Indian Small Caps _Thematic_12 High Quality Small Cap_Oct2012

7/31/2019 Indian Small Caps _Thematic_12 High Quality Small Cap_Oct2012

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October 01, 2012

Indian Small CapsTHEMATIC

Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that AmbitCapital may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Please refer to disclaimer section on the last page for further important disclaimer.

Analyst contact

Saurabh Mukherjea, CFA Tel: +91 22 3043 [email protected]

Over the last 4 months BSE Small Caps have risen by 12% compared to the16% rise in the Nifty. Going forward, as we enter an economic recovery,small caps seem likely to outperform as they have beendisproportionately hammered (both fundamentally and from a stock priceperspective) in this prolonged economic downturn. In this note wehighlight 12 stocks with market cap of less than US$0.5 bn which could bedisproportionate beneficiaries in a rallying stock market.

The sheer persistence of this economic downturn (five consecutive quarters of GDPgrowth decelerating) combined with relentless rate hikes by the RBI (11 repo ratehikes by the RBI before the April 12 cut) has meant that small caps have beenhammered over FY11 and FY12 (see pages 3-4 for more details).

With our Economist, Ritika Mankar, being of the view that GDP growth in FY13 will

be 6.3% (vs 5.5% in Q1 FY13) and then 7.1% in FY14, arguably small caps are thebest way to play an impending economic recovery. With that in mind, in this note we highlight 12 high quality small cap stocks (defined for the purposes of this noteas stocks with market cap below roughly $0.5bn). The ideas profiled in this noteare summarized below.

Bajaj Electricals (BJE IN, mcap US$375 mn, NOT RATED, 3 mth ADV US$0.3mn,12 mth price change 10%) : Market leader in the small domestic appliances. Pg 5.Balkrishna Industries (BKT IN, mcap US$518 mn, BUY, 3 mth ADV US$1.2mn,12 mth price change 62%) : Leading exporter of Off-Highway tyres.Pg 11.

Elgi Equipments (ELEQ IN, mcap US$248 mn, NOT RATED, 3 mth ADV US$0.1mn, 12 mth price change 20%) : The local market leader in air

compressors. Pg 17.Greaves Cotton (GRV IN, mcap US$356 mn, BUY, 3 mth ADV US$0.3mn, 12mth price change (12%)) : Largest manufacturer in India of lightweight single/dualcylinder diesel engines. Pg 23.

Heidelberg Cement (HEIM IN, mcap US$203 mn, NOT RATED, 3 mth ADV US$0.4mn, 12 mth price change 32%) : Indian subsidiary of the worlds fourthlargest cement manufacturer. Pg 29.

ICRA (ICRA IN, mcap US$228 mn, NOT RATED, 3 mth ADV US$0.1mn, 12 mthprice change 30%) : The second biggest credit rating agency in India. Pg 35.Infoedge (INFOE IN, mcap US$719 mn, BUY, 3 mth ADV US$0.2mn, 12 mthprice change 0%) : A leading Indian online classified firm present in therecruitment, real estate, and matrimony verticals. Pg 39.

Kirloskar Oil Engines (KOEL IN, mcap US$460 mn, NOT RATED, 3 mth ADV US$0.1mn, 12 mth price change 21%) : Market leader in small-medium segmentdiesel engines. Pg 45.

Motilal Oswal (MOFS IN, mcap US$295 mn, BUY, 3 mth ADV US$0.1mn, 12 mthprice change 33%) : One of the largest and one of the more trusted retail andinstitutional stock brokers in India. Pg 51.

Sadbhav Engineering (SADE IN, mcap US$414 mn, BUY, 3 mth ADV US$0.5mn, 12 mth price change 4%) : The strongest player amongst mid-smallsized construction companies. Pg 57.

Supreme Industries (SI IN, mcap US$666 mn, NOT RATED, 3 mth ADV US$0.2mn, 12 mth price change 59%) : Fastest growing firm in the plastics

processing business in India; no major competitor for its Cross Laminated Filmsoffering. Pg 63.

WABCO (WIL IN, mcap US$578 mn, NOT RATED, 3 mth ADV US$0.2mn, 12 mthprice change 27%): Market leader in airbrake systems for medium & heavy commercial vehicles in India. Pg 69.


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Indian Small Caps

Ambit Capital Pvt Ltd 2

CONTENTS

Small Caps: poised to rebound? ............................................................ 3

Bajaj Electricals ................................................................................ 5

Balkrishna Industries ...................................................................... 11

Elgi Equipments ............................................................................. 17

Greaves Cotton..............................................................................23

Heidelberg Cement........................................................................29

ICRA .............................................................................................. 35

Info Edge ....................................................................................... 39

Kirloskar Oil Engines......................................................................45

Motilal Oswal ................................................................................ 51

Sadbhav Engineering ..................................................................... 57

Supreme Industries ........................................................................ 63

WABCO India ................................................................................ 69


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Indian Small Caps


Small Caps: poised to rebound The length of this economic downturn (five consecutive quarters of GDP growthdecelerating) combined with repeated rate hikes by the RBI (11 repo rate hikes by the RBI before the April 12 cut) has meant that small caps have suffered badly over FY11 and FY12. This hammering is evident both in terms of fundamentalsand in terms of share prices see charts below.Sales slowdown has been more pronounced for small caps.

Exhibit 1: Sales slowdown has been more pronouncedfor small caps

Sales growth

0%5%

10%15%20%25%30%35%40%

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

small cap stocks mid cap stocks large cap stocks

Source: Ambit Capital research

Exhibit 2: although cash conversion has held on

Median CFO as % of Sales

0%

5%

10%

15%

20%

25%

M a r 0

2

M a r -

0 3

M a r -

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M a r -

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M a r -

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M a r -

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M a r -

0 8

M a r -

0 9

M a r - 1 0

M a r - 1 1

M a r - 1 2



Return ratios have taken a bigger hit for small caps as well.

Exhibit 3: ROCEs have suffered (as PAT drops)

Median RoCE

5%

10%

15%

20%

25%

30%

M a r 0 2

M a r - 0 3

M a r - 0 4

M a r - 0 5

M a r - 0 6

M a r - 0 7

M a r - 0 8

M a r - 0 9

M a r - 1 0

M a r - 1 1

M a r - 1 2



Exhibit 4: and hence ROE has suffered as well

Median RoE

5%

10%

15%

20%25%

30%

35%

M a r 0

2

M a r -

0 3

M a r -

0 4

M a r -

0 5

M a r -

0 6

M a r -

0 7

M a r -

0 8

M a r -

0 9

M a r - 1 0

M a r - 1 1

M a r - 1 2

small cap stocks mid cap stocks large cap stocks Source: Ambit Capital research

However, valuations seem to discount most of these negatives.

Exhibit 5: Valuation discount of smallcaps-median P/BMedian PB

0.051.052.053.054.055.056.057.058.05

M a r - 0 2

S e p - 0

2

M a r - 0 3

S e p - 0

3

M a r - 0 4

S e p - 0

4

M a r - 0 5

S e p - 0

5

M a r - 0 6

S e p - 0

6

M a r - 0 7

S e p - 0

7

M a r - 0 8

S e p - 0

8

M a r - 0 9

S e p - 0

9

M a r - 1 0

S e p - 1

0

M a r - 1 1

S e p - 1

1

M a r - 1 2

S e p - 1

2


Exhibit 6: Valuation discount of smallcaps-avg P/B Avg PB

0.05

2.05

4.05

6.05

8.05

10.05

12.05

M a r - 0 2

S e p - 0

2

M a r - 0 3

S e p - 0

3

M a r - 0 4

S e p - 0

4

M a r - 0 5

S e p - 0

5

M a r - 0 6

S e p - 0

6

M a r - 0 7

S e p - 0

7

M a r - 0 8

S e p - 0

8

M a r - 0 9

S e p - 0

9

M a r - 1 0

S e p - 1

0

M a r - 1 1

S e p - 1

1

M a r - 1 2

S e p - 1

2



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Indian Small Caps


Whilst such a hammering for small caps is but normal in a prolonged economicdownturn, it also suggests that they could be disproportionate beneficiaries of anupturn.

With our Economist, Ritika Mankar, being of the view that GDP growth in FY13 willbe 6.3% (vs 5.5% in Q1 FY13) and then 7.1% in FY14, arguably small caps are thebest way to play an impending economic recovery.

With that in mind, in the pages which follow we highlight some interesting smallcaps based on our sector leads bottom-up research.

[For more details of our view on the impending economic recovery, please refer toour Strategy & Economics thematic published on Monday 24 th September 2012.]

Exhibit 7: GDP growth over the last forty quarters

0%

2%4%

6%

8%

10%

12%

J u n -

0 3

J u n -

0 4

J u n -

0 5

J u n -

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J u n -

0 7

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0 9

J u n -

1 0

J u n -

1 1

J u n -

1 2

-

3,000

6,000

9,000

12,000

15,000

GDP growth, % (LHS) BSE Small Cap (RHS) Source: Ambit Capital research

Exhibit 8: Our macro teams forecasts for FY13, FY14

(%) FY11(actuals)FY12

(actuals)FY13

(estimate)FY14

(estimate)

GDP 8.4% 6.5% 6.3% 7.1%

Agriculture 7.0% 2.8% 0.7% 5.5%

Industry 7.2% 3.4% 4.4% 5.7%

Services 9.3% 8.9% 8.5% 8.1%

Investmentdemand 7.5% 5.5% 5.5% 6.1%



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Light Electricals October 01, 2012

Bajaj ElectricalsBloomberg: BJE IN EQUITY Reuters: BJEL.BO

Accounting: AMBERPredictability: REDEarnings momentum: RED

Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that AmbitCapital may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.

Please refer to the Disclaimers at the end of this Report.

NOT RATED Analyst contacts

Bhargav Buddhadev Tel: +91 22 3043 [email protected]

Harshit VaidTel: +91 22 3043 [email protected]

Recommendation / Key details

CMP: ` 198

Target Price: NA

Previous TP: NA

Upside (%): NA

EPS (FY13E): ` 14.8

Change from previous (%) NA

Variance from consensus (%) NA

Stock Information

Mkt cap: ` 20bn/US$375mn

52-wk H/L: ` 234/132

3M ADV: ` 16.1mn/US$0.3mn

Beta: 1.0x BSE Sensex: 18,762

Nifty: 5,703

Stock Performance (%)

1M 3M 6M 12M

Absolute 15 1 2 10

Rel. to Sensex 8 (11) (8) (4)

Performance (%)

15,000

16,000

17,000

18,000

19,000

20,000

Sep-11 Feb-12 Jul-12

130

150

170

190

210

230

250

Sens ex B ajaj Elec tric als

Background: Bajaj Electricals, a 74 year old company, is part of the $7bn BajajGroup. It has six strategic business units Engineering & Projects (manufacturestransmission line towers), Appliances, Fans, Luminaries, Lightings and Morphy Richards.

Competitive positioning and its underpinnings : Bajaj Electricals is the leader in the small domestic appliances segment with a market share of ~15% in theorganized market which accounts for ~65% of the market. In Luminaries whilst itsmarket positioning is 2 nd with a market share of 17%, in fan and lightings itsmarket positioning is 3 rd with a market share of 16% and 8% respectively.

Bajajs leadership position has been built on the back of its strong distributionnetwork (the largest amidst the listed peers) comprising of 400,000+ retail outlets,1,000+ distributors and 4,000+ authorized dealers. Secondly, global appliancesmajors like Morphy Richards (a big player in UK) and Nardi (a big player in Italy)have tied up with Bajaj Electricals for distributing their products in India. Lastly,

return ratios for Bajajs non-Engineering and Projects (E&P) business is the highestin the industry due to its asset light model. RoCE in this business is a stellar 63%compared to 51% and 19% for Havells (domestic business) and V-Guardrespectively thanks to a strong vendor base. Whilst Havells and V-Guardsoutsourcing ratio is ~15% and ~60% respectively, Bajaj outsources ~90% of itsproduction with majority of the vendors being exclusive to Bajaj.

Overall success of the business : Whilst the companys revenue growth at 20%CAGR over FY09-12 is impressive, its earning CAGR at 5% has beendisappointing. The reason for the poor bottomline is due to its Engineering &Project (E&P) business wherein the margins declined by a staggering 960bps to3.2% in FY12 compared to FY09 levels of 12.8%. The reason for such a sharpdecline in the E&P margins was cost overruns across several sites as projectimplementation got delayed due to right of way issues. Consequently, the

CFO/EBITDA ratio has also deteriorated to 63% in FY12 compared to 114% inFY09 given a rise in debtor and inventory days to 42 and 131 days compared to37 and 116 days respectively. The increase in working capital days from 57 daysin FY09 to 71 days in FY12 is completely attributable to the issues in the E&Pbusiness as the non E&P business operates on a negative working capital cycle.

FY13 outlook : Whilst the FY13 outlook for the E&P business is sluggish (as theexisting order book consists of many projects which have seen cost over runs), inFY14 the business is likely to see a significant improvement in margins and cashflows as management is confident of completing the majority of its troubled sites in2HFY13. With regards to the non-E&P business, management is confident of recording an overall revenue growth of 15% underpinned by a healthy 25%growth in the domestic appliances segment. We believe this to be realisticguidance as the same is in line with the 30% guidance given by the managementof TTK prestige. (TTK Prestige is a 100% kitchen appliances company and themajority of Bajajs domestic appliances are also kitchen appliances.)

Valuation : The firm trades at 13.4x FY13 P/E, 2.4x FY13 book value and 8.9x FY13EV/EBITDA. Compared to peers - Havells and V-Guard - it trades at adiscount of 31%, 24% and 56% based on P/E, EV/EBITDA and P/B respectively.Compared to its four year average, the company trades at a premium of 6% and25% based on FY13 P/E and EV/EBITDA multiples respectively

Key financials

Year to March ( mn) FY10 FY11 FY12 FY13E FY14ENet Sales 22,286 27,414 30,990 35,374 41,202EBITDA 2,434 2,550 2,371 2,861 3,532EBITDA (%)

10.9% 9.3% 7.7% 8.1% 8.6%EPS ( ` ) 13.9 15.6 11.8 14.8 18.9RoE (%) 36.6% 27.8% 18.0% 19.6% 21.0%P/E (x) 13.8 12.3 16.2 13.4 10.5

Source: Company, Ambit Capital research


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Bajaj Electricals


Exhibit 1: Revenue growth and EPS growth over the lastfive years

-

5,000

10,000

15,000

20,00025,000

30,000

35,000

FY08 FY09 FY10 FY11 FY12

0.02.04.06.08.010.012.0

14.016.018.0

Revenues (Rs mn) (LHS) EPS (Rs) (RHS)


Exhibit 2: ROE and EBITDA margin over the last five years

0.0

10.0

20.0

30.0

40.0

50.0

60.0


0.00

2.00

4.00

6.00

8.00

10.00

12.00

RoE (%) EBITDA (%)

Source: Source: Company, Ambit Capital research.

Exhibit 3: CFO/EBITDA and Debt:Equity over the last five years

0%

20%

40%

60%

80%

100%

120%


0.000.20

0.40

0.60

0.80

1.00

1.20

1.40

CFO/EBITDA (%) Net Debt:Equity


Exhibit 4: P/E valuation bands

0

50

100

150

200

250

300

350

M a r -

0 8

J u l - 0 8

N o v -

0 8

M a r -

0 9

J u l - 0 9

D e c -

0 9

A p r -

1 0

A u g - 1

0

D e c -

1 0

A p r -

1 1

A u g - 1

1

D e c -

1 1

A p r -

1 2

A u g - 1

2

16x 14x 12x

10x 8x

18x

Source: Bloomberg, Ambit Capital research.

Exhibit 5: P/B valuation bands

0

50

100

150

200

250

300

350

M a r -

0 8

J u l - 0 8

N o v -

0 8

M a r -

0 9

J u l - 0 9

D e c -

0 9

A p r -

1 0

A u g - 1

0

D e c -

1 0

A p r -

1 1

A u g - 1

1

D e c -

1 1

A p r -

1 2

A u g - 1

2

3x 2.5x

2x

1.5x

1x

3.5x

Source: Bloomberg, Ambit Capital research

Exhibit 6: EV/EBITDA bands

0

50

100

150

200

250

300

350

M a r -

0 8

J u l - 0 8

N o v -

0 8

M a r -

0 9

J u l - 0 9

D e c -

0 9

A p r -

1 0

A u g - 1

0

D e c -

1 0

A p r -

1 1

A u g - 1

1

D e c -

1 1

A p r -

1 2

A u g - 1

2

9x 8x 7x 6x 5x

Source: Bloomberg, Ambit Capital researc


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Bajaj Electricals


Exhibit 7: Explanation for our flags on the cover pageSegment Score Comments

Accounting AMBER We give an amber flag on Bajajs accounting on account of low CFO/EBITDA ratio comparedto its peers V-Guard and Havells on the back of extremely high debtor days, high percentageof loans and advances compared to net worth and low provisioning of debtors.

Predictability RED Given the fact that the company has been surprising negatively compared to the guidance thatthe company has been providing with, the predictability remains uncertain.

Earnings momentum RED As per Bloomberg consensus estimates, there has been a decline of ~8% in the earningsestimates for FY13 in the past three months.



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Bajaj Electricals


Balance sheet

Year to March ( mn) FY08 FY09 FY10 FY11 FY12

Shareholders' equity 173 173 195 198 199

Reserves & surpluses 1,575 2,277 4,749 5,913 6,799

Total networth 1,748 2,450 4,944 6,111 6,999

Debt 2,367 2,139 1,518 1,122 1,872

Deferred tax liability 41 31 (5) (21) (19)

Total liabilities 4,156 4,620 6,457 7,212 8,851

Gross block 1,440 1,545 1,700 2,302 2,721

Net block 916 946 1,016 1,533 1,840

CWIP 3 25 1 - 30

Investments 223 316 366 366 441

Cash & equivalents 320 538 612 486 536

Debtors 4,253 5,592 7,507 10,656 11,082

Inventory 1,622 1,777 2,094 2,946 3,552

Loans & advances 890 1,131 1,777 1,651 2,015

Total current assets 7,084 9,038 11,990 15,739 17,186

Current liabilities 3,645 5,192 6,273 9,694 9,848

Provisions 426 513 643 731 797

Total current liabilities 4,071 5,704 6,916 10,425 10,645

Net current assets 3,013 3,334 5,074 5,314 6,540

Total assets 4,156 4,620 6,457 7,212 8,851 Source: Company, Ambit Capital research

Income statement

Year to March ( mn) FY08 FY09 FY10 FY11 FY12Operating income 13,816 17,657 22,286 27,414 30,990

% growth 27.2 27.8 26.2 23.0 13.0

Operating expenditure 12,384 15,859 19,852 24,864 28,619

EBITDA 1,432 1,798 2,434 2,550 2,371

% growth 65 25.6 35.4 4.7 (7.0)

Depreciation 75 85 92 108 125

EBIT 1,358 1,713 2,342 2,442 2,246

Interest expenditure 338 413 371 366 631

Non-operating income 94 100 135 211 144

PBT 1,115 1,400 2,106 2,286 1,760

Tax 383 507 754 748 581

Adjusted PAT/ Net profit 731 894 1,318 1,503 1,179

% growth 87 22 47 14 (22)

Extraordinaries - - 35 35 -

Reported PAT / Net profit 731 894 1,353 1,538 1,179

Adjusted net profit 731 894 1,318 1,503 1,179 Source: Company, Ambit Capital research


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Bajaj Electricals


Cash flow statement Year to March ( mn) FY08 FY09 FY10 FY11 FY12

PBT 1,115 1,400 2,106 2,286 1,760


Interest 337 413 370 368 607

Tax (378) (542) (912) (806) (599)

(Incr) / decr in net working capital (604) 55 (1,564) (773) (1,047)

Others 40 99 55 41 56Cash flow from operatingactivities 584 1,510 148 1,224 901

(Incr) / decr in capital expenditure (75) (146) (144) (627) (463)

(Incr) / decr in investments (0) (92) (50) (0) (75)

Others 27 (154) 58 (74) 59Cash flow from investingactivities (48) (392) (137) (702) (479)

Issuance of equity - - 1,634 55 38

Incr / (decr) in borrowings (5) (228) (620) (397) 750

Others 1 (224) (235) (274) (352)Cash flow from financingactivities (4) (453) 779 (615) 436

Net change in cash 532 665 791 (93) 858

Free Cash Flow 536 1,118 11 522 422 Source: Company, Ambit Capital research

Ratio analysis Year to March (%) FY08 FY09 FY10 FY11 FY12

EBITDA margin (%) 10.4% 10.2% 10.9% 9.3% 7.7%

EBIT margin(%) 9.8% 9.7% 10.5% 8.9% 7.2%

Net profit margin(%) 5.3% 5.1% 5.9% 5.5% 3.8%Dividend payout ratio(%) 23% 23% 22% 28% 30%

Net debt: equity (x) 1.17 0.65 0.18 0.10 0.19

Working capital turnover (x) 5.13 6.32 4.99 5.68 5.16

Gross block turnover (x) 9.59 11.43 13.11 11.91 11.39

RoCE(%) 30.3% 25.1% 26.5% 23.5% 18.7%

RoE(%) 50.2% 42.6% 36.6% 27.8% 18.0% Source: Company, Ambit Capital research

Valuation parameters Year to March ( mn) FY08 FY09 FY10 FY11 FY12

EPS ( ` ) 8.5 9.2 13.9 15.6 11.8

Diluted EPS ( ` ) 8.5 9.2 13.9 15.6 11.8

Book value per share ( ` ) 20.2 25.1 50.7 61.8 70.2

Dividend per share ( ` ) 1.9 2.1 2.8 3.3 3.3

P/E (x) 22.7 21.0 13.8 12.3 16.2

P/BV (x) 9.5 7.6 3.8 3.1 2.7

EV/EBITDA (x) 14.3 11.4 8.4 8.0 8.6

EV/EBIT (x) 15.1 11.9 8.7 8.4 9.1 Source: Company, Ambit Capital research


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Bajaj Electricals


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Auto & Auto Ancillaries October 01, 2012

Balkrishna IndustriesBloomberg: BIL IN EQUITY Reuters: LKI.BO

Accounting: AMBERPredictability: AMBEREarnings momentum: AMBER



BUY Analyst contact

Ashvin Shetty Tel: +91 22 3043 [email protected]


CMP: 284

Target Price ( June 2013 ): 315

Previous TP: NA

Upside (%) 11

EPS (FY13E): ` 35.1

Change from previous (%) NAVariance from consensus (%) 4

Stock Information


52-wk H/L: ` 308/146

3M ADV: ` 64mn/US$1.2mn

Beta: 0.4x

BSE Sensex: 18,763

Nifty: 5,703


1M 3M 6M 12M

Absolute 6.4 16.0 16.7 62.3

Rel. to Sensex - 5.5 7.1 48.3

Performance (%)

15,00015,50016,00016,50017,00017,500

18,00018,50019,000

S e p - 1

1

D e c - 1

1

M a r -

1 2

J u n - 1

2

S e p - 1

2100

150

200250

300

350

Sensex Balkrishna

Background: Balkrishna Industries (BKT) is the leading exporter of off-highway tyres (OHT) from India. BKT currently accounts for close to 4% of the globalOHT market. The company generated revenues of ` 28.2bn (up 48% YoY) andnet earnings of ` 2.7bn (up 45% YoY) in FY12.

Competitive positioning and its underpinnings: Market share gain has beenthe key driver for BKTs strong volumes and revenue growth in recent years.Going forward too, we believe BKT will continue to gain market share on theback of its competitive advantages relative to the large global incumbents

while being relatively insulated from the threat of new entrants (includingdomestic players) in the OHT space. Some of the key factors underpinningBKTs competitive advantages are: (a) Lower prices for consumers in Westernmarkets made possible by BKTs low cost structure; (b) The de-focus of globalsecular players (eg. Bridgestone, Michelin) from the OHT space; (c) OHTs area high variety low volume and difficult to manage business; this acts as astrong entry barrier to new players; and (d) Relatively low threat in the OHTindustry from Chinese imports (as this is not a labour intensive industry).

Overall success of the business: BKTs standalone volumes, revenues,EBITDA and net earnings have grown at a CAGR of 19%, 26%, 23% and 25%respectively over FY07-FY12 (implying major market share gains).Furthermore, BKTs EBITDA margin is significantly ahead of both domestic andglobal peers driven by its export model (and ensuing fiscal benefits) andlocational advantage (resulting in lower wage costs).

FY13 outlook: We expect BKT to record revenue growth of 27% YoY, EBITDA margin of 19.1% and net earnings growth of 26% in FY13. We expect thedepreciation that has taken place in H1 FY13 in the INR (relative to both US$

and Euro) to favourably impact realisation and margins in the forthcomingquarters. However, on the negative side, the order book witnessed a declineof around 20% QoQ in volume terms (from around 64,000 MT to around51,000 MT) and around 18% in value terms in 1QFY13. Our discussion withthe company management indicated that there is some contraction in order inflows particularly from the European geography due to a postponement inorders from the distributors' end. However, the company expects orders tobounce back and has retained its sales volume guidance of around 160,000-165,000 MT for FY2013 (against our estimate of 155,623 MT). Moreimportantly, the company is going ahead with the new Bhuj facility as per schedule (scheduled to commence commercial production by September 2012).

Valuation: BKT earns significantly better RoICs v/s peers due to its muchbetter margin profile. Our DCF model values the core OHT business at ` 315/share, implying 11% upside and 8.5x FY14 net earnings (a premium of 10% to Apollo Tyres). On a crosscycle P/E comparison, BKT is trading at apremium of 14% to the average multiple of the company over last six years.

Key financials (standalone) Year to March ( mn) FY10 FY11 FY12 FY13E FY14ENet Sales 13,870 19,341 28,200 35,893 42,852EBITDA 3,698 3,598 5,058 6,865 7,917EBITDA (%) 26.7% 18.6% 17.9% 19.1% 18.5%EPS ( ` ) 21.6 19.2 27.8 35.1 36.8RoCE (%) 29.3% 22.2% 21.7% 19.2% 16.9%RoE (%) 36.6% 24.9% 28.1% 27.3% 22.6%P/E (x) 13.1 14.8 10.2 8.1 7.7P/B (x) 4.2 3.3 2.5 2.0 1.6Source: Company, Ambit Capital research


12/75

Balkrishna Industries


Exhibit 1: Strong revenue growth and steady EBITDA margin over the years

5,000

10,000

15,000

20,000

FY07 FY08 FY09 FY10 FY1110%

15%

20%25%

30%

Revenues (Rs mn) (LHS) EBITDA margin (RHS)

(Rs mn)

Source: Company, Ambit Capital research.


15%

20%

25%

30%

35%

40%


EBITDA margin RoE

Source: Source: Company, Ambit Capital research

Exhibit 3: CFO/EBITDA and Debt:Equity over the last five years

20%

40%

60%

80%

100%

120%

140%

FY08 FY09 FY10 FY11 FY12(0.3)

(0.1)

0.1

0.3

0.5

0.7

0.9

1.1

1.3

1.5

CFO/EBITDA (LHS) Net debt-equity (RHS)


Exhibit 4: Growing export revenues and exportcontribution through the years

5,000

8,000

11,000

14,000

17,000

20,000


60%

65%

70%

75%

80%

85%

90%

Exports (Rs mn) (LHS) Exports as % of Revenues (RHS)

(Rs mn)


Exhibit 5: BKT trading close to its six-year avg P/E

1

6

11

16

21

26

A p r -

0 5

A p r -

0 6

A p r -

0 7

A p r -

0 8

A p r -

0 9

A p r -

1 0

A p r -

1 1

A p r -

1 2

P / E

BKT P/E 6 year average4 year average

Source: Bloomberg, Ambit Capital research; Note: P/E bands arrived atusing Bloomberg consensus estimates for respective periods

Exhibit 6: BKT has closed the gap to Apollo on P/E

1

6

11

16

A p r -

0 7

A p r -

0 8

A p r -

0 9

A p r -

1 0

A p r -

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P / E

BKT P/E APTY P/E

Source: Bloomberg, Ambit Capital research Note: P/E bands arrived atusing Bloomberg consensus estimates for respective periods


13/75




Accounting AMBER Amber flag for much higher debtor days and a longer operating cycle compared to peers.

Predictability AMBERGiven the high fixed costs (including depreciation and interest expenses), any marginaloutperformance/underperformance at the topline level tends to have a magnified impact at the netearnings level. However, this is an industry-wide phenomenon.

Earnings momentum AMBER No significant upgrades/downgrades to consensus numbers post 4QFY12 results.



14/75



Balance sheet (standalone) Year to March ( mn) FY10 FY11 FY12E FY13E FY14E


Reserves and surpluses 6,414 8,124 10,626 13,841 17,207

Total net worth 6,608 8,318 10,819 14,034 17,401

Debt 4,643 6,070 16,630 19,630 21,630

Deferred tax liability 548 570 626 626 626


Gross block 8,715 10,089 12,328 22,048 28,551

Net block 6,149 6,874 8,281 16,741 21,474

CWIP 589 1,464 7,000 5,703 3,500

Investments (non-current) 807 322 322 322 322

Cash & cash equivalents 42 110 3,574 181 796

Debtors 2,403 3,248 4,796 6,105 7,288

Inventory 2,031 4,104 4,811 6,123 7,310

Loans & advances 3,697 4,853 3,637 4,626 5,520Total current assets 8,173 12,315 16,818 17,035 20,915

Current liabilities 1,149 2,393 2,893 3,682 4,396

Provisions 2,769 3,624 1,454 1,816 2,145

Total current liabilities 3,918 6,017 4,347 5,498 6,541

Net current assets 4,254 6,297 12,471 11,537 14,374

Total assets 11,799 14,958 28,074 34,289 39,656


Income statement (standalone)

Year to March ( mn) FY10 FY11 FY12E FY13E FY14ENet Sales 13,870 19,341 28,200 35,893 42,852

% growth 11% 39% 46% 27% 19%


EBITDA 3,698 3,598 5,058 6,865 7,917

% growth 56% -3% 41% 36% 15%

Depreciation 662 744 831 1,260 1,771

EBIT 3,036 2,854 4,227 5,605 6,146



Adjusted PBT 3,113 2,749 3,983 5,034 5,276

Tax 1,048 894 1,297 1,639 1,718

Adjusted PAT 2,065 1,855 2,686 3,395 3,558

Extraordinary expense/(income) (22) (0) - - -

Reported PAT after minority interest 2,087 1,855 2,686 3,395 3,558



15/75



Cash flow statement (standalone) Year to March ( mn) FY10 FY11 FY12E FY13E FY14E

Net profit before tax 3,113 2,749 3,983 5,034 5,276

Depreciation 662 744 831 1,260 1,771

Others 12 142 273 671 970

Tax (1,003) (837) (1,241) (1,639) (1,718)

(Incr)/decr in net working capital (819) (2,199) (2,721) (2,470) (2,234)

Cash flow from operations 1,965 599 1,125 2,856 4,065

Capex (net) (1,336) (2,162) (7,774) (8,423) (4,300)

(Incr)/decr in investments (485) 485 - - -

Other income (expenditure) 15 97 4 38 10

Cash flow from investments (1,806) (1,580) (7,770) (8,385) (4,290)

Net borrowings 103 1,433 10,559 3,000 2,000

Interest paid (196) (228) (278) (709) (980)

Dividend paid (135) (158) (157) (168) (180)

Cash flow from financing (228) 1,047 10,125 2,123 841

Net change in cash(69) 66 3,480 (3,407) 615

Closing cash balance 46 108 3,588 181 796

Free cash flow 629 (1,563) (6,649) (5,567) (235)


Ratio analysis Year to March (%) FY10 FY11 FY12E FY13E FY14E

EBITDA margin (%) 26.7% 18.6% 17.9% 19.1% 18.5%

EBIT margin (%) 21.9% 14.8% 15.0% 15.6% 14.3%

Net prof. margin (%) 14.9% 9.6% 9.5% 9.5% 8.3%

Dividend payout ratio (%) 6.5% 7.3% 5.4% 4.6% 4.6%

Net debt: equity (x) 0.7 0.7 1.2 1.4 1.2



RoCE (pre-tax) (%) 29.3% 22.2% 21.7% 19.2% 16.9%

RoIC (%) 19.4% 14.9% 14.6% 13.0% 11.4%

RoE (%) 36.6% 24.9% 28.1% 27.3% 22.6%


Valuation parameters Year to March ( mn) FY10 FY11 FY12E FY13E FY14E

Diluted EPS ( ` ) 21.6 19.2 27.8 35.1 36.8

Book value per share ( ` ) 68 86 112 145 180


P/E (x) 13.1 14.8 10.2 8.1 7.7

P/BV (x) 4.2 3.3 2.5 2.0 1.6

EV/EBITDA (x) 11.0 11.3 8.0 5.9 5.1

EV/EBIT (x) 13.3 14.2 9.6 7.2 6.6



16/75





17/75

Light Electricals October 01, 2012

Elgi EquipmentsBloomberg: ELEQ IN EQUITY Reuters: ELGE.NS








CMP: ` 83

Target Price: NA

Previous TP: NA

Upside (%): NA

EPS (FY13E): ` 5.4

Change from previous (%) NA

Variance from consensus (%) NA

Stock Information


52-wk H/L: ` 89/62



Nifty: 5,703


1M 3M 6M 12M

Absolute 2 3 11 20

Rel. to Sensex (5) (8) 1 5

Performance (%)

15,000

16,000

17,000

18,000

19,000

20,000


65

70

75

80

85

90

Sensex Elgi Equipment s

Background: In the air compressor market, Elgi Equipments is a marketleader with a market share of ~30% in India. The firm is also Asias largestmanufacturer of air compressors. In FY12, it posted revenues and PAT of ` 9.8bn (+5% YoY) and ` 755mn (-15% YoY) respectively.Competitive positioning and its underpinnings : The critical strength whichhas fuelled growth for Elgi has been the dominant position it enjoys in thesmall to medium air compressor market wherein it has market share rangingfrom 25-70% across various product categories and a product portfoliocovering around 80% of the different air compressors in the market. The maincompetitive advantage Elgi has over key competitors (such as Ingersoll Randand Atlas Copco) is its expertise in manufacturing airends which is the maincomponent of the compressor and costs as much as ~50% of the compressor.Elgis ability to refurbish these airends in comparison to its peers (which haveto be replaced), makes its compressors more economical. Furthermore, thecompetitive pricing of its products, the firms distribution and after-salessupport (116 branches and 365 dealers across India) is significantly superior compared to Ingersoll Rand which has only around 20 dealers in India.Overall success of the business : Incorporated in 1960, revenues and profitsfor this majority family owned firm have grown at a CAGR of 21% and 26%respectively in the past 5 years. This has been accomplished by strong cashflows from operations and positive free cash flows over the years. That beingsaid, margins have fallen in FY12 due to an increase in raw material prices,change in the product mix, increase in travel costs due to the expansion of thenetwork within India and overseas employee expenses on opening of new offices in Brazil and Australia. Furthermore, the company has been focusingon making strategic acquisitions abroad to tap the global opportunity in air compressors. The management is aiming to triple its exports by FY15 (impliedCAGR of 25% over FY11-15 compared to historical five-year average of 15%).In line with this strategy, Elgi in FY11 acquired Belair S.A. (a French company)for a consideration of ` 43mn. In the past month, Elgi has acquired Rotair S.p.a., an Italian company which has an annual turnover of ~ ` 1.1bn. Elgi alsohas a strong balance sheet wherein the net debt-equity is zero and the firmhad cash of ` 1.4bn as on March 12.FY13 outlook : Whilst we do not have coverage on this stock, consensusestimates as per Bloomberg imply growth of 10% and 13% in sales and PATrespectively in FY13. The management has indicated that sales growth will bearound 15% and that the firm will seek to maintain the EBITDA margin in therange of 10-11%.

Valuation : The firm trades at 15x FY13 P/E, 2.8x FY13 book value and 9.3x FY13 EV/EBITDA. Compared to its own four year averages, these estimates areat a 33% premium, 18% premium and 42% premium respectively. Its peers -Ingersoll Rand (India) and Atlas Copco - trade at 16x FY13 P/E and 12.3x FY13 P/E respectively.

Key Financials Y/E Mar ( mn) FY09 FY10 FY11 FY12 FY13EOperating Income ( ` mn) 5,509 6,769 9,410 9,917 10,946EBITDA ( ` mn) 683 975 1,364 1,086 1,259EBITDA margin (%) 12.4% 14.4% 14.5% 11.0% 11.5%EPS ( ` ) 6.12 6.74 4.97 4.63 5.4

BPS ( ` ) 31.39 33.01 20.57 24.20 28.5RoE (%) 22% 23% 30% 21% 20.5%EV / EBITDA (x) 17.2 12.0 8.6 10.8 9.3

Source: Company, Bloomberg, Ambit Capita l research


18/75

Elgi Equipments



-

2,000

4,000

6,000

8,000

10,000

12,000


-

2.00

4.00

6.00




0%

5%

10%

15%

20%25%

30%

35%


RoE (%) EBITDA (%)


Exhibit 3: CFO/EBITDA and Net Debt:Equity over the lastfive years

0%20%

40%60%80%

100%120%140%160%


(1.00)

(0.50)

-

0.50

1.00

CFO/EBITDA (%) Net Debt:Equity (x)



020406080

100120140160

M a r -

0 8

J u l - 0 8

N o v -

0 8

M a r -

0 9

J u l - 0 9

D e c -

0 9

A p r -

1 0

A u g - 1

0

D e c -

1 0

A p r -

1 1

A u g - 1

1

D e c -

1 1

A p r -

1 2

A u g - 1

2

16x 14x 12x 10x

8x

18x



0

20

40

60

80

100

120

M a r -

0 8

J u l - 0 8

N o v -

0 8

M a r -

0 9

J u l - 0 9

D e c -

0 9

A p r -

1 0

A u g - 1

0

D e c -

1 0

A p r -

1 1

A u g - 1

1

D e c -

1 1

A p r -

1 2

A u g - 1

2

2.5x

2x 1.5x

1x

3.5x

3x



020406080

100120140

160

M a r -

0 8

J u l - 0 8

N o v -

0 8

M a r -

0 9

J u l - 0 9

D e c -

0 9

A p r -

1 0

A u g - 1

0

D e c -

1 0

A p r -

1 1

A u g - 1

1

D e c -

1 1

A p r -

1 2

A u g - 1

2

8x

4x 6x

2x

10x



19/75

Elgi Equipments


Explanation for our flags on the cover pageSegment Score Comments

Accounting AMBER

On the basis of our various parameters, the company is flagged amber on account of poor assetturnover ratio, high percentage of loans and advances to net worth and no provision for doubtfuldebts. The positives for Elgi are the CFO/EBITDA ratio remains high, marginal contingent liabilitiescompared to net worth and lesser transactions with related parties.

Predictability AMBER As we do not cover this stock and there are barely any estimates available for Elgi, the predictability remains uncertain.

Earnings Momentum AMBER Bloomberg consensus consists of only 2 brokerages. There have been no significant upgrades /downgrades post the FY12 results.



20/75

Elgi Equipments


Balance sheet Year to March ( mn) FY08 FY09 FY10 FY11 FY12Shareholders' equity 63 63 79 158 158Reserves & surpluses 1,624 1,934 2,553 3,228 3,818Total net worth 1,687 1,997 2,632 3,387 3,976Debt - - 28 74 91

Deferred tax liability (25) (4) 17 31 40Total liabilities 1,662 1,993 2,677 3,491 4,108Gross block 1,383 1,581 1,828 2,071 2,404Net block 509 655 728 870 1,087CWIP 8 11 21 34 76Investments 143 143 143 173 154Cash & equivalents 120 246 1,192 1,407 1,481Debtors 941 814 907 1,160 1,351Inventory 707 705 810 1,151 1,207Loans & advances 978 761 1,362 400 398Other current assets

- - - 552 498Total current assets 2,746 2,526 4,270 4,669 4,935Current liabilities 958 627 1,366 1,250 1,320Provisions 801 745 1,131 1,006 823Total current liabilities 1,759 1,372 2,497 2,256 2,144Net current assets 987 1,154 1,773 2,413 2,791Miscellaneous 16 30 12 - -Total assets 1,662 1,993 2,677 3,491 4,108


Income statement

Year to March ( mn) FY08 FY09 FY10 FY11 FY12

Operating income 5,039 5,509 6,769 9,410 9,917

% growth 33% 9% 23% 39% 5%


EBITDA 607 683 975 1,364 1,086

% growth 57% 12% 43% 40% -20%


EBIT 537 600 871 1,249 951



Adjusted PBT 589 654 940 1,363 1,106

Tax 171 247 361 472 350

Adjusted PAT/ Net profit 434 409 530 890 756

% growth 88% -6% 30% 68% -15%

Extra ordinaries 15 1 (49) (2) -

Adjusted Consolidated net profit 434 409 530 890 756

Reported Consolidated net profit 419 407 579 891 756 Source: Company, Ambit Capital research


21/75

Elgi Equipments


Cash flow statement Year to March ( mn) FY08 FY09 FY10 FY11 FY12

PBT 589 651 940 1,361 1,106


Others (382) 80 (34) (26) (92)

Tax 171 (239) (314) (415) (346)

(Incr) / decr in net working capital (223) (239) 369 (540) (310)

Cash flow from operations 225 337 1,069 494 494

Capex (166) (232) (177) (258) (391)

(Incr) / decrin investments 2 1 - (30) 19

Other income (expenditure) 16 11 45 89 114

Others 13 56 (99) 17 20

Cash flow from investments (136) (165) (231) (182) (238)

Net borrowings (2) - 28 22 22

Issuance of equity - - 232 1 -

Dividend paid (81) (44) (150) (116) (186)

Others (4) (2) (1) (5) (17)Cash flow from financing (87) (46) 108 (98) (181)

Net change in cash 2 127 946 215 75

Closing cash balance 120 246 1,192 1,407 1,481

Free cash flow 88 172 838 312 257 Source: Company, Ambit Capital research

Ratio analysis Year to March FY08 FY09 FY10 FY11 FY12

EBITDA margin (%) 12.1% 12.4% 14.4% 14.5% 11.0%

EBIT margin (%) 10.7% 10.9% 12.9% 13.3% 9.6%

Net profit margin (%) 8.6% 7.4% 7.8% 9.5% 7.6%

Dividend payout ratio (%) 18% 20% 25% 18% 21%

Net debt: equity (x) (0.07) (0.12) (0.44) (0.39) (0.35)



RoCE(%) 35% 32% 37% 41% 25%

RoE (%) 29% 22% 23% 30% 21% Source: Company, Ambit Capital research

Valuation parameters Year to March FY08 FY09 FY10 FY11 FY12

EPS ( ` ) 3.3 3.3 3.7 5.6 4.8

Book value per share ( ` ) 10.8 12.8 16.8 21.4 25.1


P/E (x) 12.1 12.5 11.0 14.4 17.0

P/BV (x) 3.0 2.6 2.5 3.9 3.3

EV/EBITDA (x) 19.3 17.2 12.0 8.6 10.8



22/75

Elgi Equipments




23/75

Engineering & Capital Goods October 01, 2012

Greaves CottonBloomberg: GRV IN EQUITY Reuters: GRVBL.BO

Accounting: GREENPredictability: AMBEREarnings momentum: AMBER



BUY Analyst contacts




CMP: 78

Target Price (12 Months):

Previous TP: 102

Upside (%) 22

EPS (FY13E): `5.9

Change from previous (%) (6)

Variance from consensus (%) (3)

Stock Information


52-wk H/L: ` 99/ ` 60



Nifty: 5,703


1M 3M 6M 12M

Absolute 17 10 (8) (12)

Rel. to Sensex 10 (1) (18) (26)

Performance (%)

15,000

16,000

17,000

18,000

19,000

20,000


70

90

Sens ex Greav es C ot to n

Background: Greaves Cotton is the largest domestic manufacturer in India of light weight single/dual cylinder diesel engines for automotive and industrialapplications. It has a virtual monopoly in the diesel three wheeler engine segment

with exclusive arrangements to supply engines to M&M (5-year agreement untilFY2016) and Piaggio (8-year agreement until FY2016). Recently, it has also mademeaningful progress in the Small Commercial Vehicle (SCV) market by signing a10-year agreement with Tata Motors to supply engines for its Ace Zip and MagicIris models. The promoters of this Mumbai-based firm are the Thapar Group.Competitive positioning : The firm has a strong position in the three wheeler engine market with market share above 80% in diesel engines. Our discussions

with industry participants suggests that Greaves is irreplaceable in the singlecylinder three wheeler market and small CV market due to its superior technology,economies of scale and established product. In FY12, ~50% of revenues and~2/3rds of profits for Greaves came from the auto segment. In the genset and theconstruction equipment business, Greaves does not any competitive advantage.Hence it makes losses in its construction equipment business (equipment used inroad construction & ready mix concrete mixers) and lower margins in the gensetbusiness (in the 21-150 KVA segment which is the most commoditized space to bein) compared to peers such as Cummins and Kirloskar Oil Engines.Overall success of the business : The company has witnessed revenue growth ata CAGR of 13% over FY10-12. This was on the back of an increase in domesticthree wheeler sales which grew at a CAGR of 8% over the same period. Thecompany has a strong balance sheet with no debt and strong free cash flow generation over the last three years. FY12 was a difficult year for the company

where it witnessed a decline of ~250bps in its operating margins compared toFY11 as its largest customer in the automotive engines segment, Piaggio lostmarket share in the three wheeler segment over the past year. However, goingforward, the new tie up with Tata Motors provides improved visibility for Greavesengine sales and hence stronger revenue growth.FY13 outlook : Whilst the outlook for FY13 on revenues and earnings continue toremain muted we expect Greaves to announce entry into a new segment (possibly super compact cars) which could rerate the stock. The super compact car segment(seats upto-5, length normally between 4000-4250 mm, engine displacementnormally upto 1.6 Litre) is growing at a fast pace (31% YoY growth in FY12) with

volumes of 187,026 vehicles (compared to Greaves current volumes of ~0.4mnengines). Note that Suzuki, Hyundai and Honda are gearing up with their owncompact versions of diesel passenger cars given the widening gap between dieseland petrol prices. On the genset and the construction equipment portfolio weexpect an uptick from FY14 onwards given our Economist, Ritika Mankars,expectation of a pick-up in investment growth (measured by Gross Fixed Capital

Formation). A rise in investment growth will drive manufacturing and capital goodssector growth and hence boost demand for gensets & construction equipment. Valuation : Our DCF assumes a WACC of 14% and terminal growth of 3% whichtranslates into a valuation of ` 94 implying 25% upside. At CMP, the stock trades at11.3x FY14 earnings which is a discount of 34% compared to Cummins. Webelieve such a huge discount is unjustified given a similar earnings profile andreturn ratios. Cummins and Greaves Cotton have earnings growth of 17% and13% in FY14 respectively and similar ROCE of 21%.Key financials (standalone)

Year to March ( mn) FY10 FY11 FY12 FY13E FY14ENet Sales 13,923 12,789 17,893 18,342 20,152EBITDA 2,101 1,991 2,367 2,458 2,801EBITDA (%) 15.1% 15.6% 13.2% 13.4% 13.9%

EPS ( `

) 4.8 6.9 6.0 5.9 6.7RoCE (%) 28% 25% 24% 20% 20%RoE (%) 28% 27% 33% 21% 21%P/E (x) 15.6 10.9 12.5 12.7 11.3P/B (x) 4.3 3.6 2.9 2.5 2.2



24/75

Greaves Cotton



-

5,000

10,000

15,000

20,000


-

2.00

4.00

6.00

8.00




0%5%

10%15%20%25%30%35%40%


0.0%

3.0%

6.0%

9.0%

12.0%

15.0%

18.0%

RoE (%) EBITDA (%)


Exhibit 3: CFO/EBITDA and Net Debt:Equity over the lastfive years

0%

20%

40%

60%

80%

100%

120%

FY08 FY09 FY10 FY11 FY12(1.00)

(0.50)

-

0.50

1.00

CFO/EBITDA (%) Net Debt:Equity



020

40

60

80

100

120

M a r -

0 8

J u l - 0 8

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0

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A p r -

1 1

A u g - 1

1

D e c -

1 1

A p r -

1 2

A u g - 1

2

15x 13x 11x 9x

17x



0

20

40

60

80

100

120

M a r -

0 8

J u l - 0 8

N o v -

0 8

M a r -

0 9

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0

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A p r -

1 1

A u g - 1

1

D e c -

1 1

A p r -

1 2

A u g - 1

2

1.5x

3x

1x

3.5x

2x 2.5x



0

20

40

60

80

100

120

M a r -

0 8

J u l - 0 8

N o v -

0 8

M a r -

0 9

J u l - 0 9

D e c -

0 9

A p r -

1 0

A u g - 1

0

D e c -

1 0

A p r -

1 1

A u g - 1

1

D e c -

1 1

A p r -

1 2

A u g - 1

2

11x

9x

7x

5x

3x

Source: Bloomberg, Ambit Capital researc


25/75

Greaves Cotton



Accounting GREEN In our forensic accounting model, Greaves scores (253), far ahead of both the average score of Capital Goods companies (188) and the BSE 500 universe (196).

Predictability AMBER

Greaves has had a history of getting into non core diversifications (resins, tractors, autos, etc.) in thepast. Whilst the company exited from most such areas during 2000-03, based on its track record weassign an Amber . Besides, the turnaround of its infrastructure equipment business continues to beelusive.

Earnings momentum AMBER Consensus estimates as per Bloomberg have seen a reduction of ~3-6% in earnings for FY13 andFY14 over the past three months.



26/75

Greaves Cotton


Balance sheet Year to March ( mn) FY10 FY11 FY12 FY13E FY14E

Cash 225 626 715 1,469 1,683

Debtors 2,092 2,909 2,567 3,046 3,121

Inventory 1,594 1,971 1,821 2,066 2,205

Loans & advances 1,002 1,024 1,369 1,084 1,611Investments 983 532 937 937 937

Fixed assets 2,805 3,007 3,510 4,106 4,128

Miscellaneous - - - - -

Total assets 8,701 10,069 10,919 12,707 13,684

Current liabilities & provisions 4,098 4,595 3,978 4,810 4,844

Debt 146 162 330 330 330

Other liabilities 246 264 301 301 301



Reserves & surpluses 3,723 4,559 5,822 6,778 7,721

Total networth 4,211 5,047 6,310 7,266 8,209

Net working capital 590 1,308 1,780 1,386 2,093

Net debt (cash) (79) (464) (385) (1,139) (1,353) Source: Company, Ambit Capital research

Income statement Year to March ( mn) FY10 FY11* FY12 FY13E FY14E

Operating income 13,923 12,789 17,893 18,342 20,152

% growth 30.7% 22.5% 4.9% 2.5% 9.9%


EBITDA 2,101 1,991 2,367 2,458 2,801% growth 95% 26% -11% 4% 14%

Depreciation 305 236 416 404 478

EBIT 1,796 1,756 1,951 2,054 2,323

Interest expenditure 136 75 37 37 37Non-operational income / Exceptional

items 73 150 635 69 69

PBT 1,732 1,831 2,549 2,086 2,355

Tax 558 568 660 647 730

Minority Interest / others - - - - -

Reported PAT 1,175 1,263 1,889 1,439 1,625

Adjustments - - 426 - - Adjusted PAT 1,175 1,263 1,463 1,439 1,625

% growth 170% 43% -13% -2% 13% Source: Company, Ambit Capital research, *Represents a nine month period


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Greaves Cotton


Cash flow statement Year to March ( mn) FY10 FY11* FY12 FY13E FY14E

PBT 1,732 1,831 2,549 2,086 2,355

Depreciation 305 236 416 404 478

Interest 136 75 37 37 37

Tax (460) (548) (656) (647) (730)

(Incr) / decr in net working capital 113 (307) (390) 395 (707)

Others (37) (113) (825) - -Cash flow from operatingactivities 1,790 1,173 1,132 2,275 1,433

(Incr) / decr in capital expenditure (274) (363) (254) (1,000) (500)

(Incr) / decr in investments (636) 469 (530) - -

Others 24 17 165 - -Cash flow from investingactivities (886) 123 (620) (1,000) (500)

Issuance of equity - - - - -

Incr / (decr) in borrowings (424) 16 170 - -

Others (447) (911) (579) (521) (719)Cash flow from financingactivities (871) (895) (410) (521) (719)

Net change in cash 34 401 102 755 214

Free cash flow 905 1,296 512 1,275 933 Source: Company, Ambit Capital research, *Represents a nine month period

Ratio analysis Year to March FY10 FY11 FY12 FY13E FY14E

EBITDA margin (%) 15.1% 15.6% 13.2% 13.4% 13.9%

EBIT margin(%) 12.9% 13.7% 10.9% 11.2% 11.5%

Net profit margin(%) 8.4% 9.9% 10.6% 7.8% 8.1%Net debt: equity (x) (0.02) (0.09) (0.06) (0.16) (0.16)


RoCE(%) 28% 25% 24% 20% 20%

RoE (%) 28% 27% 33% 21% 21% Source: Company, Ambit Capital research,

Valuation parameters Year to March FY10 FY11 FY12 FY13E FY14E

EPS ( ` ) 4.81 6.90 5.99 5.89 6.65

Book value per share ( ` ) 17.2 20.7 25.8 29.8 33.6P/E (x) 15.6 10.9 12.5 12.7 11.3

P/BV (x) 4.3 3.6 2.9 2.5 2.2

EV/EBITDA (x) 8.5 9.0 7.6 7.3 6.4



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Greaves Cotton




29/75

Cement October 01, 2012

Heidelberg CementBloomberg: HEIM IN EQUITY Reuters: HEID.BO





Nitin BhasinTel: +91 22 3043 [email protected]

Ritu ModiTel: +91 22 3043 [email protected]

Stock Information

CMP: 48


52-wk H/L: ` 49/25


Beta: 1.1x

BSE Sensex: 18,568

Nifty: 5,660

Stock Performance (%)1M 3M 6M 12M

Absolute 14 54 24 32

Rel. to Sensex 9 45 17 20

Performance

15,00015,50016,00016,50017,00017,50018,00018,50019,000

S e p - 1

1

D e c -

1 1

F e b

- 1 2

M a y -

1 2

J u l - 1 2

S e p - 1

22025303540455055

Sensex Heidelberg

Background: A subsidiary of the worlds fourth largest cement producer,Heidelberg Cement India currently has 3.1mn tonnes of cement capacity and1.6mn tonnes of clinker capacity across four manufacturing locations. Whilst thecompany generated revenues of ` 9.8bn (14% growth), its PAT declined 54% to ` 291mn in CY11 on account of a significant increase in operating costsCompetitive positioning: Central India, the best placed region in Indiaconsidering the demand-supply scenario, contributes ~65% to the overallrevenues of Heidelberg, followed by the West (~22%) and the South (~13%).Over the last 3 years (FY09-12), whilst demand in India has grown at a CAGR of 7%, Central India grew by 10% (mainly driven by 23% demand growth in UP). Itspresence in Central India (where strong demand growth is expected on the back of robust rural demand (in UP) and elections next year (in MP)), gives Heidelberg anedge over new entrants. Furthermore, the company is doubling its capacity to 6mntonnes by Nov 2012 by setting up 2.9mn grinding units in MP and UP and plans toenter into markets of Bihar, Delhi, NCR, Haryana, Punjab and Uttarakhand. Whilstincreasing the lead distance would mean higher freight costs, managementbelieves that the North and East India have better realisations and hence they caneasily pass the increase in cost to the consumers.Overall success of the business : Whilst Heidelbergs volumes and revenueshave grown at a CAGR of 4% and 9%, respectively over CY08-11, its EBITDA andnet earnings have declined by 12% and 39% respectively mainly on account of input cost pressures arising from the: (a) Increasing prices of linkage coal (90%dependence); (b) Unavailability of (and poor quality of) raw materials (gypsum, fly ash); and (c) Increase in diesel and rail freight prices. Apart from increasingcapacities, Heidelberg is incurring ` 2bn of capex on conveyor belts for thetransportation of limestone between the plant and the mine which would result insavings of ` 100/tonne. Expansion of the clinker unit to 3.1mn tonnes would alsoreduce raw material costs (~35% of the raw material costs is on account of clinker purchased).CY13 outlook : We believe cement volume growth is correlated to GFCF growthand given that the economy and corporate spending is likely to improve in thecoming months, it would lead to higher cement demand from the institutionalclients and thus benefit regional/smaller players given the higher proportion of institutional clients in their sales split. The doubling of capacity and the resultantoperating leverage in terms of cost savings would enable Heidelberg to improve itsmargins and profitability. Stable cement prices and high utilisation in the Centralregion is also likely to benefit the company. With Heidelbergs current net debt of ` 7.6bn likely to have peaked out and with no major capex plans for CY13, thecompany will generate positive FCF. Consensus estimates indicate thatHeidelbergs EBITDA and EPS will grow at a CAGR of 107% and 85% respectively

over CY11-13 resulting in a sharp jump in return ratios going forward. Valuation : Heidelberg is currently trading at 6.9x 1-year forward EV/EBITDA onconsensus EBITDA estimates. Whilst on EV/tonne the stock is trading at a US$55, a39% premium to its 5-year average (but a significant discount to the large capcement plays), on 1-year forward EV/EBITDA, the stock is trading at an 11%premium to its 5-year average. We expect return ratios to improve from here on.Expansions and cost rationlisation would lead to improvement in EBITDA/tonne.

Key financials Year to December CY09 CY10 CY11 CY12E CY13EOperating Income ( ` mn) 9,364 8,655 9,827 12,121 18,228

EBITDA ( ` mn) 1,595 989 605 1,354 2,942

EBITDA margin (%) 17.0 11.4 6.2 11.2 16.1

EPS ( `

)5.9 2.8 1.3 2.1 4.4

BPS ( ` ) 32.5 34.6 36.0 37.5 43.9

RoE (%) 19.9 8.3 3.6 5.7 10.0

EV / EBITDA (x) 3.7 8.8 25.7 13.6 6.9

Source: Company, Bloomberg


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Heidelberg Cement



5,000

5,500

6,000

6,500

7,000

7,5008,000

8,500

9,000

9,500

10,000

CY07 CY08 CY09 CY10 CY110.5

1.5

2.5

3.5

4.5

5.5

6.5

Revenues (Rs mn) EPS (Rs) - RHS



-

5

10

15

20

25

30

35

CY07 CY08 CY09 CY10 CY11

EBITDA margin (%) RoE (%)


Exhibit 3: Heidelbergs CFO/EBITDA has started toimprove since CY11 but its debt:equity increasedsubstantially due to ongoing capex

-20406080

100120140160180200

CY07 CY08 CY09 CY10 CY11(0.8)

(0.6)

(0.4)

(0.2)

-

0.2

0.4

0.6

0.8

CFO/EBITDA (%) - LHSNet debt cash : E uit x


Exhibit 4: Heidelberg has operated at utilisations northof 85%, however input costs pressures have resulted insubdued profitability

1.40

1.60

1.80

2.00

2.20

2.40

2.60

2.80

3.00

C Y 0 7

C Y 0 8

C Y 0 9

C Y 1 0

C Y 1 1

1 H C Y 1 2 150

200250300350400450500550600

Cement despatches (mn tonnes) EBITDA (Rs/tonne) - RHS

Source: Company, CMA, Ambit Capital research.

Exhibit 5: 1-year forward EV/EBITDA is trading at a 10%premium to its historical average

-1

1

3

5

7

9

11

13

15

J a n - 0

7

J u l - 0 7

J a n - 0

8

J u n - 0

8

D e c -

0 8

J u n - 0

9

D e c -

0 9

J u n - 1

0

D e c -

1 0

J u n - 1

1

D e c -

1 1

J u n - 1

2

1-yr fwd EV/EBITDA Avg 1-yr fwd EV/EBITDA


Exhibit 6: 1-year forward EV/tonne (US$) is trading at a27% premium to its historical average

0

20

40

60

80

100

120

J a n - 0

7

J u l - 0 7

J a n - 0

8

J u n - 0

8

D e c -

0 8

J u n - 0

9

D e c -

0 9

J u n - 1

0

D e c -

1 0

J u n - 1

1

D e c -

1 1

J u n - 1

2

1-yr fwd EV/tonne (US$) Avg 1-yr fwd EV/tonne (US$)



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Heidelberg Cement


Exhibit 7: Explanation for the flags on cover pageSegment Score Comments

Accounting AMBERIn our forensic accounting screen, Heidelberg Cement scores above the industry average. Thecompany scores high on CFO/EBITDA and doubtful debts as % of total debtors. However, thecompany scores poorly on contingent liabilities as % of networth and asset turnover.

Predictability GREENManagement has made timely announcements in earnings calls and meetings regarding businessoutlook, capacity expansions, mergers & acquisitions and has rarely surprised in a positive or negative manner

Earnings momentum AMBERCY12 and CY13 EBITDA estimates have witnessed ~9-37% upgrades respectively over the past 6months. However, CY12 and CY13 EPS estimates have witnessed ~11-35% downgrades respectively over the past six months.



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Heidelberg Cement


Balance sheet Year to December ( mn) CY07 CY08 CY09 CY10 CY11

Share capital 1,715 2,401 2,401 2,266 2,266

Reserves and surplus 1,931 3,698 4,961 5,566 5,890

Total Networth 3,646 6,099 7,362 7,833 8,156

Loans - 100 20 - 7,769

Deferred tax liability (net) - - 165 301 331Sources of funds 3,646 6,199 7,547 8,134 16,256

Net block 1,768 2,740 3,163 3,305 3,476

Capital work-in-progress 95 558 588 4,282 11,083

Investments 1 1 1 - -

Cash and bank balances 1,807 3,378 4,954 2,195 3,107

Sundry debtors 125 199 222 243 243

Inventories 617 711 645 712 1,107

Loans and advances 739 999 1,186 1,482 2,540

Total Current Assets 3,289 5,287 7,007 4,631 6,997

Current Liabilities 938 1,586 2,138 3,000 4,179

Provisions 570 800 1,074 1,084 1,122

Current liabilities and provisions 1,507 2,387 3,212 4,084 5,300

Net current assets 1,782 2,900 3,795 548 1,697

Application of funds 3,646 6,199 7,547 8,134 16,256


Income statement Year to December ( mn) CY07 CY08 CY09 CY10 CY11

Revenue 5,936 7,622 9,364 8,655 9,827

yoy growth 15.1% 28.4% 22.9% -7.6% 13.5%

Total expenses 4,904 6,743 7,769 7,666 9,222

EBITDA 1,033 879 1,595 989 605

yoy growth 252.4% -14.8% 81.4% -38.0% -38.9%

Net depreciation 144 214 258 289 314

EBIT 888 666 1,337 701 291

Interest and financial charges 31 41 44 42 38

Other income 125 443 455 301 171

Adj PBT 983 1,067 1,748 960 424

Provision for taxation 7 (188) 407 327 132

Adjusted PAT 977 1,255 1,340 633 292

yoy growth 28.6% 6.8% -52.8% -53.9%Reported PAT 977 1,255 1,340 633 292

EPS basic ( ` ) 6.1 5.9 5.9 2.8 1.3

EPS diluted ( ` ) 6.1 5.9 5.9 2.8 1.3



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Heidelberg Cement


Cash flow statement Year to December ( mn) CY07 CY08 CY09 CY10 CY11

PBT 983 1,076 1,748 960 424

Depreciation 144 214 258 289 314

Others 5 (7) (119) (49) 16

Interest paid (net) (63) (211) (243) (148) (60)

CFO before change in WC 1,070 1,072 1,644 1,052 694Change in working capital 283 532 727 (246) (101)

Direct taxes paid (8) (77) (224) (242) (73)

CFO 1,344 1,526 2,146 564 521

Net capex (242) (743) (749) (3,338) (6,821)

Net investments (845) (7) - 12 -

Interest received 82 209 271 200 88

CFI (1,006) (385) (2,444) 27 (6,523)

Proceeds from borrowings - (60) (80) (20) 7,140

Change in share capital - - - - -

Interest & finance charges paid (29) (23) (22) (25) (15)

Dividends paid - - - (41) -

CFF (29) (83) (102) (229) 7,125

Net increase in cash 310 1,059 (400) 363 1,122

Free Cash flows 1,102 783 1,397 (2,774) (6,301)


Ratio analysis (%) Year to December CY07 CY08 CY09 CY10 CY11

Revenue growth 15.1 28.4 22.9 (7.6) 13.5

EBITDA growth 252.4 (14.8) 81.4 (38.0) (38.9)

PAT growth 403.7 28.5 6.8 (52.8) (53.9)

EBITDA margin 17.4 11.5 17.0 11.4 6.2

EBIT margin 15.0 8.7 14.3 8.1 3.0

Net margin 16.4 16.5 14.3 7.3 3.0

RoCE 31.9 22.6 26.0 12.7 3.8

RoIC 28.5 14.5 21.2 12.9 6.4

RoE 30.7 25.8 19.9 8.3 3.6


Valuation parameters Year to December CY07 CY08 CY09 CY10 CY11

P/E (x) 7.9 8.1 8.2 17.3 37.2

P/B(x) 2.1 1.2 1.5 1.4 1.3

Debt/Equity(x) - 0.0 0.0 - 1.0

Net debt/Equity(x) (0.5) (0.5) (0.7) (0.3) 0.6

EV/Sales(x) 1.0 0.6 0.6 1.0 1.6

EV/EBITDA(x) 5.6 4.9 3.7 8.8 25.7



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Heidelberg Cement




35/75

BFSI October 01, 2012

ICRA Bloomberg: ICRA IN EQUITY Reuters: ICRA.NS

Accounting: GREENPredictability: GREENEarnings momentum: AMBER




Pankaj Agarwal, CFA Tel: +91 22 3043 [email protected]

Krishnan ASV Tel: +91 22 3043 3205

[email protected]

Aadesh MehtaTel: +91 22 3043 [email protected]

Stock Information

CMP: 1,212


52-wk H/L: ` 1,354/793


Beta: 0.7x

BSE Sensex: 18,632

Nifty: 5,663


1M 3M 6M 12M

Absolute 3.9 -6.6 12.9 30.3Rel. to Sensex -0.9 -16.8 3.7 14.2

Performance (%)

14,000

16,000

18,000

20,000

27-Sep-11 21-Feb-12 11-Jul-12700

900

1100

1300

1500

Sensex ICRA

Cross cycle P/E

300400500600700800900

10001100120013001400

A p r -

0 8

O c t - 0

8

A p r -

0 9

O c t - 0

9

A p r -

1 0

O c t - 1

0

A p r -

1 1

O c t - 1

1

A p r -

1 2

16x

20x

12x

Background: Set up in 1991, ICRA is the second biggest credit rating agency inIndia (~21% market share) with a presence in other business segments such asconsultancy, Information Technology services and outsourcing. Moodys is astrategic partner in the company having 28.5% stake where Moodys providesICRA with technical services and also outsources certain services to ICRA.Competitive positioning and its underpinnings : (i) ICRA is the second biggestrating agency in India amongst six rating agencies and hence is in a lesscrowded market than any other Financial Services industry; (ii) ICRA has accessto Moodys global research base and credit risk analytics techniques; (iii) ICRA has a strong and credible brand name in a issuer paid industry where theindependence of the rating agency is sometimes questionable; (iv) ICRAspresence in regional centers helps it in garner more business and gives this firma better understanding of the regional entities it rates; (v) The company hasdiversified into other businesses like consulting, outsourcing, etc. whichcontribute ~33% of its revenues. This helps ICRA to maintain its profitability

without compromising on independence in its rating business which we believe would be a critical factor in long term sustainability of business.Overall success of the business : After witnessing strong revenue and PATCAGR of 31% and 39% respectively between FY06 to FY10, ICRA has seen aslowdown in its revenues and PAT between FY10-12 at a CAGR of 14% and 1%respectively due to sluggish debt markets, a slowdown in credit off take,increased employee overheads and competitive pressures due to an increase innumber of players in the credit rating industry.FY13 and FY14 outlook : Whilst FY12 revenues and profits of ICRA grew modestly by only 11%-12%, ICRA would be a disproportionate beneficiary of a

pick-up the in investment cycle leading to increased credit off-take and morebond issuances by Indian corporates. With operating leverage in the businessmodel, PAT growth would be disproportionately higher than revenue growth.Moreover, as organizations like Employee Provident Fund Organisation (EPFO)and insurance companies are provided more flexibility in investing in below AAA rated bonds, bond markets could further widen in India benfiting ratingagencies like ICRA disproportionately. That being said aggressive competitionbased on less independent rating to the issuer to gain business is less likely inthe listed bond market (vs bank loan market) due to high reputational damage if the ratings turn wrong (due to involvement of multiple institutional and retailinvestors). Moreover, the increasing in SME rating pool could be another largeopportunity for ICRA given that there are potentially ~25mn SMEs in India, withonly a handful of them currently rated.

Valuation : ICRA trades at 17.6x FY13E P/E and 15.6x FY14E P/E based onconsensus estimates and is at 33% discount respectively to its closest peer CRISILon 1 year rolling forward PE ratio. Increased competition in the segment leadingto pressure on growth and margins is the key risk to the company.

Key financials (standalone) Year to March ( mn) FY08 FY09 FY10 FY11 FY12Total Revenue 1,073 1,498 1,765 2,059 2,288 PAT 285 389 535 481 540 Operating Margin 38% 38% 40% 36% 35%EPS ( ` ) 28.5 38.9 53.5 48.1 54.0 RoA (%) 20.4% 25.4% 28.0% 20.4% 19.4%RoE (%)

17.4% 22.4% 27.2% 20.4% 19.3%P/E (x) 42.7 31.2 22.7 25.3 22.5P/B (x) 7.4 6.4 5.5 4.7 4.0



36/75

ICRA


Exhibit 1: Revenue and EPS growth over the last 5 years

40%

37%

11%

17%

18%

40%

-10%

42% 38%

12%

-10%

0%

10%

20%

30%

40%

50%


Revenue Growth EPS Growth


Exhibit 2: Operating Margin

38%

36%

35%

40%

38%

34%

36%

38%

40%

42%

FY08 FY09 FY10 FY11 FY12Operating Margin (%)


Exhibit 3: ROAs and ROEs

19%

17%

22%20%

27%

14%

16%

18%

20%

22%

24%

Indian Small Caps _Thematic_12 High Quality Small Cap_Oct2012

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