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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 of 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 circulated only within India and to no countries outside India. Disclosures and analyst certifications are present in Appendix. Anand Rathi Research India Equities

India I Equities Country

Daily

6 December 2012

India Morning Bell

All the latest research and data

BHEL – Surviving tough times; Hold. BHEL has been experiencing a surfeit of new orders over the past several quarters. However, the company has been soldiering on by booking sporadic orders in the power segment, while trying to build up its industrial supplies business to make up for the slack. At the CMP of ~`238, BHEL trades at a P/E and EV/EBIDTA of 10.1x and 4.7x, respectively, discounting our FY14e numbers.

TreeHouse Education and Accessories – Fund infusion to fuel growth; positives priced in; Hold. TreeHouse Education and Accessories’ preferential allotment would bring it `812m (~10.8% dilution). Promoter holding would rise two percentage points to 31.21%. Net cash and cash equivalents (~`412m, `11 a share) by end-FY13 would aid organic growth and M&A opportunities. On the rich valuations, we downgrade the stock to a Hold. We, nevertheless, using the DCF-based method raise our price target to `280 at which the stock would trade at a PE of 19x FY14e and 13x FY15e earnings.

Derivatives view.

Sensex: 19392

Nifty: 5901

Net exports pull down the demand-side GDP in 2QFY13

2.4

1.0

-1.3

-0.2

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1QFY13 2QFY13

Source: Anand Rathi Research

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Markets 5 Dec ’12 1 Day YTD Sensex 19392 0.2% 25.5%Nifty 5901 0.2% 27.6%Dow Jones 13034 0.6% 6.7%S & P 500 1409 0.2% 12.1%FTSE 5892 0.4% 5.7%Nikkei* 9532 0.7% 12.7%Hang Seng* 22289 0.1% 20.9%

Volumes (US$m) 5 Dec ’12 1 Day Avg '12Cash BSE 529 -1.6% 453Cash NSE 2,409 4.8% 2,141Derivatives (NSE) 19,512 23.5% 23,264

Flows (US$m) 5 Dec ’12* MTD YTD FII – Cash Buy 517 883 114,518Sell 356 629 94,205Net 161 254 20,355FII - Derivatives Buy 2,562 6,659 844,357Sell 2,640 6,886 831,695Net -78 -227 11,946DII – Cash Buy 212 196 20,315Sell 330 234 23,503Net -117 -38 -3,269

Others 5 Dec ’12 1 Day YTD Oil Brent (US$/bbl)* 108.8 -0.1% 5.1%Gold (US$/oz)* 1,690.9 -0.2% 8.1%Steel (US$/MT) 590.0 0.0% -7.1%`/US$ 54.56 0.0% -2.7%US$/Euro* 1.31 0.1% -0.7%Yen/US$* 82.44 0.0% -6.7%Call Rate 8.05% -4.9bps -44.9bps10-year G-Secs 8.17% 0.1bps -39.5bpsEMBI spreads 266.75 1.8bps -109.7bps@7:30am *Provisional Source: BSE, Bloomberg

6 December 2012 India Morning Bell

Anand Rathi Research India Equities

Market Data

Price Performance Price Performance Price Performance Top-5 gainers Top-5 gainers Top-5 gainersCompany CMP (INR) 1 wk (%) 1 Mth (%) Company CMP (INR) 1 wk (%) 1 Mth (%) Company CMP (INR) 1 wk (%) 1 Mth (%)

UNITED BREWERIES 885 16.9 13.6 INDIABULLS POWER 14 20.9 20.9 PVR LTD 322 35.9 41.0

UNITECH LTD 34 16.6 43.0 PANTALOON RETAIL 238 17.8 25.5 ELDER PHARMACEUT 432 32.4 36.3

JAIPRAKASH POWER 44 16.0 14.8 RUCHI SOYA INDUS 71 17.7 6.8 FINOLEX CABLES 61 18.1 42.1

INDIA TOURISM 848 15.8 71.0 MRF LTD 11642 15.9 13.3 SRS LTD 48 16.1 30.8

ALLAHABAD BANK 155 14.2 15.3 RUCHI SOYA INDUS 71 17.7 6.8 INDIABULLS INFRA 7 14.0 16.9

Top-5 losers Top-5 losers Top-5 losersCompany CMP (INR) 1 wk (%) 1 Mth (%) Company CMP (INR) 1 wk (%) 1 Mth (%) Company CMP (INR) 1 wk (%) 1 Mth (%)

APOLLO HOSPITALS 806 (8.1) 2.9 JAYBHARAT TEXTIL 47 (18.3) (45.5) LS INDUSTRIES LT 12 (22.5) (17.0)

CASTROL INDIA 287 (4.2) (5.1) MAKEMYTRIP LTD 687 (9.0) (17.2) ZUARI AGRO CHEMI 305 (18.6) 0.0

INFOSYS LTD 2383 (3.6) 0.2 TUNI TEXTILE MIL 203 (6.9) (24.7) MYTRAH ENERGY LT 50 (12.6) (30.1)

TATA COMMUNICATI 229 (3.5) (9.4) EDELWEISS FIN SE 34 (6.5) (5.4) GOENKA DIAMOND 28 (9.1) (0.2)

TV18 BROADCAST L 34 (3.4) 16.0 TUNI TEXTILE MIL 203 (6.9) (24.7) WELSPUN INDIA 63 (6.4) 21.8

Volume Volume VolumeVolume spurts Volume spurts Volume spurtsCompany CMP (INR) 1 wk avg 1/4 wk (%) Company CMP (INR) 1 wk avg 1/4 wk (%) Company CMP (INR) 1 wk avg 1/4 wk (%)

PROCTER & GAMBLE 2,563 20,975 225.5 BOMBAY RAYON FAS 256 116,622 269.0 TD POWER SYSTEMS 240 101,591 266.0

APOLLO HOSPITALS 806 3,464,532 203.3 RELIGARE ENTERPR 304 103,963 257.3 PVR LTD 322 3,656,103 262.1

CRISIL LTD 1,029 137,895 193.1 TRIVENI TURBINE 54 936,312 203.5 ASHOKA BUILDCON 212 45,773 260.4

VIDEOCON INDUSTR 230 2,161,357 184.0 VST INDS LTD 1,875 29,419 187.7 ELDER PHARMACEUT 432 413,491 257.8

TORRENT POWER LT 167 413,460 170.6 INDIABULLS POWER 14 8,120,594 187.1 BEML LTD 308 920,881 237.3

Technicals Technicals Technicals Above 200 DMA Above 200 DMA Above 200 DMACompany CMP (INR) 200D Avg (%) Company CMP (INR) 200D Avg (%) Company CMP (INR) 200D Avg (%)

INDIA TOURISM 848 233 263.2 PENINSULA LAND 74 42 77.0 VISESH INFOTECNI 20 6 253.1

UNITED SPIRITS 2,019 904 123.5 KARNATAKA BANK 173 101 72.1 SHREE NATH COMM 70 25 176.4

WOCKHARDT LTD 1,742 1,012 72.2 ANANT RAJ INDUS 101 61 66.8 OUT OF CITY TRAV 78 30 160.1

L&T FINANCE HOLD 80 49 63.4 KAVERI SEED 1,324 822 61.0 RASOYA PROTEINS 90 37 140.9

AUROBINDO PHARMA 195 127 54.0 DEN NETWORKS LTD 202.5 126.3 60.3 ACCELYA KALE SOL 375 169 121.8

Below 200 DMA Below 200 DMA Below 200 DMACompany CMP (INR) 200D Avg (%) Company CMP (INR) 200D Avg (%) Company CMP (INR) 200D Avg (%)

HINDUSTAN COPPER 151 257 (41.1) JAYBHARAT TEXTIL 47 103 (54.6) SHREE GLOBAL TRA 34 80 (57.6)

GMR INFRASTRUCTU 20 24 (15.5) MAKEMYTRIP LTD 687 938 (25.9) TULIP TELECOM E 40 82 (50.6)

NATIONAL ALUMIN 49 55 (11.6) MONNET ISPAT & E 281 370 (24.2) ALOK INDUSTRIES 11 16 (31.8)

BHARAT FORGE CO 268 300 (10.8) SIFY TECHNOL-ADR 109 138 (21.1) MYTRAH ENERGY LT 50 66 (31.1)

MMTC LTD 678 753 (9.9) ASTRAZENECA PHAR 1,490 1,823 (18.2) RAMKY INFRASTRUC 99 137 (27.6)

Large Caps Mid Caps Small Caps(>US$1bn) (US$250m-1bn) (US$100m-250m)

Source: Bloomberg


Capital goodsUpdateIndia I Equities

Key financials (YE Mar) FY11 FY12 FY13e FY14e FY15e

Revenues (`m) 420,375 479,789 434,470 443,982 513,829

EBITDA (`m) 77,107 99,073 82,981 89,291 110,187

EBITDA Margin (%) 18 21 19 20 21

PAT (`m) 60,091 70,400 54,129 57,833 73,616

EPS (`) 24.6 28.8 22.1 23.6 30.1

EPS growth (%) 39.5 17.2 -23.1 6.8 27.3

P/E (x) 9.7 8.3 10.8 10.1 7.9

P/BV (x) 2.9 2.3 2.0 1.8 1.5

EV/EBITDA (x) 5.1 4.6 5.6 4.6 3.1

RoE (%) 33.3 30.9 19.9 18.6 20.5

Source: Company, Anand Rathi Research

`

Rating: Hold Target Price: `255 Share Price: `238

Key data BHEL IN / BHEL.BO52-week high / low `328 / `195Sensex / Nifty 19392/5901

3-m average volume US$24m

Market cap `580bn / US$10.6bn

Shares outstanding 2448m

Shareholding pattern (%) Sep ’12 Jun ’12 Mar ’12

Promoters 67.72 67.72 67.72 - of which, Pledged - - -Free Float 32.28 32.37 32.28 - Foreign Institutions 14.35 12.93 13.48 - Domestic Institutions 14.62 13.12 12.85 - Public 3.31 6.32 5.95

Change in Estimates Target Reco

6 December 2012

BHEL

Surviving tough times; Hold

BHEL has been experiencing a surfeit of new orders over the past several quarters. However, the company has been soldiering on by booking sporadic orders in the power segment, while trying to build up its industrial supplies business to make up for the slack. Execution on track, to drive revenues for now. BHEL’s unexecuted

order book at the end of 2QFY13 stood at `1,223bn, implying a coverage ratio of ~2.5x. We estimate BHEL’s unexecuted order book in the power segment at ~43,000MW, which represents an order-book coverage of ~1.7x It is the execution of this order book that is currently driving revenues. We believe the company is on track to clock revenues of `434bn, with EBIDTA of `83bn in FY13e.

Order inflows likely to pick up from 2HFY13. Going by industry estimates, we expect orders for projects of 10-15 GW (by Central and state utilities) to materialize over the next four quarters. More importantly, we anticipate orders for NTPC’s bulk tenders [Darlipalli (2x800 MW) and Nabhinagar (3x660 MW)] crystallising by end-FY13. We also expect shorter cycle orders in the industry segment, relating to railways and T&D, to materialize over the next two quarters.

Environment still subdued, but expected to pick up. Going forward, we believe that a cut in lending rates is imminent, as is finalisation of capacity addition by central and state utilities. We also expect clarity to emerge gradually on contentious issues like re-financing of SEB debt, coal allocation as well as re-negotiation of unviable IPP PPAs. We believe the next four quarters hold immense promise for the capital goods sector as capacity creation revives and GFCF picks up.

Valuation At the CMP of ~`238, BHEL trades at a P/E and EV/EBIDTA of 10.1x and 4.7x, respectively, discounting our FY14e numbers. Risks. Order cancellations and significantly lower–than-expected order booking could result in a downward revision of our estimates.

Relative price performance

BHEL

Sensex

180

210

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270

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360

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Apr-1

2

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Oct

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Source: Bloomberg

6 December 2012 BHEL – Surviving tough times; Hold

Anand Rathi Research 2

Quick Glance – Financials and ValuationsFig 1 – Income statement (`m)

Year-end: Mar FY11 FY12 FY13e FY14e FY15e

Revenue 420,375 479,789 434,470 443,982 513,829- Op. expenses 237,505 290,991 263,723 260,617 301,618- Employee Costs 53,966 54,658 57,566 63,323 68,250- Other Administrative 51,796 35,068 30,199 30,751 33,774EBIDTA 77,107 99,073 82,981 89,291 110,187- Interest 547 513 970 1,294 1,164- Depreciation 5,441 8,000 8,453 9,156 9,506+ Other income 18,917 12,463 7,962 8,257 11,352- Tax 29,945 32,623 27,391 29,265 37,252PAT 60,091 70,400 54,129 57,833 73,616Dividend 15,249 15,827 14,686 14,686 14,686FDEPS (` / share) 25 29 22 24 30CEPS (` / share) 27 32 26 27 34DPS (` / share) 6 6 6 6 6BV (` / share) 82 104 119 135 159Shares outstanding 2,448 2,448 2,448 2,448 2,448Source: Company, Anand Rathi Research

Fig 3 – Cash-flow statement (`m) Year-end: Mar FY11 FY12 FY13e FY14e FY15e

Consolidated PAT 60,091 70,400 54,129 57,833 73,616 +Depreciation 5,441 8,000 8,453 9,156 9,506 +Deferred Tax (6,363) 6,173 0 0 0 +Other non cash 21 188 0 0 0 Cash profit 59,190 84,761 62,582 66,989 83,123 - Incr/(Decr) in WC 22,387 82,511 35,986 (13,733) (3,330)Operating cash flow 36,803 2,250 26,596 80,722 86,453 -Capex 17,418 12,813 5,600 600 600 Free cash flow 19,386 (10,564) 20,996 80,122 85,853 -Dividend 17,747 18,394 17,068 17,068 17,068 + Equity raised 0 0 0 0 0 + Debt raised 356 (399) 2,000 0 0 -Investments 3,593 225 0 0 0 Net cash flow (1,599) (29,582) 5,928 63,054 68,785 +Opening cash 97,901 96,302 66,720 72,648 135,702 Source: Company, Anand Rathi Research

Fig 5 – PE band

10X

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Source: Bloomberg, Anand Rathi Research

Fig 2 – Balance sheet (`m) Year-end: Mar FY11 FY12 FY13e FY14e FY15e

Share capital 4,895 4,895 4,895 4,895 4,895 Reserves & surplus 196,643 248,837 285,898 326,663 383,212 Shareholders’ fund 201,538 253,732 290,794 331,558 388,107 Debt 1,634 1,234 3,234 3,234 3,234 Deferred Tax Liab (net) (21,636) (15,462) (15,462) (15,462) (15,462)Capital employed 181,536 239,504 278,565 319,330 375,879 Gross Fixed Assets 80,497 97,078 111,155 112,255 112,855 Less: Depreciation 46,486 54,110 62,563 71,719 81,225 Net Fixed Assets 51,631 56,444 53,592 45,035 36,129 Investments 4,392 4,617 4,617 4,617 4,617 Current Assets 589,283 591,237 610,324 684,111 786,863 Cash 96,302 66,720 72,648 135,702 204,486 Current Liab and Prov 463,769 412,794 389,967 414,432 451,730 Net Current Assets 125,514 178,443 220,357 269,678 335,133 Working Capital 29,212 111,723 147,709 133,977 130,647 Capital deployed 181,536 239,504 278,565 319,330 375,879 Source: Company, Anand Rathi Research

Fig 4 – Ratio analysis @ `238 Year-end: Mar FY11 FY12 FY13e FY14e FY15e

P / E (x) 9.7 8.3 10.8 10.1 7.9 P / BV (x) 2.9 2.3 2.0 1.8 1.5 EV / Sales (x) 1.2 1.1 1.2 1.0 0.7 EV / EBIDTA (x) 5.1 4.6 5.6 4.6 3.1 ROAE (%) 33.3 30.9 19.9 18.6 20.5 ROACE (%) 49.8 45.2 30.1 28.1 30.9 Dividend yield (%) 2.6 2.7 2.5 2.5 2.5 Dividend payout (%) 29.5 26.1 31.5 29.5 23.2 Net Debt / Equity (47.0) (25.8) (23.9) (40.0) (51.9)Revenue growth (%) 26.4 14.1 (9.4) 2.2 15.7 EBIDTA growth (%) 130.9 28.5 (16.2) 7.6 23.4 EBIDTA (%) 18.3 20.6 19.1 20.1 21.4 Net profit growth (%) 39.5 17.2 (23.1) 6.8 27.3 Order book (`bn) 1,137 898 882 929 1,037Order book (MW) 49,262 43,682 43,729 45,592 49,932Source: Company, Anand Rathi Research

Fig 6 – PB Band

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Fig 11 – Annual revenues

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Fig 7 – Order inflow

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Fig 8 – Annual Order Inflow & Execution

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Fig 9 – Annual OB / Sales

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Fig 10 – Closing Order Backlog

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Fig 12 – Major orders Quarter Date Type MW Value (`m) Customer

FY13

2Q 22-Aug-12 BTG 1,400 19,060 NPCIL

19,060

1Q 26-Jun-12 1,020 9,500 PHPA, Bhutan.

31-May-12 BTG 500 11,430 NTPC

21-May-12 EPC 1,320 - NTPC

14-May-12 160 3,800 RRVUNL

24,730

Till date FY13 43,790

FY12

4Q 20-Mar-12 BTG 300 6,300 Abhijeet Projects Ltd.

27-Feb-12 ODR - 7,740 ONGC

14,040

3Q 10-Oct-11 EPC 1,200 40,710 Singareni Collieries

5-Oct-11 BTG 1,320 37,829 DB Power Ltd.

78,539

2Q - - - N.A. N.A.

1Q - - - 9,820 -

2-Jun-11 - 5 620 Karnataka Power Corp. Ltd

20-Apr-11 - 770 8,800 NCIL

20-Apr-11 - - 400 NCIL

19,640

Total - FY12 112,219

Source: Company

Fig 13 – Quarterly order inflow

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Appendix Analyst Certification The 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 research analyst(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 by stringent internal regulations and also legal and statutory requirements of the Securities and Exchange Board of India (hereinafter “SEBI”) and the analysts’ compensation are completely delinked 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. Important Disclosures on subject companies Rating and Target Price History (as of 5 December 2012)

BHEL

2

1

50

150

250

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550

650

Jan-

08

May

-08

Oct

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Date Rating TP (`)

Share Price (`)

1 26-Sep-12 Hold 251 254 2 30-Oct-12 Hold 255 225

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

Analysts’ ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described in the Ratings Table below:

Ratings Guide Buy Hold Sell Large Caps (>US$1bn) >15% 5-15% <5% Mid/Small Caps (<US$1bn) >25% 5-25% <5%

Anand Rathi Research Ratings Distribution (as of 29 Oct 2012) Buy Hold Sell Anand Rathi Research stock coverage (155) 65% 25% 10% % who are investment banking clients 5% 3% 0% Other Disclosures This report has been issued by ARSSBL which is a SEBI regulated entity, and which is in full compliance with all rules and regulations as are applicable to its functioning and governance. The investors should note that ARSSBL is one of the companies comprising within ANAND RATHI group, and ANAND RATHI as a group consists of various companies which may include (but is not limited to) its subsidiaries, its affiliates, its group companies who may hold positions, views, stakes and may service the companies covered in this report independent of ARSSBL. Investors are cautioned to be aware that there could arise a potential conflict of interest in the views held by ARSSBL and other companies of Anand Rathi who maybe affiliated, connected or catering to the companies mentioned in the Research Report; even though, ARSSBL and Anand Rathi are fully complaint with all procedural and operational regulatory requirements. Thus, investors should not use this as a sole basis for making their investment decision and should consider the recommendations mentioned in the Research Report bearing in mind the aforementioned.

Further, the information herein has been obtained from various sources which we believe is reliable, and we do not guarantee its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes an offer, or an invitation to make an offer, to buy or sell any securities or any options, futures or other derivatives related to such securities (hereinafter referred to as “Related Investments”). ARSSBL and/or Anand Rathi may trade for their own accounts as market maker / jobber and/or arbitrageur in any securities of the companies mentioned in the Research Report or in related investments, and may be on taking a different position from the ones which haven been taken by the public orders. ARSSBL and/or Anand Rathi and its affiliates, directors, officers, and employees may have a long or short position in any securities of the companies mentioned in the Research Report or in Related Investments. ARSSBL and/or Anand Rathi, may from time to time, perform investment banking, investment management, financial advisory or any other services not explicitly mentioned herein, or solicit investment banking or other business from, any entity and/or company mentioned in this Research Report; however, the same shall have no bearing whatsoever on the specific recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the other companies of Anand Rathi, even though there might exist an inherent conflict of interest.

Furthermore, this Research Report is prepared for private circulation and use only. It does not have regard to the specific investment objectives, financial situation and the specific financial needs or objectives of any specific person who may receive this Research Report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this Research Report, and, should understand that statements regarding future prospects may or may not be realized, and we can not guarantee the same as analysis and valuation is a tool to enable investors to make investment decisions but, is not an exact and/or a precise science. Investors should note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Past performance is not necessarily a guide to future performance. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investments mentioned in this report.

© 2012 Anand Rathi Shares and Stock Brokers Limited. All rights reserved. This report or any portion thereof may not be reprinted, sold or redistributed without the prior written consent of Anand Rathi Shares and Stock Brokers Limited.

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


Education

UpdateIndia I Equities

Key financials (YE: Mar) FY11 FY12 FY13e FY14e FY15e

Sales (`m) 392 772 1,135 1,784 2,531

Net profit (`m) 92 217 333 548 818

EPS (`) 3.8 6.4 8.9 14.7 21.9

Growth (%) 156.5 67.9 38.6 64.6 49.3

PE (x) 67.4 40.2 29.0 17.6 11.8

PBV (x) 5.1 3.4 2.9 2.3 2.0

RoE (%) 9.6 11.4 11.2 14.5 17.9

RoCE (%) 11.8 16.0 16.9 21.6 26.7

Dividend yield (%) - 0.4 0.4 0.4 0.4

Net gearing (%) 13.1 (10.7) (12.2) (23.9) (26.6)


`

Rating: Hold Target Price: `280

Share Price: `258

Key data THEAL IN / THEA.BO52-week high / low `279 / `140Sensex / Nifty 19392 / 59013-m average volume US$0.3m Market cap `8.8bn / US$159.1m Shares outstanding 34.1m

Shareholding pattern (%) Sep '12 Jun '12 Mar '12

Promoters 29.60 29.60 29.60 - of which, Pledged - - -Free Float 70.75 70.40 70.40 - Foreign Institutions 4.88 2.92 2.56 - Domestic Institutions 7.23 7.41 7.30 - Public 58.64 60.07 60.54

Estimates revision (%) FY13e FY14e FY15e

Sales - 3.0 0.5EBITDA - 2.0 (0.4)EPS (5.5) 0.1 (4.9)Target multiple (x) - - -

Change in Estimates Target Reco

6 December 2012

TreeHouse Education and Accessories

Fund infusion to fuel growth; positives priced in; Hold

TreeHouse Education and Accessories’ preferential allotment would bring it `812m (~10.8% dilution). Promoter holding would rise two percentage points to 31.21%. Net cash and cash equivalents (~`412m, `11 a share) by end-FY13 would aid organic growth and M&A opportunities. Though we raise our price target to `280, on the rich valuations we have a Hold call on the stock.

Fund Infusion. Via preferential allotment to the promoters (`400.7m), to Aditya Birla PE (`311.6m) and to ON Mauritius (`100.2m), TreeHouse Education and Accessories have raised `812m (a 10.6% dilution). Promoters have been issued warrants requiring them to pay `100.2m (25%) now and the rest in the next 18 months. Shares have been issued to the Funds; hence full payment would be made on allotment. The subscription will take place at `222.60 a share. Post-funding, equity dilution will be ~10.8%; however, promoter holding would increase by nearly two percentage points and climb to 31.21%.

Enough cash to grow. Net cash and cash equivalents would be ~`412m (`11 a share) by end-FY13. This would help the company’s organic growth and its search for M&A opportunities.

Change in estimates. While our operating estimates for FY13 hold good, we expect the `512m infusion to lower the interest burden and help pay off debt. Further in FY14 the balance `300m from the promoters will be received. The `812m will aid organic and inorganic growth. We trim our EPS estimates to account for the dilution due to the preferential issue.

Valuation. On the rich valuations, we downgrade the stock to a Hold. We, nevertheless, using the DCF-based method raise our price target to `280 at which the stock would trade at a PE of 19x FY14e and 13x FY15e earnings. Risks. Available skilled manpower; geographical concentration, regulatory risks for the K-12 segment.

Relative price performance

Tree House

Sensex

140

170

200

230

260

Dec

-11

Jan-

12

Feb-

12

Mar

-12

Apr-1

2

May

-12

Jun-

12

Jul-1

2

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12

Sep-

12

Oct

-12

Nov

-12

Dec

-12

Source: Bloomberg

6 December 2012 TreeHouse Education and Accessories – Fund infusion to fuel growth; positives priced in; Hold


Quick Glance – Financials and ValuationsFig 1 – Income statement (`m)

Year-end: Mar FY11 FY12 FY13e FY14e FY15e

Net revenues 392 772 1,135 1,784 2,531 Revenue growth (%) 83.6 96.8 47.0 57.2 41.9 - Op. expenses 223 352 523 840 1,196 EBIDTA 169 420 612 944 1,336 EBITDA margin (%) 43.1 54.4 53.9 52.9 52.8 - Interest expenses 12 65 51 2 2 - Depreciation 40 78 116 164 188 + Other income 19 39 52 40 75 - Tax 44 99 164 270 403 Effective tax rate (%) 32.5 31.4 33.0 33.0 33.0 Reported PAT 92 217 333 548 818 +/- Extraordinary items - - - - -+/- Minority interest - - - - -Adjusted PAT 92 217 333 548 818 Adj. FDEPS (`/share) 3.8 6.4 8.9 14.7 21.9 Adj. FDEPS growth (%) 156.5 67.9 38.6 64.6 49.3 Source: Company, Anand Rathi Research

Fig 3 – Cash-flow statement (`m) Year-end: Mar FY11 FY12 FY13e FY14e FY15e

PAT 92 217 333 548 818 + Non-cash items 54 93 116 164 188 Cash profit 146 309 449 712 1,006 - Incr./(Decr.) in WC 45 640 569 128 281 Operating cash-flow 101 (330) (120) 584 725 - Capex 693 356 223 242 363 Free cash-flow (591) (686) (343) 342 362 - Dividend - 39 44 44 44 + Equity raised 437 1,160 525 287 0 + Debt raised 346 49 (500) - - - Investments 16 285 (312) - - - Misc. items - - - - - Net cash-flow 175 198 (50) 586 319 + Op. cash & bank bal. 103 279 477 427 1,013 Cl. cash & bank bal. 279 477 427 1,013 1,331Source: Company, Anand Rathi Research

Fig 5 – Valuation chart (EV/EBITDA)

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Share capital 240 337 374 374 374Reserves & surplus 986 2,227 3,005 3,796 4,570Net worth 1,226 2,564 3,378 4,169 4,943Minority interest - - - - -Total debt 466 515 15 15 15Def. tax liab. (net) 18 33 33 33 33Capital employed 1,711 3,112 3,426 4,217 4,991Net fixed assets 1,288 1,566 1,673 1,750 1,925Investments 26 312 - - - - of which, Liquid 26 250 - - -Net working capital 117 757 1,326 1,454 1,735Cash and bank balance 279 477 427 1,013 1,331Capital deployed 1,711 3,112 3,426 4,217 4,991Net debt 161 (212) (412) (998) (1,316)WC days 109 381 427 298 250Book value (`/sh) 51.1 76.0 90.4 111.6 132.3Source: Company, Anand Rathi Research

Fig 4 – Ratio analysis @ `258 Year-end: Mar FY11 FY12 FY13e FY14e FY15e

CEPS (`/share) 5.5 8.7 12.0 19.1 26.9 Cash / (debt) (`/share) (6.7) 6.3 11.0 26.7 35.2 P/E (x) 67.4 40.2 29.0 17.6 11.8 P/B (x) 5.1 3.4 2.9 2.3 2.0 P/C (x) 47.1 29.5 21.5 13.5 9.6 EV/sales (x) 22.6 11.3 7.3 4.3 2.9 EV/EBITDA (x) 52.6 20.8 13.5 8.2 5.5 EBIT/sales (%) 37.9 49.3 48.2 45.9 48.3 Sales/average CE (x) 0.3 0.3 0.4 0.5 0.6 Adj. RoCE (%) 11.8 16.0 16.9 21.6 26.7 Avg. CE/ avg. eq. (x) 1.3 1.3 1.1 1.0 1.0 PBT/EBIT (x) 0.9 0.8 0.9 1.0 1.0 PAT/PBT (x) 0.7 0.7 0.7 0.7 0.7 Adj. RoE (%) 9.6 11.4 11.2 14.5 17.9 Dividend yield (%) - 0.4 0.4 0.4 0.4Source: Company, Anand Rathi Research

Fig 6 – Revenue break-up

0

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3,000

FY11

FY12

e

FY13

e

FY14

e

FY15

e

Own Pre-schools Franchised K-12 & consulting

(`m)




Fund infusion Treehouse’s preferential allotment to its promoters (`400.7m), Aditya Birla PE (`311.6m) and ON Mauritius (`100.2m) would bring in `812m. The promoters have to pay 25% now (`100.2m). Shares have been issued to the Funds; full payment will come on allotment. With this ~10.8% dilution, the promoter holding will rise nearly two percentage points to 31.21%. Net cash and cash equivalents (~`412m, `11 a share) by end FY13 would aid in organic growth and M&A opportunities.

Fund infusion

Via preferential allotment to the promoters (`400.7m), to Aditya Birla PE (`311.6m) and to ON Mauritius (`100.2m), TreeHouse will raise `812m. The promoters have been issued warrants which require them to pay 25% or `100.2m now and the balance in the next 18 months. The Funds have been issued shares and full payment will come in on allotment. The subscription will take place at `222.60 a share.

Promoter holding to increase

Although after this round of funding, equity has been diluted ~10.8%, the promoter holding would rise nearly two percentage points and stand at 31.21%.

Enough cash to augment growth

The company would have net cash and cash equivalents of ~`412m (`11 a share) by end-FY13. This would help organic growth as well as scouting for M&A opportunities.

Fig 7 – Cash / Debt per Share. FY07 FY08 FY09 FY10 FY11 FY12 FY13e FY14e FY15e

Cash/Bank & Liquid assets 3 2 21 114 305 727 427 1,013 1,331

Debt 4 2 0 120 466 515 15 15 15

Net Cash / Debt (1) 0 21 (6) (161) 212 412 998 1,316

Cash / (debt) (`/share) (79.0) 0.0 1.4 (0.4) (6.7) 6.3 11.0 26.7 35.2


Business dynamics robust

We believe that pre-school business dynamics in general are intact especially on the implementation of the Right to Education (RTE) Act by state governments. We expect a general shortage of seats in the nursery and KG sections by more than 25% in cases of those integrated pre-schools which are a part of K-12 schools. This in turn would see more students preferring standalone pre-school chains such as Treehouse.



Change in estimates and target We raise our FY13, FY14 and FY15 net profit estimates 4.8%, 11% and 5.4% respectively. However, we reduce our FY13 and FY15 EPS estimates 5.5% and 4.9% to respectively `8.9 and `21.9. While we expect it to be flat in FY14 at `14.7. We raise our price target to `280 and downgrade the stock to a Hold.

Major estimate changes

While our operating estimates for FY13 hold good, we expect the `512m infusion to reduce the interest burden and help pay off debt. Further in FY14 the balance `300m from the promoters will be received. The combined `812m will help organic and inorganic growth. We trim our EPS estimates to account for the dilution due to the preferential issue.

Fig 8 – Change in estimates FY13e FY14e FY15e

(`m) Old New % chg Old New % chg Old New % chg

Sales 1,135 1,135 - 1,732 1,784 3.0 2,518 2,531 0.5

EBITDA 612 612 - 925 944 2.0 1,341 1,336 (0.4)

EBITDA margin (%) 53.9 53.9 - 53.4 52.9 (50.0) 53.3 52.8 (50.0)

Consolidated PAT 318 333 4.8 494 548 11.0 776 818 5.4

FDEPS (`) 9.4 8.9 (5.5) 14.6 14.7 0.1 23.0 21.9 (4.9)

Source: Anand Rathi Research

Valuation

On the rich valuations, we downgrade the stock to a Hold. We raise our price target however, using the DCF-based method, to `280. At this target, the stock would trade at a PE of 19x FY14e and 13x FY15e earnings (Fig 9).

Risks

Geographical concentration. Most of the company’s operations are centered around Mumbai (more than 115 of its centres are in this city). Hence, any disruption in operations or competition would significantly cut into its overall operations. The company is aware of this and has entered new markets: Kolkata (20 centres), Nagpur, Ranchi and Guwahati.

Attrition. Attrition in the senior management/content/teaching team could seriously hit the business. While senior members of the team hold shares, management is keen on issuing ESOPs to lower-level employees as well.

Regulatory risk in formal education. Any changes in regulatory norms in formal education (K-12) may significantly eat into earnings.



Fig 9 – DCF-based valuation Year-end: Mar FY12 FY13e FY14e FY15e FY16e FY17e FY18e FY19e FY20e FY21e FY22e FY23e

FCFF

Revenues (`m) 772 1,135 1,784 2,531 3,592 5,096 7,104 9,725 13,070 17,239 22,307 28,306

Growth (%) 96.8 47.0 57.2 41.9 41.9 41.9 39.4 36.9 34.4 31.9 29.4 26.9

EBITDA (`m) 420 612 944 1,336 1,859 2,587 3,535 4,694 6,112 7,759 9,650 11,750

Margins (%) 54.4 53.9 52.9 52.8 51.8 50.8 49.8 48.3 46.8 45.0 43.3 41.5

Depreciation/amortisation (`m) 78 116 164 188 146 171 205 248 304 374 458 558

Interest expenses (`m) 65 51 2 2 2 2 2 2 2 2 2 2

Other income (`m) 39 52 40 75 75 75 75 75 75 75 75 75

PBT (`m) 316 497 817 1,220 1,786 2,489 3,404 4,518 5,881 7,459 9,265 11,265

Tax (`m) 99 164 270 403 589 821 1,123 1,491 1,941 2,462 3,058 3,718

PAT (before MI) (`m) 217 333 548 818 1,197 1,668 2,281 3,027 3,940 4,998 6,208 7,548

Add: depreciation (`m) 78 116 164 188 146 171 205 248 304 374 458 558

Add: interest*(1-tax rate) (`m) 45 34 1 1 1 1 1 1 1 1 1 1

Cash profit (`m) 339 483 713 1,007 1,344 1,840 2,486 3,277 4,245 5,372 6,667 8,107

Increase/decrease in working capital (`m) 640 569 128 281 -1,538 82 110 144 183 228 278 329

Operating cash flow (`m) -300 -86 585 726 2,882 1,758 2,376 3,133 4,062 5,144 6,389 7,778

Capex (`m) 356 223 242 363 353 502 669 874 1,115 1,390 1,689 2,000

FCFF (`m) -656 -309 344 364 2,529 1,256 1,707 2,260 2,947 3,754 4,700 5,778

Less: interest*(1-tax rate) (`m) 45 34 1 1 1 1 1 1 1 1 1 1

FCFE (`m) -701 -343 342 362 2,528 1,255 1,706 2,258 2,946 3,753 4,699 5,777

Year of discounting (no.) 1 2 3 4 5 6 7 8 9 10

Discounted FCFF (`m) -656 -309 302 281 1,716 749 895 1,041 1,193 1,336 1,469 1,588

Discounted FCFE (`m) -701 -343 301 280 1,715 748 894 1,040 1,192 1,334 1,468 1,586

Calculation WACC

CMP (`) 258

Equity (market cap) (`m) 9,640 Cost of equity (%)

Debt (FY13e) (`m) 15 278 11.8 12.8 13.8 14.8 15.8

Risk-free rate - Rf (%) 9.0 3 307 285 265 247 230

Rm - market return (%) 15.0 4 316 292 271 251 234

Beta (B) 0.8 5 329 301 278 257 239

Cost of equity (ke) (%) 13.8 6 345 314 287 264 245

Cost of debt (kd) (%) 12.0

Term

inal

gro

wth

(%

)

7 369 330 299 273 252

Wd (%) 0.2

We (%) 99.8 WACC (%) 13.8 Growth rate (g) (%) 5.0

FCFF in 2023e (`m) 5,778

Terminal value of firm (`m) 3,944

Present value of terminal value(`m) 1,084

NPV of FCFF (`m) 9,017

Net debt (`m) -274

Intrinsic value (`m) 10,374 Outstanding shares (no. m) 37.4

Value per share (`) 278




Fig 10 – Income statement (`m) Year-end: Mar FY11 FY12 FY13e FY14e FY15e

Revenues 392 772 1,135 1,784 2,531

Growth (%) 83.6 96.8 47.0 57.2 41.9

Expenses 223 352 523 840 1,196

As % of revenue 56.9 45.6 46.1 47.1 47.2

Center operating exp 102 188 274 426 602

As % of revenue 26.0 24.4 24.1 23.9 23.8

Employee cost 49 96 144 231 328

As % of revenue 12.5 12.5 12.7 13.0 13.0

Other costs 72 68 105 183 266

As % of revenue 18.4 8.7 9.2 10.2 10.5

EBITDA 169 420 612 944 1,336

EBITDA margin (%) 43.1 54.4 53.9 52.9 52.8

Interest 12 65 51 2 2

Depreciation 40 78 116 164 188

Other income 19 39 52 40 75

As % of investments 18.3 14.2 17.1 11.1 12.8

PBT 136 316 497 817 1,220

Tax 44 99 164 270 403

Effective tax rate (%) 32.5 31.4 33.0 33.0 33.0

PAT 92 217 333 548 818

PAT margin (%) 23.4 28.1 29.3 30.7 32.3

PAT growth (%) 253.8 135.6 53.6 64.6 49.3

Reported PAT 92 217 333 548 818

Shares as per BS (y/e) (nos. m) 24.0 33.7 37.4 37.4 37.4

Diluted shares (nos. m) 24.0 33.7 37.4 37.4 37.4

FDEPS (`) 3.8 6.4 8.9 14.7 21.9

Growth (%) 156.5 67.9 38.6 64.6 49.3

Dividend - 34 37 37 37

DPS (Rs) - 1.0 1.0 1.0 1.0

Dividend Tax - 6 6 6 6

Dividend payout (%) - 15.6 11.2 6.8 4.6

Extra ordinary & Prior period adjustments - - - - -

Transferred to reserves 92 177 289 504 774



Equity 240 337 374 374 374

Reserves (including warrants) 986 2,227 3,005 3,796 4,570

Shareholders' funds 1,226 2,564 3,378 4,169 4,943

Debt 466 515 15 15 15

Minority interest

Capital employed 1,693 3,079 3,393 4,184 4,958

Fixed assets 1,288 1,566 1,673 1,750 1,925

Investments 26 312 - - -

Deferred tax assets (18) (33) (33) (33) (33)

Cash 279 477 427 1,013 1,331

Working capital 117 757 1,326 1,454 1,735

Capital deployed 1,693 3,079 3,393 4,184 4,958




Fig 12 – Consolidated cash-flow (`m) Year-end: Mar FY11 FY12 FY13e FY14e FY15e

PAT 92 217 333 548 818 + non-cash expense 54 93 116 164 188 Cash profit 146 309 449 712 1,006 - Increase/(decrease) in working capital 45 640 569 128 281 Operating cash flow 101 (330) (120) 584 725 - Capex 693 356 223 242 363 Free cash flow (591) (686) (343) 342 362 + Equity raised 437 1,160 525 287 0 + Debt raised 346 49 (500) - -- Investments 16 285 (312) - -- Dividend paid - 39 44 44 44 - Misc. expense - - - - -Net change in cash 175 198 (50) 586 319 Opening cash 103 279 477 427 1,013 Closing cash 279 477 427 1,013 1,331


Fig 13 – Key ratios @ `258 Year-end: Mar FY11 FY12 FY13e FY14e FY15e

Diluted shares (m) 24.0 33.7 37.4 37.4 37.4

FDEPS (`) 3.8 6.4 8.9 14.7 21.9

CEPS (`) 5.5 8.7 12.0 19.1 26.9

BV (`) 51.1 76.0 90.4 111.6 132.3 P/E (x) 67.4 40.2 29.0 17.6 11.8 P/C (x) 47.1 29.5 21.5 13.5 9.6 P/B (x) 5.1 3.4 2.9 2.3 2.0 DPS (Rs) - 1.0 1.0 1.0 1.0 Dividend yield (%) - 0.4 0.4 0.4 0.4 Dividend payout (%) - 15.6 11.2 6.8 4.6 EV/Sales (x) 23 11 7 4 3 EV/EBITDA (x) 52.6 20.8 13.5 8.2 5.5 EBIT/sales (x) 37.9 49.3 48.2 45.9 48.3 Sales/avg.CE (x) 0.3 0.3 0.4 0.5 0.6 Debt/equity (x) 0.4 0.2 0.0 0.0 0.0 ROCE (%) 11.8 16.0 16.9 21.6 26.7 Avg. CE/avg. equity (x) 1.3 1.3 1.1 1.0 1.0 PBT/EBIT (x) 0.9 0.8 0.9 1.0 1.0 PAT/PBT (x) 0.7 0.7 0.7 0.7 0.7 ROE (%) 9.6 11.4 11.2 14.5 17.9 Net gearing (%) 13.1 (10.7) (12.2) (23.9) (26.6)Working capital turnover (days) 109 358 427 298 250


Appendix Analyst Certification The 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 research analyst(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 by stringent internal regulations and also legal and statutory requirements of the Securities and Exchange Board of India (hereinafter “SEBI”) and the analysts’ compensation are completely delinked 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. Important Disclosures on subject companies Rating and Target Price History (as of 5 December 2012)

Tree House

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280

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Date Rating TP (`)

Share Price (`)

1 29-Dec-11 Buy 225 168 2 12-Nov-12 Buy 260 228

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.









Nifty Dec-12 Option Equilibrium stands at 5860.

Nifty A-T-M implied volatilities stand at 16%.

Trading Ban KBL, PF, SUEL & WLCO.

NIFTY ended the day approximately 0.2% higher. Market volumes (Rs1,225bn) were up 20%.

Session Recap Fund Flow FIIs were net buyers of +Rs8.8bn in provisional cash, but were net sellers of (-Rs3.2bn) in directional futures respectively. They opened fresh longs +0.2m shrs & shorts (-0.3m shrs) in index futures. DFIs were net sellers (-Rs6.4bn) in provisional cash.

NIFTY Dec-12 is trading at 40 pts premium to spot. Nifty OI was up approximately 0.7m shrs. Major option changes were in the Dec-12 6200CE (+0.8m shrs),Dec-12 6300CE (+0.6m shrs),Dec-12 6100CE (+0.5m shrs),Dec-12 6000PE (+0.5m shrs),Dec-12 5600PE (+0.4m shrs).

Nifty F&O

Fresh Long: ALBK, NMDC, EXID, STLT, CESC, IVRC & SESA. Fresh Short: RPWR, HZ, INFO, MM. Long Closure: KBL, JPVL & OBC. Short Covering: CRG.

SSF Open Interest changes

India Derivatives Flash

Stock Futures OI Money Flows (Rs mn)

VOLT (5.5x), 0 (2.9x), DIVI (2.9x), BOI (2.8x), ALBK (2.5x), TTMT/A (2.5x), SHRS (2.4x), IIB (2.4x), PTCIN (2.2x), CLGT (2.1x), JPA (1.8x), HNDL (1.8x), GUJS (1.7x), TTAN (1.7x) & BOB (1.6x).

Delivery Spikes

6-December-2012

Futures OI is up by Rs15.4bn (+3.1%) and constitutes 37% of overall market-wide position.

Anand Rathi Shares and Stock Brokers, its affiliates and subsidiaries, do and seek to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Disclosures and analyst certifications are located in Appendix.

Appendix Analyst Certification The 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 research analyst(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 by stringent internal regulations and also legal and statutory requirements of the Securities and Exchange Board of India (hereinafter “SEBI”) and the analysts’ compensation are completely delinked 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.









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