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Bharat Dynamics Ltd A large order pipeline just does not cut it INDIA | DEFENCE | IPO Note

12 March 2018

Bharat Dynamics (BDL) is a government‐owned company, engaged in the manufacturing of missiles and torpedoes. In FY17, its revenues/EBITDA/PAT was Rs 46.3/8.3/6.6bn, translating into 17.9% EBITDA and 14.4% PAT margins. BDL has an order book of Rs 105bn as of January 2018, implying a book‐to‐bill of 2.2x FY17 revenues. About Bharat Dynamics Ltd (BDL) Incorporated in 1970, BDL is a government‐owned company with 'Miniratna (Category‐1)' status. It is engaged in the manufacturing of Surface to Air missiles (SAMs), Anti‐Tank Guided missiles (ATGMs), underwater weapons (Torpedoes), launchers, countermeasures and test equipment. Currently, it is the sole manufacturer and supplier for SAMs, ATGMs and torpedoes to the Indian armed forces. IPO rationale: Offer for sale by government The IPO is an offer for sale by the government to raise Rs 9.5bn and dilution of shareholding by 12.3%. At the IPO price band of Rs 413‐428, the stock trades at 12x FY17 PE on an adjusted equity base. Key positives • BDL is currently the sole manufacturer for SAMs, ATGMs and torpedoes in India. It is

capable of addressing 54% of India’s missile demand over the next 10 years (2017‐26). • It benefits from a strong relationship with DRDO. BDL is part of the design and

development stage of a project giving it a competitive advantage against other players. • BDL is expanding its product base in SAM’s and Torpedoes. Over the next ten years its

revenues will be spread across multiple projects against the current scenario wherein Akash is a singular major project in its order book.

• Large opportunity pipeline of Rs 440bn FY19‐22 against current order book of Rs 105bn. Key risks • Projects that BDL is nominated to win over the next five years are large. Case in point

VSHORAD is a $ 5bn project (including the share of foreign OEM); MRSAM is $ 2.5bn and Akash ($ 2bn). These should be prone to delays given their size.

• Share of revenues from high margin Akash missile program is expected to decline over FY18‐20. In fact we expect BDL’s earnings to de‐grow by 9% over FY17‐20E.

• New projects such as VSHORAD and MRSAM are transfer of technology projects; initial profitability on these projects should be low.

Our view: AVOID In our view, stocks with a single point investment thesis of a large order pipeline will not grab investor interest if those orders are not be accompanied by commensurate profitability. As is the case with BDL. We estimate BDL’s order book to grow by 3.7x over FY19‐22 on large orders such as VSHORADS, MRSAM and Akash. However in the near term based on its existing order book BDL’s revenues/EBITDA/PAT would decline by 15%/18%/9% over FY17‐20E. Additionally, even as BDL is expected to expand its product profile from single to multiple products the margin profile of new projects is expected to be materially lower than the current cyclically high margins of the company. At IPO price of Rs 428 BDL trades at 16x FY20E PE. BDL’s valuation is in line with its listed global peers despite its smaller size and lack of research capabilities. We see downside risks overshadowing any positives of large order inflows whose benefits both in terms of execution and margin should be back ended. Hence AVOID.

AVOID COMPANY DATA ISSUE OPENS 13th March 2018ISSUE CLOSES 15th March 2018PRE‐ ISSUE EQUITY SHARES 183.3mnPRICE BAND Rs 413 – 428NO OF SHARES OFFERED 22.5mnISSUE SIZE Rs 9.2‐9.5bnMKT CAP Rs 78.4bn STANDALONE FINANCIALS Y/E Mar, Rs bn FY17 FY18E FY19E FY20ENet Sales 46.30 44.94 43.49 28.17EBIDTA 8.29 8.23 8.55 4.65Net Profit 6.65 6.22 6.56 4.93EPS, Rs. 36.3 33.9 35.8 26.9P/E@Rs 428 11.8 12.6 12.0 15.9 Jonas Bhutta (+ 9122 6246 4119) [email protected] Vikram Rawat (+ 9122 6246 4120) [email protected]


BHARAT DYNAMICS LTD IPO NOTE

About the IPO • Rs 9.2‐9.5bn issue of 22.5mn shares at a price band of Rs 413‐428 per share • Issue includes offer for sale by promoter 'Government of India (GoI)' • Market capitalisation at price band: Rs 75.7‐78.4bn. • Post‐issue, GoI's shareholding to reduce to 87.8% from 100%. Bharat Dynamics ‐ Issue details ISSUE OPENS 13th March 2018ISSUE CLOSES 15th March 2018PRE‐ ISSUE EQUITY SHARES 183.3mn ‐ LOWER BAND Rs 413 ‐ UPPER BAND Rs 428PRICE BAND Rs 413 ‐ 428 ‐ FRESH ISSUE Nil ‐ OFS 22.5mnNO OF SHARES OFFERED FOR SALE 22.5mnRETAIL AND EMPLOYEE SHARE (%) 36.3%RETAIL DISCOUNT (RS) Rs 10ISSUE SIZE Rs 9.2‐9.5bnPOST‐ ISSUE EQUITY SHARES 183.28mnMKT CAP Rs 75.7‐78.4bn

Share holding pattern post‐issue

Source: RHP, PhillipCapital India Research

Allocation of shares offered in the IPO

Shares (mn) % of Net/gross issueRetail 7.70 35.0%Non‐institutional 3.30 15.0% ‐ Mutual fund 0.55 2.5% ‐ Other QIBs 10.45 47.5%QIBs 11.00 50.0%Net Issue 21.99 98.0%Employees 0.46 2.0%Total Issue 22.45 100.0%


GOI87.75%

Others12.25%



About the company Bharat Dynamics Ltd (BDL), incorporated in 1970, is a government‐owned company with 'Miniratna (category‐1)' status. It is engaged in the manufacturing of Surface to Air missiles (SAMs), Anti‐Tank Guided missiles (ATGMs), underwater weapons (Torpedoes), launchers, countermeasures and test equipment as well as the refurbishment and extension of the life of missiles. It is currently the sole manufacturer for SAMs, ATGMs and torpedoes in India

and also the sole supplier of SAMs and ATGMs to the Indian armed forces. It is also the co‐development partner with the DRDO for the next generation of

ATGMs and SAMs. BDL currently has three manufacturing facilities in Hyderabad, Bhanur and

Vishakhapatnam. It is also in the process of setting up two new manufacturing facilities at (1) Ibrahimpatnam, Telangana to manufacture SAMs and (2) Amravati, Maharashtra for Very Short Range Air Defence Missiles (VSHORADMs).

BDL Manufacturing facilities Location Products Operational Hyderabad, Telangana SAMs, Milan 2T ATGMs, countermeasures, launchers and test equipment Bhanur, Telangana Konkurs – M ATGMs, INVAR (3 UBK 20) ATGMs, launchers & spares Vishakhapatnam, Andhra Pradesh

Light weight torpedoes, C‐303 anti torpedo system, countermeasures & spares

Under planning Ibrahimapatnam, Telangana SAMs Amravati, Maharashtra Very Short Range Air Defence Missiles (VSHORADMs)

Source: RHP, PhillipCapital India Research Details of the infrastructure facilities at each of the three manufacturing units Hyderabad > 6 Axis CNC machines > X‐Ray building

> Robotic welding machine R&D facilities

> Electron beam welding machine > Aerodynamics / high performance computing facility for CFD

> 3D measuring machine > Computer aided design

> CNC flow forming machine > Optics and lasers spectral radiometry

> 5‐Axis CNC machining center > RF lab

> Combined altitude temperature and humidity chamber > Embedded systems design

> Vibration test facility > Simulation and analysis facility

> Vacuum furnace for heat treatment > Electronic circuit design and simulation.

> Explosive storage and magazine building > Counter measures dispensing system lab

> Unification / automation of cold and hot conditioning of missiles / sub‐systems including thermal shock capability.

> Missile simulation mode

> Spectro Radiometer

Bhanur > Robotic welding machine > Armour room facility for high pressure testing

> 3D measuring machine > Hybrid micro circuits in place of conventional SMD technology.

> Tooled up CNC Turn‐mill center for Outer gimble of Konkurs‐M ATGM > Thin film hybrid technology for components of INVAR (3 UBK 20) ATGM

> Mill turn with multitask CNC machine. > Vacuum furnace for heat treatment

> X‐Ray machine > Explosive storage and magazine Building

> Advanced universal testing machine > PLC based automatic loading & progression of jobs in electro plating production line > CNC flow forming machine

> Environmental stress screening chamber > Introduction of lithium based high reliable thermal batteries

> Vibration test facility > Flow forming in place of deep drawing process.

Vishakhapatnam > Vibration test facility

> Pressure testing tank




BDL Products portfolio

Source: RHP, PhillipCapital India Research Surface to Air Missiles

Akash SAM is an all weather area defense system which can engage multiple targets simultaneously. It can target helicopters, fighter aircraft and unmanned aerial vehicles. In addition to Akash SAM, BDL will also supply the ground support system and construct infrastructure facilities for the Akash SAM. BDL is currently supplying Akash SAMs to MoD for Indian Army.

LRSAM & MSRSAM is a high response quick reaction vertical launch supersonic missile to neutralise enemy aerial threats such as missiles, aircraft, guided bombs and helicopters. BDL is currently supplying LRSAMs and MRSAMs to MoD for Indian Army and Indian Navy respectively.

Anti‐Tank Guided Missiles

Milan 2T ATGM is a man portable second generation ATGM with a tandem warhead to destroy tanks. It can target both moving and stationary targets. BDL is currently supplying Milan 2T ATGMs to MoD for Indian Army.

Konkurs ‐ M ATGM is a second generation, semi‐automatic tube launch optically tracked, wire guided and canard controlled missile which has been designed to destroy moving and stationary armoured targets. It can be launched from vehicles and ground launchers. BDL is currently supplying Konkurs ‐ M ATGMs to MoD for Indian Army.

INVAR (3 UBK 20) ATGM is a second generation plus mechanized infantry weapon which can be fired from the gun barrel of a T‐90 tank to destroy armored vehicles. BDL is currently supplying the INVAR (3 UBK 20) ATGMs to MoD for Indian Army.

BDL Products

SAMs

Akash Missiles

ATGMs

MILAN 2T, Konkurs‐M, INVAR (3 UBK

20)

Torpedoes

Light Torpedoes

Launchers

Launchers for Konkus‐M & MILAN 2T ATGMs

Counter‐measures

Chadd & flare based air defence

systems, C‐303 topedo decoys

Decoy Systems

Submarine fired decoys

Test Equipment

Health monitoring

equipment for ATGMs



Underwater weapons

Light weight torpedo (TAL) is used for anti‐submarine warfare and can be launched from a ship or a helicopter. BDL is currently exporting the light weight torpedo.

Launchers

Launchers for the Konkurs M ATGM and the Milan 2T ATGM. FLAME (Fagot Launcher Adapted to Milan Equipment) is a launcher for operation of Milan 2T ATGM.

Countermeasures

CMDS is a micro controller chaff and flare based airborne defence system. It can be activated by the pilot or the radar warning receiver of the aircraft. CMDS provides protection to the aircraft against radar guided and heat seeking missiles (air and ground) by dispensing chaff and / or flare payloads. BDL is currently supplying the CMDS to a defence PSU engaged in the manufacture of fighter aircrafts.

C‐303 Anti Torpedo Decoy launching system ‐ Anti Torpedo System is meant to counter the threat posed to any submarine by any active and / or passive homing torpedo. BDL is currently supplying Anti Torpedo System to a defence PSU engaged in the construction of submarines and warships.

Submarine Fired Decoy (SFD) acts as preferred target in the presence of an own submarine to a passive or active homing torpedo.

Test Equipment

Konkurs missile and launcher test equipment monitor the health of prior generation Konkurs ATGM and current Konkurs‐M ATGM.



Indian guided missile and torpedo market outlook As per Frost & Sullivan, Indian guided missiles and torpedoes market will be of US$24.5bn during 2017‐26 which will be driven by:

1. Committed and planned missile procurement underway such as S‐400 Triumf advanced air defence systems, Barak‐8 SAMs, Hellfire ASMs, Harpoon anti‐ship missiles and heavy weight torpedoes etc.

2. Modernization and refurbishment of deployed and stored missile systems used on existing air, land, and seabased platforms such as missile system upgrades in existing Talwar class frigates (FFGs), ATGM upgrades etc.

3. Missile procurements expected as a result of procurement programs initiated during the forecast timeline such as new fighter procurements, Project 28A (Next Generation Missile Corvette), Project 17A (FFG), Project 75I (Diesel Electric Submarines with Air Independent Propulsion) etc.

Indian guided missile market will be dominated by Tactical missiles during 2017‐26 with share of 80%, followed by Torpedo (9%) and Cruise Missile (7%) segments. Within Tactical missiles, SAM (US$ 9.8bn, 50% share) and ASM (31%) will be the key contributor. Tactical missiles (with 80% share) to be the key driver of the Indian guided missiles market during 2017‐26...

....which will be driven by the Surface to Air (50% share) and Air to Surface (31%) missiles

Source: RHP, Frost & Sullivan , PhillipCapital India Research

Ballistic, $0.7bn

Tactical, $19.6bn

Cruise, $1.7bn

Special mission, $0.2bn

Torpedo, $2.2bn

Guided missiles & Topedoes market (2017‐26)

Surface to Air, $9.8bn

Air to Surface, $6.1bn

Air to Air, $1.8bn

ATGM, $1.7bn

Surface to Surface, $0.6bn

Tactical missile market (2017‐26)



India's major missile procurement and modernization programs Program name & procurement timeline Status Remarks Akash missile (2016‐26)

Purchase cleared

Cabinet Committee on Security (CCS) is set to clear the procurement of Akash missiles for IAF, enhancing supersonic missile capability to intercept fighter jets, cruise missiles, ballistic missiles etc. The production of Akash systems is also to enhance production capacity to meet demand / requirements.

Barak ‐ 8 (2017‐22)

Purchase cleared

CSS has approved the procurement of MRSAM (Medium range ‐ land /Long range ‐naval) systems, further strengthening the defence capabilities to intercept aircraft, UAS and missile systems. IAI and DRDO have partnered for co‐development of both long range (Naval) and medium range (Land) versions of the missile. BDL is manufacturer in India.

VSHORADS (2018‐23)

Planned Field trial for a US$ 5.2bn the weapon system contract under underway. The total contract is for the supply of 5175 missiles and 1276 single/multi‐launchers with streamlined technology transfer for the DPSUs. MBDA, Saab & Rosboronexport participating in bid. BDL is the nominated production agency for the program.

MRASM (2018‐21)

Planned Indian Navy has invited RFI for supply of medium range anti‐ship missiles procurement of which is expected to begin by early 2018. Combat missiles, practice missiles, training missiles, cut section missiles; dummy missiles and systems for fitment on‐board ships will be procured.

Heavy Weight Torpedo (2018‐21)

Planned As India is inducting Kalvari class submarines into the fleet, heavy weight torpedoes may be procured to improve kill capabilities.

Barak ‐ 1 (2017‐22)

Purchase cleared

GoI has approved procurement of Barak‐1 missile systems. The contract is worth over US$ 78mn and will be delivered over a period of 5 years from 2017 onwards.

S‐400 Triumf (2016‐21)

Purchase cleared

India & Russia have reached an agreement for over US$ 5bn for procuring S ‐ 400 Triumf air defence system. Technical discussion is underway post which contracts to be penned down. Contract is being executed by Rosboronexport and deliveries are expected to be within 3 years from the agreement.

ATGM (2017‐21)

To be approved

Mod has forwarded a request for the procurement of Spike ATGMs to Defence Acquisition Council (DAC) for approval. This contract is expected to be worth US$ 1bn to be supplied by Rafael Advanced Defence Systems.

Arrow 2 (2018‐23)

Planned Earlier, Indian interest for procuring the Arrow 2 missile was not addressed due to the MTCR regulations. An RFQ can be expected to be released in the near future for procurement.

Stinger (2015‐22)

Purchase cleared

GoI has approved the purchase of air to air missiles to be supplied by Raytheon, which is a part of US$ 3.1bn India‐US defence contract. Stingers will be equipped on the fleet of light attack and advanced light attack helicopters, apart from the Apache‐64 E helicopters being procured.

MICA (2012‐15)

Purchase cleared

CCS approved procurement of MICA multi mission air to air missiles available in two configurations (IR & RF) for upgrading Mirage 2000 jets and will be supplied by MBDA. The missiles will also be loaded on the Rafale combat jets to be delivered from 2019 onwards. MBDA‐L&T has also entered into a JV for joint development of missile systems and high speed UAS.

AGM‐114L‐3 Hellfire Longbow missile (2015‐22)

Purchase cleared

CCS has approved the procurement of Hellfire 812 AGM‐114L‐3 missiles for Apache 64‐E attack helicopter (part of US$3bn contract between India & US which also includes 542 AGM‐114R‐3 Hellfire‐II missiles along with Chinook and AH‐64 helicopters and associated electronics systems. As per DPP 2016, the contract will have a 30% offset clause and the armaments have been procured through a contract under Foreign military sale (FMS) agreement.

Source: RHP, Frost & Sullivan, PhillipCapital India Research



Competitive landscape and BDL's positioning Global competitive landscape The guided missile and torpedo systems competitive landscape is dominated by 22 global players. However, most companies do not offer solutions across the entire gamut of guided missile product segments and tend to specialize in segments where revenue opportunities are high. Also, export restrictions on theatre warfare weapons such as ICBMs, IRBMs etc. prevent many firms from developing newer solutions in this segment as there is a constraint on realizable opportunities. In such cases, OEMs only start developing solutions as and when there is an explicit demand from respective MoDs for such systems.

Guided missile & torpedo market landscape

Source: RHP, Frost & Sullivan, PhillipCapital India Research Ballistic missile: There are over 60 solutions available globally, with majority of solutions provided by Tactical Missiles Corporation (a holding corporation comprising over 20 Russian specialized munitions solution providers).

In the cruise missile segment, about 26 solutions (includes variants) are marketed today by 8 major firms.

Tactical missile segment has a large expansion in terms of the number of solutions and the companies providing them.

• ATGM is the most competitive, within the tactical missile segment, with majority of the companies having at least one solution because of the high demand and relatively low costs associated to it. It is also the segment straddling the lowest price points vis‐à‐vis other segments.

• Surface to Air and Air to Surface segments are both broad product lines indicating a high variation in customer requirements. There are over 480 solutions available for these two segments globally.

• Air to Air and Anti‐Ship missile segments also exhibit similar characteristics. Increasing demand is also driving the production of specialized solutions within the segment. Also, as improved electronic countermeasures systems are deployed on aircraft, smarter new age Air to Air missiles impervious to jamming are being developed. Today, there are about 166 Air to Air missile solutions available in the market.

• Within the Surface to Surface segment there are more solutions and market players in the medium range category as opposed to the long range category. The two categories combined together present over 250 solution types globally.



Torpedo: Light torpedo is a more competitive segment with more choice of naval solutions available in the market. There are only about 14 major heavy water torpedo solutions available globally whilst there are 30+ solutions available in the light water torpedo segment.

Guided missile & torpedo manufacturers and solutions


Main players, benchmarked by Frost & Sullivan, in the guided missile and torpedo market as per their capabilities

Source: RHP, Frost & Sullivan, PhillipCapital India Research Note: CASIC is left empty because of opacity of the Chinese markets in identifying product portfolios



Indian competitive landscape Presently, Indian guided missile and torpedo market is dominated by DPSU produced missiles and foreign solutions. Solutions from Russia, Israel, Europe and US are well entrenched in the Indian market.

Indigenous development and manufacturing is carried out by three DPSUs ‐ DRDO, BDL, and BEL. Amongst the three BDL is the main player in manufacturing and is the sole manufacturer in India for SAMs, torpedoes, ATGMs.

However, there is a drive within the establishment to indigenize missile production as much as possible in order to extricate the armed forces from any external dependencies for missile systems in the future.

Popular solutions for guided missile and torpedo in India Key players in Indian guided missile & torpedo market


Strong opportunities in Indian market, coupled with the ‘Make in India’ initiative and DPP 2016 has stimulated an interesting market dynamic in India. Foreign OEMs accord high priority to the Indian market because of assured opportunities but has come to realize that partnering with DPSUs and private companies is the way ahead. This has resulted in many partnerships in the field, as well as stand‐alone indigenous development.

Foreign OEM’s have entered into arrangements with domestic companies Company Brief Tata Advanced Systems

• Partnered with Raytheon to produce components for Stinger missile systems which will be deployed at platoon levels and also on‐board AH‐64 Apaches being procured by India

Reliance Defence • Signed JV agreement with Rafael Advanced Systems to build Air to Air missile systems Kalyani Strategic Systems

• Formed JV with Rafael Advanced Systems to manufacture high technology defence components in India.

• Also, signed MoU with IAI to form a JV to build air defence, ground to ground and ground to sea munitions in India.

Punj Lloyd • Acquired licenses for manufacturing missiles and rockets in India. Tie up with Weapon Industries (IWI) to manufacture small arms and may venture into the guided missile space in the future.

L&T • Entered into a JV with MBDA to produce 5th generation ATGMs in India. • Also, BDL and L&T entered into an agreement to export light torpedo solutions ‐ BDL manufactures light torpedoes, whilst L&T has expertise in tube torpedo launchers.

BDL • Exploring possibilities of technology transfer with Thales with respect to the Star STREAK missile system


RUSSIAIglaStrelaS‐400 Triumf2K12 Kub/KvadratAPR 3‐E

INDIAInvar, Konkurs, MILAN 2T(produced by BDL post TOT)

Light Weight Torpedo(produced by BDL)

EUROPEMICABlackSharkExocetSea Eagle

ISRAELBarak 1Arrow 2SpikePython 5Spyder

NORTH AMERICAHellFireHarpoonStingerHydra

MAJORSOLUTIONS

RUSSIA

INDIA ‐ PRIVATE

EUROPE

ISRAEL

NORTH AMERICA

KEY PARTICIPANTSINDIA ‐ DPSU/Govt.



Key strengths A play on India's defence BDL offers investors an opportunity to play the India defence sector, as there are not many sizeable companies currently. It derives 97% of its revenues from the defence sector. BDL have strong track record of guided missile production with a well reinforced and holistic value chain in the same. BDL derives almost whole of its revenues from MoD...

Source: RHP, PhillipCapital India Research Product offerings addresses 54% of the Indian guided missile and torpedoes market BDL is the leading DPSU in India in manufacturing guided missile systems. Its product offerings are capable of addressing 54% of the total guided missile and torpedoes market in India over 2017‐26. BDLs product offerings capable to address 54% of the total missile market led by Tactical missiles and Torpedoes...

Segment Market

(US$ bn) % of total

Addressed by BDL (US$ bn)

BDL's share (%)

Ballistic 0.7 3% ‐ 0%Tactical 19.6 80% 11.5 59%Cruise 1.7 7% ‐ 0%Special mission 0.2 1% ‐ 0%Torpedo 2.2 9% 1.6 73%Total 24.5 100% 13.1 54%Unaddressed 19.4

...with strong presence in tactical missiles (largest segment) where it addresses 58% market of SAMs and ATGMs

Segment Market ($ bn)

% of total

Addressed by BDL (US$ bn)

BDL's share (%)

Surface to Air 9.8 49% 9.8 100%Air to Surface 6.1 30% ‐ 0%Air to Air 1.8 9% ‐ 0%ATGM 1.7 9% 1.7 100%Surface to Surface 0.6 3% ‐ 0%Tactical missiles 19.9 100% 11.5 58%


Developing new products and partners with DRDO BDL planning to develop new products such as new generation SAMs, ATGMs, and heavy weight torpedoes to further increase its offerings. It is also the joint development partner with the DRDO for the next generation of ATGMs and SAMs. MoD has identified it as the production agency and the lead integrator for one of the new generation of SAMs and the nominated agency for the third generation of ATGMs. Additionally, BDL has entered into license agreements, principles of cooperation, MoUs and non‐disclosure agreements with companies / organisations in France, Israel, Russia and UK for its existing products and for the development of new products. It is also exploring possibilities of technology transfer with Thales with respect to the StarSTREAK missile system

79.3%

92.9% 97.3% 98.3%

0%

20%

40%

60%

80%

100%

FY15 FY16 FY17 1HFY18Revenue from MoD (%)



BDL partnership with DRDO and Foreign OEMs Partner Type of agreement Scope of work DRDO, GoI MoU Co‐development of next generation man

portable ATGM DRDO, GoI MoU Co‐development of next generation man

portable SAM DRDO, GoI MoU Co‐development of next generation

ATGM DRDO, GoI MoU Enhancement of missile and other

weapon support systems Euro Missile, France Licence TOT Milan‐2 ATGM and Milan‐2T ATGM KBP, Tula, Russia Licence TOT Konkurs ATGM and Konkurs‐M ATGM

Source: RHP, PhillipCapital India Research Modern manufacturing infrastructure to add timely execution of orders Over the last 5 years, BDL has invested Rs 7bn for modernisation of its manufacturing plants. Its plants are equipped with robotic welding machines, four axis machines, flow forming machines, vacuum furnace for heat treatment, automated electroplating shop, 3D ‐ coordinating measuring machine, climatic chambers and 800G acceleration measuring fixture. Its Hyderabad manufacturing unit has been automated for material handling and grain loading of SAMs. Further, Vishakhapatnam plant is exclusively for the manufacturing of torpedoes. Rs 9.7bn of capex over last 5‐6 years of which Rs 7bn spend for the modernization of its manufacturing infrastructure facilities...

Source: RHP, PhillipCapital India Research Experienced management with bandwidth BDL has a capable management having several years of experience in the defence industry. Its current Managing Director has been with the company for 28 years, with good credentials. Similarly, its Directors production and technical have been with the firm for 32 and 30 years respectively. During the IPO meet, we interacted with the middle‐management team in finance and business development and found them well experienced. Further, it has a large pool of experienced engineers ‐ as of January 2018 engineers constitute 28.4% of its total employees.

1.3 1.2

2.9

2.2

1.4

0.7

0.0

0.5

1.0

1.5

2.0

2.5

3.0

FY13 FY14 FY15 FY16 FY17 1HFY18

(Rs bn) Capex (Rs bn)



Key management personnel

Name Designation Age

(years) Qualification Mr. V. Udaya Bhaskar

Chairman & Managing Director

59 • Joined BDL in 1990 and appointed as CMD on January 30, 2015. Prior to BDL, he was associated with Bakelite Hylam Ltd, Dytron (India) Ltd and SIP Resins Ltd

• B. Tech in Plastics Technology & Chemical Engineering from H.B Technological Institute, Kanpur • M. Tech Technology ‘Polymer Science & Technology’ from Indian Institute of Technology, Delhi

S. Piramanayagam Director (Finance) & Chief Financial Officer

57 • He has been on the board of BDL since January 01, 2015. Prior to BDL, he has worked as a GM (finance) of BEML and also at NLC India for ten years in the middle management

• B. Sc. from Madurai Kamraj University and associate member of the Institute of Chartered Accountants of India

V. Gurudatta Prasad

Director (Production)

58 • Associated with BDL since 1986 and prior to appointment as Director, served as GM at BDL's office in Bhanur in the capacity of Unit Head. Prior to BDL, he was working with Hyderabad Allwyn Ltd

• He is a recipient of the Raksha Mantri’s Innovation Award for the year 2012‐13 • Bachelors in Mechanical Engineering from Bangalore University • M. Tech (Industrial Engineering & Management) from Jawaharlal Nehru Technological University, Hyderabad

K. Divakar Director (Technical)

59 • Associated with BDL since 1988 and has served as GM (Design & Engineering), headed the Milan, Refurbishment and Explosive divisions. Also played an instrumental role in establishing the naval division at Vishakhapatnam. He is experienced in various areas of missile production.

• Prior to BDL, he has worked with Indian Telephone Industries Ltd. • B. Tech in Mechanical Engineering from Jawaharlal Nehru Technological University, Andhra Pradesh• Post graduate course in tool, die and mould design from Central Institute of Tool Design, Hyderabad

Source: RHP, PhillipCapital India Research Focusing on R&D and efficiency improvements to address competition from private To address competition due to opening of defence for the private players, BDL is focusing on (1) increasing its R&D activities to provide novel and better products to customers; and (2) process improvements to increase operational productivity and efficiency to lower costs. Its R&D expenses grew at a CAGR of 23.6% to Rs 347mn in FY17 from Rs 227mn in FY15. • BDL has established a missile development group to design and develop missiles

and various technological labs such as RF labs, laser labs, aerodynamic labs and seeker labs to develop seeker technologies.

• It is also conducting R&D for an improved version of the second generation of the Konkurs‐M ATGM.

Export market ‐ an emerging opportunity GOI has set an ambitious target to export US$ 2bn worth of defence equipment by 2019. Consequently, policy changes have been made to ease exports. DPSUs have been allowed to export 10% of their annual production. The process of obtaining No Objection Certificates (NOCs) has also been streamlined, web‐based and time‐bound.

BDL and L&T has entered into an agreement to export light torpedo solutions. BDL manufactures light torpedoes, whilst L&T has expertise in tube torpedo launchers.



Capacity expansion plans In order to address the expected demand of new products, BDL is setting up two new manufacturing facilities at (1) Ibrahimapatnam, Telangana for the manufacturing of SAMs (including new gen SAMs); and (2) Amravati, Maharashtra for the manufacturing of VSHORADMs. The company will be investing ~Rs 7bn over the next 3‐4 years on these new facilities. Planned new manufacturing facilities Location Products Ibrahimapatnam, Telangana SAMs Amravati, Maharashtra Very Short Range Air Defence Missiles (VSHORADMs)

Source: RHP, PhillipCapital India Research Further, it is planning to automate production system at its existing manufacturing facility in Hyderabad to increase the production of SAMs. It is also in the process of setting up a test fire range in Rachakonda, Telangana which will lead to operational advantage and cost efficiencies.

Key risks Delay in award of expected large orders Lack of award of large orders has led to depletion in BDL's order book (2.2x Jan'18 book to bill vs 21x in FY11) since its peak in FY11 when it had won its largest ever order (Rs 142bn) for Akash SAM for the army.

Though, BDL has a large pipeline of orders but these projects could be delayed due to their large size and inter government agreements. This will have the risk to visibility of its sales and capacity utilization.

Further, BDL enjoys a negative working capital position/large cash balances due to huge customer advances resulting in earning of significant interest income. However, in past a few years its interest income has declined due to lower cash balances mainly on account of reduction in customer advances. Hence, any delay in expected large orders may further lead to decline in its interest income.

Order book depleting since FY11 due to lack of large orders

... also decline in other income on decline in customer advances


40 200 190 173 189 164 137 112 105

6.4

21.3

19.9

16.1

10.6

5.9 3.6

2.4 2.2

0

3

6

9

12

15

18

21

24

0

25

50

75

100

125

150

175

200

225

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Jan'18

(Rs bn) Order book (Rs bn) Book‐to‐bill (x)Akash SAM for Army

40.3

50.7

55.3

62.3

57.1

55.1

35.5

34.5

‐

1.0

2.0

3.0

4.0

5.0

6.0

0

10

20

30

40

50

60

70

FY11 FY12 FY13 FY14 FY15 FY16 FY17 1HFY18

(Rs bn) Customer advances (LHS) Other income (RHS)



Risk to margins which are at cyclically high levels We see a two pronged risk to BDL’s EBITDA margins viz. a) Share of revenues from indigenously developed Akash SAM is expected to

reduce over the next two years as the project reaches completion and the follow up order is still some time away. Akash contributed about 75% of BDL’s sales in FY17. Ever since its execution picked up BDL’s margins have expanded 1900bps between FY13‐17.

b) New order wins in the near term such as VSHORAD (Rs 130bn) and MRSAM (Rs100bn) would involve transfer of technology (ToT) initially and should be low margin projects initially.

BDL's EBITDA margins expanded 1900bps over FY13‐17 led by pick up in execution of Akash

Source: RHP, PhillipCapital India Research Delay in execution may lead to levy of penalty or liquidated damages as well as termination of contracts: Any delay in the supply of goods by BDL may lead to the levy of liquidated damages or invocation of the indemnity bond / performance bank guarantee (5% to 10% of the contract value) by its customers. Further, BDL's contracts with MoD permit the later to terminate the contract for any delay of more than 24 months after the scheduled delivery (unless attributable to force majeure) as well for default in the event of any breach. BDL has provided Rs 7bn for liquidated damages since FY13


‐1.2%

4.6%

9.9%

13.6%

17.9%

‐5%

0%

5%

10%

15%

20%

‐12

0

12

24

36

48

FY13 FY14 FY15 FY16 FY17

(Rs bn) Revenues (Rs bn) EBITDA margins (%)

0.3 0.6 1.1 2.5 1.9 1.0

2.6%

3.4%3.9%

6.5%

4.1%

5.9%

2%

3%

4%

5%

6%

7%

0.0

0.5

1.0

1.5

2.0

2.5

3.0


(Rs bn) Liquidated damanges (Rs bn) % of Sales



Increased competition due to opening up of defence to private sector: BDL faces competition largely from global players particularly from Europe and USA (such as Boeing, Raytheon, Lockheed Martin, Rafael Advanced Defence Systems and Roketsan). However, due to implementation of recent policies (DPP, 2016), private companies will be allowed to manufacture and bid for missiles, torpedoes and countermeasures. Private players are scrambling to ready themselves for opportunities by setting up manufacturing facilities in India and securing production licenses. They are positioning themselves as able partners for foreign OEMs in the guided missile space to enter into partnerships with. Over dependence on a single customer: BDL primarily dependent on a single customer, the Indian armed forces through the Ministry of Defence ‐ which contributed 97% of its FY17 revenues. This exposes BDL with material adverse impact due to any decline or reprioritization of the Indian defence budget, reduction in their orders, termination of contracts or failure to succeed in tendering projects and deviations in the short and long term policies of the MoD or the Indian armed forces in the future. BDL is primarily dependent on the MOD for orders


79.3%

92.9% 97.3% 98.3%

0%

20%

40%

60%

80%

100%

FY15 FY16 FY17 1HFY18Revenue from MoD (%)



Historical financial performance in charts Order book depleted due to lack of large orders...

Revenues grew 44% CAGR led by execution of Akash missiles...

Source: RHP, PhillipCapital India Research ... strong growth in EBITDA driven by execution and operating leverage led margin expansion...

However, PAT grew at 24% CAGR due to decline in other income on lower cash balances

Source: RHP, PhillipCapital India Research RoE expanded to 32.7% (vs 31.3%) on improved assets turnover...

Free cash flow remains negative mainly due to decline in advances from customers and capex


173 189 164 137 112 105

16.1

10.6

5.9

3.6 2.4 2.5

0

3

6

9

12

15

18

0

25

50

75

100

125

150

175

200

FY13 FY14 FY15 FY16 FY17 Jan'18

(Rs bn) Order book (Rs bn) Book‐to‐bill (x)

10.8

17.8

27.8

37.9

46.3

16.4

0%

15%

30%

45%

60%

75%

0

10

20

30

40

50


(Rs bn) Revenues (Rs bn) % yoy

44.0% CAGR

(0.1)

0.8 2.7

5.1

8.3

2.5

‐5%

0%

5%

10%

15%

20%

‐2

0

2

4

6

8

10


(Rs bn) EBITDA (Rs bn) EBITDA margin (%)

2.8

3.6

4.4

5.6

6.6

1.7

0%

5%

10%

15%

20%

25%

30%

35%

0

2

4

6

8


(Rs bn) Rec PAT (Rs bn) % yoy

24.3% CAGR

31.3% 30.9%30.3%

32.1%32.7%

24%

27%

30%

33%

FY13 FY14 FY15 FY16 FY17

RoE (%)

(6.9)

0.9

(8.7)

(4.7)

(14.8)

0.5

(18)

(15)

(12)

(9)

(6)

(3)

‐

3


(Rs bn) Free cash flow



Our view: AVOID

Multiple risks overshadow the opportunity pipeline We agree that BDL has a significant pipeline of order inflows over the next five years, we estimate new order inflows of Rs 440bn over FY19‐22 increasing its order book by 3.7x over its FY17 base. However, we believe that only order inflows will not help the stock re‐rate and we see multiple risks to current valuations.

1. Share of indigenously developed missile system ‘Akash’ is expected to reduce over the next two years.

2. New orders such as VSHORADS (Rs 130bn) and MRSAM (Rs 100bn) are technology of transfer projects.

3. Even as we agree that BDL is expanding its product profile from a single product (Akash) to multiple products (VSHORAD, MRSAM and Torpedoes) the benefits would be back ended.

4. Consequently, BDL’s margins which are at cyclically high levels have downside risks as new projects would have a learning curve impact on margins.

5. Going forward, BDL might have to share a certain percentage of the development cost with DRDO and also have a revenue share for projects developed by DRDO. Both of these would have a bearing on margins which are currently not priced in.

6. Though pipeline of orders is large but these projects could be delayed due to their large size and inter government agreements.

IPO valuations are cheap and rightly so At its IPO price of Rs 428 BDL trades at 16x PE FY20E based on our estimates. One would argue that current valuations are undemanding. However, we believe that with the above risks coupled with a 9% decline in earnings over FY18‐20E the stock does not have room for upside in the near term.

Valuations in line with global peers BDL’s IPO valuation would peg it in line with its global peers despite its relatively smaller size and lack of research capabilities.

What would make us revisit our thesis? We would have a relook at our view incase of additional information on the potential size of the projects and any change in BDL’s work share agreement in the ToT projects.



Global valuations comparison

Sales (LC bn) EBITDA (LC bn) EBITDA margin (%) PAT (LC bn) Company name FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E Indian companies Bharat Dynamics 44.9 43.5 28.2 8.2 8.6 4.6 18.3 19.7 16.5 6.2 6.6 4.9 Bharat Electronics 106.2 121.7 139.2 20.8 23.8 26.7 19.6 19.6 19.2 15.3 17.5 19.9 Cochin Shipyard 23.4 28.0 36.3 4.2 4.8 6.0 17.9 17.1 16.6 3.8 4.1 4.6 US companies Boeing 92.6 97.3 102.7 11.8 13.6 14.9 12.8 14.0 14.5 7.0 8.8 9.9 Lockheed Martin 50.6 51.0 53.5 7.1 8.0 8.6 13.9 15.6 16.1 3.8 4.4 5.0 Raytheon 25.4 26.7 28.0 3.9 4.9 5.2 15.3 18.4 18.5 2.2 2.8 3.1 European companies BAE Systems 19.8 18.6 19.2 2.3 2.2 2.3 11.7 12.0 12.1 1.4 1.4 1.4 Thales 15.6 16.2 17.7 1.9 2.1 2.3 12.4 12.9 13.2 1.0 1.1 1.3 Leonardo Finmeccanica 11.6 11.9 12.4 1.5 1.6 1.8 13.2 13.5 14.2 0.4 0.5 0.6 SAAB AB 31.4 33.4 36.1 3.3 3.6 4.2 10.5 10.8 11.6 1.7 1.8 2.2 Average 14.6 15.4 15.2

Price Shares Mkt cap PE (x) EV/EBITDA RoE (%)

Company name (LC) O/s (mn) (USD mn) FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E Indian companies Bharat Dynamics 428 183 1,207 12.6 12.0 15.9 7.9 5.4 5.6 28.4 27.7 18.0 Bharat Electronics 148 2,457 5,611 23.9 20.8 18.3 15.6 13.2 11.2 19.3 19.7 19.9 Cochin Shipyard 516 136 1,080 18.7 17.1 15.4 10.6 9.9 7.4 13.5 12.2 12.5 US companies Boeing 355 588 2,08,632 34.7 24.7 21.0 17.8 15.4 13.9 1,948 472 315 Lockheed Martin 340 286 97,234 26.0 21.9 18.8 15.4 13.8 12.6 222.7 620.9 259.1 Raytheon 215 289 61,974 28.2 22.1 19.2 16.5 13.0 12.3 21.0 26.3 27.4 European companies BAE Systems 602 3,187 26,566 14.1 13.8 12.9 9.0 9.0 8.5 33.1 25.9 24.8 Thales 97 213 25,313 20.6 18.2 16.1 9.4 8.7 7.5 19.7 20.0 21.3 Leonardo Finmeccanica 9 578 6,542 13.3 10.6 8.9 5.2 4.9 4.4 7.9 10.0 11.3 SAAB AB 387 107 5,124 24.7 21.9 17.9 13.6 12.5 10.5 12.0 12.4 14.2 Average 21.7 18.3 16.5 12.1 10.6 9.4 19.3 19.3 18.7




Financial outlook in charts Order book to pick up from FY19 onwards led by award of large orders...

However, revenues will decline by 15% over FY17‐20 on depleting Akash order and back ended execution of new orders...

Source: RHP, PhillipCapital India Research ... EBITDA to decline at 18% CAGR due to weak execution and lower margins impacted by negative operating leverage...

However, PAT to decline at 9.5% CAGR due higher other income on customer advances led improved cash balances...

Source: RHP, PhillipCapital India Research ... lower assets turnover will lead to sharp contraction in RoE (18% vs 32.7% in FY17)...

However, the improved cash balances led by customer advances will result in free cash flow of Rs 38bn...


137 112 87 149 191 344 416

3.6 2.4 1.9

3.4

6.8

18.0

15.7

0

3

6

9

12

15

18

21

0

50

100

150

200

250

300

350

400

450

FY16 FY17 FY18e FY19e FY20e FY21e FY22e

(Rs bn) Order book (Rs bn) Book‐to‐bill (x)

37.9 46.3 44.9 43.5 28.2 ‐45%

‐30%

‐15%

0%

15%

30%

45%

0

10

20

30

40

50

FY16 FY17 FY18e FY19e FY20e

(Rs bn) Revenues (Rs bn) % yoy

‐15.3% CAGR

5.1 8.3 8.2 8.6 4.6

13.6%

17.9% 18.3%

19.7%

16.5%

10%

12%

14%

16%

18%

20%

22%

0

2

4

6

8

10


(Rs bn) EBITDA (Rs bn) EBITDA margin (%)

‐17.6% CAGR5.6

6.6

6.2 6.6

4.9

‐30%

‐20%

‐10%

0%

10%

20%

30%

3

4

5

6

7


(Rs bn) Rec PAT (Rs bn) % yoy

‐9.5% CAGR

32.1% 32.7%

28.4% 27.7%

18.0%

10%

15%

20%

25%

30%

35%


RoE (%)

(4.7)

(14.8)

0.8

18.7 18.8

(20)(15)(10)(5)‐5

10 15 20 25


(Rs bn) Free cash flow



Annexure Frost & Sullivan has segmented the market into 5 major segments

Source: RHP, PhillipCapital India Research Segment / sub segment Definition/ Brief Example Ballistic Missile A missile delivery system which follows a ballistic trajectory. Major

part of its flight stage will be unpowered and governed by gravity and air friction. It may also have the capability to carry Multiple Independently Targetable Re‐entry Vehicles (MIRVs). These missiles may be silo‐launched, canister launched, ship launched or submarine launched. Some ballistic missiles (such as the Indian Dhanush) can perform mid‐course missile correction manoeuvres.

• Minuteman ballistic missile systems of USA• Dongfeng missile systems of China

Intercontinental Ballistic Missile (ICBM)

Range over 5,500 kms • LGM‐30 Minuteman II system of USA• Jericho III missile system of Israel

Intermediate Range Ballistic Missile (IRBM)

Range between 3,000 to 5,500 kms • DF‐26 missile system of China • PGM‐17 Thor missile system of USA (retired)

Medium Range Ballistic Missile (MRBM)

Range between 1,000 to 3,000 kms • Shaheen III missile system of Pakistan

Short Range Ballistic Missiles (SRBM)

Range between 300 to 1,000 kms • Jericho I of Israel • Grom missile of Ukraine (under development)

Tactical Ballistic Missile Systems (TBM)

Range of 500 kms or less • Nasr missile of Pakistan • 9K720 Iskander missile system of Russia

Tactical Missile Systems TMS are used to counter land, sea or air based threats. It has a shorter range and unlike ballistic missile, majority of its flight time is unguided.

• 9K720 Iskander • LORA

Surface to Surface Missiles (SSM)

Launched from man‐portable packs, vehicle mounted, fixed or ship‐based installations to destroy other stationary/mobile ground targets

• Lockheed Martin’s MGM‐140 Army Tactical Missile System (ATacMS) used by USA Army

Surface to Air Missiles (SAM)

Launched from ground to destroy aircraft or other missiles under this category. Missile defence interceptors also fall in this category.

• MIM‐104 Patriot • RIM‐7 Sea Sparrow

Air to Air Missiles (AAM) Launched by air platforms intended to destroy other air targets inthis category. These missiles may be visual range missiles or beyond visual range missiles. Certain modern Air to Air missiles are capable of mid mission course correction and active guidance.

• MBDA Meteor used in the Eurofighter Typhoons

Air to Surface Missiles (ASM)

Launched by air platforms intended to destroy other stationary or mobile ground targets

Anti Tank Guided Missiles (ATGM)

Man portable or platform launched missiles with a specific role of destroying armoured vehicles

• PARS 3 LR• FGM‐148 Javelin

Cruise Missile Cruise missiles are used to destroy terrestrial targets and designed to glide at fairly constant speed in order to deliver heavy warheads with high precision. They can be hypersonic, supersonic or subsonic as far as speed is concerned.

• Tomahawk missile system of USA

Long Range With ranges in excess of 1000 kms • Kh‐55 missile system of Russia Medium Range With ranges in between 300 to 1000 kms • AGM‐158C LRASM of USA

• Babur missile system of Pakistan

Missile Systems and Torpedoes

Ballistic missile

Intercontinental (ICBM), Intermediate

range (IRBM), Medium range

(MRBM), Short range (SRBM), Tactical Ballistic Missiles

(TBM)

Tactical missile

Surface to Surface (SSM), Surface to Air (SAM), Air to Air

(AAM), Air to Surface (ASM), Anti‐Tank Guided Missiles

(ATGM)

Cruise missile

Long range, Medium range, Short range

Special mission

Anti radiation, Anti Satellite,

Electro Magnetic Pulse

Torpedo systems

Light Torpedoes,Heavy Torpedoes



Short Range With range upto 300 kms • Nasr‐1 missile system of Iran Special Mission Missile These missiles are developed for a specific mission type. Standard

missiles can also be modified to perform special missions Raytheon’s Counter‐electronics High‐powered Advanced Missile Project (CHAMP) EMP weapon

Anti‐Satellite Missiles Strategic military weapons used for destroying satellites Arrow‐3 missile system used by Israel can be used for an exo‐atmospheric interception role.

Anti‐Radiation Missiles Detect enemy radio sources such as radar stations and home in on the target. They can be surface to surface, air to air or surface to air.

BAE System’s ALARM (Air Launched Anti‐Radiation Missile) used by Saudi Arabia and UK

Electromagnetic Pulse Missiles

Missiles designed to produce a short burst of electromagnetic energy which will cripple or disable all electronic equipment.

Raytheon has tested an EMP missile weapon‐Counter‐electronics High powered Advanced Missile Project (CHAMP) in USA

Torpedo System Torpedoes are self‐propelled weapons used to destroy or incapacitate ships, submarines and mines.

• Whitehead Alenia Sistemi Subacquei Blackshark torpedo system

Light Weight Torpedoes Warhead weight is less than 100 kg • Raytheon’s Mk 54 used by USA Heavy Weight Torpedoes Warhead weight is greater than 100 kgs • Mark 48 torpedo used by USA




Financials Income Statement Y/E Mar, Rs mn FY17 FY18e FY19e FY20eNet sales 46,301 44,943 43,494 28,174Growth, % 22.3 (2.9) (3.2) (35.2)Raw material expenses (30,195) (28,245) (26,411) (16,545)Employee expenses (3,884) (4,486) (4,673) (4,906)Other Operating expenses (3,929) (3,984) (3,855) (2,075)EBITDA (Core) 8,293 8,229 8,555 4,648Growth, % 61.6 (0.8) 4.0 (45.7)Margin, % 17.9 18.3 19.7 16.5Depreciation (622) (699) (762) (797)EBIT 7,671 7,530 7,793 3,851Growth, % 66.8 (1.8) 3.5 (50.6)Margin, % 16.6 16.8 17.9 13.7Interest paid (37) (38) (38) (39)Other Income 2,298 1,928 2,190 3,658Pre‐tax profit 9,933 9,421 9,944 7,469Tax provided (3,286) (3,203) (3,381) (2,540)Net Profit (recurring) 6,647 6,218 6,563 4,930Growth, % 18 (6) 6 (25)Net Profit (reported) 4,903 6,218 6,563 4,930Unadj. shares (m) 122 183 183 183Wtd avg shares (m) 183 183 183 183 Balance Sheet Y/E Mar, Rs mn FY17 FY18e FY19e FY20eCash & bank 17,380 13,370 31,825 52,437Debtors 3,564 3,460 3,348 2,169Inventory 22,511 21,058 19,691 12,335Loans & advances ‐ ‐ ‐ ‐Other current assets 32,042 27,543 24,152 13,112Total current assets 75,498 65,430 79,015 80,053Investments 29 29 29 29Gross fixed assets 9,466 10,366 11,266 11,366Less: Depreciation (1,812) (2,510) (3,272) (4,070)Add: Capital WIP 1,312 1,812 3,212 6,212Net fixed assets 8,967 9,669 11,207 13,509Total assets 84,495 75,128 90,251 93,592Current liabilities 57,472 48,781 59,889 62,116Provisions 6,412 6,261 6,077 4,035Total current liabilities 63,883 55,043 65,966 66,151Non‐current liabilities (1,513) (1,513) (1,513) (1,513)Total liabilities 62,370 53,529 64,452 64,638Paid‐up capital 1,222 1,833 1,833 1,833Reserves & surplus 20,903 19,766 23,966 27,121Shareholders’ equity 22,125 21,599 25,799 28,954Total equity & liabilities 84,495 75,128 90,251 93,592 Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY17 FY18e FY19e FY20ePre‐tax profit 7,322 9,421 9,944 7,469Depreciation 622 699 762 797Chg in working capital (5,055) (2,783) 15,793 19,760Total tax paid (3,349) (3,203) (3,381) (2,540)Cash flow from operating activities (232) 2,243 20,966 21,869Capital expenditure (1,360) (1,400) (2,300) (3,100)Chg in investments ‐ ‐ ‐ ‐Cash flow from investing activities 31 528 (110) 558Free cash flow (14,773) 843 18,666 18,769Equity raised/(repaid) ‐ (4,505) ‐ ‐Debt raised/(repaid) ‐ ‐ ‐ ‐Dividend (incl. tax) (1,220) (2,238) (2,363) (1,775)Other financing activities (442) (38) (38) (39)Cash flow from financing activities (1,662) (6,781) (2,401) (1,814)Net chg in cash (1,863) (4,010) 18,455 20,612 Valuation Ratios

FY17 FY18e FY19e FY20ePer Share data EPS (INR) 36.3 33.9 35.8 26.9Growth, % 18.3 (6.5) 5.6 (24.9)Book NAV/share (INR) 120.7 117.8 140.8 158.0FDEPS (INR) 36.3 33.9 35.8 26.9CEPS (INR) 35.8 37.7 40.0 31.2DPS (INR) 8.6 10.2 10.7 8.1Return ratios 32.1 30.0 30.0 30.0Return on assets (%) 7.4 7.8 8.0 5.4Return on equity (%) 32.7 28.4 27.7 18.0Return on capital employed (%) 34.8 30.7 29.7 19.2Turnover ratios Asset turnover (x) 0.7 0.7 0.7 0.6Sales/Total assets (x) 0.5 0.6 0.5 0.3Sales/Net FA (x) 6.3 5.8 5.5 3.7Working capital/Sales (x) (0.1) (0.1) (0.4) (1.4)Working capital days (45.5) (24.2) (157.6) (499.2)Liquidity ratios Current ratio (x) 1.2 1.2 1.2 1.2Quick ratio (x) 0.8 0.8 0.9 1.0Interest cover (x) 208.6 200.7 203.6 98.7Dividend cover (x) 4.2 3.3 3.3 3.3Total debt/Equity (%) ‐ ‐ ‐ ‐Net debt/Equity (%) (0.8) (0.6) (1.2) (1.8)Valuation PER (x) 11.8 12.6 12.0 15.9PEG (x) ‐ y‐o‐y growth 0.6 (2.0) 2.1 (0.6)Price/Book (x) 3.5 3.6 3.0 2.7Yield (%) 2.0 2.4 2.5 1.9EV/Net sales (x) 1.3 1.4 1.1 0.9EV/EBITDA (x) 7.4 7.9 5.4 5.6



Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year. Rating Criteria Definition

BUY >= +15% Target price is equal to or more than 15% of current market price

NEUTRAL ‐15% > to < +15% Target price is less than +15% but more than ‐15%

SELL <= ‐15% Target price is less than or equal to ‐15%.

Management Vineet Bhatnagar (Managing Director) (91 22) 2483 1919 Kinshuk Bharti Tiwari (Head – Institutional Equity) (91 22) 6246 4101 Jignesh Shah (Head – Equity Derivatives) (91 22) 6667 9735 Research Automobiles Engineering, Capital Goods Pharma & Specialty Chem Dhawal Doshi (9122) 6246 4128 Jonas Bhutta (9122) 6246 4119 Surya Patra (9122) 6246 4121 Nitesh Sharma, CFA (9122) 6246 4126 Vikram Rawat (9122) 6246 4120 Mehul Sheth (9122) 6246 4123 Agro Chemicals IT Services Raag Haria (9122) 6667 9943 Varun Vijayan (9122) 6246 4117 Vibhor Singhal (9122) 6246 4109 Strategy Banking, NBFCs Shyamal Dhruve (9122) 6246 4110 Naveen Kulkarni, CFA, FRM (9122) 6246 4122 Manish Agarwalla (9122) 6246 4125 Infrastructure Neeraj Chadawar (9122) 6246 4116 Pradeep Agrawal (9122) 6246 4113 Vibhor Singhal (9122) 6246 4109 Telecom Paresh Jain (9122) 6246 4114 Logistics, Transportation & Midcap Naveen Kulkarni, CFA, FRM (9122) 6246 4122 Consumer & Retail Vikram Suryavanshi (9122) 6246 4111 Technicals Naveen Kulkarni, CFA, FRM (9122) 6246 4122 Media Subodh Gupta, CMT (9122) 6246 4136 Preeyam Tolia (9122) 6246 4129 Naveen Kulkarni, CFA, FRM (9122) 6246 4122 Production Manager Vishal Gutka (9122) 6246 4118 Vishal Gutka (9122) 6246 4118 Ganesh Deorukhkar (9122) 6667 9966 Akshay Mokashe (9122) 6246 4130 Metals Editor Cement Dhawal Doshi (9122) 6246 4128 Roshan Sony 98199 72726 Vaibhav Agarwal (9122) 6246 4124 Vipul Agrawal (9122) 6246 4127 Sr. Manager – Equities Support Economics Mid-Caps Rosie Ferns (9122) 6667 9971 Anjali Verma (9122) 6246 4115 Deepak Agarwal (9122) 6246 4112 Sales & Distribution Corporate Communications Ashvin Patil (9122) 6246 4105 Asia Sales Zarine Damania (9122) 6667 9976 Kishor Binwal (9122) 6246 4106 Dhawal Shah 8522 277 6747 Bhavin Shah (9122) 6246 4102 Sales Trader Ashka Mehta Gulati (9122) 6246 4108 Dilesh Doshi (9122) 6667 9747 Execution Archan Vyas (9122) 6246 4107 Suniil Pandit (9122) 6667 9745 Mayur Shah (9122) 6667 9945

Contact Information (Regional Member Companies)

SINGAPORE: Phillip Securities Pte Ltd 250 North Bridge Road, #06‐00 RafflesCityTower,

Singapore 179101 Tel : (65) 6533 6001 Fax: (65) 6535 3834

www.phillip.com.sg

MALAYSIA: Phillip Capital Management Sdn Bhd B‐3‐6 Block B Level 3, Megan Avenue II,

No. 12, Jalan Yap Kwan Seng, 50450 Kuala Lumpur Tel (60) 3 2162 8841 Fax (60) 3 2166 5099

www.poems.com.my

HONG KONG: Phillip Securities (HK) Ltd 11/F United Centre 95 Queensway Hong Kong Tel (852) 2277 6600 Fax: (852) 2868 5307

www.phillip.com.hk

JAPAN: Phillip Securities Japan, Ltd 4‐2 Nihonbashi Kabutocho, Chuo‐ku

Tokyo 103‐0026 Tel: (81) 3 3666 2101 Fax: (81) 3 3664 0141

www.phillip.co.jp

INDONESIA: PT Phillip Securities Indonesia ANZTower Level 23B, Jl Jend Sudirman Kav 33A,

Jakarta 10220, Indonesia Tel (62) 21 5790 0800 Fax: (62) 21 5790 0809

www.phillip.co.id

CHINA: Phillip Financial Advisory (Shanghai) Co. Ltd. No 550 Yan An East Road, OceanTower Unit 2318

Shanghai 200 001 Tel (86) 21 5169 9200 Fax: (86) 21 6351 2940

www.phillip.com.cn THAILAND: Phillip Securities (Thailand) Public Co. Ltd.

15th Floor, VorawatBuilding, 849 Silom Road, Silom, Bangrak, Bangkok 10500 Thailand

Tel (66) 2 2268 0999 Fax: (66) 2 2268 0921 www.phillip.co.th

FRANCE: King & Shaxson Capital Ltd. 3rd Floor, 35 Rue de la Bienfaisance

75008 Paris France Tel (33) 1 4563 3100 Fax : (33) 1 4563 6017

www.kingandshaxson.com

UNITED KINGDOM: King & Shaxson Ltd. 6th Floor, Candlewick House, 120 Cannon Street

London, EC4N 6AS Tel (44) 20 7929 5300 Fax: (44) 20 7283 6835

www.kingandshaxson.com UNITED STATES: Phillip Futures Inc.

141 W Jackson Blvd Ste 3050 The Chicago Board of TradeBuilding

Chicago, IL 60604 USA Tel (1) 312 356 9000 Fax: (1) 312 356 9005

AUSTRALIA: PhillipCapital Australia Level 10, 330 Collins Street

Melbourne, VIC 3000, Australia Tel: (61) 3 8633 9800 Fax: (61) 3 8633 9899

www.phillipcapital.com.au

SRI LANKA: Asha Phillip Securities Limited Level 4, Millennium House, 46/58 Navam Mawatha,

Colombo 2, Sri Lanka Tel: (94) 11 2429 100 Fax: (94) 11 2429 199

www.ashaphillip.net/home.htm INDIA

PhillipCapital (India) Private Limited No. 1, 18th Floor, Urmi Estate, 95 Ganpatrao Kadam Marg, Lower Parel West, Mumbai 400013 Tel: (9122) 2300 2999 Fax: (9122) 6667 9955 www.phillipcapital.in



Disclosures and Disclaimers PhillipCapital (India) Pvt. Ltd. has three independent equity research groups: Institutional Equities, Institutional Equity Derivatives, and Private Client Group. This report has been prepared by Institutional Equities Group. The views and opinions expressed in this document may, may not match, or may be contrary at times with the views, estimates, rating, and target price of the other equity research groups of PhillipCapital (India) Pvt. Ltd.

This report is issued by PhillipCapital (India) Pvt. Ltd., which is regulated by the SEBI. PhillipCapital (India) Pvt. Ltd. is a subsidiary of Phillip (Mauritius) Pvt. Ltd. References to "PCIPL" in this report shall mean PhillipCapital (India) Pvt. Ltd unless otherwise stated. This report is prepared and distributed by PCIPL for information purposes only, and neither the information contained herein, nor any opinion expressed should be construed or deemed to be construed as solicitation or as offering advice for the purposes of the purchase or sale of any security, investment, or derivatives. The information and opinions contained in the report were considered by PCIPL to be valid when published. The report also contains information provided to PCIPL by third parties. The source of such information will usually be disclosed in the report. Whilst PCIPL has taken all reasonable steps to ensure that this information is correct, PCIPL does not offer any warranty as to the accuracy or completeness of such information. Any person placing reliance on the report to undertake trading does so entirely at his or her own risk and PCIPL does not accept any liability as a result. Securities and Derivatives markets may be subject to rapid and unexpected price movements and past performance is not necessarily an indication of future performance.

This report does not regard the specific investment objectives, financial situation, and the particular needs of any specific person who may receive this report. Investors must undertake independent analysis with their own legal, tax, and financial advisors and reach their own conclusions regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realised. Under no circumstances can it be used or considered as an offer to sell or as a solicitation of any offer to buy or sell the securities mentioned within it. The information contained in the research reports may have been taken from trade and statistical services and other sources, which PCIL believe is reliable. PhillipCapital (India) Pvt. Ltd. or any of its group/associate/affiliate companies do not guarantee that such information is accurate or complete and it should not be relied upon as such. Any opinions expressed reflect judgments at this date and are subject to change without notice.

Important: These disclosures and disclaimers must be read in conjunction with the research report of which it forms part. Receipt and use of the research report is subject to all aspects of these disclosures and disclaimers. Additional information about the issuers and securities discussed in this research report is available on request.

Certifications: The research analyst(s) who prepared this research report hereby certifies that the views expressed in this research report accurately reflect the research analyst’s personal views about all of the subject issuers and/or securities, that the analyst(s) have no known conflict of interest and no part of the research analyst’s compensation was, is, or will be, directly or indirectly, related to the specific views or recommendations contained in this research report.

Additional Disclosures of Interest: Unless specifically mentioned in Point No. 9 below: 1. The Research Analyst(s), PCIL, or its associates or relatives of the Research Analyst does not have any financial interest in the company(ies) covered in

this report. 2. The Research Analyst, PCIL or its associates or relatives of the Research Analyst affiliates collectively do not hold more than 1% of the securities of the

company (ies)covered in this report as of the end of the month immediately preceding the distribution of the research report. 3. The Research Analyst, his/her associate, his/her relative, and PCIL, do not have any other material conflict of interest at the time of publication of this

research report. 4. The Research Analyst, PCIL, and its associates have not received compensation for investment banking or merchant banking or brokerage services or for

any other products or services from the company(ies) covered in this report, in the past twelve months. 5. The Research Analyst, PCIL or its associates have not managed or co‐managed in the previous twelve months, a private or public offering of securities for

the company (ies) covered in this report. 6. PCIL or its associates have not received compensation or other benefits from the company(ies) covered in this report or from any third party, in

connection with the research report. 7. The Research Analyst has not served as an Officer, Director, or employee of the company (ies) covered in the Research report. 8. The Research Analyst and PCIL has not been engaged in market making activity for the company(ies) covered in the Research report. 9. Details of PCIL, Research Analyst and its associates pertaining to the companies covered in the Research report: Sr. no. Particulars Yes/No

1 Whether compensation has been received from the company(ies) covered in the Research report in the past 12 months for investment banking transaction by PCIL

No

2 Whether Research Analyst, PCIL or its associates or relatives of the Research Analyst affiliates collectively hold more than 1% of the company(ies) covered in the Research report

No

3 Whether compensation has been received by PCIL or its associates from the company(ies) covered in the Research report No4 PCIL or its affiliates have managed or co‐managed in the previous twelve months a private or public offering of securities for the

company(ies) covered in the Research report No

5 Research Analyst, his associate, PCIL or its associates have received compensation for investment banking or merchant banking or brokerage services or for any other products or services from the company(ies) covered in the Research report, in the last twelve months

No

Independence: PhillipCapital (India) Pvt. Ltd. has not had an investment banking relationship with, and has not received any compensation for investment banking services from, the subject issuers in the past twelve (12) months, and PhillipCapital (India) Pvt. Ltd does not anticipate receiving or intend to seek compensation for investment banking services from the subject issuers in the next three (3) months. PhillipCapital (India) Pvt. Ltd is not a market maker in the securities mentioned in this research report, although it, or its affiliates/employees, may have positions in, purchase or sell, or be materially interested in any of the securities covered in the report.

Suitability and Risks: This research report is for informational purposes only and is not tailored to the specific investment objectives, financial situation or particular requirements of any individual recipient hereof. Certain securities may give rise to substantial risks and may not be suitable for certain investors. Each investor must make its own determination as to the appropriateness of any securities referred to in this research report based upon the legal, tax and accounting considerations applicable to such investor and its own investment objectives or strategy, its financial situation and its investing experience. The value of any security may be positively or adversely affected by changes in foreign exchange or interest rates, as well as by other financial, economic, or political factors. Past performance is not necessarily indicative of future performance or results.



Sources, Completeness and Accuracy: The material herein is based upon information obtained from sources that PCIPL and the research analyst believe to be reliable, but neither PCIPL nor the research analyst represents or guarantees that the information contained herein is accurate or complete and it should not be relied upon as such. Opinions expressed herein are current opinions as of the date appearing on this material, and are subject to change without notice. Furthermore, PCIPL is under no obligation to update or keep the information current. Without limiting any of the foregoing, in no event shall PCIL, any of its affiliates/employees or any third party involved in, or related to computing or compiling the information have any liability for any damages of any kind including but not limited to any direct or consequential loss or damage, however arising, from the use of this document.

Copyright: The copyright in this research report belongs exclusively to PCIPL. All rights are reserved. Any unauthorised use or disclosure is prohibited. No reprinting or reproduction, in whole or in part, is permitted without the PCIPL’s prior consent, except that a recipient may reprint it for internal circulation only and only if it is reprinted in its entirety.

Caution: Risk of loss in trading/investment can be substantial and even more than the amount / margin given by you. Investment in securities market are subject to market risks, you are requested to read all the related documents carefully before investing. You should carefully consider whether trading/investment is appropriate for you in light of your experience, objectives, financial resources and other relevant circumstances. PhillipCapital and any of its employees, directors, associates, group entities, or affiliates shall not be liable for losses, if any, incurred by you. You are further cautioned that trading/investments in financial markets are subject to market risks and are advised to seek independent third party trading/investment advice outside PhillipCapital/group/associates/affiliates/directors/employees before and during your trading/investment. There is no guarantee/assurance as to returns or profits or capital protection or appreciation. PhillipCapital and any of its employees, directors, associates, and/or employees, directors, associates of PhillipCapital’s group entities or affiliates is not inducing you for trading/investing in the financial market(s). Trading/Investment decision is your sole responsibility. You must also read the Risk Disclosure Document and Do’s and Don’ts before investing.

Kindly note that past performance is not necessarily a guide to future performance.

For Detailed Disclaimer: Please visit our website www.phillipcapital.in

For U.S. persons only: This research report is a product of PhillipCapital (India) Pvt Ltd., 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 PhillipCapital (India) Pvt Ltd. 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 the 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 a Major Institutional Investor. 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, PhillipCapital (India) Pvt Ltd. has entered into an agreement with a U.S. registered broker‐dealer, Decker & Co, LLC. Transactions in securities discussed in this research report should be effected through Decker & Co, LLC or another U.S. registered broker dealer. If Distribution is to Australian Investors This report is produced by PhillipCapital (India) Pvt Ltd and is being distributed in Australia by Phillip Capital Limited (Australian Financial Services Licence No. 246827). This report contains general securities advice and does not take into account your personal objectives, situation and needs. Please read the Disclosures and Disclaimers set out above. By receiving or reading this report, you agree to be bound by the terms and limitations set out above. Any failure to comply with these terms and limitations may constitute a violation of law. This report has been provided to you for personal use only and shall not be reproduced, distributed or published by you in whole or in part, for any purpose. If you have received this report by mistake, please delete or destroy it, and notify the sender immediately. PhillipCapital (India) Pvt. Ltd. Registered office: No. 1, 18th Floor, Urmi Estate, 95 Ganpatrao Kadam Marg, Lower Parel West, Mumbai 400013

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