Professional Documents
Culture Documents
November 2014
2014
2024
Nitin Bhasin
nitinbhasin@ambitcapital.com
Sagar Rastogi
sagarrastogi@ambitcapital.com
Aditya Khemka
adityakhemkal@ambitcapital.com
Karan Khanna
karankhanna@ambitcapital.com
Bhargav Buddhadev
bhargavbuddhadev@ambitcapital.com
Anupam Gupta
anupam.gupta@aavanresearch.com
Strategy
CONTENTS
STRATEGY
The Indian Coffee Can Portfolio3
Section 1: The case for a Coffee Can Portfolio.. 4
Section 2: Constructing the Indian Coffee Can Portfolio. 7
Section 3: How the Coffee Can is different to our other portfolio constructs14
Section 4: Todays Coffee Can for 2014-202416
COMPANIES
ITC (NOT RATED) .. 19
HDFC Bank (SELL) . 25
HCL Tech (BUY) . 31
Axis Bank (BUY) . 37
Asian Paints (SELL) 43
Godrej Consumer (SELL) . 49
Marico (BUY) .. 55
Berger Paints (SELL) .. 61
Page Industries (BUY) ...67
IPCA Laboratories (BUY) ..73
Gruh Finance (NOT RATED) 79
Balkrishna Industries (BUY) . 83
City Union Bank (BUY) . 89
eClerx (UNDER REVIEW) ..95
V-Guard (BUY) .101
Mayur Uniquoters (NOT RATED) . 107
Page 2
Strategy
THEMATIC
We introduce the Coffee Can Portfolio for investors who have the ability to
hold stocks for very long periods of time (ideally, for ten years). Our portfolio
consists of large-cap and small-cap stocks that have delivered 10% sales
growth and 15% RoCE every single year over FY05-14. Detailed back-testing
shows that this portfolio, including a large-cap only version, beats
benchmarks across all time periods. The portfolio also performs admirably
well in stress tests of maximum drawdown (in periods like the Lehman crisis).
Left untouched for a decade, this portfolio, coupled with the power of
compounding, generates returns that are substantially higher than the
benchmark.
The case for a Coffee Can Portfolio
Thirty years ago, Robert Kirby of Capital Guardian Trust spoke of how a Coffee Can
Portfolio of stocks selected using superior research and left untouched for a decade
can deliver superior returns over the long term. Over and above the quality of the
stock selection process, three other factors help the Coffee Can Portfolio generate
superior returns: (a) no churn this reduces transaction costs; (b) the power of
compounding stocks that do well over the long term become disproportionately
large in the overall portfolio; and (c) the long holding period of the portfolio helps
the investor effectively neutralise the noise that distracts from the core investment
thesis of a stock.
ITC
Our stance: NR
HDFC Bank
HCL Tech
Axis Bank
Asian Paints
Godrej Consumer
Marico
Berger Paints
Page Inds
So here is the CCP for 2014to be bought now and opened ten years hence!
Our 2014 CCP consists of 16 stocks, including four banks. The list includes large-caps
with hugely successful franchises (ITC, HDFC Bank, HCL Tech, Axis Bank and Asian
Paints) as well as robust, fast-growing mid-caps/small-caps (Godrej Consumer,
Marico, IPCA Labs, GRUH Finance, Berger Paints, Page Industries, Balkrishna
Industries, City Union Bank, eClerx, V-Guard Industries and Mayur Uniquoters).
Our research clearly shows that valuation at the entry-point does not make a
difference for those who are willing to invest for the truly long run. Hence,
valuation parameters play no role whatsoever in the construction of the CCP.
Mayur Uniquoters
Our stance: NR
IPCA Labs
Gruh Finance
Our stance: NR
Balkrishna Inds
eClerx
Our stance: UR
V-Guard Inds
Analyst Details
Saurabh Mukherjea, CFA
+91 99877 85848
saurabhmukherjea@ambitcapital.com
The Coffee Can Portfolio, including the large-cap version, beats the Sensex in each Gaurav Mehta, CFA
of the five iterations that were run over 2000-2014
+91 22 3043 3255
CAGR returns for ten-year
CCP All-cap
CCP Large-cap
Sensex gauravmehta@ambitcapital.com
period starting
30 June 2000 30 June 2010
16.7%
17.8%
14.1%
21.7%
23.6%
18.5%
19.0%
19.3%
18.3%
25.1%
27.5%
18.3%
31.6%
18.2%
18.1%
Karan Khanna
+91 22 3043 3251
karankhanna@ambitcapital.com
Consultant: Anupam Gupta
anupam.gupta@aavanresearch.com
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.
Strategy
Following the sudden death of his clients husband who handled her financial
affairs, Kirby was intrigued to see that the husband had secretly piggy-backed the
recommendations made by Kirby for the wifes portfolio. However, the husband
had managed to outperform the portfolio that Kirby managed for the wife by
applying a twist to Kirbys advice: he paid no attention to the sale
recommendations. He had simply put US$5,000 for every purchase
recommendation, tossed the share certificate in the safe deposit box and forgotten
about it.
On evaluating the portfolio, Kirby noticed several small holdings (with a value of
less than US$2,000) and large holdings (with values in excess of US$8,000).
However, one jumbo holding worth over US$800,000 stood out since it exceeded
the value of his wifes portfolio (which Kirby was managing) and was made from a
small investment in Haloid, which later resulted in a zillion shares of Xerox.
Kirby coined it the term Coffee Can Portfolio because the concept harkens back
to the Wild West, when Americans, before the widespread advent of banks, saved
their valuables in a coffee can and kept it under a mattress.
No churn: By holding a portfolio of stocks for over ten years, a fund manager
resists the temptation to buy/sell in the short term. With no churn, the Coffee
Can approach reduces transaction costs which add to the overall portfolio
performance over the long term. We illustrate this with an example below.
Assume that you invest US$100mn in the CCP which kicks off on 30 June 2004
(discussed in greater detail in Section 2 of this note). Assume further that you
churn this portfolio by 25% per annum (implying that a typical position is held
for four years). Assuming a total price impact cost and brokerage cost of
100bps for every trade done over a ten-year period, this portfolio would
generate CAGR returns of 30.8%. Left untouched, however, the same portfolio
would have generated CAGR returns of 31.5%. This implies ~4.4% of the final
corpus (~US$67mn in value terms) is lost to churn over the ten-year period.
Thus, a US$100mn portfolio that would have grown to US$1.53bn over the
ten-year period (30 June 2004 - 30 June 2014) in effect grows to US$1.46bn
due to high churn.
Page 4
Strategy
compared the portfolios to the market average over three different time periods
(4 months, 1 year and 2 years). In every case, he found two amazing trends: (1)
the stocks that the investors bought consistently trailed the market, and (2) the
stocks that they sold actually beat the market1.
Odean wanted to look deeper, so he next examined the trading behavior and
performance results of 6,465 households. In a paper titled, Trading Is
Hazardous to Your Wealth (2000), Odean, along with Brad Barber, professor of
finance at University of California, Davis, compared the records of people who
traded frequently versus people who traded less often. They found that, on
average, the most active traders had the poorest results, while those who traded
the least earned the highest returns2. The implication here is that people who
might have suffered the most from myopic loss aversion and acted upon it by
selling stocks and did less well much less well than those who were able to
resist the natural impulse and instead hold their ground.
The CCPs indifference to short term trends (such as economic booms & busts,
sector-specific fads, performance blips in companies, etc) allows it to
outperform the benchmark consistently. In other words, the benchmark
responds to or reflects - every trend, fad and fashion in the market whilst the
CCP is indifferent to these trends, fads and fashions which are typically
temporary in nature - and even out over the longer term.
The CCP is also an effective way of killing noise that interferes with the
investment process. In Investing The Last Liberal Art, Hagstrom also talks
about the chaotic environment, with so much rumor, miscalculation, and bad
information swirling. Such an environment was labelled noise by Fischer
Black, the inventor of the Black-Scholes formula. Hagstrom goes on to say:
Is there a solution for noise in the market? Can we distinguish between noise
prices and fundamental prices? The obvious answer is to know the economic
fundamentals of your investment so you can rightly observe when prices have
moved above or below your companys intrinsic value. It is the same lesson
preached by Ben Graham and Warren Buffett. But all too often, deep-rooted
psychological issues outweigh this commonsensical advice. It is easy to say we
should ignore noise in the market but quite another thing to master the
psychological effects of that noise. What investors need is a process that allows
1
Terence Odean, Do investors trade too much? American economic review (December
1999)
2
Terence Odean and Brad Barber, "Trading Is Hazardous to Your Wealth: The Common
Stock Investment Performance of Individual Investors," Journal of Finance 55, no. 2 (April
2000)
Page 5
Strategy
them to reduce the noise, which then makes it easier to make rational
decisions.
As an example, we highlight how, over the long term, Hero MotoCorps stock
price has withstood short-term news such as disappointing monthly sales,
aggressive competitive launches as well as the split with Honda.
Exhibit 1: Hero MotoCorps stock price has compounded at an impressive 18%
CAGR over 2004-2014
Jun-14
Jun-13
Jun-12
Jun-11
Jun-10
Jun-09
Jun-08
Jun-07
Jun-06
Jun-05
Jun-04
3,200
2,800
2,400
2,000
1,600
1,200
800
400
-
Hero Motocorp
Source: Bloomberg, Ambit Capital research
The chart shown above highlights that over the past ten years there are two
extended time periods when Heros share price has not gone anywhere 2006
to 2008 and then 2010 to 2013. In fact for five of the past ten years, Heros
share price has been flat. And yet, in the remaining half of the past decade,
Hero has performed so well that the 10-year CAGR of the share price is 18%.
At its simplest, this is why the Coffee Can concept works once you have
identified a great franchise and you have the ability to hold on it for a long
period time, there is no point trying to be too precise about timing your entry
or your exit. As soon as we try to time that entry/exit, we run the risk of noise
rather than fundamentals driving our investment decisions.
Page 6
Strategy
Market cap of more than Rs1bn: India is the least liquid among the worlds
15 largest equity markets. Thus, for institutional clients, we believe a market
capitalisation of Rs1bn is the bare minimum to take a position in the stock.
Stocks smaller than this tend to be illiquid and create high impact costs.
Why RoCE? Whilst management teams have a natural desire for growth
and scale, growth creates shareholder value only when the returns on
capital exceed the cost of capital. RoCE, therefore, is of utmost importance
in assessing a firms performance. Our empirical work on share price
performance of Indian companies also supports the primacy of RoCE as a
share price driver (see the exhibit below).
Exhibit 2: RoCE drives share prices (This chart is based on data from March 2002 to
March 2012)
Median outperformance - Ten-year CAGR
12.0%
12%
9.0%
10%
8%
6%
5.9%
4%
2%
0%
Superior revenue growth
Superior RoCE
Superior on both
Source: Bloomberg, Ambit Capital research. Note* The universe in 2002s BSE200 firms (ex-financials);
performance relative to the BSE200 Index.
Revenue growth of 10% every year: Indias nominal GDP growth rate has
averaged 15% over the past ten years. A firm operating in India should,
therefore, be able to deliver sales growth of at least 15% per annum. However,
very few listed companies, only 5 out of the ~1,100 firms run under our
screen, have managed to achieve this! Therefore, we reduce this filter rate
modestly to 10% i.e. we look for companies that have delivered revenue
growth of 10% per annum every year for ten consecutive years.
Page 7
Strategy
In summary, our filters for non-Financial Services stocks focus on a minimum
market cap of Rs1bn, RoCE of 15% for more over ten consecutive years and sales
growth of 10% for more over ten consecutive years. In effect, a healthy RoCE
protects the franchise and sales growth expands the franchise.
For Financial Services stocks, we keep the market-cap limit of Rs1bn and modify
the filters on RoE and sales growth as follows:
ROE of 15%: We prefer Return on Equity over Return on Assets because this is
a fairer measure of the banks ability to generate higher income efficiently on
a given equity capital base over time.
Loan growth of 15%: We believe loan growth of 15% is an indication of a
banks ability to lend over business cycles. Strong lenders ride the down-cycle
better, as their competitive advantages surrounding their origination, appraisal
and collection process ensure that they continue their growth profitably either
through market share improvements or upping the ante in sectors which are
resilient during a downturn.
We summarise the results of each of the five iterations in the next five pages.
Page 8
Strategy
All-cap CCP
CAGR returns
Maximum drawdown**
Excess returns
Large-cap CCP
Sensex
16.7%
17.8%
14.1%
-42.2%
-39.2%
-52.4%
0.21
0.25
0.12
Source: Bloomberg, Ambit Capital research. Note: * Portfolio kicks off on 30 June 2000. Excess returns have
been calculated as returns in excess of risk-free rate (assumed to be 8%) divided by absolute maximum
drawdown. Maximum drawdown is defined as the maximum drop in cumulative returns from the highest peak
to the lowest subsequent trough. ** Maximum drawdown took place from June 2000 to March 2003 for the
all-cap CCP and large-cap CCP, and from December 2007 to December 2008 for the Sensex.
The four stocks that constituted the first iteration of the Coffee Can Portfolio
consisted of one IT, one pharma company, and two companies from the
automobile/auto-ancillary sector. These were NIIT, Cipla, Hero MotoCorp and
Swaraj Engines. The star performer during this period was Hero MotoCorp which
proved to be a ten-bagger whilst NIITs stock price collapsed 78% in this period.
Exhibit 5: Portfolio performance during the first iteration
Company
Date from/to
30/06/2000
Share price
CAGR
FY2000-10
PAT CAGR
30/06/2010
NIIT
295
65
-14.1%
-11%
Cipla
69
339
17.2%
23%
Hero Moto
198
2,049
26.4%
27%
Swaraj Engines
118
378
12.4%
7%
Portfolio*
400
1,870
16.7%
4,749
17,701
14.1%
Sensex
Source: Bloomberg, Ambit Capital research. Note: *Portfolio price at start of Rs400 denotes an equal
allocation of Rs100 in each stock at the start of the period. Portfolio price at end is the value of the portfolio
at the end of the period. Thus, for this period, the value of the portfolio rose from Rs400 at the start to
Rs1,870 at the end.
(Rs)
1,800
1,600
1,400
1,200
Swaraj Engines
1,000
Hero Moto
800
Cipla
600
NIIT
400
200
Value at start
Value at end
Source: Bloomberg, Ambit Capital research. Note: Value at start denotes an equal allocation of Rs100 in each
stock at the start of the period. Value at end is the value of each stock at the end of the period. Thus, for this
period, the value of the portfolio rose from Rs400 at the start to Rs1,870 at the end.
Page 9
Strategy
All-cap CCP
21.7%
-37.7%
0.36
Large-cap CCP
23.6%
-39.7%
0.39
Sensex
18.5%
-52.4%
0.20
Source: Bloomberg, Ambit Capital research. Note: * Portfolio kicks off on 29 June 2001. Excess returns have
been calculated as returns in excess of risk-free rate (assumed to be 8%) divided by absolute maximum
drawdown. Maximum drawdown is defined as the maximum drop in cumulative returns from the highest peak
to the lowest subsequent trough. ** Maximum drawdown took place from June 2001 to March 2003 for the
all-cap CCP and large-cap CCP, and from December 2007 to December 2008 for the Sensex.
During the second iteration as well, the Coffee Can Portfolio consisted of four
stocks with two repeats (Cipla and Hero MotoCorp from the Period 1) and two new
entries (Apollo Hospitals and Roofit Industries). During this period, note that one of
the stocks in the portfolio, Roofit Industries, was delisted during 2001-2011.
Despite this, the portfolio performed admirably. The star performer yet again was
Hero MotoCorp whose stock price rose 13x whilst Cipla was a laggard at 3.6x.
Exhibit 8: Portfolio performance during the second iteration
Price at Start
(Rsbn)
29/06/2001
91
145
40
106
400
3,457
Company
Date from/to
Cipla
Hero Motocorp
Apollo Hospitals
Roofit Inds.
Portfolio*
Sensex
Price at End
(Rsbn)
29/06/2011
331
1,877
478
NA
2,855
18,846
Share
price CAGR
FY01-11
PAT CAGR
13.7%
29.2%
28.1%
NA
21.7%
18.5%
19%
22%
19%
NA
Source: Bloomberg, Ambit Capital research. Note: NA - Data for Roofit is not available because the company
was delisted during this period. *Portfolio price at start of Rs400 denotes an equal allocation of Rs100 in each
stock at the start of the period. Portfolio price at end is the value of the portfolio at the end of the period.
Thus, for this period, the value of the portfolio rose from Rs400 at the start to Rs2,855 at the end.
(Rs)
2,500
2,000
Roofit Inds
1,500
Apollo Hosp
1,000
Hero Moto
Cipla
500
Value at start
Value at end
Source: Bloomberg, Ambit Capital research. Note: Data for Roofit Ind is not available from FY03 onwards.
Value at start denotes an equal allocation of Rs100 in each stock at the start of the period. Value at end is the
value of each stock at the end of the period. Thus, for this period, the value of the portfolio rose from Rs400 at
the start to Rs2,855 at the end.
Page 10
Strategy
Cipla,
Container
All-cap CCP
CAGR returns
Maximum drawdown**
Excess returns
Large-cap CCP
Sensex
19.0%
19.3%
18.3%
-42.6%
-35.1%
-52.4%
0.26
0.32
0.20
Source: Bloomberg, Ambit Capital research. Note: * Portfolio kicks off on 28 June 2002. Excess returns have
been calculated as returns in excess of risk-free rate (assumed to be 8%) divided by absolute maximum
drawdown. Maximum drawdown is defined as the maximum drop in cumulative returns from the highest peak
to the lowest subsequent trough. ** Maximum drawdown took place from June 2007 to December 2008 for
the all-cap CCP, from December 2006 to December 2008 for the large-cap CCP and from December 2007 to
December 2008 for the Sensex.
The Coffee Can Portfolio expanded in size during the third iteration. Compared
with the four stocks in the first two iterations, six stocks qualified to be part of the
Coffee Can Portfolio in the third iteration. Cipla and Hero MotoCorp were
repeated yet again whilst the other four stocks were Infosys, Container
Corporation, Gujarat Gas and Aurobindo Pharma.
Exhibit 11: Portfolio performance during the third iteration
Company
Date from/to
28/06/2002
29/06/2012
Infosys
411
2,509
19.8%
26%
Hero Motocorp
308
2,149
21.4%
17%
Cipla
75
317
15.4%
18%
Container Corpn.
99
613
20.0%
13%
50
310
20.0%
17%
11%
Aurobindo Pharma
Portfolio*
Sensex
24
110
16.6%
600
3,427
19.0%
3,245
17,430
18.3%
Source: Bloomberg, Ambit Capital research. Note: *Portfolio price at start of Rs600 denotes an equal
allocation of Rs100 in each stock at the start of the period. Portfolio price at end is the value of the portfolio
at the end of the period. Thus, for this period, the value of the portfolio rose from Rs600 at the start to
Rs3,427 at the end.
Exhibit 12: During this phase, the portfolio broadly tracked the Sensex
4,000
(Rs)
Auro Pharma
3,000
Guj Gas
2,000
ConCor
Cipla
1,000
Hero Moto
Infosys
Value at start
Value at end
Source: Bloomberg, Ambit Capital research. Note: Value at start denotes an equal allocation of Rs100 in each
stock at the start of the period. Value at end is the value of each stock at the end of the period. Thus, for this
period, the value of the portfolio rose from Rs600 at the start to Rs3,427 at the end.
Page 11
Strategy
All-cap CCP
CAGR returns
Maximum drawdown**
Excess returns
Large-cap CCP
Sensex
25.1%
27.5%
18.3%
-28.4%
-22.2%
-52.4%
0.60
0.88
0.20
Source: Bloomberg, Ambit Capital research. Note: * Portfolio kicks off on 30 June 2003. Excess returns have
been calculated as returns in excess of risk-free rate (assumed to be 8%) divided by absolute maximum
drawdown. Maximum drawdown is defined as the maximum drop in cumulative returns from the highest peak
to the lowest subsequent trough. ** Maximum drawdown took place from June 2007 to December 2008 for
the all-cap CCP, from September 2008 to December 2008 for the large-cap CCP and from December 2007 to
December 2008 for the Sensex.
Barring one addition (Sun Pharma), the Coffee Can Portfolio in its fourth iteration
was the same as that in the third iteration. Performance was driven by Sun
Pharmas stellar performance. However, the performance of the large-cap version
was better than the all-cap version of the Coffee Can Portfolio.
Exhibit 14: Portfolio performance during the fourth iteration
Company
Date from/to
Infosys
Cipla
Hero Motocorp
Sun Pharma.Inds.
Container Corpn.
Aurobindo Pharma
Guj Gas Company
Portfolio*
Sensex
30/06/2003
408
60
253
16
115
37
45
700
3,607
30/06/2013
2,499
392
1,663
506
719
181
191
6,585
19,396
26%
20%
13%
30%
13%
14%
18%
Source: Bloomberg, Ambit Capital research. Note: *Portfolio price at start of Rs700 denotes an equal
allocation of Rs100 in each stock at the start of the period. Portfolio price at end is the value of the portfolio
at the end of the period. Thus, for this period, the value of the portfolio rose from Rs700 at the start to
Rs6,585 at the end.
(Rs)
6,000
GujGas
5,000
Auro Pharma
4,000
ConCor
Sun Pharma
3,000
Hero Moto
2,000
Cipla
1,000
Infosys
Value at start
Value at end
Source: Bloomberg, Ambit Capital research. Note: Value at start denotes an equal allocation of Rs100 in each
stock at the start of the period. Value at end is the value of each stock at the end of the period. Thus, for this
period, the value of the portfolio rose from Rs700 at the start to Rs6,585 at the end.
Page 12
Strategy
All-cap CCP
31.6%
-64.1%
0.37
Large-cap CCP
18.2%
-33.9%
0.30
Sensex
18.1%
-52.4%
0.19
Source: Bloomberg, Ambit Capital research. Note: * Portfolio kicks off on 30 June 2004. Excess returns have
been calculated as returns in excess of risk-free rate (assumed to be 8%) divided by absolute maximum
drawdown. Maximum drawdown is defined as the maximum drop in cumulative returns from the highest peak
to the lowest subsequent trough. ** Maximum drawdown took place from December 2007 to December 2008
for the all-cap CCP, from December 2006 to December 2008 for the large-cap CCP and from December
2007 to December 2008 for the Sensex.
Date from/to
Infosys
Hero Motocorp
Cipla
Container Corpn.
Guj Gas Company
Alok Inds.
Munjal Showa
Havells India
Portfolio*
Sensex
30/06/2004
690
508
85
188
43
45
34
3
800
4,795
30/06/2014
3,256
2,635
438
1,189
415
14
142
235
12,469
25,414
24%
11%
16%
10%
17%
19%
12%
37%
Source: Bloomberg, Ambit Capital research. Note: * Portfolio price at start of Rs800 denotes an equal
allocation of Rs100 in each stock at the start of the period. Portfolio price at end is the value of the portfolio
at the end of the period. Thus, for this period, the value of the portfolio rose from Rs800 at the start to
Rs12,469 at the end.
(Rs)
Havells
12,000
Munjal Showa
10,000
Alok Inds.
8,000
6,000
Guj Gas
4,000
ConCor
2,000
Cipla
Value at start
Value at end
Hero Moto
Source: Bloomberg, Ambit Capital research. Note: Value at start denotes an equal allocation of Rs100 in each
stock at the start of the period. Value at end is the value of each stock at the end of the period. Thus, for this
period, the value of the portfolio rose from Rs800 at the start to Rs12,469 at the end.
Page 13
Strategy
Within each sector, we first identify firms that do well on our greatness and
accounting frameworks;
We then overlay our macro outlook and valuation filters to identify sectors
which are placed favourably; and
The sector-level champions from step 1 (for the sectors identified in step 2)
constitute our G&C portfolio.
Please click here for the latest G&C portfolio published on 25th July 2014.
Ten-bagger: We first unveiled this portfolio - built using our greatness
framework - in January 2012. [See our 19th January 2012 note - Tomorrows ten
baggers - for the framework behind this construct note; click here for the note.]
This framework studies a firms structural strengths by focusing not on absolutes
but rather on improvements over a period of time and the consistency of those
improvements.
A basic sketch of the underlying process behind the making of a great firm has
been recaptured in Exhibit 19 below.
Exhibit 19: The greatness framework
a. Investment (gross
block)
b.
Conversion
of
investment to sales
(asset turnover, sales)
c.
Pricing
discipline
(PBIT margin)
e. Cash generation
(CFO)
d.
Balance
sheet
discipline (D/E, cash
ratio)
We rank the BSE500 universe of firms (excluding financial services firms and
excluding firms with insufficient data) on our greatness score, which consists of six
equally weighted headingsinvestments, conversion to sales, pricing discipline,
balance sheet discipline, cash generation and EPS improvement, and return ratio
improvement. Under each of these six headings, we further look at two kinds of
improvements:
Page 14
Strategy
A complete list of factors that are considered whilst quantifying greatness has been
mentioned in Exhibit 20 below.
Exhibit 20: Factors used for quantifying greatness
Head
1 Investments
2 Conversion to sales
Criteria
a.
b.
3 Pricing discipline
4 Balance sheet discipline
a.
b.
a.
b.
c.
d.
a.
b.
c.
d.
6 Return ratio improvement a.
b.
c.
d.
Source: Ambit Capital research; Note: * Rather than comparing one annual endpoint to another annual
endpoint (say, FY08 to FY13), we prefer to average the data out over FY08-10 and compare that to the
averaged data from FY11-13. This gives a more consistent picture of performance (as opposed to simply
comparing FY08 to FY13).
The ten-bagger portfolio focuses on structural plays that are financially strong firms
(with credible management teams) and remain consistent performers on a crosscyclical basis. Companies are identified based on their relentless improvement in
financial performance over long periods of time (usually, six years). This portfolio is
ideal for conventional buy-and-hold investors with a 1-3 year horizon.
Adding the Coffee Can for long-term investors with a ten-year outlook
To this suite of portfolios, we now add the Coffee Can which is ideal for long-term
investors with a ten-year outlook. In the table below, we summarise our portfolio
recommendations for investors.
Exhibit 21: Our suite of Portfolios for investors looking to invest in India
Type of Investor
Recommended Ambit
Portfolio
Ten-bagger portfolio
In the next section, we discuss the rationale used for constructing the India Coffee
Can Portfolio.
Page 15
Strategy
FY15 P/E
2,966
28.8
HCL Tech
12%
1,134
15.5
Asian Paints
19%
622
42.3
Godrej Consumer
21%
319
37.2
Marico
17%
205
37.2
Berger Paints
19%
126
40.6
Page Ind
47%
109
53.9
IPCA
14%
80
18.4
Balkrishna Inds.
18%
80
12.2
Astral Polytechnik#
53%
41
38.9
eClerx
30%
39
15.3
V-Guard Inds.
33%
27
26.5
Mayur Uniquoters
76%
19
26.4
Insecticide India
23%
10
18.3
Source: Bloomberg, Capitaline, Ambit Capital research; Note: Share price performance has been measured
over a ten-year period (i.e. March 2004 to March 2014). In case of firms with a shorter listing history, the
performance has been measured over the shorter period (not less than 5 years). * Market cap as on 31
October 2014. Page Inds, eClerx, V-Guard and Insecticides India were not listed throughout the ten-year
period and hence the financial data used is based on Draft Red Herring Prospectus as provided by Capitaline,
for periods prior to their IPOs. # Comments withheld on this company due to internal policy.
We note that the stocks identified by this filter are the same as those in our Cusp
of Greatness report (published on 14th July 2014), as we had used the same filter
and the same time period in that report as well. However, whilst that report
focused on mid-cap/small-cap stocks, in this report we add commentary on the
first four large-cap names (ITC, HCL Tech, Asian Paints and Godrej Consumer). As
before, we exclude Insecticides India from this report due to its size.
We run a similar filter for Indias listed BFSI stocks with a market cap of more than
Rs1bn and: (a) an RoE of 15%; and (b) loan growth of 15% for every consecutive
year for the past ten years. In a universe of 507 firms, a meagre 5 firms managed
to pass this test (representing a small fraction of ~1%). This handful of firms is
shown in the exhibit below.
Exhibit 23: The very short list of BFSI firms with superior RoEs and superior loan
book growth (over FY05-14)
HDFC Bank
Axis Bank
Gruh Finance
City Union Bank
Dewan Housing
FY15 P/E
20.5
15.4
39.8
12.9
7.9
Source: Bloomberg, Capitaline, Ambit Capital research; Note: Share price performance has been measured
over the last ten-year period (i.e. March 2004 to March 2014). * Market cap as on 31 October 2014.
From the above list, we exclude Dewan Housing due to our standard G&C filters.
Page 16
Strategy
An introduction to our stock-specific sections
In the rest of this note, we provide two-pagers for 16 of the 19 stocks (excluding
Insecticides India, Dewan Housing and Astral Polytechnik) that have made the cut
in our filters and constitute the CCP for India. Our notes focus on two critical points
that lie at the heart of any business.
Any investor taking a ten-year call must be convinced that the underlying business
has strong competitive advantages and the management has a proven ability to
take judicious capital allocation decisions:
Competitive
advantages
Accounting
quality
Capital
allocation
Treatment of
minorities
Succession
planning
HCL Tech
Asian Paints
Godrej
Consumer
Marico
IPCA
Berger Paints
Page Ind
Balkrishna Inds.
eClerx
V-Guard Inds.
Mayur
Uniquoters
HDFC Bank
Axis Bank
Gruh Finance
City Union
Bank
Comments
Strong cigarette franchise; risk around
succession planning
Strong capital allocation and sales and delivery
metrics; AMBER flag in treatment of minorities
Strong brand franchise, capital misallocation
risk
Risk around capital allocation, lack of focus on
RoCE
Strong brand equity, RoCE back in focus
Sustainable low cost advantage and high focus
on brand equity and cash flow generation
Maintained #2 position, RoCE improvement on
the cards
Market leader, strong growth visibility,
aspirational brand recall
Strong player in OHT tyre exports with
sustainable low cost advantage
Niche KPO with high-quality client base
Strong franchise in south India along with
strong capital allocation; high competition in
the sector and redundancy of core product
remains a risk
ITC
Overall
= rating of 4/4;
Page 17
Strategy
Why valuations are NOT a consideration whilst constructing the CCP?
Whilst we acknowledge that from a tactical standpoint valuations play an
important role in shaping short-term returns, we have not paid any heed to
valuations whilst constructing the CCP. So why are we ignoring valuations?
Over long periods, it is how the underlying fundamentals evolve for the firm that
plays a more important role in determining returns than the beginning of the
period valuation itself. Put another way, over long periods how a business
fundamentally performs is overwhelmingly the most important driver of investment
returns (so much so that the valuation at the time of entering the stock becomes
almost irrelevant). This point can be understood better with the following exhibits
that plot ten-year returns over FY02-12 vs FY02 valuations as measured by P/B
and P/E at the beginning of the period (in 2002).
FY02-FY12 returns
40%
R2 = 0.000
20%
0%
-20%
5.0
10.0
15.0
20.0
25.0
-40%
-60%
-80%
FY02 Price to Book
Source: Ambit Capital research; Note: FY02-12 returns here are stock returns relative to the Sensex
The value of the R-squared makes the story self-explanatory. A zero for this value
indicates that the beginning-of-period valuations do not play any meaningful role
in explaining stock returns over the next ten years. This holds true for both P/B (as
seen in Exhibit 25 above) and P/E (as seen in Exhibit 26 below) as the measures of
valuation.
Exhibit 26: Valuation impact on long-term returns - P/E
60%
FY02-FY12 returns
40%
R2 = 0.001
20%
0%
-
10.0
20.0
30.0
40.0
50.0
60.0
70.0
-20%
-40%
-60%
-80%
FY02 Price to Earnings
Source: Ambit Capital research; Note: FY02-12 returns here are stock returns relative to the Sensex
Asian Paints, Berger Paints, and HDFC Bank are three stocks from our conventional
coverage on which we have a SELL stance and which are in the portfolio. So why
are these stocks in the CCP? Firstly, all the three stocks are what we would call
valuation-driven SELLs. As valuations have NOT been considered whilst creating
the CCP, these SELL stances are not relevant from the point of the view of the CCP.
Secondly, since our conventional coverage is based on a one-year horizon whereas
the CCP is based on a ten-year horizon, we have not paid heed to these valuationdriven SELLs whilst constructing the CCP.
Page 18
ITC
NOT RATED
ITC IN EQUITY
Mcap (bn):
3M ADV (mn):
CMP:
TP (12 mths):
Upside (%):
`2,838/US$46.2
`1,962/US$31.9
`774
NA
NA
Flags
Accounting:
Predictability:
Treatment of Minorities:
GREEN
GREEN
AMBER
Catalysts
Softening/predictability
of
Governments stance on cigarette
taxation
Performance
30,000
28,000
26,000
24,000
22,000
20,000
390
360
330
Sensex
Nov 14
Sep 14
Jul 14
300
May 14
Recommendation
Mar 14
ITCs moats are its distribution network and cash-rich tobacco business
On the back of its strong cigarette franchise, ITC has developed the most
expansive distribution network in India. It has leveraged this distribution muscle
to rapidly scale up its FMCG business. The high cash generation of its tobacco
business is ITCs second critical competitive advantage. ITCs tobacco business
has ~70% operating profit margins and 100%+ RoCE with strong cash flows
which fund ITCs investments in its other nascent businesses.
Consumer
Jan 14
ITC has the largest cigarette business in India with >70% market share.
It has leveraged its wide distribution and cash flows from the cigarettes
business to rapidly expand and fund investments in its non-cigarette
FMCG business, which has become the third-largest FMCG business in
India. However, there are concerns around succession planning once
the current Chairman Mr. YC Deveshwar (YCD) retires in 2017, as the
next line of command lacks experience and will have only 5-6 years to
go before retirement from the point they get the top job.
Largest tobacco company on course to become an FMCG major
ITC has been present in India for over 100 years and is Indias largest tobacco
company with >70% market share in the branded Indian cigarette market. In
the last 15 years, the company has diversified its revenue base beyond
cigarettes (~62% of gross sales) and it now derives ~17%/11%/7% of its gross
from the FMCG/Agri products/Paper business. ITC commands ~10% market
share in the biscuit market and along with its personal care business it is
among the top-three FMCG companies in India.
Nov 13
COMPANY INSIGHT
ITC (RHS)
FY10
FY11
FY12
FY13
FY14
181,532
211,676
247,984
296,056
328,826
60,740
71,534
84,996
103,318
120,988
33.5%
33.8%
34.3%
34.9%
36.8%
5.1
6.3
7.8
9.4
11.1
27.6%
31.6%
34.0%
34.5%
34.3%
71.4
58.1
47.1
39.1
33.0
Analyst Details
Rakshit Ranjan, CFA
+91 22 3043 3201
rakshitranjan@ambitcapital.com
Ritesh Vaidya
+91 22 3043 3246
riteshvaidya@ambitcapital.com
ITC
Exhibit 1: Except for FY07-09, sales growth and profitability
has been consistent for ITC
Revenues (Rs. Bn)
350
300
38.0%
36.0%
34.0%
250
35.0%
200
34.0%
RoCE
RoE
30.0%
33.0%
150
32.0%
100
26.0%
31.0%
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY05
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
Proceeds
from
shares,
6%
22.0%
FY06
30.0%
50
Interest
received,
13%
Purchase of
Investments
Subsidiaries
& Others
Dividend
paid
51%
Net Capex
(incl.
acquisitions
)
30% Interest
CFO, 81%
paid
1% Capital research
Source: Company, Ambit
400
350
12x
10.5
300
26x
23x
300
9x
250
20x
250
Nov-14
Nov-13
Nov-12
Nov-11
Nov-10
Nov-09
6x
Nov-07
Nov-14
50
Nov-13
50
Nov-12
100
Nov-11
100
Nov-10
150
Nov-09
150
Nov-08
200
Nov-07
200
7.5x
Nov-08
350
Page 20
ITC
Exhibit 7: Explanation for our flags
Segment
Score
Comments
Accounting
GREEN
The company in the past has shown high levels of cash conversion and efficient working capital management
and is professionally managed.
Predictability
GREEN
The company has high pricing power in its cigarettes business and has consistently seen margin expansion in the
segment. Further, FMCG losses are declining and hence, visibility of earnings is very high.
AMBER
Before YCD took charge of ITC in 1996, ITC had a chequered past with several failed diversification attempts
into power and global commodity trading. In 1991, ITC started a financial services venture which was finally sold
to ICICI in 1995, as the business suffered large-scale write-offs. Under YCD, ITC made failed attempts at
entering the golf course development/accessories and greeting cards business. Since 2002 however, ITC has
been more prudent with its capital allocation. It increased its dividend payout to over 60% and has looked to
expand its FMCG franchise.
Treatment of
minorities
Score (%)
Comment
Competitive advantage
ITCs cigarette business with >70% market share lends it two competitive
advantages: a) ITC has developed the largest pan-India distribution network, b)
The high cash generation from the cigarette business allows it to fund
investments in its nascent businesses
Accounting quality
The company in the past has shown high levels of cash conversion and efficient
working capital management and is professionally managed.
Capital allocation
ITC under the leadership of Mr. YC Deveshwar (YCD) has been very prudent with
its capital allocation. It has increased its dividend payout ratio and invested in
growing businesses for the future like its non-cigarette FMCG business.
However, with concerns around succession planning we remain sceptical around
the capital allocation abilities of the next leader.
ITC is not part of Ambits Connected Companies Index and does not appear to
rely on political connections.
Treatment of minorities
Before YCD took charge of ITC in 1996, ITC had a chequered past with several
failed diversification attempts into power and global commodity trading. In
1991, ITC started a financial services venture which was finally sold to ICICI in
1995, as the business suffered large-scale write-offs. Under YCD, ITC made
failed attempts at entering the golf course development/accessories and
greeting cards business. Since 2002 however, ITC has been more prudent with
its capital allocation. It increased its dividend payout to over 60% and has looked
to expand its FMCG franchise.
Succession planning
YCD is due to retire in 2017. The next successor if appointed from the next level
of senior management would then get only 5-6 year tenure. ITC hasnt till date
appointed an external recruit as its Chairman. Due to this lack of visibility
around the next Chairman we remain cautious around ITCs succession planning
ability.
Total (%)
Source: Company, Ambit Capital research. Note:
= rating of 4/4;
Page 21
ITC
Balance sheet (` mn)
Year to March
FY10
FY11
FY12
FY13
FY14
Shareholders' equity
3,818
7,738
7,818
7,902
7,953
136,826
151,795
180,101
214,977
254,667
Total networth
140,644
159,533
187,919
222,879
262,620
1,077
992
791
664
511
Debt
Deferred tax liability
7,850
8,019
8,727
12,037
12,970
Total liabilities
149,571
168,543
197,437
235,580
276,101
Gross block
119,679
127,658
141,444
169,444
185,449
Net block
81,424
83,451
90,992
112,093
120,127
CWIP
10,090
13,334
22,768
14,878
22,957
Investments
57,269
55,547
63,166
70,603
88,234
11,263
22,432
28,189
36,150
32,894
Debtors
8,581
9,076
9,824
11,633
21,654
Inventory
45,491
52,675
56,378
66,002
73,595
13,061
14,181
17,154
22,401
22,635
2,884
3,475
1,412
6,414
10,197
81,279
101,840
112,957
142,600
160,975
Current liabilities
34,991
44,579
48,334
52,007
56,246
Provisions
45,499
41,048
44,111
52,588
59,947
80,491
85,628
92,445
104,595
116,193
788
16,212
20,512
38,006
44,782
149,571
168,543
197,437
235,580
276,101
FY10
FY11
FY12
FY13
FY14
181,532
211,676
247,984
296,056
328,826
16.3%
16.6%
17.2%
19.4%
11.1%
120,792
140,141
162,988
192,738
207,838
EBITDA
60,740
71,534
84,996
103,318
120,988
% growth
25.0%
17.8%
18.8%
21.6%
17.1%
Depreciation
6,087
6,560
6,985
7,956
8,999
54,653
64,975
78,011
95,363
111,989
648
481
779
865
30
6,147
8,188
11,744
12,344
14,632
Adjusted PBT
60,153
72,682
88,975
106,842
126,591
Tax
19,543
22,806
27,352
32,658
38,739
40,610
49,876
61,624
74,184
87,852
24.4%
22.8%
23.6%
20.4%
18.4%
40,610
49,876
61,624
74,184
87,852
Share of associates
1,072
Adjusted Consolidated net
41,682
profit
Source: Company, Ambit Capital research
303
958
1,897
1,062
50,178
62,579
76,078
88,910
Operating expenditure
EBIT
Interest expenditure
Non-operating income
% growth
Extraordinaries
Reported PAT / Net profit
Minority Interest
Page 22
ITC
Cash flow statement (` mn)
Year to March
EBIT
Depreciation
Others
Tax
FY10
FY11
FY12
FY13
FY14
60,801
73,163
89,755
107,707
126,621
6,087
6,560
6,985
7,956
8,999
(1,469)
(313)
(71)
2,445
903
(19,543)
(22,806)
(27,352)
(32,658)
(38,739)
34,725
(4,254)
1,457
(9,533)
(10,033)
80,601
52,351
70,775
75,916
87,751
Capex
(12,741)
(11,831)
(23,960)
(21,168)
(25,113)
(28,891)
1,722
(7,619)
(7,437)
(17,631)
(41,633)
(10,109)
(31,579)
(28,605)
(42,744)
(698)
(85)
(201)
(127)
(153)
Others
Cash flow from investments
Net borrowings
Interest paid
Dividend paid
Others
Cash flow from financing
Net change in cash
(648)
(481)
(779)
(865)
(30)
(44,517)
(40,015)
(34,524)
(41,561)
(55,452)
7,848
9,509
2,066
3,202
7,371
(38,015)
(31,072)
(33,439)
(39,351)
(48,263)
953
11,170
5,757
7,961
(3,256)
11,263
22,432
28,189
36,150
32,894
67,859
40,520
46,815
54,749
62,638
Ratio analysis
Year to March
FY10
FY11
FY12
FY13
FY14
61.4%
61.6%
61.2%
59.2%
60.0%
33.5%
33.8%
34.3%
34.9%
36.8%
33.5%
34.6%
36.2%
36.4%
38.5%
22.4%
23.6%
24.8%
25.1%
26.7%
94.0%
69.0%
57.7%
55.9%
54.0%
(0.1)
(0.1)
(0.1)
(0.2)
(0.1)
1.1
19.1
21.2
32.7
34.5
1.5
1.7
1.8
1.7
1.8
RoCE (%)
27.6%
31.6%
34.0%
34.5%
34.3%
RoE (%)
29.2%
33.2%
35.5%
36.1%
36.2%
Valuation parameters
Year to March
FY10
FY11
FY12
FY13
FY14
EPS (`)
5.1
6.3
7.8
9.4
11.1
5.1
6.3
7.8
9.4
11.1
18.0
20.4
24.0
28.5
33.6
4.8
4.4
4.5
5.3
6.0
P/E (x)
71.4
58.1
47.1
39.1
33.0
P/BV (x)
20.4
18.0
15.3
12.9
10.9
EV/EBITDA (x)
45.8
39.4
33.4
27.7
23.9
Price/Sales (x)
7.7
13.4
11.6
9.8
8.9
Page 23
ITC
Page 24
HDFC Bank
SELL
HDFCB IN EQUITY
`2,246/US$36.5
`1,807/US$29.4
`930
`717
23
Flags
Accounting:
Predictability:
Treatment of Minorities:
GREEN
GREEN
GREEN
Catalysts
Performance
Sensex
HDFC Bank
FY13
FY14
FY15E
FY16E
FY17E
226,637
264,023
308,909
369,385
445,045
114,276
143,601
172,667
210,711
260,447
67,263
84,784
99,920
122,192
147,975
28.3
35.3
41.4
50.6
61.3
RoA (%)
1.82%
1.90%
1.86%
1.87%
1.83%
RoE (%)
20.3%
21.3%
21.1%
21.9%
22.2%
6.11
5.13
4.39
3.70
3.09
P/B (x)
Nov-14
Sep-14
Aug-14
Jun-14
150
140
130
120
110
100
90
May-14
Mcap (bn):
3M ADV (mn):
CMP:
TP (12 mths):
Downside (%):
Mar-14
Recommendation
Feb-14
BFSI
Dec-13
Since its inception 20 years ago, HDFC Bank has focused on building a
granular retail franchise on both sides of the balance sheet and
maintained a conservative approach on the balance of growth and
asset quality. With a stable management team at the helm, the bank
will seek to further penetrate its retail offering on a pan-India basis
and fill the gaps in its corporate banking offering as the economic
climate improves.
Numero uno in Indian banking
Established in 1994, HDFC Bank is Indias second-largest private sector bank
by assets. It has ~4% market share in total bank credit. Retail loans form 48%
of the banks loans, with a market-leading presence in most retail product
categories. Its corporate business has focussed on working capital financing.
Nov-13
COMPANY INSIGHT
HDFC Bank
5%
FY14
FY13
FY12
FY11
0%
10%
FY10
0.0%
15%
FY09
0%
20%
FY08
1.0%
25%
FY05
10%
RoE - RHS
2.00%
1.80%
1.60%
1.40%
1.20%
1.00%
0.80%
0.60%
0.40%
0.20%
0.00%
FY14
2.0%
FY13
20%
FY12
3.0%
FY11
30%
FY10
4.0%
FY09
40%
FY08
5.0%
FY07
50%
FY06
6.0%
FY05
60%
RoA - LHS
FY06
FY07
2.5%
100%
2.0%
80%
20.4x
16.8x
800
11.6%
11.1%
FY12
FY13
11.8%
12.2%
FY14
24.0x
1000
FY10
0%
1200
FY11
2%
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
13.3%
0%
10.6%
0.0%
4%
FY09
20%
10.3%
0.5%
FY08
6%
8.6%
40%
FY07
1.0%
8.6%
8%
FY06
60%
9.6%
1.5%
FY05
10%
4.11x
1000
3.56x
800
3.02x
600
600
400
400
200
200
0
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14
Page 26
HDFC Bank
Exhibit 7: Explanation for our flags
Segment
Score
Comments
Accounting
GREEN
We did not find anything unusual in the accounts of the bank and we believe that the reported numbers are a
true reflection of the profitability of the bank. The bank has made adequate disclosures of its ESOP accounting
and revenue recognition norms.
Predictability
GREEN
The banks conservative approach towards growth and asset quality imparts sufficient predictability to its
financial performance.
Treatment of
minorities
GREEN
We did not find any material example of unfair treatment to minorities. Lately, the banks sensible approach
towards a possible merger with HDFC Ltd has been comforting from the investors point of view.
Exhibit 8: HDFC Bank - Three quarters of the pie on our STAR* framework
Criteria
Score (%)
Competitive advantage
Comment
Strong retail franchise with long-term track record
Accounting quality
Capital allocation
HDFC Bank is not part of Ambits Connected Companies Index and does not appear to have
any questionable political connections.
Treatment of minorities
Succession planning
Total (%)
Source: Company, Ambit Capital research. Note:
= rating of 4/4;
Page 27
HDFC Bank
Balance sheet
Year to March (Rs mn)
Networth
Deposits
Borrowings
Other Liabilities
Total Liabilities
Cash & Balances with RBI & Banks
FY13
FY14
FY15E
FY16E
FY17E
362,141
434,786
511,543
606,053
726,345
2,962,470
3,673,375
4,371,316
5,464,145
6,830,181
330,066
394,390
448,203
525,224
619,773
348,642
413,444
496,133
620,166
775,208
4,003,319
4,915,995
5,827,195
7,215,588
8,951,507
272,802
395,836
467,999
552,796
650,576
Investments
1,116,136
1,209,511
1,487,744
1,835,232
2,274,449
Advances
2,397,206
3,030,003
3,540,536
4,419,965
5,523,514
Other Assets
217,175
280,645
330,916
407,595
502,969
Total Assets
4,003,319
4,915,995
5,827,195
7,215,588
8,951,507
Income statement
Year to March (Rs mn)
Interest Income
FY13
FY14
FY15E
FY16E
FY17E
350,649
411,355
485,526
572,496
681,486
Interest Expense
192,538
226,529
268,599
311,728
364,832
158,111
184,826
216,927
260,768
316,654
68,526
79,196
91,982
108,617
128,391
Total Income
226,637
264,023
308,909
369,385
445,045
112,361
120,422
136,242
158,674
184,598
Employees expenses
39,654
41,790
45,815
51,970
58,687
72,707
78,632
90,427
106,704
125,911
114,276
143,601
172,667
210,711
260,447
16,764
15,873
22,412
26,963
37,928
PBT
97,512
127,728
150,255
183,748
222,519
Tax
30,249
42,944
50,335
61,556
74,544
PAT
67,263
84,784
99,920
122,192
147,975
FY13
FY14
FY15E
FY16E
FY17E
Credit-Deposit (%)
80.9%
82.5%
81.0%
80.9%
80.9%
47.7%
45.6%
45.3%
45.0%
44.7%
49.6%
45.6%
44.1%
43.0%
41.5%
23,346
29,893
38,475
39,069
54,518
0.97%
0.98%
1.08%
0.88%
0.98%
Provisions
Key ratios
Year to March
4,690
8,200
13,466
13,674
19,081
0.20%
0.27%
0.38%
0.31%
0.35%
79.9%
72.6%
65.0%
65.0%
65.0%
NIMs (%)
4.57%
4.39%
4.28%
4.24%
4.15%
11.1%
11.8%
10.7%
10.3%
10.1%
Page 28
HDFC Bank
Du-pont analysis
Year to March
FY13
FY14
FY15E
FY16E
FY17E
4.3%
4.1%
4.0%
4.0%
3.9%
1.9%
1.8%
1.7%
1.7%
1.6%
6.1%
5.9%
5.8%
5.7%
5.5%
3.0%
2.7%
2.5%
2.4%
2.3%
3.1%
3.2%
3.2%
3.2%
3.2%
0.5%
0.4%
0.4%
0.4%
0.5%
2.6%
2.9%
2.8%
2.8%
2.8%
31.0%
33.6%
33.5%
33.5%
33.5%
1.8%
1.9%
1.9%
1.9%
1.8%
Leverage
11.2
11.2
11.4
11.7
12.1
ROE (%)
20.3%
21.3%
21.1%
21.9%
22.2%
Year to March
FY13
FY14
FY15E
FY16E
FY17E
EPS (Rs)
28.3
35.3
41.4
50.6
61.3
28%
25%
17%
22%
21%
Valuation
BVPS (Rs)
152.2
181.2
211.9
251.0
300.9
P/E (x)
32.9
26.3
22.5
18.4
15.2
P/BV (x)
6.11
5.13
4.39
3.70
3.09
Page 29
HDFC Bank
Page 30
HCL Technologies
BUY
HCLT IN EQUITY
`1,130/US$18.4
`1,684/US$27.4
`1,611
`2,110
31
Flags
Accounting:
Predictability:
Treatment of Minorities:
GREEN
AMBER
AMBER
Catalysts
Performance
2,000
1,700
1,400
1,100
800
500
27,000
24,000
21,000
18,000
Sensex (LHS)
Aug-14
Jun-14
15,000
Apr-14
Mcap (bn):
3M ADV (mn):
CMP:
TP (12 mths):
Upside (%):
Feb-14
Recommendation
Dec-13
Technology
Oct-13
Aug-13
COMPANY INSIGHT
FY13
FY14
FY15E
FY16E
FY17E
4,687
5,360
5,995
6,877
7,849
Analyst Details
Sagar Rastogi
+91 22 3043 3291
sagarrastogi@ambitcapital.com
EBIT (` bn)
50.4
79.4
86.3
101.5
115.9
19.6%
24.1%
23.5%
24.0%
24.0%
56.4
90.2
105.0
123.6
140.8
RoE
31.8%
37.2%
33.5%
31.9%
29.3%
P/E
28.6
17.8
15.3
13.0
11.4
EV/EBITDA
18.2
12.0
11.4
9.7
8.5
EBIT margins
Diluted EPS (`)
Utsav Mehta
+91 22 3043 3209
utsavmehta@ambitcapital.com
HCL Technologies
30%
3,000
15%
25%
2,000
10%
20%
1,000
5%
15%
0%
10%
Revenue(US$mn) (LHS)
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
Equity
raised
4%
RoCE
Other
income
5%
RoE
in
FY14
20%
FY13
4,000
improvement
FY12
35%
FY11
25%
marked
FY10
5,000
FY09
40%
FY08
30%
FY05
6,000
in
FY07
Exhibit 2: resulting
profitability
FY06
Debt raised
3%
Interest
paid
3%
Increase in
cash
6%
Investments
10%
Dividend
paid
33%
Acquisition
17%
CFO
88%
Capex
31%
Source: Company, Ambit Capital research
HCLT P/E
6 yr avg
4 yr avg
6 yr avg
Oct-14
Oct-13
Oct-12
Oct-11
Oct-10
Oct-07
EV/ EBITDA
Oct-06
Apr-14
Apr-13
Apr-12
Apr-11
19
17
15
13
11
9
7
5
3
Apr-10
Apr-09
Apr-08
Apr-07
Apr-06
Apr-05
P/E
Oct-05
24
22
20
18
16
14
12
10
8
6
4
Oct-09
Oct-08
4 yr avg
Page 32
HCL Technologies
Exhibit 7: Explanation for our flags
Segment
Accounting
Predictability
Treatment of
minorities
Score
Comments
GREEN
The company has amongst the leanest working capital cycles (receivable + unbilled revenue days at 87, lower
than the average of 91 for top-5 Indian IT vendors), high capex productivity and strong cash flow generation
(five-year FCF/ NI of 66% in line with the peer average). As a result, the company ranks in the top quartile
within the Indian IT universe in our accounting framework.
AMBER
Unlike certain peers, the company does not provide specific annual or quarterly guidance on revenues or
margins. It also has not indicated medium-term topline growth targets and the associated timeframe. HCLT has
significantly surprised in its quarterly EPS with an average surprise of 11% (positive or negative) in the last eight
quarters. Over these eight quarters, the company had a positive surprise on EPS five times. However, its sales
figures have been largely in line with consensus expectations (revenue surprise of 1% over the same period).
AMBER
Minorities were treated unfairly by HCL Infosystems, a sister concern belonging to the same promoter group as
HCLT. HCL Infosystems, among other things, was a reseller of Nokia phones in India. The promoters reduced
their stake in HCL Infosystems from 61% in June 2005 to 57% in December 2005. In February 2006, Nokia
decided to set up its own distribution channels in India and as a result, HCL Infosystems market share reduced
to 50% from 100%. This led to the stock price correcting by about 30%. There has been no other such incident
over the past eight years.
Score (%)
Comment
Competitive advantage
The company has built strong capabilities in its industry leading IMS practise. Further, it has
created differentiated innovations such as ALT ASM.
Accounting quality
The company ranks in the top quartile of our accounting framework. It has a lean working
capital cycle, strong cash flow generation and high capex productivity.
Capital allocation
Its capital allocation track record has been good, with a conservative, yet successful acquisition
track record. Further, despite its dividend pay-out ratio is lower than peers, it is an impressive
31% (3 year average).
HCLT is not a part of Ambits Connected Companies Index and does not have any questionable
political connection.
Treatment of minorities
Minority shareholders were treated unfairly by HCL Infosystems, a group company owned by the
same promoters.
Succession planning
The company has not faced issues with top level management transition in the past and has
programmes to create multiple layers of management.
Total (%)
Source: Company, Ambit Capital research. Note:
= rating of 4/4;
Page 33
HCL Technologies
Income statement
Year to March (` bn)
FY13
FY14
FY15E
FY16E
FY17E
4,687
5,360
5,995
6,877
7,849
Growth
12.9%
14.4%
11.9%
14.7%
14.1%
Revenue
257.3
329.6
367.8
422.9
482.7
172.4
209.7
236.7
268.1
306.3
SG&A expanses
34.5
40.4
44.8
53.3
60.5
EBITDA
57.1
86.8
91.1
107.4
123.0
Depreciation
6.7
7.3
4.7
5.9
7.1
50.4
79.4
86.3
101.5
115.9
19.6%
24.1%
23.5%
24.0%
24.0%
EBIT
EBIT Margin
Other Income
1.6
(0.2)
8.6
10.2
11.5
PBT
52.0
79.3
94.9
111.8
127.4
Tax
12.2
15.5
20.8
24.6
28.0
23.5%
19.5%
21.9%
22.0%
22.0%
39.8
63.8
74.1
87.2
99.3
56.4
90.2
105.0
123.6
140.8
DPS
12.0
22.0
32.0
32.0
36.0
FY13
FY14
FY15E
FY16E
FY17E
142.9
200.0
242.8
304.1
373.8
22.1
22.0
20.6
20.7
20.7
Rate (%)
Reported PAT
Balance sheet
Year to March (` bn)
Net Worth
Other Liabilities
Capital Employed
165.1
222.0
263.4
324.8
394.5
Net Block
76.9
82.6
89.7
97.6
106.0
23.0
23.5
26.7
26.8
26.8
Curr. Assets
130.7
197.5
239.7
307.0
383.3
Debtors
44.6
56.6
64.8
74.5
85.1
Unbilled revenues
17.1
20.2
25.2
29.0
33.1
49.8
99.6
124.5
174.6
232.1
19.1
21.2
25.2
29.0
33.1
65.4
81.6
92.7
106.6
121.7
65.2
115.9
147.0
200.4
261.7
165.1
222.0
263.4
324.8
394.5
Application of Funds
Page 34
HCL Technologies
Cash flow statement
Year to March (` bn)
FY13
FY14
FY15E
FY16E
FY17E
Net Income
39.8
63.8
74.1
87.2
99.3
Depreciation
6.3
6.8
4.2
5.4
6.6
46.5
71.1
78.8
93.1
106.4
4.8
(0.8)
(5.8)
(3.3)
(3.7)
Net Operating CF
51.2
70.3
73.0
89.7
102.7
Net Purchase of FA
(5.8)
(6.5)
(12.8)
(13.5)
(15.4)
CF from Operations
Cash for Working Capital
Others
(1.6)
(6.8)
0.3
(0.0)
(0.0)
(5.1)
(12.9)
(12.5)
(13.5)
(15.5)
(9.8)
(18.4)
(26.4)
(26.4)
(29.7)
(25.2)
(6.9)
(37.9)
(26.4)
(29.7)
45.4
63.8
60.3
76.2
87.3
25.1
51.6
101.9
124.8
174.6
20.9
50.6
22.6
49.8
57.6
46.1
102.2
124.5
174.6
232.1
FY13
FY14
FY15E
FY16E
FY17E
12.9%
14.4%
11.9%
14.7%
14.1%
50.3%
57.6%
8.7%
17.6%
14.1%
EPS growth
62.9%
60.1%
16.4%
17.6%
13.9%
RoE
32%
37%
33%
32%
29%
RoCE
25%
33%
28%
27%
25%
ROIC
34%
54%
52%
55%
58%
88
85
89
89
89
3.4
4.1
4.3
4.5
4.7
Year to March
FY13
FY14
FY15E
FY16E
FY17E
P/E
28.6
17.8
15.3
13.0
11.4
EV/EBITDA
Ratio analysis
Growth
Turnover Ratios
Valuation parameters
18.2
12.0
11.4
9.7
8.5
EV/Sales
4.0
3.2
2.8
2.5
2.2
Price/Book Value
8.0
5.7
4.7
3.7
3.0
0.7%
1.4%
2.0%
2.0%
2.2%
Page 35
HCL Technologies
Page 36
Axis Bank
BUY
AXSB IN EQUITY
FY13
FY14
FY15E
FY16E
FY17E
162,174
193,569
216,578
253,664
299,001
93,031
114,561
125,507
147,703
176,709
51,794
62,181
70,061
84,016
102,196
EPS (Rs)
22.1
26.5
29.8
35.8
43.5
RoA (%)
1.65%
1.72%
1.70%
1.74%
1.77%
RoE (%)
18.5%
17.4%
17.1%
17.8%
18.6%
3.37
2.93
2.55
2.21
1.90
P/B (x)
Flags
Accounting:
Predictability:
Treatment of Minorities:
GREEN
GREEN
GREEN
Catalysts
Performance
Sensex
Axis Bank
Analyst Details
Pankaj Agarwal, CFA
+91 22 3043 3206
pankajagarwal@ambitcapital.com
Ravi Singh
+91 22 3043 3181
ravisingh@ambitcapital.com
Aadesh Mehta, CFA
+91 22 3043 3239
aadeshmehta@ambitcapital.com
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.
Nov-14
240
210
180
150
120
90
Sep-14
`1,126/US$18.3
`1,618/US$26.3
`477
`450
-6
Jul-14
Mcap (bn):
3M ADV (mn):
CMP:
TP (12 mths):
Upside (%):
May-14
Recommendation
Mar-14
BFSI
Jan-14
Nov-13
COMPANY INSIGHT
Axis Bank
FY14
11.2%
9.4%
9.5%
FY10
FY11
FY12
12.2%
9.3%
FY14
FY13
0%
600
FY09
2%
10.2%
10%
0%
FY08
4%
6.4%
20%
FY07
6%
7.3%
8%
12.6%
10%
FY14
FY13
FY12
FY11
FY10
FY09
0.0%
FY08
0%
FY05
0.5%
FY07
0.00%
FY06
5%
FY06
FY05
0.50%
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
0%
10%
FY05
0.5%
0.0%
15%
FY13
10%
1.00%
FY12
20%
2.0%
1.5%
1.0%
20%
FY11
30%
1.50%
25%
FY10
40%
3.0%
2.5%
RoE - RHS
FY09
50%
2.00%
FY08
60%
4.0%
3.5%
FY07
70%
RoA - LHS
8.9%
FY06
650
2.97x
550
13.5x
400
8.7x
300
450
2.27x
350
1.56x
250
150
100
50
-50
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14
200
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14
500
Page 38
Axis Bank
Exhibit 7: Explanation for our flags
Segment
Score
Comments
Accounting
GREEN
We did not find anything unusual in the accounts of the bank and we believe that the reported numbers are a
true reflection of the profitability of the bank. The bank has made adequate disclosures of its ESOP accounting
and revenue recognition norms.
Predictability
GREEN
The bank has one of the best track records of long-term profitability. Going forward, whilst credit cost could be
elevated, the bank has built buffers in its operating profitability and capital position.
Treatment of
minorities
GREEN
Exhibit 8: Axis Bank - Three quarters of the pie on our STAR* framework
Criteria
Score (%)
Competitive advantage
Comment
Solid roots in corporate banking; efficient retail network
Accounting quality
Capital allocation
Axis Bank is not part of Ambits Connected Companies Index and does not appear to have any
questionable political connections.
Treatment of minorities
Succession planning
Total (%)
Source: Company, Ambit Capital research. Note:
= rating of 4/4;
Page 39
Axis Bank
Balance sheet
Year to March (` mn)
Networth
Deposits
Borrowings
Other Liabilities
Total Liabilities
Cash & Balances with RBI & Banks
FY13
FY14
FY15E
FY16E
FY17E
331,079
382,205
438,798
507,422
591,202
2,526,136
2,809,446
3,230,862
3,812,418
4,613,025
439,511
502,909
593,687
722,352
879,435
165,467
198,560
238,272
108,881
137,889
3,405,607
3,832,449
204,350
282,387
333,522
394,108
475,889
Investments
1,137,375
1,135,484
1,267,735
1,495,607
1,803,972
Advances
1,969,660
2,300,668
2,740,395
3,269,846
3,981,787
87,162
81,191
60,285
Other Assets
94,222
113,910
Total Assets
3,405,607
3,832,449
FY13
FY14
FY15E
FY16E
FY17E
Interest Income
271,826
306,412
349,164
404,112
476,371
Interest Expense
175,163
186,895
213,656
243,994
284,958
96,663
119,516
135,509
160,118
191,413
Income statement
Year to March (` mn)
65,511
74,052
81,069
93,546
107,589
162,174
193,569
216,578
253,664
299,001
69,142
79,008
91,072
105,962
122,293
Employees expenses
23,770
26,013
29,598
34,038
38,142
45,373
52,994
61,473
71,924
84,151
93,031
114,561
125,507
147,703
176,709
Provisions
17,501
21,070
21,712
23,235
25,308
PBT
75,531
93,490
103,795
124,468
151,401
Tax
23,736
31,310
33,733
40,452
49,205
PAT
51,794
62,181
70,061
84,016
102,196
FY13
FY14
FY15E
FY16E
FY17E
Credit-Deposit (%)
78.0%
81.9%
84.8%
85.8%
86.3%
47.0%
47.4%
46.8%
46.3%
45.7%
42.6%
40.8%
42.1%
41.8%
40.9%
23,934
31,464
33,061
45,916
49,157
1.20%
1.36%
1.20%
1.39%
1.23%
7,041
10,246
9,918
18,366
22,121
0.36%
0.45%
0.36%
0.56%
0.56%
70.6%
67.4%
70.0%
60.0%
55.0%
NIMs (%)
3.18%
3.40%
3.36%
3.37%
3.35%
12.2%
12.6%
12.5%
12.1%
11.6%
Total Income
Total Operating Expenses
Ratio analysis
Year to March
Page 40
Axis Bank
Du-pont analysis
Year to March
FY13
FY14
FY15E
FY16E
FY17E
3.1%
3.3%
3.3%
3.3%
3.3%
2.1%
2.0%
2.0%
1.9%
1.9%
5.2%
5.3%
5.2%
5.2%
5.2%
2.2%
2.2%
2.2%
2.2%
2.1%
3.0%
3.2%
3.0%
3.1%
3.1%
0.6%
0.6%
0.5%
0.5%
0.4%
2.4%
2.6%
2.5%
2.6%
2.6%
31.4%
33.5%
32.5%
32.5%
32.5%
1.7%
1.7%
1.7%
1.7%
1.8%
Leverage
11.2
10.1
10.1
10.2
10.5
ROE (%)
18.5%
17.4%
17.1%
17.8%
18.6%
Valuation parameters
Year to March
FY13
FY14
FY15E
FY16E
FY17E
EPS (`)
22.1
26.5
29.8
35.8
43.5
8%
20%
13%
20%
22%
141.5
162.7
186.8
216.0
251.7
P/E (x)
21.5
18.0
16.0
13.3
11.0
P/BV (x)
3.37
2.93
2.55
2.21
1.90
Page 41
Axis Bank
Page 42
Asian Paints
SELL
APNT IN EQUITY
`622/US$10.1
`835/US$13.6
`649
`559
14
Flags
Accounting:
Predictability:
Treatment of minorities:
GREEN
GREEN
AMBER
Catalysts
Performance
28,000
700
650
600
550
500
450
400
25,500
23,000
20,500
18,000
Sensex
Oct-14
Mcap (bn):
6M ADV (mn):
CMP:
TP (12 mths):
Downside (%):
Jul-14
Recommendation
Apr-14
Jan-14
Oct-13
COMPANY INSIGHT
FY13
109,707
17,319
15.8%
11.6
36.3%
35.3%
55.9
FY14
127,148
19,979
15.7%
12.8
33.1%
30.7%
43.5
FY15E
148,609
25,060
16.9%
16.5
36.1%
34.7%
39.3
FY16E
175,904
30,405
17.3%
20.4
38.0%
36.7%
31.9
FY17E
208,240
36,665
17.6%
24.5
38.9%
37.7%
26.4
Analyst Details
Rakshit Ranjan, CFA
+91 22 3043 3201
rakshitranjan@ambitcapital.com
Aditya Bagul
+91 22 3043 3264
adityabagul@ambitcapital.com
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.
Asian Paints
Exhibit 1: EBITDA margins and revenue growth over the
last ten years
Revenue (Rs mn)
150,000
22%
120,000
20%
18%
90,000
16%
60,000
14%
30,000
Exhibit 2: RoCE
and
RoE
over
RoCE
60%
the
last
ten
RoE (% RHS)
years
60%
50%
50%
40%
40%
30%
30%
20%
20%
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY05
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
10%
FY07
FY06
12%
Debt
raised, 4%
Interest Dividend
received, received,
1%
4%
Debt
repayment,
3%
Increase in
cash and
cash
equivalents,
9%
Dividend
paid, 36%
Purchase of
Investments
, 10%
Net Capex,
38%
Interest
paid, 4%
CFO, 92%
Source: Company, Ambit Capital research
45
40
35
30
25
20
15
10
5
-
14
12
10
8
6
4
APNT P/E
6 Yr Avg
Apr-05
Oct-05
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Oct-12
Apr-13
Oct-13
Apr-14
Oct-14
Apr-05
Oct-05
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Oct-12
Apr-13
Oct-13
Apr-14
Oct-14
4 Yr Avg
APNT P/B
6 Yr Avg
4 Yr Avg
Page 44
Asian Paints
Exhibit 7: Explanation for our flags
Segment
Score
Comments
Accounting
GREEN
Asian Paints has, in the past, reported high cash conversion, efficient management of working capital and low levels of
loans and advances and contingent liabilities. Consequently, we give a high rating to the quality of its accounting.
Predictability
GREEN
Due to a combination of high pricing power, presence across products, categories and SKUs, and predominant exposure to
consumer-activity-led sectors of the economy, we expect earnings to remain stable for Asian Paints.
Treatment of
minorities
AMBER
Our accounting analysis does not raise any major red flags with respect to dubious transactions by promoters. However,
we raise concerns around Asian Paints capital allocation, as the firm pursues its inorganic growth aspirations with recent
acquisitions like Sleek and Ess Ess. These along with increasing contribution of overseas business will be RoE-dilutive.
Score (%)
Comment
Competitive advantage
Sustained advantage around product portfolio, supply chain and brand recall
Accounting quality
Capital allocation
Key risk as new acquisitions and overseas business are RoCE dilutive,
Asian Paints is not part of Ambits Connected Companies Index and does not
appear to have any questionable political connections
Risk of capital misallocation could lead to lower FCF and compressed RoCE in
future
3rd generation promoter family members occupying managerial positions.
However day to day operations run by professional management team.
= rating of 4/4;
Page 45
Asian Paints
Balance sheet (standalone)
Year to March (` mn)
Shareholders' equity
FY13
FY14
FY15E
FY16E
FY17E
959
959
959
959
959
32,884
39,433
46,281
54,594
64,667
33,843
40,392
47,241
55,553
65,626
2,377
2,400
2,400
2,400
2,400
Debt
Deferred tax liability
1,544
1,878
1,878
1,878
1,878
Total liabilities
39,371
47,131
54,507
63,452
74,285
Gross block
33,851
36,621
38,621
40,621
42,621
Net block
23,967
24,202
23,568
22,795
21,881
592
716
1,000
1,000
1,000
Investments (non-current)
2,807
7,212
4,000
4,000
4,000
7,520
9,317
19,231
27,978
38,573
CWIP
Debtors
9,809
11,103
12,214
14,458
17,116
18,303
20,699
24,836
29,398
34,802
3,211
3,767
4,886
5,783
6,846
40,058
46,829
62,796
79,544
99,618
Current liabilities
23,101
26,563
31,350
37,108
43,930
Inventory
Provisions
5,394
6,679
6,922
8,193
9,699
28,495
33,242
38,272
45,301
53,629
11,562
13,587
24,524
34,243
45,989
Total assets
39,371
47,131
54,507
63,452
74,285
FY13
FY14
FY15E
FY16E
FY17E
109,707
127,148
148,609
175,904
208,240
14%
16%
17%
18%
18%
Operating expenditure
92,388
107,169
123,550
145,499
171,575
EBITDA
17,319
19,979
25,060
30,405
36,665
14%
15%
25%
21%
21%
1,546
2,457
2,633
2,773
2,913
16,919
18,864
24,037
29,564
36,071
366.5
422.2
336.042
336.042
336.042
Non-operating income
1145.2
1342.2
1610.64
Adjusted PBT
16,552
18,442
23,701
29,228
35,735
4,957
5,715
7,347
9,061
11,435
11,595
12,727
16,353
20,167
24,299
-99.6
11,139
12,188
15,826
19,534
23,540
% growth
Depreciation
EBIT
Interest expenditure
Tax
Adjusted PAT
Extraordinary expense/(income)
Reported PAT after minority interest
1932.768 2319.3216
Page 46
Asian Paints
Cash flow statement (standalone)
Year to March (` mn)
FY13
FY14
FY15E
FY16E
FY17E
16,552
18,442
23,701
29,228
35,735
Depreciation
1,546
2,457
2,633
2,773
2,913
Others
(259)
(415)
336
336
336
(4,385)
(4,802)
(7,347)
(9,061)
(11,435)
Tax
(Incr)/decr in net working capital
(1,587)
(1,682)
(1,022)
(972)
(1,152)
11,868
14,000
18,301
22,305
26,397
Capex (net)
(6,367)
(2,336)
(2,284)
(2,000)
(2,000)
(Incr)/decr in investments
973
(4,113)
3,212
551
421
(4,843)
(6,029)
928
(2,000)
(2,000)
Net borrowings
(1,016)
(369)
Interest paid
(371)
(423)
(336)
(336)
(336)
Dividend paid
(4,621)
(5,467)
(8,978)
(11,222)
(13,467)
(6,007)
(6,259)
(9,314)
(11,558)
(13,803)
1,018
1,712
9,915
8,746
10,595
7,515
9,267
19,231
27,978
38,573
5,501
11,664
16,017
20,305
24,397
FY13
FY14
FY15E
FY16E
FY17E
15.8%
15.7%
16.9%
17.3%
17.6%
15.4%
14.8%
16.2%
16.8%
17.3%
10.2%
9.6%
10.6%
11.1%
11.3%
46.3%
48.4%
56.7%
57.4%
57.2%
(0.2)
(0.2)
(0.4)
(0.5)
(0.6)
9.5
9.4
6.1
5.1
4.5
3.2
3.5
3.8
4.3
4.9
48.5%
46.1%
50.4%
53.2%
55.5%
RoIC (%)
46.4%
39.2%
48.4%
61.9%
73.9%
RoE (%)
36.3%
33.1%
36.1%
38.0%
38.9%
Year to March
FY13
FY14
FY15E
FY16E
FY17E
11.6
12.7
16.5
20.4
24.5
35.3
42.1
49.2
57.9
68.4
45.0
5.3
8.0
10.0
12.0
P/E (x)
55.9
51.1
39.3
31.9
26.4
P/BV (x)
18.4
15.4
13.2
11.2
9.5
EV/EBITDA (x)
33.8
29.3
23.4
19.3
16.0
EV/EBIT (x)
36.9
33.1
26.0
21.1
17.3
Page 47
Asian Paints
Page 48
Godrej Consumer
SELL
GCPL IN EQUITY
Recommendation
Mcap (bn):
6M ADV (mn):
CMP:
TP (12 mths):
Downside (%):
`337/US$5.5
`135/US$2.2
`944
`722
24
Flags
Accounting:
Predictability:
Earnings Momentum:
AMBER
AMBER
AMBER
Catalysts
Integration issues in its acquisitions in
Africa and LatAm
Performance (%)
Sensex
Nov 14
Sep 14
Jul 14
1180
1080
980
880
780
680
May 14
30,000
28,000
26,000
24,000
22,000
20,000
Mar 14
26% sales CAGR target presents more risks than rewards around M&A
GCPLs 26% sales CAGR target over FY11-21 is likely to include substantial
capital allocation for M&A. However, with the international portfolios RoCEs
declining from 16% in FY08 to 7% in FY14, we see the risk of a sustained drag
on ROCEs, due to challenges around management bandwidth, integration
expertise and incentive to consolidate the existing portfolio before further
acquisitions are pursued. Inorganic growth ambitions are expected to keep
dividend payout ratio at the current level of ~25%.
Family-owned and professionally managed
GCPL is a professionally managed company with Vivek Gambhir as the MD. The
promoter, Adi Godrej, serves as the Chairman and oversees longer term
strategy including inorganic plans for the company. Mr. Godrejs younger
daughter, Nisaba, is actively involved in the business and serves as the
Executive Director looking at the innovation function at GCPL. We expect her to
assume greater responsibilities in GCPL after Mr.Godrej retires.
Headwinds for existing business, acquisition ambitions a key risk
Changes in the product portfolio include: (a) recent relaunch of Cinthol
branded soaps; and (b) cross pollination of HI portfolio from Indonesia and hair
color portfolio from LatAm. However, we forecast only 14%/16% sales/EPS
CAGR over FY14-18 due to the headwinds around market share saturation in HI
and macro/integration issues in the international business. Due to overseas
acquisitions, RoCEs should remain at ~18-20% over FY14-18.
Consumer
Jan 14
Nov 13
COMPANY INSIGHT
GCPL (RHS)
FY13
FY14
FY15E
FY16E
FY17E
64,074
76,024
87,994
100,668
114,398
EBITDA (` mn)
9,824
11,503
12,972
14,942
17,208
15.3%
15.1%
14.7%
14.8%
15.0%
19.6
22.2
25.8
30.4
35.3
15.1%
16.1%
17.5%
20.3%
21.9%
48.1
42.6
36.6
31.0
26.8
Analyst Details
Rakshit Ranjan, CFA
+91 22 3043 3201
rakshitranjan@ambitcapital.com
Ritesh Vaidya
+91 22 3043 3246
riteshvaidya@ambitcapital.com
Godrej Consumer
130.0%
20%
110.0%
70.0%
Interest
received,
5%
Proceeds
from
shares,
18%
Source: Company, Ambit Capital research
14x
350
350
8x
Nov-07
Nov-14
Nov-13
Nov-12
50
Nov-11
50
Nov-10
200
Nov-09
200
Nov-08
13x
500
Nov-14
20x
500
18x
650
Nov-13
26x
650
23x
800
Nov-12
32x
800
28x
950
Nov-11
950
1100
Nov-10
38x
Nov-08
1100
Nov-07
Interest
paid
5%
Dividend
paid
17%
Net Capex
(incl.
acquisition
s)
68%
CFO, 57%
FY14
Debt
raised,
21%
FY13
FY05
FY14
FY13
FY12
FY11
10.0%
FY10
14%
FY09
4,000
FY08
30.0%
FY07
15%
FY06
14,000
FY05
16%
FY12
50.0%
24,000
FY11
17%
34,000
FY10
44,000
90.0%
FY09
18%
FY08
19%
54,000
RoE (RHS)
200%
180%
160%
140%
120%
100%
80%
60%
40%
20%
FY07
64,000
RoCE
Nov-09
FY06
Exhibit 1: Revenue has grown at a CAGR of 34% over FY0514 due to series of acquisitions since FY06
Page 50
Godrej Consumer
Exhibit 7: Explanation for our flags
Segment
Score
Comments
AMBER
In the past, Godrej Consumer has reported excellent cash conversion, efficient management of working capital
in the domestic business, and reasonable levels of loans and advances and contingent liabilities. However, its
working capital management in its international business has been weak. Working Capital days have kept
fluctuating from a low of 7 in FY06 days to 51 days in FY12. Due to lack of disclosures, it is difficult to get a
handle on the the debt level at each of its overseas businesses.
Predictability
AMBER
Whilst the company has seen strong performance in its domestic business, its increased focus on overseas
businesses in Africa and Latin American has led to volatility in its reported numbers at the EBITDA margin level.
EBITDA margin for the international have moved in a range of ~5% in FY06 to ~16% in FY12 and are currently
down to ~11%. This variability in the margins makes the predictability of international business earnings
difficult.
Treatment of
minorities
AMBER
GCPL has financed a slew of acquisitions by cutting back on dividend payouts since FY06. By and large, these
acquisitions have faced slowing growth, lower profitability and integration issues. This has resulted in a dip in
GCPLs RoE from ~190% in FY05 to 23% in FY14.
Accounting
Score (%)
Comment
Due to the scale of GCPLs household insecticide business, it is one of the first
companies globally to acquire the latest Active ingredient. It is the domestic
market leader in hair colour and #2 in soaps. However, it faces headwinds
around market share saturation and higher competitive intensity for its domestic
and overseas business, which have diluted its competitive advantages.
In the past, Godrej Consumer has reported excellent cash conversion, efficient
management of working capital in the domestic business, and reasonable levels
of loans and advances and contingent liabilities. However, its working capital
management in its international business has been weak.
GCPL has financed a slew of acquisitions by cutting back on dividend payouts
since FY06. Slowing growth, lower profitability and integration issues for these
acquisitions has resulted in a dip in GCPLs RoCE from ~130% in FY05 to 17% in
FY14.
GCPL is not part of Ambits Connected Companies Index and does not appear to
rely on political connections.
GCPL has cut down on its dividend pay-out in order to finance acquisitions which
have deteriorated the RoEs from ~170 in FY05 to 23% in FY14
GCPL is a family owned but professionally managed company. There are slight
concerns over the leadership capabilities of the next generation of the promoter
family, but the presence of a professional management team gives some
comfort.
Competitive advantage
Accounting quality
Capital allocation
Succession planning
Total (%)
Source: Company, Ambit Capital research. Note:
= rating of 4/4;
Page 51
Godrej Consumer
Balance Sheet (` mn)
Year to March
Shareholders' equity
FY13
FY14
FY15E
FY16E
FY17E
340
340
340
340
340
32,790
37,414
43,019
49,410
56,660
33,130
37,754
43,359
49,750
57,000
2,095
2,251
2,966
3,824
4,853
19,486
17,017
9,517
3,017
517
Minority Interest
Debt
Other long term liabilities
273
294
294
294
294
(140)
(203)
(203)
(203)
(203)
54,844
57,113
55,933
56,682
62,461
Gross block
21,575
22,511
23,411
24,311
25,211
Net block
15,876
15,689
15,710
15,730
15,748
CWIP
Goodwill
Investments
Cash & equivalents
Debtors
1,409
1,671
1,671
1,671
1,671
29,085
35,525
35,525
35,525
35,525
343
343
343
343
8,688
8,068
4,132
5,069
11,056
7,288
7,113
8,438
9,653
10,970
10,471
10,821
12,536
14,342
16,298
3,995
3,769
4,822
5,516
6,268
30,441
29,771
29,927
34,581
44,592
Current liabilities
21,381
25,326
26,519
30,338
34,476
585
559
723
827
940
21,967
25,885
27,242
31,166
35,416
8,475
3,886
2,685
3,415
9,175
54,844
57,113
55,933
56,682
62,461
Inventory
Loans & advances
Other current assets
Provisions
Total current liabilities
Net current assets
Total assets
Source: Company, Ambit Capital research
FY13
FY14
FY15E
FY16E
FY17E
64,074
76,024
87,994
100,668
114,398
31.7%
18.6%
15.7%
14.4%
13.6%
54,251
64,521
75,022
85,727
97,190
EBITDA
9,824
11,503
12,972
14,942
17,208
% growth
14.8%
17.1%
12.8%
15.2%
15.2%
770
819
879
880
882
9,054
10,685
12,093
14,061
16,326
Interest expenditure
775
1,074
531
251
Non-operating income
678
627
690
759
835
Adjusted PBT
8,957
10,238
12,252
14,569
17,161
Tax
1,792
2,104
2,757
3,351
4,119
7,165
8,134
9,496
11,218
13,042
% growth
15.2%
14.3%
19.7%
18.9%
17.8%
Extraordinaries
1,289
59
8,454
8,193
9,496
11,218
13,042
Minority Interest
(493)
(596)
(715)
(858)
(1,029)
7,961
7,597
8,781
10,360
12,013
Depreciation
EBIT
Share of associates
Adjusted Consolidated net profit
Source: Company, Ambit Capital research
Page 52
Godrej Consumer
Cash Flow statement (` mn)
Year to March
FY13
FY14
FY15E
FY16E
FY17E
EBIT
9,732
11,312
12,783
14,820
17,161
Depreciation
770
819
879
880
882
Others
282
(960)
184
607
1,029
(1,792)
(2,104)
(2,757)
(3,351)
(4,119)
Tax
(Incr) / decr in net working capital
4,613
3,969
(2,735)
208
226
13,604
13,036
8,354
13,165
15,179
Capex
(9,845)
(7,334)
(900)
(900)
(900)
(343)
Others
(9,845)
(7,676)
(900)
(900)
(900)
717
(2,469)
(7,500)
(6,500)
(2,500)
(775)
(1,074)
(531)
(251)
(1,984)
(2,083)
(3,175)
(3,969)
(4,763)
572
(354)
(184)
(607)
(1,029)
(1,470)
(5,979)
(11,390)
(11,327)
(8,293)
2,289
(620)
(3,936)
938
5,986
8,688
8,068
4,132
5,069
11,056
3,759
5,702
7,454
12,265
14,279
Ratio Analysis
Year to March
FY13
FY14
FY15E
FY16E
FY17E
53.9%
53.2%
53.0%
53.1%
53.2%
15.3%
15.1%
14.7%
14.8%
15.0%
15.2%
14.9%
14.5%
14.7%
15.0%
11.2%
10.7%
10.8%
11.1%
11.4%
27.7%
25.6%
33.4%
35.4%
36.5%
0.3
0.2
0.1
(0.0)
(0.2)
(301.0)
NA
(60.8)
(60.8)
(60.8)
3.0
3.4
3.8
4.1
4.5
RoCE (%)
15.1%
16.1%
17.5%
20.3%
21.9%
RoE (%)
23.4%
23.0%
23.4%
24.1%
24.4%
Year to March
FY13
FY14
FY15E
FY16E
FY17E
EPS (`)
19.6
22.2
25.8
30.4
35.3
Valuation Parameter
19.6
22.2
25.8
30.4
35.3
97.4
110.9
127.4
146.2
167.5
5.0
5.3
8.0
10.0
12.0
48.1
42.6
36.6
31.0
26.8
9.7
8.5
7.4
6.5
5.6
EV/EBITDA (x)
33.8
28.7
25.2
21.4
18.1
Price/Sales (x)
5.0
4.2
3.7
3.2
2.8
P/E (x)
P/BV (x)
Page 53
Godrej Consumer
Page 54
Marico
BUY
MRCO IN EQUITY
Recommendation
Mcap (bn):
3M ADV (mn):
CMP:
TP (12 mths):
Upside (%):
`201/US$3.3
`97/US$1.6
`314
`313
0
Flags
Accounting:
Predictability:
Treatment of Minorities:
AMBER
AMBER
AMBER
Catalysts
Performance
Sensex
Nov 14
Sep 14
Jul 14
350
320
290
260
230
200
May 14
30,000
28,000
26,000
24,000
22,000
20,000
Mar 14
Consumer
Jan 14
Nov 13
COMPANY INSIGHT
Marico (RHS)
FY13
FY14
FY15E
FY16E
FY17E
45,962
46,865
53,985
62,760
73,148
EBITDA (` mn)
6,258
7,480
8,809
10,555
12,668
13.6%
16.0%
16.3%
16.8%
17.3%
5.6
7.5
9.2
11.1
13.4
17.1%
21.5%
31.5%
36.6%
41.0%
45.0
33.6
27.5
22.8
18.9
Analyst Details
Rakshit Ranjan, CFA
+91 22 3043 3201
rakshitranjan@ambitcapital.com
Ritesh Vaidya
+91 22 3043 3246
riteshvaidya@ambitcapital.com
Marico
45.0%
35.0%
25.0%
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
15.0%
RoE
Interest
received,
2%
55.0%
RoCE
FY05-08 but
a series of
65.0%
FY14
FY13
FY10
FY09
FY08
FY07
FY06
FY05
FY12
FY05
Exhibit 1: Revenue has recorded a CAGR of 19% over FY0514 with EBITDA margin expansion of 720bps
Purchase of
Investments
Subsidiaries
& Others
4%
Debt
raised, 21%
Dividend
paid
10%
Interest
paid
6%
Net Capex
(incl.
internation
al
acquisitions
72%
CFO, 62%
Proceeds
from
shares,
14%
Debt
repayment
3%
Source: Company, Ambit Capital research. Note: Size of the pie represents
cumulative funds raised (through various sources such as CFO, equity, debt,
etc) and spent (on capex, debt repayment, interest, dividend paid, etc) over
FY04-13.
Source: Company, Ambit Capital research. Note: Size of the pie represents
cumulative funds raised (through various sources such as CFO, equity, debt,
etc) and spent (on capex, debt repayment, interest, dividend paid, etc) over
FY04-13.
14x
8x
Nov-07
Nov-14
Nov-13
Nov-12
0
Nov-11
0
Nov-10
50
Nov-09
50
Nov-08
100
Nov-07
100
12x
150
Nov-14
150
16x
200
Nov-13
22x
18x
Nov-12
200
20x
250
Nov-11
250
24x
300
Nov-10
300
Nov-09
30x
26x
Nov-08
350
Page 56
Marico
Exhibit 7: Explanation for our flags
Segment
Accounting
Predictability
Treatment of
minorities
Score
Comments
AMBER
In the past, Marico has reported strong cash conversion, effective management of working capital and low levels
of loans and advances. But it still ranks lower than the overall FMCG average, as it runs the risk of contingent
liabilities related to excise duty evasion on its coconut oil sales (representing ~30% of total equity) working
against it.
AMBER
Marico is strongly influenced by commodity price volatility which largely impacts the growth rate of its coconut oil
portfolio. However, with improving inventory management and strong brand equity for Parachute, Marico has
over the years improved its ability to manage copra price volatility. This has improved its volume and margin
predictability particularly for the domestic business. Predictability of the international business performance
(~25% of sales) still remains poor.
AMBER
In the past, Marico has done capital misallocation by pursuing unprofitable overseas acquisitions and
diversifying into the Kaya Skin Clinic business in 2002. During this period, return ratios were impacted, as RoEs
came down from 63% in FY08 to only 23% in FY13. However, during our recent discussions, the management
clearly said that it would avoid acquisitions in the near term and drive growth through the organic route. This
should drive a pickup in RoEs to ~46% by FY18.
Score (%)
Comment
Competitive advantage
Marico has competitive advantages around: a) strong brand equity of Parachute and Saffola,
b) 4mn widespread distribution and is seen by distributors as one of the most preferred
business partner and c) Superior HR policies which have fostered a competitive and
meritocratic work culture.
Accounting quality
Maricos accounting quality is poorer than its FMCG peers. Specifically, we have concerns
around the companys low cash conversion ratio ratios, poor FCF, higher proportion of
contingent liabilities and lower proportion of auditor fees as a percentage of sales vs its
FMCG peers.
Capital allocation
Increasing focus on organic growth and higher dividend payout ratio is a step in the right
direction for capital allocation. However, previous low RoCE acquisitions continue to depress
the consolidated RoCE.
Marico is not part of Ambits Connected Companies Index and does not appear to rely on
political connections.
Treatment of minorities
Succession planning
The promoter recently stepped down in favour of a professional CEO. Harsh Mariwalas son
Rishabh is independently pursuing his venture and is not involved with Marico. Though, at a
later stage, Rishabhs involvement with Marico cannot be ruled out.
Total (%)
Source: Company, Ambit Capital research. Note:
= rating of 4/4;
Page 57
Marico
Balance sheet (consolidated) (` mn)
Year to March
Shareholders' equity
FY13
FY14
FY15E
FY16E
FY17E
645
645
645
645
645
19,170
12,961
14,953
17,533
20,727
Total networth
19,815
13,606
15,598
18,177
21,372
Minority Interest
351
358
508
658
808
7,907
5,259
3,259
1,259
58
96
96
96
96
Total liabilities
28,131
19,319
19,461
20,190
22,276
Gross block
17,009
9,634
10,634
11,634
12,634
Net block
12,748
6,334
6,616
6,858
7,062
Debt
Deferred tax liability
CWIP
1,477
44
44
44
44
Goodwill
3,955
2,543
2,543
2,543
2,543
Investments
1,516
3,105
3,105
3,105
3,105
2,667
4,064
3,358
3,233
4,390
Debtors
1,966
2,232
2,733
3,174
3,695
Inventory
8,627
7,962
9,110
10,581
12,318
2,555
1,474
1,822
2,116
2,464
1,562
1,892
2,278
2,645
3,080
17,376
17,624
19,300
21,749
25,947
Current liabilities
7,727
9,473
10,628
12,344
14,371
Provisions
Total current
liabilities
Net current assets
1,214
857
1,518
1,763
2,053
8,941
10,330
12,147
14,107
16,424
8,435
7,294
7,153
7,641
9,523
28,131
19,319
19,461
20,190
22,276
Total assets
FY13
FY14
FY15E
FY16E
FY17E
45,962
46,865
55,419
64,365
74,935
14.7%
2.0%
18.3%
16.1%
16.4%
39,704
39,385
46,598
53,540
61,958
EBITDA
6,258
7,480
8,822
10,825
12,977
% growth
29.2%
19.5%
17.9%
22.7%
19.9%
Depreciation
866
769
718
758
796
5,392
6,711
8,104
10,067
12,182
Interest expenditure
580
345
256
136
38
Non-operating income
375
579
599
547
576
5,187
6,946
8,447
10,478
12,720
EBIT
Adjusted PBT
Tax
1,462
1,905
2,365
2,986
3,752
3,725
5,041
6,082
7,492
8,967
% growth
15.0%
35.3%
20.6%
23.2%
19.7%
332
4,057
5,041
6,082
7,492
8,967
98
187
150
150
150
4,854
5,932
7,342
8,817
4,854
5,932
7,342
8,817
Extraordinaries
Reported PAT / Net profit
Minority Interest
Share of associates
Adjusted Consolidated
3,959
net profit
Reported Consolidated
3,959
net profit
Source: Company, Ambit Capital research
Page 58
Marico
Cash flow statement (consolidated) (` mn)
Year to March
FY13
FY14
FY15E
FY16E
FY17E
EBIT
5,767
7,290
8,703
10,614
12,757
Depreciation
Others
Tax
(Incr) / decr in net
working capital
Cash flow from
operations
Capex
(Incr) / decr in
investments
Others
Cash flow from
investments
Net borrowings
866
769
718
758
796
(295)
(487)
(256)
(136)
(38)
(1,462)
(1,905)
(2,365)
(2,986)
(3,752)
(201)
2,538
(566)
(613)
(724)
4,675
8,205
6,234
7,637
9,039
(10,072)
7,078
(1,000)
(1,000)
(1,000)
1,440
(176)
(8,632)
6,902
(1,000)
(1,000)
(1,000)
278
(2,648)
(2,000)
(2,000)
(1,259)
Interest paid
(580)
(345)
(256)
(136)
(38)
Dividend paid
(749)
(2,632)
(3,458)
(4,280)
(5,140)
Others
Cash flow from
financing
Net change in cash
6,088
(8,086)
(226)
(346)
(444)
5,036
(13,711)
(5,940)
(6,762)
(6,881)
1,079
1,397
(706)
(125)
1,158
2,667
4,064
3,358
3,233
4,390
(5,397)
15,284
5,234
6,637
8,039
FY13
FY14
FY15E
FY16E
FY17E
51.9%
48.8%
48.8%
49.7%
50.1%
13.6%
16.0%
15.9%
16.8%
17.3%
12.5%
15.6%
15.7%
16.5%
17.0%
7.9%
10.4%
10.7%
11.4%
11.8%
18.9%
54.2%
58.3%
58.3%
58.3%
0.3
0.1
(0.0)
(0.1)
(0.2)
8.0
14.5
14.6
14.6
14.6
2.7
4.9
5.2
5.5
5.9
RoCE (%)
17.1%
21.5%
31.5%
37.5%
41.7%
RoE (%)
23.2%
29.0%
40.6%
43.5%
44.6%
FY13
FY14
FY15E
FY16E
FY17E
5.6
7.5
9.2
11.4
13.7
5.6
7.5
9.2
11.4
13.7
32.2
22.1
25.4
29.6
34.8
1.0
3.5
4.6
5.7
6.8
55.8
41.7
34.1
27.6
23.0
9.7
14.2
12.4
10.6
9.0
EV/EBITDA (x)
33.2
27.2
22.9
18.5
15.3
Price/Sales (x)
4.4
4.3
3.7
3.1
2.7
P/E (x)
P/BV (x)
Page 59
Marico
Page 60
Berger Paints
SELL
BRGR IN EQUITY
Mcap (bn):
3M ADV (mn):
CMP:
TP (12 mths):
Downside (%):
`126/US$2.0
`125/US$2.0
`362
`269
26
Flags
Accounting:
Predictability:
Treatment of Minorities:
AMBER
AMBER
GREEN
Catalysts
Performance
28,000
500
25,500
400
23,000
300
20,500
18,000
Sensex
Oct-14
200
Jul-14
Recommendation
Apr-14
Jan-14
Oct-13
COMPANY INSIGHT
FY13
FY14
FY15E
FY16E
FY17E
33,464
38,697
44,753
52,672
61,986
EBITDA
3,712
4,314
5,206
6,180
7,458
EBITDA (%)
11.1%
11.1%
11.6%
11.7%
12.0%
EPS (`)
6.3
7.2
8.7
11.0
13.9
RoE (%)
22.9%
24.1%
24.7%
26.5%
28.1%
RoCE (%)
18.6%
17.4%
18.3%
21.1%
24.5%
57.4
50.3
41.8
33.0
26.0
P/E (x)
Analyst Details
Rakshit Ranjan, CFA
+91 22 3043 3201
rakshitranjan@ambitcapital.com
Aditya Bagul
+91 22 3043 3264
adityabagul@ambitcapital.com
Berger Paints
Exhibit 1: EBITDA margins and revenue growth over the
last ten years
Revenue (Rs mn)
50,000
13%
40,000
12%
30,000
11%
20,000
10%
10,000
9%
Exhibit 2: RoCE
and
RoE
over
RoCE
29%
the
last
ten
RoE (% RHS)
40%
27%
35%
25%
23%
30%
21%
19%
15%
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
Debt
raised,
29%
20%
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
Dividend
received,
0%
25%
17%
8%
years
Interest
received,
4%
Debt
repayment,
3%
Purchase
of
Investment
s , 4%
CFO, 60%
Proceeds
from
shares,
7%
Dividend
paid, 17%
Interest
paid, 10%
Net Capex,
58%
30
25
20
15
10
5
Apr-05
Oct-05
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Oct-12
Apr-13
Oct-13
Apr-14
Oct-14
BRGR P/E
6 Yr Avg
Apr-05
Oct-05
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Oct-12
Apr-13
Oct-13
Apr-14
Oct-14
8
7
6
5
4
3
2
1
-
35
BRGR P/B
4 Yr Avg
6 Yr Avg
4 Yr Avg
Page 62
Berger Paints
Exhibit 7: Explanation for our flags
Segment
Score
Comments
Accounting
AMBER
Whilst Berger scores well on cash conversion, related party advances and return on surplus cash, its working
capital cycle (65-70 days) and RoEs (~25%) are inferior relative to Asian Paints (working capital cycle of 12-14
days and RoEs of 38-40%).
Predictability
AMBER
Although the macro demand for paints in India is not very volatile across economic cycles, the low pricing power
of Berger Paints in the industry results in volatility of EPS growth over time.
Treatment of
minorities
GREEN
Our accounting analysis does not raise any major concerns around dubious transactions by promoters. Berger
has been in a capex mode for the last four years and has allocated surplus cash towards its core operations.
Score (%)
Comment
Competitive advantage
Product innovation, relationships with institutional buyers and dealers is the key
strength. However the supply chain benefits lag Asian Paints.
Accounting quality
Whilst Berger scores well on cash conversion, related party advances and return
on surplus cash, its working capital cycle and RoEs are inferior relative to Asian
Paints.
Capital allocation
Berger is not part of Ambits Connected Companies Index and does not appear
to have any questionable political connections
Treatment of minorities
Succession planning
Total (%)
Source: Company, Ambit Capital research. Note:
= rating of 4/4;
Page 63
Berger Paints
Balance sheet (standalone)
Year to March (` mn)
Shareholders' equity
FY13
FY14
FY15E
FY16E
FY17E
693
693
693
693
693
8,839
10,514
12,377
14,881
18,081
9,532
11,207
13,070
15,574
18,774
Debt
5,497
6,235
5,835
4,235
2,235
408
538
538
538
538
15,436
17,980
19,444
20,347
21,547
Gross block
9,795
13,220
14,220
15,220
16,220
Net block
6,040
8,638
8,792
8,992
9,173
CWIP
1,674
1,333
500
500
500
Total liabilities
Investments (non-current)
108
907
907
907
907
2,270
1,841
3,544
3,528
3,751
Debtors
4,114
4,857
5,617
6,466
7,440
Inventory
6,364
6,957
8,045
9,325
10,804
1,194
1,301
1,504
1,770
2,083
14,050
15,071
18,832
21,233
24,247
5,514
6,887
8,337
9,813
11,548
Current liabilities
Provisions
922
1,081
1,250
1,472
1,732
6,436
7,968
9,588
11,284
13,280
7,614
7,103
9,245
9,949
10,967
15,436
17,980
19,444
20,347
21,547
FY13
FY14
FY15E
FY16E
FY17E
33,464
38,697
44,753
52,672
61,986
Total assets
14%
16%
16%
18%
18%
29,752
34,384
39,547
46,492
54,528
3,712
4,314
5,206
6,180
7,458
% growth
22%
16%
21%
19%
21%
Depreciation
567
707
845
801
819
3,145
3,607
4,360
5,379
6,640
377
466
480
400
257
EBIT
Interest expenditure
Non-operating income
314
360
403
451
505
3,082
3,500
4,283
5,430
6,888
898
1,006
1,285
1,629
2,066
Adjusted PAT
2,184
Extraordinary
0
expense/(income)
Reported PAT after minority
2,184
interest
Source: Company, Ambit Capital research
2,494
2,998
3,801
4,821
2,494
2,998
3,801
4,821
Adjusted PBT
Tax
Page 64
Berger Paints
Cash flow statement (standalone)
Year to March (` mn)
FY13
FY14
FY15E
FY16E
FY17E
3,082
3,500
4,283
5,430
6,888
Depreciation
Others
567
707
845
801
819
(1,222)
(1,315)
(1,364)
(1,772)
(2,185)
(843)
(1,022)
(1,285)
(1,629)
(2,066)
(2,049)
(2,049)
(2,049)
(2,049)
(2,049)
Tax
(Incr)/decr in net working
capital
Cash flow from
operations
Capex (net)
1,206
3,084
3,805
4,138
4,982
(2,179)
(2,431)
(167)
(1,000)
(1,000)
(Incr)/decr in investments
(92)
(803)
230
220
(2,041)
(3,014)
(167)
(1,000)
(1,000)
2,080
525
(400)
(1,600)
(2,000)
Interest paid
(327)
(424)
(400)
(257)
(138)
Dividend paid
(484)
(619)
(1,135)
(1,297)
(1,622)
1,281
(499)
(1,935)
(3,154)
(3,760)
446
(429)
1,703
(16)
223
2,270
1,841
3,544
3,528
3,751
(974)
653
3,638
3,138
3,982
FY13
FY14
FY15E
FY16E
FY17E
12.0%
12.1%
12.5%
12.6%
12.8%
10.3%
10.2%
10.6%
11.1%
11.5%
6.5%
6.4%
6.7%
7.2%
7.8%
33.4%
35.8%
37.9%
34.1%
33.6%
0.3
0.4
0.2
0.0
(0.1)
4.4
5.4
4.8
5.3
5.7
3.4
2.9
3.1
3.5
3.8
26.2%
24.4%
26.2%
30.1%
35.0%
RoIC (%)
23.9%
21.5%
22.1%
25.7%
29.8%
RoE (%)
25.0%
24.1%
24.7%
26.5%
28.1%
FY13
FY14
FY15E
FY16E
FY17E
6.3
7.2
8.7
11.0
13.9
137.6
161.7
188.6
224.7
270.9
1.8
2.2
2.8
3.2
4.0
57.4
50.3
41.8
33.0
26.0
2.6
2.2
1.9
1.6
1.3
EV/EBITDA (x)
32.5
28.2
23.4
19.6
16.0
EV/EBIT (x)
37.8
33.2
27.6
22.2
17.9
Page 65
Berger Paints
Page 66
Page Industries
BUY
PAG IN EQUITY
Recommendation
Mcap (bn):
3M ADV (mn):
CMP:
TP (12 mths):
Downside (%):
`109/US$1.8
`88/US$1.4
`9,796
`9,265
5
Flags
Accounting:
Predictability:
Treatment of Minorities:
GREEN
GREEN
GREEN
Catalysts
Performance
8000
24,000
7000
22,000
6000
20,000
5000
18,000
4000
Sensex
Oct-14
9000
26,000
Jul-14
28,000
Apr-14
Consumer Discretionary
Jan-14
Over the last 20 years, Page Industries has successfully transformed the
Jockey brand into a market leader in the fast-growing, organised
innerwear segment. Jockeys highly aspirational brand image has been built
by consistent delivery of comfortable, durable and affordable products. Page
is likely to outperform its peers over FY14-20 amidst a strong macro tailwind
for
mid-premium
innerwear
through:
(a)
backward
integrated
manufacturing (delivering high-quality product at affordable prices); and (b)
aggressive distribution expansion along with an aspirational brand recall for
Jockey. We build in 28% revenue CAGR and 29% earnings CAGR over FY1420E with RoEs of ~60% over this period.
Oct-13
COMPANY INSIGHT
FY13
8,758
1,766
20.2
100.9
59.3
42.4
96.8
FY14
11,876
2,511
21.1
137.8
61.2
41.9
70.8
FY15E
15,567
3,323
21.3
182.5
60.8
44.8
53.5
FY16E
20,267
4,358
21.5
243.5
61.5
49.4
40.1
FY17E
26,177
5,647
21.6
318.7
61.0
51.1
30.6
Analyst Details
Rakshit Ranjan, CFA
+91 22 3043 3201
rakshitranjan@ambitcapital.com
Aditya Bagul
+91 22 3043 3264
adityabagul@ambitcapital.com
Page Industries
Exhibit 1: EBITDA margins and revenue growth over the
last ten years
Revenue (Rs mn)
Exhibit 2: RoCE
15,000
60%
12,000
20%
50%
and
RoE
over
RoCE
the
last
ten
RoE (% RHS)
120%
90%
18%
9,000
16%
6,000
14%
3,000
years
40%
60%
30%
12%
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
30%
FY05
20%
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
10%
FY05
Interest
received,
2%
Debt
raised,
23%
Debt
repayment,
1%
Purchase of
Investments
, -1%
Dividend
paid, 49%
Net Capex,
43%
Proceeds
from
shares,
9%
CFO, 67%
Interest
paid, 7%
Source: Company, Ambit Capital research
4 Yr Avg
PAG P/B
6 Yr Avg
Apr-14
Oct-14
Apr-13
Oct-13
Oct-12
Apr-12
Oct-11
Apr-11
Oct-10
Apr-10
Oct-09
Apr-09
Oct-08
Apr-08
Oct-07
Apr-07
Apr-14
Oct-14
Oct-13
Apr-13
Oct-12
Apr-12
Apr-11
6 Yr Avg
Oct-11
Oct-10
Apr-10
Apr-09
PAG P/E
Oct-09
Oct-08
Apr-08
Apr-07
Oct-07
4 Yr Avg
Page 68
Page Industries
Exhibit 7: Explanation for our flags
Segment
Score
Comments
Accounting
GREEN
Page Industries' cash conversion has remained healthy, resulting in cumulative CFO (pre-tax)/EBITDA of more than
72% in FY05-14. Page has maintained effective control on the working capital cycle, and hence despite high sales
growth, working capital days have increased marginally from 63 days in FY09 to 69 days in FY14.
Predictability
GREEN
The underpenetrated nature of the industry, the growth of the middle class and continued efforts by management
have enabled Page (with its strong brand franchise) to deliver consistent performance. Page has delivered growth
of above 25% YoY consistently in both revenues and net profits over the last eight years.
Treatment of
minorities
GREEN
Our accounting analysis does not raise any major red flags with respect to dubious transactions by promoters.
Also, with the high levels of cash generation, the company has returned the excess cash to the shareholders.
Score (%)
Comment
Competitive advantage
Near monopoly within its segment, with efficient inhouse manufacturing despite
it being labour intensive and complete control over product development, strong
brand and well-incentivised dealer network.
Accounting quality
Capital allocation
Page is not part of Ambits Connected Companies Index and does not appear to
have any questionable political connections.
Treatment of minorities
Promoters have a very small and non-competing apparel business in India, but
good overall track record of corporate governance.
Succession planning
Total (%)
Source: Company, Ambit Capital research. Note:
= rating of 4/4;
Page 69
Page Industries
Balance sheet (standalone)
Year to March (` mn)
Shareholders' equity
FY13
FY14
FY15E
FY16E
FY17E
112
112
112
112
112
2,024
2,778
3,695
4,917
6,517
2,135
2,890
3,806
5,028
6,628
Debt
1,007
1,632
1,162
1,322
1,262
57
95
95
95
95
3,199
4,617
5,063
6,445
7,985
Gross block
1,860
2,404
3,125
3,917
4,712
Net block
1,322
1,728
2,272
2,845
3,377
138
36
36
36
36
Total liabilities
CWIP
Investments (non-current)
10
46
35
34
39
34
Debtors
581
727
853
1,111
1,434
2,350
3,626
3,796
4,942
6,383
130
328
426
555
717
3,248
4,932
5,382
6,985
8,990
Current liabilities
1,302
1,838
2,371
3,087
3,987
Inventory
Loans & advances
Provisions
216
241
256
333
430
1,518
2,079
2,627
3,420
4,418
1,730
2,853
2,755
3,565
4,572
Total assets
3,199
4,617
5,063
6,445
7,985
FY13
FY14
FY15E
FY16E
FY17E
8,758
11,876
15,567
20,267
26,177
26%
36%
31%
30%
29%
Operating expenditure
6,992
9,365
12,244
15,909
20,530
EBITDA
1,766
2,511
3,323
4,358
5,647
% growth
21%
42%
32%
31%
30%
Depreciation
114
139
176
219
262
1,652
2,372
3,147
4,138
5,384
80
104
140
124
129
EBIT
Interest expenditure
Non-operating income
Adjusted PBT
Tax
Adjusted PAT
Extraordinary expense/(income)
Reported PAT after minority interest
85
66
78
101
131
1,657
2,334
3,085
4,115
5,386
531
797
1,049
1,399
1,831
1,125
1,537
2,036
2,716
3,555
1,125
1,537
2,036
2,716
3,555
Page 70
Page Industries
Cash flow statement (standalone)
Year to March (` mn)
FY13
FY14
FY15E
FY16E
FY17E
1,657
2,335
3,085
4,115
5,386
114
139
176
219
262
74
67
62
23
(2)
Tax
-516
-750
-1,049
-1,399
-1,831
-457
-1,051
98
-805
-1,012
871
740
2,372
2,154
2,803
Depreciation
Others
-449
-473
-721
-792
-795
(Incr)/decr in investments
19
13
-419
-441
-643
-691
-664
238
543
-470
160
-60
(80)
(97)
(140)
(124)
(129)
Dividend paid
(596)
(756)
(1,120)
(1,494)
(1,955)
-438
-310
-1,730
-1,458
-2,144
14
-11
-5
46
35
34
39
34
430
280
1,729
1,463
2,139
FY13
FY14
FY15E
FY16E
FY17E
20.2%
21.1%
21.3%
21.5%
21.6%
18.9%
20.0%
20.2%
20.4%
20.6%
12.8%
12.9%
13.1%
13.4%
13.6%
57.6%
50.9%
55.0%
55.0%
55.0%
0.5
0.6
0.3
0.3
0.2
6.0
5.2
5.6
6.4
6.4
5.2
5.6
5.6
5.8
6.1
62.5%
63.6%
68.0%
74.9%
77.5%
RoIC (%)
42.8%
41.4%
43.5%
48.1%
49.8%
RoE (%)
59.3%
61.2%
60.8%
61.5%
61.0%
FY13
FY14
FY15E
FY16E
FY17E
100.9
137.8
182.5
243.5
318.7
191.4
259.1
341.2
450.8
594.2
50.0
60.0
85.8
114.5
149.8
P/E (x)
96.8
70.8
53.5
40.1
30.6
P/BV (x)
51.0
37.7
28.6
21.7
16.4
EV/EBITDA (x)
62.2
44.0
33.1
25.3
19.5
EV/EBIT (x)
66.5
46.6
35.0
26.6
20.5
Page 71
Page Industries
Page 72
IPCA Laboratories
BUY
IPCA IN EQUITY
IPCA has built an enviably profitable and growing franchise in the India
and export market by playing to its strengths. The companys sustainable
competitive advantage is around innovation and cost management. It
has innovated around manufacturing processes and formulations such
that the product is more cost-efficient and patient-friendly. This has
aided IPCA in building brand equity in front of Indian doctors. At the
same time, IPCA has managed costs efficiently, as reflected by its
consistent RoCE. Brand IPCA is showcased through various publications in
medical journals like Lancet and through its dominance in therapy areas
like malaria and pain in India.
Market domination in segment like malaria and rheumatology
IPCA currently manufactures 350 formulations and 80 APIs across various
therapeutic segments and sells in India (38% of sales in FY14), regulated markets
(20%) and emerging markets (25%). IPCA is an emerging player in most
geographies and it dominates in segments like malaria (34% market share) and
rheumatology (46% market share) in India.
Innovation and established brand - the key competitive advantages
IPCAs excellence in process re-engineering, innovation in formulations,
established brand in front of doctors, relationship with regulators and cost
leadership are its key competitive advantages. Its cost competitiveness may
decline over time, but as the company scales up the value chain, the other
factors are likely to sustain (the key factor being brand). IPCA has been able to
sustain RoCE and RoE of >15% led by high cash generation and rational capital
allocation owing to tight working capital investment and low capex.
Prudent capital allocation as evidenced by strong EBITDA margins
Rational capital allocation has been IPCAs forte, as evidenced by its comparable
gross and EBITDA margins vs its peers despite owning plain-vanilla products. The
company has spent 60.3% of its cash on capex aimed at increasing
manufacturing capacity and vertical integration. The gross block turnover has
remained stable at ~1.9x over the last decade, indicating that investments in
capex have yielded sales. IPCA pays ~15% of its profits (at par with peers) as
dividend, consistently ploughing back most of the profits.
No management transition in sight
IPCA has not hired any external talent in the top management in the past decade
and continues to be a promoter-run business. The first-generation entrepreneur,
Mr. Premchand Godha, still plays an active role in execution whilst his sons, Mr.
Pranay Godha (Head of exports) and Prashant Godha (Head of domestic
business), are now well entrenched in the company. We believe a management
transition is not in sight.
Healthcare
Recommendation
Mcap (bn):
3M ADV (mn):
CMP:
TP (12 mths):
Upside (%):
`86/US$1.4
`217/US$3.5
`684
`949
39
Flags
Accounting:
Predictability:
Treatment of Minorities:
GREEN
AMBER
GREEN
Catalysts
Performance
29,000
27,500
26,000
24,500
23,000
21,500
20,000
900
850
800
750
700
650
600
Nov-13
Dec-13
Jan-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Sep-14
Oct-14
COMPANY INSIGHT
Sensex
Ipca, RHS
FY13
FY14
FY15E
FY16E
FY17E
28,131
32,818
35,387
42,185
50,098
Operating Profits
4,876
6,575
7,154
8,931
10,304
Net Profits
3,686
5,333
5,226
6,573
7,615
Diluted EPS
29.2
42.3
41.4
52.1
60.3
RoE (%)
23.0
27.2
24.1
24.8
23.6
P/E (x)
25.0
17.3
17.7
14.0
12.1
Analyst Details
Aditya Khemka
+91 22 3043 3272
adityakhemka@ambitcapital.com
Paresh Dave, CFA
+91 22 3043 3212
pareshdave@ambitcapital.com
IPCA Laboratories
Exhibit 1: EBITDA margins and revenue growth over the
last ten years
40%
35%
35%
25.0%
30%
30%
20.0%
20.0%
25%
25%
15.0%
15.0%
20%
20%
10.0%
10.0%
35.0%
35.0%
30.0%
30.0%
25.0%
Revenue growth
FY14
FY13
FY12
FY11
FY10
FY09
FY08
RoCE
RoE, RHS
Debt
raised,
26.1%
FY07
FY06
FY05
Proceeds
from
shares,
0.0%
FY04
FY03
FY14
FY13
FY12
FY11
10%
FY10
10%
FY09
0.0%
FY08
0.0%
FY07
15%
FY06
15%
FY05
5.0%
FY04
5.0%
Interest
received,
1.8%
Dividend
received,
0.2%
CFO,
71.8%
Dividend
paid,
12.0%
Increase in
cash and
cash
equivalent,
2.1%
Debt
repayment
, 15.9%
Purchase
of
investment
, 1.6%
Interest
paid, 8.2%
Net
Capex,
60.3%
20
4.0
15
3.0
10
2.0
0.0
IPCA P/E
6 yr avg
Mar-05
Sep-05
Mar-06
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Feb-11
Aug-11
Feb-12
Aug-12
Feb-13
Aug-13
Feb-14
Aug-14
1.0
Mar-05
Sep-05
Mar-06
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Feb-11
Aug-11
Feb-12
Aug-12
Feb-13
Aug-13
Feb-14
Aug-14
IPCA P/B
4 yr avg
6 yr avg
4 yr avg
Page 74
IPCA Laboratories
Exhibit 7: Explanation for our flags
Segment
Score
Comments
Accounting
GREEN
In our forensic analysis of 360 companies, IPCA scores above the pharma industry average (comprising 26
companies). IPCA scores high on ratios of: (a) cash yield; (b) fixed asset turnover; (c) contingent liabilities and (d)
change in depreciation rates. However, IPCA has weaker scores on: (a) CFO / EBITDA; and (b) provisioning for
debtors outstanding for more than six months.
Predictability
AMBER
Overall, the management has made appropriate disclosures in its earnings calls, meetings and interviews
regarding product filings, acquisitions and business outlook. However, the unpredictability of the institutional
generics, US business (post Ratlam and Indore FDA Form 483s) and API business makes us assign AMBER on
predictability.
Treatment of
GREEN
We have no evidence of IPCA mistreating the minorities.
minorities
Source: Bloomberg, Ambit Capital research
Score (%)
Comment
Competitive advantages
Accounting quality
Capital allocation
Rational capital allocation has been IPCAs forte, as evidenced by its comparable gross and
EBITDA margins vs its peers despite owning plain-vanilla products
IPCA is not part of Ambits Connected Companies Index and does not appear to rely on political
connections.
Treatment of minorities
Succession planning
The first-generation entrepreneur still plays an active role in execution whilst his sons are now
well entrenched in the company.
Total (%)
Sustainable low cost advantage and high focus on brand equity and cash flow
generation
= rating of 4/4;
Page 75
IPCA Laboratories
Balance sheet (consolidated)
Year to March (` mn)
FY13
FY14
FY15E
FY16E
FY17E
Total Assets
26,970
32,103
37,234
43,554
50,783
Fixed Assets
12,334
15,185
18,902
22,321
23,015
Current Assets
14,545
16,827
18,240
21,142
27,676
90
92
92
92
92
26,970
32,103
37,234
43,554
50,783
252
252
252
252
252
Investments
Total Liabilities
Shareholders' equity
Reserves and Surplus
15,285
19,344
23,592
28,935
35,124
15,538
19,597
23,844
29,187
35,377
Total debt
6,170
6,026
6,026
6,026
6,026
Current liabilities
3,828
4,847
5,731
6,708
7,747
1,433
1,633
1,633
1,633
1,633
FY13
FY14
FY15E
FY16E
FY17E
28,131
32,818
35,387
42,185
50,098
19.3%
16.7%
7.8%
19.2%
18.8%
21,899
24,712
27,276
32,164
38,063
Core EBITDA
6,232
8,106
8,111
10,020
12,035
% growth
21.4%
30.1%
0.1%
23.5%
20.1%
Depreciation
867
1,031
1,283
1,581
1,805
Interest expense
334
269
262
262
262
Adjusted PBT
5,031
6,806
6,565
8,176
9,967
Tax
1,345
1,472
1,339
1,603
2,352
3,686
5,333
5,226
6,573
7,615
FY13
FY14
FY15E
FY16E
FY17E
PBT
4,543
6,306
6,891
8,668
10,041
867
1,031
1,283
1,581
1,805
916
1,305
1,665
2,095
2,427
(1,444)
(1,041)
(158)
(1,779)
(2,169)
Depreciation
Tax
Net Working Capital
CFO
Capital Expenditure
3,445
5,346
6,479
6,505
7,475
(2,993)
(3,924)
(5,000)
(5,000)
(2,500)
250
Investment
Other investments
CFI
119
111
134
134
38
(2,624)
(3,813)
(4,866)
(4,866)
(2,462)
Issuance of Equity
Inc/Dec in Borrowings
Net Dividends
442
(282)
(468)
(661)
(978)
(1,230)
(1,425)
(339)
(306)
(262)
(262)
(262)
CFF
(361)
(1,361)
(1,241)
(1,493)
(1,688)
460
171
372
146
3,326
452
1,422
1,479
1,505
4,975
Page 76
IPCA Laboratories
Ratio analysis (consolidated)
Year to March
FY13
FY14
FY15E
FY16E
FY17E
Revenue growth
19.3
16.7
7.8
19.2
18.8
21.4
30.1
0.1
23.5
20.1
APAT growth
16.3
44.7
(2.0)
25.8
15.8
EPS growth
16.2
44.6
(2.0)
25.8
15.8
22.2
24.7
22.9
23.8
24.0
EBIT margin
17.3
20.0
20.2
21.2
20.6
13.1
16.3
14.8
15.6
15.2
ROCE (%)
26.6
27.2
30.6
25.6
27.3
23.0
27.2
24.1
24.8
23.6
0.4
0.3
0.3
0.2
0.2
Current Ratio
3.8
3.5
3.2
3.2
3.6
CFO/EBITDA (x)
0.6
0.7
0.8
0.6
0.6
1.8
1.7
1.5
1.5
1.6
2.6
2.7
2.8
2.9
2.5
FY13
FY14
FY15E
FY16E
FY17E
EPS
29.2
42.3
41.4
52.1
60.3
123.1
155.3
188.9
231.3
280.3
25.0
17.3
17.7
14.0
12.1
5.9
4.7
3.9
3.2
2.6
15.7
12.0
12.0
9.7
8.1
EV/Sales (x)
3.5
3.0
2.8
2.3
1.9
EV/EBIT (x)
20.0
14.8
13.6
10.9
9.5
Page 77
IPCA Laboratories
Page 78
GRUH Finance
NOT RATED
GRHF IN EQUITY
`85/US$1.4
`80/US$1.3
`233
NA
NA
Flags
Accounting:
Predictability:
Treatment of Minorities:
GREEN
GREEN
GREEN
Catalysts
Performance
200
20,000
150
15,000
100
10,000
50
Sensex
Nov-14
250
25,000
Sep-14
30,000
Jul-14
Mcap (bn):
3M ADV (mn):
CMP:
TP (12 mths):
Upside (%):
May-14
Recommendation
Mar-14
BFSI
Jan-14
Nov-13
COMPANY INSIGHT
Gruh Finance
FY10
FY11
FY12
FY13
FY14
Total income
1,270
1,570
1,960
2,400
2,980
690
920
1,200
1,460
1,770
RoA (%)
2.7%
3.1%
3.2%
3.0%
2.8%
RoE (%)
28.4%
31.6%
34.1%
33.3%
32.2%
1.9
2.5
3.3
4.0
4.9
PAT
EPS (`)
BVPS (`)
7.3
8.8
10.6
13.5
16.7
P/E (x)
122.2
91.6
70.2
57.7
47.6
P/B (x)
31.8
26.5
21.8
17.2
13.9
GRUH Finance
Exhibit 2: RoA and RoE over the past ten years
4.1%
25%
3.8%
20%
3.5%
24%
15%
3.2%
22%
3.5%
3.1%
32%
30%
2.7%
28%
2.3%
26%
1.9%
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
1.5%
FY05
FY14
FY13
30%
FY12
4.4%
FY11
35%
FY10
34%
FY09
4.7%
FY08
40%
FY07
36%
FY06
5.0%
FY05
45%
FY06
Exhibit 1: NIMs and loan growth over the past ten years
9%
2%
5%
Maharashtra
7%
16%
Gujarat
NHB
46%
37%
Bank loans
Madhya Pradesh
12%
Public deposits
Karnataka
Others
Rajasthan
Chhatisgarh
30%
36%
37
34
31
28
25
22
19
16
13
10
Tamil Nadu
10.0
33x
9.0
8.9x
8.0
7.0
6.0
19x
5.5x
5.0
4.0
3.0
Oct-14
Apr-14
Oct-13
Apr-13
Oct-12
Apr-12
Oct-11
Apr-11
Oct-10
Apr-10
Oct-14
Apr-14
Oct-13
Apr-13
Oct-12
Apr-12
Oct-11
Apr-11
Oct-10
Apr-10
2.0
Page 80
GRUH Finance
Exhibit 7: Explanation for our flags
Segment
Score
Comments
Accounting
GREEN
We do not find anything unusual in the accounts of the company and we believe that the reported numbers are
a true reflection of the profitability of the company.
Predictability
GREEN
Increasing diversification along with deeper penetration into newer geographies augur well for GRUHs
profitability and growth given that it currently has a modest loan book of `79bn.
Treatment of
minorities
GREEN
Despite its parent HDFCs domination of the Board of the company by virtue of its majority shareholding, there is
a negligible risk to mistreatment of minorities given the clean track record of the HDFC management. We have
not come across any instances wherein the HDFC management has mistreated the minority shareholders of its
other subsidiaries or associate companies (HDFC Bank).
Score (%)
Competitive advantage
Comment
HDFCs parentage and deep rural penetration are its competitive advantages.
Accounting quality
Capital allocation
GRUH is not part of Ambits Connected Companies Index and does not appear to have any
questionable political connections.
Treatment of minorities
Negligible risk to mistreatment of minorities given the clean track record of the HDFC
management.
Succession planning
Total (%)
Source: Company, Ambit Capital research. Note:
= rating of 4/4;
Page 81
GRUH Finance
Balance sheet
Year to March (` mn)
FY10
FY11
FY12
FY13
FY14
Stockholders Equity
2,650
3,180
3,860
4,910
6,070
Borrowed Funds
23,230
29,660
38,330
49,150
64,470
Total liabilities
25,880
32,840
42,190
54,060
70,540
Loan Assets
24,490
31,720
40,670
54,380
70,090
Other assets
1,390
1,120
1,520
(320)
450
Total assets
25,880
32,840
42,190
54,060
70,540
Income statement
Year to March (` mn)
FY10
FY11
FY12
FY13
FY14
1,150
1,430
1,790
2,180
2,710
120
140
170
220
270
1,270
1,570
1,960
2,400
2,980
250
320
390
460
560
1,030
1,270
1,590
1,980
2,460
80
10
(40)
10
20
940
1,260
1,630
1,970
2,440
Tax
250
340
430
510
670
690
920
1,200
1,460
1,770
FY10
FY11
FY12
FY13
FY14
16.6
13.3
14.0
14.6
16.4
9.0
9.0
10.0
10.0
11.0
1.1
0.8
0.5
0.3
0.3
0.1
4.6
4.9
4.8
4.5
4.3
1.0
1.1
1.0
1.0
0.9
Total income
Operating Cost
Operating Profit
Provisions & Write Offs (net)
Ratio analysis
20.0
20.0
20.0
19.0
19.0
RoAs (%)
2.7
3.1
3.2
3.0
2.8
RoEs (%)
28.4
31.6
34.1
33.3
32.2
FY10
FY11
FY12
FY13
FY14
1.9
2.5
3.3
4.0
4.9
Valuation parameters
Year to March
Diluted EPS (`)
Book value per share (`)
P/E (x)
P/BV (x)
7.3
8.8
10.6
13.5
16.7
122.2
91.6
70.2
57.7
47.6
31.8
26.5
21.8
17.2
13.9
Page 82
Balkrishna Industries
BUY
BIL IN EQUITY
Flags
Accounting:
Predictability:
Treatment of Minorities:
AMBER
AMBER
GREEN
Catalysts
Performance
30,000
900
700
25,000
500
20,000
300
100
Sensex
Nov-14
15,000
Sep-14
`67/US$1.1
`105/US$1.7
`691
`800
16
Jul-14
Mcap (bn):
3M ADV (mn):
CMP:
TP (12 mths):
Upside (%):
May-14
Recommendation
Mar-14
Jan-14
Balkrishna Industries (BKT) has built a substantial export business over the
years in the niche area of off-highway tyres (OHT) by successfully leveraging
Indias low cost of manufacturing. Its current global OHT market share of 4%
would likely increase, due to: (1) higher capacities from the new Bhuj facility
(total achievable capacity of 300k MT by FY16 vs 220k MT in FY14) for
product portfolio expansion into industrial and mining tyres; (2) OEM tie-ups;
and (3) entry into newer geographies.
Nov-13
COMPANY INSIGHT
Balkrishna (Rs)
FY13
FY14
FY15E
FY16E
FY17E
31,906
6,644
20.8%
36.8
28%
19%
18.8
35,767
8,938
25.0%
50.5
30%
20%
13.7
38,963
9,532
24.5%
47.0
22%
17%
14.7
45,117
10,822
24.0%
53.6
20%
19%
12.9
51,363
12,270
23.9%
65.9
20%
23%
10.5
Analyst Details
Ashvin Shetty, CFA
+91 22 3043 3285
ashvinshetty@ambitcapital.com
Ritu Modi
+91 22 3043 3292
ritumodi@ambitcapital.com
Balkrishna Industries
Exhibit 1: Strong revenue growth and EBITDA margin over
the years
40,000
28.0%
35,000
26.0%
24.0%
30,000
22.0%
25,000
20.0%
20,000
18.0%
15,000
30%
25%
20%
16.0%
10,000
14.0%
12.0%
5,000
FY09
FY10
FY11
FY12
FY13
15%
10%
FY09
FY14
FY10
FY11
FY12
RoCE
FY13
FY14
RoE
Others,
15%
India, 12%
Europe,
54%
America,
19%
Source: Company, Ambit Capital research. Note: Size of the pie represents
cumulative funds raised (through various sources such as CFO, equity, debt,
etc) and spent (on capex, debt repayment, interest, dividend paid, etc) over
FY05-14.
BKT P/E
6 year average
Nov-08
Mar-09
Jul-09
Nov-09
Mar-10
Jul-10
Nov-10
Mar-11
Jul-11
Nov-11
Mar-12
Jul-12
Nov-12
Mar-13
Jul-13
Nov-13
Mar-14
Jul-14
Oct-14
Jul-14
Oct-14
Mar-14
Jul-13
Nov-13
0
Mar-13
2
Nov-12
Jul-12
Jul-11
Nov-11
Mar-12
Mar-11
Nov-10
10
Mar-10
Jul-10
10
Jul-09
12
Nov-09
12
Mar-09
14
Nov-08
14
4 year average
EV/EBITDA
6 year average
4 year average
Page 84
Balkrishna Industries
Exhibit 7: Explanation for our flags
Segment
Score
Comments
Accounting
AMBER
The company has significantly higher debtor days and operating working capital cycle as compared to its peers.
However, this is primarily due to its global customer base alongside its centralised manufacturing structure (in
India) which results in significant transit time in delivering the goods to the customers (exports account for nearly
90% of overall revenues).
Predictability
AMBER
Given the high nature of fixed costs (including depreciation and interest expenses), any marginal
outperformance/underperformance at the top-line level tends to have a magnified impact at the net earnings
level. However, this is an industry-wide phenomenon.
Treatment of
minorities
GREEN
We have not come across any instances where the interests of the minority shareholders have been violated. A
significant portion of the companys capital has been allocated in the core business and the promoters do not
seem to have any business interests outside of BKT.
Score (%)
Comment
Competitive advantage
BKT operates in a niche segment where its core competitive advantage is its low-cost
structure/locational advantage. Despite not commanding the same brand equity as global
majors like Michelin and Bridgestone, we believe BKT is poised to gain market share in the
global OHT business driven by: (a) its cost advantage; (b) increasing de-focus of the global
majors on the OHT space; (c) high variety low volume business, which discourages the entry
of Chinese players; and (d) high capex-intensive nature of business restraining the domestic
conventional tyre makers from focussing on the OHT segment.
Accounting quality
BKT is in the third quartile as compared to its peers on accounting quality. A significantly
higher working capital cycle is the primary reason for BKT having a relatively modest score on
accounting quality. That said, BKTs cash generation is best-in-class and the company is ranked
1 on pre-tax CFO/EBITDA among its peers.
Capital allocation
Given the capital-intensive nature of the tyre business and BKT's ambitious expansion plan
(new plant at Bhuj), nearly 88% of CFO has been reinvested in capex. This and the consequent
low pay-outs to shareholders adversely impact BKT's scoring on capital allocation.
BKT is not part of Ambits Connected Companies Index and does not appear to rely on political
connections for its profitability.
Treatment of minorities
Our study of BKTs annual report suggests that BKT has refrained from transactions that could
impact minority shareholder interests.
Succession planning
BKT is a promoter-driven company. It is run by the second generation of the Poddar family and
the third generation has also joined the ranks.
Total
Source: Company, Ambit Capital research. Note:
= rating of 4/4;
Page 85
Balkrishna Industries
Balance sheet (standalone)
Year to March (` mn)
Shareholders' equity
FY13
FY14
FY15E
FY16E
FY17E
193
193
193
193
193
13,996
18,652
22,958
27,896
34,008
14,190
18,845
23,151
28,089
34,202
Debt
20,744
23,500
23,500
20,000
14,500
999
1,722
1,722
1,722
1,722
35,933
44,067
48,373
49,811
50,424
Gross block
17,842
30,014
39,686
40,133
41,150
Net block
12,777
23,294
30,597
28,329
26,583
CWIP
11,810
6,172
500
500
500
Total liabilities
329
615
615
615
615
Investments (non-current)
2,663
3,748
5,506
7,432
7,984
Debtors
5,045
6,185
6,737
7,801
8,881
Inventory
4,326
5,291
5,763
6,674
7,598
2,938
3,432
3,734
4,315
4,904
14,971
18,656
21,740
26,222
29,368
3,740
4,394
4,787
5,543
6,310
Current liabilities
Provisions
215
276
291
311
331
3,955
4,670
5,078
5,854
6,641
11,017
13,985
16,663
20,368
22,727
Total assets
35,933
44,067
48,375
49,813
50,425
FY13
FY14
FY15E
FY16E
FY17E
31,906
35,767
38,963
45,117
51,363
13%
12%
9%
16%
14%
25,262
26,829
29,430
34,295
39,093
6,644
8,938
9,532
10,822
12,270
31%
35%
7%
14%
13%
Depreciation
1,077
1,650
2,370
2,714
2,764
EBIT
5,567
7,288
7,163
8,108
9,506
257
253
554
634
431
Operating expenditure
EBITDA
% growth
Interest expenditure
Non-operating income
37
138
121
151
159
Adjusted PBT
5,347
7,174
6,730
7,626
9,234
Tax
1,794
2,293
2,187
2,440
2,863
Adjusted PAT
3,553
4,880
4,543
5,186
6,371
(5)
3,558
4,880
4,543
5,186
6,371
Extraordinary expense/(income)
Reported PAT after minority interest
Source: Company, Ambit Capital research
Page 86
Balkrishna Industries
Cash flow statement (standalone)
Year to March (` mn)
FY13
FY14
FY15E
FY16E
FY17E
5,352
7,177
6,730
7,626
9,234
Depreciation
1,077
1,650
2,370
2,714
2,764
191
387
554
634
431
(1,410)
(1,758)
(2,187)
(2,440)
(2,863)
Others
Tax
(Incr)/decr in net working capital
Cash flow from operations
Capex (net)
291
(1,518)
(930)
(1,791)
(1,818)
5,501
5,937
6,536
6,742
7,749
(9,605)
(8,581)
(4,000)
(446)
(1,017)
(Incr)/decr in investments
(7)
(3,936)
3,650
19
110
(9,593)
(12,407)
(350)
(446)
(1,017)
Net borrowings
3,610
4,325
(3,500)
(5,500)
Interest paid
(261)
(251)
(554)
(634)
(431)
Dividend paid
(169)
(170)
(226)
(237)
(248)
3,181
3,904
(780)
(4,370)
(6,179)
(911)
(2,565)
5,407
1,926
552
2,662
99
5,506
7,432
7,984
(4,104)
(2,643)
2,536
6,296
6,732
FY13
FY14
FY15E
FY16E
FY17E
20.8%
25.0%
24.5%
24.0%
23.9%
17.4%
20.4%
18.4%
18.0%
18.5%
11.1%
13.6%
11.7%
11.5%
12.4%
4.1%
4.0%
4.5%
4.1%
3.5%
1.3
1.0
0.8
0.4
0.2
3.6
3.8
3.6
3.7
3.7
2.1
1.5
1.1
1.1
1.3
19.4%
20.0%
17.4%
19.2%
22.6%
RoIC (%)
12.9%
13.6%
11.7%
13.1%
15.6%
RoE (%)
28.4%
29.5%
21.6%
20.2%
20.5%
Year to March
FY13
FY14
FY15E
FY16E
FY17E
36.8
50.5
47.0
53.6
65.9
147
195
240
291
354
1.5
2.0
2.1
2.2
2.3
18.8
13.7
14.7
12.9
10.5
4.7
3.5
2.9
2.4
2.0
P/E (x)
P/BV (x)
EV/EBITDA (x)
12.8
9.5
8.9
7.8
6.9
EV/EBIT (x)
15.2
11.6
11.8
10.5
8.9
Page 87
Balkrishna Industries
Page 88
Flags
Accounting:
Predictability:
Treatment of Minorities:
GREEN
GREEN
GREEN
Catalysts
Performance
Sensex
FY13
FY14
FY15E
FY16E
FY17E
8,976
10,606
12,583
14,608
17,859
5,234
5,810
6,992
7,955
9,853
3,220
3,471
4,033
4,834
6,037
6.8
6.4
6.8
8.2
10.2
RoA (%)
1.56%
1.45%
1.51%
1.55%
1.59%
RoE (%)
22.3%
18.9%
17.1%
16.7%
18.0%
2.62
2.43
1.97
1.72
1.48
EPS (`)
P/B (x)
Nov-14
210
190
170
150
130
110
90
Sep-14
`54/US$0.9
`68/US$1.1
`91
`90
-1
Jul-14
Mcap (bn):
3M ADV (mn):
CMP:
TP (12 mths):
Upside (%):
May-14
Recommendation
Mar-14
BFSI
Jan-14
Nov-13
COMPANY INSIGHT
Ravi Singh
+91 22 3043 3181
ravisingh@ambitcapital.com
Pankaj Agarwal, CFA
+91 22 3043 3206
pankajagarwal@ambitcapital.com
Aadesh Mehta, CFA
+91 22 3043 3239
aadeshmehta@ambitcapital.com
14.4%
13.3%
11.7%
FY14
FY13
FY12
2%
0%
FY14
FY13
FY12
FY11
FY10
FY09
FY08
11.8%
0%
0.0%
FY11
10%
12.4%
1.0%
6%
4%
FY10
20%
11.5%
30%
FY09
2.0%
11.2%
40%
12%
10%
8%
FY08
3.0%
10.9%
50%
FY07
60%
4.0%
FY07
0%
FY06
5%
10.8%
8.5x
6.7x
90
80
70
60
50
40
30
20
10
0
1.59x
1.26x
0.93x
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14
4.9x
10%
FY06
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
0.0%
15%
FY14
1.0%
5%
0%
20%
FY13
2.0%
25%
FY12
20%
15%
10%
30%
FY11
3.0%
1.75%
1.70%
1.65%
1.60%
1.55%
1.50%
1.45%
1.40%
1.35%
1.30%
FY10
4.0%
30%
25%
RoE - RHS
FY09
5.0%
FY08
40%
35%
RoA - LHS
FY06
FY07
Page 90
Score
Comments
Accounting
GREEN
We did not find anything unusual in the accounts of the bank and we believe that the reported numbers are a
true reflection of the profitability of the bank. The bank has made adequate disclosures of its ESOP accounting
and revenue recognition norms.
Predictability
GREEN
The banks conservative approach towards growth and asset quality imparts sufficient predictability to its
financial performance.
Treatment of
minorities
GREEN
Whilst its practice of capital-raising only through rights issue has been questioned in the past, the bank has
recently shown flexibility by opting for a QIP. We did not find any material example of unfair treatment to
minorities.
Exhibit 8: City Union Bank - Three quarters of the pie on our STAR* framework
Criteria
Score (%)
Competitive advantage
Comment
A business model with pricing power yet conservative lending
Accounting quality
Capital allocation
City Union Bank is not part of Ambits Connected Companies Index and does not appear to
have any questionable political connections.
Treatment of minorities
Except for last QIP, the bank has raised capital through rights
Succession planning
CEO has support of promoter families and has a long tenure ahead
Total (%)
Source: Company, Ambit Capital research. Note:
= rating of 4/4;
Page 91
FY13
FY14
FY15E
FY16E
FY17E
Networth
16,407
20,249
27,024
30,961
36,101
Deposits
203,048
220,169
246,589
295,907
369,884
4,767
3,050
3,050
3,580
4,216
Borrowings
Other Liabilities
5,549
6,470
7,441
9,152
11,257
229,771
249,938
284,104
339,600
421,458
17,705
21,796
26,976
32,074
39,670
Investments
52,668
59,536
71,805
86,185
107,662
Total Liabilities
Advances
152,461
160,968
177,208
213,057
266,401
Other Assets
6,937
7,638
8,115
8,284
7,725
Total Assets
229,771
249,938
284,104
339,600
421,458
FY13
FY14
FY15E
FY16E
FY17E
Interest Income
21,888
25,459
27,702
31,632
37,942
Interest Expense
15,647
17,865
19,214
21,521
25,490
6,240
7,594
8,488
10,111
12,452
2,736
3,012
4,095
4,498
5,407
Total Income
8,976
10,606
12,583
14,608
17,859
3,742
4,796
5,592
6,653
8,005
Employees expenses
1,509
1,856
2,211
2,698
3,259
2,233
2,940
3,381
3,956
4,747
5,234
5,810
6,992
7,955
9,853
Provisions
1,204
1,674
1,950
1,913
2,308
PBT
4,030
4,136
5,041
6,042
7,546
Tax
810
665
1,008
1,208
1,509
3,220
3,471
4,033
4,834
6,037
FY13
FY14
FY15E
FY16E
FY17E
Credit-Deposit (%)
75.1%
73.1%
71.9%
72.0%
72.0%
16.8%
17.8%
18.6%
19.1%
19.6%
41.7%
45.2%
44.4%
45.5%
44.8%
1,731
2,931
3,852
4,652
5,603
1.16%
1.84%
2.16%
2.16%
2.08%
PAT
Source: Company, Ambit Capital research
964
1,973
2,388
2,698
3,082
0.63%
1.23%
1.35%
1.27%
1.16%
46.0%
33.9%
38.0%
42.0%
45.0%
NIMs (%)
3.11%
3.27%
3.28%
3.33%
3.34%
13.3%
14.4%
16.8%
15.8%
14.7%
Page 92
FY13
FY14
FY15E
FY16E
FY17E
3.0%
3.2%
3.2%
3.2%
3.3%
1.3%
1.3%
1.5%
1.4%
1.4%
4.3%
4.4%
4.7%
4.7%
4.7%
1.8%
2.0%
2.1%
2.1%
2.1%
2.5%
2.4%
2.6%
2.6%
2.6%
0.6%
0.7%
0.7%
0.6%
0.6%
2.0%
1.7%
1.9%
1.9%
2.0%
20.1%
16.1%
20.0%
20.0%
20.0%
1.6%
1.4%
1.5%
1.5%
1.6%
Leverage
14.3
13.1
11.3
10.8
11.3
ROE (%)
22.3%
18.9%
17.1%
16.7%
18.0%
FY13
FY14
FY15E
FY16E
FY17E
6.8
6.4
6.8
8.2
10.2
-1%
-6%
7%
20%
25%
BVPS (`)
34.6
37.3
45.9
52.5
61.3
P/E (x)
12.2
14.2
13.2
11.0
8.8
P/BV (x)
2.62
2.43
1.97
1.72
1.48
Page 93
Page 94
eClerx
UNDER REVIEW
ECLX IN EQUITY
Recommendation
Mcap (bn):
3M ADV (mn):
CMP:
TP (12 mths):
Upside (%):
`39/US$0.6
`58/US$0.9
`1,290
UR
UR
Flags
Accounting:
Predictability:
Treatment of Minorities:
GREEN
AMBER
GREEN
Catalysts
Revenue
acceleration
driven
by
Performance
27,000
1,500
24,000
1,200
21,000
900
18,000
15,000
600
Sensex (LHS)
Jun-14
Aug-14
Technology
Sep-13
Nov-13
Dec-13
Feb-14
Mar-14
May-14
Aug-13
COMPANY INSIGHT
FY10
FY11
FY12
FY13
FY14
2,570
3,420
4,729
6,605
8,410
EBIT (` bn)
933
1,254
1,770
2,291
3,204
EBIT margins
36%
37%
37%
35%
38%
25.1
41.1
53.0
56.9
83.7
Analyst Details
Sagar Rastogi
+91 22 3043 3291
sagarrastogi@ambitcapital.com
RoE
40%
61%
55%
44%
50%
P/E
51.4
31.4
24.3
22.7
15.4
Utsav Mehta
+91 22 3043 3209
EV/EBITDA
36.1
26.9
19.1
14.2
10.2
utsavmehta@ambitcapital.com
eClerx
Exhibit 1: eClerxs margins have been steady in the last
five years
160
60%
140
50%
120
40%
100
30%
80
60
20%
40
110%
60%
10%
Revenue(US$mn) (LHS)
FY14
FY13
RoCE
Non opincome
6%
Capex
14%
Dividend
paid
38%
Increase in
cash
24%
Acquisitions
24%
CFO
84%
FY12
FY11
FY10
RoE
Source: Company, Ambit Capital research
Proceeds
from IPO in
2008
10%
FY09
10%
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
0%
FY08
FY07
20
P/E
16
EV/ EBITDA
14
14
12
12
10
10
ECLX P/E
Source: Company, Ambit Capital research
4 yr avg
Sep-14
May-14
Jan-14
Sep-13
May-13
Jan-13
Sep-12
May-12
Jan-12
Sep-11
May-11
Jan-11
Sep-10
Jan-10
Sep-14
Jan-14
May-14
Sep-13
May-13
Jan-13
Sep-12
May-12
Jan-12
Sep-11
May-11
Jan-11
4
Sep-10
4
May-10
6
Jan-10
May-10
4 yr avg
Page 96
eClerx
Exhibit 7: Explanation for our flags
Segment
Accounting
Predictability
Treatment of
minorities
Score
Comments
GREEN
The company has a lean working capital cycle (receivable + unbilled revenue days at 79), lower than the
average of 93 for mid-sized IT vendors), and strong cash flow generation (five year FCF/ NI of 74% vs 47% peer
average). Further, the company has carried marginal related party transactions in the last five years. As a result,
the company ranks in the top quartile within the Indian IT universe in our accounting framework.
AMBER
The company does not provide specific annual or quarterly guidance on revenues or margins. It provides a
qualitative outlook on its business. eClerx surprises regularly on its quarterly EPS with an average surprise of 9%
(positive or negative) in the last eight quarters on consensus expectations Over these eight quarters, the
company had a positive surprise on EPS five times. However, its sales figures have been largely in-line with
consensus expectations (revenue surprise of 1% over the same period).
GREEN
There have been no significant related party transactions made by the company in the last five years. Further,
both promoters hold their stake in the company in their individual names and the holding structure is
transparent. Lastly, the companys dividend payouts are high (47% average in the last three years) and it had
proposed a buyback in 2013 (which failed). The share price moved significantly above the proposed buyback
price and hence did not garner interest. The company has not indicated another buyback in the future.
Score (%)
Comment
Competitive advantage
eClerx scores on technology processes and strong relationships with clients but is vulnerable to
competition from large IT companies.
Accounting quality
The company is in the top quartile among peers on this criteria. It has a lean working capital
cycle, strong cash flow generation and has marginal related party transactions in the last five
years.
Capital allocation
Its business model generates high RoCEs and dividend payout has been high. Further, the
company is conservative on acquisitions.
eClerx is not part of Ambits Connected Companies Index and does not have any questionable
political connection.
Treatment of minorities
The promoters hold shares in their individual names and there have been no anti-minority
transactions so far.
Succession planning
Promoters are relatively young (under 45 years of age) and have a professional background.
Further, the senior management have been with the company for over 10 years providing an
able second in-line command.
Total (%)
Source: Company, Ambit Capital research. Note:
= rating of 4/4;
Page 97
eClerx
Balance sheet
Balance sheet (` mn)
Net Worth
Other Liabilities
Capital Employed
Net Block
Other Non current Assets
Curr. Assets
Debtors
FY11
FY12
FY13
FY14
2,384
3,432.0
4,383.3
5,890
1.7
9.9
19
2,384
3,433.7
4,393.2
5,908
370
488.7
1,355.2
1,559
70
88.4
144.8
216
3,088
4,038.8
4,521.3
6,138
659
421.8
654.8
996
1,794
2,685.4
2,700.1
3,560
635
931.5
1,166.5
1,581
1,144
1,182.2
1,628.2
2,005
1,943
2,856.6
2,893.2
4,133
Application of Funds
2,384
3,433.7
4,393.2
5,908
FY11
FY12
FY13
FY14
76
98
122
138
Revenue
3,420
4,729
6,605
8,410
EBITDA
1,345
1,899
2,546
3,535
91
129
256
331
Income statement
Income statement (` mn)
Revenue (US$ mn)
Depreciation
EBIT
1,254
1,770
2,291
3,204
EBIT Margin
36.7%
37.4%
34.7%
38.1%
Other Income
PBT
Tax
240
223
(181)
110
1,494
1,993
2,109
3,314
166
394
393
759
Reported PAT
1,328
1,599
1,716
2,555
PAT Margin
38.8%
33.8%
26.0%
30.4%
Diluted EPS
41.1
53.0
56.9
83.7
DPS
29.0
23.0
25.0
35.0
In ` mn
FY11
FY12
FY13
FY14
PBT
1,392
1,992
2,109
3,316
(324)
113
(348)
(791)
Taxes
(166)
(384)
(403)
(767)
Net Operating CF
1,020
1,721
1,533
1,950
Net Purchase of FA
(240)
(251)
(267)
(212)
332
(832)
(349)
(1,117)
25
33
70
85
Dividend Payments
(335)
(758)
(597)
(911)
(310)
(725)
(527)
(825)
780
1,469
1,266
1,734
472
1,515
1,687
2,349
1,042
163
658
1,515
1,686
2,349
2,406
Page 98
eClerx
Financial ratios
FY11
FY12
FY13
FY14
Revenue (US$)
37%
29%
25%
14%
EPS
64%
29%
7%
47%
RoE
61%
55%
44%
50%
RoCE
51%
49%
48%
48%
71
31
36
44
9.9
11.0
7.2
5.8
Growth
Turnover Ratios
Valuations
FY11
FY12
FY13
FY14
P/E
31.4
24.3
22.7
15.4
EV/EBITDA
26.9
19.1
14.2
10.2
EV/Sales
10.6
7.7
5.5
4.3
Price/Book Value
16.7
11.6
9.1
6.7
2.2%
1.8%
1.9%
2.7%
Page 99
eClerx
Page 100
V-Guard Industries
BUY
VGRD IN EQUITY
`27/US$0.4
`39/US$0.6
`910
`1,009
11
Flags
Accounting:
Predictability:
Treatment of Minorities:
AMBER
GREEN
GREEN
Catalysts
Performance
950
25,000
750
22,000
550
19,000
350
16,000
V-Guard
Oct-14
28,000
Aug-14
1,150
Jun-14
Mcap (bn):
3M ADV (mn):
CMP:
TP (12 mths):
Upside (%):
Apr-14
Recommendation
Feb-14
Capital Goods
Dec-13
Oct-13
COMPANY UPDATE
Sensex on RHS
FY13
FY14
FY15E
FY16E
FY17E
13,602
15,176
18,342
22,194
25,967
1,099
1,226
1,651
2,108
2,532
8.1
8.1
9.0
9.5
9.8
EPS (`)
21.1
23.6
33.0
42.5
53.8
RoE (%)
26.7
24.3
27.8
29.6
30.1
RoCE (%)
20.6
19.9
24.4
27.0
28.4
P/E (x)
42.7
38.3
27.3
21.2
16.7
Analyst Details
Bhargav Buddhadev
+91 3043 3252
bhargavbuddhadev@ambitcapital.com
Deepesh Agarwal
+91 3043 3275
deepeshagarwal@ambitcapital.com
V-Guard Industries
Exhibit 1: Strong revenue CAGR of 31% over FY05-14
alongside robust average EBITDA margin of 10.3% over
FY05-14
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
-
13.0
12.0
11.0
10.0
9.0
30
8.0
20
7.0
FY14
10
FY14
FY13
FY12
ROE (%)
Debt, 25%
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
6.0
Sales (Rsmn)
40
Others, 5%
Dividend,
25%
CFO, 56%
Interest,
dividend
recd, 2%
capex,
45%
Capital
raised,
17%
Source: Company, Ambit Capital research. Note: Size of the pie represents
cumulative funds raised (through various sources such as CFO, equity, debt,
etc) and spent (on capex, debt repayment, interest, dividend paid, etc) in
the past 10 years
29x
1,000
24x
800
19x
600
14x
Interest,
25%
Source: Company, Ambit Capital research. Note: Size of the pie represents
cumulative funds raised (through various sources such as CFO, equity, debt,
etc) and spent (on capex, debt repayment, interest, dividend paid, etc) in
the past 10 years
7.0x
1,000
5.5x
800
4.0x
600
Sep-14
Mar-14
Sep-13
Mar-13
Sep-12
Mar-12
Sep-11
Mar-11
Sep-14
Sep-13
Mar-14
Mar-13
Sep-12
Sep-11
Mar-12
Mar-11
Sep-10
Sep-09
Mar-10
Mar-09
Sep-08
Mar-08
Sep-10
Mar-10
1.0x
Sep-09
200
Mar-09
200
Sep-08
2.5x
9x
Mar-08
400
400
Page 102
V-Guard Industries
Exhibit 7: Explanation for our flags
Segment
Score
Comments
Accounting
AMBER
In our accounting analysis of light electrical companies, V-Guard scores low due to its poor working capital cycle
and low CFO/EBITDA. Expansion in the non-south market has been the reason for V-Guards poor cash
conversion. However, its working capital cycle has improved from 96 days in FY11 to 61 days in FY14.
Predictability
GREEN
Given its detailed disclosure (this is the only company in the sector which gives product-wise disclosures) and
transparency of the management guidance, the predictability over topline and bottomline performance is strong.
GREEN
Whilst V-Guard remains the largest company for the Chittilapilly family, it is also involved in other businesses such
as theme parks (Wonderla Holidays, which was listed in May 2014) and garments (V-Star Creations). So far, there
have been no incidences of mistreatment of minorities by the promoters. The Chittilapilly family holds a 66% stake
in the company and this stake is held in their individual names.
Treatment of
minorities
Exhibit 8: V-Guard Industries gets three-quarters of the pie on our STAR (Sustainable and Tenable Advantages Rank)
framework
Criteria
Score (%)
Comment
Competitive advantage
Whilst V-Guard is ranked 1 in light electricals in Kerala, it is still not ranked among the top-five players
in the non-south market. Competition in the sector remains tough.
Accounting quality
V-Guard is in the second quartile; expansion beyond south India has kept its CFO/EBITDA low.
Capital allocation
V-Guard is a cash-generative company with low capex and high RoCEs; the management has
maintained healthy payout ratios (average ~33% since listing in 2008).
V-Guard is not part of Ambits Connected Companies Index and does not appear to have any
questionable political connections.
Treatment of minorities
The promoter family has other unrelated businesses; no major anti-minority transactions so far.
Succession planning
Business remains promoter driven, with the second generation currently in charge.
Total (%)
Weaknesses
Source: Company, Ambit Capital research. Note:
Use of stabilisers could become redundant in the future, and beyond stabilisers, V-Guards newer
products are more competitive. V-Guard remains a regional player.
= rating of 4/4;
= rating of 3/ 4 and so on
Page 103
V-Guard Industries
Balance sheet (standalone)
Year to March (` mn)
Cash
FY13
FY14
150
28 -
FY15E
FY16E
FY17
150
19
424
Debtors
1,988
2,121
2,513
2,919
3,344
Inventory
2,486
2,525
3,216
3,770
4,269
454
381
612
741
867
Investments
Fixed assets
1,470
1,662
1,794
2,051
2,209
6,549
6,718
7,986
9,500
11,113
2,282
2,473
3,278
4,088
4,926
Debt
1,574
992
700
400
Miscellaneous
Total assets
79
95
95
95
95
3,935
3,560
4,074
4,584
5,021
298
298
298
298
298
2,315
2,859
3,614
4,618
5,794
Total networth
2,613
3,158
3,912
4,917
6,092
2,646
2,554
3,063
3,341
3,553
1,425
964
850
381 -
424
FY13
FY14
FY15E
FY16E
FY17
13,602
15,176
18,342
22,194
25,967
36.9
11.6
20.9
21.0
17.0
12,503
13,950
16,691
20,086
23,435
EBITDA
1,099
1,226
1,651
2,108
2,532
% growth
(10.3)
11.5
34.7
27.7
20.1
Operating income
% growth
Operating expenditure
Depreciation
114
120
168
193
216
EBIT
985
1,106
1,482
1,915
2,315
Interest expenditure
200
211
154
88
36
48
37
42
52
822
943
1,366
1,869
2,368
Tax
193
241
382
561
710
Reported PAT
629
702
983
1,308
1,657
Adjustments
Adjusted PAT
% growth
629
702
983
1,308
1,657
(21.2)
11.6
40.1
33.1
26.7
Page 104
V-Guard Industries
Cash flow statement (standalone)
Year to March (` mn)
FY13
FY14
FY15E
FY16E
FY17
822
943
1,366
1,869
2,368
Depreciation
114
120
168
193
216
Interest
180
191
154
88
Tax
(255)
(189)
(382)
(561)
(710)
(772)
(23)
(509)
(278)
(212)
16
66
PBT
Others
Cash flow from operating activities
(Incr) / decr in capital expenditure
(Incr) / decr in investments
Others
Cash flow from investing activities
Issuance of equity
105
1,108
797
1,311
1,661
(253)
(324)
(300)
(450)
(375)
25
19
(253)
(280)
(300)
(450)
(375)
(2)
560
(567)
(292)
(300)
(400)
(310)
(359)
(383)
(392)
(481)
248
(926)
(674)
(692)
(881)
100
(98)
(177)
169
405
FY13
FY14
FY15E
FY16E
FY17E
EBITDA margin
8.1
8.1
9.0
9.5
9.8
EBIT margin
7.2
7.3
8.1
8.6
8.9
4.6
4.6
5.4
5.9
6.4
20.6
19.9
24.4
27.0
28.4
Return on equity
26.7
24.3
27.8
29.6
30.1
2.2
2.0
1.9
1.8
1.8
Year to March
FY13
FY14
FY15E
FY16E
FY17E
EPS (`)
21.1
23.6
33.0
42.5
53.8
87.7
106.0
131.3
159.6
197.8
P/E (x)
42.7
38.3
27.3
21.2
16.7
P/BV (x)
10.3
8.5
6.9
5.6
4.6
EV/EBITDA (x)
25.3
22.7
16.9
13.2
11.0
EV/Sales (x)
2.0
1.8
1.5
1.3
1.1
EV/EBIT (x)
28.3
25.2
18.8
14.5
12.0
Page 105
V-Guard Industries
Page 106
Mayur Uniquoters
NOT RATED
COMPANY INSIGHT
MUNI IN EQUITY
Mayur Uniquoters scale, focus on quality, innovation and wellestablished relationship with domestic footwear manufacturers and
domestic/global auto OEMs set it apart in a fragmented synthetic leather
industry. The companys stellar capital allocation track record and
consistent RoCE expansion is a testament of its well-entrenched
competitive advantages which are sustainable over the long term.
The largest Indian synthetic leather manufacturer
Mayur Uniquoters, Indias largest synthetic leather manufacturer has built: (a)
strong manufacturing capabilities (five Italian coating lines, sixth line to be
commissioned in FY15); and (b) strong relationships with large auto OEMs and
footwear manufacturers in the last two decades. Mayur reported revenue/EBITDA
CAGR of 32%/51% and its RoCE averaged 43% over FY09-14. Exports recorded
55% CAGR over FY08-14 (23% of sales in FY14 vs 9% in FY10).
Industrials
Recommendation
Mcap (bn/mn):
3M ADV (mn):
CMP:
`19/US$312
`27/US$0.4
`442
Flags
Accounting:
Predictability:
Treatment of Minorities:
GREEN
GREEN
GREEN
Catalysts
Performance
500
29,000
400
26,000
300
23,000
200
MUNI (LHS)
Nov-14
Sep-14
Jul-14
20,000
May-14
100
Mar-14
Strong
volume
growth
post
commissioning of the new coating
line in 3QFY15
Jan-14
Nov-13
SENSEX
FY10
1,647
282
17.1%
3.0
64.0%
59.9%
151.6
FY11
2,486
410
16.5%
4.7
68.4%
77.1%
97.2
FY12
3,109
533
17.1%
6.2
64.9%
66.1%
73.6
FY13
3,692
690
18.7%
4.0
62.9%
57.6%
112.7
FY14
4,556
932
20.5%
13.1
58.7%
51.9%
34.5
Analyst Details
Achint Bhagat
+91 22 3043 3178
achintbhagat@ambitcapital.com
Nitin Bhasin
+91 22 3043 3241
nitinbhasin@ambitcapital.com
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.
Mayur Uniquoters
Exhibit 1: Sharp revenue growth and margin expansion
(` mn)
5,000
25%
4,000
20%
60%
3,000
15%
40%
2,000
10%
1,000
5%
0%
60%
80%
40%
20%
20%
Revenue (LHS)
RoCE (LHS)
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
RoE (RHS)
Interest,
dividend
recd, 4%
0%
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
0%
Debt
Proceeds,
16%
Increase in
cash/ cash
equivalents
, 4% Dividend
paid, 19%
Interest
paid, 4%
Proceeds
from
shares, 1%
Net Capex
, 68%
CFO, 79%
Exhibit 6: Mayur
is
trading
at
peak
(X)
5
(X)
30
25
20
15
10
Nov-14
Aug-14
May-14
Feb-14
Nov-13
Aug-13
May-13
Feb-13
Nov-12
Aug-12
May-12
Feb-12
Aug-11
Nov-11
Nov-14
Aug-14
May-14
Feb-14
Nov-13
Aug-13
May-13
Feb-13
Nov-12
Aug-12
May-12
Feb-12
Nov-11
Aug-11
May-11
May-11
Page 108
P/
Mayur Uniquoters
Exhibit 7: Explanation for our flags
Segment
Score
Comments
GREEN
On our forensic accounting screener of 127 mid-cap stocks, Mayur ranks 11th due to its high CFO/EBITDA (80%
conversion ratio), low audit fees and no material unclassified loans or contingent liabilities.
Predictability
GREEN
The management has made timely announcements regarding expansion and has usually met its guided targets
both in terms of capacity commissioning and utilisation-level ramp-up. Moreover, margins have been stable and
have not been susceptible to unpredictable operating cost (raw material, power and fuel, fixed expenses)
volatilities.
Treatment of
minorities
GREEN
The company does not have any major unlisted subsidiaries (held partly by the promoter) nor does it carry out
any related party transactions to the detriment of the minority shareholders. The promoter does not hold any
shares in the company through unlisted subsidiaries.
Accounting
Score (%)
Comment
Competitive advantages
Capacity leadership and relationships with domestic/Global auto OEMs and Indian footwear
manufacturers
Accounting quality
Ranks 11th amongst 127 mid-cap companies with a market capitalization of `5bn-20bn.
CFO/EBITDA conversion ratio of 80% in the last 10 years.
Capital allocation
Re-invested 80% CFO for capacity expansion. Strong sales growth and material RoCE expansion
in the last decade.
Mayur is not part of Ambits Connected Companies Index and does not have any questionable
political connection.
Treatment of minorities
Succession planning
Total (%)
Source: Company, Ambit Capital research. Note:
= rating of 4/4;
Page 109
Mayur Uniquoters
Balance sheet (standalone)
Year to March (` mn)
Share capital
FY10
FY11
FY12
FY13
FY14
54
54
54
108
108
366
556
805
1,076
1,503
Total Networth
421
610
859
1,185
1,611
44
78
29
46
157
Sources of funds
482
708
918
1,266
1,827
Net block
231
313
451
547
977
Capital work-in-progress
34
40
189
266
Investments
196
228
190
107
134
Sundry debtors
256
316
406
565
671
98
146
307
442
638
Loans
Inventories
27
40
34
68
125
586
742
1,072
1,351
1,741
338
382
667
869
1,177
248
360
405
482
564
Application of funds
482
708
918
1,266
1,827
FY10
FY11
FY12
FY13
FY14
1,647
2,486
3,109
3,692
4,556
43%
51%
25%
19%
23%
1,366
2,076
2,642
3,115
3,764
282
410
533
690
932
136%
46%
30%
30%
35%
22
27
39
52
70
266
394
511
666
879
13
19
20
24
43
11
17
27
18
252
375
492
642
836
90
122
158
206
269
162
253
334
436
568
163%
56%
32%
31%
30%
162
253
334
436
568
13
Page 110
Mayur Uniquoters
Cash flow statement (standalone)
Year to March (` mn)
Net profit before tax
Depreciation
Others
Tax
(Incr)/decr in net working capital
FY10
FY11
FY12
FY13
FY14
252
375
492
642
836
22
27
39
52
70
(3)
(2)
(4)
43
(83)
(141)
(153)
(194)
(269)
17
(89)
(91)
(213)
(109)
216
172
281
272
555
Capex (net)
25
130
127
365
506
(Incr)/decr in investments
10
(117)
(19)
38
14
(34)
34
(23)
181
111
(28)
(45)
(69)
(96)
(46)
(6)
(7)
(8)
(9)
(43)
(69)
(18)
(99)
77
22
138
32
(50)
(10)
126
191
42
154
(93)
48
Year to March
FY10
FY11
FY12
FY13
FY14
17.1
16.5
17.1
18.7
20.5
16.1
15.9
16.5
18.0
19.3
9.8
10.2
10.7
11.8
12.5
64
68
65
63
59
RoIC (%)
60
77
66
58
52
RoE (%)
49
51
48
46
42
FY12
FY13
FY14
Interest paid
Dividend paid
FY10
FY11
P/E (x)
152
97
74
113
35
P/B(x)
46.6
32.1
22.8
16.6
12.2
0.1
0.1
0.0
0.0
0.1
Debt/Equity(x)
Net debt/Equity(x)
-0.4
-0.2
-0.1
0.0
0.1
EV/EBITDA(x)
68.8
47.3
36.4
28.1
20.8
Page 111
Mayur Uniquoters
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Page 112
Mayur Uniquoters
Expected return
(over 12-month period from date of initial rating)
Buy
>5%
Sell
<5%
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