to fulfill the defence needs of the Indian armed forces, BDL has ventured into the
under water weapon systems and air-to-air missiles and associated equipment with
technology support from DRDO and other global leaders in this domain. Thus, the company
is poised to cater to similar requirements of the Indian armed forces in the years to come.
Keeping pace with the modernisation of the Indian armed forces, BDL is poised to enter new
avenues of manufacturing covering a wide range of weapon systems such as surface to air
missiles, air defence systems, heavy weight torpedoes, air-to-air missiles etc., making it a
world-class defence equipment manufacturer. The company has also entered into new area
of refurbishment of vintage missiles, which is one more feather in its cap.
Fig. 1: Key products description
Source: Company,Edelweiss research
Milan 2 T
Second generation, semi-automatic, tube launched, optically
tracked missiles with tandem warhead
Man portable
Konkurs M
Second generation, semiautomatic, antitank, tube launched, optically
tracked, wire guided and aero-dynamically controlled missile
Designed to destroy moving and stationary armored targets with
Explosives Reactive Armours at a range of 75 to 4000 meters
Invar
Invar is weapon fired from the Gun barrel of T 90 Tank. The missile
has a semi-automatic control system, tele orienting in the laser beam.
Its a high velocity jamming immune missile
Advanced Light Weight Torpedo (TAL)
Can be launched from a Ship or a Helicopter
Akash
Medium range surface-to-air missi le.
IMultiple target tracking capability
BDL is the prime production
agency for 2nd and 3rd generation
ATGMs. It has also started
manufacturing SAM and is also the
prime production agency for all
classes of SAM required by the
Indian armed forces
Bharat Dynamics
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Financial Statements
Key P&L items (INR mn)
Year to March FY10 FY11 FY12 FY13
INCOME :
Sales 6,273 9,392 9,592 10,741
% change 35.0 49.7 2.1 12.0
No. of employees 2,894 2,897 3,142 3,300
EBITDA 3,646 3,902 2,841 3,179
Margins (%) 58 42 30 30
PAT 2,230 2,275 1,723 1,857
% change 39.4 2.0 (24.3) 7.8
Key Balance sheet items (INR mn)
Year to March FY10 FY11 FY12 FY13
Net worth 5,271 5,521 7,324 9,533
Gross block 4,612 4,801 6,042 7,116
Capital Employed 5,037 5,118 6,076 8,926
Working Capital 3,604 3,707 4,590 6,146
Key Ratios
Year to March FY10 FY11 FY12 FY13
ROE's (%) 42.3 41.2 23.5 19.5
Equity turnover (x) 1.2 1.7 1.3 1.1
Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
Edelweiss Securities Limited
Bharat Earth Movers (BEML), a Mini Ratna, serves Indias core sectors
like defence, rail, power, mining and infrastructure. The company is one
of the eight DPSUs in India and earns ~20% of its turnover from defence.
It manufactures and supplies defence ground support equipment such as
Tatra-based high mobility trucks, recovery vehicles, bridge systems,
vehicles for missile projects, tank transportation trailers, mil rail wagons,
mine ploughs, crash fire tenders, snow cutters, aircraft towing tractors
and aircraft weapon loading trolleys. BEML is likely to benefit from Indias
growing defence spending (especially capital expenditure), modernisation
of military equipment, focus on indigenous production and offset policy.
The stock is Not Rated.
Expanding product range to tap growing opportunities
BEML operates in the aerospace segment supplying ground support equipment such as
aircraft towing tractors (ATT), multi-purpose weapon loaders (MPWL- Bheema) and
crash fire tenders (CFT). To effectively exploit the e-engineering services potential in
the aerospace domain, the company launched an aerospace vertical in 2007. Its
ultimate objective is to manufacture fixed wing and rotary wing aircraft, assemble
UAVs from kits and upgrade aircraft and helicopters. The other areas of concentration
will be manufacture of gears and hydraulic aggregates to aeronautical standards as the
company has core strength in these spheres. Also, BEML and Combat Vehicles
Research and Development Establishment (CVRDE) are working together with a foreign
firm to build and supply 155mm 52-calibre tracked guns to the armed forces.
Outlook and valuations: Positive; Not Rated
BEMLs current order book stands at more than INR60bn with railways contributing
~INR30bn and defence INR20bn, lending strong near-term revenue visibility. Robust
revenue visibility (2x FY14 revenue), opportunities from Indias rising defence
spending, and offset & indigenisation plans present a strong case for the companys
defence business. Moreover, opportunities in Field Artillery Rationalisation Plan (FARP)
and Future Infantry Combat Vehicle (FICV) could lend additional fillip to the company.
The stock is Not rated
COMPANY PROFILE
BHARAT EARTH MOVERS
Powered for growth
EDELWEISS RATINGS
Absolute Rating NOT RATED
MARKET DATA (R: BEML.BO, B: BEML IN)
CMP : INR 736
Target Price : NA
52-week range (INR) : 878 / 126
Share in issue (mn) : 41.6
M cap (INR bn/USD mn) : 31 / 512
Avg. Daily Vol.BSE/NSE(000) : 554.8
SHARE HOLDING PATTERN (%)
Current Q3FY13 Q2FY13
Promoters %
54.0 54.0 54.0
MF's, FI's & BKs 26.2 25.7 25.6
FII's 1.5 1.2 1.2
others 18.3 19.1 19.2
* Promoters pledged shares
(% of share in issue)
: NIL
RELATIVE PERFORMANCE (%)
Sensex Stock
Stock over
Sensex
1 month 0.0 (0.4) (0.4)
3 months 12.7 128.4 115.7
12 months 31.6 379.4 347.8
Rahul Gajare
+91 22 4063 5561
rahul.gajare@edelweissfin.com
Amit Mahawar
+91 22 4040 7451
amit.mahawar@edelweissfin.com
Swarnim Maheshwari
+91 22 4040 7418
swarnim.maheshwari@edelweissfin.com
India Equity Research| Defence
July 09, 2014
Financials
Year to March FY11 FY12 FY13 FY14
Revenues (INR mn) 26,438 27,150 28,013 29,037
Rev. growth (%) (6.9) 2.7 3.2 3.7
EBITDA (INR mn) 834 1,423 (318) 954
Net profi t (INR mn) 1,469 281 (935) (98)
EPS (INR) 35.3 6.7 (22.4) (2.4)
EPS growth (%) (34.6) (80.9) NM NM
P/E (x) 20.9 109.1 NM NM
ROAE (%) 7.0 1.3 (4.4) (0.5)
Bharat Earth Movers
189
Edelweiss Securities Limited
Current order book
BEMLs order book stands at more than INR60bn with railways accounting for ~INR30bn,
defence ~INR20bn and the balance from mining.
Fig. 1: Products
Source: Company, Edelweiss research
Tatra Vehicles with
non Euro version
Ballistics and
Data Fusion
Other vehicles
Prithvi Missile Launcher
Oxidiser Carrier
Warhead Carrier
Missile Transporter
Ammunition Loader
Pontoon Truck
Medium Recovery Vehicle
Light Recovery Vehicle
Snow Cutter
Armoured recovery Vehicle
Aircraft Towing Tractor
Self Propelled Gun
Wagons
Defence
190
Edelweiss Securities Limited
Financial Statements
Income statement (INR mn)
Year to March FY11 FY12 FY13 FY14
Income from operations 26,438 27,150 28,013 29,037
Direct costs 15,879 15,200 17,120 16,938
Employee costs 6,888 7,317 7,452 7,227
Other expenses 2,837 3,211 3,758 3,918
Total operating expenses 25,604 25,728 28,331 28,083
EBITDA 834 1,423 (318) 954
Depreciation and amortisation 344 447 510 543
EBIT 490 976 (829) 411
Interest expenses 706 1,113 1,620 1,107
Other income 2,056 509 1,094 637
Profit before tax 1,840 371 (1,355) (59)
Provision for tax 371 90 (420) 39
Extraordinary items gain/(loss) - 288 101 159
Reported profit 1,469 569 (834) 61
Adjusted net profit 1,469 281 (935) (98)
Equity shares outstanding (mn) 42 42 42 42
EPS (INR) basic 35 6.7 (22.4) (2.4)
Diluted shares (mn) 42 42 42 42
EPS (INR) fully diluted 35.3 6.7 (22.4) (2.4)
CEPS (INR) 44 17 (10) 11
Dividend per share 11.8 11.7 5.8 1.0
Common size metrics- as % of net revenues
Year to March FY11 FY12 FY13 FY14
Direct costs 60.1 56.0 61.1 58.3
Employee costs 26.1 27.0 26.6 24.9
Other expenses 10.7 11.8 13.4 13.5
Operating expenses 96.8 94.8 101.1 96.7
Depreciation 1.3 1.6 1.8 1.9
Interest expenditure 2.7 4.1 5.8 3.8
EBITDA margins 3.2 5.2 (1.1) 3.3
Net profit margins (adjusted) 5.6 1.0 (3.3) (0.3)
Growth metrics (%)
Year to March FY11 FY12 FY13 FY14
Revenues (6.9) 2.7 3.2 3.7
EBITDA (70.6) 70.5 (122.4) (399.6)
PBT (42.9) (79.8) (464.9) (95.7)
Net profit (34.6) (80.9) (432.7) (89.5)
EPS (34.6) (80.9) (432.7) (89.5)
Balance sheet (INR mn)
As on 31st March FY11 FY12 FY13 FY14
Equity capital 418 418 418 418
Reserves & surplus 21,006 21,336 20,380 20,393
Shareholders funds 21,424 21,753 20,798 20,810
Long term borrowings 1,297 2,477 4,981 4,652
Short term borrowings 6,729 6,971 7,177 4,413
Other long term liabilities 820 4,170 4,060 3,794
Loan funds 8,026 9,448 12,158 9,065
Deferred tax liability/asset (445) (619) (1,039) (992)
Sources of funds 29,826 34,753 35,978 32,677
Tangible assets 4,009 5,399 5,406 6,878
Intangible assets 286 -
CWIP (incl. intangible) 796 240 1,132 -
Total net fixed assets 4,804 5,638 6,824 6,878
Non Current Investments 54 1 1 0
Cash and equivalents 483 1,943 785 175
Inventories 18,970 24,354 24,681 21,608
Sundry debtors 11,680 7,917 8,615 9,774
Loans and advances 4,796 6,809 6,474 5,204
Other current assets 1,385 2,291 3,801 3,066
Total current assets (ex cash) 36,831 41,370 43,572 39,652
Sundry creditors and others 9,138 10,993 11,743 11,485
Provisions 3,206 3,203 3,458 2,541
Total CL & provisions 12,344 14,196 15,201 14,026
Net current assets 24,487 27,174 28,370 25,625
Others - - - -
Uses of funds 29,826 34,753 35,978 32,677
Book value per share (BV) 514 522 499 500
Free cash flow
Year to March FY11 FY12 FY13 FY14
Net profit 1,469 569 (834) 61
Add: Depreciation 344 447 510 543
Add: Deferred tax
Add: Others (7,512) (1,251) (2,235) 6,438
Gross cash flow (5,699) (235) (2,558) 7,042
Less:Changes In Working Capital (4,141) (2,687) (1,196) 2,745
Opertaing cash flow (1,559) 2,452 (1,362) 4,297
Less: Capex 1,971 1,280 1,697 54
Free cash flow (3,530) 1,172 (3,059) 4,243
191
Edelweiss Securities Limited
BEML
Cash flow metrics
Year to March FY11 FY12 FY13 FY14
Operating cash flow (1,559) 2,452 (1,362) 4,297
Financing cash flow (2,008) 56 1,521 (4,242)
Investing cash flow (1,622) (1,048) (1,317) (54)
Net cash flow (5,189) 1,460 (1,158) 1
Capex (1,971) (1,280) (1,697) (54)
Dividend paid (490) (486) (242) (42)
Ratios
Year to March FY11 FY12 FY13 FY14
ROAE (%) 7.0 1.3 (4.4) (0.5)
ROACE (%) 1.7 3.0 (2.3) 1.2
Inventory days (x) 436 585 526 466
Debtors (Days) 161 106 112 123
Fixed assets t/o (x) 5.5 4.8 4.9 4.2
Average working capital t/o (x) 1.2 1.1 1.0 1.1
Payable (days) 210.1 264 250 248
Net debt/Equity 0.4 0.3 0.5 0.4
Operating ratios
Year to March FY11 FY12 FY13 FY14
Fixed assets turnover (x) 5.5 4.8 4.9 4.2
Total asset turnover(x) 0.9 0.8 0.8 0.8
Equity turnover(x) 1.3 1.3 1.3 1.4
Valuations parameters
Year to March FY11 FY12 FY13 FY14
EPS (INR) 35.3 6.7 (22.4) (2.4)
Y-o-Y growth (%) (34.6) (80.9) NM NM
CEPS (INR) 43.5 17.5 (10.2) 10.7
P/E (x) 20.9 109.1 NM NM
Price/BV(x) 1.4 1.4 1.5 1.5
EV/Sales (x) 0.3 0.3 0.4 0.3
EV/EBIDTA (x) 9.0 5.3 NM 9.3
Dividend yield (%) 1.6 1.6 0.8 0.1
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Edelweiss Securities Limited
Brahmos Aerospace (BA) was formed as a JV in February 1998 (50.5%
India share) between DRDO of India and NPO Mashinostroyenia, Russia
(NOPM). It is responsible for designing, developing, producing and
marketing the Brahmos supersonic cruise missiles with active
participation of consortium of Indian and Russian industries. Both the
partners have shared and combined their technological strength, which
enabled birth of the missile. While DRDO had developed crucial systems
like inertial navigation systems, mission software, mobile launchers for
Prithvi and Agni missiles, NPOM has expertise in ramjet engines, launch
vehicles and cruise missiles.
Brahmos ship, submarine, land based launch system in place
Brahmos is a formidable weapon system with unmatched speed, precision and
devastating power. The land based weapon is launched from Mobile Autonomous
Launchers (MBL). The ship based weapon can be launched from frigates, Corvettes,
offshore patrol vessels or any other ship in sea to sea and sea to land configurations
successfully. The Brahmos missile is also capable of being launched from submarine.
While the development work related to air launch version is complete, work has begun
for interface requirements and installation of Brahmos on Sukhoi SU-30MKI.
Hypersonic cruise missile Brahmos II currently under development
While BA already has supersonic cruise missile with a Mach speed of 2.8-3.0 (fastest in
world), it is also developing a hypersonic cruise missile which is estimated to have a
range of 290km with a speed of Mach 7. Like the Brahmos, the range of Brahmos II has
also been limited to 290km to comply with the Missile Technology Control Regime
(MTCR).
Fully equipped integration facilities at Hyderabad
BAs production unit is located at Hyderabad where the missile is integrated at the
Brahmis integration complex which has two major integration bays one for
integration of mechanical systems and the other for assembling electrical/electronic
systems. All the missile subsystems are fabricated at various work centers in India and
Russia and delivered at the complex where the missiles are integrated and checked.
Outlook: Vital pivot
BA has produced the best supersonic cruise missile system BRAHMOS and achieved
innumerous 'Firsts' in the world, making the missile an ultimate weapon of choice for
the Indian armed forces. There is a significant interest in the world in BrahMos cruise
missiles and various active inquiries are already in place.
COMPANY PROFILE
BRAHMOS AEROSPACE
Wings of fire
NOT LISTED
Rahul Gajare
+91 22 4063 5561
rahul.gajare@edelweissfin.com
Amit Mahawar
+91 22 4040 7451
amit.mahawar@edelweissfin.com
Swarnim Maheshwari
+91 22 4040 7418
swarnim.maheshwari@edelweissfin.com
India Equity Research| Defence
July 09, 2014
Brahms Aerospace
193
Edelweiss Securities Limited
Brahmos
Ship based weapon complex system
o INS Rajput
o INS Ranvir
Land based weapon complex system
o Mobile Autonomous Launcher
Air based weapon system
o SU-30MKI (under construction)
Submarine Launch Version
Fig. 1: MBL, Submarine launch version, Ship based weapon system, air launch system (under construction)
Source: Company, Edelweiss research
Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
Edelweiss Securities Limited
Cochin Shipyard (CSL), a fully owned Government of India company, has
emerged as a frontrunner in the Indian ship building and ship repair
industry. Its yard has facilities to build vessels up to 1,10,000DWT and
repair ships up to 1,25,000DWT, the largest such facility in India. CSL is
currently building India's first indigenous aircraft carrier. The Vikrant-
class aircraft carrier will be the first to be designed and built in India and
the largest warship built by CSL. The yard has also delivered two of Indias
largest double hull Aframax tankers each of 95,000DWT.
Indias largest facility with rich repairs experience
CSL yard can build and repair the largest vessels in India. The company has undertaken
repairs of all types of ships including upgradation of ships of oil exploration industry as
well as periodical layup repairs and life extension of ships of Navy, Coast Guard,
Fisheries and Port Trust besides merchant ships of Shipping Corporation of India and
ONGC. The yard has, over the years, developed adequate capabilities to handle
complex and sophisticated repair jobs.
Work on indigenous aircraft carrier INS Vikrant gathering pace
CSL is currently building India's first indigenous aircraft carrier. The Vikrant-class
aircraft carrier (formerly, Project 71 or P-71) is the first aircraft carrier of the Indian
Navy to be designed and built in India. It will be the largest warship built by CSL. The
first carrier of the class was expected to enter service by 2012, but was delayed due to
various reasons. The ship was redocked on February 12, 2013, for completion of all
Phase I activities. Work has picked up pace and it is expected to be ready for sea trials
by 2015 and for commissioning by 2017.
Outlook and valuations: Huge opportunities
The defence and international & domestic commercial shipping sectors are projected
to throw up humungous requirement for ships. This bodes well for CSL, which has been
building expertise in commercial ships and defence business off late. Also, there has
been increasing sourcing of ships from low-cost countries like India from international
players. The Ministry of Shipping's Maritime Agenda's objective is to capture 5% share
of the global ship building and to develop indigenous ancillary industries. This will be a
big opportunity for domestic shipyards like CSL.
COMPANY PROFILE
COCHIN SHIPYARD
Sailing the high seas
NOT LISTED
Rahul Gajare
+91 22 4063 5561
rahul.gajare@edelweissfin.com
Amit Mahawar
+91 22 4040 7451
amit.mahawar@edelweissfin.com
Swarnim Maheshwari
+91 22 4040 7418
swarnim.maheshwari@edelweissfin.com
India Equity Research| Defence
July 09, 2014
Financials (INR mn)
Year to March FY10 FY11 FY12 FY13
Sales 12,485 14,617 14,047 15,542
% change (0.6) 17.1 (3.9) 10.6
EBITDA 3,646 3,902 2,841 3,179
Margins (%) 29.2 26.7 20.2 20.5
No. of employees 1,191 1,121 1,052 976
PAT 2,230 2,275 1,723 1,857
PAT margins 17.9 15.6 12.3 11.9
Cochin Shipyard
195
Edelweiss Securities Limited
Thrust on offshore fabrication, ship repair, defence ship building
The company has identified offshore fabrication, ship repair and defence ship building to be
major future expansion areas. It is looking to set up an international ship repair facility in the
Coachin Port Trust area. The company is also looking to set up a new large sized dock for
taking up underwater repairs of rigs and for future construction of large commercial/ naval
ships.
Fig. 1: SWOT analysis
Source: Industry, Company, Edelweiss research
Highly skilled manpower (1656)
with average 20 years experience.
No tariff barriers on import of ships
affecting domestic industry
Better opportunities in shiprepair
owing to growing Indian fleet and
ships calling at Indian Ports.
Lack of level playing grounds Vis a Vis
foreign yards by way of government
support, level of taxation etc.
Good product mix comprising of
defence ships, commercial ship,
offshore support ships.
Strategic location in the main
sea route.
Shifting of International new building
to lowcost countries like India.
Restrictive labour practices.
Non availability of major equipments/
raw materials in India.
Levy of Service Tax on Shiprepair other
than for Government vessels.
Opportunity
Strength Weakness
Threat
SWOT Analysis
Defence
196
Edelweiss Securities Limited
Financial Statements
Key P&L items (INR mn)
Year to March FY10 FY11 FY12 FY13
INCOME :
Sales 12,485 14,617 14,047 15,542
% change (0.6) 17.1 (3.9) 10.6
No. of employees 1,907 1,818 1,900 1,656
EBITDA 3,646 3,902 2,841 3,179
Margins (%) 29 27 20 20
PAT 2,230 2,275 1,723 1,857
% change 39.4 2.0 (24.3) 7.8
Key BS items (INR mn)
As on 31st March FY10 FY11 FY12 FY13
Net worth 6,803 9,678 10,508 11,757
Gross block 3,496 3,621 3,767 4,443
Capital Employed 5,783 8,292 9,186 9,708
Key Ratios
Year to March FY10 FY11 FY12 FY13
ROE's (%) 32.8 23.5 16.4 15.8
Equity turnover (x) 1.8 1.5 1.3 1.3
Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
Edelweiss Securities Limited
Garden Reach Shipbuilding & Engineers (GRSE) is a Mini Ratna Category I
PSU. It is recognised as a leading ship building yard and manufacturer of
high value ships embedded with most advanced technologies. The
company is under the Ministry of Defences (MOD) administrative
control. GRSEs business profile includes ship building & repairing, engine
assembling & testing and engineering products. Its engine division
develops cost and fuel effective engines for the Indian Navy, Cost Guard,
mining industries and power sector in collaboration with MTU, Germany.
The companys major achievements include keel laying of the Mauritius
Offshore Patrol vessel, inshore patrol vessels for the Indian Coast Guard
(IPV Rajdoot, Rajkamal Rajkiran,Rajtarang).
Strong expertise in building commercial and naval vessels
GRSE has ship building facilities in Kolkata and Ranchi. The company builds various
types of vessels like research related vessels, dredgers, bulk carriers etc. GRSE has
designed and built a number of warships and patrol vessels for the Indian Navy and the
Coast Guard. It built the Aditya class tanker, Brahmaputra class frigates, two Khukri
class and Kora class corvettes. It also built all the Seaward class, Trinkat class,
Bangaram class and Car Nicobar class patrol vessels. Among amphibious warfare
vessels, it has built the Magar class and Shardul class landing ships. GRSE recently won
a contract to build four Kamorta class corvettes.
Modernisation of shipyard to aid in construction of large ships
Phase 2 modernisation of the yard was completed in May 2013 with an objective to
create new ship building infrastructure that would facilitate integrated construction of
large ships using the advanced modular technology. The enhanced facilities will lead to
considerable reduction in build period of ships. GRSE now will be able to implement
modern build strategy of constructing ships using 200 ton mega hull blocks, instead of
conventional practice of building ships with 40 Ton Hull blocks.
Outlook: Plethora of opportunities
Indian Navy is planning to acquire 30-35 ships over the next seven-eight years. GRSE is
also in discussions with MOD/ Navy for contracts of P-17A ships. Also, with increased
thrust on maritime, coastal and near coastal security, there will be good business
opportunities for ship building companies across the country. The company will also be
beneficiary of ship-repair opportunities due to high cost of replacement tonnage.
COMPANY PROFILE
GARDEN REACH SHIPBUILDING & ENGG.
Riding the wave
NOT LISTED
Rahul Gajare
+91 22 4063 5561
rahul.gajare@edelweissfin.com
Amit Mahawar
+91 22 4040 7451
amit.mahawar@edelweissfin.com
Swarnim Maheshwari
+91 22 4040 7418
swarnim.maheshwari@edelweissfin.com
India Equity Research| Defence
July 09, 2014
Financials (INR mn)
Year to March FY10 FY11 FY12 FY13
Sales 4,243 5,462 5,451 4,643
% change (42.7) 28.7 (0.2) (14.8)
No. of employees 4,345 4,117 3,792 3,491
PAT 1,144 1,157 1,080 1,315
PAT margins 27.0 21.2 19.8 28.3
Defence
198
Edelweiss Securities Limited
Fig. 1: Products
Source: Company, Edelweiss research
Engines (in collaboration with MTU of Germany)
Portable bridges
Deck Machinery Items
Pumps
Frigate
Anti Submarine Warfare
Missile Corvette
Landing ship tank ,craft facility
Survey Vessel
Fleet replenishment tanker
Offshore & Inshore patrol vessel
Fast Interceptor boat
Fast attack & Craft raft
Engineering
Shipbuilding & Repair
Engines
Garden Reach Shipbuilding & Engineers
199
Edelweiss Securities Limited
Financial Statements
Key P&L items (INR mn)
Year to March FY10 FY11 FY12 FY13
INCOME :
Sales 4,243 5,462 5,451 4,643
% change (42.7) 28.7 (0.2) (14.8)
No. of employees 4,345 4,117 3,792 3,491
PBT 1,308 1,628 1,694 1,932
PAT 1,144 1,157 1,080 1,315
% change 121.5 1.1 (6.6) 21.8
Key Balance Sheet items (INR mn)
As on 31st March FY10 FY11 FY12 FY13
Net worth 5,924 6,793 7,562 8,570
Capital Employed 4,761 5,591 6,036 7,632
Gross block 2,622 2,961 3,103 4,273
Net Fixed assets 1,490 1,740 1,759 2,798
Working Capital 3,271 3,851 4,276 4,834
Key Ratios
Year to March FY10 FY11 FY12 FY13
ROE's (%) 19.3 17.0 14.3 15.3
Equity turnover (x) 0.7 0.8 0.7 0.5
Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
Edelweiss Securities Limited
Hindustan Aeronautics (HAL) is a Nav Ratna company and the largest
DPSU. It primarily designs, develops, manufactures, repairs and overhauls
aircraft, helicopters, engines and their accessories, navigation and related
communication equipment, as well as operates airports. It has positioned
itself as a comprehensive solutions provider to the Indian defence
services in aviation, spanning fighter aircraft, trainer aircraft and light
helicopters. The company is also manufacturer of the home grown Light
Combat Aircraft (LCA) Tejas.
Global alliances to foster growth
HAL has consistently explored transfer/absorption of technologies by entering into
strategic alliances. It has 10 joint venture companies with international majors like BAE
Systems (UK), RAC MiG (Russia), Snecma (France), Elbit Systems (Israel), CAE (Canada),
Edgewood Ventures (USA), Rolls Royce (UK) and Indian majors like Tata Group,
Infotech Enterprises and Samtel Group. The company is making efforts to increase
exports by utilising opportunities arising out of planned defence acquisitions by the
government with offset obligations.
Robust order backlog; to benefit from assured margin structure
The company has an impressive order backlog of ~INR750bn (FY13), providing revenue
visibility of ~5x FY13 sales. It has a cash war chest of INR130bn (FY13 annual report)
and its RoE stands at 23%. HAL benefits from an assured margin structure for sales to
its defence customers. For the manufacturing programme, prices are fixed based on
assured margins loaded over estimated cost while the pricing for other revenue stream
is based on a normative cost structure plus fixed margin.
Disinvestment on cards; IPO awaited in H2FY15
HAL is likely to be amongst the first state owned entities to hit the primary market
given the divestment target of INR630bn for FY15. The government is likely to file
offload 10% in H2FY15.
Outlook: Opportunities galore
Successful absorption of latest technologies, impressive order backlog, sustained
competitiveness, growth potential and robust pipeline script an imposing story for HAL.
With regard to the offset opportunities, HAL is pursuing closely with all the major
vendors to enter into collaboration for offset liquidation.
COMPANY PROFILE
HINDUSTAN AERONAUTICS
Jewel in the crown
NOT LISTED
Rahul Gajare
+91 22 4063 5561
rahul.gajare@edelweissfin.com
Amit Mahawar
+91 22 4040 7451
amit.mahawar@edelweissfin.com
Swarnim Maheshwari
+91 22 4040 7418
swarnim.maheshwari@edelweissfin.com
India Equity Research| Defence
July 09, 2014
Financials (INR Mn)
Year to March FY10 FY11 FY12 FY13
Sales 134,896 164,508 126,933 142,018
% change 14.2 22.0 (22.8) 11.9
No. of employees 33,990 33,681 32,659 32,644
PAT 19,674 21,143 25,394 29,969
PAT margins 14.6 12.9 20.0 21.1
Hindustan Aeronautics
201
Edelweiss Securities Limited
Company background
HAL came into existence on October 1, 1964. The company was formed by the merger of
Hindustan Aircraft with Aeronautics India and Aircraft Manufacturing Depot, Kanpur. HAL
traces its roots to the late Seth Walchand Hirachand, who set up Hindustan Aircraft at
Bengaluru in association with the erstwhile princely State of Mysore in December 1940. The
Government of India became a shareholder in March 1941 and took over the management
in 1942. Today, HAL has been successful in numerous R&D programmes developed for both
defence and civil aviation sectors. The company has played a significant role in India's space
programmes by participating in the manufacture of structures for Satellite Launch Vehicles
like PSLV (Polar Satellite Launch Vehicle), GSLV (Geo-synchronous Satellite Launch Vehicle) ,
IRS (Indian Remote Satellite) and INSAT (Indian National Satellite).
The companys turnover during FY14 was around INR153bn. The government is planning to
disinvest 10% of its shareholding in the equity capital of the company. HAL has strategic
partnerships with several global aviation majors. It is also involved in the manufacture of
structures for Satellite Launch Vehicles (SLV) for India's space programmes. The company
also supplies transport aircraft and helicopters to airlines as well as state governments. HAL
has 19 production divisions and 10 R&D centres located in Bengaluru, Nasik, Hyderabad,
Lucknow, Kanpur, Korwa, Koraput and Barrackpore. The company exports its products to
more than 30 countries.
Robust product pipeline brightens future
HAL has an impressive product track record15 types of aircraft/helicopters manufactured
with in-house R&D and 14 types produced under licence. HAL has manufactured over 3,658
aircraft/helicopters, 4,178 engines, upgraded 272 aircraft and overhauled over 9,643 aircraft
and 29,775 engines. The company is currently producing the following types of aircraft for
the Air Force, Army, Navy, Coast Guard and civilian requirements:
SU-30MKI, multirole fighter
Hawk - advanced jet trainer
Tejas - Light Combat Aircraft (LCA)
Intermediate jet trainer (IJT)
Dornier 228 light transport aircraft
Dhruv (Advanced Light Helicopter)
Chetak, Cheetah and Cheetal helicopters
HAL has strategic partnerships
with several global aviation
majors. The company exports its
products to more than 30
countries.
Defence
202
Edelweiss Securities Limited
Fig. 1: HALOrganisation structure (complex wise)
Source: Company, Edelweiss research
HAL has made substantial progress in its current projects: Advanced Light Helicopter
Weapon System Integration (ALH-WSI), Tejas - Light Combat Aircraft (LCA), Intermediate Jet
Trainer (IJT) and Light Combat Helicopter (LCH). LCH, a dedicated helicopter, designed and
developed by HAL made its maiden flight in March 2010. This is the first craft in the attack
helicopter category to be designed and developed in India indigenously. It will be suitable
for close air support and attack roles with air to air/ air to ground missiles, rockets, turret
gun, electronic warfare suite and NBC sensors.
Snecma-HAL JV to manufacture aircraft engines
HAL and Snecma JV (50:50) was formed to build components for the Ardiden, a new
helicopter engine that Snecma is developing. The engine was tested on HAL's advanced light
Banglore complex
Aircraft division
Enfgine division
Industrial & Marine Gas turbine division
Foundry & forge division
Aerospace division
MIG complex