Nucleus - HDFC securities PCG...Company Profile: Nucleus Software Exports is a leading software...

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Nucleus

Software

INDUSTRY CMP Recommend Add On Dips To

Targets Time Horizon

DATE 01 Oct 2018

IT Software Rs. 363

Buy At CMP

And Add On

Declines

Rs 329 - 363 Rs 414-479 4-6

Quarters

Robust Balance Sheet With Net Cash Balance Strong Management Team

Estimate 15% Revenue And 21% PAT CAGR Digital ‘PaySe’ –Long-term Story

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HDFC Scrip Code NUCSOF

BSE Code 531209

NSE Code NUCLEUS

Bloomberg NSC

CMP - Sep 28, 2018 Rs. 363

Equity Capital (cr) 29.04

Face Value (Rs) 10

Eq- Share O/S (cr) 2.904

Market Cap(Rs cr) 1071

Book Value (Rs/sh) 159

Avg.52 Wk Volume 143782

52 Week High 602

52 Week Low 298

Red Flag Level # 273

Shareholding Pattern % (Jun 30, 18)

Promoters 67.6

Institutions 09.6

Non Institutions 27.8

Total 100.0

ANALYST

Kushal Rughani [email protected]

Company Profile: Nucleus Software Exports is a leading software provider with software solutions for banks and financial

organisations globally. Its software powers the operations of more than 150 companies in 50 countries,

supporting retail and corporate banking, cash management, internet banking, automotive finance, and

other business areas. Nucleus has products for two sub-segments of the banking industry – Finnone Neo

for retail banks and Finnaxia for corporate banking customers. Finnone is its lending solution that enables

end-to-end loan management for banks/NBFCs. Finnaxia is a transaction banking solution that offers

efficient and innovative services in global payments & receivables, liquidity management and business

internet banking. With deep domain knowledge and robust research capabilities in the banking sector, the

company has also developed several innovative solutions in the areas of mobility, analytics and offline

digital cash solutions. It derives ~80% revenue from products and ~20% from projects & services.

Nucleus launched its lending solution in 1994, and has since been evolving its products based on clients’

needs and technological changes. It has been deployed at over 150 customer sites globally, with many

regularly upgrading its latest offering i.e. FinnOne Neo. A few existing customers are on cloud. Customers

have benefited from the faster time to market, smooth on boarding, effective customer acquisition costs,

lower turnaround time, and reduction in printing/stationary costs.

Nucleus’ flagship offering in the lending segment, Finnone, has been the highest-rated product in its

category and the top-selling solution for over 10 of the last 15 years in the IBS sales league table. Many of

the company’s clients have won the highly-coveted Model Bank Vendor award for its deployment at various

banks such as ICICI Bank, HDFC Bank, DCB Bank, Vietnam Prosperity Bank, CIMB (Malaysia) etc. This

product accounts for a significant portion of the company’s revenue. However, Nucleus has also developed

other offerings to drive the next leg of growth. Although the products are hyper-specialised in nature, they

represent a very large opportunity as they are built to co-exist with existing traditional/modern Core

Banking Solutions (CBS) by third-party vendors.

View and valuation: We believe the company would accelerate its growth momentum, and we expect it to post 15% revenue

CAGR over FY18-20E, mainly driven by its products business. We forecast 260 bps (basis points) margin

expansion over the same period. A strong operational performance is expected to lead to 21% PAT CAGR

over FY18-20E. Total cash and equivalents as on Jun-18 were at Rs 480 cr, which is Rs 164 per share cash

in the balance sheet. Company has huge cash reserves that it plans to use to explore attractive inorganic

opportunities. For product companies like Nucleus, earnings could be lumpy. So, we have valued them on

EV/Revenues and EV/EBIDTA basis.

Currently, Nucleus trades at 1.7x FY20E EV/Revenue and 10x FY20E EV/EBITDA. We find that Nucleus is

available at attractive valuations as compared to its mid-sized peers. If the PaySe innovation works on a

larger scale, Nucleus can be an enormous wealth creator. We recommend investors to buy the stock at

CMP of Rs 363 and add on declines to Rs 329, with targets of Rs 414 and Rs 479 over the next 4-6 quarters,

based upon ~2.2x FY20E EV/Revenues.

mailto:[email protected]

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Financial Summary

(Rs Cr) FY16 FY17 FY18 FY19E FY20E

Sales 349 372 412 474 549

EBITDA 31 54 59 75 93

Net Profit 33 66 63 75 90

EPS (Rs) 11.3 22.8 21.3 25.9 31.0

P/E 32.2 16 17 14.1 11.7

EV/EBITDA 30.2 17.5 15.9 12.5 10.1

Key Highlights

Nucleus has products for two sub segments of the banking industry – Finnone Neo for retail banks and Finnaxia for corporate banking customers. Finnone’s lending solutions enable end-to-end loan management for banks/NBFCs. Finnaxia is a transaction banking solution that offers efficient and innovative services in global payments & receivables, liquidity management and business internet banking.

The company has also developed several innovative solutions in the areas of mobility, analytics and offline digital cash solutions. Company derives ~80% revenue from Products while ~20% from Projects & Services. Domestic contributed 30% to the revenues while ~70% from International Business. PaySe, the digital wallet from Nucleus Software is an online payment solution. The work for the same is still in the initial stages, and is expected to ramp up in the coming quarters. Nucleus has total cash and equivalents, including investments as on Jun-18 at Rs. 480 cr, which works out to be Rs 164 per share and provides limited downside on the stock.

(Source: Company, HDFC sec)

INVESTMENT RATIONALE: New technologies and orders to spur growth

The company has built a strong product portfolio over the last 20 years, and has developed solutions

spanning from retail banking to corporate banking, cash management, internet banking and credit cards.

It has launched new versions of existing products – FinnOne Neo and FinnAxia for NBFCs. FinnOne Neo

is now available on cloud. This would provide a lending platform that is secure, scalable and responsive

to changing customer demands. FinnAxia includes a direct debit solution that provides a robust and

scalable platform and comprehensive security features.

PaySe

PaySe, the digital wallet from Nucleus Software, is an online payment solution that is still in the initial

stages of development. The company plans to ramp up the same in the coming quarters. Company is

looking at the microfinance sector as a possible market for the product.

Lending analytics

Nucleus Lending Analytics delivers insights from qualitative and unstructured data sourced from multiple

channels, such as social media and customer surveys, to identify the appropriate set of customers. It

addresses key business drivers, including higher growth, by targeting the right category of customers

with tailor-made offerings, increased profitability by reducing costs and customer churn, enhanced quality

of the product portfolio by strategic decision-making through the loan’s life cycle.

The solution’s AI-powered capabilities such as the Natural Language Processing (NLP)-based text analysis and neural networks, can help financial institutions gauge customer sentiment.

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Cash-rich balance sheet

Nucleus has total cash and equivalents, including investments, of Rs 480 cr as on Jun-18. This includes balances in current accounts of Rs

30.6 cr, various schemes of mutual funds at Rs. 184.3 cr, Rs. 60.8 cr in fixed maturity plans, fixed deposits with banks at Rs 32.6 cr,

investment in tax-free bonds at Rs. 93.9 cr and Rs. 77.6 cr in preference shares. During FY18 (Aug 2017), company had spent Rs 117 cr

for the buyback of equity shares. The cash-per-share works out to be Rs 164 in the balance sheet, which provides limited downside on

the stock. As the company derives 65-70% revenues from international markets, the Rupee’s depreciation is profitable for the company.

Nucleus is into two business lines, namely (1) Products and (2) Projects & Services

Products business

Revenue from the product segment comprises license fees, revenue from customisation and implementation of products, and post-

production maintenance support. Product revenue for FY18 was at Rs 326 cr, 79.2% of the total revenue, as against Rs 288 cr, 77.4% of

total revenue, in the previous year.

Projects and services

Software services typically comprise of the development of software to meet specific customer requirements. These services consist of

application development and maintenance, testing, consulting and infrastructure management services with a strong focus on the banking

domain. Revenue from software projects and services for the year stands at Rs 85.7 cr, 20.8% of the total revenue, against Rs 84.3 cr,

22.6% of the total revenue in the previous year.

Lending

Nucleus Lending Analytics delivers insights from qualitative and unstructured data sourced from multiple channels, such as social media

and customer surveys, to identify the appropriate set of customers. It addresses key business drivers, including higher growth, by

targetting the appropriate customers with customised offerings, increased profitability by reducing costs and customer churn, enhanced

portfolio quality by strategic decision-making throughout the loan’s lifecycle.

The solution’s AI-powered capabilities, such as Natural Language Processing (NLP)-based text analysis and neural networks, can help

financial institutions gauge customer sentiment and offer tailored products. This solution helps in increasing acquisition rates, lowering

costs and improving customer satisfaction.

Unlike traditional analytical tools that cater to a wider set of industries, Nucleus Lending Analytics is designed specifically to address the

analytical needs of lending businesses. Along with HDB Financial Services, the solution is helping banks in Africa and the Middle East by

enabling more effective decision making, offering comprehensive portfolio management, increasing collection effectiveness and

streamlining operations. With this capability in FinnOne Neo mCollect, loan collection agents can initiate a UPI-based payment request to

the customer on their Virtual Payment Address (VPA). Customers will receive mobile notifications in their UPI app, which could either be

the BHIM or any other UPI-based mobile app of their bank.

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Once the customer accepts the request, the payment is completed instantly. Coupled with Straight Through Processing (STP) capability,

the payment gets credited to the customer’s loan account, and is reflected in the loan statement immediately. This approach facilitates

faster, simpler, cost-effective and secure loan collections, benefitting both the banks and end users.

With banks and financial services companies in India moving to UPI-based payments, it is expected to reach > 150 mn users in a few

years.

PaySe (The Digital Wallet)

PaySe is an offline digital cash solution designed to democratise money. PaySe utilizes the latest advances in mobility, big data, open

source and crypto currency (primarily tokenisation) to deliver a peer-to-peer payment solution.

PaySe, the digital wallet from Nucleus Software, is one of India’s Offline payment solution designed to the card payments market.

Traditional card-based payments are based on a hub and spoke methodology, and hence are focussed mostly on the connected and banked

population of the world. The payment solution is targeted at customers and merchants in the rural and semi-urban areas where mobile

data connectivity is still a challenge. The infrastructure consists of a POS terminal and a Mifare card (Chip Based Smart Card).

The product is the culmination of the company’s vision to make Rs 100 loan possible and profitable. This solution would allow Indians,

which are unbanked and unconnected (internet), by enabling transfer of digital cash offline. It will help address access challenges faced

by banks, micro finance institutions (MFIs) and NBFCs by making basic banking services such as direct benefit transfers (DBT), micro

pension, saving deposits, loans, recurring deposits etc. accessible to the unbanked people. Along with PaySe, the company has also

introduced PURSE, a mobile to carry money and Palm ATM, a bank teller application to democratize money.

The company has received the Prepaid Payment Instrument (PPI) license from RBI, and has three customers (microfinance institutions,

self-help groups and educational institutions) on the platform. Revenue can be earned through float (interest earned on cash in the system)

and also through transaction cost (fraction of amount loaded or encashed from the system). The company also plans to take this solution

into two more African countries. Nucleus has made PaySe available in three new forms: smart watch, band and micro SD card.

PaySe’s key differentiation is enabling the transfer of digital cash balance offline, which eventually gets updated in the system either by

the conversion point partner or by collection agent. For example: a person can recharge its PaySe digital wallet (physical card) by paying

cash to person at the conversion point even if the user has no internet device. This balance can be used to make payments at various

vendor points (with a PaySe machine) without being connected to the internet. Eventually, these vendors can get their digital-currency

collection in their bank account or physical cash.

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The Government of India has launched a massive programme to move the country from a cash-based economy to a digital economy, and

PaySe will play an important role as it is primarily focusing on the rural and semi urban economy, a segment which most wallet players

tend to ignore. PaySe has been rolled out in a couple of villages and has found favour with consumers to make payments for their daily

purchases in the village, and also for LPG and PDS payments.

Nucleus is also focussing on colleges and universities to make their campuses cashless by enabling digital payments for all financial

transactions in the campus and extending the same to transactions around the campus.

Geographically well-diversified revenue stream

Domestic business accounts for ~30% revenues and exports contributed the balance. Geographically the company is well diversified with

an equally strong presence across markets like Far East, South East Asia, India, Middle East, Africa, America, Europe /UK etc. In order to

drive growth, it is also planning to increase its presence in the markets where they have done lesser product implementations. The

company has also forayed into countries like Australia and New Zealand through a wholly-owned subsidiary.

New product launches going ahead would drive the growth momentum in revenues and profitability. Nucleus’ mobility solutions (mServe,

mCash, mCollect) are being received well by existing customers. Though the ticket size is small, it would add to the company’s revenues

and profits.

Company had spent Rs 117cr in the buyback process in 2017

In Aug 2017, Nucleus bought back 33.4 lakh shares through the tender offer route at price of Rs 350 per share for an aggregate

consideration of Rs 117 cr. Post the buyback, total equity shares were reduced to 2.90 cr. The promoters’ holding increased to 67.6% post

the same.

Q1 FY19 results analysis

Nucleus Software delivered 19% yoy growth in revenues to Rs 113 cr. Growth was driven by strong deal wins, with the company

adding 6 new product orders, including 3 new customer wins. During the quarter, domestic revenues stood at Rs 37cr or 32.7% of

its revenues. For, it was at 30.8%. Management commentary remains upbeat across markets, as is evident from order book growth.

The product segment’s order book stood at Rs 340 cr, up 13% yoy. The order book growth rate is softening due to an increased

proportion of subscription revenue. The operating profit margin (OPM) surged 580 bps yoy (210bps QoQ) to 14.8%, as the company

is benefiting from non-linearity as well as improved profitability in new deals. In FY18, OPM had improved by 140 bps to 12.4%.

Revenue contribution from the top 5 clients for the quarter was at 38%.

Nucleus reported an order book of Rs 394 cr (up 15% YoY). Of this, the product order book grew by 13% yoy (flat QoQ) to Rs 340

cr (Services order book at Rs 50 cr was up 31% YoY). Although flat on a QoQ basis, the product order book is still healthy, given

that the reported order book does not capture the upside potential in Cloud deals that have large annuity component (SaaS deals

are small in size but have strong long-term revenue visibility).

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We believe that the robust order book growth provides significant business visibility. Also, during Q1 FY19, the company launched

newer versions of its flagship offerings – FinnOne 3.0 and FinnAxia 5.0. These new launches have been received by existing

customers, building a good reference/reputation for the product in the market. Version upgrade by existing customers does not

lead to any significant revenue potential as they have bought a perpetual license. But, their adoption leads to better visibility of the

product in the market with a live user base. Nucleus also bought an additional 4% stake in Avon Mobility for Rs 83 lakh (now a

100% subsidiary with a total investment of ~Rs 600 lakh till date). This is a strategic investment by the company in a logistics

platform targeted at companies engaged in collections/delivery of goods/money, using the geo-tagging technology.

In terms of foreign currency hedges, on 30 Jun-18, Nucleus had US$ 6.25 mn dollars of forward contracts at an average rate of Rs

67.25. There is a mark-to-market loss of Rs. 1.3cr which is taken to hedging reserve in the balance sheet.

The order book position was Rs. 394cr including Rs. 344cr of products business and Rs. 50cr of projects and services business. In

Mar, 2018 the order book position was at Rs. 384cr including Rs. 344cr of products business and Rs. 45cr of projects and services

business.

Company has 19 customers for the cloud solution. It has added 3 new customers in the quarter from various geographies. It had

won 6 new orders worldwide including 1 in Americas, 4 in India and 1 in Middle East.

Nucleus Software was selected by HDB Financial Services (HDBFS), for implementing lending analytics solution to help them

leverage the insights provided by their data and make faster and more informed lending decisions.

Total Cash and cash equivalents including Investments as on Jun - 2018 were at Rs. 480cr against Rs. 504 cr as on June - 2017.

This includes balances in current accounts of Rs. 30.6 cr, various schemes of mutual funds Rs. 184.3 cr, Rs. 60.8 cr in fixed

maturity plans, fixed deposits with banks of Rs 32.6 cr, investments in tax free bonds of Rs. 93.9 cr and Rs. 77.6 cr in preference

shares. During FY18, company had spent Rs 117 cr for the buyback of equity shares. Company spends 7-8% of revenues into R&D

for its products and also for new products’ development. Cash is expected to be utilised in expansion or in the exploration of

attractive inorganic opportunities.

Nucleus’ software offerings

Nucleus Software is involved in lending and transaction banking technology. The company has inter-alia, two flagship products, built with

state-of-the-art technology

FinnOne has won 10 times award as the mantel of the World’s Best Selling Lending Solution by IBS Publishing, UK.

FinnAxia, an integrated global transaction banking solution offers an efficient and innovative global payments and receivables, liquidity

management and business internet banking services.

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FinnOne NEO, is a lending solution built on an advanced technology platform, designed to shape the future of lending across retail and

corporate sectors, and the Islamic segment’s financing. The multichannel solution helps digitise the complete loan lifecycle end to end,

from initial contact with customers and helping make better credit decisions faster to comprehensive loan servicing and sophisticated

delinquency management.

FinnOne Neo supports both cloud and on-premise deployments. It can be deployed quickly in partnership with leading cloud providers

without high upfront capital expenditure. Cloud deployment provides flexibility of scale, while optimising costs by supporting pay per- use

models.

The suite offers the following line of products which can be used as independent modules or together to form a single suite:

FinnOne Neo Customer Acquisition System (CAS) is a comprehensive loan origination software. It controls and automates various

business processes/activities involved in the processing of a loan or credit card application for advanced risk management and business

process optimisation. It allows financial institutions to integrate various processes for acquisition and pre-disbursal. It supports the entire

acquisition lifecycle, from customer walk-ins to the decision by the underwriter for disbursement. Additionally, it allows online credit

evaluation.

FinnOne Neo Loan Management System (LMS) is an advanced and comprehensive bank loan management system that enables banks

to improve the agility, transparency and efficiency of their lending solutions. As a loan management solution, it enables financial institutions

to automate the processes for achieving cost saving.

FinnOne Neo Collections is a customer centric, web based and workflow-driven solution that allows financial institutions to manage,

monitor and control delinquent loan accounts while automating the loan collections management framework. The workflow manager

governs the entire business processes, and the rule engine defines the supporting rules in line with their policies.

FinnOne Neo Enterprise Content Management (ECM) is a module that is used to store and retrieve various contents like document

images, letters, communications etc. for a particular account. It is well integrated with other modules of the FinnOne Neo suite.

FinnOne Finance Against Securities (FAS), is a comprehensive solution that establishes credit lines to individuals and corporate against

the pledging of financial securities including and not limited to equity shares, mutual funds and government & corporate bonds. It is an

end-to-end solution which automates the business processes from portfolio/account creation to daily assessment of the portfolio value to

account closure.

Islamic Financing is an offering comprising CAS and LMS modules designed as per Islamic/Shariah rules. It is designed with function-

specific modules, managing the complete finance cycle.

Lending Analytics helps financial institutions unleash the power of analytics. The solution focusses on the four key tenets of efficient

end-to-end loan lifecycle management viz. improved acquisition, faster customer on-boarding, comprehensive loan servicing and efficient

delinquency management. The product has an intuitive GUI for quick insight generation through interactive visualisations. It is easy to

build and validate scoring models. Overall, Lending Analytics gives lending business the analytical edge to make data-driven decisions

throughout the lending value chain.

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Nucleus has a large number of good reference customers including RBS, Standard Chartered, DBS, Citibank, SBI, ICICI Bank, Indusind

Bank, the Philippines National Bank, Bank of Baroda etc. as its customers for Transaction Banking. After many years of sluggish new client

wins, it has recently witnessed traction in this segment across India, South-east Asia and Africa. Though the client roster includes many

large global banks as its customers, these banks are primarily using the solution for a specific country or geography, and are not global

roll-outs. However, success in one market actually leads to a potential new opportunity, as banks go through the product consolidation

process. Currently, it is witnessing strong traction (three deals under implementation in FY18) in this segment, which would contribute

significantly to incremental growth in the future.

The key product components of FinnAxia

Global Receivables enables banks to provide comprehensive accounts receivable solutions to corporate customers, across currencies,

transaction types and jurisdictions.

Global Payments enables banks to manage the payments process of their customers, including initiation, processing, authorisation

matrices, A/P reporting, advising & alerts along with payments reconciliation for their corporate customers.

Global Liquidity Management gives banks the power to manage the cash positions of their corporate customers on an international

basis resulting in better utilisation of available funds and reduced interest costs through short-term bank borrowings. It helps the banks

setup and manage complex cash concentration and pooling structures for automated fund movements and consolidation within the group.

Global Liquidity Management automates all transactions, interest & tax calculations and manages a registry of intercompany lending /

borrowing history and limits for the corporate entity.

Financial Supply Chain Management offers an integrated way of managing invoice presentation and transaction processing across a

corporate’s supply chain, covering its suppliers and dealers. It aims to optimize working capital, automate operations, eliminate paper and

manual processing and bring about operational efficiency in the supply chain management workflows.

Business Internet Banking is a delivery channel for bank’s customers, offering convenience to bank anytime and anywhere. It allows

banks to provide easy access to information from multiple back-end systems as relevant data into a single customer view. It is an easy to

use, robust solution that provides direct access to a comprehensive suite of transaction banking products developed for bank’s corporate

customers.

E- Trade Finance gives the corporate customers of the bank a flexibility to digitize their trade finance service requests via functions like

Issuance & Amendment of Letter of Credits (Import & Export), Processing of Bank Guarantees and Settlement of Bills (Import & Export).

Mobility Solutions: The FinnOne Mobility suite is a portfolio of mobile solutions aimed at digitizing various lending business processes –

Loan origination by field staff (mCAS), Loan origination by prospect customers (mApply), Loan self-servicing (mServe), & Field collection

management (mCollect). The suite offers functional areas for use by end customers and by staff of banks and finance companies. Mobility

solutions are also available for FinnAxia customers.

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Stock trades at attractive valuations of 1.7x FY20E EV/Revenue & 10x EV/EBITDA

Nucleus has posted muted performance over FY14-17 as it went under a transformation / investment phase. In FY18, company posted

11% revenue growth while margins remained flat YoY. In FY16, company posted EBITDA margin of 8.5%, the lowest in the last eight

years. The pressure on margins was largely owing to no ramp-up in revenues and surge in operating costs. We believe company would

accelerate the growth momentum and expect it to post 15% revenue CAGR over FY18-20E, mainly driven by its products business. We

forecast 260 bps margin surge over the same period. A strong operational show would lead to 21% PAT CAGR over FY18-20E.

Total cash and cash equivalents as on Jun-18 were at Rs 480 cr, which is Rs 164 per share cash in the balance sheet. Company is sitting

on cash to explore attractive inorganic opportunities. For product companies like Nucleus, earnings could be lumpy. So, we value them on

EV/Revenues and EV/EBIDTA basis.

Currently, Nucleus trades at 1.7x FY20E EV/Revenue and 10x FY20E EV/EBITDA. We find that Nucleus is available at attractive valuations

as compared to its mid-sized peers. If the PaySe innovation works on a larger scale, Nucleus can be an enormous wealth creator.

We recommend investors to buy the stock at CMP of Rs 363 and add on declines to Rs 329, with targets of Rs 414 and Rs 479 over the

next 4-6 quarters, based upon ~2.2x FY20E EV/Revenues.

Risks and concerns

Significant overseas presence exposes Nucleus to the risk of adverse forex fluctuations. Sharp rupee appreciation could impact the

company’s revenues and margins significantly.

Company faces the risk of a product liability claim in case of the product failing to operate (as represented to be suitable

for customer requirement) or incorrect consulting advice. Further measures to dissuade outsourcing of IT services by developed

countries could lead to higher cost, thereby affecting margins.

Company’s competitors range in size from Fortune 100 companies to small, specialised single‐product businesses. In addition, it

also competes with numerous smaller local companies in various geographic markets in which it operates. These

competitive pressures may impact sales volumes, pricing power, and/or increased operating costs, such as marketing and sales

incentives, resulting in lower revenue, gross margins, and operating income.

Slowdown in IT spends could dampen the growth of the products business, and in turn impact company’s revenue growth and

margins (products is a high-margin business).

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Revenues to witness strong ~15% cagr over FY18-20E

Source: Company, HDFC sec Research

353 349 372 412 474 549

6.1

-1.2

6.6

10.8

15.215.8

-4

-2

0

2

4

6

8

10

12

14

16

18

0

100

200

300

400

500

600

FY15 FY16 FY17 FY18 FY19E FY20E

Revenue Growth

EBITDA trend over FY18-20E


67 31 54 59 75 93

-10.6

-53.5

72.6

9.9

27.0 24.5

-60

-40

-20

0

20

40

60

80

0

20

40

60

80

100


EBITDA Growth

PAT to see strong 21% cagr over FY18-20E


65

33

6663

75

90

0

10

20

30

40

50

60

70

80

90

100


Return Ratios


7.3

13.212.4

15.6

17.0

4.0

7.8

11.1

12.7

14.1

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

FY16 FY17 FY18 FY19E FY20E

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FY18 - Revenue Mix


79

21

Products Projects & Services

Order Book Mix


195

308 315 285343

65

45 4736

41

0

50

100

150

200

250

300

350

400

450

FY14 FY15 FY16 FY17 FY18

Products Projects

FY18 Revenues Break up (%)


31

10

15

15

22

7

India

Europe

Middle East

Far East

South East Asia

Others

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Income Statement Balance Sheet

(Rs Cr) FY17 FY18 FY19E FY20E

Net Revenue 372 412 474 549

Total Income 372 412 474 549

Growth (%) 6.6 10.8 15.2 15.8

Operating Expenses 319 353 400 456

EBITDA 54 59 75 93

Growth (%) 72.6 9.9 27.0 24.5

EBITDA Margin (%) 14.4 14.3 15.7 16.9

Depreciation 11.2 7.0 9.0 11.0

EBIT 42 52 66 82

Other Income 32 29 31 35

PBT 74 80 96 116

Tax 8.1 17.3 21.6 25.6

RPAT 66 63 75 90

Growth (%) 102.1 -5.2 18.9 21.8

EPS 22.8 21.3 25.9 31.0

As at March FY17 FY18 FY19E FY20E

SOURCE OF FUNDS

Share Capital 32.4 29.0 29.0 29.0

Reserves 503 432 474 528

Shareholders' Funds 535 461 503 557

Net Deferred Taxes 1 2 4 7

Long Term Provisions & Others 7 7 11 15

Total Source of Funds 543 471 518 580

APPLICATION OF FUNDS

Net Block 47 48 52 57

Intangibles 2 1 1 1

Deferred Tax Assets (net) 23 26 26 26

Long Term Loans & Advances 217 264 276 299

Total Non-Current Assets 289 340 356 384

Current Investments 238 145 138 130

Trade Receivables 67 82 90 99

Short term Loans & Advances 2 1 2 3

Cash & Equivalents 63 70 111 147

Other Current Assets 17 23 26 29

Total Current Assets 388 321 366 408

Trade Payables 35 54 69 76

Other Current Liab & Provisions 85 119 114 109

Short-Term Provisions 2 2 3 4

Total Current Liabilities 134 190 204 213

Net Current Assets 254 131 162 195

Total Application of Funds 543 471 518 580

Source: Company, HDFC sec Research,


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Cash Flow Statement Key Ratios


EBITDA Margin 14.4 14.3 15.7 16.9

EBIT Margin 11.4 12.6 13.8 14.9

APAT Margin 17.8 15.2 15.7 16.5

RoE 13.2 12.4 15.6 17.0

RoCE 7.8 11.1 12.7 14.1

Solvency Ratio

Net Debt/EBITDA (x) -5.6 -3.7 -3.3 -3.0

Net D/E -0.6 -0.5 -0.5 -0.5

Interest Coverage 84.6 99.6 328.2 273.0

PER SHARE DATA

EPS 22.8 21.3 25.9 31.0

CEPS 23.9 23.7 29.0 34.8

BV 165 159 173 192

Dividend 5.0 8.0 9.5 10.5

VALUATION

P/E 15.9 17.0 14.0 11.7

P/BV 2.2 2.3 2.1 1.9

EV/EBITDA 17.5 15.9 12.5 10.1

EV / Revenues 2.5 2.3 2.0 1.7

Dividend Yield (%) 1.4 2.2 2.6 2.9


Reported PBT 74 80 96 116

Non-operating & EO items -32 -29 -31 -35

Interest Expenses 1 1 0 0

Depreciation 11 7 9 11

Working Capital Change -71 127 5 -4

Tax Paid -8 -17 -22 -26

OPERATING CASH FLOW ( a ) -26 168 58 64

Capex 7 -1 -4 -5

Free Cash Flow -19 167 54 58

Investments -68 -50 -12 -23

Non-operating income 32 29 31 35

INVESTING CASH FLOW ( b ) -29 -22 14 6

Debt Issuance / (Repaid) 2 2 6 7

Interest Expenses -1 -1 0 0

FCFE -18 169 60 65

Share Capital Issuance 0 -3 0 0

Dividend -20 -27 -33 -36

FINANCING CASH FLOW ( c ) -18 -29 -27 -30

NET CASH FLOW (a+b+c) -73 117 46 41



16

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Rating Chart

R E T U R N

HIGH

MEDIUM

LOW

LOW MEDIUM HIGH

RISK

Ratings Explanation:

RATING Risk - Return BEAR CASE BASE CASE BULL CASE

BLUE LOW RISK - LOW RETURN STOCKS

IF RISKS MANIFEST PRICE CAN FALL 20%

OR MORE

IF RISKS MANIFEST PRICE CAN FALL 15% &

IF INVESTMENT RATIONALE FRUCTFIES PRICE CAN RISE BY 15%

IF INVESTMENT RATIONALE FRUCTFIES

PRICE CAN RISE BY 20% OR MORE

YELLOW MEDIUM RISK - HIGH RETURN STOCKS


OR MORE





RED HIGH RISK - HIGH RETURN STOCKS


OR MORE





17

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Price Chart

# Explanation of Red Flag Price Level: If the stock price sustains below red-flag, the premise of investment needs to be reviewed. Risk-averse investors should exit the stock and preserve capital. The downside of following the red-flag level is that if the price decline turns out to be temporary and recovers subsequently, you won’t be able to participate in the gains.

75

150

225

300

375

450

525

600 RECOMMENDATION HISTORY

Date Price Reco Target

20 Jun 2016 Rs 206 Buy Rs. 270

29 Dec 2016 Rs 248 Buy Rs. 380

1 Oct 2018 Rs 363 Buy Rs 479

Rating Definition:

Buy: Stock is expected to gain by 10% or more in the next 1 Year. Sell: Stock is expected to decline by 10% or more in the next 1 Year.

18

Page

Research Analyst: Kushal Rughani ([email protected]) HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022) 2496 5066 Website: www.hdfcsec.com Email: [email protected]. Compliance Officer: Binkle R. Oza Email: [email protected] Phone: (022) 3045 3600

Disclosure: I, (Kushal Rughani, MBA), authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. HSL has no material adverse disciplinary history as on the date of publication of this report. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate does not have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest. Any holding in stock – No HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475. Disclaimer: This report has been prepared by HDFC Securities Ltd and is meant for sole use by the recipient and not for circulation. The information and opinions contained herein have been compiled or arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments. This report is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity who is a citizen or resident or located in any locality, state, country or other jurisdiction where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject HSL or its affiliates to any registration or licensing requirement within such jurisdiction. If this report is inadvertently send or has reached any individual in such country, especially, USA, the same may be ignored and brought to the attention of the sender. This document may not be reproduced, distributed or published for any purposes without prior written approval of HSL. Foreign currencies denominated securities, wherever mentioned, are subject to exchange rate fluctuations, which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. HSL may from time to time solicit from, or perform broking, or other services for, any company mentioned in this mail and/or its attachments. HSL and its affiliated company (ies), their directors and employees may; (a) from time to time, have a long or short position in, and buy or sell the securities of the company(ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or act as an advisor or lender/borrower to such company (ies) or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions. HSL, its directors, analysts or employees do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of shares and bonds, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc. HSL and other group companies, its directors, associates, employees may have various positions in any of the stocks, securities and financial instruments dealt in the report, or may make sell or purchase or other deals in these securities from time to time or may deal in other securities of the companies / organizations described in this report.

HSL or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months. HSL or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from t date of this report for services in respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction in the normal course of business. HSL or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither HSL nor Research Analysts have any material conflict of interest at the time of publication of this report. Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. HSL may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. Research entity has not been engaged in market making activity for the subject company. Research analyst has not served as an officer, director or employee of the subject company. We have not received any compensation/benefits from the subject company or third party in connection with the Research Report.

HDFC Securities Limited, SEBI Reg. No.: NSE, BSE, MSEI, MCX: INZ000186937; AMFI Reg. No. ARN: 13549; PFRDA Reg. No. POP: 04102015; IRDA Corporate Agent License No.: HDF 2806925/HDF C000222657; SEBI Research Analyst Reg. No.: INH000002475; SEBI Investment Adviser Reg. No.: INA000011538; CIN - U67120MH2000PLC152193 Mutual Funds Investments are subject to market risk. Please read the offer and scheme related documents carefully before investing.

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