Edelweiss Friday, June 20, 2014 • Trident, BKC, Mumbai P o s t C o n f e r e n c e N o t e s P o s t C o n f e r e n c e N o t e s June 24, 2014 June 24, 2014 Manish Mahawar +91 22 6623 3481 [email protected]Manoj Bahety, CFA +91 22 6623 3362 [email protected]
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Edelweiss
Friday, June 20, 2014 • Trident, BKC, Mumbai
P o s t C o n f e r e n c e N o t e sP o s t C o n f e r e n c e N o t e s
Preface We present key takeaways of Edelweiss Agri Day 2014, held in Mumbai on June 20, 2014. The event, that brought together over 16 corporates/industry bodies and 107 investors, was a resounding success. Post a good monsoon and healthy crop season during FY14, onset of monsoon has been delayed in most parts of India during the ongoing season. However, the Indian Meteorological Department (IMD) expects rainfall to pick up in the coming days. Though El Nino is a risk, its impact is likely to play out only in September; and, if it raises its head post July, it will not have any material impact on the economy. Declining arable land and rising population needs to be addressed by improving the yields, which we believe bolster the agri sector’s long-term story. Agro chemicals, seed, micro irrigation and fertiliser segments offer tremendous potential considering the current low penetration and the need to improve yield. Our interactions with major agro players indicate robust demand at the ground level and most companies are cautiously optimistic about the ongoing season. Post excessive non-urea fertiliser channel inventory during FY13/14, the fertiliser sector has commenced the ongoing season with normal inventory in most markets. However, the issue persists in parts of Uttar Pradesh. Also, subsidy receivables continue to be a challenging problem. Agro chemical players have effected 5-10% price hikes during Q1FY15 and are optimistic on demand. The micro irrigation industry is also expected to fare well on lower base, considering players’ cash flow focus. Seed players are bullish on the industry anchored by lower hybridisation primarily in maize and rice. Agri financing players are focusing on diversification of portfolios, recovery and new product launches. However, the concerns of operating in a regulatory environment still persist. Based on our interactions with industry participants, price regulations along with delay in disbursal of subsidy payments, passage of the new seed bill and new urea policy are still impeding the sector’s growth. With change in government, most of the players are optimistic on series of agri reforms. Post strong stock performance in FY14, we believe stocks are offering good long-term investment opportunities. At current valuations, we like Bayer Cropscience, Dhanuka Agritech, Rallis India, PI Industries, Coromandel International and Jain Irrigation.
2 Edelweiss Securities Limited
Post Conference Notes
Agri Day Snapshot
Company Market cap Rating Closing price Target Key takeaways
(INR bn)(June 20, 2014)
(INR)Price (INR)
Central Warehousing Corp (CWC)
NA NA NA NA Regional imbalance in terms of availability of storage facilities.
Deepak Fertilisers 13 Buy 149 210 Softening raw material prices positive for margins. Gas availability and prices key challenges.
Dhanuka Agritech 20 Buy 392 450 Additions to dealer network and launch of six exclusive products to drive growth over next three years.
EPC Industrie 6 NR 204 NR Capturing untapped micro irrigation markets by expanding distribution network and product portfolio.
Indian Meteorological Dept (IMD)
NA NA NA NA Onset of monsoon delayed in most parts of India. El Nino impact likely to be felt towards September.
Insecticide India 5 NR 395 NR Focusing on brands and exports for long-term growth.
Jain Irrigation 53 Buy 115 143 Sustainable MIS growth with improvement in balance sheet and gradual reduction in debt.
Kaveri Seeds 45 NR 662 NR Riding rising hybridisation in cotton, maize and rice. Expanding market share on differentiated and high-yielding seeds portfolio.
Mahindra & Mahindra Financial
155 Buy 272 315 Diversified profile shields from below-normal monsoons.
Monsanto India 36 NR 2075 NR Riding rising hybridisation in maize, which will be the growth story over the next four-five years.
Rallis India 40 Buy 206 228 New product launches in domestic market, Dahej capacity ramp up and sales/margin expansion in Metahelix to drive overall performance.
Sharda Cropchem NA NA NA NA Expansion in existing market and addition of newer geographies will be key growth drivers.
Star Agriwarehousing NA NA NA NA Provides post-harvest management solutions to farmers and helps them improve income levels.
State Bank of India - Agri division
1928 Buy 2583 3237 Focused on NPA recovery and new product launches.
Tata Chemicals 83 NR 327 NR Stable soda ash demand both globally and domestically. Fertiliser subsidy environment however, remains challenging.
UPL 134 Buy 313 415 Looking to strengthen balance sheet and RoE/RoCE.
NA - Not applicableNR - Not rated
3 Edelweiss Securities Limited
Post Conference Notes
Contents Central Warehousing Corporation ........................................................................................ 4 Deepak Fertilisers ................................................................................................................... 5 Dhanuka Agritech ................................................................................................................... 8 EPC Industrie ........................................................................................................................ 11 IMD ...................................................................................................................................... 14 Insecticide India ................................................................................................................... 15 Jain Irrigation ....................................................................................................................... 18 Kaveri Seeds ....................................................................................................................... 21 MMFS ................................................................................................................................... 24 Monsanto India .................................................................................................................... 27 Rallis India ............................................................................................................................ 30 Sharda Cropchem ................................................................................................................. 33 Star Agriwarehousing ........................................................................................................... 36 State Bank of India ............................................................................................................... 37 Tata Chemicals ..................................................................................................................... 40 UPL ....................................................................................................................................... 43
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Key takeaways
• Over the years, continuous increase in mininmum support prices(MSP) in wheat and rice (and some states announcing high bonuses on top of the MSPs declared by the Centre) has driven away the private sector from cereal trade.
• Total storage capacity with the official agencies including Food Corporation of India (FCI), Centre and State Warehousing Corporations and state civil supplies, among others, is ~70-75MT. However, not all of this capacity is used for storage of food grains. It is used for storage of other items as well such as cotton, oilseeds and even industrial goods.
• In addition, there is the issue of regional imbalance in terms of availability of storage facilities. For instance, storage capacity has not expanded much in states such as West Bengal, Bihar and Odisha.
• To meet the increased storage demand in order to ensure full implementation of the Food Security Act, the government is incentivising the private sector to build storage capacity.
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Key takeaways Deepak Fertilisers (DFPCL) believes lower ammonia prices will boost chemical business margin in the coming quarters (positive impact visible in H2FY14). Methanol prices shot up sharply due to shut down of one of the global plants, which led to the company clocking exceptional EBITDA during H2FY14. However, prices have corrected recently, which will result in profitability of methanol normalising during FY15. Management guided for 90-95% capacity utilisation at its technical ammonium nitrate (TAN) plant.
Management stated that gas price hike will impact fertiliser segment’s margin by INR3,000-3,500/MT, which will be passed on to farmers in stages during FY15. The company anticipates fertiliser plant utilisation to jump 10-15% in FY15E. Subsidy receivable, as on March 31, 2014, was INR2bn. Maintenance capex is expected to be INR0.5-0.6bn/p.a. in FY15/16E. DFPCL is setting up a brownfield non-urea fertiliser plant as well as a bentonite sulphur plant at a capex of INR4.3bn. The company will incur this capex during FY15/16. It is expected to incur capex of INR0.7bn/INR0.8-1bn on this project during FY15/16. The plant is expected to be commissioned in Q4FY16.
Investment conclusion DFPCL is the leader in the Indian TAN market with two third share. The company has increased its TAN capacity by 300K MT from 132K MT at a capex of INR6bn. TAN volume is expected to rise over FY14-16. Based on management’s estimate, gas price hike will impact fertiliser segment’s margin by INR3,000-3,500/MT, which will be passed on to farmers in stages during FY15. We believe, the company will not be able to pass on the hike (17-20% of current MRP) in a single year.
Key risks Poor monsoon, seasonality and cyclical nature of agriculture could impact the company’s earnings. Higher raw material cost, INR depreciation and delay in payment of government subsidy could affect profitability. We believe gas price hike will be near-term risk to earnings.
COMPANY PROFILE
DEEPAK FERTILIZERGas availability, prices key
EDELWEISS RATINGS
Absolute Rating BUY
Investment Characteristics Value
MARKET DATA (R: DPFE.BO, B: DFPC IN)
CMP : INR 149
Target Price : INR 210
52-week range (INR) : 160 / 81
Share in issue (mn) : 88.2
M cap (INR bn/USD mn) : 13 / 215
Avg. Daily Vol. BSE/NSE (‘000) : 125.6
SHARE HOLDING PATTERN (%)
Current Q3FY14 Q2FY14
Promoters * 45.5 45.5 44.5
MF's, FI's & BKs 4.5 4.8 5.5
FII's 12.9 12.9 12.9
Others 37.2 36.9 37.1 * Promoters pledged shares (% of share in issue)
Total net fixed assets 14,850 15,227 15,560 16,993
Investments 2,545 2,104 2,104 2,104
Non current investments 17 1,808 1,808 1,808
Current Investments 2,528 295 295 295
Cash and equivalents 1,048 957 1,136 779
Inventories 2,468 3,426 4,051 4,466
Sundry debtors 6,517 7,891 8,179 8,679
Loans and advances 1,749 1,602 1,602 1,602
Other current assets 198 151 79 78
Total current assets (ex cash) 10,933 13,070 13,911 14,824
Trade payable 2,124 3,564 3,791 3,960
Others current liabilities 1,953 2,424 2,424 2,424
Total current liabilities & 4,077 5,988 6,216 6,384
Net current assets (ex cash) 6,856 7,082 7,696 8,441
Uses of funds 25,299 25,369 26,495 28,317
Book value per share (INR) 145.2 164.8 184.5 210.9
Free cash flow (INR mn)
Year to March FY13 FY14 FY15E FY16E
Net profit 1,293 2,405 2,467 3,096
Depreciation 1,082 1,143 1,178 1,210
Others 1,091 519 537 410
Gross cash flow 3,466 4,068 4,182 4,716
Less: Changes in WC 1,218 226 692 746
Operating cash flow 2,248 3,841 3,489 3,970
Less: Capex 1,336 1,792 1,433 2,644
Free cash flow 911 2,049 2,057 1,326
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Key takeaways Dhanuka Agritech (DAL) has over 8,000 direct dealers servicing over 75,000 retailers, covering more than 85% of India’s districts. It is planning to expand the dealer network to 10,000 over the next three years. The company is expected to clock sales growth of 25% YoY during FY15E. It believes sustainable EBITDA margin will be 15-17% going forward. DAL’s top 5 and 10 products contributed ~30% and ~40%, respectively, to its overall FY14 sales. DAL has six products in the pipeline, of which two will be launched annually over the next three years, subject to regulatory approvals. Of these, it will launch five products in-licensing with Japanese players; one product has been developed by DAL in-house. Of these, three products will be in herbicides, the fastest growing category in domestic agrochemicals industry. Out of the above six, DAL is expected to launch two herbicides in FY15—one is for paddy and one for soyabean crop. The company is setting up a formulations plant in Rajasthan, expected to go on-stream by Q4FY15, at a capex of INR0.50bn. The capex will be funded through internal accruals.
Investment conclusion DAL, an established agrochemical player in India, boasts of a unique asset-light business model underpinned by core focus on marketing and distribution network, giving it an edge over competitors. A promising launch pipeline of six exclusive products over the next three years is bound to propel the company’s growth into higher gear. We estimate DAL to post sales and PAT CAGR of 24.0% and 26.9% (FY08-14 CAGR of 19.9% and 32.9%), respectively, over FY14-16E. The company has robust operating cash flow, minimal debt and healthy RoE/RoCE with good dividend payout.
Key risks The agrochemicals industry faces risk of seasonal weather. Acceptance of GM crops may adversely affect DAL’s business.
COMPANY PROFILE
DHANUKA AGRITECHExclusive products’ launch to drive growth
EDELWEISS RATINGS
Absolute Rating BUY
Investment Characteristics Growth
MARKET DATA (R: DHNP.BO, B: DAGRI IN)
CMP : INR 392
Target Price : INR 450
52-week range (INR) : 408 / 125
Share in issue (mn) : 50.0
M cap (INR bn/USD mn) : 20 / 326
Avg. Daily Vol. BSE/NSE (‘000) : 207.6
SHARE HOLDING PATTERN (%)
Current Q3FY14 Q2FY14
Promoters * 75.0 75.0 75.0
MF's, FI's & BKs 0.2 0.0 0.8
FII's 8.4 8.4 8.2
Others 16.4 16.6 16.0 * Promoters pledged shares (% of share in issue)
CompanyNet sales growth 12.2 28.3 22.0 26.0Excise duty as % of gross sales 9.9 10.8 10.8 10.8
Cost AssumptionsRaw mat. cost as % net rev. 65.4 63.2 63.2 63.2Employee exp. as % net rev. 8.2 7.9 7.7 7.2Admin. cost as % net revenue 12.3 12.5 12.0 11.5
Financial AssumptionsDep. as % of gross block 4.9 4.6 5.0 5.0Int. rate as % of gross debt 10.7 10.7 11.9 #DIV/0!Tax rate as % of PBT 20.2 19.9 21.0 26.0Capex (INR mn) 279 302 407 110 Net borrowings (INR mn) 276 371 206 (254) Receivable (days) 94 84 85 83 Inventory (days) 153 168 155 150 Payable (days) 117 110 109 106 Cash conversion cycle (days) 131 142 131 127
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Key takeaways In India, only 6m ha is under micro irrigation systems (MIS) of the 70m ha irrigated land. However, ~60% of cultivable land is still rain-fed. Maharashtra was the pioneer in MIS adoption. According to EPC Industries (EPC), Madhya Pradesh and Rajasthan are the next emerging markets. EPC indicated that MIS industry is become more structured and streamlined over past couple of years. Further, bank financing to the MIS segment has been rising aggresively. EPC was established in 1981 and pioneered MIS in India since 1986. Mahindra & Mahindra acquired 54.81% stake in EPC in FY11. The company is registered in 15 states under the MIS subsidy programme and has more than 600 channel partners. It is present in UP, Bihar, Jharkhand, Chhattisgarh, Madhya Pradesh, Maharashtra, Karnataka, Tamil Nadu, Kerala, Rajasthan, Himachal Pradesh and Haryana. The company has strong presence in drip and sprinkler products. It commands good brand equity in the Indian MIS market. The company is expanding its distribution network. To expand its product portfolio, EPC started the pumps and greenhouse businesses, which is primarily used for flowers, capsicum, cucumbers, etc. The company also started agronomy services like agri doctors, farmer trainings and agri helpline, among others. To reduce dependence on subsidy programme, EPC is now focussing on large project business and exports.
Key risks Poor monsoon, seasonality and cyclical nature of agriculture could impact the company’s earning. MIS is working capital intensive, which may constrain EPC from achieving its targeted growth.
COMPANY PROFILE
EPC INDUSTRIE Capturing untapped market
EDELWEISS RATINGS
Absolute Rating NOT RATED
MARKET DATA (R: EPCI.BO, B: EPC IN)
CMP : INR 204
Target Price : NA
52-week range (INR) : 224 / 84
Share in issue (mn) : 27.6
M cap (INR bn/USD mn) : 6 / 94
Avg. Daily Vol. BSE (‘000) : 352.0
SHARE HOLDING PATTERN (%)
Current Q3FY13 Q2FY13
Promoters * 54.8 54.8 54.8
MF's, FI's & BKs 0.0 0.0 0.0
FII's 0.0 0.0 1.8
Others 45.2 45.2 43.4 * Promoters pledged shares (% of share in issue)
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Key takeaways
• The onset of monsoon is delayed with most parts of India receiving deficient rainfall this far. In some areas, such as interior Maharashtra, monsoon is yet to arrive. However, rainfall activity is likely to pick up in coming days. The Indian Meteorological Departmentexpects an improvement in July.
• The El Nino risk exists, but its impact is likely to be felt in the second half of the monsoon season, especially September. Broadly speaking, if the EL Nino effect materialises post July, it will not be that damaging.
• As per historical data, out of the 14 El Nino years during 1951-2014, eight recorded below-normal rainfall. So, while the EL Nino effect has negative correlation with the rainfall activity, it does not necessarily mean failure of monsoon. In fact, the year 1997 saw strongest EL Nino, and yet the rainfall activity was slightly above normal.
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Key takeaways Insecticide India (IIL), established in 2001, has a strong distribution network in the domestic agrochemical market. The company’s its pan-India network has over 3,200 distributors, 50,000 retail outlets and 25 depots with six manufacturing plants. IIL’s plants have 21,800MT and 89,950MT capcity for technical and formulations, respectively. IIL has more than 110 formulation and 10 technical products in its portfolio, across the crop and pesticide categories. The company has launched brands like Victor, Sharp, Arrow and Indian in new segments. The company’s growth strategy encompasses product and brand acquisitions and organic growth (through existing product line). Giving shape to its growth strategy, IIL acquired brands like Thimet from Amvac, California, Lethal from Montari Industries and Monocil from NOCIL. The company has also entered into marketing tie-ups with Nissan Chemicals Industries, and Japan for new-age products, Pulsor and Hakama. IIL plans to focus on select high-growth emerging markets for branded fomulations/technicals. Its new Dahej facility is best suited for exports as it is situated close to the port. The company expects to register sales/EBITDA/PAT of INR12bn/INR1.2bn/INR0.6bn in FY15 versus INR8.6bn/INR0.8bn/INR0.4bn in FY14.
Key risks The agrochemical industry faces the risks of seasonal weather. Acceptance of GM crops may also adversely affect IIL’s business.
COMPANY PROFILE
INSECTICIDE INDIAFocusing on brands
EDELWEISS RATINGS
Absolute Rating NOT RATED
MARKET DATA (R: ISIL.BO, B: INST IN)
CMP : INR 395
Target Price : NA
52-week range (INR) : 413 / 203
Share in issue (mn) : 12.7
M cap (INR bn/USD mn) : 5 / 83
Avg. Daily Vol. BSE/NSE (‘000) : 3,548.5
SHARE HOLDING PATTERN (%)
Current Q3FY14 Q2FY14
Promoters * 74.7 74.7 74.7
MF's, FI's & BKs 5.3 5.3 5.3
FII's 1.2 1.0 6.0
Others 18.8 19.0 14.0 * Promoters pledged shares (% of share in issue)
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Key takeaways Globally, only 14% of total irrigated area i.e., 276m ha, is under micro irrigation (MIS), whereas in India the number stands at only 5m ha (of total irrigated area of 62m ha). Further, government support for use of MIS in the form of subsidy is accelerating growth. Post declining 25% YoY in FY13, Jain Irrigation’s (JISL) MIS business clocked positive growth in FY14. The company guided for 20% plus YoY growth in MIS business during FY15 primarily on account of growth in Maharashtra, Gujarat, Karnataka and Rajasthan. Exports rose from INR1.3bn in FY13 to INR3.0bn in FY14, primarily due to execution of a large African order (INR1.25bn). Management believes that exports will remain flat YoY in FY15. The company expects overseas operations’ EBITDA margin to improve going ahead. MIS receivables improved by 8 days QoQ to 257days in FY14. Management believes it can be further improved by 45-60 days in FY15. JISL indicated that government subsidy is likely to drop from INR3.9bn in FY14 to INR2.5bn in FY15. NBFC business disbursement stood at INR1bn in FY14 and is expected to reach INR1.5-2.0bn in FY15. Management believes debt will reduce by INR3bn in FY15. JISL incurred capex of INR3.4bn in FY14 and expects to spend INR2.2-2.3bn in FY15 on consolidated basis.
Investment conclusion We anticipate the domestic MIS business to post sustainable strong growth with better balance sheet, going forward. However, debt reduction remains key for the stock.
Key risks Poor monsoon, seasonality and cyclical nature of agriculture could impact the company’s agro-processing division by hitting availability as well as prices of agro commodities. Though poor monsoon is unlikely to impact MIS in the short term, in case of recurring monsoon failure, the segment’s growth may slow down. Most of JISL’s activities are working capital intensive, which may constrain the company from achieving targeted growth.
COMPANY PROFILE
JAIN IRRIGATION Optimistic outlook
EDELWEISS RATINGS
Absolute Rating BUY
Investment Characteristics Growth
MARKET DATA (R: JAIR.BO, B: JI IN)
CMP : INR 115
Target Price : INR 143
52-week range (INR) : 131 / 46
Share in issue (mn) : 443.1
M cap (INR bn/USD mn) : 53 / 867
Avg. Daily Vol. BSE/NSE (‘000) : 2,927.1
SHARE HOLDING PATTERN (%)
Current Q3FY14 Q2FY14
Promoters * 28.7 27.5 27.5
MF's, FI's & BKs 13.4 1.6 0.8
FII's 39.1 52.4 52.3
Others 18.7 18.5 19.5 * Promoters pledged shares (% of share in issue)
Total net fixed assets 26,835 28,578 27,885 27,834
Investments 38 14 14 14
Non current investments 38 14 14 14
Cash and equivalents 2,359 1,968 949 1,375
Inventories 17,231 18,364 20,006 22,644
Sundry debtors 19,547 17,994 20,080 21,855
Loans and advances 5,808 8,819 8,819 8,819
Other current assets 5,461 5,113 5,113 5,113
Total current assets (ex cash) 48,046 50,290 54,018 58,432
Trade payable 13,379 13,433 14,323 17,240
Others current liabilities 3,057 4,374 4,374 4,374
Total current liabilities & 16,436 17,807 18,697 21,614
Net current assets (ex cash) 31,611 32,483 35,321 36,818
Uses of funds 60,843 63,044 64,168 66,041
Book value per share (INR) 47.7 47.0 53.5 61.9
Free cash flow (INR mn)
Year to March FY13 FY14 FY15E FY16E
Net profit 31 (397) 3,531 4,630
Depreciation 1,696 2,045 2,095 2,215
Others 4,855 4,663 3,993 3,800
Gross cash flow 6,582 6,311 9,619 10,645
Less: Changes in WC 3,828 872 2,838 1,497
Operating cash flow 2,754 5,439 6,782 9,148
Less: Capex 2,693 3,356 1,401 2,165
Free cash flow 61 2,083 5,380 6,983
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Key takeaways Organised hybrid seeds market size is INR100bn (including INR20bn vegetable seeds) and is expected to post 10-12% CAGR in coming years. Of this, cotton, maize, rice and vegetables & fruits constitute 40%, 15%, 6% and 20%, respectively. Kaveri Seeds (Kaveri) believes that India’s per acre consumption of cotton seeds is likely to jump from 1.6 packets/acre to the global standard of 2.0 packets/acre. The company has increased its market share from 5% in FY12 to 16.5% currently riding a differentiated and high yielding seeds portfolio. India has ~2mn ha (of total 40mn ha) under hybrid seed in rice crop, which is the next big opportunity for the industry as well as Kaveri. The company expects area under rice hybrid seed to grow to 4-5mn ha over the following three-four years. Bayer Cropscience and Kaveri have 40% and 7% market shares, respectively, in hybrid rice. Currently, penetration of hybrid maize is 60% in India and expected to rise to 70% in the near term. Monsanto, Dupont, Kaveri and Syngenta have 19%, 17%, 13% and 12% market shares, respectively, in the domestic hybrid maize market. Industry as well as Kaveri is expected to clock 15-20% CAGR in hybrid maize, going forward. Management expects sales to grow at 20% YoY during FY15E. Further, it expects EBITDA to surge to 25% over the next two-three years. Kaveri has set up a 100% subisidiary Kexveg India (Kexveg) with an initial invetsment of INR64m in FY12. Kexveg is a new initiative for producing high-value exotic Indian vegetables and European herbs for domestic and export markets. It could post strong growth in the long term. Capex will be in the INR300-400mn/p.a. range.
Key risks The seed industry is extremely competitive. Hence, success of any competitor’s product could impact Kaveri’s growth. Climate change drastically affects patterns of crop growth as well as cropping systems. Delayed or adverse monsoon could adversely affect the collection of receivables.
COMPANY PROFILE
KAVERI SEEDS Seeding growth
EDELWEISS RATINGS
Absolute Rating NOT RATED
MARKET DATA (R: KVRI.BO, B: KSCL IN)
CMP : INR 662
Target Price : NA
52-week range (INR) : 680 / 280
Share in issue (mn) : 68.7
M cap (INR bn/USD mn) : 46 / 754
Avg. Daily Vol. BSE/NSE (‘000) : 3,152.9
SHARE HOLDING PATTERN (%)
Current Q3FY14 Q2FY14
Promoters * 63.7 63.7 63.7
MF's, FI's & BKs 10.4 10.5 10.0
FII's 10.5 9.3 8.5
Others 15.5 16.7 17.8 * Promoters pledged shares (% of share in issue)
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Key Takeaways Monsoon impact: Mahindra & Mahindra Financial Services (MMFS) believes that below normal monsoon could have a marginal impact if it is restricted to fewer areas. Efforts over the past few years to diversify business model from a pure agri play will restrict the impact of a below-normal rainfall. Growth: Growth to pick up in H2FY15 and expects to close the year with a disbursement growth of 8-10%, translating into AUM growth of 14-15%. Asset quality: Cyclical inch up in NPL in Q1FY15 is expected on past trends given the slow activity in North India impacting cash flows coupled with challenges in the South which have continued to exert pressure on recovery. Steps taken to enhance recovery: With focus on recovery, MMFS has opened around 200 branches in Q4FY14 to move closer to customers. Growth over the past few years had widened the distance between customers and branch touch points to about 75km from an average of 35-40km, which it is trying to bridge by opening new branches .
Investment conclusion MMFSL, one of India’s leading auto financiers with ~INR340bn AUM, is in a sweet spot to capitalise on the resilient rural economy. We like the company for its Mahindra & Mahindra parentage with its resultant captive business by executives stationed at M&M dealerships (~50% of AUM from M&M vehicles). Locally recruited staff, speedy disbursements and limited access to alternative credit channels for customers further enhance its competitive profile.
Key risks MMFSL’s business model is directly linked to demand for underlying auto segments; Hence, earnings will be subject to seasonality and cyclicality of the same. 49% of MMFSL’s loan book is accounted for by M&M vehicles. This dependency links its performance to that of M&M. Hence, weak performance by the latter’s models can affect disbursements. Along with the rising footprint of banks in rural areas, expansion of other NBFCs like Shriram City Union Finance, Tata Finance, Sundaram Finance, Bajaj Finance, Kotak Prime is a cause of concern for the company due to their aggressive growth strategies. Slowdown in rural economy is another vectors to watch for.
COMPANY PROFILE
MAHINDRA & MAHINDRA FINANCIAL SERVICES
Diversified profile to shield from below normal monsoons
EDELWEISS 4D RATINGS
Absolute Rating BUY
Rating Relative to Sector Outperformer
Risk Rating Relative to Sector Medium
Sector Relative to Market Overweight
MARKET DATA (R: MMFS.BO, B: MMFS IN)
CMP : INR 272
Target Price : INR 315
52-week range (INR) : 357 / 212
Share in issue (mn) : 568.8
M cap (INR bn/USD mn) : 155/ 2,530
Avg. Daily Vol.BSE/NSE(‘000) : 1,825.5
SHARE HOLDING PATTERN (%)
Current Q3FY14 Q2FY14
Promoters * 52.1 52.2 52.2
MF's, FI's & BK’s 1.3 2.2 3.2
FII's 41.4 40.8 39.7
Others 5.1 4.8 4.9 * Promoters pledged shares (% of share in issue)
Shriram City Union Finance 1,496 14.3 12.1 - - 18.8 18.9
Median - 10.4 9.0 1.1 1.0 18.8 19.2
AVERAGE - 13.7 11.6 1.1 1.0 15.1 15.2
Source: Edelweiss research
RoE decomposition (%)
Year to March FY13 FY14 FY15E FY16E
Net interest income/assets 10.1 9.6 9.4 9.5
Net revenues/assets 10.4 9.8 9.6 9.6
Operating expense/assets (3.4) (3.2) (3.2) (3.1)
Provisions/assets (1.5) (1.8) (1.3) (1.2)
Taxes/assets (1.7) (1.6) (1.7) (1.8)
Total costs/assets (6.6) (6.6) (6.2) (6.1)
ROA 3.8 3.1 3.4 3.5
Equity/assets 16.9 16.9 16.4 16.3
ROAE (%) 22.5 18.5 20.6 21.6
Valuation parameters
Year to March FY13 FY14 FY15E FY16E
Diluted EPS (INR) 14.6 15.5 20.0 24.5
Y-o-Y growth (%) 22.7 6.0 28.6 22.7
Book value per share (INR) 78.7 89.8 104.6 122.8
Adjusted book value per share 75.5 82.7 97.7 115.0
Diluted PE (x) 18.6 17.6 13.7 11.1
Price/ Adj. BV (x) 3.6 3.3 2.8 2.4
Dividend yield (%) 1.3 1.3 1.6 2.0
Balance sheet (INR mn)
As on 31st March FY13 FY14 FY15E FY16E
Equity capital 1,124 1,127 1,127 1,127
Share premium account 20,224 20,224 20,224 20,224
Reserves & surplus 23,324 29,912 38,384 48,775
Net worth 44,672 51,264 59,735 70,127
Sub bonds/pref cap 70 70 70 70
Secured loans 185,450 229,193 270,240 317,206
Unsecured loans 27,700 34,234 40,365 47,381
Assignments 26,200 25,881 33,768 38,827
Total liabilities 284,094 340,642 404,179 473,610
Investments 5,325 5,625 5,925 6,225
Total current assets 9,214 10,979 13,127 15,413
Total current liabilities & 23,266 28,012 33,486 39,748
Net current assets 249,417 305,801 360,926 424,729
Fixed assets 945 896 822 723
Assignments 26,200 25,881 33,768 38,827
Total assets 284,094 340,642 404,179 473,610
Loan growth 37.0 22.5 18.1 17.8
Deposit growth 36.5 23.6 17.9 17.4
EA growth 39.5 22.3 17.8 17.5
Gross NPA ratio 3.0 4.4 4.3 4.3
Net NPA ratio 1.0 1.9 1.5 1.4
Provision coverage 68.0 59.0 65.0 67.0
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Key takeaways Monsanto India (MIL) is a subsidiary and the only listed Monsanto entity outside the US. In India, the Monsanto Group operates through three entities:
(1) Listed entity Monsanto India (MIL) which is primarily involved in maize seeds and herbicides (primarily Glyphosate).
(2) 50:50 JV between Mahyco and Monsanto Holdings known as Mahyco Monsanto Biotech (MMB), which is sub-licensed to distribute BT cotton technology in India.
(3) Monsanto Holding which deals in cotton and vegetable seeds. Its parent Monsanto has presence in maize seeds, glyphosate, soyabean seed, cotton seed, vegetable seed and canola seed. MIL does not have presence in soyabean seeds in India. It owns brands Dekalb (India’s largest selling hybrid maize seed) and Roundup (world’s as well as India’s largest selling herbicide). Management indicated that hybrid cotton seed market has posted strong growth over the past five years and its penetration has reached 95-97% In India. The company believes that the Indian hybrid maize market is expected to post strong growth over the next four-five years primarily led by rising hybridisation, which is currently at ~60%. MIL is the largest player in hybrid maize in India.
Key risks The seed industry is extremely competitive. Hence, success of any competitor’s product could impact Monsnato’s growth. Climate change drastically affects patterns of crop growth as well as cropping systems. Delayed or adverse monsoon could affect the collection of receivables adversely.
COMPANY PROFILE
MONSANTO INDIAInnovating growth
EDELWEISS RATINGS
Absolute Rating NOT RATED
MARKET DATA (R: MNSN.BO, B: MCHM IN)
CMP : INR 2,075
Target Price : NA
52-week range (INR) : 2,266 / 560
Share in issue (mn) : 17.3
M cap (INR bn/USD mn) : 36 / 594
Avg. Daily Vol. BSE/NSE (‘000) : 7,617.5
SHARE HOLDING PATTERN (%)
Current Q3FY14 Q2FY14
Promoters * 72.1 72.1 72.1
MF's, FI's & BKs 2.5 2.0 2.1
FII's 0.3 0.3 0.0
Others 25.1 25.8 25.8 * Promoters pledged shares (% of share in issue)
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Key takeaways Kharif season has commenced on a positive note and farmers’ sentiments are optimistic. Sowing is progressing well across India. However, sowing is yet to commence in Maharashtra. El nino, if it materialises, is expected to affect only July end or August rainfall. However, Rallis India (Rallis) is monitoring the sitution closely. The company indicated better farmer incomes augur well for near-term growth prospects. The company is expected to outperform the industry in the domestic agrochemicals market riding strong distribution network, branded product portfolio and launch of new products. It is expected to launch two new innovative agrochemical products during FY15. Its two plants in Dahej (of four) are running at 100% utilisation currently and utilisation is expected to improve during FY15 on overall basis. Metahelix (seed venture) has a strong products pipeline. It has launched a large number of products and conducted extensive field activities over the past two-three years. Rallis reiterated that it will achieve cumulative net sales of INR10bn in the initial five years from its seed business. Non-pesticide business’ contribution is expected to rise from 40% currently over the next few years. Agrochemical’s EBITDA margin is expected to be in the 15-18% range going forward. The company does not have major capex in the near future and expects to spend ~INR0.6bn in FY15E.
Investment conclusion Rallis, with market share of ~10%, is well placed to capture emerging opportunities in the domestic market due to its healthy distribution network, branded farm solutions and launch of new products. Its newly commissioned Dahej SEZ facility is anticipated to boost export sales. It is well equipped to ride the surge armed with Metahelix’s formidable R&D capabilities and robust product pipeline. Rallis is expected to post sales and PAT CAGR of 14.6% and 24.1% (FY05-14 CAGR of 12.8% and 22.0%), respectively, over FY14-16E. The company has a strong operating cash flow with healthy RoE (25-30%) and dividend payout ratio of ~30%.
Key risks The agrochemicals industry faces risk of seasonal weather. Acceptance of GM crops may adversely affect Rallis’ business.
COMPANY PROFILE
RALLIS INDIA Poised for growth
EDELWEISS RATINGS
Absolute Rating BUY
Investment Characteristics Growth
MARKET DATA (R: RALL.BO, B: RALI IN)
CMP : INR 206
Target Price : INR 228
52-week range (INR) : 218 / 125
Share in issue (mn) : 194.5
M cap (INR bn/USD mn) : 40 / 656
Avg. Daily Vol. BSE/NSE (‘000) : 322.7
SHARE HOLDING PATTERN (%)
Current Q3FY14 Q2FY14
Promoters * 50.1 50.1 50.1
MF's, FI's & BKs 6.4 6.1 6.8
FII's 13.8 12.5 11.3
Others 29.8 31.4 31.8 * Promoters pledged shares (% of share in issue)
Total debt / Capital employed (%) 72.0 68.2 60.3 56.4
Operating ratios
Year to March FY13 FY14 FY15E FY16E
Total asset turnover 1.9 2.2 2.3 2.3
Fixed asset turnover 4.0 4.4 4.9 5.5
Equity turnover 2.5 2.6 2.5 2.4
Valuation parameters
Year to March FY13 FY14 FY15E FY16E
Diluted EPS (INR) 6.4 8.3 10.6 12.7
Y-o-Y growth (%) 2.5 29.8 27.7 20.5
CEPS (INR) 8.0 10.4 12.9 15.3
Diluted PE (x) 32.4 25.0 19.5 16.2
Price/BV (x) 6.5 5.6 4.6 3.8
EV/Sales (x) 2.7 2.3 1.9 1.6
EV/EBITDA (x) 19.1 14.8 11.9 9.9
Dividend yield (%) 1.1 1.2 1.2 1.4
Balance sheet (INR mn)
As on 31st March FY13 FY14 FY15E FY16E
Equity capital 194 194 194 194
Reserves & surplus 6,013 6,985 8,472 10,312
Shareholders funds 6,207 7,180 8,667 10,506
Minority interest (BS) 47 105 63 88
Borrowings 1,305 745 - -
Deferred tax liability 281 315 315 315
Sources of funds 7,841 8,345 9,045 10,909
Tangible assets 3,745 3,939 4,089 4,199
Intangible assets 132 132 132 132
CWIP (incl. intangible) 345 322 300 300
Total net fixed assets 4,223 4,393 4,521 4,631
Goodwill on consolidation 1,676 1,860 1,860 1,860
Investments 197 251 251 251
Non current investments 187 187 187 187
Current Investments 10 64 64 64
Cash and equivalents 258 88 329 1,756
Inventories 2,672 3,295 3,707 4,425
Sundry debtors 1,648 1,679 2,110 2,417
Loans and advances 1,195 1,380 1,380 1,380
Other current assets 27 26 26 26
Total current assets (ex cash) 5,542 6,380 7,222 8,248
Trade payable 2,503 3,051 3,410 3,914
Others current liabilities 1,553 1,576 1,728 1,922
Total current liabilities & 4,056 4,627 5,138 5,836
Net current assets (ex cash) 1,486 1,753 2,084 2,412
Uses of funds 7,841 8,345 9,045 10,909
Book value per share (INR) 31.9 36.9 44.6 54.0
Free cash flow (INR mn)
Year to March FY13 FY14 FY15E FY16E
Net profit 1,190 1,518 2,056 2,477
Depreciation 315 407 450 490
Others 259 - - -
Gross cash flow 1,764 1,925 2,506 2,967
Less: Changes in WC 321 267 331 328
Operating cash flow 1,443 1,658 2,174 2,639
Less: Capex 349 577 578 600
Free cash flow 1,094 1,081 1,596 2,039
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Key takeaways Sharda Cropchem (SCC) is a fast growing global agrochemicals company with leadership in the generic crop protection chemicals industry. It has made deep inroads into the highly developed European and US markets which are characterised as high entry barrier markets. The company also has significant presence in other regulated markets such as LATAM and Rest of the World. SCC has an asset-light business model whereby it focuses on identifying generic molecules, preparing dossiers, seeking registrations, marketing & distributing formulations through third party distributors or its own sales force. The company's core competence lies in developing product dossiers and seeking product registrations in different countries. It not only has an extensive distribution network, but has also set up its own sales force in various countries in Europe and in Mexico, Colombia, South Afirca and India. SCC’s strategy of sourcing through a global network of suppliers imparts it flexibility and nimbleness. The company provides a wide bouquet of products to customers. Its product portfolio in the agrochemicals business comprises formulations and generic active ingredients in fungicide, herbicide and insecticide segments for protecting various crops. The product portfolio in non-agrochemical business comprises belts, general chemicals, dyes and dye intermediates which enables SCC cater to varied demands. Expansion in exisitng market and addition of newer geographies will be key growth driver for SCC going forward.
Key risks The agrochemicals industry faces risks of seasonal weather. Growth and acceptance of GM crops may adversely affect SCC’s business.
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Key takeaways
• Star Agriwarehousing and Collateral Management (Staragri) provides post-harvest management solutions to the farmers be it procurement, storage services, warehouse receipts, lab-testing of the produce and transportation, among others. It mainly deals in non-perishable agri-commodities such as wheat, soybean and oilseeds.
• The company is setting up private mandis (pioneer in this), which will help the
farmers improve their realisations in several ways:
o Provides lab-testing facilities to the farmers such that farmers with better quality produce will enjoy premium over others.
o In the private mandi channel, the number of middlemen are less. Typically, farmers go to the small-time traders who then sell the produce to bigger traders, and both earn commissions. Elongation of the supply chain means there is a large gap in the farm-gate prices and prices quoted to final consumers.
o The private mandis also provide storage facilities to the farmers wherein farmers who do not wish to sell their produce at distress prices can avail the warehousing services, store their produce and sell at a later date when better prices are available.
• While the company itself does not deal in perishables, it indicated that de-listing
of fruits and vegetables from the APMC will deliver benefits only in the long term. Today, farmers do not have much choice but go to the mandis to sell their perishable produce. Overtime, with the development of large retail chains and investments in cold storage, control of the traders can be minimised.
STAR AGRIWAREHOUSINGOffers post-harvest management solutions
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Key Takeaways State Bank of India’s (SBI) NPA profile, in light of the focused recovery efforts via camps, has improved. However, because of the possibility of a debt waiver customers are reluctant to repay, thereby spoiling the credit culture. Within the agri portfolio, Kisan Credit Card (KCC) accounts for half at INR600bn. It works as a credit/debit card and has the best features amongst banks. To ensure repeated borrower interaction Premium KCC is being introduced which works on staggered release of sanctioned loan amount, a part of which is linked to the repayment behaviour of the borrower. After KCC, the next big component of agri loans is the INR400bn worth of gold loans. To enhance the security, 400 carat verification machines are being installed in branches falling in Northern and Central belts. The quality of the portfolio is good with just 0.4% of NPA and that too because of borrower-wise classification regulation. To take on competition from NBFCs, tractor loan product “Shree Shakti” has been introduced which does not ask for land as a collateral and works only with tractor as the primary security. The rates will range from 12-13% and the LTV will be 50%.
Investment conclusion Given SBI’s conscious efforts towards quality growth and aggressive recoveries aided by improving macros, we expect NPLs to stabilise. Though sticky opex continues to mar profitability, the bank’s focused efforts are likely to yield benefits over the medium to long term. Further, stabilising NIMs, steady retail liability franchise and lower dependence on wholesale provides comfort. Key Risks • Macro economic risk is the biggest risk for SBI, given its size and exposures.
• Increasing geographical penetration by new private sector banks can lead to faster- than-expected decline in market share.
COMPANY PROFILE
STATE BANK OF INDIAFocused on recovery and on new product launches
EDELWEISS 4D RATINGS
Absolute Rating BUY
Rating Relative to Sector Performer
Risk Rating Relative to Sector Low
Sector Relative to Market Overweight
MARKET DATA (R: SBI.BO, B: SBIN IN)
CMP : INR 2583
Target Price : INR 3237
52-week range (INR) : 2,835 / 1,453
Share in issue (mn) : 746.6
M cap (INR bn/USD mn) : 1,928/ 31,498
Avg. Daily Vol.BSE/NSE(‘000) : 2,515.4
SHARE HOLDING PATTERN (%)
Current Q3FY14 Q2FY14
Promoters * 58.6 62.3 62.3
MF's, FI's & BK’s 20.8 17.9 17.7
FII's 9.7 8.8 8.9
Others 10.9 10.9 11.1 * Promoters pledged shares (% of share in issue)
Other liabilities 948,262 964,130 1,062,871 1,180,935
Total liabilities 15,656,321 17,922,346 20,920,503 24,422,020
Loans 10,456,166 12,098,287 14,154,996 16,701,480
Investments - - - -
Cash and equivalents 1,148,202 1,325,496 1,609,653 1,896,552
Gilts 2,721,206 3,224,056 3,911,390 4,602,100
Others 788,067 759,026 672,251 598,355
Fixed assets 70,050 80,022 92,195 102,869
Other Assets 472,631 435,459 480,018 520,665
Total assets 15,656,321 17,922,346 20,920,503 24,422,020
Credit growth 22.0 15.0 16.3 17.5
Deposit growth 15.2 15.9 18.1 18.1
EA growth 18.4 15.2 16.9 17.0
SLR ratio 20.4 22.0 22.0 22.0
C-D ratio 89.4 88.7 87.3 86.9
Low-cost deposits 44.8 41.6 42.7 44.1
Gross NPA ratio 4.8 5.0 4.8 4.4
Net NPA ratio 2.1 2.3 2.0 1.5
Provision coverage 57.1 54.4 59.2 65.5
Incremental slippage 3.6 3.9 3.4 3.1
Net NPA / Equity 22.2 - - -
Capital adequacy 13.2 12.4 10.0 9.0
- Tier 1 9.4 9.7 7.1 6.5
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Key takeaways Tata Chemicals (TCL) is witnessing early signs of improvement in global soda ash demand. The company expects global soda ash demand to grow at 1.5% p.a. Currently, global soda ash prices are hovering around USD250-280/MT and have improved USD30/MT recently. Management does not anticipate any new soda ash capacities globally as current prices are non-remunerative for new investments. TCL expects US soda ash prices to rise in the near term. The company is expected to sign new contracts in the US over the next couple of months. Domestic soda ash demand continued to be robust. Management indicated that India needs additional 1m MT of soda ash in every three years. The company has increased soda ash prices by INR600/MT recently in the India market. In agri business, TCL does not have any plan to expand in India as well as globally. Management believes that subsidy payment remains challenging in the country. TCL’s subsidy receivables stands at INR18bn currently. The company believes that the government has to first make PSUs profitable and convert all naphtha plants into gas based before decontroling the urea sector. TCL is expected to deleverage its balance sheet gradually over the next five years. Consumer products business continues with its product extension. TCL is planning to launch Tata Spices in a few states in July.
Key risks Poor monsoon, seasonality and cyclical nature of agriculture could impact the company’s earnings. Higher raw material cost, INR depreciation and delay in payment of government subsidy could affect profitability.
COMPANY PROFILE
TATA CHEMICALS Optimistic outlook
EDELWEISS RATINGS
Absolute Rating NOT RATED
MARKET DATA (R: TTCH.BO, B: TTCH IN)
CMP : INR 327
Target Price : NA
52-week range (INR) : 347 / 234
Share in issue (mn) : 254.8
M cap (INR bn/USD mn) : 83 / 1,383
Avg. Daily Vol. BSE/NSE (‘000) : 96.8
SHARE HOLDING PATTERN (%)
Current Q3FY14 Q2FY14
Promoters * 31.1 31.1 31.1
MF's, FI's & BKs 22.3 22.0 23.0
FII's 22.0 22.4 21.3
Others 24.6 24.5 24.6 * Promoters pledged shares (% of share in issue)
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Key takeaways Management guided for 12‐15% YoY revenue growth with 60‐100bps margin improvement during FY15. India and Brazil will be major growth drivers for UPL. The company is targeting EBITDA margin of 22‐23%, going forward. Management reiterated that it is looking to further strengthen balance sheet and RoE/RoCE in the coming years. The company is currently focusing on organic growth and any major acquisition is not on the agenda. Net working capital days stood at 93 as of March 31, 2014, and should be 90‐95 days in FY15E. UPL is expected to incur capex of ~INR5bn in FY15E.
Gross debt and cash, as on March 31, 2014, stood at INR35.6bn and INR10.2bn (as on March 31, 2013: INR42bn and INR15.5bn), respectively. UPL is expected to reduce debt further during FY15.
UPL has entered into an agreement with Italian Sipcam S.P.A. to sell its entire 50% stake in the Brazilian agro‐chemical Sipcam UPL Brasil S.A for USD58.5mn (~INR3.5bn). This divestment will release funds to the company, which will be available for new opportunities and meet growing requirements.
Investment conclusion UPL is a direct proxy for increase in demand for food crops due to rising commodity prices, high population growth and surge in demand for bio fuel. The company has historically focused on acquisitions of smaller companies and brands to surpass market growth. We expect 12.7% revenue CAGR and earnings CAGR of 18.8% over FY14‐16E, reflecting strength in base business.
Key risks The agrochemicals industry faces risk of seasonal weather. Growth and acceptance of GM crops may adversely affect UPL’s business.
COMPANY PROFILE
UPL Focusing on balance sheet
EDELWEISS RATINGS
Absolute Rating BUY
Investment Characteristics Growth
MARKET DATA (R: UPLL.BO, B: UPLL IN)
CMP : INR 313
Target Price : INR 415
52‐week range (INR) : 329 / 121
Share in issue (mn) : 428.6
M cap (INR bn/USD mn) : 134 / 2,187
Avg. Daily Vol. BSE/NSE (‘000) : 2,591.6
SHARE HOLDING PATTERN (%)
Current Q3FY14 Q2FY14
Promoters * 29.8 28.9 28.9
MF's, FI's & BKs 6.8 9.1 12.3
FII's 46.8 44.9 39.8
Others 16.6 17.1 19.1 * Promoters pledged shares (% of share in issue)
Rating Distribution* 149 40 12 202* 1 stocks under review
Market Cap (INR) 139 57 6
> 50bn Between 10bn and 50 bn < 10bn
Buy Hold Reduce Total
Rating Interpretation
Buy appreciate more than 15% over a 12‐month period
Hold appreciate up to 15% over a 12‐month period
Reduce depreciate more than 5% over a 12‐month period
Rating Expected to
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48 Edelweiss Securities Limited
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