Ambit Capital Takeaways From London Conf

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Ambit India Access
POST CONFERENCE NOTE June 30, 2014
Key financials

Mcap 6M ADV P/E (X) P/B (X) RoE (%)
Name Stance (US$ mn) (US$ mn) FY15 FY16 FY15 FY16 FY14 FY15 FY16
Somany Ceramics NR 157 0.2 21.3 15.3 3.6 3.1 15.3 18.2 21.3
Thermax SELL 1,856 0.9 31.4 24.9 4.9 4.3 12.6 16.1 17.9
Shoppers St. NR 543 0.2 100.0 44.9 6.3 5.6 (1.7) 5.1 12.3
I D F C UR 3,245 20.5 9.9 9.0 1.2 1.1 12.6 12.7 12.4
L&T Fin.Holdings NR 2,089 11.0 16.4 12.8 1.8 1.6 9.2 11.8 13.5
City Union Bank BUY 679 1.2 10.2 8.4 1.8 1.5 18.9 17.9 18.6
Source: Bloomberg, Ambit Capital research; Note: NR = Not Rated; UR = Under Review

Analyst Details
Nitin Bhasin
nitinbhasin@ambitcapital.com
+91 22 3043 3241
Bhargav Buddhadev
bhargavbuddhadev@ambitcapital.com
+91 22 3043 3252
Rakshit Ranjan, CFA
rakshitranjan@ambitcapital.com
+91 22 3043 3201
Pankaj Agarwal, CFA
pankajagarwal@ambitcapital.com
+91 22 3043 3206

Takeaways from London Conference
Management teams at our London Conference highlighted improving sentiment
but they are yet to see a change in on the ground business momentum. Whilst
consumption oriented companies await industrial sector led job creation and
income enhancement, the financial services companies remain concerned about
the distressed assets from the recent past. Amongst the below discussed names,
we prefer Somany Ceramics, Shoppers Stop and City union Bank for their strong
franchises.
City Union Bank: In the near term, the management expects the balance sheet growth
to be moderate but net interest margins and RoEs would be stable, at ~3.5% and ~20%,
respectively. The bank continues to stick to its core competencies of MSME/trade-based
lending. This is a segment, in which the bank has a competitive edge over its larger
peers. The bank will continue to focus on its home geography where ample growth
opportunities are still available, according to the management.
IDFC: The management suggested that getting a banking licence would not only help the
company in diversifying its exposure, products and liability profile, but also help it
become more comfortable from a regulatory and rating perspective. That said, IDFC
would still be five years away from delivering RoEs north of 15%. In infra, the
management believes that projects stuck with land acquisition and judiciary issues will
take longer to resolve but roads could take off in the near term.
L&T Finance: The management suggested that LTFH has multiple levers to improve its
RoEs in the future, such as: (i) improvement in margins; (ii) improvement in operational
efficiency i.e. decline in the operating cost to asset ratio; (iii) decline in credit costs; and
(iv) further improvement in its asset management business. However, reported earnings
in the near term could be muted due to deterioration in the asset quality in the corporate
loan book (from regulatory changes).
Shoppers Stop: Management suggests that modern retail in India faces significant
challenges around retail space acquisition, limited penetration of catchment areas, threat
from e-commerce and store-level operating inefficiencies. However, the firm has clear
competitive advantages around long-term contracts for the retail space, tools to manage
operating costs and a negative working capital cycle. Introduction of GST and revival in
overall consumer spending are likely to be positive catalysts over the next 12-24 months.
The stock is trading at consensus EV/sales multiple of 0.8x for FY15 and 0.7x for FY16.
Somany Ceramics: Management expects to grow higher than the industry rates, given
continuous capacity expansions (55-57msm by FY16) and increasing ability to invest in
branding/distribution. Furthermore, management highlighted that that: a)market share
gain from unorganised and organised players, b) increasing share of vitrified tiles in
portfolio (from 44% presently) and c) improving brand perception with users will aid PBT
margin improvement and are the key RoCE expansion levers for the next 2-3 years.
Thermax: Management remains hopeful of improvement in order inflow driven by new
governments indicated initiatives. Revenue in FY15 should grow given the higher carry
forward order book; 2HFY15 inflow momentum will determine FY16. Given domestic
slowdown Thermax has expanded overseas and presently nearly 32-35% of its revenues
originate from overseas geographies. Management expects the vacuum of inflows in IPPs
to persist for another year; however, indicates that the true BTG manufacturing capacity
in India could be lower than the stated capacities.

Ambit India Access

June 30, 2014 Ambit Capital Pvt. Ltd. Page 2

City Union Bank
Steady performance to continue
We hosted the management of City Union Bank at our London conference
last week. The management highlighted that it continues to stick to its core
competencies of MSME/trade-based lending. This is a segment, in which the
bank has a competitive edge over its larger peers and the banks loan
growth would improve as soon as the external climate improves. The bank
will continue to focus on its home geography where ample growth
opportunities are still available, according to the management. The bank is
keen to maintain its individual existence away from any M&A developments.
In the near term, the bank expects the asset quality environment to only
gradually improve but is confident of substantial recoveries from NPAs. The
balance sheet growth would be moderate but net interest margins and RoEs
would be stable, at ~3.5% and ~20%, respectively. We reiterate our BUY
stance with a target price of Rs76/share, implying a valuation of 1.75x FY15
BV.
We hosted the management team of City Union Bank at our London conference.
Here are the key takeaways:
Status quo on external environment: Currently, the main economic concerns
revolve around a bad monsoon that could fuel food inflation and, thus, lead to a tight
monetary policy. However, the good news is that the RBI is committed to providing
liquidity, and thus effective borrowing costs should hopefully remain restrained. The
management also feels that the new Government is serious about reviving economic
recovery and reining in the fiscal deficit. The management believes that the economy
will begin responding to policy measures by 3QCY14.
Relatively protected on competitive intensity: Of late, competition in the banking
system has been drifting towards retail and project finance, and CUBK does not
traditionally chase borrowers. CUBK continues to enjoy increasing market share in its
target areas, which are trading and small businesses. The management believes
there will always be space for small regional banks. SSI (small scale industries)
account for 25% of GDP. This segment (through trade and SME) forms 50% of CUBKs
loan book. The management believes that PSU banks have bigger things to worry
about, such as capitalisation, staff accountability and morale, unions, and changing
Chairmen, rather than focusing on niche customer segments, in which CUBK has a
presence.
CUBK unlikely to be a candidate for M&A: The board of CUBK is very clear about
wanting to maintain an individual identity, which is difficult to maintain with
strategic partners. Hence, an acquisition of the bank looks unlikely. The
management highlighted that, in the past, M&As in India have taken place either
because the RBI forced it or because the sellers owners wanted it (e.g. Centurion
Bank of Punjab and Bank of Rajasthan). CUBK does not need to sell, as it is a
profitable entity for its owners. The management feels that the market is large
enough for CUBK to flourish independently.
Branch expansion strategy South India focus to stay: The management plans
to take its branch network from 400 currently to ~500 by the end of FY15. The bank
continues to focus on Tamil Nadu (accounting for 50% of incremental branches), as
the state accounts for 70% of their business. The branches in Tamil Nadu comfortably
break even in a year. The rest of south India (15% of business) will account for 25% of
incremental branches. These branches break even in ~2 years. The rest of India (15%
of business) will account for 25% of incremental branches. These branches break
even in ~3 years. In the last three years, CUBK has added 175 new branches which
has put pressure on its cost-to-income ratio (now ~45%). Thus, the management will
now be careful with its branch expansion, given that they want to control C/I. The
management also highlighted that if the RBI moves to the 2011 consensus (currently
BUY
Quick Insight
Analysis

Meeting Note

News Impact

Stock Information
Bloomberg Code: CUBK IN
CMP (Rs): 75
TP (Rs): 76
Mcap (Rs bn/US$ bn): 40/0.7
3M ADV (Rs mn/US$ mn): 123/2.0

Stock Performance (%)

1M 3M 12M YTD
Absolute 5 44 36 44
Rel. to Sensex 4 30 1 26
Source: Bloomberg, Ambit Capital research

Ambit Estimates - standalone
Rs bn
FY14 FY15E FY16E
NII 7.6 8.6 10.1
PAT 3.5 3.9 4.8
EPS (Rs) 6.4 7.1 8.9

Analysts
Ravi Singh
Tel: +91 22 3043 3181
ravisingh@ambitcapital.com
Pankaj Agarwal, CFA
Tel: +91 22 3043 3206
Aadesh Mehta
Tel: +91 22 3043 3239
aadeshmehta@ambitcapital.com

Ambit India Access


2001) for classification of banking centres, CUBK will need to reclassify some of its
rural and semi-urban branches to higher categories.
Gold loan business to see stable growth: The gold loan book has come down
from 22% (end-FY13) to 18% (end-FY14) due to some de-risking. The LTV (loan to
value) on paper is ~65% but in economic terms it is effectively ~50%, as CUBK
knocks off wastage (from melting down) whilst determining value of gold collateral.
The gold loan book is secure and safe and NPLs are auctioned off regularly with
effectively no losses. In the past, the bank has actually handed over the surplus to
customers, when they have had to liquidate the collateral. CUBK does not intend to
exit the business, as it remains a significant opportunity in south India. However, the
contribution of the gold loan book will moderate over the next few years. The recent
growth in the business was due to rising gold prices. However, the decline in gold
prices in the last two years has led banks to rethink their focus. Further, the
regulatory changes (cap in LTV) have also dampened the enthusiasm. If gold prices
move up, it may fuel the demand, but otherwise CUBK expects the business to see a
steady growth.
Retail not significant: CUBKs retail book is currently at 4-6% of total book. It will
always remain low, as CUBK cannot compete with larger banks (e.g. SBI) on the
liability side and hence would find it hard to competitively price retail assets.
However, the bank feels it does not need retail loans to grow its book. If economic
activity picks up, its target customer base will provide enough growth opportunities.
Asset quality performance backed by strong recoveries track record: In the
current economic climate, the banks customer base has suffered, but smaller
businesses have fared better because their lives, in general, depend on credit. If they
are classified as NPAs to CIBIL, their business dies overnight. Hence, they tend to go
all out to repay, including liquidation of personal assets. The entire loan book of
CUBK is backed by adequate collateral. CUBK is confident of recovering most of its
dues on NPAs. CUBK expects the first few quarters of FY15 to see some stress, but the
stress in likely to ease substantially by 3Q/4Q.
Near-term guidance stays cautious on growth: Continuing with the trends in the
recent quarters, the management remained cautious on growth and is targeting a
loan growth of 10-15% in FY15. Net interest margins are likely to be stable at
~3.5%. With 85% of the book being on floating rates, CUBK expects that it would be
able to pass on any hikes in the cost of funding. The bank targets to sustain its RoEs
above 20%.
Our view profitability and long-term stability justify premium valuation:
Over the past three month, the shares of City Union Bank (up 42% vs Sensex up 15%
and Bankex up 20%) have significantly outperformed its peers. At Rs75/share, CUBKs
shares thus currently trade at 1.7x FY15 BV. This compares with the long-term trading
band of 0.9x-1.8x. In comparison with its peer group (regional old private sector
banks), CUBK is trading at a ~20% premium (P/B multiple). The premium, however,
is justified on comparison with the gap in profitability (RoA for CUBK at 1.5% vs
peers 1.1%; RoE for CUBK at 20% vs peers 15%). Having recorded a CAGR of 31%
(FY10-13), CUBK has slowed down the loan book growth in FY14 (6% YoY as at end-
FY14). We believe a cautious approach to growth is a prudent strategy not only due
to credit quality risks but also due to the constraints the bank faces on its liability
franchise in the current environment. Strong net interest margins and a core focus on
collateralised lending are the key strengths of the bank in the current environment.
We expect loan growth to improve after FY15E to 20-22% and RoA and RoE to
remain strong at ~1.5% and 18-20% over FY15-16E. We are BUYers with a target
price of Rs76/per share (implied 1.75x FY15BV).

Ambit India Access


Balance sheet (standalone)
Year to March (Rs mn) FY12 FY13 FY14 FY15E FY16E
Networth 12,431 16,407 20,249 23,427 27,425
Deposits 163,408 203,048 220,169 253,194 308,897
Borrowings 3,487 4,767 3,050 3,580 4,375
Other Liabilities 4,181 5,549 6,470 7,958 9,789
Total Liabilities 183,507 229,771 249,938 288,159 350,486
Cash & Balances with RBI & Banks 11,361 17,705 21,796 24,844 29,990
Investments 45,862 52,668 59,536 66,929 81,647
Advances 121,375 152,461 160,968 184,204 225,112
Other Assets 4,909 6,937 7,638 12,183 13,738
Total Assets 183,507 229,771 249,938 288,159 350,486
Source: Company, Ambit Capital research

Income statement (standalone)
Interest Income 16,968 21,888 25,459 28,142 32,652
Interest Expense 11,970 15,647 17,865 19,573 22,527
Net Interest Income 4,998 6,240 7,594 8,569 10,125
Total Non-Interest Income 2,071 2,736 3,012 3,417 4,031
Total Income 7,069 8,976 10,606 11,986 14,156
Total Operating Expenses 2,798 3,742 4,796 5,594 6,495
Employees expenses 1,223 1,509 1,856 2,214 2,607
Other Operating Expenses 1,575 2,233 2,940 3,381 3,888
Pre Provisioning Profits 4,271 5,234 5,810 6,391 7,661
Provisions 838 1,204 1,674 1,546 1,631
PBT 3,433 4,030 4,136 4,845 6,030
Tax 630 810 665 969 1,206
PAT - adjusted 2,803 3,220 3,471 3,876 4,824
Exceptionals 0 0 0 0 0
PAT - reported 2,803 3,220 3,471 3,876 4,824

Ratio analysis (standalone)
Credit-Deposit (%) 74.3% 75.1% 73.1% 72.8% 72.9%
CASA ratio (%) 18.2% 16.8% 17.8% 18.1% 18.4%
Cost/Income ratio (%) 39.6% 41.7% 45.2% 46.7% 45.9%
Gross NPA (Rs mn) 1,235 1,731 2,931 3,378 3,997
Gross NPA (%) 1.06% 1.16% 1.84% 1.82% 1.76%
Net NPA (Rs mn) 540 964 1,973 2,263 2,558
Net NPA (%) 0.45% 0.63% 1.23% 1.23% 1.14%
Provision coverage (%) 58.1% 46.0% 33.9% 33.0% 36.0%
NIMs (%) 3.12% 3.11% 3.27% 3.31% 3.30%
Tier-1 capital ratio (%) 11.7% 13.3% 14.5% 14.4% 13.6%

Ambit India Access


Du-pont analysis (standalone)
NII / Assets (%) 3.0% 3.0% 3.2% 3.2% 3.2%
Other income / Assets (%) 1.3% 1.3% 1.3% 1.3% 1.3%
Total Income / Assets (%) 4.3% 4.3% 4.4% 4.5% 4.4%
Cost to Assets (%) 1.7% 1.8% 2.0% 2.1% 2.0%
PPP / Assets (%) 2.6% 2.5% 2.4% 2.4% 2.4%
Provisions / Assets (%) 0.5% 0.6% 0.7% 0.6% 0.5%
PBT / Assets (%) 2.1% 2.0% 1.7% 1.8% 1.9%
Tax Rate (%) 18.4% 20.1% 16.1% 20.0% 20.0%
ROA (%) 1.7% 1.6% 1.4% 1.4% 1.5%
RoRWAs (%) 3.0% 2.8% 2.7% 2.7% 2.7%
Leverage 14.6 14.3 13.1 12.3 12.6
ROE (%) 24.9% 22.3% 18.9% 17.7% 19.0%

Valuation parameters (standalone)
Year to March FY12 FY13 FY14 FY15E FY16E
EPS (Rs) 6.9 6.8 6.4 7.1 8.9
EPS growth (%) 29% -1% -6% 12% 24%
BVPS (Rs) 30.5 34.6 37.3 43.2 50.5
P/E (x) 10.9 11.0 11.7 10.4 8.4
P/BV (x) 2.45 2.16 2.00 1.73 1.48

Ambit India Access


IDFC
London conference takeaways
We hosted the management of IDFC at our London conference last week. Mr.
Limaye, the MD and CEO of IDFC, suggested that getting a banking licence
was crucial for IDFC, as not only would it help the company in diversifying its
exposure, products and liability profile, but also help it become more
comfortable from a regulatory and rating perspective. That said, IDFC would
still be five years away from delivering RoEs north of 15%. In infra, the
management believes that projects stuck with land acquisition and judiciary
issues will take longer to resolve but roads could take off in the near term
(as early as in the second half of FY15).
Banking licence critical for IDFC: The management stated that the banking licence
would help IDFC in the following ways: (i) asset diversification from risk and growth
prospects; (ii) offer more products to even its existing infrastructure clients (eg LCs,
managing escrow accounts, trade finance, FX, etc) i.e. diversification from a product
perspective; (iii) diversify liability into retail liabilities from currently being only
wholesale funded; and (iv) become more comfortable from a regulatory and rating
perspective, as: (a) banks are viewed as safer than NBFCs by rating agencies; (b)
the RBI is clearly not comfortable with big NBFCs; (c) rating agencies do not allow
IDFC to leverage more than 6x as an NBFC, putting a cap on RoE.

Transitioning to be spread over 5 years: IDFC is currently putting up work
processes, IT systems, etc for its banking operations. Its initial branch architecture will
largely be concentrated in the top-50 cities wherein most of the business will be
generated despite customers therein being amongst the most over-banked. IDFC will
try to chip away PSU market share initially. That said, the management is still figuring
out a lower cost delivery and a differentiated product service. RoEs in the first three
years will be in the low single digits and in 3-5 years, it will be similar to todays
levels (~13%) and after 5 years will be north of 15%.
How infra creation could be different: The management highlighted that any
process that requires administrative action from the Government/authorities should
happen fairly soon. Whilst projects stuck with land acquisition issues will take a little
longer, those stuck with the judiciary will take even longer, with no visibility on an
outcome. All this will take time to play out. That said, roads could take off in the near
term (as early as in the second half, whose impact could be seen in FY16). Problems
plague both PSU and private infra creation except for land acquisition which is not
applicable to PSUs. Railways could be a big opportunity for private players, as India is
still hugely under invested in Railway infrastructure. So far only Metro projects have
seen private participation. On the mining and coal situation, the Government will
change things by hopefully allowing contract mining of coal and re-auctioning of coal
blocks.
Valuations: IDFCs near-term profitability would be under pressure due to slowdown
in the infrastructure sector and conversion into a bank. However, we believe that
these headwinds are largely factored into the price of the stock and rerating is
contingent upon the companys ability to build a successful banking franchise.
Consequently, we would need clarity on a likely course of action on building a bank
before we form an opinion on valuations.
UNDER REVIEW
Quick Insight
Analysis

Meeting Note

News Impact

Stock Information
Bloomberg Code: IDFC IN
CMP (Rs): 126
TP (Rs): NA
3M ADV (Rs mn/US$ mn): 1,598/26.6


1M 3M 12M YTD
Absolute (8) 10 (2) 15
Rel. to Sensex (9) (4) (37) (3)

Ambit Estimates - Consolidated
Rs mn FY12 FY13 FY14
NII 21,020 25,620 27,040
PAT (adj.) 14,177 18,371 18,374
EPS (Rs) 10.2 12.1 12.1

Analysts
Pankaj Agarwal, CFA
Tel: +91 22 3043 3206
Aadesh Mehta
Tel: +91 22 3043 3239
Ravi Singh
Tel: +91 22 3043 3181

Ambit India Access


Balance sheet (consolidated)
Year to March (Rs mn) FY12 FY13 FY14
Networth 122,850 136,830 150,675
Borrowings - on balance sheet 464,350 542,270 565,375
Borrowings - off balance sheet
Total liabilities 587,200 679,100 716,050
Fixed assets and goodwill 13,835 13,017 13,016
AUM 481,840 557,370 585,450
Cash and equivalents 96,050 122,180 124,030
Net Current Assets (4,525) (13,467) (6,446)
Total assets 587,200 679,100 716,050
Income statement (consolidated)
NII (inclu. Securitisation) 21,020 25,620 27,040
Other income 5,530 7,370 7,420
Total income 26,550 32,990 34,460
Operating expenditure 4,935 4,949 5,130
Pre-provisioning profit 21,615 28,041 29,330
Provisions 3,230 3,840 6,590
Profit before tax 18,385 24,201 22,740
Tax 6,219 7,511 7,511
Reported Consol PAT 15,529 18,371 18,374
Adjusted Consol PAT 14,177 18,371 18,374
Ratio analysis (consolidated)
Year to March FY12 FY13 FY14
NIM % (on AUM)- Calculated 4.4 4.2 4.2
AUM Growth 28.3 15.7 5.0
Opex as % of AUM 0.93 0.78 0.74
Credit costs as a % of AUM 0.65 0.66 1.08
CAR (%) 20.9 20.1 22.3
Return profile (consolidated)
Dil EPS Consol (Rs) 10.2 12.1 12.1
BVPS (Rs.) 81.2 90.3 99.5
ROA (%) 2.9 2.9 2.6
ROE (%) 13.1 14.1 12.4

Ambit India Access


L&T Finance Holdings
We hosted the management of L&T Finance Holdings (LTFH) at our London
conference last week. Our discussion with Mr. N Sivaraman, Director, LTFH,
suggested that LTFH has multiple levers to improve its RoEs in the future,
such as: (i) improvement in margins; (ii) improvement in operational
efficiency i.e. decline in the operating cost to asset ratio; (iii) decline in
credit costs; and (iv) further improvement in its asset management business.
However, reported earnings in the near term could be muted due to
deterioration in the asset quality in the corporate loan book (from regulatory
changes).
Retail credit segment likely to increase its RoEs: The management believes that
the retail business will end the year with RoEs of 15% driven by a 75-80bps
improvement in RoAs and a leverage of 7x. RoAs in the retail business will improve
due to: (i) margins improving to ~6.75% by end-FY15; (ii) the opex-to-asset ratio
decreasing to 2.75% by end-FY15; and (iii) credit costs improving to 1% by 4QFY15,
as asset quality has finally stabilised in this segment. The management has decided
that no more capital will be allocated to the retail business, as the management
wants this business to generate its own growth capital by improving its RoAs and
RoEs.

Wholesale credit RoEs to improve: The management expects RoEs in its wholesale
credit business to improve up to 16-18% by FY15 driven by a 100bps improvement in
RoAs and increasing leverage to 5x-6x. The RoA improvement will be driven by: (i)
Improvement in margins NIMs at 4.4% are currently under-emphasised despite
close to Rs10bn-20bn assets not earning anything. A normalised book should earn
NIMs closer to 4.5-4.6%. (ii) Fee income generation will improve, as the economy
improves. It should move up by 30bps by 4QFY15 even as the normalised business
would generate ~0.5% of fee income which would be lumpy in nature; (iii) Opex
should drop marginally in a steady state. (iv) Credit costs should stabilise at the five-
year average of 0.5% in FY15.

Slippages to increase in near term: This quarter should see slippages due to
regulatory changes like the RBIs norms on early recognition of stressed assets (.i.e.
SMA1, SMA2) and no forbearance on restructured assets from April 2015 onwards.
With LTFH having a large exposure to consortium lending, it will also have to
recognise such assets as NPAs/restructured assets if banks do so. The impact of
restructuring will be felt on under-construction projects, which are currently at ~30%
of the book.
Keen for a banking licence: The management highlighted that it is keen to
become a bank either organically or inorganically even as it is waiting for the new
differentiated licence guidelines before taking a firm decision. LTFH will not hesitate
to acquire a bank (if the price is right). The management believes that becoming a
bank is essential for the long-term strategy of LTFH, as: (i) it would be able to offer a
more wide service offering, (ii) it would be in position to service a wider customer
base (retail +wholesale), and (iii) it can increase growth without increasing risk
exposures.

Turnaround in asset management: Asset management has been a great
turnaround story, as it has broken even from its earlier loss-making status. A
presence in asset management will help LTFH in increasing its RoEs without any
capital requirements and building a retail brand. The AMC business shows a lot of
promise, as it is currently ranked #13 and has 6 equity funds in the top-2 quartiles
and has mopped Rs2.5bn of new money despite intense competition from large fund
houses who have strong distribution channels through their banking partners.
NOT RATED
Quick Insight
Analysis

Meeting Note

News Impact

Stock Information
Bloomberg Code: LTFH IN
CMP (Rs): 73
TP (Rs): NA
3M ADV (Rs mn/US$ mn): 857/14.2


1M 3M 12M YTD
Absolute (1) 2 (6) (3)
Rel. to Sensex (2) (11) (41) (21)

Ambit Estimates - consolidated
Rs mn
FY14 FY15E FY16E
NII
11,475 14,396 19,811
PAT (adj.)
4,548 5,125 5,969
EPS (Rs)
2.81 4.25 3.03

Analysts
Pankaj Agarwal, CFA
Tel: +91 22 3043 3206
Aadesh Mehta
Tel: +91 22 3043 3239
Ravi Singh
Tel: +91 22 3043 3181

Ambit India Access


Balance sheet (consolidated)
Networth 47,111 61,786 67,841
Borrowings - on balance sheet 211,813 284,792 358,536
Borrowings - off balance sheet 0 0 0
Total liabilities 258,924 346,578 426,377
Fixed assets 2820 9572 7287
AUM 251,904 324,501 388,936
Cash and equivalents 1,127 3,716 7,827
Net Current Assets 3,073 8,789 22,327
Total assets 258,924 346,578 426,377

Income statement (consolidated)
NII (inclu. Securitisation) 11,475 14,396 19,811
Other income 878 1,514 1,860
Total income 12,353 15,910 21,671
Operating expenditure 3,560 5,300 8,359
Pre-provisioning profit 8,794 10,610 13,312
Provisions 1,834 2,734 4,262
Profit before tax 6,842 9,899 8,269
Tax 2,295 2,594 2,300
Consol. PAT 4,548 7,305 5,969
Adjusted Consol. PAT 4,548 5,125 5,969

Ratio analysis (consolidated)
NIM % (on AUM)- Reported 5.51% 5.34% 5.47%
AUM Growth 45% 30% 20%
Opex as % of AAUM 1.70% 1.90% 2.50%
Credit costs as a % of AUM 0.86% 0.95% 1.19%
CAR (%) 18.10% 20.90% 18.20%

Return profile (consolidated)
NIM % (on AUM)- Reported 5.51% 5.34% 5.47%
AUM Growth 45% 30% 20%
Opex as % of AUM 1.70% 1.90% 2.50%
Credit costs as a % of AUM 0.86% 0.95% 1.19%
CAR (%) 18.10% 20.90% 18.20%

Ambit India Access


Shoppers Stop
Expect EBITDA/PAT breakeven in FY15/FY16
We hosted the management team of Shoppers Stop at our London conference
last week. The modern retail sector in India faces significant challenges
around lack of retail space acquisition, limited penetration of catchment
areas, threat from e-commerce and management of store-level operating
inefficiencies. However, the firm has clear competitive advantages around
long-term contracts for the retail space, tools to manage operating costs, and
a negative working capital cycle. Introduction of GST and revival in overall
consumer spending are likely to be positive catalysts over the next 12-24
months. The stock is trading at consensus EV/sales multiple of 0.8x for FY15
and 0.7x for FY16.
Prospects of modern retail in India
According to the management, modern retail in India currently faces the following set
of challenges:
Stagnation of new retail space: Developers across India are realising that it
takes at least 10 years for a retail mall to recover its costs. As a result, they prefer
to develop commercial properties rather than retail properties, resulting in a
shrinking pipeline of new retail malls, especially in tier-2 cities of India.
Limited penetration of catchment areas: The management believes that the
concept of destination stores is unsuccessful in India. Instead, it is more
important to have stores in catchment areas. Catchment areas in India are only
one-fifth of the US, for instance, currently. Hence, there is exists a substantial
penetration potential in terms of the number of catchment areas. However, each
catchment area can have maximum two modern retailers operating in it, and the
management expects one to be a Shoppers Stop store vs a competitors store.
Threat from e-commerce: The management believes that its focus will remain
on delivering a seamless experience across e-commerce and brick-and-mortar
formats for its customers. Shoppers Stop will have a business model similar to
Macys in the US, which is typically: (a) order & pick-up; or (b) browse online
and try in-store. The company does not intend to operate as a discount retailer
like Myntra/Jabong. It believes that the online threat to the brick-and-mortar
format is more in categories like electronic goods and books. Shoppers Stops
competition instead is more from other departmental stores.
The management expects the following aspects to help it address these challenges:
Competitive advantages around retail space acquisition: During FY12-14,
Shoppers Stop has doubled its presence in terms of the number of cities i.e. from
20 cities to 36 cities. This has been achieved through a timely tie-up with retail
developers 4-6 years ago as new retail projects were being launched by these
developers. These tie-ups include long-term contracts signed at favourable rates
of rentals for the company.
Introduction of GST: At present, Shoppers Stop cannot claim service tax input
received on rental cost, professional service charges, etc., as it sells goods and
not services, on which VAT (sales tax) is levied. With the introduction of GST,
retailers will have a single and fungible tax that can be passed on by taking
inputs against the tax payable to the Government.
Optimism about consumer demand revival in future: The management is
optimistic about a demand revival albeit this is expected to take 2-3 more
quarters to see it materially in retail footfalls. That said, the management believes
that the companys target demography will not be affected much even if it passes
the incremental cost to consumers, evidence of which can be seen from the
companys stable average transaction size and selling price.
NOT RATED
Quick Insight
Analysis

Meeting Note

News Impact

Stock Information
Bloomberg Code: SHOP IN
CMP (Rs): 375
TP (Rs): NR
Mcap (Rs bn/US$ mn): 31/519


1M 3M 12M YTD
Absolute (6) (2) 4 (13)
Rel. to Sensex (8) (16) (31) (31)

Consensus Estimates (Rs mn)

FY14 FY15 FY16
Revenues 36,594 44,840 52,113
EBITDA 1,333 1.871 2,666
EPS (Rs) (1.0) 3.9 8.7

Analysts
Rakshit Ranjan, CFA
rakshitranjan@ambitcapital.com
Tel: +91 22 3043 3201
Pratik Singhania
pratiksinghania@ambitcapital.com
Tel: +91 22 3043 3264

Ambit India Access


Mergers and acquisitions: The retail space is going through a consolidation
phase through mergers and acquisition to create synergies in costs whilst
maintaining the pursuit of continued pan-India expansion. Albeit there are no
internal strategies in place to expand through M&A, Shoppers Stop has evaluated
offers from other players. According to the management, there are distressed
players available for purchase but the valuation they seek are irrational and
hence, nothing has materialised. Also, on the back of FDI in multi-brand retail,
Shoppers Stop had been approached by potential strategic partners but nothing
has materialised as of now.
Future growth potential of Shoppers Stop and
HyperCity:
The management believes that future growth would come from: (a) Revival in
economy and hence, consumption; (b) Store expansion; and (c) Increase in share of
private label contribution from 16% at present to 20% going forward.
Store expansion: The management has visibility to open at least 8 Shoppers
Stop stores in FY15, out of which one store has already been opened and 4
stores will open each in FY16 and FY17. Store expansion would be a function of
availability of quality mall space developed in a timely manner. At present, 90%
of the stores are Shoppers Stop and HyperCity stores, and the management
expects this share to increase to 95% in the next 4-5 years.
Tapping tier-2 cities potential: The company stated that there will be a
different store format to tap the tier-2 potential which will be smaller and tighter.
The management has gone through its learning curve to attain the right
combination for tier-2 cities in the last few years. Some of the key learnings are:
(a) For Shoppers Stop (i) The population consists of self-employed individuals
and housewives and very few professionals. As a result, casual and ethnic wear
does well and not formals. (ii) Tier-2 cities customers are more sensitive to value
and are not as adventurous. Hence, in such cases, an increase in the share of
private labels helps them to cater to the needs of the customers by providing the
desired product at a reasonable price. (b) For HyperCity - The management
believes that having the right store format in terms of size and product offering is
the key to operating a store profitably. It believes that 30-35k sq ft can sustain all
the consumption in these cities.
Retail format: The company will adopt store sizes of 40-45k sq ft for HyperCity
going forward. The new Shoppers Stop would be operated in 55-65k sq ft store
sizes in metros and 30-40k sq ft in other cities.
Challenges around operating costs for the company
Power cost and service tax: The management stated that most of the operational
costs are manageable except for power cost and service taxes. For Shoppers Stop, the
weighted average cost of power cost including the generator cost has increased from
1.8% of sales to 2.5% in the last five years. Globally, power cost as a percentage of
sales is at 1.0-1.2%.
Deleveraging the balance sheet: The management wants to start capitalising on
the scale and learning curve of HyperCity to make it debt-free as soon as possible. As
on FY14, Shoppers Stop had ~Rs5.4bn of debt. The management believes that debt
is at a comfortable level and will start to come down from 2HFY15 onwards. Average
cost of debt at the consolidated level is 11.5% (and ~12.25% for HyperCity).
Other costs: According to the company, the remaining costs, which are
predominantly rental cost and employees cost, are manageable and are always kept
under control. Most of the rental agreements are on a revenue-sharing basis rather
than making it as a fixed cost. The management expects employee costs to increase
by 8-9% YoY despite high new store openings. Logistics costs are controlled by
sourcing 20-25% of the stores supplies directly to the stores from the vendors.

Ambit India Access


Profitability: Shoppers Stop expects to achieve break-even at the consolidated-level
EBITDA and PAT in FY15 and FY16 respectively. According to the management, this
business can support an 80/20 spilt between profit-making and loss-making stores
and Shoppers Stop will also fall under the same mix in the long run.
Working capital cycle: Shoppers Stop is the only retailer with negative working
capital in India. Albeit the last two quarters saw an increase in the working capital
cycle, which was a function of new store openings rather than any operating
throughput issues. With the current store format of 55-65K sq ft of Shoppers Stop
stores in metros and 30-40K sq ft stores in other cities, Shoppers Stops combined
working capital cycle is 16 weeks. Similarly, HyperCitys combined working capital
cycle is 6 weeks. Urban cities and tier-2 cities have similar working capital cycle
requirements, as lower revenues from tier-2 cities stores are offset by smaller store
sizes. As per the management, the companys capital requirements are reducing and
consequently cash flows are moving up. That said, company is still in an investment
mode (a HyperCity store takes 24-36 months to break-even; currently 15 stores).
Hence, the management expects that Shoppers Stop, on a consolidated level, will see
free cash flows only by FY18.

Valuation
Shoppers Stop is one of the best-run retail companies and will reap benefits in the
future from its expansion strategy coupled with a revival in consumer discretionary
spending. Currently, the operating losses of HyperCity and store expansion are
leading to low profitability for Shoppers Stop at the consolidated level. We do not
have a rating on Shoppers Stop currently. The stock is trading at a consensus
EV/sales multiple of 0.8x for FY15 and 0.7x for FY16.

Ambit India Access


Balance sheet
Year to March (Rs mn) FY11 FY12 FY13 FY14
Share Capital 411 413 415 416
Reserves 4,598 4,748 4,594 4,489
Shareholders funds 5,009 5,160 5,009 4,905
Minority Interest 22 39 46 15
Debt / Loan Funds 2,630 4,357 4,982 *5,424
Total 7,661 9,556 9,762 10,344
Net Block + CWIP 6,295 7,467 7,727 10,063
Inventories 2,505 3,311 3,698 4,490
Trade receivables 214 263 322 480
Cash and Bank Balance 182 150 268 279
Other assets, loans and advances 2,397 2,870 3,356 3,576
Current Liabilities 3,824 4,405 5,221 *7,225
Provisions 108 100 113 120
Total 7,661 9,556 9,762 10,344
Source: Company, Ambit Capital research; Note: * Current portion of long-term borrowing is not available and
the same forms part of current liabilities
Income statement
Year to March (Rs mn) FY11 FY12 FY13 FY14
Net Sales 21,784 29,448 33,603 39,614
EBITDA 1,311 1,032 961 1,333
Interest Expense 295 422 547 653
Depreciation 469 609 791 981
Profit Before Tax 571 78 (308) (240)
Tax 389 322 228 257
Profit After Tax 182 (244) (543) (497)
Minority Interest 250 434 430 420
Reported Net Profit 432 190 (113) (83)
Cash flow statement
Cash flow before WC changes 1,318 1,085 1,037
Investment in working capital 370 (812) 3
Taxes Paid (309) (325) (221)
Operating cash flow 1,379 (53) 869
Investing cash flow (2,137) (1,724) (1,216)
Financing cash flow 596 1,720 472
Net cash flow (163) (57) 125
Capex (1,449) (1,748) (1,100)
Dividend Paid (61) (72) (135)
Ratio analysis
Year to March FY11 FY12 FY13 FY14
Debt-Equity Ratio 0.53 0.84 0.99 1.11
EBITDA Margin (%) 6.0 3.5 2.9 3.2
Net Margin (%) 2.0 0.6 (0.3) (0.2)
ROCE (%) 9.9 5.5 2.5 3.4
RONW (%) 11.0 3.7 (2.2) (1.5)

Ambit India Access


Somany Ceramics
Whilst the present tiles demand scenario remains similar to the previous
quarters, management indicated that it continues to grow ahead of the
market (18-20% revenue growth YoY); given its continuous capacity additions
plans (55-57msm by FY16-end using JVs) and increasing ability to invest in
branding/distribution, it aims to become the 2
nd
largest player in value terms
over next 2-3 years. Management did indicate that if required Greenfield
plants could be considered in North and South India. Somany management
expects that the recent regulatory changes in fuel usage will provide level
playing field to organised vis--vis unorganised players. Management
indicated that market share gain from unorganised and organised players,
increasing share of vitrified tiles in portfolio (from 44% presently) and
improving brand perception with users should enable it to expand PBT by
50-100bps on an annual basis over next 2-3 years in order to increase RoCE
to high teens. Somany is trading at 16x FY16 consensus EPS (Rs15), a 25%
discount to Kajaria.

Demand scenario remains muted but Somany growing ahead
According to the management, the demand for organised real estate units has not
picked up in metro or tier-2/3 cities and remains muted thus impacting the overall
tiles industry demand; management expects overall tiles industry revenues to grow in
low-to-mid teens. However, Somany continues to grow ahead of the industry given
that the company has recently expanded its retail outlets by more than 25% alongside
expanding its dealer reach across the large-to-small sized cities. Management
maintains its 18-20% revenue growth guidance and expect that volumes should
continue to grow at 11-12% and the balance growth will come from realisation
improvement as the brand perception further improves and product portfolio shifts
more towards vitrified tiles.

Capacity additions to continue through JVs to support 10-15% volume growth
Management indicated that after adding nearly 10msm (million sq meters) of
capacities in FY14, the company is considering another 10-12msm for each of the
next two years. Over the next 5 years, if the demand environment improves, Somany
could be reaching 80-100msm. However, most of these capcities will be set up under
the JV arrangements, either through forming new JVs or expanding the existing JVs.
The proportions of capacities under outsourcing arrangements will be relatively lower
than present; however, own capacities (either greenfield or brownfield) will be
dependent upon how the north and south Indian markets shape up. In case a
greenfield capacity is required, the company may set up a 2.5-5msm capacity in
either of the regions through raising debt and funding from internal accruals. Most of
these capacity additions will be for vitrified tiles and not more than 25-30% of these
capacity additions will be in the ceramic tiles.

Investments in branding and reach will be the key for expanding leadership
Somany management expects that it will continue to invest 1.5-2% of its sales in
branding; whilst till now the company has been focussing on outdoor and indirect
advertisement (through exhibitions, architect meets, etc), it will now invest in other
modes of media advertisements like television and newspapers. The management
expects to launch a television ad campaign in FY15; these investments will improve
the unaided/aided recall ratio, which presently is 80/20 for the company. As per the
management, this large investment in branding by Somany and other larger peers
will further improve the market share for the larger players vis--vis other smaller
players who cannot invest such large sums of money in branding. Somanys
NOT RATED
Quick Insight
Analysis

Meeting Note

News Impact

Stock Information
Bloomberg Code: SOMC IN
CMP (Rs): 241
TP (Rs): NR
Mcap (Rs bn/US$ mn): 9.4/156


1M 3M 12M YTD
Absolute 12 45 251 114

Consensus Estimates (Rs mn)

FY14 FY15 FY16
Revenues 12,580 15,418 18,448
EBITDA 813.8 1,054 1,302
EPS (Rs) 8.2 11.4 15.8

Analysts
Achint Bhagat
achintbhagat@ambitcapital.com
Tel: +91 22 3043 3178
Nitin Bhasin
nitinbhasin@ambitcapital.com
Tel: +91 22 3043 3241

Ambit India Access


advertisement costs recorded a 39% CAGR over FY09-13 as against 24% for Kajaria
and 27% for Orient Bell. Somanys unitary advertisement costs have increased to
Rs4.5/msm as compared to Rs2/msm in FY09. Alongside the company will also invest
in expanding retail outlets (225 at FY14-end vs 181 at FY13-end) and distribution
reach in tier 2/3/4 cities and below. Whilst the company is building sub-brands within
it overall offering, the ad spends will focus on the main brand Somany.

Depleting unorganised players advantages
Somany management indicated that whilst there wouldnt be any let down in the
capacity addition momentum by smaller/mid-sized unorganised players based out of
Morbi, the fuel-based advantages of the unorganised players are nearly over and this
puts the unorganised and organised players at level playing field. The recent allowing
of use of coal-fired gasifiers using zero-discharge technology and prior permission
from Gujarat Pollution Control Board (GPCB) is good for the organised players as
unorganised players will have to adhere to similar benchmarks of operations as the
former; management indicated that now all can use coal-based gasifiers but all will
have to invest in pollution control. However, what remains unclear is the arbitrage
with coal and gas pricing if coal demand suddenly shoots and how GSPL responds to
dropping demand for gas.

Market share to shift towards large players; unorganised to lose value-
based market share
Management indicated that the overall tiles market is presently Rs210bn of which
organised accounts for nearly a little more than the 50%; the organised market is
controlled by ~25 players and the unorganised players are around 650 mainly
producing commodity products. Within the organised players, the company expects
that it is set to become the 2
nd
largest player (presently 3
rd
largest) over the next 2-3
years as it continuously expands and improves product portfolio. As per the
management, whilst the volume growth for organised vs unorganised will remain
similar, the unorganised sector will lose out on the value-based market share as the
product offering may remain more traditional or commoditised (on average the
unorganised players sell at 25% discount to leading organised players). However, the
management did indicate that a good numbers of unorganised players are more cost
efficient vis--vis the organised in the manufacturing costs given the lower overheads,
cluster-based/co-operative manufacturing practices and continuous involvement of
the owners to reduce cost inefficiencies. Hence, organised players are tying up with
these efficient unorganised players.

Our view Somany, building strength
Premiumisation and a shift to branded/organised players are the key structural trends
unfolding in the rapidly growing Indian tiles industry. Somany is building scale
(doubled capacities in the last three years and adding 30% more over FY14-16),
improvising its product mix (more vitrified) and fortifying its brand to participate
effectually in this fast-growing industry. After 14% EBITDA CAGR and 25% PAT CAGR
in FY09-14, consensus expects attainable 24% EBITDA CAGR and 44% PAT CAGR in
FY14-16, implying 8x FY16 EBITDA and 16x FY16 eps, a material premium to its five-
year average. We believe multiples can re-rate further, as the tiles industry and
Somany/Kajaria undergo a discernible shift, similar to the paints industry in the late
90s.

Ambit India Access


Thermax
Thermax management remains hopeful that the sentiment change and the
new governments indicated initiatives will gradually improve inquiries and
then corporate capex (steel, O&G and cement) and investments in power
utilities. Given the higher carry forward order book, revenues should grow
this year; 2HFY15 inflow momentum will determine FY16. Given the
slowdown in domestic order awards over the last 2-3 years, the company
expanded and acquired overseas and presently nearly 32-35% of its
revenues originate from overseas geographies; exports account for 20%.
Management indicated that combination of low-cost design employee-base
in India alongside manufacturing capacities overseas is helping it expand
footprint in Europe. In context of the large IPP BTG opportunity, the
management expects the vacuum of inflows to persist for another year;
however, indicates that the true BTG manufacturing capacity in India could
be lower than the stated capacities of players and Chinese competition could
be waning given rising indigenisation. We maintain our SELL on the stock as
we find valuations rich at 23.6x FY16 P/E and 4.2x FY16 P/B.

Management indicates better FY15 for revenues and orders
According to the management, the topline of the company should grow in FY15,
given the 23% higher carry forward order book from last year. Moreover, last year
the company did not book revenues of Rs3bn as the customer clearances were not in
place; this alongside the Reliance order execution should lead to higher revenues.
Furthermore, the management indicated that the inquiries in the system should grow
as industrial companies across sectors (cement, O&G and steel) should start
considering capacity expansions with demand improving. Unlike the capacity
additions announced in FY07-10, this time the environment could be muted but
nonetheless it should be better than last couple of years. In order to broad base its
revenues in India, across product offerings, the company expects strong momentum
in its enviro business (standard packaged water treatment, industrial water treatment
and air pollution equipment). In terms of the IPP-led BTG inflows, the management
expects vacuum to persist for another one year unless client quality improves or the
competition capacities get consumed faster-than-expected.

International revenues to remain high over the next 4-5 years
Management indicated that exports presently account for ~20% of revenues and the
overall international revenues (including subsidiaries) are ~30-35% of revenues.
Management expects this number to continue to remain at these levels or even
higher despite the expected growth in the Indian business. Acquisition of
manufacturing capacities in Europe, setting up manufacturing of air pollution
capacities in India (Thermax is the only one in India) alongside low-cost design and
bidding teams based out of India will help it expand its footprint to regions such as
Middle East, South Africa and SE Asia. Even after offsetting losses in German
subsidiary, the Danish subsidiary is making profits for the company. These
international subsidiaries with manufacturing are important as these have the right
automation and the supply chain for the products required in these regions. For most
of its international subsidiaries the company is not chasing big markets. Moreover, in
its Chinese subsidiary the losses are reducing and this should provide more funds for
broad-basing growth there.

SELL
Quick Insight
Analysis

Meeting Note

News Impact

Stock Information
Bloomberg Code: TMX IN
CMP (Rs): 935
TP (Rs): 528


1M 3M 12M YTD
Absolute 4 26 58 33

Estimates (Rs bn)

FY14 FY15 FY16
Revenues 44.7 68.6 79.1
EBITDA 4.4 7.1 8.1
EPS (Rs) 19.8 34.0 39.6

Analysts
Bhargav Buddhadev
+91 22 3043 3252
bhargavbuddhadev@ambitcapital.com
Deepesh Agarwal
+91 22 3043 3275
deepeshagarwal@ambitcapital.com

Ambit India Access


Indias utilities-focused BTG capacity not as excessive as thought out to be
Management indicated that the utilities-focused BTG manufacturing capacity is not as
excessive as thought out to be. According to the management, BGR-Hitachi and
Gammon-Ansaldo capacities are unlikely to come up in the country. Alongside, the
Chinese competition is set to reduce given the appreciation in the Chinese currency,
available capacities in India, quality concerns around Chinese equipment and
dropping prices for Indian manufactured BTG given development of supply chain;
however, Doosan remains the clear competitive threat given their approach and the
capacities that they have in Korea. However, whether Doosan will put up capacities in
India is yet to be seen. The management indicated that the companies do not actually
approach the manufacturing capacity in terms of installed MW capacity and
depending upon the plant loading factor, the capacity for a same company can differ
for different periods. As per the management, Thermax in one period can produce
3000MW and in another period can produce higher than that if the configuration was
to be 660/800MW. The main machining centers which impact the true capacity are
(a) panel making and (b) coiling capacity. Whilst Thermax and L&T have 2 panel
making machines for their capacities, BHEL has only 4 numbers. Similarly, L&T and
Thermax have one coil making machine whereas BHEL has 2 numbers. BHELs such
low numbers of machineries for much higher capacities do not provide perfect clarity
on the overall production capacity for BTG. Moreover, the site construction flexibility
also impacts the true installed capacity base. Management expects that the orders for
IPP-led boilers will take another 6-12 months and in case the JV partner B&W wins
orders internationally then Thermax could be utilising the Indian facility for the same.
Lastly, management indicated that R-ADAG group is already talking to Indian BTG
manufacturers for procuring the balance orders, which if fructifies could be a boost
for the Indian players, for whom indigenisation has increased to 80% from earlier
50%.

Our View: Operating environment tough
Fresh ordering may be weak given (a) the pipeline of ~81GW as per the CEA list of
projects under construction; (b) lower PLFs (~66%) for existing operational capacity of
~243GW and (c) cumulative capacity addition of ~57GW which is operating at lower
than Indias average PLF given the gestation period. Our discussion with industry
experts suggests a per annum demand of ~15GW over the next ten years assuming a
recovery in GDP to ~8% from FY17 onwards (and a correlation of 1x between power
demand and Indias GDP), a recovery in average PLF to ~85% and timely
commissioning of the pipeline (given significant capex has already been incurred).
Note if Indias T&D losses of ~27% come off then the per annum ordering could
further reduce. The NDA government has been focusing a lot to improve the T&D
losses by implementing the Gujarats successful Jyotigram Yojana model of
providing 24 hour power supply through feeders having specially designed
transformers. Given domestic installed capacity of ~27GW (excludes BGR and GB
Engineering) and rising share of Chinese and Korean manufactures in Indias under
construction capacity (increased to ~40% of under construction capacity compared to
0% 5 years back); pricing for BTG capacity is likely to remain under pressure.
The benign pricing environment does not augur well for Thermaxs order book
growth (declined by ~10% in FY14 after excluding the one off Reliance order of
Rs17bn which was won by Thermax at aggressive pricing; a rare phenomenon for
Thermax) as it is one of the few companies that does not participate in aggressive
bidding. Consequently we do not expect any significant recovery in Thermax ROCE
which has already declined to ~23% in FY13 (consolidated balance sheet for FY14 is
not available) from 38% in FY11; note Thermaxs investment in the JV has already
reached to ~17% of its capital employed which is earning negative returns given the
fixed cost of Rs1bn.

Ambit India Access


Balance sheet
Year to March (Rs mn) FY13 FY14E FY15E FY16E
Networth 19,788 20,359 23,228 26,565
Loans 4,373 4,209 4,209 4,209
Other Liabilities 396 1,486 1,486 1,486
Sources of funds 24,557 26,054 28,923 32,260
Net block (incl. CWIP) 13,901 15,728 15,852 15,985
Net current assets 3,015 (4,414) 116 2,362
Investments 4,429 4,429 4,429 4,429
Cash 3,212 10,312 8,526 9,484
Application of funds 24,557 26,054 28,924 32,260
Income statement
Year to March (Rs mn) FY13 FY14E FY15E FY16E
Revenue 55,765 44,676 68,570 79,122
EBITDA 5,750 4,378 7,063 8,070
Depreciation 771 1,173 1,249 1,331
Interest expense 165 165 165 165
Other income - 557 524 603
PBT 4,814 3,597 6,173 7,178
Provision for taxation 1,772 1,234 2,117 2,462
Consolidated adj PAT 3,042 2,363 4,056 4,716
EPS diluted (Rs) 25.5 19.8 34.0 39.6
Cash flow statement
Year to March (Rs mn) FY13 FY14E FY15E
PBT 4,814 3,597 6,173
WC changes 4,968 7,254 (4,531)
CFO 8,747 10,956 939
Net capex (3,508) (3,000) (1,374)
Net Investments (1,902) - -
CFI (4,983) (3,165) (1,539)
Proceeds from borrowings 1,505 - -
Issue of equity - - -
CFF 346 (691) (1,186)
FCF 3,764 7,791 (599)
Ratio analysis
Year to March FY13 FY14E FY15E FY16E
Revenue growth (%) (8.5) (19.9) 53.5 15.4
EBITDA margin (%) 10.3% 9.8% 10.3% 10.2%
Net margin (%) 5.5% 5.3% 5.9% 6.0%
RoCE (%) 23.1 13.2 22.4 23.2
RoE (%) 16.9 11.8 18.6 18.9
Net debt / Equity (x) 0.1 (0.3) (0.2) (0.2)
P/E (x) 37.1 47.8 27.9 24.0
P/B(x) 5.7 5.5 4.9 4.3
EV/EBITDA(x) 18.6 24.4 15.1 13.2

Ambit India Access


Institutional Equities Team
Saurabh Mukherjea, CFA CEO, Institutional Equities (022) 30433174 saurabhmukherjea@ambitcapital.com
Research
Analysts Industry Sectors Desk-Phone E-mail
Nitin Bhasin - Head of Research E&C / Infrastructure / Cement (022) 30433241 nitinbhasin@ambitcapital.com
Aadesh Mehta Banking / Financial Services (022) 30433239 aadeshmehta@ambitcapital.com
Achint Bhagat Cement / Infrastructure (022) 30433178 achintbhagat@ambitcapital.com
Aditya Khemka Healthcare (022) 30433272 adityakhemka@ambitcapital.com
Akshay Wadhwa Banking & Financial Services (022) 30433005 akshaywadhwa@ambitcapital.com
Ashvin Shetty, CFA Automobile (022) 30433285 ashvinshetty@ambitcapital.com
Bhargav Buddhadev Power / Capital Goods (022) 30433252 bhargavbuddhadev@ambitcapital.com
Dayanand Mittal, CFA Oil & Gas / Metals & Mining (022) 30433202 dayanandmittal@ambitcapital.com
Deepesh Agarwal Power / Capital Goods (022) 30433275 deepeshagarwal@ambitcapital.com
Gaurav Mehta, CFA Strategy / Derivatives Research (022) 30433255 gauravmehta@ambitcapital.com
Karan Khanna Strategy (022) 30433251 karankhanna@ambitcapital.com
Krishnan ASV Real Estate (022) 30433205 vkrishnan@ambitcapital.com
Pankaj Agarwal, CFA Banking / Financial Services (022) 30433206 pankajagarwal@ambitcapital.com
Paresh Dave Healthcare (022) 30433212 pareshdave@ambitcapital.com
Parita Ashar Metals & Mining / Oil & Gas (022) 30433223 paritaashar@ambitcapital.com
Pratik Singhania Retail (022) 30433264 pratiksinghania@ambitcapital.com
Rakshit Ranjan, CFA Consumer / Retail (022) 30433201 rakshitranjan@ambitcapital.com
Ravi Singh Banking / Financial Services (022) 30433181 ravisingh@ambitcapital.com
Ritesh Vaidya Consumer (022) 30433246 riteshvaidya@ambitcapital.com
Ritika Mankar Mukherjee, CFA Economy / Strategy (022) 30433175 ritikamankar@ambitcapital.com
Ritu Modi Automobile (022) 30433292 ritumodi@ambitcapital.com
Tanuj Mukhija, CFA E&C / Infrastructure (022) 30433203 tanujmukhija@ambitcapital.com
Utsav Mehta Technology (022) 30433209 utsavmehta@ambitcapital.com
Sales
Name Regions Desk-Phone E-mail
Sarojini Ramachandran - Head of Sales UK +44 (0) 20 7614 8374 sarojini@panmure.com
Deepak Sawhney India / Asia (022) 30433295 deepaksawhney@ambitcapital.com
Dharmen Shah India / Asia (022) 30433289 dharmenshah@ambitcapital.com
Dipti Mehta India / USA (022) 30433053 diptimehta@ambitcapital.com
Nityam Shah, CFA USA / Europe (022) 30433259 nityamshah@ambitcapital.com
Parees Purohit, CFA UK / USA (022) 30433169 pareespurohit@ambitcapital.com
Praveena Pattabiraman India / Asia (022) 30433268 praveenapattabiraman@ambitcapital.com
Production
Sajid Merchant Production (022) 30433247 sajidmerchant@ambitcapital.com
Sharoz G Hussain Production (022) 30433183 sharozghussain@ambitcapital.com
Joel Pereira Editor (022) 30433284 joelpereira@ambitcapital.com
Nikhil Pillai Database (022) 30433265 nikhilpillai@ambitcapital.com
E&C = Engineering & Construction

Ambit India Access


Explanation of Investment Rating

Investment Rating Expected return
(over 12-month period from date of initial rating)
Buy >5%
Sell <5%

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