dotting the i's and crossing the t's - edelweiss...

Edelweiss Securities LimitedManoj Bahety+91 22 6623 [email protected]

Nilesh Aiya+91 22 4040 7575 [email protected]

Ankit Dangayach+91 22 6620 [email protected]

Analysis Beyond ConsensusAnalysis Beyond Consensus

October 15, 2015October 15, 2015

Annual Report Analysis FY15Annual Report Analysis FY15

Dotting the i's and

crossing the t's

Dotting the i's and

crossing the t's

1 Edelweiss Securities Limited

Introduction

Introduction Annual report analysis (ARA) provides vital information on companies’ overall performance and helps develop an outlook on them based on historical events. It highlights true economic profits as against the companies’ reported profits as well as the health of balance sheets. To analyse the annual reports, we covered the following aspects:

Income statement analysis:

• Economic profits vis-à-vis reported profits

• Direct debit to reserves

• Break up of profitability into operating and financing activities (RoE analyser)

• Analysing contribution of subsidiaries and parent to overall profitability of the consolidated entity

• Accounting for mergers/acquisitions and implications of the same

Balance sheet analysis:

• Non-operational risks

• Capital structure/allocation

• Break up of operating and financial assets

• Intangibles and off-balance sheet items

• Working capital analysis

• Net worth analysis

• Balance sheet components analysis

• Domestic and global peers’ comparative analysis

Cash flow analysis

Key insights from MD&A

Segmental information analysis

Accounting policy analysis:

• A framework, wherein accounting policies adopted by a company are analysed and compared with globally accepted policies. The likely impact on convergence with more logical accounting practices (IFRS) is highlighted.

• Change in accounting policy/estimates by the company and its impact on profitability.


Annual Report Analysis

Key Highlights

Automobile

Ashok Leyland (AL)

• Standalone cash flows were supported by increase in payables (INR10.8bn), a part of which in our view is akin to debt. Reversal of revaluation reserve on land sale led to higher reported profit by INR1.4bn. Forex losses capitalised stood at INR707mn (53% of PAT).

• Net worth rose by INR5.2bn in FY15, primarily led by QIP proceeds. 87% of net worth represented by goodwill, revaluation reserve, forex losses capitalised and investments in loss-making subsidiaries/fellow subsidiaries (Hinduja Foundries/ Energy/ John Deere). Analysis of Hinduja Foundaries’ (AL exposure INR3.4bn) financials shows negative net worth to the tune of INR4.2bn and debt of INR5.5bn.

• Performance of subsidiaries/ joint ventures (JVs) / associates (ex-finance business) continued to be a drag, led by write off/ provisions and AL invested additional INR1.5bn (INR950mn in cash) in subsidiaries/ JVs (AL exposure - INR19bn, 46% of standalone net worth).

Eicher Motors (Eicher)

• Royal Enfield (RE) posted record high volumes and margins leading to consolidated EBITDA margin surging by 580bps YoY to 24.2%. VECV’s performance remained subdued, though consistent market share gains continued. Cash flow generation (adjusted for acceptances) stood robust and adjusted working capital cycle improved YoY to (7) days in CY14.

• R&D expenditure capitalised under product designs and prototypes (including under development) stood at INR1.2bn. However, R&D capitalisation ratio has been declining over the years - from 73% in CY11 to 59% in CY13 (CY14 - not available).

• Related party transactions include brand fee payments of INR269.4mn (2.7% of PAT) at consolidated level and INR75.4mn at standalone level.

Hero MotoCorp (HML)

• Related party transactions have increased since FY13 with purchases from related parties jumping to INR22.6bn, 11.4% of raw material (RM) cost (FY14: INR19.2bn, FY13: INR9.1bn).

• Amortisation of technical knowhow/ export licence (towards royalty to Honda) dipped from INR8.1bn in FY14 to INR2.0bn in FY15, being last year of amortisation. R&D cost charged to P&L for HML stood at INR1.3bn, 0.5% of sales, and for peers it ranged from 1.0-1.5% of sales.

• HML impaired INR1.5bn investment in Erik Buell Racing (EBR–49% associate) which filed winding up petition in FY15. HML infused INR1.7bn in financing arm, Hero FinCorp (48% stake – FY14: 40%), and total investment stood at INR2.7bn in FY15.


Contents

Mahindra & Mahindra (M&M)

• Standalone adjusted PBIT declined to INR36bn (FY14: INR42bn) on lower revenues and 100bps dip in EBITDA margins.

• Subsidiary losses, not generally considered in SOTP valuation, increased to ~INR7bn (FY14: INR6bn; 16%), representing ~21% of standalone PAT. Recurring capital infusion by M&M (FY15: INR12bn, FY11-15: INR34bn) was to sustain operations in these subsidiaries.

• Consolidated RoCE (ex M&M Financial Services) stood lower at ~12% (FY14: ~18%) versus standalone adjusted RoCE of 28% (FY14: 38%).

• R&D cost capitalised during FY15 rose to INR9.3bn (FY14:INR5.7bn), representing 22% of PBT. Capitalisation ratio rose to 50% in FY15 (FY14: 40%).

Motherson Sumi Systems (MSS)

• MSS reported robust improvement in profitability, operating cash flows and return ratios primarily led by subsidiaries.

• Higher capex spending (INR18.4bn; FY14: INR13.5bn) and acquisitions (INR7.1bn; FY14: nil), led to decline in consolidated free cash flow to INR5.4bn (FY14: INR10.6bn). The company estimates capex spending to be in the INR15‐20bn range during FY16.

• Trade working capital fell to 2.8% of sales in FY15 versus 6.1% in FY14, led by increase in trade payables and customer advances/unearned income. During FY12‐15, trade payables and customer advances catapulted ~INR25bn, offsetting increase in inventory and receivables, which jumped ~INR16bn, leading to release of working capital of INR9bn, despite rise in sales.

• While SMRP BV (hold co of SMR and SMP) enjoys negative cash conversion cycle of 11 days (FY14: positive 5 days), that of competitors ranges between 17- 28 days. Standalone business continued to be a major profit spinner (~60% of consolidated PAT), despite contributing mere 15% to overall revenue.

Tata Motors (TAMO)

• TAMO’s net worth accretion was significantly impacted in FY15 led by: i) forex losses on debt worth INR48bn charged directly to reserves (FCMITDA); ii) INR117bn hedging losses; and iii) INR42bn translation losses. Our calculation suggests outstanding derivative hedge book of GBP14.16bn – INR1.4trillion.

• Our calculation suggests adjusted net debt was higher by INR241bn adjusted for pension deficit and implied debt on discounting charges.

• Payables remain a major source of cash flow as JLR consistently reported negative working capital cycle owing to significantly higher payable days vis-à-vis peers.

• TAMO had cash balance of INR462bn and debt of INR736bn. Average borrowing cost of 8.5% and average yield on cash of 2.1%, led to negative carry. Restricted cash in China in FY13 stood at GBP524mn (FY14 and 15: Nil).

• Pension actuarial losses charged to reserves stood at INR27.9bn in FY15 and TAMO continues to capitalise 80-85% of product development expenditure versus global peers’ average of 20-35%.



TVS Motor Company (TVS)

• Robust volumes led to higher revenues and profitability; however EBITDA margins remained flat at 5.8%. EBITDA/unit has been consistently lower for TVS in the past 5 years versus peers owing to higher operating and employee cost per unit.

• Debt rose by INR3.9bn to INR11.2bn in FY15 (D/E ratio up from 0.6x to 0.8x), and adjusted for off-balance sheet liabilities (bills discounted, LCs, credit agreements - INR4.5bn) debt stood at INR15.7bn (adjusted D/E ratio up from 1.1x in FY14 to 1.3x).

• Consolidated return ratios remained subdued, primarily owing to losses in Indonesia and investments (largely preference shares in TVS Motor Services – INR4.5bn). TVS holds 19% of equity capital and 85% of preference capital (as at FY14) in TVS Motor Services (holding company of NBFC arm, TVS Credit Services).

• Loans and advances rose from INR4.3bn to INR7.7bn, 58% of net worth led by VAT receivables and excise account. Related party transactions included purchases worth INR4.6bn (6.2% of raw material (RM) cost) from parent, Sundaram Clayton.

Engineering / Capital Goods

Bharat Forge (BF)

• Standalone revenue surged 34% and EBITDA margin inched up to 29.2% (FY14: 25.4%). European subsidiaries’ profitability remained subdued at INR28mn (FY14: INR735mn).

• Consolidated free cash flows remained negative owing to higher capex of INR7.1bn (FY14: INR5.8bn) led by standalone and Alstom JV.

• Adjusted for bills discounted and acceptances: (1) cash conversion cycle stood at 92 days (FY14: 96 days) versus reported cycle of 42 days (FY14: 54 days); (2) adjusted net debt stood at INR24.8bn versus reported debt of INR14.1bn.

• Derivatives exposure rose 53% to INR49bn (FY14: INR32bn), representing ~1.8x FY15 exports revenue.

Crompton Greaves (CRG)

• Subsidiary losses continue to be funded from standalone entity. Aggregate cash and non-cash exposure in overseas subsidiaries stood at 77% of net worth.

• Standalone (ex-consumer products) adjusted RoCE of 9.1% (FY14: 18.9%) was significantly lower than reported RoCE of 21.4% and 37.8% for power and industrial segments, due to non consideration of un-allocable expenses and assets.

• Standalone cash conversion cycle jumped to 56 days (FY14: 36 days), led by higher receivables, unbilled revenues and lower customer advances and payable days. Overdue receivables (>6 months) jumped 56% YoY to INR3.6bn.

• Payment to Avantha Holdings (related party) for expenses stood at INR702mn (FY14: INR676mn), ~12% of adjusted standalone PBT.


Contents

Havells India (Havells)

• Consolidated profitability supported by recognition of deferred tax assets (DTA) of INR378mn (~6.7% of PBT) (FY13 and FY14: nil) with respect to unabsorbed losses pertaining to certain Sylvania subsidiaries.

• Payment to related parties stood at INR975mn (FY14: INR850mn), 17.1% of PBT. Managerial remuneration increased 57% to INR248mn.

• Sylvania’s pension deficit jumped to ~EUR58.1mn (FY14: EUR43.7mn) led by higher actuarial loss at Euro14.4mn (FY14: Euro6mn).

• Sylvania’s receivables and debt stood lower by EUR26mn owing to non-recourse receivable financing. Adjusted for receivable financing, core working capital fell by 9% in Euro terms and 25% in INR terms.

IRB Infrastructure Developers (IRB)

• IRB’s construction margins stood at 30% (FY12-15 average : 33%) vis-à-vis peers’ 10-14% (FY12-15 average: 10-14%). While IRB reported superior construction margin, return ratios of most SPVs remained subdued (RoCE < 10%).

• Till FY14, annual fixed premium on operational projects were reduced from toll collections in income statement. However, in FY15, entire outstanding premium liability (~INR218bn) has been capitalised in fixed asset. Had there been no change in accounting policy, toll revenues (including EBITDA) and PBT would have been lower by INR3bn and INR1.7bn, respectively.

Larsen & Toubro (L&T)

• Standalone core working capital surged to 20% of sales (FY14: 18%, FY13: 13.5%) led by steep increase in unbilled revenue, though partially offset by higher trade payables and customer advances. ~63% of cash profits generated during FY11-15 was invested in working capital.

• L&T (standalone) contributed ~76% to consolidated EBIT, despite only ~31% share in capital employed. Standalone RoCE declined to 25.3% (FY14: 28%).

• L&T Infotech & Technology Services accounts for ~4% of total capital employed, but contributed ~16% to consolidated EBIT. Other operational subsidiaries in power, roads, hydrocarbon, ship building, forging and boiler & turbines, etc., accounted for ~31% of capital employed, but contributed nil to consolidated EBIT.

• L&T's (consolidated) profit for FY15 includes unrealised profit (PBT) of INR3.2bn (12% margin) (FY11-15: INR17bn, 13% margin) from road and Hyderabad Metro construction, undertaken for its subsidiaries.

• Contingent liabilities (ex guarantees) at standalone and consolidated levels more than doubled to INR19.4bn (FY14: INR8.1bn) and INR32bn (FY14: INR15bn), respectively, led by steep increase in claims and disputed income tax liabilities.

Information Technology

Tech Mahindra (TML)

• Unbilled revenue surged to INR19.4bn, 8.6% of sales (FY14: INR10.7bn, 5.7%), in FY15, highest amongst peers. Receivable days at 88, unbilled days at 31 and payable days at 109 stood highest for TML versus peers.



• ESOP cost rose from INR1.3bn to INR2.3bn YoY (largely to key management). Remuneration to KMP’s stood at INR3.0bn (largely stock options).

• Merger accounting leads to lower net worth and higher RoE/RoCE. Adjusted RoE/ RoCE stood at 15%/22% versus reported 28%/36%. Goodwill rose to INR17.3bn, 16% of net worth (FY14: INR5.6bn, 7%), led by acquisitions (largely LCC & Softgen).

• Contingent liabilities rose by INR25bn of which INR12.8bn pertained to service tax matters for 2008 to 2013.

Media & Entertainment

Dish TV (Dish)

• FCF stood negative, led by higher capex due to higher subscriber additions along with increase in churn ratio to 12.3% (FY14: 4.7%; FY11-15 average: 11.6%). Churned out customers represents 42% of gross subscribers added over past 5 years, the cost of which is akin to maintenance capex.

• Trailing EV/EBITDA multiple adjusted for customer churn stood at 25x versus 13x based on reported EBITDA (28x including regulatory dues and creditors for capex) (Based on March 31, 2015 price of INR82/share).

• Dish changed its accounting policy in FY14 and started upfront recognition of activation fee, the impact of which is higher revenue recognition during FY15 by INR2bn, 7% of revenue (our estimate). ARPU has consistently risen over the past 5 years, of which in the past 2 years it could be due to change in revenue recognition policy.

• PBT stood at INR74mn, and adjusted for capitalised forex losses of INR340mn stood at negative INR(266)mn. Cumulative forex losses over last 3 years stood at INR3.3bn (28% of capital employed).

Zee Entertainment Enterprises

• EBITDA margin is optically higher by 120bps due to change in accounting policy for subscription management fees from gross to net

• As highlighted in our past annual report analysis, higher inventory spend in previous years coupled with amortisation policy of 60 months had led to mismatch in profits and cash flows.

• Investments in overseas funds, infra NCDs, ICDs and other advances increased by INR2.7bn to INR15.5bn in FY15, 44% of adjusted net worth. Average yield on cash stood at 8.0-9.1% and other income constituted 14-16% of PBT in past 3 years.

• Operating costs include media content purchased from Zee Media Corp. worth INR1.2bn (FY14: INR1.2bn) and others at INR812mn (Dish TV, Siti Cable, etc).

Oil & Gas

Reliance Industries (RIL)

• Use of lower cost forex loans, superior treasury yields coupled with accounting policy of exchange rate capitalisation led to superior reported profits. Since FY06, cumulative forex losses capitalised and revalued assets, net of depreciation stood at INR479bn, 22% of net worth.


Contents

• Derivatives exposure rose substantially owing to the increase in forward contracts and interest rate swaps. Commodity derivatives exposure for petroleum products rose 2.7x YoY and feedstock purchase contracts rose 2x YoY.

• Capital allocation analysis shows that only 36% of capital employed in refining and petrochemical segment delivers superior returns, whereas 64% of capital employed remains a drag on overall return ratios. RIL’s 44% of capital employed is under CWIP. With most of the projects nearing commissioning, RIL expects decline in capex and improvement in return ratios.

Pharmaceuticals/ Healthcare

Apollo Hospitals Enterprise (AHEL)

• Consolidated EBITDA margin declined 110bps to 14.2%, primarily impacted by increase in revenue share of low-margin pharmacy business to 34% (FY14: 31%) and higher losses in Apollo health and lifestyle Limited (AHLL) and its subsidiaries. EBITDA margin of pharmacies (opened in FY11 and subsequent years) stood at a low 1%.

• Pharmacy segment’s (~34% of consolidated revenue) EBITDA margin remained unchanged at ~3.3%, but EBIT margin declined to 2.2% (FY14: 2.5%) hit by higher depreciation and loyalty discounts. Capital employed in pharmacy business increased to INR5.3bn (FY14: INR3.3bn), while RoCE fell to 6.8% (FY14: 9.8%).

• Related party purchases (medicines) jumped to ~INR5.8bn (FY14: INR3.7bn, FY13: INR3.2bn), 33% (FY14: 27%) of pharmacy sales.

• Receivables overdue (>6 months) stood at INR1bn (~16.5% of total receivables, FY14: 1.6bn). Bad debts written off increased to INR259mn (~5.7% of PBT; FY14: INR179mn).

Aurobindo Pharma (APL)

• Actavis Group reported losses of INR557mn in FY15. Trade payables pertaining to Actavis declined by INR7.0bn. Other liabilities rose by INR4.5bn led by statutory dues of Actavis and may result in additional cash outflow if payable in short term.

• Export incentive receivables continued to rise with INR2.8bn outstanding as at FY15 (FY14: INR2.2bn, 4 years cumulative export incentive income - INR2.7bn). EBITDA margin dipped by 500bps YoY due to higher operating and employee cost. Power cost remained flat at INR3.6bn and declined as a proportion to standalone revenue.

• Cash conversion cycle, ex-acquisitions deteriorated from 178 days to 194 days in FY15 (versus 166 days reported). OCF ex-acquisition stood negative at INR2.4bn.

• Related party purchases stood at INR4.5bn, 8.1% of RM cost in FY15 (FY14: INR3.1bn, 8.5%) was largely towards packaging materials, solvents and other RM.

Cipla • Subsidiaries contribute 11% to consolidated revenues, which grew 69% YoY. South

African subsidiaries turned profitable with INR818mn PAT (FY14: INR41mn loss).

• Goodwill (related to Medpro and other acquisitions) stood at INR25.6bn, 24% of net worth. Exposure to subsidiaries/ JVs/ associates at the standalone level (including investments, loans and net receivables) stood at INR48.7bn, 44% of standalone net worth (FY14: INR39bn, 39%).



• High cost structure continue to weigh on EBITDA margin, which declined 200bps YoY primarily led by employee costs. Return ratios have declined over past 2 years led by acquisitions and capex.

Glenmark Pharmaceuticals (Glenmark)

• Net worth accretion to PAT ratio has dipped significantly during FY15 (only 4% of profits translated to net worth; 55% cumulatively over past 5 years)

• While cumulative currency translation loss stood at INR10.6bn, it is important to note that cash loss was ~INR5.4bn. We believe, over the long term, book value accretion is a better representation of value creation instead of reported profit.

• Cash tax paid has remained consistently higher than P&L tax expense over the past 5 years. Taxes charged to P&L is 44% of cash taxes paid.

• Cash conversion cycle improved primarily led by significant increase in payables from 168 to 270 days. Receivables outstanding from Venezuela subsidiary stood at INR1.5bn in FY15. Outstanding debt stood at INR38bn (FY14: INR32.7bn) and D/E ratio rose from 1.0x in FY14 to 1.3x in FY15 (total liabilities/equity – 2.1x).

Sun Pharmaceutical Industries (SUNP)

• SUNP’s net worth and goodwill stood lower by INR301.7bn due to Ranbaxy merger accounting under ‘Pooling of Interest’ method (permitted under Indian GAAP but prohibited internationally). Consequently, reported RoE/RoCE stood higher at 21.5%/25.9% versus adjusted 12.8%/16.8%.

• Demerger of unit from Sun Pharma Global FZE (SPG) to SUNP standalone in FY14 led to transfer of all assets and liabilities (including USD550mn ‘Protonix’ drug litigation claim) from tax free entity (SPG, UAE) to tax paying entity.

• P&L tax rate stood at 14.3% versus cash tax rate of 27.2% led by DTA credit (total DTA at INR22.3bn, 8.7% of net worth). Contingent liabilities include income tax demands rising to INR26.7bn (FY14: INR12.1bn; FY11: INR2.7bn).

• Our calculation suggests that Ranbaxy consolidated revenue declined by 16% YoY in FY15 and SUNP consolidated revenue, ex-Ranbaxy grew 1.5% YoY. Recurring OCF post interest declined 18% YoY to INR53.1bn.

• Loans to employees and others rose to INR11.7bn (FY14: INR5.8bn) and total loans/advances rose to INR48.7bn, 19% of net worth (FY14: INR23.0bn, 12.4%).

Power & Ports

Adani Ports (APSEZ)

• FY15 witnessed robust growth in revenue and profitability owing to healthy surge (28%) in cargo volumes at Mundra and other ports.

• ICDs/loans & advances (including capital advances) to related party (fellow subsidiaries and hold co) stood at INR24bn (FY14: INR25bn), 22.2% of net worth. ICDs (ex related parties) stood at INR12.6bn (FY14: INR16.7bn).


Contents

• Aggregate cash and non-cash exposure to related parties (ex subsidiaries and JV) stood at INR34.3bn (FY14: INR35.2bn) and INR30.2bn (FY14: INR48bn), respectively, representing ~60% of net worth.

• APSEZ resorted to bill discounting of INR4.5bn, as at March 2015, adjusted for which receivable days increased to 107 (FY14: 84).

• Aggregate unhedged forex exposure stood at INR111.7bn (FY14: INR116.8bn). Management stated that ~30-35% of income (~INR20bn-25bn) is USD denominated and will act as a hedge for USD denominated borrowings.

Retail

Titan Company

• Debt declined by INR7.1bn however, gold lease payables (akin to debt) rose by INR10.8bn as the company has resumed its gold lease model. Total liabilities (debt + payables) surged 22% YoY. Internationally, jewellery companies classify gold lease as debt.

• Off-balance sheet commitments include non-fund based facility, which rose from INR1.5bn in FY14 to INR11.3bn in FY15 pertaining to gold lease.

• Core RoCE (including payables and deposits schemes advance) has been declining since FY11 (26% to 19%), but it improved in FY15 to 23%. RoE has been consistently declining since FY11 from 49% to 29%.

• Adjusted cash flows improved to INR5.7bn in FY15 (FY14: INR5.3bn). Cumulatively adjusted FCF stood negative at INR4.0bn over past 5 years. Adjusted cash conversion cycle marginally improved in FY15, though it remained high at 153 days versus 87 on reported basis.

Telecom Bharti Airtel (Bharti)

• Bharti infused ~INR69bn in its African operations, taking the cumulative cash exposure to INR239bn. Guarantees by the parent on behalf of group companies rose by ~INR99bn to INR840bn (~107% of net worth). As highlighted in our previous years’ (FY11-14) annual report analysis, interest cost on forex loans at Bharti Airtel International (Netherlands) B.V. (BAIN) continues to be cushioned owing to choice of USD as a functional currency.

• D/E ratio, adjusted for deferred spectrum liability and equipment supply payables, stood at 1.9x versus 1.3x reported.

• We believe EV/EBITDA valuation methodology needs to be revisited considering depreciation and capex at 55% and 75% of EBITDA, respectively, over FY11-15.

• Margin of safety for goodwill of INR415bn (FY14:INR469bn), 67% of net worth (FY14:78.5%), deteriorated to 8.5% (FY14:10%, FY13: 11.5%) which in our view is due to decline in African cash flows.

• Cash paid (net) for capex (tangible assets) in FY15 was INR144bn (versus INR194bn capex in FY15). Consequently, payables for equipment supplies increased to INR104bn (FY14: INR65bn), which may come for payment in FY16 and may increase net debt.



List of Companies

Oil & Gas

Reliance Industries ............................................. 156

Pharmaceuticals & Healthcare

Apollo Hospitals Enterprise ................................ 166

Aurobindo Pharma ............................................. 175

Cipla .................................................................... 185

Glenmark Pharmaceuticals ................................. 193

Sun Pharmaceutical Industries ........................... 208

Power & Ports

Adani Ports and SEZ ............................................ 218

Retail

Titan Company ................................................... 228

Telecommunication

Bharti Airtel ........................................................ 237

Automobiles

Ashok Leyland ..................................................... 11

Eicher Motors ..................................................... 23

Hero MotoCorp ................................................... 30

Mahindra & Mahindra ........................................ 39

Motherson Sumi Systems ................................... 49

Tata Motors ........................................................ 59

TVS Motor Company ........................................... 70

Engineering / Construction / Capital Goods

Bharat Forge ....................................................... 82

Crompton Greaves .............................................. 89

Havells India ...................................................... 103

IRB Infrastructure ............................................. 111

Larsen & Toubro ............................................... 117

Information Technologies

Tech Mahindra .................................................... 129

Media & Entertainment

Dish TV ............................................................... 138

Zee Entertainment Enterprises ........................... 146


Ashok Leyland’s (AL) FY15 annual report analysis highlights operational improvement led by robust volumes. However, it posted loss at the consolidated PBT level due to exceptional loss of INR6.1bn (subsidiaries related provisions). AL capitalises forex losses on loans in line with option available under AS-11. Improvement in OCF was supported by increase in trade payables, a part of which in our view is akin to debt. Performance of subsidiaries/ JVs / associates (ex-finance business) continued to be a drag led by write off/ provisions and AL invested additional INR1.5bn (INR950mn in cash) in subsidiaries/ JVs. Exposure to these entities stood at INR19bn, 46% of standalone net worth*, and goodwill pertaining to subsidiaries stood at INR6.9bn, 20% of adjusted* consolidated net worth. Net worth rose by INR5.2bn in FY15, primarily led by QIP proceeds.

* adjusted for revaluation reserve

What’s on track? M&HCV volumes surged a robust 28% YoY and export volumes too jumped 31.8% YoY including defence vehicles. Consequently, EBITDA margin catapulted 620bps YoY. Gross debt (ex-vehicle finance business) declined INR13.3bn to INR42.4bn in FY15.

What needs tracking? AL reported INR416mn loss at PBT level led by exceptional loss of INR6.1bn pertaining to subsidiaries (largely AL Nissan Vehicles), offset by INR3.0bn gain on property sale. Reversal of revaluation reserve on above sale led to higher reported profits by INR 1.4bn. Forex losses capitalised stood at INR707.8mn, 53% of PAT in FY15 versus INR2.3bn in FY14 (INR5.7bn cumulative since FY09, 16.4% of adjusted* net worth). Share issue expenses of INR148mn (11% of PAT) were charged to reserves. Losses at subsidiaries/ JVs (ex-vehicle finance) continued to rise—INR7.8bn in FY15 (FY14: INR3.9bn). Goodwill (INR6.9bn) and other intangibles (INR5.0bn—primarily technical knowhow) collectively stood at INR11.9bn, 34% of adjusted net worth. Avia AL was sold to 49% associate entity AL (UAE) LLC and Albonair continued to be classified as held for sale (INR257mn invested in FY15; total exposure INR4.1bn). Standalone operating cash flows, post interest, improved to INR13.6bn in FY15 (FY14: INR1.2bn), partly led by INR10.8bn rise in payables (FY14: decline of INR3.4bn). Payable days continued to be higher at 106, although they declined YoY from 114 days in FY14. We believe a portion of payables is akin to debt (INR7.9bn, 26% of payables) for which AL paid discounting charge of INR525mn in FY15 (FY14: INR303.6mn). Consolidated receivables more than 6 months (post due date) rose by INR1.6bn in FY15 to INR2.5bn, 19% of total receivables (FY14: INR919mn, 6.7%) and 7.2% of net worth.

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ANALYSIS BEYOND CONSENSUS…THE NEW ABC OF RESEARCH

Ashok Leyland | Annual Report Analysis

Analysis beyond Consensus (ABC) is our initiative to provide a differentiated perspective to our clients on various non-routine and intricate issues. This unit of research works independent of the sector/stock research team and views expressed in this report may vary with that of respective sector/stock analyst.

June 23, 2015

52-week range (INR) : 77 / 29

Share in issue (mn) : 2,845.9

M cap (INR bn/USD mn) : 199 / 3,113

Avg. Daily Vol. BSE/NSE (‘000) : 18,327.5

Promoters* : 38.8

MFs, FIs & Banks : 12.1

FIIs : 20.4

Others : 28.7

*Promoters pledged shares : 4.9 (% of share in issue)

Market Data

Shareholding Pattern (%)



Other highlights Other loans & advances rose from INR16.7bn (59% of adjusted net worth) in FY14 to INR19.6bn (56%) in FY15 primarily led by: (a) increase in balances with customs and excise from INR1.1bn to INR2.1bn (including provision for doubtful balances of INR594mn - of which INR451mn was during FY15); (b) MAT credit from INR3.4bn to INR4.3bn; and (c) other advances from INR4.0bn to INR6.9bn. Borrowing cost adjusted for forex losses capitalised stood at 11.2% in FY15 versus 9.5% on reported basis (FY14: 12.5% versus 8.5% reported). Derivatives exposure rose from INR8.4bn (30% of adjusted net worth) in FY14 to INR17.1bn (49%) in FY15. Net unhedged payables declined sharply from INR15.4bn (55% of adjusted net worth) to INR2.9bn (8.4% of adjusted net worth) over the same period, primarily led by significant increase in derivatives & forex receivables. Contingent liabilities declined significantly by INR6.5bn to INR4.0bn in FY15 (from 37.6% of adjusted net worth to 11.6%) led by dip in export obligation under EPCG scheme from INR8.2bn to INR435mn in FY15.

Key highlights from MD&A • While overall commercial vehicle volumes declined 2.8% over the previous year,

M&HCV segment’s volumes increased by 16%. AL’s market share improved from 26.1% in FY14 to 28.6% in FY15 in the M&HCV segment facilitated by appropriate product mix, a sustained focus on meeting customer requirements and network expansion initiatives. M&HCV export volumes grew by 31.7% to 11,218 units from 8,511 units in FY14, enabled by growth in target export markets.

• In the LCV segment, industry volumes contracted 13.4%. However, AL was able to sustain market share in the small CV (2.0-3.5T) segment supported by sustained product improvements and variants of DOST, the second largest player in the segment. The new ‘PARTNER’ range of products has also achieved significant market share in the 6.0-7.5T segment, its first full year post launch.

• AL has turned the spotlight on product development to meet evolving customer expectations. Its BOSS range has gained leadership in the premium Intermediate Commercial Vehicles (ICV) segment. BOSS sales have significantly contributed to the overall market share in the ICV segment.

• The CAPTAIN series of next generation Heavy Commercial Vehicles (HCV) has been launched in select markets. The product has established new benchmarks in reliability, performance and ride comfort. With economic activity picking up in iron ore and coal mining, the CAPTAIN range is strategically positioned to exploit growth in these sectors.

• The company’s defence business gained momentum in FY15 with rise in the number of domestic kits dispatched as well as substantial export volumes. AL has also won major tenders from defence establishments with new products this year.


Ashok Leyland

Profitability analysis

Table 1: Profitability analysis (INR mn)

Source: Company annual report, Edelweiss research

AL’s revenue jumped 34% YoY and EBITDA margin catapulted 620bps YoY in FY15 leading to INR11.0bn EBITDA surge. However, the company continued to post loss at the PAT level (before minority), although it reduced YoY led by write offs/ impairments. Significant amount of loss after tax was attributable to minority interest (INR3.4bn) leading to reported PAT of INR1.4bn in FY15. Exceptional loss in FY15 stood at INR3.0bn led by a) INR6.1bn provision (includes fixed assets, non-moving inventory and tax liability) for certain products of subsidiaries (largely pertains to AL Nissan Vehicles), offset by b) INR3.1bn gain on sale of property, including revalued portion of gain worth INR1.4bn recorded in earlier years. Receivables outstanding towards sale of property stood at INR2.0bn as at FY15 end. Forex loss capitalised in fixed assets stood at INR707.8mn, 53% of PAT. Share issue expenses were charged through securities premium under reserves of INR148mn, 11% of PAT. Table 2: Commission on exports (INR mn)


Commission on exports as a proportion to export turnover rose to 8.6% in FY15. Export revenues grew by 54% during FY15.

Particulars

FY14 % FY15 % FY14 % FY15 % FY14 % FY15 %

Sales 99,434 100.0 135,622 100.0 15,433 100.0 17,787.0 100.0 114,867 100.0 153,409 100.0 Raw Materials Consumed 76,026 76.5 99,652 73.5 5,359 34.7 4,774.1 26.8 81,385 70.9 104,426 68.1

Operating and Admin expenses 11,746 11.8 13,863 10.2 4,060 26.3 4,586.9 25.8 15,806 13.8 18,450 12.0 Personnel cost 9,997 10.1 11,840 8.7 3,459 22.4 3,521.1 19.8 13,456 11.7 15,361 10.0 EBITDA 1,666 1.7 10,266 7.6 2,555 16.6 4,905.0 27.6 4,220 3.7 15,171 9.9 Depreciation 3,770 3.8 4,163 3.1 1,529 9.9 1,635.8 9.2 5,300 4.6 5,799 3.8 EBIT (2,105) (2.1) 6,103 4.5 1,025 6.6 3,269.3 18.4 (1,079) (0.9) 9,372 6.1 Financial Charges 4,529 4.6 3,935 2.9 3,526 22.8 4,787.9 26.9 8,055 7.0 8,723 5.7 Add: Other income 665 0.7 1,245 0.9 259 1.7 643.6 3.6 924 0.8 1,888 1.2 PBT before exceptional items (5,969) (6.0) 3,413 2.5 (2,241) (14.5) (875.0) (4.9) (8,210) (7.1) 2,538 1.7 Exceptional items 5,057 5.1 1,009 0.7 151 1.0 (3,962.5) (22.3) 5,208 4.5 (2,953) (1.9) PBT (912) (0.9) 4,422 3.3 (2,090) (13.5) (4,837.5) (27.2) (3,002) (2.6) (416) (0.3) Tax Expense/(gain) (1,206) (1.2) 1,074 0.8 521 3.4 650.3 3.7 (685) (0.6) 1,724 1.1 PAT 294 0.3 3,348 2.5 (2,611) (16.9) (5,487.8) (30.9) (2,317) (2.0) (2,140) (1.4) Attributable to Minority interest (577) (0.5) (3,386) (2.2) Profit from associates 99 0.1 92 0.1 PAT 294 0.3 3,348 2.5 (2,611) (16.9) (5,487.8) (30.9) (1,641) (1.4) 1,339 0.9

ConsolidatedStandalone Subsidiary (Derived)

Particulars FY12 FY13 FY14 FY15Commission paid in foreign currency 1,543 1,067 1,032 1,641Export revenues 15,404 14,254 12,423 19,090As a % of export revenues 10.0 7.5 8.3 8.6

Exceptional items led to losses at PAT level (before minority). INR3.1bn gain on sale of property includes INR1.4bn worth revaluation gain recorded in previous years



Subsidiaries performance Table 3: Subsidiaries performance analysis (INR mn)


* Exposure is calculated as % of standalone adjusted net worth

# Decline in AL Nissan Vehicles PAT and Investments was led by provision for losses.

Overall performance of subsidiaries (ex-financing business) deteriorated in FY15 led by AL Nissan Vehicles and the Optare Group.

Table 4: Performance of joint ventures (INR mn)


JVs continued to post losses—INR959.5mn in FY15 (FY14: INR681.7mn)—primarily led by Nissan JV and AL John Deere Construction Equipment. The company further infused INR400mn in the JVs during the year.

Networth Turnover PATInvestment

and LoansExposure

(%)*Networth Turnover PAT

Investmentand Loans

Exposure (%)*

Subsidiary companyHinduja Leyland Finance 58 8,042 5,962 812 7,785 23.8 9,171 8,143 1,112 7,785 19.0 Ashok Leyland Nissan Vehicle #

51 4,411 10,522 (1,745) 3,729 11.4 (3,131) 10,304 (7,912) 1,959 4.8

Hinduja Tech 62 (136) 1,187 (85) 1,154 3.5 641 1,389 (78) 1,213 3.0 Optare UK 0 (1,193) 354 (30) - - - - - - - Optare Group 0 (1,473) 5,373 (359) - - - - - - - Optare plc 75 2,513 - (18) 2,008 6.1 (2,166) 5,835 (300) 1,971 4.8 Avia Ashok Leyland Motors s.r.o

- 1,387 297 (842) 645 2.0 - - - - -

Albonair GmbH 100 294 700 (694) 3,828 11.7 67 1,832 405 3,873 9.5 Global TVS Bus Body Builders

67 214 908 (36) 37 0.1 295 1,423 81 145 0.4

Others 54-100 2,513 4,210 (129) 1,366 4.2 349 3,914 (10) 567 1.4 Total 16,573 29,511 (3,126) 20,552 62.8 5,226 32,841 (6,702) 17,512 42.7

ParticularsFY15 profitability and total exposureFY14 profitability and total exposureFY15

shareholding %

Name of JV Proportion of interest-

FY15 (%)

Investments as at FY14

end

Amt Infused in

FY14

FY14 (Loss) in JV

Co's share of (loss)

Investments as at FY15

end

Amt Infused in

FY15

FY15 (Loss) in JV

Co's share of (loss)

Nissan Ashok Leyland Powertrain 49.0 740.5 5.1 (49.8) (24.4) 740.5 - (62.9) (30.8) Nissan Ashok Leyland Technologies 50.0 260.5 5.5 (141.6) (70.8) 260.5 - (195.7) (97.8)

Ashok Leyland John Deere Construction Equipment

50.0 1,535.7 432.0 (391.3) (195.6) 1,860.7 325.0 (591.1) (295.5)

Ashley Alteams 50.0 280.7 150.0 (99.0) (49.5) 355.7 75.0 (109.9) (54.9) Automotive Infotronics (under l iquidation)

- 15.0 - - 15.0 - -

Total 2,832.4 592.5 (681.7) (340.3) 3,232.4 400.0 (959.5) (479.1)


Ashok Leyland

Table 5: Fresh investments in subsidiaries/JVs/associates (INR mn)


AL made additional investment of INR1.5bn (INR950mn in cash) in above subsidiaries and JVs in FY15. Further, INR154.5mn via equity and INR239mn by way of preference shares was infused in HTL (formerly Defiance Technologies) by way of conversion of loan into investment. Nissan International Holding subscribed to the equity capital of HTL, leading to dilution of AL’s take in the latter from 100% to 62% in FY15.

Fresh investment in FY15Stake (%)

Infusion during the year

Total ExposureProfit/ (Loss) for

the yearSubsidiariesHinduja Tech (formerly Defiance Technologies) 62 394 1,213 (78) Ashok Leyland Nissan Vehicles Limited (JV earlier) 51 370 1,959 (7,912) Global TVS Bus Body Builders (Formerly Irizar TVS) 67 16 145 81 Gulf Ashley Motor Limited 92 44 176 13

Subsidiaries held for saleAlbonair GmbH 100 257 3,873 405 JVsAshok Leyland John Deere Construction Equipment 50 325 1,861 (296) Ashley Alteams 50 75 356 (55) Total 1,480 9,582

FY15



Table 6: Total exposure to subsidiaries/ JVs/ associates (ex-Hinduja Leyland Finance) (INR mn)


AL continued to classify Albonair as subsidiary held for sale. In FY15, AL sold its subsidiary Avia Ashok Leyland (classified as held for sale) to its associate company Ashok Leyland (UAE) LLC for enterprise value of INR686.5mn (USD11mn), of which INR18.8mn was towards equity and balance towards loan taken over by AL (UAE) LLC. The company divested its 48.5% in Ashok Leyland Wind Energy; ergo, the latter has ceased to be a subsidiary. AL continued to hold balance 11.5% stake in the company.

Investment / Loans

Total Exposure to SA Networth (%)

Investment / Loans

Total Exposure to SA Networth (%)

Investments in subsidiaries

Hinduja Tech (formerly Defiance Technologies) 1,154 3.5 1,213 3.0

Ashok Leyland Nissan Vehicles Limited (JV earlier) 3,729 11.4 1,959 4.8

Global TVS Bus Body Builders (Formerly Irizar TVS Limited) 129 0.4 145 0.4

Ashok Leyland Wind Energy Limited 780 2.4 - -

Optare PLC (Associate earlier) 2,008 6.1 1,971 4.8

Others 494 1.5 355 0.9

Total (A) 8,294 25.3 5,642 13.8

Investments in subsidiaries held for sale

Avia Ashok Leyland 645 2.0 - -

Albonair GmbH 3,616 11.0 3,873 9.5

Albonair (I) Pvt Ltd 211 0.6 211 0.5

Total (B) 4,473 13.7 4,085 10.0

Investment in Associates

Ashok Leyland (UAE) LLC 541 1.7 541 1.3

Others 68 0.2 50 0.1

Total (C) 609 1.9 591 1.4

Investments in JVs

Ashok Leyland John Deere Construction Equipment 1,536 4.7 1,861 4.5

Nissan Ashok Leyland Powertrain Ltd 740 2.3 740 1.8

Others 606 1.9 637 1.6

Total (D) 2,883 8.8 3,238 7.9

Other investmentsHinduja Foundries (earlier fellow subsidiary) - Preference Equity Investment

3,217 9.8 3,217 7.9

Hinduja Foundries - equity investment 242 0.7 242 0.6

Hinduja Energy India Ltd. 1,871 5.7 1,871 4.6

Others 29 0.1 76 0.2

Total (E) 5,359 16.4 5,406 13.2

Grand Total (A+B+C+D+E) 21,618 66.0 18,962 46.3

ParticularsFY14 FY15


Ashok Leyland

Table 7:Hinduja Foundries performance analysis (INR mn)


Further, above analysis does not include cumulative dividend payable (largely @ 9%p.a on INR3.0bn worth preference shares) which may further reduce the net worth. Table 8: Goodwill and intangibles analysis (INR mn)


Intangibles rose by INR462mn in FY15 led by increase in intangibles under development.

Particulars Mar 11 Sep 12 Mar 13 Sep 14 Q1&Q2'15

(12 mth) (18 mth) (6 mth) (18 mth) (6 mth)Revenue from operations 5,512 10,317 3,067 9,991 2,662Total expenditure 4,900 11,503 3,466 10,788 2,841Operating profit 612 (1,186) (399) (797) (180)Other income 88 51 12 69 37Interest exp 373 1,158 401 1,061 407Depreciation 242 517 203 722 287Exceptional loss/(gain) 0 204 0 113 162PBT 84 (3,014) (991) (2,624) (999)Provision for tax 10 (100) 47 0 0PAT 75 (2,913) (1,038) (2,624) (999)

Particulars Mar 11 Sep 12 Mar 13 Sep 14 Q1&Q2'15

(12 mth) (18 mth) (6 mth) (18 mth) (6 mth)Net worth-Reported 4,085 1,852 3,073 1,887 864

Less: Redeemable cumulative Preference shares 217 967 3,217 3,217 3,217Less: Revaluation reserve 1,888 1,886 1,886 1,884 1,884Adjusted Net worth (1,020) (3,251) (2,029) (3,214) (4,237)

Total Debt 5,706 6,734 5,758 5,983 5,481

Particulars FY13 FY14 (C)Additions/

adjustmentsAmortisation/

adjustmentsFY15 (C)

Computer Software - Acquired 368 278 142 (173) 246 - Developed 1,178 1,082 (133) 949 Technical Knowhow - Acquired 462 1,625 10 (269) 1,366 - Developed 1,627 2,301 71 (365) 2,007 Intangibles under develop. 1,263 264 239 - 503 Total (A) 4,898 5,550 462 (940) 5,071 % of adjusted net worth 15.5 19.7 14.5

Goodwill on consolidation (B) - 7,817 - (961) 6,857 Total Intangibles (A+B) 4,898 13,367 462 (1,901) 11,927 % of adjusted net worth 15.5 47.5 34.2

Hinduja Foundries continues to incur losses and adjusted net worth continues to deteriorate

Goodwill pertaining to subsidiaries declined to INR6.9bn, 20% of adjusted net worth (FY14: INR7.8bn, 28%)



Net worth analysis Table 9: Net worth accretion - Consolidated (INR mn)


Net worth rose by INR7.9bn led by equity proceeds, however declined by INR2.8bn due to dividend, adjustments to revaluation reserve and forex losses booked in hedging reserve/ FCMITDA. Outstanding revaluation reserves stood at INR10.2bn, 22.6% of reported net worth (FY14: INR11.7bn, 29.4%). Reserves were further adjusted by INR810mn in FY15 led by change in the group’s interest due to dilution in Hinduja Leyland Finance.

Particulars FY15Opening shareholders' fund 39,892 Add

Profit for the year 1,339 Issue of shares (incl ESOP and premium theron) 7,998 9,337

LessAdjustment from Revaluation reserve 1,521 Change in group's interest 810 Expenses on issue of shares/ debentures 148 Exchange difference charged to FCMITDA and hedging reserves 82 Dividend 1,541 Others 14 4,116

Closing shareholders' fund 45,113

Consolidated net worth rose by INR5.2bn primarily led by QIP proceeds received in FY15 Dividend payout exceeded profits generated during the year Reversal of revaluation reserve on property sale led to higher reported profits by INR 1.4bn.


Ashok Leyland

Table 10: Adjusted net worth analysis (INR bn)


** Forex losses capitalised is In line with option available under amended AS-11.

Cash flow analysis Table 11: Cash flow analysis (INR mn)


Particulars D/E D/EReported Consolidated Networth (NW) --------------------A 39.9 1.4 45.1 0.9 Adjustments to NW:

Revaluation reserve 11.7 10.2 Goodwill (considering most subsidiaries are loss making) 7.8 6.9 Forex loss capitalised since FY 08 (net of average depreciation) ** 5.6 5.7

Adustments to NW ----------B 25.1 22.8Adustments as % of NW 63% 51%Adjusted NW (A-B)---------------C 14.8 3.8 22.3 1.9 Intangibles and investments in loss making entities

Intangibles (software, technical knowhow) 5.5 5.1 Subsidiaries held for sale-not consolidated (Albonair & Avia) 4.5 4.1 Investments in loss making sub (net off GW considered above)- excludes Hinduja L Finance

0.5 -

Financial guarantees for associates & Sub 1.8 1.6 Others (Hinduja Foundaries/Hinduja Energy, John Deere) 8.2 8.6

Intangibles and investments in loss making entities-----D 20.5 19.3 Intangible & investements in loss making entities as % of Adj. NW 139% 87%Not adjusted in above

Carrying value of MAT (assuming recoverable in future) 3.3 4.3 MTM Gains on Indusind Bank shares 2.5 4.5 QIP proceeds 6.7 - Potential upside on 57.5% stake in Hinduja Leyland Finance @ carrying cost of INR 7.8bn (Book value @ INR9.2bn for 100%)

- -

Net addition to NW on account of above 12.5 8.8

Amount AmountFY14 FY15

Profit before tax (912) 4,422 (2,090) (4,838) (3,002) (416)Non-operating expense (1,236) 373 177 4,598 (1,059) 4,971 Non-cash adjustments 3,842 6,425 1,700 6,270 5,542 12,695 Direct taxes paid (297) (502) (669) (614) (966) (1,115) Cash profit after tax 1,396 10,718 (882) 5,417 514 16,135 (Increase)/Decrease in trade and other receivables

1,168 440 1,455 (152) 2,623 288

(Increase)/Decrease in inventories 7,073 (2,098) (501) 983 6,572 (1,116) (Increase)/Decrease in loans and advance (845) (1,929) (3,188) (19,452) (4,033) (21,381) (Increase)/Decrease in other assets 147 (272) (885) 1,453 (737) 1,182 Increase/(Decrease) in l iabil ities and provisions

(3,376) 10,806 (2,603) (958) (5,978) 9,848

Increase in working capital 4,168 6,948 (5,722) (18,126) (1,554) (11,179)Net cash from operating activities 5,564 17,666 (6,604) (12,709) (1,040) 4,956 Interest expenses paid (4,358) (4,056) (631) (3,975) (4,988) (8,031)Net cash from operating activities post interest

1,206 13,609 (7,235) (16,684) (6,028) (3,075)

Less: Capex (other than exceptional items) (2,071) (2,059) (1,831) (274) (3,902) (2,333)Free cash flow (864) 11,551 (9,066) (16,958) (9,930) (5,408)

ParticularsStandalone

FY14 FY15Subsidiary (derived) Consolidated

FY14 FY15 FY14 FY15



Operating cash flow, post interest at the standalone level, improved from INR1.2bn in FY14 to INR13.6bn in FY15 partly due to increase in profitability and partly led by significant increase in liabilities, including payables. Trade payable at the standalone level rose from INR22.1bn in FY14 to INR28.3bn in FY15. Loans & advances rose at the consolidated level due to increase in Hinduja Leyland Finance’s receivables to INR15.0bn in FY15 (FY14: Not available separately).

Table 12: Cash conversion cycle (days)*


* Calculated on closing basis

Trade payables of INR30.8bn at the consolidated level include acceptances, which in our view are in the nature of debt. Acceptances stood at INR7.9bn in FY15 (FY14: INR6.6bn) for which bill discounting charges of INR525mn were charged to the P&L in FY15 versus INR303.6mn in FY14.

Table 13: Receivables analysis (INR mn)


Table 14: Other loans and advances analysis (INR mn)


• Other loans/advances rose from INR16.7bn in FY14 to INR19.6bn led by increase in balances with statutory authorities, MAT credit and other advances.

Particulars FY13 FY14 (C) FY15 (C) Inventory days 75 68 54 Trade Receivable days 42 44 32 Material Advance days 5 8 5 Less: Trade payable days (98) (114) (106) Less: Advance from customer days - (5) (7) Cash conversion cycle 23 1 (22)

Particulars FY14 FY15 FY14 FY15Receivables > than 6 months 871 2,414 919 2,531 Other receivables 12,119 10,163 12,892 11,007 Total 12,990 12,577 13,811 13,538 Receivables > than 6 months as % of total 6.7 19.2 6.7 18.7

Standalone Consolidated

Particulars FY14 FY15Loans to related parties 1,420 868 Balances with customs and excise. 1,135 2,052 Advances to tax and statutory authorities 4,741 4,578 MAT Credit 3,367 4,289 Capital advances 437 107 Material advances 1,770 1,417 Other advances 4,011 6,925 Less: Provisions (145) (598) Total 16,737 19,639 As % of adjusted net worth 59 56

Cash conversion cycle improved from 1 day to negative 22 days. Though payable days fell YoY, they continued to be higher at 106 days

Receivables outstanding for more than 6 months rose significantly in FY15 by INR1.6bn, pertaining to receivables from state government


Ashok Leyland

• Provisions include write off pertaining to balances with customs and excise authorities worth INR594mn as on FY15 versus INR143mn in FY14.

• MAT credit rose from INR3.4bn (12% of adjusted net worth) in FY14 to INR4.3bn (12%) in FY15.

Debt and borrowings Table 15: Debt and borrowing cost analysis (INR mn)


* Calculated on closing basis

Net unhedged payables declined sharply from INR15.4bn in FY14 (55% of adjusted net worth) to INR2.9bn (8.4% of adjusted net worth) primarily led by significant increase in forex receivables (including for sales, loans, cash balances, etc) and derivatives. Derivatives exposure rose from INR8.4bn in FY14 to INR17.1bn in FY15.

Contingent liabilities and commitments analysis Table 16: Contingent liabilities and commitments (INR mn)


Consolidated (ex-financing business)Particulars FY14 (C) FY15 (C)Loan funds 55,663 42,429 Interest expense 4,581 4,046 Interest capitalized 138 4 Total interest 4,719 4,051 Exchange losses capitalized 2,257 708 Interest + Exch. Loss capitalized 6,976 4,758 Borrowing cost (%)* 8.5 9.5 Borrowing cost incl exch loss (%)* 12.5 11.2

Particulars FY13 FY14 (C) FY15 (C)Export obligation under EPCG Scheme 8,227 435 Claims not acknowledged as debt 654 1,168 2,215 Capital commitments 1,203 917 978 Guarantees 1,350 16 17 Others 0 246 393 Total 3,207 10,573 4,038 Adjusted* net worth 31,585 28,153 34,895 % of net worth 10.2 37.6 11.6

AL capitalised forex losses of INR708mn, however it declined YoY as compared to INR2.3bn in previous year. Adjusted borrowing cost including forex loss stood at 11.2% versus 12.5% in FY14 due to lower forex loss

Export obligations under EPCG scheme declined sharply to INR435mn in FY15 Claims not acknowledged as debt doubled to INR2.2bn in FY15



Table 17: Summary financials (INR mn)


Particulars FY11 FY12 FY13 FY14 (S) FY14 (C) FY15 (S) FY15 (C)Sales 111,771 129,043 124,812 99,434 114,867 135,622 153,409 Total income 112,216 129,447 125,436 100,596 115,792 136,867 155,297 EBITDA 12,137 12,561 8,765 1,169 4,220 10,266 15,171 EBITDA margin (%) 10.9 9.7 7.0 1.2 3.7 7.6 9.9 RoE (%) 16.6 13.8 3.9 (6.8) (12.2) 5.61 7.8 RoCE (%) 16.0 13.6 6.9 (1.6) (0.1) 8.3 8.6 Depreciation 2,674 3,528 3,808 3,770 5,300 4,163 5,799 Financial costs 1,889 2,553 3,769 4,529 8,055 3,935 8,723 Net profit 6,313 5,660 4,337 294 (1,641) 3,348 1,339 Equity shareholders' funds 39,630 42,123 44,551 44,479 39,892 51,187 45,113 Loan funds 25,683 30,979 43,554 46,903 85,000 33,497 90,699 Net Debt 23,887 30,653 43,415 46,786 83,865 25,984 81,648 Net fixed assets (excl CWIP) 46,338 49,135 52,819 56,599 67,909 52,556 58,434 CWIP 3,580 5,482 6,889 1,815 2,965 1,201 2,161 Goodwill on consolidation - - - - 7,817 - 6,857 Current assets loans and advances 38,042 42,713 42,826 38,554 58,758 39,417 66,626 Current liabil ities and provisions 35,397 40,386 36,785 31,928 38,452 42,521 50,222 Net current assets 2,645 2,327 6,041 6,626 20,306 (3,104) 16,404 Cash and cash equivalent 1,795 326 139 117 1,134 7,513 9,051 Cash flow from operating activities 5,914 11,473 7,283 5,564 (1,040) 17,666 4,956 Cash flow from investing activities (9,177) (10,575) (11,643) (1,101) (3,773) 1,117 (1,257) Cash flow from financing activities (136) (2,411) 4,170 (4,486) 4,613 (11,792) 3,807 Net cash flows (3,400) (1,513) (190) (23) (200) 6,991 7,506 CAPEX (3,526) (6,978) (6,492) (2,071) (3,902) (2,059) (2,333) Working capital investments (4,914) 218 (485) 4,168 (1,554) 6,948 (11,179)


Eicher Motors’ (Eicher) CY14 annual report analysis highlights another blockbuster year with robust revenue and profitability, led by record high Royal Enfield (RE) volumes and margins. EBITDA margin catapulted 580bps YoY to 24.2% for CY14. Though VECV’s performance remained subdued, consistent market share gains continued. Cash flow generation (adjusted for acceptances) stood robust at INR10.4bn versus INR7.1bn in CY13. Superior capital allocation led to stable and healthy RoE/ RoCE despite the company being in expansion phase. Related party transactions include brand fee payments of INR269.4mn (2.7% of PAT) at the consolidated level. What’s on track? Standalone (RE) business continued to log robust operating performance. RE volumes surged 70% YoY to record high of more than 3lakh units, led by capacity expansion and stronger demand. Operating profit and margin surged as well to record high of 24.2% in CY14. The RE business is likely to continue to surge spurred by further capacity expansion plans and if the robust demand persists. Working capital cycle improved YoY from (17) days in CY13 to (25) days in CY14, largely led by improvement in inventory and receivable days. Acceptances supported working capital cycle, adjusted for which cash conversion cycle improved to (7) days in CY14 (CY13: 1 day).

What needs tracking? Subdued CV business (VECV) remained a drag on consolidated profitability. CV volumes declined 1.6% YoY; however, market share continued to rise. Overall EBITDA margin of subsidiaries (largely VECV) declined 110bps YoY led by higher operating and employee expenses proportion to sales. R&D expenditure details at the consolidated level were not available. Expenditure capitalised under product designs and prototypes (including under development) stood at INR1.2bn in CY14. However, R&D capitalisation ratio has been declining over the years--from 73% in CY11 to 59% in CY13. The company invested additional INR0.8bn in joint venture company Eicher Polaris and total investment as at CY14 stood at INR1.1bn. With advanced stages of project completion, the launch in CY15 is keenly awaited. Further, expansion in international markets will be the key growth driver going forward as envisioned in the annual report.



Eicher Motors | Annual Report Analysis


March 16, 2015

52-week range (INR) : 17,200 / 5,460

Share in issue (mn) : 27.1


Avg. Daily Vol. BSE/NSE (‘000) : 55.0

Promoters* : 55.0


FIIs : 19.5

Others : 20.8

*Promoters pledged shares : Nil

(% of share in issue)

Market Data




Other highlights • MAT credit outstanding rose to INR1.9bn in CY14, 8% of net worth (CY13: INR1.4bn).

Effective tax rate jumped from 22% in CY13 to 29% in CY14.

• Contingent liabilities increased to INR4.0bn, 16% of net worth (CY13: INR2.1bn, 10%), largely led by sales tax matters.

Key highlights from MD&A • Eicher clocked its highest ever revenue and operating profit. The company’s EBIT

margin, at 10.2%, was also the highest ever. At 22.5%, RE’s EBIT margin is better than any other motorcycle company in the world and possibly the highest compared to any automotive brand globally as well.

• With over 95% market share in this market in India, which is growing at more than 50% each year, RE has created this category in India. Plan is to reach a capacity of 4,50,000 units in FY15 and over 6,00,000 in FY16 from current manufacturing facilities.

• RE added nearly 100 new dealerships, taking the total dealership network close to 400. It is planning to continue to expand its distribution network over the next few years.

• Company has commenced strategic entry into international markets where it has been selling motorcycles for decades, but with considerably low support from our side.

• Markets such as US, UK and Europe are highly influential, and success therein is crucial for the company to gain currency and credibility as it works towards achieving global leadership in the mid-sized segment.

• VECV’s EBIT margin at 3.7% was the best amongst Indian CV companies in 2014 and its lean business model lends it the distinction of being the only CV company to remain profitable in every quarter during the longest downturn in recent decades for the Indian commercial vehicle industry.

• 50:50 joint venture with Polaris Industries, Eicher Polaris Private (EPPL), is in advanced stages of project completion, with the launch of the four-wheeled personal vehicle planned for the second half of this year.


Table 1: Standalone versus consolidated profitability (INR mn)


CY13 % CY14 % CY13 % CY14 % CY13 % CY14 %Sales 17,025 100.0 30,312 100.0 51,073 100.0 57,071 100.0 68,098 100.0 87,383 100.0

Raw Materials Consumed 10,598 62.3 18,076 59.6 35,789 70.1 39,583 69.4 46,387 68.1 57,660 66.0 Operating and Administrative expense

2,180 12.8 3,291 10.9 7,066 13.8 8,688 15.2 9,246 13.6 11,979 13.7

Personnel cost 1,109 6.5 1,609 5.3 4,224 8.3 4,987 8.7 5,333 7.8 6,596 7.5 EBITDA 3,137 18.4 7,336 24.2 3,995 7.8 3,812 6.7 7,132 10.5 11,148 12.8 Depreciation 304 1.8 502 1.7 996 2.0 1,697 3.0 1,300 1.9 2,198 2.5 EBIT 2,833 16.6 6,834 22.5 2,998 5.9 2,116 3.7 5,831 8.6 8,950 10.2 Financial Charges 3 0.0 17 0.1 76 0.1 81 0.1 79 0.1 98 0.1 Other income 801 4.7 1,163 3.8 152 0.3 (89) (0.2) 953 1.4 1,074 1.2 EBT 3,632 21.3 7,980 26.3 3,074 6.0 1,946 3.4 6,706 9.8 9,926 11.4

ParticularsStandalone Subsidiary/JV (Derived) Consolidated


Eicher Motors

Robust volume growth RE segment led to surge in revenue and profitability. RE volumes catapulted 70% YoY to 302,592 including exports, which jumped 46% YoY to 6,221. Higher demand and capacity expansion led to significant increase in revenue. Standalone (RE) EBITDA margin expanded 580bps to an all time high of 24.2% due to significant operating leverage kicking in. VECV’s performance remained subdued with EBITDA margin declining 110bps YoY. Although raw material cost as proportion to sales declined YoY, operating and employee expenses dented EBITDA margin YoY. Chart 1: VECV-Market share


Cash flow analysis Table 2: Cash flows analysis (INR mn)


6.0

7.8

9.6

11.4

13.2

15.0

0

12,000

24,000

36,000

48,000

60,000

CY08 CY09 CY10 CY11 CY12 CY13

(%)

(Vol

umes

)

Trucks/ Buses volumes Mkt share (%)

Particulars

Profit before tax 3,632 7,980 3,074 1,946 6,706 9,926 Non-operating expense (790) (1,096) (41) 237 (831) (860) Non-cash adjustments 304 502 996 1,697 1,300 2,198 Direct taxes paid (780) (2,255) (724) (555) (1,504) (2,810)Cash profit after tax 2,366 5,131 3,305 3,324 5,671 8,455 Changes in receivables (59) 14 (607) (511) (666) (497) Changes in inventories (684) (613) 305 (574) (380) (1,187)Changes in Loans & Advances (254) (298) (98) (1,010) (351) (1,308)Changes in trade payables 1,157 1,387 667 1,129 1,824 2,516 Changes in other l iabs and payables 869 937 (347) 862 522 1,799 Increase in working capital (ex Acceptances)

1,029 1,428 (80) (105) 948 1,323

Increase in acceptances 282 301 261 396 543 697 Increase in working capital 1,311 1,729 181 291 1,491 2,020 Net cash from operating activities 3,676 6,860 3,486 3,615 7,162 10,475Interest expenses paid (3) (17) (77) (81) (80) (98) Net cash from operating activities post interest

3,673 6,843 3,409 3,534 7,082 10,377

Capital expenditure (1,388) (3,699) (5,667) (5,983) (7,054) (9,682) Free cash flows 2,286 3,144 (2,258) (2,449) 28 695

Standalone Subsidiary (derived) ConsolidatedCY13 CY14 CY13 CY14 CY13 CY14

Despite dismal performance of CV segment, Eicher’s market share has jumped consistently over past 5-7 years



Cash flow generation continued to be robust with operating cash flow, post interest and acceptances, rising from INR7.1bn in CY13 to INR10.4bn in CY14. Working capital requirements rose YoY by INR1.3bn, partly supported by increase in acceptances of INR697mn, adjusted for which it rose by INR2.0bn. However, it largely reflects growth in the business as working capital cycle has improved over the past 2 years.

Table 3: Average cash conversion cycle (days)


Earnings to cash conversion Table 4: Earnings to cash conversion ratio (INR mn)


Chart 2: Earnings to cash ratio


Particulars CY10 CY11 CY12 CY13 CY14Inventory days 29 31 34 37 34 Trade Receivable days 20 19 23 26 24 Less: Payable days (69) (65) (65) (78) (79) Less: Advance from customer days (3) (3) (5) (7) (8) Add: Advance to supplier days - 3 5 5 4 Cash conversion cycle (23) (14) (8) (17) (25) Add: Acceptance days 12 16 17 18 18 Adjusted cash conversion cycle (11) 2 9 1 (7)

Particulars CY11 CY12 CY13 CY14OCF post interest 3,966 4,921 7,082 10,377 OCF adjusted for acceptances (A) 3,145 5,050 6,540 9,680 Profit after tax (PAT) 3,088 3,243 3,939 6,154 Depreciation 640 822 1,300 2,198 Other income 1,425 1,366 953 1,074 PAT + Depreciation - Other income (B) 2,303 2,698 4,287 7,277 Earnings to cash conversion ratio - adjusted 137 187 153 133 OCF to EBIDTA - Adjusted 53 92 92 87

0.0

40.0

80.0

120.0

160.0

200.0

CY11 CY12 CY13 CY14

(%)

Earnings to cash conversion ratio - adjusted OCF to EBIDTA - Adjusted

Cash conversion cycle, adjusted for acceptances improved to (7) days in CY14 versus CY13 primarily led by lower inventory and receivable days

Earnings to cash conversion continues to be robust and consistently above 100%, although the ratio has declined over the past 2 years


Eicher Motors

R&D spends Table 5: R&D expenditure - Consolidated (INR mn)


Total expenditure capitalised as product designs and prototypes under intangibles (incl under development) stood at INR1.2bn in CY14. Table 6: R&D expenditure - Standalone (INR mn)


Brand ownership analysis and comparison

Table 7: Brand ownership – A comparative analysis


Particulars CY11 CY12 CY13 CY14R&D - capital ised 1,789 1,373 1,298R&D - revenue 672 908 907Total R&D expense 2,460 2,282 2,204Revenue 56,844 63,899 68,098Total R&D as % of revenue 4.3 3.6 3.2 % of R&D capitalised 73 60 59

Not available

Particulars CY11 CY12 CY13 CY14R&D - capitalised 56 40 109 148R&D - revenue 105 168 209 193Total R&D expense 160 207 318 340Revenue 6,715 10,493 17,025 30,312Total R&D as % of revenue 2.4 2.0 1.9 1.1 % of R&D capitalised 65 81 66 57

Company Brand owner Remarks/ Extracts from annual report Eicher Motors Eicher Goodearth

Pvt Ltd.Company uses 'Eicher' brand and pays brand fees to Eicher Goodyear Pvt Ltd (EGPL), a promoter entity.

Tata Motors Tata Sons (Promoter)

The Company uses the “Tata” brand, which has been l icensed to the Company by Tata Sons Limited. The Company’s believes that establishment of the “Tata” word mark and logo mark in India and world over, is material to its operations.

Maruti Suzuki Suzuki Motor Corporation (Holding company)

The Company benefits from the parent, Suzuki Motor Corporation’s expertise in designing models that excel in functionality, fuel efficiency, body styling and driving pleasure, al l this while meeting the customers’ cost aspirations.

JSW Steel JSW Investment Pvt Ltd (Promoter)

The “JSW” brand is owned by JSW Investments Private Limited (JSWIPL), a promoter group company. FY14 annual report proposed a special resolution to enter into a contract, as a l icensee, with JSW Investments Private Limited as the l icensor, for a l icense to use the ‘JSW’ brand for an annual fee of 0.25% of revenue w.e.f. April 1, 2014.

Havells India QRG Enterprises Ltd (Promoter group entity)

Havells entered into a revised Trademark License Agreement with QRG Enterprises Limited (one of the promoter companies), pursuant to which the brand “Havells” wil l be transferred to the Company for no consideration with effect from 1st April 2016.

R&D capitalisation ratio to total R&D spends has declined over past few years. Details for CY14 were not available at consolidated level

R&D spends at standalone level declined as % of revenue along with R&D capitalisation ratio in CY14



Table 8: Brand fees paid/ payable (INR mn)


Related party transactions include brand fee payments to Eicher Goodearth (EGPL, a promoter entity) of INR75.4mn (CY13: INR42.3mn) at the standalone level. On consolidated level, payments stood at INR269.4mn, 2.7% of PBT (CY13: INR245.1mn, 3.7% of PBT).

Capital allocation Table 9: Capital allocation (INR mn)


Chart 3: Capital allocation


Particulars CY11 CY12 CY13 CY14StandaloneBrand fees - 26.2 42.3 75.4 As % of PBT 0.0% 1.5% 1.2% 0.9%Consolidated Brand fees 207.0 253.2 245.1 269.4 As % of PBT 3.1% 4.2% 3.7% 2.7%

Particulars CY10 CY11 CY12 CY13 CY14Sales 43,971 56,844 63,899 68,098 87,383 EBITDA 3,569 5,894 5,490 7,132 11,148 EBITDA margin (%) 8.1 10.4 8.6 10.5 12.8 ROE (%) 16.4 22.7 20.0 20.7 26.9 ROCE (%) 33.9 46.6 36.2 34.5 42.5 Net fixed assets (Ex CWIP) 3,844 5,044 9,918 16,561 23,093 CWIP 703 3,523 5,044 4,636 4,188 Fixed asset turnover ratio (x) 11.4 11.3 6.4 4.1 3.8 Equity shareholders' funds (A) 12,321 14,931 17,549 20,554 25,159 Loan funds (B) 956 432 389 839 584 Total capital employed (A+B) 13,278 15,364 17,938 21,393 25,742 Debt Equity Ratio (x) 0.1 0.0 0.0 0.0 0.0

0

6

12

18

24

30

0.0

10.0

20.0

30.0

40.0

50.0

CY10 CY11 CY12 CY13 CY14

(INR

bn)

(%)

Total capital employed EBITDA margin (%) ROE (%) ROCE (%)

Capital allocation continues to be superior, and RoE & RoCE continued to be healthy despite capex and declining asset turnover Fixed asset turnover ratio has declined the over years due to significant capex as Eicher is in expansion mode


Eicher Motors

Chart 4: RoCE de-composed




0.0

18.0

36.0

54.0

72.0

90.0

CY10 CY11 CY12 CY13 CY14

(RoC

E %

)

Royal Enfield ROCE VECV ROCE Consolidated ROCE

Particulars CY10 CY11 CY12 CY13 CY14Sales 43,971 56,844 63,899 68,098 87,383 Total income 45,247 58,269 65,265 69,051 88,458 EBITDA 3,569 5,894 5,490 7,132 11,148 EBITDA margin (%) 8.1 10.4 8.6 10.5 12.8 RoCE 33.9 46.6 36.2 34.5 42.5 RoE 16.4 22.7 20.0 20.7 26.9 Depreciation 573 640 822 1,300 2,198 Financial costs 95 77 38 79 98 Net profit 1,889 3,088 3,243 3,939 6,154 Equity shareholders' funds 12,321 14,931 17,549 20,554 25,159 Loan funds 956 432 389 839 584 Net fixed assets 4,547 8,567 14,962 21,197 27,281 CWIP - 2,233 2,791 1,253 2,363 Current assets loans and advances 20,500 26,819 26,386 29,113 30,331 Current l iabil ities and provisions 9,332 12,846 15,323 19,037 24,192 Net current assets 11,168 13,973 11,063 10,075 6,139 Cash flow from operating activities 3,360 4,050 4,825 7,162 10,475 Cash flow from investing activities (1,921) (3,380) (7,732) (7,898) (10,872) Cash flow from financing activities (689) (1,137) (974) (474) (1,622) Net cash flows 750 (467) (3,880) (1,209) (2,020) CAPEX (1,315) (4,173) (7,820) (7,054) (9,682) Working capital investments 374 (219) 391 1,491 2,020

Consolidated RoCE remained healthy as RE segment’s RoCE has surged significantly in recent years CV segment’s RoCE (derived) has remained subdued over past few years


Hero MotoCorp’s (HML) FY15 annual report analysis highlights decline in depreciation cost offsetting fall in EBITDA margin YoY. Amortisation of technical knowhow/ export licence (towards royalty to Honda) dipped from INR8.1bn in FY14 to INR2.0bn in FY15, being last year of amortisation. R&D cost charged to P&L for HML stood at INR1.3bn, 0.5% of sales, and for peers it ranged from 1.0-1.5% of sales. HML provided INR1.5bn towards impairment of investment in Erik Buell Racing (EBR–49% associate) which filed winding up petition in FY15. OCF, post interest, declined to INR21.7bn (FY14: INR29.5bn) and adjusted for royalty payment to Honda it stood at INR18.9bn (FY14: INR22.7bn). Significant cash on balance sheet impacted RoE negatively, although YoY cash balance fell to INR30.6bn, 47% of net worth (FY14: INR42.1bn, 75%). Average yield on cash stood at 13% and other income constitutes 14.3% of PBT (FY14: 15.5%). Purchases from related parties jumped to INR22.6bn, 11.4% of raw material costs (FY14: INR19.2bn, FY13: INR9.1bn). HML has embarked on a global expansion plan till 2020 with capex of over INR50bn to push exports and is targeting 12mn unit sales by 2020 (FY15: 6.6mn).

What’s on track? Healthy improvement of 6% YoY in volume (FY14: 3%, FY13: -3%) led to 9% revenue growth in FY15.

What needs tracking? Depreciation charge fell from INR11.1bn (4.4% of revenue) in FY14 to INR5.4bn (2%) in FY15 led by lower depreciation on technical knowhow at INR2.0bn (FY14: INR8.1bn). HML, in FY11, had agreed to pay INR25.6bn towards technical knowhow/ export licences and amortised it on straight line basis over 42 months (ending in June 2014). The company, in FY13, had invested INR1.5bn in EBR, which in FY15 filed a winding up petition due to its inability to honour outstanding creditors. Consequently, HML in FY15 made a provision for diminution in value of investment made in EBR worth INR1.5bn. Cash and investments contributed significant chunk to net worth and stood at INR30.6bn, 47% (FY14: INR42.1bn, 75%), on which average yield stood at 13% (FY14: 10.8%). Other income stood at INR4.9bn, 14.3% of PBT (FY14: INR4.4bn, 15.5%). Cash conversion cycle stood flattish YoY at (17) days as increase in receivables days was offset by higher payable days. Transactions with related parties (largely Rockman and A.G. Industries) have jumped since FY13 with net purchases & expenses rising from INR9.1bn in FY13 (5.3% of raw material cost) to INR19.1bn (10.5%) in FY14 and INR22.6bn (11.4%) in FY15.



Hero MotoCorp| Annual Report Analysis


October 06, 2015

52-week range (INR) : 3,271 / 2,252




Promoters* : 34.6


FIIs : 38.5

Others : 13.5



Market Data




Outstanding derivatives position (gross) declined from INR7.2bn in FY14 to INR1.5bn in FY15 and unhedged payables also fell from INR4.8bn to INR0.9bn due to fall in payables to erstwhile JV partner Honda as per the new licence agreement in 2011. Our comparative analysis indicates that on most parameters (margins, profitability, return ratios, cash flows, etc) HML scores lower than Bajaj Auto, but is superior to TVS. However, Bajaj Auto’s RoE and RoCE have slipped significantly versus peers. HML’s EBITDA margins have been stable at 10.0-12.5% over the past 5 years. Though RoE/ RoCE have been robust, they have been declining since FY11. Surplus cash continues to impact RoE and stood lower by 13.3% in FY15 due to huge cash balance. Contingent liabilities stood at INR41mn in FY15 (FY14: INR292.4mn) and commitments rose to INR8.2bn in FY15 (FY14: INR4.6bn).

MD&A: Key highlights Vision 2020: By 2020, HML aims to surpass 100mn units in cumulative production with annual bike and scooter sales of 12mn. Plans to have more than 20 manufacturing and assembly plants globally with sales in more than 50 countries by that year. Expansion roadmap: Lined up total investment of over INR50bn (USD800mn) globally. It includes manufacturing plants in Colombia and Bangladesh. Moreover, new plants are coming up at Gujarat and Andhra Pradesh, and the Hero Global Centre for Research & Design at Kukas, Rajasthan. By FY17 end, total capacity will be ramped up to 10mn units from current 7.65mn. This does not include the sixth plant in Andhra Pradesh, land for which is being acquired. Volumes from HML’s global business crossed the 200,000 mark during FY15 and the company is on track to achieve its objective of being present in 50 global markets by 2020. It remains bullish on the 2-wheeler business, not just in India, but overseas as well. HML is pumping in over INR30bn (USD470mn) in different areas to catapult into next growth stage. HML’s parts business is now in excess of INR20bn (USD313mn) and is slated to clock a turnover of USD1.0bn. By applying industry-defining technologies, the company is overhauling management of this business. Positive customer relationships and profitability outcomes from this realignment should start accruing within the current financial year. The company is putting in place relevant strategies to enhance reach across the world with emphasis on Asia, Latin America and Africa. Two new plants are coming up in Bangladesh and Colombia. Moreover, in partnership with local distributors, HML has established assembly units in Kenya, Tanzania and Uganda in East Africa. It is fast building a global manufacturing base to cater to its growing international markets. HML’s domestic market share in the motorcycle segment stood at 52.8% in FY15 with sales of 5.67mn units (FY14: 51.8%, sales of 5.4mn units). The company continues to maintain its position as the No. 1 2-wheeler company in the world for the 14th consecutive year.


Hero MotoCorp


Table 1: Consolidated profitability (INR bn)


Depreciation declined sharply from INR11.1bn in FY14 to INR5.4bn in FY15, primarily due to lower amortisation of intangibles (technical knowhow/ export licences amortisation for FY15 at INR2.0bn – FY14: INR8.1bn). HML amortised technical knowhow / export licences on straight line basis upto June 30, 2014 (42 months). During FY15, entire block of technical knowhow was depreciated. The company had agreed to pay INR25.6bn in FY11 (over 42 months) as per the licence agreement entered into with erstwhile JV partner Honda, as explained under. Promoter Group and Honda Motor, Japan (Honda), entered into a Share Transfer Agreement on January 22, 2011, wherein Honda had agreed to transfer its 26% stake in HML to the Promoter Group, ending the JV. The acquisition was completed on March 22, 2011. In addition, a License Agreement was entered into on January 1, 2011, wherein Honda gave HML the right and licence to manufacture, assemble, sell and distribute certain products/parts and export licence for certain products and their service parts under the IPR at total cost of INR25.6bn Table 2: R&D spend charged to P&L (opex) – HML versus peers (%)


HML’s R&D cost charged to P&L stood at INR1.3bn in FY15, 0.5% of sales (FY14: INR892mn, 0.4%).

FY14 % FY15 %Sales 252.8 100.0 275.4 100.0 Raw Materials Consumed 182.3 72.1 197.2 71.6 Operating and admin expense 25.8 10.2 31.5 11.4 Personnel cost 9.3 3.7 11.8 4.3 EBITDA 35.4 14.0 35.0 12.7 Royalty to honda 8.1 3.2 2.0 0.7 EBIDTA post royalty cost 27.3 10.8 33.0 12.0 Depreciation (ex-amortisation of royalty to Honda)

2.9 1.2 3.4 1.2

EBIT 24.3 9.6 29.6 10.7 Financial Charges 0.1 0.0 0.1 0.0 Other income 4.4 1.8 4.9 1.8 EBT 28.6 11.3 34.4 12.5 Exceptional items - - 1.4 0.5 EBT (after exceptional items) 28.6 11.3 32.9 12.0 Tax expense 7.6 3.0 9.4 3.4 PAT 21.1 8.3 23.5 8.5

ParticularsConsolidated

Particulars FY11 FY12 FY13 FY14 FY15Hero Moto 0.1 0.2 0.3 0.4 0.5 TVS (Standalone) 1.2 1.3 1.4 1.4 1.4 Bajaj Auto(Standalone) 0.7 0.6 0.7 1.0 1.1

Though revenue grew 9% YoY, higher operating and employee costs led to flattish EBITDA and 130bps YoY fall in EBITDA margin EBITDA margin, adjusted for royalty, stood higher at 12% in FY15 led by lower amortisation R&D cost for HML stood at 0.5% of sales versus 1.0-1.5% range for peers



Table 3: Investment in subsidiaries (INR mn)

EBR’s losses led to the erosion of HMCL’s (subsidiary) net worth and hence the company recorded a provision of INR1.5bn under exceptional items towards diminution in value of investment. Other investments at the consolidated level include investment in financing arm Hero FinCorp (48% stake) of INR2.7bn in FY15 (FY14: INR900.3mn). Table 4: Other income and yield on cash/ investments (INR mn)

Cash flow analysis Table 5: Cash flow analysis (INR bn)


Particulars FY14 FY15HMCL Netherlands B.V - 764 HMC MM Auto Limited 18 129 HMCL(N A),Inc. 1,554 1,554 Total 1,572 2,447 Less: Provision for dimunition - (1,550) Total 1,572 896 Standalone net worth 56,226 65,400 % of total standalone networth 2.8 1.4

Particulars FY12 FY13 FY14 FY15Other income 3,646 3,984 4,442 4,921 PBT 28,647 25,292 28,641 34,367 Other income as % of PBT 12.7 15.8 15.5 14.3 Cash and investments 41,576 39,886 42,150 30,629 Average yield on cash (%) 7.7 9.8 10.8 13.0

Particulars

Profit before tax 25.3 28.6 32.9 Non-operating income (3.8) (4.1) (4.4) Non-cash adjustments 11.4 11.1 6.9 Direct taxes paid (6.1) (6.5) (10.0) Cash profit after tax 26.8 29.1 25.4 Increase in receivables (3.9) (2.6) (4.5) Increase in inventories 0.4 (0.3) (1.9) Increase in advances 0.2 (1.5) (2.7) Increase in other current assets, l iabil ities and provisions

(0.4) 0.8 (0.1)

Increase in trade and other payables (4.2) 4.2 5.6 Increase in working capital (7.9) 0.6 (3.6) Net cash from operating activities 18.9 29.6 21.9 Interest expenses paid (0.1) (0.1) (0.1) Net cash from operating activities post interest 18.8 29.5 21.7 Deferred credit payments (Royalty to Honda) (7.5) (6.9) (2.9) Adjusted OCF 11.3 22.7 18.9 Capital expenditure (6.0) (9.4) (12.3) Free cash flows 5.3 13.3 6.6

FY13 FY15Consolidated

FY14

Other income rose to INR4.9bn in FY15 and average yield on cash stood at 13% during the year Other income contribution to PBT has been in the 13-16% range over the past 5 years

Operating cash flows were significantly impacted in FY15 and OCF post interest stood lower at INR21.7bn versus INR29.5bn in FY14 on account of increase in working capital requirements OCF, adjusted for royalty to Honda, stood at INR18.9bn (FY14: INR22.7bn) FCF plummeted 51% YoY to INR6.6bn led by higher capex

Erik Buell Racing (EBR), a 49% associate of HMCL (NA) (a wholly owned subsidiary), filed winding up petition due to its inability to honour outstanding creditors


Hero MotoCorp

Receivables rose by INR4.5bn in FY15 to INR13.7bn, 5% of revenue. Trade payables jumped by INR5.6bn supporting the working capital.



Cash conversion cycle stood at negative 17 days, as increase in receivables was offset by similar rise in payable days. HML’s working capital is in line with that of Bajaj Auto.

Chart 1: Cash generation and utilisation over past 5 years (INR mn)


ParticularsFY13 FY14 FY15 FY13 FY14 FY15 FY13 FY14 FY15

Receivable days 7 11 15 10 14 13 13 15 14 Inventory days 13 12 13 16 16 17 44 39 41 Payable days (41) (38) (43) (48) (51) (45) (51) (55) (55) Advance from customer days (2) (2) (2) (4) (6) (8) (1) (2) (3) Cash conversion cycle (23) (17) (17) (25) (27) (23) 5 (3) (3) Bil l discounted/ LCs/ Credit arrangements - - - - - - 13 14 15 Adjusted cash conversion cycle (23) (17) (17) (25) (27) (23) 18 11 12

TVSHero Moto Bajaj Auto

Operating cash flow

(OCF)83%

Cash / liquid investments

16%

Net borrowings

1%

Sources

Capex24.9%

Dividend55.2%

Investment in

associates2.4%

Royalty to Honda (for technical

know-how)17.4%

Application



Comparative analysis Table 7: Peer comparison


EBITDA margins for HML are lower than Bajaj Auto, but higher than TVS. Asset turnover has been improving over the past 5 years, though declined YoY. RoE/ RoCE have been declining significantly for Bajaj Auto over the past 5 years versus peers. HML clocked the highest RoE/ RoCE amongst peers in FY15, while Bajaj Auto had highest return ratios before FY13. Though HML’s OCF and FCF have been lower over the past 2 years, earnings to cash conversion ratio has improved in FY14 and FY15.

Particulars FY11 FY12 FY13 FY14 FY15 Particulars FY11 FY12 FY13 FY14 FY15Gross margins (%) ROCE (%)

TVS 27 27 29 30 29 TVS 14 17 14 19 21 Bajaj Auto 28 28 28 31 31 Bajaj Auto 78 73 59 51 40 Hero Moto Corp 27 27 27 28 27 Hero Moto Corp 58 52 44 50 55

EBITDA margins (%) OCF, post interest (INR mn)TVS 5.5 6.2 5.8 5.9 5.8 TVS (adjusted) 1,302 3,796 3,456 3,226 (392) Bajaj Auto 19.2 18.9 18.2 20.6 18.5 Bajaj Auto 20,370 32,235 22,171 35,009 21,073 Hero Moto Corp (adjusted) 12.5 11.8 10.2 10.8 12.0 Hero Moto Corp 22,723 23,385 18,785 29,512 21,738

Fixed asset turnover (x) FCF (INR mn)TVS 5 5 5 6 6 TVS (1,453) (614) 2,369 489 (3,825) Bajaj Auto 11 13 11 10 11 Bajaj Auto 18,743 28,847 17,289 32,469 18,124 Hero Moto Corp 5 6 8 11 9 Hero Moto Corp 19,113 18,351 12,781 20,138 9,436

ROE (%) Earnings to cash conversion ratio (%)TVS 20 19 15 17 23 TVS 55 137 99 105 (8) Bajaj Auto 92 56 44 37 28 Bajaj Auto 68 125 89 122 78 Hero Moto Corp 62 66 46 40 41 Hero Moto Corp 111 75 66 107 90


Hero MotoCorp

Major related party transactions Table 8: P&L transactions (INR mn)

P&L exposure to related parties rose primarily due to increase in purchases of raw material from Rockman Industries (enterprise with significant influence of KMPs). Table 9: Balance sheet exposure (INR mn)


Particulars FY13 FY14 FY15Purchase of raw materials and components etc.

A .G. Industries Private Limited 5,723 6,800 7,078 Rockman Industries Limited 1,197 12,370 15,416 Highway Industries Limited 2,156

Total 9,075 19,170 22,493 Sale of components etc.

Rockman Industries Limited - (128.0) - Payment for services

Hero Corporate Services Limited 33.5 37.5 - Hero Management Services - 3.6 Hero Mindmine Institute Limited 18.3 19.8 16.7 Hero InvestCorp Limited - 43.4 Abhyuday Manufacturing and Automotive Ltd - 60.5 -

Total 51.8 117.8 63.7 Donation

Raman Kant Munjal Foundation 8.5 3.0 4.0 Net purchases/ expenses 9,136 19,163 22,561 As a % of RM cost 5.3 10.5 11.4

Particulars FY13 FY14 FY15Associates

Receivables 2,400 2,200 - Payables - (194) (24)

KMPs and their relativesPayables (796) (894) (1,038)

Enterprises over which KMPs are able to exercise significant influenceReceivables - - 10 Payables (1,720) (1,941) (2,729)

Net payable to related parties (116) (829) (3,782)

Purchases with related parties have risen significantly over the past 3 years from INR9.1bn (5.3% of raw material cost) to INR22.6bn (11.4%)

Net outstanding payables to related parties have jumped since FY13 and stood at INR3.8bn, 5.8% of net worth, in FY15



RoE analyser RoE analyser analyses profitability on the scale of operating and capital allocation efficiency (detailed concept explained in Annexure A). We have analysed HML’s profitability for FY14 and FY15, results and key findings of which are given below: Table 10: RoE analyser

Chart 2: RoE tree


ParticularsA. Return on net operating assets (RNOA)(OPATO x NOPAT margin) (%)

51.9 53.8

OPATO (operating asset turnover) (x) 7.2 6.9 NOPAT margin (%) 7.2 7.8 B. Return from leverage (FLEV x spread) (%) (12.3) (13.3) FLEV (financial leverage) (x) (0.3) (0.3) NFI (net financing cost) (%) 15.7 14.9 Net financial spread (RNOA -NBC) (%) 36.2 38.9 C. Return from other funding (%) - 0.1 ROE Derived (A+B+C) (%) 39.6 40.6

FY14 FY15

53.8

13.3

0.1

40.4

0.0

12.0

24.0

36.0

48.0

60.0

RNOA Return from leverage

Return from other funding

ROAE

(%)

RoE is flattish at 40% YoY as increase in operating margin was offset by lower asset turnover Return from leverage continued to be higher at 13.3% in FY15 due to huge cash balance


Hero MotoCorp



Particulars FY11 FY12 FY13 FY14 FY15Sales 193,979 235,790 237,681 252,755 275,380 Total income 196,876 239,436 241,665 257,197 280,301 EBITDA 26,125 36,188 32,845 35,391 34,967 EBITDA margin (%) 13.5 15.3 13.8 14.0 12.7 Depreciation 4,024 10,973 11,418 11,074 5,405 Financial costs 152 213 119 118 117 Net profit 19,279 23,781 21,182 21,027 23,647 ROE (%) 62.0 65.6 45.6 39.6 40.6 ROCE (%) 57.8 51.8 43.6 49.8 55.0 Equity shareholders' funds 29,561 42,898 50,062 56,226 65,400 Loan funds 21,644 17,308 6,416 2,843 1,000 Net cash (30,524) (24,268) (33,470) (39,307) (29,629) Net fixed assets (Ex CWIP) 40,803 37,855 30,710 22,473 29,523 CWIP 500 388 621 8,547 7,192 Current assets loans and advances 5,550 6,733 10,891 13,433 23,168 Current l iabil ities and provisions 53,234 36,220 35,291 41,394 38,982 Net current assets (47,683) (29,487) (24,401) (27,960) (15,814) Cash and cash equivalents 52,168 41,576 39,886 42,150 30,629 Cash flow from operating activities 22,542 23,598 18,904 29,630 21,855 Cash flow from investing activities (13,223) 928 (7,329) (16,178) 314 Cash flow from financing activities (9,552) (24,582) (10,563) (14,137) (21,311) Net cash flows (234) (56) 1,012 (685) 858 CAPEX 3,610 5,034 6,004 9,374 12,302 Working capital investments 1,847 (6,906) (7,872) 551 (3,553)


Mahindra & Mahindra’s (M&M) FY15 annual report analysis highlights deterioration in standalone and consolidated profitability and free cash flows. M&M has invested ~INR12bn (FY14:INR6.5bn) in loss making subsidiaries taking cumulative investment to ~INR37bn (~20% of Net worth). Subsidiary losses have widened during FY15 mainly led by Ssangyong (SMC) and Mahindra Two Wheelers (MTW). We believe that SOTP valuation factoring only profitable subsidiaries and ignoring loss making entities needs to be evaluated for sustainability of losses considering the fact that losses are funded out of standalone (SA) cash flows (cumulative funding over last 5 years stood at INR34bn). The aggregate share of losses of these subsidiaries during FY15 stood at 21% of standalone PAT (FY14: 16%). R&D cost capitalised during FY15 rose to INR9.3bn (FY14:INR5.7bn) representing 22% of PBT. Capitalisation ratio to total R&D expenses rose to 50% in FY15 (FY14: 40%). Intangible assets rose to INR26.5bn (FY14:INR17.2 bn); 10.2% of net worth. Unfunded gratuity liability rose to INR20bn (FY14:INR13.5 bn).

What’s on track? Company maintained its position as the 3rd largest passenger Vehicle Company and 2nd largest commercial vehicle company in India.

What needs tracking? Standalone (adjusted) RoCE fell to ~28% (FY14: 38%, FY13: 50%) led by declining EBITDA margin (FY15: 10.7%, FY14: 11.7%) and fixed asset turnover ratio (FY15: 6.6x, FY14: 7.5x). Consolidated RoCE (ex MMFSL) plummeted to 12% against ~18% each in FY13 and FY14. MTW incurred loss of INR5.3bn (FY14: INR4.6bn loss) during FY15, taking accumulated losses to INR17.8bn. M&M infused ~INR7.5bn (FY14: INR3bn) as equity capital in MTW during FY15, taking cumulative investments to ~INR18.6bn (~10% of SA net worth). SMC incurred loss of INR7.1bn (FY14: INR0.7bn profit) during FY15 led by lower exports to Russia and East Europe and higher wage cost consequent to regulatory changes. M&M’s subsidiaries engaged in electric vehicles (Reva Electric), second hand vehicles (First Choice), retail, aerospace and heavy engines etc., continued to incur losses, and thereby were a drag on consolidated profitability. M&M invested INR4.5bn (FY14: INR3.5bn) in these subsidiaries during FY15 to support their loss making operations. MTW acquired 51% stake in Peugeot Motorcycles for EUR28.2mn and also agreed to buy remaining 49% stake at fair value after 7 years, for which M&M provided corporate guarantees of EUR 70mn (~INR4.7bn).



Mahindra & Mahindra | Annual Report Analysis


July 31, 2015

52-week range (INR) : 1,421 / 1,106


M cap (INR bn/USD mn) : 818 / 12,779


Promoters* : 25.6


FIIs : 33.0

Others : 18.7

*Promoters pledged shares : 1.4


Market Data




Gratuity liability (unfunded) jumped 47% to INR20bn (FY14: INR13.5bn) led by higher actuarial losses (FY15: INR2.2bn, FY14: INR0.2bn) and past service cost (FY15: INR1.7bn, FY14: Nil) recognised during the year (mainly in SMC).

Other highlights Mahindra Engineering Services (MESL), a subsidiary, was amalgamated with Tech Mahindra (TML), an associate, as per court approved scheme. Excess (INR3bn) of fair value of TML shares received over the carrying cost of investments in MESL has been recorded as an exceptional item. However, TML recognises the amalgamation at cost of shares issued, whereas M&M recognises the same at fair value of shares received. Of the 25.6% holding classified under the promoter category, 8.4% are treasury shares held by the M&M Benefit Trust formed on amalgamation of Punjab Tractors and 5.1% held by various employee welfare trusts. Thus, the promoter’s actual effective economic ownership is 12.1%. Guarantees given by the company on behalf of other companies (presumably subsidiaries) stood at ~INR13.4bn (March 2014: INR9bn). Amount outstanding against these guarantees stood at INR12.8bn (March14: INR8.3bn).

MD&A Company signed a definitive agreement to acquire 33% voting stake in Japan based Mitsubishi Agriculture Machinery Co Ltd. This will help both companies to jointly develop products in the tractor and agri-machinery space. Company’s wholly owned subsidiary Mahindra Vehicle Manufacturers Ltd signed an MOU with the Maharashtra government to invest an additional INR 40bn over a 7 year period.


Mahindra & Mahindra

Standalone profitability Table 1: Standalone—Capital allocation (INR bn)

* Adjusted for income from subsidiaries, J.V.'s & Associate

# Adjusted for investment/ loans & advances in subsidiaries, J.V.'s & associates and acceptances

Of the total INR14.3bn (FY14: INR 11.3bn) R&D expense (ex depreciation and amortisation)

incurred during FY15 at the standalone level, INR7.5bn (~50% of total cost; FY14: INR6.4bn; 55%)

was recognised in profit and loss.

Development expenditure (balance R&D cost) of INR6.8bn (FY14: INR4.9bn) was capitalised in

intangible assets of which INR 5.9 bn is under intangible assets under development (FY14:

INR4.5bn).

Chart 1: Standalone- Cumulative cash generation and utilisation (FY12-15)


Particulars FY11 FY12 FY13 FY14 FY15Sales 234.6 318.5 404.4 405.1 389.5 EBITDA 34.3 37.5 46.9 47.2 41.7 Adjusted PBIT* 33.0 34.3 42.9 42.0 36.0 Gross margin (%) 30.7 26.2 24.8 27.3 28.2 EBITDA margin (%) 14.6 11.8 11.6 11.7 10.7 ROCE (%) 29.7 25.8 26.9 23.5 18.5 Adjusted ROCE (%)*# 52.2 49.3 49.8 38.0 27.8 Net fixed assets (Ex CWIP) 30.7 40.9 47.7 57.3 58.2 CWIP 5.3 5.7 5.0 3.9 7.6 Devlopment expenditure (inc under development)

3.0 4.3 5.5 9.8 15.3

Fixed asset turnover 8.1 8.9 9.1 7.7 6.7 Net current assets (16.2) (7.1) (12.1) (9.7) (8.9) Equity shareholders' funds (A) 103.1 121.0 146.6 167.9 192.6 Loan funds (B) 24.0 35.8 34.9 40.5 37.3 Reported capital employed (A+B) 127.2 156.9 181.5 208.4 229.8 Adjusted total capital employed (A+B)# 60.1 78.9 93.5 127.8 131.6 D/E Ratio 0.2 0.3 0.2 0.2 0.2

Cash profits

89%

Stake sale in

subsidiary/JV

7%

Others4%

Sources of cash generation FY12-15

100% = INR165.6bn

Despite ~90bps increase in gross margins during FY15, standalone EBITDA margins declined 100bps led by 120bps and 60bps increase in operating and personnel expenses, respectively Standalone adjusted RoCE fell from ~50% in FY13 to ~38% in FY14 and further to ~28% in FY15 While decline in adjusted RoCE during FY14 was primarily led by higher capital employed, slip in FY15 was led by both higher capital employed and lower profitability

Capex39%

Purchase of

Investment (Net)9%

Investment in

subsidiaries/

Associate 29%

Dividend paid21%

Others2%

Cash utilisation during FY12-15



Table 2: Investment in loss making subsidiaries during FY11-FY15 (INR mn)

* Net investment made during FY14, # Capital infusion in FY15 includes share application money pending allotment

• During FY14, the company had invested ~INR4bn in SMC, taking cumulative equity investment to INR21.3bn. Since SMC redeemed bonds of INR4.6bn subscribed by the company, there was no incremental cash infusion in SMC in FY14.

• During FY14, the company acquired stake in Mahindra Sanyo Steel from Mahindra Ugine Steel Company Ltd.

• Mahindra Engineering and Chemicals Products (MECP) is the holding company for the retail business of M&M. Capital infusion in MECP by M&M is utilised towards investment in Mahindra Retail Private Ltd (MRPL) either directly or through Retail Initiative Holdings Ltd. Aggregate capital infusion in MRPL stood at INR 5,683mn.

Profitability analysis of subsidiaries

Table 3: Performance of subsidiaries generally considered for SOTP valuation (INR mn)

# considered as part of core standalone business


• In addition to above mentioned subsidiaries, SOTP valuation generally also considers certain profitable associates i.e. Tech Mahindra, CIE Automotive and Mahindra CIE.

• SOTP valuation currently factors in only profitable subsidiaries/associates and ignores loss making subsidiaries. However, considering recurring losses in subsidiaries are funded out of standalone cash flows (cumulative funding over past 5 years stood at INR 34bn in key subsidiaries), SOTP valuation needs to be evaluated.

• Aggregate economic interest (adjusted for minority stake) in losses (net) of these subsidiaries (not considered in SOTP) increased to ~INR 7bn (FY14: INR6bn; 16%), representing ~21% of standalone PAT.

Particulars FY11 FY12 FY13 FY14 FY15

Total investment as at March15

Mahindra Two Wheelers * - 3,543 3,450 2,962 7,486 18,621 Mahindra Heavy Engines Private - - 968 630 1,800 4,393 Mahindra Engineering and Chemical Products # - 2,260 800 800 1,000 4,918 Mahindra Reva Electric Vehicles 1,594 577 500 730 400 3,802 Mahindra First Choice Services 147 150 120 818 531 1,919 Mahindra Aerospace Pvt Ltd 458 598 643 512 583 2,899 Total 2,200 7,128 6,482 6,451 11,800 36,552 Mahindra Retail Pvt Ltd # 1,120 1,010 800 800 1,202 5,683

Particulars % stake Net worth Revenue PAT Revenue PAT Revenue PATMahindra & Mahindra Financial Services Ltd 51.6 56,694 38,947 8,827 49,530 8,872 55,847 8,318 Mahindra Vehicle Manufacturers Ltd # 100.0 15,206 96,810 2,838 69,682 2,167 61,605 1,530 Mahindra Lifespace Developers Ltd 50.8 13,231 4,223 975 4,213 777 7,600 2,333 Mahindra Holidays & Resorts India Ltd 75.6 7,309 7,159 1,070 7,989 945 8,076 790 Ssangyong Motor Company Ltd 73.2 40,300 149,746 (5,092) 202,407 736 182,710 (7,095)

296,886 8,618 333,822 13,498 315,838 5,876

FY13 FY15FY14

Except Mahindra Life space, all other subsidiaries reported declining profits SMC reported 10% decline in revenue and loss of INR7bn (FY14: Profit of INR0.7bn) during FY15


Mahindra & Mahindra

Table 4: Performance of subsidiaries generally not considered for SOTP valuation (INR mn)

# Formerly known as Mahindra Navistar Engines Private Limited


Table 5: Mahindra Two Wheelers—Profitability statement (INR bn)


• Operating and admin expenses at MTW stood higher at INR4bn (FY14: INR3bn) led by

higher marketing expenses (FY15: INR2.2bn, FY14: INR1.6bn) and assets written off (FY15: INR 0.3bn, FY14: nil).

Particulars % stake FY11 FY12 FY13 FY14 FY15Loss making subsidiariesGippsaero Pty. Limited 50.1 (63) (209) (396) (386) (401) Mahindra Aerostructures Private Limited 66.7 (19) (56) (87) (175) (438) Mahindra First Choice Services Limited 100.0 (106) (151) (241) (427) (541) Mahindra Heavy Engines Private Limited # 100.0 (504) (648) (619) (578) (534) Mahindra Retail Private Limited 96.2 (602) (830) (1,141) (1,140) (1,189) Mahindra Reva Electric Vehicles Private Limited 75.7 (249) (267) (319) (805) (941) Mahindra Sanyo Special Steel Private Limited 51.0 - - (380) (683) (633) Mahindra Two Wheelers Limited 88.9 (1,692) (2,383) (2,639) (4,593) (5,289) Mahindra Yueda (Yancheng) Tractor Company Limited 51.0 21 39 (520) (212) (533) Aggregate losses (a) (3,214) (4,505) (6,342) (8,998) (10,497) M&M economic interest in above losses (b) (2,429) (3,660) (5,233) (7,515) (8,720) Profitable subsidiariesBristlecone group (consolidated) 77.7 (125) 151 155 213 289 Mahindra & Mahindra South Africa (Pty) Limited 100.0 123 182 189 204 215 Mahindra Automobile Distributor Private Limited 95.0 (208) 140 140 136 138 Mahindra EPC Services Private Limited 100.0 (2) 5 389 (9) 152 Mahindra Intertrade Limited 100.0 551 705 567 644 722 Mahindra Logistic Limited 84.0 (71) 108 244 366 411 Aggregate profits (c) 268 1,292 1,685 1,554 1,927 M&M economic interest in above profits (d) 293 1,254 1,645 1,459 1,790 Aggregate losses (net) (a+c) (2,947) (3,213) (4,658) (7,444) (8,570) M&M economic interest in losses (net) (b+d) (2,137) (2,406) (3,588) (6,056) (6,930) % of Standalone PAT (8.0) (8.4) (10.7) (16.1) (20.9)

Particulars FY13 FY14 FY15 FY13 FY14 FY15Sales 3.8 7.5 6.6 100 100 100 Raw Materials Consumed 3.3 7.2 6.0 86 95 91 Gross margin 0.5 0.3 0.6 14 5 9 Operating and Administrative expense

1.6 3.0 4.0 42 40 61

Personnel cost 0.9 1.2 1.1 23 16 17 EBITDA (2.0) (3.9) (4.6) (51) (52) (69) Depreciation 0.3 0.3 0.4 7 4 6 EBIT (2.2) (4.2) (5.0) (58) (56) (75) Financial Charges 0.4 0.4 0.3 11 5 5 Other income 0.0 0.0 0.0 0 0 0 PBT (2.6) (4.6) (5.3) (69) (61) (80)

Amount % During the year, M&M infused INR 7.5bn (FY14: INR 3bn) in MTW, taking cumulative investments to INR 18.6bn



• During the year, MTW acquired 51% stake in Peugeot Motorcycles for EUR28.2mn. As at March 2015, MTW had paid EUR16.9mn up-front and balance EUR11.3mn is payable by June 2016. Further, as per the terms of the agreement with Peugeot SA (PSA), MTW has committed to acquire balance stake (49%) at the end of 7 years at fair market value (determined as per agreement). In this regard, M&M also provided corporate guarantees of EUR 70mn (~INR4.7bn) to PSA.

Table 6: Mahindra Retail Private Limited—Profitability statement (INR bn)




• Standalone adjusted free cash flow declined to INR11.3bn (FY14: INR18.1bn) led by

higher capex and lower cash profits. Cash conversion cycle remained in narrow range of -9 days to -11 days during FY13-15.

Particulars FY13 FY14 FY15 FY13 FY14 FY15Sales 2.0 2.1 2.1 100 100 100 Raw Materials Consumed 1.2 1.2 1.3 59 59 60 Gross margin 0.8 0.9 0.8 41 41 40 Operating and admin expense

1.2 1.3 1.3 62 62 62

Personnel cost 0.4 0.4 0.4 22 20 21 EBITDA (0.8) (0.8) (0.9) (43) (40) (43) Depreciation 0.2 0.2 0.2 9 9 9 EBIT (1.0) (1.0) (1.1) (52) (49) (52) Financial Charges 0.1 0.1 0.1 6 7 5 Other income 0.0 0.0 0.0 0 0 0 PBT (1.1) (1.1) (1.2) (58) (55) (57)

Amount %

Particulars

Profit before tax 43.2 38.3 11.9 2.0 55.0 40.4 Non-operating expenses/ (income) (6.7) (6.8) 10.1 9.0 3.3 2.2 Non-cash adjustments 9.2 10.1 13.3 11.9 22.5 22.0 Direct taxes paid (8.9) (8.5) (3.8) (8.5) (12.7) (17.0)Dividend from subsidiaries 2.7 2.7 (2.7) (2.7) Cash profit after tax 39.4 35.9 28.7 11.6 68.1 47.5 (Increase)/Decrease in inventories (2.7) 3.7 1.9 (4.3) (0.8) (0.6) (Increase)/Decrease in trade and other receivables

(4.5) (1.8) (18.1) (3.9) (22.6) (5.8)

Increase/(Decrease) in trade and other payables 5.0 (5.5) 5.9 17.2 10.9 11.7 Change in acceptances 0.2 1.7 (1.3) 0.2 (1.1) 1.9 (Increase)/Decrease in working capital (1.9) (2.0) (11.5) 9.2 (13.5) 7.2 Net cash from operating activities 37.5 33.9 17.2 20.8 54.6 54.7Interest expenses paid (2.6) (2.4) (3.2) (2.5) (5.8) (4.9)Net cash from operating activities post interest 34.9 31.5 13.9 18.4 48.8 49.9 Capex (16.8) (20.2) (19.3) (26.9) (36.1) (47.2)Free cash flow 18.1 11.3 (5.4) (8.6) 12.7 2.7 Increase/(Decrease) in loans against assets (MMFSL) (58.1) (42.3) (58.1) (42.3)Free cash flows (incuding MMFSL) 18.1 11.3 (63.5) (50.9) (45.4) (39.6)

Standalone Subsidiary (derived) ConsolidatedFY15 FY14 FY15 FY14FY14 FY15

Capital infusion in Mahindra Retail during FY15 stood at INR 1.2bn (FY14: 0.8bn); cumulative investment in equity stood at INR 5.7bn


Mahindra & Mahindra

• Consolidated cash flows from operating activities (post interest) increased marginally to ~INR50bn in FY15. However, due to steep increase in capex (FY15: INR47bn, FY14: INR36bn), free cash flows (ex movement in loan against assets) declined to INR2.7bn.

Table 8: Cash conversion cycle (days)


Table 9: Cash conversion cycle—Ssangyong versus peers (days)


• In comparison to peers in the South Korean market, SMC had a favourable cash

conversion cycle predominantly on account of higher trade credit enjoyed by the company.

Particulars FY13 FY14 FY15 FY13 FY14 FY15Inventory Days 28 32 34 61 61 64 Trade Receivable Days 19 22 24 32 31 33 Trade Payable Days (62) (72) (74) (87) (88) (88) Income received in advance (2) (2) (2) (7) (7) (8) Cash Conversion cycle (17) (20) (19) (1) (3) 0 Add: Acceptance Days 7 9 9 18 20 21 Adjusted Cash Conversion cycle (9) (11) (10) 17 17 21 Working capital as % to sales (1.1) (0.7) (0.2) 5.2 5.8 6.2

ConsolidatedStandalone

CY12 CY13 CY14 CY12 CY13 CY14 CY12 CY13 CY14Inventory days 31 34 35 37 37 38 43 42 50 Add: Trade receivable days 23 25 23 16 15 15 19 17 17 Less: Trade payable days (60) (82) (88) (38) (36) (36) (66) (58) (54) Cash conversion cycle (6) (23) (30) 15 16 17 (5) 1 14 Working capital as % to sales (2.9) (6.1) (5.7) 4.3 4.4 4.6 (0.3) 2.5 5.5

Kia MotorsParticulars

Ssangyong Motor Co Hyundia Motors



Table 10: Consolidated segment profitability (INR bn)


R&D expenditure analysis Table 11: Research & development capitalisation analysis (Consolidated) (INR bn)


Particulars FY11 FY12 FY13 FY14 FY15Segment RevenueAutomotive 148.9 326.6 416.2 447.0 432.1 Farm Equipment 108.3 132.6 138.0 168.6 159.1 Financial Services 20.6 28.8 40.9 52.8 60.4 Others 90.9 106.0 91.9 71.7 67.9

368.7 594.0 686.9 740.0 719.5 Segment marginsAutomotive 16.4 12.7 23.3 23.6 13.2 Farm Equipment 16.9 19.2 18.3 24.8 19.7 Financial Services 7.5 9.5 12.8 14.6 13.9 Others 7.5 8.1 3.5 0.0 (0.4)

48.3 49.5 58.0 63.0 46.4 Segment margins (%)Automotive 11.0 3.9 5.6 5.3 3.1 Farm Equipment 15.6 14.5 13.2 14.7 12.4 Financial Services 36.2 33.1 31.4 27.7 23.1 Others 8.3 7.6 3.9 0.0 (0.6)

13.1 8.3 8.4 8.5 6.5 Segment net assetsAutomotive 69.9 105.2 113.4 125.1 135.6 Farm Equipment 14.2 32.3 33.7 44.9 44.2 Financial Services (33.4) 25.3 40.6 45.9 51.5 Others 49.9 58.7 66.5 71.8 68.6

100.6 221.5 254.2 287.7 299.8 Return on segment net Automotive 29.1 14.5 21.3 19.8 10.1 Farm Equipment 111.2 82.8 55.4 63.1 44.2 Financial Services (77.7) (237.2) 39.0 33.8 28.6 Others 15.0 14.9 5.6 0.0 (0.6)

43.1 30.8 24.4 23.3 15.8

Particulars FY12 FY13 FY14 FY15Development expenditure capitalised:

Opening net block 5.7 6.1 6.3 7.7 Capitalised during the year 3.6 4.2 4.1 5.9 Amortised/ Impaired during the year (3.2) (4.0) (2.7) (4.7) Closing net block 6.1 6.3 7.7 8.9

Net expenditure capitalised (A) 0.4 0.2 1.4 1.2 Change in intangibles under development (B) 0.6 1.6 4.4 8.1 Amount capitalised (C = A+B) 1.0 1.7 5.7 9.3 PBT 41.8 55.8 58.2 43.1 Capitalised R&D as a % of PBT 2.4 3.1 9.9 21.7

Automotive segment’s margins and RoCE declined steeply during FY15 led by higher losses in SMC and MTW Farm equipment segment’s revenue and profitability was adversely impacted by poor monsoon followed by unseasonal rains R&D cost capitalised (net of amortisation) during FY15 stood at INR9.3bn (FY14: INR5.7bn), ~21.7% (FY14: 10%) of PBT


Mahindra & Mahindra

Table 12: Research & development capitalisation analysis (Consolidated) (INR bn)


Total development expenditure (including intangibles under development) capitalised in books rose to INR26.5bn, 10.2% of net worth (FY14: INR17.2bn, 7.4%).

Defined benefit obligation Table 13: Gratuity liability (consolidated) (INR bn)


Aggregate unfunded gratuity liability increased by 47% to INR20bn (FY14: INR13.5bn) led by higher actuarial losses (FY15: INR2.2bn, FY14: INR0.2bn) and past service cost (FY15: INR1.7bn, FY14: Nil) recognised during the year (mainly in SMC). During the year, gratuity deficit in the company (standalone) increased to INR2.3bn (March 2014: INR1.8bn). Table 14: Ssangyong gratuity liability (INR bn)


SMC’s gratuity liability (unfunded) stood at INR14.2bn (December 2013: INR10bn). Steep increase in the liability during FY15 was led by higher past service cost and actuarial losses.

Particulars FY12 FY13 FY14 FY15Development expenditure grouped under intangible assets (A)

6.1 6.3 7.7 8.9

Intangible assets under development (B) 3.6 5.1 9.5 17.6 Total (A+B) 9.7 11.4 17.2 26.5 As % of net worth 5.8 5.7 7.4 10.2

Unfunded FundedFY11 FY12 FY13 FY14 FY15 FY11 FY12 FY13 FY14 FY15

Gratuity expense (in P&L)Current service cost 0.1 1.1 1.3 1.8 2.1 0.3 0.3 0.4 0.5 0.5 Interest cost 0.0 0.4 0.3 0.3 0.5 0.3 0.3 0.4 0.4 0.6 Actuarial (gains)/loss (0.0) 0.8 1.3 (0.0) 1.8 0.2 0.1 0.1 0.2 0.4 Past service cost 0.0 - 0.1 - 1.7 0.0 0.0 0.0 0.0 - Others - (0.0) (0.5) - - (0.2) (0.2) (0.3) (0.3) (0.3) Total expense 0.1 2.3 2.5 2.1 6.1 0.6 0.6 0.7 0.8 1.1 Gratuity liability (in BS)Present value of Defined benefit obligation 9.0 10.2 8.6 11.6 17.1 4.4 5.0 5.7 6.4 7.8 Fair value of plan assets - - - - - 3.4 3.8 4.3 4.5 5.0 Net liability (9.0) (10.2) (8.6) (11.6) (17.1) (1.0) (1.2) (1.4) (1.9) (2.8)

Dec-11 Dec-12 Dec-13 Dec-14Present value of Defined benefit obligation 9.7 8.5 10.1 14.3 Fair value of plan assets (0.2) (0.1) (0.1) (0.1)

9.6 8.4 10.0 14.2 Key assumptionsDiscount rates 4.8 3.9 4.4 3.4Expected salary increase rate 5.3 5.3 5.3 5.3

Actuarial losses on defined benefit obligations (DBO) are deducted while computing profitability. Gratuity liability is recognised in balance sheet

Intangible assets under development rose by ~85% in FY14 and FY15 each and stood at INR17.6bn R&D capitalised as percentage of total R&D stood at ~50% versus ~40% in FY14



Table 15: Summary financials (INR bn)

*Adjusted for loan against assets in MMFSL

EBITDA presented in table above is adjusted for interest cost in MMFSL.


Particulars FY11 FY12 FY13 FY14 FY15Sales 368.6 594.0 686.9 740.0 719.5 Total income 371.8 597.4 690.8 745.1 724.7 EBITDA # 54.4 62.4 74.5 79.3 63.0 EBITDA margin (%) # 14.7 10.5 10.8 10.7 8.8 RoE (%) 24.0 19.9 20.7 20.5 12.0 Depreciation 9.7 18.0 20.8 21.7 21.2 Financial costs 4.7 6.6 6.3 7.7 6.6 Net profit 30.8 31.3 41.0 46.7 31.4 Equity shareholders' funds 142.8 167.0 199.6 233.1 258.6 Loan funds 170.5 231.2 287.1 351.7 379.1 Capital employed 313.3 398.2 486.7 584.7 637.7 Net fixed assets (excl CWIP and goodwill) 127.5 151.1 163.1 170.4 182.8 CWIP 14.1 14.9 16.3 21.9 30.3 Goodwill on consolidation 19.5 20.9 20.0 13.4 7.6 Current assets loans and advances 174.2 235.4 274.5 308.4 327.1 Current l iabil ities and provisions 112.5 147.9 172.5 178.8 181.5 Net current assets 61.7 87.4 101.9 129.6 145.6 Cash and liquid investments 37.7 54.1 67.5 87.5 70.4 Net debt 132.8 177.2 219.6 264.1 308.7 Cash flow from operating activities* 31.7 54.9 58.3 55.7 52.8 Cash flow from investing activities (17.5) (30.8) (27.9) (44.9) (44.4) Cash flow from financing activities 14.4 42.6 45.1 55.8 16.7 CAPEX 22.9 30.8 32.3 36.1 47.2 Working capital investments* 10.0 (5.7) 0.5 12.4 (5.3)


Motherson Sumi System’s (MSS) FY15 annual report analysis highlights improvement in profitability, operating cash flows and return ratios primarily led by subsidiaries. Higher capex spending (INR18.4bn; FY14: INR13.5bn) and acquisitions (INR7.1bn; FY14: nil), led to decline in consolidated free cash flow to INR5.4bn (FY14: INR10.6bn). The company estimates capex spending to be in the INR15-20bn range during FY16. Trade working capital fell to 2.8% of sales in FY15 versus 6.1% in FY14 led by increase in trade payables and customer advances/unearned income. Over FY12-15, trade payables and customer advances catapulted ~INR25bn, offsetting increase in inventory and receivables, which jumped ~INR16bn, leading to release of working capital of INR9bn despite rise in sales. While SMRP BV (hold co of SMR and SMP) enjoys negative cash conversion cycle of 11 days (FY14: positive 5 days), that of competitors ranges between 17 and 28 days. Standalone business continued to be a major profit spinner (~60% of consolidated PAT), despite contributing mere 15% to overall revenue. Related party transactions comprise purchase of goods/services/fixed assets of ~INR3.4bn (FY14: INR3.1bn). Key Highlights Revenues of SMR and SMP jumped ~14% and ~16% in EUR terms and their EBITDA margins inched up to 9.8% (FY14: 9.6%) and 6.2% (FY14: 5.4%), respectively. SMRP BV enjoys payable days of 88 (FY14:74), much higher compared to global peers’ average of 56-68 days. Payables were major source of operating cash flow and key contributors to improvement in return ratios. SMP’s subsidiaries in Mexico, Brazil and Spain continued to incur losses (although they have declined) during FY15. MSSL Wiring Systems (acquired wiring harness business of Stoneridge) and its subsidiaries reported loss of ~INR 320mn during the year. Exceptional losses during FY15 include expenses incurred in relation to issue of senior secured notes (INR1.2bn), representing 3.7% of the value of funds raised. Net cash flows from borrowings stood at INR11.4bn during FY15. However, owing to depreciation (~18%) of EUR against INR during the year, gross debt rose by mere INR2.9bn to INR51.3bn. Net debt fell by ~INR7bn to INR32.4bn. Net debt/equity ratio improved to 1.0x (FY14: 1.3x).



Motherson Sumi | Annual Report Analysis


52-week range (INR) : 395 / 217




Promoters* : 65.6


FIIs : 18.6

Others : 10.6



Market Data


October 13, 2015



Other Highlights • During the year, MSS (via subsidiaries) paid INR7.1bn (FY14: nil) towards acquisition of

subsidiaries—INR4.3bn for wiring harness business of Stoneridge and INR2.8bn for acquisition of German and Mexican businesses of the Scherer & Trier Group.

• During FY15, the group (SMRP BV) paid INR3.3bn towards acquiring minority shareholding in subsidiaries to consolidate its shareholding in SMP to 100% and in SMR to 98.5% (MSS’ economic interest in SMRP BV stood at 51%).

• MSS incurred INR2.0bn (FY14: INR1.5bn) and INR18.4bn (FY14: INR13.5bn) towards capital expenditure at standalone and consolidated levels, respectively. Capex incurred by SMR and SMP increased to EUR56mn (FY14: EUR38mn) and EUR161mn (EUR43mn), respectively.

• Other assets at SMR and SMP jumped to EUR84mn (FY14: EUR41mn) and EUR158mn (FY14: EUR79mn), respectively. Details on nature of these assets are not available.

• Goodwill (on acquisition & consolidation) increased to INR3.0bn (FY14: INR1.9bn) on account of acquisitions made during the year and stake hike in existing subsidiaries.

Key highlights from MD&A • Currently, MSS’ 18 plants are in various stages of construction. Management expects

consolidated capex to be in the INR15-20bn range during FY16.

• The company has decided to transfer its stake in JV, Calsonic Kansei Motherson Auto Products, to SMIL (company holding 36.9% in MSS) at a price determined through fair valuation.

• During the year, SMRP BV (subsidiary) issued 7-year bonds of EUR500mn carrying coupon rate of 4.125% to refinance its debts as well as to fund its capital expenditure. This borrowing has not only reduced the company’s borrowing cost, but has also provided long-term financing to SMR and SMP.

• During FY15, MSS launched its fifth five-year plan termed “Vision 2020”. Key objectives which company aims to achieve in 2020 include USD18bn revenue, RoCE of 40% and dividend payout of 40%.


Motherson Sumi

Cash flow analysis Table 1: Adjusted cash flow analysis (INR bn)


Operating cash flows (post interest) increased to ~INR31bn (FY14: ~INR24bn) due to decline in working capital (led by increase in trade payables & decrease in trade receivables). Free cash flow declined to INR5.4bn (FY14: INR10.6bn) led by steep rise in capex, which stood at INR18.4bn (FY14: INR13.5bn) and acquisitions (INR7.1bn, FY14: nil). Table 2: Consolidated cash conversion cycle (INR bn)


Over FY12-15, trade payables and customer advances/unearned income jumped by ~INR25bn, offsetting increase in inventory and receivables by ~INR16bn, leading to release of working capital of INR9bn. Owing to sales catapulting 132% over the corresponding period, trade working capital declined to 2.8% of sales versus 12.2% in FY12.

Particulars

Profit before tax 7.6 7.3 8.4 10.8 16.0 18.2 Non-operating expense (0.5) (0.3) 3.2 3.2 2.7 - 2.9 Unrealised foreign exchange loss (net) 0.7 0.2 2.4 (3.3) 3.0 (3.0) Non-cash adjustments 1.5 2.2 7.0 7.2 8.4 - 9.4 Direct taxes paid (2.1) (2.4) (3.5) (3.8) (5.6) - (6.2)Cash profit after tax 7.0 7.1 17.5 14.2 24.5 21.2 Increase in trade and other receivables (0.3) 1.2 (4.6) 3.1 (4.9) 4.3 Increase in inventories (0.2) (0.5) (6.6) (1.2) (6.8) (1.7) Increase in trade & other payables 0.1 0.4 13.9 9.7 14.1 10.1 (Increase)/decrease in working capital (0.4) 1.1 2.8 11.5 2.4 12.7 Net cash from operating activities 6.7 8.2 20.3 25.7 27.0 33.9 Interest expenses paid (0.4) (0.3) (2.5) (2.7) (2.9) (3.0)Net cash from operating activities post interest 6.3 7.9 17.8 23.0 24.1 30.9 Capex/acquisitions (1.5) (2.0) (12.1) (23.5) (13.5) (25.5)Free cash flow 4.8 5.9 5.7 (0.5) 10.6 5.4

ConsolidatedStandalone Subsidiaries (Derived)FY14 FY15 FY14 FY15 FY14 FY15

Particulars FY12 FY13 FY14 FY15Inventory 22.5 26.0 32.8 37.5 Receivable 31.3 30.5 33.9 32.2 Payable 31.0 31.8 40.9 48.6 Customer advances/unearned income 4.2 4.9 7.0 11.3 Trade working capital 18.5 19.7 18.8 9.7

Inventory days 60 52 53 57 Receivable days 49 44 38 34 Payable days 77 67 66 73 Customer advances/unearned income 10 10 11 15 Cash conversion cycle (days) 22 19 15 4 Trade working capital as % to sales 12.2 7.6 6.1 2.8

Cash conversion days declined to 4 (FY14: 15) aided by rise in payable days and customer advances Improvement in cash conversion cycle at SMR and SMP led to lower cash conversion cycle at the consolidated level Trade working capital declined to 2.8% of sales versus 12.2% in FY12 and was key contributor to superior return ratios



Table 3: SMRP BV, SMR and SMP—Cash conversion cycle (days)

# In the absence of details of trade payables, entire liabilities (other than loans) considered for cash conversion cycle in SMR and SMP;

Trade payables considered for cash conversion cycle computation in SMRP BV

Other assets at SMR and SMP jumped to EUR84mn (FY14: EUR41mn) and EUR158mn (FY14: EUR79mn), respectively. Nature of items included in other assets is not available and thus has not been considered in the above cash conversion cycle.

Table 4: Cash conversion cycle (days)—Global peers

SMRP BV enjoys payable days of 88 (FY14:74), much higher compared to global peers’ payable days of 56-68 days.

Profitability analysis Table 5: Standalone versus consolidated profitability analysis (INR bn)


* Other income adjusted for dividend income from subsidiaries

Mar-13 Mar-14 Mar-15 Mar-13 Mar-14 Mar-15 Mar-13 Mar-14 Mar-15

Inventory days n.a. 27 26 35 33 32 34 38 47 Receivable days 55 52 51 56 51 40 34 27 28 Payables/Liabil ities days # n.a. 74 88 75 73 92 77 87 100 Cash conversion cycle n.a. 5 (11) 17 11 (20) (9) (22) (25) Trade working capital as % to sales n.a. 5.6 2.5 4.6 3.0 (5.6) (2.5) (6.1) (6.8)

ParticularsSMPSMRSMRP BV

Mar-13 Mar-14 Mar-15 Mar-13 Mar-14 Mar-15 Mar-13 Mar-14 Mar-15Inventory days 24 24 24 31 31 31 30 29 29 Receivable days 65 64 56 54 52 54 57 56 57 Payable days (64) (65) (58) (57) (56) (57) (66) (66) (68) Cash conversion cycle 25 23 22 28 28 28 21 20 17 Trade working capital as % to sales 8.7 7.8 7.2 9.2 8.9 9.0 7.8 7.0 6.8

Delphi Automotive PlcParticulars

Johnson Controls Inc. Magna International Inc.

FY14 % FY15 % FY14 % FY15 % FY14 % FY15 %Sales 45.2 100.0 49.9 100.0 259.0 100.0 296.0 100.0 304.3 100.0 345.9 100.0 Raw Materials Consumed 25.1 55.6 28.0 56.1 168.5 65.0 188.3 63.6 193.6 63.6 216.3 62.5 Gross margin 20.1 44.4 21.9 43.9 90.6 35.0 107.7 36.4 110.7 36.4 129.5 37.5 Operating and administrative expense 6.7 14.8 7.1 14.2 29.0 11.2 31.2 10.6 35.6 11.7 38.3 11.1 Personnel cost 5.0 11.0 6.0 12.1 46.1 17.8 57.6 19.5 51.1 16.8 63.7 18.4 EBITDA 8.4 18.7 8.8 17.6 15.5 6.0 18.8 6.4 24.0 7.9 27.6 8.0 Depreciation 1.5 3.4 2.1 4.2 6.6 2.6 7.1 2.4 8.2 2.7 9.2 2.7 EBIT 6.9 15.3 6.7 13.4 8.9 3.4 11.7 3.9 15.8 5.2 18.4 5.3 Financial Charges 0.4 0.9 0.3 0.6 2.5 1.0 2.9 1.0 2.9 1.0 3.2 0.9 EBT 6.5 14.4 6.4 12.8 6.4 2.5 8.8 3.0 12.9 4.2 15.2 4.4 Other Income * 0.5 1.2 0.7 1.4 2.6 1.0 4.0 1.3 3.1 1.0 4.6 1.3 PBT (before exceptional items) 7.0 15.6 7.2 14.5 8.9 3.4 12.8 4.3 16.0 5.2 19.8 5.7 Exceptional losses (net) - - - - - - 1.6 0.6 - - 1.6 0.5 PBT (after exceptional items) 7.0 15.6 7.2 14.5 8.9 3.4 11.1 3.8 16.0 5.2 18.2 5.3 Tax expense 2.2 4.9 2.1 4.2 2.8 1.1 3.2 1.1 5.0 1.6 5.3 1.5 PAT 4.8 10.6 5.1 10.3 6.2 2.4 7.8 2.6 11.0 3.6 12.9 3.7 Minority interest - - - - 3.3 1.3 4.3 1.5 3.3 1.1 4.3 1.2 PAT (after MI) 4.8 10.6 5.1 10.3 2.8 1.1 3.5 1.2 7.7 2.5 8.6 2.5

Standalone Subsidiary/JV share (Derived) Consolidated


Motherson Sumi

Standalone revenue jumped 10% led by ~7% and ~18% surge in wiring harness and polymer components segments, respectively. Exceptional losses comprise fund raising (senior secured notes) cost of INR1.2bn and acquisition cost of wiring harness business of Stoneridge of INR0.4bn. Other income includes proceeds from insurance claim of INR1.6bn. Corresponding losses of INR1.2bn incurred due to fire is included in operating and admin expenses. Net loss on foreign currency transactions declined to INR114mn (FY14: INR1,881mn).

Table 6: Related party transactions (INR mn)


Note: Includes transactions with associates and companies in which KMP or their relatives have

control/significant influence; Transactions with JVs (including Sumitomo) is not included

Chart-1 Customer wise sales – Consolidated and SMRP BV Consolidated SMRP BV


Volkswagen account for 12% and 14% of total sales at consolidated and SMRP BV level

Particulars FY13 FY14 FY15Transactions during the yearPurchase of services 1,129 1,375 1,435 Purchase of goods 1,038 1,110 1,239 Rent expenses 74 198 420 Purchase of fixed assets 940 640 692 Balance sheet (closing balances)Loans & advances n.a. 559 400 Security deposits 141 194 382 Trade payables 406 476 367

Audi21%

VW12%

Seat8%

Hyundai6%

BMW6%

Renault/Nissan5%

Maruti Suzuki

5%

Ford5%

Daimler5%

Others25%

Audi VW SeatHyundai BMW Renault/NissanMaruti Suzuki Ford DaimlerOthers

While standalone EBITDA margin declined 110bps to 17.6% (FY14: 18.7%), EBITDA of subsidiaries/JVs jumped 40bps, led by 140bps gross margin expansion Purchase of fixed assets, goods and services from related parties rose to INR3.4bn (FY14: INR3.1bn).

Audi28%

VW14%

Seat10%

BMW8%

Hyundai/Kia

8%

Renault/Nissan5%

Porsche5%

Diamler5%

Ford4%

Others 13%

Audi VW SeatBMW Hyundai/Kia Renault/NissanPorsche Diamler FordOthers



Subsidiaries/JVs’ performance Table 7: Profit and loss—Key subsidiaries (EUR mn)

#excludes foreign exchange fluctuations loss/ (gain) on long term loans & exceptional items

Source: Company annual report, Edelweiss research Table 8: SMR—Financials of key geographies (INR mn)


Table 9: SMP—Financials of key geographies (INR mn)

All key subsidiaries in each geography is considered in above table Source: Company annual report, Edelweiss research

FY13 FY14 FY15 FY13 FY14 FY15

Revenue 993 1,119 1,276 1,826 1,917 2,222 EBITDA # 64 107 125 69 104 137 Depreciation 27 27 31 47 48 50 EBIT # 37 80 94 22 56 87 Capex (Eur mn) 42 38 56 60 43 161 Revenue growth (%) 15.5 12.7 14.0 n.a. 5.0 15.9 EBITDA (%) 6.4 9.6 9.8 3.8 5.4 6.2 EBIT (%) 3.7 7.1 7.4 1.2 2.9 3.9 ROCE (%) 13.9 27.3 30.3 5.3 14.1 18.0

SMR SMP

Revenue PAT PAT (%) Revenue PAT PAT (%)Hungary 27,009 1,062 3.9 21,478 1,601 7.5 South Korea 21,072 966 4.6 25,376 994 3.9 UK 11,672 57 0.5 9,803 269 2.7 USA 10,909 1,095 10.0 15,603 1,429 9.2 Australia 7,174 816 11.4 6,037 484 8.0 France 3,910 (200) (5.1) 3,150 (271) (8.6) China 3,690 237 6.4 5,096 36 0.7 India 3,486 110 3.2 3,603 93 2.6 Spain 3,069 361 11.8 3,670 655 17.8 Brasil 821 (139) (17.0) 1,153 (193) (16.7)

92,812 4,364 4.7 94,969 5,097 5.4

FY15FY14

Revenue PAT PAT (%) Revenue PAT PAT (%)Germany 72,049 2,806 3.9 74,203 2,494 3.4 China 12,752 1,457 11.4 15,461 2,187 14.1 Portugal 6,678 (180) (2.7) 5,494 144 2.6 Mexico 4,740 (311) (6.6) 3,311 (266) (8.0) Brasil 7,258 (1,120) (15.4) 5,398 (1,096) (20.3) Spain 42,108 (4,746) (11.3) 43,660 (567) (1.3)

145,586 (2,094) (1.4) 147,527 2,896 2.0

FY15FY14

Revenues of SMR and SMP jumped ~14% and ~16% in EUR terms and their EBITDA margins inched up to 9.8% (FY14: 9.6%) and 6.2% (FY14: 5.4%), respectively SMP’s subsidiaries in Mexico, Brazil and Spain continued to incur losses (although they have declined) during FY15.


Motherson Sumi

Table 10: Other subsidiaries/JVs profitability (INR mn)

* Represents wiring harness business of Stoneridge Inc acquired during FY15. MSSL Wiring Systems Inc has 3 subsidiaries.

Joint venture and subsidiaries of SMR and SMP group and other small subsidiaries has not been considered in the above table


Table 11: Borrowings analysis (INR bn)

Finance cost of FY15 excludes prepayment charges of INR124mn


% holdings Revenue PAT PAT (%) Revenue PAT PAT (%)SubsidiariesMSSL Mideast (FZE) 100 3,309 674.1 20.4 2,687 670 24.93 MSSL Global RSA Module Engineering Ltd. 100 2,295 203.6 8.9 2,177 8 0.37 Motherson Electrical Wires Lanka (Pvt) Ltd. 100 1,517 278.3 18.3 1,334 231 17.32 MSSL GB Ltd. 100 1,392 75.5 5.4 1,293 78 6.03 MSSL Japan Ltd. 100 1,363 51.8 3.8 1,040 26 2.50 MSSL Advanced Polymers s.r.o 100 890 (23.6) (2.6) 1,754 (16) (0.91) MSSL Wiring systems Inc * 100 - - 0.0 10,220 (414) (4.05)

10,766 1,260 11.7 20,505 583 2.84 Joint VentureKyungshin Industrial Motherson 50 8,241 555 6.7 9,638 1,091 11.32 Calsonic Kansei Motherson Auto Products 49 3,240 (71) (2.2) 4,057 (289) (7.12)

11,481 484 4.2 13,695 802 5.86

FY14 FY15

Particulars FY13 FY14 FY15Long term Loans (incl current maturities)

Foreign currency loans 33.2 35.3 7.9 INR loans 0.0 0.7 0.4

Finance lease l iabil ities 2.2 2.3 1.3 4.125% Senior Secured Notes (Euro) - - 33.5 Total (A) 35.5 38.3 43.1 Short term loans

Foreign currency loans 10.7 7.6 7.6 INR loans 2.8 2.5 0.7

Total (B) 13.5 10.1 8.2 Reported debt(A+B) 49.0 48.4 51.3 Cash and cash equivalents (5.9) (9.1) (18.9) Net debt 43.1 39.3 32.4 Finance cost 2.5 2.9 3.1 Average borrowings cost (%) n.a. 6.0 6.1

Average borrowings cost increased marginally to 6.1% (FY14: 6%) despite refinancing at a lower rate through issue of Senior Secured Notes Expenses incurred in relation to issue of senior secured notes stood at INR1.2bn, 3.7% of value of funds raised While gross debt jumped to INR51.3bn, net debt declined by ~INR7bn to INR32.4bn. Net debt /equity ratio improved to 1.0x (FY14: 1.3x).



Table 12: Capital allocation (INR bn)

Note: Minority interest is considered in RoCE computation




Particulars FY11 FY12 FY13 FY14 FY15Sales 82.5 147.8 253.1 304.3 345.9 EBITDA 7.7 8.9 14.8 24.0 27.6 EBITDA margin (%) 9.3 6.0 5.8 7.9 8.0 RoE (%) 28.2 17.1 21.4 29.2 31.2 RoCE (%) 26.1 13.1 14.9 23.4 25.5 Fixed asset turnover ratio 5.1 4.6 5.1 5.4 5.7 Total asset turnover ratio 3.8 3.5 4.0 4.5 5.3 Net fixed assets (Ex CWIP) 17.6 46.9 52.8 59.2 61.3 CWIP 3.9 4.5 3.9 6.5 9.6 Net current assets 5.6 13.3 14.4 9.6 1.0 Equity shareholders' funds (A) 16.1 18.7 22.9 29.6 33.2 Loan funds (B) 12.6 46.0 49.0 48.4 51.3 D/E Ratio 0.8 2.5 2.1 1.6 1.5 Total capital employed (A+B) 28.7 64.7 71.9 78.0 84.5

0

18

36

54

72

90

0.0

7.0

14.0

21.0

28.0

35.0

FY11 FY12 FY13 FY14 FY15

(INR

bn)

(%)

EBITDA margin (%) ROE (%) ROCE (%) Total capital employed (A+B)

Improvement in fixed assets & working capital turnover ratios and higher EBITDA margins led to increase in RoCE High trade payables resulted in decline in net current assets and consequently superior return ratios


Motherson Sumi

Balance sheet overview Chart 3: Major sources and application in FY15

Chart 4: Major sources and application as at FY15 end


Retained earnings &

MI26%

Borrowings13%

Inventories7%

Current liabilities

and provisions

54%

Sources during the year

Shareholder funds

20%

Debt funds30%

Minority interest

6%

Current liabilities

and provisions

44%

Net fixed assets

9%

CWIP14%

Trade Receivable

s 20%Cash 43%

Loans & advances

14%

Applications during the year

Net fixed assets36%

CWIP6%

Trade receivables

22%

Inventories19%

Cash & Cash

equivalents

11%

Others6%

100% = INR169bn



Table 13: Summary financial (INR bn)


Particulars FY11 FY12 FY13 FY14 FY15Sales 82.5 147.8 253.1 304.3 345.9 Total income 84.2 149.2 256.3 307.4 350.5 EBITDA 7.7 8.9 14.8 24.0 27.6 Depreciation 2.5 3.8 7.1 8.2 9.2 Financial costs 0.6 1.6 2.5 2.9 3.2 Net profit 3.9 2.6 4.4 7.7 8.6 Gross margin (%) 37.6 35.4 34.9 36.4 37.5 EBITDA margin (%) 9.3 6.0 5.8 7.9 8.0 RoE (%) 28.2 17.1 21.4 29.2 31.2 RoCE (%) 26.1 13.1 14.9 23.4 25.5 Equity shareholders' funds 16.1 18.7 22.9 29.6 33.2 Loan funds 12.6 46.0 49.0 48.4 51.3 Minority interest 2.3 5.0 4.0 7.9 10.1 Net fixed assets 17.6 46.9 52.8 59.2 61.3 CWIP 3.9 4.5 3.9 6.5 9.6 Current assets loans and advances 24.5 59.8 61.2 71.5 75.3 Current l iabil ities and provisions 18.9 46.5 46.8 61.9 74.3 Net current assets 5.6 13.3 14.4 9.6 1.0 Cash and cash equivalents 3.5 4.6 5.9 9.1 18.9 Net debt 9.1 41.5 43.1 39.3 32.4 Cash flow from operating activities 4.1 5.9 14.9 27.0 33.9 Cash flow from investing activities (8.1) (20.7) (10.8) (13.7) (28.5) Cash flow from financing activities 4.0 13.8 (2.6) (10.8) 4.9 Net cash flows 0.1 (1.0) 1.5 2.4 10.3 CAPEX (7.9) (10.8) (11.4) (14.1) (18.4) Working capital investments (3.1) (3.4) (1.0) 2.4 12.7


Tata Motors’ (TAMO) FY15 annual report analysis highlights significant amount of forex losses impacting net worth accretion, led by: i) forex losses on debt worth INR48bn charged directly to reserves (FCMITDA); ii) INR117bn hedging losses; and iii) INR42bn translation losses. Details of derivative positions at consolidated level are not available. Capex spend led to decline in RoE/RoCE and asset turnover ratio over past 5 years. Adjusted cash flow fell owing to higher receivables, while payables remain a major source of cash flow at JLR. Discounting charges paid on non-fund based facilities rose from INR6.6bn to INR8.2bn in FY15. Consolidated net debt rose 28% to INR274bn and adjusted for pension deficit and implied debt on discounting charges, it stood at INR515bn. TAMO had cash balance of INR462bn as at FY15 (FY14: INR393bn). Average borrowing cost stood at 8.5% and average yield on cash remained low at 2.1%, leading to negative carry. What’s on track? JLR’s performance continues to be robust with revenue growth of 13% YoY in GBP terms and 16% in INR terms.

What needs tracking? Net worth accretion was weaker in FY15 on account of significant forex losses, including for translation and hedges. Pension losses continue to be charged to reserves, further impacting net worth, with INR27.9bn booked in FY15 (FY14: INR13.4bn). Cumulatively over past 5 years, INR116bn worth pension losses were charged to reserves. Standalone revenue growth was muted at 6% YoY and standalone EBITDA margin further eroded from negative -2.6% in FY14 to -3.4% in FY15. Consolidated EBITDA margin remained flat YoY, and adjusted for product development expenses rose from 11.1% in FY14 to 12.5% YoY due to lower cash expenditure on product development. Consolidated net debt rose from INR214bn in FY14 to INR274bn in FY15. In our view, adjusted debt should be higher by INR241bn on account of pension deficit of INR82bn and non-fund based facility of INR159bn. TAMO paid discounting charges of INR8.2bn in FY15 (FY14: INR6.6bn). Average borrowing cost stood at 8.5% (17.1% adjusted for forex losses capitalised) at consolidated level, while yield on investments stood at 2.1% leading to negative carry. Net interest cost stood at INR48bn in FY15 (FY14: INR47.4bn).



Tata Motors | Annual Report Analysis


July 29, 2015

52-week range (INR) : 605 / 366


M cap (INR bn/USD mn) : 1,070 / 16,707


Promoters* : 34.3


FIIs : 20.5

Others : 28.7



Market Data




Effective tax rate rose to 32.4% in FY15 (FY14: 25.3%) and tax expenses stood at INR76.4bn versus cash tax payment of INR41.9bn, led by deferred tax of INR30.8bn. RoE/RoCE and asset turnover ratio declined in past 5 years owing to significant capex and product development costs. Intangibles contributed nearly half of the total assets’ addition over past 5 years. TAMO continues to capitalise 80-85% of product development expenditure versus global peers’ average of 20-35%. Total outstanding product development expenditure capitalised under intangibles stood at INR248bn and intangibles under development stood at INR193bn. During FY15, the company capitalised interest cost of INR16.5bn (FY14: INR14.7bn), largely towards product development expenditure.

Net worth analysis Table 1: Net worth accretion (INR bn)


Net worth declined in FY15 by INR93bn versus PAT (ex-dividend) of INR139bn, primarily impacted by significant forex and pension losses charged to reserves as explained below:

• INR57bn forex losses were charged directly through FCMITDA account (as permitted by amended AS-11) and INR9.0bn was amortised to P&L.

• MTM losses on derivatives worth INR117.3bn (net of deferred tax of INR29.3bn) were recorded under hedging reserves, as the company followed hedge accounting permitted under AS-30.

• Translation of overseas subsidiaries led to forex loss of INR41.9bn for the year.

• Pension losses rose to INR28.0bn (net of deferred tax of INR7.0bn) in FY15 (FY14: INR13.4bn)

Particulars FY14 FY15Opening shareholders' fund 376.4 656.0 Profit for the year 139.9 139.9 Dividend (incl dividend tax) (7.7) (0.6)

508.6 795.3 Other adjustments:Actuarial losses and movement in pension assets (13.4) (27.9) Forex gains/ (losses):

Capitalised under FCMITDA 17.1 (48.0) On translation 68.9 (41.9)On hedges (net of deferred tax) 69.8 155.8 (117.3) (207.2)

Premium on shares issued on conversion of FCCN net of share issue expenses

3.5 1.3

Others 1.5 1.2 Closing shareholders' fund 656.0 562.6


Tata Motors


Table 2: Consolidated versus standalone - Profitability analysis (INR bn)


Standalone revenue growth stood lower at 6% YoY, while standalone EBITDA margin further dipped from negative -2.6% in FY14 to -3.4% in FY15. Consolidated revenue grew a robust 13% YoY, primarily driven by strong subsidiaries’ revenue, mainly JLR. Revenue at JLR grew 13% YoY in GBP terms, while currency depreciation led to INR revenue growth of 16% YoY. Table 3: Adjusted EBITDA (INR bn)


* Assuming 35% capitalisation rate in line with global peers Table 4: Product development expenditure (INR bn)


ParticularsFY14 % FY15 % FY14 % FY15 % FY14 % FY15 %

Sales 342.9 100.0 362.9 100.0 1,985.5 100.0 2,265.0 100.0 2,328.3 100.0 2,628.0 100.0 Raw Materials Consumed 259.1 75.6 270.4 74.5 1,176.7 59.3 1,328.8 58.7 1,435.9 61.7 1,599.2 60.9 Operating & Admin. Exp. 63.9 18.6 74.0 20.4 264.5 13.3 306.9 13.5 328.4 14.1 380.9 14.5 Personnel cost 28.8 8.4 30.9 8.5 186.8 9.4 224.6 9.9 215.6 9.3 255.5 9.7 EBITDA (9.0) (2.6) (12.4) (3.4) 357.5 18.0 404.8 17.9 348.5 15.0 392.4 14.9 Depreciation 20.7 6.0 26.0 7.2 90.1 4.5 107.9 4.8 110.8 4.8 133.9 5.1 EBIT (29.7) (8.6) (38.4) (10.6) 267.4 13.5 296.9 13.1 237.8 10.2 258.5 9.8 Financial Charges 13.5 3.9 16.1 4.4 34.0 1.7 32.5 1.4 47.5 2.0 48.6 1.8 Other income 38.3 11.2 18.8 5.2 (30.0) (1.5) (9.8) (0.4) 8.3 0.4 9.0 0.3 Exceptional exp/ (gain) 5.4 1.6 4.0 1.1 4.5 0.2 (2.2) (0.1) 9.9 0.4 1.8 0.1 PBT (10.3) (3.0) (39.7) (11.0) 198.9 10.0 256.8 11.3 188.7 8.1 217.0 8.3 Tax expense (13.6) (4.0) 7.6 2.1 61.3 3.1 68.8 3.0 47.6 2.0 76.4 2.9 PAT 3.3 1.0 (47.4) (13.1) 137.7 6.9 188.0 8.3 141.0 6.1 140.6 5.4

Standalone Subsidiary (Derived) Consolidated

Particulars FY13 Margin (%)

FY14 Margin (%)

FY15 Margin (%)

Reported EBITDA 246 13.0 349 15.0 392 14.9 Less: Adjustments 65% of Product development cost * 61 3.2 89 3.8 64 2.4 Adjusted EBITDA 185 9.8 259 11.1 328 12.5

Particulars FY13 FY14 FY15 FY13 FY14 FY15 FY13 FY14 FY15Closing balance (A) 63.1 74.4 79.4 218.2 330.9 361.4 281.4 405.2 440.8Ammortisation during the year (B) 5.3 7.3 11.1 26.3 43.9 51.4 31.6 51.2 62.5Opening balance ( C) 52.9 63.1 74.4 160.0 218.2 330.9 212.9 281.4 405.2Expenditure capitalised during the year (D=A+B-C) 15.5 18.5 16.1 84.6 156.5 81.9 100.1 175.0 98.1Translation adjustment 0.0 0.0 0.0 4.2 (24.1) 16.4 4.2 (24.1) 16.4Adjusted expenditure capitalised 15.5 18.5 16.1 88.8 132.4 98.3 104.2 150.9 114.5Revenue expenditure incurred (E) 4.3 4.3 4.4 16.0 21.4 24.4 20.2 25.7 28.8Total Cash expense on product development (D+E) 19.7 22.8 20.5 104.7 153.8 122.7 124.4 176.6 143.2% of expenditure capitalized 78 81 79 85 86 80 84 85 80


EBITDA margin stood flat YoY, and adjusted for product development expenses, rose from 11.1% in FY14 to 12.5% in FY15



Table 5: Product development capitalisation ratio – JLR versus global peers (%)


Capitalisation ratio marginally declined from 83% in FY14 to 81% in FY15 at JLR, while from 85% to 80% at consolidated level.

Debt and borrowing cost analysis

Table 6: Adjusted debt analysis (INR bn)


TAMO paid discounting charges worth INR8.2bn in FY15 of which INR3.6bn related to subsidiaries, primarily JLR. Adjusted for implied debt (derived from discounting cost incurred) and pension deficit, consolidated gross debt stood at INR977bn in FY15 versus INR736bn reported. Note: We have used LIBOR + 300bps for JLR and average cost of borrowing for standalone entity.

Particulars CY11 CY12 CY13 CY14Product development - % capitalised:Audi 21 27 30 30 Daimler 26 26 24 20 BMW 29 28 36 33 JLR (fiscal year ending) 83 85 83 81


Discounting charges in P&L (A) 3.4 3.4 4.6 3.6 3.1 3.6 7.0 6.6 8.2 Adjustment to Debt:

Avg borrowing cost (%) - Avg 12m EUR LIBOR + 300bps for JLR (B)

8.2 9.7 8.5 3.8 3.5 3.4 - - -

Implied debt on discounting charges (A/B*100) 41 35 54 95 90 105 136 125 159 Pension deficit (as per annual report) - 54 67 82 54 67 82

Total - C 41 35 54 149 157 187 190 192 241

Gross debt - Reported (D) 168 151 211 368 456 525 536 606 736 Gross debt - Adjusted (C+D) 209 186 266 517 613 712 726 798 977

Net debt - Reported 163 148 202 86 65 72 249 214 274 Net debt - Adjusted 204 184 256 235 222 259 440 406 515

Standalone Subsidiary (derived) Consol

JLR continues to capitalise 80% -85% of product development costs versus 20-35% capitalisation by global peers


Tata Motors

Table 7: Average yield and borrowing cost – Consolidated and JLR*


* Borrowing cost and yield on investments are calculated on average basis

** FY15 data for JLR not available Gross debt of INR736bn (8.5% interest cost) and cash of INR462bn (average yield of 2.1%) led to net interest cost of INR48bn and negative carry of 6.4% in FY15. Debt pertaining to Tata Motors Finance (captive financing arm) stood at INR122.3bn, as per our estimate. Average borrowing cost, at consolidated level, stood at 8.5%. However, significant forex losses capitalised under reserves led to increase in adjusted borrowing cost at 17.1%. Average borrowing cost at JLR remained elevated at 10.1%, though it declined YoY. Average yield on investments remained lower and dropped to 2.1% in FY15, as significant amount of cash and investments are with overseas entities (primarily JLR).

Particulars FY11 FY12 FY13 FY14 FY15 FY11 FY12 FY13 FY14 FY15Cash & Investment:

Current account and deposits 111 179 206 293 318 1,028 2430 2847 3459 4263Mutual fund and others 15 78 81 100 144 - - - - -

Total 126 258 287 393 462 1,028 2430 2847 3459 4263

Income from Investment (A) 4.2 5.7 8.1 8.3 8.9 9.7 16.0 34.0 38.0 **Average Yield % (B) 3.8 3.0 3.0 2.4 2.1 1.1 0.9 1.3 1.2 **

Gross Debt 328 471 536 606 736 1,382 1,974 2,167 2,010 2,537 Net Debt / (cash) 202 214 249 214 274 353 (456) (680) (1,449) (1,726)

Interest cost (incl capitalized) (C) 22.3 31.8 41.3 55.7 57.0 84.0 166.1 176.2 257.0 230.0 Avg Borrowing cost (%) (D) 6.6 8.0 8.2 9.7 8.5 3.8 9.9 8.5 12.3 10.1 Avg Borrowing cost (%) adjuted for forex losses 6.5 11.2 11.0 6.8 17.1 3.8 9.9 8.5 12.3 10.1

Net interest expense in P&L (C-A) 18.1 26.1 33.2 47.4 48.0 74.3 150.1 142.2 219.0 **Negative carry (D-B) 2.8 5.0 5.2 7.3 6.4 2.7 9.0 7.2 11.1 **

Consolidated (INR bn) JLR (GBP mn)



Cash flow and fund flow analysis Table 8: Adjusted cash flow analysis (INR bn)


Cash profit for the year stood robust at INR388.5bn versus INR319.9bn in previous year. Free cash flow, adjusted for capex, product development spends and acceptances declined from INR25.8bn in FY14 to negative INR(51.4)bn in FY15. Capex spend rose from INR269bn in FY14 to INR315bn in FY15 and the company plans to spend additional INR388bn in FY16. Working capital requirement rose to INR36.7bn versus inflow of INR41.6bn last year, primarily led by increase in receivables by INR30.1bn (FY14: decline of INR18.6bn). Trade payables rose by INR36bn in FY15 versus INR46.9bn in FY14. Table 9: Average cash conversion cycle (days)


Receivable days stood steady at 16 days and absolute receivables rose from INR105.7bn to INR125.8bn in FY15. Receivables due for >6 months rose from INR9.5bn to INR10.0bn in FY15.

Particulars FY14 FY15 FY14 FY15 FY14 FY15Profit before tax (10.3) (39.7) 197.8 256.0 187.6 216.3 Non-operating expenses (24.8) 0.4 63.3 41.8 38.6 42.2 Non-cash adjustments 29.4 29.7 107.5 142.3 136.9 172.0 Direct taxes paid (0.6) (0.8) (42.5) (41.2) (43.1) (41.9)Cash profit after tax (6.2) (10.5) 326.1 399.0 319.9 388.5 Interest expenses paid (17.5) (18.4) (44.2) (44.6) (61.7) (63.1)Interest cost on NCD / FCCB charged through reserves (1.1) (1.1) - 1.1 (1.1) - Pension cash contribution charged through reserves - - (11.4) (13.9) (11.4) (13.9)Product Development capitalised (18.5) (16.1) (132.4) (98.3) (150.9) (114.5)Adj cash profit post product development (43.3) (46.1) 138.2 243.2 94.8 197.1 Capex done (Ex product development) (12.4) (10.9) (105.9) (190.0) (118.3) (200.9)Adj cash profit after tax post interest and capex (55.7) (57.1) 32.2 53.2 (23.5) (3.8)Working capital changes (Reported) 34.6 (15.2) 7.0 (21.5) 41.6 (36.7)Less: Acceptances (8.6) (8.6) 16.3 (2.3) 7.7 (10.9)Adj FCF post interest before finance receivables & (29.7) (80.8) 55.5 29.4 25.8 (51.4)Add: Rise in Finance Receivables (0.2) (0.0) 24.9 1.7 24.8 1.7 Adj FCF post interest & finance receivables (29.9) (80.8) 80.4 31.1 50.6 (49.7)


Particulars FY12 FY13 FY14 FY15Inventory days 53 52 60 63 Trade Receivable days 15 17 17 16 Less: Trade payable days (110) (98) (109) (109) Cash conversion cycle (41) (29) (32) (30) Add: Acceptance days 23 12 10 9 Adj Cash conversion cycle (19) (17) (22) (21)

Cash conversion cycle continued to be negative led by higher payables of 109 days


Tata Motors

Table 10: Average cash conversion cycle (days) – Gobal peers


JLR enjoys higher payables at 97 days as compared to its global peers’ average of 35-45 days.

Table 11: Fund flow analysis (INR bn)


Debt rose by INR331bn over past 5 years and total cash and investments rose by INR344bn over the same period.

Chart 1: Source of funds Chart 2: Application of funds


Cumulatively, over past 5 years, operating cash flow contributed 75% of cash generation and borrowings contributed 22%. Significant cash deployment was towards product development (34%) and capex (32%).

CY11 CY12 CY13 CY14 CY11 CY12 CY13 CY14 CY11 CY12 CY13 CY14 FY11 FY12 FY13 FY14Trade Receivable days 15 14 12 10 21 20 20 23 26 25 24 23 23 17 18 17 Inventory days 59 58 58 60 39 41 40 39 71 72 69 69 64 55 61 61 Less: Trade Payable days (33) (35) (42) (44) (39) (40) (42) (45) (39) (38) (35) (35) (93) (88) (99) (97) Cash conversion cycle 41 36 28 26 21 21 17 17 58 58 57 57 (7) (16) (20) (20)

Jaguar Land RoverDaimlerParticulars

BMW Audi

Sources FY11 FY12 FY13 FY14 FY15 Total Application FY11 FY12 FY13 FY14 FY15 TotalOperating profit 167 224 244 363 430 1,429 Capex (ex-product development) 28 47 88 94 217 475 Less: Interest (25) (34) (47) (62) (63) (230) Product development capitalised 53 91 100 175 98 517 Less: Taxes (14) (18) (22) (43) (42) (139) Dividend 10 15 16 7 7 55 Add: Investment Income 4 5 8 7 8 32 Change in finance receivable 24 57 25 1 - 106 Cash Profits 132 178 183 265 333 1,092 Net cash(FDs, Mutual funds) 20 125 43 62 95 344 Working capital changes (17) 34 25 42 (37) 46 OCF post interest 115 212 208 307 297 1,139Equity issuances (GDS and QIPs) 33 1 0 - - 34 Net borrowings (13) 124 64 34 122 331 Others (1) (3) 0 (2) (2) (7) Total 135 334 272 339 417 1,496 Total 135 334 272 339 417 1,497

OCF post interest

75%

Equity issuances (GDS and

QIPs)2%

Net borrowings

22%

Others1%

SourcesCapex (ex-

product developme

nt)32%

Product developme

nt capitalised

34%

Dividend4%

Change in finance

receivable7%

Net cash(FDs, Mutu

al funds)23%

Applications



Pension analysis Table 12: Pension cost versus cash contribution (INR bn)


Cash contribution continues to be significantly higher versus P&L charge annually led by actuarial losses accounted under reserves as per IFRS. Cumulatively, since FY10, cash contributions and increase in liability stood at INR192.7bn versus P&L charge of INR76.3bn.

Table 13: Pension actuarial assumptions and plan assets details


Pension deficit rose from INR66.7bn in FY14 to INR81.8bn in FY15, partly led by decline in the discount rate. Expected return on assets has been consistently falling in past 5 years along with the discount rate due to lower interest rates in the European region.

ParticularsCummulative

FY10 FY11 FY12 FY13 FY14 FY15 since FY10Components of employer expenseCurrent Service cost 4.8 7.5 7.8 10.1 16.3 15.8 Interest cost 15.6 15.3 18.3 21.8 25.9 27.7 Expected return on plan assets (13.1) (17.1) (18.3) (19.2) (22.0) (23.4) Others 0.1 0.3 1.1 0.5 0.6 0.0 Total expense recognised in P&L 7.3 6.1 8.9 13.2 20.7 20.2 76.3Company's cash contributions 4.0 15.5 17.6 14.4 32.0 34.1 117.6Net liability recognised in balance sheet (under funded status)

6.8 20.7 26.5 53.9 67.1 81.9 75.1

Cash infused + increase in liability 5.6 29.4 23.4 41.8 45.2 48.9 192.7Excess of Increase in Liability and cash infused over expensed in P&L

(1.7) 23.3 14.5 28.6 24.5 28.7 116.4

Post-retirement Pension scheme

Particulars FY10 FY11 FY12 FY13 FY14 FY15Discount rate (%) 5.50- 5.60 5.19- 5.50 4.38-5.1 3.69-4.40 3.71-4.59 2.45-3.37Expected return on plan assets (%) 6.5 5.75-6.57 4.85-6.34 4.75-6.34 2.07-3.94 3.37

Particulars FY10 FY11 FY12 FY13 FY14 FY15Equity securities (%) 39-53 20-40 19-38.4 17-38 10-37 8-20Debt securities (%) 39-56 40-63 38.4-67 38-68 35-69 49-70Other (%) 1-23 2.4-20 8-23.2 15-24 19-27 18-31Net fair value of plan assets 259.1 298.2 383.7 440.5 535.8 646.9Present value of defined benefit obligation 263.4 307.2 400.7 494.3 602.5 728.7


Tata Motors

Capital allocation analysis

Table 14: Capital allocation and return ratios (INR bn)


Chart 3: Capital allocation and ratios


Particulars FY11 FY12 FY13 FY14 FY15Sales 1,221 1,657 1,888 2,328 2,628 EBITDA 168 223 245 349 392 EBITDA margin (%) 14 13 13 15 15 Depreciation 47 56 76 111 134 Net profit 93 135 99 140 140 ROE (%) 67 52 29 29 23 ROCE (%) 26 26 21 23 21 Asset turnover (ex-CWIP and intangibles under development)

3.5 3.7 3.4 3.4 3.0

Capital employed 520 798 912 1,262 1,299 Equity shareholders' funds (A) 192 327 376 656 563 Loan funds (B) 328 471 536 606 736

0

280

560

840

1,120

1,400

0.0

16.0

32.0

48.0

64.0

80.0


(INR

bn)

(%)

Equity shareholders' funds (A) Loan funds (B)

EBITDA margin (%) ROE (%)

ROCE (%)

Significant increase in capex over past 5 years led to decline in RoE and RoCE and asset turnover ratio



Table 15: Capital employed – Total assets (INR bn)

Other liabilities include provisions for product warranties (rose from INR202bn to INR212bn), derivative contract liabilities (net) (up from INR(68)bn asset to INR123bn liabilities) and others (largely capex payables, advance from customers and tax related liabilities).

Table 16: Capital employed – Total liabilities (INR bn)


FY15 annual report (page 94) highlighted that in “Fiscal 2014, TAMO breached financial covenants relating to the ratio of total outstanding liabilities to tangible net worth, and to the debt service coverage ratio in various financing agreements. The company requested and obtained waivers of its obligations from the lenders and guarantors to pay additional costs as a consequence of such breaches. These breaches have not resulted in an event of default in the company’s financing agreements or the payment of penalties.

In Fiscal 2015, the company has prepaid the above borrowings and hence there has not been any breach of financial covenants”.

Particulars FY11 FY12 FY13 FY14 FY15Fixed assets:

Net fixed assets (ex CWIP) 228 271 324 407 523 CWIP 22 31 43 101 93 Intangibles (ex-Goodwill) 90 131 187 234 315 Intangibles under development 92 128 141 231 193 Goodwill 36 41 41 50 47

Total assets - A 468 603 736 1,024 1,171

Working capital - ex CashInventories 141 182 210 273 293 Receivables 65 82 109 106 126 Other assets 89 122 134 187 137 Payables (279) (367) (448) (573) (574) Other liabilities (211) (284) (340) (364) (514)

Net working capital (ex-cash) - B (196) (264) (334) (372) (532) Cash and cash equivalents - C 126 258 287 393 462 Others - D 121 202 224 218 198 Total (A+B+C+D) 520 798 912 1,262 1,299

Particulars FY11 FY12 FY13 FY14 FY15Liabilities:

Debt 328 471 536 606 736 Trade payables 279 367 448 573 574

Sub-total (A) 607 838 984 1,180 1,310 Derivative liablities/(asset) net (3) 6 26 (68) 123 Provisions (largely product warranties and provisions)

100 130 161 202 212

Other liablities (tax, capex payables and others)

115 148 154 230 179

Sub-total (B) 211 284 340 364 514 Total liablitlies (A+B) 818 1,122 1,324 1,544 1,824

Net worth (Asset - liabilities) 192 327 376 656 563 D/E ratio 1.7 1.4 1.4 0.9 1.3 Total liabilities to equity ratio 3.2 2.6 2.6 1.8 2.3

Intangibles contributed nearly half of the total assets’ addition over past 5 years Interest capitalised in FY15 stood at INR16.5bn (FY14: INR14.7bn) and largely towards product development expenditure Working capital position (ex-cash) improved over past 5 years, primarily led by sharp increase in payables and other liabilities

Total liabilities rose from INR818bn to INR1.8trn over past 5 years, primarily led by equal increase in debt and trade payables


Tata Motors

Table 17: Product warranty expenses (INR bn)


Table 18: Product warranty expenses – Global peers


** Includes provision for rebates/ discounts - warranty details not separately available.

JLR’s warranty expenses, as a % of revenues, are broadly in line with peers. Table 19: Summary financials (INR bn)


Particulars FY12 FY13 FY14 FY15 CumulativeOpening balance 41.8 53.0 67.2 94.8 41.8 Add: Provision for the year (net) 34.3 42.0 62.1 59.1 197.5 Less: Payments / debits (28.6) (27.6) (47.6) (41.5) (145.3) Foreign currency translation 5.6 (0.3) 13.2 (8.8) 9.6 Closing balance 53.0 67.2 94.8 103.6 103.6 Provision for the year as % of sales 2.1 2.2 2.7 2.2

CY12 CY13 CY14 CY12 CY13 CY14 CY12 CY13 CY14 FY12 FY13 FY14Warranty expenditure 1,819 1,243 1,451 1,731 2,474 2,611 2,221 2,426 2,617 372 462 541 Sales 58,039 56,812 60,280 48,771 49,880 53,787 100,531 103,594 114,013 13,512 15,784 19,386 % of Sales 3.1 2.2 2.4 3.5 5.0 4.9 2.2 2.3 2.3 2.8 2.9 2.8

ParticularsBMW (EUR mn) Audi (EUR mn)** Daimler (EUR mn) JLR (GBP mn)

Particulars FY11 FY12 FY13 FY14 FY15Sales 1,221 1,657 1,888 2,328 2,628 Total income 1,226 1,663 1,896 2,337 2,637 EBITDA 168 223 245 349 392 EBITDA margin (%) 13.8 13.5 13.0 15.0 14.9 RoCE 26.3 26.3 20.8 22.6 20.9 RoE 67.3 52.1 29.4 28.5 23.2 Depreciation 47 56 76 111 134 Financial costs 24 30 36 47 49 Net profit 93 135 99 140 140 Equity shareholders' funds 192 327 376 656 563 Loan funds 328 471 536 606 736 Net debt 202 214 249 214 274 Net fixed assets (Ex-CWIP) 353 444 552 691 885 CWIP 115 159 184 333 286 Current assets loans and advances (Ex-cash) 295 387 454 566 555 Current liabilities and provisions 396 541 648 770 827 Net current assets (Ex-cash) (101) (154) (195) (204) (272) Cash and cash equivalent 126 258 287 393 462 Cash flow from operating activities 112 184 221 362 352 Cash flow from investing activities (73) (205) (234) (299) (345) Cash flow from financing activities (14) 66 (17) (39) 52 Net cash flows 26 44 (30) 24 59 CAPEX (81) (139) (188) (269) (315) Working capital investments (as per Cash flow) (40) (23) (1) 42 (37)

Product warranty expenses, as a % of sales, remained consistent; however, outstanding provision has increased considerably over the years


TVS Motor Company’s (TVS) FY15 annual report analysis highlights robust volume growth leading to revenue and PBT growth (before exceptional items) of 23% and 33% YoY, respectively. EBIDTA margin however remained flat at 5.8%. EBITDA/unit has been consistently lower for TVS in the past 5 years versus peers owing to higher operating and employee cost per unit. Subsidiaries continue to record losses, largely led by Indonesia operations. Aggregate exposure to subsidiaries stood at INR6.6bn, 40% of standalone net worth (including guarantees and credit facilities - INR8.1bn, 49%). Operating cash flows declined sharply following increase in inventories and loans/advances. Debt rose by INR3.9bn to INR11.2bn in FY15 (D/E 0.8x), and adjusted for off-balance sheet liabilities (bills discounted, LCs, credit agreements) stood at INR15.7bn (adjusted* D/E 1.3x). Investments (other than subsidiaries) stood at INR5.4bn, 41% of net worth. Related party transactions included purchases worth INR4.6bn (6.2% of raw material (RM) cost) from parent, Sundaram Clayton.

*also adjusted for revaluation reserve

What’s on track? Robust volume growth at 21% YoY, led by strong demand and new launches. Revenue grew 23% to INR103.1bn.

What needs tracking? Subsidiaries’ losses declined from INR748mn ín FY14 to INR276mn in FY15. Indonesian subsidiary’s net worth has eroded by 88% since operations due to accumulated losses of INR5.0bn (equity – INR5.6bn). Aggregate cash exposure to subsidiaries stood at INR6.6bn, 40% of standalone net worth (including off- balance sheet items - INR8.1bn, 49%). Investments (other than subsidiaries) stood at INR5.4bn, 41% of net worth (FY14: INR4.4bn, 38%), largely pertaining to preference shares of TVS Motor Services (INR4.5bn) and equity investment in 49% associate entity, Emerald Haven Realty (INR400mn). Operating cash flow post interest (adjusted for off-balance sheet liabilities) declined significantly from INR3.2bn in FY14 to INR(0.4)bn in FY15, primarily led by increase in inventories and loans/advances. Adjusted cash conversion cycle stood at 12 days versus negative 17-23 days for peers. Inventory days for TVS, at 41 days, are highest amongst peers (13-17 days). Contingent liabilities include bills discounted, LC’s and liabilities towards credit facilitating agreements, aggregating to INR4.5bn (FY14: INR3.7bn). Adjusted for these liabilities and revaluation reserve of INR932mn, D/E rose from 1.1x in FY14 to 1.3x in FY15 (reported 0.6x to 0.8x).



TVS Motor Company | Annual Report Analysis


September 14, 2015

52-week range (INR) : 322 / 201




Promoters* : 57.4


FIIs : 12.7

Others : 15.6



Market Data




Other current liabilities included INR2.9bn, 23% of net worth (FY14: INR2.4bn, 22%) towards dues for expenses, which largely include marketing cost, sales incentives, excise duty provisions and other admin expenses. Consolidated EBIDTA grew 23% YoY, but margin has been flattish since past 4 years at 6%, primarily owing to higher employee and operating costs as compared to peers. Operating cost per unit stood at INR6,907 for TVS versus INR4,595 for Bajaj Auto and INR4,746 for Hero MotoCorp. Operating cost includes ad spend/marketing expense at 5.6% of revenues versus peers which ranged from 2-2.5%. Packing/ freight, power/ fuel, miscellaneous and other expenses as percentage of revenue stood highest for TVS (10%) versus peers (5.2% Bajaj Auto and 7.6% for Hero MotoCorp). TVS recognises freight cost on gross basis and recoveries from customers/ dealers are included in revenue, similar to Hero MotoCorp. In the previous year, a subsidiary company revalued its land by INR1.5bn, of which a portion of land (in Indonesia) was subsequently sold in FY15, leading to decline in revaluation reserves by INR574mn. Consequently, gain on sale of land worth INR582.7mn was recognised in exceptional items. Interest and investment income stood at INR194mn (FY14: INR233mn) and cash and investments stood at INR882mn (FY14: INR1.7bn). Average yield on cash and investments stood significantly higher at 14-15% in past 2 years, primarily led by interest charged (INR130mn in FY15) towards extended credit to dealers on receivables.

Other highlights Foreign currency translation reserve stood at negative INR275.9mn versus credit of INR750.2mn in FY14, owing to losses on translation of overseas subsidiaries (primarily Indonesia and Singapore) as INR appreciated against the IDR and SGD. Derivatives outstanding (net sell position) rose to INR7.8bn (FY14: INR4.8bn) and net unhedged receivables rose from INR285mn in FY14 to INR708.5mn in FY15. Standalone R&D expenses stood at INR2.0bn, 1.9% of sales (FY14: INR1.3bn, 1.7%). TVS capitalised INR183.8mn (4% of standalone PBT) as ‘design development and knowhow’ under Intangible assets (FY14: INR191.1mn, 5% of PBT).


TVS Motor Company

Profitability analysis Table 1: Standalone versus consolidated profitability (INR bn)


TVS reported robust 21% volume growth leading to significant improvement in consolidated revenue and profitability (PBT before exceptional items) growth at 23% and 33%, respectively. EBITDA grew 23% YoY, but margins have remained at 6% levels since past 4 years, despite significant improvement in volume growth primarily due to higher employee cost and operating expenses.

Table 2: Operating cost and margins – TVS versus peers (consolidated)


FY14 % FY15 % FY14 % FY15 % FY14 % FY15 %Sales 79.7 100.0 101.0 100.0 4.2 100.0 2.1 100.0 83.8 100.0 103.1 100.0 Raw Materials Consumed 56.7 71.2 73.0 72.3 2.3 55.2 0.1 6.3 59.0 70.4 73.1 70.9 Operating and admin expense 13.3 16.8 16.1 16.0 1.1 27.1 1.3 59.9 14.5 17.3 17.4 16.9 Personnel cost 4.8 6.0 5.9 5.8 0.6 15.5 0.7 34.4 5.4 6.5 6.6 6.4 EBITDA 4.8 6.1 6.0 6.0 0.1 2.2 (0.0) (0.6) 4.9 5.9 6.0 5.8 Depreciation 1.3 1.7 1.5 1.5 0.2 4.1 0.3 11.8 1.5 1.8 1.8 1.7 EBIT 3.5 4.4 4.5 4.5 (0.1) (1.9) (0.3) (12.5) 3.4 4.1 4.2 4.1 Financial Charges 0.3 0.3 0.3 0.3 0.5 13.1 0.3 16.3 0.8 1.0 0.6 0.6 Other income 0.3 0.4 0.3 0.3 (0.0) (0.8) (0.1) (4.2) 0.3 0.3 0.2 0.2 PBT before exceptional items 3.6 4.5 4.6 4.5 (0.7) (15.9) (0.7) (32.9) 2.9 3.4 3.9 3.7 Exceptional items (0.0) (0.0) - - 0.2 5.0 0.6 27.3 0.2 0.2 0.6 0.6 Tax (0.9) (1.1) (1.1) (1.1) (0.3) (7.0) (0.2) (7.3) (1.2) (1.4) (1.2) (1.2) PAT 2.6 3.3 3.5 3.4 (0.7) (17.9) (0.3) (12.9) 1.9 2.2 3.2 3.1

ParticularsStandalone Subsidiary (Derived) Consolidated

Particulars FY11 FY12 FY13 FY14 FY15 Particulars FY11 FY12 FY13 FY14 FY15Volumes (mn) Revenue per unit

TVS 2.0 2.2 2.0 2.1 2.5 TVS 32,026 33,997 36,744 40,442 40,952 Bajaj Auto 3.8 4.3 4.2 3.9 3.8 Bajaj Auto 42,964 45,416 47,301 52,088 56,712 Hero Moto Corp 5.4 6.2 6.1 6.2 6.6 Hero Moto Corp 35,623 37,816 39,121 40,467 41,524

Revenues (INR bn) EBITDA per unitTVS 65.4 74.4 75.1 83.8 103.1 TVS 1,748 2,099 2,145 2,371 2,394 Bajaj Auto 164.3 195.9 200.4 201.6 216.1 Bajaj Auto 8,260 8,599 8,611 10,737 10,496 Hero Moto Corp 192.5 235.8 237.7 252.8 275.4 Hero Moto Corp 4,554 5,804 5,406 5,666 5,273

Gross margins (%) Employee cost per unitTVS 27 27 29 30 29 TVS 1,853 1,968 2,318 2,610 2,617 Bajaj Auto 28 28 28 31 31 Bajaj Auto 1,312 1,275 1,534 1,891 2,357 Hero Moto Corp 27 27 27 28 27 Hero Moto Corp 1,146 1,180 1,351 1,490 1,777

EBITDA margins (%) Operating exps per unitTVS 5.5 6.2 5.8 5.9 5.8 TVS 5,186 5,227 6,119 6,984 6,907 Bajaj Auto 19.2 18.9 18.2 20.6 18.5 Bajaj Auto 2,526 2,801 3,092 3,587 4,595 Hero Moto Corp 12.8 15.3 13.8 14.0 12.7 Hero Moto Corp 3,804 3,116 3,728 4,124 4,746



EBITDA/unit and EBITDA margins have stood consistently lower than peers since past 5 years due to high employee cost and operating expenses, highest versus peers.

Table 3: Major operating expenses analysis – TVS versus peers (INR mn)


High operating expenses were partly due to higher ad spends and marketing expenses at 2.6% and 3% of sales, respectively (total 5.6%), versus peers’ range of 2-2.5%. Further, packing & freight expenses, power cost and miscellaneous expenses stood higher for TVS versus peers. Miscellaneous expenses largely include travelling, communication, R&D, legal/ professional and admin expenses. Aggregate packing & freight, power, misc. and other expenses stood at 10% versus 5.2% for Bajaj Auto and 7.6% for Hero MotoCorp. High cost structure (as explained above) led to lower EBITA margin at 5.8% versus 19% for Bajaj Auto and 12.7% for Hero MotoCorp. Other highlights Exceptional income of INR583mn pertained to gain from sale of revalued land, of which INR574mn was reduced from revaluation reserves as it was revalued in earlier years. In FY14, the company divested its stake in TVS Energy (including step-down subsidiaries) and recorded exceptional gain from sale of the energy business worth INR179.5mn. Consequently, gross block of fixed assets in FY14 fell by INR3.7bn (net block – INR3.3bn). Revenues include other operating income, which rose to INR1.8bn (FY14: INR1.1bn). Finance costs declined YoY on lower forex losses and other processing charges. Effective tax rate declined from 39% in FY14 to 28% in FY15 due to MAT credit of INR236.6mn and lower YoY deferred tax expense of INR269mn (FY14: INR516.5mn). Total outstanding MAT credit stood at INR280mn.

FY14 FY15 FY14 FY15 FY14 FY15 FY14 FY15 FY14 FY15 FY14 FY15Packing and freight charges 3,392 4,588 4.0 4.4 3,229 3,932 1.6 1.8 7,294 8,557 2.9 3.1 Miscellaneous Expenses 3,243 4,317 3.9 4.2 1,919 2,484 1.0 1.1 5,867 7,513 2.3 2.7 Other marketing expenses 2,640 3,084 3.1 3.0 241 298 0.1 0.1 - - - - Advertisement & publicity 2,914 2,693 3.5 2.6 2,623 3,215 1.3 1.5 4,935 6,787 2.0 2.5 Power and fuel 893 1,076 1.1 1.0 1,064 1,148 0.5 0.5 1,375 1,585 0.5 0.6 Repairs (Bldg, machinery) 606 660 0.7 0.6 1,448 1,998 0.7 0.9 1,337 1,388 0.5 0.5 Consumption of stores &spares 486 623 0.6 0.6 1,250 1,317 0.6 0.6 989 1,070 0.4 0.4 Royalty - - - - - - - - 1,167 1,214 0.5 0.4 Others 305 352 0.4 0.3 2,755 3,720 1.4 1.7 2,798 3,360 1.1 1.2 Total 14,479 17,393 17.3 16.9 14,530 18,112 7.2 8.4 25,761 31,473 10.2 11.4

ParticularsHero Moto Corp. % of salesTVS % of sales Bajaj Auto % of sales


TVS Motor Company

Table 4: Subsidiaries’ performance (INR mn)


Subsidiaries continued to record losses at aggregate level, though the extent of losses lowered in FY15, led by Indonesia and Europe operations. PT TVS Indonesia has equity of INR5.6bn against which accumulated losses were INR5.0bn, as at FY15. Auto component subsidiary, Sundaram Auto’s performance stood robust with 14% YoY revenue growth. However, we believe this was primarily led by inter-company transactions, as derived (consol. minus standalone) subsidiary revenue growth was negative 49% YoY. Aggregate cash exposure to subsidiaries stood at INR6.6bn, 40% of standalone net worth, including guarantees and credit facilitating agreements exposure stood at INR8.1bn, 49% of standalone net worth (FY14: INR7.4bn, 45%).



Operating cash flow post interest declined significantly from INR3.2bn in FY14 to INR(392)mn in FY15 following significant working capital investments. Inventories and loans

No Subsidiary company % shareholdingas on FY15 Networth Turnover PAT Networth Turnover PAT

1 Sundaram Auto Components Ltd. 100.00 943.9 18,770.6 106.8 1,111.6 21,373.4 253.7 2 PT. TVS Motor Company Indonesia 100.00 1,152.8 965.0 (1,398.8) 562.0 1,166.5 (392.3) 3 TVS Motor Company (Europe) B.V 100.00 237.0 75.6 (253.9) 35.1 0.5 (3.5) 4 TVS Housing Ltd. 100.00 0.7 0.4 0.2 3.4 114.4 2.7 5 TVS Motor (Singapore) Pte. Ltd. 100.00 1,964.0 - (0.4) 1,952.2 43.6 (7.4)

6Sundaram Business Development Consulting (Shanghai) Co. Ltd.

100.00 9.1 17.9 0.8 1.7 - (7.7)

Total 4,307.5 19,829.5 (1,545.3) 3,666.0 22,698.4 (154.5) PAT Margin (%) (7.8) (0.7)

FY14 FY15

Particulars

Profit before tax 3,525 4,562 (455) (120) 3,071 4,442 Non-operating expense (22) (22) 61 (316) 39 (338) Non-cash adjustments 1,396 1,566 152 245 1,548 1,811 Direct taxes paid (1,275) (1,407) (68) (187) (1,343) (1,593) Cash profit after tax 3,625 4,699 (310) (378) 3,315 4,321 (Increase)/ decrease in receivables (173) (1,697) (169) 1,079 (342) (618) (Increase)/ decrease in inventories (385) (2,715) 82 (796) (303) (3,511) (Increase)/ decrease in other current assets (266) 123 146 (44) (120) 79 (Increase)/ decrease in loans and advances (601) (2,635) 59 (94) (542) (2,729)Increase/ (decrease) in trade and other payables 1,903 2,657 (87) (46) 1,816 2,612 Increase/ (decrease) in other current l iabilities 1,135 417 (256) 258 880 675 (Increase)/ decrease in working capital 1,613 (3,851) (225) 358 1,388 (3,493) Less: Bil l discounted/ LCs/ Credit arrangements 77 58 926 706 1,004 764 Adjusted working capital (Increase)/ decrease 1,691 (3,793) 701 1,063 385 (4,258) Net cash from operating activities 5,315 907 (1,616) (843) 3,699 64 Interest expenses paid (230) (285) (244) (171) (474) (455) Net cash from operating activities post interest 5,086 622 (1,860) (1,013) 3,226 (392) Capital expenditure (2,580) (4,052) (157) 618 (2,737) (3,434) Free cash flows 2,506 (3,430) (2,018) (396) 489 (3,825)

Standalone Subsidiary (derived) ConsolidatedFY14 FY15 FY14 FY15 FY14 FY15



and advances rose significantly, but offset by increase in trade and other payables. Loans and advances rose by INR2.8bn, primarily led by VAT receivables and excise current account. Other current liabilities included INR2.9bn, 23% of net worth (FY14: INR2.4bn, 22%) towards dues for expenses, which largely include marketing costs, sales incentives, excise duty provisions and other admin. expenses. Adjusted working capital requirement rose to INR4.3bn (FY14: INR385mn credit). We have adjusted working capital for certain off-balance sheet liabilities, which include bill discounting facility, letter of credits (LCs) and credit facilitating agreements.

Table 6: Average cash conversion cycle (days) – TVS and peers


Cash conversion cycle stood at negative 3 days YoY, and adjusted for bill discounting, LCs and credit facilitating agreements stood at 12 days. Inventory days for TVS are the highest versus peers, which along with bills discounting/LCs led to higher cash conversion cycle for TVS versus negative cash conversion cycle for peers.

Table 7: Earnings to cash translation - TVS (INR mn)

Table 8: Earnings to cash translation ratio – TVS versus peers (%)



Receivable days 13 15 14 10 14 13 7 11 15 Inventory days 44 39 41 16 16 17 13 12 13 Payable days (51) (55) (55) (48) (51) (45) (41) (39) (44) Advance from customer days (1) (2) (3) (4) (6) (8) (2) (1) (1) Cash conversion cycle 5 (3) (3) (25) (27) (23) (23) (17) (17) Bil l discounted/ LCs/ Credit arrangements 13 14 15 - - - - - - Adjusted cash conversion cycle 18 11 12 (25) (27) (23) (23) (17) (17)

TVS Bajaj Auto Hero Moto

Particulars FY11 FY12 FY13 FY14 FY15Adjusted OCF, post interest (A) 1,302 3,796 3,456 3,226 (392) Profit after tax 1,279 1,323 1,975 1,863 3,283 Depreciation 1,336 1,583 1,756 1,490 1,786 Other income 258 144 242 267 237 PAT + Depreciation - Other income (B) 2,358 2,762 3,490 3,086 4,832 Earnings to cash conversion ratio (A/B*100)

55 137 99 105 (8)

Particulars FY11 FY12 FY13 FY14 FY15TVS 55 137 99 105 (8) Baja Auto 68 125 89 122 78 Hero Moto Corp. 111 75 66 107 90


TVS Motor Company

Chart 1: Earnings to cash translation ratio (%)


Despite robust growth in revenues and profits, earnings to cash conversion ratio declined on account of significant investment in working capital, as explained in above sections.

Table 9: OCF and FCF generation – TVS versus peers (INR mn)


Table 10: Cumulative cash flow generation and utilization (past 5 years) (INR mn)


(40.0)

0.0

40.0

80.0

120.0

160.0


(%)

TVS Baja Auto Hero Moto Corp.

FY11 FY12 FY13 FY14 FY15 FY11 FY12 FY13 FY14 FY15TVS (adjusted) 1,302 3,796 3,456 3,226 (392) (1,453) (614) 2,369 489 (3,825) Bajaj Auto 20,370 32,235 22,171 35,009 21,073 18,743 28,847 17,289 32,469 18,124 Hero Moto Corp 22,723 23,385 18,785 29,512 21,738 19,113 18,351 12,781 20,138 9,436

Operating cash flow, post interest Free cash flow

Sources FY11 FY12 FY13 FY14 FY15 Total Application FY11 FY12 FY13 FY14 FY15 TotalOperating profit 3,485 4,273 5,338 4,658 5,915 23,668 Capex 2,780 4,409 1,130 2,737 3,434 14,491 Less: Interest (875) (832) (931) (474) (455) (3,568) Dividend 416 663 718 695 844 3,335 Less: Taxes (832) (739) (648) (1,343) (1,593) (5,156)Cash Profits 1,777 2,701 3,759 2,841 3,866 14,945Working capital changes (467) 1,334 (120) 1,388 (3,493) (1,357)Cash Profits after working capital 1,310 4,036 3,639 4,230 373 13,587Off-Balance sheet l iabil ities (502) (240) (245) (1,004) (764) (2,755)Adjusted OCF 808 3,796 3,394 3,226 (392) 10,832Net borrowings (2,033) 1,066 (618) (996) 3,914 1,333 Reduction in net cash/ investments

3,855 (179) (1,210) (53) 547 2,959

Others 566 389 282 1,255 209 2,703 Total 3,196 5,072 1,848 3,432 4,278 17,826 Total 3,196 5,072 1,848 3,432 4,278 17,826



Chart 2: Sources and utilisation of funds (cumulative 5 years - FY11-15)


Operating cash flows represented 66% of cash generation during past 5 years, with 15% contributed by off-balance sheet liabilities. Major cash utlisation was towards capex and dividend. Adjusted net worth and debt analysis Table 11: Net worth and debt adjustments (INR mn)


Debt rose from INR7.3bn in FY14 to INR11.2bn in FY15, and including off-balance sheet items debt rose from INR11.bn to INR15.7bn. Consequently, adjusted D/E ratio rose from 1.1x to 1.3x in FY15. Debt includes sales tax deferral loan from the Karnataka government worth INR2.3bn (FY14: INR2.3bn) and soft loan from state-owned corporations worth INR1.6bn (FY14: INR1.5bn). In FY14, one of the subsidiaries revalued its land leading to increase in net worth and revaluation reserve by INR1.5bn. In FY15, the company sold part of the land in Indonesia and recognised the gain from the sale of INR582.7mn as exceptional income. Revaluation reserve declined by INR574.1mn in FY15 pertaining to land sold.

OCF post interest

61%Borrowings

7%

Sale of subsidiaries

6%

Off-Balance sheet

liabilities15%

Others11%

Sources

Particulars FY13 FY14 FY15Net worth 8,983 11,608 13,246 Revaluation reserve - 1,450 932 Adjusted Net worth 8,983 10,158 12,314

Debt 10,681 7,277 11,191 Add: Off balance sheet items (bil ls discounted, LCs, credit agreements)

2,726 3,730 4,494

Adjusted Debt 13,407 11,007 15,685 D/E 1.2 0.6 0.8 Adjusted D/E 1.5 1.1 1.3

Debt rose to INR11.2bn, while adjusted debt rose to INR15.7bn Net worth includes revaluation reserve of INR932mn

Capex81%

Dividend19%

Application


TVS Motor Company

Capital allocation and investment analysis Table 12: Capital employed and return ratios (INR mn)

* Adjusted for revaluation reserve

** Adjusted for bill discounting, LCs and credit agreement facility. Chart 3: Capital employed and RoCE


Table 13: Fixed asset turnover ratio (consolidated) (x)


Particulars FY11 FY12 FY13 FY14 FY15Sales 65,430 74,352 75,105 83,836 103,117 EBITDA 3,571 4,591 4,383 4,915 6,029 EBITDA margin (%) 5.5 6.2 5.8 5.9 5.8 ROE (%) 20 19 16 17 23 ROCE (%) 14 17 14 19 21 Adjusted ROE (%) 20 19 16 18 25 Adjusted ROCE (%) 13 15 13 17 18 Net fixed assets (Ex CWIP) 12,938 14,722 15,930 15,172 16,367 CWIP 576 1,857 362 482 929 Adjusted Net worth (A)* 6,819 7,222 8,983 10,158 12,314 Adjusted Debt (B)** 12,649 15,526 13,407 11,007 15,685 Total capital employed (A+B) 19,468 22,748 22,390 21,165 27,999

0

6

12

18

24

30

10.0

12.4

14.8

17.2

19.6

22.0


(INR

bn)

(%)

Adjusted Net worth (RHS) Adjusted Debt (RHS)

Adjusted ROCE (%) ROCE (%)

F.A. Turnover FY11 FY12 FY13 FY14 FY15TVS 5 5 5 6 6 Bajaj Auto 11 13 11 10 11 Hero Moto Corp 5 6 8 11 9

Return ratios improved in FY14 and FY15, following improvement in revenue and profitability growth RoCE stood at 21% in FY15 and adjusted for off-balance sheet liabilities, stood at 18% Consolidated return ratios remained subdued, primarily owing to losses in Indonesia and investments (largely preference shares in TVS Motor Services)

Fixed asset turnover ratio was the lowest for TVS in past 5 years ranging from 5x-6x versus 11x-13x for Bajaj Auto and 6x-11x for Hero MotoCorp



Table 14: Investments analysis (consolidated) (INR mn)


* As at end of FY14. As at end of FY14, TVS holds 85% of the Non-cumulative Redeemable Preference shares (NCRP) of TVS Motor Services. Preference shares issued are redeemable at 70% premium at the end of 9th year (as per disclosure in TVS Motor Services financials filed with ROC – Registrar of companies). Equity holding of TVS stood at 19% of the total equity share capital of TVS Motor Services while remaining 81% was held by TVS Motor Foundation (as at end of FY14).

Yield on cash/ Investments and loans & advances analysis Table 15: Average yield on cash and investments (INR mn)

Other income stood at INR236.6bn, of which INR194mn pertained to interest income and profit on sale of investments.

Particulars % holding FY13 FY14 FY15Investment in Equity Instruments

Emerald Haven Realty Limited 48.8 400 400 400 TVS Motor Services Limited 19.0* 4 4 4 Green Infra BTV Limited 21.6 - 33 33 Others 24 67 147

Total 428 503 583 Invetment in Preference shares - Unquoted

TVS Motor Services Limited 84.8* 2,710 3,460 4,460 Pinnacle Engines Inc., USA - 117 117

Total 2,710 3,577 4,577 Other investments 319 307 233 Investment Property 20 - - Total Investment (A) + (B) + (C) 3,477 4,387 5,393 As % of net worth 39 38 41

Particulars FY12 FY13 FY14 FY15Cash and investments:Cash/ Banks 1,375 796 985 278 Debentures/ bonds/ other Investments 300 319 307 233 Deposits 150 194 182 231 Employee advances 136 106 101 109 ICD's 30 125 73 30 Total 1,990 1,540 1,647 882

Income from Investments:Interest income 168 207 192 Gain on sale of investments 1 27 2 Total 169 233 194 Average yield on cash and investments 9.6 14.6 15.3

Income from investments as % of PBT 5.8 7.6 4.4

Average yield on cash and investments stood significantly higher at 14-15% in past 2 years, primarily due to interest charged to dealers on extended credit on receivables

Total investment (other than subsidiaries) stood at INR5.4bn, 41% of net worth Major investments include preference shares of TVS Motor Services (INR4.5bn) and equity investment in Emerald Haven Realty (INR400mn)


TVS Motor Company

Table 16: Loans and advances analysis (INR mn)


Advance tax includes MAT credit outstanding worth INR280mn.

Related party transactions Table 17: Major related party transactions (INR mn)


Particulars FY12 FY13 FY14 FY15Advance Income Tax 221 233 830 1,322 VAT receivables 508 1,173 1,328 2,189 Excise current account 478 634 1,182 2,877 Vendor advances 338 382 276 610 Others 411 606 630 669 Total 1,954 3,028 4,246 7,666 As a % to Networth 27% 34% 37% 58%

Related party Purchases/ Services availed Sale of goods/ servicesFY13 FY14 FY15 FY13 FY14 FY15

Sundaram-Clayton 2,128 2,577 3,707 13.0 79.7 21.9 Lucas-TVS 375 430 720 2 2 26 Green Infra Wind Energy Theni - 12 58 - - - Others 56 61 78 0 0 0 Total 2,559 3,079 4,563 15 82 48 As % of RM cost/ Sales 4.8 5.2 6.2 0.0 0.1 0.0

Loans and advances rose significantly in FY15, led by VAT receivables and excise account

Major related party transactions include purchases from holding company Sundaram Clayton of INR4.6bn, 6.2% of total RM cost





Particulars FY11 FY12 FY13 FY14 FY15Sales 65,430 74,352 75,105 83,836 103,117 Total income 65,688 74,496 75,346 84,103 103,353 Gross Profit 17,952 20,326 21,629 24,804 30,011 Gross margin (%) 27 27 29 30 29 EBITDA 3,571 4,591 4,383 4,915 6,029 EBITDA margin (%) 5.5 6.2 5.8 5.9 5.8 Depreciation 1,336 1,583 1,756 1,490 1,786 Financial costs 708 883 1,034 801 621 Net profit 1,279 1,323 1,975 1,863 3,283 ROE (%) 20 19 15 17 23 ROCE (%) 14 17 14 19 21 Equity shareholders' funds 6,827 7,222 8,983 11,608 13,246 Loan funds 10,407 13,044 10,681 7,277 11,191 Net fixed assets (Ex CWIP) 12,938 14,722 15,930 15,172 16,367 CWIP 576 1,857 362 482 929 Current assets loans and advances 11,664 11,740 12,850 14,850 21,702 Current l iabil ities and provisions 10,215 11,754 12,696 15,472 19,122 Net current assets 1,449 (14) 154 (622) 2,581 Cash and cash equivalents 552 1,375 796 985 278 Net debt 9,855 11,669 9,885 6,292 10,913 Cash flow from operating activities 2,653 4,868 4,705 4,703 828 Cash flow from investing activities (1,111) (5,071) (1,343) (2,350) (4,149) Cash flow from financing activities (3,182) (355) (2,196) (2,160) 2,610 Net cash flows (1,639) (559) 1,166 193 (711) CAPEX 2,756 4,409 1,130 2,737 3,434 Working capital investments (90) (1,334) 120 (1,388) 3,493


Bharat Forge’s (BF) FY15 annual report analysis highlights robust operating performance at standalone level as revenue surged 34% and EBITDA margin inched up to 29.2% (FY14: 25.4%). Free cash flows, though improved, remained negative owing to higher capex of INR7.1bn (FY14: INR5.8bn) led by standalone (INR2.9bn) and Alstom JV (~INR3bn). Capital commitments jumped to INR5.8bn (FY14: INR2.1bn). Net debt, adjusted for acceptances and bill discounting, increased by INR2.8bn to INR24.8bn (versus reported debt of INR14.1bn). Cash conversion cycle, adjusted for bills discounted and acceptances, stood at 92 days (FY14: 96) versus reported cycle of 42 days (FY14: 54). Adjusted RoCE stood at 18.5% (FY14: 13.7%) versus reported 21.6% (FY14: 15.5%). Derivatives exposure to hedge expected sales catapulted 53% to INR49bn (FY14: INR32bn, FY13: INR8.5bn), representing ~1.8x FY15 exports revenue, as the company has increased hedging for anticipated revenues. Derivative gains recognised in balance sheet increased to INR5.1bn (FY14: INR1.8bn). What’s on track? Consolidated revenue surged ~13.4% to INR76bn. Adjusted RoCE jumped to 18.5% (FY14: 13.7%), led by higher EBITDA margin (FY15: 18.9%, FY14: 15.3%), fixed asset (FY15: 3x, FY14: 2.5x) and working capital turnover ratio (FY15: 4.3x, FY14: 4x). Standalone adjusted cash conversion cycle declined to 136 days (FY14: 158) on lower inventory days at 74 (FY14: 88) and higher payable days (adjusted for acceptances) at 60 (FY14:52).

What needs tracking? Overseas key subsidiaries (mainly European) reported mere 2% revenue growth, while aggregate profits declined 96% to INR28mn (FY14: INR735mn) impacted by subdued demand for trucks and passenger vehicles in Europe. In the Alstom JV, EBITDA and PBT margins declined to 4.3% (FY14: 2.8%) and 3.9% (FY14: 4.5%), respectively. Adjusted (for bills discounted and acceptances) net debt stood higher at INR24.8bn (FY14: INR21.9bn) versus reported net debt of INR14.1bn. This increase was primarily led by Alstom JV where non-current liabilities increased to INR3bn (FY14: INR0.4bn). BF recognised diminution (in standalone financials) of INR290mn in its investment (INR400mn) in BF Infrastructure Ventures (BFIV). Management stated that other current assets (representing cost incurred on project related activity) of INR414mn (FY14: INR414mn, FY13: INR414mn) appearing in BFIV are unlikely to be realised and consequently has provided for impairment loss (under exceptional items) for part amount. However, no impairment loss is recognised in consolidated financials.



Bharat Forge | Annual Report Analysis


52-week range (INR) : 1,362 / 713




Promoters* : 46.7


FIIs : 15.3

Others : 21.2



Market Data


September 18, 2015



Other highlights • BF capitalised MTM forex loss, net of amortisation, of INR0.2bn (2.1% of PBT) versus

INR1.1bn (17.2% of PBT) in FY14.

• Purchase of goods (at standalone level) from related parties stood at INR15bn, ~84% of raw material purchases (FY14: INR12.6bn, 89%).

• Goodwill on consolidation jumped to INR537mn (FY14: INR57mn) presumably due to acquisition of Mécanique Générale Langroise.

• During the year, the company purchased shares of KPIT Technologies for INR100mn. These shares were classified under noncurrent investments.

• Standalone and consolidated capital commitments jumped to INR3.2bn (FY14: INR0.8bn) and INR5.8bn (FY14: INR2.1bn), respectively.

• During the year, Kalyani Alstom Power Ltd (subsidiary) was merged with Alstom Bharat Forge Power Ltd (Alstom JV). Subsequently, BF infused additional ~INR0.7bn as equity in the Alstom JV.

• During the year, BF infused ~INR 290mn as equity in CDP Bharat Forge Gmbh (CDP),

taking cumulative investment in the company to ~INR 4bn, representing ~11.5% of BF standalone net worth.

• During FY15, CDB acquired 100% stake in Mécanique Générale Langroise (MGL), a

company focused on precision machining and other high value added processes for EUR 11.8mn.

Profitability and cash flow analysis Table 1: Profitability analysis (INR bn)

Source: Company’s Annual Report, Edelweiss research

• Revenues of overseas subsidiaries (primarily European) grew mere 2% and their profits plummeted 96% to INR28mn (FY14: INR735mn). While CDB Bharat Forge’s profit declined 50%, losses of Bharat Forge Kilsta AB jumped to INR422mn (FY14: INR122mn).

• Amongst domestic subsidiaries, Analogic Controls reported decline in revenue coupled with higher losses.

Particulars Standalone Subsidiary (Derived) ConsolidatedFY14 % FY15 % FY14 % FY15 % FY14 % FY15 %

Sales 34.0 100.0 45.5 100.0 33.2 100.0 30.8 100.0 67.2 100.0 76.2 100.0 Raw materials consumed 13.7 40.4 17.4 38.3 18.5 55.8 16.4 53.3 32.2 48.0 33.8 44.3 Gross margin 20.3 59.6 28.1 61.7 14.7 44.2 14.4 46.7 34.9 52.0 42.4 55.7 Operating and admin expense 8.8 26.0 11.5 25.2 7.9 23.8 7.5 24.4 16.7 24.9 19.0 24.9 Personnel cost 2.8 8.2 3.3 7.3 5.1 15.4 5.7 18.6 7.9 11.7 9.1 11.9 EBITDA 8.6 25.4 13.3 29.2 1.7 5.0 1.1 3.6 10.3 15.3 14.4 18.9 Depreciation 2.5 7.2 2.5 5.5 1.1 3.4 1.1 3.6 3.6 5.3 3.6 4.8 EBIT 6.2 18.2 10.8 23.7 0.5 1.6 (0.0) (0.0) 6.7 10.0 10.8 14.1 Financial charges 1.5 4.4 1.1 2.5 0.2 0.6 0.2 0.8 1.7 2.5 1.4 1.8 Other Income 1.1 3.4 0.9 2.1 0.1 0.3 0.4 1.4 1.2 1.9 1.4 1.8 PBT 5.8 17.2 10.6 23.3 0.5 1.4 0.2 0.6 6.3 9.4 10.8 14.2

Standalone revenue surged 34% to INR45.5bn. EBIDTA margin expanded 385bps led by higher gross margin (up 210bps) and operating leverage Consolidated revenue grew 14% to INR76bn. EBIDTA margin expanded 360bps in FY15


Bharat Forge

Table 2: Key subsidiaries and JV profitability analysis (INR mn)


Table 3: Adjusted cash flow analysis (INR bn)


• Standalone adjusted operating cash flows (post interest) jumped to INR5.4bn (FY14:

INR3bn) led by sharp increase in exports (leading to higher profitability). Bill discounting increased from INR7.0bn in FY14 to INR11.7bn in FY15.

• Consolidated adjusted operating cash flows (post interest) surged to INR6.4bn (FY14: INR2.2bn) led by higher profits and lower incremental investment in working capital.

Networth Turnover PAT Turnover PATOverseas subsidiariesCDP Bharat Forge GmbH 100 7,384 13,402 577 13,109 291 Bharat Forge International Ltd. 100 283 8,955 114 10,870 127 Bharat Forge Kilsta AB 100 371 7,110 (122) 6,046 (422) Bharat Forge Aluminiumtechnik Gmbh & Co 100 1,159 3,513 166 3,466 33

32,980 735 33,490 28 Domestic subsidiariesBF Infrastructure Ltd 100 189 3,900 (226) 392 1 BF Infrastructure Ventures Limited 100 396 - (4) - (0) Analogic Controls India Ltd. 60 (113) 109 (24) 34 (71)

4,009 (253) 426 (70) Joint venturesAlstom Bharat Forge Power Limited 49 1,631 4,006 154 5,473 130

40,994 635 39,389 89

FY14 FY15Stake (%)Particulars

Particulars Standalone Subsidiary (derived) ConsolidatedFY14 FY15 FY14 FY15

Profit before tax 6.0 10.6 1.4 0.6 7.3 11.2 Non-operating expense 0.7 1.2 (0.4) (0.2) 0.3 1.0 Non-cash adjustments 2.4 2.2 1.1 1.2 3.5 3.4 Others - - (0.2) (0.0) (0.2) (0.0)Direct taxes paid (1.4) (3.6) (0.7) (0.5) (2.1) (4.1)Cash profit after tax 7.6 10.4 1.2 1.2 8.8 11.5 (Increase)/Decrease in loans and advances (0.0) (1.3) (0.5) 0.9 (0.5) (0.4)(Increase)/Decrease in inventories (0.3) (0.3) (0.9) 0.3 (1.3) 0.0 (Increase)/Decrease in trade receivables (0.3) (0.6) (1.7) 0.4 (2.0) (0.2)Adj for (Increase)/Decrease in bil l discounted (1.5) (4.6) (0.2) 0.0 (1.7) (4.6)Acceptances (1.6) 2.2 - - (1.6) 2.2 Change in working capital on disposal of subsidiary - - 1.0 0.0 1.0 0.0 (Increase)/Decrease in other assets (1.0) (0.1) (0.1) (0.2) (1.2) (0.3)Increase/(Decrease) in trade payables 1.3 0.8 2.7 (0.1) 4.1 0.7 Increase/(Decrease) in other l iabil ities & provisions 0.3 0.1 (2.1) (1.2) (1.8) (1.1)Increase in working capital (3.1) (3.8) (1.8) 0.1 (4.9) (3.6)Net cash from operating activities 4.5 6.6 (0.7) 1.3 3.9 7.9 Interest expenses paid (1.5) (1.2) (0.2) (0.2) (1.7) (1.5)Net cash from operating activities post interest 3.0 5.4 (0.8) 1.0 2.2 6.4 Less: Capex (1.6) (2.9) (4.2) (4.2) (5.8) (7.1)Free cash flow 1.4 2.5 (5.1) (3.2) (3.7) (0.7)

FY14 FY15

Payable to related parties towards purchases jumped to INR2.7bn (FY14: INR0.8bn) and thereby supported working capital



However, free cash flows remained negative owing to higher capex of INR7.1bn (FY14: INR5.8bn) led primarily by standalone (INR2.9bn) and Alstom JV (INR 3bn).

Table 4: Cash conversion cycle


• Consolidated cash conversion cycle (adjusted) improved marginally and stood at 92

days (FY14: 96 days).

• Tax and duty credit receivables (not considered in cash conversion above) catapulted to INR 3.2bn (FY14: INR1.7bn).

Table 5: Capital allocation (Consolidated) (INR bn)

Note: *Adjusted for bills discounting, acceptances and forward contracts

FY11 working capital turnover ratio is computed on closing working capital


Particulars FY13 FY14 FY15 FY13 FY14 FY15Inventory days 89 88 74 112 99 84 Receivable Days 53 51 42 51 53 43 Payable Days (100) (89) (84) (91) (101) (89) Advance received from customers (2) (1) (1) (15) (8) (2) Advance to suppliers 3 6 8 10 11 6 Reported cash conversion cycle 44 56 38 66 54 42 Add: Acceptance days 30 37 25 18 17 14 Add: Bil ls discounted days 71 65 73 39 25 37 Adjusted Cash conversion cycle 145 158 136 123 96 92 Working capital as % to revenues 36.5 41.9 36.9 27.9 25.3 24.7


Particulars FY11 FY12 FY13 FY14 FY15Sales 50.9 62.8 51.7 67.2 76.2 EBIT 6.0 7.8 5.8 8.0 12.2 EBITDA 7.9 10.0 7.9 10.3 14.4 Gross Margin (%) 52.3 53.6 55.9 52.0 55.7 EBITDA margin (%) 15.4 15.9 15.3 15.3 18.9 RoE (%) 17.3 20.0 12.6 18.3 24.1 Adj. RoCE (%) 13.6 15.1 10.2 13.7 18.5 Net Fixed Assets 24.6 26.4 29.1 25.3 26.3 CWIP 2.0 5.2 6.3 5.8 8.6 Net current assets* 16.2 21.1 17.4 16.0 19.4 Cash and l iquid investments 6.4 10.4 9.4 11.9 11.4 Fixed assets turnover ratio 2.1 2.5 1.9 2.5 3.0 Adj. Working capital turnover ratio 3.6 3.4 2.7 4.0 4.3 Equity shareholders' funds (A) 19.5 21.9 22.6 26.8 34.4 Adj. Loan funds (B) 25.8 36.9 32.8 33.9 36.1 Adj. Capital employed (A+B) 45.4 58.7 55.4 60.7 70.6

EBITDA margins jumped 360bps to 18.9% riding 370bps surge in gross margin Higher EBITDA margin coupled with improvement in turnover ratios (fixed asset and WC) led to higher RoE and RoCE in FY15

Payable days to related parties stood at 43 (FY14: 33) versus 142 (FY14: 177) from other suppliers


Bharat Forge

Table 6: Borrowings analysis (INR bn)


While management highlighted decline in long term borrowings during the year, adjusted net debt increased at standalone and consolidated levels. However, D/E ratio (adjusted) improved at standalone and consolidated levels. Consolidated adjusted net debt increased to INR24.8bn (FY14: INR21.9bn), led mainly by Alstom JV. However, D/E ratio declined to 0.7x (FY14: 0.8x). Table 7: Outstanding derivatives analysis (Standalone) (Foreign currency in mn)

Note: Excluding share in o/s derivatives of JV.


Management stated the company has increased hedges for anticipated revenues. Further, a substantial portion (~80%) of hedges, as at March’15, was taken against sales expected to be clocked within 18 months from year end. Table 8: Treatment of foreign exchange losses (INR mn)


Standalone ConsolidatedParticulars FY12 FY13 FY14 FY15 FY12 FY13 FY14 FY15Long Term borrowings 16.0 14.5 13.6 15.7 19.2 18.3 15.2 19.8 Short Term borrowings 0.8 0.4 1.1 0.8 5.0 5.1 4.9 3.8 Current maturities of long-term borrowings 3.0 3.9 5.3 1.4 3.4 4.5 5.5 1.8 Less: Cash & Liquid investments (9.3) (6.6) (10.2) (10.5) (10.4) (9.4) (11.9) (11.4) Reported net debt 10.6 12.1 9.7 7.5 17.2 18.4 13.7 14.1 Add: Bil ls discounted 7.2 5.6 7.1 11.7 7.2 3.7 5.4 10.1 Add: Acceptances 2.0 1.2 2.9 0.6 2.0 1.2 2.9 0.6 Adjusted net debt 19.8 18.9 19.7 19.9 26.5 23.4 21.9 24.8 D/E ratio (reported) 0.5 0.5 0.4 0.2 0.8 0.8 0.5 0.4 D/E ratio (adjusted) 0.9 0.8 0.7 0.6 1.2 1.0 0.8 0.7

FY13 FY14 FY15 FY13 FY14 FY15USD 111 328 567 54.3 59.9 62.5 EURO 34 149 202 69.6 82.3 67.2 GBP 2 N.A. N.A. 82.5 N.A. N.A.O/S hedges (INR bn) 8.5 32.0 49.0 - - - Hedge reserve (INR bn) 0.2 1.8 5.1 - - - Exports revenue (INR bn) 15.6 18.3 27.0 - - - O/S Hedges as % to exports revenue 54.7 174.9 181.5 - - -

Exchange rateDerivatives O/sParticulars

Particulars FY13 FY14 FY15Exchange difference capitalized to cost of fixed assets/CWIP

613.5 576.3 226.6

Amounts Capitalized to FCMITDA 278.4 692.1 248.2 Total Capitalization 892.0 1,268.4 474.8 Less: Amortized to P&L (143.7) (185.6) (253.3) Net capitalization 748.3 1,082.8 221.4 Profit before Tax (PBT) before exceptional items 4,169.1 6,285.4 10,795.3Proportion of Capitalized Costs to PBT (%) 17.9 17.2 2.1

Derivatives outstanding against highly probable sales transactions catapulted 53% to INR49bn (March 2014: INR32bn) Derivative gains recognised in balance sheet (reserves) increased to INR 5.1bn (FY14: INR1.8bn), presumably due to higher level of outstanding derivatives along with currency volatility.

While reported debt declined by ~INR2bn at standalone level, the fall was led by steep rise in bill discounted. Adjusted net debt marginally increased to INR19.9bn (FY14: INR19.7bn)




Note: Transactions with Alstom group companies are excluded in the above table


Purchases (at standalone level) from related parties (Kalyani Carpenter Special Steels and Kalyani Steel Steels) constituted ~84% (FY14: 89%) of raw material purchases. Payable to related parties catapulted 239% to INR2.7bn and supported working capital during FY15. Payable days to related parties increased to 43 (FY14: 33) versus 142 (FY14: 177) from other suppliers.

RoE analyser RoE analyser analyses profitability on the scale of operating and capital allocation efficiency (detailed concept explained in Annexure A). We have analysed BF’s profitability for FY13, FY14 and FY15, results and key findings of which are given below: Table 10: RoE analyser


Particulars FY13 FY14 FY15Profit & Loss exposure Purchase of goods 11,507 12,579 14,928 Sale of goods 1,457 1,605 2,032 Services rendered 165 143 146 Managerial remuneration 245 315 417

Balance Sheet exposurePayable towards purchases 1,463 798 2,706 Trade receivable 404 509 585 Loans given / ICD placed N.A. 770 845 Advances receivable 200 210 210 Managerial remuneration payable 88 149 234


7.8 11.9 17.8

OPATO (operating asset turnover) (x) 1.2 1.5 1.7 NOPAT margin (%) 6.7 7.9 10.4 B. Return from leverage (FLEV x spread) (%) 4.1 5.8 6.2 FLEV (financial leverage) (x) 1.0 0.8 0.5 NFC (net financing cost) (%) 3.5 4.4 4.8 Net financial spread (RNOA -NBC) (%) 4.3 7.5 13.0 C. Return from other funding (%) 0.8 0.6 0.1 ROE Derived (A+B+C) (%) 12.7 18.3 24.1

FY13 FY14 FY15 RoE surged to 24.1% in FY15 (FY14: 18.3%) driven by spurt in operating profit margin and asset turnover

Key managerial remuneration jumped ~33% to INR417mn. However, managerial remuneration as % of PBT declined to 3.9% (FY14: 5%)


Bharat Forge

Chart 1: RoE tree


Table 11: Summary financials- Consolidated (INR bn)

Note: Above numbers are on reported basis. For adjusted numbers refer earlier pages of the report.


0.1

17.8

24.1

0.0

6.0

12.0

18.0

24.0

30.0



ROAE

(%)

6.2

Particulars FY11 FY12 FY13 FY14 FY15Sales 50.9 62.8 51.7 67.2 76.2 Total income 51.5 63.7 52.8 68.4 77.6 Gross Margin 26.6 33.7 28.9 34.9 42.4 Gross Margin (%) 52.3 53.6 55.9 52.0 55.7 EBITDA 7.9 10.0 7.9 10.3 14.4 EBITDA margin (%) 15.4 15.9 15.3 15.3 18.9 ROE 17.3 20.0 12.6 18.3 24.1 ROCE 15.8 17.8 11.7 15.5 21.6 Depreciation 2.6 3.0 3.2 3.6 3.6 Financial costs 1.5 1.8 1.7 1.7 1.4 Net profit 2.9 4.1 2.5 5.0 7.6 Equity shareholders' funds 19.5 21.9 22.6 26.8 34.4 Loan funds 19.0 27.6 27.8 25.6 25.5 Net Debt 12.6 17.2 18.4 13.7 14.1 Net fixed assets 24.6 26.4 29.1 25.3 25.7 CWIP 2.0 5.2 6.3 5.8 8.6 Goodwill on consolidation 0.0 0.0 0.0 0.1 0.5 Current assets loans and advances 23.9 32.0 33.8 29.3 33.1 Current l iabil ities and provisions 14.5 20.1 21.1 19.7 19.0 Net current assets 9.3 11.9 12.7 9.6 14.0 Cash and l iquid investments 6.4 10.4 9.4 11.9 11.4 Cash flow from operating activities 3.4 7.0 7.3 7.2 10.3 Cash flow from investing activities (4.0) (10.5) (2.1) (1.9) (4.6) Cash flow from financing activities (1.4) 6.3 (3.3) (6.4) (3.6) Net cash flows (2.0) 2.8 1.9 (1.1) 2.1 Capex 4.2 8.0 5.6 5.9 7.1 Working capital investments 4.1 1.5 0.2 1.6 1.2


Crompton Greaves’ (CRG) FY15 annual report highlights steep increase in loans & advances and equity investment in overseas subsidiaries to support their loss making operations. The company’s aggregate cash exposure to these subsidiaries stood at ~INR 17bn and it also guarantees borrowings of ~INR 13.6bn. Management intends to curtail CRG’s exposure in overseas subsidiaries by way of sale of substantial part of overseas power equipment business and retiring ex consumer net debt which stood at ~INR 16bn (including acceptances). The company’s current standalone debt of ~INR 7bn will be transferred to the demerged consumer business. Standalone (ex consumer products) adjusted PBT and free cash flow deteriorated to INR2bn and INR(-8.5)bn (FY14: INR 3.5bn and INR(-2.4)bn) respectively in FY15 and its adjusted RoCE stood lower at 9.1% (FY14: 18.9%). Segment level profitability and RoCE looks superior due to non consideration of un-allocable expenses and assets. In the subsequent pages we have analysed CRG’s profitability, cash flows, RoCE etc. at standalone and consolidated levels in the consumer and ex consumer segments. What’s on track? CRG is in the process of divesting its loss making/low margins overseas operations and has been evaluating non-binding proposals submitted by bidders. Consumer products business reported 13% and 10% growth in PAT and operating cash flows YoY respectively.

What needs tracking? CRG infused additional INR5.1bn in its subsidiaries, leading to increase in equity investments and loans & advances to INR7.7bn and INR9.6bn, respectively. Total cash exposure to subsidiaries/associates/others stood at INR19.7bn (March14: INR14.7bn), 49% of net worth. Guarantees on behalf of subsidiaries stood at INR13.6bn (March14: INR14.6bn), ~34% of standalone net worth. Our analysis indicates adjusted RoCE of standalone business (ex-consumer) declined to 9.1% (FY14: 18.9%). This is significantly lower than reported RoCE of 21.4% and 37.8% of the power and industrial segments, respectively. The difference is mainly due to non allocation of common expenses, assets & others in computation of segment level RoCE. Unbilled revenue as percentage of contract revenue rose to 25.7% in FY15 versus 23.3% in FY14. Outstanding unbilled revenue (dues from customers) stood at INR4.1bn in FY15 (FY14: INR2.6bn).



Crompton Greaves | Annual Report Analysis


July 14, 2015

52-week range (INR) : 231 / 153




Promoters* : 34.4


FIIs : 15.7

Others : 18.7



Market Data




Payment to Avantha Holdings, hold co, for expenses stood at INR 702mn (FY14: INR676mn), ~12% of adjusted standalone PBT. Cash conversion cycle jumped to 55 days (FY14:45 days) led by higher receivables (including unbilled revenues) and lower customer advances. Receivables O/S for more than 6 months stood at INR 4.7bn (March 2014: INR 3.2bn), ~12% of net worth. Gross debt increased to INR31.3bn (including acceptances of INR 3.8bn) in FY15 (FY14: INR27.4bn). Management stated that almost entire debt (~INR 7bn) (excluding acceptances of INR 2.3bn) at the standalone level will be transferred to the consumer products division as part of the demerger. Intangibles stood at INR14.5bn, 38% of net worth (FY14: INR18bn, 49.3%), led by goodwill (INR9.5bn) and brand names & customer lists (INR2bn). Intangibles along with overdue receivables (>6 months) and equity investment in Avantha Power and Infra stood at INR21.6bn (~57% of net worth).

Other Highlights • Avantha Power and Infrastructure ceased to be an associate company with effect from

April 1, 2014 due to decline in CRG’s stake to below 20%. The carrying cost of the company’s investment in Avantha Power stood at ~INR 2.5bn, ~6.5% of net worth.

• Unfunded defined benefit obligations including leave encashment and post retirement benefit plans stood at INR 530mn.

• Expenses (including employee benefits and other expenses) capitalised during the year stood at INR 473mn (FY14: INR 437mn).

• As at March 2015, CRG had recognised deferred tax asset of INR 1.6bn (~4.2% of net worth) (March 2014: INR 2.1bn) in respect of carried forward tax losses/depreciation of subsidiaries.

• During the year, CRG sold a portion (8 acres) of land at Kanjurmarg, Mumbai at a profit of INR 2.8bn. Cash flows from sale of fixed assets stood at INR 3.4bn in FY15, which we believe is towards part consideration.

Management discussion and analysis: Key highlights • CRG received non-binding proposals from reputed international entities for acquiring

European, North American and Indonesian activities of CG Power.

• Further, the company also received firm offers for the Canadian power facility, and the US transportation automation businesses, formerly known as QEI Inc.


Crompton Greaves

Earnings analysis

Table 1: Standalone/subsidiary profitability analysis (INR bn)

Note: Interest income on loans to subsidiaries are excluded while computing standalone profitability

Source: Company annual report, Edelweiss research • Standalone revenues jumped 3% YoY lead by consumer products business which

clocked growth of 12% YoY; revenue (ex consumer) declined 2% YoY.

• During FY15, CRG classified certain expenses as exceptional and prior period items. These include certain normal business expenses which, we have adjusted while arriving at adjusted EBITDA.


Sales 75.7 100.0 78.4 100.0 60.6 100.0 61.8 100.0 136.3 100.0 140.1 100.0Raw Materials Consumed 56.0 73.9 58.2 74.3 35.4 58.4 37.1 60.0 91.4 67.0 95.3 68.0Gross Profit 19.7 26.1 20.1 25.7 25.2 41.6 24.7 40.0 45.0 33.0 44.8 32.0Other expense 8.8 11.6 8.4 10.7 10.5 17.4 10.1 16.3 19.3 14.2 18.5 13.2Personnel cost 4.8 6.3 5.2 6.7 14.8 24.3 14.7 23.8 19.5 14.3 19.9 14.2Reported EBITDA 6.2 8.1 6.5 8.3 (0.0) (0.1) (0.1) (0.2) 6.1 4.5 6.4 4.6Operating expenses classified as exceptional expenses and Prior period item

0.0 0.0 0.0 0.0 0.0 0.0 (1.7) (2.7) 0.0 0.0 (1.7) (1.2)

Exchange gain / (loss) 0.9 1.2 (0.5) (0.6) 0.0 0.0 0.0 0.0 0.9 0.7 (0.5) (0.3)Adjusted EBITDA 7.1 9.4 6.1 7.7 (0.0) (0.1) (1.8) (2.8) 7.0 5.2 4.3 3.1Depreciation 0.9 1.2 1.0 1.2 1.7 2.9 1.7 2.7 2.6 1.9 2.6 1.9Adjusted EBIT 6.2 8.2 5.1 6.5 (1.8) (2.9) (3.4) (5.5) 4.4 3.2 1.7 1.2Financial Charges 0.4 0.5 0.5 0.6 1.0 1.6 0.9 1.5 1.4 1.0 1.4 1.0Other income 1.0 1.3 1.3 1.7 0.9 1.5 0.3 0.5 1.9 1.4 1.7 1.2Adjusted PBT 6.8 9.0 5.9 10.9 (1.8) (3.0) (4.0) (6.9) 4.9 3.6 1.9 3.1 Consumer products business PBT 3.3 4.0 - (0.0) 3.3 3.9 PBT (ex consumer products) 3.5 2.0 (1.8) (4.0) 1.6 (2.0) Tax expense (ex consumer products) 1.0 0.4 0.4 0.5 1.4 1.0PAT (ex consumer products) (before exceptional items)

2.5 1.6 (2.3) (4.6) 0.2 (3.0)

Exceptional exp/ (gain) - - (2.6) - - 0.2 - - (2.4) PAT (ex consumer products) (after exceptional items)

2.5 - 4.2 (2.3) - (4.8) - 0.2 - (0.6)


Adjusted EBITDA margins at standalone level declined to 7.7% in FY15 versus 9.4% in FY14 Standalone PBT (ex consumer products) declined to INR 2bn (FY14: INR3.5bn) Adjusted EBITDA at the consolidated entity level declined to INR4.3bn (FY14: INR7bn) led by negative EBITDA of INR 1.8bn of subsidiaries Higher fixed cost in overseas subsidiaries led to negative EBITDA margin despite higher gross margin



Table 2: Exceptional and prior period items (INR mn)


• Consolidated finance cost stood at INR 1.4bn, implying average borrowings cost of

~5% on borrowings (gross) of INR 31.3bn (including acceptances). Considering low cost of overseas borrowings the impact of deleveraging will be minimal on reported profitability

• Other expenses includes miscellaneous expenses amounting to INR 6.2bn (FY14: INR 6.8bn), 33% of other expenses, in consolidated financial statements. Details regarding nature of miscellaneous expenses are unavailable.

• Other income includes miscellaneous income of INR 0.9bn (FY14: INR 1bn), in consolidated financial statements for which details regarding nature of income are unavailable.

Chart 1: Segment revenue and margins- Standalone business


S. No. Nature of item Amount Treatment1 Profit on sale of portion of land at Kanjurmarg 2,782 Exceptional gain

in FY15

2 Compensation to employees pursuant to VRS (181) Exceptional loss in FY15

3 Loss on account of cancellation of Sale Order pertaining to sales made during last year

(821) Adjusted from EBITDA in FY15

4 Loss on account of award in favour of the customer in the arbitration related to a company prior to its acquisition by CGL

(223) Exceptional loss in FY15

5 Warranty claim towards replacement / repairs of certain type of transformers supplied in the

(652) Adjusted from EBITDA in FY15

Exceptional items 904 Prior period items 177 Adjusted from

EBITDA in FY15 Exceptional and prior period items 1,081

0.0

4.0

8.0

12.0

16.0

20.0

0

10,000

20,000

30,000

40,000

50,000


(%)

(INR

mn)

Segment revenues (ex consumer) Consumer Products revenues

Segment margins (consumer) Segment margins (ex consumer)

Considering low cost of overseas borrowings the impact of deleveraging will be minimal on reported profitability Operating margins (ex consumer and unallocated costs) declined 150bps YoY to 7.2%


Crompton Greaves

Consumer products business Table 3: Consumer products business (Standalone) - Key highlights (INR mn)


Cash flow analysis

Table 4: Cash flow analysis (INR bn)


• Cash flow from operating activities declined from INR 2.2bn in FY14 to INR–(6.6)bn in

FY15 led by lower operating profitability and higher working capital. • Operating cash flows of consumer products business was robust at INR 3.9bn (FY14:

INR3.5bn).

Particulars FY14 % FY15 %Revenue (including other income) 28,985 100.0 32,327 100.0Expenses 25,656 88.5 28,355 87.7 Profit before tax 3,329 11.5 3,971 12.3 Tax expense 962 3.3 1,277 3.9 Profit after tax 2,367 8.2 2,694 8.3 Total Assets 6,280 6,809 Total Liabil ities 5,069 12,401 Net cash inflow/ (outflow) from operating 3,527 3,851 Net cash inflow/ (outflow) from investing (240) 36 Net cash inflow/ (outflow) from financing (7) 6,895

ParticularsProfit before tax - 7.1 - 9.0 - (2.2) - (4.7) - 4.9 - 4.3 Non-operating (profit)/loss (1.0) - (2.5) - 1.6 - 0.7 - 0.5 - (1.8) - Non-cash adjustments 1.1 - 1.2 - 1.6 - 1.9 - 2.8 - 3.1 - Operating profit before working capital changes 7.2 7.7 1.1 (2.1) 8.3 5.6 (Increase) / Decrease in trade and other receivables (1.6) - (7.8) (4.7) - 1.0 (6.3) - (6.8) - (Increase) / Decrease in loans and advances to subsidiaries (1.5) - (3.0) 1.5 - 3.0 (0.0) - (0.0) -

(Increase) / Decrease in inventories (0.1) - 0.3 (0.3) - 1.8 (0.3) - 2.2 - Increase / (Decrease) in trade and other payables (0.1) - (1.8) 3.9 - (4.0) 3.8 - (5.7) - Increase / (Decrease ) in provisions 0.2 - (0.1) 0.2 - 0.4 0.3 - 0.4 - Adjustment: For Acceptances (0.8) - (0.2) (0.0) (0.1) (0.9) - (0.4) - Adjustment: For Bill discounted (0.1) - 0.6 - - (0.1) - 0.6 - (Increase)/Decrease in working capital (4.1) (11.9) 0.6 2.2 (3.5) (9.8)Minority interest in loss 0.0 - 0.0 0.0 - 0.0 Share of profit / (loss) of associate companies (net) (0.2) - 0.0 (0.2) - 0.0 Direct taxes paid - (1.9) - (2.2) (0.5) - (0.3) (2.4) - (2.5)Net cash from operating activities 1.2 (6.4) 1.0 (0.2) 2.2 (6.6)Adjustment for consumer products division (3.5) - (3.9) - - (3.5) - (3.9)Net cash from operating activities- (ex consumer) (2.3) (10.3) 1.0 (0.2) (1.3) (10.5)Interest expenses paid (0.4) - (0.4) (0.9) - (1.0) (1.3) - (1.4)Net cash from operating activities (ex consumer)- Post interest

(2.7) (10.7) 0.0 (1.2) (2.7) (11.9)

Less: Capex (ex consumer) (1.2) - (0.8) (1.4) (1.3) (2.6) - (2.1)Free Cash flows (ex consumer) (3.9) (11.6) (1.4) (2.4) (5.3) (14.0)Standalone free cash flows (ex consumer and loans & advances to subsidiaries)

(2.4) (8.5) - - - -

Standalone Subsidiary (Derived) ConsolidatedFY15 FY14 FY15 FY14 FY15FY14

PAT margin of consumer products business was stable at ~8.3% Borrowings of ~INR 7bn availed at standalone level during FY15 will be transferred to the consumer products division as part of demerger and thus included in consumer product liabilities in FY15

Standalone free cash flows (adjusted for inter company loans) declined from INR –(2.4)bn in FY14 to INR –(8.5)bn in FY15



• Free cash flows of subsidiaries deteriorated to INR-(2.4)bn (FY14: INR-(1.4)bn) led by high operating losses.

Table 5: Cash conversion cycle (days)


• Since working capital requirement of consumer business is lower, cash conversion cycle

will increase post demerger of consumer business. Table 6: Receivables profile (INR bn)


Particulars Standalone ConsolidatedFY12 FY13 FY14 FY15 FY12 FY13 FY14 FY15

Inventory days 32 33 35 33 55 60 64 58 Trade Receivable days 91 91 90 97 92 95 90 95 Due from customers days - - 1 2 2 4 6 9 Advance from customers days (18) (16) (7) (0) (25) (27) (25) (21) Due to customers (1) (1) (1) (1) (1) (2) (3) (3) Trade Payable days (85) (90) (98) (91) (91) (96) (101) (98) Cash conversion cycle 20 18 21 39 33 35 32 40 Acceptances days 7 8 11 13 7 9 12 13 Bills discounted days 5 4 4 3 3 3 2 2 Adj cash conversion cycle 32 31 36 56 43 47 45 55 Working capital as a % of sales 13.2 10.9 16.0 20.9 15.3 15.4 15.5 19.4

Particulars Standalone Total Consolidated TotalYears < 6 Mn > 6 Months < 6 Months > 6 MonthsFY15 19.0 3.6 22.6 32.7 4.7 37.3 FY14 16.8 2.3 19.1 32.7 3.2 35.9 FY13 16.1 2.3 18.4 27.9 3.7 31.6 FY12 15.5 1.8 17.4 28.4 3.0 31.4

Consolidated free cash flows (ex consumer) worsened to INR(-14)bn (FY14: INR (-5.3)bn) Standalone cash conversion cycle increased to 56 days led by higher receivables and lower advance from customers and payables Advance recoverable in cash or in kind (not considered in cash conversion cycle) increased from INR 2.8bn in FY14 to INR 6.3bn in FY15 Receivables more than 6 months jumped 56% YoY to INR3.6bn, 16% of standalone receivables (FY14: INR2.3bn, 12%)


Crompton Greaves

Capital allocation- Standalone business Table 7: Standalone- RoCE (INR bn)


Table 8: Standalone- Cumulative cash generation and utilisation (FY11-15) (INR bn)

*(excl changes in loans and advances to related parties)


Particulars FY11 FY12 FY13 FY14 FY15Equity shareholders' funds 23.0 27.0 30.6 33.6 40.1 Loan funds 0.1 0.1 0.1 0.3 7.2 Capital employed 23.2 27.1 30.7 33.9 47.3 Investment in subsidiaries/Associates etc (3.8) (5.5) (5.5) (8.1) (10.0)Advances to subsidiaries/associates etc (1.0) (0.9) (5.2) (6.7) (9.7) Advances from subsidiaries/Associates etc 0.0 0.4 0.3 0.1 0.1 Adjusted capital employed- standalone 18.4 21.0 20.2 19.2 27.6 Represented byFixed & intangible assets (Incl CWIP) 9.2 6.8 7.8 8.2 7.9 Inventory 4.1 4.5 5.5 5.6 5.2 Trade receivables 15.1 17.4 18.4 19.1 22.6 Trade payables (11.0) (11.7) (15.1) (15.6) (14.3) Core working capital 8.2 10.1 8.7 9.0 13.6 Other current assets(inc loans and advances) 2.0 2.2 2.2 3.2 6.8 Cash and Current investments 5.5 8.2 7.9 4.6 4.6 Non- current loans & advances 0.2 0.2 0.2 0.4 0.2 Non-current investments 0.0 0.0 0.0 0.0 0.0 Other non-current l iabil ities (1.5) (1.0) (1.2) (1.2) (1.2) Other current l iabil ities and provisions (5.2) (5.6) (5.4) (5.0) (4.3)

18.4 21.0 20.2 19.2 27.6 Capital employed- Consumer products (0.8) (0.9) (1.1) (1.2) (1.4) Closing capital employed (ex consumer) 17.6 20.1 19.1 18.0 26.2 Average capital employed (overall) 16.2 19.7 20.6 19.7 23.4 Average capital employed (ex consumer) 15.5 18.8 19.6 18.6 22.1 Adjusted EBIT of standalone business 9.4 6.9 6.0 6.8 6.0 Consumer business EBIT 2.9 2.6 2.7 3.3 4.0 EBIT (ex consumer business) 6.6 4.3 3.3 3.5 2.0 Adjusted pre tax RoCE (overall) 58.3 35.0 29.1 34.7 25.6 Adjusted pre tax RoCE (ex consumer) 42.3 23.0 16.7 18.9 9.1

Sources FY11 FY12 FY13 FY14 FY15 Total Application FY11 FY12 FY13 FY14 FY15 TotalOperating profit 9.9 7.6 6.3 7.2 7.7 38.7 Capex 4.4 (1.6) 1.7 1.0 (2.6) 3.0 Less: Interest (0.2) (0.3) (0.3) (0.4) (0.4) (1.6) Dividend Paid 1.2 1.2 0.9 0.9 0.9 5.1

Less: Taxes (3.0) (2.1) (1.1) (1.9) (2.2) (10.3) Investment/ loans to subsidiaries

0.9 1.6 4.4 4.2 5.1 16.2

Add: Investment Income 0.2 0.2 0.5 0.6 0.7 2.2 Buyback of shares - - - 1.3 - 1.3 Cash Profits 6.9 5.4 5.4 5.5 5.8 29.1 Net increase in cash and ban - 1.7 - 1.5 - 3.2 Working capital (WC) changes* (3.5) (2.0) 0.9 (1.5) (9.3) (15.2)Cash Profits after WC 3.4 3.5 6.4 4.1 (3.5) 13.9 Miscellaneous 0.1 0.2 - (0.1) (0.1) 0.1 Net decrease in cash and bank 4.0 - 0.3 - 1.4 5.7 Sale/(Purchase) of Investment (0.8) (0.8) 0.2 4.9 (1.4) 2.1 Proceedings from borrowings (0.1) (0.1) 0.1 0.2 6.9 6.9 Total 6.6 2.8 7.0 9.0 3.4 28.8 Total 6.6 2.8 7.0 9.0 3.4 28.8

The company’s investment and loans & advances (net) to subsidiaries/associates/others stood at INR 19.7bn (March 2014: INR14.6bn) Standalone business (ex consumer) RoCE declined to 9.1% (FY14: 18.9%) in FY15 Increase in capital employed in FY15 was led by higher advance recoverable in cash or in kind (INR 3.2bn) and trade receivables (INR3.5bn)



• Borrowings were key source of cash during FY15 as owing to steep increase in working capital, cash profits were negative.

• Total investment (including loans & advances) in subsidiaries stood at INR 16.2bn, ~56% of available cash during FY11-15.

• Working capital rose steeply in FY15, highest in past 5 years, leading to negative cash profits.

Table 9: Consolidated- RoCE (INR bn)


Particulars FY12 FY13 FY14 FY15Equity shareholders' funds 36.1 35.6 36.4 38.2Loan funds 10.4 20.3 23.9 27.4Capital employed 46.5 55.9 60.4 65.6Represented byFixed assets(Incl CWIP & excl Goodwill) 12.9 15.2 16.6 15.4Intangible assets(excl Goodwill) 3.9 5.7 6.4 5.1Goodwill 5.8 9.8 11.6 9.5

Inventory 12.2 16.4 16.7 14.6Trade receivables 31.4 31.6 35.9 37.3Trade payables (21.1) (24.6) (27.7) (25.3)

Core working capital 22.6 23.4 24.9 26.6Other current assets including loans and advances 6.4 5.8 7.9 13.5Cash and Current investments 10.0 10.8 8.4 8.5Non- current loans & advances 0.3 0.2 0.5 0.2Non-current investments 2.9 2.9 2.8 2.8Other non-current assets 0.5 1.7 1.5 1.1Other non-current liabilities (2.9) (2.3) (1.5) (1.4)Other current liabilities and provisions (15.8) (17.3) (18.6) (15.7)

46.5 55.9 60.4 65.6Capital employed- Consumer products (0.9) (1.1) (1.2) (1.4)Closing capital employed (ex consumer business) 45.6 54.8 59.2 64.2Average capital employed (overall) 42.0 51.2 58.1 63.0Average capital employed (ex consumer business) 41.1 50.2 57.0 61.7Adjusted EBIT of consolidated business 6.1 2.8 6.2 3.4Consumer business EBIT n.a. n.a. 3.3 3.9EBIT (ex consumer business) n.a. n.a. 2.8 (0.6)Adjusted pre tax RoCE (overall) 14.6 5.5 10.6 5.3Adjusted pre tax RoCE (ex consumer) n.a. n.a. 5.0 (0.9)

Consolidated RoCE declined from 10.6% in FY14 to 5.3% in FY15 RoCE (ex consumer business) declined to –(0.9%) in FY15 (FY14: 5%) Increase in capital employed in FY15 was led by higher advance recoverable in cash or in kind (INR 3.5bn) and unbilled revenues (INR1.6bn) Noncurrent investment includes investment of INR 2.4bn (~6.5% of net worth) in Avantha Power and Infra Share of profit / (loss) in associate stood at INR 15.5mn (FY14: INR (-150)mn).


Crompton Greaves

Segment and subsidiary performance analysis Table 10: Segment analysis (Standalone) (INR bn)

Table 11: Segment EBIT and capital employed reconciliation (Standalone) (INR bn)


Particulars FY11 FY12 FY13 FY14 FY15Segment revenuesPower Systems 25.5 27.5 27.2 28.4 27.3 Industrial Systems 14.1 15.2 15.0 15.0 15.0 Others 0.2 1.3 3.8 3.8 4.1 Segment revenues (ex consumer) 39.8 44.0 46.0 47.3 46.5 Consumer Products 20.2 21.3 25.9 29.0 32.3 Inter segment sales (0.5) (0.5) (0.6) (0.5) (0.4)

59.5 64.9 71.4 75.7 78.4 Segment resultPower Systems 4.6 3.2 2.3 2.6 2.2Industrial Systems 2.6 2.3 2.1 1.5 1.5Others 0.0 (0.1) 0.1 0.0 (0.4)Segment EBIT (ex consumer) 7.3 5.4 4.5 4.1 3.4Consumer Products EBIT 2.9 2.6 2.8 3.4 4.1

10.2 8.0 7.3 7.5 7.4Less: Unallocated expenses net of income 0.9 1.2 1.6 1.5 0.8Operating Profit 9.3 6.8 5.8 6.0 6.6Finance Costs 0.0 0.0 0.2 0.2 0.2Exchange (gain)/loss - - - (0.9) 0.5 Profit before Tax (ex exceptional and prior period items )

9.3 6.8 5.6 6.7 5.9

Segment margins (before unallocated expenses)Power Systems 18.0 11.6 8.5 9.1 8.1 Industrial Systems 18.7 14.8 14.2 10.2 10.1 Segment margins (ex consumer) 18.2 12.2 9.9 8.7 7.2Segment-RoCE (before unallocated expenses and unallocated assets)Power Systems 78.7 42.4 28.5 31.7 21.4Industrial Systems 100.8 61.5 53.8 38.8 37.8Segment RoCE (ex consumer) 86.1 47.6 36.5 30.9 20.3

Particulars FY14 FY15 Particulars FY14 FY15Segment EBIT (ex consumer) as per disclosure in table 10 4.1 3.4

Segment capital employed (ex consumer) as per segment disclosure (a) 14.4 18.7

Unallocable expenses (net) (1.5) (0.8) Unallocable segment assets (net) not considered in segment capital employed in (a) above 4.4 8.2

Exchange gain / (loss) 0.9 (0.5) Others (0.8) (0.7) Adjusted EBIT (ex consumer business) in table 7

3.5 2.0 Adjusted capital employed (ex consumer business) in table 7 18.0 26.2

Segment RoCE (ex consumer) at standalone level declined from ~31% in FY14 to ~20% in FY15 Other segment reported loss (EBIT) of INR 0.4bn in FY15 Segment margins presented in adjacent table are without considering unallocated expenses and exchange gain/(loss) Similarly segment RoCE is computed without considering unallocated expenses and unallocated assets Reported RoCE of 21.4% and 37.8% for the power and industrial segment was significantly higher than adjusted RoCE of 9.1% for the standalone business (ex consumer)



Table 12: CG-Power- Profitability analysis (INR mn)


• Power systems derive ~70% of revenues from overseas subsidiaries.

• The company has received non-binding proposals from reputed international entities for acquiring European, North American and Indonesian activities of CG Power.

• Unexecuted order book of overseas subsidiaries declined ~30% to INR 40bn. Table 13: Overseas entities financial performance (USD mn)


Particulars Standalone Overseas OverallFY13 FY14 FY15 FY13 FY14 FY15 FY13 FY14 FY15

Net Sales 27,250 28,430 27,340 47,530 58,400 58,980 73,360 85,360 85,740EBIDTA (including other income, OI) 2,600 2,960 2,660 (2,440) 900 120 340 4,290 3,280 EBIT 2,310 2,590 2,230 (3,520) (600) (1,320) (1,100) 2,340 1,350 Capital Employed 7,800 8,520 12,250 25,140 28,220 26,130 33,820 38,990 40,860 RoCE (%) 28.6 31.7 21.5 (16.4) (2.2) (4.9) (3.7) 6.4 3.4 EBIT (%) 8.5 9.1 8.2 (7.4) (1.0) (2.2) (1.5) 2.7 1.6 Unexecuted Order Book 33,300 31,080 29,670 51,950 55,300 39,490 85,250 86,380 69,160

Particulars FY12 FY13 FY14 FY15Revenue from Operations 996 936 1,029 1,023 EBIDTA 15 (42) - (6) Other Income 3 7 13 9 Finance cost 9 16 19 20 Depreciation and Amortisation expenses 35 23 27 26 PBT (Before Exceptional & Prior period items) (26) (74) (33) (43) Exceptional items - (22) - (28) Prior period items - - - (3) PBT before tax (26) (96) (33) (74) Less: Tax Expenses

Current Tax 5 7 4 4 Deferred Tax (3) (16) 3 5

PAT (28) (87) (40) (83) Minority Interest - - - - Share of Profit / (Loss) of Associates - - (3) (1) PAT Carried Forward to the Balance Sheet (28) (87) (43) (84)

Overseas entities EBITDA stood at USD –(6) mn. Losses (PBT) more than doubled to USD –(74)mn (FY14: USD –(33)mn)

Losses (EBIT) of overseas power systems business more than doubled to INR 1.3bn (FY14: INR 0.6bn) Capital employed in domestic (India) power business increased 44% YoY, presumably due to higher investment in working capital


Crompton Greaves

Table 14: Major subsidiaries analysis (INR mn)


Note: Subsidiary numbers presented above are not fully comparable due to exchange rate

volatility

• Management intends to divest ailing overseas power equipment business to reduce

exposure at standalone balance sheet and focus on domestic operations and overseas industrial systems.

Table 15: Unbilled revenue analysis (INR bn)


FY14 FY15Revenue PAT Net Worth Revenue PAT

CG International B.V 1,608 165 8,230 1,354 (1) CG Holdings Belgium N.V. 8,404 496 17,146 6,948 317 CG Power Systems Belgium N.V 12,513 (1,186) 7,098 9,974 (1,512) CG Power Systems Ireland Limited 5,912 49 2,540 4,664 103 CG Power Systems Canada Inc. 3,844 (727) (945) 3,802 (258) PT. CG Power Systems Indonesia 7,384 640 5,747 8,106 576 CG Electric Systems Hungary Zrt. 7,918 (803) (1,403) 3,676 (2,542) CG Power USA Inc. 11,174 311 2,047 11,746 (78) CG Power Solutions UK Limited 2,669 (445) (313) 1,684 (740) CG Power Systems Brazil Ltda 899 (371) (974) 453 (443) CG Middle East FZE 2,165 (535) 97 1,058 520 Others 1,347 (406) 6,485 1,308 (310) Total (A) 65,836 (2,812) 45,755 54,773 (4,369) Emotron Group subsidiariesCG Drives and Automation

Sweden AB 2,732 492 1,789 1,694 177 Netherlands B.V. 574 11 169 512 30 Germany GmbH 1,296 19 60 1,017 10

Total (B) 4,602 522 2,018 3,223 217 ZIV Group subsidiariesZIV Aplicaciones y Tecnologia S.L. 1,418 459 958 292 33 ZIV Metering Solutions S.L. 3,269 253 1,441 4,868 169 ZIV Grid Automation S.L. 1,923 (38) 922 952 (109) Others 1,168 (159) 39 1,091 18 Total (C) 7,778 514 3,361 7,204 111 Grand Total (A)+(B)+(C) 78,216 (1,776) 51,134 65,199 (4,041)

Name of the Subsidiary Company

Particulars FY11 FY12 FY13 FY14 FY15Due to customers 0.2 0.7 0.7 1.3 1.2 Due from customers 0.5 1.0 1.7 2.6 4.1 Contract revenue recognised 7.5 17.6 12.6 11.0 16.1 Excess billed as % of contract revenue 2.9 3.8 5.3 11.5 7.5 Unbilled as % of contract revenue 6.8 5.6 13.4 23.3 25.7

Unbilled revenue (as % of contract revenue) rose ~4.5x during FY12-15

Aggregate losses of subsidiaries increased to INR –(4)bn versus INR –(1.8)bn in FY14, led by higher losses in Belgium and Hungary Profitability of Emotron and ZIV group companies (not part of proposed assets sales) deteriorated in FY15



Chart 2: Unbilled revenue as % of contract revenue


0.0

6.0

12.0

18.0

24.0

30.0


(%)

Excess billed as % of contract revenue Unbilled as % of contract revenue


Crompton Greaves

Intangibles Table 16: Intangibles analysis (INR bn)


Research & development costs are amortised over 3-15 years based on expected useful life. Brand names and customer lists are amortised over 10 years. Goodwill arising on consolidation is not amortized but tested for impairment annually.

CG (Standalone) exposure in subsidiary/associate/other companies Table 17: Exposure to subsidiaries/associates/others (INR mn)


• Avantha Power and Infrastructure ceased to be an associate company with effect from April 1, 2014, due to decline in CRG’s shareholding to below 20%. The carrying cost of ~INR 2.5bn pertaining to Avantha Power which was accounted under equity method till FY14, has been reclassified under investment in others.

Particulars FY11 FY12 FY13 FY14 FY15Goodwill 2.9 5.9 9.8 11.6 9.5Computer software 0.3 0.4 0.6 0.6 0.6Technical know-how 0.2 0.5 0.4 0.4 0.4Commercial rights 0.3 0.3 0.3 0.2 0.1Research and development 0.4 1.1 0.9 1.3 1.5Brand names and customer l ists 0.7 1.2 2.5 2.7 2.0Total 4.9 9.3 14.4 16.7 14.0Intangible assets under development 0.1 0.4 1.0 1.3 0.5Total 4.9 9.7 15.5 18.0 14.5Intangibles as % of net worth 15.0 27.0 43.4 49.3 38.1

Particulars FY13 FY14 FY15Investments in subsidiaries 3,085 5,596 7,688 Investments in Associates/ Others 2,356 2,356 2,356 Investments in debentures 100 100 - Loans & advances (net) 4,921 6,594 9,622 Total cash exposure 10,461.7 14,646.1 19,666.2 % of net worth 34.2 43.6 49.0 Guarantees given 12,679 14,565 13,586 Non cash exposure (% of net worth) 41.5 43.4 33.9

Total exposure 23,141 29,211 33,252 Total exposure (% of standalone net worth) 75.7 87.0 82.9

Although intangible assets declined to INR14.5bn during the year, they still constitute 38% of net worth Decline in goodwill during FY15 was presumably due to depreciation of EUR against INR

Total exposure to subsidiaries/associates stood at INR33.2bn, 83% of standalone net worth







Particulars FY13 FY14 FY15Loans and advances receivable 105 112 120 Accounts receivable 113 215 192 Sale of goods and servicesKorba west power company 139 91 51 Others 189 69 115 Rent paidAvantha Holdings Ltd. 20 20 20 Other expensesAvantha Holdings Ltd. 784 676 702 Others 16 16 63 Key mangerial personnel remuneration 135 172 142

Particulars FY11 FY12 FY13 FY14 FY15Sales 100,051 112,486 120,944 136,315 140,131 Total income 101,184 113,113 121,944 138,205 141,802 EBITDA 13,438 8,036 3,832 6,120 6,424 EBITDA margin (%) 13.4 7.1 3.2 4.5 4.6 Gross Margin (%) 37.3 31.7 31.0 33.0 32.0 RoE 31.7 10.9 1.2 5.1 5.2 RoCE 37.4 14.4 5.5 9.3 8.7 Depreciation 1,936 2,600 2,029 2,621 2,620 Financial costs 343 567 955 1,366 1,443 Net profit 8,887 3,736 (361) 2,443 2,094 Equity shareholders' funds 32,747 36,109 35,615 36,446 38,159 Loan funds 4,703 10,440 20,270 23,936 27,438 Net debt (2,309) 453 9,429 15,578 18,937 Net fixed assets 15,381 15,201 18,907 20,820 19,167 CWIP 1,098 1,493 1,965 2,184 1,267 Goodwill on consolidation 2,934 5,882 9,792 11,588 9,468 Current assets loans and advances 42,068 50,039 53,728 60,520 65,355 Current l iabil ities and provisions 31,379 36,877 41,896 46,185 40,933 Net current assets 10,690 13,162 11,832 14,335 24,422 Cash and cash equivalent 7,012 9,987 10,841 8,358 8,501 Cash flow from operating activities 5,669 4,133 4,449 3,196 (6,801) Cash flow from investing activities (7,560) (4,623) (11,367) (978) 4,284 Cash flow from financing activities (1,813) 2,482 7,776 99 1,260 Net cash flows (3,704) 1,992 858 2,316 (1,257) CAPEX (7,461) (3,724) (3,724) (2,620) 1,310 Working capital investments (5,070) (2,277) 2,480 (2,513) (9,983)

Payment to Avantha Holdings stood at INR 702mn, ~12% of adjusted standalone PBT


Havells India’s (Havells) FY15 annual report analysis highlights subdued (5 year low) revenue and EBITDA growth at standalone level. Standalone tax rate rose to 28% due to lapse of tax holiday period of certain units and management expects tax rate to increase further. Consolidated profits were aided by recognition of deferred tax asset (DTA) of INR378mn (~6.7% of PBT) (FY14: nil) in respect of unabsorbed losses pertaining to certain Sylvania subsidiaries. Higher actuarial loss on defined benefits obligations led to slippage in Sylvania’s EBITDA and its losses surged to EUR11.5mn in FY15 (FY14: EUR4mn). Sylvania’s net pension liability rose to INR3.9bn (EUR58.1mn) as at March 2015 (March 2014: INR3.6bn; EUR43.7mn). Goodwill on Sylvania consolidation stood at INR3.6bn (March 2014: INR4.4bn), representing ~20% of consolidated net worth. During FY15, Havells infused INR1.3bn (FY14: INR0.8bn) in Sylvania, taking its cumulative investment in the company to INR9.8bn (~40% of standalone net worth). What’s on track? Standalone (excluding investment in subsidiaries/JV) RoCE continued to be robust at ~46% (FY14: 47%). As at March 2015, no corporate guarantees were given by the company on behalf of Sylvania (guarantees worth INR 1.4bn were outstanding at March 2014).

What needs tracking? Sylvania’s EBITDA declined from EUR16.5mn (~3.75% of revenue) in FY14 to EUR6.3mn (~1.4% of revenue) in FY15 primarily led by higher actuarial loss of EUR14.4mn (FY14: EUR6.1mn) on defined benefits obligations. Losses rose to EUR11.5mn in FY15 (FY14: EUR4mn). Underfunded status of Sylvania defined benefit obligation stood at ~EUR58.1mn (~INR4bn). Product warranties and after sales service expenses catapulted 85% to INR1.5bn led primarily by Sylvania. Payment to related parties stood at INR 975mn (FY14: INR850mn), 17.1% of PBT. During FY15, Sylvania has started receivable financing on a non-recourse basis, which led to reduction in receivables and debt of INR 1,764mn (EUR26mn) as at March 2015. Sylvania’s core working capital (excluding acceptances) declined by ~9% and ~25% in EUR and INR terms, respectively, in FY15. Decline in core working capital was steeper in INR terms due to EUR depreciation (March 2015: EUR=INR67.8; March 2014: EUR=INR82.5). During the year, Havells recognised impairment loss of INR121mn (FY14: INR4mn) in respect of overseas operations in Columbia and Belgium.



Havells India | Annual Report Analysis


June 15, 2015

52-week range (INR) : 346 / 222




Promoters* : 61.6


FIIs : 26.0

Others : 9.8

*Promoters pledged shares : NIL (% of share in issue)

Market Data




Other Highlights • Standalone effective tax rate jumped from ~20% in FY13 and FY14 to ~28% in FY15 due

to lapse of tax holiday period for a few units. Management expects tax rate to further increase to ~30% in FY16.

• During Q1FY16, the company acquired 51% stake in Promptec Renewable Energy Solution (Promptec) for INR 291mn. The latter markets and manufactures LED products, including street, office and solar lighting.

• DTA has not been recognised in respect of losses amounting to ~INR16.9bn (March 2014: INR24bn) due to absence of virtual certainty supported by convincing evidences that sufficient future taxable income will be available against which such deferred tax assets can be realised.

• The company has settled claims with one of its customers related to supply of switchgear products. Aggregate settlement amount payable was ~INR700mn, of which INR420mn was recognised as expense in FY14 and balance ~INR280mn in FY15.

• The company’s JV (50% stake), Jiangsu Havells Sylvania Lighting Co, reported sales of ~USD20mn (FY14: USD17.4mn) and net profit margin of 4% in FY15 (FY14: Loss of 1.4%).

Key Highlights from MD&A and Director’s Report • Havells’ recent acquisition of Promptec, a Bengaluru-based company, is another step to

strengthen its position in the growing LED market.

• Sylvania’s European operations remained stable during the year despite difficult market conditions. Even in the face of volatile forex scenario, the company retained unwavering focus on profitability, cash generation and debt reduction.

Earnings analysis

Table 1: Standalone / Subsidiary analysis (INR mn)


FY14 % FY15 % FY14 % FY15 % FY14 % FY15 %Sales 47,197 100.0 52,387 100.0 34,661 100.0 33,307 100.0 81,858 100.0 85,694 100.0 Raw Materials Consumed 29,017 61.5 31,784 60.7 17,380 50.1 16,508 49.6 46,398 56.7 48,292 56.4 Gross margin 18,180 38.5 20,603 39.3 17,281 49.9 16,800 50.4 35,461 43.3 37,403 43.6 Operating & Admin. Exp. 9,289 19.7 10,484 20.0 7,878 22.7 7,832 23.5 17,167 21.0 18,316 21.4 Personnel cost 2,475 5.2 3,127 6.0 8,394 24.2 8,748 26.3 10,869 13.3 11,875 13.9 EBITDA 6,416 13.6 6,991 13.3 1,009 2.9 220 0.7 7,425 9.1 7,211 8.4 Depreciation 636 1.3 875 1.7 519 1.5 512 1.5 1,155 1.4 1,387 1.6 EBIT 5,780 12.2 6,116 11.7 490 1.4 (291) (0.9) 6,270 7.7 5,825 6.8 Financial Charges 269 0.6 176 0.3 472 1.4 464 1.4 741 0.9 640 0.7 Other Income 441 0.9 522 1.0 (28) (0.1) (18) (0.1) 413 0.5 505 0.6 PBT 5,951 12.6 6,463 12.3 (10) (0.0) (773) (2.3) 5,941 7.3 5,690 6.6

Standalone Subsidiary/JV (Derived) Consolidated


Havells India

• During FY15, standalone revenue grew only 11% led by sluggish growth in switchgear and lighting & fixture, which clocked growth of 5% and 3%, respectively.

• EBITDA margin declined to 13.3% (FY14: 13.6%) owing to higher personnel cost.

• Depreciation expense during the year was higher as it was computed based on estimated useful life of assets, as prescribed in the Companies Act 2013.

• Advertisement & sales promotion expense stood at 3% of revenue (FY14: 2.4%) at standalone level.

• During FY15, Sylvania’s personnel cost included actuarial loss of INR1.1bn (FY14: INR0.5bn) on DBO due to significant reduction in interest/discount rates in Europe (primarily Germany).

Table 2: Standalone segment analysis (INR mn)


• Unallocated expenses in the above segment wise profitability analysis increased from

INR 4bn in FY14 to INR5bn in FY15.

Particulars FY12 FY13 FY14 FY15Segment revenueSwitchgears 8,962 10,781 12,192 12,790 Cables 15,930 16,925 19,264 21,904 Lighting and fixtures 5,544 6,652 7,207 7,410 Electrical consumable durables 5,721 7,893 8,534 10,283

36,156 42,250 47,197 52,387 Segmental resultSwitchgears 3,234 3,653 4,032 4,390 Cables 1,259 1,541 2,110 2,657 Lighting and fixtures 1,318 1,568 1,787 1,969 Electrical consumable durables 1,610 1,978 2,304 2,580

7,421 8,740 10,233 11,595 Less: Unallocated exp. net of income (3,239) (3,883) (4,012) (4,957) Operating Profit 4,182 4,857 6,220 6,638 Finance Costs (444) (286) (269) (176) Profit before Tax 3,738 4,572 5,951 6,463 Income Tax expense (684) (858) (1,164) (1,813) Profit after tax 3,054 3,714 4,787 4,649 Segmental EBIT marginsSwitchgears 36.1 33.9 33.1 34.3 Cables 7.9 9.1 11.0 12.1 Lighting and fixtures 23.8 23.6 24.8 26.6 Electrical consumable durables 28.1 25.1 27.0 25.1

20.5 20.7 21.7 22.1

EBIT margin in consumer durables declined from ~27% in FY14 to ~25% in FY15

Revenue and EBITDA growth at standalone level remained muted at 11% and 9%, respectively Higher fixed cost at Sylvania led to lower EBITDA margins despite of higher gross margins



Table 3: RoCE profile (Standalone) (INR mn)


Table 4: Sylvania income statement (Standalone) (EUR mn)


Table 5: Sylvania—Pension liability analysis (EUR mn)


Net pension liability as at March 2015 end was EUR58mn, of which Germany accounted for ~80%. Since pension obligation (PBO) in Germany is not backed by plan assets, net liability catapulted significantly during FY15 owing to fall in German bond yields. Management expects pension outgo to be in the EUR1.40-1.50mn p.a. range in Sylvania for the next 8-10 years.

Particulars FY11 FY12 FY13 FY14 FY15PBIT 3,289 4,182 4,857 6,220 6,638 Closing Capital employed (Ex investment in Subsidiaries & J.V.)

7,590 9,618 11,871 14,429 14,475

Average Capital employed (Ex investment in Subsidiaries & J.V.)

7,391 8,604 10,745 13,150 14,452

RoCE (%) 44.5 48.6 45.2 47.3 45.9

FY13 FY14 FY15Net Revenue 439.90 440.10 443.10 EBIDTA 22.50 16.50 6.30 Depreciation 7.40 6.40 6.50 Finance Cost 11.90 5.20 5.80 Foreign Exchange Loss 2.60 6.00 7.00 Add: other Income 3.50 0.90 1.10 Exceptional Item 25.80 - -

Profit before tax 29.90 (0.20) (11.90) Tax (0.60) 3.80 (0.40) Profit after tax 30.50 (4.00) (11.50)

Revenue Growth 0.05% 0.68%EBITDA Margin 5.11% 3.75% 1.42%PBT margin 6.80% -0.05% -2.69%

Particulars UK Germany Others TotalPresent value of Benefit obligation 84.6 47.0 8.0 139.6 Less: Fair Value of Plan Assets 79.4 2.1 - 81.5 Net Liability as at Mar’15 5.2 44.9 8.0 58.1

Net Liability as at Mar’14 2.8 33.9 7.0 43.7

Standalone RoCE (net of investment in subsidiaries/JV) stood at ~46%

Sylvania’s sales growth remained muted at below 1% YoY Sylvania’s EBITDA margin fell to 1.4% in FY15 (FY14: 3.75%) primarily led by higher actuarial losses of ~EUR14.4mn in FY15 (FY14: ~EUR6mn) Sylvania losses (PBT) rose to EUR11.9mn in FY15 (FY14: EUR0.2mn)

Sylvania’s pension liability jumped by EUR14.4mn in FY15 versus EUR6.1mn in FY14 Discount rate has steadily declined in European countries, leading to steep rise in pension obligations


Havells India

Table 6: Sylvania—Principal actuarial assumptions




• Free cash flows (adjusted for acceptances and bills discounted) at the standalone level

declined ~36% to INR3.2bn (FY14: INR5bn) led by higher capex and increased working capital requirement.

• Subsidiary/JV adjusted free cash flows jumped to ~INR1.3bn in FY15 (FY14: INR0.9bn) led primarily by steep decline in capex. During the year, Sylvania has started receivable financing on a non-recourse basis in its European operations, which resulted in reduction in receivables of INR 1,764mn (EUR26mn) as at March 2015. This also resulted in reduction in debt without corresponding increase in contingent liabilities.

• Sylvania’s core working capital (excluding acceptances) declined by ~9% and ~25% in EUR and INR terms, respectively, in FY15. Decline in core working capital was steeper in INR terms due to EUR depreciation (March 2015: EUR=INR67.8; March 2014: EUR=INR82.5).

Particulars 2012 2013 2014 2015Discount rate 1.40% - 5.00% 3.75% - 4.70% 3.25% - 4.50% 1.50% - 3.80%Future salary increases 2.50% - 3.00% 2.50% - 6.50% 2.50% - 5.00% 2.50% - 5.00%Inflation rate 2.00% 2.00% - 2.20% 1.75% - 2.20% 1.75% - 1.90%Future pension increases 2.00% 2.00% - 2.20% 1.75% - 2.20% 1.75% - 1.90%Expected return on plan assets 4.50% - 5.60% 4.50% - 5.50% 3.75% - 4.70% 3.75% - 4.50%

Particulars Standalone Subsidiary/JV (derived) Consolidated

Profit before tax 5,951.0 6,462.5 (10.1) (772.8) 5,940.9 5,689.7 Non-operating expense 601.2 841.6 527.3 (566.9) 1,128.5 274.7 Non-cash adjustments 15.6 (193.8) 1,248.9 1,765.3 1,264.5 1,571.5 Foreign currency translation reserve

- - (36.3) (146.8) (36.3) (146.8)

Direct taxes paid (1,117.6) (1,504.7) (217.9) (410.3) (1,335.5) (1,915.0)Cash profit after tax 5,450.2 5,605.6 1,511.9 (131.5) 6,962.1 5,474.1 (Increase)/Decrease in trade and other receivables

(86.4) 48.8 (1,459.5) 3,636.9 (1,545.9) 3,685.7

(Increase)/Decrease in inventories (196.8) (70.1) (1,554.0) 1,341.6 (1,750.8) 1,271.5

(Increase)/Decrease in loans, advance and other assets

(62.4) (153.0) (98.7) 349.3 (161.1) 196.3

Increase/(Decrease) in trade payables

432.9 (551.5) 2,237.2 (1,010.4) 2,670.1 (1,561.9)

Increase/(Decrease) in other l iabilities and provisions

987.8 1,124.6 1,518.9 (564.7) 2,506.7 559.9

Increase in working capital 1,075.1 398.8 643.9 3,752.7 1,719.0 4,151.5 Net cash from operating activities 6,525.3 6,004.4 2,155.8 3,621.2 8,681.1 9,625.6 Adj: Bil ls discounted (304.3) (932.7) - (1,764.1) (304.3) (2,696.8)Adj: Acceptances (226.5) (31.8) (1,553.9) (58.5) (1,780.4) (90.3)Adj net cash from operating activities

5,994.5 5,039.9 2,155.8 1,798.6 6,596.4 6,838.5

Interest expenses paid (82.8) (170.9) (440.7) (435.7) (523.5) (606.6)Adj net cash from operating activities post interest

5,911.7 4,869.0 1,715.1 1,362.9 6,072.9 6,231.9

Capex (900.9) (1,674.7) (832.0) (48.8) (1,732.9) (1,723.5)Adj free cash flow 5,010.8 3,194.3 883.1 1,314.1 4,340.0 4,508.4

FY15 FY14 FY15FY14FY14 FY15





• Trade receivables factoring charges stood as INR256mn (FY14: INR237mn) and

INR319mn (FY14: INR283mn) for standalone and consolidated entities, respectively, for FY15.

Table 9: Sylvania core working capital (Euro mn)


Note: In the absence of information, no adjustment for acceptances have been made in the

above table

FY12 FY13 FY14 FY15 FY12 FY13 FY14 FY15Inventory days 83 84 79 73 117 112 105 102 Add: Trade Receivable days 13 12 10 9 45 42 40 33 Less: Trade Payable days (72) (60) (50) (45) (90) (83) (80) (81) Less: Advance from customer days (4) (4) (2) (1) (2) (2) (1) (0) Add: Advance to supplier days 2 2 1 1 4 5 5 4 Cash conversion cycle 23 34 38 37 74 74 69 58 Add: Acceptance days 24 13 1 3 25 17 9 15 Add: Bi l ls discounted days 43 48 49 49 24 29 29 34 Adjusted Cash conversion cycle 90 94 89 89 124 119 107 108 Adjusted working capital as % to revenues 24.8 22.7 21.7 22.4 31.0 26.1 26.4 24.4

ParticularsStandalone Consolidated

Particulars FY12 FY13 FY14 FY15Trade Receivables 106.7 107.1 106.4 75.3 Inventory 106.2 92.6 98.6 100.6 Trade payables (75.5) (76.9) (95.1) (101.5) Add: Non recourse receivable financing

- - - 26

Working capital 137.4 122.8 109.9 100.4Working capital as % to revenues 30.7 27.9 25.0 22.7

Sylvania’s receivable days (reported) declined from 89 in FY13 and FY14 to 75 in FY15 primarily due to non recourse receivable financing availed by the company As at March 2015, Sylvania availed receivable financing of INR1.75bn (EUR26mn) which led to decrease in reported receivables Sylvania reported YoY improvement in working capital led by increase in trade payable days


Havells India

Related party transactions Table 10: Related party transactions (INR mn)


Table 11: Contingent liabilities analysis (INR mn)


Particulars FY12 FY13 FY14 FY15QRG Enterprise LtdRent/ usage charges paid 193.4 193.4 193.4 193.4 Trademark fees and royalty 379.2 422.5 405.6 400.0 Purchase of traded goods 2.6 - - - Purchase of stores & spares 0.1 - - Purchase of tangible fixed estates 0.1 0.3 0.2 - Guptajee & Co.Commission on sales 56.4 65.9 68.9 76.4 QRG FoundationDonation paid 60.0 45.0 25.0 - CSR Contribution 55.0 Appleby Trust (Isle of Man) LimitedLegal & professional charges 1.0 2.1 - - The Vivekananda AsharmaCSR Contribution - - - 2.5 Donation paid - - 1.1 - Managerial remuneration 98.8 116.2 157.4 247.8 Total 791.5 845.5 851.6 975.1 % of PBT 16.6% 12.7% 14.3% 17.1%

Standalone ConsolidatedFY13 FY14 FY15 FY13 FY14 FY15

Liabil ity towards banks against receivable buyout facil ities

638 868 1,063 638 868 1,063

Disputed tax l iabil ities 460 705 1,008 460 705 1,008 Corporate Guarantees given on behalf of subsidiary companies

2,917 1,431 - - - -

Bank guarantees and Letter of Credits

1,148 1,228 1,035 1,300 1,491 1,082

Others 526 528 217 679 611 217 Total 5,690 4,761 3,322 3,077 3,675 3,369 Net Worth 18,702 21,299 23,758 14,420 16,660 18,182% of net worth 30.4 22.4 14.0 21.3 22.1 18.5

Particulars

Disputed tax liabilities jumped from INR705mn in FY14 to INR1,008mn in FY15 As at March 2015, Havells has not provided any corporate guarantees for Sylvania

Managerial remuneration increased 57% to INR248mn (6.5% of PAT). Havells had announced that the Havells brand will be transferred to the company in April 2016 for nil consideration



Table 12: Summary financials (Consolidated) (INR mn)


FY11 FY12 FY13 FY14 FY15Sales 56,126 65,182 72,479 81,858 85,694 Total income 56,364 65,596 72,813 82,271 86,199 EBITDA 5,570 6,573 6,689 7,425 7,211 Gross margin (%) 43.1 44.2 42.6 43.3 43.6 EBITDA margin (%) 9.9 10.1 9.2 9.1 8.4 RoE (%) 58.0 46.0 34.3 28.7 22.12 RoCE (%) 30.9 32.2 26.9 26.0 25.5 Depreciation 804 949 1,097 1,155 1,387 Financial costs 902 1,281 1,232 741 640 Net profit 3,036 3,699 5,814 4,463 3,854 Equity shareholders' funds 6,537 9,556 14,420 16,660 18,182 Loan funds 11,173 10,271 9,815 10,535 4,239 Net fixed assets (Excl CWIP) 9,955 10,284 11,306 11,624 11,829 CWIP 249 663 249 444 383 Goodwill on consolidation 3,354 3,625 3,694 4,380 3,581 Cash and cash equivalent 1,779 2,336 4,736 8,819 9,525 Net Debt 9,395 7,934 5,079 1,716 (5,286) Current assets loans and advances 19,906 24,379 23,984 27,251 21,837 Current l iabil ities and provisions 14,596 18,894 16,452 21,427 20,919 Net current assets 5,310 5,486 7,533 5,824 918 Cash flow from operating activities 2,530 4,519 6,377 8,681 9,626 Cash flow from investing activities (1,762) (1,053) (1,433) (3,762) (4,864) Cash flow from financing activities (654) (2,470) (2,521) (3,097) (7,538) Net cash flows 114 996 2,423 1,822 (2,776) CAPEX 1,886 1,716 1,750 1,764 1,739 Working capital investments 1,998 1,234 1,419 (1,719) (4,152)


IRB Infrastructure’s (IRB) FY15 annual report analysis highlights ~21% decline in construction revenue to INR20bn (FY14: INR25.5bn) primarily due to shifting of construction activities on certain projects to FY16. Unrealised gains on construction activities (captive projects) fell to INR6.0bn versus INR9.4bn in FY14. Construction margin of 33% (INR31bn) recognised on captive projects during FY12-15 is the highest amongst peers. Toll revenue jumped INR6.6bn to INR18.4bn following traffic growth, toll rate revision and change in accounting policy with respect to fixed premium payable to NHAI. Had there been no change in accounting policy, toll revenue (including EBITDA) and PBT would have been lower by INR3bn and INR1.7bn, respectively. Unhedged foreign exchange exposure stood at ~USD177mn (FY14: USD181mn). Exchange difference capitalised to intangibles under development stood at INR431mn (FY14: INR915.7mn). Key highlights

IRB has changed its accounting policy with respect to annual fixed premium payable to NHAI for BOT projects. Till FY14, such annual premiums on operational projects were reduced from toll collections in income statement. During FY15, entire outstanding premium liability (~INR218bn) has been capitalised in fixed asset, which will be amortised over the life of the project based on traffic projections.

The company’s construction margin on captive EPC contracts stood at 30% (FY12-15 average: 33%) vis-à-vis peers’ 10-14% (FY12-15 average: 10-14%). While IRB reported superior construction margin, return ratios of most SPVs remained subdued (RoCE < 10%). During the year, the company received NHAI approval for premium deferral on 2 road projects. Deferred premium obligation on these projects stood at INR3.3bn on which interest is payable at bank rate+2%. Aryan Infra Investment (AIIPL) (IRB holds 66% stake), which is engaged in real estate development, had extended INR2bn mobilisation advance to Aryan Construction (a proprietary concern of promoter) in 2007 and 2008. This advance continues to remain outstanding as at FY15 end. Guarantees given by IRB (standalone) on behalf of subsidiaries stood at ~INR112bn (~5.2x standalone net worth; FY14:~INR92bn).

52-week range (INR) : 289 / 197




Promoters* : 57.8


FIIs : 27.4

Others : 6.3



Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited


IRB Infrastructure| Annual Report Analysis


Market Data


October 20, 2015



Other highlights • Donations to political parties stood at INR234mn (~4.5% of PBT; FY14: INR46mn).

• IRB’s commitment to invest in SPV as sponsor’s contribution (share capital and subordinated debt) increased to INR26.7bn (FY14: INR21bn), led by award of new BOT projects. During FY15, the company made equity investment of INR2.9bn and advanced subordinate debt of INR8.8bn to its various SPVs (subsidiaries).

Advances outstanding from related party During FY07, AIIPL (IRB holds 66% stake and Aryan construction hold 34%) had awarded a contract of INR INR22.6bn to Aryan constructions to provide various construction related services. Subsequently, AIIPL has extended INR2bn mobilisation advance to Aryan Construction (a proprietary concern of promoter) in 2007 and 2008. This advance continues to remain outstanding as at FY15 end. Aryan Construction has agreed with AIIPL to execute the work awarded to it by March 31, 2017. In case of default on Aryan Construction’s part to substantially complete work by the stipulated time, the contract will be terminated and outstanding advance, if any, will be returned to AIIPL. In case of Aryan Construction’s inability to return the outstanding advance, AIIPL is entitled to sell the former’s stake in AIIPL to recover the outstanding advance. Aryan Construction has pledged its shares with the group as security.

Management discussion and analysis: Key highlights As part of inorganic growth strategy, IRB has been evaluating various BOT projects in secondary markets. However, due to substantial gap between expectations of the seller and potential buyer of projects, there were no acquisitions last year. The Government of Maharashtra directed the company to stop toll collections on Mohol – Mandrup – Kamtee BOT project and Nagar – Karmala – Tembhurni BOT project with effect from May 31, 2015. Further, IRB was also directed to exempt cars and MSRTC buses from paying toll on the Thane – Ghodbunder BOT project. The Company has lodged claims with the Government of Maharashtra for compensation for these projects. The company intends to sell/transfer its shareholding in SPVs to Infrastructure Investment Trusts to enable generation of funds to meet future growth needs.


IRB Infrastructure Developers

Profitability and cash flow analysis Table 1: Reported versus adjusted revenue and profitability (INR bn)

#Adjustment for change in accounting policy for fixed premium payments to NHAI.

Revenue from sale of electricity is not considered in above table


IRB has changed its accounting policy for fixed premium payable to NHAI for BOT projects. Till FY14, such annual premiums were reduced from toll collections (and thereby impact the EBITDA), but from FY15 entire outstanding premium liability has been capitalised in fixed asset, which will be amortised over the life of the project. IRB (standalone) and its EPC arm (Modern Road Makers) recognise revenues and profits on construction activities undertaken for subsidiary companies (road SPVs). These profits are not eliminated in the consolidated financials and remain included in cost of assets.

Table 2: Revenue and profitability on captive construction projects (INR bn)

L&T margins are on intra group transaction at PBT level

Sadbhav Engineering margins are on intra group transactions

Ashoka Buildcon and PNC infra margins are on construction contracts (as per

segment reporting)


While IRB discloses construction and BOT business as one reportable segment, its peers disclose the same as 2 separate reportable segments in segment information presented in annual reports.

Particulars FY11 FY12 FY 13 FY14 FY15Construction- Revenues (a) 16.0 21.7 26.3 25.5 20.0Toll- Revenues 8.2 9.5 10.5 11.8 18.4Adjustments for accounting change # - - - - (3.0) Adjusted Toll- Revenues (b) 8.2 9.5 10.5 11.8 15.4Adjusted revenues (a+b) 24.2 31.2 36.8 37.2 35.4Reported EBITDA 10.9 13.7 16.3 17.5 22.1 Adjustments for accounting change # - - - - (3.0) Adjusted EBITDA 10.9 13.7 16.3 17.5 19.1 Reported PBT 5.8 6.5 7.1 6.4 6.9Adjustments for accounting change # - - - - (1.7) Adjusted PBT 5.8 6.5 7.1 6.4 5.2 Revenue growth 28.8 17.8 1.3 (4.9) Adjusted EBITDA % 44.9 43.9 44.4 47.1 54.0 Adjusted PBT % 23.8 20.9 19.2 17.2 14.5

Particulars IRB Sadbhav Engineering Ashoka Buildcon PNC Infra Larsen & ToubroFY12 FY13 FY14 FY15 FY12 FY13 FY14 FY15 FY12 FY13 FY14 FY15 FY14 FY15 FY12 FY13 FY14 FY15

Revenue 21.6 26.3 25.5 20.0 18.1 7.7 6.5 14.2 11.4 14.9 14.1 17.6 12.1 16.0 19.9 30.6 37.2 26.6 Profit 6.8 8.8 9.4 6.0 2.3 1.0 1.2 2.0 1.4 1.8 2.0 2.3 1.1 1.6 2.9 3.6 5.9 3.2 Profit (%) 31.4 33.5 36.8 29.9 12.9 13.2 18.5 14.2 11.9 12.3 14.0 13.3 9.1 10.1 14.4 11.8 15.7 12.2

Had IRB continued to follow the earlier accounting policy, toll revenue would have been lower by INR3bn and PBT would have been lower by INR1.7bn Revenue/ profitability on construction activities are booked partially in the standalone entity and the balance in Modern Road Makers IRB’s average construction margin during FY12-15 on inter group contracts stood at 33% vis-à-vis 10-14% for peers



Table 3: Construction margins (INR bn)

Note: Employee and other expenses of INR 307mn (FY14:INR403mn) in IRB (standalone) are not

considered for EBITDA and EBIT computation as these expenses are primarily corporate overheads


Our computation indicates that IRB (standalone) and Modern Road Makers recognised EBIT margins of ~29% (FY12-15: 27%) on captive EPC computation.

Table 4: Profitability of key road SPVs (INR mn)

# FY14 and FY15 numbers are not fully comparable due to change in accounting policy for fixed

premium payments to NHAI.

RoCE is computed on closing capital employed

Source: Company annual report, Edelweiss research Table 5: Proforma P&L—Adjusted for NHAI premium (INR mn)

Note: We have considered 5% p.a. increase in NHAI premium during FY15

FY15 numbers are adjusted to make it comparable with FY14 numbers


FY12 FY13 FY14 FY15 FY12 FY13 FY14 FY15Revenue 19.8 23.9 23.0 18.5 12.5 20.3 22.1 19.6 EBITDA 3.9 5.2 4.9 4.1 1.8 2.5 2.7 2.3 EBIT 3.3 4.6 4.5 3.6 1.8 2.5 2.7 2.3 EBITDA (%) 19.7 21.7 21.4 22.3 14.2 12.4 12.1 11.8 EBIT(%) 16.8 19.5 19.6 19.2 14.2 12.4 12.1 11.8

ParticularsModern road makers IRB Infra (standalone)

Commissioning date FY14 FY15 FY14 FY15 FY14 FY15 FY14 FY15 FY14 FY15

Mumbai-Pune BOT Prior to FY11 13,332 14,698 4,377 5,673 3,773 5,034 1,969 3,049 21.4 26.5 Surat Dahisar BOT Prior to FY11 19,096 17,342 2,961 3,204 2,648 2,530 (503) (702) 4.4 3.0 Tumkur Chitradura BOT # FY12 12,155 12,347 93 1,843 23 1,666 (709) (61) 0.6 6.4 Bharuch Surat BOT Prior to FY11 12,039 11,075 1,681 1,863 1,484 1,509 108 83 5.4 5.3 Thane Bhiwandi Bypass BOT Prior to FY11 5,461 5,464 1,521 1,646 553 640 364 418 11.6 12.2 Thane Ghodbunder BOT Prior to FY11 2,047 1,887 344 396 277 325 (63) 7 5.0 10.1 Recently commissionedAhmedabad Vadodara BOT # FY13 27,297 43,147 198 1,848 (86) 1,452 (86) 758 n.a. 2.2 Jaipur Deoli BOT FY14 15,056 15,036 363 1,027 319 872 (73) (130) 2.0 5.0 Talegaon-Amravati BOT FY14 6,827 6,530 331 480 251 359 11 (148) 3.6 4.3

ParticularsCapital employed Revenue EBITDA PAT RoCE (%)

FY14 FY15 FY14 FY15Toll revenues (Reported) 82 1,842 16 1,566 Adjustment for premium deferment (a) - (1,625) - (1,263) Toll revenues (Adjusted) 82 216 16 303

Reported EBITDA 23 1,666 (86) 1,452 Adjustment for premium deferment - (1,625) - (1,263) Adjusted EBITDA 23 41 (86) 189

Reported Depreciation 1 911 0 484 Depreciation on premium capitalised(b) - (774) - (473) Adjusted Depreciation 1 137 0 11 Impact of policy change on PBT (a-b) - (851) - (790)

Tumkur -Chitradura Ahmedabad - VadodaraParticulars

All of the company’s operational road projects (SPVs) (ex Mumbai-Pune and Thane-Bhiwandi) have RoCE of less than 10% PBT of Tumkur-Chitradura and Ahemdabad-Vadodara BOT project is higher by INR851mn and INR790mn respectively due to change in accounting policy for fixed premium

While IRB recognises superior construction margins, return ratios of most SPVs remained subdued (RoCE < 10%) High construction margins led to higher upfront tax outflow in the EPC arm


IRB Infrastructure Developers

During FY14, revenue, profitability and cash flows of above projects were adversely impacted as NHAI’s annual fixed premium obligation was charged to profit & loss and the company was required to pay the premium on yearly basis. Since FY15, the company stopped charging annual NHAI premium liability in profit & loss and instead capitalised entire outstanding premium liability (~INR218bn) in fixed asset, which will be amortised over the life of the project. Further, the company also received NHAI approval for deferment of premium obligation. Payment of NHAI premium is limited to availability of free cash flows (after interest) and balance premium amount is deferred. Premium deferment for FY15 stood at INR3.2bn.

Table 6: Cumulative cash generation and utilisation (FY11-15) (INR bn)


Cash profit after working capital changes declined to INR6.1bn (FY14: INR6.9bn) owing to higher

investment in working capital.

~16% of cash profits generated during FY11-15 was declared as dividend. Table 7: Borrowings analysis (INR bn)

Source: Company annual report, Edelweiss research In addition to above borrowings, IRB is also required to pay interest on deferred component of NHAI premium liability, which stood at INR3.2bn as at March 2015.

Sources FY11 FY12 FY13 FY14 FY15 Total Application FY11 FY12 FY13 FY14 FY15 TotalOperating profit 10.9 13.5 16.4 17.5 22.2 80.4 Capex (mainly toll collection rights) 17.5 24.2 24.8 26.5 23.1 116.1 Less: Interest 3.3 5.6 6.2 10.9 13.2 39.1 Net cash and investments 7.0 5.8 (3.1) (0.2) 1.0 10.5 Less: Taxes 1.5 1.6 2.4 2.3 2.2 10.0 Dividend Paid (inc taxes) 0.8 1.3 1.2 1.9 0.8 6.0 Add: Investment Income 0.4 1.2 1.4 1.2 1.1 5.2 Others (0.1) (0.1) 1.1 0.7 0.0 1.6 Cash Profits 6.6 7.5 9.1 5.5 7.9 36.6 Working capital changes 1.3 (0.8) 0.5 1.4 (1.8) 0.7 Cash Profits after working capital 7.9 6.7 9.6 6.9 6.1 37.2 Net Borrowings 17.3 24.5 14.4 22.1 14.5 92.7 Equity share issue - - - - 4.2 4.2 Total 25.2 31.2 24.0 29.0 24.8 134.1 Total 25.2 31.2 24.0 29.0 24.8 134.1

Particulars FY12 FY13 FY14 FY15Long term borrowingsProject specific loan of SPV

Foreign currency loans 6.7 8.0 10.4 10.8 Indian rupee loan 42.6 57.6 71.7 86.2

General purpose borrowings 2.5 8.5 19.0 19.4 Equipment finance 1.1 1.0 0.7 2.9

52.8 75.0 101.9 119.3 Short term borrowings 17.9 12.7 9.0 6.3 Gross borrowings 70.7 87.8 110.8 125.6 Cash and liquid investments (18.3) (15.3) (15.1) (16.1) Net borrowings 52.4 72.4 95.7 109.4 D/E ratio 1.8 2.2 2.7 2.5

Project loans at SPV level account for ~77% of overall borrowings (gross) Debt equity ratio declined marginally to 2.5x led by equity infusion of INR4.4bn




Source: Company’s annual report, Edelweiss research

Particulars FY11 FY12 FY13 FY14 FY15Sales 24,381 31,330 36,872 37,319 38,475 Total income 25,026 32,582 38,220 38,533 39,605 EBITDA 10,883 13,694 16,333 17,537 22,117 EBITDA margin (%) 44.6 43.7 44.3 47.0 57.5 RoE (%) 20.23 18.76 18.22 13.47 13.71RoCE (%) 15.44 14.10 12.08 10.48 10.24Depreciation 2,254 2,970 4,415 4,771 7,071 Financial costs 3,515 5,464 6,200 7,562 9,312 Net profit 4,524 4,960 5,567 4,591 5,429 Equity shareholders' funds 24,326 28,566 32,547 35,607 43,609 Loan funds 46,242 70,722 87,761 1,10,841 1,25,762 Net fixed assets (Excluding CWIP) 33,622 55,542 55,088 85,544 3,17,638 CWIP 25,074 24,452 49,160 44,867 48,353 Current assets loans and advances 6,325 6,640 8,042 8,466 7,906 Current l iabil ities and provisions 5,402 3,716 5,885 6,923 7,614 Net current assets 922 2,923 2,156 1,543 293 Cash and l iquid investments 12,537 18,334 15,317 15,143 16,133 Cash flow from operating activities 10,689 11,103 14,453 16,555 18,235 Cash flow from investing activities (23,728) (26,729) (22,473) (23,945) (22,955) Cash flow from financing activities 13,411 17,579 6,994 9,254 4,735 Net cash flows 372 1,953 (1,026) 1,864 16 CAPEX 17,550 24,201 24,766 27,187 23,076 Working capital investments (1,222) 779 (519) (1,389) 1,766


Larsen & Toubro’s (L&T) FY15 annual report highlights marginal increase in standalone revenue, decline in EBITDA margin and higher working capital leading to dip in adjusted RoCE to 25.3% (FY14: 28%, FY13: 30.3%). Standalone core working capital jumped to 20% of sales (FY14: ~18%, FY13: 13.5%) primarily due to steep rise in unbilled revenue, partially offset by higher trade payables and customer advances. Though standalone capital employed constituted ~31% of overall capital employed*, it contributed 76% to consolidated EBIT*. While L&T Infotech & Technology Services reported robust profitability, the company’s operating subsidiaries continued to report subdued profits/losses and dragged consolidated return ratios (adjusted RoCE (ex CWIP): FY15: 11.4%, FY14: 15.6%). While these subsidiaries accounted for ~31% of capital employed (INR270bn), they did not contribute anything to consolidated EBIT in FY15. L&T follows fair value/BOT accounting wherein unrealised profits recognised from inter-group projects do not get eliminated. Aggregate revenues that accrued to L&T from these projects during FY15 and cumulatively over FY11-15 stood at INR 33bn and INR198bn, respectively.

*ex L&T finance

Key highlights Unbilled revenue (standalone) rose to INR183bn (FY14: INR152bn), representing ~37% (FY14:32%) of revenue from construction and project related activity. Trade receivables stood at INR231bn (40% of revenue; FY14: INR215bn, 38%) and included overdue receivables (>6 months) of INR28bn (FY14: INR24.3bn) and receivables not contractually due of INR151bn (FY14:~INR148bn). L&T’s operating subsidiaries in power, roads, hydrocarbons, ship building, forging and boiler & turbines etc., accounted for ~31% of capital employed (INR270bn), but contributed nil to consolidated EBIT in FY15. Ship building, forging and turbine generator subsidiaries required continued financial support from L&T—capital infusion during FY14 and FY15 stood at INR12bn. L&T’s (consolidated) profit includes unrealised profit (PBT) of INR3.2bn (12% margin) (FY11-15: INR17bn, 13% margin) from road and Hyderabad Metro construction, undertaken for its subsidiaries. Similarly, the company also recognises profits from construction activities undertaken for Nabha Power, details of which are not disclosed separately. These unrealised profits form part of asset cost and have been charged as depreciation over life of the asset.



Larsen & Toubro | Annual Report Analysis


52-week range (INR) : 1,892 / 1,400


M cap (INR bn/USD mn) : 1,433 / 21,730


Promoters* : 0.0


FIIs : 16.2

Others : 44.3



Market Data


September 21, 2015



Standalone Standalone revenue rose marginally to ~INR570bn (FY14: INR566bn). Higher revenue from the infrastructure segment was offset by decline in revenue in other segments, viz., power, metallurgical & material handling and heavy engineering. Further, margins fell across all segments (ex electrical and automation). Contingent liabilities catapulted 140% to INR19.4bn (FY14: INR8.1bn) following higher claims and income tax liabilities. Corporate guarantees for subsidiary debt and performance bank guarantees given on behalf of subsidiaries jumped 131% and 64% to INR87bn (~23% of net worth) and INR92bn (~25% of net worth), respectively.

Consolidated capital allocation Table 1: Capital allocation analysis (INR bn)

# RoCE is computed based on year end capital employed

*Road projects which are operational for more than a year are considered

@Company recognised construction cost of plant & machinery as financial lease and thus no

depreciation is charged to income statement. Revenue and profitability of power generation

business is considered.

^ Profit from continuing operations are considered

L&T Finance EBIT is after considering interest expense


Capital employed Revenue PAT EBIT RoCEFY14 FY15 % FY14 FY15 FY14 FY15 FY14 FY15 FY14 FY15

L&T Limited (Standalone- adjusted) 249.8 272.8 31.5 566.0 570.2 54.9 50.6 66.9 66.2 26.8 24.2 Nabha Power @ 82.9 102.8 11.9 N.A. 25.7 N.A. 2.0 N.A. 8.2 N.A. 8.0 Road Projects (operational) * 76.3 71.1 8.2 8.6 9.8 (2.9) (4.8) 4.3 3.4 5.7 4.8 L&T Shipbuilding 34.3 38.1 4.4 5.5 5.9 (6.5) (6.7) (3.7) (3.7) N.A. N.A.Special Steels And Heavy Forgings 15.3 15.4 1.8 0.6 1.0 (3.3) (2.8) (2.1) (1.3) N.A. N.A.Hydrocarbon engineering 25.5 19.0 2.2 87.4 57.5 1.1 (6.5) 2.0 (9.0) 8.0 N.A.L&T Infotech ^ 15.8 21.4 2.5 42.8 47.4 6.0 7.7 N.A. 9.5 N.A. 44.5 L&T Technology services 5.3 12.1 1.4 1.3 25.6 0.1 3.2 0.1 3.8 N.A. 31.5 L&T-MHPS Turbine Generators 14.4 13.9 1.6 8.0 6.1 (0.9) (1.3) 0.6 0.1 4.1 0.7 L&T-MHPS Boilers 10.1 10.1 1.2 12.5 12.3 1.0 1.2 2.2 2.4 21.8 24.0 Projects under developmentHyderabad Metro 37.2 65.1 7.5 0.0 0.1 (0.0) (0.1) N.A. N.A. N.A. N.A.Seawoods 27.2 30.4 3.5 0.1 1.1 0.1 (0.0) N.A. N.A. N.A. N.A.L&T BPP Tollway Limited 16.2 24.0 2.8 - 0.0 (0.0) (0.0) N.A. N.A. N.A. N.A.Others (derived) 175.0 169.5 19.6 67.8 95.3 N.A. N.A. N.A. N.A. N.A. N.A.Consolidated (Ex L&T Finance) 785.2 865.7 800.7 858.1 42.7 40.8 94.4 86.9 12.0 10.0 L&T Finance 426.8 499.3 50.6 62.0 6.0 8.5 8.3 10.3 N.A. N.A.Consolidated (Inc Minority interest) 1,212 1,365 851 920 48.6 49.4 103 97 N.A. N.A.

Particulars

Capital employed in L&T(standalone) and L&T Infotech (inc technology services) constituted ~35% of total capital employed, but contributed ~92% to consolidated EBIT


Larsen & Toubro

Chart 1: Consolidated capital employed and EBIT (Ex L&T finance)


Development projects Nabha Power’s construction (fixed asset) cost stood at ~INR92bn (~INR65mn/MW) and its RoCE stood lower at ~8%. The company’s core working capital stood at ~INR7.5bn, representing working capital cycle of ~105 days. Revenue of the company’s 10 operational road projects (comparable) increased by 14% in FY15. EBITDA margin grew to 68% (FY14: 60%). However, owing to high interest cost and depreciation, losses stood at INR4.8bn (FY14: INR2.9bn). RoCE of operational road projects stood at meagre 4.8% (FY14: 5.7%). In FY15, only 2 road projects (of 10) clocked RoCE in excess of 10%.

Table 2: Operational road projects profitability and RoCE analysis (INR mn)

# RoCE is computed based on year end capital employed

*Road projects which are operational for more than a year are considered for RoCE computation

@Companies having negative net worth


L&T(Standalone)31%

L&T Infotech

(inc Technology

services)4%

Operational subsidiaries

31%

Subsidiaries (Projects

under developme

nt)14%

Others (derived)

20%

Capital employed

RoCEFY14 FY15 FY14 FY15 FY14 FY15 FY14 FY15 FY14 FY15 FY14 FY15

L&T Transportation Infrastructure 2,350 2,304 243 248 137 151 555 267 246 112 23.6 11.6 L&T Panipat Elevated Corridor @ 1,444 1,052 519 580 247 437 (186) (0.5) (466) (268) N.A. N.A.L&T Krishnagiri Thopur Toll Road @ 3,243 3,081 1,060 1,291 636 772 139 280 (267) (106) 4.3 9.1 L&T Western Andhra Tollways @ 2,564 2,319 504 561 100 324 (87) 141 (358) (125) N.A. 6.1 L&T Interstate Road Corridor 5,012 4,941 864 864 570 546 249 176 8 (44) 5.0 3.6 L&T Vadodara Bharuch Tollway @ 8,618 7,727 2,489 2,775 1,609 2,353 468 1,206 (850) 1 5.4 15.6 L&T Rajkot Vadinar Tollway @ 9,840 9,301 693 857 444 517 894 353 (125) (712) 9.1 3.8 L&T Halol Shamlaji Tollway @ 12,397 11,502 770 688 472 306 963 154 (269) (1,157) 7.8 1.3 L&T Ahmedabad Maliya Tollway @ 14,778 13,480 1,132 1,193 798 785 1,001 476 (453) (991) 6.8 3.5 PNG Tollway @ 16,003 15,442 371 786 200 506 336 328 (324) (1,536) 2.1 2.1 Overall 76,250 71,149 8,644 9,845 5,213 6,697 4,331 3,380 (2,857) (4,826) 5.7 4.8

EBIT PATParticulars

Capital employed Revenue EBITDA

Losses of operational road projects stood at INR4.8bn (FY14: INR2.9bn)

L&T(Standalone)

76%

L&T Infotech

(inc Technology services)

16%

Others (derived)

8%

EBIT



L&T recognises obligation towards additional concessional fees payable to NHAI as deferred payment liability on commencement of commercial operations of the project. Deferred payment liability on operational projects stood at ~INR30bn in FY15 (FY14: INR30.6bn). L&T BPP Tollway and L&T Deccan Tollways (SPV for the under constructed road projects) are required to pay additional concession fees of ~INR81bn and ~INR33bn, respectively, to NHAI over the concession period. These liabilities are showed under commitments (off balance sheet items) during construction phase and will be recognised as liability on commencement of commercial operations. L&T Infrastructure Development Projects’ (IDPL) consolidated revenue and profits (PBT) increased to ~INR30.9bn (FY14:INR12.8bn) and INR5.4bn (FY14:INR2bn), respectively, led by profit from Dhamra port sale of ~INR12.7bn. In FY14, the company changed its accounting policy on amortization of toll rights. Consequently, there was reversal of accumulated amortisation of toll collection rights (till April 2013) of INR6.6bn and toll collection rights amortisation for FY14 was lower by INR2.9bn. Pursuant to this change, consolidated PAT was higher by INR9.5bn.

Ship building L&T Shipbuilding’s losses stood at INR6.7bn (FY14: INR6.5bn). Operating cash flows (post interest) stood at INR(6.2)bn (FY14: INR(7.2)bn). Management stated losses were primarily due to time and cost overruns and under recovery of overheads due to low capacity utilisation. However, the company’s business prospects may improve going forward led by government’s Make in India push and higher port traffic post receipt of approvals. L&T infused INR4.2bn in L&T Shipbuilding during FY15, taking cumulative investments to ~INR17.7bn. It also extended corporate guarantee of INR28.8bn with respect to borrowings in the ship building business.

Heavy forging L&T Special Steel and Heavy Forging incurred loss of INR2.8bn (FY14: INR3.3bn loss). Operating cash flows (post interest) stood at INR(1.8)bn (FY14: INR(1.8)bn). L&T infused INR2.8bn (FY14: INR2.1bn) during FY15, taking cumulative investments to ~INR10bn. Management stated that the company faced fierce competition from global players owing to excess global capacity and low demand. However, with commencement of project awards in the nuclear power sector, management expects improvement in business prospects in the medium term.

Hydrocarbon L&T Hydrocarbon Engineering reported ~34% decline in revenue to INR57bn, led primarily by ~56% fall in overseas revenues. The company incurred loss of INR8bn at the EBITDA level against gain of ~INR3bn in FY14. Further, the company also recognised deferred tax asset of INR3.5bn on losses and accumulated depreciation.

L&T Shipbuilding’s losses stood at INR6.7bn. Operating cash flows (post interest) stood at INR(6.2)bn L&T infused INR4.2bn in L&T Shipbuilding during FY15, taking cumulative investments to ~INR17.7bn. It also extended corporate guarantee of INR28.8bn L&T Special Steel and Heavy Forging incurred loss of INR2.8bn (FY14: INR3.3bn) L&T Hydrocarbon Engineering reported ~34% decline in revenue to INR57bn leading to loss of INR8bn at EBITDA level


Larsen & Toubro

The company highlighted that the losses were led by low domestic order book and drop in international revenue as most of the existing international projects reached close out stage. Loss incurred during the year was primarily on certain stressed international projects, primarily in GCC countries. The company is in advanced stages of commissioning and close-out of these stressed projects. Table 3: Hydrocarbon segment - Overseas subsidiaries (INRbn)


Financial services business During the year, L&T Infrastructure Finance (L&TIFL) sold NPAs amounting to ~INR3.9bn to ARCs for a consideration of INR1.5bn (mainly security receipts). As permitted by RBI, L&TIFL decided to amortise loss of INR2.4bn over a 2 year period. Unamortised loss on sale of NPAs stood at INR1.8bn as at March 2015. Total security receipt stood at INR2.3bn as at March 2015. L&TIFL’s restructured advances (including o/s amount against other facilities) increased to INR19.5bn (FY14: INR15.9bn), while provisions against these advances increased to INR2.8bn (FY14: INR2bn). Fresh restructuring during the year stood at INR6.5bn. The company’s subsidiaries in general insurance and mutual fund (AMC) reported marginal decline in losses to INR942mn (FY14: INR1,002mn) and INR649mn (FY14: INR700mn), respectively.

Other businesses L&T InfoTech’s EBITDA margin dipped ~280bps to 20% in FY15, primarily due to increase in employee and other administrative costs. Working capital (% to sales) increased to 19.4% in FY15 (FY14: 17%) following 21% increase in receivables and ~35% rise in unbilled revenue. L&T Technology Services’ receivable days stood at ~95 and unbilled revenue days at ~24. Further, core working capital (adjusted for related parties) stood at ~30% of revenue. Capital infusion in L&T Sea Woods during FY15 stood at INR15.3bn, taking cumulative capital infusion to INR30.4bn. In FY15, Sea Woods recognised revenue of mere INR1.1bn (mainly from sale of floor space), of which INR0.8bn remained unbilled. L&T-MHPS Turbine Generator incurred loss of INR1.3bn (FY14: INR0.9bn) owing to high interest cost. RoCE stood at mere 0.7% (FY14: 4%). The company (through its subsidiaries) is executing capital-intensive businesses in metro (Hyderabad Metro) and transit oriented development (Sea Woods), etc. RoCE of these businesses (post commencement of operations) will be key driver of consolidated RoCE going forward.

NetParticulars Worth FY13 FY14 FY15 FY13 FY14 FY15L&T ATCO Saudia LLC (2.0) 1.2 5.4 9.0 0.0 (0.0) (2.0) L&T Electromech LLC (0.8) 5.9 7.9 6.0 0.3 (0.7) (1.8) Modular Fabrication Yard LLC (0.7) 4.8 3.4 0.6 0.2 (0.5) (1.2)

Revenue PAT

Overseas subsidiaries in hydrocarbon segment reported losses and have negative net worth NPA sale to ARC led to loss of INR2.4bn, which will get amortised over 2 years Restructured advances increased to INR19.5bn (FY14: INR15.9bn). Fresh restructuring during FY15 stood at INR6.5bn L&T InfoTech’s EBITDA margin dipped ~280bps to 20% led by increase in employee and other administrative costs



Profitability and cash flow analysis

Table 4: Profitability analysis (INR bn)

Note: FY15 numbers are not fully comparable to FY14 at standalone level as technology services business was demerged from standalone

business from FY15.

• Standalone revenue increased marginally as higher revenue from infrastructure segment was offset by the decline in revenue of other segments, viz., power, metallurgical & material handling and heavy engineering.

Table 5: Segment profitability (Standalone) (INR bn)

Note: Above revenue is inclusive of excise duty


FY14 % FY15 % FY14 % FY15 % FY14 % FY15 % FY14 % FY15 %Sales 566.0 100.0 570.2 100.0 234.7 100.0 287.9 100.0 50.6 100.0 62.0 100.0 851.3 100.0 920.0 100.0 Raw Materials Consumed 433.5 76.6 444.0 77.9 53.8 22.9 67.2 23.3 - - - - 487.4 57.3 511.2 55.6 Operating and Administrative expense

19.2 3.4 19.8 3.5 125.5 53.4 147.9 51.4 40.6 80.3 48.6 78.4 185.3 21.8 216.3 23.5

Personnel cost 46.6 8.2 41.5 7.3 22.0 9.4 34.2 11.9 2.7 5.4 3.5 5.7 71.4 8.4 79.2 8.6 EBITDA 66.7 11.8 64.9 11.4 33.4 14.2 38.6 13.4 7.2 14.3 9.9 15.9 107.3 12.6 113.4 12.3 Depreciation 7.9 1.4 10.1 1.8 5.7 2.4 15.2 5.3 0.8 1.6 1.0 1.5 14.5 1.7 26.2 2.9 EBIT 58.7 10.4 54.8 9.6 27.7 11.8 23.4 8.1 6.4 12.7 8.9 14.4 92.8 10.9 87.1 9.5 Financial Charges 10.8 1.9 14.2 2.5 20.6 8.8 14.3 5.0 - - - - 31.4 3.7 28.5 3.1 Other income 18.8 3.3 22.8 4.0 (10.8) (4.6) (14.2) (4.9) 1.8 3.6 1.4 2.3 9.8 1.2 10.1 1.1 PBT 66.8 11.8 63.4 11.1 (3.8) (1.6) (5.1) (1.8) 8.2 16.3 10.3 16.6 71.3 8.4 68.7 7.5

Subsidiary-Derived (Ex-L&T Finance Holdings)

L&T Finance Holdings ConsolidatedParticulars

Standalone

Particulars FY13 FY14 FY15 FY13 FY14 FY15Segment revenue Revenue composition (%)Infrastructure 288.2 351.2 406.5 55.2 61.4 70.6 Power 80.7 51.4 44.6 15.5 9.0 7.7 Metallurgical & Material Handling 64.3 55.5 33.0 12.3 9.7 5.7 Heavy Engineering 30.0 43.2 33.0 5.8 7.6 5.7 Electrical & Automation 36.4 39.1 41.3 7.0 6.8 7.2 Others 39.2 42.9 28.3 7.5 7.5 4.9 Elimination (17.0) (11.6) (11.1) (3.2) (2.0) (1.9) Total 522.0 571.6 575.6 Segment results Segment margins (%)Infrastructure 28.7 38.8 44.4 9.9 11.0 10.9 Power 5.9 5.2 2.0 7.3 10.1 4.5 Metallurgical & Material Handling 9.7 8.2 2.4 15.1 14.8 7.2 Heavy Engineering 5.1 6.9 3.4 16.9 15.9 10.2 Electrical & Automation 3.6 4.3 5.0 9.8 11.1 12.2 Others 6.3 4.3 6.5 16.0 9.9 23.1 Inter-segment margin (0.2) (0.1) (0.0)

59.0 67.6 63.7 11.3 11.8 11.1 Unallocated income (net) 3.8 10.9 11.8Operating Profit (PBIT) 62.8 78.5 75.5Interest expense (net of income) (4.2) (5.8) (8.5)Profit before tax 58.5 72.7 67.0

Subsidiaries (ex L&T Finance) losses increased to INR5.1bn (FY14: INR3.8bn), led by higher losses in hydrocarbon business Segment margins fell by 70bps owing to steep decline in margins across segments (except infrastructure). Infrastructure segment reported flat margin at ~11% Unallocated income (net) catapulted to ~INR11bn (FY13: INR3.8bn) during FY14


Larsen & Toubro

Table 6: Profitability on captive projects (INR bn)

Note: BOT/DBFOT projects mainly pertain to road projects and Hyderabad Metro. Profits (on

construction activities undertaken by L&T (standalone) for Nabha power and other subsidiaries (if

any) not disclosed in annual report

Source: Company’s Annual Report, Edelweiss research L&T (Standalone) recognise revenues and profits on construction activities undertaken for subsidiary companies mainly road SPVs, Nabha Power and Hyderabad metro. However, these profits are not eliminated in the consolidated financial statements and remain included in cost of assets. Aggregate revenues that accrued to L&T from these companies stood at INR198bn during FY11-15. Table 7: Cash conversion cycle (Standalone)


Advance recoverable in cash or kind (not part of cash conversion cycle presented above) increased from INR42.6bn (7.4% of sales) in FY14 to INR48.4bn in FY15 (8.4% of sales).

Particulars FY11 FY12 FY13 FY14 FY15Revenues on captive projectsBOT/DBFOT projects 16 20 31 37 27 Nabha power 4 21 24 13 7 Profits on captive projects (PBT)BOT/DBFOT projects 1.4 2.9 3.6 5.9 3.2 Nabha power n.a. n.a. n.a. n.a. n.a.Margins on captive projects (%)BOT/DBFOT projects 8.9 14.4 11.8 15.7 12.2 Nabha power n.a. n.a. n.a. n.a. n.a.

Particulars FY12 FY13 FY14 FY15Trade receivable days 107 146 142 143 Unbilled revenue days 78 83 87 108 Advances from customer days (67) (66) (55) (55) Excess bil led revenue days (17) (26) (28) (27) Receivable days (net) 101 138 147 168 Inventory days 15 17 17 17 Trade payable days (127) (148) (140) (145) Acceptance days 1 3 3 1 Cash conversion cycle (11) 10 27 41 Working capital as a % of sales 7.4 13.5 17.9 20.1

L&T follows fair value/BOT accounting (as allowed under IFRS) wherein unrealised profits recognised on inter-group projects do not get eliminated L&T’s (Standalone) revenues from in-house construction projects stood at INR33bn (FY14:INR50bn) Profits from construction of road and Hyderabad metro projects for subsidiary SPVs stood at ~INR17bn (13% margin) during FY11-15. Profits earned on Nabha Power are not disclosed separately Working capital, as % to sales, surged from 13.5% in FY13 to 18% in FY14 and further to 20% in FY15



Table 8: Unbilled revenue analysis (INR bn)

# Revenue from construction and project related activity


Table 9: Unbilled revenue analysis (By subsidiary) (INR bn)


Table 10: Standalone- Cumulative cash generation and utilisation (FY11-15) (INR bn)


Total cash generated from core operations during FY11-15 stood at INR83bn, capex (net) incurred during the period stood at INR59bn. Investment/loans to subsidiaries (net) of INR91bn during FY11-15 were financed from borrowings and internal accruals.

Particulars FY13 FY14 FY15 FY13 FY14 FY15Revenues # 434 479 495 559 616 607 Excess bil led revenues 44 41 40 45 46 45 Unbil led revenues 117 152 183 194 234 227 Unbil led revenues (%) 27 32 37 35 38 37 Excess bil led (%) 10 9 8 8 7 7


Particulars FY13 FY14 FY15Standalone 117 152 183 Nabha power 63 43 4 Hydrocarbon engineering - 21 12 Shipbuilding 1 5 8 Others (derived) 12 13 20

194 234 227

Sources FY11 FY12 FY13 FY14 FY15 Total Application FY11 FY12 FY13 FY14 FY15 TotalOperating profit 61 68 61 72 70 332 Capex 15 16 9 10 9 59 Less: Interest (6) (6) (8) (10) (12) (42) Dividend Paid (net) 7 6 5 4 6 27 Less: Taxes (20) (22) (17) (20) (17) (95) Investment/loans to

subsidiaries (Net)21 20 10 25 15 91

Add: Investment Income 5 7 6 5 6 28 Cash Profits 40 47 42 47 47 223Working capital changes (3) (35) (30) (51) (21) (140)Cash Profits after working capital 37 12 12 (3) 26 83 Change in net debt 2 28 11 40 3 84

Proceeds from share capital 3 2 2 1 1 9 Total 43 42 25 38 30 177 Total 43 42 25 38 30 177

Unbilled revenues at standalone level increased from 27% of revenues (construction and project related) in FY13 to ~37% in FY15 Adjusted for unbilled revenue of Nabha Power, unbilled revenue at consolidated level increased to INR223bn (FY14: INR191bn) led by standalone entity

~63% of cash profits generated during FY11-15 was invested in working capital


Larsen & Toubro

Table 11: Standalone- Adjusted capital employed and RoCE (INR bn)

Note: Above numbers are not fully comparable as hydrocarbon, valves and integrated

engineering business were demerged and transferred to subsidiaries during FY14 and FY15

Source: Company annual report, Edelweiss research Table 12: Investments in key loss-making subsidiaries (INR mn)


Capital infusion in key loss-making subsidiaries during FY15 stood at INR10bn (FY14: INR4bn).

Particulars FY11 FY12 FY13 FY14 FY15Equity shareholders' funds 218 252 291 337 371 Loan funds 72 99 88 115 129 Capital employed 290 351 380 451 500 Investment in subsidiaries/JV etc (72) (89) (105) (151) (176) Loans & advances to subsidiaries/JV etc (48) (51) (47) (50) (51) Adjusted capital employed 170 211 228 250 273 Represented byFixed & intangible assets (Incl CWIP) 74 84 89 82 80 Core working capital 25 69 63 101 113 Other current assets (inc loans ) 26 36 42 45 48 Cash and Current investments 90 86 70 58 69 Non- current loans & advances 9 5 7 7 7 Non-current investments 2 2 0 0 0 Other non-current assets 0 1 1 1 1 Other non-current l iabil ities (5) (8) (10) (8) (8) Other current l iabil ities and provisions (51) (63) (34) (36) (38) Closing capital employed 170 211 228 250 273 Average capital employed n.a. 190 219 239 261 Adjusted EBIT of standalone business 58.0 63.9 66.5 66.9 66.2 Adjusted pre tax RoCE n.a. 33.6 30.3 28.0 25.3

ParticularsCommenc

ement

Year FY13 FY14 FY15 FY13 FY14 FY15Equity

Loans & others

Total

L&T Shipbuilding FY13 3,880 - - - 900 4,210 8,187 9,486 17,673 L&T Special Steels and Heavy Forgings FY13 666 197 - 458 1,902 2,792 4,193 5,640 9,833 L&T General Insurance Company FY12 900 800 1,250 - - - 6,200 - 6,200 L&T MHPS Turbine Generators FY09 462 204 1,683 - - - 3,624 - 3,624 Total 5,908 1,201 2,933 458 2,802 7,002 22,204 15,126 37,330

Equity investmentLoans & advances and

PreferenceAggregate exposure

While adjusted EBIT of standalone business remained in the range of INR64-67bn during FY12-15, higher capital employed resulted in a decline in RoCE from ~34% in FY12 to ~25% in FY15 Increase in capital employed was led by steep increase in core working capital and other current assets



Table 13: Borrowings summary (Standalone) (INR bn)

*Current portion of long term debt of INR 6bn (FY14: INR21bn) is included in long term borrowings


During FY15, the company refinanced USD200mn foreign currency loan through foreign currency convertible bonds (FCCB) of equivalent amount. These bonds carry coupon rate of 0.675% and are convertible into equity shares, at the option of investors (up to October 15, 2019) at the conversion price of INR1,916.5 per share. Details of unhedged borrowings (USD denominated) at standalone level is not available. Further details of borrowings (if any) in foreign currency at consolidated level is also not available. Table 14: Borrowings analysis (consolidated - ex L&T Finance) (INR bn)

#Borrowings of operation projects is considered

Only external borrowings are considered in above table


Particulars FY13 FY14 FY15Long term borrowingsINR Denominated loansRedeemable non-convertible debentures 19.5 15.6 27.1 Foreign curreny denominated loansForeign currency convertible bonds 10.9 12.0 12.5 Term loans from banks 50.6 48.3 51.9

(A) 80.9 75.8 91.4 Short term borrowingsBank borrowings 7.3 30.6 27.5 Others - 8.1 10.4

(B) 7.3 38.8 37.9 Total (A)+(B) 88.3 114.6 129.4

Particulars Mar-14 Mar-15L&T Limited (Standalone) 114.6 129.4 Road projects # 93.5 91.0 Nabha Power 60.1 74.1 L&T Ship building 33.6 35.6 L&T Forging 8.8 14.2 MHPS Turbine Generators 11.4 11.3 MHPS Boilers 6.2 5.1 L&T Hydrocarbon engineering 8.6 5.2 L&T Technology services 0.3 1.6 L&T Infotech 1.1 2.2 Metro Rail (Hyderabad) 25.7 45.4 Other (Derived) 110.5 98.9 Consolidated 474.4 513.9

L&T’s (Standalone) gross debt increased to INR129bn (FY14: INR115bn) Borrowings denominated in foreign currency (including FCCB) constitute ~50% of total borrowings at standalone level

We believe the company has only charged coupon interest on FCCB in the income statement and not effective interest rate (interest rate on similar debt instrument without the conversion option), which is usually higher than the coupon rate, to reflect the true opportunity cost of the financial liability


Larsen & Toubro

Table 15: Contingent liabilities (INR bn)


In addition to above, Contingent liability also includes liabilities in relation to interests in joint

ventures at INR32.5bn (FY14: INR5bn).

Table 16: Capital allocation (consolidated- ex L&T Finance) (INR bn)

Note: FY15 RoCE is adjusted for profit of INR 12.7bn on stake sale in Dhamra port; FY14 RoCE

and depreciation is adjusted for reversal of accumulated amortisation of toll collection rights of

INR 6.6bn due to change in accounting policy.

*excluding cash and current investments


Particulars FY13 FY14 FY15 FY13 FY14 FY15Claims not acknowledged as debts 1.8 1.8 8.8 3.2 3.5 16.0Sales-tax l iabil ity 1.1 1.2 1.7 1.2 1.6 2.2 Excise duty/Service Tax 0.4 0.4 0.6 0.5 2.1 2.3 Income-Tax l iabil ity 3.9 4.6 8.3 5.4 7.6 11.7 Contingent l iabil ities (ex guarantees) 7.2 8.1 19.4 10.3 14.9 32.1 Contingent liabilities (ex guarantees) as % to NW

2.5 2.4 5.2 3.1 4.0 7.8

Corporate guarantees for subsidiary debt 34.9 37.7 87.2 Performance guarantees- subsidiary 9.3 56.3 92.0


Particulars FY11 FY12 FY13 FY14 FY15Sales 499 613 706 801 858 EBITDA 70 81 92 100 104 Other income 20 17 9 8 9 Depreciation 13 15 16 20 25 EBITDA (%) 14.1 13.1 13.0 12.5 12.1 RoCE 21.3 17.8 15.0 12.8 9.3 RoCE (ex CWIP) 28.8 25.3 19.5 15.6 11.4 Net fixed assets (ex CWIP) 151 189 293 312 336 Net current assets * 36 105 168 215 184 CWIP (Incl. Intangibles) 123 149 113 140 154 Total capital employed 403 519 624 755 836 Total capital employed (Ex-CWIP) 279 370 511 614 682

RoCE (ex CWIP) dipped to 11.4% (FY14: 15.6%) due to lower profitability of subsidiaries

Contingent liabilities (ex guarantees) more than doubled to INR19.4bn (FY14: INR8.1bn) and INR32bn (FY14: INR15bn) led by steep increase in claims and disputed income tax liabilities




Note: Numbers presented above are on reported basis.


Particulars FY11 FY12 FY13 FY14 FY15Sales 520.4 643.1 745.0 851.3 920.0 Total income 530.1 651.4 755.5 861.1 930.1 EBITDA 76.8 88.8 99.3 107.5 113.4 EBITDA margin (%) 14.8 13.8 13.3 12.6 12.3 RoCE (%) 13.6 11.4 10.4 9.3 7.6 RoE (%) 18.6 17.1 15.6 13.1 11.5 Depreciation 13.2 15.8 16.4 14.5 26.2 Financial costs 8.0 12.2 21.2 31.4 28.5 Net profit 44.6 46.9 52.1 49.0 47.6 Equity shareholders' funds 250.5 293.9 338.6 377.1 409.1 Loan funds 372.2 511.0 661.5 833.0 934.8 Net fixed assets (excl CWIP) 156.2 194.0 303.9 324.0 347.4 CWIP 123.6 149.1 113.5 141.8 155.2 Current assets loans and advances 412.2 538.0 645.4 744.8 812.7 Current l iabil ities and provisions 305.8 357.0 385.7 429.6 524.1 Net current assets 106.4 181.0 259.7 315.2 288.5 Cash and current investments 113.6 106.0 111.1 107.7 137.2 Cash flow from operating activities (16.2) (62.3) (43.5) (71.4) (6.7) Cash flow from investing activities (59.3) (58.6) (69.2) (55.1) (54.6) Cash flow from financing activities 78.7 119.7 114.3 131.4 78.9 Net cash flows 3.2 (1.2) 1.5 4.8 17.6 CAPEX 68.7 71.0 74.4 66.8 67.7 Working capital investments 69.8 128.0 121.6 153.8 78.8


Tech Mahindra’s (TML) FY15 annual report analysis highlights significant jump in unbilled revenue to 8.6% of sales (FY14: 5.7%) highest amongst peers. Sub-contracting cost surged from 9.1% of sales in FY14 to 12.5% in FY15, leading to decline in EBITDA margin. ESOP cost rose 1.8x from INR1.3bn in FY14 to INR2.3bn in FY15. TML’s receivables, unbilled revenue and payable days are highest amongst peers. Earning to cash flow conversion ratio improved in FY15, albeit it is the lowest amongst peers. FY15 net worth rose by INR2.1bn on account of merger of Mahindra Engineering Services (MESL) as per ‘pooling of interest’ method akin to the merger of Mahindra Satyam and other associates in FY14. In our estimate, net worth would have been higher by INR39.0bn on the above 2 mergers had the company followed the ‘purchase accounting’ method. Consequently, adjusted RoE/ RoCE (without goodwill amortisation impact) would be lower from reported 28%/36% to 20%/26%, respectively (15%/22% including goodwill amortisation). TML paid INR12.7bn for acquisitions during FY15, largely towards goodwill. What’s on track? Revenue grew a healthy 20% in FY15 (organic growth 17% YoY). Dollar revenue jumped 19% YoY to USD3.7bn (organic growth 16%).

What needs tracking? Unbilled revenue surged to INR19.4bn, 8.6% of sales (FY14: INR10.7bn, 5.7%), in FY15, highest amongst peers. Sub-contracting cost rose to INR28.3bn, 12.5% of sales in FY15 (FY14: INR17.1bn, 9.1%). TML, along with HCL Tech, has highest sub-contracting cost.

Receivable days at 88 (FY14: 84), unbilled days at 31 (FY14: 21) and payable days at 109 (FY14: 94) stood highest for TML versus peers. Receivables continue to rise with INR8.5bn jump in FY15. Payables rose by INR5.7bn in FY15 (INR3.5bn was led by acquisitions).

Merger accounting as per ‘pooling of interest’ method (permitted under Indian GAAP) led to lower net worth by INR4.9bn and INR34.1bn on merger of MESL in FY15 and Mahindra Satyam in FY14, respectively. TML continue to hold 10% of equity under trust as treasury shares on merger of Mahindra Satyam in FY14.

Under the purchase method, we estimate that TML would have recorded goodwill worth INR39.0bn. As per AS-14, goodwill would be amortised over 5 years (unless higher period is justified) and would have impacted profits by INR7.8bn annually, 22% of PBT).

Goodwill on consolidation rose to INR17.3bn, 16% of net worth (FY14: INR5.6bn, 7%), led by acquisitions in FY15 (largely LLC and SOFTGEN). TML paid INR12.7bn cash for various acquisitions (of which USD 170mn was for LLC and USD24.3mn for SOFTGEN acquisition).



Tech Mahindra | Annual Report Analysis


July 15, 2015

52-week range (INR) : 749 / 458




Promoters* : 36.7


FIIs : 34.2

Others : 15.2



Market Data




ESOP cost rose from INR1.3bn to INR2.3bn YoY (largely to key management personnel). TML accounted ESOPs on intrinsic value, as permitted by SEBI’s ESOP regulations. Had the company followed the fair value method, net profit would have be lower by INR398mn, 1.5% of PAT (FY14: INR254mn, 0.8%). Derivatives exposure rose to INR103.6bn, 46% of revenue (FY14: INR62.8bn, 33%), and TML clocked forex gain of INR6.3bn in hedging reserve. Forex loss in P&L stood at INR2.2bn in FY15 (FY14: INR2.1bn). Contingent liabilities rose from INR48.1bn in FY14 (60% of net worth) to INR73.1bn (66%) in FY15 and largely included guarantees, disputed income tax and service tax liabilities. Major increase in FY15 includes INR12.8bn relating to service tax matters for 2008 to 2013, which we believe could pertain to erstwhile Satyam Computers. TML has given premises on operating lease (including long term lease of Land for Engineering College), for which it receives rent (FY15: INR212mn). Amount receivable in FY16 is INR283mn and rental receivable after 5 years stands at INR11.0bn, implying average useful life of 39 years.


Table 1: Profitability analysis (INR bn)


Though revenue jumped 20% YoY, previous years’ numbers are not comparable due to acquisitions made by TML during the year. FY15 revenue, in USD terms, grew 19% YoY to USD3,686mn and included USD100mn from LLC and Softgen (excluding acquisitions, USD revenue grew 16% YoY).


Sales 163.0 100.0 191.6 100.0 25.4 100.0 34.6 100.0 188.3 100.0 226.2 100.0 Subcontracting expenses 34.0 20.9 64.2 33.5 (16.9) (66.6) (35.8) (103.6) 17.1 9.1 28.3 12.5 Operating and Administrative expense

23.6 14.5 23.2 12.1 8.4 33.1 14.0 40.6 32.0 17.0 37.2 16.4

Personnel cost 69.7 42.8 72.0 37.6 27.6 109.0 47.1 136.3 97.4 51.7 119.1 52.7 EBITDA 35.6 21.9 32.3 16.8 6.2 24.5 9.3 26.8 41.8 22.2 41.5 18.4 Depreciation 4.3 2.6 4.7 2.5 1.0 3.8 1.4 4.0 5.2 2.8 6.1 2.7 EBIT 31.3 19.2 27.5 14.4 5.3 20.8 7.9 22.8 36.6 19.4 35.4 15.7 Financial Charges 0.9 0.5 0.1 0.0 (0.1) (0.3) 0.2 0.6 0.8 0.4 0.3 0.1 Other income 0.7 0.4 1.2 0.6 0.4 1.7 (0.2) (0.5) 1.1 0.6 1.1 0.5 PBT before exceptional items 31.2 19.1 28.7 15.0 5.8 22.7 7.5 21.7 36.9 19.6 36.2 16.0

Standalone Subsidiary/ JV (Derived) Consolidated


Tech Mahindra

Table 2: Sub-contracting cost (INR mn)


Table 3: Peer comparison (%)


FY15 saw significant increase in sub-contracting cost at 12.5% of revenue, leading to EBITDA margin contraction YoY from 22.2% to 18.4%. Table 4: Unbilled revenue (INR mn)


Other highlights:

TML incurred INR6.6bn, 3% of revenue in FY15 (FY14: INR5.6bn, 3%), on software, hardware and project specific expenses. These costs are reimbursed by the customers as part of contract and are accounted on gross basis. Employee cost included ESOP cost, which rose from INR1.3bn to INR2.3bn YoY (largely to key management personnel). TML accounted ESOPs on intrinsic value, as permitted by SEBI’s ESOP regulations. Had the company followed the fair value method, net profit would have been lower by INR398mn, 1.5% of PAT (FY14: INR254mn, 0.8%).

Particulars FY13 FY14 FY15Subcontracting expenses 6,615 17,114 28,343 Revenues 68,731 188,314 226,213 Subcontracting as % of revenues 9.6 9.1 12.5

Particulars FY13 FY14 FY15Tech Mahindra 9.6 9.1 12.5 Infosys 3.6 3.9 4.1 TCS 6.0 6.0 6.6 HCL Tech (December year end) 11.5 11.1 13.1

Particulars FY12 FY13 FY14 FY15Unbilled revenue 2,124 2,376 10,709 19,425 % of revenue 3.9 3.5 5.7 8.6 Unearned revenue 153 117 1,421 1,260 % of revenue 0.3 0.2 0.8 0.6

Unbilled revenue surged during FY15 to 8.6% of sales from 5.7% in FY14

TML and HCL Tech have the highest sub-contracting cost compared to peers



Cash flow analysis and earnings to cash conversion Table 5: Cash flow analysis (INR bn)


Operating cash flow (OCF), post interest improved YoY from INR15.0bn to INR23.4bn primarily led by lower working capital investment YoY. Receivables grew by INR8.5bn in FY15 versus INR20.4bn in FY14. The rise in payables was offset by fall in other liabilities and provisions (primarily led by reduction in liability towards derivatives contracts). Free cash flows adjusted for capex, acquisitions and incremental investment in subsidiaries declined from INR5.0bn in FY14 to INR(1.4)bn in FY15.

Table 6: Cash conversion cycle – Peer comparison (days)*

* Conversion cycle is calculated on closing basis for like to like comparison between peers.


Unbilled revenue rose significantly in FY15 from 21 to 31 days and payable days rose to 109 in FY15, partly led by acquisitions. Receivables, unbilled and payable days are the highest for TML amongst peers. During FY15, TML for the first time started availing the bill discounting facility and amount outstanding as at FY15 stood at INR2.7bn. Receivable days calculated above are adjusted for bills discounted.

Profit before tax 31.2 28.7 5.8 7.5 36.9 36.2 Non-operating expense (0.3) (0.0) 0.3 0.1 (0.0) 0.1 Non-cash adjustments 5.4 5.5 0.8 1.5 6.2 7.0 Direct taxes paid (8.8) (6.8) (2.2) (4.0) (10.9) (10.7) Cash profit after tax 27.5 27.4 4.7 5.1 32.1 32.6

(Increase)/Decrease in trade and other receivables (18.7) (8.9) (1.7) 0.3 (20.4) (8.5) Increase/(Decrease) in Trade payables 6.1 4.2 (2.1) 1.5 3.9 5.7 Increase/(Decrease) in other liabilities & provisions (derived) (1.9) (2.1) 2.2 (3.6) 0.3 (5.7) Increase in working capital (14.5) (6.8) (1.6) (1.7) (16.1) (8.5)Net cash from operating activities 12.9 20.7 3.0 3.4 16.0 24.1 Interest expenses paid (1.0) (0.4) 0.1 (0.3) (1.0) (0.6)Net cash from operating activities post interest 11.9 20.3 3.1 3.1 15.0 23.4 Less: Capex (7.7) (9.0) (1.5) (2.1) (9.1) (11.1)Less: Cash paid for acquisitions - (1.5) (0.4) (11.2) (0.4) (12.7)Less: Additional investment in subsidiaries (net) (1.1) (11.4) 0.5 10.3 (0.5) (1.1)Adjusted free cash flow 3.1 (1.6) 1.8 0.1 5.0 (1.4)

ParticularsStandalone Consolidated

FY14 FY15 FY14 FY15 FY14 FY15Subsidiary (derived)

Particulars FY14 FY15 FY14 FY15 FY14 FY15 CY13 CY14Trade receivable days 84 88 61 66 81 79 64 65 Unbilled revenue days 21 31 20 19 18 15 24 23 Inventory days - - - - 13 5 Advance from customer/unearned revenue days

(5) (3) (11) (8) (5) (5) (10) (1)

Trade payable days (94) (109) (5) (7) (88) (83) (40) (19) Supplier credit days - - - - - - 20 34 Conversion cycle 6 7 66 70 7 6 71 108

HCL TechTML Infosys TCS

Amounts outstanding towards bills discounting facility stood at INR2.7bn (FY14: Nil)


Tech Mahindra

Total receivables rose from INR43.5bn in FY14 to INR52.1bn in FY15 and unbilled revenue rose from INR10.7bn to INR19.4bn over the same period. Payables catapulted from INR9.5bn in FY14 to INR15.2bn in FY15 of which INR3.5bn was led by acquisitions. Table 6: Receivables analysis (INR mn)


Receivables more than 6 months and 1 year stood higher at INR9.6bn. However, the company has already provided INR7.0bn towards doubtful receivables.

Table 7: Earnings to cash conversion analysis (INR mn)


Chart 1: Earnings to cash conversion ratio


Particulars FY13 FY14 FY15Receivables > 1 year 151 3,604 3,343 Receivables > 6 months 1,787 5,330 6,292 Total 1,938 8,934 9,635 Less: Provision for doubtful receivables (820) (6,965) (6,990) Net receivables >6 months 1,118 1,969 2,645 Others 15,918 41,517 49,414 Total 17,036 43,486 52,059

Particulars FY11 FY12 FY13 FY14 FY15Operating cash flow post interest (A) 7,715 6,206 14,988 14,988 23,448 Profit after tax (PAT) 6,442 10,955 12,878 30,288 26,277 Depreciation 1,435 1,613 2,000 5,222 6,114 Other income 1,288 982 (747) 1,130 1,065 PAT + Depreciation - Other income (B) 6,589 11,586 15,625 34,380 31,326 Earnings to cash conversion ratio (A/B*100) 117 54 96 44 75

30.0

50.0

70.0

90.0

110.0

130.0


(%)

Earnings to cash conversion ratio (A/B*100)

Unprovided receivables more than 6 months rose to INR2.6bn in FY15



Table 8: Earning to cash flow conversion ratio—TML versus peers (INR bn)


Earning to cash flow conversion ratio improved in FY15, although it remains low vis-à-vis peers.

Merger accounting During FY15, TML merged Mahindra Engineering Services (MESL) with itself and issued 5 shares for every 12 shares of MESL in December 2014, aggregating to 4,259,011 shares (1.8% of outstanding shares). The merger was accounted under the ‘pooling of interest’ method and led to increase in net worth by INR2.1bn. Table 9: MESL merger—Increase in net worth if shares were issued at market price

Source: Company annual report, BSE, Edelweiss research

Had the company followed the ‘purchase’ method of accounting, FY15 net worth would have been higher by INR4.9bn.

Table 10: Mahindra Satyam merger approved in FY14

Source: Company annual report, BSE, Edelweiss research

In FY14, the company had merged Mahindra Satyam and other subsidiaries/ associates with itself which led to increase in net worth by INR16.8bn (INR14.1bn pertaining to Mahindra Satyam).

Particulars FY14 FY15 FY14 FY15 FY14 FY15 FY13 FY15Operating cash flow post interest (A) 15.0 23.4 98.3 83.5 147.1 192.6 44.2 64.0 Profit after tax (PAT) 30.3 26.3 106.6 123.7 191.6 198.5 40.4 65.1 Depreciation 5.2 6.1 13.2 10.2 13.5 18.0 6.4 6.8 Other income 1.1 1.1 26.6 34.3 16.4 32.3 3.5 6.8 PAT + Depreciation - Other income (B) 34.4 31.3 93.1 99.6 188.8 184.2 43.3 65.1 Earnings to cash conversion ratio (A/B*100) 44 75 106 84 78 105 102 98

Infosys TCS HCL techTML

ParticularsNo of shares

(mn)INR mn

Shares issued to acquire Mahindra Engineering Services Ltd. 4.26 43 Net worth increased on account of merger as per pooling of 2,058 Total increase in net worth (A) 2,101 Value of 4.26mn shares issued on merger at 1 month average 6,975 Increase in net worth had the company issued shares at market price or followed purchase method of accounting (B-A)

4,874

ParticularsNo of shares

(mn)INR mn

Cash paid for acquiring 42.6% stake in FY10 (A) 29,695 Value of 79.4mn shares issued on merger at 1 month average price of INR606.8 each pre-merger (B)

79.4 48,184

Total cost of investment in Mahindra Satyam (A+B) 77,879 Net worth increased on account of merger as per pooling of interest method (C)

14,096

Increase in net worth had the company issued shares at market price or followed purchase method of accounting (B-C)

34,088

Net worth stood lower by INR39.0bn due to merger as per ‘pooling of interest’ method


Tech Mahindra

Cumulatively, net worth is lower by INR39.0bn due to merger accounting as per aforementioned analysis. Consequently, RoE/ RoCE are higher as explained under:

Table 11: Adjusted RoE and RoCE (%)

# Adjusted for treasury shares and net worth adjustment as per above Table


As per AS 14, any goodwill arising on amalgamation is required to be amortised over a period of 5 years. Book value is also understated to that extent.

Treasury shares

TML continues to hold 10% of equity in the form of treasury shares on merger of Mahindra Satyam. To that extent, effective voting rights of minority shareholders are lower than the economic interest.

Derivatives and forex losses/ gains

Table 12: Derivative exposure (Figures in mn)


Derivatives exposure rose significantly in FY15 to INR103.6bn, 46% of revenue, from INR62.8bn in FY14.

Particulars FY14 FY15 FY14 FY15 FY14 FY15ROE (%) 44 28 28 20 22 15 ROCE (%) 50 36 34 26 29 22 Book value per share (INR) 342 115 567 173 530 164

Adjusted#

Reported Before goodwill

amortisation After goodwill amortisation

Particulars FY14 FY15FCY INR FCY INR INR INR

GBP/EUR to USD contractsForward GBP 157 15,676 GBP 183 16,920 752 (795)

EUR 30 2,477 EUR 155 10,464 4 (1,375) Total 18,154 27,384 756 (2,170)

USD/ GBP/ EUR to INR contractsForward USD 933 56,073 USD 1,470 92,008 5,211 1,368

EUR 12 991 EUR 4 270 60 (39) GBP 10 998 GBP 1 92 103 (1)

Options USD 79 4,748 USD 180 11,266 (77) 25 Total 62,810 103,637 5,297 1,353 As % of revenues 33 46

Fair value loss/ (gain)FY15

Notional amountFY14

Adjusted for INR39.0bn (without goodwill amortization), ROE and ROCE are lower by 8% and 10% respectively Including goodwill amortisation ROE/ROCE are lower by 13% and 15% respectively



Table 13: Forex losses/ (gains) (INR mn)


Table 14: Hedging reserve movement (INR mn)


Forex losses charged to P&L stood at INR2.2bn in FY15 and TML recorded forex gain of INR6.3bn in hedging reserve. Table 15: Contingent liabilities / claims (INR mn)


Particulars FY13 FY14 FY15Charged to P&LAs a part of finance costs 157.0 98.0 - AS a part of other income 1,189.0 2,007.0 2,234.0 Total 1,346.0 2,105.0 2,234.0 Add: Charged to Hedging reserve (net) (1,049.0) 3,072.0 (6,294.0) Total forex losses/ (gain) 297.0 5,177.0 (4,060.0)

Particulars FY13 FY14 FY15Opening balance 3,535.0 2,486.0 5,558.0 Add: Loss/ (gain) for the year (585.0) 4,084.0 (6,294.0) Less: Loss/ (gain) transferred to P&L 464.0 843.0 - Additions on amalgamation (net) - (169.0) - Closing balance [Loss/ (gain)] 2,486.0 5,558.0 (736.0)

Particulars FY14 FY15

Guarantees/ Letter of supports 16,492 22,170

Outstanding bill discounting - 2,697

Income tax demands 28,209 30,548

Service tax and Sales Tax matters 2,140 16,506

Other claims not acknowledged as debt 1,212 1,228

Total 48,053 73,149

Net worth 79,749 110,418

% of net worth 60.3 66.2


Tech Mahindra


* Adjusted for treasury shares


Particulars FY11 FY12 FY13 FY14 FY15Sales 51,402 54,897 68,731 188,314 226,213 Total income 52,690 55,879 67,984 189,444 227,278 EBITDA 10,034 9,194 14,242 41,838 41,529 EBITDA margin (%) 19.5 16.7 20.7 22.2 18.4 RoCE (%) 22.4 17.6 19.2 49.9 36.4 RoE (%) 20.7 31.0 27.2 43.8 27.6 Depreciation 1,435 1,613 2,000 5,222 6,114 Financial costs 1,113 1,026 1,030 799 299 Net profit 6,442 10,955 12,878 30,288 26,277 Equity shareholders' funds* 33,514 40,509 54,256 79,749 110,418 Loan funds 12,227 11,266 13,804 3,589 6,838 Net Debt 9,183 7,243 6,701 (32,085) (25,252) Net fixed assets (Ex CWIP and goodwill on consolidation) 6,137 6,792 9,039 20,304 23,046 CWIP 608 1,671 343 2,662 5,677 Goodwill on consolidation 33 33 3,407 5,640 17,283 Current assets loans and advances 17,246 18,019 23,809 69,745 90,436 Current liabilities and provisions 9,278 11,235 16,377 42,350 50,708 Net current assets (ex-cash) 7,968 6,784 7,432 27,395 39,728 Cash and cash equivalent 3,044 4,023 7,103 35,674 32,090 Cash flow from operating activities 4,637 7,117 9,597 15,962 24,087 Cash flow from investing activities (1,334) (4,203) (7,072) (1,896) (20,922) Cash flow from financing activities (2,867) (3,174) (3,481) (9,723) (7,898) Net cash flows 436 (260) (956) 4,343 (4,733) CAPEX (1,534) (2,958) (4,382) (9,138) (11,132) Working capital (investments)/inflow (2,743) 226 3,195 (16,148) (8,498)


Dish TV's (Dish) FY15 annual report analysis highlights rise in capex due to higher subscriber additions along with increase in churn ratio to 12.3% (FY14: 4.7%; FY11-15 average: 11.6%), which led to negative FCF (post interest) of INR(144)mn (FY14: INR3.4bn). Average annual capex during past 5 years stood at INR6.6bn, of which INR2.8bn was towards replenishing churned out subscribers representing 42% of gross subscribers added. In our view, cost incurred towards replenishing churned out subscribers should be considered as maintenance capex (capex required to maintain current revenue stream); hence, it should be deducted from EBITDA while deriving valuation based on EV/ EBITDA multiple. Trailing EV/EBITDA multiple adjusted for above stood at 25x versus 13x based on reported EBITDA (28x including regulatory dues and creditors for capex). Dish turned profitable in FY15 (posted losses in previous years) led by improved operating performance. The company changed its accounting policy in FY14 and started upfront recognition of activation fee, the impact of which is higher revenue recognition during FY15 by INR2bn, 7% of revenue (our estimate). Gross debt rose 5% YoY to INR14.8bn (of which unhedged forex loans are INR7.6bn, 51% of debt). Regulatory dues rose by INR2.1bn to INR10.5bn, adjusted for which net debt/EBITDA stood at 2.9x.

Higher churn led to higher maintenance capex FY15 capex catapulted to INR7.1bn (FY14: INR3.0bn) owing to higher gross subscriber addition at 2.9mn (FY14: 1.2mn). Subscriber churn jumped to 1.4mn (FY14: 0.5mn). 42% of gross capex over past 5 years was towards replenishing churned out subscribers.

Average gross subscriber addition over past 5 years stood at 2.5mn and average churn stood at 1.0mn (42% of gross subscriber addition and 12% of total subscriber base).

Activation fee up fronting led to higher revenue recognition In FY14, Dish changed its accounting policy and started recognising a portion of activation fee upfront against earlier policy of recognition over subscription period/life of CPE. Consequently, revenue for FY15 and FY14 stood higher by INR2.0bn (our estimate) and INR894mn, respectively. Dish amortizes cost of set-top box and realization from customer (other than activation fees) over 5 years. ARPU has consistently risen over the past 5 years, of which in the past 2 years it could be due to change in revenue recognition policy. ARPU also includes entertainment tax. Advance (unearned) income proportion to revenue has declined over the past 5 years (41% in FY11 to 13% in FY15), which we believe was partly due to accounting changes.



Dish TV | Annual Report Analysis


52-week range (INR) : 121 / 52




Promoters* : 64.5


FIIs : 18.6

Others : 12.9



Market Data


September 22, 2015



Other highlights Net debt rose from INR9.4bn to INR10.6bn (all due within 1 year) and regulatory dues rose to INR10.5bn in FY15, up 26% YoY. Net Debt/EBITDA declined marginally from 1.5x to 1.4x and adjusted for regulatory dues, stood at 2.9x (FY14: 2.8x). PBT stood at INR74mn, and adjusted for capitalised forex losses of INR340mn stood at negative INR(266)mn. Cumulative forex losses over last 3 years stood at INR3.3bn (28% of capital employed – Note: Capital employed is used for comparison, as net worth is negative). Net trade payables and other liabilities (largely advance income) declined by INR1.8bn in FY15. However, the cash flow statement showed an increase of INR1.1bn. Loans and advances rose to INR4.7bn, 41% of capital employed (FY14: INR3.8bn, 35%), primarily including loans to related parties, vendor advances and tax related advances. Related party loans though declined YoY from INR1.7bn in FY14 to INR1.3bn in FY15. Net worth continues to be negative at INR(3.1bn) in FY15 (FY14: INR(3.1bn)). Contingent liabilities rose to INR1.3bn, 10.8% of capital employed (FY14: INR1.0bn, 9.3%), primarily led by service tax, VAT and entertainment tax demands. Net unhedged exposure declined to INR5.7bn in FY15, led by drop in forex loans. Unhedged forex loans declined YoY from INR10.1bn in FY14 (71% of gross debt) to INR7.6bn in FY15 (51% of gross debt). However, payables rose from INR326mn in FY14 to INR1.5bn. Outstanding derivative contracts rose from USD1.1mn in FY14 to USD33.9mn.

Subscriber churn and EV/ EBITDA valuation Table 1: Subscriber addition and ARPU (figures in mn except per unit)


Net subscriber addition stood at a robust 1.5mn versus 0.7mn in FY14, 13.2% YoY growth. However, the churn rate also increased YoY to 12.3%. ARPU has consistently increased over past 5 years and rose to 174 in FY15. Like-to-like ARPU for FY14 (adjusted for accounting changes) stood at 162 versus 171 reported. ARPU includes entertainment tax, as the company follows gross accounting and entertainment tax is included in the revenue.

Particulars FY11 FY12 FY13 FY14 FY15Gross 10.4 12.9 15.2 16.4 19.3Net (paying) 8.5 9.6 10.7 11.4 12.9Gross addition 3.5 2.5 2.3 1.2 2.9Net (paying) addition 2.8 1.1 1.1 0.7 1.5Churn 0.7 1.4 1.2 0.5 1.4Churn as % of opening net paying customer 12.3 16.5 12.5 4.7 12.3Growth in net paying subscriber (%) 49.1 12.9 11.5 6.5 13.2ARPU (per month) 140 153 158 171 174

Net subscriber addition stood robust at 1.5mn in FY15... …however, the churn rate also increased to 12.3% (FY14: 4.7%) ARPU has consistently risen in past 5 years, of which increase in the past 2 years could be due to change in the revenue recognition policy


Dish TV

Table 2: Subscriber churn, maintenance capex and adjusted EV/EBITDA (INR mn)


EV/ EBITDA multiple on trailing basis stood at 13x while adjusted for maintenance capex, it stood at 25x. Note: Our EV calculation (based on INR82 per share as on 31 March 2015) does not include regulatory dues of INR10.5bn and creditors for capex of INR2.0bn, adjusted for which EV/ EBITDA multiple stood at 28x (trailing).


Table 3: Consolidated profitability analysis (INR mn)


* Policy for capitalisation of forex losses adopted from FY13 onwards.

Revenue grew 11% YoY to INR27.8bn and EBITDA rose to INR7.3bn, up 17% YoY leading to expansion in EBITDA margin by 150bps. The company turned PAT positive in FY15 vis-à-vis losses in past 4 years. PBT stood at INR74mn, though adjusted for forex losses capitalised, stood at INR(266)mn. Cumulative forex losses capitalised over past 3 years stood at INR3.3bn.

Particulars FY11 FY12 FY13 FY14 FY15 AverageSubscriber base (net paying) 8.5 9.6 10.7 11.4 12.9 -Gross subscriber addition 3.5 2.5 2.3 1.2 2.9 2.5 Churn 0.7 1.4 1.2 0.5 1.4 1.0 Churn as % of net subscriber base

12.3 16.5 12.5 4.7 12.3 11.6

Churn as % of gross subscriber addition (A)

20 56 52 42 48 42

Capex p.a.(B) (10,050) (6,038) (6,980) (2,986) (7,057) (6,622)Maintanence capex (B*A) (2,010) (3,381) (3,642) (1,244) (3,407) (2,777)

EBITDA 2,380 4,960 5,794 6,240 7,331 5,341EBITDA post maintanence capex 370 1,579 2,152 4,996 3,924 2,564

FY11 FY12 FY13 FY14 FY15 FY11 FY12 FY13 FY14 FY15Sales 14,367 19,579 21,668 25,090 27,816 100 100 100 100 100 RM, operating & administrative exps. 11,225 13,871 15,052 17,958 19,468 78.1 70.8 69.5 71.6 70.0 Personnel cost 761 748 822 892 1,018 5.3 3.8 3.8 3.6 3.7 EBITDA 2,380 4,960 5,794 6,240 7,331 16.6 25.3 26.7 24.9 26.4 Depreciation 3,996 5,219 6,276 5,974 6,138 27.8 26.7 29.0 23.8 22.1 EBIT (1,615) (259) (482) 267 1,193 (11.2) (1.3) (2.2) 1.1 4.3 Financial Charges 1,534 1,973 1,284 1,328 1,754 10.7 10.1 5.9 5.3 6.3 Other income 1,226 900 511 649 635 8.5 4.6 2.4 2.6 2.3 PBT before exceptional (1,923) (1,331) (1,254) (412) 74 (13.4) (6.8) (5.8) (1.6) 0.3 Exceptional/ priod period items - - 594 (1,164) - - - (4.1) 8.1 - PBT (1,923) (1,331) (660) (1,576) 74 (13.4) (9.3) (4.6) (11.0) 0.5 Forex losses capitalised * * (1,252) (1,723) (340) * * (5.8) (6.9) (1.2) Adjusted PBT (1,923) (1,331) (1,912) (3,298) (266) (13.4) (6.8) (8.8) (13.1) (1.0)

ParticularsConsolidated (INR mn) % of Revenue

Past 5 years’ average annual capex stood at INR6.6bn, of which we believe INR2.8bn is maintenance capex required to maintain existing revenue stream Adjusted for maintenance capex, trailing EV/EBITDA stood at 25x. Including regulatory dues and creditors for capex it stood at 28x.



Impact on revenue, pertaining activation fee accounting changes (for like-to-like comparison) in FY15 & FY14 stood at INR2.0bn (our estimate) and INR894mn respectively. The company, in the previous year, changed its accounting policy for revenue recognition (CPE rentals and activation fee). A portion of activation fee is now recognised on upfront basis versus earlier policy of recognition over subscription period/ life of CPE. Consequently, FY14 revenue stood higher by: a) INR333mn for rentals; and b) INR894mn towards upfront recognition of activation fees. Revenue is recognised net of service tax but gross of entertainment tax. Total entertainment tax charged to P&L stood at INR1.5bn, 5% of revenues (FY14: INR1.3bn, 5%). Table 4: Income received in advance (INR mn)




FCF stood negative in FY15 at INR(144)mn led by INR7.1bn capex. Creditors for capex rose by INR1.4bn to INR2.0b n in FY15.

Particulars FY11 FY12 FY13 FY14 FY15Income received in advance:

Long term 2,034 1,770 1,501 918 183 Short term (less than 1 year) 3,853 3,015 2,946 3,390 3,443

Total advance income 5,887 4,785 4,448 4,308 3,626 Revenue 14,367 19,579 21,668 25,090 27,816 Advance income as % of revenue 41.0 24.4 20.5 17.2 13.0

ParticularsFY12 FY13 FY14 FY15

Profit before tax (1,331) (660) (1,576) 74 Non-operating expense 1,186 (78) 460 945 Non-cash adjustments 5,219 6,388 6,267 6,351 Direct taxes paid 16 (82) (60) (99) Cash profit after tax 5,088 5,569 5,091 7,270 (Increase)/ decrease in trade receivables

(60) (18) (111) (222)

(Increase)/ decrease in inventories (24) (17) 11 (24) (Increase)/ decrease in Loans, advances and other current assets

85 (1,447) 1,349 (367)

Increase/ (decrease) in trade payables, other current l iabil ities

(978) 2,008 714 1,017

(Increase)/ decrease in working capital (977) 526 1,964 404 Net cash from operating activities 4,111 6,095 7,055 7,675 Interest expenses paid (784) (691) (625) (761) Net cash from operating activities post interest

3,328 5,404 6,429 6,914

Capital expenditure (6,038) (6,980) (2,986) (7,057) Free cash flows (2,710) (1,577) 3,443 (144)

Consolidated

Advance income and its proportion to revenue, both consistently declined over past 5 years Decline in past 3 years also partly reflects the impact of changes in revenue recognition policy

OCF, post interest rose to INR6.9bn from INR6.4bn in previous year, led by improvement in profitability and lower working capital investments FCF, however, stood negative INR144mn, led by increase in capex spend


Dish TV

Net trade payables and other liabilities (largely advance income) declined by INR1.8bn in FY15. However, cash flow statement showed an increase of INR1.1bn. Table 6: Net working capital (INR mn)




Debt and borrowing cost analysis Table 8: Debt analysis (INR bn)


FY 12 FY 13 FY 14 FY 15Change from

FY12 - FY15 Inventory 69 86 75 99 30 Trade Receivables 286 304 415 642 356 Trade payables (1,275) (2,138) (1,357) (1,268) 7 Advance to vendors 336 522 555 1,573 1,236 Unearned Income (advance income) (4,785) (4,448) (4,308) (3,626) 1,159 Net working capital (5,369) (5,674) (4,620) (2,581) 2,788 As % of revenue 27.4 26.2 18.4 9.3

Particulars

Outstanding balances

Particulars FY11 FY12 FY13 FY14 FY15Loans/ advances to related parties 469 870 1,022 1,745 1,316 Advances to vendors, distributors etc 261 336 522 555 1,573 Tax related advances 1,411 973 1,360 921 1,291 Others 545 147 802 569 569 Total 2,687 2,326 3,706 3,790 4,748 As % of total assets 9.9 8.8 11.7 13.7 15.0 As % of capital employed 24.1 17.8 25.1 34.6 40.6

Particulars FY11 FY12 FY13 FY14 FY15 % change

YoY Gross debt 10.8 14.0 16.3 14.1 14.8 5 Creditor for capex 2.2 0.8 1.8 0.6 2.0 212 Bank overdraft , accrued interest 0.1 0.3 0.2 0.2 0.3 35 Total Debt (A) 13.2 15.1 18.4 14.9 17.1 14 Regulatory dues - Short term provisions (B)

3.2 4.9 6.5 8.4 10.5 26

Cash and liquid investment (C) 5.4 5.5 6.6 5.5 6.5 17 Net adjusted debt (A+B-C) 10.9 14.5 18.3 17.8 21.1 19 Net cash reqd to meet short term liabil ity (Current maturities - cash)

(1.1) (3.6) 1.0 0.1 7.9

Add:Trade payables (D) 2.5 1.3 2.1 1.4 1.3 (7) Total adjusted l iabil ities (A+B-C+D) 13.4 15.8 20.5 19.1 22.4 17 Ratios:Reported Debt/ EBITDA 2.3 1.7 1.7 1.4 1.1 Net adjusted Debt/ EBITDA 4.6 2.9 3.2 2.8 2.9 Total adjusted l iabil ities/ EBITDA 5.6 3.2 3.5 3.1 3.1

Gross debt rose by 5% YoY and net adjusted debt jumped 19% YoY to INR21.1bn in FY15 Regulatory dues rose to INR10.5bn in FY15, up 26% YoY Entire gross debt of INR14.8bn is due within 1 year Debt/EBITDA declined from 1.4x in FY14 to 1.1x, while net adjusted debt/EBITDA rose to 2.9x

Loans and advances rose to INR4.7bn, 41% of capital employed primarily led by advance to vendors and tax-related advances Loans to related parties declined YoY

Working capital investment over last 4 years rose by INR2.8bn following decline in trade payables and advance income.



Total gross debt stood at INR14.8bn and unhedged loans in foreign currency stood at INR7.6bn, 51% of total debt (FY14: INR10.1bn, 71%). Table 9: Average borrowing cost analysis (INR mn)


Table 10: Unhedged exposure (INR mn)


Bank balances of INR2.8bn represents unutilised amount of GDR issuance. Outstanding derivative contracts rose from USD1.1mn in FY14 to USD33.9mn.

Balance sheet analysis

Table 11: Balance sheet analysis (INR mn)


Particulars FY11 FY12 FY13 FY14 FY15Borrowing cost (excluding 'Interest on others' pertaining to l icense fee)

1,028 1,497 602 575 825

Add: Forex loss capitalised (as per amended AS-11)

- 703 1,252 1,723 340

Prepaid borrowing cost - - - 120 181 Adjusted borrowing cost 1,028 2,200 1,854 2,298 1,165 Average borrowing cost (%) 10.2 12.1 4.0 3.8 5.7 Average adjusted borrowing cost (%) 10.2 17.8 12.2 15.1 8.1

Particulars FY13 FY14 FY15Loans and borrowing 13,859 10,074 7,576 Trade payables 1,508 326 1,461 Advances/deposits received 0 5 6 Less:Balance with Bank 2,227 2,544 2,757 Loans given 10 222 304 Receivables 22 99 276 Net Unhedged payables 13,109 7,539 5,705

Sources FY14 FY15 Change Application FY14 FY15 ChangeDebt 14,095 14,839 744 Fixed assets 17,797 19,510 1,714 Regularoty dues 8,355 10,505 2,149 Loans/ advances 3,790 4,748 958 Advance income 4,308 3,626 (683) Cash/ investments 5,505 6,459 954 Creditors for capex 637 1,984 1,347 Net worth (negative) 3,126 3,134 8 Others 3,433 3,844 411 Others 610 945 335 Total 30,828 34,796 3,969 Total 30,828 34,796 3,969

Average borrowing cost rose from 3.8% in FY14 to 5.7%... …adjusted for forex losses and prepaid borrowing cost, it declined from 15.1% to 8.1% led by lower forex losses in FY15

Net unhedged exposure declined to INR5.7bn Forex loans fell, but payables increased in FY15


Dish TV

Chart 1: Movement during the year


Chart 2: Balance sheet, as at end of the year


Table 12: Major related party transactions (INR mn)


Debt16%

Regulatory dues45%

Creditors for capex

28%

Others11%


100% = INR4.7bn

Debt43%

Regularoty dues30%

Advance income

10%

Creditors for capex

6%

Others11%

Sources as at FY15

100% = INR34.8bn

Company Loans/adv. Receivable Payable Purchase Sale Loans/adv. Receivable Payable Purchase SaleMedia Pro Enterprise India 107 - 235 3,027 - - - - 1,065 - Zee Entertainment Enterprises - 44 14 108 181 - 73 13 8 192 ITZ Cash Card 49 - - 166 - 39 - - 216 - Taj Television India - - 43 470 - - - 129 1,370 - Cyquator Media Services 1,722 - - 760 - 1,277 - 20 852 - Others 229 89 8 90 118 - 58 6 99 153 Total 2,107 133 300 4,620 299 1,316 130 168 3,610 345 As % of total loans and advances 65 34 As % of operating expenses 26 19

FY14 FY15

Fixed assets56%

Loans/ advances

14%

Cash/ investments

18%

Net worth (negative)

9%

Others3%

Application as at FY15

100% = INR34.8bn

Fixed assets36%

Inventories/ receivables

5%Loans & advances

20%

Cash/ investments

20%

Advance income decline

15%

Others4%

Application during the year

100% = INR4.7bn



Overall related party transactions declined in FY15. Loans/ advances fell to INR1.3bn, 34% of total loans and advances, while purchases dropped from 26% to 19% of total expenses. Guarantees given by related parties (key management personnel and group companies) on behalf of Dish TV stood at INR12bn in FY15 (FY14: INR12.4bn).



Particulars FY11 FY12 FY13 FY14 FY15Sales 14,367 19,579 21,668 25,090 27,816 Total income 15,593 20,479 22,179 25,739 28,451 EBITDA 2,380 4,960 5,794 6,240 7,331 EBITDA margin (%) 16.6 25.3 26.7 24.9 26.4 ROE (%) (92.8) (468.3) (85.1) (33.7) 1.0 RoCE (%) (3.2) 5.3 0.2 7.1 16.1 Depreciation 3,996 5,219 6,276 5,974 6,138 Financial costs 1,534 1,973 1,284 1,328 1,754 Net profit (1,920) (1,331) (660) (1,576) 31 Equity shareholders' funds 370 (939) (1,556) (3,126) (3,134) Loan funds 10,763 14,003 16,330 14,095 14,839 Net Debt 5,357 8,510 9,762 8,590 8,380 Net fixed assets (Excluding CWIP) 14,437 14,204 14,340 13,571 14,539 CWIP 4,421 3,884 6,535 4,226 4,972 Current assets loans and advances 5,650 6,335 9,929 7,451 9,147 Current l iabil ities and provisions 13,951 11,373 15,142 15,673 19,709 Net current assets (8,301) (5,038) (5,213) (8,222) (10,563) Cash and investments 5,406 5,493 6,568 5,505 6,459 Cash flow from operating activities 3,948 4,111 6,095 7,055 7,675 Cash flow from investing activities (6,429) (5,002) (7,869) (2,984) (6,699) Cash flow from financing activities 655 1,424 1,222 (4,610) (362) Net cash flows (1,825) 534 (553) (539) 614 CAPEX (10,050) (6,038) (6,980) (2,986) (7,057) Working capital investments 1,602 (978) 526 1,964 404


Zee Entertainment Enterprises’ (Zee) FY15 annual report analysis highlights increase in sale of media content by INR2.0bn (syndication deals largely sports related and one time). Subscription management costs declined in FY15 due to accounting changes (from gross to net), excluding which operating cost proportion to sales stood flat at 43.8%. Unbilled revenues grew to INR1.1bn, 2.3% of sales in FY15 (FY14: INR752mn, 1.7%). OCF improved YoY due to lower investment in inventories. As highlighted in our past annual report analysis, higher inventory spend in previous years coupled with amortisation policy of 60 months led to mismatch in profits and cash flows, which reversed in FY15. Investment in overseas funds, loans and advances continued and stood at INR15.5bn, 44% of adjusted* net worth. Contingent liabilities increased YoY owing to direct tax disputes, while commitments for media content and license fees rose 1.8x to INR34.6bn. Related party transactions (ex-joint venture /associates) with respect to revenues and operating costs increased in FY15.

* adjusted for preference shares

What’s on track? Zee has been reporting healthy net profit margin of ~20% since 4 consecutive years, despite several challenges faced by industry. The company has been focusing on new launches for future growth and successfully launched “&TV and Zindagi” in FY15. In light of its 2020 Vision, it continues to expand its international operations.

What needs tracking? FY15 saw significant increase in ad spend by INR1.2bn (up 50% YoY) and marketing cost by INR1.1bn (up 53% YoY), primarily due to launch of new channels, &TV and Zindagi. Subscription management fees declined to INR28mn in FY15 (FY14: INR2.4bn) following change it accounting policy (from gross to net). To that extent, EBITDA margins were optically higher by 120bps. PAT, adjusted for preference dividend of INR1.5bn, declined YoY to INR8.3bn versus INR8.8bn in FY14. Preference shares, we believe should be considered as debt, and profits, cash flows and return ratios require adjustment to that extent. OCF rose to INR6.8bn in FY15 (FY14: INR3.8bn), led by lower investment in inventories in FY15 at INR142mn (FY14: INR3.0bn). Inventory days stood at 202 in FY15 (FY14: 204).



Zee Entertainment Enterprises | Annual Report Analysis


July 3, 2015

52-week range (INR) : 401 / 265




Promoters* : 43.1


FIIs : 50.0

Others : 4.8

*Promoters pledged shares : 16.2 (% of share in issue)

Market Data




Investments in global funds and loans/ advances to other parties rose in FY15 by INR426mn and INR2.1bn, respectively. Total loans/advances and investments stood at INR15.5bn, 44% of adjusted net worth (FY14: INR12.8bn, 47%). Average yield on cash and investments was robust at 9.1% in FY15 (FY14: 8%). Other income constituted 14-16% of PBT over each of past 3 years.

Other highlights • FY15 onwards the company has changed its accounting policy for expenses incurred on

development of new channels wherein it will be recognised under intangibles, until the channel is ready for commercial launch. In FY15, INR133mn was recognised as intangibles of which INR6mn was amortised during the year.

• Receivables under litigation stood at INR376mn (FY14: INR359mn), management is confident that the receivables will be realised fully.

• Net un-hedged receivables at standalone level (largely forex loans to subsidiaries) stood at INR6.8bn, 15% of standalone net worth (FY14: INR6.6bn, 17%). Details at consolidated level are not available.

MD&A highlights • Goal is to be amongst the top global media conglomerates by year 2020.

• Mission - To become the world’s leading global company from emerging markets.

• Zee is a global media brand with strong presence in over 169 countries, total viewership of over 959mn people around the world and more than 36 international channels. It also has an extensive library with over 2,10,678 hours of television content, rights to more than 3,500 movie titles and a rich bouquet of 33 popular domestic channels.

• Vision 2020:- i) to achieve 5x growth in viewership; ii) to achieve 4x growth in content consumption

• Digitisation in Phase I and II cities is complete, rollout of digitisation process in Phase III and IV cities undertaken during the year signified a positive development for industry and is expected to boost subscription revenues going ahead.

• Major acquisitions during the year included renewal of rights with the Pakistan Cricket Board, WWE and UEFA Champions League. Ten Sports also bagged the rights for MotoGP for the next 5 years.

• The company expanded its international operations by forming a step-down wholly-owned subsidiary of Asia TV Ltd, UK in Ontario, Canada in the name of Asia Multimedia Distribution Inc., for facilitating distribution of television channels.

• The company is setting up infrastructure to rapidly scale up in high-growth, high-potential markets such as Latin America, Japan and China.





Revenues (ex-subscription management cost) rose 17% YoY, which included sale of media content — spurted from INR1.7bn (3.9% of sales) in FY14 to INR3.7bn (7.7% of sales) in FY15. Content sale included syndication deals, a large part of which included one-time sports deals and were bottom-line neutral. EBITDA margins declined from 28.8% in FY14 to 25.7% impacted by rise in other expenses, primarily led by: i) higher ad expenditure which increased from INR2.5bn in FY14to INR3.7bn in FY15 (up 50% YoY); and ii) marketing, distribution/promotion expenses increased from INR1.9bn in FY14 to INR3.0bn (up 53% YoY). This rise in costs was predominantly on account of the new channel launches during the year. EBITDA margins however, stood optically higher by 120bps at 25.7% due to change in accounting for subscription management fees, from gross to net. Consequently, subscription management fees fell from INR2.4bn in FY14 to INR28mn in FY15. Operating cost also included media content impairment worth INR668mn in FY15 (FY14: INR447mn). Other income stood higher at INR2.3bn in FY15 and contributed 16% to PBT (FY14: 14%). Adjusted for preference share, dividend profit available to equity shareholders declined YoY from INR8.8bn in FY14 to INR8.3bn in FY15. Table 2: Unbilled revenue analysis (INR mn)


FY14 % FY15 % FY14 % FY15 % FY14 % FY15 % Sales (ex-subcription management cost) 30.8 100.0 34.3 100.0 11.1 100.0 14.6 100.0 41.9 100.0 48.8 100.0 Operating cost (ex-subcription management cost) 13.1 42.6 13.5 39.4 5.2 47.1 7.9 54.2 18.3 43.8 21.4 43.8 Personnel cost 2.2 7.2 2.8 8.2 1.7 15.0 1.7 11.5 3.9 9.3 4.5 9.2 Other expenses 5.1 16.6 7.5 21.9 2.5 22.3 2.9 19.9 7.6 18.1 10.4 21.3 EBITDA 10.3 33.5 10.4 30.5 1.7 15.6 2.1 14.3 12.0 28.8 12.5 25.7 Depreciation 0.3 1.1 0.6 1.7 0.2 1.5 0.1 0.6 0.5 1.2 0.7 1.4 EBIT 10.0 32.4 9.9 28.8 1.6 14.1 2.0 13.7 11.5 27.6 11.9 24.3 Financial charges 0.1 0.2 0.0 0.1 0.1 0.8 0.1 0.6 0.2 0.4 0.1 0.2 other income 1.8 6.0 2.3 6.6 (0.0) (0.3) 0.0 0.0 1.8 4.3 2.3 4.7 PBT 11.8 38.2 12.1 35.4 1.4 13.0 1.9 13.2 13.2 31.5 14.0 28.7 Tax 4.0 13.1 3.8 11.1 0.3 2.4 0.5 3.3 4.3 10.3 4.3 8.8 Associate/ minority share - - - - 0.0 0.2 0.0 0.1 0.0 0.1 0.0 0.0 PAT 7.7 25.1 8.3 24.3 1.2 10.8 1.5 10.0 8.9 21.3 9.8 20.0 Preference dividend (Incl. tax) 0.1 0.3 1.5 4.2 - - - - 0.1 0.2 1.5 3.0 Adjusted PAT 7.6 24.8 6.9 20.0 1.2 10.8 1.5 10.0 8.8 21.1 8.3 17.0

ParticularsStandalone Subsidiary (Derived) Consolidated

Particulars FY13 FY14 FY15Unbilled revenue 4 752 1,143 Revenue 36,996 44,217 48,837 As a % of revenue 0.0 1.7 2.3

Unbilled revenue, as a proportion to sales, has been rising since FY13



Tax rate and MAT credit

Effective tax rate declined to 30.5% in FY15 (FY14: 32.5%), aided by MAT credit of INR1.4bn availed during the year. During FY15, Zee acquired and merged a related party company, Diligent Media Corp (DMCL) and acquired deferred tax assets worth INR3.0bn (included in loans & advances under advance tax), debt of INR1.0bn and issued preference shares worth INR22mn. Consequently, it recorded net gain of INR1,996mn in reserves.

Cash flow analysis

Table 3: Standalone versus consolidated cash flow (INR mn)


Chart 1: Cash flow chart


Despite lower profitability growth during FY15 (6% YoY PBT growth), the company reported robust 43% YoY growth in operating cash flows (post interest and preference dividend), primarily led by inventories which rose by INR142mn in FY15 versus INR3.0bn in FY14.

Particulars

Profit before tax 11,750 12,122 1,441 1,918 13,191 14,040 Non operating expenses (1,184) (1,755) 202 200 (982) (1,555) Non cash adjustments 404 214 362 510 766 724 Direct taxes paid (3,619) (3,575) (623) (589) (4,242) (4,164) Cash profit after tax 7,351 7,006 1,382 2,039 8,733 9,045 (Increase)/Decrease in trade and other receivables (1,465) (1,228) (999) (1,465) (2,464) (2,693) (Increase)/Decrease in inventories (1,617) (869) (1,374) 727 (2,991) (142) Increase/ (Decrease) trade and other payables 161 1,714 390 (1,115) 551 599 (Increase)/ Decrease in working capital (2,921) (383) (1,983) (1,853) (4,904) (2,236)Net cash from operating activities 4,430 6,623 (601) 186 3,829 6,809 Interest expenses paid (22) (64) (4) (7) (26) (71)Preference share dividend (101) (1,453) - - (101) (1,453)Net Cash from operating activities post interest 4,307 5,106 (605) 179 3,702 5,285 Capex (1,384) (935) (81) (156) (1,465) (1,091)Free Cash Flow 2,923 4,171 (686) 23 2,237 4,194

Subsidary/JV derived ConsolidatedFY15

StandaloneFY14 FY15 FY14 FY15 FY14

9.0

( 2.7 )( 0.1 ) 0.6

6.8

0.0

2.0

4.0

6.0

8.0

10.0

Cash

pro

fit

afte

r tax

Rece

ivab

les

Inve

ntor

ies

Paya

bles

OCF

(INR

bn)

FY15 cash flow analysis

8.7

( 2.5 )

( 3.0 )0.6

3.8

0.0

2.0

4.0

6.0

8.0

10.0

Cash

pro

fit

afte

r tax

Rece

ivab

les

Inve

ntor

ies

Paya

bles

OCF

(INR

bn)

FY14 cash flow analysis



Table 4: Earnings to cash conversion analysis (INR mn)


Chart 2: Earnings to cash conversion ratio (%)


Earnings to cash flow conversion improved in FY15 after declining in past 5 years, mainly due to lower acquisition of movie rights. The improvement was also owing to the company’s accounting policy of amortisation of inventory over 60 months, thus creating a mismatch in profitability and cash flows. Table 5: Average cash conversion cycle (days)


* Inventory days is calculated excluding subscription management cost

Cash conversion cycle rose primarily due to the decline in payable days. Trade payables fell from INR5.1bn in FY14 to INR4.2bn in FY15. Total inventories stood at INR11.9bn in FY15 versus INR11.7bn in FY14 and includes rights worth INR1.5bn (FY14: INR1.2bn), which will commence at future date.

Particulars FY10 FY11 FY12 FY13 FY14 FY15Operating cash flow post interest (A) 6,770 5,662 4,068 3,837 3,703 5,285 Profit after tax (PAT) 6,344 6,369 5,891 7,196 8,820 8,322 Depreciation 285 289 323 399 501 673 Other income 1,220 882 1,384 1,461 1,807 2,278 PAT + Depreciation - Other income (B) 5,410 5,776 4,830 6,134 7,514 6,717 Earnings to cash conversion ratio (A/B*100) 125 98 84 63 49 79

30

50

70

90

110

130

FY10 FY11 FY12 FY13 FY14 FY15

(%)

Earnings to cash conversion ratio

Particulars FY13 FY14 FY15Inventory days* 195 204 202 Trade Receivable days 87 79 77 Trade Payable days (95) (90) (79) Cash conversion cycle 188 193 200

Earnings to cash conversion ratio improved led by lower movie rights acquisition and amortisation policy.



Table 6: Accounting policy for inventory and film distribution


Investments, loans and advances Table 7: Investments and loans (INR mn)


S.No FY14 FY151

2 Film produced and/ or acquired for distribution:

a) Theatrical rights: 70% of allocated cost is amortised over three months of theatrical release of fi lms and balance 30% in subsequent three quarters.b) Satellite rights, music rights, home video rights etc.:Allocated cost of each right is expensed on sale and amortised on exploitation as per 1 above.c) Negative rights: 90% of the cost is allocated and amortised as per (a) and (b) above and 10% of the cost is allocated to Intellectual Property Rights (IPR) and amortised over subsequent five years.

Film produced and/ or acquired for distribution:

a) Theatrical rights: Cost is amortised immediately on theatrical release.b) Satellite rights and other rights: Allocated cost of each right is expensed immediately on sale.

Film rights are amortised on a straight-l ine basis over the l icensed period or 60 months from the commencement of rights, whichever is shorter.

Particulars FY13 Change YoY

FY14 Change YoY

FY15

Investment in domestic/ overseas Socrates money market fund 633 (602) 31 (31) - First Global Wealth Ltd 954 1,287 2,241 (2,241) - Globex Fund Ltd 981 96 1,077 (1,077) - Birla Sun Life Cash Plus 350 (350) - - - Poseidon Opportunities Fund Ltd - - - 3,775 3,775

Total (A) 2,918 431 3,349 426 3,775

Investment in NCDs (Domestic):17% unrated subordinate NCDs of SGGD Projects Development Pvt. Ltd. - 1,250 1,250 - 1,250 18% NCDs of Parsvanath Developers - 237 237 (237) - Morpheus Media Fund. - 420 420 - 420

Total (B) - 1,907 1,907 (237) 1,670

Loan and advances:Loans to related parties 88 (44) 44 411 455 Inter-corporate deposits (ICD's) 1,750 1,700 3,450 800 4,250 Other advances 3,361 695 4,056 1,254 5,310

Total (C) 5,199 2,351 7,550 2,465 10,015

Total (A+B+C) 8,117 4,689 12,806 2,654 15,460As % of adjusted net worth 21 47 44

Other investments/ loans:CP/ CD's 4,347 (2,347) 2,000 1,245 3,245 Others 625 100 725 - 725

Total (D) 4,972 (2,247) 2,725 1,245 3,970

Total (A+B+C+D) 13,089 2,442 15,531 3,899 19,430

In FY5, Zee invested in Poseidon opportunities fund, a Bermuda based entity Investments in global funds, NCDs and other (non-related party) loans continue to be high Total exposure to investments, loans/ advances increased in FY15 by INR2.7bn to INR15.5bn, 44% of adjusted net worth



Table 8: Yield on investments and other income (INR mn)


Capital allocation analysis

Table 9: Capital allocation (INR bn)


Chart 3: Capital allocation chart


Particulars FY13 FY14 FY15Income from investments 1,132 1,232 1,626 Total cash and cash equivalents 14,331 16,502 19,207 Average yield on investments (%) 8.5 8.0 9.1

Total other income 1,461 1,807 2,278 Other income as % of PBT 13.9 13.7 16.2

Particulars FY11 FY12 FY13 FY14 FY15Sales 30.1 30.4 37.0 44.2 48.8 EBITDA 8.2 7.4 9.5 12.0 12.5 EBITDA margin (%) 27.3 24.3 25.8 27.2 25.7 ROE (%) - adjusted* 18.4 18.0 19.6 26.6 26.6 ROCE (%) 25.0 25.9 28.9 30.8 27.5 ROCE (%) - ex loans/ investments 31.5 33.0 37.3 39.8 34.9 Net fixed assets (Ex CWIP) 8.1 9.2 9.9 10.7 11.4 CWIP 0.0 0.2 0.1 1.0 0.9 Fixed asset turnover ratio (x) 3.7 3.3 3.7 4.1 4.3 Equity (A) 31.0 34.4 39.1 27.2 35.3 Debt (incl Pref. shares)* (B) 0.0 0.0 0.0 20.2 20.2 Total capital employed (A+B) 31.0 34.4 39.1 47.4 55.5 Adjusted D/E Ratio (x) 0.0 0.0 0.0 0.7 0.6

0.0

12.0

24.0

36.0

48.0

60.0

0.0

9.0

18.0

27.0

36.0

45.0


(INR

bn)

(%)

Capital employed ex-loans/investments Loans and investments

ROCE (%) - ex loans/ investments ROE (%) - adjusted

Average yield on cash and investments stood at robust 8.0%-9.1% and other income constituted 14-16% of PBT in past 3 years

Significant portion of capital deployed in various loans/advances and non-operating investments, leads to lower RoCE at consolidated level



Table 10: Capital employed analysis (INR bn)


49% of the capital employed represents goodwill, loans and non-operating investments.

Table 11: Major subsidiaries’ performance (INR mn)


On an aggregate basis, subsidiaries’ performance continues to be stable although declined marginally in FY15.

Contingent liabilities and commitments

Table 12: Contingent liabilities and commitments (INR mn)


Particulars FY11 FY12 FY13 FY14 FY15Loans and investments 11.1 11.4 13.1 15.5 19.4 Goodwill 6.1 6.9 7.1 7.6 7.9 Total 17.2 18.3 20.2 23.2 27.3 As % of capital employed 55.5 53.1 51.6 48.8 49.2

Subsidiary company % shareholdingas on FY15 Networth Turnover PAT Networth Turnover PAT

Asia Today 100 7,457 6,455 665 8,788 6,311 960 Taj TV Mauritius 100 247 7,152 268 68 5,080 (186) Taj Television (I) Private 100 270 571 71 767 2,071 498 Zee Entertainment Middle East FZ-LLC 460 1,717 129 Zee TV South Africa (Proprietary) Ltd. 100 (251) 58 (44) (381) 45 (161) Zee Multimedia Worldwide (Mauritius) 100 4,464 86 75 4,754 - 79 Others 51-100 1,432 5,586 231 883 3,437 (190) Total 13,619 19,908 1,266 15,339 18,661 1,129 PAT Margin (%) 6.4 6.1

FY14 FY15

Particulars FY14 FY15Corporate Guarantees:- -For subsidiaries, loans outstanding 12,366 11,049 -For other related parties, loans outstanding 1,396 791 Indirect taxes 492 539 Direct Taxes 3,684 6,474 Claims against the company not acknowledged as debts 624 631 Total 18,562 19,484 As % of adjusted net worth 68 55

Capital and other commitmentsParticulars FY14 FY15Towards media content and l icense fees 19,568 34,555 Estimated amount of contracts remaining to be executed 155 394 Uncalled l iabil ity on investments 404 392 Total 20,127 35,341

Contingent liabilities rose primarily on account of increase in disputed income tax demands Commitments to media content and license fees rose significantly to INR34.6bn



Other commitments to media content and license fees for broadcasting rose significantly in FY15 to INR34.6bn versus INR19.6bn in FY14. Commitments majorly rose at subsidiaries level with standalone media content commitments at INR8.4bn versus INR3.0bn in FY14.

Related party transactions

Table 13: Related party transactions (other than joint venture’s/ associates) (INR mn)


Revenue from related parties rose to INR1.9bn in FY15, largely led by sales to Dish TV at INR1.2bn (FY14: INR560mn) and Siti Cable at INR491mn (FY14: INR41mn). Operating costs include media content purchased from Zee Media Corp. worth INR1.2bn (FY14: INR1.2bn), Dish TV at INR203mn, Siti Cable at INR315mn and Essel Corporate Resources P.Ltd. at INR294mn.

P&L transactions FY14 FY15Revenue from operations (largely Dish TV, Siti Cable) 680 1,758 Other income 76 107 Total (A) 756 1,865 As % of total sales 1.7 3.8

Purchase of media content and services (Largely Zee Media Corp) 2,150 2,279 Other expenses, reimbursements 199 306 Total (B) 2,349 2,585 As % of total operating expenses 8.3 8.1

Balance sheet exposure FY14 FY15Investments 2 3 Receivables 576 749 Loans/ advances 44 455 Total (A) 622.0 1,207.0

Payables (522) (459) Loans/ advances received - (22) Total (B) (522) (481)

Net exposure (A-B) 100 726 As % of adjusted networth 0.4 2.1



Table 14: Summary Financials (INR mn)



Particulars FY11 FY12 FY13 FY14 FY15Sales 30,088 30,405 36,996 44,217 48,837 Total income 30,970 31,789 38,457 46,024 51,115 EBITDA 8,220 7,395 9,543 12,043 12,538 EBITDA margin (%) 27 24 26 27 26 RoE (%) 18 18 20 21 19 RoCE (%) 25 26 29 31 27 Depreciation 289 323 399 501 673 Financial costs 88 50 86 158 103 Net profit 6,369 5,891 7,196 8,921 9,775 Equity shareholders' funds 30,982 34,354 39,115 47,377 55,498 Adjusted* equity shareholders' funds 30,982 34,354 39,115 27,207 35,306 Loan funds 17 21 28 29 22 Net Debt/ (Cash) (10,180) (10,586) (12,553) (10,964) (15,634) Adjusted* Net Debt/ (Cash) (10,180) (10,586) (12,553) 9,206 4,558 Net fixed assets 8,098 9,199 9,906 10,733 11,376 CWIP 8 201 69 997 878 Current assets loans and advances 28,457 31,011 37,009 42,116 49,802 Current l iabil ities and provisions 7,670 8,592 11,099 12,203 13,776 Net current assets 20,787 22,419 25,910 29,913 36,026 Cash and cash equivalent 10,197 10,607 12,581 10,993 15,656 Cash flow from operating activities 5,725 4,078 3,867 3,830 6,809 Cash flow from investing activities (4,989) (164) 452 (2,059) (3,661) Cash flow from financing activities (2,951) (4,488) (2,287) (1,444) (3,427) Net cash flows (2,215) (574) 2,032 327 (279) CAPEX (376) (797) (709) (1,465) (1,091) Working capital investments 886 (1,612) (2,348) (4,904) (2,236)


Reliance Industries’ (RIL) FY15 annual report analysis highlights improvement in EBITDA margin by 200bps YoY. Gross debt rose 16% YoY to INR1,609bn due to highest-ever capex spend of INR1.0tn during FY15. Interest cost declined from INR39bn to INR33bn, though including interest capitalised, rose by INR21bn to INR77bn in FY15. RIL capitalised MTM forex losses of INR68.7bn (FY14: INR106.8bn). Average yield on cash and investments of INR838bn stood at 9.4% and adjusted borrowing cost (including interest and forex capitalised) at 9.7%. Use of lower cost forex loans, superior treasury yields coupled with accounting policy of exchange rate capitalisation led to superior reported profits. Other income contributed 28% of PBT (FY14: 31%). As per our estimate, since FY06, cumulative forex losses capitalised and revalued assets (without corresponding revaluation reserve) net of depreciation stood at INR479bn, 22% of net worth. This, alongwith significant capex, led to subdued RoE and RoCE over the years, as 44% of RIL’s capital employed is under CWIP. Management guided for improvement in return ratios and decline in capex spend since major projects are nearing commissioning operations. Outstanding currency and oil derivative position increased significantly during FY15. What’s on track? Refining and petchem segment’s EBIT margins and return on net assets have improved over past 3 years. Retail segment delivered robust performance. Oil & gas segment margins and returns have however declined over the years. Consolidated RoCE (ex-telecom) improved marginally YoY, however other non-operational business ventures remained a drag on consolidated RoE/RoCE. Most upcoming projects are on track and expected to commence operations during FY16/Q1FY17, which will lead to improvement in return ratios.

What needs tracking? Interest cost capitalised rose to INR44.1bn in FY15 (FY14: INR17.6bn) and RIL continued capitalisation of forex losses (INR68.7bn in FY15) as per amended AS-11. Operating cash flow post interest dipped from INR376.4bn in FY14 to INR282.3bn on account of decline in trade and other payables by INR27.5bn versus increase of INR143.4bn in FY14. Receivable days have been declining over the years — from 17 days in FY12 to 7 in FY15. Receivables fell to INR53bn in FY15 versus INR94bn last year. Payable days stood at 70 in FY15 (FY14: 53 days) and outstanding payables stood at INR594bn (FY14: INR608.6bn).



Reliance Industries | Annual Report Analysis


June 01, 2015

52-week range (INR) : 1,132 / 796


M cap (INR bn/USD mn) : 2,838 / 44,514

Avg. Daily Vol. BSE/NSE (‘000) : 3,714

Promoters* : 45.2


FIIs : 18.8

Others : 23.4

*Promoters pledged shares : NIL (% of share in issue)

Market Data




Contingent liabilities rose significantly during FY15 to INR322bn (15% of net worth) versus INR165bn in FY14 (8% of net worth), primarily led by increase in guarantees issued (including letter of credits – LC’s) from INR96bn in FY14 to INR280bn in FY15. Cash utilised for capex in FY15 was INR630bn versus INR1.0tn capex, which could be due to increase in creditors for capex which may come for payment in FY16 and likely to increase net debt. Derivatives exposure rose substantially owing to the increase in forward contracts (from INR767bn in FY14 to INR959bn) and interest rate swaps (from INR337bn in FY14 to INR700bn). Commodity derivatives exposure for petroleum products rose 2.7x YoY to 158,095kbbl and feedstock purchase contracts rose 2x YoY to 308,711kbbl. Since FY13, commodity derivatives have increased 3x. Related party transactions stood at INR66.4bn in FY15 (FY14: INR69.8bn), largely pertaining to raw material purchase, fuel and power cost, hire charges and sales/distribution expenses. Total outstanding exposure (investments, loans/advances net of payables) stood at INR67bn, and including guarantees of INR14.3bn, stood at INR81bn, 3.7% of net worth (FY14: INR78bn 3.9%).

Other highlights • FY15 capex stood at INR1.0tn on account of expansion in refining, petrochemical,

telecom and shale gas businesses. Total telecom assets rose by INR405bn to INR826bn.

• RIL acquired control of Network18 Media & Investments (including its subsidiary TV18 Broadcast) via Independent Media Trust (IMT), of which RIL is the sole beneficiary. Since acquisition, Network18’s revenues stood at INR27.5bn and EBIT at INR1.4bn.

• Goodwill on consolidation, as on FY15, stood at INR44bn, 2% of net worth (FY14: Nil) which we believe could pertain to acquisition of controlling stake in Network18 group.

• RIL provided INR14bn towards liability related to dismantling and abandonment of facilities based on estimated future expenditure. Liability pertains to blocks at Tapti Part B facilities, D1D3 and MA fields.

Key highlights from MD&A • Efforts by RIL to provide 4G services across the country is gathering momentum. During

the year, based on acquisition of additional spectrum, RIL emerged as the largest holder of liberalised spectrum in India.

• The company was successful in acquiring rights to use spectrum in 800 MHz or 1800 MHz bands or both in 13 key circles across India. With this, Reliance Jio Infocomm (RJIL) has spectrum in either 800 MHz or 1800 MHz or both in 20 out of 22 circles in the country. This is in addition to the pan-India spectrum in the 2300 MHz band.

• Refining business delivered record EBIT of INR158.3bn and GRM of USD8.6/bbl.

• Over 300 fuel retailing outlets were commissioned, with plans to re-commission the entire network of 1,400 outlets by end of FY16. RIL’s focus is to ensure consistent and superior customer experience through several technology-enabled initiatives.

• US shale business recorded strong operational performance. In CY14, gross joint venture (JV) production averaged ~1.2bn cubic feet equivalent per day (BCFe/d),


Reliance Industries

implying 26% YoY growth. The business delivered EBIT of USD402mn, an increase of 36.3% YoY.

• Retail business, over past five years, has sustained its growth momentum growing at 31% CAGR to generate record revenues of INR176.4bn. RIL also enhanced its presence with 2,621 stores (12.5mn sq ft) spread across 200 cities. Net store addition in FY15 stood at 930, at almost 18 new stores every week.



• Revenues declined 14% YoY to INR3.8tn in FY15, impacted by the sharp dip in

crude oil prices in second half of the year. EBITDA, however, rose by 7% YoY and EBITDA margins expanded by 200bps.

• Interest cost declined to INR33bn, though adjusted for interest capitalised worth INR44.1bn (FY14: INR17.6bn), rose 38% YoY to INR77.3bn versus INR55.9bn in FY14.

• Depreciation capitalised and not included in P&L stood at INR2.5bn in FY15 (FY14: INR1.9bn).

• Forex loss capitalised during the year stood at INR68.7bn, 22% of PBT. As per our estimates, cumulative forex losses (net of depreciation) worth INR294.7bn is capitalised in fixed assets, constituting 13.5% of net worth as detailed below:

Table 2: Forex loss capitalized (INR bn)



Sales 3,901 100.0 3,291 100.0 443 100.0 464 100.0 4,345 100.0 3,754 100.0 Raw Materials Consumed 3,302 84.7 2,651 80.6 328 73.9 290 62.5 3,630 83.6 2,940 78.3 Other Exp. 256 6.6 287 8.7 54 12.3 91 19.5 311 7.2 378 10.1 Personnel cost 34 0.9 37 1.1 22 5.0 26 5.6 56 1.3 63 1.7 EBITDA 309 7.9 316 9.6 39 8.8 58 12.4 348 8.0 374 10.0 Depreciation 88 2.3 85 2.6 24 5.4 31 6.6 112 2.6 115 3.1 EBIT 221 5.7 231 7.0 15 3.4 27 5.8 236 5.4 258 6.9 Financial Charges 32 0.8 24 0.7 6 1.4 9 2.0 38 0.9 33 0.9 EBT 189 4.8 207 6.3 9 2.0 18 3.8 198 4.5 225 6.0 Other Income 89 2.3 87 2.7 1 0.1 (1) (0.2) 90 2.1 86 2.3 PBT 278 7.1 295 9.0 9 2.1 16 3.6 288 6.6 311 8.3


Particulars FY05-09 FY10 FY11 FY12 FY13 FY14 FY15 Total Exchange Gain/Loss for the year included in cost of assets 105.7 (53.1) (0.4) 79.2 59.5 106.8 68.7 366.3 Addl depreciation on exchange fluctuation * 2.2 6.5 4.2 6.8 12.0 17.9 22.6 72.1 Net exchange fluctuation carried in value of assets 104.0 44.4 39.8 112.2 159.7 248.6 294.7 As % of net worth 3.2 2.6 6.6 8.8 12.5 13.5



Subsidiaries’ performance Table 3: Major subsidiaries profitability analysis (INR bn)


Aggregate profitability of subsidiaries fell from INR9.2bn profit to INR7.4bn loss. Reliance Retail and Reliance Eagleford Midstream (shale gas business) performed well, however losses in Reliance Marcellus (shale gas) and Reliance Holdings, USA, increased.

Subsidiary company % shareholding FY14 FY15as on FY15 Networth Turnover PAT Networth Turnover PAT

Telecom segment entities:Reliance Jio Infocomm Ltd. 98.9 230.4 0.0 (0.1) 300.7 0.0 (0.2) Reliance Jio Infocomm Pte. Ltd. 98.9 1.3 - (0.0) 4.1 0.0 (0.1) Reliance Jio Infocomm USA Inc. 98.9 0.2 - (0.0) 1.0 - (0.1)

Retail segment entities:Reliance Retail Ventures Ltd. 94.5 60.0 - (0.0) 60.0 - (0.0) Reliance Retail Ltd. (Formerly Reliance Fresh Ltd.)

94.4 52.5 127.5 2.7 51.9 162.0 2.7

Shale gas/oil entities:Reliance Eagleford Upstream LLC 100 14.1 - (0.0) 14.4 - (0.0) Reliance Eagleford Upstream Holding LP 100 38.6 40.1 10.7 55.6 49.0 16.2 Reliance Eagleford Midstream LLC 100 6.1 - 2.0 5.0 3.1 2.5 Reliance Marcellus LLC 100 8.1 2.3 (1.5) 8.0 8.9 (8.9) Reliance Marcellus II LLC 100 4.6 3.4 (1.0) 3.9 4.1 (15.0)

OthersRIL USA Inc 100 0.6 266.9 0.5 1.8 176.4 1.1 Reliance World Trade Pvt Ltd. 100 61.3 - - 61.3 - (0.0) Reliance Commercial Land & Infrastructure Ltd.

100 41.7 0.0 0.0 41.7 0.0 (0.0)

Reliance Universal Enterprises Ltd. 100 34.2 0.0 0.0 34.2 0.0 (0.0) Reliance Corporate IT Park Ltd. 100 28.6 40.4 0.1 28.2 67.6 0.1 Reliance Holdings USA Inc. 100 32.4 - (2.9) 27.6 - (5.4) Reliance Aromatics & Petrochemicals Pvt Ltd.

100 27.1 0.0 (0.0) 27.1 0.0 -

Reliance Chemicals Ltd. 100 26.1 0.0 - 26.0 0.0 (0.0) Reliance Polyolefins Ltd. 100 26.0 0.3 0.0 26.0 0.6 0.0 Reliance Ventures Ltd. 100 24.3 1.6 0.6 25.9 2.6 1.6 Reliance Eminent Trading & Commerical Pvt Ltd.

100 20.6 0.0 (0.1) 21.5 0.0 (0.1)

Reliance Progressive Traders Pvt Ltd. 100 17.4 0.0 (0.2) 19.2 0.0 (0.3) Reliance Prolific Traders Pvt Ltd. 100 14.4 0.0 0.1 14.3 0.0 (0.2) Reliance Strategic Investments Ltd. 100 11.9 0.5 0.2 12.6 2.5 0.7 Reliance Industrial Investments & Holdings Ltd.

100 12.2 9.6 0.1 12.5 11.0 0.0

Recron (Malaysia) Sdn Bhd 100 15.4 67.1 (1.6) 11.2 65.8 (2.7) Gapco Kenya Ltd. 76 5.1 98.8 0.0 5.4 128.6 0.4 Others 64.9 127.2 (0.4) 64.2 67.2 0.0 Total 880.1 785.8 9.2 965.2 749.5 (7.4)


Reliance Industries

Cash flow analysis Table 4: Cash flows analysis (INR bn)


Operating cash flow post interest declined 25% YoY to INR282.3bn, primarily on account of the dip in trade payables by INR27.5bn (versus increase of INR143.4bn last year). Inventories and receivables dropped YoY and aided working capital (versus decline in FY14). Capex rose substantially during the year by INR1.0tn as per annual report. However, cash flow statement reflected INR630bn as cash payments towards capex. We believe remaining INR370bn cost, could come for payment in FY16 and may increase net debt to that extent. Other payables, under current liabilities, jumped from INR113bn to INR325bn, which could partly be due to creditors for capex.

Table 5: Average cash conversion cycle (days) *


* Recevable days are calculated on sales while inventory and payable days are on COGS.

Inventory days stood higher at 63, though offset by the increase in payable days from 53 to 70. Receivable days continued to decline and receivables during FY15 stood at INR53bn (versus INR94bn last year). Trade payables stood at INR594bn (FY14: INR608.6bn).

Table 6: Average cash conversion cycle (days) – Global peers

Particulars

Profit before tax 278.2 294.7 9.4 16.5 287.6 311.2 Non-operating expense (29.2) (49.0) 14.6 13.2 (14.6) (35.9) Non-cash adjustments 88.1 84.9 23.3 29.8 111.4 114.7 Direct taxes paid (60.7) (60.8) (1.5) (3.5) (62.1) (64.4) Cash profit after tax 276.5 269.7 45.8 55.9 322.3 325.6 Changes in trade and other receivables 4.1 54.6 (23.3) (43.7) (19.1) 11.0 Changes in inventories (2.0) 63.8 (11.9) (29.1) (14.0) 34.7 Changes in trade and other payables 143.1 (35.3) 0.3 7.7 143.4 (27.5) (Increase)/ Decrease in working capital 145.2 83.2 (34.9) (65.0) 110.3 18.2 Net cash from operating activities 421.6 352.9 11.0 (9.1) 432.6 343.8 Interest expenses paid (40.5) (33.7) (15.7) (27.8) (56.2) (61.5) Net cash from operating activities post interest 381.1 319.2 (4.7) (36.9) 376.4 282.3 Capital expenditure (324.0) (426.3) (275.4) (203.3) (599.4) (629.6) Free cash flows 57.1 (107.2) (280.1) (240.2) (223.0) (347.4)

Subsidiary (derived) ConsolidatedFY14 FY15 FY14 FY15 FY14 FY15

Standalone

Particulars FY13 FY14 FY15 FY13 FY14 FY15Inventory days 45 45 51 53 53 63 Add: Trade Receivable days 15 11 8 12 8 7 Less: Trade Payable days (50) (55) (72) (47) (53) (70) Cash conversion cycle 11 1 (13) 18 8 1


Oil & Gas global peers BP Exxon Mobil Shell ChevronParticulars CY12 CY13 CY14 CY12 CY13 CY14 CY12 CY13 CY14 CY12 CY13 CY14Inventory days 30 32 28 18 20 22 28 29 25 13 14 16 Add: Trade Receivable days 27 27 25 24 24 21 35 32 29 34 35 35 Less: Trade Payable days (34) (33) (31) (41) (41) (38) (40) (40) (38) (50) (52) (53) Cash conversion cycle 24 26 23 1 2 5 22 21 17 (3) (3) (2)

Cash conversion cycle has continued to show improvement over the years, though partly led by increase in payable days. RIL enjoys better cash conversion cycle compared to peers supported by lower receivable days and higher payable days, though impacted by higher inventory days.



Source: Bloomberg, Company annual report, Edelweiss research

Capital allocation Table 7: Capital allocation (INR bn)


FY15 witnessed significant increase in net fixed assets and CWIP by INR150bn and INR750bn, respectively. CWIP included Intangibles under development, which rose by INR174bn. Significant capex of INR1.0tn (USD16bn) was on account of expansion projects in petrochemical and refining businesses (Jamnagar, Dahej and Hazira), US shale business and RJIL , the telecom business. Assets of telecom venture, RJIL, increased by INR405bn in FY15, leading to total outstanding assets of INR826bn as at end FY15. Total debt pertaining to RJIL rose from INR148bn in FY14 to INR223bn in FY15.

Petrochemical global peersParticulars CY12 CY13 CY14 CY12 CY13 CY14 CY12 CY13 CY14 CY12 CY13 CY14Inventory days 17 18 17 17 18 19 5 5 5 6 7 6 Add: Trade Receivable days 9 9 8 13 14 14 6 6 6 9 8 7 Less: Trade Payable days (10) (10) (10) (8) (9) (9) (7) (8) (7) (7) (10) (13) Cash conversion cycle 15 16 16 22 23 24 3 3 4 8 5 1

Petroleos MexicanosDow Chemical BASF Valero Energy

Particulars FY11 FY12 FY13 FY14 FY15Sales 2,658 3,585 3,971 4,345 3,754 EBITDA 380 345 330 348 374 EBITDA margin (%) 14.3 9.6 8.3 8.0 10.0 ROE (%) 13.1 12.2 11.9 11.8 11.3 ROCE (%) 11.9 11.3 10.8 10.4 9.6 ROCE (%) - ex telecom 11.9 11.3 10.8 11.2 11.6 Net fixed assets (Ex CWIP) 1,597 1,388 1,335 1,414 1,565 CWIP 282 254 500 915 1,665 Fixed asset turnover ratio (Ex CWIP) 1.7 2.6 3.0 3.1 2.4 Equity shareholders' funds (A) 1,541 1,694 1,821 1,987 2,185 Loan funds (B) 841 924 1,072 1,388 1,609 Total capital employed (A+B) 2,382 2,619 2,893 3,374 3,794 Debt Equity Ratio 0.5 0.5 0.6 0.7 0.7

Significant capex and expansion plans led to decline in asset turnover and RoE/RoCE, as 44% of capital employed is under CWIP RoE and RoCE remain subdued, though ex-telecom assets the ratios have marginally improved on YoY basis


Reliance Industries



Significant amount of forex losses capitalised in cost of fixed assets and revaluation of assets (cumulatively 22% of net worth) has led to subdued RoE and RoCE over the years. Table 8: Segment margins and return on net assets (%)


* Estimate

1,500

2,000

2,500

3,000

3,500

4,000

5.0

7.0

9.0

11.0

13.0

15.0


(INR

bn)

(%)

Total capital employed (A+B) EBITDA margin (%)

ROCE (%) ROCE (%) - ex telecom

Particulars FY13 FY14 FY15

Refining 3.5 3.3 4.7 Petrochemical 8.2 8.7 9.3 Oil&Gas 33.3 26.3 28.1 Retail # 0.8 2.4 Others 2.3 15.1 10.1

Refining 18.1 19.8 19.8 Petrochemical 18.6 18.7 17.6 Oil&Gas 8.2 5.0 4.7 Retail # 4.0 6.9

Refining 22 19 23 Petrochemical 14 14 12 Oil&Gas 16 18 18 Retail - 2 2 Telecom* - - 13 Others and unallocable (including surplus cash and investments)

48 48 33

EBIT Margins:

Return on Net Assets (RONA):

Proportion of capital employed:

Refining EBIT margins and RONA improved over past 3 years, while oil & gas segment margins declined. 35% of capital employed in refining and petrochemical business generates superior returns.



Investments and Borrowings analysis Table 9: Other income, as a % of PBT (INR bn)


Other income contributes significant proportion of PBT although the proportion declined in FY15 from 31% to 28% Table 10: Average yield on investments (INR bn)

Table 11: Borrowings (INR bn)


Average borrowing cost charged to P&L fell to 2.2%, and adjusted for interest and forex loss capitalised, borrowing cost declined from 13.2% in FY14 to 9.7% which is due to lower MTM forex loss during FY15 vs FY14. Gross debt increased 16% YoY to INR1,609bn, of which INR364bn pertained to US shale gas business, INR223bn towards telecom (RJIL) and balance towards standalone and other businesses. Forex and commodity derivatives Table 12: Forex derivatives (INR bn)


Particulars FY11 FY12 FY13 FY14 FY15Other Income 25.4 61.9 78.7 90.0 86.1 PBT 240.5 254.1 262.2 287.6 311.1 Other Income as a % of PBT 11 24 30 31 28

Particulars FY12 FY13 FY14 FY15Income from Investment 58.9 77.2 85.8 83.4

Cash & Bank 407.3 504.6 379.8 125.5 Current Investments 271.7 288.7 344.6 510.1 Non- current investments (Excl. investment in associates)

71.5 94.8 220.1 202.6

Total 750.5 888.1 944.5 838.2 Average yield (%) 9.5 9.4 9.4 9.4

Particulars FY12 FY13 FY14 FY15Total Debt 924.5 1,072.2 1,387.6 1,608.6Avg Borrowing Cost (Charged to P/L) (%) 3.3 3.5 3.1 2.2 Avg Borrowing Cost (Incl interest and forex loss capitalised) (%) 13.6 10.7 13.2 9.7 Difference 10.3 7.3 10.1 7.5

Particulars FY11 FY12 FY13 FY14 FY15 Interest Rate Swaps 363 341 332 337 700 Currency Swaps 46 42 44 28 24 Options (net) 282 251 23 24 65 Forward Contracts 317 252 896 767 959 Total 1,007 886 1,296 1,157 1,748

Average yield on investments stood at 9.4%, while adjusted borrowing cost stood at 9.7%


Reliance Industries

Derivatives exposure jumped 51% YoY to INR1.75tn in FY15, primarily on account of the increase in interest rate swaps and forward contracts. Unhedged exposure rose 31% YoY at INR858bn in FY15, 39% of net worth versus INR656bn in FY14, 33% of net worth.

Table 13: Commodity derivatives


Commodity derivatives hedging increased significantly in FY15. Hedging contracts for Petroleum products sales rose 2.7x YoY and feedstock contracts rose 2x YoY. Since FY13, commodity derivatives contracts have risen nearly 3x.

Fixed assets and revaluation

Table 14: Assets revalued (INR bn)


RIL charged depreciation on revalued assets from general/capital reserves in past 3 years, although in FY15 the amount was significantly lower than FY14. As per our estimates, assets revalued since FY06 for which no revaluation reserves exist stood at INR184.6bn, 8.4% of net worth.

FY14

Particulars

Petroleum Product

sales(in kbbl)

Feedstock purchases

(in kbbl)

Petroleum Product

sales(in kbbl)

Feedstock purchases

(in kbbl)

Petroleum Product

sales(in kbbl)

Feedstock purchases

(in kbbl)

Petroleum Product

sales(in kbbl)

Feedstock purchases

(in kbbl)

Petroleum Product

sales(in kbbl)

Feedstock purchases

(in kbbl)

Petroleum Product

sales(in kbbl)

Feedstock purchases

(in kbbl) Forward swaps (net) 1,900 8,185 14,757 21,420 16,722 18,842 7,334 16,575 16,944 21,321 40,469 49,460 Futures 5,772 4,967 2,194 9,453 4,809 5,879 6,259 5,488 6,737 7,066 16,186 23,980 Spreads 10,306 32,141 33,768 51,227 25,193 81,337 44,900 50,366 35,456 86,016 89,290 104,653 Options (net) 1,800 12,175 0 1,800 2,720 8,875 0 23,895 0 36,550 12,150 130,618Total 19,778 57,468 50,719 83,900 49,444 114,933 58,493 96,324 59,137 150,953 158,095 308,711Margin hedging 72,700 79,308 81,869 85,168 105,627 88,508

FY15FY10 FY11 FY12 FY13

Particulars FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15Opening value of revalued assets 27.3 237.7 217.7 199.9 310.2 282.1 255.8 232.4 210.8 193.9 Add: Accreation on revaluation of assets 225.0 - - 130.6 2.3 0.1 0.1 - 3.5 - Depreciation charged through revaluation reserve

(14.6) (20.0) (17.8) (20.2) (30.4) (26.4) (23.5) (20.8) (11.6) (0.2)

Depreciation charged through General / Capital reserve

(0.8) (8.8) (0.9)

Closing value of revalued assets carried in the books

237.7 217.7 199.9 310.2 282.1 255.8 232.4 210.8 193.9 192.8

Closing value of revalued assets in excess of revaluation reserve (A)

187.9 187.9 187.9 187.9 187.9 195.0 195.0 194.2 185.4 184.6

Networth (B) 510.3 682.2 855.1 1,212.6 1,410.0 1,541.0 1,694.5 1,820.6 1,986.9 2,185.0Revalued assets (in excess of revaluation reserve) as % of networth (A/B)

36.8 27.5 22.0 15.5 13.3 12.7 11.5 10.7 9.3 8.4



Related party transactions Table 15: Major P&L transactions (INR bn)


Net outstanding exposure (investments, loans and advances) towards related parties stood at INR67bn (FY14: INR63bn), and including guarantees of INR14.3bn stood at INR81bn, 3.7% of net worth (FY14: INR78bn, 3.9%).



Related party FY11 FY12 FY13 FY14 FY15Reliance Ports and Terminals 28.0 28.4 31.9 32.6 32.9 Gujarat Chemical Port Terminal Co 0.5 0.8 0.7 1.1 1.1 Reliance Industrial Infrastructure 0.5 0.4 0.7 0.7 0.8 Reliance Util ities 6.3 7.7 - - - Reliance Europe 0.2 0.3 0.4 0.3 0.5 Reliance Util ities and Power 2.9 3.7 13.3 14.7 15.8 Reliance Gas Transportation Infrastructure 6.5 2.4 2.0 1.9 1.9 Reliance Commercial Dealers - - 2.6 2.7 2.8 RP Chemicals (Malaysia) Sdn. Bhd. 15.8 10.5 Total 45.0 43.6 51.5 69.8 66.4

Particulars FY11 FY12 FY13 FY14 FY15Sales 2,658 3,585 3,971 4,345 3,754 Total income 2,684 3,647 4,049 4,435 3,840 EBITDA 380 345 330 348 374 EBITDA margin (%) 14.3 9.6 8.3 8.0 10.0 RoE (%) 13.1 12.2 11.9 11.8 11.3 RoCE (%) 11.9 11.3 10.8 10.4 9.6 Depreciation 141 124 112 112 115 Financial costs 24 29 35 38 33 Net profit 193 197 209 225 236 Equity shareholders' funds 1,541 1,694 1,821 1,987 2,185 Loan funds 841 924 1,072 1,388 1,609 Net Debt 367 202 218 479 792 Net fixed assets (Ex CWIP) 1,597 1,388 1,335 1,414 1,565 CWIP 282 254 500 915 1,665 Current assets loans and advances 627 769 766 794 730 Current l iabil ities and provisions 574 525 600 774 985 Net current assets 406 244 166 19 (254) Cash flow from operating activities 333 245 369 433 344 Cash flow from investing activities (320) (63) (277) (731) (649) Cash flow from financing activities 149 (76) 4 137 84 Net cash flows 162 106 97 (161) (221) CAPEX (336) 69 (286) (599) (630) Working capital investments (10) (67) 74 110 18

Major related party transactions include raw materials purchases (RP Chemicals, Malaysia), fuel and power costs (Reliance Utilities and power) and sales, distribution and hire charges (Reliance ports and terminals).


Apollo Hospitals Enterprises’ (AHEL) FY15 annual report highlights 12% increase in revenue of healthcare segment (~62% of consolidated revenue). Hospitals occupancy fell ~300bps to 68% (FY14: 71%) following addition of new capacities in past 24 months. Pharmacy segment’s (~34% of consolidated revenue) EBITDA margin remained unchanged at ~3.3%, but EBIT margin declined to 2.2% (FY14: 2.5%) hit by higher depreciation and loyalty discounts. Capital employed in pharmacy business increased to INR5.3bn (FY14: INR3.3bn), while RoCE fell to 6.8% (FY14: 9.8%). Related party purchases (medicines) jumped to ~INR5.8bn (FY14: INR3.7bn, FY13: INR3.2bn), 33% (FY14: 27%) of pharmacy sales. AHLL (standalone) clocked loss of INR272mn (FY14: INR327mn) for FY15 with subsidiaries (in sugar clinics, cradle, poly clinics (Nova) businesses) also incurring losses. AHEL infused INR1bn in AHLL during FY15, taking cumulative cash exposure to ~INR2.1bn. AHEL has also given corporate guarantee of INR 1bn on behalf of AHLL.

What’s on track? Apollo Munich Health Insurance’s EBITDA and PAT improved to INR96mn (FY14: loss of INR290mn) and INR7mn (FY14: loss of INR370mn), respectively. Revenue of Jayanagar and Vanagaram hospitals (launched in FY13) jumped to INR1.32bn (FY14: INR0.47bn). These hospitals reported positive EBITDA of INR68mn. Consequently, EBITDA loss from new hospitals declined to INR75mn (FY14: INR210mn).

What needs tracking? Consolidated EBITDA margin declined 110bps to 14.2%, primarily impacted by increase in revenue share of low-margin pharmacy business to 34% (FY14: 31%) and higher losses in AHLL and its subsidiaries. EBITDA margin of pharmacies (opened in FY11 and subsequent years) stood at a low 1%. Number of pharmacies opened since FY11 stood at 1,033 (~57% of total pharmacies) and contribute merely 13% to pharmacy segment’s total EBITDA. Pharmacies (opened till FY10) reported revenue growth of ~14% YoY, but EBITDA margin increased only marginally to 5.1% (FY14: 4.8%), which management attributed to impact of drug price control order and higher loyalty customer discounts. Standalone and consolidated profitability stood higher by INR184mn, being one-off profit on divestment of outpatient clinic business to Apollo Sugar Clinics, a step-down subsidiary of AHLL.



Apollo Hospitals | Annual Report Analysis


52-week range (INR) : 1,515 / 1,022




Promoters* : 34.3


FIIs : 43.8

Others : 19.6



Market Data


October 8, 2015



Occupancy of Hyderabad cluster declined 300bps to 63.4% due to dip in average length of stay and sluggish in-patient growth at 1.6% (FY14: 3.4%). Receivables overdue (>6 months) stood at INR 1bn (~16.5% of total receivables, FY14: 1.6bn). Bad debts written off increased to INR259mn (~5.7% of PBT; FY14: INR179mn).

Other matters During FY15, Alliance Medicorp (AHEL’s subsidiary with 51% stake) sold part of its stake in subsidiary Alliance Dental Care (ADC). Consequently, AHEL ceased to consolidate ADC in its financials. Since AHEL continues to hold its stake (FY14: ~23.8%, FY15: n.a.) in ADC, it discloses it under investments with carrying value of INR178mn (FY14: nil) in consolidated financials. AHEL has also given corporate guarantee of INR475mn on behalf of ADC. Further, AHEL discloses ADC as an entity in which key managerial personnel or their relatives are able to exercise significant influence. Trademarks and concept rights (intangibles) addition during the year stood at INR274mn. These include payments made to doctors in acquired Nova Specialty Hospitals and amount paid for acquisition of Akeso Healthcare. Corporate guarantees increased to INR1,505mn (INR475mn in FY14). This predominantly includes comfort letters of INR1,020mn and INR450mn given on behalf of AHLL and Apollo Rajshree Hospital, respectively.

Profitability and cash flow analysis Table 1: Profitability analysis (INR mn)


# Income from subsidiaries/associates Operating and administrative expenses include bad debts written off and donations, which increased to INR259mn (FY14: INR179mn) and INR103mn (FY14: INR17mn), respectively. Consolidated rent expenses spurted to ~INR1.7bn (FY14: ~INR1.3bn) following increase in number of pharmacies and new hospitals coming up on leased premises. Standalone depreciation charge stood higher by INR104mn due to revision in useful life in accordance with the Companies Act 2013.

Particulars Standalone Subsidiary (Derived) ConsolidatedFY14 % FY15 % FY14 % FY15 % FY14 % FY15 %

Sales 38,616 100.0 45,928 100.0 5,226 100.0 5,857 100.0 43,842 100.0 51,785 100.0 Raw Materials Consumed 20,019 51.8 24,240 52.8 1,482 28.4 1,572 26.8 21,501 49.0 25,812 49.8 Gross margin 18,597 48.2 21,688 47.2 3,744 71.6 4,284 73.2 22,341 51.0 25,973 50.2 Operating and Administrative expense 6,357 16.5 7,698 16.8 1,986 38.0 2,328 39.7 8,342 19.0 10,026 19.4 Personnel cost 6,102 15.8 7,210 15.7 1,172 22.4 1,391 23.7 7,274 16.6 8,600 16.6 EBITDA 6,139 15.9 6,781 14.8 586 11.2 566 9.7 6,724 15.3 7,347 14.2 Depreciation 1,291 3.3 1,580 3.4 387 7.4 536 9.2 1,678 3.8 2,117 4.1 EBIT 4,848 12.6 5,200 11.3 198 3.8 30 0.5 5,046 11.5 5,230 10.1 Financial Charges 871 2.3 833 1.8 323 6.2 346 5.9 1,194 2.7 1,179 2.3 Other Income 175 0.5 330 0.7 39 (0.2) 37 (1.5) 215 0.5 368 0.7 Interest/dividend income # 49 0.1 123 0.3 - - - - - - - - PBT before exceptional items 4,202 10.9 4,820 10.5 (86) (2.6) (278) (6.8) 4,067 9.3 4,419 8.5

Other income (in standalone and consolidated financials) includes profit of INR184mn on divestiture of outpatient diabetics’ clinic business to Apollo Sugar Clinics


Apollo Hospitals

Table 2: Segment profitability analysis (Consolidated) (INR mn)


Note:# AHEL’s share (10%) in revenue and profits is considered and presented in the above table.

Healthcare services Addition of new hospitals coupled with maturity of hospitals opened in FY13, led to revenues of new hospitals surging to INR1.8bn (FY14: INR0.5bn). Revenues of Vanagaram and Jayanagar hospitals (opened in FY13) increased to INR1,320mn (FY14: INR470mn). Other new hospitals (opened in FY14 and FY15) reported revenues of INR440mn. New hospitals reported EBITDA loss of INR75mn (FY14: INR210mn). While Vanagaram and Jayanagar hospitals reported positive EBITDA of INR68mn, other newly opened hospitals reported EBITDA loss of INR143mn.

Table 3: Healthcare services: Key operating parameters


Revenue EBITDA EBITFY13 FY14 FY15 FY13 FY14 FY15 FY13 FY14 FY15

Existing 25,545 28,312 30,483 5,930 6,688 7,124 4,686 5,330 5,574 New 28 531 1,767 (54) (210) (75) (65) (333) (300)

Healthcare services 25,573 28,843 32,250 5,876 6,478 7,049 4,621 4,997 5,274 Standalone pharmacy 11,017 13,648 17,726 293 449 580 200 343 390 Apollo Munich insurance # 497 607 735 (1) (30) 10 (10) (37) 2 AHLL (incl. Cradle) 601 743 1,074 (86) (172) (292) (152) (257) (435) Total 37,688 43,841 51,785 6,082 6,725 7,347 4,659 5,046 5,231

Revenue composition (%) EBITDA (%) EBIT (%)FY13 FY14 FY15 FY13 FY14 FY15 FY13 FY14 FY15

Existing 67.8 64.6 58.9 23.2 23.6 23.4 18.3 18.8 18.3 New 0.1 1.2 3.4 (192.9) (39.5) (4.2) (232.1) (62.7) (17.0)

Healthcare services 67.9 65.8 62.3 23.0 22.5 21.9 18.1 17.3 16.4 Standalone pharmacy 29.2 31.1 34.2 2.7 3.3 3.3 1.8 2.5 2.2 Apollo Munich insurance 1.3 1.4 1.4 (0.2) (4.9) 1.4 (2.0) (6.1) 0.3 AHLL (incl. Cradle) 1.6 1.7 2.1 (14.3) (23.1) (27.2) (25.3) (34.6) (40.5) Total 100.0 100.0 100.0 16.1 15.3 14.2 12.4 11.5 10.1

Particulars

Particulars

Particulars FY11 FY12 FY13 FY14 FY15Owned Beds- (A) 5,842 5,888 6,382 6,684 7,207 Managed Beds- (B) 2,875 2,338 2,038 1,933 2,008 Total Beds- Year end (A+B) 8,717 8,226 8,420 8,617 9,215 Operating Beds- Year end 4,767 5,153 5,549 5,811 6,321 Capacity (bed days- in mn) 1.74 1.88 2.03 2.12 2.31 In-patient admissions 265,000 281,000 313,000 332,000 354,000 Average length of stay (A) 4.79 4.78 4.65 4.54 4.43 In-patient days (in mn) 1.27 1.34 1.46 1.51 1.57 Occupancy rate (%) 73.0 71.4 71.9 71.1 68.0 Average revenue per occupied bed per day (Rs) 18,474 20,455 21,724 23,684 25,381

Existing hospitals’ revenues surged 7.7%, while EBITDA margin stood at ~23.5%



Overall occupancy declined to 68% (FY14: 71%) due to lower occupancies in the newly added hospitals (Chennai and others) and Hyderabad cluster (owing to decline in average length of stay - ALOS).

Table 4: Cluster-wise operational performance (INR mn)


Note: Others include hospitals in Madurai, Trichy, Mysore, Vizag, Pune, Karimnagar, Bilaspur, Bhumneshwar and Jayanagar

ARPOB stands for Average revenue per occupied bed

Occupancy of Hyderabad cluster fell by 400bps to 63.4% on decline in ALOS. In-patient growth in the cluster stood at a low 3.4% and 1.6% for FY14 and FY15, respectively. However, owing to greater focus on high-value cases and increased inflow of international patients, ARPOB increased by ~15% to INR23k. Occupancies of hospitals (grouped under others) declined by 450bps to 63.4%, mainly due to low occupancy in newly commissioned hospitals.

Pharmacies Pharmacies (standalone) revenues surged ~30%, led by 12% (net) increase in store count and ~16% rise in revenue per store. EBITDA margins improved for stores opened till FY10, but overall remained unchanged at ~3.3%. Pharmacy loyalty discounts increased to INR495mn (FY14: INR271mn), representing 2.8% (FY14: 2%) of pharmacy sales. Management highlighted the increase in discounts was led by the new stores. During FY15, 190 (net) stores were added, taking the total store count to 1,822. Stores (321) acquired as part of the Hetero acquisition were integrated from Q1FY16, taking total store count to over 2,100 during the quarter.

Chennai cluster Hyderabad cluster Others Subsidiary/JV/AssociateFY13 FY14 FY15 FY13 FY14 FY15 FY13 FY14 FY15 FY13 FY14 FY15

Operating beds 1,237 1,264 1491 930 930 930 1,416 1,585 1821 1,966 2,032 2079Bed occupancy 73.5 71.6 66.7 66.2 67.5 63.4 72.0 68.1 63.4 73.7 74.5 74.8Volumes

Inpatient 72,608 75,931 81,920 49,362 51,048 51,877 71,988 78,757 87,834 1,19,390 1,25,942 1,31,916Outpatient 3,28,991 3,51,195 3,81,931 1,43,806 1,52,495 1,61,717 1,94,244 2,31,102 2,57,174 3,94,486 3,97,826 4,43,370

RevenuesInpatient 7,619 8,372 9,273 3,405 3,763 4,066 3,697 4,573 5,364 10,840 11,901 13,063Outpatient 2,400 2,717 3,161 713 820 905 633 810 944 1,907 2,237 2,537

ARPOB / (INR/Day) 30,174 33,561 34,266 18,280 20,002 23,081 11,603 13,662 14,953 24,055 25,590 27,506Inpatient ALOS 4.6 4.4 4.4 4.6 4.5 4.2 5.2 5.0 4.8 4.4 4.4 4.3 Growth- Volumes

Inpatient N.A. 4.6% 7.9% N.A. 3.4% 1.6% N.A. 9.4% 11.5% N.A. 5.5% 4.7%Outpatient N.A. 6.7% 8.8% N.A. 6.0% 6.0% N.A. 19.0% 11.3% N.A. 0.8% 11.4%

Growth- ARPOB N.A. 11.2% 2.1% N.A. 9.4% 15.4% N.A. 17.7% 9.4% N.A. 6.4% 7.5%

Particulars

ARPOB for Chennai cluster grew 2.1% in FY15. However, excluding impact of the 4 newly commissioned hospitals, APROB for the cluster grew 11% Pharmacy EBIT margins declined to 2.2% (FY14: 2.5%) owing to the steep increase in depreciation to INR190mn (FY14: INR106mn)


Apollo Hospitals

Table 5: Pharmacies - Key operating parameters (INR mn)


Note: Due to rounding off, EBITDA presented above will not reconcile with EBITDA presented in Segment profitability analysis Pharmacy stores opened till FY08 stood at 425 and accounts for ~23% of total stores. However, these stores contributed ~57% to total EBITDA of the segment.

Others Apollo Munich Health Insurance (AHEL stake at 10.2%) reported 24% increase in gross written premium to INR8.6bn. Its EBITDA and PAT improved to INR96mn (FY14: loss of INR290mn) and INR7mn (FY14: Loss of INR370mn), respectively.


# Keimed Private Limited has controlling interest in these parties


Related party transactions (ex purchase of medicines and remuneration) increased to ~INR1.1bn (FY14: INR0.6bn). Managerial remuneration stood at INR352mn (FY14: INR356mn), and represented ~7.2% of PBT.

Stores count Revenue EBITDAFY13 FY14 FY15 FY13 FY14 FY15 FY13 FY14 FY15

Upto FY08 Batch 455 434 425 4,700 5,047 5,653 250 286 332 FY09 Batch 201 193 189 1,763 1,974 2,319 42 58 87 FY10 Batch 189 184 175 1,491 1,680 1,916 43 70 88 FY11 & onwards Batch 658 821 1,033 3,063 4,942 7,749 (35) 26 77

1,503 1,632 1,822 11,017 13,644 17,637 301 441 583 Average revenue per store

Upto FY08 Batch N.A. N.A. N.A. 10.3 11.6 13.3 5.3 5.6 5.9 FY09 Batch N.A. N.A. N.A. 8.8 10.2 12.3 2.4 2.9 3.7 FY10 Batch N.A. N.A. N.A. 7.9 9.1 11.0 2.9 4.2 4.6 FY11 & onwards Batch N.A. N.A. N.A. 4.7 6.0 7.5 (1.2) 0.5 1.0 Overall 7.3 8.4 9.7 2.7 3.3 3.3

Particulars

EBITDA margins (%)

Particulars Nature of transaction FY13 FY14 FY15Keimed Private Limited Purchase of drugs & medicines 3,199 3,699 4,828 Faber Sindoori Management Services Biomedical Engineering Services 244 296 480 Apollo Sindoori Hotels Limited Catering Services 2 220 460 Faber Sindoori Management Services Housekeeping services 18 46 60 Other parties # Purchase of drugs & medicines - - 992 P. Obul Reddy & Sons n.a. 30 37 54 Remuneration paid Remuneration 366 356 352 Total 3,860 4,654 7,226

Purchases of drugs & medicines from Keimed and other related parties increased by 57% to INR5.8bn (FY14: INR 3.7bn)

While average revenue per store surged ~20% for the stores opened during FY09 and FY10, it stood lower at ~14% for the stores opened up to FY08



Table 7: Key subsidiaries (INR mn)


* Subsidiary of Apollo health and lifestyle(AHLL)

During FY15, the company acquired 11 day care and short stay surgery centres from Nova Specialty Hospitals. Of the 11 centers which were acquired, 2 have been remodeled as Cradle, while the remaining 9 centers have been rebranded as Apollo Spectra Hospitals. AHLL’s consolidated losses at EBITDA and PAT level for FY14 stood at INR181mn (FY13: INR95mn) and INR324mn (FY13: INR155mn) respectively. Consolidated revenue and profitability of AHLL for FY15 is not available. AHLL (standalone) losses declined to INR272mn (FY14: INR327mn). The company requires continued financial support from AHEL to sustain its loss-making operations and fund its growth plans (including acquisitions). AHEL infused INR1bn in AHLL during FY15, taking cumulative cash exposure to INR2.1bn. Management highlighted that AHLL has plans to raise money from private equity to fund its growth plans.

Table 8: Cash Flow Analysis (INR mn)


Operating cash flow improved YoY, but FCF stood negative at INR5.1bn in FY15 (FY14: INR(3.4)bn) due to higher capex of INR8.7bn in FY15 (FY14:INR6bn).

FY14 FY15Business % Holding Net Worth Revenue PAT Revenue PAT

Apollo Rajshree Hospitals Pvt Hospital-Indore 58 218 - - 140 (96) Imperial Hospital & Research Centre Hospital-Bengaluru 90 469 1,469 52 1,672 47 Samudra Healthcare Enterprise Hospital-Kakinada 100 228 280 3 283 5 Apollo Health and Lifestyle Primary healthcare 100 447 1,149 (327) 1,664 (272) Nova Special ity Hospitals * Poly Clinics, diagnostic centres 100 (109) - - 205 (109) Apollo Bangalore Cradle * Maternity services, chil care 81 134 151 (34) 226 (35) Apollo Sugar Clinics * Diabetes cl inics 80 691 - - 44 (51)

Particulars

ParticularsFY14 FY15 FY14 FY15 FY14 FY15

Profit before tax 4,202 4,673 (135) (119) 4,067 4,554

Non-operating expense 683 592 343 (223) 1,026 369

Non-cash adjustments 1,452 1,796 433 591 1,885 2,387

Direct taxes paid (1,060) (936) (43) (66) (1,104) (1,003)

Cash profit after tax 5,276 6,125 598 183 5,874 6,308

Increase in trade/other receivables (579) (1,026) (114) (315) (693) (1,341)

Increase in inventories (596) (675) (4) (46) (599) (722)

Increase in trade payables 724 714 (205) 595 519 1,308

Change in Others (1,794) (1,246) 427 393 (1,367) (853)

Increase in working capital (2,246) (2,234) 105 626 (2,140) (1,608)

Net cash from operating activities 3,031 3,891 703 809 3,734 4,699

Interest expenses paid (871) (833) (333) (343) (1,204) (1,176)

Net cash from operating activities post interest 2,160 3,058 370 466 2,530 3,524

Capital expenditure (5,373) (6,847) (585) (1,807) (5,958) (8,655)

Free cash flows (3,213) (3,790) (215) (1,341) (3,428) (5,131)

ConsolidatedStandalone Subsidiary (derived)

Aggregate losses of AHLL and its subsidiaries stood at INR 467mn Sanofi acquired 20% stake in Apollo Sugar Clinics (ASC). ASC plans to increase the number of sugar clinics to 250 over next 5 years from the existing 26, as at March’15


Apollo Hospitals



Other advances (not considered in above cash conversion cycle) increased by 71% to INR3.5bn (FY14: INR2.1bn).

Table 10: Cumulative cash generation and utilisation (consolidated; FY11-15) (INRmn)


AHEL incurred capex of INR28bn during FY11-15, which represented ~87% of the application of funds primarily funded by operating cash flow, borrowings and equity. Table 11: Contingent liabilities (INR mn)


Particulars FY12 FY13 FY14 FY15Inventory days 38 37 39 41 Receivable days 40 42 41 40 Payable days (53) (47) (47) (49) Patient deposit & supplier advance days 4 1 1 3 Cash conversion cycle 29 32 34 35 Working cap. as % of sales 10.3 11.0 10.7 10.9

Sources FY11 FY12 FY13 FY14 FY15 Total Application FY11 FY12 FY13 FY14 FY15 TotalOperating profit 4,252 5,357 6,256 6,978 7,311 30,153 Capex 3,157 3,867 6,600 5,958 8,655 28,237 Less: Interest 780 891 1,033 1,204 1,176 5,084 Dividend 432 468 557 765 800 3,022 Less: Taxes 675 627 927 1,104 1,003 4,336 Purchase of investment 1,307 1,071 1,071 (2,302) (670) 478 Add: Investment Income 115 272 283 98 113 880 Net increase in cash (1,359) 545 832 (459) 1,032 591 Cash Profits 2,911 4,110 4,579 4,769 5,245 21,613 Working capital changes (1,042) (873) (901) (2,140) (1,608) (6,565)Operating cash flow 1,869 3,237 3,678 2,628 3,636 15,049 Equity capital 107 4,159 1,631 72 417 6,387 Net borrowings 1,562 (1,446) 3,688 1,262 5,481 10,547 Others - - 63 - 282 345 Total 3,537 5,951 9,060 3,962 9,817 32,327 Total 3,537 5,951 9,060 3,962 9,817 32,327

Standalone ConsolidatedFY14 FY15 FY14 FY15

Claims not acknowledged as debt 438 592 698 803 EPCG obligation 1,525 922 1,525 922 Indirect tax l iabil ities 130 121 154 165 Direct tax l iabil ities 337 395 401 397

2,430 2,031 2,778 2,287 Guarantees

Bank guarantees 263 262 264 312 Corporate guarantees 475 1,505 475 1,505

5,598 5,828 6,294 6,391

ParticularsCorporate guarantees increased to INR1,505mn (versus INR475mn in FY14). Capital commitment increased to INR10.5bn (FY14: INR10bn).

Cash conversion cycle remained in the range of 32 to 35 days during FY13-15



Table 12: Capital allocation (INR mn)


Gross debt increased to ~INR20bn (FY14:INR13.5bn). Debt/equity ratio increased to 0.6x (versus 0.45x in FY14).

Chart 1: Segment capital employed and RoNA


Note: Return on Net Assets (RoNA) computed on year-end net assets

Management highlighted RoCE of healthcare services (excluding new hospitals added in FY14 and FY15) stood at ~20% (FY14: 20%). Capital employed in pharmacy business surged to INR5.3bn (FY14: INR3.3bn), while its RoCE declined to 6.8% (FY14:9.8%).

Particulars FY11 FY12 FY13 FY14 FY15Sales 26,054 31,475 37,687 43,842 51,785 EBITDA 4,190 5,131 6,082 6,724 7,347 EBITDA margin (%) 16.1 16.3 16.1 15.3 14.2 ROE (%) 10.4 10.0 11.6 11.1 10.6 ROCE (%) 18.8 20.2 20.7 19.1 17.7 Fixed asset turnover ratio n.a. 1.9 1.9 1.9 1.8 Working capital turnover ratio n.a. 16.5 15.2 13.0 10.4 Net fixed assets (Ex CWIP) 14,619 18,762 21,953 25,313 30,789 CWIP 3,610 2,093 4,034 4,913 5,326 Goodwill 677 1,350 1,453 1,499 1,652 Net current assets (Ex-Cash) 1,616 2,195 2,762 3,965 6,038 Equity shareholders' funds (A) 18,989 25,068 27,468 29,767 31,713 Loan funds (B) 9,574 8,167 12,132 13,444 19,923 Total capital employed (A+B) 28,563 33,235 39,600 43,210 51,636

13.6

11.5

9.2

7.2

0.0

3.2

6.4

9.6

12.8

16.0

0

10,000

20,000

30,000

40,000

50,000

FY14 FY15

(%)

(IN

R m

n)

Net Assets - Hospitals Net Assets - Retail Pharmacy

RoNA - Hospitals RoNA - Retail Pharmacy


Apollo Hospitals



Particulars FY11 FY12 FY13 FY14 FY15Sales 26,054 31,475 37,687 43,842 51,785 Total income 26,202 31,734 38,052 44,057 52,152 EBITDA 4,190 5,131 6,082 6,724 7,347 EBITDA margin (%) 16.1 16.3 16.1 15.3 14.2 RoCE 18.8 20.2 20.7 19.1 17.7 ROE 10.4 10.0 11.6 11.1 10.6 Depreciation 948 1,239 1,423 1,678 2,117 Financial costs 778 891 1,033 1,194 1,179 Net profit 1,839 2,193 3,044 3,167 3,399 Equity shareholders' funds 18,989 25,068 27,468 29,767 31,713 Loan funds 9,574 8,167 12,132 13,444 19,923 Net fixed assets (Ex-CWIP & Goodwill) 14,619 18,762 21,953 25,313 30,789 CWIP 3,610 2,093 4,034 4,913 5,326 Goodwill 677 1,350 1,453 1,499 1,652 Curr. assets loans & advances (Ex- cash & Liquid investment) 5,848 7,036 8,759 10,712 14,160 Current l iabil ities and provisions 4,232 4,842 5,997 6,748 8,121 Net current assets 1,616 2,195 2,762 3,965 6,038 Cash & Liquid investment 2,940 3,588 6,988 4,296 5,229 Cash flow from operating activities 2,588 3,871 4,428 3,734 4,699 Cash flow from investing activities (4,415) (4,680) (7,325) (3,558) (7,591) Cash flow from financing activities 467 1,354 3,730 (635) 3,923 Net cash flows (1,359) 545 832 (459) 1,032 CAPEX 3,157 3,867 6,600 5,958 8,655 Working capital investments 1,042 873 901 2,140 1,608


Aurobindo Pharma’s (APL) FY15 annual report analysis highlights robust revenue growth of 50% YoY (19% ex-acquisition) and PAT growth of 34% YoY. Goodwill rose by INR4.6bn to INR5.3bn in FY15 (10% of networth) and brands rose by INR1.8bn, primarily led by Natrol acquisition. Export incentive receivables continued to rise with INR2.8bn outstanding as at FY15 (FY14: INR2.2bn, cumulative export incentive income of past 4 years is INR2.7bn). While operating cash flow (OCF) post interest improved YoY, free cash flow including acquisitions stood negative. Cash conversion cycle, ex-acquisitions rose from 178 days in FY14 to 194 days in FY15 (166 days reported). Purchases from related parties stood at INR4.5bn, 8.1% of total raw material cost in FY15 (FY14: INR3.1bn, 8.5%).

What’s on track? Revenue jumped 50% YoY led by acquisition of Actavis and Natrol Groups. Organic revenue growth was robust at 19% YoY. Net unhedged payables continued to decline and stood at INR5.3bn, 10% of net worth in FY15 (FY14: INR8.5bn, 23%; FY13: INR12.5bn, 48%) led by increasing forex receivables being natural hedge against forex loans.

What needs tracking? Consolidated gross margin declined from 56% in FY14 to 55% in FY15 led by increase in sale of traded goods (led by acquisitions) at INR26.1bn (FY14: INR1.8bn) wherein gross margin was 36.8% and largely pertained to Actavis acquisition. Consolidated EBTDA margin dipped 500bps YoY largely due to jump in operating expenses by 340bps YoY and employee cost by 80bps. Operating expenses rose primarily led by selling expenses, carriage expenses and legal & professional costs. Power cost, however, remained flat at INR3.6bn and declined as proportion to revenue by 130bps. OCF improved YoY partly led by robust profitability and partly due to lower pace of increase in receivables (INR2.3bn in FY15 versus INR11.0bn in FY14). Free cash flow post acquisitions turned negative and stood at INR(2.4)bn in FY15 (FY14: INR1.8bn). Cumulatively, over the past 5 years, APL’s capex spends were INR26.6bn versus OCF post interest of INR24.5bn, leading to negative FCF of INR2.1bn. Inventory days rose from 180 to 190 days (adjusted for acquisitions) and receivable days from 95 to 109 days. Adjusted payable days rose from 97 to 105 days in FY15 cushioning the cash conversion cycle.



Aurobindo Pharma | Annual Report Analysis


August 19, 2015

52-week range (INR) : 796 / 382




Promoters* : 53.9


FIIs : 29.5

Others : 10.3



Market Data




Other liabilities rose from INR1.7bn in FY14 to INR6.2bn FY15 largely pertaining to statutory dues of Actavis group. This may result in additional cash outflow if payable in short term. Trade payables pertaining to Actavis declined by INR7.0bn during FY15 (ex-Actavis trade payables rose by INR2.2bn). Intangibles rose by INR6.3bn FY14 to INR8.5bn (17% of net worth) in FY15 led by goodwill and brands of INR4.6bn and INR1.8bn, respectively largely pertaining to Natrol. Goodwill is tested annually for impairment, while brands are amortised over a period of 10 years. Loans and advances rose by INR2.5bn to INR10.2bn in FY15 (FY14: INR7.7bn – excluding INR4.0bn advance for acquisition) which largely includes: (i) advances recoverable in cash or in kind of INR2.2bn (FY14: INR1.2bn); (ii) MAT credit of INR2.6bn (FY14: INR2.5bn); (iii) export incentives of INR1.8bn (FY14: INR1.4bn) and (iv) balance with government authorities of INR1.7bn (FY14: INR1.2bn). Borrowing cost declined from 8.6% in FY14 to 3.9% in FY15 led by decline in forex losses to INR756mn in FY15 (FY14: INR2.0bn). While gross debt rose by INR6.8bn to INR44.5bn in FY15 (D/E at 0.9x), cash and investments rose by INR3.1bn to INR4.9bn largely lying in current account (INR4.3bn).



Revenue catapulted 50% YoY partly led by acquisition of Actavis and Natrol in FY15; excluding which, organic revenue growth was 19% YoY. While Natrol was acquired and consolidated effective December 2014, Actavis acquisition was w.e.f. April 1, 2014, for full year.


Sales 71.1 100.0 81.0 100.0 9.9 100.0 40.3 100.0 81.0 100.0 121.2 100.0 Raw Materials Consumed 34.8 49.0 37.8 46.7 1.2 12.4 17.3 42.9 36.1 44.5 55.1 45.4 Gross margin 36.3 51.0 43.2 53.3 8.7 87.6 23.0 57.1 44.9 55.5 66.1 54.6 Operating & admin. Expenses 11.9 16.8 14.0 17.3 3.6 36.8 13.5 33.5 15.6 19.2 27.5 22.7 Personnel cost 5.1 7.2 6.7 8.3 2.9 29.1 6.3 15.7 8.0 9.9 13.0 10.7 EBITDA 19.2 27.0 22.5 27.8 2.1 21.7 3.1 7.8 21.3 26.3 25.6 21.2 Depreciation 1.9 2.6 2.5 3.0 1.3 12.8 0.9 2.2 3.1 3.9 3.3 2.7 EBIT 17.3 24.4 20.1 24.8 0.9 8.9 2.3 5.6 18.2 22.5 22.3 18.4 Financial Charges 2.9 4.1 1.3 1.6 0.2 2.2 0.3 0.7 3.1 3.8 1.6 1.3 EBT 14.4 20.3 18.7 23.1 0.7 6.7 2.0 4.9 15.1 18.7 20.7 17.1 Other Income 0.7 1.1 0.7 0.8 (0.5) (5.4) 0.3 0.7 0.2 0.3 1.0 0.8 PBT before exceptional items 15.2 21.4 19.4 24.0 0.1 1.3 2.3 5.7 15.3 18.9 21.7 17.9 Tax expense 3.5 4.9 4.2 5.2 0.2 1.6 1.7 4.3 3.6 4.5 6.0 4.9 PAT 11.7 16.5 15.2 18.7 (0.0) (0.3) 0.5 1.4 11.7 14.4 15.7 13.0



Aurobindo Pharma

Table 2: Revenue and gross margin break up (INR mn)


Traded goods gross margin stood at 36.8%, while finished goods gross margin improved from 56% to 59% YoY. Actavis and Natrol acquisition analysis Actavis Group’s aggregate revenue and profit stood at INR22.6bn and INR6.3bn, respectively, with PAT margin at 28%. Natrol performance in FY15 was muted with revenue of INR1.9bn and PAT margin of 4%. Table 3: Actavis and Natrol acquisitions and profitability analysis (INR mn)


Post acquisition, Actavis Group’s trade payables declined by INR7.0bn and other liabilities at consolidated level (largely statutory dues of Actavis) have gone up by INR4.5bn in FY15. Table 4: Profitability of subsidiaries pertaining to Actavis operations (INR mn)


ParticularsFinished

goods Traded

goods Total

Finished goods

Traded goods

Total

Revenue (net of excise): 78,327 1,761 80,088 94,002 26,135 120,137

Others operating income - - 910 - - 1,068

Net revenues 78,327 1,761 80,998 94,002 26,135 121,205

RM Cost 34,274 1,787 36,060 38,530 16,526 55,056

Gross profit 44,054 (26) 44,938 55,472 9,610 66,149

Gross margins (%) 56.2 (1.5) 56.1 59.0 36.8 55.1

FY14 Consolidated FY15 Consolidated

Particulars Actavis Group Natrol LLCAcquisition cost 2,526 8,344 Net assets acquired 3,253 3,651 Goodwill/ (capital reserve) (728) 4,693

Particulars Actavis Group Natrol LLCIncome 22,574 1,881 Expenses 16,271 1,799 Net Profit (A) 6,302 82 Net Profit margins (%) 27.9 4.4

Name of the Company Networth Turnover PATArrow Generiques SAS 1,507 9,011 (41) Actavis France SAS 434 249 (51)Actavis Management GmbH 4 - 0 Actavis Deutschland GmbH & Co., KG 1,002 5,834 280 Aurovitas Spain S.A.U. (formerly known as Actavis Spain S.A.U.)

619 1,815 4

Actavis B.V. 7 2,962 (133)Aurobindo Pharma (Portugal) Unipessoal Lda (167) 208 (151)Aurobindo Pharma (Italia) s.r.l . 109 1,270 (466)Total 3,514 21,349 (557)

APL acquired Western European assets of Actavis at the beginning of FY15 for INR2.5bn Actavis group reported profits of INR6.3bn as per disclosure in annual report, however adjusted for inter-company transactions, Actavis group reported losses As per Form AOC-1 subsidiary disclosure, Actavis group and related subsidiaries reported a loss of INR557mn in FY15 Management indicated that the group will turn PAT positive in second year of acquisition i.e. FY16

Sale of traded goods rose during FY15 largely led by Actavis acquisition.



Goodwill of INR4.6bn on Natrol acquisition was subject to revision, pending outcome of legal case filed by APL against the erstwhile promoters pertaining to discrepancies in the value of acquired assets. APL had sought monetary damages relating to this action. Subsequently in April 2015, a settlement agreement has been reached wherein Plethico group (erstwhile owners) would assign USD23.3mn in cash in milestone payments, certain global IP rights and other assets. These adjustments would be reflected in FY16.

Table 5: Export incentive income / receivable analysis (INR mn)


Outstanding export claims/ incentives continued to rise and stood at INR2.8bn, 5.4% of net worth. Cumulatively, over past 4 years, export incentive income of INR2.7bn was outstanding and receivable as at FY15 end. Table 6: Export incentive income / receivable analysis – Peers # (INR mn)

* Data for Sunpharma and Cadila is based on FY14 numbers. Export incentive income is not disclosed separately.

# Data for Dr.Reddy’s and Glenmark is not separately disclosed.

Table 7: Operating expense analysis (INR mn)


Particulars FY12 FY13 FY14 FY15 CumulativeExport incentives - Income booked in P&L 722 685 555 700 2,662 % of export revenues 2.5 1.8 1.0 1.1

Cumulative outstanding amount FY12 FY13 FY14 FY15Export claims/ incentives receivable:

Long term - 155 163 285 Short term 1,468 1,854 2,076 2,515

Total 1,468 2,008 2,239 2,800 % of net worth 6.3 7.7 6.0 5.4

Particulars APL Cipla Lupin Sun Pharma* Cadila*Export incentive income - Cumulative from FY12-FY15

2,662 3,513 3,782 * *

Export incentive receivable outstand. 2,800 1,448 1,254 681 276 Receivable as % of cumulative income 105 41 33 * *

ParticularsFY12 % FY13 % FY14 % FY15 %

Revenue (excluding traded goods) 45,855 100.0 58,434 100.0 79,921 100.0 95,522 100.0 - - - -

Power and fuel 2,324 5.1 3,247 5.6 3,498 4.4 3,596 3.8 Carriage Outward 1,349 2.9 1,752 3.0 2,336 2.9 4,611 4.8 Sell ing Expenses 373 0.8 880 1.5 798 1.0 3,609 3.8 Legal and Professional Fees 469 1.0 508 0.9 684 0.9 2,217 2.3 Registration, Fil ing and Licence Charges 106 0.2 600 1.0 738 0.9 1,452 1.5 Product destruction expenses/Stock written off 212 0.5 357 0.6 521 0.7 574 0.6 Consumption of stores and spare parts 672 1.5 665 1.1 841 1.1 1,234 1.3 Chemicals Consumed 818 1.8 824 1.4 956 1.2 1,222 1.3 Rates and taxes, excluding taxes on income 110 0.2 122 0.2 465 0.6 1,083 1.1 Others 3,706 8.1 4,448 7.6 4,739 5.9 7,892 8.3 Operating and admin expenses 10,138 22.1 13,403 22.9 15,577 19.5 27,490 28.8

Consolidated


Aurobindo Pharma

Selling, carriage expenses and legal & professional costs rose in past 4 years led by upswing in revenue. However, FY15 saw a significant increase in these costs. Power and fuel costs stood flattish in absolute terms YoY and declined as proportion to revenue. Table 8: Power and fuel consumption data - Standalone (INR/ Units mn)


* FY15 data not available Power and fuel cost stood flattish at INR3.4bn at the standalone level. Power unit’s consumption data is not available in FY15 as the new Companies Act does not require consumption data disclosure. APL received power subsidy during FY15 of INR135.1mn (FY14: INR4.4mn) which was recorded under other income as ‘State Subsidy’ income.

Cash flow analysis



PBT grew 41% YoY and OCF post interest doubled led by robust profitability and partly due to lower pace of increase in receivables. FCF post acquisitions stood negative at INR2.4bn.

Particulars FY12 FY13 FY14 FY15*Power and fuel cost as per P&L:

Cost in P&L - Standalone 2,266 3,163 3,357 3,401 Standalone revenue 42,815 54,251 71,107 80,951 As % of revenue 5.3 5.8 4.7 4.2

Power and fuel consumption data:Units consumed - nos. in Million: 349 362 374 NA

Purchased 290 284 321 NAOwn generation 58 78 52 NA


Profit before tax 15.2 19.4 0.1 2.3 15.3 21.7 Non-operating expense 2.5 1.3 (0.5) (0.6) 2.0 0.7 Non-cash adjustments 1.7 2.5 1.5 0.9 3.2 3.4 Direct taxes paid (3.4) (4.3) (0.0) (0.7) (3.4) (5.0) Cash profit after tax 16.0 18.9 1.1 1.9 17.1 20.8 (Increase)/Decrease in receivables (12.9) (6.7) 1.8 4.4 (11.0) (2.3) Adj for (Increase)/Decrease in bil l discounted 2.2 0.1 (1.9) 0.1 0.3 0.3 (Increase)/Decrease in inventories (2.8) (4.3) (1.6) (1.4) (4.4) (5.7) (Increase)/Decrease in other current assets (0.5) (1.2) (0.0) 2.2 (0.5) 1.0 Increase/(Decrease) in trade payables 3.5 (1.0) 0.4 (4.0) 3.8 (5.1) Increase/(Decrease) in other l iabil ities/ provision 0.0 0.2 1.5 3.5 1.5 3.7 (Increase)/Decrease in working capital (10.5) (12.9) 0.1 4.7 (10.3) (8.2)Net cash from operating activities 5.5 6.0 1.2 6.6 6.7 12.6 Interest expenses paid (0.7) (0.6) (0.2) (0.1) (0.9) (0.7)Net cash from operating activities post interest 4.8 5.4 1.0 6.5 5.8 11.9 Capital expenditure (1.4) (5.4) (2.4) (2.0) (3.7) (7.5)Free cash flows 3.4 0.0 (1.4) 4.4 2.0 4.4 Acquisitions/ investment in subsidiaries (2.5) (1.9) 2.2 (4.9) (0.2) (6.9)Adjusted free cash flows 0.9 (1.9) 0.9 (0.5) 1.8 (2.4)

Standalone Subsidiary (derived) Consolidated



APL acquired Actavis group for INR2.5bn and post acquisition trade payables declined by INR7.0bn during FY15 which primarily led to decline in trade payables in cash flow statement by INR5.1bn. Trade payables ex-Actavis rose by INR2.2bn in FY15. During FY15, other liabilities rose to INR6.2bn from INR1.7bn in FY14, primarily led by statutory dues pertaining to Actavis Group.

Table 10: Average cash conversion cycle (days)*


* We have assumed gross margins for acquisitions same as consolidated gross margins for computing ex-acquisition cash conversion cycle

Cash conversion cycle improved YoY. However, adjusted for acquisitions, it deteriorated YoY primarily led by inventory days.

Table 11: Average cash conversion cycle (days) – Peer comparison

Note: * Detailed information is not available, as FY15 annual report is not yet released


Particulars FY12 FY13 FY14 FY15 FY15 (ex-

acquisitions) Inventory days 179 173 180 170 190 Receivable days 97 88 95 93 109 Payable days (86) (81) (97) (97) (105) Cash conversion cycle 191 181 178 166 194

SummaryCash conversion cycle FY12 FY13 FY14 FY15 FY12 FY13 FY14 FY15* FY12 FY13 FY14 FY15Receivable days 80 88 89 90 68 70 52 - 78 75 76 74 Inventory days 202 179 197 191 290 296 272 - 158 149 150 154 Payable days (73) (72) (80) (67) (111) (115) (104) - (123) (113) (112) (115) Cash Conversion cycle 209 194 206 214 248 251 220 - 113 110 115 113 Acceptances days - - - - - 1 - - 24 19 17 17 Adjusted Cash Conversion cycle 209 194 206 214 248 252 220 - 137 130 132 129

SummaryCash conversion cycle FY12 FY13 FY14 FY15 FY12 FY13 FY14 FY15 FY12 FY13 FY14 FY15*Receivable days 76 67 56 55 58 54 52 56 108 105 116 - Inventory days 198 209 213 248 167 151 147 138 216 161 153 - Payable days (74) (75) (73) (95) (84) (67) (80) (90) (173) (151) (173) - Cash Conversion cycle 200 201 196 208 141 139 119 105 151 115 96 - Acceptances days - - - - - - - - - - - - Adjusted Cash Conversion cycle 200 201 196 208 141 139 119 105 151 115 96 -

Dr Reddys SunPharma Lupin

Cipla Cadila Glenmark

150

160

170

180

190

200

FY12 FY13 FY14 FY15(D

ays)

Cash conversion cycle (ex-acquisition)

Cash conversion cycle-reported


Aurobindo Pharma

Receivables days for Aurobindo and Glenmark are highest within peers while inventory days for Cipla and Sun Pharma are highest. Overall core working capital (receivables and inventory) of Lupin and Cadila is lowest amongst peers.

Table 12: Cumulative cash flow generation and utilization—Past 5 years (INR bn)


Chart 1: Sources and utilisation of funds


While OCF contributed 60% to overall cash generation, debt was 40%. APL utilised 65% of funds for capex, 25% for acquisitions and 10% towards dividend. Cumulatively, over the past 5 years, APL generated OCF post interest of INR24.5bn and capex stood at INR26.6bn, leading to negative FCF of INR2.1bn.

Table 13: Cumulative free cash flow generation over past 5 years – APL versus peers (INR bn)


Sources FY11 FY12 FY13 FY14 FY15 Total Application FY11 FY12 FY13 FY14 FY15 TotalOperating profit (incl currency adj) 10.0 5.0 8.2 20.5 25.7 69.4 Capex 7.1 5.7 2.7 3.7 7.5 26.6 Less: Interest 0.5 0.8 1.1 0.9 0.7 4.0 Dividend 0.5 0.3 0.7 0.6 1.8 3.9 Less: Taxes 2.0 0.4 1.2 3.4 5.0 12.0 Acquisitions (0.8) - - 4.2 6.9 10.3 Add: Investment Income 0.0 0.1 0.0 - 0.2 0.3 Net cash/ investments 1.2 (1.2) 1.2 (0.3) (0.8) 0.1 Cash Profits 7.6 3.8 5.9 16.2 20.2 53.7 (FDs, Mutual funds)Working capital changes (4.7) (1.3) (4.2) (10.6) (8.4) (29.2)Operating cash flow 2.9 2.6 1.6 5.6 11.8 24.5 Equity (ESOPs) 0.0 - 0.0 0.0 0.1 0.1 Net borrowings 5.0 2.3 2.9 2.7 3.4 16.2

- Total 7.9 4.8 4.5 8.3 15.3 40.8 Total 7.9 4.8 4.5 8.3 15.3 40.8

Operating cash flow

60%

Net borrowings

40%

Sources

Particulars Aurobindo Cipla Dr. Reddys Cadila# Glenmark# Sun Pharma#Cumulative Operating Cash Flow (A) 24.5 67.9 80.6 29.6 33.6 134.2Cumulative Capex (B) 26.6 32.0 53.2 31.9 15.5 31.0Free cash flow (A)-(B) (2.1) 35.9 27.4 (2.2) 18.1 103.2Capex as % of OCF (B/A*100) 108.7 47.1 66.0 107.5 46.1 23.1

Cumulative from FY11 to FY15 Cumulative from FY10 to FY14

Capex65%

Dividend10%

Acquisitions

25%

Net cash/ investment

s 0%

Utilisation



Capex spend for most peers stood in the range of 45-65% of OCF over previous 5 years while for APL it was higher at 109%, however return ratios have been improving over last 5 years. Table 14: Debt and borrowing cost analysis (INR mn)


Gross debt rose by INR6.8bn, while cash rose by INR3.1bn partly led by acquisitions. Net debt rose 10% YoY to INR39.6bn as at FY15. Cash and liquid investments of INR4.9bn include INR4.3 lying in current account.

Table 15: Unhedged exposure (INR bn)




Particulars FY13 FY14 FY15 Change YoY (%)

Interest cost 1,313 1,079 843 (22) Forex loss/ (gains) 1,353 2,022 756 (63) Total borrowing cost 2,666 3,102 1,599 (48) Average borrowing cost (%) 8.2 8.6 3.9 (55)

Gross Debt 34,355 37,691 44,511 18 Cash and investments 2,085 1,786 4,888 174 Net debt 32,270 35,905 39,623 10

Particulars Mar-12 Mar-13 Mar-14 Mar-15 % changeTrade receivables 9.3 16.0 23.8 29.8 25.0 Loans and advances 1.1 0.9 0.9 0.4 (54.4) Interest accrued but not due (0.1) (0.1) (0.1) (0.1) (21.1) Bank balances 0.0 1.0 0.1 0.3 Total (A) 10.3 17.8 24.7 30.4 23.3 Loans availed 26.9 26.7 29 32 12.0 Trade payables 1.7 3.6 4.6 3.7 (19.1) Total (B) 28.6 30.3 33.2 35.7 7.7 Net unhedged forex payables (B-A) 18.3 12.5 8.5 5.3 (37.5) Unhedged payables as % of net worth 78.3 48.0 22.8 10.3

Particulars FY14 FY15Outstanding bank guarantees 774 723Claims - Direct taxes 105 309Claims - Indirect taxes 223 772Other claims 150 150Bills discounted 260.6 - Total 1,514 1,954As % of net worth 4.0 3.8

Capital and other commitments 1,682 4,135

Borrowing cost declined in FY15 primarily led by lower forex losses Majority of APL’s debt (>95%) is denominated in foreign currency

Contingent liabilities rose marginally YoY to INR1,954mn as at FY15 and largely include guarantees and tax claims Commitments rose to INR4.1bn largely led by unexecuted contract for capital commitments

Unhedged forex payables continued to decline over past 4 years led by increase in forex receivables, acting as hedge for forex loans


Aurobindo Pharma

Table 17: Major related party transactions (INR mn)


* Purchase of services

Purchases from related parties rose to INR4.5bn, 8.1% of total raw material cost in FY15, while sales to these parties declined from INR918mn in FY14 to INR658mn in FY15.

RoE analyser RoE analyser analysis profitability on the scale of operating and capital allocation efficiency (detailed concept explained in Annexure A). We have analysed APL’s profitability for FY14 and FY15, results and key findings of which are given below: Table 18: RoE analyser


Related party Purchases SalesFY13 FY14 FY15 FY13 FY14 FY15

Pravesh Industries Pvt Ltd 1,080 1,389 1,589 0.4 0.5 0.2 Axis Clinicals Ltd* 337 390 308 - - - Trident Chemphar Ltd 299 558 1,203 219 892 77 Cogent Glass Limited 128 384 447 - - - Alex Merchant Pte. Limited - - 309 - - - Trident Petrochemicals DMCC - - 156 - - - Pranit Packaging Private Limited 75 100 122 - 0 555 Others 246 243 321 61 26 25 Total 2,165 3,063 4,455 280 918 658 As % of RM cost/ Sales 7.2 8.5 8.1 0.5 1.1 0.5


21.6 20.3

OPATO (operating asset turnover) (x) 1.2 1.5 NOPAT margin (%) 17.3 13.7 B. Return from leverage (FLEV x spread) (%) 15.1 14.9 FLEV (financial leverage) (x) 1.0 0.8 NBC (net borrowing cost) (%) 7.1 2.8 Net financial spread (RNOA -NBC) (%) 14.5 17.5 C. Return from other funding (%) 0.2 0.2 ROE Derived (A+B+C) (%) 36.9 35.4

FY14 FY15

RoE marginally declined to 35.4% in FY15 (FY14: 36.9%) led by lower operating margin however operating asset turnover improved. Return from leverage continues to be higher at 15%.



Chart 2: RoE Analyser




20.3

14.9

0.2

35.4

0.0

8.0

16.0

24.0

32.0

40.0



ROAE

(%)

Particulars FY11 FY12 FY13 FY14 FY15Sales 43,815 46,274 58,553 80,998 121,205 Total income 44,529 46,521 58,839 81,214 122,172 EBITDA 9,633 5,613 8,610 21,336 25,636 EBITDA margin (%) 22.0 12.1 14.7 26.3 21.2 ROE (%) 26.4 3.3 11.9 36.9 35.4 ROCE (%) 19.5 7.5 11.2 27.2 27.2 Depreciation 1,715 2,005 2,487 3,125 3,326 Financial costs 647 2,772 2,666 3,102 1,599 Net profit 5,635 (1,235) 2,939 11,729 15,758 Equity shareholders' funds 24,448 23,397 26,058 37,502 51,559 Loan funds 24,143 30,959 34,355 37,691 44,511 Net Debt 22,275 30,064 32,270 35,905 39,623 Net fixed assets 17,386 21,947 26,389 27,217 37,056 CWIP 6,574 6,454 2,185 3,097 4,196 Current assets loans and advances (Excl Cash & liquid investment)

31,344 31,745 39,283 54,526 78,100

Current l iabil ities and provisions 8,776 7,837 11,436 17,303 30,468 Net current assets (Ex-Cash) 22,568 23,908 27,846 37,223 47,632 Cash and cash equivalent 1,868 895 2,085 1,786 4,888 Cash flow from operating activities 2,446 3,263 2,749 6,463 12,368 Cash flow from investing activities (5,697) (5,632) (2,463) (8,187) (14,085) Cash flow from financing activities 4,431 1,189 1,081 1,176 932 Net cash flows 1,180 (1,181) 1,366 (548) (785) CAPEX (5,137) (5,666) (2,676) (3,741) (7,459) Working capital investments 4,216 (1,283) (4,216) (10,574) (8,417)


Cipla’s FY15 annual report analysis highlights robust revenue growth of 12% YoY (partly led by subsidiaries) and 120bps YoY improvement in gross margin. However, high cost structure weighed on EBITDA margin, which declined 200bps YoY primarily led by employee costs. Return ratios have declined over the past 2 years led by acquisitions and capex. OCF and free cash flows slipped in FY15 led by higher inventories and receivables. In FY15, South African subsidiaries (largely Medpro—acquired in FY14) turned profitable versus a loss posted in FY14. Goodwill (related to Medpro and other acquisitions) stood at INR25.6bn, 24% of net worth in FY15 (FY14: INR24.9bn, 25%). Total exposure to subsidiaries/ JVs/ associates at the standalone level (including investments, loans and net receivables) stood at INR48.7bn, 44% of standalone net worth (FY14: INR39bn, 39%). What’s on track? Revenue growth remained robust in FY15 with standalone business growing 7% YoY. Significant improvement in revenue of subsidiaries led to consolidated revenue growth of 12% YoY. Subsidiaries contribute 11% to consolidated revenue, which grew 69% YoY. Medpro acquisition in FY14 helped Cipla strengthen its position in South Africa. During FY15, South African subsidiaries turned profitable with INR818mn PAT versus INR41mn loss in FY14 (as per sec129 (3) statement of subsidiaries). On an aggregate, performance of subsidiaries improved and profit margin increased from 2.2% in FY14 to 4.9% in FY15, led by improvement in South African subsidiaries.

What needs tracking? EBITDA margin dipped 200bps to 19% in FY15 primarily led by higher employee cost (up 200bps) and operating expenses (up 100bps). PBT margin further declined led by higher depreciation and lower other income. Employee cost included ESOP cost, which doubled YoY to INR510.7mn in FY15 (FY14: INR223.6mn). No ESOPs were granted to executive directors in FY15. OCF, post interest, declined by INR4.3bn in FY15 to INR10.1bn led by lower profitability, increase in inventories & receivables, partially offset by INR5.6bn increase in payables. Inventory days rose significantly to 248 days in FY15 (FY14: 213 days) leading to increase in working capital cycle from 196 days to 208 days. Payable days rose from 73 in FY14 to 95 in FY15. Inventory days for Cipla and Sun Pharma are highest amongst peers. Margins and RoE/RoCE have dipped in the past 2 years, led by acquisitions and capex.



Cipla | Annual Report Analysis


August 25, 2015

52-week range (INR) : 752 / 491




Promoters* : 36.8


FIIs : 18.3

Others : 28.9



Market Data




Total R&D expenditure stood at INR8.4bn, 7.4% of sales (FY14: INR5.2bn, 5.1% of sales). 15% of R&D (INR1.2bn) was capitalised in FY15 (FY14: 1%). Pending litigations/ claims included INR17.7bn pertaining to case pending since 2003 with NPPA for overcharging of drugs. Cipla, based on legal advice, believes that no provision is required as there is no probability of the demand materialising. Net unhedged payables rose from INR1.3bn in FY14 to INR5.2bn in FY15, 4.8% of net worth, largely due to increase in short-term forex loans. Overall derivatives position stood stable at INR4.9bn in FY15 (net sell position) versus INR4.3bn in FY14.

Key highlights from MD&A • Cipla successfully launched generic drug Sofosbuvir in India for the treatment of

hepatitis-C under the brand name HepCvir.

• South Africa’s (14% of consolidated revenue) manufacturing unit generated a profit compared to a loss last year. This was on account of significantly improving utilisation, improved efficiencies and cost control measures.

• Europe business contributed 4% to overall revenue, declining 24% YoY. The drop was driven by a one-off event in the previous year due to decline in partner based business and some supply-related issues.

• Cipla Europe NV inked a distribution agreement with Serum Institute of India (SII) to market pediatric vaccines in Europe and expects to commence filings in the near future.

• In Q4FY15, Teva Pharma announced FDA approval of the first generic equivalent to Nexium in the US. Cipla is the supplier of the finished formulation to Teva.

• Cipla manufactures metered dose inhalers (pMDIs), dry powder inhalers (DPIs), nasal sprays, nebulisers and a range of inhalation accessory devices. The company has 5 manufacturing facilities dedicated to respiratory products and is currently the third largest manufacturer of pMDIs in the world.

• During the year, Cipla acquired 60% stake in Jay Precision Pharma, a leading respiratory device manufacturer. As Cipla is targeting a strong entry in overseas markets, derisking respiratory devices supply through backward integration is key to strengthen the foundation.

Profitability analysis Table 1: Standalone vs. consolidated profitability (INR mn)



Sales 94,569 100.0 101,318 100.0 7,165 100.0 12,137 100.0 101,734 100.0 113,454 100.0 Raw Materials Consumed 37,606 39.8 39,811 39.3 1,142 15.9 2,086 17.2 38,748 38.1 41,897 36.9 Gross profit 56,963 60.2 61,507 60.7 6,023 84.1 10,051 82.8 62,986 61.9 71,557 63.1 Operating and Admn exps 24,220 25.6 26,838 26.5 2,006 28.0 3,366 27.7 26,226 25.8 30,204 26.6 Personnel cost 12,848 13.6 15,056 14.9 2,582 36.0 4,681 38.6 15,430 15.2 19,737 17.4 EBITDA 19,895 21.0 19,613 19.4 1,435 20.0 2,004 16.5 21,331 21.0 21,617 19.1 Depreciation 3,236 3.4 4,332 4.3 490 6.8 715 5.9 3,726 3.7 5,047 4.4 EBIT 16,659 17.6 15,281 15.1 945 13.2 1,289 10.6 17,604 17.3 16,570 14.6 Financial Charges 1,279 1.4 1,361 1.3 179 2.5 322 2.7 1,457 1.4 1,683 1.5 Other income 2,803 3.0 1,479 1.5 (149) (2.1) 176 1.5 2,654 2.6 1,656 1.5 EBT 18,183 19.2 15,400 15.2 617 8.6 1,143 9.4 18,800 18.5 16,543 14.6



Cipla

Consolidated revenue grew 12% YoY led by robust 69% YoY surge in revenue of subsidiaries. Standalone business grew 7% YoY. Gross margin expanded 120bps YoY; however, higher employee cost and operating expenditure (largely marketing, sales promotions and miscellaneous expenses) led to 200bps decline in EBITDA margin, which was further aggravated by higher depreciation cost. Depreciation increased 35% to INR5.04bn in FY15 (FY14: INR3.7bn) and employee cost increased 28% to INR19.7bn in FY15 (FY14: INR15.4bn). Employee cost included ESOP cost, which doubled YoY to INR510.7mn in FY15 (FY14: INR223.6mn). ESOPs were granted largely to employees other than key managerial persons (KMPs). No ESOPs were granted to executive directors in FY15. Other income declined YoY from 2.6% of sales in FY14 to 1.5% in FY15, leading to further lower PBT margin.

Major subsidiaries’ analysis

Table 2: Subsidiaries profitability (INR mn)


On an aggregate basis, financial performance of subsidiaries improved as the profit margin increased from 2.2% in FY14 to 4.9% in FY15. The improvement was majorly led by South African subsidiaries which reported profits in FY15 versus losses in FY14. South Africa contributes 14% to total revenue and Cipla has 5% market share in South Africa. Goodwill on consolidation (towards Medpro acquisition) stood at INR25.6bn, 24% of net worth, in FY15 (FY14: INR24.9bn, 25%). Total exposure to subsidiaries/ JVs / associates (including investments, loans and net receivables) stood at INR48.7bn in FY15, 44% of standalone net worth (FY14: INR39bn, 39%).

% shareholdingSubsidiary company Currency Country as on FY14 Networth Turnover PAT Networth Turnover PATMedpro Pharmaceutica Proprietary Ltd. ZAR South Africa 100 3,876 16,389 (89) 3,928 11,871 418 Cipla Medpro South Africa (Pty) Ltd. ZAR South Africa 100 3,501 1,086 (599) 3,046 936 (125) Cipla-Medpro Proprietary Ltd. ZAR South Africa 100 2,527 603 272 2,579 466 290 Cipla Life Sciences Proprietary Ltd. ZAR South Africa 100 1,388 220 177 1,327 100 70 Cipla Quality Chemical Industries Ltd. UGX Uganda 51 1,102 2,899 357 1,682 2,445 704 Goldencross Pharma Pvt Ltd. INR India 100 2,296 2,502 188 2,478 2,264 184 Al-Jabal For Drugs & Medical Appliances Company Ltd. YR Yemen 50 - - - 344 1,179 261 Medispray Laboratories Pvt Ltd. INR India 100 823 670 219 1,116 1,094 292 Jay Precision Pharmaceuticals Pvt Ltd. INR India 60 399 778 172 Cipla Europe NV EUR Belgium 100 280 - (59) (240) 575 (669) Meditab Specialities Pvt Ltd. INR India 100 1,179 291 (104) 1,486 532 98 Mabpharm Pvt Ltd. INR India 100 1,385 8 (145) Meditab Holdings Ltd. USD Mauritius 100 3,352 - (11) 3,403 - (94) Cipla (Mauritius) Ltd. USD Mauritius 100 86 - (4) 1,372 - 33 Others 2,272 4,306 293 5,435 5,057 (164)

Total 22680 28,967 639 29740 27,305 1,326 Margin (%) 2.2 4.9

FY14 FY15





OCF, post interest, declined to INR10.1bn in FY15 from INR14.4bn in FY14 primarily on account of lower profitability and increase in inventories and receivables. Payables rose by INR5.6bn, which supported cash flows. Table 4: Average cash conversion cycle (days)


Inventory days increased significantly to 248 days in FY15 from 213 days in FY14 leading to higher cash conversion cycle of 208 days (FY14: 196 days) partially offset by an increase in payable days—to 95 days in FY15 from 73 days in FY14. Higher inventory days are for supporting distribution network due to front ends in various markets, including emerging markets. Inventory is also used for in-house consumption.

Table 5: Average cash conversion cycle (days) – Peer comparison – Large cap companies



Profit before tax 18.2 15.4 0.6 1.1 18.8 16.5 Non-operating expense 0.2 1.1 1.4 0.0 1.6 1.1 Non-cash adjustments 3.5 4.4 0.4 0.8 4.0 5.2 Direct taxes paid (2.9) (3.5) (0.2) (0.4) (3.1) (3.9) Cash profit after tax 19.1 17.4 2.2 1.5 21.2 18.9 (Increase)/Decrease in trade and other receivables

(1.8) (5.0) (0.7) 0.6 (2.5) (4.4)

(Increase)/Decrease in inventories (1.7) (7.8) (0.1) (0.5) (1.7) (8.3) Increase/(Decrease) in trade payables and other l iabil ities

2.5 5.9 (3.9) (0.3) (1.4) 5.6

(Increase)/Decrease in working capital (0.9) (6.9) (4.7) (0.3) (5.6) (7.2)Net cash from operating activities 18.1 10.5 (2.5) 1.2 15.6 11.7 Interest expenses paid (1.0) (1.4) (0.2) (0.3) (1.2) (1.7)Net cash from operating activities post interest 17.1 9.2 (2.7) 0.9 14.4 10.1 Less: Capex (5.0) (5.2) (0.7) (1.0) (5.7) (6.3)Free Cash Flows 12.1 3.9 (3.3) (0.1) 8.8 3.8

Standalone ConsolidatedSubsidiary (derived)

Particulars FY12 FY13 FY14 FY15Receivable days 76 67 56 55 Inventory days 198 209 213 248 Payable days (74) (75) (73) (95) Cash conversion cycle 200 201 196 208

SummaryCash conversion cycle FY12 FY13 FY14 FY15 FY12 FY13 FY14 FY15* FY12 FY13 FY14 FY15Receivable days 80 88 89 90 68 70 52 - 78 75 76 74 Inventory days 202 179 197 191 290 296 272 - 158 149 150 154 Payable days (73) (72) (80) (67) (111) (115) (104) - (123) (113) (112) (115) Cash Conversion cycle 209 194 206 214 248 251 220 - 113 110 115 113 Acceptances days - - - - - 1 - - 24 19 17 17 Adjusted Cash Conversion cycle 209 194 206 214 248 252 220 - 137 130 132 129

Dr Reddys SunPharma Lupin

Cash conversion cycle increased led by higher inventory days.


Cipla

Table 6: Average cash conversion cycle (days) – Peer comparison – Midcap companies


Note: * Detailed information is not available, as FY15 annual report is not yet released

Inventory days for Cipla and Sun Pharma are highest in industry, while receivables and payable days are largely in line with peers, except in case of Glenmark wherein payable days are significantly higher. Overall core working capital (receivables and inventory) of Lupin and Cadila is lowest amongst peers.

Table 7: Fund flow analysis (INR bn)


Chart 1: Source of funds Chart 2: Application of funds


82% of cash generation was through OCF while 40% cash was spent on capex and 39% on acquisitions.

SummaryCash conversion cycle FY12 FY13 FY14 FY15 FY12 FY13 FY14 FY15* FY12 FY13 FY14 FY15Receivable days 58 54 52 56 108 105 116 - 97 88 95 93 Inventory days 167 151 147 138 216 161 153 - 179 173 180 170 Payable days (84) (67) (80) (90) (173) (151) (173) - (86) (81) (97) (97) Cash Conversion cycle 141 139 119 105 151 115 96 - 191 181 178 166 Adjusted Cash Conversion cycle 141 139 119 105 151 115 96 - 191 181 178 166

AurobindoCadila Glenmark

Sources FY11 FY12 FY13 FY14 FY15 Total Application FY11 FY12 FY13 FY14 FY15 TotalCash profit 14.5 18.4 23.8 24.3 22.8 103.9 Capex 7.0 5.6 7.5 5.7 6.3 32.0 Less : Interest 0.2 0.2 0.3 1.2 1.7 3.6 Acquis i tion 2.4 0.7 (1.4) 25.9 3.1 30.8 Less : Taxes 2.6 3.3 4.6 3.1 3.9 17.6 Dividend 2.6 1.9 1.9 1.9 1.9 10.1 Cash Profits 11.7 14.9 18.8 20.0 17.2 82.7 Net cash and investments 0.2 3.8 15.4 (17.6) 4.3 6.1 Working capita l changes (1.6) 2.0 (5.2) (5.6) (7.2) (17.6)OCF, post interest 10.1 16.9 13.6 14.4 10.1 65.1 Net borrowings 2.0 (5.4) 8.9 0.4 5.1 11.0 Investment and Misc Income 0.2 0.5 0.9 0.9 0.4 3.0 Total 12.2 12.0 23.4 15.8 15.6 79.0 Total 12.2 12.0 23.4 15.8 15.6 79.0

OCF, post interest

82%

Net borrowings

14%

Invst & misc

Income4%

Capex40%

Acquisition 39%

Dividend13%

Net cash & investment

8%

Inventory days are highest for Cipla and Sunpharma.



Capital allocation analysis Table 8: Capital employed and return ratios (INR bn)


Chart 3: Capital employed and RoE/ RoCE


Particulars FY11 FY12 FY13 FY14 FY15Sales 63 70 83 102 113 EBITDA 14 17 22 21 22 EBITDA margin (%) 21.7 23.6 26.5 21.0 19.1 ROE (%) 15.7 16.0 18.5 14.6 11.3 ROCE (%) 18.1 19.9 23.7 19.0 15.3 Net fixed assets (Ex CWIP incl goodwill) 31 32 36 65 68 CWIP 3 4 4 4 6 Net current assets (Ex-Cash) 28 21 12 32 37 Equity shareholders' funds (A) 67 76 90 101 108 Loan funds (B) 6 0 10 12 17 Total capital employed (A+B) 72 77 100 113 125 D/E 0.1 0.0 0.1 0.1 0.2

60

76

92

108

124

140

5.0

12.0

19.0

26.0

33.0

40.0


(INR

bn)

(%)

EBITDA margin (%) ROE (%) ROCE (%) Total capital employed

EBITDA margins and RoE/RoCE improved during FY12 and FY13 however declined significantly over last 2 years primarily led by acquisitions and capex. Net fixed assets include INR25bn towards goodwill on acquisition of Medpro in FY14.


Cipla



Contingent liabilities rose from INR3.6bn in FY14 to INR4.3bn in FY15, 4% of net worth, primarily led by guarantees, excise duty and sales tax matters. LCs rose from INR93mn in FY14 to INR493mn in FY15. Other claims included INR17.7bn pertaining to case pending since 2003 with NPPA for overcharging of drugs. Cipla believes there is no probability of this demand materialising and hence no provision is warranted.

Table 10: Unhedged exposure (INR mn)


Derivative position stood stable at INR4.9bn in FY15 (net sell position) versus INR4.3bn in FY14.

Particulars FY14 FY15Contingent Liability:Guarantees 1,561 1,330 Income Tax 1,020 1,101 Excise Duty/Service Tax 820 1,118 Letters of Credit 93 493 Others 132 216 Total 3,627 4,259 As a % of Networth 3.6 3.9

Commitments:Capital commitments 2,033 3,885 Other commitments 7,542 10,059 Other claims:Case pending with National Pharmaceutical Pricing Authority (NPPA)

17,685 17,685

Case pending w.r.t Goa SEZ land 267 267 Total 27,526 31,896

Particulars FY12 FY13 FY14 FY15Receivable 4,171 4,102 3,279 8,990 Payable 3,795 4,011 4,579 5,756 Short term borrowings - - - 8,438 Net receivable/ (payable) 376 91 (1,300) (5,204) as % of net worth 0.5 0.1 1.3 4.8

Contingent liabilities rose primarily led by tax matters and letter of credits (LCs) Claims included pending case with NPPA for INR17.7bn

Net unhedged payables rose to INR5.2bn, 4.8% of net worth, led by short-term forex loans





Particulars FY11 FY12 FY13 FY14 FY15Sales 63,238 70,207 82,793 101,734 113,454 Total income 64,155 71,602 85,015 104,388 115,110 Gross Profit 35,487 42,814 53,267 62,986 71,557 Gross Margin (%) 56.1 61.0 64.3 61.9 63.1 EBITDA 13,692 16,589 21,979 21,331 21,617 EBITDA margin (%) 21.7 23.6 26.5 21.0 19.1 ROE (%) 14.8 16.0 18.5 14.6 11.3 ROCE (%) 19.9 23.7 19.0 15.3 Depreciation 2,733 3,122 3,305 3,726 5,047 Financial costs 251 383 339 1,457 1,683 Net profit 9,896 11,442 15,449 13,884 11,808 Equity shareholders' funds 66,661 76,389 90,187 100,504 108,015 Loan funds 5,719 292 9,671 12,479 17,033 Net fixed assets 33,795 35,867 39,878 69,383 74,105 Current assets loans and advances 39,000 34,499 25,149 48,534 62,471 Current l iabil ities and provisions 11,446 13,873 13,111 16,335 24,996 Net current assets 27,554 20,626 12,038 32,198 37,476 Cash and cash equivalents 3,196 6,664 22,598 4,872 9,543 Net debt 2,523 (6,372) (12,927) 7,607 7,491 Cash flow from operating activities 10,251 17,128 13,977 15,633 11,734 Cash flow from investing activities (9,084) (9,651) (20,629) (12,499) (9,412) Cash flow from financing activities (828) (7,532) 7,178 (2,656) 1,648 Net cash flows 339 (55) 525 478 3,971 CAPEX (6,979) (5,565) (7,517) (5,666) (6,256) Working capital investments (1,620) 1,998 (5,198) (5,613) (7,186)


Glenmark Pharmaceutical’s (Glenmark) FY15 annual report analysis highlights significant increase in currency translation losses impacting net worth (INR3.6bn in FY15), which as per management is mainly due to depreciation in Russian rouble and Brazilian real. As highlighted in our earlier years’ reports (FY14, FY13, FY12), net worth accretion to PAT ratio continues to remain low (4% in FY15, 46% in FY14). Since FY11, cumulative profit (post dividend) was INR23.3bn, however accretion to net worth was mere INR12.7bn (55% of profits). While cumulative currency translation loss stood at INR10.6bn, it is important to note that cash loss was ~INR5.4bn. We believe, over the long term, book value accretion is a better representation of value creation instead of reported profit. Adjusted cash flow declined by INR2.0bn YoY to INR3.2bn in FY15 led by currency translation losses and lower profitability. Cash conversion cycle improved primarily led by significant increase in payables (ex-TARKA provision - from 168 to 270 days). Receivables outstanding from Venezuela subsidiary stood at INR1.5bn in FY15. Cash tax paid has remained consistently higher than P&L tax expense over the past 5 years due to deferred tax and MAT credits (outstanding as on FY15 - INR9.7bn, 32% of net worth).

Key highlights Revenue grew 10% YoY; however, EBITDA margin declined 270bps in FY15 to 15.4% (FY14: 18.2%) led by forex loss of INR1.6bn and INR1.6bn paid for settlement of litigation to State of Texas. Excluding these, margin dipped 180bps to 20.1%. In FY15, while PAT (post dividend) stood at INR4.2bn, net worth stood flattish at INR30.0bn led by significant forex translation loss, due to adverse movement in Emerging Market currencies. The INR depreciated against USD by average 1.1% in FY15 (FY14: 11.1%) and 62% of net worth of subsidiaries is USD denominated. Translation losses have continued since FY11, despite all major subsidiaries recording positive net worth. OCF, post interest, declined to INR4.9bn (FY14: INR7.2bn). Adjusted for cash translation loss of INR1.7bn, OCF dipped to INR3.2bn (FY14: INR5.2bn). Cumulatively, in the past 5 years, currency translation loss adjustment in cash flow statement stood at INR5.4bn. Cash tax paid stood at INR3.2bn in FY15 (53% of PBT) versus P&L tax expense of INR1.2bn (20% of PBT) led by deferred tax and MAT credit. Cumulative cash taxes paid during the past 5 years stood at INR9.7bn (32% of PBT) versus P&L charge of INR4.3bn (14% of PBT). Net deferred tax assets continued to rise led by unused tax losses and MAT credit. Total deferred tax assets stood at INR9.7bn in FY15, 32% of net worth.



Glenmark Pharmaceuticals| Annual Report Analysis


September 04, 2015

52-week range (INR) : 1,261 / 677




Promoters* : 46.4


FIIs : 35.9

Others : 10.9



Market Data




Cash conversion cycle improved YoY to 111 days, primarily led by surge in payable days (ex-TARKA provision) from 168 in FY14 to 270 in FY15. Trade payables and receivables rose significantly over the past 5 years. Receivables rose from INR21.6bn in FY14 to INR25.1bn in FY15, 38% of revenue (Venezuela receivables at INR1.5bn in FY15). During the year, the company merged Glenmark Generics (wholly owned subsidiary) with itself and hence standalone YoY numbers are not comparable. The merger led to increase in net worth by INR14.1bn at the standalone level. Losses of subsidiaries (ex-Glenmark Generics) increased to INR4.4bn in FY15 versus INR864mn loss in FY14 on aggregate basis. Total cash exposure to subsidiaries stood at INR20.4bn, 41% of standalone net worth (FY14: INR18.2bn, 62%), and including the letter’s of comfort issued (worth INR52.1bn), it stood at INR72.5bn, 146% of standalone net worth (FY14: INR50.2bn, 173%). While RoE declined from 19% in FY14 to 16% in FY15, RoE based on total comprehensive income declined to 3% (FY14: 11%). Average RoE based on book value accretion over the past 5 years stood at 13.2% versus reported RoE of 20%. Post FY15, Glenmark has issued shares on preferential basis to Aranda Investments (Mauritius) worth INR9,450mn primarily for reduction of debt, which will lead to improvement in above ratios. R&D expenditure stood at INR6.0bn in FY15, 9.1% of revenue (FY14: INR6.0bn, 10%). Intangibles stood at INR12.7bn, 42% of net worth, largely comprising product development/ brands. Contingent liabilities at the consolidated level rose from INR1.3bn in FY14 to INR4.1bn in FY15, primarily led by indemnity bond for customs. Interest income stood at INR14.3mn in FY15 (FY14: INR66.4mn) versus cash & liquid investments of INR7.7bn in FY15 (FY14: INR8.0bn), leading to low yield on cash & investments (FY15: 0.2% - FY14: 0.9%). Average borrowing cost stood at 5% (FY14: 6%). Management attributed lower yields to higher cash balance kept for TARKA liability (INR2.5bn) and cash in Venezuela subsidiary (INR2.5bn – USD40mn).


Glenmark Pharmaceuticals


Table 1: Standalone versus consolidated profitability (INR mn)


In FY15, though revenue grew 10% YoY, EBITDA margin declined 270bps YoY to 15.4% led by forex loss of INR1.6bn and INR1.6bn paid for settlement of litigation to State of Texas (USD25mn payable in 16 equal quarterly installments). Excluding the above items, EBIDTA declined from 21.9% to 20.1% YoY. Standalone figures are not comparable YoY as Glenmark merged one of its subsidiaries— Glenmark Generics—with the standalone entity in FY15. Glenmark Generics manufactures and distributes generic formulations and bulk drugs. The merger led to increase in standalone net worth by INR14.1bn, 48% of standalone net worth.

Table 2: PAT versus total comprehensive income (INR bn)


FY14 % FY15 % FY14 % FY15 % FY14 % FY15 %Sales 23,009 100.0 50,856 100.0 37,043 100.0 15,442 100.0 60,052 100.0 66,298 100.0 Raw Materials Consumed 6,226 27.1 16,683 32.8 12,504 33.8 2,661 17.2 18,730 31.2 19,344 29.2 Other expenses (ex-litigation claim) 7,591 33.0 12,900 25.4 10,290 27.8 8,678 56.2 17,881 29.8 21,578 32.5 Personnel cost 3,954 17.2 6,623 13.0 6,308 17.0 5,402 35.0 10,261 17.1 12,024 18.1 EBITDA, before exceptional items and forex loss

5,238 22.8 14,650 28.8 7,941 21.4 (1,299) (8.4) 13,179 21.9 13,351 20.1

Forex loss/ (gain) 278 1.2 (211) (0.4) (182) (0.5) 1,774 11.5 96 0.2 1,563 2.4 Exceptional items/ Litigation claims - - 1,687 3.3 2,175 5.9 (125) (0.8) 2,175 3.6 1,562 2.4 EBITDA 4,960 21.6 13,173 25.9 5,948 16.1 (2,948) (19.1) 10,908 18.2 10,225 15.4 Depreciation 302 1.3 1,195 2.3 1,866 5.0 1,405 9.1 2,168 3.6 2,600 3.9 EBIT 4,658 20.2 11,979 23.6 4,082 11.0 (4,353) (28.2) 8,740 14.6 7,625 11.5 Financial Charges 310 1.3 302 0.6 1,576 4.3 1,600 10.4 1,886 3.1 1,902 2.9 Other income 671 2.9 639 1.3 (557) (1.5) (420) (2.7) 115 0.2 219 0.3 PBT 5,019 21.8 12,315 24.2 1,950 5.3 (6,373) (41.3) 6,969 11.6 5,943 9.0 Tax 681 3.0 2,240 4.4 832 2.2 (1,050) (6.8) 1,513 2.5 1,190 1.8 PAT 4,338 18.9 10,075 19.8 1,118 3.0 (5,323) (34.5) 5,456 9.1 4,752 7.2 Adjusted in other comprehensive income:

Actuarial losses (net of tax) 29 0.0 105 0.2 Exchange loss on translation 2,244 3.7 3,615 5.5

Total Comprehensive income 3,182 5.3 1,033 1.6

Particulars Standalone Subsidiary (Derived) Consolidated

Particulars FY11 FY12 FY13 FY14 FY15Revenues 29.5 40.2 50.1 60.1 66.3 Net profit 4.5 4.6 6.1 5.4 4.8 Net profit margin (%) 15.4 11.4 12.3 9.0 7.2 Total comprehensive income (TCI)

3.3 4.0 4.7 3.2 1.0

TCI margin (%) 11.3 9.8 9.5 5.3 1.6

4.5 4.6 6.1

5.4 4.8

3.3 4.0 4.7

3.2 1.0

0.0

1.5

3.0

4.5

6.0

7.5

0.0

4.0

8.0

12.0

16.0

20.0


(INR

bn)

(%)

Net profit TCI

Net profit margin (%) TCI margin (%)



PAT declined to INR4.8bn in FY15 and significant translation losses worth INR3.6bn in FY15 impacted net worth accretion, leading to decline in total comprehensive income by 68% YoY to INR1.0bn (FY14: INR3.2bn).

Net worth accretion analysis

Table 3: Profitability versus net worth accretion (INR mn)


Cumulatively, over the past 5 years, net worth rose by INR12.7bn versus profit (post dividend) of INR23.3bn. 55% of profit accrued to net worth and balance 45% largely represented currency translation losses. Acquisition of non-controlling interest charged to reserves stood at INR273mn in FY15 versus INR433mn in FY14 pertaining to ESOPs granted to Glenmark Generics’ employees. Management highlighted that FY15 is the last year of payment towards acquisition of ESOPs led by merger of Glenmark Generics. In FY15, most employees opted to encash their ESOPs and remaining employees were issued shares of Glenmark.

Chart 1: Net worth to PAT accretion ratio Table 4: INR versus major currencies (closing rates)

Source: Company annual report, Bloomberg, Edelweiss research

Net worth to PAT (ex-dividend) ratio plunged to 4% in FY15 led by significant translation losses charged to reserves (other comprehensive income).

Particulars FY11 FY12 FY13 FY14 FY15 CumulativeOpening shareholders' fund 17,257 20,372 24,016 27,630 29,833 17,257 PAT (net of dividend) 4,406 4,477 5,558 4,789 4,118 23,348 FCTR (1,249) (684) (1,492) (2,244) (3,615) (9,284) Others 144 87 (77) 91 (60) 184 Acquisition of non controlling interest

(185) (236) (375) (433) (273) (1,503)

Closing shareholders' fund 20,372 24,016 27,630 29,833 30,003 30,003

4.4 4.5 5.6

4.8 4.1

3.1 3.6 3.6

2.2

0.2

71%81%

65%

46%

4%0.0

0.2

0.4

0.6

0.8

1.0

0.0

1.2

2.4

3.6

4.8

6.0


(%)

(INR

bn)

Profit after dividendNetworth accretionNetworth to Profit ratio (%)

Profit, after dividend, stood at INR4.2bn in FY15. However, net worth stood flattish YoY led by significant forex translation losses The INR depreciated against USD by an average 1.1% in FY15 against 11.1% in FY14

Currency FY11 FY12 FY13 FY14 FY15YoY

change (%)YTD

USD 45 49 54 62 62 0.1% 64EUR 63 66 71 85 69 -18.5% 70GBP 74 78 83 103 95 -7.6% 100CHF 49 55 58 70 65 -7.0% 67BRL 27 29 28 26 22 -18.2% 19RUB 1.6 1.7 1.8 1.7 1.0 -41.1% 1.1VEF (official rate)

10.5 11.4 8.7 9.8 9.8 -0.3% 10.2



Table 5: Currency translation losses (FCTR)—Peer analysis (INR mn)

NA: Data for Sun Pharma is not available, loss in FY12 for Aurobindo

Subsidiaries analysis Table 6: Performance of major subsidiaries (INR mn)

FY14 includes Glenmark Generics, which was merged in FY15 with the standalone entity. Ex-

Glenmark Generics, performance of subsidiaries deteriorated during the year and losses

increased to INR4.4bn in FY15 versus INR864mn loss in FY14.

Table 7: Currency exposure analysis of subsidiaries (INR mn)


ParticularsFY12 FY13 FY14 FY15 FY12 FY13 FY14 FY15

Glenmark (684) (1,492) (2,244) (3,615) (14.0) (20.3) (32.2) (60.8)Cipla 152 228 (1,625) (2,580) 1.0 1.1 (8.6) (15.6)Lupin 983 (28) 829 (1,121) 8.2 (0.1) 2.9 (3.3)Aurobindo 522 223 703 (736) NA 6.0 4.6 (3.4)DrReddys 775 137 (37) (1) 4.3 0.6 (0.1) (0.0)Sunpharma 5,957 3,767 7,572 NA 17.8 8.7 16.5 NA

Change in FCTR balance YoY Change in FCTR as % of PBT

Subsidiary company % shareholdingas on FY15 Currency Networth Turnover PAT Networth Turnover PAT

Glenmark Generics Ltd. (Merged in FY15 with parent) 99.3 INR 23,119 19,134 3,950 - - - Glenmark Pharmaceuticals Inc., USA 100 USD 6,447 20,849 1,858 7,549 21,449 825 Glenmark Holding S.A. 100 USD 6,381 - (793) 6,392 - (1,191)Glenmark Impex L.L.C. 100 RUB 5,168 5,222 977 2,590 2,911 (871)Glenmark Farmaceutica Ltda. 100 BRL 5,053 2,228 (852) 3,617 2,345 (1,119)Glenmark Pharmaceuticals Venezuela, CA 100 VEF 326 1,010 118 2,286 4,291 1,164 Glenmark Generics Finance S.A. 100 USD 3,779 - 937 7,502 468 (236)Glenmark Pharmaceuticals SRO 100 CZK 1,692 2,355 (191) 551 2,317 (953)Glenmark Pharmaceuticals S.A., Switzerland 100 USD 1,525 366 (2,403) 320 324 (1,191)Glenmark Uruguay SA 100 USD 1,446 (1) 628 0 (10)Glenmark Pharmaceuticals (Europe) Ltd. 100 GBP 155 375 26 1,061 3,255 42 Glenmark Generics (Europe) Ltd. 100 GBP 1,093 2,513 139 - - - Glenmark Generics S.A. Argentina 100 ARS 1,083 391 (326) 1,377 521 (317)Glenmark Pharmaceuticals S.R.L. 100 RON 362 1,323 93 208 771 (104)Glenmark Pharmaceuticals Mexico, SA DE CV 100 MXN 237 186 (194) 403 384 (178)Glenmark Pharmaceuticals South Africa (Pty) Ltd. 100 ZAR (229) 503 (166) (374) 492 (122)Others 100 1,773 2,893 (84) 1,853 5,623 (79)Total 59,410 59,346 3,086 35,963 45,153 (4,339)PAT margin (%) 5.2 (9.6)

FY14 FY15

Currency Networth Turnover PAT Networth Turnover PATUSD 19,619 21,379 (389) 22,347 22,379 (1,886) 62% 0.1%BRL 5,053 2,228 (852) 3,617 2,345 (1,119) 10% -18.2%RUB 5,168 5,222 977 2,590 2,911 (871) 7% -41.1%VEF 326 1,010 118 2,286 4,291 1,164 6% -0.3%GBP 155 375 26 1,239 3,693 78 3% -7.6%EUR 40 734 19 59 1,653 26 0% -18.5%INR 23,119 19,134 3,950 - 0% -Others 5,931 9,266 (762) 3,825 7,879 (1,730) 11% -Total 59,410 59,346 3,086 35,963 45,153 (4,339) 100% -

FY14 FY15 Proportion of

FY15 networth (%)

FY15 currency movement vs

INR (%)

Major proportion of net assets of subsidiaries are denominated in USD (62%), Brazil currency (BRL; 10%), Russian rouble (7%) and Venezuela Bolivar (6%)



All major subsidiaries have positive net worth and major revenue contributing subsidiaries include operations in US, Russia, Brazil and Venezuela. Revenue from Venezuela subsidiary stood at INR4.3bn, 6% of consolidated sales, while Brazil and Russia contributed 4% each to consolidated revenue (aggregate 14% revenue comes from these 3 regions). During the year, Glenmark converted loans given to subsidiaries worth INR6.2bn into equity and converted receivables of USD1.3mn in Venezuela subsidiary into equity investment. Glenmark follows IFRS which requires conversion of all the assets and liabilities of overseas subsidiaries including goodwill at the closing rate with the resultant difference captured in FCTR. Considering positive networth of overseas subsidiaries, the conversion should result in gain in depreciating INR scenario and vice versa loss in appreciating INR scenario. Accounting policy (annual report extracts)

In case of foreign operations whose functional currency is different from the parent company’s functional currency, the assets and liabilities of such foreign operations, including goodwill and fair value adjustments arising upon acquisition, are translated to the reporting currency at exchange rates at the reporting date. The income and expenses of such foreign operations are translated to the reporting currency at the average exchange rates prevailing during the year. Resulting foreign currency differences are recognized in other comprehensive income/(loss) and presented within equity as part of FCTR. When a foreign operation is disposed of, in part or in full, the relevant amount in the FCTR is transferred to the consolidated income statement.

Table 8: Exposure to subsidiaries—At standalone level (INR mn)


Equity investment and loans to Glenmark Generics declined led by merger with parent. Consequently, investment and loans to Switzerland subsidiary increased in FY15 at the standalone level, which we believe were earlier part of Glenmark Generics balance sheet.

Particulars FY11 FY12 FY13 FY14 FY15Equity investment Glenmark Generics (merged in FY15) 8,100 8,427 8,913 9,494 - Glenmark Generics Finance (Switzerland) - - - - 9,069 Others 2,128 2,221 3,846 4,413 7,351 Loans and advancesGlenmark Generics (merged in FY15) 5,356 4,736 4,683 - - Glenmark Holding S.A., Switzerland 8,993 4,164 3,471 4,065 3,238 Others 889 380 154 177 694 Total cash exposure (A) 17,366 11,500 12,154 8,656 20,352 As % of standalone net worth 87.7 52.6 48.2 29.8 41.1 Letter of comfort on behalf of subsidairies -mainly to switzerland subsidiares) - B

5,687 15,926 24,287 32,046 52,131

Total cash + non cash exposure (A+B) 23,054 27,426 36,441 40,702 72,483 As % of standalone net worth 116.4 125.5 144.4 140.1 146.4

Aggregate cash exposure to subsidiaries stood at 41% of standalone net worth and including letters of comfort issued, it stood at 146% of standalone net worth

Glenmark has consistently reported negative movement in FCTR over last 5 years.



Deferred taxes and effective tax rate analysis

Table 9: Deferred tax assets (INR mn)


Annual report extracts

In assessing the reliability of deferred income tax assets, management considers whether it is more likely than not that some portion or all of the deferred income tax assets will be realised. The ultimate realisation of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences become deductible. The amount of the deferred income tax assets considered realisable, however, could be reduced in the near term if estimates of future taxable income during the carry forward period are reduced. The Company’s subsidiaries had losses which can be carried forward for future utilisation within period of 3 to 7 years. These subsidiaries have been incurring losses and therefore it is considered more likely than not the deferred tax asset arising from these carried forward net operating losses will not be realised. Table 10: P&L tax expense versus cash tax paid (INR mn)


Particulars FY11 FY12 FY13 FY14 FY15Deferred tax assetsUnused tax losses 1,358 2,365 2,269 2,810 4,263 MAT Credit 1,057 1,586 3,086 3,622 4,183 Others 142 223 217 781 1,285 Total 2,558 4,174 5,571 7,213 9,731 As % of net worth 12.6 17.4 20.2 24.2 32.4 Deferred tax liabilitiesProperty, plant and equipment 1,451 1,457 1,673 1,895 2,205 Others 25 43 96 176 593 Total 1,476 1,500 1,768 2,071 2,798 Net deferred tax asset 1,081 2,674 3,803 5,142 6,933 As % of net worth 5.3 11.1 13.8 18.6 23.2

Particulars FY11 FY12 FY13 FY14 FY15 CumulativeTax as per P&L 237 238 1,107 1,513 1,190 4,285 Cash Tax 938 1,330 1,650 2,629 3,178 9,724 Difference (701) (1,092) (543) (1,116) (1,988) (5,439) Effective tax rate (%) 4.9 4.9 15.1 21.7 20.0 14.3 Effective cash tax rate (%) 19.5 27.2 22.5 37.7 53.5 32.5

Net deferred tax assets continued to rise led by unused tax losses and MAT credit. Total deferred tax assets stood at INR9.7bn, 32% of net worth

Cash tax rate stood significantly higher than P&L tax rate led by deferred tax and MAT credit

As per annual report disclosure it is more likely that the deferred tax asset losses will not be realised during remaining carried forward period





OCF, post interest, declined from INR7.2bn in FY14 to INR4.9bn in FY15 led by lower profitability and currency translation losses which impacted cash flows by INR1.7bn during the year. Adjusted for these losses, OCF declined to INR3.2bn. Cumulatively, over FY11-15, currency translation losses worth INR5.4bn were adjusted in cash flow statement.



Table 13: Working capital over past 5 years (INR bn)


Particulars

Profit before tax 5.0 12.3 1.9 (6.4) 7.0 5.9 Non-operating expense 1.1 (0.6) 1.5 2.1 2.6 1.5 Non-cash adjustments (mainly provisions) 0.3 1.7 4.2 1.5 4.5 3.2 Direct taxes paid (0.8) (2.4) (1.9) (0.8) (2.6) (3.2) Cash profit after tax 5.6 11.0 5.8 (3.5) 11.4 7.5 (Increase)/Decrease in trade and other receivables (5.8) (9.7) 1.2 5.7 (4.6) (4.0) (Increase)/Decrease in inventories (0.2) (1.6) (0.3) (2.0) (0.5) (3.5) (Increase)/Decrease in other assets - (2.2) 0.9 (2.2) 0.9 (Increase)/Decrease in other receivables 0.2 (1.1) - 1.1 - Increase/(Decrease) in trade payables & other liabilities 1.3 2.9 3.1 1.2 4.4 4.0 Increase in working capital (4.5) (9.5) 1.8 6.8 (2.9) (2.7)Net cash from operating activities 1.1 1.5 7.6 3.4 8.5 4.8 Interest expenses paid (0.3) (0.3) (1.6) (1.5) (1.9) (1.8)

Net cash from operating activities post interest 0.8 1.1 6.0 1.9 6.6 3.0 Increase/(Decrease) in acceptances (0.8) 1.9 1.3 - 0.6 1.9 Net cash from operating activities post interest (Adj for acceptances)

0.0 3.0 7.4 1.9 7.2 4.9

Currency translation losses 0.1 0.0 1.9 1.7 2.0 1.7 Adjusted cash flows post currency translation losses (0.0) 3.0 5.4 0.2 5.2 3.2

Standalone Subsidiary (Derived) ConsolidatedFY14 FY15 FY14 FY15 FY14 FY15

Particulars FY13 FY14 FY15Inventory days 134 124 188 Receivable days 105 115 128 Payable days (150) (168) (270) Advances to vendors days 25 28 38 Cash conversion cycle 113 99 83 Add: Acceptance days 45 41 28 Adj cash conversion cycle 158 140 111

Particulars FY11 FY12 FY13 FY14 FY15Change from

FY11-15Receivables 11.3 12.4 16.4 21.6 25.1 13.8 Inventories 8.1 7.9 8.4 9.3 12.7 4.6 Less: Trade payables (6.6) (7.9) (10.4) (13.6) (18.0) (11.5) Net working capital 12.8 12.4 14.4 17.3 19.8 7.0 Revenue 29.5 40.2 50.1 60.1 66.3 36.8 As % of revenue 43 31 29 29 30

Cash conversion cycle improved YoY to 111 days primarily led by surge in payable days from 168 in FY14 to 270 in FY15 Payables have gone up during FY15 due to clearance of packing material ahead of merger. Inventory days rose from 124 in FY14 to 188 during the year Trade payables (ex-TARKA provision) and receivables rose significantly over FY11-15. Revenue rose by INR36.8bn over 4 years while net working capital requirement rose by INR7.0bn.



Table 14: Receivables analysis (INR bn)


Receivables rose to INR25.1bn in FY15, 38% of revenue. Glenmark has converted receivables of USD1.3mn (INR79.3mn) from the Venezuelan subsidiary into investment (8,266,347 equity shares) at exchange rate of VEF6.30 per USD1.0. Total exposure to Venezuela subsidiary (equity investment) stood at INR627mn in FY15 (FY14: INR515mn). Outstanding receivables from Venezuela subsidiary at the standalone level stood at INR1.5bn in FY15 (FY14: INR540mn). In FY15, the Venezuela economy was adversely impacted by significant decline in crude oil prices, leading to higher inflation rates and significantly delayed approvals for import payments. Consequently, the currency depreciated significantly in the new exchange rate mechanism (known as SIMADI rate) wherein the exchange rate surged to VEF193 vis-à-vis government declared VEF6.3/ USD.

Extracts from Dr. Reddy’s FY15 annual report

In February 2015, the Venezuelan government launched an overhaul of the exchange rate system and introduced a new exchange rate mechanism. The Marginal Currency System (SIMADI) is the third mechanism in the new three-tier exchange rate regime and allows for legal trading of the Venezuelan Bolivar for foreign currency with fewer restrictions than other mechanisms in Venezuela (CENCOEX and SICAD). As on March 31, 2015, exchange rates in all the three tiers are as follows:

• CENCOEX preferential rate: VEF6.3/ USD.

• SICAD rate: VEF12/ USD.

• SIMADI rate: Approximately VEF193/ USD. Table 15: Dr. Reddy’s—Exchange losses on Venezuela monetary assets/ liabilities (INR mn)



ReceivablesO/s for more than 6 months 2.0 3.4 3.3 0.7 (0.5) (0.6) 2.8 2.8 2.7 Others 3.7 8.2 21.7 10.2 10.8 1.4 13.9 19.0 23.1

Less: Provision for doubtful debts (0.2) (0.2) (0.5) (0.1) (0.1) (0.1) (0.3) (0.3) (0.6) Total receivables 5.6 11.4 24.4 10.8 10.2 0.7 16.4 21.6 25.1 Receivables as % of revenue 29 49 48 35 28 5 33 36 38


Particulars VEF mn Equivalent USDmn

(@6.3 rate)Equivalent

(INR mn)Venezuela sales in FY15 813 129 8,335 Impact on net monetary assets:Monetary assets 245 38.9 2,512 Moneraty net assets at 6.3VEF /USD rate (A) 88 14.0 902 Net assets revalued at VEF 193/USD (B) 0.5 29 Derived loss on revaluation (A-B) 873 Loss booked as per 20-F filing 843 As a % of networth 1%

Monetary assets equal to VEF245mn imports of pharma products are eligible for VEF6.3/ USD exchange rate Dr. Reddy in FY15 recognised losses on remaining net monetary assets of VEF88mn at rate of VEF193/ USD Consequently, INR843mn forex loss was booked in FY15 P&L



Payments towards importation of pharmaceutical products qualify for preferential rate of VEF6.3/USD. Accordingly, monetary assets which equal the amount of import payments amounting to INR2.5bn (VEF813mn) are translated at such preferential rate. The company’s balance monetary assets, which do not qualify for the preferential rate, are translated at the SIMADI rate. Hence, a forex loss of INR843mn on translation of such monetary items has been recognised by the company. The loss amounts to 1% of Glenmark’s total consolidated net worth.

Earnings to cash translation and fund flow analysis

Table 16: Earnings to cash translation—Past 5 years (INR mn)

Source: Company annual report, Edelweiss research Earnings to cash translation ratio consistently declined over FY11-15, except for a marginal uptick in FY14, primarily led by currency translation losses charged to reserves and working capital investments.

Table 17: Cumulative cash flow generation and utilisation—Past 5 years (INR mn)


Particulars FY11 FY12 FY13 FY14 FY15 Adjusted cash flows post currency translation losses (A)

7,483 4,516 3,203 5,194 3,221

Profit after tax (PAT) 4,532 4,603 6,147 5,423 4,753 Depreciation 947 979 1,270 2,168 2,600 Other income 1,444 182 107 115 219 PAT + Depreciation - Other income (B)

4,035 5,401 7,310 7,476 7,134

Earnings to cash conversion ratio (A/B*100)

185 84 44 69 45

Sources FY11 FY12 FY13 FY14 FY15 Total Application FY11 FY12 FY13 FY14 FY15 TotalOCF before w.cap (post tax, interest and fx losses)

4,316 6,760 7,699 7,515 3,979 30,270 Receivables & inventories

(1,088) 1,705 5,791 7,297 6,696 20,401

Payables 2,443 1,357 3,106 4,396 4,023 15,326 Capex 3,708 2,829 4,677 3,728 5,380 20,322

Debt (2,580) (1,565) 4,475 2,046 4,807 7,184 Others (Dividend, net cash etc)

1,638 2,120 4,920 3,125 778 12,581

Equity and others 80 102 107 192 44 524

Total 4,259 6,654 15,387 14,150 12,854 53,304 Total 4,259 6,654 15,387 14,150 12,854 53,304

185

84

44

69

45 30.0

70.0

110.0

150.0

190.0

230.0


(%)

Earnings to cash conversion ratio



Chart 2: Sources and utilisation of funds—Cumulative 5 years (FY11 to FY15)


Capital allocation analysis Table 18: Capital employed and return ratios (INR mn)


OCF before w.cap (post tax, interest

and fx losses)

57%

Payables29%

Debt13%

Equity and others

1%

Sources

Particulars FY11 FY12 FY13 FY14 FY15Sales 29,491 40,206 50,123 60,052 66,298 EBITDA 5,923 7,144 10,100 10,908 10,225 EBITDA margin (%) 20 18 20 18 15 Net profit 4,532 4,603 6,147 5,423 4,753 ROE (%) 21 21 24 19 16 ROCE (%) 15 14 18 15 12 TCI 3,329 3,959 4,738 3,182 1,033 ROE (%) on TCI 15 18 18 11 3 Net Fixed Assets 20,342 22,228 24,063 28,897 28,362 CWIP 1,781 2,629 4,223 2,062 4,923 Equity shareholders' funds 20,372 24,016 27,630 29,833 30,003 Loan funds 20,973 22,445 27,649 32,670 37,999 Total Capital Employed 41,345 46,461 55,279 62,503 68,003 DE ratio (x) 1.0 0.9 1.0 1.1 1.3

Revenue and EBITDA nearly doubled over FY11-15. However, PAT stood flattish over the same period While RoE improved initially and declined significantly over the past 2 years to 16%, RoE based on total comprehensive income declined to 3% D/E ratio rose to 1.3x in FY15

Receivables &

inventories38%

Capex38%

Others (Dividend, net cash

etc)24%

Utilisation



Chart 3: Capital employed and RoE/ RoCE


Balance sheet analysis

Table 19: Balance sheet analysis (INR mn)

Chart 4: Movement during the year


During FY15, while retained earnings contributed merely 1% to generation of funds, majority sources of funds were from debt, trade payables and loans/ advances.

16

28

40

52

64

76

0.0

5.4

10.8

16.2

21.6

27.0


(INR

bn)

(%)

Equity Debt ROE (%) ROE (%) on TCI

Sources FY14 FY15 Change Application FY14 FY15 ChangeShareholders funds 29,833 30,003 171 Tangible assets (Incl CWIP) 17,628 20,569 2,941 Debt 32,670 37,999 5,330 Intangible assets (Incl Goodwill) 13,331 12,715 (616) Trade payables 13,635 20,530 6,895 Trade receivables 21,563 25,118 3,554 Others 10,198 8,342 (1,856) Inventories 9,329 12,690 3,362

Cash 8,007 7,681 (325) Deferred tax assets 7,213 9,731 2,518 Loans/ advances 5,264 3,290 (1,974) Others 4,002 5,081 1,079

Total 86,336 96,875 10,539 Total 86,336 96,875 10,539

Retained earnings

1%

Debt36%

Trade payables

47%

Cash2%

Loans/ advances

14%


100% = INR14.7bn

Tangible and

Intangible assets16%

Trade receivables

and inventories

47%

Deferred tax assets

17%

Others20%

Application during the year

100% = INR14.7bn



Chart 5: Balance sheet at the end of the year


As at FY15 end, debt & trade payables represent 60% of liabilities, while equity shareholders’ funds stood at 31%. Tangible & intangible assets contributed 34% to assets, receivables & inventories represented 39%, while deferred tax assets were at 10%.

R&D and intangibles analysis Table 20: R&D expenditure - Consolidated (INR mn)


R&D capitalisation under product development/ brands during FY15 stood at INR965mn, while translation adjustment stood at negative INR(768)mn. Table 21: R&D as % of revenue—Peers analysis (consolidated level) (%)


NA: Sun Pharma FY15 data not available.

Shareholders funds31%

Debt39%

Trade payables

21%

Others9%

Sources as at FY15

100% = INR96.9bn

FY12 FY13 FY14 FY15R&D expenditure 2,916 4,116 5,998 6,014 Sales 40,206 50,123 60,052 66,298 R&D as % of sales 7.3 8.2 10.0 9.1

ParticularsR&D expenditure

Particulars FY12 FY13 FY14 FY15Sun Pharma 5.1 5.9 6.2 n.a.Lupin Ltd. 7.1 7.1 7.7 7.8Dr. Reddys Labs 6.3 6.9 9.4 11.2Cipla Ltd. 4.4 4.4 5.0 6.3Aurobindo Pharma 3.5 4.0 3.4 2.9Glenmark Pharma 7.3 8.2 10.0 9.1

R&D expenditure stood at 9.1% of sales in FY15

R&D as percentage of sales stood higher for Dr. Reddy’s and Glenmark in FY15 R&D for Glenmark has increased over the past 5 years

Tangible assets (Incl

CWIP)21%

Intangible assets (Incl Goodwill)

13%

Trade receivables

26%

Inventories13%

Cash8%

Deferred tax assets

10%

Loans/ advances

4%

Others5%

Application as at FY15

100% = INR96.9bn



Table 22: Intangible assets—Consolidated (INR mn)

Intangibles include assets with indefinite useful lives worth INR3.8bn in FY15 (FY14: INR5.2bn) which are tested for impairment annually. Glenmark has recorded an impairment charge towards these intangibles. No further details are available in this regard. Table 23: Contingent liabilities - Consolidated (INR mn)


Particulars FY11 FY12 FY13 FY14 FY15Intangibles assets:

Computer software 147 166 198 266 237 Product development/ Brands 9,252 10,942 11,876 12,410 11,564 Goodwill 606 609 604 602 580

Intangibles under development 324 145 62 53 333 Total 10,329 11,862 12,739 13,331 12,715 As % of net worth 51 49 46 45 42

Particulars FY11 FY12 FY13 FY14 FY15 Bank guarantees 69 39 66 72 74 Letters of credit issued by bankers 323 764 524 661 838 Guarantees given to third party for office 9 11 11 13 13 Indemnity bond for customs 260 288 375 394 2,775 Corporate guarantees 1,206 Disputed Income tax/Excise duty/Sales tax 47 212 203 155 224 Others 0.2 - 0.1 0.1 145 Total 1,914 1,314 1,179 1,294 4,069

As % of net worth 9.4 5.5 4.3 4.3 13.6

Intangibles stood at INR12.7bn, 42% of net worth, largely including product development/ brands

Contingent liabilities at consolidated level rose from INR1.3bn in FY14 to INR4.1bn in FY15, primarily led by indemnity bond for customs





Particulars FY11 FY12 FY13 FY14 FY15Sales 29,491 40,206 50,123 60,052 66,298 Total income 30,935 40,388 50,231 60,167 66,516 EBITDA 5,922 7,144 10,100 10,908 10,225 EBITDA margin (%) 20 18 20 18 15 RoE (%) 21 21 24 19 16 RoCE (%) 15 14 18 15 12 Depreciation 947 979 1,270 2,168 2,600 Financial costs 1,605 1,466 1,600 1,886 1,902 Net profit 4,532 4,603 6,147 5,423 4,753 Total comprehensive income for the year 3,329 3,959 4,738 3,182 1,033 Equity shareholders' funds 20,372 24,016 27,630 29,833 30,003 Loan funds 21,085 22,445 27,649 32,670 37,999 Net fixed assets 20,666 22,373 24,125 28,950 28,695 CWIP 1,457 2,483 4,161 2,009 4,589 Current assets loans and advances 24,029 26,252 31,195 39,620 45,551 Current l iabil ities and provisions 7,677 9,697 13,359 21,109 24,857 Net current assets 16,353 16,555 17,836 18,512 20,694 Cash and cash equivalents 1,958 3,219 6,073 8,007 7,681 Net Debt 19,126 19,226 21,576 24,663 30,318 Cash flow from operating activities 9,306 8,044 6,479 8,537 4,817 Cash flow from investing activities (3,673) (2,778) (4,641) (3,681) (5,400) Cash flow from financing activities (4,356) (3,614) 1,952 (980) 1,992 Net cash flows 1,277 1,652 3,791 3,876 1,409 CAPEX (4,012) (2,854) (4,710) (3,728) (5,380) Working capital investments 3,531 (348) (2,685) (2,901) (2,673)


Sun Pharmaceutical Industries’ (SUNP) FY15 annual report analysis highlights lower adjusted RoE/RoCE of 12.8%/16.8% versus reported 21.5%/25.9% on merger of Ranbaxy. Merger accounting under ‘Pooling of Interest’ method (permitted under Indian GAAP but prohibited internationally) leads to recognition of cost of acquisition being lower by INR301.7bn and hence superior return ratios for FY15 and going forward. Demerger of unit from Sun Pharma Global FZE (SPG) to SUNP standalone in FY14 and third-party deal to supply discounted products worth USD400mn, led to transfer of assets and liabilities (including USD550mn ‘Protonix’ drug litigation claim) from tax-free entity (SPG, UAE) to tax-paying entity. Contingent liabilities include income tax demands rising to INR26.7bn (FY14: INR12.1bn; FY11: INR2.7bn). P&L tax rate stood at 14.3% versus cash tax rate of 27.2% led by deferred tax asset (DTA). Our calculation suggests that Ranbaxy’s consolidated revenue declined by 16% YoY in FY15 and SUNP’s consolidated revenue, ex-Ranbaxy grew 1.5% YoY. Recurring OCF post interest declined 18% YoY to INR53.1bn. Loans to employees and others rose to INR11.7bn (FY14: INR5.8bn) and total loans/advances rose to INR48.7bn, 19% of net worth (FY14: INR23.0bn, 12.4%).

Note: YoY numbers are not comparable due to Ranbaxy being merged in FY15

‘Pooling of interest’ accounting leads to higher reported RoE/RoCE SUNP issued 335mn shares on merger to erstwhile Ranbaxy shareholders worth INR331.5bn based on 1 month average price. However, cost of acquisition recorded on merger was only INR29.9bn (9% of fair value of shares issued) due to accounting as per ‘Pooling of Interest’ method (as permitted under Indian GAAP). ‘Purchase ‘method would have led to net worth and goodwill being higher by INR301.7bn and RoE/RoCE would have been lower by 9% each.

Revenues ex-Ranbaxy grew 1.5% YoY Our calculation suggests 16% decline in Ranbaxy’s FY15 consolidated revenues and hence SUNP’s revenues ex-Ranbaxy rose by 1.5% YoY. We believe combined revenue could have been impacted due to adverse movement in emerging market currencies (higher Ranbaxy exposure versus SUNP), price erosion in Taro products and supply issues at the Halol facility.

Tax rate stood at 14.3% versus cash tax rate of 27.2% P&L tax charge stood at INR9.2bn versus cash tax payment of INR17.4bn, led by deferred tax credit in FY15. DTA increased by INR10.5bn due to unpaid liabilities, unabsorbed losses and others. Total deferred tax assets stood at INR22.3bn, 8.7% of net worth. SUNP recognised MAT of INR7.5bn pertaining to Ranbaxy on merger.



Sun Pharmaceuticals | Annual Report Analysis


October 15, 2015

52-week range (INR) : 1,200 / 792


M cap (INR bn/USD mn) : 2,127/32,668


Promoters* : 54.7


FIIs : 23.8

Others : 13.8



Market Data




Gross margins dipped by 7% while EBITDA margins declined by 15% YoY, partially owing to merger related expenses. Sun Pharma Laboratories Limited (SPLL’s) reported profits remained subdued led by high amortisation cost of intangibles transferred internally at fair value on demerger of domestic formulation business in FY13. However there is no impact on consolidated profitability as the amortisation cost is an inter-company transaction and gets eliminated on consolidation. Recurring OCF (adjusted for exceptional/one-time loss) declined 18% YoY from INR64.5bn in FY14 to INR53.1bn in FY15, led by higher working capital investment and tax payment. Working capital, as a proportion to revenue, rose from 26% in FY14 to 29% in FY15. Goodwill rose to INR50.6bn in FY15, 20% of net worth (FY14: INR29.1bn, 16%) and other intangibles (including under development) stood at INR11.5bn, 4% of net worth (FY14: INR4.1bn, 2%). Outstanding derivatives position (gross) rose from INR21.6bn in FY14 to INR54bn at consolidated level. Unhedged exposure details at consolidated level are not available. Standalone net unhedged exposure (largely loans) rose to INR35.5bn, 16% of standalone net worth (FY14: INR2.5bn, 3%). Forex losses under other expenses stood at INR968mn in FY15 (FY14: INR1.9bn) and forex losses booked under finance cost stood at INR2.7bn in FY15 (FY14: INR218.1mn). Unrealised forex gains (as per cash flow) rose to INR7.9bn in FY15 (FY14: INR114.4mn). R&D expenses rose from INR9.9bn (6% of revenues) in FY14 to INR18.6bn (7%) in FY15. Major related party transactions include sales/purchase of INR202.7mn/INR1.5bn with Sun Pharma Advanced Research Company (SPARC). Other highlights

• Long-term equity investments declined to INR1.5bn from INR4.3bn in FY14, partially led by impairment of INR1.7bn in an associate. We believe it pertained to associate, Zenotech Laboratories (Zenotech), which incurred loss of INR143.2mn (SUNP’s share). Total Investment in Zenotech stood at INR2.5bn, as at FY15.

• Consolidated financials included unaudited financials of 44 subsidiaries, 3 joint ventures (JVs) and 1 associate accounting for revenues of INR10.4bn (4% of consolidated revenues), total assets of INR12.5bn and net cash inflow of INR4.3bn.

• SUNP’s board has proposed a special resolution to be passed (enabling provision) to raise INR120bn. The board had sought consent of shareholders in FY14 and since the resolution is valid only for 1 year, consent of shareholders has been sought once again. SUNP has also obtained shareholders’ approval to increase the borrowing limit up to INR500bn.


Sun Pharmaceuticals

‘Pooling of Interest’ accounting led to higher RoE/RoCE Table 1: Net worth analysis post Ranbaxy merger


SUNP, on April 10, 2015, announced swap ratio of 0.8x to 1 on merger of Ranbaxy and issued 335mn shares to erstwhile Ranbaxy shareholders. The company followed ‘Pooling of Interest’ method of accounting in accordance with Accounting Standard (AS) 14 for Ranbaxy merger as permitted under Indian GAAP. Internationally, under IFRS and USGAAP, ‘Pooling of Interest’ method is prohibited.

Under ‘Pooling of Interest’ method, all assets and liabilities are recorded at book value and any excess/ shortfall of investments over net assets are adjusted in reserves.

Had the company followed the ‘Purchase’ method, net worth and goodwill would have been higher by INR301.7bn each and RoE/RoCE would have been 12.8%/16.8% versus reported 21.5%/25.9%. Ranbaxy in FY14 reported RoCE of 7.2% and RoE stood negative.

Table 2: Net worth analysis - Standalone vérsus consolidated (INR bn)


Particulars INR mnShares issued to Ranbaxy shareholders @ swap ratio of 0.8 to 1 335.0 Fair market value of shares issued on 10 April 2015 (swap ratio announcement date) based on 1 month average price @INR989.7 per share - A

331,507

Less: Increase in networth on Ranbaxy merger - B 29,857 Increase in net worth had the company issued shares at market price or followed purchase method of accounting (A-B)

301,650

Reported RoE (%) 21.5 Reported RoCE (%) 25.9

Adjusted RoE (%) 12.8 Adjusted RoCE (%) 16.8


Opening shareholders' fund 78.8 77.9 74.1 122.4 149.9 185.2 Add Profit for the year 5.2 - - 29.8 31.4 45.4 Movement in Foreign currency translation reserve - - - 3.8 7.6 3.3 Pursuant to merger of SunP Global FZE (SPG) unit - 28.1 - - - - Pursuant to merger of SunP Global Inc. (100% subsidiary) - - 165.3 - - - Pursuant to merger of Ranbaxy - - 10.6 - - 29.9 Others - - 1.3 - - 1.2 Total 5.2 28.1 177.2 33.6 39.0 79.8 Less:Dividend and tax thereon 6.1 3.6 8.7 6.1 3.6 8.7 Loss for the year - 28.3 14.7 - - - Total 6.1 31.9 23.4 6.1 3.6 8.7 Closing shareholders' fund 77.9 74.1 227.9 149.9 185.2 256.4


SUNP allotted shares worth INR331.5bn to erstwhile Ranbaxy shareholders on merger, however net worth rose by INR29.9bn in FY15 Goodwill of INR301.7bn does not appear in the Balance Sheet due to adoption of ‘Pooling of Interest’ accounting method RoE/ RoCE, adjusted for true cost of acquisition, would be lower by 9% each. Reported ROE/ROCE will continue to be higher, hence requires appropriate adjustment while calculating future return ratios.



In FY15, the company merged its wholly-owned subsidiary Sun Pharma Global Inc (SPI), incorporated in British Virgin Island (BVI). Consequently, standalone net worth increased by INR165.3bn. Ranbaxy’s standalone entity merger with SUNP’s standalone company led to increase in net worth by INR10.6bn in FY15. In FY14, SUNP merged a unit of its 100% subsidiary, SPG leading to increase in standalone net worth by INR28.1bn. Merger led to transfer of all assets and liabilities of SPG’s unit into standalone entity including settlement of ‘Protonix’ drug’s litigation liabilities as explained below.

Demerger of SPG’s unit Fig. 1: SPG’s unit demerger and third party arrangement


Post merger of SPG’s unit, the company settled the Protonix litigation liability of USD550mn and entered into an agreement with a third party, wherein the said party will bear part of the liability of USD400mn and SUNP has agreed to supply products at a discounted price. Consequently, discount/incidental expenses (akin to finance costs in our view) of USD16.5mn (equivalent to INR1.0bn) were charged to P&L in FY15 (FY14: USD38.5mn – INR2.3bn). Table 3: Movement in provisions – Towards liability to third party (INR mn)


Total provisions stood at INR28.3bn of which 79% is long term and remaining INR5.9bn is recognised as short term.

Particulars FY14 FY15Opening Balance 5,808.0 26,312.2 Pursuant to the scheme of Amalgamation - 817.0 Provision for the year 27,555.3 2,223.6 Util ised during the year (9,190.5) (2,101.3) Exchange Fluctuation 2,139.4 1,069.5 Closing Balance 26,312.2 28,321.0

May 2013 Demerger and transfer of ulcer therapeutics segment to standalone entity

June 2013

USD550 mn (INR31bn) settlement agreement for 'Protonix' with Pfizer, Wyeth and Nycomed.

3rd party contract - wherein the party will bear USD400mn (INR24bn) Consideration - SPG to sell products at discounted price for specified period.

De-merger from SPG to standalone entity leads to transfer

of USD550mn cost from tax free entity (SPG, UAE) to tax paying

entity.

3rd party contract leads to discount/ incidental costs of USD16.5mn in FY15 (FY14:

USD38.5mn) charged to P&L.


Sun Pharmaceuticals

Profitability analysis Though revenue ex-Ranbaxy is not disclosed separately, we have tried to derive the same, based on annual report disclosures. Our calculations suggest 1.5% YoY revenue growth for SUNP ex-Ranbaxy as explained below.

Table 4: Ranbaxy revenues (derived) (INR mn) Table 5: SUNP revenue ex-Ranbaxy (INR mn)


# In absence of details, proportion of inter-company transactions within subsidiaries has been assumed as in FY14.

** Variance in derived consolidated revenues could be led by inter-company transactions within subsidiaries for which no details are available.

Ranbaxy’s standalone revenues declined 19% YoY, while consolidated (derived) revenues fell 16% YoY, which could partially be attributable to company’s emerging market exposure. SUNP’s consolidated (ex-Ranbaxy) revenues grew by 1.5% YoY as per our calculation. Standalone revenue (ex-Ranbaxy) declined 14% YoY. While in FY15, standalone entity also included impact of merger of Sun Pharma Global Inc (SPI), a wholly-owned subsidiary, we believe there will be no impact on revenue, as SPG was a holding company incorporated in BVI, and in FY14 SPG reported nil revenues.

Table 6: Ranbaxy versus SUNP revenues – Geographical distribution (INR mn)


Rest of the World (RoW) segment revenues declined 24% YoY, primarily due to exposure to emerging markets like Russia, Brazil, etc.

ParticularsFY14

(Reported)FY15

(Derived)**YoY (%)

Standalone (As per annual report) 68,649 55,867 (19) Subsidiary (Section 212 / AOC-1 disclosure)

98,662 87,761 (11)

Inter-Company revenues (from standalone to subsidiaries)

(20,256) (20,516)

Total 1,47,056 1,23,112 (16) Variance - due to inter-co transactions within subsidiaries**

(14,371) (12,031)#

Consolidated revenues 1,32,685 1,11,081 (16)

Ranbaxy revenues

FY15

Geography Ranbaxy SunP TotalMerged

entityYOY (%) FY14 (SunP) FY15 (merged)

US Business 42,554 97,844 140,398 137,195 (2.3) 60.5 49.8 Indian Business & API 29,884 44,927 74,811 77,868 4.1 27.8 28.2 ROW 60,246 19,084 79,330 60,646 (23.6) 11.8 22.0 Total 132,685 161,855 294,540 275,709 (6.4) 100.0 100.0

FY14 Revenue proportion (%)

Particulars Consol StandaloneCombined/ merged entity revenue 274,334 80,172 Ranbaxy revenue (derived)** (111,081) (55,867) FY15 Revenue ex-ranbaxy 163,254 24,305 FY14 revenue 160,804 28,288 YoY change (%) 1.5 (14.1)



Table 7: Merged entities’ standalone versus consolidated profitability analysis (INR bn)


Note: FY15 numbers are not comparable YoY due to Ranbaxy and SPI merger

Gross margins declined by 700bps YoY while EBITDA margins dipped by 15% YoY to 29%, led by increase in raw material costs and higher operating and employee expenses partially due to higher expenses related to Ranbaxy merger. Profitability also got impacted due to alignment of Ranbaxy’s policy (largely depreciation). Legal and professional expenses rose to INR14.2bn, 5% of sales (FY14: INR4.8bn, 3%).

Effective tax rate declined from 15.3% in FY14 to 14.3% in FY15 led by deferred tax credit.

Table 8: P&L tax charge versus cash tax paid (INR mn)

Table 9: Deferred tax analysis (INR mn)



Sales 28.3 100.0 80.2 100.0 132.5 100.0 194.2 100.0 160.8 100.0 274.3 100.0 Raw Materials Consumed 10.7 37.7 35.1 43.8 17.1 12.9 32.3 16.6 27.8 17.3 67.4 24.6 Operating and Administrative expense

14.7 51.9 35.8 44.6 27.6 20.8 48.2 24.8 42.2 26.3 84.0 30.6

Personnel cost 2.8 9.9 14.9 18.5 17.9 13.5 29.4 15.2 20.7 12.9 44.3 16.1 EBITDA 0.2 0.6 (5.6) (7.0) 69.8 52.7 84.3 43.4 70.0 43.5 78.7 28.7 Depreciation 1.0 3.6 6.6 8.2 3.1 2.3 5.3 2.8 4.1 2.5 11.9 4.4 EBIT (0.8) (3.0) (12.2) (15.2) 66.8 50.4 78.9 40.6 65.9 41.0 66.7 24.3 Financial Charges - - 5.5 6.9 0.4 0.3 0.3 0.1 0.4 0.3 5.8 2.1 EBT (0.8) (3.0) (17.7) (22.1) 66.3 50.1 78.6 40.5 65.5 40.7 60.9 22.2 Other Income 1.6 5.6 2.1 2.6 3.9 3.0 3.4 1.7 5.5 3.4 5.5 2.0 PBT before exceptional item 0.7 2.6 (15.6) (19.4) 70.3 53.0 82.0 42.2 71.0 44.2 66.4 24.2 Exceptional item (28.8) (101.7) - - 3.6 2.7 (2.4) (1.2) (25.2) (15.7) (2.4) (0.9) PBT after exceptional item (28.0) (99.0) (15.6) (19.4) 73.8 55.7 79.6 41.0 45.8 28.5 64.0 23.3 Tax expense 0.3 1.0 (0.8) (1.1) 6.7 5.1 10.0 5.1 7.0 4.4 9.1 3.3 PAT (28.3) (100.0) (14.7) (18.4) 67.1 50.6 69.6 35.9 38.8 24.1 54.9 20.0


Particulars FY11 FY12 FY13 FY14 FY15PBT 20,360 33,554 43,149 45,812 64,029 Tax charge 1,286 3,132 8,456 7,022 9,147 Tax rate (%) 6.3 9.3 19.6 15.3 14.3 Cash tax paid 693 2,268 10,735 7,889 17,404 Cash tax rate (%) 3.4 6.8 24.9 17.2 27.2

Particulars FY11 FY12 FY13 FY14 FY15Deferred tax assets:Unpaid Liabil ities 1,819 4,061 4,409 5,901 9,116 Intangibles 1,233 1,257 1,415 3,137 3,283 Unabsorbed losses 1,857 1,016 1,622 52 2,917 Others 502 653 1,806 2,712 6,956 Total - A 5,410 6,987 9,252 11,801 22,272 As % of net worth 5.7 5.7 6.2 6.4 8.7 Deferred tax liabilities:Depreciation on fixed assets 1,758 1,704 2,130 2,691 4,756 Total - B 1,476 1,500 1,768 2,071 2,798 Net deferred tax asset (A-B) 3,934 5,487 7,484 9,730 19,474 As % of net worth 4.1 4.5 5.0 5.3 7.6

P&L tax rate stood at 14.3%, while cash tax rate increased to 27.2% due to deferred tax credit SUNP recognised MAT of INR7.5bn pertaining to Ranbaxy DTA increased by INR10.5bn due to unpaid liabilities, unabsorbed losses and others Total deferred tax assets stood at INR22.3bn, 8.7% of net worth


Sun Pharmaceuticals

Table 10: Contingent liabilities (INR mn)


Commitments (over and above contingent liabilities) included INR11.3bn (FY14: INR4.2bn) towards derivatives related commitments (towards forward contracts).

Subsidiaries profitability analysis

Table 11: Subsidiaries’ profitability analysis (INR mn)


Particulars FY11 FY12 FY13 FY14 FY15Income Tax related 2,562 5,092 7,624 12,115 26,707 Others 3,922 1,778 2,318 4,347 9,211 Total 6,484 6,869 9,942 16,461 35,918 As % of net worth 7 6 7 9 14

Particulars FY15Networth Revenues PAT Networth Revenues PAT

Sun Pharma subsidiariesTaro Pharmaceuticals U.S.A.,Inc. 68.9 1,863 39,773 907 (799) 48,107 1,155 Sun Pharma Laboratories Ltd. (SPLL) 100.0 186,334 39,469 2,466 186,107 43,726 (227) Sun Pharmaceutical Industries Inc. (Previously Caraco Pharmaceutical Laboratories Ltd)

100.0 6,164 46,675 502 5,183 43,230 (1,237)

Taro Pharmaceutical Industries Ltd.(TARO) 68.9 60,936 18,709 10,079 88,232 23,609 30,266 Sun Pharma Global (FZE) 100.0 69,090 31,621 31,668 81,850 22,106 11,326 Taro Pharmaceuticals Inc. 68.9 31,774 19,168 10,335 40,731 19,285 12,046 Dusa Pharmaceuticals Inc. 100.0 147 4,232 237 1,143 6,898 1,372 Mutual Pharmaceutical Company Inc. 100.0 11,776 17,699 6,048 11,829 6,051 (124) Taro Pharmaceuticals North America, Inc. 68.9 7,374 6,709 4,796 15,750 5,170 3,074 Chattem Chemicals Inc 100.0 3,169 1,810 203 3,465 1,826 164 Pharmalucence Inc. 100.0 5,264 1,144 (196) Alkaloida Chemical Company Zrt. 100.0 6,493 970 1,066 35,309 799 (1,201) Sun Pharma Holdings 100.0 214,150 173 170 Taro Hungary Intellectual Property Licensing LLC . 68.9 6,103 - 132 6,358 - 42 URL Pharma Inc. 100.0 5,268 - - 5,487 - - Sun Pharma Global Inc. 100.0 206,470 - 150,815 214,922 - (3) Others 65-100 214,718 8,518 1,440 109 7,537 (1,209) Total (A) 817,678 235,354 220,693 915,091 229,661 55,417

Ranbaxy subsidiariesRanbaxy Pharmaceutical, Inc., 100.0 6,138 20,309 (155) Ohm Laboratories Inc., 100.0 5,293 17,135 (332) Ranbaxy Laboratories Inc., 100.0 6,106 12,999 3,576 S.C Terapia S.A. , 96.7 7,178 8,064 1,222 Ranbaxy, Inc., 100.0 14,870 1,874 (109) Ranbaxy USA, Inc, 100.0 9,796 - 2 Ranbaxy (Netherlands) B.V. 100.0 49,765 - (4,310) Others 65-100 7,373 27,380 (1,251) Total (B) 106,519 87,761 (1,358) Grand total 817,678 235,354 220,693 1,021,610 317,422 54,059

FY14Shareholding %

Contingent liabilities continue to rise led by income tax related demands



Overall subsidiaries’ revenue (ex-Ranbaxy) declined by 2% YoY. However, Taro, SPLL and Dusa Pharma reported robust revenue growth. SPLL’s reported profitability remained subdued primarily due to high amortisation cost of intangibles transferred internally at fair value on demerger of domestic formulation business into SPLL in FY13.

Cash flow analysis



Operating cash flow rose from INR39.6bn in FY14 to INR53.2bn. However, adjusted for exceptional items, (mainly pertaining to one-off Protonix drug litigation costs in FY14) recurring OCF declined 18% YoY from INR64.5bn in FY14 to INR53.1bn in FY15. Receivables increased at subsidiaries level leading to consolidated receivables rising by INR10.5bn in FY15.

Table 13: Cash conversion cycle (days – closing basis*)


* Cash conversion cycle is calculated on closing basis instead of average due to mergers in FY15

Cash conversion cycle, at consolidated level, improved from 234 days in FY14 to 183 days in FY15, led by lower inventory days and higher payable days. Taro receivable days rose from

Profit before tax (28.0) (15.6) 73.8 79.6 45.8 64.0 Non-operating expense (0.7) (1.6) (4.0) (4.9) (4.6) (6.5) Non-cash adjustments 1.1 7.4 3.1 6.1 4.2 13.5 Direct taxes paid (1.5) (1.9) (6.4) (15.5) (7.9) (17.4) Cash profit after tax (29.1) (11.7) 66.6 65.3 37.5 53.6 (Increase)/Decrease in inventories (0.5) 4.2 (5.0) (2.3) (5.5) 1.9 (Increase)/Decrease in Trade Receivables 3.4 2.8 (1.2) (13.3) 2.2 (10.5)(Increase)/Decrease in loans & adv (0.9) (0.5) 4.3 (1.4) 3.4 (1.9) (Increase)/Decrease in other assets (24.4) 28.4 (0.0) (28.8) (24.4) (0.4) Increase/(Decrease) in trade payables 0.2 1.2 2.5 2.2 2.7 3.4 Increase/(Decrease) in provisions and others 27.3 (22.9) (3.7) 30.0 23.6 7.1 (Increase)/Decrease in working capital 5.0 13.2 (2.9) (13.6) 2.1 (0.4)Net cash from operating activities (24.1) 1.5 63.6 51.7 39.6 53.2 Interest expenses paid (0.2) (3.3) (0.0) 0.8 (0.2) (2.5)Net cash from operating activities post interest (24.2) (1.8) 63.6 52.5 39.4 50.7 Add: exceptional loss 28.8 - (3.6) 2.4 25.2 2.4 Adjusted recurring operating cash flow (OCF) 4.5 (1.8) 60.0 54.9 64.5 53.1 Less: Capex (4.3) (10.1) (4.6) (13.0) (9.0) (23.2)Free cash flow 0.2 (12.0) 55.4 41.9 55.6 29.9

ParticularsStandalone

FY14 FY15Subsidiary (Derived) Consolidated

FY15FY14 FY15 FY14


Trade Receivable days 110 38 56 78 50 70 65 42 89 Add: Inventory days 262 233 180 327 298 237 180 183 174 Less: Trade payable days (100) (84) (115) (126) (114) (124) (30) (31) (24) Cash conversion cycle 271 186 122 279 234 183 214 194 239

TAROStandalone Consolidated


Sun Pharmaceuticals

42 to 89 days in FY15. Receivables for Taro are net of charge-backs/reserves for sales deductions. Working capital, as a proportion to revenue, rose from 26% in FY14 to 29% in FY15.

Table 14: Receivables analysis – Taro (USD mn) Table 15: Receivables analysis – Consolidated (INR bn)


Consolidated receivables rose to INR53.1bn in FY15, 19.4% of revenues (FY14: INR22bn). Taro’s receivables and revenues are recorded net of charge-backs/customer rebates/deductions that the company estimates, based on several factors.

Loans/advances and yield on cash



Particulars FY13 FY14 FY15Trade receivables (gross) 237.0 301.2 459.8 Less: Chargebacks/ customer rebates/ other deductions

117.2 183.4 237.3

Net receivables 119.8 117.8 222.4 Gross receivables as % of sales 35 40 53 Net receivables as % of sales 18 16 26

Particulars FY12 FY13 FY14 FY15Loans and advances towards:Employees / Others 6,128 5,217 5,754 11,732 Prepaid Expenses 660 1,267 1,508 2,727 Balances with Government Authorities 2,428 3,164 5,390 7,391 Advance Income Tax [Net of Provisions] 4,163 2,448 5,690 11,040 MAT Credit - - - 7,517 Advances for Supply of Goods and Services 1,655 679 1,360 1,829 Capital Advances 1,132 2,098 2,681 3,771 Others 208 4,302 575 2,732 Total 16,374 19,174 22,957 48,738 Net worth 122,358 149,897 185,250 256,381 As % of net worth 13.4 12.8 12.4 19.0

Loans to employees and others rose to INR11.7bn in FY15 Total loans/ advances stood at INR48.7bn, 19% of net worth

Particulars FY13 FY14 FY15Outstanding for > 6 months 2,150 2,821 4,015 Less: Provision (137) (167) (1,345) Other receivables 22,109 19,350 50,453 Total receivables 24,122 22,004 53,123 Revenues 112,999 160,804 274,334 As a % of revenue 21.3 13.7 19.4



Table 17: Yield on cash and investments (INR mn)




Particulars FY12 FY13 FY14 FY15Other income 4,393 3,511 4,977 4,642 Other income as % of PBT 13.1 8.1 10.9 7.3

Cash & investments:Current account 3,421 5,578 39,714 57,517 Deposits, Loans and others (incl employee loans)

58,462 65,031 69,708 91,516

Total 61,883 70,608 109,422 149,034

Average yield on cash (%) 4.2 5.3 5.5 3.6

Particulars FY11 FY12 FY13 FY14 FY15Sales 57.3 80.2 113.0 160.8 274.3 Total income 60.4 84.9 116.9 166.3 279.8 Gross Margin 42.7 63.8 92.3 133.0 206.9 Gross Margin (%) 74.5 79.6 81.7 82.7 75.4 EBITDA 20.0 32.0 49.0 70.0 78.7 EBITDA margin (%) 35.0 40.0 43.3 43.5 28.7 RoE (%) 21.0 24.5 25.4 31.5 21.5 RoCE (%) 23.6 30.1 35.6 39.3 25.9 Depreciation 2.0 2.9 3.4 4.1 11.9 Financial costs 0.7 0.3 0.4 0.4 5.8 Net profit 18.2 26.6 29.8 31.4 45.4 Equity shareholders' funds 94.8 122.4 149.9 185.2 256.4 Loan funds 4.3 3.2 2.6 25.6 89.9 Net fixed assets 32.9 39.5 56.5 68.2 131.9 CWIP 2.4 3.4 5.6 8.4 15.3 Current assets loans and advances 76.4 102.9 102.0 166.9 270.0 Current l iabil ities and provisions 15.1 24.5 27.0 34.8 87.3 Net current assets 61.3 78.4 75.0 132.1 182.8 Cash and investments 44.3 55.8 64.7 103.8 137.1 Net Cash 40.1 52.6 62.1 78.2 47.2 Cash flow from operating activities 23.9 22.3 33.6 39.6 53.2 Cash flow from investing activities (21.5) (8.6) (26.4) (23.7) (26.7) Cash flow from financing activities (7.7) (5.4) (6.6) 5.1 (10.9) Net cash flows (5.3) 8.3 0.6 21.0 15.6 CAPEX (4.5) (7.1) (8.3) (9.0) (23.2) Working capital investments 5.5 (10.1) (0.4) 2.1 (0.4)

Average yield on cash declined from 5.5% in FY14 to 3.6% in FY15 Cash and investments rose to INR149bn in FY15, of which INR57.5bn was in current account


Adani Ports SEZ’s (APSEZ) FY15 annual report highlights robust growth in revenue and profitability owing to healthy surge (28%) in cargo volumes at Mundra and other ports. The company resorted to bill discounting of INR4.5bn as at March 2015, adjusted for which receivable days increased to 107 (FY14: 84). Aggregate cash and non-cash exposure to related parties (ex subsidiaries and JV) stood at INR34.3bn (FY14: INR35.2bn) and INR30.2bn (FY14: INR48bn), respectively, representing ~60% of net worth. Aggregate unhedged forex exposure stood at INR111.7bn (FY14: INR116.8bn). Management stated that ~30-35% of income (~INR20bn-25bn) is USD denominated and will act as hedge for USD denominated borrowings. What’s on track Consolidated revenue (adjusted) surged ~38% and EBITDA margin inched up to 63.4% (FY14: 61.9%) led by robust growth in cargo volumes at Mundra and other ports. Consolidated operating cash flows post interest (adjusted for bill discounted) spurted to ~INR20.9bn in FY15 (FY14: INR6.5bn) led by higher profitability and lower incremental investment in working capital.

What needs tracking? ICDs/loans & advances (including capital advances) to related party (fellow subsidiaries and hold co) stood at INR24bn (FY14: INR25bn), 22.2% of net worth.

ICDs (ex related parties) stood at INR12.6bn (FY14: INR16.7bn) at prevailing market interest.

During the year, loan/ICD of INR 12.5bn was given to Adani Enterprises which was subsequently received back, resulting in no change in yearend balance.

Net debt jumped to ~INR169bn in FY15 (FY14: INR124bn) primarily owing to acquisition of Dhamra port. Debt equity ratio increased to 1.65x versus 1.5x at March14.

Receivables from related parties increased to INR8.2bn, 47% of total receivables (FY14: INR7.3bn, 51%), representing 7.6% of net worth. Receivable days from related parties stood at 243 (FY14: 185) versus 59 (FY14: 61) from non-related parties.

Cash conversion cycle, adjusted for bill discounting, rose to 120 days (FY14: 90) led by steep rise in receivable days to 107 (FY14: 84). As at March 2015, APSEZ discounted bills of INR4.5bn (FY14: nil). Receivables outstanding for more than 6 months stood at INR5.2bn (FY14: INR3.4bn).



Adani Ports & SEZ | Annual Report Analysis


August 13, 2015

52-week range (INR) : 357 / 244


M cap (INR bn/USD mn) : 667 / 10,281


Promoters* : 56.3


FIIs : 24.9

Others : 6.5



Market Data




During the year, based on preliminary agreement, APSEZ recognised revenue (INR2bn) and cost towards land reclamation based on activities completed and land being made available for setting up of Mundra LNG project. As at March 2015, entire sales consideration of INR 2bn remained uncollected. Management stated that ~30-35% of income (~INR20bn-25bn) is USD denominated and will act as hedge for USD denominated borrowings (~INR110bn). Hence, the forex exposure was kept open. However, since March’15, the INR has depreciated by 4% to INR 65/USD, which may increase MTM losses on borrowings and derivatives. The company capitalised forex loss of INR1.3bn (FY14: INR7.3bn) in fixed assets and INR0.2bn (FY14: INR1.2bn; net of amortisation) in FCMITDA as per amended AS11 APSEZ guaranteed credit facility of USD800mn availed by erstwhile subsidiary Mundra Port Pty Ltd. Outstanding loan against said corporate guarantee (CG) stood at USD487mn (FY14: USD800mn). However, the company has received corporate guarantee (CG) (deed of indemnity) from Abbot Point Port Holding against outstanding CG given by APSEZ.

Other highlights • During FY14, APSEZ gave deposit of INR2.5bn to Adani Enterprises to purchase/lease

corporate office space as per agreement/MoU valid till March 31, 2017. The, said amount remained outstanding as at March15.

• During the year, loan/ICD of INR 12.5bn was given to Adani Enterprises which was subsequently received back, resulting in no change in yearend balance.

• Cash tax paid stood at INR4.9bn (FY14: INR5.2bn) vis-à-vis P&L charge of INR1.8bn (FY14: INR2.3bn). The difference was primarily on account of MAT credit entitlement of INR5.3bn (FY14: INR3.9bn) recognised in FY15, taking total MAT credit entitlement to INR15.2bn.

• The Income Tax Department has filed appeals with ITAT on the ground that interest income on loans given to existing and potential associates is not a business income and hence cannot be netted off against interest expense while computing deduction u/s 80IAB. Considering the CIT (Appeals) order upholding the company’s claim in similar matter in the past and based on expert advice, no tax provision is made in the books against such income. Based on this, APSEZ has accounted higher MAT credit of INR1.4bn during the year (including INR0.6bn of earlier years).

• The company proposed to acquire balance 24% stake in Adani Murmugao Port from AEL and is in the process of obtaining regulatory approval.

Key highlights of MD&A • APSEZ has obtained the Government approval to set up another multi-product at the

Mundra port (on ~1,856 hectares of land), adjacent to the existing multi-product SEZ.

• The company is in process of developing a container handing terminal at Ennore port, Tamil Nadu and expects Phase 1 to get completed and commence operations by March 2016.


Adani Ports & SEZ

Earnings analysis


Note: % presented in above table is after adjustment of revenue and cost from CT-3

sales; Intercompany interest income is adjusted in above table


Standalone • Financial charges (standalone) declined to INR7.1bn (FY14: INR7.5bn) despite increase

in average borrowings. This was due to gain on derivatives of INR0.6bn (FY14: Loss of INR1.8bn) recognised in FY15 under financial charges.

Consolidated • Finance cost surged to INR11.8bn (FY14: INR9.8bn) led by 25% increase in average

borrowings. This was partly offset by gains on derivatives of INR0.7bn (FY14: Loss of INR2.1bn) recognised in finance cost.

• During FY15, based on preliminary agreement, APSEZ recognised revenue (INR2bn) and cost towards land reclamation based on activities completed and land being made available for setting up of Mundra LNG project. Consequently, accrued revenue increased from INR1bn in FY14 to INR3bn in FY15.

• Other income includes interest income of INR3.9bn (FY14: INR2.4bn) due from related party.

• Other income also includes unclaimed liabilities/excess provision written back and miscellaneous income of INR423mn and INR311mn, respectively.

Table 2: Other income (Consolidated) (INR mn)



Revenue (ex CT-3 sales) 36.3 100.0 39.1 100.0 8.4 100.0 22.4 100.0 44.7 100.0 61.5 100.0 Revenue- CT-3 sale 7.2 - - - - - - - 3.6 - - - Operating and admin expense 10.8 29.8 11.4 29.3 4.6 54.9 8.7 38.7 15.4 34.5 20.1 32.7 Cost- CT-3 sale 4.2 - - - - - - - 2.1 - - - Personnel cost 1.2 3.2 1.6 4.0 0.4 5.3 0.8 3.5 1.6 3.6 2.4 3.9 EBITDA 27.4 67.0 26.1 66.7 3.4 39.9 12.9 57.7 29.2 61.9 39.0 63.4 Depreciation 4.6 12.6 4.9 12.5 1.9 23.0 4.2 18.9 6.5 14.5 9.1 14.8 EBIT 22.8 54.4 21.2 54.2 1.4 16.8 8.7 38.9 22.7 47.4 29.9 48.6 Financial Charges 7.5 20.8 7.1 18.1 2.2 26.5 4.7 20.8 9.8 21.9 11.8 19.1 Other Income 5.6 15.5 4.9 12.6 1.2 14.6 1.9 8.5 6.8 15.3 6.9 11.1 PBT 20.9 49.2 19.0 48.7 0.4 4.9 6.0 26.6 19.8 40.8 25.0 40.7


Particulars FY13 FY14 FY15Interest & dividend income 1,310 5,578 6,123 Profit on dilution of control from subsidiary to JV 1,258 - - Profit on Sale of Fixed assets - 1,104 - Unclaimed Liabilities / Excess Provision written back 14 64 423 Miscellaneous Income 63 102 311 Total 2,644 6,848 6,856

Standalone revenue (adjusted for CT-3 sale of INR7.2bn) grew 8% during FY15. EBITDA margin (adjusted for profit on CT-3 sale) remained unchanged at ~67% Consolidated adjusted EBITDA margin (adjusted for margin on CT-3 sale of INR 1.5bn) surged to 63.4% (FY14: 61.9%) led by improved profitability of Hazira, Dahez and Dhamra ports



Subsidiary/JV profitability

Table 3: Major subsidiaries & JV analysis (INR bn)

Note: Company’s share of revenue and profit in JV is presented in above table

• Aggregate profitability of subsidiaries increased to INR2.6bn (FY14: INR 0.6bn)

led by improvement in profitability of newer ports—Dhamra, Hazira and Dahez.

• Adani International container terminal revenue surged 65% in FY15 and EBITDA margins stood at ~55%.

Cash flow analysis


Note: We have adjusted the investment income from the interest cost to arrive at free cash flows in above table


Networth Turnover PAT Turnover PATSubsidiaryThe Dhamra Port Company Limited 100% 27.4 2.8 - - 7.2 1.0 Adani Logistics Limited 100% 3.3 3.5 5.4 0.3 6.3 0.5 Adani Hazira Port Private Limited 100% 7.2 7.6 2.7 0.2 4.9 0.7 Adani Petronet (Dahej) Port Private Limited 74% 2.6 4.8 3.0 0.1 4.8 0.9 MPSEZ Util ities Private Limited 100% 0.5 0.8 0.9 0.0 1.2 0.1 Karnavati Aviation Private Limited 100% 0.5 0.0 0.5 (0.2) 0.5 (0.1) Adani Murmugao Port Terminal Private Limited 74% 0.9 0.9 - (0.0) 0.2 (0.3) Adani Vizag Coal Terminal Private Limited 100% 1.0 0.8 - (0.0) 0.2 (0.2) Total 43.2 12.4 0.6 25.4 2.6 PAT Margin (%) 4.5 10.3Joint VentureAdani International Container Terminal Private Ltd. 50% 3.1 2.6 1.1 (0.3) 1.8 (0.3) Adani CMA Mundra Terminal Private Limited 50% 0.3 0.3 - - 0.0 0.0

Particulars % holding

FY15FY14Standalone investment

Particulars

Profit before tax 22.1 21.5 (2.3) 3.5 19.8 25.0 Non-operating expense /(profit) 1.5 0.6 1.9 5.5 3.4 6.2 Non-cash adjustments 4.1 4.4 2.0 4.0 6.0 8.3 Direct taxes paid (4.9) (4.3) (0.3) (0.6) (5.2) (4.9) Cash profit after tax - 22.8 22.2 - 1.3 - 12.5 - 24.1 - 34.7 (Increase)/Decrease in trade receivables (4.7) 1.0 (1.6) (0.4) (6.3) 0.5 (Increase)/Decrease in inventories (0.6) (0.4) (0.2) (0.3) (0.7) (0.7) (Increase)/Decrease in Loans & Adv. & others (3.6) (3.5) 1.0 (0.8) (2.6) (4.3) Increase/(Decrease) in trade payables 0.9 (0.3) 0.1 (0.4) 0.9 (0.6) Increase/(Decrease) in provisions and other l iabil ities

1.2 1.0 (5.3) 0.1 (4.1) 1.1

(Increase)/Decrease in bill discounted - (4.5) - - - (4.5) (Increase)/Decrease in working capital (6.8) (6.7) (6.0) (1.8) (12.7) (8.5)Net cash from operating activities 16.0 15.5 (4.7) 10.7 11.3 26.2 Interest expenses paid (net of invest. income) (2.8) 1.3 (1.6) (6.6) (4.4) (5.3)Net cash from operating activities post interest 13.2 16.8 (6.3) 4.1 7.0 20.9 Less: Capex (4.1) (4.6) (6.9) (13.2) (11.0) (17.8)Free Cash Flows 9.1 12.2 (13.2) (9.2) (4.1) 3.1

Standalone ConsolidatedFY14 FY15 FY14 FY15 FY14 FY15

Subsidiary (derived)


Adani Ports & SEZ

• Consolidated operating cash flows post interest (adjusted for bill discounted) spurted to ~INR20.9bn in FY15 (FY14: INR7bn) led by higher profitability and lower incremental investment in working capital.

• Despite steep increase in operating cash flows, free cash flows only improved

moderately to INR3.1bn (FY14: INR(4.1bn)) due to higher capex undertaken by the company’s subsidiaries.



Table 6: Receivables profile (INR bn)

*includes INR6.7bn (FY14:INR7.3bn) contractually collectable on deferred basis (Inc where

receivable period extended) # including receivable due from JVs


• Management is confident of recovery of certain receivables which remained overdue

(amount not quantified) as at year end on account of pending environment clearance.

Particulars FY12 FY13 FY14 FY15Inventory days 8 9 10 13 Receivable days 46 61 84 94 Advance from customers days 7 6 5 7 Accrued revenue days 3 7 7 11 Payable days (36) (29) (17) (18) Cash conversion cycle 27 53 90 106 Add: Bil l disounted days - - - 13 Adjusted Cash conversion cycle 27 53 90 120

FY12 FY13 FY14 FY15Current (a) 3.0 7.2 9.2 12.9 >6 months 1.0 0.8 3.4 5.2 <6 months* 2.0 6.4 5.9 7.7 Non current(b) - - - - <6 months* 0.9 0.8 5.0 4.4 Total (a)+(b) 3.9 8.0 14.3 17.3

Due from related party #Current - - 3.4 4.9 Non current - - 4.4 3.6

0.0 0.3 7.8 8.5 Due from others 3.9 7.7 6.5 8.8 % of total receivables 1.1 3.6 54.7 49.1

Bills discounted with banks stood at INR4.5bn as at March 2015 (FY14: nil) Cash conversion cycle (adjusted for bill discounting) increased from 90 days in FY14 to 120 days in FY15 led by higher receivable days Receivable days adjusted for related parties increased to 59 (ex bill discounting) (FY14: 61) Receivables o/s for more than 6 months stood at INR5.2bn (FY14: INR3.4bn) Non- current receivables are primarily due from related parties



Related party analysis Table 7: P&L Exposure (INR bn)


Table 8: Interest Income analysis from related parties (INR mn)


P&L exposure FY12 FY13 FY14 FY15Income from Port ServicesAdani Enterprises Ltd 1.4 2.9 2.9 3.5 Adani Power Ltd. 2.4 3.8 4.6 5.3 Adani Power Rajasthan Ltd. 0.0 0.1 0.5 1.0 Adani Power Maharashtra Ltd. - 0.2 0.3 1.0 Others 0.6 0.7 0.7 0.7

Lease & Infrastructure usage incomeOthers 0.4 0.1 0.1 0.0

Operating Revenues 4.8 7.9 9.2 11.6 Related party revenue as % to total operating rev. 17.9 22.0 19.0 18.9 Interest Income on ICDs/deferred incomeAdani Agri Fresh Ltd. - - - 1.2 Adani Enterprises Ltd. - - - 0.4 Adani Power Ltd. - 0.3 0.6 0.9 Adani Infra (India) Ltd. - 0.1 1.6 1.2 Others - - 0.3 0.2

- 0.4 2.4 3.9 Purchase of spares, consumables and PowerChemoil Adani Pvt. Ltd. 1.8 0.9 1.6 1.1 Adani Power Ltd. 0.3 0.0 0.7 0.1 Others 0.2 0.0 0.0 0.0

2.3 0.9 2.3 1.2 Purchase of assetsAdani Power Dahej Ltd - - - 1.1 Services availed (inc reibursement of expenses)Adani Enterprises Ltd. 0.0 0.0 0.0 0.2 Adani Power Ltd. - 0.6 0.0 0.1 Others 0.0 0.0 0.0 0.0

ParticularsAdani Agri

Fresh Adani

Enterprises Adani Infra

(India) As on April 1, 2014 9,040 2,502 8,929 Given during FY15 3,098 12,530 2,793 Received back during FY15 (1,489) (12,530) (1,033) Closing 10,649 2,502 10,689 Average (a) 9,845 2,502 9,809

Interest income (b) 1,193 364 1,222 Interest (b/a) (%) 12.1 14.5 12.5

Operating revenue earned from related parties increased to INR11.6bn, 19% of consolidated revenue, in FY15 (FY14: INR9.2bn, 19%) Interest income (on ICDs given to related parties) jumped ~60% to INR3.9bn led by spurt in average loans/ICDs outstanding from related parties Donation to Adani Foundation stood at INR344mn (FY14: INR242mn) Our calculations indicate yield of ~12-15% on loans given to related parties Loan transactions with Adani Enterprises remained high during FY15, although there was no change in year end balance


Adani Ports & SEZ

Table 9: Balance sheet exposure (INR bn)


• APSEZ guarantees credit facility of USD800mn availed by erstwhile subsidiary, Mundra

Port Pty Ltd, representing Abbot Point Port. Outstanding loan against said corporate guarantee (CG) stood at USD487mn (FY14: USD800mn), ~28% of net worth. However, the company has received CG (deed of indemnity) against outstanding CG from Abbot Point Port Holding.

Table 10: Capitalisation of forex exchange losses (INR bn)


Balance sheet exposure FY12 FY13 FY14 FY15Trade receivables (A)

Adani Power Ltd. 0.3 1.5 5.7 6.3 Adani Power Rajasthan Ltd. 0.0 0.1 0.5 0.8 Others 0.1 0.5 1.1 1.0

0.5 2.0 7.3 8.2 Loans and advances (incl. capital advances) (B)

Adani Infra (India) Ltd. - 2.5 8.9 10.7 Adani Agri Fresh Ltd. - - 9.0 10.6 Adani Enterprises - - 2.5 2.5 Adani power - - 2.5 - Chemoil Adani Pvt Ltd 0.0 0.0 1.9 0.0 Others 0.4 1.3 0.1 0.1

0.4 3.8 25.0 23.9 Other current assets (C)

Abbot Point Port Holdings Pte Ltd - 13.3 0.9 0.8 Adani Power Ltd. - 0.2 0.5 1.0 Adani Infra (India) Ltd. - - 1.0 0.5 Others - - 0.7 0.3

- 13.5 3.1 2.6 Current liabilities (D)

Others 0.0 0.0 0.1 0.1 0.0 0.0 0.1 0.1

Advances from customers (E)Others 0.1 0.1 0.2 0.3

0.1 0.1 0.2 0.3 Net asset exposure (A+B+C-D-E) 0.7 19.2 35.2 34.3

Particulars FY13 FY14 FY15 FY13-15Exchange difference capitalized to cost of fixed assets/CWIP

3.6 7.3 1.3 12.1

Amounts Capital ized to FCMITDA 0.7 1.8 0.8 3.2 Total Capitalisation 4.2 9.0 2.0 15.3 Less: Amortized to P&L 0.3 (0.5) (0.6) (0.8) Net Capitalisation 4.5 8.5 1.4 14.5 % of PBT 27.0 43.0 5.8 23.5 Forex (gains)/losses recognised in P&L 0.1 0.6 0.7 1.4 % of PBT 0.4 2.9 2.9 2.2

Total exposure to RPs marginally declined to INR34.3bn, at 12% and 32% of capital employed and net worth (March 2014: INR35.2bn, 16% and 40.0%) respectively Trade receivables from related parties (RP) stood at INR8.2bn. Receivables from Adani Power (including its subsidiaries) rose 10% to INR7.6bn Loans and advances to RP marginally declined to ~INR24bn as at March 2015 (March 2014: INR25bn) Outstanding loan against corporate guarantee given to Mundra Port Pty Ltd declined to INR 487mn (FY14: USD800mn) Foreign exchange losses of INR1.4bn (FY14: INR8.5bn), 5.8% of PBT, were adjusted in the balance sheet Cumulative capitalisation (net) of forex losses during FY13-15 stood at INR14.5bn (23.5% of reported PBT)



Table 11: Unhedged forex exposure (INR bn)


• Management stated that ~30-35% of income (~INR20bn-25bn) is USD denominated

and will act as hedge for USD denominated borrowings (~INR110bn); considering this forex exposure is kept open.

• Since March15, INR has further depreciated by 4% to INR 65 per USD. This would lead to increase in losses (realised and MTM) on borrowings and derivatives.

Table 12: Outstanding derivative position (Respective currency in mn)


• Gains/loss on derivatives is recognised under “Finance charges”. APSEZ recognised gain

on derivatives of INR0.7bn in FY15 against loss of INR2.1bn in FY14.

Particulars FY13 FY14 FY15Foreign currency loans 68.5 81.9 79.2 Buyer's Credit 5.6 7.6 5.7 Trade Payables 0.3 0.1 0.2 Interest accrued but not due 0.3 0.5 0.5 Total (A) 74.8 90.2 85.7

Add: Outstanding swap position (B) 15.9 27.6 27.1 Less: Trade Receivables (C) 13.3 0.9 1.1 Net unhedged payables (A+B-C) 77.3 116.8 111.7 Exchange rate (USD) 54.3 59.9 62.5

Particulars Currency FY14 FY15 Purpose

INR- Foreign Currency Swap USD 460.9 434.2 Hedging of equivalent INR NCDs to mitigate higher interest rate of INR loans against foreign currency loans with possible risk of principal currency losses

Forward Contracts USD - 20.3 Hedging of expected future bil l ing based on foreign currency denominated tariff

Forward Contracts Euro - 4.7 Hedging of foreign currency term loan installment l iabil ity

Interest rate swap USD - 5.0 Hedging of interest rate on foreign currency term loan l iabil ity equivalent of USD 5 mill ion

Interest rate future INR - 1,045 Hedging of Interest costs on rupee term loan

APSEZ’s net forex exposure (comprising unhedged foreign currency payables and INR-USD Swap) declined marginally to ~INR112bn


Adani Ports & SEZ

Table 13: Consolidated capital employed (INR bn)


• As at March 2015, APSEZ has given inter corporate deposits aggregating INR12.6bn

(FY14: 16.7bn) to various parties (ex RP) at prevailing market interest. No further details available regarding the terms of deposits.

• Increase in borrowed funds during FY15 was led by acquisition of Dhamra, which had a debt of ~INR33bn at the time of acquisition.

Table 14: Borrowing analysis (INR bn)


Particulars FY13 FY14 FY15 FY13 FY14 FY15Equity shareholders' funds 64.0 87.7 107.7 35.3 40.1 37.6 Loan funds 115.9 129.3 177.3 63.9 59.2 61.9 Minority interest 1.4 1.4 1.6 0.8 0.7 0.6 Capital employed 181.2 218.5 286.6 100.0 100.0 100.0Net exposure in RP 19.2 35.2 34.3 10.6 16.1 12.0 Inter corporate deposits (ex RP) 12.1 16.7 12.6 6.7 7.6 4.4 Capital employed (ex RP & ICD) 149.9 166.6 239.7 82.7 76.3 83.6

181.2 218.5 286.6 100.0 100.0 100.0

Amount % to total capital employed

Particulars FY13 FY14 FY15Foreign currency loans 73.1 81.9 79.5 Non convertible debentures 20.5 19.9 41.4 Rupee term loans 14.8 19.7 39.1 Commercial paper 2.5 2.3 11.5 Suppliers bil ls accepted under foreign currency LC 4.9 5.5 5.7 Total 115.8 129.3 177.3 Interest cost analysisInterest expense 5.4 9.8 11.8 Interest capitalised 2.4 0.5 1.3 Total interest 7.8 10.3 13.1 Exchange loss capitalised in FA 10.9 7.3 1.3 Forex loss charged to reserves (FCMITDA) 0.7 1.8 0.8 Forex losses 11.6 9.0 2.0 Borrowing cost (%) - ex forex losses 5.3 8.4 8.5 Borrowing cost including forex loss (%) 13.3 15.8 9.8

Borrowing cost (ex forex losses) increased marginally to 8.5% (FY14: 8.4%) Forex losses steeply declined to INR2bn (FY14: INR9bn). Consequently, effective borrowing cost declined 600bps to 9.8% in FY15

Exposure to related parties stood at ~INR34bn (FY14: INR35bn), representing 12% of consolidated capital employed.



Table 15: Summary Financials (INR bn)


Particulars FY11 FY12 FY13 FY14 FY15Sales 20.0 27.0 35.8 48.3 61.5 Total income 21.1 27.5 38.4 55.1 68.4 EBITDA 13.0 17.5 23.8 29.2 39.0 EBITDA margin (%) 65.0 64.8 66.4 60.4 63.4 RoE 24.0 24.8 27.5 22.9 23.7 RoCE 15.6 9.8 11.0 14.9 14.6 Depreciation 2.4 3.2 4.2 6.5 9.1 Financial costs 1.7 2.8 5.4 9.8 11.8 Net profit 9.2 11.0 16.2 17.4 23.1 Equity shareholders' funds 41.9 48.2 64.0 87.7 107.7 Loan funds 35.9 175.6 115.9 129.3 177.3 Net fixed assets 63.5 173.2 113.4 131.2 179.3 Goowill on consolidation 0.4 11.1 0.4 0.4 26.0 CWIP 17.2 36.4 29.5 20.2 12.8 Current assets loans and advances 5.5 8.7 41.2 49.3 59.5 Current l iabil ities and provisions 6.4 11.3 16.9 10.5 15.5 Net current assets (0.8) (2.6) 24.3 38.7 44.0 Cash and cash equivalents 2.3 11.2 9.8 5.2 8.4 Net Debt 33.6 164.5 106.1 124.1 168.9 Cash flow from operating activities 12.1 12.0 13.8 11.3 30.7 Cash flow from investing activities (9.7) (138.8) (46.9) (25.1) (24.9) Cash flow from financing activities (5.3) 129.8 42.1 7.7 (2.4) Net cash flows (2.9) 3.0 9.0 (6.1) 3.4 CAPEX (18.3) (45.5) (38.3) (11.0) (16.3) Working capital investments 0.3 (5.4) (6.3) (12.7) (4.0)


Titan Company’s (Titan) FY15 annual report analysis highlights reduction in debt by INR7.1bn but increase in gold lease payables (akin to debt) by INR10.8bn as the company has resumed its gold lease model. Total liabilities (debt + payables) surged 22% YoY, but deposits towards incentive schemes fell pending pick up in the new scheme. D/E ratio adjusted for gold lease stood at 0.7x versus 0.03x reported. Internationally, jewellery companies classify gold lease as debt. Off balance sheet commitments include non-fund based facility, which rose from INR1.5bn in FY14 to INR11.3bn in FY15 pertaining to gold lease. Jewellery segment RoCE declined in FY15 although core RoCE (adjusted for gold lease and customer deposits) improved YoY. Gold prices partly aided revenue growth till FY13, however prices declined in FY15 and volume growth stood robust. ICDs given in FY15 rose by INR480mn to INR2.4bn (7.7% of net worth). What’s on track? Revenues grew by 9% YoY despite decline in average gold prices by 5.6% in FY15, as volume growth was robust.

What needs tracking? Total liabilities (including debt and payables) rose from INR16.7bn in FY14 to INR20.4bn in FY15. Advance towards customer incentive schemes declined from INR13.0bn to INR681mn in FY15. Core RoCE (including payables and deposits schemes advance) has been declining since FY11, but it improved in FY15. RoE has been consistently declining in past 5 years. Capex spend rose to INR1.5bn in FY15 (FY14: INR1.0bn), of which capex for watches rose significantly to INR916mn versus INR324mn in FY14 primarily due to INR750mn investment in new manufacturing plant at Coimbatore. Titan had reported robust double-digit revenue growth (25-40% p.a.) until FY13, partly led by consistent rise in gold prices. Over past 2 years, gold prices remained subdued and declined, leading to single-digit revenue growth even as volume growth stood robust. Finance cost includes gold on lease charges of INR286mn (FY14: INR434mn) and commercial paper (CP) discounting charges of INR289.5mn (FY14: INR118.2mn). There were no CP’s outstanding as at FY15.



Titan Company | Annual Report Analysis


July 27, 2015

52-week range (INR) : 448 / 321




Promoters* : 53.1


FIIs : 20.1

Others : 22.2



Market Data




Other income fell to INR708mn in FY15 (FY14: INR1.2bn) as cash and cash equivalents declined to INR2.1bn in FY15 versus INR8.9bn in FY14.

Increase in trade payables on account of gold on lease was offset by the decline in advances from customers as the Golden Harvest scheme was discontinued and the new scheme is yet to pick up. Adjusted cash flows improved to INR5.7bn in FY15 (FY14: INR5.3bn). Average cash conversion cycle rose from 62 to 87 days, and adjusted for gold lease and advance from customers, it declined from 159 to 153 days YoY.

Other highlights • Gold futures contracts dropped from INR17.5bn in FY14 to INR11.6bn in FY15, as the

company reduced its hedging activity following lifting of the ban on gold lease.

• Brand equity subscription payments to promoters, Tata Sons, continued with INR190.7mn paid in FY15 (FY14: INR174mn).

• R&D spend stood higher at INR174mn in FY15 (2.1% PAT) versus INR35-55mn over past 4 years.

• Raw material imports, as a % of total raw material cost, consistently declined from 70% in FY12 to 7% in FY15, led by the government measures to curb gold imports into the country.

Capital allocation analysis Chart 1: Capital employed


Gross debt declined and was converted back into payables in FY15 as the ban on gold on lease was lifted. Deposit scheme advance was hit by discontinuance of the Golden Harvest and other schemes not being in line with the new Companies Act. The new scheme launched in FY15, in compliance with regulations (IRR @ 9.7% – 11.6% p.a approximately), is yet to pick up.

3 4 6 7 10 15 20 25

31

2 2 2 1 1

0 0

8 1

3 5 5 5

12 16

18

5 15

1 1 2 3

6

9

12 13 1

0.0

0.2

0.4

0.6

0.8

1.0

0.0

12.0

24.0

36.0

48.0

60.0

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15D

/E (x

)

(INR

bn)

Equity DebtTrade payables (Gold lease) Advance under deposit schemesD/E

Payables rose as gold on lease was allowed.

Deposit scheme advance stood lower

Gold on lease was resumed and payables replaced debt. Customer advances declined due to discontinuance of golden harvest schemes


Titan Company

Net worth accretion continues to be robust with INR5.6bn increase in FY15, led by healthy profit generation. Table 1: Total liabilities (INR mn)


Table 2: Gold loans: Comparison with international players


Hong Kong-based jewelers, Luk Fook and Chow Tai Fook report gold loans separately as debt in their balance sheets. As for Tiffany, no separate disclosure is made, but the payables are not very high.

RoCE decomposition Chart 2: Return ratios analysis (consolidated) Chart 3: Jewellery segment RoCE


Consolidated reported RoCE continued its downward trend in FY15. Adjusted RoCE (including payables and deposits schemes advance) has been declining since FY11, but improved in FY15. RoE consistently fell in past 5 years.

Particulars FY11 FY12 FY13 FY14 FY15Debt 680 113 60 8,068 998 Trade payables 15,262 17,529 20,980 8,594 19,396 Total liabilities 15,942 17,642 21,040 16,663 20,394 Payables as % of total 96 99 100 52 95

Particulars FY14 FY15 FY14 FY15 FY14 FY15 FY14 FY15Debt 8,068 998 568 1,713 17,086 15,089 1,004 1,117 Trade payables 8,594 19,396 338 218 1,234 840 342 318 Total liabilities 16,663 20,394 906 1,931 18,320 15,929 1,346 1,435 Payables as % of total liabilities 52 95 37 11 7 5 25 22 Gold segment revenues 86,274 94,206 19,215 15,923 60,849 74,050 3,717 3,930 Payables as % of Gold revenues 10 21 2 1 2 1 9 8

Chow Tai Fook (HKD mn)

Tiffany (USD mn)Titan (INR mn) Luk Fook (HKD mn)

18 19 22 26 23 22 19 23 0 0 1

3 3 2 2 1

15 20

23

38 43 38

20 13

0.0

7.0

14.0

21.0

28.0

35.0

0.0

14.0

28.0

42.0

56.0

70.0

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

(No.

of ti

mes

x)

(%)

Core ROCEOther incomeGold lease and deposit schemesROE (%)1 yr Fwd PE (RHS)

Payables, as % of total liabilities, stood highest for Titan versus its international peers ranging from 5-40%.

14 16 22 25 23 23 23 27

30 35

48

75 86

78

42 25

0.0

7.0

14.0

21.0

28.0

35.0

0.0

24.0

48.0

72.0

96.0

120.0


(No.

of ti

mes

x)

(RoC

E %

)

Core ROCEOn gold lease and deposit schemes1 yr Fwd PE (LHS)

Internationally, jewellery companies classify gold lease as debt



Jewellery segment RoCE slipped from 65% in FY14 to 52% in FY15, but core RoCE (adjusted for gold on lease and advance from customers) improved from 23% in FY14 to 27% in FY15, primarily led by 10% YoY growth in jewellery EBIT. Chart 4: Watches segment capital allocation


Watches segment RoCE stabilised at 31% in FY15 after having consistently declined over past 5 years. EBIT growth remained muted in past 5 years. Titan added 29 World of Titan stores in FY15 and shut down 7 stores each of Fastrack and Helios.

Capex and store additions Chart 5: Segment wise store additions and capex spend


1.2 1.4 1.4 1.9 2.1 1.9 1.8 2.0

3.3 3.7

2.3

3.9

5.2

6.9

5.9

6.8

0.0

14.0

28.0

42.0

56.0

70.0

0.0

1.6

3.2

4.8

6.4

8.0


(RO

CE %

)

(INR

bn)

EBIT Capital employed ROCE % (RHS)

206 260 543 539

324

916

83 191

754 746

693

588

0

130

260

390

520

650

0

350

700

1,050

1,400

1,750

2010 2011 2012 2013 2014 2015

(No.

of st

ores

)

(INR

mn)

Watches - Capex Jewellery - Capex

Watches - Stores (RHS) Jewellery - Stores (RHS)

Watches division EBIT growth remained muted and RoCE stabilised after consistent decline since FY11

Overall capex spend increased from INR1.0bn in FY14 to INR1.5bn in FY15. Capex for watches segment spurted in FY15 to INR916mn largely due to capex spend at new plant and renovation of stores.


Titan Company

Table 3: Per store capex analysis (INR mn)


** (For FY15 numbers we have excluded Fastrack and Helios due to net decline in stores YoY)

Jewellery capex per store increased in FY15, but was largely in line with earlier years. Watches capex rose from INR324mn in FY14 to INR916mn in FY15, largely towards new manufacturing plant and renovation of stores. Capex include INR750mn spent towards first phase of investment for new stainless steel case manufacturing plant at Coimbatore which commenced commercial production on 3rd March 2015. During the year, World of Titan’ chain commenced renovations at more than 40 stores. A total of 151 stores now carry the new retail identity. In case of multi brand outlets (MBOs), the new look Shop-in-Shops, were invested in and given to 120 outlets during the year. With this, a total of 250 MBOs are now in the new look Shop-in-Shops mould.

Profitability analysis Table 4: Profitability analysis (INR mn)


Particulars FY13 FY14 FY15 FY13 FY14 FY15Store addition p.a. 16 19 11 91 50 29 Capex (INR mn) 746 693 588 539 324 916 Less: New plant capex (750) Capex (INR mn) for stores 539 324 166 Per store capex 46.6 36.5 53.5 5.9 6.5 5.7 Area (in sq. ft.) addition 141,562 118,207 85,717 85,227 37,966 15,698 Avg per store area (in sq. ft.) addition 8,848 6,221 7,792 937 759 541

Jewellery segment Watches segment**

FY14 % FY15 %Sales 109,274 100.0 119,134 100.0 Raw Materials Consumed 80,519 73.7 87,515 73.5 Operating and Administrative expense 12,908 11.8 13,811 11.6 Personnel cost 5,404 4.9 6,325 5.3 EBITDA 10,443 9.6 11,484 9.6 Depreciation 675 0.6 896 0.8 EBIT 9,768 8.9 10,588 8.9 Financial Charges 871 0.8 807 0.7 Other income 1,202 1.1 708 0.6 EBT 10,099 9.2 10,489 8.8

ParticularsConsolidated

Revenues grew by 9% YoY in FY15, led by the rise in volumes as average gold prices declined by 5.6% YoY in FY15.



Chart 6: Price versus volume growth analysis

Source: Company annual report, MCX, Edelweiss research

Gold price increase contributed significantly to revenues until FY13 and Titan reported double-digit revenue growth during the period. In FY14 and FY15, gold prices remained subdued and declined leading to single-digit revenue growth, but volume growth remained robust. Chart 7: Imports versus local raw material (RM) cost


RM imports declined substantially in past 5 years from INR31bn in FY11 to INR5bn in FY15, primarily owing to regulatory hurdles as government measures curbed gold imports. However, in later part of FY15 the import regulations (80:20 rule) were relaxed. Other highlights In FY15, INR164.4mn provision was made towards customer loyalty programme. Total provision stood at INR828.9mn, as at end FY15 (FY14: INR664.5mn). Titan runs a scheme of reward points which can be redeemed for future purchases by customers.

29 22 22

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FY09 FY10 FY11 FY12 FY13 FY14 FY15

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Price growth Volume growth (derived)Average gold price (RHS)

31 42

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2011 2012 2013 2014 2015

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Imported RM Local RM cost Imports as % of total RM cost

Gold imports declined significantly over 5 years led by regulatory hurdles, to curb gold imports.

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Gold price CAGR Volume (derived) CAGR


Titan Company

Finance cost includes gold on lease charges of INR286mn (FY14: INR434mn) and CP discounting charges of INR289.5mn (FY14: INR118.2mn). Titan redeemed all the outstanding CP’s and no amount was outstanding as at FY15. Other income dropped to INR708mn in FY15 as cash and cash equivalents declined to INR2.1bn in FY15. Cash balance slipped in FY15 after a run-rate of INR9.0bn-INR11.0bn in past 4-5 years. Effective tax rate declined from 27% in FY14 to 22% in FY15 due to ramp up at the Pantnagar (Uttarakhand) plant and tax benefits available thereon.



* Gold lease payables have been assumed to be the changes in trade payables as reflected in cash

flow statement in absence of specific information.

Operating cash flow (OCF), post interest improved to INR4.2bn in FY15 versus cash loss in previous year. Adjusted for gold on lease and advances towards customer incentive scheme, OCF rose to INR5.7bn in FY15 Cumulatively over past 5 years FCF adjusted for gold on lease and golden harvest scheme stood negative at INR4.0bn. During FY15 Increase in trade payables on account of gold on lease was offset by the decline in advance from customers as the Golden Harvest scheme was discontinued and the new scheme has yet to pick up. Titan invested in ICDs worth INR480mn in FY15 and total outstanding investments in ICDs stood at INR2.4bn, as at end FY15, 7.7% of net worth (FY14: INR1.9bn, 7.5%)

Particulars FY11 FY12 FY13 FY14 FY15Cumulative -

5 yearsProfit before tax 6,032 8,405 10,065 10,099 10,489 45,090 Non-operating expense (189) (401) (475) (295) 204 (1,155) Non-cash adjustments 376 696 459 682 934 3,147 Direct taxes paid (1,740) (2,568) (2,757) (2,852) (2,449) (12,367) Cash profit after tax 4,479 6,132 7,292 7,635 9,178 34,715 (Increase)/ decrease in trade receivables (229) (492) (19) 117 (393) (1,015) (Increase)/ decrease in inventories (6,527) (8,839) (7,983) (1,891) (1,800) (27,039) (Increase)/ decrease in loans and advances (207) (292) (269) (62) (710) (1,540)Increase/ (decrease) in trade payables 10,262 1,976 2,224 (12,386) 10,787 12,863 Increase/ (decrease) in other l iab. & provisions 2,755 3,109 4,285 1,039 (12,036) (847)(Increase)/ decrease in working capital 6,055 (4,537) (1,763) (13,182) (4,152) (17,579)Net cash from operating activities 10,533 1,595 5,530 (5,547) 5,026 17,136 Interest expenses paid (343) (482) (506) (871) (807) (3,010)Net cash from operating activities post interest 10,190 1,113 5,023 (6,418) 4,219 14,126 Change in Gold on lease payables* (10,262) (1,976) (2,224) 12,386 (10,787) (12,863)Change in advance towards deposit schemes (2,524) (2,688) (3,841) (580) 12,306 2,673 Adjusted operating cash flows (2,596) (3,552) (1,041) 5,388 5,738 3,936 Capex (643) (1,463) (1,650) (2,111) (2,070) (7,937)Free cash flow (3,239) (5,015) (2,691) 3,276 3,667 (4,001)

Consolidated





* * For gold lease days, we have reduced watches segment liabilities from total trade payables

and hence adjusted cash conversion cycle could be lower than above if gold lease payable is lower

than our calculation.

Table 7: Receivables analysis (INR mn)


Contingent liabilities/commitments Table 8: Contingent liabilities and commitments (INR mn)


Particulars FY12 FY13 FY14 FY15Inventory days 134 158 169 162 Trade Receivable days 6 6 5 5 Advance to supplier days 1 0 0 1 Trade payable days (94) (96) (66) (57) Advance received from customer days (33) (42) (47) (24) Cash conversion cycle - Reported 14 26 62 87 Add: Gold lease days** 76 80 50 41 Add: Deposit scheme days 33 42 47 24 Cash conversion cycle - Adjusted 123 149 159 153

Particulars FY13 FY14 FY15Receivables > than 6 months 114 172 245 Less: Provisions (34) (35) (89) Net Receivables > than 6 months 80 137 156 Other receivables 1,578 1,404 1,741 Total 1,658 1,541 1,897 Net Receivables > than 6 months as % of total 4.8 8.9 8.2

Particulars FY13 FY14 FY15Contingent Liability

Sales Tax 170 250 256 Customs Duty 32 32 47 Excise Duty 1,494 1,516 1,935 Income Tax 404 491 685 Others 41 46 57

Total 2,141 2,336 2,979As % of net worth 11 9 10

Other Commitments:Non fund based facil ity 2,513 1,477 11,290Capital commitments 514 986 1,627Revenue commitments 17 37 64Claims not acknowledged (Excise demands) 1,470 2,134 3,482

Total 4,513 4,634 16,463

Adjusted cash conversion cycle marginally improved in FY15, though it remained high at 153 days versus 87 on reported basis.

Un-provided receivables beyond 6 months stood at 8.2% of total receivables.

Contingent liabilities rose marginally led by excise duty demands. Non-fund based facility rose significantly to INR11.3bn pertaining to gold lease.


Titan Company



Particulars FY11 FY12 FY13 FY14 FY15Sales 65,331 88,484 101,233 109,274 119,134 Total income 65,899 89,429 102,242 110,476 119,842 EBITDA 6,161 8,354 10,125 10,443 11,484 EBITDA margin (%) 9.4 9.4 10.0 9.6 9.6 ROE (%) 49.0 48.2 42.3 32.7 29.1 ROCE (%) 66.8 68.7 61.3 41.4 37.3 Depreciation 351 456 562 675 896 Financial costs 345 437 506 871 807 Net profit 4,331 6,014 7,254 7,349 8,163 Equity shareholders' funds 10,356 14,609 19,699 25,227 30,839 Loan funds 680 113 60 8,068 998 Net debt/ (cash) (10,419) (9,558) (11,330) (858) (1,140) Adjusted debt (including trade payables) 15,942 17,642 21,040 16,663 20,394 Net fixed assets (Ex CWIP) 3,051 4,088 4,639 6,142 6,991 CWIP 166 249 418 329 552 Current assets loans and advances 22,194 32,059 40,550 43,547 46,336 Current liabil ities and provisions 26,599 31,729 38,431 27,072 25,938 Net current assets - ex cash and cash equivalents (4,405) 330 2,120 16,474 20,398 Cash and cash equivalents 11,099 9,671 11,390 8,927 2,138 Cash flow from operating activities 1,595 10,533 5,530 (5,547) 5,026 Cash flow from investing activities (699) (250) (1,417) (2,717) (1,187) Cash flow from financing activities (2,349) (1,168) (2,356) 4,974 (10,047) Net cash flows (1,453) 9,115 1,756 (3,290) (6,207) CAPEX 1,463 643 1,650 2,111 2,070 Working capital investments (6,058) (6,055) 12,806 13,188 4,152


Bharti Airtel’s (Bharti) FY15 annual report analysis highlights robust improvement in standalone (including Hexacom) and Infratel profitability. Other subsidiaries continued to report losses at the PBT level. During the year, Bharti infused ~INR69bn in its African operations, taking cumulative cash exposure to INR239bn. Guarantees by the parent on behalf of group companies rose by ~INR99bn to INR840bn (~107% of net worth). As highlighted in our previous years (FY11-14) annual report analysis, interest cost on forex loans at Bharti Airtel International (Netherlands) B.V. (BAIN) continues to be cushioned owing to choice of USD as functional currency. D/E ratio, adjusted for deferred spectrum liability and equipment supply payables, stood at 1.9x versus 1.3x reported. We believe, EV/EBITDA valuation methodology needs to be revisited considering depreciation and capex stood at 55% and 75% of EBITDA, respectively, over FY11-15. What’s on track? Bharti (standalone) clocked revenue growth of 11.2% YoY coupled with improvement in EBIDTA margin to 35% (versus 32.7% in FY14). Operating cash flow (post interest) increased to INR173.4bn (FY14: INR 149bn).

What needs tracking? During FY15, Bharti infused additional equity and loans of INR40bn (~USD650mn) and INR29bn, respectively, in African operations/servicing acquisition loan. Further, the company also infused INR32bn (USD500mn) as equity in Bharti Airtel International (Mauritius) Ltd (BAIM) in Q1FY16. Corporate guarantees given on behalf of group companies increased to INR858.2bn (FY14: INR770.1bn), of which INR814.5bn (FY14: INR684.3bn) pertained to BAIN. As highlighted in our previous reports, repayment of USD loans from INR cash flows led to realization of exchange losses, which are being charged via foreign currency translation reserve (FCTR). Our calculation indicates forex translation losses during FY15 and cumulatively over the past 5 years stood at INR14bn and INR134bn, respectively. During the year, the company won spectrum in 17 service areas (in India) for INR291bn, against which advances of INR47.2bn and INR66.5bn were paid in FY15 and Q1FY16, respectively. Amount outstanding as at March 2015 of INR244bn has been considered as an off-balance sheet obligation under capital commitments. Margin of safety for goodwill of INR415bn (FY14:INR469bn), 67% of net worth (FY14:78.5%), deteriorated to 8.5% (FY14:10%, FY13: 11.5%) which in our view is due to decline in African cash flows.

52-week range (INR) : 452 / 336


M cap (INR bn/USD mn) : 1,579/24,244


Promoters* : 65.4


FIIs : 16.3

Others : 8.8

*Promoters pledged shares : nil




Bharti Airtel | Annual Report Analysis


August 17, 2015

Market Data




Cash paid (net) for capex (tangible assets) in FY15 was INR144bn (versus INR194bn capex in FY15). Consequently, payables for equipment supplies increased to INR104bn (FY14: INR65bn), which may come for payment in FY16 and may increase net debt. Depreciation charge for FY15 was lower by INR 4.3bn due to classification of assets worth INR 40bn (net) as “Held for Sale” in Africa. Subsequently, during Q1FY16, a part of these assets were reclassified to their respective asset category and the related depreciation charge of INR1.6bn (for previous period) was considered as an exceptional item. Owing to uncertainty, deferred tax cannot be recognised by loss-making subsidiaries, which leads to higher effective tax rate at the consolidated Africa level. Loans (ex spectrum liability) of INR212bn (32% of total debt) are due for repayment in FY16. Contingent liabilities jumped 13% to ~INR158bn (~25% of net worth), led by surge in sales tax and service tax demands/disputes. Some African countries are contemplating change in regulations with regard to cost plus based pricing, unique international gateways, increase in license fee, grant of new type of licenses, etc, which may have detrimental impact on industry.

Other highlights • Receivables (standalone) outstanding (net) for more than 6 months increased to

INR2.5bn (FY14: INR0.2bn).

• The company was required to spend INR1,400mn for CSR during FY15, of which it spent only INR411mn which is charged directly from reserves in standalone financials.

• Net unhedged forex payables (including borrowings), at standalone level, increased to INR56.9bn (FY14: INR45.2bn), 9.2% of net worth.

• Africa revenues (in constant currency terms) surged by 6.2% to USD4,407mn. EBITDA margins declined to 22.7% (FY14: 26.2%), owing to investments in network and higher marketing spends.

Management discussion and analysis: Key highlights • African economy faced headwinds during the year led by sharp decline in crude and

other commodity prices, which triggered sharp depreciation in currencies across countries.

• The company has invested INR681bn in spectrum since 2010. This will put exert pressure on RoCE. Hence, it is imperative to generate healthy revenue growth.

• During Q1FY15, agreement for sale of tower assets in Tanzania, Chad and Democratic Republic of Congo lapsed and therefore stands terminated thereby. Accordingly, assets and related liabilities amounting to INR12.2bn and INR1.4bn, respectively, have been re-classified from held for sale.


Bharti Airtel

Earnings analysis


Notes: Standalone and Infratel profit and loss is as per Indian GAAPs; consolidated financials are in IFRS

Dividend income from subsidiaries and JVs are adjusted in above table.

Share of profit of Indus Tower (JV) is included in Bharti Infratel as separate line item

Source: Company annual report, Edelweiss research Exceptional income (standalone) in FY15 includes gain of INR32.7bn recognised on sale of Bharti Infratel shares. Corresponding gains in consolidated financial statements are included in other comprehensive income. Subsidiaries’ (ex Infratel) continued to post losses at PBT level due to high finance costs. Average borrowing cost (including forex losses) recognised in standalone and consolidated profitability stood at 9.5% (FY14:10.9%) and 9.7% (FY14:8.6%), respectively. Exceptional items (net) of INR8.5bn at consolidated level, primarily includes charge of INR4.4bn on account of restructuring activities, INR2.6bn on settlement of disputes and INR2bn on one-time translation impact of certain foreign currency liabilities in Nigeria. Table 2: Africa profitability and cash flows (USD mn)


ParticularsFY14 (%) FY15 (%) FY14 (%) FY15 (%) FY14 (%) FY15 (%) FY14 (%) FY15 (%)

Sales 499 100.0 555 100.0 50 100.0 54 100.0 309 100.0 312 100.0 859 100.0 921 100.0Operating and admin exp 320 64.0 344 61.9 26 52.7 27 49.9 189 60.9 191 61.2 535 62.3 562 61.0Personnel cost 16 3.3 17 3.0 2 4.3 2 4.5 28 8.9 28 8.9 46 5.4 47 5.1EBITDA 163 32.7 194 35.0 22 43.0 25 45.5 93 30.1 93 29.9 278 32.4 312 33.9Depreciation & amortisation 72 14.5 76 13.6 12 23.5 12 21.9 72 23.4 68 21.7 156 18.2 155 16.9EBIT 91 18.2 119 21.4 10 19.5 13 23.6 21 6.7 25 8.2 121 14.1 157 17.0Financial Charges 13 2.7 14 2.5 0 0.2 (0) (0.1) 45 14.6 59 19.0 59 6.8 73 8.0Other income 4 0.8 5 1.0 3 6.2 4 6.6 3 1.1 16 5.0 10 1.2 25 2.7PBT before exceptional items 81 16.3 110 19.8 13 25.5 16 30.3 (21) (6.8) (18) (5.8) 73 8.5 108 11.8Exceptional items (2) (0.4) 33 5.9 - 0.0 - 0.0 3 0.8 (9) (2.7) 1 0.1 (9) (0.9)PBT 79 15.9 143 25.7 13 25.5 16 30.3 (19) (7.7) (27) (3.0) 73 8.6 100 10.8Tax Expense 18 3.6 25 4.4 4 8.1 5 10.2 27 8.6 24 7.7 48 5.6 54 5.9PAT 61 12.3 118 21.3 9 17.4 11 20.1 (45) (16.3) (51) (10.7) 25 2.9 46 5.0Share of profit of JV/associate - - - - 5 7 0 0.1 (0) (0.0) 5 0.6 7 0.8PAT (inc profit of JV/associates 61 118 14 18 (45) (51) 30 53

Standalone Bharti Infratel (Standalone) Other Subsidiaries/JV (Derived) Consolidated

Particulars FY12 FY13 FY14 FY15Revenues 4,137 4,417 4,491 4,407 EBITDA (a) 1,097 1,158 1,175 1,002 EBIT 291 284 280 193 Capex (b) 1,514 724 635 1,073 Operating Free Cash Flow (a-b) (417) 434 540 (71)

Standalone revenue grew by 11.2% YoY, while EBIDTA margin improved to 35% versus 32.7% in FY14 Consolidated revenues moved up 7.3% YoY and EBIDTA margins improved to 34% (FY14: 32.4%), owing to higher EBITDA margins in standalone and Infratel Cash outflow for Africa was USD71mn versus operating free cash flows of USD540mn in FY14 in Africa



Tax expense Table 3: Tax expense analysis (INR bn)

Note: ERT is effective tax rate in above table; PBT is adjusted for share of profit in JV/associate


The consolidated income tax expense (ex tax on exceptional items) for FY15 stood at INR53bn (versus INR44.5bn for FY14). The effective tax rate in India (standalone, Infratel, Hexacom and others) for FY15 stood lower at 26.5% (FY14: 31.2%). Reduction in the underlying effective tax rate in India was due to improved performance in the loss-making subsidiaries and lower forex losses in relation to borrowings. During FY15, African operations reported EBIT of USD193mn (FY14: USD280mn), against which tax charge stood at USD203mn (FY14: USD273mn). Effective tax rate in Africa was higher as tax expense is computed at entity level, whereby profit of one entity cannot be adjusted against losses of another entity for tax computation purposes. Further, owing to uncertainty, deferred tax cannot be recognised by loss-making subsidiaries. This leads to higher effective tax rate at consolidated Africa level.

Tax losses Unused tax credits and losses increased to INR230bn (FY14: INR176bn) on which deferred tax asset (DTA) has not been recorded. Of the above, INR143.3bn (FY14: INR66.7bn) has an indefinite carry forward period, while the balance amount will expire as under: Table 4: Tax losses - Carry forward limits (INR bn)


Improvement in loss-making subsidiaries would result in recognition of the unused deferred tax asset and reduce the effective tax rate subject to the carry forward time limit.

PBT Tax ETR PBT Tax ETR PBT Tax ETRBharti Airtel-Standalone 64.5 13.6 21.0 83.8 17.8 21.2 156.6 24.5 15.7Bharti Infratel-Consolidated 15.3 5.3 34.5 23.2 8.1 34.7 30.5 10.6 34.7Bharti Hexacom 8.1 2.3 28.0 8.3 2.3 27.6 16.1 5.3 33.1Other subsidiaries (derived) (43.6) 4.1 N.A. (41.9) 20.3 N.A. (103.3) 13.6 N.A.Bharti Airtel-Consolidated 44.3 25.2 56.8 73.4 48.4 66.0 99.9 54.0 54.1

FY13 FY14 FY15

Expiring in FY12 FY13 FY14 FY15FY13 6.1 NA NA NAFY14 5.8 11.8 NA NAFY15 9.3 7.9 8.2 NAFY16 10.9 7.6 6.2 6.0 FY17 3.3 13.1 7.8 5.6 FY18 NA 5.6 10.0 8.7 FY19 NA NA 6.9 8.9 FY20 NA NA NA 3.9 Therafter 18.4 44.4 70.2 53.5 Indefinite 37.0 54.4 66.7 143.3 Total 90.9 144.8 176.0 229.9

Significant unused tax losses existed as at FY15 of INR230bn (FY14: INR176bn)


Bharti Airtel

Net worth analysis Table 5: Net worth accretion (INR bn)


• During the year, the group formally designated certain Euro borrowings as a hedge

against net investments in subsidiaries (in Francophone countries local currency is pegged to the Euro). Foreign exchange gain of INR32.9bn on these hedge instruments has been recognised in other comprehensive income.

• In FY15, the group designated some of its foreign currency borrowings as a cash flow hedge of the currency risk, arising from the expected sale consideration from highly probable transactions relating to the sale of telecom towers. Consequently, foreign exchange loss of INR4.2bn is recognised in other comprehensive income.

• Transactions with non-controlling interest (NCI) during FY15 mainly pertained to profit on sale of the 7.4% stake in Bharati Infratel.

Table 6: MTM loss on USD denominated debt (INR bn)


• Forex loss on USD denominated borrowings (ex standalone) based on FY15 closing debt

stood at INR14bn and cumulatively over 5 years at INR133.6bn.

• Implied cumulative exchange fluctuation loss on forex loans stood at INR133.6bn, though actual loss may be lower due to hedges taken by the company for interest and principal re-payments over the period.

Particulars Note FY13 FY14 FY15Opening shareholders' fund 506.1 503.2 597.6 Add Profit for the year 22.8 27.6 51.9 FCTR (26.5) 15.8 (68.2) Gain / (Loss) on effective portion on hedge of net investment

1 - - 32.9

Gain / (Loss) on cash flow hedge 2 - - (4.2) Issue of shares - 68.0 0.2 Transactions with NCI 3 - (5.1) 25.5

(3.8) 106.3 38.2 LessDividend and tax thereon 4.4 4.4 16.0 Others (5.3) 7.5 0.2

(0.9) 11.9 16.2 Closing shareholders' fund 503.2 597.6 619.6

Particulars FY11 FY12 FY13 FY14 FY15 TotalNet USD Borrowings for Africa acquisition (ex standalone) (in equivalent INR) 418 448 459 423 352 Borrowings for Africa acquisition and other borrowings (in equivalent USD) (A) 9.4 8.8 8.5 7.0 5.6 Closing rate (USD/INR) 44.7 51.2 54.1 60.1 62.6 Difference in closing rate during the year (B) (0.5) 6.5 3.0 6.0 2.5 Equivalent INR MTM loss based on year end borrowing (C=A*B) (4.6) 57.0 25.1 42.1 14.0 133.6



Table 7: USD appreciation/(depreciation) against various currencies

Note: INR depreciation against USD stood at 4% (FY14:11%) in FY15

Source: Company annual report, Edelweiss research • During FY15, revenue-weighted currency depreciation (year end rates) of 17 African

countries against USD has been 22.3%, primarily caused by depreciation in Ghana Cedi (GHS) by 42.3%, Nigerian Naira (NGN) by 20.7% and CFA by 28.3%.

• Similarly, depreciation if computed based on average rates was 8.2%, primarily caused by depreciation in Ghana Cedi (GHS) by 49.1%, Zambian Kwacha (ZMK) by 16.8%, Nigerian Naira (NGN) by 8.5% and CFA by 6.0%.

Cash flow analysis



Consolidated operating cash flows post interest grew marginally to ~INR224bn in FY15. Capex increased in FY15, led by higher investment in tangible assets (FY15: INR144bn, FY14: INR110bn). Cash outflows attributable to purchase of intangible assets marginally increased to ~INR66bn (FY14: INR 65bn).

Particulars INR NGN GHS KES TZS XAF XOF ZMW UGSFY11 (0.7) 3.4 6.3 7.4 10.7 (4.4) (4.0) 0.6 15.4 FY12 14.1 1.7 17.7 (0.1) 6.0 6.0 5.6 12.1 4.5 FY13 6.7 0.5 9.0 3.1 1.7 4.3 4.5 1.6 3.5 FY14 10.3 4.1 37.3 0.9 1.1 (7.2) (7.3) 14.6 (1.8) FY15 4.4 20.7 42.3 7.0 14.1 29.1 29.0 23.2 16.8

ParticularsProfit before tax 83.8 156.6 15.0 32.7 (25.3) (89.4) 73.4 99.9 Non-operating cost 7.9 (36.0) (4.7) (19.3) 42.7 106 45.9 50.4 Non-cash adjustments 72.3 75.6 9.4 10.0 74.0 69.7 155.7 155.3Direct taxes paid (18.5) (28.1) (1.7) (5.0) (14.8) (13.0) (35.0) (46.1)Cash profit after tax 145.5 168.0 18.0 18.4 76.6 73.0 240.0 259.5 Increase in trade and other receivables (L&A for Infratel)

(1.0) (15.5) (0.7) (1.3) 3.8 5.7 2.1 (11.1)

Decrease in inventories 0.0 (0.1) - - (0.2) 0.1 (0.1) (0.0) Increase in trade and other payables 15.4 27.3 0.9 0.3 0.5 (13.4) 16.8 14.2 Increase in provisions 0.3 0.1 0.0 0.0 2.2 1.0 2.5 1.1 Increase in other financial and non-financial l iabil ities

- - 10.5 (0.1) 10.5 (0.1)

Increase in other financial and non-financial assets

- - (14.2) (5.7) (14.2) (5.7)

Decrease/(Increase) in working capital 14.8 11.8 0.2 (1.0) 2.6 (12.4) 17.5 (1.6)Net cash from operating activities 160.2 179.4 18.2 17.2 79.2 61.2 257.5 257.8 Interest expenses paid (11.0) (6.4) (0.0) (0.0) (26.6) (27.5) (37.6) (33.9)Net cash from operating activities post interest

149.2 173.0 18.2 17.2 52.6 33.7 219.9 223.9

Capex (107.8) (76.5) (6.7) (9.4) (60.2) (123.8) (174.7) (209.8)FCF post interest 41.4 96.5 11.4 7.8 (7.6) (90.1) 45.3 14.2

FY14 FY15Bharti Infratel (Standalone) Other subsidiaries (Derived) Consolidated

FY14 FY15 FY14 FY15 FY14 FY15Standalone

Standalone operating cash flows (post interest) surged by 16% to INR173bn.


Bharti Airtel

Borrowings analysis

Table 9: Standalone and consolidated adjusted debt (INR bn)

# classified under capital commitment as spectrum was not allocated


• Consolidated debt (reported) increased by INR46bn to INR807bn in FY15, largely on

account of deferred payment obligations of INR143bn recognised on purchase of spectrum in India.

• Till March’15, the company’s subsidiary paid advance of INR47.2bn towards purchase of spectrum (2 circles) in auctions conducted in FY15.

• Post FY15, Bharti (standalone) paid an advance of INR66.5bn towards purchase of spectrum in 15 circles, with the balance amount of INR177.5bn payable in 10 equal installments after a moratorium period of 2 years.

Table 10: Standalone and consolidated borrowing cost (INR bn)

Note: Forex loss considered above exclude losses on forex loans recognised in reserves.

Cumulative forex losses recognised in reserves since FY11 stood at ~INR 134bn


• Consolidated average borrowing cost (ex forex losses) declined to 5.9% (FY14: 6.4%).

However, owing to high forex losses, borrowing cost (Inc forex losses) increased by 110bps to 9.7%.

FY12 FY13 FY14 FY15 FY12 FY13 FY14 FY15Long term debts 94.1 110.8 90.1 66.3 611.2 601.5 661.5 577.0 Deffered Payment l iabities towards spectrum - - 1.0 143.2 - - 1.0 143.2 Long term borrowings (a) 94.1 110.8 91.1 209.4 611.2 601.5 662.5 720.2 Short term borrowings (b) 59.0 31.4 12.5 6.3 79.1 65.9 97.5 86.7 Total reported debt (a+b) 153.0 142.2 103.7 215.7 690.2 667.4 760.0 806.8 Deffered Payment l iabities towards spectrum # - - 129.1 244.0 - - 129.1 244.0 Equipment supply payables 25.8 40.7 32.9 54.1 66.0 59.8 64.7 103.7 Adjusted debt 178.9 182.9 265.7 513.8 756.3 727.2 953.8 1,154.6 Reported D/E 0.3 0.3 0.2 0.3 1.4 1.3 1.3 1.3 Adjusted D/E 0.4 0.3 0.4 0.7 1.5 1.4 1.6 1.9

ParticularsConsolidated Standalone

FY12 FY13 FY14 FY15 FY12 FY13 FY14 FY15Interest cost 11.1 14.9 10.2 10.7 30.6 36.9 36.4 37.0 Others 0.9 0.8 1.5 1.7 5.0 5.0 6.7 6.1 Interest cost capitalised 1.6 0.3 - 1.1 1.6 2.6 2.3 2.8 Interest cost (a) 13.6 16.0 11.7 13.4 37.2 44.5 45.4 45.9 Forex loss (b) 2.0 0.8 1.6 1.7 5.2 3.2 15.7 30.2 Total (a+b) 15.53 16.82 13.36 15.17 42.39 47.75 61.05 76.06 Reported debt 153 142 104 216 690 667 760 807 Average borrowing cost (ex forex loss) (%) 10.0 10.8 9.6 8.4 5.7 6.6 6.4 5.9 Average borrowing cost (inc forex loss) (%) 11.4 11.4 10.9 9.5 6.5 7.0 8.6 9.7

Particulars ConsolidatedStandalone

D/E ratio, adjusted for deferred spectrum purchase liability and equipment supply payables, rose to 1.86x (FY14: 1.6x) as against reported D/E ratio of 1.3x (1.27x).



Table 11: Borrowings summary - by currency (INR bn)

# Liability towards spectrum purchase is not included in above table


Floating rate borrowings continued its declining trajectory, dipping from ~90% in FY12 to ~50% in FY15.

Table 12: Interest rate sensitivity (INR mn)

Note: above sensitivity is computed for 1% change in interest rate on floating rate

portion of loans and borrowings after considering the impact of swaps


Assets held for sale During the year, the group decided to sell and lease back a dedicated portion of towers under long-term lease contracts, considered as finance lease. Accordingly, assets and associated liabilities of INR45.6bn and INR5.5bn, respectively, that are part of the sale have been classified as “assets/liabilities of disposal group classified as held for sale”. The group has ceased depreciation and amortisation on the telecom tower assets to the extent it has estimated such assets would not be leased back. If the group had not decided to sell these assets and classified as held for sale, depreciation/amortisation for FY15 would have been higher by INR4.3bn.

Lapse of agreement for sale of tower assets During Q1FY15, agreement for sale of tower assets in Tanzania, Chad and Democratic Republic of Congo lapsed and therefore stood terminated thereby. Accordingly, assets and the related liabilities were re-classified from held for sale and the related depreciation charge of INR1.6bn pertaining to previous quarters considered as an exceptional item

Currency FY12 FY13 FY14 FY15USD 483.7 481.7 460.9 403.9Euro 5.0 0.0 111.9 135.8INR 133.8 158.8 64.9 35.2NGN 48.3 60.5 70.5 31.9CHF - 0.0 23.8 22.5XAF 10.0 10.5 12.1 11.1BDT - 0.0 8.3 10.3XOF 5.3 6.1 8.4 7.7Others 6.8 15.1 7.1 6.2Total 693.0 732.7 767.8 664.6Floating rate borrowing (%) # 91.3 86.1 70.0 50.0Fixed rate borrowings (%) # 8.7 13.9 30.0 50.0

Currency FY12 FY13 FY14 FY15USD 4,805 4,770 4,338 3,629Euro - - 995 757INR 994 1,423 649 352NGN 444 582 705 314Other 73 75 55 32

During the year, BAIN raised USD1bn and EUR750mn through 2 issues of guaranteed Senior Notes. Interest rate sensitivity to floating rate loans declined in FY15 presumably due to shift in borrowings mix towards fixed rate loans.


Bharti Airtel

Investments in/loans to subsidiaries Table 13: Exposure to African operations (INR bn)


Aggregate cash exposure in African operations surged by 40% to INR239bn (FY14: INR170bn). During the year, the company made equity investment of INR40bn (FY14:INR9.5bn) in Bharti Airtel International (Mauritius) Limited. In Q1FY16, the company made additional equity investment of USD500mn (~INR32bn) in Bharti Airtel International (Mauritius) Limited. Corporate guarantees given for African operations increased to ~INR840bn (FY14: ~INR741bn) of which INR814.5bn (FY14: INR684.3bn) pertains to BAIN. During the year, the company increased its equity investment in Bharti Airtel Lanka by way of conversion of loan into equity of INR 11bn.

Goodwill Table 14: Goodwill analysis (INR bn)


Decline in goodwill during FY15 was on account of steep depreciation of functional currency of African nations against the USD.

Company FY12 FY13 FY14 FY15Equity Investment in select subsidiaryBharti Airtel International (Netherlands) BV 0.0 67.4 67.4 67.4 Bharti Airtel International (Mauritius) 4.8 48.1 57.6 97.6 Bharti International (Singapore) Pte 0.9 33.0 33.0 33.0 Total (A) 5.7 148.5 158.0 198.0 Loans o/s to select subsidiaries Bharti Airtel International (Netherlands) BV 51.2 - 9.8 32.2 Bharti Airtel International (Mauritius) 9.2 - - - Bharti International (Singapore) Pte 25.2 - 2.5 8.9 Total (B) 85.6 - 12.3 41.1 Cash Exposure (A) + (B) 91.3 148.5 170.3 239.1 Corporate guarantees Bharti Airtel International (Netherlands) BV 391.1 431.0 684.3 814.4 Bharti International (Singapore) Pte 82.4 96.3 56.5 25.2 Non-cash exposure 473.5 527.3 740.8 839.6 Cash Exposure as % to networth 18.5 27.4 25.5 30.5Non cash Exposure as % to networth 95.8 97.4 111.0 107.3

Particulars FY13 FY14 FY15Mobile services - Africa 368.6 415.7 360.9 Mobile services - India & South Asia 31.2 39.5 39.5 Mobile service Bangladesh 7.4 8.2 8.5 Airtel business 4.9 5.4 5.6 Telemedia Services 0.3 0.3 0.3 Total 412.4 469.1 414.8 Goodwill as a % of networth 82.0 78.5 67.0

Goodwill stood at INR415bn, 67% of net worth, 87% of which pertains to Africa



Of the total goodwill, 87% pertains to the Africa business and the margin of safety declined from 11.5% in FY13 to 10% in FY14 and further to 8.7% in FY15. An increase of 1.3% in the discount rate (FY14: 1.2%) shall make the margin of safety nil.

Table 15: Key assumptions of goodwill impairment


Table 16: Major subsidiaries performance (INR mn)


Particulars FY13 FY14 FY15Fair value exceeds the carrying value

Africa CGU - Fair value exceeds the carrying value by 11.5%All other CGU - No reasonable changes in assumptions wil l cause carrying value to exceed the fair value

Africa CGU - Fair value exceeds the carrying value by 10%All other CGU - No reasonable changes in assumptions will cause carrying value to exceed the fair value

Africa CGU - Fair value exceeds the carrying value by 8.7%All other CGU - No reasonable changes in assumptions will cause carrying value to exceed the fair value

Growth rate beyond planning period

3.5-4.0% (higher rates used for Africa and bangladesh CGU)

3.5-5.49% (higher rates used for Bangladesh CGU)

3.5-5.6% (higher rates used for Bangladesh CGU)

Pre-tax discount rate 12.5-19.9% (higher rates used for Africa CGU)

13.53-20.22% (higher rates used for Africa CGU)

14.3-21.3% (higher rates used for Africa CGU)

Growth rates for normal planning period

In l ine with long term average growth rates of the industry and country

In l ine with long term average growth rates of the industry and country

In line with long term average growth rates of the industry and country

Impairment testing Africa CGU - Dec 31, 2012India & South Asia - Dec 31, 2012

Africa CGU - Dec 31, 2013India & South Asia - Dec 31, 2013

Africa CGU - Dec 31, 2014India & South Asia - Dec 31, 2014

Name of the subsidiary % holding Networth Turnover PAT Turnover PATIndiaBharti Infratel Ltd. 71.9 170,200 112,754 15,179 121,906 19,924 Bharti Hexacom Ltd. 70.0 52,287 40,687 6,036 47,003 10,792 Bharti Telemedia Ltd. 95.0 (35,393) 20,771 (5,185) 24,759 (1,906)

174,212 16,030 193,668 28,810 Africa (operating subsidiaries)Airtel Networks Ltd. (Nigeria) 79.06 (1,099) 86,001 (8,019) 75,131 (10,401) Airtel Tanzania Ltd. 60.00 (9,217) 16,766 (3,073) 17,222 (5,291) Airtel Uganda Ltd. 100.00 (4,684) 11,915 1,230 14,656 (1,252) Airtel Networks Zambia Plc 96.36 2,573 15,819 3,127 13,281 574 Celtel Niger S.A. 90.00 5,360 12,790 2,632 12,741 1,788 Airtel Gabon S.A. 90.00 447 16,808 1,715 11,836 (1,312) Airtel Burkina Faso S.A 100.00 1,313 13,810 2,593 11,449 618 Airtel Networks Kenya Ltd. 100.00 (19,376) 10,708 (4,069) 10,358 (4,806) Airtel Tchad S.A. 100.00 (1,055) 8,705 (144) 7,955 (1,459) Airtel Malawi Ltd. 100.00 833 6,028 (807) 7,674 1,487 Airtel Ghana Ltd. 75.00 (21,410) 11,292 (4,808) 8,295 (8,377) Airtel Rwanda Ltd. 100.00 (6,162) 911 (2,477) 1,213 (2,391) Airtel Congo S.A. 90.00 (3,647) 11,907 (1,220) 9,947 (2,802) Airtel Congo (RDC) S.A. 98.50 (20,415) 22,115 (8,064) 20,702 (20,462)

245,575 (21,384) 222,460 (54,086) South Asia Airtel Bangladesh Ltd. 100.00 (12,980) 13,258 (4,121) 11,838 (6,746) Bharti Airtel Lanka (Pvt) Ltd. 100.00 (2,148) 4,033 (2,103) 4,171 (2,119) Total 17,291 (6,224) 16,009 (8,865)

FY14 FY15


Bharti Airtel

• Profitability of all the key operating subsidiaries in Africa and South Asia has deteriorated during FY15.

• Most of key operating subsidiaries in Africa and South Asia have negative net worth.

Key regulatory issues in African operations • Burkina Faso- Regulator is contemplating cost plus based pricing. This will

negatively impact business freedom to price competitively.

The Regulator is also considering imposition of fixed-line obligations on operators; efforts are being made to persuade the Regulator to accept wireless fixed services instead of wire line fixed services, in view of the huge financial outlay that will be required for cabling and wiring.

• Niger: The government is enforcing a unique international gateway, which will have a detrimental impact on industry.

• Sierra Leone: The government is contemplating an increase in license fee, which may increase the payout of operators by 8x.

• Zambia: The government is conducting a consultation for introducing a fourth operator. Industry has represented that this would fragment the sector and affect scale and economies of existing operators.

Table 17: Contingencies (INR bn)


Particulars FY12 FY13 FY14 FY15Taxes, duties and other demandsDoT demands 3.4 58.0 58.2 60.5Sales Tax and service tax 10.5 17.1 22.3 38.2Income Tax 23.5 18.8 20.7 20.1Custom duty 3.1 5.5 6.1 6.1Entry tax 4.3 5.5 6.0 7.0Others 3.0 4.3 3.3 3.6Total (A) 47.7 109.1 116.5 135.6Claims under legal cases including arbitration mattersAccess charges 4.8 4.9 6.2 7.4Others 3.0 3.6 6.4 5.7Total (B) 7.8 8.6 12.6 13.1Group’s share of Joint Ventures (C) 1.5 1.8 10.9 9.1(A) + (B) + (C) 57.1 119.5 140.1 157.8

Contingent liabilities with respect of sales taxes and service tax surged 71% to INR 38bn



Table 18: Valuation Parameters (INR bn)


Profitability is marred by depreciation, which represents ~55% of EBITDA during FY11-15.

Chart 1: Standalone cash generation and utilisation during FY11-15

*100%= INR833bn


~59% and 37% of total cash available at the standalone level during FY11-15 was utilised towards capex and investment (including loans) in subsidiaries respectively. Consequently, very low proportion (4%) of available cash was used for dividend payment.

Particulars FY11 FY12 FY13 FY14 FY15 CumulativeCapex 277 150 130 175 210 942 Depreciation 102 134 148 156 155 696 EBITDA 201 237 233 278 312 1,260 EBIT 99 103 84 121 157 565 EV 1,957 1,897 1,692 1,880 2,243 N.A.Market cap 1,358 1,279 1,108 1,275 1,575 N.A.EV/EBITDA 9.7 8.0 7.3 6.8 7.2EV/EBIT 19.8 18.3 20.0 15.5 14.3Capex (% to EBITDA) 138 63 56 63 67 75 Depreciation (% to EBITDA) 51 56 64 56 50 55

Cash Profits after

working capital

88%

Net borrowing

s 2%

Equity share capital

issued 9%

Net proceeds

from investmen

ts 1%

Sources

Capex -Tangibles

31%

Capex -Intangible

s28%

Investments in

subsidiaries/associat

es/JVs12%

Loans and advances

to subsidiarie

s25%

Dividend4%

Application

Capex cost incurred during FY11-15 stood at INR 942bn, 75% of EBITDA for FY11-15 Considering high depreciation (led by consistent high capex), we believe EBIT will give clearer picture of cash flows available to shareholders


Bharti Airtel



Particulars FY11 FY12 FY13 FY14 FY15Sales 596 715 769 859 921 Total income 600 718 775 869 946 EBITDA 201 237 233 278 312 EBITDA margin (%) 34 33 30 32 34 RoE 13 9 4 5 10 RoCE 13 9 8 10 14 Depreciation 102 134 148 156 155 Financial costs 25 41 45 59 73 Net profit 59 43 23 30 53 Equity shareholders' funds 488 506 503 598 620 Loan funds 617 690 667 759 664 Net fixed assets 1,241 1,292 1,257 1,275 1,286 CWIP 48 44 30 131 216 Current assets loans and advances 96 110 115 112 158 Current l iabil ities and provisions 285 296 322 359 418 Net current assets (189) (186) (207) (247) (260) Cash and cash equivalents 16 38 82 112 105 Net debt 601 652 586 647 559 Cash flow from operating activities 189 225 228 262 276 Cash flow from investing activities (604) (184) (187) (250) (220) Cash flow from financing activities 397 (40) (46) 28 (97) Net cash flows (19) 2 (5) 40 (41) CAPEX (277) (150) (130) (175) (210) Working capital investments 10 15 20 18 (2)



ANNEXURES


Annexure

Annexure A – ROE analyzer

ROE analyser analyses profitability on the scale of operating efficiency and capital allocation efficiency. While operating efficiency is a measure of how efficiently the company is making use of operating assets, capital efficiency is the measure of balance sheet efficiency. The above analysis involves:

1. Dissection of profitability along two major drivers:

a. Return from operating activities (RNOA: return on net operating assets).

b. Return from financing activities (leveraging effect on ROE).

ROE = Return from operating activities (RNOA) + Return from leverage

Or

ROE = Operating margin x Operating assets turnover + Leverage spread x Leverage multiplier

Whereas:

RNOA = NOPAT/Average operating assets

Operating margin = NOPAT/Operating revenue

Operating assets turnover = Operating revenue/Average operating assets

Leverage spread = RNOA – Net borrowing cost

Leverage multiplier = Average net financial obligation/Average common shareholders’ equity

2. Reformulation of balance sheet, wherein we have regrouped assets and liabilities into operating and financing categories (against traditional current and non-current categorisation).

3. Reformulation of income statement, wherein we have regrouped income and expenses into operating and financing activities.



Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098. Board: (91-22) 4009 4400, Email: [email protected]

Nirav Sheth

Head Research

[email protected]


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