Midcaps_india Infoline With Two Years Target - Excellent Portpolio

India Strategy

Midcaps

Double your stake, quadruple your money

June 2014

PriceasonJune27,2014

Niftychart

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SensexMidcapSmallcap

Nifty: 7,509Sensex: 25,100

AmarAmbani

[email protected]

Midcaps

ThisreportispublishedbyIIFLIndiaPrivateClientsresearchdesk.IIFLhasotherbusinessunitswithindependentresearchteamsseparatedby'Chinesewalls'cateringtodifferentsetsofcustomershavingvaryingobjectives,riskprofiles,investmenthorizon,etc.Theviewsandopinionsexpressedinthisdocumentmayattimesbecontraryintermsofrating,targetprices,estimatesandviewsonsectorsandmarkets.

June30,2014

India Strategy

ThemeReport

Double your stake, quadruple your money Onlybuysomethingthatyou'dbeperfectlyhappytoholdifthemarketshutdownfor10yearsWarrenBuffettAfterfivetumultuousyearsforIndianequitiesasanassetclass,weareattheonset of a new multiyear Bull Market. In this phase, we assign highprobability toNiftydelivering60% returnorevendoubling in4years.Manyindividual stocks, in themeanwhile, could double inmuch smaller periods.Whilemanywouldbeskepticaloftakingfreshpositionsgiventhenewhighsthat benchmark indices and stocks have hit, our belief is that it is just thebeginning.Ourpremise for thisbelief ispurely tectonicgiven that Indiahasachieved political stability and is on the course of repairing its macroeconomic situation. Moreover, valuations are nowhere close to the highsachieved in thepreviousBull runandarenear long termhistoricalaveragelevels.Globally too, thingsaregettingbetterwithmacro factors inUS (exceptQ1CY14GDP,whichwasablip) showing signsof recovery.EuroZonehasalsoshown stabilitypost the financial crisis.With JapanandEuroZone likely toeasemonetarypolicy,liquidityisexpectedtobebenignandwillchasegrowthin emerging nations leading to strong FII inflows. India, for theaforementionedfactorsisoneofthemostattractivedestinations.Empirically,duringBullmarkets,midcapsoutperformlargecaps.TomakethemostoftheensuingBullrun,wehavehandpickedseveralinterestingmidcapstockshavingpotentialtodoubleintwoyears.Allstocksrankhighintermsofearnings growth potential, balance sheet strength, future cash flows,managementbandwidthandvaluationappeal.BUYrecommendationsummaryCompanyName Sector M.Cap CMP Target Upside

Rscrore Rs Rs %AlembicPharma Pharma 5,071 269 550 104BharatForge AutoAncillary 14,163 608 1,250 106DhanukaAgritech Agriculture 1,990 397 800 101FinolexCables CapitalGoods 2,694 176 352 100GreavesCotton AutoAncillary 2,786 115 232 102IndiabullsHousingFin Financials 12,801 383 771 101JKLakshmiCement Cement 2,475 210 433 106JyotiStrucutres CapitalGoods 487 59 120 102KirloskarOilEngines CapitalGoods 3,450 238 485 104LGBalakrishnan AutoAncillary 693 883 1,878 113MagmaFincorp Financials 1,857 98 198 102PTCIndiaFinServices Financials 1,773 32 65 103SREIInfraFinance Financials 2,465 48 97 102

Source:IndiaInfolineResearch

Midcaps

2

Onset of a new multiyear Bull Market AstronggovernmentwillbringaboutmuchneededreformsAfter1984,itsthefirsttimethatanypoliticalpartyhasachievedanabsolutemajorityintheLokSabhaelectionswithBJPwinning282seatsoutofthe574seats. Alongwith its allies the tallywas higher at 336 seats. The thumpingvictory will ensure implementation of tough reforms, which the pastgovernment,beingacoalitionone,founddifficulttoexecute.Duringtheonemonth inpower,thenewgovernmenthasgottheballrollingwithmeasuressuchas1)railwaypassengerandfreighttariffhikes,2)continueddieselpricehikes.

ModisexemplarytrackrecordinGujaratThe preelection period saw high debates about the Gujarat model ofdevelopment andwhether the same canbe replicatedat thenational level.While spatial, cultural, demographic and topographic disparities exist, webelieve a part of Gujarat model can be applied at the national level. Thisincludes faster clearances of projects, ensuring power availability for all,building robust infrastructure, deeper penetration of irrigation facilities andturningaroundofPSUs.Withproperexecution(NarendraModisforte)thesestepscanaddtotheimprovingGDPgrowth.KeyachievementsofGujaratgrowthmodel

[email protected]%

[email protected]%

Tourism13.5%yoygrowth

StatePSUTurnaroundofGSFC,GACLand

GEB

Solar57%Indiastotal

capacity

Highways24,000kmsofnationalandstatehighways


ThethumpingvictoryforBJPwillensureimplementationoftoughreforms

Whilespatial,cultural,demographicandtopographicdisparitiesexist,webelieveapartofGujaratmodelcanbeappliedatthenationallevel

AstrongmandateforBJP OneineverythreevotersoptedforBJP

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1977 1980 1984 1989 1991 1996 1998 1999 2004 2009 2014

BLD295

INC353

INC404

INC197

INC232

BJP161

BJP182

BJP182 INC

145

INC206

BJP282 31%

19%

4%4%3%

4%

35%

BJP

Congress

BSP

SP

ADMK

AITC

Others

Source:ElectionCommission,IndiaInfolineResearch Source:ElectionCommission,IndiaInfolineResearch

Midcaps

3

EconomyinamuchbettershapeOverthepastoneyear,marked improvementhasbeenseen inIndiasmacroeconomicvariables.GDPgrowthwhichhaddwindledfrom6%+tolessthan5%inamatterof4quarters,hasbottomedoutandhasbeenstableat4.5%4.7%rangeinthepastfewquarters.RBIthenwasraisinginterestratesbuthasnowmaintainedstatusquoforpasttwomonetarypoliciesindicatingpeakingoutofinterest rates. Inflation,whichwasmounting then,hasnow seendownwardtrajectory inthepastfewmonths,notwithstandingneartermriskfromweakmonsoon. Fiscal and current account deficits have been well reigned inthrough measures such as curbs on gold imports and postponement ofsubsidies to next year. Rating agencies, a year ago, were considering adowngrade in rating for Indiawithanegativeoutlookon theeconomy.Theoutlookforratingshasnowbeenrevisedtostable.Currency,whichwasonadepreciatingspreeandhadreachedRs68/US$,hasnowstabilizedinarangeofRs5861/US$.With regards to investmentcycle, stepswere takenby theUPAgovernmentwhichshall fructify in themediumterm.Thesesteps include1)settingupofCCI(CabinetCommitteeonInvestment)whichhasclearedbottlenecksof210projectsworthmorethanRs3.8tnacrossvarioussectors.2)Around8590%of173FSAshavebeensigned;fullcompletionwouldensurefuelsupplyto78,000MWworthof power capacity. 3) Partialmining ban reversals. Furthermore,announcements from the new government have also been encouragingtowards this space.With regards to theassetquality in thebanking system,afteraperiodofsustaineduptrend inNPAs,Q4FY14results indicatedstabletrend.Intermittently,issuessuchascurrentgeopoliticaltensionsinIraqandRussiaUkraine tussle canpose short term risks to theeconomyas these results inhigh crude oil prices.With India importingmore than 80% of its crude oilrequirements, firm crude oil prices have a cascading impact on macroeconomicvariablessuchascurrentaccountdeficit,fiscaldeficit, inflationandGDP growth.Nevertheless, Indiawill still remain one of themost attractivedestinations for FIIs given thatmost emerging economies face similar riskswhileIndiahasatrackrecordofmanagingtheserisksbetter.SummarizingtheshiftinIndianeconomyMacroIndicators OneYearBack CurrentStatusEconomicGrowth Slowingdownsteeply ConsolidatingInflation FirmandInchingup ModeratingInterestRate Rising PeakedoutSystemLiquidity Tight ComfortableCAD UncomfortablyHigh SubstantiallyReducedFiscalDeficit HighRiskofSlippage IncontrolCurrency WeakandVolatile Stabilized&WorstBehindSovereignRating DownwardBias StableoutlookPolicy&Reforms Chaos&Paralysis BrightprospectsInvestmentCycle Frozen StillinInertiaBankingAssetQuality Deteriorating Stabilizing


EconomicvariablessuchasGDPgrowth,inflation,fiscalandcurrentaccountdeficitshaveseenamarkedimprovementinthepastoneyearStepstowardsrevivalofinvestmentcyclehavebeentaken,whileassetqualityinthebankingsystemhasseenstabilityinQ4FY14

Midcaps

4

EarningsmomentumtopickupWe expect strong traction in earnings for India Inc in the next three years.Corporate revenue growth andGDP growthhave a strong correlation.WithGDPgrowthexpectedtorevivefromthecurrentlevelsof4.7%to6.06.5% inthe next couple of years, India Inc having built capacities in the past threeyears is well placed to service the expected rise in demand. Benefits ofoperating leveragewilltranslate intomarginexpansionwhile interestsavingswillcomeontwocounts1)expecteddeclineininterestratesand2)lowerdebtpositions servicedby strongcash flowgeneration.Conservatively,weexpectSensex earnings towitness 15%+ CAGR over the next three years. A pointworthnotinghereisthat,inthepreviousBullrunSensexearningsCAGRwasat25%.TrendinSensexEPS

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Source:Bloomberg,IndiaInfolineResearchIndiaIncRoEtoimprovefurtherIndia, over the years, has outperformed emerging nations as well as thedevelopedworld intermsofRoE.Webelievethegap issettowiden furtherfortwomajorreasons:1) Asset Turnover: With capacity expansion in place, we believe revenuegeneratedperrupeeofincrementalcapitalinfusionwillbemuchhigherwhencomparedwiththepreviousfewyears2) Operating Margins: With fixed costs getting distributed over a largernumberofunitsales,marginsareexpectedtoinchhigher.

WhileeconomicgrowthwilldriverevenuegrowthforIndiaInc,operatingleverageandlowerinterestcostswilldriveearningsgrowthImprovementinassetturnoverandmarginimprovementtodriveRoEsforIndiaincreasingitsdifferentialwithrestoftheworld

Midcaps

5

Valuationsinexpensive,Nifty4yeartargetof12,000BasedonFY16EEPS,NiftyistradingataP/Emultipleof14.5x,whichismuchlower than the highs achieved during the previous Bull run.While earningsupgradeshavejuststarted,weseeupsidestoourearningsassumptions.SointermsofPEG,wearecurrentlyjustbelow1x.Ifearningsseematerialtraction(higher than our estimates) we believe valuation rerating will follow.Considering,thisweseeNiftyat12,000infouryears.Valuationsclosertohistoricalaverage

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Source:Bloomberg,IndiaInfolineResearchFIIflowstoriseFIIshave investedonlyUS$10bnYTD in Indianequities.Webelievetheflowswillpickupas: US10yrTreasuryYieldlikelytoremaininmodestrangeof2.52.8% BenigngloballiquidityasEurope&Japanexpectedtoeasemonetarypolicy StrongprospectsforIndianeconomyGDPgrowthtoreach7%byFY17 CorporateearningsgrowthtorecoversharplyMarketvaluationattractive

inthatcontext HighrelativeattractivenessofIndiaisvisvisChina,RussiaandBrazil Stronggovernmentinplacereformenvironmentexpectedtoimprove ExcessivevolatilitybehindfortheRupeelikelytostabilizeintherangeof

Rs5862/US$FIIFlowsinIndia

10.98.3

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(12.9)

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29.3

(0.5)

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(20)(15)(10)(5)05

101520253035

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YTD

US$bn

Source:Bloomberg,IndiaInfolineResearch

Whileearningsupgradeshavejuststarted,weseeupsidestoourearningsassumptionsFIIflowstoincreaseoverthenextfewyears

Midcaps

6

TimetopickmorequalitymidcapsAt the end ofMarch 2014,we had recommended 10midcapswith 1yearupsides of 18.4%27.3%. 8 stocks have already hit the targetswithin threemonths.Webelieve that inaBull run,qualitymidcapscanoutperform largecapssubstantiallyandinvestorsshouldincreaseweightagetomidcapsintheirlong term portfolio. For making most of the ensuing Bull run, we havehandpicked several interestingmid cap stocks having potential to double intwoyears.Allstocksrankhigh intermsofearningsgrowthpotential,balancesheet strength, future cash flows, management bandwidth and valuationappeal.BUYrecommendationsummaryCompanyName Sector M.Cap CMP Target Upside

Rscrore Rs Rs %AlembicPharma Pharma 5,071 269 550 104BharatForge AutoAncillary 14,163 608 1,250 106DhanukaAgritech Agriculture 1,990 397 800 101FinolexCables CapitalGoods 2,694 176 352 100GreavesCotton AutoAncillary 2,786 115 232 102IndiabullsHousingFin Financials 12,801 383 771 101JKLakshmiCement Cement 2,475 210 433 106JyotiStrucutres CapitalGoods 487 59 120 102KirloskarOilEngines CapitalGoods 3,450 238 485 104LGBalakrishnan AutoAncillary 693 883 1,878 113MagmaFincorp Financials 1,857 98 198 102PTCIndiaFinServices Financials 1,773 32 65 103SREIInfraFinance Financials 2,465 48 97 102


InaBullrun,qualitymidcapscanoutperformlargecapssubstantiallyandinvestorsshouldincreaseweightagetomidcapsintheirlongtermportfolio

Sector:

Pharmaceuticals

Sector view: Positive

Sensex: 25,10052Weekh/l(Rs): 316/118Marketcap(Rscr): 5,0713mAvgvol(000Nos): 227Bloombergcode: ALPMINBSEcode: 533573NSEcode: APLLTDFV(Rs): 2PriceasonJune27,2014Companyratinggrid LowHigh 1 2 3 4 5EarningsGrowth CashFlow B/SStrength Valuationappeal Risk

Sharepricetrend

50100150200250

Jun13 Dec13 Jun14

Alembic Sensex

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%Others FIIs Promoters

Rating: BUYTarget(2years): Rs550CMP: Rs269Upside: 104%

Research Analyst: BhaveshGandhi

[email protected]

Alembic PharmaceuticalsRising star AlembicPharmaceuticalsoffersopportunity toplay thegrowingdomesticbranded formulations market combined with its UScentric internationalgenerics business. The latter has posted ~39% cagr over FY1214 andweexpectrobustUSledmomentumininternationalgenericstocontinuewhiledomesticbrandedformulationsgrowthwouldbecloserto20%overnext23years.OurconfidenceonstrongrevenuevisibilitystemsfromrampupinFY15 capex guidance while margin expansion would be back ended,supported by enhanced focus on specialty therapies within domesticmarket. Expect stock to rerate on back of impressiveRoEs and free cashflowsevenasneartermvaluationsappearcompelling;recommendBUY. Expanding focus on specialty therapies Alembic has increased the proportion of specialty products within itsdomestic formulation business from 39% in FY10 to ~54% in FY14; thespecialtysegmentgrewby17% intheprevious fiscalvsdegrowthof3% forthe acute segmentwhich comprises the cough and cold and anti infectivebusinesses.Companywouldattempttoreducefocusonlowmarginareasindomestic formulations and look to consolidate its presence in specialtysegmentwith the launch of a third cardio division, up gradation of legacyrespiratorytherapyandexpansionofgastroenterology. Capex ramp up indicates mgmt confidence on revenue visibilityAlembic has guided for FY15 capex of Rs2.5bn spread across internationalAPIs and generics aswell domestic branded formulations and R&D and ismuchhigherthanitstypicalrunrateofRs11.2bnseeninthepreviousyears.Capex rampupwasnecessitatedby sharp growth in international genericsbusiness which has posted ~39% cagr over FY1214 and consequentlycompany needs to augment its APIs and formulations capacities. Viewedalternately, we believe the capex ramp up from ~4.4% of sales to anestimated11%ofcurrentyearrevenuesindicateanextremelystrongvisibilityonrevenuepipelineoncemostofthecapexiscompletedbyendofFY15.FinancialsummaryY/e31Mar(Rsm) FY14 FY15E FY16E FY17ERevenues 18,632 22,228 26,996 33,020yoygrowth(%) 22.6 19.3 21.5 22.3Operatingprofit 3,577 4,312 5,426 6,967OPM(%) 19.2 19.4 20.1 21.1ReportedPAT 2,355 2,778 3,605 4,729yoygrowth(%) 42.5 18.0 29.8 31.2 EPS(Rs) 12.5 14.7 19.1 25.1P/E(x) 21.5 18.3 14.1 10.7P/BV(x) 1.5 1.1 0.9 0.6EV/EBITDA(x) 3.1 2.7 2.0 1.2Debt/Equity(x) 0.2 0.2 0.1 0.0ROE(%) 40.0 35.6 34.9 34.1ROCE(%) 39.7 35.8 38.1 38.4Source:Company,IndiaInfolineResearch

Alembic Pharmaceuticals

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Impressivereturnratiosdespitehighupfrontcapex HealthyfreecashgenerationinFY16andbeyond

0.05.0

10.015.020.025.030.035.040.045.0

FY11

FY12

FY13

FY14

FY15

E

FY16

E

FY17

E

RoCE RoE%

(3.0)

(2.0)

(1.0)

0.01.02.03.04.05.0

FY14

FY15

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OpCF Capex FreeCFRs bn

Source:Company,IndiaInfolineResearch

Robust growth likely to continue in international generics International generics sales nearly doubled yoy in FY14withUS being themainfocusareaaccountingfor6570%oftotalexportsthoughthis includedsalesfrompreviousyearbacklogs. Internationalmarketgrowthwouldcomethrough new filings (para IV, NDA and technically complex products) andlaunches.Companyhasfiled61ANDAsallintheoralsolidswithfocusonUSmarket.Althoughcompanyfiledonly4ANDAsinFY14(duetomorecomplexproductsleadingtohigherfailureratesandcapacityconstraints),ithopesforagradualrampupinfilingsinnexttwoyears;Alembicwouldhave68productlaunchesinUSeveryyear.Moreover,capacityinoralsolidtabletshasbeenexpandedto5bnand throughdebottleneckingwouldagain increased it to7bnwhichtakecareofcapacityconstraintsseeninpreviousyear.Impressive RoEs, free cash flows and compelling valuations; BUY Overall Indiabranded formulationsbusinessgrewby14% inFY14 impactedbydegrowth inanti infectivebusinessbutweexpectabetterrunrate fromcurrentyearonthebackofnewformulationcapacitybeingputfordomesticmarket as also new prices come in to effect fromQ2. Increased capex incurrent fiscal is likely to reduce free cash generation though we expecthealthycashgenerationinFY16andbeyond.Companysreturnratiostooareexpected to remain impressivewithbothRoEandRoCE in the rangeof3538%.Robust26%earningscagroverFY1417islikelytobeaccompaniedbyastrongbalancesheetasleverageratiosremainwithincomfortablelimits.Our earnings forecasts factor in a ~18.5% growth in domestic brandedformulations while international generics are projected to grow at ~30%compoundedovernextthreeyears.Weexpectthestocktorerateonbackofstrong growth visibility,margin upsides and robust balance sheet; currentvaluationsprovideanattractiveentrypointandwerecommendBUYwitha2yearpricetargetofRs550.

Alembichaslinedup68productlaunchesinUSeveryyearwhilepaceofannualANDAfilingsisalsolikelytorampupfromFY14levelsAstrongrevenuevisibility,scopeformarginexpansionandimpressivefinancialmetrics(RoEs,cashflows)woulddrivestockrerating;recommendBUY


3

Marginexpansionseeninthemediumterm PaceofANDAfilingstorampupfromcurrentfiscal

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ANDAsfiled DMFsfiled#

Source:Company,IndiaInfolineResearchNote:DrugMasterFile(DMF)containschemistry,mfgetcofdrugcomponentandisrequiredtosupplybulkdrugstoUS

FY14sales:domesticbrandedformulationsaccountfor46%share

Focusonspecialtysegmentwithindomesticbrandedbusiness

46

64

25

181

Indiabranded

Indiagenerics

Internationalbranded

Internationalgenerics

API

Exportincentives

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1219

11

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55

2 2AntiinfectivesCough&coldGastrology

Cardiology

Gynecology

Orthopedics

AntiDiabeticsNephrology/Urology

Opthalmology

General

Specialty


About Alembic Pharma: stellar earnings cagr over FY12-14Establishedin1907,AlembicPharmaceuticals(erstwhilepartofAlembicLtd)possessmanufacturingandmarketingcapabilitiesacrossthevaluechainfrombulk drugs and intermediaries to branded formulations. Company is themarket leader in theMacrolides segmentofantiinfectivedrugs in India. Itownsmanufacturing facilities in Vadodara (APIs and formulationsboth USFDA approved) and Baddi (formulations for domestic and nonregulatedmarkets) in Himachal Pradesh. It posted FY1214 revenue/PAT cagr of13%/35%drivenbydoublingof internationalgenericssales inFY14;exportsaccountedfor~44%ofFY14sales.Withinoverallrevenues,domesticbrandedformulations share stoodat~45%while internationalgenerics (majorityUSbound) accounted for~25%. Alembichas filed for61ANDAs (AbbreviatedNew Drug Application) out of which it has received approvals for 31applicationsplusone505(b)(2)(avariationoftypicalNDAapproval).

Alembicposted35%profitcagroverpasttwoyearsdrivenbystrongmomentumininternationalgenericsbusiness


4

Financials

IncomestatementY/e31Mar(Rsm) FY14 FY15E FY16E FY17ERevenue 18,632 22,228 26,996 33,020Operatingprofit 3,577 4,312 5,426 6,967Depreciation (405) (562) (657) (751)Interestexpense (98) (128) (61) (31)Otherincome 32 33 35 37Profitbeforetax 3,106 3,655 4,744 6,222Taxes (751) (877) (1,139) (1,493)Netprofit 2,355 2,778 3,605 4,729

Balancesheet

Y/e31Mar(Rsm) FY14 FY15E FY16E FY17EEquitycapital 377 377 377 377Reserves 6,379 8,495 11,438 15,506Networth 6,756 8,872 11,816 15,883Debt 1,309 1,709 809 409Def.taxlia 227 227 227 227Totalliabilities 8,292 10,808 12,852 16,519

Fixedassets 4,176 6,114 6,957 7,705Investments 33 33 33 33Networkingcap 4,083 4,662 5,862 8,781Inventories 3,108 3,715 4,512 5,518Sundrydebtors 2,734 3,289 3,994 4,885Cash 240 123 350 2,039Othercurrassets 1,887 2,223 2,700 3,302Sundrycreditors (2,884) (3,471) (4,216) (5,157)Othercurrentlia (1,001) (1,216) (1,477) (1,807)Totalassets 8,292 10,808 12,852 16,519

Cashflowstatement

Y/e31Mar(Rsm) FY14 FY15E FY16E FY17EProfitbeforetax 3,106 3,655 4,744 6,222Depreciation 405 562 657 751Def.taxlia 88 Taxpaid (751) (877) (1,139) (1,493)Workingcapital (638) (695) (974) (1,230)OperatingCF 2,210 2,645 3,289 4,250Capitalexp (816) (2,500) (1,500) (1,500)FreeCF 1,394 145 1,789 2,750Equityraised 33 Debtfin/disp (686) 400 (900) (400)Dividends (662) (662) (662) (662)Netincash 79 (117) 227 1,689

KeyratiosY/e31Mar FY14 FY15E FY16E FY17EGrowthmatrix(%)Revenuegrowth 22.6 19.3 21.5 22.3Opprofitgrowth 42.0 20.6 25.8 28.4EBITgrowth 45.0 18.1 27.0 30.1Netprofitgrowth 42.5 18.0 29.8 31.2

Profitabilityratios(%)OPM 19.2 19.4 20.1 21.1EBITmargin 17.2 17.0 17.8 18.9Netprofitmargin 12.6 12.5 13.4 14.3RoCE 41.5 39.6 40.6 42.6RoNW 40.0 35.6 34.9 34.1RoA 20.8 20.1 21.2 22.5

PershareratiosEPS 12.5 14.7 19.1 25.1Dividendpershare 3.0 3.0 3.0 3.0CashEPS 14.6 17.7 22.6 29.1Bookvaluepershare 35.8 47.1 62.7 84.3

Valuationratios(x)P/E 21.5 18.3 14.1 10.7P/BV 7.5 5.7 4.3 3.2MCap/Sales 2.7 2.3 1.9 1.5EV/EBIDTA 14.5 12.1 9.4 7.0

Payout(%)Taxpayout 24.2 24.0 24.0 24.0Dividendpayout 24.0 23.8 18.4 14.0

LiquidityratiosDebtordays 54 54 54 54Inventorydays 61 61 61 61Creditordays 57 57 57 57

LeverageratiosInterestcoverage 32.7 29.5 79.1 203.7Netdebt/equity 0.2 0.2 0.0 (0.1)Netdebt/op.profit 0.3 0.4 0.1 (0.2)DuPontAnalysisY/e31Mar(Rsm) FY14 FY15E FY16E FY17ETaxburden(x) 0.76 0.76 0.76 0.76Interestburden(x) 0.97 0.97 0.99 1.00EBITmargin(x) 0.17 0.17 0.18 0.19Assetturnover(x) 1.64 1.61 1.59 1.57Financialleverage(x) 1.92 1.77 1.65 1.52

RoE(%) 40.0 35.6 34.9 34.1

Sector: Auto Ancillary Sector view: Positive

Sensex: 25,10052Weekh/l(Rs): 611/186Marketcap(Rscr): 14,1636mAvgvol(000Nos): 892Bloombergcode: BHFCIBBSEcode: 500493NSEcode: BHARATFORGFV(Rs): 2PriceasonJune27,2014Companyratinggrid LowHigh 1 2 3 4 5

EarningsGrowth CashFlow B/SStrength Valuationappeal Risk Sharepricetrend

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BharatForge Sensex

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Promoter Institutions Others

Rating: BUYTarget(2Years): Rs1,250CMP: Rs608Upside: 106%

Research Analyst:

Prayesh Jain [email protected]

Bharat Forge

Growth engine cranked Bharat Forge Ltd (BFL) is an indirect play on the expected resurgence indomesticcommercialvehicledemand, improvement inoverall investmentclimate and gradual global economic recovery. In the down cycle, bothdomestic and global, seen in thepast three years,BFLhas emerged as acompanywithmorediversifiedbusiness,strongerbalancesheetandbetterproductionefficiency.Withcapacityutilizationratesatbelow55%,recoveryin revenueswould translate intoearningsCAGRof28%overFY1417E ledby benefits of operating leverage. With superior earnings growth, webelievethevaluationsshouldinchtowardsitspreviousbullcyclemultiples.Revenue base much more diversified Highdependenceon thedomesticCVbusinesshadhitBFLhardduring thedown cycle of the past couple of years. However, during this phase thecompanyhasdiversifiednotonlyoutsideofautobusinessbutalsowithintheauto business. Non automotive sector contribution has risen from 27% inFY12 to37% inFY14.Amongstautosector,whilecontributionofpassengercars to total revenueshas risen from10% to15%,CVproportionhas fallenfrom63%to48%.Alsointermsofgeographies,thecontributionofIndiahasdeclinedfrom53% inFY12to46% inFY14,whilethatofUSandEuropehasincreasedby5%and2%respectively.Thismakesthebusinesslesscyclical.Domestic automotive business to gain traction Pasttwoyearshavebeendifficultfortheautomotiveplayersinthedomesticmarketduetotheweakeconomicbackdrop,rising fuelprices,high interestrates and weak consumer sentiment. CVs were the worst hit being mostclosely linked to economic growth. With a stable government and theanticipated reforms, we expect strong overall economic recovery in themedium term which eventually translates into a strong demand forautomobiles. BFL being a supplier of critical components and havingexpanded its capacity is well poised to garner the ensuing businessopportunities.Weexpecta20%revenueCAGR inBFLsautomotivebusinessduringFY1417E. FinancialsummaryY/e31Mar(Rsm) FY14 FY15E FY16E FY17ERevenues 67,161 77,948 92,495 112,628yoygrowth(%) 30.0 16.1 18.7 21.8Operatingprofit 10,271 13,166 16,193 20,518OPM(%) 15.3 16.9 17.5 18.2ReportedPAT 5,215 6,018 8,051 10,961yoygrowth(%) 110.8 15.4 33.8 36.1EPS(Rs) 17.9 25.8 34.6 47.1P/E(x) 32.3 22.4 16.8 12.3Price/Book(x) 4.9 4.0 3.2 2.6EV/EBITDA(x) 14.3 10.5 8.0 5.6Debt/Equity(x) 0.7 0.5 0.4 0.2RoE(%) 16.7 19.7 21.4 23.3RoCE(%) 15.4 20.2 23.4 27.1


Bharat Forge

2

International auto business also recovering Following the financial crisis, automotive sales in the developedworld hadseenamarkedslowdown.WithgrowthprospectsemerginginUSandstabilityexpectedinEurope,automotivevolumesareexpectedtorevive.ParticularlyinUSCVmarket,fleethasagedandreplacementdemandisrising.Passengercarsalestherehavealsobeengainingstrength.Weexpectthistrendtocontinueinthemediumtermandsee18%CAGRinitsBFLsinternationalautobusiness.Non automotive business could see exponential growth BFL, in itsnonautobusiness,servicesdemandforcriticalcomponentsoffivemajorsegments1)oil&gas,2)unconventionalsourcesofpower,3)railways,4)aerospaceand5)mining. Investments inall thesesectorsareexpected torise substantially in India given the strong focusof thenew governmentonbuilding infrastructure, improvingenergysecurityandprovidingpowertoall.Nonautocurrentlycontributesabout40%ofthestandalonerevenuesandBFLplans to increase it to 60% over themedium term. To achieve this, it hasentered into tieupswithglobal leaders suchasAlstom,Areva,DavidBrownetc.Also ithas setupdedicatedmanufacturing locations.Weexpect a30%revenueCAGRinBFLsnonautorevenues.

Operating leverage, value addition and favorable product mix to drive margins 1) Operatingleverage:CapacityutilizationlevelsforBFLwasat65%initsauto

andnonautobusiness acrossdomesticand international facilitiesat theend of FY14 leaving substantial scope for operating leverage. To add tothis,thecompanyhasbroughtdownbreakevenlevelsacrossitsfacilities.

2) Valueaddition:Overtheyearsthecompanyhas increasedvalueadditionbyaddingmachiningcapacityutilizationofwhichstoodat50%attheendofFY14.Marginsonmachiningaresubstantiallyhigher.

3) Favorable product mix: Nonauto business proportion is set to risesignificantly and we note here that nonauto segment requiring moretechnologicallyadvancedcomponentscommandbettermarginsthanauto.

The aforementioned factors could result in substantial improvement inmarginsforBFLevenfromthecurrentlevels.

WithgrowthprospectsemerginginUSandstabilityexpectedinEurope,automotivevolumesareexpectedtoreviveNonautocurrentlycontributesabout40%ofthestandalonerevenuesandBFLplanstoincreaseitto60%overthemediumterm

Improvementincapacityutilization,lowerbreakevenlevels,highermachiningcontributiontorevenuesandhighernonautocontributionwilldrivemarginexpansion

Risingcontributionofnonautoandpassengercars ReducingdependenceonIndia

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

PassVehicle CommercialVehicle Nonauto

0%

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30%

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60%

70%

80%

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100%

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

India US Europe Others

Source:Company,IndiaInfolineResearch Source:Company,IndiaInfolineResearch

Bharat Forge

3

Financials to gain further strength Driven by robust growth across segments and geographies and capacity inplace,weexpectBFLtoreportaFY1417ErevenueCAGRof19%.Asoutlinedabove, OPM is expected to expand by 300bps during the same period.Resultantly, earningsCAGR is expected to bemuch higher at 29%.RoE andRoCEareexpectedtoimprovemeaningfully.Withnomajorcapexplansinthenear future (given low capacity utilization) free cash flows are expected tosurgeduringthisperiod.

Valuations below historical average BFLtradesatoneyearforwardP/Emultipleof16.8xcomparedtoitshistoricalaverageof24x.Given the topquartileearningsgrowthexpected in thenextthreeyearswebelievethestockshouldreratetothehistoricalaveragelevels.Reduced cyclicality in business also supports our thesis of rerating. WemaintainourBUYratingwitha2yearpricetargetofRs1,250. TradingsubstantiallybelowhistoricalP/Evaluations

0

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Giventhetopquartileearningsgrowthexpectedinthenextthreeyearswebelievethestockshouldreratetothehistoricalaveragelevels

Strongfreecashflowgeneration ImprovedRoEandRoCE

(2,000)

(1,000)

01,0002,0003,0004,0005,000

FY11 FY12 FY13 FY14 FY15E FY16E FY17E

Operatingcashflow Capitalexpenditure Freecashflow

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Bharat Forge

Financials IncomestatementY/e31Mar(Rsm) FY14 FY15E FY16E FY17ERevenue 67,161 77,948 92,495 112,628Operatingprofit 10,271 13,166 16,193 20,518Depreciation (3,579) (3,768) (3,896) (4,024)Interestexpense (1,692) (1,506) (1,326) (1,146)Otherincome 1,249 1,000 1,000 1,000Profitbeforetax 6,250 8,892 11,971 16,348Taxes (2,100) (3,050) (4,097) (5,563)Minoritiesandother 29 176 176 176Adj.profit 4,178 6,018 8,051 10,961Exceptionalitems 1,037 0 0 0Netprofit 5,215 6,018 8,051 10,961

BalancesheetY/e31Mar(Rsm) FY14 FY15E FY16E FY17EEquitycapital 466 466 466 466Reserves 27,083 33,101 41,152 52,113Networth 27,549 33,567 41,618 52,579Minorityinterest 1,842 2,042 2,242 2,442Debt 18,737 16,737 14,737 12,737Deferredtaxliab(net) 1,345 1,345 1,345 1,345Totalliabilities 49,474 53,692 59,943 69,104 Fixedassets 28,487 26,719 24,824 22,800Investments 4,160 4,160 4,160 4,160Networkingcapital 9,573 9,764 9,934 10,074Inventories 12,880 14,949 17,739 21,600Sundrydebtors 8,832 10,251 12,164 14,811Othercurrentassets 12,524 13,224 13,924 14,624Sundrycreditors (22,080) (25,627) (30,409) (37,028)Othercurrentliabilities (2,583) (3,033) (3,483) (3,933)Cash 7,254 13,049 21,025 32,070Totalassets 49,474 53,692 59,943 69,104

CashflowstatementY/e31Mar(Rsm) FY14 FY15E FY16E FY17EProfitbeforetax 6,250 8,892 11,971 16,348Depreciation 3,579 3,768 3,896 4,024Taxpaid (2,100) (3,050) (4,097) (5,563)Workingcapital (1,312) (191) (170) (140)Operatingcashflow 6,416 9,419 11,600 14,669Capitalexpenditure 3,324 (2,000) (2,000) (2,000)Freecashflow 9,741 7,419 9,600 12,669Equityraised 696 926 926 926Debtfinancing/disposal (9,108) (2,000) (2,000) (2,000)Dividendspaid (926) (926) (926) (926)Otheritems 1,266 376 376 376Netincash 1,668 5,795 7,976 11,045

KeyratiosY/e31Mar FY14 FY15E FY16E FY17EGrowthmatrix(%)Revenuegrowth 30.0 16.1 18.7 21.8Opprofitgrowth 29.8 28.2 23.0 26.7EBITgrowth 36.0 30.9 27.9 31.6Netprofitgrowth 98.2 44.0 33.8 36.1 Profitabilityratios(%) OPM 15.3 16.9 17.5 18.2EBITmargin 11.8 13.3 14.4 15.5Netprofitmargin 6.2 7.7 8.7 9.7RoCE 15.4 20.2 23.4 27.1RoNW 16.7 19.7 21.4 23.3RoA 5.6 7.7 9.1 10.8 Pershareratios EPS 17.9 25.8 34.6 47.1Dividendpershare 4.0 4.0 4.0 4.0CashEPS 33.3 42.0 51.3 64.4Bookvaluepershare 118.3 144.2 178.7 225.8 Valuationratios P/E 33.9 23.5 17.6 12.9P/CEPS 18.2 14.5 11.8 9.4P/BV 5.1 4.2 3.4 2.7EV/EBIDTA 14.9 11.0 8.4 6.0 Payout(%) Dividendpayout 22.2 15.4 11.5 8.4Taxpayout 33.6 34.3 34.2 34.0 Liquidityratios Debtordays 48 48 48 48Inventorydays 70 70 70 70Creditordays 120 120 120 120 Leverageratios Interestcoverage 4.7 6.9 10.0 15.3Netdebt/equity 0.4 0.1 (0.2) (0.4)Netdebt/op.profit 1.1 0.3 (0.4) (0.9)

DuPontAnalysisY/e31Mar FY14 FY15E FY16E FY17ETaxburden(x) 0.67 0.68 0.67 0.67Interestburden(x) 0.79 0.86 0.90 0.93EBITmargin(x) 0.12 0.13 0.14 0.16Assetturnover(x) 0.90 1.00 1.05 1.10Financialleverage(x) 2.96 2.56 2.34 2.16RoE(%) 16.7 19.7 21.4 23.3

Sector: Agrochemicals Sector view: Positive

Sensex: 25,10052Weekh/l(Rs): 408/125Marketcap(Rscr): 1,9906mAvgvol(000Nos): 143Bloombergcode: DAGRIINBSEcode: 507717NSEcode: DHANUKAFV(Rs): 2PriceasonJune27,2014Companyratinggrid LowHigh 1 2 3 4 5


50100150200250300


Dhanuka Sensex

Shareholdingpattern

0

50

100


Promoters Institutions Others

Rating: BUYTarget(2Years): Rs800CMP: Rs397Upside: 101.5%

Research Analyst: PratikTholiya

[email protected]

Dhanuka Agritech Ltd

Set to reap bumper harvest DhanukaAgritechLtd (DAL) isa leadingplayer intheagrochemicalsector.DALs inherentstrength lies in itsasset lightbusinessmodelwhichhas ledto higher return on asset than the industry. Managements focus onbuildingstrongdistributionnetworkwhilecollaboratingwithmajorglobalchemicalplayersto introducehighmarginspecialtyproductshaspaidrichdividendsandwillcontinuetodosointheyearstocome.Debtfreebalancesheet, sound financial backing and experienced management team aresomeoftheotherthingsthatmakethisstockattractive.New innovative products key to exponential growth In April 2014, company has announced the receipt of approvals for itsinnovativeproductregisteredunderthe9(3)sectionoftheInsecticideActofIndia,which gives it exclusive rights to sell the product in Indianmarkets.Theseproductswillbe launched inthiskharifseason.Managementhasfiledfor license for 6 new products and is confident of launching at least 2productseachyear inthecoming3years.Ofthese6productsthreewillbeherbicide which is a fast growing category in the agrochemical space.Specialty products contribute twothird revenue while generic productscontributeonethirdrevenue.Crop protection gaining importance; DAL direct beneficiary According to estimates from Crop Care Federation of India (CCFI), 85% ofannualcrop lossesareduetopest infestation,diseasesandweeds.Pesticidepenetration is low in India (0.6kg/ha) vs. global peers (517 kg/ha). Thegovernmentsfocuson increasingtheMSP(minimumsupportprices)forkeycrops like rice,wheat,maize, sugarcaneetcwill lead tohigher farm incomeandprovideanincentiveforfarmerstousemorepesticidestoimproveyields.AllthisaugerswellforDAL. FinancialsummaryY/e31Mar(Rsm) FY14 FY15E FY16E FY17ERevenues 7,395 9,317 11,745 14,877yoygrowth(%) 27.0 26.0 26.1 26.7Operatingprofit 1,216 1,540 1,961 2,499OPM(%) 16.4 16.5 16.7 16.8PreexceptionalPAT 931 1,151 1,405 1,806ReportedPAT 931 1,151 1,405 1,806yoygrowth(%) 44.5 23.5 22.1 28.5 EPS(Rs) 18.6 23.0 28.1 36.1P/E(x) 21.5 17.4 14.2 11.1Price/Book(x) 6.0 4.8 3.8 3.0EV/EBITDA(x) 16.9 13.3 10.4 8.1Debt/Equity(x) 0.2 0.1 0.1 0.1RoE(%) 31.3 30.6 29.8 30.5RoCE(%) 34.9 34.5 36.1 37.7



2

NewInLicensedProductslaunchedinFY14ProductName DescriptionMaxyld PlantGrowthRegulator;InLicensedproductlaunchedinFY14.Application:Cotton&paddyDanfuron Insecticide;InLicensedproductfromBayerCropscience,launchedinQ3FY14.Application:Chilli,Cotton,TeaPlantationProtocol Fungicide;launchedinQ3FY14.Application:Potato,Grapes,BlackGramDefend Insecticide;launchedinQ3FY14.Application:Chilli,Cotton,Grapes

Source:Company,IILFResearch Long standing International tie-ups gives the edge DALhas long standing tieupswith leadingchemicalcompaniesof theworldsuchasNissan,Sumitomo,Chemtura,DuPont,FMCetc.TechnicalsaresourcedfromMNCs and the formulations aremade in the companysmanufacturingplants.TheseproductscommandhighermarginswhichcanbeseenbyDALssuperior EBITDAmargins (~16%) compared to industry average (~14%). ForMNCs,DALcomesasapreferredchoicedueto itsprofoundunderstandingofthe Indianagrochemicalmarket,nationwidedistributionnetworkand strongfarmercontact.SofarDALhas25productsfromitspartnersoutofwhich6areamong the top10revenuecontributors.Majorityof thenewproducts in thepipelinewillbecomingfromsuchtieups.Asset light model, marketing and distribution centric DALs asset light business model has enabled it to achieve superior assetturnoverratioaswellasreturnratioscomparedtoitspeers.Themorecapitalintensive technical manufacturing process has been consciously avoided.Managements priority remains on leveraging itsmarketing and distributionnetworkwhich isoneof the largest in the country. Ithasalsobuilta robustteamofsalesandmarketingworkforcewhichhasfosteredstrongrelationshipwiththefarmers.Lastyear,ithadropedinsuperstarAmitabhBachchanasitsbrandambassador.ThismarketingexercisehasimprovedDALsbrandvisibility,increased brand recognition and has had a positive influence on the targetaudience.

DALs ability to source technicals fromMNCs has resulted in higher marginsthanindustry Asset light model, various marketinginitiatives and strong distributionnetworkhasresultedinsuperiorratios.

SuperiorAssetTurnoverRatio ReturnRatioshigherthanpeers

0

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ExcelCrop

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Insecticides

(In

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PIIndu

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Agritech

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ROE(%) ROCE(%)

Source:Company,IIFLResearch


3

Debt free balance sheet, strong operating cash flow and experienced management team Over the last few years management has taken measures to reduce theworkingcapitalwhichhasresulted instrong inoperatingcashflow.Debt freebalancesheetcoupledwithhigherprofitabilitygivestheflexibilitytoinvestitscash back into the business for further expansion or development of newproducts.RoCEhasconsistentlybeenmaintainedabove30%which ishigherthan the industry. DAL is led by first generation entrepreneurs Mr. R GAgarwal(Chairman)andMrMKDhanuka(MD)whohavebeeninstrumentalinthesteadyriseofthecompany.Bothhaveover40yearsofexperienceintheagrochemicalbusiness. Outlook & Valuation We are positive on the companys prospects in the coming years, given thelaunch of new innovative productswhich command highermargins andwillhelpinincreasingmarketshare.WeexpectDALtoreportrevenueCAGRof26%duringFY201417E.EBITDA isexpectedtoclockaCAGRof27%whilemarginsaretoremainabove16.5%duringthisperiod.AtCMPofRs397,thestock istradingataP/Eof11xbasedonFY17EEPSofRs.36.WerecommendBuyonthestockwithatargetpriceofRs800.Company Background NewDelhibasedDhanukaAgritechLtdisoneoftheleadingcompaniesintheagro chemical space. Ithas featured thrice in theprestigious 'Inc. India500'list. Ithasadiversifiedportfolioofherbicide, insecticideand fungicide,alongwithvarioustypesofplantgrowthnutrients.DALhas3formulationsfacilitieslocatedat Jammu,GurgaonandGujarat.A fourth facility inRajasthanwillbecommissioned inFY15 thatwilldouble theexistingcapacity.Currentproductportfoliocomprisesof85products,twothirdsofwhicharespecialtyproducts.Top 5products include Targa Super (herbicide),Marker,Calden (insecticide),Omite(miticide)andDhanzymeGranules(plantgrowthregulator).

RoCEabove30%duetostrongbalancesheetandhigherprofitability

CategorywiseRevenuebreakup RegionwiseRevenuebreakup44%

14%

32%

10%

Insecticides

Fungicides

Herbicides

Others

28.3%

13.0%

31.7%

27.0%

NorthZone

EastZone

WestZone

SouthZone


4


Financials (Consolidated) IncomestatementY/e31Mar(Rsmn) FY14 FY15E FY16E FY17ERevenue 7,395 9,317 11,745 14,877Operatingprofit 1,216 1,540 1,961 2,499Depreciation (48) (79) (85) (89)Interestexpense (42) (43) (42) (42)Otherincome 37 38 39 40Profitbeforetax 1,163 1,456 1,873 2,408Taxes (232) (306) (468) (602)Adj.profit 931 1,151 1,405 1,806Netprofit 931 1,151 1,405 1,806BalancesheetY/e31Mar(Rsm) FY14 FY15E FY16E FY17EEquitycapital 100 100 100 100Reserves 3,225 4,086 5,137 6,489Networth 3,325 4,186 5,237 6,589Debt 544 559 551 543Deferredtaxliab(net) 36 36 36 36Totalliabilities 3,905 4,781 5,825 7,168 Fixedassets 893 965 930 941Investments 10 10 10 10Networkingcapital 2,979 3,699 4,687 5,894Inventories 2,148 2,664 3,351 4,239Sundrydebtors 1,709 2,144 2,703 3,424Othercurrentassets 385 511 644 774Sundrycreditors (1,115) (1,406) (1,769) (2,238)Othercurrentliabilities (148) (213) (241) (305)Cash 23 108 198 323Totalassets 3,905 4,781 5,825 7,168

CashflowstatementY/e31Mar(Rsmn) FY14 FY15E FY16E FY17EProfitbeforetax 1,163 1,456 1,873 2,408Depreciation 48 79 85 89Taxpaid (232) (306) (468) (602)Workingcapital (764) (720) (988) (1,207)Operatingcashflow 216 509 501 688Capitalexpenditure (303) (150) (50) (100)Freecashflow (87) 359 451 588Equityraised (0) Debtfinancing/disposal 207 15 (8) (8)Dividendspaid (234) (289) (353) (454)Netincash (31) 85 90 126

KeyratiosY/e31Mar FY14 FY15E FY16E FY17EGrowthmatrix(%) Revenuegrowth 27.0 26.0 26.1 26.7Opprofitgrowth 48.5 26.6 27.4 27.4EBITgrowth 45.9 24.4 27.7 27.9Netprofitgrowth 44.5 23.5 22.1 28.5 Profitabilityratios(%) OPM 16.4 16.5 16.7 16.8EBITmargin 16.3 16.1 16.3 16.5Netprofitmargin 12.6 12.3 12.0 12.1RoCE 34.9 34.5 36.1 37.7RoNW 31.3 30.6 29.8 30.5RoA 19.9 19.9 19.7 20.6 Pershareratios EPS 18.6 23.0 28.1 36.1Dividendpershare 4.0 4.8 5.9 7.6CashEPS 19.6 24.6 29.8 37.9Bookvaluepershare 66.5 83.7 104.7 131.7 Valuationratios P/E 21.5 17.4 14.2 11.1P/CEPS 20.4 16.3 13.4 10.6P/B 6.0 4.8 3.8 3.0EV/EBIDTA 16.9 13.3 10.4 8.1 Payout(%) Dividendpayout 25.2 25.2 25.2 25.2Taxpayout 19.9 21.0 25.0 25.0 Liquidityratios Debtordays 84 84 84 84Inventorydays 127 125 125 125Creditordays 66 66 66 66 Leverageratios Interestcoverage 28.9 35.0 45.4 58.9Netdebt/equity 0.2 0.1 0.1 0.0Netdebt/op.profit 0.4 0.3 0.2 0.1


Sector: Capital Goods Sector view: Positive

Sensex: 25,10052Weekh/l(Rs): 177/47Marketcap(Rscr): 2,6946mAvgvol(000Nos): 757Bloombergcode: FNXCINBSEcode: 500144NSEcode: FINCABLESFV(Rs): 2PriceasonJune27,2014Companyratinggrid LowHigh 1 2 3 4 5


50100150200250300


Finolex Sensex

Shareholdingpattern

0

50

100


Promoters Institutions Others

Rating: BUYTarget(2Years): Rs352CMP: Rs176Upside: 100%

Research Analyst: PratikTholiya

[email protected]

Finolex Cables Ltd

Cabled for Growth FinolexCablesLtd(FCL)standstobenefitfromtheexpectedrevivalinuserindustries such as construction, power, telecom and automobile. FCLsdominant position in the cable industry can be attributed to its inherentadvantagessuchashighbrandrecognition,stronggoodwill,soundfinancialbackingandexperiencedmanagementteam.Asapartofitsdiversificationstrategy, FCL has ventured into switchgears, electric motors andtransformers.FCLwilllaunchvarioustypesofcircuitbreakersandcabinetsinthemarketbyendofthisfiscal.Strongbalancesheet,positivefreecashflowsowingtobetterworkingcapitalmanagement,higherprofitability,lowcapex anddebt alongwith robustROE supportourbullish stanceon thecompany.Resurgence in the infrastructure industry to boost demand With the new governments focus on reviving the economic activity, FCLsrevenue growth will be led by robust construction activity, significantinfrastructure improvement in power and telecom industries, and strongautomobile production. Positive outlook for the automotive industry alsobodes well for automotive wires and cables. Currently electrical andcommunicationdatawireandcablecontributes94%oftherevenues. NOFC project, 4G launch provide big opportunity Indian governments ambitious project to connect 2.5 lac gram panchayatsacrossthecountrywithopticalfibercablenetworkundertheNationalOpticFiber Network (NOFN) project has significantly increased the demand foropticalfibercables.InJan2014,FCLwasawardedanadvancepurchaseorderof overRs. 2bn forMetal FreeOptical FibreCable (OFC)under theNOFNproject. FCL is a front runner towinmanymore contracts. Rollout of 4GserviceswillprovideampleopportunitiesforFCLscommunicationwiresandcablesbusiness.FinancialsummaryY/e31Mar(Rsm) FY14 FY15E FY16E FY17ERevenues 23,590 28,210 34,327 42,081yoygrowth(%) 3.9 19.6 21.7 22.6Operatingprofit 2,471 2,986 3,761 4,762OPM(%) 10.5 10.6 11.0 11.3PreexceptionalPAT 1,973 2,272 2,861 3,622ReportedPAT 2,077 2,272 2,861 3,622yoygrowth(%) 43.0 9.4 26.0 26.6 EPS(Rs) 12.9 14.9 18.7 23.7P/E(x) 13.6 11.9 9.4 7.4Price/Book(x) 2.4 2.1 1.8 1.5EV/EBITDA(x) 11.2 9.0 6.9 5.2Debt/Equity(x) 0.1 0.1 0.1 0.1RoE(%) 19.5 19.0 20.3 21.6RoCE(%) 20.7 21.8 23.6 25.3


Finolex Cables Ltd

2

Product mix change to drive margins Thecompanyhasventuredintonewproductslikelightsandelectricalswitches.NewrangeoflampsincludingLEDbasedlightingsystemsmeantforhomeuse,street lighting and other commercial spaces were launched in FY14. Thecompany plans to enter the switchgear product segment andwill launch aseries of productswithin theMCB, ELCB andMCCB range by FY15. For thispurposemanufacturingunithasbeensetupinGujarat.Apartfromswitchgears,thecompanyalsoplanstoventureintomotorsandtransformerbusiness.Thenoncable business of the company, which currently forms 1% of the totalsales, is expected to contribute 34% to the top line by FY1718 as permanagement. With this, the company expects to significantly derisk thebusinessandchangeitsimagefromacablemanufacturertoelectricalproductmanufacturer.ProductPortfolioCategory ProductWiresandCables LightDutyandCommunicationCables.PowerCables PowerandControlCablesSwitches BrandNameFinoswitchPremiumandClassicCFLs BrandNameFinoglowRetrofitandnonretrofitCopperRods BasedonEssexConcast


Entering new geographiesFCLislookingatexploringnewerterritories.SomeoftheAfricancountriesareon top the agenda of themanagement as they provide immense untappedgrowthopportunity.Currently, it ispresent in theUK andGulfCooperationCouncil(GCC)countries.Innext23years,FCLplanstodoubleitsrevenuefromexports.

Strong Balance sheet, positive cash flow can lead to higher dividend payout ratio. FortheperiodFY1417E,weexpectFCLtopoststrongpositivecashflowowingtobetterworking capitalmanagement,higherPAT, low capex anddebt alongwithrobustROEof21%.RoCEhasbeenconsistentlyimprovingfrom9%inFY10to 17% in FY14 and is further expected to improve to 23% during FY1417E.Dividendpayoutratiohasincreasedfrom10%inFY11to14%inFY14andcanbeexpectedtofurtherincreaseonaccountofhigherfreecashflowinthefuture.

Diversificationintoelectricalproductstoaidmarginexpansion.Exportrevenuetodoublein23years.Dividendpayoutcanincreaseduetohigherprofitabilityandlowdebt.

NetSalesCAGR21%duringFY1417E Marginstohoveraround11%duringFY1417E

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10.4%

10.6%

10.8%

11.0%

11.2%

11.4%

11.6%

0

1,000

2,000

3,000

4,000

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7,000


EBITDA(RsMn) EBITDAMargin(%)


Finolex Cables Ltd

3

InternationalJVsJVName TechPartner FCLsOwnership ProductCorningFinolexOpticalFibrePvtLtd. CorningSAS(USA) 50% OpticalFibreFinolexJPowerSystemsPvtLtd

JPowerSystemsCorp(Japan) 49%

ExtraHighVoltageCable

CategorywiseRevenueBreakup

87.3% 86.1% 85.9% 84.9% 83.8%

8.3% 9.2% 10.2% 11.1% 11.7%

3.50% 3.37% 2.20% 1.43% 0.92%

0.9% 1.3% 1.8% 2.5% 3.5%

70%

80%

90%

100%


ElectricalCables CommunicationCables CopperRods Others

Source:IndiaInfolineResearch Outlook & Valuation Wearepositiveonthecompanysprospectsinthecomingyears,owingto(1)expectationof robustgrowth in traditionaluser industries, (2)diversificationintononcableproducts,(3)retainingmarketshare.WeexpectthecompanytopostaCAGRof21%intoplineoverFY201417E.EBITDAisexpectedtoclockaCAGRof24%whilemarginsare to remainabove11% inFY1617E.With theendofderivative contract losses,PAT isexpected togrowataCAGRof20%overFY201417E.AtCMPofRs176,thestocktradesataP/Eof7.4xbasedonFY17EEPSofRs.23.7.WerecommendBuyonthestockwithatargetpriceofRs352. Company Background PunebasedFinolexCablesLtdisa56yearoldcablemanufacturingcompany.Itistheleadingmanufacturerofelectricalandcommunicationcables.Withover3000 distributors FCL has one of the largest distribution networks in India.Company has amarket leadership position inWest and South India and ismaking efforts to expand its footprint inNorth and East India. FCLhas Fourmanufacturingplantswhich are located atPune (Urse andPimpri),Goa andUttarakhand (Roorkee). It has launched switches under the brand nameFinoswitch. It has also started manufacturing and marketing compactfluorescent lamps under band name "Finoglow". Two types of CFLs arecurrentlymanufacturedRetrofitLampsandNonRetrofitLamps.

4

Finolex Cables Ltd

Financials (Standalone) IncomestatementY/e31Mar(Rsmn) FY14 FY15E FY16E FY17ERevenue 23,590 28,210 34,327 42,081Operatingprofit 2,471 2,986 3,761 4,762Depreciation (484) (514) (552) (602)Interestexpense (134) (116) (116) (116)Otherincome 484 484 484 484Profitbeforetax 2,336 2,840 3,577 4,528Taxes (363) (568) (715) (906)Adj.profit 1,973 2,272 2,861 3,622Exceptionalitems 104 0 0 0Netprofit 2,077 2,272 2,861 3,622BalancesheetY/e31Mar(Rsm) FY14 FY15E FY16E FY17EEquitycapital 306 306 306 306Reserves 10,728 12,591 14,953 17,952Networth 11,034 12,897 15,259 18,258Debt 1,285 1,285 1,285 1,285Deferredtaxliab(net) 295 295 295 295Totalliabilities 12,614 14,477 16,839 19,838 Fixedassets 5,065 4,366 4,814 5,212Investments 4,031 4,031 4,031 4,031Networkingcapital 2,868 4,619 5,807 7,299Inventories 3,524 4,492 5,443 6,646Sundrydebtors 1,452 1,932 2,351 2,882Othercurrentassets 919 1,932 2,351 2,882Sundrycreditors (2,117) (2,419) (2,931) (3,579)Othercurrentliabilities (909) (1,319) (1,408) (1,533)Cash 649 1,460 2,187 3,294Totalassets 12,614 14,477 16,839 19,838

CashflowstatementY/e31Mar(Rsmn) FY14 FY15E FY16E FY17EProfitbeforetax 2,336 2,840 3,577 4,528Depreciation 484 514 552 602Taxpaid (363) (568) (715) (906)Workingcapital 238 (1,751) (1,188) (1,493)Operatingcashflow 2,696 1,035 2,225 2,731Capitalexpenditure (1,071) 185 (1,000) (1,000)Freecashflow 1,624 1,221 1,225 1,731Debtfinancing/disposal (351) Dividendspaid (285) (410) (499) (624)Otheritems 54 Netincash 151 812 726 1,108

KeyratiosY/e31Mar FY14 FY15E FY16E FY17EGrowthmatrix(%) Revenuegrowth 3.9 19.6 21.7 22.6Opprofitgrowth 7.6 20.8 25.9 26.6EBITgrowth 19.2 19.6 24.9 25.8Netprofitgrowth 17.2 15.1 26.0 26.6 Profitabilityratios(%) OPM 10.5 10.6 11.0 11.3EBITmargin 10.5 10.5 10.8 11.0Netprofitmargin 8.4 8.1 8.3 8.6RoCE 20.7 21.8 23.6 25.3RoNW 19.5 19.0 20.3 21.6RoA 13.3 13.4 14.5 15.7 Pershareratios EPS 12.9 14.9 18.7 23.7Dividendpershare 1.6 2.3 2.8 3.5CashEPS 16.1 18.2 22.3 27.6Bookvaluepershare 72.1 84.3 99.8 119.4 Valuationratios(x) P/E 13.6 11.9 9.4 7.4P/CEPS 11.0 9.7 7.9 6.4P/B 2.4 2.1 1.8 1.5EV/EBIDTA 11.2 9.0 6.9 5.2 Payout(%) Dividendpayout 14 18 17 17Taxpayout 15.6 20.0 20.0 20.0 Liquidityratios Debtordays 22 25 25 25Inventorydays 61 65 65 65Creditordays 37 35 35 35 Leverageratios Interestcoverage 18.4 25.6 31.9 40.2Netdebt/equity 0.1 (0.0) (0.1) (0.1)Netdebt/op.profit 0.3 (0.1) (0.2) (0.4)


Sector: Auto Ancillary Sector view: Positive

Sensex: 25,10052Weekh/l(Rs): 116/53Marketcap(Rscr): 2,7866mAvgvol(000Nos): 446Bloombergcode: GRVIBBSEcode: 501455NSEcode: GREAVESCOTFV(Rs): 2PriceasonJune27,2014Companyratinggrid LowHigh 1 2 3 4 5


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GreavesCotton Sensex

Shareholdingpattern

0%

20%

40%

60%

80%

100%


Promoter Institutions Others

Rating: BUYTarget(2Years): Rs232CMP: Rs115Upside: 102%

Research Analyst:

Prayesh Jain [email protected]

Greaves Cotton

Firing all cylinders GreavesCotton(GCL)iswellpoisedtogainfromtheexpectedbroadbasedeconomic recovery where we expect revival in auto sales, spurt ininfrastructure investments and sustained growth in agriculture.A leadingsupplier of engines to threewheelers and small commercial vehiclesegment (SCV), GCL is also a supplier of gensets, farm equipments andconstruction equipments. The company has built a strong balance sheet,generatesrobustcashflowsandhasRoCEinexcessof20%.AtP/Eof13.6xFY16EEPSofRs7.2, the stock is relativelyattractivewhencomparedwiththe industry leader.We believe the valuation gapwill narrow down andhenceinitiatecoveragewithaBUYrecommendation.Commercial vehicle industry set to revive WhileM&HCVshaveseensharpfallindemandoverthepastcoupleofyears,LCVshaveseenweaknessonly inthepastoneyear.Webelievethe industrywillrevivefromH2FY15as industrialactivitypicksup, interestratesarecutdownand fuelpricehikesareceased.With thenewgovernmenthavinganagenda of building 100 cities, demand for LCVs should recover asmanufacturers seek lastmile connectivity using the hub and spokemodel.GCL is the market leader in the three wheeler engines market, while itgradually increases itsshare inthe4WSCVmarket.Weexpect3Wdomesticsalestoremainstrongaspaceofurbanizationpicksupinthecountryleadingtohigherrequirementsofpublictransport.Agri equipment business provides large opportunities Penetration ofmechanization in Indian agriculture is at substantially lowerlevelswhencomparedwithotheremergingnations.With increasingfinanceavailability and higher MSPs, farmers should resort to mechanization toimprove productivity. GCLmanufactures engines in the 14 HP range andportable gensets in the 1.4 KVA range which are popular for agricultureapplications. Also recently, GCL has launched Greaves Power Tiller,manufactured by a leadingmanufacturer in China and customized to suitIndianconditions.ImpetusonirrigationdevelopmentbythenewgovernmentwouldprovideampleopportunitiesforGCLsproducts.FinancialsummaryY/e31Mar(Rsm) FY14 FY15E FY16E FY17ERevenues 17,189 19,252 22,717 26,806yoygrowth(%) (8.2) 12.0 18.0 18.0Operatingprofit 1,936 2,237 2,942 3,805OPM(%) 11.3 11.6 13.0 14.2ReportedPAT 1,211 1,377 1,860 2,450yoygrowth(%) (18.0) 21.8 35.0 31.8EPS(Rs) 5.0 5.6 7.6 10.0P/E(x) 23.2 20.4 15.1 11.5Price/Book(x) 3.4 2.9 2.5 2.0EV/EBITDA(x) 14.4 12.3 9.3 7.2Debt/Equity(x) 0.0 0.0 0.0 0.0RoE(%) 15.5 15.5 17.7 19.4RoCE(%) 21.6 22.2 25.3 27.7


Greaves Cotton

2

Promising outlook for the construction equipment business: Constructionequipmentbusinessoverthepastcoupleofyearshasseentorridtimes owing to sharp slowdown in infrastructure activities. Given the pasttrackrecordoftheNDAgovernment,infrastructureinvestmentsareexpectedtosurge.Infact,forthe12thFiveyearplan,infrastructureexpenditureoutlayisplanned tobedoubled toUS$1 trillion.GCLhasbuiltaportfolioofproductswhich include Transit Mixers, Concrete Pumps and Batching Plants. Withapplications primarily in construction of roads, bridges, buildings and otherready mix concrete activities, GCL is well placed to play the infrastructurerevivaltheme.Industrial engines segment to see a multi-pronged growth GCL has built flexibility at itsmanufacturing locations so as to enable it tomanufactureanyenginewhich isrequiredtopowerequipment forpumping,digging, pulling, pushing, carrying or moving. Hence, GCL products findpresence inmarineequipments, fire fighting instruments,agriculture,mining&construction,materialhandling,railcars,etc.Strongpickup isexpected inmost of these areas in the near future. Fire fighting particularly could be amajor driving force as stricter safety normswill entail heavier investmentsfromthecorporateworld.GCLwitha25%shareinthebusinessiswellplacedtocapturetheensuinggrowthindemand. Strategic initiatives for future growth 1) Expanding product plays:GCL facilities are ready for producing engines

andgensetscomplyingwithCPCBIInormsandBSIVnormsfor0.6TSCVand3Wsegment.Thecompanyisworkingonproductssuchashighercapacityautomotiveengines,powertiller,otherlightagricultureequipments,dieselenginesforpumpsetapplicationsandCNGvariantfor0.6TSCV(TataMagicIris).

2) Strengtheningmarketplay:AmongstOEMs,GCLisdevelopingproductsforTVS(3W),Piaggio(4WSCV),M&M(gensetengines),AshokLeyland(gensetengines) and internationalOEMs (nonautomotive applications).Also thecompanyhasestablishedchannelsinSAARC,EastAfricaandMiddleEasttodevelop GCL as a locally entrenched entity. It is also building similarnetwork in South EastAsia. In the aftermarket,GCL is enhancing dealernetworkandisleveragingtheexistingnetworkfordistributionandsaleofnontraditionalproducts.

3) Operational excellence: GCL, with a focus on improving gross margins,initiatedacompanywide initiativeProjectPROPEL. InFY14,theprojecthelped improving the contribution by 1%. Exiting from non strategicinvestments such as divestment ofGreaves FarymannDiesel, closure ofGreaves Cotton Netherlands and closure of foundry unit in Pune hasprovedbeneficial.

4) Building functionalcapabilities:GCLhasconsolidated itsautomotiveandindustrialengines intounifiedenginesbusinesstoderivesynergybenefitssuchas sourcingofRMand logistics.Consolidationofaftermarket forallbusinesseshasenabledrapiddevelopmentofservicecapability.

RobustoutlookforconstructionequipmentbusinessgivenhugeimpetusoninfrastructureinvestmentsexpectedfromthenewgovernmentGCLsflexibilityinmanufacturingofenginesputsingoodsteadtogainfromtheensuingsurgeinindustrialactivityAddingnewenginesandnewcustomerstoitsprofileDeepeningitsmarketreachbothdomesticallyandinternationallyCostcuttinginitiativestodrivemarginsalongwithoperatingleverage

Greaves Cotton

3

Deserve previous bull cycle valuation multiple GCLoverthepastthreeyears,whentheCVsalesandindustrialactivityinIndiawitnessedasharpslowdown,sawavaluationderating. Itwas justified thengiventhedeclineinrevenuegrowth.However,intheyearstocome,weexpectstrong upsurge in CV sales, industrial activity and development of irrigationinfrastructure.Thisshouldtranslate into largebusinessopportunitiesforGCL.We expect 16% revenue CAGR for GCL during FY1417E. With benefits ofoperating leverage,wesee strong recovery inmarginsand resultantlyaPATCAGRof29%duringFY1417E.InthepreviousbullcycleGCLhadtradedatanaverageP/Emultiplerangeof1225x.Webelievegiven thestrongcash flowgenerationandRoCEofabove20%,weexpectareratinginthestock.Substantiallybelowpreviousbullmarket1yearforwardP/Emultiple

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Company Background Greaves Cotton manufactures various industrial engineering products likediesel&petrolengines,gensets,agroequipmentandconstructionequipment.Thebusinessisoperatedthroughfivemaindivisionsagriculturalequipment,automotive, industrialengines,auxiliarypowerandconstructionequipments.Inrecentyears,GCLhasmaderapidstridesintheexportmarkets.GCLhas11manufacturing units located all over India, with overseas offices in UAE,TanzaniaandChina.TheCompany'smanufacturingplantsareequippedwithstateoftheartproductionfacilities,backedbyinhouseR&D.

InthepreviousbullcycleGCLhadtradedatanaverageP/Emultiplerangeof1225x.WebelievegiventhestrongcashflowgenerationandRoCEofabove20%,weexpectareratinginthestock

Trendinrevenuebreakup OPMexpectedtoimprove

75%

80%

85%

90%

95%

100%

FY11 FY12 FY13 FY14

Engines Equipments Others

0.02.04.06.08.0

10.012.014.016.018.0

FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

%


4

Greaves Cotton

Financials IncomestatementY/e31Mar(Rsm) FY14 FY15E FY16E FY17ERevenue 17,189 19,252 22,717 26,806Operatingprofit 1,936 2,237 2,942 3,805Depreciation (435) (465) (495) (525)Interestexpense (46) (46) (46) (46)Otherincome 268 275 300 325Profitbeforetax 1,723 2,001 2,701 3,559Taxes (512) (623) (842) (1,109)Adj.profit 1,211 1,377 1,860 2,450Exceptionalitems (80) 0 0 0Netprofit 1,131 1,377 1,860 2,450

BalancesheetY/e31Mar(Rsm) FY14 FY15E FY16E FY17EEquitycapital 488 488 488 488Reserves 7,691 9,069 10,928 13,379Networth 8,180 9,557 11,417 13,867Debt 40 40 40 40Deferredtaxliab(net) 334 334 334 334Totalliabilities 8,553 9,930 11,790 14,240

Fixedassets 3,734 3,781 3,786 3,762Investments 1,781 2,543 3,543 5,543Networkingcapital 2,698 3,029 3,605 4,287Inventories 1,581 1,771 2,089 2,466Sundrydebtors 3,330 3,730 4,401 5,194Othercurrentassets 1,235 1,358 1,494 1,643Sundrycreditors (1,864) (2,088) (2,464) (2,908)Othercurrentliabilities (1,584) (1,742) (1,916) (2,108)Cash 340 577 855 648Totalassets 8,553 9,930 11,790 14,240

CashflowstatementY/e31Mar(Rsm) FY14 FY15E FY16E FY17EProfitbeforetax 1,723 2,001 2,701 3,559Depreciation 435 465 495 525Taxpaid (512) (623) (842) (1,109)Workingcapital 17 (331) (576) (683)Operatingcashflow 1,662 1,511 1,778 2,292Capitalexpenditure (408) (511) (500) (500)Freecashflow 1,254 1,000 1,278 1,792Equityraised (307) Investments (842) (763) (1,000) (2,000)Debtfinancing/disposal (21) Dividendspaid (65) Otheritems (94) Netincash (74) 237 278 (208)

KeyratiosY/e31Mar FY14 FY15E FY16E FY17EGrowthmatrix(%)Revenuegrowth (8.2) 12.0 18.0 18.0Opprofitgrowth (20.1) 15.6 31.5 29.3EBITgrowth (19.2) 15.7 34.2 31.2Netprofitgrowth (22.2) 13.8 35.0 31.8 Profitabilityratios(%) OPM 11.3 11.6 13.0 14.2EBITmargin 10.3 10.6 12.1 13.5Netprofitmargin 7.0 7.2 8.2 9.1RoCE 21.6 22.2 25.3 27.7RoNW 15.5 15.5 17.7 19.4RoA 10.2 10.7 12.4 13.8 Pershareratios EPS 5.0 5.6 7.6 10.0Dividendpershare 0.3 0.0 0.0 0.0CashEPS 6.7 7.5 9.6 12.2Bookvaluepershare 33.5 39.1 46.8 56.8 Valuationratios P/E 23.2 20.4 15.1 11.5P/CEPS 17.1 15.2 11.9 9.4P/B 3.4 2.9 2.5 2.0EV/EBIDTA 14.4 12.3 9.3 7.2 Payout(%) Dividendpayout 5.4 0.0 0.0 0.0Taxpayout 29.7 31.2 31.2 31.2 Liquidityratios Debtordays 71 71 71 71Inventorydays 38 38 39 39Creditordays 45 45 45 46 Leverageratios Interestcoverage 38.1 44.1 59.2 77.7Netdebt/equity (0.0) (0.1) (0.1) (0.0)Netdebt/op.profit (0.2) (0.2) (0.3) (0.2)


Sector: FinancialsSector view: Positive

Sensex: 25,10052Weekh/l(Rs): 407/166Marketcap(Rscr): 12,8016mAvgvol(000Nos): 746Bloombergcode: IHFLINBSEcode: 535789NSEcode: IBULHSGFINFV(Rs): 2PriceasonJune27,2014Companyratinggrid LowHigh 1 2 3 4 5EarningsGrowth RoAProgression B/SStrength Valuationappeal Risk Sharepricetrend

5075

100125150

Jul13 Oct13 Dec13Mar14 Jun14

IndiabullsHousing Sensex

Shareholdingpattern

20406080

100


Others Institutions Promoters

%


Research Analyst: RajivMehta

[email protected]

Indiabulls Housing Finance Ltd. Surfing smoothly IHF is one of the fastest growing and most profitable housing financecompanies. Strong asset quality, liquidity and capitalization underlie itsrobust balance sheet. Aided by sustained strong volume growth inmortgages (market share at just ~2.5%) and stabletoincreasingpropertyprices,company isexpectedtodeliver23%CAGR in loanassetsoverFY1417. With CV book runningoff fast, the portfolio mix is moving towardsmortgages. On account of this, blended spreads are under pressurecurrentlybutarelikelytostabilizeinthelongerterm.IHFsassetqualityhasremained largelyunscathed amid stressfulmacro;nowwithNPL accrualsandwriteoffs to decline, credit cost should startmoderating. This alongwithhighersecuritizationwoulddrivefurtherRoEimprovement.Valuationat 1.4x FY17P/ABV is inexpensive given estimated averageRoA andRoEdeliveryof4%and32% respectivelyoverFY1417.Highdividendyield (89%)furthersweetensbuyingpropositionofthestock.AUM to witness 23% CAGR over FY14-17; market share to improve IndiabullsHousingFinance(IHF)haswitnessedarobustloanassetsgrowthof28%paoverthepastthreeyears.WithanAUMofRs411bn,IHF iscurrentlythethirdlargestHFCwithashareof~2.5%incountrysexpandinghomeloanmarket.About74%of loanassets ismortgages(~50%home loansand~24%LAP), 21% is commercial credit (largely LDR/construction finance todevelopers)and the residual5% isCV financing. In retailhome loans, IHFsfocusonthemiddleanduppermiddleclassandsalariedindividualshasbeendriving market outperforming growth. In the LAP segment, companyscustomers are selfemployed individuals and small enterprises havingestablished income records. With CV portfolio (company has quit thebusiness)expected to runoff completelyover thenext twoyears, the loanmix isexpected to shift towardsmortgages.Despite shrinkingCVbook, thecompany isconfidentofachieving25%assetgrowth in thecurrentyear. Inourview,IHFwoulddeliver23%CAGRinloanassetsoverFY1417aidedby1)sustained volume growth in mortgages given its small share 2) stabletoincreasingpropertypricesand3)increaseindistributionnetwork.FinancialsummaryY/e31Mar(Rsm) FY14 FY15E FY16E FY17ETotaloperatingincome 26,789 32,427 40,439 50,393Yoygrowth(%) 23.0 21.0 24.7 24.6Operatingprofit(preprovisions) 22,678 27,534 34,421 42,931Netprofit 15,642 18,761 23,691 29,650yoygrowth(%) 24.3 19.9 26.3 25.2 EPS(Rs) 47.0 56.3 65.6 82.1Adj.BVPS(Rs) 166.4 188.3 222.0 265.9P/E(x) 8.2 6.8 5.8 4.7P/Adj.BV(x) 2.3 2.0 1.7 1.4ROE(%) 28.8 30.8 32.3 32.8ROA(%) 3.7 3.8 4.0 4.2CAR(%) 19.1 18.0 18.8 19.1


Indiabulls Housing Finance Ltd.

2

AUMtodoublebyFY17;Securitizationtoincrease Wellcapitalized(Tier1ratio)forrobustgrowth

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ThesecuritizationactivityhaswitnessedincreasedtractiontowardstheendofFY14 thus aidingprofitability and liquidityof the company.During FY14, IHFsolddownloansworthRs42bnandtheoutstandingstockofitstoodatRs57bnat theendof year.Going forward, company intends to selldown3040%ofincremental origination and therefore proportion of securitized loans isexpected to increase.Spreadsof~3.33.5%on these loansare recognizedasincomeover the lifeof the loan. IHF is currentlywellcapitalizedwith Tier1ratio at 15%. In our view, even if the company were to continue its highdividend payout policy (4060%), robust internal capital generation andconversion ofwarrants in FY16 (27.5mn@ Rs225/share)would ensure thatcapitalpositionremainsstrongtillFY17.

Strong balance sheet; spreads to come-off Asapolicy, IHFhasbeenmaintainingadequate liquidity in itsbalance sheet;endFY14 cash & liquid investments stood at Rs74bn, ~18% of loan assets.Though maintaining such high levels of liquidity is RoA dilutive, it reducesliquidity risks substantially and immunes spread from high interest ratevolatility.Lastyear,companywasleastaffectedbytheexceptionalvolatilityinliquidity conditions and consequent spike in borrowing rates.Across variousdurationbuckets,companyhasacloselymatchedALMprofile.

IHFs spreads are expected to comeoff in themedium term as betterthanaverage yielding CV portfolio (14.6% v/s 13.6% for overall book) runsoffwhereasincrementalyieldsinLAPsegmenthavebeenlower(14.5%v/s15.5%for the existing portfolio). So the blended book yield is expected to correctfrom 13.6% to 13.3% in FY15. On the other hand, the average cost ofborrowings (10.1%) is likely to remain firm for a couple of quarters beforestarting to gradually decline. Currently, the borrowing mix is more skewedtowards bank loans (share at 62%)which themanagement intends to shifttowardsbonds(shareat30%),arelativelystableandcheapersource.Aidedbystrongassetgrowth, IHFhas reaped significantefficiencygainsover thepastthreeyears.Thecost/incomeratiohasdeclinedfrom19% inFY12to15.4% inFY14onthebackof1)improvingbusinessproductivityofcenters2)calibrationofnetworkexpansion (closureofCV loancenters)and3) increasing inhousesourcingofloansleadingtolowerDSAcommissions.

Companyintendstoselldown3040%ofincrementaloriginationCurrentlywellcapitalizedwithTier1ratioat15%

Cash&liquidinvestmentsstandat~18%ofloanassets;companyhasacloselymatchedALMprofileSpreadsareexpectedtocomeoffinthemediumtermManagementintendstoshiftborrowingmixtowardsbondsAidedbystrongassetgrowth,IHFhasreapedsignificantefficiencygainsoverthepastthreeyears


3

Creditcosttomoderatesharply Profitabilitytoimprovefurther

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FY13 FY14 FY15E FY16E FY17E

(%)(%)RoA(LHS) RoE(RHS)


Withheadroomavailableforfurtherproductivityimprovementsandpersistentincreaseininhouseloansourcing(targeting80%inFY15v/s74%inFY14),thecost/income ratio is estimated to be comfortably sustained at near currentlevelsevenifthecompanyweretoexpandingitsnetworkatafasterpace.WeexpectIHFtodeliver23%CAGRinpreprovisioningoperatingprofitoverFY1417inlinewiththeassetgrowthAsset quality has been resilient; credit cost to come down Notwithstandingheightened stress in the economyover thepast two years,IHFs asset quality has remained largely unscathed as manifested in stablegrossandnetNPLratios.AssetqualityhasheldupparticularlywellinmainstaymortgagessegmentwherethegrossNPLsstandatmarginal0.250.3%. IthasincreasedintheCVsegment(~3.3%)whichislargelyattributabletodecreasingsizeoftheportfolio.Commercialcreditportfoliohasbehavedresilientlyduetoexposureto largeandreputeddevelopers.Withmacrorecoveryontheanvil,management isreasonablyconfidentofsustainingGrossNPLs intherangeof7090bpsandNetNPLs intherangeof3050bps. InFY14,thecreditcostwashigher at ~76bps due to higher provisioning onwrittenoff accounts. Goingforward,itisexpectedtonormalizetowards50bps.RoEs to improve further; inexpensive valuation and attractive dividend yield IHF is one of the fastest growing and the most profitable housing financecompanies.Strongassetquality, liquidityandcapitalizationunderlie itsrobustbalance sheet. Over the next three years, we dont expect any dilution incompanys performance both on growth and profitability front. Rather,increasingsecuritizationshould leadtofurther improvement inRoE.WiththecompanyestimatedtodeliveraverageRoAandRoEof4%and32%respectivelyover FY1417, current valuation at 1.4x FY17 P/ABV appears extremelyattractive. High dividend yield on the stock further sweetens the buyingproposition.Weexpect IHFprice todouble fromcurrent levelsover thenextcoupleofyearsaidedbysubstantialgrowth innetworthandasharpreratinginvaluation.

Cost/incomeratioisestimatedtobecomfortablysustainedatnearcurrentlevelsevenAssetqualityhasheldupparticularlywellinmainstaymortgagessegmentManagementconfidentofsustainingGrossNPLsintherangeof7090bpsIncreasingsecuritizationshouldleadtofurtherimprovementinRoEEstimatedtodeliveraverageRoAandRoEof4%and32%respoverFY1417


4

Financials IncomestatementY/e31Mar(Rsmn) FY14 FY15E FY16E FY17EIncomefromOperatns 54,194 65,307 79,459 95,096Interestexpense (32,824) (38,841) (45,876) (52,929)Netinterestincome 21,370 26,466 33,583 42,167Noninterestincome 5,419 5,961 6,855 8,226Totalopincome 26,789 32,427 40,439 50,393Totalopexpenses (4,111) (4,893) (6,018) (7,462)Opprofit(preprov) 22,678 27,534 34,421 42,931Provisions (2,860) (3,112) (3,190) (3,860)Profitbeforetax 19,818 24,422 31,231 39,071Taxes (4,133) (5,617) (7,495) (9,377)MinorityInterest (44) (44) (44) (44)Netprofit 15,642 18,761 23,691 29,650

BalancesheetY/e31Mar(Rsmn) FY14 FY15E FY16E FY17EEquityCapital 668 668 723 723Reserves 56,402 63,930 81,594 97,820Shareholder'sfunds 57,070 64,599 82,317 98,544Minorityinterest 19 19 19 19Longtermborrow 201,655 246,019 292,763 345,460Otherlongtermliab 2 3 3 4Longtermprovi 3,684 4,421 5,305 6,366Totalnoncurrliab 205,341 250,443 298,071 351,830ShortTermBorrow 91,474 111,598 132,802 156,706Tradepayables 23 28 34 40Othercurrentliab 81,438 99,354 118,231 139,513Shorttermprov 8,819 10,583 12,699 15,239Totalcurrentliab 181,754 221,563 263,766 311,499Equity+Liab 444,184 536,623 644,173 761,891 FixedAssets 469 483 502 523Goodwill 700 700 700 700Noncurrentinv 247 247 247 247Deferredtaxassets 1,848 2,217 2,660 3,192Longtermloans/adv 310,302 378,569 454,283 536,053Othernoncurrasset 8,153 9,783 11,740 14,088Totalnoncurrasset 321,719 391,999 470,133 554,804Currentinvestments 29,223 35,068 42,082 50,498Tradereceivables 6 8 9 11Cashandcashequiv 44,190 49,713 60,147 71,852Shorttermloans 45,498 55,507 66,609 78,598Othercurrentassets 3,548 4,328 5,194 6,129TotalCurrentassets 122,465 144,624 174,040 207,088TotalAssets 444,184 536,623 644,173 761,891

Keyratios Y/e31Mar FY14 FY15E FY16E FY17EGrowthmatrix(%) Netinterestincome 12.2 23.8 26.9 25.6Totalopincome 23.0 21.0 24.7 24.6Opprofit(preprov) 27.5 21.4 25.0 24.7Netprofit 24.3 19.9 26.3 25.2Advances 14.8 22.5 20.5 18.0Borrowings 13.6 22.5 19.0 18.0Totalassets 13.5 20.8 20.0 18.3 ProfitabilityRatios(%) NIM 5.7 5.7 5.8 6.0Nonintinc/Totalinc 20.2 18.4 17.0 16.3ReturnonAvgEquity 28.8 30.8 32.3 32.8ReturnonAvgAssets 3.7 3.8 4.0 4.2 Pershareratios(Rs) EPS 47.0 56.3 65.6 82.1Adj.BVPS 166.4 188.3 222.0 265.9DPS 29.0 29.0 29.0 32.0 Valuationratios(x) P/E 8.2 6.8 5.8 4.7P/Adj.BVPS 2.3 2.0 1.7 1.4 Otherkeyratios(%) Loans/Borrowings 1.0 1.0 1.0 1.0Cost/Income 15.3 15.1 14.9 14.8CAR 19.1 18.0 18.8 19.1TierIcapital 15.0 13.7 14.4 14.4GrossNPLs/Loans 0.8 0.8 0.8 0.8CreditCost 0.8 0.6 0.5 0.5NetNPLs/Netloans 0.4 0.3 0.3 0.3Taxrate 20.9 23.0 24.0 24.0Dividendyield 7.9 7.9 7.9 8.8

Sector: Cement Sector view: Positive

Sensex: 25,10052Weekh/l(Rs): 248/49Marketcap(Rscr): 2,4756mAvgvol(000Nos): 352Bloombergcode: JKLCINBSEcode: 500380NSEcode: JKLAKSHMIFV(Rs): 5PriceasonJune27,2014Companyratinggrid LowHigh 1 2 3 4 5EarningsGrowth CashFlow B/SStrength Valuationappeal Risk

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JKLakshmi Sensex

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Others Institutions Promoters%


Research Analyst: HemantNahata

[email protected]

JK Lakshmi Cement Ltd

Up-cycle on an anvil Governmentemphasisona)housingforall,b)100newcities,c)connectingmajorriversandd)infrastructuredevelopmentlikebuildingportsandroadsis most likely to boost up cement demand in the coming year. Asincremental capacity addition for industry slowsdown anddemandpicksup, itwould lead tobetter capacityutilization for JK Lakshmi (JKLCE)andthereby support improved realizations.Company isenhancing its capacityfrom6.6mtpato10mtpainthecurrentyearandweexpectittobeamajorbeneficiaryoftheanticipatedvolumetractioninthenorthern,easternandwestern regions;moreover supply surplus is at aminimum level in theseareas.We factor in44%earningCAGRoverFY1418and recommendBUYwith2yrpricetargetofRs433.Beneficiary of favourable market mix JKLCEs capacity is located across Rajasthan, Haryana and Gujarat withNorth/West regions accounting for 62%/38% of sales. Post Durg plantexpansion,each region (northern,westernandeastern) is likely toaccountforonethirdofthesales.PanIndiacementconsumption is likelytogrow812%overthenexttwoyears;assumingevenlyspreadgrowthratesacrossthefiveregions,northandwesternregioncouldrunintoaminordeficitinFY17.Webelieve theupcyclewitnessed inFY13could repeat itselfpostH2FY15where demand push can boost realizations and hence earnings of thecompaniescateringtotheselowsurpluszones.Volume traction to translate into strong revenue growth JKLCEisenhancingitscapacityto~10mtpabyQ4FY15;thiswouldtranslateinto 15% volume CAGR over FY13FY16. This expansion includes 1) 2.7mtpaplantatDurg,ChhattisgarhbyQ2FY15,2)revivalofdefunctcementcapacity(adding1.4mtpaby1HFY15)atUdaipurCementWorks(JKLCEislikelytohaveamajoritystake)and3)0.55mtpagrindingunitinSuratcomingupinH2FY15to boost blending ratio. Volume traction along with improvement inrealizationislikelytotranslateinto18%/24%revenuegrowthinFY15/16.FinancialsummaryY/e31Mar(Rsm) FY14 FY15E FY16E FY17ERevenues 20,567 24,265 30,272 35,706yoygrowth(%) 0.1 18.0 24.8 18.0Operatingprofit 3,021 4,482 6,577 8,605OPM(%) 14.7 18.5 21.7 24.1PreexceptionalPAT 1,115 1,315 2,329 3,862ReportedPAT 1,115 1,315 2,329 3,862yoygrowth(%) (41.9) 17.9 77.1 65.9EPS(Rs) 9.5 11.2 19.8 32.8P/E(x) 22.2 18.8 10.6 6.4Price/Book(x) 1.9 1.7 1.5 1.2EV/EBITDA(x) 11.6 8.8 5.9 4.3Debt/Equity(x) 1.1 1.3 1.2 0.9RoE(%) 8.7 9.6 15.0 20.8RoCE(%) 7.7 9.5 13.4 17.5



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Cement demand likely to regain its historical average Over the past three years, slowdown in the economy (3year avg GDP at+5.3%) impacted growth in sectors like infrastructure and manufacturingwhich inturn loweredcementdemand. Cementdemand/GDPmultiplieralsodippedbelow1xasagainstanaverageof1.3xseeninhighGDPgrowthphasebetween 1999 and 2009. Post election, we expect a decisive focus oninfrastructuredevelopmentandhousingwhichwouldleadtoanimprovementincementdemandinthemediumterm.WeexpecttheGDPgrowthmultipliertoregain1.21.3xlevelsinthecomingyear,therebytranslatingintoacementgrowthofapprox812%overthenextfiveyears.Slow down in new capacity additions to support utilization After adding ~121mtpa in last five years, the pace of incremental capacityadditionhassloweddownsignificantly.Accordingtotheannouncementmadeby the companies we are likely to see addition of ~16/19/15mtpa inFY15/16/17.Inaddition,asub75%levelofcapacityutilizationfortheindustryhasalsoledtodelayincapacityexpansionbycertainplayers.

AllIndiacementdemandsupplyscenario CementdemandsupplyscenarioinnorthernregionMntons FY13E FY14E FY15E FY16E FY17EEffectiveCemCapacity 306 322 338 357 372yoygrowth(%) 4.8 5.2 5.0 5.6 4.2Possibleproduction 296 311 328 342 362CementDispatches 238 247 262 289 310yoygrowth(%) 5.8 3.8 6.1 10.3 7.3CapacityUtilization 77.8 76.7 77.5 81.0 83.3Surplus/(Deficit) 58.0 64.0 66.0 53.0 52.0

Mntons FY13E FY14E FY15E FY16E FY17EEffectiveCemCapacity 67 74 79 85 90yoygrowth(%) 1.5 10.4 6.8 7.6 5.9Possibleproduction 64 69 76 82 87CementDispatches 61 65 69 76 85yoygrowth(%) 8.9 6.6 6.2 10.1 11.8CapacityUtilization 91.0 87.8 87.3 89.4 94.4Surplus/(Deficit) 3.0 4.0 7.0 6.0 2.0

Source:Company,IndiaInfolineResearch CementdemandsupplyscenarioinWesternregion CementdemandsupplyscenarioinsouthernregionMntons FY13E FY14E FY15E FY16E FY17EEffectiveCemCapacity 45 44 47 49 49yoygrowth(%) 2.3 (2.2) 6.8 4.3 Possibleproduction 44 47 49 46 49CementDispatches 38 39 41 44 48yoygrowth(%) 5.6 2.6 5.1 7.3 9.1CapacityUtilization 84.4 88.6 87.2 89.8 98.0Surplus/(Deficit) 6.0 8.0 8.0 2.0 1.0

Mntons FY13E FY14E FY15E FY16E FY17EEffectiveCemCapacity 119 115 118 121 124yoygrowth(%) 8.2 (3.4) 2.6 2.5 2.5Possibleproduction 114 114 116 120 121CementDispatches 70 72 77 85 94yoygrowth(%) 4.5 2.9 6.9 10.4 10.6CapacityUtilization 58.8 62.6 65.3 70.2 75.8Surplus/(Deficit) 44.0 42.0 39.0 35.0 27.0

Source:Company,IndiaInfolineResearch Cementdemandsupplyscenarioincentralregion CementdemandsupplyscenarioinEasternregionMntons FY13E FY14E FY15E FY16E FY17EEffectiveCemCapacity 40 44 49 50 51yoygrowth(%) 11.1 10.0 11.4 2.0 2.0Possibleproduction 37 43 46 46 46CementDispatches 34 37 38 42 45yoygrowth(%) 3.0 8.8 2.7 10.5 7.1CapacityUtilization 85.0 84.1 77.6 84.0 88.2Surplus/(Deficit) 3.0 6.0 8.0 4.0 1.0

Mntons FY13E FY14E FY15E FY16E FY17EEffectiveCemCapacity 39 41 48 52 60yoygrowth(%) 5.4 5.1 17.1 8.3 15.4Possibleproduction 38 42 44 45 56CementDispatches 35 38 41 41 44yoygrowth(%) 9.4 8.6 7.9 7.3CapacityUtilization 89.7 92.7 85.4 78.8 73.3Surplus/(Deficit) 3.0 4.0 3.0 4.0 12.0



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Stock trades at discount to replacement cost - Compelling BUY OnanEV/tonbasis,companytradesatFY16EV/tonofUS$70,representingadiscounttothereplacementcost.WebelieveJKLCEwillbeamajorbeneficiaryof improvement in keydynamics such as expansionled volume growth in adeficitmarketandavailabilityof fuel linkages.Thiswould translate into44%earnings CAGR over FY1418. Stock trades at FY17 PER of 6.4x, at a deepdiscounttomuch largerplayerssuchasACC,UltratechandAmbujaCements,whichare tradingat~1418x.We recommendBUY for2year targetpriceofRs433.Company Background JKLCE, a Hari Shankar Singhania group company was incorporated in 1982started operations by setting up a cement manufacturing plant in Sirohi,Rajasthan. The company has its 6.6mtpa capacity in Rajasthan,Gujarat andHaryanaand100% captivepower capacity (54MW thermalpowerplantand12MWwasteheatrecovery;JKLCEalsohasatieupwithVSLignitetosourcepower).JKLCEusepetcokeforKILNandpowerproduction.

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Financials IncomestatementY/e31Mar(Rsmn) FY14 FY15E FY16E FY17ERevenue 20,567 24,265 30,272 35,706Operatingprofit 3,021 4,482 6,577 8,605Depreciation (1,352) (1,830) (2,195) (2,220)Interestexpense (772) (1,180) (1,560) (1,480)Otherincome 442 330 368 386Profitbeforetax 1,339 1,801 3,190 5,291Taxes (224) (486) (861) (1,429)PAT 1,115 1,315 2,329 3,862BalancesheetY/e31Mar(Rsm) FY14 FY15E FY16E FY17EEquitycapital 589 589 589 589Reserves 12,446 13,488 15,545 19,135Networth 13,034 14,077 16,133 19,724Debt 14,962 18,462 19,962 18,962Deferredtaxliab(net) 1,226 1,226 1,226 1,226Totalliabilities 29,222 33,764 37,321 39,911IntangibleAsset 764Fixedassets 25,511 30,511 32,511 35,011Investments 3,577 3,577 3,577 3,577Networkingcapital (1,407) (1,577) (1,778) (2,062)Inventories 1,081 1,279 1,617 1,901Sundrydebtors 566 701 918 1,136Othercurrentassets 4,138 4,851 6,072 7,073Sundrycreditors (6,768) (7,985) (9,962) (11,750)Othercurrentliabilities (423) (423) (423) (423)Cash 777 1,253 3,011 3,386Totalassets 29,222 33,764 37,321 39,911CashflowstatementY/e31Mar(Rsmn) FY14 FY15E FY16E FY17EProfitbeforetax 1,339 1,801 3,190 5,291Depreciation 1,352 1,830 2,195 2,220Taxpaid (224) (486) (861) (1,429)Workingcapital 1,463 170 201 284Operatingcashflow 3,930 3,314 4,725 6,366Capitalexpenditure (6,378) (6,066) (4,195) (4,720)Freecashflow (2,448) (2,752) 530 1,646Debtfinancing/disposal 3,208 3,500 1,500 (1,000)Dividendspaid (275) (272) (272) (272)Netincash 650 476 1,758 374

KeyratiosY/e31Mar FY14 FY15E FY16E FY17EGrowthmatrix(%)Revenuegrowth 0.1 18.0 24.8 18.0Opprofitgrowth (29.5) 48.4 46.8 30.8EBITgrowth (37.0) 41.2 59.3 42.5Netprofitgrowth (41.9) 17.9 77.1 65.9 Profitabilityratios(%) OPM 14.7 18.5 21.7 24.1EBITmargin 10.3 12.3 15.7 19.0Netprofitmargin 5.4 5.4 7.7 10.8RoCE 7.7 9.5 13.4 17.5RoNW 8.7 9.7 15.4 21.5RoA 3.3 3.3 5.2 7.7PershareratiosEPS 9.5 11.2 19.8 32.8Dividendpershare 2.0 2.0 2.0 2.0CashEPS 21.0 26.7 38.4 51.7Bookvaluepershare 110.7 119.6 137.1 167.6Valuationratios(x)P/E 9.5 11.2 19.8 32.8P/B 1.9 1.8 1.5 1.3EV/EBIDTA 11.6 8.6 5.8 4.3 Payout(%) Dividendpayout 24.7 20.7 11.7 7.0Taxpayout 16.7 27.0 27.0 27.0 Liquidityratios Debtordays 10 11 11 12Inventorydays 19 19 19 19Creditordays 120 120 120 120 Leverageratios Interestcoverage 2.7 2.5 3.0 4.6Netdebt/equity 1.1 1.2 1.1 0.8Netdebt/op.profit 4.7 3.8 2.6 1.8


Sector: Capital GoodsSector view: NeutralSensex: 25,10052Weekh/l(Rs): 68/15Marketcap(Rscr): 4876mAvgvol(000Nos): 724Bloombergcode: JYSINBSEcode: 513250NSEcode: JYOTISTRUCFV(Rs): 2PriceasonJune27,2014Companyratinggrid LowHigh 1 2 3 4 5EarningsGrowth CashFlow B/SStrength Valuationappeal Risk

Midcaps_india Infoline With Two Years Target - Excellent Portpolio

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