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FUNDAMENTALS VALUATION
OPTIEMUS INFRACOM LIMITED
August 22, 2012
ANALYTICAL CONTACT
Mr. Amod Khanorkar +91-22-6754 3520 amod.khanorkar@careratings.com
BUSINESS DEVELOPMENT CONTACTS
MUMBAI
Mr. R. Suryanarayan +91-22-6754 3602 r.suryanarayan@careratings.com
KOLKATA
Ms. Priti Agarwal +91-33-40181600 priti.agarwal@careratings.com
CHENNAI
Mr. V Pradeep Kumar +91-44-2849 7812 pradeep.kumar@careratings.com
AHMEDABAD
Mr. Mehul Pandya +91-79-40265656 mehul.pandya@careratings.com
NEW DELHI
Ms. Swati Agrawal +91- 11- 2331 8701 swati.agrawal@careratings.com
BANGALORE
Mr. Dinesh Sharma +91-80-2211 7140 dinesh.sharma@careratings.com
HYDERABAD
Mr. Ashwini Kumar Jani +91-40-40102030 ashwini.jani@careratings.com
CARE EQUITY RESEARCH OFFERS
Independent Research of equities on fundamentals or valuations or both
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Valuation of companies for Institutional Investors, Asset Managers and Corporates
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OPTIEMUS INFRACOM LIMITED
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EQUIGRADE
Financial Information Snapshot
(Rs. Crores) FY11 FY12P FY13E FY14E
Total Revenues 1,212 1,907 2,355 2,925
EBITDA 44 60 103 113
PAT 16 27 39 45
Fully Diluted EPS* (Rs.) 1.8 3.2 4.5 5.3
Dividend Per Share (Rs.) 0.0 0.0 0.0 0.0
P/E (x) 10.5 6.0 4.2 3.6
EV/EBITDA (x) 10.1 7.4 4.3 3.9
* Calculated on Current Face Value of Rs.10/- per share
EQUIGRADE – Analytical Power for Investment Decision
OPTIEMUS INFRACOM LTD Handset Distribution
Good Fundamentals, Considerable Upside Potential CMP: 19/ CIV: 28.31
Sensex: 17,847
CARE Equity Research assigns 3/5 on fundamental grade to
Optiemus Infracom Limited (Optiemus)
CARE Equity Research assigns a fundamental grade of 3/5 to Optiemus.
This indicates ‘Good Fundamentals’. The grade draws reflects sustained
growth in sales achieved by the company which is in line with the growth
of Samsung India Electronics Ltd. (Samsung), a subsidiary of the South
Korean electronics major Samsung Electronics Co. Ltd., in the handset
market in India. The company has established a strong network for
distribution of mobile handsets to modern trade (organized retail chains).
Optiemus has a pan India presence with 27 offices cum warehouses
across India. Though renewal of agreement with Samsung would remain a
concern, the presence of the company in allied businesses would help in
diversifying the revenue stream and mitigating overall risk. CARE Equity
Research believes that the increasing penetration of smart-phones in India
(where Samsung has emerged as one of the leading players) augurs well
for the fortunes of the company.
Valuation
CARE Equity Research values Optiemus using Price-Earnings (P/E)
multiple based methodology. Optiemus is currently trading at a P/E of
4.2x and 3.6x to the FY13 and FY14 diluted EPS estimates of Rs.4.5 per
share and Rs.5.3 per share, respectively. Historically, the company has
traded at one year forward rolling multiple of 6x. Given the continued
healthy outlook on growth going forward, CARE Equity Research
believes that it is fair to value Optiemus at the historical one year forward
P/E multiple of 6x, translating into a Current Intrinsic Value (CIV) of
Rs.28.3 per share. At the Current Market Price (CMP) of Rs.19 per share
the CIV results in a valuation grade of 5/5 indicating the equity shares of
Optiemus have ‘Considerable Upside Potential’
August 22, 2012
OPTIEMUS INFRACOM LIMITED
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EQUIGRADE
Continued robust growth in mobile subscriber base to aid mobile handset market
India is the second largest and the fastest growing telecom market in the world in terms of number of wireless
connections. From a level of about 34 million in March 2004, the mobile subscribers have reached a level of over
812 million in March, 2011 registering a compounded annual growth rate (CAGR) of 57%.
Growth in wireless subscriber base
Source: Telecom Regulatory Authority of India (TRAI)
Source: Telecom Regulatory Authority of India (TRAI)
As estimated by Telecom Regulatory Authority of India (TRAI) the number of wireless subscribers is expected to be
over 1 billion by March 2014. While wireless penetration is urban areas has increased significantly over the years,
rural and semi-urban areas continue to be under-penetrated. The point is corroborated by the fact that the urban
wireless tele-density stood at around 163% as on March 31, 2012 while the rural wireless tele-density stood at
around 38% as on the same date. Nevertheless, in the last 5 years, subscriber base in rural areas has grown more
rapidly than the urban areas, their respective CAGRs over FY 2007-2011 period being 70% and 42% respectively. In
the pursuit of growth, service providers have rolled out their services in newer rural hinterlands. Also, the lower
tariffs and falling handset prices has increased the affordability of telecom services. CARE Equity Research
estimates that the growth in both urban and rural areas will be slower compared to their historical growth rate,
however rural areas will continue to grow faster than the urban areas.
FUNDAMENTAL GRADE Good Fundamentals 3/5
OPTIEMUS INFRACOM LIMITED
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EQUIGRADE
Growth of Samsung in the Indian mobile handset industry shall benefit Optiemus
In line with the growth in the mobile subscriber base, the Indian mobile handset industry has also grown
significantly during the last decade. In the last one year, the Indian handset market has grown by 15% to reach
Rs.33,171cr in FY11 compared to Rs.28,897cr in FY10. Although, Nokia continued to remain the market leader in
the Indian handset market posting a revenue of Rs12,929cr in FY11, it grew at a negligible y-o-y growth of 0.2%.
Indian Mobile Handset Market in FY10 and FY11
Top Players Revenues in
FY10 (in Rs.cr)
Market share
(%)
Revenues in
FY11 (in Rs.cr)
Market share
(%)
Nokia 12,900 44.6 12,929 39.0
Samsung 4,700 16.3 5,720 17.2
Micromax 1,602 5.5 2,289 6.9
RIM 1,210 4.2 1,950 5.9
LG 1,600 5.5 1,834 5.5
Others 6,885 23.8 8,449 25.5
Total 28,897 100 33,171 100
Source: Industry and CARE Equity Research
In contrast, Samsung showed an impressive growth and its revenues from the handset business in India grew from
Rs.4,700cr in FY10 to Rs.5,720cr in FY11, thereby registering a y-o-y growth of 22%. In FY11, the company
launched 42 handset models in various categories. Samsung did particularly well in the smart-phone segment where
its entry level smart phones such as ‘Wave’ and ‘Galaxy S’ have been hugely successful. The compatibility of
Samsung smart-phones with all major operating systems such as Windows, Android and Bada have been major
reasons for its popularity.
OPTIEMUS INFRACOM LIMITED
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EQUIGRADE
Factors Driving Mobile Handset growth
Source: CARE Equity Research
Optiemus, which derives over 95% of its revenues from the distribution of Samsung handsets, is set to benefit from
the continued growth in mobile handset market coupled with robust growth of Samsung in India. Optiemus exhibited
revenue CAGR of 68% over the period FY09-FY11. As per the provisional results for FY12 Optiemus achieved a
turnover of Rs.1906cr and a PAT of 27.24cr
Turnover and Handset Sales Trends - Optiemus
Source: Company and CARE Equity Research
OPTIEMUS INFRACOM LIMITED
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EQUIGRADE
Experienced promoter
Mr. Ashok Gupta, the chairman of the Optiemus has more than 14 years of experience in the field of
telecommunications and distribution. Under his leadership the company has been involved in the distribution of
Samsung mobile phones since January 2007. Prior to this, the company, since October 2001, was involved in the
distribution of Nokia handsets. Mr. Gupta has also served as the secretary of the ‘Indian Cellular Association’
(ICA), an apex body representing the mobile brands in India.
Low margin business, however higher sales of smart-phones to boost the profit on absolute levels
Samsung has been the global leader in the smart-phone category followed by Apple and then Nokia. Though
currently in India, smart-phones penetration continues to be on the lower side, it has been continuously improving
and is expected to become more popular as 3G data services gather steam. The same point is vindicated by the fact
that while in FY11, Optiemus sold 2.14 lakh smart-phones (9.22% of total), in FY12 it has increased to 9.70 lakh
(33% of total) thereby registering a y-o-y growth of 353%.
With the share of smart-phones increasing in Optiemus’ product portfolio and its price being relatively higher than
that of feature phones, the company in recent times has seen an increasing trend in the average selling price which
has also augmented into higher profits at the absolute level. However the margins continue to be on the lower side
owing to the distribution nature of business.
Trends in average selling price in recent months- Optiemus
Source: Company and CARE Equity Research
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EQUIGRADE
Strong distribution infrastructure in place
Optiemus is the national distributor for Samsung mobile handsets to modern trade (retail chains). The company has
as its clients some well known and reputed retailers such as The Mobile Store, Spice Distribution Limited, Planet M
Retail Limited, Reliance Digital Retail and Indus Mobile Distribution. These retail chains give their model-wise and
location-wise projections to Optiemus, who after receipt of the consignment from Samsung, deliver the same to the
retail chains as per their requirement. Optiemus currently has 27 offices cum warehouses across India. The
widespread distribution network enables the company to cater to the needs of the customers/retail chains in a prompt
and timely manner.
Optiemus - Distribution centres
S. No. Distribution
Centre
State S. No. Distribution
Centre
State
1. Guwahati Assam 15. Palam Delhi
2. Patna Bihar 16. Bhubaneswar Orissa
3. Chandigarh Union Territory 17. Zirakpur Punjab
4. Raipur Chhattisgarh 18. Jaipur Rajasthan
5. Ahmedabad Gujarat 19. Ghaziabad Uttar Pradesh
6. Parwanoo Himachal Pradesh 20. Lucknow Uttar Pradesh
7. Ranchi Jharkhand 21. Dehradun Uttarakhand
8. Indore Madhya Pradesh 22. Kolkata West Bengal
9. Gurgaon Haryana 23. Kochi Kerala
10. Mumbai Maharashtra 24. Bangalore Karnataka
11. Navi Mumbai Maharashtra 25. Chennai Tamil Nadu
12. Pune Maharashtra 26. Hyderabad Andhra Pradesh
13. Lajpat Nagar Delhi 27. Jammu Jammu & Kashmir
14. Srinivaspuri Delhi
Source: Company and CARE Equity Research
Focus on diversification affirms the de-risking strategy
On the back of the strength and expertise in the mobile handset industry in general, Optiemus has also established its
presence in allied businesses such as trading of mobile accessories and distribution of telecommunication headsets.
The company sells mobile accessories such as mobile pouches and screen guards under its own brand name
‘MoLife’. For distribution of mobile accessories it has a tie-up with mobile retail outlets such as The Mobile store,
Hot Spot, Reliance Digital, Reliance Infocom, Univercell, E zone and Planet M. The company is also involved in the
distribution of ‘Plantronics’ brand of telecommunication headsets across India. Plantronics Inc., a company
headquartered in California, U.S.A is one of the leading manufacturers of telecommunication headsets in the world.
Though both the above ventures contribute less than 10% to the turnover they nevertheless provide diversification to
the revenue stream and contribute to the profitability with their relatively higher margins.
OPTIEMUS INFRACOM LIMITED
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EQUIGRADE
Further in January 2012, the company has acquired a commercial property at Noida, Uttar Pradesh having a total
land area of 13,620 sq. mt for a total consideration of Rs.120cr. The company has already signed an agreement with
Samsung India Electronics Ltd. to lease out the above property for a period of nine years. The income from
aforementioned property is expected to contribute around 20% to the bottom-line from FY13 onwards.
Renewal of agreement with Samsung would remain a concern
Optiemus has been involved in the distribution of Samsung handsets since January 2007. The distributorship is
guided by an agreement between the two parties, which are valid for a period of two years. On the expiry of the term
a fresh agreement shall be signed between the two parties based on mutual consent. The current agreement would
expire on March 31, 2013. Though the renewability of the same would pose a risk to the business sustenance of the
company, considering the impressive growth achieved by the company specifically in the last three years, it is
expected that the agreement would be renewed.
In compliance with the listing arrangement No.49
The company has six board of directors, with three of them being executive and three being non executive
independent directors. The board has formed three sub-committees which include the audit, share transfer and
investor grievance committee. The audit committee has four members, which includes three non-executive
independent directors and Mr. Ashok Gupta who is also the promoter. The other two sub committees namely the
share transfer and investor grievance committees have two members each. Mr. Ashok Gupta is the member in both
the committees while the other member in each committee includes one non-executive independent director.
Optiemus: Board of Directors
Name Category of Director
Mr. Ashok Gupta Executive and Promoter
Mr. Hardip Singh Executive
Ms.Parul Rai Executive
Mr. Manoj Jain Non Executive and Independent
Mr. Laliet Gupta Non Executive and Independent
Mr. Gautam Kanjilal Non Executive and Independent
Source: Company and CARE Equity Research
OPTIEMUS INFRACOM LIMITED
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EQUIGRADE
CARE Equity Research assigns a valuation grade of 5/5 to the equity shares of Optiemus
According to CARE Equity Research, the Current Intrinsic Value (CIV) of Optiemus is Rs.28.3 per share, which
translates into an Enterprise Value of Rs.524 crore.
Optiemus is currently trading at a P/E of 4.2x and 3.6x to the FY13 and FY14 diluted EPS estimates of Rs.4.5
per share and Rs.5.3 per share, respectively. Historically, the company has traded at an average one year forward
rolling multiple of 6x. Given the continued healthy outlook on growth going forward, CARE Equity Research
believes that it is fair to value the equity shares of Optiemus at the historical one year forward P/E multiple of
6x, translating into a CIV of Rs.28.3 per share.
The CIV of Rs.28.3 is around 49 per cent higher than the CMP of Rs. 19 per share, resulting in a valuation grade
of 5/5 and indicating the shares of Optiemus has ‘Considerable Upside Potential’.
One-year forward rolling P/E multiple One-year forward rolling P/B multiple
Source: CMIE and CARE Equity Research
VALUATION GRADE Considerable Potential Upside 5/5
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OPTIEMUS INFRACOM LIMITED
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EQUIGRADE
“Optiemus Infracom Limited” was originally incorporated in the year 1993 as Akanksha Finvest Limited (AFL)
as a Non-Banking Financial Company (NBFC). In January 2009, Mr. Ashok Gupta, the promoter of Telemart
Communication India Pvt. Ltd (Telemart) which was distributor of Samsung mobile handsets, took over the
management of AFL
Subsequent to the takeover, the name and business of AFL was changed to Akanksha Cellular Limited (ACL)
and telecommunication respectively. Later during March 2009, the Board of Directors of ACL approved a
scheme of merger of seven group companies (including Telemart) with ACL. Out of the seven group companies,
six were into telecommunication while one was into road construction business. The seven merged entities were
as follows:
Name of Entity
Telemart Communication India Pvt. Ltd.
A. Design & Details (Interiors & Infrastructures) Private Limited
Mach Communications Private Limited
Mo-Life Communication (India) Private Limited
Mo-Life Retails Private Limited
Pacific I Net Support Private Limited
Radical Softnet Private Limited
The name of the merged entity was subsequently changed to “Optiemus Infracom Limited” in June 2011.
Optiemus is currently listed with the Bombay, Delhi and Jaipur Stock Exchanges.
Among the entities mentioned above only four entities including Telemart, A. Design & Details (Interiors &
Infrastructures) Private Limited (ADD), Mach Communications Private Limited (Mach) and Mo-Life
Communication (India) Private Limited (Mo Life) had significant business operations at the time of merger.
Currently the company operates in four divisions’ viz. handset distribution (Telemart division), mobile
accessories (Mo Life division), headset distribution (Mach division) and Infrastructural work (ADD division).
The Telemart division accounts for more than 90% turnover of the company. The Mo Life division is engaged in
the trading of mobile accessories such as mobile pouches and screen guards under the brand name “Mo Life”
while the Mach division is engaged in the national distribution of Plantronics telecommunication headsets. The
ADD division initially was engaged in providing consulting work related to interior design but later started
providing subcontracting services for road infrastructure projects. ADD in its capacity as a sub-contractor had in
the past executed two road infrastructure projects for Valecha Engineering. Currently there are no outstanding
orders in this division.
COMPANY BACKGROUND
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EQUIGRADE
Mobile Handset Industry Overview
Between 2005 and 2011, the Indian Mobile Handset industry grew at a healthy CAGR of 28%. In comparison, the
number of wireless subscribers grew at a CAGR of 58% over the same period. The market value of India’s mobile
handset industry has increased from Rs. 153.5 billion in FY2005 to Rs. 368.5 billion in FY2011 and is second only to
China.
Comparison of handset volume growth and wireless subscriber growth
Source: Indian cellular Association, TRAI and CARE Research
Though it would be difficult to expect future growth in the wireless subscriber base similar to the historical growth
rates, growth in the mobile handset industry is not expected to be dampened as the same is not only driven by new
subscriber additions but also by replacement demand. Historically from FY05-FY11, the growth rate experienced in
the Indian mobile handset market has far outstripped the growth achieved in the mobile handset space globally.
Global Mobile handset Demand Mobile handset demand in India
Source: Industry & CARE Research Source: Indian Cellular Association & CARE Research
SNAPSHOT OF THE INDUSTRY
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EQUIGRADE
Mobile handsets can be broadly divided into two categories, smart-phones and feature-phones (non-smart-phones). In
India, smart-phone penetration among the age group of 15 – 24 years has been low; however the same is expected to
increase as 3G data services’ penetration increases. The number of smart-phones shipped to India witnessed a
dramatic increase from 2.5 million units in 2009 to 6 million units in 2010.It would fair to expect the increasing
smart-phone penetration as a major driver for the mobile handset industry going forward.
Smart-Phone Penetration in Various countries(2010)
Source: Industry and CARE Research
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EQUIGRADE
Income Statement
(Rs. Crores) FY10 FY11 FY12# FY13 P FY14 P FY15 P
Operating Income 868 1,212 1,907 2,355 2,925 3,450
EBITDA 30 44 60 103 113 131
Depreciation and amortisation 12 9 7 14 13 12
EBIT 18 35 53 90 100 119
Interest 9 12 16 33 35 37
PBT 13 23 40 57 65 82
Ordinary PAT 8 16 27 39 45 57
PAT 8 16 27 39 45 57
Fully Diluted Earnings Per Share* (Rs.) 1.1 1.8 3.2 4.5 5.3 6.6
Dividend, including tax 0 0 0 0 0 0
* Calculated based on ordinary PAT on Current Face Value of Rs. 10/- per share
Balance Sheet
(Rs. Crores) FY10 FY11 FY12# FY13 P FY14 P FY15 P
Tangible Net worth (incl. Minority Interest) 86 114 140 179 224 280
Debt (incl. Preference Shares) 82 98 319 379 418 426
Deferred Liabilities / (Assets) 2 2
Capital Employed 170 214 459 557 642 706
Net Fixed Assets, (incl. Capital WIP, net of revaluation reserve) 26 19 177 164 151 140
Investments 10 1 5 7 10 12
Loans and Advances 32 62 28 28 32 39
Inventory 27 42 71 105 130 150
Receivables 148 210 255 302 373 423
Cash and Cash Equivalents 36 34 38 38 50 58
Current Assets, Loans and Advances 264 358 432 505 627 725
Less: Current Liabilities and Provisions 130 164 155 119 146 171
Total Assets 170 214 459 557 642 706
Ratios based on Financials
FY11 FY12# FY13 P FY14 P FY15 P
Growth in Operating Income 39.7% 57.3% 23.5% 24.2% 17.9%
Growth in EBITDA
45.0% 37.0% 72.1% 9.3% 15.5%
Growth in PAT
91.4% 74.8% 43.3% 15.7% 25.2%
Growth in EPS 60.8% 74.8% 43.3% 15.7% 25.2%
EBITDA Margin
3.6% 3.1% 4.4% 3.9% 3.8%
PAT Margin
1.3% 1.4% 1.7% 1.5% 1.6%
RoCE
18.6% 16.6% 17.7% 16.8% 17.7%
RoE
15.3% 21.3% 24.5% 22.5% 22.4%
Gross Debt - Equity (times)
0.9 2.3 2.1 1.9 1.5
Net Debt - Equity (times)
0.6 2.0 1.9 1.6 1.3
Interest Coverage (times)
3.6 3.8 3.1 3.2 3.5
Current Ratio (times)
1.4 1.4 1.6 1.6 1.6
Inventory Days
11 11 14 15 15
Receivable Days
54 46 44 42 42
Price / Earnings (P/E) Ratio
10.5 6.0 4.2 3.6 2.9
Price / Book Value(P/BV) Ratio
1.4 1.2 0.9 0.7 0.6
Enterprise Value (EV)/EBITDA
10.1 7.4 4.3 3.9 3.4
Source: Company, CARE Equity Research # Figures for FY12 are Provisional
FINANCIAL ANALYSIS
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EQUIGRADE
CARE Equigrade Grid (CEG)
Through CEG, CARE Equity Research addresses two critical factors considered by an investor while investing in
a particular company’s equity shares:
1. Fundamentals: Whether the company is fundamentally sound with respect to its business, its financial
position, its management and its prospects.
2. Valuation: What is the Current Intrinsic Value (CIV) of the stock and how it compares vis-a-vis its Current
Market Price (CMP)
These factors are answered assigning quantitative grades to both these parameters. CEG is the snapshot of
‘Fundamental Grade’ and ‘Valuation Grade’ assigned by CARE Equity Research.
Fundamental Grade
This grade represents how sound the company is fundamentally, vis-à-vis other listed companies in India. This
grade captures:
1. Business Fundamentals and Prospects
2. Financial Soundness
3. Management Quality
4. Corporate Governance Practices
The grade is assigned on a five-point scale as under:
CARE Fundamental Grade Evaluation
5/5 Strong Fundamentals
4/5 Very Good Fundamentals
3/5 Good Fundamentals
2/5 Modest Fundamentals
1/5 Weak Fundamentals
Valuation Grade
This grade represents the potential value in the company’s equity share for the investor over a 1 year period. The
Current Intrinsic Value (CIV) or the price arrived by CARE Equity Research on fundamental basis is compared
with the current market price (CMP) of the stock and the grade is assigned based on the gap between CIV and
CMP of the stock.
The grade is assigned on a five-point scale as under:
CARE Valuation Grade Evaluation
5/5 Considerable Upside Potential (>25% upside from CMP)
4/5 Moderate Upside Potential (10-25% upside from CMP)
3/5 Fairly Priced (+/- 10% from CMP)
2/5 Moderate Downside Potential (10-25% downside from CMP)
1/5 Considerable Downside Potential (>25% downside from CMP)
Grading determination is a matter of experienced and holistic judgment, based on relevant quantitative and
qualitative factors of the company in relation to other listed companies.
EXPLANATION OF GRADES
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EQUIGRADE
DISCLOSURES
Each member of the team involved in the preparation of this grading report, hereby affirms that there exists no conflict
of interest that can bias the grading recommendation of the company.
This report has been sponsored by the company.
DISLCLAIMER
This report is prepared by CARE Research, a division of Credit Analysis & REsearch Limited [CARE]. CARE Research has
taken utmost care to ensure accuracy and objectivity while developing this report based on information available in public
domain or from sources considered reliable. However, neither the accuracy nor completeness of information contained in
this report is guaranteed. Opinions expressed herein are our current opinions as on the date of this report.
CARE’s valuation of the security is mainly based on company specific fundamental factors. Equity prices are affected by
both fundamental factors as well as market factors such as – liquidity, sentiment, broad market direction etc. The impact of
market factors can distort the price of the security thereby deviating from the intrinsic value for extended period of time.
This report should not be construed as recommendation to buy, sell or hold a security or any advice or any solicitation,
whatsoever. It is also not a comment on the suitability of the investment to the reader. The subscriber / user assumes the
entire risk of any use made of this report or data herein. CARE specifically states that it or any of its divisions or employees
have no financial liabilities whatsoever to the subscribers / users of this report. This report is for personal information only
of the authorised recipient in India only. This report or part of it should not be reproduced or redistributed or
communicated directly or indirectly in any form to any other person, especially outside India or published or copied for any
purpose.
Credit Analysis and Research Limited proposes, subject to receipt of requisite approvals, market conditions and other
considerations, to make an initial public offer of its equity shares and has filed a draft red herring prospectus (“DRHP”) with
the Securities and Exchange Board of India (the “SEBI”). The DRHP is available on the website of SEBI at www.sebi.gov.in
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investment in equity shares involves a high degree of risk and for details relating to the same, see the section titled “Risk
Factors” of the DRHP.
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