Indra...Jul 28, 2014 · Indra Rating change 2 keplercheuvreux.com Summary Company profile Indra is...

28 July 2014 Rating change

Indra

Spain | IT software & services

Hold (Reduce) Target price EUR 12.00

Current price EUR 11.73

Natalia Bobo [email protected] +34 914 36 5165

Not yet

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Market data

Market cap (EURm) 1,926

Free float 69%

No. of shares outstanding (m) 164

Avg. daily trading volume('000) 1,162

YTD abs performance -3.5%

52-week high (EUR) 14.77

52-week low (EUR) 10.12

FY to 31/12 (EUR) 2014E 2015E 2016E

Sales (m) 2,955.5 3,091.5 3,238.8

EBITDA adj (m) 276.7 310.2 346.9

EBIT adj (m) 223.4 252.0 275.9

Net profit adj (m) 131.8 159.7 182.4

Net fin. debt (m) 637.4 586.3 495.5

FCF (m) 89.9 140.4 171.7

EPS adj. and fully dil. 0.73 0.88 1.00

Consensus EPS 0.76 0.91 1.05

Net dividend 0.37 0.49 0.56

FY to 31/12 (EUR) 2014E 2015E 2016E

P/E (x) adj and ful. dil. 16.2 13.3 11.7

EV/EBITDA (x) 9.6 8.4 7.2

EV/EBIT (x) 11.8 10.3 9.1

FCF yield 4.7% 7.3% 8.9%

Dividend yield 3.2% 4.1% 4.7%

Net debt/EBITDA (x) 2.3 1.9 1.4

Gearing 53.0% 45.1% 35.3%

ROIC 10.6% 12.0% 13.1%

EV/IC (x) 1.8 1.8 1.7

After recent underperformance, we are upgrading our rating from Reduce to Hold with an unchanged TP of EUR12. Although we see significant recovery potential in domestic sales, margins and working capital, we believe the real turnaround will still take time.

We see 2014 as a transition year… We see 2014 as a transition year for Indra, with a small drop in adjusted net profit and an improvement in FCF largely due to one-offs (lower restructuring costs and a suppliers’ plan in Spain). The main reason is that Spain is likely to remain weak, limiting any margin recovery. In fact, we believe upcoming Q2 figures (30 July) could create uncertainty over the timing of the turnaround.

… with upside from 2015 2015 could mark a change, as underlying trends looks set to improve in Spain (we expect sales up c. 2% thanks to a public sector recovery), and this could in turn trigger higher margins (we expect Indra to benefit from workforce optimisation and a higher weight of solutions). Working capital improvements could take longer, in our view, considering the weak situation of the Spanish public administration. Indra’s global leadership in certain segments (ATM, radars, simulators, balloting systems, etc.) is reassuring, and we also believe huge infrastructure and defence plans in key countries in LatAm and AMEA could create opportunities for the company. Finally, Indra has been investing in new solutions in the energy, healthcare and financial sectors, which could start generating revenues as of 2015.

We estimate a 9.7% CAGR in adjusted EPS for 2013-16E After a period of very weak earnings since 2010, we estimate a 9.7% CAGR in adjusted EPS and 46% in adjusted FCF for 2013-16E thanks to a small recovery in Spanish sales, some improvement in adjusted EBITA margins (from 7.8% to 8.5%) and a reduction in DoS (from 109 to 97).

We upgrade our rating from Reduce to Hold We upgrade our rating from Reduce to Hold after a weak share price performance (-20% since April). While the stock is less expensive after recent drops and even though Indra can be considered a turnaround story, there is still uncertainty over the pace of recovery in Spain, which is key for that turnaround. In addition, while we believe the new solutions developed in-house could generate additional revenues, the company still needs critical mass to generate profits on the investments. All in all, considering we expect some tough quarters ahead, we would still wait to buy the shares. A negative share price reaction post quarterly figures could provide that opportunity.

IMPORTANT. Please refer to the last page of this report for “Important disclosures” and analyst certification(s)

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Indra Rating change

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Summary

Company profile Indra is Spain's leading IT services player, with a c.a. 13% market share (Spain accounted for 38.6% of sales in 2013). It is also present in Latin America, the balance being US, Euro and Asia.

Management structure

Javier Monzón de Cáceres Chairman

Javier de Andrés CEO

Juan Carlos Baena CFO

Key shareholders

Caja Madrid 20.0%

Corp. Fin. Alba 11.3%

EPS and P/E FCF and Gearing Balance sheet structure, 2014E

Valuation

Base case Long term EBITA margins of 9.5%

Best case EV/EBITA 12x 2017E

Worst case EV/EBITA 8x 2017E

Target price

Risk to our rating Quicker than expected recovery in Spain, working capital improvements above estimates, margin improvements in Brazil

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Indra Rating change


Contents

Investment summary .......................................... 4

Quick overview of Indra 4

Where are we in the recovery path? 5

We maintain our TP of EUR12 7

We upgrade our rating from Reduce to Hold 8

Spain: slowly improving ..................................... 9

Spain: the main reason for the P&L deterioration 9

Measures taken by Indra 10

Potential recovery in Spain, but slowly 10

International opportunities .............................. 14

Increasing international exposure 14

LatAm: potential in Mexico and Brazil, but when? 15

Asia, Middle East & Africa (AMEA) 18

Estimates ................................................................ 20

3.6% CAGR in sales in 2013-16E, acceleration post-2014 20

Operating margins: heading for double digits, but long-term 23

Net profit 25

FCF generation 26

Indra guidance for 2014: challenging FCF? 27

Valuation ................................................................ 28

DCF: EUR12.2 per share 28

2017 EV/EBITA: EUR12.6 per share 30

SOP: EUR10.3 per share 30

Peers 31

Appendix: additional insights .......................... 34

Q2 preview 34

Indra business lines, competitive advantages 35

A closer look at Indra Solutions 38

Debt structure 39

Backlog and order intake 39

Research ratings and important disclosures 45

Legal and disclosure information .................... 47

Indra Rating change


Investment summary Although we see significant long-term upside in Spanish sales, margins and

working capital, we are unsure about the pace of the recovery in FCF, and we

believe upcoming quarterly figures will still be weak. We could have to wait until

2015 to see a real turnaround in underlying results. Nevertheless, following the

stock’s recent underperformance (-20% since April), we are upgrading our rating

from Reduce to Hold, while maintaining our EUR12 TP.

Quick overview of Indra

Indra offers solutions and IT services in 138 countries worldwide. Solutions, which are

more profitable than services, account for 64.8% of sales (73.6% in 2007) and Services

account for the remaining 35.2%.

The company has six verticals, out of which the Transport and Traffic and the Security and

Defence business lines are the ones with the highest component of solutions and are public

sector-related. In addition, we believe these segments offer the greatest growth

opportunities, as, apart from sound sector trends, Indra is a worldwide leader on various

fronts. The company is among the world leaders in ATM, secondary radars, simulators,

submarine transmissions, balloting systems and railway control systems (Da Vinci), among

others.

Chart 1: Indra sales by geography (2013)

Chart 2: Indra sales by vertical (2013)

Source: Kepler Cheuvreux Source: Kepler Cheuvreux

Spain 38.6%

Europe 19.8%

Latam 28.5%

AMEA 13.1%

Transport & Traffic

21.0%

Telecom & Media 12.2%

Energy & Industry

16.5%

Public Admin. &

Healthcare 17.3%

Financial Services

16.1%

Security & Defense

17.0%

Indra Rating change


Table 1: Quick glance at Indra

Vertical Description % solutions % Spain Key competitors Competitive position

Key future drivers

Transport & Traffic

Air traffic, railways, mass rapid transit buses, Intelligent traffic

systems and smart mobility, services

90% 15% Thales, Selex, Siemens,

Alstoms, Ansaldo

Top 3 in railway control systems

(Da Vinci) and ATM

Infrastructure plans, air traffic

growth

Telecom & Media

Networks & communications, social media, digital platforms, IT services

45% 50% SAP, Accenture, IBM, Atos

Outsourcing trends

Financial Services

Core banking, core insurance, e-payments, IT services

45% 55% Oracle, SAP, Everys, Telvent, Temenos, Sopra

Outsourcing trends, Indra

solutions Public Admin. & Healthcare

Taxes and Justice, voting, Healthcare, IT services

60% 40% Siemens, Phillips, Everys, IECISA,

SAP, Accenture, Atos, IBM

World leader in voting systems

Personalised medicine, Elections,

Energy & Industry

Customer management, network management, plant management

and energy markets, IT services

60% 50% SAP, Accenture, IBM. Atos

Outsourcing trends, Indra solutions for

commercial management,

Security & Defence

Air defence, border control, simulation

90% 15% Thales, Selex, Lockheed

Martin, Ultra Electronics, BAE

systems, Finmeccanica

Top 5 in Simulators, top 3

in secondary radars,

electronic, nuclear

submarine transmissions.

Increase in Defence budgets,

Source: Kepler Cheuvreux

Where are we in the recovery path?

As a late cyclical, in the last two years Indra has really suffered from the weak macro

environment in Spain. Domestic revenues were down 17.6% in 2012 and 11% in 2013 and

now account for 39% of sales versus 57% in 2011. In addition, in only two years, Indra has

experienced a strong EBITA margins deterioration (from 10.0% to 7.8%) and a poor

working capital performance (with DoS reaching 108.8 days in 2013 versus 102.6 in 2011

and 98 in 2007).

We see 2014 as a transition year… We see 2014 as a transition year, with an estimated low single-digit adjusted net profit

performance and an improvement in FCF mainly related to one-offs (lower restructuring

costs, a supplier plan in Spain, implying a EUR40m improvement in working capital). In fact,

excluding those effects, adjusted FCF would go up by 11% while reported FCF is expected

to be close to twice the level reported for 2013. In fact, Indra’s ability to meet its FCF

guidance of “more than EUR100m” for 2014 will be highly dependent on the performance

of “other operating changes”, which are difficult to predict. In our numbers, we assume FCF

of EUR90m to be on the safe side.

The main reason is that we believe Spain is likely to remain weak in 2014, with estimated

revenues down 5.5% (the company guides for a “small decline”). In fact, domestic revenues

in Q1 were down 10% and order intake was still down 4% while we still estimate a 8% drop

in Q2. We expect H2 to be better mainly as a result of an improvement in public sector

order intake (Indra has signed a EUR35m railway contract with Adif and is negotiating a

defence contract), but considering the weak performance in H1, we still expect the FY

Indra Rating change


figures to be weak. This will limit any EBITA margin improvement, and the company is in

fact guiding for flat EBITA margins this year versus 2013. For our part, we estimate EBITA

margins to reach levels of 7.6% versus 7.8% in 2013.

…and we expect recovery from 2015 Although we believe that there is potential for recovery in sales, margins and working

capital as a result of macro improvements and costs optimisation, the key question remains

the timing for that recovery and whether Indra could potentially return to “pre-crisis”

levels of sales in Spain, margins and working capital.

Indra’s worldwide leadership in certain segments (ATM, secondary radars, railway) is

reassuring, and we also believe some sector trends in key areas are supportive, especially in

Defence, Transport and Traffic, Energy and Healthcare. In addition, in recent years, the

company has developed new solutions (capitalised projects amount to more than

EUR177m) in utilities, healthcare, banking, insurance and other areas, which we expect to

generate revenues mainly from 2015.

Therefore, we believe that 2015 could already mark a change for the company, as

underlying trends should improve in Spain (we expect sales to be up by 2% thanks to some

recovery in the public sector, as investments are expected in Transport and Traffic and

Defence), and this could in turn trigger higher margins (the company could benefit from

higher prices, workforce optimisation and a higher weight of solutions). Working capital

could take longer to recover, in our view, considering the weak situation of the Spanish

public administration and corporates.

Increasing free cash flows Thus, we believe that FCF generation should improve in coming years through a

combination of different factors:

Recovery in the Spanish business

Improvement in the solutions/services mix, in Spain and abroad

Operating leverage

Working capital improvements due to a better situation in Spain and a better

sales mix (solutions benefit from better payment conditions).

Chart 3: Our FCF forecasts for Indra (EURm, before FI, according to Indra criteria)


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However, looking at 2016-17, we are assuming that Indra is likely to stay well below pre-

crisis Spanish sales, EBITA margins and working capital. We see several reasons for that:

In Spain, although some of the verticals are expected to recover, we believe the

private sector will face a long period in which price increases will be tough to

implement, and therefore sales will remain depressed. This is especially the case in

some verticals such as Telecom and Media, where Telefónica is a key client,

weakening Indra’s negotiating position.

The fact that price improvements in the private segment will be tough will be a

limit for margins recovery. In addition, in LatAm, we feel that due to the

competitive pressures and the company’s difficulties in gaining exposure to the

Brazilian solutions market, a margin recovery is uncertain.

We expect depreciation will increase substantially from 2015 as the company will

start to amortise its capitalised projects. This means that EBITDA margins will

increase more than EBITA margins.

Two years ago, Indra changed its inventory policy in certain segments such as

radars and now produces in advance (before, it used to produce on demand and

delivery took one year). This is a positive move if the market is strong but penalises

working capital. In addition, we believe the budget constraints of the Spanish

government will continue, as the fiscal deficit is expected to remain above

reasonable levels.

Still, we believe that the risk to our numbers is on the upside, especially if the company is

able to increase the weight of solutions, with higher margins.

Assuming Indra is able to recover peak margins, sales in Spain and DoS levels, our

estimated 2016 FCF would reach EUR372m instead of EUR197m.

We maintain our TP of EUR12

Our target price for Indra is the blended average of three approaches, namely: a DCF, the

valuation derived from applying a 10x EBITA multiple to 2017E earnings and an SOP

(valuing IT services and solutions separately). We give more weight to the first two

methods as we believe they better captures the upside from the expected Spanish

recovery. The result is a EUR12 TP, slightly above current market prices. Dividend yield is

4% (2015E).

Table 2: Summary of Indra valuation

Method EUR/share % weight

DCF model 12.2 40% 10x EBITA 2017E 12.6 40% SOP 10.3 20% Average valuation 12.0 100% Upside 2.5%


Indra Rating change


In relative terms, Indra trades at a 27% premium to its IT services peer group on EV/EBITA

2014-2015E. In fact, Indra has historically always traded at a premium to the European IT

services sector (average or c. 20-30% over last ten years).

Versus defence peers and infrastructure peers, it trades at a small premium on EV/EBITA.

Table 3: Indra versus peers

____________P/E____________ __________EV/EBITDA__________ __________EV/EBITA__________ 2014E 2015E 2016E 2014E 2015E 2016E 2014E 2015E 2016E

Indra 16.2x 13.4x 11.7x 9.6x 8.4x 7.2x 11.9x 10.3x 9.1x Defence peers 15.4 x 13.7 x 12.4 x 8.3 x 7.7 x 7.3 x 11.1 x 10.1 x 9.7 x IT services peers 14.8 x 12.8 x 11.6 x 7.1 x 6.4 x 5.7 x 8.9 x 8.1 x 7.2 x Infrastructure peers 17.1 x 14.8 x 14.2 x 8.9 x 8.0 x 7.6 x 10.8 x 9.4 x 8.8 x


Finally, FCF yield 2015E is 9% (7% if we take FCF/EV), above the European IT sector

average of 7%.

We upgrade our rating from Reduce to Hold

We upgrade our rating from Reduce to Hold, following a very weak share price

performance, since we issued our last update in April (-20%). The Del Pino family has just

sold a 4% stake in Indra at a 3% discount to market prices, which has created some

additional pricing pressure.

We agree that Indra is a turnaround story. We also agree that there is potential for a strong

FCF recovery at these levels. Still, we prefer a Hold rating for different reasons:

We are unsure about the timing and the depth of such recovery as we see different

factors that can limit upside, including a weak public sector in Spain, despite a

macro improvement, competitive pressures in LatAm and difficulties in entering

the solutions market in Brazil.

Although Indra has developed some interesting solutions in the Energy, Healthcare

and Financial services fields, the company needs some critical mass (a large

number of clients) to make those solutions profitable. Thus, there is some

execution risk ahead.

Following the disposal of a 4% stake by the Del Pino family, we feel there is still

some overhang left, mainly coming from the 20% stake that La Sepi (State-owned

vehicle for industrial participations) holds in Indra, acquired at EUR10.2 per share,

below current levels.

We see some risk of earnings disappointment in upcoming quarters, especially in

Q2 where negative FCF could be close to EUR20m (see appendix for details). The

difficulties in Spain and the expected working capital deterioration could pose

again concerns about the pace of recovery and the ability to meet the FY FCF

guidance of EUR100m. In fact, we do not rule out a short-term correction in the

share price post results that could eventually trigger a buying opportunity.

Indra Rating change


Spain: slowly improving The dramatic cut in the Spanish public budget coupled with price cuts across the board

from Spanish corporates have been the key reasons for deterioration in Indra’s P&L in

recent years. We believe we are close to a stabilisation in domestic sales, although a clear

rebound may take a while, as public spending is likely to remain depressed, and prices in

the corporate segment will take time to recover, in our view.

Spain: the main reason for the P&L deterioration

As we know, IT is a late cyclical sector. This explains the very weak performance of Indra´s

domestic sales starting in 2010, but especially in the last two years (-17.6% in 2012, -10.6%

in 2013). Thus, sales in Spain now account for 39% of group sales versus 68% in 2009.

Table 4: Spanish GDP versus Indra sales in Spain

2004 2005 2006* 2007* 2008 2009 2010 2011 2012 2013 2014E 2015E

Spanish GDP (nominal) 5.5% 6.8% 6.6% 7.0% 3.3% -3.1% 0.3% 2.1% -1.6% -0.6% 1.2% 2.4% Spanish GDP (real) 3.1% 3.4% 3.9% 3.7% 0.9% -3.7% -0.1% 0.7% -1.6% -1.2% 1.2% 1.9% Indra sales in Spain (YoY growth) 6.6% 10.1% 14.0% 8.5% 6.6% 2.9% -2.9% -2.6% -17.6% -10.6% -3.0% 2.8%

Source: Funcas, Kepler Cheuvreux, *distorted by the acquisitions of Azertia and Soluziona

Weak revenues, significant drop in public sector… Indra has been affected by a strong decrease in the revenues from the public sector (-50%

in the period) and some slowdown in the revenues from the private segment, due to lower

prices (the IT services business, which is mostly private, is very price sensitive).

Table 5: Sales in Spain recent performance

EURm 2007 % total 2013 % total Change

Public 864 58.9% 433 38.5% -49.9% Corporates 604 41.1% 692 61.5% 14.6% Total 1468 100.0% 1125 100.0% -23.4%

Source: Indra

…leading to a drop in EBITA margins... Spain has been a key reason for the group’s recent margins deterioration. In the last four

years, the adjusted EBIT margins at Indra have collapsed, reaching levels of 7.8% in 2013

versus 11.4% in 2009. Looking only at Spain, one major reason has been the fact that the

downturn in Spain has especially affected the solutions business (concentrated in the

Defence and Air and Traffic control verticals with a higher weight of the public segment),

where margins are higher. The price cuts in the Spanish private segment were another

reason. Still, during the crisis and owing to the fact that the company could accept price

cuts, it was able to increase its market share in the Spanish IT market by around 100bps

from 11-12% to 12-13%.

Indra Rating change


…and working capital deterioration In addition, working capital has significantly increased due to late payments from the public

administration and corporates and the lower weight of solutions (that normally benefit

from prepayments). Group DoS reached a peak of 108.8 days in 2013 versus 76 in 2007

and 80.6 in 2009. In fact, net working capital reached EUR868m in 2013 (30% sales) versus

EUR453.1m in 2007 (21% sales).

Table 6: Indra’s working capital performance

EURm 2007 2008 2009 2010 2011 2012 2013

Trade working capital 453.1 499.5 555.0 655.3 755.9 833.8 868.4 % sales 21% 21% 22% 26% 28% 28% 30% DoS (days) 76.3 76.6 80.6 93.5 102.6 103.5 108.8


Measures taken by Indra

In that context, Indra took different decisions that helped offset part of the effects of the

weak Spanish macro scenario.

First, the company carried out a restructuring plan to reduce workforce in the most

expensive part of the pyramid. In total, restructuring expenses over 2007-13

reached EUR93m. Note that Indra has c. 4,000 employees to provide additional

flexibility worldwide.

Indra started to put a greater focus in its international business, allocating a good

part of the Spanish workforce to international projects. In fact, utilisation rates

remain at 94%.

Finally, the company has decentralised the workforce and some engineers are now

working in the so-called nearshore factories, which are located in small cities

(Seville, Asturias, Ciudad Real…), where salaries are 20-30% lower than in Madrid.

In fact, some 3,000 employees from Madrid were transferred to these locations.

Potential recovery in Spain, but slowly

Macro improvement should help, but it is going slowly It seems that the worse is over for Spanish Macro. According to Funcas, Spanish GDP is

expected to grow by 1.2% in 2014 and 1.9% in 2015 after a 1.2% drop in 2013. The Bank of

Spain recently raised its GDP growth forecasts from +1.2% to +1.3% YOY for 2014, and

from +1.7% YOY to +2% YOY for 2015.

This recovery will be mainly driven by a recovery in private consumption and gross capital

formation. Fiscal imbalances are gradually being corrected and internal devaluation is

paying-off.

Still, there are uncertainties in different fronts and this explains why we remain cautious

about Spain and why we believe a real recovery in the IT sector will take time. On one hand,

public debt keeps growing (it was EUR990bn in Q1, 97% of GDP). On the other, the public

deficit is also likely to remain above reasonable levels. In fact, we estimate there is a need

to carry out an additional EUR25bn adjustment, although the upcoming Elections (October

Indra Rating change


2015) will mean that the government will be as constructive as possible, in our view, to

avoid unpopular measures.

Table 7: Spanish macro forecasts

2013 2014E 2015E

PIB real -1.2% 1.2% 1.9% Private consumption -2.1% 1.5% 1.6% Public consumption -2.3% -0.9% -0.5% Gross fixed capital formation -5.1% 0.5% 2.9% Construction Gross fixed capital formation -9.6% -4.2% 0.2% Public deficit (% GDP) -6.6% -5.7% -4.8% Un-employment 26.4% 24.9% 23.7%

Source: Funcas, Kepler Cheuvreux

Chart 4:Spanish public debt trend

Chart 5: Spanish fiscal deficit over GDP

Source: Bank of Spain Source: Funcas

Public segment to lead the recovery of Indra in Spain Against this backdrop, Indra is guiding for a small decline in Spanish sales in 2014 after a

10.6% drop in 2013 and a 17.8% drop in 2012. The main upside comes from the public

segment (39% of sales), where the pipeline seems to be recovering (the company won a

EUR35m railway contract with Adif and is negotiating a defence contract for the NH90

helicopter). Nevertheless, the corporate segment remains depressed for the moment, and

there is little visibility for the next few months.

In fact, although it is a highly erratic variable, order intake in Spain was down 12% in 2013

and down 4% in Q1 2014 although we do not rule out a positive surprise in Q2.

We would point out that, following the drop in the contribution from the public sector in

recent years, the segments with the greatest contribution to Spanish sales have been

Financial Services, Energy & Industry and Telecom & Media. We believe that price

increases in the current environment are tough to implement among Spanish corporates,

and in some cases, we believe that previous levels will never be recovered due to the

overall industry situation.

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Indra Rating change


Meanwhile, we believe the Transport and Traffic and Defence businesses are facing the

best opportunities, although a real recovery could take more time, in our view, as it remains

linked to the public sector.

We believe Telecom and Media will be the worst performing vertical. Telefónica is

the main client in this segment (we estimate it accounts for 70-80% of sales), and

we see little room for price improvements, as telecom companies are facing

aggressive competition and are basically focused on spending money to gain

market share. Prisa is also a key client in the media side, and its weak financial

situation will not allow for any improvement.

On the Energy & Industry front, Indra has invested some EUR64m in different

solutions, including one called InCMS for commercial management (including

inSPEED, an intelligent platform for efficient energy management). Given the

historical relationship between Indra and Gas Natural, we don’t rule out a

partnership between the groups.

In Financial Services, Indra has also invested significant amounts in its core

banking and core insurance applications (EUR63m in total).

In Healthcare, Indra has invested EUR15m in the so-called “Salud 2.0”, which

addresses personalised medicine and hospital management.

Transport and Traffic, where Indra enjoys a relevant position especially in ATM

and railways, could benefit from a recovery in different fronts from 2015-16. For

example, Aena, used to be a key client for Indra, representing aroundEUR80m in

annual sales (versus the current EUR15m), and we would not rule out an

improvement in coming years. In addition, there is a pipeline of pending

investments in railway in Spain, which, apart from new high speed lines (current

plans account for EUR14bn, while there is a need to obtain financing for EUR5bn

to complete the network) also include an improvement in the control systems after

the unlucky accident that took place in Galicia one year ago. Having said that, there

have been large delays in the railway investments for obvious reasons, and quite a

bit of discussion around the late payments of Adif, the state investment unit for

railways. Thus, we cannot rule out that plans could be delayed.

On the Defence side, it seems that the pipeline of new projects could improve in

the coming years, after a very weak period due to public budget constraints and

the need to pay for past investments. Still, according to press information, the

government’s amount pending debts in defence is huge, and this could limit new

projects. Future projects could include drones, frigates (the Spanish government

recently approved EUR376m in investments for two new vessels) and new military

vehicles (734 vehicles have been approved).

Indra Rating change


Drivers of operating leverage of the Spanish business Apart from a recovery in these activities, a key issue is operating leverage and how Indra’s

margins could potentially bounce back. This is linked to several factors:

The mix between solutions/services (as we know, solutions have higher margins).

Given that we expect some improvements in the public sector, with a significant

weight in solutions, the mix should improve, in our view.

Price improvements that have a direct impact on margins. Currently, IT prices in

the private segment in Spain are 35-40% below 2007 levels. We believe this will be

tougher to achieve, especially in some of the verticals such as Telecom and Media.

The recovery of historical churn rates (15% versus current 4%) will help the

“renovation” of the workforce. We are confident that Indra will be able to hire

younger (and cheaper) engineers in Spain as a result of the tough situation of the

Spanish labour market (unfortunately, unemployment expected to be very high in

the next years).

Our final thoughts about Spain Some final conclusions then:

The macro recovery in Spain should help the recovery of the Spanish business in

both the public segment and with corporates (potential to increase prices). On

the public sector side, public budget constraints could still limit new projects.

We are confident that the mix solutions/services will improve in coming years.

Still, we believe this will take time, as, despite these improvements, the

government still has budget constraints, and the fiscal deficit remains high. This

also applies to the working capital, as the government will remain a bad payer for

some time. The last suppliers plan was implemented in February 2014 and the

government has made no new announcements regarding new plans.

We believe that EBITA margins have the potential to rise, but we believe they

will not reach pre-crisis levels (we estimate they were close to 10% in Spain

versus the current 4%).

Assuming that Indra recovers the revenues lost in Spain, that margins also

recover peak levels and that DoS reaches pre-crisis levels, we estimate that

group FCF by 2016 could be 90% above our current estimate. We emphasise,

however, that this is a highly unlikely scenario.

For the sake of caution, we forecast a 5.5% fall in Spanish revenues in 2014,

followed by increases of a 2.0% in 2015 and 3.0% in 2016. This implies a flattish

performance in 2013-16E.

Indra Rating change


International opportunities We expect the international business to remain a key driver for Indra in the

coming years, especially in LatAm and AMEA. Nevertheless, Brazil remains

challenging, in our view, as the company has so far failed to move to the solutions

segment. On the positive side, Mexico could provide significant opportunities

due to the huge infrastructure plan recently approved by the government.

Increasing international exposure

Indra has improved its international exposure (61% of sales in 2013 versus 32% in 2007),

due to the combination of different factors:

A weak situation in Spain that has helped increasing its relative weight;

Efforts by the company to grow outside Spain, including the acquisition of Politec

in Brazil in July 2011;

Indra’s worldwide leadership in different segments such as elections, ATM,

secondary radars or simulators, which has helped to offset weak domestic

revenues. In fact, in 2007-13, international revenues were up 17% (+14.6%

excluding Politec consolidation);

Local presence in 45 different countries that has helped the company’s

international expansion.

Chart 6: Indra`s sales split


In our view LatAm and AMEA are likely to be the fastest growing areas in the future, thus

increasing the weight in total sales, despite the expected recovery in Spain. Meanwhile, we

expect Europe to grow below the group average in sales and Spain to maintain its share of

revenues.

Spain 39.0%

Europe & USA 20.0%

Asia, Middle East & Africa 13.0%

LatAm 28.0%

Indra Rating change


Chart 7: Geographical sales split


LatAm: potential in Mexico and Brazil, but when?

Latin America is a key area for Indra (28% of sales) and in fact, the company is the third

largest pan-Latin-American IT player after IBM and Accenture.

Moreover, following the acquisition of Politec, Brazil became the second market for the

company (following Spain), accounting for 35% of the Latin American sales and 10% of

group sales.

The Latam IT market is a services market, with average EBITA margins of some 5%. This is

also the case for Indra. In fact, the company wants to increase the percentage of solutions

to help margin performance.

The business in LatAm is growing significantly in local currencies (+22% in 2013 and +24%

in Q1 2014, also helped by inflation and one-offs in balloting), but contribution to Indra’s

P&L has been hit by strong currencies devaluations (reported sales were up 11% in 2013,

+4% in Q1 2014). In addition, we believe the company has experienced margin pressure

across the board, as the competitive environment is tough (many European players have

tried to enter emerging markets to offset their weak domestic markets).

Latin America is an easy diversification for Indra, as the company works for Spanish groups

that have a presence in LatAm in many cases (Telefónica, BBVA, Santander, Mapfre).

However, Indra has been also able to secure contracts with local players, including regional

governments (e.g. Chile, México, Ecuador or the US).

0%

20%

40%

60%

80%

100%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E

Spain Europe USA & Canada Latam AMEA

Indra Rating change


Chart 8: Sales composition in Latin America

Source: Indra

Brazil: upside ahead, but slow execution Indra acquired Politec in July 2011. The company paid BRL4.5m for a 6.5% stake and there

is still a BRL219m (EUR78m) estimated payment pending, which we have included in 2014-

15 (if the earn-out mechanism is not triggered, we expect the company to use that amount

for restructuring). When it was acquired, the company was loss-making (EBIT margins of -

4%), had 5,000 employees and had a business model primarily much focused on IT services

(especially consulting and outsourcing). Indra’s plan was to increase profitability (Politec

was in the middle of a restructuring plan) and benefit from cross-selling solutions in which

Indra was stronger and had a product to offer.

Since then, the Brazilian IT market has improved significantly, growing by 42% in 2012 and

15.4% in 2013, according to IDC, which was also helped by very high inflation rates (5.8% in

2012 and 5.9% in 2013). In fact, it now accounts for 47.4% of the Latin American IT market

and has a global market share of 3% (it is the seventh largest country in the world).

However, on the negative side, and despite Politec now having positive EBIT margins of

some 2-4%, the company has failed to make the real turnaround and to focus more on

solutions. The reasons are related to the very strong competitive pressure in Brazil and to

the delay in the expected investments in infrastructures.

Back in 2012, the current government announced a huge investment plan, worth

EUR53.3bn for the upcoming 25 years with the aim of modernising the country’s

infrastructures. This basically included motorways, railways, airports and ports, where

Indra could potentially play a role, especially in Transport and Traffic. However, execution

of these plans has been very slow, and we believe competition has been fierce, both from

local players and international groups.

A high speed train is expected to comprise an important part of these investments in

infrastructure. At the end of 2014 or the beginning of 2015, Brazil will award the high speed rail

line covering Rio de Janeiro-Sao Pàolo-Campinas, in which Indra is participating. We note that

Indra’s Da Vinci is one of the most advanced railroad control systems in the World.

In addition, after a weak period due to fiscal budget cuts, the Brazilian government plans

investments in Defence of c. USD190bn until 2019, focused on naval vessels, border

monitoring programmes, airplanes, and submarines, among others. For example, the

Brazil 35.0%

México 19.0%

Colombia 10.0%

Chile 6.0%

Peru 6.0%

Argentina 5.0%

Others 19.0%

Indra Rating change


Brazilian Navy is moving forward with a SisGAAz, which is a maritime surveillance

programme. Although the prime contractor is a local company, Indra is also participating

together with others, and any award could be a very interesting opportunity for the

company to gain presence in the Brazilian Defence market. Other areas of interest could be

the installation of auto-protection equipment in the new airplane Embraer-390, where

Indra could participate. Finally, another example is the fact that the Brazilian government

wants to invest some EUR5bn in a border control project, which is still being analysed by

the government.

A key event will be the general elections in Brazil that will take place in October 2014,

which could potentially mark a change in the government’s investment strategy. If there is

a change in government, the opposition candidate has announced a reactivation in the

country’s investments in infrastructures, which could mean more upside. If the current

government remains in place, we believe investments could take longer.

All in all, we believe there is upside in Brazil, although we believe progress will take time

and there is execution risk ahead. The result of the elections will be key to assess the pace

of the investments and the potential upside for Indra.

Mexico: the largest infrastructure plan Mexico is Indra’s second Latin American market by size, accounting for 19% of Indra’s

LatAm sales. We believe it is one of the countries with the highest growth potential based

on the huge infrastructure plans announced by the Mexican government. In addition, we

believe margins in Mexico are well above those in Brazil, for example, as there is a better

business mix (in addition, Indra has not carried out any margin dilutive acquisition, like in

Brazil with Politec).

However Indra is México is not in the top five, as key players in IT include IBM, HP and Kio

Networks (a local company), among others.

Very recently, the prime minister announced a huge infrastructure plan for a total of

USD600bn in 2014-18 (60% public, 40% private), which includes investments in

motorways, ports, airports, railways, power plants, oil, and hospitals, among others. More

concretely, investments in communications and transport (highways, railways, ports and

broadband networks) could exceed USD100bn. Even if this plan is not executed in full, the

potential opportunity is significant, in our view.

Looking at the railway segment, there will be different new high speed lines where Indra

could potentially participate, opening a new business line for the company in Mexico:

Mexico-Querétaro, México-Toluca, Trans peninsular in Yucatan and electric trains in

Guadalajara and Monterrey. Total estimated investments amount to USD7.3bn. Regarding

highways, Indra has recently signed a traffic and control contract for Michoacán highways.

We would point out that 90% of the new investments in Mexican highways use Indra’s

systems, so the company could potentially participate in the new projects.

Indra Rating change


Table 8: Mexican infrastructure plan

Sector MXNbn USDbn % total

Energy 3,898 302.2 50.3% Agricultural, Regional, Urban development 1,861 144.2 24.0% Communications and transportation 1,320 102.3 17.0% Water 418 32.4 5.4% Tourism 181 14.0 2.3% Health 73 5.6 0.9% Total 7,751 600.8 100.0%

Source: Mexican Government

There is also potential in Defence (the weight of defence expenditure/GDP is 0.5x versus

1.4x in Brazil, 0.7x in Argentina, 3.4x in Colombia, 1.4x in Peru, 2x in Chile or 1.5x in Bolivia,

according to the World Bank numbers).

All in all, we believe Mexico offers significant potential, although Indra has to demonstrate

it can play a key role as its competitive position is not as good as in other regions.

Asia, Middle East & Africa (AMEA)

Asia, Middle East & Africa represent a booming area for Indra (revenues grew by more than

fourfold in 2007-13), and the most profitable one (together with Europe), as the weight of

solutions is above the group average. However, AMEA only accounts for 13% of sales, out

of which 46% is Asia, 28% is Africa, and 26% is Middle East.

In 2013-14, Indra’s revenues benefited from balloting systems in Iraq (EUR100m), which

are fuelling the sales in the region (+28% in Q1 2014). Those revenues will disappear from

Q3 2014, so we expect growth rates in the region to slow in the last part of the year.

Indra is very well positioned in different markets, mainly around the Transport and Traffic

division. For example, it is very strong in China, as its radars control close to 80% of the

Chinese air space. In railway, the company has installed Da Vinci systems in China, India,

and Egypt, while it has obtained a railway contract in Middle East for the high speed train to

Mecca. As we can see, the railway market in Middle East and Africa, where Indra has a solid

position, is expected to lead global growth.

Transport and Traffic to remain key driver Transport and Traffic will remain a key driver for this area, in our view. In Malaysia, the

government has approved a huge plan for high speed trains that will link Kuala Lumpur with

Singapore with a EUR9.2bn budget. In fact, in 2013, Indra obtained a contract for the

modernisation of the Malaysian transportation system. High speed investments are also

expected in Morocco (USD970m in investments in planned for this year for new lines and

enhancing of existing ones).

As we can see, the railway market in Middle-East and Africa are expected to post the

highest growth rates among all regions (LatAm is also expected to be very strong).

Indra Rating change


Chart 9: Global rail market 2015-2017

Source: Unife, Thalesx

Defence budgets to increase, especially in Middle East/Africa In Defence, Indra is working in India and is bidding in Singapore and Korea. In the

simulation front, the company also works in the Middle East, China and Indonesia.

Indra wants to reinforce its position in countries like Malaysia, Indonesia, Vietnam and

India. All of these countries offer a solid pipeline, especially in the area of Defence, as the

existing assets are obsolete in all cases, especially India. According to IHS Jane’s, the

expected increase in the worldwide defence budgets in the coming years will be primarily

driven by Asian countries (the weight of the US is expected to decrease). China is a relevant

market for Indra, especially in Transport and Traffic, and therefore we believe the company

could also benefit in Defence.

Table 9: Top defence budget expectations

Top ten defence budgets 2013 (USD1.5bn)

Top ten defence budgets 2017 (USD1.6bn)

US 52% 47% China 12% 14% Japan 6% 8% Russia 6% 6% UK 5% 5% France 4% 4% India 4% 5% Germany 4% 5% Saudi Arabia 4% 4% Australia 3% 3%

Source: HIS Janes´s, Kepler Cheuvreux

3% 2%

8% 7%

0%

2%

4%

6%

8%

10%

Global Asia Pacific Middle-East/Africa Latin America

Indra Rating change


Estimates We believe that after a transition period in 2014, a real turnaround in results is

likely to occur in 2015-16. We estimate a 6.8% CAGR in adjusted EBITA over

2013-16 and 9.7% in adjusted net profit, thanks to an improvement in EBITA

margins by 2016 and some sales acceleration, mainly as a result of a Spain

recovery. 2014 FCF guidance (above EUR100m versus EUR52m in 2013) could

be achieved on one-offs, but a real underlying FCF improvement will occur only

in 2015, in our view.

3.6% CAGR in sales in 2013-16E, acceleration post-2014

To calculate our group revenues, we have estimated the revenues coming from the

different verticals, which we have crosschecked with our estimated performance by

geographical area. In addition, we have disclosed sales by solutions and IT services as this is

fundamental to determining future margins.

We estimate a 3.6% CAGR in sales in 2013-2016E, with an acceleration post 2014.

Spain recovering, growth driven by AMEA From a geographical point of view, we believe that Spain will continue to be down in 2014

(we estimate -5.5% while the company guides for a small decline). We would mention that

after an 11% drop in 2013, sales in Spain were still down 10% in Q1 2014, while order

intake was down 4% also in Q1 (-12% in 2013). In Q2 we expect a small improvement

mainly thanks to the contract for the European Elections (EUR13m), but we still think sales

will remain very weak (-8%). Finally, the second part of the year should benefit from the

recently awarded contract with Adif (EUR35m), which also includes maintenance for 20

years. This explains why we expect H2 sales to be flattish.

From 2015, we expect sales to grow by 2% on for the reasons we have discussed in

previous sections.

We expect LatAm and AMEA to be the key growth drivers for sales in coming years. In the

case of LatAm, currency depreciation is likely to offset a good part of the growth in 2014,

and despite that, we believe that the company should be able to grow at double-digit rates

in local currencies, while estimated reported growth is 5%. For 2015, we estimate no

currency impact, although we have assumed that sales growth in local currencies (+6.6%)

will be lower than in 2014 (there could be an upside risk here).

In the case of AMEA (sales are mostly USD-denominated), we expect a double-digit sales

growth in 2014 (in Q1, sales were up 28%), partly fuelled by the EUR100m elections

contract in Iraq, impacting three quarters this year. Post-2014, we believe that, as we have

discussed in previous sections, that there are multiple growth drivers in the area and that

contribution to sales should improve in coming years.

Finally, in Europe, our view for the IT market and for Indra in particular is that 2014 should

be a flattish year, and that 2015-16 should be slightly better, with the UK and Nordics as

drivers, as well as offshore in Europe picking up. However, Indra could benefit from

investments in Defence, in our view.

Indra Rating change


Table 10: Indra estimated sales by geography

EURm 2013 % growth 2014E % growth 2015E % growth

2016E % growth

CAGR 2013-16

Spain 1,124.9 -10.6% 1,063.0 -5.5% 1,084.3 2.0% 1,120.4 3.3% -0.1% Europe & US 577.3 17.8% 583.9 1.1% 601.4 3.0% 619.4 3.0% +2.4% LatAm 830.7 11.5% 872.2 5.0% 926.4 6.2% 981.6 6.0% +5.7% AMEA 381.2 -7.9% 436.4 14.5% 479.4 9.9% 517.3 7.9% +10.7% Total 2,914.1 -0.9% 2,955.5 1.4% 3,091.5 4.6% 3,238.8 4.8% +3.6%


Transport and traffic and Defence as the main drivers From a business point of view, we believe that the main drivers of Indra’s sales growth will

be the Transport and Traffic, Security and Defence and Energy and Industry divisions.

Transport and Traffic will be driven by a slight recovery in Spain, LatAm (Brazil and Mexico

could be key areas due to the huge existing infrastructure plans), Asia, where the company

has a good presence in some segments such radars, and Africa. The contract awarded for

the high speed train to Mecca could open up new business opportunities (as we can see, the

expected growth of the global rail market is very strong in Middle East/Africa). Finally,

Indra’s pipeline also includes the European single-sky project, which will be implemented

from 2015 and could lead to new opportunities in other European countries.

More concretely, as far as air traffic goes, the expected acceleration going forward are

reassuring, in our view.

Chart 10: Air traffic growth expectations

Source: IATA, Thales

In Security and Defence, we also expect a combination of a better performance in Spain

(although not massive, as budgets remain tight) and some opportunities in other areas.

According to IHS Jane’s, defence budgets will increase in coming years, despite the US

cutting its budget, and this growth will come mainly from Asia. The Middle East and LatAm

could also be interesting markets. Indra has relevant positions in all those areas. In terms of

Europe, the Eurofighter still has a five/six-year pipeline, but in any case, we expect some

upgrades (Indra could play a role in the mobile radars). In addition, although the project is

smaller and margins are probably lower, we expect some contribution from the new A-

400M, in which Indra also participates.

0.0%

2.0%

4.0%

6.0%

8.0%

2013 2014 2015 2016 2017

Expected air traffic growth

Indra Rating change


The Energy and Industry division could also grow above the group average going forward,

especially from the utilities side. Indra has invested EUR64m in recent years for the

development of certain solutions, such as InCMS that provides integrated support for

managing customers for power companies. These solutions are suitable for emerging

markets, as they are modular and they can provide flexibility. In fact, Indra has recently

signed a contract in Ghana.

Finally, in Public Administrations and Healthcare, Indra will continue to be involved in

balloting systems worldwide, so we believe those revenues can be considered to be nearly

recurrent.

On the negative side, Telecommunications and Media is expected to be the weakest

vertical, as we think the company will have trouble recovering historical price levels,

considering the strong weight of Telefónica in this business and strong competitive

pressure existing in the telecom market. Therefore, we have assumed that sales decrease in

coming years until 2016.

Table 11: Indra estimated sales by vertical

EURm 2013 % growth 2014E % growth 2015E % growth 2016E % growth CAGR 2013-16

Transport & Traffic 611.1 -8.4% 580.5 -5.0% 615.4 6.0% 658.5 7.0% 2.5% Telecom & Media 355.3 -3.7% 334.0 -6.0% 327.3 -2.0% 320.8 -2.0% -4.0% Financial Services 470.1 1.2% 474.8 1.0% 489.0 3.0% 503.7 3.0% 2.3% Public Admin. & Healthcare 503.3 -2.6% 518.4 3.0% 539.1 4.0% 560.7 4.0% 3.7% Energy & Industry 479.5 4.1% 503.5 5.0% 528.6 5.0% 555.1 5.0% 5.0% Security & Defence 494.8 6.8% 544.3 10.0% 609.6 12.0% 658.4 8.0% 9.3% Total 2,914.1 -0.9% 2,955.5 1.4% 3,109.1 5.2% 3,257.1 4.8% 3.6%


Solutions to increase weight Finally, we expect solutions to gain some weight in the P&L account, due to the expected

recovery of the Transport and Traffic and Defence divisions, with a higher solutions

component. We emphasise that a key driver will be the new solutions developed by the

company, which we expect to start contributing to sales mainly from 2015.

On the IT services side, Indra has a large CPD centre, with significant spare capacity that

allows for significant growth potential and could also reinforce the cloud business.

Indra Rating change


Chart 11: Indra sales composition by solutions/services


Operating margins: heading for double digits, but long-term

Operating margins have come down significantly in the last years due to the situation of the

Spanish market (implying lower prices for services and a decrease in volumes in solutions),

and margin dilution resulting from the consolidation of Politec in Brazil.

Chart 12: Adjusted EBITDA and EBIT margins last years performance

Source: Indra, Kepler Cheuvreux

The future performance of Indra’s EBITA margins will depend on different factors:

Weight of solutions versus services. As we have said before, we expect the

weight of solutions to increase. Indra discloses the contribution margins of the

Solutions and IT segments. Taking 2013 data, contribution margins from IT

were 11.9% and contribution margins of solutions were 16.6%. A key factor

will be the success of the new solutions developed by the company.

An improvement in the Spanish macro situation would potentially help some

price recovery and should fuel public investments. In our view, this could be a

reality from 2015.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E

Solutions Services

7%

8%

9%

10%

11%

12%

13%

14%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Adjusted EBITDA Adjusted EBIT

Indra Rating change


Potential for workforce optimisation A key driver of the future margins

recovery is the operating leverage. Despite the significant drop in the sales in

Spain, capacity utilisation remains close to 94%, as a significant part of the

Spanish workforce was dedicated to the export business. In fact, some of them

have been reallocated to nearshore factories with lower salaries. Once activity

recovers, the company should be able to hire cheaper personal.

Some improvement in Politec following the restructuring. Even if the

company is not successful in increasing the weight of solutions in Brazil, there

is some upside to the average EBITA margin for the IT sector in that country

(5% versus 2-4% in the case of Politec).

The level of depreciation, which is expected to increase, as in the last few

years the company has invested more than EUR177m in different solutions,

mainly for the banking, energy and healthcare industries. As we know,

amortisation of capitalised R&D will be done once the project starts to

contribute at revenue level, so we believe the real impact is likely to occur

from 2016, when we expect revenues from the new solutions to be higher. We

have assumed that depreciation of each solution takes place in ten years.

Recall that new solutions replace “old” ones, so we can be fairly optimistic on

the rollout as we believe a good portion of clients will replace “old” solutions

with “new” ones, while Indra will also benefit from market share gains. Margins

will obviously be higher as the company gains new clients (solutions are

launched with an industrial partner but need critical mass to reach reasonable

profitability).

Table 12: Capitalised projects in 2013

Capitalised projects 2013 EURm

Banking core development 33 Healthcare market software development 15 Internal software development 17 Energy market sales management systems 64 Insurance market platform development 30 Air surveillance systems 18 Total 177

Source: Indra

Table 13: Project capitalisations and depreciation estimates

EURm 2013 2014E 2015E 2016E 2017E 2018E

Capitalised projects 177.3 197.3 217.3 237.3 257.3 277.3 Capex 20.0 20.0 20.0 20.0 20.0 20.0 Annual amortisation 4.2 4.1 8.9 21.8 27.5 30.1 Carrying amount 172.4 193.1 208.3 215.5 229.8 247.2


In our numbers, we have assumed that EBITA margins (excluding restructuring) will

improve from levels of 7.8% to levels of 8.5% by 2016, in the low part of the guidance given

by Atos, for example (8.5-9.5% by 2016). Still, we note that Indra comes from a very weak

situation in Spain and will face significant increases in depreciation charges. We expect

improvement in EBITDA margins to be higher (1.2pp in the period versus 0.7pp

improvement in EBITA margins).

Indra Rating change


Still, as we can see, margins in 2016 will be far away from peak levels.

In our numbers, we have not included any potential one-off depreciation charge if some of

the solutions are not successful. If this is the case, we believe it will not take place in the

next two years.

Table 14: Indra’s margins expected evolution

2013 2014E 2015E 2016E 2016E vs. peak

Contribution margin solutions 16.6% 16.6% 16.7% 17.4% -3.3% Contribution margin IT 11.9% 11.9% 13.0% 13.2% -3.7% Group contribution margin 15.0% 15.0% 15.5% 16.0% -3.7% Adjusted EBITDA 9.5% 9.4% 10.0% 10.7% -2.6% Adjusted EBIT 7.8% 7.6% 8.2% 8.5% -3.3%


Net profit

Below the EBIT line, we assume that net financial expenses decrease over time, thanks to

the company deleveraging as a result of increasing FCF generation (we have assumed that

average cost of debt remains close to 5% in the period). We have assumed that the tax rate

should be close to 22%, slightly above 2013 levels due to lower R&D investments and

uncertainties over future R&D credit deductions. We expect this to more than offset the

decrease in the corporate tax rate in Spain (from current 30% to 25% till 2015).

Table 15: Indra P&L

EURm 2010 2011 2012 2013 2014E 2015E 2016E CAGR 2013-16E

Revenues 2,557.0 2,688.5 2,941.0 2,914.1 2,955.5 3,091.5 3,238.8 3.6% Other revenues 110.1 83.8 83.2 75.1 75.4 74.2 72.9 -1.0% Operating expenses -1,258.8 -1,264.8 -1,326.4 -1,257.5 -1,287.2 -1,336.2 -1,401.0 3.7% Labour costs -1,081.0 -1,194.0 -1,397.9 -1,453.6 -1,466.9 -1,519.3 -1,563.7 2.5% Extraordinary costs & profits -33.4 0.0 -31.6 -27.9 -15.0 0.0 0.0 -100.0% EBITDA 294.0 313.5 268.3 250.2 261.7 310.2 346.9 11.5% Depreciation -42.1 -45.6 -51.2 -51.9 -53.4 -58.2 -71.0 11.0% EBIT 251.9 267.9 217.2 198.3 208.4 252.0 275.9 11.6% Financial result -19.1 -37.7 -53.8 -64.0 -53.3 -47.3 -43.5 -12.1% Associates 0.9 3.2 -0.2 12.4 3.4 0.0 0.0 -100.0% EBT 233.6 233.4 163.2 146.7 158.5 204.7 232.4 16.6% Taxes -45.7 -52.2 -35.7 -30.0 -34.9 -45.0 -51.1 19.5% Tax rate (%) 19.6% 22.4% 21.9% 20.4% 22.0% 22.0% 22.0% 2.5% Net income from discontinued op. 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Minorities 0.6 -0.1 5.1 -0.9 -1.0 0.0 1.1 Net profit 188.5 181.1 132.7 115.8 122.7 159.7 182.4 16.4% Net cash flow 230.6 226.7 183.9 167.7 176.1 217.8 253.4 14.8% Adjusted EBIT 285.3 267.9 248.8 226.2 223.4 252.0 275.9 6.8% Adjusted net profit 188.5 181.1 157.3 138.0 131.8 159.7 182.4 9.7%


Indra Rating change


FCF generation

We expect FCF generation to improve in upcoming years, thanks to a combination of:

Operating improvements.

A reduction in the working capital days due to a better situation of the Spanish

business and better sales mix (solutions enjoy a higher level of prepayments and

therefore working capital improves). In addition, in 2014, the company will

benefit from the government suppliers plan that can reduce DoS by 4 days,

although we have only assumed a reduction of two days for the whole year as we

believe the environment will remain tough.

Lower restructuring expenses (we assume they disappear from 2015 after a

EUR28m charge in 2013 and EUR15m in 2014).

Regarding the “other operating changes”, which include, among other issues, tax payment

regularisations, employee bonuses, social security payments and subsidies, we have

assumed a EUR30m outflow in 2014 (recall that in Q1 EUR47m of one-offs were included

in this line, mainly related to the externalisation of the pension fund and the payment of the

medium-term management remuneration plan) and EUR20m in subsequent years.

Nevertheless, we emphasise that this variable is impossible to predict.

Regarding capex, we have assumed that Indra continues to invest close to EUR40m per

year in intangible assets (out of which project capitalisations will be close to EUR20m and

the rest will be other intangible capex) and that tangible capex will be close to EUR20m.

Adjusting for one-offs (restructuring expenses, suppliers plan), we estimate that Indra’s

FCF generation will go up by 11% in 2014 and will accelerate in 2015.

Table 16: Indra estimated FCF

EURm 2013 2014E 2015E 2016E

Net profit after taxes 115.8 122.7 159.7 182.4 Depreciation & provisions 51.9 53.4 58.2 71.0 Change in trade working capital -34.7 3.9 2.5 3.3 CF from continuous operations 133.0 179.9 220.4 256.7 Capex -56.2 -60.0 -60.0 -65.0 Equity issued 0.0 0.0 0.0 0.0 Financial investments -14.1 0.0 0.0 0.0 Other (including disposals) -24.8 -80.0 -48.0 -20.0 CF from investing activities -95.1 -140.0 -108.0 -85.0 Operating free cash flow 38.8 40.9 112.4 170.6 Dividends -55.3 -55.8 -61.3 -79.8 Share buy-backs 0.0 0.0 0.0 0.0 Minorities & other 0.9 1.0 0.0 -1.1 CF from financing activities -54.4 -54.8 -61.3 -80.9 Change in net debt -16.5 -14.9 51.1 90.8 Free cash flow before FI* 52.0 89.9 140.4 171.7 % sales 1.8% 3.0% 4.5% 5.3% Adjusted FCF** 55.0 61.5 140.4 171.7

*Indra criteria, which includes “other operating variables” but doesn’t include financial investments **Excluding one offs Source: Kepler Cheuvreux,

On the dividend side, we have assumed that Indra maintains a 50% payout for coming

years, in line with the company’s guidance.

As a result, we expect leverage to come down in coming years and to reach comfortable

levels of 1.4x net debt/EBITDA by 2016E versus 2.5x in 2013.

Indra Rating change


Indra guidance for 2014: challenging FCF?

Indra expects FCF above EUR100m for 2014 (versus EUR52m in 2013), which is based on

positive organic growth in sales in LC (with a “small decline” in Spain), order intake in line

with sales, similar operating margins versus 2013 and a decrease in working capital days.

Considering the lower of restructuring costs in 2014 (from EUR28m to EUR15m) and the

government supplier plan (which started for Indra in February, implying a positive impact

of four days or EUR40m), this guidance could be achievable, in our view. However, we

expect Q2 to be a weak quarter for working capital and we think sales in Spain will be at the

very low end of company guidance.

So, generally speaking, our numbers are in line with this guidance, although at the lower

end. As for FCF, we estimate the final figure will be close to EUR90m (thus, slightly below

Indra’s guidance), although we insist that this will be highly dependent on the “other

operating changes” performance, which is difficult to predict. In addition, apart from the

fact that Indra has never failed to hit its guidance, we believe that the company has

flexibility in different items, including capex.

Table 17: Indra guidance versus Kepler estimates

Guidance Kepler estimates

Revenues Positive organic growth in LC 1.4% Spanish revenues small decline -5.5% LatAm revenues Double digit growth in LC 15.0% AMEA revenues Double digit growth (with a higher contribution from solutions) 14.5% European revenues Stable 1.1% Security and Defence Double digit growth 10.0% PPAA& Healthcare Mild growth 3.0% Transport and Traffic Share reduction in the rate of revenue decline -5.0% Order intake Similar to revenues Similar to revenues Adjusted EBIT margins Similar to 2013 levels (7.8%) 7.6% Free cash flow Above EUR100m EUR90m Net working capital (days of sales) Decrease versus 2013 106.8 days vs. 108.8 in 2013 Intangible capex EUR40m EUR40m Total capex below 2013 EUR60m vs. EUR65m in 2013


Indra Rating change


Valuation Our TP of EUR12 is the weighted average of three valuation metrics: a DCF, a

valuation derived by applying a 10x EBITA multiple to 2017E earnings and then

discounting the result back, and an SOP. In relative terms, Indra trades at a

premium to its IT peers and slightly above it defence peers.

Our target price for Indra is the blended average of three approaches, namely: a DCF, the

valuation derived from applying a 10x EBITA multiple to 2017E earnings and a SOP. We

assign a lower weighting to the SOP as it is a static valuation that doesn’t fully reflect the

potential recovery of the company’s FCF. In all cases, our numbers are fully diluted

(including the new shares from the EUR250m convertible).

Table 18: Summary of Indra valuation

Method EUR/share % weight

DCF model 12.2 40% 10x EBITA 2017E 12.6 40% SOP 10.3 20% Average valuation 12.0 100% Upside 2.5%


DCF: EUR12.2 per share

We have carried out a DCF using the following assumptions:

Long-term sales in Spain recover 30% of the lost amount from peak levels

EBIT margins reach 9.5% by 2018 (versus current 7.7% and versus peak levels of

11.8% in 2005)

2018 DoS is 93.8 days versus 108.8 in 2013 and 98 in 2007.

Long-term capex/sales of 2.1%, above the 2013 level (1.9%) and below the

historical average of 2.8% (2003-2013).

A EUR20m annual cash outflow from “other operating changes”

An 8.8% WACC and a residual growth of 1.5%, both assumptions in line with

those we use for other companies in the IT sector.

We adjust 2013 net debt by adding the pending payments for Politec (EUR78m).

In addition, our TP calculation includes the new shares from the conversion of

the EUR250m convertible bond (17.5m shares, 10.6% of total). Thus, we deduct

that amount from the debt.

Indra Rating change


Table 19: Indra operating cash flows

EURm 2013 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E

EBIT 226.2 223.4 252.0 275.9 310.3 336.0 346.1 353.0 360.1 363.7 YOY (%) -9% -1% 13% 9% 12% 8% 3% 2% 2% 1% tax on EBIT -46.3 -49.1 -55.4 -60.7 -68.3 -73.9 -86.5 -88.3 -90.0 -90.9 NOPAT 179.9 174.2 196.6 215.2 242.0 262.1 259.6 264.8 270.1 272.8 YOY (%) 3% -3% 13% 9% 12% 8% -1% 2% 2% 1% Depreciation & amortisation 51.9 53.4 58.2 71.0 76.7 79.3 75.4 71.6 73.0 74.5 Change in working capital -34.7 3.9 2.5 3.3 -10.2 -36.7 -37.8 -38.6 -39.3 -39.7 Others -30.0 -20.0 -20.0 -20.0 -20.0 -20.0 -20.0 -20.0 -20.0 Trading cash flow 197.2 201.5 237.3 269.5 288.5 284.7 277.1 277.8 283.8 287.5 Capex -56.2 -60.0 -60.0 -60.0 -65.0 -70.0 -75.0 -75.0 -75.0 -75.0 Cash flow to the firm 141.0 141.5 177.3 209.5 223.5 214.7 202.1 202.8 208.8 212.5


Table 20: Indra DCF valuation

DCF valuation EURm

PV of future cash flows 1,180 PV of Terminal value 1,490 Enterprise value 2,669 Net debt 2013 (plus pending payments for Politec) 451 Minorities 11 Equity value 2,208 Number of share (millions) 181.6 Fair Value per share (EUR/share) 12.2


Sensitivity analysis We have analysed the sensitivity of our DCF to three main variables: long-term EBITA

margins, long-term DoS and WACC.

Table 21: DCF sensitivity to long-term EBITA margins

2018 EBITA margins DCF (EUR/share)

6.5% 9.2 7.5% 10.1 8.5% 11.1 9.5% 12.2 10.5% 13.4 11.5% 14.6 12.5% 15.9


Indra Rating change


Table 22: DCF sensitivity to long-term DoS

2018 DoS DCF (EUR/share)

81.8 12.9 84.8 12.7 87.8 12.5 90.8 12.4 93.8 12.2 96.8 12.0 99.8 11.9 102.8 11.7 105.8 11.5


Table 23: DCF sensitivity to WACC

WACC DCF (EUR/share)

6.8% 17.0 7.3% 15.7 7.8% 14.4 8.3% 13.3 8.8% 12.2 9.3% 11.1 9.8% 10.2 10.3% 9.3


2017 EV/EBITA: EUR12.6 per share

As with other IT services companies, we calculate a valuation which is the result of applying

a 10x multiple to our 2017E EBITA. We then discount back the result at the same WACC

used for the DCF (8.8%) and we subtract 2017E net debt. The result is a TP of EUR12.6,

slightly below the one we derive from our DCF.

SOP: EUR10.3 per share

Indra is involved in two different types of business, Solutions and Services, with different

margins, different capital structures and different growth prospects. Thus, we also decided

to use a SOP to value these two divisions separately, applying higher multiples to the

solutions business, with higher margins and higher growth prospects, in our view. We took

IT and Defence peers as a reference.

As we know, the company only reports the sales and the contribution margins separately.

Thus, to calculate our theoretical EBITA margin by business line we have decided to

attribute the indirect costs using sales contribution as a reference.

The result is a valuation of EUR10.3/share, well below the one we obtain from the other

methods as it doesn’t take into account the potential recovery of Indra’s earnings.

Indra Rating change


Table 24:Indra SOP

EURm EBITA 2014 EV/EBITA 2014 EV by EBITA Value

Solutions 145 11.0 x 2,401 1,597 Services 78 9.5 x 1,049 743 Enterprise value 223 10.5 x 3,450 2,340 Net debt 451 Minorities 11 Equity value 1,878 Million shares outstanding 181.6 Equity value per share 10.3 €


Peers

It is tough to compare Indra with other listed companies, due to the peculiarities of its

business mix, which result in different growth prospects and capital structures (Indra has

net debt while the IT sector in general has a net cash position). In fact, compared with the

European large IT companies, Indra has historically traded at a premium of 20-30% on

EV/EBITA due to the Defence and Transport and Traffic component, in our view.

Overall, probably the most comparable is Cap Gemini, although it is much larger than Indra.

In Security and Defence and Transport and Traffic, the best comparable is Thales while in

the railway segment specifically Ansaldo could be a good reference.

Still, we have built three groups of comparables (IT, Defence, and Infrastructure) to have an

idea of how Indra trades in relative terms. We would highlight that the company’s current

multiples are penalised by the very weak results expected in Spain and that we have

assumed fully diluted figures (new shares coming from the convertible despite it not being

a mandatory one).

As we can see in the following table, compared with IT services, the company trades at a

20-30% premium, in line with its historical premium. Versus defence peers and

infrastructure peers, it trades at a small premium on EV/EBITA.

Table 25: Indra multiples versus peers

____________P/E___________ __________EV/EBITDA__________ __________EV/EBITA__________ 2014E 2015E 2016E 2014E 2015E 2016E 2014E 2015E 2016E

Indra 16.2x 13.4x 11.7x 9.6x 8.4x 7.2x 11.9x 10.3x 9.1x Defence peers 15.4 x 13.7 x 12.4 x 8.3 x 7.7 x 7.3 x 11.1 x 10.1 x 9.7 x IT services peers 14.8 x 12.8 x 11.6 x 7.1 x 6.4 x 5.7 x 8.9 x 8.1 x 7.2 x Infrastructure peers 17.1 x 14.8 x 14.2 x 8.9 x 8.0 x 7.6 x 10.8 x 9.4 x 8.8 x

Source: Kepler Cheuvreux, Includes European and US IT companies

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Table 26: IT servi ces multiples

Country Market cap) ______________P/E______________ ____________EV/EBITDA ____________ ____________EV/EBITA____________ ____________EV/sales____________ (EUR m 2014E 2015E 2016E 2014E 2015E 2016E 2014E 2015E 2016E 2014E 2015E 2016E

Large caps Europe Atos France 4,839 14.1 x 13.2 x 12.1 x 4.8 x 4.5 x 4.0 x 6.8 x 6.3 x 5.5 x 0.5 x 0.5 x 0.5 x Cap Gemini France 8,412 15.1 x 13.7 x 12.1 x 6.2 x 5.5 x 4.8 x 7.7 x 6.7 x 5.7 x 0.7 x 0.6 x 0.6 x Tieto OYJ Finland 1,425 13.7 x 12.3 x 11.4 x 7.8 x 6.2 x 5.6 x 9.9 x 9.2 x 8.3 x 0.9 x 0.9 x 0.8 x Average 14.3 x 13.0 x 11.8 x 6.3 x 5.4 x 4.8 x 8.1 x 7.4 x 6.5 x 0.7 x 0.7 x 0.6 x

Small caps Europe Bull France 597 18.8 x 13.6 x 12.2 x 7.0 x 6.0 x 5.2 x 10.0 x 8.2 x 6.8 x 0.4 x 0.4 x 0.4 x Devoteam France 138 19.3 x 13.7 x 11.4 x 4.9 x 4.1 x 3.6 x 5.6 x 5.2 x 4.5 x 0.3 x 0.3 x 0.2 x Engineering Italy 522 10.2 x 9.1 x 9.2 x 4.7 x 4.1 x 3.7 x 5.9 x 5.0 x 4.5 x 0.6 x 0.5 x 0.5 x GFI Informatique France 3,748 16.8 x 15.0 x 13.4 x 7.5 x 7.0 x 6.2 x 8.6 x 8.0 x 7.3 x 0.6 x 0.5 x 0.5 x Sopra France 905 10.9 x 9.8 x 8.6 x 6.5 x 6.5 x 5.5 x 7.5 x 7.4 x 6.2 x 0.6 x 0.7 x 0.6 x Steria France 604 13.1 x 9.0 x 7.3 x 5.6 x 5.0 x 4.2 x 7.3 x 6.4 x 5.2 x 0.5 x 0.4 x 0.4 x Average 14.8 x 11.7 x 10.3 x 6.0 x 5.4 x 4.7 x 7.5 x 6.7 x 5.7 x 0.5 x 0.5 x 0.4 x

US Accenture USA 40,125 17.8 x 16.3 x 15.0 x 10.4 x 9.7 x 9.3 x 11.8 x 11.0 x 10.3 x 1.7 x 1.6 x 1.5 x CGI Group Canada 8,236 13.6 x 12.0 x 11.4 x 8.3 x 7.9 x 7.7 x 11.3 x 10.3 x 10.0 x 1.4 x 1.3 x 1.3 x Cognizant USA 23,148 20.2 x 17.5 x 15.4 x 12.9 x 11.1 x 9.4 x 13.9 x 12.0 x 10.2 x 2.6 x 2.3 x 2.0 x CSC USA 7,020 14.4 x 12.9 x 11.7 x 4.5 x 4.5 x 4.4 x 8.7 x 8.0 x 6.8 x 0.8 x 0.7 x 0.7 x IBM USA 144,386 10.9 x 9.8 x 9.1 x 8.7 x 8.1 x 7.8 x 10.5 x 9.7 x 9.2 x 2.4 x 2.3 x 2.3 x Average 15.4 x 13.7 x 12.5 x 9.0 x 8.3 x 7.7 x 11.3 x 10.2 x 9.3 x 1.8 x 1.7 x 1.6 x

India Infosys India 23,956 16.1 x 14.4 x 12.9 x 11.3 x 10.1 x 9.0 x 12.2 x 11.0 x 9.8 x 3.1 x 2.8 x 2.4 x Tata Consultancy Services India 62,673 23.1 x 20.2 x 17.6 x 17.0 x 14.8 x 13.1 x 18.1 x 15.7 x 14.1 x 5.0 x 4.4 x 3.8 x Wipro India 17,013 15.6 x 13.9 x 12.5 x 11.2 x 10.1 x 9.0 x 12.5 x 11.1 x 9.8 x 2.6 x 2.3 x 2.1 x Average 18.3 x 16.2 x 14.3 x 13.2 x 11.7 x 10.4 x 14.3 x 12.6 x 11.2 x 3.6 x 3.2 x 2.8 x

TOTAL AVERAGE 15.7 x 13.6 x 12.3 x 8.6 x 7.7 x 6.9 x 10.3 x 9.2 x 8.2 x 1.6 x 1.5 x 1.4 x TOTAL AVERAGE (exIndia) 14.8 x 12.8 x 11.6 x 7.1 x 6.4 x 5.7 x 8.9 x 8.1 x 7.2 x 1.0 x 0.9 x 0.9 x

Source: Kepler Cheuvreux, Bloomberg

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Table 27: Defence peers

Country Market cap ______________P/E______________ ____________EV/EBITDA ____________ ____________EV/EBITA____________ ____________EV/sales____________ (EUR m) 2014E 2015E 2016E 2014E 2015E 2016E 2014E 2015E 2016E 2014E 2015E 2016E

Europe Airbus France 35,022 14.5 x 12.8 x 11.4 x 5.8 x 5.3 x 4.9 x 8.6 x 8.0 x 7.1 x 0.6 x 0.5 x 0.5 x BAE systems UK 17,094 11.1 x 10.6 x 10.1 x 6.8 x 6.7 x 6.6 x 8.4 x 8.2 x 8.2 x 0.8 x 0.8 x 0.8 x QinetiQ Group UK 1,710 14.7 x 13.9 x 13.2 x 9.0 x 8.7 x 8.8 x 11.2 x 10.6 x 10.9 x 1.4 x 1.4 x 1.4 x Rheinmetall AG Germany 1,861 14.4 x 9.1 x 7.9 x 5.8 x 4.7 x 4.3 x 11.0 x 7.6 x 6.7 x 0.5 x 0.5 x 0.5 x Cobham IUK 4,328 15.2 x 13.7 x 12.7 x 9.8 x 8.4 x 8.0 x 13.5 x 11.2 x 10.9 x 2.1 x 1.9 x 1.8 x Finmeccanica Italy 4,145 14.8 x 10.8 x 10.2 x 6.0 x 5.7 x 5.5 x 12.2 x 10.4 x 9.5 x 0.7 x 0.7 x 0.7 x Saab Sweden 2,333 17.3 x 14.1 x 12.5 x 8.0 x 7.1 x 6.8 x 12.5 x 10.3 x 9.3 x 0.9 x 0.8 x 0.8 x Thales France 9,033 12.4 x 11.6 x 10.7 x 6.2 x 5.9 x 5.9 x 8.5 x 7.9 x 7.5 x 0.7 x 0.7 x 0.7 x Meggit UK 5,340 14.2 x 13.2 x 12.2 x 9.9 x 9.2 x 8.5 x 12.4 x 11.7 x 11.0 x 2.9 x 2.8 x 2.6 x Ultra Electronics UK 1,613 14.3 x 13.6 x 12.8 x 9.3 x 8.8 x 8.3 x 11.0 x 10.5 x 12.0 x 1.7 x 1.6 x 1.6 x Average 14.3 x 12.3 x 11.4 x 7.7 x 7.1 x 6.8 x 10.9 x 9.6 x 9.3 x 1.2 x 1.2 x 1.1 x

US CAE Canada 2,582 17.5 x 15.6 x 14.3 x 8.8 x 8.1 x 7.7 x 13.6 x 12.2 x 11.8 x 2.1 x 2.0 x 1.9 x Raytheon USA 21,290 13.3 x 11.9 x 10.0 x 8.0 x 7.3 x 6.4 x 9.2 x 8.3 x 8.3 x 1.3 x 1.3 x 1.3 x HEICO Corporation USA 2,171 28.3 x 24.6 x 21.0 x 13.2 x 11.9 x 11.0 x 16.3 x 14.6 x 13.3 x 3.0 x 2.7 x 2.5 x Lockheed Martin USA 40,164 15.2 x 14.1 x 12.7 x 8.6 x 8.3 x 7.6 x 10.3 x 10.2 x 9.3 x 1.3 x 1.3 x 1.3 x Spirit AeroSystems USA 3,454 11.4 x 11.0 x 10.5 x 6.4 x 6.1 x 5.9 x 8.4 x 7.9 x 7.9 x 0.8 x 0.8 x 0.8 x Northrop Grumman USA 19,740 13.6 x 12.7 x 11.4 x 7.9 x 7.9 x 7.7 x 9.6 x 9.7 x 9.7 x 1.2 x 1.3 x 1.3 x Boeing USA 66,071 15.6 x 14.9 x 13.9 x 9.3 x 8.3 x 8.0 x 11.5 x 10.4 x 10.1 x 1.0 x 0.9 x 0.9 x Average 16.4 x 15.0 x 13.4 x 8.9 x 8.3 x 7.8 x 11.3 x 10.5 x 10.0 x 1.5 x 1.5 x 1.4 x

TOTAL AVERAGE 15.4 x 13.7 x 12.4 x 8.3 x 7.7 x 7.3 x 11.1 x 10.1 x 9.7 x 1.4 x 1.3 x 1.3 x

Source: Kepler Cheuvreux; Bloomberg

Table 28: Infrastructure peers

Country Market cap ______________P/E______________ ____________EV/EBITDA ____________ ____________EV/EBITA____________ ____________EV/sales____________ (EUR m) 2014E 2015E 2016E 2014E 2015E 2016E 2014E 2015E 2016E 2014E 2015E 2016E

Ansaldo Italy 1,478 18.2 x 17.2 x 16.0 x 9.3 x 8.7 x 8.2 x 10.4 x 9.7 x 9.0 x 1.0 x 0.9 x 0.9 x Cubic USA 870 15.8 x 13.2 x 13.1 x 9.1 x 8.0 x 7.3 x 11.9 x 10.1 x 9.2 x 0.8 x 0.8 x 0.8 x Kapsch Austria 390 16.3 x 9.0 x 9.9 x 7.1 x 5.4 x 5.8 x 9.8 x 6.5 x 7.1 x 0.9 x 1.0 x 1.1 x Average 17.1 x 14.8 x 14.2 x 8.9 x 8.0 x 7.6 x 10.8 x 9.4 x 8.8 x 0.9 x 0.9 x 0.9 x

Source: Kepler Cheuvreux, Bloomberg

Indra Rating change


Appendix: additional insights

Q2 preview

As we have said before, we expect weak Q2 2014 earnings, with a sales decrease in Spain,

lower margins and a significant working capital deterioration. In fact, we cannot rule out

some disappointment, especially regarding FCF generation as, in our numbers, the

company will have to generate EUR100min FCF in H2 (we estimate FCF contribution in H1

will be close to zero).

Spain to remain weak, working capital deterioration We expect sales to go slightly down in Q2, as Spain should remain weak (we estimate -8%,

slightly better than the -10% posted in Q1, thanks to the European Elections contract),

while growth in LatAm should be weaker than in Q1, as anticipated by the company. On the

positive side, as in Q1, we expect AMEA to benefit still from easier comps versus 2013 and

from the elections contract in Iraq. As a result, we expect sales to go down by 1.4% (vs.

+0.1% in Q1). Another key issue will be working capital, as after a better Q1 thanks to the

suppliers plan in Spain (DoS reached 103 versus 108.8 in 2013), we expect DoS to

deteriorate again and to return to 2013 levels or above. Although this trend was also

anticipated by Indra and Q2 is always weak for WC, we do not rule out negative surprises

on this front.

Recurrent EBIT margins in line with the FY guidance We have assumed that Q2 recurrent EBIT margins are still close to 7.7%, which are in line

with the full-year guidance and Q1 levels as well as slightly below Q2 2013. It will be hard

to see any recovery in margins as long as Spain remains so weak. As a result, recurrent EBIT

should be down by around 5%.

Growth in net profit thanks to lower restructuring costs Finally, we expect net profit to grow by c. 40% on lower restructuring costs (EUR5m in Q2

2014E versus EUR13m in Q2 2013) and a lower tax rate (21% vs. 25% in Q2 2013). All in

all, there are no signs of underlying recovery yet.

Table 29: Indra Q2 2014 preview

EURm Q2 2014E Q2 2013 Increase Consensus

Sales 751.8 762.6 -1.4% 755.5 Recurrent EBIT 57.8 60.6 -4.7% 58.3 % margin 7.7% 7.9% -3.3% 7.7% EBIT 53.1 47.3 12.2% 53.7 % margin 7.1% 6.2% 13.8% 7.1% Net profit reported 29.2 20.9 39.7% 29.5

FCF -20.9 -7.6 nm NA


Indra Rating change


Indra business lines, competitive advantages

Indra offers solutions (consulting, technological solutions) and services (outsourcing, BPO)

to clients in 138 countries.

The company has six verticals: Transport and Traffic, Security and Defence, Telecom and

media, Energy and Industry, Public Administrations and Healthcare and Financial services.

Transport and Traffic and Security and Defence are those with the highest component of

solutions (with higher margins and better payment conditions) as well as being the greatest

contributors to group sales. In addition, we believe they offer the highest growth potential.

In general we would say that Indra’s competitive advantages are basically related to its

expertise in Transport and Traffic, Defence and balloting systems.

Chart 13: Indra sales by region (2013)

Chart 14: Indra sales by vertical (2013)

Source: Kepler Cheuvreux Source: Kepler Cheuvreux

Spain 38.6%

Europe 19.8%

Latam 28.5%

AMEA 13.1%

Transport & Traffic 21.0%

Telecom & Media 12.2%

Energy & Industry

16.5%

Public Admin. &

Healthcare 17.3%

Financial Services

16.1%

Security & Defense

17.0%

Indra Rating change


Table 30: Quick glance at Indra

Vertical Description % solutions % Spain Key competitors Competitive position

Key future drivers

Transport & Traffic

Air traffic, railways, mass rapid transit buses, Intelligent traffic

systems and smart mobility, services

90% 15% Thales, Selex, Siemens,

Alstoms, Ansaldo

Top 3 in railway control systems

(Da Vinci) and ATM

Infrastructure plans, air traffic

growth

Telecom & Media

Networks & communications, social media, digital platforms, IT services

45% 50% SAP, Accenture, IBM, Atos

Outsourcing trends

Financial Services

Core banking, core insurance, e-payments, IT services

45% 55% Oracle, SAP, Everys, Telvent, Temenos, Sopra

Outsourcing trends, Indra

solutions Public Admin. & Healthcare

Taxes and Justice, voting, Healthcare, IT services

60% 40% Siemens, Phillips, Everys, IECISA,

SAP, Accenture, Atos, IBM

World leader in voting systems

Personalised medicine, Elections,

Energy & Industry

Customer management, network management, plant management

and energy markets, IT services

60% 50% SAP, Accenture, IBM. Atos

Outsourcing trends, Indra solutions for

commercial management,

Security & Defence

Air defence, border control, simulation

90% 15% Thales, Selex, Lockheed

Martin, Ultra Electronics, BAE

systems, Finmeccanica

Top 5 in Simulators, top 3

in secondary radars,

electronic, nuclear

submarine transmissions.

Increase in Defence budgets,


Transport and Traffic (21% of sales) This line basically includes solutions for air, railway and road transport. Some of the key

applications offered by Indra include air traffic management (Indra is the world leader for

flight data processing systems and is top three in simulators), railway control systems

(DaVinci is one of the most advanced systems in the world), intelligent traffic systems,

ticketing, tolling, among others.

Clients in this segment include national railway companies, air traffic agencies, road traffic

agencies, urban transport operators and others. This vertical has a heavy component of

solutions (90%). Spain accounts for around 15% of sales, and the company is also very

strong in AMEA, especially Asia.

Security and Defence (17% of sales) The Security and Defence division offers a wide range of solutions and services, including

security, command and control systems, simulators (military and civil), border control, air

and electronic defence, support applications, space (satellite control, communications,

teledetection, navigation).

Indra has a leading position worldwide in different areas including simulators, nuclear

submarines transmissions and radars. In addition, the company participates in the

Eurofighter, with 20% of the defence system being Indra’s after several improvements in

this percentage, as the project goes ahead (there is pipeline for five years). Also, Indra is

participating in the new Airbus 400M and in the unmanned Pelicano Helicopter.

Indra Rating change


As in the case of transport and traffic, this vertical has a very strong component of solutions

and therefore associated margins are higher. We expect the main growth drivers to come

from the improvement in the Spanish Defence budget after several years of weakeness.

Telecom and media (12% sales) In this business line, Indra provides different tools for the sectors (digital TV, operational

and business support systems, satellite communications, new media solutions) as well as

outsourcing and business consulting. Basically the company covers the entire IT services

value chain.

Télefónica is the main client, accounting for 70-80% of the sales of the vertical, although

the company also works with Orange and Vodafone. In most of the cases, Indra works not

only in Spain but also abroad with the international operators (Telefónica is the best

example).

In this vertical, services accounts for close to 50% of the revenues.

Energy and Industry (16.5% sales) Following the acquisition of Soluziona and Azertia in 2006, Indra offers business

consultancy, turn-key solutions (for example, for billing, distribution, measurement

systems, plants management, network management…), outsourcing and business

technologies for utilities. The main clients in this business lines are Repsol and Gas Natural

Fenosa.

In addition, in the industry side, Indra also offers technological solutions for a wide range of

sectors, including hotels, airlines, airports, retail companies, real estate. Again, Indra covers

the complete life cycle of the company’s IT, from consultancy, solutions to outsourcing.

Public Administrations and Healthcare (17.3% sales) This vertical offers management and administration systems for the administration in

different areas: electronic administration, taxation, justice and land property management

solutions. In addition, Indra is the world leader in balloting systems, which has turned to be

a recurrent revenue source. Indra works with the governments of Spain, Argentina,

Venezuela, Chile, and Algeria, etc.

In the Healthcare side, Indra offers solutions related to telemedicine, management,

sanitary systems platforms, and works with different hospitals.

Financial services (16.1% sales) Financial services is, together with Telecom and Media, the vertical with the lowest weight

in solutions. Indra offers core banking and insurance systems, consulting, integration

systems, risk management applications.

Indra has the main Spanish banking and Insurance institutions as clients and has been able

to expand abroad in their different subsidiaries. In addition, the company has been able to

gather some international clients in key areas such as Brazil, Colombia, Mexico and others.

Indra Rating change


A closer look at Indra Solutions

65% of Indra’s sales come from the so-called solutions, which, as we have said before, carry

higher margins than IT services. 50% of the solutions are in the Transport and Traffic and

Security and Defence verticals and 50% are in the IT verticals.

In addition, 80% of solutions revenues comes from owned solutions (developed by Indra)

and 20% from the implementation of third-party i.e. SAP, solutions. SAP has 23 global

partners and Indra is one of them. In 2011, the Indra was chosen to implement the 3.0

version as a result of its expertise in real-time information. However, this part of the

business has lower margins than the solutions developed internally by the company.

Some of the main solutions developed by Indra are the following:

Table 31: A look at Indra’s main solutions by sector

Sector Main solutions

Transport and Traffic Air traffic management: surveillance systems, automation, simulation and communication, navigation aids, aeronautical information management systems, airports). Maritime traffic: maritime, inland waterway and port traffic control, maritime communications, management of port operations, port solutions. Road traffic: intercity traffic, urban traffic, toll systems, road control centres, rail and road transport: ticketing, operations assistance and passenger information, high-speed control systems, security, facilities and communications control).

Energy Electricity and gas: simulators and performance monitoring, market operations, contracting management, measurement management, control centres, plant operation and control, planning and network models, customer management, plant management. Water: plant management and control, water balance, incident management, control systems, remote detection. Oil and upstream: plant information, plant automation and control, installation of ETRM systems, status monitoring.

Consumer Goods & services Travel and transportation: consultancy, frequent flyer programmes, revenue accounting, electronic commerce, customer relationship, business intelligence. Consumer goods: fleet locator, electronic payment methods, WFM solutions. Hotels and tourism: implementation of integral solutions, e-commerce, tourism management suite.

Public Administration Electoral processes, electronic administration, cadastre, taxes, justice system solutions. Healthcare Regional healthcare system, hospital management, digital medical imaging, clinical stations, electronic

drug prescription, integral care centre, telemedicine and monitoring. Finance Core banking, private banking, cards, trade finance, risk management and recoveries. Insurance Administrative and management systems for insurance companies, integral insurance platform,

solutions for life insurance, for health insurance, for general insurance. Security and Defence Security (identify threats and minimise impacts), command and control (land, sea, air), vetronic and

electro-optic systems, electronic defence (intelligence, surveillance, alert defence and countermeasure systems), radars (identification friend or foe systems, naval radars, air defence radars, etc.), unmanned platforms (Pelicano helicopter), space (satellite control, communications, teledetection, navigation), simulation (training military and civil aircraft pilots).

Telecom and media Media: production management, grid management, multimedia advertising management, broadcasting operation, digital editing. Telecom: business support systems, operations support systems, enterprise management systems.


In addition, Indra is investing in new solutions for the financial, insurance, energy and

healthcare sectors, which in most cases are upgrades of existing ones.

Table 32: New solutions

New solution Description

Banking core development Core banking Healthcare market software development Salud 2.0; includes 3 modules, for platform systems, hospital management, mobility services Energy market sales management systems InCMS, commercial management Insurance market platform development Core insurance


Indra Rating change


Debt structure

At the end of 2013, Indra had gross debt of EUR986m and a net cash position of EUR350m,

which covers debt repayments due in 2014 and 2015. In addition, the company has

available credit lines (signed and committed) worth EUR1.3bn.

On 17 October 2013, the company issued a 5-year EUR250m non-mandatory convertible

bond at a nominal annual interest rate of 1.75% aiming to reduce its cost of debt. The

conversion price is EUR14.29/share, implying a 10.7% increase in the number of shares.

Our numbers for Indra are fully diluted (we assume full conversion).

We estimate the current average cost of debt at close to 5%.

Since 2005, when it had a net cash position, Indra has increased its leverage as a result of

acquisitions (Azertia and Soluziona in 2006, Politec in 2011) and poor P&L and cash flow

performance due to the tough situation in Spain (despite that, Indra maintained a payout

close to 50%). However, we expect net debt of all back again in coming years, thanks to the

expected improvement in FCF on EBITA growth and better working capital performance.

Table 33: Net debt/equity

EURm 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E

Net debt (cash) -54.1 58.9 188.9 187.3 135.0 274.8 512.5 633.3 622.5 615.3 548.1 434.0 EBITDA 159.9 184.3 257.7 308.3 327.4 294.0 313.5 268.3 250.2 261.7 311.9 351.7 Equity 302.7 372.1 738.7 823.6 977.1 1,014.0 1,067.2 1,109.6 1,134.7 1,204.3 1,305.6 1,412.2

Net debt/EBITDA -0.34 0.32 0.73 0.61 0.41 0.93 1.63 2.36 2.49 2.35 1.76 1.23 Net debt/equity -18% 16% 26% 23% 14% 27% 48% 57% 55% 51% 42% 31%


Backlog and order intake

Chart 15: Backlog and order intake historical and expected performance


0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E

Revenues Order intake Backlog

Indra Rating change


Valuation

FY to 31/12 (EUR) 2009 2010 2011 2012 2013 2014E 2015E 2016E

Per share data EPS adjusted 1.19 1.15 1.22 0.96 0.84 0.80 0.97 1.11 % Change 7.2% -3.6% 6.3% -21.5% -12.3% -4.5% 21.2% 14.2% EPS adjusted and fully diluted 1.19 1.15 1.22 0.96 0.82 0.73 0.88 1.00 % Change 7.2% -3.6% 6.3% -21.5% -14.1% -11.9% 21.2% 14.2% EPS reported 1.19 1.15 1.22 0.81 0.71 0.75 0.97 1.11 % Change 7.2% -3.6% 6.3% -33.9% -12.6% 6.0% 30.1% 14.2% EPS Consensus 0.76 0.91 1.05 Cash flow per share 1.23 0.72 0.75 0.61 0.66 0.91 1.22 1.44 Book value per share 5.68 6.04 6.37 6.63 6.85 7.26 7.86 8.48

DPS 0.66 0.70 0.68 0.34 0.34 0.37 0.49 0.56 Number of shares, YE (m) 164.1 164.1 164.1 164.1 164.1 164.1 164.1 164.1 Number of shares, fully diluted, YE (m) 164.1 164.1 164.1 164.1 181.6 181.6 181.6 181.6 Share price Latest price / year end 16.5 12.8 9.8 10.0 12.2 11.7 11.7 11.7 52 week high (Year high) 17.7 16.9 15.8 11.0 12.6 14.8 52 week low (Year low) 13.8 12.3 9.7 6.1 8.9 11.7 Average price (Year) 15.8 14.2 12.8 8.6 10.6 11.7 Enterprise value (EURm)

Market capitalisation 2,586.1 2,326.9 2,104.3 1,404.5 1,737.1 1,926.1 1,926.1 1,926.1 Net financial debt 135.0 274.8 512.5 633.3 622.5 637.4 586.3 495.5 Pension provisions 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Market value of minorities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Market value of equity affiliates (net of tax)

41.4 50.5 66.4 68.5 79.5 79.5 79.5 79.5

Others 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Enterprise value 2,762.5 2,652.2 2,683.3 2,106.3 2,439.1 2,643.0 2,591.9 2,501.1 Valuation P/E adjusted 13.2 12.3 10.5 8.9 12.6 14.6 12.1 10.6 P/E adjusted and fully diluted 13.2 12.3 10.5 8.9 12.9 16.2 13.3 11.7 P/E consensus 15.4 12.9 11.2

P/BV 2.8 2.3 2.0 1.3 1.5 1.6 1.5 1.4 P/CF 12.8 19.8 17.1 13.9 16.1 12.9 9.6 8.1 Dividend yield (%) 4.2% 4.9% 5.3% 4.0% 3.2% 3.2% 4.1% 4.7% FCF yield (%) 4.8% 1.2% -0.2% 1.9% 3.0% 4.7% 7.3% 8.9% ROE (%) 21.7% 18.9% 19.3% 14.5% 12.3% 11.3% 12.8% 13.5% ROIC (%) 21.0% 19.0% 14.7% 11.7% 10.6% 10.6% 12.0% 13.1% EV/Sales 1.10 1.04 1.00 0.72 0.84 0.89 0.84 0.77 EV/EBITDA 8.4 8.1 8.6 7.0 8.8 9.6 8.4 7.2 EV/EBIT 9.6 9.3 10.0 8.5 10.8 11.8 10.3 9.1

Indra Rating change


Income statement

FY to 31/12 (EURm) 2009 2010 2011 2012 2013 2014E 2015E 2016E

Sales 2,513.2 2,557.0 2,688.5 2,941.0 2,914.1 2,955.5 3,091.5 3,238.8 % Change 5.6% 1.7% 5.1% 9.4% -0.9% 1.4% 4.6% 4.8% EBITDA reported 327.4 294.0 313.5 268.3 250.2 261.7 310.2 346.9 % Change 6.2% -10.2% 6.6% -14.4% -6.7% 4.6% 18.5% 11.8% Depreciation and amortisation -42.0 -42.1 -45.6 -51.2 -51.9 -53.4 -58.2 -71.0 Goodwill impairment 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other financial result and associates 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 EBIT reported 285.4 251.9 267.9 217.1 198.3 208.4 252.0 275.9

% Change 5.5% -11.7% 6.3% -19.0% -8.7% 5.1% 20.9% 9.5% Net financial items -24.5 -19.1 -19.1 -53.8 -64.0 -53.3 -47.3 -43.5 Associates -0.1 0.9 3.2 -0.2 12.4 3.4 0.0 0.0 Others 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Earnings before tax 260.7 233.6 252.0 163.1 146.7 158.5 204.7 232.4 % Change 3.8% -10.4% 7.8% -35.3% -10.1% 8.1% 29.1% 13.5% Tax -62.7 -45.7 -52.2 -35.7 -30.0 -34.9 -45.0 -51.1 Net profit from continuing operations 198.0 187.9 199.8 127.4 116.7 123.7 159.7 181.3

% Change 6.3% -5.1% 6.3% -36.2% -8.4% 6.0% 29.1% 13.5% Net profit from discontinuing activities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Net profit before minorities 198.0 187.9 199.8 127.4 116.7 123.7 159.7 181.3 Minorities -2.4 0.6 0.6 5.1 -0.9 -1.0 0.0 1.1 Net profit reported 195.6 188.5 200.4 132.5 115.8 122.7 159.7 182.4 % Change 7.2% -3.6% 6.3% -33.9% -12.6% 6.0% 30.1% 14.2% Adjustments 0.0 0.0 0.0 24.8 22.2 9.0 0.0 0.0 Net profit adjusted 195.6 188.5 200.4 157.3 138.0 131.8 159.7 182.4 % Change 7.2% -3.6% 6.3% -21.5% -12.3% -4.5% 21.2% 14.2%

Gross profit 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 EBITDA adjusted 329.6 327.4 313.5 299.9 278.1 276.7 310.2 346.9 EBIT adjusted 287.5 285.3 267.9 248.8 226.2 223.4 252.0 275.9 EBITDA margin (%) 13.1% 12.8% 11.7% 10.2% 9.5% 9.4% 10.0% 10.7% EBIT margin (%) 11.4% 11.2% 10.0% 8.5% 7.8% 7.6% 8.2% 8.5% Net profit margin (%) 7.8% 7.4% 7.5% 5.3% 4.7% 4.5% 5.2% 5.6% Tax rate (%) 24.1% 19.6% 22.4% 21.9% 20.4% 22.0% 22.0% 22.0% Payout ratio (%) 54.2% 55.0% 61.0% 55.4% 41.7% 48.2% 50.0% 50.0%

EPS reported (EUR) 1.19 1.15 1.22 0.81 0.71 0.75 0.97 1.11 % change 7.2% -3.6% 6.3% -33.9% -12.6% 6.0% 30.1% 14.2% EPS adjusted (EUR) 1.19 1.15 1.22 0.96 0.84 0.80 0.97 1.11 % change 7.2% -3.6% 6.3% -21.5% -12.3% -4.5% 21.2% 14.2% EPS adj and fully diluted(EUR) 1.19 1.15 1.22 0.96 0.82 0.73 0.88 1.00 % change 7.2% -3.6% 6.3% -21.5% -14.1% -11.9% 21.2% 14.2% DPS (EUR) 0.66 0.70 0.68 0.34 0.34 0.37 0.49 0.56 % change 8.7% 6.9% -3.6% -49.7% 0.0% 9.9% 30.1% 14.2% Consensus Sales (EURm) 2,957.9 3,093.5 3,233.0 Consensus EBITDA (EURm) 282.0 308.9 337.9

Consensus EBIT (EURm) 228.4 252.4 277.7 Consensus EPS (EUR) 0.76 0.91 1.05 Consensus DPS (EUR) 0.34 0.39 0.50

Indra Rating change


Cash flow statement

FY to 31/12 (EURm) 2009 2010 2011 2012 2013 2014E 2015E 2016E

Net profit before minorities 198.0 187.9 199.8 127.4 116.7 123.7 159.7 181.3 Depreciation and amortisation 42.0 42.1 45.6 51.2 51.9 53.4 58.2 71.0 Goodwill impairment 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Change in working capital -49.7 -105.9 -69.2 -77.9 -34.7 3.9 2.5 3.3 Others 12.3 -6.5 -53.2 0.0 -25.9 -31.0 -20.0 -18.9 Cash Flow from operating activities 202.7 117.7 122.9 100.7 108.0 149.9 200.4 236.7 % Change 21.4% -41.9% 4.4% -18.1% 7.3% 38.8% 33.7% 18.1% Capex -79.8 -89.0 -126.1 -74.4 -56.2 -60.0 -60.0 -65.0

Free cash flow 122.9 28.7 -3.2 26.3 51.8 89.9 140.4 171.7 % Change 16.6% -76.6% na na 97.0% 73.5% 56.2% 22.3% Acquisitions -20.2 -49.3 -45.4 -52.9 -14.1 0.0 0.0 0.0 Divestments 0.0 0.0 0.0 7.1 0.0 -50.0 -28.0 0.0 Dividend paid -99.0 -107.6 -115.0 -111.1 -55.3 -55.8 -61.3 -79.8 Share buy back 11.3 -12.4 -56.5 6.5 0.0 0.0 0.0 0.0 Capital increases 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Others 37.3 0.8 -17.7 3.3 28.4 1.0 0.0 -1.1 Change in net financial debt 52.3 -139.8 -237.8 -120.8 10.8 -14.9 51.1 90.8 Change in cash and cash equivalents 43.3 62.5 -45.9 -13.3 293.3 0.0 0.0 0.0

Attributable FCF 122.9 28.7 -3.2 26.3 51.8 89.9 140.4 171.7 Cash flow per share (EUR) 1.23 0.72 0.75 0.61 0.66 0.91 1.22 1.44 % Change 21.4% -41.9% 4.4% -18.1% 7.3% 38.8% 33.7% 18.1% FCF per share (EUR) 0.75 0.17 -0.02 0.16 0.32 0.55 0.86 1.05 % Change 16.6% -76.6% na na 97.0% 73.5% 56.2% 22.3% Capex / Sales (%) 3.2% 3.5% 4.7% 2.5% 1.9% 2.0% 1.9% 2.0% Capex / D&A (%) 189.8% 211.5% 276.5% 145.3% 108.3% 112.4% 103.2% 91.5% Cash flow / Sales (%) 8.1% 4.6% 4.6% 3.4% 3.7% 5.1% 6.5% 7.3%

FCF / Sales (%) 4.9% 1.1% -0.1% 0.9% 1.8% 3.0% 4.5% 5.3% FCF Yield (%) 4.8% 1.2% -0.2% 1.9% 3.0% 4.7% 7.3% 8.9% Unlevered FCF Yield (%) 5.2% 1.7% 0.5% 3.7% 4.4% 5.1% 7.0% 8.4%

Indra Rating change


Balance sheet

FY to 31/12 (EURm) 2009 2010 2011 2012 2013 2014E 2015E 2016E

Cash and cash equivalents 66.5 129.0 83.1 69.8 363.1 363.1 363.1 363.1 Inventories 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Accounts receivable 1,591.8 1,832.1 2,017.6 2,176.3 2,059.8 2,072.9 2,126.0 2,182.9 Other current assets 44.3 89.6 179.9 185.2 151.6 181.6 201.6 221.6 Current assets 1,702.7 2,050.7 2,280.6 2,431.3 2,574.5 2,617.5 2,690.6 2,767.5 Tangible assets 140.4 148.2 171.9 166.4 144.1 129.4 111.6 85.4 Goodwill 440.2 456.3 624.6 645.3 605.9 605.9 605.9 605.9 Other Intangible assets 133.6 219.9 243.3 280.3 285.9 307.2 326.9 347.0 Financial assets 41.4 50.5 66.4 68.5 79.5 79.5 79.5 79.5

Other non-current assets 31.3 50.3 138.0 164.1 175.0 175.0 175.0 175.0 Non-current assets 786.9 925.2 1,244.3 1,324.7 1,290.4 1,297.0 1,298.9 1,292.9 Short term debt 99.6 155.6 281.2 305.0 195.7 700.3 664.6 601.0 Accounts payable 1,036.8 1,176.8 1,261.7 1,342.5 1,191.4 1,208.3 1,263.9 1,324.1 Other short term liabilities 179.8 251.7 287.1 298.4 305.8 305.8 305.8 305.8 Current liabilities 1,316.2 1,584.1 1,830.1 1,945.9 1,692.9 2,214.5 2,234.3 2,230.9 Long term debt 101.9 248.2 314.4 398.1 789.9 300.1 284.8 257.6 Pension provisions 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other long term provisions 21.7 19.8 109.3 75.0 99.3 49.3 21.3 21.3 Other long term liabilities 72.6 109.8 203.9 227.3 148.1 148.1 148.1 148.1 Non-current liabilities 196.2 377.8 627.6 700.4 1,037.3 497.5 454.2 427.0

Shareholders' equity 931.8 991.0 1,045.8 1,088.9 1,124.0 1,190.9 1,289.3 1,391.9 Minority interests 45.3 23.0 21.4 20.7 10.7 11.7 11.7 10.5 Total equity 977.1 1,014.0 1,067.2 1,109.6 1,134.7 1,202.6 1,300.9 1,402.4 Balance sheet total 2,489.5 2,975.9 3,524.9 3,755.9 3,864.9 3,914.6 3,989.5 4,060.4 % Change 1.1% 19.5% 18.4% 6.6% 2.9% 1.3% 1.9% 1.8% Book value per share (EUR) 5.68 6.04 6.37 6.63 6.85 7.26 7.86 8.48 % Change 19.2% 6.4% 5.5% 4.1% 3.2% 6.0% 8.3% 8.0% Net debt 135.0 274.8 512.5 633.3 622.5 637.4 586.3 495.5

Net financial debt 135.0 274.8 512.5 633.3 622.5 637.4 586.3 495.5 Trade working capital 555.0 655.3 755.9 833.8 868.4 864.6 862.0 858.7 Working capital 419.6 493.2 648.7 720.6 714.2 740.3 757.8 774.5 Inventories/sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Invested capital 1,000.1 1,097.7 1,445.2 1,532.3 1,464.2 1,475.6 1,475.3 1,465.8 Net debt / EBITDA (x) 0.4 0.8 1.6 2.1 2.2 2.3 1.9 1.4 Net debt / FCF (x) 1.1 9.6 na 24.1 12.0 7.1 4.2 2.9 Gearing (%) 13.8% 27.1% 48.0% 57.1% 54.9% 53.0% 45.1% 35.3% Goodwill / Equity (%) 45.0% 45.0% 58.5% 58.2% 53.4% 50.4% 46.6% 43.2%

Indra Rating change


Divisions and regions

FY to 31/12 (EUR) 2009 2010 2011 2012 2013 2014E 2015E 2016E

Key assumptions

Sales by division Transport and Traffic 497.6 554.8 597.2 667.1 611.1 580.5 615.4 658.5 Telecoms & Media 270.2 321.3 396.8 369.0 355.3 334.0 320.6 314.2 Public Admin / Healthcare (Including election revs

347.5 356.6 390.5 516.9 503.3 518.4 539.1 560.7

Finance and Insurance 334.4 367.7 386.4 464.4 470.1 474.8 489.0 503.7 Energy and Industry 381.6 362.7 407.8 460.4 479.5 503.5 528.6 555.1 Geographic breakdown of sales, adjusted (%) Eurozone & USA 80.1% 75.7% 71.1% 59.4% 58.4% 55.7% 54.5% 53.7% of which Spain 78.2% 78.6% 77.4% 72.0% 66.1% 64.5% 64.3% 64.4%

Latam 10.5% 14.5% 18.0% 25.3% 28.5% 29.5% 30.0% 30.3% AMEA 6.2% 6.5% 7.3% 14.1% 13.1% 14.8% 15.5% 16.0% Currency exposure of sales (%) Hedging policy The company covers all non-USD contracts

Indra Rating change


Research ratings and important disclosures Disclosure checklist - Potential conflict of interests Stock ISIN Disclosure (See Below) Currency Price

Accenture BMG1150G1116 nothing to disclose USD 33.00

Airbus Group NL0000235190 15, 17, 19 EUR 44.50

Alstom FR0010220475 nothing to disclose EUR 27.24

Ansaldo STS IT0003977540 nothing to disclose EUR 7.36

Atos FR0000051732 nothing to disclose EUR 58.66

BAE Systems GB0002634946 nothing to disclose GBP 427.40

Boeing US0970231058 nothing to disclose USD 123.20

Bull FR0010266601 nothing to disclose EUR 4.89 CAE CA1247651088 nothing to disclose CAD 14.21

Cap Gemini FR0000125338 nothing to disclose EUR 52.00

CGI GROUP 'A' CA39945C1095 nothing to disclose CAD 38.46 Cobham GB00B07KD360 nothing to disclose GBP 300.20 COGNIZANT TECH.SLTN.'A' US1924461023 nothing to disclose USD 51.12 COMPUTER SCIS. US2053631048 nothing to disclose USD 64.79 CUBIC US2296691064 nothing to disclose USD 43.66

Devoteam FR0000073793 nothing to disclose EUR 16.23

Engineering IT0003029441 nothing to disclose EUR 41.75

Finmeccanica IT0003856405 14, 16, 18 EUR 7.21

Gas Natural ES0116870314 nothing to disclose EUR 23.12

GFI Informatique FR0004038099 nothing to disclose EUR 6.90 HEICO US4228061093 nothing to disclose USD 49.16

IBM US4592001014 nothing to disclose USD 194.40

Indra ES0118594417 nothing to disclose EUR 11.74 INFOSYS INE009A01021 nothing to disclose INR 3,352.20 KAPSCH TRAFFICCOM AT000KAPSCH9 nothing to disclose EUR 30.12

Lockheed Martin US5398301094 nothing to disclose USD 170.04

Meggitt plc GB0005758098 nothing to disclose GBP 526.00

Northrop Grumman US6668071029 nothing to disclose USD 127.56

Orange FR0000133308 nothing to disclose EUR 11.64

Philips NL0000009538 nothing to disclose EUR 23.60 QINETIQ GROUP GB00B0WMWD03 nothing to disclose GBP 208.90

Raytheon US7551115071 nothing to disclose USD 92.07

Repsol ES0173516115 nothing to disclose EUR 18.96

Rheinmetall DE0007030009 nothing to disclose EUR 47.45

Saab SE0000112385 nothing to disclose SEK 196.40

Siemens DE0007236101 nothing to disclose EUR 93.03

Sopra FR0000050809 9 EUR 77.01 SPIRIT AEROSYSTEMS CL.A US8485741099 nothing to disclose USD 33.45

Steria FR0000072910 nothing to disclose EUR 19.00 TATA CONSULTANCY SVS. INE467B01029 nothing to disclose INR 2,605.75

Telefonica ES0178430E18 14, 16, 18 EUR 12.25

Thales FR0000121329 nothing to disclose EUR 43.15 TIETO OYJ FI0009000277 nothing to disclose EUR 19.93

Ultra Electronics plc GB0009123323 nothing to disclose GBP 1,825.00

Vodafone GB00BH4HKS39 nothing to disclose GBP 202.05 WIPRO INE075A01022 nothing to disclose INR 551.05

Source: Factset closing prices of 25/07/2014 Stock prices: Prices are taken as of the previous day’s close (to the date of this report) on the home market unless otherwise stated.

Key:

Kepler Capital Markets SA (KCM) holds or owns or controls 100% of the issued shares of Crédit Agricole Cheuvreux SA (CA Cheuvreux), collectively hereafter KEPLER CHEUVREUX .

1. KEPLER CHEUVREUX holds or owns or controls 5% or more of the issued share capital of this company; 2. The company holds or owns or controls 5% or more of the issued share capital of Kepler Capital Markets SA; 3. KEPLER CHEUVREUX is or may be regularly carrying out proprietary trading in equity securities of this company; 4. KEPLER CHEUVREUX has been lead manager or co-lead manager in a public offering of the issuer’s financial instruments during the last twelve months; 5. KEPLER CHEUVREUX is a market maker in the issuer’s financial instruments; 6. KEPLER CHEUVREUX is a liquidity provider in relation to price stabilisation activities for the issuer to provide liquidity in such instruments; 7. KEPLER CHEUVREUX acts as a corporate broker or a sponsor or a sponsor specialist (in accordance with the local regulations) to this company; 8. KEPLER CHEUVREUX and the issuer have agreed that KEPLER CHEUVREUX will produce and disseminate investment research on the said issuer as a service to the issuer; 9. KEPLER CHEUVREUX has received compensation from this company for the provision of investment banking or financial advisory services within the previous twelve months; 10. KEPLER CHEUVREUX may expect to receive or intend to seek compensation for investment banking services from this company in the next three months; 11. The author of, or an individual who assisted in the preparation of, this report (or a member of his/her household), or a person who although not involved in the preparation of the report had or could reasonably be expected to have access to the substance of the report prior to its dissemination has a direct ownership position in securities issued by this company; 12. An employee of KEPLER CHEUVREUX serves on the board of directors of this company; 13. As at the end of the month immediately preceding the date of publication of the research report Kepler Capital Markets, Inc. beneficially owned 1% or more of a class of common equity securities of the subject company; 14. KEPLER CHEUVREUX and UniCredit Bank AG have entered into a Co-operation Agreement to form a strategic alliance in connection with certain services including services connected to investment banking transactions. UniCredit Bank AG provides investment banking services to this issuer in return for which UniCredit Bank AG received consideration or a promise of consideration. Separately, through the Co-operation Agreement with UniCredit Bank AG for services provided by KEPLER CHEUVREUX in connection with such activities, KEPLER CHEUVREUX also received consideration or a promise of a consideration in accordance with the general terms of the Co-operation Agreement; 15. KEPLER CHEUVREUX and Crédit Agricole Corporate & Investment Bank (“CACIB”) have entered into a Co-operation Agreement to form a strategic alliance in connection with certain services including services connected to investment banking transactions. CACIB provides investment banking services to this issuer in return for which CACIB received consideration or a promise of consideration. Separately, through the Co-operation Agreement with CACIB for services provided by KEPLER CHEUVREUX in connection with such activities, KEPLER CHEUVREUX also received consideration or a promise of a consideration in accordance with the

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general terms of the Co-operation Agreement; 16. UniCredit Bank AG holds or owns or controls 5% or more of the issued share capital of KEPLER CAPITAL MARKETS SA. UniCredit Bank AG provides investment banking services to this issuer in return for which UniCredit Bank AG received consideration or a promise of consideration; 17. CACIB holds or owns or controls 15% of more of the issued share capital of KEPLER CAPITAL MARKETS SA. CACIB provides investment banking services to this issuer in return for which CACIB received consideration or a promise of consideration; 18. An employee of UniCredit Bank AG serves on the board of directors of KEPLER CAPITAL MARKETS SA; 19. Two employees of CACIB serve on the board of directors of KEPLER CAPITAL MARKETS SA. CACIB provides investment banking services to this issuer in return for which CACIB received consideration or a p romise of consideration; 20. The services provided by KEPLER CHEUVREUX are provided by Kepler Equities S.A.S., a wholly-owned subsidiary of KEPLER CAPITAL MARKETS SA.

Rating history:

KEPLER CHEUVREUX current rating for Indra is Hold and was issued on 28/07/2014. The preceding rating was Reduce and was issued on 12/05/2011.

We did not disclose the rating to the issuer before publication and dissemination of this document.

Rating ratio Kepler Cheuvreux Q1 2014 Rating breakdown A B Buy 43.0% 0.0% Hold 32.0% 0.0% Reduce 21.0% 0.0% Not Rated/Under Review/Accept Offer 4.0% 0.0% Total 100.0% 0.0% Source: Kepler Cheuvreux A: % of all research recommendations B: % of issuers to which Investment Banking Services are supplied

From 9 May 2006, KEPLER CHEUVREUX’s rating system consists of three ratings: Buy, Hold and Reduce. For a Buy rating, the minimum expected upside is 10% in absolute terms over 12 months. For a Hold rating the expected upside is below 10% in absolute terms. A Reduce rating is applied when there is expected downside on the stock. Target prices are set on all stocks under coverage, based on a 12-month view. Equity ratings and valuations are issued in absolute terms, not relative to any given benchmark.

Analyst disclosures The functional job title of the person(s) responsible for the recommendations contained in this report is Equity Research Analyst unless otherwise stated on the cover.

Name of the Equity Research Analyst(s): Natalia Bobo

Regulation AC - Analyst Certification: Each Equity Research Analyst(s) listed on the front-page of this report, principally responsible for the preparation and content of all or any identified portion of this research report hereby certifies that, with respect to each issuer or security or any identified portion of the report with respect to an issuer or security that the equity research analyst covers in this research report, all of the views expressed in this research report accurately reflect their personal views about those issuer(s) or securities. Each Equity Research Analyst(s) also certifies that no part of their compensation was, is, or will be, directly or indirectly, related to the specific recommendation(s) or view(s) expressed by that equity research analyst in this research report.

Each Equity Research Analyst certifies that he is acting independently and impartially from KEPLER CHEUVREUX shareholders, directors and is not affected by any current or potential conflict of interest that may arise from any KEPLER CHEUVREUX activities.

Analyst Compensation: The research analyst(s) primarily responsible for the preparation of the content of the research report attest that no part of the analyst’s(s’) compensation was, is or will be, directly or indirectly, related to the specific recommendations expressed by the research analyst(s) in the research report. The research analyst’s(s’) compensation is, however, determined by the overall economic performance of KEPLER CHEUVREUX.

Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of KEPLER CHEUVREUX, which is a non-US affiliate and parent company of Kepler Capital Markets, Inc. a SEC registered and FINRA member broker-dealer. Equity Research Analysts employed by KEPLER CHEUVREUX, are not registered/qualified as research analysts under FINRA/NYSE rules, may not be associated persons of Kepler Capital Markets, Inc. and may not be subject to NASD Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account.

Please refer to www.keplercheuvreux.com for further information relating to research and conflict of interest management.

Regulators Location Regulator Abbreviation

Kepler Capital Markets S.A - France Autorité des Marchés Financiers AMF

Kepler Capital Markets, Sucursal en España Comisión Nacional del Mercado de Valores CNMV

Kepler Capital Markets, Frankfurt branch Bundesanstalt für Finanzdienstleistungsaufsicht BaFin

Kepler Capital Markets, Milan branch Commissione Nazionale per le Società e la Borsa CONSOB

Kepler Capital Markets, Amsterdam branch Autoriteit Financiële Markten AFM

Kepler Capital Markets, Zurich branch Swiss Financial Market Supervisory Authority FINMA

Kepler Capital Markets, Inc. Financial Industry Regulatory Authority FINRA

Kepler Capital Markets, London branch Financial Conduct Authority FCA

Kepler Capital Markets, Vienna branch Austrian Financial Services Authority FMA

Crédit Agricole Cheuvreux, SA - France Autorité des Marchés Financiers AMF

Crédit Agricole Cheuvreux España S.V Comisión Nacional del Mercado de Valores CNMV

Crédit Agricole Cheuvreux Niederlassung Deutschland Bundesanstalt für Finanzdienstleistungsaufsicht BaFin

Crédit Agricole Cheuvreux S.A., branch di Milano Commissione Nazionale per le Società e la Borsa CONSOB

Crédit Agricole Cheuvreux Amsterdam Autoriteit Financiële Markten AFM

Crédit Agricole Cheuvreux Zurich Branch Swiss Financial Market Supervisory Authority FINMA

Crédit Agricole Cheuvreux North America, Inc. Financial Industry Regulatory Authority FINRA

Crédit Agricole Cheuvreux International Limited Financial Conduct Authority FCA

Crédit Agricole Cheuvreux Nordic AB Finansinspektionen FI

Kepler Capital Markets S.A and Crédit Agricole Cheuvreux SA, are authorised and regulated by both Autorité de Contrôle Prudentiel and Autorité des Marchés Financiers.

For further information relating to research recommendations and conflict of interest management please refer to www.keplercheuvreux.com..

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Legal and disclosure information Other disclosures

This product is not for retail clients or private individuals.

The information contained in this publication was obtained from various publicly available sources believed to be reliable, but has not been independently verified by KEPLER CHEUVREUX. KEPLER CHEUVREUX does not warrant the completeness or accuracy of such information and does not accept any liability with respect to the accuracy or completeness of such information, except to the extent required by applicable law.

This publication is a brief summary and does not purport to contain all available information on the subjects covered. Further information may be available on request. This report may not be reproduced for further publication unless the source is quoted.

This publication is for information purposes only and shall not be construed as an offer or solicitation for the subscription or purchase or sale of any securities, or as an invitation, inducement or intermediation for the sale, subscription or purchase of any securities, or for engaging in any other transaction. This publication is not for private individuals.

Any opinions, projections, forecasts or estimates in this report are those of the author only, who has acted with a high degree of expertise. They reflect only the current views of the author at the date of this report and are subject to change without notice. KEPLER CHEUVREUX has no obligation to update, modify or amend this publication or to otherwise notify a reader or recipient of this publication in the event that any matter, opinion, projection, forecast or estimate contained herein, changes or subsequently becomes inaccurate, or if research on the subject company is withdrawn. The analysis, opinions, projections, forecasts and estimates expressed in this report were in no way affected or influenced by the issuer. The author of this publication benefits financially from the overall success of KEPLER CHEUVREUX.

The investments referred to in this publication may not be suitable for all recipients. Recipients are urged to base their investment decisions upon their own appropriate investigations that they deem necessary. Any loss or other consequence arising from the use of the material contained in this publication shall be the sole and exclusive responsibility of the investor and KEPLER CHEUVREUX accepts no liability for any such loss or consequence. In the event of any doubt about any investment, recipients should contact their own investment, legal and/or tax advisers to seek advice regarding the appropriateness of investing. Some of the investments mentioned in this publication may not be readily liquid investments. Consequently it may be difficult to sell or realise such investments. The past is not necessarily a guide to future performance of an investment. The value of investments and the income derived from them may fall as well as rise and investors may not get back the amount invested. Some investments discussed in this publication may have a high level of volatility. High volatility investments may experience sudden and large falls in their value which may cause losses. International investing includes risks related to political and economic uncertainties of foreign countries, as well as currency risk.

To the extent permitted by applicable law, no liability whatsoever is accepted for any direct or consequential loss, damages, costs or prejudices whatsoever arising from the use of this publication or its contents.

KEPLER CHEUVREUX (and its affiliates) have implemented written procedures designed to identify and manage potential conflicts of interest that arise in connection with its research business, which are available upon request. The KEPLER CHEUVREUX research analysts and other staff involved in issuing and disseminating research reports operate independently of KEPLER CHEUVREUX Investment Banking business. Information barriers and procedures are in place between the research analysts and staff involved in securities trading for the account of KEPLER CHEUVREUX or clients to ensure that price sensitive information is handled according to applicable laws and regulations.

Country and region disclosures

United Kingdom: This document is for persons who are Eligible Counterparties or Professional Clients only and is exempt from the general restriction in section 21 of the Financial Services and Markets Act 2000 on the communication of invitations or inducements to engage in investment activity on the grounds that it is being distributed in the United Kingdom only to persons of a kind described in Articles 19(5) (Investment professionals) and 49(2) (High net worth companies, unincorporated associations, etc.) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended). It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons. Any investment to which this document relates is available only to such persons, and other classes of person should not rely on this document.

United States: This communication is only intended for, and will only be distributed to, persons residing in any jurisdictions where such distribution or availability would not be contrary to local law or regulation. This communication must not be acted upon or relied on by persons in any jurisdiction other than in accordance with local law or regulation and where such person is an investment professional with the requisite sophistication to understand an investment in such securities of the type communicated and assume the risks associated therewith.

This communication is confidential and is intended solely for the addressee. It is not to be forwarded to any other person or copied without the permission of the sender. This communication is provided for information only. It is not a personal recommendation or an offer to sell or a solicitation to buy the securities mentioned. Investors should obtain independent professional advice before making an investment.

Notice to U.S. Investors: This material is not for distribution in the United States, except to “major US institutional investors” as defined in SEC Rule 15a-6 ("Rule 15a-6"). Kepler Cheuvreux refers to Kepler Capital Markets, Société anonyme (S.A.) (“Kepler Capital Markets SA”) and its affiliates, including CA Cheuvreux, Société Anonyme (S.A.). Kepler Capital Markets SA has entered into a 15a-6 Agreement with Kepler Capital Markets, Inc. ("KCM, Inc.”) which enables this report to be furnished to certain U.S. recipients in reliance on Rule 15a-6 through KCM, Inc.

Each U.S. recipient of this report represents and agrees, by virtue of its acceptance thereof, that it is a "major U.S. institutional investor" (as such term is defined in Rule 15a-6) and that it understands the risks involved in executing transactions in such securities. Any U.S. recipient of this report that wishes to discuss or receive additional information regarding any security or issuer mentioned herein, or engage in any transaction to purchase or sell or solicit or offer the purchase or sale of such securities, should contact a registered representative of KCM, Inc.

KCM, Inc. is a broker-dealer registered with the Securities and Exchange Commission (“SEC”) under the U.S. Securities Exchange Act of 1934, as amen ded, Member of the Financial Industry Regulatory Authority (“FINRA”) and Member of the Securities Investor Protection Corporation (“SIPC”). Pursuant to SEC Rule 15a-6, you must contact a Registered Representative of KCM, Inc. if you are seeking to execute a transaction in the securities discussed in this report. You can reach KCM, Inc. at 600 Lexington Avenue, New York, NY 10022, Compliance Department (212) 710-7625; Operations Department (212) 710-7606; Trading Desk (212) 710-7602. Further information is also available at www.keplercapitalmarkets.com. You may obtain information about SIPC, including the SIPC brochure, by contacting SIPC directly at 202-371-8300; website: http://www.sipc.org/

KCM, Inc. is a wholly owned subsidiary of Kepler Capital Markets SA. Kepler Capital Markets SA, registered on the Paris Register of Companies with the number 413 064 841 (1997 B 10253), whose registered office is located at 112 avenue Kléber, 75016 Paris, is authorised and regulated by both Autorité de Contrôle Prudentiel (ACP) and Autorité des Marchés Financiers (AMF).

Nothing herein excludes or restricts any duty or liability to a customer that KCM, Inc. may have under applicable law. Investment products provided by or through KCM, Inc. are not insured by the Federal Deposit Insurance Corporation and are not deposits or other obligations of any insured depository institution, may lose value and are not guaranteed by the entity that published the research as disclosed on the front page and are not guaranteed by KCM, Inc.

Investing in non-U.S. Securities may entail certain risks. The securities referred to in this report and non-U.S. issuers may not be registered under the U.S. Securities Act of 1933, as amended, and the issuer of such securities may not be subject to U.S. reporting and/or other requirements. Rule 144A securities may be offered or sold only to persons in the U.S. who are Qualified Institutional Buyers within the meaning of Rule 144A under the Securities Act. The information

http://www.keplercapitalmarkets.com/

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available about non-U.S. companies may be limited, and non-U.S. companies are generally not subject to the same uniform auditing and reporting standards as U.S. companies. Securities of some non-U.S. companies may not be as liquid as securities of comparable U.S. companies. Securities discussed herein may be rated below investment grade and should therefore only be considered for inclusion in accounts qualified for speculative investment.

Analysts employed by Kepler Capital Markets SA, a non-U.S. broker-dealer, are not required to take the FINRA analyst exam. The information contained in this report is intended solely for certain "major U.S. institutional investors" and may not be used or relied upon by any other person for any purpose. Such information is provided for informational purposes only and does not constitute a solicitation to buy or an offer to sell any securities under the Securities Act of 1933, as amended, or under any other U.S. federal or state securities laws, rules or regulations. The investment opportunities discussed in this report may be unsuitable for certain investors depending on their specific investment objectives, risk tolerance and financial position.

In jurisdictions where KCM, Inc. is not registered or licensed to trade in securities, or other financial products, transactions may be executed only in accordance with applicable law and legislation, which may vary from jurisdiction to jurisdiction and which may require that a transaction be made in accordance with applicable exemptions from registration or licensing requirements.

The information in this publication is based on sources believed to be reliable, but KCM, Inc. does not make any representation with respect to its completeness or accuracy. All opinions expressed herein reflect the author's judgment at the original time of publication, without regard to the date on which you may receive such information, and are subject to change without notice.

KCM, Inc. and/or its affiliates may have issued other reports that are inconsistent with, and reach different conclusions from, the information presented in this report. These publications reflect the different assumptions, views and analytical methods of the analysts who prepared them. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is provided in relation to future performance.

KCM, Inc. and any company affiliated with it may, with respect to any securities discussed herein: (a) take a long or short position and buy or sell such securities; (b) act as investment and/or commercial bankers for issuers of such securities; (c) act as market makers for such securities; (d) serve on the board of any issuer of such securities; and (e) act as paid consultant or advisor to any issuer. The information contained herein may include forward-looking statements within the meaning of U.S. federal securities laws that are subject to risks and uncertainties. Factors that could cause a company's actual results and financial condition to differ from expectations include, without limitation: political uncertainty, changes in general economic conditions that adversely affect the level of demand for the company's products or services, changes in foreign exchange markets, changes in international and domestic financial markets and in the competitive environment, and other factors relating to the foregoing. All forward-looking statements contained in this report are qualified in their entirety by this cautionary statement.

France: This publication is issued and distributed in accordance with Articles L.544-1 and seq and R. 621-30-1 of the Code Monétaire et Financier and with Articles 313-25 to 313-27 and 315-1 and seq of the General Regulation of the Autorité des Marchés Financiers (AMF).

Germany: This report must not be distributed to persons who are retail clients in the meaning of Sec. 31a para. 3 of the German Securities Trading Act (Wertpapierhandelsgesetz – “WpHG”). This report may be amended, supplemented or updated in such manner and as frequently as the author deems.

Italy: This document is issued by Kepler Capital Markets, Milan branch and Crédit Agricole Cheuvreux S.A., branch di Milano, authorised in France by the Autorité des Marchés Financiers (AMF) and the Autorité de Contrôle Prudentiel (ACP) and registered in Italy by the Commissione Nazionale per le Società e la Borsa (CONSOB) and is distributed by Kepler Capital Markets S.A and Crédit Agricole Cheuvreux, Société Anonyme (S.A.), authorised in France by the AMF and the ACP and registered in Italy by CONSOB. This document is for Eligible Counterparties or Professional Clients only as defined by the CONSOB Regulation 16190/2007 (art. 26 and art. 58).Other classes of persons should not rely on this document. Reports on issuers of financial instruments listed by Article 180, paragraph 1, letter a) of the Italian Consolidated Act on Financial Services (Legislative Decree No. 58 of 24/2/1998, as amended from time to time) must comply with the requirements envisaged by articles 69 to 69-novies of CONSOB Regulation 11971/1999. According to these provisions Kepler Capital Markets S.A and Crédit Agricole Cheuvreux, Société Anonyme (S.A.)warns on the significant interests of Kepler Capital Markets S.A and Crédit Agricole Cheuvreux, Société Anonyme (S.A.)indicated in Annex 1 hereof, confirms that there are not significant financial interests of Kepler Capital Markets S.A and Crédit Agricole Cheuvreux, Société Anonyme (S.A.)in relation to the securities object of this report as well as other circumstance or relationship with the issuer of the securities object of this report (including but not limited to conflict of interest, significant shareholdings held in or by the issuer and other significant interests held by Kepler Capital Markets S.A and Crédit Agricole Cheuvreux, Société Anonyme (S.A.)or other entities controlling or subject to control by Kepler Capital Markets S.A and Crédit Agricole Cheuvreux, Société Anonyme (S.A.)in relation to the issuer which may affect the impartiality of this document]. Equities discussed herein are covered on a continuous basis with regular reports at results release. Reports are released on the date shown on cover and distributed via print and email. Kepler Capital Markets, Milan branch and Crédit Agricole Cheuvreux S.A., branch di Milano analysts are not affiliated with any professional groups or organisations. All estimates are by Kepler Capital Markets S.A and Crédit Agricole Cheuvreux, Société Anonyme (S.A.) unless otherwise stated.

Spain: This document is only intended for persons who are Eligible Counterparties or Professional Clients within the meaning of Article 78bis and Article 78ter of the Spanish Securities Market Act. It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons. This report has been issued by Kepler Capital Markets, Sucursal en España and Crédit Agricole Cheuvreux España S.V, registered in Spain by the Comisión Nacional del Mercado de Valores (CNMV) in the foreign investments firms registry and it has been distributed in Spain by it or by Kepler Capital Markets S.A and Crédit Agricole Cheuvreux, Société Anonyme (S.A.) authorised and regulated by both Autorité de Contrôle Prudentiel and Autorité des Marchés Financiers. There is no obligation to either register or file any report or any supplemental documentation or information with the CNMV. In accordance with the Spanish Securities Market Law (Ley del Mercado de Valores), there is no need for the CNMV to verify, authorise or carry out a compliance review of this document or related documentation, and no information needs to be provided.

Switzerland: This publication is intended to be distributed to professional investors in circumstances such that there is no public offer. This publication does not constitute a prospectus within the meaning of Articles 652a and 1156 of the Swiss Code of Obligations.

Canada: The information provided in this publication is not intended to be distributed or circulated in any manner in Canada and therefore should not be construed as any kind of financial recommendation or advice provided within the meaning of Canadian securities laws.

Other countries: Laws and regulations of other countries may also restrict the distribution of this report. Persons in possession of this document should inform themselves about possible legal restrictions and observe them accordingly.

Local insight, European scale

Amsterdam Kepler Cheuvreux Benelux Johannes Vermeerstraat 9 1071 DK Amsterdam

+31 20 573 06 66

Frankfurt Kepler Cheuvreux Germany Taunusanlage 18 60325 Frankfurt

+49 69 756960

Geneva Kepler Cheuvreux SA Route de Crassier 11 1262 - Eysins Switzerland

+41 22361 5151

London Kepler Cheuvreux UK 12th Floor, Moorhouse 120 London Wall London EC2Y 5ET

+44 20 7621 5100

Madrid Kepler Cheuvreux Espana Alcala 95 28009 Madrid

+3491 4365100

Milan Kepler Cheuvreux Italia Via C. Cornaggia 10 20123 Milano

+39 02 855 07 1

Paris Kepler Cheuvreux France 112 Avenue Kleber 75016 Paris

+33 1 53653500

Stockholm Kepler Cheuvreux Nordic Regeringsgatan 38 10393 Stockholm

+468 723 5100

Vienna Kepler Cheuvreux Vienna Schottenring 16/2 Vienna 1010

+43 1 537 124 147

Zurich Kepler Cheuvreux Switzerland Stadelhoferstrasse 22 Postfach 8024 Zurich

+41 433336666

North America Boston Kepler Capital Markets, Inc 225 Franklin Street, Floor 26 Boston MA 02110 +1 617-217-2615

New York Kepler Capital Markets, Inc. 600 Lexington Avenue, Floor 28 10022 New York, NY USA

+1 212-710-7600

San Francisco Kepler Capital Markets, Inc 50 California Street, Suite 1500 San Francisco, CA 94111

+1 415-439-5253

Kepler Cheuvreux has exclusive international distribution rights for UniCredit’s CEE product.

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