investor's eye-july24 12 - the smart investor
TRANSCRIPT
Visit us at www.sharekhan.com July 24, 2012
For Private Circulation only
Sharekhan Ltd, Regd Add: 10th Floor, Beta Building, Lodha iThink Techno Campus, Off. JVLR, Opp. Kanjurmarg Railway
Station, Kanjurmarg (East), Mumbai – 400 042, Maharashtra. Tel: 022 - 61150000. BSE Cash-INB011073351; F&O-
INF011073351; NSE – INB/INF231073330; CD - INE231073330; MCX Stock Exchange: CD - INE261073330 DP: NSDL-IN-DP-NSDL-
233-2003; CDSL-IN-DP-CDSL-271-2004; PMS INP000000662; Mutual Fund: ARN 20669. Sharekhan Commodities Pvt. Ltd.: MCX-
10080; (MCX/TCM/CORP/0425); NCDEX -00132; (NCDEX/TCM/CORP/0142)
Index
� Stock Update >> Ashok Leyland
� Stock Update >> Lupin
� Stock Update >> Wipro
� Stock Update >> Hindustan Unilever
� Stock Update >> Larsen & Toubro
� Stock Update >> Torrent Pharmaceuticals
� Stock Update >> Polaris Financial Technology
� Sector Update >> Telecommunications
� Viewpoint >> Idea Cellular
2Sharekhan Home NextJuly 24, 2012
Company details
Price chart
Shareholding pattern
Price performance
(%) 1m 3m 6m 12m
Absolute -0.6 -21.6 -7.6 -4.3
Relative -0.3 -21.5 -9.5 4.4to Sensex
Ashok Leyland Ugly Duckling
Stock Update
Q1FY2013 results: First-cut analysis Hold; CMP: Rs23
Price target: Rs28
Market cap: Rs6,199 cr
52 week high/low: Rs33/20
NSE volume: 63.5 lakh(no. of shares)
BSE code: 500477
NSE code: ASHOKLEY
Sharekhan code: ASHOKLEY
Free float: 163.3 cr(no. of shares)
Result highlights
Ashok Leyland’s Q1FY2013 results: PAT 23% below estimates on higher em-
ployee and interest costs
Ashok Leyland Ltd (ALL)’s performance in Q1FY2013 was significantly below our
and the street’s estimates. Higher employee costs impacted the operating margin
that came in 70 basis points below our estimates at 8%. Higher interest costs
further marred profitability leading to a profit after tax (PAT) of Rs67 crore, 23%
below estimates.
Positive surprises
� Contribution per vehicle improved on a sequential basis despite increased
proportion of buses and the traded light commercial vehicle (LCV) Dost.
� Depreciation at Rs89 crore was below our estimates of Rs98 crore.
Negative surprises
� Employee costs increased on both, year-on-year (Y-o-Y) and quarter-on-quarter (Q-
o-Q) basis. The employee/sales at 8.9% was much above our expectation of 7.1%.
� Financial charges at Rs83 crore were higher on a sequential basis despite of it
being a seasonally lean period. This may be due to higher inventory levels at
the stockyard.
Valuation
In the recent analyst interaction of July 4, 2012, the company maintained its
volume guidance of 1.07 lakh units ex-Dost but lowered its FY2013 margin guidance
to 10%. We would seek further clarity on volume and margin expectations from the
conference call to be held tomorrow. We maintain our Hold recommendation on
the stock but may revise our estimates post an interaction with the management
in our subsequent note.
Results (Rs cr)
Particulars Q1FY13 Q1FY12 YoY % Q4FY12 QoQ %
Net sales 3007.3 2512.7 19.7 4311.0 -30.2
Operating profit 240.7 244.6 -1.6 469.9 -48.8
OPM (%) 8.0 9.7 10.9
Depreciation 89.3 84.7 5.4 95.6 -6.6
Interest 83.4 56.7 47.1 72.4 15.2
Other Income 12.9 7.4 72.9 10.9 18.3
PBT 80.9 110.7 -26.9 314.4 -74.3
Tax 10.0 16.8 -40.4 32.7 -69.5
Adjusted PAT 66.9 86.3 -22.4 258.7 -74.1
EPS 0.3 0.3 -22.4 1.0 -74.1
investor’s eye stock update
Institutions20%
FIIs16%
Promoters39%
Public & Others25%
2022242628303234
Jul-1
1
Sep
-11
Nov
-11
Jan-
12
Mar
-12
May
-12
Jul-1
2
3Sharekhan July 24, 2012 Home Next
� Operating margins at 8% were below estimates on the
back of higher than expected employee expenses.
� Operating profit/vehicle declined on a Y-o-Y basis on
the back of margin contraction and increased
proportion of the traded LCV - the Dost.
� Realisation/vehicle has been on a declining trend on
account of increased proportion of the Dost.
� Contribution/vehicle at Rs3,22,278 remained flat on
a Q-o-Q basis despite an increase in LCV volumes and
the bus mix.
0
20000
40000
60000
80000
100000
120000
140000
160000
Q1 FY12 Q2 FY12 Q3 FY12 Q4 FY12 Q1 FY13
5%
6%
7%
8%
9%
10%
11%
12%
Operating Prof it/ vehicle (Rs) OPM Margin (%)
ALL: Operating profit per vehicle and margin
ALL: Realisation and contribution per vehicle
11200001140000116000011800001200000122000012400001260000128000013000001320000
Q1 FY12 Q2 FY12 Q3 FY12 Q4 FY12 Q1 FY13
300000
310000
320000
330000
340000
350000
360000
370000
Realisation/vehicle (Rs) LHS Contribution/vehicle (Rs) RHS
Valuation
Particulars FY10 FY11 FY12 FY13E FY14E
Net sales (Rs cr) 7,244.7 11,117.7 12,780.9 14,747.6 17,075.0
YoY Chg (% ) 21.4 53.5 15.0 15.4 15.8
EBIDTA (Rs cr) 762.9 1,217.6 1,256.1 1,457.8 1,696.8
OPM (%) 10.5 11.0 9.8 9.9 9.9
Net profit (Rs cr) 425.1 636.2 595.0 656.4 717.4
EPS (Rs) 1.6 2.4 2.2 2.5 2.7
EPS growth (%) 123.6 49.7 (6.5) 10.3 9.3
P/E (x) 16.1 10.8 11.5 9.3 8.6
P/BV (x) 1.8 1.7 1.6 1.4 1.3
EV/EBITDA (x) 10.9 7.4 7.6 6.1 5.0
RoCE (%) 9.3 14.2 12.0 12.5 13.8
RoE (%) 11.9 16.5 14.4 14.8 14.9
ALL: Volume mix and growth
0
5000
10000
15000
20000
25000
30000
35000
40000
Q1 FY12 Q2 FY12 Q3 FY12 Q4 FY12 Q1 FY13
-20%
-10%
0%
10%
20%
30%
40%
Truck volume Bus volumeLCV volume MHCV volume grow thOverall volume grow th
� LCV volumes have seen steady increase on the back of
increasing penetration of the LCV- Dost.
� The medium and heavy commercial vehicle (MHCV)
volume growth has recovered from the negative
territory witnessed during H1FY2012 on the back of
better performance in the southern market, leading
to a market share gain for ALL.
Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.
investor’s eye stock update
4Sharekhan Home NextJuly 24, 2012
Company details
Price chart
Shareholding pattern
Price performance
(%) 1m 3m 6m 12m
Absolute 8.8 4.5 31.1 26.7
Relative 9.0 4.7 28.5 38.3to Sensex
Lupin Apple Green
Stock Update
Q1FY2013 results: First-cut analysis Buy; CMP: Rs582
Price target: Rs597
Market cap: Rs25,950 cr
52 week high/low: Rs582/409
NSE volume: 6.3 lakh(no. of shares)
BSE code: 500257
NSE code: LUPIN
Sharekhan code: LUPIN
Free float: 23.7 cr(no. of shares)
Result highlights
� An impressive all-round performance; higher tax incidence affects profit:
Lupin reported better than expected revenues and profit for Q1FY2013 on a
good all-around performance during the quarter. Its net sales grew by 42.8%
year on year (YoY) to Rs2,219.2 crore during the quarter and its profit before
tax rose by 67.2% YoY to Rs405.8 crore. The profit growth was driven by a 158-
basis-point year-on-year (Y-o-Y) rise in the operating profit margin (OPM) to
19.1% and a 126% Y-o-Y growth in the other income during the quarter. However,
a sharp rise in the tax incidence (29.8% in Q1FY2013 vs 11.8% in Q1FY2012)
restricted the profit growth to 33.5% YoY at Rs280.39 crore. But even that is
impressive.
� US, Japan and India lead the growth: During the quarter the revenues from
the US market rose by 62.8% YoY to Rs802 crore while the revenues from the
Japanese market (excluding the newly acquired Irom Pharma) jumped by 36.7%
YoY to Rs227.8 crore. The revenues from Japan (including Irom Pharma) now
account for 15% of the total revenues of the company. Lupin continues to outpace
the domestic formulation market with a 25% Y-o-Y growth recorded during the
quarter. The growth in the other emerging markets was also impressive at 54%
YoY to Rs117.4 crore.
We have Buy rating on the stock with a price target of Rs597.
The company’s management is holding a teleconference call on July 25, 2012 at
11.30am. We will come out with a detailed note after the teleconference with the
management.
investor’s eye stock update
Results (Rs cr)
Particulars Q1FY13 Q1FY12 YoY % FY12 FY11 YoY %
Net sales 2219.2 1554.3 42.8 6959.7 5706.8 22.0
Expenditure 1796.1 1273.4 41.1 5638.2 4641.0 21.5
Operating profit 423.0 280.9 50.6 1321.5 1065.9 24.0
Other income 58.2 25.7 125.9 137.6 134.1 2.6
EBIDTA 481.2 306.6 56.9 1459.1 1200.0 21.6
Interest 10.1 5.8 74.4 35.5 32.5 9.3
Depreciation 65.4 47.1 38.7 227.5 171.2 32.9
PBT 405.8 253.7 59.9 1196.1 996.3 20.0
Tax 120.8 28.6 322.1 252.2 116.9 115.7
Adjusted PAT 280.4 210.1 33.5 924.0 862.5 7.1
Extraordinary items 0.00 0.0 56.3 0.0
Net profit (reported) 280.4 210.1 33.5 980.3 862.5 13.7
EPS (Rs) 6.3 4.7 19.4 19.3 0.5
OPM (%) 19.1 18.1 0.99 19.0 18.7 0.31
EBIDTA margin (%) 21.7 19.7 21.0 21.0
Net profit margin (%) 12.6 13.5 13.3 15.1
Effective tax rate 29.8 11.3 21.1 11.7
Promoters46%
Non-promoter corporate
1%Public and others8%
Institutions17%
Foreign28%
400425450475500525550575600
Jul-1
1
Sep
-11
Nov
-11
Jan-
12
Mar
-12
May
-12
Jul-1
2
5Sharekhan July 24, 2012 Home Next
investor’s eye stock update
Revenue break-up
Particualrs Q1FY13 Q1FY12 YoY % FY12 FY11 YoY%
Formulations 1988 1333 49.1 6111 4883 25.1
US 802 493 62.8 2530 2020 25.2
EU 47 42 13.4 198 181 8.9
Japan 333 167 99.8 861 621 38.5
Advanced markets 1183 701 68.6 3588 2823 27.1
India 621 497 25.0 1906 1551 22.9
South Africa 66 59 12.9 255 183 39.6
RoW 117 76 54.3 361 327 10.5
Emerging markets 805 632 27.4 2522 2060 22.4
API 232 210 10.2 849 859 -1.1
Others 0 0 0.0 0.0
Total 2219 1543 43.8 6960 5742 21.2
Valuations
Particulars FY10 FY11 FY12 FY13E FY14E
Net sales (Rs cr) 4740.5 5706.8 6959.7 8098.7 9586.4
Adj. net profit (Rs cr) 681.6 862.5 924.0 1164.2 1474.7
Shares in issue (cr) 44.5 44.6 44.7 44.7 44.7
EPS (Rs) 15.2 19.3 20.7 26.1 33.0
PER (x) 38.2 30.1 28.1 22.3 17.6
Cash EPS (Rs) 18.4 23.5 26.2 31.9 39.5
Cash PER (x) 31.6 24.7 22.2 18.2 14.7
EV/EBIDTA (x) 31.4 25.1 20.5 16.5 12.7
Book value (Rs/share) 57.7 73.5 89.8 121.9 156.0
P/BV (x) 10.1 7.9 6.5 4.8 3.7
Mcap/sales 5.5 4.5 3.7 3.2 2.7
RoCE (%) 22.4 22.0 21.1 21.9 22.8
RoNW (%) 26.5 26.3 23.0 21.4 21.2
Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.
6Sharekhan Home NextJuly 24, 2012
Company details
Price chart
Shareholding pattern
Price performance
(%) 1m 3m 6m 12m
Absolute -10.0 -15.1 -13.0 -10.9
Relative -9.8 -15.0 -14.7 -2.8to Sensex
Wipro Apple Green
Stock Update
Downgrade to Hold Hold; CMP: Rs345
Price target: Rs360
Market cap: Rs85,120 cr
52 week high/low: Rs453/310
NSE volume: 13.0 lakh(no. of shares)
BSE code: 507685
NSE code: WIPRO
Sharekhan code: WIPRO
Free float: 53.2 cr(no. of shares)
Result highlights (IFRS)
� Performance below expectations, disappointing guidance: Wipro’s overall
performance for Q1FY2013 was below our expectation. The most disappointing
part was the Q2FY2013 guidance, which suggested a 0.3% to 2.3% sequential
growth to $1,520-1,550 million, much below our as well as the street’s
expectations. This is in spite of the September quarter being a traditionally
strong quarter for the IT sector.
� Soft volume growth: IT services revenues were down 1.4% quarter on quarter
(QoQ) to $1,514.8 million (our expectation was of $1,531 million). On a constant
currency basis, the revenues were up 0.3% QoQ to $1,540 million. The volume
growth came in at 0.8% QoQ. Onsite pricing was down by 0.9% QoQ (up 0.2% on
constant currency basis) and offshore pricing was down 2% (down 1% on constant
currency basis).
� Margins disappoint, incremental investments continue in S&M space: The IT
services’ earnings before interest and tax (EBIT) margins have shown an
improvement of 30 basis points to 21% (much below our expectations of 22.5%),
despite the rupee benefits (11.1% rupee depreciation) and absence of full quarter
impact of wage hikes (effective from June 1, 2012). The lower margin
performance has been attributed to incremental allocation to selling and
marketing (S&M), which has gone up by 22.9% to Rs533 crore (additional
investment of Rs100 crore on QoQ basis). As a matter of fact, on a trailing
Results (under IFRS) (Rs cr)
Particulars Q1FY13 Q1 FY12 Q4FY12 YoY % QoQ %
Net sales 10483.2 8492.9 9816.4 23.4 6.8
Direct costs 7287.0 6002.1 6847.0 21.4 6.4
Gross profit 3196.2 2490.8 2969.4 28.3 7.6
SG&A 1324.0 995.6 1275.1 33.0 3.8
EBIT 1872.2 1495.2 1694.3 25.2 10.5
Net other income 132.5 143.2 197.7 -7.5 -33.0
Affiliate profit/(loss) -10.2 11.0 0.7 -192.7 -1557.1
PBT 1994.5 1649.4 1892.7 20.9 5.4
Tax provision 404.6 309.6 401.5 30.7 0.8
PAT 1589.9 1339.8 1491.2 18.7 6.6
Minority interest 9.7 4.9 10.3 98.0 -5.8
Net profit 1580.2 1334.9 1480.9 18.4 6.7
EPS (Rs) 6.4 5.4 6.0
Margin (%)
GPM 30.5 29.3 30.2
EBIT margins 17.9 17.6 17.3
NPM 15.1 15.7 15.1
Tax rate 20.3 18.8 21.2
investor’s eye stock update
Foreign9% Institutions
3%
Non-promoter corporate
3%
Promoters79%
Public & Others
6%
300320340360380400420440460
Jul-1
1
Sep
-11
Nov
-11
Jan-
12
Mar
-12
May
-12
Jul-1
2
7Sharekhan July 24, 2012 Home Next
investor’s eye stock update
twelve month (TTM) basis, Wipro’s S&M investments
have gone up by 34% to Rs1,781 crore. Wipro is heavily
investing and strengthening its front end as a part of
its business transition. Thus the margins are expected
to continue to remain in a narrow range in the next
few quarters, as the benefits of investments will take
time to reflect.
� Net profit below expectation: The consolidated
revenues of the company for the quarter were up 6.8%
QoQ to Rs10,483.2 crore. The net other income was
down 33% QoQ to Rs132.5 crore driven by higher foreign
exchange (forex) losses pertaining to external
commercial borrowing (ECB) to the tune of Rs100.2
crore as compared to Rs33.7 crore in Q4FY2012. The
net profit was up 6.7% QoQ to Rs1,580.2 crore (below
our expectations of Rs1,708.9 crore).
� Performance/guidance does not favour revival
thesis: Wipro has failed to meet the upper end of its
revenue guidance in constant currency terms in four
of the last six quarters. Volume growth continues to
languish with an average 1.1% sequential growth in
the last three preceding quarters (lowest among the
peers). Further, a lackluster guidance for the seasonally
strong September quarter reflects at a slower than
anticipated ramp up in the clients’ accounts. We draw
comfort from the incremental investments in the S&M
area (130 people in the hunting team) and clients
mining ($100 million clients moved to 8 from 4 in one
year). However any meaningful benefit from the S&M
investments would take time to reflect in numbers
(management indicates at 8-12 months time frame).
Overall, looking at the current business traction and
increasing uncertainties in the macro environment, we
expect Wipro to take atleast three quarters to come
closer to match its peer companies’ (TCS, HCL
Technologies, Cognizant) growth levels.
� Outlook and valuation: We have reset our currency
estimates to Rs54.4 and Rs54 and have lowered our
earnings estimates by 4.7% and 5.8% on the back of
lower revenue estimates of 4.2% and 9.2% respectively
for FY2013E and FY2014E. In the last one month
Wipro’s stock price has corrected by close to 14% and
is trading at close to 12x FY2014E earnings. Though
any major downside from the current levels looks
unlikely, we remain circumspect on upside triggers.
With lack of positive investment triggers in the medium
term, we have downgraded our rating to Hold from
Buy and lowered the target price to Rs360.
Segmental performance (Rs cr)
Particulars Q1 Q1 Q4 YoY QoQFY13 FY12 FY12 % %
IT revenues ($ mln) 1514.8 1407.5 1535.6 7.6 -1.4
USD/INR 54.9 45.5 49.4 20.6 11.1
IT services 8314.3 6404.6 7589.7 29.8 9.5
IT products 953.3 1005.8 937.0 -5.2 1.7
IT services & products 9267.6 7410.4 8526.7 25.1 8.7
Con. care & lighting 979.8 754.5 906.7 29.9 8.1
Others 388.7 395.9 428.8 -1.8 -9.4
Eliminations 16.9 3.2 6.9
Total revenues 10653.0 8564.0 9869.1 24.4 7.9
EBIT
IT services 1744.3 1406.7 1573.1 24.0 10.9
IT products 21.1 42.3 43.8 -50.1 -51.8
IT services & products 1765.4 1449.0 1616.9 21.8 9.2
Con. Care & lighting 113.9 89.5 113.4 27.3 0.4
Others 9.7 -2.4 3.5 504.2 -177.1
Eliminations -16.8 -40.9 -39.5
Total EBIT 1872.2 1495.2 1694.3 25.2 10.5
EBIT margin (%)
IT services 21.0 22.0 20.7
IT products 2.2 4.2 4.7
IT services & products 19.0 19.6 19.0
Con. Care& lighting 11.6 11.9 12.5
Others 2.5 -0.6 0.8
Source: Company and Sharekhan Research
� Management seeing increasing delays in decision
making: The management continues to maintain that
the deal pipeline remains robust and growing, but it is
seeing increasing delays in decision making at the
clients’ end which is impacting performance and
revenue visibility. Specifically in the investment
banking space, on the discretionary side of the business
there are ramp downs happening in the existing
projects and delays are being witnessed in starting of
new projects. The retail industry is also starting to
see the impact of slower decision making because of
the macro uncertainties. The competitive intensity is
also increasing in select existing deals coming up for
renewal as well as new deals. Also, the India business
which contributes to about 1% of the quarterly volume
growth is seeing slowness in demand due to lack of
capital investment, delays in decision making and
uncertainty in the telecom vertical. The management
expects the India business to stabilise in the second
half of the fiscal year. On the pricing front, the
management maintains a stable pricing environment.
8Sharekhan Home NextJuly 24, 2012
Segment-wise performance
IT products
The IT products segment’s revenue grew by 1.7%
sequentially whereas it was down 5.2% year on year (YoY)
to Rs953.3 crore in Q1FY2013. The Y-o-Y drop in revenues
could be attributable to sluggishness in the India & Middle
East business. The EBIT margin for the segment shrank
250 basis points QoQ and 200 basis points YoY to 2.2% in
the same period.
Consumer care and lighting business
The division’s revenues grew by 8.1% QoQ and 29.9% YoY
to Rs979.8 crore. The EBIT margin for the segment was
down 90 basis points QoQ and 30 basis points YoY to 11.6%.
Wipro signed an agreement with Lornamead Group to
acquire the Yardley business in the UK and the rest of
Europe (excluding Germany and Austria). This transaction
further expands the geographic reach of the Yardley
portfolio already owned by Wipro. Earlier, Wipro had
acquired the Yardley portfolio for Asia, Middle East, North
Africa and Australasia in December 2009. Wipro will also
acquire the “Woods of Windsor” business, another heritage
brand in the UK, which is well known for its floral fragrance
led portfolio in the personal care segment.
Other highlights
� During Q1FY2013, Wipro made a net addition of 2,632
employees in the IT services business. The total
headcount in the IT services business at the end of
Q1FY2013 stood at 138,552 people.
� The utilisation excluding trainees improved 180 basis
points to 77.9% and including trainees improved by
140 basis points to 75.5%.
� At the end of Q1FY2013, the voluntary quarterly
annualised attrition rate increased to 15.2% as
compared with 14.4% in Q4FY2012. On a trailing
twelve-month (TTM) basis, the attrition was down 190
basis points to 15.6%.
Operating matrix
Particulars Q1FY13 Q1FY12 Q4FY12 YoY % QoQ % Key comments
Geographic mix (%)
Americas 51.6 53.0 52.1 4.8 -2.3
Europe 28.1 28.6 27.7 5.7 0.1
Japan 1.3 1.1 1.1 27.2 16.6
India & Middle East 8.8 9.0 9.6 5.2 -9.6
APAC & others 10.2 8.3 9.5 32.3 5.9
Service offering (%)
Tech Infra. Services 22.8 21.7 22.6 13.1 -0.5
Analytics & Information Mgmt 7.1 6.4 6.8 19.4 3.0
Business application services 30.7 30.4 30.6 8.7 -1.0
BPO 8.4 9.3 8.2 -2.8 1.1
Product Engg. 8.5 8.3 8.2 10.2 2.3
ADM 22.5 23.9 23.6 1.3 -6.0
R&D business 12.0 12.5 12.0 3.3 -1.4
Consulting 2.5 3.1 2.9 -13.2 -15.0
Industry verticals (%)
Global Media & Telecom 14.9 16.8 14.9 -4.5 -1.4
Finance Solutions 26.4 26.7 26.6 6.4 -2.1
Manufacturing & Hitech 19.4 19.7 19.1 6.0 0.2
Healthcare, life sciences 10.1 10.2 10.0 6.6 -0.4
& services
Retail & Transportation 15.0 15.0 15.4 7.6 -3.9
Energy & Utilities 14.2 11.6 14.0 31.7 0.1
Client contribution (%)
Top client 3.5 3.3 3.5 14.1 -1.4
Top 5 clients 12.2 10.9 11.5 20.5 4.6
Top 10 clients 20.9 19.4 20.0 15.9 3.1
Others 79.1 80.6 80.0 5.6 -2.5
Source: Company & Sharekhan Research
America revenues were impacted by sluggishness in thefinancial services (investment banking) space. Europerevenues were impacted by cross currency headwinds andfinancial services.
India & Middle East revenues were down due to slow Indiabusiness, mainly in the government and telecom segments.
ADM revenues were down due to ramp down in investmentbanking space with no ramp ups and slower decision makingin the retail space.
BPO looks stable.
Telecom continues with its soft performance (in the telecomOEMs and India business space).
Energy & utilities and healthcare remain stable with decenttraction.
Growth in top 2-5 clients at 7.2% QoQ and clients with revenuesof $100 million and more increased by 1 to 8.
investor’s eye stock update
9Sharekhan July 24, 2012 Home Next
� The cash and cash equivalents at the end of Q1FY2013
stood at Rs5,985.2 crore and that including the
investments stood at Rs12,995.7 crore.
� The total hedge at the end of Q1FY2013 stood at $1.6
billion, down from $2 billion at the end of the previous
quarter.
� The DSO days were down to 69 from 71 days in the
previous quarter.
� Clients: The company added 37 new clients in the
quarter and the active number of clients for the quarter
was down to 919 (943 in the sequential previous
quarter). The clients contributing more than $100
million increased to eight from seven in the previous
quarter and four in the corresponding quarter of the
previous year.
� Deal wins: During the quarter, the company won a
few deals including a large multi-year contract from
Royal Philips Electronics; a leading retail bank and
insurance provider in the UK; a large developer,
manufacturer and marketer of medical devices and
from Power Grid.
� Outlook and valuation: We have reset our currency
estimates to Rs54.4 and Rs54 and have lowered our
earnings estimates by 4.7% and 5.8% on the back of
lower revenue estimates of 4.2% and 9.2% respectively
for FY2013E and FY2014E. In the last one month
Wipro’s stock price has corrected by close to 14% and
is trading at close to 12x FY2014E earnings. Though
any major downside from the current levels looks
unlikely, we remain circumspect on upside triggers.
With lack of positive investment triggers in the medium
term, we have downgraded our rating to Hold from
Buy and lowered the target price to Rs360.
Valuation
Particulars FY2011 FY2012 FY2013E FY2014E
Net sales (Rs cr) 31,054.2 37,197.1 43,492.0 48,238.9
Net profit (Rs cr) 5297.7 5573.0 6200.6 6840.5
EPS (Rs) 21.5 22.7 25.2 27.8
PER (x) 16.1 15.3 13.7 12.4
Price/BV (x) 3.5 2.9 2.5 2.2
EV/EBIDTA(x) 14.6 12.9 11.1 10.0
Dividend yield (%) 1.7 1.7 1.8 2.0
RoCE (%) 21.6 20.8 20.5 20.0
RoNW (%) 23.9 20.8 19.7 18.8
One-year forward PE band
30x
0.0
100.0200.0
300.0
400.0500.0
600.0
700.0800.0
900.0
Jul-0
2Ja
n-03
Jul-0
3Ja
n-04
Jul-0
4Ja
n-05
Jul-0
5Ja
n-06
Jul-0
6Ja
n-07
Jul-0
7Ja
n-08
Jul-0
8Ja
n-09
Jul-0
9Ja
n-10
Jul-1
0Ja
n-11
Jul-1
1Ja
n-12
Jul-1
2
25x
17x
21x
13x
10x
7x
Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.
investor’s eye stock update
10Sharekhan Home NextJuly 24, 2012
Promoters53%
Domestic Institutions
10%
FIIs20%
Others17%
investor’s eye stock update
Company details
Price chart
Shareholding pattern
Price performance
(%) 1m 3m 6m 12m
Absolute 2.9 7.2 13.0 35.2
Relative -2.7 7.4 10.7 47.5to Sensex
Hindustan Unilever Apple Green
Stock Update
Price target revised to Rs479 Hold; CMP: Rs476
Price target: Rs479
Market cap: Rs102,901 cr
52 week high/low: Rs478/309
NSE volume: 21.0 lakh(no. of shares)
BSE code: 500696
NSE code: HINDUNILVR
Sharekhan code: HINDUNILVR
Free float: 102.7 cr(no. of shares)
Result highlights
� Strong beginning to FY2013: Hindustan Unilever Ltd (HUL) began FY2013 on a
strong note by posting a strong operating performance in the first quarter of
the fiscal. Despite macro uncertainties and sustained high food inflation HUL
was able to maintain a strong growth in the domestic consumer business, which
grew by 19% year on year (YoY) in Q1FY2013. The sales volume growth stood at
9% (close to 10% volume growth in Q4FY2012). This was the fourth consecutive
quarter when HUL’s volume growth in the consumer business stood in the range
of 9-10%. The highlight of the quarter was close to a 220-basis-point year-on-
year (Y-o-Y) improvement in the gross profit margin (GPM).
� Performance snapshot: HUL’s net sales grew by 13.7% YoY to Rs6,250.2 crore
in Q1FY2013, driven by a 21% growth in the home and personal care (HPC)
business. The food business’ revenue growth remained at 11% YoY during the
quarter. The stand-alone business’ GPM improved by 216 basis points YoY to
46.1% and its operating profit margin (OPM) improved by 137 basis points YoY to
13.4%. Judicious price increases in the product portfolio, the benefits of a low-
cost inventory and effective buying of the key inputs at the global level helped
HUL to post a strong improvement in the GPM during the quarter. Hence, the
operating profit grew by 26.7% YoY to Rs837.9 crore. However a higher than
expected other income (including the other operating income) led to a 46% Y-o-Y
growth in the adjusted profit after tax (PAT) to Rs848.8 crore. The other income
(including income from other operations) stood at Rs347.2 crore in Q1FY2013
as against Rs126.1 crore in Q1FY2012. The surge in the other income was aided
by a Rs71.7-crore profit on the sale of long-term investments and the interest
on an income tax refund of Rs34.5 crore.
Results (stand-alone) (Rs cr)
Particulars Q1FY13 Q1FY12 YoY % Q4FY12 QoQ %
Net sales 6250.2 5495.9 13.7 5660.5 10.4
Total expenditure 5412.3 4834.6 11.9 4932.5 9.7
Operating profit 837.9 661.3 26.7 728.0 15.1
Other income 347.2 143.6 141.9 175.4 98.0
EBIDTA 1185.1 804.9 47.2 903.3 31.2
Interest 5.3 0.0 - 0.2 -
PBDT 1179.8 804.9 46.6 903.1 30.6
Depreciation 57.6 56.2 2.5 57.1 1.0
PBT 1122.2 748.7 49.9 846.1 32.6
Tax 273.4 167.3 63.4 176.9 54.6
Adjusted PAT 848.8 581.3 46.0 669.2 26.8
Extra-ordinary items -482.4 -45.8 952.8 -17.4 2670.8
Reported PAT 1331.2 627.2 112.3 686.6 93.9
Adjusted EPS (Rs.) 3.9 2.7 47.4 3.1 26.8
GPM (%) 46.1 44.0 216bps 44.8 128bps
OPM (%) 13.4 12.0 137bps 12.9 54bps
290
330
370
410
450
490
Jul-1
1
Sep
-11
Nov
-11
Jan-
12
Mar
-12
May
-12
Jul-1
2
11Sharekhan July 24, 2012 Home Next
investor’s eye stock update
� Upward revision in estimates: We have revised
upwards our earnings estimates for FY2013 and FY2014
by 5.0% and 6.2% respectively to factor in the higher
than expected OPM and other income during the
quarter. With the prices of the key inputs showing a
softening trend, we expect the OPM to stand in the
range of 13.5-13.8% in the coming years.
� Outlook and valuation: Though the strong volume
growth momentum sustained in Q1FY2013, we believe
the volume growth has to be keenly monitored in the
coming quarters in view of the poor monsoon and the
persistent high food inflation. We believe HUL’s
portfolio of strong brands (catering to the masses as
well as the premium end of the market) will help
overcome the concerns and maintain the growth
momentum in the coming quarters. Also, banking on
the Indian consumer growth story the company has
maintained its thrust on innovation and enhanced its
distribution reach. These will be the key growth drivers
for the company in the long run. We expect HUL’s top
line and bottom line to grow at a compounded annual
growth rate (CAGR) of 17% and 19% respectively over
FY2012-14.
HUL has traded at an average one-year forward
multiple of 27x in the uncertain market environment
of the last twelve months. That is 6% above its four-
year average multiple of 25.5x. We have revised our
price target to Rs479 (valuing the stock at 27x its
FY2014E earnings of Rs17.7). However, with a limited
upside from the current level we maintain our Hold
recommendation on the stock. At the current market
price the stock is trading at 31.3x its FY2013E earnings
per share (EPS) of Rs15.2 and 26.8x its FY2014E EPS of
Rs17.7.
HPC business performance—strong growth along with
margin improvement
� Soap and detergent segment: Q1FY2013 was the
fourth consecutive quarter of above 20% Y-o-Y revenue
growth driven by the price increases effected in the
portfolio in the previous few quarters. The soap and
detergent segment registered a revenue growth of
23.7% YoY in Q1FY2013. The sales volume of the
segment grew in single digits during the quarter. The
laundry category maintained its strong performance
with the brands growing in double digits. The
upgradation in the category led to a strong growth in
the premium segment with both Surf and Rin delivering
a double-digit volume growth. In the skin-cleansing
category, all segments and the key brands grew in
double digits (driven by a healthy volume growth)
during the quarter. The PBIT margin of the segment
improved by 295 basis points YoY to 12.2% largely on
account of a higher sales realisation due to the price
increases undertaken in the product portfolio and an
improved revenue mix due to the higher sales of the
premium brands. The company is test marketing the
Magic water-saver laundry detergent in Andhra
Pradesh. The product was launched with the objective
to reduce the amount of water required by the end
consumer to wash clothes. It has extended the Lux
brand to female deodorants to tap the women’s
deodorant market.
� Personal care segment: The personal care segment
maintained the strong growth momentum of the
previous quarter. In Q1FY2013 its revenues grew by
16.7% YoY. The strong growth was driven by a double-
digit volume growth. All brands under the skin care
category maintained the double-digit growth, while
the hair care category recorded a double-digit growth
across formats during the quarter. Dove shampoo
sustained the strong growth momentum with a double-
digit growth in the sales volume. The oral care
segment’s growth improved to double digits during the
quarter. During the same quarter the company
launched the Pepsodent Expert Protection range of
toothpaste for sensitive teeth. The PBIT margin of the
segment remained flat YoY to 25.8% during the quarter.
HPC business’ performance
Particulars Q1FY13 Q1FY12 YoY % Q4FY12 QoQ %
Revenue
Soaps & detergents 3163.1 2557.6 23.7 2834.4 11.6
Personal products 1847.1 1582.3 16.7 1710.9 8.0
Total 5010.1 4139.9 21.0 4545.3 10.2
PBIT
Soaps and detergents 385.2 236.1 63.2 320.1 20.4
Personal products 475.7 410.7 15.8 449.2 5.9
Total 860.9 646.8 33.1 769.3 11.9
PBIT margins (%)
Soaps and detergents 12.2 9.2 295 11.3 89
Personal products 25.8 26.0 -21 26.3 -50
Total 17.2 15.6 156 16.9 26
Food business—an improved performance
� Packaged food segment: The packaged food
segment’s revenues grew by 17.3% YoY to Rs437.0
crore. The revenue growth of above 15% is much better
than the ~10% revenue growth of Q4FY2012. The strong
growth was driven by the strong performance of the
core categories (Kissan Ketchups and Knorr soups grew
in double digits). Kwality Walls had the strongest
quarter on the back of an innovative product portfolio
12Sharekhan Home NextJuly 24, 2012
Trend in raw material cost and advertisement spend
OPM improved to 13.4%
44.0
46.0
48.0
50.0
52.0
54.0
56.0
58.0
Q1F
Y09
Q2F
Y09
Q3F
Y09
Q4F
Y09
Q5F
Y09
Q1F
Y10
Q2F
Y10
Q3F
Y10
Q4F
Y10
Q1F
Y11
Q2F
Y11
Q3F
Y11
Q4F
Y11
Q1F
Y12
Q2F
Y12
Q3F
Y12
Q4F
Y12
Q1F
Y13
R.M
as
% to
sal
es
0.02.04.06.08.010.012.014.016.018.0
ad-s
pend
s as
% to
sal
es
Raw material cost % to sales ad-spends % to sales
and thrust on enhancing its distribution reach. The
margins of the packaged food segment improved by
100 basis points YoY to 5.7% during the quarter.
� Beverages segment: The beverages segment’s revenues
remained muted at 7.4% YoY during the quarter. The
coffee category performed well with both instant and
roast & ground coffee gaining good acceptance in the
domestic market. Moreover, the innovated Bru
continued the category premiumisation.
Food business’ performance (Rs cr)
Particulars Q1FY13 Q1FY12 YoY % Q4FY12 QoQ %
Revenues
Packaged food 437.0 372.5 17.3 348.1 25.6
Beverages 654.1 609.2 7.4 683.2 -4.3
Total 1091.1 981.6 11.1 1031.2 5.8
PBIT
Processed foods 24.8 17.4 42.6 -3.7 -767.9
Beverages 95.0 75.4 25.9 98.4 -3.5
Total 119.7 92.8 29.0 94.7
PBIT margins (%)
Processed foods 5.7 4.7 100.4 -1.1 674
Beverages 14.5 12.4 213.9 14.4 12
Total 11.0 9.5 152.2 9.2 179
Volume growth in consumer business stood at 9%
Despite macro uncertainties and sustained high food
inflation HUL was able to maintain the strong volume
growth of the previous quarter in the domestic consumer
business, which grew by 9% YoY in Q1FY2013. This was
the fourth consecutive quarter when HUL’s volume growth
in the consumer business stood in the range of 9-10%.
The volume growth could be sustained due to innovations
in the product portfolio, enhanced distribution reach and
sustained good growth in the rural markets. However,
going ahead the monsoon has to be keenly monitored, as
a below-normal monsoon would affect the demand in the
rural as well as urban markets. This along with the
sustained high food inflation would moderate the volume
growth momentum of the consumer business in the coming
quarters. However, HUL has a portfolio of strong brands
(straddling the consumer pyramid) which will help in
mitigating the concerns that may show up in the coming
quarters.
Profitability improved YoY
The quarter saw a strong improvement of 216 basis points
YoY in the GPM to 46.1%. Though some of the key inputs
(including palm oil and coffee) corrected from their highs,
the rupee’s depreciation maintained the raw material
inflation during the quarter. Judicious price increases in
the product portfolio, the benefits of a low-cost inventory
and effective buying of the key inputs at the global level
helped HUL to post a strong improvement in the GPM
during the quarter. Some of the savings at the GPM level
were utilised for brand-building activities. Hence, the OPM
improved by just 137 basis points YoY to 13.4% in
Q1FY2013.
Revenue growth mix of volume and value
19.121.1
19.720.0
6.07.8 7.1
13.515.0
1816.4
20.519
5.0
4.6
8.210.7
11.6
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
Q1F
Y09
Q2F
Y09
Q3F
Y09
Q4F
Y09
Q5F
Y09
Q1F
Y10
Q2F
Y10
Q3F
Y10
Q4F
Y10
Q1F
Y11
Q2F
Y11
Q3F
Y11
Q4F
Y11
Q1F
Y12
Q2F
Y12
Q3F
Y12
Q4F
Y12
Q1F
Y13
Volume grow th (%) Price-led grow th (%) Topline grow th (%)
Upward revision in earnings estimates: We have revised
upwards our earnings estimates for FY2013 and FY2014
by 5.0% and 6.2% respectively to factor in the higher than
investor’s eye stock update
10.7
13.3
11.8
16.1
13.8
16.015.4
14.4
11.812.4
12.012.312.5
13.4
12.9
15.1
13.4
12.3
40.0
42.0
44.0
46.0
48.0
50.0
52.0
Q1F
Y09
Q2F
Y09
Q3F
Y09
Q4F
Y09
Q5F
Y09
Q1F
Y10
Q2F
Y10
Q3F
Y10
Q4F
Y10
Q1F
Y11
Q2F
Y11
Q3F
Y11
Q4F
Y11
Q1F
Y12
Q2F
Y12
Q3F
Y12
Q4F
Y12
Q1F
Y13
10.0
11.0
12.0
13.0
14.0
15.0
16.0
17.0
GPM(%) OPM(%)
13Sharekhan July 24, 2012 Home Next
Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.
expected OPM and other income during the quarter. With
the prices of the key inputs showing a softening trend,
we expect the OPM to stand in the range of 13.5-13.8% in
the coming years.
Revised estimates (Rs cr)
FY2013E FY2014E
Prev. Curr. Chg % Prev. Curr. Chg %
Net sales 26750.9 27006.7 1.0 30996.3 31485.0 1.6
Opt. profit 3563.7 3637.7 2.1 4156.5 4277.9 2.9
Adj. net profit 3130.0 3289.3 5.1 3612.7 3832.0 6.1
EPS 14.5 15.2 5.0 16.7 17.7 6.2
Outlook and valuation: Though the strong volume growth
momentum sustained in Q1FY2013, we believe the volume
growth has to be keenly monitored in the coming quarters
in view of the poor monsoon and the persistent high food
inflation. We believe HUL’s portfolio of strong brands
(catering to the masses as well as the premium end of
the market) will help overcome the concerns and maintain
the growth momentum in the coming quarters. Also,
banking on the Indian consumer growth story the company
has maintained its thrust on innovation and enhanced its
distribution reach. These will be the key growth drivers
for the company in the long run. We expect HUL’s top line
and bottom line to grow at a compounded annual growth
rate (CAGR) of 17% and 19% respectively over FY2012-14.
HUL has traded at an average one-year forward multiple
of 27x in the uncertain market environment of the last
twelve months. That is 6% above its four-year average
multiple of 25.5x. We have revised our price target to
Rs479 (valuing the stock at 27x its FY2014E earnings of
Rs17.7). However, with a limited upside from the current
level we maintain our Hold recommendation on the stock.
At the current market price the stock is trading at 31.3x
its FY2013E EPS of Rs15.2 and 26.8x its FY2014E EPS of
Rs17.7.
Valuations
Particulars FY10 FY11 FY12 FY13E FY14E
Net sales (Rs cr) 17764.3 19691.0 22987.7 27006.7 31485.0
Net profit (Rs cr) 2108.2 2134.4 2712.5 3289.3 3832.0
Y-o-Y growth % - 1.2 27.1 21.3 16.5
OPM (%) 14.5 12.1 13.2 13.5 13.6
EPS (Rs) 9.7 9.9 12.5 15.2 17.7
PER (x) 49.3 48.2 37.9 31.3 26.8
P/BV (Rs) 38.9 37.6 28.0 19.8 14.2
EV/EBIDTA (x) 39.1 42.0 32.5 27.1 22.6
RoCE (%) 103.5 100.6 108.8 95.8 79.6
RoNW (%) 87.7 79.0 84.6 74.1 61.5
One year forward PE (x)
One year forward PE band
32x
28x
24x
20x
20.0
23.0
26.0
29.0
32.0
35.0
38.0
Jul-0
4O
ct-0
4Ja
n-05
Apr
-05
Jul-0
5O
ct-0
5Ja
n-06
Apr
-06
Jul-0
6O
ct-0
6Ja
n-07
Apr
-07
Jul-0
7O
ct-0
7Ja
n-08
Apr
-08
Jul-0
8O
ct-0
8Ja
n-09
Apr
-09
Jul-0
9O
ct-0
9Ja
n-10
Apr
-10
Jul-1
0O
ct-1
0Ja
n-11
Apr
-11
Jul-1
1O
ct-1
1Ja
n-12
Apr
-12
Jul-1
2
25
100
175
250
325
400
475
550
Jul-0
4N
ov-0
4M
ar-0
5Ju
l-05
Nov
-05
Mar
-06
Jul-0
6N
ov-0
6M
ar-0
7Ju
l-07
Nov
-07
Mar
-08
Jul-0
8N
ov-0
8M
ar-0
9Ju
l-09
Nov
-09
Mar
-10
Jul-1
0N
ov-1
0M
ar-1
1Ju
l-11
Nov
-11
Mar
-12
Jul-1
2
investor’s eye stock update
14Sharekhan Home NextJuly 24, 2012
Company details
Price chart
Shareholding pattern
Price performance
(%) 1m 3m 6m 12m
Absolute 1.2 9.9 7.9 -23.9
Relative 1.4 10.1 5.7 -17.0to Sensex
Larsen & Toubro Evergreen
Stock Update
Price target revised to Rs1,584 Buy; CMP: Rs1,355
Price target: Rs1,584
Market cap: Rs82,980 cr
52 week high/low: Rs1864/971
NSE volume: 21.7 lakh(no. of shares)
BSE code: 500510
NSE code: LT
Sharekhan code: LT
Free float: 42.3 cr(no. of shares)
Result highlights
� Results exceed expectations; forex loss hurts margins: Larsen and Toubro
(L&T)’s Q1FY2013 results were better than expected mainly on account of a
robust performance by its engineering and construction (E&C) division and a
higher other income. However, the good operating performance was shadowed
by a foreign exchange (forex) loss of Rs267 crore. The order inflow registered a
year-on-year (Y-o-Y) rise of 21% to Rs19,594 crore, led by the spill-over of the
delayed orders from FY2012. The company has maintained its guidance of a 15-
20% growth in both revenues and order inflow for FY2013.
� Order inflow boosted by spill over from FY2012: Of the total order intake of
Rs19,594 crore, about Rs5,000 crore (~25% of total intake) is attributable to
spillovers from the previous quarter; excluding which the order inflow for Q1
would show a de-growth of 10% on a yearly basis. The share of slow moving
orders in the order book has risen to 10% since FY2012. The current order book
stands at Rs1,53,095 crore (up 12% YoY and 5% quarter on quarter [QoQ]). The
majority of the orders were received from the private players in the
transportation, and building and factory segments. Going forward, the company
expects good traction from the new markets like West Asia and South-East Asia.
� Cautious in taking BOT projects: The management indicated that they would
be cautious in taking fresh build-operate-transfer (BOT) orders as their prime
focus now in executing current projects on hand and want to keep equity
Results (Rs cr)
Particulars Q1FY12 Q1FY13 YoY %
Net sales 9,482 11,955 26
Total expenditure 8,334 10,868 30
Operating profits 1,148 1,087 -5
Other income 270 606 125
PBIDT 1,418 1,693 19
Interest 157 228 45
PBDT 1,261 1,464 16
Depreciation 168 192 14
PBT 1,093 1,273 16
Tax 347 370 7
Adjusted PAT 746 902 21
Extraordinary items (38)
Reported PAT 746 864 16
Margins (%)
OPM 12.1 9.1
PATM 7.9 7.5
Tax rate 31.7 29.1
investor’s eye stock update
DIIs38%
Foreign14%
Others48%
9001050120013501500165018001950
Jul-1
1
Sep
-11
Nov
-11
Jan-
12
Mar
-12
May
-12
Jul-1
2
15Sharekhan July 24, 2012 Home Next
investor’s eye stock update
investment requirement under check. They have not
mentioned of any new projects in order inflows
expected in FY2013.
� Estimates marginally upgraded: In view of robust
execution and order inflow in Q1FY2013 along with
spectacular performance of “others” segment (mainly
integrated engineering services) we have upgraded our
earnings estimates by 4-5% for FY2013 and FY2014.
We expect the company’s stand-alone earnings to grow
at a compounded annual growth rate (CAGR) of 9%
over the next two years. Our revised consolidated
earnings per share (EPS) estimate stands at Rs97.9 and
Rs106.5 for FY2013 and FY2014 respectively. Its
overseas business (exports) has increased to 17% this
quarter from the past level of 11-12%, led by sound
execution of orders bagged in FY2012. With such
increasing contribution of its overseas business, we
feel that the impact of fluctuations in foreign
currencies on its performance could become more
unpredictable in the coming quarters.
� Price target revised to Rs1,584: While the company
reported overall robust results for the quarter, the
achievement of yearly order inflow guidance would
be highly subjective to an uptick in infrastructure
development activities in the country and in the Middle
East region. Moreover, excluding BOT projects might
limit the growth in order inflow, especially in the public
private partnership (PPP) projects. At the current
market price the stock is trading at 12.7x its FY2014
consolidated estimates. Our sum-of–the-parts (SOTP)
based price target stands revised upwards to Rs1,584
on account of revised estimate of the standalone
business. We continue to believe that L&T is the best
proxy play on India’s infrastructure growth theme and
hence maintain our Buy rating on the stock.
Valuation (standalone)
Particulars FY11 FY12E FY13E FY14E
Net sales (Rs cr) 44,295.2 53,737.8 61,822.9 69,545.3
Net profit (Rs cr) 3,404.4 4,412.4 4,785.4 5,232.0
EPS (Rs) 55.9 72.5 78.6 85.9
YoY growth (%) 12.2 29.6 8.5 9.3
PER (x) 24.2 18.7 17.2 15.8
P/B (x) 3.8 3.3 2.9 2.5
EV/EBIDTA (x) 13.0 11.9 10.6 9.3
RoCE (%) 20.9 22.4 21.9 21.4
RoNW (%) 17.0 18.8 17.7 17.0
Result highlights and analysis
� Stand-alone sales up 26%: L&T has reported a strong
rise of 26% in its revenues (stand-alone) for Q1FY2013.
The revenue growth was higher than our expectation
of a 13% Y-o-Y growth. This was mainly on account of
strong execution in the engineering and construction
(E&C) segment, which reported a 30% growth in
revenues. The electrical and electronics (E&E) division
reported a subdued 2% Y-o-Y growth in revenues while
the machinery and industrial product (MIP) division
disappointed with a 17% Y-o-Y fall in revenues. The
“others” segment reported a stunning 82% growth Y-
o-Y driven by the integrated engineering business.
SOTP valuation
Particulars Remarks Value (Rs cr) Per share
L&T’s core business At 14x FY2014E estimates 73,248.1 1,196
Subsidiaries
L&T Infotech At 10x FY2013earnings 5,144.8 84
L&T Finance Holdings--82.6% stake At 1.5x FY2012 Book Value 5891.5 96.2
IDPL At 1.5x equity invested 9,000.0 147
Other subsidiaries At Book Value 1,672.2 27
Associates and others 2,021 33
Total subsidiary valuation 23,729.2 387
Fair value 96,977.2 1,584
Robust growth in ‘‘others’’ segment in recent quarters
0%
2%
4%
6%
8%
10%
Q2F
Y10
Q3F
Y10
Q4F
Y10
Q1F
Y11
Q2F
Y11
Q3F
Y11
Q4F
Y11
Q1F
Y12
Q2F
Y12
Q3F
Y12
Q4F
Y12
Q1F
Y13
0%
1%
1%
2%2%
3%
3%
4%
Contribution to PBIT (%)- LHS Contribution to revenue (%)- RHS
16Sharekhan Home NextJuly 24, 2012
� OPM marred by forex loss: The reported operating
profit margin (OPM) stood at 9.1%, much lower than
our expectation of 11.5%. But it included a one-time
foreign exchange (forex) related marked-to-market
(MTM) provision of Rs267 crore (Rs160 crore on
unhedged foreign currency loans) and Rs100 crore for
business related exposure like receivables, payables
as against a gain of Rs35 crore reported in Q1FY2012.
Adjusting for the same, the margin at 11.3% was largely
in line with our expectation for Q1FY2013. The
company maintained its margin guidance at FY2012
level with 50 basis points movement either side in
FY2013 on account of volatility in the input cost, mainly
metal prices.
Expenditure break-up (Rs cr)
Particulars Q1FY12 Q1FY13 YoY (%)
Purchase of finished goods 549.3 501.7 -9
Raw material consumed 2,196.1 3,720.1 69
Stock adjustment (293.7) (511.5) 74
Sub-contracting charges 1,906.9 2,490.5 31
Construction materials 2,023.0 2,089.1 3
Other manufacturing / 923.2 1,062.4 1
Operating expenses
Total material cost 7,304.9 9,352.3 28
As a % of sales 77.0 78.2
Employee expenses 747.9 947.4 27
As a % of sales 7.9 7.9
Selling & administrative expenses 280.9 568.7 102
As a % of sales 3.0 4.8
Total expenditure 8,334 10,868 30
� Other income and lower tax rate aid PAT growth: A
healthy other income, which doubled to Rs606 crore
led by higher treasury gains and dividends from
subsidiaries and associates (Rs292 crore), and a lower
tax rate of 29.1% boosted the adjusted net profit
(including forex losses) to Rs902 crore. This is a Y-o-Y
increase of 21% and higher than our as well as the
Street’s expectations. There was an exceptional item
(expense) of Rs38.3 crore pertaining to the
compensation paid under a voluntary retirement
scheme. The company is in the process of gradually
shifting its manufacturing activities from the high cost
region-Mumbai to its low-cost units in Ahmadnagar and
Baroda. This has led to an increase in expenses towards
voluntary retirement scheme (VRS) for employees.
� Order inflow boosted by spill-over from FY2012: Of
the total order intake of Rs19,594 crore, about Rs5,000
crore (~25% of total intake) is attributable to spill-
overs from the previous quarter; excluding which the
order inflow for Q1 would show a de-growth of 10% on
a yearly basis. The share of slow moving orders in the
order book has risen to 10% since FY2012. The current
order book stands at Rs1,53,095 crore (up 12% YoY and
5% QoQ). In Q1, the company saw better ordering from
the infrastructure space (up 16% YoY) including
transportation and buildings and factories construction,
which contributed 65% to the overall order intake. Of
the total order book, ~11% comprises of overseas
orders, primarily driven by a thrust in orders from the
Middle East region (up 69% YoY). However, the near-
term outlook for the domestic power sector remains
muted, indicated by a 2% fall in order backlog from
this sector as the ordering environment still faces
deferral of award decisions. The orders from the recent
deal signed by L&T with the Mazgaon Dock for the
manufacture of equipments in the defence sector, is
likely to go to the company’s subsidiary, L&T
Shipbuilding. Going forward, the company expects good
traction from the domestic infrastructure and
hydrocarbon segment and the overseas markets like
West Asia and South-East Asia.
Sector-wise order inflow trend- Infrastructure orders shone
investor’s eye stock update
0%
10%
20%
30%
40%
50%
60%
70%
Infr
astr
uctu
re
Pow
er
Hyd
roca
rbon
s
Pro
cess
Oth
ers
Q1FY11
Q2FY11Q3FY11
Q4FY11
Q1FY12Q2FY12
Q3FY12Q4FY12
Q1FY13
Order booking trend
020000400006000080000
100000120000140000160000180000
Q2F
Y10
Q3F
Y10
Q4F
Y10
Q1F
Y11
Q2F
Y11
Q3F
Y11
Q4F
Y11
Q1F
Y12
Q2F
Y12
Q3F
Y12
Q4F
Y12
Q1F
Y13
2.22.32.42.52.62.72.82.93.03.13.2
Order inf low (Rs cr) Order Book at the end (Rs cr)Book to Bill ratio (x)
17Sharekhan July 24, 2012 Home Next
Export order book saw an uptick in recent quarters
02000400060008000
1000012000140001600018000
Q2F
Y10
Q3F
Y10
Q4F
Y10
Q1F
Y11
Q2F
Y11
Q3F
Y11
Q4F
Y11
Q1F
Y12
Q2F
Y12
Q3F
Y12
Q4F
Y12
Q1F
Y13
0%5%10%15%20%25%30%35%40%45%
Order Inflow - Exports (Rs cr) Order Book- Exports (Rs cr)As a % total order inf low
PE band
10x
400600800
10001200140016001800200022002400
Jan-
06M
ay-0
6S
ep-0
6Ja
n-07
May
-07
Sep
-07
Jan-
08M
ay-0
8S
ep-0
8Ja
n-09
May
-09
Sep
-09
Jan-
10M
ay-1
0S
ep-1
0Ja
n-11
May
-11
Sep
-11
Jan-
12M
ay-1
2
27x
20x
14x
investor’s eye stock update
� Debt increased further: During the quarter, the total
debt liability of the company increased by 15% QoQ to
Rs11,373 crore, a majority of which was due to
additional short term loans taken by the company (up
71% QoQ) showing a stretch in its working capital cycle.
The average cost of debt in Q1 was 8.5%.
Key subsidiaries’ performance
L&T Infotech registered a top line growth of 19% in
Q1FY2013, led by growth across verticals and geographies.
The profit after tax (PAT) grew by 39% YoY for the same
period boosted by the rupee’s depreciation. The
performance of its public-listed financial service business-
L&T Finance Holdings has also been robust with a 37% YoY
growth in loans and advances and 25% YoY growth in net
profits.
Performance of L&T Infotech
Particulars Q1FY12 Q1FY13 YoY %
Revenues (Rs cr) 738 877 19
PAT (Rs cr) 95 132 39
PAT Margin (%) 12.9 15.1
Valuation (consolidated)
Particulars FY11 FY12 FY13E FY14E
Net sales (Rs cr) 52,089.1 66,832.5 71,396.2 78,890.2
Net profit (Rs cr) 3,920.9 5,306.8 5,994.6 6,523.7
EPS (Rs) 64.5 86.7 97.9 106.5
Y-o-Y growth (%) -44.5 34.3 13.0 8.8
PER (x) 21.0 15.6 13.8 12.7
P/B (x) 3.3 2.8 2.4 2.1
EV/EBIDTA (x) 13.2 9.3 8.5 8.0
RoCE (%) 12.9 12.8 12.9 12.3
RoNW (%) 15.7 18.0 17.5 16.5
Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.
18Sharekhan Home NextJuly 24, 2012
investor’s eye stock update
Company details
Price chart
Shareholding pattern
Price performance
(%) 1m 3m 6m 12m
Absolute 5.7 -1.7 17.1 -3.6
Relative 5.9 -1.5 14.7 5.2to Sensex
Torrent Pharmaceuticals Ugly Duckling
Stock Update
Strong performance; forex loss spoils the show Buy; CMP: Rs662
Price target: Rs760
Market cap: Rs5,593 cr
52 week high/low: Rs699/505
NSE volume: 44,304(no. of shares)
BSE code: 500420
NSE code: TORNTPHARM
Sharekhan code: TORNTPHARM
Free float: 2.4 cr(no. of shares)
Result highlights
� Q1FY2013 results in line with expectations: During Q1FY2013 the net sales of
Torrent Pharmaceuticals (Torrent) grew by 20.4% year on year (YoY) to Rs736
crore on the back of a 33% year-on-year (Y-o-Y) rise in the international business
and a 13% Y-o-Y increase in the domestic formulation business. The operating
profit margin (OPM) excluding the foreign exchange (forex) loss was 82 basis
points higher YoY at 20.3%. Moreover, the other operating income jumped by
179% YoY to Rs31.2 crore, which included Rs15 crore of non-recurring revenues.
This led the profit before tax (PBT) to jump by 48.3% YoY to Rs165 crore. However,
the profit after tax (PAT) remained flat at Rs102 crore mainly due to a forex
loss of Rs24.7 crore. Excluding the forex loss the PAT would grow stronger by
53.4% to Rs127 crore. The revenues and profit are largely in line with our
expectations.
� Better rupee realisation and new launches in key markets drive growth:
During the quarter, the revenues from the USA jumped by 88% YoY to Rs78.9
crore while the revenues from Brazil, which witnessed three product launches
during the quarter, recorded a 26% growth YoY (from a high base due to the
spill-over effects in Q1FY2012) to Rs135.5 crore. The revenue growth in the
international market can partly be attributed to a 15% better rupee realisation
(Rs55/dollar in Q1FY2013 vs Rs47-48/dollar in Q1FY2012). However, new launches
in the US and emerging markets also played a vital role in driving the strong
revenue growth.
Results (Rs cr)
Particulars Q1FY13 Q1FY12 YoY % FY12 FY11 YoY %
Net sales 736 611 20.4 2594.4 2122.0 22.3
Expenditure 586 492 19.2 2153.3 1817.3 18.5
Operating profit 149 119 25.4 441.1 304.7 44.8
Other operating income 31.3 11.2 179.3 101.5 82.5 23.0
Other income 14 11 22.2 44.5 8.1 450.2
EBITDA 194.7 142 37.4 485.7 312.8 55.3
Interest 9 10 (7.8) 39.45 12.06 227.1
Depreciation 20 20 (0.3) 81.7 62.6 30.6
PBT 165 111 48.3 364 238 53.0
Taxes 37 29 30.1 72.3 72.5 (0.3)
EO/forex loss (gains) (24.7) 20.0 -107.4 27.9
Adj. PAT 127 83 53.4 391.4 248.2 57.7
Reported PAT 102 102.5 (0.7) 284.0 270.2 5.1
EPS 15.0 9.8 53.4 46.3 29.3 57.7
Margins (%)
OPM 20.3 19.5 17.0 14.4
EBIDTA 26.5 23.2 18.7 14.7
PATM 17.2 13.5 15.1 11.7
Tax 22.6 25.8 19.8 30.4
Promoters72%
Foreign5%
Institutions12%
Public & others
7%
Non-promoter corporate
4%
500525550575600625650675700
Jul-1
1
Sep
-11
Nov
-11
Jan-
12
Mar
-12
May
-12
Jul-1
2
19Sharekhan July 24, 2012 Home Next
investor’s eye stock update
� We maintain our estimates, price target and
recommendation: The Q1FY2013 performance has
been in line with our expectations. Therefore, we
maintain our estimates for FY2013 and FY2014. We
maintain our Buy recommendation with the old price
target of Rs760 (implies 13x average earnings for
FY2013-14).
Strong revenue from international business powers the
growth: Torrent recorded a 20.4% Y-o-Y rise in net sales
to Rs735.6 crore from the pharmaceutical business and a
sharp 179% rise in the other operating income to Rs31.3
crore during Q1FY2013. The other operating income
included Rs15 crore as a milestone-based licencing
income, which is non-recurring in nature. Excluding the
non-recurring revenue, the other operating income
jumped by 45.5% YoY to Rs16.3 crore.
The growth during the quarter was mainly driven by the
international business, which enjoyed the benefits of a
favourable currency and a few new launches in the key
geographies.
Indian formulation business picks up but underperforms
industry: The revenues from the Indian formulation
business recorded a 13% Y-o-Y rise to Rs277.8 crore during
the quarter. The growth was better than that seen in the
previous five quarters. However, it was still lower than
the 15.3% growth in the addressable market. The company
is focusing more on expanding the revenues from the
products that have been launched already.
Contract manufacturing business declines on low
offtake: During the quarter, the revenues from the
contract manufacturing business declined by 20% YoY to
Rs64 crore mainly due to a low offtake from one of its
clients. However, the growth is expected to recover in
the coming quarters.
Trend in India formualation
0
50
100
150
200
250
300
Q1F
Y20
09
Q2F
Y20
09
Q3F
Y20
09
Q4F
Y20
09
Q1F
Y20
10
Q2F
Y20
10
Q3F
Y20
10
Q4F
Y20
10
Q1F
Y20
11
Q2F
Y20
11
Q3F
Y20
11
Q4F
Y20
11
Q1F
Y20
12
Q2F
Y20
12
Q3F
Y20
12
Q4F
Y20
12
Q1F
Y20
13
Rs
cr
0.0
5.0
10.0
15.0
20.0
25.0
%
India formulation YoY %
The company launched three new products in Brazil during
the quarter. This coupled with a favourable currency led
the revenue from the Brazilian market to go up by 26%
YoY to Rs135.5 crore. In Q1FY2012, the company had the
spill-over of sales from the previous quarter. Therefore,
the high base effect played a role in the Y-o-Y comparison
during current quarter. Discounting the spill-over
component of the sales, the Y-o-Y growth would have been
87% during the quarter.
With three products launched during Q1FY2013, the
company has now 34 products in the Brazilian market.
Robust growth in US market; turnaround in profits: The
revenues from the US market surged by 88% YoY to Rs783.9
crore. The growth was contributed by a 15% higher
realisation in the rupee against the dollar. Currently,
Torrent has 38 abbreviated new drug applications (ANDAs)
approved of which 19 are actively marketed. Besides, it
has 26 ANDAs pending approvals and 18 ANDAs under
development. During the quarter, the US business turned
profitable again.
Trend in revenue from CRAMS
0102030405060708090
Q1F
Y20
09
Q2F
Y20
09
Q3F
Y20
09
Q4F
Y20
09
Q1F
Y20
10
Q2F
Y20
10
Q3F
Y20
10
Q4F
Y20
10
Q1F
Y20
11
Q2F
Y20
11
Q3F
Y20
11
Q4F
Y20
11
Q1F
Y20
12
Q2F
Y20
12
Q3F
Y20
12
Q4F
Y20
12
Q1F
Y20
13
Rs
cr
-40.0
-20.0
0.0
20.0
40.0
60.0
80.0
100.0
%
CRA MS Y oY %
Revenue trend in US market
0102030405060708090
Q1F
Y20
10
Q2F
Y20
10
Q3F
Y20
10
Q4F
Y20
10
Q1F
Y20
11
Q2F
Y20
11
Q3F
Y20
11
Q4F
Y20
11
Q1F
Y20
12
Q2F
Y20
12
Q3F
Y20
12
Q4F
Y20
12
Q1F
Y20
13
Rs
cr
-1000
100200300400
500600
%
US revenue YoY %
20Sharekhan Home NextJuly 24, 2012
investor’s eye stock update
Heumann (Germany) continues to face pricing pressure:
During Q1FY2013, the revenues from Heumann (Germany)
declined by 6% YoY in rupee terms to Rs78.3 crore and by
9% in euro terms. The decline in the revenue can mainly
be attributed to the pricing pressure faced by the tender-
based business in Germany.
Revenue break-up (Rs cr)
Particulars Q1FY13 Q1FY12 YoY % FY12 FY11 YoY %
India 345.7 326.1 6 1218 1059 15
Domestic form. 277.8 244.8 13 909 842 8
Contract mfg. 63.9 79.4 (20) 296 214 38
Others 4.0 1.9 111 13 4 260
International 421.2 316.0 33 1478 1063 39
Heumann (Germany) 78.3 83.4 (6) 349 297 18
Brazil + Mexico 140.3 110.2 27 493 346 42
Russia/CIS 21.3 11.3 88 70 58 21
Europe 53.2 38.3 39 193 125 54
Rest of world 49.2 30.9 59 157 128 23
USA 78.9 41.9 88 216 109 99
Gross sales 766.9 653.6 17 2696.1 2121.9 27
The other markets like the rest of Europe and the emerging
markets also recorded strong revenues during the quarter
on the back of geographical expansions and a favourable
currency.
Operating profit remains virtually flat: The OPM of the
company improved by 82 basis points YoY to 20.3% mainly
due to an improvement in the raw material cost, which
reduced by 216 basis points YoY to 29.9% of the net sales.
However, the employee costs and other expenses
increased during the quarter which resulted in a marginal
improvement in the OPM during the quarter.
Cost analysis (RS cr)
Particulars Q1 Q1 YoY FY FY YoY
FY13 FY12 % 12 11 %
Adj. material cost 220 196 12.3 863 697 23.9
% of sales 29.9 32.1 33.3 32.8
Employee expenses 153 126 21.6 534 390 37.0
% of sales 20.8 20.6 20.6 18.4
Other expenses 213 170 25.3 756 731 3.4
% of sales 29.0 27.8 29.2 34.5
Total 586 492 2153 1817
Forex loss spoils the show; ex forex net profit jumped
by 53%: Despite the impressive growth in the revenues
and an improvement in the OPM, the net profit remained
flat at Rs102 crore. This was mainly due to a forex loss of
Rs24.7 crore during the quarter against a forex gain of
Rs3 crore in the previous quarter. Excluding the forex gains
and the non-recurring items, the net profit would grow
by a strong 53% YoY.
The company has hedged all export revenues (net
exposure) at Rs53.50 per dollar for the next six months.
Therefore, the forex movement would be crucial for the
company.
Outlook: As expected, the company delivered a strong
performance in Q1FY2013 on most fronts. Although the
benefits of the depreciation in the local currency against
the other major international currencies contributed to
the performance, yet the strong volume growth on the
back of its key product launches is appreciable. The
company maintains its pace of product filing in most of
the geographies like the USA, Brazil and the emerging
markets which will drive its growth. It has hinted that
supply deals with AstraZeneca may take off in FY2014
which would be ramped up subsequently. However,
inconsistent revenues from the contract manufacturing
operations and volatility in the forex market are the key
causes for concerns. We continue to have a positive
outlook on the company’s growth prospects. We expect a
17% revenue compounded annual growth rate (CAGR) and
an 18% profit CAGR over FY2012-14E.
Trend in profit margins
0
5
10
15
20
25
30
Q1F
Y20
09
Q2F
Y20
09
Q3F
Y20
09
Q4F
Y20
09
Q1F
Y20
10
Q2F
Y20
10
Q3F
Y20
10
Q4F
Y20
10
Q1F
Y20
11
Q2F
Y20
11
Q3F
Y20
11
Q4F
Y20
11
Q1F
Y20
12
Q2F
Y20
12
Q3F
Y20
12
Q4F
Y20
12
Q1F
Y20
13
OPM % EBIDTA margin %
21Sharekhan July 24, 2012 Home Next
investor’s eye stock update
Key growth drivers
Markets Growth strategies
Brazil 25-30 new products to be launched by
FY2014-15
USA 16 ANDAs and 8 DMFs under development;
26 ANDA pending approvals
Europe 30 new products to be launched by FY2014-
15; field force expansion
Heumann (Germany) New tenders; entry into new therapy and
shifting of manufacturing base to India
RoW Entry into newer geographies and increased
field force
Mexico Portfolio to grow to 30 products in 4 years
with field force of 200 people
Maintain price target of Rs760 and Buy
recommendation: We maintain our estimates for FY2013
and FY2014. We also maintain our price target of Rs760
(which implies 13x average earnings for FY2013-14) and
Buy recommendation. The stock is currently trading at
11x average earnings for FY2013 and FY2014.
Valuation
Particulars FY210 FY11 FY12 FY13E FY14E
Net sales 1832.9 2122.0 2594.4 3098.9 3544.8
Adjusted net profit 219.2 248.2 391.4 436.7 545.1
Shares in issue (cr) 8.5 8.5 8.5 8.5 8.5
EPS (Rs) 25.9 29.3 46.3 51.6 64.4
PER (x) 25.5 22.5 14.3 12.8 10.3
EV/EBIDTA (x) 16.6 18.7 12.2 10.2 7.8
Book value (Rs/share) 98.2 120.8 141.1 190.8 248.4
P/BV (x) 6.7 5.5 4.7 3.5 2.7
Mcap/sales 3.1 2.6 2.2 1.8 1.6
RoCE (%) 27.1 21.8 30.1 30.9 31.3
RoNW (%) 29.6 26.8 35.3 31.1 29.3
Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.
22Sharekhan Home NextJuly 24, 2012
investor’s eye stock update
Company details
Price chart
Shareholding pattern
Price performance
(%) 1m 3m 6m 12m
Absolute -7.5 -24.9 -15.5 -35.8
Relative -7.3 -24.8 -17.1 -30.0to Sensex
Polaris Financial Technology Ugly Duckling
Stock Update
Price target revised to Rs163 Buy; CMP: Rs114
Price target: Rs163
Market cap: Rs1,136 cr
52 week high/low: Rs181/103
NSE volume: 5.4 lakh(no. of shares)
BSE code: 532254
NSE code: POLARIS
Sharekhan code: POLARIS
Free float: 7.0 cr(no. of shares)
Result highlights
� Revenues in line: In Q1FY2013, Polaris Financial Technology (Polaris)’s revenues
were up 3.9% quarter on quarter (QoQ) to $107.6 million (in line with our
expectations of $106.7 million). On a constant currency basis, the revenues
were up 5.6% QoQ to $109.3 million. IT services’ (including BPO) revenues were
up 3.2% QoQ to $83.1 million, whereas Intellect revenues were up 6.4% QoQ to
$24.5 million.
� Margins disappoint: The margins continued to disappoint; despite rupee benefits
for the quarter and absence of wage hikes. The EBITDA margins declined by 20
basis points to 12.2% in the quarter. Adjusting for hedging loss of Rs12.4 crore
in the revenue line (company has adopted Accounting Standard 30 with effect
from April 1, 2012), the EBITDA margins look more decent at 14.1%. Going
forward, the management expects margins to move in a narrow range in the
coming quarters as currency benefits would be offset by wage hikes and
incremental research and development (R&D) investments in the products space.
Results (Rs cr)
Particulars Q1FY13 Q1FY12 Q4FY12 YoY % QoQ %
USD/INR 52.9 44.7 50.3 18.4 5.3
Revenues 107.6 100.7 103.5 6.9 3.9
Net sales 569.3 450.2 520.3 26.5 9.4
Direct costs 394.7 308.5 356.7 27.9 10.7
Gross profit 174.6 141.7 163.6 23.3 6.7
SG&A 105.3 84.0 98.9 25.3 6.4
EBITDA 69.3 57.6 64.7 20.3 7.2
Depreciation & amortization 12.9 9.6 13.4 35.1 -3.8
EBIT 56.4 48.1 51.3 17.4 10.0
Other Income 13.6 8.0 21.6 70.2 -36.8
Forex gain/(loss) 8.0 5.6 -2.1 42.5 -471.6
Interest 0.8 0.2 0.6 231.9 17.3
PBT 77.3 61.5 70.1 25.7 10.3
Tax provision 16.3 16.9 9.0 -3.8 81.2
PAT 61.0 44.5 61.1 37.0 -0.1
Minority interest -0.2 0.0 -0.1
Net profit 61.2 44.5 61.1 37.4 0.0
EO 10.0 0.0 22.5
Net profit (Adj) 51.2 44.5 38.6 14.9 32.5
EPS (Rs) 6.2 4.5 6.1
EPS Adj. (Rs) 5.1 4.5 3.9
Margin (%)
GPM 30.7 31.5 31.4
EBITDA 12.2 12.8 12.4
EBIT 9.9 10.7 9.9
NPM 10.7 9.9 11.8
Tax rate 21.1 27.5 12.8
Public & Others35%
Promoters29%
Non-promoter corporate
4%
Institutions12%
Foreign20%
95
110
125
140
155
170
185
Jul-1
1
Sep
-11
Nov
-11
Jan-
12
Mar
-12
May
-12
Jul-1
2
23Sharekhan July 24, 2012 Home Next
investor’s eye stock update
� Net income in line, includes profit on real estate sale:
The adjusted net income for the quarter excluding one
offs stood at Rs51.2 crore, up by 32.5% QoQ. However,
the reported net income including profit on sale of real
estate of Rs10 crore and one offs of Rs22.5 crore in
Q4FY2012 (pertaining to sale of real estate of Rs15 crore
and tax benefit on merger of Optimus business of Rs7.5
crore) remained flat at Rs61.2 crore.
� Margins to remain in narrow range due to
investments in R&D and hedging losses in revenues
line: Polaris’ management indicates at stable EBITDA
margins for the coming quarters and for FY2013 despite
rupee benefits. The lower margins performance could
largely be attributed to hedging losses in the revenues
line (revenue of around $25 million hedged at around
Rs50.34 for the next eight quarters). Thus there will
be around Rs11-12 crore of hedging loss per quarter in
the revenue line. This coupled with incremental
investments of Rs95 crore towards product R&D for
FY2013E would restrict any meaningful margin
improvement in the coming quarters.
� Valuation and view: We reset our currency estimates
to Rs53.2 and Rs53.1 and also tweak our margins
estimates to 12.6% and 13.2% for FY2013 and FY2014
respectively. Consequently we have lowered our
earnings estimates by 5.2% and 8.6% respectively for
FY2013 and FY2014. We continue to remain optimistic
on Polaris’ Intellect side of the business. However
macro uncertainties might pose some hindrance in the
medium term. The stock has corrected close to 24% in
the last three months and at the current price of Rs114,
it is available at attractive valuation of 4.7x FY2013
and 4.2x FY2014 earnings estimates. We maintain our
Buy recommendation on the stock with a revised price
target of Rs163.
Focus on product led services business: As per Polaris’
management, the services outsourcing business has
reached a saturation stage and differentiation would be
the key for winning deals. The management expects that
with its product led services business, the company would
be able to garner incremental market share in the global
market place. The management is targeting a revenue
mix between services and products of 70:30 from the
current revenue mix of 77:23. Currently, the management
is looking at a sales funnel of $600 - 681 million. The
company is pursuing atleast six large opportunities across
the globe. Added to this, there are about 40 opportunities
in the US and about 25 in Europe. The company has
earmarked three segments for investment and growth,
core banking and credit cards; treasury and capital
markets, and insurance. The company would be investing
in these segments in FY2013 with results expected from
FY2014 onwards.
Operating matrix
Particulars Q1FY13 Q1FY12 Q4FY12 YoY % QoQ %
Revenues 107.6 100.7 103.5 6.9 3.9
Intellect revenues 24.5 23.5 23.0 4.2 6.4
Services revenues 82.2 76.4 79.8 7.6 3.0
BPO 0.9 0.7 0.7 25.7 29.4
Delivery mix (%)
Onsite 43.1 43.3 42.2 6.4 6.2
Offshore 56.9 56.7 57.8 7.2 2.3
Client contribution (%)
Top 5 clients 39.3 40.8 39.0 2.9 4.8
Top 10 clients 52.7 54.8 52.8 2.8 3.8
Others 47.3 45.4 47.2 11.3 4.1
Employees (nos) 13718 11429 12886 2289 832
Utilisation (%) 80.5 81.0 81.0
DSO days 75 52 63
Client wins 14 15 17
Active clients 267 246 266
Intellect business matrix
Particulars Q1FY13 Q1FY12 Q4FY12 YoY % QoQ %
Geographies
Americas 17.0 15.0 18.0 18.1 0.5
Europe 27.0 24.0 25.0 17.2 14.9
Rest of World 56.0 61.0 57.0 -4.3 4.6
Service lines
License 13.3 21.2 7.8 -34.6 81.5
Professional services 49.3 46.5 48.4 10.5 8.4
Support & maintenance 36.2 27.6 40.6 36.7 -5.1
System integration 1.2 4.7 3.2 -73.4 -60.1
Client wins 9 11 11
Services business mix
Particulars Q1FY13 Q1FY12 Q4FY12 YoY % QoQ %
Geographies
Americas 53.0 53.0 52.0 7.6 5.0
Europe 23.0 25.0 25.0 -1.0 -5.2
Rest of world 24.0 22.0 23.0 17.3 7.5
Service lines
Application 38.5 35.0 38.1 18.3 4.1
maintenance
Application 39.2 44.0 40.7 -4.2 -0.8
development
Testing 20.7 19.2 19.7 16.0 8.2
Others 1.6 1.8 1.5 -4.4 9.9
Client wins 5 4 6
24Sharekhan Home NextJuly 24, 2012
Other highlights:
� Polaris added 14 new clients in the quarter taking the
total active clients to 267. Of the new client wins, 9
were in Intellect and 5 in the services business.
� During Q1FY2013, Polaris made a net employee
addition of 832 people. The total headcount at the
end of Q1FY2013 stood at 13,718 employees. The
utilisation rate was down marginally to 80.5% on a
sequential basis.
� The DSO days increased to 75 days from 63 days in
Q4FY2012. The spike in the quarter can mainly be
attributable to delay in two clients on account of
internal operational errors. The company is taking steps
to reduce the DSO days.
� The cash and cash equivalents at the end of the quarter
stood at Rs329 crore down from Rs390 crore at the
end of the previous quarter. The drop in the cash was
mainly due to a capital expenditure of Rs17 crore,
Rs20 crore towards funding of employee trust and Rs73
crore towards employee annual payments.
� The company has hedges worth $193 million spread
across FY2013 to FY2015. These comprise of $75 million
at an average rate of Rs49.32 for FY2013, $100 million
at Rs50.24 for FY2014 and $18 million at Rs55.62 for
FY2015.
Valuation and view:
We reset our currency estimates to Rs53.2 and Rs53.1
and also tweak our margins estimates to 12.6% and 13.2%
for FY2013 and FY2014 respectively. Consequently we have
lowered our earnings estimates by 5.2% and 8.6%
respectively for FY2013 and FY2014. We continue to
remain optimistic on Polaris’ Intellect side of the business.
However macro uncertainties might pose some hindrance
in the medium term. The stock has corrected close to
24% in the last three months and at the current price of
Rs114, it is available at attractive valuation of 4.7x FY2013
and 4.2x FY2014 earnings estimates. We maintain our Buy
recommendation on the stock with a revised price target
of Rs163.
Valuation
Particulars FY11 FY12 FY13E FY14E
Total revenue (Rs cr) 1586.3 2052.7 2443.3 2731.2
EBITDA margin (%) 13.5 14.2 12.6 13.2
Net profit ((Rs cr) 202.5 220.7 244.4 268.4
EPS (Rs) 20.4 22.2 24.6 27.1
P/E (x) 5.6 5.2 4.7 4.2
EV/EBITDA (x) 2.9 2.6 2.3 1.6
RoE (%) 20.1 17.2 18.3 18.4
RoCE (%) 23.8 23.6 23.4 23.3
Dividend yield (%) 3.9 4.4 4.8 5.3
investor’s eye stock update
One-year forward PE band
18x
15x
12x
9x
6x
3x
0.050.0
100.0150.0
200.0250.0
300.0350.0
400.0450.0
500.0
Jul-0
5N
ov-0
5M
ar-0
6Ju
l-06
Nov
-06
Mar
-07
Jul-0
7N
ov-0
7M
ar-0
8Ju
l-08
Nov
-08
Mar
-09
Jul-0
9N
ov-0
9M
ar-1
0Ju
l-10
Nov
-10
Mar
-11
Jul-1
1N
ov-1
1M
ar-1
2Ju
l-12
Source: Bloomberg
Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.
25Sharekhan July 24, 2012 Home Next
investor’s eye sector update
Telecommunications
Sector Update
Weak reported net adds; Bharti continues to lead
In June 2012 the GSM operators across India (excludingReliance Communications [RCom] and TataTelecommunications [Tata Tele]) added 4.64 million SIMcards, taking the overall base to approximately 677.3million. That is an increase of 0.7% over May 2012’s base.On the net additions front, the June net additions (ofabout 4.64 million) reported a 36.1% decline than thatreported in the previous month.
After May witnessing a robust growth in net adds, theindustry subscriber addition dipped again in June led byweak performance from the new players. The overallsubscriber base grew by a mere 0.7% month on month(MoM; on a restated basis) taking the aggregate GSMsubscriber base across India (excluding RCom and TataTele) to 677.3 million.
Bharti Airtel added over 2 million subscribers; contin-
ues to lead the net addition trend
In terms of players, Bharti Airtel (Bharti) added 2 millionsubscribers, in line with its last three month run rate. Itregistered a flat growth.
In the last quarter (Q4FY2012 which included January,February and March) Bharti had come back very strongly,in terms of subscribers as well as traffic growth, whilethe revenue market share had slipped by 50 basis points.With subscriber additions in April, May and June beingstrong, we believe that the traffic growth momentumwould sustain while the revenue market share is likely to
increase.
Idea net down 31.7% MoM; Vodafone reported a 1.5%
growth for the period
For the month under review Idea Cellular (Idea)’s net
additions were down 31.7% (from 1.76 million in May to
1.2 million). This comes on the back of a decent 18%
growth witnessed in May. Idea continues to gain revenue
market share. As per the latest release by the Telecom
Regulatory Authority of India (TRAI), Idea commands a
15% share in the total telecom revenue space. The impact
of low subscriber addition and a build up of competitive
pressure on tariffs was visible in Idea’s Q1FY2013
performance. On the other hand, Vodafone India
(Vodafone) reported 1.22 million net adds (+1.5% MoM).
Also, the traffic growth momentum continued to be strong
for Vodafone as is visible in its quarterly performance
report.
New players - Uninor, Aircel witness slowdown
New players like Uninor and Aircel posted a dismal
performance for the month, wherein Uninor’s net adds
fell to less than one third its usual run rate (from 1.52
million net adds in May to 0.5 million in June), while Aircel
saw a 40% decline on a M-o-M basis.
View: The Indian telecommunications space is plagued
with a myriad of policy issues and regulatory uncertainty.
We believe that constant media news on the sector with
regards issues like 2G spectrum auction, base pricing,
spectrum refarming, excess payment of spectrum charges
beyond 6.2 MHz and the new 4G spectrum are weighing
on the sector. Thus telecom stocks could be under pressure
in the near term. However, we remain positive on Bharti
from a long-term perspective in view of its valuation. We
maintain our Buy recommendation and price target of
Rs362 on Bharti.
GSM subscriber base
(in million) Total subscribers Net adds Share in net adds %May June Growth % May June MoM growth % May June
Bharti 185.3 187.3 1.1 2.01 2.00 -0.4 27.6 43.1
Vodafone 152.5 153.7 0.8 1.20 1.22 1.5 16.5 26.3
Loop Mobile 3.3 3.2 -3.4 0.48 0.49 0.2 6.7 10.4
BSNL 94.7 94.7 0.0 0.00 - -100.0 0.0 -
Idea 116.0 117.2 1.0 1.76 1.20 -31.7 24.1 25.8
MTNL 3.3 3.2 -3.4 0.01 (0.11) 0.1 (2.4)
Aircel 64.4 64.9 0.8 0.81 0.48 -39.9 11.1 10.4
Uninor 45.1 45.6 1.1 1.52 0.50 -67.1 21.0 10.8
Total Ex Rcom andTata Tele 672.7 677.3 0.7 7.3 4.6 -36.1 100.0 100.0
26Sharekhan Home NextJuly 24, 2012
Idea Cellular
Viewpoint
Displays competitive intensity amid regulatory uncertainty CMP: Rs81
Idea Cellular (Idea)’s Q1FY2013 results were below our as
well as the street’s expectations on the revenue/margin
as well as the earnings front. The key performance
indicators showed a mixed trend. The volume growth came
in at 5.3% quarter on quarter (QoQ), while a strong
competitive environment continued to exert pressure on
the realised rate.
What happened in the quarter gone by?
� Muted top line growth; misses estimates: Idea’s
Q1FY2013 revenue showed a modest 2.5% sequential
growth that was lower than our as well as the street’s
expectations. We expected a 5.2% revenue growth.
The lower revenue growth was on account of pricing
pressure (the average revenue per minute [ARPM] saw
a 2.4% dip on a sequential basis) with no elasticity
(flat minutes of usage on a sequential basis; stood at
379 minutes per user).
� Reported operating profit up 5.8% QoQ; while on an
adjusted basis the same contracted 4.8%: The
leveraging advantage was missing in Idea’s Q1FY2013
performance; prima facie on a reported front though
the operating profit showed an uptick of 5.8% on a Q-
o-Q basis. The same was a result of an exceptional
expense of Rs150 crore booked in Q4FY2012. Adjusting
for the same, the operating profit showed a contraction
of 4.8%; consequently the adjusted margin too
contracted by 200 basis points.
� Earnings miss estimates as well: The net earnings too
missed expectations in line with the miss on revenue
and operating performance fronts. The net earnings
for Q1FY2013 came in at Rs234 crore (-2% QoQ; +32.1%
year on year [YoY]).
Key positives
� Traffic growth +5.3%; sequentially albeit lower than
expectation
� High court approves Spice, Idea amalgamation
� Net Debt/EBITDA at 2.2x
investor’s eye viewpoint
Key negatives
� ARR down 2.4% QoQ: In Q1FY2013 the average
realisation declined (from 42 paise to 41.2 paise;
ie -2.4% QoQ).
� Adjusted VAS share on decline: Though the reported
value added services (VAS) revenue share saw a mild
uptick from 14.3% to 14.5%, from the current quarter
the company has started booking SMS interconnect
charges in VAS. Adjusting for the same the VAS
contribution has contracted.
� Churn level continues to remain sticky
Results (consolidated) (Rs cr)
Particulars Q1FY13 Q1FY12 QoQ % Q4FY12 YoY %
Total revenue 5,504 5,370 2.5 4,521 21.7
Operating profit 1,436 1,357 5.8 1,204 19.2
OPM (%) 26.1 25.3 26.6
Adjusted OPM 1,436 1,507.1 -4.8 1,204 19.2
Adjusted OPM (%) 26.1 28.1 26.6
Depreciation & 832.5 784.4 6.1 702.6 18.5Amortisation
PBIT 603 655 -7.9 501 20.3
Finance & Treasury 267.0 227.5 17.4 246.3 8.4charges (Net)
PBT 336 345 -2.7 255 31.7
Prov. for taxation 101.9 106.3 -4.1 77.8 31.0(Net of MAT credit)
Effective tax rate (%) 30.3 30.8 30.5
PAT 234 239 -2.0 177 32.1
What were the management’s comments?
Competitive intensity in the market place remains high-
The management continued with its earlier stance that
the competitive intensity in the market place continues
to be at an elevated level, and rather than looking at pan
India basis, circle wise competition remains strong with
each circle still having 10-11 operators for subscribers to
choose from.
No call yet taken on loss making circles- In response to
the questioning on future growth and strategy on the loss
making circles (7 circles), and the probability of closing
27Sharekhan July 24, 2012 Home Next
investor’s eye viewpoint
the same, the management opined that it is still
maintaining its calibrated growth approach for these
circles and would not commit higher capex till it gains
substantial revenue market share in these segments.
Capex guidance maintained at Rs3,500 crore- The
management continued to guide for Rs3,500 crore of
capital expenditure (capex) in FY2013. It further
elucidated that the same would be back ended, that is in
line with the revenue and traffic growth which is generally
higher during festive season.
3G a key performance indicator- As on date, Idea has an
active 3G customer base of 3.1 million subscribers, with
an average usage of 375 megabyte per user per month.
The incremental average revenue per user (ARPU) from
3G subscribers is Rs88. The management confirmed that
the volume has been strong post the price reduction in
3G services.
Keenly watching the regulatory environment- In line
with all the other industry players, Idea too is keenly
watching the moves and the outcomes on the regulatory
front in order to undertake its future course of action
and strategy. The company remains hopeful on the 2G
spectrum pricing issue, wherein it has strongly opposed
the Telecom Regulatory Authority of India (TRAI)’s
recommendation (TRAI has recommended Rs18,000 crore
as a pan India reserve price), and has suggested a lower
reserve price for the same.
Our view- Idea’s Q1FY2013 quarterly performance
displayed strong competitive forces playing on the
industry. The same was visible from the limited elasticity
(2.4% QoQ decline in the realised rate); flat minutes of
usage (MoU) and a 2.5% decline in ARPU. Despite strong
execution capabilities, Idea failed to deliver on margin
expansion. In fact on an adjusted basis, the operating
profit margin (OPM) contracted by 200 basis points on a
sequential basis. Along with a challenging operating
environment, the regulatory risk and ambiguity continue
to plague the sector and Idea in specific. Thus we believe
that the stock’s performance is more likely to be directed
by regulatory moves and despite a decent valuation (at
13x 1 year forward price earning ratio [PER] and 5x EV/
EBITDA) we continue with our neutral stance on the stock.
Valuation (Rs cr)
Particulars FY11 FY12 FY13E FY14E
Revenue 15,438 19,489 23,523 26,947
EBIDTA 3,791 5,092 6,434 7,576
EBIDTA margins (%) 24.6 26.1 27.4 28.1
Net profit 898.7 723.0 1338.6 1945.3
EPS 2.7 2.2 3.945 5.868
P/E 27.9 34.8 19.3 13.0
EV/EBIDTA 10.1 7.5 6.1 5.0
Consensus estimates
Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.
28Sharekhan Home NextJuly 24, 2012
Evergreen
GlaxoSmithKline Consumer HealthcareHousing Development Finance CorporationHDFC BankInfosysLarsen & ToubroReliance IndustriesTata Consultancy Services
Emerging Star
Axis Bank (UTI Bank)Cadila HealthcareEros International MediaGateway DistriparksGreaves CottonIL&FS Transportation NetworksIRB Infrastructure DevelopersKalpataru Power TransmissionMax IndiaOpto Circuits IndiaThermaxYes BankZydus Wellness
Apple Green
Aditya Birla NuvoApollo TyresBajaj AutoBajaj FinServBajaj Holdings & InvestmentBank of BarodaBank of IndiaBharat ElectronicsBharat Heavy ElectricalsBharti AirtelCorporation BankCrompton GreavesDivi's LaboratoriesGAIL IndiaGlenmark PharmaceuticalsGodrej Consumer ProductsGrasim IndustriesHCL TechnologiesHindustan UnileverICICI BankIndian Hotels CompanyITCMahindra & MahindraMaricoMaruti Suzuki IndiaLupinOil IndiaPiramal Healthcare (Nicholas Piramal India)PTC IndiaPunj LloydSintex IndustriesState Bank of IndiaTata Global Beverages (Tata Tea)Wipro
Ugly Duckling
Ashok LeylandBajaj Corp
CESC
Deepak Fertilisers & Petrochemicals Corporation
Federal Bank
Gayatri Projects
India Cements
Ipca Laboratories
ISMT
Jaiprakash Associates
Kewal Kiran Clothing
Mcleod Russel India
NIIT Technologies
Orbit Corporation
Polaris Financial Technology
Pratibha Industries
Provogue India
Punjab National Bank
Ratnamani Metals and Tubes
Raymond
Selan Exploration Technology
Sun Pharmaceutical Industries
Torrent Pharmaceuticals
UltraTech Cement
Union Bank of India
United Phosphorus
V-Guard Industries
Vulture’s Pick
Mahindra Lifespace DevelopersOrient Paper and IndustriesTata ChemicalsUnity Infraprojects
Cannonball
Allahabad Bank
Andhra Bank
IDBI Bank
Madras Cements
Shree Cement
Sharekhan Stock Idea
Disclaimer
This document has been prepared by Sharekhan Ltd.(SHAREKHAN) This Document is subject to changes without prior notice and is intended only for the person or entity to which it is addressed to and may contain confidential and/orprivileged material and is not for any type of circulation. Any review, retransmission, or any other use is prohibited. Kindly note that this document does not constitute an offer or solicitation for the purchase or sale of any financialinstrument or as an official confirmation of any transaction.
Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. SHAREKHAN will not treat recipients as customers by virtue of their receiving this report.
The information contained herein is from publicly available data or other sources believed to be reliable. While we would endeavour to update the information herein on reasonable basis, SHAREKHAN, its subsidiaries and associatedcompanies, their directors and employees (“SHAREKHAN and affiliates”) are under no obligation to update or keep the information current. Also, there may be regulatory, compliance, or other reasons that may prevent SHAREKHAN andaffiliates from doing so. We do not represent that information contained herein is accurate or complete and it should not be relied upon as such. This document is prepared for assistance only and is not intended to be and must not alonebetaken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigations as it deems necessary to arrive at an independentevaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. The investmentdiscussed or views expressed may not be suitable for all investors. We do not undertake to advise you as to any change of our views. Affiliates of Sharekhan may have issued other reports that are inconsistent with and reach differentconclusion from the information presented in this report.
This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability oruse would be contrary to law, regulation or which would subject SHAREKHAN and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in alljurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.
SHAREKHAN & affiliates may have used the information set forth herein before publication and may have positions in, may from time to time purchase or sell or may be materially interested in any of the securities mentioned or relatedsecurities. SHAREKHAN may from time to time solicit from, or perform investment banking, or other services for, any company mentioned herein. Without limiting any of the foregoing, in no event shall SHAREKHAN, any of its affiliatesor any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. Any comments or statements made herein are those of the analyst and do not necessarily reflect thoseof SHAREKHAN.
To know more about our products and services click here.