Anand Rathi Shares and Stock Brokers Limited (hereinafter “ARSSBL”) is a full service brokerage and equities research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient and is to be circulated only within India and to no countries outside India. Disclosures and analyst certifications are present in Appendix. Anand Rathi Research India Equities India I Equities Country Daily 2 May 2014 India Morning Bell All the latest research and data Core Infrastructure Industries – Core continues to grow. The continuing strong performance of electricity has helped the core sector grow for the fifth successive month. Electricity was the best performing sector for FY14, followed by steel and cement. The uninspiring performances of natural gas and crude oil continued. Growth of electricity steel and cement is harbinger of improvement in construction. Mining growth will help manufacturing sector to grow. With inflation off its peak, we feel that RBI is likely to cut rates by 25 – 50 bps in 2HCY14. Maruti Suzuki – Weak trend continues; Sell. In FY15, the company would benefit from a favourable exchange rate and the low base for its vehicle sales. Nevertheless, headwinds of curtailed demand for passenger cars and of launches by competitors would prove to be speed bumps. With the past six-month movement in the stock price, we believe that the short- term positives have already been factored into the price, while possible downgrades in vehicle-sales estimates have not yet been captured. Additionally, the proposed structure of the new Gujarat plant complicates matters over the long term. For the short term, though, it would prove positive for the company because cash is now being conserved. We value the stock at 14x Sep’15e earnings, which works out to `1,753, a 10% downside from present levels. Federal Bank – SME-led credit growth, lower slippages; Buy. Overall credit growth for Federal Bank during the quarter was sluggish, at 4.3% yoy (up 1.4% qoq). This was due to a 14% drop in the corporate loan book, the share of which has now declined 1070bps yoy, to 31.4% in the overall loan book. We raise our target to `108, from `98 earlier and value the bank at 1.1x 1HFY16e BV (1.1xFY15e earlier). Diversified loan book, better asset quality and high capital adequacy would aid RoE expansion by FY16, to 14.4%. On inexpensive valuations, we retain Buy. At our target, the stock would trade at P/ABV of 1.2x FY15e and 1x FY16e, based on the two- stage DDM. Bajaj Corp. – Market-share gains; Buy. Dabur’s Almond Hair Oil has failed to gain more than a 4% market share. Keo Karpin is not investing in pushing its brands. This has led to Bajaj Corp. gaining market share. The market-share ratio of Bajaj Corp. to Keo Karpin has risen from 4.34 to 4.44. We expect a 13% earnings CAGR over FY14-16. We value the stock at a target price of `270, at a target PE of 18x FY16e earnings. We believe the success of Kailash Parbat and the No Marks acquisition would reduce dependence on Bajaj Almond Drops and erase the ‘single-product- company’ tag. Sensex: 22418 Nifty: 6696 Markets 30 Apr ’14 1 Day YTD Sensex 22418 -0.2% 5.9% Nifty 6696 -0.3% 6.2% Dow Jones 16559 -0.1% -0.1% S & P 500 1884 0.0% 1.9% FTSE 6809 0.4% 0.9% Nikkei* 14435 -0.3% -11.4% Hang Seng* 22177 0.1% -4.8% Volumes (US$m) 30 Apr ’14 1 Day Avg '14 Cash BSE 517 9.0% 400 Cash NSE 2,741 18.7% 1,991 Derivatives (NSE) 17,606 44.7% 24,583 Flows (US$m) 30 Apr ’14* MTD YTD FII – Cash Buy 737 4,880 35,919 Sell 661 4,458 31,344 Net 75 1,115 5,201 FII - Derivatives Buy 2,901 72,105 256,100 Sell 2,956 70,804 252,629 Net -55 607 2,778 DII – Cash Buy 220 1,888 6,263 Sell 219 2,308 7,892 Net 1 -302 -1,511 Others 30 Apr ’14 1 Day YTD Oil Brent (US$/bbl)* 107.7 -0.1% -1.7% Gold (US$/oz)* 1,282.5 -0.1% 6.4% Steel (US$/MT) 590.0 3.5% 0.9% `/US$ 60.34 0.0% 2.4% US$/Euro* 1.39 0.1% -0.8% Yen/US$* 102.35 0.0% 2.9% Call Rate 9.00% 55.bps 25.bps 10-year G-Secs 8.83% .bps .5bps EMBI spreads 318.79 2.2bps -15.5bps @7:30am *Provisional Source: BSE, Bloomberg
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Anand Rathi Shares and Stock Brokers Limited (hereinafter “ARSSBL”) is a full service brokerage and equities research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient and is to be circulated only within India and to no countries outside India. Disclosures and analyst certifications are present in Appendix. Anand Rathi Research India Equities
India I Equities Country
Daily
2 May 2014
India Morning Bell
All the latest research and data
Core Infrastructure Industries – Core continues to grow. The continuing strong performance of electricity has helped the core sector grow for the fifth successive month. Electricity was the best performing sector for FY14, followed by steel and cement. The uninspiring performances of natural gas and crude oil continued. Growth of electricity steel and cement is harbinger of improvement in construction. Mining growth will help manufacturing sector to grow. With inflation off its peak, we feel that RBI is likely to cut rates by 25 – 50 bps in 2HCY14.
Maruti Suzuki – Weak trend continues; Sell. In FY15, the company would benefit from a favourable exchange rate and the low base for its vehicle sales. Nevertheless, headwinds of curtailed demand for passenger cars and of launches by competitors would prove to be speed bumps. With the past six-month movement in the stock price, we believe that the short-term positives have already been factored into the price, while possible downgrades in vehicle-sales estimates have not yet been captured. Additionally, the proposed structure of the new Gujarat plant complicates matters over the long term. For the short term, though, it would prove positive for the company because cash is now being conserved. We value the stock at 14x Sep’15e earnings, which works out to `1,753, a 10% downside from present levels.
Federal Bank – SME-led credit growth, lower slippages; Buy. Overall credit growth for Federal Bank during the quarter was sluggish, at 4.3% yoy (up 1.4% qoq). This was due to a 14% drop in the corporate loan book, the share of which has now declined 1070bps yoy, to 31.4% in the overall loan book. We raise our target to `108, from `98 earlier and value the bank at 1.1x 1HFY16e BV (1.1xFY15e earlier). Diversified loan book, better asset quality and high capital adequacy would aid RoE expansion by FY16, to 14.4%. On inexpensive valuations, we retain Buy. At our target, the stock would trade at P/ABV of 1.2x FY15e and 1x FY16e, based on the two-stage DDM.
Bajaj Corp. – Market-share gains; Buy. Dabur’s Almond Hair Oil has failed to gain more than a 4% market share. Keo Karpin is not investing in pushing its brands. This has led to Bajaj Corp. gaining market share. The market-share ratio of Bajaj Corp. to Keo Karpin has risen from 4.34 to 4.44. We expect a 13% earnings CAGR over FY14-16. We value the stock at a target price of `270, at a target PE of 18x FY16e earnings. We believe the success of Kailash Parbat and the No Marks acquisition would reduce dependence on Bajaj Almond Drops and erase the ‘single-product-company’ tag.
Shoppers Stop – Recovery still some time away; Hold. With comparable growth recovering, we believe the standalone business is improving. The margin expansion, with an increase in private-label sales and with cost controls, would be a key growth driver. We believe Hypercity remains a drag and could return to profitability only in FY16. We maintain our Hold (call) on the stock and value it on a sum-of-parts basis at `366, using the PE multiple for the standalone business and m.cap/sales for Hypercity and Crossword.
Orient Cement – In-line 4Q; recovery ahead, expansion on track; Buy. Orient Cement’s EBITDA and PAT was largely in-line with estimates due to lower-than-expected costs. We expect better performance in FY15 given expectation of better cement prices in Maharashtra and AP. Our fair price is `60, based on 7x Mar’16e EV/EBITDA. The implied EV/ton is US$52, with a PE of 12x. The stock is attractively priced when benchmarked against midcap peers. A key advantage is its low-cost cement production, resulting in industry-leading RoE and RoCE.
Swaraj Engines – Results surprise, maintain Buy. The results bettered our expectations chiefly because of better-than-expected volumes. Growth ahead would be boosted by a better performance by the Swaraj division of tractors as compared to the rest of the tractor industry. For FY15 however, the tractor industry growth outlook is likely to be under pressure. We expect tractors to do well in the long run, led by more scope for productivity, low penetration, need for mechanization and shortage of labour. Greater capacity could prove to be a huge fillip. We maintain a Buy. At the ruling market price, the stock trades at 11.7x FY15e and 10.5x FY16e. We value it at 12.5x Sep’15e earnings and arrive at a price target of `780.
Phillips Carbon Black – Performance constrained, improvement in sight; Hold. For 4QFY14, Phillips Carbon Black (PCB) reported `5.9bn in revenue against our estimates of `5.7bn (up 11% yoy). Sales in the carbon black (CB) division grew 12% to `5.8bn, while in power it declined 27% to `0.14bn. The company has commissioned 50,000MT carbon black line at Kochi Plant. With this the total capacity is 4,72,000 MTPA. In view of global developments, project work at Vietnam is under review. We value the stock at a target PE of 4x FY16e earnings. We retain a Hold, with a revised target of `71.
Anand Rathi Shares and Stock Brokers Limited (hereinafter “ARSSBL”) is a full service brokerage and equities research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient and is to be circulated only within India and to no countries outside India. Disclosures and analyst certifications are present in Appendix. Anand Rathi Research India Equities
India I Equities
Economy
Update
`
2 May 2014
Core Infrastructure Industries Core continues to grow
The continuing strong performance of electricity has helped the core sector grow for the fifth successive month. Electricity was the best performing sector for FY14, followed by steel and cement. The uninspiring performances of natural gas and crude oil continued. Growth of electricity steel and cement is harbinger of improvement in construction. Mining growth will help manufacturing sector to grow. With inflation off its peak, we feel that RBI is likely to cut rates by 25 – 50 bps in 2HCY14.
Performance. Core infrastructure industries, with a weighting of 37.9% in industrial production grew 2.5% in Mar’14 (vs 7.0% in Mar’13). During Mar’14 steel and electricity grew 5.4%, refinery products also grew 2.8%. Cement index remained same as the Mar’13 level. Coal grew 0.7% in Mar’14 (vs 1.7% growth in Mar’13). The major contraction was visible in natural gas (-9.3%), followed by fertilizers (-6.1%) and crude oil (-1.6%). We thus have the FY14 growth of core infrastructure at 2.6% versus 6.5% growth in FY13. Excluding natural gas and crude oil, all the other six core sectors have grown over the year – electricity being the best performing sector.
Assessment. Core infrastructure industries have been maintaining better growth than overall industrial production, chiefly due to the higher weighting of electricity (10.3%) in core industries. While electricity growth decelerated in the month, the average growth in FY14 (5.6%) is still better than FY13. Steel and cement also grew through the year. Coal sector growth is showing signs of bottoming out. Fertilizers is losing steam – it contracted for the second month. Performance of natural gas, however, continues to be lackluster.
Outlook. Electricity, steel and cement (a combined weighting of 19%) are likely to maintain the robust growth of FY14 next year. With the operational and procedural aspects of mining improving, we are optimistic of coal picking up pace. Natural gas has contracted for the third year and a revival in this sector looks distant. Core infrastructure will also be helped by a favorable base in the first eight months of FY15.
Recommendations. While the core industries continue to grow, the headline IIP number remain disappointing, for Feb’14 while core grew by 4.5%, IIP contracted by -1.9%. Manufacturing sector contraction has negated the growth of electricity and mining sectors. Growth in electricity, steel and cement are the harbinger of growth in construction. The growth of mining would help in the turnaround of manufacturing sector. We thus expect a modest recovery for the manufacturing sector in FY15. With inflation rates off the peak and inflation on a downward trajectory, barring the seasonal headwinds, we believe that RBI is likely to cut rates by 25 – 50bps in 2HCY14.
Fig 1 – Growth decelerates in Mar
Source: Government of India
Fig 2 –Mar growth at 2.5%
Source: Government of India (GoI)
Core infrastructure (Mar’14): 2.5%
Core infrastructure (FY14): 2.6%
2 May 2014 India Economy – Core Infrastructure Industries – Core continues to grow
Anand Rathi Research 2
Fig 3 – Coal production picks up pace
Source: GoI
Fig 4 – Crude oil contracts in Mar’14
Source: GoI
Fig 5 – Electricity growth buoyant throughout FY14
Source: GoI
2 May 2014 India Economy – Core Infrastructure Industries – Core continues to grow
Anand Rathi Research 3
Fig 6 – Steel growth consistent
Source: GoI
Fig 7 – Refinery-product contracts due to high base of Mar’13
Source: GoI
Fig 8 – Base unfavourable for first eight months of FY15
Source: GoI
2 May 2014 India Economy – Core Infrastructure Industries – Core continues to grow
Anand Rathi Research 4
Fig 9 – Five sectors posted mom growth
Source: GoI
Appendix Analyst Certification The views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. The research analysts are bound by stringent internal regulations and also legal and statutory requirements of the Securities and Exchange Board of India (hereinafter “SEBI”) and the analysts’ compensation are completely delinked from all the other companies and/or entities of Anand Rathi, and have no bearing whatsoever on any recommendation that they have given in the Research Report. The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.
Anand Rathi Ratings Definitions
Analysts’ ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described in the Ratings Table below:
Ratings Guide Buy Hold Sell Large Caps (>US$1bn) >15% 5-15% <5% Mid/Small Caps (<US$1bn) >25% 5-25% <5% Anand Rathi Research Ratings Distribution (as of 4 March 2014) Buy Hold Sell Anand Rathi Research stock coverage (185) 64% 27% 9% % who are investment banking clients 4% 0% 0% Other Disclosures This report has been issued by ARSSBL which is a SEBI regulated entity, and which is in full compliance with all rules and regulations as are applicable to its functioning and governance. The investors should note that ARSSBL is one of the companies comprising within ANAND RATHI group, and ANAND RATHI as a group consists of various companies which may include (but is not limited to) its subsidiaries, its affiliates, its group companies who may hold positions, views, stakes and may service the companies covered in this report independent of ARSSBL. Investors are cautioned to be aware that there could arise a potential conflict of interest in the views held by ARSSBL and other companies of Anand Rathi who maybe affiliated, connected or catering to the companies mentioned in the Research Report; even though, ARSSBL and Anand Rathi are fully complaint with all procedural and operational regulatory requirements. Thus, investors should not use this as a sole basis for making their investment decision and should consider the recommendations mentioned in the Research Report bearing in mind the aforementioned.
Further, the information herein has been obtained from various sources which we believe is reliable, and we do not guarantee its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes an offer, or an invitation to make an offer, to buy or sell any securities or any options, futures or other derivatives related to such securities (hereinafter referred to as “Related Investments”). ARSSBL and/or Anand Rathi may trade for their own accounts as market maker / jobber and/or arbitrageur in any securities of the companies mentioned in the Research Report or in related investments, and may be on taking a different position from the ones which haven been taken by the public orders. ARSSBL and/or Anand Rathi and its affiliates, directors, officers, and employees may have a long or short position in any securities of the companies mentioned in the Research Report or in Related Investments. ARSSBL and/or Anand Rathi, may from time to time, perform investment banking, investment management, financial advisory or any other services not explicitly mentioned herein, or solicit investment banking or other business from, any entity and/or company mentioned in this Research Report; however, the same shall have no bearing whatsoever on the specific recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the other companies of Anand Rathi, even though there might exist an inherent conflict of interest.
Furthermore, this Research Report is prepared for private circulation and use only. It does not have regard to the specific investment objectives, financial situation and the specific financial needs or objectives of any specific person who may receive this Research Report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this Research Report, and, should understand that statements regarding future prospects may or may not be realized, and we can not guarantee the same as analysis and valuation is a tool to enable investors to make investment decisions but, is not an exact and/or a precise science. Investors should note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Past performance is not necessarily a guide to future performance. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investments mentioned in this report.
Other Disclosures pertaining to distribution of research in the United States of America
This material was produced by ARSSBL, solely for information purposes and for the use of the recipient. It is not to be reproduced under any circumstances and is not to be copied or made available to any person other than the recipient. It is distributed in the United States of America by Enclave Capital LLC (19 West 44th Street, Suite 1700, New York, NY 10036) and elsewhere in the world by ARSSBL or an authorized affiliate of ARSSBL (such entities and any other entity, directly or indirectly, controlled by ARSSBL, the “Affiliates”). This document does not constitute an offer of, or an invitation by or on behalf of ARSSBL or its Affiliates or any other company to any person, to buy or sell any security. The information contained herein has been obtained from published information and other sources, which ARSSBL or its Affiliates consider to be reliable. None of ARSSBL or its Affiliates accepts any liability or responsibility whatsoever for the accuracy or completeness of any such information. All estimates, expressions of opinion and other subjective judgments contained herein are made as of the date of this document. Emerging securities markets may be subject to risks significantly higher than more established markets. In particular, the political and economic environment, company practices and market prices and volumes may be subject to significant variations. The ability to assess such risks may also be limited due to significantly lower information quantity and quality. By accepting this document, you agree to be bound by all the foregoing provisions.
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4. However, one or more of ARSSBL or its Affiliates may, from time to time, have a long or short position in any of the securities mentioned herein and may buy or sell those securities or options thereon, either on their own account or on behalf of their clients.
5. As of the publication of this report, ARSSBL does not make a market in the subject securities.
6. ARSSBL or its Affiliates may or may not, to the extent permitted by law, act upon or use the above material or the conclusions stated above, or the research or analysis on which they are based before the material is published to recipients and from time to time, provide investment banking, investment management or other services for or solicit to seek to obtain investment banking, or other securities business from, any entity referred to in this report.
Enclave Capital LLC is distributing this document in the United States of America. ARSSBL accepts responsibility for its contents. Any US customer wishing to effect transactions in any securities referred to herein or options thereon should do so only by contacting a representative of Enclave Capital LLC.
Additional information on recommended securities/instruments is available on request.
Anand Rathi Shares and Stock Brokers Limited (hereinafter “ARSSBL”) is a full service brokerage and equities research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient and is to be circulated only within India and to no countries outside India. Disclosures and analyst certifications are present in Appendix. Anand Rathi Research India Equities
Autos
Company UpdateIndia I Equities
Volume data – April (units) Apr-14 yoy chg (%) mom chg (%) FY14 yoy chg (%)
Sales dip sustains. Maruti Suzuki’s Apr’14 dispatches declined 11.4% yoy to 86,196 units (lower 24% month-over-month). This is on the back of a 1.4% volume decline in FY14. This was the sixth consecutive month of yoy volume decline for Maruti. This is also the biggest m-o-m drop for the company in its April sales since April ’07. The weak growth trend for the company over FY11-14 saw a compounded volume decline of 3.1%.
Compacts do well. Domestic sales were weak, 12.6% lower yoy, to 79,119 units; exports fared better, at 7,077 units, 4.4% higher yoy (though mom down 36.1%). The compact-vehicle sub-segment was the best performing, with 9.9% yoy growth (16.4% lower mom). Growth in this segment has been driven by the newly launched Celerio, which is drawing a good response and is witnessing a high average waiting period.
In most other segments sales dwindle. In the super-compact-car sub-segment, sales disappointed, 17.7% lower yoy and 7.1% mom. The mini segment declined 25.4% yoy (down 35% mom). Vans and UVs also declined, down 4.3% yoy and 5.8% yoy respectively.
Our take. In FY15, the company would benefit from a favourable exchange rate and the low base for its vehicle sales. Nevertheless, headwinds of curtailed demand for passenger cars and of launches by competitors would prove to be speed bumps. With the past six-month movement in the stock price, we believe that the short-term positives have already been factored into the price, while possible downgrades in vehicle-sales estimates have not yet been captured. Additionally, the proposed structure of the new Gujarat plant complicates matters over the long term. For the short term, though, it would prove positive for the company because cash is now being conserved. We value the stock at 14x Sep’15e earnings, which works out to `1,753, a 10% downside from present levels. Risks: More-than-expected volume growth and currency-related benefits.
Volume Trade
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Source: Company
2 April 2014 Maruti Suzuki – Weak trend continues; Sell
Anand Rathi Research 2
Quick Glance – Financials and ValuationsFig 1 – Income statement (` m) Year-end: Mar FY12 FY13 FY14e FY15e FY16e
Mini Compact Super Compact Mid-Size Executive UVs Vans Exports
Source: Company
2 April 2014 Maruti Suzuki – Weak trend continues; Sell
Anand Rathi Research 3
Fig 11 – Minis too witness sharp decline
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Fig 12 – Van sales subdued
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Fig 7 – Compact cars boosted by the Celerio launch
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Fig 8 – Exports were higher yoy
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Fig 9 – Super-compact sales decline yoy
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Fig 10 – UVs remain subdued
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Source: Company
Appendix Analyst Certification The views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. The research analysts are bound by stringent internal regulations and also legal and statutory requirements of the Securities and Exchange Board of India (hereinafter “SEBI”) and the analysts’ compensation are completely delinked from all the other companies and/or entities of Anand Rathi, and have no bearing whatsoever on any recommendation that they have given in the Research Report. Important Disclosures on subject companies Rating and Target Price History (as of 2 May 2014)
The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.
Anand Rathi Ratings Definitions
Analysts’ ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described in the Ratings Table below:
Ratings Guide Buy Hold Sell Large Caps (>US$1bn) >15% 5-15% <5% Mid/Small Caps (<US$1bn) >25% 5-25% <5%
Anand Rathi Research Ratings Distribution (as of 4 March 2014) Buy Hold Sell Anand Rathi Research stock coverage (182) 64% 27% 9% % who are investment banking clients 4% 0% 0% Other Disclosures This report has been issued by ARSSBL which is a SEBI regulated entity, and which is in full compliance with all rules and regulations as are applicable to its functioning and governance. The investors should note that ARSSBL is one of the companies comprising within ANAND RATHI group, and ANAND RATHI as a group consists of various companies which may include (but is not limited to) its subsidiaries, its affiliates, its group companies who may hold positions, views, stakes and may service the companies covered in this report independent of ARSSBL. Investors are cautioned to be aware that there could arise a potential conflict of interest in the views held by ARSSBL and other companies of Anand Rathi who maybe affiliated, connected or catering to the companies mentioned in the Research Report; even though, ARSSBL and Anand Rathi are fully complaint with all procedural and operational regulatory requirements. Thus, investors should not use this as a sole basis for making their investment decision and should consider the recommendations mentioned in the Research Report bearing in mind the aforementioned.
Further, the information herein has been obtained from various sources which we believe is reliable, and we do not guarantee its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes an offer, or an invitation to make an offer, to buy or sell any securities or any options, futures or other derivatives related to such securities (hereinafter referred to as “Related Investments”). ARSSBL and/or Anand Rathi may trade for their own accounts as market maker / jobber and/or arbitrageur in any securities of the companies mentioned in the Research Report or in related investments, and may be on taking a different position from the ones which haven been taken by the public orders. ARSSBL and/or Anand Rathi and its affiliates, directors, officers, and employees may have a long or short position in any securities of the companies mentioned in the Research Report or in Related Investments. ARSSBL and/or Anand Rathi, may from time to time, perform investment banking, investment management, financial advisory or any other services not explicitly mentioned herein, or solicit investment banking or other business from, any entity and/or company mentioned in this Research Report; however, the same shall have no bearing whatsoever on the specific recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the other companies of Anand Rathi, even though there might exist an inherent conflict of interest.
Furthermore, this Research Report is prepared for private circulation and use only. It does not have regard to the specific investment objectives, financial situation and the specific financial needs or objectives of any specific person who may receive this Research Report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this Research Report, and, should understand that statements regarding future prospects may or may not be realized, and we can not guarantee the same as analysis and valuation is a tool to enable investors to make investment decisions but, is not an exact and/or a precise science. Investors should note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Past performance is not necessarily a guide to future performance. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investments mentioned in this report.
Other Disclosures pertaining to distribution of research in the United States of America
This material was produced by ARSSBL, solely for information purposes and for the use of the recipient. It is not to be reproduced under any circumstances and is not to be copied or made available to any person other than the recipient. It is distributed in the United States of America by Enclave Capital LLC (19 West 44th Street, Suite 1700, New York, NY 10036) and elsewhere in the world by ARSSBL or an authorized affiliate of ARSSBL (such entities and any other entity, directly or indirectly, controlled by ARSSBL, the “Affiliates”). This document does not constitute an offer of, or an invitation by or on behalf of ARSSBL or its Affiliates or any other company to any person, to buy or sell any security. The information contained herein has been obtained from published information and other sources, which ARSSBL or its Affiliates consider to be reliable. None of ARSSBL or its Affiliates accepts any liability or responsibility whatsoever for the accuracy or completeness of any such information. All estimates, expressions of opinion and other subjective judgments contained herein are made as of the date of this document. Emerging securities markets may be subject to risks significantly higher than more established markets. In particular, the political and economic environment, company practices and market prices and volumes may be subject to significant variations. The ability to assess such risks may also be limited due to significantly lower information quantity and quality. By accepting this document, you agree to be bound by all the foregoing provisions.
1. ARSSBL or its Affiliates may or may not have been beneficial owners of the securities mentioned in this report.
2. ARSSBL or its affiliates may have or not managed or co-managed a public offering of the securities mentioned in the report in the past 12 months.
3. ARSSBL or its affiliates may have or not received compensation for investment banking services from the issuer of these securities in the past 12 months and do not expect to receive compensation for investment banking services from the issuer of these securities within the next three months.
4. However, one or more of ARSSBL or its Affiliates may, from time to time, have a long or short position in any of the securities mentioned herein and may buy or sell those securities or options thereon, either on their own account or on behalf of their clients.
5. As of the publication of this report, ARSSBL does not make a market in the subject securities.
6. ARSSBL or its Affiliates may or may not, to the extent permitted by law, act upon or use the above material or the conclusions stated above, or the research or analysis on which they are based before the material is published to recipients and from time to time, provide investment banking, investment management or other services for or solicit to seek to obtain investment banking, or other securities business from, any entity referred to in this report.
Enclave Capital LLC is distributing this document in the United States of America. ARSSBL accepts responsibility for its contents. Any US customer wishing to effect transactions in any securities referred to herein or options thereon should do so only by contacting a representative of Enclave Capital LLC.
Additional information on recommended securities/instruments is available on request.
Anand Rathi Shares and Stock Brokers Limited (hereinafter “ARSSBL”) is a full service brokerage and equities research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient and is to be circulated only within India and to no countries outside India. Disclosures and analyst certifications are present in Appendix. Anand Rathi Research India Equities
India I Equities
Banks Result Update
2 May 2014
Federal Bank
SME-led credit growth, lower slippages; Buy
Key takeaways
SME and agri-led credit growth. Overall credit growth for Federal Bank during the quarter was sluggish, at 4.3% yoy (up 1.4% qoq). This was due to a 14% drop in the corporate loan book, the share of which has now declined 1070bps yoy, to 31.4% in the overall loan book. SME loans continue to trend upward, growing 26% yoy. We expect the SME and retail segments to drive the 19% loan growth over FY14-16. Higher NIM and CASA, lower productivity. Reported NIM increased sharply by 52bps yoy (up 34bps qoq), to 3.6%, led by a one-time interest received on income tax refund. The proportion of CASA improved 360bps yoy, to 30.8%, on traction in savings deposit (up 19.9% yoy). Going forward, we expect higher CASA to drive improvement in NIM to 3.4% by FY16. Cost-income rose 230bps yoy, to 47.7%. Management expects to consolidate its strong branch-network expansion in FY15. Consequently, we expect cost-income to improve to 45% by FY16. Asset quality improves on sale to Arcil. GNPA declined 9.4% qoq, driven by: (a) Lower slippages yoy (1.8% of loans) and (b) `1.6bn sale of non performing asset to ARCIL. NPA coverage remained steady at 70.3%. The bank has restructured an additional `3.2m of loans in the quarter. The outstanding restructured portfolio now stands at 4.5% of book. A high restructured book are likely to keep credit costs at a high 60bps over FY15-16. The high 14.6% capital adequacy is better than most peers and offers fair assurance against further delinquencies. Our take. We raise our target to `108, from `98 earlier and value the bank at 1.1x 1HFY16e BV (1.1xFY15e earlier). Diversified loan book, better asset quality and high capital adequacy would aid RoE expansion by FY16, to 14.4%. On inexpensive valuations, we retain Buy. At our target, the stock would trade at P/ABV of 1.2x FY15e and 1x FY16e, based on the two-stage DDM (CoE: 15.5%; beta: 0.8; Rf: 8.5%). Risk. Higher delinquencies.
Rating: Buy Target Price: `108
Share Price: `90
Key data FB IN/FED.BO52-week high / low `99/`44 Sensex / Nifty 22148/66963-m average volume US$3.9mMarket cap `77bn/US$1.3bn Shares outstanding 170.9m
Overall credit growth for Federal Bank during the quarter was sluggish, at 4.3% yoy (up 1.4% qoq). This was due to a 14% drop in the corporate loan book, the share of which has now declined 1070bps yoy to 31.4% in the overall loan book. SME loans continue to trend upward, growing 26% yoy. We expect the SME and retail segments to drive the 19% loan growth over FY14-16.
Fig 9 – Business growth sluggish
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Fig 10 – SME growth healthy, corporate in consolidation
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2 May 2014 Federal Bank – SME-led credit growth, lower slippages; Buy
Anand Rathi Research 4
NIM improves, expected to continue
Reported NIM increased sharply by 52bps yoy (up 34bps qoq) to 3.6%, led by a one time interest received on income tax refund. The proportion of CASA improved 360bps yoy, to 30.8%, on traction in savings deposit (up 19.9% yoy). Ahead, we expect improvement in NIM to 3.4%, given the likely drop in cost of funds, a higher credit-deposit ratio and the rising proportion of higher-yielding SME.
Fig 13 – NII growth jumps as NIM increase
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Fig 14 – CASA share improves
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Fig 11 – SME gaining share
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Source: Company, Anand Rathi Research
Fig 12 – Gold loan also slows down
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Housing Loans Gold Loans Others Source: Company, Anand Rathi Research
2 May 2014 Federal Bank – SME-led credit growth, lower slippages; Buy
Anand Rathi Research 5
Investment in branches slows down, treasury profits fall
Fee income, excluding treasury and recoveries, registered 12.9% yoy growth, while treasury profits decreased 53% yoy, leading to the 9.4% yoy decline in non-interest income. We expect fee income to grow in line with balance-sheet growth, given the various measures undertaken by the bank. Cost-income rose 230bps yoy, to 47.7%. Management expects to consolidate its strong branch network expansion in FY15. Consequently, we expect cost-income to improve to 45% by FY16.
Fig 15 – Core cost-income rises; bank to consolidate branches
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Asset quality improves on lower slippages and sale to Arcil
GNPA declined 9.4% qoq, driven by: (a) Lower slippages yoy (1.8% of loans) and (b) `1.6bn sale of non-performing asset to ARCIL. Slippages in retail and SME seem to have stabilized. NPA coverage remained steady at 70.3%. The bank has restructured an additional `3.2m of loans in the quarter. The outstanding restructured portfolio now stands at 4.5% of book. A high restructured book are likely to keep credit costs at a high 60bps over FY15/16. The high 14.6% capital adequacy is better than most of its peers and offers fair assurance against further delinquencies.
Fig 16 – Asset quality improves on lower slippages yoy
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2 May 2014 Federal Bank – SME-led credit growth, lower slippages; Buy
Anand Rathi Research 6
Valuations We raise our target to `108, from `98 earlier and value the bank at 1.1x 1HFY16e BV (1.1xFY15e earlier). The diversified loan book, better productivity and high capital adequacy would aid RoE expansion by FY16, to 14.4%. On the inexpensive valuations, we retain a Buy. At our target, the stock would trade at P/ABV of 1.2x FY15e and 1x FY16e. Our target is based on the two-stage DDM (CoE: 15.5%; beta: 0.8; Rf: 8.5%).
Fig 17 – Past one-year-forward P/BV
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Source: Bloomberg, Anand Rathi Research
Risk
Less-than-expected economic growth over FY15-16, leading to NPA being more than estimated, consequently leading to higher credit costs.
More-than-expected delinquencies could lead to a rise in costs of provisioning and drop in earnings.
2 May 2014 Federal Bank – SME-led credit growth, lower slippages; Buy
Anand Rathi Research 7
Financials We expect the bank’s business to register an 18% CAGR over FY14-16,. We expect a 20.4% CAGR in net profit over the same period.
Fig 18 – Income Statement Year-end: Mar (`m) FY12 FY13 FY14e FY15e FY16e
Interest Income 55,584 61,676 69,461 74,191 84,817
Cash & Bank Balances 35,326 37,200 44,990 40,408 47,871
Fixed & Other Assets 19,357 20,783 25,471 27,616 33,102
Total Assets 606,268 710,496 746,001 836,841 1,003,082
Source : Company, Anand Rathi Research
Appendix Analyst Certification The views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. The research analysts are bound by stringent internal regulations and also legal and statutory requirements of the Securities and Exchange Board of India (hereinafter “SEBI”) and the analysts’ compensation are completely delinked from all the other companies and/or entities of Anand Rathi, and have no bearing whatsoever on any recommendation that they have given in the Research Report. Important Disclosures on subject companies Rating and Target Price History (as of 30 April 2014)
The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.
Anand Rathi Ratings Definitions
Analysts’ ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described in the Ratings Table below:
Ratings Guide Buy Hold Sell Large Caps (>US$1bn) >15% 5-15% <5% Mid/Small Caps (<US$1bn) >25% 5-25% <5%
Anand Rathi Research Ratings Distribution (as of 4 March 2014) Buy Hold Sell Anand Rathi Research stock coverage (182) 64% 27% 9% % who are investment banking clients 4% 0% 0% Other Disclosures This report has been issued by ARSSBL which is a SEBI regulated entity, and which is in full compliance with all rules and regulations as are applicable to its functioning and governance. The investors should note that ARSSBL is one of the companies comprising within ANAND RATHI group, and ANAND RATHI as a group consists of various companies which may include (but is not limited to) its subsidiaries, its affiliates, its group companies who may hold positions, views, stakes and may service the companies covered in this report independent of ARSSBL. Investors are cautioned to be aware that there could arise a potential conflict of interest in the views held by ARSSBL and other companies of Anand Rathi who maybe affiliated, connected or catering to the companies mentioned in the Research Report; even though, ARSSBL and Anand Rathi are fully complaint with all procedural and operational regulatory requirements. Thus, investors should not use this as a sole basis for making their investment decision and should consider the recommendations mentioned in the Research Report bearing in mind the aforementioned.
Further, the information herein has been obtained from various sources which we believe is reliable, and we do not guarantee its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes an offer, or an invitation to make an offer, to buy or sell any securities or any options, futures or other derivatives related to such securities (hereinafter referred to as “Related Investments”). ARSSBL and/or Anand Rathi may trade for their own accounts as market maker / jobber and/or arbitrageur in any securities of the companies mentioned in the Research Report or in related investments, and may be on taking a different position from the ones which haven been taken by the public orders. ARSSBL and/or Anand Rathi and its affiliates, directors, officers, and employees may have a long or short position in any securities of the companies mentioned in the Research Report or in Related Investments. ARSSBL and/or Anand Rathi, may from time to time, perform investment banking, investment management, financial advisory or any other services not explicitly mentioned herein, or solicit investment banking or other business from, any entity and/or company mentioned in this Research Report; however, the same shall have no bearing whatsoever on the specific recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the other companies of Anand Rathi, even though there might exist an inherent conflict of interest.
Furthermore, this Research Report is prepared for private circulation and use only. It does not have regard to the specific investment objectives, financial situation and the specific financial needs or objectives of any specific person who may receive this Research Report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this Research Report, and, should understand that statements regarding future prospects may or may not be realized, and we can not guarantee the same as analysis and valuation is a tool to enable investors to make investment decisions but, is not an exact and/or a precise science. Investors should note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Past performance is not necessarily a guide to future performance. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investments mentioned in this report.
Other Disclosures pertaining to distribution of research in the United States of America
This material was produced by ARSSBL, solely for information purposes and for the use of the recipient. It is not to be reproduced under any circumstances and is not to be copied or made available to any person other than the recipient. It is distributed in the United States of America by Enclave Capital LLC (19 West 44th Street, Suite 1700, New York, NY 10036) and elsewhere in the world by ARSSBL or an authorized affiliate of ARSSBL (such entities and any other entity, directly or indirectly, controlled by ARSSBL, the “Affiliates”). This document does not constitute an offer of, or an invitation by or on behalf of ARSSBL or its Affiliates or any other company to any person, to buy or sell any security. The information contained herein has been obtained from published information and other sources, which ARSSBL or its Affiliates consider to be reliable. None of ARSSBL or its Affiliates accepts any liability or responsibility whatsoever for the accuracy or completeness of any such information. All estimates, expressions of opinion and other subjective judgments contained herein are made as of the date of this document. Emerging securities markets may be subject to risks significantly higher than more established markets. In particular, the political and economic environment, company practices and market prices and volumes may be subject to significant variations. The ability to assess such risks may also be limited due to significantly lower information quantity and quality. By accepting this document, you agree to be bound by all the foregoing provisions.
1. ARSSBL or its Affiliates may or may not have been beneficial owners of the securities mentioned in this report.
2. ARSSBL or its affiliates may have or not managed or co-managed a public offering of the securities mentioned in the report in the past 12 months.
3. ARSSBL or its affiliates may have or not received compensation for investment banking services from the issuer of these securities in the past 12 months and do not expect to receive compensation for investment banking services from the issuer of these securities within the next three months.
4. However, one or more of ARSSBL or its Affiliates may, from time to time, have a long or short position in any of the securities mentioned herein and may buy or sell those securities or options thereon, either on their own account or on behalf of their clients.
5. As of the publication of this report, ARSSBL does not make a market in the subject securities.
6. ARSSBL or its Affiliates may or may not, to the extent permitted by law, act upon or use the above material or the conclusions stated above, or the research or analysis on which they are based before the material is published to recipients and from time to time, provide investment banking, investment management or other services for or solicit to seek to obtain investment banking, or other securities business from, any entity referred to in this report.
Enclave Capital LLC is distributing this document in the United States of America. ARSSBL accepts responsibility for its contents. Any US customer wishing to effect transactions in any securities referred to herein or options thereon should do so only by contacting a representative of Enclave Capital LLC.
Additional information on recommended securities/instruments is available on request.
Anand Rathi Shares and Stock Brokers Limited (hereinafter “ARSSBL”) is a full service brokerage and equities research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient and is to be circulated only within India and to no countries outside India. Disclosures and analyst certifications are present in Appendix. Anand Rathi Research India Equities
Consumer
Result UpdateIndia I Equities
`
Rating: Buy Target Price: `270 Share Price: `211
Key data BJCOR IN / BACO.BO52-week high / low `287 / `198Sensex / Nifty 22418 / 66963-m average volume US$0.6m Market cap `31bn / US$519mShares outstanding 148m
Muted revenue growth. Bajaj Corp.’s revenues were flat, yoy, on price hikes of only 6%. Volume dropped 6.3%. The company reported lower primary sales as inventory days in trade have reduced from 55 to 32. Secondary revenue growth, though, was on track. The company has continued to report market share gains in Almond Drops hair oil. As of now, the company has market leadership in the almond drops hair oil industry with market share of 57.9%, up 350bps, yoy. On the other hand, it lost market share in Kailash Parbat cooling oil due to a delayed summer. It, however, continues to invest in this brand, along with expanding distribution. The company has raised average prices by 5% in April 2014.
EBITDA margin lower. The company reported gross margin expansion of 60bps due to price hikes of 6%. Average prices of major raw material, light liquid paraffin was up 6%, and that of refined oil was down 5.5%, yoy. EBITDA margin was up 50bps, yoy. Due to acquisition of No Marks and repayment of debt, other income is down 23%, yoy. The company has also reduced the ad-spend by 180bps, yoy. Effective income tax rate is also down 260bps, yoy. Net profit dropped 2%, yoy.
Our take. Competition in almond-based hair oils is benign. Dabur’s Almond Hair Oil has failed to gain more than a 4% market share. Keo Karpin is not investing in pushing its brands. This has led to Bajaj Corp. gaining market share. The market-share ratio of Bajaj Corp. to Keo Karpin has risen from 4.34 to 4.44. We expect a 13% earnings CAGR over FY14-16. We value the stock at a target price of `270, at a target PE of 18x FY16e earnings. We believe the success of Kailash Parbat and the No Marks acquisition would reduce dependence on Bajaj Almond Drops and erase the ‘single-product-company’ tag. Risks. Raw-material price rises, keener-than-expected competition.
Muted revenue growth. Bajaj Corp.’s revenues were flat, yoy, on price hikes of only 6%. Volume dropped 6.3%. The company reported lower primary sales as inventory days in trade have reduced from 55 to 32. Secondary revenue growth, though, was on track. The company has continued to report market share gains in Almond Drops hair oil. As of now, the company has market leadership in the almond drops hair oil industry with market share of 57.9%, up 350bps, yoy. On the other hand, it lost market share in Kailash Parbat cooling oil due to a delayed summer. It, however, continues to invest in this brand, along with expanding distribution. The company has raised average prices by 5% in April 2014.
Fig 8 – Muted revenue growth
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Fig 9 – Improving market shares
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2 May 2014 Bajaj Corp – Market-share gains; Buy
Anand Rathi Research 4
EBITDA margin improves slightly
The company reported gross margin expansion of 60bps due to price hikes of 6%. Average prices of major raw material, light liquid paraffin was up by 6%, yoy. The average price of refined oil was down 5.5%, yoy. EBITDA margin was up 50bps, yoy. Due to acquisition of No Marks and repayment of debt, other income is down 23%, yoy. The company has also reduced the ad-spend by 180bps, yoy. Effective income tax rate is also down 260bps, yoy. Net profit dropped 2%, yoy.
Fig 10 – EBITDA margin expands
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Fig 11 – Net profit drops
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Dec
13
Mar
14
(%)
Source: Company, Anand Rathi Research
Valuation
Competition in almond-based hair oils is benign. Dabur’s Almond Hair Oil has failed to gain more than a 4% market share. Keo Karpin is not investing in pushing its brands. This has led to Bajaj Corp. gaining market share. The market-share ratio of Bajaj Corp. to Keo Karpin has risen from 4.34 to 4.44.
We expect a 13% earnings CAGR over FY14-16. We value the stock at a target price of `270, at a target PE of 18x FY16e earnings. We believe the success of Kailash Parbat and the No Marks acquisition would reduce dependence on Bajaj Almond Drops and erase the ‘single-product-company’ tag.
2 May 2014 Bajaj Corp – Market-share gains; Buy
Anand Rathi Research 5
Fig 12 – Mean PE and Standard deviation
Mean
+1SD
+2SD
-1SD
-2SD
0
5
10
15
20
25
Aug-
10
Nov
-10
Feb-
11
May
-11
Aug-
11
Nov
-11
Feb-
12
May
-12
Aug-
12
Nov
-12
Feb-
13
May
-13
Aug-
13
Oct
-13
Jan-
14
Apr-1
4
Source: Company, Anand Rathi Research
Risks
Higher raw-material prices.
More-than-expected competitive pressures.
Appendix Analyst Certification The views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. The research analysts are bound by stringent internal regulations and also legal and statutory requirements of the Securities and Exchange Board of India (hereinafter “SEBI”) and the analysts’ compensation are completely delinked from all the other companies and/or entities of Anand Rathi, and have no bearing whatsoever on any recommendation that they have given in the Research Report. Important Disclosures on subject companies Rating and Target Price History (as of 30 April 2014)
The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.
Anand Rathi Ratings Definitions
Analysts’ ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described in the Ratings Table below:
Ratings Guide Buy Hold Sell Large Caps (>US$1bn) >15% 5-15% <5% Mid/Small Caps (<US$1bn) >25% 5-25% <5%
Anand Rathi Research Ratings Distribution (as of 4 March 2014) Buy Hold Sell Anand Rathi Research stock coverage (182) 64% 27% 9% % who are investment banking clients 4% 0% 0% Other Disclosures This report has been issued by ARSSBL which is a SEBI regulated entity, and which is in full compliance with all rules and regulations as are applicable to its functioning and governance. The investors should note that ARSSBL is one of the companies comprising within ANAND RATHI group, and ANAND RATHI as a group consists of various companies which may include (but is not limited to) its subsidiaries, its affiliates, its group companies who may hold positions, views, stakes and may service the companies covered in this report independent of ARSSBL. Investors are cautioned to be aware that there could arise a potential conflict of interest in the views held by ARSSBL and other companies of Anand Rathi who maybe affiliated, connected or catering to the companies mentioned in the Research Report; even though, ARSSBL and Anand Rathi are fully complaint with all procedural and operational regulatory requirements. Thus, investors should not use this as a sole basis for making their investment decision and should consider the recommendations mentioned in the Research Report bearing in mind the aforementioned.
Further, the information herein has been obtained from various sources which we believe is reliable, and we do not guarantee its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes an offer, or an invitation to make an offer, to buy or sell any securities or any options, futures or other derivatives related to such securities (hereinafter referred to as “Related Investments”). ARSSBL and/or Anand Rathi may trade for their own accounts as market maker / jobber and/or arbitrageur in any securities of the companies mentioned in the Research Report or in related investments, and may be on taking a different position from the ones which haven been taken by the public orders. ARSSBL and/or Anand Rathi and its affiliates, directors, officers, and employees may have a long or short position in any securities of the companies mentioned in the Research Report or in Related Investments. ARSSBL and/or Anand Rathi, may from time to time, perform investment banking, investment management, financial advisory or any other services not explicitly mentioned herein, or solicit investment banking or other business from, any entity and/or company mentioned in this Research Report; however, the same shall have no bearing whatsoever on the specific recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the other companies of Anand Rathi, even though there might exist an inherent conflict of interest.
Furthermore, this Research Report is prepared for private circulation and use only. It does not have regard to the specific investment objectives, financial situation and the specific financial needs or objectives of any specific person who may receive this Research Report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this Research Report, and, should understand that statements regarding future prospects may or may not be realized, and we can not guarantee the same as analysis and valuation is a tool to enable investors to make investment decisions but, is not an exact and/or a precise science. Investors should note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Past performance is not necessarily a guide to future performance. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investments mentioned in this report.
Other Disclosures pertaining to distribution of research in the United States of America
This material was produced by ARSSBL, solely for information purposes and for the use of the recipient. It is not to be reproduced under any circumstances and is not to be copied or made available to any person other than the recipient. It is distributed in the United States of America by Enclave Capital LLC (19 West 44th Street, Suite 1700, New York, NY 10036) and elsewhere in the world by ARSSBL or an authorized affiliate of ARSSBL (such entities and any other entity, directly or indirectly, controlled by ARSSBL, the “Affiliates”). This document does not constitute an offer of, or an invitation by or on behalf of ARSSBL or its Affiliates or any other company to any person, to buy or sell any security. The information contained herein has been obtained from published information and other sources, which ARSSBL or its Affiliates consider to be reliable. None of ARSSBL or its Affiliates accepts any liability or responsibility whatsoever for the accuracy or completeness of any such information. All estimates, expressions of opinion and other subjective judgments contained herein are made as of the date of this document. Emerging securities markets may be subject to risks significantly higher than more established markets. In particular, the political and economic environment, company practices and market prices and volumes may be subject to significant variations. The ability to assess such risks may also be limited due to significantly lower information quantity and quality. By accepting this document, you agree to be bound by all the foregoing provisions.
1. ARSSBL or its Affiliates may or may not have been beneficial owners of the securities mentioned in this report.
2. ARSSBL or its affiliates may have or not managed or co-managed a public offering of the securities mentioned in the report in the past 12 months.
3. ARSSBL or its affiliates may have or not received compensation for investment banking services from the issuer of these securities in the past 12 months and do not expect to receive compensation for investment banking services from the issuer of these securities within the next three months.
4. However, one or more of ARSSBL or its Affiliates may, from time to time, have a long or short position in any of the securities mentioned herein and may buy or sell those securities or options thereon, either on their own account or on behalf of their clients.
5. As of the publication of this report, ARSSBL does not make a market in the subject securities.
6. ARSSBL or its Affiliates may or may not, to the extent permitted by law, act upon or use the above material or the conclusions stated above, or the research or analysis on which they are based before the material is published to recipients and from time to time, provide investment banking, investment management or other services for or solicit to seek to obtain investment banking, or other securities business from, any entity referred to in this report.
Enclave Capital LLC is distributing this document in the United States of America. ARSSBL accepts responsibility for its contents. Any US customer wishing to effect transactions in any securities referred to herein or options thereon should do so only by contacting a representative of Enclave Capital LLC.
Additional information on recommended securities/instruments is available on request.
Anand Rathi Shares and Stock Brokers Limited (hereinafter “ARSSBL”) is a full service brokerage and equities research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient and is to be circulated only within India and to no countries outside India. Disclosures and analyst certifications are present in Appendix. Anand Rathi Research India Equities
India I Equities
Retail
Result Update `
Rating: Hold Target Price: `366 Share Price: `364
Key data SHOP IN / SHOP.BO52-week high / low `444 / `318Sensex / Nifty 22418 / 66963-m average volume US$1.6m Market cap `30.2bn/US$487mShares outstanding 83m
Strong revenue growth. In 4QFY14, Shoppers Stop’s net sales (standalone) rose 18.1% yoy to `7.27bn. Comparable growth, at 8.4%, was quite low, resulting from lower growth by matured stores. Comparable volume growth improved 6.5%. With 3.3m members, First Citizen’s share of revenue was 72% (74% in 3QFY14 and 69% in 4QFY13). Consignment/SOR revenue came at 57.9% (55.3% in 3QFY14), bought-out items 39.4% and concession sales 2.7%. Revenue from Hypercity (a 51% subsidiary) increased 7.5%, with comparable sales declining 6.6% due to a cut in store area.
EBITDA margin declines. The standalone EBITDA margin dipped from 6.2% in 3QFY14 and 4.9% in 4QFY13 to 3.9% in the current quarter on the back of extended discount sales. In FY15/16, however, we expect it to expand following a slowdown in expansion and a rise in the proportion of private-label sales, to 20% (currently 15.6%). The company completed 70,000 sq.ft. of down-sizing in 4Q14, taking the total downsizing to 1.5lac sq.ft.
Other highlights. The area increased from 5.17m sq.ft. in 2QFY14 to 5.41m sq.ft. in 4QFY14 with the addition of two Shoppers Stop department stores (to 67 now), one MAC store and one Clinique store. In FY14, we expect the company to open eight stores, taking the store count to 75. Eight stores are likely to be added in FY16 & FY17.
Our take. With comparable growth recovering, we believe the standalone business is improving. The margin expansion, with an increase in private-label sales and with cost controls, would be a key growth driver. We believe Hypercity remains a drag and could return to profitability only in FY16. We maintain our Hold (call) on the stock and value it on a sum-of-parts basis at `366, using the PE multiple for the standalone business and m.cap/sales for Hypercity and Crossword. Risk. Slower growth in the economy.
In 4QFY14, Shoppers Stop’s net sales (standalone) rose 18.1% yoy to `7.27bn. Comparable growth, at 8.4%, was quite low consequent on the lower growth in matured stores. Comparable volume growth improved 6.5%. With 3.3m members, First Citizen’s share of revenue was 72% (74% in 3QFY14 and 69% in 4QFY13). Consignment/SOR revenue was 57.9% (55.3% in 3QFY14), bought-out items 39.4% and concession sales 2.7%.
Fig 8 – First Citizen members and their contribution to sales
1.5
1.7
1.9
2.1
2.3
2.5
2.7
2.9
3.1
3.3
3.5
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14
(m)
66
67
68
69
70
71
72
73
74
75
(%)
First citizen member First citizen member contribution to sales (RHS) Source: Company
Fig 9 – Comparable volume growth and average selling price
0
200
400
600
800
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Q1F
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(`)
-15
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0
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20(%)
ASP LTL Volume growth (RHS) Source: Company, Anand Rathi Research
Fig 10 – Comparable sales growth
-2%0%2%4%6%8%
10%12%14%16%18%20%22%24%
1QFY
11
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3QFY
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Source: Company
2 May 2014 Shoppers Stop – Recovery still some time away; Hold
Anand Rathi Research 4
Fig 11 – Sales/sq.ft. and total area
2.0
2.5
3.0
3.5
4.0
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(msf)
1,600
1,700
1,800
1,900
2,000
2,100
2,200
2,300
2,400
(`)
Area m sq.ft Sales per sq.ft. (RHS) Source: Company
EBITDA margin expands
The standalone EBITDA margin dipped from 6.2% in 3QFY14 and 4.9% in 4QFY13 to 3.9% in the current quarter on the back of extended discount sales. In FY15/16, however, we expect it to expand following the slowdown in expansion and a rise in the proportion of private-label sales to 20% (currently 15.6%).
The company completed 70,000 sq.ft. of down-sizing in 4Q14, taking the total downsizing to 1.5lac sq.ft. It will continue this exercise to further downsize by 1.25lac sq.ft. in FY15-16. The new stores will not be selling furniture, white goods, mobiles, etc., aiding an expansion in the EBITDA margin. So far, in Hypercity, eight stores are EBITDA positive.
The proportion of the apparel business increased to 63.2% compared with 60.3% in 4QFY13.
Fig 12 – Private-label sales and growth
600
750
900
1,050
1,200
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1,500
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3QFY
14
4QFY
14
(`m)
0
5
10
15
20
25
30
(%)
Private label sales Private label sales growth (RHS) Source: Company
Fig 13 – Private sales vs non-private sales
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1QFY
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4QFY
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Non Private labels Private labels
Source: Company
2 May 2014 Shoppers Stop – Recovery still some time away; Hold
Anand Rathi Research 5
Fig 14 – EBITDA and EBITDA margin
0
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(`m)
0
2
4
6
8
(%)
EBITDA EBITDA Margin (RHS) Source: Bloomberg, Company, Anand Rathi Research
Other Highlights
The area increased from 5.17m sq.ft. in 2QFY14 to 5.41m sq.ft. in 4QFY14 with the addition of two Shoppers Stop department stores (to 67 now), an MAC store and a Clinique store. In FY14, we expect the company to open eight stores, taking its store count to 75. Eight stores are likely to be added in FY16 & FY17.
Fig 15 – Revenue vs store growth
0
10
20
30
40
50
60
70
Q1F
Y12
Q2F
Y12
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Y12
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(nos.)
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4,250
5,000
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6,500
7,250
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8,750
(`m)
Shoppers stop store Home Stores Mother care
MAC/Estee/Clinique Revenue (RHS) Source: Company, Anand Rathi Research
Fig 16 – Store count Stores Nos.
Shoppers Stop Department stores 67
Crossword 44
Homestop 18
Mother Care 4
MAC/Estee/Clinique/Bobbi Brown 66
Hypercity 15
Total 214
Source: Company
Hypercity remains a drag
Revenue from Hypercity (a 51% subsidiary) increased 7.5% with comparable sales declining 6.6% due to a cut in the store area. The gross margin expanded
2 May 2014 Shoppers Stop – Recovery still some time away; Hold
Anand Rathi Research 6
90bps yoy following more sales of apparel, which now contributes over 12.6% of sales. The management plans to increase it to ~15% over a few quarters. The company, however, suffered a `140m/`103m EBITDA/PAT loss (adjusting for one time gain from property options).
Valuations
We maintain a Hold recommendation, and value the stock on a sum-of-parts basis at `366, using the PE multiple for the standalone business and m.cap/sales for Hypercity and Crossword.
Fig 19 – Sum-of-parts calculation
Basis of Valuation Driver Value (`m) Multiple (x) Value (`m) Value Per
share (`)Standalone Business P/E Mar'16 1,239 16.0 19,826 239 Other Businesses Hypercity M Cap /sales - Mar'16 11,055 1.5 16,582 102 Crossword M Cap /sales - Mar'16 1,381 1.5 2,071 25
Fair Value (per share) 38,479 366 Source: Anand Rathi Research
Risks
Revival in the macro-economic scenario
Increase/decrease in the pace of expansion.
Fig 17 – Sales/sq.ft. and Total area (Hypercity)
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1QFY
12
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(msf)
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500
1,000
1,500
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(`)
Area Sales per sq. ft. (RHS)
Source: Company, Anand Rathi Research
Fig 18 – Gross and EBITDA margins (Hypercity)
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
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(%)
Gross margin EBITDA margin Source: Company, Anand Rathi Research
Appendix Analyst Certification The views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. The research analysts are bound by stringent internal regulations and also legal and statutory requirements of the Securities and Exchange Board of India (hereinafter “SEBI”) and the analysts’ compensation are completely delinked from all the other companies and/or entities of Anand Rathi, and have no bearing whatsoever on any recommendation that they have given in the Research Report. Important Disclosures on subject companies Rating and Target Price History (as of 30 April 2014)
Shoppers Stop
1
2
250
300
350
400
450
500
Jan-
12
Apr-1
2
Jul-1
2
Oct
-12
Jan-
13
Apr-1
3
Jul-1
3
Oct
-13
Jan-
14
Apr-1
4
Date Rating TP (`)
Share Price (`)
1 15-Jan-13 Hold 440 450 2 29-Oct-13 Hold 357 338
The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.
Anand Rathi Ratings Definitions
Analysts’ ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described in the Ratings Table below:
Ratings Guide Buy Hold Sell Large Caps (>US$1bn) >15% 5-15% <5% Mid/Small Caps (<US$1bn) >25% 5-25% <5%
Anand Rathi Research Ratings Distribution (as of 4 March 2014) Buy Hold Sell Anand Rathi Research stock coverage (182) 64% 27% 9% % who are investment banking clients 4% 0% 0% Other Disclosures This report has been issued by ARSSBL which is a SEBI regulated entity, and which is in full compliance with all rules and regulations as are applicable to its functioning and governance. The investors should note that ARSSBL is one of the companies comprising within ANAND RATHI group, and ANAND RATHI as a group consists of various companies which may include (but is not limited to) its subsidiaries, its affiliates, its group companies who may hold positions, views, stakes and may service the companies covered in this report independent of ARSSBL. Investors are cautioned to be aware that there could arise a potential conflict of interest in the views held by ARSSBL and other companies of Anand Rathi who maybe affiliated, connected or catering to the companies mentioned in the Research Report; even though, ARSSBL and Anand Rathi are fully complaint with all procedural and operational regulatory requirements. Thus, investors should not use this as a sole basis for making their investment decision and should consider the recommendations mentioned in the Research Report bearing in mind the aforementioned.
Further, the information herein has been obtained from various sources which we believe is reliable, and we do not guarantee its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes an offer, or an invitation to make an offer, to buy or sell any securities or any options, futures or other derivatives related to such securities (hereinafter referred to as “Related Investments”). ARSSBL and/or Anand Rathi may trade for their own accounts as market maker / jobber and/or arbitrageur in any securities of the companies mentioned in the Research Report or in related investments, and may be on taking a different position from the ones which haven been taken by the public orders. ARSSBL and/or Anand Rathi and its affiliates, directors, officers, and employees may have a long or short position in any securities of the companies mentioned in the Research Report or in Related Investments. ARSSBL and/or Anand Rathi, may from time to time, perform investment banking, investment management, financial advisory or any other services not explicitly mentioned herein, or solicit investment banking or other business from, any entity and/or company mentioned in this Research Report; however, the same shall have no bearing whatsoever on the specific recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the other companies of Anand Rathi, even though there might exist an inherent conflict of interest.
Furthermore, this Research Report is prepared for private circulation and use only. It does not have regard to the specific investment objectives, financial situation and the specific financial needs or objectives of any specific person who may receive this Research Report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this Research Report, and, should understand that statements regarding future prospects may or may not be realized, and we can not guarantee the same as analysis and valuation is a tool to enable investors to make investment decisions but, is not an exact and/or a precise science. Investors should note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Past performance is not necessarily a guide to future performance. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investments mentioned in this report.
Other Disclosures pertaining to distribution of research in the United States of America
This material was produced by ARSSBL, solely for information purposes and for the use of the recipient. It is not to be reproduced under any circumstances and is not to be copied or made available to any person other than the recipient. It is distributed in the United States of America by Enclave Capital LLC (19 West 44th Street, Suite 1700, New York, NY 10036) and elsewhere in the world by ARSSBL or an authorized affiliate of ARSSBL (such entities and any other entity, directly or indirectly, controlled by ARSSBL, the “Affiliates”). This document does not constitute an offer of, or an invitation by or on behalf of ARSSBL or its Affiliates or any other company to any person, to buy or sell any security. The information contained herein has been obtained from published information and other sources, which ARSSBL or its Affiliates consider to be reliable. None of ARSSBL or its Affiliates accepts any liability or responsibility whatsoever for the accuracy or completeness of any such information. All estimates, expressions of opinion and other subjective judgments contained herein are made as of the date of this document. Emerging securities markets may be subject to risks significantly higher than more established markets. In particular, the political and economic environment, company practices and market prices and volumes may be subject to significant variations. The ability to assess such risks may also be limited due to significantly lower information quantity and quality. By accepting this document, you agree to be bound by all the foregoing provisions.
1. ARSSBL or its Affiliates may or may not have been beneficial owners of the securities mentioned in this report.
2. ARSSBL or its affiliates may have or not managed or co-managed a public offering of the securities mentioned in the report in the past 12 months.
3. ARSSBL or its affiliates may have or not received compensation for investment banking services from the issuer of these securities in the past 12 months and do not expect to receive compensation for investment banking services from the issuer of these securities within the next three months.
4. However, one or more of ARSSBL or its Affiliates may, from time to time, have a long or short position in any of the securities mentioned herein and may buy or sell those securities or options thereon, either on their own account or on behalf of their clients.
5. As of the publication of this report, ARSSBL does not make a market in the subject securities.
6. ARSSBL or its Affiliates may or may not, to the extent permitted by law, act upon or use the above material or the conclusions stated above, or the research or analysis on which they are based before the material is published to recipients and from time to time, provide investment banking, investment management or other services for or solicit to seek to obtain investment banking, or other securities business from, any entity referred to in this report.
Enclave Capital LLC is distributing this document in the United States of America. ARSSBL accepts responsibility for its contents. Any US customer wishing to effect transactions in any securities referred to herein or options thereon should do so only by contacting a representative of Enclave Capital LLC.
Additional information on recommended securities/instruments is available on request.
Anand Rathi Shares and Stock Brokers Limited (hereinafter “ARSSBL”) is a full service brokerage and equities research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient and is to be circulated only within India and to no countries outside India. Disclosures and analyst certifications are present in Appendix. Anand Rathi Research India Equities
India I Equities Cement
Result Update `
Rating: Buy Target Price: `60 Share Price: `49
Key data ORCMNT IN 52-week high / low `60 / `30Sensex / Nifty 22418 / 66963-m average volume US$0.05mMarket cap `10bn / US$167Shares outstanding 204.9m
In-line 4Q; recovery ahead, expansion on track; Buy
Key takeaways
Dispatches up 8% yoy. Orient Cement’s 4QFY14 dispatches rose 8% yoy (22% qoq), to 1.2m tons, better than regional growth rate. It operated at 96% utilisation in 4Q and 84% in FY14. Average realisation, though, fell 8% yoy (4% qoq) to `3,290 a ton, below estimates. The drop can be attributed largely to price decline in AP (30% of sales). Revenue slid 1% yoy (up 16% qoq).
EBITDA falls 27% yoy; rises 4% qoq. EBITDA fell 27% yoy, though qoq it rose 4%, and was 7% over our estimates. EBITDA/ton came at `425 (vs `630 in 4QFY13 and `495 in 3QFY14) better than we expected, because of lower power & fuel costs. PAT dipped 27% yoy, in line with the EBITDA decline. Cost deflation stemmed chiefly from decline in freight (10% yoy), fixed costs (11% yoy) and static power & fuel charges.
Capacity addition in progress. Work on the proposed 3m-ton greenfield project in Gulbarga, Karnataka, is underway, with most of the land and clearances in place. Equipment has been ordered and commissioning is slated for 1QFY16. Trial production is expected to start from Apr’15 and commercial production from Jun’15. Capex of `17.2bn is to be funded through a mix of debt (`12bn) and internal accruals. Financial closure has been achieved. The project includes associated infrastructure such as a 45 MW thermal plant, a 7-MW waste-heat-recovery plant and a railway line.
Our take. Orient Cement’s EBITDA and PAT was largely in-line with estimates due to lower-than-expected costs. We expect better performance in FY15 given expectation of better cement prices in Maharashtra and AP. Our fair price is `60, based on 7x Mar’16e EV/EBITDA. The implied EV/ton is US$52, with a PE of 12x. The stock is attractively priced when benchmarked against midcap peers. A key advantage is its low-cost cement production, resulting in industry-leading RoE and RoCE. Risk. Drop in cement prices.
Share capital NA 205 205 205 205 Reserves & surplus NA 7,363 8,083 9,262 9,923 Net worth NA 7,567 8,288 9,467 10,128 Minority interest NA - - - -Total Debt NA 1,489 3,277 10,777 13,277 Def. tax liab. (net) NA 1,293 1,266 1,266 1,516 Capital employed NA 10,350 12,830 21,509 24,920 Net fixed assets NA 8,935 11,532 20,226 23,669 Investments NA 0.0 0.1 0.1 0.1 - of which, Liquid 0.0 0.0 0.0 0.0 Net working capital NA 652 482 574 693 Cash and bank balance NA 763 816 710 558 Capital deployed NA 10,350 12,830 21,509 24,920 Net debt NA 726 2,461 10,067 12,718 WC days NA 14 14 11 11 Book value (`/sh) NA 37 40 46 49 Source: Company, Anand Rathi Research
Fig 4 – Ratio analysis @ `49 Year-end: Mar FY12 FY13 FY14 FY15e FY16e
Orient Cement’s 4QFY14 dispatches rose 8% yoy (22% qoq) to 1.2m tons, better than the regional growth rate. It was marginally lower than our estimate. It operated at 96% utilisation in 4Q and 84% in FY14. Average realisation though fell 8% yoy (4% qoq) to `3,290 a ton, lower than our estimate. The drop can be attributed largely to the price decline in AP (30% of sales). Revenue slid 1% yoy (up 16% qoq).
EBITDA fell 27% yoy, though qoq it rose 4%, and was 7% over our estimation. EBITDA/ton came at `425 (vs `630 in 4QFY13 and `495 in 3QFY14) better than we expected, because of lower power &fuel costs. PAT dipped 27% yoy, in line with the EBITDA decline. Cost deflation stemmed chiefly from decline in freight (10% yoy), fixed costs (11% yoy) and static power & fuel charges. Better availability of coal from Singareni Collieries arrested any escalation in fuel costs.
Key updates
Work on the proposed 3m-ton greenfield project in Gulbarga, Karnataka, is underway, with most of the land and clearances in place. Equipment has been ordered and commissioning is slated for 1QFY16. Trial production is expected to start from Apr’15 and commercial production from Jun’15. Capex of `17.2bn is to be funded through a mix of debt (`12bn) and internal accruals. It has already spent `5.5bn till Mar’14. Financial closure has been achieved. The company has taken a short-term loan of `3bn as on Mar’14, which will be repaid once the banks start releasing the term loans.
The project includes associated infrastructure such as a 45 MW thermal plant, a 7-MW waste-heat-recovery plant and a railway line.
2 May 2014 Orient Cement – In-line 4Q; recovery ahead, expansion on track; Buy
Anand Rathi Research 4
Valuations The stock is attractively priced when benchmarked against peers in the mid- to small-cap space. The company’s key competitive advantage is that it is a low-cost cement producer, resulting in industry-leading RoE and RoCE. Our fair price is `60, based on 7x Mar’16e EV/EBITDA. The implied EV per ton is US$52, with a PE of 12x. We have a Buy rating on the stock.
Risks
A sharp spike in coal prices.
Drop in cement prices.
Fig 9 – Peer comparison FY15e EV/ton EV/EBITDA PE P/BV RoE RoCE Capacity EBITDA/ton Net Gearing
Appendix Analyst Certification The views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. The research analysts are bound by stringent internal regulations and also legal and statutory requirements of the Securities and Exchange Board of India (hereinafter “SEBI”) and the analysts’ compensation are completely delinked from all the other companies and/or entities of Anand Rathi, and have no bearing whatsoever on any recommendation that they have given in the Research Report. Important Disclosures on subject companies Rating and Target Price History (as of 30 April 2014)
The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.
Anand Rathi Ratings Definitions
Analysts’ ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described in the Ratings Table below:
Ratings Guide Buy Hold Sell Large Caps (>US$1bn) >15% 5-15% <5% Mid/Small Caps (<US$1bn) >25% 5-25% <5%
Anand Rathi Research Ratings Distribution (as of 4 March 2014) Buy Hold Sell Anand Rathi Research stock coverage (182) 64% 27% 9% % who are investment banking clients 4% 0% 0% Other Disclosures This report has been issued by ARSSBL which is a SEBI regulated entity, and which is in full compliance with all rules and regulations as are applicable to its functioning and governance. The investors should note that ARSSBL is one of the companies comprising within ANAND RATHI group, and ANAND RATHI as a group consists of various companies which may include (but is not limited to) its subsidiaries, its affiliates, its group companies who may hold positions, views, stakes and may service the companies covered in this report independent of ARSSBL. Investors are cautioned to be aware that there could arise a potential conflict of interest in the views held by ARSSBL and other companies of Anand Rathi who maybe affiliated, connected or catering to the companies mentioned in the Research Report; even though, ARSSBL and Anand Rathi are fully complaint with all procedural and operational regulatory requirements. Thus, investors should not use this as a sole basis for making their investment decision and should consider the recommendations mentioned in the Research Report bearing in mind the aforementioned.
Further, the information herein has been obtained from various sources which we believe is reliable, and we do not guarantee its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes an offer, or an invitation to make an offer, to buy or sell any securities or any options, futures or other derivatives related to such securities (hereinafter referred to as “Related Investments”). ARSSBL and/or Anand Rathi may trade for their own accounts as market maker / jobber and/or arbitrageur in any securities of the companies mentioned in the Research Report or in related investments, and may be on taking a different position from the ones which haven been taken by the public orders. ARSSBL and/or Anand Rathi and its affiliates, directors, officers, and employees may have a long or short position in any securities of the companies mentioned in the Research Report or in Related Investments. ARSSBL and/or Anand Rathi, may from time to time, perform investment banking, investment management, financial advisory or any other services not explicitly mentioned herein, or solicit investment banking or other business from, any entity and/or company mentioned in this Research Report; however, the same shall have no bearing whatsoever on the specific recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the other companies of Anand Rathi, even though there might exist an inherent conflict of interest.
Furthermore, this Research Report is prepared for private circulation and use only. It does not have regard to the specific investment objectives, financial situation and the specific financial needs or objectives of any specific person who may receive this Research Report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this Research Report, and, should understand that statements regarding future prospects may or may not be realized, and we can not guarantee the same as analysis and valuation is a tool to enable investors to make investment decisions but, is not an exact and/or a precise science. Investors should note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Past performance is not necessarily a guide to future performance. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investments mentioned in this report.
Other Disclosures pertaining to distribution of research in the United States of America
This material was produced by ARSSBL, solely for information purposes and for the use of the recipient. It is not to be reproduced under any circumstances and is not to be copied or made available to any person other than the recipient. It is distributed in the United States of America by Enclave Capital LLC (19 West 44th Street, Suite 1700, New York, NY 10036) and elsewhere in the world by ARSSBL or an authorized affiliate of ARSSBL (such entities and any other entity, directly or indirectly, controlled by ARSSBL, the “Affiliates”). This document does not constitute an offer of, or an invitation by or on behalf of ARSSBL or its Affiliates or any other company to any person, to buy or sell any security. The information contained herein has been obtained from published information and other sources, which ARSSBL or its Affiliates consider to be reliable. None of ARSSBL or its Affiliates accepts any liability or responsibility whatsoever for the accuracy or completeness of any such information. All estimates, expressions of opinion and other subjective judgments contained herein are made as of the date of this document. Emerging securities markets may be subject to risks significantly higher than more established markets. In particular, the political and economic environment, company practices and market prices and volumes may be subject to significant variations. The ability to assess such risks may also be limited due to significantly lower information quantity and quality. By accepting this document, you agree to be bound by all the foregoing provisions.
1. ARSSBL or its Affiliates may or may not have been beneficial owners of the securities mentioned in this report.
2. ARSSBL or its affiliates may have or not managed or co-managed a public offering of the securities mentioned in the report in the past 12 months.
3. ARSSBL or its affiliates may have or not received compensation for investment banking services from the issuer of these securities in the past 12 months and do not expect to receive compensation for investment banking services from the issuer of these securities within the next three months.
4. However, one or more of ARSSBL or its Affiliates may, from time to time, have a long or short position in any of the securities mentioned herein and may buy or sell those securities or options thereon, either on their own account or on behalf of their clients.
5. As of the publication of this report, ARSSBL does not make a market in the subject securities.
6. ARSSBL or its Affiliates may or may not, to the extent permitted by law, act upon or use the above material or the conclusions stated above, or the research or analysis on which they are based before the material is published to recipients and from time to time, provide investment banking, investment management or other services for or solicit to seek to obtain investment banking, or other securities business from, any entity referred to in this report.
Enclave Capital LLC is distributing this document in the United States of America. ARSSBL accepts responsibility for its contents. Any US customer wishing to effect transactions in any securities referred to herein or options thereon should do so only by contacting a representative of Enclave Capital LLC.
Additional information on recommended securities/instruments is available on request.
Anand Rathi Shares and Stock Brokers Limited (hereinafter “ARSSBL”) is a full service brokerage and equities research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient and is to be circulated only within India and to no countries outside India. Disclosures and analyst certifications are present in Appendix. Anand Rathi Research India Equities
Healthy volume growth. Boosted by greater capacity, Swaraj Engines hit its highest ever quarterly sales in 4QFY14, its engine volumes growing 40.8% yoy. Qoq growth was also good at 4%. This was, much better than our expectations. Tractor sales of M&M, for whose ‘Swaraj’ family of tractors Swaraj Engines sells engines, were up just 11.5% yoy and lower 29.4% qoq. This indicates that the Swaraj family of tractors continues to gain prominence within M&M’s product mix. Driven by strong volume growth, total income grew 39.1% yoy to `1.6bn as realisations were lower 1.2% yoy.
EBITDA margin improves. EBITDA margin, at 15.1%, was 80bps higher yoy and 60bps qoq. Lower margin was mainly attributable to a lower qoq RM/sales ratio (by 60bps), while other-expenditure-to-sales ratio was 90bps lower yoy.
Profit less than anticipated. On the back of 46.4% yoy, EBITDA growth, profit growth was lower at 25.3% yoy to Rs175m (bettering expectations). This was due to lower non-operating income and an effective tax rate higher by 160bps.
Our take. The results bettered our expectations chiefly because of better-than-expected volumes (it may be noted that 3Q volumes were a shade lower than expected). Growth ahead would be boosted by a better performance by the Swaraj division of tractors as compared to the rest of the tractor industry. For FY15 however, the tractor industry growth outlook is likely to be under pressure. We expect tractors to do well in the long run, led by more scope for productivity, low penetration, need for mechanization and shortage of labour. Greater capacity could prove to be a huge fillip. We maintain a Buy. At the ruling market price, the stock trades at 11.7x FY15e and 10.5x FY16e. We value it at 12.5x Sep’15e earnings and arrive at a price target of `780. Risks. Commodity price rises, loss of market share by M&M, tractor cycle slowdown, labour strife.
2 May 2014 Swaraj Engines – Results surprise, maintain Buy
Anand Rathi Research 3
Result highlights Fig 7 – 4QFY14 Results vs Expectations (`m) 4QFY14 4QFY14e Var % 4QFY13 YoY % 3QFY14 QoQ %
Revenue 1,594 1,260 26.4 1,145 39.1 1,502 6.1
EBITDA 241 188 28.2 164 46.4 218 10.4
EBITDA Margin (%) 15.1 14.9 21 14.3 75 14.5 58
Adjusted Profit 175 142 23.1 139 25.3 161 8.7
EPS (`) 14.1 11.4 23.1 11.2 25.3 12.9 8.7
Source: Company, Anand Rathi Research
Volumes better qoq and yoy
Boosted by greater capacity, Swaraj Engines hit its highest ever quarterly sales in 4QFY14, its engine volumes growing 40.8% yoy. Qoq growth was also good at 4%. This was, much better than our expectations. Tractor sales of M&M, for whose ‘Swaraj’ family of tractors Swaraj Engines sells engines were up just 11.5% yoy and lower 29.4% qoq. This indicates that the Swaraj family of tractors continues to gain prominence within M&M’s product mix.
Driven by strong volume growth, total income grew 39.1% yoy to `1.6bn as realisations were lower 1.2% yoy. The EBITDA margin, at 15.1%, was 80bps higher yoy and 60bps qoq. The lower margin was mainly attributable to a lower qoq RM/sales ratio (by 60bps), while the other-expenditure-to-sales ratio was 90bps lower yoy. On the back of 46.4% yoy EBITDA growth, profit growth was lower at 25.3% yoy to Rs175m (bettering expectations). This was due to lower non-operating income and an effective tax rate higher by 160bps.
Capacity expansion
Swaraj Engines benefited from its timely expansion in FY13 in time for the tractor-cycle recovery in FY14. With this capacity likely to be fully utilised in the near-term itself, the Board has approved further capacity expansion from 75,000 units to 105,000 units over the next 1.5 years. The cost involved would be `380m, to be fully financed from internal resources. Besides capacity augmentation, the company is also to focus on engineering and quality.
2 May 2014 Swaraj Engines – Results surprise, maintain Buy
Anand Rathi Research 4
Per-unit parameters were better qoq. Realisations were 1.2% lower yoy, but higher 2.1% qoq. EBITDA per engine was up 4% yoy and 6.2% qoq; while contribution per engine while lower 1.9% yoy was up 4.6% qoq. The profit per engine was 11% lower yoy, but higher 4,6% qoq.
Fig 9 – EBITDA margin higher yoy
16.2
14.7
15.3
14.8
14.314.5
15.1
15.515.4 15.3
15.014.9
140
160
180
200
220
240
260
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
FY12 FY13 FY14
14
15
16
17
EBITDA EBITDA as a % of Sales (RHS)
Source: Company, Anand Rathi Research
Fig 10 – RM/Sales lower qoq
77.0
75.5
77.9
75.3
76.7
75.6
76.3
75.6
76.6
75.3
76.4
75.8
700
800
900
1,000
1,100
1,200
1,300
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
FY12 FY13 FY14
75.0
76.0
77.0
78.0
Raw-material cost RM cost as a % of Sales (RHS)
Source: Company, Anand Rathi Research
Fig 11 – Realisation–per-vehicle higher qoq
7.1
9.4
5.0
0.9
(1.9)(3.1)
(0.5)(1.2)
7.1
4.76.0
(1.1)
78,000
79,000
80,000
81,000
82,000
83,000
84,000
85,000
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
FY12 FY13 FY14
(4.0)
(2.0)
-
2.0
4.0
6.0
8.0
10.0
Realisation yoy change (RHS)
Source: Company, Anand Rathi Research
Fig 12 – Contribution-per-vehicle lower yoy
(1.3)
5.4
(1.8)
14.8
7.15.9
(0.8)(1.9)
4.6
(0.5) (1.1) (1.9)
17,000
18,000
19,000
20,000
21,000
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
FY12 FY13 FY14
-5
0
5
10
15
20
Contribution yoy change (RHS)
Source: Company, Anand Rathi Research
Fig 13 – EBITDA-per-vehicle up yoy
(1.2)
(9.4)
(2.0)
4.9
0.0
9.2
(5.8)
(2.1)
4.0
(5.8)
(3.4)
(5.4)
11,500
11,900
12,300
12,700
13,100
13,500
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
FY12 FY13 FY14
-10
-6
-2
2
6
10
EBITDA yoy change (RHS)
Source: Company, Anand Rathi Research
Fig 14 – Profit-per-vehicle also higher qoq
4.1
(2.9)
3.9
0.0
6.0
(8.8)
8.3
(3.2) (3.7)
(11.0)
7.0
(4.5)
8,800
9,000
9,200
9,400
9,600
9,800
10,000
10,200
10,400
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
FY12 FY13 FY14
-15
-10
-5
0
5
10
Profit yoy change (RHS)
Source: Company, Anand Rathi Research
2 May 2014 Swaraj Engines – Results surprise, maintain Buy
Anand Rathi Research 5
Valuations The results bettered our expectations chiefly because of better-than-expected volumes (it may be noted that 3Q volumes were a shade lower than expected). Growth ahead would be boosted by a better performance by the Swaraj division of tractors as compared to the rest of the tractor industry.
For FY15 however, the tractor industry growth outlook is likely to be under pressure. We expect tractors to do well in the long run, led by more scope for productivity, low penetration, need for mechanization and shortage of labour. Greater capacity could prove to be a huge fillip. We maintain a Buy. At the ruling market price, the stock trades at 11.7x FY15e and 10.5x FY16e. We value it at 12.5x Sep’15e earnings and arrive at a price target of `780.
Risks. Commodity price rises, loss of market share by M&M, tractor cycle slowdown, labour strife.
Fig 15 – EV/EBITDA Band
Mean
+1SD
+2SD
-1SD
-2SD
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
Mar
-10
Jun-
10
Sep-
10
Dec
-10
Mar
-11
Jun-
11
Sep-
11
Dec
-11
Mar
-12
Jun-
12
Sep-
12
Dec
-12
Mar
-13
Jun-
13
Sep-
13
Dec
-13
Mar
-14
Source: company, Anand Rathi Research
Appendix Analyst Certification The views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. The research analysts are bound by stringent internal regulations and also legal and statutory requirements of the Securities and Exchange Board of India (hereinafter “SEBI”) and the analysts’ compensation are completely delinked from all the other companies and/or entities of Anand Rathi, and have no bearing whatsoever on any recommendation that they have given in the Research Report. Important Disclosures on subject companies Rating and Target Price History (as of 30 April 2014)
The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.
Anand Rathi Ratings Definitions
Analysts’ ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described in the Ratings Table below:
Ratings Guide Buy Hold Sell Large Caps (>US$1bn) >15% 5-15% <5% Mid/Small Caps (<US$1bn) >25% 5-25% <5%
Anand Rathi Research Ratings Distribution (as of 4 March 2014) Buy Hold Sell Anand Rathi Research stock coverage (182) 64% 27% 9% % who are investment banking clients 4% 0% 0% Other Disclosures This report has been issued by ARSSBL which is a SEBI regulated entity, and which is in full compliance with all rules and regulations as are applicable to its functioning and governance. The investors should note that ARSSBL is one of the companies comprising within ANAND RATHI group, and ANAND RATHI as a group consists of various companies which may include (but is not limited to) its subsidiaries, its affiliates, its group companies who may hold positions, views, stakes and may service the companies covered in this report independent of ARSSBL. Investors are cautioned to be aware that there could arise a potential conflict of interest in the views held by ARSSBL and other companies of Anand Rathi who maybe affiliated, connected or catering to the companies mentioned in the Research Report; even though, ARSSBL and Anand Rathi are fully complaint with all procedural and operational regulatory requirements. Thus, investors should not use this as a sole basis for making their investment decision and should consider the recommendations mentioned in the Research Report bearing in mind the aforementioned.
Further, the information herein has been obtained from various sources which we believe is reliable, and we do not guarantee its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes an offer, or an invitation to make an offer, to buy or sell any securities or any options, futures or other derivatives related to such securities (hereinafter referred to as “Related Investments”). ARSSBL and/or Anand Rathi may trade for their own accounts as market maker / jobber and/or arbitrageur in any securities of the companies mentioned in the Research Report or in related investments, and may be on taking a different position from the ones which haven been taken by the public orders. ARSSBL and/or Anand Rathi and its affiliates, directors, officers, and employees may have a long or short position in any securities of the companies mentioned in the Research Report or in Related Investments. ARSSBL and/or Anand Rathi, may from time to time, perform investment banking, investment management, financial advisory or any other services not explicitly mentioned herein, or solicit investment banking or other business from, any entity and/or company mentioned in this Research Report; however, the same shall have no bearing whatsoever on the specific recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the other companies of Anand Rathi, even though there might exist an inherent conflict of interest.
Furthermore, this Research Report is prepared for private circulation and use only. It does not have regard to the specific investment objectives, financial situation and the specific financial needs or objectives of any specific person who may receive this Research Report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this Research Report, and, should understand that statements regarding future prospects may or may not be realized, and we can not guarantee the same as analysis and valuation is a tool to enable investors to make investment decisions but, is not an exact and/or a precise science. Investors should note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Past performance is not necessarily a guide to future performance. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investments mentioned in this report.
Other Disclosures pertaining to distribution of research in the United States of America
This material was produced by ARSSBL, solely for information purposes and for the use of the recipient. It is not to be reproduced under any circumstances and is not to be copied or made available to any person other than the recipient. It is distributed in the United States of America by Enclave Capital LLC (19 West 44th Street, Suite 1700, New York, NY 10036) and elsewhere in the world by ARSSBL or an authorized affiliate of ARSSBL (such entities and any other entity, directly or indirectly, controlled by ARSSBL, the “Affiliates”). This document does not constitute an offer of, or an invitation by or on behalf of ARSSBL or its Affiliates or any other company to any person, to buy or sell any security. The information contained herein has been obtained from published information and other sources, which ARSSBL or its Affiliates consider to be reliable. None of ARSSBL or its Affiliates accepts any liability or responsibility whatsoever for the accuracy or completeness of any such information. All estimates, expressions of opinion and other subjective judgments contained herein are made as of the date of this document. Emerging securities markets may be subject to risks significantly higher than more established markets. In particular, the political and economic environment, company practices and market prices and volumes may be subject to significant variations. The ability to assess such risks may also be limited due to significantly lower information quantity and quality. By accepting this document, you agree to be bound by all the foregoing provisions.
1. ARSSBL or its Affiliates may or may not have been beneficial owners of the securities mentioned in this report.
2. ARSSBL or its affiliates may have or not managed or co-managed a public offering of the securities mentioned in the report in the past 12 months.
3. ARSSBL or its affiliates may have or not received compensation for investment banking services from the issuer of these securities in the past 12 months and do not expect to receive compensation for investment banking services from the issuer of these securities within the next three months.
4. However, one or more of ARSSBL or its Affiliates may, from time to time, have a long or short position in any of the securities mentioned herein and may buy or sell those securities or options thereon, either on their own account or on behalf of their clients.
5. As of the publication of this report, ARSSBL does not make a market in the subject securities.
6. ARSSBL or its Affiliates may or may not, to the extent permitted by law, act upon or use the above material or the conclusions stated above, or the research or analysis on which they are based before the material is published to recipients and from time to time, provide investment banking, investment management or other services for or solicit to seek to obtain investment banking, or other securities business from, any entity referred to in this report.
Enclave Capital LLC is distributing this document in the United States of America. ARSSBL accepts responsibility for its contents. Any US customer wishing to effect transactions in any securities referred to herein or options thereon should do so only by contacting a representative of Enclave Capital LLC.
Additional information on recommended securities/instruments is available on request.
Anand Rathi Shares and Stock Brokers Limited (hereinafter “ARSSBL”) is a full service brokerage and equities research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient and is to be circulated only within India and to no countries outside India. Disclosures and analyst certifications are present in Appendix. Anand Rathi Research India Equities
Chemical
Result UpdateIndia I Equities
`
Rating: Hold Target Price: `71 Share Price: `62
Key data PHCB IN /PHIL.BO
52-week high / low `76/ `32
Sensex / Nifty 22418 / 6696
3-m average volume US$0.1m
Market cap `2.1bn / US$35.5m
Shares outstanding 34.5m
Shareholding pattern (%) Mar ’14 Dec ’13 Sep ’13
Promoters 53.4 53.0 52.6
- of which, Pledged - - -
Free Float 46.6 47.0 47.4
- Foreign Institutions 9.8 9.8 9.2
- Domestic Institutions 2.8 2.8 3.9
- Public 33.8 34.1 34.1
2 May 2014
Phillips Carbon Black
Performance constrained, improvement in sight; Hold
Key takeaways
Sales flat for FY14, up 11% yoy for 4Q. For 4QFY14, Phillips Carbon Black (PCB) reported `5.9bn in revenue against our estimates of `5.7bn (up 11% yoy). Sales in the carbon black (CB) division grew 12% to `5.8bn, while in power it declined 27% to `0.14bn. Revenue for FY14 was flat at `22.7bn with CB & power divisions contributing ~96% (at `22.1bn) and ~4% (at`0.6bn) respectively. Volumes for 4QFY14 rose 11% yoy to 77,298MT, leading to yoy growth in revenue. There was a 2% decline in FY14 volume at 2,87,839 MT, resulting in flat revenue for the year. Export volumes increased 26% yoy.
Modest EBITDA margin for 4Q, decline in FY14. EBIDTA came in at `319m, 6% above our estimate. EBIDTA margin was 5.4%, 29bps lower yoy, as the company was unable to fully pass on higher input costs. Margin in CB is down 87bps yoy to 1.9%, while it rose in power. EBIDTA margin for FY14 dipped 210bps to 1.1% due to high forex loss incurred in the year. In 4QFY14, net realization in power was 17% lower than 4QFY14 figures.
Net profit of `20m for 4Q; FY14 profitability severely hit. PCB reported `20m profit (`49.4m profit 4QFY13), better than our estimates. Decline in the quarter is due to high finance cost. For FY14, it reported net loss of `866mn, up from `218mn FY13, owing to the high finance cost and forex loss.
Our take. The company has commissioned 50,000MT carbon black line at Kochi Plant. With this the total capacity is 4,72,000 MTPA. In view of global developments, project work at Vietnam is under review. We value the stock at a target PE of 4x FY16e earnings. We retain a Hold, with a revised target of `71. Risks. A slowdown among tyre manufacturers and adverse forex movements.
Financials (YE Mar) FY15e FY16e
Sales (`m) 27,415 31,523 Net profit (`m) 406 701 EPS (`) 11.8 20.3 Growth (%) (146.9) 72.5 PE (x) 5.3 3.0 PBV (x) 0.4 0.4 RoE (%) 7.8 12.2 RoCE (%) 8.7 10.8 Dividend yield (%) 0.8 0.8 Net gearing (%) 190.6 174.5 Source: Anand Rathi Research
Year end 31 March 4QFY13 4QFY14 % yoy FY13 FY14 % yoy
CB sales were 12% higher yoy. The EBIT margin in this division rose 266bps qoq to (1.9%). Capital employed in this division increased sharply, by 28% yoy. Volumes increased 11% yoy to 77,298 MT. Export volumes rose 26% yoy, though exports to the US and Turkey have improved. With the anticipated economic revival in the USA and China and stabilization in the euro zone, carbon-black feedstock (CBFS) prices are expected to rise. In the power division, volumes declined 12% & realisations declined 17%. On account of the safeguard duty imposed, imports from China dropped; however, those from Korea increased.
Fig 9 – EBITDA margin improves
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2 May 2014 Phillips Carbon Black – Performance constrained, improvement in sight; Hold
Anand Rathi Research 4
Valuations On account of the weak short-term outlook, the stock is available at attractive valuations. At this price, all the negatives have been priced in. We maintain a Hold rating, with a revised price target of `71. We value the stock at a target PE of 3.5x FY16e earnings.
Risks
Volatility in key raw material prices.PCB imports most of its key raw material, CBFS. Prices strongly correlate with those of crude oil. Though a pricing mechanism is in place, any sharp increase in the price of CBFS, if not passed on to end-customers, would eat into margins.
Capacity utilization. Capacity has been constantly increased over the years. If optimal utilization is not forthcoming, profitability would be substantially affected.
Forex fluctuation. Nearly 90% of the raw material is imported; hence, any depreciation in exchange rates may squeeze margins.
Appendix Analyst Certification The views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. The research analysts are bound by stringent internal regulations and also legal and statutory requirements of the Securities and Exchange Board of India (hereinafter “SEBI”) and the analysts’ compensation are completely delinked from all the other companies and/or entities of Anand Rathi, and have no bearing whatsoever on any recommendation that they have given in the Research Report. Important Disclosures on subject companies Rating and Target Price History (as of 30 April 2014)
The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.
Anand Rathi Ratings Definitions
Analysts’ ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described in the Ratings Table below:
Ratings Guide Buy Hold Sell Large Caps (>US$1bn) >15% 5-15% <5% Mid/Small Caps (<US$1bn) >25% 5-25% <5%
Anand Rathi Research Ratings Distribution (as of 4 March 2014) Buy Hold Sell Anand Rathi Research stock coverage (182) 64% 27% 9% % who are investment banking clients 4% 0% 0% Other Disclosures This report has been issued by ARSSBL which is a SEBI regulated entity, and which is in full compliance with all rules and regulations as are applicable to its functioning and governance. The investors should note that ARSSBL is one of the companies comprising within ANAND RATHI group, and ANAND RATHI as a group consists of various companies which may include (but is not limited to) its subsidiaries, its affiliates, its group companies who may hold positions, views, stakes and may service the companies covered in this report independent of ARSSBL. Investors are cautioned to be aware that there could arise a potential conflict of interest in the views held by ARSSBL and other companies of Anand Rathi who maybe affiliated, connected or catering to the companies mentioned in the Research Report; even though, ARSSBL and Anand Rathi are fully complaint with all procedural and operational regulatory requirements. Thus, investors should not use this as a sole basis for making their investment decision and should consider the recommendations mentioned in the Research Report bearing in mind the aforementioned.
Further, the information herein has been obtained from various sources which we believe is reliable, and we do not guarantee its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes an offer, or an invitation to make an offer, to buy or sell any securities or any options, futures or other derivatives related to such securities (hereinafter referred to as “Related Investments”). ARSSBL and/or Anand Rathi may trade for their own accounts as market maker / jobber and/or arbitrageur in any securities of the companies mentioned in the Research Report or in related investments, and may be on taking a different position from the ones which haven been taken by the public orders. ARSSBL and/or Anand Rathi and its affiliates, directors, officers, and employees may have a long or short position in any securities of the companies mentioned in the Research Report or in Related Investments. ARSSBL and/or Anand Rathi, may from time to time, perform investment banking, investment management, financial advisory or any other services not explicitly mentioned herein, or solicit investment banking or other business from, any entity and/or company mentioned in this Research Report; however, the same shall have no bearing whatsoever on the specific recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the other companies of Anand Rathi, even though there might exist an inherent conflict of interest.
Furthermore, this Research Report is prepared for private circulation and use only. It does not have regard to the specific investment objectives, financial situation and the specific financial needs or objectives of any specific person who may receive this Research Report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this Research Report, and, should understand that statements regarding future prospects may or may not be realized, and we can not guarantee the same as analysis and valuation is a tool to enable investors to make investment decisions but, is not an exact and/or a precise science. Investors should note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Past performance is not necessarily a guide to future performance. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investments mentioned in this report.
Other Disclosures pertaining to distribution of research in the United States of America
This material was produced by ARSSBL, solely for information purposes and for the use of the recipient. It is not to be reproduced under any circumstances and is not to be copied or made available to any person other than the recipient. It is distributed in the United States of America by Enclave Capital LLC (19 West 44th Street, Suite 1700, New York, NY 10036) and elsewhere in the world by ARSSBL or an authorized affiliate of ARSSBL (such entities and any other entity, directly or indirectly, controlled by ARSSBL, the “Affiliates”). This document does not constitute an offer of, or an invitation by or on behalf of ARSSBL or its Affiliates or any other company to any person, to buy or sell any security. The information contained herein has been obtained from published information and other sources, which ARSSBL or its Affiliates consider to be reliable. None of ARSSBL or its Affiliates accepts any liability or responsibility whatsoever for the accuracy or completeness of any such information. All estimates, expressions of opinion and other subjective judgments contained herein are made as of the date of this document. Emerging securities markets may be subject to risks significantly higher than more established markets. In particular, the political and economic environment, company practices and market prices and volumes may be subject to significant variations. The ability to assess such risks may also be limited due to significantly lower information quantity and quality. By accepting this document, you agree to be bound by all the foregoing provisions.
1. ARSSBL or its Affiliates may or may not have been beneficial owners of the securities mentioned in this report.
2. ARSSBL or its affiliates may have or not managed or co-managed a public offering of the securities mentioned in the report in the past 12 months.
3. ARSSBL or its affiliates may have or not received compensation for investment banking services from the issuer of these securities in the past 12 months and do not expect to receive compensation for investment banking services from the issuer of these securities within the next three months.
4. However, one or more of ARSSBL or its Affiliates may, from time to time, have a long or short position in any of the securities mentioned herein and may buy or sell those securities or options thereon, either on their own account or on behalf of their clients.
5. As of the publication of this report, ARSSBL does not make a market in the subject securities.
6. ARSSBL or its Affiliates may or may not, to the extent permitted by law, act upon or use the above material or the conclusions stated above, or the research or analysis on which they are based before the material is published to recipients and from time to time, provide investment banking, investment management or other services for or solicit to seek to obtain investment banking, or other securities business from, any entity referred to in this report.
Enclave Capital LLC is distributing this document in the United States of America. ARSSBL accepts responsibility for its contents. Any US customer wishing to effect transactions in any securities referred to herein or options thereon should do so only by contacting a representative of Enclave Capital LLC.
Additional information on recommended securities/instruments is available on request.
Appendix Analyst Certification The views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. The research analysts are bound by stringent internal regulations and also legal and statutory requirements of the Securities and Exchange Board of India (hereinafter “SEBI”) and the analysts’ compensation are completely delinked from all the other companies and/or entities of Anand Rathi, and have no bearing whatsoever on any recommendation that they have given in the Research Report. The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.
Anand Rathi Ratings Definitions
Analysts’ ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described in the Ratings Table below:
Ratings Guide Buy Hold Sell Large Caps (>US$1bn) >15% 5-15% <5% Mid/Small Caps (<US$1bn) >25% 5-25% <5% Anand Rathi Research Ratings Distribution (as of 4 March 2014) Buy Hold Sell Anand Rathi Research stock coverage (185) 64% 27% 9% % who are investment banking clients 4% 0% 0% Other Disclosures This report has been issued by ARSSBL which is a SEBI regulated entity, and which is in full compliance with all rules and regulations as are applicable to its functioning and governance. The investors should note that ARSSBL is one of the companies comprising within ANAND RATHI group, and ANAND RATHI as a group consists of various companies which may include (but is not limited to) its subsidiaries, its affiliates, its group companies who may hold positions, views, stakes and may service the companies covered in this report independent of ARSSBL. Investors are cautioned to be aware that there could arise a potential conflict of interest in the views held by ARSSBL and other companies of Anand Rathi who maybe affiliated, connected or catering to the companies mentioned in the Research Report; even though, ARSSBL and Anand Rathi are fully complaint with all procedural and operational regulatory requirements. Thus, investors should not use this as a sole basis for making their investment decision and should consider the recommendations mentioned in the Research Report bearing in mind the aforementioned.
Further, the information herein has been obtained from various sources which we believe is reliable, and we do not guarantee its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes an offer, or an invitation to make an offer, to buy or sell any securities or any options, futures or other derivatives related to such securities (hereinafter referred to as “Related Investments”). ARSSBL and/or Anand Rathi may trade for their own accounts as market maker / jobber and/or arbitrageur in any securities of the companies mentioned in the Research Report or in related investments, and may be on taking a different position from the ones which haven been taken by the public orders. ARSSBL and/or Anand Rathi and its affiliates, directors, officers, and employees may have a long or short position in any securities of the companies mentioned in the Research Report or in Related Investments. ARSSBL and/or Anand Rathi, may from time to time, perform investment banking, investment management, financial advisory or any other services not explicitly mentioned herein, or solicit investment banking or other business from, any entity and/or company mentioned in this Research Report; however, the same shall have no bearing whatsoever on the specific recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the other companies of Anand Rathi, even though there might exist an inherent conflict of interest.
Furthermore, this Research Report is prepared for private circulation and use only. It does not have regard to the specific investment objectives, financial situation and the specific financial needs or objectives of any specific person who may receive this Research Report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this Research Report, and, should understand that statements regarding future prospects may or may not be realized, and we can not guarantee the same as analysis and valuation is a tool to enable investors to make investment decisions but, is not an exact and/or a precise science. Investors should note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Past performance is not necessarily a guide to future performance. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investments mentioned in this report.
Other Disclosures pertaining to distribution of research in the United States of America
This material was produced by ARSSBL, solely for information purposes and for the use of the recipient. It is not to be reproduced under any circumstances and is not to be copied or made available to any person other than the recipient. It is distributed in the United States of America by Enclave Capital LLC (19 West 44th Street, Suite 1700, New York, NY 10036) and elsewhere in the world by ARSSBL or an authorized affiliate of ARSSBL (such entities and any other entity, directly or indirectly, controlled by ARSSBL, the “Affiliates”). This document does not constitute an offer of, or an invitation by or on behalf of ARSSBL or its Affiliates or any other company to any person, to buy or sell any security. The information contained herein has been obtained from published information and other sources, which ARSSBL or its Affiliates consider to be reliable. None of ARSSBL or its Affiliates accepts any liability or responsibility whatsoever for the accuracy or completeness of any such information. All estimates, expressions of opinion and other subjective judgments contained herein are made as of the date of this document. Emerging securities markets may be subject to risks significantly higher than more established markets. In particular, the political and economic environment, company practices and market prices and volumes may be subject to significant variations. The ability to assess such risks may also be limited due to significantly lower information quantity and quality. By accepting this document, you agree to be bound by all the foregoing provisions.
1. ARSSBL or its Affiliates may or may not have been beneficial owners of the securities mentioned in this report.
2. ARSSBL or its affiliates may have or not managed or co-managed a public offering of the securities mentioned in the report in the past 12 months.
3. ARSSBL or its affiliates may have or not received compensation for investment banking services from the issuer of these securities in the past 12 months and do not expect to receive compensation for investment banking services from the issuer of these securities within the next three months.
4. However, one or more of ARSSBL or its Affiliates may, from time to time, have a long or short position in any of the securities mentioned herein and may buy or sell those securities or options thereon, either on their own account or on behalf of their clients.
5. As of the publication of this report, ARSSBL does not make a market in the subject securities.
6. ARSSBL or its Affiliates may or may not, to the extent permitted by law, act upon or use the above material or the conclusions stated above, or the research or analysis on which they are based before the material is published to recipients and from time to time, provide investment banking, investment management or other services for or solicit to seek to obtain investment banking, or other securities business from, any entity referred to in this report.
Enclave Capital LLC is distributing this document in the United States of America. ARSSBL accepts responsibility for its contents. Any US customer wishing to effect transactions in any securities referred to herein or options thereon should do so only by contacting a representative of Enclave Capital LLC.