Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its
research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
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
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
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
June 30, 2014 Ambit Capital Pvt. Ltd. Page 4
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) Year to March (Rs mn) FY12 FY13 FY14 FY15E FY16E 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 Source: Company, Ambit Capital research
Ratio analysis (standalone) Year to March (Rs mn) FY12 FY13 FY14 FY15E FY16E 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% Source: Company, Ambit Capital research
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 Mcap (Rs bn/US$ bn): 192/3.2 3M ADV (Rs mn/US$ mn): 1,598/26.6
Stock Performance (%)
1M 3M 12M YTD Absolute (8) 10 (2) 15 Rel. to Sensex (9) (4) (37) (3) Source: Bloomberg, Ambit Capital research
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 Source: Bloomberg, Ambit Capital research
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 Source: Company, Ambit Capital research Income statement (consolidated) Year to March (Rs mn) FY12 FY13 FY14 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 Source: Company, Ambit Capital research 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 Source: Company, Ambit Capital research Return profile (consolidated) Year to March FY12 FY13 FY14 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 Source: Company, Ambit Capital research
Ambit India Access
June 30, 2014 Ambit Capital Pvt. Ltd. Page 8
L&T Finance Holdings London conference takeaways 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 Mcap (Rs bn/US$ bn): 125/2.1 3M ADV (Rs mn/US$ mn): 857/14.2
Stock Performance (%)
1M 3M 12M YTD Absolute (1) 2 (6) (3) Rel. to Sensex (2) (11) (41) (21) Source: Bloomberg, Ambit Capital research
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 Source: Bloomberg, Ambit Capital research
Balance sheet (consolidated) Year to March (Rs mn) FY12 FY13 FY14 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 Source: Company, Ambit Capital research
Income statement (consolidated) Year to March (Rs mn) FY12 FY13 FY14 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 Source: Company, Ambit Capital research
Ratio analysis (consolidated) Year to March FY12 FY13 FY14 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% Source: Company, Ambit Capital research
Return profile (consolidated) Year to March FY12 FY13 FY14 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% Source: Company, Ambit Capital research
Ambit India Access
June 30, 2014 Ambit Capital Pvt. Ltd. Page 10
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 3M ADV (Rs mn/US$ mn): 11/0.2
Stock Performance (%)
1M 3M 12M YTD Absolute (6) (2) 4 (13) Rel. to Sensex (8) (16) (31) (31) Source: Bloomberg, Ambit Capital research
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
June 30, 2014 Ambit Capital Pvt. Ltd. Page 12
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
June 30, 2014 Ambit Capital Pvt. Ltd. Page 13
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) Source: Company, Ambit Capital research Cash flow statement Year to March (Rs mn) FY11 FY12 FY13 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) Source: Company, Ambit Capital research 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) Source: Company, Ambit Capital research
Ambit India Access
June 30, 2014 Ambit Capital Pvt. Ltd. Page 14
Somany Ceramics London conference takeaways 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 3M ADV (Rs mn/US$ mn): 9/0.1
Stock Performance (%)
1M 3M 12M YTD Absolute 12 45 251 114 Rel. to Sensex 11 32 216 95 Source: Bloomberg, Ambit Capital research
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
June 30, 2014 Ambit Capital Pvt. Ltd. Page 16
Thermax London conference takeaways 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.
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
June 30, 2014 Ambit Capital Pvt. Ltd. Page 18
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 Source: Company, Ambit Capital research 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 Source: Company, Ambit Capital research 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) Source: Company, Ambit Capital research 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 Source: Company, Ambit Capital research
Ambit India Access
June 30, 2014 Ambit Capital Pvt. Ltd. Page 19
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
June 30, 2014 Ambit Capital Pvt. Ltd. Page 20
Explanation of Investment Rating
Investment Rating Expected return (over 12-month period from date of initial rating) Buy >5% Sell <5%
Disclaimer
This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Ambit Capital. AMBIT Capital Research is disseminated and available primarily electronically, and, in some cases, in printed form. Additional information on recommended securities is available on request. Disclaimer 1. AMBIT Capital Private Limited (AMBIT Capital) and its affiliates are a full service, integrated investment banking, investment advisory and brokerage group. AMBIT Capital is a Stock Broker, Portfolio Manager and Depository Participant registered with Securities and Exchange Board of India Limited (SEBI) and is regulated by SEBI 2. The recommendations, opinions and views contained in this Research Report reflect the views of the research analyst named on the Research Report and are based upon publicly available information and rates of taxation at the time of publication, which are subject to change from time to time without any prior notice. 3. AMBIT Capital makes best endeavours to ensure that the research analyst(s) use current, reliable, comprehensive information and obtain such information from sources which the analyst(s) believes to be reliable. However, such information has not been independently verified by AMBIT Capital and/or the analyst(s) and no representation or warranty, express or implied, is made as to the accuracy or completeness of any information obtained from third parties. The information or opinions are provided as at the date of this Research Report and are subject to change without notice. 4. If you are dissatisfied with the contents of this complimentary Research Report or with the terms of this Disclaimer, your sole and exclusive remedy is to stop using this Research Report and AMBIT Capital shall not be responsible and/ or liable in any manner. 5. If this Research Report is received by any client of AMBIT Capital or its affiliate, the relationship of AMBIT Capital/its affiliate with such client will continue to be governed by the terms and conditions in place between AMBIT Capital/ such affiliate and the client. 6. This Research Report is issued for information only and should not be construed as an investment advice to any recipient to acquire, subscribe, purchase, sell, dispose of, retain any securities. Recipients should consider this Research Report as only a single factor in making any investment decisions. This Research Report is not an offer to sell or the solicitation of an offer to purchase or subscribe for any investment or as an official endorsement of any investment. 7. If 'Buy', 'Sell', or 'Hold' recommendation is made in this Research Report such recommendation or view or opinion expressed on investments in this Research Report is not intended to constitute investment advice and should not be intended or treated as a substitute for necessary review or validation or any professional advice. The views expressed in this Research Report are those of the research analyst which are subject to change and do not represent to be an authority on the subject. AMBIT Capital may or may not subscribe to any and/ or all the views expressed herein. 8. AMBIT Capital makes no guarantee, representation or warranty, express or implied; and accepts no responsibility or liability as to the accuracy or completeness or currentess of the information in this Research Report. AMBIT Capital or its affiliates do not accept any liability whatsoever for any direct or consequential loss howsoever arising, directly or indirectly, from any use of this Research Report. 9. Past performance is not necessarily a guide to evaluate future performance. 10. AMBIT Capital and/or its affiliates (as principal or on behalf of its/their clients) and their respective officers directors and employees may hold positions in any securities mentioned in this Research Report (or in any related investment) and may from time to time add to or dispose of any such securities (or investment). Such positions in securities may be contrary to or inconsistent with this Research Report. 11. This Research Report should be read and relied upon at the sole discretion and risk of the recipient. 12. The value of any investment made at your discretion based on this Research Report or income therefrom may be affected by changes in economic, financial and/ or political factors and may go down as well as up and you may not get back the full or the expected amount invested. Some securities and/ or investments involve substantial risk and are not suitable for all investors. 13. This Research Report is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied in whole or in part, for any purpose. Neither this Research Report nor any copy of it may be taken or transmitted or distributed, directly or indirectly within India or into any other country including United States (to US Persons), Canada or Japan or to any resident thereof. The distribution of this Research Report in other jurisdictions may be strictly restricted and/ or prohibited by law or contract, and persons into whose possession this Research Report comes should inform themselves about such restriction and/ or prohibition, and observe any such restrictions and/ or prohibition. 14. Neither AMBIT Capital nor its affiliates or their respective directors, employees, agents or representatives, shall be responsible or liable in any manner, directly or indirectly, for views or opinions expressed in this Report or the contents or any errors or discrepancies herein or for any decisions or actions taken in reliance on the Report or inability to use or access our service or this Research Report or for any loss or damages whether direct or indirect, incidental, special or consequential including without limitation loss of revenue or profits that may arise from or in connection with the use of or reliance on this Research Report or inability to use or access our service or this Research Report. Conflict of Interests 15. In the normal course of AMBIT Capitals business circumstances may arise that could result in the interests of AMBIT Capital conflicting with the interests of clients or one clients interests conflicting with the interest of another client. AMBIT Capital makes best efforts to ensure that conflicts are identified and managed and that clients interests are protected. AMBIT Capital has policies and procedures in place to control the flow and use of non-public, price sensitive information and employees personal account trading. Where appropriate and reasonably achievable, AMBIT Capital segregates the activities of staff working in areas where conflicts of interest may arise. However, clients/potential clients of AMBIT Capital should be aware of these possible conflicts of interests and should make informed decisions in relation to AMBIT Capitals services. 16. AMBIT Capital and/or its affiliates may from time to time have investment banking, investment advisory and other business relationships with companies covered in this Research Report and may receive compensation for the same. Research analysts provide important inputs into AMBIT Capitals investment banking and other business selection processes. 17. AMBIT Capital and/or its affiliates may seek investment banking or other businesses from the companies covered in this Research Report and research analysts involved in preparing this Research Report may participate in the solicitation of such business. 18. In addition to the foregoing, the companies covered in this Research Report may be clients of AMBIT Capital where AMBIT Capital may be required, inter alia, to prepare and publish research reports covering such companies and AMBIT Capital may receive compensation from such companies in relation to such services. However, the views reflected in this Research Report are objective views, independent of AMBIT Capitals relationship with such company. 19. In addition, AMBIT Capital may also act as a market maker or risk arbitrator or liquidity provider or may have assumed an underwriting commitment in the securities of companies covered in this Research Report (or in related investments) and may also be represented in the supervisory board or on any other committee of those companies. Additional Disclaimer for U.S. Persons 20. The research report is solely a product of AMBIT Capital 21. AMBIT Capital is the employer of the research analyst(s) who has prepared the research report 22. Any subsequent transactions in securities discussed in the research reports should be effected through J.P.P. Euro-Securities, Inc. (JPP). 23. JPP does not accept or receive any compensation of any kind for the dissemination of the AMBIT Capital research reports. 24. The research analyst(s) preparing the research report is resident outside the United States and is/are not associated persons of any U.S. regulated broker-dealer and that therefore the analyst(s) is/are not subject to supervision by a U.S. broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account. Additional Disclaimer for Canadian Persons 25. AMBIT Capital is not registered in the Province of Ontario and /or Province of Qubec to trade in securities nor is it registered in the Province of Ontario and /or Province of Qubec to provide advice with respect to securities. 26. AMBIT Capital's head office or principal place of business is located in India. 27. All or substantially all of AMBIT Capital's assets may be situated outside of Canada. 28. It may be difficult for enforcing legal rights against AMBIT Capital because of the above. 29. Name and address of AMBIT Capital's agent for service of process in the Province of Ontario is: Torys LLP, 79 Wellington St. W., 30th Floor, Box 270, TD South Tower, Toronto, Ontario M5K 1N2 Canada. 30. Name and address of AMBIT Capital's agent for service of process in the Province of Montral is Torys Law Firm LLP, 1 Place Ville Marie, Suite 1919 Montral, Qubec H3B 2C3 Canada.
Copyright 2014 AMBIT Capital Private Limited. All rights reserved.