8
Morgan Stanley Research
India Investors’ Summit
2008
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MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Morgan Stanley India
Head of India Research
Ridham Desai
+91 22 2209 7790
Ridham.Desai@morganstanley.com
Strategists
Ridham Desai
Economists
Chetan Ahya
+91 22 2209 7790
Ridham.Desai@morganstanley.com
+65 6834 6738
Chetan.Ahya@morganstanley.com
Sheela Rathi
Tanvee Gupta
+91 22 2209 7730
Sheela.Rathi@morganstanley.com
+91 22 2209 7927
Tanvee.Gupta@morganstanley.com
Saumya Srivastav
+91 22 2209 7084
Saumya Srivastav@morganstanley.com
Sector Teams
Agriculture
Financial Services
Pharmaceuticals/Property
Ashish Jain
Anil Agarwal
Sameer Baisiwala
+91 22 2209 7156
Ashish.G.Jain@morganstanley.com
+852 2848 5842
Anil.Agarwal@morganstanley.com
+91 22 2209 7830
Sameer.Baisiwala@morganstanley.com
Autos/Airlines
Anil Bang
Mangesh Bhadang
+91 22 2209 7072
Anil.Bang@morganstanley.com
+91 22 2209 7073
Mangesh.Bhadang@morganstanley.com
Balaji Jayaraman
+91 22 2209 7811
Balaji.Jayaraman@morganstanley.com
Anosh Koppikar
+91 22 2209 7062
Anosh.Koppikar@morganstanley.com
Mansi Shah
Varun Desa
+91 22 2209 7820
Mansi.S.Shah@morganstanley.com
+91 22 2209 7148
Varun.Desa@morganstanley.com
Hotels/Shipping/Industrials/Utilities
Cement/Construction/Infrastructure/Engineering
Parag Gupta
Akshay Soni
+91 22 2209 7915
Parag.Gupta@morganstanley.com
+91 22 2209 7151
Akshay.Soni@morganstanley.com
Nonferrous Metals & Mining/Steel/Media
Pratima Swaminathan
Vipul Prasad
+91 22 2209 7158
Pratima.Swaminathan@morganstanley.com
+91 22 2209 7807
Vipul.Prasad@ morganstanley.com
Binay Paul Singh
Ketaki Kulkarni
+91 22 2209 7819
Binay.Singh@morganstanley.com
+91 22 2209 7925
Ketaki.Kulkarni@morganstanley.com
Consumer/Textiles/Retail
Saniel Chandrawat
+91 22 2209 7810
Saniel.Chandrawat@morganstanley.com
Software Services
Vipin Khare
+91 22 2209 7765
Vipin.Khare@morganstanley.com
Gaurav Rateria
+91 22 2209 7160
Gaurav.Rateria@morganstanley.com
Oil & Gas/Telecoms/Chemicals
Hozefa Topiwalla
Vinay Jaising
+91 22 2209 7808
Hozefa.Topiwalla@morganstanley.com
+91 22 2209 7780
Vinay.Jaising@morganstanley.com
Nillai Shah
Mayank Maheshwari
+91 22 2209 7157
Nillai.Shah@morganstanley.com
+91 22 2209 7821
Mayank.Maheshwari@morganstanley.com
Divya Gangahar
Surabhi Chandna
+91 22 2209 7172
Divya.Gangahar@morganstanley.com
+91 22 2209 7149
Surabhi.Chandna@morganstanley.com
Kalpesh Makwana
+91 22 2209 7171
Kalpesh.Makwana@morganstanley.com
2
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
CONTENTS
Macro
Fact Sheet............................................................................................................................................................................................4
Strategy................................................................................................................................................................................................6
Economics............................................................................................................................................................................................8
Company Analysis
AXIS Bank........................................................................... 10
Larsen & Toubro ..................................................................84
Bharti Airtel Limited ............................................................. 13
Mahindra & Mahindra ..........................................................87
BHEL................................................................................... 16
Marico Limited .....................................................................90
Cairn India Ltd. .................................................................... 19
Oil & Natural Gas Corp. .......................................................93
Dabur India.......................................................................... 22
Pantaloon Retail ..................................................................96
DLF Limited......................................................................... 25
Parsvnath Developers Limited .............................................99
Educomp Solutions Ltd ....................................................... 28
PTC India Ltd.....................................................................102
Entertainment Network (India) Limited ................................ 30
Ranbaxy Laboratories........................................................104
Financial Technologies........................................................ 33
Reliance Communications Ltd. ..........................................107
Gateway Distriparks Ltd ...................................................... 35
Reliance Energy ................................................................110
Gitanjali Gems Ltd............................................................... 37
Reliance Industries ............................................................113
Glenmark Pharmaceuticals ................................................. 40
Sobha Developers Ltd. ......................................................116
GMR Infrastructure Ltd........................................................ 42
State Bank of India ............................................................119
Grasim Industries ................................................................ 45
Steel Authority of India.......................................................122
HDFC .................................................................................. 48
Sterlite Industries (India) Limited .......................................125
HDFC Bank ......................................................................... 51
Sun Pharmaceutical Industries ..........................................128
Hindalco Industries.............................................................. 54
Suzlon Energy ...................................................................131
Hindustan Unilever .............................................................. 57
Tata Consultancy Services ................................................134
ICICI Bank........................................................................... 60
Tata Steel ..........................................................................137
IDFC.................................................................................... 63
Titan Industries Ltd ............................................................140
Indiabulls Financial Services Ltd ......................................... 66
United Phosphorus ............................................................143
Indian Hotels Company Ltd ................................................. 68
Voltas Limited ....................................................................145
Infosys Technologies........................................................... 71
Wipro Ltd. ..........................................................................148
Jain Irrigation Systems ........................................................ 74
Wire and Wireless India Ltd. ..............................................151
Jaiprakash Associates Limited ............................................ 77
Yes Bank ...........................................................................153
Jet Airways.......................................................................... 80
Zee Entertainment Enterprise Limited ...............................155
Koutons Retail India ............................................................ 82
Appendix
Industry Views ..................................................................................................................................................................................158
Current Earnings Estimates .............................................................................................................................................................160
3
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
India Economic Indicators
Quarterly Performance
National Accounts
Gross Domestic Product (Current Prices, Rs bn)
Gross Domestic Product (Current Prices, US$ bn)
India’s Share of World GDP, %
Gross Domestic Production (Real, YoY %)
Private Consumption (Real, YoY %)
Gross Fixed Capital Formation (Real, YoY, %)
Gross National Savings (% of GDP)
GDP Per Capita (US$)
Debt Level
Total External Debt (US$ bn)
External Debt to GDP Ratio (%)
Retail Debt (to GDP)
International Transactions
Current Account (US$ bn)
Financial Account (US$ bn)
Foreign Direct Investment (US$ bn)
Monthly Performance
External Trade
Trade Balance (US$ bn)
Exports (YoY, )
Imports (YoY, )
Monetary Data
M3 (YoY, , Period End)
USD/ INR (Period End)
Foreign Reserves (US$bn)
Production and Domestic Demand
Industrial Production Index (YoY, )
Prices (Period Average)
Consumer Price Index (YoY, )
Wholesale Price Index (YoY, )
F2001
F2002
F2003
F2004
F2005
F2006
F2007
F1Q08
F2Q08
21,023
459
1.5
4.4
2.6
0.3
23.7
450
22,790
478
1.5
5.8
6.0
4.5
23.5
462
24,546
507
1.5
3.8
2.2
8.7
26.4
481
27,546
600
1.6
8.5
6.9
13.1
29.8
561
31,494
700
1.6
7.5
5.4
11.8
31.8
637
35803
809
1.7
9.4
6.7
15.3
34.3
728
41458
916
1.8
9.6
6.2
14.6
34.8
813
10605
257
NA
9.3
5.6
15.9
NA
NA
10802
267
NA
8.9
5.6
15.2
NA
NA
101
22.5
4.9
99
21.1
5.9
105
20.3
7.7
112
18.2
9.0
123
17.2
10.9
126
15.8
13.0
155
16.5
14.3
NA
NA
NA
NA
NA
NA
-3.6
9.0
3.3
3.4
8.6
4.7
6.3
10.8
3.2
14.1
16.7
2.4
-2.5
28.0
3.7
-9.2
25.4
3.0
-7.9
41.9
8.5
-5.2
16.5
1.7
-5.5
33.9
2.1
F2001
F2002
F2003
F2004
F2005
F2006
F2007
Nov-07
Dec-07
-14.4
19.6
7.0
-11.6
-0.4
-5.0
-10.7
20.3
14.5
-13.7
23.3
24.1
-33.7
28.5
48.6
-51.8
23.4
32.0
-63.2
21.8
21.8
-7.4
26.8
29.3
-5.4
16.0
18.1
17.4
46.6
42.3
15.7
48.7
54.1
12.9
47.6
75.4
12.6
45.0
111.6
14.3
43.7
140.1
15.4
44.5
150.9
19.5
44.0
198.7
23.3
39.4
273.1
22.1
39.4
275.1
5.0
2.7
5.8
7.0
8.4
8.2
11.6
5.3
NA
4.1
7.0
4.3
3.6
4.0
3.4
3.9
5.4
3.8
6.4
4.4
4.4
6.8
5.4
5.5
3.3
5.5
3.6
For India, data is for the financial year (Year - end March)
Sources: CEIC, RBI, CSO, Bloomberg, Morgan Stanley Research
India Economic Forecasts
Real GDP Growth (YoY %)
WPI Inflation (YoY %, Period Average)
Current Account (% of GDP)
Central Government Fiscal Balance (% of GDP)
91-Day T-Bill Yield (year-end)
USD/INR (Period End)
F2002
F2003
F2004
F2005
F2006
F2007
F2008E
F2009E
F2010E
5.8
3.6
0.7
6.2
6.2
48.7
3.8
3.4
1.2
5.9
5.8
47.6
8.5
5.4
2.3
4.5
4.3
45.0
7.5
6.4
-0.4
4.0
5.2
43.7
9.4
4.4
-1.1
4.1
6.1
44.5
9.6
5.4
-0.9
3.7
7.6
44.0
8.4
4.4
-0.9
3.5
6.7
39.5
7.2
4.7
-0.9
3.7
6.5
36.0
7.8
4.4
-0.9
3.7
6.3
36.0
For India, data is for the financial year (Year - end March)
E = Morgan Stanley Research estimates Sources: CEIC, RBI, Bloomberg, Morgan Stanley Research
4
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Charting the India Economy
Exhibit 1
Exhibit 4
Quarterly GDP Growth Trend
Balance of Payments Surplus (as % of GDP)
12
7%
10
5%
8
3%
6
2%
4
0%
2
Source: RBI, Morgan Stanley Research
Source: RBI, Morgan Stanley Research
Exhibit 2
Exhibit 5
Trade Deficit vs Industrial Production Growth
Trade Performance
15%
-10%
13%
-8%
30%
-4%
15%
-3%
Source: Ministry of Commerce, Morgan Stanley Research
Exhibit 3
Exhibit 6
Wholesale Price Inflation (% YoY)
Short-Term Policy and Market Rates
Inflation (YoY%)
Non-Food Non-Global Commodity Linked Inflation (YoY%)
8%
Jun-07
Dec-05
Jan-07
Jan-06
Jan-05
Source: CSO, Ministry of Commerce, Morgan Stanley Research
10%
Jun-04
Dec-02
Jun-01
Jan-04
Jan-03
Nov-07
Jan-07
Mar-06
May-05
Jul-04
Sep-03
Nov-02
Jan-02
Mar-01
May-00
Jul-99
Sep-98
Nov-97
Jan-97
1%
Jan-02
-15%
Jan-01
0%
YOY%, 3MMA
-1%
Jan-00
3%
0%
Jan-99
Trailing 3M Trade
Deficit (As % of GDP,
Annualized, RS, Rev.
Scale)
Jan-98
5%
-6%
Jan-97
8%
Imports in US $ terms
Jan-96
10%
Dec-99
Exports in US$ terms
45%
IIP pushed forward 3
months (% YoY, 3MMA,
LS)
Jun-98
Dec-96
Jun-95
Dec-93
Mar-07
Jun-06
Sep-05
Dec-04
Mar-04
Jun-03
Sep-02
Dec-01
Mar-01
Jun-00
Sep-99
Dec-98
Mar-98
Jun-97
Jun-92
-2%
0
8.50%
Repo Rate
7.75%
7.00%
6%
6.25%
4%
5.50%
2%
91-Day TBill Yield
Reverse Repo Rate
4.75%
Jan-08
Jul-07
Jan-07
Jul-06
Jan-06
Jul-05
Jan-05
Jul-04
Jan-04
Jul-03
Jan-03
Jul-02
Jan-02
Sep-07
Sep-06
Sep-05
Sep-04
Sep-03
Sep-02
Sep-01
Sep-00
Sep-99
Sep-98
Sep-97
Sep-96
Source: RBI, Morgan Stanley Research
Jul-01
4.00%
0%
Source: RBI, Morgan Stanley Research
5
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
India Strategy
Strong Fundamentals, Rich
Valuations
Morgan Stanley Asia
Limited+
Ridham Desai
Morgan Stanley India
Company Private Limited+
Sheela Rathi
Ridham.Desai@morganstanley.com
Sheela.Rathi@morganstanley.com
Key Points
z India has had a roller coaster start to 2008. The market
has already had one bout of exuberance to panic and
we could well have another later this year. The
unambiguous message that comes out from the trading
activity in January is that India remains a high-beta
market, especially when global markets sell off. The
fundamental underpinning this high-beta characteristic is
India’s dependence on portfolio flows to fund its macro
balance sheet.
z No doubt, valuations are now off their highs in early
January but are still very rich by most measures.
Investors have to also worry about the possibility of
slower earnings growth with fewer positive surprises, a
peaking in corporate activity, and lower market trading.
Domestic growth is slowing and India needs lower rates
to stem the slide. Therefore, monetary policy moves will
be important to the market. Retail sentiment, which was
a key driver, may take a while to come back and to that
extent the market is more dependent on institutional
behavior in the first half of 2008.
z The backdrop for the equity markets in early 2008 is that
India is booming versus the US, a prime supplier of
capital to India, which seems to be heading into
recession. Such a contrast in macro economic
conditions lends itself to extreme volatility on the
bourses and to fat-tail outcomes. Our forecast range for
the BSE Sensex is from 11,022 to 28,000 making
volatility the only certainty in 2008. Our base case calls
for an 11% decline in the BSE Sensex to 14,864. Our
sector model portfolio is pitched to take advantage of a
high level of valuation dispersion and combines value
and growth styles.
Fundamentals Appear to be Turning Soft
The central bank has engineered a soft landing and we think
growth is likely to slow in 2008. Morgan Stanley India
economist Chetan Ahya believes growth will likely slow from
9.1% in 1H F2008 to 7.2% in F2009. Investors need to keep
a close watch on credit growth, which is fighting five-year
highs in real interest rates. We think the rate levels are too
prohibitive and need to decline for a recovery in credit growth.
The exogenous risks come from a blow-out in flows or a US
recession. The key upside risk to growth is that India
accelerates infrastructure spending, which also improves
absorption of foreign inflows with the attendant positive effect
on monetary policy.
Corporate activity is unlikely to surpass its 2007 peak in 2008.
M&A activity, especially overseas M&A, is likely to be
constrained by a combination of high valuations and funding
issues because of difficult credit markets. Our bottom-up work
shows that private corporate capital spending is likely to be
lower when adjusted for depreciation in F2009. Corporate
balance sheets are in great shape and we do not see any
change in 2008. Income statements may start becoming less
attractive. Revenue growth for Morgan Stanley’s India
coverage universe has decelerated in recent quarters and,
given the growth slowdown Chetan forecasts, revenue growth
may not accelerate in a hurry. This makes earnings more
dependent on margin expansion, which is an issue, given the
starting point. Therefore, earnings growth will likely slow in
F2009, versus the consensus expectation of 18.3% growth for
the BSE Sensex constituents.
That said, India is one of the few emerging markets that is
experiencing upward earnings revisions at this point in time.
This should definitely provide comfort to investors. The more
discerning issue about earnings is the deterioration in quality.
The high share of financial earnings in pre-tax earnings
creates the bottom-up reflexivity between earnings and share
prices adding to the top down reflexivity emanating from
foreign flows. Strong foreign flows have supported economic
growth, which in turn has driven up earnings and share prices.
Of course, the reverse is also true.
Valuation and Sentiment: Still Room for Correction
The MSCI India index is trading at a trailing P/E multiple of
27x and a trailing P/B multiple of 5.3x, both around 2 sigma
above average, so the market does not look cheap even after
its sharp correction in January. The valuation case becomes
more difficult, given India’s P/E premium to emerging and
global equities at 84% and 91%, respectively, both just off alltime highs. We also know that earnings could be inflated,
given the extended economic growth cycle we have been in –
the share of profits in GDP is well over its historical high. This
implies that absolute multiples are understated, making the
valuation case even weaker.
6
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
The other valuation issue is that dispersion is high, even as it
has come off its recent peak. Valuation dispersion provides
investors the opportunity to make aggressive sector calls in
2008, as we do through our model portfolio. Although
healthcare, consumer staples, technology, and even
consumer discretionary stocks are significantly cheaper than
they have been historically, industrials, financials and
telecoms stocks are off the charts relative to history.
ahead of fundamentals and we are neutrally positioned in the
technology sector, wherein we believe a lot of bad news is
now in the price. Selective mid-cap exposure with a focus on
out-of-favor and large-cap stocks defines our focus list for
2008 (Exhibit 2 & 3).
Exhibit 1
BSE Sensex: Risk-Reward View – 12 Month View
30,000
Rs28,000 (+67%)
Sentiment was extremely buoyant at the start of the year.
That seems to be changing at the margin. Leveraged
positions have come off and so has our proprietary
speculative volume indicator. Breadth has declined from a
15-year high and, even though volatility has increased,
sentiment is no longer exuberant.
Market Outlook: A Bumpy Ride Is Most Likely Outcome
Our residual income model projects a fair value of 14,864 as
at December 2008, implying 11% downside potential from
current levels (Exhibit 1). Our bull case of 21,622 represents
29% upside from current levels, while our bear case implies
downside risk of 34% to December 2008 to 11022. We attach
a 55% probability to the base case and a 20% probability
each to our bull and bear case. In the short run, strong
earnings revisions, the Reserve Bank of India’s comfortable
liquidity position, a benign political environment, growing
success of the central bank in soft landing economic growth,
and robust corporate balance sheets are likely to bring our
bull case into play. The base case is that the US recessionled sell off prolongs and Indian equities suffer because of their
premium valuations and the tendency of India’s beta to rise in
falling markets. The bear case becomes a reality if the US
recession is deep, and is combined with policy errors at home
and a more hostile political environment.
A bubble case scenario, to which we assign 5% probability, is
that the US undergoes a soft growth patch and continues to
receive aggressive Fed stimulus, emerging markets continue
to assert themselves, and India’s growth and relative
valuations remain in good shape; this could take the Sensex
to 28,000. The probability-weighted index objective is 16,104
although our target for the market is our base-case scenario
of 14,864. The market’s absolute performance is still
intricately tied to the outcomes in global financial markets.
Sectors and Stocks: Defensive Tilt
The defensive tilt in our sector model portfolio is quite evident,
with consumer staples, healthcare, telecoms and energy as
key overweight positions and industrials, financials, consumer
discretionary as key underweight sectors. We are also
underweight utilities, for which we believe valuations have run
25,000
21,622 (+29%)
16,729.94
20,000
14,864 (-11%)
15,000
11,022 (-34%)
10,000
Dec 06
Feb 07
May 07
Price Target
Aug 07
Oct 07
Jan 08
Historical Stock Performance
Apr 08
Jun 08
Sep 08
Dec 08
Current Stock Price
Prices as of December 6. Source: FactSet, Morgan Stanley Research estimates
Exhibit 2
India: Sector Model Portfolio
Sector
MSCI
Weight
Portfolio
Weight
Over/Under
- Weight
(%)
(%)
(bps)
Consumer Disc.
Consumer
Staples
3.7
0.7
-300
Perf Rel. To MSCI India
YTD
12m
Perf. (%)
Perf.(%)
-4%
-36%
-23%
3.9
5.9
200
6%
Energy
19.1
21.1
200
0%
30%
Financials
28.7
25.7
-300
6%
27%
-29%
Healthcare
0.0
3.0
300
0%
Industrials
12.3
6.8
-550
1%
28%
Information Tech
11.2
11.2
0
-3%
-46%
Materials
7.9
6.4
-150
-10%
-2%
Telecom
4.5
5.5
100
-6%
2%
Utilities
5.7
2.7
-300
-8%
65%
Cash
0.0
8.0
800
Performance as of January 22 Source: Factset, MSCI, Morgan Stanley Research
Exhibit 3
India: Focus List
Stocks
Arvind Mills
Marico Limited
Reliance Industries
ONGC
HDFC
Union Bank of India
Sobha Developers
Sun Pharmaceutical
Jaiprakash Associates
Tata Steel
Bharti Airtel
Infosys Tech
Sector
Consumer
Consumer
Energy
Energy
Financials
Financials
Financials
Healthcare
Industrials
Materials
Telecom
Technology
Ticker
ARVND IN
MRCO IN
RIL IN
ONGC IN
HDFC IN
UNBK IN
SOBHA IN
SUNP IN
JPA IN
TATA IN
BHARTI IN
INFO IN
Price (Rs)
42
54
2,358
962
2,480
164
642
964
316
671
849
1,378
Prices as of January 22. Source: Factset, MSCI, Morgan Stanley Research
7
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
India Economics
Soft Landing in 2008, Recovery in
2009
Morgan Stanley Asia
(Singapore) Pte.+
Chetan Ahya
Chetan.Ahya@morganstanley.com
Key Points
z Clear signs of growth slowing: Corporate revenue
growth for a basket of 1,850 Indian companies
decelerated to 11.6% in 3Q07 from 32% in 3Q06. From
preliminary analysis, there has not been a significant
improvement in revenue growth in the quarter-ended
December 2007. Other indicators, including industrial
production, export growth (rupee terms), automobile
sales, and cement dispatches corroborate this trend.
Key Economic Indicators: India
2006
2007E
2008E
2009E
GDP Growth
9.6%
8.8%
7.4%
7.8%
CPI Inflation (Average)
6.3%
6.4%
5.3%
4.7%
Current Account (as a % of GDP)
-1.1%
-1.0%
-1.0%
-1.0%
Interest Rates*
6.9%
7.5%
6.6%
6.3%
E = Morgan Stanley Research estimates * Year-end 91-day T-bill yield
Source: RBI, Bloomberg, Morgan Stanley Research
Exhibit 1
Corporate Revenue Growth Decelerates Further
35%
Revenue growth YoY%
30%
25%
20%
15%
z Soft-landing in 2008 and recovery in 2009: Recent
overheating has confirmed that 9-9.5% growth was not
sustainable, forcing policy makers to initiate measures to
slow the economy. We expect the lagged effect of a
relatively tight monetary policy and weaker external
demand to slow GDP growth to 7.4% in 2008 from 8.8%
in 2007. We expect growth to recover to 7.8% in 2009.
Clear signs of a slowdown in growth have emerged over
the past few months. In a recent survey of 319 chief
operating officers and managing directors by the Associated
Chambers of Commerce and Industry, 79% of respondents
felt the conditions in the Indian economy were poised for a
slowdown. The Reserve Bank of India’s (RBI) tightening
measures have lifted the mortgage and consumer borrowing
rates by about 400bp from the bottom. In addition to
monetary tightening, the central bank has shifted its exchange
rate management approach since early March, allowing faster
appreciation of the currency. The rupee has appreciated
about 11.6% against the US dollar since early March 2007.
Indeed, this appreciation has been much higher than that by
other regional currencies. The combined effect of these two
measures, and a slowdown in export demand from the
Sep-07
Jun-07
Mar-07
Dec-06
Sep-06
Jun-06
Mar-06
Dec-05
Sep-05
Jun-05
Mar-05
Dec-04
Sep-04
10%
Jun-04
z Effective easing in monetary policy already
underway: We believe the most important indicator for
assessing the effective monetary policy environment will
be banks’ lending rates, which are already declining.
We believe credit growth decelerating below deposit
growth has increased pressure to cut lending rates
further.
Source: Capitaline, Morgan Stanley Research Note: Data refers to 1,850 companies
developed world, has resulted in weaker domestic and
external demand growth.
More importantly, overheating concerns have been
declining. Over the past few weeks, headline inflation has
moderated well below the RBI’s comfort zone. The more widely
followed wholesale price index slowed to 3.9% during the week
ended January 19, 2008 from the peak of 6.7% during the week
ended January 27, 2007. The inflation-based consumer price
index (industrial workers) moderated to 5.5% in December
2007 from the peak of 7.9% in June 2006. Inflation, excluding
food and global commodity-linked products (core inflation),
decelerated to 6% for the week ended January 19, 2008 from
the peak of 6.5% (average) in April 2007.
Property purchase transactions have declined significantly,
with price declines evident in some areas. In 3Q07, mortgage
disbursement by the three largest mortgage lenders in India –
ICICI Bank, HDFC, and LIC Housing – was up just 3% YoY,
further reflecting weakening property demand. These three
lending companies combined account for about 42% of the
all-India mortgage loan portfolio. The trailing four-quarter
current account deficit (excluding remittances), though high,
has stabilized at around 4.5% of GDP. Credit growth
moderated to 22.5% in the fortnight to January 18, 2008 from
a peak of 33.1% in June 2006.
8
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Exhibit 2
Improving Demand-Supply Balance
30%
Production Growth
( YoY%, 3MMA)
Consumer Goods
Capital Goods Growth
20%
10%
0%
Jun-07
Jun-06
Jun-05
Jun-04
Jun-03
Jun-02
Jun-01
Jun-00
Jun-99
Jun-98
Jun-97
Jun-96
-10%
Jun-95
Slowing consumption, strong capex improving
underlying demand-supply imbalance: The RBI’s policy
measures have successfully engineered a soft landing in the
growth cycle. More importantly, we believe these measures
should gradually improve the demand-supply imbalance,
which was at the heart of recent overheating of the economy.
Although consumption spending has significantly moderated,
investment growth has remained strong. The interest-ratesensitive segments, such as automobiles and consumer
durables, have reported an extremely weak trend over the
past two quarters. However, growth in capital goods
production has remained steadily high. Although a higher
cost of capital and slowing consumption demand will result in
some moderation of capex growth, we expect it to remain
relatively high.
Source: CSO, Morgan Stanley Research
Exhibit 3
35%
YoY%
Credit Growth
29%
24%
18%
13%
Deposit Growth
Oct-07
Jan-07
Apr-06
Jul-05
Oct-04
Apr-03
Jan-04
Jul-02
Oct-01
Jan-01
Apr-00
Jul-99
Oct-98
Jan-98
Apr-97
Jul-96
Oct-95
Jan-95
7%
Source: RBI, Morgan Stanley Research
Exhibit 4
Mortgage Lending Rates Have Peaked
13
Phase I - 50 bps hike in 17 months
12
Phase II - 150 bps hike in 10 months
11
Phase III - 250 bps hike in 4 months
10
9
8
Oct-07
Apr-07
Oct-06
Apr-06
Oct-05
Apr-05
Oct-04
Apr-04
Oct-03
Apr-03
Oct-02
7
Apr-02
Recovery in 2009
We expect growth to recover to 7.8% in 2009 driven by an
improved global environment and a gradual improvement in
supply response, particularly for infrastructure, allowing policy
makers to pursue a more constructive monetary policy. The
key risk to our view is a deeper recession in the US and
prolonged risk aversion in global financial markets.
Credit Growth Decelerating Below Deposit Growth
Oct-01
No immediate official rate cut, but effective monetary
policy easing to continue: We do not expect a policy rate
cut in the near term. First, although investment growth has
picked up, a long gestation period, particularly for
infrastructure, implies that effective supply (commissioning) of
new capabilities will take a long time. Therefore, we believe
the RBI would like to keep aggregate demand growth at
current moderated levels before it reverses its monetary
policy stance. Second, the RBI remains concerned about
higher global oil prices and food prices weighing on
inflationary expectations. Morgan Stanley oil and gas analyst
Vinay Jaising estimates that if oil prices stay at current levels
and domestic prices are kept unchanged for the next 12
months, the oil subsidy burden would increase to 2.1% of
GDP. The longer oil prices stay at current levels, the higher
the pressure on the government to hike domestic fuel prices.
Similarly, although international food price inflation has
moderated recently, the absolute levels remain elevated. We
believe the RBI would prefer to see a meaningful correction in
international oil and food prices before officially signing off on
a loosening of monetary policy. Meanwhile, market forces will
ensure that banks continue to pursue a moderate reduction in
lending rates. This will be inevitable, as credit growth is now
lower than deposit growth, resulting in a fall in the creditdeposit ratio. We maintain our view for lending rates to fall to
fall by 50bp over the next three months.
Source: Morgan Stanley Research
9
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Axis Bank
Growing at a Fast Pace
Morgan Stanley Asia Limited
Anil Agarwal
Anil.Agarwal@morganstanley.com
Morgan Stanley India
Company Private Limited
Anil Bang
Key Statistics
Stock Rating: Equal-weight
Reuters: AXBK.BO Bloomberg: AXSB IN
India Financial Services
In-Line
Price target
Rs550.00
Share price, close (January 22, 2008)
Rs985.95
Market cap (bn)
US$ 9.0
52-Week Range
Rs1,1291-399
Shares outstanding, basic, currency (mn)
356
Anil.Bang@morganstanley.com
Company Description
Axis Bank is one of the new generation private sector banks in India. It
was started in 1994 by UTI, which currently holds a 27% stake in the
bank. Over the last couple of years, the bank has made rapid strides in
increasing its retail focus causing an improvement in earnings quality.
The bank currently has a fully connected network of 608 branches and
2595 ATMs.
Mansi Shah
Mansi.S.Shah@morganstanley.com
Investment Conclusion
Axis Bank is the third-largest private sector bank in India and
has been growing quite rapidly over the past few years. Axis
Bank has been able to show good progress in almost all its
revenue items, such as fee income and net interest income
(by improving its net interest margin) over the past few years,
which has led to profit growth remaining quite strong.
We expect earnings progression to remain strong. However,
we believe the current valuations are full, at 28x F2009E
earnings and 3.6x F2009E book, and factor in the strong
earnings growth potential.
Recent Developments
Axis Bank reported 3Q F2008 earnings of Rs3.1 billion, up
66% YoY and 35% QoQ. All the revenue items reported very
strong growth resulting in revenue growth of 84% YoY. Net
interest income rose 91% YoY and 27% QoQ, mainly backed
by a 63bp QoQ net interest margin expansion. Fee income
and capital gains were up a strong 78% YoY and 65% YoY,
respectively. However, credit costs also increased
significantly to about 1.7% of loans, as Axis Bank’s coverage
is quite low and loan portfolio is relatively unseasoned.
Key Investment Issues
Axis Bank reported very strong expansion in its net interest
margins during 3Q F2008, leading to its reported net interest
margin at 3.9%. We need to see if the bank is able to sustain
margins at that level. Also, low loan loss coverage and large
unseasoned book are likely to keep credit costs high.
Valuation Methodology
We use a residual income model to derive our price target.
We assume 14.6% cost of equity. Axis Bank is trading at 28x
F2009E EPS and 3.6x F2009E book, which appears
expensive compared to ROE of 14% in F2009E.
What We Like
•
High growth leading to increase in market share: Axis
Bank has been growing very quickly. It loan CAGR in the
past three years is over 50%, leading to an increase in
market share from 1.1% in F2004 to close to 2% now.
•
Strong fee income progression: Axis Bank has shown
strong fee income progression in all areas. Fee income
as a percentage of assets rose to 1.6% in 3Q F2008 from
1.3-1.4% for the previous few quarters.
•
Strong margins: Axis Bank has reported strong
expansion in margins in the past few quarters because of
improvement in the proportion of low-cost deposits. It is
also benefiting from a decline in wholesale yields, as it is
also dependent on market borrowings to some extent.
What We Don’t Like
•
Credit costs expected to remain high: Axis Bank has a
very low loan loss coverage of 48%, which means any
unexpected increase in non-performing loans would have
to flow directly through the P&L. Also, a large part of its
loan book is unseasoned, so credit costs are likely to
remain high.
•
Cyclical pressures on funding side: Axis Bank is
benefiting from easing wholesale yields. However, its
dependence on wholesale funds makes it vulnerable to
any sharp movements in short yields, which could affect
its margins adversely.
10
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Risk-Reward Snapshot: Axis Bank
Investment Thesis
Risk Reward View: Implies More Downside Than Upside Potential
Rs1,400
1,200
Rs1,100 (+12%)
Rs985.95
1,000
800
600
Rs550 (-44%)
400
200
• Growing quickly – Axis Bank has
been growing its assets aggressively.
Its market share of system loans has
doubled in the past three years.
• Credit costs are likely to rise on
account of low coverage ratio at
around 48% and large portion of loan
book being unseasoned.
• Valuations – full – trades at 28x
F2009E earnings and 3.6x book.
Rs450 (-54%)
Key Value Drivers
0
Jan 06
May 06
Sep 06
Price Target
Jan 07
May 07
Sep 07
Historical Stock Performance
Jan 08
May 08
Sep 08
Jan 09
Current Stock Price
• Loan growth
• Net interest margin
• Credit costs
Price Target Rs550
Derived from base-case scenario using residual income methodology.
Potential Catalysts
Bull case
Rs1,100
31x F2009E
Loan growth remains strong. Loan growth declines, albeit at a lesser
EPS, 4.0x
rate in F2008-09. Margins improve by around 25-30bp and credit costs
book
decline by around 30bp from our base case in F2008-09.
16x F2009E
Margins to improve marginally, credit costs increase. Loan growth
EPS, 2x book
slows from F2007 level of 65% to around 45% and 30% in F2008 and
• Short-term interest rates: Axis Bank’s
margins are geared to short-term
interest rates, as the bank relies on
wholesale funds to some extent. A
sharp movement in interest rates
either way would have a significant
bearing on the stock’s performance.
Base case
Rs550
F2009. Margins improve slightly from F2007 levels. Credit costs rise as
the bank will need to catch up, given its current low stock of provisioning.
Bear case
Rs450
13x F2009E
Pressures on margins and credit quality intensify. Slowdown in loan
EPS, 1.6x
growth sharper than in the base case. Margins decline and the increase in
book
credit costs is higher.
Risks
• Higher- and sooner-than-expected
increase in credit costs.
• Upward movement in short-term
interest rates.
Bear to Bull: Credit Costs and Margins are Key Variables
1,400
1,200
125
Indian Rupee (Rs)
275
1,100
1,000
800
150
600
400
40
25
35
550
450
200
0
Bear
Case
LLP Rise
Decline in Slower loan
NIMs
Growth
Base
Case
Strong loan
Growth
NIMs
improve
LLP rise at
a lower rate
Bull
Case
Source: Morgan Stanley, FactSet
11
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Axis Bank: Financial Summary
Rs million; Years Ending March
Profit and Loss Statem ent
Per Share Data and Valuations
Rs Mln (Year end March)
F2006
F2007
F2008E
F2009E
Interest Income
28888
45604
65107
88909
Per Share Data
Interest Expense
18106
29933
42335
58488
EPS
Net Interest Incom e
10782
15671
22772
30421
Book Value
Core Op. Profit
---Fee Income
4889
7790
10360
13676
---Forex Income
869
1248
1623
2061
---Capital Gains
1298
609
1200
1500
---Miscellaneous Inc.
Total Non Interest Incom e
Total Operating Incom e
---Employee Exp
Rs Mln (Year end March)
DPS
240
454
568
710
7296
10101
13751
17946
PE
18079
25772
36523
48368
Price to Book
2402
3813
5911
7861
F2006
F2007
F2008E
F2009E
17.4
23.4
29.8
35.5
103.1
120.5
245.9
274.1
31.0
46.2
47.5
62.9
3.5
4.5
5.0
5.5
56.6
42.1
33.1
27.8
9.6
8.2
4.0
3.6
31.8
21.3
20.7
15.7
0.4%
0.5%
0.5%
0.6%
F2006
F2007
F2008E
F2009E
7.9%
Valuations
Price to Core Op. Profit
---Other Expenses
5739
8332
12499
16623
Total Operating Expenses
8141
12146
18409
24485
Operating Profit
9938
13626
18113
23883
910
1657
1000
1000
Rs Mln (Year end March)
---Loan Loss Provisions
1271
737
2033
3382
Spread Analysis
Total provisions
2625
3664
3533
4882
Average yield on assets
7.2%
7.7%
7.7%
Profit Before Tax
7313
9962
14581
19001
Cost of earning assets
4.5%
5.1%
5.0%
5.2%
Provision for Tax
2462
3372
4899
6384
Net Interest Margin (NIM)
2.7%
2.7%
2.7%
2.7%
---Prov. For Investment Dep.
Net Profit
4851
6590
9682
12617
Core Operating profit
8640
13017
16913
22383
Balance Sheet Data
Rs Mln (Year end March)
F2006
F2007
F2008E
F2009E
Share holders equity
28722
33932
87474
97518
Deposits
Dividend Yield
Ratio Analysis
Grow th Ratios
Net Interest Income
47.5%
45.3%
45.3%
33.6%
Non Interest Income
75.5%
38.4%
36.1%
30.5%
Operating expenses
40.0%
49.2%
51.6%
33.0%
Operating Profit
75.7%
37.1%
32.9%
31.9%
401135
587856
793606
1031687
Net Profit
45.0%
35.9%
46.9%
30.3%
Borrow ings
26809
51956
51956
62347
EPS
20.5%
34.4%
27.4%
19.0%
Other Liabilities & Prov.
40645
58828
82288
99884
Deposits
26.5%
46.5%
35.0%
30.0%
497311
732572
1015324
1291437
Advances
43.0%
65.3%
45.0%
30.0%
Total Assets
31.8%
47.3%
38.6%
27.2%
Total Liabilities
Cash & Balances w ith RBI
Balances w ith Banks
24294
46610
65650
84620
12124
22573
28216
32448
Investments
215274
268972
355034
442202
Return On Equity
18.4%
21.0%
15.9%
13.6%
Advances
223142
368765
534709
695122
Return on Assets
1.1%
1.1%
1.1%
1.1%
5677
6732
8078
9290
45.0%
47.1%
50.4%
50.6%
1.9%
2.0%
2.1%
2.1%
9.4%
Fixed Assets
Profitability Ratios
Other Assets
16800
18921
23637
27754
Efficiency Ratios
Total Assets
497311
732572
1015324
1291437
Cost Income Ratio
Expenses/Avg Assets
Earning Assets
474834
706919
983609
1254392
Average Interest Earning Assets
413187
590877
845264
1119001
Average Loans
189586
295954
451737
614915
Tier 1 Ratio
7.3%
6.4%
10.9%
6.0%
5.1%
6.9%
8.0%
Tier 2 Ratio
3.8%
5.2%
5.2%
5.2%
279
282
356
356
11.1%
11.6%
16.1%
14.5%
Avg Equity / Avg Assets (%)
No Of Shares (mn)
Capital Ratios
Capital Adequacy Ratio
Asset Quality
Annual LLP / Advances (bps)
Gross NPL
67
25
45
55
3780
4187
6652
10408
Net NPL
2198
2663
4203
6353
Reserve Coverage
1581
1523
2450
4055
Gross NPL Ratio
1.3%
1.0%
1.0%
1.5%
Net NPL Ratio
0.8%
0.7%
0.8%
0.9%
41.8%
36.4%
36.8%
39.0%
Coverage Ratio
Source:Company Data, Morgan Stanley Research
E=Morgan Stanley Research Estimates
12
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Bharti Airtel Limited
Towering Ahead
Morgan Stanley India
Company Private Limited +
Vinay Jaising
Vinay.Jaising@morganstanley.com
Surabhi Chandna
Key Statistics
Stock Rating: Overweight
Reuters: BRTI.BO Bloomberg: BHARTI IN
India Telecommunications
Attractive
Price target
Rs1,275.00
Share price, close (January 22, 2008)
Rs849.30
Market cap (mn)
Rs1,610,103.00
52-Week Range
Rs1149.00-Rs661.25
Shares outstanding, basic, currency (mn)
1895.90
Surabhi.Chandna@morganstanley.com
Investment Conclusion
Bharti is the number one wireless operator in India. It has
increased its wireless market share by 242bp in the past 12
months to 23.6% and is investing US$3.3-3.5 billion in F2008
to increase its coverage to 75% of the country’s population. It
plans to cover over 95% by F2010. We estimate an F2007-10
revenue CAGR of 31% and operating and net profit growth of
36% per annum.
Recent Developments
In F3Q08, the company added 6.3 million wireless
subscribers, its highest ever. Its overall wireless subscriber
base stood at 55.2 million, up 73% YoY and 13% QoQ. Bharti
had a market share of 23.6%, up 24 bps sequentially and
215bps YoY. Bharti accounted for an impressive 25.6% of
the country’s overall wireless net adds in the quarter. In the
wireline segment, Bharti added 103k subscribers, with the
overall base at 2.2 million. The company posted YoY and
QoQ gross sales growth of 42% and 10%, and EBITDA
growth of 48% and 9%, respectively. Gross and net EBITDA
margins improved 155 bps and 174bps YoY to 37.7% and
42.6%, though declined marginally QoQ. A lower effective tax
rate of 8.2% led to higher-than-expected net profit growth of
42% YoY and 7% QoQ.
Key Investment Issues
•
Timing of unlocking of value from the tower business.
•
Current spectrum requirement and constraints faced
because of the lack of such spectrum.
Valuation Methodology
We value Bharti based on a sum of the parts, adding our DCF
value for the core business to the value derived from its tower
business. Our value for the core business is the mid-point of
the value derived from our DCF calculation on a one-year
forward basis, assuming a terminal growth rate of 4% and
cost of capital of 10.7%. We base our tower business
valuation on Reliance Communications’ recent transaction
with private equity investors, in which that company sold 5%
of its tower business at an enterprise-based value of US$265k
per usable tower as of March 2008.
Company Description
Bharti Airtel Limited is a nationwide, private-sector, integrated telecom
service provider in India. It is the country’s leading wireless service
provider with a 32% share of GSM subscribers and 24% of wireless
subscribers. It also offers access, long-distance, and broadband
services. SingTel has a 30.5% effective stake in the company.
What We Like
•
Focused on increasing coverage: Bharti plans to invest
an impressive US$3.3-3.5 billion in F2008 to enhance its
coverage by adding 25-30,000 base transmission
stations and to increase its population coverage to 75%.
•
Increasing market share: Bharti has increased its
wireless market share by 242bp in the past 12 months to
23.6% and we expect this to peak at 23.9% in F2008.
•
Bharti has been able to control its three key financial
variables effectively, these being gross revenues,
annualized gross revenues-to-capex, and opex-to-net
revenues. As a result, growth has remained on track,
despite a significant rise in capex. Revenues have risen
in the past 12 quarters, triggered by tariff cuts, thereby
leading to more subscribers and an increase in traffic —
via higher minutes of usage and a larger subscriber base.
What We Don’t Like
•
Intense competition can dilute dominance: Bharti
faces risk of dilution of its dominance because of intense
competition in the Indian telecom sector, which has 12
operators in the wireless segment alone.
Sensitivity Analysis
Our base case assumes 21% net adds for Bharti from 2H
F2009, as against 27% currently, and a dip of 9.4% per
annum in ARPUs from F2007 through F2010. We have done
a sensitivity analysis of the impact of increased competition
on Bharti – both on share of net adds and on ARPU decline.
Although increased competition could lower the valuation of
the core business, the tower business valuation would
increase because of higher tenancy. Our sum-of-parts value
for our most conservative assumption, under our sensitivity
analysis, is Rs1,079, 27% above the current market price.
13
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Risk-Reward Snapshot: Bharti Airtel Limited
Investment Thesis
Strong Overall Metric Driving Growth
Rs1,600
Rs1,404 (+65%)
1,400
Rs 1,275 (+50%)
1,200
Rs 849.30
Rs971 (+14%)
1,000
800
600
• India is the world’s fastest-growing
telecom market.
• Bharti is India’s leading wireless
operator, and has increased its
market share by 240bp in the past
12months.
• Continued acceleration in net adds
leading to strong quarterly
performances.
400
Key Value Drivers
200
Jan 06
Jun 06
Sep 06
Price Target
Jan 07
Jun 07
Oct 07
Historical Stock Performance
Price Target Rs1,275.00
Jan 08
May 08
Sep 08
Jan 09
Current Stock Price
Derived from base-case scenario.
Bull case
39x bull-case Less intense competition: 1) 8.4% per annum decline in ARPU
Rs1,404.00 F2008E EPS from F2007-10; 2) long-term EBITDA margins at 45%; and 3) a
100bp increase in wireless market share by F2010.
Base case 37x baseStrong operational performance: Annual decline of 9.4% in
Rs1,275.00 case F2008E ARPU for F2007-10E as the company expands in rural India;
EPS
EBITDA margins to stabilize at 43% by F2009; WACC of 10.7%.
Bear case
Rs971.00
32x bearIntensifying competition affect operations: Increasing
case F2008E competition leads to a 12.8% annual decline in ARPU; long-term
EPS
EBITDA margin at 40% because of economies of scale; 60bp
reduction in wireless market share in F2010; 60bp increase in
WACC.
Indian Rupee (Rs)
Competition to Determine Future Dominance
1,550
1,450
1,350
1,250
1,150
1,050
950
850
750
650
Price Target: 1,275
85
50
77
55
24
1,404
71
25
1,275
46
971
Bear
Case
Bharti gets Increase in
EBITDA
Market
Drop in
25% benefit WACC by
Margin at
share
ARPUs
60bps
increase by 40% Levels reduction from Tower
by 100bps business
7.5%
Wireless
Bus.
Base
Case
Drop in
ARPUs
decrease
by 5%
Increase in Increase in
Market
EBITDA
Margins by share by
100bps
2.5%
Bull
Case
• Bharti should turn FCF positive in
F2009 and may institute a dividend.
• Improvement in EBITDA margins,
driven by economies of scale and
improvement in wireless business
margins.
• Strong net adds market share
• Tower business could increase
earnings 10-15% on consolidation.
Potential Catalysts
• Unlocking value in the tower business
through listing, strategic sale.
• Lowering of telcos’ revenue share
pertaining to license fees. We
estimate the license fee may be
reduced to 6% from a weighted
average of 10%, as suggested by the
Telecom Regulatory Authority of India.
• Bharti getting additional spectrum in
the near future.
Risks
• The CDMA operators resume major
handset subsidies.
• Competition from regional operators
intensifies, leading some to exit the
business or consolidate.
• Regulatory uncertainty regarding
spectrum.
Source: Morgan Stanley, FactSet
14
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Bharti Airtel Limited: Financial Summary
Rs million; Years Ending March
Income Statement
Rs mn (Year ending March 31)
Cash Flow Statement
F2007
F2008E
F2009E
F2010E
22,453
29,222
35,301
40,924
Profit/(Loss) before tax
48,850
77,267
99,391 124,904
141,442 216,035 290,409
336,367
Depreciation
23,467
35,744
49,024
57,224
1,506
1,506
1,506
1,506
Revenues
Wireline
Wireless
Long distance - Domestic
Long distance - International
Data
Rs mn (Year ending March 31)
F2007
F2008E
F2009E
F2010E
Operating Activities
27,751
30,991
34,910
38,323
Amortization
7,942
9,687
10,211
12,214
Direct Taxes Paid
(5,330)
(8,731)
9,049
14,543
Changes in Working Capital
(11,231) (14,114)
23,370
33,225
20,869
22,620
1,551
(7,905)
Gross Revenues
208,637 300,478 394,201
461,052
Prior period adjustments
-
-
-
-
Eliminations
(23,452) (32,055) (36,841) (43,855)
Operating Cash Flows
91,049
130,285
145,449 164,836
Total Operating Revenues
91,660
138,638
107,541
185,185 268,424 357,361
417,197
Investing Activities
EBITDA
74,262 114,160 153,552
185,366
Purchase/(Sale) of Fixed Assets
Depreciation
23,467
35,744
49,024
57,224
Investing Cash Flows
Financing Activities
Proceeds from Issue
of Share Capital
Repayment of
Long Term Borrowings
Amortization
1,506
1,506
1,506
1,506
Non Operating Income
1,064
2,236
1,576
1,489
Interest Expenses
1,438
1,879
5,208
3,222
Profit before Tax
48,850
77,267
99,391
124,904
5,822
10,817
13,915
17,487
43,028
66,450
85,476
107,417
Income Tax
Profit after Tax
Minority Interest
Consolidated Net Profit
467
721
928
1,166
42,561
65,728
84,549
106,251
Change in Shareholders Equity
Change in Other
Non-Current Liabilities
21
-
5,066
20,336
783
-
1,140
4,825
-
(11,685)
-
(1,461)
5,571
10,137
Dividends Paid
Dividend Tax
Balance Sheet
Rs mn (Year ending March 31)
Financing Cash Flows
F2007
F2008E
F2009E
F2010E
Share Capital
18,959
18,959
18,959
18,959
Share Premium
56,645
56,645
56,645
56,645
Reserves & Surplus
60,083 112,665 171,849 235,600
Shareholders' Funds
-
-
(11,203) (40,052)
-
-
5,516
3,120
(22,546) (37,778)
(2,818)
(4,722)
(36,259) (82,655)
Cash & Marketable Securities
Beginning balance
SOURCES
82,517
(92,397) (138,638) (107,541) (82,517)
Ending Balance
5,921
10,155
11,939
13,587
10,155
11,939
13,587
13,251
Ratio Analysis
135,553 188,136 247,320 311,071
F2007
F2008E
F2009E
F2010E
Deferred Tax Liability
(1,198)
888
3,572
6,944
Valuation
Loan Funds
52,461
72,797
61,594
21,542
Adj. EPS
22.4
34.7
44.6
56.0
1,801
2,522
3,450
4,615
Book Value
71.5
99.2
130.4
164.1
12,350
17,175
22,691
25,811
P/E
37.8
24.5
19.0
15.2
P/BV
11.9
8.6
6.5
5.2
Yield
0.0%
0.7%
1.4%
2.3%
22.3
14.6
10.8
8.7
Minority Interest
Other Non-Current Liabilities
TOTAL LIABILITIES
200,966 281,518 338,626 369,983
APPLICATIONS
Net Block
Capital Work in Progress
Net Fixed Assets
Goodwill
License Fee
Other Intangibles,
Non-Current Assets
185,586 277,289 340,546 372,846
25,018
36,209
31,469
24,462
7,817
23,684
7,197
23,684
6,577
Profitability
EBITDA Margin (Net Revenues)
40.1%
42.5%
43.0%
44.4%
23,684
Net Margin
20.4%
21.9%
21.4%
23.0%
5,957
RONW (%)
37.8%
41.1%
39.3%
38.5%
ROCE (%)
29.5%
33.4%
34.2%
36.6%
210,604 313,498 372,015 397,308
23,684
EV/EBITDA
6,298
5,412
4,526
3,640
182
182
182
182
Debt/Equity
0.39
0.39
0.25
0.07
Current Assets
48,105
60,175
59,128
59,889
Net Debt / Equity
0.31
0.32
0.19
0.03
Cash & Marketable Securities
10,155
11,939
13,587
13,251
E = Morgan Stanley Research Estimates
Source: Company data; Morgan Stanley Research
Investments
Current Liabilities
95,724 128,630 127,486 120,678
Net Current Assets
(47,619) (68,455) (68,358) (60,789)
TOTAL ASSETS
200,966 281,518 338,626 369,983
Gearing
15
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Bharat Heavy Electricals Ltd.
(BHEL)
Supercritical Challenges Ahead
Morgan Stanley India
Company Private Limited+
Akshay Soni
Akshay.Soni@morganstanley.com
Key Statistics
Stock Rating: Equal-weight
Reuters: BHEL.BO Bloomberg: BHEL IN
India Capital Goods
In-Line
Price target
Rs2,071.00
Share price, close (January 22, 2008)
Rs1,985.20
Market cap (mn)
Rs971,516.00
52-Week Range
Rs2,925.00-970.00
Shares outstanding, basic, currency (mn)
489.00
Binay Singh
Company Description
BHEL is India's premier heavy electrical equipment manufacturer. It
has a dominant presence in power generation and a significant
presence in transmission and distribution. The Government of India has
a 65% stake in the company.
Binay.Singh@morganstanley.com
Investment Conclusion
BHEL is India’s pre-eminent power equipment manufacturer
and has expertise in 250 and 500 MW thermal units. It is the
preferred supplier to public sector utilities in India, which set
up the majority of generation capacity. BHEL has supplied
65% of India’s installed generation capacity. However, rising
competition from cost-competitive foreign and local firms,
together with the increasing private-sector market share in
power generation capacity creation, threatens BHEL’s sector
monopoly. Our Equal-weight rating on the stock reflects our
view that the premium valuation discounts the healthy
medium-term growth prospects.
What We Like
•
Preferred supplier for government owned projects:
We expect BHEL to continue to benefit from its status as
the preferred supplier for government contracts, which we
expect to account for 84% of capacity addition in India in
F2008-12.
Recent Developments
In December 2007, BHEL and National Thermal Power
Corporation (NTPC) agreed to set up a 50:50 JV for
engineering, procurement, and construction (EPC) business.
In January 2008, the partners increased the scope of the JV
to include manufacturing and supply of equipment for power
plants, making it a direct competitor to BHEL. The JV will
start offering EPC services in the next three to four months,
and the manufacturing plant will come on stream in F2013-14.
NTPC is BHEL‘s biggest customer (around 20% of the order
book). We believe the JV structure could result in profit
erosion for BHEL.
What We Don’t Like
•
Increasing competition = risk of margin compression:
Chinese and Korean companies have created pricing
pressure in the segment, winning the lion’s share of
orders from private firms. We expect competition to
intensify even for government orders, with Larsen &
Toubro and NTPC (through the JV) also set to
manufacture power plants.
•
Key Investment Issues
Acquiring supercritical expertise at competitive pricing will be
one of the major challenges for BHEL. All supercritical orders
(660 MW-plus) awarded in India have gone to foreign firms.
BHEL is trying to get a foothold in this market by entering
equity tie-ups with various state governments that plan to start
supercritical projects.
Aggressive capacity addition plans: A record-high
order backlog, coupled with aggressive capacity addition
plans, implies BHEL needs to adhere to delivery timelines
for projects while keeping capacity addition on track.
•
Lack of experience in supercritical units: We estimate
supercritical units will account for 49% of India’s 12th fiveyear plan capacity additions; so far, BHEL has no
experience in manufacturing supercritical units.
•
Strong order book should maintain growth
momentum: BHEL’s F2Q08 order book of Rs726 billion
(4.2x F2007 revenues) should lead to profit growth of
31.7% CAGR over F2007-10, in our estimation.
Valuation Methodology
We value BHEL using a residual income model. We assume
beta of 1.14 and a cost of equity of 12.7%. Our price target
discounts a 21% revenue CAGR for F2008-17, together with
stable margins in the short term and constant market share
for BHEL, despite rising competition.
16
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Risk-Reward Snapshot: Bharat Heavy Electricals Ltd. (BHEL)
Investment Thesis
Risk-Reward View: Balanced Potential Outcomes Support Rating
Rs3,000
Rs2,624 (+32%)
2,500
Rs1,985.20
Rs2,071 (+4%)
2,000
1,500
Rs1,476 (-26%)
1,000
500
Jan 06
May 06
Sep 06
Price Target
Price Target Rs2,071.00
Jan 07
May 07
Sep 07
Historical Stock Performance
Jan 08
May 08
Sep 08
Jan 09
Current Stock Price
Derived from base-case scenario.
Bull case
Rs2,624
25.4x bullSector delivers more growth: BHEL maintains its market share
th
case F2009E and the sector delivers 77% of the government’s 11 five-year
EPS
plan capacity addition.
Base case
Rs2,071
21.8x base- BHEL has constant market share and the sector delivers 62%
th
case F2009E of the 78.5 GW 11 five-year plan capacity addition target; 14.7%
EPS
revenue CAGR over the next 25 years and a steady growth rate
of 6% (long-term GDP growth rate) thereafter.
Bear case
Rs1,476
17.8x bear- Market share loss; too-ambitious government plan: The
th
case F2009E sector delivers 50% of the government’s 11 five-year plan
EPS
capacity addition. BHEL loses 200bp market share over F2008-10
because of international competitive bidding and supercritical
units becoming the model for capacity addition.
From Bear to Bull: Capacity Additions Drive Upside
Indian Rupee (Rs)
3,500
3,000
2,500
553
Price Target: 2,071
2,000
2,071
381
1,500
Key Value Drivers
• Preferred supplier for governmentowned projects: About 90% of the
installed capacity is owned by
government units.
• Strong order book: Around 44 GW of
additional capacity expected in the next
5-7 years has been ordered, and BHEL
has secured 63% of it
Potential Catalysts
2,624
214
• Pre-eminent firm in India: BHEL has
supplied around 65% of India’s installed
capacity.
• Adding capacity to meet demand:
From 6 GW currently, BHEL plans to
increase capacity to 10 GW by end2007 and 15 GW by end-2009.
• Risk of monopoly disruption: Rising
competition from cost-competitive
foreign firms threatens margins, while
local firms’ setting up of manufacturing
units poses a long-term threat.
• Lack of experience in supercritical
units: We estimate supercritical units
will account for 49% of the 12th five-year
plan capacity additions; this could close
a significant portion of the market to
BHEL.
• Valuation factor in strong growth:
Our price target factors in 21% revenue
CAGR for F2008-17, versus 12% for
F1998-2007. We assume stable
margins in the short term and constant
market share.
• Entry into supercritical unit markets.
• Increase in dividend payout or investing
surplus cash in high-return projects
1,476
1,000
Risks
Bear
Case
Source: Morgan Stanley, FactSet
All India
Capacity
Addition of 39
GW
Drop of 200
bps in BHEL's
Market Share
Base
Case
All India
Capacity
Addition of 57
GW
Bull
Case
• Change in pace of power capacity
addition by public-sector units.
• Ability of regional equipment players to
adapt to requirements of India markets.
17
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Bharat Heavy Electricals Ltd. (BHEL): Financial Summary
Rs million; Years Ending March
Profit & Loss Statement
Rs mn
Net Sales
Other Operating
Income
Total Income
Total Expenses
Raw Materials
Personnel
E&E expenses
Other Expenses
Operating Profit
Non Operating
Income
Depreciation
Interest
PBT
Tax
Net Profit
Extraordinary Items
Reported PAT
Cash Flow Statement
F2006
F2007
F2008E
F2009E
F2010E
132,275
170,435
226,068
308,726
374,914
3,443
135,718
109,860
67,808
18,785
10,471
12,796
25,858
3,498
4,642
6,009
173,933 230,710 314,735
137,882 181,889 248,323
83,532 112,051 153,943
23,690
28,938
38,270
16,205
20,571
28,063
14,456
20,328
28,047
36,051
48,821
66,412
3,857
378,771
300,467
187,056
45,885
33,773
33,753
78,304
Share Capital
Reserves & Surplus
Share Holders
Funds
Secured Loans
Unsecured Loans
Total Debt
Total Liabilities
Gross Block
Accumulated
Depreciation
Net Block
Other Fixed Assets
Investments
Cash & Bank
Current Assets
Receivables
Inventories
Other Current Assets
Current Liabilities
Net Current Assets
Deferred Tax Asset
Total Assets
F2007
F2008E
F2009E
F2010E
4,468
2,730
433
37,356
13,069
24,287
(140)
24,147
5,962
3,090
205
51,487
17,500
33,987
33,987
8,008
3,732
246
70,442
23,943
46,499
46,499
10,485
4,402
260
84,127
28,595
55,532
55,532
F2006
F2007
F2008E
F2009E
F2009E
2,448
70,567
2,448
85,435
4,895
4,895
107,227 140,391
4,895
179,998
F2006
16,792
24,147
33,987
46,499
55,532
2,459
2,730
3,090
3,732
4,402
Deferred Tax
(1,554) (2,614)
(1,750)
(2,394)
(2,859)
Sub total
CASH FLOW FROM OPERATIONS
Reported Net Profit
Depreciation
17,696
24,262
35,327
47,836
57,075
Chng in N. Work. Capital (1,576)
10,429
32,819 (15,642)
38,060
Total
34,691
68,146
32,194
95,135
(2,732) (3,974) (10,075) (12,075)
(8,075)
16,120
CASH FLOW FROM INVESTING
Chng of F. Assets
2,797
2,459
587
25,608
8,804
16,804
(13)
16,792
Balance Sheet
Rs mn
Rs mn
Chng of Invest.
Total
7
-
-
-
-
(2,726) (3,974) (10,075) (12,075)
(8,075)
CASH FLOW FROM FINANCING
Chng of Debt
213 (4,689)
Dividends
(4,047) (6,925)
Total
(3,834) (13,968)
Net change in cash
9,561
16,749
(305)
(305)
(249)
(9,747) (13,335) (15,926)
(10,052)
(13,640)
(16,175)
48,019
6,479
70,885
F2008E
F2009E
F2010E
Key Financial Ratios
73,014
5,000
582
5,582
78,597
37,882
87,883
893
893
88,776
40,594
28,334 30,777
9,547
9,817
2,121
3,096
83
83
41,340 58,089
121,969 152,541
71,681 96,958
37,444 42,177
12,844 13,406
103,200 144,201
18,768
8,340
6,737
9,352
78,597 88,776
112,122 145,286
588
283
588
283
112,711 145,569
49,014 59,898
33,846
15,168
4,730
83
106,108
210,233
125,817
63,003
21,413
234,713
(24,480)
11,102
112,711
37,576
22,322
5,919
83
112,587
285,133
178,412
80,634
26,087
293,970
(8,838)
13,496
145,569
184,893
34
34
184,927
69,275
42,000
27,275
4,639
83
183,472
315,915
191,040
93,797
31,077
362,812
(46,897)
16,355
184,927
Per Share
F2006
F2007
EPS
34.3
49.6
69.4
95.0
113.4
CEPS
39.4
55.2
75.7
102.6
122.4
149.2
179.5
229.0
296.8
377.7
7.3
12.2
17.5
23.9
28.5
Book Value
Dividend per share
Valuation
P/E
32.9
22.8
28.6
20.9
17.5
P/CEPS
28.5
20.5
26.2
19.3
16.2
P/BV
EV/EBIDTA
7.5
6.3
8.7
6.7
5.3
19.9
13.8
17.7
12.9
10.1
Returns (%)
EBIDTA Margin
19.1
20.7
21.2
21.1
20.7
ROCE
23.8
29.4
33.9
36.1
33.7
ROE
25.2
30.2
34.0
36.1
33.6
ROA
23.3
29.0
33.7
36.0
33.6
NPM
12.4
14.0
14.7
14.8
14.7
0.4
0.6
0.9
1.2
1.4
Dividend Yield
Others
Debt/Equity
Net Debt/Equity
0.08
0.01
0.01
0.00
0.00
(0.49)
(0.65)
(0.94)
(0.77)
(0.99)
E=Morgan Stanley Research estimates
Source: Company data, Morgan Stanley Research
18
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Cairn India Ltd.
Leverage on Crude Oil
Morgan Stanley India
Company Private Limited+
Vinay Jaising
Vinay.Jaising@morganstanley.com
Mayank Maheshwari
Key Statistics
Stock Rating: Overweight-V
Reuters: CAIL.BO Bloomberg: CAIL IN
India Oil and Gas
Attractive
Price target
Rs272.00
Share price, close (January 22, 2008)
Rs185.95
Market cap (mn)
US$8,365
52-Week Range
Rs270.00-128.00
Shares outstanding, basic, currency (mn)
1799.8
Mayank.Maheshwari@morganstanley.com
Investment Conclusion
We have an Overweight rating on Cairn India. The company
has an excellent record in India’s exploration and production
segment. Overall, it has working interests of 498mmboe of
proved and probable oil reserves and potential for 740mmboe
via enhanced oil recovery and resource optimization. It
provides direct leverage to global crude oil prices and a worldclass exploration and production (E&P) resource base with
increasing reserves and exposure to the fast-growing,
emerging E&P space.
Recent Developments
Cairn has filed an addendum with the GOI to increase the
plateau production for the Mangala field by 25% i.e from
96kbpd currently to 125kbpd. The company has also
upgraded the STOIIP reserve and resource estimates for the
field in this new development plan. The company is on track
to produce the first oil from Mangala field in 2H09, which is
inline with our first oil production estimates for the field. The
company is facing increased cost challenges for the
development of the MBA fields due to shortage of engineering
and material requirements. The company is in discussion with
the government for inclusion of Rajasthan pipeline in the FDP.
Key Investment Issues
1) Global crude prices are cyclical and volatile, so Cairn’s
earnings, too, may correlate with sector cyclicality. 2)
Resolution of crude oil sales agreements will be a positive or
negative risk, depending on the outcome. 3) Pricing of
Rajasthan crude could be limited by the oil’s viscous nature,
posing a potential negative risk. 4) Cairn faces the challenge
of executing its projects in a timely manner.
Valuation Methodology
We use an NAV valuation based on a sum of the parts and
the DCF for individual fields. We then add the NAV of total
reserves to arrive at our price target. We use a DCF
methodology to assess the cash flow of individual fields
owned by Cairn India based on its proved and probable (2P)
reserves. We assume a WACC of 10.2%. We calculate NAV
as at July 2008 at US$5.0 billion.
Company Description
Cairn India has been exploring acreage and operating development and
production assets in India for over 12 years. The Cairn India Group has
long and proven exploration expertise in India, having made 31
hydrocarbon discoveries since 1994, and currently has a resource base
of 498mmboe of reserves.
What We Like
•
Proven record: Cairn has over 12 years of experience in
India. It has made 30 discoveries there and has been
successful in its exploratory, development, and
production activities in the country.
•
Leverage to crude oil and no regulatory uncertainty
Cairn India’s profitability is linked to the product sharing
contracts (PSC) it has signed with the Indian government
for each of its blocks. The PSCs exclude Cairn from any
of the country’s subsidy mechanisms on petroleum
products. We estimate Cairn’s net asset value will vary
by US$143 million for every dollar change in the price of
crude oil. We estimate every one dollar change in crude
oil price changes Cairn’s earnings by 2%.
•
Rising reserves and resources: Cairn India has a
resource base of over 4.6 billion boe of original oil-inplace, with a working interest of 498mmboe of 2P
reserves, including the 25.2mmboe of Raageshwari gas
reserve to be used for internal consumption, which could
be augmented to 740mmboe through enhanced oil
recovery and resource optimization.
What We Don’t Like
•
Cash flows only in 2010: The Mangala, Bhagyam, and
Aishwarya Rajasthan fields will produce oil only in mid2009, so the full effect will be felt only in 2010.
•
Time over-run risk: Cairn faces the challenge of
executing its projects in a timely manner.
•
Crude oil sales agreements are still not finalized.
19
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Risk-Reward Snapshot: Cairn India Ltd.
Investment Thesis
Risk-Reward View – Leverage on Crude Oil
Rs450
Rs404 (+117%)
400
350
300
Rs272 (+46%)
250
Rs185.95
200
150
Rs166 (-11%)
• Cairn has an excellent record, with
three of the country’s seven landmark
discoveries since 2000. It has 31
hydro-carbon discoveries in India.
• Overall, the company has working
interests of 498million boe of 2P
reserves, and potential for 740mmboe
via enhanced oil recovery and
resource optimization.
100
Key Value Drivers
50
• Cash flow of individual fields owned by
Cairn India based on 2P reserves.
Jan 07
Apr 07
Jul 07
Price Target
Oct 07
Dec 07
Mar 08
Historical Stock Performance
May 08
Aug 08
Nov 08
Jan 09
Potential Catalysts
Current Stock Price
Price target Rs272
Derived from our base-case scenario
Bull case
Rs404
7.1x bull
case 2010E
EPS
Higher demand for oil: Long-term crude oil price of US$115/bbl.
This reflects higher crude oil demand and OPEC cutting
production. Rajasthan fields start production six months earlier.
Base case
Rs272
8.1x basecase 2010E
EPS
Moving towards sustainability: Crude oil prices of US$90/bbl in
F2012 as per Morgan Stanley global energy view. Pipeline capex
of US$500m. WACC of 10.9%. Cairn pays Rs900/MT cess on
Rajasthan crude.
Bear case
Rs166
6.4x bearcase 2010E
EPS
Weaker global economy: Crude oil price of US$70/bbl. This
reflects an unexpected weaker global economic situation and
lower crude oil demand. Cairn pays cess of Rs2,500/MT on
Rajasthan crude.
Moving Towards Sustainability – Slowly but Steadily
600
• Rise in crude oil prices.
• Resolution of Rajasthan crude oil
logistics.
Risks
• Execution: Cairn faces the challenge
of executing its projects in a timely
manner.
• Crude volatility: Global crude prices
are cyclical and volatile, so Cairn’s
earnings, too, may correlate with
sector cyclicality.
• Crude oil sales agreement and
pipeline logistics still not set.
• Price of Rajasthan crude: Could be
limited by its viscous nature.
Indian Rupee (Rs)
500
105
400
300
Price Target: 272
64
37
16
404
5
272
200
100
11
166
0
Bear
Case
Long Term
Crude Oil
Estimate of
US$70/bbl
Cess on
Rajasthan
fields at Rs
2500/MT
Opex costs
increases by
US$1.0/bbl
Base
Case
Long Term
Crude Oil
Estimate of
US$115/bbl
Six months
advance in
MBA fields
production
Pipeline is not
built by Cairn
Bull
Case
Source: Morgan Stanley, FactSet, Company data
20
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Cairn India Ltd.: Financial Summary
Rs million; Years Ending December 31
Income Statement
Cash Flow Statement
2006
Production Revenues
Total Revenues
Government Levies
Net Production Revenues
Non-production Reveneues
2007E
637 15,871
29
844
608 15,027
0
608 15,027
427
529
Net Revenues
Operating Expenses
Porfit Sharing with
the Government
EBITDA
Recouped Costs
Dry Wells
Depletion
Depreciation
Total
EBIT
Non Operating Income
Interest & Finance Charges
Amortisation -Goodwill
Profit before Tax
Provision for Taxation
Net Profit
250
-69
0
59
54
8
0
-190
62
3
-130
56
-187
2008E
2009E
2010E
19,046 46,495 97,194
934 2,124 4,262
18,112 44,371 92,932
18,112 44,371 92,932
609 2,989 7,265
6,944
7,553
8,093 9,244 6,841
9,410 32,138 78,825
196
76
1,510
183
79
1,402
5,772
505
5,267
2,336
2,931
7,747 28,223 65,622
1,431 2,746 1,334
6,316 25,477 64,287
2,578 4,338 8,540
3,738 21,139 55,747
188
937
173
333
3,555 11,934
2007E
2008E
Profit Before Tax
Recouped Costs
Interest Charges
Taxes
Changes in W. Capital
Operating Cash Flows
5,267
1,586
505
(2,336)
(32,151)
(27,129)
6,316
1,481
1,431
(2,578)
1,382
8,032
Purchase of Fixed Assets
Investing Cash Flows
(16,561) (29,972) (30,398) (10,920)
(16,561) (29,972) (30,398) (10,920)
Liability for Abandonment
Net Issue of Debt
Net Issue / (Repurchase) of Shares
Interest Charges
Dividends Paid
Financing Cash Flows
Net Change in Cash & Cash
Equivalents
Cash & Cash Equivalents
Beginning Balance
Ending Balance
(76)
2,500
423
(505)
2,342
(79)
9,164
(1,431)
7,654
(41,348) (14,286)
61,348
20,000
20,000
5,714
2009E
2010E
25,477 64,287
3,728 12,267
2,746
1,334
(4,338) (8,540)
(6,616) (15,370)
20,996 53,979
(173)
(333)
11,257 (16,602)
(2,746) (1,334)
8,338 (18,269)
(1,064)
24,789
5,714
4,649
4,649
29,439
Ratio Analysis
Balance Sheet
SOURCES OF FUNDS
Equity Share Capital
Reserves and
Surplus
Shareholders Funds
Long Term Loan
Funds
Abandonment Cost
Total
2006
2007E
2008E
2009E
2010E
17,998
17,998
17,998
17,998
17,998
275,018
293,016
278,371
296,370
282,109
300,108
303,248
321,247
358,996
376,994
9,380
302,396
11,880
(76)
308,173
21,044
(155)
320,997
32,301
(328)
353,219
15,699
(661)
392,032
6,570
3,009
3,561
31,588
35,149
254,115
4
24,617
159
3,968
20,000
476
14
5,711
18,905
308,173
11,139
4,412
6,728
56,913
63,640
254,115
4
11,253
190
4,762
5,714
571
15
8,015
3,238
320,997
40,303
7,966
32,337
57,974
90,310
254,115
4
18,615
930
11,624
4,649
1,395
17
9,825
8,790
353,219
95,151
19,900
75,251
13,712
88,964
254,115
4
60,560
1,944
24,299
29,439
4,860
19
11,611
48,949
392,032
APPLICATION OF FUNDS
Gross Fixed Assets
Acc. Depreciation
Net Block
CWIP
NFA including CWIP
Goodwill
Net Investments
Current Assets
Inventories
Sundry Debtors
Cash & Eqv.
Loans and Advances
Others
Current Liabilities
Net Current Assets
Total
4,094
1,022
3,072
17,102
20,174
254,115
4
67,818
1,251
1,917
61,348
3,289
13
39,716
28,102
302,396
EPS (Rs)
EPS Growth
P/E
Book Value (Rs)
P/BV
EV/EBITDA
EV/BOE
Profitability Ratios
NPM (%)
ROCE (%)
RONW (%)
Other Ratios
Debt/Equity (%)
Effective Tax Rate (%)
2006
2007E
2008E
2009E
2010E
-
1.63
2.08
11.75
30.97
21.6
7.17
-3,282.3
95.18
23.5
6.60
35.9
13.92
74.63
25.6
6.07
31.3
16.20
13.20
37.3
4.16
9.5
16.43
5.00
68.3
2.27
3.4
14.22
-29.3
0.0
-0.1
18.5
2.0
1.0
19.6
2.5
1.3
45.5
8.1
6.8
57.4
17.1
16.0
3.2
4.0
44
7.0
41
10.1
17
4.2
13
E = Morgan Stanley Research estimates
Source: Morgan Stanley Research
21
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Dabur India
Multiple Growth Engines – Good
Long Term Play
Morgan Stanley India
Company Private Limited+
Hozefa Topiwalla
Hozefa.Topiwalla@morganstanley.com
Key Statistics
Stock Rating: Overweight
Reuters: DABU.BO Bloomberg: DABUR IN
India Consumer
Attractive
Price target
Rs125.00
Share price, close (January 22, 2008)
Rs90.85
Market cap (mn)
Rs78,087
52-Week Range
Rs117.53-83.40
Shares outstanding, basic, currency (mn)
859.5
Nillai Shah
Company Description
Dabur is India’s fourth-largest fast-moving consumer goods company. It
has interests in healthcare, personal care, and food products. It has
annual turnover of over Rs2 billion. Its powerful brands include Dabur
Amla, Dabur Chyawanprash, Vatika, Hajmola, and Real.
Nillai.Shah@morganstanley.com
Divya Gangahar
Divya.Gangahar@morganstanley.com
Investment Conclusion
We believe Dabur remains an attractive investment
proposition in the consumer staples space, considering its
higher revenue and earnings growth visibility. Dabur has
created seven growth engines to deliver superior revenue
gains. Growth momentum in its cash cows and revenue
drivers remains strong. Cost pressures are beginning to
diminish, and the company has implemented sufficient price
hikes to offset cost pressures. Although its is premature to
discuss the value Dabur could create in its Health & Beauty
(H&B) retail venture, we believe that, over the next 12-18
months, investors will assign an option value to the retail
business if it is executed successfully.
Recent Developments
Dabur plans to invest Rs1.4 billion by 2010 to establish its
H&B retail chain. It has recruited three senior global retail
professionals to drive its retail foray. Management says H&B
Stores Limited plans to set up 350 retail stores across India
within five years and 1,000 within 10 years. It plans to begin
its roll-out in the metros and tier-one cities in 4QF08.
Management projects H&B stores will start generating profits
by the fourth year of operations and that annual revenue will
exceed Rs10 billion.
Key Investment Issues
1. Slowdown in revenue growth during the last two quarters.
2. Potential upsides and risk involved in the investment of the
retail business. 3. Likelihood of rising cost pressures
impacting margins in F2009. 4. Its international acquisition led
strategy.
Valuation Methodology
Our price target of Rs125 is our base-case DCF value which
discounts a WACC of 11%, F2011-21 NOPLAT growth of
13% and terminal growth rate of 6%. At our price target, the
stock would trade at 27x our F2009 EPS estimate and 23x our
F2010 estimate.
What We Like
•
Good long-term play: Dabur has a unique mix of seven
diverse growth engines. These can use resources from
the company’s four cash cows and should help it to
deliver consistently superior revenue growth.
•
Cost pressures plateau: Cost pressures on Dabur
increased in F2007 because of higher commodity prices.
We believe costs have begun to plateau and that the
company has implemented sufficient price increases to
offset pressures, which should improve/maintain margins.
•
Ability to launch differentiated products and
positioning: In our view, Dabur could launch highly
differentiated products across its portfolio positioned in
the ayurvedic/herbal/natural (AHN) niche to drive
sustained growth.
•
Successful retail launch could be an upside: Over the
next 18-24 months, investors could assign an option
value to the retail business if it is executed successfully.
•
Food – a key growth engine: The foods business,
despite the initial hurdles, has emerged as one of Dabur’s
key growth drivers. Dabur dominates the fruit juices
market in India, followed by Pepsi’s Tropicana.
What We Don’t Like
•
Risk of being marginalized: We expect Dabur to focus
on its AHN niche, which may remain small in most
product categories. Therefore, the company runs the risk
of being marginalized as the third- or fourth-largest firm in
the emerging segments in which it wants to operate.
22
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Risk-Reward Snapshot: Dabur India
Investment Thesis
Risk-Reward View: ANH Positioning to Protect Profitability
Rs180
Rs165 (+82%)
160
140
Rs125 (+38%)
120
100
Rs90.85
Rs84 (-8%)
80
60
Jan 06
May 06
Sep 06
Price Target
Jan 07
May 07
Sep 07
Historical Stock Performance
Jan 08
May 08
Sep 08
Jan 09
Current Stock Price
Price target Rs125
Based on our base-case DCF value.
Bull
Case
Rs165
35x basecase 2009E
EPS
Success in all new growth engines; price-hike-led margin
expansion: 20% revenue growth in F2008-10; 200bp gross
margin improvement over F2007 margin.
Base
Case
Rs125
26x basecase 2009E
EPS
Moderate success in most growth engines; benign cost
environment continues: 16% revenue growth in F2008-10;
F2008-10 average gross margins remain flat at F2007 level.
Bear
Case
Rs84
18x basecase 2009E
EPS
Limited success in new growth engines and poor performance
of existing cash cows; cost pressures intensify: 20% revenue
growth in 2008-10; 300bp gross margin contraction from F2007
margin.
Indian Rupee (Rs)
Performance of Various Growth Engines to Determine Value
200
180
160
140
120
100
80
60
40
20
0
19
165
21
Price Target: 125
125
84
Bear
Case
Limited
success in
growth
engines
Cost
pressures
intensify
Base
Case
All growth Price hike led
engines fire
margin
expansion
Key Value Drivers
• Dabur has the potential to outstrip
market gains in most of its growth
businesses, considering the buoyancy
in India’s consumer space, as a result
of income growth and lifestyle
changes, as well as Dabur’s
positioning in the AHN niche.
• We believe costs have begun to
plateau and that the company has
implemented sufficient price increases
to offset pressures, which should
improve/maintain margins.
Potential Catalysts
• We believe investors will assign an
option value, over the next 18-24
months, to the retail business, if it is
executed successfully.
Key Risks
21
20
• Unique mix of seven diverse growth
engines in the fast-moving consumer
goods space, which has the potential
to deliver consistent superior revenue
growth.
• ANH positioning should protect
profitability in a potentially intensely
competitive environment.
• Cost pressures.
• Predatory price competition.
• Inability to develop differentiated
products.
• Inability to extend brands successfully
to new-product categories.
• Steep decline in profitability in any of
the cash cow businesses.
Bull
Case
Source: Morgan Stanley, FactSet
23
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Dabur India: Financial Summary
Rs million; Years Ending March
Profit and Loss Statement
(Rs m, Year Ending Mar)
Net sales
Raw material Consumed
Manufacturing expenses
Gross Profit
Margin (%)
Employee costs
Advertising
Other
Operating Profit
Growth (%)
Margin (%)
Interest
Depreciation/ amortzn
Other Income
Profit before Tax
Income Tax
Effective Tax Rate (%)
Minority Interest
Net Profit
Net Margin
Modelware EPS
Cash Flow Statement
2007
2008E
2009E
2010E
21,966
9,711
743
11,513
52%
1,667
6,349
65
3,432
20%
16%
154
343
259
3,195
373
12%
-9
2,830
13%
3.3
26,180
11,624
818
13,738
52%
1,967
7,513
65
4,194
22%
16%
132
346
264
3,979
517
13%
-10
3,472
13%
4.0
30,412
13,503
968
15,941
52%
2,262
8,710
65
4,904
17%
16%
94
368
267
4,709
612
13%
-10
4,107
14%
4.8
35,345
15,693
1,147
18,505
52%
2,601
10,105
65
5,734
17%
16%
84
390
272
5,532
719
13%
-10
4,823
14%
5.6
2007
2008E
2009E
2010E
863
3,735
4,597
1,599
45
245
6,485
6,172
2,381
3,792
11
1,403
1,420
2,571
1,807
4,518
1,280
6,485
863
5,166
6,029
1,043
36
257
7,364
6,510
2,034
4,476
111
3,324
1,076
3,068
1,833
6,522
-546
7,364
863
7,006
7,869
843
26
270
9,007
6,905
1,666
5,239
361
3,971
1,250
3,568
2,129
7,510
-563
9,007
863
9,110
9,973
843
16
283
11,114
7,300
1,277
6,024
711
5,058
1,453
4,152
2,474
8,757
-678
11,114
Balance Sheet
(Rs m, Year Ending Mar)
Share Capital
Reserves & Surplus
Shareholders' Funds
Loan Funds
Minority Interest
Deferred tax liabilities
TOTAL LIABILITIES
Gross fixed assets
Less: Depreciation
Net Fixed Assets
Investments
Cash
Debtors
Inventory
Loans & advances
Current liabilities
Net Current Assets
TOTAL ASSETS
Yr end Mar
Net income reported
Depreciation
Chg in working cap
Change in deferred tax liab
Cash flow from operations
Capital expenditure
Strategic investments
Cash flow from investing
LT Debt raised
Dividend (incl. tax)
Others
Cash flow from financing
Net chg in cash
2007
2008E
2009E
2010E
2,830
343
-1,440
86
1,820
990
1
991
556
-1,393
-1,492
-2,329
482
3,472
346
1,827
12
5,657
-1,031
-100
-1,131
-556
-1,786
-263
-2,605
1,921
4,107
368
17
13
4,504
-1,131
-250
-1,381
-200
-1,985
-292
-2,477
647
4,823
390
115
13
5,341
-1,174
-350
-1,524
0
-2,382
-348
-2,729
1,088
Key Ratios
(Rs m, Year Ending Mar)
Net sales growth (%)
EBITDA growth (%)
EBIT margin (%)
Return on Avg Equity (%)
ROE - Beg Period (%)
RNOA (%)
Sales/Total Assets (x)
Sales/Net FA (x)
Creditor turnover (days)
Debtor turnover (days)
Inventory turnover (days)
Current ratio (x)
Working capital turnover (days)
Total debt/Equity (%)
Net debt/Equity (%)
EPS
DPS
BVPS
PE
Div Yield
P/BV
P/sales
EV/EBITDA
EV/Sales
2007
2008E
2009E
2010E
17.7%
19.8%
14.1%
61%
61%
42.6%
1.8
8.5
58.6
23.6
89.8
1.3
54.8
40%
4%
3.3
1.8
5.3
28.8
2%
17.8
3.7
23.8
3.7
19.2%
22.2%
14.7%
65.3%
76%
60%
1.8
8.1
60.0
15.0
90.0
0.9
45.0
22%
-40%
4.0
1.8
7.0
22.5
2.0%
13.0
3.0
18.1
2.9
16.2%
16.9%
14.9%
59.1%
68%
75%
1.8
8.1
60.0
15.0
90.0
0.9
45.0
14%
-44%
4.8
2.0
9.2
19.0
2.2%
9.9
2.6
15.2
2.5
16.2%
16.9%
15.1%
54.1%
61%
75%
1.8
8.1
60.0
15.0
90.0
0.9
45.0
11%
-49%
5.6
2.4
11.6
16.2
2.6%
7.8
2.2
12.8
2.1
E = Morgan Stanley Research estimates
Source: Company data, Morgan Stanley Research
24
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
DLF Limited
Pricing In Execution Scale-up
Morgan Stanley India
Company Private Limited+
Sameer Baisiwala, CFA
Sameer.Baisiwala@morganstanley.com
Varun Desa
Key Statistics
Stock Rating: Underweight-V
Reuters: DLF.BO Bloomberg: DLFU IN
India Property
In-Line
Price target
Rs828.00
Share price, close (January 22, 2008)
Rs867.70
Market cap (mn)
Rs1,478,891.00
52-Week Range
Rs1,225.00-505.60
Shares outstanding, basic, currency (mn)
1,529.50
Varun.Desa@morganstanley.com
Investment Conclusion
We have an Underweight-V rating on the stock based
primarily on rich valuations. We believe DLF’s share price
appears to be factoring in strong demand momentum,
multifold execution scale-up, a couple of mega
township/special economic zone (SEZ) developments, and
possible cap rate compression. On our estimates, DLF is
trading at P/Es of 21.1x F2008 and 15.0x F2009.
Recent Developments
DLF has agreed to buy a 51% stake in Aman Resorts, which
has 22 operational properties, 600 rooms, and seven ongoing
projects. DLF has entered the asset management business
through a 39:61 JV with Prudential Financial. It has secured
the ‘New Bangalore’ project in Bidadi, with a projected value
of Rs500 billion. DLF has launched two IT SEZs, in
Gandhinagar and Nagpur, and an IT park in Kolkata. In the
hotel business, DLF has acquired 39 sites and has 19
projects underway. It has an agreement with Four Seasons
for a super luxury hotel in Gurgaon.
Company Description
DLF is a prominent Indian real-estate developer. It has a sizable land
bank of 615 million square feet of planned projects spread across the
country. It is involved in residential, commercial, retail, hotels,
infrastructure, and SEZ developments.
What We Like
•
Sizable, quality land bank: DLF’s nationwide presence
gives the company the ability to launch several projects
simultaneously. It has a significant presence in fastgrowing affluent tier-one (76%) and tier-two cities (16%).
•
Mid-term scale-up visibility: We estimate DLF will
significantly scale up its execution volumes to 19msf in
F2008, 35msf in F2009, and 51msf in F2010. We
estimate F2008-10 CAGRs of 84% for sales and 85% for
earnings. DLF’s sale of commercial projects to DLF
Asset Limited/third parties is key to our earnings forecast.
•
Investing in other businesses: DLF is investing in new
businesses, such as hotels, infrastructure, insurance,
telecoms, and an asset management company, which will
mitigate the volatility risk in the cash flows of the cyclical
real-estate business.
Key Investment Issues
•
Update on the planned business trust listing (DOT).
•
Company plans for scaling up investment assets –
commercial, retail and hospitality.
•
Size of pending land payments.
•
Funding requirements over next three years and how to
meet these.
•
Update on new businesses – power, infrastructure, and
telecom.
Valuation Methodology
We base our price target on a sum-of-the-parts valuation,
incorporating the following: our March 2008 NAV estimate of
Rs570/share, upside from three mega-township/SEZ projects
(Rs93), new businesses (Rs68), new land acquisition (Rs38),
and six-month forward (to Sep’08) rollover of the above
sources of value (Rs58). Key assumptions for our
calculations: 15% discount rate, 5% price & cost inflation per
annum for the development horizon and 7%/9% cap rates for
SEZ/non-SEZ projects.
What We Don’t Like
•
Near-mid-term dependence on IT/ITES growth: A
slowdown in the IT/ITES sector would adversely affect
DLF, as its near-mid-term earnings depend on the
IT/ITES offshoring business. Such a slowdown could
affect its ongoing IT/ITES SEZs projects and residential
projects in close proximity to IT/ITES hubs.
•
Oversupply could hurt pricing/occupancy rates: Price
inflation (100-250% in two to three years), and plans of
property companies to develop landbanks, could result in
oversupply, which may adversely affect DLF through
lower pricing for projects and lower volume off-take.
•
Landbank concentration: Large land parcels (Gurgaon,
Dankuni and other mega townships/SEZs) are risky, as
they require significant upfront capital and are vulnerable
to similar competing projects.
25
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Risk-Reward Snapshot: DLF Limited
Investment Thesis
Risk-Reward View: Execution Scale-up is the Key Valuation Driver
Rs1,300
1,200
1,100
Rs1,073 (+24%)
1,000
Rs867.70
900
Rs828 (-5%)
800
700
600
Rs584 (-33%)
500
• Macro themes to drive demand:
India’s GDP growth, urbanization,
strong demographics, rising
affordability, customer preference
shifting to organized developers, and
easy credit availability.
• DLF well positioned to benefit:
sizable quality landbank, rising
execution skills, yield scale-up
visibility from strong balance sheet.
• Valuation appears rich.
Key Value Drivers
May 07
Jul 07
Sep 07
Price Target
Nov 07
Feb 08
Apr 08
Historical Stock Performance
Jun 08
Sep 08
Nov 08
Jan 09
Current Stock Price
Price Target Rs828
Derived from base-case scenario.
Bull case
Rs1,073
NAV Based
Valuation
Demand boom leads to higher prices: Three additional mega
township/SEZ developments, 100bp lower cap rates for SEZ
investment assets, and 10% price/cost inflation per annum.
Base case
Rs828
NAV Based
Valuation
Successful execution of current landbank, new land
acquisitions, new businesses : Sum-of-parts valuation includes
March 2008E NAV of Rs570, three mega township/SEZ
developments (Rs93/share), new land acquisition (Rs38/share),
new businesses (Rs68/share), and time value of six-month
forward rollover (Rs58/ share). NAV valuation assumes 15%
discount rate, 5% price/cost inflation p.a., and 7-9% cap rates.
Bear case
Rs584
NAV Based
Valuation
Economic slowdown slows execution and stagnates prices:
Loss of one mega township/SEZ development, 100bp higher cap
rate for non-SEZ projects, flat selling price/cost for development
horizon, and 12-month execution delay.
Bull to Bear: Several Upside Drivers
1,400
1,200
Price Target: 828
Indian Rupee (Rs)
1,000
104
800
27
28
86
600
400
23
1,073
828
584
200
0
Bear
Case
12 months
Flat
1% higher cap Loses one
execution prices/cost for rate for non mega project
delay
development
SEZs
horizon
Base
Case
3 Additional 1% lower cap 5% price/cost
Mega
rate for SEZs
inflation
SEZ/Twnships
Potential Catalysts
• Multiple project launches.
• Probable listing of business trust in
Singapore in the next few months.
• Equity-linked fund raising.
• Momentum in quarterly earnings.
• Execution in new businesses.
Risks
137
85
• Scale-up in volumes. DLF targets
25-30msf of residential products, 1012msf of commercial, and 8msf of
retail construction per annum.
• Sale of commercial SEZs to DLF
Asset Limited/third parties.
• Compression in cap rates for
investment properties.
• Progress (including land
acquisition) in mega township/SEZ
developments.
• Deployment of US$2.5 billion cash
on balance sheet.
Bull
Case
• Slowdown in India’s GDP growth
(especially IT/ITES growth) is the key
risk to DLF’s scale-up story.
• Adverse regulatory changes, an
oversupply situation, slow uptake in
mega developments, and inability to
sell investment assets are other risks.
Source: Morgan Stanley Research
26
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
DLF Limited: Financial Summary
Rs million; Years Ending March
Income Statement
Rs Million
Total Income
% Growth
Cash Flow Statement
2007
2008E
2009E
2010E
39,233
125,030
191,265
242,433
237
219
53
27
Rs Million
2007
2008E
Cost of revenue
Establishment expenses
Other expenses
Net Profits
11,199
33,397
56,022
74,948
add working capital required
7,090
28,558
49,935
67,754
Other Balance Sheet Adjustments
922
1,014
1,116
1,227
Net cash from operations
3,187
3,824
4,972
5,966
28,034
91,633
135,243
167,485
% Growth
476
227
48
24
fixed asset investments
% Margins
71
73
71
69
Other investments
Other Income
1,108
1,274
1,465
1,685
Finance charges
3,076
3,107
995
(5,256)
571
92
430
1,755
25,495
89,708
135,284
172,671
6,058
19,736
36,527
50,075
PAT (before minority int)
19,437
69,972
98,757
122,597
Loss/ (profit) in associates
13
-
-
-
Operating Profits
Depreciation
Profit before Tax
Provision for tax
Minority Interest
Net Profit
11
-
-
-
19,413
69,972
98,757
122,597
2007
2008E
2009E
2010E
3,059
3,409
3,409
3,409
Balance Sheet
Rs Million
Share capital
2010E
19,413
69,972
571
92
430
1,755
(67,025) (51,445)
(6,643)
19,476
-
-
Cash flow from operating activities:
add depreciation
Operating Expenditure
2009E
(1,421)
-
(48,462)
18,619
98,757 122,597
92,545 143,828
Cash flow from investing activities
Net cash from investing
(25,400) (10,458) (25,873) (18,774)
5,747
(19,653)
2,107
-
-
(8,351) (25,873) (18,774)
Cash flow from financing activities
Issuance of equity
12,179
87,476
-
-
-
10,496
14,814
18,389
-
-
-
Dividends (incl dividend tax)
Other adjustments
Net cash from financing
(Increase)/decrease in net debt
133
12,312
(55,803)
76,980 (14,814) (18,389)
87,248
51,858 106,664
Ratio Analysis
2007
2008E
2009E
2010E
Profitability Ratios
Reserves
27,115
86,592
170,535
274,742
Operating Margin (%)
71
73
71
69
Net Worth
30,174
177,126
261,070
365,277
Pre-tax Margin (%)
65
72
71
71
92
92
92
92
Net Margin (Excl Extraordinary Items) (%)
49
56
52
51
9,498
9,498
9,498
9,498
99,328
101,000
101,000
101,000
187
187
187
187
P/E
-
21.1
15.0
12.1
139,279
287,903
371,847
476,054
P/BV
-
8.3
5.7
4.0
Net Debt
95,173
7,925
(43,933)
(150,597)
ROE (%)
98
68
45
39
Total Fixed Assets
41,872
52,238
77,681
94,700
ROCE (%)
30
43
41
39
16.0
10.5
7.9
Minority interest
Preferential Share Capital
Loan Funds
Deferred tax liability (net)
Total Liabilities
Investments
2,107
-
-
-
Cash and bank balances
4,155
93,075
144,933
251,597
Goodwill
8,935
8,935
8,935
8,935
Stocks
57,006
71,735
72,815
71,866
Sundry debtors
15,195
21,328
25,324
27,288
Other current assets
67
67
67
67
Loans and advances
54,225
Current Assets
52,371
62,931
63,533
Current liab and provisions
42,429
22,406
21,441
32,624
Net Current Assets
82,210
133,655
140,298
120,822
139,279
287,903
371,847
476,054
Total Assets
Valuation Ratios
EV/EBITDA
Leverage Ratios
Net Debt/Equity
3.2
0.0
(0.2)
(0.4)
Total Debt/Equity
3.3
0.6
0.4
0.3
E=Morgan Stanley Research estimates
Source: Company data, Morgan Stanley Research
27
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Educomp Solutions Ltd.
Carving a Niche
Morgan Stanley India
Company Private Limited+
Vipin Khare
Key Statistics
Stock Rating: NOT RATED
Reuters: EDSO.BO Bloomberg: EDSL IN
Share price, close (January 22, 2008)
Rs3,798.70
Market cap (mn)
Rs65,337.64
52-Week Range
Rs5,650.00-833.00
Vipin.Khare@morganstanley.com
Gaurav Rateria
Gaurav.Rateria@morganstanley.com
Educomp is a technology-driven education company that
develops and provides digital content to various schools (over
6,500 schools across India, the US, and Singapore). It
collaborates with central and various state government
agencies to implement education infrastructure, providing
teacher training and content development projects. Educomp
operates in four major business segments: 1) professional
development: technology-aided learning and workshops for
teachers, 2) smart class: highly animated instructor-led
content for schools delivered inside the classroom, 3)
instructional and computing technology (ICT): educational
infrastructure and digital content; and 4) others, including
retail and consulting.
Recent Developments
Educomp recently acquired a 70% stake in Savvica (Sep07),
a Toronto-based leading e-learning company, for US$2 million
and a 51% strategic stake in AuthorGen Technologies
(Aug07), which provides technology platforms for online
learning, for Rs26 million. Educomp has made a foray into
formal school management with the launch of Millenium
Learning System, an integrated learning delivery system for
schools. It has entered into 60-year lease agreement with
Ansal Properties (Jan08), which will provide land and
infrastructure to set up schools on 15-17 different sites.
Stock Price Performance
E
d u co m p
Educom p
W e e k l y C l o s i n g P ri c e i n R s
6000
5000
4000
4000
3000
3000
2000
2000
1000
1000
0
400
Company Guidance and Outlook
Management guided for revenues of Rs2,300-2,400 million,
(+109% yoy), for F2008, of which around 75% has already
been achieved. Management has raised its PAT guidance to
Rs650-700 million (+ 244% yoy) from Rs650 million.
0
400
R e l a t i v e P e rf o rm a n c e to M S C I I n d i a
200
200
0
0
-2 0 0
-2 0 0
T o t a l W e e kl y T u rn o v e r b y V a l u e i n R s b n
5
5
0
0
J
F
M
A
M
J
J
A
S
O
N
D
J
Source: Datastream
Company Description
Incorporated in 1994, Educomp provides end-to-end solutions in the
education technology domain for the K12 segment i.e. creation of
content (digital content), delivery (IT education, online tutoring) and
management of learning (professional development and retailing of
educational content).
Educomp: Trends in Segmental Performance
Year to 31 March, Rs mn
Dec-06
Sep-07
Dec-07
QoQ
YoY
Professional Development
Revenues
31
64
66
2%
112%
PBIT
20
36
42
16%
109%
64.5
56.3
63.6
732 bps
-95 bps
Revenues
80
112
239
113%
198%
PBIT
30
30
68
123%
124%
37.7
27.1
28.4
131 bps
-934 bps
144
260
347
34%
141%
91
143
192
34%
112%
63.0
55.1
55.4
32 bps
-760 bps
20
14
64
362%
224%
5
6
39
581%
743%
23.4
41.3
60.8
PBIT margin (%)
Results Summary
In 3Q F2008, consolidated revenue was Rs883 million (+55%
qoq), and net income was Rs198 million (+51% qoq). Strong
revenue and profitability growth was driven by increased
penetration of the smart class business segment. The smart
class and ICT business segments accounted for 82% of
revenues, against 72% in the previous corresponding period.
The current order book stands at Rs3,830 million (+31% qoq).
6000
5000
ICT
PBIT margin (%)
Smart Class
Revenues
PBIT
PBIT margin (%)
Others (Retail & Consulting)
Revenues
PBIT
PBIT margin (%)
1951 bps 3746 bps
Source: Company data Morgan Stanley Research
28
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Educomp Solutions Ltd.: Financial Summary
Rs million; Year Ending March
Consolidated Profit & Loss Account (Rs mn)
Consolidated Balance Sheet (Rs mn)
As at March 31st
Year to March
2004
2005
2006
2007
Net sales
260
332
555
1,101
Raw material consumed
70
34
95
304
Share Premium
Personnel Expenses
57
68
91
126
SG&A expenses
66
74
97
EBITDA
66
157
271
25.5
47.2
29
Growth (%)
Margin (%)
EBITDA Margin (%)
Operating Profit
Interest
2004
2005
2006
2007
45
45
160
160
0
66
509
505
Reserves & Surplus
111
114
226
482
164
Shareholders' Funds
156
225
894
1,147
506
Loan Funds
30
45
110
1,255
48.8
46.0
Deferred tax liabilities
15
20
16
59
105
215
410
TOTAL LIABILITIES
276
417
1,204
2,831
25.86
263.48
103.64
91.01
Net Fixed Assets
101
146
252
831
11.1
31.7
38.6
37.2
2
10
21
102
4
4
6
14
Cash
13
23
606
1,106
131
192
255
496
9
10
17
33
12
32
49
110
Share Capital
Investments
Depreciation/ amortzn
37
51
56
96
Debtors
Other Income
13
13
15
59
Inventory
Non-recurring income
-4
-1
-3
3
Profit before Tax
38
114
223
454
Other current assets
5
0
3
16
Income Tax
16
45
81
170
Current liabilities
74
141
257
320
95
116
673
1,441
276
417
1,204
2,831
Loans & advances
42.6
39.5
36.1
37.3
Net Current Assets
Net Profit
17
67
139
287
TOTAL ASSETS
Growth (%)
36
292
107
106
Net Margin (%)
8.2
20.5
25.5
25.8
Key Ratios
EPS (Diluted)
3.8
6.1
11.2
17.3
Year to March
2004
2005
2006
2007
Net sales growth (%)
22.8
27.6
67.1
98.3
EBITDA growth (%)
24.1
135.9
72.8
86.8
EBIT margin (%)
25.5
47.2
48.8
46.0
Return on Avg Equity (%)
11.7
35.3
24.9
28.1
Sales/Total Assets (x)
0.9
0.8
0.5
0.4
Sales/Net FA (x)
2.6
2.3
2.2
1.3
Debtor turnover (days)
183
210
168
165
Current ratio (x)
2.3
1.8
3.6
5.5
Total debt/Equity (%)
0.0
20.2
12.3
109.5
-8.5
9.9
-55.5
13.1
3.8
6.1
11.2
17.3
Effective Tax Rate (%)
Consolidated Cash Flow Statement (Rs mn)
Year to March
Net income reported
Depreciation
Chg in working cap
Change in deferred tax liab
Cash flow from operations
Capital expenditure
Strategic investments
Cash flow from investing
Equity raised
2004
2005
2006
2007
17
67
139
287
37
44
56
37
-27
-61
-99
-222
6
39
34
-17
33
89
130
84
-45
-89
-162
-616
-2
-8
-11
-81
-47
-97
-173
-697
EPS
DPS
0
67
557
123
LT Debt raised
16
0
5
1143
ST debt raised
0
16
59
3
Dividend (incl. tax)
0
0
0
-27
16
18
625
1,113
2
10
582
500
Cash flow from financing
Net chg in cash
Net debt/Equity (%)
BVPS
PE
Div Yield (%)
P/BV
P/sales
EV/EBITDA
EV/Sales
0
0
2.2
2.3
34.8
20.5
71.7
69.3
991.9
620.3
340.5
219.2
0.0
0.0
0.1
0.1
109.3
185.1
53.0
54.8
65.3
125.3
85.3
57.1
255.6
265.8
173.1
124.6
65.2
125.4
84.4
57.2
Source: Company data, Morgan Stanley Research
29
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Entertainment Network (India)
Limited
Multiple Earnings Streams
Emerging
Morgan Stanley India
Company Private Limited+
Key Statistics
Stock Rating: Overweight
Reuters ENIL.BO Bloomberg: ENIL IN
India Media
Attractive
Rs533.00
Price target
Rs406.10
Share price, close (January 22, 2008)
Rs19,355.00
Market cap (mn)
Rs700.00-250.00
52-Week Range
47.70
Shares outstanding, basic, currency (mn)
Vipul Prasad
Vipul.Prasad@morganstanley.com
Company Description
ENIL owns and operates radio stations in India. It was the first private
FM radio operator in India and has a Pan-India presence. It operates
the out-of-home and event management businesses through its TIMPL
subsidiary.
Ketaki K. Kulkarni
Ketaki.Kulkarni@morganstanley.com
Investment Conclusion
We reiterate our Overweight rating on Entertainment Network
(India) Limited (ENIL) stock because of the likelihood of solid
growth in the company’s out-of-home (OOH) business and
margin resurgence in the radio business.
Recent Developments
2Q F2008 results: ENIL’s EBITDA margin narrowed 80bp
QoQ as the roll-out of new stations tightened cost pressures.
However, the incremental revenue addition from rising ad
rates and contribution from new stations more than offset this
cost inflation. But, amortization and marketing expenses of
the OOH business continue to affect the bottom line.
Key Investment Issues
•
Radio business – rapid stabilization of new stations:
We expect ENIL’s radio business to regain a large part of
its margin strength by F2009 after roll-out of new stations
by mid-3Q F2008.
•
What We Like
•
Airport advertising rights in Mumbai and Delhi augur
well: We expect an EBITDA CAGR of 109% for the OOH
business in F2007-10. ENIL bid successfully for the
advertising rights to Mumbai and Delhi airports, and we
expect this to result in OOH contributing 42% of
consolidated EBITDA in F09. We project an EBITDA
CAGR of 67% for ENIL in F2007-10.
•
Radio – new stations being rolled out quickly, margin
rebound expected in F2009: ENIL is strengthening its
presence in the radio market by rapidly rolling out its
phase two radio stations. We think it has a technological,
commercial and marketing edge over competitors.
•
Radio industry growth should accelerate: The radio
industry accounts for around 2.8% of advertising
expenditure in India. We expect this to rise to 5.4% by
F2010 because of improving perceptions, by media
planners and buyers, of radio as a long-term and viable
media, coupled with vastly expanded coverage as new
operators start broadcasting in various markets across
the country
.
The OOH business is fast evolving into a money
spinner for ENIL, in our view. Management’s focus on
opening up revenue streams, in addition to the radio
business, appears to be yielding rewards.
Valuation Methodology
We use a DCF model to derive our price target of Rs533,
which equates to an F2009E EV/EBITDA multiple of 16.9x
and a F2009E P/E of 30.2x, given the sector growth more
than 30%. To calculate our DCF value, we assume an explicit
phase of eight years with a terminal growth rate of 5% and a
WACC of 12.1%.
What We Don’t Like
•
Low differentiation among radio stations is a problem
for the radio market. The launch of many new stations at
around the same time could soften margins over the next
three to four quarters.
•
Sensitivity to advertising revenues: Although a
positive factor when GDP growth is strong, such
sensitivity implies a slight drop in corporate budgets may
have a very large impact on ENIL’s advertising revenues.
30
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Risk-Reward Snapshot: Entertainment Network (India) Limited
Multiple Emerging Earnings Streams Skew Risk-Reward to the Upside
Rs700
Investment Thesis
200
• New radio stations are stabilizing
rapidly: with the rollout of seven new
stations, ENIL has been able to
garner greater advertising revenues
from the extended reach.
• Delhi and Mumbai airport OOH
business is turning into a major
revenue stream.
100
Key Value Drivers
Rs624 (+54%)
600
Rs533 (+31%)
500
400
Rs398 (-2%)
Rs406.10
300
Jan 06
May 06
Price Target
Sep 06
Jan 07
May 07
Sep 07
Historical Stock Performance
Jan 08
May 08
Sep 08
Jan 09
Rs241.00
Price Target Rs533
Derived from base case
Bull case
Rs624
29.6x bullcase 2009E
EPS
Stronger OOH growth: Radio stations maintain their ad rates
with 3% greater capacity utilization. OOH airport contracts are
renewed at double the base-case value.
Base case
Rs533
20.5x basecase 2009E
EPS
Extended reach: 52% utilization rates for the Delhi and Mumbai
radio stations. 40% utilization rates to the new radio stations. 5%
terminal growth.
Bear case
Rs398
16.9x bearcase 2009E
EPS
Lower radio capacity: Radio stations maintain their ad rates with
3% lower capacity utilization. OOH airport contracts are renewed
at half the base-case value. 3% terminal growth.
From Bear to Bull: Radio Utilization and OOH Business are Key
• Balance of ad rates and utilization
rate: ENIL should be able to maintain
and better their ad rates without
compromising on utilization levels
• OOH order wins: OOH growth will
depend mainly on how well the
company manages to attract new
contracts and renew the existing ones.
Potential Catalysts
• New stations capture greater market
share.
• Mumbai and Delhi stations gain
greater popularity.
• Any news on consolidation allowance
or content other than radio permitted
in radio sector.
• ENIL wins more OOH contracts or
generates more events business.
800
Indian Rupee (Rs)
700
68
600
72
500
37
23
26
624
533
400
300
398
Current Price: 406
200
100
0
Bear
Case
Economy
Radio
Capacity
utilisation
Source: Morgan Stanley, Facset, Company data
OOH airport
contracts
Base
Case
Radio
Capacity
utilisation
OOH airport
contracts
Bull
Case
Risks
• Price wars in the ad market could put
pressure on ENIL on the pricing and
inventory utilization fronts. This could
also manifest itself in a surge in
employee costs, as competitors try to
attract employees from the industry
leader.
• Unfavorable regulatory issues, such
as those regarding royalties on music,
and broadcast of news/current affairs.
31
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Entertainment Network (India) Limited: Financial Summary
Rs million; Years Ending March
Profit and Loss Statements
F2006
Total Revenues
Cash Flow Statements
F2007
F2008E
F2009E
F2010E
F2006
F2007
F2008E
F2009E
F2010E
1,111
1,374
2,351
4,172
6,044
6,956
PAT
310
251
323
842
982
1,921
3,495
4,532
4,934
Depreciation & Amort.
124
187
276
363
367
68
330
383
457
511
Change in C. Assets
(336)
(668)
(790)
(462)
(129)
Employee Costs
276
447
644
835
989
Change in Debtors
(187)
Admin & Other Exp.
458
753
1,067
1,141
1,247
Production expenses
180
391
1,401
2,098
2,187
EBITDA
393
429
677
1,512
2,022
Expenses
License Fees
Depreciation & Amort.
Interest
Operating Income
Other Income
Exceptional Item
124
187
276
363
367
26
22
52
53
53
243
220
349
1,096
1,602
15
24
25
26
27
(260)
(302)
(462)
(129)
Change in Inventories
Chg in Loans &
Advances
17
-
-
-
-
(165)
(408)
(488)
-
-
Chg in C. Liab & Prov
161
50
601
351
170
Change in Intangibles
(2,128)
(24)
-
-
-
(149)
(785)
(745)
(61)
(38)
Capex
Impairment of assets
(3)
-
20
-
-
Change in Sec. Loans
Change in Unsec.
Loans
-
318
-
(100)
(100)
350
470
261
(100)
-
Change in Investments
(66)
278
4
-
-
(0)
(24)
23
-
-
98
-
-
-
-
356
244
374
1,122
1,629
46
(8)
50
280
518
Reported PAT
310
251
323
842
1,111
Change in Other Assets
Adjusted PAT
212
251
323
842
1,111
Chg in Equity
PBT
Provision for Tax
Change in Cash
Balance Sheet
F2006
Share Capital
F2007
F2008E
F2009E
F2010E
1,795
9
(0)
-
-
59
62
(27)
834
1,381
F2010E
Ratio Analysis
476
477
477
477
477
F2007
F2008E
F2009E
Reserves & Surplus
2,180
2,439
2,762
3,604
4,715
Modelware EPS
5.3
6.8
17.7
23.3
Shareholders Funds
2,655
2,915
3,239
4,080
5,191
Reported EPS
5.3
6.8
17.7
23.3
61.2
68.0
85.6
108.9
Secured Loans
Unsecured Loans
TOTAL
Intangible Assets
Fixed Assets
Net Block
-
318
318
218
118
Book Value per Share
350
820
1,081
981
981
Valuation
3,006
4,053
4,638
5,279
6,290
2,046
1,945
1,789
1,574
1,359
228
467
1,073
986
872
2,274
2,412
2,862
2,559
2,230
Capital WIP
47
44
44
44
44
Preoperative Exp.
81
568
568
568
568
P/E
62.8
59.8
23.0
17.4
EV/EBITDA
38.2
30.2
13.0
9.0
EV/Sales
7.0
4.9
3.2
2.6
Price to Book Value
5.4
6.0
4.7
3.7
Profitability Ratios (%)
-
-
-
-
Average ROE
9.0
10.5
23.0
24.0
Average ROCE
7.8
8.6
18.0
20.1
71.0
77.5
44.9
15.1
9.3
57.8
123.3
33.7
Growth (%)
Investments
302
25
20
20
20
Current Assets
894
1,576
2,339
3,635
5,145
Sales
477
728
1,029
1,490
1,620
EBITDA
65
126
100
934
2,315
Modelware Net Profit
18.5
28.8
160.2
32.0
Loans & Advances
352
722
1,210
1,210
1,210
Modelware EPS
18.2
28.8
160.2
32.0
Curr Liab & Prov.
555
635
1,199
1,550
1,720
Leverage Ratio
Net Current Assets
298
978
1,140
2,084
3,425
Debt/Equity (x)
0.39
0.43
0.29
0.21
Net Debt/Equity (x)
0.35
0.40
0.06
(0.23)
Debtors
Cash & Bank
Other Assets
TOTAL
2
26
3
3
3
3,006
4,053
4,638
5,279
6,290
E = Morgan Stanley Research estimates
Source: Company data, Morgan Stanley Research
32
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Financial Technologies
Leading Player in Commodity
Exchanges
Morgan Stanley India
Company Private Limited+
Anil Bang
Anil.Bang@morganstanley.com
Key Statistics
Stock Rating: NOT RATED
Reuters: FITE.BO Bloomberg: WWTC IN
Share price, close (January 22, 2008)
Rs1930.50
Market cap (bn)
US$ 2.20
52-Week Range
Rs3048.00-1641.35
Stock Price Performance
Financial Tech
Weekly Closing Price in Rs
3000
3000
Mansi Shah
Mansi.S.Shah@morganstanley.com
Morgan Stanley Asia
Limited+
2000
2000
1000
1000
Anil Agarwal
Anil.Agarwal@morganstanley.com
Financial Technologies (FT) provides technology solutions
and domain expertise for digital transactions and financial
markets. FT has expertise in setting and scaling up
exchanges – it has set up seven exchanges globally. FT’s
key ventures include Dubai Gold and Commodity exchange
(DGCX), National Spot Exchange, and GBOT Mauritius.
0
4000
2000
2000
0
0
2000
-2000
Total Weekly Turnover by Value in Rs Bn
4
Results Summary
FT reported 3Q F2008 net profit of Rs5.4 billion, up 1,337%
YoY, on a standalone basis. Revenues were up 1,159% at
Rs7.2 billion, while operating expenses were up 70% YoY.
EBIDTA of Rs7 billion translates into an EBIDTA margin of
97%.
Company Overview
FT has two key business segments – software and
commodity exchanges.
Software business – FT provides technology for exchanges
and trading terminals for equities and commodities. The main
sources of revenues in this business are technology licensing,
annual maintenance contracts, and services revenue. The
key customers are exchanges, brokerage houses, and fund
houses.
4
2
2
0
0
2003
Recent Developments
• FT is setting up India’s first power exchange – India Energy
Exchange Ltd (IEX), which has received expressions of
interest from over 100 companies for membership.
• FT raised US$115 million through a GDR issue, which,
including the greenshoe option, was completed in
November 2007. The company issued about 3.6% of its
post-issue shares at about Rs2,800 per share.
0
4000
Relative Performance to MSCI India
2004
2005
2006
2007
2008
Source: Datastream
Company Description
Financial Technologies is the flagship company of group of the same
name. It is a US$2.2 billion company, with presence in commodity
exchanges business and software business. The software business
contributes around 40% of revenues. The company provides
technology for exchanges and trading terminals for equities and
commodities.
Exchange business – FT has set up seven exchanges, of
which two are outside India. The main sources of revenues
are in this business are transaction fees, membership fees,
and content development. FT has a 44% stake in DGCX,
which is in a free trade zone with a 50 year tax holiday. It has
a 49% stake in Safal National Exchange, which facilitates
trading in horticulture, floriculture, and dairy products; a 100%
stake in National Spot Exchange, which will be a pan-India
electronic spot market; a 76% stake in IB Forex (76%), an
online interbank forex trading platform; a 100% stake in
GBOT Mauritius, which would enable FT to expand to Africa;
and a 100% stake in IEX.
33
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Financial Technologies*: Financial Summary
Rs million; Years Ending March
Profit & Loss Statement
Per Share data & Valuations
F2005
F2006
F2007
Operating Income
574
1820
2645
--Products (IPR Based License)
251
506
696
25
127
74
--Services
--Admission Fees
F2005
F2006
F2007
Per Share Data
EPS (Rs)
Book Value (Rs)
14.8
16.2
70.1
71.1
0.4
5.2
8.0
119.2
217
267
416
--Transaction Fees
53
537
1107
--Others
28
384
386
0
1
35
432.5
130.7
Other Income
53
192
606
Price to Book
59.9
27.5
27.2
Total Income
627
2012
3251
Dividend Yield
0.0%
0.3%
0.4%
Total Expenditure
323
831
1714
97
259
658
Less: Excise Duty
--Employee expenses
--Other Expenses
226
571
1057
PBT
305
1182
1536
79
326
517
226
855
1019
-16
Taxation
PAT prior to exceptional items
Exceptional Items
0
16
Short Provision for IT
6
43
2
220
796
1034
23
146
319
196
650
714
PAT
Minority Interest
PAT (adj for minority interest)
Balance Sheet
F2006
F2007
Liabilities
88
88
88
Reserves and Surplus
1331
2999
3045
Share holders equity
1419
3087
3133
0
0
4344
96
1109
1089
Total Loans
Minority Interest
Deferred Tax Liablity(Net)
Total Liablilities
Valuations
P/E
Ratios
Ratios
F2005
F2006
F2007
ROE
20.6%
28.8%
23.0%
Operating Cost/Op Income
51.4%
41.3%
52.7%
Operating Cost/ Avg Assets
31.8%
28.8%
26.7%
Loans & Advances
213%
389%
-45%
Cash & Bank Balance
451%
56%
524%
Assets
218%
174%
103%
Total Income
172%
221%
62%
79%
158%
106%
Growth Ratios
Operating expenses
F2005
Capital
DPS (Rs)
4.5
32.2
30
1545
36
4232
35
8602
PAT
323%
231%
10%
EPS
295%
231%
10%
*Consolidated data. Source: Company data
Shareholding Pattern
Shareholding
Promoters
Directors & their relatives
FIIs
Dec-07
46%
8%
31%
Assets
MF & UTI
1%
Fixed Assets
217
362
1870
Bodies corporate
2%
Investments
1518
6310
4387
4
13
9
Indian Public & Others
Total
Deferred Tax Asset
Current Assets
859
1866
7209
---Cash & Bank Balance
673
1052
6563
---Loans & Advances
133
652
359
1053
4319
4874
Net Current Assets
-194
-2453
2334
Total Assets
1545
4232
8602
No. of shares
44
44
44
Total Current Liabilities
12%
100%
Source: BSE
34
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Gateway Distriparks Ltd
Integrated Player in Logistics
Solutions Market
Morgan Stanley India
Company Private Limited+
Mangesh Bhadang
Mangesh.Bhadang@morganstanley.com
Key Statistics
Stock Rating: NOT RATED
Reuters: GATE.BO Bloomberg: GDPL IN
Share price, close (January 22, 2008)
Rs101.95
Market cap (mn)
Rs9454.9
52-Week Range
Rs174.3 – Rs81.5
Stock Price Performance
Gateway Distriparks
Weekly Closing Price in Rs
250
250
Hozefa Topiwalla
Hozefa.Topiwalla@morganstanley.com
Gateway Distriparks provides logistics solutions for the trading
community and the shipping industry. It is equipped with
modern contained freight stations (CFS) at Navi Mumbai
(Jawaharlal Nehru Port Trust), Chennai, and Vishakapatnam.
It has an inland container depot (ICD) close to Delhi spread
over 21 hectares.
200
200
150
150
100
50
100
50
Relative Performance to MSCI India
0
0
-50
-50
-100
2
-100
Total Weekly Turnover by Value in Rs Bn
1
Recent Developments
Gateway Distriparks recently entered the container rail
segment through a JV with Container Corporation of India.
The JV will operate a rail linked ICD at Garhi Harsau,
Gurgaon. The company also ventured into cold chain
logistics through its subsidiary Snowman Foods catering to
the food retail segment. The company has also expanded its
existing business by adding more capacity in its CFS at Navi
Mumbai through the acquisition of Punjab Conware’s CFS at
Navi Mumbai.
2
1
0
0
2006
2007
2008
Source: Datastream
Company Description
Gateway Distriparks (GDL) is a container logistics company with panIndia presence providing CFS and ICD services. GDL operates two
large CFSs at JNPT Navi Mumbai, an ICD at Garhi Harsaru, near
Gurgaon, and CFSs at Chennai and Vizag. GDL has recently started
operating its own container trains and has entered the cold chain
logistics business through its subsidiary, Snowman Frozen Foods.
Results Summary
In 3Q F2008, Gateway Distriparks’ sales were Rs720 million
with net profit of Rs201.3 million. Volumes were at 96,000
TEUs. The fully diluted EPS was Rs1.74. Volume throughput
was up 67% YoY and sales were up 74% YoY. However, net
profits were up just 20% YoY because of substantial
extraordinary income. In FY07, Gateway Distriparks reported
sales of Rs1,609 million and net profit of Rs778.3 million.
Company Guidance and Outlook
Container traffic in India has risen 15% annually in the past
five years. The government has increasingly opened up the
ports, rail movement of containers, and associated logistics
activities to private firms. Management believes these are
key to Gateway Distriparks’ operations and growth. Gateway
Distriparks plans to become an integrated logistics firm
through its network of CFSs, ICDs, and cold chain logistics.
35
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Gateway Distriparks Ltd: Financial Summary
Rs million; Years Ending March
Income Statement
2005
Sales Turnover
956
2006
1,386
2007
1,610
Balance Sheet
Other Income
10
110
250
Total Income
966
1,496
1,859
Power & Fuel Cost
12
18
30
Secured Loans
Employee Cost
33
68
80
Unsecured Loans
275
322
487
Total Debt
80
123
181
Total Liabilities
Selling and Admin Expenses
30
18
17
Total Expenditure
Miscellaneous Expenses
429
548
795
Operating Profit
537
948
1,065
48
27
17
Depreciation
72
106
139
416
815
910
Profit Before Tax
Tax
Net Profit before Minority Interest
750
922
924
910
4,830
5,264
1,660
5,752
6,188
828
319
Less: Accumulated Depreciation
Net Block
Investments
35
75
109
Current Assets
722
771
Sundry Debtors
(8)
30
-
75
-
858
319
75
2,526
6,079
6,746
1,939
2,387
4,373
259
365
714
1,679
2,022
3,660
Application of Funds
346
(1)
2007
Share Capital
Gross Block
Interest
2006
Reserves Total
Total Shareholders Funds
Other Manufacturing Expenses
2005
Sourced of Funds
-
145
-
85
70
182
2,068
Minority Interest
-
Cash and Bank
927
3,526
Net Profit after Minority Interest
346
723
778
Loans and Advances
120
700
326
EPS (Rs)
4.3
7.4
7.9
Total Current Assets
1,131
4,296
2,576
2005
2006
2007
Less : Current Liabilities
Ratios
Growth (YoY)
Current Liabilities
128
108
220
Provisions
240
288
223
Sales
45%
16%
Total Current Liabilities
367
396
443
Operating Profit
77%
12%
Net Current Assets
764
3,900
2,133
2,526
6,079
6,746
Total Assets
Net Profit
109%
8%
Total Assets
141%
11%
0.52
0.06
0.01
Cash and Cash Equivalents at BoP
56%
63%
57%
Net Cash Used in Investing Activities
Leverage
Debt/Equity
Cash Flow Statement
Profitability
OPM
Net Cash from Operating Activities
2005
2006
62
927
2007
3,526
479
304
1,215
(844)
(492)
(1,912)
NPM
36%
48%
42%
Net Cash Used in Financing Activities
1,230
2,787
(761)
ROE
21%
13%
13%
Net Inc/(Dec) in Cash
865
2,600
(1,458)
ROCE
18%
14%
14%
Cash and Cash Equivalents at EoP
927
3,526
2,068
Source: Company data
36
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Gitanjali Gems Ltd
Play on Domestic Jewelry Retail Attractive Valuations
Morgan Stanley India
Company Private Limited+
Mangesh Bhadang
Mangesh.Bhadang@morganstanley.com
Hozefa Topiwalla
Hozefa.Topiwalla@morganstanley.com
Investment Conclusion
We believe Gitanjali Gems is the highly undervalued stock in
the India consumer and retail space. The company is a
pioneer in branded jewelry in India and is leveraging its brand
equity to drive growth in the retail market through increased
outlets and distribution. We believe it is set to benefit from a
shift in consumer buying patterns towards branded and
diamond studded jewelry. Given the diverse brand bouquet
and aggressive expansion plans, we estimate an impressive
51% earnings growth in FY07-10. The stock is trading at 13x
2009E EPS and the core jewelry business is at 7.5x 2009E
EPS, after stripping out the real estate business value.
Recent Developments
Gitanjali Gems recently acquired the Nakshatra brand
completely. This brand is one of the top five jewelry brands in
India. With this acquisition, the company has consolidated its
position in the branded jewelry space and is set to expand its
retail operations to leverage maximum value out of the
brands. Following its acquisitions of Samuels and Tristar,
Gitanjali Gems, in November, acquired Rogers Jewellers.
Gitanjali Gems has formed subsidiaries for its real estate
development and is seeking a partner in this segment.
Key Investment Issues
•
How would the company turnaround the US operations
and what kind of profitability can be expected from them?
•
What is the effect of rupee appreciation on the profitability
of the company?
•
With the aggressive expansion in retail, what kind of
growth and profitability can we expect from the company
and when?
Key Statistics
Stock Rating: Overweight
Reuters: GTGM.BO Bloomberg: GITG IN
India Mid Cap
NA
Price target
Rs547.0
Share price, close (January 22, 2008)
Rs271
Market cap (mn)
Rs24,036
52-Week Range
Rs480.0-178.5
Shares outstanding, basic, currency (mn)
88.5
Company Description
Gitanjali Gems’ businesses include diamond cutting and polishing,
jewelry exports, and jewelry retail. The company has the largest
presence iin retail jewelry in India, with brands such as Gili, D'Damas,
Nakshatra, Asmi, Sangini etc. The company recently ventured into
infrastructure development with its Hyderabad SEZ development.
What We Like
•
Infrastructure development – likely the biggest driver:
We believe markets have failed to price in the potential
upside from Gitanjali’s SEZ in Hyderabad. The company
has 200 acres of land, which is very close to the new
Hyderabad airport, developable into 15.6 million sq ft of
saleable space.
•
Expanding retail operations: According to the
company, proceeds from the GDR issue will be used to
fund its retail operations in India. We believe that, with
an increasing share of retail, the company will get better
valuation multiples.
•
High quality brands: The company has seven out of the
top ten jewelry brands in India. We believe the
increasing focus towards branded jewelry in India by
consumers augurs well for Gitanjali Gems domestic retail
business.
What We Don’t Like
•
Failure to turnaround US operations: Even though the
US is the largest jewelry market in the world, the current
consumer sentiment is not very positive. Failure to
turnaround the US operations could dampen margin.
•
Rupee and gold price appreciation: The appreciating
rupee reduces the competitive advantage of India in
jewelry exports. Gitanjali Gems derives more than 80%
of its revenue through exports.
•
Competition from other luxury goods: The jewelry
sector competes with other luxury goods, such as
watches, leather goods, electronic gadgets etc.
Valuation Methodology
We value Gitanjali Gems using a sum-of-parts valuation to
derive our price target of Rs547, valuing the jewelry business
at Rs417 and the real estate business at Rs130 per share.
37
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Risk-Reward Snapshot: Gitanjali Gems Ltd
Investment Thesis
Risk-Reward View: Branded Jewelry to Drive Growth
Rs800
Rs754 (+178%)
700
600
Rs547 (+102%)
500
400
Rs271.00
300
Rs260 (-4%)
200
100
Feb 07
Apr 07
Jul 07
Price Target
Sep 07
Dec 07
Mar 08
Historical Stock Performance
May 08
Aug 08
Nov 08
Jan 09
Key Value Drivers
This is derived from our base-case scenario.
Bull case
Rs754
Higher-than-expected increase in branded jewelry and jewelry
exports top line and higher realization from the SEZ and further launch
of new SEZs. Stronger growth in the diamond polishing business and
an overall increase in margins. CAGRs of 57% for earnings and 28%
for sales for F2007-10.
Base case CMP is 13x
Rs547
base-case
F2009E
EPS
Moderate growth in branded jewelry, exports, and diamond polishing.
Net margins move from the current 2.6% to 4.9% in F2010, leading to a
51% CAGR in earnings.
Bear case
Rs260
Weaker growth in branded jewelry, jewelry exports, and diamond
polishing. 20% CAGR in sales and 46% CAGR in net profit over
F2007-10. Lower realizations from the SEZ leading to the real estate
value of Rs57 per share. 10% less growth in exports because of
currency impact.
CMP is 15x
Bear Case
F2009E
EPS
Bear to Bull: Margins, SEZ, and Branded Jewelry are Key
800
88
700
600
Price Target: 547
500
68
400
47
37
30
23
31
754
547
51
300
200
35
84
growing affluent and middle class
population, disposable income, and
urbanization should drive jewelry
consumption.
• Shift in buying patterns: Consumer
demand is shifting towards diamond
and branded jewelry, leading to high
growth.
• Valuation: Markets appear to be
underestimating the value of Gitanjali’s
real estate. If we strip out the real
estate value, jewelry valuations look
cheap at 9x F2009E EPS.
Current Stock Price
Price Target Rs547
CMP is 11x
bull-case
F2009E
EPS
• Positive macro environment: India’s
260
100
Bear Decrease in Slow Decrase inCurrencyDecrase in Base Higher SEZ Higher Higher More SEZIncrease in Bull
Case
SEZ Branded Diamond Impact overall Case realisation Branded diamond projects margins Case
realisationJewellery growth
margins
jewellery polishing
growth
growth growth
• Leading brand presence: Gitanjali
has six of the top 10 highest recall
jewelry brands in India. These brands
have grown more than 80% in F07.
• The Hyderabad SEZ: The 200-acre
Hyderabad SEZ is the key value driver
for the company. Its proximity to the
new airport, availability of skilled labour
and tax benefits are key advantages.
• Increase in retail network: The
company is investing in increasing its
reach through more outlets and
distributors.
Potential Catalyst
• Acquisition of further retail chains in
the US: The company is looking at
increasing its presence in the US retail
market, which could lead to further
forward integration.
Key Risks
• Increasing competition in brands and
threat from Chinese exports; high gold
prices, appreciating rupee, slower
growth in jewelry exports; and margin
squeeze.
Source: Morgan Stanley, FactSet
38
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Gitanjali Gems Ltd: Financial Summary
Rs million; Years Ending March
Income Statement
Income
Sales
Other Income
Total Income
Expenditure
Materials
Other Operating Expenses
Total Expenditure
EBIDTA
Depreciation
Interest
Profit Before Tax
Total Tax
Net Profit after tax
Less: Minority Interest
Add: Share of profit/(Loss) in A
2006
2007
2008e
2009e
2010e
24,033
14
24,047
34,674
41
34,715
45,187
225
45,413
54,770
125
54,895
65,026
33
65,059
22,522
457
22,980
1,068
27
409
631
92
539
32
6
31,710
1,286
32,996
1,719
70
496
1,153
143
1,009
98
6
40,669
1,695
42,363
3,049
97
718
2,235
335
1,899
157
7
48,883
1,917
50,800
4,096
120
785
3,191
479
2,712
204
9
57,711
2,308
60,019
5,040
150
885
4,005
601
3,404
244
11
514
59.00
8.72
67
918
59.00
15.55
110
1,750
106.50
16.43
249
2,517
106.50
23.64
374
3,170
106.50
29.77
498
Net Profit
No. of shares (Diluted)
EPS (Diluted)
Dividends
Balance sheet
2006
2007
2008e
2009e
2010e
Shareholders Funds
Share Capital
Reserves
Roral shareholders equity
Minority interest
590
7,103
7,693
620
590
8,137
8,727
941
1,065
17,442
18,507
941
1,065
19,586
20,651
941
1,065
22,258
23,323
941
Loan Funds
Secured Loans
Unsecured Loans
6,810
159
9,567
5,022
9,567
500
10,067
1,250
12,067
1,250
Total Liabilities
15,282
24,257
29,516
32,909
37,581
355
131
224
5
229
1,162
232
931
275
1,206
1,591
329
1,262
175
1,437
2,208
449
1,759
100
1,859
2,938
599
2,339
50
2,389
115
101
147
403
229
147
403
229
147
403
229
147
403
229
Cash Flow Statement
2006
2007
2008e
2009e
2010e
PAT
Add: Depreciation
Change in WCap
Inventories
Sundry Debtors
Loans and Adv
Sundry Creditors
Provisions
Cash Flow from Operations
514
27
918
70
1,750
97
2,517
120
3,170
150
(1,726)
(6,383)
(908)
3,268
266
(4,942)
(5,168)
(2,813)
(1,389)
4,092
161
(4,129)
(5,388)
(2,866)
(968)
3,116
83
(4,176)
(5,215)
(3,858)
(920)
2,949
270
(4,137)
(4,408)
(2,707)
(908)
2,927
249
(1,527)
(218)
(71)
190
(98)
(1,077)
(128)
(244)
(1,450)
(329)
(1)
(330)
(542)
(542)
(680)
(680)
inc/(dec) of eq cap
Incr/(Decr) of Equities
Incr/(Decr) of ST Debt
Incr/(Decr) of LT Debt
Dividends(including Tax)
Others
290
4,936
3,831
(67)
(77)
7,620
(110)
131
475
7,805
(4,522)
(249)
(100)
1,250
(374)
(100)
2,000
(498)
-
Cash Flow From Financing Act
8,913
7,641
3,409
776
1,502
Net Cash Flow
Opening Cash
Closing Cash
3,872
241
4,113
2,062
4,113
6,175
(1,097)
6,175
5,078
(3,902)
5,078
1,176
(706)
1,176
470
2007
2008e
2009e
2010e
44%
78%
59%
30%
91%
22%
21%
44%
11%
19%
26%
14%
4%
2%
21%
3%
5%
3%
12%
4%
6%
4%
20%
6%
7%
5%
14%
8%
8%
5%
15%
8%
0.98
0.70
0.58
0.58
0.60
2.30
6.78
1.52
3.41
187
1.76
3.48
1.93
2.91
168
1.69
2.74
2.21
2.91
173
1.76
2.43
2.28
2.91
185
1.85
2.34
2.43
2.91
181
18.55
9.04
0.97
0.40
12.90
6.73
0.87
0.33
10.24
5.47
0.77
0.28
10.64
6.47
0.55
0.22
7.40
4.82
0.49
0.19
5.87
3.92
0.44
0.16
(Incr)/Decr of Fixed Assets
(Incr)/decr of Strategic Investme
Incr/(decr) in others
Cash Flow From Investment Ac
Ratios
Fixed Assets
Gross block
Less Depreciation
Net Block
Capital WIP
Net Fixed assets
Advances on Capital account
Goodwill on consolidation
Investments
Current Assets
Inventories
Sundry Debtors
Cash and Bank Balances
Loans and Advances
Total Current Assets
Liabilities and Provisions
Current Liabilities
Provisions
Total Current Liabilities
Net Current Assets
2,629
12,372
4,113
1,299
20,413
7,797
15,185
6,175
2,687
31,844
13,186
18,051
5,078
3,656
39,971
18,401
21,909
1,176
4,576
46,061
22,809
24,616
470
5,484
53,379
5,221
358
5,578
14,834
9,313
519
9,832
22,013
12,429
602
13,031
26,940
15,378
872
16,250
29,812
18,304
1,121
19,425
33,954
Total Assets
15,282
24,257
29,516
32,909
37,581
Growth
Sales
Net Profit
Total Assets
Profitability
OPM
NPM
ROE
ROCE
Liquidity
Debt/Equity
Turnover
Asset turnover
Inventory turnover
Receivables Turnover
Payables Turnover
Cash Conversion Cycle
Valuation
P/E
EV/EBIDTA
P/B
P/S
Valuation excl Real Estate
P/E
EV/EBIDTA
P/B
P/S
2006
E = Morgan Stanley Research estimates
Source: Company data
39
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Glenmark Pharmaceuticals
Player in NCE Research
Morgan Stanley India
Company Private Limited+
Key Statistics
Stock Rating: NOT RATED
Reuters: GLEN. BO Bloomberg: GNP IN
Share price, close (January 22, 2008)
Rs440.80
Market cap (mn)
Rs107,531.00
52-Week Range
Rs247. 50-623.90
Sameer Baisiwala, CFA
Sameer.Baisiwala@morganstanley.com
Stock Price Performance
Saniel Chandrawat
G le n m a r k
G le n m a rk
W e e k l y C l o s i n g P ri c e i n R s
800
Saniel.Chandrawat@morganstanley.com
Glenmark is a prominent Indian pharmaceutical company. It
has two distinct businesses: 1) the generics business, which
incorporates the North America/EU generics business, the
global active pharmaceutical ingredient (API) business, and
the Argentinean oncology business; and 2) the specialty
business, comprising new chemical entity (NCE) research and
branded generics business in several countries. Glenmark
has a fully integrated business model and a global footprint.
The company has high visibility for its out-licensing deals with
Merck KGaA and Eli Lilly.
600
600
400
400
200
200
0
1000
Results Summary
Glenmark’s 3Q08 consolidated revenue was up 54% YoY at
Rs6,851 million, with the main revenue contributors being the
US (Rs2,041 million, up 144% YoY) and Latin America
(Rs520 million, up 150% YoY). Consolidated profit after tax
was Rs2,800 million, up 48% YoY. Glenmark received two
abbreviated new drug application (ANDA) approvals in 3Q08,
including 180-day exclusivity for the first generic version of
Trileptal (Oxcarbazepine). The generics business revenue of
Rs2,678 million was up 105% YoY, while the specialty
business revenue (including out-licensing revenue) of
Rs4,172 million was up 32% YoY.
0
1000
R e l a t i v e P e rf o rm a n c e to M S C I I n d i a
500
500
0
0
-5 0 0
-5 0 0
T o t a l W e e kl y T u rn o v e r b y V a l u e i n R s b n
10
10
5
5
0
0
2003
Recent Developments
Glenmark plans to reorganize its business into two
companies: 1) the parent company, Glenmark
Pharmaceuticals (GPL, branded generics in India/RoW and
NCE/Biologics research); and 2) a 100%-owned subsidiary,
Glenmark Generics (GGL, US/EU generics, API, Argentina
oncology). Subject to regulatory approvals, GGL will be
formed by April 2008 and listed (via IPO, not more than 30%
dilution) by F1Q09.
800
2004
2005
2006
2007
Source: Datastream
Company Description
Glenmark is a research-based pharmaceutical company. It markets its
products over 80 countries and has 11 molecules in the new chemical
entity (NCE) and new biological entity (NBE) pipeline. Three of these
leads are in Phase II clinical trials and eight are in the pre-clinical and
discovery stages, targeting the broad areas of inflammation, metabolic
disorders, and oncology.
NCE/Biologic
Management is optimistic about its NCE pipeline and aims to
take two novel drugs into clinical trials per year. It plans to
conclude two or three additional out-licensing deals by 2010
and launch two novel drugs by 2015. Out-licensing of
Oglemilast for the EU could occur in the coming months,
according to management. Glenmark is evaluating options for
development of GRC 8200, an inhibitor for diabetes, given
Merck KGaA’s defocus on diabetes. The company has outlicensed GRC 6211, which targets pain and is undergoing
Phase II clinical trials in Europe, to Eli Lilly & Company.
Management says it could move one or two novel biological
compounds into Phase I clinical trials in F2009.
Company Guidance and Outlook
In US$ mn
Revenues - Specialty
- Generics
Consolidated revenues* **
PAT*
Milestone payments
FY08E
FY09E
FY10E
306
180
479
154
75
352
255
600
195
69
421
365
776
245
69
Source: Company data. * Including milestone payments. **Excludes contra effect of US$7
mn, US$7 mn and US$10 mn for FY08E, FY09E, FY10E respectively.
E = Glenmark estimates
40
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Glenmark Pharmaceuticals: Financial Summary
Rs million; Years Ending March
Income Statement
Rs million
Cash Flow Statement
2004
2005
2006
2007
Total revenues
3,717
5,995
7,086
13,035
Cost of goods sold
1,454
2,277
3,009
4,631
Gross margin
2,263
3,718
4,077
8,404
303
436
773
1,215
1,072
1,379
1,694
2,527
197
346
239
399
1,572
2,161
2,705
4,141
691
1,557
1,372
4,263
35
52
163
171
725
1,609
1,534
4,434
Interest expense
101
173
182
398
Depreciation
111
164
232
423
Pre-tax profits
514
1,273
1,120
3,613
Taxation
101
201
241
512
(1)
0
(1)
9
414
1,071
880
3,091
2004
2005
2006
2007
Personal cost
Selling & administrative
cost
Miscellaneous expenses
Operating expenses
Operating profits
Other income
EBIDTA
Extraordinary items
Profit after tax
Balance Sheet
Rs million
Equity capital
219
437
438
240
Reserves & surplus
2,125
2,852
3,494
6,624
Net worth
2,344
3,290
3,931
6,864
4
-
-
-
Debt
1,149
4,375
7,354
9,367
Total
3,497
7,664
11,285
16,231
Net block
1,490
3,372
4,531
5,930
252
131
1,273
2,174
Minority interest
Capital WIP
Net fixed assets
1,742
3,503
5,805
8,104
Investments
Cash & cash
equivalents
148
152
197
187
81
1,273
1,056
1,058
Inventories
822
1,194
1,575
2,697
1,305
2,376
3,816
5,712
Receivables
Loans & advances
403
579
968
1,588
Current assets
Current liabilities &
provision
2,529
4,149
6,359
9,997
767
1,122
1,728
2,395
Net current assets
1,762
3,026
4,631
7,602
Net deferred tax
(265)
(309)
(420)
(720)
Total
3,467
7,645
11,269
16,231
Rs million
Profit Before tax
Add: Depreciation & other non cash items
Less: Tax paid
Net change in working capital
Change in inventory
Change in trade & other receivables
Change in trade payables
Net cash from operations
Capital expenditure
Sale of fixed assets
Purchase of investments
Sale of investments
Interest received & others
Net cash from investing
Issue of shares
Borrowings
Dividend paid
Interest paid & others
Repayments
Net cash from financing
Inc/ (dec) in cash
Opening cash
Closing cash
2004
2005
2006
2007
514
213
(70)
(432)
(201)
(377)
147
226
(657)
250
(1)
2
(405)
508
248
(76)
(124)
(342)
215
1,273
357
(215)
(1,279)
(1,268)
(373)
361
136
(1,927)
23
(5)
(1)
(1,910)
102
3,482
(83)
(284)
(251)
2,966
1,121
440
(173)
(1,657)
(1,780)
(381)
504
(268)
(2,621)
68
(45)
30
(2,568)
4
3,146
(180)
(146)
(205)
2,619
3,613
859
(277)
(3,263)
(2,522)
(1,122)
381
932
(2,797)
86
10
13
(2,688)
311
2,170
(102)
(540)
(82)
1,757
36
46
81
1,191
81
1,273
(217)
1,273
1,056
2
1,056
1,058
Key Ratios
Effective tax rate (%)
EPS (Rs)
BVPS (Rs)
DPS (Rs)
Profitability ratios
Gross margin
Operating margin
Pre-tax margin
Net margin
Valuation ratios
P/E
P/BV
ROE
ROCE
EV/EBITDA
Leverage ratios
Net debt/ equity
Total debt/ equity
Turnover days
Inventory (days of net sales)
Receivables (days of net sales)
Cash cycle (days of net sales)
Net working capital (x net sales)
2007
2006
2005
2004
14%
26
57
1
21%
7
31
1
16%
9
26
1
20%
7
38
1
64%
33%
28%
24%
58%
19%
16%
12%
62%
26%
21%
18%
61%
19%
14%
11%
17
8
57%
29%
14
61
14
24%
14%
38
50
17
38%
26%
34
67
12
21%
20%
37
1.21
1.36
1.60
1.87
0.94
1.33
0.46
0.49
60
133
193
171
71
159
231
197
61
112
173
146
81
128
209
173
Source: Company data
41
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
GMR Infrastructure Ltd
Best in Class, but Already Looks
Priced for Perfection
Morgan Stanley India
Company Private Limited+
Akshay Soni
Akshay.Soni@morganstanley.com
Key Statistics
Stock Rating: Underweight
Reuters: GMRI.BO Bloomberg: GMRI IN
India Construction & Infrastructure
Attractive
Price target
Rs59.40
Share price, close (January 22, 2008)
Rs157.55
Market cap (mn)
Rs269,657.00
52-Week Range
Rs268.70-65.43
Shares outstanding, basic, currency (mn)
1,655.00
Pratima Swaminathan
Company Description
GMR Group is a pure infrastructure development company. It is one of
India’s largest private power companies, and has diversified into the
airports and roads segments. We believe the company’s first-mover
advantage is significant in an industry where returns are falling and has
helped GMR create an attractive portfolio of assets
Pratima.Swaminathan@morganstanley.com
Investment Conclusion
We think GMR is a solid long-term story. However, premium
valuations, coupled with little or no execution risk factored in
the price, lead us to rate the stock Underweight.
Recent Developments
In its first international foray, in F2008, GMR won a 20-year
contract for the brownfield development of Sabiha Gokcen,
the second airport in Istanbul after Ataturk International.
Recently, GMR raised US$1 billion through a qualified
institutional placement (QIP) making it the first Indian
company to raise such an amount through a QIP. GMR
expects to start its first greenfield airport in Hyderabad in
March 2008.
Key Investment Issues
•
Execution risk: We believe the market is discounting the
execution risk associated with GMR’s projects because of
the partnership model.
•
Falling returns: Returns are falling dramatically in the
infrastructure industry. Also, a lack of internal cash
contract business could affect margins, as GMR might
find it difficult to get contractors to give it a fixed price for
engineering, procurement, and construction projects.
Regulatory risk in all segments of business: Any changes
in regulations could have a significant effect on GMR’s current
operations and future expansion, given the highly regulated
environment in every segment of the company’s infrastructure
business.
Valuation Methodology
We base our price target on a DCF methodology (assuming a
separate WACC of 9.3-11.4% for each of the projects
depending on risk profile and gearing). Most of GMR’s
projects are in the early investment phases, so we allocate
further execution risk discounts to them, based on the time
period to commercial operations and the cost of equity for
GMR. This results in a value of US$2.13 billion, 12.5% below
our DCF value for the projects.
What We Like
•
As an infrastructure developer, GMR is one of the biggest
beneficiaries of India’s total infrastructure spending of
US$54 billion (4.9% of GDP) by F2009.
•
Diversified infrastructure play: GMR’s diversified
infrastructure breadth, with presence in power, airports,
roads, and real estate, provides balance sheet strength
and ensures stable future cash flows.
•
First-mover advantage: We believe first-mover
advantage is more sustainable in the infrastructure
development business than in other industries.
What We Don’t Like
•
Increasing competition could compress margins, with
contracts being awarded to the lowest bidder.
•
Lack of internal cash contract business: GMR opted
out of the ultra-mega power project race because it could
not get a contractor to give it a fixed price.
42
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Risk-Reward Snapshot: GMR Infrastructure Ltd
Risk-Reward View: Pricing in Medium-term Upside in the Short Term
Rs300
250
200
Rs 157.55
150
Rs83.20 (-47%)
100
Rs59.40 (-62%)
50
Rs51 (-68%)
0
Jan 07
Apr 07
Jul 07
Price Target
Sep 07
Dec 07
Mar 08
Historical Stock Performance
Price Target Rs59.40
May 08
Aug 08
Oct 08
Key Value Drivers
Derived from base-case scenario.
38x bull-case Higher traffic growth with no execution risk: No execution risk
2009E EPS on all projects. A pick-up in India’s growth drives higher traffic for
airports and roads.
Base case
Rs59.40
33x basecase 2009E
EPS
Long-term traffic growth of 7-8.5% on Indian roads as the number
of vehicles and road usage move up. 7-8% growth for airport
traffic as domestic and international traffic continues to increase.
Bear case
Rs51.00
32x bearcase 2009E
EPS
Slower-than-expected growth: A slowdown in India’s growth
leads to lower traffic at the airports. High leakages (due to
alternate routes available) lead to low traffic growth on roads.
Indian Rupee (Rs)
Bear to Bull: All About Traffic and Risk
11
2
5
5
2
7
• As an infrastructure developer, GMR
is a direct beneficiary of the
government’s planned infrastructure
spending of US$54 billion to F2009.
• Its longer-term perspective gives
GMR an edge in terms of bidding
against competitors.
• GMR has diversified infrastructure
breadth, with presence in power,
airports, roads, and real estate
segments.
• We expect the cash flow profile to
improve over the next five years.
Jan 09
Current Stock Price
Bull case
Rs83.20
100
90
80
70
60
50
40
30
20
10
0
Investment Thesis
1
83
• First-mover advantage in airports and
road BOT/BOOT projects gives GMR
access to higher-return projects.
• Non-involvement in cash contract
construction business allows GMR to
judge development risk better than
peers.
• Traffic growth in airports and roads
owned by GMR .
Potential Catalysts
• Award of new projects.
• Completion of current projects closer
to deadlines.
• Any acceleration in infrastructure
spending by the government or any
move to increase the share of privatepublic partnership projects.
59
51
Bear
Case
Risks
Road
HIAL
v ehicle traf f ic
traf f ic
decline
decrease
DIAL
traf f ic
decline
Base
Case
Road
HIAL DIAL traf f ic No
v ehicle traf f ic
surges execution
traf f ic increases
risk
increases
Bull
Case
• Impressive long-term story appears to
be already in the price with little or no
execution risk priced in.
Source: Morgan Stanley, FactSet
43
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
GMR Infrastructure Ltd: Financial Summary
Rs million; Years Ending March
Income Statement
Balance Sheet
2006
2007E
1,077
4,576
4,107
Sources of Funds
Share Capital
Reserves & Surplus
Net Worth
Minority Interest
Secured Loans
Unsecured Loans
Deferred Tax Liability
Total Capital Employed
2,644
3,060
5,704
4,243
25,925
3,778
2
39,652
3,311
16,612
19,923
5,261
30,220
6,837
145
62,385
3,311
3,311
18,561 20,943
21,872 24,254
5,774
6,583
53,352 54,627
11,557 18,341
3
3
92,557 103,808
1,549
303
249
54
1,245
465
780
4,160
531
493
38
3,629
664
2,965
Application of Funds
Gross Block
Depreciation & Amort
Net Block
Capital WIP
Pre-operative exp
Investments
24,559
11,051
13,508
13,868
2,450
2,557
41,406
12,407
29,000
14,232
4,828
2,625
68,526
16,541
51,985
10,949
15,441
314
86,302
20,766
65,536
16,677
1,244
220
2007E
2008E
2009E
0.5
4.3
5.0
1.1
149.0
12.0
13.0
4.3
0.5
333.1
13.2
11.9
7.9
1.8
87.7
14.7
10.7
4.2
359
304
119
2,369 3,860 1,748
6,758 13,000 13,414
841
137 1,051
1,052 1,870
907
223
2,951
18,623
1,127
736
43%
10%
12%
7%
28%
14%
9%
7%
28%
8%
4%
2%
37%
13%
12%
6%
2006
2007E
2008E
2009E
Income from operations
Operating expenses
10,617 19,687 19,757
6,086 14,250 14,308
32,214
20,449
EBITDA
EBITDA Margin (%)
4,530
42.7%
5,437
27.6%
5,448
27.6%
11,765
36.5%
Other Income
Depreciation & Amort
Interest (net)
33
2,200
1,303
183
1,346
1,441
1,055
3,028
1,927
Earnings before Tax
Provision for Tax
Current tax
Deferred tax
Earnings after Tax
Minority Interest
Net Profit for the year
1,061
125
126
(1)
936
231
706
2,833
415
319
96
2,418
673
1,744
2006
Key Ratios
Valuation Ratios
EPS (Rs)
P/E x
Book Value (Rs)
P/Book x
EV/EBITDA x
Profitability Ratios
EBITDA Margin
Net Profit Margins
ROE
ROCE
Growth Ratios
Sales
EBITDA
Net Income
Leverage Ratios
Debt/Equity
Net Debt/Equity
7%
15%
3%
85%
20%
147%
0%
0%
-55%
63%
116%
280%
5.2
4.0
1.9
1.2
3.0
2.4
3.0
2.2
Curr Assets, Loans & Adv
Inventories
Debtors
Cash & Bank
Other current assets
Loans & Advances
Curr Liabilities & Prov
Current Liabilities
Provisions
Net current assets
Total Assets
2008E
2009E
3,376 6,627 2,271
2,477
732
845 1,100
1,052
7,269 11,701 13,868 20,131
39,652 62,385 92,557 103,808
Cash Flow Statement
2006
2007E
2008E
2009E
Income from Operations
Depreciation
Cash flow from operations
Change in Net Working Capital
Net cash from operations
706
2,200
2,905
(2,483)
422
Capital Expenditure
Change in Investments
Net cash from investing
(8,659) (19,579) (33,344) (9,657)
(802)
(68) 2,311
94
(9,461) (19,647) (31,033) (9,563)
Change in Deferred Tax Liability
Change in Debt
Increase/Decrease in Equity
Ordinary Dividend Paid
Net cash from financing
(1)
143
(142)
10,548 7,354 27,853
740 13,492 1,681
11,287 20,989 29,392
Change in Cash
Opening Cash in Balance Sheet
Closing Cash in Balance Sheet
1,744
780 2,965
1,346 3,028 4,576
3,090 3,808 7,540
1,811 (1,753) (1,054)
4,901 2,055 6,486
8,059
227
8,286
2,248 6,243
414 5,208
4,509 6,757 13,000 13,414
6,757 13,000 13,414 18,623
E = Morgan Stanley Research estimates
Source: Company Data, Morgan Stanley Research
44
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Grasim Industries Ltd
Cement to Drag Growth
Morgan Stanley India
Company Private Limited+
Akshay Soni
Akshay.Soni@morganstanley.com
Pratima Swaminathan
Key Statistics
Stock Rating: Equal-weight
Reuters: GRAS.BO Bloomberg: GRAS IN
India Cement
Cautious
Price target
Rs1,783.00
Share price, close (January 22, 2008)
Rs2,859.70
Market cap (mn)
Rs262,206.00
Rs4,704.00-1,927.00
52-Week Range
91.70
Shares outstanding, basic, currency (mn)
Pratima.Swaminathan@morganstanley.com
Investment Conclusion
We have a Cautious view on the India Cement industry and
an Equal-weight rating on Grasim. Grasim has a dominant
position in its three main businesses – cement, viscose fibre
(VSF), and sponge iron, although cement is the key driver. ,
We expect a cement capacity overhang in F2009 to slow
pricing for cement companies. However, Grasim has a stable
cash stream from its VSF business, which is partly why we
have an Equal-weight rating on the stock, as against our
Underweight rating for pure cement-play peers.
Recent Developments
Recently, the Tamil Nadu government said that that it would
take over private cement factories in the state if they did not
reduce prices in the public interest. In 3Q F2008, Grasim’s
revenue was up 19% YoY and profit up 29% YoY. Revenue
was up 24% YoY for VSF, 52% YoY for chemicals, and 25%
YoY for sponge iron. Cement revenue was up just 16% YoY.
Grasim (including Ultratech) plans to spend Rs17.5 billion to
modernize and expand cement capacity by 192,875 tons in
Gujarat and Karnataka from the current capacity of 270,100
tons. It plans to spend Rs74.3 billion in the cement division
overall to increase capacity by 17.1 million tons.
Key Investment Issues
•
F2009 cement capacity overhang could affect profits
significantly.
•
Government monitoring of cement prices could dampen
price increases in the coming quarters.
•
Mounting raw-material, fuel, and freight costs will put
pressure on margins.
Company Description
Grasim Industries, a flagship of the Aditya Birla Group, is the seventhlargest cement company and one of the biggest viscose fibre producers
in the world. Cement and viscose contribute more than two-thirds of
EBITDA. The company also manufactures sponge iron and textiles. It
has a 51% stake in Ultratech Cemco, the second-largest cement
manufacturer in India.
Valuation Methodology
We use a sum of the parts to derive our price target because
of the diverse nature of Grasim’s businesses. We apply 12month-forward peer-average EV/EBITDA multiples for the
VSF and sponge iron businesses. We benchmark the
replacement value of US$100 for the 12-month forward
capacity of the cement business.
What We Like
•
Second-largest cement company in India: Grasim
(including UltraTech) has 31 million tons of cement
capacity, controlling 22% of Indian cement capacity.
•
Dominant position in three main businesses: Other
than cement (71% of F2007 revenues), Grasim is also a
leader in the VSF (19.3%) and sponge iron (5.3%)
businesses.
•
We believe VSF cash flows give Grasim the ability to
weather the cement industry downturns, and even
acquire cheap assets, making it the best long-term play in
the cement industry in India.
What We Don’t Like
•
F2009 cement capacity overhang: India’s cement
industry plans to add 90 million tons of capacity in F2009,
thereby causing a capacity overhang, which could lead to
price declines.
45
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Risk-Reward Snapshot: Grasim Industries Ltd
Investment Thesis
Risk-Reward View: Conglomerate Exposure Hedges Cement Play
Rs4,000
3,500
3,000
Rs 2,859.70
Rs2,494 (-13%)
2,500
2,000
Rs 1,783 (-38%)
1,500
• Second-largest cement company in
India (including UltraTech).
• Dominant position in three main
businesses.
• VSF cash flows position Grasim as
the best long-term play in the
industry, in our view.
• Grasim/UltraTech venture provides
superior bargaining power with
suppliers of raw materials.
Rs1,316 (-54%)
1,000
Key Value Drivers
Jan 06
May 06
Sep 06
Price Target
Price Target Rs1,783
Jan 07
May 07
Sep 07
Historical Stock Performance
Jan 08
May 08
Sep 08
Jan 09
Current Stock Price
Derived from base-case scenario.
Bull case
Rs2,494
16x bull-case Government allows price hikes: With pricing power allowed full
2009E EPS rein, cement prices move up to Rs250/bag. The higher profits
result in the company’s capacity trading at the EV/ton multiple
ACC Ltd has had in the past 18 months (US$152/ton).
Base case
Rs1,783
18x basecase 2009E
EPS
Bear case
Rs1,316
25x bearcase 2009E
EPS
Stable pricing before a decline in F2009: With stable prices in
F2008, investors begin to look out to the excess capacity coming
on line in F2009 and start pricing the company’s capacity at
replacement value (US$100/ton).
Government export ban: Inflation control measures take the
form of a ban on cement exports resulting in a 15% fall in prices.
The company’s capacity trades at ACC’s 10-year average EV/ton
valuation (US$77/ton).
Note: We benchmark the valuations of Grasim’s cement businesses to ACC, as we see ACC as the closest comparable.
Source: FactSet, Morgan Stanley Research
• Cement pricing environment.
• Upcoming cement capacity addition.
Potential Catalysts
• Government control on cement
prices.
• Any tax-cuts announced by the
government in the budget.
• Sponge iron and VSF prices are
stronger than we estimate.
Key Risks
• Downside:
• F2009 cement capacity overhang.
• Government intervention negates
any cement profitability.
• Upside:
• Delay in capacity expansion causes
cement prices to hold up.
• Greater-than-expected efficiencies
between UltraTech and Grasim.
46
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Grasim Industries Ltd: Financial Summary
Rs million; Years Ending March
Profit and Loss Statement
(Rs. million)
F2006
Cash Flow Statement
F2007
F2008E
F2009E
F2006
F2007
F2008E
F2009E
15,174
Gross Revenues
93,323
121,410
138,548
Less : Excise Duty
12,662
13,034
16,135
16,897
Profit after tax
9,759
19,113
23,327
Net Revenues
80,661
108,376
122,413
123,277
Add : Depreciation
4,092
4,345
5,565
7,530
Cost of goods sold
61,762
74,887
80,459
89,713
Cash flow from ops
13,851
23,458
28,891
22,704
EBITDA
18,899
33,488
41,954
33,565
Net change in Work cap
737
-1,604
-130
5,170
27.2%
Extraordinary items
29
256
0
0
-172
-97
762
669
14,444
22,012
29,524
28,543
-13,519
EBITDA margin
23.4%
30.9%
34.3%
140,174
(Rs. million)
Cash from Operations
Interest (net)
1,331
1,259
2,357
3,643
Change in Deferred Tax
Depreciation
4,092
4,345
5,565
7,530
Net cash from ops
Pre-Tax Profit
Taxation
Effective Tax rate
Net profit
Deferred Tax
Profit after Deferred
Tax
22,392
13,477
27,884
34,032
4,009
8,868
9,943
6,549
Capital Expenditure
-5,817
-21,539
-50,860
29.7%
31.8%
29.2%
29.2%
Sale of Investments
-4,799
-8,190
-2,000
-1,000
9,468
19,016
24,089
15,843
Net cash from Investing
-10,617
-29,728
-52,860
-14,519
-291
-97
762
669
9,759
19,113
23,327
15,174
Net cash from financing
F2006
F2007
F2008E
F2009E
Equity share capital
917
917
917
917
Reserves & Surplus
32,868
47,451
67,662
79,659
0
0
0
0
Net Worth
33,784
48,368
68,578
80,576
Debt
27,199
37,564
64,203
54,180
8,788
8,691
9,453
10,122
69,772
94,622
142,234
144,879
Gross Fixed Assets
85,484
95,789
137,535
167,719
Less : Depreciation
41,670
45,399
50,964
58,493
Add: Capital WIP
3,064
12,067
21,228
4,563
Net Fixed Assets
46,877
62,457
107,799
113,789
Investments
13,870
22,059
24,059
25,059
Current Assets
24,557
28,421
33,970
30,468
- Inventories
9,479
10,491
11,964
11,002
- Receivables
4,961
6,651
10,834
6,870
2,748
Deferred Tax Liabilities
Total Liabilities
Assets
- Cash & cash equiv.
2,252
1,736
1,922
- Loans & advances
7,865
9,543
9,249
9,849
Less : Current Liabilities
15,586
18,362
23,595
24,437
Net Current Assets
Misc expenditure to the
extent not written off
8,971
10,059
10,376
6,031
53
46
0
0
69,772
94,622
142,234
144,879
Total Assets
Increase in debt
Merger Adjustment
Liabilities
Revaluation Reserve
Cash from Financing
Dividends paid incl tax
Balance Sheet
(Rs. million)
Cash from Investing
E = Morgan Stanley Research estimates
NA = Not Applicable; NM = Not Meaningful
Source: Company Data, Morgan Stanley Research
Net Inc/(Dec) in cash
-2,218
-3,165
-3,116
-3,177
-725
10,365
26,639
-10,022
0
0
0
0
-2,943
7,200
23,523
-13,199
885
-516
187
825
Opening cash
1,368
2,252
1,736
1,922
Closing cash
2,252
1,736
1,922
2,748
F2006
F2007
F2008E
F2009E
106.4
26.9
368.5
7.8
15.2
208.5
13.7
527.5
5.4
8.9
254.4
11.2
747.9
3.8
7.7
165.5
17.3
878.8
3.3
9.3
23.4%
12.1%
22.0%
31.7%
30.9%
17.6%
35.5%
46.5%
34.3%
19.1%
30.7%
39.9%
27.2%
12.3%
18.1%
20.3%
9.8%
-3.9%
-1.8%
4.2%
14.2
34.4%
77.2%
106.9%
95.8%
26.6
13.0%
25.3%
22.0%
22.0%
17.8
0.7%
-20.0%
-34.2%
-34.9%
9.2
33.3
30.0
32.2
33.3
30.0
25.3
33.3
30.0
25.0
33.3
30.0
17.4
0.81
0.74
0.78
0.74
0.94
0.91
0.67
0.64
Ratio Analysis
Valuation
EPS (Rs)
P/E x
Book Value (Rs)
P/Book x
EV/EBITDA x
Profitability Ratios
EBITDA Margin
NPM
ROCE
ROE
Growth Ratios
Revenues
EBIDTA
PBT
Net Profit
Interest coverage
Turnover Ratios
Inventory (days)
Debtors (days)
Working capital
Leverage Ratio
Debt/Equity
Net Debt/Equity
47
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
HDFC
Strong Macro = Strong Micro
Morgan Stanley Asia
Limited+
Anil Agarwal
Morgan Stanley India
Company Private Limited+
Anil Bang
Anil.Agarwal@morganstanley.com
Key Statistics
Stock Rating: Overweight
Reuters: HDFC.BO Bloomberg: HDFC IN
India Financial Services
In-Line
Price target
Rs3200.00
Share price, close (January 22, 2008)
Rs2480.30
Market cap (bn)
US $17.90
52-Week Range
Rs3257.00-1397.10
Shares outstanding, basic, currency (mn)
281.00
Anil.Bang@morganstanley.com
Company Description
HDFC has been a leading player in the mortgage finance market since
1977. It has around 244 outlets through which it carries out its
operations. Besides the core business of mortgages, HDFC has
evolved into a financial conglomerate with its subsidiaries/associates
carrying out operations in life insurance, general insurance, commercial
banking, asset management, etc.
Mansi Shah
Mansi.S.Shah@morganstanley.com
Investment Conclusion
HDFC is one of the largest mortgage lenders in India and has
significant presence in non-banking financial services
businesses, such as insurance and asset management. It
has been in the mortgage finance business since 1977 and
has good brand equity. We believe HDFC’s spreads will
remain high in a declining rate scenario and that this, together
with strong asset growth and benign costs, will cause
profitability to remain exceptionally high. The core ROA for
HDFC (excluding capital gains) is now running at 2.6%
compared with 2.2% a year ago. HDFC is one of our top
picks in the industry, as we expect interest rates to decline in
India.
What We Like
•
Beneficiary of favorable macro environment: HDFC is
wholesale funded and falling rates in India have led to an
expansion in spreads. Also, unlike banks, which are
experiencing a slowdown in home loans, HDFC is still
growing at a healthy pace, driven by strong demand from
its target segments, and hence gaining market share.
•
Recent Developments
HDFC reported 3Q F08 earnings of Rs6.5 billion, up 83%
YoY. Core earnings rose 77% YoY, backed by strong net
interest income growth of 60% YoY. Loan spreads improved
to 2.3% in 9M F08 from 2.27% in 1H F08 – implying spreads
at about 2.35% in 3Q F08. The core cost income ratio
(excluding capital gains from revenues) declined to 9.9%,
against 14.3% in 3Q F07 and 11.3% in 2Q F08.
Efficient operations: HDFC’s core cost income ratio is
just about 10%, and unlike banks, the company does not
have to maintain a statutory liquidity ratio or a cash
reserve ratio. Savings in these areas more than offset its
higher cost of funds, thereby giving it a competitive edge.
•
Optionality to various growing businesses: HDFC has
presence in growing businesses, such as insurance,
asset management, and private equity, through its
subsidiaries. It also holds a 23% stake in HDFC Bank,
the second-largest private sector bank in India.
Key Investment Issues
Growth and earnings depend fully on the mortgage sector’s
growth in India. HDFC’s non-mortgage businesses are doing
quite well and a significant portion of the company’s value is
based on the outlook in these businesses. Therefore, the
company’s strategy for these businesses is very important.
What We Don’t Like
•
Dependence on wholesale funding: HDFC depends
mainly on wholesale sources to meet its funding
requirements. Therefore, spikes in wholesale yields have
a negative effect. Its key competitors, banks, have
access to retail deposits, which are cheaper than
wholesale funds.
Valuation Methodology
We base our price target of Rs3,200 on a sum-of-the-parts
model. We value the parent business at Rs2,230 on the basis
of our residual income model, and other businesses/stakes at
Rs970 per share. We believe the growth and margin outlook
for HDFC is very strong, which should result in continued
outperformance by the stock, in our view.
•
Subsidiaries’ fortunes are linked to capital markets:
Growth in HDFC’s key subsidiaries depends on capital
markets. Also, HDFC has stakes in many listed
companies, the value of which also depend on capital
markets.
•
Monoline business: Unlike a bank, which lends to
various segments, HDFC lends only to the mortgage
segment. Therefore, it depends fully on the performance
of India’s mortgage sector.
48
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Risk-Reward Snapshot: HDFC
Investment Thesis
Risk-Reward View: Still Skewed Towards the Upside
Rs4,000
Rs3,700 (+49%)
3,500
Rs3,200 (+29%)
3,000
Rs2,480.30
2,500
Rs2,100 (-15%)
2,000
1,500
1,000
Jan 07
Apr 07
Jul 07
Price Target
Sep 07
Dec 07
Mar 08
Historical Stock Performance
May 08
Aug 08
Oct 08
Jan 09
Current Stock Price
Key Value Drivers
Price Target Rs3,200
Derived from our base-case scenario using sum-of-the-parts
valuation.
Bull case
Rs3,700
40.3x basecase 2009E
EPS
Strong loan growth with improved margins: Loan growth
CAGR of 27% in F2007-09. Margins improve around 20bp from
our base case. Bull-case insurance value, which assumes higher
NBAP multiple, higher growth in new business premiums, and
bull-case value of stake in HDFC Bank.
Base case
Rs3,200
34.9x basecase 2009E
EPS
Improvements in margins to boost profit growth: Loan growth
CAGR of 23% in F2007-09. Margins expand as wholesale
funding costs decline. We add up our base-case value of other
subsidiaries to arrive at our base-case sum-of-the-parts value.
Bear case
Rs2,100
22.9x basecase 2009E
EPS
Pressure on loan growth and margins: Loan growth CAGR of
20% in F2007-09. Margins decline around 30bp from our base
case. Bear-case insurance value, which assumes lower growth in
new business premiums, lower NBAP multiple, and bear-case
value of stake in HDFC Bank.
Bear to Bull: Margins and Loan Growth are Important Factors
4,000
Indian Rupee (Rs)
190
50
80
3,700
420
3,000
150
2,500
2,000
180
330
3,500
3,200
200
• One of the largest mortgage lenders.
• Leverage to different businesses in
the financial sector, such as life
insurance, asset management.
• Beneficiary of current macro
environment wherein wholesale yields
have come down.
• Lower operating costs and regulatory
costs – no need to maintain SLR and
CRR.
• Attractive risk-return profile – trading
at 17x F2009E on a core basis with
an ROE of 21%.
2,100
1,500
• Loan growth.
• Margins.
• Life insurance, asset management,
and private equity businesses.
• Strategic partner in general insurance
business.
Potential Catalysts
• Higher-than-expected decline in
wholesale rates, resulting in sharp
increase in NII.
• Listing of Life insurance subsidiary –
HDFC Standard Life could be the first
life insurance company to get listed
on Indian stock markets.
Risks
• Upward movement in short-term
interest rates.
• Sharper-than-expected slowdown in
loan growth because of an increase in
interest rates, which may also create
some concern on the asset quality
front.
1,000
500
0
Bear
Case
Bear Case
Insurance
Biz
Lower
value in
HDBK
Lower Lower loan
margins
growth
Base
Case
Higher Higher loan Higher Insurance
margins
growth
value for doing well
HDBK
Stake
Bull
Case
Source: Morgan Stanley Research, FactSet
49
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
HDFC: Financial Summary
Rs million; Years Ending March
Profit and Loss Statem ent
Per Share Data and Valuations
Rs Mln (Year end March)
F2006
F2007
F2008E
F2009E
Year end March
Interest Income
37863
53141
72530
87471
Per Share Ratio (Rs)
F2006
F2007
F2008E
F2009E
Interest Expense
24911
36669
47858
56180
ModelWare EPS
48.6
58.5
87.2
91.7
Net Interest Incom e
12952
16473
24671
31291
Book Value
179.0
219.4
405.4
495.3
---Fee Income
675
686
686
857
Core Operating Profit
51.6
60.4
85.8
106.8
---Capital Gains
2362
3710
9000
4500
DPS
20.0
22.0
25.0
27.0
---Dividend Income
1080
1179
1297
1556
51.1
42.4
28.5
27.0
---Other non int. income
805
248
246
278
Valuations
Total Non Interest Incom e
4921
5822
11229
7191
P/E
Total Incom e
17873
22295
35900
38482
Price to Book
13.9
11.3
6.1
5.0
803
913
1187
1400
Price to Core Op. Profit
48.1
41.1
28.9
23.2
Dividend Yield
0.8%
0.9%
1.0%
1.1%
F2006
F2007
F2008E
F2009E
---Employee Expenses
---Other Operating exp
1346
1454
1599
1727
Total Operating Expenses
2150
2367
2786
3127
Operating Profit
15723
19928
33114
35355
150
250
300
350
Year end March
Pre-tax Profit
15573
19678
32814
35005
Spread Analysis
Tax
3000
3974
8314
8507
Avg. Yield on Earning Assets
8.3%
9.7%
10.9%
10.7%
Net Profit
12573
15704
24500
26498
Cost of Earning Assets
5.5%
6.7%
7.2%
6.9%
Net Interest Margin
2.9%
3.0%
3.7%
3.8%
Provisions for Contingencies
Balance Sheet Data
Ratio Analysis
Grow th Ratios
Rs Mln (Year end March)
F2006
F2007
F2008E
F2009E
Net Interest Income
33.1%
27.2%
49.8%
26.8%
Total Assets
511897
627444
784647
956260
Non Interest Income
3.1%
18.3%
92.9%
-36.0%
Total Loans
449901
565124
696803
852860
Operating Expenses
19.5%
10.1%
17.7%
12.3%
Total Earning Assets
501653
596413
736371
901689
Operating Profit
23.7%
26.7%
66.2%
6.8%
Total deposits
87414
103844
124613
152028
Net profit
21.3%
24.9%
56.0%
8.2%
Shareholder's Equity
44683
55514
113505
143091
EPS
16.7%
20.4%
49.1%
5.2%
259
269
281
289
Total Loans
24.9%
25.6%
23.3%
22.4%
458601
569671
706046
870453
Total Assets
26.3%
22.6%
25.1%
21.9%
Gross NPL's
4464
5577
7005
8637
Return on Equity
30.1%
31.3%
24.7%
20.7%
Loan Loss Reserve
3805
4080
4605
5317
Return on Assets
2.7%
2.8%
2.8%
3.0%
Gross NPL Ratio
1.0%
0.9%
1.0%
1.0%
Coverage Ratio
85.2%
73.2%
65.7%
61.6%
Cost Income Ratio
12.0%
10.6%
7.8%
8.1%
Expenses/average assets
0.5%
0.4%
0.4%
0.4%
No. of shares (fully diluted)
Average Assets
Asset Quality
Profitability Ratios
Capital Ratios
Tier 1 Ratio
8.5%
7.6%
14.0%
14.1%
Tier 2 Ratio
6.5%
5.3%
5.0%
5.0%
Capital Adequacy ratio
15.0%
12.9%
19.0%
19.1%
Efficiency
Source: Company Data, Morgan Stanley Research, E= Morgan Stanley Research estimates.
50
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
HDFC Bank
For the Long Haul
Morgan Stanley Asia
Limited+
Anil Agarwal
Morgan Stanley India
Company Private Limited+
Anil Bang
Anil.Agarwal@morganstanley.com
Key Statistics
Stock Rating: Equal-weight
Reuters: HDBK.BO Bloomberg: HDFCB IN
India Financial Services
In-Line
Price target
Rs1,275.00
Share price, close (January 22, 2008)
Rs1439.65
Market cap (bn)
US$13.10
52-Week Range
Rs1825-890
Shares outstanding, basic (mn)
354
Anil.Bang@morganstanley.com
Company Description
HDFC Bank Ltd. was set up by the HDFC Group and started operations
in 1995. It is the second largest private sector bank in India. In addition
to branches and ATMs, the bank offers phone banking and net banking.
The bank’s strategy is to reduce the capital intensity of its corporate
business by focusing on value-added fee streams.
Mansi Shah
Mansi.S.Shah@morganstanley.com
Investment Conclusion
HDFC Bank is the second-largest private-sector bank in India.
The stock has been one of the strongest performers among
Indian financials in the past 10 years, driven by a combination
of strong growth, high returns, and low risk. It has the best
funding franchise in India with the highest proportion of lowcost deposits. We believe the bank should do well in the long
run based on its strong fundamentals and experienced
management team. However, in the near term, we believe
the current valuations of 23.1x F2009E earnings and 3.7x
book value, with an ROE of 17%, fully capture its strong
fundamentals.
Recent Developments
HDFC Bank reported 3Q F08 earnings of Rs4.3 billion, up
45% YoY. EPS growth was 29% YoY. Core revenue for the
bank rose 57% YoY, backed by 66% YoY net interest income
growth and 39% YoY fee income growth. However, operating
expenses increased a sharp 74% YoY and credit costs
remained high at 2.1% of loans. Loan growth was up 39%
YoY and 14% QoQ.
Key Investment Issues
Loan growth, particularly consumer loans, has slowed
significantly in India. Almost half of HDFC Bank’s loan book is
retail, so it will also be affected. Also, while there will likely be
a slowdown in retail loans, credit costs should pick up as the
loan book seasons.
Valuation Methodology
We use a residual income model to derive our price target of
Rs1,275. We are comfortable with our Equal-weight rating on
the stock, despite the current price being higher than our price
target, as we believe the stock will perform in line with the
market over 12-15 months. Our cost of equity assumption is
13%.
What We Like
•
Loan market share expected to grow: We believe
HDFC Bank, which is more efficient and has better
access to capital than state-owned banks, will continue to
gain market share. We expect its market share to grow
from the current 3.3% of system loans to about 5% in the
next five years.
•
Strong funding franchise: HDFC Bank has the best
low-cost deposit proportion (51%) in India; this enables it
to have the lowest funding cost in India. Its cost of
deposits is almost 50bp lower than for our other coverage
banks in India. As a result, HDFC Bank has quite healthy
net interest margins compared to those of other banks.
What We Don’t Like
•
Increase in loan loss provisions: HDFC Bank is
focusing on higher-yielding assets, such as credit cards,
personal loans, commercial vehicles, and business
banking. Although the yields on these products are
higher, so are the provisions. HDFC Bank’s provisioning
costs are running at about 2.1% of loans.
•
Operating expenses remain high: The bank is
aggressively expanding its distribution infrastructure. It
increased the number of branches from 535 in F2006 to
684 in F2007 and 754 in the first nine months of F2008.
We like this strategy from a long-term perspective, but it
is affecting current profitability. HDFC Bank’s costincome ratio was about 50% in 3QF08.
51
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Risk-Reward Snapshot: HDFC Bank
Investment Thesis
Current Valuation Fully Reflects Strong Fundamentals
Rs1,900
Rs1,840 (+28%)
1,620
Rs1,439.65
1,340
Rs1,275 (-11%)
1,060
780
Rs1,050 (-27%)
500
• Best funding franchise with low-cost
deposits at 51% of deposits.
• The bank’s NIM is among the highest
in the system.
• Earnings growth expected to be
strong at 39% CAGR in F2007-09.
• Asset quality remains strong with
coverage (specific and general) of
more than 100%.
• Valuations – fully priced in at 23.1x
earnings and 3.7x book for F2009E.
Key Value Drivers
Jan 07
Apr 07
Jul 07
Price Target
Sep 07
Dec 07
Mar 08
Historical Stock Performance
May 08
Aug 08
Oct 08
Jan 09
Current Stock Price
Price Target Rs1,275
Derived from base-case scenario using residual income model.
Bull
Case
Rs1,840
29.6x Bull
Case 2009E
EPS
Strong loan growth with improved margins. Loan growth of
44% in F2007-09 and margins improve about 25bp from our base
case. Credit costs decline about 35bp from our base case.
Base
Case
Rs1,275
20.5x Base
Case 2009E
EPS
Earnings growth of 39% CAGR in F2007-09. Loan growth of
36% in F2007-09. Margins more or less stable at F2007 levels.
Credit costs remain high at about 200bp as the loan book,
particularly the consumer loan book, seasons.
Bear
Case
Rs1,050
16.9x Bear
Case 2009E
EPS
Slowdown in loan growth and credit costs. Loan growth of
32% in F2007-09 and margins decline 15-20bp from our base
case. Credit costs increase 20-25bp from our base case.
Bear to Bull: Loan Growth is the Key Variable
2,500
• Loan growth to remain strong, as the
bank gains market share. However,
the pace is likely to be slower than in
recent quarters.
• Stable NIM to drive strong core
operating profit growth for the bank.
• Credit costs expected to remain at the
current high levels, as the bank
increases its proportion of lending to
riskier assets.
Potential Catalysts
• Availability of new branch licenses.
The bank has exhausted all existing
branch licenses and is awaiting new
licenses from the Reserve Bank of
India.
Risks
Indian Rupee (Rs)
2,000
215
105
245
1,500
54
1,000
67
1,840
104
1,275
1,050
• Higher-than-expected increase in
credit costs.
• Greater-than-expected slowdown in
consumer loans.
500
0
Bear
Case
LLP Rise
NIMs
decline
Slower loan
growth
Base
Case
Strong loan
NIMs
growth
Improve
LLP is
lower
Bull
Case
Source: Morgan Stanley, FactSet
52
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
HDFC Bank: Financial Summary
Rs million; Years Ending March
Profit and Loss Statem ent
Per Share Data and Valuations
Rs Mln (Year end March)
F2006
F2007
F2008E
F2009E
Year end March
Interest Income
44753
68890
93646
124226
Interest Expense
19295
31795
43702
58109
Per Share Data
EPS
Net Interest Income
---Fee Income
25458
10451
37096
12924
49944
16478
66117
20597
---Forex Income
1186
1904
3046
3959
---Capital Gains
-521
-684
1400
1100
---Miscellaneous Inc.
Book Value
Core Op. Profit
DPS
F2006
F2007
F2008E
F2009E
27.8
35.7
45.8
62.2
169.2
201.4
336.6
388.3
57.0
80.4
97.8
138.4
5.5
7.0
6.0
7.0
23.1
124
1019
1325
1656
Total Non Interest Income
11240
15162
22248
27313
Valuations
PE
51.8
40.3
31.5
Total Operating Income
36698
52258
72192
93430
Price to Book
8.5
7.1
4.3
3.7
4868
7769
12974
17385
Price to Core Op. Profit
25.3
17.9
14.7
10.4
Dividend Yield
0.4%
0.5%
0.4%
0.5%
---Employee Exp
---Other Expenses
12043
16439
20834
26043
Total Operating Expenses
16911
24208
33808
43427
Operating Profit
19788
28050
38384
50003
---Prov. For Investment Dep.
2459
3048
2400
1800
---Loan Loss Provisions
4793
8614
12194
15382
Total provisions
7252
11663
14594
17182
ADR Data (ADR=3 shares)
EPADR (US$)
Profit Before Tax
P/E
Yields
2.1
2.7
3.5
4.7
53.9
42.0
32.8
24.1
0.1%
0.2%
0.1%
0.2%
F2006
F2007
F2008E
F2009E
12536
16388
23791
32820
Provision for Tax
3827
4973
7613
10831
Year end March
Net Profit
8708
11415
16178
21989
Spread Analysis
17850
25686
34584
48903
Average yield on assets
7.5%
8.8%
9.0%
9.0%
Cost of earning assets
3.2%
4.0%
4.2%
4.2%
Net Interest Margin (NIM)
4.3%
4.7%
4.8%
4.8%
32.4%
Core Operating profit
Balance Sheet Data
Rs Mln (Year end March)
Share holders equity
F2006
F2007
F2008E
Ratio Analysis
F2009E
52995
64331
118978
137261
557968
682979
956171
1243023
Grow th Ratios
Net Interest Income
43.2%
45.7%
34.6%
Borrow ings
28585
28154
33785
40542
Non Interest Income
72.6%
34.9%
46.7%
22.8%
Other Liabilities & Prov.
95516
136891
164270
197123
Operating expenses
55.8%
43.2%
39.7%
28.5%
735064
912356
1273203
1617948
Operating Profit
47.2%
41.8%
36.8%
30.3%
Net Profit
30.8%
31.1%
41.7%
35.9%
Deposits
Total Liabilities
Cash & Balances w ith RBI
33066
51825
70537
90488
EPS
19.5%
28.5%
28.1%
35.9%
Balances w ith Banks
36124
39714
53614
61656
Deposits
53.5%
22.4%
40.0%
30.0%
Investments
283940
305648
428421
530447
Advances
37.1%
33.9%
41.6%
31.4%
Advances
350613
469448
664861
873380
Total Assets
42.7%
24.1%
39.6%
27.1%
Return On Equity
17.7%
19.5%
17.7%
17.2%
Return on Assets
1.4%
1.4%
1.5%
1.5%
46.1%
46.3%
46.8%
46.5%
2.7%
2.9%
3.1%
3.0%
10.9%
Fixed Assets
8551
9667
11793
13562
Other Assets
22771
36055
43977
48415
Total Assets
735064
912356
1273203
1617948
Earning Assets
703742
866635
1217433
1555971
Profitability Ratios
Average Interest Earning Assets
598822
785188
1042034
1386702
Efficiency Ratios
Average Loans
303138
410030
567155
769121
Cost Income Ratio
Avg Common Equity / Avg Assets (%)
8%
7%
8%
9%
No Of Shares (mn)
313
319
353
353
Expenses/Avg Assets
Capital Adequacy
Asset Quality
LLP / Avg Loans (Bps)
Gross NPL
158
210
215
200
5089
6578
10041
16045
Net NPL
1552
2029
2992
4804
Reserve Coverage
5378
6390
9783
14166
Gross NPL Ratio
1.2%
1.2%
1.3%
1.6%
Net NPL Ratio
0.4%
0.4%
0.5%
0.6%
105.7%
97.1%
97.4%
88.3%
Coverage Ratio
Tier 1 Ratio
8.6%
8.6%
12.3%
Tier 2 Ratio
2.8%
4.5%
4.5%
4.5%
11.4%
13.1%
16.9%
15.4%
Capital Adequacy Ratio
Source: Company Data, Morgan Stanley Research
E=Morgan Stanley Research Estimates
53
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Hindalco Industries
Upstream Aluminum, Novelis to
Provide a Boost: Overweight
Morgan Stanley India
Company Private Limited+
Vipul Prasad
Vipul.Prasad@morganstanley.com
Key Statistics
Stock Rating: Overweight
Reuters: HALC.BO Bloomberg: HNDL IN
India Non Ferrous Metals
Attractive
Rs221.00
Price target
Rs150.40
Share price, close (January 22, 2008)
Rs193,053.00
Market cap (mn)
Rs223.30-125.25
52-Week Range
1,043.30
Shares outstanding, basic, currency (mn)
Ketaki K Kulkarni
Company Description
Hindalco, a flagship company of the Aditya Birla group, is a dominant
company in the non-ferrous industry. In India, it controls about 40% of
copper smelting capacity, 25% of alumina refining capacity, and 35% of
aluminum smelting capacity. For copper, it is largely a custom smelter
although it has acquired concentrate mines in Australia. For aluminum,
it has fully integrated operations with a significant presence in the valueadded product segments.
Ketaki.Kulkarni@morganstanley.com
Investment Conclusion
We reiterate our Overweight rating on Hindalco, reflecting our
positive stance on aluminum prices, impressive volume
growth, and expectations of a positive earnings surprise from
the aluminum-rolling Novelis business. We forecast an
EBITDA CAGR of 25.6% for F2007-10.
Recent Developments
Novelis reported good 2Q F2008 results, with adjusted
EBITDA of US$147 million against negative US$8 million in
2Q F2007. The strong performance was mainly driven by a
12% increase in realized prices and a 15% reduction in SG&A
costs.
Key Investment Issues
The upstream aluminum business remains the primary
earnings driver. We estimate it will contribute 60% of
consolidated EBITDA in F2008-10. We forecast an EBITDA
CAGR of 11.9% for this business in F2008-10. We made this
forecast in December 2007 after lowering our aluminum price
forecasts to reflect price corrections.
Valuation Methodology
We derive our price target from a two-phase DCF model with
an explicit phase of eight years. We assume a debt/equity
ratio of 1.0x, WACC of 9.6% with cost of equity of 12.5% and
cost of debt of 9.0%. We project a long-term aluminum price
of US$2,315/ton and a long-term treatment and refining
charge (TC/RC) rate of 15c/lb. With these assumptions, we
derive our price target of Rs220, based on a DCF value of
Rs251 for Hindalco and Rs(30) for Novelis.
What We Like
•
Novelis turnaround running ahead of expectations:
We estimate an EBITDA CAGR of 88.8% for Novelis in
F2007-10, based on rapidly falling corporate costs, an
improving product mix, and a shrinking proportion of
sales contracts with price ceilings. We estimate Novelis
would contribute 33.3% to F2010 EBITDA for the
combined company.
•
Copper division cost-cutting yielding good results:
Hindalco’s copper business is benefiting from improved
by-product realized prices and declining conversion
costs. The production costs are declining because of two
main factors: 1) lower specific power consumption; and 2)
enhanced power self-sufficiency, implying lower
purchases of power from the grid, from where power is
often 100% more expensive.
What We Don’t Like
•
Copper production continues to disappoint: In
December 2007, we cut our cathode production forecasts
for Hindalco 46% for F2008 and 29% for F2009; we
estimate a production CAGR of 24% for F2007-10. Also,
the declining TC/RC trend in the copper concentrate
market will likely continue to pressure Hindalco’s copper
division’s margins over the next two years.
•
Increases in Chinese aluminum surplus, coupled with
a slump in global demand, may put downward pressure
on aluminum prices, which would affect our estimates.
54
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Risk-Reward Snapshot: Hindalco Industries
Investment Thesis
Risk-Reward: Strong Aluminum Prices, Novelis Provide a Boost
Rs300
Rs277 (+84%)
280
260
240
220
Rs221 (+47%)
200
180
Rs150.40
160
Rs143 (-5%)
140
120
100
Jan 06
May 06
Aug 06
Price Target
Dec 06
Apr 07
Aug 07
Historical Stock Performance
Price Target Rs221.00
Nov 07
Mar 08
Jul 08
Oct 08
Current Stock Price
Derived from base-case scenario.
Bull case
Rs277
10.6x bullA curb on Chinese aluminum production could lead to higher aluminum
case F2009E prices as below; 2.5% of capped contracts for Novelis in F2010.
EPS
US$/t
F09
F10
F11
F12
LT
Base case
Rs221
8.5x baseMorgan Stanley estimates for aluminum prices, as below; 5% of capped
case F2009E contracts for Novelis in F2010 as guided by the company.
EPS
US$/t
F09
F10
F11
F12
LT
3142
Al
2866
Al
Bear case
Rs143
3252
2811
2977
2590
2646
2425
2426
2315
9.0x bearIncreases in Chinese aluminum surplus leading to aluminum prices
case F2009E reaching market consensus levels as below; 6% of capped contracts for
EPS
Novelis in F2010.
US$/t
F09
F10
F11
F12
LT
Al
2426
2398
2288
2205
2095
Bear to Bull: Aluminium Prices and Proportion of Capped Contracts
Indian Rupee (Rs)
350
300
41
250
71
15
7
200
277
221
150
100
143
50
• Improving aluminum price outlook,
strong volume growth, and cost
cutting initiatives by Hindalco will
sustain high growth in the upstream
aluminum business.
• Novelis earnings likely to rebound
handsomely in F2008, aided by
sustainable cost reductions, improved
product mix, and shrinking proportion
of price-capped sales contracts.
• Stronger non-ferrous metals
sentiment than consensus
expectations because of healthy
demand in developing economies,
continued supply constraints, and raw
materials woes.
Key Value Drivers
• Hindalco’s upstream aluminum
business is highly sensitive to
aluminum prices.
• Proportion of capped price
contracts for Novelis.
• TC/RC for copper.
• Volume growth with captive sources
Potential Catalysts
• Positive surprise in Novelis’ results in
the coming three to four quarters.
• Higher aluminum and alumina volume
for Indian operations from F2009.
• Visible aluminum pricing strength from
1Q08.
Key Risks
• Increases in Chinese aluminum
surplus.
• Slump in global aluminum demand.
• Global economic slowdown.
• Material correction in Indian stock
market.
• Delay in Novelis turnaround.
0
Bear
Case
Lower
Aluminum
Prices
Increased
Capped
Contract
Proportion for
Novelis
Base
Case
Higher
Aluminum
Prices
Decreased
Capped
Contract
Proportion for
Novelis
Bull
Case
Source: FactSet, Morgan Stanley Research
55
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Hindalco Industries: Financial Summary
Rs million; Years Ending March
Cash Flow Statement
Income Statement
Rs Mn
Net Sales
Chg in stock Inc/(Dec)
Raw Materials
Power and Fuel
F2007
F2008E
F2009E
F2010E
Rs Mn (Yr Ended March)
183,129
622,940
685,120
687,320
PAT
(4,425)
(3,501)
(3,491)
(278)
110,663
399,506
440,693
426,451
18,486
15,337
16,255
17,159
Salaries
5,196
5,528
5,939
6,178
Other mfg exp
6,305
127,584
133,986
137,930
Sellg and Other exp
Total op exp
EBITDA
Depreciation
F2007
F2008E
F2009E
F2010E
25,797
16,576
28,861
35,233
18,139
6,380
19,464
18,814
Chg in Debtors
(2,561)
(59,571)
(5,793)
(248)
Chg in Inv
(2,203)
(76,557)
(9,608)
1,370
Chg in Other C. Assets
1,259
(5,892)
100
100
(3,770)
2,742
900
100
Chg in Creditors
3,122
72,980
8,590
(1,676)
Chg in Other C. Liab.
2,317
23,093
(135)
703
3,309
87
(400)
(1,600)
Chg in Loans/Advances
6,635
20,979
21,944
21,497
142,860
565,433
615,325
608,938
40,269
57,507
69,795
78,383
Chg in Provisions
Net Operating CF
Other Income
3,734
2,809
5,987
7,160
33,650
(7,078)
41,329
52,120
Interest
2,424
15,252
16,274
17,071
Capex
(15,054)
(108,616)
(45,051)
(80,714)
6,380
19,464
18,814
18,139
Other Investing CFs
(47,012)
44,734
-
-
35,200
25,600
40,694
50,333
Chg in Intangibles
-
(136,720)
-
-
(62,066)
(200,602)
(45,051)
(80,715)
4,343
23,019
13,440
-
(2,022)
(2,798)
(2,980)
(2,979)
Chg in Borrowings
24,652
157,858
(10,300)
35,200
Chg in Other LT Liabilities
(1,076)
35,249
1,501
1,696
CF from Financing
25,897
213,328
1,661
33,917
Change in Cash
(2,519)
5,649
(2,062)
5,322
6,654
12,303
10,241
15,563
F2010E
Depreciation
PBT
Tax
9,403
9,024
11,833
15,100
CF from Investing
PAT
25,797
16,576
28,861
35,233
Chg in Equity
56.1
(35.7)
74.1
22.1
2,022
2,798
2,980
2,979
% Change YoY
Dividend incl Dividend Tax
Balance Sheet
F2007
F2008E
F2009E
F2010E
Closing Cash Balance
Sources of Funds
Equity Capital
1,043
1,227
1,307
1,307
Reserves and Surplus
123,137
159,750
198,991
231,244
Net Worth
Key Ratios
F2007
F2008E
F2009E
Modelware EPS
24.73
13.51
22.09
26.96
18,984
Book Value Per Share
119.0
131.2
153.3
178.0
DPS
1.7
2.0
2.0
2.0
7.0
124,180
160,977
200,297
232,551
Debt
73,686
231,544
221,244
256,444
DeferdTax Liab
11,258
15,787
17,288
Other LT Liab
Dividends Paid
-
30,720
30,720
30,720
209,124
439,028
469,550
538,699
P/E
5.3
13.9
8.5
-
136,720
136,720
136,720
EV/EBITDA
6.5
7.8
6.5
6.2
112,527
218,207
214,639
211,410
Price to Book Value
1.6
1.4
1.2
1.1
Less : Dep& Amort.
42,460
48,725
55,669
62,696
Dividend Yield (%)
0.9
1.1
1.1
1.1
Capital WIP
14,764
4,500
41,250
114,080
Profitability Ratios (%)
Net Fixed Assets
84,831
310,702
336,939
399,514
EBITDA Margin
22.0
9.2
10.2
11.4
Invt/LT assets
86,753
42,245
42,245
42,246
Net Profit Margin
14.1
2.7
4.2
5.1
-
7,954
7,954
7,954
Average RoE
23.4
11.6
16.0
16.3
77,783
222,710
235,049
239,050
Average RoCE
15.4
9.8
9.9
10.4
6,654
12,303
10,241
15,563
Current Liabilities
40,275
136,435
144,490
141,917
Net Sales
60.7
240.2
10.0
0.3
Sundry Creditors
22,867
95,847
104,437
102,761
EBITDA
54.6
42.8
21.4
12.3
Total
Application of funds
Intangibles
Gross Block
Other LT Assets
Current assets
Cash & Bank
Valuation
Growth (%)
4,567
27,660
27,525
28,228
Net Profit
56.1
(35.7)
74.1
22.1
Provisions
12,841
12,928
12,528
10,928
Modelware EPS
47.5
(45.4)
63.5
22.1
Net Current Assets
37,508
86,275
90,559
97,134
Leverage
32
-
-
-
0.54
1.36
1.05
1.04
209,124
439,222
469,744
538,893
Other Liabilities
Misc. Expenses not w/o
Total
Net debt/Equity (x)
E = Morgan Stanley Research estimates
Source: Company data, Morgan Stanley Research
56
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Hindustan Unilever
Improving Growth Visibility
Morgan Stanley India
Company Private Limited+
Hozefa Topiwalla
Hozefa.Topiwalla@morganstanley.com
Nillai Shah
Key Statistics
Stock Rating: Overweight
Reuters: HLL.BO Bloomberg: HUVR IN
India Consumer
Attractive
Price target
Rs275.00
Share price, close (January 22, 2008)
Rs186.25
Market cap (mn)
Rs410,887
52-Week Range
Rs231.35-166.00
Shares outstanding, basic, currency (mn)
2,192
Nillai.Shah@morganstanley.com
Company Description
Hindustan Lever, a 51%-owned subsidiary of Anglo Dutch giant
Unilever, is the largest consumer company in India. It has annual
turnover of US$2.2 billion. Its business portfolio includes detergents,
soaps, personal and oral care products, processed foods, and
beverages. It is the market leader in most of its product categories.
Divya Gangahar
Divya.Gangahar@morganstanley.com
Investment Conclusion
We believe the following factors will drive Hindustan
Unilever’s (HUL) earnings: 1) high-teen growth in the personal
products (PP) business; 2) a recovery in laundry product
margins as the price war with Proctor & Gamble (P&G) comes
to an end; and 3) a successful foray into the foods business.
The market appears to be focusing only on cost pressures
and increases in competition. We think HUL has adequate
pricing power to offset cost pressures. Competitive pressures
are high and likely to remain so. However, HUL has built very
strong brands, which are likely to help it gain market share,
despite a competitive market.
Recent Developments
1. The company has successfully expanded the Dove and
Pond’s brands into premium hair and skin care categories. 2.
The 3Q07 performance indicated that laundry margins could
be rising. 3. The company has expanded its foods portfolio
under the Kissan brand umbrella targeting children’s nutrient
based convenience foods. 4. HUL has completed the recently
announced Rs6.3 billion share buyback program.
Key Investment Issues
1. Medium and long term outlook for growth in the personal
products business 2. Laundry business margins considering
cost pressures and price hikes 3. Entry into packaged foods
4. Management of rising cost and competitive pressures
Valuation Methodology
We estimate HUL’s DCF value at Rs290 per share. We
assume a WACC of 12% in our model. We base our price
target of Rs275 on a 5% discount to the DCF value as the
company faces some pressure from input costs and
competitive activities from ITC and P&G. At our price target,
the stock would trade at P/Es of 28.2x 2008E, 24.1x 2009E,
and 20.6x 2010E. HUL’s one-year forward P/E relative to the
global Morgan Stanley consumer universe is at an all-time
low. We do not believe this is justified, considering HUL’s
higher growth prospects and return ratios than for global
consumer companies.
What We Like
•
High-teen PP business growth likely in 2008-10: We
believe the skin and hair care segments and HUL’s
successful repositioning of brands such as Pond’s and
Dove will drive growth. The PP business EBIT margin is
nearly 1.8x the company’s overall EBIT margin.
•
Likely end of price war to improve laundry product
margins: The prices for HUL’s key laundry stock-keeping
unit have risen 23% since March 2004, but are still 21%
lower than the highs of June 2002, around the time the
price war with P&G started. Renewed focus on laundry
margins through price increases and product mix
improvement is likely to drive profitability in this segment.
•
Large long-term growth potential for food: HUL plans
to launch its foods portfolio in 2008. This may not have
an immediate impact on earnings, but we expect a
successful foray into foods to improve HUL’s long-term
growth visibility and result in a re-rating of the stock.
•
Attractive valuations: HUL’s P/E relative to the BSE
Sensex is at an all-time low. The stock is trading at
around 1.2x relative to the BSE Sensex.
What We Don’t Like
•
Severe cost pressures: Cost pressures have been
rising steadily. However, HUL has demonstrated
significant ability to hike prices and offset cost pressures,
and is likely to continue doing so in the foreseeable
future, in our view.
•
Competitive threat from ITC: ITC plans to launch
products in the home and personal care space, which
HUL dominates. ITC could begin a price war and hurt
HUL’s profitability.
57
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Risk-Reward Snapshot: Hindustan Unilever
Recovery in PP/Laundry Products and Entry into Foods Not Priced In
Rs400
Rs366 (+97%)
350
300
Rs275 (+48%)
250
Investment Thesis
• Strong, high-teen growth in the PP
business.
• Recovery in laundry product margins,
as price war with P&G comes to an
end.
• Successful foray into foods business.
• Attractive valuation.
Key Value Drivers
200
Rs175 (-6%)
Rs186.25
150
Jan 06
May 06
Sep 06
Price Target
Jan 07
May 07
Sep 07
Historical Stock Performance
Jan 08
May 08
Sep 08
Jan 09
Current Stock Price
Price Target Rs275
Our price target is based on a 5% discount to our DCF value.
Bull case
Rs366
32.5x 2008E
EPS
Sharper recovery in PP business. Faster and better margin
recovery for laundry products. Reduction in cost pressures and
improvement in competitive environment.
Base case
Rs290
28.2x 2008E
EPS
Recovery in PP business. Margin expansion for laundry
products. Roll-out of foods business. No significant deterioration
in pricing power or competitive environment.
Bear case
Rs175
23.7x 2008E
EPS
No recovery in PP or laundry product businesses. Increase in
cost pressures and deterioration in competitive environment.
Indian Rupee (Rs)
PP/Laundry Product Businesses and Competition are Key Drivers
450
400
350
300
250
200
150
100
50
0
38
22
51
Price Target: 275
28
16
366
290
36
• Growth in the higher-margin PP
business is the most significant driver
of earnings and valuations.
• Laundry product margins.
• Nascent packaged foods business in
India.
Potential Catalysts
• Successful roll-out of foods portfolio
from February 2008.
• Acceleration in PP growth.
• Evidence of recovery in laundry
product margins.
• Alleviation of cost pressure.
• Evidence of market share gains.
Key Risks
• Further increases in input costs.
• Increase in competitors’ predatory
pricing in categories such as skin
care, shampoos, and soaps.
• Inability to institute price hikes.
• Failure to meet cost-savings plan.
• Inability to expand foods portfolio.
175
Bear
Case
No Recovery No recovery
in PP growth in Laundry
margins
Severe
increse in
cost and
competitive
pressures
Base
Case
Sharp
Recovery in
PP growth
Faster and
better
recovery in
Laundry
margins
Behign cost
and
competitive
environment
Bull
Case
Source: FactSet, Morgan Stanley Research
58
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Hindustan Unilever: Financial Summary
Rs million; Years Ending December
Income Statement
Net sales
Raw material consumed
Manufacturing expenses
Gross Profit
Margin (%)
Total Operating costs
Operating Profit
Growth (%)
Margin (%)
Interest
Depreciation/ amortzn
Other Income
Non-recurring income
Profit before Tax
Income Tax
Effective Tax Rate (%)
Net Profit
Growth (%)
Net Margin
ModelWare EPS
Cash Flow Statement
F2007
F2008E
F2009E
F2010E
123,693
53,849
5,292
64,552
52%
84,129
39,564
18.9%
32.0%
33
3,629
3,416
0
39,318
12,267
31%
27,051
19%
22%
7.2
144,413
62,652
6,351
75,411
52%
100,110
44,303
12.0%
30.7%
102
4,195
3,588
0
43,593
13,601
31%
29,992
11%
21%
8.0
173,163
78,328
6,986
87,849
51%
121,309
51,854
17.0%
29.9%
94
4,782
3,398
0
50,376
15,308
30%
35,068
17%
20%
9.3
198,982
88,987
7,824
102,171
51%
138,330
60,652
17.0%
30.5%
94
5,293
3,686
0
58,951
17,914
30%
41,037
17%
21%
10.9
F2007
F2008E
F2009E
F2010E
3,762
100,038
103,800
2,009
4,729
110,537
55,538
8,422
31,257
6,367
33,540
12,158
1,830
38,576
15,320
110,537
3,762
113,123
116,885
1,704
877
119,467
62,371
8,422
27,769
7,913
41,141
14,441
2,166
44,757
20,905
119,467
3,762
128,459
132,221
1,704
877
134,803
68,616
8,422
32,524
9,488
49,853
17,316
2,597
54,015
25,240
134,803
3,762
147,081
150,844
1,704
878
153,426
74,351
8,423
41,795
10,903
56,848
19,898
2,985
61,776
28,857
153,426
Balance Sheet
Share Capital
Reserves & Surplus
Shareholders' Funds
Loan Funds
Deferred tax liabilities
TOTAL LIABILITIES
Net Fixed Assets
Investments
Cash
Debtors
Inventory
Loans & advances
Other current assets
Current liabilities
Net Current Assets
TOTAL ASSETS
Net income reported
Depreciation
Chg in working cap
Change in deferred tax liab
Cash flow from operations
Capital expenditure
Strategic investments
Cash flow from investing
Equity raised
LT Debt raised
ST debt raised
Dividend (incl. tax)
Cash flow from financing
Net chg in cash
F2007
F2008E
F2009E
F2010E
27,051
3,629
-8,040
1,481
24,122
-15,708
-513
-16,221
371
227
585
-13,645
-12,463
-4,562
29,992
4,195
-5,585
-3,851
24,751
-11,000
0
-11,000
0
-305
0
-16,936
-17,240
-3,489
35,068
4,782
-4,336
0
35,514
-11,000
0
-11,000
0
0
0
-19,759
-19,759
4,755
41,037
5,293
-3,617
1
42,713
-11,000
0
-11,000
0
0
0
-22,440
-22,440
9,273
2007E
2008E
2009E
2009E
12%
16%
14%
68%
67%
5.1
8.5
11
1%
-105%
8.3
6.5
11.9
9.4
25.9
3.0%
18.0
4%
3.5
21.2
3.3
14%
18%
15%
82%
81%
5.9
9.3
11
1%
-109%
9.7
7.5
11.8
10.3
19.1
4.0%
15.8
6%
2.7
15.5
2.5
13%
17%
16%
91%
96%
6.1
10.2
11
1%
-117%
11.4
9.0
13.1
12.6
16.3
4.8%
14.2
7%
2.3
13.0
2.1
14%
18%
16%
96%
102%
6.2
11.4
11
1%
-125%
13.4
10.5
14.6
14.8
13.9
5.6%
12.7
8%
2.1
10.9
1.9
Key Ratios
(Rs m, Year Ending Dec)
Net sales growth (%)
EBITDA growth (%)
EBIT margin (%)
Return on Avg Equity (%)
ROE - Beg Period (%)
Sales/Total Assets (x)
Sales/Net FA (x)
Working capital turnover (days)
Total debt/Equity (%)
Net debt/Equity (%)
EPS
DPS
BVPS
FCFS
P/E
Div Yield
P/BV
Free cash flow yield
P/sales
EV/EBITDA
EV/Sales
E = Morgan Stanley Research estimates
Source: Company data, Morgan Stanley Research
59
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
ICICI Bank
The Good and the Improving
Morgan Stanley Asia Limited
Anil Agarwal
Anil.Agarwal@morganstanley.com
Morgan Stanley India
Company Private Limited
Anil Bang
Key Statistics
Stock Rating: Overweight
Reuters: ICBK.BO Bloomberg: ICICIBC IN
India Financial Services
In-Line
Price target
Rs1,575.00
Share price, close (January 22, 2008)
Rs1,124.75
Market cap (Bn)
US$32.10
52-Week Range
Rs1465.00-791.15
Shares outstanding, basic, (mn)
1,112.00
Anil.Bang@morganstanley.com
Company Description
ICICI Bank is India’s premier bank in terms of scale and efficiency.
Following the reverse merger with its parent, ICICI, the bank has about
a 10% share of system loans, and is poised to reap the benefits of scale
in terms of lower funding costs and higher fees. It also has a significant
presence in financial services businesses, such as life insurance, asset
management, private equity, and securities.
Mansi Shah
Mansi.S.Shah@morganstanley.com
Investment Conclusion
ICICI Bank (ICBK) offers a strong long-term investment
option, in our view. Management has executed its strategy
across its businesses very well. In India, the bank is the
largest retail lender, the largest private life insurer, the largest
general insurance provider on an incremental basis, one of
the largest asset managers, and one of the largest investment
banks and securities houses. We expect ICBK’s earnings
growth to improve, backed by a strong macro environment
(wholesale yields coming down) and strong capital markets
(resulting in strong fee income and better performance by
subsidiaries).
Recent Developments
ICBK reported 3Q F2008 earnings of Rs12.3 billion, up 35%
YoY. EPS growth was sluggish at 9% YoY, but core
operating profit rose 48% YoY. NIM expanded 7bp QoQ
because of a better deposit mix and slowdown in loan growth
to 25% YoY. Credit costs remain high at 132bp of loans.
ICBK has announced plans to issue equity in ICICI Securities
through an IPO and a private placement, up to a maximum of
15% of post-issue capital of ICICI Securities.
Key Investment Issues
ICBK depends on wholesale funds. We believe margins
should improve for the bank, as wholesale yields have come
down, the low-cost deposit ratio is improving, and it has
licenses for 400 new branches. Other key issues for ICBK
include the growth outlook and capital infusion plans for other
subsidiaries.
Valuation Methodology
We use a sum of the parts to derive our price target of
Rs1,575. We value the parent lending business at Rs935 per
share using a residual income model; ICICI Financial Services
at Rs401 per share as per the deal in April 2007; and other
subsidiaries on the basis of peer group multiples. ICBK is
trading at 13x our F2009 EPS estimate on a core basis.
What We Like
•
Largest private bank: ICBK is the largest private-sector
bank in India and the second-largest bank in the country
overall. It has a dominant position in almost all financial
services businesses in which it operates.
•
Fast-growing subsidiaries: ICBK offers optionality on
the fast-growing life and general insurance, asset
management, and securities businesses. Subsidiaries in
these businesses are among the market leaders.
•
Likely improvement in funding costs: We believe ICBK
will benefit from declines in wholesale yields, as it also
depends on market borrowings to a large extent. We
believe the 400 additional branch licenses that it has
received (almost 50% of its current network excluding
Sangli bank branches) will help it to garner low-cost
deposits and increase its margins.
What We Don’t Like
•
Credit costs expected to remain high: NPLs on ICBK’s
non-collateralized retail assets remain high, resulting in
higher credit costs. The bank’s loan loss coverage is
about 58%, which means any unexpected increase in
NPLs would flow directly through to the P&L.
•
Cyclical pressures on funding: ICBK is benefiting from
easing of wholesale yields. But its dependence on
wholesale funds makes it vulnerable to any sharp
movements in short yields, which could affect its margins
adversely.
•
Subsidiaries’ fortunes linked to capital markets:
Growth in all key subsidiaries depends highly on capital
markets. Sharp declines in market levels or turnover
could result in declining growth and a reduction in the
valuation multiples applied to these businesses.
60
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Risk-Reward Snapshot: ICICI Bank
Investment Thesis
Risk Reward View: Banking Could Turn Around in F2009
Rs2,000
Rs1,790 (+59%)
1,800
1,600
Rs1,575 (+40%)
1,400
Rs1,124.75
1,200
1,000
Rs1,050 (-7%)
800
600
Jan 07
Apr 07
Jul 07
Price Target
Sep 07
Dec 07
Mar 08
Historical Stock Performance
May 08
Aug 08
Oct 08
Jan 09
Key Value Drivers
Current Stock Price
Price Target Rs1,575
Derived from our base-case scenario using a sum-of-the-parts
valuation. We value the parent on a residual income basis.
Bull case
Rs1,790
36.1x bullcase 2009E
EPS
Better margins and loan growth: 23% loan growth CAGR for
F2007-09. Margins improve as low-cost deposit proportion
increases through new branches and wholesale rates remain low.
Credit costs remain high, but lower than in base case.
Base case
Rs1,575
31.8x basecase 2009E
EPS
Bear case
Rs1,050
21.2x bearcase 2009E
EPS
Slight improvement in margins leads to earnings growth:
21% loan-growth CAGR for F2007-09. Margins improve
marginally because of better funding mix. Credit costs remain
high at around 130bp of loans.
Pressure on margins, loan growth and capital market activity
slows: 17% loan growth CAGR for F2007-09. Margins remain
under pressure as wholesale rates remain high and branch roll
out is not as expected. Credit costs rise more than expected.
25% discount for non-banking businesses as capital market
activity slows.
Bear to Bull Case: Banking Business Strength is Key
2,000
130
Indian Rupee (Rs)
1,600
50
90
145
75
90
1,790
1,575
160
1,200
800
1,050
400
0
Bear
Case
Non-bank
businesses
Source: Morgan Stanley, FactSet
LLP rise
Weak NIMs Weak loan
growth
Base
Case
Strong loan
growth
Strong
NIMs
• Largest private-sector bank in India –
implies significant scale.
• Market leader in almost all retail loan
segments.
• Fast-growing subsidiaries: ICBK’s
subsidiaries in life insurance, general
insurance, and asset management
are among the market leaders.
• Retail NPLs have risen in recent
quarters – continued increase may
result in higher credit cost.
• Trades at 13x F2009E earnings on a
core basis.
Lower LLP
Bull
Case
• Loan growth.
• NIMs drive core operating profits
growth for the bank.
• Credit costs.
Potential Catalysts
• Short-term interest rates: margins are
highly geared to short-term interest
rates, as ICBK is predominantly a
wholesale-funded institution.
• Listing of financial services
businesses in the near term.
Risks
• Higher- and sooner-than-expected
increase in credit costs.
• Upward movement in short-term
interest rates.
• Lower premium growth in the life
insurance business.
Our ADR price target is US$81.8*
based on a conversion ratio of 2.00,
average premium of ADR over
domestic price of 2%, and a current
exchange rate of US$1:Rs39.3.
*Investors should be aware that such
calculations do not take into account
any issues or risks associated with
investing in an ADR, including but not
limited to liquidity, voting rights,
dividends, volatility, and currency or
exchange rate fluctuations.
61
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
ICICI Bank: Financial Summary
Rs million; Years Ending March
Profit and Loss Statem ent
Rs Mln (Year end-March)
Per Share Data and Valuations
F2006
F2007
F2008E
F2009E
Year end-March
135045
220133
311996
379053
Per Share Data (Rs)
Interest Expense
95975
163585
238030
285940
EPS
Net Interest Incom e
39070
56548
73966
93113
Book Value
---Fee Income
Interest Income
30019
43309
57170
72434
DPS
---Forex Income
4731
6440
8371
10715
Core Op. Profit
---Capital Gains
7498
11152
10270
15000
---Miscellaneous Inc.
4197
3716
3537
4316
Total Non Interest Income
49831
69102
92803
114465
PE
Total Operating Incom e
88902
125650
166769
207578
Price to Book
---Employee Exp
10823
16168
22294
29428
Dividend Yield
Price to Core Op. Profit
39192
50738
62623
75448
Total Operating Expenses
50015
66906
84917
104876
Operating Profit
38887
58744
81852
102702
-27
671
0
0
7947
21593
27884
34188
P/E
7921
22264
27884
34188
Yields
30966
36480
53968
68515
---Loan Loss Provisions
Total provisions
Profit Before Tax
Provision for Tax
F2007
F2008E
F2009E
32.8
34.6
39.1
49.3
249.6
270.3
417.4
450.4
8.5
10.0
11.3
14.3
42.6
47.9
52.3
68.1
34.3
32.5
28.7
22.8
4.5
4.2
2.7
2.5
0.8%
0.9%
1.0%
1.3%
26.4
23.5
21.5
16.5
Valuations
---Other Expenses
---Other Provisions
F2006
ADR Data (ADR=2 shares)
EPADR (US$)
1.7
1.8
2.0
2.5
36.0
34.1
30.1
23.9
0.7%
0.8%
1.0%
1.2%
F2006
F2007
F2008E
F2009E
9.0%
5565
5378
10453
13700
Ratio Analysis
Net Profit
25401
31102
43515
54815
Year end-March
Core Operating profit
31389
43107
58127
75702
Spread Analysis
Average yield on assets
7.0%
8.2%
8.9%
F2006
F2007
F2008E
F2009E
Cost of earning assets
4.9%
6.1%
6.8%
6.8%
222060
243133
464150
500858
Net Interest Margin (NIM)
2.0%
2.1%
2.1%
2.2%
1650832 2305102
26%
Balance Sheet Data
Rs Mln (Year end-March)
Share holders equity
Deposits
2673918
3155223
Borrow ings
385219
512560
536944
637027
Grow th Ratios
Other Liabilities & Prov.
255779
385786
483893
551063
Net Interest Income
47%
45%
31%
2513890 3446581
4158905
4844172
Non Interest Income
46%
39%
34%
23%
Operating expenses
36%
34%
27%
24%
Total Liabilities
Cash & Balances w ith RBI
89344
187069
213174
251773
Operating Profit
61%
51%
39%
25%
Balances w ith Banks
81059
184144
89687
115926
Net Profit
27%
22%
40%
26%
715474
912578
1175310
1313950
EPS
20%
6%
13%
26%
1461631 1958660
2431452
2878007
Deposits
65%
40%
16%
18%
Advances
60%
34%
24%
18%
Total Assets
50%
37%
21%
16%
Investments
Advances
Fixed Assets
39807
39234
43158
47473
Other Assets
126575
164899
206124
237043
Total Assets
2513890 3446581
4158905
4844172
Earning Assets
2347507 3242448
3909623
4559656
Return On Equity
17.7%
13.2%
11.7%
11.4%
Average Interest Earning Assets 1947866 2794977
3576035
4234640
Return on Assets
1.2%
1.0%
1.2%
1.2%
Average Loans
2195056
2654729
56.3%
53.2%
50.9%
50.5%
2.4%
2.2%
2.0%
2.3%
10.4%
Profitability Ratios
1187841 1710146
Avg Common Equity / Avg Assets
8%
8%
9%
11%
No Of Shares (mn)
890
899
1112
1112
Efficiency Ratios
Cost Income Ratio
Expenses/Avg Assets
Asset Quality
LLP/Avg Advances (bps)
67
128
132
129
Gross NPL
22226
41261
83219
119055
Tier 1 Ratio
9.2%
7.4%
11.5%
Net NPL
10527
19920
42147
54796
Tier 2 Ratio
4.2%
4.3%
4.3%
4.3%
Reserve Coverage
11699
21340
41072
64260
Capital Adequacy Ratio
13.3%
11.7%
15.7%
14.7%
Gross NPL Ratio
1.5%
2.1%
3.4%
4.0%
Net NPL Ratio
0.7%
1.0%
1.7%
1.9%
52.6%
51.7%
49.4%
54.0%
Coverage Ratio
Capital Adequacy
Source: Company Data, Morgan Stanley Research
E=Morgan Stanley Research Estimates
62
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
IDFC
Going From Strength to Strength
Morgan Stanley Asia
Limited+
Anil Agarwal
Morgan Stanley India
Company Private Limited+
Anil Bang
Anil.Agarwal@morganstanley.com
Key Statistics
Stock Rating: Overweight
Reuters: IDFC.BO Bloomberg: IDFC IN
India Financial Services
In-Line
Price target
Rs250.00
Share price, close (January 22, 2008)
Rs177.45
Market cap (bn)
US$5.90
52-Week Range
Rs235.00-74.05
Shares outstanding, basic, currency (mn)
1294.00
Anil.Bang@morganstanley.com
Company Description
IDFC was established in 1997 as a private enterprise for infrastructure
financing, with the Government of India as one of the key shareholders.
Even though the government is the key shareholder, IDFC is a
professionally managed institution. The key sectors IDFC lends to are
energy, telecom, transport, and commercial and industrial infrastructure.
Mansi Shah
Mansi.S.Shah@morganstanley.com
Investment Conclusion
IDFC is one of the best ways to play the structural theme of a
pick-up in infrastructure financing in India, in our view. We
expect it to benefit from growth in credit demand emanating
from increased infrastructure spending (rising to 4.9% of GDP
in F2009 from 3.6% now). IDFC is getting good traction in its
private equity business. We see sustainable ROE of about
22% for IDFC, making it one of the more profitable financial
services businesses in India. Its key competitive advantages
include a low total cost of credit intermediation (funding plus
operating plus regulatory), and a strong credit appraisal
process, capital position, and management team.
Recent Developments
IDFC reported 3Q F2008 earnings of Rs2.17 billion, up 74%
YoY. EPS was up 53% YoY. Revenue growth excluding
capital gains was 111% YoY, backed by strong net interest
income (stable spreads plus strong assets growth) and strong
fee income growth. IDFC’s loan book grew 43% YoY and
14% QoQ.
Key Investment Issues
•
We expect IDFC to do well as it is a strong company in a
growing segment; therefore, the performance outlook for
the infrastructure sector in India is highly important.
•
IDFC is trying to maximize its fee income revenues
through avenues such as private equity and its acquisition
of SSKI. How these initiatives are progressing and IDFC’s
long-term vision for these businesses are key issues.
Valuation Methodology
We value IDFC based on a sum-of-the-parts model, valuing
its lending business at Rs200 using a residual income model,
private equity at Rs35 using DCF, and its stake in the National
Stock Exchange at Rs15 using comparable multiples, to
derive a fair value and price target of Rs250.
What We Like
•
Strong growth opportunities: We expect credit demand
for infrastructure loans to be very strong in the next few
years. It will be easy for IDFC to grow its loan book at a
35% CAGR for the next two years, in our view, given its
small balance sheet (US$6.5 billion).
•
Exciting fee income growth: The strength in
infrastructure spending gives rise to significant
opportunities for IDFC in terms of potential early stage
equity investments. It currently manages US$650 million
of equity assets. We expect this to rise to about US$3.5
billion in the next two years.
•
Efficient operations: IDFC’s cost-income ratio is just
18% on a consolidated basis, (11% on a standalone
basis), and unlike banks, it does not have to maintain a
statutory liquidity ratio or a cash reserve ratio. Savings in
these areas more than offset its higher cost of funds,
thereby giving it a competitive edge.
•
Proximity to government: The government 20% stake,
coupled with IDFC’s strong management team, enables
the company to be a key contributor to infrastructure
policy, thereby creating a strong franchise for IDFC.
What We Don’t Like
•
Dependence on wholesale funding: IDFC is a
wholesale borrower, so its funding cost is aligned with
movements in short-term rates. This causes volatility in
net interest margin and core earnings.
•
Mono-line business: Unlike a bank, which lends to
different segments, IDFC focuses on infrastructure
spending. A slowdown in the economy and therefore
infrastructure spending could hamper IDFC’s lending
growth, potentially hurting asset quality and profits.
63
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Risk-Reward Snapshot: IDFC
Investment Thesis
Risk-Reward View: Odds Still Skewed Towards Upside
Rs350
300
Rs300 (+69%)
250
Rs250 (+41%)
Rs177.45
200
150
Rs135 (-24%)
100
50
Jan 07
Apr 07
Jul 07
Price Target
Sep 07
Dec 07
Mar 08
Historical Stock Performance
May 08
Aug 08
Oct 08
Jan 09
Current Stock Price
Price Target Rs250
Derived from base-case sum of parts model.
Bull case
Rs300
41.7x basecase 2009E
EPS
Less-than-expected margin compression; strong fee income
and higher loan growth. Margins rise 10bp in F2009 because of
easing wholesale funding costs and stable lending rates. Fees as
a percentage of average assets increase because of strong PE
business. 20% higher AUM than in base case.
Base case
Rs250
34.8x basecase 2009E
EPS
Earnings growth to remain strong: 35% loan growth CAGR for
F2007-09. Margins remain stable at F2007 levels because of
lower wholesale rates. Fee income picks up as IDFC starts
booking performance fees in its PE business. PE assets to be
around US$3.5 billion in next two years.
18.8x basecase 2009E
EPS
Loan growth slows and pressure on margins intensifies: 28%
loan growth 28% CAGR for F2007-09. Returns on PE are less
than expected, resulting in lower fees and lower DCF value of PE
business. Margins decline by around 30bp by F2009.
Bear case
Rs135
Bear to Bull: Core Businesses Hold the Key
400
Indian Rupee (Rs)
320
45
240
17
15
18
15
• High leverage to growth in
infrastructure spending, which we
expect to be strong for next few years.
• Diversifying business model to
improve earnings sustainability – fee
income growth expected to be robust.
• Weak funding franchise, but this is
offset by lower operating (one of the
lowest operating costs at 0.5% of
average assets) and regulatory costs.
• Comfortable capital position – Tier 1
at around 16%.
• Core valuations – at 18.6x F2009E
earnings and 2.6x book, valuations
appear attractive when seen in
conjunction with ROE of 16%.
Key Value Drivers
• Loan growth.
• Net interest margin.
• Private equity business – higher AUM
would lead to fee income growth.
Potential Catalysts
• Any announcement regarding private
equity business – raising of more
funds, disclosure of IRRs generated
on past funds, etc.
Risks
• Slowdown in infrastructure spending
in India. As IDFC is quite dependent
on growth in the infrastructure sector,
any slowdown could affect the
revenue outlook.
300
250
55
160
135
80
0
Bear
Case
Lower loan
growth
Lower
margins
Slowdown in
PE business
Base
Case
Strong Loan Improvement Robust
Growth
in NIM
Growth in
PE biz
Bull
Case
Source: Morgan Stanley, FactSet
64
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
IDFC: Financial Summary
Rs million; Years Ending March
Profit and Loss Statem ents
Per Share Data and Valuations
Rs Mln (Year end March)
F2006
F2007
F2008E
F2009E
Year end March
Interest Income
7757
12461
19304
26222
Per Share Data (Rs)
F2006
F2007
F2008E
F2009E
Interest Expenses
5008
8555
13788
19019
EPS
3.5
4.5
5.6
7.2
Net Interest Incom e
2749
3906
5516
7203
Book Value
22.9
26.2
43.2
48.6
Non Interest Incom e
2610
3252
6572
9103
DPS
1.0
1.0
1.3
1.5
---Fee & others
1287
1911
4632
6907
Core Optg Profits (COP)
2.8
4.4
5.9
8.1
73
101
141
196
---Capital gains
1250
1240
1800
2000
Valuations
---Other Income
22
157
170
170
PE
51.0
39.7
31.5
24.7
Total Incom e
5359
7158
12089
16306
Price to Book
7.8
6.8
4.1
3.7
Operating Expenses
546
821
1955
2905
Dividend Yield
0.6%
0.6%
0.7%
0.8%
P/COP
62.8
40.6
30.1
21.9
F2006
F2007
F2008E
F2009E
---Dividends
---Employee Exp
315
480
1390
2156
---Non Employee Exp
231
341
565
749
Operating Profit
4813
6337
10133
13401
Provisions
387
175
550
698
Year end March
PBT
4426
6162
9583
12703
Spread Analysis
Tax
517
1241
2140
3211
Average yield on assets
8.6%
9.5%
10.5%
10.8%
5.6%
6.5%
7.5%
7.8%
3.1%
3.0%
3.0%
3.0%
Ratio Analysis
PAT
3907
5039
7283
9300
Cost of Earning Assets
Core Profits
3174
4922
7623
10511
Net Int. Margin (NIM)
Rs Mln (Year end March)
F2006
F2007
F2008E
F2009E
Net Interest Income
16.4%
42.1%
41.2%
30.6%
Share holders equity
25685
29476
55895
62924
Non Int. Income (ex cap gains)
108.5%
56.9%
116.9%
65.2%
Loan Funds
87302
142528
188983
255946
Capital Gains
20.8%
2.9%
86.9%
6.7%
Subordinated debts
6500
6500
6500
6500
Operating Expenses
95.1%
50.6%
138.1%
48.6%
119489
178505
251377
325369
Operating Profit
24.1%
31.7%
59.9%
32.2%
Net Profit
28.5%
29.0%
44.5%
27.7%
EPS
14.5%
28.6%
25.7%
27.7%
Balance Sheet Data
Total Liabilities
Grow th Ratios
Infra loans
100871
Investments
12928
23903
43926
47396
Total Loans
43.1%
38.0%
35.2%
35.2%
Net Current Assets
5183
13959
17746
22056
Total Assets
41.7%
49.4%
40.8%
29.4%
Fixed Assets
508
489
525
525
Total Assets
119489
178505
251377
325369
Profitability Ratios
ROE
16.0%
18.3%
17.1%
15.7%
Earning Assets
106803
155647
210365
277436
ROA
3.8%
3.4%
3.4%
3.2%
1122
1126
1294
1294
Cost / Income
10.2%
11.5%
16.2%
17.8%
Cost/ Avg Assets
0.5%
0.6%
0.9%
1.0%
Tier 1 Ratio
19.2%
16.1%
23.2%
19.2%
Tier 2 Ratio
6.4%
4.3%
3.5%
2.6%
CAR
25.6%
20.4%
26.7%
21.8%
No Of Shares
139184
188210
254423
Efficiency Ratios
Asset Quality
Annual LLP / Loans (bps)
Net NPL Ratio
Coverage Ratio
56
12
30
30
0.0%
0.0%
0.0%
0.0%
100.0%
100.0%
100.0%
100.0%
Source: Company Data, Morgan Stanley Research
E=Morgan Stanley Research Estimates
Capital Ratios
65
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Indiabulls Financial Services
A Play on Consumer Finance
Morgan Stanley India
Company Private Limited+
Anil Bang
Mansi.S.Shah@morganstanley.com
Stock Price Performance
Indiabulls Financial Serv
Weekly Closing Price in Rs
1000
1000
Anil Agarwal
800
800
Anil.Agarwal@morganstanley.com
600
600
400
400
200
200
Indiabulls Financial Services (IBull) started as a securities
brokerage firm to cater mainly to retail clients. Over the years,
it has expanded and now it, along with its subsidiaries,
provides a variety of financial services, such as consumer
loans, home loans, personal loans, securities brokerage, and
distribution of third-party mutual funds and insurance products
to retail customers throughout India. IBull has a branch
network of 680 offices and employs 17,450 people. IBull has
demerged its securities business, with an aim to listing it
separately.
Recent Developments
• Indiabulls Securities Limited has been de-merged from
IBull and one share of Indiabulls Limited was given for
every share of IBull held on the record date of January 8,
2008.
•
Stock Rating: NOT RATED
Reuters: IBUL.BO Bloomberg: IBULL IN
Share price, close (January 22, 2008)
Rs651.6
Market cap (bn)
US$ 3.8
52-Week Range
Rs984.75-178.48
Anil.Bang@morganstanley.com
Mansi Shah
Morgan Stanley Asia
Limited+
Key Statistics
IBull has a memorandum of understanding (MOU) with
Sogecap (insurance arm of Societe Generale) for its life
insurance JV. As per the MOU, Sogecap plans to invest
Rs.1.5 billion for a 26% stake in the JV.
•
IBull has an MOU with MMTC to establish a commodities
exchange, in which IBull would hold a 74% stake.
•
IBull plans to enter asset management businesss after
receiving approval from the Securities and Exchange
Board of India to do so.
Results Summary
In 3Q F2008, consolidated net profit (including securities
business financials) of Rs2.5 billion was up 120% YoY and
42% QoQ. Total revenue was up 98% YoY. The loan
portfolio grew 270% YoY to Rs88 billion. On a standalone
basis – financial services business PAT was Rs3.9 billion in
9M F2008 and securities business PAT was Rs2 billion.
0
1000
0
1000
Relative Performance to MSCI India
500
500
0
0
-500
-500
10
Total Weekly Turnover by Value in Rs Bn
10
5
5
0
0
2005
2006
2007
2008
Source: Datastream
Company Description
IBull started as a securities firm in 2000, catering mainly to retail clients.
It provides a variety of financial services, such as consumer loans,
home loans, personal loans, securities brokerage, and distribution of
third-party mutual funds and insurance products to retail customers. It
was listed on the Indian stock exchanges in September 2004 and
issued GDRs in 2005.
Company Guidance and Outlook
IBull’s key businesses after the demerger of the securities
business would be the consumer loan business and new
initiatives, such as life insurance, commodity exchange,
through various subsidiaries.
Within the consumer finance business, IBull expects
significant growth in loan origination, backed by introduction of
new products through a wider distribution network. It has a
loan portfolio of Rs88 billion as of December 2007 with an
average yield of 20.8%. Incrementally, IBull is focusing
mainly on secured loans, such as mortgages and loans
against property. Its total outstanding small-ticket personal
loans were Rs5 billion as of December 31, 2007, constituting
5.1% of the portfolio. The total delinquent consumer loans
with payments outstanding for more than 90 days were Rs1.3
billion, 1.46% of the loan portfolio, as of December 31, 2007.
66
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Indiabulls Financial Services: Financial Summary
Rs million; Years Ending March
Profit & Loss Statement*
F2005
F2006
F2007
Operating Income
1676
6102
12409
--Brokerage and Related Income
1016
2754
3895
--Financing Income
507
2604
6569
Per Share Data
--Other Operating Income
EPS
21.5
27.5
42.1
Book Value
101.5
146.3
184.6
3.5
3.8
4.8
15.5
147
482
1420
Other Income
8
29
35
Total Income
1684
6132
12444
Total Expenditure
784
2398
5814
Per Share Data & Valuations
F2007
DPS
F2008E^
F2009E^
--Employee expenses
232
808
2369
Valuations
--Other Expenses
552
1590
3444
PE
30.3
23.7
PBT
900
3734
6631
Price to Book
6.4
4.5
3.5
Taxation
333
1200
2197
Dividend Yield
0.53%
0.59%
0.74%
PAT
567
2534
4434
^ IBES consensus estimates. Source: Company data, IBES
Minority Interest
PAT (adj for minority interest)
7
159
495
560
2374
3939
Ratios & Other Information
Ratios & Other Data
Balance Sheet (Key Items)
F2005
F2006
F2007
ROE
22.5%
28.5%
27.8%
Operating Cost/Op Income
46.8%
39.3%
46.8%
Operating Cost/ Avg Assets
12.2%
15.6%
21.7%
Loans & Advances
2042%
46%
93%
7301
Assets
371%
91%
66%
33348
Operating Income
140%
264%
103%
Operating expenses
91%
206%
142%
Assets
PAT
193%
347%
75%
Fixed Assets
EPS
64%
295%
45%
F2005
F2006
F2007
4484
13282
18609
Total Loans
4954
3030
10659
Growth Ratios
---Secured Loans
3822
30
3358
Liabilities
Share holders equity
---Unsecured Loans
Total Liabilities
1133
10570
3000
20140
212
725
1541
Current Assets
11803
22157
33225
---Cash & Bank Balance
3326
8910
8054
Employees
NA
10069
17497
12383
23872
Branches
NA
168
680
---Loans & Advances
---Others
8452
25
864
1298
* The financials are for consolidated entity i.e. securities + consumer finance businesses.
Total Current Liabilities
1645
5416
7263
Source: Company data
Net Current Assets
10158
16741
25962
Total Assets
10570
20140
33348
No.of shares
133
160
183
67
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Indian Hotels Company Ltd
Strong Long-term Outlook
Morgan Stanley India
Company Private Limited+
Parag Gupta
Parag.Gupta@morganstanley.com
Saumya Srivastav
Key Statistics
Stock Rating: Overweight
Reuters: IHTL.BO Bloomberg: IH IN
India Hotels
Attractive
Price target
Rs180.00
Share price, close (January 22, 2008)
Rs114.45.00
Market cap (mn)
Rs68996.03
52-Week Range
Rs1,77.80-101.00
Shares outstanding, basic, currency (mn)
602.90
Saumya.Srivastav@morganstanley.com
Investment Conclusion
As Indian Hotels Company Ltd (IHCL) is the largest and most
diversified hotel company in India, it can benefit from the
strong trends in the industry. IHCL’s financial performance in
F2007 and 1H F2008 has been strong because of healthy
room rate increases, which have been the main reason for
strong RevPAR growth. In F2007, IHCL’s revenue and
EBITDA growth were much stronger than at competitors EIH
Ltd and Hotel Leelaventure Ltd. We believe this trend will
continue in F2008. We remain confident about the strong
industry trends, as a result of increasing tourist inflow and
continuing undersupply of hotel rooms relative to demand.
Recent Developments
IHCL has acquired an 11.5% equity stake in Orient-Express
Hotels, a hotel company that operates in the super-luxury
segment. Orient Express brands include Orient-Express,
Hotel Cipriani, Copacabana Palace, ‘21’ Club, Mount Nelson,
and The Ritz. It has a presence in North America, Europe,
Southeast Asia, South America, Africa, and Australia. IHCL
paid consideration of US$269 million.
Key Investment Issues
IHCL has been increasing its presence in international
markets through acquisitions, which could be expensive and
less profitable than domestic properties. Its acquisitions
include the Pierre in New York, the Taj Boston in Boston,
Campton Place in San Francisco, and the stake in Orient
Express. The high acquisition cost, lower profitability, and
integration issues could pose significant challenges for the
company.
Valuation
Our price target of Rs180 for IHCL is based on a 50%
premium to the 12-month forward EV/EBITDA multiple of the
Sensex. Historically, IHCL has traded in a premium band of
10-135% relative to the Sensex, while the five-year average
has been about 65%. As we expect IHCL’s earnings to be
strong due to the paucity of room supply, we believe a 50%
premium to the Sensex multiple is reasonable at this time. On
a 12-month forward EV/EBITDA basis, IHCL shares are
currently trading at 10.5x, 7% above the Sensex. Asian peers
Company Description
Indian Hotels is India's largest domestic hotel company, and owns and
manages hotel properties in India and overseas under the Taj brand. It
has properties in the luxury, business, and leisure segments, and is
venturing into new areas such as budget hotels, serviced apartments,
and wildlife lodges.
Shangri-La Asia and Mandarin Oriental International Ltd are
trading at 15.9x and 21.2x F2008E, respectively.
What We Like
•
India’s largest hotel company: IHCL has a presence in
the luxury, leisure, and business segments. Therefore,
we think it will be a key beneficiary of the favorable trends
in the hotel industry.
•
Scope for margin expansion: We believe any
improvement in the operational performance of the
subsidiary companies could boost overall margins.
These subsidiary companies contributed about 36% of
consolidated revenue in F2007, but their net profitability
was less than 4%, largely because of losses recorded by
the international properties. Any improvement in the
financial performance of these international properties
could boost overall profitability.
What We Don’t Like
•
International exposure: In our view, the foreign
operations have lower margins and bring additional
challenges. The acquisitions in Boston and New York
could dilute margins in the near term.
•
Incremental room supply could reduce rates: There
has been a rapid increase in room rates in the Indian
hotel sector over the past few years. As a result, several
domestic and international operators have announced
bold plans to add room capacity. We expect significant
room supply in F2010-11 and believe any rapid
expansion in room inventory could increase the
probability of a rate decline.
68
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Risk-Reward Snapshot: Indian Hotels Company Ltd
Investment Thesis
Risk Reward View: Long-term Outlook Is Strong
Rs240
Rs220 (+92%)
220
200
180
Rs180 (+57%)
160
140
Rs114.45
120
100
Rs124 (+8%)
80
Jan 06
May 06
Sep 06
Price Target
Jan 07
May 07
Sep 07
Jan 08
Historical Stock Performance
May 08
Sep 08
Jan 09
Key Value Drivers
Current Stock Price
Price Target Rs180
Same as base-case valuation
Bull case
Rs220
Strong growth in revenue and operating profitability: ARR
27x F2009E
EPS
increases 25% in F2008 and 20% in F2009. Strong revenue growth helps
EBITDA margins move up to 31% in F2009. F2009 EPS at Rs8.12. We
use a 70% premium to the Sensex 12-month forward EV/EBITDA multiple
to arrive at the bull-case fair value of Rs220.
Base case 25x F2009E
Rs180
EPS
Domestic operations drive growth: ARR increases 22% in F2008
and 12% in F2009. F2009 EPS at Rs 7.20 on the back of EBITDA margins
of 29.3% in F2009. We apply a 50% premium to the Sensex 12-month
forward EV/EBITDA multiple to derive our base-case fair value of Rs180.
Bear case
Rs124
22x F2009E
EPS
• Largest hotel company in India.
• Presence in the luxury, business,
leisure, and budget segments.
• Industry trends remain strong, with
strong room rate growth leading
RevPAR growth.
• Rapid expansion largely through
management contracts supports the
asset-light strategy.
• One of the cheapest hotel stocks in
the Morgan Stanley coverage
universe.
Slow growth in ARR, and international properties remain
loss-making: ARRs increase 20% in F2008 and remain flat in F2009.
EBITDA margins move down to 27% in F2009. EPS at Rs5.62 in F2009.
We use a 20% premium to the Sensex 12-month forward EV/EBITDA
multiple to arrive at the bear-case fair value of Rs124.
• Average room rates (ARR).
• Capacity expansion.
• Turnaround of subsidiary performance,
especially the international properties.
Potential Catalysts
• Strong room rate increases for the
next 18-24 months.
• Increase in profitability of international
properties (this could be a scenario in
F2010, in our view).
Risks
• Significant acquisition of properties
outside India.
• Continuing losses at some of the
international properties.
• Decline in ARR.
Bear to Bull: Stronger ARR Growth to Drive Earnings Growth
300
250
27
INR (Rs)
14
150
100
13
42
200
220
180
124
50
0
Bear
Case
Weak financial
performance as
ARR growth slows
down
Contraction in
EV/EBITDA
multiple
Base
Case
Strong financial
performance due
to strong ARR
growth leading to
EBITDA margin
expansion
Expansion in
EV/EBITDA
multiple
Bull
Case
Source: FactSet, Morgan Stanley Research
69
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Indian Hotels Company Ltd: Financial Summary
Rs million; Years Ending March
Income Statement
(Rs mn) (Year end March)
Revenue
Employee costs
F&B consumed
Fuel, power and light
Repairs
License fees
Other expenses
Total operating expenses
EBITDA
Depreciation
EBIT
Interest cost
Other income
PBT
Tax expense
PAT
Minority Interest
Equity share in affiliates
Profit after MI and affiliates
Exceptional items
PAT after exceptional items
EPS (Rs)
DPS (Rs)
Cash Flow Statement
F2006
18,373
4,846
1,842
1,059
613
901
4,028
13,290
5,084
1,274
3,810
1,456
766
3,120
904
2,217
(144)
395
2,467
21
2,487
4.21
1.30
F2007
25,063
6,527
2,538
1,328
869
1,132
5,464
17,858
7,205
1,607
5,598
1,701
1,102
4,999
1,965
3,034
(201)
544
3,377
327
3,703
5.60
1.60
F2008E
31,604
8,217
3,273
1,580
1,096
1,359
6,746
22,271
9,333
1,945
7,388
2,323
1,264
6,330
2,151
4,178
(282)
734
4,631
4,631
7.32
2.00
F2009E
35,929
9,198
4,068
1,796
1,258
1,545
7,533
25,397
10,532
2,293
8,240
2,325
1,730
7,644
2,598
5,046
(394)
991
5,643
5,643
7.20
2.25
Balance Sheet
(Rs mn) (Year end March)
Share Capital
Reserves and Surplus
Less: Miscellaneous Expenditure
Total Shareholders Funds
Loan Funds
Deposits
Minority Interest
Deferred Tax Liability
TOTAL LIABILITIES
Gross Fixed Assets
Accumulated Depreciation
Net Block
Capital Work-in-Progress
Investments
Deposits
Goodwill on consolidation
Deferred Tax Assets
Current Assets
Cash and Cash Equivalents
Less: Current Liabilities
Net Current Assets
TOTAL ASSETS
F2006
584
18,737
105
19,216
15,010
333
2,399
919
37,877
31,607
8,264
23,343
1,245
5,249
1,114
3,352
200
4,290
4,469
5,384
3,375
37,877
F2007
603
20,363
127
20,839
20,552
152
2,758
1,470
45,771
44,092
10,312
33,780
1,745
5,012
1,492
3,141
4
5,221
1,903
6,527
597
45,771
F2008E
723
31,867
10
32,580
31,068
152
3,040
1,470
68,310
56,212
12,257
43,955
3,000
14,328
1,492
3,141
4
5,494
6,131
9,235
2,390
68,310
F2009E
784
44,729
45,512
27,068
152
3,434
1,470
77,637
65,732
14,550
51,182
3,500
14,328
1,492
3,141
4
5,997
8,606
10,615
3,989
77,637
(Rs mn) (Year end March)
PBT
Depreciation
Exceptional items
Income from associates
Change in working capital
Tax provision
Cash Flow From Operations
(Purchase)/sale of fixed assets, net
(Purchase)/sale of investment, net
(Inc)/dec in deposits
Cash Flow From Investing Activities
Proceeds from equity issuance
Proceeds/(repayment) of loan
Dividend paid
Other items
Cash Flow From Financing Activities
Change in cash and cash equiv
Opening cash and cash equiv
Closing cash and cash equiv
F2006
F2007
F2008E
F2009E
3,120
1,274
21
395
797
904
4,702
(2,136)
(842)
(39)
(3,018)
4,437
(4,684)
(677)
(1,170)
(2,093)
(409)
4,878
4,469
4,999
1,607
327
544
212
1,965
5,723
(12,544)
237
(379)
(12,686)
362
5,542
(1,084)
(423)
4,397
(2,567)
4,469
1,903
6,330
1,945
734
2,117
2,151
8,974
(13,375)
(9,316)
(22,691)
8,440
10,516
(1,129)
117
17,945
4,228
1,903
6,131
7,644
2,293
991
560
2,598
8,890
(10,020)
(10,020)
9,043
(4,000)
(1,447)
10
3,606
2,476
6,131
8,606
Key Ratios
(Year end March)
Growth (%)
Revenues
EBITDA
Net Profit
EPS
Margins (%)
EBITDA
Net Profit
Return (%)
ROE
ROCE
ROA
Gearing
Debt/Equity
Net Debt/Equity
Valuations
EV/EBITDA
P/E
P/BV
Dividend Yield (%)
Turnover (days)
Inventory
Debtors
Creditors
F2006
F2007
F2008E
F2009E
39.9%
53.0%
96.1%
96.1%
36.4%
41.7%
36.9%
33.2%
26.1%
29.5%
37.1%
30.6%
13.7%
12.8%
21.9%
-1.6%
27.7%
13.4%
28.7%
13.5%
29.5%
14.7%
29.3%
15.7%
15.2%
10.2%
5.8%
16.9%
13.4%
7.1%
17.3%
13.0%
7.1%
14.5%
11.3%
6.8%
0.78
0.55
0.99
0.89
0.95
0.77
0.59
0.41
14.6
27.2
3.4
1.1%
12.2
20.4
3.3
1.4%
11.5
15.6
2.5
1.7%
10.3
15.9
2.0
2.0%
12
23
47
11
25
49
11
25
49
11
25
49
E = Morgan Stanley Research estimates
Source: Company data, Morgan Stanley Research
70
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Infosys Technologies
Leading the Way
Morgan Stanley India
Company Private Limited+
Vipin Khare
Vipin.Khare@morganstanley.com
Gaurav Rateria
Key Statistics
Stock Rating: Overweight
Reuters: INFY.BO Bloomberg: INFO IN
India Software
In-Line
Price target
Rs2,030.00
Share price, close (January 22, 2008)
Rs1,377.55
Market cap (mn)
Rs787,063.20
52-Week Range
Rs2,393.00-1452.00
Shares outstanding, basic, currency (mn)
571.35
Gaurav.Rateria@morganstanley.com
Investment Conclusion
We rate Infosys Overweight. A potential slowdown in the US
and the effect on technology spending has been the single
biggest investor concern regarding Infosys. Our channel
checks indicate budgets are unlikely to collapse in 2008. As a
result of the uncertain outlook for the US, the budget cycle
has been delayed. However, management continues to see a
budget increase with its existing client base. The stock is
trading at a P/E of 15x F2009E EPS, towards the lower end of
its historical trading range, assuming earnings growth of 20%
in F2009E.
Recent Developments
For 3Q F2008, revenues at Rs42.7bn (+4%qoq, +17%yoy)
were ahead of guidance but below our estimates. EBIT at
Rs12.4bn (9%qoq, 17%yoy) and EBIT margins of 29%
(+125bps qoq, +15bps yoy) were ahead of our estimates. Net
profit at Rs12.3bn (+12%qoq, +25%yoy) included tax
reversals of Rs500m.
Key Investment Issues
Infosys has high exposure to the banking, financial services,
and insurance (BFSI) sector (around 36% of revenue) and
any slowdown in this sector may hurt earnings. The US
economy slowing and corporates coming under pressure to
trim their technology spending for offshore activities could
constrain Infosys’ revenue and earnings growth.
Valuation Methodology
We believe P/E multiple comparisons remain the most
appropriate valuation measure for Infosys given the
company’s profitable track record and strong earnings
visibility. Our price target of Rs2,030 is based on a P/E of 21x
F2009E earnings. We derive our target multiple from a P/E
band analysis based on the stock’s historical trading patterns.
Infosys has traded at an average two-year rolling P/E of 24x
with a low of 14x.
Company Description
Infosys Technologies provides IT consulting and software services to
global organizations. It offers offshore-based software services such as
application development, software maintenance, consulting, and BPO,
and establishes software centers for its customers. Infosys's solutions
cover a wide range of business areas.
What We Like
•
Flat margins despite rupee appreciation: We expect
Infosys to maintain flat YoY EBIT margins for F2008
despite the 12% rupee appreciation ytd. We estimate 1%
rupee appreciation impacts margins by 50bps.
•
Pricing improvement: Infosys enjoys billing rates that
are 10-15% above the industry average. Also, its
blended pricing continues to improve, up 4% YoY in
Dec07.
•
Higher headcount additions: Infosys plans 31,000
gross hires during F2008 versus 30,000 guided earlier.
•
Top client now over US$400 million in annualized
revenue run-rate. Infosys has demonstrated its ability to
scale-up existing accounts.
What We Don’t Like
•
Revenue growth YoY has been slower over the past few
quarters.
•
Budget delays by a few large clients: A few of Infosys’
large clients have delayed their budgets. Also, some of
Infosys’ top 10 offshore IT clients could cut their budgets.
•
The consulting and China subsidiaries are still making
a loss and are in the investment phase.
71
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Risk-Reward Snapshot: Infosys Technologies
Investment Thesis
Risk-Reward View: Potential for Positive Surprises
Rs2,600
2,400
2,200
Rs2,150 (+56%)
2,000
Rs2,030 (+47%)
1,800
1,600
Rs1,300 (-6%)
Rs1,377.55
1,400
1,200
1,000
• Technology spending in US should be
stable in the event of a mild US
recession in 2008.
• Given the predictable nature of this
slowdown, clients of large offshore
vendors should continue to spend on
moving work offshore.
• Infosys continues to see stable pricing
from its BFSI clients and has already
given 17,000 campus offers for
F2009.
Key Value Drivers
Jan 06
May 06
Sep 06
Price Target
May 07
Sep 07
Historical Stock Performance
Price Target Rs2,030
Bull case
Rs2,150
Jan 07
Jan 08
May 08
Sep 08
Jan 09
Current Stock Price
Derived from the base case
22x baseStrong outsourcing: 22.3% revenue CAGR and 19.6% EBIT
case F2009E CAGR for F2008-18 coupled with stable EBIT margins at 26.7%
EPS
in F2009. Strong volume growth from new services, favorable
pricing, and favorable tax rates beyond F2009.
Base case
Rs2,030
21x baseSteady growth continues. Volumes grow by 31% in F2009e
case F2009E and stable pricing implies a 2% higher realization in FY09. We
EPS
forecast tax rates rise to 20.3% post tax exemption period.
Bear case
Rs1,300
13x baseGrowth environment deteriorates. Volumes grow by 26% in
case F2009E F2009e and pricing declines through the year as clients try to
EPS
extract savings in IT budgets. EBIT margins contract by 150 bps
to 26% resulting in a lower growth. We use a lower growthadjusted P/E multiple of 13x to reflect slower-than-expected
earnings growth.
Price Target: 2,030
105
Indian Rupee (Rs)
175
65
215
2,000
340
Potential Catalyst
• Higher-than-expected technology
budgets.
• Any pricing improvement will
positively drive margins.
• Rupee depreciation, if any, can be a
positive catalyst.
• Full-year guidance by Cognizant in
February 2008 could be a catalyst.
Key Risks
• Significant rupee appreciation is a key
risk.
• A sudden and significant slowdown in
the US could hurt demand.
Bear to Bull: Stable Technology Spending Should Help Growth
2,500
• Management execution and focus on
maintaining profitability.
• Scale and scalability.
• Diversified client base.
• Operating cash flows.
2,150
2,030
1,500
1,000
1,300
500
0
Bear
Case
Lower
volume
growth
Lower pricing
Margin
contraction
Base
Case
Faster
Favourable
Growth from
pricing
new services
Bull
Case
Source: Morgan Stanley, FactSet
72
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Infosys Technologies: Financial Summary
Rs million; Years Ending March
Consolidated P&L Statement (Rs mn)
Consolidated Balance Sheet (Rs mn)
Year to March
F2006
F2007
F2008E
F2009E
F2010E
REVENUES
95,216
138,930
166,545
215,277
269,454
33.5
45.9
19.9
29.3
25.2
Cost of Services
50,655
74,580
91,336
118,903
150,792
GROSS PROFIT
44,561
64,350
75,209
96,374
118,662
% chg YoY
Gross Margin (%)
S, G & A
EBITDA
EBITDA margin (%)
Depreciation
EBIT
EBIT margin (%)
Other income
PBT
Tax
Eff. Tax Rate (%)
NET PROFIT
46.8
13,643
46.3
20,440
45.2
23,050
44.8
31,089
44.0
39,544
30,917
43,910
52,159
65,285
79,119
32.5
31.6
31.3
30.3
29.4
4,371
5,140
6,092
7,777
9,201
26,546
38,770
46,067
57,508
69,918
27.9
27.9
27.7
26.7
25.9
1,385
3,700
6,932
6,562
9,064
27,931
42,470
52,999
64,070
78,982
3,132
5,100
6,668
8,354
15,967
11.2
12.0
12.6
13.0
20.2
As at 31st March
F2006
F2007
F2008E
F2009E
Gross Fixed Assets
Less: Depreciation and
Amort
29830
46,420
65,072
84,142 103,625
13280
18,360
24,002
30,179
37,780
Net Fixed Assets
16550
28,060
41,070
53,963
65,845
Add: Capital WIP
5710
9650
14000
14000
14000
22,260
37,710
55,070
67,963
79,845
APPLICATION OF FUNDS
Total Fixed Assets
INVESTMENTS
DEFERRED TAX ASSETS
1,360
1,360
1,150
1,150
95,460 131,024 173,109 220,878
16,080
24,360
27,151
Cash and Bank Balances 41,820
58,960
81,351 108,212 140,778
Loans and Advances
12,140
22,523
12,970
35,472
29,425
43,782
36,319
TOTAL ASSETS
93,800 134,090 188,605 243,583 303,233
SOURCES OF FUNDS
Current liabilities &
provisions
23,460
21,500
33,333
43,550
9,340
14,690
17,568
22,952
28,329
14,120
6,810
15,766
20,598
25,423
1,380
2,860
2,860
2,860
2,860
37,260
46,331
55,717
63,015
51.5
24.3
20.3
13.1
Current Liabilities
Net Margin (%)
25.8
26.8
27.8
25.9
23.4
Provisions
Basic EPS (Rs)
45.05
69.25
81.11
97.54
109.78
Share Capital
FD EPS (Rs)
43.77
67.73
80.82
97.19
109.78
Reserves and Surplus
53,752
68,280 109,690 152,411 197,173 246,621
SHAREHOLDERS FUNDS 69,660 112,550 155,271 200,033 249,481
Consolidated Cash Flow (Rs mn)
TOTAL LIABILITIES
F2006
F2007
F2008E
F2009E
F2010E
37,260
46,331
55,717
63,015
4,371
5,140
6,092
7,777
9,201
Chnges in wkng Cap
3,167
(10,170)
(1,340)
(5,008)
(5,001)
RoE (%)
OP CASH FLOW
32,136
32,230
51,084
58,486
67,215
Volume (% chg YoY)
Capital Expenditure
(9,490)
(15,030)
(23,002)
-
(20)
1,360
INV CASH FLOW
(9,570)
(20,610)
(21,642)
Free Cash Flow
22,566
17,120
29,441
(19,070) (19,482)
-
-
(19,080) (19,472)
39,406
47,742
27
1,480
-
-
-
Reserve Adjustments
(3,187)
14,120
3,970
(580)
659
Dividends paid
(4,030)
(15,520)
(7,580)
FX/Others
(1,400)
(60)
(3,440)
FIN CASH FLOW
(8,589)
20
(7,050)
(10,375) (14,226)
(1,590)
(1,610)
(12,545) (15,177)
NET CASH FLOW
13,977
17,140
22,391
26,861
Cash & Eq at Yr Beg
27,843
41,820
58,960
81,351 108,212
Cash & Eq at Yr End
41,820
58,960
81,351
108,212 140,778
93,800 134,090 188,605 243,583 303,233
Key Ratios & Assumptions
24,598
Depreciation
Issue of shares
1,360
1,150
Sundry Debtors
30.0
Investments
920
70,870
24,598
PAT
20
650
CURRENT ASSETS
% chg YoY
Year to March
F2010E
Year to March
Avg Price Realiz (% YoY)
Avg realisd FX rate (Rs/US$)
F2006E
F2007
F2008E
F2009E F2010E
40.53
41.26
35.06
32.00
28.72
31.6
35.6
27.7
31.5
27.7
0.0
4.5
6.3
1.8
1.6
44.2
45.5
39.8
38.2
36.5
Emp Costs as % of Rev
47.4
47.4
49.3
50.0
50.6
SG&A as % of Revenue
14.3
14.7
13.8
14.4
14.7
Effective Tax Rate (%)
11.2
12.0
12.6
13.0
20.2
E = Morgan Stanley Research estimates
NA = Not Applicable; NM = Not Meaningful
EPS includes Extraordinary Items and Minority Interest
Source: Company data, Morgan Stanley Research
32,565
73
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Jain Irrigation Systems
The ‘WOW’ Play on Indian
Agriculture
Morgan Stanley India
Company Private Limited+
Ashish Jain
Ashish.G.Jain@morganstanley.com
Investment Conclusion
We believe Jain Irrigation Systems (JISL) is one of the best
plays in the Indian agriculture industry. It has presence in
high-potential, less-penetrated segments – micro-irrigation
systems (MIS) and agro-processing (AP). We estimate the
size of the MIS market in India at US$3.6 billion for F2008-12,
driven by the current under-penetration and government
subsidies. In our view, JISL is well positioned to benefit from
this opportunity because of its 50% market share and strong
distribution network. The AP business has long-term growth
potential in the export and domestic markets.
Recent Developments
In 3Q F2008, JISL reported standalone revenue growth of
36% YoY to Rs4bn and 75% EBITDA growth to Rs820mn.
MIS business grew 69% YoY to Rs1.7bn, driven by strong
growth in all key states and the business EBITDA margin
expanded by 60bps. JISL has an MIS order book of around
Rs3.3bn, largely to be executed by March 2008. AP business
grew 76%, driven by 170% growth in fruit and vegetable
business, while onion dehydration business declined 52%.
Plastics business grew 11% YoY to Rs2bn, affected by lower
exports to the US and a slowdown in PVC pipes business.
Net profit growth was 43% YoY to Rs449mn, affected by
higher interest costs.
Key Statistics
Stock Rating: Overweight
Reuters: JAIR.BO Bloomberg: JI IN
India Multi-Industry
Attractive
Price target
Rs762.00
Share price, close (January 22, 2008)
Rs593.80
Market cap (mn)
US$928.00
52-Week Range
Rs765.95-390.00
Shares outstanding, basic, currency (mn)
73.00
Company Description
Jain Irrigation is the largest company in India’s micro-irrigation systems
segment, which includes drip and sprinkler irrigation systems. It also
has presence in the following business segments: agro-processing,
onion dehydration, PVC and PE pipe products, and PVC and
polycarbonate sheets.
What We Like
•
MIS poised for strong long term growth: MIS
penetration in India is less than 2% of agricultural land.
We believe the government focus on agricultural
productivity and 50% subsidy on initial cost of installation
will drive strong growth.
•
JISL well positioned to benefit from the opportunity:
JISL has a 50% market share and 1,500 distributors. It is
focusing on covering new crops under MIS and assists
farmers with agronomic services (soil study, cropping
patterns, etc.) that strengthen its market position.
•
MIS growth to drive margin expansion: We estimate
170bp margin expansion to 16% in F2010 led by faster
growth in high-margin MIS business, with its revenue
contribution increasing from 30% to 47% in F2010.
•
AP – strong growth potential: India is the secondlargest producer of fruits and vegetables, and has
processing levels below 2%. Industry estimates suggest
the Indian processed fruit and vegetable market could
grow to Rs550 billion by F2015, a 25% CAGR.
Key Investment Issues
•
Margin outlook for MIS business.
•
•
Management initiatives to drive faster and visible growth
in AP business and manage margin volatility.
Strategy regarding controlling working capital
requirements and acquisitions, including completed ones.
Valuation Methodology
We estimate revenue and earnings CAGRs of 29% and 42%,
respectively, for F2007-10, led by a 48% revenue CAGR for
the MIS business. We value the stock based on a residual
income model to derive our price target of Rs762, assuming
an 11.4% COE. The stock is trading at P/Es of 26x F2009E
and 19x F2010E and has an attractive PEG of 0.7x over
F2009-11E.
What We Don’t Like
•
MIS growth depends largely on government scheme:
The government subsidy has been a strong driver of MIS
growth, as high cost could have been a deterrent. We
believe subsidies will continue in the medium term.
•
Margin headwind from plastics and AP: The margin in
the plastic business is low; we estimate it will decline in
the next couple of years. AP margins tend to be volatile,
depending on crop produce and average realized prices.
•
High working capital: High debtor days for MIS and
inventories for AP keep working capital high.
74
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Risk-Reward Snapshot: Jain Irrigation Systems
Investment Thesis
Risk-Reward: Strong MIS Prospects Indicate Upside Skew
Rs1,000
Rs933 (+57%)
900
800
Rs762 (+28%)
700
Rs593.80
600
500
Rs506 (-15%)
400
300
200
100
• MIS business has strong growth
prospects in the medium-to-long
term.
• Macro drivers support growth
prospects; focus is on increasing
agricultural productivity and subsidy
support.
• JISL is a market leader, with around
50% market share.
• AP has strong growth opportunities in
domestic and export markets.
Key Value Drivers
Mar 06
Jun 06
Oct 06
Price Target
Feb 07
Jun 07
Oct 07
Historical Stock Performance
Feb 08
Jun 08
Sep 08
Jan 09
Current Stock Price
Price Target Rs762
Derived from base-case scenario.
Bull case
Rs933
Strong MIS growth: Faster ramp of state-sponsored MIS projects
on success of government subsidy scheme, more state
government-driven MIS projects, and direct retail demand from
visible gains to farmers. Fruit processing: Strong volume growth
and margin improvement on faster off-take in mango processing
and success in other fruits.
30x base
case 2010E
EPS
Base case
Rs762
24x base
case 2010E
EPS
MIS poised for strong growth as a) penetration is less than 2%
of agricultural land and should rise to 5% by F12, b) 50%
government subsidy on initial purchase is expected to continue
and c) more state governments are driving MIS projects.
Bear case
Rs506
16x base
case 2010E
EPS
Slowdown in state-sponsored MIS schemes on lower
productivity gains. Lower growth in mango business and limited
success in other fruits. Modest onion dehydration growth. AP
and pipe businesses grow slower.
Bear to Bull: MIS Business is the Key Value Driver
Indian Rupee (Rs)
1,000
96
Price Target: 762
850
135
700
60
43
18
50
25
933
762
550
400
506
• Government focus and subsidy
support MIS – subsidy of Rs14 billion
in past three years.
• Low penetration of MIS – only 3mha
covered against potential of 69mha.
Also, only around 40% of agricultural
land is irrigated.
Potential Catalysts
• Signs of continued government
support for MIS.
• Faster-than-expected scale-up in
agro-processing business coupled
with margin expansion.
• Strong, profitable growth in plastics
business.
Risks
• Significant dependence of MIS on
government support; delays or
slowdown will affect growth.
• Headwinds from low-margin (11-13%)
plastic business and possible volatility
in the AP business.
• High working capital requirement.
250
100
-50
Bear 42% (36% Higher Faster Onion and Base 46% (42% Higher Faster
Bull
Case
in bear Margin in profitable Pipes
Case in base Margin in profitable Case
case)
MIS growth in Business
case)
MIS growth in
CAGR in business AgroCAGR in business AgroMIS (F07processing
MIS (F07processing
F12)
F12)
Source: Morgan Stanley, FactSet
75
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Jain Irrigation Systems: Financial Summary
Rs million; Years Ending March
Income Statement
Revenues (Net of Excise)
Raw Materials
Changes in Inventory
Other Operating expenses
Total Expenses
EBIDTA
Depreciation
EBIT
Interest Cost
Other Income
Write Off
PBT
Tax
PAT
PAT after MI, Ext Ord. Pref Div.
EPS
Cash Flow Statement
F2007
F2008E
F2009E
F2010E
12390
8216
(887)
3267
10597
1793
337
1456
712
305
7
1042
206
836
790
13.5
20168
13194
(887)
4840
17148
3020
480
2540
911
381
0
2010
603
1407
1365
16.6
24895
15852
(887)
6037
21002
3893
581
3311
992
400
0
2719
816
1904
1882
22.9
30553
19095
(887)
7409
25617
4936
704
4233
946
408
0
3695
1108
2586
2586
31.4
F2007 F2008E
PAT
Add: Depreciation
Add: Interest
Change in working capital
Cash flow from operations
Capital Expenditure
Investments
Goodwill
Cash Flow from Investing Activities
Issue of Share Capital
Issue of Preference Shares
Issue of Debt
Dividend Paid
Others
Cash Flow from Financing Activities
836
337
712
(1685)
200
(2569)
0
(664)
(3233)
447
(25)
1584
(259)
51
1085
1407
480
911
(4822)
(2024)
(1408)
0
0
(1408)
978
0
4926
(197)
(7)
4789
F2009E F2010E
1904
2586
581
704
992
946
(1106) (2801)
2371
1435
(1200) (1200)
0
0
0
0
(1200) (1200)
0
4116
(419)
(442)
(550)
(450)
(383)
(490)
0
0
(2344)
1788
Key Ratios
Balance Sheet
Cash & Bank
Sundry Debtors
Other Current Assets
Total Current Assets
Others
Net Assets
Capital WIP
Goodwill
Investments
Total Assets
Sundry Creditors
Other Current Liab. & Prov.
Total Current Liability
Minority Interest
Total Debt
Preference Shares
Share Capital
Profit & Loss Account
Other Reserves
Shareholders Funds
Total Liabilities
F2007
F2008E
F2009E
F2010E
443
3585
5960
9988
536
5802
792
664
200
17981
4021
1123
5144
104
8689
885
615
873
1669
3158
17981
1800
6907
9053
17759
154
7122
400
664
200
26299
5422
1120
6542
100
11000
885
729
1897
5146
7772
26299
626
8526
9786
18938
0
7740
400
664
200
27942
6514
1226
7741
100
10450
466
729
3311
5146
9185
27942
2649
10882
11563
25094
0
8237
400
664
200
34595
7847
1360
9207
100
10000
24
820
5274
9170
15264
34595
Growth
Revenues
EBITDA
EBIT
PBT
PAT
Margins
EBITDA
EBIT
PAT
Return
RoE
RoCE
Gearing
Total Debt / Equity
Valuations
P/E
EV/EBITDA
Dividend Yield
F2007
F2008E
F2009E
F2010E
47%
39%
43%
79%
66%
63%
68%
74%
93%
73%
23%
29%
30%
35%
38%
23%
27%
28%
36%
37%
14.5%
11.8%
6.4%
15.0%
12.6%
6.8%
15.6%
13.3%
7.6%
16.2%
13.9%
8.5%
29.0%
12.6%
25.0%
15.7%
22.2%
16.7%
21.2%
18.6%
3.0
1.5
1.2
0.7
44.0
25.4
0.4%
35.8
17.6
0.7%
25.9
13.7
0.9%
18.9
11.4
1.1%
E = Morgan Stanley Research estimates
Source: Company data, Morgan Stanley Research
76
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Jaiprakash Associates Limited
Long Way to Go for Full Value
Morgan Stanley India
Company Private Limited +
Akshay Soni
Akshay.Soni@morganstanley.com
Pratima Swaminathan
Key Statistics
Stock Rating: Overweight
Reuters: JAIA.BO Bloomberg: JPA IN
India Construction & Infrastructure
Attractive
Price target
Rs314.00
Share price, close (January 22,2008)
Rs315.50
Market cap (mn)
Rs339,858.00
Rs510.00-93.00
52-Week Range
Shares outstanding, basic, currency (mn)
1,175.00
Pratima.Swaminathan@morganstanley.com
Investment Conclusion
Jaiprakash Associates (JPA) is the sixth-largest cement
company in India. It has 7 million tons of capacity as of March
31, 2007, and plans to increase capacity to about 25 million
tons by F2010. JPA is a market leader in hydropower and
river valley projects in the construction business. We believe
the cement business will weaken, despite massive volume
growth, as a result of pricing weakness over the next 24
months. However, we think the construction and real estate
businesses will more than compensate.
The order book build-up, as a result of massive internal
projects – including the Taj Expressway, Jaypee Greens, and
upcoming power generation (hydro and thermal) projects –
will drive JPA’s construction business growth, in our view.
Meanwhile, we expect the build-out at Jaypee Greens (8
million sq ft), Taj Expressway (400 million sq ft), and Ganga
Expressway (3.2 billion sq ft) to drive the real estate business.
JPA is well-diversified across various businesses, such as
cement, construction, power, and real estate. In addition, we
believe its forays into power transmission, steel, and oil
exploration & production could create value for investors.
Recent Developments
JPA recently won the contract to build and operate the 1,047
km Ganga expressway. The eight-lane road project, which
will run along the River Ganga to connect eastern and
western Uttar Pradesh, will cost around Rs400 billion to build.
We believe JPA will get development rights for around 3.2
billion sq ft spread over 30,000 acres and the right to collect
tolls on the expressway for 35 years (including the
construction period).
Key Investment Issues
•
Risk of dilution of management focus as the company
spreads itself across diverse businesses – power
generation, construction, cement, real estate, and hotels.
•
Company Description
Jaiprakash Associates Limited undertakes large engineering projects
entailing the construction of dams and power stations. It also
manufactures cement, manages hotels, and develops hydro-electric
power projects.
Valuation Methodology
We value JPA using a sum-of-the-parts methodology because
of the company’s different businesses. We value each
business unit in line with peer/industry valuation practices.
What We Like
•
Well diversified businesses across cement, construction,
power, and real estate segments.
•
Leader in the highest-margin hydropower segment of the
power construction industry.
•
The core cement/construction business is available at a
significant discount to peers in India, making JPA our top
pick in our India Construction & Infrastructure universe.
•
JPA has become the largest landowner in India, with the
inclusion of the land that would be available to JPA with
the Ganga Expressway.
What We Don’t Like
•
Start of the cement down-cycle in F2009 as massive
capacity expansion takes place in the sector will result in
the cement business being a drag on growth, in our view.
•
Growth in hydropower construction is slower than in other
areas of infrastructure, resulting in the growth of JPA’s
construction business lagging that of peers.
•
Real estate development dramatically increases risk on
the company’s P&L through exposure to real estate
prices.
In F2009, we expect a cement sector capacity overhang
to affect the company significantly; we estimate cement
EBIT will decline 12% YoY, despite the company’s
significant increase in capacity.
77
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Risk-Reward Snapshot: Jaiprakash Associates Limited
Investment Thesis
Great Risk/Reward Trade-Off Makes JPA Our Top Industry Pick
Rs600
500
Rs400 (+27%)
400
Rs 314 - PT
300
Rs292.20 (-7%)
Rs315.50
200
100
Rs194.40 (-38%)
0
Jan 06
May 06
Price Target
Sep 06
Jan 07
May 07
Sep 07
Historical Stock Performance
Jan 08
May 08
Sep 08
Jan 09
Current Stock Price
Price Target Rs314
Base-case value plus 20% of the differential to the value in our
bull-case scenario (arrived at by sum-of parts)
Bull case
Rs400
22.2x bullcase 2009E
EPS
Government allows large cement price hikes: Cement prices
move up to Rs250/bag in F08. The higher profits result in JPA’s
capacity trading at the same valuations as ACC (F09 EV/ton of
US$250). Full development value of Taj Expressway. Value of
power projects JPA is implementing benchmarked to NTPC.
Base case
Rs292.2
28.8x basecase 2009E
EPS
Stable pricing before a decline in F2009: With stable prices in
F2008, investors begin to look out to the excess capacity coming
on line in F09 and start pricing the company’s capacity at the
valuation of ACC (closest cement peer; F09 EV/ton of US$250)
Bear case
Rs194.4
20.8x bearcase 2009E
EPS
Government export ban: Inflation control measures mean a ban
on cement exports, resulting in a 20% fall in prices in F09. JPA’s
capacity trades at ACC’s 10-year average EV/ton valuation
(US$81/ton. JPA realizes only the land value on the Taj
Expressway project.
Real Estate Will Be the Key Driver
Indian Rupee (Rs)
500
50
58
400
66
300
29
Key Value Drivers
• Cement pricing environment.
• Upcoming cement capacity additions.
• Real estate development plans
rollout by JPA (Jaypee Greens and
Taj Expressway).
Potential Catalysts
• New project wins by JPA.
• News on progress of internal
projects.
• News on development progress of
various BOT/BOOT projects.
Key Risks
• F2009 cement capacity overhang.
• Government intervention in cement
prices hurts cement profitability.
• Slow growth in hydropower
construction.
• Dilution of management focus.
292
200
100
400
• India’s leading hydropower
construction company.
• Massive upcoming internal
hydropower projects to help JPA
record strong growth and protect
margins.
• Doubling of cement capacity in the
next 24 months to help stave off
pricing weakness.
• Real estate (Jaypee Greens and Taj
Expressway) to add significant value.
• Core cement/construction business
at a significant discount to peers in
India.
196
0
Bear
Case
Cement
Taj
Valuations areExpressway ’s
at ACC's 10-y r land v alue
av erage of without any
US$ 81/Ton dev elopment
Base
Case
Benchmark Dev elopment
v alue of the v alue of Noida
power projects
Land
under
implementation
to NTPC
Bull
Case
Source: Morgan Stanley Research, FactSet
78
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Jaiprakash Associates Limited: Financial Summary
Rs million; Years Ending March
Profit and Loss Statement
Year Ended Mar 31
Net Revenues
(Increase)/Decrease in Stock
Construction, Mfg & Hotel Expenses
Personnel
Selling & Distribution Expenses
Other Expenses
EBITDA
EBITDA Margin
Interest
Depreciation
Other Income
PBT
Provision for Taxation
PAT
Extraordinary income/(loss)
Reported Profit
Cash Flow Statement
2006
2007
2008E
2009E
31,683
171
18,798
1,244
2,716
2,407
6,347
20%
2,397
1,515
1,598
4,032
1,246
2,786
3,614
6,400
34,617
(153)
17,743
1,611
3,451
2,708
9,257
27%
2,573
1,631
1,145
6,199
2,050
4,149
4,149
41,866
20,196
1,843
4,064
3,171
11,476
27%
3,992
1,879
2,100
7,706
2,548
5,157
5,157
55,581
24,743
2,308
6,136
4,488
14,715
26%
4,722
2,349
2,627
10,271
3,397
6,874
6,874
Balance Sheet
Year Ended Mar 31
Shareholders Funds
Share Capital
Reserves & Surplus
Loan Funds
Short Term Loans
Long Term Loans
Deferred Tax Liability
Total Capital Employed
Gross Block
Accumulated Depreciation
Net Block
Capital WIP
Investments
Deferred Tax Asset
Inventories
Debtors
Cash & Bank
Other Current Assets
Loans & Advances
Creditors
Advance from Customers
Due to Staff
Other Liabilities
Interest acc but not due on loans
Inv Education & Protection Fund
Provisions
Miscellaneous Expenditure
Total Application of Funds
2006
26,822
2,151
24,671
42,198
3,626
38,572
4,902
73,922
36,638
11,961
24,677
8,761
15,570
70
12,125
4,224
16,698
34
9,118
4,041
2,138
56
8,318
495
48
1,991
5
73,922
2007
2008E
2009E
28,729
41,437 46,520
2,192
2,354
2,354
26,537
39,082 44,166
55,158
72,077 77,077
3,240
3,240
3,240
51,918
68,836 73,836
4,994
5,080
5,194
88,881 118,594 128,791
42,019
60,019 75,019
12,800
14,687 17,038
29,220
45,332 57,982
22,281
22,281 22,281
17,787
11,772 11,772
93
93
93
12,646
14,598 18,788
4,521
5,582
7,410
14,298
34,726 31,518
125
152
201
10,985
12,867 16,526
4,832
5,577
7,178
4,214
5,096
6,766
90
103
129
10,162
12,290 16,315
698
1,084
1,282
40
40
40
3,041
4,620
6,070
1
88,881 118,594 128,791
Year Ended Mar 31
2006
2007
2008E
2009E
PAT
2,786
4,149
5,157
6,874
Depreciation
1,515
1,631
1,879
2,349
Net change in working capital
(2,681)
2,941
812
(756)
Extraordinaries
3,614
Net cash from Operations
5,234
8,720
7,849
8,467
Capex
(10,317) (18,902) (18,000) (15,000)
Impairment of assets
(149)
(792)
8
2
Change in Investments
(3,651) (2,217)
6,015
Net cash from Investing
(14,113) (21,931) (11,976) (14,998)
Change in Deferred Tax Liability
21
93
86
114
Change in ST Loans
2,451
(386)
Change in LT Loans
7,758 13,346 16,919
5,000
Increase/Decrease in Equity
8,737 (1,332)
8,934
(0)
Dividends Paid
(662)
(909) (1,384) (1,791)
Net cash from financing
18,305 10,811 24,555
3,323
Change in Cash
9,426 (2,400) 20,428 (3,208)
Opening Cash in Balance Sheet
7,272 16,698 14,298 34,726
Closing Cash in Balance Sheet
16,698 14,298 34,726 31,518
Ratio Analysis
Year Ended Mar 31
ModelWare EPS
Book Value per Share
DPS (Excl. Div. Tax)
Payout (Incl. Div. Tax) %
Adjusted Valuation
P/E
EV/EBITDA
EV/Sales
Price to Book Value
Dividend Yield (%)
Profitability Ratios (%)
EBIDTA Margins
Net Profit Margins
Average RoE
Average RoCE
Turnover Ratios
Net Sales to Total Assets
Net Sales to Fixed Assets
Net Sales to Working Capital
Growth (%)
Sales
Operating Profit
ModelWare Net Profit
Leverage Ratio
Debt/Equity (x)
Net Debt/Equity (x)
2006
2007
2008E
2009E
2.6
124.7
2.7
24%
3.8
131.0
3.6
22%
4.4
176.0
5.1
27%
5.8
197.6
6.6
26%
36.3
7.2
1.4
0.8
2.9%
28.5
7.0
1.9
0.8
3.3%
7.0
3.9
1.1
0.2
16.6%
5.3
3.6
1.0
0.2
21.4%
20.0%
8.8%
14.2%
4.5%
26.7%
12.0%
14.9%
5.1%
27.4%
12.3%
14.7%
5.0%
26.5%
12.4%
15.6%
5.6%
0.4
0.9
1.3
0.4
0.7
1.8
0.4
0.6
1.1
0.4
0.7
1.5
15%
18%
34%
9%
46%
49%
21%
24%
24%
33%
28%
33%
1.6
1.0
1.9
1.4
1.7
0.9
1.7
1.0
E = Morgan Stanley Research estimates
Source: Company data, Morgan Stanley Research
79
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Jet Airways
India’s Largest Domestic Airline
Morgan Stanley India
Company Private Limited+
Balaji Jayaraman, CFA
Key Statistics
Stock Rating: NOT RATED
Reuters: JET.BO Bloomberg: JETIN.IN
Share price, close (January 22, 2008)
Rs 692.5
Market cap (mn)
Rs59786
52-Week Range
Rs 533.35-1049.8
Balaji.Jayaraman@morganstanley.com
Anosh Koppikar
Anosh.Koppikar@morganstanley.com
Jet Airways (JA) is India’s largest domestic airline and
has a market share of roughly 30% (including its low-cost
carrier operations under the brand JetLite). JA’s average fleet
age is 4.4 years, which compares well with those of peers in
Asia/Pacific. According to management, JA’s operating
results have been under pressure recently because of rising
crude oil prices. But there could be some respite with the
relaxation of hedging norms by the Reserve Bank of India and
expectations of concessions on the duties/tariff structure of
aviation turbine fuel (ATF). ATF prices in India are roughly
40-50% higher than international prices because of high taxes
and a disproportionate burden from subsidizing other refined
products such as diesel and gasoline.
Recent Developments
Oil companies cut aviation turbine fuel (ATF) prices 3.2%, to
reflect a decline in crude oil prices, to Rs44,716/kl from
Rs45,605/kl a month back. Earlier this year, the Ministry of
Civil Aviation had appealed to the Finance Ministry for a
rationalization of taxes and duties on ATF in its forthcoming
Union Budget in February. Sales taxes constitute roughly 1520% of overall ATF prices.
JA’s chairman, Naresh Goyal, recently indicated JA will
launch additional flights connecting San Francisco, Los
Angeles, and Washington DC, using Brussels as its European
hub. He indicated the company expects annual revenue from
international operations to rise to US$3.0 billion over the next
three years from the current US$1.4 billion.
JA also expects to get permission to begin its MumbaiShanghai-San Francisco daily flight, with the Indian
government clearing the proposal of China's Great Wall cargo
airline to fly to Mumbai and Chennai. The Indian commerce
ministry is optimistic that JA’s proposal will be approved. If
this happens, JA would become the first non-Chinese airline
to use a Chinese hub for transit to a third country. Mr Goyal
told the media that JA hopes to start flights to Shanghai from
New Delhi in the near future as well, to take advantage of the
growing traffic between India and China.
Stock Price Performance
J e t A ir wa ys
J e t A irw a y s
W e e k l y C l o s i n g P ri c e i n R s
1200
1200
1000
1000
800
800
600
600
400
50
400
50
R e l a ti v e P e rf o rm a n c e to M S C I I n d i a
0
0
-5 0
-5 0
-1 0 0
-1 0 0
T o t a l W e e kl y T u rn o v e r b y V a l u e i n R s b n
4
4
2
2
0
0
J
F
M
A
M
J
J
A
S
O
N
D
J
F
M
A
M
J
J
A
S
O
N
D
J
Source: Datastream
Company Description
JA provides regular scheduled airline services on domestic and
international routes. JA has 60-plus aircraft under its main brand: including
four Boeing 777-300 ERs, 49 classic and next-generation Boeing 737400/700/800/900s, four Airbus A330-200s, and eight modern ATR 72-500
turboprop aircraft. JA provides services to eight international destinations in
Europe, the US, and Asia.
JA also plans to commence operations to the lucrative Middle
East market from the end of January 2008. It expects these
international forays to diversify business risk and improve
profitability, as it aims to tap into the large non-resident Indian
population in these various regions.
Company Guidance and Outlook
JA plans to increase its overall fleet from 86 as of March 2007
(62 JA and 24 JetLite) to 148 in March 2011 (112 JA and 36
JetLite). JA expects to fund these aircraft acquisitions
through a mix of equity and debt. JA has indicated it will have
a rights issue of equity shares amounting to US$400-450
million within the current fiscal year.
80
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Jet Airways: Financial Summary
Rs million; Years Ending March
Profit & Loss Account
Rs mn
Total Income
Total Expenses
Employee Cost
Power and Fuel Cost
Other Manufacturing
Costs
Selling Costs
Miscellaneous
Expenses
EBITDA
Depreciation &
Amortisation
Interest & financial
Charges
Profit Before Tax
Tax
Profit after Tax
Extraordinary Items
Adjusted Profit after tax
Cash Flow Statement
F2004
F2005
F2006
F2007
35657.4
25833.4
7486
2770.9
44201.7
31273.9
10591.3
3669.3
61082.9
47380.9
16882.1
5403.8
74476.2
67420.8
24370.2
9149.8
7298.3
7579.3
7329.6
8995.3
9931.7
13907
14590.6
17642.7
698.9
9824
688.4
12927.8
1256.3
13702
1667.5
7055.4
5151.5
4570
4064.1
4141
2891.4
1781.1
150
1631.1
421.1
1210
2536.9
5820.9
1901
3919.9
71.4
3848.5
2416
7221.9
2701.5
4520.4
2067.4
2453
2401.5
512.9
233.5
279.4
2019.3
-1739.9
Balance Sheet
Rs mn
Shareholder Equity
Retained Earnings
Net Worth
Deferred Tax Liability
Total Debt
Total Liabilities
Net Fixed Assets
Investments
Current Assets, Loans & Advances:
Inventories
Sundry Debtors
Cash and Bank
Loans and Advances
Total Current Assets
Current Liabilities:
Total Current Liabilities
Net Current Assets
Miscellaneous Expenses not w/o
Total Assets
F2004
F2005
F2006
F2007
1,419
2,755
4,174
508
32,100
36,782
31,268
2,334
863
19,238
20,102
1,949
29,648
51,699
26,407
15,957
863
22,196
23,059
3,207
48,956
75,221
47,882
1,872
863
21,509
22,373
3,311
60,563
86,246
72,920
689
3,474
2,344
3,699
1,803
11,322
3,325
2,523
12,242
2,353
20,444
4,053
4,332
21,043
9,327
38,754
4,390
6,039
10,966
12,249
33,645
8,142
3,179
11,109
9,335
13,286
25,468
21,008
12,637
36,782
51,699
75,221
86,246
Rs mn
Cash and Cash Equivalents at
Beginning of the year
Net Cash from Operating
Activities
Net Profit before Tax &
Extraordinary Items
Total Adjustments (PBT &
Extraordinary Items)
Working Capital Changes
Tax
Net Cash from (Used in)
Investing Activities
Net Purchase/Sale of Fixed
Assets
Net Purchase/Sale of
Investments
Interest/ Dividend Received
F2004
F2005
F2006
F2007
484.8
135.6
5040.1
2277.6
10556.7
13550.4
6074.8
6874.6
1781.1
5821
7222.2
512.9
7875.8
890.5
9.3
7054.9
1141.1
-466.6
2854.1
-2662.3
-1339.2
4108.5
2806.6
-553.4
-3199.5 -17799.2 -24715.6
-7860.8
863.7
Other Cash Flow from Investing
Net Cash Used in Financing
Activities
Net Proceeds from Equity
issuances
Net Proceeds from Borrowings
Interest/ Dividend Paid
Net increase/ (Decrease) In cash
and Cash Equivalents
Cash and Cash Equivalents at
the end of the year
5.2
4628.2
4666.3
-1713.4 -13513.1
17.1
287.6
14610.3
536.7
1287.9
587.4
14402.4
-2366.9
-4578.9 -44490.8
-7706.4
9153.3
15878.3
7323.3
-4677.4
-3029
14175.9
-2755.8
-2266.8
19173.8
-3295.5
12757.2
-5433.9
-349.2
4904.5
-2762.5
6337.1
135.6
5040.1
2277.6
8614.7
Ratio Analysis
Price (Rs)
Adjusted shares O/S
(INR 10 each) (mn)
Returns
OPM
NPM
Dividend Yield
ROCE
ROE
Per Share
EPS
Book Value
Dividend
Valuation
P/E
P/BV
EV/EBIDTA
Capitalisation and
Coverage
Total Debt/Equity
Equity/Net Assets
Turnover / Gross Block
F2004
F2005
F2006
F2007
NA
1,135.0
1,005.0
620.0
86.3
86.3
86.3
86.3
27.6%
5%
0.0%
10.2%
49.9%
29.2%
9%
0.3%
12.6%
31.7%
22.4%
7%
0.6%
6.2%
11.4%
9.5%
0%
1.0%
-0.5%
-7.7%
14
48
-
45
233
3
28
267
6
(20)
259
6
NMF
NMF
3
25
5
9
35
4
8
(31)
2
15
7.7
0.1
0.7
1.5
0.4
0.8
2.1
0.3
1.4
2.7
0.3
1.3
Source: Company data
81
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Koutons Retail India
High Growth Ambitions
Morgan Stanley India
Company Private Limited+
Hozefa Topiwalla
Key Statistics
Stock Rating: NOT RATED
Reuters: KRIL.BO Bloomberg: KUTN IN
Share price, close (January 22, 2008)
Rs805
Market cap (mn)
Rs24,594
52-Week Range
Rs1,060-415
Hozefa.Topiwalla@morganstanley.com
Divya Gangahar
Stock Price Performance
K o u t o n s R e t a il In d ia
K o u t o n s R e t a il In d i a
W e e k l y C l o s i n g P ri c e i n R s
Divya.Gangahar@morganstanley.com
1100
Nillai Shah
1000
1000
900
900
800
800
700
700
Nillai.Shah@morganstanley.com
Koutons Retail (KR) is one of the fastest-growing fashion
apparel retailers in India. It designs, manufactures, and
retails apparel under the Koutons and Charlie Outlaw brands
through a network of 1,150 exclusive brand outlets (EBOs). It
has annual in-house capacity to manufacture 12.36 million
and finish 22.92 million pieces of apparel.
600
50
1100
600
50
R e l a ti v e P e rf o rm a n c e to M S C I I n d i a
0
0
-5 0
-5 0
T o t a l W e e kl y T u rn o v e r b y V a l u e i n R s b n
5
5
0
Recent Developments
KR recently acquired a 51% stake in Delhi-based brand
Upper Class, which has a foothold in the ladies’ apparel
segment. The acquisition is part of KR’s planned foray into
women’s and kids’ apparel. In September 2007, KR entered
the capital market with an IPO of about 3.5 million equity
shares, raising about Rs1.46 billion.
Results Summary
For 3Q F2008, KR’s net sales, operating profit, and net
income were Rs4,222 million, Rs812 million, and Rs332
million, respectively. These figures compare with Rs4,024
million, Rs692 million, and Rs342 million, respectively, for the
whole of F2007. The operating profit margin was 17.3% for
3Q F2008 and 19.2% for 9M F2008. KR added 180 and 379
EBOs for Koutons and Charlie Outlaw, respectively, YoY in
3Q F2008. Overall, the store count rose 95% YoY to 1,150
EBOs as of December 31, 2007.
Company Guidance and Outlook
KR has 610 Koutons and 540 Charlie Outlaw stores and aims
to increase these numbers to 1,000 and 2,000, respectively,
in the next three years. KR also plans about 300 exclusive
ladies’ apparel stores and another 250 Koutons Junior stores
specializing in kids’ apparel.
0
15
22
29
OCT
5
12
19
NOV
26
3
10
17
24
DEC
31
7
14
21
JA N
28
4
Source: Datastream
Company Description
Koutons Retail is a specialty apparel retailer-cum-manufacturer. It
Koutons and Charlie Outlaw brands provide a complete range of men’s
apparel. Its brands are positioned as ‘value for money, but high on
fashion’ and target the 14-45 age groups.
Targeting a Growing Segment With ‘High-value Fashion’
KR is focused on providing a complete menswear range in the
middle-to-high fashion segment at affordable prices. The
Koutons brand is focused on the 22-45 age bracket. The
Charlie Outlaw brand is positioned to cater to the 14-25 age
bracket. KR is introducing a line of women’s apparel under
the Les Femme brand.
Franchisee Model to Expand Rapidly
KR has been able to increase its store count rapidly through
its franchisee model. This works on the principle of offering
minimum guarantee to the franchisee and, additionally, KR
also takes on the entire store inventory risk. As of August
2007, almost 98% of KR’s EBOs were operated by
franchisees.
Fully Integrated Apparel Company
KR is a backward integrated firm and operates across the
value chain from manufacturing to retailing. In F2007, 85% of
its sales were of goods manufactured at its in-house facilities.
82
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Koutons Retail India: Financial Summary
Rs million; Years Ending March 31
Income Statement
Cash Flow Statement
Total Sales
F2004
F2005
F2006
F2007
311
579
1,583
4,024
Reported Net Profit
Total COGS
104
255
669
590
Gross Profit
207
324
914
3,434
GPM (%)
66.6
55.9
57.7
85.3
Manufacturing & Other Expenses
104
120
253
1,574
Payment to Employees
10.6
22.6
31.9
76.2
Sundry Debtors
G&A Expenses
12.0
18.2
41.3
86.2
Loans & Advances
Selling Expenses
58.2
114.7
332.0
993.9
Misc Expenditure written off
0.02
0.04
0.05
1.84
Provisions
EBITDA
22
48
256
703
Cash Flow From Operations
EBITDA Margin (%)
(Incr)/Decr of Fixed Assets
F2004
F2005
F2006
F2007
8.8
19.3
132.0
344.9
Depreciation
Change in deferred tax liabilities
4
4
10
40
(0.01)
0.12
1.90
17.28
(42)
(45)
(786)
(2,761)
7
(9)
(30)
(122)
(9)
(57)
(98)
(337)
(13)
56
464
533
6
6
44
143
Change in Working Capital
Inventories
Sundry Liabilities
(37.3) (24.9) (260.9) (2,143.1)
7.2
8.3
16.2
17.5
(6)
(16)
(85)
(369)
Other Income
7
2
0
12
(Incr)/decr of Strategic Investments
-
-
-
-
Depreciation
4
4
10
40
Other assets
-
-
-
-
Interest and Financial Charges
14
16
34
149
Cash Flow From Investment Activities
(6)
(16)
(85)
(369)
PBT
12
31
211
526
Incr/(Decr) of Equities
-
38
3
224
3
11
79
181
Inc/Dec in other accumulates reserves
0
(32)
(1)
858
PAT
8.8
19.3
132.0
344.9
Incr/(Decr) of Secured Loans
1
14
21
58
Net Margin (%)
2.8
3.3
8.3
8.6
Incr/(Decr) of Unsecured Loans
6
19
145
283
Inc/Dec in WC Loans
36
25
172
1,240
Cash Flow From Financing Activities
44
64
339
2,663
0.34 23.12
(6.67)
151.15
Total Tax
Growth (%)
104
119
584
161
EPS
0.39
0.85
5.97
14.22
Net change in cash
Balance Sheet
F2004
F2005
F2006
F2007
Key Ratios
F2005
F2006
F2007
Net sales growth (%)
86.5
173.3
154.1
Operating Profit growth (%)
116
430
175
Liabilities
Share Capital
10
47
50
273
Share Application Money
4
1
-
-
Share Premium Account
-
-
-
1,071
Reserves & Surplus
29
19
151
288
Net profit growth (%)
119
584
161
Less: Misc Exp
0.1
0.3
0.4
6.2
EPS Growth (%)
119
603
138
Net Worth
42
67
200
1,627
Growth Ratios
Profitability
Deferred Tax Liability
0.1
0.2
2.1
19.4
8.3
16.2
17.5
Loan Funds
116
175
513
2,094
EBIT margin (%)
8
15.5
16.5
86
111
282
1,523
Net Margin (%)
3
8.3
8.6
8
22
43
102
Return on Avg Equity (%)
35.3
98.6
37.6
15.6
35.3
20.3
Working Capital Loans
Secured Loans
Operating Margin (%)
Unsecured Loans
22
42
187
470
RNOA (%)
Current Liabilities
75
136
645
1,320
Efficiency
Total Liabilities
233
378
1,360
5,060
Debtor turnover (days)
Assets
Net Block
20
32
106
436
-
-
-
-
Current Assets
213
347
1,253
4,625
Inventories
147
192
977
3,738
43
52
82
204
5
28
21
173
Investments
Sundry Debtors
Cash & bank
Loans & Advances
Total Assets
18
75
173
510
233
378
1,360
5,060
32.7
18.8
18.5
Inventory turnover (days)
269.4
525.0
2,168.4
Creditors turnover (days)
168.9
317.5
690.1
2.19
2.45
1.18
Net debt/Equity
Source: Company data
83
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Larsen & Toubro
Bigger and Better than the Rest,
and Still Growing Well
Morgan Stanley India
Company Private Limited +
Akshay Soni
Akshay.Soni@morganstanley.com
Key Statistics
Stock Rating: Overweight
Reuters: LART.BO Bloomberg: LT IN
India Construction & Infrastructure
Attractive
Price target
Rs 4,427.00
Share price, close (January 22, 2008)
Rs 3,655.40
Market cap (mn)
Rs1,105,303.00
Rs4,670.00-1,374.90
52-Week Range
Shares outstanding, basic, currency (mn)
283.00
Pratima Swaminathan
Company Description
Larsen & Toubro's primary businesses are engineering and
construction, electrical and electronics equipment, and software. L&T
has played a key role in building manufacturing facilities for several
industries, such as oil and gas, petrochemicals, cement, steel,
fertilizers, and power. L&T's construction business is 6-7 times larger
than that of its nearest Indian competitor.
Pratima.Swaminathan@morganstanley.com
Investment Conclusion
L&T is already the largest and most diversified player in the
Indian construction universe, and the company’s initiatives in
newer and relatively uncontested ventures, such as
aerospace and defense, shipbuilding, and nuclear power,
provide solid growth potential and better margins than the
core business, in our opinion. We expect corporate capex
and infrastructure investment to grow strongly, and estimate a
31% revenue CAGR for L&T’s core business for F2008-10.
The core engineering and construction business is doing well
by itself. In addition, L&T’s subsidiaries, including
infrastructure development forays, Infotech, finance, and a
supercritical equipment JV, along with investments in other
JVs, are creating solid value, in our opinion.
Recent Developments
L&T’s subsidiaries in the IT services, finance, and
infrastructure development arenas have been operational for
some time now, and with a couple of them nearing the scale
considered sufficient by management, will potentially undergo
value unlocking through IPOs in the next 24 months, in line
with L&T’s stated plan to take its three main subsidiaries to
market at some point.
Key Investment Issues
•
Sourcing of middle-level manpower becoming difficult
with the rapid growth of people-driven companies.
•
Increasing business risk.
•
Rising raw material prices.
Valuation Methodology
We value L&T using a sum-of-the-parts methodology to derive
our price target of Rs4,427, given the diverse nature of its
businesses. We value the core business using a residual
income model, assuming a 12.6% cost of equity. We value
each subsidiary by benchmarking to peers in the respective
industries.
What We Like
•
Diversified play: L&T is the most diversified play in the
sector in India, with exposure to engineering and
construction from diverse sources of infrastructure/
corporate capex.
•
Strong order book: As of 1H F2008, L&T has an order
book buildup of Rs440 billion at 2.2x revenues (trailing 12
months) giving us confidence in strong revenue visibility
over the next two years.
•
Scale allowing margin expansion: L&T is winning
contracts nearly uncontested, allowing it to increase
margins significantly. This is because of its scale, the
growing size of contracts, and the shortage of
construction capability in India. L&T is constructing all
four airports in India that private parties plan to run.
•
Initiatives in newer and relatively uncontested
ventures such as aerospace and defense, shipbuilding,
and nuclear power provide solid growth potential and
better margins than the core business.
What We Don’t Like
•
Competition could squeeze margins: Increasing
competition could compress margins with contracts being
awarded to the lowest bidder.
•
Sensitive to raw materials prices: The rising prices of
raw materials, such as cement and steel, could put
significant pressure on profit growth because of L&T’s
fixed-price contract business model and low-margin
business.
•
Sensitive to regulatory changes: Any changes in
regulations could have a significant effect on L&T
because of the highly regulated environment in its
infrastructure business (40%-plus of revenue).
84
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Risk-Reward Snapshot: Larsen & Toubro
Investment Thesis
Growth to Continue
Rs8,000
Rs6,939 (+90%)
7,000
6,000
5,000
Rs3,655.40
Rs4,427 (+21%)
4,000
3,000
2,000
Rs3,335 (-9%)
1,000
0
Jan 06
May 06
Sep 06
Price Target
Jan 07
May 07
Sep 07
Historical Stock Performance
Jan 08
May 08
Sep 08
Jan 09
Current Stock Price
Price Target Rs 4,427
Derived from base-case scenario.
Bull case
Rs6,939
59x bullcase 2009E
EPS
JV with Toshiba materializes: The turbine JV with Toshiba
comes through and L&T’s revenue rises 40% in F2008 and 35%
in F2009; margins flat at 12.0%.
Base case
Rs4,427
37.5x basecase 2009E
EPS
Strong order book: Revenue rises 35% in F2008 and 30% in
F2009. Margins are 12% in F2008 and fall 30bp for each of the
next three years.
Bear case
Rs3,335
28.3x bear
case 2009E
EPS
Supercritical JV with Mitsubishi fails: Revenue growth slows to
30% in F2008 and 25% in F2009; margins fall 50bp due to
escalating costs; and the supercritical JV with Mitsubishi fails.
• L&T is a hybrid relative to its peers,
depending on infrastructure spending
and corporate capital spending.
• Within the construction universe in
India, L&T remains the largest and the
most diversified play and continues to
record impressive growth.
• With nearly 60% of its business
coming from non-infrastructure
corporate capital spending, L&T is
better protected from margin pressure
than most of its peers, in our view.
• Although the core engineering and
construction business is doing well by
itself, L&T’s infrastructure
development forays, along with its
investments in subsidiaries and JVs,
are creating solid value, in our
opinion.
Key Value Drivers
Indian Rupee (Rs)
Supercritical Value Addition
10,000
8,000
1,794
6,000
274
557
4,000
2,000
526
192
261
6,939
4,427
3,335
Potential Catalysts
• Any acceleration in infrastructure
spending by the government or
increase in corporate capex.
• Announcement of new project wins.
• Listing of subsidiaries – L&T Infotech
and L& IDPL.
Key Risks
0
Bear
Case
• L&T’s strong order book and
initiatives in relatively uncontested
areas.
• Margins expansion initiatives by L&T.
Super Rev enuesMargins f all
Critical JV growth by 50 bps
does not slows down
come
to 30% in
through F2008E and
25% in
F2009e
Base
Case
Turbine JV Rev enues Margins
with Hitachi growth remain Flat
comes increases at current
through to 40% in lev els
F2008E and
35% in
F2009E
Bull
Case
• Slowdown in infrastructure spending.
• Lack of profitability of infrastructure
development projects undertaken by
L&T.
• Margin decline that is greater than
expected.
Source: Morgan Stanley, FactSet
85
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Larsen & Toubro: Financial Summary
Rs million; Years Ending March
Income Statement
Rs. Million
Net Operating Income
Manufacturing Expenses
Staff Cost
SG&A
Total Operating Expenses
Operating Profit
Operating Profit Margin
Cash Flow Statement
F2006
F2007
F2008E
F2009E
148,403 176,923 238,083 310,269
115,603 130,781 173,460 225,342
8,925 12,582 18,141 25,209
12,444 14,992 17,834 23,264
136,973 158,355 209,435 273,815
11,430
7.7%
18,568
10.5%
28,648
12.0%
36,454
11.7%
2,081
3,180
3,498
3,847
EBITDA
EBITDA margin
13,510
9.0%
21,748
12.1%
32,145
13.3%
40,301
12.8%
Depreciation & Amortization
Interest
Profit before tax
Tax
Profit after tax
Extraordinaries Net of Tax
Reported PAT
Subsidiary profits
Consolidated PAT
1,126
751
11,634
3,233
8,401
1,721
10,121
3,051
11,451
1,667
339
19,742
5,925
13,817
214
14,031
8,370
22,187
2,085
226
29,834
9,248
20,585
20,585
6,464
27,050
2,663
292
37,347
11,951
25,396
25,396
8,403
33,799
Other income
Balance Sheet
Rs. Million
F2006
F2007
F2008E
F2009E
Share Capital
Reserves & Surplus
Net Worth
275
49,178
49,452
567
65,488
66,055
Secured Loans
Unsecured Loans
Loan Funds
Def. Tax Liab
Total Capital Employed
4,658
9,878
14,536
2,098
66,086
2,454
2,454
2,454
18,324 14,101 17,101
20,778 16,555 19,555
2,049
2,049
2,049
88,881 109,893 139,313
Gross Fixed assets
Less : Accumulated Depr
Net Block
Capital W-I-P
Fixed Assets
23,007
9,822
13,185
2,861
16,045
28,763
11,228
17,535
4,712
22,247
37,113
13,221
23,892
4,712
28,604
47,413
15,845
31,568
4,712
36,280
Investments
22,246
39,415
57,842
63,881
Inventories
Sundry Debtors
Cash & Bank Balances
Other Current Assets
Loans & Advances
Total Current Assets
Less: Current Liabilities
Net Current Assets
22,103 30,011 42,398 55,253
48,142 55,046 58,167 78,274
5,832 10,944
9,199 18,560
1,498
1,912
1,912
1,912
19,106 22,579 26,855 31,985
95,355 118,847 136,884 184,338
69,106 93,372 115,084 146,833
26,249 25,474 21,799 37,504
Miscellaneous Expenses
Total Capital Employed
221
66,086
574
574
90,716 117,136
91,289 117,709
98
88,881 109,893 139,313
Rs. Million
F2006
F2007
F2008E
F2009E
Profit after tax
Add: Depreciation
Add: Extraordinaries
Add: Deferred Tax
Cash flow from operations
Net Dec in Working Capital
Net Cash from Operations
11,451
1,126
1,721
(173)
14,126
3,691
17,817
22,187
1,667
214
(371)
23,698
5,887
29,585
27,050
2,085
29,135
1,930
31,065
33,799
2,663
36,462
(6,344)
30,118
Capital Expenditure
Change in Core Investments
Change in Miscellaneous Exp
Net Cash from Investing
6,343
11,965
(181)
18,127
7,869
17,169
(123)
24,915
8,443
18,427
(98)
26,772
10,338
6,039
16,378
Issue of Equities
Change in Debt
Dividend Paid (-)
Net Cash from Financing
5,364
(4,055)
3,446
(2,138)
(1,583)
6,242
4,216
443
4,223
(4,223)
6,038
(6,038)
3,000
7,379
(4,379)
Net Change in Cash
Opening Cash & Bank
Closing Cash & Bank
(2,448)
8,280
5,832
5,112
5,832
10,944
(1,745)
10,944
9,199
9,361
9,199
18,560
Rs. Million
F2006
F2007
F2008E
F2009E
Per share Ratios
ModelWare EPS
Book Value per Share
DPS
41.7
180.0
11.0
78.3
233.2
13.0
94.3
318.3
18.0
117.8
410.4
22.0
Adjusted Valuation
P/E
EV/EBITDA
EV/Sales
Price to Book Value
29.2 x
25.4 x
2.3 x
6.8 x
20.7 x
21.5 x
2.6 x
6.9 x
37.8 x
32.1 x
4.3 x
11.2 x
30.3 x
25.4 x
3.3 x
8.7 x
Profitability Ratios (%)
Operating Margins
Net Profit Margins
Average RoE
Average RoCE
7.7%
6.8%
20.0%
12.7%
10.5%
7.9%
23.9%
15.5%
12.0%
8.6%
26.2%
18.7%
11.7%
8.2%
24.3%
18.2%
Turnover Ratios
Net Sales to Total Assets
Net Sales to Fixed Assets
Net Sales to Working Capital
2.2
9.2
5.7
2.0
8.0
6.9
2.2
8.3
10.9
2.2
8.6
8.3
Capitalization
Debt/Equity (x)
Net Debt/Equity (x)
0.3
0.2
0.3
0.1
0.2
0.1
0.2
0.0
274.80
283.25
286.81
286.81
Ratio Analysis
Basic Shares Outstanding (m)
E = Morgan Stanley Research estimates
NA = Not Applicable; NM = Not Meaningful
Source: Company data, Morgan Stanley Researc
86
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Mahindra & Mahindra
Potential Value Trap: Near-term
Catalysts Priced In
Morgan Stanley India
Company Private Limited+
Balaji Jayaraman, CFA
Balaji.Jayaraman@morganstanley.com
Key Statistics
Stock Rating: Equal-Weight
Reuters: MAHM.BO Bloomberg: MM IN
India Four-Wheelers: Commercial Vehicles
Cautious
Price target
Shr price, close (February 1, 2008)
Mkt cap, curr (mn)
52-Week Range
Rs800.00
Rs674.30
Rs165,704
Rs950.75-543.00
Sh out, basic, curr (mn)
245.7
Anosh Koppikar
Anosh.Koppikar@morganstanley.com
Investment Conclusion
We believe all potential near-term catalysts appear priced in,
and we are increasingly concerned about earnings growth in
core operations. M&M recently unlocked the value in its
Mahindra Holiday Resorts subsidiary, selling a 1% equity
stake in a pre-IPO deal at an overall valuation of Rs170 per
M&M share — well above our and consensus expectations of
Rs20-40.
Key Investment Issues
• We expect a core earnings CAGR of 9.2% for F2007-10.
We expect a tractor volumes CAGR of 2%. We see
declining operating margins in the automotive segment
because of ongoing new product development, capacity
expansion, and competitive intensity. M&M still projects
elevated capex spend of nearly Rs90 billion over the next
three to four years, despite walking away from a 400K unit
passenger car JV with Renault in Chennai.
Company Description
Mahindra & Mahindra Ltd manufactures and markets general-purpose
utility vehicles, including medium and heavy commercial vehicles,
jeeps, cars, agricultural tractors, and other related products. With
revenues of nearly US$2 billion in F2006, M&M is among the top-five
auto companies in India. M&M has several subsidiaries that are
involved in businesses such as financing, telecom software,
construction, steel, and auto components.
Valuation Methodology
We derive our price target using a combination of a sum of
the parts and historical price earnings multiples. We use the
historical average of 12x to value the core operations (farm
equipment segment, automotive segment, and Systech
division), while we use consensus earnings (where available)
and a market multiple (or market valuation, in its absence) to
value M&M’s interest in the subsidiaries. For comparison
purposes, we also derive a sum-of-the-parts valuation for
M&M based on the current market price of all its listed
entities, without providing any holding company discount.
• We have an Equal-Weight rating despite an upside
potential of nearly 19%, primarily due to the following
reasons: a) investors look at core operations earnings
which we estimate to be muted in the near term; b) the
stock could be volatile in the near term, given the sharp
movements in the value of its various key listed
subsidiaries (Tech Mahindra); and c) we assume a 20%
discount to the pre-IPO value of Mahindra Holiday Resorts
in our sum of the parts – there could be downside/upside to
our price target if it lists at a discount/premium to our
valuation.
What We Like
The company is maintaining margins in the farm equipment
division (13.7% in F2007 and 13.3% so far in F2008), despite
declining tractor volumes (-5.9% so far in 2008).
What We Don’t Like
Automotive margins are declining (11.2% in F2007 and 9.2%
so far in F2008), despite strong growth in automotive volumes
(17.8% so far in 2008).
87
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Risk-Reward Snapshot: Mahindra & Mahindra
Investment Thesis
All Near-term Catalysts Priced In While Core Operations Slow
Rs1,100
1,000
900
Rs855 (+27%)
800
Rs 800 (+19%)
Rs 674.30
700
600
Rs750 (+11%)
500
400
Jan 06
Jun 06
Sep 06
Price Target
Price Target Rs800
Jan 07
Jun 07
Oct 07
Historical Stock Performance
Jan 08
May 08
Sep 08
Jan 09
Current Stock Price
Derived from base-case scenario.
Bull
Case
Rs855
11.3 x
Rural credit growth powers UV and tractor sales. A sharp
F2009E EPS turnaround in UV and tractor volumes aided by rural credit
availability aids strong growth. UV and tractor volumes both rise
15% in F2009. Tractor margins at 14% and automotive margins
at 10% for F2009 lead to overall EBITDA margin of 12.3%.
Base
Case
Rs800
11.3 x
Core operations remain under pressure: Continuing weakness
F2009E EPS in tractor volumes and declining operating margins in the
automotive segment because of the ongoing new product
development, capacity expansion, and competitive intensity. UV
and tractor volumes grow a modest 5% and 11.6%, respectively
in F2009. Tractor and automotive margins at 13% and 9.3%,
respectively, for F2009 lead to overall EBITDA margin of 11.4%.
Bear
Case
Rs750
11.3X
Scarce rural credit hurts volumes: Tractor and UV volumes
F2009E EPS both decline 5% in F2009. Tractor and automotive margins at
13% and 9.3%, respectively, for F2009 lead to overall EBITDA
margin of 11.4%.
Source: Morgan Stanley, FactSet
• We believe M&M could be a value
trap given the muted core earnings
growth outlook. Core operations are
trading at an implied valuation of 5-8x
our F09e earnings, using the market
cap of M&M’s subsidiaries in our sumof-the-parts valuation.
• We expect core operations earnings
growth to be muted in the near term
due to lower tractor volumes and
declining operating margins in the
automotive segment due to ongoing
new product development, capacity
expansion and competition intensity.
• Further, with ongoing capital spending
plans of nearly Rs90 billion over the
next 3-4 years despite walking away
from the JV with Renault-Nissan for a
400K unit passenger car plant in
Chennai, the earnings could be muted
in the near term as these new projects
come up the curve on return
measures.
Risks
• A slowdown in rural credit availability
and a resultant drop in tractor
volumes
• Execution risks from integrating the
recent acquisitions in the Systech
division/Mahindra Forgings
• Upside risks include signs of a
sharper turnaround in tractor volumes,
listing of subsidiaries/divisions to
unlock further value, and/or improved
margins in the automotive segment
due to delays in the launch of
competitive models
88
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Mahindra & Mahindra Financial Summary
Rs Million; Years Ending March
Profit & Loss Account
(Rs Mn)
Volumes
Total Income
COGS
Material Costs
Employee Costs
Power & Fuel
Manufacturing & Other
Expenses
Admn, Selling & Distn
Operating Profit
Other Income
Depreciation
Interest
PBT
Adjusted Tax
Core PAT
Extra ordinaries (net of
tax)
Reported Standalone
PAT
Share from JVs
Contribution from
Subsidiaries
Contribution from PTL
Consolidated PAT
Consolidated Reported
PAT
Cash Flow Statement
F2007
F2008E
F2009E
F2010E
280,930
100,798
87,895
68,519
6,662
652
299,550
108,321
95,969
73,495
7,764
828
325,742
123,207
109,083
83,842
8,857
945
354,232
136,395
120,100
92,549
9,583
1,050
5,712
6,351
12,902
2,471
2,096
198
13,079
3,373
9,707
6,582
7,300
12,352
1,665
2,453
257
11,307
2,020
9,287
7,458
7,982
14,125
1,532
2,924
322
12,411
2,730
9,680
8,395
8,524
16,295
1,667
3,596
402
13,964
3,072
10,892
1,248
1,659
0
0
10,955
-217
10,946
-39
9,680
108
10,892
332
858
3,510
13,857
1,265
4,736
15,249
1,696
5,754
17,238
2,008
6,649
19,881
15,106
16,908
17,238
19,881
F2007
F2008E
F2009E
F2010E
18,712
17,995
36,707
7,009
8,785
21,791
8,427
46,012
19,355
176
56,237
2,454
37,226
39,680
198
1,067
15,294
16,360
56,237
21,869
31,020
52,889
8,211
10,400
24,874
10,074
53,558
23,065
176
76,129
2,454
49,229
51,682
87
9,067
15,294
24,360
76,129
27,075
40,520
67,595
9,107
11,535
27,657
11,477
59,776
25,599
176
93,369
2,454
62,796
65,250
-241
13,067
15,294
28,360
93,369
31,109
44,520
75,629
10,248
12,980
38,398
12,915
74,541
36,407
176
112,211
2,454
79,007
81,461
-610
16,067
15,294
31,360
112,211
F2007
F2008E F2009E F2010E
CASH FLOW FROM OPERATIONS
Net Profit
15,106 17,106 17,460 20,144
Depreciation
2,096 2,453 2,924 3,596
Deferred Tax
(1,270)
(114)
(335) (378)
Sub Total
15,932 19,445 20,049 23,362
(Incr)/Decr in Working Cap
2,107
(742)
116
(89)
Total Cash Flow from Operations
18,038 18,704 20,165 23,272
CASH Flow FROM INVESTING ACTIVITIES
(Incr)/Decr of Fixed Assets
(5,263) (5,610) (8,130) (7,630)
(Incr)/Decr of Investments
(6,207) (13,025) (9,500) (4,000)
(Incr)/Decr in Others
5
0
0
0
Total Cash Flow from Investment
Activities
(11,465) (18,635) (17,630)11,630)
CASH FLOW FROM FINANCING ACTIVITIES
Incr/(Decr) of Equities
(5,225) (1,659)
(0)
0
Incr/(Decr) of Sec. Loans
(1,100) 8,000 4,000 3,000
Incr/(Decr) of Unsec. Loans
8,626
0
0
0
Dividends
(3,247) (3,247) (3,670) (3,670)
Total Cash Flow fom Financing
Activities
(946) 3,094
330 (670)
Net Change in cash
5,628 3,163 2,865 10,972
Cash at beginning of year
16,163 21,791 24,954 27,818
Cash at Year-end
21,791 24,954 27,818 38,791
Ratio Analysis
Ratio Analysis
Balance Sheet
Net Fixed Assets
Investments
Total Long Term Assets
Receivables
Inventories
Cash & Cash Eq
Other Current Assets
Total Current Assets
Net Current Assets
Misc Exp
Total Assets
Share Capital
Reserves & Surplus
Share Holders Funds
Deferred Tax
Secured Loans
Unsecured Loans
Total Debt
Total Liabilities
(Rs Mn)
Per Share
EPS
Standalone EPS
Core Sub EPS
JV EPS
Non Core Sub EPS
BVPS
DPS
Valuation
P/E
P/BV
EV/EBIDTA
Returns (%)
EBIDTA Margin
ROCE
ROE
ROA
NPM
Dividend Yield
Capitalisation & Coverage
Total Debt/Equity
Equity/ Net Assets
Turnover / Gross Block
F2007
F2008E
F2009E
F2010E
56.4
39.5
3.5
(0.9)
14.3
161.5
11.5
62.1
37.8
5.1
(0.2)
19.3
210.3
11.5
70.1
39.4
6.9
0.4
23.4
265.5
13.0
80.9
44.3
8.2
1.4
27.1
331.5
13.0
12.0
4.2
12.4
10.9
3.2
13.4
9.6
2.5
11.8
8.3
2.0
9.7
12.8
19.8
26.7
19.5
9.6
1.7
11.4
14.3
20.3
14.0
8.6
1.7
11.5
11.7
16.6
11.4
7.9
1.9
11.9
10.9
14.8
10.6
8.0
1.9
0.4
0.7
3.2
0.5
0.7
3.1
0.4
0.7
3.1
0.4
0.7
2.9
E= Morgan Stanley Research estimates
Source: Company data, Morgan Stanley Research
89
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Marico Limited
Riding on Health and Beauty
Morgan Stanley India
Company Private Limited+
Hozefa Topiwalla
Hozefa.Topiwalla@morganstanley.com
Nillai Shah
Key Statistics
Stock Rating: Overweight
Reuters: MRCO.BO Bloomberg: MRCO IN
India Consumer
Attractive
Price target
Rs83.00
Share price, close (January 22, 2008)
Rs53.60
Market cap (mn)
Rs32,642
52-Week Range
Rs83.25-51.80
Shares outstanding, basic, currency (mn)
609
Nillai.Shah@morganstanley.com
Company Description
Marico is a leading Indian consumer products and services group in the
global beauty and wellness space. Marico’s hair care, skincare, and
healthy foods products and services generated turnover of about
Rs.15.6 billion in 2006-07. Marico is present in the skincare services
segment through Kaya Skin Clinics (51 in India and the Middle East),
the Sundari range of spa skincare products (in the US and elsewhere)
and its nascent soap franchise in India and Bangladesh.
Divya Gangahar
Divya.Gangahar@morganstanley.com
Investment Conclusion
The market has absorbed the recent 3% increase in prices of
Marico’s flagship brand, Parachute, sales volumes of which
increased 8% YoY in 2Q F2008. This reinforces our
confidence in the brand and its competitive positioning. The
price of copra, the key raw material, remains benign; average
prices are down about 5% YoY so far in 2008. Marico is an
interesting mix of a defensive play on the stable consumer
business and two promising growth engines in its services
and international business, in our view. Marico is a proxy play
on the fast-growing beauty and wellness space.
What We Like
•
Cyclical downturn for key input cost: Copra is the key
input cost for coconut hair oil. Prices of copra are in a
cyclical downturn after peaking in F2005. However, if
domestic demand for copra accelerates, there could be a
cyclical rally in copra prices as was seen in F3Q07.
•
Services business progressing well: We expect the
market to begin ascribing a separate value to Marico’s
Kaya Skin and Wellness service businesses. We
conservatively value Kaya at Rs2.8 billion in our base
case and believe there is upside risk to our numbers. We
also believe that, over the next one to three years, Marico
could bring in a financial partner(s) in its Kaya business,
which could result in partial unlocking of value.
•
Key Investment Issues
1. Scale-up plans of service businesses under the Kaya brand
umbrella 2. Successful capitalization of Saffola’s brand equity
with the launch of new products 3. Diversification of sales mix,
thus reducing reliance on its flagship Parachute pure coconut
hair oil. 4. Scale-up of its international forays into other
developing markets.
Limited impact so far from increased competition:
The Adani Group, which is a market leader in the
branded edible oil industry, launched its first coconut hair
oil product under the Fortune Naturelle brand in 4Q
F2007. This has had limited effect on Marico so far,
according to management.
•
International expansion to continue: Marico recently
acquired Enaleni, a leading hair care company in South
Africa. We expect the company to continue to expand its
geographical presence with fresh international
acquisitions.
Valuation Methodology
Our DCF value for Marico’s core fast-moving consumer goods
business is Rs78/share (we assume a WACC of 12.2%). We
value Kaya at Rs2.8 billion (Rs5/share), implying a sum-ofthe-parts price target of Rs83. At our price target, the stock
would trade at P/Es of 27x F2009E, 23x F2010E and 19x
F2011E.
What We Don’t Like
•
Earnings depend heavily on hair oils: We expect
Marico to continue to use part of the gross margins in its
hair oil business to build new businesses and enter new
areas. However, other businesses are in the early stages
and hair oil remains a significant driver for earnings.
Recent Developments
Marico’s skincare business, Kaya Skin Clinic, broke even in
F2007. Having established the model, with 51 clinics
currently, Kaya Skin Clinic plans to move to the next phase of
expansion, opening around 15 new clinics per year. In 2Q
F2008, it launched skin-lightening services with national TV
advertising support. The company also launched Kaya Skin
Renewal, a range of peels that target specific skin needs of
customers, such as pimples, age-control, pigmentation,
clarity, and overall skin health. Extending Kaya beyond skin
care solutions, Marico is prototyping Kaya Life, its chain of
weight control centers.
90
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Risk-Reward Snapshot: Marico Limited
Investment Thesis
Interesting Mix of Defensive Play and Promising Growth Engines
Rs120
Rs110 (+105%)
110
100
90
Rs83 (+55%)
80
70
60
Rs53.60
Rs50 (-7%)
50
40
30
Jan 06
May 06
Sep 06
Price Target
Jan 07
May 07
Sep 07
Historical Stock Performance
Price Target Rs83
Jan 08
May 08
Sep 08
Jan 09
Current Stock Price
• We believe coconut oil and hair oils
remain the cheapest products for
effective hair care and conditioning in
India. Recent increases in consumer
awareness and the need for hair care
and personal grooming should
support strong growth for the hair oil
and coconut oil categories for the
foreseeable future.
• We expect the market to begin
ascribing a separate value to Marico’s
Kaya Skin and Wellness service
businesses.
Key Value Drivers
Base-case sum-of-the-parts.
Bull
Case
Rs110
31x bull-case Strong organic revenue growth; strong growth in services and
2009E EPS
international business; benign cost pressures: 16% F2008-11
revenue CAGR and 16% F2008-10 average operating profit margin.
International business generates 14.5% of revenue. Kaya valued at
Rs6.9bn assuming F2009-18 revenue CAGR of 25%, 10% net profit
margin, and 20x earnings multiple discounted to F2009.
Base
Case
Rs83
27x basecase 2009E
EPS
Benign cost and competition, international and services drive
growth: 15% F2008-11 revenue CAGR and 14% F2008-11 average
operating profit margin. International business generates 13.4% of
revenue. Kaya valued at 2x F2009E sales.
Bear
Case
Rs50
21x bearcase 2009E
EPS
Limited success in international business; increase in cost
pressures, competition increases: 11% F2008-11 revenue CAGR
and 11% F2008-10 average operating profit margin. Limited growth
in international business. Kaya valued at 1x F2009E sales.
Kaya, Cost, Competition and International Business Drive Value
• Revenue growth in the core domestic
coconut hair oil business.
• Expansion into new product
categories and internationally.
• Expansion of Kaya Clinics and
improvement of productivity at older
clinics.
Potential Catalysts
• Successful entry into new product
categories.
• Profitable growth in Kaya Skin
business.
• Successful integration of recently
acquired Egyptian and South African
business.
• Expansion of Saffola brands into more
packaged food categories.
140
120
Indian Rupee (Rs)
15
100
13
7
3
83
10
60
40
Risks
6
110
Price Target: 83
80
6
50
20
0
Bear
Case
step up in
Cost
competitive pressures
activity
Limited Kaya Value
success in
Int'l
business
Base
Case
Strong rev strong Int'l Kaya Value
growth;
business
margin exp
growth
• Sharp up-tick in input costs.
• Increased competitive activity.
• Unsuccessful entry into new product
areas.
• Poor performance in international
business.
• A decline in the hair oiling trend.
Bull
Case
Source: Morgan Stanley, FactSet
91
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Marico Limited: Financial Summary
Rs million; Years Ending March
Profit and Loss Statement
2007
Net sales
Raw material consumed
Manufacturing expenses
Gross Profit
Margin (%)
Employee costs
Selling & Admin. Exp.
Total Operating costs
Operating Profit
Interest
Depreciation/ amortzn
Other Income
Profit before Tax
Income Tax
Net Profit
Net Profit (adjusted)
Growth (%)
Modelware EPS
Growth (%)
DPS
Cash Flow Statement
2008E
2009E
2010E
2011E
15,569 18,532 21,396 24,442 28,029
8,184 9,574 11,054 12,578 14,396
842
992 1,143 1,309 1,503
6,543 7,966 9,200 10,554 12,130
42%
43%
43%
43%
43%
911 1,093 1,256 1,445 1,662
3,646 4,320 4,971 5,710 6,564
13,582 15,978 18,425 21,042 24,125
1,987 2,554 2,972 3,399 3,905
206
255
189
153
144
242
266
268
305
327
102
37
39
41
84
1,641 2,070 2,553 2,982 3,517
372
408
638
745
879
1,129 1,632 1,915 2,236 2,638
1,250 1,662 1,915 2,236 2,638
33%
33%
15%
17%
18%
2.1
2.7
3.1
3.7
4.3
27%
33%
15%
17%
18%
0.6
0.9
1.5
1.7
1.9
2008E
2009E
2010E
2011E
1,129 1,632 1,915 2,236 2,638
242
266
268
305
327
-87
-908
-41
-268
-324
-892
-412
-402
-430
-507
-127
-120
-118
-125
-148
-188
-210
-143
-152
-179
961
-224
324
334
399
159
57
298
105
111
-1,234
115
104
93
84
50 1,105 2,246 2,367 2,725
-77 -1,062
-550
-550
-550
-431
301
150
0
0
-1,994
1,485
-761
-401
-550
-550
-1,356
30
0
-0
1
-1,516
684
-400
0
0
1,629
-793
-200
-200
0
-464
-630 -1,051 -1,191 -1,331
-1,707
-710 -1,651 -1,391 -1,330
-172
-366
195
426
845
Key Ratios
Balance Sheet
Share Capital
Reserves & Surplus
Shareholders' Funds
Loan Funds
TOTAL LIABILITIES
Gross fixed assets
Less: Depreciation
Add: CWIP
Net Fixed Assets
Cash
Debtors
Inventory
Loans & advances
Other current assets
Current liabilities
Deferred Tax Assets
Net Current Assets
Total ASSETS
2007
Net income reported
Depreciation
Chg in Working cap
Net decrease in inventories
Net decrease in debtors
Net decrease in Other Assets
Net increase in creditors
Net increase in other liab
Change in deferred tax liab
Cash flow from operations
Capital expenditure
Other Changes
Inc/Dec in Goodwill
Cash flow from investing
Equity raised
LT Debt raised
ST debt raised
Dividend (incl. tax)
Cash flow from financing
Net chg in cash
2007 2008E
609
609
1,315
2,347
1,924
2,956
2,510
2,400
4,433
5,356
2,817
3,879
1,394
1,660
231
231
1,654
2,451
427
62
643
763
2,215
2,627
717
927
451
150
2,824
2,658
1,152
1,036
2,352
2,843
4,433
5,356
2009E
609
3,211
3,820
1,800
5,620
4,429
1,928
231
2,732
257
880
3,029
1,070
0
3,281
933
2,631
5,620
2010E
609
4,257
4,866
1,600
6,466
4,979
2,234
231
2,977
683
1,006
3,459
1,222
0
3,720
839
2,806
6,466
2011E
609
5,565
6,174
1,600
7,774
5,529
2,561
231
3,199
1,528
1,153
3,966
1,401
0
4,230
755
3,046
7,774
EBIT margin (%)
Return on Avg Equity (%)
RNOA (%)
Sales/Total Assets (x)
Sales/Net FA (x)
Debtor turnover (days)
Inventory turnover (days)
Current ratio (x)
Total debt/Equity (%)
Net debt/Equity (%)
EPS
DPS
BVPS
PE
Div Yield
P/BV
P/sales
EV/EBITDA
EV/Sales
2007
11.2%
55.1%
26.7%
1.8
9.4
15.0
59.5
1.4
130%
108%
2.1
0.6
3.2
29.9
1.0%
19.4
2.4
19.8
2.5
2008E
12.3%
68.1%
31.6%
1.8
7.6
15.0
60.0
1.6
81%
79%
2.7
0.9
4.9
19.6
1.7%
11.0
1.8
13.7
1.9
2009E
12.6%
56.5%
32.6%
1.8
7.8
15.0
60.0
1.6
47%
40%
3.1
1.5
6.3
17.0
2.8%
8.5
1.5
11.5
1.6
2010E
12.7%
51.5%
35.7%
2.8
8.2
15.0
60.0
1.7
33%
19%
3.7
1.7
8.0
14.6
3.2%
6.7
1.3
9.9
1.4
2011E
12.8%
47.8%
38.2%
3.8
8.8
15.0
60.0
1.9
26%
1%
4.3
1.9
10.1
12.4
3.5%
5.3
1.2
8.4
1.2
E = Morgan Stanley Research estimates
Source: Company data, Morgan Stanley Research
92
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Oil & Natural Gas Corp.
Impressive Operational
Performance; Subsidy a Concern
Morgan Stanley India
Company Private Limited+
Vinay Jaising
Vinay.Jaising@morganstanley.com
Key Statistics
Stock Rating: Overweight
Reuters: ONGC.BO Bloomberg: ONGC IN
India Oil & Gas
Attractive
Price target
Rs1,385.00
Share price, close (January 22, 2008)
Rs962.35
Market cap (mn)
Rs2,058,370.00
52-Week Range
Rs1,320.00-845.00
Shares outstanding, basic, currency (mn)
2138.90
Mayank Maheshwari
Company Description
ONGC is India’s dominant exploration and production company. It has
a virtual monopoly on crude oil and natural gas production. It has
7.2mmboe of proven oil and gas reserves. It is India’s biggest company
in terms of net profits and market capitalization. The government owns
74% of ONGC.
Mayank.Maheshwati@morganstanley.com
Investment Conclusion
We have an Overweight rating on the stock because of
ONGC’s impressive production growth and international
acquisition strategy and the upside potential to higher gas
prices.
Recent Developments
In 3Q F2008, ONGC’s net profit was down 7% YoY and 13%
QoQ to Rs43.7 billion because of lower sales and a higher
subsidy burden. Crude oil sales declined 3.9% YoY and 2.3%
QoQ, despite strong production, because of a problem in the
crude delivery pipeline from the Mumbai High fields. ONGC’s
net crude oil realized price was US$54.5/bbl, down 7.2% YoY
and 2.3% QoQ. Crude oil production remained strong and
increased 2% QoQ. Gas production volumes increased 1.4%
YoY and 3% QoQ, despite a leak in the Heera-Uran gas
pipeline. ONGC made nine discoveries in the quarter.
Key Investment Issues
ONGC has to part with most of the upside from realized crude
oil prices in the form of a subsidy to downstream refiners.
Also, in this volatile forex environment, we believe the
government is trying to shelter ONGC’s domestic earnings
from a weaker dollar and hence lowering the subsidy.
Therefore, we think ONGC’s net realized prices in rupee
terms would largely be constant, irrespective of the dollar
movement and crude oil price movement until crude oil prices
decline to US$63/bbl.
Valuation Methodology
We derive our price target of Rs1,385 by calculating the DCF
value of existing businesses, including ONGC Videsh Ltd.
(OVL – ONGC’s 100% subsidiary) and using our long-term
crude oil price estimate of US$85/bbl (WTI) and a 28% share
of subsidy for ONGC. We then calculate the fair value of the
gas business based on US$3/mmbtu as the long-term price.
Our price target is the sum-of-parts value of our DCF of
ONGC and ONVL and fair value of gas at US$3/mmbtu.
What We Like
•
We estimate ONGC’s production will grow an impressive
5.8% per annum in F2007-10. ONGC is focusing on
increasing its production from marginal fields, which
could have 200 million tons of reserves.
•
ONGC’s international acquisition strategy is paying
rich dividends. We expect its international arm (OVL) to
contribute 19% of crude oil production, 12% of gas
production, and 10% to the bottom line by F2009.
•
A call option on gas price deregulation in India. Gas
accounts for 40% of production, with realized prices of
less than US$2.2/mmbtu, versus market price of US$45/mmbtu.
•
Option value of KG Basin – The Economic Times
reported ONGC has found as much as 21 TCF of gas in
the deep-water KG Basin. If this were to be true, we
believe ONGC’s stock value could be enhanced by
Rs100/share.
What We Don’t Like
•
A large portion of the company’s domestic earnings from
crude is passed on to the government in the form of a
higher subsidy burden.
•
For its gas, which accounts to 40% of production, ONGC
receives less than US$2.2/mmbtu, versus the prevailing
market price of US$4-5/mmbtu.
93
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Risk-Reward Snapshot: Oil & Natural Gas Corp.
Investment Thesis
Strong Operational Performance; Subsidy a Concern
Rs1,800
Rs1,707 (+77%)
1,600
1,400
Rs1,385 (+44%)
1,200
Rs962.35
Rs1,052 (+9%)
1,000
800
600
400
Jan 06
• ONGC’s crude is sweet and has a
long reserve life.
• 19 new hydrocarbon finds in India in
F2008. 31 discoveries in the past 24
months
• Domestic fields R/P =1:1.35
• Highest ever in-place oil and gas
reserve accretion of 169.5mtoe.
Ultimate reserve accretion at
65.5mtoe
Key Value Drivers
Jun 06
Sep 06
Price Target
Jan 07
Jun 07
Oct 07
Historical Stock Performance
Jan 08
May 08
Sep 08
Jan 09
Current Stock Price
Price Target Rs1,385
Derived from our base-case scenario
Bull
Case
Rs1,707
12.4x bullcase 2010E
EPS
Base
Case
Rs1,385
12.0x base
case 2010E
EPS
Lower subsidy burden/higher prices: Net crude oil realization
is US$5/bbl higher than in the base case as the government
lowers the upstream subsidy burden. OVL benefits from higher
crude oil prices, which remain at US$120/bbl in the long term.
This reflects higher crude oil demand and OPEC cutting
production levels. The government partially de-regulates gas
prices and ONGC earns US$4/mmbtu on gas sales.
Net crude oil realization of US$65/bbl in the long term. Option
value of gas at US$3/mmbtu. WACC of 11.8%. Long-term crude
oil prices at US$90/bbl.
Bear
Case
Rs1,052
11.2x bear
case 2010E
EPS
• Crude oil prices
• Gas prices
• Subsidies
Potential Catalysts
Higher subsidy burden/lower prices: Net crude oil realization is
US$5/bbl lower than in the base case as the government
increases the upstream subsidy burden. OVL suffers from lower
crude oil prices, which remain at US$65/bbl in the long term. This
reflects lower crude oil demand and OPEC maintaining production
levels. Zero value for ONGC’s liquid investments. No gas
upside.
• Retail price hikes which could lower
the country’s petroleum subsidy and
therefore ONGC’s subsidy burden.
• A stable petroleum pricing policy,
which could remove the uncertainty
regarding ONGC’s profitability.
• Gas price deregulation.
Risks
• Sharing of LPG, kerosene subsidy
losses. ONGC expects some
transparency from the government in
this quarter.
• Large capex requirement.
Potential Upside from Deregulation
96
1,750
160
Indian Rupee (Rs)
1,650
1,550
1,450
1,707
66
Price Target: 1,385
120
1,350
95
1,250
1,385
89
1,150
29
1,050
950
1,052
Bear
Case
Crude Oil Zero value to Standalone
prices decline
liquid
Net
by US$25/bbl Investments Realisation
for OVL
reduces by
US$5/bbl
No Gas
Upside
Base
Case
Crude Oil
Gas Price Standalone
prices
Realisation at
Net
increase by US$4/mmbtu Realisation
US$30/bbl for
reduces by
OVL
US$5/bbl
Bull
Case
Source: Morgan Stanley, FactSet, Company data
94
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Oil & Natural Gas Corp.: Financial Summary
Rs million; Years Ending March
Income Statement
Cash Flow Statement
F2007
Gross Sales
Less Government Levies
Net Sales
Pipeline Transportation
Other Related Income
Net Revenues
OPERATING EXPENSES
LPG/Kerosene
subsidy losses
Increase/Decrease in stock
Raw Materials Consumed
Staff Cost
Other Expenses
General &
Administrative Exp
Provisions & Write-offs
Operating Profit
Recouped Costs
Non Operating Income
Interest & Finance Charges
Profit before Tax
Tax - Current
Tax - Deferred
Net Profit
Reported PAT
Less: Minority Interest
Adjusted Cons. Net Profit
F2008E
F2009E
F2010E
1,032,837 1,287,398 1,309,934 1,413,798
216,411
231,234
233,818
267,752
816,426 1,056,163 1,076,116 1,146,046
82
82
82
82
14,433
14,433
14,433
14,433
830,941 1,070,678 1,090,631 1,160,561
467,694
647,626
649,916
677,761
170,161
(9,815)
192,445
30,705
59,558
197,690
(7,983)
345,017
13,824
71,026
180,980
(7,983)
361,269
14,551
73,093
196,633
(7,983)
366,410
15,318
77,130
19,404
5,237
363,247
119,678
32,955
1,614
277,582
89,055
9,400
179,128
171,124
1,424
177,806
24,602
3,449
423,053
96,195
36,384
1,394
361,607
111,471
13,900
236,236
236,236
4,243
231,993
24,585
3,423
440,715
101,091
42,487
1,295
380,576
116,315
14,968
249,293
249,293
5,013
244,280
26,573
3,681
482,800
94,981
54,054
1,295
440,339
136,617
17,047
286,676
286,676
5,214
281,461
Balance Sheet
F2007
SOURCES OF FUNDS
Equity Share Capital
Reserves and Surplus
Shareholders Funds
Minority Interest
Deferred Tax Liability
Loan Funds
Abandonment Cost
Total
APPLICATION OF FUNDS
Net Block
Capital Work in progress
Net Producing Properties
NFA including CWIP
Goodwill
Net Investments
Current Assets
Cash & Cash Balance
Current Liabilities
Net Current Assets
Total
F2008E
F2009E
F2010E
21,389
21,389
21,389
21,389
645,719
783,452
928,403 1,095,865
667,252
804,986
949,936 1,117,398
8,321
11,600
15,474
19,504
81,119
95,018
109,986
127,033
16,005
14,672
25,144
25,144
151,857
153,002
158,650
164,299
924,554 1,079,277 1,259,190 1,453,378
185,355
358,566
422,251
442,563
64,055
144,552
93,754
83,598
351,741
193,527
165,211
136,087
647,399
714,789
686,831
664,848
30,616
35,832
36,888
36,888
36,888
388,403
579,161
798,980 1,066,777
206,900
328,598
545,126
804,028
182,956
255,619
266,428
318,055
205,447
323,542
532,552
748,722
924,554 1,079,277 1,259,190 1,453,378
Profit Before Tax
Recouped Costs
F/x Fluctuation Charges
Taxes
Changes in W. Capital
Extra ordinaries
Operating Cash Flows
Purchase of Fixed Assets
Acquisition of Goodwill
Purchase of Investments
Investing Cash Flows
Liability for Abandonment
Net Issue of Debt
Net Issue/
(Repurchase) of Shares
Interest Charges
Dividends Paid
Financing Cash Flows
Net Change in Cash
Cash & Cash Equivalents
Beginning Balance
Ending Balance
F2007
F2008E
F2009E
F2010E
277,582 361,607 380,576 440,339
119,678
96,195 101,091
94,981
(1,058)
1,394
1,295
1,295
(89,055) (111,471) (116,315) (136,617)
83,417
4,829
8,657
42,731
(8,004)
381,027 352,529 375,304 442,729
(198,972) (163,586) (73,132) (72,998)
(13,514)
30,616
(253)
(1,055)
(212,739) (134,025) (73,132) (72,998)
23,182
1,145
5,649
5,649
(6,336)
(1,334)
10,472
6,901
1,058
(77,131)
(52,327)
115,962
964
1,139
(1,394)
(1,295)
(1,295)
(95,224) (100,469) (115,183)
(95,843) (84,504) (110,829)
122,661 217,667 258,901
91,057
207,019
207,019
329,680
329,680
547,347
547,347
806,249
Key Ratios
EPS (Rs)
EPS Growth (%)
P/E
Book Value (Rs)
P/BV
DPS (Rs)
Yield (%)
EV/EBITDA
Profitability Ratios
NPM (%)
ROCE (%)
RONW (%)
Other Ratios
Debt/Equity (%)
Effective Tax Rate (%)
F2007
F2008E
F2009E
F2010E
83.13
17.3
10.5
312.0
2.8
32.1
3.7
4.6
108.46
30.5
8.1
376.4
2.3
38.3
4.4
3.7
114.21
5.3
7.7
444.1
2.0
40.3
4.6
3.1
131.59
15.2
6.6
522.4
1.7
46.3
5.3
2.3
21.4
32.1
28.8
21.7
36.3
31.5
22.4
32.7
27.8
24.3
32.6
27.2
2.4
35.5
1.8
34.7
2.6
34.5
2.3
34.9
E = Morgan Stanley Research Estimates
Source: Company data, Morgan Stanley Research
95
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Pantaloon Retail
Value in Sum of Parts
Morgan Stanley India
Company Private Limited+
Hozefa Topiwalla
Hozefa.Topiwalla@morganstanley.com
Divya Gangahar
Key Statistics
Stock Rating: Overweight
Reuters: PART.BO Bloomberg: PF IN
India Retail
In-Line
Price target
Rs788
Share price, close (January 22, 2008)
Rs626
Market cap (mn)
Rs84,156
52-Week Range
Rs365-875
Shares outstanding, basic, currency (mn)
134.4
Divya.Gangahar@morganstanley.com
Company Description
Pantaloon Retail owns and operates retail stores throughout India. It
has around 6.8 million square feet of retail space. It operates stores
under the Pantaloons, Big Bazaar, Food Bazaar, and Home Town
brands. It has made forays into retail real estate, asset management,
consumer finance, brand management, retail media, and logistics.
Nillai Shah
Nillai.Shah@morganstanley.com
Investment Conclusion
We believe Pantaloon Retail (PRIL) has built a formidable
organization that should enable it to reduce execution risk
significantly. From talent management to IT infrastructure,
logistics to consumer loyalty, new store roll-outs to creating
valuable subsidiaries and partnerships with strong Indian and
international companies and developing high-margin private
labels to raising financial resources for funding growth, PRIL
is clearly focused on building each of these pillars necessary
to execute its growth plan. With better cost management and
efficiencies from scale creeping in, we expect PRIL to deliver
a strong 84% CAGR in earnings over the next two years and
around a 61% CAGR over the next five years.
Recent Developments
The IPO of PRIL’s financial services subsidiary, Future
Capital Holdings Limited, was oversubscribed by 130x and
was recently listed on the bourses. The implied pre-money
market capitalization is US$1.2 billion. PRIL has issued
warrants totaling Rs10.6 billion to the promoter group and the
Employee Welfare Trust. PRIL has approved an investment
of Rs3.25 billion in Pantaloon Future Ventures Ltd, which will
undertake investments in new businesses, ideas, and JVs.
PRIL plans to hive off this subsidiary as a separate listed
entity. PRIL added around 3.2msf of retail space in F2007
and 1.8msf in H1 F2008.
Key Investment Issues
•
Subsidiaries: progress and timeline for monetization.
•
Competition: effect on margins and cost of retail space.
•
Environment: effect of political backlash on retail sector
development in certain states.
Valuation Methodology
Our DCF value for the company’s core business is Rs625 per
share and our valuation of four of PRIL’s major subsidiaries is
Rs251 per share, of which Rs161 per share is contributed by
the recently listed Future Capital Holdings. Our price target is
Rs788, based on a 10% discount to our sum-of-the-parts
valuation to incorporate potential execution risk.
What We Like
•
Confidence to deliver targets: PRIL, being the first
mover in the industry, has the ability to deliver growth
because of its well-established formats, secured retail
space locked in at attractive lease rentals in prime
locations, and sufficient capital to fund its growth in the
medium term. The recent infusion of equity bolsters our
confidence in PRIL’s ability to deliver.
•
Management actions demonstrate vision:
Management is forward-looking and nimble to capture
emerging trends and capitalize on its first-mover
advantage. It has exhibited its dynamism in terms of
retail space domination, a rich talent pool, and aggressive
investment in mutually beneficial businesses.
•
Potential upside from subsidiaries and JVs: We
expect PRIL’s subsidiaries and JVs to be value accretive
to the business in the long term. We estimate the
company’s foray into Home Solutions, Future Capital,
Future Bazaar, and Future Media are worth Rs41.4
billion, or Rs251 per share. PRIL has several other
subsidiaries, including the recently announced insurance
JV with Italian insurance major Generali Group.
What We Don’t Like
•
Medium-term cost pressures from scale-up costs:
PRIL’s profitability may be affected because of
organizational build-up costs and lower profitability in new
stores.
•
Change in competitive landscape and political
conditions: The entry of large industry houses to the
retail scene, recent nationwide protests by traders, and
the apathetic response of the state governments to major
retail firms may delay store roll-out plans and thereby
prolong the turnaround in margins.
96
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Risk-Reward Snapshot: Pantaloon Retail
Investment Thesis
Risk-Reward View: Favorable Long-term Outlook
Rs1,400
Rs1,186 (+89%)
1,200
1,000
800
Rs788 (+26%)
Rs626.00
600
400
Rs406 (-35%)
200
0
• We believe PRIL has secured
sufficient capital to finance its planned
growth for the next 2-3 years with the
recent infusion of equity capital.
• Current stock price does not fully
capture the value of subsidiaries.
• PRIL’s cost management has been
effective in the past two quarters,
which augurs well for margin
improvement and strong top-line
growth.
Key Value Drivers
Jan 06
May 06
Sep 06
Price Target
Jan 07
May 07
Sep 07
Historical Stock Performance
Jan 08
May 08
Sep 08
Jan 09
Current Stock Price
Price Target Rs788
10% discount to the base-case assumption.
Bull case
Rs1,186
95.3x basecase 2009E
EPS
Accelerated store roll-out: Retail space increases to 30msf
because of faster rollout of stores. Operating profit margin
increases to 8.5% by F2012. Subsidiaries add Rs264 per share.
Base case
Rs876
70.4x basecase 2009E
EPS
Good execution/real-estate advantage: Retail space increases
to 23msf through good execution and real estate advantage.
Operating profit margin increases to 7.4% by F2012. Subsidiaries
add Rs251 per share.
Bear case
Rs406
32.6x basecase 2009E
EPS
Greater competition and cost pressures hit margins: Retail
space at 15msf because of poor execution and competitive
pressures. Operating profit margin decreases to 5% by F2012.
Subsidiaries add just Rs206 per share.
Profit Margins and Store Roll Outs to be Key Value Drivers
Price Target: 788
197
1,200
13
100
161
1,000
1,186
264
800
876
600
45
400
200
Potential Catalysts
• Increase in visibility for achieving
target store roll outs.
• Monetizing subsidiaries via
independent-capital raising plans.
Risks
1,600
1,400
• Successful roll-out of new stores.
• Margin expansion because of scale
benefits and improving profitability of
older stores.
• Developing subsidiaries into
independent profitable companies
with the ability to raise their own
funding requirements.
• Successful roll-out of new formats
and deriving scale benefits from the
extensive roll-out of existing formats.
406
Bull
Case
Subsidiaries
Bull
Scenario
OPM
increases to
8.5%
Total retail
space 30
mn sq ft
Base
Case
Total Retail
space 15
mn sq ft
OPM
decraeses
to 5%
Subsidiaries
Bear
Scenario
Bear
Case
0
• Execution risk in terms of store rollouts.
• Heightened competitive pressures
adversely affecting margins.
• Inability to fund growth plans.
• An unfavorable macro and political
environment.
Source: Morgan Stanley, FactSet
97
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Pantaloon Retail: Financial Summary
Rs million; Years Ending June
Income Statement
Ratio Analysis
2007
2008E
2009E
2010E
2011E
2012E
Net sales
32,367 57,147 86,438 121,273 167,795 220,696
COGS
22,095 39,832 59,642 84,285 116,617 153,384
Gross Profit
10,273 17,316 26,796 36,988 51,177 67,312
Margin (%)
31.7
30.3
31.0
30.5
30.5
30.5
Employee costs
2,061 3,229 5,013
6,670
9,229 12,138
General Expenses
6,056 10,001 15,559 21,829 29,951 38,843
EBITDA
2,156 4,086 6,224
8,489 11,997 16,332
Margin (%)
6.7
7.1
7.2
7.0
7.1
7.4
Depreciation
369
726 1,070
1,550
2,045
2,541
Interest
898 1,501 2,186
2,772
3,467
4,216
Other Income
32
15
15
15
15
15
Profit before Tax
921 1,874 2,982
4,182
6,500
9,590
Income Tax
314
586
930
1,297
2,015
2,973
Tax Rate (%)
34.1
31.3
31.2
31.0
31.0
31.0
Net Profit (adjusted)
607 1,288 2,051
2,886
4,485
6,617
Net Margin (%)
1.9
2.3
2.4
2.4
2.7
3.0
Modelware EPS
4.4
8.2
12.4
16.7
26.0
38.4
DPS
0.4
0.6
0.7
1.5
2.0
4.0
2007 2008E 2009E 2010E 2011E 2012E
Net sales growth (%)
73.3 76.6
EBITDA growth (%)
48.3 89.5
Net Profit Growth (%)
-5.4 112.2
EPS Growth (%)
-7.7 85.2
Gross Margin (%)
31.7 30.3
Operating Margin (%)
6.7
7.1
EBIT margin (%)
5.5
5.9
Net Margin (
1.9
2.3
Return on Avg Equity (%)
7.5
8.8
RNOA (%)
7.2
7.2
Total debt/Equity (%)
1.19 1.13
Net debt/Equity (%)
1.0
1.1
Per share data and valuation
PE
112.4 76.7
P/BV
6.2
5.4
P/sales
2.1
1.5
EV/EBITDA
36.7 25.5
EV/Sales
2.4
1.8
51.3
52.3
59.2
52.5
31.0
7.2
6.0
2.4
9.8
7.8
1.20
1.1
40.3
36.4
40.7
34.6
30.5
7.0
5.7
2.4
10.9
8.2
1.15
1.1
38.4
41.3
55.4
55.4
30.5
7.1
5.9
2.7
14.3
9.3
1.31
1.3
31.5
36.1
47.5
47.5
30.5
7.4
6.2
3.0
18.2
10.9
1.28
1.3
50.3
4.4
1.0
17.9
1.3
37.4
3.7
0.7
14.6
1.0
24.1
3.2
0.5
11.1
0.8
16.3
2.7
0.4
8.6
0.6
Source: Company data, Morgan Stanley Research
Balance Sheet
Shareholders' Funds
Share Capital
Warrants
Reserves & Surplus
Loan Funds
Long term loans
Short term loans
Deferred tax liabilities
TOTAL LIABILITIES
Net Fixed Assets
Investments
Long term investments
Cash
Marketable Securities
Short-Term Investments
Debtors
Inventory
Loans & advances
Other Assets
Current assets
Sundry creditors
Others (incl. provisions)
Current liabilities
Net Current Assets
TOTAL ASSETS
2007
2008E
2009E
2010E
2011E
2012E
10,922
294
0
10,628
12,996
9,519
3,477
558
24,476
8,057
2,090
2,090
2,060
1,630
430
652
8,860
6,339
15
15,865
3,439
157
3,596
12,269
24,476
18,350
316
725
17,309
20,727
17,250
3,477
558
39,635
14,184
7,840
7,840
536
106
430
783
14,978
8,339
15
24,115
6,548
493
7,041
17,074
39,635
23,433
330
375
22,728
28,227
24,750
3,477
558
52,217
19,998
8,340
8,340
3,951
3,520
430
474
19,835
10,139
15
30,463
9,804
730
10,534
19,929
52,217
29,411
345
0
29,066
33,727
30,250
3,477
558
63,696
28,045
8,840
8,840
769
339
430
665
28,416
11,939
15
41,034
13,855
1,137
14,992
26,042
63,696
33,500
345
0
33,155
43,727
40,250
3,477
558
77,785
35,900
9,340
9,340
1,222
791
430
919
37,805
13,439
15
52,178
19,170
1,684
20,854
31,324
77,785
39,324
345
0
38,979
50,227
46,750
3,477
558
90,109
43,283
9,840
9,840
896
466
430
1,209
48,334
14,439
15
63,997
25,214
2,693
27,907
36,090
90,109
Cash Flow Statement
Net income
reported
Depreciation
Chg in Working cap
Inventories
Debtors
Receivables
Creditors
Other liabilities
Deferred tax
liabilities
Cash flow from
operations
Capital expenditure
Strategic
investments
Cash flow from
investing
Equity raised
LT Debt raised
ST debt raised
Dividend (incl. tax)
Cash flow from
financing
Net chg in cash
2007
2008E
2009E
2010E
1,200
369
-6,286
-3,789
-481
-2,988
1,141
-168
1,288
726
-4,805
-6,119
-131
-2,000
3,109
336
2,051
1,070
-2,855
-4,857
309
-1,800
3,257
237
2,886
1,550
-6,114
-8,581
-191
-1,800
4,051
407
279
0
0
0
0
0
-4,438
-4,471
-2,791
-6,853
267
-6,884
-1,678
-9,597
1,249
-9,901
4,392
-9,925
-1,114
-5,750
-500
-500
-500
-500
-5,585 -12,603
4,541
6,249
5,238
7,731
1,744
0
-88
-109
11,435
1,412
2011E
2012E
4,485
6,617
2,045
2,541
-5,281 -4,766
-9,389 -10,529
-255
-290
-1,500 -1,000
5,315
6,044
548
1,009
-7,384 -10,097 -10,401 -10,425
3,164
3,390
0
0
7,500
5,500 10,000
6,500
0
0
0
0
-133
-297
-396
-793
13,871 10,531
-1,523 3,414
8,593
-3,181
9,604
452
5,707
-326
E=Morgan Stanley Research estimates
Source: Company data, Morgan Stanley Research
98
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Parsvnath Developers Ltd.
Multiple Projects and Locations
Give Scale-up Visibility
Morgan Stanley India
Company Private Limited+
Sameer Baisiwala, CFA
Sameer.Baisiwala@morganstanley.com
Key Statistics
Stock Rating: Overweight
Reuters: PARV.BO Bloomberg: PARSV IN
India Property
In-Line
Price target
Rs472.00
Share price, close (January 22, 2008)
Rs252.35
Market cap (mn)
Rs46,608.00
52-Week Range
Rs598.00-221.60
Shares outstanding, basic, currency (mn)
184.70
Varun Desa
Company Description
Parsvnath Developers Limited (PDL) is a prominent real estate
developer in India with a proven track record in residential and retail
businesses. Having operated in northern India, PDL is expanding its
business across the country. It is diversifying its product offerings to
include townships, special economic zones, and hotels.
Varun.Desa@morganstanley.com
Investment Conclusion
We have an Overweight rating on Parsvnath Developers
Limited (PDL) in view of its well-dispersed, sizable landbank
and readiness to commercialise it, multi-year strong structural
housing demand expectations in India, and reasonable
valuations. Our price target of Rs472 implies 87% upside
from the current market price.
Recent Developments
PDL has launched Prideasia, Chandigarh Phases I and II
(347ksf sold in Phase I for Rs2.65 billion). It has increased its
landbank from 160msf to 191msf (new land addition of
Mysore special economic zone (SEZ) – 13msf and increase in
floor space index for other SEZ projects). It has launched
Parsvnath Preston in Sonepat, Haryana (1,200 units). It has
won the bid to develop a commercial mall in Greater Noida,
which will cost Rs1.6 billion, with around 360ksf saleable area
and Rs3 billion in revenues over three years.
Key Investment Issues
•
What are the timelines and broad parameters for diluting
stakes in the SEZ business?
•
What is driving up the receivables and when will we see
these unwind?
•
What are the plans for the retail business?
•
How does PDL plan to re-invest the high and rising
profits?
•
What We Like
•
Sizable, well-dispersed landbank: PDL’s landbank
(191msf) is spread across 48 cities in 17 states. This will
facilitate faster market absorption. We estimate six to
seven years to develop and commercialize the landbank.
•
Scale-up visibility: We estimate PDL will complete
development of 13.7msf in F2008 and 22.7msf in F2009
(versus 8.1msf in F2007), translating to two-year CAGRs
of 60% for sales and 51% for profit.
•
Aggressive SEZ plans: PDL has 17 SEZ projects
totaling 4,540 acres (three notified, two formally
approved, and 12 awaiting government approvals). The
projects will have tax benefits, and therefore have the
potential to attract tenants.
What We Don’t Like
•
Landbank concentration: Given modest economic
growth in Tier II/III cities, PDL’s landbank (31%/49% in
Tier II/III cities) is vulnerable to slow market absorption,
and possibly low pricing power because of lower
affordability.
•
Execution risk: PDL has developed 14msf of its
landbank of 191msf. It plans to increase execution to 3035msf annually. This requires substantial manpower,
material, planning, and technical inputs, which it may fail
to deliver.
•
Capital shortage to fund growth: PDL has around
Rs19 billion in outstanding land payments (for disclosed
landbank, payable in the next couple of years) and we
estimate around Rs15 billion in upfront construction costs
for the non-residential business. We estimate Rs11
billion in combined net profit for F2008-09. Net leverage
of 0.4 should allow PDL to borrow to fund growth.
Update on the physical property market – demand and
supply and pricing situation.
Valuation Methodology
We base our price target on a one-year forward NAV of PDL’s
current land bank at Rs404/share and eight SEZ projects in
the pipeline at Rs68/share. The key assumptions are: six to
seven years for development, 16% discount rate, a post-tax
basis, and constant selling prices and costs. PDL is trading at
P/Es of 10.5x F2008E and 7.1x F2009E.
99
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Risk-Reward Snapshot: Parsvnath Developers Ltd.
Investment Thesis
Risk-Reward View: Execution Scale-up is the Key
Rs600
Rs570.31 (+126%)
550
500
Rs 472.14 (+87%)
450
400
350
Rs298.70 (+18%)
300
Rs 252.35
250
200
Nov 06
Feb 07
May 07
Price Target
Aug 07
Nov 07
Feb 08
Historical Stock Performance
May 08
Jul 08
Oct 08
Jan 09
Current Stock Price
Price Target Rs472
Based on one-year forward NAV valuations for the current
landbank and land addition of 3,000 acres for eight pipeline SEZs.
Bull case
Rs570
NAV Based
Valuation
Customer demand shift drives higher prices: 5% per annum
price and cost inflation over the period of landbank development
and 15msf new land acquisition.
Base case
Rs472
NAV Based
Valuation
Long-term growth visibility: One-year forward NAV valuations
for the current landbank and new land addition totaling 3,000
acres for eight pipeline SEZs.
Bear case
Rs299
NAV Based
Valuation
Market slowdown/regulatory delays: 5% price deflation for next
12 months, one year delay in execution and eight pending SEZs
don’t come to fruition.
New Land Acquisition, Execution, and Prices Drive Valuations
700
74
Indian Rupee (Rs)
24
68
570
56
472
49
400
300
200
Key Value Drivers
• Execution scale-up.
• Monetization of the landbank through
project-based financial partnerships.
• Unlocking of time value of money with
the progressive execution.
• Land bank fortification, which gives
longer-term growth visibility.
Potential Catalysts
Price Target: 472
600
500
• Long-term growth visibility in the
Indian real estate industry linked to
GDP growth and continuing trend of
urbanization and nuclearization of
families.
• Onset of structural trend of shift in
customer demand from unorganized
to organized sector (which includes
PDL).
• PDL appears well positioned to
benefit from the above two trends.
• PDL’s competitive strengths sizable and well dispersed land bank,
high regulatory preparedness, and
increasing breadth in the product
offerings and city markets.
• We have an Overweight rating in
view of PDL’s readiness to benefit
from the sectoral growth/trends and
reasonable valuations.
299
100
• Acceleration in plan approvals for the
pending townships and subsequent
market launch.
• Notification of four SEZs and land
acquisition of the balance of eight
SEZs.
Risks
0
Bear
Case
5% Price
Deflation
Source: Morgan Stanley, FactSet
1 Yr Delay
8 SEZs
remain
pending
Base
Case
5% price & New land
cost
addition
inflation p.a.
Bull
Case
• Capital shortage to fund pending land
payment and upfront construction cost
for SEZ/retail businesses.
• Market slowdown.
100
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Parsvnath Developers Ltd.: Financial Summary
Rs million; Years Ending March
Income Statements
Cash Flow Statements
2007
Income from Sales
2008E
2009E
2010E
15,103 20,963 38,489 51,281
Income from Rentals
-
Total
328
337
867
15,103 21,291 38,826 52,149
Growth %
135
Cost of Construction/Development
41
82
34
2007
2008E
2009E
2010E
2922
4429
6611
9,580
143
203
246
498
add working capital required
(16128) (16244) (12575)
1,145
Net cash from operations
(12978) (11612)
Cash flow from operating activities:
Net Profits
add depreciation
(5718)
11,223
10,374 11,845 24,496 30,661
Personnel Expenses
218
468
660
1,043
S G and A Expenses
337
852
1,165
1,825
Operating Expenses
10,929 13,165 26,321 33,529
Operating Profits
4,174
8,127 12,506 18,620
Growth (%)
189
95
54
49
Other Income
242
141
148
156
Financial Expenses
193
1,827
3,096
3,979
246
498
Depreciation
143
203
4,080
6,239
9,311 14,298
Provision for taxation
981
1,809
2,700
4,718
Less: Minority Interest
176
-
-
-
Net Profits
2,922
4,429
6,611
9,580
Growth (%)
175
52
49
45
24
29
29
33
Profit before tax
Effective Tax Rate %
Cash flow from investing activities
fixed asset investments
(721)
(840)
Other investments
(492)
0
(1213)
(840)
Net cash from investing
(1835) -15,663
0
-
(1835) -15,663
Cash flow from financing activities
Issuance of equity
Dividends (incl dividend tax)
10440
0
0
-
(540)
(620)
(926)
-1,341
Other adjustments
0
0
0
-
9899
(620)
(926)
-1,341
(4291) (13072)
(8478)
-5,782
Net cash from financing
(Increase)/decrease in net debt
Ratio Analysis
2007
2008E
2009E
2010E
Operating Margin (%)
28%
38%
32%
36%
Pre-tax Margin (%)
27%
29%
24%
27%
19
21
17
18
16.4
10.5
7.1
4.9
3.2
2.5
1.9
1.4
ROE (%)
35%
26%
31%
34%
ROCE (%)
28%
24%
27%
31%
EV/EBITDA
12.7
8.1
5.9
4.3
Profitability Ratios
Balance Sheets
2007
2008E
2009E
2010E
Net Margin (Excl Extraordinary Items) (%)
Liabilities
Share Capital
1,847
1,847
1,847
1,847
Reserve & Surplus
13,071
16,880
22,566
30,804
Net Worth
14,918
18,727
24,413
32,651
0.01
0.01
0.01
0.01
Minority Interest
Total Loans
11,695
20,500
28,000
33,000
Total Liabilities
26,613
39,227
52,413
65,651
Net Debt
6,238
19,310
27,788
33,570
Investments
1,106
1,744
3,332
18,497
534
534
534
534
Deferred Tax Assets
32
32
32
32
Preliminary Expenses
7
7
7
7
5,458
1,190
212
-570
29,146
44,951
57,854
56,941
9,670
9,230
9,558
9,790
Net Working Capital
19,476
35,720
48,296
47,151
Total Assets
26,613
39,227
52,413
65,651
Cash & Bank Balances
P/E
P/BV
Leverage Ratios
Assets
Total Fixed Assets
Valuation Ratios
Net Debt/Equity
0.4
1.0
1.1
1.0
Total Debt/Equity
0.8
1.1
1.1
1.0
E=Morgan Stanley Research estimates
Source: Company data, Morgan Stanley Research
Current Assets
Total Current Assets
Total Current Liabilities
101
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
PTC India Ltd.
Developing the Power Trading
Market in India
Morgan Stanley India
Company Private Limited+
Parag Gupta
Parag.Gupta@morganstanley.com
Key Statistics
Stock Rating: NOT RATED
Reuters: PTCI.BO Bloomberg: PTCIN
Share price, close (January 22, 2008)
Rs109.50
Market cap (mn)
Rs16425.00
52-Week Range
Rs201.7-53.45
Stock Price Performance
P
T C In d ia L t d
P T C In d i a L t d
W e e k l y C l o s i n g P ri c e i n R s
200
200
Saumya Srivastav
Saumya Srivastav@morganstanley.com
PTC India provides power trading solutions in India with a
primary focus to develop a commercially vibrant power market
in the country. Its principal activity is to trade in power and
enable power generators and utilities to trade power more
efficiently and profitably. It has projects with a total capacity
of over 16 GW under various stages of development in India
and 1770 MW in Bhutan and Nepal. It has a 26% equity
stake in the Indian Energy Exchange, which will be India’s first
national power exchange, through its financial services arm,
PTC Financial Services (PFS).
150
150
100
100
50
50
0
50
0
50
R e l a t i v e P e rf o rm a n c e to M S C I I n d i a
0
0
-5 0
-5 0
-1 0 0
-1 0 0
T o t a l W e e kl y T u rn o v e r b y V a l u e i n R s b n
4
4
2
2
0
0
2005
2006
2007
Source: Datastream
Recent Developments
PFS is a non-banking financial company formed to make
investments in small and medium companies across the
energy chain. In December 2007, Goldman Sachs and
Macquarie India Holdings each subscribed to a 20% stake in
PFS for approximately US$39 million.
Results Summary
In F2007, PTC India reported standalone revenue of Rs38
billion, up 21% YoY, and profit after tax of Rs351 million,
down 13.6% YoY. Operating expenses increased 22% YoY
to Rs37.4 billion, resulting in a 38.6% YoY decline in
operating profit.
In 1H F2008, revenue rose 11% YoY to Rs26 billion and net
profit was up 12.5% YoY to Rs233 million. In this period, PTC
India recommended an increase in the foreign institutional
investor limit to 60% from 40%.
Company Description
PTC India’s main activity is trading power. The company catalyzes the
development of power projects. Its services enable power generators
and utilities to trade power more efficiently and profitably. It acts as a
nodal agency for exchange of power with India’s neighboring countries.
The India Energy Exchange
PTC India, along with other partners, is setting up the first
Indian Energy Exchange, which aims to be a pan-India,
neutral, transparent electronic exchange for efficient price
discovery in the electricity market. Financial Technologies
(India) Ltd has a 46% stake in the Indian Energy Exchange,
PTC India 26%, and Tata Power, Reliance Energy, and Lanco
5% each. The Central Electric Regulatory Commission will
regulate the new exchange.
102
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
PTC India Ltd.: Financial Summary
Rs million; Years ending March
Income Statement
Net Revenues
Operating Expenses
EBITDA
Non-Operating Income
Interest Expense
Depreciation & Amortization
Misc. Exp. / Def. Revenue
w/off
Pretax Profit
Income Tax - Current
Income Tax - Deferred
Profit After Tax
Extraordinary / Prior Period
Items
Reported Net Profit
Balance Sheet
F2004
23,718
23,273
445
62
13
F2005
20,321
19,970
351
44
12
F2006
31,086
30,599
487
118
14
F2007
37,667
37,368
299
191
13
20
474
169
(8)
313
21
362
129
(4)
238
20
571
170
(6)
407
20
457
110
(4)
351
15
328
6
243
(1)
406
1
352
F2004
474
13
(169)
296
20
(101)
533
4
(1,323)
(1,320)
F2005
362
12
(129)
(655)
21
(1)
(390)
(12)
(639)
(651)
F2006
571
14
(170)
171
20
(2)
603
(3)
66
63
F2007
457
13
(110)
(107)
20
(5)
267
(6)
(198)
(204)
1,097
(2)
1
-
(22)
1,075
(120)
(17)
(139)
(150)
(21)
(170)
(150)
(25)
(175)
288
988
1,277
(1,180)
1,277
96
497
96
594
(112)
594
482
Cash Flow Statement
Profit before Tax
Depreciation & Amortization
Direct Taxes Paid
Changes in Working Capital
Misc Expenditure w/off
Others
Operating Cash Flows
Purchase of Fixed Assets
Purchase of Investments
Investing Cash Flows
Equity Issuance /
(Repurchase)
Debt Issuance /
(Repayment)
Dividend Paid
Dividend Tax Paid
Financing Cash Flows
Net Change in Cash
Opening cash
Closing cash
Liabilities
Equity Capital
Share Premium
Reserves & Surplus
Shareholders Funds
Deferred Tax Liability
TOTAL
Assets
Gross Fixed Assets
Less: Accumulated
Depreciation
Net Fixed Assets
Capital WIP (Software)
Investments
Current Assets
Cash & Cash Equivalents
Current Liabilities
Net Current Assets
Miscellaneous Expenditure
TOTAL
F2004
F2005
F2006
F2007
1,500
322
322
2,145
28
2,172
1,500
320
426
2,246
24
2,270
1,500
321
661
2,482
17
2,499
1,500
321
835
2,656
9
2,665
220
228
230
235
(27)
193
1
1,341
2,292
1,277
1,728
564
73
2,172
(39)
189
5
1,980
1,032
96
992
40
57
2,270
(52)
177
5
1,913
2,289
594
1,923
366
37
2,499
(65)
170
5
2,111
2,635
482
2,273
362
17
2,665
Key Ratios
Growth (%)
Revenues
EBITDA
Net Profit
EPS
Margins (%)
EBITDA
EBT
Net Profit
Return (%)
ROE
ROCE
Gearing
Debt/Equity
Valuations
EV/EBITDA
P/E
P/BV
Dividend Yield (%)
F2005
F2006
F2007
-14.3%
-21.2%
-24.1%
-24.1%
53.0%
38.6%
71.1%
71.1%
21.2%
-38.6%
-13.6%
-13.6%
1.7%
1.2%
1.2%
1.6%
1.3%
1.3%
0.8%
0.9%
0.9%
10.8%
10.7%
17.2%
17.0%
13.7%
13.6%
0.0%
0.0%
0.0%
46.5
69.1
7.3
0.7%
32.5
40.4
6.6
0.9%
53.4
46.8
6.2
0.9%
Source: Company data
103
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Ranbaxy Laboratories
Strengthening Base Business and
Multiple Exclusivities
Morgan Stanley India
Company Private Limited+
Sameer Baisiwala, CFA
Sameer.Baisiwala@morganstanley.com
Key Statistics
Stock Rating: Overweight
Reuters: RANB.BO Bloomberg: RBXY IN
India Pharmaceuticals
In-Line
Price target
Rs465.00
Share price, close (January 22, 2008)
Rs340.60
Market cap (mn)
Rs136,141.00
52-Week Range
Rs490.00-305.50
Shares outstanding, basic, currency (mn)
372.70
Saniel Chandrawat
Company Description
Ranbaxy Laboratories is India's largest pharmaceutical company in
terms of revenue and profit. Ranked second in the local market, the
company’s therapeutic profile is fairly diversified. Ranbaxy Laboratories
is one of India's leading pharmaceutical companies in the US generic
market. It has a wide NDDS and drug discovery platform with several
products at various stages of development.
Saniel.Chandrawat@morganstanley.com
Investment Conclusion
We have an Overweight rating on the stock in view of strong
growth momentum (we estimate a two-year EPS CAGR of
20%), plus upside from exclusivities and the reasonable
valuation (trading at 18.4x 2008E and 15.6x 2009E EPS for
the core business). The stock has underperformed the
market by 55% over the past 12 months. We believe the
current weakness presents a good buying opportunity.
However, given the major product triggers for 4Q08 and time
required (1H) for the company to convince markets about its
ability to deliver on ‘tall’ 2008 guidance, we position Ranbaxy
as a 2H08 stock.
Recent Developments
New chemical entity (NCE) research spin-off update: Ranbaxy
has ‘in-principle’ approval from its board and expects
regulatory approval in the next six to eight months. The demerger would result in US$20-25 million less research spend
for Ranbaxy. Ranbaxy will retain Novel Drug Delivery
Systems (NDDS) research. Impending changes to Romanian
regulatory framework will likely result in price cuts. Ranbaxy
has received special economic zone (SEZ) approval for a new
manufacturing unit in Mohali, which is due to be completed by
end 2009 and would result in a multi-year tax exemption.
What We Like
•
Strengthening base business driven by fully backward
integrated business model and global footprint. This
gives visibility of multiple product launches and multiple
country markets.
•
2008 pipeline looking good: A likely ‘at risk’ generic
Primaxin (US$250 million US market) launch,
Sumatriptan Succinate (generic Imitrex) 180-day
exclusivity, and galantamine (US$130 million, end-2008)
exclusivity are key products.
•
Zenotech (45% stakeholder) pipeline could shape up
well – five or six specialty injectable filings for the US in
2007, five or six oncology filings in 2008, biologicals in
2010, plus similar filings in emerging markets of Russia,
Latin America, etc.
•
Three-year outlook – A string of exclusivities –
Sumatriptan Succinate (generic Imitrex) (4Q08), Valtrex
(4Q09), Flomax (1Q10), Lipitor (1Q10) – deepening
technology options – penams, limuses, peptides,
biosimilars – and new revenue streams – SEZ
monetization, marketing/research partnership with
innovators – should support valuations, we believe.
Key Investment Issues
•
What are the key drivers of the 2008 guidance, which
implies roughly 30% rise in operating profits?
•
Is there an upside risk from Lipitor exclusivity in the US?
•
Does the company plan to lower its leverage in the next
couple of years?
•
Update in global generic market environment with regard
to pricing, volume, patent expiry, etc.
Valuation Methodology
We derive our price target of Rs465 from a sum-of-the-parts
valuation, valuing the base business at Rs415 (19x 2009E
EPS) and Rs50 for the DCF value of US Lipitor and Valtrex
exclusivities. We do not include any upside from the Canada
Lipitor opportunity in our model.
What We Don’t Like
•
Currency risk – Rupee appreciation will hurt profitability
in the longer run.
•
Internal process – The company has faced a few
regulatory challenges, such as ongoing US Food and
Drug Adminstration issues related to the Paonta Sahib
facility.
•
Slow margin recovery in base business.
104
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Risk-Reward Snapshot: Ranbaxy Laboratories
Investment Thesis
Risk-Reward View: Execution Scale-up is the Key Valuation Driver
Rs600
Rs549 (+61%)
550
500
Rs465 (+37%)
450
400
Rs340.60
350
Rs308 (-10%)
300
250
Key Value Drivers
Jan 07
Apr 07
Jul 07
Price Target
Sep 07
Dec 07
Mar 08
Historical Stock Performance
Price target Rs465
May 08
Aug 08
Oct 08
Jan 09
Current Stock Price
Derived from our Base Case Scenario
Bull case
Rs549
Sum of parts Stronger base business (Rs42/share), higher value for Lipitor
opportunity (Rs36/share), and strategic initiatives (land sales,
SEZ monetization, MNC partnerships for product marketing)
(Rs6/share).
Base case
Rs465
Sum of parts 18% sales growth for the base business and 162bps OPM
expansion over 2007-09 resulting in a 20% EPS CAGR (200709). We apply a P/E multiple of 19x to our 2009 EPS estimate of
Rs21.86 (Rs415/share) and add Lipitor and Valtrex upside
(Rs50/share).
Bear case
Rs308
Sum of parts Set back in core business (Rs83/share), quinapril liability
(Rs30/share), and loss of Lipitor opportunity (Rs44/share).
Bull to Bear: Execution Scale-up is the Key Valuation Driver
700
500
83
30
42
44
36
• Momentum in the base business
driven by several geographies and
new launches.
• Momentum in regulatory filings for
complex products – penams, limuses,
peptides, and biosimilars
• Monetisation of first-to-file
opportunities.
• Visibility of new revenue streams.
Potential Catalysts
• Execution of the ‘tall’ 2008 guidance.
• De-merger of NDDR research.
• Innovator deals for marketing (in
emerging markets) and research
services.
• Primaxin launch.
Risks
Price Target: 465
600
Indian Rupee (Rs)
• Globally aging population, pressure to
contain cost, significant patent
expiries, and new markets (such as
Japan) are defining global
opportunities.
• Long-term growth visibility driven by
domestic and export markets.
• Global competitive advantages –
strong chemistry, low cost, and global
distribution capabilities.
6
549
• Adverse currency movements.
• Loss of US Lipitor opportunity.
• Regulatory/legal setbacks.
465
400
300
200
308
100
0
Bear
Case
Setback in core
business
Quinapril
Liability
Loss of Lipitor
Opportunity
Base
Case
Strong base
business
Higher Value
for Lipitor
opportunity
Strategic
Initiatives
Bull
Case
Source: Company data, Morgan Stanley Research
105
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Ranbaxy Laboratories: Financial Summary
Rs million; Years Ending December
Income Statement
Rs mn
Total Revenues
Other Operating Income
Cash Flow Statement
2006
2007E
61916
2008E
68680
77102
2009E
87156
0
1364
1330
1380
Total Operating Income
61916
70044
78432
88536
Cost of Goods Sold
26832
31593
35853
40963
Gross margin
35084
38451
42580
47573
Excise Duty
482
563
678
788
7955
8194
8604
9292
13867
14838
16321
17954
3955
4121
4164
4532
53091
59309
65619
73529
8825
10736
12813
15007
564
575
507
572
Net Interest Expense
1036
1379
1331
1315
Depreciation
1494
1914
2278
2688
Amortisation
348
400
450
500
Pre-tax profit
6510
7617
9260
11076
Taxation
1357
1449
1789
2260
50
60
70
80
5103
6108
7401
8736
Personnel Costs
Administration expenses
R & D expenses
Operating Expenses
Operating profit
Other income
Minority Interest
Consolidated Profits
Equity Capital
2006
2007E
2008E
2009E
1999
1999
1999
1999
Reserves & Surplus
43366
45439
48378
52225
Networth
45374
47437
50376
54224
334
395
465
545
94
94
94
94
20082
20028
17028
16028
Minority Interest
Employee Stock Options
Debt
Total
65884
67954
67963
70891
Net Block
38953
41050
42321
41633
Capital WIP
Net Fixed Assets
Investments
Cash & Cash Equivalents
3581
170
170
170
42534
41220
42491
41803
362
362
362
362
3086
5039
913
1591
Inventories
16116
17463
19554
22073
Receivables
15716
17271
19339
21831
6321
7555
8481
9587
38153
42289
47375
53492
Loans & Advances
Current Assets
Current Liabilities & Provisions
17597
20302
22524
25703
Net Current Assets
20556
21987
24851
27789
Deferred Tax :Liabilities
Total
2008E
2009E
Profit after tax
5103 6108 7401
Add : Depreciation
1843 2314 2728
Add : Increase in Def Tax Liab
(2044)
0
0
Change in ESOP/Minority Interest
150
60
70
Cash flow from operations
5052 8483 10200
Extraordinary items and prior period adj
433
0
0
Net change in Working capital
4716 1431 2864
Change in inventory
2492 1348 2091
Change in debtors
4313 1555 2068
Change in other current assets
500 1234
926
Change in current liabilities
2589 2705 2222
Net cash from operations
769 7052 7336
Capital expenditure
(18190) (1000) (4000)
Miscellaneous exp
120
0
0
Sale of investments
(191)
0
0
Net cash from investing
(18261) (1000) (4000)
Issue of shares
18983
(9)
0
Dividends paid including divdend tax
(3613) (4036) (4462)
Net cash from financing
15370 (4045) (4462)
Inc/(Dec) in net debt
2122 (2007) 1126
Opening net debt
14874 16996 14988
Closing net debt
16996 14988 16115
2006
2007E
8736
3188
0
80
12004
0
2938
2519
2491
1106
3178
9066
(2500)
0
0
(2500)
0
(4888)
(4888)
(1678)
16115
14437
Ratio Analysis
Balance Sheet
Rs mn
Rs mn
(655)
(655)
(655)
(655)
65884
67954
67963
70891
Effective Tax Rate (%)
EPS (Rs)
CEPS (Rs)
BVPS (Rs)
DPS (Rs)
Profitability Ratios
Gross Margin (%)
Operating Margin (%)
Pre-tax Margin (%)
Net Margin (%)
Valuation Ratios
P/E
P/BV
ROE (%)
ROCE (%)
EV/EBITDA
Leverage Ratios
Net Debt/Equity
Total Debt/Equity
Turnover Ratios
Inventory (days of net sales)
Receivables (days of net sales)
Cash cycle (days of net sales)
Net working capital (x net sales)
2006
2007E
2008E
2009E
20.8%
12.77
17.4
113.5
4.3
19.0%
15.28
21.1
118.7
4.8
19.3%
18.52
25.3
126.0
5.3
20.4%
21.86
29.8
135.7
5.8
56.7%
14.3%
10.5%
8.2%
54.9%
15.3%
10.9%
8.7%
54.3%
16.3%
11.8%
9.4%
53.7%
17.0%
12.5%
9.9%
26.7
3.0
14.6%
13.6%
16.1
22.3
2.9
13.2%
13.4%
13.2
18.4
2.7
15.1%
15.6%
11.3
15.6
2.5
16.7%
17.8%
9.6
0.37
0.44
0.32
0.42
0.32
0.34
0.27
0.30
95
93
188
107
91
90
181
111
91
90
181
109
91
90
181
109
E = Morgan Stanley Research estimates
Source: Company data, Morgan Stanley Research
106
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Reliance Communications Ltd.
Strong Growth Plans
Morgan Stanley India
Company Private Limited +
Vinay Jaising
Vinay.Jaising@morganstanley.com
Surabhi Chandna
Key Statistics
Stock Rating: Overweight
Reuters: RLCM.BO Bloomberg: RCOM IN
India Telecommunications
Attractive
Price target
Rs891.00
Share price, close (Jan 22, 2008)
Rs575.15
Market cap (mn)
Rs1,176,182.00
52-Week Range
Rs844.00-Rs371.25
Shares outstanding, basic, currency (mn)
2,045.00
Surabhi.Chandna@morganstanley.com
Investment Conclusion
Reliance Communications Ltd (RCOM) plans US$4-5 billion in
capex in F2008, the highest planned capex by any Indian
telecom operator. This should enhance its coverage to
23,000 towns, covering 90% of India’s population. We expect
RCOM’s overall wireless subscriber numbers to increase 45%
per annum between F2007 and F2010 to 85 million. We
estimate EBITDA and net profit growth at 40% and 42%
annually, respectively, in F2007-10.
Recent Developments
RCOM had its highest ever net adds of 4.5mn subs last
quarter, an increase of 2% QoQ and 13% YoY. The company
now has a wireless subs base of 40.9 mn, up 36% YoY and
13% QoQ, wireless market share of 17.5%, down 264bps
YoY (due to write off in March) and up 12bps sequentially. Net
adds market share of 18.5% was up 10bps sequentially. The
company posted YoY and sequential revenue growth of
29.8% and 6.5%, respectively, and EBITDA growth of 37.9%
and 7.4%. EBITDA margins increased sequentially by 37bps
to 43.2%. Net profits grew 48.5% YoY and 3.3% sequentially.
Company Description
RCOM was formed by the de-merger and vesting of the telecom
undertakings of Reliance Industries Limited. RCOM is India's largest
integrated communications service provider in the private sector. It has
more than 40 million individual consumer, enterprise, and carrier
customers. It has pan-Indian operations and provides wireless,
wireline, and long-distance voice, data, and internet communication
services. It has an extensive international presence through the
provision of long-distance voice, data, and internet services and a
global submarine cable network infrastructure.
What We Like
•
Focus on reach. RCOM plans US$4-5 billion capex (we
estimate US$4 billion) as a consolidated entity in F2008
and US$6bn in F2009, nearly double its peers. RCOM
expects to add 23,000 towers and close to 20 million
subscribers.
•
RCOM has India’s largest connectivity domestically
and globally: It has over 100k route km of fiber optic
network, 200k sq ft of data center capacity, 489k
buildings that are fiber optic connected domestically, and
66 route km of submarine cable capacity.
Key Investment Issues
•
Timing of value unlocking from tower business and Flag
Telecom.
What We Don’t Like
•
Lowest ARPM’s in the sector: RCOM has the lowest
ARPMs among stocks in our India telecoms coverage
universe.
•
GSM roll-out plans.
•
•
Managing a dual technology strategy.
Handset subsidies: RCOM has a history of providing
handset subsidies on its CDMA platform, which have
historically dented its financial performance.
•
Lack of historical financials: RCOM has a short
financial history, with only one annual report so far.
Valuation Methodology
We use a sum-of-the-parts valuation to derive our price target
for RCOM, adding its core business valuation to the tower
business valuation. Our core business value for RCOM is the
mid-point of the value derived from our DCF calculation on a
one-year forward basis, assuming a terminal growth rate of
4% and cost of capital of 11%. Our price target of Rs891
implies a P/E of 19.8x F2010E and EV/EBITDA of 12.4x.
107
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Risk-Reward Snapshot: Reliance Communications Ltd.
Investment Thesis
Significant Upside Prevails
Rs1,100
Rs1,019 (+77%)
1,000
900
Rs891 (+55%)
800
Rs575.15
700
Rs709 (+23%)
600
500
400
300
Jan 07
Apr 07
Jul 07
Price Target
Price Target Rs891.00
Bull case
Rs1,019
Sep 07
Dec 07
Mar 08
Historical Stock Performance
May 08
Aug 08
Oct 08
Jan 09
Current Stock Price
Derived from base-case scenario.
16x bull-case Slower ARPU decline: Annual ARPU decrease limited to 6.6%.
2007E EPS RCOM receives 10 MHz spectrum in the 1800 band and captures
14% of the incremental net adds in GSM in its new 14 circles.
RCOM increases market share in the enterprise market to 35% in
the long term. RCOM’s wholly owned subsidiary, Flag Telecom,
is listed.
Base case
Rs891
15x basecase 2007E
EPS
Improving margin, strong market share: Annual ARPU decline
of 6.8% for F2007-10. EBITDA margin improves to 44.1% by
F2009. Market shares of 42.5% for international long distance,
25% for national long-distance, and 30% for domestic enterprise
business in the long term.
Bear case
Rs709
14.5x bearcase 2007E
EPS
Increasing competition: RCOM invests US$40/sub as migration
costs for shifting from CDMA to GSM in the next 12 months.
Increased competition lowers ARPU for the industry by an
additional 5% and increases marketing discounts to 2.5% of
sales, thereby lowering wireless division margins to around 42.2%
in F2009.
Indian Rupee (Rs)
Contribution from All Divisions
1,100
Price Target: 891
80
900
29
32
29
45
25
31
40
1,019
• India is the world’s fastest-growing
telecom market.
• Continued acceleration in net adds for
RCOM.
• RCOM has India’s largest connectivity
domestically and globally.
Key Value Drivers
• Improvement in EBITDA margins by
F2009, driven by economies of scale
• Strong Net adds through pan India
presence in both CDMA and GSM
• Potential to unlock value in the tower
business and international operations
through Flag Telecom.
• Market share in the
international/national long-distance
and domestic enterprise businesses
Potential Catalysts
• Strong quarterly performance.
• Lowering of telcos’ license fees under
revenue-sharing agreements – we
estimate the license fee may be
reduced to 6% from a weighted
average of 10%, as suggested by the
Telecom Regulatory Authority of India.
• RCOM turning FCF-positive – which
we estimate will occur in F2009.
• RCOM gets GSM spectrum in the
1800MHz band, which would lower its
capex in the wireless business.
Risks
• The CDMA operators, including
RCOM, increase handset subsidies.
• Competition from regional operators
intensifies, leading some to exit the
business or consolidate.
891
700
709
500
Bear
Case
GSM
Migration
cost of
US$40/sub
Drop in RCOM gets EBITDA
ARPUs 25% benefit Margins
increases from Tower similar to
by 5%
Business
F1Q08
levels of
42.2%
Base
Case
Drop in
Increase in Increased
ARPUs
GSM Net Enterprise
decreases Adds In Mid Market
by 5%
F2008 and Share to
25%
F2009
Value of
Flag at
US$2bn
Bull
Case
Source: Morgan Stanley, Factset, Company data
108
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Reliance Communications Ltd.: Financial Summary
Rs million; Years Ending March
Income Statement
Wireless
Cash Flow Statement
F2007
F2008E
F2009E
F2010E
107,276
155,686
223,923
282,376
Global
51,770
53,394
63,929
76,858
Broadband
11,965
21,395
36,774
46,127
Total
174,727
230,475
324,626
405,360
Net Revenues
145,018
190,250
276,959
351,602
Access / Interconnect Costs
24,196
12,777
21,995
29,904
License Fees
13,626
19,449
27,992
35,068
Network Charges
16,737
21,764
30,939
40,138
Employee Costs
9,079
14,804
21,219
25,037
Sales & Marketing
23,839
39,087
52,696
62,898
Total Operating Costs
87,477
107,881
154,841
193,045
EBITDA
57,542
82,368
122,118
158,557
Depreciation
24,653
29,518
38,283
49,710
Non Operating Income
-
4,434
1,767
3,070
Interest Expenses
4
2,093
6,940
7,677
Profit before Tax
32,885
55,191
78,662
104,241
616
2,760
8,912
11,810
32,269
52,432
69,749
92,430
Income Tax
Profit after Tax
Extraordinary Items
Reported PAT
(302)
12,218
-
-
32,572
40,214
69,749
92,430
Balance Sheet
F2007
F2008E
F2009E
F2010E
SOURCES
Share Capital
10,223
10,261
10,261
10,261
Reserves & Surplus
219,140
277,324 340,099 423,286
Shareholders' Funds
229,363
287,585 350,360 433,547
Loan Funds
174,383
88,544 153,889 102,005
TOTAL LIABILITIES
403,772
376,129 504,249 535,552
F2007
F2008E
F2009E
F2010E
Operating Activities
Profit/(Loss) before tax
32,885
55,191
78,662 104,241
Depreciation
24,653
29,518
38,283 49,710
Direct Taxes Paid
(616)
(2,760)
(8,912) (11,810)
Changes in Working Capital
38,427
29,854 (26,284) 18,940
Prior period adjustments
4
2,093
6,940
7,677
Operating Cash Flows
94,663 126,089
88,689 168,756
Investing Activities
Purchase/(Sale) of Fixed
Assets
(59,401) (159,533) (133,083) (93,066)
Goodwill + Intangibles
(Accretion)/Decretion
(26,588)
Purchase of Investments
(76,993)
74,114
Investing Cash Flows
(162,981) (85,419) (133,083) (93,066)
Financing Activities
Proceeds from Issue of Share
Capital
38
Repayment of
Long Term Debt
81,407 (85,840)
65,346 (51,884)
Interest on Long Term Loans
(4)
(2,093)
(6,940) (7,677)
Dividends Paid
(1,047)
(5,657)
(6,103) (8,088)
Dividend Tax
(150)
(808)
(872) (1,155)
Financing Cash Flows
80,208 (94,359)
51,431 (68,804)
Net change in Cash &
Cash Eqv
11,890 (53,690)
7,037
6,886
Cash & Marketable
Securities
Beginning balance
60,038
71,928
18,238
25,275
Ending Balance
71,928
18,238
25,275
32,161
Ratio Analysis
F2007
F2008E
F2009E
F2010E
ModelWare EPS
15.8
25.5
34.0
45.0
APPLICATIONS
Adj. EPS
15.6
31.5
34.0
45.0
Net Block
Book Value
112.2
140.1
170.7
211.3
3.94
Capital Work in Progress
Net Fixed Assets
293,516
36,907
330,422
404,739 504,172 560,461
55,698
51,064
38,133
460,437 555,237 598,593
Goodwill
26,588
26,588
26,588
26,588
Investments
77,114
3,000
3,000
3,000
Current Assets
59,124
75,501
81,724
65,095
Cash & Marketable Securities
72,006
18,317
25,354
32,240
Valuation
DPS(Rs)
0.5
2.8
3.0
36.4
22.5
16.9
12.8
5.1
4.1
3.4
2.72
23.0
15.8
11.2
8.30
EBITDA Margin (Net Rev)
39.7%
43.3%
44.1%
45.1%
Net Margin
18.5%
22.7%
21.5%
22.8%
P/E
P/BV
EV/EBITDA
Profitability
Current Liabilities
161,482
207,714 187,653 189,964
RONW (%)
18.4%
25.0%
21.9%
23.6%
Net Current Assets
(30,352) (113,896) (80,575) (92,629)
ROCE (%)
10.7%
14.7%
19.4%
21.53%
TOTAL ASSETS
403,772
Gearing
376,129 504,249 535,552
Debt/Equity
0.76
0.31
0.44
0.24
Net Debt / Equity
0.45
0.24
0.37
0.16
E = Morgan Stanley Research estimates
Source: Company data, Morgan Stanley Research
109
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Reliance Energy
Aggressive in the Right Direction
Morgan Stanley India
Company Private Limited+
Parag Gupta
Parag.Gupta@morganstanley.com
Saumya Srivastav
Key Statistics
Stock Rating: Overweight
Reuters: RLEN.BO Bloomberg: RELE IN
India Utilities
In-Line
Price target
Rs2,073.00
Share price, close (January 22, 2008)
Rs1,716.35
Market cap (mn)
Rs452,169.43
52-Week Range
Rs2,631.70-448.20
Shares outstanding, basic, currency (mn)
236.50
Saumya.Srivastav@morganstanley.com
Investment Conclusion
Reliance Energy is focusing on the boom in Indian
infrastructure, where we believe significant opportunities exist
in the utility, infrastructure, real estate and coal mining/oil and
gas exploration space. The company’s financial strength and
aggressive efforts to win new projects increase our
confidence in Reliance’s growth trajectory.
Recent Developments
Reliance Power, the key power generating company of the
Reliance ADA group, offered 11% of its equity in an IPO that
closed on January 18. Reliance Power has plans to add
capacity of 28,200 MW and Reliance Energy and AAA Project
Ventures (a promoter company) each hold a 50% equity stake
(which will go down to 45% each post IPO). The IPO price
band was Rs405-Rs450/share, and the issue was
oversubscribed 73x.
Reliance Energy has issued 43 million warrants to AAA
Project Ventures, a promoter company, for a total
consideration of nearly Rs78.4 billion (at Rs1,822 per share).
The warrants are convertible into equity shares at any time up
to July 19, 2009. When converted, AAA Project Ventures'
stake in Reliance Energy would increase from 35% to 52%.
Key Investment Issues
•
Business plans for Reliance Energy given that all power
capacities will now be in Reliance Power
•
•
Execution risks involved with the significant ramp-up in
capacity for Reliance Power
Clarity on gas supply from Reliance Industries necessary
to fire gas plants of Reliance Power
Valuation
Our price target of Rs2073 for Reliance Energy is based on a
sum-of-parts methodology. The key constituents of our price
target are the generation and distribution businesses in
Mumbai and Delhi, EPC business, investment in Reliance
Power and value of financial assets.
Company Description
Reliance Energy is one of India's largest integrated electric utility
companies. It has a generation capacity of 941 MW and distributes
power in Mumbai and Delhi. The company also has an EPC business
for constructing internal/external power projects. The promoters own a
35.6% stake in the company.
What We Like
•
Utility + EPC has great potential: Reliance Power has
plans to add 28,200 MW of power capacity, which
includes the 4,000 MW Sasan UMPP and the 4,000 MW
Krishnapatnam UMPP. Furthermore, the EPC business
seems well poised with an outstanding order book of
US$2.1 billion and the potential to increase as more
power projects are handed out in the future. Furthermore,
we believe the EPC business could see incremental
upside if Reliance Power were to award the construction
contracts for its power projects to Reliance Energy.
•
Getting aggressive in the infrastructure segment:
Reliance Energy is executing various road and metro
projects worth over Rs60 billion. It also has plans to
develop jointly 11 million sq ft of real estate in Hyderabad
over the next seven years.
What We Don’t Like
•
Execution risk involved with generation projects:
Delays in receiving government approvals, fuel linkages
and equipment have been the primary risks relating to
setting up power projects in India. These risks will apply
to Reliance Power as well.
•
Gas pricing issue is still sub judice: The gas supply
agreement between Reliance Industries and Reliance
Natural Resource remains sub judice due to the gas
pricing issue. Further delays in resolving this issue could
delay the implementation of the Dadri and Shahpur gas
projects.
110
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Risk-Reward Snapshot: Reliance Energy
Risk Reward View: Momentum in Reliance Power Could Drive Value
Rs3,500
Rs2,955 (+72%)
3,000
2,500
2,000
Rs2,073 (+21%)
Rs1,716.35
1,500
Rs1,645 (-4%)
1,000
500
0
Investment Thesis
• One of India’s largest integrated
electric utilities in the private sector
with experience in generation and
distribution businesses.
• Surplus cash position allows the
company to finance large power
projects.
• EPC division can benefit from the
increasing activity in the generation
space as a result of the government’s
XIth five-year plan.
Key Value Drivers
Jan 06
May 06
Sep 06
Price Target
Jan 07
May 07
Sep 07
Historical Stock Performance
Jan 08
May 08
Sep 08
Jan 09
Current Stock Price
Price Target Rs2,073
Same as base-case valuation
Bull
Case
Rs2,955
Reliance Power valued at US$25 bn: The key difference from
the base case is valuing Reliance Power at the higher end of the
IPO price band. We also assume stronger revenue growth and
margin expansion in the EPC business.
2x F2009
core P/B
Base
Case
Rs2,073
2x F2009
core P/B
Fair Value of Reliance Power = US$12.7 bn: The 50% stake in
Reliance Power is worth Rs1,073 per share. We further include
the value of the Mumbai distribution business, EPC business, and
financial assets.
Bear
Case
Rs1,645
1.8x F2009
core P/B
Delays in power projects: We assume a delay in some of
Reliance Power’s projects, MP Power to be a 2000 MW project
and lower merchant tariff rate. We also assume slower growth in
the EPC business.
Bear to Bull: EPC and Reliance Power are Key
3,000
862
2,955
• Substantial increase in EPC order
book as a large portion of Reliance
Power’s projects are handed out to
Reliance Energy.
Potential Catalysts
• Significant increase in the value of
Reliance Power post the IPO.
• Significant increase in the project
portfolio by Reliance Power through
either bids or acquisitions.
• Regulatory regime improving in India.
• Government encourages increased
private participation in the utility sector.
Risks
• Execution delays for any of the power
projects.
• Ambiguity on gas supplies necessary
for firing over 10,000 MW of capacity.
2,500
Indian Rupee (Rs)
Price Target: 2,073
2,000
1,500
17
346
82
3
2,073
1,645
1,000
500
0
Bear
Case
Slow growth in
EPC
Decrease in
value of
Reliance Power
Base
Case
Strong EPC
growth
Delhi Distribution Reliance Power
- Higher ROE at higher end of
IPO price band
Bull
Case
Source: Morgan Stanley, FactSet
111
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Reliance Energy: Financial Summary
Rs million; Years Ending March
Income Statement
Cash Flow Statement
Rs Mn(Year-end March)
F2005
F2006
F2007 F2008E F2009E
Rs mn (year-end March)
F2005
F2006
Total Revenues
41,337
40,126
57,100
76,071
92,570
PAT
5,203
6,503
8,015
8,811
11,933
Power Revenue
28,899
31,582
36,110
47,000
51,940
Depreciation
3,464
3,486
2,401
2,720
2,783
EPC and Other Revenue
12,438
8,545
20,990
29,071
40,631
Interest
1,348
1,919
2,503
2,926
3,219
Total operating expenses
34,715
32,859
52,125
68,267
81,491
Changes in Working Capital
-1,381 -20,035 -50,626
-261
-420
10,041
10,876
15,324
22,803
25,827
Cash flow from operations
-8,127 -37,707
14,195
17,514
-1,655
-3,100
-4,707
-3,000
-1,500
704
2,896
-7,530
-1,006
-15
-204 -12,237
-4,006
-1,515
Power purchase cost
8,635
F2007 F2008E F2009E
Fuel cost
7,363
8,121
9,213
9,631
9,810
(Purchase)/sale of fixed assets, net
Repairs,Electricity Tax & Other costs
3,830
4,717
5,303
6,315
7,019
(Purchase)/sale of investment, net
Employee cost
1,836
1,857
2,594
2,880
3,168
Cash flow from investing activities
EPC expenses
11,646
7,288
19,692
26,638
35,668
Proceeds from equity issuance
11,863
10,447
7,950
7,914
0
6,623
7,267
4,975
7,804
11,079
Proceeds/(repayment) of loan
17,078
5,283
15,914
0
0
3,464
3,486
2,401
2,720
2,783
Dividend
1,007
585
920
1,417
1,578
3,158
3,781
2,574
5,084
8,296
Interest expense
1,348
1,919
2,503
2,926
3,219
Other income
3,923
5,768
7,738
8,587
9,475
Other items
-3,502
-958
395
0
0
Interest and finance charges
1,348
1,919
2,503
2,926
3,219
Cash flow from financing activities
23,085
12,268
20,836
3,571
-4,796
5,732
7,630
7,809
10,745
14,552
Change in cash and cash equiv
30,768
13,760
11,203
495
506
1,221
1,934
2,619
Opening cash and cash equiv
31,858
62,627
66,563
37,455
51,214
Closing cash and cash equiv
62,627
66,563
37,455
51,214
62,417
EBITDA
Depreciation
EBIT
PBT
Taxation
Tax rate (%)
PAT
9
7
16
18
18
5,237
7,124
6,588
8,811
11,933
-35
-621
1426
0
0
Key Ratios
PAT after extraordinary items
5,203
6,503
8,015
8,811
11,933
(year-end March)
EPS (Rs)
25.59
33.88
29.31
37.25
50.45
DPS (Rs)
4.70
5.00
5.30
5.80
6.20
Extraordinary items
Rs mn (year-end March)
F2005
F2006
F2007
F2008E
F2009E
Liabilities
Share Capital
Share Warrants
Reserves and surplus
Shareholders funds
Secured loans
Unsecured loans
1,856
2,124
2,286
2,365
2,365
F2005
3,937 -29,108
F2006
F2007
F2008E
F2009E
22%
Growth (%)
Revenues (%)
21%
-3%
42%
33%
3%
10%
-32%
57%
42%
EBIT (%)
-2%
20%
-32%
97%
63%
Net Profit (%)
50%
36%
-8%
34%
35%
EPS (%)
20%
32%
-13%
27%
35%
12.0%
EBITDA (%)
Balance Sheet
-951
Margins (%)
5,680
882
0
7,835
7,835
16.0%
18.1%
8.7%
10.3%
55,863
75,727
91,107
98,340
108,586
EBIT (%)
7.6%
9.4%
4.5%
6.7%
9.0%
63,399
78,733
93,392
108,539
118,786
EBT (%)
13.9%
19.0%
13.7%
14.1%
15.7%
Net Profit (%)
12.7%
17.8%
11.5%
11.6%
12.9%
EBITDA (%)
7,850
19,198
14,350
14,350
14,350
29,537
23,471
44,233
44,233
44,233
Return (%)
ROE (%)
9.1%
10.0%
7.7%
8.7%
10.5%
ROCE (%)
5.9%
6.3%
4.7%
5.4%
6.8%
ROA (%)
5.0%
5.3%
4.0%
4.5%
5.6%
Others Liabilities
2,827
2,276
2,559
2,559
2,559
Total Liabilities
103,612
123,678
154,535
169,682
179,928
Assets
51,730
54,706
58,984
61,984
Accumulated Depreciation
24,529
28,146
30,825
33,544
36,328
Debt/Equity
0.59
0.54
0.63
0.54
0.49
27,201
26,561
28,159
28,439
27,156
Net Debt/Equity
0.47
0.57
0.61
0.65
0.69
1,922
2,177
2,885
2,885
2,885
EV/EBITDA
43.6
44.0
67.4
43.0
29.3
P/E
67.1
50.7
58.5
46.1
34.0
Net Block
CWIP
Investments
63,484
Gearing
Gross Block
Valuations
4,789
1,893
9,423
10,429
10,445
Inventories
3,531
3,111
2,927
3,060
3,117
Sundry debtors
9,310
10,928
10,564
14,074
17,126
P/BV
5.0
4.6
4.2
3.7
3.4
62,627
66,563
37,455
51,214
62,417
Dividend Yield (%)
0%
0.3%
0.3%
0.3%
0.4%
116
Cash and Cash Equivalents
Turnover (days)
Deposits
4,478
20,681
78,027
78,027
78,027
Other current assets
8,633
13,905
14,867
17,451
20,785
Inventory
175
140
116
116
Sundry creditors
7,391
6,621
11,607
15,201
18,145
Debtors
82
99
68
68
68
11,487
15,519
18,165
20,696
23,883
Creditors
78
74
81
81
81
69,700
93,048
114,068
127,929
139,443
103,612
123,678
154,535
169,682
179,928
Other Current Liab. & Prov.
Net current assets
Total Assets
E = Morgan Stanley Research estimates
Source: Company data, Morgan Stanley Research
112
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Reliance Industries
Solid Long Term Play:
Maintain Overweight
Morgan Stanley India
Company Private Limited +
Vinay Jaising
Vinay.Jaising@morganstanley.com
Mayank Maheshwari
Mayank.Maheshwari@morganstanley.com
Investment Conclusion
We believe Reliance Industries (RELI) is a good long-term
play. Earnings look stable, as contributions from exploration
and production (E&P) and retail should strengthen in the next
five and 10 years, respectively. We project CAGRs of 12%
for EBITDA and 20% for net profit in F2007-12.
Recent Developments
For 3Q F2008, RELI reported EBITDA up 13% YoY and net
profit up 26% YoY, 7% above our expectation. The gross
refining margin (GRM) exceeded our expectation at
US$15.4/bbl, up 32% YoY and 13% QoQ. Refining EBIT
increased 36% YoY and 13% QoQ because of lower losses
domestically. Netbacks, however, were 5% below our
expectation. RELI had two new discoveries in 3Q F2008,
taking its overall discoveries to 38; its MA field, which earlier
had oil prospects, now has estimated gas plateau production
of 9mmscmd and is expected to commence production in the
next 12 months. RELI is expanding its retail outlets. It is
positioning itself well to capitalize on the significant
opportunity in organized retailing under the brand Reliance
Fresh. It added 112 stores in 3Q F2008 and had 441 stores
at the end of the quarter.
Key Investment Issues
1) The overhang of RELI stock held by the company’s
subsidiaries; 2) a decline in global economic growth that
would likely compress petrochemical and refining margins; 3)
policy risk with respect to subsidy sharing; 4) potential delays
in the execution of the business plan;5) RELI’s correlation
with the Sensex; and 6) exchange rate movements.
Valuation Methodology
Given the diversity of RELI’s businesses, we value RELI on a
sum-of-the-parts basis, which assigns value to RELI’s
petrochem, refining, retail, and E&P businesses, and includes
RELI’s 70.4% investment in Reliance Petroleum (RPL) at our
RPL price target of Rs204. However, our price target of
Rs3,475 for RELI does not take into account the potential
upside from special economic zone business.
Key Statistics
Stock Rating: Overweight
Reuters: RELI.BO Bloomberg: RIL IN
India Oil & Gas
Attractive
Price target
Rs3,475.00
Share price, close (January 22, 2008)
Rs2,358.05
Market cap (mn)
US$113,000
52-Week Range
Rs3,051.00-1,582.00
Shares outstanding, basic, currency (mn)
1573.4
Company Description
Reliance Industries is India's largest private-sector company by
revenue, assets, and profits. It has interests in exploration and
production, refining, petrochemicals, textiles, and infrastructure. Its
petrochemicals business is vertically integrated with an output of around
11 million tons. Reliance Industries ranks among the top 10 companies
worldwide in most of its key downstream products. It also operates
India's largest and most complex refinery, with a capacity of 33 million
tons.
What We Like
• E&P business to generate US$3.7 billion in profits
F2010-15E – RELI has had 38 discoveries to date:
RELI’s proven reserves stand at 1.5 billion bbls. It has net
2P of 4 billion bbls, and is aiming to reach 10 billion bbls of
gross 2P reserves. RELI has recently submitted a
commerciality plan for an additional eight discoveries in the
prolific KG D6 block, according to Niko Resources India.
The discoveries are adjacent to the D1/D3 field that is
currently under development. The company has made two
discoveries this quarter in the E&P business: 1) oil in the
KGD4 block well; and 2) oil and gas in the Cauvery Basin
block.
• Refining and marketing: RELI operates one of the most
complex refineries, with a Nelson complexity index of
11.3x, which helps RELI achieve US$5-7/bbl more in
margins than Singapore complex refiners. RELI earned a
spread of US$7.7/bbl over Singapore GRMs in 3Q F2008.
• Gas pricing for KG-D6 gas: The Government of India has
approved RELI’s gas price of US$4.2/mmbtu for the KG-D6
gas, and the company has started signing gas contracts
with potential customers. It is currently selling its PMT gas
at US$5.7/mmbtu.
What We Don’t Like
• Resolution of gas pricing between RNRL/NTPC and
RELI: Gas pricing is a key valuation issue for RELI’s E&P
assets. RELI signed with National Thermal Power Corp
(NTPC) to supply gas at US$2.34/mmbtu for about
12mmscmd over 20 years. RELI also has a contract to
provide Reliance Natural Resources (RNRL) 28 mmscmd
(plus option value) of gas at similar terms as for NTPC.
113
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Risk-Reward Snapshot: Reliance Industries
Investment Thesis
Risk-Reward View: On a Growth Path
Rs6,000
Rs5,170 (+119%)
5,000
4,000
Rs 3,475 (+47%)
3,000
Rs2,358.05
2,000
Rs2,266 (-4%)
1,000
Key Value Drivers
0
Feb 06
Jun 06
Oct 06
Price Target
Feb 07
Jun 07
Oct 07
Historical Stock Performance
Feb 08
Jun 08
Oct 08
Feb 09
Current Stock Price
Price target Rs3,475
Derived from our base-case scenario
Bull case
Rs5,170
Petroleum product demand drives margins higher: Refining
margins US$1.0/bbl higher than in the base case, reflecting higher
petroleum product demand and delays in capacity expansion. 5%
higher petrochemical prices because of stronger-than-expected
petrochemical cycle. RELI’s stake in RPL valued at Rs234/share.
Upside from Reliance Retail. E&P business 10bn bbl reserves valued
at US$11.1/boe, a 40% discount to average global comparables.
22.1x Bull
Case- F08e
EPS
Base case
Rs3,475
19.8x Base
Case F08e
EPS
Upside from E&P: Refining margins of US$12.3/bbl for F2008.
Petrochemical cycle remains strong in F2008-09. RELI’s RPL stake
valued at Rs204/share. E&P business valued at US$9.8/boe.
Bear case
Rs2,266
20.1x Bear
Case 08e
EPS
Economic slowdown: Refining margins US$1.0/bbl lower than in
base case, reflecting lower petroleum product demand because of
economic slowdown. 5% lower petrochemical prices as new
capacities come on stream and supply exceeds demand. RELI’s
stake in RPL valued at Rs173/share. Lower margins from RELI Retail.
Bear to Bull: E&P Reserves and Margins are Key
1,168
5,250
5,170
Indian Rupee (Rs)
4,750
353
4,250
3,750
• RELI is focused on growth, and we
expect its net profits and assets to
double in the next four years.
• RELI has one of the most complex
refineries in Asia, which it leverages
to earn strong GRMs.
• The refining and petrochemical
divisions are going through supercycles.
3,250
2,750
145
61
90
775
Price Target: 3,475
67
130
31
30
54
3,475
2,250
2,266
1,750
• Increased reserve base for E&P
business. RELI aims to have
10bnboe of reserves and 100
discoveries.
• RELI’s refinery continues posting
strong GRMs and maintains its
spread over Singapore Complex
GRMs.
Key Catalysts
• More news on the E&P business.
• RELI signing gas contracts with
various consumers; higher global
refining margins.
• RELI setting up its pan-India retail
network.
Risks
e
as
C
ll
Bu
as
G
d
an
l
il
ai
O
et
R
e
nc
ia
el
R
PL
R
g
in
in
s
ef
al
R
ic
em
ch
tro
Pe
e
as
C
se
Ba
as
G
d
an
il
O
t
eb
D
l
et
ai
N
et
R
e
nc
ia
el
R
PL
R
g
in
in
s
ef
al
R
ic
em
ch
tro
Pe
e
as
C
ar
Be
• The overhang of Reliance stock held
by the company’s subsidiaries,
currently valued at close to US$9.2bn.
• A sharp decline in global economic
growth would likely compress our
forecast petrochemical and refining
margins.
• Policy risk with respect to subsidy
sharing in the refining business and
sales tax laws.
• Reduction in import tariffs and
appreciation of the rupee versus the
US dollar.
• Potential delays in the execution of
the company’s business plan.
Source: Morgan Stanley, Facset, Company data
114
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Reliance Industries: Financial Summary
Rs million; Years Ending March
Income Statement
Gross Revenues
Petrochemical & Others
Gas
Less: Excise Duties
Net Revenues
Gross Margin
Gross margin %
Cost of Goods Sold
EBITDA
Energy
Petrochemical & Others
Gas
EBITDA profit margin (%)
Other Income
Interest Expense
Depreciation
Pre-tax Profit
Tax - Current (including
FBT)
Tax - Deferred
Effective Tax Rate (%)
Net Profit
Rel Petrolem
Others
Consol Profit
Ratio Analysis
F2007
1,183,544
524,615
66,599
1,116,945
298,613
26.7
917,179
199,766
95,644
104,123
17.9
4,783
11,889
48,152
144,509
F2008E
1,385,115
607,765
98,567
1,286,548
307,543
23.9
1,052,360
234,188
118,015
116,173
18.2
7,710
10,486
48,002
183,410
F2009E
1,424,360
601,067
30,539
78,383
1,345,977
321,545
23.9
1,096,968
249,009
109,364
112,750
26,895
18.5
14,277
8,226
55,205
199,855
F2010E
1,618,328
602,594
173,529
78,644
1,539,685
424,483
27.6
1,189,117
350,567
104,694
101,472
144,401
22.8
19,127
9,846
65,195
294,653
16,574
9,196
17.8
118,738
22,033
8,568
16.7
152,809
93
152,902
24,837
8,358
16.6
166,660
20,459
187,119
40,480
7,887
16.4
246,286
52,706
298,992
89
118,827
Balance Sheet
F2007
F2008E
F2009E
F2010E
83.49
121.2
440.1
11.00
101.04
133.1
626.8
9.00
118.93
146.3
735.2
9.00
190.04
203.0
913.5
10.00
26.8
20.8
7.2
26.6
30.0
18.8
16.9
9.8
20.4
29.1
15.6
14.9
8.1
17.8
27.5
19.0
18.7
28.4
21.5
32.8
10.6
1.70
11.9
1.41
12.4
1.31
16.0
1.26
0.37
0.44
13.15
1.58
-0.07
0.25
18.49
1.17
-0.11
0.21
25.30
1.06
-0.20
0.17
30.93
0.75
12.1
4.93
16.0
9.3
3.38
18.1
8.5
3.35
13.0
6.4
2.95
15.9
Cash Flow Statement
F2007
Sources of Funds
Equity Share Capital
Preference Capital
Reserves & Surplus
Shareholder's equity
Debt
Deferred Tax Liability
Total Liabilities
Application of Funds
Gross Fixed Assets
Less: Depreciation
Add: Capital WIP
Net Fixed Assets
Investments
Cash & Cash Equivalents
Current Assets
Inventories
Receivables
Loans & Advances
Other Current Assets
Less: Current Liabilities
Net Current Assets
Total Assets
Per Share Data
Consolidated Earnings
Cash Earnings
Book Value
Dividends
Return Ratios
ROE (%)
ROCE (%)
Incremental ROE (%)
EBITDA/Capital Employed (%)
Operational ROCE (%)
ROE Breakdown
Net margin (%)
Leverage
Gearing
Net debt/equity
Debt/equity
Interest coverage
Debt/operational cash flow
Others
Dividend payout (%)
Capex/depreciation
Retention Rate (%)
F2008E
F2009E
F2010E
14,534
625,138
639,671
278,257
69,820
987,749
15,734
970,390
986,124
244,689
78,388
1,309,200
15,734
1,140,942
1,156,676
243,881
86,746
1,487,303
15,734
1,421,528
1,437,261
240,339
94,633
1,772,233
995,328
358,723
75,281
711,886
181,860
40,124
235,680
121,365
37,324
76,960
31
181,801
53,879
987,749
1,009,641
406,725
210,179
813,095
194,838
315,990
250,794
148,484
66,093
36,186
31
265,517
- 14,723
1,309,200
1,302,698
461,930
84,854
925,623
212,238
370,864
257,621
153,275
67,409
36,906
31
279,042
- 21,422
1,487,303
1,474,322
527,125
77,391
1,024,588
240,678
532,843
286,525
166,151
75,788
44,555
31
312,401
- 25,876
1,772,233
F2007
118,738
57,348
176,086
(39,240)
136,846
F2008E
152,809
56,570
209,379
68,602
41,970
319,951
F2009E
187,119
63,563
250,682
6,698
257,380
F2010E
298,992
73,082
372,075
4,455
376,529
Capital Expenditure
Investments
Net cash from Investing
(403,602)
167,031
(236,571)
(149,211)
(12,978)
(162,189)
(167,732)
(17,400)
(185,132)
(164,161)
(28,440)
(192,601)
Increase in debt
Dividends
Net cash from financing
59,601
(16,425)
98,409
(33,569)
(16,567)
118,105
(807)
(16,567)
(17,374)
(3,542)
(18,407)
(21,950)
(1,316)
41,440
40,124
275,867
40,124
315,990
54,874
315,990
370,864
161,979
370,864
532,843
Profit after tax
Add : Depreciation and Def Tax
Cash flow from operations
Working capital
Extraordinary items
Net cash from operations
Net Inc/(Dec) in Cash
Opening cash balance
Closing cash balance
E=Morgan Stanley Research estimates
Source: Company data, Morgan Stanley Research
115
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Sobha Developers Ltd.
Sharp Scale-up Visibility
Morgan Stanley India
Company Private Limited+
Sameer Baisiwala, CFA
Sameer.Baisiwala@morganstanley.com
Varun Desa
Key Statistics
Stock Rating: Overweight
Reuters: SOBH.BO Bloomberg: SOBHA IN
India Property
In-Line
Price target
Rs1,172.00
Share price, close (January 22, 2008)
Rs641.95
Market cap (mn)
Rs46,799.00
52-Week Range
Rs1,085.00-620.00
Shares outstanding, basic, currency (mn)
72.90
Varun.Desa@morganstanley.com
Investment Conclusion
We base our investment thesis for Sobha Developers (SDL)
on the company’s sizable quality landbank, which is largely in
tier I/II cities; visibility on execution ramp-up, driven by a
variety of locations, city markets, and products; reasonable
valuations; and expectations of strong structural housing
demand in the longer term in India. Our price target of
Rs1,172 is 83% above the current market price.
Recent Developments
SDL has signed a joint development agreement with QVC
Realty Pvt Ltd and Chintels India Ltd to develop an integrated
township spread over 192 acres in Gurgaon (total
development of 6.5 msf). It has made recent additions to its
landbank in Gurgaon and Hyderabad and launched the Sobha
Carnation residential project in Pune. Also, it has a
memorandum of understanding with the Kerala Government
for Hi-tech City.
Key Investment Issues
•
Balance sheet – what is SDL doing to improve the
leverage and organize the pending land payment?
•
When would SDL scale-up execution in the investment
assets – commercial, retail and hospitality?
•
Does SDL plan development of special economic zones?
•
Is there visibility regarding dilution of a stake in SDL or at
SPV level to improve the company’s liquidity position?
NAV-Based Valuation Methodology
Our sum-of-the-parts derived price target is based on our
forecast of a one-year forward NAV of Rs907 for the existing
landbank and Rs183 for our estimate of new land acquisition
of 35msf, plus Rs82 for the contractual business. Our key
assumptions are eight to nine years for development, 16%
discount rate, post-tax calculations, and constant selling
prices and costs. The stock is trading at P/Es of 19.3x
F2008E and 13.0x F2009E.
Company Description
Sobha Developers Ltd is a Bangalore-based real estate development
and construction company that focuses on residential, commercial and
contractual projects. The company is diversifying its real estate
business from its stronghold Bangalore market to seven/eight new city
markets. It is now starting to develop villas, row houses, shopping
malls, commercial offices and hotels.
What We Like
•
Well-located sizable landbank: SDL’s landbank (4,012
acres, 175msf) is in key economic hubs (Bangalore,
Chennai, and Pune) and emerging IT/ITES destinations
(Kochi, Hosur, Coimbatore, and Thrissur), giving it good
visibility and market absorption.
•
Strong growth visibility: We expect scale-up in
operations from approximately 3msf in F2007 to about
8msf in F2009 (two-year CAGR of 33%/49%
sales/profits), driven by the Bangalore market and entry
into new markets.
•
Diversifying product portfolio: SDL is extending its
product offerings to a variety of residential, commercial,
retail, and hospitality projects. This will help develop the
landbank faster and give greater choice to customers.
What We Don’t Like
•
High capital requirement: We estimate significant
funding requirements for SDL, including outstanding landcost payments (Rs10 billion) and upfront construction
costs for the non-residential business (Rs 8 billion over
the next two years).
•
Dependence on Bangalore: Near-term earnings are
largely dependent on the Bangalore market, where SDL
has many ongoing projects (7-8msf) and also future
developments. This exposes the company to market risk
in the event of an IT/ITES slowdown or oversupply.
•
Execution challenge: SDL’s real estate business has so
far been mainly in Bangalore, with a focus on group
housing. Lack of experience in new markets and product
offerings could lead to project delays, but should be
mitigated by construction experience in several cities.
116
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Risk-Reward Snapshot: Sobha Developers Ltd.
Investment Thesis
Risk-Reward View: Execution Scale-up the Key Value Driver
Rs1,500
Rs1,401 (+118%)
1,400
1,300
1,200
Rs 1,172.44 (+83%)
1,100
1,000
900
Rs805.69 (+26%)
800
Rs 641.95
700
600
500
Dec 06
Mar 07
Jun 07
Price Target
Aug 07
Nov 07
Feb 08
Historical Stock Performance
May 08
Aug 08
Oct 08
Jan 09
Current Stock Price
Key Value Drivers
Price Target Rs1,172
Derived from base-case scenario.
Bull case
Rs1,401
NAV Based
Valuation
Prices rise as interest rates ease: 5% per annum price and cost
inflation over the period of landbank development versus constant
pricing/costs in base case and 5 mn sq ft greater land addition.
Base case
Rs1,172
NAV Based
Valuation
Sizable quality landbank/strong execution: One-year forward
NAV for the existing landbank, 35 mn sq ft new land acquired and
Rs82/share valuation for contractual business.
Bear case
Rs806
NAV Based
Valuation
Market slowdown/regulatory delays: 5% price deflation for next
12 months versus constant pricing and costs in base case, oneyear delay in execution and smaller amount (10 mn sq ft) of new
land added.
Landbank Fortification, Execution, and Prices are Key
1,800
Price Target: 1,172
Indian Rupee (Rs)
1,600
198
1,400
30
123
1,200
1,401
126
118
1,000
1,172
800
600
• Execution scale-up.
• Land bank fortification, which gives
longer-term growth visibility
• Unlocking of time value of money with
the progressive execution.
• Contractual business, which should
provide steady cash flow, enhance
the franchise and enrich execution
capabilities.
Potential Catalysts
• Project launches in new city markets,
including Pune, Mysore, Chennai, and
Cochin.
• Mid-term prospects of price inflation if
interest rates ease.
• Joint development agreements for
mega projects.
Risks
806
400
200
0
Bear
Case
• SDL seems well-placed to benefit
from two key trends: (i) long-term
growth visibility in Indian real estate,
which is closely linked to GDP growth
and the continuing trends toward
urbanization and nuclear families; and
(ii) a structural shift in customer
demand from the unorganized to the
organized sector, which includes SDL.
• Competitive strengths – Sizable
quality landbank, strong execution
capabilities and increasing breadth in
product offerings and city markets.
• Reasonable valuations.
5% price
deflation
1 yr
Lower land
execution acquisition
delay
Base
Case
5% price & New land
cost
addition (5
inflation p.a. mln sqft)
Bull
Case
• Market slowdown.
• Delays because of regulatory
changes.
• Inadequate capital to fund land and
construction costs.
Source: Morgan Stanley, FactSet
117
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Sobha Developers Ltd.: Financial Summary
Rs million; Years Ending March
Income Statements
Cash Flow Statements
2007
Total Sales
% Growth
2008E
2009E
2010E
11,865 18,689 23,015 39,772
90
58
23
73
- Real Estate Business
- Contractual Projects
7,538 14,189 18,290 35,047
4,327 4,500 4,725 4,725
Operating Expenses
Land and Construction Expenses
SG&A
Operating Profits
% Growth
% OPM
9,303 14,648 16,823 27,785
5,767 12,219 14,062 24,206
2,249 2,430 2,762 3,579
2,562 4,041 6,191 11,987
85
58
53
94
22
22
27
30
Other Income
Finance Charges
Depreciation
Profit before Taxation
Total Tax
PAT
% Growth
% Margins
29
481
244
1,866
251
1,615
83
14
163
730
282
3,192
766
2,426
50
13
205
200
1,028 1,534
354
426
5,014 10,226
1,404 3,375
3,610 6,852
49
90
16
17
Balance Sheets
2008E
2009E
2010E
729
729
729
729
Share Premium
5,639
5,639
5,639
5,639
Reserves and Surplus
7,426
9,285
12,052
17,303
Networth
8,155
10,014
12,781
18,032
Preferential Share Capital
Loan Funds
Deferred Tax Liabilities
Total Liabilities
Net Debt
Total Fixed Assets
Investments
Deferred Tax Asset
Cash and Bank Balances
Current Assets
1,615
2,426
3,610
6,852
244
282
354
426
add working capital required
(6,736) (2,702) (6,169)
(9,180)
Net cash from operations
(4,877)
(1,903)
Cash flow from operating activities:
Net Profits
add depreciation
6 (2,205)
Cash flow from investing activities
fixed asset investments
(1,171)
(691)
(800)
(501)
-
-
-
(1,672)
(691)
(800)
(800)
Other investments
Net cash from investing
(800)
Cash flow from financing activities
Issuance of equity
5,734
-
-
-
475
567
844
1,601
Dividends (incl dividend tax)
Other adjustments
(82)
(22)
-
-
5,178
(589)
(844)
(1,601)
(1,372) (1,274) (3,848)
(4,304)
Net cash from financing
(Increase)/decrease in net debt
2007
2008E
2009E
2010E
Profitability Ratios
Operating Margin (%)
22%
22%
27%
30%
Pre-tax Margin (%)
16%
17%
22%
26%
Net Margin (Excl Extraordinary Items) (%)
14%
13%
16%
17%
36.1
19.3
13.0
6.8
7.2
4.7
3.7
2.6
-
-
-
7,500
10,500
13,500
22
-
-
-
14,014
17,514
23,281
31,532
ROE (%)
34%
27%
32%
44%
5,153
6,427
10,275
14,579
ROCE (%)
24%
25%
30%
43%
EV/EBITDA
24.8
13.2
9.2
5.1
Valuation Ratios
P/E
P/BV
1,948
2,357
2,803
3,177
528
528
528
528
-
-
-
-
Net Debt/Equity
0.6
0.6
0.8
0.8
684
1,073
225
(1,079)
Total Debt/Equity
0.7
0.7
0.8
0.7
17,173
20,261
29,701
43,328
E=Morgan Stanley Research estimates
Source: Company data, Morgan Stanley Research;
25,760
3,908
4,856
12,272
1,577
1,869
1,611
1,989
11,688
11,536
13,817
13,579
-
2,000
2,000
2,000
6,318
6,704
9,975
14,422
Net Current Assets
10,855
13,557
19,726
28,906
Total Assets
14,014
17,514
23,281
31,532
Current Liabilities and provisions
2010E
-
Sundry Debtors
Other
2009E
5,837
Inventories
Loans and Advances
2008E
Ratio Analysis
2007
Share Capital
2007
Leverage Ratios
118
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
State Bank of India
All Round Strength
Morgan Stanley Asia
Limited+
Anil Agarwal
Morgan Stanley India
Company Private Limited+
Anil Bang
Anil.Agarwal@morganstanley.com
Key Statistics
Stock Rating: Overweight
Reuters: SBI.BO Bloomberg: SBIN IN
India Financial Services
In-Line
Price target
Rs2550.00
Share price, close (January 22, 2008)
Rs2159.10
Market cap (bn)
US$29.10
52-Week Range
Rs2540.00-845.00
Shares outstanding, basic, (mn)
526.30
Anil.Bang@morganstanley.com
Company Description
SBI is the largest bank in India and makes up about 15% of the deposit
base in India. It has a branch network of around 9,500 branches on a
standalone basis and almost 14,500 branches including associates. It
has an asset base of around US$126 billion. Apart from banking
businesses, SBI is also active in life insurance, asset management, etc.
through its subsidiaries.
Mansi Shah
Mansi.S.Shah@morganstanley.com
Investment Conclusion
We believe some of the key positives for SBI are its focus on
profitability, improvement in margins along with better fee
income growth, potential upside from consolidation with
banking subsidiaries, and rapidly growing non-banking
businesses.
Recent Developments
•
SBI reported 3Q F2008 earnings of Rs18 billion, up 70%
YoY. Core operating profits rose 61% YoY. The bank
did very well in all revenue fields leading to total revenue
growth of 32% YoY and 20% QoQ. Net loans rose 26%
YoY and deposits growth was also strong at 23% YoY.
•
•
SBI plans to raise Rs167 billion through a rights issue in
February by offering one share for every five held, at
Rs1,590 per share. The government will infuse Rs100
billion to keep its holding in the bank at 59.7%.
SBI has announced the merger of State Bank of
Saurashtra with itself.
Key Investment Issues
SBI’s earnings have been strong because of margin
improvement, fee income growth, and strong capital markets.
The key question is whether it will be able to continue
improving margins and report strong business growth. Also, a
one-time hit on account of employee benefits as per AS-15
would have a significant negative effect.
Valuation Methodology
We derive our price target of Rs2550 using a sum-of-the-parts
valuation methodology. We value the parent business at
Rs1,700 per share using a residual income model. The key
assumptions in our residual income model are – cost of equity
of 13.6% (risk free rate = 7.6%, beta = 1.1 and equity risk
premium = 5.5%). We value stakes in subsidiaries at Rs850
per share based on different methods for each business.
What We Like
•
Largest distribution network in India: SBI’s branch
network represents a significant competitive advantage,
given ongoing networking and computerization. More
than 95% of the banks’ business is now core banking.
•
Non-banking businesses gaining traction: All SBI’s
non-banking businesses, including life insurance, asset
management, capital markets and credit cards, are
adding considerable value to the bank.
•
Forthcoming rights issue: SBI’s rights issue should
remove the uncertainty surrounding the capital position at
the bank.
What We Don’t Like
•
Credit costs may rise: SBI has a very low specific
coverage ratio of 47%. This is a key concern for SBI, as
a turn in the asset quality cycle would place significant
pressure on the banks earnings.
•
High operating costs: SBI has one of the highest costincome ratios among state-owned banks in our coverage.
We believe SBI should start making provisions for higher
wages following the next round of wage settlements,
which were due in November 2007.
•
AS-15 liability: The AS-15 retirement benefits, which the
bank will have to provide to its employees, will have a
significant negative effect on its book if provided for
through reserves.
119
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Risk-Reward Snapshot: State Bank of India
Investment Thesis
Risk-Reward View: Margins and Loan Growth Spark Upside
Rs3,200
Rs3,000 (+39%)
2,800
Rs 2,550 (+18%)
Rs 2,159.10
2,400
2,000
Rs1,850 (-14%)
1,600
1,200
800
Jan 07
Apr 07
Jul 07
Price Target
Price target Rs2550
Bull case
Rs3,000
Sep 07
Dec 07
Mar 08
Historical Stock Performance
May 08
Aug 08
Nov 08
Jan 09
Current Stock Price
Derived from our base-case.
24.9x
Stronger loan growth/margin improvement: Loan growth
F2009E EPS remains strong at 24% in F2009 and margins improve 10-15bp
from our base case because of an increase in bond spreads.
Credit quality remains benign leading to lower credit costs. SBI
benefits from continued momentum in non-banking subsidiaries –
we value them at 1.2x our base-case value.
Base case
Rs2,550
21.2x
Strong earnings growth: NIM at 3.1% in F2008 and 3.2% in
F2009E EPS F2009. Loan growth slows to 23% in F2008 and 21% in F2009.
Credit costs increase to 90bp of loans because of higher flow of
NPLs. Rs850 per share value for non-banking subsidiaries.
Bear case
Rs1,850
15.4x
Higher funding costs/lower growth: NIM contracts to <3% in
F2009E EPS F2008, as a result of increased funding costs pressures in 4Q
F2008, and remain at that level in F2009. Loan growth slows to
15% in F2009. Credit costs increase 20bp from our base case
levels, as NPLs are higher than expected. 25% discount to our
base-case value for non-banking businesses (mainly linked to
capital markets) and 20% discount to banking subsidiaries value,
as their merger with SBI does not take place in the medium term.
Bear to Bull Case: Banking Business is Key
3,600
Indian Rupee (Rs)
3,100
215
2,600
189
• Largest bank in India with around
18% market share in total loans.
• One of the highest cost income ratios
in our SOE banks coverage universe.
• Strong earnings growth – we expect
an earnings growth of 31% CAGR
during F2007-09 period led by
improvement in NIM and fee income.
• Credit costs are likely to rise on
account of low provisioning levels as
well as low coverage ratio.
• Large provision has to be made for
transitional liability as per AS-15.
• Valuations – trades at 14x F2009E
earnings and 1.5x book on core basis.
140
160
136
126
108
76
Key Value Drivers
• Loan growth
• Net interest margins
• Credit costs
Potential Catalysts
• AS-15 retirement benefits will have a
significant negative effect on SBI’s
book if provided for through reserves.
• Interest rates: a sharp decline in
interest rates would have a significant
bearing on the bank’s performance.
• Merger with subsidiaries along the
lines of the merger with State Bank of
Saurashtra.
Risks
• Higher and sooner-than-expected
increase in credit costs, particularly on
the SME book. Low stock of
provisioning implies higher flow
through P&L in such a case.
3,000
2,550
2,100
1,600
1,850
1,100
600
100
Bear Bear case
Case subs. value
LLP
NIM
Loan Gr.
Base
Case
Loan Gr.
NIM
LLP
Non-bank
Bull
subs. doing Case
Source: Morgan Stanley, FactSet
120
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
State Bank of India: Financial Summary
Rs million; Years Ending March
Profit and Loss Statem ent
Rs Mln (Year end-March)
Per Share Data and Valuations
F2006
F2007
F2008E
F2009E
Year end-March
Interest Income
341291
394910
492082
593434
Per Share Data (Rs)
Interest Expense
207228
234368
308470
364301
EPS
Net Interest Incom e
134063
160542
183612
229133
Book Value
36796
48045
56213
65769
4232
3734
5414
5956
---Fee Income
---Forex Income
---Capital Gains
DPS
5872
5678
10000
10000
Valuations
---Miscellaneous Inc.
49280
17011
16137
15433
PE
Total Non Interest Incom e
96180
74468
87764
97158
Price to Book
230243
235010
271377
326291
Dividend Yield
---Employee Exp
81230
79326
86096
98012
---Other Expenses
36021
38909
42377
47117
Total Operating Expenses
117251
118235
128473
145129
EPADR (US$)
Operating Profit
112992
116774
142903
181162
P/E
Total Operating Incom e
---Prov. For Investment Dep.
F2006
F2007
F2008E
F2009E
83.7
86.3
116.9
120.4
525.3
594.7
798.9
900.6
14.0
14.0
15.0
16.0
25.8
25.0
18.5
17.9
4.1
3.6
2.7
2.4
0.6%
0.6%
0.7%
0.7%
GDR Data (GDR=2 shares)
4.4
5.9
6.1
30.2
22.3
21.7
0.5%
0.5%
0.6%
0.6%
F2006
F2007
F2008E
F2009E
8.2%
38919
20567
22000
22000
5530
20187
28270
41337
Total provisions
43931
40524
50270
63337
Profit Before Tax
69062
76251
92634
117825
Year end-March
Provision for Tax
24995
30838
31125
39589
Spread Analysis
Average yield on assets
7.5%
7.8%
8.2%
Cost of earning assets
4.6%
4.7%
5.1%
5.1%
Net Interest Margin (NIM)
3.0%
3.2%
3.1%
3.2%
---Loan Loss Provisions
Net Profit
44067
45413
61509
78236
Core Operating profit
75478
111097
132903
171162
Yields
4.2
31.1
Ratio Analysis
Balance Sheet Data
Rs Mln (Year end-March)
F2006
F2007
F2008E
F2009E
Grow th Ratios
276441
312986
519317
585386
Net Interest Income
1.8%
19.8%
14.4%
24.8%
3800461
4355211
5139149
6064196
Non Interest Income
21.9%
-22.6%
17.9%
10.7%
Borrow ings
306412
397033
484381
581257
Operating expenses
Other Liabilities & Prov.
555382
600423
763168
890815
Operating Profit
4938696
5665652
6906015
8121654
Share holders equity
Deposits
Total Liabilities
Cash & Balances w ith RBI
Balances w ith Banks
216527
290764
415135
8.3%
0.8%
8.7%
13.0%
10.3%
3.3%
22.4%
26.8%
Net Profit
2.4%
3.1%
35.4%
27.2%
EPS
2.4%
3.1%
35.4%
3.0%
452176
Deposits
3.5%
14.6%
18.0%
18.0%
Advances
29.3%
28.9%
23.5%
20.5%
7.4%
14.7%
21.9%
17.6%
229073
228923
251815
276996
Investments
1625342
1491489
1779554
2063566
Advances
2616415
3373365
4165189
5020740
Total Assets
Fixed Assets
27529
28189
28752
29327
Other Assets
223808
252923
265569
278848
Return On Equity
17.0%
15.4%
14.8%
14.2%
Total Assets
4938696
5665652
6906015
8121654
Return on Assets
0.9%
0.9%
1.0%
1.0%
Earning Assets
4687358
5384541
6611693
7813479
Efficiency Ratios
526
526
650
650
Cost Income Ratio
50.9%
50.3%
47.3%
44.5%
2.5%
2.2%
2.0%
1.9%
No Of Shares (mn)
Profitability Ratios
Expenses/Avg Assets
Asset Quality
Gross NPL
96281
99982
127231
176853
Net NPL
49114
52577
63557
83842
Tier 1 Ratio
9.4%
8.0%
7.6%
7.6%
Reserve Coverage
47167
47405
63675
93011
Tier 2 Ratio
2.5%
4.3%
5.0%
5.0%
Gross NPL Ratio
3.6%
2.9%
3.0%
3.5%
11.9%
12.3%
12.6%
12.6%
Net NPL Ratio
1.9%
1.6%
1.5%
1.7%
Coverage Ratio
49%
47%
50%
53%
Capital Ratios
Capital Adequacy Ratio
Source: Company Data, Morgan Stanley Research, E=Morgan Stanley Research Estimates
121
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Steel Authority of India
Improving Competitiveness Should
Trigger Re-rating; Still Overweight
Morgan Stanley India
Company Private Limited+
Vipul Prasad
Vipul.Prasad@morganstanley.com
Key Statistics
Stock Rating: Overweight
Reuters: SAIL.BO Bloomberg: SAIL IN
India Steel
Attractive
Price target
Rs304.63
Share price, close (January 22, 2008)
Rs193.50
Rs967,133.00
Market cap (mn)
Rs292.50-91.50
52-Week Range
4,130.00
Shares outstanding, basic, currency (mn)
Ketaki K Kulkarni
Company Description
SAIL is the leader in the Indian steel market with a capacity of 12mtpa
and a market share of about 27%. It benefits from a high level of
vertical integration and is fully self-sufficient in iron ore. It has a wideranging product mix, with flat products contributing about 59% of its
sales volume and long products about 41%. The Indian government
owns 86% of SAIL’s outstanding shares.
Ketaki.Kulkarni@morganstanley.com
Investment Conclusion
We continue to recommend SAIL as one of our top picks in
the Indian metals space. Amid further tightening iron ore
dynamics, the huge ore reserves of SAIL (the largest iron ore
producer in India) cannot be ignored for long, especially as it
proceeds to monetize its iron ore assets by increasing its steel
capacity. We estimate SAIL can prune its sustainable steel
production cost 10-12% in the next three to four years to
become one of the industry’s cost leaders. These factors
should help narrow SAIL’s valuation discount versus its peers,
in our view. Our price target implies 58% upside potential.
Recent Developments
SAIL reported strong 2Q F2008 PAT of Rs17 billion, up 18%
YoY and 11% QoQ, and EBIDTA of Rs26.3 billion, up 13%
YoY and 10% QoQ. Revenue of Rs91.6 billion was 6% below
our expectations because of sales volume and realized prices
were 5% and 1% lower than we expected, respectively. The
positive surprise came from improvement in operating cost
per ton, at Rs19,914, down 8% QoQ and 6% lower than our
expectation.
What We Like
•
SAIL’s capacity ramp-up plan is a step towards
monetizing its iron ore assets, in our view.
•
Substantial and sustainable margin improvement
likely: We estimate SAIL can lower its production cost
10-12% by F2011, adding US$2 billion to its enterprise
value. We believe SAIL raising the proportion of steel
produced via the LD converter route from 82% to 100%,
augmenting its blast furnaces with alternative fuel
injection facilities, and enhancing the continuous cast
steel proportion from 65% to 100% will lead to
substantially lower production and staff costs.
•
Product mix embellishment to boost margins and
perception: SAIL has historically been a low-end steel
producer, selling more than 15% of its output as semifinished steel. We estimate SAIL loses Rs3,526 for every
ton it sells as semi-finished steel – rather than converting
it into finished steel. We expect the proportion of semifinished steel to reduce to zero by F2013 and SAIL to
benefit from the better resulting product mix, leading to
an increase in margins.
Key Investment Issues
•
Positive outlook on steel prices: We expect steel
prices globally to remain strong over the next year.
•
Captive iron ore: SAIL has 100% self-sufficiency with
respect to iron ore, leading to better margins. Rising iron
ore prices should trigger a stock re-rating, in our view.
•
Improving product mix and operational
improvements: SAIL’s product mix and productivity
improvement efforts should lead to a considerable
improvement in its EBITDA per ton, in our view.
Valuation Methodology
We base our price target on a DCF model with an explicit
phase of nine years. Our WACC estimate is 13.0%. Our
long-run pricing for steel is US$385 per ton. Our long-run
prices for coking coal and iron ore are US$80 (hard coking
coal) and US$50 (63.5% fines) per ton, respectively.
What We Don’t Like
•
Coking coal cost increases affect margins.
•
SAIL can optimize its capital structure better, to benefit
from increased leverage.
•
Employee productivity is a concern, but SAIL is moving to
increase it.
122
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Risk-Reward Snapshot: Steel Authority of India
Investment Thesis
Unlocking of Iron Ore Value, Steel Price Strength are the Drivers
Rs400
Rs351 (+81%)
350
Rs305 (+58%)
300
250
Rs193.50
200
Rs161 (-17%)
150
100
50
0
Jan 06
May 06
Aug 06
Price Target
Price Target Rs305
Bull case
Rs351
Dec 06
Apr 07
Aug 07
Historical Stock Performance
Nov 07
Mar 08
Jul 08
Oct 08
Current Stock Price
Derived from base-case scenario.
10.9x bull- Global demand for infrastructure pushes steel prices higher:
case F2009E Steel prices 3% higher in F2008 and 6% higher in F2009-10 than in
EPS of
base case. Steel production of 24.2 mt in F2011. Production costs
Rs32.2
decline 3.5% in F2009 and F2010.
Base case 9.5x base- Input cost inflation, decrease in steel exports from China, and
Rs305
case F2009E high demand growth from emerging economies push up steel
EPS of
prices: Long-run steel prices of US$385/ton and steel production
Rs26.1
volume of 20.1mt in F2011 and 24.5mt in F2012.
Bear case
Rs161
8.3x bear- Steel prices fall on slump in global demand: Steel prices 7%
case F2009E lower than in base case. Steel production CAGR of 4% in F2007EPS of
F11 versus our base case of 15%.
Rs19.3
Bear to Bull-Steel Prices, Volume Growth, Production Costs are Key
Indian Rupee (Rs)
400
350
11
87
11
24
351
300
305
250
200
100
Key Value Drivers
• Steel prices: SAIL is highly sensitive
to steel prices.
• Volume growth
• Product mix
• Coking coal costs
Potential Catalysts
• Steel price hikes in India of 10-12%
by the end of 1Q F2009 as we see a
further decrease in Chinese exports,
raw material cost inflation, and a fall in
Indian net exports.
• Benchmark iron ore price settlement
increases in 2008 negotiations.
• Progress on SAIL’s expansion
projects.
Key Risks
450
150
• Improving steel price outlook: We
expect steel prices globally to remain
strong over the coming three to four
quarters.
• We expect SAIL’s large iron ore
reserves to be increasingly reflected
in the stock’s valuations.
• SAIL should be able to grow its steel
volumes at a CAGR of 14.3% in F07F12. This expansion is likely to be
accompanied by substantial cost
improvements.
57
161
50
• Surge in Chinese steel exports and
slump in global demand, putting
downward pressure on steel prices.
• Delay in project execution.
• Extremely high escalation in prices of
raw materials, adversely affecting
earnings and sentiment.
• Correction in the Indian stock market.
0
Bear
Case
Steel Prices
Volume
growth
Base
Case
Steel Prices
Volume
growth
Production
costs
Bull
Case
Source: Morgan Stanley, FactSet
123
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Steel Authority of India: Financial Summary
Rs million; Years Ending March
Income Statement
Cash Flow Statement
2007A
2008E
2009E
2010E
Net Sales
339,230 380,238 444,889 492,545
Total Expenditure
244,891 257,650 283,450 311,312
Depletion to stocks
-2,465
Raw Material
248
540
617
132,749 130,745 151,367 168,670
Purchase
13
50
75
100
Stores & spares
29,761
31,592
34,749
38,646
Employee Cost
50,874
58,142
58,679
61,262
Power & Fuel
25,788
28,176
28,914
31,745
3,834
3,867
4,185
4,398
Repairs and maint.
Freight outward
6,920
7,478
8,425
9,628
Other Expenses
16,164
16,569
16,937
17,392
EBITDA
94,340 122,587 161,439 181,233
Depreciation
12,115
EBIT
82,225 109,976 147,567 164,664
Int.& Finance Charges
12,612
13,871
16,569
3,321
2,959
2,161
1,609
Other Revenues and Int. Earned
15,323
16,999
18,024
15,134
Profit before Tax
94,226 124,015 163,431 178,190
Tax
32,202
42,289
Profit after Tax
62,024
81,726 107,701 117,427
55,730
60,763
2007A
2008E
2009E
2010E
41,304
41,304
41,304
41,304
Reserves and Surplus
131,829
194,886
283,917
382,675
Net Worth
173,133
236,190
325,221
423,979
Loans
41,805
35,305
28,805
24,805
Deferred Tax Liability
14,126
14,126
14,126
14,126
Capital Employed
229,064
285,621
368,152
462,910
Gross Fixed Assets
299,127
309,827
359,827
439,827
Less: Depreciation
183,150
194,584
207,277
222,668
Capital WIP
12,360
41,882
107,882
165,882
Investments
5,138
5,138
5,138
5,138
66,515
59,526
60,938
63,879
Inventory
Sundry Debtors
23,148
25,002
28,034
31,037
Cash & Bank Balances
96,100
147,687
134,277
107,906
1,526
864
864
864
Loans and Advances
16,500
16,215
16,181
16,708
Sundry Creditors
25,451
31,252
36,566
40,483
Interest Receivable/Accrued
Other current Liabilities
28,532
32,099
32,299
32,499
Provisions
55,508
64,056
70,148
73,812
Net Current Assets
94,297
121,886
101,281
73,600
1,292
1,472
1,302
1,132
229,064
285,621
368,152
462,910
Misc. Exp.not Wr Off
Application of Funds
2008E
2009E
2010E
117,427
PAT
67,606
81,726
107,701
Depreciation
12,115
12,612
13,871
16,569
Change in Inventory
(4,414)
6,989
(1,413)
(2,941)
Change in Debtors
(4,330)
(1,854)
(3,032)
(3,003)
(671)
662
-
-
(3,691)
285
34
(527)
Chg in Creditors
1,177
5,802
5,314
3,917
Chg in Curr Liab
889
3,567
200
200
Chg in Prov
672
8,548
6,092
3,664
Chng in Int
Chg in Loans and Adv
Net Op Cash Flow
Capital Expenditure
Other Inv CF
CF from Investing
Chge in Defrd Tax Liab
Change in Misc Exp
69,353
118,336
128,768
135,306
(11,252)
(41,400)
(117,178)
(139,178)
(2,218)
-
-
-
(13,470)
(41,400)
(117,178)
(139,178)
(718)
-
-
-
867
(180)
170
170
Change in Equity
(5,703)
-
(0)
-
Change in Borrowings
(1,171)
(6,500)
(6,500)
(4,000)
Dividends Paid
(14,784)
(18,669)
(18,669)
(18,669)
CF From Financing
(21,510)
(25,349)
(24,999)
(22,499)
34,373
51,587
(13,410)
(26,371)
2007A
2008E
2009E
2010E
Share Price (Rs)
132.0
193.5
193.5
193.5
Modelware EPS
15.0
19.8
26.1
28.4
P/E
8.8
9.8
7.4
6.8
EV/EBITDA
5.2
5.6
4.3
4.0
Change in Cash
Balance Sheet
Share Capital
2007A
Ratio Analysis
Profitability Ratios (%)
EBITDA Margin
27.8
32.2
36.3
36.8
RoE
35.8
34.6
33.1
27.7
Avg RoE
41.5
39.9
38.4
31.3
Avg ROCE
31.7
32.9
33.6
28.6
Debtors (Days)
25
24
23
23
Inventory (Days)
72
57
50
47
Creditors (Days)
32
30
30
30
101
117
83
55
Turnover Ratios
Working Capital (Days)
Growth (%)
Net Sales
21.9
12.1
17.0
10.7
EBITDA
48.9
29.9
31.7
12.3
Net Profit
54.6
31.8
31.8
9.0
EPS
54.6
31.8
31.8
9.0
-0.3
-0.5
-0.3
-0.2
Leverage Ratio
Net Debt/Equity (x)
E = Morgan Stanley Research estimates
Source: Company data, Morgan Stanley Research
124
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Sterlite Industries (India)
Limited
Multi-Pronged Growth Story;
Remain Overweight
Morgan Stanley India
Company Private Limited+
Key Statistics
Stock Rating: Overweight
Reuters: STRL.BO Bloomberg: STLT IN
India Nonferrous Metals & Mining
Attractive
Price target
Rs1,078.00
Share price, close (January 22, 2008)
Rs758.00
Rs492,941.00
Market cap (mn)
Rs1,140.00-415.00
52-Week Range
558.70
Shares outstanding, basic, currency (mn)
Vipul Prasad
Vipul.Prasad@morganstanley.com
Company Description
Sterlite Industries (India) Ltd manufactures a wide range of electrical
wires and related products. Its products include copper cathodes,
continuous cast copper rods, power transmission line aluminum
conductors, sulfuric acid, and phosphoric acid. It also manufactures
zinc and lead products. It has a majority holding in Hindustan Zinc and
Balco.
Ketaki K Kulkarni
Ketaki.Kulkarni@morganstanley.com
Investment Conclusion
We have an Overweight rating on Sterlite. We are
encouraged by the company’s strong growth pipeline, costreduction initiatives and the possibility of value-accretive stake
acquisitions in its zinc and aluminum subsidiaries (Hindustan
Zinc and Balco). Higher demand growth than the market
expects and continued supply-side bottlenecks should keep
nonferrous metals prices strong, in our view.
Recent Developments
In the 2Q F2008 results, the positive surprise came from the
copper business, which posted EBIDTA of Rs4 billion, up 5%
QoQ and 26% ahead of our estimates. Zinc concentrate
production was up 15% YoY and 7% QoQ, which we think
displays the company’s ability to enhance capacities at all
levels of the value chain. Zinc EBIDTA was Rs15.6 billion,
down 8% QoQ, as expected, mainly because of weak London
Metal Exchange zinc prices (US$3,240/ton down 4% YoY and
12% QoQ).
What We Like
•
High degree of diversification: Sterlite’s diversified
business provides a strong shield against metal price
fluctuations, compared with Indian metals and mining
companies. Copper accounts for around 24%, aluminum
11%, and zinc 64% of attributable EBITDA.
•
Low-cost volume growth strategy: Sterlite is expanding
to build on its captive raw materials sources and to tap
the growing markets for copper, aluminum, and zinc in
Asia, as well as to increase its cost competitiveness.
Sterlite has managed to upgrade its capacity at
reasonably low capital costs.
•
Large cash balance – another value-accretive item
waiting to be harnessed: Sterlite has a consistent track
record of finding and implementing high-return projects or
identifying and acquiring value-accretive acquisition
targets. Hence the large cash surplus on the company’s
balance sheet.
Key Investment Issues
•
Positive guidance from the company regarding stake
acquisitions could have a meaningful effect on sentiment.
•
Sterlite Energy, a fully owned subsidiary of Sterlite looks
set to commission the 2,400 MW Merchant Power Plant
in Jharsuguda by the end of F2010. With the increasing
prominence of the power sector in India, this could
command better valuations.
What We Don’t Like
•
Bauxite mine issue yet to be resolved: The 1.4 mtpa
alumina refinery could face relatively high production
costs if delays in mine allotment continue. This would
remove some of the aluminum business’s cost
advantage.
•
Production ramp-up largely running faster than company
guidance.
•
Valuation Methodology
We base our price target on a sum-of-the-parts model, in
which we value the five divisions – Vedanta Alumina, zinc,
Sterlite, Balco, and power – separately. For the first four, we
use our two-phase DCF models. We use a residual income
model for the power business, in line with our power and
utilities team’s practice.
Copper business lacks sustainable advantages: The
copper smelting business has low returns and poor
margins, especially in view of the shortage of copper
resources in India.
•
Close correlation to metal prices: The stock could
come under pressure, despite good earnings
performance, if metals prices drop sharply.
125
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Risk-Reward Snapshot: Sterlite Industries (India) Limited
Investment Thesis
Zinc Prices/Power Valuations Skew Risk-Reward to the Upside
Rs1,400
Rs1,270 (+68%)
1,200
Rs1,078 (+42%)
1,000
Rs758.00
800
Rs700 (-8%)
600
400
200
Jan 07
Apr 07
Jul 07
Price Target
Sep 07
Dec 07
Mar 08
Historical Stock Performance
May 08
Aug 08
Oct 08
Jan 09
Current Stock Price
Key Value Drivers
Price Target Rs1,078
Derived from base-case scenario.
Bull case
Rs1,270
12.6x bullcase 2009E
EPS
Higher valuation for Sterlite Energy (comparable to that of
NTPC) of $1mn/MW for the 3600 MW capacity coming up.
Base case
Rs1,078
10.9x basecase 2009E
EPS
Strong Al prices, balance stake purchase completed by endF2009: WACC of 12.9% with terminal growth of 3% for zinc and
copper businesses, 2% for Vedanta Alumina, and 4% for Balco.
Long-term average price of US$2,094/ton for aluminum,
US$254/ton for alumina, and US$1,675 for zinc, and long-term
copper treatment and refining cost of 15c/lb
Bear case
Rs700
12.6 bearcase 2009E
EPS
Lower zinc prices; stake purchase does not materialise: 10%
lower zinc prices in F2008 and 20% lower from F2009. The
government refuses to sell Balco and HZL, costing Sterlite
Rs.252/share.
Indian Rupee (Rs)
From Bear to Bull – Zinc Prices, Power Valuations are Key drivers
1,500
1,400
1,300
1,200
1,100
1,000
900
800
700
600
500
166
1,270
252
1,078
Current Price : 758
700
Bear
Case
126
Lower Zinc Prices Stake Purchase
does not
materialise
Base
Case
• Sterlite is pursuing a low-cost volume
growth strategy. In the next three
years, we estimate CAGRs of 14%,
22%, and 9% for attributable output of
aluminum, zinc, and copper,
respectively.
• Options to increase stakes in
Hindustan Zinc and Balco imply
substantial value-creation potential.
• We expect sentiment to improve
toward nonferrous metals because of
continued strong demand (for
example, from China, India, Russia)
and constrained supply.
Higher Power
valuations
Bull
Case
• Zinc and aluminum prices.
• Volume growth – captive sources of
zinc and bauxite are key for Sterlite’s
value creation.
• Power valuations.
Potential Catalysts
• Favorable news flow on Hindustan
Zinc and Balco stakes; resolution of
bauxite mines issue.
• Changes in consensus expectations
for non-ferrous metals prices.
Key Risks
• Further increase in Chinese
aluminum surplus, coupled with slump
in global demand, putting downward
pressure on zinc and aluminum
prices.
• Global economic slowdown and/or
sustained correction in Indian stock
market.
• Issues escalate with the government
regarding the Hindustan Zinc and
Balco stake purchases.
• Allotment of bauxite mine further
delayed.
Source: Morgan Stanley, FactSet
126
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Sterlite Industries (India) Limited: Financial Summary
Rs million; Years Ending March
Profit and Loss Statement
F2006
Cash Flow Statement
F2007
F2008E
F2009E
F2010E
Sales
131,272 243,868 274,879 315,763 348,248
Raw Material
61,580 104,978 121,366 136,446 151,993
Power & Fuel
12,256 13,738 15,883 17,856
19,891
Other Manufacturing
13,338 18,437 21,315 23,963
26,693
Personnel
4,518
5,495
6,353
7,142
7,956
Selling & Distribution
2,566
3,849
4,450
5,003
5,573
Administration &
2,681
3,243
3,749
4,215
4,696
General
Operating Costs
96,939 149,739 173,115 194,625 216,801
EBITDA
34,333 94,129 101,764 121,138 131,447
Other income
3,343
6,817 12,470 13,529
10,274
Interest
2,353
3,791
1,494
1,499
2,821
Pre-operative expenses
-2,545
-460
Depreciation
5,269
8,039
8,109 12,171
14,039
Extraordinary
Expenses
101
1,572
PBT
32,498 88,004 104,631 120,996 124,862
Tax
10,166 24,120 29,820 36,299
38,707
Tax Rate (%)
31.3
27.4
28.5
30.0
31.0
Minority Interest (MI)
MI in proposed divi. of
subsidiary & tax
thereon
PAT
5,991
423
16,764
20,023
981
44,842
27,515
47,296
13,628
71,069
16,108
70,047
F2006
PAT
Depreciation
Minority Interest
Change in Inventories
Change in Debtors
Change in Loans
Change in Acceptances
Change in Creditors
Change in Other Liab.
Change in Provisions
Capex
Change in Investments
Change in Misc Exp
Change in Goodwill
Issue of Shares
Change in Reserves
Change in MI
Change in Secured
Loans
Change in Unsec.Loans
Change in Deferred
Tax.
Dividends Paid
Change in Cash
F2007
16,764 44,842
5,269
8,039
5,991 20,023
-9,150 -8,586
-6,273 -3,046
-7,242 -18,559
-665
0
6,186 -4,838
22
7,320
10,052 12,042
-12,648 -19,718
-6,461 -27,268
105
104
0
0
20
-219
1,708 -3,362
-423
-712
F2008E
F2009E
F2010E
47,296 71,069
70,047
8,109 12,171
14,039
27,515 13,628
16,108
-2,736
-1,164
-3,645
-800
-846
-915
-888
-2,157
-416
2,371
295
304
-541
7,459
1,823
616
323
332
4,301
-1,231
1,231
-34,612 -64,669 -169,522
-748
0
10,000
0
0
0
0 -60,163
0
301
0
0
82,598
0
0
0 -56,204
0
-6,964
5,307
-8,887
3,338
-5,000
-8,300
-5,000
5,110
34,000
-4,994
2,413
-1,221
2,811
1,663
0
0
-2,194
-4,924
-3,693
-18 114,558 -85,072
0
-4,925
-36,535
F2006
F2007
F2008E
F2009E
F2010E
350
30.0
108.3
611
80.3
178.7
923
66.7
317.4
923
100.2
412.4
923
98.8
504.3
11.7
9.2
3.2
0.4
7.6
5.2
3.4
0.2
13.8
8.1
2.9
0.4
9.2
5.9
2.2
0.3
9.3
6.3
1.8
0.4
26.2
27.6
38.6
44.9
37.0
21.0
38.4
24.3
37.7
19.6
37
52
73
25
22
68
23
18
65
21
30
60
20
30
60
1.0
1.3
0.8
0.9
0.7
81.0
129.7
157.2
85.8
174.2
167.5
12.7
8.1
5.5
14.9
19.0
50.3
10.3
8.5
-1.4
0.7
0.4
0.4
-0.0
0.2
Ratio Analysis
Balance Sheet
Equity Share Capital
Preference Share
Capital
Reserves & Surplus
Deferred Govt Grants
Net Worth
Minority Interest
Secured Loans
Unsecured Loans
Deferred Tax Liability
TOTAL
Goodwill
Gross Fixed Assets
Accumulated
Depreciation
Net Fixed Assets
Capital WIP
Investments
Inventories
Debtors
Cash & Bank
Loans & Advances
Acceptances
Creditors
Others
Provisions
Misc. Expenditure
TOTAL
F2006
F2007
F2008E
F2009E
F2010E
1,117
1,117
1,418
1,418
1,418
219
59,413 98,698 223,667
3
2
2
60,751 99,818 225,088
16,948 36,259 63,774
24,145 15,258 10,258
27,508 30,845 22,545
7,511
9,174
9,174
136,862 191,354 330,839
9,735
9,735
9,735
103,874 116,679 144,591
291,044
2
292,464
21,198
5,258
27,656
9,174
355,750
69,898
179,150
356,165
2
357,586
37,305
39,258
22,661
9,174
465,984
69,898
328,666
35,723 43,235 51,345 63,515
68,152 73,444 93,247 115,635
7,611 13,997 20,697 50,807
24,952 52,219 52,967 52,967
19,507 28,092 30,829 31,993
13,475 16,521 17,321 18,167
11,153 11,134 125,692 40,620
16,287 34,846 35,734 37,892
2,371
2,666
13,917
9,078
8,537 15,997
5,001 12,321 12,937 13,260
15,195 27,237 31,538 30,307
105
0
0
0
136,862 191,354 330,839 355,750
77,554
251,112
70,813
42,967
35,639
19,082
4,086
38,307
2,970
17,819
13,592
31,538
0
465,984
Share Price
Modelware EPS
Book Value per Share
Valuation
P/E
EV/EBITDA (Adjusted)
Price to Book Value
Dividend Yield (%)
Profitability Ratios (%)
EBIDTA Margins
RoE
Turnover Ratios
Debtors Days
Creditors Days
Inventory Daus
Net Sales to Total
Assets
Growth (%)
Sales
Operating Profit
Net Profit
Leverage Ratio
Net debt /Equity (x)
E = Morgan Stanley Research estimates
Source: Company data, Morgan Stanley Research
127
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Sun Pharmaceutical Industries
Growth Momentum and Product
Optionality
Morgan Stanley India
Company Private Limited+
Sameer Baisiwala, CFA
Sameer.Baisiwala@morganstanley.com
Key Statistics
Stock Rating: Overweight
India Pharmaceuticals
Price target (Feb 4, 2008)
Share price, close (Feb 1, 2008)
Market cap (mn)
52-Week Range
Shares outstanding, basic, (mn)
Saniel Chandrawat
Company Description
Sun Pharmaceutical Industries manufactures and markets specialty
drugs and active pharmaceutical ingredients for chronic therapy areas,
such as cardiology, psychiatry, neurology and women's health.
Saniel.Chandrawat@morganstanley.com
Investment Conclusion
We have an Overweight rating on Sun Pharmaceutical (Sun)
given the company’s strong product pipeline, which gives
good growth visibility, and the stock’s reasonable valuations
(Sun trades at 23x and 19.6x our F2008e and F2009e EPS).
We forecast 3-year (F08-10) EPS CAGR of 19.6% for Sun.
Reuters: SUN.BO Bloomberg: SUNP IN
In-Line
Rs1,227.00
Rs1118.20
Rs222,723.00
Rs1,265.00-797.50
199.2
What We Like
•
One of the best domestic businesses in the sector,
leadership in chronic ailment therapy and strong
customer relationships.
Recent Developments
Update on meaningful opportunities: Sun launched generic
Protonix 40 mg ($2.3 bn) in the US market, at risk. Denial of
a preliminary injunction, launch of AG, and launch by Teva, all
put together, significantly de-risks the opportunity for Sun, we
believe. It does not expect an AB rating for its tablet form of
generic Effexor ER, and will therefore explore alternative
distribution channels/strategies to gain market share once it
launches its product. The company remains confident of its
IPR on gabapentin and does not expect recent rulings to
affect other generic companies. Taro Update: Shareholder
meeting is likely to be scheduled in 1Q09 to consider approval
of Sun’s acquisition.
•
Focus on technology: The company has strengthened
its product portfolio through complex products, inhibitors
and oncology.
•
Focus on profitability: Sun is a well-managed company
with among the best profitability in the sector. Operating
margins are around 35-37% due to cost efficiencies and
high-margin products.
•
Judicious use of capital: Over the past several years,
Sun has deployed its capital in high-quality manufacturing
assets and research initiatives, resulting in high ROCE
(25-30%).
Key Investment Issues
•
What is the roadmap for Taro’s acquisition, key hurdles,
and the likely upside from the acquisition?
What We Don’t Like
•
Lack of a biosimilar product portfolio, which could be
an important growth driver in the next decade.
•
What is the outlook for the domestic market and how is
the new product launch pipeline for 2009 shaping up?
•
•
Limited presence: The company has limited presence in
the export market.
What are the fund requirements over the next 2-3 years
and how does the firm plan to deploy internal accruals?
•
Currency risk: Rupee appreciation will hurt the
company’s profitability in the long run.
Valuation Methodology
We arrive at our price target of Rs1,227 for Sun by using a
sum-of-the-parts methodology, valuing the base business at
Rs1,142 (20x our F2009 EPS estimate of Rs57.09) and
valuing upside from generic Protonix at Rs85 per share. We
argue for a premium valuation for Sun in view of the strong
fundamentals of its generic business, including its robust base
business, continuing success with patent challenges (generic
Ultracet and gabapentin) that target lucrative opportunities,
and diversifying dosage forms to injectables, nasal sprays,
ointments, and creams.
128
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Risk-Reward Snapshot: Sun Pharmaceuticals Industries
Risk-Reward View: Execution Scale-up Is the Key Valuation Driver
Investment Thesis
Rs1,500
900
• Globally aging population, pressure to
contain costs, significant patent
expiries, and new markets (such as
Japan) are defining global
opportunities.
• Long-term growth visibility driven by
domestic and export markets.
• Global competitive advantages –
strong chemistry, low cost, and global
distribution capabilities.
800
Key Value Drivers
Rs1,442.26 (+29%)
1,400
1,300
Rs1,118.20
Rs1,226.50 (+10%)
1,200
1,100
1,000
Jan 07
Rs847.05 (-24%)
Apr 07
Jul 07
Price Target
Oct 07
Dec 07
Mar 08
Historical Stock Performance
May 08
Aug 08
Nov 08
Jan 09
Current Stock Price
Price Target Rs1,227
Derived from our base-case scenario
Bull
Case
Rs1,442
Sum-of-theparts
valuation
Stronger base business (Rs114 per share), higher value for
Pantoprazole opportunity (Rs9 per share), and value-accretive
acquisition (Rs92 per share).
Base
Case
Rs1,227
Sum-of-theparts
valuation
17% sales growth for the base business and two-year (F2008-10)
EPS CAGR of 16%. We apply a P/E multiple of 20x to our
F2009E EPS of Rs57.1 (Rs1,142 per share) and add
Pantoprazole upside (Rs85 per share).
Bear
Case
Rs847
Sum-of-theparts
valuation
Set-back in core business (Rs285 per share) and Pantoprazole
liability (Rs94 per share).
Indian Rupee (Rs)
Bull to Bear: Several Upside Drivers
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
Price Target:
1,227
285
114
94
9
92
1,442
1,227
847
• Momentum in the base business
driven by several geographies and
new launches.
• Progression of technically complex
products on the regulatory pathway.
• Monetization of FTF opportunities
through custom approach to each
filing – settlement, launch at risk
and/or court case win.
• Commercialization of monopolistic
opportunities such as modified
release products, nasal sprays, etc.
Potential Catalysts
• Market share gain in pantoprazole and
litigation win on the underlying patent
challenge.
• Launch of Effexor XR in 3Q08 and
market share gains.
• Potential launch of amifostine at risk.
• Completion of Taro acquisition and
successful integration thereafter.
• Regulatory filings of technically difficult
products such as luprolide depot and
liposomal doxorubicin.
Key Risks
Bear
Case
Setback in core
business
Source: FactSet, Morgan Stanley Research
Pantoprazole
backfires
Base
Case
Strong base
business
Higher Value for Value Accretive
Acquisition
Pantoprazole
opportunity
Bull
Case
Adverse currency movements, loss of
pantoprazole opportunity, and limited
presence in export market are the key
risks to our investment thesis.
129
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Sun Pharmaceutical Industries: Financial Summary
Rs million; Years Ending March
Income Statement
Cash Flow Statement
(Rs million)
F2007
F2008E
F2009E
F2010E
(Rs million)
F2007
F2008E
F2009E
F2010E
21,321
26,756
31,329
36,581
Profit after tax
7842
10028
11838
13444
7,149
9,150
10,715
12,694
Add : Depreciation
813
927
1078
1199
14,172
17,605
20,614
23,887
Add : Increase in Def Tax Liab
(158)
224
270
309
R&D Expenses
2,440
2,408
2,820
3,292
Change in Minority Interest
106
0
0
0
Personnel Costs
1,989
1,575
1,811
2,083
Extraordinary Items
421
0
0
0
SG&A
3,019
3,746
4,386
5,304
Net change in Working capital
(5202)
(212)
(2410)
(2777)
Sales
Cost of Goods Sold
Gross Profit
Operating Profit
6,724
9,876
11,598
13,208
Non-Operating Income
1,352
1,012
1,100
1,100
EBITDA
Interest Expenses
8,076
10,888
12,698
14,308
(1,072)
(1,232)
(1,870)
(2,328)
Depreciation & Amortization
813
927
1,078
1,199
8,335
11,194
13,490
15,437
Income Tax
(67)
560
944
1,235
Minority Interest
559
605
706
757
7,842
10,028
11,838
13,444
1,754
7,014
-
-0.8%
5.0%
7.0%
8.0%
EPS
37.8
48.4
57.1
64.8
DPS
5.5
6.5
7.0
8.0
1
1
1
1
Pretax Profit
Net Profit
Profits from Pantoprazole
Effective Tax Rate (%)
Preference dividend
F2007
F2008E
F2009E
1,037
1,037
1,037
Reserves & Surplus
36,325
44,856
55,242
67,026
Net worth
37,361
45,892
56,279
68,063
14
14
14
14
1,581
2,754
2,754
2,754
438
438
438
438
39,380
49,084
59,470
71,254
9,514
9,975
10,797
11,418
608
120
120
300
Debt
Minority Interest
Total
APPLICATION OF FUNDS
Net Block
Capital WIP
Net Fixed Assets
10,122
10,095
10,917
11,718
Goodwill on consolidation
697
697
697
697
Investments
193
193
193
193
Cash & Cash Equivalents
16,611
26,354
33,778
42,293
Inventories
6,645
7,019
8,073
9,390
Receivables
6,789
6,597
7,725
9,020
Loans & Advances
Current Assets
Less: Current Liabilities & Provisions
Net Current Assets
Misc. Expenditure not Written off
Total
10776
12175
(900)
(1900)
(2000)
(31)
0
0
0
Net cash from Investing
(2179)
(900)
(1900)
(2000)
Issue of equity shares
Dividends paid including dividend
tax
Share buy back/preferential
bonus/general res entry
(881)
0
0
0
(1484)
(1497)
(1452)
(1660)
0
0
0
0
Net cash from financing
(2365)
(1497)
(1452)
(1660)
Net Increase (Decrease) in Net
Debt
722
(8570)
(7424)
(8516)
Opening Net Debt
(15752)
(15030)
(23600)
(31024)
Closing Net Debt
(15030)
(23600)
(31024)
(39539)
F2007
F2008E
F2009E
F2010E
Profitability Ratios
1,037
Preference Share Capital
10966
(2148)
F2010E
SOURCES OF FUNDS
Equity Capital
3822
Capital Expenditure
Decrease/(Increase) in
Investments
Key Ratios
Balance Sheet
(Rs million)
Net cash from operations
2,264
2,943
3,446
4,024
15,698
16,560
19,244
22,434
3,046
3,696
3,970
4,383
12,651
12,863
15,274
18,050
(895)
(1119)
(1389)
(1698)
39,380
49,084
59,470
71,254
Gross Margin (%)
66.5%
65.8%
65.8%
65.3%
Operating Margin (%)
31.5%
36.9%
37.0%
36.1%
Pre-tax Margin (%)
39.1%
41.8%
43.1%
42.2%
Net Margin (%)
36.8%
37.5%
37.8%
36.8%
29.6
23.1
19.6
17.2
6.2
5.1
4.1
3.4
ROE (%)
22.8%
24.1%
23.2%
21.6%
ROCE (%)
22.4%
25.3%
24.9%
23.6%
26.8
19.1
15.8
13.4
-0.40
-0.51
-0.55
-0.58
0.04
0.06
0.05
0.04
270
Valuation Ratios
P/E
P/BV
EV/EBITDA
Leverage Ratios
Net Debt/Equity
Total Debt/Equity
Turnover Ratios
Inventory (days of net sales)
300
280
275
Receivables (days of net sales)
89
90
90
90
Cash cycle (days of net sales)
389
370
365
360
Net working capital (x net sales)
172
174
164
166
E = Morgan Stanley Research Estimates
Source: Company data, Morgan Stanley Research
130
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Suzlon Energy
Strengthening Global Footprint
Morgan Stanley India
Company Private Limited+
Akshay Soni
Akshay.Soni@morganstanley.com
Binay Singh
Key Statistics
Stock Rating: Overweight
Reuters: SUZL.BO Bloomberg: SUEL IN
India Capital Goods
In-line
Price target
Rs498.60
Share price, close (January 22, 2008)
Rs344.60
Market cap (mn)
Rs495,810
52-Week Range
Rs460.00-186.40
Shares outstanding, basic, currency (mn)
1,438.8
Binay.Singh@morganstanley.com
Investment Conclusion
Environmental factors, energy security and economics are
encouraging governments and corporates across the world to
adopt renewable energy sources. We expect global wind
turbine installations to grow at a 19% CAGR over 2006-10.
Suzlon is one of the largest WTG (wind turbine generators)
players in the world, with a manufacturing capacity of 2.7 GW,
spread across India, China, and the US. The company plans
to increase capacity to 5.7 GW by the middle of F2009.
Suzlon is also driving aggressive capacity expansion across
its subsidiaries. It plans to increase capacity at Hansen from
3.6 GW in F2007 to 9.3 GW by F2010, and at REpower from
900MW currently to 1,700MW by December 2008.
Suzlon + Hansen + REpower = To Play on Synergies
The acquisitions of Hansen and REpower have enabled
Suzlon to integrate across the value chain. Currently, Suzlon
sources the majority of its gearbox requirements from
Winergy; however, we expect Hansen to supply 20-25% of
Suzlon’s gearbox requirements in F2009 and for this to
increase to around 50% in F2010. The acquisition of
REpower has enabled Suzlon to gain access to offshore wind
technology and get a foothold in Europe. Further, REpower
has high raw material sourcing costs (more than 80% of sales
against less than 65% for Suzlon). Over the next two years,
as Suzlon expands capacity, it will be able to supply
components to REpower, helping it push EBIDTA margins
towards double-digit levels from 1.3% in 1H07. Once the
group becomes integrated, all the synergies will result in value
creation, we believe.
Valuation Methodology
In our view, the current valuation does not take into account
the strong long-term growth in the wind power market and
Suzlon’s positioning as the lowest-cost manufacturer, with the
third-largest global market share.
Our price target of Rs499 is based on a residual income
model and assumes a 19% revenue CAGR for F2007-32,
versus 110% for F2004-07. Other assumptions include a riskfree rate of 7.9%, beta of 1.11, and cost of equity of 12.6%.
Company Description
Suzlon Energy, now combined with REpower, is the third-largest wind
energy solutions provider globally. It has substantial manufacturing
facilities in India, the US, China, and Belgium. Its fully integrated
business model includes consultancy, site development, design,
manufacturing, and overhaul and maintenance services. Suzlon has
had a market share above 50% in India in the past six years. It expects
the majority of its revenues to come from international markets,
primarily the US and China.
What We Like
•
Climate change and energy security to drive secular
growth for alternative energy in the next decade. Further,
the rising fossil fuel prices will make alternate fuel
sources more viable in cost terms.
•
Diversified presence across markets: Suzlon is well
positioned to exploit growth across four major markets,
through its established manufacturing bases in India,
China and the US, and presence in Europe through
REpower.
•
Vertical integration provides edge over peers: Suzlon
is one of the few WTG players that are present across
the value chain and is relatively shielded from industry
bottlenecks like component shortages.
What We Don’t Like
•
Increasing pressure on margins: Manufacturing in lowcost India has always been an advantage for Suzlon.
However, the manufacturing facilities will need to be
more dispersed as the company goes global and this
could result in some margin dilution.
•
Increasing competition from newer and stronger
firms, especially local companies from China and US,
could further create pricing pressure.
•
Aggressive capacity expansion plans across Suzlon,
REpower, and Hansen imply execution risks.
•
Solar and bio-diesels may eat into wind market share.
131
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Risk-Reward: Suzlon Energy
Investment Thesis
Strongly Poised to Deliver Performance
Rs1,000
Rs911 (+164%)
900
800
700
600
500
Rs499 (+45%)
400
Rs344.60
300
200
Rs271 (-21%)
100
0
Oct 05
Feb 06
Jul 06
Price Target
Nov 06
Mar 07
Aug 07
Historical Stock Performance
Price Target Rs499
Dec 07
May 08
Sep 08
Jan 09
Current Stock Price
Derived from our RI model, with the base-case assumptions.
Bull
Case
Rs911
Implies 54.2x Higher growth/synergy: Global wind power installations grow at
Bull Case
a CAGR of 22% over 2006-10E. Suzlon’s utilisation rises to 86%
F2009E P/E over our forecast period. Greater synergies from Hansen result in
a 100 bps EBIDTA margin increase over F2008-10E. We bring in
the value of REpower, which is not taken in the base case.
Base
Case
Rs499
Implies 35.8x Strong growth continues: Global wind power installations grow
Base Case
at a CAGR of 19% over 2006-10E. Suzlon’s utilisation over
F2009E P/E F2007-10E is 81%. The company continues to grow strongly over
25 years, after which its revenues grow at 1.5% annually, given
the industry’s global nature.
Bear
Case
Rs271
Implies 25.6x Production tax credits are withdrawn in the US market,
Bear Case
resulting in a drop-off in growth, with the company’s utilisation
F2009E P/E falling to 74%. Given demand from existing customers, Hansen is
unable to supply gearboxes to Suzlon, resulting in a 100 bps
decline in EBIDTA margin over F2008-10E.
From Bear to Bull: Capacity Additions Drive Upside
1,200
Indian Rupee (Rs)
1,000
800
168
600
• Suzlon has higher margins than all its
global peers, apart from Gamesa,
which is equally vertically integrated.
• Suzlon’s in-house manufacturing
facilities help control costs and avoid
supply disruptions.
• Suzlon aims to expand its capacity
from 2.7GW in F2007 to 5.7GW in
F2010, creating room for significant
volume growth.
Potential Catalysts
• Increase in dividend payout or
investing surplus cash in high-return
projects.
Key Risks
• Slowdown in capacity additions.
• Margin compression from globalization
of the business model.
• Other clean energy sources becoming
more cost competitive.
911
197
400
200
Value Drivers
17
227
Price Target: 499
• We expect global wind turbine
installations to grow at a 19% CAGR
over 2006-10.
• We expect Suzlon to become the
third-largest company in the industry
worldwide, following the acquisition of
REpower in May 2007.
• Suzlon trades at attractive valuations
compared to both capital goods
stocks in India and global wind turbine
manufacturers.
31
499
271
0
Bear
Case
Decrease in
Margins
Sales
Growth
Decline
Base
Case
Sales
Growth
Increase in
Margins
Repower
Bull
Case
Source: Morgan Stanley, FactSet
132
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Suzlon Energy Ltd.: Financial Summary
Rs million; Years Ending March
Profit & Loss Statement
Cash Flow Statement
Rs mn (Year-end March)
F2006
F2007
F2008E
F2009E
F2010E
Sales (MW)
Revenue
Cost of Materials
Manufacturing Exp
Employees Exp
Selling & Admin Exp
Total Operating Exp
Operating Profit
Interest
Depreciation & Amortzn
Non Operating Income
Profit Before Tax
Tax
PAT before MI
Minority Interest
Consolidated PAT
Exceptional Items
Reported PAT
963
38,410
23,279
3,039
1,216
2,084
29,618
8,792
648
716
745
8,173
568
7,605
(10)
7,595
7,595
1,456
79,857
48,114
5,206
6,496
6,843
66,658
13,199
2,763
1,718
965
9,683
1,146
8,536
(8)
8,528
112
8,640
2,299
124,951
76,259
9,723
10,496
9,218
105,696
19,255
5,472
2,913
2,768
13,638
1,405
12,232
(10)
12,222
12,222
3,489
187,469
115,500
14,586
14,113
14,709
158,908
28,561
6,506
4,155
3,844
21,744
2,083
19,661
(13)
19,648
19,648
4,388
247,693
151,003
19,811
19,324
19,037
209,175
38,518
5,579
6,140
3,466
30,265
2,984
27,281
(17)
27,264
27,264
F2006
F2007
F2008E
F2009E
F2010E
2,875
24,219
(25)
104
27,173
175
75
4,507
31,929
6,275
(1,532)
1,652
6,395
14
76
5,515
818
36,172
16,473
5,897
13,802
7,253
9,807
19,112
31,929
2,878
31,226
(39)
117
34,182
890
25
177
141
51,620
87,036
25,568
(7,016)
4,498
23,050
17,643
156
15,383
69,143
25,704
12,076
31,363
16,029
22,310
30,804
87,036
2,992
2,995
61,245
77,153
(39)
(39)
64,198
80,109
890
890
25
25
214
277
151
164
80,570
75,465
146,049 156,931
29,916
49,220
(9,929) (14,083)
22,879
21,894
42,867
57,030
17,643
17,643
166
176
59,013
44,085
79,374 117,435
36,420
52,074
20,224
30,934
22,730
34,426
18,451
27,945
34,562
51,493
26,361
37,996
146,049 156,931
2,995
99,109
(39)
102,065
890
25
339
181
58,219
161,719
67,735
(20,223)
4,379
51,890
17,643
186
47,101
149,864
65,410
39,446
45,008
36,535
68,431
44,899
161,719
Balance Sheet
Rs mn (Year-end March)
Share Capital
Reserves & Surplus
Less: Mis. Exp.
Employee Stock Options
Shareholders' Funds
Option Certificates*
Preference Share Capital
Deferred Tax Liability
Minority Interest
Loan Funds
TOTAL LIABILITIES
Gross fixed assets
Less: Depreciation
Add: Capital WIP
Net Fixed Assets
Net Goodwill
Investments
Cash/Liquid Invest.
Deferred Tax Asset
Current Assets
Debtors
Loans & Advances
Inventory
Sundry Creditors
Other Liabilities and Prov.
Net Current Assets
Total ASSETS
Rs mn (Year-end March)
F2006
F2007
F2008E
F2009E
Cash Flow from Operations
Reported PAT
7,595
8,640
12,222
19,648
Add: Deprn & Amortzn
716
1,718
2,913
4,155
Add: Deferred Tax
(568)
(126)
(38)
(63)
Less:Misc Exp w/off
21
13
Change in working capital (10,989) (11,691)
4,443 (11,636)
Total
(3,226) (1,445)
19,540
12,104
Cash Flow from Investing Activities
Capital Expenditure
(4,040) (18,378) (22,730) (18,318)
Acquisition of Goodwill
(6) (17,625)
Investments
2
(80)
(10)
(10)
Others
107
2,088
(32)
138
Total
(3,937) (33,994) (22,772) (18,190)
Cash Flow from Financing Activities
Change in Paid In Capital
13,268
45
20,302
94
Dividend Paid
(1,664) (1,674) (2,390) (3,831)
Net issuance of
Preference Capital / Debt
(429)
46,963
28,950 (5,105)
Total
11,175
45,334
46,861 (8,842)
Net Change in Cash
4,012
9,895
43,630 (14,928)
F2010E
27,264
6,140
(62)
(6,902)
26,439
(1,000)
(10)
141
(869)
(5,308)
(17,246)
(22,554)
3,016
Key Financial Ratios
Valuation
EPS (Rs)
P/E
BVPS (Rs)
P/BV
DPS
Dividend Yield (%)
EV/EBITDA
Profitability (%)
NPM (%)
OPM (%)
EBIT Margin (%)
ROE (%)
ROCE (%)
Gearing
Debt/Equity (%)
Net Debt/Equity (%)
Others
Effective Tax Rate()
F2006
F2007
F2008E
F2009E
F2010E
5.3
49.3
18.9
13.8
1.0
0.4
42.5
5.9
33.8
24.4
8.2
1.0
0.5
24.6
8.2
42.2
43.5
7.9
1.8
0.5
27.9
13.1
26.3
54.1
6.4
2.4
0.7
19.2
18.2
18.9
68.7
5.0
2.6
0.8
13.7
19.8
22.9
21.0
43.3
36.6
10.7
16.5
14.4
27.4
19.0
9.8
15.4
13.1
24.4
15.2
10.5
15.2
13.0
26.9
17.3
11.0
15.6
13.1
29.6
20.6
17
-3
147
103
124
33
93
39
57
11
7
12
10
10
10
E=Morgan Stanley Research estimates. Source: Company data, Morgan Stanley Research
133
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Tata Consultancy Services
Largest Offshore Vendor
Morgan Stanley India
Company Private Limited+
Vipin Khare
Vipin.Khare@morganstanley.com
Gaurav Rateria
Key Statistics
Stock Rating: Overweight
Reuters: TCS.BO Bloomberg: TCS IN
India Software
In-Line
Price target
Rs1,130.00
Share price, close (January 28, 2008)
Rs854.20
Market cap (mn)
Rs835,920
52-Week Range
Rs1,350-730
Shares outstanding, basic, currency (mn)
979
Gaurav.Rateria@morganstanley.com
Company Description
TCS is India's largest IT services organization and among the top IT
services corporations globally. It provides services in IT solutions and
services (application development, maintenance), IT-enabled services
(call centers, business process outsourcing), packaged software
implementation, engineering and technology services, infrastructurebased services, asset-based offerings (products and associated
services) and consulting (IT and business consulting). TCS was
publicly listed in August 2004.
Investment Conclusion
We maintain our Overweight rating on TCS. The stock is
trading at P/Es of 15x F2009E and 13x F2010E, towards the
lower end of its historical trading range. TCS has an
experienced management team and its blended pricing
continues to improve, with a 5-8% billing rate increase for new
clients and a 3-5% increase for re-negotiations.
Recent Developments
In 3Q, F2008 revenues of Rs59.2bn (+5%qoq, +22%yoy)
were below our and consensus estimates. International
business revenue growth (+3.7%qoq, +20%yoy) was slower
than that of Infosys. EBIT of Rs14.3bn (+6.5%qoq,
+13%yoy); EBIT margins of 24.2% (+33bps qoq, -191bps yoy)
and net profit of Rs13.3bn (+6.7%qoq, +20%yoy) were below
our estimates. TCS has cut the variable portion in its
employees’ salary linked to company performance for the
quarter, as it did not meet its internal EVA targets. TCS’ UKbased subsidiary, Diligenta, recently won a BPO contract from
Sun Life Financial UK for £100m.
Key Investment Issues
1) Rupee appreciation, wages and higher taxes (after F2009)
adversely affect margins. 2) Focus on large deals: while this
could provide better revenue visibility, margins could be lower,
affecting overall margins. 3) Client concentration and
acquisition related risks. 4) Outstanding litigations in the state
of California are similar to those of Infosys.
Valuation Methodology
We believe P/E multiple comparisons remain the most
appropriate valuation measure for TCS, given the company’s
profitable track record and strong earnings visibility. Our price
target of Rs1,130 is based on a P/E of 19x F2009E. We
derive the multiple of 19x from a P/E band analysis based on
the stock’s historical trading patterns. TCS has traded at a
discount of 3-20% with respect to Infosys over the past year
and we apply a 10% discount (towards the average of the
range) to derive our target multiple.
What We Like
•
Lower exposure to US: TCS’s exposure to US is around
50% and has declined from 60% in 2Q F2006. This US
exposure is the lowest among the large Indian IT services
companies.
•
Lower attrition: Attrition at 12% remains under control
and is lowest in the industry. Also, TCS is increasing its
presence in other low-cost locations (outside India) such
as Brazil and Mexico.
•
Lower offshore proportion of revenues: TCS’s
offshore revenue proportion is around 41%, the lowest
among the large IT services companies. This could be a
key margin lever as an increase in offshore could help
EBIT margins.
•
Strong pipeline of 25 deals of over US$50 million.
What We Don’t Like
•
Relatively higher exposure to the BFSI segment: TCS
derives around 44% of its revenues from banking,
financial services, and insurance.
•
Lower margins: We estimate margins for the full year
are likely to be down around 100bp YoY in F2008
(including some FX gains) compared to flat margins for
Infosys.
•
Dependence on GE: TCS’s largest client accounts for
around 7.0% of the company’s revenues; this is relatively
low-margin business.
•
TCS generates around 9% of its revenues from Indian
clients, a higher proportion than large peers do; again,
this is relatively low-margin business.
134
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Risk-Reward Snapshot: Tata Consultancy Services
Investment Thesis
Risk-Reward View: Strong Growth Drives Upside Skew
Rs1,400
1,300
Rs1,200 (+40%)
1,200
Rs 1,130 (+32%)
1,100
1,000
900
Rs854.20
Rs750 (-12%)
800
700
Jan 06
May 06
Sep 06
Price Target
Price target Rs1,130
Jan 07
May 07
Sep 07
Historical Stock Performance
Jan 08
May 08
Sep 08
Jan 09
Key Value Drivers
Current Stock Price
Derived from the base case.
Bull case
Rs1,200
20x baseNon-linear revenue growth: 22.3% revenue CAGR and 22%
case F2009E EBIT CAGR for F2008-18. Stable margins at 23.3% in F2009,
EPS
declining only marginally to 22.3% by 2018.
Base case
Rs1,130
19x baseSteady growth: 21.6% revenue CAGR and 20% EBIT CAGR for
case F2009E F2008-18 with margins declining to 21.6% by F2018. Revenue
EPS
and earnings growth of 25.7% and 16.2% in F2009.
Bear case
Rs750
12x baseLack of non-linear growth: 18.5% revenue CAGR and 16.2%
case F2009E EBIT CAGR for F2008-18 with a larger margin decline to 19.6%
EPS
by F2018 because of rising costs.
From Bear to Bull: Volume Growth and Stable Pricing are Key
1,400
Price Target: 1,130
Indian Rupee (Rs)
42
150
1,200
230
28
1,200
1,130
1,000
• Strong demand for offshore IT
services.
• Old large legacy deals being broken
down now and the offshore firms are
seeing a pipeline of large deals.
• TCS, with its execution skills and
global delivery network, has been
winning more than a fair share of such
deals.
• Strong brand with customers and
employees - it has among the lowest
employee turnover in the industry.
• Strong, stable management team.
• Strong volumes to drive steady
revenue growth.
• Pricing improvement to help maintain
margins despite rupee appreciation.
• Cash flows and high return on
balance sheet parameters.
Potential Catalysts
• Better-than-expected revenue growth.
• Any pricing improvement could drive
margins, earnings, and stock price.
Key Risks
• Flawed execution in large projects
can dilute margins.
• Tata Sons own around 75% of the
company – large flow of paper in the
secondary markets could hold back
stock performance
800
600
750
400
200
0
Bear
Case
Slow vloume
growth
Pricing pressure
Base
Case
Strong volume
growth
Favourable
pricing
Bull
Case
Source: Morgan Stanley, FactSet
135
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Tata Consultancy Services: Financial Summary
Rs million; Years Ending March
Consolidated Profit & Loss A/C (Rsm)
Year to March
Net Revenues
YoY Growth (%)
Cost of Sales
F2006
F2007
F2008E
F2009E
F2010E
132,550
186,332
229,753
288,689
354,462
36.3
40.6
23.3
25.7
22.8
(71,652) (104,126) (126,394) (160,906) (202,460)
Gross Profit
60,898
Gross margin (%)
S,G&A
Consolidated Balance Sheet (Rsm)
82,206
103,359
127,783
152,002
As at 31st March
Intangibles/Goodwill
PPE (Net)
Eq in Affiliates
F2006
F2007
F2008E
F2009E
F2010E
8,692
14,147
14,246
14,246
14,246
15,072
22,912
30,646
48,002
67,032
188
-
66
105
143
Investments
7,086
12,711
23,019
23,019
23,019
Other non-current
4,988
7,110
11,537
14,023
17,045
Cash & Cash Eq
3,965
11,120
10,796
24,470
38,241
45.9
44.1
45.0
44.3
42.9
(26,697)
(35,762)
(48,657)
(60,480)
(70,538)
37,012
50,740
60,283
73,942
88,731
32,790
43,090
51,029
68,059
81,920
27.9
27.2
26.2
25.6
25.0
Unbilled Rev.
4,712
7,835
11,672
17,295
20,817
34,202
46,444
54,702
67,303
81,464
Pre Paid Exp
7,327
-
-
-
-
25.8
24.9
23.8
23.3
23.0
806
11,661
17,144
26,977
42,448
Total Current Assets
49,600
73,707
90,642 136,800
183,426
TOTAL ASSETS
85,626 130,587 170,155 236,195
304,912
EBITDA
EBITDA margin (%)
EBIT
EBIT margin (%)
Non-op Income
Accounts Receivables
Other curr. assets
257
1,943
4,698
4,402
5,082
Profit Before Tax
34,459
48,389
59,401
71,705
86,546
Tax
(4,984)
(6,700)
(7,909)
(11,921)
(19,065)
Accounts Payable
4,308
7,289
10,111
14,482
18,221
Profit bfr Minorities
29,475
41,689
51,492
59,783
67,481
Other Current Liab
11,920
17,037
24,124
28,869
35,446
(280)
(417)
(479)
(551)
(634)
16
44
16
39
39
29,211
41,316
51,029
59,271
66,886
979
603
351
351
351
22.0
22.2
22.2
20.5
18.9
Total Curr Liab.
23,706
32,207
43,735
64,771
82,690
25,894
41,499
46,906
72,029
100,736
489
979
979
979
979
Minority Interests
Equity in Affil
NET INCOME
Net margin (%)
Income Tax Payable
1,181
1,240
9,149
9,606
10,087
Deferred Rev.
5,317
6,038
-
11,464
18,585
Sh Term Borrowings
YoY Growth (%)
24.0
41.4
23.5
16.2
12.8
Net Current Assets
FD EPS (Rs)
29.8
42.2
52.1
60.6
68.3
Share capital
Consolidated Cash Flow Statement (Rsm)
Year to March
F2006
F2007
F2008E
F2009E
F2010E
Net income
28,968
41,316
51,029
59,271
66,886
Depreciation
4,592
4,296
5,580
6,640
7,266
Changes in wkng cap
(17,111) (15,430) (11,373) (13,936)
16,448
51,975
56,194
Capital Expenditure
(8,793) (12,137) (14,814) (23,996)
(26,296)
Investments
(3,077)
INV. CASH FLOW
30,182
(5,437)
45,236
(17,958)
OPER. CASH FLOW
(8,874)
(39)
(39)
(11,871) (17,574) (23,688) (24,035)
(26,335)
Reserves & Surplus
57,919
88,682 116,671 161,125
211,289
Shareholder's Funds
58,408
89,661 117,650 162,103
212,268
Long Term Loans
-
4,429
5,623
5,623
5,623
Minority Interest
1,564
2,121
2,346
2,897
3,531
Other non-current liab
3,130
2,170
801
800
800
85,626 130,587 170,155 236,195
304,912
Total Liabilities
Key Ratios and Assumptions
Year to March
F2006
F2007
F2008E
F2009E
F2010E
ROE
64.10
55.81
49.23
42.37
35.73
36.8
37.4
31.6
27.8
25.9
Free Cash Flow
4,577
12,609
21,548
27,940
29,859
Issue of shares
250
1,046
225
551
634
Avg Price Relz(% YoY)
0.5
3.9
4.3
2.6
1.6
(948)
4,053
942
-
-
Avg FX Rate (Rs/US$)
43.90
44.75
40.14
38.16
36.48
(6,606) (11,743) (11,743) (13,700)
Incr/(Decr) in Debt
Dividends paid
Others
4,059
Volume (% chg YoY)
(15,658)
Emp Costs as % of Rev
42
54
55
57
58
(1,117)
(1,064)
SG&A as % of Revenue
20.1
19.2
21.2
21.0
19.9
(5,454) (21,872) (14,267)
(16,088)
Effective Tax Rate (%)
14.5
13.8
13.3
16.6
22.0
1,190 (11,296)
FIN. CASH FLOW
(3,245)
NET CASH FLOW
1,332
7,155
(324)
13,674
13,771
Cash & Eq at Yr Beg.
2,633
3,965
11,120
10,796
24,470
Cash & Eq at Yr End
3,965
11,120
10,796
24,470
38,241
E = Morgan Stanley Research estimates
Source: Company data, Morgan Stanley Research
136
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Tata Steel
Earnings Likely to Surprise the
Street; Overweight
Morgan Stanley India
Company Private Limited+
Vipul Prasad
Vipul.Prasad@morganstanley.com
Key Statistics
Stock Rating: Overweight
Reuters: TISC.BO Bloomberg: TATA IN
India Tata Steel
Attractive
Rs993.40
Price target
Rs671.05
Share price, close (January 22, 2008)
Rs471,415
Market cap (mn)
Rs969.80-352.64
52-Week Range
702.50
Shares outstanding, basic, currency (mn)
Ketaki K. Kulkarni
Company Description
Tisco, a flagship company of the Tata group, is the second-largest steel
maker in India with a capacity of 5 mtpa with a high level of vertical
integration. Its sales basket consists of 40% long products with flat
products constituting the rest. Tata Steel has brownfield expansion
plans of 2.4 mtpa and greenfield expansion plans of 9 mtpa at various
stages of implementation. The company is considering acquisitions to
boost growth.
Ketaki.Kulkarni@MorganStanley.com
Investment Conclusion
High sensitivity to steel prices, strong cash flow generation
from Corus, and compelling valuations continue to make Tata
Steel one of our top picks in the India Metals space.
Recent Developments
Despite higher iron ore and coking coal costs, we expect
more earnings upgrades on the Street. We believe that
currently steel markets are conducive to a full pass-through of
the impending input cost inflation for CY2008, a scenario that
doesn’t seem to be recognized by the Street.
Key Investment Issues
•
Strong steel price outlook in India and Europe.
•
Improving raw material self-sufficiency.
•
Corus operational improvements and synergies.
•
Decreasing net debt/equity.
•
Impressive volume growth.
Valuation Methodology
Our price target is based on a DCF model with an explicit
phase of seven years. Our WACC estimate for the company
is 12.2%. Our long-run pricing for steel has been pushed up
to US$385 per ton from the earlier level of US$365 per ton,
while our long-run prices for coking coal and iron ore have
been upgraded by 6.7% and 11.1%, to US$80 (hard coking
coal) and US$50 (63.5% fines) per ton, respectively. In
addition, with enhanced clarity on the company’s Jamshedpur
3 mtpa brown field expansion project, we have included this
project in our valuation exercise.
What We Like
•
Stock deserves a re-rating: We believe the stock is due
for a re-rating owing to the firm’s high steel price
sensitivity (a 5% steel price change affects EPS by 37%),
the likelihood of strong cash flow generation, diminishing
balance sheet risk and enhanced clarity on synergy
gains.
•
Total iron ore reserves could be worth 44% of current
stock price: Tata Steel’s iron ore and coking coal
reserves are much more valuable than what they were
before the Corus acquisition, we believe. We view the
Corus acquisition as a positive step towards monetizing
the company’s iron ore reserves.
•
Production growth in India indicates strong future
trend: Tata Steel’s brown field steel capacity addition will
ratchet up the Jamshedpur operation’s capacity by about
35% to 6.8 mtpa. Tata Steel has also made good
progress on its planned Orissa greenfield plant of 6 mtpa
capacity.
What We Don’t Like
Since Corus is not fully integrated, a surge in key raw
materials prices like iron ore and coking coal and the
company’s inability to pass on these costs may dampen
sentiment and hurt earnings.
Post-Corus acquisition, Tata Steel has a highly levered
balance sheet; hence, any hike in interest rates may increase
financing costs.
137
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Risk-Reward Snapshot: Tata Steel
Investment Thesis
Risk-Reward View: Earning Surprises – Re-rating Looks Likely
Rs1,200
Rs1,135 (+69%)
1,100
1,000
Rs993 (+48%)
900
800
Rs 671.05
700
Rs506 (-25%)
600
500
• Improving steel price outlook – We
expect steel prices globally to remain
strong over the coming months.
• Consensus earnings will likely be
revised with improving outlook for
Tisco and Corus; improved investor
sentiment should boost valuations too.
Key Value Drivers
400
300
200
Jan 06
May 06
Sep 06
Price Target
Jan 07
May 07
Sep 07
Historical Stock Performance
Jan 08
May 08
Sep 08
Jan 09
Current Stock Price
Price Target Rs993.40
Derived from our base-case scenario.
Bull
Case
Rs1,135
Higher steel prices/synergy: Our DCF-based Bull case
incorporates higher than Base case steel prices (3% higher for
F08 and 5% higher for F09 and F10), higher synergy gains from
Corus (50m in F09 and 200m in F10) and 66% capacity utilization
of the Jamshedpur plant in F11 as against 16% in the base case.
6.5x Bull
Case F09E
EPS of
Rs198
Base
Case
Rs993
6.1x Base
Case F09E
EPS of
Rs142
Improving steel price outlook: Our Base case DCF fair value
assumes WACC of 12.2% and a terminal growth rate of 2%. We
are modeling in long-term HR steel pricing of US$385 per ton.
We also assume that the Orissa and Jamshedpur projects will
start by F11 and F12, respectively.
Bear
Case
Rs506
8.4x Bear
Case F09E
EPS of
Rs68
Global demand slump hits steel prices: Our Bear case
scenario takes into account: (1) a pessimistic steel price outlook
of 6% lower than our base case; (2) Jamshedpur 3 mt and Orissa
plant starting in F13; and (3) input prices that are 10% higher than
our base case.
From Bear to Bull – Steel Prices, Synergies, Production Costs Are Keys
1,600
• Steel prices. Tisco (consolidated) is
highly sensitive to steel prices.
• Diverse, robust volume growth.
Improving product mix and strong
volume growth should positively
surprise the Street.
• Raw material costs inflation could
have an adverse impact on the
company’s Corus operations.
Potential Catalysts
• Hike in steel prices in the coming 69 months.
• Strong results in the next 2-3
quarters , especially from Corus.
• Timely completion of expansion
projects in Jamshedpur.
Key Risks
• Surge in Chinese steel exports, slump
in global demand, thus putting
downward pressure on steel prices.
• Delay in project execution.
• Substantial increase in the prices of
iron ore and coking coal.
• Correction in the Indian stock market.
Indian Rupee (Rs)
1,400
119
1,200
432
1,000
21
9
1,135
993
800
600
400
14
34
Current Price
671
506
200
0
Bear
Case
Steel
Prices
New
Projects
Input
prices
Base
Case
Steel
Prices
New
Corus
Projects Synergies
Bull
Case
Source: Morgan Stanley, FactSet
138
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Tata Steel: Financial Summary
Rs million; Years Ending March
Income Statement
Cash Flow Statement
Rs Bn (Yr Ended March)
F07
F08E
F09E
F10E
Net Sales
Change in Inventory
Raw Materials
Employee Costs
Other Operating Costs
Total Expenses
EBITDA
Other Income
Depreciation
Interest Expense
PBT
Tax
Reported PAT
PAT for Equity Shareholders
252
(1)
45
16
47
179
73
4
10
4
63
21
42
42
1,170
(4)
443
145
295
962
208
8
40
32
145
38
107
107
1,297
(4)
515
149
308
1,060
237
10
42
27
178
48
130
130
1,338
(5)
545
153
314
1,097
241
9
44
22
183
51
133
133
Balance Sheet
Rs Bn (Yr Ended March)
Share Capital
Reserves
Net Worth
Convertible Preference Shares
Loans
Deferred Tax Liabilities
Retirement Benefit Obligations - Long Term
Other Long Term Liabilities
TOTAL
Goodwill
Other Intangible Assets
Gross PP&E
Accumulated Depreciation
Net PP&E
Capital WIP
Investments
Retirement Benefit Assets
Deferred Tax Assets
Current Assets
Inventory
Debtors
Cash & Bank
Other Current Assets
Current Liabilities & Provisions
Creditors
Other Current Liabilities
Provisions
Net Current Assets
Misc. Expenditures
TOTAL
F07
F08E
F09E
F10E
5.80 7.73 7.73 8.64
139
383
495
610
145
391
503
619
- 0.914 0.914
249
413
352
340
8
17
18
18
16
16
16
11
29
29
29
421
874
925 1,028
2
182
182
182
5
5
5
201
915
985 1,013
92
567
609
653
109
348
376
360
33
85
111
233
165
47
44
43
35
35
35
14
14
14
184
400
412
404
23
169
189
194
6
143
145
148
109
40
28
12
46
47
50
50
75
244
255
250
51
182
185
169
4
10
10
10
21
52
60
71
109
156
157
154
2
2
3
3
421
874
925 1,028
Rs Bn (Yr Ended March)
Net Profit
Depreciation
Chg in Inventory
Chg in Debtors
Chg in Other Current Assets
Chg in Creditors
Chg in Other Current Liab
Chg in Provisions
Capex
Chg in Investments
Chg in Ret. Benefit Assets
Chg in Defrd Tax Assets
Chg in Goodwill
Chg in Other Intangible Assets
Chg in Equity & Pref Shares
Chg in Borrowings
Dividend Paid
Chg in Def Tax Liab
Chg in Ret. Benefit Oblig.
Chg in Other Long Term Liab
Inc / (Dec) in Cash
F07
F08E
F09E
F10E
42
10
(2)
(1)
(22)
21
1
10
(44)
(130)
(1)
16
215
(11)
(2)
(3)
101
107
40
(146)
(137)
(2)
131
6
32
(330)
118
(35)
(14)
(180)
(5)
160
163
(20)
10
16
18
(69)
130
42
(20)
(2)
(2)
3
0
8
(96)
3
(61)
(18)
0
(12)
133
44
(5)
(3)
(0)
(16)
0
11
(150)
1
0
(12)
(18)
0
(16)
Ratio Analysis
Rs Mn (Yr Ended March)
F07
F08E
F09E
F10E
Share Price
Modelware EPS
Reported EPS
Book Value Per Share
(Diluted)
DPS
Valuation
P/E
EV/EBITDA
P/B
Profitability Ratios (%)
EBITDA Margin
Net Profit Margin
Average RoE
Average RoCE
Turnover Ratios
Debtors (Days)
Inventory (Days)
Creditors (Days)
Growth (%)
Net Sales
EBITDA
Net Profit
Modelware EPS
Leverage Ratio
Net debt/Equity (x)
450
72
72
671
117
138
671
142
168
671
145
154
250
16
452
22
582
20
716
18
6.2
5.5
1.8
5.7
4.6
1.5
4.7
3.8
1.2
4.6
3.8
0.9
28.9
16.6
33.7
15.8
17.8
9.1
39.9
21.4
18.3
10.0
29.1
17.4
18.0
9.9
23.7
15.9
9
48
103
45
64
69
41
65
64
40
64
56
24
16
12
7
364
185
156
62
11
14
22
22
3
1
2
2
1.0
1.0
0.6
0.5
E = Morgan Stanley Research estimates
Source: Company data, Morgan Stanley Research
139
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Titan Industries Ltd
Driven by India’s Affluent
Consumers
Morgan Stanley India
Company Private Limited+
Hozefa Topiwalla
Hozefa.Topiwalla@morganstanley.com
Key Statistics
Stock Rating: Overweight
Reuters: TITN.BO Bloomberg: TTAN IN
India Retail
In-Line
Price target
Rs1,732.00
Share price, close (January 22, 2008)
Rs1,103.90
Market cap (mn)
Rs49,001
52-Week Range
Rs730-1795
Shares outstanding, basic, currency (mn)
44.4
Divya Gangahar
Company Description
Titan Industries Ltd. is India's leading manufacturer and retailer of
watches and jewelry and the world's sixth-largest manufacturer of
branded watches. Titan has a well-established retail model with 222
World of Titan showrooms and 102 Tanishq boutiques. Titan aims to be
a $1 billion company by 2010.
Divya.Gangahar@morganstanley.com
Nillai Shah
Nillai.Shah@morganstanley.com
Investment Conclusion
We have an Overweight rating on Titan Industries with a price
target of Rs1,732. We consider Titan one of the best plays on
Indian consumers’ affluence and the country’s changing
demographics. The company is successful and profitable,
dominates potentially high-growth categories, has the best
brands in the business, and is nimble in responding to
evolving consumer needs. Improvement in Titan’s product
mix is likely to be its key value driver.
Recent Developments
•
Made a foray into prescription eyewear with the launch of
Titan Eye+ as a one-stop shop for eye care and style.
•
Launched Gold Plus to cater to the mass-market jewelry
segment. Has received encouraging feedback from the
initial 12 stores rolled out in Tier II cities.
•
Focusing on the Rs5,000-10,000 price range, Titan has
launched new product ranges like Raga Crystals, The
Heritage Collection and the Aviator range of watches.
What We Like
•
One of the best plays on consumer income growth:
We believe India’s per capita income has the potential to
grow at a CAGR of 10% over the next nine years. Both
watches and branded jewelry have a strong correlation
and high elasticity with income growth and hence are set
to grow rapidly in the next few years.
•
Story of improving product mix: Over 80% of Titan’s
incremental innovation is focused on the Rs5000-plus
watch segment, a segment expected to grow dramatically
in the next few years. Titan is likely to launch 4-6 new sub
brands in the segment over the next 1-2 years to drive
consumer uptrading, thereby increasing realizations.
Similarly, Titan’s product mix in jewelry would improve as
the proportion of studded jewelry increases.
•
Market dominance: Titan is the market leader in both
organized watches and jewelry, with market shares of
over 60% and 70%, respectively, in each segment.
•
Flexible organization to better capitalize on
opportunity: Titan’s proactive approach backed by a
nimble management is likely to be the key distinguishing
factor in adapting to changing consumer dynamics. It has
a well-developed distribution channel, which would act as
an advantage in capitalizing growth opportunities.
Key Investment Issues
•
Impact of the changing product mix in the watch industry.
•
Potential role of foreign watch retailers – possibility of
India going the China way, that is, imported watches
dominating the market in value terms.
•
Impact of jewelry revenues outpacing watches on overall
margins.
•
Progress of new formats/brands and product pipeline.
Valuation Methodology
We estimate Titan’s one-year forward intrinsic value based on
our residual income model at Rs1,649 per share. Our price
target is derived by applying a 5% premium to this as we
believe there is a strong probability that Titan will beat our
earnings forecast. In our RI model, we assume a cost of
equity of 13.3%, a beta of 1.1, a risk premium of 5%, and a
risk-free rate of 7.8%.
What We Don’t Like
•
Potential increase in competitive activity: In the watch
segment, competitive pressures are likely to rise as
foreign players stir up the premium and luxury segment.
•
Dependence on economic growth and rapidly
changing consumer tastes: Titan’s fortunes are closely
linked to the India economy and its ability to keep pace
with the ever-changing demands of the Indian consumer.
140
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Risk-Reward Snapshot: Titan Industries Ltd
Investment Thesis
Risk-Reward View: Favorable Long-Term Outlook
Rs3,000
Rs2,498 (+126%)
2,500
2,000
Rs1,732 (+57%)
1,500
Rs1,103.90
1,000
Rs828 (-25%)
500
0
Jan 06
May 06
Sep 06
Price Target
Jan 07
May 07
Sep 07
Historical Stock Performance
Jan 08
May 08
Sep 08
Jan 09
Current Stock Price
Price Target Rs1,732
PT is derived by adding a 5% premium to the one-year forward
RI-based IV calculation.
Bull
Case
Rs2,498
40.9x Bull
Case 08e
EPS
Margin expansion across businesses: Watches: 20.4% CAGR
in revenues during F2007-20; EBIT margin improves from 15% to
19%. Jewelry: Revenue 24.7% CAGR; EBIT margin rises from
6.7% to 11%. Other businesses achieve 5-12% EBIT margin.
Base
Case
Rs1,649
41.9x Base
Case 08e
EPS
Product mix-led growth: Watches: 15.6% CAGR in revenues
during F2007-20; EBIT margins improve by 50 bps to 15.5%.
Jewelry: Revenue posts 21.2% CAGR; EBIT margin increases
from 6.7% to 8.5%. Other businesses achieve 2-8% EBIT margin.
Bear
Case
Rs828
44.8x Bear
Case 08e
EPS
Increase in competitive pressures: Watches register 10.1%
CAGR in revenues during F2007-20 as EBIT margins decline 50
basis points. Jewelry revenue posts 10.9% CAGR on flat margins.
Other businesses break even.
• Macro environment in India is highly
favorable for retailers of premium
products (watches and jewelry). Titan
has built a formidable lead over
potential competitors with strong
brands and distribution, critical for
growth in this business.
• Although the stock is factoring in
some long-term growth potential, it
does not fully reflect the potential
improvement in Titan’s product mix
and the company’s strong lead over
the competition.
• Titan has been nimble and proactive
in addressing evolving consumer
needs with products, brands, and
distribution.
Key Value Drivers
• Product mix-led growth and margin
improvement in the watch business.
• Sustained long-term growth in the
jewelry business, driven by shift in
consumer preference to branded and
organized jewelry retailing.
• Moderate success in building new
businesses such as Eyewear and
mass market Gold retailing.
• Turnaround in International and PED
businesses.
Potential Catalysts
Bear to Bull: There Is Upside Potential to Our Numbers
3,000
Price Target: 1,732
424
2,500
264
2,000
491
2,498
138
1,500
Risks to Price Target
1,649
192
1,000
500
161
828
0
Bear
Case
Just Break- Jewellery
Watch
even in
business business
Other deceleratesdecelerates
business
Base
Case
• New distribution arrangements with
international watch brands.
• Maintenance/acceleration of samestore growth in jewelry business.
Watch
Jewellery Profitability
business business of Other
acceleratesaccelerates business
improves
Bull
Case
• Poor execution of store rollout plan.
• Failure of new businesses.
• Inability to manage competitive
pressures.
• Economic slowdown and resultant
sluggishness in income growth.
Source: Morgan Stanley, FactSet
141
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Titan Industries Ltd: Financial Summary
Rs million; Years Ending March
Income Statement
Net sales
Raw material
Gross Profit
Margin (%)
Employee costs
S, G & A
Operating Profit
Margin (%)
Interest
Depreciation
Other Income
Profit before Tax
Income Tax
Non-recurring income(expense)
Net Profit
Adjusted Net Profit
Net Margin (%)
Modelware EPS
Growth (%)
DPS
Cash Flow Statement
F2007
F2008E
F2009E
F2010E
20,902
13,744
7,158
34
1,671
3,502
1,984
9.5
204
256
32
1,556.6
432.7
(240)
884
1,120
5.4
25.23
15
5.00
29,877
19,901
9,976
33
2,443
4,953
2,581
8.6
204
286
34
2,125
574
0
1,551
1,551
5.2
34.95
39
10.49
39,449
25,858
13,591
34
3,427
6,786
3,377
8.6
226
315
36
2,872
775
0
2,097
2,097
5.3
47.23
35
14.17
51,295
33,460
17,835
35
4,456
9,049
4,330
8.4
270
345
39
3,754
1,013
0
2,740
2,740
5.3
61.73
31
18.52
Balance Sheet
Share Capital
Preferred Equity
Reserves & Surplus
Secured Loans
Unsecured Loans
Deferred tax liabilities
Total Liabilities
Net Fixed Assets
Trade Investments
Other Investments
Cash and Bank Balances
Debtors
Inventory
Loans & advances
Sundry Creditors
Provisions
Other accrued expenses
Dividends Payable
Misc. Expenditure
Total Assets
F2007
F2008E
F2009E
F2010E
444
0
2,831
1,727
743
174
5,919
2,671
263
7
507
921
6,775
655
4,586
554
777
6
42
5,919
444
0
3,917
1,727
900
174
7,162
2,986
263
7
184
1,221
9,359
1,374
6,544
870
814
6
0
7,162
444
0
5,384
1,727
1,300
174
9,029
3,270
263
7
69
1,613
12,227
1,814
8,278
1,097
852
6
0
9,029
444
0
7,302
1,727
2,000
174
11,647
3,525
263
7
76
2,097
15,813
2,621
10,493
1,362
893
6
0
11,647
Net income reported
Depreciation
Chg in working cap
Change in deferred tax liabilities
Cash flow from operations
Capital expenditure
Strategic investments
Other assets
Cash flow from investing
Equity raised
Incr/(Decr) of Pref share capital
Secured Loans raised
Unsecured Loans raised
Dividend (incl. tax)
Preferred Dividend paid
Cash flow from financing
Net chg in cash
F2007
F2008E
F2009E
F2010E
884
256
58
(63)
1,135
(967)
101
(866)
729
(400)
238
(447)
(260)
(4)
(144)
124
1,551
286
(1,293)
544
(600)
(0)
42
(558)
0
157
(465)
(309)
(323)
2,097
315
(1,699)
713
(600)
(600)
400
(629)
(229)
(116)
2,740
345
(2,356)
729
(600)
(600)
700
(822)
(122)
7
Ratio Analysis
Growth Ratios
Net sales growth (%)
Operating Profit growth (%)
Net profit growth (%)
EPS Growth (%)
Profitability
Operating Margin (%)
EBIT margin (%)
Net Margin (%)
Return on Avg Equity (%)
RNOA (%)
Net debt/Equity
Per share data and valuation
PE
Div Yield (%)
P/BV
FCFyr
P/sales
EV/EBITDA
EV/Sales
F2007
F2008E
F2009E
F2010E
45.1
29
20
15
42.9
30
39
39
32.0
31
35
35
30.0
28
31
31
9.5
8.3
5.4
43.1
23.2
0.60
8.6
7.7
5.2
40.6
24.9
0.56
8.6
7.8
5.3
41.2
25.5
0.51
8.4
7.8
5.3
40.4
25.7
0.47
33.4
0.6
11.4
0.0
1.8
19.8
1.9
33.3
0.9
11.9
(0.0)
1.7
21.0
1.8
24.7
1.2
8.9
0.0
1.3
16.2
1.4
18.9
1.5
6.7
0.0
1.0
12.8
1.1
E = Morgan Stanley Research estimates
Source: Company data, Morgan Stanley Research
142
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
United Phosphorus
The Indian Agrochemical
Multinational Company
Morgan Stanley India
Company Private Limited+
Ashish Jain
Ashish.G.Jain@morganstanley.com
United Phosphorous (UPL) is the third largest generic crop
chemical and twelfth largest crop protection company globally.
Other than agrochemicals (that contributed 84% of revenues
in F2007), UPL has interest in the industrial and specialty
chemical business and a 49.9% holding in the Hyderabad
(India) based agronomic seeds company, Advanta Limited. In
F2007, the company generated around 73% of its revenues
from exports (around 25% each from the US and Europe). In
the last couple of years, UPL has made aggressive
acquisitions across the world to gain market and product
access. The company has around eight manufacturing
facilities in India and 15 in Europe.
Key Statistics
Stock Rating: NOT RATED
Reuters: UNPO.BO Bloomberg: UNTP.IN
Share price, close (January 22, 2008)
Rs319.00
Market cap (mn)
US$1719.00
52-Week Range
Rs425.00 – 262.00
Stock Price Performance
U
n it e d P h o s p h o r u s
U n it e d P h o s p h o r u s
W e e k l y C l o s i n g P ri c e i n R s
500
500
400
400
300
300
200
200
100
100
0
400
0
400
R e l a ti v e P e rf o rm a n c e to M S C I I n d i a
200
200
0
0
-2 0 0
-2 0 0
T o t a l W e e kl y T u rn o v e r b y V a l u e i n R s b n
1 .0 0
1 .0 0
0 .5 0
0 .5 0
0
0
2003
2004
2005
2006
2007
Source: Datastream
Recent Developments
In the last 24 months, UPL has grown and expanded its
geographical reach through a series of acquisitions. UPL
acquired four companies – Advanta (seeds business) and
Cropserve, Cerexagri and Icona in the agrochemical
business. UPL has also acquired around seven products
from companies like DuPont, Dow Agrosciences and Bayer
CropSciences, which have helped to expand its product
portfolio.
Results Summary
In 3Q F2008, UPL reported 66% YoY growth in consolidated
revenues to Rs8 billion (including revenues from Cerexagri,
company acquired in March 2007 and hence not comparable).
Consolidated EBITDA margins declined 670bp to 17.2% and
EBITDA grew 20% to Rs1.3 billion. Net income rose 36% to
Rs486 million, buoyed by significantly higher other income.
UPL standalone revenues grew 10% YoY to Rs4 billion with
2% growth in agro-chemical business and 9% growth in
power business. EBITDA margins declined sharply to 10%
and EBITDA declined 42% to Rs400 million.
Company Description
United Phosphorus Limited (UPL) is the largest producer in India of crop
protection products with a wide range of products that include fumigant,
fungicides, insecticides, rodenticides, and herbicides. The company
ranks amongst the top five generic agrochemical companies in the
world.
formulations, technicals or even combinations. The company
has around 2200 employees with around 1000 employees
based outside India.
Shareholding
Promoter shareholding in the company is around 26% as of
December 2007. Foreign institutional investors hold around
45% (up from 35% as of June 2007) with domestic institutions
holding around 15%.
Company Overview
Agrochemical is the predominant business of UPL with
presence in pesticides (including insecticides, herbicides and
fungicides) and fumigant segment. Through acquisitions and
alliances, UPL has built a strong global network and today
has presence in Europe, America, Asia Pacific, CIS, Africa
and Australia. The company sells agrochemical products as
143
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
United Phosphorus: Financial Summary
Rs million; Years Ending March
Income Statement
Rs million
Total revenues
Cost of goods sold
Gross margin
Personal cost
Selling & administrative cost
Miscellaneous expenses
Cash Flow Statement
F2005
F2006
F2007
F2005
F2006
F2007
14,091
17,824
26,839
Profit Before tax
1,742
2,507
3,181
8,505
10,614
17,343
Add: Dep. & other non cash
1,539
2,144
1,363
(65)
(219)
(476)
(561)
(1,969)
4,424
5,586
7,210
9,496
Less: Tax paid
842
1,054
1,842
Net change in working capital
1,466
1,980
2,671
Change in inventory
Change in trade & other rece.
(654)
(1,432)
6,925
(1,069)
(1,421)
(2,095)
380
605
775
Operating expenses
2,688
3,639
5,287
Change in trade payables
1,162
884
(406)
Operating profits
2,898
3,571
4,209
Others
(807)
(950)
(1,822)
Other income
EBIDTA
Interest expense
Depreciation
Pre-tax profits
Taxation
Extraordinary items
Profit after tax
708
1,326
2,078
Net cash from operations
1,849
1,513
6,671
3,607
4,897
6,287
Capital expenditure
(865)
(1,452)
(1,270)
886
988
1,285
Purchase of investments
1,402
1,656
2,507
3,346
Net cash from investing
(3,606)
(7,003)
(13,008)
2,276
9,981
7,247
170
328
525
Borrowings
(1)
(43)
(47)
Dividend paid
(143)
(141)
(396)
1,561
2,206
2,868
Interest paid & others
(332)
(57)
(59)
36
(471)
Net cash from financing
F2005
F2006
F2007
369
376
375
Reserves & surplus
7,498
12,399
14,579
Networth
7,867
12,775
14,954
62
0
49
Debt
6,597
13,052
20,287
Total
14,525
25,827
35,290
9,383
10,517
17,984
380
351
753
9,763
10,868
18,736
108
2,237
3,910
336
4,158
4,604
3,966
5,386
10,435
Minority interest
Net block
Capital WIP
Net fixed assets
Investments
Cash & cash equivalents
Inventories
Receivables
3,637
4,298
5,697
Loans & advances
1,429
6,456
4,433
Current assets
9,032
16,140
20,565
Current liabilities & provision
5,324
7,995
12,504
Net current assets
3,708
8,145
8,061
20
10
7
590
409
(28)
14,525
25,827
35,290
Misc Exp
Net deferred tax
Total
(6,986)
(4,753)
978
Balance Sheet
Equity capital
(3,862)
(1,689)
1,742
Others
Rs million
(8)
(2,732)
Interest received & others
Inc/ (dec) in cash
1,837
9,311
(8)
6,784
80
3,822
447
Opening cash
256
336
4,158
Closing cash
336
4,158
4,604
Key Ratios
F2005
F2006
9
11
15
BVPS (Rs)
47
68
80
DPS (Rs)
1
2
2
EPS (Rs)
F2007
Profitability ratios
Gross margin
40%
40%
35%
Operating margin
21%
20%
16%
Pre-tax margin
12%
14%
12%
Net margin
11%
12%
11%
21
Valuation ratios
P/E
35
28
P/BV
7
5
4
ROE
20%
28%
34%
ROCE
36%
17%
15%
12
10
9
EV/EBITDA
Leverage ratios
Net debt/ equity
0.80
0.70
1.05
Total debt/ equity
0.84
1.02
1.36
Source: Company data
144
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Voltas Ltd
Margins Need to Sustain
Morgan Stanley India
Company Private Limited+
Parag Gupta
Parag.Gupta@morganstanley.com
Saumya Srivastav
Key Statistics
Stock Rating: Equal-weight
Reuters: VOLT.BO Bloomberg: VOLT IN
India Industrials
In Line
Price target
Rs221.00
Share price, close (January 25, 2008)
Rs209.90
Market cap (mn)
US$1,770
52-Week Range
Rs266.90-75.10
Shares outstanding, basic, currency (mn)
330.90
Saumya Srivastav@morganstanley.com
Investment Conclusion
Voltas is a market leader in the Heating, Ventilation and Air
Conditioning (HVAC) segment, which forms over 50% of its
total revenue base. The company has a strong order book
position in India and the Middle East for these services, which
should underpin its strong market position. While Voltas
continues to show strong revenue growth, operating margins
have been an area of concern in the past. In our view, the
profitability of the unitary cooling business (room airconditioning) and the international electro-mechanical
business (central air-conditioning) is critical since these
segments witnessed significant pressure on margins and
have started recovering only over the last two quarters.
Recent Developments
The company recently bought out two of its joint venture
companies to make them its wholly owned subsidiaries. The
first is a local Saudi Arabian company, which is engaged in
the execution, operations and maintenance of electro
mechanical parts. The second is Universal Comfort Products,
which is engaged in manufacturing room and split air
conditioners.
Key Investment Issues
•
Are operating margins sustainable in the unitary cooling
business?
•
Will large sized MEP projects put pressure on
profitability?
Valuation Methodology
We use the residual income method to derive our price target
of Rs221. We assume a 12.7% cost of equity and a 5%
terminal growth rate.
Company Description
Voltas offers engineering solutions for a wide range of industries
including heating, ventilation and air conditioning, refrigeration, electromechanical projects, textile machinery, machine tools, mining and
construction equipment, materials handling, water management,
building management systems, indoor air quality and chemicals.
What We Like
•
Revenues linked to rapid growth sectors. The
company is largely active in India and the Middle East
where the market for HVAC services has been witnessing
significant growth due to the IT/BPO, retail, hospitality,
entertainment (multiplexes) and healthcare segments.
Along with Blue Star and Carrier, Voltas commands 75%
of the market share in India for executing electromechanical projects and services and hence, stands to
gain from the positive momentum in the industry.
•
Revenue growth in the electro-mechanical segment
will likely be strong: The order book position of Rs27
billion at the end of September 2007 looks healthy. The
domestic business looks strong with incremental demand
coming from various airport and retail projects. In the
international business, Voltas is pursuing opportunities in
Qatar, UAE, Abu Dhabi, Bahrain and Saudi Arabia.
What We Don’t Like
•
Low margins on international operations. Voltas has
significant exposure to the Middle East market in the
electro-mechanical business where margins are lower
than the domestic business. Any pressure on margins
due to cost pressures could dilute overall margins.
•
Declining profitability in the engineering agency
business: The increasing share of forklift trucks and
cranes, which are manufactured by Voltas, has caused
operating margins in this segment to trend closer to 20%
from 33% two years back.
145
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Risk-Reward Snapshot: Voltas Ltd
Investment Thesis
Risk Reward – Sustainability of Margins Can Boost Value
Rs300
Rs287 (+37%)
250
Rs209.90
Rs221 (+5%)
200
Rs160 (-24%)
150
100
• Strong pace of growth in IT/BPO,
retail, entertainment and healthcare
sectors in India and the Middle East.
• Market leader in the electromechanical project and services
business.
• Uncertainty on margin expansion in
the unitary cooling and international
electro-mechanical businesses.
Key Value Drivers
50
Jan 06
May 06
Sep 06
Price Target
Jan 07
May 07
Sep 07
Historical Stock Performance
Price Target Rs221
Jan 08
May 08
Sep 08
Potential Catalysts
Same as Base Case
38.2x base- Strong margins across business segments:
Revenue CAGR (F2009-F2020)
case F2009E •
•
Earnings CAGR (F2009-F2020)
EPS
•
EBITDA Margin at 2014
29.4x base- Favorable trends in the HVAC segment:
Revenue CAGR (F2009-F2020)
case F2009E •
•
Earnings CAGR (F2009-F2020)
EPS
•
EBITDA Margin at 2014
21.3x base- Weak profits in unitary cooling and international HVAC
case F2009E segments:
•
Revenue CAGR (F2009-F2020)
EPS
•
Earnings CAGR (F2009-F2020)
•
EBITDA Margin at 2014
Bull
Case
Rs287
Base
Case
Rs221
Bear
Case
Rs160
Jan 0
Current Stock Price
22%
23%
9.4%
20%
20%
8.7%
19%
17%
7.4%
Key Downside Risks
• Cost overruns in international
projects.
• Intensifying competition in unitary
cooling business resulting in negative
margins.
• Faster revenue growth and improving
margins.
350
41
300
Indian Rupee (Rs)
• Turnaround in the unitary cooling
product business.
• Margin expansion in the electromechanical project and services
business.
Key Upside Risks
Strong Financial Performance Can Be a Key Trigger
25
250 Price Target: 221
200
150
• Strong growth in business segments.
• Possibility of margin expansion.
287
27
34
221
160
100
50
0
Bear
Case
Margins
deteriorate
Revenue
growth slows
down
Base
Case
Margin
expansion
Strong
revenue
growth
Bull
Case
Source: Morgan Stanley, FactSet
146
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Voltas Ltd: Financial Summary
Rs million; Years Ending March
Income Statement
Gross Revenue
Excise duty
Net Revenue
Employee costs
Cost of sales and services
Other expenses
Total operating expenses
EBITDA
Depreciation
EBIT
Cash Flow
F2005
F2006
F2007
F2008E
F2009E
15,508
20,227
25,983
34,624
45,105
737
683
14,771
19,544
716
25,267
779
33,845
902
44,203
1,546
1,925
2,596
3,554
4,641
10,881
14,571
18,782
24,775
32,312
1,812
1,931
2,610
3,063
3,912
14,239
18,427
23,988
31,392
40,866
532
1,118
1,280
2,453
3,337
133
141
156
164
187
F2005 F2006 F2007 F2008E F2009E
PAT
452
929
1,051
1,843
2,486
Depreciation
133
141
156
164
187
70
(193)
965
231
0
1
248
(586)
(324)
(1,394)
Cash Flow From Operations
656
1,125
1,585
1,913
1,279
Capex
246
(663)
(122)
(492)
(425)
28
11
(8)
0
0
274
(652)
(129)
(492)
(425)
0
Exceptional items
Change in working capital
Purchase and Sale of investments
Cash Flow From Investing Activities
Equity issuance
Inc/(Dec) in Borrowings
Dividend paid
0
0
0
0
236
(364)
215
0
0
(165)
(199)
(331)
(397)
(496)
399
977
1,124
2,289
3,150
Interest cost
87
64
99
109
109
Other income
222
242
481
614
727
534
1,154
1,506
2,794
3,768
Opening cash and cash equiv
Closing cash and cash equiv
1,627
PBT
Tax expense
PAT
Minority Interest
Equity share in affiliates
Profit after MI and affiliates
Exceptional items
PAT after exceptional items
82
224
454
950
1,281
452
929
1,052
1,844
2,487
(0)
(0)
(2)
(2)
(2)
-
-
0
0
0
452
929
1,051
1,843
2,486
70
(193)
965
231
-
523
737
2,016
2,073
2,486
EPS (Rs)
1.37
2.81
3.18
5.57
7.51
DPS (Rs)
0.50
0.60
0.80
1.20
1.50
Balance Sheet
F2005
F2006
F2007
F2008E
F2009E
Liabilities
Share Capital
Others
(419)
(64)
(182)
2
2
Cash Flow From Financing Activities
(349)
(627)
(298)
(395)
(495)
581
(154)
1,158
1,027
359
1,046
1,627
1,473
2,631
3,658
1,473
2,631
3,658
4,017
Change in cash and cash equiv
Ratio Analysis
F2005
F2006
F2007
F2008E
F2009E
Growth (%)
Revenues
8.6%
32.3%
29.3%
33.9%
30.6%
EBITDA
28.1%
110.2%
14.5%
91.7%
36.0%
EBIT
56.1%
144.7%
15.1%
103.7%
37.6%
EBT
43.9%
116.1%
30.5%
85.5%
34.9%
Net Profit
56.3%
105.4%
13.1%
75.4%
34.9%
EPS
56.3%
105.4%
13.1%
75.4%
34.9%
EBITDA
3.6%
5.7%
5.1%
7.2%
7.5%
EBIT
2.7%
5.0%
4.4%
6.8%
7.1%
EBT
3.6%
5.9%
6.0%
8.3%
8.5%
3.1%
4.8%
4.2%
5.4%
5.6%
Margins (%)
331
331
331
331
331
Reserves and Surplus
1,865
2,383
3,907
5,583
7,573
Net Profit
Total Shareholders Funds
2,195
2,714
4,237
5,914
7,903
Return (%)
Loan Funds
1,265
901
1,116
1,116
1,116
ROE
20.8%
37.9%
30.2%
36.3%
36.0%
2
3
4
6
8
ROCE
12.0%
27.6%
25.0%
36.9%
39.2%
3,463
3,617
5,358
7,036
9,027
4.3%
7.9%
7.2%
9.5%
10.2%
0.58
0.33
0.26
0.19
0.14
NC
NC
NC
NC
NC
Minority Interest
TOTAL LIABILITIES
ROA
Gearing
Assets
Debt/Equity
Gross Fixed Assets
2,864
3,163
2,851
3,321
3,746
Net Debt/Equity
Accumulated Depreciation
1,823
1,642
1,379
1,543
1,730
Valuations
Net Block
1,041
1,521
1,473
1,778
2,016
EV/EBITDA
129.7
61.5
53.0
27.2
19.9
72
114
128
150
150
P/E
153.3
74.6
66.0
37.6
27.9
1,113
1,635
1,601
1,928
2,166
31.6
25.6
16.4
11.7
8.8
297
286
293
293
293
0.2%
0.3%
0.4%
0.6%
0.7%
81
Capital Work-in-Progress
Net Fixed Assets
Investments
Deferred Revenue Expenditure
P/BV
Dividend Yield (%)
Turnover (days)
0
0
0
0
0
212
256
279
279
279
Inventory
73
73
81
81
Current Assets
7,800
8,824
11,805
15,872
20,189
Debtors
94
76
65
65
65
Cash and Cash Equivalents
1,627
1,473
2,631
3,658
4,017
Creditors
108
89
77
77
77
Less: Current Liabilities
7,586
8,858
11,252
14,994
17,917
Net Current Assets
1,842
1,440
3,184
4,535
6,289
TOTAL ASSETS
3,463
3,617
5,358
7,036
9,027
Deferred Tax Assets
E= Morgan Stanley Research estimates; NC = Net Cash
Source: Company data, Morgan Stanley Research
147
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Wipro Ltd.
Focus on Inorganic Growth
Morgan Stanley India
Company Private Limited+
Vipin Khare
Vipin.Khare@morganstanley.com
Gaurav Rateria
Key Statistics
Stock Rating: Equal-weight
Reuters: WIPR.BO Bloomberg: WIPRO IN
India Software
In-Line
Price target
Rs490.00
Share price, close (January 28, 2008)
Rs406.25
Market cap (mn)
Rs585,597
52-Week Range
Rs683.00-425.00
Shares outstanding, basic, currency (mn)
1460.70
Gaurav.Rateria@morganstanley.com
Investment Conclusion
We rate Wipro Equal-weight. Over the past two years, Wipro
has focused on expanding its services offerings through
acquisitions. These acquisitions, though small, have lower
margins compared to company averages, and lead to margin
dilution in the short-to-medium term. Acquisitions of lowmargin non-IT businesses are likely to help revenues, but also
likely to affect overall margins.
Recent Developments
In 3Q F2008, revenues at Rs53bn (10.8%qoq, 33%yoy) were
below our estimates. EBIT at Rs9.4bn (10.6%qoq, 19.7%yoy)
and EBIT margins at 17.8% (-1bps qoq, -201bps yoy), net
profit at Rs8.5bn (+3.7%qoq, +11.6%yoy) were also below our
and consensus estimates. Global IT revenues at US$910m
were ahead of guidance but marginally below our estimates.
Volume growth of 6% was better than peers, however,
margins have declined by 260bps in 9mFY08 with onsite
wage hikes to impact margins in Mar08 quarter.
Key Investment Issues
1) High exposure to the telecom/tech sectors (33% of
revenues) – any slowdown in these sectors may adversely
affect earnings. 2) Higher-than-expected attrition and/or wage
inflation especially in the BPO business segment. 3)
Acquisition-related risks.
Valuation Methodology
We believe P/E remains the most appropriate valuation
measure given Wipro’s profitable track record and earnings
visibility. We base our price target of Rs490 on 18x one-year
forward EPS. Our target P/E multiple is based on a 5%
discount to that for TCS because of the lower margins and the
acquisition-related risks.
Company Description
Wipro provides high-end R&D services along with application
development and maintenance services to corporate giants and global
technology organizations. Wipro also manages IT infrastructure for
both types of customers globally. Wipro's solutions cover a wide range
of business areas including hardware design, system software and
embedded software, telecom software, BPO, e-commerce consulting,
web enabling, and customer management.
What We Like
•
Relatively lower exposure to BFSI: Wipro generates
around 25% revenue from banking, financial services,
and insurance, against 35%-plus for other larger peers.
•
Diversified service offerings: Wipro has one of the
largest infrastructure and BPO businesses among the
large offshore vendors, with a run-rate of over US$300
million each.
•
Non-IT businesses account for 32% of revenues and
18% of EBIT. Non-IT business has lower margins, but,
given its domestic nature, also cushions against the
impact of rupee appreciation to some extent.
•
Presence in Europe contributing 30% of revenues.
What We Don’t Like
•
Margin dilutive acquisitions and declining contribution
from global IT business remains a drag on profitability.
•
Slower growth from telecom clients because of clientspecific issues.
•
Pricing improvement lags peers: Price increases for
Wipro have remained relatively muted at 2-3% YoY over
the past four to six quarters versus 3-6% YoY for peers.
•
Flattish budget: For the three large vendors,
management expects flat to slightly higher budgets with
some companies mentioning delays in project starts.
148
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Risk-Reward Snapshot: Wipro Ltd.
Investment Thesis
Risk-Reward View: Dilutive Acquisitions Affecting Performance
Rs700
650
600
Rs545 (+34%)
550
500
Rs490 (+21%)
450
Rs 406.25
400
Rs325 (-20%)
350
300
• Strong demand for offshore IT
services.
• Volume growth has been robust;
Margin performance has broadly been
in line with that of top peers.
• 2H margin comparison will be more
difficult relative to peers because of
wage increases.
• Wipro offers a wider range of services
including R&D services, BPO, testing,
and infrastructure services.
Key Value Drivers
Jan 06
May 06
Sep 06
Price Target
May 07
Sep 07
Historical Stock Performance
Price target Rs490
Bull case
Rs545
Jan 07
Jan 08
May 08
Sep 08
Jan 09
Current Stock Price
Derived from the base case
20x baseSynergies from acquisitions to drive growth and value: Our
case F2009E bull case assumes 23.2% revenue CAGR and 22% EBIT CAGR
EPS
for F2008-18 coupled with stable margins at 17.7% in FY09.
Base case
Rs490
18x baseSteady growth: 21.2% revenue CAGR and 20% EBIT CAGR for
case F2009E F2008-18 with margins declining to 16% by F2018. Revenue and
EPS
earnings growth of 26% and 19.6% in F2009.
Bear case
Rs325
12x baseSlow synergies from acquisitions: 17.8% revenue CAGR and
case F2009E 15.4% EBIT CAGR for F2008-18 with a larger margin decline to
EPS
14.4% by F2018 because of rising costs.
Bear to Bull: Profitability of Acquisitions is Key
600
Price Target: 490
500
Indian Rupee (Rs)
32
55
110
23
545
490
400
300
• Strong organic growth and ramp-ups
in new services.
• Strong cash flows and high return on
balance sheet parameters.
Potential Catalysts
• Any pricing improvement should
positively drive margins, earnings,
and stock price.
• Improvement in spending by telecom
equipment customers can accelerate
volume growth.
Key Risks
• Further slowdown in spending by
telecom equipment clients.
• Challenges for BPO business
because of high employee attrition.
• Integration issues or costs because of
the several small acquisitions the
company has made.
325
200
100
0
Bear
Case
Slow organic
growth
Lower
profitability
Base
Case
Acqusitions
boosts growth
Better
profitability
Bull
Case
Source: Morgan Stanley, FactSet
149
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Wipro Ltd.: Financial Summary
Rs million; Years Ending March
Consolidated Profit & Loss Account (Rs m)
Year to March
Total Revenue
Growth (%)
2006
2007
2008E
2009E
2010E
106,264
150,008
199,199
251,343
306,112
41.2
32.8
26.2
21.8
30.0
Cost of Revenue
-68,338
Gross profit
Consolidated Balance Sheet (Rs m)
-97,690 -135,365 -172,490 -211,937
As at 31st March
Net Fixed Assets
2006
2007
2008E
2009E
2010E
18,154
28,484
39,126
46,739
56,041
Intangibles
3,528
9,477
41,309
41,309
41,309
Liquid Investments
29817
32206
25000
25000
25000
982
1,043
1,043
1,043
1,043
2,065
4,150
4,912
6,197
7,548
21,272
29,391
38,203
48,203
58,706
8,858
19,782
29,051
54,375
76,118
Other Assets
10,966
16,981
22,424
28,138
38,334
37,926
52,318
63,834
78,853
94,176
35.7
34.9
32.0
31.4
30.8
-12,320
-17,938
-23,244
-28,790
-34,605
25,606
34,379
40,590
50,063
59,571
24.1
22.9
20.4
19.9
19.5
Depreciation
-3,099
-4,046
-5,291
-6,314
-7,469
Current Assets
43,160
70,304
94,589
136,914 180,707
EBIT
22,507
30,333
35,299
43,749
52,102
Total Assets
95,642
141,514
201,067
251,005 304,100
21.2
20.2
17.7
17.4
17.0
4,146
7,060
9,824
12,395
15,096
Other Income
1,272
2,582
3,214
3,374
4,418
Other liabilities
24,624
34,640
38,477
58,323
77,996
Pretax Profits
23,778
32,915
38,513
47,122
56,520
Short term Debt
26,512
Tax
-3,391
-3,868
-5,034
-6,810
-11,325
14.3
11.8
13.1
14.5
20.0
-1
6
-7
0
0
288
294
275
279
289
20,674
29,348
33,748
40,591
45,484
Margin (%)
SG&A
EBITDA
Margin (%)
Margin (%)
Eff tax rate (%)
Minority Interest
Associate Income
Recurring Net Profit
Growth (%)
25.5
42.0
15.0
20.3
12.1
FD EPS (Rs)
14.5
20.40
23.17
27.72
30.89
Consolidated Cash Flow Statement (Rs m)
Year to March
2006
2007
2008E
2009E
2010E
PAT
20,674
29,410
33,748
40,591
45,483
Depn
2,958
6,083
5,291
6,314
7,469
Tax adjusted..
Long Term Investments
Inventory
Receivables
Cash & Equivalents
Creditors
307
2,338
26,512
26,512
Current Liabilities
29,077
44,038
74,812
97,230 119,604
Net Current Assets
14,083
26,266
19,777
39,684
61,102
451
1,489
2,792
2,792
2,792
0
29
117
117
117
2,851
2,877
2,905
2,921
2,931
24,530
24,530
Long term debt
Minority Interest
Share Capital
Share premium
14,378
24,530
24,530
Reserves
48,884
68,551
95,911
123,415 154,125
Shareholders' Equity
66,114
95,958
123,346
150,866 181,587
Total Liabilities
95,642
141,514
201,067
251,005 304,100
Key Ratios and Assumptions
Year to March
2006
2007
2008E
2009E
2010E
ROE
34.8
36.3
29.9
29.6
27.4
Volume (% chg YoY)
39.5
35.4
30.3
25.8
27.9
2,531
660
5,034
6,810
11,325
Wrkng Cap Chg
(6,940)
2,200
(17,250)
(8,000)
(12,596)
Op Cash Flow
19,223
38,354
26,822
45,715
51,681
Avg Blended Price % chg YoY)
-2.2
0.9
1.9
1.6
1.1
Capital Exp
(7,561)
(16,413)
(15,933)
(13,927)
(16,771)
Avg realised FX Rate (Rs/US$)
44.4
45.1
40.1
38.4
36.4
Free Cash Flow
11,663
21,941
10,889
31,788
34,910
Investments
(7,307)
(2,450)
7,206
0
0
(14,868)
(18,863)
(8,727)
(13,927)
(16,771)
136
3,070
25,477
0
0
6,258
10,207
116
16
10
(3,972)
(15,740)
(7,588)
(6,479)
(13,177)
2,135
(5,949)
(31,832)
0
0
Reserve adj.
(5,781)
(155)
5,000
0
0
Fin Cash Flow
Invs Cash Flow
Debt
Share Issue
Dividend Paid
Others
(1,224)
(8,567)
(8,827)
(6,463)
(13,167)
Net cash Chg
3,132
10,924
9,268
25,325
21,743
Opg Net (Cash
5,726
8,858
19,782
29,051
54,375
Clg Net (Cash
8,858
19,782
29,051
54,375
76,118
Employees (IT)
37,655 50,354 61,344 79,222 96,196
SG&A as % of Revenue
11.6
11.7
11.7
11.5
11.3
Effective Tax Rate (%)
14.3
11.7
13.1
14.5
20.0
E = Morgan Stanley Research estimates
Source: Company data, Morgan Stanley Research
150
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Wire and Wireless India Ltd.
India’s Largest Cable TV
Multi System Operator
Morgan Stanley India
Company Private Limited+
Vipul Prasad
Vipul.Prasad@morganstanley.com
Key Statistics
Stock Rating: NOT RATED
Reuters: WIWI.BO Bloomberg: NWNW:IN
Share price, close (January 22, 2008)
Rs40
Market cap (mn)
Rs.8.7 b
52-Week Range
Rs.30.3-Rs.127
Stock Price Performance
W ir e a n d W ir e le s s ( In d ia )
W i r e a n d W i r e l e s s ( In d i a )
W e e k l y C l o s i n g P ri c e i n R s
140
140
Ketaki K Kulkarni
120
120
Ketaki.Kulkarni@MorganStanley.com
100
100
80
80
60
60
Wire and Wireless India Ltd (WWIL) is India’s largest multisystem operator (MSO) in the cable-TV industry. It has taken
over the cable business of Siticable, a wholly owned
subsidiary of Zee Telefilms Ltd, following a de-merger. WWIL
has presence in 43 cities and operates 52 head ends. It
operates through 4,000-plus franchisee local operators called
LCOs
Recent Developments
The government has rolled out the conditional access system
(CAS) in Mumbai, Delhi, and Kolkata from January 2007.
WWIL was able to garner a substantial subscriber base
through voluntary digital cable adoption and via rollout of the
CAS. Also, to reduce leakage in non-CAS areas, WWIL
started schemes for acquisition of 51% of LCOs in such
areas.
40
40
20
50
20
50
R e l a t i v e P e rf o rm a n c e to M S C I I n d i a
0
0
-5 0
-5 0
-1 0 0
-1 0 0
T o t a l W e e kl y T u rn o v e r b y V a l u e i n R s b n
5
5
0
0
J
F
M
A
M
J
J
A
S
O
N
D
J
Source: Datastream
Company Description
WWIL is a de-merged entity of Zee Telefilms and was listed in February
2007. Zee Telefilms holds a 44% stake in WWIL. WWIL operates as an
MSO. It has connectivity with cable TV service networks in 43 cities in
India. It has around seven million subscribers. It plans to expand its
reach to 66 cities and capture digital cable market demand.
Results Summary
In 2Q F2008, WWIL’s consolidated revenue was Rs673
million. The operating loss was Rs14 million, against Rs38
million in 1Q F2008. WWIL offers 192 channels on its digital
platform, among the highest number offered by any MSO.
Company Guidance and Outlook
WWIL targets to roll out in 66 cities within three years. Its
digital schemes include triple-play services. In phase one of
this planned rollout, it plans VOIP services; in phase two,
VOIP for local calls; and, in phase three, it plans to develop a
partnership model with telcos.
151
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Wire and Wireless India Ltd.: Financial Summary
Rs million; Years Ending March
Balance Sheet
Income Statement
2007
2007
SOURCES OF FUNDS
Income
Operational Costs
1,736.0
1,562.1
Personnel Costs
113.0
Admin Expenses
312.0
Selling and Distrib
37.4
Total Costs
2,024.5
EBITDA
(288.5)
Shareholders’ Funds
Share Capital
217,241
Reserves and Surplus
284,192
Loan Funds
Secured Loans
Unsecured Loans
TOTAL
2,212,266
434,995
3,148,694
APPLICATION OF FUNDS
Fixed Assets
Other Income
190.2
Gross Block
Less: Accumulated Depreciation/Amortization
1,802,394
671,352
Interest
169.2
Net Block
Depreciation
333.6
Capital Work-in-Progress
214,234
Investments
198,170
PBT
(601.1)
Exceptional Items
562.8
Tax
(52.0)
PAT
(1,111.8)
1,131,042
Current Assets, Loans and Advances
Inventories
720,360
Sundry Debtors
617,843
Cash and Bank Balances
Loans and Advances
154,260
1,521,306
Less:
Current Liabilities and Provisions
Current Liabilities
Provisions
Net Current Assets
Miscellaneous Expenditure
TOTAL
1,405,837
13,029
1,594,903
10,345
3,148,694
Source: Company data
152
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Yes Bank
The New Age Bank
Morgan Stanley India
Company Private Limited+
Anil Bang
Stock Price Performance
Yes Bank
Weekly Closing Price in Rs
Mansi.S.Shah@morganstanley.com
300
Anil Agarwal
250
250
Anil.Agarwal@morganstanley.com
200
200
150
150
100
100
Yes Bank is one of the new private-sector banks, and is
promoted by Mr. Rana Kapoor and Mr. Ashok Kapur, two
experienced bankers. Although it is relatively new and has a
small balance sheet of about US$4 billion, management
believes that it has created a niche for itself in the banking
space, with strong momentum in all its business segments,
mainly corporate and institutional banking, business and
transactional banking, and investment banking.
Recent Developments
•
Yes Bank raised US$84 million in December 2007 by
way of preferential equity placement of 14.7 million
shares to Orient Global Tamarind at an issue price of
Rs.225 per share.
•
Stock Rating: NOT RATED
Reuters: YESB.BO Bloomberg: YES IN
Share price, close (January 22, 2008)
Rs210
Market cap (bn)
US$1.9
52-Week Range
Rs277.8-116.55
Anil.Bang@morganstanley.com
Mansi Shah
Morgan Stanley Asia
Limited+
Key Statistics
Yes Bank is considering to raise further funds by way of
issuance of up to 20 million equity shares in one or more
tranches either through a qualified institutional
placement, preferential allotment, or other means.
Results Summary
Yes Bank reported 3Q F2008 profit of Rs5.4 billion, up 116%
YoY and 20% QoQ. Revenue growth was 101% YoY and
20% QoQ, led by net interest income growth of 82% YoY and
non-interest income growth of 124% YoY. About 54% of the
non-interest income was income from financial market
services. Loans growth was 79% YoY and 14% QoQ and
deposit growth was 104% YoY and 12% QoQ. Yes Bank has
no NPLs. The reported ROA improved to 1.5% from 1.4% in
the previous quarter.
Company Overview
Yes Bank has positioned itself as a bank with a knowledgedriven approach. Management believes that it has built up a
very high quality team, led by Mr. Rana Kapoor, which has
enabled the bank to grow in all its businesses.
50
100
300
50
100
Relative Performance to MSCI India
50
50
0
0
-50
-50
1.00
Total Weekly Turnover by Value in Rs Bn
0.50
1.00
0.50
0
0
2006
2007
2008
Source: Datastream
Company Description
Yes Bank is a new private-sector bank promoted by Mr. Rana Kapoor
and Mr. Ashok Kapur. It commenced operations in August 2004. It
provides a wide range of banking products and financial services
through its network of 60 branches. Rabobank owns about 18% stake
in Yes Bank.
Non-interest income is almost 50% of Yes Bank’s revenues.
This substantiates Yes Bank’s differentiated offering,
compared with other banks’ fee-based businesses. A
significant portion of Yes Bank’s non-interest income comes
from financial market services, which includes products such
as foreign exchange spot and forward transactions and
derivatives. Other revenue streams for Yes Bank are its
financial advisory services, fees from investment banking,
third-party distribution and trade guarantee services. Even on
the retail banking and the wealth management front, where
the bank is relatively new, management believes it is showing
good progress. The low-cost deposits proportion is currently
low, but improving as Yes Bank is expanding its distribution
network. It has 60 branches across 50 locations. It has
received additional licenses to open 57 new branches. Yes
Bank has a capital adequacy ratio of 14.2% with Tier 1 at
8.9% as of December 2007.
153
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Yes Bank: Financial Summary
Rs million; Years Ending March
Profit & Loss Statement
Per Share Data and Valuations
F2005
F2006
F2007
Per Share Data (Rs)
F2006
F2007
F2008E
Interest Income
300
1902
5876
EPS
2.0
3.4
6.4
9.5
Interest Expense
118
1047
4163
Book Value
21.2
28.1
42.9
56.2
Net Interest Income
181
855
1714
Core Operating Profit Per Share
3.5
5.8
NA
NA
Non Interest Income
182
997
1946
---CEB
78
419
1116
Valuations
---Capital Gains
26
40
106
PE
102.5
62.3
33.0
22.2
---Forex Income
70
477
330
Price to Book
9.9
7.5
4.9
3.7
---Others
8
61
393
P/ COP
59.6
36.3
NA
NA
Total income
363
1852
3659
E= IBES consensus estimates
Operating Expenses
399
861
1935
Ratios & Other Information
---Employee Expenses
213
501
1175
---Others
187
360
760
Operating Profit
-36
991
1724
Spread Analysis
Ratio Analysis
F2009E
F2006
F2007
Provisions & Contingencies
19
147
288
Yield on advances
7.3%
8.0%
Profit Before Tax
-56
844
1436
Cost of earning assets
4.0%
5.7%
Provision for Tax
-18
291
493
Net Interest Margin (NIM)
3.3%
2.3%
Profit After Tax
-38
553
944
Core Operating Profit
-62
951
1618
Net Interest Income
371%
100%
Non Interest Income
449%
95%
Operating Expenses
116%
125%
Operating Profit
NA
74%
Net Profit
NA
71%
Deposits
339%
182%
Advances
216%
161%
Total Assets
226%
167%
Return on Equity
14.0%
13.9%
Return on Assets
2.0%
1.2%
Balance Sheet
F2005
F2006
F2007
Liabilities
Share holders equity
2170
5727
7871
Deposits
6630
29104
82204
Borrowings
3697
4648
8673
Other Liabilities & Provisions
284
2147
12287
12782
41626
111034
Total Liabilities
Assets
Cash & balances with RBI
413
882
3898
Balances with banks & call money
117
1274
9031
Investments
3949
13501
30731
---SLR
2687
8119
21526
---Others
1262
5382
9206
Advances
7610
24071
62897
Fixed Assets
196
347
709
Other Assets
497
1550
3769
Total Assets
12782
41626
111034
Growth Ratios
Profitability Ratios
Efficiency Ratios
Operating Cost/Op Income
47%
53%
Operating Cost/ Avg Assets
3.2%
2.5%
Tier 1 Ratio
13.7%
8.2%
Tier 2 Ratio
2.7%
5.4%
Capital Adequacy Ratio
16.4%
13.6%
Capital Adequacy
Source: IBES, company data
154
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Zee Entertainment Enterprise
Limited
Improved Ratings Yet to Be
Reflected in the Stock
Morgan Stanley India
Company Private Limited+
Key Statistics
Stock Rating: Overweight
Reuters: ZEE.BO Bloomberg: Z IN
India ZEEL
Attractive
Price target
Rs393.00
Share price, close (January 22, 2008)
Rs260.35
Market cap (mn)
Rs125,305.00
52-Week Range
Rs362.80-200.54
Shares outstanding, basic, currency (mn)
433.50
Vipul Prasad
Vipul.Prasad@morganstanley.com
Ketaki K Kulkarni
Ketaki.Kulkarni@MorganStanley.com
Investment Conclusion
We have an Overweight rating and price target of Rs393,
implying 51% upside potential, for ZEEL due to the following
factors: 1) the ability of ZEEL to increasingly monetize its high
ratings; and 2) an expected jump in subscription revenues
because of the increase in the direct-to-home (DTH) and
reported cable subscriber base in the next 9-12 months.
Recent Developments
Strong F2Q08: PAT at Rs970m, Up 361% YoY, 19% QoQ
Advertising revenue of Rs2.2 billion represented an increase
of 28% YoY and 4% QoQ. This strong trend reflects the
company’s ability to raise ad rates amid ratings improvement.
Subscription revenues were 5% lower than our expectation
but up 10% YoY due to growing pains at the CAS
implementation level and relatively sober subscriber addition
growth by the DTH industry in the quarter.
Key Investment Issues
Handsome advertising revenue growth ahead
In view of rapidly improving ad ratings for ZEEL’s channels,
we believe the company can ratchet up its ad rates faster than
our earlier expectations. As the company is able to gain
market share at the expense of its general entertainment
genre competitors, we believe this will increasingly be
reflected in its stock price.
Growth of new distribution platforms the key for
subscription revenue growth: As DTH and addressable
cable distribution platforms look set for strong growth trends
beginning end-F2009, we believe ZEEL’s subscription
revenue growth may be headed for a strong growth period in
F2009 and F2010.
Company Description
Zee Telefilms Ltd produces and develops Hindi films, serials, game
shows and children's programs. The company is mainly focused on
production and distribution of content.
What We Like
Substantial ratings improvements = ad revenue growth
ZEEL has made rapid advances in its television ratings in the
last year, especially in the last three months. Management’s
conscious effort to spend more on enhancing content is
paying off, in our view, especially when most of its
competitors’ top-rated programs (these have been running for
more than 3-4 years now) are fighting audience fatigue.
Moreover, ZEEL has also gained from increased employee
turnover at its biggest competitor, STAR TV, in the last 12-18
months. As ZEEL’s ratings improve and as these
improvements show signs of sustenance, the company should
be able to successfully push up its ad rates over the next 3-4
quarters, in our view.
Subscription revenues (propped up by DTH) should take
the baton beginning mid-f09: Subscription revenue, which
until now has shown only muted growth, should start picking
up steam as DTH subscriber additions gain momentum. With
at least two or more serious players scheduled to enter the
fray (apart from existing players Dish TV and Tata Sky) in the
next 12-18 months, we would expect subscriber numbers to
grow strongly in the next 3-4 years.
What We Don’t Like
ZEEL is largely dependent on the general entertainment
genre, which is facing intense competition. The company is
also highly sensitive to GDP growth due to ad revenue growth.
Subscription revenues are dependent on the rollout of CAS on
which progress has been relatively slower due to regulatory
hurdles and stakes of parties involved in the chain.
Valuation Methodology
To calculate our price target, we use a DCF model with an
explicit phase of seven years and a terminal growth rate of
4%. We assume a WACC of 11.5% with a cost of equity of
13% and cost of debt of 8%.
155
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Risk-Reward Snapshot: Zee Entertainment Enterprise Limited
Investment Thesis
Improved Ratings Yet to Be Reflected in the Stock
Rs5 5 0
Rs5 0 5 (+ 9 4 % )
500
450
400
Rs 393 (+51%)
350
300
Rs 260.35
250
Rs2 3 5 (-1 0 % )
• We expect ZEEL’s general
entertainment channel to pose a
strong competition to STAR TV which
is the market leader in the genre and
hence enjoy high advertising
revenues.
Growth of new distribution
platforms the key for subscription
revenue growth
200
150
100
Ja n 0 6
M ay 06
Sep 06
P ric e Ta rge t
Ja n 0 7
M a y 07
Sep 07
His toric a l S toc k P e rform a nc e
Ja n 0 8
M ay 08
Sep 08
Ja n 0 9
Curre nt S toc k P ric e
Price Target Rs393
Derived from our base-case scenario.
Bull
Case
Rs505
Higher growth/market share: 2% higher growth in Indian TV
advertising market growth than our base case and a 3% higher
share for ZEEL in the total advertising TV market in the long run
(post F2012) on a higher market share and better ratings than our
base-case assumption.
46.6x Bull
Case 09e
EPS
Base
Case
Rs393
36.3x Base
Case 09e
EPS
Assuming 16% Indian TV market growth: Our DCF-based bull
case incorporates 16% growth in the Indian TV advertising market
growth and a 10% share for ZEEL in the total advertising TV
market in the long run (post F2012)
Bear
Case
Rs235
21.7x Bear
Case 09e
EPS
Pessimistic outlook for ZEEL and the TV market in India: In
this scenario, we are modeling TV advertising spend to grow at
3% lower than in our base case and ZEEL to have a 5% lower
share in the total TV advertising spend in India in the long-run
(post F2012).
Bull to Bear: TV Share in Ad Pie and Market Share in TV Ad Market
700
600
99
Indian Rupee (Rs)
Handsome advertising revenue
growth ahead
500
18
140
400
505
393
300
200
13
Current Price: 260
235
• Subscription revenue growth should
be rapid since DTH has started
capturing the share of the market
untouched by cable. ZEEL should
also benefit from the early adoption of
voluntary CAS since the leakage will
decrease with the rollout of CAS.
Key Value Drivers
• Substantial ratings improvements =
ad revenue growth.
• Additional subscription revenues
propped up by DTH and digitization.
Potential Catalysts
• Faster-than-expected rollout of CAS.
• Increase in TRP ratings.
Risks
• Fast rollout of competitors’ channels
and aggressive price-cutting could
hurt ZEEL’s advertising revenues,
posing a risk to our price target.
• Advertising revenue has high
sensitivity to corporate budgets and in
turn with GDP. Subsequently, any fall
in economic growth will adversely
impact ZEEL.
• Regulatory hurdles in the rollout of
CAS will impact subscription revenues.
100
0
Bear
Case
TV Share in Ad
Pie
ZEE share
Base
Case
ZEE share
TV Share in Ad
Pie
Bull
Case
Source: Company data, Morgan Stanley Research
156
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Zee Entertainment Enterprise Limited: Financial Summary
Rs million; Years Ending March
Income Statement
Cash Flow
2007A
Sales & Services
2008E
2009E
2010E
15,159 17,397 20,685 24,722
2007A
2008E
2009E
2010E
2,375
3,534
4,696
5,688
185
231
248
270
(3,559)
537
(581)
(1,265)
282
PAT
Operational Cost/Cost of Goods
8,080
7,945
9,077 10,790
Depreciation
Personnel Cost
1,017
1,240
1,320
1,515
Change in Current Assets
Administrative & Other Expenses
1,244
1,154
1,433
1,516
Change in Current Liabilities
801
(147)
509
Selling & Distribution Expenses
1,614
1,498
1,759
2,385
Change in Provisions
(40)
(763)
-
-
73
-
-
-
Total Expenses
EBITDA
12,008 11,882 13,633 16,249
Change in Deferred Tax Asset
3,204
5,560
7,096
8,517
(2,220)
-
-
-
EBITDA margin
21.1
32.0
34.3
34.5
Change in Tangible Assets (Capex)
143
(277)
(150)
(250)
Other Income
747
416
631
793
Change in Investments
698
-
-
-
Depreciation
185
231
248
270
Change in Miscellaneous Expenditure
10
-
-
-
Change in Minority Interest
-
Financial Expenses
Profit Before Exceptional Items and Tax
Provision for Taxation
Tax Rate (%)
PBT
334
355
258
226
3,432
5,390
7,220
8,814
Change in Secured Loans
999
1,752
2,383
2,953
Change in Unsecured Loans
29.1
32.5
33.0
33.5
2,433
3,638
4,838
5,861
Share of results in Associates
10
10
10
10
Minority Interest
68
114
151
183
2,375
3,534
4,696
5,688
Profit for the year
Change in Intangible Assets
360
114
151
2,088
-
-
-
(3,764)
-
-
-
Change in Equity
3,284
-
-
-
Dividends Paid
(650)
(530)
(704)
(853)
Dividend Tax Paid
(113)
(92)
(122)
(148)
Change in Cash Flow
(330)
2,607
4,047
3,723
Ratio Analysis
Balance Sheet
Share Capital
2007A
2008E
2009E
2010E
434
434
434
434
2007A
2008E
2009E
Modelware EPS
5.5
8.2
10.8
2010E
13.1
Share Price
300
260.35
260.35
260.35
Reserves & Surplus
25,748 28,659 32,529 37,215
P/E
54.8
31.9
24.0
19.8
Net Worth
26,181 29,093 32,962 37,649
EV/EBITDA
41.3
20.2
15.3
12.3
8.7
6.5
5.2
4.2
Minority Interest
Secured Loans
Unsecured Loans
819
932
1,084
1,084
EV/Sales
2,452
2,452
2,452
2,452
Profitability Ratios (%)
774
774
774
774
EBIDTA Margin (%)
21.1
32.0
34.3
34.5
CAPITAL EMPLOYED
30,225 33,251 37,272 41,958
Reported Net Profit Margin (%)
15.7
20.3
22.7
23.0
Intangible Assets
12,970 12,970 12,970 12,970
Turnover Ratios
Gross Block
2,702
2,848
3,048
3,348
Net Sales to Total Assets
0.5
0.5
0.6
0.6
Accumulated Depreciation
1,050
1,195
1,444
1,714
Net Sales to Fixed Assets
1.0
1.2
1.4
1.7
Net Block
1,652
1,653
1,605
1,635
Growth (%)
Capital WIP
219
264
214
164
Investments
2,326
2,326
2,326
2,326
75
75
75
75
Deferred Tax Asset
Current Assets, Loans & Advances
Program/Film Rights
18,088 20,157 24,785 29,774
2,016
2,016
2,016
2,016
24
162
186
222
5,331
5,719
5,667
5,080
955
3,562
7,608 11,331
Loans & Advances
9,762
8,698
9,308 11,125
Current Liabilities & Provisions
5,106
4,196
4,705
Inventories
Debtors
Cash and Bank
Net Current Assets
Miscellaneous Expenditure
TOTAL ASSETS
Sales (%)
-8.4
14.8
18.9
19.5
EBITDA (%)
18.9
73.5
27.6
20.0
Net Profit (%)
11.9
48.8
32.9
21.1
6.5
48.8
32.9
21.1
0.1
(0.0)
(0.1)
(0.2)
Modelware EPS (%)
Leverage Ratio
Net Debt/Equity (x)
E = Morgan Stanley Research estimates
Source: Company data, Morgan Stanley Research
4,987
12,981 15,961 20,081 24,787
13
17
17
17
30,225 33,251 37,272 41,958
157
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Industry Views: India
Industry
Industry View
Explanation
Capital Goods
In-Line
Cement
Cautious
Construction &
Infrastructure
Attractive
Consumer
Attractive
Financial Services
In-Line
Four-Wheelers:
Commercial
Vehicles
Cautious
Hotels
Attractive
Industrials
In-Line
IT Services
In-Line
Media
Attractive
Multi-Industry
Attractive
We have an In-Line view on the industry, given the high valuations that we believe already discount the strong
growth story.
The agreement between the sector and the government has ruled out any price increases – and therefore
potential upwards earnings revisions – for 12 months, after which we expect capacity expansions (F2009) to
have a negative effect on pricing.
We have an Attractive view on Indian Construction. The rapid growth we expect in the top lines of larger
companies should offset margin compression as a result of commoditization of some parts of the industry,
and produce strong earnings growth in the medium/long term.
The industry outlook remains attractive, with most consumer companies growing revenues significantly. Input
cost pressures remain severe, but the pricing environment has improved and price increases have been
sufficient to offset cost pressures, albeit with a lag. Any alleviation of cost pressures could lead to steady
margin expansion for consumer companies in India over the next few quarters.
We believe lower rates will benefit revenue progression. However, the negative variable is the likely rise in
credit costs, which would keep earnings growth in check.
We were anticipating a soft landing of the medium/heavy domestic truck demand cycle, given the strong
economic indicators and structural changes in the Industry. However, with the current higher interest rate
environment, relatively declining profitability of transport operators, increasing competition from Indian
railways, and lower replacement demand, we now anticipate a hard landing of the overall demand cycle. We
would become more positive if the interest rate environment were to improve, or if there was better capacity
utilization in the transportation sector and/or reduced intensity of competition from Indian railways.
The current demand outweighing supply in the Indian hotel industry should keep room rates and occupancy
rates firm in the near term.
We expect positive trends in the IT/BPO, retail, entertainment, and healthcare segments to drive industry
growth. However, margin pressures lead to our In-Line view.
Although the demand environment remains favorable for large offshore vendors, specific factors, such as the
imposition of tax rates after F2009 for STPs, the inability of smaller vendors to migrate to SEZs, and rising
offshore wage costs as a result of increasing competition, imply significantly lower profitability for sub-scale
offshore IT vendors.
The Indian media industry is on a fast growth track, buoyed by rising consumerism leading to increased
advertising spends. The industry should also benefit from the emergence of new distribution platforms such
as direct-to-home and digital cable. Also, with the recent change in regulations, we believe that the radio and
out-of-home industry in India is set to grow at a rapid pace, resulting in an increase in its share of total
advertising spend.
We expect accelerating government spending on agriculture and increased efforts by state governments
regarding micro irrigation to drive growth in the industry.
We think Indian companies will be able to further exploit their cost advantage with well planned scaling-up
initiatives as nonferrous metal prices remain strong.
Organic growth, attractive valuations, strong gross refining margins, and an impressive pick-up in demand are
key triggers for the industry. We prefer upstream to downstream, as we believe uncertainty hangs over future
profitability in the refining and marketing sector in India because of government price controls amid a volatile
and high crude oil environment.
Moderation in growth and lack of major product opportunity underline our sector view.
Near-term market slowdown, driven by high property prices and interest rates, amid otherwise longer-term
strong demand expectations underline our sector view.
In our view, the structural growth story of the industry remains strong. However, we believe cost pressures
and pressures on cash flow as a result of increased working capital investments are likely to affect earnings
and free cash flow for the foreseeable future.
We view the Indian steel industry as Attractive and we expect a further demand pick-up in 2008. We believe
that, as excessive pessimism regarding the threat of steel imports from China has receded, domestic prices
should rise. Against this backdrop, the earnings performance of large vertically integrated firms with rising
volume growth should improve.
India is the world’s fastest-growing telecom market. The Indian telecom industry is on a strong growth
trajectory. Key industry positives include a low wireless penetration of 20%, lower capex per subscriber,
fewer regulatory hurdles, innovative products, economies of scale because of integrated strategy, and an
increase in tower sharing.
Nonferrous Metals & Attractive
Mining
Oil & Gas
Attractive
Pharmaceuticals
Property
In-Line
In-Line
Retail
In-Line
Steel
Attractive
Telecommunications Attractive
158
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
Industry
Industry View
Explanation
Two-Wheelers
In-Line
Utilities
In-Line
Volume growth takes a breather, as higher interest rates and reduced allocation of capital by vehicle
financiers constrain demand. Key to industry earnings growth, in our view, is the level of fiscal benefits
retained by the companies from capacity addition in Uttaranchal/Himachal Pradesh production facilities as
pricing becomes difficult in an intensely competitive market.
The government’s thrust to increase generation capacity will benefit companies, in our view. However, the
slow pace of reforms and political intervention continue to dampen positive sentiment.
The industry views listed in the table above reflect the views mentioned in this report. It is not an exhaustive list of Morgan Stanley's industry views.
159
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
India: Current Earnings Estimates
Company
Rec
Share
Price
Local Currency
52Wk
52Wk
High
Low
Autos & Auto Parts – Industry View: Attractive
Amtek Auto Ltd.
O
335.00
526.00
Bharat Forge
U
289.25
389.75
Capital Goods – Industry View: In-Line
BHEL
E 2,060.20 2,925.00
Suzlon Energy
O
335.70
460.00
Cement – Industry View: Cautious
ACC Ltd.
U
767.30 1,314.85
Ambuja Cements Ltd.
U
148.75
154.00
Grasim Industries
E 3,029.75 4,074.00
UltraTech CemCo
U
898.90 1,165.00
Construction & Infrastructure – Industry View: Attractive
Gammon India
O
549.95
845.00
GMR Infrastructure Ltd.
U
184.95
268.70
IVRCL Infrast. & Projects LTD
O
450.15
575.00
Jaiprakash Associates Limited
O
367.90
510.00
Larsen & Toubro
O 3,806.45 4,670.00
Consumer – Industry View: Attractive
Colgate-Palmolive India
O
423.75
521.00
Dabur India
O
100.20
134.00
Gitanjali Gems Ltd
O
318.00
480.00
Godrej Consumer Products Ltd
O
114.90
178.00
Hindustan Unilever
O
211.90
244.10
ITC Ltd.
E
205.05
239.40
Marico Limited
O
65.55
83.25
Nestle India
O 1,362.00 1,662.75
Tata Tea
O
829.40 1,014.00
Financial Services – Industry View: In-Line
AXIS Bank
E 1,089.25 1,291.00
Bank of Baroda
O
416.05
501.00
Bank of India
O
377.15
466.00
Canara Bank
O
319.25
421.45
Corporation Bank
O
347.70
490.00
HDFC
O 3,015.90 3,257.00
HDFC Bank
E 1,548.25 1,825.00
ICICI Bank
O 1,210.30 1,465.00
IDBI
U
120.45
181.00
IDFC
O
209.60
235.00
Kotak Mahindra Bank
U
986.30 1,435.55
Oriental Bank of Commerce
O
270.25
321.00
Fiscal
Month
Display
DPS Div Yield
Current 2006E*
2006E*
EPS
2006E*
EPS
2007E*
290.00
254.00
Jun
Mar
INR
INR
2.27
3.50
0.6%
1.1%
20.95
13.59
28.16
11.51
970.00
186.40
Mar
Mar
INR
INR
12.25
1.00
0.5%
0.3%
49.61
5.92
69.43
8.17
357.10
99.80
1,927.00
662.30
Dec
Dec
Mar
Mar
INR
INR
INR
INR
15.00
3.04
27.50
4.56
1.7%
1.8%
0.8%
0.5%
55.78
10.48
208.45
63.05
68.80
8.89
177.74
77.83
258.00
65.43
241.15
93.00
1,374.90
Mar
Mar
Mar
Mar
Mar
INR
INR
INR
INR
INR
0.80
0.00
1.00
3.60
14.88
0.1%
0.0%
0.2%
0.9%
0.4%
12.93
1.05
10.91
3.82
78.33
17.16
0.47
15.31
4.54
94.31
291.00
72.00
176.50
95.00
166.00
140.15
47.00
876.00
558.25
Mar
Mar
Mar
Mar
Dec
Mar
Mar
Dec
Mar
INR
INR
INR
INR
INR
INR
INR
INR
INR
9.50
1.75
1.86
3.75
6.00
3.11
0.64
25.50
15.00
2.0%
1.6%
0.5%
3.0%
2.5%
1.4%
0.9%
1.7%
1.6%
13.55
3.29
15.55
5.94
6.98
7.21
2.05
33.91
50.56
17.49
4.04
23.69
7.27
8.26
8.29
2.73
44.56
52.37
399.00
188.50
132.00
174.00
211.70
1,397.10
890.00
791.15
66.50
74.05
402.00
156.50
Mar
Mar
Mar
Mar
Mar
Mar
Mar
Mar
Mar
Mar
Mar
Mar
INR
INR
INR
INR
INR
INR
INR
INR
INR
INR
INR
INR
4.50
6.00
4.03
7.00
7.50
22.00
8.27
11.42
1.50
1.17
0.70
4.70
0.4%
1.3%
1.0%
2.0%
2.0%
0.7%
0.5%
0.9%
1.1%
0.5%
0.1%
1.6%
23.40
28.08
23.01
34.65
37.38
58.46
35.74
34.58
8.70
4.34
14.27
33.00
29.80
38.99
35.13
40.01
46.35
87.18
45.77
39.13
8.73
5.63
23.26
39.57
Modelware
EPS
PE
2008E* 2006E*
PE
2007E*
PE
2008E*
Mkt Cap
U$Mn
Reuters
Code
Balaji Jayaraman +91 22 2209 7811
9.6
1,045
AMTK.BO
20.0
1,642
BFRG.BO
Akshay Soni +91 22 2209 7151
94.99
45.6
29.7
21.7
25,708
BHEL.BO
13.12
62.3
41.1
25.6
12,312
SUZL.BO
Akshay Soni +91 22 2209 7151
24.41
15.5
11.2
31.4
3,672
ACC.BO
4.29
16.0
16.8
34.7
5,767
GACM.BO
99.63
16.0
17.0
30.4
7,081
GRAS.BO
50.14
15.7
11.6
17.9
2,853
ULTC.BO
Akshay Soni +91 22 2209 7151
21.60
46.7
32.0
25.5
1,216
GAMM.BO
1.79
192.8
392.4
103.3
6,233
GMRI.BO
20.49
45.3
29.4
22.0
1,488
IVRC.BO
5.84
105.8
81.1
63.0
10,280
JAIA.BO
117.85
53.4
40.4
32.3
27,483
LART.BO
Hozefa Topiwalla +91 22 2209-7808
21.02
34.3
24.2
20.2
1,469
COLG.BO
4.78
33.4
24.8
21.0
2,195
DABU.BO
28.38
22.5
13.4
11.2
478
GTGM.BO
8.47
21.3
15.8
13.6
661
GOCP.BO
9.74
34.1
25.8
21.8
11,916
HLL.BO
9.69
31.3
24.7
21.2
19,628
ITC.BO
3.14
35.1
24.0
20.8
1,018
MRCO.BO
56.85
45.2
30.7
24.0
3,347
NEST.BO
72.59
18.0
15.8
11.4
1,248
TTTE.BO
Anil Bang +91 22 2209 7072 / Anil Agarwal +852 2848 5842
35.47
51.1
36.5
30.7
7,820
AXBK.BO
45.40
16.3
10.7
9.2
3,877
BOB.BO
38.80
18.0
10.7
9.7
4,693
BOI.BO
48.68
10.1
8.0
6.6
3,337
CNBK.BO
54.17
10.2
7.5
6.4
1,271
CRBK.BO
91.71
56.7
34.6
32.9
20,651
HDFC.BO
62.21
47.6
33.8
24.9
12,605
HDBK.BO
49.29
38.4
30.9
24.6
27,746
ICBK.BO
9.59
15.2
13.8
12.6
2,224
IDBI.BO
7.19
53.0
37.2
29.2
6,016
IDFC.BO
30.28
75.9
42.4
32.6
8,200
KTKM.BO
46.09
9.0
6.8
5.9
1,726
ORBC.BO
34.78
14.49
18.7
23.4
12.3
25.1
* Fiscal Aligned : If the Fiscal period ends between January 1 and May 31 of any given year, the fiscal period returned will be that of the previous year. Example: A company's fiscal year ends March 31st, 2007. The period is referring to Fiscal 2006. NA = Not
Applicable; NM = Not Meaningful ++Rating and Estimates for this company have been removed from consideration in this report because, under applicable law and/or Morgan Stanley policy, Morgan Stanley may be precluded from issuing such information with
respect to this company at this time. Share prices as of February 4, 2008.
160
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
India: Current Earnings Estimates
Company
Rec
Share
Price
Local Currency
52Wk
52Wk
High
Low
Financial Services – Industry View: In-Line
Punjab National Bank
O
700.75
721.00
400.00
Reliance Capital
O 2,004.80 2,925.00
559.50
Union Bank of India
O
209.90
234.80
84.00
Four-Wheelers: Commercial Vehicles – Industry View: Cautious
Ashok Leyland Ltd.
E
37.25
57.90
25.80
Mahindra & Mahindra
E
696.15
950.75
543.00
Tata Motors
U
769.95
926.90
535.00
Four-Wheelers: Passenger Cars – Industry View: Attractive
Maruti Suzuki India Limited
O
896.55 1,252.00
700.00
Hotels – Industry View: Attractive
EIH Limited
U
181.60
246.95
88.15
Hotel Leelaventure Limited
U
51.75
76.85
37.50
Indian Hotels Company Ltd
O
139.10
177.80
101.00
Industrials – Industry View: In-Line
Voltas Limited
E
205.55
266.90
75.10
Media – Industry View: Attractive
Entertainment Network (India) Ltd O
473.85
700.00
250.00
New Delhi Television Ltd (NDTV) ++
413.50
511.75
267.00
Zee Entert Enterprise Limited
O
273.75
362.80
169.00
Multi-Industry – Industry View: Attractive
Jain Irrigation Systems
O
630.00
765.95
397.00
Nonferrous Metals & Mining – Industry View: Attractive
Hindalco Industries
O
178.50
223.30
125.25
National Aluminium
E
420.50
546.90
204.10
Sesa Goa
O 3,252.55 3,969.00 1,485.00
Sterlite Industries (India) Limited O
847.95 1,140.00
415.00
Oil & Gas – Industry View: Attractive
Bharat Petroleum Corp.
U
432.55
560.00
287.05
Cairn India Ltd.
O-V 212.60
268.50
111.00
GAIL (India)
O
428.90
555.00
254.00
Hindustan Petroleum
U
276.55
405.90
218.00
Indian Oil Corp
NA
524.35
809.90
355.00
Oil & Natural Gas Corp.
O 1,055.50 1,386.90
750.00
Reliance Industries
O 2,592.60 3,252.10 1,250.00
Reliance Petroleum Limited
O
173.35
295.00
64.55
Pharmaceuticals – Industry View: In-Line
Aventis (India)
O
931.70 1,494.80
855.00
Biocon Ltd
U
405.50
663.30
345.00
Cipla Ltd.
U
199.35
260.00
160.00
Dishman Pharm & Chemicals Ltd O
310.90
427.00
194.00
Dr. Reddy's Lab
E
527.95
760.00
520.00
GlaxoSmithKline Pharma
O
899.65 1,340.00
800.00
Fiscal
Month
Display
DPS Div Yield
Current 2006E*
2006E*
EPS
2006E*
EPS
2007E*
Modelware
EPS
PE
2008E* 2006E*
PE
2007E*
PE
2008E*
Mkt Cap
U$Mn
Reuters
Code
Mar
Mar
Mar
INR
INR
INR
10.00
3.49
3.50
1.3%
0.2%
1.5%
48.84
28.57
16.73
60.93
36.59
22.15
Mar
Mar
Mar
INR
INR
INR
1.50
11.50
14.20
3.7%
1.5%
1.7%
3.42
56.39
53.38
2.99
62.05
50.75
Anil Bang +91 22 2209 7072 / Anil Agarwal +852 2848 5842
72.99
15.8
11.5
9.6
5,632
PNBK.BO
47.52
77.1
54.8
42.2
12,580
RLCP.BO
27.09
13.8
9.5
7.7
2,703
UNBK.BO
Balaji Jayaraman +91 22 2209 6350
3.35
12.0
12.5
11.1
1,257
ASOK.BO
70.15
13.6
11.2
9.9
4,361
MAHM.BO
52.85
15.8
15.2
14.6
7,564
TAMO.BO
Mar
INR
3.50
0.4%
54.96
69.74
80.30
Mar
Mar
Mar
INR
INR
INR
1.40
0.45
1.60
0.7%
0.8%
1.0%
3.94
2.13
5.60
Mar
INR
0.80
0.4%
3.18
Mar
Mar
Mar
INR
INR
INR
0.00
0.80
1.50
0.0%
0.2%
0.5%
5.27
3.34
5.48
Mar
INR
2.64
0.4%
13.48
Mar
Mar
Mar
Mar
INR
INR
INR
INR
1.70
7.50
40.00
1.25
0.9%
1.6%
1.1%
0.1%
24.73
37.05
163.42
80.26
Mar
Dec
Mar
Mar
Mar
Mar
Mar
Mar
INR
INR
INR
INR
INR
INR
INR
INR
16.00
0.00
10.33
12.97
18.88
32.08
9.91
0.00
3.4%
NA
2.2%
4.3%
3.3%
2.8%
0.3%
0.0%
64.98
(0.34)
27.77
37.24
64.37
83.17
83.43
0.00
Dec
Mar
Mar
Mar
Mar
Dec
INR
INR
INR
INR
INR
INR
20.00
3.00
2.00
1.23
2.72
31.00
1.9%
0.7%
0.9%
0.4%
0.5%
3.1%
73.49
20.03
8.65
11.32
58.06
42.70
17.9
12.9
11.2
6,605
MRTI.BO
Parag Gupta +91 22 2209 7915
5.14
3.82
50.6
35.3
47.5
1,819
EIHO.BO
2.73
2.11
26.7
18.9
24.5
488
HTLE.BO
7.32
7.20
27.3
19.0
19.3
2,138
IHTL.BO
Parag Gupta +91 22 2209 7915
5.57
7.51
71.1
36.9
27.4
1,734
VOLT.BO
Vipul Prasad +91 22 2209 7807
6.79
17.66
98.8
69.8
26.8
576
ENIL.BO
4.41
7.36
135.8
93.8
56.2
658
NDTV.BO
8.15
10.83
54.9
33.6
25.3
3,025
ZEE.BO
Ashish Jain +91 22 2209 7156
16.59
22.88
51.3
38.0
27.5
987
JAIR.BO
Vipul Prasad +91 22 2209 7807
13.51
22.09
7.9
13.2
8.1
4,747
HALC.BO
29.72
33.07
12.5
14.1
12.7
6,906
NALU.BO
305.99
398.11
21.9
10.6
8.2
3,263
SESA.BO
66.69
100.22
11.6
12.7
8.5
12,076
STRL.BO
Vinay Jaising +91 22 2209 7780
58.88
48.00
7.3
7.3
9.0
3,986
BPCL.BO
1.62
2.08
NM
131.9
102.2
9,754
CAIL.BO
32.24
33.66
17.0
13.3
12.7
9,245
GAIL.BO
36.76
37.01
8.2
7.5
7.5
2,389
HPCL.BO
46.41
47.85
8.9
11.3
11.0
15,937
IOC.BO
108.46
114.21
13.9
9.7
9.2
57,548
ONGC.BO
100.98
118.93
34.1
25.7
21.8
96,048
RELI.BO
0.00
6.75
NM
NM
25.7
10,163
RPET.BO
Sameer Baisiwala +91 22 2209 7830 / Kang-Ho Chong +65 6834 6741
84.24
95.90
14.3
11.1
9.7
547
AVPH.BO
24.18
27.38
22.2
16.8
14.8
1,034
BION.BO
8.56
9.76
25.3
23.3
20.4
3,950
CIPL.BO
14.77
22.43
30.2
21.0
13.9
544
DISH.BO
37.91
41.09
10.0
13.9
12.8
2,260
REDY.BO
46.30
53.11
23.7
19.5
16.9
1,942
GLAX.BO
* Fiscal Aligned : If the Fiscal period ends between January 1 and May 31 of any given year, the fiscal period returned will be that of the previous year. Example: A company's fiscal year ends March 31st, 2007. The period is referring to Fiscal 2006. NA = Not
Applicable; NM = Not Meaningful ++Rating and Estimates for this company have been removed from consideration in this report because, under applicable law and/or Morgan Stanley policy, Morgan Stanley may be precluded from issuing such information with
respect to this company at this time. Share prices as of February 4, 2008.
161
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RESEARCH
India Investors’ Summit 2008
India: Current Earnings Estimates
Company
Rec
Share
Price
Pharmaceuticals – Industry View: In-Line
Jubilant Organosys Limited
O
347.55
Lupin Ltd.
O
552.80
Ranbaxy Laboratories
O
373.15
Sun Pharmaceutical Industries
O 1,108.15
Wockhardt Limited
O
361.80
Property – Industry View: In-Line
DLF Limited
U-V 883.00
Parsvnath Developers Limited
O-V 287.20
Sobha Developers Ltd.
O-V 798.75
Unitech Corporate Parks Plc
O-V 106.00
Retail – Industry View: In-Line
Pantaloon Retail
O
596.45
Shoppers' Stop
U
410.15
Titan Industries Ltd
O 1,256.15
Shipping – Industry View: In-Line
Great Eastern Shipping
O
418.95
Shipping Corporation of India
U
217.50
IT Services – Industry View: In-Line
HCL Technologies
O
277.85
Hexaware Technologies Limited O
72.80
Infosys Technologies
O 1,642.65
MindTree Consulting Limited
E-V 379.55
MphasiS Limited
E
274.70
Patni Computer Systems
O
258.50
Satyam Computer Services
O
437.25
Tata Consultancy Services
O
976.00
Tech Mahindra Limited
E-V 797.75
Wipro Ltd.
E
464.25
Steel – Industry View: Attractive
Jindal Steel & Power
E 2,283.70
JSW Steel Ltd.
O 1,151.05
Steel Authority Of India
O
230.70
Tata Steel
O
802.80
Telecommunications – Industry View: Attractive
Bharti Airtel Limited
O
922.65
Idea Cellular Ltd.
E-V 122.85
Mahanagar Telephone Nigam
U
128.85
Reliance Communications Ltd.
O
685.00
Videsh Sanchar Nigam
U
537.45
Local Currency
52Wk
52Wk
High
Low
Fiscal
Month
Display
DPS Div Yield
Current 2006E*
2006E*
EPS
2006E*
378.00
755.00
490.00
1,265.00
450.05
226.50
429.90
299.90
797.50
295.05
Mar
Mar
Dec
Mar
Dec
INR
INR
INR
INR
INR
1.47
4.50
9.70
5.50
5.22
0.4%
0.7%
2.3%
0.5%
1.3%
13.02
36.09
13.22
37.82
25.26
1,225.00
598.00
1,060.00
121.50
505.60
221.60
590.00
80.00
Mar
Mar
Mar
Mar
INR
INR
INR
GBp
0.00
2.92
6.51
NA
NA
0.9%
0.7%
NA
12.69
15.82
22.16
(4.70)
875.00
702.80
1,795.00
365.00
350.00
730.00
Jun
Mar
Mar
INR
INR
INR
0.60
1.51
5.00
0.1%
0.3%
0.4%
4.77
7.28
25.23
572.00
332.00
185.00
151.00
Mar
Mar
INR
INR
11.50
8.50
2.5%
3.6%
57.65
29.46
365.75
186.00
2,439.00
1,021.80
339.80
572.95
522.30
1,350.00
1,841.75
690.00
180.00
55.10
1,212.20
322.00
200.00
185.00
305.00
730.00
615.00
325.00
Jun
Dec
Mar
Mar
Mar
Dec
Mar
Mar
Mar
Mar
INR
INR
INR
INR
INR
INR
INR
INR
INR
INR
7.96
1.60
13.19
2.54
4.45
2.50
3.99
12.00
2.30
6.00
2.4%
2.0%
0.7%
0.6%
1.5%
0.9%
0.8%
1.1%
0.3%
1.2%
10.96
8.99
65.71
27.70
8.61
25.68
20.98
42.22
49.56
20.40
3,356.00
1,389.70
292.50
969.80
400.30
400.00
91.50
352.64
Mar
Mar
Mar
Mar
INR
INR
INR
INR
18.00
8.00
3.10
16.27
0.7%
0.6%
1.2%
1.8%
45.69
77.09
15.02
59.46
1,149.00
161.00
219.45
844.00
783.00
661.25
84.00
112.60
371.25
342.20
Mar
Mar
Mar
Mar
Mar
INR
INR
INR
INR
INR
0.00
0.00
4.00
0.51
4.50
0.0%
0.0%
2.8%
0.1%
0.8%
22.46
1.94
7.28
15.78
2.78
EPS
2007E*
Modelware
EPS
PE
2008E* 2006E*
PE
2007E*
PE
2008E*
Mkt Cap
U$Mn
Reuters
Code
Sameer Baisiwala +91 22 2209 7830 / Kang-Ho Chong +65 6834 6741
20.13
20.19
29.3
17.3
17.2
1,271
JUBO.BO
35.25
36.29
16.8
15.7
15.2
1,181
LUPN.BO
15.28
18.52
31.7
24.5
20.2
3,545
RANB.BO
48.36
57.09
32.2
22.9
19.4
5,857
SUN.BO
30.41
35.35
16.1
11.9
10.2
1,102
WCKH.BO
Sameer Baisiwala +91 22 2209 7830
41.05
57.94
76.4
21.5
15.2
34,426
DLF.BO
23.98
35.79
19.9
12.0
8.0
1,352
PARV.BO
33.27
49.52
39.6
24.0
16.1
1,484
SOBH.BO
0.28
(0.16)
NM
372.3
NM
753
UCP.L
Hozefa Topiwalla +91 22 2209-7808
4.41
8.16
146.1
139.8
73.1
2,044
PART.BO
3.49
6.09
61.9
117.4
67.4
361
SHOP.BO
34.95
47.23
54.7
35.9
26.6
1,421
TITN.BO
Parag Gupta +91 22 2209 7915
71.03
61.57
8.0
5.9
6.8
1,626
GESC.BO
21.19
12.09
8.1
10.3
18.0
1,565
SCI.BO
Vipin Khare +91 22 2209-7765 / Ashish Jain +91 22 2209 7156
15.82
18.52
29.6
18.1
15.0
4,618
HCLT.BO
9.77
12.67
9.1
7.5
5.7
245
HEXT.BO
80.82
97.19
27.5
20.3
16.9
23,317
INFY.BO
23.03
28.16
15.1
16.5
13.5
301
MINT.BO
14.62
17.99
35.1
18.8
15.3
1,458
MBFL.BO
32.32
34.83
11.3
8.0
7.4
909
PTNI.BO
24.90
29.72
22.9
17.6
14.7
7,297
SATY.BO
52.15
60.57
25.4
18.7
16.1
24,347
TCS.BO
56.61
65.34
17.7
14.1
12.2
2,339
TEML.BO
23.17
27.72
25.0
20.0
16.7
17,058
WIPR.BO
Vipul Prasad +91 22 2209 7807
78.62
133.57
54.9
29.0
17.1
8,962
JNSP.BO
91.55
95.09
16.4
12.6
12.1
4,606
JSTL.BO
19.79
26.08
16.9
11.7
8.8
24,290
SAIL.BO
116.88
142.19
14.8
6.9
5.6
14,376
TISC.BO
Vinay Jaising +91 22 2209 7780
34.67
44.59
45.1
26.6
20.7
44,590
BRTI.BO
4.01
5.28
69.7
30.6
23.3
8,120
IDEA.BO
9.40
11.61
19.4
13.7
11.1
2,069
MTNL.BO
25.55
33.99
47.7
26.8
20.2
35,701
RLCM.BO
20.89
34.04
212.2
25.7
15.8
3,904
VSNL.BO
* Fiscal Aligned : If the Fiscal period ends between January 1 and May 31 of any given year, the fiscal period returned will be that of the previous year. Example: A company's fiscal year ends March 31st, 2007. The period is referring to Fiscal 2006. NA = Not
Applicable; NM = Not Meaningful ++Rating and Estimates for this company have been removed from consideration in this report because, under applicable law and/or Morgan Stanley policy, Morgan Stanley may be precluded from issuing such information with
respect to this company at this time. Share prices as of February 4, 2008.
162
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India Investors’ Summit 2008
India: Current Earnings Estimates
Company
Rec
Share
Price
Local Currency
52Wk
52Wk
High
Low
Textiles, Apparel and Footwear – Industry View: In-Line
Arvind Mills
O
49.00
93.50
House of Pearl Fashions Limited O-V 200.55
580.25
Two-Wheelers – Industry View: In-Line
Bajaj Auto Ltd.
O 2,459.05 3,171.90
Hero Honda Motor Ltd
U
769.60
786.00
TVS Motors
E
40.75
78.90
Utilities – Industry View: In-Line
LANCO Infratech Ltd
E-V 502.70
887.95
NTPC
E
214.45
291.00
Reliance Energy
O 2,012.80 2,631.70
Tata Power Co
O 1,400.85 1,641.00
Fiscal
Month
Display
DPS Div Yield
Current 2006E*
2006E*
EPS
2006E*
EPS
2007E*
Modelware
EPS
PE
2008E* 2006E*
PE
2007E*
35.00
168.80
Mar
Mar
INR
INR
0.00
0.68
0.0%
0.3%
1.12
32.48
1.41
28.50
3.24
37.81
48.0
6.8
34.6
7.0
1,800.95
561.00
33.35
Mar
Mar
Mar
INR
INR
INR
40.00
17.00
2.10
1.5%
2.0%
4.7%
118.20
42.96
3.12
115.32
43.67
2.05
136.53
48.65
3.94
22.9
19.7
14.3
21.3
17.6
19.9
137.00
129.00
448.20
483.00
Mar
Mar
Mar
Mar
INR
INR
INR
INR
NA
3.20
5.30
9.50
NA
1.4%
0.2%
0.6%
19.63
8.31
29.31
29.08
17.20
9.09
37.25
31.27
38.79
9.83
50.45
29.49
28.1
28.3
75.4
52.9
29.2
23.6
54.0
44.8
PE
2008E*
Mkt Cap
U$Mn
Reuters
Code
Hozefa Topiwalla +91 22 2209-7808
15.1
262
ARMI.BO
5.3
76
HOPF.BO
Balaji Jayaraman +91 22 2209 6350
18.0
6,342
BJAT.BO
15.8
3,917
HROH.BO
10.3
247
TVSM.BO
Parag Gupta +91 22 2209 7915
13.0
2,849
LAIN.BO
21.8
45,074
NTPC.BO
39.9
11,725
RLEN.BO
47.5
7,068
TTPW.BO
* Fiscal Aligned : If the Fiscal period ends between January 1 and May 31 of any given year, the fiscal period returned will be that of the previous year. Example: A company's fiscal year ends March 31st, 2007. The period is referring to Fiscal 2006. NA = Not
Applicable; NM = Not Meaningful ++Rating and Estimates for this company have been removed from consideration in this report because, under applicable law and/or Morgan Stanley policy, Morgan Stanley may be precluded from issuing such information with
respect to this company at this time. Share prices as of February 4, 2008.
163
MORGAN
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RESEARCH
India Investors’ Summit 2008
Morgan Stanley ModelWare is a proprietary analytic framework that helps clients
uncover value, adjusting for distortions and ambiguities created by local accounting
regulations. For example, ModelWare EPS adjusts for one-time events, capitalizes operating
leases (where their use is significant), and converts inventory from LIFO costing to a FIFO
basis. ModelWare also emphasizes the separation of operating performance of a company
from its financing for a more complete view of how a company generates earnings.
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(Attention: Equity Research Management), New York, NY, 10036 USA.
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As to each company mentioned in this report, the respective primary research analyst or analysts covering that company hereby certify that their views about the
companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in
exchange for expressing specific recommendations or views in this report.
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Morgan Stanley Research has been published in accordance with our conflict management policy, which is available at
www.morganstanley.com/institutional/research/conflictpolicies.
Important US Regulatory Disclosures on Subject Companies
The following analyst, strategist, or research associate (or a household member) owns securities (or related derivatives) in a company that he or she covers or
recommends in Morgan Stanley Research: Ridham Desai - Hindustan Unilever (common stock), Infosys Technologies (common stock), Zee Entertainment Enterprise
Limited (common stock); Ashish Jain - Infosys Technologies (common stock); Vinay Jaising - Reliance Communications Ltd. (common stock), Reliance Industries
(common stock); Saumya Srivastav - IDFC (common stock), Reliance Communications Ltd. (common stock), Tata Consultancy Services (common stock); Pratima
Swaminathan - Bharti Airtel Limited (common stock), Tata Consultancy Services (common stock); Hozefa Topiwalla - Hindustan Unilever (common stock). Morgan
Stanley policy prohibits research analysts, strategists and research associates from investing in securities in their sub industry as defined by the Global Industry
Classification Standard ("GICS," which was developed by and is the exclusive property of MSCI and S&P). Analysts may nevertheless own such securities to the extent
acquired under a prior policy or in a merger, fund distribution or other involuntary acquisition.
As of December 31, 2007, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in Morgan Stanley
Research: Arvind Mills, AXIS Bank, Bharti Airtel Limited, BHEL, Cairn India Ltd., Dabur India, Entertainment Network (India) Limited, Gitanjali Gems Ltd, GMR
Infrastructure Ltd., Grasim Industries, HDFC, HDFC Bank, Hindustan Unilever, ICICI Bank, IDFC, Indian Hotels Company Ltd, Infosys Technologies, Jain Irrigation
Systems, Jaiprakash Associates Limited, Larsen & Toubro, Mahindra & Mahindra, Marico Limited, Oil & Natural Gas Corp., Pantaloon Retail, Parsvnath Developers
Limited, Reliance Communications Ltd., Reliance Energy, Reliance Industries, Sobha Developers Ltd., Steel Authority Of India, Sterlite Industries (India) Limited, Sun
Pharmaceutical Industries, Suzlon Energy, Tata Consultancy Services, Tata Steel, Titan Industries Ltd, Union Bank of India, Voltas Limited, Wipro Ltd., Zee
Entertainment Enterprise Limited, EDUCOMP SOLUTIONS LT, FINANCIAL TECHNOLOGI, GLENMARK PHARMACEUTI, INDIABULLS FINANCIAL, PTC INDIA LTD.,
UNITED PHOSPHOROUS I.
As of January 1, 2008, Morgan Stanley held a net long or short position of US$1 million or more of the debt securities of the following issuers covered in Morgan Stanley
Research (including where guarantor of the securities): AXIS Bank, Bharti Airtel Limited, HDFC, HDFC Bank, Hindalco Industries, Hindustan Unilever, ICICI Bank, Indian
Hotels Company Ltd, Mahindra & Mahindra, Reliance Energy, Reliance Industries, State Bank of India, Sterlite Industries (India) Limited, Suzlon Energy, Tata Steel.
Within the last 12 months, Morgan Stanley managed or co-managed a public offering of securities of Cairn India Ltd., HDFC Bank, Hindalco Industries, IDFC, Parsvnath
Developers Limited, Sterlite Industries (India) Limited.
Within the last 12 months, Morgan Stanley has received compensation for investment banking services from Cairn India Ltd., GMR Infrastructure Ltd., HDFC Bank,
Hindalco Industries, ICICI Bank, Oil & Natural Gas Corp., Parsvnath Developers Limited, State Bank of India, Sterlite Industries (India) Limited.
In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from AXIS Bank, BHEL, Cairn India Ltd., DLF
Limited, Entertainment Network (India) Limited, Gitanjali Gems Ltd, GMR Infrastructure Ltd., Grasim Industries, HDFC, HDFC Bank, Hindalco Industries, ICICI Bank,
IDFC, Larsen & Toubro, Mahindra & Mahindra, Oil & Natural Gas Corp., Pantaloon Retail, Parsvnath Developers Limited, Ranbaxy Laboratories, Reliance Energy,
Reliance Industries, State Bank of India, Sterlite Industries (India) Limited, Sun Pharmaceutical Industries, Suzlon Energy, Tata Consultancy Services, Tata Steel, Titan
Industries Ltd, Voltas Limited, Wipro Ltd., Zee Entertainment Enterprise Limited, GLENMARK PHARMACEUTICALS LTD (Mumbai), YES BANK LIMITED (Mumbai).
Within the last 12 months, Morgan Stanley & Co. Incorporated has received compensation for products and services other than investment banking services from HDFC,
ICICI Bank, Reliance Industries, State Bank of India, Suzlon Energy.
Within the last 12 months, Morgan Stanley has provided or is providing investment banking services to, or has an investment banking client relationship with, the
following company: AXIS Bank, BHEL, Cairn India Ltd., DLF Limited, Entertainment Network (India) Limited, Gitanjali Gems Ltd, GMR Infrastructure Ltd., Grasim
Industries, HDFC, HDFC Bank, Hindalco Industries, ICICI Bank, IDFC, Larsen & Toubro, Mahindra & Mahindra, Oil & Natural Gas Corp., Pantaloon Retail, Parsvnath
Developers Limited, Ranbaxy Laboratories, Reliance Energy, Reliance Industries, State Bank of India, Sterlite Industries (India) Limited, Sun Pharmaceutical Industries,
Suzlon Energy, Tata Consultancy Services, Tata Steel, Titan Industries Ltd, Voltas Limited, Wipro Ltd., Zee Entertainment Enterprise Limited, GLENMARK
PHARMACEUTICALS LTD (Mumbai), YES BANK LIMITED (Mumbai).
Within the last 12 months, Morgan Stanley has either provided or is providing non-investment banking, securities-related services to and/or in the past has entered into
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STOCK RATINGS
Morgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight or Underweight (see definitions below). Morgan Stanley does not assign
ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight and Underweight are not the equivalent of Buy, Hold and Sell. Investors should carefully
read the definitions of all ratings used in Morgan Stanley Research. In addition, since Morgan Stanley Research contains more complete information concerning the
analyst's views, investors should carefully read Morgan Stanley Research, in its entirety, and not infer the contents from the rating alone. In any case, ratings (or
164
MORGAN
STANLEY
RESEARCH
India Investors’ Summit 2008
research) should not be used or relied upon as investment advice. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the
investor's existing holdings) and other considerations.
Global Stock Ratings Distribution
(as of January 31, 2008)
For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of
Overweight, Equal-weight and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, and
Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we
correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight and Underweight to hold and sell recommendations,
respectively.
Stock Rating Category
Coverage Universe
Investment Banking Clients (IBC)
% of
% of % of Rating
Count
Total
Count Total IBC Category
Overweight/Buy
Equal-weight/Hold
Underweight/Sell
Total
1048
986
346
2,380
44%
41%
15%
333
308
98
739
45%
42%
13%
32%
31%
28%
Data include common stock and ADRs currently assigned ratings. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the
investor's existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan Stanley or an affiliate received investment banking
compensation in the last 12 months.
Analyst Stock Ratings
Overweight (O or Over) - The stock's total return is expected to exceed the total return of the relevant country MSCI Index, on a risk-adjusted basis over the next 12-18
months.
Equal-weight (E or Equal) - The stock's total return is expected to be in line with the total return of the relevant country MSCI Index, on a risk-adjusted basis over the next
12-18 months.
Underweight (U or Under) - The stock's total return is expected to be below the total return of the relevant country MSCI Index, on a risk-adjusted basis, over the next 1218 months.
More volatile (V) - We estimate that this stock has more than a 25% chance of a price move (up or down) of more than 25% in a month, based on a quantitative
assessment of historical data, or in the analyst's view, it is likely to become materially more volatile over the next 1-12 months compared with the past three years.
Stocks with less than one year of trading history are automatically rated as more volatile (unless otherwise noted). We note that securities that we do not currently
consider "more volatile" can still perform in that manner.
Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months.
Analyst Industry Views
Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market
benchmark, as indicated below.
In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market
benchmark, as indicated below.
Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market
benchmark, as indicated below.
Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe;
Japan - TOPIX; Asia - relevant MSCI country index.
Other Important Disclosures
For a discussion, if applicable, of the valuation methods used to determine the price targets included in Morgan Stanley Research, and the risks related to achieving
these targets, please refer to the latest relevant published research on these stocks. Research is available through your sales representative or on Client Link at
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