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Def ence Def ence

July 09, 2014 July 09, 2014


Ar mor i ng I ndi a Ar mor i ng I ndi a
Edelweiss Securities Limited
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
Gunning for indigenous fire power




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Defence



Why should we import defence equipment, why
cant we send our defence equipment to other
nations. We need to give immense importance to
latest technology. This will help the nation
Mr. Narendra Modi
Honble Prime Minister of India
Excerpts from BJPs Manifesto 2014
Modernize armed forces, and increase the R&D in
defence
Goal of developing indigenous defence technologies
Fast tracking of defence purchases
Strengthen the Defence Research and Development
Organization (DRDO)
Encourage private sector participation and
investment, including FDI in selected defence
industries
Technology transfer in defence manufacturing will
be encouraged to the maximum
Will encourage domestic industry to have a larger
share in design and production of military
hardware and platforms for both domestic use
and exports, in a competitive environment


The slow pace of acquisition of weapon
systems is a matter of concern and the new
government will work towards expediting the
procurement process to meet the requirements
of the armed forces
Mr. Arun Jaitley
Honble Defence Minister of India
Excerpts from Budget 2014-15
Total defence budget increased by 12.4% to
INR2,290bn
Capital expenditure budget raised by 20% to
INR946bn
FDI in defence raised to 49% from the current
26% on composite basis (FDI + FII), with
Indian management control
Beneficiaries would include:
Astra Microwave
Pipavav Defence
Bharat Electronics
Larsen & Toubro
Bharat Forge



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Defence
Executive Summary
In the post cold war scenario, western nations have sizeably
dressed down their defence budgets. Moreover, global
economic downturn has put additional pressure on
governments to scale down their defence spending, impacting
the global armament market. India, on the other hand, has
emerged the largest importer of defence arms and is likely to
spend a whopping USD248bn over the next decade, as few
countries in the world face the range of security challenges, concerns and
threats that it doesterrorism, low-intensity conflict and nuclear weapons.
Ergo, global defence majors cannot afford to ignore one of the most
promising markets and are eager to step up their engagement with India.
Moreover, given the governments intent to enhance private sector
participation in defence, it has put in place the right policy framework
including enhanced FDI limit at 49% in order to develop the required
ecosystem. This is one opportunity that Indian companies cannot miss and to
this end have stepped up engagements with global majors to tap their
expertise. The offsets opportunity, whereby domestic companies get a chance
to tap into this large defence spending, is likely to exceed USD75bn.

USD248bn defence opportunity over next decade; USD75bn for offsets
With Indian defence establishments saddled with high level of obsolete armaments, India is
on the cusp of a major spending drive to modernise its armed forces. Our base case
calculation pegs the countrys likely defence outlay at USD248bn over the next 10 years.
Thus, the Indian defence market will be a significant opportunity for both foreign and
domestic players, given the governments intent to promote the domestic defence industry
via fresh dose of defence reforms. Given sharpening focus on indigenisation and promoting
domestic industrial base with increased participation from the private sector, at 30% offset
requirement, the minimum opportunity for domestic players stands at USD75bn.

Favourable policy framework in place; political intent to drive growth
To reduce import dependency in defence equipment, the government has initiated a slew of
measures to promote the domestic industry. Defence Procurement Procedure (DPP) 2013
was a step in this direction, wherein domestic purchase will be accorded highest priority and
imports will be the last resort to purchase armaments. The new BJP-led governments
manifesto explicitly envisages India as an exporter of defence equipment over the next
decade. The government has done away with the requirement of licences for defence
manufacturing for all but 16 items. Further, in Budget 2014-15, it has increased FDI in
defence to 49% and also enhanced capital expenditure budget by 20%.

Offsets: Tried and tested model; co-production the way ahead
While US, Russia and a handful of western nations have been at the forefront of developing
cutting edge weapons systems, most other countries which have scaled up the learning
curve in defence technologies have done so via use of offsets. Turkey has effectively used
offsets to develop its domestic defence capabilities and has become a sizeable exporter.
While India is already engaged with Russia for co-development and co-production via
BrahMos, similar tie ups with US will positively impact the domestic defence industry.

(Click here for
video clip)




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Self reliance to combat unpredictable restrictive international laws
Defence is controlled by governments world over; hence, exporting nations defence
policies have ramifications for large importers like India. Also, international sanctions,
treaties and certain laws could push importing nations in a corner. Hence, it is imperative
for India to develop its defence industry and become self reliant. ISRO is a classic home
grown case study of how the organisation perceived potential embargo on critical
technology and worked towards developing it in-house/ domestically.

Private sector achieved credibility; delicensing in defence a positive
Post liberalisation of the Indian economy in 1991, the government opened up several
sectors to private players and imports, which flourished in the backdrop of right policies and
ecosystem. The Indian automobile industry has demonstrated the scale that an industry can
achieve given that it is today amongst the top exporters of cars in the world. Also, the auto
components industry has achieved global scale and products are well accepted by global
OEMs. Similarly, Indian pharmaceutical industry has also demonstrated that the private
sector can achieve global scale and world class quality. The recent step by the government
to do away with licensing requirement for all but 16 core defence items, including those of
dual use for military as well as civilian purpose is another step in the right direction for
development of domestic defence industry. This move will encourage private sector and
thus contribute to the indigenisation of defence industry in a meaningful way.

Key challenges and hindrances keeping away private players
Considered strategic and sensitive, defence industry was kept away from private sector with
DPSU and OFBs driving defence manufacturing with R&D led by DRDO. Several marquee
defence projects led by public sector have seen inordinate delays, which is one of the
reasons for armed forces preference to buy from foreign equipment off-the-shelf. Recipient
of transfer-of-technology for such purchases by default is a DSPU and private sector is kept
out of it. The Indian private companies have lobbied for long to be allowed to participate in
defence in a meaningful way along with level playing field, including requirement of the
armed forces being made available to them so as to direct their R&D focus accordingly. The
domestic private sector is also disadvantaged due to currency volatility compared to foreign
players. The recent policy changes are a welcome step which will encourage private sector
to invest for capabilities.

L&T, Tata Group favourably placed to tap opportunity; prefer BEL, AMP
Domestic defence manufacturing is dominated by defence public sector undertakings
(DPSU) and Ordnance Factories Board (OFB) with 80-90% share in domestic defence
manufacturing. However, various private sector companies have been involved in a small
way with several defence projects over the past years. Larsen & Toubro (L&T), Tata Group,
Pipavav, amongst others, have tied up with global defence majors and have created
infrastructure required to take on bigger roles in the defence space. These companies are
yet to make a significant impact given the tardy processes involved in bagging defence
orders. We initiate coverage on Astra Microwave (AMP) with a BUY and prefer Bharat
Electronics (BEL) and AMP by virtue of them being pure defence play. Listed beneficiary
companies will include L&T, Bharat Forge, Tata Group companies, Mahindra & Mahindra,
Ashok Leyland, Bharat Earth Movers and Pipavav Defence. We believe defence could be the
sunrise industry of the next decade for Indian companies.

Direct Defence Play
Bharat Electronic
Astra Microwave
Pipavav Defence
Large Defence Potential
L&T
Tata Group
M&M Group
Other Defence Beneficiaries
Bharat Forge
Ashok Leyland
Bharat Earth Movers



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Defence
Contents

Executive Summary .................................................................................................................. 3
Key charts at a glance .............................................................................................................. 6
Defence: Macro Economics and Market Opportunity ............................................................. 8
Government, Regulatory Perspective .................................................................................... 16
Private Players Can Enhance Efficiency .................................................................................. 20
Indias Artillery Gun: FARP Programme ................................................................................. 28
Advanced Technology Vessel Project: Nuclear Submarine .................................................... 32
Light Combat Aircraft: Tejas ................................................................................................... 36
Key Drivers for Defence Spending and Geopolitics ................................................................ 40
Current State of Indian Defence Industry .............................................................................. 49
Trends in Global Defence Spending ....................................................................................... 56
Recent Trends in Industry ...................................................................................................... 64
Key Challenges Facing Industry/ Players ................................................................................ 66
Case studies on models adopted by various countries .......................................................... 70
Turkey: Evolution of domestic defence industry ............................................................... 70
South Korea: North Korean hostility helped develop defence industry ............................ 71
Israel: French embargo drove Israel towards self sufficiency in defence .......................... 72
ISRO: Adversity turned into opportunity for Indian companies ........................................ 73

Companies
Ashok Leyland ........................................................................................................................ 75
Astra Microwave .................................................................................................................... 83
Bharat Electronic .................................................................................................................. 101
Bharat Forge ........................................................................................................................ 111
Larsen & Toubro .................................................................................................................. 117
M&M .................................................................................................................................... 129
Reliance Industries ............................................................................................................... 137
Solar Industries .................................................................................................................... 143






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Defence
Tata Group ..................................................................................................................... 149
Tata Advanced Materials ..................................................................................................... 150
Tata Advanced Systems ....................................................................................................... 153
CMC...................................................................................................................................... 159
Tata Motors ......................................................................................................................... 165
Tata Power ........................................................................................................................... 175
Bharat Dynamics .................................................................................................................. 185
Bharat Earth Movers ............................................................................................................ 188
BrahMos Aerospace ............................................................................................................. 192
Cochin Shipyard ................................................................................................................... 194
Garden Reach Shipbuilders and Engineers .......................................................................... 197
Hindustan Aeronautics ......................................................................................................... 200
Hindustan Shipyard .............................................................................................................. 206
Mazagon Docks .................................................................................................................... 209
Mishra Dhatu Nigam ............................................................................................................ 215
Ordinance Factory Board ..................................................................................................... 218
Pipavav Defence................................................................................................................... 221
Rolta ..................................................................................................................................... 233
Walchandnagar Industries ................................................................................................... 237

Annexure .............................................................................................................. 241






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Defence
Key charts at a glance
Indian defence capex - Spiralling upwards Procurement priority Made-in-India over imports

Source: MoD, Edelweiss research Source: DPP 2013, Edelweiss research

USD163bn, of USD248bn, projects ripe for awarding Per capita defence spend globally India lags woefully

Source: Industry, Edelweiss research Source: Nation Master, Edelweiss research




Structural shift likely in India, in line with global model, where the integrator does ~20% of value add and relies on suppliers

Global structure Current Indian structure Future Indian structure expected
Source: Industry, Edelweiss research

0
600
1,200
1,800
2,400
3,000
9.7% CAGR
15.8% CAGR
12% CAGR
F
Y
9
7
F
Y
9
9
F
Y
0
1
F
Y
0
3
F
Y
0
5
F
Y
0
7
F
Y
0
9
F
Y
1
1
F
Y
1
3
F
Y
1
5
E
F
Y
1
7
E
F
Y
1
9
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F
Y
2
1
E
F
Y
2
3
E
(
I
N
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b
n
)
Defence capital spending
Defence
Spending
Wingwise
Project
Identified
(USD mn)
Army 41,855
Navy 69,910
Ai r Force 51,742
Total 163,507
Integrator
(50% value addition)
Component suppliers
(Main private
companies)
(50% value addition)
Integrator
Tier 1 / Tier 2
(80% value addition)
Component suppliers
(20% value addition)
Integrator
(20% value addition)
Tier 1 suppliers
Tier 2 suppliers
Component suppliers
Buy (Indian)
Buy & Make (Indian)
Make
Buy & Make with ToT
Buy Global
0
320
640
960
1,280
1,600
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Per-capita spending World average




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Defence
Global peer comparison

Source: Bloomberg, Edelweiss research
Company
Market
Cap
(USD mn) Year Revenue EBITDA Adj. PAT
EBITDA
Margins
(%)
EV/
EBITDA
(x)
P/E
(x)
P/B
(x)
ROE
(%)
Thal es 12,327 CY13 14,194 1,481 573 10.4 5.2 16.4 2.5 15.4
(France) CY14E 13,335 1,493 711 11.2 5.1 12.5 2.0 15.8
CY15E 13,670 1,556 765 11.4 4.9 11.6 1.8 15.1
Lockheed Marti n 50,139 CY13 45,358 5,495 2,981 12.1 9.7 14.9 9.6 120.3
(USA) CY14E 44,743 6,443 3,533 14.4 8.2 14.5 10.1 67.6
CY15E 44,355 6,607 3,676 14.9 8.0 13.6 8.6 60.1
Boei ng 92,043 CY13 86,623 3,031 4,585 3.5 10.6 21.8 6.9 44.2
(USA) CY14E 89,951 2,100 5,097 2.3 9.5 16.8 5.7 34.2
CY15E 94,205 10,335 5,614 11.0 8.6 15.3 5.7 37.1
BAE Systems 22,547 CY13 18,180 3,031 168 16.7 4.6 83.7 4.1 4.7
(UK) CY14E 17,190 2,100 1,219 12.2 6.6 10.8 3.6 34.3
CY15E 17,304 2,147 1,259 12.4 6.5 10.3 3.4 29.4
Raytheon 28,611 CY13 23,706 3,383 1,996 14.3 8.6 14.9 2.6 20.9
(USA) CY14E 22,749 3,692 2,171 16.2 7.9 13.3 2.7 19.1
CY15E 22,324 4,027 2,363 18.0 7.2 11.8 2.3 19.3
General Dynami cs 39,501 CY13 31,218 4,241 2,357 13.6 9.2 13.6 2.3 18.2
(USA) CY14E 30,355 4,263 2,507 14.0 9.2 15.7 2.7 17.7
CY15E 30,680 4,404 2,598 14.4 8.9 14.7 2.6 18.2
Northrop Grumman 25,649 CY13 24,661 3,618 1,952 14.7 7.7 13.6 2.3 19.4
(USA) CY14E 23,673 3,658 1,989 15.5 7.6 13.0 2.5 19.1
CY15E 23,127 3,642 1,981 15.7 7.6 12.1 2.5 19.3
Ai rbus 50,224 CY13 59,256 4,224 1,465 7.1 8.3 30.2 4.0 13.7
(France) CY14E 59,723 5,794 2,421 9.7 6.1 14.9 2.9 19.9
CY15E 62,827 6,620 2,936 10.5 5.3 12.5 2.5 20.1
Uni ted Technol ogi es 104,205 CY13 62,626 9,879 5,721 15.8 12.3 18.3 3.3 19.8
(USA) CY14E 65,162 12,157 6,268 18.7 6.1 16.6 2.9 18.5
CY15E 68,417 13,073 6,938 19.1 9.3 14.9 2.7 19.0
Financials (USD mn) Valuations



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Defence
Defence: Macro Economics and Market Opportunity

GDP scenarios over next 10 years; USD248bn opportunity for defence
While Indias average real GDP grew 7.9% during the past 10 years, it faltered to below 5%
during the past two years; in FY14, it dropped to 4.7%, the lowest in 10 years. We believe
the Indian economy has bottomed out and should see gradual pick up here on.

Indias defence capital spending between FY96 and FY04 posted ~10% CAGR. However, over
the past 10 years, capital spending in defence posted ~15% CAGR, broadly in line with the
nominal GDP growth. This shift is primarily due to two reasons: (1) increased impetus to the
modernisation drive from FY05; and (2) increase in the proportion of capital expenditure
from ~30% of total defence budget to about ~40%.

Our analysis of historical GDP and defence capital spending pegs average defence capital
spending at 0.7% of GDP. In our base case assumption, we have estimated nominal GDP
growth of 12% over the next 10 years (real GDP at 6% and inflation at 6%). We did sensitivity
analysis for GDP growth and inflation estimates keeping the percentage of capex related
defence spending to overall GDP constant at 0.7% over the next 10 years.






This is broadly in line with the projection made by the Ministry of Finance through the
Thirteenth Finance Commission, which projects 7% growth in defence revenue expenditure,
while capital expenditure is projected to grow by 10% per annum. The Finance Ministry also
noted that there exists considerable scope to improve the quality and efficiency of defence
expenditure through engagement of the private sector in the space.

In our worst case scenario of 4% GDP growth with 4% inflation, capital defence spending is
expected at ~INR11,470bn or ~USD198bn over the next 10 years, thus giving an annual run
rate of ~USD20bn. This is significantly above the current budgeted capital expenditure for
FY15 of ~USD15bn. In our best case scenario of 8% GDP growth with 8% inflation, capital
defence spending is expected at ~INR18,132bn or ~USD313bn over the next 10 years, thus
giving an annual run rate of over USD31bn.

Table 1: Sensitivity Analysis: Defence capital expenditure over the next decade

Source: Edelweiss research

4% 5% 6% 7% 8%
4% 11,470 12,140 12,852 13,607 14,409
5% 12,140 12,852 13,607 14,409 15,259
6% 12,852 13,607 14,409 15,259 16,161
7% 13,607 14,409 15,259 16,161 17,117
8% 14,409 15,259 16,161 17,117 18,132
(INR bn) Real GDP Growth
I
n
f
l
a
t
i
o
n
With bottoming out of the Indian
economy, defence capex is likely
to get a leg up given significant
pent up ordering
Defence capex likely over the next
decade:
- Best Case: USD313bn
- Base Case: USD248bn
- Worst Case: USD 198bn
Our top-down assumption makes a case for GDP (nominal) growth of 12% (real GDP at
6% and inflation at 6%). This entails total size of capital defence spending at
~INR14,409bn or USD248bn, thus throwing an annual run rate of ~USD25bn over the
next 10 years.
4% 5% 6% 7% 8%
4% 198 209 222 235 248
5% 209 222 235 248 263
6% 222 235 248 263 279
7% 235 248 263 279 295
8% 248 263 279 295 313
I
n
f
l
a
t
i
o
n
(USD bn) Real GDP Growth





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Defence
Chart 1: Capital spending in Indian defence

Source: Ministry of Defence, Edelweiss research

Ordering pattern in recent years; India biggest importer of armaments
After independence, most Indian weapon systems and equipment were of British origin.
Gradually, India shifted towards other European nations including Soviet Union. Currently, a
large part of the Indian defence armaments is of Russian origin. It is only in recent years that
India has stepped up engagement with other nations in a big way. While Russia continues to
remain its largest weapon supplier, Israel has been a distant second with trade between the
two countries pegged at USD1.5-2.0bn annually. India, in fact, is an export target for Israels
defence industries. In recent years, US too has stepped up engagement with India with
export of weapons/ defence systems. Given that India is likely to be one of the largest
spenders on defence equipment, no nation can ignore its defence market.

During the past five-six years, the country spent close to INR1,927bn (USD38bn) on capital
expenditure with significant part spent towards equipment upgrade programmes. The
spending over the next decade is likely to top USD248bn on purchase of equipment along
with upgrading programmes. This is likely to be a big opportunity for development of the
domestic defence industry via offsets requirement on defence purchases from global
players.

Opportunity over the next decade; readying for component export
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 the coming years, in
addition to massive upgrade programmes. We have listed below defence purchases of
about USD163bn expected over the next decade which are likely to open up a huge market
for all stakeholders including 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. The offset model has been
successful globally with Turkey, South Korea being sound examples of the same.

Developing domestic defence manufacturing capability is high on the governments agenda,
demonstrated through DPP 2013, where imports would be the last resort for acquisition and
0
600
1,200
1,800
2,400
3,000
9.7% CAGR
15.8% CAGR
12% CAGR
F
Y
9
7
F
Y
9
9
F
Y
0
1
F
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0
3
F
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5
F
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F
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Defence capital spending
From 10% CAGR, the defence
capex has grown at ~15% during
the past decade. We expect it to
sustain a 12% CAGR over the next
decade
USD 38bn spent during the past 5-
6 years
Defence
Spending
Wingwise
Project
Identified
(USD mn)
Army 41,855
Navy 69,910
Ai r Force 51,742
Total 163,507



10

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Defence
buying made in India would be accorded top priority. The offsets are likely to help develop
the required ecosystem for major private players to emerge.

Given the cost advantage and highly skilled engineering talent base, India has already
carved a niche in frugal engineering. Coming at par with the global supply chain will be the
next logical move for domestic companies. We already have instances of such partnerships
where Tata Advance Systems is catering to the global market by supplying aero structures
from its manufacturing facilities in Hyderabad.
Land systems / army requirements
In the 11th Plan, average capital expenditure in land systems was 21% of total capital
expenditure. Major investments are planned in Bharat Dynamics (BDL) and OFB in the
12th Plan. Assuming the capital expenditure in land systems being maintained at the
same proportion of 21% of the overall capital expenditure in defence budget, the
volume of same is expected to be INR935bn during the 12th Plan period.

Streamlining of Indias defence procurement policy offers a unique opportunity for
Indian companies to provide services to the armed forces. Indian Armys acquisition
plan over the next 10-15 years includes the following:

Table 2: Defence purchases expected to be undertaken by Indian Army over the next decade

Source: Industry, Edelweiss research


Equipment/ Projects
Quantity
(Nos)
Spending
(USD mn) Remarks / Comments
Ul tra Li ght Howi tzers 145 885 For Mountai n Corps (mai nl y FMS route)
Wheel ed Howi tzers 185 1,000 Several domesti c pl ayers have shown
Tracked Howi tzers 100 2,000 i nterest to parti ci pate i n arti l ery guns
Short Range Qui ck Response Surface to Ai r Mi ssl e (QRSAM) 78 1,400
T-90 Tanks EW System 1,657
T-90 Tanks 235 1,000
T-90 Tanks - Upgrade Mi ssl e System (Invar) 90 470
Roboti c mi l i tary vehi cl es / tacti cal unmanned vehi cl es (Daksh) 20 100
Future Mai n Battl e Tanks 1,000 5,000
Futuri sti c Infantry Combat Vehi cl e 2,610 10,000 BMP-3 (Abhay) to be Buy & Make program
Ni ght vi si on equi pments 5,000 500
Battl efi el d Management Systems 5,000 Thi s i s l i kel y to be bi dded on the l i nes of
the TCS Project where 2 Indi an cos have to
be shortl i sted for prototypes
Future Infantry Sol di er as a system (F-INSAS) - Phase I 5,000
Tacti cal Communi cati on Systems 2,000
Combat Hel i copter 114
Li ght Hel i copter 400
Radars and Radi os etc 2,500
Rockets and Mi ssi l es etc 5,000
Sub total 41,855
Advantage India for exports low
cost and highly skilled
engineering talent base





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Defence
Naval systems / navy requirements
Keeping long-term maritime interest in focus, the Indian Navy has embarked upon an
acquisition programme to enhance its capacities substantially for both warships and
submarines. This is to consolidate its position in the Indian Ocean and beyond in
alignment with its redefined strategic interests in a structured manner. The long-term
perspective programme is to acquire indigenous capability in design, development and
construction of ships and submarines. Though the Navy was the first force to embark
on indigenisation way back in 1960s, very little ground has been covered over time.
Based on our interactions with several industry players, the current level of
indigenisation is as under:

Fig. 1: Current level of indigenisation

Source: Industry, Edelweiss research

As per Indian Navys vision, it expects to become a well equipped maritime force which
will include aircraft carriers and various types of combatants including submarines. In
alignment with the Maritime Capability Perspective Plan (MCPP), currently there are 45
vessels on order, of which 43 have been placed with Indian shipyards with the latest P-
28 ASW Corvettes planned for an indigenous content of over 90%. Apart from
indigenous development, two warships are being built along with refitting and
refurbishment of aircraft carriers at Russian shipyards. In addition, the Indian Coast
Guard has also undertaken a massive plan to upgrade its capabilities to protect Indias
coast line more effectively. In the aftermath of Mumbai terrorist attack, nine more
Coast Guard stations are being added to the existing 30.


Float : ~80-90%
Move : ~50-60%
Fight : ~30%
Indian Navy was the first force to
embark on indigenisation way
back in 1960s
Indian Navy was the first force to
embark on indigenisation way
back in 1960s
43 warships under construction as
Indian shipyards



12

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Defence
Table 3: Defence purchases expected to be undertaken by Indian Navy over the next decade

Source: Industry, Edelweiss research

Aerospace / Air Force requirement
New acquisitions during 12th and 13th Plan periods will almost double the military
aircraft and helicopters produced in the next five years. Around 650 aircraft are
estimated during the 12th Plan period compared to around 300 during the past five
years.

Hindustan Aeronautics (HAL) has been a major producer of aircrafts for the Indian
armed forces. The companys FY14 turnover was ~INR153bn with an annual growth
rate of more than ~8%. The growth is expected to continue and improve during the
12th Plan. HALs turnover at 12th Plan end (FY17) is estimated at INR235bn. The new
programmes will create employment opportunities in HAL. Its manpower requirement
at 12th Plan end is estimated at 42,500 from the current 34,000.

Capital investment of INR94bn is estimated for implementation of new projects during
the 12th Plan and beyond. Capital investments during 11th Plan were ~INR14bn.


Equipment/ Projects
Quantity
(Nos)
Spending
(USD mn) Remarks / Comments
Di esel El ectri c Submari nes 6 7,920 Project 75i - 3 by MDL, 1 by HSL and 2
Forei gn Technol ogy Partners
Di esel El ectri c Submari nes - Scorpene 6 8,000
Nucl ear Power Submari nes (On l ease) 1 1,500
Nucl ear Power Submari nes 4 12,000
Barak I Mi ssi l es 262 142 MoD i n Dec13 cl eared i t for Ai rcraft
Carri ers - Vi rat & Vi kramadi tya
Anti -submari ne warfare (ASW) shal l ow water craft 16 2,168 MoD approved purchase on 23Dec13.
Eurocopters NH-90 & Si korsky's S-70
Bravo are i n the race
Mi G-29K 45 2,000
Patrol ai rcrafts P-8I Posei don (From Boei ng) 8 2,100
Patrol ai rcrafts P-8I Posei don (From Boei ng) 4 880
Ai rcraft Carri ers (Vi kramadi tya & Vi kraat). Vi raat i s due to reti re 2 2,300
Warshi ps - Fri gates, Destroyers and Corvettes 46 20,000
Landi ng Pl atform Dock 4 2,600 Tendered i n Dec'13. 2 to be bui l t by pvt cos
and 2 by HSL.
Surface Survei l l ance Radars 31 300
Mul ti rol e Hel i copter 123 8,000
Sub total 69,910
650 new aircraft and helicopters
expected during the 12
th
Plan
period





13

Edelweiss Securities Limited
Defence
Table 4: Defence purchases expected to be undertaken by Indian Air Force over the next decade

Source: Industry, Edelweiss research

Electronic warfare systems across all wings
The defence electronics sector is likely to clock higher growth during the 12th Plan
period. While the Navy and IAF are likely to contribute about 15% each, bulk of the
demand (about 70%) will come from the Army. Network-centric systems, radars,
communication systems, electronic warfare and electro optic equipment will be in
demand.

Equipment/ Projects
Quantity
(Nos)
Spending
(USD mn) Remarks / Comments
Mul ti Rol e Medi um Combat Ai rcraft (MMRCA) 126 10,000 Sel ected Dassaul t's Rafal e (18 i n fl y away
condi ti on, bal to mfg by HAL thru TT)
Fi fth Generati on Fi ghter Ai rcraft 144 15,000 Devel opment cost coul d be hi gher and not
i ncl uded
Li ght Combat Ai rcraft 200 5,000 Devel opment cost coul d be hi gher and not
i ncl uded
Sukhoi Fi ghter (SU-30MKI) Ai rcrafts 42 4,500
Medi um Li ft Transport Ai rcraft 56 2,400 16 to be bought and 40 to be made l ocal l y.
Ai rbus has proposed setti ng up assembl y
l i ne for i ts C295 ai rcraft.
Combat Hel i copters 22 1,200 Boei ng's Apache i s i n the reckoni ng for
thi s order
Heavy l i ft hel i copters 15 1,400 Boei ng'sCH-47 Chi nook (most l i kel y)
C-130J - Super Hercul eus 6 1,100 6 were ordered out on 27 Dec 13 through
FMS. Intenti on i s to add 6 more
C-17 Gl obemaster III 6 1,200 10 were ordered out on 27 Dec 13 through
FMS. Intenti on i s to add 6 more. 30% offset
i n pl ace for thi s.
Li ght Combat Ai rcraft Engi ne (GE) 99 560
Mi d-ai r refuel l i ng ai rcraft (Ai rbus A330 MRTT ) 6 1,000 Govt asked Ai rbus to hol d the pri ce ti l l
Jul y'14.
Mi G 29 upgrade 69 964
Advanced MRMR pl anes 6 1,000
Medi um Li ght Hel i copter 172 286
ASW Hel i copter 391
KA 28 Hel i copter upgrade 100
Unmanned Aeri al Vehi cl e 7 71
Trasportabl e Radars 1,200
EL/M-2083 Aerostat Ai r Search Radars 9 2,700
Ai rborne Earl y Warni ng and Control Systems 400
Ai r Defence System 1,000
AFV Protecti on and Counter Measure System 270
El ectroni c warfare sui tes for fi ghter ai rcrafts
MMTA
Sub total 51,742
Army to drive major share in
electronic warfare system



14

Edelweiss Securities Limited
Defence
Major products and systems planned for induction by the Defence Ministry during 12th
Plan are battlefield management systems, future infantry soldier as a system, long-
range surveillance radars, weapon locating radars, mountain radars, tactical
communication systems, software defined radios, electronic warfare systems for
different terrains, unmanned aerial vehicles and aerostats, electronic warfare suites for
fighter aircrafts, long range electro optical surveillance systems, thermal imager-based
sights for tanks and weapons, image intensifier based passive night vision devices and
weapon and missile systems.

Fig. 2: FirepowerC-130J Super Hercules landing in Ladakh, worlds highest airstrip

Source: Media

Offset policy: How India has done so far and the way ahead
The key objective of the Defence Offset Policy is to leverage capital acquisitions to develop
the domestic defence industry. This has been the modus operandi followed by several
countries, which today have a fairly developed defence industry.

While the offset requirement is currently pegged at 30% of the total contract value, the
same could be increased or decreased by the Defence Acquisition Council (DAC) on case-to-
case basis. For the 126 Medium Multi-Role Combat Aircraft (MMRCA) contract, the offset
requirement stands at 50% of the contract value. The policy will apply to capital acquisition
under the Buy (Global) and Buy and Make with Transfer of Technology where the contract
value is INR3bn and above. The offset requirement will not apply to procurements under
the fast track procedure.

The offset obligations have to be discharged within the period that can extended by a
maximum two years from the conclusion of the main procurement including the warranty
period. There are some reservations which foreign OEMs have highlighted regarding
inability to discharge the offset requirement due to difficulty in identifying domestic
partners.


Offset at atleast 30% of the total
contract value





15

Edelweiss Securities Limited
Defence
Indian companies vying for being part of global supply chain of OEMs
India has displayed excellence in several industries including auto/auto component, IT/ITES,
generic pharmaceuticals, amongst others. Today it is recognised as a hub for auto
components and small cars in particular, globally. Similarly, India is one of the serious
players in the generic pharmaceutical industry globally.

In the defence industry, the private sectors role has been restricted to providing raw
material, semi-finished products and parts/ components to DPSUs and OFBs. With
developed nations defence budgets shrinking and global defence companies looking at
ways to reduce costs, manufacturing in India could be a logical choice for these companies.
Several leading technology companies have R&D centres in India, a testimony to the
countrys skills in the high technology industry. Several Indian companies are currently
working or exploring to work in the high tech defence industry. Experiences of a handful of
companies, currently part of the global supply chain, albeit on a small scale, see traction
improving with potential to significant scale up.

R&D centres of leading high tech
companies in India is a testimony
to the countrys skills in cutting
edge technology



16

Edelweiss Securities Limited
Defence
Government, Regulatory Perspective

Evolution of DPPs over the years; encourage domestic 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 Kelkar Committee report on review of DPP had recommended an integrated approach
involving users, Ministry of Defence and the industry in the Make procedure. DRDO should
concentrate on projects requiring sophisticated technology of strategic, complex and
security sensitive nature. Outsourcing of research and development work of high technology
to private sector should be on the lines of parallel development for which the cost should be
shared. A minimum order quantity to sustain the financial viability of development within
the time schedule should be spelt out to encourage private sector participation. These
recommendations were accepted by the government for implementation.

The DPP has evolved since 2002 with the latest being DPP 2013. While the private sector will
always angle for more benefits and concessions, the ones that emerge out of our
discussions with industry captains are listed below:

1) Permitting exports, the most important point
2) Balance nomination across public and private sectors
3) R&D support from the government as is available in
other countries
4) Infrastructure industry status for tax benefits
5) Better duty structure
6) Keep all duties, taxes out of L1 calculations, thus
making like-to-like comparison with foreign players

Fig. 3: Evolution of DPP over the yearsProgressing with each amendment

Source: DPP, Edelweiss research

DPP 2002 DPP 2006 DPP 2008
DPP Amendment
2009
DPP Amendment
2011
Introduced after the Kargil
conflict to formalise the
procurement process by
the Ministry of Defence.
Applicable to
procurements flowing out
of 'Buy' decision of DAC
Document revised in 2003
to include procurements
under 'Buy and Make'
category
Extended to include
procurements under the
FTP, 'Make' category and
procedure for indigenous
warship building
Concept of offsets
introduced, envisaged
USD10bn to flow back
between 2007-2012
Transfer to technology
envisaged in the 'Buy'
category
Level playing field
between DPSUs and RURs
addressed
Decision taken to review
the DPP after two years
Introduced concept of
offset banking; allowing
vendors to discharge their
offset credit against RFPs
issued within two financial
years of date of approval
of banked credits
Removal of offset
obligation for contracts
with a least 50%
indigenous content
Increased offset obligation
to 50% on a per case basis
Change in licensing policy,
with a private company
requiring license only if
stipulated licensing
requirement for defense
industry, issued by
Ministry of Commerce
Increased information
provided during issue of
RFPs
Offset penalty introduced
Introduced a new category
of procurement - 'Buy and
Make (Indian)' to issue
RFPs to only Indian
vendors who have the
requisite financial and
technical capabilities
Public version of LTPP
covering a period of 15
years to be widely
publicised
Enhancement of role of
independent monitors in
integrity Pact
Liberalisationof offset
provisions by permitting
change in offset partner
First serious effort
towards increasing the
role of private players in
defense procurement and
promotion indigenisation
The existing Chapter-III on
"Ship Building" in DPP has
been comprehensively
revised to include
guidelines for shipbuilding
to promote competition
between the Private and
Public Sector Shipyard
and improve delivery
indices
The scope of Offset Policy
Guidelines in being
expanded to include "civil
aerospace", "internal
security and "training"
Kelkar Committee
recommendations accepted by
the government to encourage
private sector participation





17

Edelweiss Securities Limited
Defence
DPP 2013: To boost domestic defence manufacturing
The Defence Acquisition Council (DAC), apex body of the Ministry of Defence, approved
(notified in May 2013) new norms for defence procurement with specific emphasis on
strengthening defence manufacturing in the country over foreign buying and greater
transparency in defence procurement to stem corruption.










Fig. 4: Priority of sourcing arrangementForeign buying the last resort

Source: DPP, Edelweiss research

DPP 2013: Key highlights
1. Prioritisation of various categories with foreign buying being a choice of last resort.
2. Release of long-term plan (15 years) outlining defence requirement, thus helping
channelise private sector R&D effectively.
3. Maintenance contract will no longer be given through nomination to DPSUs, thus,
opening it up for the private sector.
4. Simplification of Buy & Make (Indian) procedure.
5. Clear definition of indigenous content, which is important to armed forces for reliable
supply chains.
6. Efficiency in defence procurementto freeze Services Qualitative Requirements (SQRs)
before the Acceptance of Necessity (AoN), where validity has been reduced from two
years to one year.
7. Enhanced delegation to service chiefs/ DG (Coast Guard) from INR500mn to
INR1,500mn for capital acquisition cases.
8. Powers to DAC to approve any deviation in requirements.
Buy (Indian)
Buy & Make (Indian)
Make
Buy & Make with ToT
Buy Global
Any proposal to select a particular
category must now state reasons
for excluding the higher preferred
category
Through this policy: (1) domestic defence companies will get access to the militarys
long-term (15 years) equipment road map, providing them with the time needed for
developing the equipment that the armed forces need in the future; (2) it will also
provide a level playing field to private defence companies vis-a-vis DPSUs in terms of
time to develop equipment; (3) it simplifies the Buy & Make (Indian) procedure to
benefit domestic industry; and (4) finally, it defines ambiguous terms in DPP like
indigenous content.



18

Edelweiss Securities Limited
Defence
One disappointment in DPP 2013 was not simultaneously increasing FDI in defence from
26% currently. This would have fast tracked the process of domestic manufacturing through
tie up with foreign players given foreign collaborators would be unlikely to part with core/
critical technical know-how with just 26% stake. However, the private sector continues to
keep a vigil and is hopeful that FDI will be hiked in future to at least 49%.

DPP 2013: Nuts and boltsProcurement procedures
DPP 2013 lays specific emphasis on strengthening defence manufacturing in the country
over foreign buying and greater transparency in defence procurement to stem corruption.
We have detailed below the process for procurement under DPP for each of the categories.

Fig. 5: Process for Buy, Buy and Make with ToT and Buy & Make (Indian)


Fig. 6: Acquisition process under Make category

Source: DPP 2013, Edelweiss research

SQR
AON
Solicitation of
offers
Evaluation of
technical offer
by TEC
Field evaluation
Staff evaluation
Oversight by TOC
for acquisitions
above INR3bn
Commercial
negotiations by
CNC
Approval of CFA
Award of
contract / Supply
order
Contract
administration
and post
contract
management
Defence
Capability Plan
LTIPP
PSQR
Feasibility
Study
Categorisation
and AON by
DAC
Constitution of
IPMT
Stages Leading
to DPR
CFA Approval
Design and
Development
of Prototype
User Trials by
Service HQs
Staff
Evaluation
Solicitation of
Commercial
Offers
Commercial
Negotiations
by CNC
Award of
Contract
SQR: Services Qualitative
Requirements; AON: Acceptance of
Necessity; TEC: Technical Evaluation
Committee; TOC: Technical
Oversight Committee; CNC:
Contract Negotiation Committee;
CFA: Competent Financial Authority;
SO: Supply Order
LTIPP: 15 years Long Term
Integrated Perspective Plan; PSQR:
Preliminary Services Qualitative
Requirements; DPR: Detailed
Project Report; DAC: Defence
Acquisition Council





19

Edelweiss Securities Limited
Defence
Fig. 7: Process for acquisition process for naval ships

Source: DPP 2013, Edelweiss research

Fig. 8: Broad time frame for procurement activities

Source: DPP 2013, Edelweiss research

Outline Staff
Requirements
Acceptance of
Necessity
Nomination of
Shipyards
Preliminary
Staff
Requirements
Preliminary
Design
Preliminary
Build
Specifications
Build Strategy
Budgetary and
Estimated Costs
Contract
Negotiations
Approval of CFA
Conclusion of
Contract
Detailed Design
Procurement of
Ship-borne
Equipment
Monitoring of
Projects
Revision of Cost
Closure of the
Project
Liquidated
Damages, if
applicable
0
0
04
08
03
17
12
32
04-08*
36*
20-45
56-81
04
64-89
(I) Multi vendor 06
(ii) Resultant Single
Vendor (18-26)
(I) Multi vendor 74-99
(ii) Resultant single
vendor 86-119
02
04
04
06
14
03
20
04
36
04*
36*
04
60-85
04
68-93
04-16
(I) Multi vendor 78-115
(ii) Resultant single
vendor 90-135
(I) Multi vendor 80-117
(ii) Resultant single
vendor 92-137
Time (in weeks) Cumulative time (in weeks)
*Concurrent activity # Offset Activity
1. Acceptance of necessity
2. Initiation of draft RFP for collegiate vetting at MoD
3 Issue of RFP
4. Pre Bid meeting
5. Dispatch of Pre Bid reply
6. Receipt of responses
#(Receipt of offset Compliance Commitment)
7. Completion of TEC report
#(Submission of Technical and Commerical Offset proposals)
8 Acceptance of TEC report
#(Acceptance of TOEC report by DG (Acq))
9. Completion of Technical offset Evaluation Committee Report
10. Acceptance of Technical Offset Evaluation Committee Report
11. Completion of Field Evaluations (Trials)
12. Completion of Staff Evaluation
13. Acceptance of Trials/Staff Evaluation Report
14. Acceptance of TOC Report (if applicable)
15. (I)Finalisation of CNC Report
(ii) Finalisation of Offset Contract
#(Evaluation of Commercial Offset Offers will be done
cocnurrentlyby CNC
16. Obtaining of CFA MoD/MoF/CC approval
17. Signing of Main Contract & Signing of Offset
Contract



20

Edelweiss Securities Limited
Defence
Private Players Can Enhance Efficiency

Private players to spur efficiency as seen after liberalisation in 1991
Since independence, the Strategic Defence Production Policy has been evolving. Production
of defence equipment has been under the purview of the government right from inception.
Indias Industrial Policy kept defence production in the public sector domain since the First
Industrial Policy outlined in the Industry Policy Resolution of 1948. The Industries
(Development & Regulation) Act, 1951, gave statutory base to the Industrial Policy. Under it,
the defence industry, which required heavy investments, strong R&D backing and on which
there could be total reliance because of criticality, remained under government control at
all times. Control over defence industry was exercised under the Industries (Development &
Regulation) Act, 1951, which made licensing compulsory. As a consequence of the then
industrial policy, a large infrastructure for defence production consisting of 39 ordnance
factories, 9 defence PSUs and 50 R&D laboratories was created in the country over time.

For too long, India depended on foreign industries for its military hardware. Constraints of
technology and resources precluded self-reliance to the extent desired. The first phase was
characterised by state-led industrialisation. Since liberalisation in 1991, the role of private
sector and also that of competition, both domestic and international, is playing a much
greater role in the national economy to bring in overall efficiency.







We have elaborated the journey of these two sectors through case studies below. We
believe the defence industry is likely to draw parallels over the next decade, given the right
policy framework, which is likely to help develop the required ecosystem in the country. The
new BJP-led government is likely to provide the much needed catalyst based on its 2014
election manifesto spelling out not just self reliance, but also developing export capabilities.

Automobiles: Drive from good ol Ambassador to global small car hub
The Indian automobile sector today is the sixth largest in the world, producing about 3.1mn
cars annually (2013) with global market share of 4.8% (up from 1.3% in 2000). In fact, almost
every large global automotive company is planning to develop and/or export small cars from
India. Export of cars from India has grown by over 23% during the past decade and
continues to look promising going forward.

The right policy framework and low cost and high quality engineering talent have helped
develop the right ecosystem which has aided the industry achieve the scale and size. The
government has a rather ambitious and larger roadmap through Automotive Mission Plan
2006-16 to reach USD145bn (including both automobile and auto components) with
additional employment for over 25mn people as investment of USD35-40bn is envisaged
through this period.


What an Indian engineer
promises to do with one, my
engineer tells me we need five
to complete
Carlos Ghosn,
CEO Renault Nissan
Automobile and pharmaceutical sectors have grown significantly post liberalisation in
the backdrop of the right policy framework, which helped develop the ecosystem for
these industries. Today, these industries are global hubs for small cars export and
generic medicine in their respective industries.
Private sector has brought in
efficiency across sector when
permitted to enter





21

Edelweiss Securities Limited
Defence
Indigenisation has helped cut production cost from the early days when Maruti-Suzuki
launched its first small car Maruti 800 in 1983. It indigenised over 70% of the car in less than
five years. This helped incubate the auto component industry in India, in addition to the
right policy framework post liberalisation during 1990s.

Chart 2: Trend on exports of cars from India

Source: SIAM, Edelweiss research

Fig. 9: Increased presence of foreign automobile player through the years

Source: ACMA, Edelweiss research

India is not just a low cost producer, but also a leader in engineering services. Other
advantages include better protection of intellectual property, being ranked 58 based on
0.0
18.0
36.0
54.0
72.0
90.0
0
144
288
432
576
720
F
Y
0
3
F
Y
0
4
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
(
%
)
(
N
o

o
f

C
a
r
s

'
0
0
0
)
Exports from India Growth
F
o
r
e
i
g
n

P
l
a
y
e
r
s

1
9
8
0Premier
Hindustan Motors
Mahindra
1
9
9
0Premier
Hindustan Motors
Mahindra
Tata Motors
Maruti Suzuki
2
0
0
0Hindustan Motors
Mahindra
Tata Motors
Maruti Suzuki
Hyundai
Ford
GM
Fiat
Honda
Toyota
Mercedes Benz
2
0
1
0Hindustan Motors
Mahindra
Tata Motors
Force Motors
Maruti Suzuki
Hyundai
Ford
GM
Fiat
Honda
Toyota
Mercedes Benz
BMW
Renault Nissan
Skoda
Volkwagen



22

Edelweiss Securities Limited
Defence
International Property Rights Index 2013, and a strong auto component industry. While the
automotive industry provides employment directly to about 1mn, indirectly it employs over
17.5mn.

Export of auto components has posted 22% CAGR during the past five years to ~USD9bn
currently. Further, continued improvement in policy work by the government helped shape
the Indian auto industry with special emphasis on small cars.

Chart 3: Export destination for auto components Chart 4: Product range in exports of auto components

Source: ACMA, Edelweiss research






Pharmaceuticals: Hub for generic medicine; moving up the value chain
Evolution of the Indian pharmaceutical industry has its roots in the government policy
through introduction of the Indian Patents Act and Drug Price Control Order, 1970. Through
this policy framework, product patents were derecognised and only process patents were
recognised. Fallout of this was that several MNCs curbed their operations and maintained
limited exposure to the Indian market, producing simple formulations through imported
bulk drugs.

This regulatory framework provided a major thrust to growth of domestic pharmaceutical
companies, primarily generics, who through reverse engineering and synthesis began
producing bulk drugs/ active pharmaceutical ingredients (APIs) and formulations at much
lower costs given the Indian cost advantage. Private domestic companies increased their
market share from ~30% (in early 1970s) to over 70% currently, taking away share from
MNCs. During this period, the industry also helped build a large talent pool of skilled
chemists, at a cost significantly lower than developed countries.

During 1980s, Indian companies arrived on the global map with exports of APIs and
subsequently formulations to global markets, primarily emerging. Towards late 1990s,
Indian companies started exporting to developed markets like US with APIs followed by
Europe
35%
North
America
26%
Asia
25%
Africa
9%
South
America
4%
Australia
1%
Auto component industry has
recorded 22% CAGR during the
past five years
Right ecosystem helped the
domestic pharma sector evolve
and attain global scale
Pharmaceuticals exports have
clocked over 17% CAGR during
the past 20 years to USD 14.8bn
in FY14
Today, the Indian automobile sector is one of the largest potential markets which no
major global player can ignore. From Ambassadors to top notch cars and an export
hub for small cars, the Indian auto sector has come a long way.
Engine
31%
Transmissi
on &
Steering
19%
Body &
Chassis
12%
Suspension
& Braking
12%
Equipment
s
10%
Electricals
9%
Others
7%





23

Edelweiss Securities Limited
Defence
formulations. In 1994, the New Drug Policy gave further impetus by abolishing industrial
licensing for all bulk drugs, encouraging several players to join the pharmaceutical
manufacturing space. Exports from India have grown to USD14.8bn in FY14 from USD2.6bn
in FY02, ~17% CAGR during the past two decades. Exports during FY74 were a meagre
USD48mn.

Chart 5: Market share of domestic pharmaceutical industry Chart 6: Exports of the Indian pharmaceutical industry

Source: Industry, Edelweiss research

In accordance with WTO requirements, the Indian government in 1995 amended the
Patents Act, 1970, to recognise product patents with 20 years patents life, in line with the
requirements of the Trade-Related Aspects of Intellectual Property Rights (TRIPS)
agreement effective 2005. The Indian industry woke up to the challenges of post TRIPS
regime and thus truly became a knowledge-driven industry, thereafter increasing focus on
R&D.

During 30 years, the Indian pharmaceutical industry has come of age with some companies
amongst the top generic companies in the world (5 Indian companies feature in top 10
generic companies by sales in 2012). Subsequently, Indian players moved up the value chain
in terms of complexity given increased competition in the formulations market. The next leg
of growth, which includes innovations, will be the most challenging for the Indian industry
given significant costs involved in R&D with higher risk of failures.

Ultimately, global innovator companies did realise the benefits of generic players, evident
from the acquisition of Ranbaxy by Daiichi Sankyo in 2008 for over USD4.6bn. This was
subsequently followed by Abbot acquiring the Indian formulations business of Piramal
Healthcare for USD3.7bn in May 2010. Today, global players are looking at leveraging Indian
companies product development capabilities and low-cost manufacturing in their effort to
penetrate generics and emerging markets. The sector has attracted FDI worth USD11.4bn
between April 2000 and September 2013.




0
20
40
60
80
100
1
9
5
2
1
9
7
0
1
9
7
1
1
9
7
8
1
9
8
0
1
9
9
1
1
9
9
6
1
9
9
8
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
6
2
0
0
8
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
2
0
1
4
(
%
)
MNCs Domestic Players
Top 5 Indian companies feature
amongst the top 10 global generic
companies
0
3,200
6,400
9,600
12,800
16,000
F
Y
7
4
F
Y
7
7
F
Y
8
0
F
Y
8
3
F
Y
8
6
F
Y
8
9
F
Y
9
2
F
Y
9
5
F
Y
9
8
F
Y
0
1
F
Y
0
4
F
Y
0
7
F
Y
1
0
F
Y
1
3
Exports



24

Edelweiss Securities Limited
Defence
Defence industry to set out of the cradle; the next sunrise industry
Till recently, the Indian defence industry had been largely catered to by the public sector,
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 armamentsIndian being at the
top and buying global being the last resort. Many domestic private companies perceive this
as a step in the right direction and are looking at significant opportunities from the defence
sector.

Given that the defence sector was catered to by the DPSUs and OFBs, the scope for private
sector was limited. With several purchases from DPSU being embroiled in delays, the
capability of armed forces has been adversely affected. To bridge this gap, the government
is looking at promoting private sector participation in the defence sector. While the private
sector has proved time and again across industry bringing in efficiency, improvement in
technology through R&D spend, the defence sector is likely to see major changes in the way
it functions as private sector contribution / involvement increases.

The early benefits of partnership between Indian companies and global majors where
defence ecosystems are being developed are evident. Today, albeit small, India has featured
on the map of global supply chain with certain aerospace structures being made in India for
the global market.

Thus, rightly, the defence industry in our view is the next sunrise industry in the making.
Humungous market opportunity for private sector over next decade
Defence demands high speed technology upgrades
With rising pressure on DPSUs for fast technology upgrades and lower cost, we
perceive an increasing role of private sector as tier I, tier II and other component
suppliers. Incrementally, DPSUs and OFBs will play a major role as defence integrators
with substantial inputs from the private sector.
Global defence value chain
Developed nations like US and Europe have an evolved model of defence with OEMs
playing the lead role of an integrator with tier I vendors doing majority of a defence
contract. Work is then sub-contracted to tier II and III vendors, from where it goes to
small component manufacturers. This has led to an evolution of an efficient and strong
supply chain. The concept of an OEM present across the value chain became obsolete
by the late 70s. The current model evolved, where specialisation in each part of the
value chain forced the player to significantly invest in R&D and make choices on where
do they want to operate in the value chain.
India defence model
Unlike the global practice, India has a concentrated defence production model with
major scope (more than ~80%) covered by DPSUs and OFBs, right down to the
component level. Private sector, at best, is seen supplying raw material / components
to DSPU/ OFBs. This has two main disadvantages of such a model (1) limited or no
bandwidth for high tech R&D including product innovation and (2) limited or no head-
room for private sector to grow and evolve. As DPSU/OFB focus on the integration, the
scope for private sector is likely to improve on space vacated by DPSU/ OFBs.
Right ecosystem to help defence
in India emerge as the next
sunrise industry
Indian defence structure to
undergo change as seen globally
where DPSU/ OFB to do limited
work in-house and private sector
to do a large part of component
supply





25

Edelweiss Securities Limited
Defence
Fig. 10: Global defence structure Current Indian defence structur Future Indian defence structure expected

Source: Industry, Edelweiss research

Defence SEZ: The way forward to develop right ecosystem
For many years, the Indian state-owned aeronautical major Hindustan Aeronautics (HAL)
was synonymous with fortunes of the Indian aerospace sector. But, unfortunately, it could
not transform itself into a forward-looking aerospace hub of global repute due to various
reasons such as defence bureaucracy, complacency of being the only company in aerospace
in the country and lack of innovation due to lack of competition. If India has to grow and
compete with international players, it has to look beyond HAL to give an impetus to its
aerospace sector, which, in turn, has the potential to exert a force multiplier effect on the
national economy. We have recently seen entry of players like Tata and M&M in the
aerospace sector and expect these companies to help develop the domestic aerospace
industry.

Belgaum: First defence SEZ
The government, to provide defence manufacturers and service providers (especially foreign
companies), a suitable tax friendly environment and fillip to export products/ services,
established Indias first SEZ for aerospace in Belgaum (Karnataka) in November 2009. The
SEZ seeks to transform the Indian aerospace sector by striving to create a well-endowed
aerospace ecosystem at one location. SEZs help create a supply chain clusters that can bring
rapid growth and maturity of business process and system to participants of clusters.

The government is considering establishment of dedicated SEZs on similar lines catering
specifically to the defence sector along the lines of IT, automobile and other specialised SEZs.
This approach could go a long way in giving the much-needed fillip to the Indian defence
manufacturing sector.

Integrator
(50% value addition)
Component suppliers
(Main private
companies)
(50% value addition)
Integrator
Tier 1 / Tier 2
(80% value addition)
Component suppliers
(20% value addition)
Integrator
(20% value addition)
Tier 1 suppliers
Tier 2 suppliers
Component suppliers



26

Edelweiss Securities Limited
Defence
Chart 7: Indias defence trade in past 25 years

Source: SIPRI

To attract global capital and technologies in defence
India has many advantages like availability of low cost and skilled man power which makes it
a competent destination for high-tech manufacturing including defence, especially given
many global OEMs struggling with high cost and lower utilisation levels. As per industry
estimates, India is likely to command a fourth of global skilled labour supply over CY10-30E
which coupled with its low-cost advantage renders it a favoured destination for defence
manufacturing.

Chart 8: India has one of the lowest wages among countries with large labour pool

Source: ILO


0.0
7.0
14.0
21.0
28.0
35.0
0
1,200
2,400
3,600
4,800
6,000
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
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9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
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6
2
0
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0
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9
2
0
1
0
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0
1
1
2
0
1
2
(
U
S
D

m
n
)
(
U
S
D

m
n
)
Imports value Exports value (RHS)
0 300 600 900 1,200 1,500
Bangladesh
Pakistan
Vietnam
India
Indonesia
Philippines
China
Mexico
Russia
Malaysia
Brazil
Turkey
Wages in USD/month





27

Edelweiss Securities Limited
Defence
Chart 9: A large engineering pool puts India at an advantageous position

Source: ILO

Favourable policy framework has set the tone
Of the many factors, we believe political intent and policy framework to develop the
ecosystem required for defence manufacturing will be the biggest driver encouraging global
OEMs towards technology sharing and investments in defence sector in India. Since 1991,
when the Government of India opened up several sectors including telecom, banking,
automobile etc., there has been a remarkable improvement in respective sectors whilst
attracting significant capital in the form of FDI from global majors.

However, there was no major change in status and policies for few sectors like defence,
which we believe is a prime reason why India still remains a laggard w.r.t. its domestic
defence capabilities compared to global players.

Industry wish-list from policy makers
1. Increase in FDI in defence from present 26% to attract global OEMs.
2. Policies promoting defence exports to make production viable in the long run.
3. Further, delicensing requirement for defence manufacturing.
4. Promotion of local defence eco-system to facilitate large scale production.

Low hanging fruits for local defence manufacturing
While India will take time to develop cutting edge technologies in defence armaments,
there are several low hanging fruits which should be the first to be tapped by the private
sector in India. These include equipment for Navy and Army given that indigenisation for
Navy started some time in early 1960s. The low hanging fruits include:
Artillery Gun programme
Given that India has not added any artillery guns since the mid 1980s.
Submarine programme
India has successfully built its first nuclear submarine INS Arihant and could provide the
much needed fillip to speed up the submarine addition programme.
(50) 0 50 100 150 200 250
India
Nigeria
Pakistan
Indonesia
Bangladesh
Philippines
Mexico
Brazil
United States
Turkey
Iran
Vietnam
Malaysia
Korea
Germany
China
Japan
Russia
Increase in working age population in CY30/CY10 (mn)
24.3% of incremental labour
between CY10 and CY30 will
be supplied by India


A country can be said to be very
powerful not just by its economic
wealth but if it has its own
independent and powerful
defence sector
Mr. A. M. Naik
Group Executive Chairman
Larsen & Toubro



28

Edelweiss Securities Limited
Defence
Indias Artillery Gun: FARP Programme

Best case for domestic private sector to start
The Indian Artillery Gun Programme appears to have stabilised at 155mm barrel bore
configuration, which is now also the globally stabilised standard of artillery guns. Last major
procurement of artillery guns by India was in 1986, when it procured 410, 155mm/39
calibre Swedish Bofors guns. The country is now facing severe shortage of artillery guns to
guard its borders, for which the government came out with the much talked about Field
Artillery Rationalisation Programme (FARP) which warrants huge procurement.

Based on our discussion with various entities across defence value chain below is our thesis:
1. Government intent: The Kargil war triggered a major change in the governments
mindset as it realised the grave need for public-private partnership to facilitate
indigenisation in defence. As we understand, DRDO in partnership with select private
players like Bharat Forge, L&T etc., is planning to develop capabilities for 155mm
artillery guns. DRDOs Pune arm (DRDE) is leading this project and will select an
industrial partner. Thus, it is clear that the core of future procurement for artillery guns
has to be via public-private partnership with substantial inputs from the private sector.

2. Indian requirement: As per assessment by MoD, India needs more than 3,000 artillery
guns in the 155mm category across towed, mounted, tracked and wheeled gun systems
over the next 8-10 years to bridge the existing gaps in its artillery. These guns will
replace/add to existing dismal inventory of its artillery guns in service.

Table 5: Current state of artillery programme

Source: Industry, Edelweiss research

3. Indian capability: While no private or public sector player today is manufacturing
155mm artillery guns in India, OFB, Bharat Forge, L&T and Tata Power have been
working on respective models over the past few years to establish themselves in this
space. With ample technology transfers available from various OEMs globally and local
machining, forgings capabilities, we believe manufacturing of over 70% of the total gun
system in India is feasible.

Artillery Guns Volume USD mn Players Current status
M-777 Ul tra Li ght Howi tzers 145 + 290 667
(for 145 guns)
BAE Systems Li kel y to be a Forei gn
mi l i tary servi ce (FMS) deal
Towed gun- 155 mm 52 cal i bre 400 + 1180 1788 (400 guns) Nexter-L&T, El bi t-Bharat
Forge
5th RFP i s out . No progress
Tracked sel f propel l ed gun- 155 mm
52 cal i bre
100 800 Tata Power SED, Mahi ndra-
RDM, BEML-
Rosoboronexport, L&T-
Samsung, Ashok Leyl and
Several Indi an pl ayers are
i n the reckoni ng . No update
on awards
Wheel ed sel f propel l ed gun- 155 mm
52 cal i bre
180 960 November 2011 RFP
cancel l ed. No further
progress
Mounted gun system- 155 mm 52
cal i bre
200 + 614 Archer, Ceaser, L&T, OFB,
BEL, Bharat Forge
Bi ds have been i nvi ted.
Tri al s underway
Total 3000+ 5400+

There are the DRDO, the OFB and
other excellent organisations that
have design talent and capability.
What India lacks is the ability to
convert designs into manufactured
products.
Mr Baba Kalyani
CMD - Bharat Forge





29

Edelweiss Securities Limited
Defence
Fig. 11: Tata Power SEDs 155mm gun with range of over 52 kms

Source: Media

4. Market opportunity: In our assessment, FARP alone has a potential of USD12-14bn
over the next 6-10 years, of which a substantial portion (50% plus) could be catered by
the private sector. This includes manufacturing of critical sub-systems like barrel &
breach assembly, carriages, wheels & tracks, hydraulics, gun control systems,
protective armour etc.

Table 6: Opportunity in each of the key components of an artillery gun

Source: Industry, Edelweiss research

Key partnerships between domestic private players with global OEMs
L&T with Nexter (France): L&T has entered into a JV with Nexter for 155mm towed and
mounted gun systems, where Nexter will be the lead partner and integrator while L&T
will supply key components for its TRAJAN and CAESAR guns.
Bharat Forge with Elbit Systems (Israel): Bharat Forge (74%) and Elbit (26%) have set
up a JV to develop and assemble artillery guns. The gun is currently is in testing phase,
which is likely to be completed by 2014 end.
Tata Power SED Howtizer: The company, in December 2012, has displayed a 55%
indigenous 155mm/52 caliber mounted gun with a range of 50km entering a market
expected to top USD8bn.

Key components (INR bn)
Barrel & breach assembl y 195
El ectri c control and El ectroni c fi ri ng system 195
Carri age/ tracks/ wheel s/ saddl e etc 195
Hydraul i cs, engi ne & others 195
Total opportunity 780

We have created capability by
purchasing the right technologies
from partners across Africa and East
Europe,"
Mr Rahul Chaudhry
CEO - Tata Power SED



30

Edelweiss Securities Limited
Defence
Chart 10: Cost matrix of a typical 155mm artillery gun

Source: Industry, Edelweiss research

Chart 11: Artillery comparison amongst India, China and Pakistan

Source: India Defence Yearbook 2011, Edelweiss research















Barrel & breach
assembly
25%
Carriages, tracks
, wheels &
saddle etc.
25%
Hydraulics, engi
ne & others
25%
Electric control
and Electronic
firing systems
25%
0
320
640
960
1,280
1,600
Pakistan China India
(
N
o
s
)
Self Propelled
0
3,200
6,400
9,600
12,800
16,000
Pakistan China India
(
N
o
s
)
Towed Artillery
0
1,800
3,600
5,400
7,200
9,000
Pakistan China India
(
N
o
s
)
Air Defense Guns
An army General indicated in the media that the armys artillery requirement is so
huge and running so late that it would require multiple players and lines in order to
buy all the guns by 2022. Artillery gun is amongst the low hanging fruits and several
Indian players including, Tatas, L&T, Bharat Forge amongst other have made tangible
progress to tap the large opportunity that it presents.





31

Edelweiss Securities Limited
Defence
Fig. 12: Key component of a typical artillery gun

Source: FAS





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Defence
Advanced Technology Vessel Project: N. Submarine

Indias first indigenous nuclear submarine: INS Arihant
The Advanced Technology Vessel (ATV) Project helped India join a select group of nations
capable of building their nuclear submarine. While the nuclear reactor was built with BARCs
help, the hull was built by L&T. Tata Power SED supplied the control systems while the
systems for the steam turbine integrated with the reactor are supplied by Walchandnagar.

Though India has significant capability in designing and building parts of ships and
submarines, its indigenisation levels are high in float at 65-70% even as it has enough
ground to cover in other areas move and fight.

Milestones in development of indigenous nuclear submarine through ATV project:
The ATV programme to build a nuclear-powered submarine began in 1974 and became
a serious effort only in 1985.
ATV project has been under development since 1998.
The symbolic launch ceremony for INS Arihant was held on July 26, 2009.
The 6,000 tonne vessel was built under the ATV project at the Ship Building Centre in
Visakhapatnam.
INS Arihant will be the first of the expected six in the class of submarines designed and
constructed as part of the Indian Navy's ATV project.
It will be commissioned into the Indian Navy after extensive sea acceptance trials (SATs)
having completed the harbour acceptance trials (HATs).
The completion of INS Arihant will make India one of six countries in the world with the
ability to design, build and operate its own nuclear submarines.

INS Arihant: Salient features
The Arihant class submarines are reported to be comparable to the Akula class
submarines.
The vessel is powered by an 83MW pressurised light-water reactor with enriched
uranium fuel. A land-based prototype of the reactor was first built at Kalpakkam and
made operational in September 2006. Successful operation over three years yielded the
data that enabled the production version for Arihant.
At 110m length and 11m breadth, Arihant is the longest in the Indian Navy's fleet of
submarines and can accommodate a crew of 95. It can reach a speed of 12kt-15kt on
surface and up to 24kt when submerged.
It has four vertical launch tubes, which can carry 12 (three per launch tube) smaller K-
15 missiles or four larger K-4 missiles. The K-4 has a longer range of 3,500km and is still
under development.
The launch of Arihant strengthens India's endeavour to build a credible nuclear triad
capability to fire nuclear weapons from air, land and sea.
At USD2.9bn, Arihant is certainly an expensive submarine.

With indigenised nuclear
submarine, India enters a
coveted club of nations





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Defence
Cost / component / indigenisation achieved and road map ahead
Float: Hull, internal structure, ballasts.
Move: Propulsion system, propeller, rudders, aux motors, gear box, SG package & heat
exchangers, batteries, electronic submarine control system, turbine blades & shaft.
Fight: Missiles, torpedos, sonar & radars, electronic combat system.

Of a typical submarine, hull, ballasts and internal structures form around 25% of the cost,
while 25% is for main propulsion system, motors, turbines system, submarine control
system etc. Missiles, torpedos sonar, radars and fire control system form the balance 50%.
With significant capability to design, fabricate and manufacture submarines, India has
achieved a significant 70% plus capability to manufacture what is termed at Float portion
of the submarine. However, with significant dependence on foreign technology and OEMs
for propulsion systems, sonar, torpedos & firing control systems etc., the level of
indigenisation for move and fight is still low at a dismal 20%. However, it was much
higher for INS Arihant, as we understand.

Chart 12: Cost mix of warship Chart 13: Current level of indigenisation

Source: Industry, Edelweiss research


Float
25%
Move
25%
Fight
50%
Float
64%
Move
18%
Fight
18%



34

Edelweiss Securities Limited
Defence
Table 7: INS ArihantCapability road map

Source: Industry, Edelweiss research

Fig. 13: Brief sketch of nuclear submarine:

Source: Media



Sr No Components/ Parts Entities involved
1 Desi gn engi neeri ng DRDO, Russi a
2 Nucl ear reactor
The mi ni aturi sed naval versi on of the reactor was desi gned and bui l t by
BARC wi th Russi an i nputs
3 Reactor trai ni ng compl ex at IGCC Can test submari ne nucl ear reactors of 80MW pl us
4 Hul l L&T - The hul l for the vessel was bui l t by L&T's Hazi ra shi pbui l di ng faci l i ty
5
Sonar, radars, combat management
system
Compl etel y devel oped by Tata Power SED wi th i nputs from BAE Systems for
control pedestal . Fi nal l y, USHUS sonar, radar and combat management
system i ntegrated by BEL
6 Steam turbi ne system Wal chandnagar Industri es suppl i ed the systems l i ke gear box and shafts
7 Pumps KSB Pumps
8 Materi al DMD, Hyderabad
9 Steal th materi al Rubber anechoi c ti l es suppl i ed by a Mysore based rubber val cani si ng
10 Heat exchanger, Steam generators BHEL
11 Speci al i ty steel MIDHANI: Speci al materi al for submari ne
12 Hi gh grade steel : Heavy Engg Corp, Ranchi
13 Pressure val ves Audco Indi a





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Edelweiss Securities Limited
Defence
INS Arihant indigenisation level at an impressive 40%; 50% plus next goal
While the ATV project was in existence much before 1990s, it gathered meaningful pace
only after 1998-2000. It was one of the most exhaustive co-ordinations and collaborations
among DRDO-BARC-Russian government-DPSUs-Indian private sector players like L&T, Tata
Power etc. As we understand, with a significant portion of the submarine manufactured in
India by local players, more than 40% of the USD2.9bn nuclear submarine components were
built and designed in the country.

INS Arihant: Success factors:
Russian technology transfer
When BARCs design failed, Russia played a key role in helping reduce the size of the
nuclear reactor to fit inside the 10m submarine diameter.

Indian design, fabricating & manufacturing capabilities
Apart from L&T which manufactured the submarines hull at its Hazira facility, several
companies like Tata Power, Walchandnagar etc., played key roles in various sub-
systems. Also, DPSUs like HEC, MIDHANI, BEL etc., played key roles in speciality
material for the submarine.

Fig. 14: INS ArihantMilestones in development

Source: Industry, Edelweiss research


1990
Projectt code
S2 took off
1998
L&T begins hull
manufacturing at Hazira
2009
Submarine
formally launched
2008
Nuclear reactor
integrated with hull
2013
Nuclear reactor
went critical
2015e
Final induction
post complete sea trials
1975
Project idea
conceived
1994
Reactor was build
and tested on land with
Russia help
50% indigenisation is the next
goal for nuclear submarine



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Defence
Light Combat Aircraft: Tejas

Table 8: Milestones in development of indigenous combat aircraft Tejas

Source: Tejas, Edelweiss research

The development effort for LCA is spearheaded by the Aeronautical Development
Agency (ADA), an autonomous society under the Department of Defence Research &
Development. ADA is responsible for project design, project monitoring and promoting
the development of advanced technologies of relevance to the LCA. LCAs principal
partner is Hindustan Aeronautics. Tejas development programme is in advanced
stagecompleted Initial Operation Clearance (IOC) requirements and marching
towards final operation clearance (FOC).
Tejas has completed over 2,000 flights so far and continuing system performance and
evaluation towards reaching Final Operational Clearance (FOC).
One positive outcome is that the design and development of the LCA has helped
establish an entire ecosystem that will work as a platform for future aircraft
manufacturing in India.

Salient features of LCA Tejas
Tejas came from the LCA programme, which began in the 1980s to replace India's aging
MiG-21 fighters.
It is an advanced technology, single seat, single engine, supersonic, light-weight, all-
weather, multi-role, air superiority fighter designed for air-to-air, air-to-ground and air-
to-sea combat roles. It is a tailless, compound delta wing design powered by a single
engine.
Tejas airframe is made of advanced carbon composites covering ~90% of the aircraft
surface. This critical technology has been totally developed in house. A number of other
components like wheels, brakes, undercarriage, heat exchangers and actuators were
designed and developed within India.
It is capable of flying non-stop to destinations over 1,700km away and its radius of
action is up to 500km depending upon the nature and duration of actual combat.
Mark II will have better thrust, improved radar system and 120mm gun capable of firing
anti-tank guided missiles.

There are 358 LRUs (components) in Tejas, of which 53% are indigenously developed.
To reduce the balance 47% of import LRUs, ADA has initiated a development
programme for indigenisation of import LRUs.
1983 Project concei ved
1984 LCAs nodal agencyAeronauti cal Devel opment Agencyset up
1989 Project defi ni ti on phase compl eted
Apr-93 Sancti oned ful l scal e engi neeri ng devel opment phase-I
Jan-01 Mai den fl i ght
Jan-11 Recei ved Ini ti al Operati onal Cl earance 1
Dec-13 Recei ved Ini ti al Operati onal Cl earance 2
Dec-14 Fi nal Operati onal Cl earance expected wi th formal i nducti on i nto IAF





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o ADA is looking at indigenisation for the following systems/ sub-systems through
development:

Table 9: Target systems for indigenisation by ADA

Source: ADA, Edelweiss research

Table 10: Partners in LCA project include

Source: ADA, Edelweiss research

Table 11: Details of contribution by entities involved in LCA programme

Source: ADA, Edelweiss research

Avi oni cs Fl i ght Control Envi ronmental Control
El ectri cal s Landi ng Gear Heal th & Uti l i ty Management System
Hydraul i cs Propul si on and Fuel Uti l i ty Servi ces and Moni tori ng
Public Sector Undertakings Indian Air Force (IAF) Establishments
Bharat El ectroni cs IAF Programme Management Team
Mi shra Dhatu Ni gam Ai rcraft Systems & Testi ng Establ i shment
Bharat Heavy El ectri cal s Insti tute of Aerospace Medi ci ne
Indi an Petro-Chemi cal s (now RIL) Central Servi ci ng Devel opment Organi sati on
CSIR Laboratories and other Autonomous Organisations Ordnance Factories
Nati onal Aerospace Laboratory Ambajari , Ambarnath, Medak and Avadi
Central Sci enti fi c & Industri al Organi sati on Private Sector Entities
Structural Engi neeri ng Research Centre Machi ne Tool s and Recondi ti oni ng, Hyderabad
Central El ectro-Chemi cal Research Insti tute Kobayashi , Hyderabad
Central Machi ne Tool s Insti tute Hi gh Energy Batteri es, Hyderabad
Government Tool room & Trai ni ng Centre Turbotech, Bangal ore
Academic Institutions Southern El ectroni cs, Bangal ore
Indi an Insti tutes of Technol ogy Kumaran Industri es, Bangal ore
Indi an Insti tute of Sci ence, Bangal ore Shanthi Gears, Mysore
Jadavpur Uni versi ty, Kol kata JS Lamps, Del hi
PSG Col l ege of Technol ogy, Coi mbatore Wal chand Industri es, Wal chandnagar
Sanghvi Aerospace, Ahmedabad
Bharat El ectroni cs, Bangal ore The cockpi t has two 76mm76mm col our l i qui d crystal
mul ti functi on di spl ays
Marti n Baker, UK Zero-zero ejecti on seats
Sagem, France Navi gati on systemsSi gma 95N ri ng l aser gyroscope wi th
an i ntegrated GPS
Spectrum Infotech, an L&T company, Bangal ore Envi ronmental control system i n cockpi t
Advanced Systems Integrati on and Eval uati on Organi sati on,
Bangal ore
El ectroni c warfare sui te i ncl udes a radar warni ng
recei ver and jammer, l aser warner, mi ssi l e approach
warner and chaff and fl are di spenser
The El ectroni cs Research and Devel opment Establ i shment and HAL Mul ti mode radar whi ch i ncorporates pul se Doppl er radar
wi th Doppl er beam shapi ng, movi ng target i ndi cati on and
l ook-up / l ook-down capabi l i ty. The radar i s mounted i n a
Kevl ar radome
BHEL, Del hi Compact heat exchangers
MIDHANI, Hyderabad Important al l oys for LCA 17- 4PH, 15- 5PH
Wal chandnagar Inds, Pune



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Defence
In addition, 300 small and medium scale firms participated in the project. The LCA
programme, thus, is a national aeronautical endeavour encompassing all available talents
in the country across a wide spectrum availing services of institutions and industries, both
public and private.

Cost / component / indigenisation achieved and road map ahead
HAL has quoted INR1.6bn a fighter as its latest price. Amortising the entire
development cost on the envisioned 344 fighters (IAF: 294; Navy: 50), Tejas will cost
INR2.1bn (USD33.5mn) per fighter.
Cost break up of LCA programme:
o Project Definition Phase (PDP) for development of LCA was sanctioned in August
1983 at a cost of INR5.6bn.
o After completion of PDP, Full Scale Engineering Development (FSED) Programme
Phase-I was sanctioned in April 1993 at a cost of INR21.9bn (including PDP cost
INR5.6bn) with increased scope.
o FSED programme Phase-I was successfully completed in March 2004 and
technology was demonstrated.
o FSED programme Phase-II was sanctioned in November 2001 at a cost of
INR33.0bn to build 3 prototypes, 8 Limited Series Production (LSP) aircraft and
establish infrastructure for producing 8 aircraft per year.
o Additional sanction of INR24.8bn was given to meet the financial requirements of
FSED programme Phase-II for induction into Indian Air Force by obtaining IOC and
FOC.
o The total sanctioned cost for development of LCA, Tejas (PDP + FSED Phase-I +
FSED Phase-II) is INR79.7bn.
Tejas is 65% Indian right now. But Dr.V K Saraswat, Former Scientific Advisor to the
Defence Minister, has promised that by the time the aircraft gets Final Operational
clearance, indigenisation will reach 75%.
Dr. Saraswat disclosed that no country opts for 100% indigenisation as it is not cost
effective and needs huge infrastructure. Hence, he explained that the main structure
and sub-systems of the aircraft are indigenised and the balance parts are imported.
Currently, foreign components in LCA are as under:

Table 12: Foreign assistance in the LCA project

Source: ADA, Edelweiss research

Ameri can GE F414 engi ne



Israel i El bi t-furni shed DASH hel met-
mounted di spl ay and si ght

Israel i El ta EL/M-2032 mul ti -mode


radar

French Sextant mul ti -functi on di spl ays

Israel i Rafael l aser pod



Bri ti sh Marti n-Baker zero-zero ejecti on

Russi an GSh-23 cannon



French Sagem SIGMA 95N ri ng-l aser
gyroscope

Russi an/Israel i mi ssi l es



Bri ti sh BAE Systems shi p-sets of
actuators (at USD2mn each)

By the time the aircraft gets Final
Operational clearance, the
indigenisation to reach 75%"
Dr V. K. Saraswat
Former Director General - DRDO





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Edelweiss Securities Limited
Defence
The import proportion in the indigenous defence products is not unique to India. Even
developed countries do not hesitate to import non-strategic components that are easily
available at a much cheaper rate. To reduce the cost of the system, it is essential to
import non-critical items from available sources, particularly when the demand is for
few numbers.
Lifecycle cost is expected to be ~50% lower than any acquired aircraft as maintenance
costs tend to spiral for acquired aircraft.

Fig. 15: Main components and costing

Source: Industry, Edelweiss research

Conclusion: The way forward
With LCA Tejas close to induction in the Air Force, an important milestone in the history of
Indian aviation has been achieved. The LCA programme demonstrated the countrys
indigenous capability to develop a major air-based weapon platform which has helped India
step closer to achieving self-reliance in aircraft design, fabrication and manufacture. In fact,
it lays a sound foundation for development of the entire aviation industry ecosystem to
develop more advanced fighter aircrafts in the country.





GE Jet Engine
Multi Mode Radar
Air Frame
Composites
(45% by weight
90% by area)
Flight
Control
System
Pilots
Ejection
Seat
Avionics
Nozzle Actuator
Outward
Elevon
Inward
Elevon
Hydraulic Slat Actuator
Drop Tank
Bombs
Major Aircraft Components
(>50% of total cost)
Engine
Avionics
Armaments
Close Combat
Missiles
Beyond Vishal
Range Missiles
According to DRDO Chief, an opportunity worth INR1,000bn (~USD16bn) is expected in
the domestic defence aircraft industry for private sector players to supply components
and sub-systems to HAL over the next decade. Additional opportunity is likely to come
from new purchase like MMRCA which required 50% offset.



40

Edelweiss Securities Limited
Defence
Key Drivers for Defence Spending and Geopolitics

Diverse topography
India has ~15,000km of land border with its neighbours and ~7,600km of coastline. The
diverse topology ranges from snow-clad Himalayas with peak of 28,000 feet to deserts, thick
jungles and vast plains.

The Siachen Glacier in the North is the worlds highest battlefield with a post located at
21,000 feet. The western border runs through deserts, fertile plains and thickly forested
mountains. North-East includes steep and high mountain ranges along with dense tropical
forests. In the South, there are ranges close to the sea, inland plateaus interspersed with
river valleys, coastal plains and far-flung island territories such as Lakshadweep to the West
and the Andaman & Nicobar Islands to the East. The Indian peninsula starting from Gujarat
to West Bengal is surrounded by the Arabian Sea, Bay of Bengal and the Indian Ocean. The
Andaman & Nicobar islands located 1,300km away from the nearest point on the East coast
assume strategic importance with respect to entry to Malacca Straits. In the Arabian Sea,
Lakshadweep and Minicoy islands, situated on the sea-lanes of communication running
eastwards from the Persian Gulf and the Red Sea are 450km away from the nearest point on
the West coast.

India is, thus, a maritime as well as a continental nation.

Hostile neighbourhood
Along with diverse topography, India shares land borders with seven neighbouring
countriesPakistan, Afghanistan, Bangladesh, Bhutan, Nepal, Myanmar and China. It also
counts Sri Lanka as a neighbour in the South. The Indian sub-continent is amongst the
worlds most unstable areas on account of terrorism, civil war and other internal security
issues. Afghanistan and Sri Lanka have come out of long internal /civil wars /insurgency that
ravaged the countries for years.

While China attacked India in 1962, with Pakistan India has faced three wars in 1965, 1971
and 1999. With Pakistan, concerns arise due to undiminished activities of terrorist
organisations functioning from its territory. The unresolved border issue with China
continues to create disturbances. Further, Chinas drive towards modernisation of its large
armed forces along with rapid infrastructure development in Tibet and Xinijang region has
raised eyebrows in Indian forces. India continues to remain conscious and watchful of the
implication of Chinas military expansion, including that in the neighbourhood.











Diverse topography makes
defence spending inevitable
across all the wings of armed
forces
South Asia is known as one of
the most militarised area in
the world





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Edelweiss Securities Limited
Defence
Fig. 16: South Asia considered as one of the worlds most unstable/ militarised areas

Source: Maps of India

Table 13: Salient features of neighbouring countries and relations with India

Source: SIPRI, Edelweiss research







Country India Afghanistan Pakistan Sri Lanka Nepal China Bangladesh Bhutan Myanmar

Govt Type Democrati c
Republ i c
Isl ami c
Republ i c
Parl i amenta
ry Republ i c
Democrati c
Republ i c
Federal
Republ i c
Communi st Democrati c
Republ i c
Parl i amenta
ry Monarchy
Consti tuti on
al Republ i c
Rel ati on
wi th Indi a
- Fri endl y Hosti l e Fri endl y Fri endl y Hosti l e Fri endl y Fri endl y Fri endl y
Border
i ssues
- None Pendi ng None Pendi ng Pendi ng Pendi ng None None
Acti ve
mi l i tary
(000)
1,325 164 617 161 96 2,285 157 5 406
Def. Spend
(USD mn)
47,398 1,293 7,641 1,823 258 188,460 1,818 NA 2,211
Def. spend
(% of GDP)
2.5 6.3 3.0 2.8 1.3 2.0 1.2 NA 4.5
Internal
Securi ty
Scenari o
Mi l i tancy &
Maoi st
i ssues
Tal i ban not
ful l y out yet
Faces threat
of terrori sm
Stabl e after
LTTE confl i ct
Maoi st
i ssues
Broadl y
stabl e
Broadl y
stabl e
Stabl e Broadl y
stabl e



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Defence
Table 14: Head-on-Head - Comparison of defence might

Source: Global Fire Power, Edelweiss research


Particulars India Pakistan China USA
Current GFP Rank 4 15 3 1
Total popul ati on (mn) 1,220.8 193.2 1,349.6 316.7
Manpower avai l abl e (mn) 615.2 93.4 749.6 145.2
Fi t for mi l i tary servi ce (mn) 489.6 75.3 618.6 120.0
Popul ati on reachi ng mi l i tary age annual l y (mn) 22.9 4.3 19.5 4.2
Acti ve mi l i tary personnel (mn) 1.3 0.6 2.3 1.4
Acti ve mi l i tary reserves (mn) 2.1 0.5 2.3 0.9
Total ai rcraft strength 1,785 847 2,788 13,683
Total hel i copter strength 504 263 856 6,012
Servi ceabl e ai rports 346 151 507 13,513
Total tank strength 3,569 3,124 9,150 8,325
Total Armoured Fi ghti ng Vehi cl e (AFV) strength 5,085 3,187 4,788 25,782
Total Sel f Propel l ed Guns (SPG) strength 290 470 1,710 1,934
Towed arti l l ery strength 6,445 3,263 6,246 1,791
Total Mul ti pl e Launch Rocket System (MLRS) strength 292 200 1,770 1,330
Merchant mari ne strength 340 11 2,030 393
Maj or ports and termi nal s 7 2 15 24
Total navy shi p strength 184 74 520 473
Ai rcraft carri er strength 2 - 1 10
Submari ne fl eet strength 17 8 69 72
Fri gate strength 15 11 45 15
Destroyer strength 11 - 24 62
Corvette strength 24 - 9 -
Mi ne warfare craft strength 7 3 119 13
Coastal patrol craft strength 32 12 353 13
External debt (USD bn) 378.9 54.5 728.9 15,930.0
Annual defense budget (USD bn) 46.0 7.0 126.0 612.5
Reserves of forei gn exchange and gol d (USD bn) 297.8 13.8 3,341.0 150.2
Purchasi ng Power Pari ty (USD bn) 4,716.0 546.7 12,260.0 15,940.0
Labor force strength (mn) 482.3 59.2 798.5 155.0
Oi l producti on (mn BPD) 0.9 0.1 4.1 8.5
Oi l consumpti on (mn BPD) 3.2 0.4 9.5 19.0
Proven oi l reserves (mn BPD) 5,476 248 25,580 20,680
Roadway coverage (mn km) 3.3 0.3 3.9 6.6
Rai l way coverage (km) 63,974 7,791 86,000 224,792
Waterway coverage (km) 14,500 25,220 110,000 41,009
Coastl i ne coverage (km) 7,000 1,046 14,500 19,924
Shared borders (km) 14,103 6,774 22,117 12,034
Square l and area (mn km) 3.3 0.8 9.6 9.8





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Sits close to one of worlds most important shipping channels
The Indian peninsula places it adjacent to one of the worlds most important shipping lanes
connecting Indian Ocean and Pacific Ocean, stretching from the Suez Canal and the Persian
Gulf to the Straits of Malacca, through which more than 55,000 ships and much of the oil
from Gulf traverses each year. This stretch carries about a fourth of the worlds traded
goods.

Fig. 17: Important sea routes and Chinas string of Pearl

Source: Media

The string of pearls strategy adopted by China through economic and diplomatic efforts to
enhance its military and commercial facilities and relationships along the sea of
communication extends from Chinese port (mainly Hong Kong) to Port in Sudan and covers
shipping routes from Persian Gulf to Straits of Malacca. China essentially wants to challenge
US dominance in the Indian Ocean. This, however, has raised concerns among Indian policy
makers and increasingly India is likely to focus on enhancing its naval capability and capacity
to counter growing Chinese influence in Indias backyard. INS Vikrant, Indias indigenous
aircraft carrier, will add more muscle/ credibility to the naval force and domestic
manufacturing. This is in addition to the indigenously built nuclear submarine INS Arihant,
placing India in the select club of six nations with such capabilities which includes US, Russia,
France, China and UK. These two vessels are likely to join the Indian navy shortly.

Pirates a real threat; increased naval patrolling
The threat of piracy emerging from Somalian pirates continues to endanger these sea lanes
and has thus emerged as a major concern for international trade in the region. Indian Navy
along with the Coast Guard continues to deal with challenges emerging from pirates via
increased patrolling/ combating on its own and coordination with navies of other countries.
The safety and security of the Indian Ocean is central to Indias maritime interest and
concerns.

While the trend in 2013 does indicate lower number of piracy, the lowest levels since 2006,
the threat of attack remains primarily in the waters off Somalia and Nigeria in the Gulf of
Indias growing international
stature gives it strategic
relevance in the area ranging
from the Persian Gulf to the
Straits of Malacca India has
exploited the fluidities of the
emerging world order to forge
new links through a combination
of diplomatic repositioning,
economic resurgence and military
firmness.
Dr Manmohan Singh
Ex Prime Minister of India



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Defence
Guinea, a hotspot for violent piracy and ship hijacking. The fall in piracy is attributed to
increased patrolling and actions by naval forces.

Chart 14: Pirate attacks against ships worldwide

Source: ICC International Maritime Bureau
Note: For 2014, number of incidents updated till May 2, 2014

Internal security challenges; emergence of ideology linked terrorism
India faces multifaceted challenges internally, which includes Left wing extremism, proxy
war in Kashmir, militancy in some North East states and Naxal presence in several states.
Infiltration attempts into Jammu & Kashmir from Pakistan and Pakistan Occupied Kashmir
(POK) continue to remain a big cause for concern. The attack on Indian Parliament in
December 2001 brought the two countries on the brink of a war. Sporadic incidences of
clash/ firing remain at the line of actual control between the two armies.

Chart 15: Incidents of terrorist attacks Chart 16: Terrorist incidence break up

Source: National Consortium for the Study of Terrorism and Responses to Terrorism

In the post cold war international scenario and after the 9/11 terrorist attack in US, the
world has come closer on the issue of terrorism and has united to fight it. Emergence of
ideology linked terrorism has finally attracted the worlds attention, something which India
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Phillippiness
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The fall in piracy is attributed to
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Nationalist/Separatist
Political
Religious





45

Edelweiss Securities Limited
Defence
has tried to highlight at various world forums for a very long time. The chart below indicates
significant fatalities on account of terrorist attack worldwide.

Chart 17: Number of fatalities due to terrorist attacks worldwide

Source: National Consortium for the Study of Terrorism and Responses to Terrorism

Unfortunately, the current global trend of terrorism is best described as plateauing rather
than decreasing with ~72 countries experiencing increase in terrorist activity against ~63
experiencing decrease in terrorist activity over the past decade. Further, over the past
decade, more than 125 countries have faced terrorist attacks, which indicate the global
spread of terrorism even though it is heavily concentrated in Iraq, Afghanistan, Pakistan and
India.

Geopolitical scenario and Indias foreign policy post independence
Non-violence and non-alignment have been the cornerstones of Indias foreign policy since
independence. During much of the Cold War, India chose to pursue a non-aligned foreign
policy posture. However, collapse of the Soviet Union and end of the Cold War forced India
to redefine its foreign policy and thereby search for a new place in the emerging world
order.

The foreign policy adopted helped India achieve some successes by 1980s in carving out an
independent international role. Regionally, India was the predominant power given its size
and population, in addition to growing military strength. However, emergence of coalition
governments at the national level since the early 1990s, the countrys federal structure,
weaknesses in Indias foreign policy institutions and lack of a strategic culture within the
country together affected Indias search for a post-Cold War foreign policy. Given that
Southeast Asia was less developed than India until the 1970s, the region was not an
attractive trading and economic partner. India subsequently realised that its perceptions
about the region were flawed. Launched in 1990s, after the end of the Cold War, the Look-
East Policy was a strategic shift in India's vision of the world and its place in the evolving
global economy.

Geopolitical equations are rapidly changing globally, with new power upheavals in many
strategic regions and economic crisis in the developed world. Indias size, strategic location,
2.0
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Impact of Terrorism between 2002
and 2011

Rank Increasing Decreasing
1 Iraq Uni ted States
2 Paki stan Al geri a
3 Afghani stan Col ombi a
4 Yemen Israel
5 Somal i a Indonesi a
Source: Institute for Economics and Peace
End of cold war forced India to
redefine its foreign policy



46

Edelweiss Securities Limited
Defence
trade interests and dynamic global security environment underpin the critical need to
bolster the countrys defence preparedness and infrastructure to safeguard security
interests. In todays dynamic world, foreign trade dominates foreign relations. Given below
are the details of Indias largest trading partners region wise.

Chart 18: Indias foreign trade details Import Chart 19: Indias foreign trade details - Export

Source: Ministry of Commerce & Industry, Edelweiss research

With crude oil import of USD144bn during FY14 and USD150bn likely in FY15E, Middle East
is a dominant trading partner. Further, Indias Look East Policy has significantly increased its
trade with Asian partners led by China.

Table 15: Indias top 5 trading partners for import and export

Source: Ministry of Commerce & Industry, Edelweiss research

Impact of defence policies by UN, EU, US
India has been dependent on imports to meet its defence requirement. Long and time
consuming internal procedures and vested interests have impacted development of the
local defence industry. Defence being controlled by governments world over has
ramification of defence policies adopted by exporting nations. After nuclear test of 1998,
most nations imposed sanctions on India, affecting its defence procurement and dual use
technology export to India. This forced India to move towards development of indigenous
technology in many areas including Inter Continental Ballistic Missiles (ICBM) systems.

UNs Global Arms Trade Treaty: India pushed to a corner
The Global Arms Trade Treaty (ATT), which lays down common international standards
and limits the illicit sale of conventional arms, was passed by the UN General Assembly
0
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480
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FY09 FY10 FY11 FY12 FY13 FY14
(
U
S
D

b
n
)
Europe Africa America Asia CIS & Baltics Others
0
70
140
210
280
350
FY09 FY10 FY11 FY12 FY13 FY14
(
U
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)
Europe Africa America Asia CIS & Baltics Others
Rank Country Import (INR mn)
1 Chi na 51,049
2 Saudi Arabi a 36,536
3 UAE 29,114
4 USA 22,325
5 Swi tzerl and 19,430
Rank Country Export (INR mn)
1 USA 39,165
2 UAE 30,498
3 Chi na 14,829
4 Hong Kong 12,734
5 Si ngapore 12,601
International norms may not
be favour India, thus
indigenisation





47

Edelweiss Securities Limited
Defence
in April 2013. India, China and Russia abstained from voting. The ATT lays down several
contentious issues as detailed below:
o ATT will enable arms exporting countries to impose unilateral conditions on
countries that import arms.
o The treaty has failed to address Indian concerns about illegal transfer of arms to
terrorist organisations, insurgent groups and other non-state actors who oppose
democratically elected governments.
o It does not ensure a balance of obligations between arms exporting states and
importers of arms.

While an initiative like ATT that seeks to establish a global benchmark, under normal
circumstances, would have been welcome and supported, the treaty has turned out to
be discriminatory. This, we believe, has been one of the catalysts to promote domestic
defence manufacturing and thus lower dependency on arms exporting nations.
Impact of Geneva Convention on India
India is party to the Geneva Convention, 1949, which has been ratified by 195 countries.
It comprises four treaties and three additional protocols establish the standards of
international law for humanitarian treatment of war. The Geneva Convention applies at
times of war and armed conflict to governments who have ratified its terms and hence,
governments have surrendered some of their national sovereignty by signing these
treaties.
To implement the same at the domestic level, the Indian parliament passed The Geneva
Convention Act, 1960. India follows the dualistic theory of international law; therefore,
international principles and norms do not by themselves become part of domestic law
and to invoke them in domestic courts they have to be incorporated in the domestic
law of the land.

The impact of the Geneva Convention on India has been regarding the reparation of the
prisoners of war whom India holds as a result of armed conflict in December 1971
between India and Pakistan. This occasion has been widely seen as a failure on part of
both the state parties to the Geneva Conventions to act in full conformity with the
obligations of the treaty.

Non-aggressive stance weakened military; history of not attacking
India was heavily influenced by the Gandhian philosophy of non-violence during the
independence struggle and thereafter. Given its nonaggressive stance from the very
beginning, India has faced several invaders, which led to India being under foreign rule for
hundreds of years. Post independence in 1947, India continued to ignore military
considerations in dealing with foreign policy issues. The reason for this is the fact that in
early 1950s several countries in the neighbourhood, Africa and Europe were ruled by
military dictators. This led to an unnatural fear of the Armed Forces and instead of co-opting
them in the national foreign policy framework, attempts were made to keep them out of
the decision making process. Interestingly, India has a distinction of never attacking any
other nation. Further, India has always advocated worldwide nuclear disarmament and
accordingly has a stated policy of no-first-use (NFU), a sign of responsible nuclear nation. In
2010, India signalled a shifted in the policy to no first use against non-nuclear weapon
states.
As long as the world is
constituted as it is, every country
will have to devise and use the
latest devices for its protection. I
have no doubt India will develop
her scientific researches and I
hope Indian scientists will use the
atomic force for constructive
purposes. But if India is
threatened, she will inevitably try
to defend herself by all means at
her disposal.
Jawaharlal Nehru
First Prime Minister of India



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Defence
Self reliance in defence paramount for emerging nation like India
India is today the largest importer of arms and is expected to import close to USD100bn
over the next few years. New Delhi replaced Beijing as the world's top arms importer
accounting for 12% of global arms transfers between 2008 and 2012 where China accounted
for about 6%. This could be Indias best chance to develop its domestic defence industry
given the large market that several global players see and their willingness to share
technology.

There is a political consensus regarding promoting domestic capabilities in defence industry.
DPP 2013 was the step in that direction. BJP through its 2014 manifesto clearly stated its
policy and view on defence, where it would like to strengthen the indigenous capabilities
including greater participation by private sector, promoting R&D and fast track purchases
which is important to modernise the armed forces of the nation. It is also keen to increase
FDI in defence industries as see India as defence equipment exporting nation.

Several private players of repute have demonstrated time and again their seriousness to
harness the potential that the defence industry throws up. India currently has several
private companies supplying components to DPSUs, OFBs and global companies, albeit on a
much smaller scale. With an aim to becoming self reliant, the country cannot afford to
remain dependent on foreign defence equipment for large part of its requirement.

In fact, as demonstrated in other industries like automobile, IT and pharmaceuticals, India
could become an important player in the global supply chain and export equipment to
friendly nations.


India is the largest importer of
arms with 12% of global market
share





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Defence
Current State of Indian Defence Industry

Public sector leads the way
Defence Research and Development Organisation (DRDO)
The DRDO was formed in 1958 by the amalgamation of the then already functioning
Technical Development Establishment (TDE) of the Indian Army and the Directorate of
Technical Development & Production (DTDP) with the Defence Science Organisation
(DSO). Today, DRDO is a network of more than 50 laboratories which develop defence
technologies covering various disciplines, like aeronautics, armaments, electronics,
combat vehicles, engineering systems, instrumentation, missiles, advanced computing
and simulation, special materials, naval systems, life sciences, training, information
systems and agriculture. The organisation is backed by over 5,000 scientists and about
25,000 other scientific, technical and supporting personnel.

The organisation develops defence technologies and has established an excellent
ecosystem with good infrastructure and technology base for defence R&D. It has
partnered with both large industries and SMEs in the development of various systems
and has more than 100 partner development firms for specialist products.

DRDO has been entrusted primarily the responsibility for several high-tech projects for
armed forces. While it has led several flagship projects in India in the past, many of
them have been plagued by delays. We understand that the delays are due to a
combination of: (1) delays from DRDO; (2) changes in the specification by armed forces
during the development of a project/ equipment; and (3) delay in procurement of raw
material (which many times could be part of restricted items). It is primarily due to
these delays that the armed forces prefer to opt for foreign equipment based on the
criticality of the required equipment.

Table 16: Briefs on the DRDOs flagship projects
Light Combat Aircraft (LCA)
First conceived in 1983, the maiden
flight took off in Jan 2001 and is
currently undergoing final stage of
trials. DRDO expects the first fleet to
be out by mid-2014 to be powered by
GE engines.
Kaveri Engine
Conceived in 1986 to power the LCA,
the engine fell short on certain
technical parameters and was thus
delinked from LCA programme.
Development continues on two
engines K9+ and K10. Kaveri is likely
to be used to power the future UAVs.



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Defence
Missile: Agni, Prithvi, Akash, Nag,
Trishul
The Integrated Guided Missile
Development Programme led by DRDO
started in early 1980s which was
towards development of a
comprehensive range of missiles. It
concluded in 2008 after given strategic
missiles were successfully developed
with Agni 3 being the last missile
developed under this programme.
With Agni V, India has entered the
select club of countries having ICBM
capabilities.
MBT Arjun (Mark I and Mark II)
While development commenced in
1972, it was only in 1992 that govt
decided to mass produce Arjun. It was
inducted in 2004 by the Indian Army.
Mark II would have over 90 upgrades
with most of the tests expected to be
completed this year.
Pinaka: Multi Barrel Rocket Launcher
Development began in 1986 and was
used in Kargil war. It is the first
indigenous rocket system designed,
developed & produced by DRDO with
private sector including L&T and Tata
Group. Further, trails for improved
Pinaka Mark II are underway.
Source: DRDO, Edelweiss research

Defence Public Sector Undertakings (DPSUs)
Indian defence manufacturing is dominated by DPSUs and Ordnance Factory Boards
(OFBs) which contribute about 90% to the total manufacturing output. DPSUs have
played a critical role in building a domestic industrial base in this sector as they typically
outsource 20-25% of their production requirements to private companies. Leading
DPSUs include HAL, Bharat Electronics, Mazagon Dock and Bharat Earth Movers.

DPSUs contribute about 65-70% to Indias defence manufacturing output. Their output
has posted CAGR of 12% between FY01 and FY13. While they have enjoyed significant
protection from the government, it must also be acknowledged that their growth has
been constrained by this ownership. DPSUs have been unable to expand with the
orders placed and each has order books that extend well beyond 15-20 years.

DPSUs collectively registered healthy revenue CAGR of ~12% over FY01-13 and a
turnover of more than INR297bn in FY13 compared to INR77bn in FY01. Of the total
nine DPSU, HAL and BEL contribute more than 68% to total revenue of DPSUs; HAL





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alone contributes 48% of this. The profit margin during the period for DPSUs has
increased from ~6% in FY01 to ~19% in FY13.

Chart 20: Financial performance of DPSUs

Source: Ministry of Defence

Ordnance Factory Boards (OFBs)
The 41 ordnance factories (39 currently operational and two projects coming up in
Nalanda (Bihar) and Korwa (UP)) are spread over 26 different locations with workforce
of over 1,00,000. These factories manufacture a wide spectrum of products including
weapons (small calibre, mortar equipment, medium calibre and large calibre),
ammunition (small medium and large calibre, mortar bombs, grenades, signalling
smoke, rocket bombs, demolition, explosives, propellants and chemicals), vehicles
(armoured and transport), clothing, general stores and equipment for defence services.
OFBs have clocked a lower revenue CAGR of ~8% during 2001-13; turnover increased
from INR55bn to INR125bn over the same period.


0.0
12.0
24.0
36.0
48.0
60.0
0
70
140
210
280
350
F
Y
0
1
F
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Y
1
3
(
I
N
R

b
n
)
(
I
N
R

b
n
)
DPSU Sales DPSU PAT
DPSUs have posted revenue CAGR
of ~12% from FY01-13



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Edelweiss Securities Limited
Defence
Chart 21: Financial performance of OFBs

Source: Ministry of Defence

OFBs are currently working on development of some important projects like Up-
Gunning of 130mm, M46 to 155mm/ 45 Caliber MK-IV, Development of 155mm X 52
Caliber FH mounted gun system with electronic modules, integration of 105mm LFG on
BMP, development of SRCWS (Stabilised Remote Control Weapons Station) with
12.7HMG for navy indigenisation of AK-630-M except the control system (D2 1950A)
and KAVACH-MOD-II through in-house manufacturing and assistance from the Indian
industry.

Further, to cater to the growing requirement of modern armaments, OFBs have an
ambitious modernisation plan envisaging investment of INR150bn during the Twelfth
Plan period (2012-17) against INR5.8bn spent during the Eleventh Plan period.

Table 17: OFBs - Modernisation plan

Source: Ministry of Defence

Absence of private sector from such strategic and remunerative sector
The Defence Ministry has been vocal about commitment required from the private sector in
the defence space. Unfortunately, baring a few companies, domestic private sector
companies have not invested in the required R&D, infrastructure and manufacturing
facilities. Given unpredictability of policy and requirement of armed forces, the private
0
30
60
90
120
150
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1
3
E
(
I
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R

b
n
)
OF sales
Augmentation of capacity for
production of Tank T-90
Creation of capacity for production of
variants of Tank T-72



Creation of capacity for production of
Track Link Assembly for Armoured
vehicles
Booster and Sustainer for Akash missile
Augmentation of capacity for ICV BMP-
II and its variant
Augmentation of capacity for Engines of
Armoured vehicles
Nalanda and Korwa Project HMX and Ammonium per-chlorate plant
Creation of capacity for production of
155mn Howitzer
Augmentation of Capacity for Pinaka
Rocket
OFB clocked revenue CAGR of
~8% from FY01-FY13





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Defence
sector has been unable to direct its R&D efforts towards a required product/ project/
system. The military modernisation programme up to 202715-year Long-Term Integrated
Perspective Plan (LTIPP) from 2012 to 2027was approved by the Defence Acquisition
Council (DAC) in April 2012. The public version of LTIPP released is sketchy and lacks clear
direction in terms of requirements of the armed forces for the private sector to focus its
efforts on.

In 2010, the Defence Ministry invited three private players (Tata Motors, Mahindra Group
and L&T) and one public sector entity (Ordnance Factory Board) for the Future Infantry
Combat Vehicle (FICV) projectworth over INR500bn to replace ~2,600 units of the army's
BMP-2 infantry vehicles. But, after a lot of ground work by the three players, which included
spending ~INR1bn in the interim, in October 2012, the ministry withdrew its letter of intent
and the project is back on the drawing board.

Compared to the FICV project, the Tactical Communication System (TCS) project made more
progress. In June 2012, the government shortlisted two parties for this USD2bn project
where a consortium of L&T, Tata Power SED and HCL, and state-owned Bharat Electronics
competed. Almost a year has passed with little progress. Based on our discussions with
industry players, we understand that prototype designs will be submitted to MoD for
appraisal. The TCS project is the first off the block in the right direction in terms of
indigenisation. While delay/ deferrals are seen here as well, based on the success of this
project, the domestic private sector could be lured back to the defence industry.

Typically, globally, governments outline their requirements for the armed forces from the
private sector and provide financial support to private companies to develop prototypes;
the winning model (sometimes a combination of multiple prototypes) bags a massive
contract. TCS is the project in this direction, which unfortunately has been delayed. But it is
certainly a good start in line with global best practices.

Private sector companies spend significant amount of time and money to set up the process
and tie-up with foreign players to bid for defence projects. Complete about turns, as in the
FICV project, costs companies dear and shakes their confidence. This, in our view, is the
single biggest factor dissuading private sector companies from setting up capacity/
capability to cater to the Indian defence industry.

It cannot be emphasised enough for the need of private sector participation in the defence
industry as in our view they are likely to bring in more efficiency, quick turnaround and high
ability to absorb technology and indigenise the defence industry. This, in turn, could benefit
DPSUs/ OFBs as they can focus on being top level integrators. Similarly, promoting R&D in
the private sector will free up DRDOs bandwidth to focus on cutting-edge R&D. Thus, co-
opting the private sector will, over time, reduce the production and delivery period, help
DPSUs, OFB and DRDO and will also benefit the nation at large.





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Defence
Table 18: Foreign collaborations by Indian companies

Source: Companies, Industry, Edelweiss research
Sr No Indian Company Foreign Collaborator Country Area of Cooperation
Boei ng USA P-8I reconnai ssance pl anes, naval systems
EADS Europe Manufacture hi gh-end defence el ectroni cs
Raytheon USA Upgrade of T-72 tanks
Pratt & Whi tney USA Ai rcraft engi ne components
Nexter Systems France Towed & mountai n gun systems
Cassi di an Germany systems used i n el ectroni c warfare, radars, avi oni cs and
mobi l e systems
Thal es France Hi gh-end avi oni cs software
Fi ncanteri Ital y Fl eet refuel l i ng tankers, naval systems
Si l korsky Ai rcraft Corp USA S-92 hel i copter cabi ns
Israel Aerospace Industri es Israel Manufacture and defence products
EADS Europe Advanced tacti cal communi cati on systems
Thal es France Optroni c sol uti ons for mul ti -rol e combat ai rcraft
Boei ng USA Aerospace component work
Lockheed Marti n USA aerostructures for the C-130 Hercul es and the C-130J
Super Hercul es i n Indi a
BAE Systems UK Armoured vehi cl es
Lockheed Marti n UK Si mul ators
Eaton USA
Saab Sweden
DCNS France
SembCorp Mari ne Si ngapore
Notthrop Grumman USA
Babcock UK
Mori nformsystem Agat Russi a
Komac South Korea
Fi nmeccani ca Ital y
Ai rbus France
El bi t Systems Israel
Panhard General Defence France
Saab Sweden
Paramount Group South Afri ca
Krauss-Maffei Wegmann Germany
BAE Systems UK
RAC Mi G Russi a
Snecma France
El bi t Systems Israel
CAE Canada
Edgewood Ventures LLC USA
Rol l s Royce UK
9 BEL Thal es Desi gn, devel opment, marketi ng, suppl y & support of
ci vi l i an & sel ect defence radars for Indi an & gl obal
markets
10 RIL Dassaul t Avi ati on France Defence and homel and securi ty
8 Hi ndustan
Aeronauti cs
Devel op & market software, fi rmware and computer
programmes , ai rcraft engi nes, accessori es, aero engi nes
components, aggregates, systems & spares of al l ki nd of
avi ati on equi pment
6 Bharat Forge Ti e up to address arti l l ery and mortar systems sol uti ons
7 Wi pro Mi ne protected vehi cl es , armoured wheel ed vehi cl es,
recovery vehi cl es, arti l l ery and combat systems, bri dge
l ayi ng systems
4 Godrej Group To produce actuator for Eaton
5 Pi pavav Defence Technol ogy transfer to bui l d strategi c assets for Indi an
armed forces
1 L&T
2 Tata Group
3 Mahi ndra
Group





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Defence
Policy and thinking to increase private sector participation
Taking a cue from the domestic power sector will be apt here.
Issue: The Indian power generation sector was plagued with delays given that BHEL was the
sole domestic company manufacturing power generation equipmentboilers and turbine
generators (BTG). In fact, comparisons were drawn as to how the Indian GDP growth was
adversely affected due to lack of sufficient power generation capacity, a derivative of lower
power generation equipment capacity in the country. At the same time, some domestic power
developers started importing power generation equipment from China and Korea. The
domestic power equipment players were vocal about how the Chinese power equipment
players were taking away the market share of power generation equipment in India.

Solution: After significant deliberation on the policy front, it was decided to promote
domestic manufacturing of power generation equipment. The government through NTPC,
the state owned power utility, floated bulk tenders to purchase power generation
equipment for 14.5GW. The condition was that the winner (based on competitive bidding)
will need to have a phased manufacturing programme in place and supply the equipment
from a domestic facility, barring some initial imports. This encouraged private players and
thus saw several private companies like L&T, Thermax, BGR Energy, Alstom Bharat Forge,
JSW Toshiba gearing up to set up power generation equipment facilities in India, in a phased
manner. Given INR depreciation, imports are no longer as viable as earlier.

Conclusion: Thus, India today has, in addition to BHEL, several private sector players
including L&T and Thermax with capacity to produce power generation equipment
domestically. This, in the long run, will help the country tide over the lack of power
generation equipment capacity crisis and thus power generation capacity at large.






Technology sharing by foreign majors; co-development and co-
production a solution
Based on our discussions with several large global players in the defence business, foreign
OEMs are unlikely to part with their core/ critical technology to an entity, where they do not
hold majority shareholding. Also, in most countries, defence is considered a sensitive and
strategic industry. Thus, most intellectual property rights developed by OEMs are in fact
owned by respective governments. Hence, to sell defence equipment to a foreign nation,
OEMs require certain approvals from respective governments, which obviously depend on
the political relations between the two countries.

However, given that India is likely to be one of the largest importers of armaments over the
next decade, no major exporter would like to miss the opportunity that the country throws
up, especially in a scenario where defence expenditure in western nations is on the wane.
While India has had good experiences of co-development and co-production with Russia, US
has recently thrown its hat in the ring, offering co-development and co-production of
defence equipment including cutting-edge technology and next-generation armaments. To
begin with, it has offered to develop the next generation Javelin anti-tank missiles jointly
with India.
Power sector offers valuable
lessons for the defence sector in
India to encourage private sector
participation
After Russia, US offered India co-
development and co-production,
the way for India to scale up the
learning curve
While the Ministry of Defence views putting up defence related manufacturing
capacity and then waiting for defence orders as the most convenient scenario, phased
manufacturing programme is the mid-path, which is likely to be viewed more
constructively by the private sector, in our view.



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Trends in Global Defence Spending

Uptick in exports to Asia and Africa
At USD1,756bn, global military spending accounts for 2.5% of global GDP, with top 100
companies accounting for ~23%. In the international arms trade, US, Russia, Germany,
France and China accounted for ~75% of global exports between 2008 and 2012. China has
replaced UK in the top 5 global exporters during the period, as its exports spiked 162% from
2003-07. This is the first time since World War II that an Asian nation features amongst the
top 5 exporters in the world.

Between 2003-07 and 2008-12, Asia (up 35%) and Africa (up 104%) regions saw sharp uptick
in armaments imports. The global financial crisis has led to US and European nations
streamlining bureaucratic procedures and increased their willingness to engage in licensed
production, technology transfers and cooperative production arrangements.

In terms of global imports, top 5 importers accounted for ~32% of total global imports with
India topping the list with 12% share in 2012 in international arms imports against 9% at
2007 end. India, China, Pakistan, South Korea and Singapore were the top 5 importers
during 2008-12. Indias import rose 59% between 2003-07 and 2008-12 with 79% from
Russia, followed by UK at 6%, a distant second.

Chart 22: Top exporters and their recipients

Source: SIPRI, Edelweiss research

South Korea, 12%
Australia, 10%
UAE, 7%
Others, 70%
India, 35%
China, 15%
Algeria, 14%
Others, 36%
Others, 72%
Spain, 8%
South Korea, 10%
Greece, 10%
Others, 57%
Morocco, 10%
China, 12%
Singapore, 21%
Others
25% Others
22%
China
5%
UK
4%
France
9%
France
6%
Germany
10%
Germany
7%
Russia
24%
Russia
26%
USA
31%
USA
30%
2
003-2007
2008-12
Others, 30%
Bangladesh, 7%
Myanmar, 8%
Pakistan, 55%
India is the largest arms importer
with 12% share globally





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Edelweiss Securities Limited
Defence
Chart 23: International defence trade between 2008 and 2012

Source: SIPRI, Edelweiss research

While US and Russia, including the western nations, have been at the forefront of
developing several defence platforms, most other countries have stepped up the curve
through offset arrangements. Today, amongst the top 100 defence companies, US has the
highest number of defence companies followed by Western Europe. The total sales of the
top 100 arms producing and military service companies in 2012 stood at USD395bn. US and
Western European companies accounted for 86.7% of sales through 73 companies from the
two regions.

Table 19: Top defence players in the world

Source: SIPRI, Edelweiss research

During the past 10 years, sales of the top 10 defence players have clocked ~5% CAGR. US
continues to dominate the group with 7 companies in the top 10. These companies spend
significantly on R&D with the expenditure topping USD16.7bn in 2012, which is about 4% of
total sales.




USA
30%
Russia
26%
Germany
7%
France
6%
China
5%
UK
4%
Spain
3%
Italy
2%
Ukraine
2%
Israel
2%
Others
13%
Exporters
Sr No Company Country
Total
Sales
(USD mn)
Defence
Sales
(USD mn)
Total
Profit
(USD mn)
1 Lockheed Marti n USA 47,182 36,000 2,745
2 Boei ng USA 81,698 27,610 3,900
3 BAE Systems UK 28,263 26,850 2,599
4 Raytheon USA 24,414 22,500 1,900
5 General Dynami cs USA 31,513 20,940 (332)
6 Northrop Grumman USA 25,218 19,400 1,978
7 EADS Europe 72,596 15,400 1,580
8 Uni ted Technol ogi es USA 62,173 13,460 5,200
9 Fi nmeccani ca Ital y 22,131 12,530 (1,010)
10 L-3 Communi cati ons USA 13,146 10,840 782
Top 10 defence players sold
armaments worth USD 205bn
during 2012 with over USD20bn of
profits
India
12%
China
6%
Pakistan
5%
S. Korea
5%
Singapore
4%
Algeria
4%
Australia
4%
USA
4%
UAE
3%
S. Arabia
3%
Others
50%
Importers



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Chart 24: World military spending Western nations on the wane

Source: SIPRI, Edelweiss research

Indian defence spending and likely future direction
With the worlds largest volunteer army, third largest active military base of ~1.3mn armed
forces personnel, along with the third largest paramilitary forces, India has been spending a
larger share (~70%) of its defence budget on upkeep of the large military base, leaving
smaller portion for capital expenditure (~30%). However, the situation seems to be
improving now (see chart below) with increase in the share of capital expenditure to ~40%.
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 25: Defence expenditure and increasing proportion of capital expenditure

Source: Union Budget, Edelweiss research

With significant part of the current armament either redundant or outdated (in terms of
technology), India needs to spend for massive upgrades to its existing armaments and
include/ procure the latest high-tech weapon systems. Chart below indicates that almost
0
400
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1,200
1,600
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Africa Americas Asia & Oceania Europe Middle East
19.0
28.2
37.4
46.6
55.8
65.0
0
1,200
2,400
3,600
4,800
6,000
F
Y
9
6
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9
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1
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E
F
Y
1
8
E
F
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2
0
E
F
Y
2
2
E
F
Y
2
4
E
(
%
)
(
I
N
R

b
n
)
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 of
reduction in interest as a percent
of GDP.

B: Based on MoF projection,
where capex and revenue growth
is pegged at 10% and 7%,
respectively.
Overall growth seen in Asia and
African region





59

Edelweiss Securities Limited
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~15% of the defence budget on the capex front is underutilised. Perhaps, under spending is
one of the key reasons for obsoleteness of Indias weapons systems.

Chart 26: Under spending in defence budget

Source: Union Budget; MoD, Edelweiss research

Since FY08, the Indian government has spent close to INR1,927bn (USD38bn) on capital
expenditure. A significant part of this was towards equipment upgradation. Air Force and
Indian Navy have been at the forefront regarding new equipment thereafter.

The Indian government is likely to spend USD248bn over the next decade on purchase of
new defence equipment for modernisation of the armed forces, making India one of the
most lucrative markets globally for equipment manufacturers. The Planning Commission has
emphasised on domestic manufacturing for self reliance and offset is the way to start with.
Indian Army
The Indian Army, with an active strength of ~1.3mn, is the third largest land force in the
world. Although the armys budget is mostly revenue-intensive, its capital expenditure
has nonetheless increased ~14% CAGR over 10 years to INR~300bn in FY13. The
increase in capital budget has, however, not translated into a comprehensive
modernisation of the Indian Army.


(2.0)
11.8
25.6
39.4
53.2
67.0
F
Y
0
2
F
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0
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Y
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(
%
)
% Underspending in capex
A sharp 60% rise in capital
expenditure during FY05 in
addition to usual delays in
procurement led to sharp rise in
underspending



60

Edelweiss Securities Limited
Defence
Chart 27: ArmyCapital spending

Source: MoD, Industry, Edelweiss research

The army, in order to upgrade its armament, is likely to spend INR1,000bn over the
next 5-10 years. Further, given the reduced probability of a full fledged conventional
warfare, electronic warfare and spending on electronic warfare systems has become
imperative.
Indian Air Force
The Indian Air Force (IAF) is the fourth-largest air arm in the world. Among the three
services, IAF is the most capital-intensive, accounting for about 28% of total capital
expenditure in FY13. During FY04-13, IAFs total capital expenditure saw ~19% CAGR to
INR195bn.

The increase has, however, not prevented the depletion of its combat force strength to
34 squadrons against the government authorised 42. Further, the number of squadrons
is likely to shrink to 31 during the 12th Plan period (2012-17) given the delay in
procuring new aircraft.

Nonetheless, the IAF has taken some major initiatives to increase its squadron strength
including induction of new fighter aircraft and upgradation of existing ones in its
armoury. It is hopeful that by the 15th Plan (2027-32) the number of fighter squadrons
will rise to 45.


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(
I
N
R

b
n
)
Army capex





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Defence
Chart 28: Air ForceCapital spending

Source: MoD, Industry, Edelweiss research

Indian Navy
The Indian Navy (IN), the fifth-largest maritime force in the world, is responsible for
protecting Indias maritime interests along the 7,516.6km coastline, the 2.01mn km
Exclusive Economic Zone (EEZ), distant islands and its vast Sea Lines of Communication
(SLOC). Among the three services, IN, however, has the lowest budget, although its
share in the defence budget is rising gradually. It now constitutes ~19% of the defence
budget, a noticeable increase from the less than 15% in early 2000s.

Over the years, IN is becoming increasingly capital intensive. From less than 50% in
FY00, capital expenditure in its total expenditure shot up to over 66% in FY13. Its total
budgeted capital expenditure touched INR152bn, a growing at a CAGR of 21% over the
last 10 years.

Chart 29: Indian NavyCapital spending

Source: MoD, Industry, Edelweiss research

0
50
100
150
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250
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Airforce capex
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64
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128
160
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(
I
N
R

b
n
)
Navy capex



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Edelweiss Securities Limited
Defence
P5 spending pattern (special focus on China, Pakistan, Israel)
India has been a leading spender on defence during the past 20 years. The spending has
clocked compounded growth of ~5% during 1993 to 2013, only behind China, which grew
~10.5% during the same period. Close with India has been Saudi Arabia, whose spending
grew ~5% during the same period, but much fast during the past decade. Pakistans growth
has been slow in terms of defence spending at ~2%. Most other major powers including the
P5s growth in defence spending has been abysmally low raging from negative to 2% (US)
given their high base, with the exception of Russia, which clocked ~8% growth during the
past decade. India is likely to emerge as the third largest defence spender after US and
China over the next decade given the large pipeline of purchases expected by all the three
wings of the Indian armed forces.

Table 20: Change in defence spending of major countries

Source: SIPRI, Edelweiss research

Chart 30: Trends in defence expenditure Chart 31: Growth in defence expenditure

Source: SIPRI, Edelweiss research


Sr No Country 1993 2003 2013 1993-2013 2003-13
1 USA 463,504 507,781 618,681 1.5 2.0
2 Chi na 23,454 57,390 171,381 10.5 11.6
3 Russi a 54,400 39,100 84,864 2.2 8.1
4 S. Arabi a 23,569 25,951 62,760 5.0 9.2
5 France 67,991 64,749 62,272 (0.4) (0.4)
6 Japan 54,607 61,460 59,431 0.4 (0.3)
7 UK 53,042 57,005 56,231 0.3 (0.1)
8 Indi a 18,956 29,165 49,091 4.9 5.3
9 Israel 15,181 17,279 16,019 0.3 (0.8)
10 Paki stan 5,017 5,903 7,637 2.1 2.6
CAGR (%) Defence Spending (USD mn)
(18.0)
(9.0)
0.0
9.0
18.0
27.0
1
9
9
2
1
9
9
4
1
9
9
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0
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0
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2
0
0
8
2
0
1
0
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0
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(
%
)
China India Pakistan
0
160
320
480
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800
0
38
76
114
152
190
1
9
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9
8
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0
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2
0
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4
2
0
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0
0
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(
U
S
D

b
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Russia China India
Pakistan S Arabia USA (RHS)





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Edelweiss Securities Limited
Defence
Trends: Per capita spending on defence and as percentage of GDP
Though Indias per capital spending is on the lower side given its large population, it is
amongst the largest defence importers in the world and is likely to be the third largest
overall spender over the next decade. However, the per capita defence spending is likely to
increase given huge spending lined up by Indian defence establishment. The country is likely
to spend over USD248bn on defence equipment during the next decade.

Chart 32: Per capita defence spend

Source: Nation Master, Edelweiss research


0
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960
1,280
1,600
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(
U
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D
)
Per-capita spending World average
World average per-capita defence
spend stands at USD 249 or 2.5% of
global GDP



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Edelweiss Securities Limited
Defence
Recent Trends in Industry

Indian defence market hard to ignore; ingress of private players finally
Incrementally, for strategic reasons, India is now encouraging domestic manufacturing and
involvement of local private players in the defence manufacturing/ procurement process
which was dominated by imports and selective manufacturing by DPSUs. The recently
approved DPP 2013 is a step towards encouraging domestic manufacture. Increase in FDI in
defence will definitely help attract several global behemoths vying to enter the Indian
defence market through tie ups with local private players given their reluctance to share
technical know-how with only 26% stake. However, local private players (via tie ups/ foreign
collaborations) are making steady progress through tie ups in defence knowing well that
defence is the next sunrise industry in India.

Below are few instances of promising development involving domestic private players.
JV between Pipavav and Mazagaon Dock for building warships/ other naval vessels
Pipavav is the first Indian private shipyard to bag the licence to produce naval assets
including warships for the Indian Navy. Subsequently, the company also entered into
strategic tie ups/ alliances with global defence players. In May 2012, Mazagon Dock
(MDL) selected Pipavav to partner it in a JV to build warships and speed up execution of
large pending order book along with bidding for future naval projects. The JV partner
subsequently received nod from the Government of India. The company is currently
building offshore patrol vessels for the Indian Navy. While the JV does not give
exclusivity, it will certainly speed up clearing MDLs vast order backlog.
JV between Mazagon Dock and Larsen & Toubro for building naval vessels
MDL and L&T entered into a JV to primarily build submarines and warships. The JV does
not give any specific preference to L&T and for each contract it will have to bid. Given
that MDL has a huge unexecuted order book, such a JV is likely to push it to release
orders for naval vessels, which in turn is likely to help the company build warships and
thus utilise its facility at Katupalli.
Bharat Electronics and Larsen & Toubro to compete for project worth INR100bn
The Ministry of Defence (MoD) in June 2012, for the first time, pitted a private player
against an established PSU for defence deals for development programme of strategic
nature. MoD has chosen a L&T-led consortium to bid for developing Tactical
Communications System (TCS), a backbone communications network, worth INR100bn.
Bharat Electronics (BEL), a DPSU, was the only other bidder selected. This move is
significant as it could open up a new window of opportunity for Indian private sector
companies and set a trend for increased private participation in supply of defence
equipment.

In the first six months, the L&T-led consortium and BEL were to prepare a detailed
project report (DPR). The prototype, expected to be ready in 18 months, is likely to cost
INR2-3bn, of which the government will fund 80% and bidders will bear the balance. 6-
8 months thereafter, evaluation trials are expected, post which the ministry will choose
the developer. Thus, the deal was supposed to take about two years to materialise into
order flows for the chosen company. Further, the entity that indigenises technology
better is likely to have an advantage over the one that relies more on foreign





65

Edelweiss Securities Limited
Defence
technologies/components. The deal may also be split between the two, with major
share going to the entity with better designs. The project however has been delayed.
Tata Power SED readies improvised indigenous Howitzer, eyes INR85bn order
In December 2012, Tata Powers Strategic Electronics Division (SED) displayed a
prototype of high calibre artillery gun. The 155mm, 52 calibre gun can reach about
52km compared to the existing 155mn, 39 calibre Bofors gun which has a range of
under 30km. This is a significant development given that no artillery gun has been
inducted by the Indian Army since the tainted Bofors deal of 1986. However, the
Defence Ministry has for the third time in the past 10 years cancelled a tender for
purchase of artillery guns floated in 2012; first two cancellations were in 2002 and 2007.
Interestingly, Gun Carriage Factory (GCF), Indian Ordnance Factorys arm, was also
developing an upgraded/ superior version of the Swedish Bofors around the same time.
The Tata Group has developed the gun without any mandate / commitment from the
Defence Ministry, thus putting its own money at stake. This goes on to demonstrate
that the domestic private sector is ready to invest and deliver world-class defence
equipment. Tata is looking forward to the tender to purchase 814 mounted artillery
guns worth over INR85bn.
Indigenous aircraft to be reality as Defence Ministry invites tenders worth INR130bn
The Defence Ministry, for the first time in May 2013, issued a tender to develop an
indigenous aerospace industry as it looks to replace IAFs ageing Avro aircraft. The
ministry has invited tenders for 56 transport aircraft from eight foreign vendors where
they have to partner an Indian player to produce 40 aircraft within the country with
60% local content. The first 16 aircrafts, to be manufactured at the foreign vendors site,
are to have 30% local content. The deal value is expected to be about INR130bn. The
deal is likely to be delayed given concerns on exclusion of Indian players from the
tender.





66

Edelweiss Securities Limited
Defence
Key Challenges Facing Industry/ Players

Continued domination of DPSU; moving at snails pace
India has been completely dependent on imports to meet its defence equipment needs. This
included both deals between governments as well as with private foreign players, even as
local private players were kept out of the ambit of defence procurement/ supply deals.

The strategy adopted by India to bring defence manufacturing/ sourcing to India was to
have a foreign firm to tie up with one of the DPSUs or OFB where some portion/ quantity
would be manufactured locally through technology transfer or assistance from the foreign
vendor. It is pertinent to note that the first ordnance factory was set up in 1801 in Cossipore
by the British. This, however, has been a time consuming and longish route given the slower
turnaround at OFBs.

Indias dependence on DPSUs and OFBs has resulted in inordinate delays in several marquee
projects. While the Light Combat Aircraft (LCA) and Arjun main battle tank were delayed by
over a decade, the Kaveri aircraft engine (for LCA) and Advanced Technology Vessel
submarine have been delayed by two decades. Delays have been the reason why armed
forces prefer to buy foreign manufactured goods / products / equipment off the shelf.

Indian companies have lobbied for long to correct this inequality and put Indian private
sector companies on par for defence procurement. This has begun to bear fruits only during
the previous decade when smaller orders are being given to private companies in India.
Several private sector companies have invested in developing defence capabilities and are
prepared to invest more. But they face an uncertain policy environment and staunch
opposition from powerful unions at DPSUs/ OFBs who oppose any move by the government
to allow the private sector a leg in.

Issues of DPSUs and ordnance factories
DPSUs and OFBs employ about 176,503. Although they manufacture INR368bn worth
defence equipment per year, productivity is abysmal. A Finance Ministry survey indicated
productivity in the state-owned defence sector was the lowest among all industries
INR2.1mn per employee per year, half of the national average.

Powerful unions have been sabotaging any move by the government to allow private sector,
which in other sectors have ushered in better productivity, newer technology and overall
efficiency. Order books of most DPSUs are several times the annual execution, leading to
delays in delivery of products/ systems to the armed forces.

Average productivity of employees across DPSUs is just INR3.9mn with Hindustan Shipyard
being lowest at INR1.6mn per employee per year compared to Bharat Electronics where it is
at INR5.9mn. This is significantly lower compared to private companiesL&Ts FY14
employee productivity stood at INR10mn; The productivity per employee of companies in
BSE Capital Goods stands at INR10.4mn. The recently approved DPP 2013 is aimed at
tapping the domestic potential to harness domestic requirement.








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Edelweiss Securities Limited
Defence
Table 21: Employees productivity comparing DPSU and private sector companies

Source: FY13 Annual reports, Industry, Edelweiss research

Fig. 18: SWOT analysis of DPSUs and ordnance factories

Source: Industry, Edelweiss research

DRDOs take on delays; exports opportunity for DPSUs and OFBs
DRDO has been the favourite whipping boy for all the delays faced by the domestic defence
sector. However, there are several instances where requirements were changed midway,
delaying the procedure further. This has been a vicious circle for defence projects given that
the technology is evolving much faster and the armed forces obviously would want
armaments based on latest technologies.

A way to self reliance is adding significant export capacity/ capability, which, in wartime can be
harnessed towards domestic requirements. Further, upgrading is likely to be quicker based on
Defence PSUs
Sales
(INR mn)
No. of
employees
Productivity per employee
(INR mn/Employee)
Hi ndustan Aeronauti cs 142,010 32,644 4.4
Bharat El ectroni cs 61,038 10,305 5.9
Bharat Earth Movers 28,012 11,005 2.5
Mazagon Dock 24,047 8,670 2.8
Garden Reach
Shi pbui l der & Engi neers
15,290 3,491 4.4
Goa Shi pyard 5,087 1,602 3.2
Bharat Dynami cs 10,747 3,300 3.3
Mi shra Dhatu Ni gam 5,374 976 5.5
Hi ndsutan Shi pyards 4,838 3,065 1.6
Ordi nance Factori es 72,290 101,445 0.7
Total 368,734 176,503 2.1
Large domestic market High import dependence
Shrinking budgets in the US/EU
Private participation
Unfavourable policies for private players
Existing manufacturing infrastructure
Strong R&D set-up
Large pool of talented scientists, engineers
Offset policy
Talent retention
Unpredictable policy regime
Low absorption and ToT
Adversaries turning self-sufficient
Global OEMs investments and ToT
Opportunity
Strength Weakness
Threat
SWOT Analysis



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Edelweiss Securities Limited
Defence
the feedback received from international customers given timelines are paramount. India is
looking at building on its Look East policy having participated in ADEX 2013 (Seoul) to
showcase some of its defence capabilities. It is looking at expanding military engagement
including exports to select ASEAN members in addition to other friendly nations.

Restricted exposure to private companies (limited sourcing currently)
Indias defence requirement has been met by DPSU and OFBs historically through foreign tie
ups. Through the recently released DPP 2013, the government proposes to share the public
version of Long Term Integrated Perspective Plan (LTIPP), outlining the Technology
Perspective and Capability Roadmap (TPCR) against LTIPP 2012-27. The TPCR will provide
useful guidance to the Indian defence industry to boost its infrastructure capabilities and
direct its R&D and technology investments. This will equip private sector companies to
direct / channelise their energies / efforts including R&D efforts in the right direction. Indian
manufacturing has an inherent low-cost advantage. Thus, with participation of private
players, the overall cost of defence equipment is likely to decline and more important is
reliability of supply.

Private Sectors Wish List
We believe that apart from red tape there are various other reasons which have prevented
active participation of private sector in the defence space which are as follows:
Policy issues
Decisions are taken by the Defence Acquisition Council to categorise a proposal as Buy
or Buy and Make or Make based on advice from the DRDO and the public sector. No
inputs are sought from the private sector. Its competence and potential are given no
consideration. In all deals where transfer of technology is negotiated, the nominated
recipient is always a DPSU, even if a private sector company is better placed in terms of
infrastructure and know-how to absorb the technology. A DPSU may have to establish
complete facilities ab initio, whereas a private sector company may need only
incremental technology.
Procedural issues
Requirements of the armed forces are not made known to the private sector
sufficiently in advance, with the result that it does not get adequate time, either to
scout for foreign tie ups or to establish the necessary facilities. The time given for
submission of technical and commercial proposals is grossly inadequate for a new
entrant in the field. Parameters for the equipment to be procured are formulated with
foreign equipment in mind, after referring to manufacturers brochures. The domestic
private sector is not consulted in this process, whereas minor acceptable changes in
parameters may make the Indian equipment eligible for consideration.
Functional issues
Every producer seeks economies of scale and assured continuous orders. Unfortunately,
Indian procurement regime precludes both. RFPs are issued for one-time piecemeal
quantities without indicating the envisaged total requirement over a period of time.
Additionally, no long-term commitment is made regarding regular flow of orders. This
deters Indian companies from committing resources for establishing production
facilities as the venture can prove both expensive and risky.





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Edelweiss Securities Limited
Defence
Absence of level playing field
According to Assocham's calculations, which it has presented to MoD, equipment that
costs INR100 when procured ready-built from a foreign OEM and imported into the
country, would cost INR116.31 if a private Indian company chooses to buy only 70%
ready-built, and adds 30% value in India. Incredibly, the greater the component of work
transferred to India, the more the cost. If 70% value-addition is done in India, the cost
would rise to INR120.51. This makes a mockery of MoDs slogan that India must rapidly
enhance indigenisation in defence from 30% to 70%. The tax and duty structure
burdens Indian private companies with a serious competitive disadvantage.
Foreign exchange rate variation (ERV)
Foreign exchange rate variation (ERV) risk is another major bugbear for the private
sector in defence. Given the rupee's continuing volatility and the fact that most defence
contracts run five to ten years from signing to conclusion, an ERV hedge is essential. In
every category other than Buy (Global), private Indian companies compete at a
disadvantage against foreign vendors (that are not affected by ERV) and against DPSUs
that enjoy ERV protection in "nominated" manufacturing, which constitutes the bulk of
their portfolio. That gives DPSUs a buffer which mitigates their ERV risk on other
contracts where they do not enjoy protection.





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Defence
Case studies on models adopted by various countries

Turkey: Evolution of domestic defence industry
Like India, Turkeys defence procurement involved direct purchase from foreign vendors
until 1990s. From being a defence importer, it today has a flourishing defence industrial
base with significant presence in the export market. During 1980s, government initiative
was undertaken to modernise the Turkish Armed Forces and the establishment of a national
defence industry based on contemporary technology was determined as the primary goal.

Over the next 25 years since its establishment, the Undersecretariat for Defence Industries
made significant achievements in building the blocks for a modern national defence industry
in Turkey, with notable results in certain vital areas. As a result of government efforts and
policies in support of local industries, Turkeys procurement model underwent a gradual but
significant change throughout the 1990s to co-production and finally during the last decade
to local production (i.e., developing its own designs) and system integration.

In order to increase the local content ratio and optimise resources to improve the
technological infrastructure, R&D expenditure had to increase. Accordingly, important R&D
projects were identified and prioritised based on the defence R&D roadmap.

Turkey has used the offset clause to develop its domestic defence industry. This has helped
develop products range across land platform, naval platform, air platform, sophisticated
defence electronics and high-tech rocket-missile and ammunition. Two Turkish companies
Aselsan, a leader in electronic defence products, and Turkish Aerospace Industries (TAI)
feature amongst the top 100 global defence companies, a significant feat in a short period.

Chart 33: Total R&D expenses by Turkey Chart 34: Growth in defence exports from Turkey

Source: Undersecretariat for Defence Industries, Edelweiss research

Turkish defence industry exports stood at USD196mn in 2004, which increased to USD1.2bn
in 2012. By 2016, the country is targeting USD4bn defence production with USD2bn exports,
a 10x increase in about a decade.


0
160
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2007 2008 2009 2010 2011 2012
(
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Total R&D Expenditure
From co-production in 1990s to its
own local production in last decade,
turkeys defence industry has
matured over the last 10-15 years
0
280
560
840
1,120
1,400
2004 2005 2006 2007 2008 2009 2010 2011 2012
(
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Total Defence and Aerospace Exports





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Edelweiss Securities Limited
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South Korea: North Korean hostility helped develop defence industry
South Koreas domestic defence industry has its roots in the 1950-53 Korean War. Reduced
presence and commitment of the US following the Guam Doctrine of 1969 together with
North Koreas increasing military provocation with North Korean commandos attacking the
presidential mansion in Seoul in January 1968 forced Seoul to look at developing the
domestic defence industry.

South Korea set about establishing an indigenous defence industry in the 1970s. By the late
1980s, a series of overseas and domestic developments moved the focus of South Korean
defence industry beyond licensed production of US-designed conventional weapons to the
requirements of military modernisation, including command and control. By the late 1990s,
South Koreas military modernisation had begun to assume many of the characteristics of
the Revolution in Military Affairs (RMA) pioneered in the US and had begun to effect
profound changes in the nations defence industry and associated defence exports.

Chart 35: Exports by Korean defence industry

Source: The Korea Institute of Defence Analysis, Edelweiss research

Since the late 1990s, South Korea has focused on innovation and restructuring of its military
and has been elevated from third-tier to second tier arms producer by moving from the
stage of imitation and assembly to that of creative imitation and indigenisation.

While South Korea continues to import big-ticket hardware, it continues to take steps to
promote the domestic defence industry as it increases R&D spending and today competes
with major arms-supplying countries. It spent ~USD1.5bn on defence R&D last year. In
addition, the South Korean defence industry has made remarkable progress in RMA-related
areas mostly involving command, control, communication, intelligence, reconnaissance and
surveillance.

It is noteworthy to mention that Indias L&T has tied up with South Koreas Samsung
Techwin to develop an artillery system for the Indian Army. Also, Pipavav Defence has tied
up with Komac for designing and developing as it prepares to tap the large naval business.


(70.0)
0.0
70.0
140.0
210.0
280.0
0
800
1,600
2,400
3,200
4,000
1
9
9
8
1
9
9
9
2
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(
%
)
(
U
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m
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)
Exports Growth (%)
South Korea is looking at tapping
a large export market



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Edelweiss Securities Limited
Defence
Israel: French embargo drove Israel towards self sufficiency in defence
Consolidation of the Israeli defence industry can be traced back to the early 1920s, when it
first produced weapons and ammunition. The formalisation of the defence sector in Israel
started in the 1950s with the establishment of many defence organisationsproduction,
research or maintenance. An R&D division established within the Israel MoD in 1952 was
reorganised in 1958 as a separate entity, Rafael, which over the years, turned it into the
countrys central defence development organisation.

Bedek, established in 1953 for maintaining and refurbishing aircrafts, later developed into
the Israel Aircraft Industry (IAI). Several refurbishing and maintenance centres were also
established in the army to maintain armoured and support vehicles. The sector was opened
to the private industry and several privately owned defence firms were established in the
1950s.

However, it was only after 1967, following the French embargo on arms, that Israel
embarked on an all-out policy of self-sufficiency, trying to develop and produce all its
defence needs. By 1981, Israel had unlimited potential in the military, industrial and security
fields and was able to produce everything it needed to protect itself.

Israels high-tech industry has experienced an unprecedented growth rate which began in
the early 1990s. This growth is evidenced in its total sales1997 sales totalled USD7.2bn, a
growth of 10.7% over 1996; USD5.6bn in 1997, a growth of 14.2% over 1996 in exports.

Moreover, advanced technologies developed in Israel are in great demand and many Israeli-
developed applications can now be found in the products of multi-national companies in
communications, computers, information systems, medicine, optics, consumer goods and
software sectors.

Today, three companies from Israel feature amongst the top 100 defence companies
globallyElbit Systems, Israel Aerospace Industries and Rafaelwith combined sales of
~USD7bn in 2012.


Israel is known for its high tech
arms industry





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Edelweiss Securities Limited
Defence
ISRO: Adversity turned into opportunity for Indian companies
The Indian Space Research Organisation (ISRO) was largely reliant on international
technologies for its various programmes. It depended on foreign suppliers for major systems
and components. ISRO feared that this success could be accompanied by sanctions and
other restrictions that would bring challenges. Its solution to this challenge focused on a
long-term approach that works well for the country, its private and public sectors, and of
course, the manpower and intelligence associated with these industries. The core intent of
the approach is to optimise Indias inherent resources, intelligence and people capabilities,
as also support and encourage the private sector during the development phase.

ISRO pre-empted such challenges and as a result of this foresight, it has been able to
continue with its design, development and execution uninterrupted. This is a study on
intelligence, pertinent strategy and timely action. The strategy and change management
process adopted by the leadership was to look into Indias inherent industrial capabilities. It
adopted a policy that ensured maximum utilisation of industrial capability in private and
public sectors. Over the years, the level of industry participation gradually increased, in sync
with requirements of the programme.

Apart from fabricating hardware for satellites, launching vehicles and participating in
building ground infrastructure, industries are being encouraged to engage in system-level
fabrication and integration activities, either independently or through a consortium. ISRO
continues to encourage cooperative ventures in Indian industries to enable them to achieve
self-sufficiency. This ensures that the intelligence developed in the country is used
effectively and in turn makes processes more secure from national security perspective.

More than 500 small, medium and large-scale companies participate in these programmes
in the form of hardware development and supply; they also provide software and other
services. Almost 60% of a launch vehicles cost flows to Indian industries. As for rockets, 80%
of the work involved was executed through industries compared to only 40% for satellites.
ISRO is working to enhance the participation of industries in the satellite area as well. The
private sector has assumed a role of paramount importance in satellite communication,
with a large array of services such as broadcasting, a V-Sat network, internet, ground system
and training/education services. The geo-spatial information services (GIS)/remote sensing
programme includes more than 200 companies and employs over 12,000 professionals. In
addition, around 20-30 SME firms join the GIS programme every year.

In its endeavour to develop new technologies, ISRO partners with appropriate industries by
outsourcing components and sub-assemblies. It provides in-house facilities, shares
knowledge and resources, and initiates joint investments and unique test facilities. In
addition, it transfers technology to private sector vendors and support through
documentation, training, provision of components, prototype testing, commissioning of
production as well as marketing and export promotion.

After establishing a close and effective relationship with the industry, ISRO now wants the
private sector to play a larger role in specialised services, improve the quality and reliability
of products and reduce time span in achieving project objectives in the most cost-effective
manner. The policy framework of the Indian space programme envisages effective industry
participation with higher levels of aggregates in system-/stage-level supply from the
industry, use of ISROs facilities by industry, technology transfer to the industry and
utilisation of ISRO expertise including its technical consultancy services.



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Defence


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Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.


Edelweiss Securities Limited










































Ashok Leyland Defence Systems (ALDS) is a pioneer in the design,
development and manufacture of specialised defence vehicles for the
armed forces and other international customers. The company is the
largest supplier of logistics vehicles to the Indian Army70,000 vehicles
on Stallion platform are the armys veritable logistics backbone. It also
supplies a large number of vehicles for various applications to the Indian
Air Force, Indian Navy and para-military forces like troop carriers, re-
fuellers, vehicles for gun mounting, fire-fighting, UAV support and
recovery vehicles, flat-bed trucks and buses. Maintain HOLD.

Strategic partnerships with global players bolster capabilities
ALDS has formed several strategic partnerships with global players to jointly develop
advanced military vehicles and defence solutions for armed forces around the world.
Its strategic partnerships with Panhard General Defence (France), Paramount Group
(South Africa) and Krauss-Maffei Wegmann (Germany) leverage their strengths to offer
Indian customers a superior choice of products and defence solutions.

Offers cost effective end-to-end solutions
The company offers end-to-end solutions around its proven vehicle platforms, which
includes modular packages for training, maintenance, electronic publications and a
fleet management system as a standard feature. This solution approach translates into
operational flexibility, high reliability and cost effectiveness for customers in the
defence industry. The solutions are available off-the-shelf and also on turnkey basis.

Outlook and valuations: Positive; Maintain HOLD
We believe the company will be a key beneficiary of pick up in defence sales (~4% of
FY14 revenues). It has already signed a consortium agreement with Nexter Systems
(France) and L&T to participate in key artillery gun programme worth INR120-140bn.
We are factoring in strong volumes (28% FY16 growth in domestic truck sales) and
margin (up by 900bps to 10.7% over FY14-16E). However, post the recent rally, we
believe current valuations at 8.7x/15.2x EV-EBITDA/PE on FY16E are factoring in most
of the positives. Maintain HOLD/SP with SOTP based TP of INR36.
COMPANY UPDATE
ASHOK LEYLAND

Riding the growth Stallion



EDELWEISS 4D RATINGS
Absolute Rating HOLD
Rating Relative to Sector Performer
Risk Rating Relative to Sector High
Sector Relative to Market Overweight


MARKET DATA (R: ASOK.BO, B: AL IN)
CMP : INR 35
Target Price : INR 36
52-week range (INR) : 39 / 12
Share in issue (mn) : 2,845.9
M cap (INR bn/USD mn) : 100/ 1,671
Avg. Daily Vol.BSE/NSE(000) : 14,645.5


SHARE HOLDING PATTERN (%)
Current Q3FY14 Q2FY14
Promoters *

41.5 40.9 38.6
MF's, FI's & BKs 13.3 12.3 12.4
FII's 12.7 13.2 16.0
Others 32.5 33.6 33.0
* Promoters pledged shares
(% of share in issue)

: 17.8


PRICE PERFORMANCE (%)

Stock Nifty EW Auto Index
1 month 6.3 4.7 8.4
3 months 53.9 15.8 21.2
12 months 94.6 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 (INR mn)
Year to March FY13 FY14 FY15E FY16E
Revenues (INR mn) 124,812 99,434 108,142 135,689
Rev. growth (%) (3.3) (20.3) 8.8 25.5
EBITDA (INR mn) 8,765 1,666 8,229 14,540
Net profi t (INR mn) 4,337 294 1,027 6,388
Shares outstandi ng (mn) 2,661 2,661 2,661 2,661
Di l uted EPS (INR) 0.5 (1.6) 0.4 2.4
EPS growth (%) (77.0) NA NA 521.9
Di l uted P/E (x) 64.6 (21.9) 90.7 14.6
EV/EBITDA (x) 15.5 84.0 16.0 8.5
ROAE (%) 3.3 (9.6) 2.3 13.7



Automobiles
76

Edelweiss Securities Limited
Evolving from Hippo to Stallion to Super Stallion platform
ALDS entry in to defence started in 1970s when it supplied 1,000 Hippo vehicles specially
configured for the Indian Army. The company expanded its customer base by supplying the
vehicles to the Indian Air Force to mount Indra Radars, the Indian Navy to mount torpedo
carriers and the Border Roads Organisation for dozer transportation.

The companys most successful platform Stallion (6x6) was launched in 1997 for the Indian
Army. The Stallion range of trucks is a medium duty defence vehicle with multiple logistical
and tactical applications. This versatile platform has been used for various applications such
as general service roles, troop carriers, water bowsers, fuel bowsers, light recover vehicles
and others and has performed under the most demanding operating conditions with
excellent results. Not only was the platform successful in India, it was highly successful in
Honduras Army, an American organisation for operation in Iraq and Afghanistan and more
recently in Thailand and South Africa.

Fig. 1: ALDS Evolving platform


Source: Company, Edelweiss research

In order to address the high mobility requirements of the Indian Army, ALDS launched its
new platform Super Stallion (8x8). It is an updated version of the Stallion.

State-of-the-art technical and production facility in Sengadu
ALDS has a state-of-the-art technical and production facility in Sengadu, near Chennai. The
company has a team of defence professionals bringing in domain expertise and experience
to their tasks.




Hippo
Platform 1970
Stallion
Platform 1997
Super Stallion
Platform 2013
The company is the largest
supplier of logistics vehicles to the
Indian Army70,000 vehicles on
Stallion platform are the armys
veritable logistics backbone



Ashok Leyland
77

Edelweiss Securities Limited
Fig. 2: ALDSProduct offerings

Source: Company, Edelweiss research























Logistical Vehicles
Light recovery vehicle
Fox
Stallion
Rhino




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



82

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
84

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
0
1,200
2,400
3,600
4,800
6,000
F
Y
9
6
F
Y
9
8
F
Y
0
0
F
Y
0
2
F
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4
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F
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0
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F
Y
2
4
E
(
%
)
(
I
N
R

b
n
)
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
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
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F
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1
4
F
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5
E
F
Y
1
6
E
(
I
N
R

m
n
)
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
48.0
60.0
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a
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J
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1
4
(
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
91

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
92

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.

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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
96

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
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Y
0
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F
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1
2
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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
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F
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1
6
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(
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)
(
I
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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
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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
102

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
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
(
%
)
(
I
N
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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Edelweiss Securities Limited
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



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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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Edelweiss Securities Limited
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.







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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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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 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.





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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 Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.


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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Edelweiss Securities Limited
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




127

Edelweiss Securities Limited
Larsen & Toubro



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.











133

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)



134

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
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

Edelweiss Securities Limited
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



























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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
138

Edelweiss Securities Limited
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.











139

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



140

Edelweiss Securities Limited
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






141

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




142

Edelweiss Securities Limited
Oil, Gas and Services



























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Edelweiss Research is also available on www.edelresearch.com,
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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
144

Edelweiss Securities Limited

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
145

Edelweiss Securities Limited
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
146

Edelweiss Securities Limited


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
Perc. Holding Perc. Holding
HDFC Asset Management Co Ltd 8.78 Excel Fund Management Inc 0.75
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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Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.


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






163

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CMC












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



164

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IT





























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










































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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Edelweiss Securities Limited
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
167

Edelweiss Securities Limited
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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Edelweiss Securities Limited
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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Edelweiss Securities Limited
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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Edelweiss Securities Limited
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




























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










































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
176

Edelweiss Securities Limited
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.
177

Edelweiss Securities Limited
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


N
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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




T
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G
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i
d
S
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G
r
i
d



Power
178

Edelweiss Securities Limited
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.
179

Edelweiss Securities Limited
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
180

Edelweiss Securities Limited
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.












181

Edelweiss Securities Limited
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



182

Edelweiss Securities Limited
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







183

Edelweiss Securities Limited
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



184

Edelweiss Securities Limited
Power




























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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
186

Edelweiss Securities Limited
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
187

Edelweiss Securities Limited
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

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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



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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

Aircraft division, Nashik


Aircraft overhaul division, Nasik
Engine division , Koratput
Sukhoi Engine division, Koratput
Gas turbine R&D centre, Koratpu
Helicopter complex

Rotary wing R&D centre


Helicopter division & MRO division
Barrackpore division
Composites manufacturing division
Accessories complex

Transport aircraft divsion (Kanpur)


Accessories division, Lucknow
Avionics division , Hyderabad & korwa
Stategic elctronics R&D centre, Korwa
Design Complex
(Banglore)

Aircraft R&D centre ARDC)


Mission & compbat system (MCSRDC)
Engine test bed R&D



Hindustan Aeronautics
203

Edelweiss Securities Limited
helicopter. This JV has become a centre of excellence for the manufacture of key
components and assemblies of aero-engines.

Global alliances to foster growth
The company has consistently explored transfer/absorption of technologies by entering into
strategic alliances. It has concluded MoUs with OEMs who are participating in acquisition
programme by the MOD to maximise business opportunities through offset programmes. 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.

Fig. 2: HALMajor products and services classification (division wise)







Source: Company








Avionics
divion
(Korwa)
Avionics
divion
(Hyderabad)
Accessories
divion
(Lucknow)
Trasnport
Aircraft
division
(Kanpur)
Helicopter
Mro
division
(Banglore)
Barrackpore
division
Helicopter
division
(Banglore)
Composire
manufacturing
division
(Banglore)
Aircrafr
manufacturing
division
(Nasik)
Naval
attack
systems
Communication
systems
Mechanical,
Electrical,
Hydraulic
& fuel
system
Manufacture
& overhaul
of DO-228
Overhaul,
Maintenance
support
and repair
facility for
helicopters
Manufacture
& overhaul
of chetak,
cheetah,
chetan &
cheetal
Advanced
Light
Helicopter
(ALH Dhruv)
Manufacture
of composites
parts/
assemblies
for
indigenous
programmes
li ke ALH,LCA,
LCH, GSLv
& for export
Manufacture
of SU-30MKI
Aircraft
Coskpit
displays
Flight data
recorder
Mission
computers
Airborne
& ground
radar
systems
Accessories
and aircraft
instruments
Overhaul
of HPT-32,
HS-748,
AN-32
Light
Combat
Helicopter



Defence
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Fig. 2: HALMajor products and services classification (division wise) (contd)






Source: Company






Sukhoi Engine
divion
(Koratput)
Engine
division
(Koratput)
Aircraft
overhaul
division
(Nasik)
Aircraft
diviision,
Banglore
Engine
division ,
Banglore
Aircraft
overhaul
division,
Banglore
Aerospace
division,
Banglore
Foundry &
forge division,
Banglore
IGMT
division,
Banglore
Manufacture
& overhaul
of AL-31Fp
engine for
SU-30MKI
Manufacture
of of R 25
engine
Overhaul
of MIG-21
& 27
Manufacture
of Tejas (LCA)
& Hawk Mk132
aircraft
Manufacture
and overhaul
of Adour
Mk811, 871
Overhaul of
Jaguar, Mirage
-2000 & kiran
aircraft
Structural
packages
for PSLV,GSLV
& satellites
Castings,
Forgings,
rolled rings
Manufacture
& overhaul
of Lm2500
Industrial &
Gas turbines
Overhaul
of R11,R25,
R29 & R33
engines
Castings
& Forgings
Upgrade
of MIG-21
BIS & 27-M
Manufacture
of Lakshya
- PTA
Manufacture
of structural
work packages
for export
Overhall of
Adour 840E,
Dart, Gnome
, Orpheus
and avon
engine
Powder
metallurgy
products
Repair/
overhaul
of industrial
avon & Allison
501K/571
engines



Hindustan Aeronautics
205

Edelweiss Securities Limited
Financial Statements










Key P&L items (INR mn)
Year to March FY10 FY11 FY12 FY13
INCOME :
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
PBT 26,884 28,395 33,285 34,970
PAT 19,674 21,143 25,394 29,969
% change 13.1 7.5 20.1 18.0
Key Balance Sheet items (INR mn)
As on 31st March FY10 FY11 FY12 FY13
Net worth 81,235 97,452 113,386 133,782
Gross block 33,828 36,543 40,508 40,983
Capital Employed 81,235 97,452 113,386 133,782
Key Ratios
Year to March FY10 FY11 FY12 FY13
ROE's (%) 24.2 21.7 22.4 22.4
Equity turnover (x) 1.7 1.7 1.1 1.1

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Hindustan Shipyard (HSL) is the largest shipyard under the Department of
Defence Production on the East cost of India. HSL was transferred from
the Ministry of Shipping to the Department of Defence Production during
2009-10 for strengthening Indias naval defence capabilities for
manufacture of warships and submarines. The company has successfully
diversified into ship repairs, offshore and onshore structural fabrication.
Since inception, the yard has delivered 169 vessels of various types and
repaired over 1,900 vessels. It is capable of building ships up to
80,000DWT.

To modernise shipyard to meet future challenges
The yards current infrastructure is outdated and has almost outlived its life. There is
an urgent need to refurbish and also renew plant and machinery to meet future
challenges. Management is planning to modernise the yard in two phasesin phase 1,
emphasis will be on refurbishment & replacement of machinery & infrastructure;
phase 2 will emphasize on augmentation of infrastructure to enable construction of
sophisticated warships and strategic vessels for Indian Navy and Coast Guard. The
modernisation exercise is expected to be completed in the next four-five years. Both
phases will be funded by the Government of India.

Order book not sufficient to meet requirements of the yard
HSL had outstanding order book of INR18bn in FY13, too low for it to reach break even
level. Current order book comprises 29 vessels of various categories; 26 of them are
small which are not suited for a yard designed for large ships. The company is trying to
pursue rigorously to secure high repairs orders from the Indian Navy on nomination
basis. The yard is also facing severe financial constraints due to inadequate working
capital which is also affecting ongoing projects.

Outlook: Challenging times ahead
Given the current state of HSLs affairs, the yard is in doldrums. The yard has been
recently transferred from the Ministry of Shipping to the Ministry of Defence. HSL is
hoping to win orders from the Indian Navy on nomination basis. The company is also
looking to secure high value construction and repair orders.
COMPANY PROFILE
HINDUSTAN SHIPYARD
Turbulent waters
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 6,620 6,379 6,043 5,625
% change 32.9 (3.6) (5.3) (6.9)
PBT 251 (2,655) (662) (295)
PAT 23 550 (860) (552)
PAT margins 0.4 8.6 (14.2) (9.8)



Hindustan Shipyard
207

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fig. 1: HSLProducts

Source: Company, Edelweiss research


Cargo Liners (including multipurpose vessels)
Bulk Carriers & survey Vessel
Mooring Vessel
HSD Oiler
Landing Ship Tank (Large)
Offshore & Inshore patrol vessel
Ship repairs
Shipbuilding
Submarine refit
Drill Ship
Dredger
Oil Recovery and Pollution control vessel
Passenger Ferry / Ships
Landing Crafts (HSL)
Off Shore Wellhead Platforms



Defence
208

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Financial Statements











Key P&L items (INR mn)
Year to March FY10 FY11 FY12 FY13
INCOME :
Sales 6,620 6,379 6,043 5,625
% change 32.9 (3.6) (5.3) (6.9)
PBT 251 (2,655) (662) (295)
PAT 23 550 (860) (552)
% change NM NM NM NM
Key Balance Sheet items (INR mn)
As on 31st March FY10 FY11 FY12 FY13
Net worth (6,830) (6,280) (7,140) (7,692)
Net fixed assets 688 768 754 760



Mazagon Docks
209

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Mazagon Docks (MDL), Mumbai, an ISO 9001:2008 company is one of the
leading shipbuilding and offshore fabrication yards in India. It has grown
from a single unit and small ship repair company to a multi-unit and
multi-product company, with significant rise in production, use of
modern technology and sophistication of products. The companys main
activities include ship building, ship repair and fabrication of offshore
structures with facilities situated at Mumbai and Nhava. The company
has capability to build warships, submarines, merchant ships up to 30,000
DWT and fabrication of well head platforms, process and production
platforms and jack up rigs.

Rich experience in building warships, diversified product profile
MDL has a long tradition of shipbuilding dating back to 1774. Rich heritage and
tradition are major factors responsible for its sustained position as lead shipyard in
warship construction in the country. MDL is the only defence public sector shipyard
capable of constructing conventional submarines. This unique position provides it an
edge over other defence shipyards in future conventional submarine induction plans of
the Indian Navy.

Thrust on future growth, expansion programme on track
To augment shipyard capacity and reduce build period of warship/submarines, MDL is
currently working on Mazdock Modernisation Project (MMP), which is nearing
completion. Total project cost is pegged at INR8.2bn. It has successfully commissioned
the heavy duty (300 tonne) Goliath crane, which is a major milestone. The company
has also built second assembly workshop at Alcock yard to cater to requirements of
submarine construction. Such modernisation and expansion will facilitate reduction in
build period of vessels and enable creation of additional assembly lines in both
shipbuilding and submarine divisions.

Outlook: Cache of opportunities in warships/submarine space
Indian Navy plans to acquire 30-35 ships over the next 7-8 years. MDL is the lead shipyard
for construction of frontline warships and submarines could be assured of a major chunk
of the acquisition plan. Considering high scope of technology transfer in the ongoing P75
programme, MDL will be frontrunner to bag orders for P75 (I) programme. With
increased thrust on maritime, coastal and near coastal security, there will be good
business opportunities for shipbuilding companies across the country.

COMPANY PROFILE
MAZAGON DOCKS
Seasoned player
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
Value of Production 28,561 26,114 25,236 22,906
% change 11.2 (8.6) (3.4) (9.2)
No. of employees 8,072 8,090 8,325 8,670
PAT 2,402 2,435 4,943 4,127
% change (11.3) 1.4 103.0 (16.5)
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Engineering and Capital Goods
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Background
MDL Mumbai, an ISO 9001:2008 company, is one of the leading shipbuilding and offshore
fabrication yards in India. It was incorporated as a public limited company in 1934. After its
takeover by the government in 1960, MDL grew rapidly to become the premier war-
shipbuilding yard in India, producing sophisticated warships for the navy and offshore
structures for the ONGC. It has grown from being a single unit and small ship repair
company to becoming a multi-unit and multi-product player with significant rise in
production, use of modern technology and sophistication of products.

Main activities of the company are ship building, ship repair and fabrication of offshore
structures with facilities situated at Mumbai and Nhava. The company has the capability to
build warships, submarines, merchant ships up to 30,000 DWT and fabrication of well-head
platforms, process and production platforms and jack up rigs. For outfitting work, it has
many workshops with sophisticated equipment and machine specific to hull fabrication and
ship construction work. Repair work is also undertaken using available facilities. The
company has qualified manpower to implement CAD/CAM/CIM using the latest ship design
software, operating from a number of work stations equipped with latest computer
hardware to provide up-to-date design and production support, commensurate with the
yards capabilities. The yard is currently engaged in construction of state-of-the-art stealth
frigates (Shivalik Class), missile destroyers (Kolkata Class) and Scorpene submarines, and is
striding forward to attain Indias self-reliance goals in construction of warships and
submarines.

Rich experience in building warships, diversified product profile
The company has a long tradition of shipbuilding dating back to 1774. Rich heritage and
tradition will be major factors that will help MDL sustain its position as lead shipyard in
warship construction in the country. It is the only defence public sector shipyard capable of
constructing conventional submarines. This unique position provides MDL an edge over
other defence shipyards in future conventional submarine induction plan of the Indian Navy.
The company is located at Mumbai, the commercial capital of India and the headquarter of
the largest navy and coast guard fleet which facilitates close association with customers for
ready feedback to help improve performance. Access to host of ancillary industries in
Mumbai is an added advantage.

The company has developed a wide range of products in the offshore shipbuilding sector. It
has constructed ships like diving support vessels, multipurpose support vessels, harbour
utility vessels, tugs, dredgers, passenger-cum-cargo vessels and an assortment of support
vessels, trawlers, barges and floating cranes.

Opportunities galore in warships and submarine space
Indian Navy plans to acquire 30-35 ships over the next 7-8 years. MDL being the lead
shipyard in the construction of frontline warships and submarines could be assured of major
chunk of the acquisition plan. In view of high scope of technology transfer in the ongoing
P75 programme, MDL will be front runner to bag orders in the P75 (I) programme. With
increased thrust on maritime, coastal and near coastal security, there will be good business
opportunities for shipbuilding companies across the country. Coastal states are also looking
at setting up ship building infrastructure and MDL will have good business opportunities
considering its longstanding reputation. Also, emergence of private shipyards all around the
MDL is the only defence public
sector shipyard capable of
constructing conventional
submarines. It has also developed
a wide range of products in the
offshore shipbuilding sector



Mazagon Docks
211

Edelweiss Securities Limited
coast provides an opportunity to enter into JV for non-core technologies and cut down
overall build time. The company is already in JV with Pipavav Defence and L&T for the same.

Projects under execution
Currently, it has orders to manufacture bulk of 45 naval warships and submarines that are at
various stages of construction. INS Kolkata is first of the three destroyers built by MDL. The
company is also constructing six French Scorpene submarines. It will also build four new
destroyers under project 15 B. Four follow-on ships of the Shivalik class will also be
constructed by MDL. The amount of money riding on a single shipyard is phenomenal with
each warship costing over INR40bn.

Current order book at INR1,230bn; shipyard full till FY28
MDLs order book (OB) as at end September 2013 stood at INR1,230bn. Out of the current
OB, while INR1,000bn forms part of destroyers/frigate orders, balance INR230bn constitutes
submarine orders. On the basis of current manufacturing capacity of the company, its
shipyard is booked till FY28. While margin in defence projects is ~7-8%, the company in the
past 3-4 contracts has moved from a cost-plus model to fixed-cost model.

Fig. 1: SWOT analysis

Source: Industry, Company , Edelweiss research


Only defence public sector shipyard,
capable of constructing conventional
submarines
Tradtional method of operations .
Indian Navy plans of acquiring 30 to 35
ships for the next decade.
To cut down overalltime by entering into
JV's with emergence of private shipyard.
It may not be commercially viable
to continue with telescopic
designing of warship.
The industrious, highly skilled versatile
workforce of the Company is capable
of adapting to emerging changes in
technologies.
MDL will be front runner to win orders
for the P75 (I) submarine programme
in Navy's bid to lays emphasis on
indigenization.
Lack of outsourcing facilities/
resources in the country directly
impinging the delivery schedule.
Limited land area of 75 acres ,
which restricts operations of
large scale shipbuilding.
The company will have to prepare
for an era beyond the nomination
era with the emergence of private
sector ship builders.
Opportunity
Strength Weakness
Threat
SWOT Analysis


Engineering and Capital Goods
212

Edelweiss Securities Limited

Table 1: Frigates, submarines, destroyers manufactured by MDL

Source: Company, Edelweiss research
























Warship Production details
Ni l gi ri cl ass fri gates Thi s was fi rst warshi p bui l t by MDL wi th 2,900ton di spl acement and
commi ssi oned i n 1972. Fi ve more fri gates of thi s cl ass were bui l t over the next
ni ne years for the Indi an Navy.
Godavari cl ass fri gates These fri gates were desi gned and manufactured whol l y i n Indi a. MDL desi gned
and bui l t three shi ps of the Godavari cl ass gui ded-mi ssi l e fri gates wi th 3,800
tons di spl acement
Khukri cl ass corvettes MDL desi gned and bui l t the fi rst two vessel s of the Khukri cl ass corvettes. The
rest of the cl ass were bui l t at GRSE fol l owi ng a transfer of technol ogy from MDL.
Del hi cl ass destroyers Under the Project-15, MDL desi gned and bui l t three Del hi cl ass gui ded-mi ssi l e
destroyers. These were powered by gas turbi nes and di spl aced 6,200 tonnes.
Shi val i k cl ass fri gates Under Project-17 these fri gates are the fi rst warshi ps wi th steal th features to be
desi gned
Kol kata cl ass destroyers Three of these next-generati on gui ded-mi ssi l e destroyers i n the 6,800 tonnes
range are bei ng desi gned and bui l t at MDL.
Shi shumar cl ass submari ne The Indi an vari ant German HDW Type 209 di esel -el ectri c submari ne. Two
vessel s of thi s cl ass were constructed at MDL i n 1992-94 under a technol ogy
transfer agreement.
Scorpene cl ass submari ne MDL i s currentl y bui l di ng si x di esel -el ectri c submari nes of the Scorpene cl ass
under a technol ogy-transfer agreement wi th DCNS, France.



Mazagon Docks
213

Edelweiss Securities Limited
Fig. 2: Products


Source: Company, Edelweiss research























Shipbuilding
(Merchant Ships)
Shipbuilding
(Navy Ships)
Submarines
Trailing suction hopper dredger
Multi-purpose support vessels
Special trade passenger cum cargo vessels
iBOP vessels
General cargo vessels
Offshore supply vessels
45T bollard pull voith tug
Corvettes
Nilgiri
Missile boats
Godavari class frigates
Patrol vessels
Destroyers
Type 1500 (SSK) submarines
Leander class frigates
Refit of submarines
Web frame machines
INS Shalki
INS Shankul
Scorpene submarines


Engineering and Capital Goods
214

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Financial Statements



Key P&L items (INR mn)
Year to March FY10 FY11 FY12 FY13
INCOME :
Production 28,561 26,114 25,236 22,906
% change 11.2 (8.6) (3.4) (9.2)
No. of employees 8,072 8,090 8,325 8,670
EBITDA 3,897 3,788 7,058 6,312
PBT 3,865 3,661 6,918 6,389
PAT 2,402 2,435 4,943 4,127
% change (11.3) 1.4 103.0 (16.5)
Key Balance Sheet items (INR mn)
As on 31st March FY10 FY11 FY12 FY13
Net worth 9,800 11,400 15,185 18,073
Capital Employed 8,426 8,371 14,826 14,383
Gross block 2,976 3,019 3,148 3,128
Net Fixed assets 1,137 1,148 1,234 1,260
Working Capital 7,289 7,223 13,632 13,123
Key Ratios
Year to March FY10 FY11 FY12 FY13
ROE's (%) 24.5 21.4 32.6 22.8
Equity turnover (x) 2.9 2.3 1.7 1.3

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Mishra Dhatu Nigam (MIDHANI) was established in 1973 as a PSU under
the administrative control of the then Department of Defence Production
& Supplies (Ministry of Defence) to achieve self reliance in the
manufacture of a wide range of super alloys, titanium alloys, special
purpose steels etc., for critical sectors like defence, space, atomic energy,
aeronautics, among others, with technical knowhow from foreign
collaborators. Since then, MIDHANI has developed, manufactured and
supplied more than 105 grades of high performance alloys in different
shapes, sizes, forms towards programmes of national importance in the
defence and atomic energy sectors. The company was accorded Mini
Ratna Category I status in November 2008.

Modernisation/ upgradation to double existing capacity
In order to compete in a technologically changing market and to meet customers rising
demands, MIDHANI has taken initiatives to revamp existing facilities, augment them
with new processes and equipment and diversify its portfolio to provide world-class
manufacturing capacities. While in Phase 1 the basic melting capacity was enhanced,
Phase 2 was focused primarily on the conversion facilities like radial axal ring rolling
mill, 6,000T forging press etc., for saleable products. While Phase 1 and 2 have been
completed, Phase 3 (focus on electron beam melting furnace and wind plate mill) is
expected to be completed over the next two years. After the expansion, capacity is
expected to double from 4,000MT/ year to 8,000MT/ year.

Impressive client references of private sector and overseas players
Apart from catering to government / public sector entities, MIDHANI also caters to the
private sector and exports to various companies. A few name worth mentioning are
L&T, ABB, Godrej & Boyce, Escorts, Reliance Industries, GE-Alstom, among others.
MIDHANI exports to companies like Goldman Titanium (US), Firth Rixson (UK), MT
(Japan), Paris St Denis (France) etc.

Outlook: Scaling up
MIDHANI has come a long way from 2-3% sales growth to sales CAGR of more than
20% over the past 10 years by implementing holistic plans for appropriate
development. The modernisation and upgradation programme has given a major
boost to the companys operations. Order book at FY13 end stood at INR13bn which
provides sufficient revenue visibility for the next three years.
COMPANY PROFILE
MISHRA DHATU NIGAM
High performance delivered
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 3,712 4,179 5,090 5,586
% change 20.1 12.6 21.8 9.7
No. of employees 1,191 1,121 1,052 976
PAT 446 509 685 825
PAT margins 12.0 12.2 13.4 14.8



Defence
216

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Fig. 1: SWOT analysis

Source: Industry, Company, Edelweiss research



Products
Super alloys
Titanium & Titanium Alloys
Special Steels
Electric alloys
Biomedical Implants
Armour Products


Capability to manufacture wide range of
advanced metals and alooys in mill forms.
High overhead and production
cost due ot economies of scale.
Diversification into armour products,
bio medical implants, fastners for
aerospace
Synergisation and integration with other
PSU's for processing part of materials.
Adverse import duty structure
for some of the compnay's products
volati le prices of critically imported
raw material.
Modernisation , upgradation and expansion
project improves the competitive edge
of the company.
Skilled and experience manpower.
Long term tie ups with customers and
making stategic alliances.
High lead time.
Lack of adequate and matching
sownstream capacities
Risk of obsolescence in processes
and procedure.
Opportunity
Strength Weakness
Threat
SWOT Analysis



Mishra Dhatu Nigam
217

Edelweiss Securities Limited
Financial Statements









Key P&L items (INR mn)
Year to March FY10 FY11 FY12 FY13
INCOME :
Sales 3,712 4,179 5,090 5,586
% change 20.1 12.6 21.8 9.7
No. of employees 1,191 1,121 1,052 976
PBT 677 752 985 1,178
PAT 446 509 685 825
% change 8.3 14.3 34.5 20.5
Key Balance Sheet items (INR mn)
As on 31st March FY10 FY11 FY12 FY13
Net worth 2,739 3,380 3,678 4,068
Gross block 1,546 1,769 1,870 1,998
Capital Employed 2,643 3,584 4,557 3,474
Key Ratios
Year to March FY10 FY11 FY12 FY13
ROE's (%) 16.3 15.1 18.6 20.3
Equity turnover (x) 1.4 1.2 1.4 1.4

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Edelweiss Securities Limited









































Ordnance Factory Board (OFB), comprising Indian ordnance factories, is
an industrial set up functioning under the Department of Defence
Production of Ministry of Defence, Government of India. It is engaged in
production, testing, logistics, research, development and marketing of a
comprehensive product range in land, air and sea systems.
Headquartered at Ayudh Bhawan (Kolkata) it has 41 factories, nine
training institutes, three regional marketing centres and four regional
Controllerates for Safety. OFB is the world's largest government operated
production organisation and the oldest industrial set up run by the
Government of India. It has total workforce of about 100,000 and is often
referred to as the Fourth arm of defence and force behind the armed
forces of India.

Work on critical projects underway; modernisation on the anvil
OFB is currently working on development of some important projects like up-gunning
of 130mm, M46 to 155mm/ 45 caliber MK-IV, development of 155mm X 52 caliber FH
mounted gun system with electronic modules, integration of 105mm LFG on BMP,
development of SRCWS (Stabilised Remote Control Weapons Station) with 12.7HMG
for navy indigenisation of AK-630-M except the control system (D2 1950A) and
KAVACH-MOD-II through in-house manufacturing and assistance from the Indian
industry. Further, to cater to the growing requirement of modern armaments, OFBs
have an ambitious modernisation plan envisaging investment of INR150bn during the
Twelfth Plan period (2012-17) against INR5.8bn spent during the Eleventh Plan period.

Indigenous version of Bofors Howitzer in final stages of trials
The indigenous version of the Bofors Howitzer, Dhanush, is expected to go for final
trials post which an evaluation by the armys Directorate General of Quality Assurance
(DGQA) will follow before the Howitzer is finally inducted into the force. There are 114
Dhanush artillery guns (155x45mm calibre) being developed by the Gun Carriage
Factory, Jabalpur. The development is significant as it has been nearly three decades
since the army added a big gun to its armoury.

Outlook: To play a pivotal role in defence indigenisation
MoD is planning to spend an unprecedented INR150bn on upgrading, modernising and
supplementing production facilities of OFBs in the Twelfth Plan. The new infrastructure
is intended to improve production quality and reduce OFB's manpower levels by
increasing automation. OFB will play a pivotal role in Indias quest of upgrading and
indigenising its defence equipment.
COMPANY PROFILE
ORDNANCE FACTORY BOARD
Fortifying India























































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



Mishra Dhatu Nigam
219

Edelweiss Securities Limited

Introduction
OFB is the largest and oldest departmentally run defence production enterprise in India. The
history of the organisation dates back to British rule in India when the first factory, i.e., the
Gun Carriage Agency (currently known as the Gun & Shell Factory) was established in 1801
at Cossipore, in Kolkata. Over the years, the number of factories has grown, with the focus
of expansion post 1962. The war with China and subsequent desire for self-reliance in
defence production led to the establishment of 16 new factories, compared to five factories
that were set up between 1949 and 1962. Apart from 39 factories that are in operation at
24 different locations all over India, two more factories are being set up. The 40th factory is
being set up in Nalanda (Bihar) for the production of Bimodular charges; the 41st at Korwa
(Uttar Pradesh) for the production of new generation carbines (see Annexure I for state-
wise distribution of OFs and their main items of production and sales). The existing OFs are
divided into the following five operating divisions based on the main products/technologies
employed:



Source: Company


Ammunition &
Explosives
(10 factories)
Ordnance Factories
(39 factories)
Weapons, Vehicles
and Equipment
(10 factories)
Materials
and Components
(9 factories)
Armoured
Vehicles
(5 factories)
Ordnance Equipment
Group of Factories
(5 factories)



Defence
220

Edelweiss Securities Limited
Table 1: Product profile

Source: Company






Weapon Items Ammunition Items
Armoured and
Transport Vehicles
Troop Comfort Items Opto Electronics Others
Smal l arms (Ri fl es,
Pi stol s, Carbi nes,
Machi ne Guns)
Ammuni ti ons for al l
the above weapon
systems
MBT Arjun Parachutes for the Army
and Ai r Force
Opti cal Instruments
and Opto-El ectroni c
devi ces
Speci al Al umi ni um
al l oys for the avi ati on
and space i ndustry
Tank Guns Rockets Tank T-72 (Ajeya) Hi gh Al ti tude and Combat
Cl othi ng
Fi re Control
Instruments for
armoured vehi cl es
Fi el d Cabl es
Anti Tank Guns Mi ssi l e War Heads Tank T-90 (Bhi shma) Infantry and Arti l l ery
Systems.
Water Bowser, etc
Fi l ed Howi tzers Mortar Bombs Infantry Combat
Vehi cl es
Tents of Vari ous Types
Arti l l ery Guns Smoke Armoured Ambul ance
Mortars Il l umi nati ng si gnal Bul l et Proof and Mi ne
Proof vehi cl es
Uni forms and Cl othi ng
i tem
Ai r Defence Guns Speci al Transport
Vehi cl es and Vari ants
Rocket Laucnhers Grenades and Bombs
for Ai r Force,
Fl oats for Li ght Assaul t
Bri dges
Naval Ammuni ti on,
Propel l ant and Fuses
Naval Ammuni ti on
Propel l ant and Fuses.

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Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
Edelweiss Securities Limited









































Pipavav Defence and Offshore Engineering (Pipavav) is Indias first integrated
defence company engaged in building defence warships. It also builds
commercial ships and provides ship repair and offshore services. Pipavav is
promoted by SKIL Group which is a leading green-field infrastructure focused
group in India. The company is strategically located near international
maritime route. It has entered into alliances and strategic partnerships with
global defence players including DCNS of France, SAAB of Sweden, Babcock
of UK and Northrop Grumman of USA. Not Rated.

First-mover advantage in high-entry barrier industry
Pipavav is ahead of any new player by ~8-10 years in terms of setting up infrastructure
and capabilities. The entry barriers are high as setting up infra facilities is not only time
consuming (~ five years), but highly capital intensive as well. Once infra facilities are in
place, it takes another five years for various strategic tie-ups and production of warships.

Proximity to port, a great locational advantage
Pipavav is situated on West coast of India on the Dubai-Singapore sea route, ~150
nautical miles from Mumbai, and is one of the busiest international maritime ports in
India. It is also close to offshore oil fields on Indias West coast as well as the Middle
East owing to which it is best suited to tap offshore construction/repairs market.

JV with Mazagon Dock in a bind
The company is the first private sector player to get license from the Government of
India to build submarines and warships. Pipavav has formed an equal JV with state-run
MDL to implement part existing orders of the latter, which amounts to over
USD20.5bn. However, recently the government had said that Pipavav will have to
participate in tenders to get business.

Outlook and valuations: Positive; Not Rated
Global aspirations of economically strong India, with ever-increasing geo-political
challenges have made the Indian government realise imperatives of strengthening its
defence capabilities. With its 'Buy Indian, Make Indian' initiative, the MoD is increasing
stress on indigenisation. The ministry also envisages greater role for the private sector,
which should benefit Pipavav. The stock is Not rated
COMPANY PROFILE
PIPAVAV DEFENCE & OFFSHORE ENGINEERING
Ready to set sail
EDELWEISS RATINGS
Absolute Rating NOT RATED





MARKET DATA (R: PIPA.BO, B: PIPV IN)
CMP : INR 63
Target Price : NA
52-week range (INR) : 74 / 31
Share in issue (mn) : 736.2
M cap (INR bn/USD mn) : 46 / 776
Avg. Daily Vol.BSE/NSE(000) : 1,197.9


SHARE HOLDING PATTERN (%)
Current Q3FY13 Q2FY13
Promoters %
44.5 44.5 44.5
MF's, FI's & BKs 15.1 15.2 15.4
FII's 2.2 2.2 2.3
others 38.2 38.1 37.8
* Promoters pledged shares
(% of share in issue)
: NIL


RELATIVE PERFORMANCE (%)

Sensex Stock
Stock over
Sensex
1 month 0.0 (3.0) (3.0)
3 months 12.7 69.2 56.5
12 months 31.6 0.4 (31.2)



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| Defence
July 09, 2014
Year to March FY11 FY12 FY13 FY14
Revenues (INR mn) 8,599 18,671 25,865 25,337
Rev. growth (%) 36.6 117.1 38.5 (2.0)
EBITDA (INR mn) 1,618 4,202 5,443 6,256
Net profi t (INR mn) 438 214 311 27
EPS (INR) 0.6 0.3 0.5 0.0
EPS growth (%) - (51.1) 45.1 (91.4)
P/E (x) NM NM NM NM
ROAE (%) 2.6 1.1 1.5 0.1



Defence
222

Edelweiss Securities Limited
Locational advantage
Pipavav is situated on the West coast of India on the Dubai-Singapore sea route, ~150
nautical miles from Mumbai and is one of the busiest international maritime ports in India.
It is also close to offshore oil fields on the West coast of India as well as in the Middle East.
Thus, it is well suited to tap the offshore construction/repair/refurbishment markets. The
company avails all infrastructure benefits of being in close to proximity to the Pipavav port.

High entry barriers
On account of being present in a high entry barrier industry, Pipavav enjoys first-mover
advantage. The company is ahead of any new player by ~10 years in terms of setting up
infrastructure and capabilities it already has. The high entry barrier is on account of:
Being a highly capital intensive business. Almost five years are needed to carry out site
surveys, land acquisition, environment clearances, shipyard designing, project financing
and construction of dry dock.
Once infra facilities are in place, it takes another two years for various strategic tie-ups
to demonstrate execution capabilities to identify partners to secure higher value orders
through tie-ups and demonstrate growth.
After the strategic tie-ups and securing orders, production of warship may take another
three years as it involves securing warship production license and smooth execution of
first order.

World-class shipbuilding infrastructure
Pipavav has world-class strategic manufacturing and infrastructure setup. The company has
Indias longest and the worlds second longest dry dock facility (662mx65m) with capacity to
manufacture ships up to 400,000DWT, which is next to Hyundai, South Korea (700mx92m),
with capacity to handle ships of size up to 1,000,000 DWT. The company not only has
facilities for dry dock and block manufacturing, it also has a dedicated offshore yard.

Key infrastructure facilities
2x 600 MT Goliath cranes
662mx65m dry dock
750mx90m dry dock (under construction)
Fit-out berths
144,000MTPA steel fabrication unit
286km long private rail
20km four lane expressway from the state highway to Pipavav











Pipavav Defence
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Edelweiss Securities Limited
Global alliances: Various partnerships across value chain
Pipavav has strategic and technical alliances with major global players. Few important
partnerships include:

Table 1: Key partnertships

Source: Company

JV with MDL in a state in a bind
Pipavav is the first private sector player to get a license from the Government of India to
build submarines and warships. To carry out the same, the company has formed an equal JV
with the state-run MDL to implement part of the latters existing orders which amounts to
INR1,250bn (USD21.7bn) and also bid for future defence contracts in India. Apart from doing
work for the navy, the JV will also look at export orders from "friendly countries. The
company is in dialogue with the governments of six friendly nations to build their warships
at the world-class defence focused infrastructure in India. However, till two months back
the JV was kept under hold by the MoD until formulation of a new policy on warship-
building JVs following a flurry of protests from competitors. Recently, the government had
said that Pipavav will have to participate in tenders to get business.

Bright future: Humongous opportunity in India defence space
Given expected defence capital expenditure allocation of ~USD248bn over the next decade,
India is set to meaningfully ramp up its naval capabilities. With its 'Buy Indian, Make Indian'
initiative, the MoD is increasing stress on indigenisation. The ministry also envisages greater
role for the private sector, which should benefit established players like Pipavav. The Indian
Navy has huge acquisition plans with requirements of more than 100 ships of different types
including submarines in the next two decades. The Indian Coast Guard will also need ~160
ships over the next seven years. As per the company, the Indian Navy has estimated capex
of USD90bn for FY12-22 to be incurred towards warships and strategic asset acquisitions.
Also, Pipavav is betting high on enhancing its export reach to geographies like Indonesia,
Southeast Asia, Latin America and Africa.

There is also huge demand for offshore supply vessels such as drill ships and floating
production storage platforms, which throws up additional opportunity of ~USD25-30bn.
Partnering company Country Scope of partnership
SAAB Europe For propri etary technol ogy transfer for army,
navy and ai r force.
Sembcorp Marine Singapore For techni cal support i n shi p repai r,
shi pbui l di ng, shi p conversi on, ri g bui l di ng,
offshore engi neeri ng and constructi on.
DCNS
Ministry of Defence
France For technol ogy transfer to bui l d strategi c
assets for Indi an Navy and Coast Guard usi ng
DCNSs propri etary technol ogy
Airbus Europe To joi ntl y devel op an ai rcraft mai ntenance,
repai r and overhaul (MRO) uni t i n Indi a, at
i ni ti al i nvestment of INR4900mn (USD100mn).
Pipavav JV with MDL to execute
MDL order book is under shadow



Defence
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Edelweiss Securities Limited
Key opportunities in end-user segments

Government focusing on reducing import dependency
India imports 70-75% of its defence hardware requirements from overseas. To encourage
Indian companies to produce high-tech defence equipment to reduce import dependency,
the Indian Government has introduced the Make Indian and Buy Indian category in its
defence procurement policy. Pipavav is not only well-positioned to benefit from the
governments emphasis on self reliance in defence production, it is also well-equipped
compared to peers and stands to gain the most.

Huge demand in offshore oil and gas sector
In India, demand for high-end offshore facilities such as drill ships and floating production
storage platforms amounts to approximately USD20-40bn. With oil prices on the rise, the
sector is gaining importance. The increase in demand for offshore assets will see
consequential rise in demand for offshore supply vessels (OSVs) required to service them.
Furthermore, higher production cost of OSVs in other countries such as Japan, Korea etc.,
may result in diversion of orders to India, consequently creating huge prospects for Pipavav.
The company is well-established in this area through its construction programme of OSVs.

Rising demand for new naval vessels as well as replacement
In view of increasing geo-political challenges and need for anti-piracy operations in the
Indian Ocean, the government has recognised the need to build more warships and other
military hardware indigenously to rapidly expand the countrys naval and coast guard fleet.
A huge replacement/refurbishment demand for defence vessels has also been witnessed.
About 40% of the commercial fleet is more than 20 years old and the Indian ship owners are
expected to spend ~USD4bn to replace these over the next five years. Following
commissioning of Indias most technologically advanced infrastructure geared for
construction/repair of most sophisticated warships including aircraft carriers, submarines,
landing platform docks, patrol vessels and other naval products, Pipavav is far ahead of
peers to bank on such lucrative opportunities.


Pipavav is rightly poised to benefit
from the growing opportunities in
Indian defence industry, offshore
oil & gas sector and replacement
demand



Pipavav Defence
225

Edelweiss Securities Limited
Other key highlights

Order book remains robust especially in defence, offshore segments
Currently, Pipavav has robust order book of ~INR66bn (2.5x FY14 revenues). The order book
includes INR54bn orders from defence, INR26bn from offshore and INR41bn from
commercial shipbuilding. Importantly, most of the recent orders are either from defence or
offshore segments. Orders from commercial segment have dried up hit by slow down.
Clients in the commercial segment are also either cancelling orders or deferring deliveries,
which makes up part of the companys commercial segment order book vulnerable to
cancellation.

3 Panamax, 2 OSVs delivered till date
Till date, Pipavav has delivered three 74,500 DWT Panamax bulk carriers to Golden Ocean,
Norway and two OSVs to ONGC, India. The company expects to execute entire current order
book by FY18. Execution is expected to pick up once the second dry dock becomes
operational (expected by December 2015).













Defence
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Edelweiss Securities Limited
Strong business model

Pipavav enjoys first-mover advantage and has best-in-class infrastructure in shipbuilding
segment. The company has not only strongly positioned itself in defence space it is also
present in non-defence segments where it is well placed to exploit opportunities. It has
strong presence in supply of offshore vessels, commercial and shipbuilding and ship repairs.
Pipavav has been focusing on each segment of shipbuilding to beat cyclicality in any one
segment.

Fig. 1: Growth drivers segment wise

Source: Company, Edelweiss research









Defence Offshore
Growth Drivers
Rising E&P expenditures
will divert resources
towards revival in the
offshore industry.
Redevelopment and
modernisation of rigs
reaching expiration
period.
Key developments
Received contract for the
construction of 12 OSV
worth INR5.3bn from
ONGC.
Dedicated facilities for
the fabrication and
revamping of offshore oil
rigs.
Growth Drivers
Increasing focus of the
GOI on indigenization of
defence production
Strategic and technology
partnership with global
defence players
Increased exports and
defense off set
opportunity
Key developments
Received orders worth
INR30 bn for the
construction of 5 NOPVs
Bidding for several such
projects and is in talks
with governments of six
friendly nations for
similar orders



Pipavav Defence
227

Edelweiss Securities Limited
Fig. 2: Growth drivers segment wise

Source: Company, Edelweiss research


Commerical
Shipbuilding
Ship repair &
refit
Growth Drivers
Global repair market will
continue to increase
substantially
Segment will capture
demand from Indian
ships that depends on
domestic shipyards
India is likely grow to be
major hub for ship repair
by 2020
Key developments
Capacity to repair VLCCs
and OSVs
Growth Drivers
Turnaround in the global
shipping industry wi ll
revive demand for large
dry bulk cargo ships
Indian Government plans
to capture 5% of the
global market share for
commercial shipbui lding
by 2020.
Key developments
Have been delivering bulk
cargo ships to global
clients



Defence
228

Edelweiss Securities Limited
Fig. 3: Global partnerships

Source: Company





Komac
(Korea)
Sembcorp
(Singapore)
SAAB
(Europe)
Northrop
Grumman
Babcock
(UK)
DCNS
(France)
Airbus
(France)
Oto Melara
(Italy)
Sagem
(France)
Scope : Design support, material support
Partner Profile : Established naval architects and marine engineers
Scope : Technical support , ship repair, ship building, ship conversion, rig
building, offshore engineering and construction.
Partner Profile: Global leader in marine & offshore engineering business
Scope : Product services and solutions for military defence and civil security
Partner Profile :Sweden-based industrial and technology giant
Scope : Providing products in the aerospace, electronics, information systems
and shipbuilding segments, and technical services to government and
commercial customers worldwide
Partner Profile : Leading US defence major, with annual revenue of USD35b
Scope : Focusing on defence, telecommunications, energy and transportation.
This includes building next generation aircraft carriers for Indian Navy.
Partner Profile : UK's leading engineering and naval warship services
Scope : Helicopter carriers and submarines
Partner Profile : French Ministry defence Company
Scope : to develop state-of-the-art MRO facilities in India
Partner Profile : Leader in both civil and defence planes
Scope : Leading manufacturer of artillery and ammunition systems
Partner Profile : Part of USD25b Finmeccanica Group
Scope : manufacturer of defence electronics, navigation systems and optronics
Partner Profile : Part of France's leading defence conglomerate, Safran Group.



Pipavav Defence
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Key risk

Though in recent times Pipavav turned around and has been clocking profits in past few
quarters, increasing debt and tardiness in launching ships could exert pressure on
profitability.
Despite robust order book and world-class infrastructure, the company is yet to prove
itself on execution front given its limited track record in the space.
The company confronts several macro-economic hurdles like rising input cost, lack of
transparent policy, uncertainty in approvals, etc.






Defence
230

Edelweiss Securities Limited
Outlook

The Indian government has encouraged indigenisation of defence hardware with
introduction of the Buy Local in its DPP 2013. It is aimed at promoting production of
defence equipment by capable Indian companies. In view of global aspirations of
economically strong India, ever-increasing geo-political challenges and the need for anti-
piracy operations in the Indian Ocean, the Indian Navy and Coast Guard are being
modernised to safeguard the countrys maritime interests. Scope of naval defence is further
widened by providing support to maritime neighbours during natural disasters. This will
require substantial as well as rapid expansion of Indias naval and coast guard fleet.

There is huge replacement/refurbishment demand for defence vessels. About 40% of the
commercial fleet is more than 20 years old and the Indian ship owners are expected to
spend ~USD4bn to replace these over the next five years.

In India, the demand for high-end offshore facilities such as drill ships and floating
production storage platforms amounts to ~USD20-40bn. With oil prices on the rise,
importance of this sector is only building up.

We see India spending over USD248bn on defence equipment over the next decade,
presenting significant offset opportunity expected to top USD70bn. Not Rated






Pipavav Defence
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Financial Statements







Income statement (INR mn)
Year to March FY11 FY12 FY13 FY14
Income from operations 8,599 18,671 25,865 25,337
Direct costs 2,828 4,988 13,521 9,971
Employee costs 277 462 536 574
Other expenses 3,876 9,018 6,366 8,536
Total operating expenses 6,981 14,468 20,422 19,081
EBITDA 1,618 4,202 5,443 6,256
Depreciation and amortisation 520 1,103 1,272 1,665
EBIT 1,098 3,099 4,170 4,591
Interest expenses 1,193 2,577 3,988 4,775
Other income 636 244 266 390
Profit before tax 541 767 449 207
Provision for tax 103 553 138 180
Core profit 438 214 311 27
PAT before Minority Interest 438 214 311 27
PAT after Minority Interest 438 214 311 27
Adjusted net profit 438 214 311 27
Basic shares outstanding (mn) 680 680 680 685
EPS (INR) basic 0.6 0.3 0.5 0.0
Diluted equity shares (mn) 680 680 680 685
EPS (INR) fully diluted 0.6 0.3 0.5 0.0
CEPS (INR) 1.5 2.8 2.3 2.5
Common size metrics- as % of net revenues
Year to March FY11 FY12 FY13 FY14
Direct cost 32.9 26.7 52.3 39.4
Employee expenses 3.2 2.5 2.1 2.3
S G &A expenses 45.1 48.3 24.6 33.7
Operating expenses 81.2 77.5 79.0 75.3
Depreciation and Amortization 6.0 5.9 4.9 6.6
Interest expenditure 13.9 13.8 15.4 18.8
EBITDA margins 18.8 22.5 21.0 24.7
EBIT margins 12.8 16.6 16.1 18.1
Net profit margins (adjusted) 5.1 1.1 1.2 0.1
Growth metrics (%)
Year to March FY11 FY12 FY13 FY14
Revenues 36.6 117.1 38.5 (2.0)
EBITDA NM 159.7 29.5 14.9
PBT NM 41.8 (41.5) (53.9)
Net profit NM (51.1) 45.1 (91.3)
EPS - (51.1) 45.1 (91.4)
Balance sheet (INR mn)
As on 31st March FY11 FY12 FY13 FY14
Equity capital 6,658 6,912 7,012 7,362
Reserves & surplus 10,831 12,971 13,767 16,068
Shareholders funds 17,489 19,883 20,779 23,430
Long term borrowings 9,350 10,018 22,038 22,447
Short term borrowings 7,599 17,233 22,819 27,041
Loan funds 16,949 27,251 44,857 49,488
Deferred tax liability/asset 116 672 810 986
Sources of funds 34,554 47,806 66,446 73,904
Total fixed assets 28,383 29,172 50,481 60,725
Goodwill 102 102 102 102
Current investments 230 108 63 19
Inventories 2,453 3,391 1,628 2,309
Sundry debtors 2,050 9,094 8,960 13,956
Cash and equivalents 4,277 2,783 3,756 3,844
Othe current assets 4,345 6,776 8,428 7,966
Loans and advances 3,674 8,474 8,426 11,907
Total current assets (ex cash) 12,522 27,735 27,442 36,138
Sundry creditors and others 10,060 11,842 12,906 21,725
Other current liabilities & prov. 900 251 2,491 5,198
Total current liabilities & prov. 10,961 12,093 15,397 26,923
Net current assets 1,561 15,642 12,045 9,215
Uses of funds 34,554 47,806 66,446 73,904
Adjusted BV per share (INR) 26 29 31 34
Free cash flow
Year to March FY11 FY12 FY13 FY14
Net profit 438 214 311 27
Depreciation 520 1,103 1,272 1,665
Deferred tax 80 556 0 0
Others 102 1,571 3,988 4,774
Gross cash flow 1,140 3,444 5,571 6,466
Less:Changes in WC 6,052 9,597 (3,597) (2,830)
Operating cash flow (4,912) (6,153) 9,167 9,296
Less: Capex 3,371 5,266 27,086 10,244
Free cash flow (8,283) (11,419) (17,919) (948)



232

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Engineering and Capital Goods


Cash flow metrices
Year to March FY11 FY12 FY13 FY14
Operating cash flow (4,912) (6,153) 9,167 9,296
Financing cash flow 7,919 10,042 13,619 (4,725)
Investing cash flow (3,217) (4,672) (27,086) (10,200)
Net cash flow (209) (783) (4,300) (5,629)
Capex (3,371) (5,266) (27,086) (10,244)
Profitability & liquidity ratios
Year to March FY11 FY12 FY13 FY14
ROAE (%) (on adjusted profits) 2.6 1.1 1.5 0.1
ROACE (%) 3 8 7 7
Debtors days 45 109 127 165
Inventory days 244 214 68 72
Fixed assets t/o (x) - 0.6 0.6 0.5
Interest coverage 1 1 1 1
Payable days 775 801 334 634
Cash conversion cycle (486) (479) (139) (397)
Current ratio 1 2 2 1
Year to March FY11 FY12 FY13 FY14
Total asset turnover - 0.5 0.5 0.4
Fixed asset turnover - 0.6 0.6 0.5
Equity turnover 0.5 1.0 1.3 1.1
Valuations parameters
Year to March FY11 FY12 FY13 FY14
EPS (INR) fully diluted 0.6 0.3 0.5 0.0
Y-o-Y growth (%) (51.1) 45.1 (91.4)
CEPS 1.5 2.8 2.3 2.5
Diluted P/E (x) NM NM NM NM
Price/BV (x) 2.4 2.2 2.1 1.8
EV/Sales (x) 6.4 3.6 3.2 3.5
EV/EBITDA (X) 34.2 16.0 15.4 14.2
Dividend yield (%) 0.0 0.0 0.0 0.0

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Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
Edelweiss Securities Limited









































Rolta India (Rolta) offers a complete range of solutions for efficient defence
operations that are vital for the safety of a nation. The company has
transformed its business from a services-centric model into one that is
solutions oriented, with a large repository of its own intellectual property
(IPR). As a dominant market leader for defence geospatial solutions in India
for over two decades, the company has a deep understanding of the
operational environment of defence forces and continues to design
innovative solutions. Roltas strength lies in its level of commitment, as was
demonstrated by its participation in the Armys Operation Vijay, Operation
Parakram and in several other major exercises. The company is one of the
select vendors under the stringent `Make India categorisation. Not Rated.

Strong presence in GIS segment; impressive client base
Demand for GIS (Geographic Information System) application is growing at a fast pace.
Rolta enjoys strong leadership in the GIS segment with a market share of over 70% in
India and is well placed to capture a large chunk of various GIS requirements in the
future. The company enjoys long-term relationships with its customers, many of whom
have been with the company for over two decades.

Addressable defence market close to USD20bn
The market Rolta hopes to address has increased many folds due to its IP and
numerous strategic partnerships. Key defence programmes which are of interest to the
company are primarily military communications, battle field management system,
digital solider system, C4ISTAR, optronics vehicle systems, and homeland security
which together amount to ~USD20bn addressable market. The company also expects
~USD10bn offset market potential in the long term as it delivers solutions in
partnership with foreign vendors.

Outlook and valuations: Positive; Not Rated
Rolta has a deep understanding of the operational environment of the defence forces
and continues to design innovative solutions. It is one of the select vendors under the
stringent `Make India categorisation and is favourably placed to tap the opportunity as
India hikes spending on defence acquisitions. The stock is Not Rated.



COMPANY PROFILE
ROLTA INDIA
Secure bet
EDELWEISS RATINGS
Absolute Rating NOT RATED





MARKET DATA (R: ROLT.BO, B: RLTA IN)
CMP : INR 107
Target Price : NA
52-week range (INR) : 122 / 53
Share in issue (mn) : 161.3
M cap (INR bn/USD mn) : 17 / 289
Avg. Daily Vol.BSE/NSE(000) : 1,168.7


SHARE HOLDING PATTERN (%)
Current Q3FY13 Q2FY13
Promoters %
50.5 50.3 49.1
MF's, FI's & BKs 2.5 2.5 2.5
FII's 16.8 17.2 19.7
others 30.2 30.0 28.7
* Promoters pledged shares
(% of share in issue)
: NIL


RELATIVE PERFORMANCE (%)

Sensex Stock
Stock over
Sensex
1 month 0.0 (1.9) (1.9)
3 months 12.7 43.7 31.0
12 months 31.6 88.0 56.4



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 FY10 FY11 FY12 FY13
Revenue (INR mn) 15,327 18,056 18,288 21,788
Rev. growth (%) 11.6 17.8 1.3 19.1
EBIDTA (INR mn) 5,888 7,247 8,181 8,870
Net profi t (INR mn) 2,612 4,014 2,423 (8,392)
EPS (INR) 15.8 18.0 15.0 19.5
EPS growth (%) (10.9) 14.0 (16.6) NM
P/E (x) 6.8 6.0 7.2 NM
ROAE (%) 17.1 17.0 12.7 16.3



Defence
234

Edelweiss Securities Limited
Fig. 1: Products/Solutions

Source: Company



Emergency Response Management
Command and Control Solutions
Maritime Security solution
Mobile Surveillance Vehicle
Disaster Management and Border Surveillance
Coastal Security solution
Critical Infrastructure Protection of on-shore and off-shore
sites and assets
TMIS (Vessel Traffic Management and Information System)
Defence Geospatial solutions
Command & Control
Intelligence, Surveillance & Reconnaissance (C2ISR)
Optronics, Communications
Digital Soldier Systems
Battlefield Management Systems (BMS)
Vehicle & Fire Control Systems
Maritime Safety &
Security
Defence
Homeland
Security



Rolta
235

Edelweiss Securities Limited
Financial Statements







Income statement (INR mn)
Year to March FY10 FY11 FY12 FY13
Income from operations 15,327 18,056 18,288 21,788
Software development 2,854 3,693 2,663 4,577
Employee costs 4,859 5,237 5,427 6,187
Other expenses 1,725 1,878 2,017 2,154
Total operating expenses 9,439 10,809 10,107 12,918
EBITDA 5,888 7,247 8,181 8,870
Depreciation and amortisation 2,679 3,300 4,433 3,726
EBIT 3,209 3,947 3,748 5,144
Interest expenses 471 652 1,252 2,348
Other income 279 308 362 390
Profit before tax 3,017 3,603 2,857 3,186
Provision for tax 406 625 435 41
Extraordinary items gain/(loss) 1,037 (11,537)
Reported profit 2,612 4,014 2,423 (8,392)
Adjusted net profit 2,612 2,978 2,423 3,145
Equity shares outstanding (mn) 165 165 161 161
EPS (INR) basic 16 18 15.0 19.5
Diluted shares (mn) 165 165 161 161
EPS (INR) fully diluted 15.8 18.0 15.0 19.5
CEPS (INR) 32 38 43 43
Dividend per share 8.6 10.7 10.7 10.7
Dividend payout (%) 54.4 59.5 71.3 54.9
Common size metrics- as % of net revenues
Year to March FY10 FY11 FY12 FY13
Direct costs 18.6 20.5 14.6 21.0
Employee costs 31.7 29.0 29.7 28.4
Other expenses 11.3 10.4 11.0 9.9
Operating expenses 61.6 59.9 55.3 59.3
Depreciation 17.5 18.3 24.2 17.1
Interest expenditure 3.1 3.6 6.8 10.8
EBITDA margins 38.4 40.1 44.7 40.7
Net profit margins (adjusted) 17.0 16.5 13.2 14.4
Growth metrics (%)
Year to March FY10 FY11 FY12 FY13
Revenues 11.6 17.8 1.3 19.1
EBITDA 26.0 23.1 12.9 8.4
PBT (9.5) 19.4 (20.7) 11.5
Net profit (10.9) 14.0 (18.6) 29.8
EPS (10.9) 14.0 (16.6) 29.8
Balance sheet (INR mn)
As on 31st March FY10 FY11 FY12 FY13
Equity capital 1,612 1,613 1,613 1,613
Reserves & surplus 14,479 17,376 17,584 17,731
Shareholders funds 16,091 18,990 19,198 19,344
Long term borrowings 12,588 7,309 19,132 33,140
Short term borrowings 1,479 4,441 1,406
Loan funds 12,588 8,788 23,573 34,546
Other long term liabilities 18 187
Deferred tax liability/asset 353 380 506 549
Sources of funds 29,032 28,176 43,277 54,625
Tangible assets 19,540 23,494 34,304 50,577
CWIP (incl. intangible) 2,428 2,825 3,112 196
Total net fixed assets 21,969 26,319 37,415 50,773
Non Current Investments 0
Investments 551 961 266 12
Cash and equivalents 504 401 260 1,662
Inventories 39
Sundry debtors 6,248 6,926 6,024 6,219
Loans and advances 784 716 2,066 1,729
Other current assets 1,288 1,096 336 1,737
Total current assets (ex cash) 8,359 8,737 8,425 9,685
Sundry creditors and others 1,246 7,104 1,786 6,586
Provisions 1,105 1,139 1,302 920
Total CL & provisions 2,351 8,243 3,088 7,506
Net current assets 6,008 495 5,337 2,178
Others - - - -
Uses of funds 29,031.3 28,176 43,277 54,625
Book value per share (BV) 98 115 119 120
Free cash flow
Year to March FY10 FY11 FY12 FY13
Net profit 2,612 4,014 2,423 (8,392)
Add: Depreciation 2,679 3,300 4,433 3,726
Add: Deferred tax
Add: Others (2,948) (894) 2,680 18,230
Gross cash flow 2,343 6,420 9,536 13,564
Less:Changes In Working Cap. (1,706) (507) 119 2,849
Opertaing cash flow 4,049 6,927 9,417 10,715
Less: Capex 4,748 3,384 9,029 15,017
Free cash flow (699) 3,543 388 (4,302)



236

Edelweiss Securities Limited
Engineering and Capital Goods


Cash flow metrics
Year to March FY10 FY11 FY12 FY13
Operating cash flow 4,049 6,927 9,417 10,715
Financing cash flow 1,705 495 3,637 8,772
Investing cash flow (6,627) (7,466) (13,180) (18,107)
Net cash flow (872) (44) (127) 1,380
Capex (4,748) (3,384) (9,029) (15,017)
Dividend paid (573) (611) (656) (563)
Ratios
Year to March FY10 FY11 FY12 FY13
ROAE (%) 17.1 17.0 12.7 16.3
ROACE (%) 11.9 13.8 10.5 10.5
Inventory days (x) 5 0 0 0
Debtors (Days) 149 140 120 104
Fixed assets t/o (x) 0.7 0.7 0.5 0.4
Average working capital t/o (x) 2.8 5.6 6.3 5.8
Payable (days) 159 702 245 525
Net debt/Equity 0.7 0.4 1.2 1.7
Operating ratios
Year to March FY10 FY11 FY12 FY13
Fixed assets turnover (x) 0.7 0.7 0.5 0.4
Total asset turnover(x) 0.5 0.6 0.5 0.4
Equity turnover(x) 1.0 1.0 1.0 1.1
Valuations parameters
Year to March FY10 FY11 FY12 FY13
EPS (INR) 15.8 18.0 15.0 19.5
Y-o-Y growth (%) (10.9) 14.0 (16.6) 29.8
CEPS (INR) 32.1 38.0 42.6 42.7
P/E (x) 6.8 6.0 7.2 5.5
Price/BV(x) 1.1 0.9 0.9 0.9
EV/Sales (x) 1.9 1.4 2.2 2.3
EV/EBIDTA (x) 5.0 3.5 4.9 5.7
Dividend yield (%) 8.0 9.9 9.9 9.9

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Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
Edelweiss Securities Limited









































Walchandnagar Industries (WIL) is an ISO 9001: 2008 certified Indian
company with global presence and diversified business portfolio in
projects, products and high-tech manufacturing. Boasting of more than
100 years of engineering excellence legacy, the company has established
its name as one of the best in its operational areas. WIL is known for
pioneering achievements in Indian engineering industry and for its
contribution to nation building activities. It has successfully developed
indigenously critical manufacturing technologies for the defence sector.
Over the past three decades, WIL has manufactured and supplied critical
equipment such as Combustion Chambers, Al. Alloy Bridges, Launching
Systems, Motor casings, etc. It has supplied critical and core equipment
and successfully integrated main power plant on board Indias first
indigenous nuclear submarine INS-Arihant. WIL has recently set up an
exclusive infrastructure and facilities for production of combustion
chambers for Akash missile. Not Rated.

Partnering with DCNS for critical submarine component
DCNS (France) signed an MoU with WIL in February 2010 for the manufacture of critical
components for the Scorpne contract, termed Project 75 by the Indian Navy. WIL is
already a subcontractor of MDL for some high-end structural requirement of Scorpne.
Its partnership with DCNS puts it in a prominent position in the manufacture of some
of the main equipment for Scorpne. DCNS is already working with WIL for
manufacturing complex cradle-gearbox for the navys first anti-submarine warfare
(ASW) corvette Project 28.

Outlook and valuations: Positive winds; Not Rated
The Indian Navy is reportedly looking to upgrade its submarines with advanced sonar
and torpedoes in the near future. We believe the DCNS partnership is likely to extend
to other projects in DCNS naval business from Indian or even overseas markets. The
upgradation and launch of various submarines/ aircraft carrier is likely to present
ample business opportunities to WIL in the future. The stock is Not Rated.
COMPANY PROFILE
WALCHANDNAGAR INDUSTRIES
Glad tidings
EDELWEISS RATINGS
Absolute Rating NOT RATED





MARKET DATA (R: WALC.BO, B: WI IN)
CMP : INR 101
Target Price : NA
52-week range (INR) : 123 / 41
Share in issue (mn) : 38.0
M cap (INR bn/USD mn) : 4 / 64
Avg. Daily Vol.BSE/NSE(000) : 243.5


SHARE HOLDING PATTERN (%)
Current Q3FY13 Q2FY13
Promoters %
55.0 55.0 55.0
MF's, FI's & BKs 4.9 5.2 5.5
FII's 0.0 0.0 0.0
others 40.1 39.8 39.5
* Promoters pledged shares
(% of share in issue)
: NIL


RELATIVE PERFORMANCE (%)

Sensex Stock
Stock over
Sensex
1 month 0.0 (10.2) (10.2)
3 months 12.7 66.8 54.1
12 months 31.6 80.7 49.1



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 FY10 FY11 FY12 FY13
Revenue (INR mn) 6,724 9,577 8,788 7,265
Rev. growth (%) 31.2 42.4 (8.2) (17.3)
EBIDTA (INR mn) 244 432 563 (233)
Net profi t (INR mn) 223 128 121 (383)
EPS (INR) 6.1 3.3 4.6 (20.9)
EPS growth (%) 0.1 (45.3) 36.1 NM
P/E (x) 16.3 29.9 22.0 NM
ROAE (%) 2.6 3.1 4.3 (14.4)



Defence
238

Edelweiss Securities Limited
Contributing technical expertise to Indian Navy
WIL has been associated with the Indian Navy since 1967, helping the service indigenise
critical equipment required for various warship projects. Its involvement extended to Indias
first indigenously built nuclear powered submarine, Arihant, for which it supplied the steam
turbine integrated with the 85MW pressurised water reactor on board. WIL has been
designing, manufacturing and supplying gearboxes for the navys Leander class frigates,
survey vessels, aircraft carrier, corvettes, and fleet tankers, with horse power of up to
24,000.




Walchandnagar Industries
239

Edelweiss Securities Limited
Financial Statements







Income statement (INR mn)
Year to September FY10 FY11 FY12 FY13
Income from operations 6,724 9,577 8,788 7,265
Direct costs 5,254 7,425 6,252 5,338
Employee costs 601 784 937 965
Other expenses 624 936 1,035 1,195
Total operating expenses 6,480 9,145 8,224 7,498
EBITDA 244 432 563 (233)
Depreciation and amortisation 134 159 180 182
EBIT 110 273 384 (414)
Interest expenses 93 170 299 417
Other income 213 66 137 56
Profit before tax 230 170 222 (775)
Provision for tax (4) 42 48 25
Extraordinary items gain/(loss) (11) - (53) 417
Reported profit 223 128 121 (383)
Adjusted net profit 234 128 174 (800)
Equity shares outstanding (mn) 38 38 38 38
EPS (INR) basic 6 3 4.6 (20.9)
Diluted shares (mn) 277 277 277 277.2
EPS (INR) fully diluted 0.8 0.5 0.6 (2.9)
CEPS (INR) 10 8 9 (16)
Dividend per share 8.6 10.7 10.7 10.7
Dividend payout (%) 140.7 320.7 235.7 (51.3)
Common size metrics- as % of net revenues
Year to September FY10 FY11 FY12 FY13
Direct costs 78.1 77.5 71.2 73.5
Employee costs 8.9 8.2 10.7 13.3
Other expenses 9.3 9.8 11.8 16.5
Operating expenses 96.4 95.5 93.6 103.2
Depreciation 2.0 1.7 2.0 2.5
Interest expenditure 1.4 1.8 3.4 5.7
EBITDA margins 3.6 4.5 6.4 (3.2)
Net profit margins (adjusted) 3.5 1.3 2.0 (11.0)
Growth metrics (%)
Year to September FY10 FY11 FY12 FY13
Revenues 31.2 42.4 (8.2) (17.3)
EBITDA (43.1) 77.2 30.4 (141.3)
PBT (34.9) (26.4) 30.9 (449.1)
Net profit 0.1 (45.3) 36.1 (559.3)
EPS 0.1 (45.3) 36.1 (559.3)
Balance sheet (INR mn)
Year to September FY10 FY11 FY12 FY13
Equity capital 76 76 76 76
Reserves & surplus 4,034 3,994 3,935 6,988
Shareholders funds 4,110 4,070 4,011 7,064
Long term borrowings 1,039 371 213 1
Short term borrowings 998 1,654 2,357
Loan funds 1,039 1,370 1,867 2,358
Other long term liabilities 2,276 1,329 852
Deferred tax liability/asset 59 48 34 (190)
Sources of funds 5,208.4 7,764 7,240 10,085
Tangible assets 2,814 2,944 3,011 6,383
CWIP (incl. intangible) 585 438 230 204
Total net fixed assets 3,400 3,382 3,242 6,587
Non Current Investments 468 14 14 102
Investments 173 185 207
Cash and equivalents 347 295 185 123
Inventories 2,231 2,897 3,144 2,627
Sundry debtors 3,573 3,977 4,391 4,172
Loans and advances 1,687 1,620 829 1,458
Other current assets 3 163 545 394
Total current assets (ex cash) 7,493 8,658 8,909 8,651
Sundry creditors and others 6,435 4,384 5,197 5,395
Provisions 64 81 98 190
Total CL & provisions 6,500 4,466 5,295 5,585
Net current assets 994 4,192 3,615 3,066
Others - - - -
Uses of funds 5,208.5 8,056 7,241 10,085
Book value per share (BV) 107 106 105 185
Free cash flow
Year to September FY10 FY11 FY12 FY13
Net profit 223 128 121 (383)
Add: Depreciation 134 159 180 182
Add: Deferred tax
Add: Others 165 (1,517) (1,215) (328)
Gross cash flow 521 (1,230) (914) (529)
Less:Changes In Working Capital 149 (809) (754) (152)
Opertaing cash flow 372 (421) (160) (378)
Less: Capex 235 267 161 54
Free cash flow 138 (688) (321) (432)



240

Edelweiss Securities Limited
Defence





Cash flow metrics
Year to September FY10 FY11 FY12 FY13
Operating cash flow 372 (421) (160) (378)
Financing cash flow (329) 324 149 48
Investing cash flow (111) 58 (98) 267
Net cash flow (68) (38) (110) (63)
Capex (235) (267) (161) (54)
Dividend paid (43) (44) (44) (44)
Ratios
Year to September FY10 FY11 FY12 FY13
ROAE (%) 2.6 3.1 4.3 (14.4)
ROACE (%) 1.2 4.2 5.1 (4.8)
Inventory days (x) 155 142 184 180
Debtors (Days) 194 152 182 210
Fixed assets t/o (x) 2.0 2.8 2.7 1.1
Average working capital t/o (x) 1.8 3.7 2.3 2.2
Payable (days) 447 216 303 369
Net debt/Equity 0.2 0.2 0.4 0.3
Operating ratios
Year to September FY10 FY11 FY12 FY13
Fixed assets turnover (x) 2.0 2.8 2.7 1.1
Total asset turnover(x) 1.3 1.4 1.1 0.8
Equity turnover(x) 0.7 2.3 2.2 1.3
Valuations parameters
Year to September FY10 FY11 FY12 FY13
EPS (INR) 6.1 3.3 4.6 (20.9)
Y-o-Y growth (%) 0.1 (45.3) 36.1 (559.3)
CEPS (INR) 1.3 1.0 1.3 (2.2)
P/E (x) 16.3 29.9 22.0 (4.8)
Price/BV(x) 0.9 0.9 1.0 0.5
EV/Sales (x) 0.7 0.5 0.6 0.8
EV/EBIDTA (x) 18.5 10.9 9.4 (25.1)
Dividend yield (%) 8.6 10.7 10.7 10.7



241

Edelweiss Securities Limited
Annexures
Annexure 1

History of Indian Defence Industry

Early days
The Indian Army has its roots in the beginning of the British rule over India. During the past
250 years, it has undergone humungous changes, accomplished many commendable feats
and fought countless battles at home and abroad on different continents. Winston Churchill
referred to the over 2mn strong Indian Army during World War II as the largest volunteer
army known to history. Even today at around 1.3mn personnel, the Indian Army is one of
the largest volunteer armies in the world.

Post independence, it was China's belligerence in 1962 that shook the nation. This was
defeat, pure and simple, born of short-sightedness and bad decisions. India was outclassed
and outsmarted by masters of real geopolitics. This rude awakening in the Himalayas,
caused by the failure of the political and military leadership, brought about a great national
humiliation. The Army, however, soon recovered from this trauma. The glorified battles of
the war with Pakistan three years later in 1965 helped partly heal the wounds. But honour
was not really restored until the resounding victory in the 1971 Indo-Pak war, with tales of
impossible victories won in places like Longewala with scores of Pakistani tanks destroyed. A
decisive victory like this had not materialised in centuries.

Thought process towards defence industry
Independence brought about a huge change in formation, structure and size of the Indian
armed forces. The defence industry was practically non-existent with most military
hardware of British make. Given that takeover by military was the norm around the time of
Indias independence, as seen in several African and Asian countries, the Indian government
chose to moderate the military and hence was slow to develop it. The governments intent
was to keep military out of strategic decision making from the geo-political perspective. The
break up of Soviet Union in 1990s, a partner for major defence procurement, led to a
strategic shift in Indias defence policy with emphasis on domestic manufacturing. With over
39 ordnance factories (two more in pipeline) and over nine defence public sector
undertaking (DPSU), India today has one of the largest defence industrial complexes in
developing nations, all in the government fold, with minimal private participation.

Impact of post cold war on Indian defence mindset; nuclear aspiration seeded
India chose to go with USSR over US-led West given that the former was weaker amongst
the two Super Powers and hence unlikely to dominate smaller countries like India. While the
seeds of atomic energy were sown by Indias first Prime Minister Jawaharlal Nehru, it was
only under the aegis of Indira Gandhi that the nuclear power ambition gathered pace. Ms.
Gandhi was impressed during the 1971 war when USSR sent nuclear powered vessels which
prevented joint British-American attack on India. This essentially fast tracked Indias nuclear
aspirations.

India was heavily dependent on USSR for both military hardware and political support on
the global platform. However, with the fall of the Soviet Union, globalisation of the world
commenced with US being the sole Super Power. India subsequently improved relations
with US and continues to work towards deepening the strategic relation.


I believe that the stability of
the Indian Army may perhaps
be a deciding factor in the
future of India
- Lord Wavell,
Former Viceroy of India
(In his farewell speech)
Nuclear power ambition
gathered pace under the aegis
of Indira Gandhi



242

Edelweiss Securities Limited
Defence
During the past decade, India has stepped up engagement with US with rapid
transformation. Total defence orders bagged by the US during the period increased from nil
to USD8-9bn and likely to add another USD5-6bn during the next one-two years, which is
likely to include the C-130J Super Hercules aircraft, M777 155mm ultra-light Howitzers,
Apache helicopters and Chinook heavy-lift helicopters. The US government has further
indicated co-development of armament as the way forward to deepen the strategic and
defence relationship.

Lessons from China war; new mountain unit to counter China
To never lower its guard is the most important lesson learnt out of the Chinese war. The
Indian troops were not properly equipped to fight in the harsh weather conditions in
Himalayas. The setback in Sino-India war of 1962 made the Govt of India to sit up and take
notice of lack of its capability to manufacture armament domestically. It resolved to correct
this and set up domestic manufacturing base. The Government set up Department of
Production under Ministry of Defence.

China continued to remain assertive after the war and there have been numerous instances
of intrusion by Chinese Army into the Indian Territory during the years. In the past two
decades, China has intensified patrolling along the Line of Actual Control including
modernisation of border infrastructure and thus it becomes imperative for India to balance
the equation. India in order to address these intrusions is stepping presence along the Indo-
Tibetan border.

India currently has three Strike Corps, based in Mathura, Ambala, and Bhopal to deal with
any offense from Pakistan. Similarly, the Government has approved a new Mountain Strike
Corps deploying about 40,000 - 50,000 soldiers to counter Chinese military build-up along
the border. The unit is likely to be scaled up to over 90,000 soldiers subsequently. This new
unit is likely to cost over INR647bn and be setup by 2016-17. The Strike Corps will be
headquartered at Panagarh, West Bengal along with two divisions in Bihar and Assam and
other units from Ladakh in Jammu and Kashmir to Arunachal Pradesh.

Lessons from wars with Pakistan; Kargil war with Pakistan a turning point
Although the Indian Army comprehensively won the Kargil war, it was due to more of
aggressive strategy and perseverance rather than having equipped with modern arms.
Weapons and equipment were obsolete in the absence of modernisation in more than a
decade. The obsolesce has only increased over time. Kargil war was indeed a turning point
for the Indian defence industry. The government set up the Kelkar Committee to suggest
changes in the acquisition procedure so as to encourage private sector participation and set
up domestic manufacturing for defence equipment. With most of the suggestions accepted,
came the first Defence Procurement Policy, 2002, a huge milestone for encouraging private
sector participation in the defence industry with offset policy introduced in 2005. The policy
has only evolved with more clarity over the period with encouragement to private sector to
enter the defence sector.


India would spend INR647bn to
setup the new Mountain Strike
Corps eventually deploying 90,000
soldiers.
Private sector encouraged in
defence sector after learnings
from Kargil war.



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Annexure 2

Latest innovations and technological advancement

World moving towards fifth generation fighter aircraft; India upgrades to fourth
After a delay of several years, India in January 2012 has finally shortlisted Dassault Rafale of
France over Eurofighter Typhoon to provide it with 126 Medium Multi-Role Combat Aircraft
(MMRCA) from amongst six contenders. The other four in the fray included American Boeing
F-18 and Lockheed Martin F-16, Swedish JAS 39 Gripen and Russian MiG-35. The deal, worth
about USD10-12bn, makes it the single largest defence deal so far.
While Indian Air Force is likely to receive the first squadron of the fourth generation Rafale
fighter planes by 2016, China is preparing to induct its home grown fifth generation stealth
fighter Chengdu J-20 by 2017. China will thus join US and Russia as the fifth generation
fighter jet owner, where stealth is the main feature.
Meanwhile, India has tied up with Russia to jointly develop and co-produce the fifth
generation fighter aircraft (Sukhoi T-50) and thus enter the coveted club of fifth generation
fighter aircraft owners. This, however, is at least a decade away with prototype of the same
expected earliest by 2016-17.

Next generation technologies being developed by DRDO
Stealth
With the advent of and improvement in sonar, infra-red and radar technologies, it has
become increasingly difficult to remain undetected by the enemy. Countries around the
world are trying to develop ways to reduce visibility of their troops and machinery for
tactical and operational advantages. Stealth technology was developed as a direct
consequence. It aims to reduce visibility of troops, vehicles or aircraft using a variety of
techniques. Some of these involve design, shape, camouflage, radar absorbing
materials and ways to reduce the infrared trail. Stealth aircraft are probably the best
example of advancements in stealth technology. They are adapted in certain ground
vehicles and are also an important part of designing a submarine. In India, the
advanced medium combat aircraft (AMCA) and fifth generation fighter aircraft (FGFA)
will possess stealth technology.
Robotics
The importance of robots for armed forces is immense. Unmanned aerial vehicles
(UAVs) and unmanned ground vehicles (UGVs) are examples of robots increasingly
being used by countries both for reconnaissance and attack. Robots are used in a
variety of applications where the job is either too tedious or dangerous for human
beings. DRDO is developing an unmanned combat air vehicle (UCAV) called Rustom for
the Indian military. It has the potential to be used for reconnaissance in Naxalite
infested areas which will give troops a clear idea of dangers.
Air independent propulsion (AIP)
The AIP technology helps keep submarines underwater for longer periods of time.
Submarines have to surface or use a snorkel to access atmospheric oxygen and to
release exhaust. This makes them vulnerable to detection by enemy forces
compromising safety. DRDO is developing this technology. Two of the Scorpne class



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submarines bought from the French company DCNS may also be fitted with AIP
technology.
Directed energy weapons
Directed energy weapons (DEWs) emit energy in an aimed direction without a projectile.
This energy can be of various formsparticles with mass, sound and electromagnetic
radiation. This is a developing technology, yet to be used effectively and being
considered for operations like protecting the earth from asteroids. In time, the
technology is expected to develop because of its many operational advantages. DRDO
has reportedly started work on DEWs such as a 25-kilowatt laser system to destroy
incoming missiles in their terminal stage and a 100-kilowatt solid-state laser system to
take out missiles in their boost phase itself.

Collaborations, co-development, co-production: The way forward
US and Russia are keen to engage with India which includes co-development and co-
production to take defence relations to the next level. While Indo-Russian co-
development and co-production is already a reality, US is keen to tie up with Indian
entities to take the co-development and co-production route given the significant
ordering received by US during the past few years. To start, US had offered to develop
the next generation Javelin anti-tank missiles jointly with India. Given below are the key
joint projects:

BrahMos: Excellent example of Indo-Russian venture
BrahMos is a stealth supersonic cruise missile that can be launched from submarines,
ships, aircraft or land. A joint venture between Indias DRDO and Russians NPO
Mashinostroeyenia, BrahMos is amongst the worlds fastest cruise missiles. After
meeting domestic requirement, the JV is exploring the possibility of commercially
exploiting the missile.
Snecma: HAL JV to manufacture aircraft engines
HAL and Snecma (France), a Safran group company formed a JV (50:50) to build
components for Ardiden, a new helicopter engine that Snecma is developing. The
engine was tested on HAL's advanced light helicopter. This JV has become a centre of
excellence for the manufacture of key components and assemblies of aero-engines.
Venture between India and Russia for fifth generation fighter aircraft
In October 2007, India and Russia agreed to jointly develop and produce Fifth
Generation Fighter Aircraft (FGFA), the largest joint project of the Indo-Russian military
and technical cooperation. Under the project, India will modify and customise the
prototype Russia has developed independently.
Four Russian prototypes of the fifth-generation fighter codenamed T-50 or PAK-FA have
performed more than 200 test flights since January 2010. Sukhoi Company and HAL will
work jointly on this project. While the Russian Air Force plans to begin inducting the
planes in 2015, HAL is to receive three Russian prototypes for redesign and testing in
2015, 2016 and 2017, and will hand over the first series produced aircraft to the IAF in
2019.




Co-production and co-
development projects, I'm
bringing a number of them to
India
- Ashton B Carter
Former Deputy Secretary of
Defence, USA



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Annexure 3

Case for active participation by private sector
US
According to the US War Department, private sector is better equipped for the defence
industry for reasons mentioned below. Continued US military prowess fully justifies the
confidence reposed in the private sector.
Defence industry is highly technology driven and it is the private sector that adapts
itself better to rapidly changing technology.
The private sector possesses business acumen to spot fleeting opportunities for
long-term survival and continued prosperity of enterprise.
Open and free competition compels companies to master frontier technology to
beat rivals for limited orders available. It, in turn, helps the nation build a reservoir
of latest technology giving it the edge over prospective adversaries.
Russia
Russia embarked on a major restructuring exercise of its defence industry in the early
1990s. One of the major steps was to create new corporate structures to undertake the
complete gamut of research, design and production of defence systems. In a way,
Russia wanted to follow the highly successful Western model. It privatised a large
number of defence production facilities. However, major research/design
establishments and production facilities falling under strategic disciplines were kept
under the governments direct control.
UK
As per the UK Ministry of Defence Policy Paper No 5 on Defence Industrial Policy, a
thriving, innovative and competitive defence industry is essential for the defence of UK.
The UK defence industry embraces all defence suppliers that create value, employment,
technology or intellectual assets in the country. UKs innovative science base supports
the defence industrys high levels of technology development, and this brings benefits
to other industry sectors through the application of military technology to civil products.
The UK government works closely with industry and is committed to public/private
partnerships. As a matter of fact, intense consultations are held with Defence
Manufacturers Association before formulating government policies.
Australia
The Australian government recognises the role of defence industry and considers it to
be partner in the development of indigenous capability. It wants the industry to be
aware of long-term defence plans to be able to identify and exploit emerging business
opportunities.
Pakistan
Pakistan has also realised that private sector has to be dovetailed in the overall effort to
produce defence equipment indigenously. Defence Production Division has been
created in the Ministry of Defence Production to involve local industry in defence
production. It has been made responsible to identify, integrate and utilise the industrial
potential available both in public and private sectors for production and procurement
of defence stores. It also tries to attain economies of scale by optimum utilisation of
available production capacities in both sectors.



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Annexure 4

Current capabilities for artillery gun components in India

Source: Industry, Edelweiss research


Barrel
Breech
Assembly Armour
Electroni
cs Hydraulics Engine Casting Fabrication Forging
Assembly for
carriage
Cradle &
Saddle
Gear box &
others
Communication
apparatus, Sensors Others Radars
Missile
system
Ballistics/missi
les
Communication and
electronics
Heavy Enginnering Corp.
Tata Steel
Walchand Nagar
Super Auto ltd.
Simplex Engineering
TAL
HMT Banglore
Mahindra Forgings
Sandhu Forgings
Mayura Steels
MTAR technologies
Apex Hydraulics
Dynamatics Technology
Servo Controls India
Dantal Hydraulics
Yuken India
Kirloskar Engines
Kinetic Gears
Kirloskar Engines
JMT, Jamshedpur
Bharat Forge Ltd.
Ashok Leyland
TS Kisan
L&T
Starwire India
Tata Power SED
Electronics Corporation of india
MEL Systems and Services
MDL
OFB
BEL
Astra Microwave
Tata advanced system
Rolta
ECIL Hyd
Avantel Softech, Hyd
L&T
Godrej & Boyece
Data Pattern
Nova integrated sys
Punj Llyod
Tata Power SED
HAL
BHEL
BDL
SAIL
Wartsila
Caterpillar
MAN



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Annexure 5

Presence of Indian companies across submarine value chain

Source: Industry, Edelweiss research


Companies Radars
Missile
system
Electro
optic
systems
Ballistics/missil
es/torpedos
Communication
and electronics
Design
engineering Fabrication Hull
material(steel
plates)
Steam/gas
turbines Dieses engine
Alternator/ge
nerator/HVAC
Pumps/mot
ors
BEL
Astra Microwave
Tata advanced system
Rolta
ECIL Hyd
Avantel Softech, Hyd
L&T
Godrej & Boyece
Data Pattern
Nova integrated sys
Punj Llyod
Tata Power SED
HAL
BHEL
BDL
SAIL
Wartsila
Caterpillar
MAN
MDL
Garden reach
Goa shipyard
Cochin shipyard
Pipavav Shipyard
Fight MOVE FLOAT



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NOTES:


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RATING & INTERPRETATION
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
Buy More than 15%
Hold Between 15% and - 5%
Reduce Less than -5%
RELATIVE RETURNS RATING
Ratings Criteria
Sector Outperformer (SO) Stock return > 1.25 x Sector return
Sector Performer (SP) Stock return > 0.75 x Sector return
Stock return < 1.25 x Sector return
Sector Underperformer (SU) Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe
within the sector
RELATIVE RISK RATING
Ratings Criteria
Low (L) Bottom 1/3rd percentile in the sector
Medium (M) Middle 1/3rd percentile in the sector
High (H) Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return
Equalweight (EW) Sector return > 0.75 x Nifty return
Sector return < 1.25 x Nifty return
Underweight (UW) Sector return < 0.75 x Nifty return


250

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Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai 400 098.
Board: (91-22) 4009 4400, Email: research@edelweissfin.com
Vikas Khemani Head Institutional Equities vikas.khemani@edelweissfin.com +91 22 2286 4206
Nischal Maheshwari Co-Head Institutional Equities & Head Research nischal.maheshwari@edelweissfin.com +91 22 4063 5476
Nirav Sheth Head Sales nirav.sheth@edelweissfin.com +91 22 4040 7499

Distribution of Ratings / Market Cap
Edelweiss Research Coverage Universe

Rating Distribution* 149 40 12 202
* 1 stocks under review

Market Cap (INR) 139 57 6
> 50bn Between 10bn and 50 bn < 10bn
Buy Hold Reduce Total
Rating Interpretation


Buy appreciate more than 15% over a 12-month period
Hold appreciate up to 15% over a 12-month period
Reduce depreciate more than 5% over a 12-month period
Rating Expected to



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