114 Indra maq finalrev › sites › default › files › bbva_5.pdfIndra Madrid, 15 March 2012 REFER TO IMPORTANT DISCLOSURES ON THE LAST TWO PAGES OF THIS REPORT Page 2 Basic data

REFER TO IMPORTANT DISCLOSURES ON THE LAST TWO PAGES OF THIS REPORT

Banco Bilbao Vizcaya Argentaria, S.A. is a legal person incorporated under Spanish law. BBVA is not a member of the FINRA and is not subject to the rules of disclosure affecting such members. The persons who have prepared and or contributed to the preparation of this Report are not registered members of the FINRA.

Indra Europe Information Technology\Software & Services

Madrid, 15 March 2012 Company Update Target price: EUR12.70

IDR SM Equity \IDR.MC Market Analysis

Equity Closing price as of 13/03/2012:EUR10.15 OutperformTechnology Team Leader Lurdes Sáiz de Quevedo (*) [email protected] +34 91 537 54 26 (*) Author/authors of this report.

A matter of free cash flow We have analysed Indra’s cash flow generation potential in a challenging

business scenario which assumes that in the next few years i) growth will have to come exclusively from international markets; ii) the Solutions/Services mix deteriorates further; and iii) working capital requirements tend to ease after peaking in 2012e, albeit at a very slow pace.

Our main take is that Indra should start improving its cash generation, with operating cash conversion reaching around 74% by 2013e and a sizeable reduction in capex from 2012e (-40%e YoY). Conversely, we expect the P&L to be tarnished by margin dilution in the short term and non-recurrent restructuring costs. But longer-term, we expect these restructuring costs to represent a boost for margins.

We expect Indra’s growth profile to be skewed towards Services and therefore mildly dilutive in terms of EBIT margins (revised long-term EBIT margin projection of 10%e). International (rev. CAGR 10-13e +15%) driven by emerging regions (32% of 2012e revenues) should offset a sluggish domestic market (rev. CAGR 10-13e -3%). We expect Brazil to become Indra’s second largest market (11%e of 2012 sales).

We have cut our estimates (EPS 12e by 30%) and updated our DCF valuation to reflect the new scenario, reducing our TP to EUR12.7 (from EUR16.5). We are maintaining our Outperform rating based on an attractive valuation (Ord. P/E 13e 10.1x) and the expected improvement in cash generation.

Stock market performance (-3y until last close) Basic data

Market cap (EUR mn) 1,665Number of shares (million) 164.1Average daily volume (EURmn) 11.6

2011 2012e 2013e 2014e EPS (EUR) 1.12 0.86 0.96 1.19

Ord. EPS (EUR) 1.12 0.99 1.03 1.19DPS (EUR) 0.61 0.61 0.61 0.61P/E (x) 8.92 12.0 10.8 8.68Ord. P/E (x) 8.92 10.4 10.1 8.68

57.22

67.22

77.22

87.22

97.22

3/09 7/10 12/11

0

5

10

15

20

Relative Absolute

P/CF (x) -49.1 62.5 13.4 23.8Source: Bloomberg P/BV (x) 1.54 1.53 1.43 1.31 EV/EBITDA (x) 6.65 8.28 7.37 6.32 FCF yield (%) -2.0% 1.6% 7.4% 4.2% Dividend yield (%) 6.4% 6.0% 6.0% 6.0%

Source: Datastream, company data and BBVA Research estimates

Rating record (-3y or since initiating coverage) (01/01/2008) O

Indra Madrid, 15 March 2012


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Basic data Closing price as of 13/03/2012: 10.1 Recommendation Outperform Market cap (EURmn) 1,665 Target price (EUR/share) 12.7 Total enterprise value (EURmn) 2,204 Number of shares (million) 164.1 Average daily volume (EURmn) 11.6 Free-float (%) 65.0 Main shareholders (%) Caja Madrid 20 Corp. F. Alba 10 Caja Astur 5 Main assumptions (%) Exposure to Domestic Public Budget 2012e

22%

Domestic P.A. & Healthcare revenue 12/11 YoY

-15%

Defense Revenue 12/11 YoY -10%

Revenues by geographical area Revenues by division

Spain (57%)

Europe (17%)

Latam (18%)

USA & Canada (1%)

RoW (7%)

Solutions (67%) Services (33%)

Per share data 2011 2012e 2013e EPS (EUR) 1.12 0.86 0.96 EPS growth (%) -4.0% -23.4% 11.4% Ord. EPS (EUR) 1.12 0.99 1.03 Ord. EPS growth (%) -15.9% -11.5% 3.4% DPS (EUR) 0.61 0.61 0.61 CFPS (EUR) -0.20 0.16 0.75 Valuation ratios (x) 2011 2012e 2013e P/E 8.92 12.0 10.8 Ord. P/E 8.92 10.4 10.1 P/CF -49.1 62.5 13.4 P/BV 1.54 1.53 1.43 EV/EBIT 7.78 10.2 8.91 EV/EBITDA 6.65 8.28 7.37 EV/sales 0.75 0.75 0.73 FCF yield (%) -2.0% 1.6% 7.4% Dividend yield (%) 6.4% 6.0% 6.0% Pay-out (%) 54.5% 71.2% 63.9% Financial and others (x) 2011 2012e 2013e Net debt/EBITDA 1.64 2.20 1.81 Interest coverage 7.11 5.79 5.22 Net debt/equity 49.1% 54.1% 46.6% ROE (%) 17.8% 13.0% 13.7% ROCE (%) 11.9% 8.2% 9.1% EV/CE 1.08 1.08 1.06 Capex/sales 6.2% 2.6% 2.5% Working capital/sales 27.3% 28.6% 27.9%

Source: company data and BBVA Research estimates

Balance sheet (EUR mn) 2010 2011 2012e 2013e 2014eIntangible assets 219.9 243.3 273.6 302.6 330.5Tangible assets 148.2 171.9 167.2 161.2 154.1Financial investments 50.5 66.4 69.6 72.8 156.0Other long-term assets 506.6 762.6 762.6 762.6 762.6Assets classified for disposal 0.00 0.00 0.00 0.00 0.00Current assets 1,849 2,018 2,021 2,052 2,057Other current assets 72.6 181.1 181.1 181.1 181.1Cash and cash equivalents 129.0 81.9 81.9 81.9 81.9Total assets 2,976 3,525 3,557 3,614 3,723Equity 991.0 1,046 1,085 1,163 1,270Minority interests 23.0 21.4 21.5 21.6 21.7Prov. and other LT liabilities 129.6 313.2 313.2 313.2 313.2Liabilities classified for disposal 0.00 0.00 0.00 0.00 0.00Financial debt 403.8 595.6 669.1 623.9 640.4Accounts payable 1,177 1,262 1,181 1,205 1,191Other current liabilities 251.7 287.1 287.1 287.1 287.1Total liabilities 2,976 3,525 3,557 3,614 3,723Net debt 274.8 513.7 587.2 542.0 558.5Capital employed 1,547 1,934 2,043 2,073 2,113Working capital 672.3 755.9 839.8 846.5 865.9 P&L (EUR mn) 2010 2011 2012e 2013e 2014eNet revenues 2,557 2,689 2,857 2,946 3,101Other income 74.4 83.8 83.8 83.8 83.8Revenues and other income 2,631 2,772 2,941 3,030 3,185Growth in sales (%) 2.2% 5.4% 6.1% 3.0% 5.1%Supplies -1,256 -1,282 -1,343 -1,394 -1,470Personnel costs -1,049 -1,176 -1,303 -1,322 -1,363Other operating expenses 0.00 0.00 0.00 0.00 0.00Recurrent EBITDA 327.3 313.5 294.9 314.2 352.1Non-recurrent items -33.3 0.00 -28.6 -14.7 0.00EBITDA 294.0 313.5 266.3 299.5 352.1EBITDA growth (%) -10.2% 6.6% -15.0% 12.5% 17.6%EBITDA/sales (%) 11.2% 11.3% 9.1% 9.9% 11.1%Depreciation and provisions -42.1 -45.6 -49.5 -51.9 -54.2EBIT 251.9 267.9 216.8 247.7 297.9EBIT growth (%) -11.7% 6.3% -19.1% 14.2% 20.3%EBIT/sales (%) 9.6% 9.7% 7.4% 8.2% 9.4%EBIT non-recurrent items 0.00 0.00 0.00 0.00 0.00Operating profit 251.9 267.9 216.8 247.7 297.9Net financial result -19.1 -37.7 -37.5 -47.4 -48.5Equity-accounted earnings 0.90 3.20 3.20 3.20 3.20Ordinary income 233.7 233.4 182.6 203.4 252.6Ordinary income growth (%) -10.4% -0.1% -21.8% 11.4% 24.2%Extr. result/discont. activities 0.00 0.00 0.00 0.00 0.00Pre-tax profit 233.7 233.4 182.6 203.4 252.6Tax -45.7 -52.2 -43.8 -48.8 -60.6Minorities 0.60 -0.10 -0.10 -0.10 -0.10Net profit 188.6 181.1 138.6 154.5 191.9Net profit growth (%) -3.6% -4.0% -23.4% 11.4% 24.2%Ordinary net profit 215.4 181.1 160.2 165.6 191.9Effective tax rate (%) 19.6% 22.7% 24.4% 24.4% 24.3% Cash flow statement (EUR mn) 2012e 2013e 2014eEBITDA 266.3 299.5 352.1Non-cash EBITDA 0.00 0.00 0.00Working capital variation -83.9 -6.68 -19.5Capex -75.0 -75.0 -155.0Free operating CF pre-tax 107.4 217.8 177.6Net financial result -37.5 -47.4 -48.5Non-cash financial result 0.00 0.00 0.00Taxes -43.8 -48.8 -60.6Div. from/to assoc. /minorities 0.00 0.00 0.00Cash flow other 0.00 0.00 0.00FCFE 26.1 121.6 68.5Dividends -99.6 -76.3 -85.0FCFE after dividends -73.5 45.3 -16.5FX 0.00 0.00 0.00Change in net debt 73.5 -45.3 16.5

Source: company data and BBVA Research estimates Note: 2014e capex includes the Politec acquisition pending payment



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Investment Case In our view, cash generation is the real issue at Indra …

Cash generation has been challenging in the last couple of years:

Operating cash conversion (defined as cash flow from operating activities as a percentage of EBITDA) has deteriorated sharply in the last few years, dropping from an historical average of c.75%e to a level close to 50%. The main reason for this decline is the additional working capital requirement (Days of Sales at 98 by the end of 2011e vs. historical levels of 70-75, further deterioration expected in 2012e).

Cash outflows from investment activities at Indra have increased more than two-fold, fuelled by investments in intangible (R&D capitalisations and licensing) and financial assets (joint ventures and acquisitions). Intangible and financial investments represented >80% of capex in 2011e.

… but we see indications that it will gradually improve, albeit at a slow pace

We expect working capital requirements to gradually ease over time, mainly thanks to changes in the client mix as we expect a smaller proportion of institutional and large clients with bargaining power. As an illustration, Indra’s exposure to the Spanish administrations is expected to fall to 22% in 2012e from historical levels of above 30% only two years ago.

In addition, we are forecasting a stabilisation of client pre-payments at around EUR500mn as pre-payments corresponding to order intake from international Transport & Traffic projects are offset by cash outflows from project execution. Some of the projects that have historically generated pre-payments are in our view delayed rather than cancelled. We would only perceive risks to client pre-payments in the event of project cancellations, which as of today we do not see as very likely given the strategic nature of these projects.

We expect that as a result of working capital improvements, cash conversion will return to roughly the 75% level by 2013e, adding some EUR75mn to yearly cash generation. Extraordinary liquidity measures such as the Spanish public agency ICO providing liquidity to the regions could provide a one-off, short-term relief to net working capital assets that we would quantify around 5-6e DoS (c.EUR50mne). We think this could potentially lead to Indra beating its own guidance in terms of working capital this year.

Finally, the company has committed to yearly capex of EUR65-75mn, considerably below the average of the last few years (12/11e -40% YoY), as it claims that the bulk of the investment needed to reinforce the solutions portfolio and to adapt it to the requirements of the international markets is already behind us. The expected capex reduction should add c. EUR50mn to yearly cash generation from 2012e.

In short, cash generation should be boosted by at least EUR50mn in 2012e and EUR125mn in 2013e. In our view, the market consensus does not appear to be giving credit to Indra’s ability to return to normalised cash generation patterns.

Indra’s growth profile has changed: we see margin dilution in the short term, with 2012e EBIT margin at 8.6%, and a revised downwards long-term EBIT margin projection of 10%

In our view, top-line growth over the next few years is bound to come from international markets, offsetting a challenging scenario in the domestic market. We expect international revenues to grow at a CAGR 10-13e of +15% vs. domestic revenues at -3%. Regionally, LatAm is the most promising area of growth for Indra: revenue CAGR 10-13e of +27%, fuelled by the recent acquisition of Politec. Other geographies, such as APAC & Africa, should also post revenue growth in the high teens (CAGR 10-13e of +17%). We forecast that emerging markets should increase their share in Indra’s revenues from 32% in 2012e to 39% by 2015e.



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We think that this international growth is going to be skewed towards Services rather than Solutions, taking the corresponding toll on margins, although the situation is not drastic (we see LatAm growth as Services-driven but APAC & Africa growth as Solutions-driven). We forecast moderate margin dilution to 8.6% in the first full year of the Politec integration, followed by a gradual expansion thanks to restructuring, which is consistent with company guidance (2012 EBIT margin between 8% and 9%). We think that the changes in Indra’s business mix might as well be structural, so consequently we have changed our long-term EBIT margin projection for Indra to 10%e (from 11.5% previously).

We underline the good visibility of Indra’s growth prospects and margins as the backlog represented 1.2x LTM sales by the end of 2011 (1.22x for Solutions, 1.16x for Services). In addition, we note that the first half of 2012e should show a good order intake performance thanks to the impact of large projects not yet booked such as the Mecca-Riyadh high-speed train.

However, this margin dilution should by no means be read as an indication of potential convergence with the average IT Services industry.

There are a number of reasons that justify Indra’s margins being noticeably better than those of IT Services companies:

Even if the mix has deteriorated over the last few years, the largest share of Indra’s business (60% in 2012e) still comes from its own solutions. In contrast to Indra, IT Services companies tend to lack their own technology and solutions (15-30% Solutions mix on average), relying on third parties. We estimate that Solutions margins on average are some 400-500bp above Services margins.

In the long term, Indra’s Solutions business is protected by the company’s recurrent investment in R&D (around 7-8% of revenues over the last few years).

Even though the P&L is likely to be tarnished in the short term, we think that the company will now deliver in the area where it has so far disappointed: cash generation

We have updated our DCF valuation of Indra to better reflect our views on its cash generation profile, reducing our TP to EUR12.7 (from EUR16.5). We are maintaining our Outperform rating based on an attractive valuation (Ord. P/E 13e 10.1x), increasing exposure to emerging markets and an improvement in cash conversion.



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Valuation We have updated our DCF valuation, reducing our TP to EUR12.7

We have updated our cash flow projections for Indra to reflect:

A more conservative view of the outlook for the Brazilian market, both in terms of growth and in terms of margin dilution.

A more conservative approach to working capital normalisation.

A decrease in capex (-40%e) after peaking (at EUR126mn) in 2011.

Figure 1

DCF Model Summary (EUR mn)

2012e 2013e 2014e 2015eEBIT 216.8 247.7 297.9 325.8

Tax rate 24.0% 24.0% 24.0% 24.0%

NOPAT 164.8 188.2 226.4 247.6

Capex -75.0 -75.0 -75.0 -75.0

Financial investments 0.0 0.0 -80.0 0.0

Depreciation 49.5 51.9 54.2 58.2

Working capital requirements -83.9 -6.7 -19.5 -24.2

FCFF 55.4 158.4 106.1 206.6

Source: BBVA Research estimates

We are leaving our cost of equity estimate at 10.5% as we believe that the market is still penalising Indra due to: i) its high exposure to the economic cycle in Spain; and ii) more specifically, its vulnerability to the upcoming public budget cuts. We have raised our WACC estimate to 8.8% on a higher cost of debt. We are applying a long-term g of 2% (0% in Spain, 1% in Europe, 4% in emerging), which could prove conservative as Indra’s exposure to emerging regions is increasing. However we do not think that the market is ready to pay for a growth premium in Indra before cash conversion normalises.

Figure 2

Valuation summary (EUR mn)

NVP FCFF (12-15e) 470.2

NPV Terminal Value 2223.7

Target EV 2693.9

Net debt 2011 513.7

Provisions & Minority interests 2011 130.7

Financial Assets 2011 excl. Politec 11.4

Equity value 2060.9

Nb of shares 162.0

Value per share (EUR) 12.7 Source: BBVA Research estimates

Our valuation is extremely sensitive to our views on the level of investment required to sustain growth and margins

We have identified two main assumptions in our model that have a significant influence on Indra’s value-creation potential:



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Investment in net working capital assets: since the start of the economic downturn, Indra’s working capital has been penalised by two factors: the extension of payment terms to certain large and institutional clients and the dramatic drop in client pre-payments (linked to the sharp decrease in Security and Defence activities), which decreased from EUR622mn in 2008 to around EUR500mn in 2009-11.

We now expect a gradual normalisation of working capital requirements-driven favourable client mix effects as the international growth profile of the company results in a smaller proportion of institutional and large clients with bargaining power. In this context, we note that for example Indra’s exposure to the Spanish administration is expected to fall to 22% in 2012e from historical levels of above 30% only two years ago. In addition, we see the underlying performance of payment terms to institutional clients stabilising (although not necessarily improving) thanks to initiatives such as the Spanish public agency ICO providing liquidity to the regions., which could provide a one-off boost to net working capital assets that we would quantify at around 5-6e DoS (EUR 50mne).

We are modelling stable client pre-payments at around EUR500mn as pre-payments corresponding to order intake from international Transport & Traffic projects are offset by cash outflows from project execution. Some of the projects that have historically generated pre-payments are in our view delayed rather than cancelled. We would only perceive risks to client pre-payments in the event of project cancellations, which as of today we do not see as very likely given the strategic nature of these projects.

In spite of this expected normalisation, 2012e DoS is likely to increase with respect to the level at the end of 2011 (98 DoS), as last year net working capital assets were unexpectedly reduced due to some collection of receivables scheduled for 2012e brought forward to 2011. Nevertheless, this should not be read as a sign of deterioration in the underlying working capital environment. According to our model, net working capital assets, in terms of days of sales, should peak in 2012e before experiencing a very gradual reduction (2014e 102.4 DoS). Our base-case estimate for working capital DoS does not include the potential positive impact of the ICO liquidity programme, which could be as high as 5-6e DoS.

Figure 3

Valuation sensitivity to working capital DoS deviations from base case (EUR/share)

-20 days -10 days -5 days Base case +5 days +10 days +20 days

15.3 14.0 13.4 12.7 12.1 11.4 10.2 Source: BBVA Research estimates

We estimate that if Indra’s net working capital assets were to stabilise around the upper end of the guided range, 110 DoS, instead of gradually improving as per our base case, the impact on the valuation would be as much as EUR.2.4/share, taking the valuation to EUR10.3/share. However, this is a scenario that we consider as highly unlikely, because: of i) the already mentioned mix effects; ii) the liquidity measures put in place by the Spanish government; and iii) expected order intake from large international projects not yet reflected either in the backlog nor in client pre-payments.

We acknowledge that client pre-payments are controversial as some investors consider them not sustainable in the long run, particularly those linked Security and Defence (80%e of the total). If we were to remove from our estimates the portion of pre-payments that we see linked to Security and Defence (EUR400mne), the impact on valuation would be as much as EUR2.4/share taking valuation to EUR10.3/share. This would take working capital DoS to 150-140 in 2012-15e.



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Investment in intangible assets: Over the last few years (2008-11), Indra’s investment in intangible assets has increased more than twofold, from EUR38mn in 2008 to EUR84mn in 2011. The main reason behind this increase is the pick-up in R&D capitalisation, which some elements of the market tend to regard as a strategy to boost margins at the expense of capex. R&D investment is obviously a pre-requisite for reinforcing the company’s solutions catalogue and increasing its competitiveness in international markets. The main areas of investment for the company in the last few years are railway transport, smart energy infrastructure, healthcare, financial services, security and defence.

Going forward, the company has committed to a yearly capex of EUR65-75mn (which according to our estimates implies R&D capitalisation in the range of EUR45-55mne), considerably below the average of the last few years, as it claims that the bulk of the investment needed to reinforce the solutions portfolio and to adapt it to the requirements of the international markets is already behind us. In our view, this represents a commitment that margin guidance is expected to be achieved without resorting to increases in R&D capitalisations (and consequently higher capex).

Figure 4

Valuation sensitivity to capex deviations from base case (EUR/share)

-30% -20% -10% Base case +10% +20% +30%14.2 13.7 13.2 12.7 12.2 11.8 11.3


Current valuation (10.1x P/E 13e) is not expensive in our view

Since the onset of the economic downturn, Indra has been trading at a discount in terms of P/E vs. its peer group, although in terms of EV/EBIT and EV/EBITDA it trades at a premium. However, in our view, Indra’s traditional peer group is somewhat artificial and there are some specific factors that need to be taken into account before making a fair comparison of EV/EBIT and EV/EBITDA:

Indra has a different business model, with a higher Solutions component (60%e in 2012 vs peer range of 15-30%e), which translates into higher visibility and margins. The market has traditionally paid a premium for this and we believe it deserves higher multiples.

Most of Indra’s peers rely on inorganic growth to offset a flat (or even shrinking) organic business. This translates into recurrent restructuring costs and impairments, which are typically excluded from peer comparisons. If we included them in the comparison, the apparent premium disappears.

In our view, the bear arguments on the stock depend on i) a potential margin convergence towards the peer average (Indra’s operating margin remains some 400bp above the average of its peer group); ii) a deterioration in its cash generation capacity, which could indicate a turning point in the company’s cash generation profile; and iii) the large exposure to a sluggish domestic economy, and in particular to a domestic public budget that needs to be cut back further.

Figure 5

Peer group comparison

IDR CAP ATO LOG TIE1VRevenue growth 12/11 6.8% 2.7% 25.8% -2.0% 2.2%

EPS growth 12/11 -7.7% 4.7% 20.8% 22.2% 10.8%

Net debt/EBITDA 11 1.7x -1.3x 0.2x 1.8x 0.2x

EV/EBIT 12e 8.9x 6.6x 6.6x 7.3x 9.0x

P/E 12e 9.3x. 11.8x 10.9x 7.8x 10.5x Source: BBVA Research estimates



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2012 represents a particularly tough comparison year for Indra as according to our estimates, top-line growth will be driven by inorganic contributions that will fail to translate into EPS growth. However, Indra still has a superior organic growth profile (and track-record) and an attractive regional mix (emerging markets should account for 32% of 2012e revenues). In addition, we think that its best-in-class operating margins are just a direct consequence of a superior business model (Solutions component, R&D investment …), and therefore should be sustainable in the long term. Our implied valuation P/E 12e of 12.4x is above the peer group’s current trading average, however this ratio should be put in context with the sustained EPS growth we expect once the Politec acquisition is integrated (CAGR 13-15e +18%).



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It’s the cash that matters … and cash conversion should gradually improve In the last few years, Indra has systematically met its guidance in terms of operating and P&L metrics (top-line growth, EBIT margin, order intake), but at the same time it has disappointed in the cash generation area. We think that management’s focus has shifted towards cash generation and we expect the company to now deliver in what has been its main area of weakness since the onset of the bearish cycle.

Figure 6

We expect FCF to equity to turn positive in 2012e (EURmn)

2008 2009 2010 2011 2012e 2013e 2014eEBITDA 308 327 327 314 295 314 352

Working Capital -67 -50 -111 -96 -84 -7 -19

Capex -67 -80 -89 -126 -75 -75 -75

Financial investments -18 -20 -49 -45 -80

Restructuring costs 0 0 -33 0 -29 -15 0

Free Operating CF Pre-Tax 157 178 44 46 107 218 177

Net financial result -23 -25 -19 -38 -37 -47 -48

Cash taxes -32 -62 -54 -75 -44 -49 -61

Free Cash Flow to Equity 102 91 -29 -67 26 121 68Source: BBVA Research estimates/Company data

Working capital remains challenging, but guidance should not be read as a sign of further deterioration

There are two main elements that shape the evolution of Indra’s working capital:

Accounts receivable: outstanding bills from clients have been growing steadily since the onset of the bearish cycle. Nevertheless, there have been a couple of cases where the company’s collection of receivables has experienced some glitches (i.e. payments unexpectedly brought forward), producing a more volatile pattern in terms of cash generation. This was the case in 4Q09 and has been the case again in 4Q11. Our point is that the company should have closed 2011 with a higher level of net working capital assets in terms of DoS, as the combination of one of this collection glitches (probably from institutional clients) and the consolidation effect from Politec (lower net working capital assets in terms of DoS) produced an artificially low figure.

In any event, we prefer to focus our attention in the underlying working capital trends and we do not see any significant changes on that front, although Indra reports that large and institutional clients continue to request favourable payment terms (often in exchange for a higher workload). We are not forecasting relevant changes in the underlying accounts receivable trends, but we acknowledge that measures such as the Spanish public agency ICO providing liquidity to the suppliers of the regional administrations point to a general domestic context for payment terms that should (at least) not deteriorate. Furthermore, Indra is even likely to benefit from a marginally positive one-off effect in early 2012e as a consequence of the ICO plan (but then again, Indra’s has a fairly small exposure to local and regional administrations that we estimate at around EUR100mn in outstanding bills, of which roughly half could be considered overdue). Longer-term, Indra should benefit from mix effects as the weight of institutional and large domestic in Indra’s revenues is diluted.



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– Client pre-payments: Client pre-payments were the main reason behind Indra’s working capital deterioration in the 2008-09. Client pre-payments are most often tied to large Solutions projects which are commissioned and partly financed by the client before the delivery of the actual solution. This payment scheme is therefore more frequent in the Security & Defence and Transport & Traffic vertical markets. We estimate that as of today, client pre-payments in Indra’s balance sheet correspond to 80% Security & Defence projects, 20% Transport & Traffic. We see the negative performance of pre-payments in 2008-10 as linked to the sharp decline seen in Security & Defence projects, partly offset by the effect of Transport & Traffic growth. We have already seen signs of client pre-payments stabilisation in Indra’s balance sheet (2009-10), and we are actually forecasting flat pre-payments for the next few years at EUR500mn, close to the pre-payments recorded in the challenging 2010-2011e period (note that 2011 pre-payments have not yet been disclosed).

As well as the actual pre-payments situation in a challenging scenario, we have one other powerful reason for forecasting that Defence pre-payments are not disappearing, but just stabilising. We are referring to the fact that the large strategic Defence projects (i.e. those that carry pre-payments) have been so far either delayed or extended over time, but not cancelled due to their strategic nature. Should we start seeing project cancellations, we might perceive some downside risk to our pre-payments estimates, although the risk should be analysed on a case-by-case basis.

Figure 7

Accounts receivable should benefit slightly from mix effects (EUR mn)

2008 2009 2010 2011 2012e 2013eAccounts Receivable 1493 1420 1693 1877 1873 1898

Days of sales 227 201 235 247 233 229 Source: BBVA Research estimates

Figure 8

We expect client pre-payments to stabilise in absolute terms (EUR mn)

2008 2009 2010 2011 2012e 2013eClient pre-payments 622 499 511 511 500 500

Days of sales 95 71 71 69 64 62


We note that the expected improvement in working capital management is an essential part of Indra’s equity story. If Indra’s net working capital assets were to stabilise around the level expected in 2012e (108 DoS) instead of gradually decreasing as we forecast, the company would continue to be challenged on the cash generation front.

We expect capex to be contained after the integration of Politec

Total capex, (excluding investments in financial assets, volatile by nature), has soared in the last few years, basically driven by investment in intangible assets. In fact, investment in intangible assets increased more than four-fold between 2006 (EUR17.4mn) and 2011 (EUR84mn). One of the main drivers of investments in intangible assets is a significant pick up in R&D capitalisation, which some investors tend to regard as a strategy to boost margins at the expense of capex.



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Going forward, the company has committed to a yearly capex of EUR65-75mn, considerably below the average of the last few years. In our view, this represents a commitment that margin guidance is expected to be achieved without resorting to increases in R&D capitalisations (and consequently higher capex). The company claims that it has already made an effort to reinforce its Solutions portfolio in order to make it more competitive, particularly at the international level, so this is the main reason why the corresponding level of capitalised R&D should decrease significantly in the next few years. We expect to see the company trend towards a level of around EUR50-45mn yearly investment in intangible assets, which in our view corresponds to a total capex of around EUR75mn (the upper-end of the yearly capex range provided by the company). We think that the consensus is currently overstating the company’s long-term capex trend.

Figure 9

Capex has soared in the last few years, basically driven by investment in intangible assets (EUR mn)

2006 2007 2008 2009 2010 20112006-11

CAGRInvestment in tangible assets 21 41 27 29 20 42 15%

Investment in intangible assets 17 32 38 51 69 84 37% Source: BBVA Research estimates

We perceive a low risk of impairments

The capitalisation of R&D investments always implies some degree of risk of impairments if the corresponding projects fail to create the expected value. We understand that Indra’s capitalised projects carry a low risk of impairments:

Most of the capitalised projects correspond to areas where the company already enjoys a recognised leadership position (Transport & Traffic, Healthcare, Financial Services …) and the capitalised efforts often correspond to incorporating market requirements so as to enlarge the target market of the corresponding solution. We see low risk of impairments in this type of projects.

Capitalised R&D tends to be increasingly financed by third parties (48% in 2010).This third-party financing comes in the form of government grants and soft loans (zero coupon), subject to both the technical and the commercial success of the project (i.e. Indra does not have to repay the subsidies unless the financed project achieves commercial success). In the event of an impairment, the overall impact for the company would be limited.

There are some other projects aimed at enlarging the company’s business scope in a particular market where the company is already present (as we understand is the case in certain railway projects). Although we perceive moderate risk of impairments in this field, we understand that they represent a minor portion of the company’s capitalised R&D (



Page 12

Figure 10

We expect a gradual improvement in operating cash conversion (EUR mn)

2008 2009 2010 2011 2012e 2013e 2014e 2015eEBITDA 308 327 327 314 295 314 352 384

Pre tax cash flow from operating activities 231 271 163 169 136 233 258 285

Operating cash conversion 75% 83% 50% 54% 46% 74% 73% 74% Source: BBVA Research estimates

A significant change in the top-line growth profile Growth at Indra had already been driven by International markets for the last few years …

Since the integration of Azertia and Soluziona, Indra’s top line has clearly been driven by international expansion. In our view, in the last few years there have been two main axes of international expansion:

Large domestic clients expanding abroad: in the vertical markets of telecoms, energy and financial services, Indra has been able to leverage strong business relationships with domestic clients expanding their operations at an international level. This growth driver has been mainly concentrated in LatAm, following the expansion footprint of this client base.

Technological leadership in selected Solution niches: Even today, Indra’s two most international vertical businesses are Security & Defence and Transport & Traffic. In both of them, growth has been driven by technological leadership (air defence, air traffic control, ticketing, etc). Regionally, Europe has historically been the first natural expansion market.

Figure 11

Indra's top-line growth has been driven by international markets (EUR mn)

0

500

1000

1500

2000

2500

3000

2006 2007 2008 2009 2010 2011e 2012e

EUR

mn

Domestic Market Europe Latam RoW US & Canada


Nevertheless, we also see signs that Indra’s growth profile is starting to change:

In LatAm, Indra has already consolidated as an important regional IT Services player, with a business scope that expands way beyond its traditional client footprint.

In Europe, the historical growth area for Solutions, the market is stagnating but emerging markets have taken over as the natural expansion market for Solutions.

Indra is now exporting its own technology and solutions beyond the vertical markets of Transport & Traffic and Security & Defence (Financial Services, Healthcare, Public Administrations …). This is in part the result of the investment in R&D made in the last few years to adapt Indra’s Solutions catalogue to international market requirements.



Page 13

In addition to these trends, it is worth mentioning that global macro conditions are not yet ripe for massive investment in new Solutions projects. As a consequence, we see growth in the next few years skewed towards Services, mainly in LatAm and therefore the Solutions/Services business mix will further evolve towards the latter. Note that this does not imply that Indra’s Solutions business is about to plummet. On the contrary, Solutions order intake has remained flat last year while the order backlog (1.22x last twelve months sales) has slightly increased. Furthermore, the first half of 2012e should show a good order intake performance thanks to the impact of large projects not yet booked such as the Mecca-Riyadh high-speed train.

Inorganic growth provides a strong platform for consolidating a LatAm leadership position …

Indra’s revenues in LatAm have grown at a 24% CAGR 06-11, clearly outperforming the International franchise top-line CAGR of 14% in the same period. Indra enjoys a leadership position in most of the largest countries in the region (Argentina, Chile, Peru …), but its business in Brazil, relative to the market potential, was still just a fledgling before the acquisition of Politec (EUR70mn in revenues in 2010).

The acquisition of Politec (EUR180mn in revenues in 2010, 100% in the Services segment) provides Indra with a strong platform to grow its IT Services business locally in Brazil and consolidate a LatAm leadership position. Politec’s presence in vertical markets (mainly Energy, Financial Services and Public Administration) is fully complementary to that of Indra (65%e of revenues in Telecom and Media), potentially generating commercial synergies for Indra’s Solutions business.

Figure 12 Figure 13

Politec is a Services company (based on 2010 revenues) ...

... and its business is concentrated in three vertical markets

40%

25%

13%

9%13%

Outsourcing

Consulting

Infrastructure Services

Application Development

Application Management

37%

32%

31%

Financial Services

Public Administration

Energy and Industry

Source: company data Source: company data

We understand that IT Outsourcing and SAP implementations are the main areas of expertise at Politec. In our view, as of today this is probably a low added-value business where excellence in execution and efficiency are the only levers for margin expansion. But in spite of that, we think that both of them provide an excellent platform to cross-sell and up-sell from plain vanilla services to higher value-added products and solutions, hence the commercial synergies we expect. In this sense, we think that Politec’s attraction to Indra lies in its client portfolio, which includes Petrobras, Caixa Economica Federal, Banco do Brasil, Banco Itaú, Secretaria de Fazenda, BR Distribuidora, Ministerio do Trabalho, Bayer and Alstom.



Page 14

Nevertheless, note that in our view, Politec (2010 EBIT margin -2%) faces an efficiency challenge that needs to be addressed during the integration process. In our opinion, Politec’s troubles started with its international expansion plan, launched in 2008 after Mitshubishi made a strategic investment in the company (USD80mn, 9% stake). The international expansion plan, mainly with North and South America in view, leveraged Politec’s SAP implementation and IT outsourcing expertise. In our view, this ambitious strategy, opening head offices in Argentina, Chile and the US, resulted in a loss of focus and translated into a downward trend in the top line and mounting losses.

Figure 14

Politec revenues and margins have been challenged since the onset of the international expansion plan (BRL mn)

2007 2008 2009 2010Revenues 472 396 405 400

EBIT margin 7.8% -13.1% -2.4% -2.0% Source: company data

After recording material losses in 2008, Politec launched an operational restructuring with the aim of expanding margins back towards the industry average. This restructuring plan should have been completed by 2011.

Further restructuring is needed …

Indra’s new growth profile (in terms of business mix, inorganic contribution, etc) represents a challenge for the company’s margin. In this sense, some further restructuring is needed, mainly to bring resources in line with its actual business needs (both geographically and by vertical market). The company has announced measures aimed at increasing efficiency and streamlining the organisation, which should represent around 1% and 0.5% of sales in extraordinary costs in 2012e and 2013e. We have included in our model EUR29mn and EUR15mn in non-recurrent restructuring costs in 2012e and 2013e respectively. The company has not been very specific about the focus of measures, but we understand that the main targets are the production capacity in Spain.

… but there are levers available to propel profitability in Brazil closer to the company’s average

Further to the result of the restructuring measures, we are convinced that after the integration with Indra, margin expansion should improve in Brazil. In this sense, we underline that Indra’s track-record in integrating acquisitions is excellent, with several margin expansion success stories such as the cases of Azertia and Soluziona. We think that Indra’s acquisition integration skills leverage two main resources:

Standardisation of operational processes: Indra has proved to be a disciplined player in terms of operational processes and efficiency. Politec already has the highest software quality CMMi certification (level 5), so in that sense we think that it probably only needs to strengthen its alignment with the actual business to overcome its current challenges.

Monitoring and control processes: we think that Indra’s project monitoring and control tools are superior to the industry standard and this is, in our view, one of the reasons why Indra regularly meets guidance without springing any unpleasant surprises along the way.

We think the “new Indra” in Brazil, i.e. the result of the combination of former Indra’s business with Politec, should be able to grow in line with the IT Services market (CAGR 10-15 +11% according to Gartner). Nevertheless, we consider that our estimates (CAGR 10-13e +11%) may err on the conservative side, as on the one hand they are somewhat below the targets implicit in the Politec acquisition presentation (+22%), while on the other they are still below Indra’s performance in LatAm in the last few years (CAGR 09-11e +35%), which points at Indra still benefiting from consolidating critical mass in the region.



Page 15

Figure 15

Indra Brazil should grow at least in-line with the 11%e CAGR of the market (EUR mn)

2010 2011 2012E 2013E 2014E 2015E2010-15e

CAGRTransport & Traffic 0 2 2 3 3 4 n.m.

Security & Defense. 0 1.5 3 3 4 4 n.m.

Telecom & Media 46 54 63 72 77 83 13%

P.A. & Healthcare 61 46 61 73 85 98 10%

Financial Services 74 66 81 89 99 110 8%

Energy & Industry 70 91 95 105 118 132 13%

Total Indra Brazil Pro forma 250 261 305 346 386 430 11%

Indra Brazil as Reported 70 125 305 346 386 430 44%

EBIT Indra Brazil as Reported 5.2 0.5 -2.4 12.5 22.0 25.6 38%

EBIT margin Indra Brazil as Reported 7.4% 0.4% -0.8% 3.6% 5.7% 6.0% Source: BBVA Research estimates

Outside Brazil, organic growth should continue to be driven by emerging markets

In our view, it is clear that Indra’s business is stagnant not only in its domestic market (CAGR 09-11 –3%) but also in Europe (CAGR 09-11 0%, including the positive effect from the Galyleo acquisition) as a result of the challenging macro context. Both regions have been affected by severe cuts in Security and Defence budgets (penalising the Solutions business) and new investment projects in general, while Outsourcing and Services deals have materially increased but not enough to offset the decline in Solutions revenues.

Against this backdrop, emerging markets have taken over as the main growth region, with an outstanding performance in LatAm and a slightly more volatile (but promising) profile in APAC and MEA. In these two regions, the business is increasingly becoming recurrent but it still depends on bulky projects (such as the recent award of the Mecca-Riyadh high speed train), which results in lumpier revenue patterns.

Figure 16

International continues to be the clear growth driver, both organic and inorganic (EUR mn)

2010 2011 2012E 2013E 2014E 2015E

2011-15e

CAGROrganic Revenue Evolution 2557 2627 2638 2698 2820 2950 3%

Politec 41 179 206 237 273 61%

Galyleo 21 40 42 44 45 21%

Consolidated revenues 2557 2689 2857 2946 3101 3266 5%

Domestic 1566 1525 1439 1427 1448 1476 -1%

International 991 1158 1418 1513 1647 1782 11%

Europe 425 446 460 460 470 490 2%

LatAm 372 485 679 752 840 917 17%

US&Canada 29 36 36 36 36 36 0%

APAC, MEA and Rest of the World 166 196 243 265 301 339 15%

International - organic only 991 1101 1153 1223 1323 1420 7%




Page 16

We want to underline here the resilience of IT spending that most industry analysts (such as Gartner or IDC) are forecasting for 2010-15e, not only in emerging markets, where double-digit growth is expected, but also in developed markets with a slowing economy such as Europe where growth is expected to be in the 0-5% range. We would add that we expect that the migration to cloud computing delivery models at large organisations should drive demand for IT Services in developed markets in the next few years.

… and skewed towards Services

We expect the Services business segment to continue to outperform Solutions given i) the counter-cyclical nature of outsourcing activities (Application Management Outsourcing and Business Process Outsourcing are the main drivers of the Services business); and ii) the very strong order intake recorded in the last few quarters (order intake 9% YoY in 2011).

Nevertheless, with BPO becoming a powerful cost-reduction tool for the corporate and public sectors, we note that the border between Solutions and Services is becoming blurred:

Traditionally, the business scope of most Services contacts, independent of the pricing scheme chosen, used to leave little room for adding extra value compared to a “cost-plus” type of contract.

Conversely, with BPO the object of outsourcing is the complete business process, leaving room for the outsourcing provider to re-engineer and optimise the business process. In this sense, the Services provider is potentially able to extract better margins from these deals and thus create shareholder value.

In addition to this, we expect the corporate move towards “the cloud” to represent an important driver for IT Services demand. Indra has raised its profile in Cloud Computing in the last few months:

It has defined a proprietary reference architecture and on-demand delivery model, Flex-IT.

In parallel, it has also been very active in the partnership arena: it has signed an MoU with Cisco in January and has launched a joint desktop virtualisation solution with NEC (Desktop as a Service or DaaS). In this joint DaaS solution, NEC is responsible for providing the infrastructure (both hardware and software), while Indra is in charge of the solution deployment and the management, operation and hosting of the service (with, according to our understanding, an EMEA scope).

We do not have elements to assess the value of the Flex-IT proprietary architecture but in our opinion, cloud reference designs tend to be a commodity. Nevertheless, in our view the real value-added that Indra can bring in an environment of generalised migrations from traditional IT delivery models to cloud computing lies in the Services part, thanks to its excellent knowledge of the IT infrastructure (and limitations) of its client base. In this sense we applaud the partnerships announced, such as with NEC which lead us to think that Indra is going to focus on the areas of cloud computing where it can claim a competitive advantage.

But on top of that, what is clear to us is that the traditional Solutions segment, while not plummeting, is not making a comeback yet. Solutions order intake has lagged the corporate average in the last few quarters (0% YoY in 2011), a leading indicator that a turnaround in terms of business mix is not likely in the short to medium term. The challenging macro context in Spain and Europe in general does not seem like a favourable environment for investing in new solutions, which tend to have a long pay-out (typically beyond the 18-month timeframe). Even if the picture is clearly more favourable in emerging markets, and there are a few large Solutions deals (such international awards in high-speed trains and air traffic control) that we expect to have a positive impact on both top-line, order intake and business mix, in our view they will not be enough to fully offset the weakness in Spain and Europe at least till 2015e.



Page 17

Figure 17

Growth skewed towards Services, business mix expected to further deteriorate (EUR mn)

2010 2011 2012E 2013E 2014E 2015E2011-

15e Solutions 1827 1811 1715 1715 1715 1715 -1%

Services 730 878 1142 1231 1386 1551 15%

Solutions as a % of total 71% 67% 60% 58% 55% 53%


Figure 18

The mid-single-digit revenue CAGR we expect results from the combination of rather divergent performances (EUR mn)

2010 2011 2012e 2013e 2014e 2015e2011-15e

CAGRTransport & Traffic

Total vertical market 555 597 641 678 735 788 7%Domestic 297 248 220 208 208 208 -4%International organic 258 349 421 470 527 580 14%

Security & DefenceTotal vertical market 594 510 459 444 444 444 -3%

Domestic 276 205 185 185 185 185 -3%International organic 318 305 274 259 259 259 -4%

Telecom & MediaTotal vertical market 321 397 400 420 441 464 4%

Domestic 196 237 213 220 228 236 0%International organic 125 155 178 190 204 219 9%International inorganic 5 9 10 9 9 0%

P.A. & HealthcareTotal vertical market 357 391 421 413 433 465 4%

Domestic 278 273 244 232 232 239 -3%International organic 78 99 106 120 131 145 10%International inorganic 19 71 79 89 100 12%

Financial ServicesTotal vertical market 368 386 448 481 513 545 9%


Energy & IndustryTotal vertical market 363 408 488 511 535 562 8%


Consolidated revenues 2557 2689 2857 2946 3101 3266 5%


Margin dilution should be partly offset by restructuring … Historically, Indra’s business has been characterised by a remarkable stability in terms of margins (i.e. EBIT margin excluding extraordinary items constrained within the 11.6%-10% range in the 2006-2011e period). In the past, the most important changes in terms of EBIT margins have been related to inorganic growth and the integration of acquisitions. In this context, we see the Politec integration as the main driver of the margin dilution at Indra implied in its guidance, as a consequence of:

A significant increase in headcount: the Politec integration represents an increase of c.5,000 in Indra’s headcount.

A material change in business mix: Politec business is virtually 100% Services and its integration within Indra is the main reason behind the 6pp drop we are forecasting for Solutions mix in 2012e.



Page 18

Figure 19

Indra has recorded a remarkable EBIT margin stability in the last few years (%)

10.2%

11.2%11.4%11.4%

11.6%

11.1%

9.0%

9.5%

10.0%

10.5%

11.0%

11.5%

12.0%

2006 2007 2008 2009 2010 2011e

Source: company data

Figure 20

Headcount has been determined by inorganic growth

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2006 2007 2008 2009 2010 2011e

Spain Rest of Europe LatAm North America Rest of the world


Figure 21

We expect margin dilution in the short term due to consolidation effects, followed by gradual expansion (EUR mn)

2010 2011 2012E 2013E 2014E 2015E2010-15e

CAGRRevenues 2557 2689 2857 2946 3101 3266 5%

EBITDA (excl. Non recurrent) 327 314 295 314 352 384 5%

EBITDA margin % 12.8% 11.7% 10.3% 10.7% 11.4% 11.8%

EBIT (excl. Non recurrent) 285 268 245 262 298 326 5%

EBIT margin % 11.2% 10.0% 8.6% 8.9% 9.6% 10.0%

Solutions revenues 1827 1811 1715 1715 1715 1715 -1%

Solutions contribution margin 355 338 294 280 294 295 -3%

% of revenues 19.4% 18.7% 17.1% 16.4% 17.2% 17.2%

Services revenues 730 878 1142 1231 1386 1551 15%

Services contribution margin 112 127 144 178 201 233 16%

% of revenues 15.4% 14.4% 12.6% 14.5% 14.5% 15.0%

Corporate costs -182 -197 -192 -196 -197 -202 1%




Page 19

There are two main reasons why margins are likely to remain challenged in 2012-2015e:

We expect strong pricing pressure in the Solutions domestic business, particularly from institutional clients and large corporations, as we see that its bargaining power has increased. In addition, the pre-payments already made might put some of them in a favourable position in the event of project redefinitions (or eventual cancellations if they occurred). We have modelled a 150bp drop in the domestic Solutions contribution margin in 2012e, followed by a 100bp in 2013e and 50bp in 2014e, 2015e. This translates into a significant dilution of consolidated Solutions contribution margin in the next couple of years, followed by a slight recovery driven by international projects.

We forecast that the integration of Politec will take some time to deliver the expected results in terms of margin expansion, heavily penalising the 2012e Services contribution margin. The subsequent expansion process should be progressive and driven by restructuring. Nevertheless, is will most likely be offset by some pricing pressure in the domestic market to deliver roughly stable Services contribution margins in 2013e-15e.

The upside risks to our base case lie in the international franchise We think we have taken a conservative approach to Brazil estimates

We have modelled growth for Indra in Brazil that is essentially in line with the expected market evolution (CAGR 10-13e +11% according to Gartner). These estimates reflect the combination of:

A conservative view of the potential of the Transport & Traffic and Security & Defence verticals, which according to our model, should remain as marginal businesses in Brazil throughout the whole period. We believe that Indra’s commercial pipeline in these two vertical markets in Brazil is rich, but we have opted to maintain a conservative stance in our figures. Upside risk lies in project awards in these two areas, which could materially change the profile of the business.

Slightly faster than average growth in the Telecom & Media (+13% CAGR 10-15e) and Financial Services (+12% CAGR 10-15e) vertical markets. Upside risk lies in commercial synergies after the integration of Politec.

A sluggish Energy & Industry market (-4% CAGR 10-15e). Upside risk lies in the recovery of the lost ground in this vertical.

Our view of the evolution of the Solutions/Services business mix is also conservative

We are expecting a stabilisation of the Solutions business at around EUR1.7bn/year, or 5% below current levels. The Solutions business has shown a flattish performance in the last two years while order intake has remained more volatile (-3% in 2010, 0% in 2011). By region, we understand that the weakness of the domestic market has been offset by the good performance at the international level.

Our forecast is conservative in the sense that while we see risks in domestic new projects, the order backlog provides us with valuable visibility about the business. We underline the fact that the current order backlog does not include the positive impact of the Mecca-Riyadh high-speed train project, so Solutions backlog could easily represent 1.35-1.4x our EUR1.7bn forecast by the end of the first half of 2012e, which gives an idea of how conservative our model could be.



Page 20

…While the downside risks are concentrated in the domestic market In 2012e, Indra should still have a total exposure to the domestic public budget of 22%

Indra’s exposure to the domestic public budget, although still significant, is materially below the roughly one third it had just a couple of years ago. Exposure is concentrated in three vertical markets: Transport & Traffic, Security & Defence and Public Administration & Healthcare.

In domestic Transport & Traffic we are forecasting double-digit drops in 2012e, mid-single digit drops in 2013e and a flattish business afterwards. We are not assuming new projects before 2014e, but just maintenance mode for the installed base (air traffic management, road traffic control, ticketing, etc). The business mix should further skew towards Services.

In Security & Defence, we expect a similar situation, but we highlight the decline of this vertical market that started 3-4 years ago (vs. 1-2 years ago in the case of Transport & Traffic). As in Transport & Traffic, the business mix should further skew towards Services.

In P.A: & Healthcare, this should be the first year of real decline as on the one hand the vertical has proved to be surprisingly resilient in spite of the budgetary context, while on the other hand last year it was helped by the positive effect from regional and general elections in Spain (Indra is market leader in balloting systems). We are expecting revenues to drop by -15% in 2012e in the domestic market, followed by mid-single-digit drops in 2013-2014e. We find the area of Business Process Outsourcing for the Public Administration very powerful as a cost-savings driver, so for this reason we are not forecasting further drops from 2014e on. As a reminder, Indra’s domestic business in P.A. & Healthcare is mainly concentrated in the central administration, within areas that are “service critical” in an environment where it is critical to maximise the efficiency in use of existing resources (tax management and control, land registry management and control, etc.).

Further risks concern additional pricing pressure in the domestic market

We are already forecasting significant drops in the domestic Solutions contribution margin (-150bp in 2012e, -100bp in 2013e, and -50bp in 2014e-15e) which give us a proxy of the pricing pressure we expect Indra to face in the next few years.

Conversely, our estimates for the Services contribution margin in Spain (i.e. margin stability) could be considered a little aggressive if taken out of context. We are actually counting on the positive effect of the restructuring measures that Indra is putting in place, as we think that the market will be volume-driven in the next few years and pricing pressure needs to be offset by efficiency. However, if the current restructuring measures take longer than expected to bear fruit, there could be some downside risk to our estimates.



Page 21

Balance sheet (EUR mn) 2007 2008 2009 2010 2011 2012e 2013e 2014eIntangible assets 62.9 87.3 133.6 219.9 243.3 273.6 302.6 330.5Tangible assets 131.1 139.2 140.4 148.2 171.9 167.2 161.2 154.1Financial investments 37.0 42.9 41.4 50.5 66.4 69.6 72.8 156.0Other long-term assets 459.2 464.2 471.5 506.6 762.6 762.6 762.6 762.6Assets classified for disposal 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Current assets 1,585 1,632 1,561 1,849 2,018 2,021 2,052 2,057Other current assets 78.3 73.1 74.8 72.6 181.1 181.1 181.1 181.1Cash and cash equivalents 32.0 23.1 66.5 129.0 81.9 81.9 81.9 81.9Total assets 2,385 2,462 2,490 2,976 3,525 3,557 3,614 3,723Equity 696.7 781.4 931.8 991.0 1,046 1,085 1,163 1,270Minority interests 41.8 42.2 45.3 23.0 21.4 21.5 21.6 21.7Prov. and other LT liabilities 97.4 66.4 94.4 129.6 313.2 313.2 313.2 313.2Liabilities classified for disposal 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Financial debt 182.4 171.8 201.1 403.8 595.6 669.1 623.9 640.4Accounts payable 1,154 1,134 1,013 1,177 1,262 1,181 1,205 1,191Other current liabilities 213.6 266.5 203.7 251.7 287.1 287.1 287.1 287.1Total liabilities 2,386 2,462 2,490 2,976 3,525 3,557 3,614 3,723Net debt 150.4 148.7 134.6 274.8 513.7 587.2 542.0 558.5Capital employed 1,085 1,189 1,294 1,547 1,934 2,043 2,073 2,113Working capital 431.4 498.5 548.1 672.3 755.9 839.8 846.5 865.9

P&L (EUR mn) 2007 2008 2009 2010 2011 2012e 2013e 2014eCAGR 11/14e

Net revenues 2,168 2,380 2,513 2,557 2,689 2,857 2,946 3,101 4.88Other income 13.6 19.6 60.6 74.4 83.8 83.8 83.8 83.8Revenues and other income 2,181 2,399 2,574 2,631 2,772 2,941 3,030 3,185 4.74Growth in sales (%) 54.3% 10.0% 7.3% 2.2% 5.4% 6.1% 3.0% 5.1%Supplies -1,067 -1,134 -1,240 -1,256 -1,282 -1,343 -1,394 -1,470Personnel costs -840.4 -957.2 -1,007 -1,049 -1,176 -1,303 -1,322 -1,363Other operating expenses 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Recurrent EBITDA 273.4 308.2 327.4 327.3 313.5 294.9 314.2 352.1 3.95Non-recurrent items -16.5 0.00 0.00 -33.3 0.00 -28.6 -14.7 0.00EBITDA 256.9 308.2 327.4 294.0 313.5 266.3 299.5 352.1 3.95EBITDA growth (%) 39.2% 20.0% 6.2% -10.2% 6.6% -15.0% 12.5% 17.6%EBITDA/sales (%) 11.8% 12.8% 12.7% 11.2% 11.3% 9.1% 9.9% 11.1%Depreciation and provisions -33.4 -37.7 -42.0 -42.1 -45.6 -49.5 -51.9 -54.2EBIT 223.5 270.5 285.4 251.9 267.9 216.8 247.7 297.9 3.60EBIT growth (%) n.a. 21.0% 5.5% -11.7% 6.3% -19.1% 14.2% 20.3%EBIT/sales (%) 10.2% 11.3% 11.1% 9.6% 9.7% 7.4% 8.2% 9.4%EBIT non-recurrent items 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Operating profit 223.5 270.5 285.4 251.9 267.9 216.8 247.7 297.9 3.60Net financial result -12.7 -22.9 -24.9 -19.1 -37.7 -37.5 -47.4 -48.5Equity-accounted earnings 1.40 3.50 0.20 0.90 3.20 3.20 3.20 3.20Ordinary income 212.2 251.1 260.7 233.7 233.4 182.6 203.4 252.6 2.67Ordinary income growth (%) n.a. 18.3% 3.8% -10.4% -0.1% -21.8% 11.4% 24.2%Extr. result/discont. activities 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Pre-tax profit 212.2 251.1 260.7 233.7 233.4 182.6 203.4 252.6 2.67Tax -57.4 -65.0 -62.7 -45.7 -52.2 -43.8 -48.8 -60.6Minorities -7.00 -3.70 -2.40 0.60 -0.10 -0.10 -0.10 -0.10Net profit 147.8 182.4 195.6 188.6 181.1 138.6 154.5 191.9 1.95Net profit growth (%) 29.3% 23.4% 7.2% -3.6% -4.0% -23.4% 11.4% 24.2%Ordinary net profit 159.8 182.4 195.6 215.4 181.1 160.2 165.6 191.9 1.95Effective tax rate (%) 27.2% 26.3% 24.1% 19.6% 22.7% 24.4% 24.4% 24.3% Cash flow statement (EUR mn) 2012e 2013e 2014eEBITDA 266.3 299.5 352.1Non-cash EBITDA 0.00 0.00 0.00Working capital variation -83.9 -6.68 -19.5Capex -75.0 -75.0 -155.0Free operating CF pre-tax 107.4 217.8 177.6Net financial result -37.5 -47.4 -48.5Non-cash financial result 0.00 0.00 0.00Taxes -43.8 -48.8 -60.6Div. from/to assoc. /minorities 0.00 0.00 0.00Cash flow other 0.00 0.00 0.00FCFE 26.1 121.6 68.5Dividends -99.6 -76.3 -85.0FCFE after dividends -73.5 45.3 -16.5FX 0.00 0.00 0.00Change in net debt 73.5 -45.3 16.5




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Market & Client Strategy Director

Antonio Pulido [email protected] +34 91 374 31 81

Global Equity Director

Ana Munera [email protected] +34 91 374 36 72

Equity Europe

Telecoms / Media Chief Analyst Ivón Leal [email protected] +34 91 537 81 44

Technology Chief Analyst Lurdes Sáiz de Quevedo [email protected] +34 91 537 54 26 Construction / Industrials / Real Estate / Infrastructure Chief Analyst Antonio Rodríguez [email protected] +34 91 374 66 21

Jaime Sémelas [email protected] +34 91 374 59 77

Financials Chief Analyst Ignacio Ulargui, CFA [email protected] +34 91 537 50 47 Silvia Rigol [email protected] +34 91 374 32 94 Juan Cremades [email protected] +34 91 537 77 28

Utilities Chief Analyst Isidoro del Álamo [email protected] +34 91 374 75 07

Daniel Ortea [email protected] +34 91 537 05 50

Oil / Industrials Chief Analyst Luis de Toledo, CFA [email protected] +34 91 537 07 09

Consumer / Pharma / Small Caps Chief Analyst Isabel Carballo [email protected] +34 91 374 32 69

Juan Ros [email protected] +34 91 537 88 57

Consumer - Europe Iñigo Alabart [email protected] +34 91 537 46 70

Strategy Chief Strategist Joaquín García, CFA [email protected] +34 91 374 68 30

European Equity Strategist Beatriz Tejero [email protected] +34 91 374 46 61

Equity Derivatives Chief Analyst Juan Antonio Rodríguez, CFA [email protected] +34 91 374 30 54

Alfredo de la Figuera [email protected] +34 91 537 61 16

Mayte Frutos [email protected] +34 91 374 76 21



Page 23

Equity Distribution

Cash Equities

Director

Javier Valverde Sorensen [email protected] +34 91 374 53 60 International +34 91 374 53 60 Head of Cash Equit ies

Javier Godoy [email protected] +34 91 382 62 49

Deputy Head of Cash Equities

Javier Enrile [email protected] +34 91 537 07 65

Spain +34 91 374 53 50 Team Leader

Milagros Treviño [email protected] +34 91 374 39 01 Sales Trading +34 91 374 53 61 Team Leader

Daniel Ruiz [email protected] +34 91 374 53 18


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Important Disclosure

This document and the information, opinions, estimates and recommendations expressed herein, have been prepared by Banco Bilbao Vizcaya Argentaria, S.A. (hereinafter called "BBVA").

In the next three months, BBVA or any of its affiliates expects to receive or intends to seek compensation for investment banking services from the company/ies discussed in this report Indra.

"BBVA is subject to the BBVA Group Code of Conduct for Security Market Operations which, among other regulations, includes rules to prevent and avoid conflicts of interests with the ratings given, including information barriers. The BBVA Group Code of Conduct for Security Market Operations is available for reference at the following web site: www.bbva.com / Corporate Governance".

BBVA is a bank supervised by the Bank of Spain and by Spain’s Stock Exchange Commission (CNMV), registered with the Bank of Spain with number 0182.

Ratings System

Recommendations are set on a six to twelve-month basis against the relevant benchmark market. There are three recommendations: Outperform.- Upside potential of more than 5% vs. the market; Market Perform.- Stock is expected to perform in line with the market (+/-5%); Underperform.-Expected downside potential of at least 5% vs. the market.

As of today, for the whole universe of companies which BBVA has under coverage there are 39.77% Outperform ratings, 32.95% Market Perform ratings and 26.14% Underperform ratings. BBVA or any of its affiliates has rendered Investment Banking services or participated as manager and/or co-manager in public offerings in 47.83% of the Outperform ratings, 34.78% of the Market Perform ratings and in 17.39% of the Underperform ratings.

I, Lurdes Sáiz de Quevedo, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject company(ies) and its (their) securities. I also certify that I have not been, am not, and will not be receiving direct or indirect compensation in exchange for any specific recommendation in this report.


Page 25

Disclaimer

This document and the information, opinions, estimates and recommendations expressed herein, have been prepared by Banco Bilbao Vizcaya Argentaria, S.A. (hereinafter called "BBVA") to provide its customers with general information regarding the date of issue of the report and are subject to changes without prior notice. BBVA is not liable for giving notice of such changes or for updating the contents hereof.

This document and its contents do not constitute an offer, invitation or solicitation to purchase or subscribe to any securities or other instruments, or to undertake or divest investments. Neither shall this document nor its contents form the basis of any contract, commitment or decision of any kind.

Investors who have access to this document should be aware that the securities, instruments or investments to which it refers may not be appropriate for them due to their specific investment goals, financial positions or risk profiles, as these have not been taken into account to prepare this report. Therefore, investors should make their own investment decisions considering the said circumstances and obtaining such specialized advice as may be necessary. The contents of this document is based upon information available to the public that has been obtained from sources considered to be reliable. However, such information has not been independently verified by BBVA and therefore no warranty, either express or implicit, is given regarding its accuracy, integrity or correctness. BBVA accepts no liability of any type for any direct or indirect losses arising from the use of the document or its contents. Investors should note that the past performance of securities or instruments or the historical results of investments do not guarantee future performance.

The market prices of securities or instruments or the results of investments could fluctuate against the interests of investors. Investors should be aware that they could even face a loss of their investment. Transactions in futures, options and securities or high-yield securities can involve high risks and are not appropriate for every investor. Indeed, in the case of some investments, the potential losses may exceed the amount of initial investment and, in such circumstances, investors may be required to pay more money to support those losses. Thus, before undertaking any transaction with these instruments, investors should be aware of their operation, as well as the rights, liabilities and risks implied by the same and the underlying stocks. Investors should also be aware that secondary markets for the said instruments may be limited or even not exist.

BBVA or any of its affiliates, as well as their respective executives and employees, may have a position in any of the securities or instruments referred to, directly or indirectly, in this document, or in any other related thereto; they may trade for their own account or for third-party account in those securities, provide consulting or other services to the issuer of the aforementioned securities or instruments or to companies related thereto or to their shareholders, executives or employees, or may have interests or perform transactions in those securities or instruments or related investments before or after the publication of this report, to the extent permitted by the applicable law.

BBVA or any of its affiliates, salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to its clients that reflect opinions that are contrary to the opinions expressed herein. Furthermore, BBVA or any of its affiliates' proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. No part of this document may be (i) copied, photocopied or duplicated by any other form or means (ii) redistributed or (iii) quoted, without the prior written consent of BBVA. No part of this report may be copied, conveyed, distributed or furnished to any person or entity in any country (or persons or entities in the same) in which its distribution is prohibited by law. Failure to comply with these restrictions may breach the laws of the relevant jurisdiction.

In the United Kingdom, this document is directed only at persons who (i) have professional experience in matters relating to investments falling within article 19(5) of the financial services and markets act 2000 (financial promotion) order 2005 (as amended, the "financial promotion order"), (ii) are persons falling within article 49(2) (a) to (d) (“high net worth companies, unincorporated associations, etc.”) Of the financial promotion order, or (iii) are persons to whom an invitation or inducement to engage in investment activity (within the meaning of section 21 of the financial services and markets act 2000) may otherwise lawfully be communicated (all such persons together being referred to as "relevant persons"). This document is directed only at relevant persons and must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this document relates is available only to relevant persons and will be engaged in only with relevant persons.

The remuneration system concerning the analyst/s author/s of this report is based on multiple criteria, including the revenues obtained by BBVA and, indirectly, the results of BBVA Group in the fiscal year, which, in turn, include the results generated by the investment banking business; nevertheless, they do not receive any remuneration based on revenues from any specific transaction in investment banking.

BBVA is not a member of the FINRA and is not subject to the rules of disclosure affecting such members.

114 Indra maq finalrev › sites › default › files › bbva_5.pdfIndra Madrid, 15 March 2012 REFER TO IMPORTANT DISCLOSURES ON THE LAST TWO PAGES OF THIS REPORT Page 2 Basic data

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