institutional equity research bharat...

INSTITUTIONALEQUITYRESEARCH

Page|1|PHILLIPCAPITALINDIARESEARCH

BharatElectronics(BHEIN)Highvisibilityonorders+robustFCF=PremiumvaluationsINDIA|CAPITALGOODS|INITIATINGCOVERAGE

19June2017

WeinitiatecoverageonBharatElectronics(BEL),agovernmentowneddefencecompany,withaBUYratingandatargetpriceofRs220.Overthenextfiveyears,BELoffershighestvisibility on orders with limited susceptibility to competition compared to any othercapitalgoods company in our coverage. A 15% CAGR in FY1820 earnings, despite a(cyclically)highbase inFY17, coupledwitha4x increase inFCF (ex customeradvances)shouldhelpBELsustainitspremiumvaluations.

US$11bnorderopportunityinFY1820vs.US$6bninFY1517;limitedcompetitionWeestimateaUS$23bnorderopportunity forBELover thenext tenyears,ofwhichUS$11bnisrealisableoverthenextthreeyears.However,wehaveconservativelyassumedUS$7.7bn inourestimates,which still impliesa31%growthover theUS$5.9bnof inflows inFY1517.BELsR&Dexpenditure(9%ofrevenue),strongworkingrelationshipwithdefencelabs (DRDO),anddeepsupplychain (+13,000vendors)willhelpcountercompetition fromtheprivatesector.

RevenueCAGRtoaccelerateto13%inFY1820vs.5.6%inFY1116WeexpectBELsrevenuegrowthtobesubstantiallyhigheroverthenextthreeyears(13%CAGR) against amodest6%CAGRover FY1116.Managementsnet sales guidanceofRs100bn in FY18 implies 16% yoy growth over FY17s high base. Pace of executionwill befaster,aslargeprojectswoninthepasttwoyearsstartcontributingandcertainshortcycleprojectssuchaselectronicvotingmachinesandhandheldthermalimagersalsochipin.

Aggressivelyexpecta300bpsmargincontractioninFY1720withupsideriskstoearningsBELsEBITDAmarginsexpandedby11percentagepointsbetweenFY1317onaproductsheavy salesmix,andareata cyclicalhigh.However, from FY18, the shareof integrationprojects (where BELs valueadd is relatively lower than in products orders) in saleswillincrease. This, coupledwith the increase in employee costs due to 7th paycommissionrelatedwagehikes,shouldleadtoadownwardpressureonmarginsoverFY1820.However,large integrationprojectssuchas IACCS,Akash(sevensquadrons),andLRSAM(fourships),willaccountforjust40%ofBELsFY18orderbookourdetailedprojectwisemarginanalysissuggeststhattheweightedaveragemarginsoftheseprojectsshouldbe15%while60%oftheorderbook (thebalance) shouldhavemarginsof~22%.Thismeansmarginsof19.1%,implying only a 200bps margin contraction vs. FY17 while we have built in a 300bpscontraction.Hence,ourestimateof15%CAGRinFY1820earningshasanupsiderisk.

4xincreaseinFCFoverFY1820vs.FY1417,RoEstabledespitehighercashWe expect BELs free cash flow (FCF) to increase by 4x in FY1820 vs. FY1417, despiteexcluding the impact of customer advances and accounting for higher capex over thisperiod. FCF/PAT should increase to 65% in FY20 from 20% in FY16. RoEs should remainstableat19.4%betweenFY17andFY20,ashigherfixedassetturnovershouldhelpmaintainRoEs,despitehighercashbalances(93%ofnetworthinFY20vs.50%inFY17).

Valuation:Highcorrelationtoorderinflows;initiatewithBUYratingandTPofRs220BELhasseenareratingoverthepastfouryearsduetoanimprovingenvironmentfororderinflowsandpositivesurpriseinearningsduetoanonlinearexpansioninmargins.BELsPEhasa0.8xcorrelationtoorder inflowsandshouldremainthemaindriverof itsvaluations.WeexpectBELtoretain itspremiumvaluations,as itexceedsexpectationsonneworders,execution,andmargins,andgenerateshigh freecash.Amongkeymonitorableswouldbethe extentofmargin contraction,whichwebelieve shouldbe lower thanwhatwehaveincorporatedintoourestimates.Consensusseemstobeoverestimatingthenegativeimpactofintegrationprojectsonmargins.WeinitiatewithaBUYratingandtargetpriceofRs220,whichisbasedon25xourFY20earningsonhighordervisibility.Thestockcurrentlytradesat23x/19xourFY19/20EPS.

BUYCMPRS168TARGETRS220(+31%)COMPANYDATAO/SSHARES(MN): 2234MARKETCAP(RSBN): 375MARKETCAP(USDBN): 5.852WKHI/LO(RS): 187/118LIQUIDITY3M(USDMN): 12.2PARVALUE(RS): 1SHAREHOLDINGPATTERN,% Mar17 Dec16 Sep16PROMOTERS: 68.2 74.4 75.0FII/NRI: 6.7 4.3 4.0FI/MF: 17.7 15.8 14.5NONPRO: 0.7 0.4 1.3PUBLIC&OTHERS: 6.7 5.2 5.2PRICEPERFORMANCE,%

1MTH 3MTH 1YRABS 7.9 1.8 32.4RELTOBSE 9.6 3.4 15.1PRICEVS.SENSEX

Source:PhillipCapitalIndiaResearchKEYFINANCIALSRsmn FY17 FY18E FY19ENetSales 86,119 100,063 113,077EBIDTA 18,327 18,561 20,642NetProfit 16,034 14,865 16,578EPS,Rs 7.2 6.6 7.4PER,x 23.4 25.6 22.8EV/EBIDTA,x 18.4 17.2 14.7P/BV,x 3.9 3.2 2.7ROE,% 19.4 18.6 18.8

Source:PhillipCapitalIndiaResearchEst. JonasBhutta(+912262464119)[email protected](+912262464120)[email protected]

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BHARATELECTRONICS INITIATINGCOVERAGE

FocuschartsandtablesWebuildin31%growthinordersoverFY1820vs.FY1517; Paceofexecutiontoincrease:13%CAGRinFY1820vs.6%couldbepotentiallyevenhigher overFY1116

MarginsshouldberesilientafteradeclineinFY18despite 4xincreaseinFCFexcustomeradvancesoverFY1820highershareofintegrationsales

ROEsshouldbestableat20%despitehighercashbalances BELsPEishighlycorrelatedtoorderinflows

Source:Company,PhillipCapitalIndiaResearchEstimates

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India:DefencesectoroverviewIndiadefencespendingis1.5%ofGDPIndiascapitalinvestmentondefenceequipmenthasaveragedUS$12bnforthelastfiveyears(FY1418,meagre2%CAGR)andaccountsfor1.5%ofGDP.Indiasdefencecapitalexpenditureis1.5%ofGDP whiletheglobalaverageis2.5%


90%ofIndiasdefencebudgetisallocatedtocommitted Budgetgrowthisconstrained,importsubstitutionliabilities willbethetrend

Source:SIPRI,MoD,PhillipCapitalIndiaResearchEstimates

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AboutBELBEL:IndiaspremierdefenceelectronicscompanyBELisagovernmentownedleadingdefenceelectronicscompany.Setupin1954,BELnow produces stateofart equipment in defence communication, radar, navalsystems, electronicwarfare, electro optics, and C4I systems. It alsomanufacturescivilianproductssuchaselectronicvotingmachines.BELhasastrongmanufacturingbase with nine factories across India. 47% of its 9,700 employees arescientists/engineersanditinvests79%ofitsannualrevenuesonR&D.BEL:Keyproductssegments

Source:Company,PhillipCapitalIndiaResearch

Radars Missile Systems Defence Communications Electronic Warfare & AvionicsNetwork Centric Systems

(C4ISR)

Tank Electronics & Gun Weapon System upgrades Civilian productsElectro OpticsNaval Systems

BHARAT ELECTRONICS



Moats:R&Dfocus,DRDO,deepsupplychain47%ofBELsworkforceconsistsscientist/engineersOverthepastfifteenyears,whileBELstotalemployeebasehasreducedby30%,buttheshareofitstechnicalemployees(scientistsandengineers)increasedto47%from9% inthisperiod.Typically, itsemployeeshaveanaverageexperienceof>10years,andthishasenabledthecompanytonotonlyrestrictlossofknowledgeuponretrials,butalsoallowedittoadoptnewtechnologies.Technicalemployeesaccountfor47%ofitsworkforceinFY17vs.9%inFY03

Source:Company,PhillipCapitalIndiaResearchEstimatesInvests79%ofrevenuesonR&DThe everincreasingneed fornewerdefence technologies, coupledwith effortsonlocalisation of technologies that come under Transfer of Technology (ToT),necessitates investments inR&D.Onanaverage,BEL invests79%of itsrevenueonR&D,whichhelpsgarner4060%ofitsannualrevenues.BELinvested9%ofitsrevenuesonR&DinFY17


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ProductsdevelopedbyBELinthepasttwoyears,someofwhichhavealreadytranslatedintoordersFY16 FY153DSurveillanceRadar SchilkaAirDefenceSystemforArmyLBand2DAirSurveillanceRadarforNavy, LynxU1MODCoastalSurveillanceRadar,SatcomTerminals SoftwareDefinedRadioforNavy,Communication

Network(LinkIIModIII)forNavySoftwareDefinedRadio(NavalVersionNC),multimodemultibandshipbornetwochannelV/UHFradios

ExportversionofUnitLevelSwitchBoard(ULSB)Mk.III

AdvancedCompositeCommunicationSystem(ACCS),

ShipDataNetwork(SDN)forP16Aship

IntegratedSonarSuiteforSubmarines TestBedforAirDefenceControlandReportingSystem

IntegratedEWSystemforMountainousTerrain XbandTRmoduleGunnerSightforT90,DriverSightforMBTArjun

Source:Company,PhillipCapitalIndiaResearchStrongworkingrelationshipwithDRDOBEL has historicallyworked closelywith Indias defence laboratories, especially onprojects in radars, electronic warfare, andmissile systems. In FY16, products codeveloped byBEL andDRDO accounted for 47% of its revenues. This relationshiphelpsBELstayaheadofthecurveonfutureproductsthatthearmedforcesrequire.BELderives>80%ofitsrevenuesfromproductsthatitdevelopedorwithDRDO

Source:Company,PhillipCapitalIndiaResearchDeepsupplychainBELhasasupplychainofmorethan13,000vendors.Suchadeepvendorbase isacompetitiveadvantageagainstrelativelynewprivatesectorplayers,whowillrequirecontinuityinordersandover510yearstodevelopsuchasupplierbase.

BELhas>13,000vendors,77%ofwhicharedomesticcompanies No. %oftotalIndian 10,095 77%Foreign 3,026 23%Total 13,121


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FiveyearcapexplantohelpmaintainleadinmissilesystemsandoptronicsBELhasoutlinedacapexofRs23bnoverFY1721vs.Rs15bnincurredoverFY1216.It has envisaged amajor investment of Rs 5bn for a defencesystem integrationfacility in Andhra Pradesh, which will enable BEL to expand its missile systembusiness.Inaddition,thecompanywilladoptanewstateoftheartXR5technologyforimageintensifiertubestobeusedinpassivenightvisiondevices.BEL:areasofcapexovernextfiveyears Defencesystemsintegrationcomplex Microchannelplatetechnologyfornightvisiondevices Cooledthermalimagertechnology Optoelectronicsmanufacturingfacility ImageintensifiertubeXR5technology CentreforhighpowerlaserIndiasspendonmanagingobsolescenceisalmostacaptiveopportunityforBELTheidealsplitofdefencebudgetsindevelopedcountriesis25:50:25onobsolescencemanagement:510yearrequirement:stateofart.However,inIndiascase,theratioisskewed towardsupgradingexistingproducts tomanage technologyobsolescence(60%)due to inadequatebudgets fornewproducts (30%)andstateofart research(10%).DuetoBELsinvolvementinthe1stgenerationversionofmostradar,communicationsystems, and electronic warfare systems, it becomes a beneficiary of systemupgrades,whichtypicallyaccountfor3040%ofitsannualorderinflow.Thispieceofthe business is mainly free of competition. In addition, the company is alsodevelopingnewproducts tomeetdemands inmissile systems, radars,and tacticalcommunication,whichwillbegrowthareasforthenextfiveyears;heretoo,weseelimitedcompetition.Indiaallocates



RobustorderinflowprospectsinFY182031%growthovertheprecedingthreeyearsBased on our channel checks, we have identified Rs 687bn (US$ 11bn) of orderopportunitiesforBELoverthenextthreeyears,mostlyonnomination,with limitedprivatesector competition. However, we build in Rs 500bn (US$ 7.7bn) into ourestimates for FY1820.We expect some project awards to be delayed by 1218monthsbecauseofgeneralelection(inFY20)andduetopaucityoffunds.EvenourlowerorderinflowestimatesforFY1820representsastrong31%growthoverFY1517.LargeprojectsthatwilldriveinflowinthenextthreeyearsareElectronicWarfaresystems (Rs140bn),MRSAM (Rs120bn),LRSAM (Rs100bn),andAkash forArmy&Airforce(Rs85bn).Systemsofsystemstodriveorders,accountingfor70%oforderopportunityBELsabilitytoexecutecomplexprogramshasimprovedovertime.Ithasproveditsability to integrate large systems. As a result, we expect almost 70% of orderopportunitiestobeforintegrationprojectswhiletherestwillbeforproducts.Webuildin31%growthinBELFY1820ordersvs.FY1517. WeestimatelowerordersinFY20becauseofHowever,thiscanbehigheriforderingtimelinesaremet generalelections

Source:Company,PhillipCapitalIndiaResearchEstimates70%oforderopportunitiesoverFY1820willbeforintegrationprojects

Source:PhillipCapitalIndiaResearch

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PaceofexecutiontopickupWeforecasta13%CAGRinFY1820revenuesoverahighbaseBEL surprised consensus in FY17 with a higherthanexpected revenue growth of17.5%yoyagainstitsoriginalexpectationof1012%yoy.StartofexecutionofcertainshortcycleproductsordersonreceivingBulkProductionClearances(BPCs)ledtothesurprise inFY17.ForFY18, themanagementexpectsRs100bn innetsales inFY18,whichimplies17%yoygrowth.Going forward, intoFY1820,weexpectRs40bn incremental revenue contributionfromthreemajorprogramsIACCS(Rs16bn),LRSAM(Rs17bn),andAkash(Rs7bn).In addition, BEL is supposed to supply Rs 24bn of Electronic VotingMachines bySeptember2018,whichshouldalsoaidsalesgrowthinFY18andFY19.WeexpectpaceofexecutiontoincreaseoverFY1820

Source:Company,PhillipCapitalIndiaResearchEstimatesIncrementalgrowthinrevenuestobemainlydrivenbyintegrationprojectsOrdervalue(Rsbn) FY17e FY18e FY19e FY20e FY21e FY22e FY23e FY24e FY25eTotalrevenuefromlargeprojects 2 24 36 42 68 82 55 55 47Incrementalrevenue 2 23 12 6 26 14 (27) (8)Systemrevenue 2 11 25 42 63 74 45 50 47Productrevenue 13 11 5 8 10 5 Systemrevenue%ofconsolsales 2% 11% 22% 33% 47% 50% 28% 31% 31%


BooktobillhasneverbeenaconcernforBELBELsFY17orderbook(Rs400bn) is4.8x itsrevenues,andhenceprovides longtermrevenue visibility. In addition, as we expect growth in orders in FY1819, itsorderbookshouldrisetoRs560bnbyFY19,whichwouldbe5xFY19sales.

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BELsorderbookis5xitsFY17revenues


MarginstoremainstrongafterFY18drag(unlikelastcycle)BELcurrentlyenjoyscyclicallyhighmargins...BELsEBITDAmarginsexpandedsharply(by11percentagepoints)intheinpastfiveyears(FY1317)aidedbyimprovingsalesmix.WeseetwotypesofmargindragsinFY1820In FY18, BEL will face increased cost pressures because of: (1) employee wagerevisionunderthe7thPayCommission,and(2)growingshareofintegrationprojectsinrevenues.Consequently,weestimatea300bpsdeclineinFY1720EBITDAmarginsto 18.5%. However, BEL has said that itwill be able to restrict the downside inmarginsto100150bpsduetothesecostpressures.The companys recurring employee cost (excluding the impact of provision forincrease in gratuity limit,which is onetime) should increase by 25% in FY18; thisshouldresultina130bpsdeclineinmargins.WealsoexpectexecutiononintegrationprojectssuchasIACCSandLRSAMtopickuppace in FY1820. These projects are expected to have lower grossmargins in theinitialperiodbecauseoflearningcurve(incaseofLRSAM)andahighportionofcivilconstruction(incaseofIACCS).WeestimateBELsgrossmarginstocontractto43.7%inFY20from49%inFY17.BELsemployeecostsshouldriseby25%yoyinFY18 Growingshareofintegrationprojectsinrevenuesshoulddueto7thPC leadtolowergrossmargins


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AfterasharpcontractioninFY18,nofurtherdeclineWebelievethatconsensusisundulyworriedaboutimpactofhigherintegrationsaleson BELs EBITDA margins. Based on our analysis of potential margins on threeintegration projects, viz., IACCS, LRSAM (four ships) and Akash (seven squadrons),whichwillaccount for40%ofBELsFY18orderbook,webelieve that theweightedaveragemarginsontheseprojectswouldbe15%.However,thebalanceorderbook(60%)wouldcommandmarginsof~22%therebythecompanywidemarginsshouldbe 19.1%. This implies a 200bps margin contraction over FY1720, compared to300bpsbuiltintoourestimates.Hence,webelievethatunlikeinthelastcycle(FY0813),wheremarginscontractedsharplyfromapeakof26%to10.5%duetopoorsalesmix, in the current environment, despite higher share of integration projects inrevenues,marginswillberesilient.Ouranalysislargeprojectsmarginssuggestsanupsiderisktoourestimates

IACCS Akash(7sqd) LRSAM(4ships)Ordervalue(Rsbn) 79 55 64Ordersas%ofFY18estimatedorderbook 17% 12% 14%%ofordervalueOutsourced 65% 60% 62%Coreproduct 35% 40% 38%Revenues(Rsbn) 79 55 64Outsourced 51 33 40Coreproduct 28 22 24EBITDAMarginOutsourced 10% 10% 10%Coreproduct 25% 25% 20%EBITDA(Rsbn) 12 9 9Outsourced 5 3 4Coreproduct 7 6 5BlendedEBITDAmargin 15.3% 16.0% 13.8%WeightedAverageMarginsontheseorders 15.0%Averagemarginsonbalanceorderbook 22.0%Companywidemargin 19.1%OurFY1820marginestimate 18.5%

Source:Company,PhillipCapitalIndiaResearchWeexpectmarginstoberesilientafteradeclineinFY18


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15%CAGRinFY1820earningsWeexpectBELsrecurringearningsCAGRat15%overFY1820,drivenbya13%CAGRin revenues, aswe estimatemargins to remain largely flat.Growth in earnings iscommendable,giventhehighbaseof(FY1517),whenearningsCAGRwas20%.Webelievethatthereareupsideriskstoourearningsifthemargincontractionislowerthanourestimate.WeseerecurringearningsCAGRof15%inFY1820,despiteahighbase


SharpincreaseinFCFdespitehighercapexBEL enjoys the benefit of customer advances on neworders (typically 15% of thecontractvalueupfront),whichhelpsmaintainanegativeworkingcapitalcycle.Weexpectorder inflows to growby31%over thenext three years (vs.precedingthreeyears),whichshouldhelpBELtomaintainnegativeworkingcapital.Evenafterexcludingcustomeradvances,weexpectBELsFCFtogrow4xoverFY1820vs.FY1417.Thisisdespiteahighercapexplannedoverthenextfiveyears(Rs23bninFY1721vs.Rs15bnFY1216).Consequently,weexpectFCF to increase from20%ofPAT inFY16to65%inFY20.WeexpectFCFexcustomeradvancestogrow4xinFY1820vs.FY1417


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RoEtoremainstableonhigherassetturnsWeexpectBELsRoEstoremainstableat1920%overFY1720despiteanincreaseincashbalanceto91%ofnetworthinFY20from50%inFY17.Increaseinfixedassetturnoverto1.3xfrom1xshouldhelpmaintainRoEs.HighassetturnsshouldhelpmaintainRoEsdespitehighercashbalances


ValuationsandoutlookBELalreadytradesaboveaveragesIn thepast fouryears,BELsvaluationshave reratedon improvingenvironment fornewordersandhigherthanexpectedexpansioninmargins.Thestocknowtradesat23x / 19x FY19/20 EPS,which is at a premium to its longterm twoyearforwardaverage(sinceFY98)of10xand+1SDof16x.BELtradesaboveitslongtermaverages


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BELsPEishighlycorrelatedtoorderinflowsBasedonouranalysisofBELsvaluationwegatherthatBELsoneyearforwardPEhasa0.8xcorrelationtoitsorderinflows.BELsPEishighlycorrelatedtoorderinflows;0.8xcorrelation

Source:Company,PhillipCapitalIndiaResearchExpectfurtherrerating;initiatewithaBUYratingWe expect BELs valuation to rerate further on higherthanexpected order inflowopportunities over the next five years, robust sales growth, resilientmargins andRoEs, andhigh cashflow generation.Hence,we valueBEL at25xour FY20EPS toarriveata targetpriceofRs220,which impliesa31%upside from current levels.InitiatewithaBUYrating.

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Correl0.79x



Financials

IncomeStatementY/EMar,Rsmn FY17 FY18e FY19e FY20eNetsales 86,119 100,063 113,077 128,966Growth,% 18 16 13 14Totalincome 86,119 100,063 113,077 128,966Rawmaterialexpenses 44,131 54,034 62,758 72,608Employeeexpenses 14,773 18,472 19,455 20,486OtherOperatingexpenses 8,888 8,996 10,222 11,788EBITDA(Core) 18,327 18,561 20,642 24,085Growth,% 33.6 1.3 11.2 16.7Margin,% 21.3 18.5 18.3 18.7Depreciation 1,915 2,270 2,608 2,927EBIT 16,412 16,291 18,033 21,158Growth,% 36.8 (0.7) 10.7 17.3Margin,% 19.1 16.3 15.9 16.4Interestpaid 118 50 50 50OtherNonOperatingIncome 4,710 3,303 3,985 4,912NonrecurringItems 557 1,110 0 0Pretaxprofit 20,447 18,434 21,968 26,020Taxprovided 4,971 4,886 5,492 6,505Profitaftertax 15,476 13,548 16,476 19,515NetProfit 15,476 13,548 16,476 19,515Growth,% 22.6 (8.6) 12.4 18.4NetProfit(adjusted) 16,034 14,865 16,578 19,476Unadj.shares(m) 2,234 2,234 2,234 2,234Wtdavgshares(m) 2,234 2,234 2,234 2,234BalanceSheetY/EMar,Rsmn FY17 FY18e FY19e FY20eCash&bank 37,900 55,360 70,912 91,528Debtors 43,550 51,046 56,299 60,874Inventory 49,050 48,412 52,548 54,619Loans&advances 12,381 11,592 13,025 13,203Othercurrentassets 1,062 1,234 1,394 1,590Totalcurrentassets 143,943 167,644 194,178 221,814Investments 3,180 3,180 3,180 3,180Grossfixedassets 32,551 43,114 47,614 51,614Less:Depreciation 19,998 22,268 24,876 27,803Add:CapitalWIP 6,563 0 0 0Netfixedassets 19,116 20,846 22,738 23,811Totalassets 171,561 196,993 225,418 254,127Currentliabilities 96,391 114,320 132,789 149,911Provisions 0 0 0 0Totalcurrentliabilities 96,391 114,320 132,789 149,911Totalliabilities 96,391 114,320 132,789 149,911Paidupcapital 2,234 2,234 2,234 2,234Reserves&surplus 72,937 80,439 90,396 101,983Shareholdersequity 75,170 82,673 92,629 104,216Totalequity&liabilities 171,561 196,993 225,418 254,128Source:Company,PhillipCapitalIndiaResearchEstimates

CashFlowY/EMar,Rsmn FY17 FY18e FY19e FY20ePretaxprofit 20,447 18,434 21,968 26,020Depreciation 1,915 2,270 2,608 2,927Chginworkingcapital 14,938 11,688 7,486 10,102Totaltaxpaid 5,686 4,886 5,492 6,505Cashflowfromoperatingactivities 1,581 25,363 22,636 27,682Capitalexpenditure 6,968 4,000 4,500 4,000Cashflowfrominvestingactivities 3,494 1,807 515 912Freecashflow 5,075 23,556 22,121 28,594Equityraised/(repaid) 166 0 0 0Dividend(incl.tax) 6,046 6,519 7,928 9,391Otherfinancingactivities 24,132 424 1,359 1,412Cashflowfromfinancingactivities 30,345 6,096 6,569 7,978Netchgincash 35,420 17,461 15,551 20,616ValuationRatios

FY17 FY18e FY19e FY20ePerSharedataEPS(INR) 7.2 6.6 7.4 8.7Growth,% 22.6 (8.6) 12.4 18.4BookNAV/share(INR) 33.7 37.0 41.5 46.7FDEPS(INR) 7.2 6.6 7.4 8.7CEPS(INR) 8.3 8.1 8.5 10.0CFPS(INR) (1.3) 10.8 10.1 12.4DPS(INR) 2.3 2.4 3.0 3.5ReturnratiosReturnonassets(%) 8.8 7.4 7.8 8.2Returnonequity(%) 19.4 18.6 18.8 19.8Returnoncapitalemployed(%) 18.9 17.2 18.9 19.9TurnoverratiosAssetturnover(x) 4.6 4.2 7.1 14.8Sales/Totalassets(x) 0.5 0.5 0.5 0.5Sales/NetFA(x) 5.2 5.0 5.2 5.5Workingcapital/Sales(x) 0.1 (0.0) (0.1) (0.2)Receivabledays 184.6 186.2 181.7 172.3Inventorydays 207.9 176.6 169.6 154.6Payabledays 108.5 104.2 106.5 110.5Workingcapitaldays 40.9 (7.4) (30.7) (55.5)Liquidityratios Currentratio(x) 1.5 1.5 1.5 1.5Quickratio(x) 1.0 1.0 1.1 1.1Interestcover(x) 139.3 325.8 360.7 423.2Netdebt/Equity(%) (50.4) (67.0) (76.6) (87.8)Valuation PER(x) 23.4 25.6 22.8 19.2PEG(x)yoygrowth 1.0 (3.0) 1.8 1.0Price/Book(x) 5.0 4.5 4.1 3.6Yield(%) 1.3 1.4 1.8 2.1EV/Netsales(x) 3.9 3.2 2.7 2.2EV/EBITDA(x) 18.4 17.2 14.7 11.8



RatingMethodologyWeratestockonabsolutereturnbasis.Ourtargetpriceforthestockshasaninvestmenthorizonofoneyear.Rating Criteria Definition

BUY >=+15% Targetpriceisequaltoormorethan15%ofcurrentmarketprice

NEUTRAL 15%>to



DisclosuresandDisclaimersPhillipCapital(India)Pvt.Ltd.hasthree independentequityresearchgroups: InstitutionalEquities, InstitutionalEquityDerivatives,andPrivateClientGroup.ThisreporthasbeenpreparedbyInstitutionalEquitiesGroup.Theviewsandopinionsexpressedinthisdocumentmay,maynotmatch,ormaybecontraryattimeswiththeviews,estimates,rating,andtargetpriceoftheotherequityresearchgroupsofPhillipCapital(India)Pvt.Ltd.

ThisreportisissuedbyPhillipCapital(India)Pvt.Ltd.,whichisregulatedbytheSEBI.PhillipCapital(India)Pvt.Ltd.isasubsidiaryofPhillip(Mauritius)Pvt.Ltd.References to "PCIPL" in this report shallmeanPhillipCapital (India)Pvt. Ltdunlessotherwise stated.This report ispreparedanddistributedbyPCIPL forinformationpurposesonly,andneither the information containedherein,noranyopinionexpressed shouldbe construedordeemed tobe construedassolicitationorasofferingadviceforthepurposesofthepurchaseorsaleofanysecurity,investment,orderivatives.TheinformationandopinionscontainedinthereportwereconsideredbyPCIPLtobevalidwhenpublished.ThereportalsocontainsinformationprovidedtoPCIPLbythirdparties.Thesourceofsuchinformationwillusuallybedisclosedinthereport.WhilstPCIPLhastakenallreasonablestepstoensurethatthisinformationiscorrect,PCIPLdoesnotofferanywarrantyastotheaccuracyorcompletenessofsuchinformation.AnypersonplacingrelianceonthereporttoundertaketradingdoessoentirelyathisorherownriskandPCIPLdoesnotacceptanyliabilityasaresult.SecuritiesandDerivativesmarketsmaybesubjecttorapidandunexpectedpricemovementsandpastperformanceisnotnecessarilyanindicationoffutureperformance.

Thisreportdoesnotregardthespecificinvestmentobjectives,financialsituation,andtheparticularneedsofanyspecificpersonwhomayreceivethisreport.Investorsmustundertakeindependentanalysiswiththeirownlegal,tax,andfinancialadvisorsandreachtheirownconclusionsregardingtheappropriatenessof investing in any securitiesor investment strategiesdiscussedor recommended in this report and shouldunderstand that statements regarding futureprospectsmaynotbe realised.Undernocircumstancescan itbeusedorconsideredasanoffer to sellorasa solicitationofanyoffer tobuyor sell thesecuritiesmentionedwithinit.Theinformationcontainedintheresearchreportsmayhavebeentakenfromtradeandstatisticalservicesandothersources,whichPCILbelieveisreliable.PhillipCapital(India)Pvt.Ltd.oranyofitsgroup/associate/affiliatecompaniesdonotguaranteethatsuchinformationisaccurateorcompleteanditshouldnotberelieduponassuch.Anyopinionsexpressedreflectjudgmentsatthisdateandaresubjecttochangewithoutnotice.

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Certifications:Theresearchanalyst(s)whopreparedthisresearchreportherebycertifiesthattheviewsexpressedinthisresearchreportaccuratelyreflecttheresearchanalystspersonalviewsaboutallofthesubject issuersand/orsecurities,thattheanalyst(s)havenoknownconflictof interestandnopartoftheresearchanalystscompensationwas,is,orwillbe,directlyorindirectly,relatedtothespecificviewsorrecommendationscontainedinthisresearchreport.

AdditionalDisclosuresofInterest:UnlessspecificallymentionedinPointNo.9below:1. TheResearchAnalyst(s),PCIL,or itsassociatesorrelativesoftheResearchAnalystdoesnothaveanyfinancialinterest inthecompany(ies)covered in

thisreport.2. TheResearchAnalyst,PCILoritsassociatesorrelativesoftheResearchAnalystaffiliatescollectivelydonotholdmorethan1%ofthesecuritiesofthe

company(ies)coveredinthisreportasoftheendofthemonthimmediatelyprecedingthedistributionoftheresearchreport.3. TheResearchAnalyst,his/herassociate,his/herrelative,andPCIL,donothaveanyothermaterialconflictofinterestatthetimeofpublicationofthis

researchreport.4. TheResearchAnalyst,PCIL,anditsassociateshavenotreceivedcompensationforinvestmentbankingormerchantbankingorbrokerageservicesorfor

anyotherproductsorservicesfromthecompany(ies)coveredinthisreport,inthepasttwelvemonths.5. TheResearchAnalyst,PCILoritsassociateshavenotmanagedorcomanagedintheprevioustwelvemonths,aprivateorpublicofferingofsecuritiesfor

thecompany(ies)coveredinthisreport.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

connectionwiththeresearchreport.7. TheResearchAnalysthasnotservedasanOfficer,Director,oremployeeofthecompany(ies)coveredintheResearchreport.8. TheResearchAnalystandPCILhasnotbeenengagedinmarketmakingactivityforthecompany(ies)coveredintheResearchreport.9. DetailsofPCIL,ResearchAnalystanditsassociatespertainingtothecompaniescoveredintheResearchreport:Sr.no. Particulars Yes/No

1 Whether compensation has been received from the company(ies) covered in the Research report in the past 12months forinvestmentbankingtransactionbyPCIL

No

2 WhetherResearchAnalyst,PCILor itsassociatesorrelativesoftheResearchAnalystaffiliatescollectivelyholdmorethan1%ofthecompany(ies)coveredintheResearchreport

No

3 WhethercompensationhasbeenreceivedbyPCILoritsassociatesfromthecompany(ies)coveredintheResearchreport No4 PCILor itsaffiliateshavemanagedorcomanaged in theprevious twelvemonthsaprivateorpublicofferingofsecurities for the

company(ies)coveredintheResearchreportNo

5 ResearchAnalyst,hisassociate,PCILor itsassociateshavereceivedcompensation for investmentbankingormerchantbankingorbrokerageservicesor foranyotherproductsorservices from thecompany(ies)covered in theResearch report, in the lasttwelvemonths

No

Independence:PhillipCapital (India)Pvt.Ltd.hasnothadan investmentbanking relationshipwith,andhasnot receivedanycompensation for investmentbankingservices from, thesubject issuers in thepast twelve (12)months,andPhillipCapital (India)Pvt.Ltddoesnotanticipate receivingor intend toseekcompensationforinvestmentbankingservicesfromthesubjectissuersinthenextthree(3)months.PhillipCapital(India)Pvt.Ltdisnotamarketmakerinthesecuritiesmentionedinthisresearchreport,althoughit,oritsaffiliates/employees,mayhavepositionsin,purchaseorsell,orbemateriallyinterestedinanyofthesecuritiescoveredinthereport.

SuitabilityandRisks:This research report is for informationalpurposesonlyand isnot tailored to the specific investmentobjectives, financial situationorparticularrequirementsofany individualrecipienthereof.Certainsecuritiesmaygiverisetosubstantialrisksandmaynotbesuitableforcertain investors.Eachinvestormustmakeitsowndeterminationastotheappropriatenessofanysecuritiesreferredtointhisresearchreportbaseduponthelegal,taxandaccountingconsiderationsapplicabletosuch investorand itsown investmentobjectivesorstrategy, itsfinancialsituationand its investingexperience.Thevalueofany securitymaybepositivelyoradverselyaffectedby changes in foreignexchangeor interest rates,aswellasbyother financial,economic,orpoliticalfactors.Pastperformanceisnotnecessarilyindicativeoffutureperformanceorresults.



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2017-06-19T15:22:12+0530Jonas Hemant Bhutta

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