You are on page 1of 257

Analysis Beyond Consensus

Annual Report Analysis FY15


October 15, 2015

Dotting the i's


and
crossing the t's

Manoj Bahety
+91 22 6623 3362
manoj.bahety@edelweissfin.com

Nilesh Aiya
+91 22 4040 7575
nilesh.aiya@edelweissfin.com

Ankit Dangayach
+91 22 6620 3077
ankit.dangayach@edelweissfin.com

Edelweiss Securities Limited

Introduction

Introduction
Annual report analysis (ARA) provides vital information on companies overall
performance and helps develop an outlook on them based on historical events. It
highlights true economic profits as against the companies reported profits as well as the
health of balance sheets.
To analyse the annual reports, we covered the following aspects:

Income statement analysis:

Economic profits vis--vis reported profits

Direct debit to reserves

Break up of profitability into operating and financing activities (RoE analyser)

Analysing contribution of subsidiaries and parent to overall profitability of the


consolidated entity

Accounting for mergers/acquisitions and implications of the same

Balance sheet analysis:

Non-operational risks

Capital structure/allocation

Break up of operating and financial assets

Intangibles and off-balance sheet items

Working capital analysis

Net worth analysis

Balance sheet components analysis

Domestic and global peers comparative analysis

Cash flow analysis

Key insights from MD&A

Segmental information analysis

Accounting policy analysis:

A framework, wherein accounting policies adopted by a company are analysed


and compared with globally accepted policies. The likely impact on
convergence with more logical accounting practices (IFRS) is highlighted.

Change in accounting policy/estimates by the company and its impact on


profitability.

Edelweiss Securities Limited

Annual Report Analysis

Key Highlights
Automobile
Ashok Leyland (AL)

Standalone cash flows were supported by increase in payables (INR10.8bn), a part


of which in our view is akin to debt. Reversal of revaluation reserve on land sale led
to higher reported profit by INR1.4bn. Forex losses capitalised stood at INR707mn
(53% of PAT).

Net worth rose by INR5.2bn in FY15, primarily led by QIP proceeds. 87% of net
worth represented by goodwill, revaluation reserve, forex losses capitalised and
investments in loss-making subsidiaries/fellow subsidiaries (Hinduja Foundries/
Energy/ John Deere). Analysis of Hinduja Foundaries (AL exposure INR3.4bn)
financials shows negative net worth to the tune of INR4.2bn and debt of INR5.5bn.

Performance of subsidiaries/ joint ventures (JVs) / associates (ex-finance business)


continued to be a drag, led by write off/ provisions and AL invested additional
INR1.5bn (INR950mn in cash) in subsidiaries/ JVs (AL exposure - INR19bn, 46% of
standalone net worth).

Eicher Motors (Eicher)

Royal Enfield (RE) posted record high volumes and margins leading to consolidated
EBITDA margin surging by 580bps YoY to 24.2%. VECVs performance remained
subdued, though consistent market share gains continued. Cash flow generation
(adjusted for acceptances) stood robust and adjusted working capital cycle
improved YoY to (7) days in CY14.

R&D expenditure capitalised under product designs and prototypes (including under
development) stood at INR1.2bn. However, R&D capitalisation ratio has been
declining over the years - from 73% in CY11 to 59% in CY13 (CY14 - not available).

Related party transactions include brand fee payments of INR269.4mn (2.7% of


PAT) at consolidated level and INR75.4mn at standalone level.

Hero MotoCorp (HML)

Related party transactions have increased since FY13 with purchases from related
parties jumping to INR22.6bn, 11.4% of raw material (RM) cost (FY14: INR19.2bn,
FY13: INR9.1bn).

Amortisation of technical knowhow/ export licence (towards royalty to Honda)


dipped from INR8.1bn in FY14 to INR2.0bn in FY15, being last year of amortisation.
R&D cost charged to P&L for HML stood at INR1.3bn, 0.5% of sales, and for peers it
ranged from 1.0-1.5% of sales.

HML impaired INR1.5bn investment in Erik Buell Racing (EBR49% associate) which
filed winding up petition in FY15. HML infused INR1.7bn in financing arm, Hero
FinCorp (48% stake FY14: 40%), and total investment stood at INR2.7bn in FY15.

Edelweiss Securities Limited

Contents
Mahindra & Mahindra (M&M)

Standalone adjusted PBIT declined to INR36bn (FY14: INR42bn) on lower revenues


and 100bps dip in EBITDA margins.

Subsidiary losses, not generally considered in SOTP valuation, increased to ~INR7bn


(FY14: INR6bn; 16%), representing ~21% of standalone PAT. Recurring capital
infusion by M&M (FY15: INR12bn, FY11-15: INR34bn) was to sustain operations in
these subsidiaries.

Consolidated RoCE (ex M&M Financial Services) stood lower at ~12% (FY14: ~18%)
versus standalone adjusted RoCE of 28% (FY14: 38%).

R&D cost capitalised during FY15 rose to INR9.3bn (FY14:INR5.7bn), representing


22% of PBT. Capitalisation ratio rose to 50% in FY15 (FY14: 40%).

Motherson Sumi Systems (MSS)

MSS reported robust improvement in profitability, operating cash flows and return
ratios primarily led by subsidiaries.

Higher capex spending (INR18.4bn; FY14: INR13.5bn) and acquisitions (INR7.1bn;


FY14: nil), led to decline in consolidated free cash flow to INR5.4bn (FY14:
INR10.6bn). The company estimates capex spending to be in the INR1520bn
range during FY16.

Trade working capital fell to 2.8% of sales in FY15 versus 6.1% in FY14, led by
increase in trade payables and customer advances/unearned income. During FY12
15, trade payables and customer advances catapulted ~INR25bn, offsetting
increase in inventory and receivables, which jumped ~INR16bn, leading to release of
working capital of INR9bn, despite rise in sales.

While SMRP BV (hold co of SMR and SMP) enjoys negative cash conversion cycle of
11 days (FY14: positive 5 days), that of competitors ranges between 17- 28 days.
Standalone business continued to be a major profit spinner (~60% of consolidated
PAT), despite contributing mere 15% to overall revenue.

Tata Motors (TAMO)

TAMOs net worth accretion was significantly impacted in FY15 led by: i) forex losses
on debt worth INR48bn charged directly to reserves (FCMITDA); ii) INR117bn
hedging losses; and iii) INR42bn translation losses. Our calculation suggests
outstanding derivative hedge book of GBP14.16bn INR1.4trillion.

Our calculation suggests adjusted net debt was higher by INR241bn adjusted for
pension deficit and implied debt on discounting charges.

Payables remain a major source of cash flow as JLR consistently reported negative
working capital cycle owing to significantly higher payable days vis--vis peers.

TAMO had cash balance of INR462bn and debt of INR736bn. Average borrowing
cost of 8.5% and average yield on cash of 2.1%, led to negative carry. Restricted
cash in China in FY13 stood at GBP524mn (FY14 and 15: Nil).

Pension actuarial losses charged to reserves stood at INR27.9bn in FY15 and TAMO
continues to capitalise 80-85% of product development expenditure versus global
peers average of 20-35%.

Edelweiss Securities Limited

Annual Report Analysis


TVS Motor Company (TVS)

Robust volumes led to higher revenues and profitability; however EBITDA margins
remained flat at 5.8%. EBITDA/unit has been consistently lower for TVS in the past 5
years versus peers owing to higher operating and employee cost per unit.

Debt rose by INR3.9bn to INR11.2bn in FY15 (D/E ratio up from 0.6x to 0.8x), and
adjusted for off-balance sheet liabilities (bills discounted, LCs, credit agreements INR4.5bn) debt stood at INR15.7bn (adjusted D/E ratio up from 1.1x in FY14 to
1.3x).

Consolidated return ratios remained subdued, primarily owing to losses in Indonesia


and investments (largely preference shares in TVS Motor Services INR4.5bn). TVS
holds 19% of equity capital and 85% of preference capital (as at FY14) in TVS Motor
Services (holding company of NBFC arm, TVS Credit Services).

Loans and advances rose from INR4.3bn to INR7.7bn, 58% of net worth led by VAT
receivables and excise account. Related party transactions included purchases
worth INR4.6bn (6.2% of raw material (RM) cost) from parent, Sundaram Clayton.

Engineering / Capital Goods


Bharat Forge (BF)

Standalone revenue surged 34% and EBITDA margin inched up to 29.2% (FY14:
25.4%). European subsidiaries profitability remained subdued at INR28mn (FY14:
INR735mn).

Consolidated free cash flows remained negative owing to higher capex of INR7.1bn
(FY14: INR5.8bn) led by standalone and Alstom JV.

Adjusted for bills discounted and acceptances: (1) cash conversion cycle stood at 92
days (FY14: 96 days) versus reported cycle of 42 days (FY14: 54 days); (2) adjusted
net debt stood at INR24.8bn versus reported debt of INR14.1bn.

Derivatives exposure rose 53% to INR49bn (FY14: INR32bn), representing ~1.8x


FY15 exports revenue.

Crompton Greaves (CRG)

Subsidiary losses continue to be funded from standalone entity. Aggregate cash and
non-cash exposure in overseas subsidiaries stood at 77% of net worth.

Standalone (ex-consumer products) adjusted RoCE of 9.1% (FY14: 18.9%) was


significantly lower than reported RoCE of 21.4% and 37.8% for power and industrial
segments, due to non consideration of un-allocable expenses and assets.

Standalone cash conversion cycle jumped to 56 days (FY14: 36 days), led by higher
receivables, unbilled revenues and lower customer advances and payable days.
Overdue receivables (>6 months) jumped 56% YoY to INR3.6bn.

Payment to Avantha Holdings (related party) for expenses stood at INR702mn


(FY14: INR676mn), ~12% of adjusted standalone PBT.

Edelweiss Securities Limited

Contents
Havells India (Havells)

Consolidated profitability supported by recognition of deferred tax assets (DTA) of


INR378mn (~6.7% of PBT) (FY13 and FY14: nil) with respect to unabsorbed losses
pertaining to certain Sylvania subsidiaries.

Payment to related parties stood at INR975mn (FY14: INR850mn), 17.1% of PBT.


Managerial remuneration increased 57% to INR248mn.

Sylvanias pension deficit jumped to ~EUR58.1mn (FY14: EUR43.7mn) led by higher


actuarial loss at Euro14.4mn (FY14: Euro6mn).

Sylvanias receivables and debt stood lower by EUR26mn owing to non-recourse


receivable financing. Adjusted for receivable financing, core working capital fell by
9% in Euro terms and 25% in INR terms.

IRB Infrastructure Developers (IRB)

IRBs construction margins stood at 30% (FY12-15 average : 33%) vis--vis peers
10-14% (FY12-15 average: 10-14%). While IRB reported superior construction
margin, return ratios of most SPVs remained subdued (RoCE < 10%).

Till FY14, annual fixed premium on operational projects were reduced from toll
collections in income statement. However, in FY15, entire outstanding premium
liability (~INR218bn) has been capitalised in fixed asset. Had there been no change
in accounting policy, toll revenues (including EBITDA) and PBT would have been
lower by INR3bn and INR1.7bn, respectively.

Larsen & Toubro (L&T)

Standalone core working capital surged to 20% of sales (FY14: 18%, FY13: 13.5%) led
by steep increase in unbilled revenue, though partially offset by higher trade
payables and customer advances. ~63% of cash profits generated during FY11-15
was invested in working capital.

L&T (standalone) contributed ~76% to consolidated EBIT, despite only ~31% share in
capital employed. Standalone RoCE declined to 25.3% (FY14: 28%).

L&T Infotech & Technology Services accounts for ~4% of total capital employed, but
contributed ~16% to consolidated EBIT. Other operational subsidiaries in power,
roads, hydrocarbon, ship building, forging and boiler & turbines, etc., accounted for
~31% of capital employed, but contributed nil to consolidated EBIT.

L&T's (consolidated) profit for FY15 includes unrealised profit (PBT) of INR3.2bn
(12% margin) (FY11-15: INR17bn, 13% margin) from road and Hyderabad Metro
construction, undertaken for its subsidiaries.

Contingent liabilities (ex guarantees) at standalone and consolidated levels more


than doubled to INR19.4bn (FY14: INR8.1bn) and INR32bn (FY14: INR15bn),
respectively, led by steep increase in claims and disputed income tax liabilities.

Information Technology
Tech Mahindra (TML)

Unbilled revenue surged to INR19.4bn, 8.6% of sales (FY14: INR10.7bn, 5.7%), in


FY15, highest amongst peers. Receivable days at 88, unbilled days at 31 and payable
days at 109 stood highest for TML versus peers.
Edelweiss Securities Limited

Annual Report Analysis

ESOP cost rose from INR1.3bn to INR2.3bn YoY (largely to key management).
Remuneration to KMPs stood at INR3.0bn (largely stock options).

Merger accounting leads to lower net worth and higher RoE/RoCE. Adjusted RoE/
RoCE stood at 15%/22% versus reported 28%/36%. Goodwill rose to INR17.3bn,
16% of net worth (FY14: INR5.6bn, 7%), led by acquisitions (largely LCC & Softgen).

Contingent liabilities rose by INR25bn of which INR12.8bn pertained to service tax


matters for 2008 to 2013.

Media & Entertainment


Dish TV (Dish)

FCF stood negative, led by higher capex due to higher subscriber additions along
with increase in churn ratio to 12.3% (FY14: 4.7%; FY11-15 average: 11.6%).
Churned out customers represents 42% of gross subscribers added over past 5
years, the cost of which is akin to maintenance capex.

Trailing EV/EBITDA multiple adjusted for customer churn stood at 25x versus 13x
based on reported EBITDA (28x including regulatory dues and creditors for capex)
(Based on March 31, 2015 price of INR82/share).

Dish changed its accounting policy in FY14 and started upfront recognition of activation
fee, the impact of which is higher revenue recognition during FY15 by INR2bn, 7% of
revenue (our estimate). ARPU has consistently risen over the past 5 years, of which in
the past 2 years it could be due to change in revenue recognition policy.

PBT stood at INR74mn, and adjusted for capitalised forex losses of INR340mn stood
at negative INR(266)mn. Cumulative forex losses over last 3 years stood at INR3.3bn
(28% of capital employed).

Zee Entertainment Enterprises

EBITDA margin is optically higher by 120bps due to change in accounting policy for
subscription management fees from gross to net

As highlighted in our past annual report analysis, higher inventory spend in previous
years coupled with amortisation policy of 60 months had led to mismatch in profits
and cash flows.

Investments in overseas funds, infra NCDs, ICDs and other advances increased by
INR2.7bn to INR15.5bn in FY15, 44% of adjusted net worth. Average yield on cash
stood at 8.0-9.1% and other income constituted 14-16% of PBT in past 3 years.

Operating costs include media content purchased from Zee Media Corp. worth
INR1.2bn (FY14: INR1.2bn) and others at INR812mn (Dish TV, Siti Cable, etc).

Oil & Gas


Reliance Industries (RIL)

Use of lower cost forex loans, superior treasury yields coupled with accounting
policy of exchange rate capitalisation led to superior reported profits. Since FY06,
cumulative forex losses capitalised and revalued assets, net of depreciation stood at
INR479bn, 22% of net worth.
Edelweiss Securities Limited

Contents

Derivatives exposure rose substantially owing to the increase in forward contracts


and interest rate swaps. Commodity derivatives exposure for petroleum products
rose 2.7x YoY and feedstock purchase contracts rose 2x YoY.

Capital allocation analysis shows that only 36% of capital employed in refining and
petrochemical segment delivers superior returns, whereas 64% of capital employed
remains a drag on overall return ratios. RILs 44% of capital employed is under
CWIP. With most of the projects nearing commissioning, RIL expects decline in
capex and improvement in return ratios.

Pharmaceuticals/ Healthcare
Apollo Hospitals Enterprise (AHEL)

Consolidated EBITDA margin declined 110bps to 14.2%, primarily impacted by


increase in revenue share of low-margin pharmacy business to 34% (FY14: 31%) and
higher losses in Apollo health and lifestyle Limited (AHLL) and its subsidiaries. EBITDA
margin of pharmacies (opened in FY11 and subsequent years) stood at a low 1%.

Pharmacy segments (~34% of consolidated revenue) EBITDA margin remained


unchanged at ~3.3%, but EBIT margin declined to 2.2% (FY14: 2.5%) hit by higher
depreciation and loyalty discounts. Capital employed in pharmacy business
increased to INR5.3bn (FY14: INR3.3bn), while RoCE fell to 6.8% (FY14: 9.8%).

Related party purchases (medicines) jumped to ~INR5.8bn (FY14: INR3.7bn, FY13:


INR3.2bn), 33% (FY14: 27%) of pharmacy sales.

Receivables overdue (>6 months) stood at INR1bn (~16.5% of total receivables,


FY14: 1.6bn). Bad debts written off increased to INR259mn (~5.7% of PBT; FY14:
INR179mn).

Aurobindo Pharma (APL)

Actavis Group reported losses of INR557mn in FY15. Trade payables pertaining to


Actavis declined by INR7.0bn. Other liabilities rose by INR4.5bn led by statutory
dues of Actavis and may result in additional cash outflow if payable in short term.

Export incentive receivables continued to rise with INR2.8bn outstanding as at FY15


(FY14: INR2.2bn, 4 years cumulative export incentive income - INR2.7bn). EBITDA
margin dipped by 500bps YoY due to higher operating and employee cost. Power
cost remained flat at INR3.6bn and declined as a proportion to standalone revenue.

Cash conversion cycle, ex-acquisitions deteriorated from 178 days to 194 days in
FY15 (versus 166 days reported). OCF ex-acquisition stood negative at INR2.4bn.

Related party purchases stood at INR4.5bn, 8.1% of RM cost in FY15 (FY14:


INR3.1bn, 8.5%) was largely towards packaging materials, solvents and other RM.

Cipla

Subsidiaries contribute 11% to consolidated revenues, which grew 69% YoY. South
African subsidiaries turned profitable with INR818mn PAT (FY14: INR41mn loss).

Goodwill (related to Medpro and other acquisitions) stood at INR25.6bn, 24% of net
worth. Exposure to subsidiaries/ JVs/ associates at the standalone level (including
investments, loans and net receivables) stood at INR48.7bn, 44% of standalone net
worth (FY14: INR39bn, 39%).

Edelweiss Securities Limited

Annual Report Analysis

High cost structure continue to weigh on EBITDA margin, which declined 200bps
YoY primarily led by employee costs. Return ratios have declined over past 2 years
led by acquisitions and capex.

Glenmark Pharmaceuticals (Glenmark)

Net worth accretion to PAT ratio has dipped significantly during FY15 (only 4% of
profits translated to net worth; 55% cumulatively over past 5 years)

While cumulative currency translation loss stood at INR10.6bn, it is important to


note that cash loss was ~INR5.4bn. We believe, over the long term, book value
accretion is a better representation of value creation instead of reported profit.

Cash tax paid has remained consistently higher than P&L tax expense over the past
5 years. Taxes charged to P&L is 44% of cash taxes paid.

Cash conversion cycle improved primarily led by significant increase in payables


from 168 to 270 days. Receivables outstanding from Venezuela subsidiary stood at
INR1.5bn in FY15. Outstanding debt stood at INR38bn (FY14: INR32.7bn) and D/E
ratio rose from 1.0x in FY14 to 1.3x in FY15 (total liabilities/equity 2.1x).

Sun Pharmaceutical Industries (SUNP)

SUNPs net worth and goodwill stood lower by INR301.7bn due to Ranbaxy merger
accounting under Pooling of Interest method (permitted under Indian GAAP but
prohibited internationally). Consequently, reported RoE/RoCE stood higher at
21.5%/25.9% versus adjusted 12.8%/16.8%.

Demerger of unit from Sun Pharma Global FZE (SPG) to SUNP standalone in FY14 led
to transfer of all assets and liabilities (including USD550mn Protonix drug litigation
claim) from tax free entity (SPG, UAE) to tax paying entity.

P&L tax rate stood at 14.3% versus cash tax rate of 27.2% led by DTA credit (total
DTA at INR22.3bn, 8.7% of net worth). Contingent liabilities include income tax
demands rising to INR26.7bn (FY14: INR12.1bn; FY11: INR2.7bn).

Our calculation suggests that Ranbaxy consolidated revenue declined by 16% YoY
in FY15 and SUNP consolidated revenue, ex-Ranbaxy grew 1.5% YoY. Recurring OCF
post interest declined 18% YoY to INR53.1bn.

Loans to employees and others rose to INR11.7bn (FY14: INR5.8bn) and total
loans/advances rose to INR48.7bn, 19% of net worth (FY14: INR23.0bn, 12.4%).

Power & Ports


Adani Ports (APSEZ)

FY15 witnessed robust growth in revenue and profitability owing to healthy surge
(28%) in cargo volumes at Mundra and other ports.

ICDs/loans & advances (including capital advances) to related party (fellow


subsidiaries and hold co) stood at INR24bn (FY14: INR25bn), 22.2% of net worth.
ICDs (ex related parties) stood at INR12.6bn (FY14: INR16.7bn).

Edelweiss Securities Limited

Contents

Aggregate cash and non-cash exposure to related parties (ex subsidiaries and JV)
stood at INR34.3bn (FY14: INR35.2bn) and INR30.2bn (FY14: INR48bn), respectively,
representing ~60% of net worth.

APSEZ resorted to bill discounting of INR4.5bn, as at March 2015, adjusted for which
receivable days increased to 107 (FY14: 84).

Aggregate unhedged forex exposure stood at INR111.7bn (FY14: INR116.8bn).


Management stated that ~30-35% of income (~INR20bn-25bn) is USD denominated
and will act as a hedge for USD denominated borrowings.

Retail
Titan Company

Debt declined by INR7.1bn however, gold lease payables (akin to debt) rose by
INR10.8bn as the company has resumed its gold lease model. Total liabilities (debt +
payables) surged 22% YoY. Internationally, jewellery companies classify gold lease
as debt.

Off-balance sheet commitments include non-fund based facility, which rose from
INR1.5bn in FY14 to INR11.3bn in FY15 pertaining to gold lease.

Core RoCE (including payables and deposits schemes advance) has been declining
since FY11 (26% to 19%), but it improved in FY15 to 23%. RoE has been consistently
declining since FY11 from 49% to 29%.

Adjusted cash flows improved to INR5.7bn in FY15 (FY14: INR5.3bn). Cumulatively


adjusted FCF stood negative at INR4.0bn over past 5 years. Adjusted cash
conversion cycle marginally improved in FY15, though it remained high at 153 days
versus 87 on reported basis.

Telecom
Bharti Airtel (Bharti)

Bharti infused ~INR69bn in its African operations, taking the cumulative cash
exposure to INR239bn. Guarantees by the parent on behalf of group companies
rose by ~INR99bn to INR840bn (~107% of net worth). As highlighted in our previous
years (FY11-14) annual report analysis, interest cost on forex loans at Bharti Airtel
International (Netherlands) B.V. (BAIN) continues to be cushioned owing to choice
of USD as a functional currency.

D/E ratio, adjusted for deferred spectrum liability and equipment supply payables,
stood at 1.9x versus 1.3x reported.

We believe EV/EBITDA valuation methodology needs to be revisited considering


depreciation and capex at 55% and 75% of EBITDA, respectively, over FY11-15.

Margin of safety for goodwill of INR415bn (FY14:INR469bn), 67% of net worth


(FY14:78.5%), deteriorated to 8.5% (FY14:10%, FY13: 11.5%) which in our view is
due to decline in African cash flows.

Cash paid (net) for capex (tangible assets) in FY15 was INR144bn (versus INR194bn
capex in FY15). Consequently, payables for equipment supplies increased to
INR104bn (FY14: INR65bn), which may come for payment in FY16 and may increase
net debt.

Edelweiss Securities Limited

Annual Report Analysis


List of Companies

Automobiles

Oil & Gas

Ashok Leyland ..................................................... 11

Reliance Industries ............................................. 156

Eicher Motors ..................................................... 23


Hero MotoCorp................................................... 30

Pharmaceuticals & Healthcare

Mahindra & Mahindra ........................................ 39

Apollo Hospitals Enterprise ................................ 166

Motherson Sumi Systems ................................... 49

Aurobindo Pharma ............................................. 175

Tata Motors ........................................................ 59

Cipla .................................................................... 185

TVS Motor Company ........................................... 70

Glenmark Pharmaceuticals................................. 193


Sun Pharmaceutical Industries ........................... 208

Engineering / Construction / Capital Goods


Bharat Forge ....................................................... 82

Power & Ports

Crompton Greaves .............................................. 89

Adani Ports and SEZ ............................................ 218

Havells India...................................................... 103


IRB Infrastructure ............................................. 111

Retail

Larsen & Toubro ............................................... 117

Titan Company ................................................... 228

Information Technologies

Telecommunication

Tech Mahindra ....................................................129

Bharti Airtel ........................................................ 237

Media & Entertainment


Dish TV ...............................................................138
Zee Entertainment Enterprises ...........................146

10

Edelweiss Securities Limited

ANALYSIS BEYOND CONSENSUS


THE NEW ABC OF RESEARCH
Ashok Leyland | Annual Report Analysis

Ashok Leylands (AL) FY15 annual report analysis highlights operational


improvement led by robust volumes. However, it posted loss at the
consolidated PBT level due to exceptional loss of INR6.1bn (subsidiaries
related provisions). AL capitalises forex losses on loans in line with option
available under AS-11. Improvement in OCF was supported by increase in
trade payables, a part of which in our view is akin to debt. Performance of
subsidiaries/ JVs / associates (ex-finance business) continued to be a drag
led by write off/ provisions and AL invested additional INR1.5bn
(INR950mn in cash) in subsidiaries/ JVs. Exposure to these entities stood at
INR19bn, 46% of standalone net worth*, and goodwill pertaining to
subsidiaries stood at INR6.9bn, 20% of adjusted* consolidated net worth.
Net worth rose by INR5.2bn in FY15, primarily led by QIP proceeds.
* adjusted for revaluation reserve

Whats on track?
M&HCV volumes surged a robust 28% YoY and export volumes too jumped 31.8% YoY
including defence vehicles. Consequently, EBITDA margin catapulted 620bps YoY. Gross
debt (ex-vehicle finance business) declined INR13.3bn to INR42.4bn in FY15.

Market Data
52-week range (INR)

: 77 / 29

Share in issue (mn)

: 2,845.9

M cap (INR bn/USD mn)

: 199 / 3,113

Avg. Daily Vol. BSE/NSE (000) : 18,327.5

Shareholding Pattern (%)


Promoters*

: 38.8

MFs, FIs & Banks

: 12.1

FIIs

: 20.4

Others

: 28.7

*Promoters pledged shares


(% of share in issue)

: 4.9

What needs tracking?


AL reported INR416mn loss at PBT level led by exceptional loss of INR6.1bn pertaining to
subsidiaries (largely AL Nissan Vehicles), offset by INR3.0bn gain on property sale.
Reversal of revaluation reserve on above sale led to higher reported profits by INR 1.4bn.
Forex losses capitalised stood at INR707.8mn, 53% of PAT in FY15 versus INR2.3bn in
FY14 (INR5.7bn cumulative since FY09, 16.4% of adjusted* net worth). Share issue
expenses of INR148mn (11% of PAT) were charged to reserves.
Losses at subsidiaries/ JVs (ex-vehicle finance) continued to riseINR7.8bn in FY15 (FY14:
INR3.9bn). Goodwill (INR6.9bn) and other intangibles (INR5.0bnprimarily technical
knowhow) collectively stood at INR11.9bn, 34% of adjusted net worth.
Avia AL was sold to 49% associate entity AL (UAE) LLC and Albonair continued to be
classified as held for sale (INR257mn invested in FY15; total exposure INR4.1bn).
Standalone operating cash flows, post interest, improved to INR13.6bn in FY15 (FY14:
INR1.2bn), partly led by INR10.8bn rise in payables (FY14: decline of INR3.4bn). Payable
days continued to be higher at 106, although they declined YoY from 114 days in FY14.
We believe a portion of payables is akin to debt (INR7.9bn, 26% of payables) for which AL
paid discounting charge of INR525mn in FY15 (FY14: INR303.6mn).
Consolidated receivables more than 6 months (post due date) rose by INR1.6bn in FY15
to INR2.5bn, 19% of total receivables (FY14: INR919mn, 6.7%) and 7.2% of net worth.
Analysis beyond Consensus (ABC) is our initiative to provide a differentiated perspective to our clients
on various non-routine and intricate issues. This unit of research works independent of the sector/stock
research team and views expressed in this report may vary with that of respective sector/stock analyst.
Edelweiss research is also available on www.edelresearch.com,
1
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

June 23, 2015


Edelweiss Securities Limited

Annual Report Analysis


Other highlights
Other loans & advances rose from INR16.7bn (59% of adjusted net worth) in FY14 to
INR19.6bn (56%) in FY15 primarily led by: (a) increase in balances with customs and excise
from INR1.1bn to INR2.1bn (including provision for doubtful balances of INR594mn - of
which INR451mn was during FY15); (b) MAT credit from INR3.4bn to INR4.3bn; and (c) other
advances from INR4.0bn to INR6.9bn.
Borrowing cost adjusted for forex losses capitalised stood at 11.2% in FY15 versus 9.5% on
reported basis (FY14: 12.5% versus 8.5% reported).
Derivatives exposure rose from INR8.4bn (30% of adjusted net worth) in FY14 to INR17.1bn
(49%) in FY15. Net unhedged payables declined sharply from INR15.4bn (55% of adjusted
net worth) to INR2.9bn (8.4% of adjusted net worth) over the same period, primarily led by
significant increase in derivatives & forex receivables.
Contingent liabilities declined significantly by INR6.5bn to INR4.0bn in FY15 (from 37.6% of
adjusted net worth to 11.6%) led by dip in export obligation under EPCG scheme from
INR8.2bn to INR435mn in FY15.

Key highlights from MD&A

12

While overall commercial vehicle volumes declined 2.8% over the previous year,
M&HCV segments volumes increased by 16%. ALs market share improved from 26.1%
in FY14 to 28.6% in FY15 in the M&HCV segment facilitated by appropriate product mix,
a sustained focus on meeting customer requirements and network expansion initiatives.
M&HCV export volumes grew by 31.7% to 11,218 units from 8,511 units in FY14,
enabled by growth in target export markets.

In the LCV segment, industry volumes contracted 13.4%. However, AL was able to
sustain market share in the small CV (2.0-3.5T) segment supported by sustained
product improvements and variants of DOST, the second largest player in the segment.
The new PARTNER range of products has also achieved significant market share in the
6.0-7.5T segment, its first full year post launch.

AL has turned the spotlight on product development to meet evolving customer


expectations. Its BOSS range has gained leadership in the premium Intermediate
Commercial Vehicles (ICV) segment. BOSS sales have significantly contributed to the
overall market share in the ICV segment.

The CAPTAIN series of next generation Heavy Commercial Vehicles (HCV) has been
launched in select markets. The product has established new benchmarks in reliability,
performance and ride comfort. With economic activity picking up in iron ore and coal
mining, the CAPTAIN range is strategically positioned to exploit growth in these sectors.

The companys defence business gained momentum in FY15 with rise in the number of
domestic kits dispatched as well as substantial export volumes. AL has also won major
tenders from defence establishments with new products this year.

Edelweiss Securities Limited

Ashok Leyland
Profitability analysis
Table 1: Profitability analysis

(INR mn)
Standalone

Particulars
Sales
Raw Materials Consumed
Operating and Admin expenses
Personnel cost
EBITDA
Depreciation
EBIT
Financial Charges
Add: Other income
PBT before exceptional items
Exceptional items
PBT
Tax Expense/(gain)
PAT
Attributable to Minority interest
Profit from associates
PAT

FY14
99,434
76,026
11,746
9,997
1,666
3,770
(2,105)
4,529
665
(5,969)
5,057
(912)
(1,206)
294

%
FY15
100.0 135,622
76.5
99,652
11.8
13,863
10.1
11,840
1.7
10,266
3.8
4,163
(2.1)
6,103
4.6
3,935
0.7
1,245
(6.0)
3,413
5.1
1,009
(0.9)
4,422
(1.2)
1,074
0.3
3,348

294

0.3

3,348

Subsidiary (Derived)
%
100.0
73.5
10.2
8.7
7.6
3.1
4.5
2.9
0.9
2.5
0.7
3.3
0.8
2.5

FY14
15,433
5,359
4,060
3,459
2,555
1,529
1,025
3,526
259
(2,241)
151
(2,090)
521
(2,611)

%
FY15
100.0 17,787.0
34.7
4,774.1
26.3
4,586.9
22.4
3,521.1
16.6
4,905.0
9.9
1,635.8
6.6
3,269.3
22.8
4,787.9
1.7
643.6
(14.5)
(875.0)
1.0 (3,962.5)
(13.5) (4,837.5)
3.4
650.3
(16.9) (5,487.8)

2.5

(2,611)

(16.9)

(5,487.8)

Consolidated
%
FY14
100.0 114,867
26.8
81,385
25.8
15,806
19.8
13,456
27.6
4,220
9.2
5,300
18.4
(1,079)
26.9
8,055
3.6
924
(4.9)
(8,210)
(22.3)
5,208
(27.2)
(3,002)
3.7
(685)
(30.9)
(2,317)
(577)
99
(30.9)
(1,641)

%
FY15
100.0 153,409
70.9 104,426
13.8
18,450
11.7
15,361
3.7
15,171
4.6
5,799
(0.9)
9,372
7.0
8,723
0.8
1,888
(7.1)
2,538
4.5
(2,953)
(2.6)
(416)
(0.6)
1,724
(2.0)
(2,140)
(0.5)
(3,386)
0.1
92
(1.4)
1,339

%
100.0
68.1
12.0
10.0
9.9
3.8
6.1
5.7
1.2
1.7
(1.9)
(0.3)
1.1
(1.4)
(2.2)
0.1
0.9

Source: Company annual report, Edelweiss research

ALs revenue jumped 34% YoY and EBITDA margin catapulted 620bps YoY in FY15 leading to
INR11.0bn EBITDA surge. However, the company continued to post loss at the PAT level
(before minority), although it reduced YoY led by write offs/ impairments. Significant
amount of loss after tax was attributable to minority interest (INR3.4bn) leading to reported
PAT of INR1.4bn in FY15.
Exceptional loss in FY15 stood at INR3.0bn led by a) INR6.1bn provision (includes fixed
assets, non-moving inventory and tax liability) for certain products of subsidiaries (largely
pertains to AL Nissan Vehicles), offset by b) INR3.1bn gain on sale of property, including
revalued portion of gain worth INR1.4bn recorded in earlier years. Receivables outstanding
towards sale of property stood at INR2.0bn as at FY15 end.

Exceptional items led to losses at


PAT level (before minority).
INR3.1bn gain on sale of property
includes INR1.4bn worth
revaluation gain recorded in
previous years

Forex loss capitalised in fixed assets stood at INR707.8mn, 53% of PAT. Share issue expenses
were charged through securities premium under reserves of INR148mn, 11% of PAT.

Table 2: Commission on exports


Particulars
Commission paid in foreign currency
Export revenues
As a % of export revenues

(INR mn)
FY12
FY13
FY14
FY15
1,543
1,067
1,032
1,641
15,404
14,254
12,423
19,090
10.0
7.5
8.3
8.6
Source: Company annual report, Edelweiss research

Commission on exports as a proportion to export turnover rose to 8.6% in FY15. Export


revenues grew by 54% during FY15.

13

Edelweiss Securities Limited

Annual Report Analysis


Subsidiaries performance
Table 3: Subsidiaries performance analysis
Particulars

(INR mn)

FY14 profitability and total exposure


FY15 profitability and total exposure
FY15
Investment Exposure
Investment Exposure
shareholding
Networth Turnover
PAT
Networth Turnover
PAT
and Loans
(%)*
and Loans
(%)*
%

Subsidiary company
Hinduja Leyland Finance
Ashok Leyland Nissan
Vehicle #
Hinduja Tech
Optare UK
Optare Group
Optare plc
Avia Ashok Leyland
Motors s.r.o
Albonair GmbH
Global TVS Bus Body
Builders
Others
Total

58
51

8,042
4,411

5,962
812
10,522 (1,745)

7,785
3,729

23.8
11.4

9,171
(3,131)

62
0
0
75
-

(136)
(1,193)
(1,473)
2,513
1,387

1,187
354
5,373
297

100
67

294
214

700
908

54-100

2,513
16,573

8,143 1,112
10,304 (7,912)

7,785
1,959

19.0
4.8

(85)
(30)
(359)
(18)
(842)

1,154
2,008
645

3.5
6.1
2.0

641
(2,166)
-

1,389
5,835
-

(78)
(300)
-

1,213
1,971
-

3.0
4.8
-

(694)
(36)

3,828
37

11.7
0.1

67
295

1,832
1,423

405
81

3,873
145

9.5
0.4

4,210
(129)
29,511 (3,126)

1,366
20,552

4.2
62.8

349
5,226

3,914
(10)
32,841 (6,702)

567
17,512

1.4
42.7

Source: Company annual report, Edelweiss research


* Exposure is calculated as % of standalone adjusted net worth
# Decline in AL Nissan Vehicles PAT and Investments was led by provision for losses.

Overall performance of subsidiaries (ex-financing business) deteriorated in FY15 led by AL


Nissan Vehicles and the Optare Group.

Table 4: Performance of joint ventures


Name of JV
Nissan Ashok Leyland Powertrain
Nissan Ashok Leyland Technologies
Ashok Leyland John Deere
Construction Equipment
Ashley Alteams
Automotive Infotronics (under
liquidation)
Total

(INR mn)

Proportion Investments
of interest- as at FY14
end
FY15 (%)
49.0
740.5
50.0
260.5

Amt
FY14 (Loss)
Infused in
in JV
FY14
5.1
(49.8)
5.5
(141.6)

Co's share
of (loss)
(24.4)
(70.8)

Amt
Investments
FY15 Co's share
as at FY15 Infused in
(Loss) in JV
of (loss)
FY15
end
740.5
(62.9)
(30.8)
260.5
(195.7)
(97.8)

50.0

1,535.7

432.0

(391.3)

(195.6)

1,860.7

325.0

(591.1)

(295.5)

50.0
-

280.7
15.0

150.0

(99.0)
-

(49.5)
-

355.7
15.0

75.0

(109.9)
-

(54.9)
-

2,832.4

592.5

(681.7)

(340.3)

3,232.4

400.0

(959.5)

(479.1)

Source: Company annual report, Edelweiss research

JVs continued to post lossesINR959.5mn in FY15 (FY14: INR681.7mn)primarily led by


Nissan JV and AL John Deere Construction Equipment. The company further infused
INR400mn in the JVs during the year.

14

Edelweiss Securities Limited

Ashok Leyland
Table 5: Fresh investments in subsidiaries/JVs/associates

(INR mn)
FY15

Fresh investment in FY15


Subsidiaries
Hinduja Tech (formerly Defiance Technologies)
Ashok Leyland Nissan Vehicles Limited (JV earlier)
Global TVS Bus Body Builders (Formerly Irizar TVS)
Gulf Ashley Motor Limited
Subsidiaries held for sale
Albonair GmbH
JVs
Ashok Leyland John Deere Construction Equipment
Ashley Alteams
Total

Stake (%)

Infusion during
the year

Total Exposure

Profit/ (Loss) for


the year

62
51
67
92

394
370
16
44

1,213
1,959
145
176

(78)
(7,912)
81
13

100

257

3,873

405

50
50

325
75
1,480

1,861
356
9,582

(296)
(55)

Source: Company annual report, Edelweiss research

AL made additional investment of INR1.5bn (INR950mn in cash) in above subsidiaries and


JVs in FY15. Further, INR154.5mn via equity and INR239mn by way of preference shares was
infused in HTL (formerly Defiance Technologies) by way of conversion of loan into
investment. Nissan International Holding subscribed to the equity capital of HTL, leading to
dilution of ALs take in the latter from 100% to 62% in FY15.

15

Edelweiss Securities Limited

Annual Report Analysis


Table 6: Total exposure to subsidiaries/ JVs/ associates (ex-Hinduja Leyland Finance)
Particulars

Investment /
Loans

(INR mn)

FY14
Total Exposure to SA
Networth (%)

Investment /
Loans

FY15
Total Exposure to SA
Networth (%)

Investments in subsidiaries
Hinduja Tech (formerly Defiance Technologies)

1,154

3.5

1,213

Ashok Leyland Nissan Vehicles Limited (JV earlier)

3.0

3,729

11.4

1,959

4.8

Global TVS Bus Body Builders (Formerly Irizar TVS Limited)

129

0.4

145

0.4

Ashok Leyland Wind Energy Limited

780

2.4

2,008

6.1

1,971

4.8

494

1.5

355

0.9

8,294

25.3

5,642

13.8

Optare PLC (Associate earlier)


Others
Total (A)
Investments in subsidiaries held for sale
Avia Ashok Leyland
Albonair GmbH
Albonair (I) Pvt Ltd
Total (B)

645

2.0

3,616

11.0

3,873

9.5

211

0.6

211

0.5

4,473

13.7

4,085

10.0

541

1.7

541

1.3

Investment in Associates
Ashok Leyland (UAE) LLC
Others
Total (C)

68

0.2

50

0.1

609

1.9

591

1.4

1,536

4.7

1,861

4.5

Investments in JVs
Ashok Leyland John Deere Construction Equipment
Nissan Ashok Leyland Powertrain Ltd

740

2.3

740

1.8

Others

606

1.9

637

1.6

Total (D)

2,883

8.8

3,238

7.9

Other investments
Hinduja Foundries (earlier fellow subsidiary) - Preference Equity
Investment
Hinduja Foundries - equity investment

3,217

9.8

3,217

7.9

242

0.7

242

0.6

Hinduja Energy India Ltd.

1,871

5.7

1,871

4.6

29

0.1

76

0.2

5,359

16.4

5,406

13.2

21,618

66.0

18,962

46.3

Others
Total (E)
Grand Total (A+B+C+D+E)

Source: Company annual report, Edelweiss research

AL continued to classify Albonair as subsidiary held for sale. In FY15, AL sold its subsidiary
Avia Ashok Leyland (classified as held for sale) to its associate company Ashok Leyland (UAE)
LLC for enterprise value of INR686.5mn (USD11mn), of which INR18.8mn was towards
equity and balance towards loan taken over by AL (UAE) LLC.
The company divested its 48.5% in Ashok Leyland Wind Energy; ergo, the latter has ceased
to be a subsidiary. AL continued to hold balance 11.5% stake in the company.

16

Edelweiss Securities Limited

Ashok Leyland
Table 7:Hinduja Foundries performance analysis
Particulars
Mar 11
Sep 12
(12 mth) (18 mth)
Revenue from operations
5,512
10,317
Total expenditure
4,900
11,503
Operating profit
612
(1,186)
Other income
88
51
Interest exp
373
1,158
Depreciation
242
517
Exceptional loss/(gain)
0
204
PBT
84
(3,014)
Provision for tax
10
(100)
PAT
75
(2,913)

Hinduja Foundries continues to


incur losses and adjusted net
worth continues to deteriorate

Particulars
Net worth-Reported
Less: Redeemable
cumulative Preference
shares
Less: Revaluation reserve
Adjusted Net worth

(INR mn)
Mar 13
Sep 14 Q1&Q2'15
(6 mth) (18 mth)
(6 mth)
3,067
9,991
2,662
3,466
10,788
2,841
(399)
(797)
(180)
12
69
37
401
1,061
407
203
722
287
0
113
162
(991)
(2,624)
(999)
47
0
0
(1,038)
(2,624)
(999)

Mar 11

Sep 12

Mar 13

(12 mth)
4,085

(18 mth)
1,852

(6 mth)
3,073

Total Debt

217
1,888
(1,020)
5,706

Sep 14 Q1&Q2'15
(18 mth)
1,887

(6 mth)
864

967
1,886
(3,251)

3,217
1,886
(2,029)

3,217
1,884
(3,214)

3,217
1,884
(4,237)

6,734

5,758

5,983

5,481

Source: Company annual report, Edelweiss research

Further, above analysis does not include cumulative dividend payable (largely @ 9%p.a on
INR3.0bn worth preference shares) which may further reduce the net worth.

Table 8: Goodwill and intangibles analysis


Particulars
Computer Software
- Acquired
- Developed
Technical Knowhow
- Acquired
- Developed
Intangibles under develop.
Total (A)
% of adjusted net worth
Goodwill on consolidation (B)
Total Intangibles (A+B)
% of adjusted net worth

Goodwill pertaining to subsidiaries


declined to INR6.9bn, 20% of
adjusted net worth (FY14:
INR7.8bn, 28%)

(INR mn)
Additions/ Amortisation/
FY15 (C)
FY13 FY14 (C)
adjustments
adjustments

368
1,178

278
1,082

142

(173)
(133)

462
1,627
1,263
4,898
15.5
4,898
15.5

1,625
2,301
264
5,550
19.7
7,817
13,367
47.5

10
71
239
462

(269)
(365)
(940)

462

246
949

1,366
2,007
503
5,071
14.5
(961) 6,857
(1,901) 11,927
34.2

Source: Company annual report, Edelweiss research

Intangibles rose by INR462mn in FY15 led by increase in intangibles under development.

17

Edelweiss Securities Limited

Annual Report Analysis


Net worth analysis
Table 9: Net worth accretion - Consolidated
Particulars
Opening shareholders' fund
Add
Profit for the year
Issue of shares (incl ESOP and premium theron)
Less
Adjustment from Revaluation reserve
Change in group's interest
Expenses on issue of shares/ debentures
Exchange difference charged to FCMITDA and hedging reserves
Dividend
Others
Closing shareholders' fund

Consolidated net worth rose by


INR5.2bn primarily led by QIP
proceeds received in FY15
Dividend payout exceeded profits
generated during the year
Reversal of revaluation reserve on
property sale led to higher
reported profits by INR 1.4bn.

(INR mn)
FY15
39,892
1,339
7,998
1,521
810
148
82
1,541
14

9,337

4,116
45,113

Source: Company annual report, Edelweiss research

Net worth rose by INR7.9bn led by equity proceeds, however declined by INR2.8bn due to
dividend, adjustments to revaluation reserve and forex losses booked in hedging reserve/
FCMITDA.
Outstanding revaluation reserves stood at INR10.2bn, 22.6% of reported net worth (FY14:
INR11.7bn, 29.4%). Reserves were further adjusted by INR810mn in FY15 led by change in
the groups interest due to dilution in Hinduja Leyland Finance.

18

Edelweiss Securities Limited

Ashok Leyland
Table 10: Adjusted net worth analysis

(INR bn)

Particulars
Reported Consolidated Networth (NW) --------------------A
Adjustments to NW:
Revaluation reserve
Goodwill (considering most subsidiaries are loss making)
Forex loss capitalised since FY 08 (net of average depreciation) **
Adustments to NW ----------B
Adustments as % of NW
Adjusted NW (A-B)---------------C
Intangibles and investments in loss making entities
Intangibles (software, technical knowhow)
Subsidiaries held for sale-not consolidated (Albonair & Avia)
Investments in loss making sub (net off GW considered above)- excludes
Hinduja L Finance
Financial guarantees for associates & Sub
Others (Hinduja Foundaries/Hinduja Energy, John Deere)
Intangibles and investments in loss making entities-----D
Intangible & investements in loss making entities as % of Adj. NW
Not adjusted in above
Carrying value of MAT (assuming recoverable in future)
MTM Gains on Indusind Bank shares
QIP proceeds
Potential upside on 57.5% stake in Hinduja Leyland Finance @ carrying cost of
INR 7.8bn (Book value @ INR9.2bn for 100%)
Net addition to NW on account of above

FY14
Amount
39.9

FY15
Amount
45.1

D/E
1.4

11.7
7.8
5.6

D/E
0.9

10.2
6.9
5.7
25.1
63%
14.8

22.8
51%
22.3

3.8

5.5
4.5

5.1
4.1

0.5

1.8
8.2

1.6
8.6
20.5
139%

19.3
87%

3.3
2.5
6.7

4.3
4.5
-

12.5

1.9

8.8

Source: Company annual report, Edelweiss research


** Forex losses capitalised is In line with option available under amended AS-11.

Cash flow analysis


Table 11: Cash flow analysis

(INR mn)
Standalone

Particulars
Profit before tax
Non-operating expense
Non-cash adjustments
Direct taxes paid
Cash profit after tax
(Increase)/Decrease in trade and other
receivables
(Increase)/Decrease in inventories
(Increase)/Decrease in loans and advance
(Increase)/Decrease in other assets
Increase/(Decrease) in liabilities and
provisions
Increase in working capital
Net cash from operating activities
Interest expenses paid
Net cash from operating activities post
interest
Less: Capex (other than exceptional items)
Free cash flow

FY14

FY15
(912)

(1,236)
3,842
(297)

4,422
373
6,425
(502)

1,396
1,168

10,718
440

Subsidiary (derived)
Consolidated
FY14
FY15
FY14
FY15
(2,090)
(4,838)
(3,002)
(416)
177
4,598
(1,059)
4,971
1,700
6,270
5,542
12,695
(669)
(614)
(966)
(1,115)
(882)
5,417
514
16,135
1,455

(152)

2,623

288

7,073
(845)
147

(2,098)
(1,929)
(272)

(501)
(3,188)
(885)

983
(19,452)
1,453

6,572
(4,033)
(737)

(1,116)
(21,381)
1,182

(3,376)

10,806

(2,603)

(958)

(5,978)

9,848

4,168
5,564
(4,358)

6,948
17,666
(4,056)

(5,722)
(6,604)
(631)

(18,126)
(12,709)
(3,975)

(1,554)
(1,040)
(4,988)

(11,179)
4,956
(8,031)

1,206

13,609

(7,235)

(16,684)

(6,028)

(3,075)

(2,071)
(864)

(2,059)
11,551

(1,831)
(9,066)

(274)
(16,958)

(3,902)
(9,930)

(2,333)
(5,408)

Source: Company annual report, Edelweiss research

19

Edelweiss Securities Limited

Annual Report Analysis


Operating cash flow, post interest at the standalone level, improved from INR1.2bn in FY14
to INR13.6bn in FY15 partly due to increase in profitability and partly led by significant
increase in liabilities, including payables. Trade payable at the standalone level rose from
INR22.1bn in FY14 to INR28.3bn in FY15.
Loans & advances rose at the consolidated level due to increase in Hinduja Leyland
Finances receivables to INR15.0bn in FY15 (FY14: Not available separately).

Table 12: Cash conversion cycle (days)*


Particulars
Inventory days
Trade Receivable days
Material Advance days
Less: Trade payable days
Less: Advance from customer days
Cash conversion cycle

Cash conversion cycle improved


from 1 day to negative 22 days.
Though payable days fell YoY, they
continued to be higher at 106 days

FY13
75
42
5
(98)
23

FY14 (C)
68
44
8
(114)
(5)
1

FY15 (C)
54
32
5
(106)
(7)
(22)

Source: Company annual report, Edelweiss research


* Calculated on closing basis

Trade payables of INR30.8bn at the consolidated level include acceptances, which in our
view are in the nature of debt. Acceptances stood at INR7.9bn in FY15 (FY14: INR6.6bn) for
which bill discounting charges of INR525mn were charged to the P&L in FY15 versus
INR303.6mn in FY14.

Table 13: Receivables analysis


Particulars
Receivables > than 6 months
Other receivables
Total
Receivables > than 6 months as % of total

Receivables outstanding for more


than 6 months rose significantly in
FY15 by INR1.6bn, pertaining to
receivables from state government

Standalone
FY14
FY15
871
2,414
12,119
10,163
12,990
12,577
6.7
19.2

(INR mn)
Consolidated
FY14
FY15
919
2,531
12,892
11,007
13,811
13,538
6.7
18.7

Source: Company annual report, Edelweiss research

Table 14: Other loans and advances analysis


Particulars
Loans to related parties
Balances with customs and excise.
Advances to tax and statutory authorities
MAT Credit
Capital advances
Material advances
Other advances
Less: Provisions
Total
As % of adjusted net worth

FY14
1,420
1,135
4,741
3,367
437
1,770
4,011
(145)
16,737
59

(INR mn)
FY15
868
2,052
4,578
4,289
107
1,417
6,925
(598)
19,639
56

Source: Company annual report, Edelweiss research

20

Other loans/advances rose from INR16.7bn in FY14 to INR19.6bn led by increase in


balances with statutory authorities, MAT credit and other advances.

Edelweiss Securities Limited

Ashok Leyland

Provisions include write off pertaining to balances with customs and excise authorities
worth INR594mn as on FY15 versus INR143mn in FY14.

MAT credit rose from INR3.4bn (12% of adjusted net worth) in FY14 to INR4.3bn (12%)
in FY15.

Debt and borrowings


Table 15: Debt and borrowing cost analysis
AL capitalised forex losses of
INR708mn, however it declined
YoY as compared to INR2.3bn in
previous year.

Particulars
Loan funds
Interest expense
Interest capitalized
Total interest
Exchange losses capitalized
Interest + Exch. Loss capitalized
Borrowing cost (%)*
Borrowing cost incl exch loss (%)*

Adjusted borrowing cost including


forex loss stood at 11.2% versus
12.5% in FY14 due to lower forex
loss

(INR mn)
Consolidated (ex-financing business)
FY14 (C)
FY15 (C)
55,663
42,429
4,581
4,046
138
4
4,719
4,051
2,257
708
6,976
4,758
8.5
9.5
12.5
11.2

Source: Company annual report, Edelweiss research


* Calculated on closing basis
Net unhedged payables declined sharply from INR15.4bn in FY14 (55% of adjusted net
worth) to INR2.9bn (8.4% of adjusted net worth) primarily led by significant increase in forex
receivables (including for sales, loans, cash balances, etc) and derivatives.
Derivatives exposure rose from INR8.4bn in FY14 to INR17.1bn in FY15.

Contingent liabilities and commitments analysis


Table 16: Contingent liabilities and commitments
Particulars
FY13
Export obligation under EPCG Scheme
Claims not acknowledged as debt
654
Capital commitments
1,203
Guarantees
1,350
Others
0
Total
3,207
Adjusted* net worth
31,585
% of net worth
10.2

Export obligations under EPCG


scheme declined sharply to
INR435mn in FY15
Claims not acknowledged as debt
doubled to INR2.2bn in FY15

FY14 (C)
8,227
1,168
917
16
246
10,573
28,153
37.6

(INR mn)
FY15 (C)
435
2,215
978
17
393
4,038
34,895
11.6

Source: Company annual report, Edelweiss research

21

Edelweiss Securities Limited

Annual Report Analysis


Table 17: Summary financials

(INR mn)

Particulars
Sales
Total income
EBITDA
EBITDA margin (%)
RoE (%)
RoCE (%)
Depreciation
Financial costs
Net profit
Equity shareholders' funds
Loan funds
Net Debt
Net fixed assets (excl CWIP)
CWIP
Goodwill on consolidation
Current assets loans and advances
Current liabilities and provisions
Net current assets
Cash and cash equivalent
Cash flow from operating activities
Cash flow from investing activities
Cash flow from financing activities
Net cash flows
CAPEX
Working capital investments

FY11
111,771
112,216
12,137
10.9
16.6
16.0
2,674
1,889
6,313
39,630
25,683
23,887
46,338
3,580
38,042
35,397
2,645
1,795
5,914
(9,177)
(136)
(3,400)
(3,526)
(4,914)

22

FY12
129,043
129,447
12,561
9.7
13.8
13.6
3,528
2,553
5,660
42,123
30,979
30,653
49,135
5,482
42,713
40,386
2,327
326
11,473
(10,575)
(2,411)
(1,513)
(6,978)
218

FY13
124,812
125,436
8,765
7.0
3.9
6.9
3,808
3,769
4,337
44,551
43,554
43,415
52,819
6,889
42,826
36,785
6,041
139
7,283
(11,643)
4,170
(190)
(6,492)
(485)

FY14 (S)
FY14 (C)
FY15 (S)
FY15 (C)
99,434
114,867
135,622
153,409
100,596
115,792
136,867
155,297
1,169
4,220
10,266
15,171
1.2
3.7
7.6
9.9
(6.8)
(12.2)
5.61
7.8
(1.6)
(0.1)
8.3
8.6
3,770
5,300
4,163
5,799
4,529
8,055
3,935
8,723
294
(1,641)
3,348
1,339
44,479
39,892
51,187
45,113
46,903
85,000
33,497
90,699
46,786
83,865
25,984
81,648
52,556
58,434
56,599
67,909
1,815
2,965
1,201
2,161
7,817
6,857
38,554
58,758
39,417
66,626
31,928
38,452
42,521
50,222
6,626
20,306
(3,104)
16,404
117
1,134
7,513
9,051
5,564
(1,040)
17,666
4,956
(1,101)
(3,773)
1,117
(1,257)
(4,486)
4,613
(11,792)
3,807
(23)
(200)
6,991
7,506
(2,071)
(3,902)
(2,059)
(2,333)
4,168
(1,554)
6,948
(11,179)
Source: Company annual report, Edelweiss research

Edelweiss Securities Limited

ANALYSIS BEYOND CONSENSUS


THE NEW ABC OF RESEARCH
Eicher Motors | Annual Report Analysis

Eicher Motors (Eicher) CY14 annual report analysis highlights another


blockbuster year with robust revenue and profitability, led by record high
Royal Enfield (RE) volumes and margins. EBITDA margin catapulted 580bps
YoY to 24.2% for CY14. Though VECVs performance remained subdued,
consistent market share gains continued. Cash flow generation (adjusted
for acceptances) stood robust at INR10.4bn versus INR7.1bn in CY13.
Superior capital allocation led to stable and healthy RoE/ RoCE despite the
company being in expansion phase. Related party transactions include
brand fee payments of INR269.4mn (2.7% of PAT) at the consolidated level.

Whats on track?
Standalone (RE) business continued to log robust operating performance. RE volumes
surged 70% YoY to record high of more than 3lakh units, led by capacity expansion and
stronger demand. Operating profit and margin surged as well to record high of 24.2% in
CY14. The RE business is likely to continue to surge spurred by further capacity expansion
plans and if the robust demand persists.
Working capital cycle improved YoY from (17) days in CY13 to (25) days in CY14, largely
led by improvement in inventory and receivable days. Acceptances supported working
capital cycle, adjusted for which cash conversion cycle improved to (7) days in CY14
(CY13: 1 day).

Market Data
52-week range (INR)

: 17,200 / 5,460

Share in issue (mn)

: 27.1

M cap (INR bn/USD mn)

: 435 / 6,939

Avg. Daily Vol. BSE/NSE (000) : 55.0

Shareholding Pattern (%)

Promoters*

: 55.0

MFs, FIs & Banks

: 4.7

FIIs

: 19.5

Others

: 20.8

*Promoters pledged shares

: Nil

(% of share in issue)

What needs tracking?


Subdued CV business (VECV) remained a drag on consolidated profitability. CV volumes
declined 1.6% YoY; however, market share continued to rise.
Overall EBITDA margin of subsidiaries (largely VECV) declined 110bps YoY led by higher
operating and employee expenses proportion to sales.
R&D expenditure details at the consolidated level were not available. Expenditure
capitalised under product designs and prototypes (including under development) stood
at INR1.2bn in CY14. However, R&D capitalisation ratio has been declining over the years-from 73% in CY11 to 59% in CY13.
The company invested additional INR0.8bn in joint venture company Eicher Polaris and
total investment as at CY14 stood at INR1.1bn. With advanced stages of project
completion, the launch in CY15 is keenly awaited.
Further, expansion in international markets will be the key growth driver going forward
as envisioned in the annual report.

Analysis beyond Consensus (ABC) is our initiative to provide a differentiated perspective to our clients
on various non-routine and intricate issues. This unit of research works independent of the sector/stock
research team and views expressed in this report may vary with that of respective sector/stock analyst.
Edelweiss research is also available on www.edelresearch.com,
1 First Call, Reuters and Factset.
Bloomberg EDEL <GO>, Thomson

March 16, 2015


Edelweiss Securities Limited

Annual Report Analysis


Other highlights

MAT credit outstanding rose to INR1.9bn in CY14, 8% of net worth (CY13: INR1.4bn).
Effective tax rate jumped from 22% in CY13 to 29% in CY14.

Contingent liabilities increased to INR4.0bn, 16% of net worth (CY13: INR2.1bn, 10%),
largely led by sales tax matters.

Key highlights from MD&A

Eicher clocked its highest ever revenue and operating profit. The companys EBIT
margin, at 10.2%, was also the highest ever. At 22.5%, REs EBIT margin is better than
any other motorcycle company in the world and possibly the highest compared to any
automotive brand globally as well.

With over 95% market share in this market in India, which is growing at more than 50%
each year, RE has created this category in India. Plan is to reach a capacity of 4,50,000
units in FY15 and over 6,00,000 in FY16 from current manufacturing facilities.

RE added nearly 100 new dealerships, taking the total dealership network close to 400.
It is planning to continue to expand its distribution network over the next few years.

Company has commenced strategic entry into international markets where it has been
selling motorcycles for decades, but with considerably low support from our side.

Markets such as US, UK and Europe are highly influential, and success therein is crucial
for the company to gain currency and credibility as it works towards achieving global
leadership in the mid-sized segment.

VECVs EBIT margin at 3.7% was the best amongst Indian CV companies in 2014 and its
lean business model lends it the distinction of being the only CV company to remain
profitable in every quarter during the longest downturn in recent decades for the
Indian commercial vehicle industry.

50:50 joint venture with Polaris Industries, Eicher Polaris Private (EPPL), is in advanced
stages of project completion, with the launch of the four-wheeled personal vehicle
planned for the second half of this year.

Profitability analysis
Table 1: Standalone versus consolidated profitability
Particulars
Sales
Raw Materials Consumed
Operating and
Administrative expense
Personnel cost
EBITDA
Depreciation
EBIT
Financial Charges
Other income
EBT

CY13
17,025

Standalone
%
CY14
100.0 30,312

(INR mn)
%
100.0

Subsidiary/JV (Derived)
CY13
%
CY14
%
51,073 100.0 57,071 100.0

CY13
68,098

Consolidated
%
CY14
100.0 87,383

%
100.0

10,598

62.3

18,076

59.6

35,789

70.1

39,583

69.4

46,387

68.1

57,660

66.0

2,180

12.8

3,291

10.9

7,066

13.8

8,688

15.2

9,246

13.6

11,979

13.7

1,109
3,137
304
2,833
3
801
3,632

6.5
18.4
1.8
16.6
0.0
4.7
21.3

1,609
7,336
502
6,834
17
1,163
7,980

5.3
24.2
1.7
22.5
0.1
3.8
26.3

4,224
3,995
996
2,998
76
152
3,074

8.3
7.8
2.0
5.9
0.1
0.3
6.0

24

4,987
8.7
5,333
7.8
6,596
7.5
3,812
6.7
7,132
10.5 11,148
12.8
1,697
3.0
1,300
1.9
2,198
2.5
2,116
3.7
5,831
8.6
8,950
10.2
79
0.1
98
0.1
81
0.1
(89)
(0.2)
953
1.4
1,074
1.2
1,946
3.4
6,706
9.8
9,926
11.4
Source: Company annual report, Edelweiss research

Edelweiss Securities Limited

Eicher Motors
Robust volume growth RE segment led to surge in revenue and profitability. RE volumes
catapulted 70% YoY to 302,592 including exports, which jumped 46% YoY to 6,221.
Higher demand and capacity expansion led to significant increase in revenue. Standalone
(RE) EBITDA margin expanded 580bps to an all time high of 24.2% due to significant
operating leverage kicking in.
VECVs performance remained subdued with EBITDA margin declining 110bps YoY. Although
raw material cost as proportion to sales declined YoY, operating and employee expenses
dented EBITDA margin YoY.

Despite dismal performance of


CV segment, Eichers market
share has jumped consistently
over past 5-7 years

15.0

48,000

13.2

36,000

11.4

24,000

9.6

12,000

7.8

(%)

(Volumes)

Chart 1: VECV-Market share


60,000

CY08

CY09

CY10

CY11

Trucks/ Buses volumes

CY12

6.0

CY13

Mkt share (%)

Source: Company annual report, Edelweiss research

Cash flow analysis


Table 2: Cash flows analysis
Particulars
Profit before tax
Non-operating expense
Non-cash adjustments
Direct taxes paid
Cash profit after tax
Changes in receivables
Changes in inventories
Changes in Loans & Advances
Changes in trade payables
Changes in other liabs and payables
Increase in working capital (ex
Acceptances)
Increase in acceptances
Increase in working capital
Net cash from operating activities
Interest expenses paid
Net cash from operating activities
post interest
Capital expenditure
Free cash flows

(INR mn)
Standalone
Subsidiary (derived)
Consolidated
CY13
CY14
CY13
CY14
CY13
CY14
3,632
7,980
3,074
1,946
6,706
9,926
(790)
(1,096)
(41)
237
(831)
(860)
304
502
996
1,697
1,300
2,198
(780)
(2,255)
(724)
(555)
(1,504)
(2,810)
2,366
5,131
3,305
3,324
5,671
8,455
(59)
14
(607)
(511)
(666)
(497)
(684)
(613)
305
(574)
(380)
(1,187)
(254)
(298)
(98)
(1,010)
(351)
(1,308)
1,157
1,387
667
1,129
1,824
2,516
869
937
(347)
862
522
1,799
1,029

1,428

(80)

(105)

948

1,323

282
1,311
3,676
(3)

301
1,729
6,860
(17)

261
181
3,486
(77)

396
291
3,615
(81)

543
1,491
7,162
(80)

697
2,020
10,475
(98)

3,673

6,843

3,409

3,534

7,082

10,377

(1,388)
2,286

(3,699)
3,144

(5,667)
(2,258)

(5,983)
(2,449)

(7,054)
28

(9,682)
695

Source: Company annual report, Edelweiss research


25

Edelweiss Securities Limited

Annual Report Analysis


Cash flow generation continued to be robust with operating cash flow, post interest and
acceptances, rising from INR7.1bn in CY13 to INR10.4bn in CY14.
Working capital requirements rose YoY by INR1.3bn, partly supported by increase in
acceptances of INR697mn, adjusted for which it rose by INR2.0bn. However, it largely
reflects growth in the business as working capital cycle has improved over the past 2 years.

Cash conversion cycle, adjusted


for acceptances improved to (7)
days in CY14 versus CY13
primarily led by lower inventory
and receivable days

Table 3: Average cash conversion cycle (days)


Particulars
CY10
Inventory days
29
Trade Receivable days
20
Less: Payable days
(69)
Less: Advance from customer days
(3)
Add: Advance to supplier days
Cash conversion cycle
(23)
Add: Acceptance days
12
Adjusted cash conversion cycle
(11)

CY11
31
19
(65)
(3)
3
(14)
16
2

CY12
34
23
(65)
(5)
5
(8)
17
9

CY13
37
26
(78)
(7)
5
(17)
18
1

CY14
34
24
(79)
(8)
4
(25)
18
(7)

Source: Company annual report, Edelweiss research

Earnings to cash conversion


CY11
3,966
3,145
3,088
640
1,425
2,303
137
53

CY12
4,921
5,050
3,243
822
1,366
2,698
187
92

CY13
7,082
6,540
3,939
1,300
953
4,287
153
92

(INR mn)
CY14
10,377
9,680
6,154
2,198
1,074
7,277
133
87

Source: Company annual report, Edelweiss research

Chart 2: Earnings to cash ratio


200.0
160.0
120.0

(%)

Earnings to cash conversion


continues to be robust and
consistently above 100%,
although the ratio has declined
over the past 2 years

Table 4: Earnings to cash conversion ratio


Particulars
OCF post interest
OCF adjusted for acceptances (A)
Profit after tax (PAT)
Depreciation
Other income
PAT + Depreciation - Other income (B)
Earnings to cash conversion ratio - adjusted
OCF to EBIDTA - Adjusted

80.0
40.0
0.0

CY11

CY12

Earnings to cash conversion ratio - adjusted

CY13

CY14
OCF to EBIDTA - Adjusted

Source: Company annual report, Edelweiss research


26

Edelweiss Securities Limited

Eicher Motors
R&D spends
Table 5: R&D expenditure - Consolidated
Particulars
CY11
R&D - capitalised
1,789
R&D - revenue
672
Total R&D expense
2,460
Revenue
56,844
Total R&D as % of revenue
4.3
% of R&D capitalised
73

R&D capitalisation ratio to total


R&D spends has declined over
past few years. Details for CY14
were not available at
consolidated level

CY12
1,373
908
2,282
63,899
3.6
60

CY13
1,298
907
2,204
68,098
3.2
59

(INR mn)
CY14

Not
available

Source: Company annual report, Edelweiss research

Total expenditure capitalised as product designs and prototypes under intangibles (incl
under development) stood at INR1.2bn in CY14.

Table 6: R&D expenditure - Standalone


Particulars
CY11
R&D - capitalised
56
R&D - revenue
105
Total R&D expense
160
Revenue
6,715
Total R&D as % of revenue
2.4
% of R&D capitalised
65

R&D spends at standalone level


declined as % of revenue along
with R&D capitalisation ratio in
CY14

CY12
40
168
207
10,493
2.0
81

CY13
109
209
318
17,025
1.9
66

(INR mn)
CY14
148
193
340
30,312
1.1
57

Source: Company annual report, Edelweiss research

Brand ownership analysis and comparison


Table 7: Brand ownership A comparative analysis
Company
Brand owner
Remarks/ Extracts from annual report
Eicher Motors
Eicher Goodearth
Company uses 'Eicher' brand and pays brand fees to Eicher Goodyear Pvt Ltd (EGPL),
Pvt Ltd.
a promoter entity.
Tata Motors
Tata Sons
The Company uses the Tata brand, which has been licensed to the Company by
(Promoter)
Tata Sons Limited. The Companys believes that establishment of the Tata word
mark and logo mark in India and world over, is material to its operations.
Maruti Suzuki
Suzuki Motor
The Company benefits from the parent, Suzuki Motor Corporations expertise in
Corporation
designing models that excel in functionality, fuel efficiency, body styling and
(Holding company)
driving pleasure, all this while meeting the customers cost aspirations.
JSW Steel
JSW Investment Pvt
The JSW brand is owned by JSW Investments Private Limited (JSWIPL), a promoter
Ltd (Promoter)
group company. FY14 annual report proposed a special resolution to enter into a
contract, as a licensee, with JSW Investments Private Limited as the licensor, for a
license to use the JSW brand for an annual fee of 0.25% of revenue w.e.f. April 1,
2014.
Havells India
QRG Enterprises Ltd
Havells entered into a revised Trademark License Agreement with QRG Enterprises
(Promoter group
Limited (one of the promoter companies), pursuant to which the brand Havells
entity)
will be transferred to the Company for no consideration with effect from 1st April
2016.
Source: Company annual report, Edelweiss research

27

Edelweiss Securities Limited

Annual Report Analysis


Table 8: Brand fees paid/ payable
Particulars
Standalone
Brand fees
As % of PBT
Consolidated
Brand fees
As % of PBT

CY11

CY12

CY13

(INR mn)
CY14

0.0%

26.2
1.5%

42.3
1.2%

75.4
0.9%

207.0
3.1%

253.2
4.2%

245.1
3.7%

269.4
2.7%

Source: Company annual report, Edelweiss research

Related party transactions include brand fee payments to Eicher Goodearth (EGPL, a
promoter entity) of INR75.4mn (CY13: INR42.3mn) at the standalone level. On consolidated
level, payments stood at INR269.4mn, 2.7% of PBT (CY13: INR245.1mn, 3.7% of PBT).

Capital allocation
Table 9: Capital allocation
Particulars
Sales
EBITDA
EBITDA margin (%)
ROE (%)
ROCE (%)
Net fixed assets (Ex CWIP)
CWIP
Fixed asset turnover ratio (x)
Equity shareholders' funds (A)
Loan funds (B)
Total capital employed (A+B)
Debt Equity Ratio (x)

Capital allocation continues to be


superior, and RoE & RoCE
continued to be healthy despite
capex and declining asset
turnover

Fixed asset turnover ratio has


declined the over years due to
significant capex as Eicher is in
expansion mode

CY10
43,971
3,569
8.1
16.4
33.9
3,844
703
11.4
12,321
956
13,278
0.1

CY11
56,844
5,894
10.4
22.7
46.6
5,044
3,523
11.3
14,931
432
15,364
0.0

CY12
63,899
5,490
8.6
20.0
36.2
9,918
5,044
6.4
17,549
389
17,938
0.0

CY13
68,098
7,132
10.5
20.7
34.5
16,561
4,636
4.1
20,554
839
21,393
0.0

(INR mn)
CY14
87,383
11,148
12.8
26.9
42.5
23,093
4,188
3.8
25,159
584
25,742
0.0

Source: Company annual report, Edelweiss research

30

40.0

24

30.0

18

20.0

12

10.0

(%)

50.0

0.0

CY10

CY11

Total capital employed

CY12

CY13

EBITDA margin (%)

CY14
ROE (%)

(INR bn)

Chart 3: Capital allocation

ROCE (%)

Source: Company annual report, Edelweiss research

28

Edelweiss Securities Limited

Eicher Motors
Chart 4: RoCE de-composed
90.0
72.0

(RoCE %)

Consolidated RoCE remained


healthy as RE segments RoCE
has surged significantly in recent
years
CV segments RoCE (derived) has
remained subdued over past few
years

54.0
36.0
18.0
0.0
CY10

CY11

Royal Enfield ROCE

CY12
VECV ROCE

CY13

CY14

Consolidated ROCE

Source: Company annual report, Edelweiss research

Table 10: Summary financials


Particulars
Sales
Total income
EBITDA
EBITDA margin (%)
RoCE
RoE
Depreciation
Financial costs
Net profit
Equity shareholders' funds
Loan funds
Net fixed assets
CWIP
Current assets loans and advances
Current liabilities and provisions
Net current assets
Cash flow from operating activities
Cash flow from investing activities
Cash flow from financing activities
Net cash flows
CAPEX
Working capital investments

CY10
43,971
45,247
3,569
8.1
33.9
16.4
573
95
1,889
12,321
956
4,547
20,500
9,332
11,168
3,360
(1,921)
(689)
750
(1,315)
374

CY11
56,844
58,269
5,894
10.4
46.6
22.7
640
77
3,088
14,931
432
8,567
2,233
26,819
12,846
13,973
4,050
(3,380)
(1,137)
(467)
(4,173)
(219)

CY12
63,899
65,265
5,490
8.6
36.2
20.0
822
38
3,243
17,549
389
14,962
2,791
26,386
15,323
11,063
4,825
(7,732)
(974)
(3,880)
(7,820)
391

(INR mn)
CY13
CY14
68,098
87,383
69,051
88,458
7,132
11,148
10.5
12.8
34.5
42.5
20.7
26.9
1,300
2,198
79
98
3,939
6,154
20,554
25,159
839
584
21,197
27,281
1,253
2,363
29,113
30,331
19,037
24,192
10,075
6,139
7,162
10,475
(7,898) (10,872)
(474) (1,622)
(1,209) (2,020)
(7,054) (9,682)
1,491
2,020

Source: Company annual report, Edelweiss research

29

Edelweiss Securities Limited

ANALYSIS BEYOND CONSENSUS


THE NEW ABC OF RESEARCH
Hero MotoCorp| Annual Report Analysis

Hero MotoCorps (HML) FY15 annual report analysis highlights decline in


depreciation cost offsetting fall in EBITDA margin YoY. Amortisation of
technical knowhow/ export licence (towards royalty to Honda) dipped
from INR8.1bn in FY14 to INR2.0bn in FY15, being last year of amortisation.
R&D cost charged to P&L for HML stood at INR1.3bn, 0.5% of sales, and for
peers it ranged from 1.0-1.5% of sales. HML provided INR1.5bn towards
impairment of investment in Erik Buell Racing (EBR49% associate) which
filed winding up petition in FY15. OCF, post interest, declined to INR21.7bn
(FY14: INR29.5bn) and adjusted for royalty payment to Honda it stood at
INR18.9bn (FY14: INR22.7bn). Significant cash on balance sheet impacted
RoE negatively, although YoY cash balance fell to INR30.6bn, 47% of net
worth (FY14: INR42.1bn, 75%). Average yield on cash stood at 13% and
other income constitutes 14.3% of PBT (FY14: 15.5%). Purchases from
related parties jumped to INR22.6bn, 11.4% of raw material costs (FY14:
INR19.2bn, FY13: INR9.1bn). HML has embarked on a global expansion plan
till 2020 with capex of over INR50bn to push exports and is targeting 12mn
unit sales by 2020 (FY15: 6.6mn).

Market Data

52-week range (INR)

: 3,271 / 2,252

Share in issue (mn)

: 199.7

M cap (INR bn/USD mn)

: 478 / 7,277

Avg. Daily Vol. BSE/NSE (000) : 676.1

Shareholding Pattern (%)

Promoters*

: 34.6

MFs, FIs & Banks

: 13.4

FIIs

: 38.5

Others

: 13.5

*Promoters pledged shares

: Nil

(% of share in issue)

Whats on track?
Healthy improvement of 6% YoY in volume (FY14: 3%, FY13: -3%) led to 9% revenue
growth in FY15.

What needs tracking?


Depreciation charge fell from INR11.1bn (4.4% of revenue) in FY14 to INR5.4bn (2%) in
FY15 led by lower depreciation on technical knowhow at INR2.0bn (FY14: INR8.1bn).
HML, in FY11, had agreed to pay INR25.6bn towards technical knowhow/ export licences
and amortised it on straight line basis over 42 months (ending in June 2014).
The company, in FY13, had invested INR1.5bn in EBR, which in FY15 filed a winding up
petition due to its inability to honour outstanding creditors. Consequently, HML in FY15
made a provision for diminution in value of investment made in EBR worth INR1.5bn.
Cash and investments contributed significant chunk to net worth and stood at INR30.6bn,
47% (FY14: INR42.1bn, 75%), on which average yield stood at 13% (FY14: 10.8%). Other
income stood at INR4.9bn, 14.3% of PBT (FY14: INR4.4bn, 15.5%).
Cash conversion cycle stood flattish YoY at (17) days as increase in receivables days was
offset by higher payable days.
Transactions with related parties (largely Rockman and A.G. Industries) have jumped
since FY13 with net purchases & expenses rising from INR9.1bn in FY13 (5.3% of raw
material cost) to INR19.1bn (10.5%) in FY14 and INR22.6bn (11.4%) in FY15.
Analysis beyond Consensus (ABC) is our initiative to provide a differentiated perspective to our clients
on various non-routine and intricate issues. This unit of research works independent of the sector/stock
research team and views expressed in this report may vary with that of respective sector/stock analyst.
Edelweiss research is also available on www.edelresearch.com,
1
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

October 06, 2015


Edelweiss Securities Limited

Annual Report Analysis


Outstanding derivatives position (gross) declined from INR7.2bn in FY14 to INR1.5bn in FY15
and unhedged payables also fell from INR4.8bn to INR0.9bn due to fall in payables to
erstwhile JV partner Honda as per the new licence agreement in 2011.
Our comparative analysis indicates that on most parameters (margins, profitability, return
ratios, cash flows, etc) HML scores lower than Bajaj Auto, but is superior to TVS. However,
Bajaj Autos RoE and RoCE have slipped significantly versus peers.
HMLs EBITDA margins have been stable at 10.0-12.5% over the past 5 years. Though RoE/
RoCE have been robust, they have been declining since FY11. Surplus cash continues to
impact RoE and stood lower by 13.3% in FY15 due to huge cash balance.
Contingent liabilities stood at INR41mn in FY15 (FY14: INR292.4mn) and commitments rose
to INR8.2bn in FY15 (FY14: INR4.6bn).

MD&A: Key highlights


Vision 2020: By 2020, HML aims to surpass 100mn units in cumulative production with
annual bike and scooter sales of 12mn. Plans to have more than 20 manufacturing and
assembly plants globally with sales in more than 50 countries by that year.
Expansion roadmap: Lined up total investment of over INR50bn (USD800mn) globally. It
includes manufacturing plants in Colombia and Bangladesh. Moreover, new plants are
coming up at Gujarat and Andhra Pradesh, and the Hero Global Centre for Research &
Design at Kukas, Rajasthan. By FY17 end, total capacity will be ramped up to 10mn units
from current 7.65mn. This does not include the sixth plant in Andhra Pradesh, land for
which is being acquired.
Volumes from HMLs global business crossed the 200,000 mark during FY15 and the
company is on track to achieve its objective of being present in 50 global markets by 2020. It
remains bullish on the 2-wheeler business, not just in India, but overseas as well. HML is
pumping in over INR30bn (USD470mn) in different areas to catapult into next growth stage.
HMLs parts business is now in excess of INR20bn (USD313mn) and is slated to clock a
turnover of USD1.0bn. By applying industry-defining technologies, the company is
overhauling management of this business. Positive customer relationships and profitability
outcomes from this realignment should start accruing within the current financial year.
The company is putting in place relevant strategies to enhance reach across the world with
emphasis on Asia, Latin America and Africa. Two new plants are coming up in Bangladesh
and Colombia. Moreover, in partnership with local distributors, HML has established
assembly units in Kenya, Tanzania and Uganda in East Africa. It is fast building a global
manufacturing base to cater to its growing international markets.
HMLs domestic market share in the motorcycle segment stood at 52.8% in FY15 with sales
of 5.67mn units (FY14: 51.8%, sales of 5.4mn units). The company continues to maintain its
position as the No. 1 2-wheeler company in the world for the 14th consecutive year.

31

Edelweiss Securities Limited

Hero MotoCorp
Profitability analysis
Table 1: Consolidated profitability
Particulars
Sales
Raw Materials Consumed
Operating and admin expense
Personnel cost
EBITDA
Royalty to honda
EBIDTA post royalty cost
Depreciation (ex-amortisation of
royalty to Honda)
EBIT
Financial Charges
Other income
EBT
Exceptional items
EBT (after exceptional items)
Tax expense
PAT

Though revenue grew 9% YoY,


higher operating and employee
costs led to flattish EBITDA and
130bps YoY fall in EBITDA margin

EBITDA margin, adjusted for


royalty, stood higher at 12% in
FY15 led by lower amortisation
R&D cost for HML stood at 0.5% of
sales versus 1.0-1.5% range for
peers

(INR bn)
FY14
252.8
182.3
25.8
9.3
35.4
8.1
27.3

Consolidated
%
FY15
100.0
275.4
72.1
197.2
10.2
31.5
3.7
11.8
14.0
35.0
3.2
2.0
10.8
33.0

%
100.0
71.6
11.4
4.3
12.7
0.7
12.0

2.9

1.2

3.4

1.2

24.3
0.1
4.4
28.6
28.6
7.6
21.1

9.6
0.0
1.8
11.3
11.3
3.0
8.3

29.6
0.1
4.9
34.4
1.4
32.9
9.4
23.5

10.7
0.0
1.8
12.5
0.5
12.0
3.4
8.5

Source: Company annual report, Edelweiss research

Depreciation declined sharply from INR11.1bn in FY14 to INR5.4bn in FY15, primarily due to
lower amortisation of intangibles (technical knowhow/ export licences amortisation for
FY15 at INR2.0bn FY14: INR8.1bn). HML amortised technical knowhow / export licences on
straight line basis upto June 30, 2014 (42 months). During FY15, entire block of technical
knowhow was depreciated. The company had agreed to pay INR25.6bn in FY11 (over 42
months) as per the licence agreement entered into with erstwhile JV partner Honda, as
explained under.
Promoter Group and Honda Motor, Japan (Honda), entered into a Share Transfer
Agreement on January 22, 2011, wherein Honda had agreed to transfer its 26% stake in
HML to the Promoter Group, ending the JV. The acquisition was completed on March 22,
2011. In addition, a License Agreement was entered into on January 1, 2011, wherein Honda
gave HML the right and licence to manufacture, assemble, sell and distribute certain
products/parts and export licence for certain products and their service parts under the IPR
at total cost of INR25.6bn

Table 2: R&D spend charged to P&L (opex) HML versus peers


Particulars
FY11
FY12
FY13
Hero Moto
0.1
0.2
0.3
TVS (Standalone)
1.2
1.3
1.4
Bajaj Auto(Standalone)
0.7
0.6
0.7

FY14
0.4
1.4
1.0

(%)
FY15
0.5
1.4
1.1

Source: Company annual report, Edelweiss research

HMLs R&D cost charged to P&L stood at INR1.3bn in FY15, 0.5% of sales (FY14: INR892mn,
0.4%).

32

Edelweiss Securities Limited

Annual Report Analysis

Erik Buell Racing (EBR), a 49%


associate of HMCL (NA) (a wholly
owned subsidiary), filed winding
up petition due to its inability to
honour outstanding creditors

Table 3: Investment in subsidiaries


Particulars
HMCL Netherlands B.V
HMC MM Auto Limited
HMCL(N A),Inc.
Total
Less: Provision for dimunition
Total
Standalone net worth
% of total standalone networth

FY14
18
1,554
1,572
1,572
56,226
2.8

(INR mn)
FY15
764
129
1,554
2,447
(1,550)
896
65,400
1.4

EBRs losses led to the erosion of HMCLs (subsidiary) net worth and hence the company
recorded a provision of INR1.5bn under exceptional items towards diminution in value of
investment.
Other investments at the consolidated level include investment in financing arm Hero
FinCorp (48% stake) of INR2.7bn in FY15 (FY14: INR900.3mn).

Other income rose to INR4.9bn in


FY15 and average yield on cash
stood at 13% during the year
Other income contribution to PBT
has been in the 13-16% range over
the past 5 years

Table 4: Other income and yield on cash/ investments


Particulars
FY12
FY13
Other income
3,646
3,984
PBT
28,647
25,292
Other income as % of PBT
12.7
15.8
Cash and investments
41,576
39,886
Average yield on cash (%)
7.7
9.8

FY14
4,442
28,641
15.5
42,150
10.8

(INR mn)
FY15
4,921
34,367
14.3
30,629
13.0

Cash flow analysis


Table 5: Cash flow analysis
Particulars

Operating cash flows were


significantly impacted in FY15 and
OCF post interest stood lower at
INR21.7bn versus INR29.5bn in
FY14 on account of increase in
working capital requirements

OCF, adjusted for royalty to


Honda, stood at INR18.9bn (FY14:
INR22.7bn)

FCF plummeted 51% YoY to


INR6.6bn led by higher capex

(INR bn)
Consolidated
FY13
FY14
FY15
25.3
28.6
32.9
(3.8)
(4.1)
(4.4)
11.4
11.1
6.9
(6.1)
(6.5)
(10.0)
26.8
29.1
25.4
(3.9)
(2.6)
(4.5)
0.4
(0.3)
(1.9)
0.2
(1.5)
(2.7)

Profit before tax


Non-operating income
Non-cash adjustments
Direct taxes paid
Cash profit after tax
Increase in receivables
Increase in inventories
Increase in advances
Increase in other current assets, liabilities and
(0.4)
0.8
(0.1)
provisions
Increase in trade and other payables
(4.2)
4.2
5.6
Increase in working capital
(7.9)
0.6
(3.6)
Net cash from operating activities
18.9
29.6
21.9
Interest expenses paid
(0.1)
(0.1)
(0.1)
Net cash from operating activities post interest
18.8
29.5
21.7
Deferred credit payments (Royalty to Honda)
(7.5)
(6.9)
(2.9)
Adjusted OCF
11.3
22.7
18.9
Capital expenditure
(6.0)
(9.4)
(12.3)
Free cash flows
5.3
13.3
6.6
Source: Company annual report, Edelweiss research

33

Edelweiss Securities Limited

Hero MotoCorp
Receivables rose by INR4.5bn in FY15 to INR13.7bn, 5% of revenue. Trade payables jumped
by INR5.6bn supporting the working capital.

Table 6: Average cash conversion cycle (days)


Particulars
Receivable days
Inventory days
Payable days
Advance from customer days
Cash conversion cycle
Bill discounted/ LCs/ Credit arrangements
Adjusted cash conversion cycle

Hero Moto
FY13
FY14
7
11
13
12
(41)
(38)
(2)
(2)
(23)
(17)
(23)
(17)

FY15
15
13
(43)
(2)
(17)
(17)

Bajaj Auto
FY13
FY14
10
14
16
16
(48)
(51)
(4)
(6)
(25)
(27)
(25)
(27)

FY15
13
17
(45)
(8)
(23)
(23)

FY13
13
44
(51)
(1)
5
13
18

TVS
FY14
15
39
(55)
(2)
(3)
14
11

FY15
14
41
(55)
(3)
(3)
15
12

Source: Company annual report, Edelweiss research

Cash conversion cycle stood at negative 17 days, as increase in receivables was offset by
similar rise in payable days. HMLs working capital is in line with that of Bajaj Auto.

Chart 1: Cash generation and utilisation over past 5 years

Sources
Cash / liquid
investments
16%

(INR mn)
Royalty to
Honda (for
technical
know-how)
17.4%

Net
borrowings
1%

Application
Capex
24.9%

Investment
in
associates
2.4%
Operating
cash flow
(OCF)
83%

Dividend
55.2%
Source: Company annual report, Edelweiss research

34

Edelweiss Securities Limited

Annual Report Analysis


Comparative analysis
Table 7: Peer comparison
Particulars
Gross margins (%)
TVS
Bajaj Auto
Hero Moto Corp

FY11 FY12 FY13 FY14 FY15


27
28
27

27
28
27

29
28
27

30
31
28

29
31
27

EBITDA margins (%)


TVS
5.5
Bajaj Auto
19.2
Hero Moto Corp (adjusted) 12.5

6.2
18.9
11.8

5.8
18.2
10.2

5.9
20.6
10.8

5.8
18.5
12.0

Fixed asset turnover (x)


TVS
Bajaj Auto
Hero Moto Corp

5
11
5

5
13
6

5
11
8

6
10
11

6
11
9

ROE (%)
TVS
Bajaj Auto
Hero Moto Corp

20
92
62

19
56
66

15
44
46

17
37
40

23
28
41

Particulars
ROCE (%)
TVS
Bajaj Auto
Hero Moto Corp

FY11

FY12

FY13

FY14

FY15

14
78
58

17
73
52

14
59
44

19
51
50

21
40
55

OCF, post interest (INR mn)


TVS (adjusted)
1,302
Bajaj Auto
20,370
Hero Moto Corp
22,723

3,796
32,235
23,385

3,456
22,171
18,785

3,226
35,009
29,512

(392)
21,073
21,738

(1,453)
(614) 2,369
18,743 28,847 17,289
19,113 18,351 12,781

489
32,469
20,138

(3,825)
18,124
9,436

FCF (INR mn)


TVS
Bajaj Auto
Hero Moto Corp

Earnings to cash conversion ratio (%)


TVS
55
137
99
105
(8)
Bajaj Auto
68
125
89
122
78
Hero Moto Corp
111
75
66
107
90
Source: Company annual report, Edelweiss research

EBITDA margins for HML are lower than Bajaj Auto, but higher than TVS. Asset turnover has
been improving over the past 5 years, though declined YoY.
RoE/ RoCE have been declining significantly for Bajaj Auto over the past 5 years versus peers.
HML clocked the highest RoE/ RoCE amongst peers in FY15, while Bajaj Auto had highest
return ratios before FY13.
Though HMLs OCF and FCF have been lower over the past 2 years, earnings to cash
conversion ratio has improved in FY14 and FY15.

35

Edelweiss Securities Limited

Hero MotoCorp
Major related party transactions

Purchases with related parties


have risen significantly over the
past 3 years from INR9.1bn (5.3%
of raw material cost) to INR22.6bn
(11.4%)

Table 8: P&L transactions


Particulars
Purchase of raw materials and components etc.
A .G. Industries Private Limited
Rockman Industries Limited
Highway Industries Limited
Total
Sale of components etc.
Rockman Industries Limited
Payment for services
Hero Corporate Services Limited
Hero Management Services
Hero Mindmine Institute Limited
Hero InvestCorp Limited
Abhyuday Manufacturing and Automotive Ltd
Total
Donation
Raman Kant Munjal Foundation
Net purchases/ expenses
As a % of RM cost

FY13

FY14

(INR mn)
FY15

5,723
1,197
2,156
9,075

6,800
12,370

7,078
15,416

19,170

22,493

(128.0)

33.5

51.8

37.5
19.8
60.5
117.8

3.6
16.7
43.4
63.7

8.5
9,136
5.3

3.0
19,163
10.5

4.0
22,561
11.4

18.3

P&L exposure to related parties rose primarily due to increase in purchases of raw material
from Rockman Industries (enterprise with significant influence of KMPs).

Net outstanding payables to


related parties have jumped since
FY13 and stood at INR3.8bn, 5.8%
of net worth, in FY15

Table 9: Balance sheet exposure


Particulars
FY13
FY14
Associates
Receivables
2,400
2,200
Payables
(194)
KMPs and their relatives
Payables
(796)
(894)
Enterprises over which KMPs are able to exercise significant influence
Receivables
Payables
(1,720)
(1,941)
Net payable to related parties
(116)
(829)

(INR mn)
FY15
(24)
(1,038)
10
(2,729)
(3,782)

Source: Company annual report, Edelweiss research

36

Edelweiss Securities Limited

Annual Report Analysis


RoE analyser
RoE analyser analyses profitability on the scale of operating and capital allocation efficiency
(detailed concept explained in Annexure A). We have analysed HMLs profitability for FY14
and FY15, results and key findings of which are given below:

Return from leverage continued


to be higher at 13.3% in FY15 due
to huge cash balance

FY14

FY15
51.9

7.2
7.2

53.8
6.9
7.8

(12.3)
(0.3)
15.7
36.2

(13.3)
(0.3)
14.9
38.9

39.6

0.1
40.6

Chart 2: RoE tree


60.0
48.0

13.3
0.1

36.0
(%)

RoE is flattish at 40% YoY as


increase in operating margin was
offset by lower asset turnover

Table 10: RoE analyser


Particulars
A. Return on net operating assets (RNOA)
(OPATO x NOPAT margin) (%)
OPATO (operating asset turnover) (x)
NOPAT margin (%)
B. Return from leverage (FLEV x spread) (%)
FLEV (financial leverage) (x)
NFI (net financing cost) (%)
Net financial spread (RNOA -NBC) (%)
C. Return from other funding (%)
ROE Derived (A+B+C) (%)

24.0

53.8
40.4

12.0
0.0

RNOA

Return from
leverage

Return from other


funding

ROAE

Source: Company annual report, Edelweiss research

37

Edelweiss Securities Limited

Hero MotoCorp
Table 11: Summary financials
Particulars
Sales
Total income
EBITDA
EBITDA margin (%)
Depreciation
Financial costs
Net profit
ROE (%)
ROCE (%)
Equity shareholders' funds
Loan funds
Net cash
Net fixed assets (Ex CWIP)
CWIP
Current assets loans and advances
Current liabilities and provisions
Net current assets
Cash and cash equivalents
Cash flow from operating activities
Cash flow from investing activities
Cash flow from financing activities
Net cash flows
CAPEX
Working capital investments

FY11
193,979
196,876
26,125
13.5
4,024
152
19,279
62.0
57.8
29,561
21,644
(30,524)
40,803
500
5,550
53,234
(47,683)
52,168
22,542
(13,223)
(9,552)
(234)
3,610
1,847

FY12
235,790
239,436
36,188
15.3
10,973
213
23,781
65.6
51.8
42,898
17,308
(24,268)
37,855
388
6,733
36,220
(29,487)
41,576
23,598
928
(24,582)
(56)
5,034
(6,906)

FY13
237,681
241,665
32,845
13.8
11,418
119
21,182
45.6
43.6
50,062
6,416
(33,470)
30,710
621
10,891
35,291
(24,401)
39,886
18,904
(7,329)
(10,563)
1,012
6,004
(7,872)

FY14
252,755
257,197
35,391
14.0
11,074
118
21,027
39.6
49.8
56,226
2,843
(39,307)
22,473
8,547
13,433
41,394
(27,960)
42,150
29,630
(16,178)
(14,137)
(685)
9,374
551

(INR mn)
FY15
275,380
280,301
34,967
12.7
5,405
117
23,647
40.6
55.0
65,400
1,000
(29,629)
29,523
7,192
23,168
38,982
(15,814)
30,629
21,855
314
(21,311)
858
12,302
(3,553)

Source: Company annual report, Edelweiss research

38

Edelweiss Securities Limited

ANALYSIS BEYOND CONSENSUS


THE NEW ABC OF RESEARCH
Mahindra & Mahindra | Annual Report Analysis

Mahindra & Mahindras (M&M) FY15 annual report analysis highlights


deterioration in standalone and consolidated profitability and free cash
flows. M&M has invested ~INR12bn (FY14:INR6.5bn) in loss making
subsidiaries taking cumulative investment to ~INR37bn (~20% of Net
worth). Subsidiary losses have widened during FY15 mainly led by
Ssangyong (SMC) and Mahindra Two Wheelers (MTW). We believe that
SOTP valuation factoring only profitable subsidiaries and ignoring loss
making entities needs to be evaluated for sustainability of losses
considering the fact that losses are funded out of standalone (SA) cash
flows (cumulative funding over last 5 years stood at INR34bn). The
aggregate share of losses of these subsidiaries during FY15 stood at 21% of
standalone PAT (FY14: 16%). R&D cost capitalised during FY15 rose to
INR9.3bn (FY14:INR5.7bn) representing 22% of PBT. Capitalisation ratio to
total R&D expenses rose to 50% in FY15 (FY14: 40%). Intangible assets rose
to INR26.5bn (FY14:INR17.2 bn); 10.2% of net worth. Unfunded gratuity
liability rose to INR20bn (FY14:INR13.5 bn).

Whats on track?

Market Data

52-week range (INR)

: 1,421 / 1,106

Share in issue (mn)

: 621.1

M cap (INR bn/USD mn)

: 818 / 12,779

Avg. Daily Vol. BSE/NSE (000) : 1,074.8

Shareholding Pattern (%)


Promoters*

: 25.6

MFs, FIs & Banks

: 22.7

FIIs

: 33.0

Others

: 18.7

*Promoters pledged shares

: 1.4

(% of share in issue)

Company maintained its position as the 3rd largest passenger Vehicle Company and 2nd
largest commercial vehicle company in India.

What needs tracking?


Standalone (adjusted) RoCE fell to ~28% (FY14: 38%, FY13: 50%) led by declining EBITDA
margin (FY15: 10.7%, FY14: 11.7%) and fixed asset turnover ratio (FY15: 6.6x, FY14: 7.5x).
Consolidated RoCE (ex MMFSL) plummeted to 12% against ~18% each in FY13 and FY14.
MTW incurred loss of INR5.3bn (FY14: INR4.6bn loss) during FY15, taking accumulated
losses to INR17.8bn. M&M infused ~INR7.5bn (FY14: INR3bn) as equity capital in MTW
during FY15, taking cumulative investments to ~INR18.6bn (~10% of SA net worth).
SMC incurred loss of INR7.1bn (FY14: INR0.7bn profit) during FY15 led by lower exports
to Russia and East Europe and higher wage cost consequent to regulatory changes.
M&Ms subsidiaries engaged in electric vehicles (Reva Electric), second hand vehicles
(First Choice), retail, aerospace and heavy engines etc., continued to incur losses, and
thereby were a drag on consolidated profitability. M&M invested INR4.5bn (FY14:
INR3.5bn) in these subsidiaries during FY15 to support their loss making operations.
MTW acquired 51% stake in Peugeot Motorcycles for EUR28.2mn and also agreed to buy
remaining 49% stake at fair value after 7 years, for which M&M provided corporate
guarantees of EUR 70mn (~INR4.7bn).
Analysis beyond Consensus (ABC) is our initiative to provide a differentiated perspective to our clients
on various non-routine and intricate issues. This unit of research works independent of the sector/stock
research team and views expressed in this report may vary with that of respective sector/stock analyst.
Edelweiss research is also available on www.edelresearch.com,
1
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

July 31, 2015


Edelweiss Securities Limited

Annual Report Analysis


Gratuity liability (unfunded) jumped 47% to INR20bn (FY14: INR13.5bn) led by higher
actuarial losses (FY15: INR2.2bn, FY14: INR0.2bn) and past service cost (FY15: INR1.7bn,
FY14: Nil) recognised during the year (mainly in SMC).

Other highlights
Mahindra Engineering Services (MESL), a subsidiary, was amalgamated with Tech Mahindra
(TML), an associate, as per court approved scheme. Excess (INR3bn) of fair value of TML
shares received over the carrying cost of investments in MESL has been recorded as an
exceptional item. However, TML recognises the amalgamation at cost of shares issued,
whereas M&M recognises the same at fair value of shares received.
Of the 25.6% holding classified under the promoter category, 8.4% are treasury shares held
by the M&M Benefit Trust formed on amalgamation of Punjab Tractors and 5.1% held by
various employee welfare trusts. Thus, the promoters actual effective economic ownership
is 12.1%.
Guarantees given by the company on behalf of other companies (presumably subsidiaries)
stood at ~INR13.4bn (March 2014: INR9bn). Amount outstanding against these guarantees
stood at INR12.8bn (March14: INR8.3bn).

MD&A
Company signed a definitive agreement to acquire 33% voting stake in Japan based
Mitsubishi Agriculture Machinery Co Ltd. This will help both companies to jointly develop
products in the tractor and agri-machinery space.
Companys wholly owned subsidiary Mahindra Vehicle Manufacturers Ltd signed an MOU
with the Maharashtra government to invest an additional INR 40bn over a 7 year period.

40

Edelweiss Securities Limited

Mahindra & Mahindra


Standalone profitability

Despite ~90bps increase in gross


margins during FY15, standalone
EBITDA margins declined 100bps
led by 120bps and 60bps increase
in operating and personnel
expenses, respectively

Table 1: StandaloneCapital allocation


Particulars
Sales
EBITDA
Adjusted PBIT*
Gross margin (%)
EBITDA margin (%)
ROCE (%)
Adjusted ROCE (%)*#
Net fixed assets (Ex CWIP)
CWIP
Devlopment expenditure (inc under
development)
Fixed asset turnover
Net current assets
Equity shareholders' funds (A)
Loan funds (B)
Reported capital employed (A+B)
Adjusted total capital employed (A+B)#
D/E Ratio

Standalone adjusted RoCE fell


from ~50% in FY13 to ~38% in
FY14 and further to ~28% in FY15

While decline in adjusted RoCE


during FY14 was primarily led by
higher capital employed, slip in
FY15 was led by both higher
capital employed and lower
profitability

FY11
234.6
34.3
33.0
30.7
14.6
29.7
52.2
30.7
5.3

FY12
318.5
37.5
34.3
26.2
11.8
25.8
49.3
40.9
5.7

FY13
404.4
46.9
42.9
24.8
11.6
26.9
49.8
47.7
5.0

FY14
405.1
47.2
42.0
27.3
11.7
23.5
38.0
57.3
3.9

3.0

4.3

5.5

9.8

(INR bn)
FY15
389.5
41.7
36.0
28.2
10.7
18.5
27.8
58.2
7.6
15.3

8.1
8.9
9.1
7.7
6.7
(16.2)
(7.1) (12.1)
(9.7)
(8.9)
103.1 121.0 146.6 167.9 192.6
24.0
35.8
34.9
40.5
37.3
127.2 156.9 181.5 208.4 229.8
60.1
78.9
93.5 127.8 131.6
0.2
0.3
0.2
0.2
0.2
* Adjusted for income from subsidiaries, J.V.'s & Associate

# Adjusted for investment/ loans & advances in subsidiaries, J.V.'s & associates and acceptances

Of the total INR14.3bn (FY14: INR 11.3bn) R&D expense (ex depreciation and amortisation)
incurred during FY15 at the standalone level, INR7.5bn (~50% of total cost; FY14: INR6.4bn; 55%)
was recognised in profit and loss.
Development expenditure (balance R&D cost) of INR6.8bn (FY14: INR4.9bn) was capitalised in
intangible assets of which INR 5.9 bn is under intangible assets under development (FY14:
INR4.5bn).

Chart 1: Standalone- Cumulative cash generation and utilisation (FY12-15)

Sources of cash generation FY12-15


Stake sale
in
subsidiary/
JV
7%

100% =
INR165.6bn

Others
4%

Cash utilisation during FY12-15


Dividend
paid
21%

Cash
profits
89%

Investment
in
subsidiarie
s/
Associate
29%

Others
2%

Capex
39%

Purchase
of
Investment
(Net)
9%
Source: Company annual report, Edelweiss research

41

Edelweiss Securities Limited

Annual Report Analysis


Table 2: Investment in loss making subsidiaries during FY11-FY15
Particulars
Mahindra Two Wheelers *
Mahindra Heavy Engines Private
Mahindra Engineering and Chemical Products #
Mahindra Reva Electric Vehicles
Mahindra First Choice Services
Mahindra Aerospace Pvt Ltd
Total
Mahindra Retail Pvt Ltd #

FY11
1,594
147
458
2,200
1,120

(INR mn)
FY12
3,543
2,260
577
150
598
7,128
1,010

FY13
3,450
968
800
500
120
643
6,482
800

FY14
2,962
630
800
730
818
512
6,451
800

FY15
7,486
1,800
1,000
400
531
583
11,800
1,202

Total investment as
at March15
18,621
4,393
4,918
3,802
1,919
2,899
36,552
5,683

* Net investment made during FY14, # Capital infusion in FY15 includes share application money pending allotment

During FY14, the company had invested ~INR4bn in SMC, taking cumulative equity
investment to INR21.3bn. Since SMC redeemed bonds of INR4.6bn subscribed by the
company, there was no incremental cash infusion in SMC in FY14.

During FY14, the company acquired stake in Mahindra Sanyo Steel from Mahindra
Ugine Steel Company Ltd.

Mahindra Engineering and Chemicals Products (MECP) is the holding company for the
retail business of M&M. Capital infusion in MECP by M&M is utilised towards
investment in Mahindra Retail Private Ltd (MRPL) either directly or through Retail
Initiative Holdings Ltd. Aggregate capital infusion in MRPL stood at INR 5,683mn.

Profitability analysis of subsidiaries


Table 3: Performance of subsidiaries generally considered for SOTP valuation
Particulars
Mahindra & Mahindra Financial Services Ltd
Mahindra Vehicle Manufacturers Ltd #
Mahindra Lifespace Developers Ltd
Mahindra Holidays & Resorts India Ltd
Ssangyong Motor Company Ltd

Except Mahindra Life space, all other


subsidiaries reported declining
profits

FY13
Revenue
38,947
96,810
4,223
7,159
149,746
296,886

FY14
FY15
PAT Revenue
PAT Revenue
PAT
8,827
49,530
8,872
55,847
8,318
2,838
69,682
2,167
61,605
1,530
975
4,213
777
7,600
2,333
1,070
7,989
945
8,076
790
(5,092) 202,407
736 182,710
(7,095)
8,618 333,822 13,498 315,838
5,876
# considered as part of core standalone business
Source: Company annual report, Edelweiss research

In addition to above mentioned subsidiaries, SOTP valuation generally also considers


certain profitable associates i.e. Tech Mahindra, CIE Automotive and Mahindra CIE.

SOTP valuation currently factors in only profitable subsidiaries/associates and ignores


loss making subsidiaries. However, considering recurring losses in subsidiaries are
funded out of standalone cash flows (cumulative funding over past 5 years stood at INR
34bn in key subsidiaries), SOTP valuation needs to be evaluated.

Aggregate economic interest (adjusted for minority stake) in losses (net) of these
subsidiaries (not considered in SOTP) increased to ~INR 7bn (FY14: INR6bn; 16%),
representing ~21% of standalone PAT.

SMC reported 10% decline in


revenue and loss of INR7bn (FY14:
Profit of INR0.7bn) during FY15

42

% stake Net worth


51.6
56,694
100.0
15,206
50.8
13,231
75.6
7,309
73.2
40,300

(INR mn)

Edelweiss Securities Limited

Mahindra & Mahindra


Table 4: Performance of subsidiaries generally not considered for SOTP valuation
Particulars
% stake
FY11
Loss making subsidiaries
Gippsaero Pty. Limited
50.1
(63)
Mahindra Aerostructures Private Limited
66.7
(19)
Mahindra First Choice Services Limited
100.0
(106)
Mahindra Heavy Engines Private Limited #
100.0
(504)
Mahindra Retail Private Limited
96.2
(602)
Mahindra Reva Electric Vehicles Private Limited
75.7
(249)
Mahindra Sanyo Special Steel Private Limited
51.0
Mahindra Two Wheelers Limited
88.9
(1,692)
Mahindra Yueda (Yancheng) Tractor Company Limited
51.0
21
Aggregate losses (a)
(3,214)
M&M economic interest in above losses (b)
(2,429)
Profitable subsidiaries
Bristlecone group (consolidated)
77.7
(125)
Mahindra & Mahindra South Africa (Pty) Limited
100.0
123
Mahindra Automobile Distributor Private Limited
95.0
(208)
Mahindra EPC Services Private Limited
100.0
(2)
Mahindra Intertrade Limited
100.0
551
Mahindra Logistic Limited
84.0
(71)
Aggregate profits (c)
268
M&M economic interest in above profits (d)
293
Aggregate losses (net) (a+c)
(2,947)
M&M economic interest in losses (net) (b+d)
(2,137)
% of Standalone PAT
(8.0)

FY12

FY13

FY14

(INR mn)
FY15

(209)
(56)
(151)
(648)
(830)
(267)
(2,383)
39
(4,505)
(3,660)

(396)
(87)
(241)
(619)
(1,141)
(319)
(380)
(2,639)
(520)
(6,342)
(5,233)

(386)
(175)
(427)
(578)
(1,140)
(805)
(683)
(4,593)
(212)
(8,998)
(7,515)

(401)
(438)
(541)
(534)
(1,189)
(941)
(633)
(5,289)
(533)
(10,497)
(8,720)

151
182
140
5
705
108
1,292
1,254
(3,213)
(2,406)
(8.4)

155
189
140
389
567
244
1,685
1,645
(4,658)
(3,588)
(10.7)

213
204
136
(9)
644
366
1,554
1,459
(7,444)
(6,056)
(16.1)

289
215
138
152
722
411
1,927
1,790
(8,570)
(6,930)
(20.9)

# Formerly known as Mahindra Navistar Engines Private Limited


Source: Company annual report, Edelweiss research

During the year, M&M infused INR


7.5bn (FY14: INR 3bn) in MTW,
taking cumulative investments to
INR 18.6bn

Table 5: Mahindra Two WheelersProfitability statement


Amount
Particulars
FY13
FY14
FY15
Sales
3.8
7.5
6.6
Raw Materials Consumed
3.3
7.2
6.0
Gross margin
0.5
0.3
0.6
Operating and Administrative
1.6
3.0
4.0
expense
Personnel cost
0.9
1.2
1.1
EBITDA
(2.0)
(3.9)
(4.6)
Depreciation
0.3
0.3
0.4
EBIT
(2.2)
(4.2)
(5.0)
Financial Charges
0.4
0.4
0.3
Other income
0.0
0.0
0.0
PBT
(2.6)
(4.6)
(5.3)

(INR bn)
FY13
100
86
14

%
FY14
100
95
5

FY15
100
91
9

42

40

61

23
(51)
7
(58)
11
0
(69)

16
(52)
4
(56)
5
0
(61)

17
(69)
6
(75)
5
0
(80)

Source: Company annual report, Edelweiss research

43

Operating and admin expenses at MTW stood higher at INR4bn (FY14: INR3bn) led by
higher marketing expenses (FY15: INR2.2bn, FY14: INR1.6bn) and assets written off
(FY15: INR 0.3bn, FY14: nil).

Edelweiss Securities Limited

Annual Report Analysis

During the year, MTW acquired 51% stake in Peugeot Motorcycles for EUR28.2mn. As
at March 2015, MTW had paid EUR16.9mn up-front and balance EUR11.3mn is payable
by June 2016. Further, as per the terms of the agreement with Peugeot SA (PSA), MTW
has committed to acquire balance stake (49%) at the end of 7 years at fair market value
(determined as per agreement). In this regard, M&M also provided corporate
guarantees of EUR 70mn (~INR4.7bn) to PSA.

Table 6: Mahindra Retail Private LimitedProfitability statement

Capital infusion in Mahindra Retail


during FY15 stood at INR 1.2bn
(FY14: 0.8bn); cumulative
investment in equity stood at INR
5.7bn

Particulars
Sales
Raw Materials Consumed
Gross margin
Operating and admin
expense
Personnel cost
EBITDA
Depreciation
EBIT
Financial Charges
Other income
PBT

FY13
2.0
1.2
0.8

Amount
FY14
2.1
1.2
0.9

(INR bn)

FY15
2.1
1.3
0.8

FY13
100
59
41

%
FY14
100
59
41

FY15
100
60
40

1.2

1.3

1.3

62

62

62

0.4
(0.8)
0.2
(1.0)
0.1
0.0
(1.1)

0.4
(0.8)
0.2
(1.0)
0.1
0.0
(1.1)

0.4
(0.9)
0.2
(1.1)
0.1
0.0
(1.2)

22
(43)
9
(52)
6
0
(58)

20
(40)
9
(49)
7
0
(55)

21
(43)
9
(52)
5
0
(57)

Source: Company annual report, Edelweiss research

Cash flow analysis


Table 7: Cash flow analysis

(INR bn)
Standalone
FY14
FY15
43.2
38.3
(6.7)
(6.8)
9.2
10.1
(8.9)
(8.5)
2.7
2.7
39.4
35.9
(2.7)
3.7
(4.5)
(1.8)

Particulars

Profit before tax


Non-operating expenses/ (income)
Non-cash adjustments
Direct taxes paid
Dividend from subsidiaries
Cash profit after tax
(Increase)/Decrease in inventories
(Increase)/Decrease in trade and other
receivables
Increase/(Decrease) in trade and other payables
5.0
Change in acceptances
0.2
(Increase)/Decrease in working capital
(1.9)
Net cash from operating activities
37.5
Interest expenses paid
(2.6)
Net cash from operating activities post interest
34.9
Capex
(16.8)
Free cash flow
18.1
Increase/(Decrease) in loans against assets (MMFSL)
Free cash flows (incuding MMFSL)
18.1

(5.5)
1.7

Subsidiary (derived)
FY14
FY15
11.9
2.0
10.1
9.0
13.3
11.9
(3.8)
(8.5)
(2.7)
(2.7)
28.7
11.6
1.9
(4.3)
(18.1)
(3.9)
5.9
(1.3)

(2.0)
33.9
(2.4)
31.5
(20.2)
11.3
11.3

17.2
0.2
(11.5)
17.2
(3.2)
13.9
(19.3)
(5.4)
(58.1)
(63.5)

9.2
20.8
(2.5)
18.4
(26.9)
(8.6)
(42.3)
(50.9)

Consolidated
FY14
FY15
55.0
40.4
3.3
2.2
22.5
22.0
(12.7)
(17.0)
68.1

47.5

(0.8)
(22.6)

(0.6)
(5.8)

10.9
(1.1)

11.7
1.9
(13.5)
54.6
(5.8)
48.8
(36.1)
12.7
(58.1)
(45.4)

7.2
54.7
(4.9)
49.9
(47.2)
2.7
(42.3)
(39.6)

Source: Company annual report, Edelweiss research

44

Standalone adjusted free cash flow declined to INR11.3bn (FY14: INR18.1bn) led by
higher capex and lower cash profits. Cash conversion cycle remained in narrow range of
-9 days to -11 days during FY13-15.

Edelweiss Securities Limited

Mahindra & Mahindra

Consolidated cash flows from operating activities (post interest) increased marginally to
~INR50bn in FY15. However, due to steep increase in capex (FY15: INR47bn, FY14:
INR36bn), free cash flows (ex movement in loan against assets) declined to INR2.7bn.

Table 8: Cash conversion cycle


Particulars
Inventory Days
Trade Receivable Days
Trade Payable Days
Income received in advance
Cash Conversion cycle
Add: Acceptance Days
Adjusted Cash Conversion cycle
Working capital as % to sales

Standalone
FY13 FY14 FY15
28
32
34
19
22
24
(62)
(72)
(74)
(2)
(2)
(2)
(17)
(20)
(19)
7
9
9
(9)
(11)
(10)
(1.1)
(0.7)
(0.2)

(days)
Consolidated
FY13 FY14 FY15
61
61
64
32
31
33
(87)
(88)
(88)
(7)
(7)
(8)
(1)
(3)
0
18
20
21
17
17
21
5.2
5.8
6.2

Source: Company annual report, Edelweiss research

Table 9: Cash conversion cycleSsangyong versus peers


Ssangyong Motor Co
Particulars
CY12
CY13
CY14
Inventory days
31
34
35
Add: Trade receivable days
23
25
23
Less: Trade payable days
(60)
(82)
(88)
Cash conversion cycle
(6)
(23)
(30)
Working capital as % to sales
(2.9)
(6.1)
(5.7)

(days)
Hyundia Motors
CY12
CY13
CY14
37
37
38
16
15
15
(38)
(36)
(36)
15
16
17
4.3
4.4
4.6

CY12
43
19
(66)
(5)
(0.3)

Kia Motors
CY13
42
17
(58)
1
2.5

CY14
50
17
(54)
14
5.5

Source: Company annual report, Edelweiss research

45

In comparison to peers in the South Korean market, SMC had a favourable cash
conversion cycle predominantly on account of higher trade credit enjoyed by the
company.

Edelweiss Securities Limited

Annual Report Analysis


Automotive segments margins
and RoCE declined steeply during
FY15 led by higher losses in SMC
and MTW

Farm equipment segments


revenue and profitability was
adversely impacted by poor
monsoon followed by unseasonal
rains

Table 10: Consolidated segment profitability


Particulars
FY11
FY12
Segment Revenue
Automotive
148.9
326.6
Farm Equipment
108.3
132.6
Financial Services
20.6
28.8
Others
90.9
106.0
368.7
594.0
Segment margins
Automotive
16.4
12.7
Farm Equipment
16.9
19.2
Financial Services
7.5
9.5
Others
7.5
8.1
48.3
49.5
Segment margins (%)
Automotive
11.0
3.9
Farm Equipment
15.6
14.5
Financial Services
36.2
33.1
Others
8.3
7.6
13.1
8.3
Segment net assets
Automotive
69.9
105.2
32.3
Farm Equipment
14.2
Financial Services
(33.4)
25.3
Others
49.9
58.7
100.6
221.5
Return on segment net
Automotive
29.1
14.5
Farm Equipment
111.2
82.8
Financial Services
(77.7)
(237.2)
Others
15.0
14.9
43.1
30.8

FY13

FY14

(INR bn)
FY15

416.2
138.0
40.9
91.9
686.9

447.0
168.6
52.8
71.7
740.0

432.1
159.1
60.4
67.9
719.5

23.3
18.3
12.8
3.5
58.0

23.6
24.8
14.6
0.0
63.0

13.2
19.7
13.9
(0.4)
46.4

5.6
13.2
31.4
3.9
8.4

5.3
14.7
27.7
0.0
8.5

3.1
12.4
23.1
(0.6)
6.5

113.4
33.7
40.6
66.5
254.2

125.1
44.9
45.9
71.8
287.7

21.3
55.4
39.0
5.6
24.4

19.8
63.1
33.8
0.0
23.3

135.6
44.2
51.5
68.6
299.8
10.1
44.2
28.6
(0.6)
15.8

Source: Company annual report, Edelweiss research

R&D expenditure analysis

R&D cost capitalised (net of


amortisation) during FY15 stood
at INR9.3bn (FY14: INR5.7bn),
~21.7% (FY14: 10%) of PBT

Table 11: Research & development capitalisation analysis (Consolidated)


(INR bn)
Particulars
FY12
FY13
FY14
FY15
Development expenditure capitalised:
Opening net block
5.7
6.1
6.3
7.7
Capitalised during the year
3.6
4.2
4.1
5.9
Amortised/ Impaired during the year
(3.2)
(4.0)
(2.7)
(4.7)
Closing net block
6.1
6.3
7.7
8.9
Net expenditure capitalised (A)
0.4
0.2
1.4
1.2
Change in intangibles under development (B)
0.6
1.6
4.4
8.1
Amount capitalised (C = A+B)
1.0
1.7
5.7
9.3
PBT
41.8
55.8
58.2
43.1
Capitalised R&D as a % of PBT
2.4
3.1
9.9
21.7
Source: Company annual report, Edelweiss research

46

Edelweiss Securities Limited

Mahindra & Mahindra


Table 12: Research & development capitalisation analysis (Consolidated)
Particulars
FY12
FY13
FY14
Development expenditure grouped under
6.1
6.3
7.7
intangible assets (A)
Intangible assets under development (B)
3.6
5.1
9.5
Total (A+B)
9.7
11.4
17.2
As % of net worth
5.8
5.7
7.4

Intangible assets under


development rose by ~85% in
FY14 and FY15 each and stood at
INR17.6bn

(INR bn)
FY15
8.9
17.6
26.5
10.2

Source: Company annual report, Edelweiss research

R&D capitalised as percentage of


total R&D stood at ~50% versus
~40% in FY14

Total development expenditure (including intangibles under development) capitalised in


books rose to INR26.5bn, 10.2% of net worth (FY14: INR17.2bn, 7.4%).

Defined benefit obligation


Table 13: Gratuity liability (consolidated)

(INR bn)

Gratuity expense (in P&L)


Current service cost
Interest cost
Actuarial (gains)/loss
Past service cost
Others
Total expense
Gratuity liability (in BS)
Present value of Defined benefit obligation
Fair value of plan assets
Net liability

Actuarial losses on defined


benefit obligations (DBO) are
deducted while computing
profitability. Gratuity liability is
recognised in balance sheet

FY11

Unfunded
FY12
FY13
FY14

0.1
0.0
(0.0)
0.0
0.1

1.1
0.4
0.8
(0.0)
2.3

1.3
0.3
1.3
0.1
(0.5)
2.5

1.8
0.3
(0.0)
2.1

9.0
(9.0)

10.2
(10.2)

8.6
(8.6)

11.6
(11.6)

FY15

FY11

Funded
FY12
FY13

2.1
0.5
1.8
1.7
6.1

0.3
0.3
0.2
0.0
(0.2)
0.6

0.3
0.3
0.1
0.0
(0.2)
0.6

0.4
0.4
0.1
0.0
(0.3)
0.7

FY14

FY15

0.5
0.4
0.2
0.0
(0.3)
0.8

0.5
0.6
0.4
(0.3)
1.1

17.1
4.4
5.0
5.7
6.4
7.8
3.4
3.8
4.3
4.5
5.0
(17.1)
(1.0)
(1.2)
(1.4)
(1.9)
(2.8)
Source: Company annual report, Edelweiss research

Aggregate unfunded gratuity liability increased by 47% to INR20bn (FY14: INR13.5bn) led by
higher actuarial losses (FY15: INR2.2bn, FY14: INR0.2bn) and past service cost (FY15:
INR1.7bn, FY14: Nil) recognised during the year (mainly in SMC).
During the year, gratuity deficit in the company (standalone) increased to INR2.3bn (March
2014: INR1.8bn).

Table 14: Ssangyong gratuity liability


Present value of Defined benefit obligation
Fair value of plan assets
Key assumptions
Discount rates
Expected salary increase rate

Dec-11
9.7
(0.2)
9.6

Dec-12
8.5
(0.1)
8.4

4.8
5.3

3.9
5.3

(INR bn)
Dec-13 Dec-14
10.1
14.3
(0.1)
(0.1)
10.0
14.2
4.4
5.3

3.4
5.3

Source: Company annual report, Edelweiss research

SMCs gratuity liability (unfunded) stood at INR14.2bn (December 2013: INR10bn). Steep
increase in the liability during FY15 was led by higher past service cost and actuarial losses.

47

Edelweiss Securities Limited

Annual Report Analysis


Table 15: Summary financials
Particulars
Sales
Total income
EBITDA #
EBITDA margin (%) #
RoE (%)
Depreciation
Financial costs
Net profit
Equity shareholders' funds
Loan funds
Capital employed
Net fixed assets (excl CWIP and goodwill)
CWIP
Goodwill on consolidation
Current assets loans and advances
Current liabilities and provisions
Net current assets
Cash and liquid investments
Net debt
Cash flow from operating activities*
Cash flow from investing activities
Cash flow from financing activities
CAPEX
Working capital investments*

FY11
368.6
371.8
54.4
14.7
24.0
9.7
4.7
30.8
142.8
170.5
313.3
127.5
14.1
19.5
174.2
112.5
61.7
37.7
132.8
31.7
(17.5)
14.4
22.9
10.0

FY12
594.0
597.4
62.4
10.5
19.9
18.0
6.6
31.3
167.0
231.2
398.2
151.1
14.9
20.9
235.4
147.9
87.4
54.1
177.2
54.9
(30.8)
42.6
30.8
(5.7)

FY13
686.9
690.8
74.5
10.8
20.7
20.8
6.3
41.0
199.6
287.1
486.7
163.1
16.3
20.0
274.5
172.5
101.9
67.5
219.6
58.3
(27.9)
45.1
32.3
0.5

(INR bn)
FY14
FY15
740.0 719.5
745.1 724.7
79.3
63.0
10.7
8.8
20.5
12.0
21.7
21.2
7.7
6.6
46.7
31.4
233.1 258.6
351.7 379.1
584.7 637.7
170.4 182.8
21.9
30.3
13.4
7.6
308.4 327.1
178.8 181.5
129.6 145.6
87.5
70.4
264.1 308.7
55.7
52.8
(44.9) (44.4)
55.8
16.7
36.1
47.2
12.4
(5.3)

*Adjusted for loan against assets in MMFSL


EBITDA presented in table above is adjusted for interest cost in MMFSL.
Source: Company annual report, Edelweiss research

48

Edelweiss Securities Limited

ANALYSIS BEYOND CONSENSUS


THE NEW ABC OF RESEARCH
Motherson Sumi | Annual Report Analysis

Motherson Sumi Systems (MSS) FY15 annual report analysis highlights


improvement in profitability, operating cash flows and return ratios
primarily led by subsidiaries. Higher capex spending (INR18.4bn; FY14:
INR13.5bn) and acquisitions (INR7.1bn; FY14: nil), led to decline in
consolidated free cash flow to INR5.4bn (FY14: INR10.6bn). The company
estimates capex spending to be in the INR15-20bn range during FY16.
Trade working capital fell to 2.8% of sales in FY15 versus 6.1% in FY14 led
by increase in trade payables and customer advances/unearned income.
Over FY12-15, trade payables and customer advances catapulted
~INR25bn, offsetting increase in inventory and receivables, which jumped
~INR16bn, leading to release of working capital of INR9bn despite rise in
sales. While SMRP BV (hold co of SMR and SMP) enjoys negative cash
conversion cycle of 11 days (FY14: positive 5 days), that of competitors
ranges between 17 and 28 days. Standalone business continued to be a
major profit spinner (~60% of consolidated PAT), despite contributing
mere 15% to overall revenue. Related party transactions comprise
purchase of goods/services/fixed assets of ~INR3.4bn (FY14: INR3.1bn).

Market Data

52-week range (INR)

: 395 / 217

Share in issue (mn)

: 881.9

M cap (INR bn/USD mn)

: 223 / 3,452

Avg. Daily Vol. BSE/NSE (000) : 3,213.8

Shareholding Pattern (%)

Promoters*

: 65.6

MFs, FIs & Banks

: 5.2

FIIs

: 18.6

Others

: 10.6

*Promoters pledged shares

: 5.04

(% of share in issue)

Key Highlights
Revenues of SMR and SMP jumped ~14% and ~16% in EUR terms and their EBITDA
margins inched up to 9.8% (FY14: 9.6%) and 6.2% (FY14: 5.4%), respectively.
SMRP BV enjoys payable days of 88 (FY14:74), much higher compared to global peers
average of 56-68 days. Payables were major source of operating cash flow and key
contributors to improvement in return ratios.
SMPs subsidiaries in Mexico, Brazil and Spain continued to incur losses (although they
have declined) during FY15.
MSSL Wiring Systems (acquired wiring harness business of Stoneridge) and its
subsidiaries reported loss of ~INR 320mn during the year.
Exceptional losses during FY15 include expenses incurred in relation to issue of senior
secured notes (INR1.2bn), representing 3.7% of the value of funds raised.
Net cash flows from borrowings stood at INR11.4bn during FY15. However, owing to
depreciation (~18%) of EUR against INR during the year, gross debt rose by mere
INR2.9bn to INR51.3bn. Net debt fell by ~INR7bn to INR32.4bn. Net debt/equity ratio
improved to 1.0x (FY14: 1.3x).

Analysis beyond Consensus (ABC) is our initiative to provide a differentiated perspective to our clients
on various non-routine and intricate issues. This unit of research works independent of the sector/stock
research team and views expressed in this report may vary with that of respective sector/stock analyst.
Edelweiss research is also available on www.edelresearch.com,
1
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

October 13, 2015


Edelweiss Securities Limited

Annual Report Analysis


Other Highlights

During the year, MSS (via subsidiaries) paid INR7.1bn (FY14: nil) towards acquisition of
subsidiariesINR4.3bn for wiring harness business of Stoneridge and INR2.8bn for
acquisition of German and Mexican businesses of the Scherer & Trier Group.

During FY15, the group (SMRP BV) paid INR3.3bn towards acquiring minority
shareholding in subsidiaries to consolidate its shareholding in SMP to 100% and in SMR
to 98.5% (MSS economic interest in SMRP BV stood at 51%).

MSS incurred INR2.0bn (FY14: INR1.5bn) and INR18.4bn (FY14: INR13.5bn) towards
capital expenditure at standalone and consolidated levels, respectively. Capex incurred
by SMR and SMP increased to EUR56mn (FY14: EUR38mn) and EUR161mn (EUR43mn),
respectively.

Other assets at SMR and SMP jumped to EUR84mn (FY14: EUR41mn) and EUR158mn
(FY14: EUR79mn), respectively. Details on nature of these assets are not available.

Goodwill (on acquisition & consolidation) increased to INR3.0bn (FY14: INR1.9bn) on


account of acquisitions made during the year and stake hike in existing subsidiaries.

Key highlights from MD&A

50

Currently, MSS 18 plants are in various stages of construction. Management expects


consolidated capex to be in the INR15-20bn range during FY16.

The company has decided to transfer its stake in JV, Calsonic Kansei Motherson Auto
Products, to SMIL (company holding 36.9% in MSS) at a price determined through fair
valuation.

During the year, SMRP BV (subsidiary) issued 7-year bonds of EUR500mn carrying
coupon rate of 4.125% to refinance its debts as well as to fund its capital expenditure.
This borrowing has not only reduced the companys borrowing cost, but has also
provided long-term financing to SMR and SMP.

During FY15, MSS launched its fifth five-year plan termed Vision 2020. Key objectives
which company aims to achieve in 2020 include USD18bn revenue, RoCE of 40% and
dividend payout of 40%.

Edelweiss Securities Limited

Motherson Sumi
Cash flow analysis
Table 1: Adjusted cash flow analysis

(INR bn)

Particulars
Profit before tax
Non-operating expense
Unrealised foreign exchange loss (net)
Non-cash adjustments
Direct taxes paid
Cash profit after tax
Increase in trade and other receivables
Increase in inventories
Increase in trade & other payables
(Increase)/decrease in working capital
Net cash from operating activities
Interest expenses paid
Net cash from operating activities post interest
Capex/acquisitions
Free cash flow

(0.5)
0.7
1.5
(2.1)
(0.3)
(0.2)
0.1

Standalone
Subsidiaries (Derived)
Consolidated
FY14
FY15
FY14
FY15
FY14
FY15
7.6
7.3
8.4
10.8
16.0
18.2
(0.3)
3.2
3.2
2.7
- 2.9
0.2
2.4
(3.3)
3.0
(3.0)
2.2
7.0
7.2
8.4
- 9.4
(2.4)
(3.5)
(3.8)
(5.6)
- (6.2)
7.0
7.1
17.5
14.2
24.5
21.2
1.2
(4.6)
3.1
(4.9)
4.3
(0.5)
(6.6)
(1.2)
(6.8)
(1.7)
0.4
13.9
9.7
14.1
10.1
(0.4)
1.1
2.8
11.5
2.4
12.7
6.7
8.2
20.3
25.7
27.0
33.9
(0.4)
(0.3)
(2.5)
(2.7)
(2.9)
(3.0)
6.3
7.9
17.8
23.0
24.1
30.9
(1.5)
(2.0)
(12.1)
(23.5)
(13.5)
(25.5)
4.8
5.9
5.7
(0.5)
10.6
5.4
Source: Company annual report, Edelweiss research

Operating cash flows (post interest) increased to ~INR31bn (FY14: ~INR24bn) due to decline
in working capital (led by increase in trade payables & decrease in trade receivables).
Cash conversion days declined to
4 (FY14: 15) aided by rise in
payable days and customer
advances

Free cash flow declined to INR5.4bn (FY14: INR10.6bn) led by steep rise in capex, which
stood at INR18.4bn (FY14: INR13.5bn) and acquisitions (INR7.1bn, FY14: nil).

Table 2: Consolidated cash conversion cycle


Particulars
FY12
Inventory
22.5
Receivable
31.3
Payable
31.0
Customer advances/unearned income
4.2
Trade working capital
18.5
Inventory days
60
Receivable days
49
Payable days
77
Customer advances/unearned income
10
Cash conversion cycle (days)
22
Trade working capital as % to sales
12.2

Improvement in cash conversion


cycle at SMR and SMP led to
lower cash conversion cycle at
the consolidated level
Trade working capital declined to
2.8% of sales versus 12.2% in
FY12 and was key contributor to
superior return ratios

FY13
26.0
30.5
31.8
4.9
19.7
52
44
67
10
19
7.6

FY14
32.8
33.9
40.9
7.0
18.8
53
38
66
11
15
6.1

(INR bn)
FY15
37.5
32.2
48.6
11.3
9.7
57
34
73
15
4
2.8

Source: Company annual report, Edelweiss research

Over FY12-15, trade payables and customer advances/unearned income jumped by


~INR25bn, offsetting increase in inventory and receivables by ~INR16bn, leading to release
of working capital of INR9bn. Owing to sales catapulting 132% over the corresponding
period, trade working capital declined to 2.8% of sales versus 12.2% in FY12.

51

Edelweiss Securities Limited

Annual Report Analysis


Table 3: SMRP BV, SMR and SMPCash conversion cycle (days)
Mar-13 Mar-14 Mar-15
Particulars
SMRP BV
Inventory days
n.a.
27
26
Receivable days
55
52
51
Payables/Liabilities days #
n.a.
74
88
Cash conversion cycle
n.a.
5
(11)
Trade working capital as % to sales
n.a.
5.6
2.5

Mar-13
35
56
75
17
4.6

Mar-14
SMR
33
51
73
11
3.0

Mar-15

Mar-13

32
40
92
(20)
(5.6)

34
34
77
(9)
(2.5)

Mar-14
SMP
38
27
87
(22)
(6.1)

Mar-15
47
28
100
(25)
(6.8)

# In the absence of details of trade payables, entire liabilities (other than loans) considered for cash conversion cycle in SMR and SMP;
Trade payables considered for cash conversion cycle computation in SMRP BV

Other assets at SMR and SMP jumped to EUR84mn (FY14: EUR41mn) and EUR158mn (FY14:
EUR79mn), respectively. Nature of items included in other assets is not available and thus
has not been considered in the above cash conversion cycle.

Table 4: Cash conversion cycle (days)Global peers


Johnson Controls Inc.
Magna International Inc.
Delphi Automotive Plc
Particulars
Mar-13 Mar-14 Mar-15 Mar-13 Mar-14 Mar-15 Mar-13 Mar-14 Mar-15
Inventory days
24
24
24
31
31
31
30
29
29
Receivable days
65
64
56
54
52
54
57
56
57
Payable days
(64)
(65)
(58)
(57)
(56)
(57)
(66)
(66)
(68)
Cash conversion cycle
25
23
22
28
28
28
21
20
17
Trade working capital as % to sales
8.7
7.8
7.2
9.2
8.9
9.0
7.8
7.0
6.8
SMRP BV enjoys payable days of 88 (FY14:74), much higher compared to global peers
payable days of 56-68 days.

Profitability analysis
Table 5: Standalone versus consolidated profitability analysis

Sales
Raw Materials Consumed
Gross margin
Operating and administrative expense
Personnel cost
EBITDA
Depreciation
EBIT
Financial Charges
EBT
Other Income *
PBT (before exceptional items)
Exceptional losses (net)
PBT (after exceptional items)
Tax expense
PAT
Minority interest
PAT (after MI)

FY14
45.2
25.1
20.1
6.7
5.0
8.4
1.5
6.9
0.4
6.5
0.5
7.0
7.0
2.2
4.8
4.8

52

Standalone
% FY15
100.0
49.9
55.6
28.0
44.4
21.9
14.8
7.1
11.0
6.0
18.7
8.8
3.4
2.1
15.3
6.7
0.9
0.3
14.4
6.4
1.2
0.7
15.6
7.2
15.6
7.2
4.9
2.1
10.6
5.1
10.6
5.1

%
100.0
56.1
43.9
14.2
12.1
17.6
4.2
13.4
0.6
12.8
1.4
14.5
14.5
4.2
10.3
10.3

(INR bn)
Subsidiary/JV share (Derived)
Consolidated
FY14
% FY15
% FY14
% FY15
%
259.0 100.0 296.0 100.0 304.3 100.0 345.9 100.0
168.5
65.0 188.3
63.6 193.6
63.6 216.3
62.5
90.6
35.0 107.7
36.4 110.7
36.4 129.5
37.5
29.0
11.2
31.2
10.6
35.6
11.7
38.3
11.1
46.1
17.8
57.6
19.5
51.1
16.8
63.7
18.4
15.5
6.0
18.8
6.4
24.0
7.9
27.6
8.0
6.6
2.6
7.1
2.4
8.2
2.7
9.2
2.7
5.3
18.4
8.9
3.4
11.7
3.9
15.8
5.2
2.5
1.0
2.9
1.0
2.9
1.0
3.2
0.9
6.4
2.5
8.8
3.0
12.9
4.2
15.2
4.4
2.6
1.0
4.0
1.3
3.1
1.0
4.6
1.3
8.9
3.4
12.8
4.3
16.0
5.2
19.8
5.7
1.6
0.6
1.6
0.5
8.9
3.4
11.1
3.8
16.0
5.2
18.2
5.3
2.8
1.1
3.2
1.1
5.0
1.6
5.3
1.5
7.8
2.6
11.0
3.6
12.9
3.7
6.2
2.4
3.3
1.3
4.3
1.5
3.3
1.1
4.3
1.2
2.8
1.1
3.5
1.2
7.7
2.5
8.6
2.5
Source: Company annual report, Edelweiss research
* Other income adjusted for dividend income from subsidiaries
Edelweiss Securities Limited

Motherson Sumi
Standalone revenue jumped 10% led by ~7% and ~18% surge in wiring harness and polymer
components segments, respectively.

While standalone EBITDA margin


declined 110bps to 17.6% (FY14:
18.7%), EBITDA of
subsidiaries/JVs jumped 40bps,
led by 140bps gross margin
expansion

Exceptional losses comprise fund raising (senior secured notes) cost of INR1.2bn and
acquisition cost of wiring harness business of Stoneridge of INR0.4bn.
Other income includes proceeds from insurance claim of INR1.6bn. Corresponding losses of
INR1.2bn incurred due to fire is included in operating and admin expenses.
Net loss on foreign currency transactions declined to INR114mn (FY14: INR1,881mn).

Table 6: Related party transactions


Particulars
Transactions during the year
Purchase of services
Purchase of goods
Rent expenses
Purchase of fixed assets
Balance sheet (closing balances)
Loans & advances
Security deposits
Trade payables

Purchase of fixed assets, goods


and services from related parties
rose to INR3.4bn (FY14:
INR3.1bn).

FY13

FY14

(INR mn)
FY15

1,129
1,038
74
940

1,375
1,110
198
640

1,435
1,239
420
692

n.a.
141
406

559
194
476

400
382
367

Source: Company annual report, Edelweiss research


Note: Includes transactions with associates and companies in which KMP or their relatives have
control/significant influence; Transactions with JVs (including Sumitomo) is not included

Chart-1 Customer wise sales Consolidated and SMRP BV

Consolidated

SMRP BV
Audi
21%

Others
25%
Daimler
5%
Ford
5%
Maruti
Renault/Ni
Suzuki
BMW
ssan
5%
6%
5%
Audi
VW
Hyundai
BMW
Maruti Suzuki
Ford
Others

VW
12%
Seat
8%
Hyundai
6%
Seat
Renault/Nissan
Daimler

Ford
Diamler 4%
5%
Porsche
5%

Others
13%

Audi
28%

Renault/Ni
ssan
5% Hyundai/K
ia
BMW
Seat
8%
8%
10%
Audi
VW
BMW
Hyundai/Kia
Porsche
Diamler
Others

VW
14%

Seat
Renault/Nissan
Ford

Source: Company annual report, Edelweiss research

Volkswagen account for 12% and 14% of total sales at consolidated and SMRP BV level

53

Edelweiss Securities Limited

Annual Report Analysis


Subsidiaries/JVs performance

Revenues of SMR and SMP


jumped ~14% and ~16% in EUR
terms and their EBITDA margins
inched up to 9.8% (FY14: 9.6%)
and 6.2% (FY14: 5.4%),
respectively

Table 7: Profit and lossKey subsidiaries


FY13
FY14
SMR
Revenue
993
1,119
EBITDA #
64
107
Depreciation
27
27
EBIT #
37
80
Capex (Eur mn)
42
38
Revenue growth (%)
15.5
12.7
EBITDA (%)
6.4
9.6
EBIT (%)
3.7
7.1
ROCE (%)
13.9
27.3

FY15
1,276
125
31
94
56
14.0
9.8
7.4
30.3

FY13
1,826
69
47
22
60
n.a.
3.8
1.2
5.3

FY14
SMP
1,917
104
48
56
43
5.0
5.4
2.9
14.1

(EUR mn)
FY15
2,222
137
50
87
161
15.9
6.2
3.9
18.0

#excludes foreign exchange fluctuations loss/ (gain) on long term loans & exceptional items
Source: Company annual report, Edelweiss research

Table 8: SMRFinancials of key geographies


FY14
Revenue
PAT
PAT (%) Revenue
Hungary
27,009
1,062
3.9
21,478
South Korea
21,072
966
4.6
25,376
UK
11,672
57
0.5
9,803
USA
10,909
1,095
10.0
15,603
Australia
7,174
816
11.4
6,037
France
3,910
(200)
(5.1)
3,150
China
3,690
237
6.4
5,096
India
3,486
110
3.2
3,603
Spain
3,069
361
11.8
3,670
Brasil
821
(139)
(17.0)
1,153
94,969
4,364
4.7
92,812

(INR mn)
FY15
PAT
1,601
994
269
1,429
484
(271)
36
93
655
(193)
5,097

PAT (%)
7.5
3.9
2.7
9.2
8.0
(8.6)
0.7
2.6
17.8
(16.7)
5.4

Source: Company annual report, Edelweiss research

SMPs subsidiaries in Mexico,


Brazil and Spain continued to
incur losses (although they have
declined) during FY15.

Table 9: SMPFinancials of key geographies


FY14
Revenue
PAT
PAT (%) Revenue
Germany
72,049
2,806
3.9
74,203
China
12,752
1,457
11.4
15,461
Portugal
6,678
(180)
(2.7)
5,494
Mexico
4,740
(311)
(6.6)
3,311
Brasil
7,258
(1,120)
(15.4)
5,398
Spain
42,108
(4,746)
(11.3)
43,660
145,586
(2,094)
(1.4) 147,527

(INR mn)
FY15
PAT
2,494
2,187
144
(266)
(1,096)
(567)
2,896

PAT (%)
3.4
14.1
2.6
(8.0)
(20.3)
(1.3)
2.0

All key subsidiaries in each geography is considered in above table


Source: Company annual report, Edelweiss research

54

Edelweiss Securities Limited

Motherson Sumi
Table 10: Other subsidiaries/JVs profitability

(INR mn)
% holdings

Revenue

FY14
PAT

PAT (%)

Revenue

FY15
PAT

Subsidiaries
MSSL Mideast (FZE)
MSSL Global RSA Module Engineering Ltd.
Motherson Electrical Wires Lanka (Pvt) Ltd.
MSSL GB Ltd.
MSSL Japan Ltd.
MSSL Advanced Polymers s.r.o
MSSL Wiring systems Inc *

100
100
100
100
100
100
100

3,309
2,295
1,517
1,392
1,363
890
10,766

674.1
203.6
278.3
75.5
51.8
(23.6)
1,260

20.4
8.9
18.3
5.4
3.8
(2.6)
0.0
11.7

2,687
2,177
1,334
1,293
1,040
1,754
10,220
20,505

670
8
231
78
26
(16)
(414)
583

24.93
0.37
17.32
6.03
2.50
(0.91)
(4.05)
2.84

Joint Venture
Kyungshin Industrial Motherson
Calsonic Kansei Motherson Auto Products

50
49

8,241
3,240
11,481

555
(71)
484

6.7
(2.2)
4.2

9,638
4,057
13,695

1,091
(289)
802

11.32
(7.12)
5.86

PAT (%)

* Represents wiring harness business of Stoneridge Inc acquired during FY15. MSSL Wiring Systems Inc has 3 subsidiaries.
Joint venture and subsidiaries of SMR and SMP group and other small subsidiaries has not been considered in the above table
Source: Company annual report, Edelweiss research

Average borrowings cost


increased marginally to 6.1%
(FY14: 6%) despite refinancing at
a lower rate through issue of
Senior Secured Notes

Expenses incurred in relation to


issue of senior secured notes
stood at INR1.2bn, 3.7% of value
of funds raised

While gross debt jumped to


INR51.3bn, net debt declined by
~INR7bn to INR32.4bn. Net debt
/equity ratio improved to 1.0x
(FY14: 1.3x).

Table 11: Borrowings analysis


Particulars
Long term Loans (incl current maturities)
Foreign currency loans
INR loans
Finance lease liabilities
4.125% Senior Secured Notes (Euro)
Total (A)
Short term loans
Foreign currency loans
INR loans
Total (B)
Reported debt(A+B)
Cash and cash equivalents
Net debt
Finance cost
Average borrowings cost (%)

FY13

FY14

(INR bn)
FY15

33.2
0.0
2.2
35.5

35.3
0.7
2.3
38.3

7.9
0.4
1.3
33.5
43.1

10.7
2.8
13.5
49.0
(5.9)
43.1
2.5
n.a.

7.6
2.5
10.1
48.4
(9.1)
39.3
2.9
6.0

7.6
0.7
8.2
51.3
(18.9)
32.4
3.1
6.1

Finance cost of FY15 excludes prepayment charges of INR124mn


Source: Company annual report, Edelweiss research

55

Edelweiss Securities Limited

Annual Report Analysis


FY12
147.8
8.9
6.0
17.1
13.1
4.6
3.5
46.9
4.5
13.3
18.7
46.0
2.5
64.7

FY13
253.1
14.8
5.8
21.4
14.9
5.1
4.0
52.8
3.9
14.4
22.9
49.0
2.1
71.9

FY14
304.3
24.0
7.9
29.2
23.4
5.4
4.5
59.2
6.5
9.6
29.6
48.4
1.6
78.0

Note: Minority interest is considered in RoCE computation


Source: Company annual report, Edelweiss research

Chart 2: Capital allocation


35.0

90

28.0

72

21.0

54

14.0

36

7.0

18

0.0

0
FY11

EBITDA margin (%)

FY12
ROE (%)

FY13
ROCE (%)

FY14

(INR bn)

High trade payables resulted in


decline in net current assets and
consequently superior return
ratios

FY11
82.5
7.7
9.3
28.2
26.1
5.1
3.8
17.6
3.9
5.6
16.1
12.6
0.8
28.7

(INR bn)
FY15
345.9
27.6
8.0
31.2
25.5
5.7
5.3
61.3
9.6
1.0
33.2
51.3
1.5
84.5

(%)

Improvement in fixed assets &


working capital turnover ratios
and higher EBITDA margins led to
increase in RoCE

Table 12: Capital allocation


Particulars
Sales
EBITDA
EBITDA margin (%)
RoE (%)
RoCE (%)
Fixed asset turnover ratio
Total asset turnover ratio
Net fixed assets (Ex CWIP)
CWIP
Net current assets
Equity shareholders' funds (A)
Loan funds (B)
D/E Ratio
Total capital employed (A+B)

FY15
Total capital employed (A+B)

Source: Company annual report, Edelweiss research

56

Edelweiss Securities Limited

Motherson Sumi
Balance sheet overview
Chart 3: Major sources and application in FY15

Sources during the year


Retained
earnings &
MI
26%

Applications during the year


Net fixed
assets
9%

Loans &
advances
14%

CWIP
14%

Current
liabilities
and
provisions
54%

Borrowings
13%
Inventories
7%

Trade
Receivable
s 20%

Cash
43%

Chart 4: Major sources and application as at FY15 end


Shareholde
r funds
20%
Current
liabilities
and
provisions
44%

Cash &
Cash
equivalent
s
11%

Others
6%
Net fixed
assets
36%

Inventories
19%

Debt funds
30%
Minority
interest
6%

Trade
receivables
22%

CWIP
6%

100% =
INR169bn

Source: Company annual report, Edelweiss research

57

Edelweiss Securities Limited

Annual Report Analysis


Table 13: Summary financial
Particulars
Sales
Total income
EBITDA
Depreciation
Financial costs
Net profit
Gross margin (%)
EBITDA margin (%)
RoE (%)
RoCE (%)
Equity shareholders' funds
Loan funds
Minority interest
Net fixed assets
CWIP
Current assets loans and advances
Current liabilities and provisions
Net current assets
Cash and cash equivalents
Net debt
Cash flow from operating activities
Cash flow from investing activities
Cash flow from financing activities
Net cash flows
CAPEX
Working capital investments

FY11
82.5
84.2
7.7
2.5
0.6
3.9
37.6
9.3
28.2
26.1
16.1
12.6
2.3
17.6
3.9
24.5
18.9
5.6
3.5
9.1
4.1
(8.1)
4.0
0.1
(7.9)
(3.1)

FY12
147.8
149.2
8.9
3.8
1.6
2.6
35.4
6.0
17.1
13.1
18.7
46.0
5.0
46.9
4.5
59.8
46.5
13.3
4.6
41.5
5.9
(20.7)
13.8
(1.0)
(10.8)
(3.4)

FY13
253.1
256.3
14.8
7.1
2.5
4.4
34.9
5.8
21.4
14.9
22.9
49.0
4.0
52.8
3.9
61.2
46.8
14.4
5.9
43.1
14.9
(10.8)
(2.6)
1.5
(11.4)
(1.0)

FY14
304.3
307.4
24.0
8.2
2.9
7.7
36.4
7.9
29.2
23.4
29.6
48.4
7.9
59.2
6.5
71.5
61.9
9.6
9.1
39.3
27.0
(13.7)
(10.8)
2.4
(14.1)
2.4

(INR bn)
FY15
345.9
350.5
27.6
9.2
3.2
8.6
37.5
8.0
31.2
25.5
33.2
51.3
10.1
61.3
9.6
75.3
74.3
1.0
18.9
32.4
33.9
(28.5)
4.9
10.3
(18.4)
12.7

Source: Company annual report, Edelweiss research

58

Edelweiss Securities Limited

ANALYSIS BEYOND CONSENSUS


THE NEW ABC OF RESEARCH
Tata Motors | Annual Report Analysis

Tata Motors (TAMO) FY15 annual report analysis highlights


significant amount of forex losses impacting net worth accretion, led
by: i) forex losses on debt worth INR48bn charged directly to
reserves (FCMITDA); ii) INR117bn hedging losses; and iii) INR42bn
translation losses. Details of derivative positions at consolidated
level are not available. Capex spend led to decline in RoE/RoCE and
asset turnover ratio over past 5 years. Adjusted cash flow fell owing
to higher receivables, while payables remain a major source of cash
flow at JLR. Discounting charges paid on non-fund based facilities
rose from INR6.6bn to INR8.2bn in FY15. Consolidated net debt rose
28% to INR274bn and adjusted for pension deficit and implied debt
on discounting charges, it stood at INR515bn. TAMO had cash
balance of INR462bn as at FY15 (FY14: INR393bn). Average
borrowing cost stood at 8.5% and average yield on cash remained
low at 2.1%, leading to negative carry.

Market Data

52-week range (INR)

: 605 / 366

Share in issue (mn)

: 2,887.2

M cap (INR bn/USD mn)

: 1,070 / 16,707

Avg. Daily Vol. BSE/NSE (000) : 6,180.5

Shareholding Pattern (%)


Promoters*

: 34.3

MFs, FIs & Banks

: 16.4

FIIs

: 20.5

Others

: 28.7

*Promoters pledged shares

: 2.1

(% of share in issue)

Whats on track?
JLRs performance continues to be robust with revenue growth of 13% YoY in GBP terms
and 16% in INR terms.

What needs tracking?


Net worth accretion was weaker in FY15 on account of significant forex losses, including
for translation and hedges. Pension losses continue to be charged to reserves, further
impacting net worth, with INR27.9bn booked in FY15 (FY14: INR13.4bn). Cumulatively
over past 5 years, INR116bn worth pension losses were charged to reserves.
Standalone revenue growth was muted at 6% YoY and standalone EBITDA margin further
eroded from negative -2.6% in FY14 to -3.4% in FY15. Consolidated EBITDA margin
remained flat YoY, and adjusted for product development expenses rose from 11.1% in
FY14 to 12.5% YoY due to lower cash expenditure on product development.
Consolidated net debt rose from INR214bn in FY14 to INR274bn in FY15. In our view,
adjusted debt should be higher by INR241bn on account of pension deficit of INR82bn
and non-fund based facility of INR159bn. TAMO paid discounting charges of INR8.2bn in
FY15 (FY14: INR6.6bn).
Average borrowing cost stood at 8.5% (17.1% adjusted for forex losses capitalised) at
consolidated level, while yield on investments stood at 2.1% leading to negative carry.
Net interest cost stood at INR48bn in FY15 (FY14: INR47.4bn).

Analysis beyond Consensus (ABC) is our initiative to provide a differentiated perspective to our clients
on various non-routine and intricate issues. This unit of research works independent of the sector/stock
research team and views expressed in this report may vary with that of respective sector/stock analyst.
Edelweiss research is also available on www.edelresearch.com,
1
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

July 29, 2015


Edelweiss Securities Limited

Annual Report Analysis


Effective tax rate rose to 32.4% in FY15 (FY14: 25.3%) and tax expenses stood at INR76.4bn
versus cash tax payment of INR41.9bn, led by deferred tax of INR30.8bn.
RoE/RoCE and asset turnover ratio declined in past 5 years owing to significant capex and
product development costs. Intangibles contributed nearly half of the total assets addition
over past 5 years.
TAMO continues to capitalise 80-85% of product development expenditure versus global
peers average of 20-35%. Total outstanding product development expenditure capitalised
under intangibles stood at INR248bn and intangibles under development stood at INR193bn.
During FY15, the company capitalised interest cost of INR16.5bn (FY14: INR14.7bn),

largely towards product development expenditure.

Net worth analysis


Table 1: Net worth accretion

(INR bn)

Particulars
Opening shareholders' fund
Profit for the year
Dividend (incl dividend tax)
Other adjustments:
Actuarial losses and movement in pension assets
Forex gains/ (losses):
Capitalised under FCMITDA
On translation
On hedges (net of deferred tax)
Premium on shares issued on conversion of
FCCN net of share issue expenses
Others
Closing shareholders' fund

17.1
68.9
69.8

FY14
376.4
139.9
(7.7)
508.6

FY15
656.0
139.9
(0.6)
795.3

(13.4)

(27.9)

155.8

(48.0)
(41.9)
(117.3)

(207.2)

3.5

1.3

1.5
656.0

1.2
562.6

Source: Company annual report, Edelweiss research

Net worth declined in FY15 by INR93bn versus PAT (ex-dividend) of INR139bn, primarily
impacted by significant forex and pension losses charged to reserves as explained below:

60

INR57bn forex losses were charged directly through FCMITDA account (as permitted by
amended AS-11) and INR9.0bn was amortised to P&L.

MTM losses on derivatives worth INR117.3bn (net of deferred tax of INR29.3bn) were
recorded under hedging reserves, as the company followed hedge accounting
permitted under AS-30.

Translation of overseas subsidiaries led to forex loss of INR41.9bn for the year.

Pension losses rose to INR28.0bn (net of deferred tax of INR7.0bn) in FY15 (FY14:
INR13.4bn)

Edelweiss Securities Limited

Tata Motors
Profitability analysis
Table 2: Consolidated versus standalone - Profitability analysis
Particulars
Sales
Raw Materials Consumed
Operating & Admin. Exp.
Personnel cost
EBITDA
Depreciation
EBIT
Financial Charges
Other income
Exceptional exp/ (gain)
PBT
Tax expense
PAT

FY14
342.9
259.1
63.9
28.8
(9.0)
20.7
(29.7)
13.5
38.3
5.4
(10.3)
(13.6)
3.3

Standalone
%
FY15
100.0
362.9
75.6
270.4
18.6
74.0
8.4
30.9
(2.6)
(12.4)
6.0
26.0
(8.6)
(38.4)
3.9
16.1
11.2
18.8
1.6
4.0
(3.0)
(39.7)
(4.0)
7.6
1.0
(47.4)

%
100.0
74.5
20.4
8.5
(3.4)
7.2
(10.6)
4.4
5.2
1.1
(11.0)
2.1
(13.1)

(INR bn)

Subsidiary (Derived)
FY14
%
FY15
1,985.5
100.0
2,265.0
1,176.7
59.3
1,328.8
264.5
13.3
306.9
186.8
9.4
224.6
357.5
18.0
404.8
90.1
4.5
107.9
267.4
13.5
296.9
34.0
1.7
32.5
(30.0)
(1.5)
(9.8)
4.5
0.2
(2.2)
198.9
10.0
256.8
61.3
3.1
68.8
137.7
6.9
188.0

%
100.0
58.7
13.5
9.9
17.9
4.8
13.1
1.4
(0.4)
(0.1)
11.3
3.0
8.3

FY14
2,328.3
1,435.9
328.4
215.6
348.5
110.8
237.8
47.5
8.3
9.9
188.7
47.6
141.0

Consolidated
%
FY15
100.0 2,628.0
61.7 1,599.2
14.1
380.9
9.3
255.5
15.0
392.4
4.8
133.9
10.2
258.5
2.0
48.6
0.4
9.0
0.4
1.8
8.1
217.0
2.0
76.4
6.1
140.6

%
100.0
60.9
14.5
9.7
14.9
5.1
9.8
1.8
0.3
0.1
8.3
2.9
5.4

Source: Company annual report, Edelweiss research

Standalone revenue growth stood lower at 6% YoY, while standalone EBITDA margin further
dipped from negative -2.6% in FY14 to -3.4% in FY15.
Consolidated revenue grew a robust 13% YoY, primarily driven by strong subsidiaries
revenue, mainly JLR. Revenue at JLR grew 13% YoY in GBP terms, while currency
depreciation led to INR revenue growth of 16% YoY.

Table 3: Adjusted EBITDA

(INR bn)

Particulars

EBITDA margin stood flat YoY,


and adjusted for product
development expenses, rose
from 11.1% in FY14 to 12.5% in
FY15

FY13

Reported EBITDA
Less: Adjustments
65% of Product development cost *
Adjusted EBITDA

Margin FY14 Margin FY15 Margin


(%)
(%)
(%)
246
13.0
349
15.0
392
14.9

61
89
64
3.2
3.8
2.4
185
9.8
259
11.1
328
12.5
Source: Company annual report, Edelweiss research
* Assuming 35% capitalisation rate in line with global peers

Table 4: Product development expenditure


Particulars
Closing balance (A)
Ammortisation during the year (B)
Opening balance ( C)
Expenditure capitalised during the
year (D=A+B-C)
Translation adjustment
Adjusted expenditure capitalised
Revenue expenditure incurred (E)
Total Cash expense on product
development (D+E)
% of expenditure capitalized

FY13
63.1
5.3
52.9

Standalone
FY14
74.4
7.3
63.1

FY15
79.4
11.1
74.4

Subsidiary (Derived)
FY13
FY14
FY15
218.2
330.9
361.4
26.3
43.9
51.4
160.0
218.2
330.9

(INR bn)
Consolidated
FY13
FY14
FY15
281.4
405.2
440.8
31.6
51.2
62.5
212.9
281.4
405.2

15.5
0.0
15.5
4.3

18.5
0.0
18.5
4.3

16.1
0.0
16.1
4.4

84.6
4.2
88.8
16.0

156.5
(24.1)
132.4
21.4

81.9
16.4
98.3
24.4

100.1
4.2
104.2
20.2

175.0
(24.1)
150.9
25.7

98.1
16.4
114.5
28.8

19.7
78

22.8
81

20.5
79

104.7
85

153.8
86

122.7
80

124.4
84

176.6
85

143.2
80

Source: Company annual report, Edelweiss research

61

Edelweiss Securities Limited

Annual Report Analysis


Table 5: Product development capitalisation ratio JLR versus global peers
Particulars
Product development - % capitalised:
Audi
Daimler
BMW
JLR (fiscal year ending)

JLR continues to capitalise 80% 85% of product development costs


versus 20-35% capitalisation by
global peers

CY11

CY12

(%)

CY13

CY14

21
27
30
30
26
26
24
20
29
28
36
33
83
85
83
81
Source: Company annual report, Edelweiss research

Capitalisation ratio marginally declined from 83% in FY14 to 81% in FY15 at JLR, while from
85% to 80% at consolidated level.

Debt and borrowing cost analysis


Table 6: Adjusted debt analysis

(INR bn)

Particulars
Discounting charges in P&L (A)
Adjustment to Debt:
Avg borrowing cost (%) - Avg 12m EUR LIBOR +
300bps for JLR (B)
Implied debt on discounting charges (A/B*100)
Pension deficit (as per annual report)
Total - C

Standalone
FY13
FY14
FY15
3.4
3.4
4.6

Subsidiary (derived)
FY13
FY14
FY15
3.6
3.1
3.6

Consol
FY13
FY14
7.0
6.6

FY15
8.2

8.2

9.7

8.5

3.8

3.5

3.4

41

35

41

35

54
54

95
54
149

90
67
157

105
82
187

136
54
190

125
67
192

159
82
241

Gross debt - Reported (D)


Gross debt - Adjusted (C+D)

168
209

151
186

211
266

368
517

456
613

525
712

536
726

606
798

736
977

Net debt - Reported


Net debt - Adjusted

163
204

148
184

202
256

86
235

65
222

72
259

249
440

214
406

274
515

Source: Company annual report, Edelweiss research

TAMO paid discounting charges worth INR8.2bn in FY15 of which INR3.6bn related to
subsidiaries, primarily JLR. Adjusted for implied debt (derived from discounting cost
incurred) and pension deficit, consolidated gross debt stood at INR977bn in FY15 versus
INR736bn reported.
Note: We have used LIBOR + 300bps for JLR and average cost of borrowing for standalone
entity.

62

Edelweiss Securities Limited

Tata Motors
Table 7: Average yield and borrowing cost Consolidated and JLR*
Particulars
Cash & Investment:
Current account and deposits
Mutual fund and others
Total

FY11

Consolidated (INR bn)


FY12
FY13
FY14

FY15

FY11

JLR (GBP mn)


FY12
FY13
FY14

FY15

2430
2430

2847
2847

3459
3459

4263
4263

16.0
0.9

34.0
1.3

38.0
1.2

**
**

111
15
126

179
78
258

206
81
287

293
100
393

318
144
462

1,028
1,028

Income from Investment (A)


Average Yield % (B)

4.2
3.8

5.7
3.0

8.1
3.0

8.3
2.4

8.9
2.1

9.7
1.1

Gross Debt
Net Debt / (cash)

328
202

471
214

536
249

606
214

736
274

1,382
353

1,974
(456)

2,167
(680)

2,010
(1,449)

2,537
(1,726)

Interest cost (incl capitalized) (C)


Avg Borrowing cost (%) (D)
Avg Borrowing cost (%) adjuted for
forex losses

22.3
6.6

31.8
8.0

41.3
8.2

55.7
9.7

57.0
8.5

84.0
3.8

166.1
9.9

176.2
8.5

257.0
12.3

230.0
10.1

6.5

11.2

11.0

6.8

17.1

3.8

9.9

8.5

12.3

10.1

Net interest expense in P&L (C-A)


Negative carry (D-B)

18.1
2.8

26.1
5.0

33.2
5.2

47.4
7.3

48.0
6.4

74.3
2.7

150.1
9.0

142.2
7.2

219.0
11.1

**
**

Source: Company annual report, Edelweiss research


* Borrowing cost and yield on investments are calculated on average basis
** FY15 data for JLR not available

Gross debt of INR736bn (8.5% interest cost) and cash of INR462bn (average yield of 2.1%)
led to net interest cost of INR48bn and negative carry of 6.4% in FY15.
Debt pertaining to Tata Motors Finance (captive financing arm) stood at INR122.3bn, as per
our estimate.
Average borrowing cost, at consolidated level, stood at 8.5%. However, significant forex
losses capitalised under reserves led to increase in adjusted borrowing cost at 17.1%.
Average borrowing cost at JLR remained elevated at 10.1%, though it declined YoY.
Average yield on investments remained lower and dropped to 2.1% in FY15, as significant
amount of cash and investments are with overseas entities (primarily JLR).

63

Edelweiss Securities Limited

Annual Report Analysis


Cash flow and fund flow analysis
Table 8: Adjusted cash flow analysis

(INR bn)

Particulars
Profit before tax
Non-operating expenses
Non-cash adjustments
Direct taxes paid
Cash profit after tax
Interest expenses paid
Interest cost on NCD / FCCB charged through reserves
Pension cash contribution charged through reserves
Product Development capitalised
Adj cash profit post product development
Capex done (Ex product development)
Adj cash profit after tax post interest and capex
Working capital changes (Reported)
Less: Acceptances
Adj FCF post interest before finance receivables &
Add: Rise in Finance Receivables
Adj FCF post interest & finance receivables

Standalone
FY14
FY15
(10.3)
(39.7)
(24.8)
0.4
29.4
29.7
(0.6)
(0.8)
(6.2)
(10.5)
(17.5)
(18.4)
(1.1)
(1.1)
(18.5)
(16.1)
(43.3)
(46.1)
(12.4)
(10.9)
(55.7)
(57.1)
34.6
(15.2)
(8.6)
(8.6)
(29.7)
(80.8)
(0.2)
(0.0)
(29.9)
(80.8)

Subsidiary (Derived)
Consolidated
FY14
FY15
FY14
FY15
197.8
256.0
187.6
216.3
63.3
41.8
38.6
42.2
107.5
142.3
136.9
172.0
(42.5)
(41.2)
(43.1)
(41.9)
326.1
399.0
319.9
388.5
(44.2)
(44.6)
(61.7)
(63.1)
1.1
(1.1)
(11.4)
(13.9)
(11.4)
(13.9)
(132.4)
(98.3)
(150.9)
(114.5)
138.2
243.2
94.8
197.1
(105.9)
(190.0)
(118.3)
(200.9)
32.2
53.2
(23.5)
(3.8)
7.0
(21.5)
41.6
(36.7)
16.3
(2.3)
7.7
(10.9)
55.5
29.4
25.8
(51.4)
24.9
1.7
24.8
1.7
80.4
31.1
50.6
(49.7)
Source: Company annual report, Edelweiss research

Cash profit for the year stood robust at INR388.5bn versus INR319.9bn in previous year.
Free cash flow, adjusted for capex, product development spends and acceptances declined
from INR25.8bn in FY14 to negative INR(51.4)bn in FY15.
Capex spend rose from INR269bn in FY14 to INR315bn in FY15 and the company plans to
spend additional INR388bn in FY16.
Working capital requirement rose to INR36.7bn versus inflow of INR41.6bn last year,
primarily led by increase in receivables by INR30.1bn (FY14: decline of INR18.6bn). Trade
payables rose by INR36bn in FY15 versus INR46.9bn in FY14.

Table 9: Average cash conversion cycle (days)


Particulars
Inventory days
Trade Receivable days
Less: Trade payable days
Cash conversion cycle
Add: Acceptance days
Adj Cash conversion cycle

Cash conversion cycle continued


to be negative led by higher
payables of 109 days

FY12
53
15
(110)
(41)
23
(19)

FY13
52
17
(98)
(29)
12
(17)

FY14
60
17
(109)
(32)
10
(22)

FY15
63
16
(109)
(30)
9
(21)

Source: Company annual report, Edelweiss research

Receivable days stood steady at 16 days and absolute receivables rose from INR105.7bn to
INR125.8bn in FY15. Receivables due for >6 months rose from INR9.5bn to INR10.0bn in
FY15.

64

Edelweiss Securities Limited

Tata Motors
Table 10: Average cash conversion cycle (days) Gobal peers
Particulars

CY11
15
59
(33)
41

Trade Receivable days


Inventory days
Less: Trade Payable days
Cash conversion cycle

BMW
Audi
Daimler
Jaguar Land Rover
CY12 CY13 CY14 CY11 CY12 CY13 CY14 CY11 CY12 CY13 CY14 FY11 FY12 FY13 FY14
14
12
10
21
20
20
23
26
25
24
23
23
17
18
17
58
58
60
39
41
40
39
71
72
69
69
64
55
61
61
(35) (42) (44) (39) (40) (42) (45) (39) (38) (35) (35) (93) (88) (99) (97)
36
28
26
21
21
17
17
58
58
57
57
(7) (16) (20) (20)
Source: Company annual report, Edelweiss research

JLR enjoys higher payables at 97 days as compared to its global peers average of 35-45 days.

Table 11: Fund flow analysis


Sources
Operating profit
Less: Interest
Less: Taxes
Add: Investment Income
Cash Profits
Working capital changes
OCF post interest
Equity issuances (GDS and
QIPs)
Net borrowings
Others
Total

(INR bn)

FY11
167
(25)
(14)
4
132
(17)
115

FY12
224
(34)
(18)
5
178
34
212

FY13
244
(47)
(22)
8
183
25
208

33
(13)
(1)
135

1
124
(3)
334

0
64
0
272

FY14
363
(62)
(43)
7
265
42
307
34
(2)
339

FY15
430
(63)
(42)
8
333
(37)
297
122
(2)
417

Total
1,429
(230)
(139)
32
1,092
46
1,139

Application
Capex (ex-product development)
Product development capitalised
Dividend
Change in finance receivable
Net cash(FDs, Mutual funds)

34
331
(7)
1,496 Total

FY11
28
53
10
24
20

FY12
47
91
15
57
125

FY13
88
100
16
25
43

FY14
94
175
7
1
62

FY15
217
98
7
95

135

334

272

339

417

Total
475
517
55
106
344

1,497

Source: Company annual report, Edelweiss research

Debt rose by INR331bn over past 5 years and total cash and investments rose by INR344bn
over the same period.

Chart 1: Source of funds


Net
borrowings
22%

Chart 2: Application of funds


Others
1%

Sources

Equity
issuances
(GDS and
QIPs)
2%
OCF post
interest
75%

Applications
Net cash
(FDs, Mutu
Change in al funds)
23%
finance
receivable
7%

Capex (exproduct
developme
nt)
32%

Dividend
4%
Product
developme
nt
capitalised
34%
Source: Company annual report, Edelweiss research

Cumulatively, over past 5 years, operating cash flow contributed 75% of cash generation
and borrowings contributed 22%. Significant cash deployment was towards product
development (34%) and capex (32%).

65

Edelweiss Securities Limited

Annual Report Analysis


Pension analysis
Table 12: Pension cost versus cash contribution

(INR bn)

Particulars

Post-retirement Pension scheme

Components of employer expense


Current Service cost
Interest cost
Expected return on plan assets
Others
Total expense recognised in P&L
Company's cash contributions
Net liability recognised in balance sheet (under funded
status)
Cash infused + increase in liability
Excess of Increase in Liability and cash infused over
expensed in P&L

Cummulative
since FY10

FY10

FY11

FY12

FY13

FY14

FY15

4.8
15.6
(13.1)
0.1
7.3
4.0
6.8

7.5
15.3
(17.1)
0.3
6.1
15.5
20.7

7.8
18.3
(18.3)
1.1
8.9
17.6
26.5

10.1
21.8
(19.2)
0.5
13.2
14.4
53.9

16.3
25.9
(22.0)
0.6
20.7
32.0
67.1

15.8
27.7
(23.4)
0.0
20.2
34.1
81.9

76.3
117.6
75.1

5.6
(1.7)

29.4
23.3

23.4
14.5

41.8
28.6

45.2
24.5

48.9
28.7

192.7
116.4

Source: Company annual report, Edelweiss research

Cash contribution continues to be significantly higher versus P&L charge annually led by
actuarial losses accounted under reserves as per IFRS. Cumulatively, since FY10, cash
contributions and increase in liability stood at INR192.7bn versus P&L charge of INR76.3bn.

Table 13: Pension actuarial assumptions and plan assets details


Particulars
Discount rate (%)
Expected return on plan assets (%)

Particulars
Equity securities (%)
Debt securities (%)
Other (%)
Net fair value of plan assets
Present value of defined benefit obligation

FY10
5.50- 5.60
6.5

FY11
5.19- 5.50
5.75-6.57

FY10
39-53
39-56
1-23
259.1
263.4

FY11
20-40
40-63
2.4-20
298.2
307.2

FY12
4.38-5.1
4.85-6.34

FY13
3.69-4.40
4.75-6.34

FY14
3.71-4.59
2.07-3.94

FY15
2.45-3.37
3.37

FY12
FY13
FY14
FY15
19-38.4
17-38
10-37
8-20
38.4-67
38-68
35-69
49-70
8-23.2
15-24
19-27
18-31
383.7
440.5
535.8
646.9
400.7
494.3
602.5
728.7
Source: Company annual report, Edelweiss research

Pension deficit rose from INR66.7bn in FY14 to INR81.8bn in FY15, partly led by decline in
the discount rate. Expected return on assets has been consistently falling in past 5 years
along with the discount rate due to lower interest rates in the European region.

66

Edelweiss Securities Limited

Tata Motors
Capital allocation analysis
Table 14: Capital allocation and return ratios

Significant increase in capex over


past 5 years led to decline in RoE
and RoCE and asset turnover ratio

(INR bn)

Particulars
Sales
EBITDA
EBITDA margin (%)
Depreciation
Net profit
ROE (%)
ROCE (%)
Asset turnover (ex-CWIP and
intangibles under development)

FY11
1,221
168
14
47
93
67
26

FY12
1,657
223
13
56
135
52
26

FY13
1,888
245
13
76
99
29
21

FY14
2,328
349
15
111
140
29
23

FY15
2,628
392
15
134
140
23
21

3.5

3.7

3.4

3.4

3.0

Capital employed
Equity shareholders' funds (A)
Loan funds (B)

520
192
328

798
327
471

912
376
536

1,262
656
606

1,299
563
736

Source: Company annual report, Edelweiss research

Chart 3: Capital allocation and ratios


80.0

1,120

48.0

840

32.0

560

16.0

280

(%)

64.0

0.0

(INR bn)

1,400

0
FY11

FY12

FY13

FY14

FY15

Equity shareholders' funds (A)

Loan funds (B)

EBITDA margin (%)

ROE (%)

ROCE (%)
Source: Company annual report, Edelweiss research

67

Edelweiss Securities Limited

Annual Report Analysis


Table 15: Capital employed Total assets
Intangibles contributed nearly half
of the total assets addition over
past 5 years

Interest capitalised in FY15 stood


at INR16.5bn (FY14: INR14.7bn)
and largely towards product
development expenditure

Working capital position (excash) improved over past 5 years,


primarily led by sharp increase in
payables and other liabilities

Particulars
Fixed assets:
Net fixed assets (ex CWIP)
CWIP
Intangibles (ex-Goodwill)
Intangibles under development
Goodwill
Total assets - A
Working capital - ex Cash
Inventories
Receivables
Other assets
Payables
Other liabilities
Net working capital (ex-cash) - B
Cash and cash equivalents - C
Others - D
Total (A+B+C+D)

(INR bn)

FY11

FY12

FY13

FY14

FY15

228
22
90
92
36
468

271
31
131
128
41
603

324
43
187
141
41
736

407
101
234
231
50
1,024

523
93
315
193
47
1,171

141
65
89
(279)
(211)
(196)
126
121
520

182
82
122
(367)
(284)
(264)
258
202
798

210
109
134
(448)
(340)
(334)
287
224
912

273
106
187
(573)
(364)
(372)
393
218
1,262

293
126
137
(574)
(514)
(532)
462
198
1,299

Other liabilities include provisions for product warranties (rose from INR202bn to INR212bn),
derivative contract liabilities (net) (up from INR(68)bn asset to INR123bn liabilities) and
others (largely capex payables, advance from customers and tax related liabilities).

Table 16: Capital employed Total liabilities

Total liabilities rose from INR818bn


to INR1.8trn over past 5 years,
primarily led by equal increase in
debt and trade payables

Particulars
Liabilities:
Debt
Trade payables
Sub-total (A)
Derivative liablities/(asset) net
Provisions (largely product
warranties and provisions)
Other liablities (tax, capex
payables and others)
Sub-total (B)
Total liablitlies (A+B)
Net worth (Asset - liabilities)
D/E ratio
Total liabilities to equity ratio

FY11

(INR bn)
FY12

FY13

FY14

FY15

328
279
607
(3)

471
367
838
6

536
448
984
26

606
573
1,180
(68)

736
574
1,310
123

100

130

161

202

212

115

148

154

230

179

211
818

284
1,122

340
1,324

364
1,544

514
1,824

192
1.7
3.2

327
1.4
2.6

376
1.4
2.6

656
0.9
1.8

563
1.3
2.3

Source: Company annual report, Edelweiss research

FY15 annual report (page 94) highlighted that in Fiscal 2014, TAMO breached financial
covenants relating to the ratio of total outstanding liabilities to tangible net worth, and to
the debt service coverage ratio in various financing agreements. The company requested
and obtained waivers of its obligations from the lenders and guarantors to pay additional
costs as a consequence of such breaches. These breaches have not resulted in an event of
default in the companys financing agreements or the payment of penalties.
In Fiscal 2015, the company has prepaid the above borrowings and hence there has not
been any breach of financial covenants.
68

Edelweiss Securities Limited

Tata Motors
Table 17: Product warranty expenses
Particulars
Opening balance
Add: Provision for the year (net)
Less: Payments / debits
Foreign currency translation
Closing balance
Provision for the year as % of sales

Product warranty expenses, as a %


of sales, remained consistent;
however, outstanding provision has
increased considerably over the
years

(INR bn)
FY12
41.8
34.3
(28.6)
5.6
53.0
2.1

FY13
53.0
42.0
(27.6)
(0.3)
67.2
2.2

FY14
67.2
62.1
(47.6)
13.2
94.8
2.7

FY15
94.8
59.1
(41.5)
(8.8)
103.6
2.2

Cumulative
41.8
197.5
(145.3)
9.6
103.6

Source: Company annual report, Edelweiss research

Table 18: Product warranty expenses Global peers


Particulars
Warranty expenditure
Sales
% of Sales

BMW (EUR mn)


CY12
CY13
CY14
1,819
1,243
1,451
58,039 56,812 60,280
3.1
2.2
2.4

Audi (EUR mn)**


Daimler (EUR mn)
CY12
CY13
CY14
CY12
CY13
CY14
1,731
2,474
2,611
2,221
2,426
2,617
48,771 49,880 53,787 100,531 103,594 114,013
3.5
5.0
4.9
2.2
2.3
2.3

JLR (GBP mn)


FY12
FY13
FY14
372
462
541
13,512 15,784 19,386
2.8
2.9
2.8

Source: Company annual report, Edelweiss research


** Includes provision for rebates/ discounts - warranty details not separately available.

JLRs warranty expenses, as a % of revenues, are broadly in line with peers.

Table 19: Summary financials

(INR bn)

Particulars
Sales
Total income
EBITDA
EBITDA margin (%)
RoCE
RoE
Depreciation
Financial costs
Net profit
Equity shareholders' funds
Loan funds
Net debt
Net fixed assets (Ex-CWIP)
CWIP
Current assets loans and advances (Ex-cash)
Current liabilities and provisions
Net current assets (Ex-cash)
Cash and cash equivalent
Cash flow from operating activities
Cash flow from investing activities
Cash flow from financing activities
Net cash flows
CAPEX
Working capital investments (as per Cash flow)

69

FY11
1,221
1,226
168
13.8
26.3
67.3
47
24
93
192
328
202
353
115
295
396
(101)
126
112
(73)
(14)
26
(81)
(40)

FY12
FY13
FY14
FY15
1,657
1,888
2,328
2,628
1,663
1,896
2,337
2,637
223
245
349
392
13.5
13.0
15.0
14.9
26.3
20.8
22.6
20.9
52.1
29.4
28.5
23.2
56
76
111
134
30
36
47
49
135
99
140
140
327
376
656
563
471
536
606
736
214
249
214
274
444
552
691
885
159
184
333
286
387
454
566
555
541
648
770
827
(154)
(195)
(204)
(272)
258
287
393
462
184
221
362
352
(205)
(234)
(299)
(345)
66
(17)
(39)
52
44
(30)
24
59
(139)
(188)
(269)
(315)
(23)
(1)
42
(37)
Source: Company annual report, Edelweiss research

Edelweiss Securities Limited

ANALYSIS BEYOND CONSENSUS


THE NEW ABC OF RESEARCH
TVS Motor Company | Annual Report Analysis

TVS Motor Companys (TVS) FY15 annual report analysis highlights robust
volume growth leading to revenue and PBT growth (before exceptional
items) of 23% and 33% YoY, respectively. EBIDTA margin however
remained flat at 5.8%. EBITDA/unit has been consistently lower for TVS in
the past 5 years versus peers owing to higher operating and employee cost
per unit. Subsidiaries continue to record losses, largely led by Indonesia
operations. Aggregate exposure to subsidiaries stood at INR6.6bn, 40% of
standalone net worth (including guarantees and credit facilities - INR8.1bn,
49%). Operating cash flows declined sharply following increase in
inventories and loans/advances. Debt rose by INR3.9bn to INR11.2bn in
FY15 (D/E 0.8x), and adjusted for off-balance sheet liabilities (bills
discounted, LCs, credit agreements) stood at INR15.7bn (adjusted* D/E
1.3x). Investments (other than subsidiaries) stood at INR5.4bn, 41% of net
worth. Related party transactions included purchases worth INR4.6bn
(6.2% of raw material (RM) cost) from parent, Sundaram Clayton.
*also adjusted for revaluation reserve

Whats on track?

Market Data
52-week range (INR)

: 322 / 201

Share in issue (mn)

: 475.0

M cap (INR bn/USD mn)

: 110 / 1,660

Avg. Daily Vol. BSE/NSE (000) : 2,737.2

Shareholding Pattern (%)

Promoters*

: 57.4

MFs, FIs & Banks

: 14.3

FIIs

: 12.7

Others

: 15.6

*Promoters pledged shares

: Nil

(% of share in issue)

Robust volume growth at 21% YoY, led by strong demand and new launches. Revenue
grew 23% to INR103.1bn.

What needs tracking?


Subsidiaries losses declined from INR748mn n FY14 to INR276mn in FY15. Indonesian
subsidiarys net worth has eroded by 88% since operations due to accumulated losses of
INR5.0bn (equity INR5.6bn). Aggregate cash exposure to subsidiaries stood at INR6.6bn,
40% of standalone net worth (including off- balance sheet items - INR8.1bn, 49%).
Investments (other than subsidiaries) stood at INR5.4bn, 41% of net worth (FY14:
INR4.4bn, 38%), largely pertaining to preference shares of TVS Motor Services (INR4.5bn)
and equity investment in 49% associate entity, Emerald Haven Realty (INR400mn).
Operating cash flow post interest (adjusted for off-balance sheet liabilities) declined
significantly from INR3.2bn in FY14 to INR(0.4)bn in FY15, primarily led by increase in
inventories and loans/advances.
Adjusted cash conversion cycle stood at 12 days versus negative 17-23 days for peers.
Inventory days for TVS, at 41 days, are highest amongst peers (13-17 days).
Contingent liabilities include bills discounted, LCs and liabilities towards credit facilitating
agreements, aggregating to INR4.5bn (FY14: INR3.7bn). Adjusted for these liabilities and
revaluation reserve of INR932mn, D/E rose from 1.1x in FY14 to 1.3x in FY15 (reported
0.6x to 0.8x).
Analysis beyond Consensus (ABC) is our initiative to provide a differentiated perspective to our clients
on various non-routine and intricate issues. This unit of research works independent of the sector/stock
research team and views expressed in this report may vary with that of respective sector/stock analyst.
Edelweiss research is also available on www.edelresearch.com,
1
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

September 14, 2015


Edelweiss Securities Limited

Annual Report Analysis


Other current liabilities included INR2.9bn, 23% of net worth (FY14: INR2.4bn, 22%) towards
dues for expenses, which largely include marketing cost, sales incentives, excise duty
provisions and other admin expenses.
Consolidated EBIDTA grew 23% YoY, but margin has been flattish since past 4 years at 6%,
primarily owing to higher employee and operating costs as compared to peers. Operating
cost per unit stood at INR6,907 for TVS versus INR4,595 for Bajaj Auto and INR4,746 for
Hero MotoCorp.
Operating cost includes ad spend/marketing expense at 5.6% of revenues versus peers
which ranged from 2-2.5%. Packing/ freight, power/ fuel, miscellaneous and other expenses
as percentage of revenue stood highest for TVS (10%) versus peers (5.2% Bajaj Auto and
7.6% for Hero MotoCorp). TVS recognises freight cost on gross basis and recoveries from
customers/ dealers are included in revenue, similar to Hero MotoCorp.
In the previous year, a subsidiary company revalued its land by INR1.5bn, of which a portion
of land (in Indonesia) was subsequently sold in FY15, leading to decline in revaluation
reserves by INR574mn. Consequently, gain on sale of land worth INR582.7mn was
recognised in exceptional items.
Interest and investment income stood at INR194mn (FY14: INR233mn) and cash and
investments stood at INR882mn (FY14: INR1.7bn). Average yield on cash and investments
stood significantly higher at 14-15% in past 2 years, primarily led by interest charged
(INR130mn in FY15) towards extended credit to dealers on receivables.

Other highlights
Foreign currency translation reserve stood at negative INR275.9mn versus credit of
INR750.2mn in FY14, owing to losses on translation of overseas subsidiaries (primarily
Indonesia and Singapore) as INR appreciated against the IDR and SGD.
Derivatives outstanding (net sell position) rose to INR7.8bn (FY14: INR4.8bn) and net
unhedged receivables rose from INR285mn in FY14 to INR708.5mn in FY15.
Standalone R&D expenses stood at INR2.0bn, 1.9% of sales (FY14: INR1.3bn, 1.7%). TVS
capitalised INR183.8mn (4% of standalone PBT) as design development and knowhow
under Intangible assets (FY14: INR191.1mn, 5% of PBT).

71

Edelweiss Securities Limited

TVS Motor Company


Profitability analysis
Table 1: Standalone versus consolidated profitability
Standalone
Particulars
FY14
% FY15
%
Sales
79.7 100.0 101.0 100.0
Raw Materials Consumed
56.7
71.2
73.0
72.3
Operating and admin expense
13.3
16.8
16.1
16.0
Personnel cost
4.8
6.0
5.9
5.8
EBITDA
4.8
6.1
6.0
6.0
Depreciation
1.3
1.7
1.5
1.5
EBIT
3.5
4.4
4.5
4.5
Financial Charges
0.3
0.3
0.3
0.3
Other income
0.3
0.4
0.3
0.3
PBT before exceptional items
3.6
4.5
4.6
4.5
Exceptional items
(0.0) (0.0)
Tax
(0.9) (1.1) (1.1) (1.1)
PAT
2.6
3.3
3.5
3.4

Subsidiary (Derived)
FY14
% FY15
%
4.2 100.0
2.1 100.0
2.3
55.2
0.1
6.3
1.1
27.1
1.3
59.9
0.6
15.5
0.7
34.4
0.1
2.2
(0.0) (0.6)
0.2
4.1
0.3
11.8
(0.1) (1.9) (0.3) (12.5)
0.5
13.1
0.3
16.3
(0.0) (0.8) (0.1) (4.2)
(0.7) (15.9) (0.7) (32.9)
0.2
5.0
0.6
27.3
(0.3) (7.0) (0.2) (7.3)
(0.7) (17.9) (0.3) (12.9)

(INR bn)
Consolidated
FY14
% FY15
%
83.8 100.0 103.1 100.0
59.0
70.4
73.1
70.9
14.5
17.3
17.4
16.9
5.4
6.5
6.6
6.4
4.9
5.9
6.0
5.8
1.5
1.8
1.8
1.7
3.4
4.1
4.2
4.1
0.6
0.6
0.8
1.0
0.3
0.3
0.2
0.2
2.9
3.4
3.9
3.7
0.2
0.2
0.6
0.6
(1.2)
(1.4)
(1.2)
(1.2)
1.9
2.2
3.2
3.1

Source: Company annual report, Edelweiss research

TVS reported robust 21% volume growth leading to significant improvement in consolidated
revenue and profitability (PBT before exceptional items) growth at 23% and 33%,
respectively.
EBITDA grew 23% YoY, but margins have remained at 6% levels since past 4 years, despite
significant improvement in volume growth primarily due to higher employee cost and
operating expenses.

Table 2: Operating cost and margins TVS versus peers (consolidated)


Particulars
Volumes (mn)
TVS
Bajaj Auto
Hero Moto Corp

FY11

FY12

FY13

FY14

FY15

2.0
3.8
5.4

2.2
4.3
6.2

2.0
4.2
6.1

2.1
3.9
6.2

Revenues (INR bn)


TVS
Bajaj Auto
Hero Moto Corp

65.4
164.3
192.5

74.4
195.9
235.8

75.1
200.4
237.7

Gross margins (%)


TVS
Bajaj Auto
Hero Moto Corp

27
28
27

27
28
27

5.5
19.2
12.8

6.2
18.9
15.3

EBITDA margins (%)


TVS
Bajaj Auto
Hero Moto Corp

2.5
3.8
6.6

Particulars
Revenue per unit
TVS
Bajaj Auto
Hero Moto Corp

32,026
42,964
35,623

33,997
45,416
37,816

36,744
47,301
39,121

40,442
52,088
40,467

40,952
56,712
41,524

83.8
201.6
252.8

103.1
216.1
275.4

EBITDA per unit


TVS
Bajaj Auto
Hero Moto Corp

1,748
8,260
4,554

2,099
8,599
5,804

2,145
8,611
5,406

2,371
10,737
5,666

2,394
10,496
5,273

29
28
27

30
31
28

29
31
27

Employee cost per unit


TVS
1,853
Bajaj Auto
1,312
Hero Moto Corp
1,146

1,968
1,275
1,180

2,318
1,534
1,351

2,610
1,891
1,490

2,617
2,357
1,777

5.8
18.2
13.8

5.9
20.6
14.0

5.8
18.5
12.7

72

FY11

FY12

FY13

FY14

FY15

Operating exps per unit


TVS
5,186
5,227
6,119
6,984
6,907
Bajaj Auto
2,526
2,801
3,092
3,587
4,595
Hero Moto Corp
3,804
3,116
3,728
4,124
4,746
Source: Company annual report, Edelweiss research

Edelweiss Securities Limited

Annual Report Analysis


EBITDA/unit and EBITDA margins have stood consistently lower than peers since past 5
years due to high employee cost and operating expenses, highest versus peers.

Table 3: Major operating expenses analysis TVS versus peers


Particulars
Packing and freight charges
Miscellaneous Expenses
Other marketing expenses
Advertisement & publicity
Power and fuel
Repairs (Bldg, machinery)
Consumption of stores &spares
Royalty
Others
Total

TVS
FY14
3,392
3,243
2,640
2,914
893
606
486
305
14,479

FY15
4,588
4,317
3,084
2,693
1,076
660
623
352
17,393

% of sales
FY14 FY15
4.0
4.4
3.9
4.2
3.1
3.0
3.5
2.6
1.1
1.0
0.7
0.6
0.6
0.6
0.4
0.3
17.3 16.9

(INR mn)
Bajaj Auto
% of sales
Hero Moto Corp.
% of sales
FY14
FY15 FY14 FY15
FY14
FY15
FY14 FY15
3,229
3,932
1.6
1.8
7,294
8,557
2.9
3.1
1,919
2,484
1.0
1.1
5,867
7,513
2.3
2.7
241
298
0.1
0.1
2,623
3,215
1.3
1.5
4,935
6,787
2.0
2.5
1,064
1,148
0.5
0.5
1,375
1,585
0.5
0.6
1,448
1,998
0.7
0.9
1,337
1,388
0.5
0.5
1,250
1,317
0.6
0.6
989
1,070
0.4
0.4
1,167
1,214
0.5
0.4
2,755
3,720
1.4
1.7
2,798
3,360
1.1
1.2
14,530 18,112
7.2
8.4 25,761 31,473 10.2 11.4
Source: Company annual report, Edelweiss research

High operating expenses were partly due to higher ad spends and marketing expenses at
2.6% and 3% of sales, respectively (total 5.6%), versus peers range of 2-2.5%.
Further, packing & freight expenses, power cost and miscellaneous expenses stood higher
for TVS versus peers. Miscellaneous expenses largely include travelling, communication,
R&D, legal/ professional and admin expenses. Aggregate packing & freight, power, misc. and
other expenses stood at 10% versus 5.2% for Bajaj Auto and 7.6% for Hero MotoCorp.
High cost structure (as explained above) led to lower EBITA margin at 5.8% versus 19% for
Bajaj Auto and 12.7% for Hero MotoCorp.
Other highlights
Exceptional income of INR583mn pertained to gain from sale of revalued land, of which
INR574mn was reduced from revaluation reserves as it was revalued in earlier years.
In FY14, the company divested its stake in TVS Energy (including step-down subsidiaries) and
recorded exceptional gain from sale of the energy business worth INR179.5mn.
Consequently, gross block of fixed assets in FY14 fell by INR3.7bn (net block INR3.3bn).
Revenues include other operating income, which rose to INR1.8bn (FY14: INR1.1bn). Finance
costs declined YoY on lower forex losses and other processing charges.
Effective tax rate declined from 39% in FY14 to 28% in FY15 due to MAT credit of
INR236.6mn and lower YoY deferred tax expense of INR269mn (FY14: INR516.5mn). Total
outstanding MAT credit stood at INR280mn.

73

Edelweiss Securities Limited

TVS Motor Company


Table 4: Subsidiaries performance
No Subsidiary company
1
2
3
4
5
6

(INR mn)

% shareholding
as on FY15
Sundaram Auto Components Ltd.
100.00
PT. TVS Motor Company Indonesia
100.00
TVS Motor Company (Europe) B.V
100.00
TVS Housing Ltd.
100.00
TVS Motor (Singapore) Pte. Ltd.
100.00
Sundaram Business Development
100.00
Consulting (Shanghai) Co. Ltd.
Total
PAT Margin (%)

Networth
943.9
1,152.8
237.0
0.7
1,964.0

FY14
Turnover
PAT
18,770.6
106.8
965.0 (1,398.8)
75.6
(253.9)
0.4
0.2
(0.4)

9.1

17.9

4,307.5

19,829.5

0.8
(1,545.3)
(7.8)

Networth
1,111.6
562.0
35.1
3.4
1,952.2
1.7
3,666.0

FY15
Turnover
21,373.4
1,166.5
0.5
114.4
43.6

PAT
253.7
(392.3)
(3.5)
2.7
(7.4)

(7.7)

22,698.4

(154.5)
(0.7)

Source: Company annual report, Edelweiss research

Subsidiaries continued to record losses at aggregate level, though the extent of losses
lowered in FY15, led by Indonesia and Europe operations. PT TVS Indonesia has equity of
INR5.6bn against which accumulated losses were INR5.0bn, as at FY15.
Auto component subsidiary, Sundaram Autos performance stood robust with 14% YoY
revenue growth. However, we believe this was primarily led by inter-company transactions,
as derived (consol. minus standalone) subsidiary revenue growth was negative 49% YoY.
Aggregate cash exposure to subsidiaries stood at INR6.6bn, 40% of standalone net worth,
including guarantees and credit facilitating agreements exposure stood at INR8.1bn, 49% of
standalone net worth (FY14: INR7.4bn, 45%).

Cash flow analysis


Table 5: Cash flow analysis

(INR mn)
Standalone

Particulars

FY14
Profit before tax
3,525
Non-operating expense
(22)
Non-cash adjustments
1,396
Direct taxes paid
(1,275)
Cash profit after tax
3,625
(Increase)/ decrease in receivables
(173)
(Increase)/ decrease in inventories
(385)
(Increase)/ decrease in other current assets
(266)
(Increase)/ decrease in loans and advances
(601)
Increase/ (decrease) in trade and other payables 1,903
Increase/ (decrease) in other current liabilities
1,135
(Increase)/ decrease in working capital
1,613
Less: Bill discounted/ LCs/ Credit arrangements
77
Adjusted working capital (Increase)/ decrease
1,691
Net cash from operating activities
5,315
Interest expenses paid
(230)
Net cash from operating activities post interest
5,086
Capital expenditure
(2,580)
Free cash flows
2,506

FY15
4,562
(22)
1,566
(1,407)
4,699
(1,697)
(2,715)
123
(2,635)
2,657
417
(3,851)
58
(3,793)
907
(285)
622
(4,052)
(3,430)

Subsidiary (derived)
Consolidated
FY14
FY15
FY14
FY15
(455)
(120)
3,071
4,442
61
(316)
39
(338)
152
245
1,548
1,811
(68)
(187)
(1,343)
(1,593)
(310)
(378)
3,315
4,321
(169)
1,079
(342)
(618)
82
(796)
(303)
(3,511)
146
(44)
(120)
79
59
(94)
(542)
(2,729)
(87)
(46)
1,816
2,612
(256)
258
880
675
(225)
358
1,388
(3,493)
926
706
1,004
764
701
1,063
385
(4,258)
(1,616)
(843)
3,699
64
(244)
(171)
(474)
(455)
(392)
(1,860)
(1,013)
3,226
(157)
618
(2,737)
(3,434)
(2,018)
(396)
489
(3,825)

Source: Company annual report, Edelweiss research

Operating cash flow post interest declined significantly from INR3.2bn in FY14 to
INR(392)mn in FY15 following significant working capital investments. Inventories and loans

74

Edelweiss Securities Limited

Annual Report Analysis


and advances rose significantly, but offset by increase in trade and other payables. Loans
and advances rose by INR2.8bn, primarily led by VAT receivables and excise current account.
Other current liabilities included INR2.9bn, 23% of net worth (FY14: INR2.4bn, 22%) towards
dues for expenses, which largely include marketing costs, sales incentives, excise duty
provisions and other admin. expenses.
Adjusted working capital requirement rose to INR4.3bn (FY14: INR385mn credit). We have
adjusted working capital for certain off-balance sheet liabilities, which include bill
discounting facility, letter of credits (LCs) and credit facilitating agreements.

Table 6: Average cash conversion cycle (days) TVS and peers


Particulars
FY13
13
44
(51)
(1)
5
13
18

Receivable days
Inventory days
Payable days
Advance from customer days
Cash conversion cycle
Bill discounted/ LCs/ Credit arrangements
Adjusted cash conversion cycle

TVS
FY14
15
39
(55)
(2)
(3)
14
11

FY15
14
41
(55)
(3)
(3)
15
12

FY13
10
16
(48)
(4)
(25)
(25)

Bajaj Auto
Hero Moto
FY14
FY15
FY13
FY14
FY15
14
13
7
11
15
16
17
13
12
13
(51)
(45)
(41)
(39)
(44)
(6)
(8)
(2)
(1)
(1)
(27)
(23)
(23)
(17)
(17)
(27)
(23)
(23)
(17)
(17)
Source: Company annual report, Edelweiss research

Cash conversion cycle stood at negative 3 days YoY, and adjusted for bill discounting, LCs
and credit facilitating agreements stood at 12 days.
Inventory days for TVS are the highest versus peers, which along with bills discounting/LCs
led to higher cash conversion cycle for TVS versus negative cash conversion cycle for peers.

Table 7: Earnings to cash translation - TVS


Particulars
Adjusted OCF, post interest (A)
Profit after tax
Depreciation
Other income
PAT + Depreciation - Other income (B)
Earnings to cash conversion ratio
(A/B*100)

FY13
3,456
1,975
1,756
242
3,490
99

FY14
3,226
1,863
1,490
267
3,086
105

(INR mn)
FY15
(392)
3,283
1,786
237
4,832
(8)

Table 8: Earnings to cash translation ratio TVS versus peers (%)


Particulars
FY11
FY12
FY13
TVS
55
137
99
Baja Auto
68
125
89
Hero Moto Corp.
111
75
66

FY14
105
122
107

FY15
(8)
78
90

FY11
1,302
1,279
1,336
258
2,358
55

FY12
3,796
1,323
1,583
144
2,762
137

Source: Company annual report, Edelweiss research

75

Edelweiss Securities Limited

TVS Motor Company


Chart 1: Earnings to cash translation ratio (%)
160.0
120.0

(%)

80.0
40.0
0.0
(40.0)
FY11

FY12

TVS

FY13

FY14

Baja Auto

FY15

Hero Moto Corp.

Source: Company annual report, Edelweiss research

Despite robust growth in revenues and profits, earnings to cash conversion ratio declined on
account of significant investment in working capital, as explained in above sections.

Table 9: OCF and FCF generation TVS versus peers


Operating cash flow, post interest
FY11
FY12
FY13
FY14
FY15
TVS (adjusted)
1,302
3,796
3,456
3,226
(392)
Bajaj Auto
20,370
32,235
22,171
35,009
21,073
Hero Moto Corp
22,723
23,385
18,785
29,512
21,738

(INR mn)
FY11
(1,453)
18,743
19,113

Free cash flow


FY12
FY13
FY14
(614)
2,369
489
28,847
17,289
32,469
18,351
12,781
20,138

FY15
(3,825)
18,124
9,436

Source: Company annual report, Edelweiss research

Table 10: Cumulative cash flow generation and utilization (past 5 years)
Sources
Operating profit
Less: Interest
Less: Taxes
Cash Profits
Working capital changes
Cash Profits after working capital
Off-Balance sheet liabilities
Adjusted OCF
Net borrowings
Reduction in net cash/
investments
Others
Total

FY11 FY12
3,485 4,273
(875) (832)
(832) (739)
1,777 2,701
(467) 1,334
1,310 4,036
(502) (240)
808 3,796
(2,033) 1,066
3,855
566
3,196

(179) (1,210)
389
5,072

(INR mn)

FY13
FY14
FY15
Total Application
FY11 FY12 FY13 FY14 FY15
Total
5,338 4,658 5,915 23,668 Capex
2,780 4,409 1,130 2,737 3,434 14,491
(931)
(474)
(455) (3,568) Dividend
416
663
718
695
844 3,335
(648) (1,343) (1,593) (5,156)
3,759 2,841 3,866 14,945
(120) 1,388 (3,493) (1,357)
3,639 4,230
373 13,587
(245) (1,004)
(764) (2,755)
3,394 3,226
(392) 10,832
(618)
(996) 3,914 1,333

282
1,848

(53)
1,255
3,432

547
209
4,278

2,959
2,703
17,826 Total

3,196

5,072

1,848

3,432

4,278

17,826

Source: Company annual report, Edelweiss research

76

Edelweiss Securities Limited

Annual Report Analysis


Chart 2: Sources and utilisation of funds (cumulative 5 years - FY11-15)

Application

Sources
Others
11%

Dividend
19%

Off-Balance
sheet
liabilities
15%
Sale of
subsidiaries
6%

OCF post
interest
61%

Borrowings
7%

Capex
81%
Source: Company annual report, Edelweiss research

Operating cash flows represented 66% of cash generation during past 5 years, with 15%
contributed by off-balance sheet liabilities. Major cash utlisation was towards capex and
dividend.

Adjusted net worth and debt analysis


Table 11: Net worth and debt adjustments
Particulars
Net worth
Revaluation reserve
Adjusted Net worth

Debt rose to INR11.2bn, while


adjusted debt rose to INR15.7bn
Net worth includes revaluation
reserve of INR932mn

Debt
Add: Off balance sheet items (bills
discounted, LCs, credit agreements)
Adjusted Debt
D/E
Adjusted D/E

FY14
11,608
1,450
10,158

(INR mn)
FY15
13,246
932
12,314

10,681

7,277

11,191

2,726

3,730

4,494

13,407
1.2
1.5

11,007
0.6
1.1

15,685
0.8
1.3

FY13
8,983
8,983

Source: Company annual report, Edelweiss research

Debt rose from INR7.3bn in FY14 to INR11.2bn in FY15, and including off-balance sheet
items debt rose from INR11.bn to INR15.7bn. Consequently, adjusted D/E ratio rose from
1.1x to 1.3x in FY15. Debt includes sales tax deferral loan from the Karnataka government
worth INR2.3bn (FY14: INR2.3bn) and soft loan from state-owned corporations worth
INR1.6bn (FY14: INR1.5bn).
In FY14, one of the subsidiaries revalued its land leading to increase in net worth and
revaluation reserve by INR1.5bn. In FY15, the company sold part of the land in Indonesia
and recognised the gain from the sale of INR582.7mn as exceptional income. Revaluation
reserve declined by INR574.1mn in FY15 pertaining to land sold.

77

Edelweiss Securities Limited

TVS Motor Company


Capital allocation and investment analysis
Table 12: Capital employed and return ratios
Particulars
FY11
Sales
65,430
EBITDA
3,571
EBITDA margin (%)
5.5
ROE (%)
20
ROCE (%)
14
Adjusted ROE (%)
20
Adjusted ROCE (%)
13
Net fixed assets (Ex CWIP)
12,938
CWIP
576
Adjusted Net worth (A)*
6,819
Adjusted Debt (B)**
12,649
Total capital employed (A+B)
19,468

Return ratios improved in FY14


and FY15, following improvement
in revenue and profitability growth
RoCE stood at 21% in FY15 and
adjusted for off-balance sheet
liabilities, stood at 18%
Consolidated return ratios
remained subdued, primarily
owing to losses in Indonesia and
investments (largely preference
shares in TVS Motor Services)

FY12
74,352
4,591
6.2
19
17
19
15
14,722
1,857
7,222
15,526
22,748

FY13
75,105
4,383
5.8
16
14
16
13
15,930
362
8,983
13,407
22,390

FY14
83,836
4,915
5.9
17
19
18
17
15,172
482
10,158
11,007
21,165

(INR mn)
FY15
103,117
6,029
5.8
23
21
25
18
16,367
929
12,314
15,685
27,999

* Adjusted for revaluation reserve


** Adjusted for bill discounting, LCs and credit agreement facility.

Chart 3: Capital employed and RoCE


22.0

24

17.2

18

14.8

12

12.4

(%)

19.6

10.0

(INR bn)

30

0
FY11

FY12

FY13

Adjusted Net worth (RHS)


Adjusted ROCE (%)

FY14

FY15

Adjusted Debt (RHS)


ROCE (%)
Source: Company annual report, Edelweiss research

Table 13: Fixed asset turnover ratio (consolidated)


F.A. Turnover
FY11
FY12
TVS
5
5
Bajaj Auto
11
13
Hero Moto Corp
5
6

Fixed asset turnover ratio was the


lowest for TVS in past 5 years
ranging from 5x-6x versus 11x-13x
for Bajaj Auto and 6x-11x for Hero
MotoCorp

FY13
5
11
8

FY14
6
10
11

(x)
FY15
6
11
9

Source: Company annual report, Edelweiss research

78

Edelweiss Securities Limited

Annual Report Analysis

Total investment (other than


subsidiaries) stood at INR5.4bn,
41% of net worth
Major investments include
preference shares of TVS Motor
Services (INR4.5bn) and equity
investment in Emerald Haven
Realty (INR400mn)

Table 14: Investments analysis (consolidated)


Particulars
% holding
Investment in Equity Instruments
Emerald Haven Realty Limited
48.8
TVS Motor Services Limited
19.0*
Green Infra BTV Limited
21.6
Others
Total
Invetment in Preference shares - Unquoted
TVS Motor Services Limited
84.8*
Pinnacle Engines Inc., USA
Total
Other investments
Investment Property
Total Investment (A) + (B) + (C)
As % of net worth

(INR mn)
FY14
FY15

FY13
400
4
24
428

400
4
33
67
503

400
4
33
147
583

2,710
2,710
319
20
3,477
39

3,460
117
3,577
307
4,387
38

4,460
117
4,577
233
5,393
41

Source: Company annual report, Edelweiss research


* As at end of FY14.

As at end of FY14, TVS holds 85% of the Non-cumulative Redeemable Preference shares
(NCRP) of TVS Motor Services. Preference shares issued are redeemable at 70% premium at
the end of 9th year (as per disclosure in TVS Motor Services financials filed with ROC
Registrar of companies).
Equity holding of TVS stood at 19% of the total equity share capital of TVS Motor Services
while remaining 81% was held by TVS Motor Foundation (as at end of FY14).

Yield on cash/ Investments and loans & advances analysis

Average yield on cash and


investments stood significantly
higher at 14-15% in past 2 years,
primarily due to interest charged
to dealers on extended credit on
receivables

Table 15: Average yield on cash and investments


Particulars
FY12
Cash and investments:
Cash/ Banks
1,375
Debentures/ bonds/ other Investments
300
Deposits
150
Employee advances
136
ICD's
30
Total
1,990
Income from Investments:
Interest income
Gain on sale of investments
Total
Average yield on cash and investments
Income from investments as % of PBT

FY13

FY14

(INR mn)
FY15

796
319
194
106
125
1,540

985
307
182
101
73
1,647

278
233
231
109
30
882

168
1
169
9.6

207
27
233
14.6

192
2
194
15.3

5.8

7.6

4.4

Other income stood at INR236.6bn, of which INR194mn pertained to interest income and
profit on sale of investments.

79

Edelweiss Securities Limited

TVS Motor Company


Table 16: Loans and advances analysis
Particulars
FY12
Advance Income Tax
221
VAT receivables
508
Excise current account
478
Vendor advances
338
Others
411
Total
1,954
As a % to Networth
27%

Loans and advances rose


significantly in FY15, led by VAT
receivables and excise account

FY13
233
1,173
634
382
606
3,028
34%

FY14
830
1,328
1,182
276
630
4,246
37%

(INR mn)
FY15
1,322
2,189
2,877
610
669
7,666
58%

Source: Company annual report, Edelweiss research

Advance tax includes MAT credit outstanding worth INR280mn.

Related party transactions


Table 17: Major related party transactions
(INR mn)
Related party
Purchases/ Services availed Sale of goods/ services
FY13
FY14
FY15 FY13 FY14 FY15
Sundaram-Clayton
2,128 2,577 3,707
13.0
79.7
21.9
Lucas-TVS
375
430
720
2
2
26
Green Infra Wind Energy Theni
12
58
Others
56
61
78
0
0
0
Total
2,559 3,079 4,563
15
82
48
As % of RM cost/ Sales
4.8
5.2
6.2
0.0
0.1
0.0

Major related party transactions


include purchases from holding
company Sundaram Clayton of
INR4.6bn, 6.2% of total RM cost

Source: Company annual report, Edelweiss research

80

Edelweiss Securities Limited

Annual Report Analysis


Table 18: Summary financials
Particulars
Sales
Total income
Gross Profit
Gross margin (%)
EBITDA
EBITDA margin (%)
Depreciation
Financial costs
Net profit
ROE (%)
ROCE (%)
Equity shareholders' funds
Loan funds
Net fixed assets (Ex CWIP)
CWIP
Current assets loans and advances
Current liabilities and provisions
Net current assets
Cash and cash equivalents
Net debt
Cash flow from operating activities
Cash flow from investing activities
Cash flow from financing activities
Net cash flows
CAPEX
Working capital investments

FY11
65,430
65,688
17,952
27
3,571
5.5
1,336
708
1,279
20
14
6,827
10,407
12,938
576
11,664
10,215
1,449
552
9,855
2,653
(1,111)
(3,182)
(1,639)
2,756
(90)

FY12
74,352
74,496
20,326
27
4,591
6.2
1,583
883
1,323
19
17
7,222
13,044
14,722
1,857
11,740
11,754
(14)
1,375
11,669
4,868
(5,071)
(355)
(559)
4,409
(1,334)

FY13
75,105
75,346
21,629
29
4,383
5.8
1,756
1,034
1,975
15
14
8,983
10,681
15,930
362
12,850
12,696
154
796
9,885
4,705
(1,343)
(2,196)
1,166
1,130
120

FY14
83,836
84,103
24,804
30
4,915
5.9
1,490
801
1,863
17
19
11,608
7,277
15,172
482
14,850
15,472
(622)
985
6,292
4,703
(2,350)
(2,160)
193
2,737
(1,388)

(INR mn)
FY15
103,117
103,353
30,011
29
6,029
5.8
1,786
621
3,283
23
21
13,246
11,191
16,367
929
21,702
19,122
2,581
278
10,913
828
(4,149)
2,610
(711)
3,434
3,493

Source: Company annual report, Edelweiss research

81

Edelweiss Securities Limited

ANALYSIS BEYOND CONSENSUS


THE NEW ABC OF RESEARCH
Bharat Forge | Annual Report Analysis

Bharat Forges (BF) FY15 annual report analysis highlights robust operating
performance at standalone level as revenue surged 34% and EBITDA margin
inched up to 29.2% (FY14: 25.4%). Free cash flows, though improved,
remained negative owing to higher capex of INR7.1bn (FY14: INR5.8bn) led by
standalone (INR2.9bn) and Alstom JV (~INR3bn). Capital commitments
jumped to INR5.8bn (FY14: INR2.1bn). Net debt, adjusted for acceptances and
bill discounting, increased by INR2.8bn to INR24.8bn (versus reported debt of
INR14.1bn). Cash conversion cycle, adjusted for bills discounted and
acceptances, stood at 92 days (FY14: 96) versus reported cycle of 42 days
(FY14: 54). Adjusted RoCE stood at 18.5% (FY14: 13.7%) versus reported
21.6% (FY14: 15.5%). Derivatives exposure to hedge expected sales
catapulted 53% to INR49bn (FY14: INR32bn, FY13: INR8.5bn), representing
~1.8x FY15 exports revenue, as the company has increased hedging for
anticipated revenues. Derivative gains recognised in balance sheet increased
to INR5.1bn (FY14: INR1.8bn).

Market Data

52-week range (INR)

: 1,362 / 713

Share in issue (mn)

: 232.8

M cap (INR bn/USD mn)

: 219 / 3,290

Avg. Daily Vol. BSE/NSE (000) : 1,104.9

Shareholding Pattern (%)

Promoters*

: 46.7

MFs, FIs & Banks

: 16.8

FIIs

: 15.3

Others

: 21.2

Whats on track?

*Promoters pledged shares

: Nil

Consolidated revenue surged ~13.4% to INR76bn. Adjusted RoCE jumped to 18.5%


(FY14: 13.7%), led by higher EBITDA margin (FY15: 18.9%, FY14: 15.3%), fixed asset
(FY15: 3x, FY14: 2.5x) and working capital turnover ratio (FY15: 4.3x, FY14: 4x).

(% of share in issue)

Standalone adjusted cash conversion cycle declined to 136 days (FY14: 158) on lower
inventory days at 74 (FY14: 88) and higher payable days (adjusted for acceptances) at
60 (FY14:52).

What needs tracking?


Overseas key subsidiaries (mainly European) reported mere 2% revenue growth, while
aggregate profits declined 96% to INR28mn (FY14: INR735mn) impacted by subdued
demand for trucks and passenger vehicles in Europe. In the Alstom JV, EBITDA and PBT
margins declined to 4.3% (FY14: 2.8%) and 3.9% (FY14: 4.5%), respectively.
Adjusted (for bills discounted and acceptances) net debt stood higher at INR24.8bn
(FY14: INR21.9bn) versus reported net debt of INR14.1bn. This increase was primarily
led by Alstom JV where non-current liabilities increased to INR3bn (FY14: INR0.4bn).
BF recognised diminution (in standalone financials) of INR290mn in its investment
(INR400mn) in BF Infrastructure Ventures (BFIV). Management stated that other
current assets (representing cost incurred on project related activity) of INR414mn
(FY14: INR414mn, FY13: INR414mn) appearing in BFIV are unlikely to be realised and
consequently has provided for impairment loss (under exceptional items) for part
amount. However, no impairment loss is recognised in consolidated financials.
Analysis beyond Consensus (ABC) is our initiative to provide a differentiated perspective to our clients
on various non-routine and intricate issues. This unit of research works independent of the sector/stock
research team and views expressed in this report may vary with that of respective sector/stock analyst.
Edelweiss research is also available on www.edelresearch.com,
1
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

September 18, 2015


Edelweiss Securities Limited

Annual Report Analysis


Other highlights

BF capitalised MTM forex loss, net of amortisation, of INR0.2bn (2.1% of PBT) versus
INR1.1bn (17.2% of PBT) in FY14.

Purchase of goods (at standalone level) from related parties stood at INR15bn, ~84% of
raw material purchases (FY14: INR12.6bn, 89%).

Goodwill on consolidation jumped to INR537mn (FY14: INR57mn) presumably due to


acquisition of Mcanique Gnrale Langroise.

During the year, the company purchased shares of KPIT Technologies for INR100mn.
These shares were classified under noncurrent investments.

Standalone and consolidated capital commitments jumped to INR3.2bn (FY14:


INR0.8bn) and INR5.8bn (FY14: INR2.1bn), respectively.

During the year, Kalyani Alstom Power Ltd (subsidiary) was merged with Alstom Bharat
Forge Power Ltd (Alstom JV). Subsequently, BF infused additional ~INR0.7bn as equity
in the Alstom JV.

During the year, BF infused ~INR 290mn as equity in CDP Bharat Forge Gmbh (CDP),
taking cumulative investment in the company to ~INR 4bn, representing ~11.5% of BF
standalone net worth.

During FY15, CDB acquired 100% stake in Mcanique Gnrale Langroise (MGL), a
company focused on precision machining and other high value added processes for
EUR 11.8mn.

Profitability and cash flow analysis


Table 1: Profitability analysis

(INR bn)

Particulars
Sales
Raw materials consumed
Gross margin
Operating and admin expense
Personnel cost
EBITDA
Depreciation
EBIT
Financial charges
Other Income
PBT

FY14
34.0
13.7
20.3
8.8
2.8
8.6
2.5
6.2
1.5
1.1
5.8

Standalone revenue surged 34% to


INR45.5bn. EBIDTA margin
expanded 385bps led by higher
gross margin (up 210bps) and
operating leverage

Standalone
%
FY15
100.0
45.5
40.4
17.4
59.6
28.1
26.0
11.5
8.2
3.3
25.4
13.3
7.2
2.5
18.2
10.8
4.4
1.1
3.4
0.9
17.2
10.6

%
100.0
38.3
61.7
25.2
7.3
29.2
5.5
23.7
2.5
2.1
23.3

Subsidiary (Derived)
Consolidated
FY14
%
FY15
%
FY14
%
FY15
%
33.2 100.0
30.8 100.0
67.2 100.0
76.2 100.0
18.5
55.8
16.4
53.3
32.2
48.0
33.8
44.3
14.7
44.2
14.4
46.7
34.9
52.0
42.4
55.7
7.9
23.8
7.5
24.4
16.7
24.9
19.0
24.9
5.1
15.4
5.7
18.6
7.9
11.7
9.1
11.9
1.7
5.0
1.1
3.6
10.3
15.3
14.4
18.9
1.1
3.4
1.1
3.6
3.6
5.3
3.6
4.8
0.5
1.6
(0.0)
(0.0)
6.7
10.0
10.8
14.1
0.2
0.6
0.2
0.8
1.7
2.5
1.4
1.8
0.1
0.3
0.4
1.4
1.2
1.9
1.4
1.8
0.5
1.4
0.2
0.6
6.3
9.4
10.8
14.2
Source: Companys Annual Report, Edelweiss research

Revenues of overseas subsidiaries (primarily European) grew mere 2% and their profits
plummeted 96% to INR28mn (FY14: INR735mn). While CDB Bharat Forges profit
declined 50%, losses of Bharat Forge Kilsta AB jumped to INR422mn (FY14: INR122mn).

Amongst domestic subsidiaries, Analogic Controls reported decline in revenue coupled


with higher losses.

Consolidated revenue grew 14% to


INR76bn. EBIDTA margin expanded
360bps in FY15
83

Edelweiss Securities Limited

Bharat Forge
Table 2: Key subsidiaries and JV profitability analysis
Particulars

(INR mn)

Stake (%)

Overseas subsidiaries
CDP Bharat Forge GmbH
Bharat Forge International Ltd.
Bharat Forge Kilsta AB
Bharat Forge Aluminiumtechnik Gmbh & Co

100
100
100
100

Domestic subsidiaries
BF Infrastructure Ltd
BF Infrastructure Ventures Limited
Analogic Controls India Ltd.

100
100
60

Joint ventures
Alstom Bharat Forge Power Limited

49

Networth
7,384
283
371
1,159

189
396
(113)

1,631

FY14
Turnover

PAT

FY15
Turnover

PAT

13,402
8,955
7,110
3,513
32,980

577
114
(122)
166
735

13,109
10,870
6,046
3,466
33,490

291
127
(422)
33
28

3,900
109
4,009

(226)
(4)
(24)
(253)

392
34
426

1
(0)
(71)
(70)

4,006
40,994

154
635

5,473
39,389

130
89

Source: Companys Annual Report, Edelweiss research

Table 3: Adjusted cash flow analysis

(INR bn)

Particulars
Profit before tax
Non-operating expense
Non-cash adjustments
Others
Direct taxes paid
Cash profit after tax
(Increase)/Decrease in loans and advances
(Increase)/Decrease in inventories
(Increase)/Decrease in trade receivables
Adj for (Increase)/Decrease in bill discounted
Acceptances
Change in working capital on disposal of subsidiary
(Increase)/Decrease in other assets
Increase/(Decrease) in trade payables
Increase/(Decrease) in other liabilities & provisions
Increase in working capital
Net cash from operating activities
Interest expenses paid
Net cash from operating activities post interest
Less: Capex
Free cash flow

Payable to related parties towards


purchases jumped to INR2.7bn
(FY14: INR0.8bn) and thereby
supported working capital

84

Standalone
FY14
FY15
6.0
10.6
0.7
1.2
2.4
2.2
(1.4)
(3.6)
7.6
10.4
(0.0)
(1.3)
(0.3)
(0.3)
(0.3)
(0.6)
(1.5)
(4.6)
(1.6)
2.2
(1.0)
(0.1)
1.3
0.8
0.3
0.1
(3.1)
(3.8)
4.5
6.6
(1.5)
(1.2)
3.0
5.4
(1.6)
(2.9)
1.4
2.5

Subsidiary (derived)
Consolidated
FY14
FY15
FY14
FY15
1.4
0.6
7.3
11.2
(0.4)
(0.2)
0.3
1.0
1.1
1.2
3.5
3.4
(0.2)
(0.0)
(0.2)
(0.0)
(0.7)
(0.5)
(2.1)
(4.1)
1.2
1.2
8.8
11.5
(0.5)
0.9
(0.5)
(0.4)
(0.9)
0.3
(1.3)
0.0
(1.7)
0.4
(2.0)
(0.2)
(0.2)
0.0
(1.7)
(4.6)
(1.6)
2.2
1.0
0.0
1.0
0.0
(0.1)
(0.2)
(1.2)
(0.3)
2.7
(0.1)
4.1
0.7
(2.1)
(1.2)
(1.8)
(1.1)
(1.8)
0.1
(4.9)
(3.6)
(0.7)
1.3
3.9
7.9
(0.2)
(0.2)
(1.7)
(1.5)
(0.8)
1.0
2.2
6.4
(4.2)
(4.2)
(5.8)
(7.1)
(5.1)
(3.2)
(3.7)
(0.7)
Source: Companys Annual Report, Edelweiss research

Standalone adjusted operating cash flows (post interest) jumped to INR5.4bn (FY14:
INR3bn) led by sharp increase in exports (leading to higher profitability). Bill
discounting increased from INR7.0bn in FY14 to INR11.7bn in FY15.

Consolidated adjusted operating cash flows (post interest) surged to INR6.4bn (FY14:
INR2.2bn) led by higher profits and lower incremental investment in working capital.

Edelweiss Securities Limited

Annual Report Analysis


However, free cash flows remained negative owing to higher capex of INR7.1bn (FY14:
INR5.8bn) led primarily by standalone (INR2.9bn) and Alstom JV (INR 3bn).

Table 4: Cash conversion cycle


Particulars
Inventory days
Receivable Days
Payable Days
Advance received from customers
Advance to suppliers
Reported cash conversion cycle
Add: Acceptance days
Add: Bills discounted days
Adjusted Cash conversion cycle
Working capital as % to revenues

Payable days to related parties


stood at 43 (FY14: 33) versus 142
(FY14: 177) from other suppliers

Standalone
FY13
FY14
FY15
89
88
74
53
51
42
(100)
(89)
(84)
(2)
(1)
(1)
3
6
8
44
56
38
30
37
25
71
65
73
145
158
136
36.5
41.9
36.9

Consolidated
FY13
FY14
FY15
112
99
84
51
53
43
(91) (101)
(89)
(15)
(8)
(2)
10
11
6
66
54
42
18
17
14
39
25
37
123
96
92
27.9
25.3
24.7

Source: Companys Annual Report, Edelweiss research

EBITDA margins jumped 360bps to


18.9% riding 370bps surge in gross
margin

Higher EBITDA margin coupled


with improvement in turnover
ratios (fixed asset and WC) led to
higher RoE and RoCE in FY15

Consolidated cash conversion cycle (adjusted) improved marginally and stood at 92


days (FY14: 96 days).

Tax and duty credit receivables (not considered in cash conversion above) catapulted to
INR 3.2bn (FY14: INR1.7bn).

Table 5: Capital allocation (Consolidated)


Particulars
FY11
Sales
50.9
EBIT
6.0
EBITDA
7.9
Gross Margin (%)
52.3
EBITDA margin (%)
15.4
RoE (%)
17.3
Adj. RoCE (%)
13.6
Net Fixed Assets
24.6
CWIP
2.0
Net current assets*
16.2
Cash and liquid investments
6.4
Fixed assets turnover ratio
2.1
Adj. Working capital turnover ratio
3.6
Equity shareholders' funds (A)
19.5
Adj. Loan funds (B)
25.8
Adj. Capital employed (A+B)
45.4

FY12
62.8
7.8
10.0
53.6
15.9
20.0
15.1
26.4
5.2
21.1
10.4
2.5
3.4
21.9
36.9
58.7

FY13
51.7
5.8
7.9
55.9
15.3
12.6
10.2
29.1
6.3
17.4
9.4
1.9
2.7
22.6
32.8
55.4

FY14
67.2
8.0
10.3
52.0
15.3
18.3
13.7
25.3
5.8
16.0
11.9
2.5
4.0
26.8
33.9
60.7

(INR bn)
FY15
76.2
12.2
14.4
55.7
18.9
24.1
18.5
26.3
8.6
19.4
11.4
3.0
4.3
34.4
36.1
70.6

Note: *Adjusted for bills discounting, acceptances and forward contracts


FY11 working capital turnover ratio is computed on closing working capital
Source: Companys Annual Report, Edelweiss research

85

Edelweiss Securities Limited

Bharat Forge
Table 6: Borrowings analysis

(INR bn)

Particulars
Long Term borrowings
Short Term borrowings
Current maturities of long-term borrowings
Less: Cash & Liquid investments
Reported net debt
Add: Bills discounted
Add: Acceptances
Adjusted net debt
D/E ratio (reported)
D/E ratio (adjusted)

FY12
16.0
0.8
3.0
(9.3)
10.6
7.2
2.0
19.8
0.5
0.9

Standalone
FY13
FY14
14.5
13.6
0.4
1.1
3.9
5.3
(6.6)
(10.2)
12.1
9.7
5.6
7.1
1.2
2.9
18.9
19.7
0.5
0.4
0.8
0.7

FY15
15.7
0.8
1.4
(10.5)
7.5
11.7
0.6
19.9
0.2
0.6

FY12
19.2
5.0
3.4
(10.4)
17.2
7.2
2.0
26.5
0.8
1.2

Consolidated
FY13
FY14
18.3
15.2
5.1
4.9
4.5
5.5
(9.4)
(11.9)
18.4
13.7
3.7
5.4
1.2
2.9
23.4
21.9
0.8
0.5
1.0
0.8

FY15
19.8
3.8
1.8
(11.4)
14.1
10.1
0.6
24.8
0.4
0.7

Source: Companys Annual Report, Edelweiss research

While reported debt declined by


~INR2bn at standalone level, the fall
was led by steep rise in bill
discounted. Adjusted net debt
marginally increased to INR19.9bn
(FY14: INR19.7bn)

Derivatives outstanding against


highly probable sales transactions
catapulted 53% to
INR49bn (March 2014: INR32bn)

While management highlighted decline in long term borrowings during the year, adjusted
net debt increased at standalone and consolidated levels. However, D/E ratio (adjusted)
improved at standalone and consolidated levels.
Consolidated adjusted net debt increased to INR24.8bn (FY14: INR21.9bn), led mainly by
Alstom JV. However, D/E ratio declined to 0.7x (FY14: 0.8x).

Table 7: Outstanding derivatives analysis (Standalone)


(Foreign currency in mn)
Derivatives O/s
Exchange rate
Particulars
FY13 FY14 FY15 FY13 FY14 FY15
USD
111
328
567 54.3 59.9 62.5
EURO
34
149
202 69.6 82.3 67.2
GBP
2
N.A.
N.A. 82.5
N.A.
N.A.
O/S hedges (INR bn)
8.5
32.0
49.0
Hedge reserve (INR bn)
0.2
1.8
5.1
Exports revenue (INR bn)
15.6
18.3
27.0
O/S Hedges as % to exports revenue
54.7 174.9 181.5
Note: Excluding share in o/s derivatives of JV.
Source: Company annual report, Edelweiss research

Derivative gains recognised in


balance sheet (reserves) increased
to INR 5.1bn (FY14: INR1.8bn),
presumably due to higher level of
outstanding derivatives along with
currency volatility.

Management stated the company has increased hedges for anticipated revenues. Further, a
substantial portion (~80%) of hedges, as at March15, was taken against sales expected to
be clocked within 18 months from year end.

Table 8: Treatment of foreign exchange losses


Particulars
Exchange difference capitalized to cost of fixed
assets/CWIP
Amounts Capitalized to FCMITDA
Total Capitalization
Less: Amortized to P&L
Net capitalization
Profit before Tax (PBT) before exceptional items
Proportion of Capitalized Costs to PBT (%)

FY13
613.5

FY14
576.3

(INR mn)
FY15
226.6

278.4
892.0
(143.7)
748.3
4,169.1
17.9

692.1
1,268.4
(185.6)
1,082.8
6,285.4
17.2

248.2
474.8
(253.3)
221.4
10,795.3
2.1

Source: Company annual report, Edelweiss research

86

Edelweiss Securities Limited

Annual Report Analysis

Key managerial remuneration


jumped ~33% to INR417mn.
However, managerial remuneration
as % of PBT declined to 3.9% (FY14:
5%)

Table 9: Related party transactions


Particulars
Profit & Loss exposure
Purchase of goods
Sale of goods
Services rendered
Managerial remuneration
Balance Sheet exposure
Payable towards purchases
Trade receivable
Loans given / ICD placed
Advances receivable
Managerial remuneration payable

FY13

FY14

(INR mn)
FY15

11,507
1,457
165
245

12,579
1,605
143
315

14,928
2,032
146
417

1,463
404
N.A.
200
88

798
509
770
210
149

2,706
585
845
210
234

Note: Transactions with Alstom group companies are excluded in the above table
Source: Companys Annual Report, Edelweiss research

Purchases (at standalone level) from related parties (Kalyani Carpenter Special Steels and
Kalyani Steel Steels) constituted ~84% (FY14: 89%) of raw material purchases. Payable to
related parties catapulted 239% to INR2.7bn and supported working capital during FY15.
Payable days to related parties increased to 43 (FY14: 33) versus 142 (FY14: 177) from other
suppliers.

RoE analyser
RoE analyser analyses profitability on the scale of operating and capital allocation efficiency
(detailed concept explained in Annexure A). We have analysed BFs profitability for FY13,
FY14 and FY15, results and key findings of which are given below:

Table 10: RoE analyser


Particulars
A. Return on net operating assets (RNOA)
(OPATO x NOPAT margin) (%)
OPATO (operating asset turnover) (x)
NOPAT margin (%)
B. Return from leverage (FLEV x spread) (%)
FLEV (financial leverage) (x)
NFC (net financing cost) (%)
Net financial spread (RNOA -NBC) (%)
C. Return from other funding (%)
ROE Derived (A+B+C) (%)

RoE surged to 24.1% in FY15


(FY14: 18.3%) driven by spurt in
operating profit margin and asset
turnover

FY13

FY14
7.8

1.2
6.7

FY15

11.9
1.5
7.9

4.1
1.0
3.5
4.3

1.7
10.4
5.8

0.8
4.4
7.5
0.8
12.7

17.8

6.2
0.5
4.8
13.0

0.6
18.3

0.1
24.1

Source: Company annual report, Edelweiss research

87

Edelweiss Securities Limited

Bharat Forge
Chart 1: RoE tree
30.0
0.1

24.0
6.2

(%)

18.0
12.0

24.1
17.8

6.0
0.0

RNOA

Return from
leverage

Return from other


funding

ROAE

Source: Company annual report, Edelweiss research

Table 11: Summary financials- Consolidated


Particulars
Sales
Total income
Gross Margin
Gross Margin (%)
EBITDA
EBITDA margin (%)
ROE
ROCE
Depreciation
Financial costs
Net profit
Equity shareholders' funds
Loan funds
Net Debt
Net fixed assets
CWIP
Goodwill on consolidation
Current assets loans and advances
Current liabilities and provisions
Net current assets
Cash and liquid investments
Cash flow from operating activities
Cash flow from investing activities
Cash flow from financing activities
Net cash flows
Capex
Working capital investments

FY11
50.9
51.5
26.6
52.3
7.9
15.4
17.3
15.8
2.6
1.5
2.9
19.5
19.0
12.6
24.6
2.0
0.0
23.9
14.5
9.3
6.4
3.4
(4.0)
(1.4)
(2.0)
4.2
4.1

FY12
62.8
63.7
33.7
53.6
10.0
15.9
20.0
17.8
3.0
1.8
4.1
21.9
27.6
17.2
26.4
5.2
0.0
32.0
20.1
11.9
10.4
7.0
(10.5)
6.3
2.8
8.0
1.5

FY13
51.7
52.8
28.9
55.9
7.9
15.3
12.6
11.7
3.2
1.7
2.5
22.6
27.8
18.4
29.1
6.3
0.0
33.8
21.1
12.7
9.4
7.3
(2.1)
(3.3)
1.9
5.6
0.2

FY14
67.2
68.4
34.9
52.0
10.3
15.3
18.3
15.5
3.6
1.7
5.0
26.8
25.6
13.7
25.3
5.8
0.1
29.3
19.7
9.6
11.9
7.2
(1.9)
(6.4)
(1.1)
5.9
1.6

(INR bn)
FY15
76.2
77.6
42.4
55.7
14.4
18.9
24.1
21.6
3.6
1.4
7.6
34.4
25.5
14.1
25.7
8.6
0.5
33.1
19.0
14.0
11.4
10.3
(4.6)
(3.6)
2.1
7.1
1.2

Note: Above numbers are on reported basis. For adjusted numbers refer earlier pages of the report.
Source: Companys Annual Report, Edelweiss research

88

Edelweiss Securities Limited

ANALYSIS BEYOND CONSENSUS


THE NEW ABC OF RESEARCH
Crompton Greaves | Annual Report Analysis

Crompton Greaves (CRG) FY15 annual report highlights steep increase in


loans & advances and equity investment in overseas subsidiaries to support
their loss making operations. The companys aggregate cash exposure to
these subsidiaries stood at ~INR 17bn and it also guarantees borrowings of
~INR 13.6bn. Management intends to curtail CRGs exposure in overseas
subsidiaries by way of sale of substantial part of overseas power equipment
business and retiring ex consumer net debt which stood at ~INR 16bn
(including acceptances). The companys current standalone debt of ~INR 7bn
will be transferred to the demerged consumer business. Standalone (ex
consumer products) adjusted PBT and free cash flow deteriorated to INR2bn
and INR(-8.5)bn (FY14: INR 3.5bn and INR(-2.4)bn) respectively in FY15 and
its adjusted RoCE stood lower at 9.1% (FY14: 18.9%). Segment level
profitability and RoCE looks superior due to non consideration of unallocable expenses and assets.
In the subsequent pages we have analysed CRGs profitability, cash flows,
RoCE etc. at standalone and consolidated levels in the consumer and ex
consumer segments.

Market Data

52-week range (INR)

: 231 / 153

Share in issue (mn)

: 626.7

M cap (INR bn/USD mn)

: 119 / 1,876

Avg. Daily Vol. BSE/NSE (000) : 4,777.1

Shareholding Pattern (%)


Promoters*

: 34.4

MFs, FIs & Banks

: 31.2

FIIs

: 15.7

Others

: 18.7

*Promoters pledged shares

: 22.8

(% of share in issue)

Whats on track?
CRG is in the process of divesting its loss making/low margins overseas operations and
has been evaluating non-binding proposals submitted by bidders.
Consumer products business reported 13% and 10% growth in PAT and operating cash
flows YoY respectively.

What needs tracking?


CRG infused additional INR5.1bn in its subsidiaries, leading to increase in equity
investments and loans & advances to INR7.7bn and INR9.6bn, respectively. Total cash
exposure to subsidiaries/associates/others stood at INR19.7bn (March14: INR14.7bn),
49% of net worth. Guarantees on behalf of subsidiaries stood at INR13.6bn (March14:
INR14.6bn), ~34% of standalone net worth.
Our analysis indicates adjusted RoCE of standalone business (ex-consumer) declined to
9.1% (FY14: 18.9%). This is significantly lower than reported RoCE of 21.4% and 37.8% of
the power and industrial segments, respectively. The difference is mainly due to non
allocation of common expenses, assets & others in computation of segment level RoCE.
Unbilled revenue as percentage of contract revenue rose to 25.7% in FY15 versus 23.3%
in FY14. Outstanding unbilled revenue (dues from customers) stood at INR4.1bn in FY15
(FY14: INR2.6bn).
Analysis beyond Consensus (ABC) is our initiative to provide a differentiated perspective to our clients
on various non-routine and intricate issues. This unit of research works independent of the sector/stock
research team and views expressed in this report may vary with that of respective sector/stock analyst.
Edelweiss research is also available on www.edelresearch.com,
1
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

July 14, 2015


Edelweiss Securities Limited

Annual Report Analysis


Payment to Avantha Holdings, hold co, for expenses stood at INR 702mn (FY14: INR676mn),
~12% of adjusted standalone PBT.
Cash conversion cycle jumped to 55 days (FY14:45 days) led by higher receivables (including
unbilled revenues) and lower customer advances. Receivables O/S for more than 6 months
stood at INR 4.7bn (March 2014: INR 3.2bn), ~12% of net worth.
Gross debt increased to INR31.3bn (including acceptances of INR 3.8bn) in FY15 (FY14:
INR27.4bn). Management stated that almost entire debt (~INR 7bn) (excluding acceptances
of INR 2.3bn) at the standalone level will be transferred to the consumer products division
as part of the demerger.
Intangibles stood at INR14.5bn, 38% of net worth (FY14: INR18bn, 49.3%), led by goodwill
(INR9.5bn) and brand names & customer lists (INR2bn). Intangibles along with overdue
receivables (>6 months) and equity investment in Avantha Power and Infra stood at
INR21.6bn (~57% of net worth).

Other Highlights

Avantha Power and Infrastructure ceased to be an associate company with effect from
April 1, 2014 due to decline in CRGs stake to below 20%. The carrying cost of the
companys investment in Avantha Power stood at ~INR 2.5bn, ~6.5% of net worth.

Unfunded defined benefit obligations including leave encashment and post retirement
benefit plans stood at INR 530mn.

Expenses (including employee benefits and other expenses) capitalised during the year
stood at INR 473mn (FY14: INR 437mn).

As at March 2015, CRG had recognised deferred tax asset of INR 1.6bn (~4.2% of net
worth) (March 2014: INR 2.1bn) in respect of carried forward tax losses/depreciation of
subsidiaries.

During the year, CRG sold a portion (8 acres) of land at Kanjurmarg, Mumbai at a profit
of INR 2.8bn. Cash flows from sale of fixed assets stood at INR 3.4bn in FY15, which we
believe is towards part consideration.

Management discussion and analysis: Key highlights

CRG received non-binding proposals from reputed international entities for acquiring
European, North American and Indonesian activities of CG Power.

Further, the company also received firm offers for the Canadian power facility, and the
US transportation automation businesses, formerly known as QEI Inc.

90

Edelweiss Securities Limited

Crompton Greaves
Earnings analysis
Table 1: Standalone/subsidiary profitability analysis
Particulars
Sales
Raw Materials Consumed
Gross Profit
Other expense
Personnel cost
Reported EBITDA
Operating expenses classified as
exceptional expenses and Prior period
item
Exchange gain / (loss)
Adjusted EBITDA
Depreciation
Adjusted EBIT
Financial Charges
Other income
Adjusted PBT
Consumer products business PBT
PBT (ex consumer products)
Tax expense (ex consumer products)
PAT (ex consumer products) (before
exceptional items)
Exceptional exp/ (gain)
PAT (ex consumer products) (after
exceptional items)

(INR bn)

Standalone
FY14
% FY15
%
75.7 100.0
78.4 100.0
56.0
73.9
58.2
74.3
19.7
26.1
20.1
25.7
8.8
11.6
8.4
10.7
4.8
6.3
5.2
6.7
6.2
8.1
6.5
8.3

Subsidiary (Derived)
Consolidated
FY14
%
FY15
% FY14
% FY15
%
60.6 100.0
61.8 100.0 136.3 100.0 140.1 100.0
35.4
58.4
37.1
60.0
91.4
67.0
95.3
68.0
25.2
41.6
24.7
40.0
45.0
33.0
44.8
32.0
10.5
17.4
10.1
16.3
19.3
14.2
18.5
13.2
14.8
24.3
14.7
23.8
19.5
14.3
19.9
14.2
(0.0)
(0.1)
(0.1)
(0.2)
6.1
4.5
6.4
4.6

0.0

0.0

0.0

0.0

0.0

0.0

(1.7)

(2.7)

0.0

0.0

(1.7)

(1.2)

0.9
7.1
0.9
6.2
0.4
1.0
6.8
3.3
3.5
1.0

1.2
9.4
1.2
8.2
0.5
1.3
9.0

(0.5)
6.1
1.0
5.1
0.5
1.3
5.9
4.0
2.0
0.4

(0.6)
7.7
1.2
6.5
0.6
1.7
10.9

0.0
(0.0)
1.7
(1.8)
1.0
0.9
(1.8)
(1.8)
0.4

0.0
(0.1)
2.9
(2.9)
1.6
1.5
(3.0)

0.0
(1.8)
1.7
(3.4)
0.9
0.3
(4.0)
(0.0)
(4.0)
0.5

0.0
(2.8)
2.7
(5.5)
1.5
0.5
(6.9)

0.9
7.0
2.6
4.4
1.4
1.9
4.9
3.3
1.6
1.4

0.7
5.2
1.9
3.2
1.0
1.4
3.6

(0.5)
4.3
2.6
1.7
1.4
1.7
1.9
3.9
(2.0)
1.0

(0.3)
3.1
1.9
1.2
1.0
1.2
3.1

2.5

1.6

(2.6)

2.5

4.2

(2.3)

(4.6)

0.2

(2.3)

(4.8)

0.2

(3.0)

(2.4)

0.2

(0.6)

Note: Interest income on loans to subsidiaries are excluded while computing standalone profitability
Source: Company annual report, Edelweiss research

Adjusted EBITDA margins at


standalone level declined to 7.7%
in FY15 versus 9.4% in FY14

Standalone revenues jumped 3% YoY lead by consumer products business which


clocked growth of 12% YoY; revenue (ex consumer) declined 2% YoY.

Standalone PBT (ex consumer


products) declined to INR 2bn
(FY14: INR3.5bn)

During FY15, CRG classified certain expenses as exceptional and prior period items.
These include certain normal business expenses which, we have adjusted while
arriving at adjusted EBITDA.

Adjusted EBITDA at the


consolidated entity level declined
to INR4.3bn (FY14: INR7bn) led
by negative EBITDA of INR 1.8bn
of subsidiaries

Higher fixed cost in overseas


subsidiaries led to negative
EBITDA margin despite higher
gross margin

91

Edelweiss Securities Limited

Annual Report Analysis


Table 2: Exceptional and prior period items
S. No. Nature of item
1
Profit on sale of portion of land at Kanjurmarg

(INR mn)
Amount
2,782

Treatment
Exceptional gain
in FY15

Compensation to employees pursuant to VRS

(181)

Exceptional loss
in FY15

Loss on account of cancellation of Sale Order


pertaining to sales made during last year

(821)

Adjusted from
EBITDA in FY15

Loss on account of award in favour of the


customer in the arbitration related to a
company prior to its acquisition by CGL

(223)

Exceptional loss
in FY15

Warranty claim towards replacement / repairs


of certain type of transformers supplied in the
Exceptional items
Prior period items

(652)

Adjusted from
EBITDA in FY15

904
177

Exceptional and prior period items

Adjusted from
EBITDA in FY15

1,081

Source: Company annual report, Edelweiss research

Considering low cost of overseas


borrowings the impact of
deleveraging will be minimal on
reported profitability

Consolidated finance cost stood at INR 1.4bn, implying average borrowings cost of
~5% on borrowings (gross) of INR 31.3bn (including acceptances). Considering low
cost of overseas borrowings the impact of deleveraging will be minimal on
reported profitability

Other expenses includes miscellaneous expenses amounting to INR 6.2bn (FY14:


INR 6.8bn), 33% of other expenses, in consolidated financial statements. Details
regarding nature of miscellaneous expenses are unavailable.

Other income includes miscellaneous income of INR 0.9bn (FY14: INR 1bn), in
consolidated financial statements for which details regarding nature of income are
unavailable.

Operating margins (ex consumer


and unallocated costs) declined
150bps YoY to 7.2%

50,000

20.0

40,000

16.0

30,000

12.0

20,000

8.0

10,000

4.0

FY11

FY12

FY13

FY14

FY15

(%)

(INR mn)

Chart 1: Segment revenue and margins- Standalone business

0.0

Segment revenues (ex consumer)

Consumer Products revenues

Segment margins (consumer)

Segment margins (ex consumer)


Source: Company annual report, Edelweiss research

92

Edelweiss Securities Limited

Crompton Greaves
Consumer products business
PAT margin of consumer
products business was stable at
~8.3%

Table 3: Consumer products business (Standalone) - Key highlights


Particulars
FY14
%
Revenue (including other income)
28,985 100.0
Expenses
25,656
88.5
Profit before tax
3,329
11.5
Tax expense
962
3.3
Profit after tax
2,367
8.2
Total Assets
6,280
Total Liabilities
5,069
Net cash inflow/ (outflow) from operating
3,527
Net cash inflow/ (outflow) from investing
(240)
Net cash inflow/ (outflow) from financing
(7)

Borrowings of ~INR 7bn availed


at standalone level during FY15
will be transferred to the
consumer products division as
part of demerger and thus
included in consumer product
liabilities in FY15

(INR mn)
FY15
%
32,327 100.0
28,355
87.7
3,971
12.3
1,277
3.9
2,694
8.3
6,809
12,401
3,851
36
6,895

Source: Company annual report, Edelweiss research

Cash flow analysis


Table 4: Cash flow analysis

(INR bn)
Standalone

Particulars
Profit before tax
Non-operating (profit)/loss
Non-cash adjustments
Operating profit before working capital changes
(Increase) / Decrease in trade and other receivables
(Increase) / Decrease in loans and advances to subsidiaries

FY14
7.1
(1.0)
1.1
7.2
(1.6)
(1.5)
-

FY15
9.0
(2.5)
1.2
7.7
(7.8)
(3.0)

Subsidiary (Derived)
FY14
FY15
(2.2)
(4.7)
1.6
0.7
1.6
1.9
1.1
(2.1)
(4.7)
1.0
1.5
3.0

(Increase) / Decrease in inventories


Increase / (Decrease) in trade and other payables
Increase / (Decrease ) in provisions
Adjustment: For Acceptances
Adjustment: For Bill discounted
(Increase)/Decrease in working capital
Minority interest in loss
Share of profit / (loss) of associate companies (net)
Direct taxes paid
Net cash from operating activities
Adjustment for consumer products division
Net cash from operating activities- (ex consumer)
Interest expenses paid
Net cash from operating activities (ex consumer)- Post
interest
Less: Capex (ex consumer)
Free Cash flows (ex consumer)
Standalone free cash flows (ex consumer and loans &
advances to subsidiaries)

(0.1)
(0.1)
0.2
(0.8)
(0.1)

0.3
(1.8)
(0.1)
(0.2)
0.6

(0.3)
3.9
0.2
(0.0)
-

(4.1)

(1.9)
1.2
(3.5)
(2.3)
(0.4)
(2.7)
(1.2)
(3.9)
(2.4)

(11.9)

(2.2)
(6.4)
(3.9)
(10.3)
(0.4)
(10.7)

0.6
0.0
(0.2)
(0.5)
1.0
1.0
(0.9)
0.0

(0.8)
(11.6)
(8.5)

(1.4)
(1.4)
-

1.8
(4.0)
0.4
(0.1)
-

Consolidated
FY14
FY15
4.9
0.5
(1.8)
2.8
3.1
8.3
(6.3)
(6.8)
(0.0)
(0.0)
(0.3)
3.8
0.3
(0.9)
(0.1)

2.2
(5.7)
0.4
(0.4)
0.6

2.2
0.0
0.0
(0.3)
(0.2)
(0.2)
(1.0)
(1.2)

(3.5)
0.0
(0.2)
(2.4)
2.2
(3.5)
(1.3)
(1.3)
(2.7)

(1.3)
(2.4)
-

(2.6)
(5.3)
-

4.3
5.6
-

(9.8)
0.0
0.0
(2.5)
(6.6)
(3.9)
(10.5)
(1.4)
(11.9)
(2.1)
(14.0)
-

Source: Company annual report, Edelweiss research

Standalone free cash flows


(adjusted for inter company loans)
declined from INR (2.4)bn in FY14
to INR (8.5)bn in FY15

93

Cash flow from operating activities declined from INR 2.2bn in FY14 to INR(6.6)bn in
FY15 led by lower operating profitability and higher working capital.
Operating cash flows of consumer products business was robust at INR 3.9bn (FY14:
INR3.5bn).

Edelweiss Securities Limited

Annual Report Analysis


Consolidated free cash flows (ex
consumer) worsened to INR(-14)bn
(FY14: INR (-5.3)bn)

Free cash flows of subsidiaries deteriorated to INR-(2.4)bn (FY14: INR-(1.4)bn) led by


high operating losses.

Table 5: Cash conversion cycle (days)


Particulars
Inventory days
Trade Receivable days
Due from customers days
Advance from customers days
Due to customers
Trade Payable days
Cash conversion cycle
Acceptances days
Bills discounted days
Adj cash conversion cycle
Working capital as a % of sales

Standalone cash conversion cycle


increased to 56 days led by higher
receivables and lower advance
from customers and payables

Advance recoverable in cash or in


kind (not considered in cash
conversion cycle) increased from
INR 2.8bn in FY14 to INR 6.3bn in
FY15

Receivables more than 6 months


jumped 56% YoY to INR3.6bn, 16%
of standalone receivables (FY14:
INR2.3bn, 12%)

Standalone
Consolidated
FY12 FY13 FY14 FY15 FY12 FY13 FY14 FY15
55
60
64
58
32
33
35
33
92
95
90
95
91
91
90
97
2
4
6
9
1
2
(25) (21)
(18) (16)
(7)
(0) (25) (27)
(1)
(2)
(3)
(3)
(1)
(1)
(1)
(1)
(85) (90) (98) (91) (91) (96) (101) (98)
33
35
32
40
20
18
21
39
7
9
12
13
7
8
11
13
3
3
2
2
5
4
4
3
43
47
45
55
36
56
31
32
13.2 10.9 16.0 20.9 15.3 15.4 15.5 19.4
Source: Company annual report, Edelweiss research

Since working capital requirement of consumer business is lower, cash conversion cycle
will increase post demerger of consumer business.

Table 6: Receivables profile


Particulars
Standalone
Years
< 6 Mn > 6 Months
FY15
19.0
3.6
FY14
16.8
2.3
FY13
16.1
2.3
FY12
15.5
1.8

Total
22.6
19.1
18.4
17.4

Consolidated
< 6 Months > 6 Months
32.7
4.7
32.7
3.2
27.9
3.7
28.4
3.0

(INR bn)
Total
37.3
35.9
31.6
31.4

Source: Company annual report, Edelweiss research

94

Edelweiss Securities Limited

Crompton Greaves
Capital allocation- Standalone business
Table 7: Standalone- RoCE
Particulars
Equity shareholders' funds
Loan funds
Capital employed
Investment in subsidiaries/Associates etc
Advances to subsidiaries/associates etc
Advances from subsidiaries/Associates etc
Adjusted capital employed- standalone
Represented by
Fixed & intangible assets (Incl CWIP)
Inventory
Trade receivables
Trade payables
Core working capital
Other current assets(inc loans and advances)
Cash and Current investments
Non- current loans & advances
Non-current investments
Other non-current liabilities
Other current liabilities and provisions

The companys investment and


loans & advances (net) to
subsidiaries/associates/others
stood at INR 19.7bn (March 2014:
INR14.6bn)

Standalone business (ex consumer)


RoCE declined to 9.1% (FY14:
18.9%) in FY15

Increase in capital employed in


FY15 was led by higher advance
recoverable in cash or in kind (INR
3.2bn) and trade receivables
(INR3.5bn)

Capital employed- Consumer products


Closing capital employed (ex consumer)
Average capital employed (overall)
Average capital employed (ex consumer)
Adjusted EBIT of standalone business
Consumer business EBIT
EBIT (ex consumer business)
Adjusted pre tax RoCE (overall)
Adjusted pre tax RoCE (ex consumer)

(INR bn)
FY11 FY12 FY13 FY14 FY15
23.0
27.0
30.6
33.6
40.1
0.1
0.1
0.1
0.3
7.2
23.2
27.1
30.7
33.9
47.3
(3.8) (5.5) (5.5) (8.1) (10.0)
(1.0) (0.9) (5.2) (6.7) (9.7)
0.0
0.4
0.3
0.1
0.1
18.4
21.0
20.2
19.2
27.6
9.2
6.8
7.8
8.2
7.9
4.1
4.5
5.5
5.6
5.2
15.1
17.4
18.4
19.1
22.6
(11.0) (11.7) (15.1) (15.6) (14.3)
8.2
10.1
8.7
9.0
13.6
2.0
2.2
2.2
3.2
6.8
5.5
8.2
7.9
4.6
4.6
0.2
0.2
0.2
0.4
0.2
0.0
0.0
0.0
0.0
0.0
(1.5) (1.0) (1.2) (1.2) (1.2)
(5.2) (5.6) (5.4) (5.0) (4.3)
18.4
21.0
20.2
19.2
27.6
(0.8) (0.9) (1.1) (1.2) (1.4)
17.6
20.1
19.1
18.0
26.2
16.2
19.7
20.6
19.7
23.4
15.5
18.8
19.6
18.6
22.1
9.4
6.9
6.0
6.8
6.0
2.9
2.6
2.7
3.3
4.0
6.6
4.3
3.3
3.5
2.0
58.3
35.0
29.1
34.7
25.6
42.3
23.0
16.7
18.9
9.1

Source: Company annual report, Edelweiss research

Table 8: Standalone- Cumulative cash generation and utilisation (FY11-15)


Sources
Operating profit
Less: Interest

FY11
9.9
(0.2)

FY12
7.6
(0.3)

FY13
6.3
(0.3)

FY14
7.2
(0.4)

FY15
7.7
(0.4)

Less: Taxes

(3.0)

(2.1)

(1.1)

(1.9)

(2.2)

Add: Investment Income


Cash Profits
Working capital (WC) changes*
Cash Profits after WC
Miscellaneous
Net decrease in cash and bank
Sale/(Purchase) of Investment
Proceedings from borrowings
Total

0.2
6.9
(3.5)
3.4
0.1
4.0
(0.8)
(0.1)
6.6

0.2
5.4
(2.0)
3.5
0.2
(0.8)
(0.1)
2.8

0.5
5.4
0.9
6.4
0.3
0.2
0.1
7.0

0.6
5.5
(1.5)
4.1
(0.1)
4.9
0.2
9.0

0.7
5.8
(9.3)
(3.5)
(0.1)
1.4
(1.4)
6.9
3.4

(INR bn)

Total Application
38.7 Capex
(1.6) Dividend Paid
Investment/ loans to
(10.3)
subsidiaries
2.2 Buyback of shares
29.1 Net increase in cash and ban
(15.2)
13.9
0.1
5.7
2.1
6.9
28.8 Total

FY11
4.4
1.2
0.9
-

FY12
(1.6)
1.2
1.6
-

FY13
1.7
0.9
4.4
-

FY14
1.0
0.9
4.2

FY15
(2.6)
0.9
5.1

1.7

1.3
1.5

6.6

2.8

7.0

9.0

3.4

Total
3.0
5.1
16.2
1.3
3.2

28.8

*(excl changes in loans and advances to related parties)


Source: Company annual report, Edelweiss research

95

Edelweiss Securities Limited

Annual Report Analysis

Consolidated RoCE declined from


10.6% in FY14 to 5.3% in FY15

Borrowings were key source of cash during FY15 as owing to steep increase in
working capital, cash profits were negative.

Total investment (including loans & advances) in subsidiaries stood at INR 16.2bn,
~56% of available cash during FY11-15.

Working capital rose steeply in FY15, highest in past 5 years, leading to negative
cash profits.

Table 9: Consolidated- RoCE

(INR bn)

Particulars
Equity shareholders' funds
Loan funds
Capital employed
Represented by
Fixed assets(Incl CWIP & excl Goodwill)
Intangible assets(excl Goodwill)
Goodwill
Inventory
Trade receivables
Trade payables
Core working capital
Other current assets including loans and advances
Cash and Current investments
Non- current loans & advances
Non-current investments
Other non-current assets
Other non-current liabilities
Other current liabilities and provisions

RoCE (ex consumer business)


declined to (0.9%) in FY15 (FY14:
5%)

Increase in capital employed in


FY15 was led by higher advance
recoverable in cash or in kind (INR
3.5bn) and unbilled revenues
(INR1.6bn)

Capital employed- Consumer products


Closing capital employed (ex consumer business)
Average capital employed (overall)
Average capital employed (ex consumer business)
Adjusted EBIT of consolidated business
Consumer business EBIT
EBIT (ex consumer business)
Adjusted pre tax RoCE (overall)
Adjusted pre tax RoCE (ex consumer)

Noncurrent investment includes


investment of INR 2.4bn (~6.5% of
net worth) in Avantha Power and
Infra

FY12
36.1
10.4
46.5

FY13
35.6
20.3
55.9

FY14
36.4
23.9
60.4

FY15
38.2
27.4
65.6

12.9
15.2
16.6
15.4
3.9
5.7
6.4
5.1
5.8
9.8
11.6
9.5
12.2
16.4
16.7
14.6
31.4
31.6
35.9
37.3
(21.1) (24.6) (27.7) (25.3)
22.6
23.4
24.9
26.6
6.4
5.8
7.9
13.5
10.0
10.8
8.4
8.5
0.3
0.2
0.5
0.2
2.9
2.9
2.8
2.8
0.5
1.7
1.5
1.1
(2.9) (2.3) (1.5) (1.4)
(15.8) (17.3) (18.6) (15.7)
46.5
55.9
60.4
65.6
(0.9) (1.1) (1.2) (1.4)
45.6
54.8
59.2
64.2
42.0
51.2
58.1
63.0
41.1
50.2
57.0
61.7
6.1
2.8
6.2
3.4
n.a.
n.a.
3.3
3.9
n.a.
n.a.
2.8
(0.6)
14.6
5.5
10.6
5.3
n.a.
n.a.
5.0
(0.9)

Source: Company annual report, Edelweiss research

Share of profit / (loss) in associate


stood at INR 15.5mn (FY14: INR (150)mn).

96

Edelweiss Securities Limited

Crompton Greaves
Segment and subsidiary performance analysis
Segment RoCE (ex consumer) at
standalone level declined from
~31% in FY14 to ~20% in FY15

Other segment reported loss


(EBIT) of INR 0.4bn in FY15

Table 10: Segment analysis (Standalone)


Particulars
Segment revenues
Power Systems
Industrial Systems
Others
Segment revenues (ex consumer)
Consumer Products
Inter segment sales
Segment result
Power Systems
Industrial Systems
Others
Segment EBIT (ex consumer)
Consumer Products EBIT

Segment margins presented in


adjacent table are without
considering unallocated
expenses and exchange
gain/(loss)

FY12

FY13

FY14

25.5
14.1
0.2
39.8
20.2
(0.5)
59.5

27.5
15.2
1.3
44.0
21.3
(0.5)
64.9

27.2
15.0
3.8
46.0
25.9
(0.6)
71.4

28.4
15.0
3.8
47.3
29.0
(0.5)
75.7

27.3
15.0
4.1
46.5
32.3
(0.4)
78.4

4.6
2.6
0.0
7.3
2.9
10.2
0.9
9.3
0.0
-

3.2
2.3
(0.1)
5.4
2.6
8.0
1.2
6.8
0.0
-

2.3
2.1
0.1
4.5
2.8
7.3
1.6
5.8
0.2
-

2.6
1.5
0.0
4.1
3.4
7.5
1.5
6.0
0.2
(0.9)

2.2
1.5
(0.4)
3.4
4.1
7.4
0.8
6.6
0.2
0.5

6.8

5.6

6.7

5.9

11.6
14.8
12.2

8.5
14.2
9.9

9.1
10.2
8.7

8.1
10.1
7.2

42.4
61.5
47.6

28.5
53.8
36.5

31.7
38.8
30.9

21.4
37.8
20.3

Less: Unallocated expenses net of income


Operating Profit
Finance Costs
Exchange (gain)/loss
Profit before Tax (ex exceptional and prior
9.3
period items )
Segment margins (before unallocated
expenses)
Power Systems
18.0
Industrial Systems
18.7
Segment margins (ex consumer)
18.2
Segment-RoCE (before unallocated expenses
and unallocated assets)
Power Systems
78.7
Industrial Systems
100.8
Segment RoCE (ex consumer)
86.1

Similarly segment RoCE is


computed without considering
unallocated expenses and
unallocated assets

Reported RoCE of 21.4% and


37.8% for the power and
industrial segment was
significantly higher than adjusted
RoCE of 9.1% for the standalone
business (ex consumer)

Table 11: Segment EBIT and capital employed reconciliation (Standalone)


Particulars
Segment EBIT (ex consumer) as per disclosure
in table 10
Unallocable expenses (net)

FY14

Exchange gain / (loss)


Adjusted EBIT (ex consumer business) in table
7

0.9
3.5

4.1
(1.5)

(INR bn)
FY15

FY11

(INR bn)

FY15 Particulars
Segment capital employed (ex consumer) as per
3.4
segment disclosure (a)
(0.8) Unallocable segment assets (net) not considered in
segment capital employed in (a) above
(0.5) Others
2.0 Adjusted capital employed (ex consumer business) in
table 7

FY14

FY15

14.4

18.7

4.4

8.2

(0.8)

(0.7)

18.0

26.2

Source: Company annual report, Edelweiss research

97

Edelweiss Securities Limited

Annual Report Analysis


Table 12: CG-Power- Profitability analysis
Particulars

(INR mn)
Standalone
FY13
FY14
27,250 28,430
2,600
2,960
2,310
2,590
7,800
8,520
28.6
31.7
8.5
9.1
33,300 31,080

Net Sales
EBIDTA (including other income, OI)
EBIT
Capital Employed
RoCE (%)
EBIT (%)
Unexecuted Order Book

Overseas
Overall
FY15
FY13
FY14
FY15
FY13
FY14
FY15
27,340 47,530 58,400 58,980 73,360 85,360 85,740
2,660 (2,440)
900
120
340
4,290
3,280
2,230 (3,520)
(600) (1,320) (1,100) 2,340
1,350
12,250 25,140 28,220 26,130 33,820 38,990 40,860
21.5
(16.4)
(2.2)
(4.9)
(3.7)
6.4
3.4
8.2
(7.4)
(1.0)
(2.2)
(1.5)
2.7
1.6
29,670 51,950 55,300 39,490 85,250 86,380 69,160
Source: Company annual report, Edelweiss research

Losses (EBIT) of overseas power


systems business more than
doubled to INR 1.3bn (FY14: INR
0.6bn)

Capital employed in domestic


(India) power business increased
44% YoY, presumably due to
higher investment in working
capital

Power systems derive ~70% of revenues from overseas subsidiaries.

The company has received non-binding proposals from reputed international entities
for acquiring European, North American and Indonesian activities of CG Power.

Unexecuted order book of overseas subsidiaries declined ~30% to INR 40bn.

Table 13: Overseas entities financial performance


Particulars
FY12
Revenue from Operations
996
EBIDTA
15
Other Income
3
Finance cost
9
Depreciation and Amortisation expenses
35
PBT (Before Exceptional & Prior period items)
(26)
Exceptional items
Prior period items
PBT before tax
(26)
Less: Tax Expenses
Current Tax
5
Deferred Tax
(3)
PAT
(28)
Minority Interest
Share of Profit / (Loss) of Associates
PAT Carried Forward to the Balance Sheet
(28)

Overseas entities EBITDA stood


at USD (6) mn.

Losses (PBT) more than doubled


to USD (74)mn (FY14: USD
(33)mn)

FY13
936
(42)
7
16
23
(74)
(22)
(96)
7
(16)
(87)
(87)

(USD mn)
FY14
FY15
1,029
1,023
(6)
13
9
19
20
27
26
(33)
(43)
(28)
(3)
(33)
(74)
4
3
(40)
(3)
(43)

4
5
(83)
(1)
(84)

Source: Company annual report, Edelweiss research

98

Edelweiss Securities Limited

Crompton Greaves
Table 14: Major subsidiaries analysis

(INR mn)

FY14
FY15
Revenue
PAT Net Worth Revenue
CG International B.V
1,608
165
8,230
1,354
CG Holdings Belgium N.V.
8,404
496
17,146
6,948
CG Power Systems Belgium N.V
12,513 (1,186)
7,098
9,974
CG Power Systems Ireland Limited 5,912
49
2,540
4,664
CG Power Systems Canada Inc.
3,844
(727)
(945)
3,802
PT. CG Power Systems Indonesia
7,384
640
5,747
8,106
CG Electric Systems Hungary Zrt.
7,918
(803)
(1,403)
3,676
CG Power USA Inc.
11,174
311
2,047 11,746
CG Power Solutions UK Limited
2,669
(445)
(313)
1,684
CG Power Systems Brazil Ltda
899
(371)
(974)
453
CG Middle East FZE
2,165
(535)
97
1,058
Others
1,347
(406)
6,485
1,308
Total (A)
65,836 (2,812)
45,755 54,773
Emotron Group subsidiaries
CG Drives and Automation
Sweden AB
2,732
492
1,789
1,694
Netherlands B.V.
574
11
169
512
Germany GmbH
1,296
19
60
1,017
Total (B)
4,602
522
2,018
3,223
ZIV Group subsidiaries
ZIV Aplicaciones y Tecnologia S.L.
1,418
459
958
292
ZIV Metering Solutions S.L.
3,269
253
1,441
4,868
ZIV Grid Automation S.L.
1,923
(38)
922
952
Others
1,168
(159)
39
1,091
Total (C)
7,778
514
3,361
7,204
Grand Total (A)+(B)+(C)
78,216 (1,776)
51,134 65,199
Name of the Subsidiary Company

Aggregate losses of subsidiaries


increased to INR (4)bn versus
INR (1.8)bn in FY14, led by
higher losses in Belgium and
Hungary

Profitability of Emotron and ZIV


group companies (not part of
proposed assets sales)
deteriorated in FY15

PAT
(1)
317
(1,512)
103
(258)
576
(2,542)
(78)
(740)
(443)
520
(310)
(4,369)

177
30
10
217
33
169
(109)
18
111
(4,041)

Source: Company annual report, Edelweiss research


Note: Subsidiary numbers presented above are not fully comparable due to exchange rate
volatility

Management intends to divest ailing overseas power equipment business to reduce


exposure at standalone balance sheet and focus on domestic operations and overseas
industrial systems.

Table 15: Unbilled revenue analysis


Particulars
Due to customers
Due from customers
Contract revenue recognised
Excess billed as % of contract revenue
Unbilled as % of contract revenue

Unbilled revenue (as % of contract


revenue) rose ~4.5x during FY1215

FY11
0.2
0.5
7.5
2.9
6.8

FY12
0.7
1.0
17.6
3.8
5.6

FY13
0.7
1.7
12.6
5.3
13.4

FY14
1.3
2.6
11.0
11.5
23.3

(INR bn)
FY15
1.2
4.1
16.1
7.5
25.7

Source: Company annual report, Edelweiss research

99

Edelweiss Securities Limited

Annual Report Analysis


Chart 2: Unbilled revenue as % of contract revenue
30.0
24.0

(%)

18.0
12.0
6.0
0.0
FY11

FY12

FY13

Excess billed as % of contract revenue

FY14

FY15

Unbilled as % of contract revenue

Source: Company annual report, Edelweiss research

100

Edelweiss Securities Limited

Crompton Greaves
Intangibles
Although intangible assets declined
to INR14.5bn during the year, they
still constitute 38% of net worth

Decline in goodwill during FY15


was presumably due to
depreciation of EUR against INR

Table 16: Intangibles analysis


Particulars
Goodwill
Computer software
Technical know-how
Commercial rights
Research and development
Brand names and customer lists
Total
Intangible assets under development
Total
Intangibles as % of net worth

FY11
2.9
0.3
0.2
0.3
0.4
0.7
4.9
0.1
4.9
15.0

FY12
5.9
0.4
0.5
0.3
1.1
1.2
9.3
0.4
9.7
27.0

FY13
9.8
0.6
0.4
0.3
0.9
2.5
14.4
1.0
15.5
43.4

FY14
11.6
0.6
0.4
0.2
1.3
2.7
16.7
1.3
18.0
49.3

(INR bn)
FY15
9.5
0.6
0.4
0.1
1.5
2.0
14.0
0.5
14.5
38.1

Source: Company annual report, Edelweiss research

Research & development costs are amortised over 3-15 years based on expected useful life.
Brand names and customer lists are amortised over 10 years. Goodwill arising on
consolidation is not amortized but tested for impairment annually.

CG (Standalone) exposure in subsidiary/associate/other companies

Total exposure to
subsidiaries/associates stood at
INR33.2bn, 83% of standalone
net worth

Table 17: Exposure to subsidiaries/associates/others


Particulars
FY13
Investments in subsidiaries
3,085
Investments in Associates/ Others
2,356
Investments in debentures
100
Loans & advances (net)
4,921
Total cash exposure
10,461.7
% of net worth
34.2
Guarantees given
12,679
Non cash exposure (% of net worth)
41.5
Total exposure
Total exposure (% of standalone net worth)

23,141
75.7

FY14
5,596
2,356
100
6,594
14,646.1
43.6
14,565
43.4
29,211
87.0

(INR mn)
FY15
7,688
2,356
9,622
19,666.2
49.0
13,586
33.9
33,252
82.9

Source: Company annual report, Edelweiss research

101

Avantha Power and Infrastructure ceased to be an associate company with effect from
April 1, 2014, due to decline in CRGs shareholding to below 20%. The carrying cost of
~INR 2.5bn pertaining to Avantha Power which was accounted under equity method till
FY14, has been reclassified under investment in others.

Edelweiss Securities Limited

Annual Report Analysis

Payment to Avantha Holdings


stood at INR 702mn, ~12% of
adjusted standalone PBT

Table 18: Related party transactions


Particulars
Loans and advances receivable
Accounts receivable
Sale of goods and services
Korba west power company
Others
Rent paid
Avantha Holdings Ltd.
Other expenses
Avantha Holdings Ltd.
Others
Key mangerial personnel remuneration

(INR mn)
FY15
120
192

FY13
105
113

FY14
112
215

139
189

91
69

51
115

20

20

20

784
16
135

676
16
172

702
63
142

Source: Company annual report, Edelweiss research

Table 19: Summary financials


Particulars
Sales
Total income
EBITDA
EBITDA margin (%)
Gross Margin (%)
RoE
RoCE
Depreciation
Financial costs
Net profit
Equity shareholders' funds
Loan funds
Net debt
Net fixed assets
CWIP
Goodwill on consolidation
Current assets loans and advances
Current liabilities and provisions
Net current assets
Cash and cash equivalent
Cash flow from operating activities
Cash flow from investing activities
Cash flow from financing activities
Net cash flows
CAPEX
Working capital investments

FY11
100,051
101,184
13,438
13.4
37.3
31.7
37.4
1,936
343
8,887
32,747
4,703
(2,309)
15,381
1,098
2,934
42,068
31,379
10,690
7,012
5,669
(7,560)
(1,813)
(3,704)
(7,461)
(5,070)

FY12
112,486
113,113
8,036
7.1
31.7
10.9
14.4
2,600
567
3,736
36,109
10,440
453
15,201
1,493
5,882
50,039
36,877
13,162
9,987
4,133
(4,623)
2,482
1,992
(3,724)
(2,277)

FY13
120,944
121,944
3,832
3.2
31.0
1.2
5.5
2,029
955
(361)
35,615
20,270
9,429
18,907
1,965
9,792
53,728
41,896
11,832
10,841
4,449
(11,367)
7,776
858
(3,724)
2,480

FY14
136,315
138,205
6,120
4.5
33.0
5.1
9.3
2,621
1,366
2,443
36,446
23,936
15,578
20,820
2,184
11,588
60,520
46,185
14,335
8,358
3,196
(978)
99
2,316
(2,620)
(2,513)

(INR mn)
FY15
140,131
141,802
6,424
4.6
32.0
5.2
8.7
2,620
1,443
2,094
38,159
27,438
18,937
19,167
1,267
9,468
65,355
40,933
24,422
8,501
(6,801)
4,284
1,260
(1,257)
1,310
(9,983)

Source: Company annual report, Edelweiss research

102

Edelweiss Securities Limited

ANALYSIS BEYOND CONSENSUS


THE NEW ABC OF RESEARCH
Havells India | Annual Report Analysis

Havells Indias (Havells) FY15 annual report analysis highlights subdued (5 year
low) revenue and EBITDA growth at standalone level. Standalone tax rate rose to
28% due to lapse of tax holiday period of certain units and management expects
tax rate to increase further. Consolidated profits were aided by recognition of
deferred tax asset (DTA) of INR378mn (~6.7% of PBT) (FY14: nil) in respect of
unabsorbed losses pertaining to certain Sylvania subsidiaries. Higher actuarial
loss on defined benefits obligations led to slippage in Sylvanias EBITDA and its
losses surged to EUR11.5mn in FY15 (FY14: EUR4mn). Sylvanias net pension
liability rose to INR3.9bn (EUR58.1mn) as at March 2015 (March 2014: INR3.6bn;
EUR43.7mn). Goodwill on Sylvania consolidation stood at INR3.6bn (March 2014:
INR4.4bn), representing ~20% of consolidated net worth. During FY15, Havells
infused INR1.3bn (FY14: INR0.8bn) in Sylvania, taking its cumulative investment in
the company to INR9.8bn (~40% of standalone net worth).

Market Data
52-week range (INR)

: 346 / 222

Share in issue (mn)

: 624.5

M cap (INR bn/USD mn)

: 176 / 2,751

Avg. Daily Vol. BSE/NSE (000) : 2,026.1

Shareholding Pattern (%)

Promoters*

: 61.6

MFs, FIs & Banks

: 2.6

Whats on track?

FIIs

: 26.0

Standalone (excluding investment in subsidiaries/JV) RoCE continued to be robust at


~46% (FY14: 47%).

Others

: 9.8

*Promoters pledged shares


(% of share in issue)

: NIL

As at March 2015, no corporate guarantees were given by the company on behalf of


Sylvania (guarantees worth INR 1.4bn were outstanding at March 2014).

What needs tracking?


Sylvanias EBITDA declined from EUR16.5mn (~3.75% of revenue) in FY14 to EUR6.3mn
(~1.4% of revenue) in FY15 primarily led by higher actuarial loss of EUR14.4mn (FY14:
EUR6.1mn) on defined benefits obligations. Losses rose to EUR11.5mn in FY15 (FY14:
EUR4mn). Underfunded status of Sylvania defined benefit obligation stood at
~EUR58.1mn (~INR4bn).
Product warranties and after sales service expenses catapulted 85% to INR1.5bn led
primarily by Sylvania.
Payment to related parties stood at INR 975mn (FY14: INR850mn), 17.1% of PBT.
During FY15, Sylvania has started receivable financing on a non-recourse basis, which led
to reduction in receivables and debt of INR 1,764mn (EUR26mn) as at March 2015.
Sylvanias core working capital (excluding acceptances) declined by ~9% and ~25% in EUR
and INR terms, respectively, in FY15. Decline in core working capital was steeper in INR
terms due to EUR depreciation (March 2015: EUR=INR67.8; March 2014: EUR=INR82.5).
During the year, Havells recognised impairment loss of INR121mn (FY14: INR4mn) in
respect of overseas operations in Columbia and Belgium.
Analysis beyond Consensus (ABC) is our initiative to provide a differentiated perspective to our clients
on various non-routine and intricate issues. This unit of research works independent of the sector/stock
research team and views expressed in this report may vary with that of respective sector/stock analyst.
Edelweiss research is also available on www.edelresearch.com,
1
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

June 15, 2015


Edelweiss Securities Limited

Annual Report Analysis


Other Highlights

Standalone effective tax rate jumped from ~20% in FY13 and FY14 to ~28% in FY15 due
to lapse of tax holiday period for a few units. Management expects tax rate to further
increase to ~30% in FY16.

During Q1FY16, the company acquired 51% stake in Promptec Renewable Energy
Solution (Promptec) for INR 291mn. The latter markets and manufactures LED products,
including street, office and solar lighting.

DTA has not been recognised in respect of losses amounting to ~INR16.9bn (March
2014: INR24bn) due to absence of virtual certainty supported by convincing evidences
that sufficient future taxable income will be available against which such deferred tax
assets can be realised.

The company has settled claims with one of its customers related to supply of
switchgear products. Aggregate settlement amount payable was ~INR700mn, of which
INR420mn was recognised as expense in FY14 and balance ~INR280mn in FY15.

The companys JV (50% stake), Jiangsu Havells Sylvania Lighting Co, reported sales of
~USD20mn (FY14: USD17.4mn) and net profit margin of 4% in FY15 (FY14: Loss of 1.4%).

Key Highlights from MD&A and Directors Report

Havells recent acquisition of Promptec, a Bengaluru-based company, is another step to


strengthen its position in the growing LED market.

Sylvanias European operations remained stable during the year despite difficult market
conditions. Even in the face of volatile forex scenario, the company retained
unwavering focus on profitability, cash generation and debt reduction.

Earnings analysis
Table 1: Standalone / Subsidiary analysis
FY14
Sales
47,197
Raw Materials Consumed 29,017
Gross margin
18,180
Operating & Admin. Exp.
9,289
Personnel cost
2,475
EBITDA
6,416
Depreciation
636
EBIT
5,780
Financial Charges
269
Other Income
441
PBT
5,951

Standalone
%
FY15
100.0 52,387
61.5 31,784
38.5 20,603
19.7 10,484
5.2
3,127
13.6
6,991
1.3
875
12.2
6,116
0.6
176
0.9
522
12.6
6,463

104

(INR mn)
Subsidiary/JV (Derived)
Consolidated
%
FY14
%
FY15
%
FY14
%
FY15
%
100.0 34,661
100.0 33,307
100.0 81,858
100.0 85,694
100.0
60.7 17,380
50.1 16,508
49.6 46,398
56.7 48,292
56.4
39.3 17,281
49.9 16,800
50.4 35,461
43.3 37,403
43.6
20.0
7,878
22.7
7,832
23.5 17,167
21.0 18,316
21.4
6.0
8,394
24.2
8,748
26.3 10,869
13.3 11,875
13.9
13.3
1,009
2.9
220
0.7
7,425
9.1
7,211
8.4
1.7
519
1.5
512
1.5
1,155
1.4
1,387
1.6
11.7
490
1.4
(291)
(0.9) 6,270
7.7
5,825
6.8
0.3
472
1.4
464
1.4
741
0.9
640
0.7
1.0
(28)
(0.1)
(18)
(0.1)
413
0.5
505
0.6
12.3
(10)
(0.0)
(773)
(2.3) 5,941
7.3
5,690
6.6
Source: Company annual report, Edelweiss research

Edelweiss Securities Limited

Havells India
Revenue and EBITDA growth at
standalone level remained muted
at 11% and 9%, respectively

Higher fixed cost at Sylvania led to


lower EBITDA margins despite of
higher gross margins

During FY15, standalone revenue grew only 11% led by sluggish growth in switchgear
and lighting & fixture, which clocked growth of 5% and 3%, respectively.

EBITDA margin declined to 13.3% (FY14: 13.6%) owing to higher personnel cost.

Depreciation expense during the year was higher as it was computed based on
estimated useful life of assets, as prescribed in the Companies Act 2013.

Advertisement & sales promotion expense stood at 3% of revenue (FY14: 2.4%) at


standalone level.

During FY15, Sylvanias personnel cost included actuarial loss of INR1.1bn (FY14:
INR0.5bn) on DBO due to significant reduction in interest/discount rates in Europe
(primarily Germany).

Table 2: Standalone segment analysis


Particulars
Segment revenue
Switchgears
Cables
Lighting and fixtures
Electrical consumable durables
EBIT margin in consumer durables
declined from ~27% in FY14 to
~25% in FY15

Segmental result
Switchgears
Cables
Lighting and fixtures
Electrical consumable durables
Less: Unallocated exp. net of income
Operating Profit
Finance Costs
Profit before Tax
Income Tax expense
Profit after tax
Segmental EBIT margins
Switchgears
Cables
Lighting and fixtures
Electrical consumable durables

FY12

FY13

(INR mn)
FY14
FY15

8,962
15,930
5,544
5,721
36,156

10,781
16,925
6,652
7,893
42,250

12,192
19,264
7,207
8,534
47,197

12,790
21,904
7,410
10,283
52,387

3,234
1,259
1,318
1,610
7,421
(3,239)
4,182
(444)
3,738
(684)
3,054

3,653
1,541
1,568
1,978
8,740
(3,883)
4,857
(286)
4,572
(858)
3,714

4,032
2,110
1,787
2,304
10,233
(4,012)
6,220
(269)
5,951
(1,164)
4,787

4,390
2,657
1,969
2,580
11,595
(4,957)
6,638
(176)
6,463
(1,813)
4,649

36.1
7.9
23.8
28.1
20.5

33.9
9.1
23.6
25.1
20.7

33.1
11.0
24.8
27.0
21.7

34.3
12.1
26.6
25.1
22.1

Source: Company annual report, Edelweiss research

105

Unallocated expenses in the above segment wise profitability analysis increased from
INR 4bn in FY14 to INR5bn in FY15.

Edelweiss Securities Limited

Annual Report Analysis


Standalone RoCE (net of
investment in subsidiaries/JV)
stood at ~46%

Table 3: RoCE profile (Standalone)


Particulars
FY11
PBIT
3,289
7,590
Closing Capital employed
(Ex investment in
Subsidiaries & J.V.)
7,391
Average Capital employed
(Ex investment in
Subsidiaries & J.V.)
RoCE (%)
44.5

FY12
4,182
9,618

FY13
4,857
11,871

FY14
6,220
14,429

(INR mn)
FY15
6,638
14,475

8,604

10,745

13,150

14,452

48.6

45.2

47.3

45.9

Source: Company annual report, Edelweiss research

Sylvanias sales growth remained


muted at below 1% YoY

Sylvanias EBITDA margin fell to


1.4% in FY15 (FY14: 3.75%)
primarily led by higher actuarial
losses of ~EUR14.4mn in FY15
(FY14: ~EUR6mn)

Sylvania losses (PBT) rose to


EUR11.9mn in FY15 (FY14:
EUR0.2mn)

Table 4: Sylvania income statement (Standalone)


FY13
Net Revenue
439.90
EBIDTA
22.50
Depreciation
7.40
Finance Cost
11.90
Foreign Exchange Loss
2.60
Add: other Income
3.50
Exceptional Item
25.80
Profit before tax
Tax
Profit after tax
Revenue Growth
EBITDA Margin
PBT margin

(EUR mn)
FY15
443.10
6.30
6.50
5.80
7.00
1.10
-

FY14
440.10
16.50
6.40
5.20
6.00
0.90
-

29.90
(0.60)
30.50

(0.20)
3.80
(4.00)

(11.90)
(0.40)
(11.50)

5.11%
6.80%

0.05%
3.75%
-0.05%

0.68%
1.42%
-2.69%

Source: Company annual report, Edelweiss research

Sylvanias pension liability jumped


by EUR14.4mn in FY15 versus
EUR6.1mn in FY14

Table 5: SylvaniaPension liability analysis


Particulars
UK
Present value of Benefit obligation
84.6
Less: Fair Value of Plan Assets
79.4
Net Liability as at Mar15
5.2
Net Liability as at Mar14

2.8

Germany
47.0
2.1
44.9

Others
8.0
8.0

(EUR mn)
Total
139.6
81.5
58.1

33.9

7.0

43.7

Source: Company annual report, Edelweiss research

Discount rate has steadily declined


in European countries, leading to
steep rise in pension obligations

Net pension liability as at March 2015 end was EUR58mn, of which Germany accounted for
~80%. Since pension obligation (PBO) in Germany is not backed by plan assets, net liability
catapulted significantly during FY15 owing to fall in German bond yields.
Management expects pension outgo to be in the EUR1.40-1.50mn p.a. range in Sylvania for
the next 8-10 years.

106

Edelweiss Securities Limited

Havells India
Table 6: SylvaniaPrincipal actuarial assumptions
Particulars
2012
Discount rate
1.40% - 5.00%
Future salary increases
2.50% - 3.00%
Inflation rate
2.00%
Future pension increases
2.00%
Expected return on plan assets
4.50% - 5.60%

2013
3.75% - 4.70%
2.50% - 6.50%
2.00% - 2.20%
2.00% - 2.20%
4.50% - 5.50%

2014
3.25% - 4.50%
2.50% - 5.00%
1.75% - 2.20%
1.75% - 2.20%
3.75% - 4.70%

2015
1.50% - 3.80%
2.50% - 5.00%
1.75% - 1.90%
1.75% - 1.90%
3.75% - 4.50%

Source: Company annual report, Edelweiss research

Cash flow analysis


Table 7: Cash flow analysis

(INR mn)

Particulars

Standalone

Subsidiary/JV (derived)
FY14
FY15
(10.1)
(772.8)
527.3
(566.9)
1,248.9
1,765.3
(36.3)
(146.8)

FY14
FY15
Profit before tax
5,951.0
6,462.5
Non-operating expense
601.2
841.6
Non-cash adjustments
15.6
(193.8)
Foreign currency translation
reserve
Direct taxes paid
(1,117.6)
(1,504.7)
(217.9)
Cash profit after tax
5,450.2
5,605.6
(Increase)/Decrease in trade and
(86.4)
48.8
(1,459.5)
other receivables
(Increase)/Decrease in inventories
(196.8)
(70.1)
(1,554.0)
(Increase)/Decrease in loans,
advance and other assets
Increase/(Decrease) in trade
payables
Increase/(Decrease) in other
liabilities and provisions
Increase in working capital
Net cash from operating activities
Adj: Bills discounted
Adj: Acceptances
Adj net cash from operating
activities
Interest expenses paid
Adj net cash from operating
activities post interest
Capex
Adj free cash flow

(410.3)
1,511.9

Consolidated
FY14

FY15
5,940.9

1,128.5
1,264.5
(36.3)
(1,335.5)

(131.5)

5,689.7
274.7
1,571.5
(146.8)
(1,915.0)

6,962.1

5,474.1

3,636.9

(1,545.9)

3,685.7

1,341.6

(1,750.8)

1,271.5

(62.4)

(153.0)

(98.7)

349.3

(161.1)

196.3

432.9

(551.5)

2,237.2

(1,010.4)

2,670.1

(1,561.9)

1,518.9

(564.7)

2,506.7

559.9

987.8

1,124.6
1,075.1
6,525.3
(304.3)
(226.5)
5,994.5

398.8
6,004.4
(932.7)
(31.8)
5,039.9

643.9
2,155.8
(1,553.9)
2,155.8

3,752.7
3,621.2
(1,764.1)
(58.5)
1,798.6

1,719.0
8,681.1
(304.3)
(1,780.4)
6,596.4

4,151.5
9,625.6
(2,696.8)
(90.3)
6,838.5

(82.8)
5,911.7

(170.9)
4,869.0

(440.7)
1,715.1

(435.7)
1,362.9

(523.5)
6,072.9

(606.6)
6,231.9

(900.9)
5,010.8

(1,674.7)
3,194.3

(832.0)
883.1

(48.8)
1,314.1

(1,732.9)
4,340.0

(1,723.5)
4,508.4

Source: Company annual report, Edelweiss research

Free cash flows (adjusted for acceptances and bills discounted) at the standalone level
declined ~36% to INR3.2bn (FY14: INR5bn) led by higher capex and increased working
capital requirement.

Subsidiary/JV adjusted free cash flows jumped to ~INR1.3bn in FY15 (FY14: INR0.9bn)
led primarily by steep decline in capex. During the year, Sylvania has started receivable
financing on a non-recourse basis in its European operations, which resulted in
reduction in receivables of INR 1,764mn (EUR26mn) as at March 2015. This also
resulted in reduction in debt without corresponding increase in contingent liabilities.

Sylvanias core working capital (excluding acceptances) declined by ~9% and ~25% in
EUR and INR terms, respectively, in FY15. Decline in core working capital was steeper in
INR terms due to EUR depreciation (March 2015: EUR=INR67.8; March 2014:
EUR=INR82.5).

107

Edelweiss Securities Limited

Annual Report Analysis


Table 8: Cash conversion cycle
Particulars

FY12
83
13
(72)
(4)
2
23
24
43
90
24.8

Inventory days
Add: Trade Receivable days
Less: Trade Payable days
Less: Advance from customer days
Add: Advance to supplier days
Cash conversion cycle
Add: Acceptance days
Add: Bills discounted days
Adjusted Cash conversion cycle
Adjusted working capital as % to revenues

Sylvanias receivable days


(reported) declined from 89 in
FY13 and FY14 to 75 in FY15
primarily due to non recourse
receivable financing availed by the
company

As at March 2015, Sylvania availed


receivable financing of INR1.75bn
(EUR26mn) which led to decrease
in reported receivables

Standalone
FY13
FY14
84
79
12
10
(60)
(50)
(4)
(2)
2
1
34
38
13
1
48
49
94
89
22.7
21.7

Consolidated
FY15
FY12
FY13
FY14
FY15
73
117
112
105
102
9
45
42
40
33
(45)
(90)
(83)
(80)
(81)
(1)
(2)
(2)
(1)
(0)
1
4
5
5
4
37
74
74
69
58
3
25
17
9
15
49
24
29
29
34
89
124
119
107
108
22.4
31.0
26.1
26.4
24.4
Source: Company annual report, Edelweiss research

Trade receivables factoring charges stood as INR256mn (FY14: INR237mn) and


INR319mn (FY14: INR283mn) for standalone and consolidated entities, respectively,
for FY15.

Table 9: Sylvania core working capital


Particulars
Trade Receivables
Inventory
Trade payables
Add: Non recourse receivable
financing
Working capital
Working capital as % to revenues

FY12
106.7
106.2
(75.5)
-

FY13
107.1
92.6
(76.9)
-

FY14
106.4
98.6
(95.1)
-

(Euro mn)
FY15
75.3
100.6
(101.5)
26

137.4
30.7

122.8
27.9

109.9
25.0

100.4
22.7

Source: Company annual report, Edelweiss research


Note: In the absence of information, no adjustment for acceptances have been made in the
above table

Sylvania reported YoY


improvement in working capital
led by increase in trade payable
days

108

Edelweiss Securities Limited

Havells India
Related party transactions

Managerial remuneration
increased 57% to INR248mn (6.5%
of PAT).

Havells had announced that the


Havells brand will be transferred to
the company in April 2016 for nil
consideration

Table 10: Related party transactions


Particulars
QRG Enterprise Ltd
Rent/ usage charges paid
Trademark fees and royalty
Purchase of traded goods
Purchase of stores & spares
Purchase of tangible fixed estates
Guptajee & Co.
Commission on sales
QRG Foundation
Donation paid
CSR Contribution
Appleby Trust (Isle of Man) Limited
Legal & professional charges
The Vivekananda Asharma
CSR Contribution
Donation paid
Managerial remuneration
Total
% of PBT

FY12

FY13

FY14

(INR mn)
FY15

193.4
379.2
2.6
0.1

193.4
422.5
0.1
0.3

193.4
405.6
0.2

193.4
400.0
-

56.4

65.9

68.9

76.4

60.0

45.0

25.0

55.0

1.0

2.1

1.1
157.4
851.6
14.3%

2.5
247.8
975.1
17.1%

98.8
791.5
16.6%

116.2
845.5
12.7%

Source: Company annual report, Edelweiss research

Table 11: Contingent liabilities analysis


Particulars
Disputed tax liabilities jumped
from INR705mn in FY14 to
INR1,008mn in FY15

As at March 2015, Havells has not


provided any corporate guarantees
for Sylvania

Standalone
FY13
FY14
FY15
638
868
1,063

Liability towards banks


against receivable buyout
facilities
Disputed tax liabilities
460
2,917
Corporate Guarantees given
on behalf of subsidiary
companies
Bank guarantees and Letter of 1,148
Credits
Others
526
Total
5,690
Net Worth
18,702
% of net worth
30.4

(INR mn)
Consolidated
FY13
FY14
FY15
638
868
1,063

705
1,431

1,008
-

460
-

705
-

1,008
-

1,228

1,035

1,300

1,491

1,082

528
4,761
21,299
22.4

217
3,322
23,758
14.0

679
3,077
14,420
21.3

611
3,675
16,660
22.1

217
3,369
18,182
18.5

Source: Company annual report, Edelweiss research

109

Edelweiss Securities Limited

Annual Report Analysis


Table 12: Summary financials (Consolidated)
FY11
Sales
56,126
Total income
56,364
EBITDA
5,570
Gross margin (%)
43.1
EBITDA margin (%)
9.9
RoE (%)
58.0
RoCE (%)
30.9
Depreciation
804
Financial costs
902
Net profit
3,036
Equity shareholders' funds
6,537
Loan funds
11,173
Net fixed assets (Excl CWIP)
9,955
CWIP
249
Goodwill on consolidation
3,354
Cash and cash equivalent
1,779
Net Debt
9,395
Current assets loans and advances 19,906
Current liabilities and provisions
14,596
Net current assets
5,310
Cash flow from operating activities
2,530
Cash flow from investing activities
(1,762)
Cash flow from financing activities
(654)
Net cash flows
114
CAPEX
1,886
Working capital investments
1,998

FY12
65,182
65,596
6,573
44.2
10.1
46.0
32.2
949
1,281
3,699
9,556
10,271
10,284
663
3,625
2,336
7,934
24,379
18,894
5,486
4,519
(1,053)
(2,470)
996
1,716
1,234

FY13
FY14
72,479 81,858
72,813 82,271
6,689
7,425
42.6
43.3
9.2
9.1
34.3
28.7
26.9
26.0
1,097
1,155
1,232
741
5,814
4,463
14,420 16,660
9,815 10,535
11,306 11,624
249
444
3,694
4,380
4,736
8,819
5,079
1,716
23,984 27,251
16,452 21,427
7,533
5,824
6,377
8,681
(1,433) (3,762)
(2,521) (3,097)
2,423
1,822
1,750
1,764
1,419
(1,719)

(INR mn)
FY15
85,694
86,199
7,211
43.6
8.4
22.12
25.5
1,387
640
3,854
18,182
4,239
11,829
383
3,581
9,525
(5,286)
21,837
20,919
918
9,626
(4,864)
(7,538)
(2,776)
1,739
(4,152)

Source: Company annual report, Edelweiss research

110

Edelweiss Securities Limited

ANALYSIS BEYOND CONSENSUS


THE NEW ABC OF RESEARCH
IRB Infrastructure| Annual Report Analysis

IRB Infrastructures (IRB) FY15 annual report analysis highlights ~21%


decline in construction revenue to INR20bn (FY14: INR25.5bn) primarily
due to shifting of construction activities on certain projects to FY16.
Unrealised gains on construction activities (captive projects) fell to
INR6.0bn versus INR9.4bn in FY14. Construction margin of 33% (INR31bn)
recognised on captive projects during FY12-15 is the highest amongst
peers. Toll revenue jumped INR6.6bn to INR18.4bn following traffic
growth, toll rate revision and change in accounting policy with respect to
fixed premium payable to NHAI. Had there been no change in accounting
policy, toll revenue (including EBITDA) and PBT would have been lower by
INR3bn and INR1.7bn, respectively. Unhedged foreign exchange exposure
stood at ~USD177mn (FY14: USD181mn). Exchange difference capitalised
to intangibles under development stood at INR431mn (FY14:
INR915.7mn).

Key highlights
IRB has changed its accounting policy with respect to annual fixed premium payable to
NHAI for BOT projects. Till FY14, such annual premiums on operational projects were
reduced from toll collections in income statement. During FY15, entire outstanding
premium liability (~INR218bn) has been capitalised in fixed asset, which will be
amortised over the life of the project based on traffic projections.

Market Data
52-week range (INR)

: 289 / 197

Share in issue (mn)

: 351.5

M cap (INR bn/USD mn)

: 89 / 1,375

Avg. Daily Vol. BSE/NSE (000) : 2,266.8

Shareholding Pattern (%)


Promoters*

: 57.8

MFs, FIs & Banks

: 8.5

FIIs

: 27.4

Others

: 6.3

*Promoters pledged shares

: 0.4

(% of share in issue)

The companys construction margin on captive EPC contracts stood at 30% (FY12-15
average: 33%) vis--vis peers 10-14% (FY12-15 average: 10-14%). While IRB reported
superior construction margin, return ratios of most SPVs remained subdued (RoCE <
10%).
During the year, the company received NHAI approval for premium deferral on 2 road
projects. Deferred premium obligation on these projects stood at INR3.3bn on which
interest is payable at bank rate+2%.
Aryan Infra Investment (AIIPL) (IRB holds 66% stake), which is engaged in real estate
development, had extended INR2bn mobilisation advance to Aryan Construction (a
proprietary concern of promoter) in 2007 and 2008. This advance continues to remain
outstanding as at FY15 end.
Guarantees given by IRB (standalone) on behalf of subsidiaries stood at ~INR112bn
(~5.2x standalone net worth; FY14:~INR92bn).

Analysis beyond Consensus (ABC) is our initiative to provide a differentiated perspective to our clients on
various non-routine and intricate issues. This unit of research works independent of the sector/stock
research team and views expressed in this report may vary with that of respective sector/stock analyst.
Edelweiss Research is also available on www.edelresearch.com,
1
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

October 20, 2015


Edelweiss Securities Limited

Annual Report Analysis


Other highlights

Donations to political parties stood at INR234mn (~4.5% of PBT; FY14: INR46mn).

IRBs commitment to invest in SPV as sponsors contribution (share capital and


subordinated debt) increased to INR26.7bn (FY14: INR21bn), led by award of new BOT
projects. During FY15, the company made equity investment of INR2.9bn and advanced
subordinate debt of INR8.8bn to its various SPVs (subsidiaries).

Advances outstanding from related party


During FY07, AIIPL (IRB holds 66% stake and Aryan construction hold 34%) had awarded a
contract of INR INR22.6bn to Aryan constructions to provide various construction related
services. Subsequently, AIIPL has extended INR2bn mobilisation advance to Aryan
Construction (a proprietary concern of promoter) in 2007 and 2008. This advance continues
to remain outstanding as at FY15 end.
Aryan Construction has agreed with AIIPL to execute the work awarded to it by March 31,
2017. In case of default on Aryan Constructions part to substantially complete work by the
stipulated time, the contract will be terminated and outstanding advance, if any, will be
returned to AIIPL.
In case of Aryan Constructions inability to return the outstanding advance, AIIPL is entitled
to sell the formers stake in AIIPL to recover the outstanding advance. Aryan Construction
has pledged its shares with the group as security.

Management discussion and analysis: Key highlights


As part of inorganic growth strategy, IRB has been evaluating various BOT projects in
secondary markets. However, due to substantial gap between expectations of the seller and
potential buyer of projects, there were no acquisitions last year.
The Government of Maharashtra directed the company to stop toll collections on Mohol
Mandrup Kamtee BOT project and Nagar Karmala Tembhurni BOT project with effect
from May 31, 2015. Further, IRB was also directed to exempt cars and MSRTC buses from
paying toll on the Thane Ghodbunder BOT project. The Company has lodged claims with
the Government of Maharashtra for compensation for these projects.
The company intends to sell/transfer its shareholding in SPVs to Infrastructure Investment
Trusts to enable generation of funds to meet future growth needs.

112

Edelweiss Securities Limited

IRB Infrastructure Developers


Profitability and cash flow analysis
Had IRB continued to follow the
earlier accounting policy, toll
revenue would have been lower
by INR3bn and PBT would have
been lower by INR1.7bn

Revenue/ profitability on
construction activities are booked
partially in the standalone entity
and the balance in Modern Road
Makers

Table 1: Reported versus adjusted revenue and profitability


Particulars
Construction- Revenues (a)
Toll- Revenues
Adjustments for accounting change #
Adjusted Toll- Revenues (b)
Adjusted revenues (a+b)
Reported EBITDA
Adjustments for accounting change #
Adjusted EBITDA
Reported PBT
Adjustments for accounting change #
Adjusted PBT
Revenue growth
Adjusted EBITDA %
Adjusted PBT %

FY11
16.0
8.2
8.2
24.2
10.9
10.9
5.8
5.8
44.9
23.8

FY12
21.7
9.5
9.5
31.2
13.7
13.7
6.5
6.5
28.8
43.9
20.9

(INR bn)
FY 13
26.3
10.5
10.5
36.8
16.3
16.3
7.1
7.1
17.8
44.4
19.2

FY14
25.5
11.8
11.8
37.2
17.5
17.5
6.4
6.4
1.3
47.1
17.2

FY15
20.0
18.4
(3.0)
15.4
35.4
22.1
(3.0)
19.1
6.9
(1.7)
5.2
(4.9)
54.0
14.5

#Adjustment for change in accounting policy for fixed premium payments to NHAI.
Revenue from sale of electricity is not considered in above table
Source: Company annual report, Edelweiss research

IRBs average construction margin


during FY12-15 on inter group
contracts stood at 33% vis--vis
10-14% for peers

IRB has changed its accounting policy for fixed premium payable to NHAI for BOT projects.
Till FY14, such annual premiums were reduced from toll collections (and thereby impact the
EBITDA), but from FY15 entire outstanding premium liability has been capitalised in fixed
asset, which will be amortised over the life of the project.
IRB (standalone) and its EPC arm (Modern Road Makers) recognise revenues and profits on
construction activities undertaken for subsidiary companies (road SPVs). These profits are
not eliminated in the consolidated financials and remain included in cost of assets.

Table 2: Revenue and profitability on captive construction projects


Particulars
Revenue
Profit
Profit (%)

FY12
21.6
6.8
31.4

IRB
FY13 FY14
26.3 25.5
8.8
9.4
33.5 36.8

FY15
20.0
6.0
29.9

Sadbhav Engineering
FY12 FY13 FY14 FY15
18.1
7.7
6.5 14.2
2.3
1.0
1.2
2.0
12.9 13.2 18.5 14.2

Ashoka Buildcon
FY12 FY13 FY14 FY15
11.4 14.9 14.1 17.6
1.4
1.8
2.0
2.3
11.9 12.3 14.0 13.3

(INR bn)
PNC Infra
FY14 FY15
12.1 16.0
1.1
1.6
9.1 10.1

Larsen & Toubro


FY12 FY13 FY14 FY15
19.9 30.6 37.2 26.6
2.9
3.6
5.9
3.2
14.4 11.8 15.7 12.2

L&T margins are on intra group transaction at PBT level


Sadbhav Engineering margins are on intra group transactions
Ashoka Buildcon and PNC infra margins are on construction contracts (as per
segment reporting)
Source: Company annual report, Edelweiss research

While IRB discloses construction and BOT business as one reportable segment, its peers
disclose the same as 2 separate reportable segments in segment information presented in
annual reports.

113

Edelweiss Securities Limited

Annual Report Analysis


Table 3: Construction margins
While IRB recognises superior
construction margins, return ratios
of most SPVs remained subdued
(RoCE < 10%)

High construction margins led to


higher upfront tax outflow in the
EPC arm

(INR bn)

Modern road makers


FY12
FY13
FY14
19.8
23.9
23.0
3.9
5.2
4.9
3.3
4.6
4.5
19.7
21.7
21.4
16.8
19.5
19.6

Particulars
Revenue
EBITDA
EBIT
EBITDA (%)
EBIT(%)

FY15
18.5
4.1
3.6
22.3
19.2

IRB Infra (standalone)


FY12
FY13
FY14
12.5
20.3
22.1
1.8
2.5
2.7
1.8
2.5
2.7
14.2
12.4
12.1
14.2
12.4
12.1

FY15
19.6
2.3
2.3
11.8
11.8

Note: Employee and other expenses of INR 307mn (FY14:INR403mn) in IRB (standalone) are not
considered for EBITDA and EBIT computation as these expenses are primarily corporate overheads
Source: Company annual report, Edelweiss research

Our computation indicates that IRB (standalone) and Modern Road Makers recognised EBIT
margins of ~29% (FY12-15: 27%) on captive EPC computation.
Table 4: Profitability of key road SPVs
Particulars
Mumbai-Pune BOT
Surat Dahisar BOT
Tumkur Chitradura BOT #
Bharuch Surat BOT
Thane Bhiwandi Bypass BOT
Thane Ghodbunder BOT
Recently commissioned
Ahmedabad Vadodara BOT #
Jaipur Deoli BOT
Talegaon-Amravati BOT

(INR mn)

Commissioning
date
Prior to FY11
Prior to FY11
FY12
Prior to FY11
Prior to FY11
Prior to FY11
FY13
FY14
FY14

Capital employed
FY14
FY15
13,332
14,698
19,096
17,342
12,155
12,347
12,039
11,075
5,461
5,464
2,047
1,887
27,297
15,056
6,827

43,147
15,036
6,530

Revenue
FY14
FY15
4,377
5,673
2,961
3,204
93
1,843
1,681
1,863
1,521
1,646
344
396
198
363
331

1,848
1,027
480

EBITDA
FY14
FY15
3,773
5,034
2,648
2,530
23
1,666
1,484
1,509
553
640
277
325
(86)
319
251

1,452
872
359

PAT
FY14
FY15
1,969
3,049
(503)
(702)
(709)
(61)
108
83
364
418
(63)
7
(86)
(73)
11

RoCE (%)
FY14
FY15
21.4
26.5
4.4
3.0
0.6
6.4
5.4
5.3
11.6
12.2
5.0
10.1

758
(130)
(148)

n.a.
2.0
3.6

2.2
5.0
4.3

# FY14 and FY15 numbers are not fully comparable due to change in accounting policy for fixed
premium payments to NHAI.
RoCE is computed on closing capital employed
Source: Company annual report, Edelweiss research

All of the companys operational


road projects (SPVs) (ex MumbaiPune and Thane-Bhiwandi) have
RoCE of less than 10%

PBT of Tumkur-Chitradura and


Ahemdabad-Vadodara BOT project
is higher by INR851mn and
INR790mn respectively due to
change in accounting policy for
fixed premium

Table 5: Proforma P&LAdjusted for NHAI premium


(INR mn)
Tumkur -Chitradura Ahmedabad - Vadodara
Particulars
FY14
FY15
FY14
FY15
Toll revenues (Reported)
82
1,842
16
1,566
Adjustment for premium deferment (a)
(1,625)
(1,263)
Toll revenues (Adjusted)
82
216
16
303

Reported EBITDA
Adjustment for premium deferment
Adjusted EBITDA
Reported Depreciation
Depreciation on premium capitalised(b)
Adjusted Depreciation
Impact of policy change on PBT (a-b)

23
23

1,666
(1,625)
41

911
(774)
137
(851)

1
-

(86)
(86)
0
0
-

1,452
(1,263)
189
484
(473)
11
(790)

Note: We have considered 5% p.a. increase in NHAI premium during FY15


FY15 numbers are adjusted to make it comparable with FY14 numbers
Source: Company annual report, Edelweiss research

114

Edelweiss Securities Limited

IRB Infrastructure Developers


During FY14, revenue, profitability and cash flows of above projects were adversely
impacted as NHAIs annual fixed premium obligation was charged to profit & loss and the
company was required to pay the premium on yearly basis.
Since FY15, the company stopped charging annual NHAI premium liability in profit & loss and
instead capitalised entire outstanding premium liability (~INR218bn) in fixed asset, which
will be amortised over the life of the project.
Further, the company also received NHAI approval for deferment of premium obligation.
Payment of NHAI premium is limited to availability of free cash flows (after interest) and
balance premium amount is deferred. Premium deferment for FY15 stood at INR3.2bn.

Table 6: Cumulative cash generation and utilisation (FY11-15)


Sources
Operating profit
Less: Interest
Less: Taxes
Add: Investment Income
Cash Profits
Working capital changes
Cash Profits after working capital
Net Borrowings
Equity share issue
Total

FY11
10.9
3.3
1.5
0.4
6.6
1.3
7.9
17.3
25.2

FY12 FY13
13.5 16.4
5.6
6.2
1.6
2.4
1.2
1.4
7.5
9.1
(0.8)
0.5
6.7
9.6
24.5
14.4
31.2 24.0

FY14
17.5
10.9
2.3
1.2
5.5
1.4
6.9
22.1
29.0

FY15
22.2
13.2
2.2
1.1
7.9
(1.8)
6.1
14.5
4.2
24.8

Total
80.4
39.1
10.0
5.2
36.6
0.7
37.2
92.7
4.2
134.1

(INR bn)
Application
Capex (mainly toll collection rights)
Net cash and investments
Dividend Paid (inc taxes)
Others

FY11 FY12 FY13 FY14 FY15


17.5 24.2 24.8 26.5 23.1
7.0
5.8
(3.1) (0.2)
1.0
0.8
1.3
1.2
1.9
0.8
(0.1) (0.1)
1.1
0.7
0.0

Total
116.1
10.5
6.0
1.6

Total

25.2

134.1

31.2

24.0

29.0

24.8

Source: Company annual report, Edelweiss research


Cash profit after working capital changes declined to INR6.1bn (FY14: INR6.9bn) owing to higher
investment in working capital.
~16% of cash profits generated during FY11-15 was declared as dividend.

Project loans at SPV level


account for ~77% of overall
borrowings (gross)

Debt equity ratio declined


marginally to 2.5x led by equity
infusion of INR4.4bn

Table 7: Borrowings analysis


Particulars
Long term borrowings
Project specific loan of SPV
Foreign currency loans
Indian rupee loan
General purpose borrowings
Equipment finance

Short term borrowings


Gross borrowings
Cash and liquid investments
Net borrowings
D/E ratio

FY12

FY13

FY14

(INR bn)
FY15

6.7
42.6
2.5
1.1
52.8
17.9
70.7
(18.3)
52.4
1.8

8.0
57.6
8.5
1.0
75.0
12.7
87.8
(15.3)
72.4
2.2

10.4
71.7
19.0
0.7
101.9
9.0
110.8
(15.1)
95.7
2.7

10.8
86.2
19.4
2.9
119.3
6.3
125.6
(16.1)
109.4
2.5

Source: Company annual report, Edelweiss research

In addition to above borrowings, IRB is also required to pay interest on deferred


component of NHAI premium liability, which stood at INR3.2bn as at March 2015.

115

Edelweiss Securities Limited

Annual Report Analysis


Table 8: Summary financials
Particulars
Sales
Total income
EBITDA
EBITDA margin (%)
RoE (%)
RoCE (%)
Depreciation
Financial costs
Net profit
Equity shareholders' funds
Loan funds
Net fixed assets (Excluding CWIP)
CWIP
Current assets loans and advances
Current liabilities and provisions
Net current assets
Cash and liquid investments
Cash flow from operating activities
Cash flow from investing activities
Cash flow from financing activities
Net cash flows
CAPEX
Working capital investments

FY11
24,381
25,026
10,883
44.6
20.23
15.44
2,254
3,515
4,524
24,326
46,242
33,622
25,074
6,325
5,402
922
12,537
10,689
(23,728)
13,411
372
17,550
(1,222)

FY12
31,330
32,582
13,694
43.7
18.76
14.10
2,970
5,464
4,960
28,566
70,722
55,542
24,452
6,640
3,716
2,923
18,334
11,103
(26,729)
17,579
1,953
24,201
779

FY13
36,872
38,220
16,333
44.3
18.22
12.08
4,415
6,200
5,567
32,547
87,761
55,088
49,160
8,042
5,885
2,156
15,317
14,453
(22,473)
6,994
(1,026)
24,766
(519)

FY14
37,319
38,533
17,537
47.0
13.47
10.48
4,771
7,562
4,591
35,607
1,10,841
85,544
44,867
8,466
6,923
1,543
15,143
16,555
(23,945)
9,254
1,864
27,187
(1,389)

(INR mn)
FY15
38,475
39,605
22,117
57.5
13.71
10.24
7,071
9,312
5,429
43,609
1,25,762
3,17,638
48,353
7,906
7,614
293
16,133
18,235
(22,955)
4,735
16
23,076
1,766

Source: Companys annual report, Edelweiss research

116

Edelweiss Securities Limited

ANALYSIS BEYOND CONSENSUS


THE NEW ABC OF RESEARCH
Larsen & Toubro | Annual Report Analysis

Larsen & Toubros (L&T) FY15 annual report highlights marginal increase
in standalone revenue, decline in EBITDA margin and higher working
capital leading to dip in adjusted RoCE to 25.3% (FY14: 28%, FY13: 30.3%).
Standalone core working capital jumped to 20% of sales (FY14: ~18%,
FY13: 13.5%) primarily due to steep rise in unbilled revenue, partially
offset by higher trade payables and customer advances. Though
standalone capital employed constituted ~31% of overall capital
employed*, it contributed 76% to consolidated EBIT*.
While L&T Infotech & Technology Services reported robust profitability,
the companys operating subsidiaries continued to report subdued
profits/losses and dragged consolidated return ratios (adjusted RoCE (ex
CWIP): FY15: 11.4%, FY14: 15.6%). While these subsidiaries accounted for
~31% of capital employed (INR270bn), they did not contribute anything to
consolidated EBIT in FY15. L&T follows fair value/BOT accounting wherein
unrealised profits recognised from inter-group projects do not get
eliminated. Aggregate revenues that accrued to L&T from these projects
during FY15 and cumulatively over FY11-15 stood at INR 33bn and
INR198bn, respectively.

Market Data

52-week range (INR)

: 1,892 / 1,400

Share in issue (mn)

: 930.3

M cap (INR bn/USD mn)

: 1,433 / 21,730

Avg. Daily Vol. BSE/NSE (000) : 1,986.1

Shareholding Pattern (%)

Promoters*

: 0.0

MFs, FIs & Banks

: 39.5

FIIs

: 16.2

Others

: 44.3

*Promoters pledged shares

: Nil

(% of share in issue)

*ex L&T finance

Key highlights
Unbilled revenue (standalone) rose to INR183bn (FY14: INR152bn), representing ~37%
(FY14:32%) of revenue from construction and project related activity. Trade receivables
stood at INR231bn (40% of revenue; FY14: INR215bn, 38%) and included overdue
receivables (>6 months) of INR28bn (FY14: INR24.3bn) and receivables not
contractually due of INR151bn (FY14:~INR148bn).
L&Ts operating subsidiaries in power, roads, hydrocarbons, ship building, forging and
boiler & turbines etc., accounted for ~31% of capital employed (INR270bn), but
contributed nil to consolidated EBIT in FY15. Ship building, forging and turbine
generator subsidiaries required continued financial support from L&Tcapital infusion
during FY14 and FY15 stood at INR12bn.
L&Ts (consolidated) profit includes unrealised profit (PBT) of INR3.2bn (12% margin)
(FY11-15: INR17bn, 13% margin) from road and Hyderabad Metro construction,
undertaken for its subsidiaries. Similarly, the company also recognises profits from
construction activities undertaken for Nabha Power, details of which are not disclosed
separately. These unrealised profits form part of asset cost and have been charged as
depreciation over life of the asset.

Analysis beyond Consensus (ABC) is our initiative to provide a differentiated perspective to our clients
on various non-routine and intricate issues. This unit of research works independent of the sector/stock
research team and views expressed in this report may vary with that of respective sector/stock analyst.
Edelweiss research is also available on www.edelresearch.com,
1
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

September 21, 2015


Edelweiss Securities Limited

Annual Report Analysis


Standalone
Standalone revenue rose marginally to ~INR570bn (FY14: INR566bn). Higher revenue from
the infrastructure segment was offset by decline in revenue in other segments, viz., power,
metallurgical & material handling and heavy engineering. Further, margins fell across all
segments (ex electrical and automation).
Contingent liabilities catapulted 140% to INR19.4bn (FY14: INR8.1bn) following higher claims
and income tax liabilities. Corporate guarantees for subsidiary debt and performance bank
guarantees given on behalf of subsidiaries jumped 131% and 64% to INR87bn (~23% of net
worth) and INR92bn (~25% of net worth), respectively.

Consolidated capital allocation


Table 1: Capital allocation analysis
Particulars
L&T Limited (Standalone- adjusted)
Nabha Power @
Road Projects (operational) *
L&T Shipbuilding
Special Steels And Heavy Forgings
Hydrocarbon engineering
L&T Infotech ^
L&T Technology services
L&T-MHPS Turbine Generators
L&T-MHPS Boilers
Projects under development
Hyderabad Metro
Seawoods
L&T BPP Tollway Limited
Others (derived)
Consolidated (Ex L&T Finance)
L&T Finance
Consolidated (Inc Minority interest)

(INR bn)
Capital employed
FY14
FY15
%
249.8
272.8
31.5
82.9
102.8
11.9
76.3
71.1
8.2
34.3
38.1
4.4
15.3
15.4
1.8
25.5
19.0
2.2
15.8
21.4
2.5
5.3
12.1
1.4
14.4
13.9
1.6
10.1
10.1
1.2

Revenue
FY14
FY15
566.0
570.2
N.A.
25.7
8.6
9.8
5.5
5.9
0.6
1.0
87.4
57.5
42.8
47.4
1.3
25.6
8.0
6.1
12.5
12.3

37.2
27.2
16.2
175.0
785.2
426.8
1,212

0.0
0.1
67.8
800.7
50.6
851

Capital employed in
L&T(standalone) and L&T
Infotech (inc technology services)
constituted ~35% of total capital
employed, but contributed ~92%
to consolidated EBIT

118

65.1
30.4
24.0
169.5
865.7
499.3
1,365

7.5
3.5
2.8
19.6

PAT
FY14
54.9
N.A.
(2.9)
(6.5)
(3.3)
1.1
6.0
0.1
(0.9)
1.0

FY15
50.6
2.0
(4.8)
(6.7)
(2.8)
(6.5)
7.7
3.2
(1.3)
1.2

EBIT
FY14
66.9
N.A.
4.3
(3.7)
(2.1)
2.0
N.A.
0.1
0.6
2.2

FY15
66.2
8.2
3.4
(3.7)
(1.3)
(9.0)
9.5
3.8
0.1
2.4

RoCE
FY14
26.8
N.A.
5.7
N.A.
N.A.
8.0
N.A.
N.A.
4.1
21.8

0.1
1.1
0.0
95.3
858.1
62.0
920

FY15
24.2
8.0
4.8
N.A.
N.A.
N.A.
44.5
31.5
0.7
24.0

(0.0)
(0.1)
N.A.
N.A.
N.A.
N.A.
0.1
(0.0)
N.A.
N.A.
N.A.
N.A.
(0.0)
(0.0)
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
42.7
40.8
94.4
86.9
12.0
10.0
6.0
8.5
8.3
10.3
N.A.
N.A.
48.6
49.4
103
97
N.A.
N.A.
# RoCE is computed based on year end capital employed
*Road projects which are operational for more than a year are considered
@Company recognised construction cost of plant & machinery as financial lease and thus no
depreciation is charged to income statement. Revenue and profitability of power generation
business is considered.
^ Profit from continuing operations are considered
L&T Finance EBIT is after considering interest expense
Source: Company annual report, Edelweiss research

Edelweiss Securities Limited

Larsen & Toubro


Chart 1: Consolidated capital employed and EBIT (Ex L&T finance)

EBIT

Capital employed
Others
(derived)
20%

L&T(Standal
one)
31%

Subsidiaries
(Projects
under
developme
nt)
14%

L&T
Infotech
(inc
Technology
services)
16%

L&T
Infotech
(inc
Technology
services)
4%

Operational
subsidiaries
31%

Others
(derived)
8%

L&T(Stand
alone)
76%
Source: Company annual report, Edelweiss research

Losses of operational road


projects stood at INR4.8bn (FY14:
INR2.9bn)

Development projects
Nabha Powers construction (fixed asset) cost stood at ~INR92bn (~INR65mn/MW) and its
RoCE stood lower at ~8%. The companys core working capital stood at ~INR7.5bn,
representing working capital cycle of ~105 days.
Revenue of the companys 10 operational road projects (comparable) increased by 14% in
FY15. EBITDA margin grew to 68% (FY14: 60%). However, owing to high interest cost and
depreciation, losses stood at INR4.8bn (FY14: INR2.9bn). RoCE of operational road projects
stood at meagre 4.8% (FY14: 5.7%). In FY15, only 2 road projects (of 10) clocked RoCE in
excess of 10%.

Table 2: Operational road projects profitability and RoCE analysis


Capital employed
Particulars
FY14
FY15
L&T Transportation Infrastructure
2,350
2,304
L&T Panipat Elevated Corridor @
1,444
1,052
L&T Krishnagiri Thopur Toll Road @ 3,243
3,081
L&T Western Andhra Tollways @
2,564
2,319
L&T Interstate Road Corridor
5,012
4,941
L&T Vadodara Bharuch Tollway @
8,618
7,727
L&T Rajkot Vadinar Tollway @
9,840
9,301
L&T Halol Shamlaji Tollway @
12,397 11,502
L&T Ahmedabad Maliya Tollway @ 14,778 13,480
PNG Tollway @
16,003 15,442
Overall
76,250 71,149

Revenue
EBITDA
FY14 FY15 FY14 FY15
243
248
137
151
519
580
247
437
1,060 1,291
636
772
504
561
100
324
864
864
570
546
2,489 2,775 1,609 2,353
693
857
444
517
770
688
472
306
1,132 1,193
798
785
371
786
200
506
8,644 9,845 5,213 6,697

(INR mn)
EBIT
PAT
RoCE
FY14 FY15
FY14
FY15 FY14 FY15
555
267
246
112 23.6 11.6
(186)
(0.5)
(466)
(268) N.A. N.A.
139
280
(267)
(106) 4.3
9.1
(87)
141
(358)
(125) N.A.
6.1
249
176
8
(44) 5.0
3.6
468 1,206
(850)
1
5.4 15.6
894
353
(125)
(712) 9.1
3.8
963
154
(269) (1,157) 7.8
1.3
1,001
476
(453)
(991) 6.8
3.5
336
328
(324) (1,536) 2.1
2.1
4,331 3,380 (2,857) (4,826) 5.7
4.8

# RoCE is computed based on year end capital employed


*Road projects which are operational for more than a year are considered for RoCE computation
@Companies having negative net worth
Source: Company annual report, Edelweiss research

119

Edelweiss Securities Limited

Annual Report Analysis


L&T recognises obligation towards additional concessional fees payable to NHAI as deferred
payment liability on commencement of commercial operations of the project. Deferred
payment liability on operational projects stood at ~INR30bn in FY15 (FY14: INR30.6bn).
L&T BPP Tollway and L&T Deccan Tollways (SPV for the under constructed road projects) are
required to pay additional concession fees of ~INR81bn and ~INR33bn, respectively, to NHAI
over the concession period. These liabilities are showed under commitments (off balance
sheet items) during construction phase and will be recognised as liability on commencement
of commercial operations.
L&T Infrastructure Development Projects (IDPL) consolidated revenue and profits (PBT)
increased to ~INR30.9bn (FY14:INR12.8bn) and INR5.4bn (FY14:INR2bn), respectively, led by
profit from Dhamra port sale of ~INR12.7bn.
In FY14, the company changed its accounting policy on amortization of toll rights.
Consequently, there was reversal of accumulated amortisation of toll collection rights (till
April 2013) of INR6.6bn and toll collection rights amortisation for FY14 was lower by
INR2.9bn. Pursuant to this change, consolidated PAT was higher by INR9.5bn.

L&T Shipbuildings losses stood


at INR6.7bn. Operating cash
flows (post interest) stood at
INR(6.2)bn

L&T infused INR4.2bn in L&T


Shipbuilding during FY15, taking
cumulative investments to
~INR17.7bn. It also extended
corporate guarantee of
INR28.8bn

L&T Special Steel and Heavy


Forging incurred loss of INR2.8bn
(FY14: INR3.3bn)

Ship building
L&T Shipbuildings losses stood at INR6.7bn (FY14: INR6.5bn). Operating cash flows (post
interest) stood at INR(6.2)bn (FY14: INR(7.2)bn).
Management stated losses were primarily due to time and cost overruns and under
recovery of overheads due to low capacity utilisation. However, the companys business
prospects may improve going forward led by governments Make in India push and higher
port traffic post receipt of approvals.
L&T infused INR4.2bn in L&T Shipbuilding during FY15, taking cumulative investments to
~INR17.7bn. It also extended corporate guarantee of INR28.8bn with respect to borrowings
in the ship building business.

Heavy forging
L&T Special Steel and Heavy Forging incurred loss of INR2.8bn (FY14: INR3.3bn loss).
Operating cash flows (post interest) stood at INR(1.8)bn (FY14: INR(1.8)bn). L&T infused
INR2.8bn (FY14: INR2.1bn) during FY15, taking cumulative investments to ~INR10bn.
Management stated that the company faced fierce competition from global players owing
to excess global capacity and low demand. However, with commencement of project
awards in the nuclear power sector, management expects improvement in business
prospects in the medium term.

L&T Hydrocarbon Engineering


reported ~34% decline in
revenue to INR57bn leading to
loss of INR8bn at EBITDA level

Hydrocarbon
L&T Hydrocarbon Engineering reported ~34% decline in revenue to INR57bn, led primarily
by ~56% fall in overseas revenues. The company incurred loss of INR8bn at the EBITDA level
against gain of ~INR3bn in FY14. Further, the company also recognised deferred tax asset of
INR3.5bn on losses and accumulated depreciation.

120

Edelweiss Securities Limited

Larsen & Toubro


Overseas subsidiaries in
hydrocarbon segment reported
losses and have negative net
worth

The company highlighted that the losses were led by low domestic order book and drop in
international revenue as most of the existing international projects reached close out stage.
Loss incurred during the year was primarily on certain stressed international projects,
primarily in GCC countries. The company is in advanced stages of commissioning and closeout of these stressed projects.

Table 3: Hydrocarbon segment - Overseas subsidiaries


Net
Revenue
Particulars
Worth FY13 FY14 FY15
L&T ATCO Saudia LLC
(2.0)
1.2
5.4
9.0
L&T Electromech LLC
(0.8)
5.9
7.9
6.0
Modular Fabrication Yard LLC
(0.7)
4.8
3.4
0.6

FY13
0.0
0.3
0.2

(INRbn)
PAT
FY14 FY15
(0.0) (2.0)
(0.7) (1.8)
(0.5) (1.2)

Source: Company annual report, Edelweiss research

NPA sale to ARC led to loss of


INR2.4bn, which will get
amortised over 2 years

Restructured advances increased


to INR19.5bn (FY14: INR15.9bn).
Fresh restructuring during FY15
stood at INR6.5bn

Financial services business


During the year, L&T Infrastructure Finance (L&TIFL) sold NPAs amounting to ~INR3.9bn to
ARCs for a consideration of INR1.5bn (mainly security receipts). As permitted by RBI, L&TIFL
decided to amortise loss of INR2.4bn over a 2 year period. Unamortised loss on sale of NPAs
stood at INR1.8bn as at March 2015. Total security receipt stood at INR2.3bn as at March
2015.
L&TIFLs restructured advances (including o/s amount against other facilities) increased to
INR19.5bn (FY14: INR15.9bn), while provisions against these advances increased to
INR2.8bn (FY14: INR2bn). Fresh restructuring during the year stood at INR6.5bn.
The companys subsidiaries in general insurance and mutual fund (AMC) reported marginal
decline in losses to INR942mn (FY14: INR1,002mn) and INR649mn (FY14: INR700mn),
respectively.

L&T InfoTechs EBITDA margin


dipped ~280bps to 20% led by
increase in employee and other
administrative costs

Other businesses
L&T InfoTechs EBITDA margin dipped ~280bps to 20% in FY15, primarily due to increase in
employee and other administrative costs. Working capital (% to sales) increased to 19.4% in
FY15 (FY14: 17%) following 21% increase in receivables and ~35% rise in unbilled revenue.
L&T Technology Services receivable days stood at ~95 and unbilled revenue days at ~24.
Further, core working capital (adjusted for related parties) stood at ~30% of revenue.
Capital infusion in L&T Sea Woods during FY15 stood at INR15.3bn, taking cumulative capital
infusion to INR30.4bn. In FY15, Sea Woods recognised revenue of mere INR1.1bn (mainly
from sale of floor space), of which INR0.8bn remained unbilled.
L&T-MHPS Turbine Generator incurred loss of INR1.3bn (FY14: INR0.9bn) owing to high
interest cost. RoCE stood at mere 0.7% (FY14: 4%).
The company (through its subsidiaries) is executing capital-intensive businesses in metro
(Hyderabad Metro) and transit oriented development (Sea Woods), etc. RoCE of these
businesses (post commencement of operations) will be key driver of consolidated RoCE
going forward.

121

Edelweiss Securities Limited

Annual Report Analysis


Profitability and cash flow analysis
Table 4: Profitability analysis
Particulars

(INR bn)
Standalone

Subsidiary-Derived (Ex-L&T
Finance Holdings)

FY14
% FY15
% FY14
% FY15
%
Sales
566.0 100.0 570.2 100.0 234.7 100.0 287.9 100.0
Raw Materials Consumed
433.5
76.6 444.0
77.9
53.8
22.9
67.2
23.3
Operating and Administrative 19.2
3.4
19.8
3.5 125.5
53.4 147.9
51.4
expense
Personnel cost
46.6
8.2
41.5
7.3
22.0
9.4
34.2
11.9
EBITDA
66.7
11.8
64.9
11.4
33.4
14.2
38.6
13.4
Depreciation
7.9
1.4
10.1
1.8
5.7
2.4
15.2
5.3
58.7
10.4
54.8
9.6
27.7
11.8
23.4
8.1
EBIT
Financial Charges
10.8
1.9
14.2
2.5
20.6
8.8
14.3
5.0
Other income
18.8
3.3
22.8
4.0 (10.8) (4.6) (14.2) (4.9)
PBT
66.8
11.8
63.4
11.1
(3.8) (1.6) (5.1) (1.8)

L&T Finance Holdings


FY14
%
50.6 100.0
40.6
80.3
2.7
7.2
0.8
6.4
1.8
8.2

5.4
14.3
1.6
12.7
3.6
16.3

Consolidated

FY15
% FY14
% FY15
%
62.0 100.0 851.3 100.0 920.0 100.0
487.4
57.3 511.2
55.6
48.6
78.4 185.3
21.8 216.3
23.5
3.5
9.9
1.0
8.9
1.4
10.3

5.7
15.9
1.5
14.4
2.3
16.6

71.4
107.3
14.5
92.8
31.4
9.8
71.3

8.4
12.6
1.7
10.9
3.7
1.2
8.4

79.2
113.4
26.2
87.1
28.5
10.1
68.7

8.6
12.3
2.9
9.5
3.1
1.1
7.5

Note: FY15 numbers are not fully comparable to FY14 at standalone level as technology services business was demerged from standalone
business from FY15.

Subsidiaries (ex L&T Finance)


losses increased to INR5.1bn
(FY14: INR3.8bn), led by higher
losses in hydrocarbon business

Segment margins fell by 70bps


owing to steep decline in margins
across segments (except
infrastructure). Infrastructure
segment reported flat margin at
~11%

Unallocated income (net)


catapulted to ~INR11bn (FY13:
INR3.8bn) during FY14

Standalone revenue increased marginally as higher revenue from infrastructure


segment was offset by the decline in revenue of other segments, viz., power,
metallurgical & material handling and heavy engineering.

Table 5: Segment profitability (Standalone)


(INR bn)
Particulars
FY13 FY14 FY15
FY13
FY14
FY15
Segment revenue
Revenue composition (%)
Infrastructure
288.2 351.2 406.5
55.2
61.4
70.6
Power
80.7
51.4
44.6
15.5
9.0
7.7
Metallurgical & Material Handling 64.3
55.5
33.0
12.3
9.7
5.7
Heavy Engineering
30.0
43.2
33.0
5.8
7.6
5.7
Electrical & Automation
36.4
39.1
41.3
7.0
6.8
7.2
Others
39.2
42.9
28.3
7.5
7.5
4.9
Elimination
(17.0) (11.6) (11.1)
(3.2)
(2.0)
(1.9)
Total
522.0 571.6 575.6
Segment results
Segment margins (%)
Infrastructure
28.7
38.8
44.4
9.9
11.0
10.9
Power
5.9
5.2
2.0
7.3
10.1
4.5
Metallurgical & Material Handling
9.7
8.2
2.4
15.1
14.8
7.2
Heavy Engineering
5.1
6.9
3.4
16.9
15.9
10.2
Electrical & Automation
3.6
4.3
5.0
9.8
11.1
12.2
16.0
9.9
23.1
4.3
6.5
Others
6.3
Inter-segment margin
(0.2)
(0.1)
(0.0)
59.0
67.6
63.7
11.3
11.8
11.1
Unallocated income (net)
3.8
10.9
11.8
Operating Profit (PBIT)
62.8
78.5
75.5
Interest expense (net of income)
(4.2)
(5.8)
(8.5)
Profit before tax
58.5
72.7
67.0
Note: Above revenue is inclusive of excise duty
Source: Companys Annual Report, Edelweiss research

122

Edelweiss Securities Limited

Larsen & Toubro


L&T follows fair value/BOT
accounting (as allowed under
IFRS) wherein unrealised profits
recognised on inter-group
projects do not get eliminated

L&Ts (Standalone) revenues


from in-house construction
projects stood at INR33bn
(FY14:INR50bn)

Profits from construction of road


and Hyderabad metro projects
for subsidiary SPVs stood at
~INR17bn (13% margin) during
FY11-15. Profits earned on Nabha
Power are not disclosed
separately

Working capital, as % to sales,


surged from 13.5% in FY13 to
18% in FY14 and further to 20%
in FY15

Table 6: Profitability on captive projects


Particulars
Revenues on captive projects
BOT/DBFOT projects
Nabha power
Profits on captive projects (PBT)
BOT/DBFOT projects
Nabha power
Margins on captive projects (%)
BOT/DBFOT projects
Nabha power

FY11

FY12

FY13

(INR bn)
FY14 FY15

16
4

20
21

31
24

37
13

27
7

1.4
n.a.

2.9
n.a.

3.6
n.a.

5.9
n.a.

3.2
n.a.

8.9
n.a.

14.4
n.a.

11.8
n.a.

15.7
n.a.

12.2
n.a.

Note: BOT/DBFOT projects mainly pertain to road projects and Hyderabad Metro. Profits (on
construction activities undertaken by L&T (standalone) for Nabha power and other subsidiaries (if
any) not disclosed in annual report
Source: Companys Annual Report, Edelweiss research

L&T (Standalone) recognise revenues and profits on construction activities undertaken for
subsidiary companies mainly road SPVs, Nabha Power and Hyderabad metro. However,
these profits are not eliminated in the consolidated financial statements and remain
included in cost of assets. Aggregate revenues that accrued to L&T from these companies
stood at INR198bn during FY11-15.

Table 7: Cash conversion cycle (Standalone)


Particulars
Trade receivable days
Unbilled revenue days
Advances from customer days
Excess billed revenue days
Receivable days (net)
Inventory days
Trade payable days
Acceptance days
Cash conversion cycle
Working capital as a % of sales

FY12
107
78
(67)
(17)
101
15
(127)
1
(11)
7.4

FY13
146
83
(66)
(26)
138
17
(148)
3
10
13.5

FY14
142
87
(55)
(28)
147
17
(140)
3
27
17.9

FY15
143
108
(55)
(27)
168
17
(145)
1
41
20.1

Source: Companys Annual Report, Edelweiss research

Advance recoverable in cash or kind (not part of cash conversion cycle presented above)
increased from INR42.6bn (7.4% of sales) in FY14 to INR48.4bn in FY15 (8.4% of sales).

123

Edelweiss Securities Limited

Annual Report Analysis


Table 8: Unbilled revenue analysis
Particulars
Revenues #
Excess billed revenues
Unbilled revenues
Unbilled revenues (%)
Excess billed (%)

Unbilled revenues at standalone


level increased from 27% of
revenues (construction and
project related) in FY13 to ~37%
in FY15

FY13
434
44
117
27
10

(INR bn)
Standalone
FY14
479
41
152
32
9

Consolidated
FY13
FY14
559
616
45
46
194
234
35
38
8
7

FY15
495
40
183
37
8

FY15
607
45
227
37
7

# Revenue from construction and project related activity


Source: Companys Annual Report, Edelweiss research

Table 9: Unbilled revenue analysis (By subsidiary)


Particulars
Standalone
Nabha power
Hydrocarbon engineering
Shipbuilding
Others (derived)

Adjusted for unbilled revenue of


Nabha Power, unbilled revenue
at consolidated level increased to
INR223bn (FY14: INR191bn) led
by standalone entity

FY13
117
63
1
12
194

FY14
152
43
21
5
13
234

(INR bn)
FY15
183
4
12
8
20
227

Source: Companys Annual Report, Edelweiss research

Table 10: Standalone- Cumulative cash generation and utilisation (FY11-15)


Sources
Operating profit
Less: Interest
Less: Taxes
Add: Investment Income
Cash Profits
Working capital changes
Cash Profits after working capital
Change in net debt
Proceeds from share capital
Total

(INR bn)

FY11 FY12 FY13 FY14 FY15 Total Application


61
68
61
72
70 332 Capex
(6)
(6)
(8) (10) (12) (42) Dividend Paid (net)
(20) (22) (17) (20) (17) (95) Investment/loans to
subsidiaries (Net)
5
7
6
5
6
28
40
47
42
47
47 223
(3) (35) (30) (51) (21) (140)
37
12
12
(3) 26
83
2
28
11
40
3
84
3
43

2
42

2
25

1
38

1
30

9
177 Total

FY11 FY12 FY13 FY14 FY15 Total


15
16
9
10
9
59
7
6
5
4
6
27
21
20
10
25
15
91

43
42
25
38
30 177
Source: Company annual report, Edelweiss research

Total cash generated from core operations during FY11-15 stood at INR83bn, capex (net)
incurred during the period stood at INR59bn.

~63% of cash profits generated


during FY11-15 was invested in
working capital

Investment/loans to subsidiaries (net) of INR91bn during FY11-15 were financed from


borrowings and internal accruals.

124

Edelweiss Securities Limited

Larsen & Toubro


While adjusted EBIT of
standalone business remained in
the range of INR64-67bn during
FY12-15, higher capital employed
resulted in a decline in RoCE
from ~34% in FY12 to ~25% in
FY15

Increase in capital employed was


led by steep increase in core
working capital and other current
assets

Table 11: Standalone- Adjusted capital employed and RoCE


Particulars
FY11 FY12
Equity shareholders' funds
218
252
Loan funds
72
99
Capital employed
290
351
Investment in subsidiaries/JV etc
(72)
(89)
Loans & advances to subsidiaries/JV etc
(48)
(51)
Adjusted capital employed
170
211
Represented by
Fixed & intangible assets (Incl CWIP)
74
84
Core working capital
25
69
Other current assets (inc loans )
26
36
Cash and Current investments
90
86
Non- current loans & advances
9
5
Non-current investments
2
2
Other non-current assets
0
1
Other non-current liabilities
(5)
(8)
Other current liabilities and provisions
(51)
(63)
Closing capital employed
170
211
Average capital employed
n.a.
190
58.0
63.9
Adjusted EBIT of standalone business
Adjusted pre tax RoCE
n.a.
33.6

FY13
291
88
380
(105)
(47)
228

(INR bn)
FY14 FY15
337
371
115
129
451
500
(151) (176)
(50)
(51)
250
273

89
63
42
70
7
0
1
(10)
(34)
228
219
66.5
30.3

82
101
45
58
7
0
1
(8)
(36)
250
239
66.9
28.0

80
113
48
69
7
0
1
(8)
(38)
273
261
66.2
25.3

Note: Above numbers are not fully comparable as hydrocarbon, valves and integrated
engineering business were demerged and transferred to subsidiaries during FY14 and FY15
Source: Company annual report, Edelweiss research

Table 12: Investments in key loss-making subsidiaries


Commenc
Equity investment
Particulars
ement

L&T Shipbuilding
L&T Special Steels and Heavy Forgings
L&T General Insurance Company
L&T MHPS Turbine Generators
Total

Year
FY13
FY13
FY12
FY09

FY13
3,880
666
900
462
5,908

FY14
197
800
204
1,201

FY15
1,250
1,683
2,933

(INR mn)
Loans & advances and
Preference

Aggregate exposure

Equity
FY13 FY14 FY15
900 4,210
8,187
458 1,902 2,792
4,193
6,200
3,624
458 2,802 7,002 22,204

Loans &
Total
others
9,486 17,673
5,640
9,833
6,200
3,624
15,126 37,330

Source: Company annual report, Edelweiss research

Capital infusion in key loss-making subsidiaries during FY15 stood at INR10bn (FY14: INR4bn).

125

Edelweiss Securities Limited

Annual Report Analysis


L&Ts (Standalone) gross debt
increased to INR129bn (FY14:
INR115bn)

Table 13: Borrowings summary (Standalone)


Particulars
Long term borrowings
INR Denominated loans
Redeemable non-convertible debentures
Foreign curreny denominated loans
Foreign currency convertible bonds
Term loans from banks
(A)

Borrowings denominated in
foreign currency (including FCCB)
constitute ~50% of total
borrowings at standalone level

Short term borrowings


Bank borrowings
Others
(B)
Total (A)+(B)

(INR bn)
FY15

FY13

FY14

19.5

15.6

27.1

10.9
50.6
80.9

12.0
48.3
75.8

12.5
51.9
91.4

7.3
7.3
88.3

30.6
8.1
38.8
114.6

27.5
10.4
37.9
129.4

*Current portion of long term debt of INR 6bn (FY14: INR21bn) is included in long term borrowings
Source: Companys Annual Report, Edelweiss research

We believe the company has only


charged coupon interest on FCCB
in the income statement and not
effective interest rate (interest
rate on similar debt instrument
without the conversion option),
which is usually higher than the
coupon rate, to reflect the true
opportunity cost of the financial
liability

During FY15, the company refinanced USD200mn foreign currency loan through foreign
currency convertible bonds (FCCB) of equivalent amount. These bonds carry coupon rate of
0.675% and are convertible into equity shares, at the option of investors (up to October 15,
2019) at the conversion price of INR1,916.5 per share.
Details of unhedged borrowings (USD denominated) at standalone level is not available.
Further details of borrowings (if any) in foreign currency at consolidated level is also not
available.

Table 14: Borrowings analysis (consolidated - ex L&T Finance)


Particulars
L&T Limited (Standalone)
Road projects #
Nabha Power
L&T Ship building
L&T Forging
MHPS Turbine Generators
MHPS Boilers
L&T Hydrocarbon engineering
L&T Technology services
L&T Infotech
Metro Rail (Hyderabad)
Other (Derived)
Consolidated

Mar-14
114.6
93.5
60.1
33.6
8.8
11.4
6.2
8.6
0.3
1.1
25.7
110.5
474.4

(INR bn)
Mar-15
129.4
91.0
74.1
35.6
14.2
11.3
5.1
5.2
1.6
2.2
45.4
98.9
513.9

#Borrowings of operation projects is considered


Only external borrowings are considered in above table
Source: Companys Annual Report, Edelweiss research

126

Edelweiss Securities Limited

Larsen & Toubro


Table 15: Contingent liabilities
Contingent liabilities (ex
guarantees) more than doubled
to INR19.4bn (FY14: INR8.1bn)
and INR32bn (FY14: INR15bn) led
by steep increase in claims and
disputed income tax liabilities

Particulars
Claims not acknowledged as debts
Sales-tax liability
Excise duty/Service Tax
Income-Tax liability
Contingent liabilities (ex guarantees)
Contingent liabilities (ex guarantees) as %
to NW
Corporate guarantees for subsidiary debt
Performance guarantees- subsidiary

(INR bn)
Standalone
Consolidated
FY13 FY14 FY15 FY13 FY14 FY15
1.8
1.8
8.8
3.2
3.5 16.0
1.1
1.2
1.7
1.2
1.6
2.2
0.4
0.4
0.6
0.5
2.1
2.3
3.9
4.6
8.3
5.4
7.6 11.7
7.2
8.1 19.4 10.3 14.9 32.1
2.5
2.4
5.2
3.1
4.0
7.8
34.9
9.3

37.7
56.3

87.2
92.0

Source: Companys Annual Report, Edelweiss research


In addition to above, Contingent liability also includes liabilities in relation to interests in joint
ventures at INR32.5bn (FY14: INR5bn).

RoCE (ex CWIP) dipped to 11.4%


(FY14: 15.6%) due to lower
profitability of subsidiaries

Table 16: Capital allocation (consolidated- ex L&T Finance)


Particulars
FY11
FY12
Sales
499
613
EBITDA
70
81
Other income
20
17
Depreciation
13
15
EBITDA (%)
14.1
13.1
RoCE
21.3
17.8
RoCE (ex CWIP)
28.8
25.3
Net fixed assets (ex CWIP)
151
189
Net current assets *
36
105
CWIP (Incl. Intangibles)
123
149
Total capital employed
403
519
Total capital employed (Ex-CWIP)
279
370

FY13
706
92
9
16
13.0
15.0
19.5
293
168
113
624
511

FY14
801
100
8
20
12.5
12.8
15.6
312
215
140
755
614

(INR bn)
FY15
858
104
9
25
12.1
9.3
11.4
336
184
154
836
682

Note: FY15 RoCE is adjusted for profit of INR 12.7bn on stake sale in Dhamra port; FY14 RoCE
and depreciation is adjusted for reversal of accumulated amortisation of toll collection rights of
INR 6.6bn due to change in accounting policy.
*excluding cash and current investments
Source: Companys Annual Report, Edelweiss research

127

Edelweiss Securities Limited

Annual Report Analysis


Table 17: Summary financials
Particulars
Sales
Total income
EBITDA
EBITDA margin (%)
RoCE (%)
RoE (%)
Depreciation
Financial costs
Net profit
Equity shareholders' funds
Loan funds
Net fixed assets (excl CWIP)
CWIP
Current assets loans and advances
Current liabilities and provisions
Net current assets
Cash and current investments
Cash flow from operating activities
Cash flow from investing activities
Cash flow from financing activities
Net cash flows
CAPEX
Working capital investments

FY11
520.4
530.1
76.8
14.8
13.6
18.6
13.2
8.0
44.6
250.5
372.2
156.2
123.6
412.2
305.8
106.4
113.6
(16.2)
(59.3)
78.7
3.2
68.7
69.8

FY12
643.1
651.4
88.8
13.8
11.4
17.1
15.8
12.2
46.9
293.9
511.0
194.0
149.1
538.0
357.0
181.0
106.0
(62.3)
(58.6)
119.7
(1.2)
71.0
128.0

FY13
745.0
755.5
99.3
13.3
10.4
15.6
16.4
21.2
52.1
338.6
661.5
303.9
113.5
645.4
385.7
259.7
111.1
(43.5)
(69.2)
114.3
1.5
74.4
121.6

FY14
851.3
861.1
107.5
12.6
9.3
13.1
14.5
31.4
49.0
377.1
833.0
324.0
141.8
744.8
429.6
315.2
107.7
(71.4)
(55.1)
131.4
4.8
66.8
153.8

(INR bn)
FY15
920.0
930.1
113.4
12.3
7.6
11.5
26.2
28.5
47.6
409.1
934.8
347.4
155.2
812.7
524.1
288.5
137.2
(6.7)
(54.6)
78.9
17.6
67.7
78.8

Note: Numbers presented above are on reported basis.


Source: Companys Annual Report, Edelweiss research

128

Edelweiss Securities Limited

ANALYSIS BEYOND CONSENSUS


THE NEW ABC OF RESEARCH
Tech Mahindra | Annual Report Analysis

Tech Mahindras (TML) FY15 annual report analysis highlights significant


jump in unbilled revenue to 8.6% of sales (FY14: 5.7%) highest amongst
peers. Sub-contracting cost surged from 9.1% of sales in FY14 to 12.5% in
FY15, leading to decline in EBITDA margin. ESOP cost rose 1.8x from
INR1.3bn in FY14 to INR2.3bn in FY15. TMLs receivables, unbilled revenue
and payable days are highest amongst peers. Earning to cash flow
conversion ratio improved in FY15, albeit it is the lowest amongst peers.
FY15 net worth rose by INR2.1bn on account of merger of Mahindra
Engineering Services (MESL) as per pooling of interest method akin to the
merger of Mahindra Satyam and other associates in FY14. In our estimate,
net worth would have been higher by INR39.0bn on the above 2 mergers
had the company followed the purchase accounting method.
Consequently, adjusted RoE/ RoCE (without goodwill amortisation impact)
would be lower from reported 28%/36% to 20%/26%, respectively
(15%/22% including goodwill amortisation). TML paid INR12.7bn for
acquisitions during FY15, largely towards goodwill.

Whats on track?

Market Data

52-week range (INR)

: 749 / 458

Share in issue (mn)

: 961.5

M cap (INR bn/USD mn)

: 459 / 7,229

Avg. Daily Vol. BSE/NSE (000) : 2,997.9

Shareholding Pattern (%)


Promoters*

: 36.7

MFs, FIs & Banks

: 13.9

FIIs

: 34.2

Others

: 15.2

*Promoters pledged shares

: Nil

(% of share in issue)

Revenue grew a healthy 20% in FY15 (organic growth 17% YoY). Dollar revenue jumped
19% YoY to USD3.7bn (organic growth 16%).

What needs tracking?


Unbilled revenue surged to INR19.4bn, 8.6% of sales (FY14: INR10.7bn, 5.7%), in FY15,
highest amongst peers. Sub-contracting cost rose to INR28.3bn, 12.5% of sales in FY15
(FY14: INR17.1bn, 9.1%). TML, along with HCL Tech, has highest sub-contracting cost.
Receivable days at 88 (FY14: 84), unbilled days at 31 (FY14: 21) and payable days at 109
(FY14: 94) stood highest for TML versus peers. Receivables continue to rise with INR8.5bn
jump in FY15. Payables rose by INR5.7bn in FY15 (INR3.5bn was led by acquisitions).
Merger accounting as per pooling of interest method (permitted under Indian GAAP) led
to lower net worth by INR4.9bn and INR34.1bn on merger of MESL in FY15 and Mahindra
Satyam in FY14, respectively. TML continue to hold 10% of equity under trust as treasury
shares on merger of Mahindra Satyam in FY14.
Under the purchase method, we estimate that TML would have recorded goodwill worth
INR39.0bn. As per AS-14, goodwill would be amortised over 5 years (unless higher period
is justified) and would have impacted profits by INR7.8bn annually, 22% of PBT).
Goodwill on consolidation rose to INR17.3bn, 16% of net worth (FY14: INR5.6bn, 7%), led
by acquisitions in FY15 (largely LLC and SOFTGEN). TML paid INR12.7bn cash for various
acquisitions (of which USD 170mn was for LLC and USD24.3mn for SOFTGEN acquisition).
Analysis beyond Consensus (ABC) is our initiative to provide a differentiated perspective to our clients
on various non-routine and intricate issues. This unit of research works independent of the sector/stock
research team and views expressed in this report may vary with that of respective sector/stock analyst.
Edelweiss research is also available on www.edelresearch.com,
1
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

July 15, 2015


Edelweiss Securities Limited

Annual Report Analysis


ESOP cost rose from INR1.3bn to INR2.3bn YoY (largely to key management personnel). TML
accounted ESOPs on intrinsic value, as permitted by SEBIs ESOP regulations. Had the
company followed the fair value method, net profit would have be lower by INR398mn,
1.5% of PAT (FY14: INR254mn, 0.8%).
Derivatives exposure rose to INR103.6bn, 46% of revenue (FY14: INR62.8bn, 33%), and TML
clocked forex gain of INR6.3bn in hedging reserve. Forex loss in P&L stood at INR2.2bn in
FY15 (FY14: INR2.1bn).
Contingent liabilities rose from INR48.1bn in FY14 (60% of net worth) to INR73.1bn (66%) in
FY15 and largely included guarantees, disputed income tax and service tax liabilities. Major
increase in FY15 includes INR12.8bn relating to service tax matters for 2008 to 2013, which
we believe could pertain to erstwhile Satyam Computers.
TML has given premises on operating lease (including long term lease of Land for
Engineering College), for which it receives rent (FY15: INR212mn). Amount receivable in
FY16 is INR283mn and rental receivable after 5 years stands at INR11.0bn, implying average
useful life of 39 years.

Profitability analysis
Table 1: Profitability analysis

(INR bn)

Particulars
Sales
Subcontracting expenses
Operating and Administrative
expense
Personnel cost
EBITDA
Depreciation
EBIT
Financial Charges
Other income
PBT before exceptional items

FY14
163.0
34.0
23.6
69.7
35.6
4.3
31.3
0.9
0.7
31.2

Standalone
%
FY15
100.0
191.6
20.9
64.2
14.5
23.2
42.8
21.9
2.6
19.2
0.5
0.4
19.1

72.0
32.3
4.7
27.5
0.1
1.2
28.7

%
100.0
33.5
12.1
37.6
16.8
2.5
14.4
0.0
0.6
15.0

Subsidiary/ JV (Derived)
FY14
%
FY15
%
25.4
100.0
34.6
100.0
(16.9)
(66.6)
(35.8) (103.6)
8.4
33.1
14.0
40.6
27.6
6.2
1.0
5.3
(0.1)
0.4
5.8

109.0
24.5
3.8
20.8
(0.3)
1.7
22.7

47.1
9.3
1.4
7.9
0.2
(0.2)
7.5

136.3
26.8
4.0
22.8
0.6
(0.5)
21.7

FY14
188.3
17.1
32.0
97.4
41.8
5.2
36.6
0.8
1.1
36.9

Consolidated
%
FY15
100.0
226.2
9.1
28.3
17.0
37.2
51.7
22.2
2.8
19.4
0.4
0.6
19.6

119.1
41.5
6.1
35.4
0.3
1.1
36.2

%
100.0
12.5
16.4
52.7
18.4
2.7
15.7
0.1
0.5
16.0

Source: Company annual report, Edelweiss research

Though revenue jumped 20% YoY, previous years numbers are not comparable due to
acquisitions made by TML during the year. FY15 revenue, in USD terms, grew 19% YoY to
USD3,686mn and included USD100mn from LLC and Softgen (excluding acquisitions, USD
revenue grew 16% YoY).

130

Edelweiss Securities Limited

Tech Mahindra
Table 2: Sub-contracting cost

(INR mn)

Particulars
Subcontracting expenses
Revenues
Subcontracting as % of revenues

TML and HCL Tech have the


highest sub-contracting cost
compared to peers

FY13
FY14
FY15
6,615
17,114
28,343
68,731
188,314
226,213
9.6
9.1
12.5
Source: Company annual report, Edelweiss research

Table 3: Peer comparison

(%)

Particulars
Tech Mahindra
Infosys
TCS
HCL Tech (December year end)

FY13
9.6
3.6
6.0
11.5

FY14
9.1
3.9
6.0
11.1

FY15
12.5
4.1
6.6
13.1

Source: Company annual report, Edelweiss research

FY15 saw significant increase in sub-contracting cost at 12.5% of revenue, leading to EBITDA
margin contraction YoY from 22.2% to 18.4%.

Unbilled revenue surged during


FY15 to 8.6% of sales from 5.7%
in FY14

Table 4: Unbilled revenue


Particulars
Unbilled revenue
% of revenue
Unearned revenue
% of revenue

FY12
2,124
3.9
153
0.3

FY13
2,376
3.5
117
0.2

FY14
10,709
5.7
1,421
0.8

(INR mn)
FY15
19,425
8.6
1,260
0.6

Source: Company annual report, Edelweiss research

Other highlights:
TML incurred INR6.6bn, 3% of revenue in FY15 (FY14: INR5.6bn, 3%), on software, hardware
and project specific expenses. These costs are reimbursed by the customers as part of
contract and are accounted on gross basis.
Employee cost included ESOP cost, which rose from INR1.3bn to INR2.3bn YoY (largely to
key management personnel). TML accounted ESOPs on intrinsic value, as permitted by
SEBIs ESOP regulations. Had the company followed the fair value method, net profit would
have been lower by INR398mn, 1.5% of PAT (FY14: INR254mn, 0.8%).

131

Edelweiss Securities Limited

Annual Report Analysis


Cash flow analysis and earnings to cash conversion
Table 5: Cash flow analysis

(INR bn)
Standalone
FY14
FY15
31.2
28.7
(0.3)
(0.0)
5.4
5.5
(8.8)
(6.8)
27.5
27.4

Particulars
Profit before tax
Non-operating expense
Non-cash adjustments
Direct taxes paid
Cash profit after tax
(Increase)/Decrease in trade and other receivables
Increase/(Decrease) in Trade payables
Increase/(Decrease) in other liabilities & provisions
(derived)
Increase in working capital
Net cash from operating activities
Interest expenses paid
Net cash from operating activities post interest
Less: Capex
Less: Cash paid for acquisitions
Less: Additional investment in subsidiaries (net)
Adjusted free cash flow

(18.7)
6.1

(8.9)
4.2

(1.9)

(2.1)
(14.5)
12.9
(1.0)
11.9
(7.7)
(1.1)
3.1

Subsidiary (derived)
FY14
FY15
5.8
7.5
0.3
0.1
0.8
1.5
(2.2)
(4.0)
4.7
5.1

Consolidated
FY14
FY15
36.9
36.2
(0.0)
0.1
6.2
7.0
(10.9)
(10.7)
32.1
32.6

(1.7)
(2.1)

(20.4)
3.9

0.3
1.5

2.2
(6.8)
20.7
(0.4)
20.3
(9.0)
(1.5)
(11.4)
(1.6)

(3.6)
(1.6)
3.0
0.1
3.1
(1.5)
(0.4)
0.5
1.8

(8.5)
5.7

0.3
(1.7)
3.4
(0.3)
3.1
(2.1)
(11.2)
10.3
0.1

(5.7)
(16.1)
16.0
(1.0)
15.0
(9.1)
(0.4)
(0.5)
5.0

(8.5)
24.1
(0.6)
23.4
(11.1)
(12.7)
(1.1)
(1.4)

Source: Company annual report, Edelweiss research

Operating cash flow (OCF), post interest improved YoY from INR15.0bn to INR23.4bn
primarily led by lower working capital investment YoY. Receivables grew by INR8.5bn in
FY15 versus INR20.4bn in FY14. The rise in payables was offset by fall in other liabilities and
provisions (primarily led by reduction in liability towards derivatives contracts).
Free cash flows adjusted for capex, acquisitions and incremental investment in subsidiaries
declined from INR5.0bn in FY14 to INR(1.4)bn in FY15.

Table 6: Cash conversion cycle Peer comparison (days)*


TML
FY14
84
21

Particulars
Trade receivable days
Unbilled revenue days
Inventory days
Advance from customer/unearned
revenue days
Trade payable days
Supplier credit days
Conversion cycle

Amounts outstanding towards


bills discounting facility stood at
INR2.7bn (FY14: Nil)

(5)

FY15
88
31
(3)

Infosys
FY14
FY15
61
66
20
19
(11)

(8)

TCS
FY14
81
18
(5)

FY15
79
15
(5)

HCL Tech
CY13
CY14
64
65
24
23
13
5
(10)

(1)

(94)
(109)
(5)
(7)
(88)
(83)
(40)
(19)
20
34
6
7
66
70
7
6
71
108
* Conversion cycle is calculated on closing basis for like to like comparison between peers.
Source: Company annual report, Edelweiss research

Unbilled revenue rose significantly in FY15 from 21 to 31 days and payable days rose to 109
in FY15, partly led by acquisitions. Receivables, unbilled and payable days are the highest for
TML amongst peers.
During FY15, TML for the first time started availing the bill discounting facility and amount
outstanding as at FY15 stood at INR2.7bn. Receivable days calculated above are adjusted for
bills discounted.

132

Edelweiss Securities Limited

Tech Mahindra
Total receivables rose from INR43.5bn in FY14 to INR52.1bn in FY15 and unbilled revenue
rose from INR10.7bn to INR19.4bn over the same period.
Payables catapulted from INR9.5bn in FY14 to INR15.2bn in FY15 of which INR3.5bn was led
by acquisitions.

Table 6: Receivables analysis

(INR mn)

Particulars
Receivables > 1 year
Receivables > 6 months
Total
Less: Provision for doubtful receivables
Net receivables >6 months
Others
Total

Unprovided receivables more


than 6 months rose to INR2.6bn
in FY15

FY13
FY14
FY15
151
3,604
3,343
1,787
5,330
6,292
1,938
8,934
9,635
(820)
(6,965)
(6,990)
1,118
1,969
2,645
15,918
41,517
49,414
17,036
43,486
52,059
Source: Company annual report, Edelweiss research

Receivables more than 6 months and 1 year stood higher at INR9.6bn. However, the
company has already provided INR7.0bn towards doubtful receivables.

Table 7: Earnings to cash conversion analysis

(INR mn)

Particulars
Operating cash flow post interest (A)
Profit after tax (PAT)
Depreciation
Other income
PAT + Depreciation - Other income (B)
Earnings to cash conversion ratio (A/B*100)

FY11
7,715
6,442
1,435
1,288
6,589
117

FY12
6,206
10,955
1,613
982
11,586
54

FY13
FY14
FY15
14,988
14,988
23,448
12,878
30,288
26,277
2,000
5,222
6,114
(747)
1,130
1,065
15,625
34,380
31,326
96
44
75
Source: Company annual report, Edelweiss research

Chart 1: Earnings to cash conversion ratio


130.0
110.0

(%)

90.0
70.0
50.0
30.0
FY11

FY12

FY13

FY14

FY15

Earnings to cash conversion ratio (A/B*100)


Source: Company annual report, Edelweiss research

133

Edelweiss Securities Limited

Annual Report Analysis


Table 8: Earning to cash flow conversion ratioTML versus peers
Particulars
Operating cash flow post interest (A)
Profit after tax (PAT)
Depreciation
Other income
PAT + Depreciation - Other income (B)
Earnings to cash conversion ratio (A/B*100)

TML
FY14
15.0
30.3
5.2
1.1
34.4
44

FY15
23.4
26.3
6.1
1.1
31.3
75

(INR bn)
Infosys
TCS
HCL tech
FY14
FY15
FY14
FY15
FY13
FY15
98.3
83.5
147.1
192.6
44.2
64.0
106.6
123.7
191.6
198.5
40.4
65.1
13.2
10.2
13.5
18.0
6.4
6.8
26.6
34.3
16.4
32.3
3.5
6.8
93.1
99.6
188.8
184.2
43.3
65.1
106
84
78
105
102
98
Source: Company annual report, Edelweiss research

Earning to cash flow conversion ratio improved in FY15, although it remains low vis--vis
peers.

Merger accounting
During FY15, TML merged Mahindra Engineering Services (MESL) with itself and issued 5
shares for every 12 shares of MESL in December 2014, aggregating to 4,259,011 shares
(1.8% of outstanding shares). The merger was accounted under the pooling of interest
method and led to increase in net worth by INR2.1bn.

Table 9: MESL mergerIncrease in net worth if shares were issued at market price
Particulars
Shares issued to acquire Mahindra Engineering Services Ltd.
Net worth increased on account of merger as per pooling of
Total increase in net worth (A)
Value of 4.26mn shares issued on merger at 1 month average
Increase in net worth had the company issued shares at market
price or followed purchase method of accounting (B-A)
Net worth stood lower by
INR39.0bn due to merger as per
pooling of interest method

No of shares
(mn)
4.26

INR mn
43
2,058
2,101
6,975
4,874

Source: Company annual report, BSE, Edelweiss research

Had the company followed the purchase method of accounting, FY15 net worth would
have been higher by INR4.9bn.

Table 10: Mahindra Satyam merger approved in FY14


No of shares
(mn)

Particulars
Cash paid for acquiring 42.6% stake in FY10 (A)
Value of 79.4mn shares issued on merger at 1 month average
price of INR606.8 each pre-merger (B)
Total cost of investment in Mahindra Satyam (A+B)
Net worth increased on account of merger as per pooling of
interest method (C)
Increase in net worth had the company issued shares at market
price or followed purchase method of accounting (B-C)

79.4

INR mn
29,695
48,184
77,879
14,096
34,088

Source: Company annual report, BSE, Edelweiss research

In FY14, the company had merged Mahindra Satyam and other subsidiaries/ associates with
itself which led to increase in net worth by INR16.8bn (INR14.1bn pertaining to Mahindra
Satyam).
134

Edelweiss Securities Limited

Tech Mahindra
Cumulatively, net worth is lower by INR39.0bn due to merger accounting as per
aforementioned analysis. Consequently, RoE/ RoCE are higher as explained under:

Table 11: Adjusted RoE and RoCE (%)


Adjusted for INR39.0bn (without
goodwill amortization), ROE and
ROCE are lower by 8% and 10%
respectively

Reported
Particulars
ROE (%)
ROCE (%)
Book value per share (INR)

Including goodwill amortisation


ROE/ROCE are lower by 13% and
15% respectively

FY14
44
50
342

FY15
28
36
115

Adjusted#
Before goodwill
After goodwill
amortisation
amortisation
FY14
FY15
FY14
FY15
28
20
22
15
34
26
29
22
567
173
530
164

# Adjusted for treasury shares and net worth adjustment as per above Table
Source: Company annual report, Edelweiss research

As per AS 14, any goodwill arising on amalgamation is required to be amortised over a


period of 5 years. Book value is also understated to that extent.

Treasury shares
TML continues to hold 10% of equity in the form of treasury shares on merger of Mahindra
Satyam. To that extent, effective voting rights of minority shareholders are lower than the
economic interest.

Derivatives and forex losses/ gains


Table 12: Derivative exposure

(Figures in mn)
Notional amount
FY14
FCY

Particulars
GBP/EUR to USD contracts
Forward

Options
Total
As % of revenues

FY15
FCY

GBP 157
EUR 30

15,676
2,477
18,154

GBP 183
EUR 155

USD 933
EUR 12
GBP 10
USD 79

56,073
991
998
4,748
62,810
33

USD 1,470
EUR 4
GBP 1
USD 180

Total
USD/ GBP/ EUR to INR contracts
Forward

INR

INR
16,920
10,464
27,384

Fair value loss/ (gain)


FY14
FY15
INR
INR
752
4
756

(795)
(1,375)
(2,170)

92,008
5,211
1,368
270
60
(39)
92
103
(1)
11,266
(77)
25
103,637
5,297
1,353
46
Source: Company annual report, Edelweiss research

Derivatives exposure rose significantly in FY15 to INR103.6bn, 46% of revenue, from


INR62.8bn in FY14.

135

Edelweiss Securities Limited

Annual Report Analysis


Table 13: Forex losses/ (gains)
Particulars
Charged to P&L
As a part of finance costs
AS a part of other income
Total
Add: Charged to Hedging reserve (net)
Total forex losses/ (gain)

(INR mn)
FY13
157.0
1,189.0
1,346.0
(1,049.0)
297.0

FY14

FY15

98.0
2,007.0
2,105.0
3,072.0
5,177.0

2,234.0
2,234.0
(6,294.0)
(4,060.0)

Source: Company annual report, Edelweiss research

Table 14: Hedging reserve movement


Particulars
Opening balance
Add: Loss/ (gain) for the year
Less: Loss/ (gain) transferred to P&L
Additions on amalgamation (net)
Closing balance [Loss/ (gain)]

(INR mn)
FY13
FY14
FY15
3,535.0
2,486.0
5,558.0
(585.0)
4,084.0
(6,294.0)
464.0
843.0
(169.0)
2,486.0
5,558.0
(736.0)
Source: Company annual report, Edelweiss research

Forex losses charged to P&L stood at INR2.2bn in FY15 and TML recorded forex gain of
INR6.3bn in hedging reserve.

Table 15: Contingent liabilities / claims


Particulars
Guarantees/ Letter of supports
Outstanding bill discounting
Income tax demands

(INR mn)
FY14

FY15

16,492

22,170

2,697

28,209

30,548

Service tax and Sales Tax matters

2,140

16,506

Other claims not acknowledged as debt

1,212

1,228

Total

48,053

73,149

Net worth

79,749

110,418

60.3

66.2

% of net worth

Source: Company annual report, Edelweiss research

136

Edelweiss Securities Limited

Tech Mahindra
Table 16: Summary financials

(INR mn)

Particulars
Sales
Total income
EBITDA
EBITDA margin (%)
RoCE (%)
RoE (%)
Depreciation
Financial costs
Net profit
Equity shareholders' funds*
Loan funds
Net Debt
Net fixed assets (Ex CWIP and goodwill on consolidation)
CWIP
Goodwill on consolidation
Current assets loans and advances
Current liabilities and provisions
Net current assets (ex-cash)
Cash and cash equivalent
Cash flow from operating activities
Cash flow from investing activities
Cash flow from financing activities
Net cash flows
CAPEX
Working capital (investments)/inflow

FY11
51,402
52,690
10,034
19.5
22.4
20.7
1,435
1,113
6,442
33,514
12,227
9,183
6,137
608
33
17,246
9,278
7,968
3,044
4,637
(1,334)
(2,867)
436
(1,534)
(2,743)

FY12
54,897
55,879
9,194
16.7
17.6
31.0
1,613
1,026
10,955
40,509
11,266
7,243
6,792
1,671
33
18,019
11,235
6,784
4,023
7,117
(4,203)
(3,174)
(260)
(2,958)
226

FY13
68,731
67,984
14,242
20.7
19.2
27.2
2,000
1,030
12,878
54,256
13,804
6,701
9,039
343
3,407
23,809
16,377
7,432
7,103
9,597
(7,072)
(3,481)
(956)
(4,382)
3,195

FY14
188,314
189,444
41,838
22.2
49.9
43.8
5,222
799
30,288
79,749
3,589
(32,085)
20,304
2,662
5,640
69,745
42,350
27,395
35,674
15,962
(1,896)
(9,723)
4,343
(9,138)
(16,148)

FY15
226,213
227,278
41,529
18.4
36.4
27.6
6,114
299
26,277
110,418
6,838
(25,252)
23,046
5,677
17,283
90,436
50,708
39,728
32,090
24,087
(20,922)
(7,898)
(4,733)
(11,132)
(8,498)

* Adjusted for treasury shares


Source: Company annual report, Edelweiss research

137

Edelweiss Securities Limited

ANALYSIS BEYOND CONSENSUS


THE NEW ABC OF RESEARCH
Dish TV | Annual Report Analysis

Dish TV's (Dish) FY15 annual report analysis highlights rise in capex due to
higher subscriber additions along with increase in churn ratio to 12.3%
(FY14: 4.7%; FY11-15 average: 11.6%), which led to negative FCF (post
interest) of INR(144)mn (FY14: INR3.4bn). Average annual capex during
past 5 years stood at INR6.6bn, of which INR2.8bn was towards
replenishing churned out subscribers representing 42% of gross
subscribers added. In our view, cost incurred towards replenishing
churned out subscribers should be considered as maintenance capex
(capex required to maintain current revenue stream); hence, it should be
deducted from EBITDA while deriving valuation based on EV/ EBITDA
multiple. Trailing EV/EBITDA multiple adjusted for above stood at 25x
versus 13x based on reported EBITDA (28x including regulatory dues and
creditors for capex). Dish turned profitable in FY15 (posted losses in
previous years) led by improved operating performance. The company
changed its accounting policy in FY14 and started upfront recognition of
activation fee, the impact of which is higher revenue recognition during
FY15 by INR2bn, 7% of revenue (our estimate). Gross debt rose 5% YoY to
INR14.8bn (of which unhedged forex loans are INR7.6bn, 51% of debt).
Regulatory dues rose by INR2.1bn to INR10.5bn, adjusted for which net
debt/EBITDA stood at 2.9x.

Market Data

52-week range (INR)

: 121 / 52

Share in issue (mn)

: 1,065.7

M cap (INR bn/USD mn)

: 124 / 1,888

Avg. Daily Vol. BSE/NSE (000) : 6,545.1

Shareholding Pattern (%)

Promoters*

: 64.5

MFs, FIs & Banks

: 4.0

FIIs

: 18.6

Others

: 12.9

*Promoters pledged shares

: 19.5

(% of share in issue)

Higher churn led to higher maintenance capex


FY15 capex catapulted to INR7.1bn (FY14: INR3.0bn) owing to higher gross subscriber
addition at 2.9mn (FY14: 1.2mn). Subscriber churn jumped to 1.4mn (FY14: 0.5mn). 42%
of gross capex over past 5 years was towards replenishing churned out subscribers.
Average gross subscriber addition over past 5 years stood at 2.5mn and average churn
stood at 1.0mn (42% of gross subscriber addition and 12% of total subscriber base).

Activation fee up fronting led to higher revenue recognition


In FY14, Dish changed its accounting policy and started recognising a portion of
activation fee upfront against earlier policy of recognition over subscription period/life
of CPE. Consequently, revenue for FY15 and FY14 stood higher by INR2.0bn (our
estimate) and INR894mn, respectively. Dish amortizes cost of set-top box and
realization from customer (other than activation fees) over 5 years.
ARPU has consistently risen over the past 5 years, of which in the past 2 years it could
be due to change in revenue recognition policy. ARPU also includes entertainment tax.
Advance (unearned) income proportion to revenue has declined over the past 5 years
(41% in FY11 to 13% in FY15), which we believe was partly due to accounting changes.
Analysis beyond Consensus (ABC) is our initiative to provide a differentiated perspective to our clients
on various non-routine and intricate issues. This unit of research works independent of the sector/stock
research team and views expressed in this report may vary with that of respective sector/stock analyst.
Edelweiss research is also available on www.edelresearch.com,
1
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

September 22, 2015


Edelweiss Securities Limited

Annual Report Analysis


Other highlights
Net debt rose from INR9.4bn to INR10.6bn (all due within 1 year) and regulatory dues rose
to INR10.5bn in FY15, up 26% YoY. Net Debt/EBITDA declined marginally from 1.5x to 1.4x
and adjusted for regulatory dues, stood at 2.9x (FY14: 2.8x).
PBT stood at INR74mn, and adjusted for capitalised forex losses of INR340mn stood at
negative INR(266)mn. Cumulative forex losses over last 3 years stood at INR3.3bn (28% of
capital employed Note: Capital employed is used for comparison, as net worth is negative).
Net trade payables and other liabilities (largely advance income) declined by INR1.8bn in
FY15. However, the cash flow statement showed an increase of INR1.1bn.
Loans and advances rose to INR4.7bn, 41% of capital employed (FY14: INR3.8bn, 35%),
primarily including loans to related parties, vendor advances and tax related advances.
Related party loans though declined YoY from INR1.7bn in FY14 to INR1.3bn in FY15.
Net worth continues to be negative at INR(3.1bn) in FY15 (FY14: INR(3.1bn)).
Contingent liabilities rose to INR1.3bn, 10.8% of capital employed (FY14: INR1.0bn, 9.3%),
primarily led by service tax, VAT and entertainment tax demands.
Net unhedged exposure declined to INR5.7bn in FY15, led by drop in forex loans. Unhedged
forex loans declined YoY from INR10.1bn in FY14 (71% of gross debt) to INR7.6bn in FY15
(51% of gross debt). However, payables rose from INR326mn in FY14 to INR1.5bn.
Outstanding derivative contracts rose from USD1.1mn in FY14 to USD33.9mn.

Subscriber churn and EV/ EBITDA valuation


Net subscriber addition stood
robust at 1.5mn in FY15...
however, the churn rate also
increased to 12.3% (FY14: 4.7%)
ARPU has consistently risen in past
5 years, of which increase in the
past 2 years could be due to
change in the revenue recognition
policy

Table 1: Subscriber addition and ARPU


Particulars
Gross
Net (paying)
Gross addition
Net (paying) addition
Churn
Churn as % of opening net paying customer
Growth in net paying subscriber (%)
ARPU (per month)

FY11
10.4
8.5
3.5
2.8
0.7
12.3
49.1
140

(figures in mn except per unit)


FY12
FY13 FY14 FY15
12.9
15.2
16.4
19.3
9.6
10.7
11.4
12.9
2.5
2.3
1.2
2.9
1.1
1.1
0.7
1.5
1.4
1.2
0.5
1.4
16.5
12.5
4.7
12.3
12.9 11.5
6.5
13.2
153
158
171
174

Source: Company annual report, Edelweiss research

Net subscriber addition stood at a robust 1.5mn versus 0.7mn in FY14, 13.2% YoY growth.
However, the churn rate also increased YoY to 12.3%. ARPU has consistently increased over
past 5 years and rose to 174 in FY15. Like-to-like ARPU for FY14 (adjusted for accounting
changes) stood at 162 versus 171 reported.
ARPU includes entertainment tax, as the company follows gross accounting and
entertainment tax is included in the revenue.

139

Edelweiss Securities Limited

Dish TV

Past 5 years average annual capex


stood at INR6.6bn, of which we
believe INR2.8bn is maintenance
capex required to maintain
existing revenue stream

Table 2: Subscriber churn, maintenance capex and adjusted EV/EBITDA


(INR mn)
Particulars
FY11
FY12
FY13
FY14
FY15 Average
Subscriber base (net paying)
8.5
9.6
10.7
11.4
12.9 Gross subscriber addition
3.5
2.5
2.3
1.2
2.9
2.5
Churn
0.7
1.4
1.2
0.5
1.4
1.0
Churn as % of net subscriber
12.3
16.5
12.5
4.7
12.3
11.6
base
Churn as % of gross subscriber
20
56
52
42
48
42
addition (A)
Capex p.a.(B)
(10,050) (6,038) (6,980) (2,986) (7,057) (6,622)
Maintanence capex (B*A)
(2,010) (3,381) (3,642) (1,244) (3,407) (2,777)

Adjusted for maintenance capex,


trailing EV/EBITDA stood at 25x.

EBITDA
EBITDA post maintanence capex

2,380
370

4,960
1,579

5,794
2,152

6,240
4,996

7,331
3,924

5,341
2,564

Source: Company annual report, Edelweiss research

Including regulatory dues and


creditors for capex it stood at 28x.

EV/ EBITDA multiple on trailing basis stood at 13x while adjusted for maintenance capex, it
stood at 25x.
Note: Our EV calculation (based on INR82 per share as on 31 March 2015) does not include
regulatory dues of INR10.5bn and creditors for capex of INR2.0bn, adjusted for which EV/
EBITDA multiple stood at 28x (trailing).

Profitability analysis
Table 3: Consolidated profitability analysis
Particulars
Sales
RM, operating & administrative exps.
Personnel cost
EBITDA
Depreciation
EBIT
Financial Charges
Other income
PBT before exceptional
Exceptional/ priod period items
PBT
Forex losses capitalised
Adjusted PBT

FY11
14,367
11,225
761
2,380
3,996
(1,615)
1,534
1,226
(1,923)
(1,923)
*
(1,923)

(INR mn)
Consolidated (INR mn)
FY12
FY13
FY14
FY15
19,579 21,668 25,090 27,816
13,871 15,052 17,958 19,468
748
822
892
1,018
4,960
5,794
6,240
7,331
5,219
6,276
5,974
6,138
(259)
(482)
267
1,193
1,973
1,284
1,328
1,754
900
511
649
635
74
(1,331) (1,254)
(412)
594 (1,164)
(1,331)
(660) (1,576)
74
* (1,252) (1,723)
(340)
(1,331) (1,912) (3,298)
(266)

FY11
100
78.1
5.3
16.6
27.8
(11.2)
10.7
8.5
(13.4)
(13.4)
*
(13.4)

% of Revenue
FY12 FY13 FY14 FY15
100
100
100
100
70.8
69.5
71.6
70.0
3.8
3.8
3.6
3.7
25.3
26.7
24.9
26.4
26.7
29.0
23.8
22.1
(1.3) (2.2)
1.1
4.3
10.1
5.9
5.3
6.3
4.6
2.4
2.6
2.3
(6.8) (5.8) (1.6)
0.3
(4.1)
8.1
(9.3) (4.6) (11.0)
0.5
*
(5.8) (6.9) (1.2)
(6.8) (8.8) (13.1) (1.0)

Source: Company annual report, Edelweiss research


* Policy for capitalisation of forex losses adopted from FY13 onwards.

Revenue grew 11% YoY to INR27.8bn and EBITDA rose to INR7.3bn, up 17% YoY leading to
expansion in EBITDA margin by 150bps. The company turned PAT positive in FY15 vis--vis
losses in past 4 years. PBT stood at INR74mn, though adjusted for forex losses capitalised,
stood at INR(266)mn. Cumulative forex losses capitalised over past 3 years stood at
INR3.3bn.

140

Edelweiss Securities Limited

Annual Report Analysis


Impact on revenue, pertaining activation fee accounting changes (for like-to-like
comparison) in FY15 & FY14 stood at INR2.0bn (our estimate) and INR894mn respectively.
The company, in the previous year, changed its accounting policy for revenue recognition
(CPE rentals and activation fee). A portion of activation fee is now recognised on upfront
basis versus earlier policy of recognition over subscription period/ life of CPE. Consequently,
FY14 revenue stood higher by: a) INR333mn for rentals; and b) INR894mn towards upfront
recognition of activation fees.
Revenue is recognised net of service tax but gross of entertainment tax. Total entertainment
tax charged to P&L stood at INR1.5bn, 5% of revenues (FY14: INR1.3bn, 5%).

Advance income and its


proportion to revenue, both
consistently declined over past 5
years
Decline in past 3 years also partly
reflects the impact of changes in
revenue recognition policy

Table 4: Income received in advance


Particulars
Income received in advance:
Long term
Short term (less than 1 year)
Total advance income
Revenue
Advance income as % of revenue

FY11
2,034
3,853
5,887
14,367
41.0

FY12
1,770
3,015
4,785
19,579
24.4

FY13
1,501
2,946
4,448
21,668
20.5

(INR mn)
FY14
FY15
918
3,390
4,308
25,090
17.2

183
3,443
3,626
27,816
13.0

Source: Company annual report, Edelweiss research

Cash flow analysis


Table 5: Cash flow analysis
Particulars

OCF, post interest rose to


INR6.9bn from INR6.4bn in
previous year, led by improvement
in profitability and lower working
capital investments

FCF, however, stood negative


INR144mn, led by increase in
capex spend

Profit before tax


Non-operating expense
Non-cash adjustments
Direct taxes paid
Cash profit after tax
(Increase)/ decrease in trade
receivables
(Increase)/ decrease in inventories
(Increase)/ decrease in Loans, advances
and other current assets
Increase/ (decrease) in trade payables,
other current liabilities
(Increase)/ decrease in working capital
Net cash from operating activities
Interest expenses paid
Net cash from operating activities post
interest
Capital expenditure
Free cash flows

(INR mn)
FY12
(1,331)
1,186
5,219
16
5,088
(60)

Consolidated
FY13
FY14
(660)
(1,576)
(78)
460
6,388
6,267
(82)
(60)
5,569
5,091
(18)
(111)
11
1,349

FY15
74
945
6,351
(99)
7,270
(222)

(24)
85

(17)
(1,447)

(24)
(367)

(978)

2,008

714

1,017

(977)
4,111
(784)
3,328

526
6,095
(691)
5,404

1,964
7,055
(625)
6,429

404
7,675
(761)
6,914

(6,038)
(2,710)

(6,980)
(1,577)

(2,986)
3,443

(7,057)
(144)

Source: Company annual report, Edelweiss research

FCF stood negative in FY15 at INR(144)mn led by INR7.1bn capex. Creditors for capex rose
by INR1.4bn to INR2.0b n in FY15.
141

Edelweiss Securities Limited

Dish TV
Net trade payables and other liabilities (largely advance income) declined by INR1.8bn in
FY15. However, cash flow statement showed an increase of INR1.1bn.

Table 6: Net working capital

(INR mn)
Outstanding balances

Working capital investment over


last 4 years rose by INR2.8bn
following decline in trade
payables and advance income.

Particulars
FY 12
FY 13
FY 14
FY 15
Inventory
69
86
75
99
Trade Receivables
286
304
415
642
Trade payables
(1,275) (2,138) (1,357) (1,268)
Advance to vendors
336
522
555 1,573
Unearned Income (advance income) (4,785) (4,448) (4,308) (3,626)
Net working capital
(5,369) (5,674) (4,620) (2,581)
As % of revenue
27.4
26.2
18.4
9.3

Change from
FY12 - FY15
30
356
7
1,236
1,159
2,788

Source: Company annual report, Edelweiss research

Loans and advances rose to


INR4.7bn, 41% of capital
employed primarily led by
advance to vendors and taxrelated advances
Loans to related parties declined
YoY

Table 7: Loans and advances analysis


Particulars
Loans/ advances to related parties
Advances to vendors, distributors etc
Tax related advances
Others
Total
As % of total assets
As % of capital employed

FY11
469
261
1,411
545
2,687
9.9
24.1

FY12
870
336
973
147
2,326
8.8
17.8

FY13
1,022
522
1,360
802
3,706
11.7
25.1

FY14
1,745
555
921
569
3,790
13.7
34.6

(INR mn)
FY15
1,316
1,573
1,291
569
4,748
15.0
40.6

Source: Company annual report, Edelweiss research

Debt and borrowing cost analysis


Table 8: Debt analysis

Gross debt rose by 5% YoY and


net adjusted debt jumped 19%
YoY to INR21.1bn in FY15
Regulatory dues rose to
INR10.5bn in FY15, up 26% YoY
Entire gross debt of INR14.8bn is
due within 1 year

Debt/EBITDA declined from 1.4x


in FY14 to 1.1x, while net
adjusted debt/EBITDA rose to
2.9x

Particulars
Gross debt
Creditor for capex
Bank overdraft , accrued interest
Total Debt (A)
Regulatory dues - Short term
provisions (B)
Cash and liquid investment (C)
Net adjusted debt (A+B-C)
Net cash reqd to meet short term
liability (Current maturities - cash)
Add:
Trade payables (D)
Total adjusted liabilities (A+B-C+D)
Ratios:
Reported Debt/ EBITDA
Net adjusted Debt/ EBITDA
Total adjusted liabilities/ EBITDA

FY11
10.8
2.2
0.1
13.2
3.2

FY12
14.0
0.8
0.3
15.1
4.9

(INR bn)
% change
YoY
5
212
35
14
26

FY13
16.3
1.8
0.2
18.4
6.5

FY14
14.1
0.6
0.2
14.9
8.4

FY15
14.8
2.0
0.3
17.1
10.5

5.4
5.5
6.6
10.9 14.5 18.3
(1.1) (3.6) 1.0

5.5
17.8
0.1

6.5
21.1
7.9

17
19

2.5
13.4

1.3
15.8

2.1
20.5

1.4
19.1

1.3
22.4

(7)
17

2.3
4.6
5.6

1.7
2.9
3.2

1.7
3.2
3.5

1.4
2.8
3.1

1.1
2.9
3.1

Source: Company annual report, Edelweiss research

142

Edelweiss Securities Limited

Annual Report Analysis


Total gross debt stood at INR14.8bn and unhedged loans in foreign currency stood at
INR7.6bn, 51% of total debt (FY14: INR10.1bn, 71%).

Average borrowing cost rose


from 3.8% in FY14 to 5.7%...
adjusted for forex losses and
prepaid borrowing cost, it
declined from 15.1% to 8.1% led
by lower forex losses in FY15

Table 9: Average borrowing cost analysis


Particulars
FY11
Borrowing cost (excluding 'Interest
1,028
on others' pertaining to license fee)
Add: Forex loss capitalised (as per
amended AS-11)
Prepaid borrowing cost
Adjusted borrowing cost
Average borrowing cost (%)
Average adjusted borrowing cost (%)

1,028
10.2
10.2

(INR mn)
FY14
FY15
575
825

FY12
1,497

FY13
602

703

1,252

1,723

340

2,200
12.1
17.8

1,854
4.0
12.2

120
2,298
3.8
15.1

181
1,165
5.7
8.1

Source: Company annual report, Edelweiss research

Net unhedged exposure declined


to INR5.7bn
Forex loans fell, but payables
increased in FY15

Table 10: Unhedged exposure


Particulars
Loans and borrowing
Trade payables
Advances/deposits received
Less:
Balance with Bank
Loans given
Receivables
Net Unhedged payables

FY13
13,859
1,508
0

FY14
10,074
326
5

(INR mn)
FY15
7,576
1,461
6

2,227
10
22
13,109

2,544
222
99
7,539

2,757
304
276
5,705

Source: Company annual report, Edelweiss research

Bank balances of INR2.8bn represents unutilised amount of GDR issuance. Outstanding


derivative contracts rose from USD1.1mn in FY14 to USD33.9mn.

Balance sheet analysis


Table 11: Balance sheet analysis
Sources
FY14
Debt
14,095
Regularoty dues
8,355
Advance income
4,308
Creditors for capex
637
Others
3,433
Total
30,828

FY15
14,839
10,505
3,626
1,984
3,844
34,796

Change
744
2,149
(683)
1,347
411
3,969

Application
Fixed assets
Loans/ advances
Cash/ investments
Net worth (negative)
Others
Total

FY14
17,797
3,790
5,505
3,126
610
30,828

FY15
19,510
4,748
6,459
3,134
945
34,796

(INR mn)
Change
1,714
958
954
8
335
3,969

Source: Company annual report, Edelweiss research

143

Edelweiss Securities Limited

Dish TV
Chart 1: Movement during the year

Sources during the year


Others
11%

Application during the year

Debt
16%

Creditors
for capex
28%

Others
4%

Advance
income
decline
15%

Regulatory
dues
45%

Fixed assets
36%

Cash/
investments
20%

Inventories/
receivables
5%

Loans &
advances
20%

100% = INR4.7bn

100% = INR4.7bn

Source: Company annual report, Edelweiss research

Chart 2: Balance sheet, as at end of the year

Sources as at FY15
Creditors
for capex
6%

Application as at FY15

Others
11%

Net worth
(negative)
9%

Debt
43%

Advance
income
10%

Others
3%

Cash/
investments
18%
Fixed assets
56%

Regularoty
dues
30%

Loans/
advances
14%

100% = INR34.8bn

100% = INR34.8bn

Source: Company annual report, Edelweiss research

Table 12: Major related party transactions


Company
Loans/adv.
Media Pro Enterprise India
107
Zee Entertainment Enterprises
ITZ Cash Card
49
Taj Television India
Cyquator Media Services
1,722
Others
229
Total
2,107
As % of total loans and advances
65
As % of operating expenses

144

(INR mn)
FY14
Receivable Payable Purchase Sale
235
3,027 44
14
108 181
166 43
470 760 89
8
90 118
133
300
4,620 299
26

Loans/adv.
39
1,277
1,316
34

FY15
Receivable Payable Purchase Sale
1,065 73
13
8 192
216 129
1,370 20
852 58
6
99 153
130
168
3,610 345

19
Source: Company annual report, Edelweiss research

Edelweiss Securities Limited

Annual Report Analysis


Overall related party transactions declined in FY15. Loans/ advances fell to INR1.3bn, 34% of
total loans and advances, while purchases dropped from 26% to 19% of total expenses.
Guarantees given by related parties (key management personnel and group companies) on
behalf of Dish TV stood at INR12bn in FY15 (FY14: INR12.4bn).

Table 13: Summary financials


Particulars
Sales
Total income
EBITDA
EBITDA margin (%)
ROE (%)
RoCE (%)
Depreciation
Financial costs
Net profit
Equity shareholders' funds
Loan funds
Net Debt
Net fixed assets (Excluding CWIP)
CWIP
Current assets loans and advances
Current liabilities and provisions
Net current assets
Cash and investments
Cash flow from operating activities
Cash flow from investing activities
Cash flow from financing activities
Net cash flows
CAPEX
Working capital investments

FY11
14,367
15,593
2,380
16.6
(92.8)
(3.2)
3,996
1,534
(1,920)
370
10,763
5,357
14,437
4,421
5,650
13,951
(8,301)
5,406
3,948
(6,429)
655
(1,825)
(10,050)
1,602

FY12
19,579
20,479
4,960
25.3
(468.3)
5.3
5,219
1,973
(1,331)
(939)
14,003
8,510
14,204
3,884
6,335
11,373
(5,038)
5,493
4,111
(5,002)
1,424
534
(6,038)
(978)

FY13
21,668
22,179
5,794
26.7
(85.1)
0.2
6,276
1,284
(660)
(1,556)
16,330
9,762
14,340
6,535
9,929
15,142
(5,213)
6,568
6,095
(7,869)
1,222
(553)
(6,980)
526

FY14
25,090
25,739
6,240
24.9
(33.7)
7.1
5,974
1,328
(1,576)
(3,126)
14,095
8,590
13,571
4,226
7,451
15,673
(8,222)
5,505
7,055
(2,984)
(4,610)
(539)
(2,986)
1,964

(INR mn)
FY15
27,816
28,451
7,331
26.4
1.0
16.1
6,138
1,754
31
(3,134)
14,839
8,380
14,539
4,972
9,147
19,709
(10,563)
6,459
7,675
(6,699)
(362)
614
(7,057)
404

Source: Company annual report, Edelweiss research

145

Edelweiss Securities Limited

ANALYSIS BEYOND CONSENSUS


THE NEW ABC OF RESEARCH
Zee Entertainment Enterprises | Annual Report Analysis

Zee Entertainment Enterprises (Zee) FY15 annual report analysis


highlights increase in sale of media content by INR2.0bn (syndication
deals largely sports related and one time). Subscription management
costs declined in FY15 due to accounting changes (from gross to net),
excluding which operating cost proportion to sales stood flat at
43.8%. Unbilled revenues grew to INR1.1bn, 2.3% of sales in FY15
(FY14: INR752mn, 1.7%). OCF improved YoY due to lower investment
in inventories. As highlighted in our past annual report analysis,
higher inventory spend in previous years coupled with amortisation
policy of 60 months led to mismatch in profits and cash flows, which
reversed in FY15. Investment in overseas funds, loans and advances
continued and stood at INR15.5bn, 44% of adjusted* net worth.
Contingent liabilities increased YoY owing to direct tax disputes,
while commitments for media content and license fees rose 1.8x to
INR34.6bn. Related party transactions (ex-joint venture /associates)
with respect to revenues and operating costs increased in FY15.

Market Data
52-week range (INR)

: 401 / 265

Share in issue (mn)

: 960.4

M cap (INR bn/USD mn)

: 355 / 5,580

Avg. Daily Vol. BSE/NSE (000) : 2,703.7

Shareholding Pattern (%)


Promoters*

: 43.1

MFs, FIs & Banks

: 2.2

FIIs

: 50.0

Others

: 4.8

*Promoters pledged shares


(% of share in issue)

: 16.2

* adjusted for preference shares

Whats on track?
Zee has been reporting healthy net profit margin of ~20% since 4 consecutive years,
despite several challenges faced by industry.
The company has been focusing on new launches for future growth and successfully
launched &TV and Zindagi in FY15. In light of its 2020 Vision, it continues to expand its
international operations.

What needs tracking?


FY15 saw significant increase in ad spend by INR1.2bn (up 50% YoY) and marketing cost
by INR1.1bn (up 53% YoY), primarily due to launch of new channels, &TV and Zindagi.
Subscription management fees declined to INR28mn in FY15 (FY14: INR2.4bn) following
change it accounting policy (from gross to net). To that extent, EBITDA margins were
optically higher by 120bps.
PAT, adjusted for preference dividend of INR1.5bn, declined YoY to INR8.3bn versus
INR8.8bn in FY14. Preference shares, we believe should be considered as debt, and
profits, cash flows and return ratios require adjustment to that extent.
OCF rose to INR6.8bn in FY15 (FY14: INR3.8bn), led by lower investment in inventories in
FY15 at INR142mn (FY14: INR3.0bn). Inventory days stood at 202 in FY15 (FY14: 204).
Analysis beyond Consensus (ABC) is our initiative to provide a differentiated perspective to our clients
on various non-routine and intricate issues. This unit of research works independent of the sector/stock
research team and views expressed in this report may vary with that of respective sector/stock analyst.
Edelweiss research is also available on www.edelresearch.com,
1
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

July 3, 2015
Edelweiss Securities Limited

Annual Report Analysis


Investments in global funds and loans/ advances to other parties rose in FY15 by INR426mn
and INR2.1bn, respectively. Total loans/advances and investments stood at INR15.5bn, 44%
of adjusted net worth (FY14: INR12.8bn, 47%).
Average yield on cash and investments was robust at 9.1% in FY15 (FY14: 8%). Other income
constituted 14-16% of PBT over each of past 3 years.

Other highlights

FY15 onwards the company has changed its accounting policy for expenses incurred on
development of new channels wherein it will be recognised under intangibles, until the
channel is ready for commercial launch. In FY15, INR133mn was recognised as
intangibles of which INR6mn was amortised during the year.

Receivables under litigation stood at INR376mn (FY14: INR359mn), management is


confident that the receivables will be realised fully.

Net un-hedged receivables at standalone level (largely forex loans to subsidiaries) stood
at INR6.8bn, 15% of standalone net worth (FY14: INR6.6bn, 17%). Details at
consolidated level are not available.

MD&A highlights

Goal is to be amongst the top global media conglomerates by year 2020.

Mission - To become the worlds leading global company from emerging markets.

Zee is a global media brand with strong presence in over 169 countries, total viewership
of over 959mn people around the world and more than 36 international channels. It
also has an extensive library with over 2,10,678 hours of television content, rights to
more than 3,500 movie titles and a rich bouquet of 33 popular domestic channels.

Vision 2020:- i) to achieve 5x growth in viewership; ii) to achieve 4x growth in content


consumption

Digitisation in Phase I and II cities is complete, rollout of digitisation process in Phase III
and IV cities undertaken during the year signified a positive development for industry
and is expected to boost subscription revenues going ahead.

Major acquisitions during the year included renewal of rights with the Pakistan Cricket
Board, WWE and UEFA Champions League. Ten Sports also bagged the rights for
MotoGP for the next 5 years.

The company expanded its international operations by forming a step-down whollyowned subsidiary of Asia TV Ltd, UK in Ontario, Canada in the name of Asia Multimedia
Distribution Inc., for facilitating distribution of television channels.

The company is setting up infrastructure to rapidly scale up in high-growth, highpotential markets such as Latin America, Japan and China.

147

Edelweiss Securities Limited

Zee Entertainment Enterprises


Profitability analysis
Table 1: Standalone versus consolidated profitability
Particulars
Sales (ex-subcription
management cost)
Operating cost (ex-subcription
management cost)
Personnel cost
Other expenses
EBITDA
Depreciation
EBIT
Financial charges
other income
PBT
Tax
Associate/ minority share
PAT
Preference dividend (Incl. tax)
Adjusted PAT

FY14

Standalone
% FY15

(INR bn)
%

Subsidiary (Derived)
FY14
% FY15

30.8

100.0

34.3

100.0

11.1

13.1
2.2
5.1
10.3
0.3
10.0
0.1
1.8
11.8
4.0
7.7
0.1
7.6

42.6
7.2
16.6
33.5
1.1
32.4
0.2
6.0
38.2
13.1
25.1
0.3
24.8

13.5
2.8
7.5
10.4
0.6
9.9
0.0
2.3
12.1
3.8
8.3
1.5
6.9

39.4
8.2
21.9
30.5
1.7
28.8
0.1
6.6
35.4
11.1
24.3
4.2
20.0

5.2
1.7
2.5
1.7
0.2
1.6
0.1
(0.0)
1.4
0.3
0.0
1.2
1.2

100.0
47.1
15.0
22.3
15.6
1.5
14.1
0.8
(0.3)
13.0
2.4
0.2
10.8
10.8

14.6

FY14

100.0

41.9

Consolidated
% FY15
100.0

48.8

100.0

7.9
54.2
18.3
43.8 21.4
43.8
1.7
11.5
3.9
9.3
4.5
9.2
18.1 10.4
21.3
2.9
19.9
7.6
2.1
14.3
12.0
28.8 12.5
25.7
0.1
0.6
0.5
1.2
0.7
1.4
2.0
13.7
11.5
27.6 11.9
24.3
0.1
0.6
0.2
0.4
0.1
0.2
0.0
0.0
1.8
4.3
2.3
4.7
1.9
13.2
13.2
31.5 14.0
28.7
0.5
3.3
4.3
10.3
4.3
8.8
0.0
0.1
0.0
0.1
0.0
0.0
10.0
8.9
21.3
9.8
20.0
1.5
0.1
0.2
1.5
3.0
1.5
10.0
8.8
21.1
8.3
17.0
Source: Company annual report, Edelweiss research

Revenues (ex-subscription management cost) rose 17% YoY, which included sale of media
content spurted from INR1.7bn (3.9% of sales) in FY14 to INR3.7bn (7.7% of sales) in FY15.
Content sale included syndication deals, a large part of which included one-time sports deals
and were bottom-line neutral.
EBITDA margins declined from 28.8% in FY14 to 25.7% impacted by rise in other expenses,
primarily led by: i) higher ad expenditure which increased from INR2.5bn in FY14to INR3.7bn
in FY15 (up 50% YoY); and ii) marketing, distribution/promotion expenses increased from
INR1.9bn in FY14 to INR3.0bn (up 53% YoY). This rise in costs was predominantly on account
of the new channel launches during the year.
EBITDA margins however, stood optically higher by 120bps at 25.7% due to change in
accounting for subscription management fees, from gross to net. Consequently, subscription
management fees fell from INR2.4bn in FY14 to INR28mn in FY15. Operating cost also
included media content impairment worth INR668mn in FY15 (FY14: INR447mn).
Other income stood higher at INR2.3bn in FY15 and contributed 16% to PBT (FY14: 14%).
Adjusted for preference share, dividend profit available to equity shareholders declined YoY
from INR8.8bn in FY14 to INR8.3bn in FY15.

Unbilled revenue, as a proportion


to sales, has been rising since
FY13

Table 2: Unbilled revenue analysis


Particulars
Unbilled revenue
Revenue
As a % of revenue

FY13
4
36,996
0.0

FY14
752
44,217
1.7

(INR mn)
FY15
1,143
48,837
2.3

Source: Company annual report, Edelweiss research

148

Edelweiss Securities Limited

Annual Report Analysis


Tax rate and MAT credit
Effective tax rate declined to 30.5% in FY15 (FY14: 32.5%), aided by MAT credit of INR1.4bn
availed during the year. During FY15, Zee acquired and merged a related party company,
Diligent Media Corp (DMCL) and acquired deferred tax assets worth INR3.0bn (included in
loans & advances under advance tax), debt of INR1.0bn and issued preference shares worth
INR22mn. Consequently, it recorded net gain of INR1,996mn in reserves.

Cash flow analysis


Table 3: Standalone versus consolidated cash flow

(INR mn)

Standalone

Particulars
Profit before tax
Non operating expenses
Non cash adjustments
Direct taxes paid
Cash profit after tax
(Increase)/Decrease in trade and
other receivables
(Increase)/Decrease in inventories
Increase/ (Decrease) trade and other
payables
(Increase)/ Decrease in working capital
Net cash from operating activities
Interest expenses paid
Preference share dividend
Net Cash from operating activities
post interest
Capex
Free Cash Flow

FY14
FY15
11,750
12,122
(1,184)
(1,755)
404
214
(3,619)
(3,575)
7,351
7,006
(1,465)
(1,617)

(1,228)
(869)

161

Subsidary/JV derived
Consolidated
FY14
FY15
FY14
FY15
1,441
1,918
13,191
14,040
202
200
(982)
(1,555)
362
510
766
724
(623)
(589)
(4,242)
(4,164)
1,382
2,039
8,733
9,045
(999)
(1,374)

1,714

(1,465)
727

390

(2,464)
(2,991)

(1,115)

(2,693)
(142)

551

599

(2,921)
4,430
(22)
(101)

(383)
6,623
(64)
(1,453)

(1,983)
(601)
(4)
-

(1,853)
186
(7)
-

(4,904)
3,829
(26)
(101)

(2,236)
6,809
(71)
(1,453)

4,307
(1,384)
2,923

5,106
(935)
4,171

(605)
(81)
(686)

179
(156)
23

3,702
(1,465)
2,237

5,285
(1,091)
4,194

Source: Company annual report, Edelweiss research

Chart 1: Cash flow chart

8.0

6.8

4.0

0.0

Payables

OCF

0.0

Inventories

2.0

Receivables

2.0

( 3.0 )

8.7

0.6
3.8

OCF

9.0

Payables

4.0

6.0

Inventories

6.0

( 2.5 )

Cash profit
after tax

0.6

( 0.1 )

(INR bn)

( 2.7 )

Cash profit
after tax

(INR bn)

8.0

FY14 cash flow analysis

10.0

Receivables

FY15 cash flow analysis

10.0

Source: Company annual report, Edelweiss research

Despite lower profitability growth during FY15 (6% YoY PBT growth), the company reported
robust 43% YoY growth in operating cash flows (post interest and preference dividend),
primarily led by inventories which rose by INR142mn in FY15 versus INR3.0bn in FY14.
149

Edelweiss Securities Limited

Zee Entertainment Enterprises


Table 4: Earnings to cash conversion analysis
Particulars
Operating cash flow post interest (A)
Profit after tax (PAT)
Depreciation
Other income
PAT + Depreciation - Other income (B)
Earnings to cash conversion ratio (A/B*100)

FY10
6,770
6,344
285
1,220
5,410
125

FY11
5,662
6,369
289
882
5,776
98

FY12
4,068
5,891
323
1,384
4,830
84

FY13
3,837
7,196
399
1,461
6,134
63

FY14
3,703
8,820
501
1,807
7,514
49

(INR mn)
FY15
5,285
8,322
673
2,278
6,717
79

Source: Company annual report, Edelweiss research

Chart 2: Earnings to cash conversion ratio (%)


130
110

(%)

90

Earnings to cash conversion ratio


improved led by lower movie
rights acquisition and
amortisation policy.

70
50
30
FY10

FY11

FY12

FY13

FY14

FY15

Earnings to cash conversion ratio


Source: Company annual report, Edelweiss research

Earnings to cash flow conversion improved in FY15 after declining in past 5 years, mainly
due to lower acquisition of movie rights. The improvement was also owing to the companys
accounting policy of amortisation of inventory over 60 months, thus creating a mismatch in
profitability and cash flows.

Table 5: Average cash conversion cycle (days)


Particulars
Inventory days*
Trade Receivable days
Trade Payable days
Cash conversion cycle

FY13
195
87
(95)
188

FY14
204
79
(90)
193

FY15
202
77
(79)
200

Source: Company annual report, Edelweiss research


* Inventory days is calculated excluding subscription management cost

Cash conversion cycle rose primarily due to the decline in payable days. Trade payables fell
from INR5.1bn in FY14 to INR4.2bn in FY15.
Total inventories stood at INR11.9bn in FY15 versus INR11.7bn in FY14 and includes rights
worth INR1.5bn (FY14: INR1.2bn), which will commence at future date.

150

Edelweiss Securities Limited

Annual Report Analysis


Table 6: Accounting policy for inventory and film distribution
S.No
1
2

FY14
FY15
Film rights are amortised on a straight-line basis over the licensed period or 60 months from the commencement of rights,
whichever is shorter.
Film produced and/ or acquired for distribution:

Film produced and/ or acquired for distribution:

a) Theatrical rights: 70% of allocated cost is amortised over three


months of theatrical release of films and balance 30% in subsequent
three quarters.
b) Satellite rights, music rights, home video rights etc.:
Allocated cost of each right is expensed on sale and amortised on
exploitation as per 1 above.
c) Negative rights: 90% of the cost is allocated and amortised as per
(a) and (b) above and 10% of the cost is allocated to Intellectual
Property Rights (IPR) and amortised over subsequent five years.

a) Theatrical rights: Cost is amortised immediately


on theatrical release.
b) Satellite rights and other rights: Allocated cost of
each right is expensed immediately on sale.

Source: Company annual report, Edelweiss research

Investments, loans and advances


Table 7: Investments and loans
Particulars

In FY5, Zee invested in Poseidon


opportunities fund, a Bermuda
based entity

Investments in global funds,


NCDs and other (non-related
party) loans continue to be high

Total exposure to investments,


loans/ advances increased in
FY15 by INR2.7bn to INR15.5bn,
44% of adjusted net worth

Investment in domestic/ overseas


Socrates money market fund
First Global Wealth Ltd
Globex Fund Ltd
Birla Sun Life Cash Plus
Poseidon Opportunities Fund Ltd
Total (A)

FY13 Change
YoY

FY14 Change
YoY

(INR mn)
FY15

633
954
981
350
2,918

(602)
1,287
96
(350)
431

31
2,241
1,077
3,349

(31)
(2,241)
(1,077)
3,775
426

3,775
3,775

1,250
237
420
1,907

1,250
237
420
1,907

(237)
(237)

1,250
420
1,670

Loan and advances:


Loans to related parties
Inter-corporate deposits (ICD's)
Other advances
Total (C)

88
1,750
3,361
5,199

(44)
1,700
695
2,351

44
3,450
4,056
7,550

411
800
1,254
2,465

455
4,250
5,310
10,015

Total (A+B+C)
As % of adjusted net worth

8,117
21

4,689

12,806
47

2,654

15,460
44

Other investments/ loans:


CP/ CD's
Others
Total (D)

4,347
625
4,972

(2,347)
100
(2,247)

2,000
725
2,725

1,245
1,245

3,245
725
3,970

13,089

2,442

15,531

3,899

19,430

Investment in NCDs (Domestic):


17% unrated subordinate NCDs of
SGGD Projects Development Pvt. Ltd.
18% NCDs of Parsvanath Developers
Morpheus Media Fund.
Total (B)

Total (A+B+C+D)

Source: Company annual report, Edelweiss research

151

Edelweiss Securities Limited

Zee Entertainment Enterprises

Average yield on cash and


investments stood at robust
8.0%-9.1% and other income
constituted 14-16% of PBT in
past 3 years

Table 8: Yield on investments and other income


Particulars
FY13
Income from investments
1,132
Total cash and cash equivalents
14,331
Average yield on investments (%)
8.5
Total other income
Other income as % of PBT

(INR mn)
FY15
1,626
19,207
9.1

FY14
1,232
16,502
8.0

1,461
13.9

1,807
13.7

2,278
16.2

Source: Company annual report, Edelweiss research

Capital allocation analysis

FY11
30.1
8.2
27.3
18.4
25.0
31.5
8.1
0.0
3.7
31.0
0.0
31.0
0.0

FY12
30.4
7.4
24.3
18.0
25.9
33.0
9.2
0.2
3.3
34.4
0.0
34.4
0.0

FY13
37.0
9.5
25.8
19.6
28.9
37.3
9.9
0.1
3.7
39.1
0.0
39.1
0.0

FY14
44.2
12.0
27.2
26.6
30.8
39.8
10.7
1.0
4.1
27.2
20.2
47.4
0.7

(INR bn)
FY15
48.8
12.5
25.7
26.6
27.5
34.9
11.4
0.9
4.3
35.3
20.2
55.5
0.6

* adjusted for preference shares

45.0

60.0

36.0

48.0

27.0

36.0

18.0

24.0

9.0

12.0

0.0

FY11

FY12

FY13

FY14

FY15

Capital employed ex-loans/investments

Loans and investments

ROCE (%) - ex loans/ investments

ROE (%) - adjusted

(INR bn)

Chart 3: Capital allocation chart

(%)

Significant portion of capital


deployed in various
loans/advances and nonoperating investments, leads to
lower RoCE at consolidated level

Table 9: Capital allocation


Particulars
Sales
EBITDA
EBITDA margin (%)
ROE (%) - adjusted*
ROCE (%)
ROCE (%) - ex loans/ investments
Net fixed assets (Ex CWIP)
CWIP
Fixed asset turnover ratio (x)
Equity (A)
Debt (incl Pref. shares)* (B)
Total capital employed (A+B)
Adjusted D/E Ratio (x)

0.0

Source: Company annual report, Edelweiss research

152

Edelweiss Securities Limited

Annual Report Analysis


Table 10: Capital employed analysis
Particulars
Loans and investments
Goodwill
Total
As % of capital employed

FY11
11.1
6.1
17.2
55.5

FY12
11.4
6.9
18.3
53.1

FY13
13.1
7.1
20.2
51.6

FY14
15.5
7.6
23.2
48.8

(INR bn)
FY15
19.4
7.9
27.3
49.2

Source: Company annual report, Edelweiss research

49% of the capital employed represents goodwill, loans and non-operating investments.

Table 11: Major subsidiaries performance


Subsidiary company
Asia Today
Taj TV Mauritius
Taj Television (I) Private
Zee Entertainment Middle East FZ-LLC
Zee TV South Africa (Proprietary) Ltd.
Zee Multimedia Worldwide (Mauritius)
Others
Total
PAT Margin (%)

(INR mn)

% shareholding
as on FY15
Networth
100
7,457
100
247
100
270
100
100
51-100

(251)
4,464
1,432
13,619

FY14
Turnover
6,455
7,152
571
58
86
5,586
19,908

PAT Networth
665
8,788
268
68
71
767
460
(44)
(381)
75
4,754
231
883
1,266
15,339
6.4

FY15
Turnover
6,311
5,080
2,071
1,717
45
3,437
18,661

PAT
960
(186)
498
129
(161)
79
(190)
1,129
6.1

Source: Company annual report, Edelweiss research

On an aggregate basis, subsidiaries performance continues to be stable although declined


marginally in FY15.

Contingent liabilities and commitments

Contingent liabilities rose


primarily on account of increase
in disputed income tax demands

Commitments to media content


and license fees rose significantly
to INR34.6bn

Table 12: Contingent liabilities and commitments


Particulars
Corporate Guarantees:-For subsidiaries, loans outstanding
-For other related parties, loans outstanding
Indirect taxes
Direct Taxes
Claims against the company not acknowledged
as debts
Total
As % of adjusted net worth
Capital and other commitments
Particulars
Towards media content and license fees
Estimated amount of contracts remaining to be
executed
Uncalled liability on investments
Total

FY14

(INR mn)
FY15

12,366
1,396
492
3,684

11,049
791
539
6,474

624
18,562
68

631
19,484
55

FY14
19,568

FY15
34,555

155
404
20,127

394
392
35,341

Source: Company annual report, Edelweiss research

153

Edelweiss Securities Limited

Zee Entertainment Enterprises


Other commitments to media content and license fees for broadcasting rose significantly in
FY15 to INR34.6bn versus INR19.6bn in FY14. Commitments majorly rose at subsidiaries
level with standalone media content commitments at INR8.4bn versus INR3.0bn in FY14.

Related party transactions


Table 13: Related party transactions (other than joint ventures/ associates)
P&L transactions
FY14
FY15
Balance sheet exposure
Revenue from operations (largely
Investments
Dish TV, Siti Cable)
680
1,758
Receivables
Other income
76
107
Loans/ advances
Total (A)
756
1,865
Total (A)
As % of total sales
1.7
3.8
Payables
Purchase of media content and
Loans/ advances received
services (Largely Zee Media Corp)
2,150
2,279
Total (B)
Other expenses, reimbursements
199
306
Total (B)
2,349
2,585
Net exposure (A-B)
As % of total operating expenses
8.3
8.1
As % of adjusted networth

FY14
2
576
44
622.0

(INR mn)
FY15
3
749
455
1,207.0

(522)
(522)

(459)
(22)
(481)

100
0.4

726
2.1

Source: Company annual report, Edelweiss research

Revenue from related parties rose to INR1.9bn in FY15, largely led by sales to Dish TV at
INR1.2bn (FY14: INR560mn) and Siti Cable at INR491mn (FY14: INR41mn).
Operating costs include media content purchased from Zee Media Corp. worth INR1.2bn
(FY14: INR1.2bn), Dish TV at INR203mn, Siti Cable at INR315mn and Essel Corporate
Resources P.Ltd. at INR294mn.

154

Edelweiss Securities Limited

Annual Report Analysis


Table 14: Summary Financials
Particulars
Sales
Total income
EBITDA
EBITDA margin (%)
RoE (%)
RoCE (%)
Depreciation
Financial costs
Net profit
Equity shareholders' funds
Adjusted* equity shareholders' funds
Loan funds
Net Debt/ (Cash)
Adjusted* Net Debt/ (Cash)
Net fixed assets
CWIP
Current assets loans and advances
Current liabilities and provisions
Net current assets
Cash and cash equivalent
Cash flow from operating activities
Cash flow from investing activities
Cash flow from financing activities
Net cash flows
CAPEX
Working capital investments

FY11
30,088
30,970
8,220
27
18
25
289
88
6,369
30,982
30,982
17
(10,180)
(10,180)
8,098
8
28,457
7,670
20,787
10,197
5,725
(4,989)
(2,951)
(2,215)
(376)
886

FY12
30,405
31,789
7,395
24
18
26
323
50
5,891
34,354
34,354
21
(10,586)
(10,586)
9,199
201
31,011
8,592
22,419
10,607
4,078
(164)
(4,488)
(574)
(797)
(1,612)

FY13
36,996
38,457
9,543
26
20
29
399
86
7,196
39,115
39,115
28
(12,553)
(12,553)
9,906
69
37,009
11,099
25,910
12,581
3,867
452
(2,287)
2,032
(709)
(2,348)

FY14
44,217
46,024
12,043
27
21
31
501
158
8,921
47,377
27,207
29
(10,964)
9,206
10,733
997
42,116
12,203
29,913
10,993
3,830
(2,059)
(1,444)
327
(1,465)
(4,904)

(INR mn)
FY15
48,837
51,115
12,538
26
19
27
673
103
9,775
55,498
35,306
22
(15,634)
4,558
11,376
878
49,802
13,776
36,026
15,656
6,809
(3,661)
(3,427)
(279)
(1,091)
(2,236)

Source: Company annual report, Edelweiss research


* adjusted for preference shares

155

Edelweiss Securities Limited

ANALYSIS BEYOND CONSENSUS


THE NEW ABC OF RESEARCH
Reliance Industries | Annual Report Analysis

Reliance Industries (RIL) FY15 annual report analysis highlights


improvement in EBITDA margin by 200bps YoY. Gross debt rose 16% YoY
to INR1,609bn due to highest-ever capex spend of INR1.0tn during FY15.
Interest cost declined from INR39bn to INR33bn, though including interest
capitalised, rose by INR21bn to INR77bn in FY15. RIL capitalised MTM
forex losses of INR68.7bn (FY14: INR106.8bn). Average yield on cash and
investments of INR838bn stood at 9.4% and adjusted borrowing cost
(including interest and forex capitalised) at 9.7%. Use of lower cost forex
loans, superior treasury yields coupled with accounting policy of exchange
rate capitalisation led to superior reported profits. Other income
contributed 28% of PBT (FY14: 31%). As per our estimate, since FY06,
cumulative forex losses capitalised and revalued assets (without
corresponding revaluation reserve) net of depreciation stood at INR479bn,
22% of net worth. This, alongwith significant capex, led to subdued RoE
and RoCE over the years, as 44% of RILs capital employed is under CWIP.
Management guided for improvement in return ratios and decline in capex
spend since major projects are nearing commissioning operations.
Outstanding currency and oil derivative position increased significantly
during FY15.

Market Data
52-week range (INR)

: 1,132 / 796

Share in issue (mn)

: 3,235.7

M cap (INR bn/USD mn)

: 2,838 / 44,514

Avg. Daily Vol. BSE/NSE (000) : 3,714

Shareholding Pattern (%)

Promoters*

: 45.2

MFs, FIs & Banks

: 12.6

FIIs

: 18.8

Others

: 23.4

*Promoters pledged shares


(% of share in issue)

: NIL

Whats on track?
Refining and petchem segments EBIT margins and return on net assets have improved
over past 3 years. Retail segment delivered robust performance. Oil & gas segment
margins and returns have however declined over the years.
Consolidated RoCE (ex-telecom) improved marginally YoY, however other nonoperational business ventures remained a drag on consolidated RoE/RoCE. Most
upcoming projects are on track and expected to commence operations during
FY16/Q1FY17, which will lead to improvement in return ratios.

What needs tracking?


Interest cost capitalised rose to INR44.1bn in FY15 (FY14: INR17.6bn) and RIL continued
capitalisation of forex losses (INR68.7bn in FY15) as per amended AS-11.
Operating cash flow post interest dipped from INR376.4bn in FY14 to INR282.3bn on
account of decline in trade and other payables by INR27.5bn versus increase of
INR143.4bn in FY14.
Receivable days have been declining over the years from 17 days in FY12 to 7 in FY15.
Receivables fell to INR53bn in FY15 versus INR94bn last year. Payable days stood at 70 in
FY15 (FY14: 53 days) and outstanding payables stood at INR594bn (FY14: INR608.6bn).
Analysis beyond Consensus (ABC) is our initiative to provide a differentiated perspective to our clients
on various non-routine and intricate issues. This unit of research works independent of the sector/stock
research team and views expressed in this report may vary with that of respective sector/stock analyst.
Edelweiss research is also available on www.edelresearch.com,
1 First Call, Reuters and Factset.
Bloomberg EDEL <GO>, Thomson

June 01, 2015


Edelweiss Securities Limited

Annual Report Analysis


Contingent liabilities rose significantly during FY15 to INR322bn (15% of net worth) versus
INR165bn in FY14 (8% of net worth), primarily led by increase in guarantees issued
(including letter of credits LCs) from INR96bn in FY14 to INR280bn in FY15.
Cash utilised for capex in FY15 was INR630bn versus INR1.0tn capex, which could be due to
increase in creditors for capex which may come for payment in FY16 and likely to increase
net debt.
Derivatives exposure rose substantially owing to the increase in forward contracts (from
INR767bn in FY14 to INR959bn) and interest rate swaps (from INR337bn in FY14 to
INR700bn). Commodity derivatives exposure for petroleum products rose 2.7x YoY to
158,095kbbl and feedstock purchase contracts rose 2x YoY to 308,711kbbl. Since FY13,
commodity derivatives have increased 3x.
Related party transactions stood at INR66.4bn in FY15 (FY14: INR69.8bn), largely pertaining
to raw material purchase, fuel and power cost, hire charges and sales/distribution expenses.
Total outstanding exposure (investments, loans/advances net of payables) stood at INR67bn,
and including guarantees of INR14.3bn, stood at INR81bn, 3.7% of net worth (FY14:
INR78bn 3.9%).

Other highlights

FY15 capex stood at INR1.0tn on account of expansion in refining, petrochemical,


telecom and shale gas businesses. Total telecom assets rose by INR405bn to INR826bn.

RIL acquired control of Network18 Media & Investments (including its subsidiary TV18
Broadcast) via Independent Media Trust (IMT), of which RIL is the sole beneficiary.
Since acquisition, Network18s revenues stood at INR27.5bn and EBIT at INR1.4bn.

Goodwill on consolidation, as on FY15, stood at INR44bn, 2% of net worth (FY14: Nil)


which we believe could pertain to acquisition of controlling stake in Network18 group.

RIL provided INR14bn towards liability related to dismantling and abandonment of


facilities based on estimated future expenditure. Liability pertains to blocks at Tapti
Part B facilities, D1D3 and MA fields.

Key highlights from MD&A

Efforts by RIL to provide 4G services across the country is gathering momentum. During
the year, based on acquisition of additional spectrum, RIL emerged as the largest
holder of liberalised spectrum in India.

The company was successful in acquiring rights to use spectrum in 800 MHz or 1800
MHz bands or both in 13 key circles across India. With this, Reliance Jio Infocomm (RJIL)
has spectrum in either 800 MHz or 1800 MHz or both in 20 out of 22 circles in the
country. This is in addition to the pan-India spectrum in the 2300 MHz band.

Refining business delivered record EBIT of INR158.3bn and GRM of USD8.6/bbl.

Over 300 fuel retailing outlets were commissioned, with plans to re-commission the
entire network of 1,400 outlets by end of FY16. RILs focus is to ensure consistent and
superior customer experience through several technology-enabled initiatives.

US shale business recorded strong operational performance. In CY14, gross joint


venture (JV) production averaged ~1.2bn cubic feet equivalent per day (BCFe/d),

157

Edelweiss Securities Limited

Reliance Industries
implying 26% YoY growth. The business delivered EBIT of USD402mn, an increase of
36.3% YoY.

Retail business, over past five years, has sustained its growth momentum growing at
31% CAGR to generate record revenues of INR176.4bn. RIL also enhanced its presence
with 2,621 stores (12.5mn sq ft) spread across 200 cities. Net store addition in FY15
stood at 930, at almost 18 new stores every week.

Profitability analysis
Table 1: Standalone versus consolidated profitability
Particulars
Sales
Raw Materials Consumed
Other Exp.
Personnel cost
EBITDA
Depreciation
EBIT
Financial Charges
EBT
Other Income
PBT

FY14
3,901
3,302
256
34
309
88
221
32
189
89
278

Standalone
%
FY15
100.0 3,291
84.7 2,651
6.6
287
0.9
37
7.9
316
2.3
85
5.7
231
0.8
24
4.8
207
2.3
87
7.1
295

(INR bn)
%
100.0
80.6
8.7
1.1
9.6
2.6
7.0
0.7
6.3
2.7
9.0

Subsidiary (Derived)
Consolidated
FY14
%
FY15
%
FY14
%
FY15
%
443 100.0
464 100.0 4,345 100.0 3,754 100.0
328
73.9
290
62.5 3,630
83.6 2,940
78.3
54
12.3
91
19.5
311
7.2
378
10.1
22
5.0
26
5.6
56
1.3
63
1.7
8.8
58
12.4
348
8.0
374
10.0
39
24
5.4
31
6.6
112
2.6
115
3.1
15
3.4
27
5.8
236
5.4
258
6.9
6
1.4
9
2.0
38
0.9
33
0.9
198
4.5
225
6.0
2.0
18
3.8
9
1
0.1
(1)
(0.2)
90
2.1
86
2.3
9
2.1
16
3.6
288
6.6
311
8.3
Source: Company annual report, Edelweiss research

Revenues declined 14% YoY to INR3.8tn in FY15, impacted by the sharp dip in
crude oil prices in second half of the year. EBITDA, however, rose by 7% YoY and
EBITDA margins expanded by 200bps.

Interest cost declined to INR33bn, though adjusted for interest capitalised worth
INR44.1bn (FY14: INR17.6bn), rose 38% YoY to INR77.3bn versus INR55.9bn in
FY14.

Depreciation capitalised and not included in P&L stood at INR2.5bn in FY15 (FY14:
INR1.9bn).

Forex loss capitalised during the year stood at INR68.7bn, 22% of PBT. As per our
estimates, cumulative forex losses (net of depreciation) worth INR294.7bn is
capitalised in fixed assets, constituting 13.5% of net worth as detailed below:

Table 2: Forex loss capitalized


Particulars
Exchange Gain/Loss for the year included in cost of assets
Addl depreciation on exchange fluctuation *
Net exchange fluctuation carried in value of assets
As % of net worth

FY05-09 FY10
105.7 (53.1)
2.2
6.5
104.0
44.4
3.2

FY11
(0.4)
4.2
39.8
2.6

FY12
79.2
6.8
112.2
6.6

FY13
59.5
12.0
159.7
8.8

FY14
106.8
17.9
248.6
12.5

(INR bn)
FY15 Total
68.7 366.3
22.6
72.1
294.7
13.5

Source: Company annual report, Edelweiss research

158

Edelweiss Securities Limited

Annual Report Analysis


Subsidiaries performance
Table 3: Major subsidiaries profitability analysis
Subsidiary company
% shareholding
as on FY15
Telecom segment entities:
Reliance Jio Infocomm Ltd.
98.9
Reliance Jio Infocomm Pte. Ltd.
98.9
Reliance Jio Infocomm USA Inc.
98.9
Retail segment entities:
Reliance Retail Ventures Ltd.
Reliance Retail Ltd. (Formerly Reliance
Fresh Ltd.)
Shale gas/oil entities:
Reliance Eagleford Upstream LLC
Reliance Eagleford Upstream Holding LP
Reliance Eagleford Midstream LLC
Reliance Marcellus LLC
Reliance Marcellus II LLC
Others
RIL USA Inc
Reliance World Trade Pvt Ltd.
Reliance Commercial Land &
Infrastructure Ltd.
Reliance Universal Enterprises Ltd.
Reliance Corporate IT Park Ltd.
Reliance Holdings USA Inc.
Reliance Aromatics & Petrochemicals
Pvt Ltd.
Reliance Chemicals Ltd.
Reliance Polyolefins Ltd.
Reliance Ventures Ltd.
Reliance Eminent Trading & Commerical
Pvt Ltd.
Reliance Progressive Traders Pvt Ltd.
Reliance Prolific Traders Pvt Ltd.
Reliance Strategic Investments Ltd.
Reliance Industrial Investments &
Holdings Ltd.
Recron (Malaysia) Sdn Bhd
Gapco Kenya Ltd.
Others
Total

(INR bn)
FY14
Networth

Turnover

FY15
PAT Networth

Turnover

PAT

230.4
1.3
0.2

0.0
-

(0.1)
(0.0)
(0.0)

300.7
4.1
1.0

0.0
0.0
-

(0.2)
(0.1)
(0.1)

94.5
94.4

60.0
52.5

127.5

(0.0)
2.7

60.0
51.9

162.0

(0.0)
2.7

100
100
100
100
100

14.1
38.6
6.1
8.1
4.6

40.1
2.3
3.4

(0.0)
10.7
2.0
(1.5)
(1.0)

14.4
55.6
5.0
8.0
3.9

49.0
3.1
8.9
4.1

(0.0)
16.2
2.5
(8.9)
(15.0)

100
100
100

0.6
61.3
41.7

266.9
0.0

0.5
0.0

1.8
61.3
41.7

176.4
0.0

1.1
(0.0)
(0.0)

100
100
100
100

34.2
28.6
32.4
27.1

0.0
40.4
0.0

0.0
0.1
(2.9)
(0.0)

34.2
28.2
27.6
27.1

0.0
67.6
0.0

(0.0)
0.1
(5.4)
-

100
100
100
100

26.1
26.0
24.3
20.6

0.0
0.3
1.6
0.0

0.0
0.6
(0.1)

26.0
26.0
25.9
21.5

0.0
0.6
2.6
0.0

(0.0)
0.0
1.6
(0.1)

100
100
100
100

17.4
14.4
11.9
12.2

0.0
0.0
0.5
9.6

(0.2)
0.1
0.2
0.1

19.2
14.3
12.6
12.5

0.0
0.0
2.5
11.0

(0.3)
(0.2)
0.7
0.0

100
76

15.4
5.1
64.9
880.1

67.1
98.8
127.2
785.8

(1.6)
0.0
(0.4)
9.2

11.2
5.4
64.2
965.2

65.8
128.6
67.2
749.5

(2.7)
0.4
0.0
(7.4)

Source: Company annual report, Edelweiss research

Aggregate profitability of subsidiaries fell from INR9.2bn profit to INR7.4bn loss. Reliance
Retail and Reliance Eagleford Midstream (shale gas business) performed well, however
losses in Reliance Marcellus (shale gas) and Reliance Holdings, USA, increased.

159

Edelweiss Securities Limited

Reliance Industries
Cash flow analysis
Table 4: Cash flows analysis

(INR bn)

Standalone
FY14
FY15
Profit before tax
278.2
294.7
Non-operating expense
(29.2)
(49.0)
Non-cash adjustments
88.1
84.9
Direct taxes paid
(60.7)
(60.8)
Cash profit after tax
276.5
269.7
Changes in trade and other receivables
4.1
54.6
Changes in inventories
(2.0)
63.8
Changes in trade and other payables
143.1
(35.3)
(Increase)/ Decrease in working capital
145.2
83.2
Net cash from operating activities
421.6
352.9
Interest expenses paid
(40.5)
(33.7)
Net cash from operating activities post interest
381.1
319.2
Capital expenditure
(324.0)
(426.3)
Free cash flows
57.1
(107.2)
Particulars

Subsidiary (derived)
Consolidated
FY14
FY15
FY14
FY15
9.4
16.5
287.6
311.2
14.6
13.2
(14.6)
(35.9)
23.3
29.8
111.4
114.7
(1.5)
(3.5)
(62.1)
(64.4)
45.8
55.9
322.3
325.6
(23.3)
(43.7)
(19.1)
11.0
(11.9)
(29.1)
(14.0)
34.7
0.3
7.7
143.4
(27.5)
(34.9)
(65.0)
110.3
18.2
11.0
(9.1)
432.6
343.8
(15.7)
(27.8)
(56.2)
(61.5)
(4.7)
(36.9)
376.4
282.3
(275.4)
(203.3)
(599.4)
(629.6)
(280.1)
(240.2)
(223.0)
(347.4)

Source: Company annual report, Edelweiss research

Operating cash flow post interest declined 25% YoY to INR282.3bn, primarily on account of
the dip in trade payables by INR27.5bn (versus increase of INR143.4bn last year). Inventories
and receivables dropped YoY and aided working capital (versus decline in FY14).
Capex rose substantially during the year by INR1.0tn as per annual report. However, cash
flow statement reflected INR630bn as cash payments towards capex. We believe remaining
INR370bn cost, could come for payment in FY16 and may increase net debt to that extent.
Other payables, under current liabilities, jumped from INR113bn to INR325bn, which could
partly be due to creditors for capex.

Cash conversion cycle has


continued to show improvement
over the years, though partly led
by increase in payable days.
RIL enjoys better cash conversion
cycle compared to peers supported
by lower receivable days and
higher payable days, though
impacted by higher inventory days.

Table 5: Average cash conversion cycle (days) *


Standalone
Particulars
FY13
FY14
FY15
Inventory days
45
45
51
Add: Trade Receivable days
15
11
8
Less: Trade Payable days
(50)
(55)
(72)
Cash conversion cycle
11
1
(13)

Consolidated
FY13
FY14
FY15
53
53
63
12
8
7
(47)
(53)
(70)
18
8
1

Source: Company annual report, Edelweiss research


* Recevable days are calculated on sales while inventory and payable days are on COGS.

Inventory days stood higher at 63, though offset by the increase in payable days from 53 to
70. Receivable days continued to decline and receivables during FY15 stood at INR53bn
(versus INR94bn last year). Trade payables stood at INR594bn (FY14: INR608.6bn).

Table 6: Average cash conversion cycle (days) Global peers


Oil & Gas global peers
Particulars
Inventory days
Add: Trade Receivable days
Less: Trade Payable days
Cash conversion cycle

CY12
30
27
(34)
24

BP
CY13
32
27
(33)
26
160

CY14
28
25
(31)
23

Exxon Mobil
CY12 CY13 CY14
18
20
22
24
24
21
(41)
(41)
(38)
1
2
5

CY12
28
35
(40)
22

Shell
CY13
29
32
(40)
21

CY14
25
29
(38)
17

CY12
13
34
(50)
(3)

Chevron
CY13
14
35
(52)
(3)

Edelweiss Securities Limited

CY14
16
35
(53)
(2)

Annual Report Analysis


Petrochemical global peers
Particulars
Inventory days
Add: Trade Receivable days
Less: Trade Payable days
Cash conversion cycle

Dow Chemical
CY12 CY13 CY14
17
18
17
9
9
8
(10)
(10)
(10)
15
16
16

CY12
17
13
(8)
22

BASF
CY13
18
14
(9)
23

Valero Energy
Petroleos Mexicanos
CY14 CY12 CY13 CY14 CY12 CY13 CY14
19
5
5
5
6
7
6
14
6
6
6
9
8
7
(9)
(7)
(8)
(7)
(7)
(10)
(13)
24
3
3
4
8
5
1
Source: Bloomberg, Company annual report, Edelweiss research

Capital allocation
Table 7: Capital allocation
Particulars
Sales
EBITDA
EBITDA margin (%)
ROE (%)
ROCE (%)
ROCE (%) - ex telecom
Net fixed assets (Ex CWIP)
CWIP
Fixed asset turnover ratio (Ex CWIP)
Equity shareholders' funds (A)
Loan funds (B)
Total capital employed (A+B)
Debt Equity Ratio

Significant capex and expansion


plans led to decline in asset
turnover and RoE/RoCE, as 44% of
capital employed is under CWIP

FY11
2,658
380
14.3
13.1
11.9
11.9
1,597
282
1.7
1,541
841
2,382
0.5

FY12
3,585
345
9.6
12.2
11.3
11.3
1,388
254
2.6
1,694
924
2,619
0.5

FY13
3,971
330
8.3
11.9
10.8
10.8
1,335
500
3.0
1,821
1,072
2,893
0.6

FY14
4,345
348
8.0
11.8
10.4
11.2
1,414
915
3.1
1,987
1,388
3,374
0.7

(INR bn)
FY15
3,754
374
10.0
11.3
9.6
11.6
1,565
1,665
2.4
2,185
1,609
3,794
0.7

Source: Company annual report, Edelweiss research

FY15 witnessed significant increase in net fixed assets and CWIP by INR150bn and INR750bn,
respectively. CWIP included Intangibles under development, which rose by INR174bn.

RoE and RoCE remain subdued,


though ex-telecom assets the
ratios have marginally improved on
YoY basis

Significant capex of INR1.0tn (USD16bn) was on account of expansion projects in


petrochemical and refining businesses (Jamnagar, Dahej and Hazira), US shale business and
RJIL , the telecom business.
Assets of telecom venture, RJIL, increased by INR405bn in FY15, leading to total outstanding
assets of INR826bn as at end FY15. Total debt pertaining to RJIL rose from INR148bn in FY14
to INR223bn in FY15.

Edelweiss Securities Limited

Reliance Industries
Chart 1: Capital allocation
15.0

3,500

11.0

3,000

9.0

2,500

7.0

2,000

(%)

13.0

5.0

(INR bn)

4,000

1,500
FY11
FY12
FY13
Total capital employed (A+B)
ROCE (%)

FY14
FY15
EBITDA margin (%)
ROCE (%) - ex telecom

Source: Company annual report, Edelweiss research

Significant amount of forex losses capitalised in cost of fixed assets and revaluation of assets
(cumulatively 22% of net worth) has led to subdued RoE and RoCE over the years.

Table 8: Segment margins and return on net assets (%)

Refining EBIT margins and RONA


improved over past 3 years, while
oil & gas segment margins
declined.

35% of capital employed in refining


and petrochemical business
generates superior returns.

Particulars
EBIT Margins:
Refining
Petrochemical
Oil&Gas
Retail
Others
Return on Net Assets (RONA):
Refining
Petrochemical
Oil&Gas
Retail
Proportion of capital employed:
Refining
Petrochemical
Oil&Gas
Retail
Telecom*
Others and unallocable (including
surplus cash and investments)

FY13

FY14

FY15

3.5
8.2
33.3
#
2.3

3.3
8.7
26.3
0.8
15.1

4.7
9.3
28.1
2.4
10.1

18.1
18.6
8.2
#

19.8
18.7
5.0
4.0

19.8
17.6
4.7
6.9

22
14
16
-

19
14
18
2
-

23
12
18
2
13

48

48

33

Source: Company annual report, Edelweiss research


* Estimate

162

Edelweiss Securities Limited

Annual Report Analysis


Investments and Borrowings analysis
Table 9: Other income, as a % of PBT
Particulars
FY11
Other Income
25.4
PBT
240.5
Other Income as a % of PBT
11

FY12
61.9
254.1
24

FY13
78.7
262.2
30

FY14
90.0
287.6
31

(INR bn)
FY15
86.1
311.1
28

Source: Company annual report, Edelweiss research

Other income contributes significant proportion of PBT although the proportion declined in
FY15 from 31% to 28%

Table 10: Average yield on investments


Particulars
Income from Investment
Cash & Bank
Current Investments
Non- current investments (Excl.
investment in associates)
Total
Average yield (%)

Average yield on investments


stood at 9.4%, while adjusted
borrowing cost stood at 9.7%

Table 11: Borrowings


Particulars
Total Debt
Avg Borrowing Cost (Charged to P/L) (%)
Avg Borrowing Cost (Incl interest and forex
loss capitalised) (%)
Difference

FY12
58.9

FY13
77.2

FY14
85.8

(INR bn)
FY15
83.4

407.3
271.7
71.5

504.6
288.7
94.8

379.8
344.6
220.1

125.5
510.1
202.6

750.5
9.5

888.1
9.4

944.5
9.4

838.2
9.4

FY12
924.5
3.3

FY13
1,072.2
3.5

FY14
1,387.6
3.1

13.6
10.3

10.7
7.3

13.2
10.1

(INR bn)
FY15
1,608.6
2.2
9.7
7.5

Source: Company annual report, Edelweiss research

Average borrowing cost charged to P&L fell to 2.2%, and adjusted for interest and forex loss
capitalised, borrowing cost declined from 13.2% in FY14 to 9.7% which is due to lower MTM
forex loss during FY15 vs FY14.
Gross debt increased 16% YoY to INR1,609bn, of which INR364bn pertained to US shale gas
business, INR223bn towards telecom (RJIL) and balance towards standalone and other
businesses.

Forex and commodity derivatives


Table 12: Forex derivatives
Particulars
Interest Rate Swaps
Currency Swaps
Options (net)
Forward Contracts
Total

FY11
363
46
282
317
1,007

FY12
341
42
251
252
886

FY13
332
44
23
896
1,296

FY14
337
28
24
767
1,157

(INR bn)
FY15
700
24
65
959
1,748

Source: Company annual report, Edelweiss research


163

Edelweiss Securities Limited

Reliance Industries
Derivatives exposure jumped 51% YoY to INR1.75tn in FY15, primarily on account of the
increase in interest rate swaps and forward contracts.
Unhedged exposure rose 31% YoY at INR858bn in FY15, 39% of net worth versus INR656bn
in FY14, 33% of net worth.

Table 13: Commodity derivatives


FY10
FY11
FY12
FY13
FY15
FY14
Petroleum
Petroleum
Petroleum
Petroleum
Petroleum
Petroleum
Product Feedstock
Product Feedstock
Product Feedstock
Product Feedstock
Product Feedstock
Product Feedstock
Particulars
sales purchases
sales purchases
sales purchases
sales purchases
sales purchases
sales purchases
(in kbbl)
(in kbbl)
(in kbbl)
(in kbbl)
(in kbbl)
(in kbbl)
(in kbbl)
(in kbbl)
(in kbbl)
(in kbbl)
(in kbbl)
(in kbbl)
Forward swaps (net)
1,900
8,185
14,757
21,420
16,722
18,842
7,334
16,575
16,944
21,321
40,469
49,460
Futures
5,772
4,967
2,194
9,453
4,809
5,879
6,259
5,488
6,737
7,066
16,186
23,980
Spreads
10,306
32,141
33,768
51,227
25,193
81,337
44,900
50,366
35,456
86,016
89,290 104,653
Options (net)
1,800
12,175
0
1,800
2,720
8,875
0
23,895
0
36,550
12,150 130,618
Total
19,778
57,468
50,719
83,900
49,444 114,933
58,493
96,324
59,137 150,953 158,095 308,711
Margin hedging
72,700
79,308
81,869
85,168
105,627
88,508

Source: Company annual report, Edelweiss research

Commodity derivatives hedging increased significantly in FY15. Hedging contracts for


Petroleum products sales rose 2.7x YoY and feedstock contracts rose 2x YoY. Since FY13,
commodity derivatives contracts have risen nearly 3x.

Fixed assets and revaluation


Table 14: Assets revalued

(INR bn)

Particulars
Opening value of revalued assets
Add: Accreation on revaluation of assets
Depreciation charged through revaluation
reserve
Depreciation charged through General /
Capital reserve
Closing value of revalued assets carried in
the books
Closing value of revalued assets in excess of
revaluation reserve (A)
Networth (B)
Revalued assets (in excess of revaluation
reserve) as % of networth (A/B)

FY06
27.3
225.0
(14.6)

FY07
237.7
(20.0)

FY08
217.7
(17.8)

FY09
199.9
130.6
(20.2)

FY10
310.2
2.3
(30.4)

FY11
282.1
0.1
(26.4)

FY12
255.8
0.1
(23.5)

FY13
232.4
(20.8)

FY14
210.8
3.5
(11.6)

FY15
193.9
(0.2)

(0.8)

(8.8)

(0.9)

237.7

217.7

199.9

310.2

282.1

255.8

232.4

210.8

193.9

192.8

187.9

187.9

187.9

187.9

187.9

195.0

195.0

194.2

185.4

184.6

510.3
36.8

682.2
27.5

855.1
22.0

1,212.6
15.5

1,410.0
13.3

1,541.0
12.7

1,694.5
11.5

1,820.6
10.7

1,986.9
9.3

2,185.0
8.4

Source: Company annual report, Edelweiss research

RIL charged depreciation on revalued assets from general/capital reserves in past 3 years,
although in FY15 the amount was significantly lower than FY14. As per our estimates, assets
revalued since FY06 for which no revaluation reserves exist stood at INR184.6bn, 8.4% of
net worth.

164

Edelweiss Securities Limited

Annual Report Analysis


Related party transactions

Major related party transactions


include raw materials purchases
(RP Chemicals, Malaysia), fuel and
power costs (Reliance Utilities and
power) and sales, distribution and
hire charges (Reliance ports and
terminals).

Table 15: Major P&L transactions


Related party
Reliance Ports and Terminals
Gujarat Chemical Port Terminal Co
Reliance Industrial Infrastructure
Reliance Utilities
Reliance Europe
Reliance Utilities and Power
Reliance Gas Transportation Infrastructure
Reliance Commercial Dealers
RP Chemicals (Malaysia) Sdn. Bhd.
Total

FY11
28.0
0.5
0.5
6.3
0.2
2.9
6.5
-

FY12
28.4
0.8
0.4
7.7
0.3
3.7
2.4
-

FY13
31.9
0.7
0.7
0.4
13.3
2.0
2.6

45.0

43.6

51.5

FY14
32.6
1.1
0.7
0.3
14.7
1.9
2.7
15.8
69.8

(INR bn)
FY15
32.9
1.1
0.8
0.5
15.8
1.9
2.8
10.5
66.4

Source: Company annual report, Edelweiss research

Net outstanding exposure (investments, loans and advances) towards related parties stood
at INR67bn (FY14: INR63bn), and including guarantees of INR14.3bn stood at INR81bn, 3.7%
of net worth (FY14: INR78bn, 3.9%).

Table 16: Summary financials


Particulars
Sales
Total income
EBITDA
EBITDA margin (%)
RoE (%)
RoCE (%)
Depreciation
Financial costs
Net profit
Equity shareholders' funds
Loan funds
Net Debt
Net fixed assets (Ex CWIP)
CWIP
Current assets loans and advances
Current liabilities and provisions
Net current assets
Cash flow from operating activities
Cash flow from investing activities
Cash flow from financing activities
Net cash flows
CAPEX
Working capital investments

FY11
2,658
2,684
380
14.3
13.1
11.9
141
24
193
1,541
841
367
1,597
282
627
574
406
333
(320)
149
162
(336)
(10)

FY12
3,585
3,647
345
9.6
12.2
11.3
124
29
197
1,694
924
202
1,388
254
769
525
244
245
(63)
(76)
106
69
(67)

FY13
3,971
4,049
330
8.3
11.9
10.8
112
35
209
1,821
1,072
218
1,335
500
766
600
166
369
(277)
4
97
(286)
74

FY14
4,345
4,435
348
8.0
11.8
10.4
112
38
225
1,987
1,388
479
1,414
915
794
774
19
433
(731)
137
(161)
(599)
110

(INR bn)
FY15
3,754
3,840
374
10.0
11.3
9.6
115
33
236
2,185
1,609
792
1,565
1,665
730
985
(254)
344
(649)
84
(221)
(630)
18

Source: Company annual report, Edelweiss research

165

Edelweiss Securities Limited

ANALYSIS BEYOND CONSENSUS


THE NEW ABC OF RESEARCH
Apollo Hospitals | Annual Report Analysis

Apollo Hospitals Enterprises (AHEL) FY15 annual report highlights 12%


increase in revenue of healthcare segment (~62% of consolidated
revenue). Hospitals occupancy fell ~300bps to 68% (FY14: 71%) following
addition of new capacities in past 24 months. Pharmacy segments (~34%
of consolidated revenue) EBITDA margin remained unchanged at ~3.3%,
but EBIT margin declined to 2.2% (FY14: 2.5%) hit by higher depreciation
and loyalty discounts. Capital employed in pharmacy business increased
to INR5.3bn (FY14: INR3.3bn), while RoCE fell to 6.8% (FY14: 9.8%).
Related party purchases (medicines) jumped to ~INR5.8bn (FY14:
INR3.7bn, FY13: INR3.2bn), 33% (FY14: 27%) of pharmacy sales. AHLL
(standalone) clocked loss of INR272mn (FY14: INR327mn) for FY15 with
subsidiaries (in sugar clinics, cradle, poly clinics (Nova) businesses) also
incurring losses. AHEL infused INR1bn in AHLL during FY15, taking
cumulative cash exposure to ~INR2.1bn. AHEL has also given corporate
guarantee of INR 1bn on behalf of AHLL.

Whats on track?
Apollo Munich Health Insurances EBITDA and PAT improved to INR96mn (FY14: loss of
INR290mn) and INR7mn (FY14: loss of INR370mn), respectively.

Market Data

52-week range (INR)

: 1,515 / 1,022

Share in issue (mn)

: 139.1

M cap (INR bn/USD mn)

: 206 / 3,155

Avg. Daily Vol. BSE/NSE (000) : 218.2

Shareholding Pattern (%)

Promoters*

: 34.3

MFs, FIs & Banks

: 2.3

FIIs

: 43.8

Others

: 19.6

*Promoters pledged shares

: 21.9

(% of share in issue)

Revenue of Jayanagar and Vanagaram hospitals (launched in FY13) jumped to


INR1.32bn (FY14: INR0.47bn). These hospitals reported positive EBITDA of INR68mn.
Consequently, EBITDA loss from new hospitals declined to INR75mn (FY14: INR210mn).

What needs tracking?


Consolidated EBITDA margin declined 110bps to 14.2%, primarily impacted by increase
in revenue share of low-margin pharmacy business to 34% (FY14: 31%) and higher
losses in AHLL and its subsidiaries.
EBITDA margin of pharmacies (opened in FY11 and subsequent years) stood at a low
1%. Number of pharmacies opened since FY11 stood at 1,033 (~57% of total
pharmacies) and contribute merely 13% to pharmacy segments total EBITDA.
Pharmacies (opened till FY10) reported revenue growth of ~14% YoY, but EBITDA
margin increased only marginally to 5.1% (FY14: 4.8%), which management attributed
to impact of drug price control order and higher loyalty customer discounts.
Standalone and consolidated profitability stood higher by INR184mn, being one-off
profit on divestment of outpatient clinic business to Apollo Sugar Clinics, a step-down
subsidiary of AHLL.

Analysis beyond Consensus (ABC) is our initiative to provide a differentiated perspective to our clients
on various non-routine and intricate issues. This unit of research works independent of the sector/stock
research team and views expressed in this report may vary with that of respective sector/stock analyst.
Edelweiss research is also available on www.edelresearch.com,
1
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

October 8, 2015
Edelweiss Securities Limited

Annual Report Analysis


Occupancy of Hyderabad cluster declined 300bps to 63.4% due to dip in average length of
stay and sluggish in-patient growth at 1.6% (FY14: 3.4%).
Receivables overdue (>6 months) stood at INR 1bn (~16.5% of total receivables, FY14: 1.6bn).
Bad debts written off increased to INR259mn (~5.7% of PBT; FY14: INR179mn).

Other matters
During FY15, Alliance Medicorp (AHELs subsidiary with 51% stake) sold part of its stake in
subsidiary Alliance Dental Care (ADC). Consequently, AHEL ceased to consolidate ADC in its
financials. Since AHEL continues to hold its stake (FY14: ~23.8%, FY15: n.a.) in ADC, it
discloses it under investments with carrying value of INR178mn (FY14: nil) in consolidated
financials. AHEL has also given corporate guarantee of INR475mn on behalf of ADC.
Further, AHEL discloses ADC as an entity in which key managerial personnel or their relatives
are able to exercise significant influence.
Trademarks and concept rights (intangibles) addition during the year stood at INR274mn.
These include payments made to doctors in acquired Nova Specialty Hospitals and amount
paid for acquisition of Akeso Healthcare.
Corporate guarantees increased to INR1,505mn (INR475mn in FY14). This predominantly
includes comfort letters of INR1,020mn and INR450mn given on behalf of AHLL and Apollo
Rajshree Hospital, respectively.

Profitability and cash flow analysis


Table 1: Profitability analysis

(INR mn)

Particulars
FY14
Sales
38,616
Raw Materials Consumed
20,019
Gross margin
18,597
Operating and Administrative expense 6,357
Personnel cost
6,102
EBITDA
6,139
Depreciation
1,291
EBIT
4,848
Financial Charges
871
Other Income
175
Interest/dividend income #
49
PBT before exceptional items
4,202

Standalone
%
FY15
100.0 45,928
51.8 24,240
48.2 21,688
16.5
7,698
15.8
7,210
15.9
6,781
3.3
1,580
12.6
5,200
2.3
833
0.5
330
0.1
123
10.9
4,820

Subsidiary (Derived)
%
FY14
%
FY15
100.0 5,226 100.0 5,857
52.8 1,482
28.4 1,572
47.2 3,744
71.6 4,284
16.8 1,986
38.0 2,328
15.7 1,172
22.4 1,391
14.8
586
11.2
566
3.4
387
7.4
536
11.3
198
3.8
30
1.8
323
6.2
346
0.7
39
(0.2)
37
0.3
10.5
(86)
(2.6) (278)

%
FY14
100.0 43,842
26.8 21,501
73.2 22,341
39.7
8,342
23.7
7,274
9.7
6,724
9.2
1,678
0.5
5,046
5.9
1,194
(1.5)
215
(6.8) 4,067

Consolidated
%
FY15
100.0 51,785
49.0 25,812
51.0 25,973
19.0 10,026
16.6
8,600
15.3
7,347
3.8
2,117
11.5
5,230
2.7
1,179
0.5
368
9.3
4,419

%
100.0
49.8
50.2
19.4
16.6
14.2
4.1
10.1
2.3
0.7
8.5

Source: Company annual report, Edelweiss research


# Income from subsidiaries/associates

Other income (in standalone


and consolidated financials)
includes profit of INR184mn on
divestiture of outpatient
diabetics clinic business to
Apollo Sugar Clinics

Operating and administrative expenses include bad debts written off and donations, which
increased to INR259mn (FY14: INR179mn) and INR103mn (FY14: INR17mn), respectively.
Consolidated rent expenses spurted to ~INR1.7bn (FY14: ~INR1.3bn) following increase in
number of pharmacies and new hospitals coming up on leased premises.
Standalone depreciation charge stood higher by INR104mn due to revision in useful life in
accordance with the Companies Act 2013.

167

Edelweiss Securities Limited

Apollo Hospitals
Table 2: Segment profitability analysis (Consolidated)
Revenue
Particulars
FY13
FY14
Existing
25,545
28,312
New
28
531
Healthcare services
25,573
28,843
Standalone pharmacy
11,017
13,648
Apollo Munich insurance #
497
607
AHLL (incl. Cradle)
601
743
Total
37,688
43,841
Particulars
Existing
New
Healthcare services
Standalone pharmacy
Apollo Munich insurance
AHLL (incl. Cradle)
Total

(INR mn)
FY15
30,483
1,767
32,250
17,726
735
1,074
51,785

FY13
5,930
(54)
5,876
293
(1)
(86)
6,082

EBITDA
FY14
6,688
(210)
6,478
449
(30)
(172)
6,725

FY15
7,124
(75)
7,049
580
10
(292)
7,347

FY13
4,686
(65)
4,621
200
(10)
(152)
4,659

EBIT
FY14
5,330
(333)
4,997
343
(37)
(257)
5,046

FY15
5,574
(300)
5,274
390
2
(435)
5,231

Revenue composition (%)


FY13
FY14
FY15
67.8
64.6
58.9
0.1
1.2
3.4
67.9
65.8
62.3
29.2
31.1
34.2
1.3
1.4
1.4
1.6
1.7
2.1
100.0
100.0
100.0

FY13
23.2
(192.9)
23.0
2.7
(0.2)
(14.3)
16.1

EBITDA (%)
FY14
23.6
(39.5)
22.5
3.3
(4.9)
(23.1)
15.3

FY15
23.4
(4.2)
21.9
3.3
1.4
(27.2)
14.2

FY13
18.3
(232.1)
18.1
1.8
(2.0)
(25.3)
12.4

EBIT (%)
FY14
18.8
(62.7)
17.3
2.5
(6.1)
(34.6)
11.5

FY15
18.3
(17.0)
16.4
2.2
0.3
(40.5)
10.1

Source: Company annual report, Edelweiss research


Note:# AHELs share (10%) in revenue and profits is considered and presented in the above table.

Healthcare services
Existing hospitals revenues
surged 7.7%, while EBITDA
margin stood at ~23.5%

Addition of new hospitals coupled with maturity of hospitals opened in FY13, led to
revenues of new hospitals surging to INR1.8bn (FY14: INR0.5bn).
Revenues of Vanagaram and Jayanagar hospitals (opened in FY13) increased to INR1,320mn
(FY14: INR470mn). Other new hospitals (opened in FY14 and FY15) reported revenues of
INR440mn.
New hospitals reported EBITDA loss of INR75mn (FY14: INR210mn). While Vanagaram and
Jayanagar hospitals reported positive EBITDA of INR68mn, other newly opened hospitals
reported EBITDA loss of INR143mn.

Table 3: Healthcare services: Key operating parameters


Particulars
Owned Beds- (A)
Managed Beds- (B)
Total Beds- Year end (A+B)
Operating Beds- Year end
Capacity (bed days- in mn)
In-patient admissions
Average length of stay (A)
In-patient days (in mn)
Occupancy rate (%)
Average revenue per occupied bed per day (Rs)

FY11
5,842
2,875
8,717
4,767
1.74
265,000
4.79
1.27
73.0
18,474

FY12
5,888
2,338
8,226
5,153
1.88
281,000
4.78
1.34
71.4
20,455

FY13
6,382
2,038
8,420
5,549
2.03
313,000
4.65
1.46
71.9
21,724

FY14
6,684
1,933
8,617
5,811
2.12
332,000
4.54
1.51
71.1
23,684

FY15
7,207
2,008
9,215
6,321
2.31
354,000
4.43
1.57
68.0
25,381

Source: Company annual report, Edelweiss research

168

Edelweiss Securities Limited

Annual Report Analysis


Overall occupancy declined to 68% (FY14: 71%) due to lower occupancies in the newly
added hospitals (Chennai and others) and Hyderabad cluster (owing to decline in average
length of stay - ALOS).

Table 4: Cluster-wise operational performance


Particulars

Chennai cluster
FY13
FY14
FY15
1,237
1,264
1491
73.5
71.6
66.7

(INR mn)
Hyderabad cluster
FY13
FY14
FY15
930
930
930
66.2
67.5
63.4

FY13
1,416
72.0

Others
FY14
1,585
68.1

FY15
1821
63.4

Subsidiary/JV/Associate
FY13
FY14
FY15
1,966
2,032
2079
73.7
74.5
74.8

Operating beds
Bed occupancy
Volumes
Inpatient
72,608 75,931 81,920 49,362 51,048 51,877 71,988 78,757 87,834 1,19,390 1,25,942 1,31,916
Outpatient
3,28,991 3,51,195 3,81,931 1,43,806 1,52,495 1,61,717 1,94,244 2,31,102 2,57,174 3,94,486 3,97,826 4,43,370
Revenues
Inpatient
7,619
8,372
9,273
3,405
3,763
4,066
3,697
4,573
5,364 10,840 11,901 13,063
Outpatient
2,400
2,717
3,161
713
820
905
633
810
944
1,907
2,237
2,537
ARPOB / (INR/Day)
30,174 33,561 34,266 18,280 20,002 23,081 11,603 13,662 14,953 24,055 25,590 27,506
Inpatient ALOS
4.6
4.4
4.4
4.6
4.5
4.2
5.2
5.0
4.8
4.4
4.4
4.3
Growth- Volumes
Inpatient
N.A.
4.6%
7.9%
N.A.
3.4%
1.6%
N.A.
9.4%
11.5%
N.A.
5.5%
4.7%
Outpatient
N.A.
6.7%
8.8%
N.A.
6.0%
6.0%
N.A.
19.0%
11.3%
N.A.
0.8%
11.4%
Growth- ARPOB
N.A.
11.2%
2.1%
N.A.
9.4%
15.4%
N.A.
17.7%
9.4%
N.A.
6.4%
7.5%

Source: Company annual report, Edelweiss research


Note: Others include hospitals in Madurai, Trichy, Mysore, Vizag, Pune, Karimnagar, Bilaspur, Bhumneshwar and Jayanagar
ARPOB stands for Average revenue per occupied bed

ARPOB for Chennai cluster


grew 2.1% in FY15. However,
excluding impact of the 4
newly commissioned hospitals,
APROB for the cluster grew
11%

Occupancy of Hyderabad cluster fell by 400bps to 63.4% on decline in ALOS. In-patient


growth in the cluster stood at a low 3.4% and 1.6% for FY14 and FY15, respectively.
However, owing to greater focus on high-value cases and increased inflow of international
patients, ARPOB increased by ~15% to INR23k.
Occupancies of hospitals (grouped under others) declined by 450bps to 63.4%, mainly due
to low occupancy in newly commissioned hospitals.

Pharmacies
Pharmacy EBIT margins
declined to 2.2% (FY14: 2.5%)
owing to the steep increase in
depreciation to INR190mn
(FY14: INR106mn)

Pharmacies (standalone) revenues surged ~30%, led by 12% (net) increase in store count
and ~16% rise in revenue per store. EBITDA margins improved for stores opened till FY10,
but overall remained unchanged at ~3.3%.
Pharmacy loyalty discounts increased to INR495mn (FY14: INR271mn), representing 2.8%
(FY14: 2%) of pharmacy sales. Management highlighted the increase in discounts was led by
the new stores.
During FY15, 190 (net) stores were added, taking the total store count to 1,822. Stores (321)
acquired as part of the Hetero acquisition were integrated from Q1FY16, taking total store
count to over 2,100 during the quarter.

169

Edelweiss Securities Limited

Apollo Hospitals
Table 5: Pharmacies - Key operating parameters
Stores count
Particulars
FY13
FY14
FY15
Upto FY08 Batch
455
434
425
FY09 Batch
201
193
189
FY10 Batch
189
184
175
FY11 & onwards Batch
658
821
1,033
1,503
1,632
1,822
Upto FY08 Batch
FY09 Batch
FY10 Batch
FY11 & onwards Batch
Overall

N.A.
N.A.
N.A.
N.A.

N.A.
N.A.
N.A.
N.A.

N.A.
N.A.
N.A.
N.A.

(INR mn)
Revenue
FY13
FY14
FY15
4,700
5,047
5,653
1,763
1,974
2,319
1,491
1,680
1,916
3,063
4,942
7,749
11,017 13,644 17,637
Average revenue per store
10.3
11.6
13.3
8.8
10.2
12.3
7.9
9.1
11.0
4.7
6.0
7.5
7.3
8.4
9.7

EBITDA
FY13
FY14
FY15
250
286
332
42
58
87
43
70
88
(35)
26
77
301
441
583
EBITDA margins (%)
5.3
5.6
5.9
2.4
2.9
3.7
2.9
4.2
4.6
(1.2)
0.5
1.0
2.7
3.3
3.3

Source: Company annual report, Edelweiss research


Note: Due to rounding off, EBITDA presented above will not reconcile with EBITDA presented in Segment profitability analysis

While average revenue per store


surged ~20% for the stores
opened during FY09 and FY10, it
stood lower at ~14% for the
stores opened up to FY08

Pharmacy stores opened till FY08 stood at 425 and accounts for ~23% of total stores.
However, these stores contributed ~57% to total EBITDA of the segment.

Others
Apollo Munich Health Insurance (AHEL stake at 10.2%) reported 24% increase in gross
written premium to INR8.6bn. Its EBITDA and PAT improved to INR96mn (FY14: loss of
INR290mn) and INR7mn (FY14: Loss of INR370mn), respectively.

Table 6: Related party transactions


Particulars
Keimed Private Limited
Faber Sindoori Management Services
Apollo Sindoori Hotels Limited
Faber Sindoori Management Services
Other parties #
P. Obul Reddy & Sons
Remuneration paid
Total

Nature of transaction
Purchase of drugs & medicines
Biomedical Engineering Services
Catering Services
Housekeeping services
Purchase of drugs & medicines
n.a.
Remuneration

FY13
3,199
244
2
18
30
366
3,860

FY14
3,699
296
220
46
37
356
4,654

(INR mn)
FY15
4,828
480
460
60
992
54
352
7,226

# Keimed Private Limited has controlling interest in these parties


Source: Company annual report, Edelweiss research

Purchases of drugs & medicines


from Keimed and other related
parties increased by 57% to
INR5.8bn (FY14: INR 3.7bn)

Related party transactions (ex purchase of medicines and remuneration) increased to


~INR1.1bn (FY14: INR0.6bn).
Managerial remuneration stood at INR352mn (FY14: INR356mn), and represented ~7.2% of
PBT.

170

Edelweiss Securities Limited

Annual Report Analysis


Table 7: Key subsidiaries
Particulars
Apollo Rajshree Hospitals Pvt
Imperial Hospital & Research Centre
Samudra Healthcare Enterprise
Apollo Health and Lifestyle
Nova Speciality Hospitals *
Apollo Bangalore Cradle *
Apollo Sugar Clinics *

Aggregate losses of AHLL and its


subsidiaries stood at INR 467mn

Sanofi acquired 20% stake in


Apollo Sugar Clinics (ASC). ASC
plans to increase the number of
sugar clinics to 250 over next 5
years from the existing 26, as at
March15

(INR mn)
FY14
FY15
Business
% Holding Net Worth Revenue
PAT Revenue
PAT
Hospital-Indore
58
218
140
(96)
Hospital-Bengaluru
90
469
1,469
52
1,672
47
Hospital-Kakinada
100
228
280
3
283
5
Primary healthcare
100
447
1,149
(327)
1,664
(272)
Poly Clinics, diagnostic centres
100
(109)
205
(109)
Maternity services, chil care
81
134
151
(34)
226
(35)
Diabetes clinics
80
691
44
(51)
Source: Company annual report, Edelweiss research
* Subsidiary of Apollo health and lifestyle(AHLL)

During FY15, the company acquired 11 day care and short stay surgery centres from Nova
Specialty Hospitals. Of the 11 centers which were acquired, 2 have been remodeled as
Cradle, while the remaining 9 centers have been rebranded as Apollo Spectra Hospitals.
AHLLs consolidated losses at EBITDA and PAT level for FY14 stood at INR181mn (FY13:
INR95mn) and INR324mn (FY13: INR155mn) respectively. Consolidated revenue and
profitability of AHLL for FY15 is not available.
AHLL (standalone) losses declined to INR272mn (FY14: INR327mn). The company requires
continued financial support from AHEL to sustain its loss-making operations and fund its
growth plans (including acquisitions). AHEL infused INR1bn in AHLL during FY15, taking
cumulative cash exposure to INR2.1bn. Management highlighted that AHLL has plans to
raise money from private equity to fund its growth plans.

Table 8: Cash Flow Analysis

(INR mn)
Standalone
FY14

Particulars

Subsidiary (derived)
FY14
FY15

FY15
4,202
4,673
(135)
(119)
Profit before tax
683
592
343
(223)
Non-operating expense
1,452
1,796
433
591
Non-cash adjustments
(1,060)
(936)
(43)
(66)
Direct taxes paid
5,276
6,125
598
183
Cash profit after tax
(579)
(1,026)
(114)
(315)
Increase in trade/other receivables
(596)
(675)
(4)
(46)
Increase in inventories
724
714
(205)
595
Increase in trade payables
(1,794)
(1,246)
427
393
Change in Others
(2,246)
(2,234)
105
626
Increase in working capital
3,031
3,891
703
809
Net cash from operating activities
(871)
(833)
(333)
(343)
Interest expenses paid
Net cash from operating activities post interest
2,160
3,058
370
466
Capital expenditure
(5,373)
(6,847)
(585)
(1,807)
Free cash flows
(3,213)
(3,790)
(215)
(1,341)

Consolidated
FY14
4,067
1,026
1,885
(1,104)

FY15
4,554

369
2,387
(1,003)
5,874

(693)
(599)
519
(1,367)

6,308
(1,341)
(722)
1,308
(853)

(2,140)
3,734
(1,204)

(1,608)
4,699
(1,176)

2,530
(5,958)

3,524
(8,655)

(3,428)

(5,131)

Source: Company annual report, Edelweiss research

Operating cash flow improved YoY, but FCF stood negative at INR5.1bn in FY15 (FY14:
INR(3.4)bn) due to higher capex of INR8.7bn in FY15 (FY14:INR6bn).

171

Edelweiss Securities Limited

Apollo Hospitals

Cash conversion cycle remained


in the range of 32 to 35 days
during FY13-15

Table 9: Cash conversion cycle


Particulars
Inventory days
Receivable days
Payable days
Patient deposit & supplier advance days
Cash conversion cycle
Working cap. as % of sales

FY12
38
40
(53)
4
29
10.3

FY13
37
42
(47)
1
32
11.0

FY14
39
41
(47)
1
34
10.7

FY15
41
40
(49)
3
35
10.9

Source: Company annual report, Edelweiss research

Other advances (not considered in above cash conversion cycle) increased by 71% to
INR3.5bn (FY14: INR2.1bn).

Table 10: Cumulative cash generation and utilisation (consolidated; FY11-15)


Sources
Operating profit
Less: Interest
Less: Taxes
Add: Investment Income
Cash Profits
Working capital changes
Operating cash flow
Equity capital
Net borrowings
Others
Total

FY11
FY12
4,252
5,357
780
891
675
627
115
272
2,911
4,110
(1,042)
(873)
1,869
3,237
107
4,159
1,562 (1,446)
3,537
5,951

FY13
FY14
FY15
Total
6,256
6,978
7,311 30,153
1,033
1,204
1,176
5,084
927
1,104
1,003
4,336
283
98
113
880
4,579
4,769
5,245 21,613
(901) (2,140) (1,608) (6,565)
3,678
2,628
3,636 15,049
1,631
72
417
6,387
3,688
1,262
5,481 10,547
63
282
345
9,060
3,962
9,817 32,327

(INRmn)

Application
Capex
Dividend
Purchase of investment
Net increase in cash

Total

FY11
FY12
3,157 3,867
432
468
1,307 1,071
(1,359)
545

FY13
FY14
FY15
Total
6,600 5,958 8,655 28,237
557
765
800
3,022
1,071 (2,302) (670)
478
832
(459) 1,032
591

3,537

9,060

5,951

3,962

9,817

32,327

Source: Company annual report, Edelweiss research

AHEL incurred capex of INR28bn during FY11-15, which represented ~87% of the application
of funds primarily funded by operating cash flow, borrowings and equity.

Table 11: Contingent liabilities


Corporate guarantees increased
to INR1,505mn (versus
INR475mn in FY14).

Capital commitment increased


to INR10.5bn (FY14: INR10bn).

Particulars
Claims not acknowledged as debt
EPCG obligation
Indirect tax liabilities
Direct tax liabilities
Guarantees
Bank guarantees
Corporate guarantees

Standalone
FY14
FY15
438
592
1,525
922
130
121
337
395
2,430
2,031

(INR mn)
Consolidated
FY14
FY15
698
803
1,525
922
154
165
401
397
2,778
2,287

263
475
5,598

264
475
6,294

262
1,505
5,828

312
1,505
6,391

Source: Company annual report, Edelweiss research

172

Edelweiss Securities Limited

Annual Report Analysis


Table 12: Capital allocation
Particulars
Sales
EBITDA
EBITDA margin (%)
ROE (%)
ROCE (%)
Fixed asset turnover ratio
Working capital turnover ratio
Net fixed assets (Ex CWIP)
CWIP
Goodwill
Net current assets (Ex-Cash)
Equity shareholders' funds (A)
Loan funds (B)
Total capital employed (A+B)

FY11
26,054
4,190
16.1
10.4
18.8
n.a.
n.a.
14,619
3,610
677
1,616
18,989
9,574
28,563

FY12
31,475
5,131
16.3
10.0
20.2
1.9
16.5
18,762
2,093
1,350
2,195
25,068
8,167
33,235

FY13
37,687
6,082
16.1
11.6
20.7
1.9
15.2
21,953
4,034
1,453
2,762
27,468
12,132
39,600

FY14
43,842
6,724
15.3
11.1
19.1
1.9
13.0
25,313
4,913
1,499
3,965
29,767
13,444
43,210

(INR mn)
FY15
51,785
7,347
14.2
10.6
17.7
1.8
10.4
30,789
5,326
1,652
6,038
31,713
19,923
51,636

Source: Company annual report, Edelweiss research

Gross debt increased to ~INR20bn (FY14:INR13.5bn). Debt/equity ratio increased to 0.6x


(versus 0.45x in FY14).

Chart 1: Segment capital employed and RoNA


50,000

16.0
13.6

40,000

12.8

30,000

9.6

9.2
7.2

20,000
10,000

6.4

(%)

(INR mn)

11.5

3.2

0.0
FY14

FY15

Net Assets - Hospitals

Net Assets - Retail Pharmacy

RoNA - Hospitals

RoNA - Retail Pharmacy

Source: Company annual report, Edelweiss research


Note: Return on Net Assets (RoNA) computed on year-end net assets

Management highlighted RoCE of healthcare services (excluding new hospitals added in


FY14 and FY15) stood at ~20% (FY14: 20%). Capital employed in pharmacy business surged
to INR5.3bn (FY14: INR3.3bn), while its RoCE declined to 6.8% (FY14:9.8%).

173

Edelweiss Securities Limited

Apollo Hospitals
Table 13: Summary financials
Particulars
Sales
Total income
EBITDA
EBITDA margin (%)
RoCE
ROE
Depreciation
Financial costs
Net profit
Equity shareholders' funds
Loan funds
Net fixed assets (Ex-CWIP & Goodwill)
CWIP
Goodwill
Curr. assets loans & advances (Ex- cash & Liquid investment)
Current liabilities and provisions
Net current assets
Cash & Liquid investment
Cash flow from operating activities
Cash flow from investing activities
Cash flow from financing activities
Net cash flows
CAPEX
Working capital investments

FY11
26,054
26,202
4,190
16.1
18.8
10.4
948
778
1,839
18,989
9,574
14,619
3,610
677
5,848
4,232
1,616
2,940
2,588
(4,415)
467
(1,359)
3,157
1,042

FY12
31,475
31,734
5,131
16.3
20.2
10.0
1,239
891
2,193
25,068
8,167
18,762
2,093
1,350
7,036
4,842
2,195
3,588
3,871
(4,680)
1,354
545
3,867
873

FY13
37,687
38,052
6,082
16.1
20.7
11.6
1,423
1,033
3,044
27,468
12,132
21,953
4,034
1,453
8,759
5,997
2,762
6,988
4,428
(7,325)
3,730
832
6,600
901

FY14
43,842
44,057
6,724
15.3
19.1
11.1
1,678
1,194
3,167
29,767
13,444
25,313
4,913
1,499
10,712
6,748
3,965
4,296
3,734
(3,558)
(635)
(459)
5,958
2,140

(INR mn)
FY15
51,785
52,152
7,347
14.2
17.7
10.6
2,117
1,179
3,399
31,713
19,923
30,789
5,326
1,652
14,160
8,121
6,038
5,229
4,699
(7,591)
3,923
1,032
8,655
1,608

Source: Company annual report, Edelweiss research

174

Edelweiss Securities Limited

ANALYSIS BEYOND CONSENSUS


THE NEW ABC OF RESEARCH
Aurobindo Pharma | Annual Report Analysis

Aurobindo Pharmas (APL) FY15 annual report analysis highlights robust


revenue growth of 50% YoY (19% ex-acquisition) and PAT growth of 34%
YoY. Goodwill rose by INR4.6bn to INR5.3bn in FY15 (10% of networth) and
brands rose by INR1.8bn, primarily led by Natrol acquisition. Export
incentive receivables continued to rise with INR2.8bn outstanding as at
FY15 (FY14: INR2.2bn, cumulative export incentive income of past 4 years is
INR2.7bn). While operating cash flow (OCF) post interest improved YoY,
free cash flow including acquisitions stood negative. Cash conversion cycle,
ex-acquisitions rose from 178 days in FY14 to 194 days in FY15 (166 days
reported). Purchases from related parties stood at INR4.5bn, 8.1% of total
raw material cost in FY15 (FY14: INR3.1bn, 8.5%).

Whats on track?
Revenue jumped 50% YoY led by acquisition of Actavis and Natrol Groups. Organic
revenue growth was robust at 19% YoY.
Net unhedged payables continued to decline and stood at INR5.3bn, 10% of net worth in
FY15 (FY14: INR8.5bn, 23%; FY13: INR12.5bn, 48%) led by increasing forex receivables
being natural hedge against forex loans.

Market Data
52-week range (INR)

: 796 / 382

Share in issue (mn)

: 292.0

M cap (INR bn/USD mn)

: 228 / 3,507

Avg. Daily Vol. BSE/NSE (000) : 2,917.4

Shareholding Pattern (%)


Promoters*

: 53.9

MFs, FIs & Banks

: 6.3

FIIs

: 29.5

Others

: 10.3

*Promoters pledged shares

: 2.9

(% of share in issue)

What needs tracking?


Consolidated gross margin declined from 56% in FY14 to 55% in FY15 led by increase in
sale of traded goods (led by acquisitions) at INR26.1bn (FY14: INR1.8bn) wherein gross
margin was 36.8% and largely pertained to Actavis acquisition.
Consolidated EBTDA margin dipped 500bps YoY largely due to jump in operating
expenses by 340bps YoY and employee cost by 80bps. Operating expenses rose primarily
led by selling expenses, carriage expenses and legal & professional costs. Power cost,
however, remained flat at INR3.6bn and declined as proportion to revenue by 130bps.
OCF improved YoY partly led by robust profitability and partly due to lower pace of
increase in receivables (INR2.3bn in FY15 versus INR11.0bn in FY14). Free cash flow post
acquisitions turned negative and stood at INR(2.4)bn in FY15 (FY14: INR1.8bn).
Cumulatively, over the past 5 years, APLs capex spends were INR26.6bn versus OCF post
interest of INR24.5bn, leading to negative FCF of INR2.1bn.
Inventory days rose from 180 to 190 days (adjusted for acquisitions) and receivable days
from 95 to 109 days. Adjusted payable days rose from 97 to 105 days in FY15 cushioning
the cash conversion cycle.

Analysis beyond Consensus (ABC) is our initiative to provide a differentiated perspective to our clients
on various non-routine and intricate issues. This unit of research works independent of the sector/stock
research team and views expressed in this report may vary with that of respective sector/stock analyst.
Edelweiss research is also available on www.edelresearch.com,
1
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

August 19, 2015


Edelweiss Securities Limited

Annual Report Analysis


Other liabilities rose from INR1.7bn in FY14 to INR6.2bn FY15 largely pertaining to statutory
dues of Actavis group. This may result in additional cash outflow if payable in short term.
Trade payables pertaining to Actavis declined by INR7.0bn during FY15 (ex-Actavis trade
payables rose by INR2.2bn).
Intangibles rose by INR6.3bn FY14 to INR8.5bn (17% of net worth) in FY15 led by goodwill
and brands of INR4.6bn and INR1.8bn, respectively largely pertaining to Natrol. Goodwill is
tested annually for impairment, while brands are amortised over a period of 10 years.
Loans and advances rose by INR2.5bn to INR10.2bn in FY15 (FY14: INR7.7bn excluding
INR4.0bn advance for acquisition) which largely includes: (i) advances recoverable in cash or
in kind of INR2.2bn (FY14: INR1.2bn); (ii) MAT credit of INR2.6bn (FY14: INR2.5bn); (iii)
export incentives of INR1.8bn (FY14: INR1.4bn) and (iv) balance with government
authorities of INR1.7bn (FY14: INR1.2bn).
Borrowing cost declined from 8.6% in FY14 to 3.9% in FY15 led by decline in forex losses to
INR756mn in FY15 (FY14: INR2.0bn). While gross debt rose by INR6.8bn to INR44.5bn in
FY15 (D/E at 0.9x), cash and investments rose by INR3.1bn to INR4.9bn largely lying in
current account (INR4.3bn).

Profitability analysis
Table 1: Standalone versus consolidated profitability

(INR bn)

Standalone
%
FY15
100.0
81.0
49.0
37.8
51.0
43.2
16.8
14.0
7.2
6.7
27.0
22.5
2.6
2.5
24.4
20.1
4.1
1.3
20.3
18.7
1.1
0.7
21.4
19.4
4.9
4.2
16.5
15.2

Subsidiary (Derived)
Consolidated
FY14
%
FY15
%
FY14
%
FY15
%
9.9 100.0
40.3 100.0
81.0 100.0
121.2 100.0
1.2
12.4
17.3
42.9
36.1
44.5
55.1
45.4
8.7
87.6
23.0
57.1
44.9
55.5
66.1
54.6
3.6
36.8
13.5
33.5
15.6
19.2
27.5
22.7
29.1
6.3
15.7
8.0
9.9
13.0
10.7
2.9
2.1
21.7
3.1
7.8
21.3
26.3
25.6
21.2
1.3
12.8
0.9
2.2
3.1
3.9
3.3
2.7
0.9
8.9
2.3
5.6
18.2
22.5
22.3
18.4
3.1
3.8
1.6
1.3
2.2
0.3
0.7
0.2
0.7
6.7
2.0
4.9
15.1
18.7
20.7
17.1
(0.5)
(5.4)
0.3
0.7
0.2
0.3
1.0
0.8
0.1
1.3
2.3
5.7
15.3
18.9
21.7
17.9
3.6
4.5
6.0
4.9
0.2
1.6
1.7
4.3
(0.0)
(0.3)
0.5
1.4
11.7
14.4
15.7
13.0
Source: Company annual report, Edelweiss research

Particulars
Sales
Raw Materials Consumed
Gross margin
Operating & admin. Expenses
Personnel cost
EBITDA
Depreciation
EBIT
Financial Charges
EBT
Other Income
PBT before exceptional items
Tax expense
PAT

FY14
71.1
34.8
36.3
11.9
5.1
19.2
1.9
17.3
2.9
14.4
0.7
15.2
3.5
11.7

%
100.0
46.7
53.3
17.3
8.3
27.8
3.0
24.8
1.6
23.1
0.8
24.0
5.2
18.7

Revenue catapulted 50% YoY partly led by acquisition of Actavis and Natrol in FY15;
excluding which, organic revenue growth was 19% YoY. While Natrol was acquired and
consolidated effective December 2014, Actavis acquisition was w.e.f. April 1, 2014, for full
year.

176

Edelweiss Securities Limited

Aurobindo Pharma

Sale of traded goods rose during


FY15 largely led by Actavis
acquisition.

Table 2: Revenue and gross margin break up


(INR mn)
Particulars
FY14 Consolidated
FY15 Consolidated
Finished Traded
Finished Traded
Total
Total
goods
goods
goods
goods
78,327
1,761 80,088
94,002
26,135 120,137
Revenue (net of excise):
910
1,068
Others operating income
78,327
1,761 80,998
94,002
26,135 121,205
Net revenues
RM Cost
Gross profit
Gross margins (%)

34,274
44,054
56.2

1,787 36,060
(26) 44,938
(1.5)
56.1

38,530
55,472
59.0

16,526
9,610
36.8

55,056
66,149
55.1

Source: Company annual report, Edelweiss research

Traded goods gross margin stood at 36.8%, while finished goods gross margin improved
from 56% to 59% YoY.
Actavis and Natrol acquisition analysis
Actavis Groups aggregate revenue and profit stood at INR22.6bn and INR6.3bn, respectively,
with PAT margin at 28%. Natrol performance in FY15 was muted with revenue of INR1.9bn
and PAT margin of 4%.

APL acquired Western European


assets of Actavis at the beginning
of FY15 for INR2.5bn

Actavis group reported profits of


INR6.3bn as per disclosure in
annual report, however adjusted
for inter-company transactions,
Actavis group reported losses

As per Form AOC-1 subsidiary


disclosure, Actavis group and
related subsidiaries reported a loss
of INR557mn in FY15

Management indicated that the


group will turn PAT positive in
second year of acquisition i.e. FY16

Table 3: Actavis and Natrol acquisitions and profitability analysis


Particulars
Actavis Group
Acquisition cost
2,526
Net assets acquired
3,253
Goodwill/ (capital reserve)
(728)
Particulars
Income
Expenses
Net Profit (A)
Net Profit margins (%)

Actavis Group
22,574
16,271
6,302
27.9

(INR mn)
Natrol LLC
8,344
3,651
4,693
Natrol LLC
1,881
1,799
82
4.4

Source: Company annual report, Edelweiss research

Post acquisition, Actavis Groups trade payables declined by INR7.0bn and other liabilities at
consolidated level (largely statutory dues of Actavis) have gone up by INR4.5bn in FY15.

Table 4: Profitability of subsidiaries pertaining to Actavis operations


Name of the Company
Networth Turnover
Arrow Generiques SAS
1,507
9,011
Actavis France SAS
434
249
Actavis Management GmbH
4
Actavis Deutschland GmbH & Co., KG
1,002
5,834
Aurovitas Spain S.A.U. (formerly known as
619
1,815
Actavis Spain S.A.U.)
Actavis B.V.
7
2,962
Aurobindo Pharma (Portugal) Unipessoal Lda
(167)
208
Aurobindo Pharma (Italia) s.r.l.
109
1,270
Total
3,514
21,349

(INR mn)
PAT
(41)
(51)
0
280
4
(133)
(151)
(466)
(557)

Source: Company annual report, Edelweiss research

177

Edelweiss Securities Limited

Annual Report Analysis


Goodwill of INR4.6bn on Natrol acquisition was subject to revision, pending outcome of
legal case filed by APL against the erstwhile promoters pertaining to discrepancies in the
value of acquired assets. APL had sought monetary damages relating to this action.
Subsequently in April 2015, a settlement agreement has been reached wherein Plethico
group (erstwhile owners) would assign USD23.3mn in cash in milestone payments, certain
global IP rights and other assets. These adjustments would be reflected in FY16.

Table 5: Export incentive income / receivable analysis


Particulars
Export incentives - Income booked in P&L
% of export revenues

FY12
722
2.5

Cumulative outstanding amount


Export claims/ incentives receivable:
Long term
Short term
Total
% of net worth

(INR mn)
Cumulative
2,662

FY13
685
1.8

FY14
555
1.0

FY15
700
1.1

FY12

FY13

FY14

FY15

1,468
1,468
6.3

155
1,854
2,008
7.7

163
2,076
2,239
6.0

285
2,515
2,800
5.4

Source: Company annual report, Edelweiss research

Outstanding export claims/ incentives continued to rise and stood at INR2.8bn, 5.4% of net
worth. Cumulatively, over past 4 years, export incentive income of INR2.7bn was
outstanding and receivable as at FY15 end.

Table 6: Export incentive income / receivable analysis Peers #


(INR mn)
Particulars
APL
Cipla Lupin Sun Pharma* Cadila*
Export incentive income - Cumulative
2,662 3,513 3,782
*
*
from FY12-FY15
Export incentive receivable outstand. 2,800 1,448 1,254
681
276
Receivable as % of cumulative income
105
41
33
*
*
* Data for Sunpharma and Cadila is based on FY14 numbers. Export incentive income is not disclosed separately.
# Data for Dr.Reddys and Glenmark is not separately disclosed.

Table 7: Operating expense analysis


Particulars

(INR mn)

Revenue (excluding traded goods)

FY12
45,855

Power and fuel


Carriage Outward
Selling Expenses
Legal and Professional Fees
Registration, Filing and Licence Charges
Product destruction expenses/Stock written off
Consumption of stores and spare parts
Chemicals Consumed
Rates and taxes, excluding taxes on income
Others
Operating and admin expenses

2,324
1,349
373
469
106
212
672
818
110
3,706
10,138

%
100.0
5.1
2.9
0.8
1.0
0.2
0.5
1.5
1.8
0.2
8.1
22.1

FY13
58,434
3,247
1,752
880
508
600
357
665
824
122
4,448
13,403

Consolidated
%
FY14
100.0 79,921
5.6
3,498
3.0
2,336
1.5
798
0.9
684
1.0
738
0.6
521
1.1
841
1.4
956
0.2
465
7.6
4,739
22.9 15,577

%
100.0
4.4
2.9
1.0
0.9
0.9
0.7
1.1
1.2
0.6
5.9
19.5

FY15
95,522
3,596
4,611
3,609
2,217
1,452
574
1,234
1,222
1,083
7,892
27,490

%
100.0
3.8
4.8
3.8
2.3
1.5
0.6
1.3
1.3
1.1
8.3
28.8

Source: Company annual report, Edelweiss research


178

Edelweiss Securities Limited

Aurobindo Pharma
Selling, carriage expenses and legal & professional costs rose in past 4 years led by upswing
in revenue. However, FY15 saw a significant increase in these costs. Power and fuel costs
stood flattish in absolute terms YoY and declined as proportion to revenue.

Table 8: Power and fuel consumption data - Standalone


(INR/ Units mn)
Particulars
FY12
FY13
FY14
FY15*
Power and fuel cost as per P&L:
Cost in P&L - Standalone
2,266
3,163
3,357
3,401
Standalone revenue
42,815 54,251 71,107 80,951
As % of revenue
5.3
5.8
4.7
4.2
Power and fuel consumption data:
Units consumed - nos. in Million:
349
362
374
NA
Purchased
290
284
321
NA
Own generation
58
78
52
NA
Source: Company annual report, Edelweiss research

* FY15 data not available


Power and fuel cost stood flattish at INR3.4bn at the standalone level. Power units
consumption data is not available in FY15 as the new Companies Act does not require
consumption data disclosure. APL received power subsidy during FY15 of INR135.1mn
(FY14: INR4.4mn) which was recorded under other income as State Subsidy income.

Cash flow analysis


Table 9: Cash flow analysis

(INR bn)

Particulars
Profit before tax
Non-operating expense
Non-cash adjustments
Direct taxes paid
Cash profit after tax
(Increase)/Decrease in receivables
Adj for (Increase)/Decrease in bill discounted
(Increase)/Decrease in inventories
(Increase)/Decrease in other current assets
Increase/(Decrease) in trade payables
Increase/(Decrease) in other liabilities/ provision
(Increase)/Decrease in working capital
Net cash from operating activities
Interest expenses paid
Net cash from operating activities post interest
Capital expenditure
Free cash flows
Acquisitions/ investment in subsidiaries
Adjusted free cash flows

2.5
1.7
(3.4)
(12.9)
2.2
(2.8)
(0.5)
3.5
0.0

Standalone
FY14
FY15
15.2
19.4
1.3
2.5
(4.3)
16.0
18.9
(6.7)
0.1
(4.3)
(1.2)
(1.0)
0.2
(10.5)
(12.9)
5.5
6.0
(0.7)
(0.6)
4.8
5.4
(1.4)
(5.4)
3.4
0.0
(2.5)
(1.9)
0.9
(1.9)

(0.5)
1.5
(0.0)
1.8
(1.9)
(1.6)
(0.0)
0.4
1.5

Subsidiary (derived)
Consolidated
FY14
FY15
FY14
FY15
0.1
2.3
15.3
21.7
(0.6)
2.0
0.7
0.9
3.2
3.4
(0.7)
(3.4)
(5.0)
1.1
1.9
17.1
20.8
4.4
(11.0)
(2.3)
0.1
0.3
0.3
(1.4)
(4.4)
(5.7)
2.2
(0.5)
1.0
(4.0)
3.8
(5.1)
3.5
1.5
3.7
0.1
4.7
(10.3)
(8.2)
1.2
6.6
6.7
12.6
(0.2)
(0.1)
(0.9)
(0.7)
1.0
6.5
5.8
11.9
(2.4)
(2.0)
(3.7)
(7.5)
(1.4)
4.4
2.0
4.4
2.2
(4.9)
(0.2)
(6.9)
0.9
(0.5)
1.8
(2.4)
Source: Company annual report, Edelweiss research

PBT grew 41% YoY and OCF post interest doubled led by robust profitability and partly due
to lower pace of increase in receivables. FCF post acquisitions stood negative at INR2.4bn.

179

Edelweiss Securities Limited

Annual Report Analysis


APL acquired Actavis group for INR2.5bn and post acquisition trade payables declined by
INR7.0bn during FY15 which primarily led to decline in trade payables in cash flow
statement by INR5.1bn. Trade payables ex-Actavis rose by INR2.2bn in FY15.
During FY15, other liabilities rose to INR6.2bn from INR1.7bn in FY14, primarily led by
statutory dues pertaining to Actavis Group.

Table 10: Average cash conversion cycle (days)*

Inventory days
Receivable days
Payable days
Cash conversion cycle

FY12 FY13 FY14 FY15


179
97
(86)
191

173
88
(81)
181

180
95
(97)
178

170
93
(97)
166

FY15 (exacquisitions)
190
109
(105)
194

200
190

(Days)

Particulars

180
170
160
150
FY12

FY13

FY14

FY15

Cash conversion cycle (ex-acquisition)


Cash conversion cycle-reported
Source: Company annual report, Edelweiss research
* We have assumed gross margins for acquisitions same as consolidated gross margins for computing ex-acquisition cash conversion cycle

Cash conversion cycle improved YoY. However, adjusted for acquisitions, it deteriorated YoY
primarily led by inventory days.

Table 11: Average cash conversion cycle (days) Peer comparison


Dr Reddys
Summary
Cash conversion cycle
FY12 FY13 FY14 FY15
Receivable days
80
88
89
90
Inventory days
202
179
197
191
Payable days
(73) (72) (80) (67)
Cash Conversion cycle
209
194
206
214
Acceptances days
Adjusted Cash Conversion cycle
209
194
206
214
Summary
Cash conversion cycle
Receivable days
Inventory days
Payable days
Cash Conversion cycle
Acceptances days
Adjusted Cash Conversion cycle

FY12
76
198
(74)
200
200

Cipla
FY13 FY14
67
56
209
213
(75) (73)
201
196
201
196

FY15
55
248
(95)
208
208

FY12
68
290
(111)
248
248

SunPharma
FY13 FY14 FY15*
70
52
296
272
(115) (104)
251
220
1
252
220
-

FY12
78
158
(123)
113
24
137

Lupin
FY13 FY14
75
76
149
150
(113) (112)
110
115
19
17
130
132

FY12
58
167
(84)
141
141

Cadila
FY13 FY14
54
52
151
147
(67)
(80)
139
119
139
119

FY12
108
216
(173)
151
151

Glenmark
FY13 FY14 FY15*
105
116
161
153
(151) (173)
115
96
115
96
-

FY15
56
138
(90)
105
105

FY15
74
154
(115)
113
17
129

Note: * Detailed information is not available, as FY15 annual report is not yet released
Source: Company annual report, Edelweiss research

180

Edelweiss Securities Limited

Aurobindo Pharma
Receivables days for Aurobindo and Glenmark are highest within peers while inventory days
for Cipla and Sun Pharma are highest. Overall core working capital (receivables and
inventory) of Lupin and Cadila is lowest amongst peers.

Table 12: Cumulative cash flow generation and utilizationPast 5 years


Sources
FY11 FY12 FY13 FY14 FY15 Total
Operating profit (incl currency adj) 10.0 5.0 8.2 20.5 25.7 69.4
Less: Interest
0.5 0.8 1.1
0.9
0.7
4.0
Less: Taxes
2.0 0.4 1.2
3.4
5.0 12.0
Add: Investment Income
0.0 0.1 0.0
0.2
0.3
Cash Profits
7.6 3.8 5.9 16.2 20.2 53.7
Working capital changes
(4.7) (1.3) (4.2) (10.6) (8.4) (29.2)
Operating cash flow
2.9 2.6 1.6
5.6 11.8 24.5
Equity (ESOPs)
0.0 0.0
0.0
0.1
0.1
Net borrowings
5.0 2.3 2.9
2.7
3.4 16.2
Total
7.9 4.8 4.5
8.3 15.3 40.8

(INR bn)

Application
FY11 FY12 FY13 FY14 FY15 Total
Capex
7.1 5.7 2.7 3.7
7.5 26.6
Dividend
0.5 0.3 0.7 0.6
1.8
3.9
Acquisitions
(0.8) 4.2
6.9 10.3
Net cash/ investments 1.2 (1.2) 1.2 (0.3) (0.8) 0.1
(FDs, Mutual funds)

Total

7.9 4.8 4.5 8.3 15.3 40.8


Source: Company annual report, Edelweiss research

Chart 1: Sources and utilisation of funds

Utilisation

Sources

Net
borrowings
40%

Acquisition
s
25%
Operating
cash flow
60%

Dividend
10%

Net cash/
investment
s
0%

Capex
65%

Source: Company annual report, Edelweiss research

While OCF contributed 60% to overall cash generation, debt was 40%. APL utilised 65% of
funds for capex, 25% for acquisitions and 10% towards dividend.
Cumulatively, over the past 5 years, APL generated OCF post interest of INR24.5bn and
capex stood at INR26.6bn, leading to negative FCF of INR2.1bn.

Table 13: Cumulative free cash flow generation over past 5 years APL versus peers
Cumulative from FY11 to FY15
Particulars
Aurobindo
Cipla
Dr. Reddys
Cumulative Operating Cash Flow (A)
24.5
67.9
80.6
Cumulative Capex (B)
26.6
32.0
53.2
Free cash flow (A)-(B)
(2.1)
35.9
27.4
Capex as % of OCF (B/A*100)
108.7
47.1
66.0

(INR bn)
Cumulative from FY10 to FY14
Cadila#
Glenmark# Sun Pharma#
29.6
33.6
134.2
31.9
15.5
31.0
(2.2)
18.1
103.2
107.5
46.1
23.1

Source: Company annual report, Edelweiss research

181

Edelweiss Securities Limited

Annual Report Analysis


Capex spend for most peers stood in the range of 45-65% of OCF over previous 5 years while
for APL it was higher at 109%, however return ratios have been improving over last 5 years.

Table 14: Debt and borrowing cost analysis


Particulars

Borrowing cost declined in FY15


primarily led by lower forex losses

Interest cost
Forex loss/ (gains)
Total borrowing cost
Average borrowing cost (%)

Majority of APLs debt (>95%) is


denominated in foreign currency

Gross Debt
Cash and investments
Net debt

FY13

FY14

FY15

1,313
1,353
2,666
8.2

1,079
2,022
3,102
8.6

843
756
1,599
3.9

34,355
2,085
32,270

37,691
1,786
35,905

44,511
4,888
39,623

(INR mn)
Change
YoY (%)
(22)
(63)
(48)
(55)
18
174
10

Source: Company annual report, Edelweiss research

Gross debt rose by INR6.8bn, while cash rose by INR3.1bn partly led by acquisitions. Net
debt rose 10% YoY to INR39.6bn as at FY15. Cash and liquid investments of INR4.9bn include
INR4.3 lying in current account.

Unhedged forex payables


continued to decline over past 4
years led by increase in forex
receivables, acting as hedge for
forex loans

Table 15: Unhedged exposure


(INR bn)
Particulars
Mar-12 Mar-13 Mar-14 Mar-15 % change
Trade receivables
9.3
16.0
23.8
29.8
25.0
Loans and advances
1.1
0.9
0.9
0.4
(54.4)
Interest accrued but not due
(0.1)
(0.1)
(0.1)
(0.1)
(21.1)
Bank balances
0.0
1.0
0.1
0.3
Total (A)
10.3
17.8
24.7
30.4
23.3
Loans availed
26.9
26.7
29
32
12.0
Trade payables
1.7
3.6
4.6
3.7
(19.1)
Total (B)
28.6
30.3
33.2
35.7
7.7
Net unhedged forex payables (B-A)
18.3
12.5
8.5
5.3
(37.5)
Unhedged payables as % of net worth 78.3
48.0
22.8
10.3
Source: Company annual report, Edelweiss research

Contingent liabilities rose


marginally YoY to INR1,954mn as
at FY15 and largely include
guarantees and tax claims
Commitments rose to INR4.1bn
largely led by unexecuted contract
for capital commitments

Table 16: Contingent liabilities and commitments


Particulars
Outstanding bank guarantees
Claims - Direct taxes
Claims - Indirect taxes
Other claims
Bills discounted
Total
As % of net worth
Capital and other commitments

FY14
774
105
223
150
260.6
1,514
4.0

(INR mn)
FY15
723
309
772
150
1,954
3.8

1,682

4,135

Source: Company annual report, Edelweiss research

182

Edelweiss Securities Limited

Aurobindo Pharma
Table 17: Major related party transactions
Related party

(INR mn)
FY13
1,080
337
299
128
75
246
2,165
7.2

Pravesh Industries Pvt Ltd


Axis Clinicals Ltd*
Trident Chemphar Ltd
Cogent Glass Limited
Alex Merchant Pte. Limited
Trident Petrochemicals DMCC
Pranit Packaging Private Limited
Others
Total
As % of RM cost/ Sales

Purchases
FY14
1,389
390
558
384
100
243
3,063
8.5

FY15
1,589
308
1,203
447
309
156
122
321
4,455
8.1

Sales
FY14
0.5
892
0
26
918
1.1

FY13
0.4
219
61
280
0.5

FY15
0.2
77
555
25
658
0.5

Source: Company annual report, Edelweiss research


* Purchase of services

Purchases from related parties rose to INR4.5bn, 8.1% of total raw material cost in FY15,
while sales to these parties declined from INR918mn in FY14 to INR658mn in FY15.

RoE analyser
RoE analyser analysis profitability on the scale of operating and capital allocation efficiency
(detailed concept explained in Annexure A). We have analysed APLs profitability for FY14
and FY15, results and key findings of which are given below:

RoE marginally declined to 35.4%


in FY15 (FY14: 36.9%) led by
lower operating margin however
operating asset turnover
improved.
Return from leverage continues
to be higher at 15%.

Table 18: RoE analyser


Particulars
A. Return on net operating assets (RNOA)
(OPATO x NOPAT margin) (%)
OPATO (operating asset turnover) (x)
NOPAT margin (%)
B. Return from leverage (FLEV x spread) (%)
FLEV (financial leverage) (x)
NBC (net borrowing cost) (%)
Net financial spread (RNOA -NBC) (%)
C. Return from other funding (%)
ROE Derived (A+B+C) (%)

FY14

FY15
21.6

1.2
17.3

20.3
1.5
13.7

15.1
1.0
7.1
14.5

14.9
0.8
2.8
17.5

0.2
36.9

0.2
35.4

Source: Company annual report, Edelweiss research

183

Edelweiss Securities Limited

Annual Report Analysis


Chart 2: RoE Analyser
40.0
0.2

32.0
14.9

(%)

24.0

35.4

16.0
8.0
0.0

20.3

RNOA

Return from
leverage

Return from other


funding

ROAE

Source: Company annual report, Edelweiss research

Table 19: Summary financials

(INR mn)

Particulars
Sales
Total income
EBITDA
EBITDA margin (%)
ROE (%)
ROCE (%)
Depreciation
Financial costs
Net profit
Equity shareholders' funds
Loan funds
Net Debt
Net fixed assets
CWIP
Current assets loans and advances (Excl Cash
& liquid investment)
Current liabilities and provisions
Net current assets (Ex-Cash)
Cash and cash equivalent
Cash flow from operating activities
Cash flow from investing activities
Cash flow from financing activities
Net cash flows
CAPEX
Working capital investments

184

FY11
43,815
44,529
9,633
22.0
26.4
19.5
1,715
647
5,635
24,448
24,143
22,275
17,386
6,574

FY12
46,274
46,521
5,613
12.1
3.3
7.5
2,005
2,772
(1,235)
23,397
30,959
30,064
21,947
6,454

FY13
58,553
58,839
8,610
14.7
11.9
11.2
2,487
2,666
2,939
26,058
34,355
32,270
26,389
2,185

FY14
80,998
81,214
21,336
26.3
36.9
27.2
3,125
3,102
11,729
37,502
37,691
35,905
27,217
3,097

FY15
121,205
122,172
25,636
21.2
35.4
27.2
3,326
1,599
15,758
51,559
44,511
39,623
37,056
4,196

31,344

31,745

39,283

54,526

78,100

8,776
22,568
1,868
2,446
(5,697)
4,431
1,180
(5,137)
4,216

7,837
23,908
895
3,263
(5,632)
1,189
(1,181)
(5,666)
(1,283)

11,436
17,303
30,468
27,846
37,223
47,632
2,085
1,786
4,888
2,749
6,463
12,368
(2,463)
(8,187)
(14,085)
1,081
1,176
932
1,366
(548)
(785)
(2,676)
(3,741)
(7,459)
(4,216)
(10,574)
(8,417)
Source: Company annual report, Edelweiss research

Edelweiss Securities Limited

ANALYSIS BEYOND CONSENSUS


THE NEW ABC OF RESEARCH
Cipla | Annual Report Analysis

Ciplas FY15 annual report analysis highlights robust revenue growth of


12% YoY (partly led by subsidiaries) and 120bps YoY improvement in gross
margin. However, high cost structure weighed on EBITDA margin, which
declined 200bps YoY primarily led by employee costs. Return ratios have
declined over the past 2 years led by acquisitions and capex. OCF and free
cash flows slipped in FY15 led by higher inventories and receivables. In
FY15, South African subsidiaries (largely Medproacquired in FY14) turned
profitable versus a loss posted in FY14. Goodwill (related to Medpro and
other acquisitions) stood at INR25.6bn, 24% of net worth in FY15 (FY14:
INR24.9bn, 25%). Total exposure to subsidiaries/ JVs/ associates at the
standalone level (including investments, loans and net receivables) stood
at INR48.7bn, 44% of standalone net worth (FY14: INR39bn, 39%).

Whats on track?
Revenue growth remained robust in FY15 with standalone business growing 7% YoY.
Significant improvement in revenue of subsidiaries led to consolidated revenue growth of
12% YoY. Subsidiaries contribute 11% to consolidated revenue, which grew 69% YoY.

Market Data

52-week range (INR)

: 752 / 491

Share in issue (mn)

: 803.1

M cap (INR bn/USD mn)

: 510 / 7,663

Avg. Daily Vol. BSE/NSE (000) : 2,026.7

Shareholding Pattern (%)


Promoters*

: 36.8

MFs, FIs & Banks

: 16.0

FIIs

: 18.3

Others

: 28.9

*Promoters pledged shares

: Nil

(% of share in issue)

Medpro acquisition in FY14 helped Cipla strengthen its position in South Africa. During
FY15, South African subsidiaries turned profitable with INR818mn PAT versus INR41mn
loss in FY14 (as per sec129 (3) statement of subsidiaries).
On an aggregate, performance of subsidiaries improved and profit margin increased from
2.2% in FY14 to 4.9% in FY15, led by improvement in South African subsidiaries.

What needs tracking?


EBITDA margin dipped 200bps to 19% in FY15 primarily led by higher employee cost (up
200bps) and operating expenses (up 100bps). PBT margin further declined led by higher
depreciation and lower other income.
Employee cost included ESOP cost, which doubled YoY to INR510.7mn in FY15 (FY14:
INR223.6mn). No ESOPs were granted to executive directors in FY15.
OCF, post interest, declined by INR4.3bn in FY15 to INR10.1bn led by lower profitability,
increase in inventories & receivables, partially offset by INR5.6bn increase in payables.
Inventory days rose significantly to 248 days in FY15 (FY14: 213 days) leading to increase
in working capital cycle from 196 days to 208 days. Payable days rose from 73 in FY14 to
95 in FY15. Inventory days for Cipla and Sun Pharma are highest amongst peers.
Margins and RoE/RoCE have dipped in the past 2 years, led by acquisitions and capex.
Analysis beyond Consensus (ABC) is our initiative to provide a differentiated perspective to our clients
on various non-routine and intricate issues. This unit of research works independent of the sector/stock
research team and views expressed in this report may vary with that of respective sector/stock analyst.
Edelweiss research is also available on www.edelresearch.com,
1
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

August 25, 2015


Edelweiss Securities Limited

Annual Report Analysis


Total R&D expenditure stood at INR8.4bn, 7.4% of sales (FY14: INR5.2bn, 5.1% of sales). 15%
of R&D (INR1.2bn) was capitalised in FY15 (FY14: 1%).
Pending litigations/ claims included INR17.7bn pertaining to case pending since 2003 with
NPPA for overcharging of drugs. Cipla, based on legal advice, believes that no provision is
required as there is no probability of the demand materialising.
Net unhedged payables rose from INR1.3bn in FY14 to INR5.2bn in FY15, 4.8% of net worth,
largely due to increase in short-term forex loans. Overall derivatives position stood stable at
INR4.9bn in FY15 (net sell position) versus INR4.3bn in FY14.

Key highlights from MD&A

Cipla successfully launched generic drug Sofosbuvir in India for the treatment of
hepatitis-C under the brand name HepCvir.

South Africas (14% of consolidated revenue) manufacturing unit generated a profit


compared to a loss last year. This was on account of significantly improving utilisation,
improved efficiencies and cost control measures.

Europe business contributed 4% to overall revenue, declining 24% YoY. The drop was
driven by a one-off event in the previous year due to decline in partner based business
and some supply-related issues.

Cipla Europe NV inked a distribution agreement with Serum Institute of India (SII) to
market pediatric vaccines in Europe and expects to commence filings in the near future.

In Q4FY15, Teva Pharma announced FDA approval of the first generic equivalent to
Nexium in the US. Cipla is the supplier of the finished formulation to Teva.

Cipla manufactures metered dose inhalers (pMDIs), dry powder inhalers (DPIs), nasal
sprays, nebulisers and a range of inhalation accessory devices. The company has 5
manufacturing facilities dedicated to respiratory products and is currently the third
largest manufacturer of pMDIs in the world.

During the year, Cipla acquired 60% stake in Jay Precision Pharma, a leading respiratory
device manufacturer. As Cipla is targeting a strong entry in overseas markets, derisking
respiratory devices supply through backward integration is key to strengthen the
foundation.

Profitability analysis
Table 1: Standalone vs. consolidated profitability
Particulars
Sales
Raw Materials Consumed
Gross profit
Operating and Admn exps
Personnel cost
EBITDA
Depreciation
EBIT
Financial Charges
Other income
EBT

FY14
94,569
37,606
56,963
24,220
12,848
19,895
3,236
16,659
1,279
2,803
18,183

Standalone
%
FY15
100.0 101,318
39.8
39,811
60.2
61,507
25.6
26,838
13.6
15,056
21.0
19,613
3.4
4,332
17.6
15,281
1.4
1,361
3.0
1,479
19.2
15,400

(INR mn)
%
100.0
39.3
60.7
26.5
14.9
19.4
4.3
15.1
1.3
1.5
15.2

Subsidiary (Derived)
FY14
%
FY15
%
7,165 100.0 12,137 100.0
1,142
15.9
2,086
17.2
6,023
84.1 10,051
82.8
2,006
28.0
3,366
27.7
2,582
36.0
4,681
38.6
1,435
20.0
2,004
16.5
490
6.8
715
5.9
945
13.2
1,289
10.6
179
2.5
322
2.7
(149)
(2.1)
176
1.5
617
8.6
1,143
9.4

FY14
101,734
38,748
62,986
26,226
15,430
21,331
3,726
17,604
1,457
2,654
18,800

Consolidated
%
FY15
100.0 113,454
38.1
41,897
61.9
71,557
25.8
30,204
15.2
19,737
21.0
21,617
3.7
5,047
17.3
16,570
1.4
1,683
2.6
1,656
18.5
16,543

%
100.0
36.9
63.1
26.6
17.4
19.1
4.4
14.6
1.5
1.5
14.6

Source: Company annual report, Edelweiss research


186

Edelweiss Securities Limited

Cipla
Consolidated revenue grew 12% YoY led by robust 69% YoY surge in revenue of subsidiaries.
Standalone business grew 7% YoY. Gross margin expanded 120bps YoY; however, higher
employee cost and operating expenditure (largely marketing, sales promotions and
miscellaneous expenses) led to 200bps decline in EBITDA margin, which was further
aggravated by higher depreciation cost.
Depreciation increased 35% to INR5.04bn in FY15 (FY14: INR3.7bn) and employee cost
increased 28% to INR19.7bn in FY15 (FY14: INR15.4bn). Employee cost included ESOP cost,
which doubled YoY to INR510.7mn in FY15 (FY14: INR223.6mn). ESOPs were granted largely
to employees other than key managerial persons (KMPs). No ESOPs were granted to
executive directors in FY15.
Other income declined YoY from 2.6% of sales in FY14 to 1.5% in FY15, leading to further
lower PBT margin.

Major subsidiaries analysis


Table 2: Subsidiaries profitability
Subsidiary company
Medpro Pharmaceutica Proprietary Ltd.
Cipla Medpro South Africa (Pty) Ltd.
Cipla-Medpro Proprietary Ltd.
Cipla Life Sciences Proprietary Ltd.
Cipla Quality Chemical Industries Ltd.
Goldencross Pharma Pvt Ltd.
Al-Jabal For Drugs & Medical Appliances
Company Ltd.
Medispray Laboratories Pvt Ltd.
Jay Precision Pharmaceuticals Pvt Ltd.
Cipla Europe NV
Meditab Specialities Pvt Ltd.
Mabpharm Pvt Ltd.
Meditab Holdings Ltd.
Cipla (Mauritius) Ltd.
Others

(INR mn)
Currency
ZAR
ZAR
ZAR
ZAR
UGX
INR

Country
South Africa
South Africa
South Africa
South Africa
Uganda
India

YR
INR
INR
EUR
INR
INR
USD
USD

Yemen
India
India
Belgium
India
India
Mauritius
Mauritius

% shareholding
as on FY14
100
100
100
100
51
100
50
100
60
100
100
100
100
100
Total
Margin (%)

Networth
3,876
3,501
2,527
1,388
1,102
2,296

FY14
Turnover
16,389
1,086
603
220
2,899
2,502

823

670

219

280
1,179

291

(59)
(104)

4,306
28,967

(11)
(4)
293
639
2.2

3,352
86
2,272
22680

FY15
PAT
Networth Turnover
(89)
3,928
11,871
(599)
3,046
936
272
2,579
466
177
1,327
100
357
1,682
2,445
188
2,478
2,264
344
1,116
399
(240)
1,486
1,385
3,403
1,372
5,435
29740

1,179
1,094
778
575
532
8
5,057
27,305

PAT
418
(125)
290
70
704
184
261
292
172
(669)
98
(145)
(94)
33
(164)
1,326
4.9

Source: Company annual report, Edelweiss research

On an aggregate basis, financial performance of subsidiaries improved as the profit margin


increased from 2.2% in FY14 to 4.9% in FY15.
The improvement was majorly led by South African subsidiaries which reported profits in
FY15 versus losses in FY14. South Africa contributes 14% to total revenue and Cipla has 5%
market share in South Africa.
Goodwill on consolidation (towards Medpro acquisition) stood at INR25.6bn, 24% of net
worth, in FY15 (FY14: INR24.9bn, 25%).
Total exposure to subsidiaries/ JVs / associates (including investments, loans and net
receivables) stood at INR48.7bn in FY15, 44% of standalone net worth (FY14: INR39bn, 39%).

187

Edelweiss Securities Limited

Annual Report Analysis


Cash flow analysis
Table 3: Cash flow analysis

(INR bn)

Particulars
Profit before tax
Non-operating expense
Non-cash adjustments
Direct taxes paid
Cash profit after tax
(Increase)/Decrease in trade and other
receivables
(Increase)/Decrease in inventories
Increase/(Decrease) in trade payables and
other liabilities
(Increase)/Decrease in working capital
Net cash from operating activities
Interest expenses paid
Net cash from operating activities post interest
Less: Capex
Free Cash Flows

Standalone
FY14
18.2
0.2
1.1
3.5
4.4
(2.9)
(3.5)
19.1

FY15
15.4

17.4

Subsidiary (derived)
FY14
FY15
0.6
1.1
1.4
0.0
0.4
0.8
(0.2)
(0.4)
2.2
1.5

Consolidated
FY14
FY15
18.8
16.5
1.6
1.1
4.0
5.2
(3.1)
(3.9)
21.2
18.9

(1.8)

(5.0)

(0.7)

0.6

(2.5)

(4.4)

(1.7)

(7.8)

(0.1)

(0.5)

(1.7)

(8.3)

2.5

5.9

(3.9)

(0.3)

(1.4)

5.6

(0.9)
18.1
(1.0)
17.1
(5.0)
12.1

(6.9)
10.5
(1.4)
9.2
(5.2)
3.9

(4.7)
(0.3)
(5.6)
(7.2)
(2.5)
1.2
15.6
11.7
(0.2)
(0.3)
(1.2)
(1.7)
(2.7)
0.9
14.4
10.1
(0.7)
(1.0)
(5.7)
(6.3)
(3.3)
(0.1)
8.8
3.8
Source: Company annual report, Edelweiss research

OCF, post interest, declined to INR10.1bn in FY15 from INR14.4bn in FY14 primarily on
account of lower profitability and increase in inventories and receivables. Payables rose by
INR5.6bn, which supported cash flows.

Cash conversion cycle increased


led by higher inventory days.

Table 4: Average cash conversion cycle (days)


Particulars
FY12
Receivable days
76
Inventory days
198
Payable days
(74)
Cash conversion cycle
200

FY13
67
209
(75)
201

FY14
56
213
(73)
196

FY15
55
248
(95)
208

Source: Company annual report, Edelweiss research

Inventory days increased significantly to 248 days in FY15 from 213 days in FY14 leading to
higher cash conversion cycle of 208 days (FY14: 196 days) partially offset by an increase in
payable daysto 95 days in FY15 from 73 days in FY14.
Higher inventory days are for supporting distribution network due to front ends in various
markets, including emerging markets. Inventory is also used for in-house consumption.

Table 5: Average cash conversion cycle (days) Peer comparison Large cap companies

Summary
Cash conversion cycle
Receivable days
Inventory days
Payable days
Cash Conversion cycle
Acceptances days
Adjusted Cash Conversion cycle

Dr Reddys
FY12
80
202
(73)
209
209

FY13
88
179
(72)
194
194

FY14
89
197
(80)
206
206

FY15
90
191
(67)
214
214

SunPharma

Lupin

FY12 FY13 FY14 FY15*


68
70
52
290 296 272
(111) (115) (104)
248 251 220
1
248 252 220
-

FY12 FY13 FY14 FY15


78
75
76
74
158 149 150 154
(123) (113) (112) (115)
113 110 115 113
24
19
17
17
137 130 132 129

Source: Company annual report, Edelweiss research


188

Edelweiss Securities Limited

Cipla
Table 6: Average cash conversion cycle (days) Peer comparison Midcap companies

Summary

Cadila

Cash conversion cycle


Receivable days
Inventory days
Payable days
Cash Conversion cycle
Adjusted Cash Conversion cycle

FY12
58
167
(84)
141
141

FY13
54
151
(67)
139
139

FY14
52
147
(80)
119
119

Glenmark
FY15
56
138
(90)
105
105

Aurobindo

FY12 FY13 FY14 FY15*


108 105 116
216 161 153
(173) (151) (173)
151 115
96
151 115
96
-

FY12
97
179
(86)
191
191

FY13
88
173
(81)
181
181

FY14
95
180
(97)
178
178

FY15
93
170
(97)
166
166

Source: Company annual report, Edelweiss research


Note: * Detailed information is not available, as FY15 annual report is not yet released

Inventory days for Cipla and Sun Pharma are highest in industry, while receivables and
payable days are largely in line with peers, except in case of Glenmark wherein payable days
are significantly higher.

Inventory days are highest for


Cipla and Sunpharma.

Overall core working capital (receivables and inventory) of Lupin and Cadila is lowest
amongst peers.

Table 7: Fund flow analysis


Sources
Cash profit
Les s : Interes t
Les s : Ta xes
Cash Profits
Worki ng ca pi ta l cha nges
OCF, post interest
Net borrowi ngs
Inves tment a nd Mi s c Income
Total

(INR bn)
FY11
14.5
0.2
2.6
11.7
(1.6)
10.1
2.0
0.2
12.2

FY12
18.4
0.2
3.3
14.9
2.0
16.9
(5.4)
0.5
12.0

FY13 FY14 FY15


23.8 24.3 22.8
0.3
1.2
1.7
4.6
3.1
3.9
18.8 20.0 17.2
(5.2) (5.6) (7.2)
13.6 14.4 10.1
8.9
0.4
5.1
0.9
0.9
0.4
23.4 15.8 15.6

Total
103.9
3.6
17.6
82.7
(17.6)
65.1
11.0
3.0
79.0

Application
Ca pex
Acqui s i ti on
Di vi dend
Net ca s h a nd i nves tments

Total

FY11 FY12 FY13 FY14 FY15 Total


7.0
5.6
7.5
5.7
6.3 32.0
2.4
0.7 (1.4) 25.9 3.1 30.8
2.6 1.9
1.9
1.9 1.9 10.1
0.2
3.8 15.4 (17.6) 4.3
6.1

12.2

12.0

23.4

15.8 15.6

79.0

Source: Company annual report, Edelweiss research

Chart 1: Source of funds


Invst &
misc
Income
4%
Net
borrowings
14%

Chart 2: Application of funds


Net cash &
investment
8%
Dividend
13%

OCF, post
interest
82%

Capex
40%

Acquisition
39%
Source: Company annual report, Edelweiss research

82% of cash generation was through OCF while 40% cash was spent on capex and 39% on
acquisitions.
189

Edelweiss Securities Limited

Annual Report Analysis


Capital allocation analysis

FY13
83
22
26.5
18.5
23.7
36
4
12
90
10
100
0.1

FY14
102
21
21.0
14.6
19.0
65
4
32
101
12
113
0.1

(INR bn)
FY15
113
22
19.1
11.3
15.3
68
6
37
108
17
125
0.2

Source: Company annual report, Edelweiss research

Chart 3: Capital employed and RoE/ RoCE


40.0

140

33.0

124

26.0

108

19.0

92

12.0

76

5.0

FY11
EBITDA margin (%)

FY12

FY13
ROE (%)

FY14
ROCE (%)

FY15

(INR bn)

Net fixed assets include INR25bn


towards goodwill on acquisition
of Medpro in FY14.

FY12
70
17
23.6
16.0
19.9
32
4
21
76
0
77
0.0

(%)

EBITDA margins and RoE/RoCE


improved during FY12 and FY13
however declined significantly
over last 2 years primarily led by
acquisitions and capex.

Table 8: Capital employed and return ratios


Particulars
FY11
Sales
63
EBITDA
14
EBITDA margin (%)
21.7
ROE (%)
15.7
ROCE (%)
18.1
Net fixed assets (Ex CWIP incl goodwill)
31
CWIP
3
Net current assets (Ex-Cash)
28
Equity shareholders' funds (A)
67
Loan funds (B)
6
Total capital employed (A+B)
72
D/E
0.1

60

Total capital employed

Source: Company annual report, Edelweiss research

190

Edelweiss Securities Limited

Cipla

Contingent liabilities rose


primarily led by tax matters and
letter of credits (LCs)

Claims included pending case


with NPPA for INR17.7bn

Table 9: Contingent liabilities and commitments


Particulars
Contingent Liability:
Guarantees
Income Tax
Excise Duty/Service Tax
Letters of Credit
Others
Total
As a % of Networth
Commitments:
Capital commitments
Other commitments
Other claims:
Case pending with National Pharmaceutical
Pricing Authority (NPPA)
Case pending w.r.t Goa SEZ land
Total

FY14

(INR mn)
FY15

1,561
1,020
820
93
132
3,627
3.6

1,330
1,101
1,118
493
216
4,259
3.9

2,033
7,542

3,885
10,059

17,685

17,685

267
27,526

267
31,896

Source: Company annual report, Edelweiss research

Contingent liabilities rose from INR3.6bn in FY14 to INR4.3bn in FY15, 4% of net worth,
primarily led by guarantees, excise duty and sales tax matters. LCs rose from INR93mn in
FY14 to INR493mn in FY15.
Other claims included INR17.7bn pertaining to case pending since 2003 with NPPA for
overcharging of drugs. Cipla believes there is no probability of this demand materialising
and hence no provision is warranted.

Net unhedged payables rose to


INR5.2bn, 4.8% of net worth, led
by short-term forex loans

Table 10: Unhedged exposure


Particulars
Receivable
Payable
Short term borrowings
Net receivable/ (payable)
as % of net worth

FY12
4,171
3,795
376
0.5

FY13
4,102
4,011
91
0.1

FY14
3,279
4,579
(1,300)
1.3

(INR mn)
FY15
8,990
5,756
8,438
(5,204)
4.8

Source: Company annual report, Edelweiss research

Derivative position stood stable at INR4.9bn in FY15 (net sell position) versus INR4.3bn in
FY14.

191

Edelweiss Securities Limited

Annual Report Analysis


Table 11: Summary financials
Particulars
Sales
Total income
Gross Profit
Gross Margin (%)
EBITDA
EBITDA margin (%)
ROE (%)
ROCE (%)
Depreciation
Financial costs
Net profit
Equity shareholders' funds
Loan funds
Net fixed assets
Current assets loans and advances
Current liabilities and provisions
Net current assets
Cash and cash equivalents
Net debt
Cash flow from operating activities
Cash flow from investing activities
Cash flow from financing activities
Net cash flows
CAPEX
Working capital investments

FY11
63,238
64,155
35,487
56.1
13,692
21.7
14.8
2,733
251
9,896
66,661
5,719
33,795
39,000
11,446
27,554
3,196
2,523
10,251
(9,084)
(828)
339
(6,979)
(1,620)

FY12
70,207
71,602
42,814
61.0
16,589
23.6
16.0
19.9
3,122
383
11,442
76,389
292
35,867
34,499
13,873
20,626
6,664
(6,372)
17,128
(9,651)
(7,532)
(55)
(5,565)
1,998

FY13
82,793
85,015
53,267
64.3
21,979
26.5
18.5
23.7
3,305
339
15,449
90,187
9,671
39,878
25,149
13,111
12,038
22,598
(12,927)
13,977
(20,629)
7,178
525
(7,517)
(5,198)

FY14
101,734
104,388
62,986
61.9
21,331
21.0
14.6
19.0
3,726
1,457
13,884
100,504
12,479
69,383
48,534
16,335
32,198
4,872
7,607
15,633
(12,499)
(2,656)
478
(5,666)
(5,613)

(INR mn)
FY15
113,454
115,110
71,557
63.1
21,617
19.1
11.3
15.3
5,047
1,683
11,808
108,015
17,033
74,105
62,471
24,996
37,476
9,543
7,491
11,734
(9,412)
1,648
3,971
(6,256)
(7,186)

Source: Company annual report, Edelweiss research

192

Edelweiss Securities Limited

ANALYSIS BEYOND CONSENSUS


THE NEW ABC OF RESEARCH
Glenmark Pharmaceuticals| Annual Report Analysis

Glenmark Pharmaceuticals (Glenmark) FY15 annual report analysis


highlights significant increase in currency translation losses impacting net
worth (INR3.6bn in FY15), which as per management is mainly due to
depreciation in Russian rouble and Brazilian real. As highlighted in our
earlier years reports (FY14, FY13, FY12), net worth accretion to PAT ratio
continues to remain low (4% in FY15, 46% in FY14). Since FY11, cumulative
profit (post dividend) was INR23.3bn, however accretion to net worth was
mere INR12.7bn (55% of profits). While cumulative currency translation
loss stood at INR10.6bn, it is important to note that cash loss was
~INR5.4bn. We believe, over the long term, book value accretion is a better
representation of value creation instead of reported profit. Adjusted cash
flow declined by INR2.0bn YoY to INR3.2bn in FY15 led by currency
translation losses and lower profitability. Cash conversion cycle improved
primarily led by significant increase in payables (ex-TARKA provision - from
168 to 270 days). Receivables outstanding from Venezuela subsidiary stood
at INR1.5bn in FY15. Cash tax paid has remained consistently higher than
P&L tax expense over the past 5 years due to deferred tax and MAT credits
(outstanding as on FY15 - INR9.7bn, 32% of net worth).

Market Data
52-week range (INR)

: 1,261 / 677

Share in issue (mn)

: 282.0

M cap (INR bn/USD mn)

: 301 / 4,545

Avg. Daily Vol. BSE/NSE (000) : 1,066.2

Shareholding Pattern (%)

Promoters*

: 46.4

MFs, FIs & Banks

: 6.8

FIIs

: 35.9

Others

: 10.9

*Promoters pledged shares

: Nil

(% of share in issue)

Key highlights
Revenue grew 10% YoY; however, EBITDA margin declined 270bps in FY15 to 15.4%
(FY14: 18.2%) led by forex loss of INR1.6bn and INR1.6bn paid for settlement of litigation
to State of Texas. Excluding these, margin dipped 180bps to 20.1%.
In FY15, while PAT (post dividend) stood at INR4.2bn, net worth stood flattish at
INR30.0bn led by significant forex translation loss, due to adverse movement in Emerging
Market currencies. The INR depreciated against USD by average 1.1% in FY15 (FY14:
11.1%) and 62% of net worth of subsidiaries is USD denominated. Translation losses have
continued since FY11, despite all major subsidiaries recording positive net worth.
OCF, post interest, declined to INR4.9bn (FY14: INR7.2bn). Adjusted for cash translation
loss of INR1.7bn, OCF dipped to INR3.2bn (FY14: INR5.2bn). Cumulatively, in the past 5
years, currency translation loss adjustment in cash flow statement stood at INR5.4bn.
Cash tax paid stood at INR3.2bn in FY15 (53% of PBT) versus P&L tax expense of INR1.2bn
(20% of PBT) led by deferred tax and MAT credit. Cumulative cash taxes paid during the
past 5 years stood at INR9.7bn (32% of PBT) versus P&L charge of INR4.3bn (14% of PBT).
Net deferred tax assets continued to rise led by unused tax losses and MAT credit. Total
deferred tax assets stood at INR9.7bn in FY15, 32% of net worth.

Analysis beyond Consensus (ABC) is our initiative to provide a differentiated perspective to our clients
on various non-routine and intricate issues. This unit of research works independent of the sector/stock
research team and views expressed in this report may vary with that of respective sector/stock analyst.
Edelweiss research is also available on www.edelresearch.com,
1
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

September 04, 2015


Edelweiss Securities Limited

Annual Report Analysis


Cash conversion cycle improved YoY to 111 days, primarily led by surge in payable days (exTARKA provision) from 168 in FY14 to 270 in FY15. Trade payables and receivables rose
significantly over the past 5 years.
Receivables rose from INR21.6bn in FY14 to INR25.1bn in FY15, 38% of revenue (Venezuela
receivables at INR1.5bn in FY15).
During the year, the company merged Glenmark Generics (wholly owned subsidiary) with
itself and hence standalone YoY numbers are not comparable. The merger led to increase in
net worth by INR14.1bn at the standalone level.
Losses of subsidiaries (ex-Glenmark Generics) increased to INR4.4bn in FY15 versus
INR864mn loss in FY14 on aggregate basis. Total cash exposure to subsidiaries stood at
INR20.4bn, 41% of standalone net worth (FY14: INR18.2bn, 62%), and including the letters
of comfort issued (worth INR52.1bn), it stood at INR72.5bn, 146% of standalone net worth
(FY14: INR50.2bn, 173%).
While RoE declined from 19% in FY14 to 16% in FY15, RoE based on total comprehensive
income declined to 3% (FY14: 11%). Average RoE based on book value accretion over the
past 5 years stood at 13.2% versus reported RoE of 20%.
Post FY15, Glenmark has issued shares on preferential basis to Aranda Investments
(Mauritius) worth INR9,450mn primarily for reduction of debt, which will lead to
improvement in above ratios.
R&D expenditure stood at INR6.0bn in FY15, 9.1% of revenue (FY14: INR6.0bn, 10%).
Intangibles stood at INR12.7bn, 42% of net worth, largely comprising product development/
brands.
Contingent liabilities at the consolidated level rose from INR1.3bn in FY14 to INR4.1bn in
FY15, primarily led by indemnity bond for customs.
Interest income stood at INR14.3mn in FY15 (FY14: INR66.4mn) versus cash & liquid
investments of INR7.7bn in FY15 (FY14: INR8.0bn), leading to low yield on cash &
investments (FY15: 0.2% - FY14: 0.9%). Average borrowing cost stood at 5% (FY14: 6%).
Management attributed lower yields to higher cash balance kept for TARKA liability
(INR2.5bn) and cash in Venezuela subsidiary (INR2.5bn USD40mn).

194

Edelweiss Securities Limited

Glenmark Pharmaceuticals
Profitability analysis
Table 1: Standalone versus consolidated profitability

(INR mn)

Standalone
%
FY15
100.0 50,856
27.1 16,683
33.0 12,900
17.2
6,623

Particulars
FY14
Sales
23,009
Raw Materials Consumed
6,226
Other expenses (ex-litigation claim)
7,591
3,954
Personnel cost
EBITDA, before exceptional items and
5,238
forex loss
Forex loss/ (gain)
278
Exceptional items/ Litigation claims
EBITDA
4,960
Depreciation
302
EBIT
4,658
Financial Charges
310
Other income
671
PBT
5,019
Tax
681
PAT
4,338
Adjusted in other comprehensive income:
Actuarial losses (net of tax)
Exchange loss on translation
Total Comprehensive income

%
100.0
32.8
25.4
13.0

Subsidiary (Derived)
FY14
%
FY15
%
37,043
100.0 15,442
100.0
12,504
33.8
2,661
17.2
10,290
27.8
8,678
56.2
6,308
17.0
5,402
35.0

Consolidated
%
FY15
100.0 66,298
31.2 19,344
29.8 21,578
17.1 12,024

FY14
60,052
18,730
17,881
10,261

%
100.0
29.2
32.5
18.1

22.8

14,650

28.8

7,941

21.4

(1,299)

(8.4) 13,179

21.9

13,351

20.1

1.2
21.6
1.3
20.2
1.3
2.9
21.8
3.0
18.9

(211)
1,687
13,173
1,195
11,979
302
639
12,315
2,240
10,075

(0.4)
3.3
25.9
2.3
23.6
0.6
1.3
24.2
4.4
19.8

(182)
2,175
5,948
1,866
4,082
1,576
(557)
1,950
832
1,118

(0.5) 1,774
5.9
(125)
16.1 (2,948)
5.0
1,405
11.0 (4,353)
4.3
1,600
(1.5)
(420)
5.3 (6,373)
2.2 (1,050)
3.0 (5,323)

11.5
96
(0.8) 2,175
(19.1) 10,908
9.1
2,168
(28.2) 8,740
10.4
1,886
(2.7)
115
(41.3) 6,969
(6.8) 1,513
(34.5) 5,456

0.2
3.6
18.2
3.6
14.6
3.1
0.2
11.6
2.5
9.1

1,563
1,562
10,225
2,600
7,625
1,902
219
5,943
1,190
4,752

2.4
2.4
15.4
3.9
11.5
2.9
0.3
9.0
1.8
7.2

29
2,244
3,182

0.0
3.7
5.3

105
3,615
1,033

0.2
5.5
1.6

Source: Company annual report, Edelweiss research

In FY15, though revenue grew 10% YoY, EBITDA margin declined 270bps YoY to 15.4% led by
forex loss of INR1.6bn and INR1.6bn paid for settlement of litigation to State of Texas
(USD25mn payable in 16 equal quarterly installments). Excluding the above items, EBIDTA
declined from 21.9% to 20.1% YoY.
Standalone figures are not comparable YoY as Glenmark merged one of its subsidiaries
Glenmark Genericswith the standalone entity in FY15. Glenmark Generics manufactures
and distributes generic formulations and bulk drugs. The merger led to increase in
standalone net worth by INR14.1bn, 48% of standalone net worth.

FY13
50.1

(INR bn)

FY11
29.5

FY12
40.2

FY14
60.1

FY15
66.3

4.5
15.4

4.6
11.4

6.1
12.3

5.4
9.0

4.8
7.2

3.3

4.0

4.7

3.2

1.0

11.3

9.8

9.5

5.3

1.6

20.0

7.5

16.0

6.0

12.0

4.5

8.0
4.0

4.5
3.3

4.6
4.0

FY11

FY12

6.1
4.7

5.4
3.2

3.0

(INR bn)

Particulars
Revenues
Net profit
Net profit margin (%)
Total comprehensive
income (TCI)
TCI margin (%)

(%)

Table 2: PAT versus total comprehensive income

4.8
1.0

1.5
0.0

0.0
Net profit
Net profit margin (%)

FY13

FY14

FY15

TCI
TCI margin (%)

Source: Company annual report, Edelweiss research

195

Edelweiss Securities Limited

Annual Report Analysis


PAT declined to INR4.8bn in FY15 and significant translation losses worth INR3.6bn in FY15
impacted net worth accretion, leading to decline in total comprehensive income by 68% YoY
to INR1.0bn (FY14: INR3.2bn).

Net worth accretion analysis


Table 3: Profitability versus net worth accretion

Profit, after dividend, stood at


INR4.2bn in FY15. However, net
worth stood flattish YoY led by
significant forex translation losses

Particulars
Opening shareholders' fund
PAT (net of dividend)
FCTR
Others
Acquisition of non controlling
interest
Closing shareholders' fund

The INR depreciated against USD


by an average 1.1% in FY15 against
11.1% in FY14

(INR mn)

FY11
17,257
4,406
(1,249)
144

FY12
20,372
4,477
(684)
87

FY13
24,016
5,558
(1,492)
(77)

FY14
27,630
4,789
(2,244)
91

(185)

(236)

(375)

(433)

20,372

FY15 Cumulative
29,833
17,257
4,118
23,348
(3,615)
(9,284)
(60)
184
(273)

(1,503)

24,016 27,630 29,833 30,003


30,003
Source: Company annual report, Edelweiss research

Cumulatively, over the past 5 years, net worth rose by INR12.7bn versus profit (post
dividend) of INR23.3bn. 55% of profit accrued to net worth and balance 45% largely
represented currency translation losses.
Acquisition of non-controlling interest charged to reserves stood at INR273mn in FY15
versus INR433mn in FY14 pertaining to ESOPs granted to Glenmark Generics employees.
Management highlighted that FY15 is the last year of payment towards acquisition of ESOPs
led by merger of Glenmark Generics. In FY15, most employees opted to encash their ESOPs
and remaining employees were issued shares of Glenmark.

Chart 1: Net worth to PAT accretion ratio


6.0
81%

0.8

(INR bn)

71%

65%

3.6

1.2

5.6
4.4
3.1

4.5
3.6

0.6
46%
4.1

4.8

3.6

2.2

0.0
FY11

FY12

Currency

FY13

FY14

0.4

0.2
4%
0.2 0.0
FY15

(%)

4.8

2.4

Table 4: INR versus major currencies (closing rates)


1.0

USD
EUR
GBP
CHF
BRL
RUB
VEF (official
rate)

45
63
74
49
27
1.6

49
66
78
55
29
1.7

54
71
83
58
28
1.8

62
85
103
70
26
1.7

62
69
95
65
22
1.0

YoY
change (%)
0.1%
-18.5%
-7.6%
-7.0%
-18.2%
-41.1%

10.5

11.4

8.7

9.8

9.8

-0.3%

FY11 FY12 FY13 FY14 FY15

YTD
64
70
100
67
19
1.1
10.2

Profit after dividend


Networth accretion
Networth to Profit ratio (%)
Source: Company annual report, Bloomberg, Edelweiss research

Net worth to PAT (ex-dividend) ratio plunged to 4% in FY15 led by significant translation
losses charged to reserves (other comprehensive income).

196

Edelweiss Securities Limited

Glenmark Pharmaceuticals
Table 5: Currency translation losses (FCTR)Peer analysis
Change in FCTR balance YoY
Particulars
FY12
FY13
FY14
Glenmark
(684)
(1,492)
(2,244)
Cipla
152
228
(1,625)
Lupin
983
(28)
829
Aurobindo
522
223
703
DrReddys
775
137
(37)
Sunpharma
5,957
3,767
7,572

(INR mn)
FY15
(3,615)
(2,580)
(1,121)
(736)
(1)
NA

Change in FCTR as % of PBT


FY12
FY13
FY14
(14.0)
(20.3)
(32.2)
1.0
1.1
(8.6)
8.2
(0.1)
2.9
NA
6.0
4.6
4.3
0.6
(0.1)
17.8
8.7
16.5

FY15
(60.8)
(15.6)
(3.3)
(3.4)
(0.0)
NA

NA: Data for Sun Pharma is not available, loss in FY12 for Aurobindo

Subsidiaries analysis
Table 6: Performance of major subsidiaries

(INR mn)

Subsidiary company

% shareholding
as on FY15
Glenmark Generics Ltd. (Merged in FY15 with parent)
99.3
Glenmark Pharmaceuticals Inc., USA
100
Glenmark Holding S.A.
100
Glenmark Impex L.L.C.
100
Glenmark Farmaceutica Ltda.
100
Glenmark Pharmaceuticals Venezuela, CA
100
Glenmark Generics Finance S.A.
100
Glenmark Pharmaceuticals SRO
100
Glenmark Pharmaceuticals S.A., Switzerland
100
Glenmark Uruguay SA
100
Glenmark Pharmaceuticals (Europe) Ltd.
100
Glenmark Generics (Europe) Ltd.
100
Glenmark Generics S.A. Argentina
100
Glenmark Pharmaceuticals S.R.L.
100
Glenmark Pharmaceuticals Mexico, SA DE CV
100
Glenmark Pharmaceuticals South Africa (Pty) Ltd.
100
Others
100
Total
PAT margin (%)

Major proportion of net assets of


subsidiaries are denominated in
USD (62%), Brazil currency (BRL;
10%), Russian rouble (7%) and
Venezuela Bolivar (6%)

Currency
INR
USD
USD
RUB
BRL
VEF
USD
CZK
USD
USD
GBP
GBP
ARS
RON
MXN
ZAR

Networth
19,619
5,053
5,168
326
155
40
23,119
5,931
59,410

Turnover
19,134
20,849
5,222
2,228
1,010
2,355
366
375
2,513
391
1,323
186
503
2,893
59,346

Networth
7,549
6,392
2,590
3,617
2,286
7,502
551
320
628
1,061
1,377
208
403
(374)
1,853
35,963

Turnover
21,449
2,911
2,345
4,291
468
2,317
324
0
3,255
521
771
384
492
5,623
45,153

FY15
PAT
825
(1,191)
(871)
(1,119)
1,164
(236)
(953)
(1,191)
(10)
42
(317)
(104)
(178)
(122)
(79)
(4,339)
(9.6)

FY14 includes Glenmark Generics, which was merged in FY15 with the standalone entity. ExGlenmark Generics, performance of subsidiaries deteriorated during the year and losses
increased to INR4.4bn in FY15 versus INR864mn loss in FY14.

Table 7: Currency exposure analysis of subsidiaries

Currency
USD
BRL
RUB
VEF
GBP
EUR
INR
Others
Total

Networth
23,119
6,447
6,381
5,168
5,053
326
3,779
1,692
1,525
1,446
155
1,093
1,083
362
237
(229)
1,773
59,410

FY14
PAT
3,950
1,858
(793)
977
(852)
118
937
(191)
(2,403)
(1)
26
139
(326)
93
(194)
(166)
(84)
3,086
5.2

FY14
Turnover
21,379
2,228
5,222
1,010
375
734
19,134
9,266
59,346

197

PAT
(389)
(852)
977
118
26
19
3,950
(762)
3,086

(INR mn)

Networth
22,347
3,617
2,590
2,286
1,239
59
3,825
35,963

Proportion of FY15 currency


FY15
FY15 networth
movement vs
(%)
INR (%)
Turnover
PAT
22,379
(1,886)
62%
0.1%
2,345
(1,119)
10%
-18.2%
2,911
(871)
7%
-41.1%
4,291
1,164
6%
-0.3%
3,693
78
3%
-7.6%
1,653
26
0%
-18.5%
0%
7,879
(1,730)
11%
45,153
(4,339)
100%
Source: Company annual report, Bloomberg, Edelweiss research

Edelweiss Securities Limited

Annual Report Analysis


All major subsidiaries have positive net worth and major revenue contributing subsidiaries
include operations in US, Russia, Brazil and Venezuela. Revenue from Venezuela subsidiary
stood at INR4.3bn, 6% of consolidated sales, while Brazil and Russia contributed 4% each to
consolidated revenue (aggregate 14% revenue comes from these 3 regions).
During the year, Glenmark converted loans given to subsidiaries worth INR6.2bn into equity
and converted receivables of USD1.3mn in Venezuela subsidiary into equity investment.
Glenmark has consistently reported
negative movement in FCTR over
last 5 years.

Glenmark follows IFRS which requires conversion of all the assets and liabilities of overseas
subsidiaries including goodwill at the closing rate with the resultant difference captured in
FCTR. Considering positive networth of overseas subsidiaries, the conversion should result in
gain in depreciating INR scenario and vice versa loss in appreciating INR scenario.

Accounting policy (annual report extracts)


In case of foreign operations whose functional currency is different from the parent
companys functional currency, the assets and liabilities of such foreign operations,
including goodwill and fair value adjustments arising upon acquisition, are translated
to the reporting currency at exchange rates at the reporting date. The income and
expenses of such foreign operations are translated to the reporting currency at the
average exchange rates prevailing during the year. Resulting foreign currency
differences are recognized in other comprehensive income/(loss) and presented
within equity as part of FCTR. When a foreign operation is disposed of, in part or in
full, the relevant amount in the FCTR is transferred to the consolidated income
statement.
Table 8: Exposure to subsidiariesAt standalone level

Aggregate cash exposure to


subsidiaries stood at 41% of
standalone net worth and
including letters of comfort issued,
it stood at 146% of standalone net
worth

(INR mn)

Particulars
FY11
FY12
FY13
FY14
FY15
Equity investment
Glenmark Generics (merged in FY15)
8,100
8,427
8,913
9,494
Glenmark Generics Finance (Switzerland)
9,069
Others
2,128
2,221
3,846
4,413
7,351
Loans and advances
Glenmark Generics (merged in FY15)
5,356
4,736
4,683
Glenmark Holding S.A., Switzerland
8,993
4,164
3,471
4,065
3,238
Others
889
380
154
177
694
Total cash exposure (A)
17,366 11,500 12,154
8,656 20,352
As % of standalone net worth
87.7
52.6
48.2
29.8
41.1
Letter of comfort on behalf of subsidairies - 5,687 15,926 24,287 32,046 52,131
mainly to switzerland subsidiares) - B
Total cash + non cash exposure (A+B)
23,054 27,426 36,441 40,702 72,483
As % of standalone net worth
116.4
125.5
144.4
140.1
146.4
Source: Company annual report, Edelweiss research

Equity investment and loans to Glenmark Generics declined led by merger with parent.
Consequently, investment and loans to Switzerland subsidiary increased in FY15 at the
standalone level, which we believe were earlier part of Glenmark Generics balance sheet.

198

Edelweiss Securities Limited

Glenmark Pharmaceuticals
Deferred taxes and effective tax rate analysis
Table 9: Deferred tax assets

Net deferred tax assets continued


to rise led by unused tax losses
and MAT credit. Total deferred tax
assets stood at INR9.7bn, 32% of
net worth

(INR mn)

Particulars
Deferred tax assets
Unused tax losses
MAT Credit
Others
Total
As % of net worth
Deferred tax liabilities
Property, plant and equipment
Others
Total
Net deferred tax asset
As % of net worth

FY11

FY12

FY13

FY14

FY15

1,358
1,057
142
2,558
12.6

2,365
1,586
223
4,174
17.4

2,269
3,086
217
5,571
20.2

2,810
3,622
781
7,213
24.2

4,263
4,183
1,285
9,731
32.4

1,451
25
1,476
1,081
5.3

1,457
43
1,500
2,674
11.1

1,673
96
1,768
3,803
13.8

1,895
176
2,071
5,142
18.6

2,205
593
2,798
6,933
23.2

Source: Company annual report, Edelweiss research

Annual report extracts

As per annual report disclosure it is


more likely that the deferred tax

asset losses will not be realised


during remaining carried forward
period

In assessing the reliability of deferred income tax assets, management considers


whether it is more likely than not that some portion or all of the deferred income tax
assets will be realised. The ultimate realisation of deferred income tax assets is
dependent upon the generation of future taxable income during the periods in which
the temporary differences become deductible. The amount of the deferred income
tax assets considered realisable, however, could be reduced in the near term if
estimates of future taxable income during the carry forward period are reduced.
The Companys subsidiaries had losses which can be carried forward for future
utilisation within period of 3 to 7 years. These subsidiaries have been incurring losses
and therefore it is considered more likely than not the deferred tax asset arising from
these carried forward net operating losses will not be realised.
Table 10: P&L tax expense versus cash tax paid

Cash tax rate stood significantly


higher than P&L tax rate led by
deferred tax and MAT credit

Particulars
Tax as per P&L
Cash Tax
Difference
Effective tax rate (%)
Effective cash tax rate (%)

199

FY11
237
938
(701)
4.9
19.5

(INR mn)

FY12
FY13
FY14
FY15 Cumulative
238
1,107
1,513
1,190
4,285
1,330
1,650
2,629
3,178
9,724
(1,092)
(543) (1,116) (1,988)
(5,439)
4.9
15.1
21.7
20.0
14.3
27.2
22.5
37.7
53.5
32.5
Source: Company annual report, Edelweiss research

Edelweiss Securities Limited

Annual Report Analysis


Cash flow analysis
Table 11: Cash flow analysis

(INR bn)

Particulars
Profit before tax
Non-operating expense
Non-cash adjustments (mainly provisions)
Direct taxes paid
Cash profit after tax
(Increase)/Decrease in trade and other receivables
(Increase)/Decrease in inventories
(Increase)/Decrease in other assets
(Increase)/Decrease in other receivables
Increase/(Decrease) in trade payables & other liabilities
Increase in working capital
Net cash from operating activities
Interest expenses paid
Net cash from operating activities post interest
Increase/(Decrease) in acceptances
Net cash from operating activities post interest (Adj
for acceptances)
Currency translation losses
Adjusted cash flows post currency translation losses

Standalone
FY14
FY15
5.0
12.3
1.1
(0.6)
0.3
1.7
(0.8)
(2.4)
5.6
11.0
(5.8)
(9.7)
(0.2)
(1.6)
0.2
(1.1)
1.3
2.9
(4.5)
(9.5)
1.1
1.5
(0.3)
(0.3)
0.8
1.1
(0.8)
1.9
0.0
3.0
0.1
(0.0)

Subsidiary (Derived)
FY14
FY15
1.9
(6.4)
1.5
2.1
4.2
1.5
(1.9)
(0.8)
5.8
(3.5)
1.2
5.7
(0.3)
(2.0)
(2.2)
0.9
1.1
3.1
1.2
1.8
6.8
7.6
3.4
(1.6)
(1.5)
6.0
1.9
1.3
7.4
1.9

0.0
3.0

1.9
5.4

Consolidated
FY14
FY15
7.0
5.9
2.6
1.5
4.5
3.2
(2.6)
(3.2)
11.4
7.5
(4.6)
(4.0)
(0.5)
(3.5)
(2.2)
0.9
4.4
4.0
(2.9)
(2.7)
8.5
4.8
(1.9)
(1.8)
6.6
3.0
0.6
1.9
7.2
4.9

1.7
0.2

2.0
5.2

1.7
3.2

Source: Company annual report, Edelweiss research

OCF, post interest, declined from INR7.2bn in FY14 to INR4.9bn in FY15 led by lower
profitability and currency translation losses which impacted cash flows by INR1.7bn during
the year. Adjusted for these losses, OCF declined to INR3.2bn. Cumulatively, over FY11-15,
currency translation losses worth INR5.4bn were adjusted in cash flow statement.

Cash conversion cycle improved


YoY to 111 days primarily led by
surge in payable days from 168 in
FY14 to 270 in FY15

Table 12: Average cash conversion cycle (days)

Payables have gone up during


FY15 due to clearance of packing
material ahead of merger.
Inventory days rose from 124 in
FY14 to 188 during the year

FY13
FY14
FY15
134
124
188
105
115
128
(150)
(168)
(270)
25
28
38
113
99
83
45
41
28
158
140
111
Source: Company annual report, Edelweiss research

Particulars
Inventory days
Receivable days
Payable days
Advances to vendors days
Cash conversion cycle
Add: Acceptance days
Adj cash conversion cycle

Table 13: Working capital over past 5 years

Trade payables (ex-TARKA


provision) and receivables rose
significantly over FY11-15.
Revenue rose by INR36.8bn over 4
years while net working capital
requirement rose by INR7.0bn.

(INR bn)

Particulars

FY11

FY12

FY13

FY14

FY15

Receivables
Inventories
Less: Trade payables
Net working capital
Revenue
As % of revenue

11.3
8.1
(6.6)
12.8
29.5
43

12.4
7.9
(7.9)
12.4
40.2
31

16.4
8.4
(10.4)
14.4
50.1
29

21.6
9.3
(13.6)
17.3
60.1
29

25.1
12.7
(18.0)
19.8
66.3
30

Change from
FY11-15

13.8
4.6
(11.5)
7.0
36.8

Source: Company annual report, Edelweiss research

200

Edelweiss Securities Limited

Glenmark Pharmaceuticals
Table 14: Receivables analysis
Particulars
Receivables
O/s for more than 6 months
Others
Less: Provision for doubtful debts
Total receivables
Receivables as % of revenue

(INR bn)
Standalone
FY13
FY14
2.0
3.7
(0.2)
5.6
29

3.4
8.2
(0.2)
11.4
49

FY15

Subsidiary (Derived)
FY13
FY14
FY15

3.3
21.7
(0.5)
24.4
48

0.7
10.2
(0.1)
10.8
35

Consolidated
FY13
FY14

FY15

(0.5)
(0.6)
2.8
2.8
2.7
10.8
1.4
13.9
19.0
23.1
(0.1)
(0.1)
(0.3)
(0.3)
(0.6)
10.2
0.7
16.4
21.6
25.1
28
5
33
36
38
Source: Company annual report, Edelweiss research

Receivables rose to INR25.1bn in FY15, 38% of revenue. Glenmark has converted receivables
of USD1.3mn (INR79.3mn) from the Venezuelan subsidiary into investment (8,266,347
equity shares) at exchange rate of VEF6.30 per USD1.0. Total exposure to Venezuela
subsidiary (equity investment) stood at INR627mn in FY15 (FY14: INR515mn).
Outstanding receivables from Venezuela subsidiary at the standalone level stood at
INR1.5bn in FY15 (FY14: INR540mn). In FY15, the Venezuela economy was adversely
impacted by significant decline in crude oil prices, leading to higher inflation rates and
significantly delayed approvals for import payments. Consequently, the currency
depreciated significantly in the new exchange rate mechanism (known as SIMADI rate)
wherein the exchange rate surged to VEF193 vis--vis government declared VEF6.3/ USD.
Extracts from Dr. Reddys FY15 annual report
In February 2015, the Venezuelan government launched an overhaul of the exchange rate
system and introduced a new exchange rate mechanism. The Marginal Currency System
(SIMADI) is the third mechanism in the new three-tier exchange rate regime and allows for
legal trading of the Venezuelan Bolivar for foreign currency with fewer restrictions than
other mechanisms in Venezuela (CENCOEX and SICAD).
As on March 31, 2015, exchange rates in all the three tiers are as follows:

CENCOEX preferential rate: VEF6.3/ USD.

SICAD rate: VEF12/ USD.

SIMADI rate: Approximately VEF193/ USD.

Table 15: Dr. ReddysExchange losses on Venezuela monetary assets/ liabilities (INR mn)
Monetary assets equal to
VEF245mn imports of pharma
products are eligible for VEF6.3/
USD exchange rate
Dr. Reddy in FY15 recognised
losses on remaining net monetary
assets of VEF88mn at rate of
VEF193/ USD
Consequently, INR843mn forex
loss was booked in FY15 P&L

Particulars

Equivalent USDmn Equivalent


(@6.3 rate) (INR mn)
813
129
8,335

VEF mn

Venezuela sales in FY15


Impact on net monetary assets:
Monetary assets
245
38.9
2,512
Moneraty net assets at 6.3VEF /USD rate (A)
88
14.0
902
Net assets revalued at VEF 193/USD (B)
0.5
29
Derived loss on revaluation (A-B)
873
Loss booked as per 20-F filing
843
As a % of networth
1%
Source: Company annual report, Edelweiss research

201

Edelweiss Securities Limited

Annual Report Analysis


Payments towards importation of pharmaceutical products qualify for preferential rate of
VEF6.3/USD. Accordingly, monetary assets which equal the amount of import payments
amounting to INR2.5bn (VEF813mn) are translated at such preferential rate.
The companys balance monetary assets, which do not qualify for the preferential rate, are
translated at the SIMADI rate. Hence, a forex loss of INR843mn on translation of such
monetary items has been recognised by the company. The loss amounts to 1% of
Glenmarks total consolidated net worth.

Earnings to cash translation and fund flow analysis


Table 16: Earnings to cash translationPast 5 years

(INR mn)

Particulars
Adjusted cash flows post
currency translation losses (A)

FY11
7,483

FY12
4,516

FY13
3,203

FY14
5,194

FY15
3,221

Profit after tax (PAT)


Depreciation
Other income
PAT + Depreciation - Other
income (B)
Earnings to cash conversion
ratio (A/B*100)

4,532
947
1,444
4,035

4,603
979
182
5,401

6,147
1,270
107
7,310

5,423
2,168
115
7,476

4,753
2,600
219
7,134

185

84

44

69

45

230.0
190.0

185

(%)

150.0
110.0
84

70.0

69
45

44

30.0
FY11

FY12

FY13

FY14

FY15

Earnings to cash conversion ratio


Source: Company annual report, Edelweiss research

Earnings to cash translation ratio consistently declined over FY11-15, except for a marginal
uptick in FY14, primarily led by currency translation losses charged to reserves and working
capital investments.

Table 17: Cumulative cash flow generation and utilisationPast 5 years


Sources
OCF before w.cap (post
tax, interest and fx losses)
Payables
Debt
Equity and others
Total

FY11

FY12

4,316

6,760

2,443

1,357

(2,580) (1,565)
80
4,259

102

FY13
7,699

FY14
7,515

FY15
3,979

3,106

4,396

4,023

4,475

2,046

4,807

107

192

44

6,654 15,387 14,150 12,854

Total

Application
Receivables &
30,270
inventories
15,326 Capex
Others (Dividend,
7,184
net cash etc)
524
53,304 Total

(INR mn)
FY11

FY12

FY13

FY14

(1,088)

1,705

5,791

7,297

3,708

2,829

4,677

3,728

5,380 20,322

1,638

2,120

4,920

3,125

778 12,581

4,259

FY15

Total

6,696 20,401

6,654 15,387 14,150 12,854 53,304

Source: Company annual report, Edelweiss research

202

Edelweiss Securities Limited

Glenmark Pharmaceuticals
Chart 2: Sources and utilisation of fundsCumulative 5 years (FY11 to FY15)

Sources
Debt
13%

Utilisation
Others
(Dividend,
net cash
etc)
24%

Equity and
others
1%

Receivables
&
inventories
38%

OCF before
w.cap (post
tax, interest
and fx
losses)
57%

Payables
29%

Capex
38%
Source: Company annual report, Edelweiss research

Capital allocation analysis


Table 18: Capital employed and return ratios
Particulars
Sales
EBITDA
EBITDA margin (%)
Net profit
ROE (%)
ROCE (%)
TCI
ROE (%) on TCI
Net Fixed Assets
CWIP
Equity shareholders' funds
Loan funds
Total Capital Employed
DE ratio (x)

Revenue and EBITDA nearly


doubled over FY11-15. However,
PAT stood flattish over the same
period
While RoE improved initially and
declined significantly over the
past 2 years to 16%, RoE based
on total comprehensive income
declined to 3%
D/E ratio rose to 1.3x in FY15

FY11
29,491
5,923
20
4,532
21
15
3,329
15
20,342
1,781
20,372
20,973
41,345
1.0

(INR mn)
FY12
40,206
7,144
18
4,603
21
14
3,959
18
22,228
2,629
24,016
22,445
46,461
0.9

FY13
50,123
10,100
20
6,147
24
18
4,738
18
24,063
4,223
27,630
27,649
55,279
1.0

FY14
60,052
10,908
18
5,423
19
15
3,182
11
28,897
2,062
29,833
32,670
62,503
1.1

FY15
66,298
10,225
15
4,753
16
12
1,033
3
28,362
4,923
30,003
37,999
68,003
1.3

Source: Company annual report, Edelweiss research

203

Edelweiss Securities Limited

Annual Report Analysis


Chart 3: Capital employed and RoE/ RoCE
27.0

64

16.2

52

10.8

40

5.4

28

(%)

21.6

0.0

FY11

FY12

Equity

FY13

Debt

FY14

16

FY15

ROE (%)

(INR bn)

76

ROE (%) on TCI

Source: Company annual report, Edelweiss research

Balance sheet analysis


Table 19: Balance sheet analysis

(INR mn)

Sources
Shareholders funds
Debt
Trade payables
Others

FY14
29,833
32,670
13,635
10,198

FY15
30,003
37,999
20,530
8,342

Change
171
5,330
6,895
(1,856)

Total

86,336

96,875

10,539

Application
Tangible assets (Incl CWIP)
Intangible assets (Incl Goodwill)
Trade receivables
Inventories
Cash
Deferred tax assets
Loans/ advances
Others
Total

FY14
17,628
13,331
21,563
9,329
8,007
7,213
5,264
4,002
86,336

FY15
20,569
12,715
25,118
12,690
7,681
9,731
3,290
5,081
96,875

Change
2,941
(616)
3,554
3,362
(325)
2,518
(1,974)
1,079
10,539

Chart 4: Movement during the year

Sources during the year


Loans/
advances
14%

Application during the year

Retained
earnings
1%

Cash
2%

Others
20%
Debt
36%

Deferred
tax assets
17%
Trade
payables
47%

Tangible
and
Intangible
assets
16%

100% = INR14.7bn

Trade
receivables
and
inventories
47%
100% = INR14.7bn

Source: Company annual report, Edelweiss research

During FY15, while retained earnings contributed merely 1% to generation of funds,


majority sources of funds were from debt, trade payables and loans/ advances.
204

Edelweiss Securities Limited

Glenmark Pharmaceuticals
Chart 5: Balance sheet at the end of the year

Application as at FY15

Sources as at FY15
Others
9%
Shareholders
funds
31%

Trade
payables
21%

Loans/
advances
4%
Deferred
tax assets
10%

Others
5%

Cash
8%

Intangible
assets (Incl
Goodwill)
13%

Inventories
13%
Debt
39%

Trade
receivables
26%

100% = INR96.9bn

Tangible
assets (Incl
CWIP)
21%

100% = INR96.9bn

Source: Company annual report, Edelweiss research

As at FY15 end, debt & trade payables represent 60% of liabilities, while equity shareholders
funds stood at 31%. Tangible & intangible assets contributed 34% to assets, receivables &
inventories represented 39%, while deferred tax assets were at 10%.

R&D and intangibles analysis


Table 20: R&D expenditure - Consolidated
Particulars

R&D expenditure stood at 9.1% of


sales in FY15

R&D expenditure
Sales
R&D as % of sales

(INR mn)
FY12
2,916
40,206
7.3

R&D expenditure
FY13
FY14
4,116
5,998
50,123
60,052
8.2
10.0

FY15
6,014
66,298
9.1

Source: Company annual report, Edelweiss research

R&D capitalisation under product development/ brands during FY15 stood at INR965mn,
while translation adjustment stood at negative INR(768)mn.

Table 21: R&D as % of revenuePeers analysis (consolidated level)


R&D as percentage of sales stood
higher for Dr. Reddys and
Glenmark in FY15
R&D for Glenmark has increased
over the past 5 years

Particulars
Sun Pharma
Lupin Ltd.
Dr. Reddys Labs
Cipla Ltd.
Aurobindo Pharma
Glenmark Pharma

FY12
5.1
7.1
6.3
4.4
3.5
7.3

FY13
5.9
7.1
6.9
4.4
4.0
8.2

(%)
FY14
6.2
7.7
9.4
5.0
3.4
10.0

FY15
n.a.
7.8
11.2
6.3
2.9
9.1

Source: Company annual report, Edelweiss research


NA: Sun Pharma FY15 data not available.

205

Edelweiss Securities Limited

Annual Report Analysis


Table 22: Intangible assetsConsolidated

Intangibles stood at INR12.7bn,


42% of net worth, largely including
product development/ brands

Particulars
Intangibles assets:
Computer software
Product development/ Brands
Goodwill
Intangibles under development
Total
As % of net worth

(INR mn)

FY11

FY12

FY13

FY14

FY15

147
9,252
606
324
10,329
51

166
10,942
609
145
11,862
49

198
11,876
604
62
12,739
46

266
12,410
602
53
13,331
45

237
11,564
580
333
12,715
42

Intangibles include assets with indefinite useful lives worth INR3.8bn in FY15 (FY14:
INR5.2bn) which are tested for impairment annually.
Glenmark has recorded an impairment charge towards these intangibles. No further details
are available in this regard.

Table 23: Contingent liabilities - Consolidated

Contingent liabilities at
consolidated level rose from
INR1.3bn in FY14 to INR4.1bn in
FY15, primarily led by indemnity
bond for customs

Particulars
Bank guarantees
Letters of credit issued by bankers
Guarantees given to third party for office
Indemnity bond for customs
Corporate guarantees
Disputed Income tax/Excise duty/Sales tax
Others
Total
As % of net worth

(INR mn)
FY11
69
323
9
260
1,206
47
0.2
1,914
9.4

FY12
39
764
11
288

FY13
66
524
11
375

FY14
72
661
13
394

FY15
74
838
13
2,775

212
1,314
5.5

203
0.1
1,179
4.3

155
0.1
1,294
4.3

224
145
4,069
13.6

Source: Company annual report, Edelweiss research

206

Edelweiss Securities Limited

Glenmark Pharmaceuticals
Table 24: Summary financials
Particulars
Sales
Total income
EBITDA
EBITDA margin (%)
RoE (%)
RoCE (%)
Depreciation
Financial costs
Net profit
Total comprehensive income for the year
Equity shareholders' funds
Loan funds
Net fixed assets
CWIP
Current assets loans and advances
Current liabilities and provisions
Net current assets
Cash and cash equivalents
Net Debt
Cash flow from operating activities
Cash flow from investing activities
Cash flow from financing activities
Net cash flows
CAPEX
Working capital investments

FY11
29,491
30,935
5,922
20
21
15
947
1,605
4,532
3,329
20,372
21,085
20,666
1,457
24,029
7,677
16,353
1,958
19,126
9,306
(3,673)
(4,356)
1,277
(4,012)
3,531

FY12
40,206
40,388
7,144
18
21
14
979
1,466
4,603
3,959
24,016
22,445
22,373
2,483
26,252
9,697
16,555
3,219
19,226
8,044
(2,778)
(3,614)
1,652
(2,854)
(348)

FY13
50,123
50,231
10,100
20
24
18
1,270
1,600
6,147
4,738
27,630
27,649
24,125
4,161
31,195
13,359
17,836
6,073
21,576
6,479
(4,641)
1,952
3,791
(4,710)
(2,685)

FY14
60,052
60,167
10,908
18
19
15
2,168
1,886
5,423
3,182
29,833
32,670
28,950
2,009
39,620
21,109
18,512
8,007
24,663
8,537
(3,681)
(980)
3,876
(3,728)
(2,901)

(INR mn)
FY15
66,298
66,516
10,225
15
16
12
2,600
1,902
4,753
1,033
30,003
37,999
28,695
4,589
45,551
24,857
20,694
7,681
30,318
4,817
(5,400)
1,992
1,409
(5,380)
(2,673)

Source: Company annual report, Edelweiss research

207

Edelweiss Securities Limited

ANALYSIS BEYOND CONSENSUS


THE NEW ABC OF RESEARCH
Sun Pharmaceuticals | Annual Report Analysis

Sun Pharmaceutical Industries (SUNP) FY15 annual report analysis


highlights lower adjusted RoE/RoCE of 12.8%/16.8% versus reported
21.5%/25.9% on merger of Ranbaxy. Merger accounting under Pooling of
Interest method (permitted under Indian GAAP but prohibited
internationally) leads to recognition of cost of acquisition being lower by
INR301.7bn and hence superior return ratios for FY15 and going forward.
Demerger of unit from Sun Pharma Global FZE (SPG) to SUNP standalone in
FY14 and third-party deal to supply discounted products worth USD400mn,
led to transfer of assets and liabilities (including USD550mn Protonix drug
litigation claim) from tax-free entity (SPG, UAE) to tax-paying entity.
Contingent liabilities include income tax demands rising to INR26.7bn
(FY14: INR12.1bn; FY11: INR2.7bn). P&L tax rate stood at 14.3% versus cash
tax rate of 27.2% led by deferred tax asset (DTA). Our calculation suggests
that Ranbaxys consolidated revenue declined by 16% YoY in FY15 and
SUNPs consolidated revenue, ex-Ranbaxy grew 1.5% YoY. Recurring OCF
post interest declined 18% YoY to INR53.1bn. Loans to employees and
others rose to INR11.7bn (FY14: INR5.8bn) and total loans/advances rose to
INR48.7bn, 19% of net worth (FY14: INR23.0bn, 12.4%).

Market Data
52-week range (INR)

: 1,200 / 792

Share in issue (mn)

: 2,406.4

M cap (INR bn/USD mn)

: 2,127/32,668

Avg. Daily Vol. BSE/NSE (000) : 4,628.0

Shareholding Pattern (%)


Promoters*

: 54.7

MFs, FIs & Banks

: 7.7

FIIs

: 23.8

Others

: 13.8

*Promoters pledged shares

: 0.8

(% of share in issue)

Note: YoY numbers are not comparable due to Ranbaxy being merged in FY15

Pooling of interest accounting leads to higher reported RoE/RoCE


SUNP issued 335mn shares on merger to erstwhile Ranbaxy shareholders worth
INR331.5bn based on 1 month average price. However, cost of acquisition recorded on
merger was only INR29.9bn (9% of fair value of shares issued) due to accounting as per
Pooling of Interest method (as permitted under Indian GAAP). Purchase method would
have led to net worth and goodwill being higher by INR301.7bn and RoE/RoCE would
have been lower by 9% each.

Revenues ex-Ranbaxy grew 1.5% YoY


Our calculation suggests 16% decline in Ranbaxys FY15 consolidated revenues and hence
SUNPs revenues ex-Ranbaxy rose by 1.5% YoY. We believe combined revenue could have
been impacted due to adverse movement in emerging market currencies (higher
Ranbaxy exposure versus SUNP), price erosion in Taro products and supply issues at the
Halol facility.

Tax rate stood at 14.3% versus cash tax rate of 27.2%


P&L tax charge stood at INR9.2bn versus cash tax payment of INR17.4bn, led by deferred
tax credit in FY15. DTA increased by INR10.5bn due to unpaid liabilities, unabsorbed
losses and others. Total deferred tax assets stood at INR22.3bn, 8.7% of net worth. SUNP
recognised MAT of INR7.5bn pertaining to Ranbaxy on merger.

Analysis beyond Consensus (ABC) is our initiative to provide a differentiated perspective to our clients
on various non-routine and intricate issues. This unit of research works independent of the sector/stock
research team and views expressed in this report may vary with that of respective sector/stock analyst.
Edelweiss research is also available on www.edelresearch.com,
1
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

October 15, 2015


Edelweiss Securities Limited

Annual Report Analysis


Gross margins dipped by 7% while EBITDA margins declined by 15% YoY, partially owing to
merger related expenses.
Sun Pharma Laboratories Limited (SPLLs) reported profits remained subdued led by high
amortisation cost of intangibles transferred internally at fair value on demerger of domestic
formulation business in FY13. However there is no impact on consolidated profitability as
the amortisation cost is an inter-company transaction and gets eliminated on consolidation.
Recurring OCF (adjusted for exceptional/one-time loss) declined 18% YoY from INR64.5bn in
FY14 to INR53.1bn in FY15, led by higher working capital investment and tax payment.
Working capital, as a proportion to revenue, rose from 26% in FY14 to 29% in FY15.
Goodwill rose to INR50.6bn in FY15, 20% of net worth (FY14: INR29.1bn, 16%) and other
intangibles (including under development) stood at INR11.5bn, 4% of net worth (FY14:
INR4.1bn, 2%).
Outstanding derivatives position (gross) rose from INR21.6bn in FY14 to INR54bn at
consolidated level. Unhedged exposure details at consolidated level are not available.
Standalone net unhedged exposure (largely loans) rose to INR35.5bn, 16% of standalone net
worth (FY14: INR2.5bn, 3%).
Forex losses under other expenses stood at INR968mn in FY15 (FY14: INR1.9bn) and forex
losses booked under finance cost stood at INR2.7bn in FY15 (FY14: INR218.1mn). Unrealised
forex gains (as per cash flow) rose to INR7.9bn in FY15 (FY14: INR114.4mn).
R&D expenses rose from INR9.9bn (6% of revenues) in FY14 to INR18.6bn (7%) in FY15.
Major related party transactions include sales/purchase of INR202.7mn/INR1.5bn with Sun
Pharma Advanced Research Company (SPARC).
Other highlights

Long-term equity investments declined to INR1.5bn from INR4.3bn in FY14, partially led
by impairment of INR1.7bn in an associate. We believe it pertained to associate,
Zenotech Laboratories (Zenotech), which incurred loss of INR143.2mn (SUNPs share).
Total Investment in Zenotech stood at INR2.5bn, as at FY15.

Consolidated financials included unaudited financials of 44 subsidiaries, 3 joint ventures


(JVs) and 1 associate accounting for revenues of INR10.4bn (4% of consolidated
revenues), total assets of INR12.5bn and net cash inflow of INR4.3bn.

SUNPs board has proposed a special resolution to be passed (enabling provision) to


raise INR120bn. The board had sought consent of shareholders in FY14 and since the
resolution is valid only for 1 year, consent of shareholders has been sought once again.
SUNP has also obtained shareholders approval to increase the borrowing limit up to
INR500bn.

209

Edelweiss Securities Limited

Sun Pharmaceuticals
Pooling of Interest accounting led to higher RoE/RoCE

SUNP allotted shares worth


INR331.5bn to erstwhile Ranbaxy
shareholders on merger, however
net worth rose by INR29.9bn in
FY15
Goodwill of INR301.7bn does not
appear in the Balance Sheet due to
adoption of Pooling of Interest
accounting method

Table 1: Net worth analysis post Ranbaxy merger


Particulars
Shares issued to Ranbaxy shareholders @ swap ratio of 0.8 to 1
Fair market value of shares issued on 10 April 2015 (swap ratio
announcement date) based on 1 month average price @INR989.7 per
share - A
Less: Increase in networth on Ranbaxy merger - B
Increase in net worth had the company issued shares at market price or
followed purchase method of accounting (A-B)

RoE/ RoCE, adjusted for true cost of


acquisition, would be lower by 9%
each.
Reported ROE/ROCE will continue
to be higher, hence requires
appropriate adjustment while
calculating future return ratios.

INR mn
335.0
331,507
29,857
301,650

Reported RoE (%)


Reported RoCE (%)

21.5
25.9

Adjusted RoE (%)


Adjusted RoCE (%)

12.8
16.8
Source: Company annual report, Edelweiss research

SUNP, on April 10, 2015, announced swap ratio of 0.8x to 1 on merger of Ranbaxy and
issued 335mn shares to erstwhile Ranbaxy shareholders. The company followed Pooling of
Interest method of accounting in accordance with Accounting Standard (AS) 14 for Ranbaxy
merger as permitted under Indian GAAP. Internationally, under IFRS and USGAAP, Pooling
of Interest method is prohibited.
Under Pooling of Interest method, all assets and liabilities are recorded at book value and
any excess/ shortfall of investments over net assets are adjusted in reserves.
Had the company followed the Purchase method, net worth and goodwill would have been
higher by INR301.7bn each and RoE/RoCE would have been 12.8%/16.8% versus reported
21.5%/25.9%. Ranbaxy in FY14 reported RoCE of 7.2% and RoE stood negative.

Table 2: Net worth analysis - Standalone vrsus consolidated


Particulars
Opening shareholders' fund
Add
Profit for the year
Movement in Foreign currency translation reserve
Pursuant to merger of SunP Global FZE (SPG) unit
Pursuant to merger of SunP Global Inc. (100% subsidiary)
Pursuant to merger of Ranbaxy
Others
Total
Less:
Dividend and tax thereon
Loss for the year
Total
Closing shareholders' fund

(INR bn)
FY13
78.8

Standalone
FY14
77.9

FY15
74.1

Consolidated
FY13
FY14
FY15
122.4
149.9
185.2

5.2
5.2

28.1
28.1

165.3
10.6
1.3
177.2

29.8
3.8
33.6

31.4
7.6
39.0

45.4
3.3
29.9
1.2
79.8

6.1
6.1
77.9

3.6
28.3
31.9
74.1

8.7
14.7
23.4
227.9

6.1
6.1
149.9

3.6
3.6
185.2

8.7
8.7
256.4

Source: Company annual report, Edelweiss research

210

Edelweiss Securities Limited

Annual Report Analysis


In FY15, the company merged its wholly-owned subsidiary Sun Pharma Global Inc (SPI),
incorporated in British Virgin Island (BVI). Consequently, standalone net worth increased by
INR165.3bn. Ranbaxys standalone entity merger with SUNPs standalone company led to
increase in net worth by INR10.6bn in FY15.
In FY14, SUNP merged a unit of its 100% subsidiary, SPG leading to increase in standalone
net worth by INR28.1bn. Merger led to transfer of all assets and liabilities of SPGs unit into
standalone entity including settlement of Protonix drugs litigation liabilities as explained
below.

Demerger of SPGs unit


Fig. 1: SPGs unit demerger and third party arrangement
May 2013
Demerger and transfer of ulcer therapeutics segment to standalone entity
June 2013
USD550 mn (INR31bn) settlement agreement for 'Protonix' with Pfizer, Wyeth and Nycomed.
3rd party contract - wherein the party will bear USD400mn (INR24bn)
Consideration - SPG to sell products at discounted price for specified period.

De-merger from SPG to


standalone entity leads to transfer
of USD550mn cost from tax free
entity (SPG, UAE) to tax paying
entity.
3rd party contract leads to
discount/ incidental costs of
USD16.5mn in FY15 (FY14:
USD38.5mn) charged to P&L.

Source: Company annual report, Edelweiss research

Post merger of SPGs unit, the company settled the Protonix litigation liability of USD550mn
and entered into an agreement with a third party, wherein the said party will bear part of
the liability of USD400mn and SUNP has agreed to supply products at a discounted price.
Consequently, discount/incidental expenses (akin to finance costs in our view) of
USD16.5mn (equivalent to INR1.0bn) were charged to P&L in FY15 (FY14: USD38.5mn
INR2.3bn).

Table 3: Movement in provisions Towards liability to third party


Particulars
FY14
Opening Balance
5,808.0
Pursuant to the scheme of Amalgamation
Provision for the year
27,555.3
Utilised during the year
(9,190.5)
Exchange Fluctuation
2,139.4
Closing Balance
26,312.2

(INR mn)
FY15
26,312.2
817.0
2,223.6
(2,101.3)
1,069.5
28,321.0

Source: Company annual report, Edelweiss research

Total provisions stood at INR28.3bn of which 79% is long term and remaining INR5.9bn is
recognised as short term.

211

Edelweiss Securities Limited

Sun Pharmaceuticals
Profitability analysis
Though revenue ex-Ranbaxy is not disclosed separately, we have tried to derive the same,
based on annual report disclosures. Our calculations suggest 1.5% YoY revenue growth for
SUNP ex-Ranbaxy as explained below.

Table 4: Ranbaxy revenues (derived)


Particulars
Standalone (As per annual report)
Subsidiary (Section 212 / AOC-1
disclosure)
Inter-Company revenues (from
standalone to subsidiaries)
Total
Variance - due to inter-co
transactions within subsidiaries**
Consolidated revenues

(INR mn)
Ranbaxy revenues
FY14
FY15
(Reported) (Derived)**
68,649
55,867
98,662

87,761

(20,256)

(20,516)

1,47,056
(14,371)
1,32,685

1,23,112

YoY
(%)
(19)
(11)

Table 5: SUNP revenue ex-Ranbaxy


Particulars
Combined/ merged entity revenue
Ranbaxy revenue (derived)**
FY15 Revenue ex-ranbaxy
FY14 revenue
YoY change (%)

Consol
274,334
(111,081)
163,254
160,804
1.5

(INR mn)
Standalone
80,172
(55,867)
24,305
28,288
(14.1)

(16)

(12,031)#
1,11,081

(16)

Source: Company annual report, Edelweiss research


# In absence of details, proportion of inter-company transactions within subsidiaries has been assumed as in FY14.
** Variance in derived consolidated revenues could be led by inter-company transactions within subsidiaries for which no details are available.

Ranbaxys standalone revenues declined 19% YoY, while consolidated (derived) revenues
fell 16% YoY, which could partially be attributable to companys emerging market exposure.
SUNPs consolidated (ex-Ranbaxy) revenues grew by 1.5% YoY as per our calculation.
Standalone revenue (ex-Ranbaxy) declined 14% YoY. While in FY15, standalone entity also
included impact of merger of Sun Pharma Global Inc (SPI), a wholly-owned subsidiary, we
believe there will be no impact on revenue, as SPG was a holding company incorporated in
BVI, and in FY14 SPG reported nil revenues.

Table 6: Ranbaxy versus SUNP revenues Geographical distribution


FY14
Geography
US Business
Indian Business & API
ROW
Total

Ranbaxy

SunP

42,554
29,884
60,246
132,685

97,844
44,927
19,084
161,855

Total
140,398
74,811
79,330
294,540

FY15
Merged
entity
137,195
77,868
60,646
275,709

(INR mn)
Revenue proportion (%)
YOY (%)
(2.3)
4.1
(23.6)
(6.4)

FY14 (SunP) FY15 (merged)


60.5
27.8
11.8
100.0

49.8
28.2
22.0
100.0

Source: Company annual report, Edelweiss research

Rest of the World (RoW) segment revenues declined 24% YoY, primarily due to exposure to
emerging markets like Russia, Brazil, etc.

212

Edelweiss Securities Limited

Annual Report Analysis


Table 7: Merged entities standalone versus consolidated profitability analysis
Particulars
Sales
Raw Materials Consumed
Operating and Administrative
expense
Personnel cost
EBITDA
Depreciation
EBIT
Financial Charges
EBT
Other Income
PBT before exceptional item
Exceptional item
PBT after exceptional item
Tax expense
PAT

FY14
28.3
10.7
14.7

Standalone
%
FY15
100.0
80.2
37.7
35.1
51.9
35.8

2.8
9.9
0.2
0.6
1.0
3.6
(0.8)
(3.0)
(0.8)
(3.0)
1.6
5.6
0.7
2.6
(28.8) (101.7)
(28.0) (99.0)
0.3
1.0
(28.3) (100.0)

14.9
(5.6)
6.6
(12.2)
5.5
(17.7)
2.1
(15.6)
(15.6)
(0.8)
(14.7)

%
100.0
43.8
44.6
18.5
(7.0)
8.2
(15.2)
6.9
(22.1)
2.6
(19.4)
(19.4)
(1.1)
(18.4)

(INR bn)

Subsidiary (Derived)
FY14
%
FY15
%
132.5 100.0 194.2 100.0
17.1
12.9
32.3
16.6
27.6
20.8
48.2
24.8
17.9
69.8
3.1
66.8
0.4
66.3
3.9
70.3
3.6
73.8
6.7
67.1

FY14
160.8
27.8
42.2

Consolidated
%
FY15
100.0 274.3
17.3
67.4
26.3
84.0

%
100.0
24.6
30.6

13.5
52.7
2.3
50.4
0.3
50.1
3.0
53.0
2.7
55.7
5.1
50.6

29.4
15.2
20.7
12.9
44.3
16.1
84.3
43.4
70.0
43.5
78.7
28.7
5.3
2.8
4.1
2.5
11.9
4.4
78.9
40.6
65.9
41.0
66.7
24.3
0.3
0.1
0.4
0.3
5.8
2.1
78.6
40.5
65.5
40.7
60.9
22.2
3.4
1.7
5.5
3.4
5.5
2.0
82.0
42.2
71.0
44.2
66.4
24.2
(2.4)
(1.2) (25.2) (15.7)
(2.4)
(0.9)
79.6
41.0
45.8
28.5
64.0
23.3
10.0
5.1
7.0
4.4
9.1
3.3
69.6
35.9
38.8
24.1
54.9
20.0
Source: Company annual report, Edelweiss research
Note: FY15 numbers are not comparable YoY due to Ranbaxy and SPI merger

Gross margins declined by 700bps YoY while EBITDA margins dipped by 15% YoY to 29%, led
by increase in raw material costs and higher operating and employee expenses partially due
to higher expenses related to Ranbaxy merger. Profitability also got impacted due to
alignment of Ranbaxys policy (largely depreciation). Legal and professional expenses rose
to INR14.2bn, 5% of sales (FY14: INR4.8bn, 3%).
Effective tax rate declined from 15.3% in FY14 to 14.3% in FY15 led by deferred tax credit.

P&L tax rate stood at 14.3%, while


cash tax rate increased to 27.2% due
to deferred tax credit

SUNP recognised MAT of INR7.5bn


pertaining to Ranbaxy

DTA increased by INR10.5bn due to


unpaid liabilities, unabsorbed losses
and others

Total deferred tax assets stood at


INR22.3bn, 8.7% of net worth

Table 8: P&L tax charge versus cash tax paid


Particulars
FY11
FY12
PBT
20,360
33,554
Tax charge
1,286
3,132
Tax rate (%)
6.3
9.3
Cash tax paid
693
2,268
Cash tax rate (%)
3.4
6.8
Table 9: Deferred tax analysis
Particulars
Deferred tax assets:
Unpaid Liabilities
Intangibles
Unabsorbed losses
Others
Total - A
As % of net worth
Deferred tax liabilities:
Depreciation on fixed assets
Total - B
Net deferred tax asset (A-B)
As % of net worth

FY13
43,149
8,456
19.6
10,735
24.9

FY14
45,812
7,022
15.3
7,889
17.2

(INR mn)
FY15
64,029
9,147
14.3
17,404
27.2
(INR mn)
FY15

FY11

FY12

FY13

FY14

1,819
1,233
1,857
502
5,410
5.7

4,061
1,257
1,016
653
6,987
5.7

4,409
1,415
1,622
1,806
9,252
6.2

5,901
3,137
52
2,712
11,801
6.4

9,116
3,283
2,917
6,956
22,272
8.7

1,758
1,476
3,934
4.1

1,704
1,500
5,487
4.5

2,130
1,768
7,484
5.0

2,691
2,071
9,730
5.3

4,756
2,798
19,474
7.6

Source: Company annual report, Edelweiss research


213

Edelweiss Securities Limited

Sun Pharmaceuticals

Contingent liabilities continue to


rise led by income tax related
demands

Table 10: Contingent liabilities


Particulars
Income Tax related
Others
Total
As % of net worth

FY11
2,562
3,922
6,484
7

FY12
5,092
1,778
6,869
6

FY13
7,624
2,318
9,942
7

FY14
12,115
4,347
16,461
9

(INR mn)
FY15
26,707
9,211
35,918
14

Source: Company annual report, Edelweiss research

Commitments (over and above contingent liabilities) included INR11.3bn (FY14: INR4.2bn)
towards derivatives related commitments (towards forward contracts).

Subsidiaries profitability analysis


Table 11: Subsidiaries profitability analysis

(INR mn)
FY14
Shareholding
% Networth Revenues

Particulars
Sun Pharma subsidiaries
Taro Pharmaceuticals U.S.A.,Inc.
Sun Pharma Laboratories Ltd. (SPLL)
Sun Pharmaceutical Industries Inc. (Previously
Caraco Pharmaceutical Laboratories Ltd)
Taro Pharmaceutical Industries Ltd.(TARO)
Sun Pharma Global (FZE)
Taro Pharmaceuticals Inc.
Dusa Pharmaceuticals Inc.
Mutual Pharmaceutical Company Inc.
Taro Pharmaceuticals North America, Inc.
Chattem Chemicals Inc
Pharmalucence Inc.
Alkaloida Chemical Company Zrt.
Sun Pharma Holdings
Taro Hungary Intellectual Property Licensing LLC .
URL Pharma Inc.
Sun Pharma Global Inc.
Others
Total (A)
Ranbaxy subsidiaries
Ranbaxy Pharmaceutical, Inc.,
Ohm Laboratories Inc.,
Ranbaxy Laboratories Inc.,
S.C Terapia S.A. ,
Ranbaxy, Inc.,
Ranbaxy USA, Inc,
Ranbaxy (Netherlands) B.V.
Others
Total (B)
Grand total

68.9
100.0

1,863
186,334

39,773
39,469

907
2,466

100.0

6,164

46,675

502

68.9
100.0
68.9
100.0
100.0
68.9
100.0
100.0
100.0
100.0
68.9
100.0
100.0
65-100

60,936
69,090
31,774
147
11,776
7,374
3,169

18,709
31,621
19,168
4,232
17,699
6,709
1,810

10,079
31,668
10,335
237
6,048
4,796
203

6,493

970

1,066

6,103
5,268
206,470
214,718
817,678

8,518
235,354

132
150,815
1,440
220,693

100.0
100.0
100.0
96.7
100.0
100.0
100.0
65-100
817,678

214

PAT

FY15
Networth Revenues
(799)
186,107

PAT

48,107
43,726

1,155
(227)

5,183

43,230

(1,237)

88,232
81,850
40,731
1,143
11,829
15,750
3,465
5,264
35,309
214,150
6,358
5,487
214,922
109
915,091

23,609
22,106
19,285
6,898
6,051
5,170
1,826
1,144
799
173
7,537
229,661

30,266
11,326
12,046
1,372
(124)
3,074
164
(196)
(1,201)
170
42
(3)
(1,209)
55,417

6,138
20,309
(155)
5,293
17,135
(332)
6,106
12,999
3,576
7,178
8,064
1,222
14,870
1,874
(109)
9,796
2
49,765
(4,310)
7,373
27,380
(1,251)
106,519
87,761
(1,358)
235,354 220,693 1,021,610 317,422
54,059
Source: Company annual report, Edelweiss research

Edelweiss Securities Limited

Annual Report Analysis


Overall subsidiaries revenue (ex-Ranbaxy) declined by 2% YoY. However, Taro, SPLL and
Dusa Pharma reported robust revenue growth.
SPLLs reported profitability remained subdued primarily due to high amortisation cost of
intangibles transferred internally at fair value on demerger of domestic formulation
business into SPLL in FY13.

Cash flow analysis


Table 12: Cash flow analysis

(INR bn)

Particulars
Profit before tax
Non-operating expense
Non-cash adjustments
Direct taxes paid
Cash profit after tax
(Increase)/Decrease in inventories
(Increase)/Decrease in Trade Receivables
(Increase)/Decrease in loans & adv
(Increase)/Decrease in other assets
Increase/(Decrease) in trade payables
Increase/(Decrease) in provisions and others
(Increase)/Decrease in working capital
Net cash from operating activities
Interest expenses paid
Net cash from operating activities post interest
Add: exceptional loss
Adjusted recurring operating cash flow (OCF)
Less: Capex
Free cash flow

Standalone
FY14
FY15
(28.0)
(15.6)
(0.7)
(1.6)
1.1
7.4
(1.5)
(1.9)
(29.1)
(11.7)
(0.5)
4.2
3.4
2.8
(0.9)
(0.5)
(24.4)
28.4
0.2
1.2
27.3
(22.9)
5.0
13.2
(24.1)
1.5
(0.2)
(3.3)
(24.2)
(1.8)
28.8
4.5
(1.8)
(4.3)
(10.1)
0.2
(12.0)

Subsidiary (Derived)
Consolidated
FY14
FY15
FY14
FY15
73.8
79.6
45.8
64.0
(4.0)
(4.9)
(4.6)
(6.5)
3.1
6.1
4.2
13.5
(6.4)
(15.5)
(7.9)
(17.4)
66.6
65.3
37.5
53.6
(5.0)
(2.3)
(5.5)
1.9
(1.2)
(13.3)
2.2
(10.5)
4.3
(1.4)
3.4
(1.9)
(0.0)
(28.8)
(24.4)
(0.4)
2.5
2.2
2.7
3.4
(3.7)
30.0
23.6
7.1
(2.9)
(13.6)
2.1
(0.4)
63.6
51.7
39.6
53.2
(0.0)
0.8
(0.2)
(2.5)
63.6
52.5
39.4
50.7
(3.6)
2.4
25.2
2.4
60.0
54.9
64.5
53.1
(4.6)
(13.0)
(9.0)
(23.2)
55.4
41.9
55.6
29.9
Source: Company annual report, Edelweiss research

Operating cash flow rose from INR39.6bn in FY14 to INR53.2bn. However, adjusted for
exceptional items, (mainly pertaining to one-off Protonix drug litigation costs in FY14)
recurring OCF declined 18% YoY from INR64.5bn in FY14 to INR53.1bn in FY15.
Receivables increased at subsidiaries level leading to consolidated receivables rising by
INR10.5bn in FY15.

Table 13: Cash conversion cycle (days closing basis*)


Standalone
Particulars
FY13
FY14
Trade Receivable days
110
38
Add: Inventory days
262
233
Less: Trade payable days
(100)
(84)
Cash conversion cycle
271
186

FY15
56
180
(115)
122

Consolidated
FY13
FY14
78
50
327
298
(126)
(114)
279
234

FY15
70
237
(124)
183

FY13
65
180
(30)
214

TARO
FY14
42
183
(31)
194

FY15
89
174
(24)
239

Source: Company annual report, Edelweiss research


* Cash conversion cycle is calculated on closing basis instead of average due to mergers in FY15

Cash conversion cycle, at consolidated level, improved from 234 days in FY14 to 183 days in
FY15, led by lower inventory days and higher payable days. Taro receivable days rose from
215

Edelweiss Securities Limited

Sun Pharmaceuticals
42 to 89 days in FY15. Receivables for Taro are net of charge-backs/reserves for sales
deductions.
Working capital, as a proportion to revenue, rose from 26% in FY14 to 29% in FY15.

Table 14: Receivables analysis Taro


Particulars
FY13
Trade receivables (gross)
237.0
Less: Chargebacks/ customer
117.2
rebates/ other deductions
Net receivables
119.8
Gross receivables as % of sales
35
Net receivables as % of sales
18

FY14
301.2

(USD mn)
FY15
459.8

183.4

237.3

117.8
40
16

222.4
53
26

Table 15: Receivables analysis Consolidated


(INR bn)
Particulars
FY13
FY14
FY15
Outstanding for > 6 months
2,150
2,821
4,015
Less: Provision
(137)
(167)
(1,345)
Other receivables
22,109
19,350
50,453
Total receivables
24,122
22,004
53,123
Revenues
112,999 160,804 274,334
As a % of revenue
21.3
13.7
19.4
Source: Company annual report, Edelweiss research

Consolidated receivables rose to INR53.1bn in FY15, 19.4% of revenues (FY14: INR22bn).


Taros receivables and revenues are recorded net of charge-backs/customer
rebates/deductions that the company estimates, based on several factors.

Loans/advances and yield on cash

Loans to employees and others rose


to INR11.7bn in FY15

Total loans/ advances stood at


INR48.7bn, 19% of net worth

Table 16: Loans and advances analysis


(INR mn)
Particulars
FY12
FY13
FY14
FY15
Loans and advances towards:
Employees / Others
6,128
5,217
5,754
11,732
Prepaid Expenses
660
1,267
1,508
2,727
Balances with Government Authorities
2,428
3,164
5,390
7,391
Advance Income Tax [Net of Provisions]
4,163
2,448
5,690
11,040
MAT Credit
7,517
Advances for Supply of Goods and Services
1,655
679
1,360
1,829
Capital Advances
1,132
2,098
2,681
3,771
Others
208
4,302
575
2,732
Total
16,374
19,174
22,957
48,738
Net worth
122,358 149,897 185,250 256,381
As % of net worth
13.4
12.8
12.4
19.0
Source: Company annual report, Edelweiss research

216

Edelweiss Securities Limited

Annual Report Analysis

Average yield on cash declined from


5.5% in FY14 to 3.6% in FY15

Cash and investments rose to


INR149bn in FY15, of which
INR57.5bn was in current account

Table 17: Yield on cash and investments


Particulars
Other income
Other income as % of PBT
Cash & investments:
Current account
Deposits, Loans and others (incl
employee loans)
Total
Average yield on cash (%)

FY12
4,393
13.1

FY13
3,511
8.1

FY14
4,977
10.9

(INR mn)
FY15
4,642
7.3

3,421

5,578

39,714

57,517

58,462

65,031

69,708

91,516

61,883

70,608

109,422

149,034

4.2

5.3

5.5

3.6

Source: Company annual report, Edelweiss research

Table 18: Summary financials


Particulars
Sales
Total income
Gross Margin
Gross Margin (%)
EBITDA
EBITDA margin (%)
RoE (%)
RoCE (%)
Depreciation
Financial costs
Net profit
Equity shareholders' funds
Loan funds
Net fixed assets
CWIP
Current assets loans and advances
Current liabilities and provisions
Net current assets
Cash and investments
Net Cash
Cash flow from operating activities
Cash flow from investing activities
Cash flow from financing activities
Net cash flows
CAPEX
Working capital investments

FY11
57.3
60.4
42.7
74.5
20.0
35.0
21.0
23.6
2.0
0.7
18.2
94.8
4.3
32.9
2.4
76.4
15.1
61.3
44.3
40.1
23.9
(21.5)
(7.7)
(5.3)
(4.5)
5.5

FY12
80.2
84.9
63.8
79.6
32.0
40.0
24.5
30.1
2.9
0.3
26.6
122.4
3.2
39.5
3.4
102.9
24.5
78.4
55.8
52.6
22.3
(8.6)
(5.4)
8.3
(7.1)
(10.1)

FY13
113.0
116.9
92.3
81.7
49.0
43.3
25.4
35.6
3.4
0.4
29.8
149.9
2.6
56.5
5.6
102.0
27.0
75.0
64.7
62.1
33.6
(26.4)
(6.6)
0.6
(8.3)
(0.4)

FY14
160.8
166.3
133.0
82.7
70.0
43.5
31.5
39.3
4.1
0.4
31.4
185.2
25.6
68.2
8.4
166.9
34.8
132.1
103.8
78.2
39.6
(23.7)
5.1
21.0
(9.0)
2.1

(INR bn)
FY15
274.3
279.8
206.9
75.4
78.7
28.7
21.5
25.9
11.9
5.8
45.4
256.4
89.9
131.9
15.3
270.0
87.3
182.8
137.1
47.2
53.2
(26.7)
(10.9)
15.6
(23.2)
(0.4)

Source: Company annual report, Edelweiss research

217

Edelweiss Securities Limited

ANALYSIS BEYOND CONSENSUS


THE NEW ABC OF RESEARCH
Adani Ports & SEZ | Annual Report Analysis

Adani Ports SEZs (APSEZ) FY15 annual report highlights robust growth in
revenue and profitability owing to healthy surge (28%) in cargo volumes
at Mundra and other ports. The company resorted to bill discounting of
INR4.5bn as at March 2015, adjusted for which receivable days increased
to 107 (FY14: 84). Aggregate cash and non-cash exposure to related
parties (ex subsidiaries and JV) stood at INR34.3bn (FY14: INR35.2bn) and
INR30.2bn (FY14: INR48bn), respectively, representing ~60% of net worth.
Aggregate unhedged forex exposure stood at INR111.7bn (FY14:
INR116.8bn). Management stated that ~30-35% of income (~INR20bn25bn) is USD denominated and will act as hedge for USD denominated
borrowings.

Whats on track

Market Data
52-week range (INR)

: 357 / 244

Share in issue (mn)

: 2,071.0

M cap (INR bn/USD mn)

: 667 / 10,281

Avg. Daily Vol. BSE/NSE (000) : 3,202.4

Shareholding Pattern (%)

Promoters*

: 56.3

MFs, FIs & Banks

: 12.3

Consolidated revenue (adjusted) surged ~38% and EBITDA margin inched up to 63.4%
(FY14: 61.9%) led by robust growth in cargo volumes at Mundra and other ports.

FIIs

: 24.9

Others

: 6.5

Consolidated operating cash flows post interest (adjusted for bill discounted) spurted to
~INR20.9bn in FY15 (FY14: INR6.5bn) led by higher profitability and lower incremental
investment in working capital.

*Promoters pledged shares

: 16.9

(% of share in issue)

What needs tracking?


ICDs/loans & advances (including capital advances) to related party (fellow subsidiaries
and hold co) stood at INR24bn (FY14: INR25bn), 22.2% of net worth.
ICDs (ex related parties) stood at INR12.6bn (FY14: INR16.7bn) at prevailing market
interest.
During the year, loan/ICD of INR 12.5bn was given to Adani Enterprises which was
subsequently received back, resulting in no change in yearend balance.
Net debt jumped to ~INR169bn in FY15 (FY14: INR124bn) primarily owing to acquisition
of Dhamra port. Debt equity ratio increased to 1.65x versus 1.5x at March14.
Receivables from related parties increased to INR8.2bn, 47% of total receivables (FY14:
INR7.3bn, 51%), representing 7.6% of net worth. Receivable days from related parties
stood at 243 (FY14: 185) versus 59 (FY14: 61) from non-related parties.
Cash conversion cycle, adjusted for bill discounting, rose to 120 days (FY14: 90) led by
steep rise in receivable days to 107 (FY14: 84). As at March 2015, APSEZ discounted bills
of INR4.5bn (FY14: nil). Receivables outstanding for more than 6 months stood at
INR5.2bn (FY14: INR3.4bn).

Analysis beyond Consensus (ABC) is our initiative to provide a differentiated perspective to our clients
on various non-routine and intricate issues. This unit of research works independent of the sector/stock
research team and views expressed in this report may vary with that of respective sector/stock analyst.
Edelweiss research is also available on www.edelresearch.com,
1
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

August 13, 2015


Edelweiss Securities Limited

Annual Report Analysis


During the year, based on preliminary agreement, APSEZ recognised revenue (INR2bn) and
cost towards land reclamation based on activities completed and land being made available
for setting up of Mundra LNG project. As at March 2015, entire sales consideration of INR
2bn remained uncollected.
Management stated that ~30-35% of income (~INR20bn-25bn) is USD denominated and will
act as hedge for USD denominated borrowings (~INR110bn). Hence, the forex exposure was
kept open. However, since March15, the INR has depreciated by 4% to INR 65/USD, which
may increase MTM losses on borrowings and derivatives.
The company capitalised forex loss of INR1.3bn (FY14: INR7.3bn) in fixed assets and
INR0.2bn (FY14: INR1.2bn; net of amortisation) in FCMITDA as per amended AS11
APSEZ guaranteed credit facility of USD800mn availed by erstwhile subsidiary Mundra Port
Pty Ltd. Outstanding loan against said corporate guarantee (CG) stood at USD487mn (FY14:
USD800mn). However, the company has received corporate guarantee (CG) (deed of
indemnity) from Abbot Point Port Holding against outstanding CG given by APSEZ.

Other highlights

During FY14, APSEZ gave deposit of INR2.5bn to Adani Enterprises to purchase/lease


corporate office space as per agreement/MoU valid till March 31, 2017. The, said
amount remained outstanding as at March15.

During the year, loan/ICD of INR 12.5bn was given to Adani Enterprises which was
subsequently received back, resulting in no change in yearend balance.

Cash tax paid stood at INR4.9bn (FY14: INR5.2bn) vis--vis P&L charge of INR1.8bn
(FY14: INR2.3bn). The difference was primarily on account of MAT credit entitlement of
INR5.3bn (FY14: INR3.9bn) recognised in FY15, taking total MAT credit entitlement to
INR15.2bn.

The Income Tax Department has filed appeals with ITAT on the ground that interest
income on loans given to existing and potential associates is not a business income and
hence cannot be netted off against interest expense while computing deduction u/s
80IAB. Considering the CIT (Appeals) order upholding the companys claim in similar
matter in the past and based on expert advice, no tax provision is made in the books
against such income. Based on this, APSEZ has accounted higher MAT credit of
INR1.4bn during the year (including INR0.6bn of earlier years).

The company proposed to acquire balance 24% stake in Adani Murmugao Port from
AEL and is in the process of obtaining regulatory approval.

Key highlights of MD&A

APSEZ has obtained the Government approval to set up another multi-product at the
Mundra port (on ~1,856 hectares of land), adjacent to the existing multi-product SEZ.

The company is in process of developing a container handing terminal at Ennore port,


Tamil Nadu and expects Phase 1 to get completed and commence operations by March
2016.

219

Edelweiss Securities Limited

Adani Ports & SEZ


Earnings analysis
Table 1: Standalone/subsidiary profitability analysis
Standalone
Particulars
FY14
% FY15
Revenue (ex CT-3 sales)
36.3 100.0
39.1
Revenue- CT-3 sale
7.2
Operating and admin
expense
10.8
29.8
11.4
Cost- CT-3 sale
4.2
Personnel cost
1.2
3.2
1.6
EBITDA
27.4
67.0
26.1
Depreciation
4.6
12.6
4.9
EBIT
22.8
54.4
21.2
Financial Charges
7.5
20.8
7.1
Other Income
5.6
15.5
4.9
PBT
20.9
49.2
19.0

(INR bn)
%
100.0
29.3
4.0
66.7
12.5
54.2
18.1
12.6
48.7

Subsidiary (Derived)
FY14
% FY15
%
8.4 100.0
22.4 100.0
4.6
0.4
3.4
1.9
1.4
2.2
1.2
0.4

54.9
5.3
39.9
23.0
16.8
26.5
14.6
4.9

8.7
0.8
12.9
4.2
8.7
4.7
1.9
6.0

38.7
3.5
57.7
18.9
38.9
20.8
8.5
26.6

FY14
44.7
3.6
15.4
2.1
1.6
29.2
6.5
22.7
9.8
6.8
19.8

Consolidated
% FY15
100.0
61.5
34.5
3.6
61.9
14.5
47.4
21.9
15.3
40.8

%
100.0
-

20.1
2.4
39.0
9.1
29.9
11.8
6.9
25.0

32.7
3.9
63.4
14.8
48.6
19.1
11.1
40.7

Note: % presented in above table is after adjustment of revenue and cost from CT-3
sales; Intercompany interest income is adjusted in above table
Source: Company annual report, Edelweiss research

Standalone revenue (adjusted for


CT-3 sale of INR7.2bn) grew 8%
during FY15. EBITDA margin
(adjusted for profit on CT-3 sale)
remained unchanged at ~67%

Consolidated adjusted EBITDA


margin (adjusted for margin on
CT-3 sale of INR 1.5bn) surged to
63.4% (FY14: 61.9%) led by
improved profitability of Hazira,
Dahez and Dhamra ports

Standalone

Financial charges (standalone) declined to INR7.1bn (FY14: INR7.5bn) despite increase


in average borrowings. This was due to gain on derivatives of INR0.6bn (FY14: Loss of
INR1.8bn) recognised in FY15 under financial charges.

Consolidated

Finance cost surged to INR11.8bn (FY14: INR9.8bn) led by 25% increase in average
borrowings. This was partly offset by gains on derivatives of INR0.7bn (FY14: Loss of
INR2.1bn) recognised in finance cost.

During FY15, based on preliminary agreement, APSEZ recognised revenue (INR2bn) and
cost towards land reclamation based on activities completed and land being made
available for setting up of Mundra LNG project. Consequently, accrued revenue
increased from INR1bn in FY14 to INR3bn in FY15.

Other income includes interest income of INR3.9bn (FY14: INR2.4bn) due from related
party.
Other income also includes unclaimed liabilities/excess provision written back and
miscellaneous income of INR423mn and INR311mn, respectively.

Table 2: Other income (Consolidated)


Particulars
Interest & dividend income
Profit on dilution of control from subsidiary to JV
Profit on Sale of Fixed assets
Unclaimed Liabilities / Excess Provision written back
Miscellaneous Income
Total

FY13
1,310
1,258
14
63
2,644

FY14
5,578
1,104
64
102
6,848

(INR mn)
FY15
6,123
423
311
6,856

Source: Company annual report, Edelweiss research

220

Edelweiss Securities Limited

Annual Report Analysis


Subsidiary/JV profitability
Table 3: Major subsidiaries & JV analysis
Particulars

% holding

Subsidiary
The Dhamra Port Company Limited
Adani Logistics Limited
Adani Hazira Port Private Limited
Adani Petronet (Dahej) Port Private Limited
MPSEZ Utilities Private Limited
Karnavati Aviation Private Limited
Adani Murmugao Port Terminal Private Limited
Adani Vizag Coal Terminal Private Limited
Total
PAT Margin (%)
Joint Venture
Adani International Container Terminal Private Ltd.
Adani CMA Mundra Terminal Private Limited

Standalone
investment

(INR bn)
FY15

FY14
Networth

100%
100%
100%
74%
100%
100%
74%
100%

27.4
3.3
7.2
2.6
0.5
0.5
0.9
1.0
43.2

2.8
3.5
7.6
4.8
0.8
0.0
0.9
0.8

50%
50%

3.1
0.3

2.6
0.3

Turnover
5.4
2.7
3.0
0.9
0.5
12.4

1.1
-

PAT Turnover

PAT

0.3
0.2
0.1
0.0
(0.2)
(0.0)
(0.0)
0.6
4.5

7.2
6.3
4.9
4.8
1.2
0.5
0.2
0.2
25.4

1.0
0.5
0.7
0.9
0.1
(0.1)
(0.3)
(0.2)
2.6
10.3

(0.3)
-

1.8
0.0

(0.3)
0.0

Note: Companys share of revenue and profit in JV is presented in above table

Aggregate profitability of subsidiaries increased to INR2.6bn (FY14: INR 0.6bn)


led by improvement in profitability of newer portsDhamra, Hazira and
Dahez.

Adani International container terminal revenue surged 65% in FY15 and


EBITDA margins stood at ~55%.

Cash flow analysis


Table 4: Cash flow analysis

(INR bn)

Particulars

Standalone
Subsidiary (derived)
Consolidated
FY14
FY15
FY14
FY15
FY14
FY15
22.1
21.5
(2.3)
3.5
19.8
25.0
0.6
1.9
5.5
3.4
6.2
4.4
2.0
4.0
6.0
8.3
(4.3)
(0.3)
(0.6)
(5.2)
(4.9)
22.8
22.2 1.3 12.5 24.1 34.7
1.0
(1.6)
(0.4)
(6.3)
0.5
(0.4)
(0.2)
(0.3)
(0.7)
(0.7)
(3.5)
1.0
(0.8)
(2.6)
(4.3)
(0.3)
0.1
(0.4)
0.9
(0.6)

Profit before tax


Non-operating expense /(profit)
1.5
Non-cash adjustments
4.1
Direct taxes paid
(4.9)
Cash profit after tax
(Increase)/Decrease in trade receivables
(4.7)
(Increase)/Decrease in inventories
(0.6)
(Increase)/Decrease in Loans & Adv. & others
(3.6)
Increase/(Decrease) in trade payables
0.9
Increase/(Decrease) in provisions and other
1.2
1.0
(5.3)
0.1
(4.1)
1.1
liabilities
(Increase)/Decrease in bill discounted
(4.5)
(4.5)
(Increase)/Decrease in working capital
(6.8)
(6.7)
(6.0)
(1.8)
(12.7)
(8.5)
Net cash from operating activities
16.0
15.5
(4.7)
10.7
11.3
26.2
Interest expenses paid (net of invest. income)
(2.8)
1.3
(1.6)
(6.6)
(4.4)
(5.3)
Net cash from operating activities post interest
13.2
16.8
(6.3)
4.1
7.0
20.9
Less: Capex
(4.1)
(4.6)
(6.9)
(13.2)
(11.0)
(17.8)
Free Cash Flows
9.1
12.2
(13.2)
(9.2)
(4.1)
3.1
Note: We have adjusted the investment income from the interest cost to arrive at free cash flows in above table
Source: Company annual report, Edelweiss research
221

Edelweiss Securities Limited

Adani Ports & SEZ

Bills discounted with banks stood


at INR4.5bn as at March 2015
(FY14: nil)

Cash conversion cycle (adjusted


for bill discounting) increased
from 90 days in FY14 to 120 days
in FY15 led by higher receivable
days

Consolidated operating cash flows post interest (adjusted for bill discounted) spurted to
~INR20.9bn in FY15 (FY14: INR7bn) led by higher profitability and lower incremental
investment in working capital.

Despite steep increase in operating cash flows, free cash flows only improved
moderately to INR3.1bn (FY14: INR(4.1bn)) due to higher capex undertaken by the
companys subsidiaries.

Table 5: Cash conversion cycle


Particulars
Inventory days
Receivable days
Advance from customers days
Accrued revenue days
Payable days
Cash conversion cycle
Add: Bill disounted days
Adjusted Cash conversion cycle

FY12
8
46
7
3
(36)
27
27

FY13
9
61
6
7
(29)
53
53

FY14
10
84
5
7
(17)
90
90

FY15
13
94
7
11
(18)
106
13
120

Source: Company annual report, Edelweiss research

Receivable days adjusted for


related parties increased to 59 (ex
bill discounting) (FY14: 61)

Table 6: Receivables profile


Current (a)
>6 months
<6 months*
Non current(b)
<6 months*
Total (a)+(b)

Receivables o/s for more than 6


months stood at INR5.2bn (FY14:
INR3.4bn)

Due from related party #


Current
Non current

Non- current receivables are


primarily due from related parties

FY12
3.0
1.0
2.0
0.9
3.9

FY13
7.2
0.8
6.4
0.8
8.0

FY14
9.2
3.4
5.9
5.0
14.3

(INR bn)
FY15
12.9
5.2
7.7
4.4
17.3

0.0
3.9
1.1

0.3
7.7
3.6

3.4
4.4
7.8
6.5
54.7

4.9
3.6
8.5
8.8
49.1

Due from others


% of total receivables
*includes INR6.7bn (FY14:INR7.3bn) contractually collectable on deferred basis (Inc where
receivable period extended)
# including receivable due from JVs
Source: Company annual report, Edelweiss research

222

Management is confident of recovery of certain receivables which remained overdue


(amount not quantified) as at year end on account of pending environment clearance.

Edelweiss Securities Limited

Annual Report Analysis


Related party analysis
Operating revenue earned from
related parties increased to
INR11.6bn, 19% of consolidated
revenue, in FY15 (FY14: INR9.2bn,
19%)

Table 7: P&L Exposure


P&L exposure
Income from Port Services
Adani Enterprises Ltd
Adani Power Ltd.
Adani Power Rajasthan Ltd.
Adani Power Maharashtra Ltd.
Others
Lease & Infrastructure usage income
Others

Interest income (on ICDs given to


related parties) jumped ~60% to
INR3.9bn led by spurt in average
loans/ICDs outstanding from
related parties

Operating Revenues
Related party revenue as % to total operating rev.
Interest Income on ICDs/deferred income
Adani Agri Fresh Ltd.
Adani Enterprises Ltd.
Adani Power Ltd.
Adani Infra (India) Ltd.
Others

Donation to Adani Foundation


stood at INR344mn (FY14:
INR242mn)

Purchase of spares, consumables and Power


Chemoil Adani Pvt. Ltd.
Adani Power Ltd.
Others
Purchase of assets
Adani Power Dahej Ltd
Services availed (inc reibursement of expenses)
Adani Enterprises Ltd.
Adani Power Ltd.
Others

(INR bn)
FY14
FY15

FY12

FY13

1.4
2.4
0.0
0.6

2.9
3.8
0.1
0.2
0.7

2.9
4.6
0.5
0.3
0.7

3.5
5.3
1.0
1.0
0.7

0.4

0.1

0.1

0.0

4.8
17.9

7.9
22.0

9.2
19.0

11.6
18.9

0.3
0.1
0.4

0.6
1.6
0.3
2.4

1.2
0.4
0.9
1.2
0.2
3.9

1.8
0.3
0.2
2.3

0.9
0.0
0.0
0.9

1.6
0.7
0.0
2.3

1.1
0.1
0.0
1.2

1.1

0.0
0.0

0.0
0.6
0.0

0.0
0.0
0.0

0.2
0.1
0.0

Source: Company annual report, Edelweiss research

Our calculations indicate yield of


~12-15% on loans given to related
parties

Table 8: Interest Income analysis from related parties


Adani Agri
Particulars
Fresh
As on April 1, 2014
9,040
Given during FY15
3,098
Received back during FY15
(1,489)
Closing
10,649
Average (a)
9,845

Loan transactions with Adani


Enterprises remained high during
FY15, although there was no
change in year end balance

Interest income (b)


Interest (b/a) (%)

1,193
12.1

Adani
Enterprises
2,502
12,530
(12,530)
2,502
2,502

(INR mn)
Adani Infra
(India)
8,929
2,793
(1,033)
10,689
9,809

364
14.5

1,222
12.5

Source: Company annual report, Edelweiss research

223

Edelweiss Securities Limited

Adani Ports & SEZ


Total exposure to RPs marginally
declined to INR34.3bn, at 12% and
32% of capital employed and net
worth (March 2014: INR35.2bn,
16% and 40.0%) respectively

Table 9: Balance sheet exposure


Balance sheet exposure
Trade receivables (A)
Adani Power Ltd.
Adani Power Rajasthan Ltd.
Others
Loans and advances (incl. capital advances) (B)
Adani Infra (India) Ltd.
Adani Agri Fresh Ltd.
Adani Enterprises
Adani power
Chemoil Adani Pvt Ltd
Others

Trade receivables from related


parties (RP) stood at INR8.2bn.
Receivables from Adani Power
(including its subsidiaries) rose
10% to INR7.6bn

Other current assets (C)


Abbot Point Port Holdings Pte Ltd
Adani Power Ltd.
Adani Infra (India) Ltd.
Others

Loans and advances to RP


marginally declined to ~INR24bn
as at March 2015 (March 2014:
INR25bn)

Foreign exchange losses of


INR1.4bn (FY14: INR8.5bn), 5.8%
of PBT, were adjusted in the
balance sheet

Cumulative capitalisation (net) of


forex losses during FY13-15 stood
at INR14.5bn (23.5% of reported
PBT)

Net asset exposure (A+B+C-D-E)

FY12

FY13

FY14

FY15

0.3
0.0
0.1
0.5

1.5
0.1
0.5
2.0

5.7
0.5
1.1
7.3

6.3
0.8
1.0
8.2

0.0
0.4
0.4

2.5
0.0
1.3
3.8

8.9
9.0
2.5
2.5
1.9
0.1
25.0

10.7
10.6
2.5
0.0
0.1
23.9

13.3
0.2
13.5

0.9
0.5
1.0
0.7
3.1

0.8
1.0
0.5
0.3
2.6

0.0
0.0

0.1
0.1

0.1
0.1

Current liabilities (D)


Others
Advances from customers (E)
Others

Outstanding loan against


corporate guarantee given to
Mundra Port Pty Ltd declined to
INR 487mn (FY14: USD800mn)

(INR bn)

0.0
0.0

0.1
0.1
0.2
0.3
0.1
0.2
0.3
0.1
0.7
19.2
35.2
34.3
Source: Company annual report, Edelweiss research

APSEZ guarantees credit facility of USD800mn availed by erstwhile subsidiary, Mundra


Port Pty Ltd, representing Abbot Point Port. Outstanding loan against said corporate
guarantee (CG) stood at USD487mn (FY14: USD800mn), ~28% of net worth. However,
the company has received CG (deed of indemnity) against outstanding CG from Abbot
Point Port Holding.

Table 10: Capitalisation of forex exchange losses


Particulars
Exchange difference capitalized to cost of fixed
assets/CWIP
Amounts Capital ized to FCMITDA
Total Capitalisation
Less: Amortized to P&L
Net Capitalisation
% of PBT
Forex (gains)/losses recognised in P&L
% of PBT

(INR bn)
FY15 FY13-15

FY13

FY14

3.6

7.3

1.3

12.1

0.7
4.2
0.3
4.5
27.0
0.1
0.4

1.8
9.0
(0.5)
8.5
43.0
0.6
2.9

0.8
2.0
(0.6)
1.4
5.8
0.7
2.9

3.2
15.3
(0.8)
14.5
23.5
1.4
2.2

Source: Company annual report, Edelweiss research

224

Edelweiss Securities Limited

Annual Report Analysis

APSEZs net forex exposure


(comprising unhedged foreign
currency payables and INR-USD
Swap) declined marginally to
~INR112bn

Table 11: Unhedged forex exposure


Particulars
Foreign currency loans
Buyer's Credit
Trade Payables
Interest accrued but not due
Total (A)

FY13
68.5
5.6
0.3
0.3
74.8

FY14
81.9
7.6
0.1
0.5
90.2

Add: Outstanding swap position (B)


Less: Trade Receivables (C)
Net unhedged payables (A+B-C)
Exchange rate (USD)

15.9
13.3
77.3
54.3

27.6
0.9
116.8
59.9

(INR bn)
FY15
79.2
5.7
0.2
0.5
85.7
27.1
1.1
111.7
62.5

Source: Company annual report, Edelweiss research

Table 12: Outstanding derivative position


Particulars
Currency

Management stated that ~30-35% of income (~INR20bn-25bn) is USD denominated


and will act as hedge for USD denominated borrowings (~INR110bn); considering this
forex exposure is kept open.
Since March15, INR has further depreciated by 4% to INR 65 per USD. This would lead
to increase in losses (realised and MTM) on borrowings and derivatives.

FY14

FY15

INR- Foreign Currency Swap

USD

460.9

434.2

Forward Contracts

USD

20.3

Forward Contracts

Euro

4.7

Interest rate swap

USD

5.0

Interest rate future

INR

1,045

(Respective currency in mn)


Purpose
Hedging of equivalent INR NCDs to mitigate higher interest rate of
INR loans against foreign currency loans with possible risk of
principal currency losses
Hedging of expected future billing based on foreign currency
denominated tariff
Hedging of foreign currency term loan installment liability
Hedging of interest rate on foreign currency term loan liability
equivalent of USD 5 million
Hedging of Interest costs on rupee term loan
Source: Company annual report, Edelweiss research

225

Gains/loss on derivatives is recognised under Finance charges. APSEZ recognised gain


on derivatives of INR0.7bn in FY15 against loss of INR2.1bn in FY14.

Edelweiss Securities Limited

Adani Ports & SEZ


Table 13: Consolidated capital employed
Exposure to related parties stood
at ~INR34bn (FY14: INR35bn),
representing 12% of consolidated
capital employed.

Particulars
Equity shareholders' funds
Loan funds
Minority interest
Capital employed
Net exposure in RP
Inter corporate deposits (ex RP)
Capital employed (ex RP & ICD)

FY13
64.0
115.9
1.4
181.2
19.2
12.1
149.9
181.2

Amount
FY14
87.7
129.3
1.4
218.5
35.2
16.7
166.6
218.5

FY15
107.7
177.3
1.6
286.6
34.3
12.6
239.7
286.6

(INR bn)
% to total capital employed
FY13
FY14
FY15
35.3
40.1
37.6
63.9
59.2
61.9
0.8
0.7
0.6
100.0
100.0 100.0
10.6
16.1
12.0
6.7
7.6
4.4
82.7
76.3
83.6
100.0
100.0 100.0

Source: Company annual report, Edelweiss research

Borrowing cost (ex forex losses)


increased marginally to 8.5%
(FY14: 8.4%)

Forex losses steeply declined to


INR2bn (FY14: INR9bn).
Consequently, effective borrowing
cost declined 600bps to 9.8% in
FY15

As at March 2015, APSEZ has given inter corporate deposits aggregating INR12.6bn
(FY14: 16.7bn) to various parties (ex RP) at prevailing market interest. No further
details available regarding the terms of deposits.

Increase in borrowed funds during FY15 was led by acquisition of Dhamra, which had a
debt of ~INR33bn at the time of acquisition.

Table 14: Borrowing analysis


Particulars
Foreign currency loans
Non convertible debentures
Rupee term loans
Commercial paper
Suppliers bills accepted under foreign currency
LC
Total
Interest cost analysis
Interest expense
Interest capitalised
Total interest
Exchange loss capitalised in FA
Forex loss charged to reserves (FCMITDA)
Forex losses
Borrowing cost (%) - ex forex losses
Borrowing cost including forex loss (%)

FY13
73.1
20.5
14.8
2.5

FY14
81.9
19.9
19.7
2.3

(INR bn)
FY15
79.5
41.4
39.1
11.5

4.9
115.8

5.5
129.3

5.7
177.3

5.4
2.4
7.8
10.9
0.7
11.6
5.3
13.3

9.8
0.5
10.3
7.3
1.8
9.0
8.4
15.8

11.8
1.3
13.1
1.3
0.8
2.0
8.5
9.8

Source: Company annual report, Edelweiss research

226

Edelweiss Securities Limited

Annual Report Analysis


Table 15: Summary Financials
Particulars
Sales
Total income
EBITDA
EBITDA margin (%)
RoE
RoCE
Depreciation
Financial costs
Net profit
Equity shareholders' funds
Loan funds
Net fixed assets
Goowill on consolidation
CWIP
Current assets loans and advances
Current liabilities and provisions
Net current assets
Cash and cash equivalents
Net Debt
Cash flow from operating activities
Cash flow from investing activities
Cash flow from financing activities
Net cash flows
CAPEX
Working capital investments

FY11
20.0
21.1
13.0
65.0
24.0
15.6
2.4
1.7
9.2
41.9
35.9
63.5
0.4
17.2
5.5
6.4
(0.8)
2.3
33.6
12.1
(9.7)
(5.3)
(2.9)
(18.3)
0.3

FY12
27.0
27.5
17.5
64.8
24.8
9.8
3.2
2.8
11.0
48.2
175.6
173.2
11.1
36.4
8.7
11.3
(2.6)
11.2
164.5
12.0
(138.8)
129.8
3.0
(45.5)
(5.4)

FY13
35.8
38.4
23.8
66.4
27.5
11.0
4.2
5.4
16.2
64.0
115.9
113.4
0.4
29.5
41.2
16.9
24.3
9.8
106.1
13.8
(46.9)
42.1
9.0
(38.3)
(6.3)

FY14
48.3
55.1
29.2
60.4
22.9
14.9
6.5
9.8
17.4
87.7
129.3
131.2
0.4
20.2
49.3
10.5
38.7
5.2
124.1
11.3
(25.1)
7.7
(6.1)
(11.0)
(12.7)

(INR bn)
FY15
61.5
68.4
39.0
63.4
23.7
14.6
9.1
11.8
23.1
107.7
177.3
179.3
26.0
12.8
59.5
15.5
44.0
8.4
168.9
30.7
(24.9)
(2.4)
3.4
(16.3)
(4.0)

Source: Company annual report, Edelweiss research

227

Edelweiss Securities Limited

ANALYSIS BEYOND CONSENSUS


THE NEW ABC OF RESEARCH
Titan Company | Annual Report Analysis

Titan Companys (Titan) FY15 annual report analysis highlights reduction in


debt by INR7.1bn but increase in gold lease payables (akin to debt) by
INR10.8bn as the company has resumed its gold lease model. Total
liabilities (debt + payables) surged 22% YoY, but deposits towards incentive
schemes fell pending pick up in the new scheme. D/E ratio adjusted for
gold lease stood at 0.7x versus 0.03x reported. Internationally, jewellery
companies classify gold lease as debt. Off balance sheet commitments
include non-fund based facility, which rose from INR1.5bn in FY14 to
INR11.3bn in FY15 pertaining to gold lease. Jewellery segment RoCE
declined in FY15 although core RoCE (adjusted for gold lease and customer
deposits) improved YoY. Gold prices partly aided revenue growth till FY13,
however prices declined in FY15 and volume growth stood robust. ICDs
given in FY15 rose by INR480mn to INR2.4bn (7.7% of net worth).

Whats on track?
Revenues grew by 9% YoY despite decline in average gold prices by 5.6% in FY15, as
volume growth was robust.

Market Data

52-week range (INR)

: 448 / 321

Share in issue (mn)

: 887.8

M cap (INR bn/USD mn)

: 301 / 4,716

Avg. Daily Vol. BSE/NSE (000) : 1,010.6

Shareholding Pattern (%)


Promoters*

: 53.1

MFs, FIs & Banks

: 4.7

FIIs

: 20.1

Others

: 22.2

*Promoters pledged shares

: Nil

(% of share in issue)

What needs tracking?


Total liabilities (including debt and payables) rose from INR16.7bn in FY14 to INR20.4bn
in FY15. Advance towards customer incentive schemes declined from INR13.0bn to
INR681mn in FY15.
Core RoCE (including payables and deposits schemes advance) has been declining since
FY11, but it improved in FY15. RoE has been consistently declining in past 5 years.
Capex spend rose to INR1.5bn in FY15 (FY14: INR1.0bn), of which capex for watches rose
significantly to INR916mn versus INR324mn in FY14 primarily due to INR750mn
investment in new manufacturing plant at Coimbatore.
Titan had reported robust double-digit revenue growth (25-40% p.a.) until FY13, partly
led by consistent rise in gold prices. Over past 2 years, gold prices remained subdued and
declined, leading to single-digit revenue growth even as volume growth stood robust.
Finance cost includes gold on lease charges of INR286mn (FY14: INR434mn) and
commercial paper (CP) discounting charges of INR289.5mn (FY14: INR118.2mn). There
were no CPs outstanding as at FY15.

Analysis beyond Consensus (ABC) is our initiative to provide a differentiated perspective to our clients
on various non-routine and intricate issues. This unit of research works independent of the sector/stock
research team and views expressed in this report may vary with that of respective sector/stock analyst.
Edelweiss research is also available on www.edelresearch.com,
1
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

July 27, 2015


Edelweiss Securities Limited

Annual Report Analysis


Other income fell to INR708mn in FY15 (FY14: INR1.2bn) as cash and cash equivalents
declined to INR2.1bn in FY15 versus INR8.9bn in FY14.
Increase in trade payables on account of gold on lease was offset by the decline in advances
from customers as the Golden Harvest scheme was discontinued and the new scheme is yet
to pick up.
Adjusted cash flows improved to INR5.7bn in FY15 (FY14: INR5.3bn). Average cash
conversion cycle rose from 62 to 87 days, and adjusted for gold lease and advance from
customers, it declined from 159 to 153 days YoY.

Other highlights

Gold futures contracts dropped from INR17.5bn in FY14 to INR11.6bn in FY15, as the
company reduced its hedging activity following lifting of the ban on gold lease.

Brand equity subscription payments to promoters, Tata Sons, continued with


INR190.7mn paid in FY15 (FY14: INR174mn).

R&D spend stood higher at INR174mn in FY15 (2.1% PAT) versus INR35-55mn over past
4 years.

Raw material imports, as a % of total raw material cost, consistently declined from 70%
in FY12 to 7% in FY15, led by the government measures to curb gold imports into the
country.

Capital allocation analysis

(INR bn)

48.0

Gold on lease was resumed and


payables replaced debt.

36.0

Customer advances declined due


to discontinuance of golden
harvest schemes

0.0

12

1
3
2
3

1
5
2
4

2
5
2
6

3
5
1
7

FY07 FY08 FY09 FY10


Equity
Trade payables (Gold lease)
D/E

12
1
10
FY11

18
16

20

1
15

0.8
0.6

1
0.4

0
15

13
5

24.0
12.0

1.0

Payables rose as gold on


lease was allowed.
Deposit scheme advance
stood lower

25

31

D/E (x)

Chart 1: Capital employed


60.0

0.2

0.0
FY12 FY13 FY14 FY15
Debt
Advance under deposit schemes

Source: Company annual report, Edelweiss research

Gross debt declined and was converted back into payables in FY15 as the ban on gold on
lease was lifted. Deposit scheme advance was hit by discontinuance of the Golden Harvest
and other schemes not being in line with the new Companies Act. The new scheme
launched in FY15, in compliance with regulations (IRR @ 9.7% 11.6% p.a approximately), is
yet to pick up.

229

Edelweiss Securities Limited

Titan Company
Net worth accretion continues to be robust with INR5.6bn increase in FY15, led by healthy
profit generation.

Payables, as % of total liabilities,


stood highest for Titan versus its
international peers ranging from
5-40%.

Table 1: Total liabilities


Particulars
Debt
Trade payables
Total liabilities
Payables as % of total

FY11
680
15,262
15,942
96

FY12
113
17,529
17,642
99

FY13
60
20,980
21,040
100

FY14
8,068
8,594
16,663
52

(INR mn)
FY15
998
19,396
20,394
95

Source: Company annual report, Edelweiss research

Table 2: Gold loans: Comparison with international players


Titan (INR mn)
Particulars
Debt
Trade payables
Total liabilities
Payables as % of total liabilities
Gold segment revenues
Payables as % of Gold revenues

FY14
8,068
8,594
16,663
52
86,274
10

Luk Fook (HKD mn)

FY15
998
19,396
20,394
95
94,206
21

FY14
568
338
906
37
19,215
2

FY15
1,713
218
1,931
11
15,923
1

Chow Tai Fook (HKD


mn)
FY14
17,086
1,234
18,320
7
60,849
2

Tiffany (USD mn)

FY15
15,089
840
15,929
5
74,050
1

FY14
1,004
342
1,346
25
3,717
9

FY15
1,117
318
1,435
22
3,930
8

Source: Company annual report, Edelweiss research

Internationally, jewellery
companies classify gold lease as
debt

Hong Kong-based jewelers, Luk Fook and Chow Tai Fook report gold loans separately as debt
in their balance sheets. As for Tiffany, no separate disclosure is made, but the payables are
not very high.

RoCE decomposition

14.0

15
0
18

0
19

1
22

20
3
26

23

22

19

13
1

14.0

23

7.0

0.0

0.0
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
Core ROCE
Other income
Gold lease and deposit schemes
ROE (%)
1 yr Fwd PE (RHS)

96.0
(RoCE %)

(%)

28.0

21.0

23
20

28.0
(No.of times x)

42.0

Chart 3: Jewellery segment RoCE


120.0

35.0

75

86

35.0
28.0

78

72.0

21.0
48

48.0
30

42
25

35

24.0
0.0

14.0

(No.of times x)

Chart 2: Return ratios analysis (consolidated)


70.0
38 43
56.0
38

7.0
14

16

22

25

23

23

23

27
0.0

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15


Core ROCE
On gold lease and deposit schemes
1 yr Fwd PE (LHS)
Source: Company annual report, Bloomberg, Edelweiss research

Consolidated reported RoCE continued its downward trend in FY15. Adjusted RoCE
(including payables and deposits schemes advance) has been declining since FY11, but
improved in FY15. RoE consistently fell in past 5 years.

230

Edelweiss Securities Limited

Annual Report Analysis


Jewellery segment RoCE slipped from 65% in FY14 to 52% in FY15, but core RoCE (adjusted
for gold on lease and advance from customers) improved from 23% in FY14 to 27% in FY15,
primarily led by 10% YoY growth in jewellery EBIT.

Chart 4: Watches segment capital allocation


8.0

70.0
6.9

6.8
5.9

6.4
4.8
3.3
3.2

2.3

1.6
0.0

42.0

3.9

3.7

1.2

1.4

1.4

FY08

FY09

FY10

EBIT

28.0
2.1

1.9

1.9

(ROCE %)

(INR bn)

Watches division EBIT growth


remained muted and RoCE
stabilised after consistent decline
since FY11

56.0

5.2

2.0

1.8

14.0

FY11

FY12

FY13

FY14

Capital employed

FY15

0.0

ROCE % (RHS)

Source: Company annual report, Edelweiss research

Watches segment RoCE stabilised at 31% in FY15 after having consistently declined over
past 5 years. EBIT growth remained muted in past 5 years. Titan added 29 World of Titan
stores in FY15 and shut down 7 stores each of Fastrack and Helios.

Capex and store additions


Chart 5: Segment wise store additions and capex spend
1,750

588
390

1,050
754

746

700
350
0

260

693
191

83
206

260

2010

2011

916
543

539

2012

2013

(No.of stores)

Capex for watches segment


spurted in FY15 to INR916mn
largely due to capex spend at
new plant and renovation of
stores.

520

1,400

(INR mn)

Overall capex spend increased


from INR1.0bn in FY14 to
INR1.5bn in FY15.

650

130

324
2014

2015

Watches - Capex

Jewellery - Capex

Watches - Stores (RHS)

Jewellery - Stores (RHS)


Source: Company annual report, Edelweiss research

231

Edelweiss Securities Limited

Titan Company
Table 3: Per store capex analysis

(INR mn)
Jewellery segment
FY13
FY14
16
19
746
693

Particulars
Store addition p.a.
Capex (INR mn)
Less: New plant capex
Capex (INR mn) for stores
Per store capex
Area (in sq. ft.) addition
Avg per store area (in sq. ft.) addition

46.6
141,562
8,848

36.5
118,207
6,221

Watches segment**
FY13
FY14
91
50
539
324

FY15
11
588

53.5
85,717
7,792

539
5.9
85,227
937

324
6.5
37,966
759

FY15
29
916
(750)
166
5.7
15,698
541

Source: Company annual report, Edelweiss research


** (For FY15 numbers we have excluded Fastrack and Helios due to net decline in stores YoY)

Jewellery capex per store increased in FY15, but was largely in line with earlier years.
Watches capex rose from INR324mn in FY14 to INR916mn in FY15, largely towards new
manufacturing plant and renovation of stores. Capex include INR750mn spent towards first
phase of investment for new stainless steel case manufacturing plant at Coimbatore which
commenced commercial production on 3rd March 2015.
During the year, World of Titan chain commenced renovations at more than 40 stores. A
total of 151 stores now carry the new retail identity. In case of multi brand outlets (MBOs),
the new look Shop-in-Shops, were invested in and given to 120 outlets during the year. With
this, a total of 250 MBOs are now in the new look Shop-in-Shops mould.

Profitability analysis
Table 4: Profitability analysis

Revenues grew by 9% YoY in


FY15, led by the rise in volumes
as average gold prices declined
by 5.6% YoY in FY15.

Particulars
Sales
Raw Materials Consumed
Operating and Administrative expense
Personnel cost
EBITDA
Depreciation
EBIT
Financial Charges
Other income
EBT

(INR mn)
FY14
109,274
80,519
12,908
5,404
10,443
675
9,768
871
1,202
10,099

Consolidated
%
FY15
100.0 119,134
73.7
87,515
11.8
13,811
4.9
6,325
9.6
11,484
0.6
896
8.9
10,588
0.8
807
1.1
708
9.2
10,489

%
100.0
73.5
11.6
5.3
9.6
0.8
8.9
0.7
0.6
8.8

Source: Company annual report, Edelweiss research

232

Edelweiss Securities Limited

Annual Report Analysis


Chart 6: Price versus volume growth analysis

26
14

21

34
22

22

2
(10)

30

24%

25

5
29

30%

20
17
(2)

12

15

(5)

(6)

15

FY09 FY10 FY11 FY12 FY13 FY14 FY15

Price growth
Average gold price (RHS)

10

12%
(CAGR %)

(YoY % growth)

38

35

(INR '000)

50

18%

9%

12%
6%

14%

9%

12%

2%

0%
8 yr CAGR

Volume growth (derived)

Gold price CAGR

5 yr CAGR

3 yr CAGR

Volume (derived) CAGR

Source: Company annual report, MCX, Edelweiss research

Gold price increase contributed significantly to revenues until FY13 and Titan reported
double-digit revenue growth during the period. In FY14 and FY15, gold prices remained
subdued and declined leading to single-digit revenue growth, but volume growth remained
robust.

Chart 7: Imports versus local raw material (RM) cost


90
72

60.0

54
36
18

19

54

13

31

45.0

35

42

12

Imported RM

2012

2013
Local RM cost

30.0
15.0

32

0
2011

73

(%)

(INR bn)

Gold imports declined


significantly over 5 years led by
regulatory hurdles, to curb gold
imports.

75.0

2014

0.0

2015

Imports as % of total RM cost

Source: Company annual report, Edelweiss research

RM imports declined substantially in past 5 years from INR31bn in FY11 to INR5bn in FY15,
primarily owing to regulatory hurdles as government measures curbed gold imports.
However, in later part of FY15 the import regulations (80:20 rule) were relaxed.
Other highlights
In FY15, INR164.4mn provision was made towards customer loyalty programme. Total
provision stood at INR828.9mn, as at end FY15 (FY14: INR664.5mn). Titan runs a scheme of
reward points which can be redeemed for future purchases by customers.

233

Edelweiss Securities Limited

Titan Company
Finance cost includes gold on lease charges of INR286mn (FY14: INR434mn) and CP
discounting charges of INR289.5mn (FY14: INR118.2mn). Titan redeemed all the outstanding
CPs and no amount was outstanding as at FY15.
Other income dropped to INR708mn in FY15 as cash and cash equivalents declined to
INR2.1bn in FY15. Cash balance slipped in FY15 after a run-rate of INR9.0bn-INR11.0bn in
past 4-5 years.
Effective tax rate declined from 27% in FY14 to 22% in FY15 due to ramp up at the
Pantnagar (Uttarakhand) plant and tax benefits available thereon.

Cash flow analysis


Table 5: Cash flow analysis

(INR mn)
Consolidated
Cumulative FY13
FY14
FY15
5 years
10,065
10,099
10,489
45,090
(475)
(295)
204
(1,155)
459
682
934
3,147
(2,757)
(2,852)
(2,449)
(12,367)
7,292
7,635
9,178
34,715
(19)
117
(393)
(1,015)
(7,983)
(1,891)
(1,800)
(27,039)
(269)
(62)
(710)
(1,540)
2,224
(12,386)
10,787
12,863
4,285
1,039
(12,036)
(847)
(1,763)
(13,182)
(4,152)
(17,579)
5,530
(5,547)
5,026
17,136
(506)
(871)
(807)
(3,010)
5,023
(6,418)
4,219
14,126
(2,224)
12,386
(10,787)
(12,863)
(3,841)
(580)
12,306
2,673
(1,041)
5,388
5,738
3,936
(1,650)
(2,111)
(2,070)
(7,937)
(2,691)
3,276
3,667
(4,001)
Source: Company annual report, Edelweiss research
* Gold lease payables have been assumed to be the changes in trade payables as reflected in cash
flow statement in absence of specific information.

Particulars
Profit before tax
Non-operating expense
Non-cash adjustments
Direct taxes paid
Cash profit after tax
(Increase)/ decrease in trade receivables
(Increase)/ decrease in inventories
(Increase)/ decrease in loans and advances
Increase/ (decrease) in trade payables
Increase/ (decrease) in other liab. & provisions
(Increase)/ decrease in working capital
Net cash from operating activities
Interest expenses paid
Net cash from operating activities post interest
Change in Gold on lease payables*
Change in advance towards deposit schemes
Adjusted operating cash flows
Capex
Free cash flow

FY11
6,032
(189)
376
(1,740)
4,479
(229)
(6,527)
(207)
10,262
2,755
6,055
10,533
(343)
10,190
(10,262)
(2,524)
(2,596)
(643)
(3,239)

FY12
8,405
(401)
696
(2,568)
6,132
(492)
(8,839)
(292)
1,976
3,109
(4,537)
1,595
(482)
1,113
(1,976)
(2,688)
(3,552)
(1,463)
(5,015)

Operating cash flow (OCF), post interest improved to INR4.2bn in FY15 versus cash loss in
previous year. Adjusted for gold on lease and advances towards customer incentive scheme,
OCF rose to INR5.7bn in FY15
Cumulatively over past 5 years FCF adjusted for gold on lease and golden harvest scheme
stood negative at INR4.0bn. During FY15 Increase in trade payables on account of gold on
lease was offset by the decline in advance from customers as the Golden Harvest scheme
was discontinued and the new scheme has yet to pick up.
Titan invested in ICDs worth INR480mn in FY15 and total outstanding investments in ICDs
stood at INR2.4bn, as at end FY15, 7.7% of net worth (FY14: INR1.9bn, 7.5%)

234

Edelweiss Securities Limited

Annual Report Analysis

Adjusted cash conversion cycle


marginally improved in FY15,
though it remained high at 153
days versus 87 on reported basis.

Table 6: Average cash conversion cycle (days)


Particulars
FY12
Inventory days
134
Trade Receivable days
6
Advance to supplier days
1
Trade payable days
(94)
Advance received from customer days
(33)
Cash conversion cycle - Reported
14
Add: Gold lease days**
76
Add: Deposit scheme days
33
Cash conversion cycle - Adjusted
123

FY13
158
6
0
(96)
(42)
26
80
42
149

FY14
169
5
0
(66)
(47)
62
50
47
159

FY15
162
5
1
(57)
(24)
87
41
24
153

Source: Company annual report, Edelweiss research


* * For gold lease days, we have reduced watches segment liabilities from total trade payables
and hence adjusted cash conversion cycle could be lower than above if gold lease payable is lower
than our calculation.

Un-provided receivables beyond


6 months stood at 8.2% of total
receivables.

Table 7: Receivables analysis


Particulars
Receivables > than 6 months
Less: Provisions
Net Receivables > than 6 months
Other receivables
Total
Net Receivables > than 6 months as % of total

FY13
114
(34)
80
1,578
1,658
4.8

FY14
172
(35)
137
1,404
1,541
8.9

(INR mn)
FY15
245
(89)
156
1,741
1,897
8.2

Source: Company annual report, Edelweiss research

Contingent liabilities/commitments

Contingent liabilities rose


marginally led by excise duty
demands.

Non-fund based facility rose


significantly to INR11.3bn
pertaining to gold lease.

Table 8: Contingent liabilities and commitments


Particulars
Contingent Liability
Sales Tax
Customs Duty
Excise Duty
Income Tax
Others
Total
As % of net worth

FY13

FY14

(INR mn)
FY15

170
32
1,494
404
41
2,141
11

250
32
1,516
491
46
2,336
9

256
47
1,935
685
57
2,979
10

Other Commitments:
Non fund based facility
Capital commitments
Revenue commitments
Claims not acknowledged (Excise demands)
Total

2,513
514
17
1,470
4,513

1,477
986
37
2,134
4,634

11,290
1,627
64
3,482
16,463

Source: Company annual report, Edelweiss research

235

Edelweiss Securities Limited

Titan Company
Table 9: Summary financials
Particulars
Sales
Total income
EBITDA
EBITDA margin (%)
ROE (%)
ROCE (%)
Depreciation
Financial costs
Net profit
Equity shareholders' funds
Loan funds
Net debt/ (cash)
Adjusted debt (including trade payables)
Net fixed assets (Ex CWIP)
CWIP
Current assets loans and advances
Current liabilities and provisions
Net current assets - ex cash and cash equivalents
Cash and cash equivalents
Cash flow from operating activities
Cash flow from investing activities
Cash flow from financing activities
Net cash flows
CAPEX
Working capital investments

FY11
65,331
65,899
6,161
9.4
49.0
66.8
351
345
4,331
10,356
680
(10,419)
15,942
3,051
166
22,194
26,599
(4,405)
11,099
1,595
(699)
(2,349)
(1,453)
1,463
(6,058)

FY12
88,484
89,429
8,354
9.4
48.2
68.7
456
437
6,014
14,609
113
(9,558)
17,642
4,088
249
32,059
31,729
330
9,671
10,533
(250)
(1,168)
9,115
643
(6,055)

FY13
101,233
102,242
10,125
10.0
42.3
61.3
562
506
7,254
19,699
60
(11,330)
21,040
4,639
418
40,550
38,431
2,120
11,390
5,530
(1,417)
(2,356)
1,756
1,650
12,806

FY14
109,274
110,476
10,443
9.6
32.7
41.4
675
871
7,349
25,227
8,068
(858)
16,663
6,142
329
43,547
27,072
16,474
8,927
(5,547)
(2,717)
4,974
(3,290)
2,111
13,188

(INR mn)
FY15
119,134
119,842
11,484
9.6
29.1
37.3
896
807
8,163
30,839
998
(1,140)
20,394
6,991
552
46,336
25,938
20,398
2,138
5,026
(1,187)
(10,047)
(6,207)
2,070
4,152

Source: Company annual report, Edelweiss research

236

Edelweiss Securities Limited

ANALYSIS BEYOND CONSENSUS


THE NEW ABC OF RESEARCH
Bharti Airtel | Annual Report Analysis

Bharti Airtels (Bharti) FY15 annual report analysis highlights robust


improvement in standalone (including Hexacom) and Infratel profitability.
Other subsidiaries continued to report losses at the PBT level. During the
year, Bharti infused ~INR69bn in its African operations, taking cumulative
cash exposure to INR239bn. Guarantees by the parent on behalf of group
companies rose by ~INR99bn to INR840bn (~107% of net worth). As
highlighted in our previous years (FY11-14) annual report analysis,
interest cost on forex loans at Bharti Airtel International (Netherlands)
B.V. (BAIN) continues to be cushioned owing to choice of USD as
functional currency. D/E ratio, adjusted for deferred spectrum liability
and equipment supply payables, stood at 1.9x versus 1.3x reported. We
believe, EV/EBITDA valuation methodology needs to be revisited
considering depreciation and capex stood at 55% and 75% of EBITDA,
respectively, over FY11-15.

Whats on track?
Bharti (standalone) clocked revenue growth of 11.2% YoY coupled with improvement in
EBIDTA margin to 35% (versus 32.7% in FY14). Operating cash flow (post interest)
increased to INR173.4bn (FY14: INR 149bn).

Market Data
52-week range (INR)

: 452 / 336

Share in issue (mn)

: 3,997.4

M cap (INR bn/USD mn)

: 1,579/24,244

Avg. Daily Vol. BSE/NSE (000) : 5,026.2

Shareholding Pattern (%)

Promoters*

: 65.4

MFs, FIs & Banks

: 9.5

FIIs

: 16.3

Others

: 8.8

*Promoters pledged shares

: nil

(% of share in issue)

What needs tracking?


During FY15, Bharti infused additional equity and loans of INR40bn (~USD650mn) and
INR29bn, respectively, in African operations/servicing acquisition loan. Further, the
company also infused INR32bn (USD500mn) as equity in Bharti Airtel International
(Mauritius) Ltd (BAIM) in Q1FY16.
Corporate guarantees given on behalf of group companies increased to INR858.2bn
(FY14: INR770.1bn), of which INR814.5bn (FY14: INR684.3bn) pertained to BAIN.
As highlighted in our previous reports, repayment of USD loans from INR cash flows led
to realization of exchange losses, which are being charged via foreign currency
translation reserve (FCTR). Our calculation indicates forex translation losses during FY15
and cumulatively over the past 5 years stood at INR14bn and INR134bn, respectively.
During the year, the company won spectrum in 17 service areas (in India) for INR291bn,
against which advances of INR47.2bn and INR66.5bn were paid in FY15 and Q1FY16,
respectively. Amount outstanding as at March 2015 of INR244bn has been considered
as an off-balance sheet obligation under capital commitments.
Margin of safety for goodwill of INR415bn (FY14:INR469bn), 67% of net worth
(FY14:78.5%), deteriorated to 8.5% (FY14:10%, FY13: 11.5%) which in our view is due to
decline in African cash flows.
Analysis beyond Consensus (ABC) is our initiative to provide a differentiated perspective to our clients
on various non-routine and intricate issues. This unit of research works independent of the sector/stock
research team and views expressed in this report may vary with that of respective sector/stock analyst.
Edelweiss research is also available on www.edelresearch.com,
1
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

August 17, 2015


Edelweiss Securities Limited

Annual Report Analysis


Cash paid (net) for capex (tangible assets) in FY15 was INR144bn (versus INR194bn capex in
FY15). Consequently, payables for equipment supplies increased to INR104bn (FY14:
INR65bn), which may come for payment in FY16 and may increase net debt.
Depreciation charge for FY15 was lower by INR 4.3bn due to classification of assets worth
INR 40bn (net) as Held for Sale in Africa. Subsequently, during Q1FY16, a part of these
assets were reclassified to their respective asset category and the related depreciation
charge of INR1.6bn (for previous period) was considered as an exceptional item.
Owing to uncertainty, deferred tax cannot be recognised by loss-making subsidiaries, which
leads to higher effective tax rate at the consolidated Africa level.
Loans (ex spectrum liability) of INR212bn (32% of total debt) are due for repayment in FY16.
Contingent liabilities jumped 13% to ~INR158bn (~25% of net worth), led by surge in sales
tax and service tax demands/disputes.
Some African countries are contemplating change in regulations with regard to cost plus
based pricing, unique international gateways, increase in license fee, grant of new type of
licenses, etc, which may have detrimental impact on industry.

Other highlights

Receivables (standalone) outstanding (net) for more than 6 months increased to


INR2.5bn (FY14: INR0.2bn).

The company was required to spend INR1,400mn for CSR during FY15, of which it
spent only INR411mn which is charged directly from reserves in standalone financials.

Net unhedged forex payables (including borrowings), at standalone level, increased to


INR56.9bn (FY14: INR45.2bn), 9.2% of net worth.

Africa revenues (in constant currency terms) surged by 6.2% to USD4,407mn. EBITDA
margins declined to 22.7% (FY14: 26.2%), owing to investments in network and higher
marketing spends.

Management discussion and analysis: Key highlights

African economy faced headwinds during the year led by sharp decline in crude and
other commodity prices, which triggered sharp depreciation in currencies across
countries.

The company has invested INR681bn in spectrum since 2010. This will put exert
pressure on RoCE. Hence, it is imperative to generate healthy revenue growth.

During Q1FY15, agreement for sale of tower assets in Tanzania, Chad and Democratic
Republic of Congo lapsed and therefore stands terminated thereby. Accordingly,
assets and related liabilities amounting to INR12.2bn and INR1.4bn, respectively, have
been re-classified from held for sale.

238

Edelweiss Securities Limited

Bharti Airtel
Earnings analysis
Table 1: Standalone/subsidiary profitability analysis
Particulars
Sales
Operating and admin exp
Personnel cost
EBITDA
Depreciation & amortisation
EBIT
Financial Charges
Other income
PBT before exceptional items
Exceptional items
PBT
Tax Expense
PAT
Share of profit of JV/associate
PAT (inc profit of JV/associates

FY14
499
320
16
163
72
91
13
4
81
(2)
79
18
61
61

Standalone
(%)
FY15
(%)
100.0
555 100.0
64.0
344 61.9
3.3
17
3.0
32.7
194 35.0
14.5
76 13.6
18.2
119 21.4
2.7
14
2.5
0.8
5
1.0
16.3
110 19.8
(0.4)
33
5.9
15.9
143 25.7
3.6
25
4.4
12.3
118 21.3
118

(INR bn)
Bharti Infratel (Standalone) Other Subsidiaries/JV (Derived)
Consolidated
FY14
(%) FY15
(%)
FY14
(%)
FY15
(%) FY14
(%) FY15
50 100.0
54 100.0
309 100.0
312 100.0
859 100.0
921
26 52.7
27 49.9
189 60.9
191 61.2
535 62.3
562
2
4.3
2
4.5
28
8.9
28
8.9
46
5.4
47
22 43.0
25 45.5
93 30.1
93 29.9
278 32.4
312
12 23.5
12 21.9
72 23.4
68 21.7
156 18.2
155
10 19.5
13 23.6
21
6.7
25
8.2
121 14.1
157
0
0.2
(0) (0.1)
45 14.6
59 19.0
59
6.8
73
3
6.2
4
6.6
3
1.1
16
5.0
10
1.2
25
13 25.5
16 30.3
(21) (6.8)
(18) (5.8)
73
8.5
108
0.0
0.0
3
0.8
(9) (2.7)
1
0.1
(9)
13 25.5
16 30.3
(19) (7.7)
(27) (3.0)
73
8.6
100
4
8.1
5 10.2
27
8.6
24
7.7
48
5.6
54
9 17.4
11 20.1
(45) (16.3)
(51) (10.7)
25
2.9
46
5
7
0
0.1
(0) (0.0)
5
0.6
7
14
18
(45)
(51)
30
53

(%)
100.0
61.0
5.1
33.9
16.9
17.0
8.0
2.7
11.8
(0.9)
10.8
5.9
5.0
0.8

Notes: Standalone and Infratel profit and loss is as per Indian GAAPs; consolidated financials are in IFRS
Dividend income from subsidiaries and JVs are adjusted in above table.
Share of profit of Indus Tower (JV) is included in Bharti Infratel as separate line item
Source: Company annual report, Edelweiss research

Standalone revenue grew by


11.2% YoY, while EBIDTA
margin improved to 35% versus
32.7% in FY14

Exceptional income (standalone) in FY15 includes gain of INR32.7bn recognised on sale of


Bharti Infratel shares. Corresponding gains in consolidated financial statements are included
in other comprehensive income.
Subsidiaries (ex Infratel) continued to post losses at PBT level due to high finance costs.

Consolidated revenues moved


up 7.3% YoY and EBIDTA
margins improved to 34%
(FY14: 32.4%), owing to higher
EBITDA margins in standalone
and Infratel

Average borrowing cost (including forex losses) recognised in standalone and consolidated
profitability stood at 9.5% (FY14:10.9%) and 9.7% (FY14:8.6%), respectively.
Exceptional items (net) of INR8.5bn at consolidated level, primarily includes charge of
INR4.4bn on account of restructuring activities, INR2.6bn on settlement of disputes and
INR2bn on one-time translation impact of certain foreign currency liabilities in Nigeria.

Table 2: Africa profitability and cash flows


Particulars
Revenues
EBITDA (a)
EBIT
Capex (b)
Operating Free Cash Flow (a-b)

Cash outflow for Africa was


USD71mn versus operating free
cash flows of USD540mn in
FY14 in Africa

239

(USD mn)

FY12
FY13
FY14
FY15
4,137
4,417
4,491
4,407
1,097
1,158
1,175
1,002
291
284
280
193
1,514
724
635
1,073
(417)
434
540
(71)
Source: Company annual report, Edelweiss research

Edelweiss Securities Limited

Annual Report Analysis


Tax expense
Table 3: Tax expense analysis

Bharti Airtel-Standalone
Bharti Infratel-Consolidated
Bharti Hexacom
Other subsidiaries (derived)
Bharti Airtel-Consolidated

(INR bn)
PBT
64.5
15.3
8.1
(43.6)
44.3

FY13
Tax
13.6
5.3
2.3
4.1
25.2

ETR
21.0
34.5
28.0
N.A.
56.8

PBT
83.8
23.2
8.3
(41.9)
73.4

FY14
Tax
17.8
8.1
2.3
20.3
48.4

ETR
21.2
34.7
27.6
N.A.
66.0

PBT
156.6
30.5
16.1
(103.3)
99.9

FY15
Tax
24.5
10.6
5.3
13.6
54.0

ETR
15.7
34.7
33.1
N.A.
54.1

Note: ERT is effective tax rate in above table; PBT is adjusted for share of profit in JV/associate
Source: Company annual report, Edelweiss research

The consolidated income tax expense (ex tax on exceptional items) for FY15 stood at
INR53bn (versus INR44.5bn for FY14). The effective tax rate in India (standalone, Infratel,
Hexacom and others) for FY15 stood lower at 26.5% (FY14: 31.2%). Reduction in the
underlying effective tax rate in India was due to improved performance in the loss-making
subsidiaries and lower forex losses in relation to borrowings.
During FY15, African operations reported EBIT of USD193mn (FY14: USD280mn), against
which tax charge stood at USD203mn (FY14: USD273mn).
Effective tax rate in Africa was higher as tax expense is computed at entity level, whereby
profit of one entity cannot be adjusted against losses of another entity for tax computation
purposes. Further, owing to uncertainty, deferred tax cannot be recognised by loss-making
subsidiaries. This leads to higher effective tax rate at consolidated Africa level.

Tax losses
Unused tax credits and losses increased to INR230bn (FY14: INR176bn) on which
deferred tax asset (DTA) has not been recorded. Of the above, INR143.3bn (FY14:
INR66.7bn) has an indefinite carry forward period, while the balance amount will expire
as under:

Significant unused tax losses


existed as at FY15 of INR230bn
(FY14: INR176bn)

Table 4: Tax losses - Carry forward limits


Expiring in
FY12
FY13
6.1
FY14
5.8
FY15
9.3
FY16
10.9
FY17
3.3
FY18
NA
FY19
NA
FY20
NA
Therafter
18.4
Indefinite
37.0
Total
90.9

FY13
NA
11.8
7.9
7.6
13.1
5.6
NA
NA
44.4
54.4
144.8

FY14
NA
NA
8.2
6.2
7.8
10.0
6.9
NA
70.2
66.7
176.0

(INR bn)
FY15
NA
NA
NA
6.0
5.6
8.7
8.9
3.9
53.5
143.3
229.9

Source: Company annual report, Edelweiss research

Improvement in loss-making subsidiaries would result in recognition of the unused deferred


tax asset and reduce the effective tax rate subject to the carry forward time limit.

240

Edelweiss Securities Limited

Bharti Airtel
Net worth analysis
Table 5: Net worth accretion
Particulars
Note
Opening shareholders' fund
Add
Profit for the year
FCTR
Gain / (Loss) on effective portion 1
on hedge of net investment
Gain / (Loss) on cash flow hedge
Issue of shares
Transactions with NCI

2
3

FY13
506.1
22.8
(26.5)
-

FY14
503.2
27.6
15.8

51.9
(68.2)
32.9

68.0
(5.1)

(4.2)
0.2
25.5

(3.8)
Less
Dividend and tax thereon
Others
Closing shareholders' fund

4.4
(5.3)

(INR bn)
FY15
597.6

106.3
4.4
7.5

(0.9)
503.2

38.2
16.0
0.2

11.9
597.6

16.2
619.6

Source: Company annual report, Edelweiss research

During the year, the group formally designated certain Euro borrowings as a hedge
against net investments in subsidiaries (in Francophone countries local currency is
pegged to the Euro). Foreign exchange gain of INR32.9bn on these hedge instruments
has been recognised in other comprehensive income.

In FY15, the group designated some of its foreign currency borrowings as a cash flow
hedge of the currency risk, arising from the expected sale consideration from highly
probable transactions relating to the sale of telecom towers. Consequently, foreign
exchange loss of INR4.2bn is recognised in other comprehensive income.

Transactions with non-controlling interest (NCI) during FY15 mainly pertained to profit
on sale of the 7.4% stake in Bharati Infratel.

Table 6: MTM loss on USD denominated debt


Particulars
Net USD Borrowings for Africa acquisition (ex standalone) (in equivalent INR)
Borrowings for Africa acquisition and other borrowings (in equivalent USD) (A)
Closing rate (USD/INR)
Difference in closing rate during the year (B)
Equivalent INR MTM loss based on year end borrowing (C=A*B)

FY11 FY12
418
448
9.4
8.8
44.7
51.2
(0.5)
6.5
(4.6) 57.0

FY13
459
8.5
54.1
3.0
25.1

FY14
423
7.0
60.1
6.0
42.1

FY15
352
5.6
62.6
2.5
14.0

(INR bn)
Total

133.6

Source: Company annual report, Edelweiss research

Forex loss on USD denominated borrowings (ex standalone) based on FY15 closing debt
stood at INR14bn and cumulatively over 5 years at INR133.6bn.

Implied cumulative exchange fluctuation loss on forex loans stood at INR133.6bn,


though actual loss may be lower due to hedges taken by the company for interest and
principal re-payments over the period.

241

Edelweiss Securities Limited

Annual Report Analysis


Table 7: USD appreciation/(depreciation) against various currencies
Particulars
INR NGN
GHS
KES
TZS
XAF
XOF ZMW
FY11
(0.7)
3.4
6.3
7.4
10.7
(4.4) (4.0)
0.6
FY12
14.1
1.7
17.7
(0.1)
6.0
6.0
5.6
12.1
FY13
6.7
0.5
9.0
3.1
1.7
4.3
4.5
1.6
FY14
10.3
4.1
37.3
0.9
1.1
(7.2) (7.3) 14.6
FY15
4.4
20.7
42.3
7.0
14.1
29.1
29.0
23.2

UGS
15.4
4.5
3.5
(1.8)
16.8

Note: INR depreciation against USD stood at 4% (FY14:11%) in FY15


Source: Company annual report, Edelweiss research

During FY15, revenue-weighted currency depreciation (year end rates) of 17 African


countries against USD has been 22.3%, primarily caused by depreciation in Ghana Cedi
(GHS) by 42.3%, Nigerian Naira (NGN) by 20.7% and CFA by 28.3%.

Similarly, depreciation if computed based on average rates was 8.2%, primarily caused
by depreciation in Ghana Cedi (GHS) by 49.1%, Zambian Kwacha (ZMK) by 16.8%,
Nigerian Naira (NGN) by 8.5% and CFA by 6.0%.

Cash flow analysis


Table 8: Cash flow analysis
Particulars
Profit before tax
Non-operating cost
Non-cash adjustments
Direct taxes paid
Cash profit after tax
Increase in trade and other receivables
(L&A for Infratel)
Decrease in inventories
Increase in trade and other payables
Increase in provisions
Increase in other financial and nonfinancial liabilities
Increase in other financial and nonfinancial assets
Decrease/(Increase) in working capital
Net cash from operating activities
Interest expenses paid
Net cash from operating activities post
interest
Capex
FCF post interest

(INR bn)

(1.0)

Standalone
FY14
FY15
83.8
156.6
(36.0)
75.6
(28.1)
145.5
168.0
(15.5)

0.0
15.4
0.3

(0.1)
27.3
0.1

7.9
72.3
(18.5)

Bharti Infratel (Standalone)


Other subsidiaries (Derived)
FY14
FY15
FY14
FY15
15.0
32.7
(25.3)
(89.4)
(4.7)
(19.3)
42.7
106
45.9
9.4
10.0
74.0
69.7
155.7
(1.7)
(5.0)
(14.8)
(13.0)
(35.0)
18.0
18.4
76.6
73.0
(0.7)
(1.3)
3.8
5.7
2.1
0.9
0.0

0.3
0.0
-

(0.2)
0.5
2.2
10.5

(14.2)

Consolidated
FY14
73.4
50.4
155.3
(46.1)
240.0
(11.1)

0.1
(13.4)
1.0
(0.1)

(0.1)
16.8
2.5
10.5

(0.0)
14.2
1.1
(0.1)

(5.7)

(14.2)

(5.7)

FY15
99.9

259.5

14.8
160.2
(11.0)
149.2

11.8
179.4
(6.4)
173.0

0.2
18.2
(0.0)
18.2

(1.0)
17.2
(0.0)
17.2

2.6
79.2
(26.6)
52.6

(12.4)
61.2
(27.5)
33.7

17.5
257.5
(37.6)
219.9

(1.6)
257.8
(33.9)
223.9

(107.8)
41.4

(76.5)
96.5

(6.7)
11.4

(9.4)
7.8

(60.2)
(7.6)

(123.8)
(90.1)

(174.7)
45.3

(209.8)
14.2

Source: Company annual report, Edelweiss research

Standalone operating cash flows


(post interest) surged by 16% to
INR173bn.

Consolidated operating cash flows post interest grew marginally to ~INR224bn in FY15.
Capex increased in FY15, led by higher investment in tangible assets (FY15: INR144bn, FY14:
INR110bn).
Cash outflows attributable to purchase of intangible assets marginally increased to
~INR66bn (FY14: INR 65bn).

242

Edelweiss Securities Limited

Bharti Airtel
Borrowings analysis
Table 9: Standalone and consolidated adjusted debt
Particulars
Long term debts
Deffered Payment liabities towards spectrum
Long term borrowings (a)
Short term borrowings (b)
Total reported debt (a+b)
Deffered Payment liabities towards spectrum #
Equipment supply payables
Adjusted debt
Reported D/E
Adjusted D/E

D/E ratio, adjusted for deferred


spectrum purchase liability and
equipment supply payables,
rose to 1.86x (FY14: 1.6x) as
against reported D/E ratio of
1.3x (1.27x).

FY12
94.1
94.1
59.0
153.0
25.8
178.9
0.3
0.4

(INR bn)
Standalone
Consolidated
FY13
FY14
FY15
FY12
FY13
FY14
FY15
110.8
90.1
66.3
611.2
601.5
661.5
577.0
1.0
143.2
1.0
143.2
110.8
91.1
209.4
611.2
601.5
662.5
720.2
31.4
12.5
6.3
79.1
65.9
97.5
86.7
142.2
103.7
215.7
690.2
667.4
760.0
806.8
129.1
244.0
129.1
244.0
40.7
32.9
54.1
66.0
59.8
64.7
103.7
182.9
265.7
513.8
756.3
727.2
953.8 1,154.6
0.3
0.2
0.3
1.4
1.3
1.3
1.3
0.3
0.4
0.7
1.5
1.4
1.6
1.9
# classified under capital commitment as spectrum was not allocated
Source: Company annual report, Edelweiss research

Consolidated debt (reported) increased by INR46bn to INR807bn in FY15, largely on


account of deferred payment obligations of INR143bn recognised on purchase of
spectrum in India.

Till March15, the companys subsidiary paid advance of INR47.2bn towards purchase
of spectrum (2 circles) in auctions conducted in FY15.

Post FY15, Bharti (standalone) paid an advance of INR66.5bn towards purchase of


spectrum in 15 circles, with the balance amount of INR177.5bn payable in 10 equal
installments after a moratorium period of 2 years.

Table 10: Standalone and consolidated borrowing cost


Particulars
FY12
Interest cost
11.1
Others
0.9
Interest cost capitalised
1.6
Interest cost (a)
13.6
Forex loss (b)
2.0
Total (a+b)
15.53
Reported debt
153
Average borrowing cost (ex forex loss) (%)
10.0
Average borrowing cost (inc forex loss) (%)
11.4

(INR bn)
Standalone
FY13
FY14
14.9
10.2
0.8
1.5
0.3
16.0
11.7
0.8
1.6
16.82
13.36
142
104
10.8
9.6
11.4
10.9

FY15
10.7
1.7
1.1
13.4
1.7
15.17
216
8.4
9.5

FY12
30.6
5.0
1.6
37.2
5.2
42.39
690
5.7
6.5

Consolidated
FY13
FY14
36.9
36.4
5.0
6.7
2.6
2.3
44.5
45.4
3.2
15.7
47.75
61.05
667
760
6.6
6.4
7.0
8.6

FY15
37.0
6.1
2.8
45.9
30.2
76.06
807
5.9
9.7

Note: Forex loss considered above exclude losses on forex loans recognised in reserves.
Cumulative forex losses recognised in reserves since FY11 stood at ~INR 134bn
Source: Company annual report, Edelweiss research

243

Consolidated average borrowing cost (ex forex losses) declined to 5.9% (FY14: 6.4%).
However, owing to high forex losses, borrowing cost (Inc forex losses) increased by
110bps to 9.7%.

Edelweiss Securities Limited

Annual Report Analysis

During the year, BAIN raised


USD1bn and EUR750mn
through 2 issues of guaranteed
Senior Notes.

Table 11: Borrowings summary - by currency


Currency
FY12
USD
483.7
Euro
5.0
INR
133.8
NGN
48.3
CHF
XAF
10.0
BDT
XOF
5.3
Others
6.8
Total
693.0
Floating rate borrowing (%) #
91.3
Fixed rate borrowings (%) #
8.7

FY13
481.7
0.0
158.8
60.5
0.0
10.5
0.0
6.1
15.1
732.7
86.1
13.9

FY14
460.9
111.9
64.9
70.5
23.8
12.1
8.3
8.4
7.1
767.8
70.0
30.0

(INR bn)
FY15
403.9
135.8
35.2
31.9
22.5
11.1
10.3
7.7
6.2
664.6
50.0
50.0

# Liability towards spectrum purchase is not included in above table


Source: Company annual report, Edelweiss research

Floating rate borrowings continued its declining trajectory, dipping from ~90% in FY12 to
~50% in FY15.

Interest rate sensitivity to


floating rate loans declined in
FY15 presumably due to shift in
borrowings mix towards fixed
rate loans.

Table 12: Interest rate sensitivity


Currency
USD
Euro
INR
NGN
Other

FY12
4,805
994
444
73

FY13
4,770
1,423
582
75

FY14
4,338
995
649
705
55

(INR mn)
FY15
3,629
757
352
314
32

Note: above sensitivity is computed for 1% change in interest rate on floating rate
portion of loans and borrowings after considering the impact of swaps
Source: Company annual report, Edelweiss research

Assets held for sale


During the year, the group decided to sell and lease back a dedicated portion of towers under
long-term lease contracts, considered as finance lease.
Accordingly, assets and associated liabilities of INR45.6bn and INR5.5bn, respectively, that are
part of the sale have been classified as assets/liabilities of disposal group classified as held for
sale. The group has ceased depreciation and amortisation on the telecom tower assets to
the extent it has estimated such assets would not be leased back.
If the group had not decided to sell these assets and classified as held for sale,
depreciation/amortisation for FY15 would have been higher by INR4.3bn.

Lapse of agreement for sale of tower assets


During Q1FY15, agreement for sale of tower assets in Tanzania, Chad and Democratic
Republic of Congo lapsed and therefore stood terminated thereby. Accordingly, assets and
the related liabilities were re-classified from held for sale and the related depreciation
charge of INR1.6bn pertaining to previous quarters considered as an exceptional item

244

Edelweiss Securities Limited

Bharti Airtel
Investments in/loans to subsidiaries
Table 13: Exposure to African operations
Company
Equity Investment in select subsidiary
Bharti Airtel International (Netherlands) BV
Bharti Airtel International (Mauritius)
Bharti International (Singapore) Pte
Total (A)
Loans o/s to select subsidiaries
Bharti Airtel International (Netherlands) BV
Bharti Airtel International (Mauritius)
Bharti International (Singapore) Pte
Total (B)
Cash Exposure (A) + (B)
Corporate guarantees
Bharti Airtel International (Netherlands) BV
Bharti International (Singapore) Pte
Non-cash exposure
Cash Exposure as % to networth
Non cash Exposure as % to networth

FY12

FY13

FY14

(INR bn)
FY15

0.0
4.8
0.9
5.7

67.4
48.1
33.0
148.5

67.4
57.6
33.0
158.0

67.4
97.6
33.0
198.0

51.2
9.2
25.2
85.6
91.3

148.5

9.8
2.5
12.3
170.3

32.2
8.9
41.1
239.1

391.1
82.4
473.5
18.5
95.8

431.0
96.3
527.3
27.4
97.4

684.3
56.5
740.8
25.5
111.0

814.4
25.2
839.6
30.5
107.3

Source: Company annual report, Edelweiss research

Aggregate cash exposure in African operations surged by 40% to INR239bn (FY14:


INR170bn). During the year, the company made equity investment of INR40bn
(FY14:INR9.5bn) in Bharti Airtel International (Mauritius) Limited.
In Q1FY16, the company made additional equity investment of USD500mn (~INR32bn) in
Bharti Airtel International (Mauritius) Limited.
Corporate guarantees given for African operations increased to ~INR840bn (FY14:
~INR741bn) of which INR814.5bn (FY14: INR684.3bn) pertains to BAIN.
During the year, the company increased its equity investment in Bharti Airtel Lanka by way
of conversion of loan into equity of INR 11bn.

Goodwill

Goodwill stood at INR415bn,


67% of net worth, 87% of which
pertains to Africa

Table 14: Goodwill analysis


Particulars
Mobile services - Africa
Mobile services - India & South Asia
Mobile service Bangladesh
Airtel business
Telemedia Services
Total
Goodwill as a % of networth

FY13
368.6
31.2
7.4
4.9
0.3
412.4
82.0

FY14
415.7
39.5
8.2
5.4
0.3
469.1
78.5

(INR bn)
FY15
360.9
39.5
8.5
5.6
0.3
414.8
67.0

Source: Company annual report, Edelweiss research

Decline in goodwill during FY15 was on account of steep depreciation of functional currency
of African nations against the USD.

245

Edelweiss Securities Limited

Annual Report Analysis


Of the total goodwill, 87% pertains to the Africa business and the margin of safety declined
from 11.5% in FY13 to 10% in FY14 and further to 8.7% in FY15. An increase of 1.3% in the
discount rate (FY14: 1.2%) shall make the margin of safety nil.

Table 15: Key assumptions of goodwill impairment


Particulars
Fair value exceeds the
carrying value

FY13
Africa CGU - Fair value exceeds the
carrying value by 11.5%
All other CGU - No reasonable changes
in assumptions will cause carrying
value to exceed the fair value

FY14
Africa CGU - Fair value exceeds the
carrying value by 10%
All other CGU - No reasonable changes
in assumptions will cause carrying
value to exceed the fair value

FY15
Africa CGU - Fair value exceeds the
carrying value by 8.7%
All other CGU - No reasonable changes
in assumptions will cause carrying
value to exceed the fair value

Growth rate beyond


planning period
Pre-tax discount rate

3.5-4.0% (higher rates used for Africa


and bangladesh CGU)
12.5-19.9% (higher rates used for
Africa CGU)
In line with long term average growth
rates of the industry and country
Africa CGU - Dec 31, 2012
India & South Asia - Dec 31, 2012

3.5-5.49% (higher rates used for


Bangladesh CGU)
13.53-20.22% (higher rates used for
Africa CGU)
In line with long term average growth
rates of the industry and country
Africa CGU - Dec 31, 2013
India & South Asia - Dec 31, 2013

3.5-5.6% (higher rates used for


Bangladesh CGU)
14.3-21.3% (higher rates used for
Africa CGU)
In line with long term average growth
rates of the industry and country
Africa CGU - Dec 31, 2014
India & South Asia - Dec 31, 2014

Growth rates for normal


planning period
Impairment testing

Source: Company annual report, Edelweiss research

Table 16: Major subsidiaries performance


Name of the subsidiary
India
Bharti Infratel Ltd.
Bharti Hexacom Ltd.
Bharti Telemedia Ltd.
Africa (operating subsidiaries)
Airtel Networks Ltd. (Nigeria)
Airtel Tanzania Ltd.
Airtel Uganda Ltd.
Airtel Networks Zambia Plc
Celtel Niger S.A.
Airtel Gabon S.A.
Airtel Burkina Faso S.A
Airtel Networks Kenya Ltd.
Airtel Tchad S.A.
Airtel Malawi Ltd.
Airtel Ghana Ltd.
Airtel Rwanda Ltd.
Airtel Congo S.A.
Airtel Congo (RDC) S.A.
South Asia
Airtel Bangladesh Ltd.
Bharti Airtel Lanka (Pvt) Ltd.
Total

(INR mn)
FY14
Turnover

PAT

FY15
Turnover

% holding

Networth

PAT

71.9
70.0
95.0

170,200
52,287
(35,393)

112,754
40,687
20,771
174,212

15,179
6,036
(5,185)
16,030

121,906
47,003
24,759
193,668

19,924
10,792
(1,906)
28,810

79.06
60.00
100.00
96.36
90.00
90.00
100.00
100.00
100.00
100.00
75.00
100.00
90.00
98.50

(1,099)
(9,217)
(4,684)
2,573
5,360
447
1,313
(19,376)
(1,055)
833
(21,410)
(6,162)
(3,647)
(20,415)

86,001
16,766
11,915
15,819
12,790
16,808
13,810
10,708
8,705
6,028
11,292
911
11,907
22,115
245,575

(8,019)
(3,073)
1,230
3,127
2,632
1,715
2,593
(4,069)
(144)
(807)
(4,808)
(2,477)
(1,220)
(8,064)
(21,384)

75,131
17,222
14,656
13,281
12,741
11,836
11,449
10,358
7,955
7,674
8,295
1,213
9,947
20,702
222,460

(10,401)
(5,291)
(1,252)
574
1,788
(1,312)
618
(4,806)
(1,459)
1,487
(8,377)
(2,391)
(2,802)
(20,462)
(54,086)

100.00
100.00

(12,980)
(2,148)

13,258
4,033
17,291

(4,121)
(2,103)
(6,224)

11,838
4,171
16,009

(6,746)
(2,119)
(8,865)

Source: Company annual report, Edelweiss research

246

Edelweiss Securities Limited

Bharti Airtel

Profitability of all the key operating subsidiaries in Africa and South Asia has
deteriorated during FY15.

Most of key operating subsidiaries in Africa and South Asia have negative net worth.

Key regulatory issues in African operations

Burkina Faso- Regulator is contemplating cost plus based pricing. This will
negatively impact business freedom to price competitively.
The Regulator is also considering imposition of fixed-line obligations on operators;
efforts are being made to persuade the Regulator to accept wireless fixed services
instead of wire line fixed services, in view of the huge financial outlay that will be
required for cabling and wiring.

Contingent liabilities with respect


of sales taxes and service tax
surged 71% to INR 38bn

Niger: The government is enforcing a unique international gateway, which will


have a detrimental impact on industry.

Sierra Leone: The government is contemplating an increase in license fee, which


may increase the payout of operators by 8x.

Zambia: The government is conducting a consultation for introducing a fourth


operator. Industry has represented that this would fragment the sector and affect
scale and economies of existing operators.

Table 17: Contingencies


Particulars
FY12
Taxes, duties and other demands
DoT demands
3.4
Sales Tax and service tax
10.5
Income Tax
23.5
Custom duty
3.1
Entry tax
4.3
Others
3.0
Total (A)
47.7
Claims under legal cases including arbitration matters
Access charges
4.8
Others
3.0
Total (B)
7.8
Groups share of Joint Ventures (C)
1.5
(A) + (B) + (C)
57.1

FY13

FY14

(INR bn)
FY15

58.0
17.1
18.8
5.5
5.5
4.3
109.1

58.2
22.3
20.7
6.1
6.0
3.3
116.5

60.5
38.2
20.1
6.1
7.0
3.6
135.6

4.9
3.6
8.6
1.8
119.5

6.2
6.4
12.6
10.9
140.1

7.4
5.7
13.1
9.1
157.8

Source: Company annual report, Edelweiss research

247

Edelweiss Securities Limited

Annual Report Analysis


Capex cost incurred during FY1115 stood at INR 942bn, 75% of
EBITDA for FY11-15

Table 18: Valuation Parameters


Particulars
Capex
Depreciation
EBITDA
EBIT
EV
Market cap
EV/EBITDA
EV/EBIT
Capex (% to EBITDA)
Depreciation (% to EBITDA)

Considering high depreciation (led


by consistent high capex), we
believe EBIT will give clearer
picture of cash flows available to
shareholders

FY11
277
102
201
99
1,957
1,358
9.7
19.8
138
51

(INR bn)
FY12
150
134
237
103
1,897
1,279
8.0
18.3
63
56

FY13
130
148
233
84
1,692
1,108
7.3
20.0
56
64

FY14
175
156
278
121
1,880
1,275
6.8
15.5
63
56

FY15
210
155
312
157
2,243
1,575
7.2
14.3
67
50

Cumulative
942
696
1,260
565
N.A.
N.A.

75
55

Source: Company annual report, Edelweiss research

Profitability is marred by depreciation, which represents ~55% of EBITDA during


FY11-15.

Chart 1: Standalone cash generation and utilisation during FY11-15


Net
Sources
proceeds
Equity
from
share
investmen
capital
ts 1%
issued 9%
Net
borrowing
s 2%

Cash
Profits
after
working
capital
88%

Application
Loans and
advances
to
subsidiarie
s
25%

Investmen
ts in
subsidiarie
s/associat
es/JVs
12%

Dividend
4%

Capex Tangibles
31%

Capex Intangible
s
28%

*100%= INR833bn
Source: Company annual report, Edelweiss research
~59% and 37% of total cash available at the standalone level during FY11-15 was
utilised towards capex and investment (including loans) in subsidiaries respectively.
Consequently, very low proportion (4%) of available cash was used for dividend
payment.

248

Edelweiss Securities Limited

Bharti Airtel
Table 19: Summary financials
Particulars
Sales
Total income
EBITDA
EBITDA margin (%)
RoE
RoCE
Depreciation
Financial costs
Net profit
Equity shareholders' funds
Loan funds
Net fixed assets
CWIP
Current assets loans and advances
Current liabilities and provisions
Net current assets
Cash and cash equivalents
Net debt
Cash flow from operating activities
Cash flow from investing activities
Cash flow from financing activities
Net cash flows
CAPEX
Working capital investments

FY11
596
600
201
34
13
13
102
25
59
488
617
1,241
48
96
285
(189)
16
601
189
(604)
397
(19)
(277)
10

FY12
715
718
237
33
9
9
134
41
43
506
690
1,292
44
110
296
(186)
38
652
225
(184)
(40)
2
(150)
15

FY13
769
775
233
30
4
8
148
45
23
503
667
1,257
30
115
322
(207)
82
586
228
(187)
(46)
(5)
(130)
20

FY14
859
869
278
32
5
10
156
59
30
598
759
1,275
131
112
359
(247)
112
647
262
(250)
28
40
(175)
18

(INR bn)
FY15
921
946
312
34
10
14
155
73
53
620
664
1,286
216
158
418
(260)
105
559
276
(220)
(97)
(41)
(210)
(2)

Source: Company annual report, Edelweiss research

249

Edelweiss Securities Limited

Annual Report Analysis

ANNEXURES

250

Edelweiss Securities Limited

Annexure
Annexure A ROE analyzer
ROE analyser analyses profitability on the scale of operating efficiency and capital allocation
efficiency. While operating efficiency is a measure of how efficiently the company is making
use of operating assets, capital efficiency is the measure of balance sheet efficiency.
The above analysis involves:
1.

Dissection of profitability along two major drivers:

a.

Return from operating activities (RNOA: return on net operating assets).

b.

Return from financing activities (leveraging effect on ROE).


ROE = Return from operating activities (RNOA) + Return from leverage
Or
ROE = Operating margin x Operating assets turnover + Leverage spread x Leverage
multiplier
Whereas:
RNOA = NOPAT/Average operating assets
Operating margin = NOPAT/Operating revenue
Operating assets turnover = Operating revenue/Average operating assets
Leverage spread = RNOA Net borrowing cost
Leverage multiplier = Average net financial obligation/Average common shareholders
equity

2.

Reformulation of balance sheet, wherein we have regrouped assets and liabilities into
operating and financing categories (against traditional current and non-current
categorisation).

3.

Reformulation of income statement, wherein we have regrouped income and expenses


into operating and financing activities.

251

Edelweiss Securities Limited

Annual Report Analysis


Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai 400 098.
Board: (91-22) 4009 4400, Email: research@edelweissfin.com
Nirav Sheth
Head Research
nirav.sheth@edelweissfin.com

252

Edelweiss Securities Limited

Disclaimer
DISCLAIMER
Edelweiss Securities Limited (ESL or Research Entity) is regulated by the Securities and Exchange Board of India (SEBI) and is
licensed to carry on the business of broking, depository services and related activities. The business of ESL and its Associates (list
available on www.edelweissfin.com) are organized around five broad business groups Credit including Housing and SME
Finance, Commodities, Financial Markets, Asset Management and Life Insurance.
This Report has been prepared by Edelweiss Securities Limited in the capacity of a Research Analyst having SEBI Registration
No.INH200000121 and distributed as per SEBI (Research Analysts) Regulations 2014. This report does not constitute an offer or
solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. Securities as
defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 includes Financial Instruments and Currency
Derivatives. The information contained herein is from publicly available data or other sources believed to be reliable. This report is
provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. The
user assumes the entire risk of any use made of this information. Each recipient of this report should make such investigation as it
deems necessary to arrive at an independent evaluation of an investment in Securities referred to in this document (including the
merits and risks involved), and should consult his own advisors to determine the merits and risks of such investment. The
investment discussed or views expressed may not be suitable for all investors.
This information is strictly confidential and is being furnished to you solely for your information. This information should not be
reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in
part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or
resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use
would be contrary to law, regulation or which would subject ESL and associates / group companies to any registration or licensing
requirements within such jurisdiction. The distribution of this report in certain jurisdictions may be restricted by law, and persons
in whose possession this report comes, should observe, any such restrictions. The information given in this report is as of the date
of this report and there can be no assurance that future results or events will be consistent with this information. This information
is subject to change without any prior notice. ESL reserves the right to make modifications and alterations to this statement as
may be required from time to time. ESL or any of its associates / group companies shall not be in any way responsible for any loss
or damage that may arise to any person from any inadvertent error in the information contained in this report. ESL is committed
to providing independent and transparent recommendation to its clients. Neither ESL nor any of its associates, group companies,
directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential
including loss of revenue or lost profits that may arise from or in connection with the use of the information. Our proprietary
trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed
herein. Past performance is not necessarily a guide to future performance .The disclosures of interest statements incorporated in
this report are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in
the report. The information provided in these reports remains, unless otherwise stated, the copyright of ESL. All layout, design,
original artwork, concepts and other Intellectual Properties, remains the property and copyright of ESL and may not be used in
any form or for any purpose whatsoever by any party without the express written permission of the copyright holders.
ESL shall not be liable for any delay or any other interruption which may occur in presenting the data due to any reason including
network (Internet) reasons or snags in the system, break down of the system or any other equipment, server breakdown,
maintenance shutdown, breakdown of communication services or inability of the ESL to present the data. In no event shall ESL be
liable for any damages, including without limitation direct or indirect, special, incidental, or consequential damages, losses or
expenses arising in connection with the data presented by the ESL through this report.
We offer our research services to clients as well as our prospects. Though this report is disseminated to all the customers
simultaneously, not all customers may receive this report at the same time. We will not treat recipients as customers by virtue of
their receiving this report.
ESL and its associates, officer, directors, and employees, research analyst (including relatives) worldwide may: (a) from time to
time, have long or short positions in, and buy or sell the Securities, mentioned herein or (b) be engaged in any other transaction
involving such Securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the
subject company/company(ies) discussed herein or act as advisor or lender/borrower to such company(ies) or have other
potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of
publication of research report or at the time of public appearance. ESL may have proprietary long/short position in the above
mentioned scrip(s) and therefore should be considered as interested. The views provided herein are general in nature and do not
consider risk appetite or investment objective of any particular investor; readers are requested to take independent professional
advice before investing. This should not be construed as invitation or solicitation to do business with ESL.
253

Edelweiss Securities Limited

Annual Report Analysis


ESL or its associates may have received compensation from the subject company in the past 12 months. ESL or its associates may
have managed or co-managed public offering of securities for the subject company in the past 12 months. ESL or its associates
may have received compensation for investment banking or merchant banking or brokerage services from the subject company in
the past 12 months. ESL or its associates may have received any compensation for products or services other than investment
banking or merchant banking or brokerage services from the subject company in the past 12 months. ESL or its associates have
not received any compensation or other benefits from the Subject Company or third party in connection with the research report.
Research analyst or his/her relative or ESLs associates may have financial interest in the subject company. ESL and/or its Group
Companies, their Directors, affiliates and/or employees may have interests/ positions, financial or otherwise in the
Securities/Currencies and other investment products mentioned in this report. ESL, its associates, research analyst and his/her
relative may have other potential/material conflict of interest with respect to any recommendation and related information and
opinions at the time of publication of research report or at the time of public appearance.
Participants in foreign exchange transactions may incur risks arising from several factors, including the following: ( i) exchange
rates can be volatile and are subject to large fluctuations; ( ii) the value of currencies may be affected by numerous market
factors, including world and national economic, political and regulatory events, events in equity and debt markets and changes in
interest rates; and (iii) currencies may be subject to devaluation or government imposed exchange controls which could affect the
value of the currency. Investors in securities such as ADRs and Currency Derivatives, whose values are affected by the currency of
an underlying security, effectively assume currency risk.
Research analyst has served as an officer, director or employee of subject Company: No
ESL has financial interest in the subject companies: No
ESLs Associates may have actual / beneficial ownership of 1% or more securities of the subject company at the end of the month
immediately preceding the date of publication of research report.
Research analyst or his/her relative has actual/beneficial ownership of 1% or more securities of the subject company at the end of
the month immediately preceding the date of publication of research report: No
ESL has actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately
preceding the date of publication of research report: No
Subject company may have been client during twelve months preceding the date of distribution of the research report.
There were no instances of non-compliance by ESL on any matter related to the capital markets, resulting in significant and
material disciplinary action during the last three years except that ESL had submitted an offer of settlement with Securities and
Exchange commission, USA (SEC) and the same has been accepted by SEC without admitting or denying the findings in relation to
their charges of non registration as a broker dealer.
A graph of daily closing prices of the securities is also available at www.nseindia.com
Analyst Certification:
The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about
the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or
indirectly related to specific recommendations or views expressed in this report.
Additional Disclaimers
Disclaimer for U.S. Persons
This research report is a product of Edelweiss Securities Limited, which is the employer of the research analyst(s) who has
prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States
(U.S.) and are not associated persons of any U.S. regulated broker-dealer and therefore the analyst(s) is/are not subject to
supervision by a U.S. broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required
to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public
appearances and trading securities held by a research analyst account.
This report is intended for distribution by Edelweiss Securities Limited only to "Major Institutional Investors" as defined by Rule
15a-6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and
Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as
specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied,
duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor.

254

Edelweiss Securities Limited

Disclaimer
In reliance on the exemption from registration provided by Rule 15a-6 of the Exchange Act and interpretations thereof by the SEC
in order to conduct certain business with Major Institutional Investors, Edelweiss Securities Limited has entered into an
agreement with a U.S. registered broker-dealer, Edelweiss Financial Services Inc. ("EFSI"). Transactions in securities discussed in
this research report should be effected through Edelweiss Financial Services Inc.
Disclaimer for U.K. Persons
The contents of this research report have not been approved by an authorised person within the meaning of the Financial
Services and Markets Act 2000 ("FSMA").
In the United Kingdom, this research report is being distributed only to and is directed only at (a) persons who have professional
experience in matters relating to investments falling within Article 19(5) of the FSMA (Financial Promotion) Order 2005 (the
Order); (b) persons falling within Article 49(2)(a) to (d) of the Order (including high net worth companies and unincorporated
associations); and (c) any other persons to whom it may otherwise lawfully be communicated (all such persons together being
referred to as relevant persons).
This research report must not be acted on or relied on by persons who are not relevant persons. Any investment or investment
activity to which this research report relates is available only to relevant persons and will be engaged in only with relevant
persons. Any person who is not a relevant person should not act or rely on this research report or any of its contents. This
research report must not be distributed, published, reproduced or disclosed (in whole or in part) by recipients to any other
person.
Disclaimer for Canadian Persons
This research report is a product of Edelweiss Securities Limited ("ESL"), which is the employer of the research analysts who have
prepared the research report. The research analysts preparing the research report are resident outside the Canada and are not
associated persons of any Canadian registered adviser and/or dealer and, therefore, the analysts are not subject to supervision by
a Canadian registered adviser and/or dealer, and are not required to satisfy the regulatory licensing requirements of the Ontario
Securities Commission, other Canadian provincial securities regulators, the Investment Industry Regulatory Organization of
Canada and are not required to otherwise comply with Canadian rules or regulations regarding, among other things, the research
analysts' business or relationship with a subject company or trading of securities by a research analyst.
This report is intended for distribution by ESL only to "Permitted Clients" (as defined in National Instrument 31-103 ("NI 31-103"))
who are resident in the Province of Ontario, Canada (an "Ontario Permitted Client"). If the recipient of this report is not an
Ontario Permitted Client, as specified above, then the recipient should not act upon this report and should return the report to
the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any Canadian person.
ESL is relying on an exemption from the adviser and/or dealer registration requirements under NI 31-103 available to certain
international advisers and/or dealers. Please be advised that (i) ESL is not registered in the Province of Ontario to trade in
securities nor is it registered in the Province of Ontario to provide advice with respect to securities; (ii) ESL's head office or
principal place of business is located in India; (iii) all or substantially all of ESL's assets may be situated outside of Canada; (iv)
there may be difficulty enforcing legal rights against ESL because of the above; and (v) the name and address of the ESL's agent for
service of process in the Province of Ontario is: Bamac Services Inc., 181 Bay Street, Suite 2100, Toronto, Ontario M5J 2T3 Canada.
Disclaimer for Singapore Persons
In Singapore, this report is being distributed by Edelweiss Investment Advisors Private Limited ("EIAPL") (Co. Reg. No.
201016306H) which is a holder of a capital markets services license and an exempt financial adviser in Singapore and (ii) solely to
persons who qualify as "institutional investors" or "accredited investors" as defined in section 4A(1) of the Securities and Futures
Act, Chapter 289 of Singapore ("the SFA"). Pursuant to regulations 33, 34, 35 and 36 of the Financial Advisers Regulations ("FAR"),
sections 25, 27 and 36 of the Financial Advisers Act, Chapter 110 of Singapore shall not apply to EIAPL when providing any
financial advisory services to an accredited investor (as defined in regulation 36 of the FAR. Persons in Singapore should contact
EIAPL in respect of any matter arising from, or in connection with this publication/communication. This report is not suitable for
private investors.
Copyright 2009 Edelweiss Research (Edelweiss Securities Ltd). All rights reserved

Access the entire repository of Edelweiss Research on www.edelresearch.com


255

Edelweiss Securities Limited

Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai 400 098
Tel: +91 22 4009 4400. Email: research@edelweissfin.com

You might also like