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July 30, 2014

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 Stock Update >> ITC
 Stock Update >> Bharti Airtel
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investors eye

stock update

ITC

Reco: Buy

Stock Update

A mixed performance, maintain Buy with revised price target of Rs387

Key points

Company details
Price target:

Rs387

Market cap:

Rs285,584 cr

52 week high/low:

Rs387 / 285

NSE volume:
(no. of shares)

70.9 lakh

BSE code:

500875

NSE code:

ITC

Sharekhan code:

ITC

Free float:
(no. of shares)

795.5 cr

Shareholding pattern

Others
15%

CMP: Rs359

Domestic
Institutions
35%

 In Q1FY2015 ITCs net revenues grew by 25% YoY, driven by a strong 19% price-led
growth in the cigarette business (sales volume declined by 2.5% in line with our
expectation of a 3% decline) and a 51% growth in the agriculture business (driven
by strong trading of low-margin commodities). The non-cigarette FMCG revenues
grew moderately by 11% (affected by a general slowdown in the industry) while
the hotel business revenues stood flat due to a silent business period.
 The GPM declined by 429BPS YoY largely on account of a change in the revenue
mix and an increase in the prices of some key inputs. However, OPM declined
by only 73BPS to 35.4%. The cigarette business PBIT margin improved by 140BPS
YoY to 64.5% on the back of a price hike undertaken in the cigarette portfolio.
The non-cigarette FMCG business posted a loss of Rs16 crore while the agriculture
business margin dropped by almost 300BPS to 6.0%. Overall, the operating
profit grew by 17.4% YoY to Rs3,277.6 crore and the PAT grew by 16% YoY to
Rs2,186.4 crore largely on the back of a strong growth in the revenues.
 Q1FY2015 was largely a quarter of a mixed performance for ITC. Going ahead,
we expect the cigarette sales volume to remain under pressure as the company
plans to hike prices again to mitigate the impact of a sharp increase in the
excise duty on cigarettes. However, we expect the cigarette business revenues
to remain in double digits while the PBIT margin is likely to sustain YoY. We
believe revival in the other FMCG business would depend on an overall
improvement in the prospects of some of the key FMCG categories.
 We have broadly maintained our earnings estimates for FY2015 and FY2016 and
believe that the company is well-poised to achieve an earnings CAGR of 16%
over the next two years. We continue to like ITC in view of its better earnings
visibility and discounted valuation of 24x FY2016E earnings to some of the other
large-cap FMCG stocks. We maintain our Buy recommendation on the stock
with a revised price target of Rs387 (valuing the stock 26x the FY2016E earnings).

FIIs
50%

Price chart

 Key risk: Any significant drop in the sales volume of the cigarette business and
further drop in the revenues of the other FMCG businesses remain the key risks
to our earning estimates.

380
360
340

Results (stand-alone)

320

Particulars

Q1FY15

Q1FY14

YoY %

Q4FY14

QoQ %

300

Net sales
Total expenditure
Operating profit
Other income
Interest
Depreciation
Profit before tax
Tax
Adjusted PAT
Exceptional item
Reported PAT
EPS (Rs)
GPM (%)
OPM (%)

9,248.3
5,970.7
3,277.6
234.6
15.2
231.3
3,265.7
1,079.3
2,186.4
0.0
2,186.4
2.7
57.0
35.4

7,410.7
4,619.4
2,791.3
203.2
17.0
215.3
2,762.2
870.9
1,891.3
0.0
1,891.3
2.4
61.3
37.7

24.8
29.3
17.4
15.4
-10.6
7.4
18.2
23.9
15.6

9,238.5
6,035.1
3,203.4
266.7
9.5
237.8
3,222.8
944.7
2,278.0
0.0
2,278.0
2.9
58.1
34.7

0.1
-1.1
2.3
-12.1
59.0
-2.7
1.3
14.2
-4.0

Jul-14

Apr-14

Jan-14

Oct-13

Jul-13

280

Price performance
(%)

1m

3m

Absolute 11.7

6.3

Relative
to Sensex

7.4

6m 12m
11.3

-1.2

-8.4 -12.5 -26.2

Sharekhan

Rs cr

July 30, 2014

15.6
15.6
(429)BPS
(73)BPS

Home

-4.0
-4.6
(112)BPS
(77BPS

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investors eye

stock update

most of the categories, but the general slowdown in

most categories resulted in moderation in the revenue
growth.

Segment-wise revenue performance

Business

Q1
FY15
4,201.1
1,934.6
248.7
3,296.1
1,288.5

Q1
FY14
3,537.4
1,744.7
249.9
2,189.0
1,163.1

FMCG - cigarettes
FMCG - others
Hotels
Agri - business
Paperboard,
paper and packaging
Total
10,968.9 8,884.0
Less: inter
1,804.5 1,545.5
segment sales
Gross sales
9,164.4 7,338.5

YoY
%
18.8
10.9
-0.5
50.6
10.8

Q4
FY14
4,078.8
2,314.5
320.5
2,004.2
1,261.2

QoQ
%
3.0
-16.4
-22.4
64.5
2.2

23.5 9,979.2
16.8
834.1

9.9
116.3

24.9 9,145.1

0.2

 Biscuit, snacks, noodles, personal care products and

matchsticks are not growing in line with some of the
earlier quarters. We believe ITCs revenue growth
would get back on track once the inflationary pressures
ease out and consumer sentiment improves.
 The company has maintained its thrust on continuous
addition of new products in the portfolio (especially
in foods and personal care portfolio).
 The company posted a PBIT loss of about Rs16 crore
during the quarter mainly on account of moderation
in the revenue growth and sustained higher spending
on brand building and promotional activities in some
of the key categories. We should monitor the
profitability of this segment on quarter-on-quarter
basis and expect it to improve with an improvement
in the revenue growth and the revenue mix.

Cigarette business: volume declined by 2-3%, margin

improved on back of price hikes
 ITCs cigarette business net revenues grew by about
19% year on year (YoY; gross revenues grew by about
10%) largely driven by the price increases undertaken
in the portfolio in the past few quarters.
 The cigarette sales volume declined by about 2.5%
under a sustained impact of price hikes in the portfolio.
The cigarettes below 65mm size continued do well and
currently contribute around 10-11% of ITCs cigarette
sales volume.

Agriculture business: revenues grew by 50%, but margin

disappointed
 The agriculture business revenues grew by 51% YoY to
Rs3,296.1 crore, driven by trading opportunities in
wheat, soya and coffee. However, the tobacco sales,
which form a large chunk of the revenue pie, didnt
grow in line with the other commodities.

 Going ahead, we expect the cigarette sales volume to

remain under pressure, as the company is planning
further price hikes in the cigarette portfolio (can be
in the range of 6-8%) to mitigate the impact of the
excise duty hike in the recently announced union
budget for 2014-15. The price hikes would be
undertaken in all the segments (including the below65mm cigarettes). Thus, we expect the cigarettes sales
volume to decline by 3.5% in FY2015.

 The PBIT margin of the segment declined by almost

300BPS YoY to 6.1%, largely on account of higher sales
of low-margin commodities.
Hotel business: a muted performance
 The first quarter of a fiscal is normally dull for hotel
business in India. ITCs revenues from the hotel business
stood flat at Rs249 crore during the quarter. The
business registered a PBIT loss of Rs12.0 crore due to
incremental depreciation charge (of Rs14.3 crore) on
account of a revision in the useful life of fixed assets,
in accordance with Companies Act, 2013.

 However, the price hikes would help the revenues to

grow in double digits and the profit before interest
and tax (PBIT) margin to sustain at about 65%.
Non-cigarette FMCG business: affected by general
slowdown in FMCG categories

 The company expects the second half of the fiscal to

be much better for the business, as domestic corporate
travel is expected to improve in the coming months.
Going ahead, once could see an improvement of at
least 100-200 basis points (BPS) in the occupancy rate
with a marginal increase in the room rentals.

 Q1FY2015 was the second consecutive quarter of

slowdown in the revenue growth of non-cigarette FMCG
businessthe revenue growth of the business
moderated to 11% during the quarter. Though the
company managed to maintain the market share in
Segment-wise margin performance
Business
FMCG - cigarettes
FMCG others
Hotels
Agri business
Paperboard, paper and packaging
Total

PBIT (Rs cr)

Q1FY15
Q1FY14
2,721.8
2,241.7
-15.6
-18.9
-12.1
8.9
202.5
199.3
274.9
251.6
3,171.4
2,682.6
Sharekhan

YoY
%
21.4
-17.6
-235.2
1.6
9.3
18.2
3

July 30, 2014

Margins (%)
Q1FY15
Q1FY14
64.8
63.4
-0.8
-1.1
-4.9
3.6
6.1
9.1
21.3
21.6
34.6
36.6

Home

Chg. in BPS
142
28
-296
-30
-195

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investors eye

stock update

 The construction activities of the new luxury properties

in Kolkata, Hyderabad, Bengaluru and at the Classic
Golf Resort near Gurgaon are progressing satisfactorily.
The Gurgaon and Bengaluru hotels are expected to be
operational in mid FY2015 (both the hotels will have a
room inventory of around 100 rooms each).

We have broadly maintained our earnings estimates for

FY2015 and FY2016 and believe that the company is well
poised to achieve an earnings compounded annual growth
rate (CAGR) of 16% over the next two years. We continue
to like ITC in view of its better earnings visibility and
discounted valuation of 24x its FY2016E earnings compared
with some of the other large-cap FMCG stocks. We
maintain our Buy recommendation on the stock with a
revised price target of Rs387 (valuing the stock at 26x
the FY2016E earnings).

Paperboard, paper and packaging business: a better

performance
 The revenues of the paperboards, paper & packaging
business grew by 10.8% aided by higher capacity
utilisation of recent investments.

Valuations
Particulars

 The PBIT margin of the business stood almost flat at

21.3%.

FY12

FY13

FY14

FY15E

FY16E

Net sales (Rs cr) 25173.8 29901.3

33238.6 37927.0 45070.2

Outlook and valuation

Net profit (Rs cr) 6,162.4 7,418.4

8,785.2 9,846.1 11,852.4

The Q1FY2015 performance of ITC was largely a mixed

bag. Going ahead, we expect the cigarette sales volume
to remain under pressure as the company plans further
price hikes to mitigate the impact of a sharp increase in
the excise duty on cigarettes. However, we expect the
cigarette business revenues to remain in the double digits
while the PBIT margin is likely to sustain YoY. We believe
a revival in the other fast moving consumer goods (FMCG)
businesses depends on the overall improvement in the
prospects for the FMCG sector.

EPS (Rs)

7.9

9.4

11.0

12.4

14.9

YoY chg (%)

22.3

19.1

17.7

12.1

20.4

PE(x)

45.5

38.2

32.5

29.0

24.2

P/BV (X)

14.9

12.7

10.9

9.4

7.8

EV/EBIDTA (x)

31.0

26.0

22.2

19.6

16.3

RoCE (%)

44.6

45.4

45.2

43.3

43.9

RoNW (%)

35.5

36.1

36.2

34.7

35.2

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

Sharekhan

July 30, 2014

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Bharti Airtel

Reco: Hold

Stock Update

Strong domestic performance, Africa still lags; price target revised to Rs400
Key points

Company details
Price target:

Rs400

Market cap:

Rs149,103 cr

52 week high/low:

Rs373/274

NSE volume:
(no. of shares)

50.9 lakh

BSE code:

532454

NSE code:

BHARTIARTL

Sharekhan code:

BHARTIARTL

Free float:
(no. of shares)

138.4 cr

Shareholding pattern

Public & Others

1%

Foreign
23%
Institutions
7%
Non-promoter
corporate
3%

Promoters
66%

 In Q1FY2015 Bharti Airtel (Bharti)s consolidated performance was marked by a

strong improvement in the domestic mobile business which led to a top line
growth of 3.3% QoQ (the top line growth was a result of volume as well as price
led improvement). The operating profit grew by a strong 5.7% QoQ. Consequently,
the margin expanded by 73BPS QoQ to 33.6%. The strong operational performance
coupled with a lower interest cost resulted in a 15.3% sequential growth in the
earnings. Adjusting for the exceptional loss for both the quarters, the adjusted
earnings grew by 17.1% QoQ.
 Bhartis domestic wireless business was the star performer in its portfolio, with
a 4% Q-o-Q revenue growth (led by a 2.5% Q-o-Q growth in voice realisation and
a 2.3% Q-o-Q growth in traffic) and a staggering 200-BPS margin expansion. The
wireless business margin at 36.9% is the highest in several quarters (the last
time the company had seen a margin of 36.4% was in Q4FY2010). On the other
hand, the African business continued to disappoint on both the revenue (down
1.1% QoQ) and the margin front (a sequential contraction of 100BPS; at 24.2% it
was a multi-quarter low margin).
 The management continued to place confidence in the improving competitive
landscape of the domestic wireless industry. Hence going forward, it expects
an improvement in the realised rates and consequently in the margins. Taking
cognisance of the strong margin improvement witnessed in the wireless business
in Q1FY2015 and the positive outlook for the Indian business, we have raised
our EBITDA estimates for FY2015 and FY2016 by 2.7% and 3.8% respectively.
Accordingly, we raise our price target from Rs370 to Rs400. We maintain our
Hold rating on the stock though.
Results (consolidated)

Rs cr

Particulars
Price chart
390
370
350
330
310
290
Jul-14

Apr-14

Jan-14

Oct-13

Jul-13

270

Price performance
(%)

1m

3m

Absolute

6.7

4.8

Relative
to Sensex

2.6

-9.7

CMP: Rs373

6m 12m
15.7

5.0

-9.0 -21.6

Q1FY15

Q1FY14

YoY %

Q4FY14

QoQ %

Net sales
23,005.5
License fee & spectrum charges
2,200.3
% Sales
9.6
Employee expenses
1,168.0
% Sales
5.1
Access & inter connection charges
2,788.9
% Sales
12.1
Network operating expenses
5,123.6
% Sales
22.3
Other expenses
3,928.0
% Sales
17.1
Total expenses
15,285.5
Operating profit
7,720.0
Interest expenses
956.5
Depreciation
4,036.5
PBT
2,884.8
Tax
1,532.6
Reported PAT before minority
1,170.2
Minority interest
61.7
Reported PAT post minority
1,108.5
Exceptional including forex &
251.9
derivatives (net)
Adjusted PAT post-minority interest
1,360.4
Adj. EPS
3.4
OPM (%)
33.6

20,299.5
1,821.9
9.0
1,092.6
5.4
2,696.1
13.3
4,670.0
23.0
3,458.7
17.0
13,754.6
6,487.0
1,167.6
3,847.0
1,837.5
968.4
869.1
180.4
688.7
534.0

13.3
20.8

22,260.5
1,995.1
9.0
1,151.7
5.2
2,873.2
12.9
5,021.9
22.6
3,860.2
17.3
14,953.9
7,306.6
991.1
3,944.4
2,381.5
1,356.2
1,025.3
63.7
961.6
98.6

3.3
10.3

Sharekhan

July 30, 2014

997.5
2.50
32.0

6.9
3.4
9.7
13.6
11.1
19.0
(18.1)
4.9
57.0
58.3
34.6
61.0

36.4
36.4
160

1,162.2
2.91
32.82

Home

1.4
(2.9)
2.0
1.8
2.2
5.7
(3.5)
2.3
21.1
13.0
14.1
15.3

17.1
17.1
73 BPS

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investors eye

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Indian business performance

Valuations
Particulars
FY12 FY13
Revenue (Rs cr)
71,506 79,434
% growth
20.2
11.1
EBITDA (Rs cr)
23,712 24,453
% growth
18.8
3.1
EBITDA margin (%)
33.2
30.8
Adjusted PAT (Rs cr) 4,258 2,172
EPS (Rs)
10.7
5.4
% growth
-27.8
-49.0
PER (x)
33.4
65.5
EV/EBITDA (x)
8.8
8.7
RoCE (%)
9.0
7.5
RoE (%)
7.9
4.3

FY14
85,746
7.9
27,660
13.1
32.3
3,935
9.8
81.2
36.2
7.5
9.3
3.8

 Indian mobile business; spectacular show on all

fronts: The mobile business witnessed a spectacular
4% sequential revenue growth; aided by volume as well
as realisation growth in the mainstay voice business
along with a strong data surge. The voice traffic grew
by 2.3% on a sequential basis on the back of a strong
3.8% sequential growth reported in Q4FY2014. For the
quarter the company carried 271 billion minutes on
its network. The voice realisation also witnessed a
sharp 2.5% sequential growth from 37.2 paise per
minute in Q4FY2014 to 38.1 paise in Q1FY2015,
signifying the easing of competition for the
telecommunications (telecom) players (the same was
evident from Idea Cellulars Q1FY2015 results). The
surge in data traffic and revenues continued, with,the
overall data volume growing by 17% QoQ and by 96%
year on year (YoY). Though the data realisation for
the quarter came 2% lower compared with Q4FY2014.

FY15E FY16E
94,714 105,205
10.5
11.1
32,124 36,084
16.1
12.3
33.9
34.3
5,607
6,509
14.0
16.3
42.5
16.1
25.4
21.9
7.1
6.1
11.9
13.7
8.6
9.0

Result highlights
 Strong top line performance aided by Indian mobile
business: The consolidated income of Bharti grew at
3.3% on a sequential basis, led by a strong 4% sequential
growth in the Indian mobile business and a 2.1% growth
in the tower business. Owing to the local currencys
appreciation against the dollar, the income from the
international businesses, ie the African and South Asian
businesses, declined by 1.1% and 2.6% quarter on
quarter (QoQ) respectively. The strong performance
of the Indian mobile business came on the back of an
improvement in both the realisation (up 3.5% QoQ)
and the volume (up 2.3% QoQ) along with a growth in
the data business.

 Non-mobile business; DTH and tower businesses

shine: On the non-mobile business, Airtel Digitals
revenues grew by 9.2% QoQ led by a strong growth in
the net additions (Bharti added 3.8 lakh subscribers in
Q1FY2015) and a 5.4% sequential growth in the average
revenue per user (ARPU). The margins for the segment
expanded by 650BPS QoQ to 24.3% in Q1FY2015 from
17.8% in Q4FY2015. This is the highest margin reported
by the segment so far. Also, the tower business reported
a 2.1% sequential growth in its revenues. The other
businessesenterprise business and telemedia
businessposted a lacklustre performance.

 Operating profit expands 5.7% QoQ; Indian mobile

business shines with 200-BPS margin expansion: The
consolidated operating profit for the quarter grew by
strong 5.7% QoQ and 19% year on year (YoY).
Consequently, the operating profit margin (OPM)
expanded by 73 basis points (BPS) QoQ. This strong
margin expansion was led by a margin (which witnessed
a very sharp margin expansion of 200BPS from 34.9%
in Q4FY2014 to 36.9% in Q1FY2015). Also, the Airtel
Digital business showed a substantial margin
improvement (up 650BPS QoQ). The African business
margin stood at 24.2% during the quarter (a contraction
of 100BPS QoQ),and was the lowest margin reported
in 14 quarters.

African business performance

 Revenue growth at modest 1.7% on constantcurrency front: The revenues of the African business
declined by 1.1% QoQ in rupee terms; on a constantcurrency basis, the growth was modest at 1.7% QoQ.
The entire constant-currency growth for the African
business was on account of a growth in data revenues
and volumes. The data realisation grew at 8% QoQ while
the volume grew at 7% QoQ.
 Higher operational expenses dragged margins to a
multi-quarter low of 24.2%: A subdued revenue
performance coupled with higher operational expenses
(network operating cost, and sales and administrative
expenses) weighed on the margin performance and
the African margin came at a multi-quarter low of 24.2%
for Q1FY2015. Consequently, the EBITDA declined 2%
QoQ. Bhartis African EBITDA has been trending in the
range of $280-300 million for ten quarters now.

 Reported earnings include exceptional losses;

adjusted earnings surpass expectations: The reported
earnings grew by 15.3% on a sequential basis to
Rs1,108.5 crore and also included an exceptional loss
on account of a charge related to various disputes and
a tax related provision. Adjusting for the same, the
earnings grew by 17.1% on a sequential basis.

Key takeaways from management conference call

 Marked improvement in the balance sheet and

gearing: The consolidated net debt stood at $9.6 billion
while the net debt-to-earnings before interest, tax,
depreciation and amortisaiton (EBITDA) improved from
2.2x in Q4FY2014 to 2.04x in Q1FY2015.
Sharekhan

 Headroom for improvement in the voice realised

rates: The management maintained its positive stance
on the trend towards the voice realised rates and
mentioned that barring seasonal quarters, the realised
6

July 30, 2014

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investors eye

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deals would be incremental profit before tax (PBT)

neutral to positive.

rates are poised to increase as there still exists a gap

between the headline tariff and the realised tariff.
This will thus keep the headroom for growth.

 Capex guidance maintained at $2-2.4 billion: On the

capital expenditure (capex) front, it guided for a
consolidated capex in the range of $2.0-2.4 billion
including $800 million towards the African business.
The capex guidance excludes any spectrum related
pay-outs.

 Strong growth in data to be complemented by

spectrum: It echoed the stance of the other telecom
companies with respect to data growth and expects
data share and its growth to continue to increase. But
it also mentioned that the growth momentum needs
to be complemented with spectrum and that it would
be keen to acquire spectrum in the upcoming auctions.

 Tax guidance: For the Indian business, the

management guided for a 28-29% effective tax rate
while it continues to be challenging to provide any
guidance for the African business owing to the
differences in the law and a mix of loss- and profitmaking countries.

 African business saw strong data led growth: On the

African front, it has now acquired 3G licences in all
the 17 countries and has 3G presence in 15 countries.
Bharti expects to roll out 3G services in the remaining
two countries in the ensuing quarter. The management
sounded very positive on the data growth potential in
the African market and expects around 16-20%
sequential growth.
 In line with Helios deal, looking at African tower
sale: In line with the recent divestment of 3,100 African
towers to Helios, the management is also looking to
enter into similar tower divestment deals for the
remaining 12,000-13,000 towers and guided that these

 Reporting changes: For the quarter, there were a couple

of reporting changes including: (a) reclassification of
financing loan of the Dutch subsidiary from the African
business towards the Indian business; and (b) changes
in data subscriber reporting (as per the new definition,
a subscriber using > 1 megabyte of data in the immediate
30 days would be classified as data subscriber as against
the earlier definition of a customer using > 0 kilobyte
of data in the preceding 30 days).

Voice realisation and growth trends (QoQ)

Voice volume and quarterly growth trends

38.500
38.000
37.500
37.000
36.500
36.000
35.500
35.000
34.500
34.000
33.500
33.000

5.0

275.0

4.6
270.0

4.0

6
5.1

265.0

3.0
2.5

2.1

260.0

0.6

1.0

0.5
(0.2)

Q4FY13A Q1FY14

-1
-2

245.0

(1.0)

240.0

-3
-4

Q4FY 13A Q1FY 14

Q2FY 14 Q3FY 14A Q4FY 14A Q1FT14A

V oice traf f ic (bn minutes)

% QoQ grow th

Data realisation and growth trends

35.0

25.0

30.0

21.9
20.0

19.3

18.7

40.00

(2.7)

% QoQ grow th

60.00

18.7

250.0

Data volume and growth trends

50.00

255.0

Q2FY14 Q3FY14A Q4FY14A Q1FT14A

Voice realization (paise per minute)

2.3 2

1.5

2.0
1.2

4
3

3.8

30.0

30.4

28.6

28.0

25.0
20.0

16.7

15.3

32.7
29.3

15.0

15.0

30.00

10.0
10.0

5.0

20.00

5.0

10.00

(5.0)

Q4FY 13A

Q1FY 14

Q2FY 14

Q3FY 14A Q4FY 14A Q1FT14A

(15.0)

Q2FY 14 Q3FY 14A Q4FY 14A Q1FT14A

Data volume (bn bytes)

Q1FY 14

(10.0)

Q4FY 13A

Data realiz ation (pasie per byte)

% grow th

% grow th

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IRB Infrastructure Developers

Reco: Buy

Stock Update

Robust BOT performance limits impact of leverage; price target revised to Rs300
Key points

Company details
Price target:

Rs300

Market cap:

Rs7,938 cr

52 week high/low:

Rs275/52

NSE volume:
(no. of shares)

51.7 lakh

BSE code:

532947

NSE code:

IRB

Sharekhan code:

IRB

Free float:
(no. of shares)

12.9 cr

Shareholding pattern

FII
25%
Institutions
4%

Promoters
61%

CMP: Rs239

 IRB Infrastructure Developers (IRB) reported a net profit growth of 11.8% on

account of a strong performance of the BOT segment (up 54% YoY, OPM up
387BPS). On the flip side, the construction business (down 23% YoY), and a
surge in the interest expenses (after commissioning of the Jaipur-Deoli project)
and depreciation (amortisation of premium deferment of two projects) limited
the net profit growth.
 The companys order book stands at Rs11,348 crore (including projects worth
Rs5,500 crore bagged recently) providing visibility of the revenues of the
construction business over next three to four years. The tariff revision in some
projects from April 1, 2014 and September 1, 2014 along with an improvement
in the traffic is expected to drive the BOT revenues.
 IRB is well funded to meet the Rs2,041 crore equity requirement over the next
three years with internal accruals. The improving macro environment (better
visibility of tendering, potential easing of interest rates etc) and a potential
upside from a better than expected growth in traffic on the back of an economic
revival are the key re-rating triggers for the stock. Thus, we continue to like
IRB, which could offer handsome gains over the next 12-18 months. We maintain
our Buy rating on the stock with a revised price target of Rs300.

Public &
others
10%

Results (consolidated)
Price chart

Rs cr

Particulars

Q1FY15

Q1FY14

YoY %

Q4FY14

QoQ %

Net sales

1,010.0

1,032.7

-2.2

882.9

14.4

26.7

29.3

-8.9

35.2

-24.2

300

Other income

250

Total income

1,036.7

1,061.9

-2.4

918.0

12.9

200

Total expenses

447.3

577.7

-22.6

440.9

1.5

150

Operating profit

562.8

455.0

23.7

442.0

27.3

Depreciation

176.5

121.7

45.0

119.3

48.0

Interest

216.7

166.0

30.5

209.9

3.3

Profit before tax

196.2

196.5

-0.2

148.0

32.5

45.6

62.5

-27.0

37.9

20.3

150.6

134.1

12.3

110.1

36.8

0.2

-0.5

-147.5

0.9

-74.9

150.4

134.6

11.8

109.2

37.7

33.2

33.2

0.0

33.2

0.0

100
Jul-14

Apr-14

Jan-14

Oct-13

Jul-13

50

Price performance
(%)

1m

3m

6m 12m

Taxes
PAT
Minority interest
Consolidated PAT
No of equity shares

Absolute
Relative
to Sensex

4.9 101.4 244.9 190.5

0.9

73.5 171.2 117.0

EPS

4.5

4.0

11.8

3.3

37.7

OPM (%)

55.7

44.1

1166 BPS

50.1

565 BPS

NPM (%)

14.9

13.0

186 BPS

12.4

252 BPS

Tax rate (%)

23.2

31.8

-854 BPS

25.6

-236 BPS

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 BOT segment drives revenues; higher interest and

depreciation charge limit profitability: In Q1FY2015,
IRBs consolidated revenues declined by 2.2% year on
year (YoY) to Rs1,010 crore owing to a year-on-year
(Y-o-Y) decline of 23.0% in the construction revenues.
The build-operate-transfer (BOT) segment reported a
53.9% Y-o-Y growth in the revenues. The construction
segment reported a decline on account of the
completion of the Tumkur-Chitradurga project during
Q2FY2014. The operating profit margin (OPM)
expanded by 1,166 basis points (BPS) YoY to 55.7% on
account of a higher contribution from the BOT segment.
Subsequently, the earnings before interest, tax,
depreciation and amortisation (EBITDA) rose by 23.7%
YoY. During the quarter, the interest expense grew by
30.5% YoY on account of the inclusion of the JaipurDeoli and Talegaon-Amravati projects. Depreciation for
the quarter rose 45% YoY on account of amoritsation
of premium deferments for two projects (total Rs32
crore for the Ahmedabad-Vadodara and TumkurChitradurga projects. However, a lower effective tax
rate led the consolidated net profit to grow at 11.8%
to Rs150 crore.

visibility of tendering, potential easing of interest rates

etc) and a potential upside from a better than expected
growth in traffic on the back of an economic revival
are the key re-rating triggers for the stock. Thus, we
continue to like IRB, which could offer handsome gains
over the next 12-18 months. We maintain our Buy rating
on the stock with a revised price target of Rs300 (which
factors in the higher than expected growth in the BOT
toll revenues from a few projects).
Strong order book at Rs11,348 crore provides revenue
visibility over the next three to four years
At the end of Q1FY2014, the company reported an order
book of Rs11,348 crore, which provides a good revenue
visibility for the next three to four years. The company
recently bagged two projectsYedeshi-Aurangabad and
Kaithal-Rajasthan, aggregating Rs5,500 crorewhich are
expected to start contributing towards the construction
income from Q3FY2015 onwards. The Solpapur-Yedeshi
project is likely to contribute from H2FY2015 onwards.
Consequently, the company expects to the construction
income to grow at 10% YoY in FY2015.
Order book composition as of Q1FY2015

 Construction segment reports decline in revenues,

as expected: The revenues from the construction
vertical declined by 22.8% YoY to Rs583 crore on
account of the completion of the Tumkur-Chitradurga
project during Q2FY2014. The construction revenues
came mainly from the Ahmedabad-Vadodara project
(Rs450 crore) and the Goa-Kundapur project (Rs125
crore). Further, the quarter also witnessed a stable or
range-bound movement in the raw material prices as
a result of which the margin expanded to 30.5% in
Q1FY2015 from 28.6% in Q1FY2014.

Kaithal Rajasthan
Border
17%

O&M contracts
17%
Sindhudurg airport
3%

A hemdabadVadodara
8%

Yedeshi
A urangabad
24%

Solapur Y edeshi
11%

 BOT division posts stellar performance: The BOT

division registered a robust performance with the
revenues rising by 53.9% YoY to Rs427 crore. The growth
was largely led by the toll revenues in the MumbaiPune, Pune-Solapur, Ahmedabad-Vadodara, SuratBharuch, Surat-Dahisar, Omallur-Namakkal and TumkurChitradurga projects, which grew by 9-25% each YoY
during Q1FY2015. At the operating level, the segment
witnessed an increase of about 387BPS YoY in the
margin to 90.1% on account of lower operating and
maintenance costs for the recently completed BOT
projects. Overall, the traffic growth across projects
was 4-5% YoY.

Goa/ Karnataka
Border Kundapur
19%

Valuation
Particulars

FY12

FY13

FY14

FY15E

FY16E

Sales (Rs cr)

3,130.5 3,687.2 3,731.9 4,309.8 4,929.8
YoY growth %
28.4
17.8
1.2
15.5
14.4
EBITDA (Rs cr)
1,373.3 1,633.3 1,753.7 2,301.7 2,609.9
Margins %
43.9
44.3
47.0
53.4
52.9
Adj. net profit (Rs cr) 495.8
556.7
459.1
556.0
685.9
YoY growth %
9.6
12.3
(17.5)
21.1
23.4
Shares in issue (cr)
33.2
33.2
33.2
33.2
33.2
EPS (Rs)
14.9
16.7
13.8
16.7
20.6
YoY growth %
9.6
12.3
(17.5)
21.1
23.4
PER (x)
16.0
14.3
17.3
14.3
11.6
Book value (Rs)
86.0
98.0
107.1
119.2
135.1
P/BV (Rs)
2.8
2.4
2.2
2.0
1.8
RoCE (%)
13.9
11.9
10.4
11.5
12.9

 Maintain Buy with revised price target of Rs300: IRB

is well funded to meet the Rs2,041 crore equity
requirement over the next three years with internal
accruals. The improving macro environment (better
Sharekhan

Others
1%

RoNW (%)

July 30, 2014

18.7

18.2

13.5

Home

14.8

16.2

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Segment-wise performance
Particulars
Revenues
Construction
BOT
Total
EBITDA
Construction
BOT
Total
EBITDA margin (%)
Construction
BOT

Rs cr
Q1FY2015

Q1FY2014

YoY %

Q4FY2014

QoQ %

583.0
427.0
1010.0

755.0
277.5
1032.4

-22.8
53.9
-2.2

568.2
314.8
883.0

2.6
35.6
14.4

178.1
384.6
562.7

215.6
239.2
454.8

-17.4
60.8
23.7

170.3
271.9
442.2

4.6
41.5
27.3

30.5
90.1

28.6
86.2

199 BPS
387 BPS

30.0
86.3

57 BPS
374 BPS

BOT revenues
Toll collections
Mumbai-Pune
Pune-Nashik
Pune-Sholapur
Thane-Bhiwandi & Kaman-Paygaon
Thane-Ghodbunder
Kharpada Bridge
Ahmednagar-Karmala-Temburni
Mohol-Kurul-Kampti-Mandrup
Surat-Bharuch
Surat-Dahisar
IRDP Kolhapur
Jaipur-Deoli
Talegaon-Amravati
Tumkur-Chitradurg
Ahmedabad-Vadodara
Omallur Salem -Namakkal
Total

Rs cr
Q1FY14

Q2FY14

Q3FY14

Q4FY14

Q1FY15

YoY %

QoQ %

108.9
5.9
4.7
18.4
8.6
2.3
3.6
1.7
40.2
117.2

109.5
5.7
4.1
15.3
8.8
1.8
3.6
1.7
39.8
115.0
0.7
6.5
39.9
26.8
14.5
394

109.0
5.5
5.3
18.2
6.5
2.1
3.4
1.5
44.0
128.7
18.6
7.7
41.7
33.7
16.6
443

135.2
5.6
5.5
18.1
7.4
2.4
3.5
1.5
43.8
131.6
0.2
22.0
12.9
44.7
36.0
17.0
487

24.2
-5.1
17.0
-1.6
-14.0
4.3
-2.8
-11.8
9.0
12.3

5.1
38.9
28.8
14.7
399

110.3
5.7
4.8
17.3
8.9
2.0
3.5
1.5
42.6
127.0
1.9
15.0
7.2
42.5
32.6
15.4
438

24.0
1.8
3.8
-0.5
13.8
14.3
2.9
0.0
-0.5
2.3
18.3
67.5
7.2
6.8
2.4
10.1

152.9
14.9
25.0
15.6
22.2

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V-Guard Industries

Reco: Buy

Stock Update

Positives galore, re-rating to continue; revised price target to Rs855

Key points

Company details
Price target:

Rs855

Market cap:

Rs2,248 cr

52 week high/low:

Rs802/403

NSE volume:
(no. of shares)

48,038

BSE code:

532953

NSE code:

VGUARD

Sharekhan code:

VGUARD

Free float:
(no. of shares)

1.0 cr

 V-Guard Industries (V-Guard) reported a very healthy earnings growth of 26%

YoY for Q1FY2015 backed by a 17% growth in the revenues and a margin expansion
of 89BPS to 8.5%. The revenue growth was mainly driven by a strong growth in
stabilisers, digital UPS systems and house wiring cables.
The two key positives of the results are: one, the company continued to ramp
up its non-south business, which grew at 31% and made the highest contribution
ever to the total sales at 35% in Q1FY2015; and two, improving working capital
efficiencies led to free cash generation of Rs33 crore from operations and helped
reduce the borrowings by Rs26 crore.
The management sounded positive on the growth outlook and maintained its
guidance for FY2015 (a 20% revenue growth and an EBITDA margin of 8-9% for
FY2015). Given the traction in the non-south markets and improving cash flows
(resulting in better return ratios), we see continued scope for the re-rating of
V-Guards valuation multiples. Consequently, we roll over our price target to
the average of FY2016 and FY2017 earnings estimates. Our revised price target
stands at Rs855.

Shareholding pattern

DIIs
4%

CMP: Rs753

Others
11%

FII
19%
Promoters
66%

Results
Price chart

Rs cr

Particulars

800
730
660

Q1FY15

Q1FY14

YoY %

Q4FY14

QoQ %

Operational income

478

408

17

422

13

Operating expenses

437

377

16

387

13

40

31

31

35

14

590

Operating profits

520

Other income

-40

-52

450

Interest

-2

Depreciation

29

17

PBT

32

24

35

28

13

Tax

10

61

25

Adj PAT

22

18

26

20

Adj EPS

7.5

5.9

26

6.9

Jul-14

Apr-14

Jan-14

Oct-13

Jul-13

380

Price performance
(%)

1m

3m

6m 12m

Absolute 24.8

49.9

66.3

36.1

Relative 20.0
to Sensex

29.2

30.8

1.6

Margins (%)

BPS

BPS

OPM

8.5

7.6

89

8.4

NPM

4.7

4.3

34

4.8

(19)

30

26

495

28

282

Tax rate

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Healthy performance in both segments led to top line

growth

to the companys continuous efforts to enhance its

presence in the non-south markets. The share of revenues
from the non-south market touched 35%, which is the
highest in the history of the company. The management
of the company is focused on having a much larger share
from the non-south market in the coming years.

The net sales of V-Guard grew by 17% year on year (YoY)

to Rs478 crore in Q1FY2015 which was around 4% higher
than our estimate. The healthy growth can be attributed
to a 17% year-on-year (Y-o-Y) growth in both electrical &
electro mechanical (EEM) and electronics segments. The
growth in the electronics segment, which contributed 41%
to the top line, was mainly due to a higher growth in the
digital uninterruptible power supply (UPS) system and
stabiliser segments due to an extended summer season.
However, the UPS segment remained a laggard. On the
other hand, the EEM segment grew primarily driven by
traction in fans, electric water heaters and housing wire
cables during the quarter. It is noteworthy that the housing
wire cable segment recorded a 20% Y-o-Y growth despite
a high base in Q1FY2014. However, pumps and LT cables
registered a decline YoY. Sequentially too, the top line
grew by 13% due to a recovery in the digital UPS and
stabiliser sales.
Product-wise sales
Particulars
Stabiliser
UPS

Q1
FY15

Q1
FY14

YoY
%

Q4
FY14

QoQ
%

111

90

23.1

67

66.9

12

-40.0

63

19.3

42

81.9

Electronics segment

193

165

17.2

116

66.4

as a % of total

40.5

40.4

27.5

Y-o-Y growth %

17.2

31.1

-8.6

50

56

-10.6

72

127

106

19.2

140

-9.7

15

16

-3.2

18

-17.5

Pump
House wiring cable
LT cables

28

20

41.4

16

80.6

44

32

38.9

39

13.6

Others

11

82.0

12

-10.5

Electrical and electro

mechanical

275

235

16.8

as a % of total

57.5

57.6

70.4

Y-o-Y growth %

16.8

24.7

23.2

10

21.5

6.7

6.7

Other segment

10

21.5

as a % of total

2.0

1.9

2.1

Y-o-Y growth %

21.5

71.7

28%

30%

29%

Q2FY14 72%

Q3FY14 70%

Q4FY14 71%

35%

31%

25%
Q4FY13 75%

Q1FY14 69%

23%
Q3FY13 77%

23%

19%
Q4FY12 81%

27%

22%
Q3FY12 78%

20%

60%

South Zone

Q1FY15 65%

Q2FY13 77%

Q1FY13 73%

0%

Q2FY12 80%

20%

Q1FY12 74%

40%

Non South Zone

Traction in better-margin products lifted margins

During Q1FY2015, V-Guards margin stood at 8.5%, an
improvement of 89 basis points (BPS) YoY and flat quarter
on quarter (QoQ). The Y-o-Y improvement in the margin
was mainly due to traction in its better-margin products
like cables, kitchen appliances, solar water heaters and
inverters. During the conference call the management
highlighted that the fan division, which was struggling in
the past, turned EBITDA positive during the quarter.
However, one of the new products, mixer grinder,
continues to be EBITDA negative till date. The advertising
expenses-to-sales ratio stood at 4.6% in Q1FY2015 vs 5.3%
in Q1FY2014. Moreover, the gross profit margin (GPM) also
improved by 20BPS YoY and by 148BPS sequentially during
Q1FY2015. Consequently, the operating profit grew by
31% YoY and 14% QoQ to Rs40.4 crore in Q1FY2105.

-31.0

FAN

26%

80%

8 -15.9

Electric water heater

SWH

100%

Rs cr

76

Digital UPS

Regional contribution (%)

297 -7.6%

Strong growth in bottom line was a reflection of improved operational performance

The adjusted profit after tax (PAT) of V-Guard saw a strong
growth of 26% YoY to Rs22.3 crore. This was largely in
line with our and the Streets estimates for Q1FY2015.
The strong growth in the bottom line was a reflection of
a healthy operational performance and a lower interest
outgo during the quarter. Hence, despite a lower other
income, a higher depreciation charge and a higher tax
rate (30.5% in Q1FY2015 vs 25.5% in Q1FY2014), the net
profit recorded a healthy growth of 26% YoY and of 9%
QoQ.

-12.6

Revenue share of non-south market touched historical

high of 35%
The south market witnessed a 9% Y-o-Y growth for V-Guard
on a high base of Q1FY2014 while the non-south market
witnessed a robust growth of 31% YoY on a low base, thanks
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OPM trend
Particulars

Q1FY13

Q2FY13

Q3FY13

Q4FY13

Q1FY14

Q2FY14

Q3FY14

Q4FY14

Q1FY15

72.2

73.8

72.5

75.4

74.2

72.4

73.1

75.5

74.0

5.0

5.4

5.0

4.8

5.3

6.6

5.8

4.9

5.3

RM cost as % of sales
Emp. Cost as % of sales
S&D cost as % of sales

5.5

4.2

6.8

8.5

7.5

5.6

5.9

5.4

6.9

Other exp as % of sales

6.6

7.1

8.4

5.9

5.4

7.4

7.0

5.8

5.3

Operating margin (%)

10.7

9.6

7.4

5.3

7.6

8.1

8.2

8.4

8.5

Net profit margin (%)

6.5

5.7

4.4

2.4

4.3

4.3

5.0

4.8

4.7

Improved working capital led to healthy return ratios

Conference call highlights

During Q1FY2015, V-Guard managed well its working

capital; the net working capital days were managed at 70
days (67 days in Q1FY2014 and 76 days in Q4FY2014). The
management continues to focus on reduction of the net
working capital days and targets reducing the cash
conversion cycle by five days every year through initiatives
like vendor financing and bill discounting. As a result of a
better operating profit and well managed working capital,
V-Guard managed to generate cash flow to the tune of
Rs33.3 crore from operations out of which Rs26 crore was
utilised for reducing debt. Thus, the debt-to-equity ratio
came down to 0.2x at the end of Q1FY2015 from 0.3x at
the end of FY2014 and 0.4x at the end of Q1FY2014.
Consequently, the balance sheet got healthier with a lower
debt-to-equity ratio and a nominal growth in the capital
employed. The company managed to deliver healthy
return ratios (return on equity [RoE] and return on capital
employed [RoCE] of 22% and 28% respectively).

1. The management maintained its guidance of a 20% top

line growth in FY2015, backed by a 9-10% growth in
the south market and a 35-40% growth in the non-south
market. It also maintained the margin guidance (at 89% in FY2015) as it expects operating leverage to kick
in especially with increase in scale in the non-south
stores. From a longer-term perspective, the
management expects the margin to be around 10%,
which would be a result of better acceptability of
products in the non-south market that will give pricing
power and natural operating leverage.
2. V-Guard plans to spend Rs20 crore as a capital
expenditure (capex) and expects to generate healthy
cash flow of Rs80-90 crore from operations (vs Rs110
crore in FY2014) with stringent working capital
management in FY2015. The management also aims
to reduce the working capital days by five days next
year. It expects the debt level to remain broadly in
the range of Rs150-160 crore.

Return ratios (%)

3. The management plans to keep the advertisement

spending in the range of 3.5-4.0% of the sales in FY2015.
With the reduction in tax exemption at certain plants,
it expects the effective tax rate to remain at 30% level
in the coming years.

33.0

28.0

View and valuation: The management sounded positive

on the growth outlook and maintained its guidance for
FY2015. We retain our estimate but believe that V-Guards
valuation multiples would be supported by an improving
growth outlook, higher free cash flows (better working
capital management) and firming return ratios. Hence,
we revise our price target to Rs855, based on 22x the
average earnings of FY2016 and FY2017. We maintain our
Buy recommendation on the stock.

23.0

RoE

FY16E

FY15E

FY14

FY13

FY12

FY11

FY10

18.0

RoCE

Working capital days

Particulars

Q3FY14

Q4FY14

Q1FY15

Inventory days

86

82

78

debtors days

44

51

50

Creditors days

53

57

57

Working capital cycle

76

76

71

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Valuations
Valuations
Net sales (Rs cr)
Growth Y-o-Y %

FY11

FY12

FY13

FY14

FY15E

FY16E

727

965

1,360

1,518

1,774

2,079

59.9%

32.8%

41.0%

11.6%

16.9%

17.2%

Operating margin (%)

10.1

9.7

8.1

8.1

8.4

8.5

Net profit (Rs cr)

39.0

50.8

62.9

70.2

85.6

105.4

Adjusted EPS (Rs)

13.1

17.0

21.1

23.5

28.7

35.3

53.1%

30.3%

23.8%

11.5%

21.9%

23.2%

57.6

44.2

35.7

32.0

26.3

21.3

Growth Y-o-Y %
PER (x)
P/B (x)

13.1

10.7

8.6

7.1

5.8

4.7

EV/EBIDTA (x)

31.8

24.5

21.0

18.4

15.2

12.6

RoCE (%)

25.1

27.6

27.8

27.6

30.4

31.0

RoNW (%)

24.9

26.6

26.7

24.2

24.3

24.5

RoIC(%)

26.1

28.1

28.5

28.2

31.4

33.2

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

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stock update

Godrej Consumer Products

Reco: Reduce

Stock Update

Valuation stretched, downgraded to Reduce with revised price target of Rs810

Key points

Company details
Price target:

Rs810

Market cap:

Rs28,823 cr

52 week high/low:

Rs970/672

NSE volume:
(no. of shares)

1.7 lakh

BSE code:

532424

NSE code:

GODREJCP

Sharekhan code:

GODREJCP

Free float:
(no. of shares)

12.5 cr

Shareholding pattern

Others
8%
Foreign &
Institutions
29%

CMP: Rs847

Promoters
63%

 Godrej Consumer Products Ltd (GCPL) registered a moderate revenue growth

of about 10% in Q1FY2015 largely on account of a 2% revenue growth in the
domestic soap business and a 9% revenue growth (vs a 17% growth in Q4FY2014)
in the domestic household insecticide (HI) business. The international business
revenues grew by 14% during the quarter. The key Indonesian and African
businesses grew at 10% and 17% respectively during the quarter.
 The domestic business OPM declined by 90BPS YoY to 15.0% while the
international business OPM improved by 52BPS to 10.5%. Thus, the overall OPM
declined by 26BPS to 12.8% during the quarter. The operating profit grew by
7.3% YoY and the adjusted PAT grew by 12.1% YoY during the quarter.
 GCPLs management has hinted that some of the benefits of a reduction in the
customs duty on some of key inputs into soaps may be passed on to the consumers
which would lead to a better performance of the domestic soap segment in the
coming quarter. The company is hoping to see a better performance from the
HI segment in the coming quarters as the penetration level is still low for the
category. It has taken many cost-saving initiatives and expects to reap the
benefits of the same from H2FY2015.
 We believe it will take two to three quarters for GCPLs revenue growth to
return to high teens. We have downgraded our earnings estimates for FY2015
and FY2016 by 3% and 5% respectively to factor in the lower growth in the
domestic soap and HI business. Accordingly, we have revised our price target to
Rs810 (valuing the stock at 25x FY2016E earnings). In view of the stocks stretched
valuations and the growth head winds GCPL is facing in the near term, we
downgrade our rating on the stock from Hold to Reduce.
 Key risk: Any significant improvement in the revenue growth of the domestic
business or margin of the international business is a key risk to our rating.

Price chart
910
870
830

Results (consolidated)

790

Rs cr

Particulars

750
710
Jul-14

Apr-14

Jan-14

Oct-13

Jul-13

670

Price performance
(%)

1m

3m

6m 12m

Absolute

6.8

11.6

22.5

Relative
to Sensex

2.7

-3.8

-3.6 -24.2

1.5

Q1FY15

Q1FY14

YoY %

Q4FY14

QoQ %

Total opt. income

1,888.5
Raw material cost
895.0
Employee cost
181.4
Advertisement spend
250.2
Other expenses
320.1
Total other expenditure
1,646.8
Operating profit
241.7
Adjusted PAT
160.5
Exceptional item
-3.2
Minority interest
-13.9
Reported PAT
143.5
Adjusted EPS (excluding minority)
4.7
Gross margins (%)
52.6
OPM (%)
12.8

1,724.9
800.8
179.2
239.1
280.5
1,499.6
225.4
143.1
2.2
-12.6
132.7
4.2
52.7
13.1

9.5
12
1
5
14
10
7.3
12.1

1,931.5
923.3
185.3
145.8
335.8
1,590.1
341.4
245.4
3.5
-12.6
236.3
7.2
52.0
17.7

-2.2
-3.1
-2.1
71.6
-4.7
3.6
-29.2
-34.6

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July 30, 2014

8.1
12.1
-10 BPS
-26 BPS

Home

-39.3
-34.6
54 BPS
-488 BPS

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 Hair colour businesscontinues to post a doubledigit growth: The hair colour business continued its
strong performance with a double-digit revenue growth
(largely driven by higher volumes). The hair colour
crmes category continues to grow its market share.
The company launched two premium variants of Godrej
Expert Rich Crme hair colour shades (cinnamon red,
honey brown) at a 15% premium to the base price.

Stand-alone businessdisappointing performance

GCPLs stand-alone revenues grew by just 6% in Q1FY2015
on account of only a 2% growth in the soap business and a
moderation of growth in the HI business, which grew by
9%. The hair colour business grew by 14% during the
quarter. The gross profit margin (GPM) improved by 50
basis points (BPS) year on year (YoY) to 52.7%. However,
the operating profit margin (OPM) declined by 90BPS
largely on account of a lower revenue growth and higher
trade marketing investments. Though the operating profit
stood flat, but a higher other income led to an 11% growth
in the profit after tax (PAT) to Rs114.1 crore.

International businessregistered better operating

performance
International business revenue performance
International markets
UK (Keyline)
Africa (Rapidol, Kinky and Tura)
Indonesia (Megasari)
Middle East
Latin America (Issue Group and
Argenco)
Total sales

Stand-alone performance snapshot

Particulars
Total revenues
Operating profit
Adjusted net profit
GPM (%)
OPM (%)

Q1FY15
977.5
146.5
114.1
52.7
14.8

Q1FY14
923.1
146.4
102.8
52.2
15.7

YoY %
5.9
0.1
11.0
50BPS
(88)BPS

 Soap segmentvolumes remain under pressure: The

first quarter of FY2015 was the second consecutive
quarter of a dismal sales performance by GCPLs
domestic soap business. While the sales volume
declined and grew in mid single digits, the revenues
grew by just 2% due to the price hikes undertaken in
the portfolio. The management has indicated that
soaps of the popular category are facing a slowdown
while the soaps of the premium category are doing
well. The sales of Godrej No.1 remained under pressure
during the quarter. The company will pass on the
benefits of a cut in the import duty on some of the
key inputs into soaps to the consumers in the form of
promotional add-ons and offerings. This should help
the company to see better sales volume in the quarters
ahead. The company has started seeing some
improvement in sales from late June this year, but it
expects a strong revival in sales on the back of a strong
improvement in the macro environment.

Q1FY14
115.0
214.0
319.0
25.0
130.0

YoY %
42.6
16.8
9.4
12.0
-3.1

917.0

803.0

14.2

Q1FY15
9.0
14.0
15.0
4.0

Q1FY14
9.0
13.0
15.0
3.0

BPS
0
100
0
100

10.5

10.0

52

International business margin performance

International markets
UK (Keyline)
Africa (Rapidol, Kinky and Tura)
Indonesia (Megasari)
Latin America (Issue Group and
Argenco)
EBIDTA margin

 Indonesiastrong constant currency revenue growth:

The revenues of the Indonesian business grew by 9.4%
(up 21% on a constant-currency basis) driven by good
acceptance of new products and distribution
expansion. The earnings before interest, depreciation,
tax and amortisation (EBIDTA) margin of the business
too stood flat while adjusting for the food business
that was hived off the same improved by 120BPS YoY.
After the results of the presidential election in the
country and a stabilising political environment, GCPL
expects a better revenue growth in its Indonesian
business going ahead. Also, the EBIDTA margin of the
Indonesian business is expected to improve sequentially
on the back of calibrated price increases and costsaving initiatives.

 HIrevenue growth moderated to high single digits:

The domestic HI business revenue growth moderated
to 9% in Q1FY2015 from 17% in Q4FY2014. The
moderation can be attributed to a delayed monsoon
and a drop in the overall category growth. However,
GCPLs HI sales growth stood two times higher than
the category growth rate. The management has
indicated the segment has enough room to grow in
strong double digits, as the category penetration is
very low in India. Also, innovative value-added products
are gaining good acceptance. So overall, the company
is expecting the segments growth to improve in the
coming quarters.

Sharekhan

Q1FY15
164.0
250.0
349.0
28.0
126.0

 Africamargins improved YoY: The African business

revenues grew by 17% (up 12% on a constant-currency
basis) driven by a strong performance of the Darling
business and an improvement in the performance of
Rapidol in South Africa. The African business margin
improved by 100BPS in Q1FY2015 and the company
expects it to improve in the coming quarters. The
company has hinted at the consolidation of the Darling
business to 100% (current 65%) over the next two to

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three years which would add another Rs300-350 crore

to the revenues of the African business. The company
is banking on low-penetrated HI segment for growth
in Africa, as it expects the segment to be a key revenue
driver in the long run.

category in Q1FY2015. The company is hoping to see a

better performance from the segment in the coming
quarters as the penetration level is still low for the
category. Also, the company is focusing on improving the
supply and distribution system. It has taken many costsaving initiatives and expects to reap the benefits of the
same from H2FY2015 onwards.

 Latam businessaffected by depreciation in

Argentine Peso: GCPLs Latin American (Latam)
business was affected by depreciation in the Argentine
Peso against the rupee. On a constant-currency basis,
the revenues of the business grew by 26% led by a
healthy market share performance. The Latam
business margin stood lower at 4% largely on account
of higher marketing investments. However, the
company is banking on Project Iceberg, which will
focus on streamlining the manufacturing process and
rationalising the sales structure, to help the business
clock better margins in the long run. The OPM is
expected to expand over the next 12 to 24 months.

Though the management has taken initiatives to improve

the growth prospects, but we believe it will take two to
three quarters for GCPLs revenue growth to return to
high teens. We have downgraded our earnings estimates
for FY2015 and FY2016 by 3% and 5% respectively to factor
in the lower growth in the domestic soap and HI
businesses. In line with our revision in the earnings
estimates, our revised price target stands at Rs810 (values
the stock at 25x the FY2016E earnings). In view of the
stocks stretched valuations and the growth head winds
faced by the company in the near term, we downgrade
our rating on the stock from Hold to Reduce.

 UK businessstrong revenue performance: The

revenues of GCPLs UK business grew by a strong 42%
(driven by a 21% organic revenue growth). The strong
growth can be attributed to competitive market
investments and distribution initiatives. The brand Soft
& Gentle continued to deliver a strong performance.

Valuations (consolidated)
Particulars
Net sales (Rs cr)

FY12

Adjusted PAT (Rs cr) 526.6

EPS (Rs)

FY13

FY14

4,850.9 6,399.7 7,582.6

667.2

753.7

FY15E

FY16E

8,627.9 10,249.3
899.1

1,100.1

15.5

19.6

22.1

26.4

32.3

3.7

26.7

12.9

19.3

22.4

PER (x)

53.3

42.1

37.3

31.2

25.5

OPM (%)

18.0

15.8

15.5

15.7

15.9

EV/EBIDTA (x)

33.8

29.6

25.5

21.9

17.9

Outlook and valuation

Y-o-Y change %

GCPLs management has hinted at passing on to the

consumer some of the benefits of a reduction in the
customs duty on some of key inputs into soaps which would
lead to a better performance of the domestic soap
segment in the coming quarter. The HI business was
affected by a delayed monsoon and a slowdown in the

RoE (%)

24.3

23.4

22.9

23.5

24.1

RoCE (%)

20.6

18.2

18.6

20.4

23.1

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Bank of India

Reco: Buy

Stock Update

Asset quality pressure persists

Key points

Company details
Price target:

Rs334

Market cap:

Rs16,742 cr

52 week high/low:

Rs356/126

NSE volume:
(no. of shares)

49.0 lakh

BSE code:

532149

NSE code:

BANKINDIA

Sharekhan code:

BANKINDIA

Free float:
(no. of shares)

21.4 cr

Shareholding pattern
Public &
others
8%

Foreign
10%

Promoter
66%

Price chart
400
350
300
250
200
150
Jul-14

Apr-14

Jan-14

Oct-13

Jul-13

100

Price performance
1m

3m

-0.4

16.2

35.7

58.1

Relative -4.2
to Sensex

0.2

6.7

18.1

Absolute

 For Q1FY2015 Bank of India reported weakness in its core operations as its net
interest income growth slowed to about 6% YoY due to a decline in the margin
(down 18BPS QoQ to 2.16%). Consequently, the banks net profit declined by
16% YoY to Rs805.7 crore.
 Fresh NPA additions remained elevated during the quarter (at Rs3,777 crore)
which was partly offset by improved recoveries and upgradations. Though the
management expects NPAs worth Rs900 crore to get resolved in Q2FY2015, but
the higher slippages remain a concern.
 The banks earnings growth was better in Q1FY2015, though higher slippages and
restructuring, and a lower capital adequacy ratio were a cause for concern.
However, the stock trades at 0.6x FY2016E book value (at about a 30% discount to
peers like Bank of Baroda and Punjab National Bank) and partly factors in the
negatives. We have revised our valuation multiple to 0.7x FY2016E which has
resulted in a new price target of Rs334. We maintain our Buy rating on the stock.

Results

MF & FI
16%

(%)

CMP: Rs281

6m 12m

Rs cr

Particulars

Q1FY15

Q1FY14

YoY %

Q4FY14

QoQ %

Interest income
Interest expense
Net interest income
Non-interest income
Fee income
Forex income
Treasury profit
Misc. income
Net total income
Operating expenses
Employee expenses
Other operating expenses
Pre-provisioning profit
Provisions
Profit before tax
Tax
Profit after tax
Asset quality
Gross NPLs
Gross NPLs (%)
Net NPLs
Net NPLs (%)
Capital adequacy (%)
CAR
Tier I
Key reported ratios (%)
NIM
CASA

10,304.3
7,617.8
2,686.5
1,024.5
427.0
243.0
162.0
192.5
3,711.0
1,650.7
1,072.6
578.1
2,060.3
893.1
1,167.2
361.5
805.7

8,541.2
6,004.2
2,537.0
1,180.8
313.0
206.0
524.0
137.8
3,717.8
1,537.4
962.5
574.9
2,180.4
694.6
1,485.8
521.7
964.2

20.6
26.9
5.9
-13.2
36.4
18.0
-69.1
39.7
-0.2
7.4
11.4
0.6
-5.5
28.6
-21.4
-30.7
-16.4

10,360.4
7,313.1
3,047.3
913.7
408.0
83.0
83.0
339.7
3,961.0
1,964.9
1,143.2
821.8
1,996.1
1,547.3
448.8
-108.7
557.5

-0.5
4.2
-11.8
12.1
4.7
95.2
-43.3
-6.3
-16.0
-6.2
-29.7
3.2
-42.3
160.1
44.5

12,532.5
3.28
8,041.6
2.14

9,413.5
3.04
6,408.9
2.10

33.1
24 bps
25.5
4 BPS

11,868.6
3.15
7,417.2
2.00

5.6
13 BPS
8.4
14 BPS

9.98
7.25

10.36
7.84

-38 BPS
-59 BPS

9.97
7.24

1 BPS
1 BPS

2.16
27.68

2.50
30.59

-34 BPS
-291 BPS

2.34
29.01

-18 BPS
-133 BPS

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NIM dips, operating performance weakens

Slippages rise sharply

In Q1FY2015 Bank of Indias net interest margin (NIM; global)

declined by 18 basis points (BPS) quarter on quarter (QoQ)
to 2.16% (contributed by a 40-BPS sequential dip in the
domestic NIM) which led to a slower than expected growth
in the net interest income (NII). However, the overseas
NIM increased (up 28BPS QoQ) due to a decline in the
proportion of buyers credit (about 30% of the overseas book
vs about 50% earlier), which have a lower yield. The income
reversal on the non-performing assets (NPAs) coupled with
higher lending in low-yielding corporate loans led to a
decline in the yield on the domestic loans (down 32BPS
QoQ to 10.92%). In addition, the rise in the cost of deposits
(up 9BPS QoQ to 5.71% and a decline in the yield on
investment also affected the NIM).

Fresh addition to NPAs rose sharply to Rs3,777 crore

(mainly from the iron & steel and infrastructure sectors)
which was partly offset by improved recoveries (including
the sale of Rs580 crore of NPAs to asset reconstruction
companies). Though the management suggested that
Rs900 crore worth of slippages were technical in nature
(ie the same are likely to get recovered), but the sheer
rise in the quantum of slippages causes concern. The fresh
restructuring during the quarter was Rs1,631 crore and
the bank has approximately Rs600 crore of loans in the
pipeline for restructuring. The provision coverage ratio
was largely stable at 58.1%, though the bank provided
Rs100 core towards floating provisions.
Stressed asset formation

NIM
12.0%

2.6%

10.0%
8.0%

2.4%

6.0%
4.0%

2.2%

2.0%
0.0%
Q1FY 13

2.0%

Q1FY 14
Slippages

Q1FY13

Q1FY14

Q1FY 15

Res truc tured book

Stres s ed Loans

Q1FY15

Business growth continues to be ahead of industry rates

Fee income posts a strong growth, opex remains low

Despite a weak environment the bank continues to grow

its advances ahead of the industry rate (a growth of over
25% on an average in the past four quarters). The growth
in the advances in Q1FY2015 was led by the large and mid
corporate segment (up 29% YoY), followed by the agriculture
segment (up 24% YoY). The bank expects the growth in the
advances to moderate to 16-18% in FY2015. On the other
hand, the deposits grew by 20.7% YoY contributed by term
deposits (up 24.2% YoY). As a result, the current account
and savings account (CASA) ratio declined by 130BPS QoQ
to 27.7% which affected the margin.

During Q1FY2015, the fee income growth was quite strong

as it grew by 36% YoY due to increased lending activity.
Overall, the non-interest income declined by 13.2%
contributed by a lower treasury profit compared with
Q1FY2014. The foreign exchange (forex) income also
showed a healthy growth of 18% YoY. However, despite
making an ad hoc provision of Rs80 crore towards wage
revision, the operating expenses (opex) grew by 7.4%,
which was slower than that of the peer banks.

Advances growth

Cost to income ratio

400,000

31.0%

370,000

29.0%

340,000

27.0%

310,000

25.0%

280,000

23.0%

250,000

21.0%

220,000

19.0%

190,000

17.0%

50.0%

45.0%
40.0%

35.0%

15.0%

160,000
Q1FY 13
A dv anc es

Q1FY 14

30.0%

Q1FY 15

Q1FY13

Grow th-RHS (Y oY ,% )

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One-year forward P/BV band

Price target revised to Rs334

The banks earnings growth was better in Q1FY2015,
though higher slippages and restructuring, and a lower
capital adequacy ratio were a cause for concern. Recently,
the bank raised additional tier-I capital of Rs1,250 crore
and has a green shoe option of retaining another Rs1,250
crore which will raise the tier-I capital adequacy ratio by
about 80BPS. The stock trades at 0.6x FY2016E book value
(at about a 30% discount to peers like Bank of Baroda and
Punjab National Bank) and partly factors in the negatives.
We have revised our valuation multiple to 0.7x FY2016E
which has resulted in a new price target of Rs334. We
maintain our Buy rating on the stock

2.2
1.8
1.4
1.0
0.6
0.2
Jul-04

Jul-06
PBV (x)

Jul-08
+0.5 Mean

Jul-10

Jul-12

5 year rolling PBV mean

Jul-14
-0.5 Mean

Financials
Profit and Loss statement
Particulars

Rs cr

FY12

FY13

FY14

FY15E

Net interest income

8,313 9,024 10,831 12,546 14,708

Non-interest income

3,321

Net total income

Operating expenses

3,766

4,292

11,635 12,790

15,122

4,941

4,719

7,775

Pre-provisioning profit 6,694 7,458

8,423

9,489 10,895

Provisions

3,116

4,451

4,878

5,100

Profit before tax

3,578

3,008

3,545

4,389

5,146

900

258

816

1,229

1,544

2,678 2,749

2,729

3,160

3,602

Balance sheet
Particulars

9,121

5,749

Rs cr
FY12

FY13

FY14

FY15E

FY16E

20,962

23,919

29,923

32,270

34,945

Liabilities
Networth
Deposits
Borrowings

318,216 381,840 476,974

548,520 640,672

32,114

35,368

48,428

52,109

56,379

Other liabilities & 13,243

provisions

11,477

17,866

13,545

16,059

Total liabilities

384,536 452,603 573,191 646,445 748,055

Assets
Cash & balances
with RBI

14,987

21,967

19,073

24,683

25,627

Balances with
19,725
banks & money at call

32,869

42,309

39,493

44,206

Investments

94,613 114,152

129,913 148,965

248,833 289,367 370,734

430,051 505,310

Advances

86,754

Fixed assets

2,772

2,870

5,786

6,480

7,258

Other assets

11,466

10,916

21,136

15,823

16,689

Total assets

FY12

Per share data (Rs)

Earnings
46.6
Dividend
7.0
Book value
343.4
Adj. book value
266.4
Spreads (%)
Yield on advances
8.8
Cost of deposits
5.8
Net interest margins
2.6
Operating ratios (%)
Credit to deposit
78.2
Cost to income
42.5
CASA
34.1
Non interest income /
28.5
Total income
Assets/Equity (x)
19.2
Return ratios (%)
RoE
14.0
RoA
0.7
Asset quality ratios (%)
Gross NPA
2.3
Net NPA
1.5
Growth ratios (%)
Net interest income
6.4
Pre-provisioning profit 24.3
Profit after tax
7.6
Advances
16.8
Deposits
6.5
Valuation ratios (x)
P/E
6.0
P/BV
0.8
P/ABV
1.1
Capital adequacy (%)
CAR
12.0
Tier I
8.6
Productivity ratios (Rs cr)
CASA per branch
21.2
Business per branch
141.8
Business per employee 12.0

17,264 20,016

6,699

Profit after tax

Particulars

5,308

5,332

Tax

Key ratios

FY16E

384,536 452,603 573,191 646,445 748,055

FY13

FY14

FY15E

FY16E

46.1
10.0
381.1
267.0

42.4
5.0
407.2
278.0

49.1
10.8
442.1
296.6

56.0
12.3
482.2
337.9

8.6
5.8
2.4

8.2
5.5
2.4

8.3
5.5
2.3

8.2
5.4
2.3

75.8
41.7
33.3
29.4

77.7
44.3
30.1
28.4

78.4
45.0
30.4
27.3

78.9
45.6
30.9
26.5

18.7

19.1

19.6

20.7

12.3
0.7

10.1
0.5

10.2
0.5

10.7
0.5

3.0
2.1

3.1
2.0

3.5
2.2

3.4
1.8

8.5
11.4
2.7
16.3
20.0

20.0
12.9
-0.7
28.1
24.9

15.8
12.7
15.8
16.0
15.0

17.2
14.8
14.0
17.5
16.8

6.1
0.7
1.1

6.6
0.7
1.0

5.7
0.6
0.9

5.0
0.6
0.8

11.0
8.2

10.0
7.2

8.8
6.7

8.3
6.5

22.8
156.4
15.9

23.6
182.5
19.6

29.5
201.9
22.2

33.6
227.1
25.6

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CESC

Reco: Buy

Stock Update

Q1 numbers in line with expectations; positive bias maintained

Key points

Company details
Price target:

Rs878

Market cap:

Rs8,063 cr

52 week high/low:

Rs786/271

NSE volume:
(no. of shares)

4.4 lakh

BSE code:

500084

NSE code:

CESC

Sharekhan code:

CESC

Free float:
(no. of shares)

6.0 cr

Shareholding pattern

Others
8%
Institutions
16%
Promoters
53%
Foreign
23%

 For Q1FY2015 CESC reported a healthy earnings growth of 15% YoY, in line with
our estimate. The revenues grew by 30% YoY as a result of a 24% revision in the
tariff and a 5% improvement in the volume. However, due to a significant jump
(of 25% YoY to 769MUs) in the power purchased from outside (where the margin
spread is lower), the OPM contracted by 206BPS YoY to 20.3%.
 The performance of its subsidiaries remained encouraging; the store-level EBITDA
of Spencers remained at 4.6% (the same-store EBITDA at Rs74 per sq ft) in
Q1FY2015, similar to the Q1FY2014 level. On the other hand, FirstSource
Solutions is on a strong traction and addressing the scheduled debt repayment.
The Quest mall is fully operational now and witnessing strong footfalls.
 The Haldia-based power plant of 600MW is expected to be commissioned by
Q4FY2015; it would supply to CESCs existing Kolkata distribution business.
Consequently, the regulated (cash generating) power generating business of
CESC group would grow significantly. However, pain at the Chandrapur (600MW)
plant continues for the time being, as after signing 100MW of PPA with TANGEDCO,
the management is still looking for opportunities to sign long-term power supply
contracts for the remaining capacities.
 We believe the commissioning of the Haldia power plant will enhance the existing
base of the cash generating regulated power business. The focus of the new
government on addressing the coal linkage issues of power plants that are ready
should also turn positive for the Chandrapur power plant in future. Further, we
are positive on the gradual progress of its other subsidiaries. The stock is trading
at 1x FY2016E BV currently. We retain our positive stance and continue to rate
CESC as a Buy with a price target of Rs878.
Results

Price chart

Rs cr

Particulars

850
750
650
550
450
350
Jul-14

Apr-14

Jan-14

Oct-13

Jul-13

250

Price performance
(%)

1m

3m

-6.9

27.6

48.9

88.6

Relative -10.4
to Sensex

10.0

17.1

40.9

Absolute

CMP: Rs642

6m 12m

Net sales
Other operating income
Total income
Total expenditure
Fuel cost expenditure
Personnel cost
Other expenditure
Operating profit
Other income
Depreciation
Interest
PBT
Tax expenses
Net profit
EPS
Margin (%)
OPM
NPM
Tax rate

Sharekhan

21

Q1FY15

Q1FY14

YoY %

Q4FY14

QoQ %

1,848
15
1,863
1,485
541
211
733
378
15
94
100
199
48
151
12.0

1,419
17
1,436
1,115
460
156
499
321
19
84
90
166
35
131
10.4

1,229
17
1,246
792
496
151
145
454
17
86
77
308
65
243
19.3

20.3
8.2
24.1

22.4
9.2
21.1

30
-12
30
33
18
35
47
18
-21
12
11
20
37
15
15
BPS
(206)
(106)
304

50
-12
50
88
9
40
406
-17
-12
9
30
-35
-26
-38
-38
BPS
(1,615)
(1,160)
302

July 30, 2014

36.4
19.8
21.1

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depreciation and amortisation (EBITDA) remained around

4.6% in Q1FY2015, similar to the level seen in Q1FY2014.
At the end of Q1FY2015, the total trading area of Spencers
was 1,062,000 sq ft spread across 126 stores (there was
an addition of one retail store in the quarter). The
company aims to add 12-15 new hyper stores in FY201415 in the existing five regions on which it intends to focus.
Going forward, the company aims to break even at the
corporate level which would be one of the key
monitorables.

Q1FY2015 result update

Revenues grew on higher tariff and decent volume
growth
For Q1FY2015 CESC reported a healthy set of numbers, in
line with our estimates for the quarter. The profit after
tax (PAT) grew by 15% year on year (YoY) to Rs151 crore,
backed by a 30% top line growth and a healthy operating
profit margin (OPM) of 20.3% (slightly lower YoY). The
revenues grew by 30% YoY to Rs1,848 crore, which was
mainly driven by a higher tariff (up 24% YoY) and a 5%
growth in the volume in Q1FY2015. The sales volume was
up by 5% while power generation remained flat; implying
a significant jump (up 25% to 769MUs) in the power
purchased from outside.

Quest mall and Haldia plant to add value, while pain at

Chandrapur remains: The Quest mall, under 100%
subsidiary CESC Properties, is fully operational now and
is witnessing strong footfalls. The Haldia-based power
plant (600MW), which would be supplying to its own
Kolkata region distribution business, is expected to be
commissioned by Q4FY2015. With this, the regulated
power capacity (cash generating) of CESC group would be
significantly higher. However, pain at the Chandrapur
(600MW) plant remains as after signing a power purchase
agreement (PPA) with TANGEDCO for 100MW, the
management is still looking for opportunities to sign longterm power supply contracts for the remaining capacities
at Chandrapur.

OPM lower on higher power purchase but PAT up 15%

The operating profit of the company grew by 18% YoY to
Rs378 crore, despite a revenue growth of 30%, due to
significantly higher quantum of power purchased from
outside. The OPM stood at 20.3%, which was slightly lower
than our estimate. The profit before tax (PBT) recorded
a growth of 20% YoY but due to a higher tax rate (24% vs
21% in Q1FY2014), the PAT reported a growth of 15% YoY
to Rs151 crore in Q1FY2015.

View and valuation: We remain positive on CESC due to a

steady improvement in its retail and business process
outsourcing subsidiaries which is in addition to the steady
performance of the stand-alone entity. Further, with the
commissioning of its Haldia plant, the cash generating
regulated power business would expand significantly and
add value to the stock. We retain our price target of Rs878
and continue to recommend CESC as a Buy.

The sequential numbers are not comparable as the

Q4FY2014 numbers were influenced by a pending tariff
revision.
Performance of subsidiaries
Spencersstore-level profitability flat while same-store
sales grew at 10%: The retail arm of CESC, Spencers,
managed to notch a same-store sales growth of around
10% YoY. The store level earnings before interest, tax,

CESC (stand-alone)
Particulars

Rs cr
FY11

FY12

FY13

FY14

FY15E

FY16E

Net sales

4,172.5

4,680.5

5,317.0

5,510.0

6,232.9

6,656.3

EBITDA

1,083.0

1,157.3

1,324.6

1,433.0

1,486.9

1,561.6

488.4

554.3

618.5

652.0

683.5

722.2

EPS (Rs)

38.9

44.1

49.2

51.9

54.4

57.5

EPS growth (%)

12.7

13.5

11.6

5.4

4.8

5.7

EBITDA margin (%)

26.0

24.7

24.9

26.0

23.9

23.5

PER (x)

16.5

14.5

13.0

12.4

11.8

11.2

Net profit

P/BV (x)

1.4

1.3

1.2

1.1

1.1

1.0

Price/sales(x)

1.9

1.7

1.5

1.5

1.3

1.2

EV/EBITDA (x)

9.1

8.5

7.9

7.4

7.0

6.6

Dividend yield (%)

0.6

0.8

1.1

1.1

1.1

1.1

RoCE (%)

8.3

8.1

8.7

8.2

7.9

7.8

RoE (%)

9.1

9.6

9.9

9.6

9.4

9.2

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SOTP valuation
Particulars
Existing power business

Rs /share

Valuation method

774

1.2x FY2016 BV

Chandrapur power plant

27

65% discount to equity invested

Haldia power plant

57

20% discount to equity invested

CESC property

17

On equity invested

Spencers & other retail business

-104

First Source acquisition

107

Total

878

Discount for loss-making retail business

30% holding discount to our target value for FSL

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Cadila Healthcare

Reco: Hold

Stock Update

US business boosts Q1 performance; price target revised to Rs1,300; put on Hold

Key points

Company details
Price target:

Rs1,300

Market cap:

Rs23,914 cr

52 week high/low:

Rs1095/631

NSE volume:
(no. of shares)

CMP: Rs1,165

1.2 lakh

BSE code:

532321

NSE code:

CADILAHC

Sharekhan code:

CADILAHC

Free float:
(no. of shares)

 Cadila Healthcare reported a strong performance for Q1FY2015, as reflected in

a 25% growth in the revenues, a 219-BPS expansion in the OPM and a 50% jump
in the adjusted net profit. The growth during the quarter was mainly driven by
the US business (up 85% YoY) and the emerging markets (up 28% YoY). However,
the growth in the other geographies remained moderate.
 The management plans to file over 40 ANDAs and expects 10-15 approvals in
the US market during FY2015, which should drive the growth in the subsequent
quarters. Also, the growth will accelerate in the domestic market as the impact
of the new pricing policy is getting settled.

7.2 cr

 We have marginally curtailed the earnings estimate for FY2015 due to a moderate
performance of the Indian business in Q1FY2015, but have revised our earnings
estimate for FY2016 up by 8.5% in anticipation of a large chunk of US approvals
in this year. Accordingly, our price target stands revised up by 8.5% to Rs1,300
(17x FY2016E EPS). However, owing to a limited upside to the stock price postresults rally, we downgrade our rating on the stock to Hold.

Shareholding pattern
Non-promoter
corporate
5%
Public and
Institutions
others
8%
6%
Foreign
6%

Results

Promoters
75%

Rs cr

Particulars

Price chart

Q1FY15

Q1FY14

YoY %

Q4FY14

QoQ %

Net sales

2,048

1,637

25.1

1,971

3.9

Expenditure

1,677

1,376

21.8

1,597

5.0

371

261

42.3

374

(0.7)

10

13

(16.9)

13

(20.7)

1200

Operating profit

1100

Other income

1000

387

(1.4)

(34.8)

27

(28.6)

800

Depreciation

700

PBT

600

Taxes

Oct-13

Jul-14

39.6

30

Apr-14

274

19

Jan-14

382

Interest

Jul-13

EBITDA

900

Minority interest
Forex loss/(gains)
Adj. PAT

Price performance

Reported PAT
(%)

1m

3m

6m 12m

Absolute

7.6

16.0

38.6

53.7

Relative
to Sensex

3.5

0.0

9.0

14.8

68

47

45.4

53

28.3

295

197

49.5

307

(4.1)

52

20

158.2

35

50.9

(13.5)

(4.4)

(6)

(27)

(77.5)

13

(148.0)

254

169

50.2

253

0.4

240

196

22.8

239

0.4

12.4

8.2

50.2

13.0

(4.4)

OPM

18.1

15.9

219.2

19.0

(84.9)

EBIDTA

18.6

16.7

193.6

19.6

(100.7)

PATM

12.4

10.3

207.3

12.8

(43.9)

Tax rate

17.4

9.1

836.6

11.8

564.8

EPS
Margins (%)

bps

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Other business continues to see a moderate

performance: Except the USA and the emerging markets
(which grew 27.7%), most of the other geographies and
businesses reported a moderate performance during the
quarter. The company reported a 9% growth in the
European business, a 4% growth in the Brazilian business,
a 2% growth in the global animal healthcare business, a
decline of 6.5% in the consumer business and a decline of
9.2% in the joint venture business during the quarter.
Though we do not expect any phenomenal change in the
business dynamics in most of these regions, but the
company is expected to see a gradual improvement in
the joint venture, consumer and European businesses over
a period of time.

US business augers well

During Q1FY2015, the revenues from the US business
jumped by 85% to Rs717 crore, mainly driven by four new
product launches and better traction in the existing
business. The company accelerated the paced of filings
with 26 abbreviated new drug application (ANDA) filings
during the quarter against the targeted 40 ANDAs for the
year (FY2015). The company got the approval for one
injectible product during the quarter. Till date, the
company has got the approval for 91 ANDAs in the US
market out of 249 ANDAs filed with the US Food and Drug
Administration (USFDA) while it currently markets 64
products in the USA. With an accelerated pace of filing
and focus on niche segments like transdermals, injectibles
and other complex products, the company is set to
maintain the high growth momentum in the US market.

Better product mix helps improve OPM; expect even

better margin ahead

Indian market to see better traction going forward

The company reported an improvement of 219 basis points

(BPS) in the operating profit margin (OPM) to 18.1% during
the quarter (adjusted for the foreign exchange [forex]
impact) on the back of strong sales in the US market. We
expect the improvement in the OPM to continue in the
subsequent quarters as well on the back of a stronger
performance in the US and Indian markets. We expect an
improvement of 300BPS and 100BPS in the margin in
FY2015 and FY2016 respectively.

During the quarter, the company recorded a moderate 8%

growth in the Indian formulation business to Rs675 crore.
The growth was moderate primarily due to the impact of
the new pricing policy and the re-organisation of the field
force in the market. However, as most of the issues related
to the pricing policy are getting fixed and the company is
able to take a price hike in the key products, we expect a
better performance from the domestic market in the
subsequent quarter.

Revenue break-up
Particulars

Rs cr
Q1FY2015

Q1FY2014

YoY %

Q4FY2014

QoQ %

Domestic

871

810

7.6

814

7.0

Formulations

675

625

7.9

625

8.0

24

20

20.0

21

14.8

108

115

-6.5

107

0.2

64

49

30.4

61

6.1

1186

837

41.8

1138

4.2

119

131

-9.2

111

7.0

API
Wellness
Animal health & others
Exports
Joint ventures (JVs)
Formulation exports

977

627

55.9

940

3.9

US

717

387

85.0

678

5.6

Europe

101

93

9.2

85

19.8

Japan

12

-100.0

14

(100.0)

Brazil

54

52

4.0

60

(8.9)

105

82

27.7

103

1.5

77

66

16.7

73

5.1

Emerging markets
API exports
Animal health and others (exports)
Total consolidated revenues
Total API

13

13

1.5

14

(4.3)

2057

1646

24.9

1952

5.4

101

86

17.5

94

7.2

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Outlook remains strong

Cost analysis
Particulars

Q1
FY15

Q1
FY14

YoY
%

Q4
FY14

QoQ
%

Adjusted material cost

% of sales
Employee expenses
% of sales
Other expenses
% of sales
Total

816
39.8
290
14.2
571
27.9
1677

568
34.7
263
16.1
546
33.3
1376

43.7

764
38.8
274
13.9
559
28.3
1597

6.7

10.4
4.6

The company is set to intensify the US filings and we

expect a sizeable number of approvals coming through
over the next two to three years. The companys pipeline
for the US markets includes generic launches of some of
blockbuster drugs like Abilify ($4 billion), Niaspan ($1.1
billion) and Lialda ($550 million), which are likely to lose
their patent protection in FY2015. Besides, the company
has got tentative approvals for Sirolimus (market size of
$203 million) under the 180-day exclusivity and Asacol
(litigation settled with innovator and to be launched in
FY2016; potential revenues for Cadila at $40 million).
Though the businesses in Brazil and Europe, and the joint
ventures are unlikely to see any significant headway in
the near term, but the domestic business and the business
in the emerging markets will see a recovery in the
subsequent quarters. We expect the revenues and profit
to grow at a compound annual growth rate (CAGR) of 18%
and 55% over FY2014-16 respectively.

6.1
2.1
5.0

Change in depreciation policy raises depreciation cost:

During the quarter, the depreciation cost increased by
45% year on year (YoY) to Rs67.60, which included Rs18.38
crore additional provision arising out of the re-estimation
of the useful life of certain assets.
Adjusted net profit jumped by 50% to Rs254 crore: The
company reported a 22.8% rise in the net profit to Rs240
crore during the quarter. However, adjusting for a forex
gain of Rs6 crore, exceptional expenses of Rs1.18 crore
and additional depreciation of Rs18.38 crore, the net
profit jumped by 50% to Rs254 crore.

We revise price target up by 8% to Rs1,300 but

downgrade the stock to Hold
We have marginally lowered the earnings estimate for
FY2015 due to a moderate performance of the Indian
business in Q1. But we have revised up our earnings
estimate for FY2016 by 8.5% in anticipation of a large
chunk of US approvals in this year. Accordingly, our price
target stands revised up by 8.5% to Rs1,300 (implies 17x
FY2016E earnings per share [EPS]). However, owing to a
limited upside to the stock price post-results rally, we
downgrade our rating on the stock to Hold.

R&D pipeline progressing well: One of the companys

new chemical entities (NCEs), namely ZYDPLA1 (targeted
at regulating blood sugar level), advanced to phase-I global
clinical trial in the US market. Besides, it also completed
the phase-II trials for one of its biosimilars based on
monoclonal antibodies (MABs). The company is also in
advanced stage of getting marketing authorisation in the
regulated markets for one of its biosimilars that is already
being marketed in India.

Revised estimates

Rs cr
Old

Particulars
Net sales
Expenditure
Operating profit
Other income
EBITDA
Interest
Depreciation
PBT
Taxes
Minority Interest
Adj.PAT
Reported PAT
EPS
Margins (%)
OPM
EBIDTA
PATM
Tax rate

New

Var %

FY2015E
8,463
6,647
1,816
58
1,874
107
217
1,550
233
33
1,285
1,285
62.7

FY2016E
9,859
7,882
1,977
70
2,047
68
237
1,742
261
36
1,445
1,445
70.6

FY2015E
8,537
6,813
1,724
58
1,783
66
217
1,500
225
33
1,242
1,242
60.7

FY2016E
9,976
7,880
2,096
70
2,166
43
237
1,886
283
36
1,567
1,567
76.5

FY2015E
0.9
2.5
-5.0
0.0
-4.9
-38.7
0.0
-3.2
-3.2
0.0
-3.3
-3.3
-3.3

FY2016E
1.2
0.0
6.0
0.0
5.8
-36.7
0.0
8.3
8.3
0.0
8.5
8.5
8.5

21.5
22.1
15.2
15.0

20.0
20.8
14.7
15.0

20.2
20.9
14.5
15.0

21.0
21.7
15.7
15.0

-126
-126
-63
0

96
95
105
0

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Valuations (consolidated)
Particulars

FY2012

FY2013

FY2014

FY2015E

FY2016E

Net sales (Rs cr)

5,263.2

6,358.1

7,224.0

8,537.2

9,976.2

770.2

655.2

803.5

1,242.0

1,567.2

Shares in issue (cr)

20.5

20.5

20.5

20.5

20.5

EPS (Rs)

37.6

32.0

39.2

60.7

76.5

% YoY change

10.6

-14.9

22.6

54.6

26.2

PER (x)

31.0

36.5

29.8

19.3

15.3

Cash EPS (Rs)

45.3

40.9

49.1

71.3

88.1

Adjusted net profit (Rs cr)

Cash PER (x)

25.8

28.5

23.8

16.4

13.3

EV/EBITDA (x)

23.5

23.2

21.4

14.5

11.5

125.7

148.5

182.8

237.6

308.4

9.3

7.9

6.4

4.9

3.8

Book value (Rs/share)

P/BV (x)
Mcap/sales

4.5

3.8

3.3

2.8

2.4

RoCE (%)

17.8

15.8

17.1

22.8

25.0

RoNW(%)

25.4

20.5

21.9

25.5

24.8

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investors eye

viewpoint

Arvind
Viewpoint

Strong run-up, 62% returns in 6 months; time to take profits home

CMP: Rs241

Key points
 Led by re-rating and latest run-up on account of a demerger the stock has delivered 62% returns in last six
months: We had initiated our positive view on Arvind on January 31, 2014 at a price of Rs149 per share. We had
further re-emphasised our preference for the stock in the subsequent Viewpoint note (dated March 14, 2014) and
again in May after the announcement of the companys Q4FY2014 results. Our prime investment thesis was a strong
growth in the textile business coupled with the companys metamorphosis into a branded play (with several marquee
brands), which were not getting reflected in the stocks valuations. The same has played off very well. Since the
time we initiated our positive view the stock has appreciated by 62%. It has risen by 27% since our last update on
the stock in May this year in which we had expressed confidence about the companys business model and the
stocks performance. At the current level of Rs241 the stock has surpassed all our targets.
 Margin pressure expected ahead: Going forward, we expect the stocks performance to be capped in the short
term owing to: (a) margin pressure expected in the textile segment; and (b) Megamarts restructuring will be a
positive in the long term but may affect the financials in the short term. The Megamart business (value retailing in
nature) is currently bleeding and for Q1FY2015 the same has reported a 3.4 % decline in its same-store sales.
 Recent run-up, possible margin risk in short term and aggressive valuation leave little scope; advise profit
booking with 62% overall gain: We continue to believe that Arvind is a proxy play on the robust brand and retail
story unfolding on the Indian shores as well as the significant opportunity in the textile export space where India is
rapidly growing its presence and taking share from Bangladesh, Vietnam and the other markets. But given the
strong appreciation in the stock price (up 62% in six months and up 27% in last three months) and the likely margin
risk in the short term, we believe that in the short term the upside to the stock is capped (more so, given the
recent run-up on account of the demerger). At the current valuation of 11x its FY2016E earnings, the stock is no
longer cheap and hence we advise our clients to take home profits with a 62% overall gain.

Valuations
Particulars
Revenue
% growth
Adjusted profit

Rs cr
FY12

FY13

FY14

FY15E

FY16E

4,925.1

5,292.5

6,862.1

8,399.4

10,134.7

22.5

7.5

29.7

22.4

20.7

244.7

248.0

368.9

440.1

579.4

1.4

48.7

19.3

31.6

% growth
EPS

9.5

9.6

14.30

17.06

22.45

PER

25.4

25.1

16.9

14.1

10.7

EV/EBITDA

11.6

10.9

8.3

7.1

5.6

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Q1FY2015 performance snapshot: Arvind posted a

decent performance for Q1FY2015, with the consolidated
revenues growing by 19% year on year (YoY, aided by a
13% growth YoY in textile business and a 26% growth YoY
in the brand & retail business). A combination of factors
(a) disruption of operations for woven owing to an
expansion project, (b) higher power and cotton costs;
and (c) losses relating to the Megamartrestricted the
operating profit growth to merely 6.2% YoY. On the other
hand, lower depreciation resulted in a 15.9% growth YoY
in the adjusted earnings, though the reported earnings
grew at 33.9% YoY.

in the real estate business, the board decided to demerge

Arvinds infrastructure subsidiary, Arvind Infrastructure,
into a separate listed entity. The share swap ratio at 1:10
is fixed, whereby each shareholder holding ten shares in
Arvind would get one share in Arvind Infrastructure. Arvind
Infrastructure is a real estate company managing 11
projects in Ahmedabad and Bengaluru with a potential
construction space of 5.3 million sq ft over 360 acres of
land. The development business gets demerged from
Arvind into a subsidary while the land parcel continues to
stay in the books of the parent Arvind. We believe that
the demerger is a positive for the company as it enables
Arvind to focus on its core business while providing ample
leg room for growth of the infrastructure development
business.

Value unlocking through demerger of infra subsidiary a

positive: In an attempt to unlock value from the real
estate business as well as to provide leg room for growth

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