india morning bell 8th december 2014

8/9/2019 India Morning Bell 8th December 2014

1/15

India I Equities

Anand Rathi Shares and Stock Brokers Limited (hereinafter ARSSBL) is a full service brokerage and equities research firm and the views expressed therein are solelyof ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient and is to be circulatedonly within India and to no countries outside India. Disclosures and analyst certifications are present in Appendix.

Anand Rathi Research India Equities

Country

Daily

8 December 2014

India Morning Bell

All the latest research and data

Infosys Entering a critical execution phase; Hold. One of thefirst problems identified by Infosys new management is industry-widedownward pressure on pricing. This can now only be offset by hiringfresh graduates in large numbers. This state is undesirable according tothe management and, therefore, the focus is on utilising advanced

technologies (cloud, open source, AI, M2M) to turn more productive.We largely retain our estimates after the analyst meet as we awaitchanges being reflected in financials (only change being FY17 marginson management outlook). However, the recent run-up in the stockmeans a recommendation downgrade from a Buy to a Hold. At our TP,it would trade at 18x FY17 PE.

Indag Rubber Tyre-retreading specialist. The second-largestoperator in the organised cold-retreading arena, with a market share of20-25%, Indag Rubber was incorporated in 1978 in a joint venture withthe US-based Bandag. Indag is a niche operator in the replacementsegment as an alternative to direct tyre demand. With recovery in CV

demand expected to gather momentum ahead, demand for retreadingwould also expand. Indags FY14 EBITDA margin came at ~16%,comparing favourably with most tyre manufacturers; it has healthyreturn ratios and good cash-flow generation.

India: Food & fuel drive down non-core inflation

5

6

7

8

9

10

11

12

13

14

Oct-12

Dec-12

Feb-13

Apr-13

Jun-13

Aug-13

Oct-13

Dec-13

Feb-14

Apr-14

Jun-14

Aug-14

Oct-14

(Inflation,%)

Non-core Core

Source: GoI, Anand Rathi Research

Chartoftheday

Markets5 Dec 14 1 Day YTD

Sensex 28458 -0.4% 34.4%Ni fty 8538 -0.3% 35.4%Dow Jones 17959 0.3% 8.3%S & P 500 2075 0.2% 12.3%FTSE 6743 1.0% -0.1%Nikkei* 17906 -0.2% 9.9%Hang Seng* 24027 0.2% 3.1%

Volumes (US$m)5 Dec 14 1 Day Avg '14

Cash BSE 586 -9.7% 527Cash NSE 2,776 -6.3% 2,645Derivatives (NSE) 20,816 -6.9% 32,055

Flows (US$m)5 Dec 14* MTD YTD

FII Cash

Buy 659 1,411 1,37,382Sell 677 1,244 1,22,447Net -18 254 16,533

FII - Derivatives

Buy 2,132 33,935 8,29,979Sell 2,086 33,585 8,18,733Net 46 350 10,554

DII Cash

Buy 249 693 28,372Sell 222 498 25,807Net 27 195 2,330

Others5 Dec 14 1 Day YTD

Oil Brent (US$/bbl)* 68.2 -1.3% -35.6%Gold (US$/oz)* 1,193.6 0.1% -1.0%Steel (US$/MT) 557.5 -2.6% -4.7%`/US$ 61.8 0.0% 0.0%US$/Euro* 1.2 -0.1% 11.7%Yen/US$* 121.4 0.0% -13.3%Call Rate 8.3% 22.bps -50.bps10-year G-Secs 7.9% -3.bps -88.7bps

EMBI spreads 353.43 1.2bps 19.2bps

@7:30am *Provisional Source: BSE, Bloomberg

Sensex: 28458

Nifty: 8538


2/15


3/15

Anand Rathi Shares and Stock Brokers Limited (hereinafter ARSSBL) is a full service brokerage and equities research firm and the views expressed therein are solely ofARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient and is to be circulated only withinIndia and to no countries outside India. Disclosures and analyst certifications are present in Appendix.


India I EquitiesTechnology

Company Update

`

Rating: Hold

Target Price:`2,300

Share Price:`2,070

Key data INFO IN / INFY.BO

52-week high / low `2,200/`1,447

Sensex / Nifty 28458 / 8538

3-m average volume US$85.2m

Market cap `2376bn / US$38.41bn

Shares outstanding 574m

Shareholding pattern (%) Sep 14 Jun 14 Mar 14

Promoters 15.92 15.94 15.94

- of which, Pledged - - -

Free Float 84.08. 84.06. 84.06

- Fore ign Inst itutions 42.67 41.58 42.1

- Domestic Institutions 14.48 14.08 13.66

- Public 26.93 28.4 28.3

Quarterly results (YE: Mar) FY13 FY14 FY15e FY16e FY17e

Sales (US$m) 7,398 8,249 8,881 9,956 11,229

Sales (`m) 403,520 501,330 533,474 596,394 672,640

Net profit (`m) 94,210 106,480 124,013 134,429 146,582

EPS (`) 165 186 108 117 128

Growth (%) 13% 13% -42% 8% 9%

PE (x) 25.2 22.3 19.2 17.7 16.2

PBV (x) 6.0 5.0 4.4 4.0 3.7

RoE (%) 26% 24% 24% 24% 24%

RoCE (%) after tax 20% 19% 19% 19% 19%

Dividend yield (%) 2% 3% 2% 3% 3%

Source: Company

8 December 2014

InfosysEntering a critical execution phase; Hold

Analyst meet takeaways

Betting on advanced tech to escape perpetual pricing pressure.One of the firstproblems identified by Infosys new management is industry-wide downwardpressure on pricing. This can now only be offset by hiring fresh graduates in largenumbers. This state is undesirable according to the management and, therefore, thefocus is on utilising advanced technologies (cloud, open source, AI, M2M) to turnmore productive. Also, employees need to be more proactive (a cultural matter)regarding their clients problems. These two factors should help the companyincrease pricing of its services as it climbs the value chain.

Focus on design thinking and holistic solutions. Infosys believes that thefocus on design thinking, clubbed with product engineering, can help it deliverlarge integrated solutions. At present, these components exist, but in scatteredform, adding little value to a client due to multiple interfaces. The managementbelieves that such holistic solutions can integrate product engineering and ITsolutions, together creating value for clients.

Upskilling employees using training infrastructure.Adding new technologies(AI, SMAC and automation) to existing service lines and products (Finacle), Infosysis leveraging its extensive training infrastructure to upskill its large employee base.

This strategy is expected to prove less disruptive as no widespread segregation is

expected in the workforce of new and old tech employees. To support thesemeasures, the company has increased its workforce in key growth areas andrevamped its sales team (with revised incentive plans).

Margin outlook intact, but finer details in April.Infosys has maintained itsoutlook regarding stable margins (25% +/-100bps) in the medium term despiteinvestment in sales, products and delivery. This would essentially be driven byefficiency improvements being ploughed back into investments.

Our take. We largely retain our estimates after the analyst meet as we awaitchanges being reflected in financials (only change being FY17 margins onmanagement outlook). However, the recent run-up in the stock means arecommendation downgrade from a Buy to a Hold. At our TP, it would trade at18x FY17 PE. Risks.Organization-wide changes may lead to volatility.

Estimates revision (%) FY16e FY17e

Sales (US$) - -

EBITDA - 1.8

Net profit - 1.7

Change in Estimates Target Reco

Relative price performance

Source: Bloomberg


4/15

8 December 2014 Infosys Entering a critical execution phase; Hold

Anand Rathi Research 2

Quick Glance Financials and Valuations

Fig 1 Income statement (

m)Year-end: Mar FY13 FY14 FY15e FY16e FY17e

Revenue (US$ m) 7,398 8,249 8,881 9,956 11,229

growth (%) 6% 12% 8% 12% 13%

Revenue (` m) 403,520 501,330 533,474 596,394 672,640

growth (%) 20% 24% 6% 12% 13%

Effective USD:INR 54.5 60.8 60.1 59.9 59.9

Cost of Revenues (249,580) (317,890) (328,261) (363,616) (419,687)

SG&A (38,360) (47,100) (52,155) (60,604) (67,855)

EBITDA 115,580 136,340 153,057 172,174 185,097

EBITDA margins (%) 28.6% 27.2% 28.7% 28.9% 27.5%

D&A (11,290) (13,740) (11,474) (13,488) (15,716)

EBIT 104,290 122,600 141,584 158,686 169,381

EBIT margins (%) 25.8% 24.5% 26.5% 26.6% 25.2%

Other income 23,590 24,500 31,287 28,667 34,877

Tax (33,670) (40,620) (48,858) (52,925) (57,676)

ETR (%) -26% -28% -28% -28% -28%

Minority Interest 0 0 0 0 0

Net Profit 94,210 106,480 124,013 134,429 146,582

Net margins (%) 23.3% 21.2% 23.2% 22.5% 21.8%

EPS (`) 165 186 108 117 128

EPS growth (%) 13% 13% -42% 8% 9%

Source: Company, Anand Rathi Research

Fig 3 Cash-flow statement ( m)Year-end: Mar FY13 FY14 FY15e FY16e FY17e

Cash from Operations

PBT 127,880 147,100 172,871 187,354 204,258

Operating Profit before WC 139,170 160,840 184,345 200,841 219,975

Chg. in Trade Receivables (9,890) (12,680) (129) (5,224) (5,996)

Chg. in Other CA (9,280) (7,400) (8,856) (12,363) (15,316)

Chg. in Trade Payables 1,240 310 73 208 300

Chg. in Other CL 8,170 20,160 11,931 15,025 18,481

Others including taxes (34,630) (39,360) (48,542) (52,529) (57,182)

Net Cash from Operations 94,780 121,870 138,822 145,958 160,262

Cash from Investments

Capex (19,280) (27,450) (23,875) (26,691) (30,104)

Acquisitions (13,190) - - - -

Investments & Others (18,040) (22,580) (20,678) (9,564) (10,998)

Net Cash from Investing (50,510) (50,030) (44,554) (36,255) (41,102)

Cash from Financing

Equity Issuance 10 - - - -

Change in Borrowings (890) - - - -

Dividends including DDT (31,230) (31,430) (62,007) (80,657) (87,949)

Others - - - - -

Net Cash from Financing (32,110) (31,430) (62,007) (80,657) (87,949)Source: Company, Anand Rathi Research

Fig 5 Key ParametersYear-end: Mar FY13 FY14 FY15e FY16e FY17e

Employees (EoP) 156,688 160,405 168,011 187,011 205,011

Rev/Employee(US$) 47,215 51,426 52,859 53,240 54,775

EBITDA/Employee(`) 737,644 849,974 910,997 920,662 902,865Source: Company, Anand Rathi Research

Fig 2 Balance sheet ( m)Year-end: Mar FY13 FY14 FY15e FY16e FY17e

Sources of Funds 413,940 501,040 563,693 618,239 677,802

Share capital 2,860 2,860 2,860 2,860 2,860

Reserves & Surplus 395,110 472,440 534,447 588,218 646,851

S/Hs Equity 397,970 475,300 537,307 591,078 649,711

Minority Interest 0 0 0 0 0

Total Debt 0 0 0 0 0

Other LT Liabilities 15,970 25,740 26,386 27,161 28,091

Application of Funds 413,940 501,040 563,693 618,239 677,802

Net Fixed Assets 64,680 78,870 91,272 104,475 118,862

Intangible/Goodwill 23,440 24,990 24,990 24,990 24,990

Other LT Assets 18,320 23,980 24,310 24,690 25,126

Current Assets 357,070 442,710 504,635 560,832 624,353

Accounts Receivable 70,830 83,510 83,639 88,864 94,859

Unbilled Revenues 24,350 28,110 35,138 43,922 54,902

Cash & Investments 239,650 302,580 355,520 394,130 436,339

Other CAs 22,240 28,510 30,338 33,916 38,252

Current Liabilities 49,570 69,510 81,514 96,747 115,528

Accounts Payable 1,890 1,730 1,803 2,011 2,311

Unearned revenue 8,590 7,000 8,400 10,080 12,096

Other CLs 39,090 60,780 71,311 84,656 101,121Source: Company, Anand Rathi Research

Fig 4 Ratio analysis @ 2,070Year-end: Mar FY13 FY14 FY15e FY16e FY17e

Return Ratios

RoCE % (post-tax) 20% 19% 19% 19% 19%

RoIC % (post-tax) 49% 48% 50% 53% 52%

RoE % 26% 24% 24% 24% 24%

Cash Ratios

CFO:Sales 23% 24% 26% 24% 24%

AR days (incl. unbilled) 86 81 81 81 81

AP days 2 2 2 2 2

duPont Analysis

RoE % 26% 24% 24% 24% 24%

EBIT margin % 26% 24% 27% 27% 25%

PBT/EBIT % 123% 120% 122% 118% 121%

PAT/PBT % 74% 72% 72% 72% 72%

Total Asset turnover 106% 110% 100% 101% 104%

Assets/Equity % 104% 105% 105% 105% 104%

Valuation ratios

P/E (x) 25.2 22.3 19.2 17.7 16.2

P/B (x) 6.0 5.0 4.4 4.0 3.7

EV/EBITDA (x) 17.9 15.2 13.6 12.0 11.2

EV / Operating CF (x) 21.9 17.0 14.9 14.2 12.9Source: Company, Anand Rathi Research

Fig 6 AssumptionsYear-end: Mar FY13 FY14 FY15e FY16e FY17e

Chg in Realization % (est) -3.2% -0.1% 0.4% 1.5% 1.5%

Gross Utilization (EoP) % 69% 73% 75% 76% 77%

US$:` 54.5 60.8 60.1 59.9 59.9Source: Company, Anand Rathi Research


5/15



Analyst Meet Takeaways

Betting on advanced tech to escape perpetual pricing pressure

Infosys believes that the pricing pressure that it and the industry are facing

today can only be countered if IT service providers move up the value chainand start providing proactive and cost-effective (less labour dependent)business solutions using IT. This would see the industry move away fromhiring in large numbers and break the linearity, to some extent.

Fig 7 Pricing pressure faced by the IT industry


Note: The above numbers are simplified revenue per employee and do not take into account difference in utilization levels.

Infosys believes that the best way to move up the value chain for IT serviceproviders is to refresh the existing service lines by adding SMAC,automation and AI flavours. For instance, it has developed the Infosys data-

testing benchmark, which automates a large part of testing efforts (dataquality and completeness), and results in a 40% reduction in effort required.Another example of such an approach is an integrated ADM and IMSplatform (Infosys automation platform), which would resolves tickets upto 30% faster.

Fig 8 Refreshing the existing service lines to move up the value chain


These efforts when clubbed with a change in the company culture, fromlargely being reactive in delivering solutions (as suggested by Infosys CSATscores and management interaction with clients) to being proactive infinding business problems and then building solutions would help the

company leapfrog to a next-generation IT services one. This is themanagements vision for the next 3-5 years.

38.0

40.0

42.0

44.0

46.0

48.0

50.0

52.0

FY10

FY11

FY12

FY13

FY14

Revenuep

erEmployee(US$000s)

Infosys TCS Wipro


6/15



Focus on design thinking and holistic solutions

Another step the company is taking on its journey to be a next-gen one is inimplementing design thinking in its offerings and in building holisticsolutions, against the present practice of building small pieces of softwaresupporting various business functions.

Design thinking develops solutions, in which holistic end-to-end ITsolutions are devised which solve critical business problems. As the wordholistic suggests, this includes integration of product-engineering systemsand typical IT-services functions. Hence, the former service line is expectedto play a critical role in this concept.

For instance, Infosys is building an oilfield-modeling and simulation solutionto determine the useful life of an oil field. This involves deployment ofsensors, building systems to collect data from sensors, analysing that data;then coming out with important trends or reports which influence businessoutcomes and which support decision-making at the top level. Anotherexample of these holistic solutions is to build a supply-chain solution for an

O&G company, optimising the routing and capacity-utilization company-wide. This results in significant cost savings to a client.

In terms of building new solutions, Infosys is now focusing on scaling up itsBig Data & Analytics practice by offering industry-specific data-analyticssolutions. These solutions will run on common Infosys platformsimplementing open-source technologies. The value addition here would beenterprise quality and IT delivery using open-source technologies whereInfosys engineering capabilities ensure optimum performance andconsistency with such technologies.

Fig 9 Addition of staff in last 6 months in various segments


Up-skilling employees using training infrastructure.

These initiatives and the new strategic direction require significantlydifferent skill sets of the workforce. To up-skill employees in these newtechnologies and in design thinking, the company is using its extensivetraining infrastructure and collaborations with universities worldwide. Thetraining program includes the sales staff, which is being trained ineffectiveness, cross-selling, design-thinking and proposal-writing.


7/15



Fig 10 Up-skilling delivery and sales employees


In addition to training employees, the company is also ramping up staff inthe identified growth areas and is taking steps to reduce attrition in bothsales and delivery. Infosys has made adjustments to compensation andincentive structures and is trying to work on the softer aspects such asemployee engagement (murmuration) and feedback system (satisfactionsurveys) to curtail attrition.

Fig 11 Steps taken by the company to control attrition


Also, the way the new strategy works is by training all employees withoutreally segregating various service lines (next gen and old gen). This, bydesign, is expected to smoothen any friction or dissatisfaction amongInfosys large employee base as the company is attempting to bridge thedivide in its workforce.

According to the management, this would reduce disruption in operations(thus raising the probability of success) while simultaneously pushing it in its

strategic direction. In our opinion, this is a significant change from theprevious strategy where the idea was to move from a pure IT-servicescompany to a consulting and SI-led one.

Up-skilling

employees


8/15



Margin outlook intact but finer details in April

Infosys has maintained its outlook of stable EBIT margins (25% +/-100bps) in the medium term, re-iterating its vision of profitable industry-leading growth despite investments in sales, products and delivery. This

would essentially be driven by operational-efficiency improvements being

ploughed back into the business to build new capabilities. The company hasseen a 25.6% margin in 1HFY15 and, assuming that some investments arealready underway and, hence, costs are already being reflected in margins, wedo not see any meaningful pressure on margins. Our FY17 estimates build ina 50-bp higher margin now vs. earlier, given the managements confidenceabout maintaining margins despite acceleration in revenue growth.

The company will come out with a detailed strategy by April. This will

include the financial impact of the new strategy and the much-awaitedcapital allocation plan. At the analyst meet Infosys talked about being moreactive in M&As, but this would be restricted to acquiring next-generationcompanies/platforms rather than scale.

Estimate revision and Valuation

After the analyst meet we have made no change to our revenue estimates,while the EPS for FY17 is up a marginal 1.7% on account of the bettermargin outlook, leading to an upward, 2%, revision to our target price. Thetarget multiple is the same, at 18x FY17e, but the recent run-up in the stockprice (11% in the last three months) has led us to changing ourrecommendation to a Hold.

Fig 14 Revision in estimatesFY15 FY16 FY17

m New Old % Chg New Old % Chg New Old % Chg

Revenues (US$m) 8,881 8,881 - 9,956 9,956 - 11,229 11,229 -

Revenues 533,474 533,474 - 596,394 596,394 - 672,640 672,640 -

EBITDA 153,057 153,057 - 172,174 172,174 - 185,097 181,741 1.8

EBITDA margin % 28.7% 28.7% 0 bps 28.9% 28.9% 0 bps 27.5% 27.0% 50 bps

EBIT 141,584 141,584 - 158,686 158,686 - 169,381 166,025 2.0

EBIT margin % 26.5% 26.5% 0 bps 26.6% 26.6% 0 bps 25.2% 24.7% 50 bps

PBT 172,871 172,871 - 187,354 187,354 - 204,258 200,902 1.7

Net Profi t 124,013 124,013 - 134,429 134,429 - 146,582 144,169 1.7


Fig 12 Revenue growth expectations


Fig 13 Infosys EBIT margin performance


-

2,000

4,000

6,000

8,000

10,000

12,000

FY13

FY14

FY15e

FY16e

FY17e

(US$m)

-

2

4

6

8

10

12

14

(%)

Revenues yoy growth (RHS)

22

23

23

24

24

25

25

26

26

27

3QFY13

4QFY13

1QFY14

2QFY14

3QFY14

4QFY14

1QFY15

2QFY15

(%)

EBIT margin %


9/15

Appendix

Analyst CertificationThe views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of thecompensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the researchanalyst(s) in this report. The research analysts are bound by stringent internal regulations and also legal and statutory requirements of the Securities and ExchangeBoard of India (hereinafter SEBI) and the analysts compensation are completely delinked from all the other companies and/or entities of Anand Rathi, and haveno bearing whatsoever on any recommendation that they have given in the Research Report.

Important Disclosures on subject companiesRating and Target Price History (as of 6 December 2014)

Infosys

8

12

3

4

5 6

7

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

Jan-13

Feb-13

Mar-13

Apr-13

May-13

Jun-13

Jul-13

Aug-13

Sep-13

Oct-13

Nov-13

Dec-13

Jan-14

Feb-14

Mar-14

Apr-14

May-14

Jun-14

Jul-14

Aug-14

Sep-14

Oct-14

Nov-14

Dec-14

Date RatingTP()

SharePrice ()

1 25-Nov-13 Buy 4,100 3,3492 14-Mar-14 Buy 3,900 3,3583 1-Apr-14 Buy 3,705 3,2634 4-Jun-14 Buy 3,550 3,0175 17-Jun-14 Buy 3,700 3,2426 20-Aug-14 Buy 4,050 3,5677 1-Oct-14 Buy 4,300 3,7518 13-Oct-14 Buy 4,500 3,889

The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation basedupon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment bankingrevenues.

Anand Rathi Ratings Definitions

Analysts ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (US$1bn) >15% 5-15%


10/15

Other Disclosures pertaining to distribution of research in the United States of America

This material was produced by ARSSBL, solely for information purposes and for the use of the recipient. It is not to be reproduced under any circumstances and isnot to be copied or made available to any person other than the recipient. It is distributed in the United States of America by Enclave Capital LLC (19 West 44thStreet, Suite 1700, New York, NY 10036) and elsewhere in the world by ARSSBL or an authorized affiliate of ARSSBL (such entities and any other entity, directlyor indirectly, controlled by ARSSBL, the Affiliates). This document does not constitute an offer of, or an invitation by or on behalf of ARSSBL or its Affiliates or anyother company to any person, to buy or sell any security. The information contained herein has been obtained from published information and other sources, whichARSSBL or its Affiliates consider to be reliable. None of ARSSBL or its Affiliates accepts any liability or responsibility whatsoever for the accuracy or completenessof any such information. All estimates, expressions of opinion and other subjective judgments contained herein are made as of the date of this document. Emerging

securities markets may be subject to risks significantly higher than more established markets. In particular, the political and economic environment, companypractices and market prices and volumes may be subject to significant variations. The ability to assess such risks may also be limited due to significantly lowerinformation quantity and quality. By accepting this document, you agree to be bound by all the foregoing provisions.

1. ARSSBL or its A ffiliates may or may not have been beneficial owners of the securities mentioned in this report.

2. ARSSBL or its affiliates may have or not managed or co-managed a public offering of the securities mentioned in the report in the past 12 months.

3. ARSSBL or its affiliates may have or not received compensation for investment banking services from the issuer of these securities in the past 12 months and donot expect to receive compensation for investment banking services from the issuer of these securities within the next three months.

4. However, one or more of ARSSBL or its Affiliates may, from time to time, have a long or short position in any of the securities mentioned herein and may buy orsell those securities or options thereon, either on their own account or on behalf of their clients.

5. As of the publication of this report, ARSSBL does not make a market in the subject securities.

6. ARSSBL or its Affiliates may or may not, to the extent permitted by law, act upon or use the above material or the conclusions stated above, or the research oranalysis on which they are based before the material is published to recipients and from time to time, provide investment banking, investment management or other

services for or solicit to seek to obtain investment banking, or other securities business from, any entity referred to in this report.

Enclave Capital LLC is distributing this document in the United States of America. ARSSBL accepts responsibility for its contents. Any US customer wishing toeffect transactions in any securities referred to herein or options thereon should do so only by contacting a representative of Enclave Capital LLC.

2014 Anand Rathi Shares and Stock Brokers Limited. All rights reserved. This report or any portion thereof may not be reprinted, sold or redistributed without theprior written consent of Anand Rathi Shares and Stock Brokers Limited.

Additional information on recommended securities/instruments is available on request.


11/15

Anand Rathi Shares and Stock Brokers Limited (hereinafter ARSSBL) is a full service brokerage and equities research firm and the views expressed therein are solely ofARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient and is to be circulated only withinIndia and to no countries outside India. Disclosures and analyst certifications are present in Appendix.


India I Equities

Key financials (YE Mar) FY10 FY11 FY12 FY13 FY14

Sales (` m) 1,113 1,500 2,162 2,349 2,323

Net profit (` m) 116 108 209 252 276

EPS (`) 22.1 20.6 39.9 48.0 52.6

Growth (%) 52.5 (6.7) 93.1 20.5 9.6

PE (x) 34.2 36.6 19.0 15.7 14.4

PBV (x) 11.0 8.9 6.4 4.9 3.9

RoE (%) 32.2 24.4 34.0 30.9 26.8

RoCE (%) 28.1 28.5 44.4 40.4 34.9

Dividend yield (%) 0.5 0.5 0.8 1.1 1.3

Net gearing (%) 0.2 0.2 0.0 0.0 0.0


Auto Components

Visit Note

`

8 December 2014

Indag RubberTyre-retreading specialist

Key takeaways

A leading tyre-retreader in India. The second-largest operator in theorganised cold-retreading arena, with a market share of 20-25%, Indag Rubber

was incorporated in 1978 in a joint venture with the US-based Bandag. Thelatter exited in 2006. That year the company started investing in building upcapacity by setting up the Nalagarh, Himachal Pradesh, plant. In the next fiveyears, this was more than doubled, from 6,000 tonnes to 13,800 tonnes.

Tread manufacturing is a steadily growing segment. The companyestimates the size of the tread-manufacturing segment at`32bn. Of this, theorganised cold-process sub-segment, where Indag operates, constitutes~33%. The segment has had a 4.3% CAGR in the past four years. However,this has to be considered in conjunction with the fact that demand hassignificantly decelerated since Sep12.

CVs comprise the most important sub-segment. Since 90% of sales areto the CV sub-segment, the slowdown has hampered growth for Indag inthe past two years. Of the CVs sold domestically, ~80% of all CV tyres areretreaded. Further, up to a maximum of three retreads are possible.

Re-treading provides a cost-effective option. Re-treading turns out to belower cost than a new tyre since it consumes less natural rubber at ~25%only. According to the management, the potential cost savings are 30% to50% of the price of a new tyre.

Our take. Indag is a niche operator in the replacement segment as analternative to direct tyre demand. With recovery in CV demand expected togather momentum ahead, demand for retreading would also expand. IndagsFY14 EBITDA margin came at ~16%, comparing favourably with most tyremanufacturers; it has healthy return ratios and good cash-flow generation.Risks. Competition in the unorganised sector, delayed growth.

Rating: NA

Target Price: NA

Share Price:`764

Relative price performance

IDR

Sensex

200

300

400

500

600

700

800

Dec-13

Feb-14

Apr-14

Jun-14

Aug-14

Oct-14

Dec-14

Source: Bloomberg

Key data IDR IN / IDGR.BO

52-week high / low `839 /`212

Sensex / Nifty 28458 / 8538

3-m average volume US$0.1m

Market cap `4.10bn / US$67.1m

Shares outstanding 5.25m

Shareholding pattern (%) Sep14 Jun14 Mar14

Promoters 74.77 74.77 75.00

- of which, Pledged - - -

Free Float 25.23 25.23 25.00

- Foreign Insti tutions 0.93 0.46 0.00

- Domestic Institutions 0.01 0.03 0.04

- Publ ic 24.29 24.74 24.96


12/15

8 December 2014 Indag Rubber Tyre re-treading specialist


Quick Glance Financials and Valuations

Fig 1 Income statement ( m)Year-end: Mar FY10 FY11 FY12 FY13 FY14

Net revenues 1,113 1,500 2,162 2,349 2,323

Revenue growth (%) 46% 35% 44% 9% -1%

- Oper. expenses 982 1,336 1,865 2,005 1,951

EBIDTA 132 164 297 344 373

EBITDA margins (%) 12% 11% 14% 15% 16%

- Interest 4 11 12 4 3

- Depreciation 16 19 23 25 25

+ Other income 8 4 10 16 17

- Tax 3 29 61 79 85

Effective tax rate (%) 3 21 23 24 23

Reported PAT 116 108 209 252 276

Extraordinary items - - - - -

Adjusted PAT 116 108 209 252 276

PAT growth (%) 52.5 (6.7) 93.1 20.5 9.6

Adj. FDEPS (`/sh) 22.1 20.6 39.9 48.0 52.6

Adj. FDEPS growth (%) 52.5 (6.7) 93.1 20.5 9.6


Fig 3 Cash-flow statement ( m)Year-end: Mar FY10 FY11 FY12 FY13 FY14

PAT 116 108 209 252 276

+ Non-cash items 20 17 27 31 25

Cash profit 136 125 237 283 301

- Incr./(decr.) in WC 120 52 87 (63) 30

Operating cash-flow 16 73 149 347 270

- Capex 61 45 45 18 60

Free cash-flow (46) 28 104 329 211

- Dividend 25 24 37 49 61

+ Equity raised - - - - -

+ Debt raised 71 (1) (59) (13) 0

- Investments 0 0 5 262 134

- Misc. items 0 0 0 0 0

Net cash-flow 1 1 3 3 15

+ Op. cash & bank bal. 11 11 13 15 18

Cl. Cash & bank bal. 11 13 15 18 33Source: Company, Anand Rathi Research

Fig 5 Tread manufacturing segment size

Source: Bloomberg, Anand Rathi Research

Fig 2 Balance sheet ( m)Year-end: Mar FY10 FY11 FY12 FY13 FY14

Share capital 53 53 53 53 53

Reserves & surplus 308 391 563 764 978

Net worth 361 444 616 817 1,031

Total debt 73 72 13 0 0

Minority interest 0 0 0 0 0

Def. tax liab. (net) 7 5 9 15 14

Capital employed 441 521 637 831 1,045

Net fixed assets 196 222 244 237 271

Investments 0 0 5 267 400

- of which, Liquid - - - - -

Working capital 233 286 373 310 340

Cash 11 13 15 18 33

Capital deployed 441 521 637 831 1,045

Net debt/equity (%) 0 0 0 0 0

W C turn (days) 64 61 62 47 55

Book value (`/sh) 69 85 117 156 196Source: Company, Anand Rathi Research

Fig 4 Ratio analysis @ 764Year-end: Mar FY10 FY11 FY12 FY13 FY14

P/E (x) 34.2 36.6 19.0 15.7 14.4

Cash P/E (x) 30.0 31.1 17.1 14.3 13.2

EV/EBITDA (x) 30.6 24.5 13.4 10.7 10.0

EV/sales (x) 3.6 2.7 1.8 1.6 1.6

P/B (x) 11.0 8.9 6.4 4.9 3.9

RoE (%) 32.2 24.4 34.0 30.9 26.8

RoCE (%) 28.1 28.5 44.4 40.4 34.9

Dividend yield (%) 0.5 0.5 0.8 1.1 1.3

Dividend payout (%) 18.1 19.4 15.1 16.7 19.0

Debt to equity (x) 0.2 0.2 0.0 - -

Debtor days 41.7 35.2 35.3 32.4 39.5

Inventory days 77.6 66.7 65.0 56.8 58.8

Payables days 55.0 40.9 38.3 41.7 43.6

W.C. days 64.3 61.0 62.1 47.5 54.8

Fixed asset T/O (x) 5.7 6.8 8.9 9.9 8.6Source: Company, Anand Rathi Research

Fig 6 FY14 revenue break-up

Source: Company


13/15

8 December 2014 Indag Rubber Tyre re-treading specialist


Meeting highlights

The company is entering the aircraft re-treading sub-segment; productsare currently at the development stage and would take 1-2 years tolaunch.

Re-treading of imported tyres from China is difficult as the casings are

weak.

For distribution, the companys dispatches go from its plant to its

depots in each state. From here, they sent to local customers. In some,sales are to dealers, while in others the company sells directly toretailers.

While most of the business is retail, institutional sales constitute ~20%of the total (to customers like STUs).

While Indags current capacity is 13,800 tonnes, sales at present are10,000 tonnes.

The company has ~400 major dealers in 25 states, besides ~300 smalldealers.

Key states for it are Tamil Nadu, Maharashtra, Andhra Pradesh,Gujarat, Rajasthan, and Jammu and Kashmir.

Gum and spray cement combined constitute ~10% of total revenue.

The excise-duty benefits and income-tax exemption available to thecompany are expected to end in FY16.


14/15

Appendix

Analyst CertificationThe views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the researchanalyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. The research analysts are bound bystringent internal regulations and also legal and statutory requirements of the Securities and Exchange Board of India (hereinafter SEBI) and the analysts compensation are completelydelinked from all the other companies and/or entities of Anand Rathi, and have no bearing whatsoever on any recommendation that they have given in the Research Report.

The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation based upon various factors,

including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.Anand Rathi Ratings Definitions



15/15

Appendix

Analyst CertificationThe views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the researchanalyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. The research analysts are bound bystringent internal regulations and also legal and statutory requirements of the Securities and Exchange Board of India (hereinafter SEBI) and the analysts compensation are completelydelinked from all the other companies and/or entities of Anand Rathi, and have no bearing whatsoever on any recommendation that they have given in the Research Report.

The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation based upon various factors,

including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.Anand Rathi Ratings Definitions


india morning bell 8th december 2014

Documents