india consumer sector - myirisbreport.myiris.com/rcml/condothe_20150127.pdf · urban consumption...

India Consumer Sector

Sector Report INDIA CONSUMER DISCRETIONARY

27 January 2015

REPORT AUTHORS

Gaurang Kakkad +91 22 6766 3470 [email protected]

Premal Kamdar +91 22 6766 3469 [email protected]

Recommendation snapshot Company CMP TP Rating

Asian Paints (APNT) 862 1,000 Buy

Berger Paints (BRGR) 224 NA NR

Kansai Nerolac (KNPL) 2,467 NA NR

Akzo Nobel (AKZO) 1,416 NA NR

Bata India (BATA) 1,450 1,650 Buy

Relaxo Footwear (RLXF) 686 NA NR

Jubilant Foodworks (JUBI) 1,394 1,650 Buy

Westlife Development (WLDL) 299 NA NR

Titan (TTAN) 399 430 Hold

Source: RCML Research

Stock price performance Company (%) 1m 3m 6m 1yr

Asian Paints (APNT) 18.3 32.1 39.0 80.3

Berger Paints (BRGR) 11.1 23.0 48.9 107.1

Kansai Nerolac (KNPL) 23.9 23.6 51.9 134.3

Akzo Nobel (AKZO) 5.4 6.4 30.8 83.9

Bata India (BATA) 13.8 15.6 10.1 49.8

Relaxo Footwear (RLXF) 30.7 37.8 74.6 183.9

Jubilant Food works (JUBI) 2.4 4.6 10.7 21.2

Westlife Development (WLDL) 0.1 (7.3) (13.7) (21.0)

Titan (TTAN) 8.2 0.8 18.7 82.4

BSE FMCG 3.7 9.4 15.2 22.9

Sensex 6.4 9.0 12.0 37.0


India Consumer Sector Return of the Urban Indian Consumer Urban consumption demand in India is set to rebound smartly as we move deeper into a macro recovery. Our 6th Urban Consumer Survey clearly shows that consumer confidence is on the rise and with it an attendant resurgence in discretionary spends – we profile the paints, footwear, QSR and jewellery segments which are likely to be prime beneficiaries of this turnaround. Our preferred picks are APNT (raised to BUY), BATA and JUBI. Maintain HOLD on TTAN.

Urban Survey reveals upbeat spending outlook: Our 6th Urban Consumer Survey points to a turnaround in consumer confidence, especially in larger cities. We surveyed 1,500 persons across 100+ towns & cities and found that ~70% of respondents are more confident about economic and own growth prospects as compared to just 33% in our last Feb’14 survey. Discretionary (auto, housing, travel, luxury goods) and FMCG spends are picking up smartly, while downtrading trends appear to have largely halted. Our survey indicates that the sharp decline in inflation (specifically for food) has spurred this recovery in consumer confidence and also in discretionary demand.

Macro pick-up to buoy urban discretionary demand: India’s consumption story thus far has been fuelled by a surge in rural demand, where growth has outpaced demand from urban India in the past 3-4 years. Urban growth, which was in the mid-teens till a couple of years ago, slowed in line with softer GDP growth and is currently in the high single digits. Now, with a likely revival in the economy from 4.7% in FY14 to 6.5% in FY16, we expect urban demand growth to retrace to ~15% levels over the next couple of years, accompanied by higher discretionary spends from FY16.

Growth to be aided by urbanisation: India’s urban populace is likely to expand at a faster pace than its rural population as improving macro conditions encourage migration to cities, in line with past trends. Also, lower emphasis on rural schemes by the new government may further drive urbanisation levels. We also expect job creation to pick up given the lull in the urban job market over the past 4-5 years, with salary hikes likely to recover from the ~10% levels estimated in 2014. All these factors augur well for a sustained pick-up in urban discretionary demand.

Prefer plays on urban discretionary consumption: We expect urban discretionary categories such as paints, footwear, QSR and jewellery to be key beneficiaries of the revival in urban demand. Market leaders APNT (upgraded from SELL to BUY), BATA and JUBI (both BUY) are expected to consolidate their strong positions and deliver ahead-of-industry growth in respective segments. TTAN (HOLD) is expected to perform well too, but we believe valuations already price in the positives. We raise earnings estimates and targets for our consumer discretionary coverage, and also profile five players with interesting growth prospects, viz. AKZO, BRGR, KNPL, RLXF, WLDL (Not Rated).

This report has been prepared by Religare Capital Markets Limited or one of its affiliates. For analyst certification and other important disclosures, please refer to the Disclosure and Disclaimer section at the end of this report. Analysts employed by non-US affiliates are not registered with FINRA regulation and may not be subject to FINRA/NYSE restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account.

http://research.religarecm.com/INDIA/Religare%20Urban%20Consumer%20Survey%206%20-%20Jan2015.pdf


India Consumer Sector Return of the Urban Indian Consumer


27 January 2015 Page 2 of 81

Contents Urban demand set to revive ...........................................................3

Spending outlook turns upbeat ........................................................................ 3 GDP growth revival to spur urban consumption ............................................ 4 Urbanisation will further aid demand growth ................................................. 5 Wage inflation and job creation to play supporting role ............................... 6 Consumer confidence on the upswing ............................................................ 7 Falling inflation to aid discretionary purchases ............................................. 8

Key stock recommendations .........................................................9 Prefer plays on urban discretionary consumption ........................................ 9

Sector analysis & Stock recommendations ................................ 10

Paints – Macro recovery to lend colour to industry volumes ... 11 Asian Paints (APNT) ........................................................................ 16

Berger Paints (BRGR) .......................................................................................24

Kansai Nerolac (KNPL) .....................................................................................29

Akzo Nobel (AKZO) ...........................................................................................34

Footwear – Making strides ........................................................... 40 Bata India (BATA) .............................................................................................45

Relaxo Footwear (RLXF) ..................................................................................52

Quick Service Restaurants – Growing appetite for fast food in India ........................................................................................... 57

Jubilant Food works (JUBI) .............................................................................61

Westlife Development (WLDL).........................................................................67

Jewellery, Watches, Eyewear – Bright prospects ...................... 73 Titan (TTAN) ......................................................................................................76




Urban demand set to revive Spending outlook turns upbeat

Our 6th Urban Consumer Survey reveals a smart turnaround in consumer confidence, especially in larger cities, backed by easing inflation. Close to 70% of survey respondents are more confident about economic and own growth prospects, up from just 33% in our Feb’14 survey. Moreover, discretionary (auto, housing, travel, luxury goods) and FMCG spends are picking up smartly, while downtrading trends have largely halted.

Survey highlights Strong pick-up in discretionary spends: Consumer confidence levels have improved

markedly, with 70% of respondents more confident about economic and own growth prospects vs. 33%/40% in our Feb’14/Nov’12 surveys. Further, in a trend reversal from our past five surveys, high income households (81%) are more upbeat about growth prospects than lower income households (58%), and respondents in metros are more optimistic than those in tier-3 cities. Our survey indicates that the sharp decline in inflation (specifically for food) has spurred the turnaround in consumer confidence and also in discretionary demand, particularly for auto, housing, travel and luxury goods.

Early signs of uptrading in FMCG categories: We are beginning to see early signs of uptrading in select consumer goods, viz. liquor, hair oil, health drinks, deodorant, soap, skin cream and shampoo. Dove, Dettol and Lux continue to be the top brands in soaps (16%, 15%, 13% market share respectively based on respondent preferences), while Head & Shoulders remains the most preferred shampoo brand (22% share).

HUVR maintains its strong leadership position in soaps (52% market share – unchanged from our last survey), skin creams (48%, -200bps), shampoo (41%, -200bps) and detergents (59%, -300bps). CLGT remains the clear No. 1 in toothpaste (44%, -300bps), but has lost ground to Dabur (14%, +300bps). APNT continues to enjoy brand preference (53%) in the paints category and BATA in footwear (despite a 500bps dip in market share to 22%).

Home and Cars – latent demand still strong: As in past surveys, we observed strong demand for homes (21% of consumers polled looking to buy in the next 3–6 months) and cars (30% looking to buy). Property prices and fuel prices are the key variables affecting purchase decisions, more so than interest rates. Consequently, the fall in petrol/diesel prices compared to 6-9 months ago is boosting demand for cars. Maruti remains the most preferred car brand (44% of respondents vs. 48% previously), followed by Hyundai (31% vs. 23%).

Sector outlook upgraded to Positive: Rising consumer confidence levels point to an improvement in consumption trends over the next 6-12 months. Consumer staple players are likely to report better growth starting in Q4FY15 itself and we expect discretionary names to deliver a sustained uptick from Q1FY16. We upgrade our view on the Consumer sector from negative to positive as the pick-up in growth momentum aided by a benign input cost situation should sustain premium valuations.

Read our detailed survey here: Religare 6th Urban Consumer Survey

Our survey points to a surge in consumer confidence levels





GDP growth revival to spur urban consumption

India’s consumption story thus far has been fuelled by a surge in rural demand, where growth has outpaced demand from urban India in the past 3-4 years. Urban growth, which was in the mid-teens till a couple of years ago, slowed in line with the slowdown in India’s GDP growth and is currently in the high single digits. Now, with a likely revival in economic growth, we expect urban demand to retrace to ~15% levels over the next couple of years.

Fig 1 - Economic growth rates have been trending down…


Fig 2 - GDP Growth Rate


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FY08 FY09 FY10 FY11 FY12 FY13 FY14

(%) Real GDP growth Agriculture growth Industry growth Services growth

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6.26.8

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FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

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We expect urban demand to retrace to mid-teen levels over the next couple of years




Urbanisation will further aid demand growth

India’s urban populace is likely to expand at a faster pace than its rural population as improving macro conditions encourage migration to cities, in line with past trends. Also, lower emphasis on rural schemes by the new government may drive urbanisation levels ahead of normative rates over the next few years.

Fig 3 - Increasing urbanisation as migration to cities continues

Source: McKinsey Report – India’s Urban awakening *Defined as the ratio of urban to total population based on the census definition of urban areas; population >5,000; density>400 persons per sq km; 75% of male workers in non-agricultural sectors; and statutory urban areas.

Fig 4 - Share of India’s GDP Fig 5 - State-wise urbanisation rate

Source: McKinsey Report – India’s Urban awakening Source: McKinsey Report – India’s Urban awakening

Fig 6 - All India households by income bracket, 2000-30

Source: McKinsey Report – India’s Urban awakening

220

290

377

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26%28%

31%

41%

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(%)(mm ) Urban Urbanisation*

4654 58

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(%) Urban Rural

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Tamil Nadu

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(%) Deprived Aspirers Seekers Strivers Globals

Rising urbanisation trends




According to McKinsey, urbanisation in India has increased from 26% in 1991 to 31% in 2011 and is expected to increase to 41% by 2030 – a key positive for most urban discretionary consumer companies. Further, a discernible shift in wallet share from basic necessities to discretionary purchases is likely to translate into a secular upmove in discretionary spends over the longer term.

Fig 7 - India’s wallet share will shift from basic necessities to discretionary items

Source: McKinsey Report – India’s Urban awakening

Wage inflation and job creation to play supporting role

According to Hewitt’s annual salary increase survey, wage inflation in 2013 was at a 10-year low (excluding subprime-crisis year 2008), with 2013 salary hikes at 10%. While most organisations continued with a 10% salary increase in 2014 (as per the Hewitt survey conducted in Feb’14), this could change for the better in 2015 given the improved sentiments and hiring outlook for most companies post the general elections in May’14. Q1FY15 data from the Labour Bureau also points to job addition across sectors, which coupled with improving salary hikes should aid urban consumption.

Fig 8 - Jobs addition data Industry group Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q3FY13* Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15

Textiles including Apparels (330) 420 780 - 500 500 40 88 66 92 (56) 69

Leather 10 (20) (120) (30) - 60 8 18 5 13 3 7

Metals 530 380 - (70) (50) 330 11 (38) 12 (20) - 47

Automobiles 180 220 (60) (10) (40) 140 12 8 7 (11) 19 1

Gems & Jewellery 130 70 100 (30) 50 (30) 13 8 (6) (6) 1 7

Transport (20) (50) 340 160 - 10 (3) (2) (2) (2) (3) -

IT/BPO 1,640 2,040 1,090 1,040 270 640 28 3 61 17 (4) 51

Handloom/Powerloom 10 90 130 (260) - 30 (2) - - - 4 -

Overall 2,150 3,150 2,260 800 730 1,680 107 85 143 83 (36) 182

Net addition QoQ (%) 24.3 46.5 (28.3) (64.6) (8.8) 130.1 (93.6) (20.6) 68.2 (42.0) (143.4) (605.6)

Source: Labour Bureau * Numbers released by Labour Bureau for 6 months combined

5948

3829

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1113

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1823

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(%)Food, beverages and tobacco and apparel Housing and utilitiesHousehold products Personal products and servicesTransportation CommunicationHealthcare Education & recreation

Secular upmove in discretionary spends likely over the longer term

Improved business sentiments and hiring outlook post general elections




Consumer confidence on the upswing

Consumer confidence in urban India hit a low in Sep’13 as indicated by a drop in the Current Situation Index to 88, but this has recovered to 105 in Sep’14 (similar to Sep’12 levels). The Future Expectations Index for consumers, however, stands at a 5-year high of 123.2 in Sep’14 after hitting a low of 90.5 in Sep’13. Buoyancy in this index is an indicator of an upswing in urban consumption over the next 1-2 years.

Fig 9 - Future Situation Index Fig 10 - Current Expectation Index

Source: CMIE, RCML Research Source: CMIE, RCML Research

Fig 11 - HSBC PMI Index Fig 12 - IIP growth

Source: HSBC Source: CMIE

107.7 105.6 103.9

109.8

90.5

100.3

114.9

122.9 123.2

80859095

100105110115120125130 Future expectations index

107.0 106.9

101.7

101.7

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48.3 48.8 48.8 48.5 48.5

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12.9

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(0.1)

(2)02468

1012141618

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

India Industrial Production (IIP) growth

Future Expectations Index for consumers at a 5-year high




Falling inflation to aid discretionary purchases

India has witnessed high inflation over the past 5-6 years with CPI increasing from a range of 3-7% seen over FY01-FY08 to a band of 9-12% over FY09-FY14. With global demand under pressure and the RBI following a tight monetary policy over the past 2-3 years, inflation has begun to moderate in the past six months. We thus expect more discretionary income in the hands of consumers as the rate softening cycle has begun –benefitting most discretionary categories including paints, QSR, footwear and jewellery.

Fig 13 - Yearly inflation over FY04-FY14

Source: RBI

Fig 14 - Inflation over the past 18 months

Source: RBI

5.56.5

4.5

6.6

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Inflation - WPI (avg) CPI (avg)

9.9 9.6 9.5 9.8 10.211.2

9.98.8

8.0 8.3 8.6 8.37.5

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6.55.5

4.45.05.2

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Moderating inflation leaves more discretionary income in the hands of consumers




Key stock recommendations Prefer plays on urban discretionary consumption

We expect urban discretionary categories such as paints, footwear, QSR and jewellery to be key beneficiaries of the revival in urban demand and have profiled these sectors along with select stocks in greater detail in the next section. Market leaders APNT (upgraded from SELL to BUY), BATA and JUBI (both BUY) are expected to consolidate their strong positions and deliver ahead-of-industry growth in respective segments. TTAN (HOLD) is expected to perform well too, but we believe valuations already price in the positives. We raise earnings estimates and targets for our consumer discretionary coverage, and also profile five players with interesting growth prospects, viz. AKZO, BRGR, KNPL, RLXF, WLDL (Not Rated).

Fig 15 - Valuation Snapshot Reco EPS ROE (%) P/E (x) EV/EBITDA (x) Bloomberg Ticker

Company Name

Mkt Cap (Rs mn) Old New CAGR

(FY14-FY17) FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E

Paints APNT IN Asian Paints 8,26,924 SELL BUY 28.0 33.2 38.6 36.6 54.1 38.7 32.0 37.1 26.5 21.8

BGRG IN Berger Paints 1,55,989 NOT RATED 25.4 25.4 27.4 28.1 44.1 33.5 31.2 29.0 23.6 19.5

Akzo IN Akzo Nobel 67,941 NOT RATED 18.4 18.4 24.0 26.0 36.0 31.0 26.0 26.0 22.0 18.0

KNPL IN Kansai Nerolac 1,33,302 NOT RATED 43.5 42.5 19.8 22.3 44.9 35.1 27.4 27.0 21.0 17.0

Footwear BATA IN Bata India 93,211 BUY BUY 24.0 23.7 24.4 25.4 42.9 35.1 28.2 26.2 21.5 17.3

RLXF IN Relaxo Footwear 40,925 NOT RATED 30.1 30.1 25.0 27.0 49.0 37.0 27.7 24.0 19.3 14.9

QSR JUBI IN Jubilant

FoodWorks 91,412 BUY BUY 32.5 22.2 25.8 28.5 67.9 45.9 31.5 31.1 21.8 15.5

WLDL IN Westlife development 46,707 NOT RATED - 2.6 -0.4 4.0 - 300.0 50.0 153.0 66.0 31.0

Jewellery TTAN IN Titan 3,54,093 HOLD HOLD 19.3 30.1 29.5 28.4 41.6 34.1 28.4 29.6 23.3 19.2

Source: RCML Research, Bloomberg




Sector analysis &

Stock recommendations


27 January 2015

REPORT AUTHORS




Asian Paints (APNT) 862 1,000 Buy

Berger Paints (BRGR) 224 NA Not Rated

Kansai Nerolac (KNPL) 2,467 NA Not rated

Akzo Nobel (AKZO) 1,416 NA Not Rated


Paints Macro recovery to lend colour to industry volumes We expect the Indian paints sector to clock a 17% CAGR over the medium term, with growth in FY16 being largely volume-driven as a pick-up in macro conditions supports higher per capita consumption. With demand likely to recover across the decorative and industrial segments, we upgrade APNT from SELL to BUY as its strong brand, wide distribution network and market leadership will enable it to capitalise on the growing market opportunity.

Paints industry to clock 17% CAGR over FY14-FY17: India’s paints market is estimated at Rs 350bn, having expanded at a 17% CAGR over the past five years. We expect the market to grow at a similar 17% CAGR over the medium term, with the organised sector likely to outpace growth in both the unorganised segment and the overall paints industry. Currently ~67% of the market is organised and we model for ~18% CAGR in the segment over FY14-FY17, further taking share away from unorganised players.

Macro pick-up to fuel paint demand: Volume growth for organised players has fallen from ~15% in FY10/FY11 to 8-9% in FY13/FY14 – we expect a return to the mid-teen levels over the next couple of years as economic growth gathers pace. India’s paint market volumes have historically grown at 1.2–2.5x GDP growth. In times when GDP growth has moved into a recovery cycle or been higher than average, the ratio of paint volume growth to GDP growth has climbed to the higher end of the band. We expect GDP growth to rise to ~7% in FY17 from 4.7% in FY14, implying ~15% volume growth for the paints industry.

Both decorative and industrial segments to do well: Capacity utilisation for the paints industry is set to improve as demand recovers. In the decorative paints segment, we expect a demand boost as per capita incomes increase and as the government’s thrust on ‘housing for all’ by 2022 plays out. For the industrial paints segment, onset of the capex cycle as well as an expected recovery in the auto industry will act as key growth drivers.

APNT to lead industry growth: We upgrade APNT from SELL to BUY with a Mar’16 TP of Rs 1,000 (rolled over from a Dec’15 TP of Rs 620), as we expect the company to be a major beneficiary of the pick-up in demand given its strong brand, product portfolio, distribution and retail network. We also expect significant margin gains for the company on account of the benign input cost environment. In this section, we also profile three potential plays on the expected volume revival, viz. AKZO, BRGR and KNPL (all Not Rated).

Paints Macro recovery to lend colour to industry volumes



Volume recovery ahead

India’s paint market is estimated at Rs 350bn, having expanded at a 17% CAGR over the past five years. We expect the market to grow at a similar 17% CAGR over the medium term, with the organised sector set to outpace growth in both the unorganised segment and the overall paints industry. Currently ~67% of the market is organised and we model for ~18% CAGR in the segment over FY14-FY17, further taking share away from unorganised players.

Fig 1 - Volume growth: Industry and major players

Source: RCML Research, Industry Sources

Macro pick-up to fuel paint demand Volume growth for organised players has fallen from ~15% in FY10/FY11 to 8-9% in FY13/FY14 – we expect a return to the mid-teen levels over the next couple of years as economic growth gathers pace. India’s paint market volumes have historically grown at 1.2–2.5x GDP growth. In times when GDP growth has moved into a recovery cycle or been higher than average, the ratio of paint volume growth to GDP growth has climbed to the higher end of the band. We expect GDP growth to rise to ~7% in FY17 from 4.7% in FY14, implying ~15% volume growth for the paints industry.

Fig 2 - Organised & unorganised market share Fig 3 - Paint companies: Market share

Source: RCML Research Source: RCML Research, CMIE

We note that with rising income levels and a healthy economic outlook, consumer spending on discretionary items such as house renovation and painting (which are generally deferred in a bad economy) is likely to increase. In India, the rising media penetration (in terms of television soap operas, etc.) has also helped shape consumer preference for well-maintained homes.

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(%)Asian Paints Berger Paints Akzo Nobel Kansai Nerolac Industry

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(%) Unorganised Organised

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Asian Paints Kansai Nerolac Berger Paints

Akzo Nobel Shalimar Paints Others

Expect 17% revenue CAGR for the paints industry over FY14-FY17

India’s paint market volumes highly correlated to GDP growth




Boost for the housing sector to aid paint demand The Modi government has made a declaration to provide pucca (proper) houses to all Indians by 2022. As per the 2011 Census, 48% of houses in India are currently burnt bricks houses – these would be eligible for upgrade under the new scheme. We estimate that even if the government is able to achieve half of its commitment, volumes for the paints industry would grow in the mid-teens.

Fig 4 - Housing census

Source: Census India, RCML Research

Industry capacity utilisation set to improve

Capacity utilisation of most paint companies has fallen from ~85% levels in FY11 to ~65% currently given the slowdown in demand as well as capex cuts by end-user sectors. As demand revives, we expect an improvement in utilisation across the paints industry, resulting in better return ratios.

Fig 5 - Capacity utilisation trend for major players

Source: RCML Research, Company

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Govt.’s aim to provide pucca houses for all by 2022 a potential growth trigger

Capacity utilisation has come off sharply




Decorative paints account for lion’s share, large scope for growth

Decorative paints account for ~75% of the total paints market. However, India’s per capita consumption is just 4kg per annum, far behind the international average of 10kg. India not only lags developed nations and China, but also countries such as Vietnam and the Philippines in terms of per capita offtake – implying significant scope for growth as income levels improve.

Fig 6 - Paint industry segment mix Fig 7 - Per capita paint consumption

Source: RCML Research Source: RCML Research, Berger Paint Annual Report

Fig 8 - India’s share in Asia-Pac paint industry – FY10 Fig 9 - India’s share in Asia-Pac paint industry – FY13

Source: RCML Research, Industry Source: RCML Research, Industry

India’s share in the Asia-Pacific market has been stable over the past three years. Notably, China’s share has been rising (at the cost of Japan).

Stronger outlook for industrials segment as well

The auto sector is a key consumer of industrial paints, accounting for close to 35% of demand. The slowdown in the auto sector over the past couple of years along with a weak capex cycle across industries has led to stagnant growth for the paints market. Our auto analyst now expects a recovery in two-wheeler volume growth from 7% in FY14 to 13% in FY15/FY16, in four-wheelers from -6% in FY14 to 10%/14%, and in CVs from -20% to 10%/15% growth. This coupled with a likely turn in capex cycle should support a better growth trajectory for industrial paints.

Decorative Paint 75%

Industrial Paint25%

Paint Industry Segment Mix

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(kgs)

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India9%

Indonesia3%

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Thailand2%

Australia5%

Other5%

China55%

India10%

Indonesia2%

Taiwan2%

Japan12%

Korea7%

Malaysia2%

Thailand2%

Australia3%

Other5%

Per capita consumption of decorative paints is just 4kg p.a. versus international average of 10kg

Improving outlook for auto sector to support demand for industrial paints




Fig 10 - Market share in industrial paints Fig 11 - Key end user sectors for industrial paints

Source: RCML Research, Industry Source: RCML Research, Industry

Fig 12 - Global comparable valuations EPS ROE (%) P/E (x) EV/EBITDA (x) Bloomberg Ticker Company Name Mkt Cap

($ mn) EV

($ mn) CAGR


SHW US SHERWIN-WILLIAMS CO 26,431 27,850 29.8 55.0 79.1 77.0 30.6 25.5 22.9 18.3 15.6 14.0

AKNA NA AKZO NOBEL 17,566 20,134 0.2 12.9 15.0 15.3 21.1 17.9 15.9 11.6 10.2 9.5

PPG US PPG INDUSTRIES INC 31,490 31,884 21.4 27.5 28.1 30.6 23.1 20.2 18.4 11.7 11.0 10.4

4613 JT KANSAI PAINT CO LTD 4,425 4,330 8.9 8.6 9.4 9.4 22.0 18.3 17.0 10.1 9.0 8.5

Source: RCML Research, Bloomberg, FY15 is CY14

Asian Paints20%

Kansai Nerolac

48%

Berger Paints13%

Shalimar Paints10%

Others9%

Industrial Paints Market share

Auto OEM21%

Auto Refinish13%

Protective Coatings/General Industries

33%

Powders10%

Coil8%

Others15%

Industrial paint demand mix

Financial Highlights

Company Update INDIA CONSUMER DISCRETIONARY

27 January 2015

REPORT AUTHORS



PRICE CLOSE (23 Jan 15) INR 862.10 MARKET CAP INR 826.9 bln USD 13.4 bln

SHARES O/S 95.9 mln

FREE FLOAT 47.4%

3M AVG DAILY VOLUME/VALUE 1.7 mln / USD 21.0 mln

52 WK HIGH INR 881.65

52 WK LOW INR 460.20

BUY TP: INR 1,000.00 16.0%

Asian Paints APNT IN

Paints a pretty picture – upgrade to BUY

We upgrade APNT from SELL to BUY as (a) volume growth is set to revive on the back of a macro recovery and resulting traction in urban demand, (b) EBITDA margins will likely expand +400bps over FY14-FY17 given the sharp fall in input costs, leading to a strong 28% EBITDA and PAT CAGR, and (c) premium valuations of 38.7x/32x FY16/FY17E P/E are justified by strong earnings growth and return ratios. We upgrade FY16/FY17 earnings by ~25%, raise our target P/E multiple from 30x to 37x, and roll over to a Mar’16 TP of Rs 1,000 (from Rs 620).

Topline CAGR at 17% over FY14-FY17: Amid the ongoing recovery in domestic economic growth, we expect demand for paints to trend up and sustain towards levels of 2-2.5x GDP growth in FY16/FY17. Accordingly, we model for an 18% topline CAGR in APNT’s domestic decorative paints business over FY14-FY17 (led by ~15% volume CAGR) along with a 15% topline CAGR in the international and industrials paint businesses.

Margins to improve 430bps through FY17: The decline in input cost index for APNT largely on account of a fall in crude and crude derivatives prices as well as lower TiO2 prices is likely to shore up its EBITDA margins by 430bps over FY14-FY17 to 19%, translating into an EBITDA CAGR of 28% over this period. With lower RM cost inflation, we also expect the company to post equally strong earnings CAGR of 28% through FY17. APNT’s ROE/ROCE figures are thus likely to resume an upward trajectory after bottoming out in FY14.

Upgrade to BUY: We raise our FY16/FY17 earnings estimates for APNT by ~25% each on the back of softening commodity prices. Tailwinds from lower commodity costs along with improving growth visibility amid a revival in domestic consumption lead us to increase our target P/E multiple from 30x to 37x and to upgrade the stock to BUY. Upon rollover to Mar’16, we have a new TP of Rs 1,000 (from a Dec’15 TP of Rs 620). Key risks to our BUY call are: (a) protracted recovery in volume growth, (b) reversal in commodity price trends, and (c) weak international business growth and margins.

Y/E 31 Mar FY13A FY14A FY15E FY16E FY17E

Revenue (INR mln) 109,060 125,816 146,528 171,974 202,161

EBITDA (INR mln) 16,672 18,647 22,674 31,739 38,525

Adjusted net profit (INR mln) 11,139 12,089 14,787 21,388 25,835

Adjusted EPS (INR) 11.6 12.8 15.9 22.3 26.9

Adjusted EPS growth (%) 12.7 10.3 24.4 39.9 20.8

DPS (INR) 3.8 4.4 5.1 5.9 6.7

ROIC (%) 43.6 40.3 45.5 59.6 64.6

Adjusted ROAE (%) 36.3 32.6 33.2 38.6 36.6

Adjusted P/E (x) 74.2 67.3 54.1 38.7 32.0

EV/EBITDA (x) 50.5 45.1 37.1 26.5 21.8

P/BV (x) 24.4 20.5 17.0 13.3 10.5

Source: Company, Bloomberg, RCML Research

14,400

19,400

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360

560

760

(INR) Stock Price Index Price

BUY TP: INR 1,000.00 16.0%




Investment thesis Resurgent volume led topline growth ahead

The Indian paints market has historically grown at 1.2–2.5x GDP growth in terms of volumes, which should continue going forward. With rising income levels and a healthy economic outlook, consumer spending on discretionary items such as house renovation and painting, which are generally deferred in a bad economy, is likely to increase. In India, rising media penetration (especially viewership of general entertainment programs such as Indian soaps and serials) has also helped shape consumer preference for well-maintained homes.

APNT is the market leader in the domestic paint industry with a market share of ~53% in the decorative segment (50% in overall paint market), reflecting a steady 100bps per annum increase in share from ~45% in 2006. We do not see any threat to APNT’s market dominance over the medium term and expect the rising shift in consumer preference towards organised paint brands to offer sizeable scope for growth.

Fig 1 - Overall paints industry market share (value terms)

Source: RCML Research, CMIE

In line with improving consumption trends, we model for an 18% topline CAGR in APNT’s domestic decorative paints business over FY14-FY17 led by ~15% volume CAGR. We also expect a 15% topline CAGR in both the international and industrials paint businesses.

Fig 2 - APNT: Volume growth set to improve… Fig 3 - …driving topline CAGR of 17% over FY14-FY17

Source: RCML Research, Company Source: RCML Research, Company

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Asian Paints Kansai Nerolac Berger Paints Akzo Nobel Shalimar Paints Others

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Rising discretionary spends amid an economic revival bode well for the paints industry

APNT a clear leader in the domestic paint market

BUY TP: INR 1,000.00 16.0%




Lower RM costs to bolster margins

We expect APNT’s EBITDA margins to expand 430bps to ~19% over FY14-FY17 on the back of an improvement in gross margins led by the steep fall in commodity prices. We model for a 28% EBITDA CAGR over FY14-FY17 driven by margin expansion and expect PAT to post a similar CAGR of 28% over this period.

Fig 4 - Titanium Dioxide – DuPont price trend Fig 5 - Titanium Dioxide (China) price trend

Source: RCML Research, Bloomberg Source: RCML Research, Bloomberg

Fig 6 - Phthalic Anhydride price trend Fig 7 - Penta Erythritol price trend

Source: RCML Research, Cline Source: RCML Research, Cline

Fig 8 - APNT: RM Cost Index shows a declining trend… Fig 9 - …aiding gross profit & margin expansion

Source: RCML Research Source: RCML Research

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Margins to expand 430bps over FY14-FY17 on account of lower RM costs

BUY TP: INR 1,000.00 16.0%




Fig 10 - EBITDA growth and margins to pick up… Fig 11 - …supporting strong PAT growth


Return ratios set to improve

We expect APNT’s ROE/ROCE trajectory to improve by 400bps/530bps over FY14-FY17 led by a topline resurgence and strong margin expansion. We also expect the company to maintain 50% dividend payout over the next 2-3 years.

Fig 12 - Return ratios


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(Rs mn) EBITDA EBITDA Margin (R)

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RoE RoCE

ROE/ROCE to improve by 400bps/530bps over FY14-FY17

BUY TP: INR 1,000.00 16.0%




Valuation Upgrade to BUY

We raise our FY16/FY17 earnings estimates by 24%/27% to build in lower commodity costs (our est. are ~10% ahead of the street) and upgrade the stock from SELL to BUY on improving volume growth visibility and expectations of continued benefits from softer commodity costs. The stock is currently trading at 38.7x/32x FY16E/FY17E earnings – we raise our target P/E multiple for APNT from 30x to 37x, a premium of ~10% to its one-year forward trading average (3 years trading history) and a 5% premium to our HUVR multiple of 35x (in-line with the 5 year trading history), which is justified on account of its improving topline, margin and return ratio profile. Rolling over to Mar’16, we have a new TP of Rs 1,000 for the stock (from a Dec’15 TP of Rs 620).

Fig 13 - Earning revision

Key parameters FY16E FY17E

Old New % Chg Old New % Chg Revenue (Rs mn) 1,71,012 1,71,974 0.6 1,99,973 2,02,161 1.1 EBITDA (Rs mn) 25,798 31,739 23.0 30,792 38,525 25.1 EBITDA margin (%) 15.1 18.5 335bps 15.4 19.1 365bps Net profit (Rs mn) 17,211 21,388 24.3 20,391 25,835 26.7 EPS (Rs) 17.9 22.3 24.3 21.3 26.9 26.7


Fig 14 - APNT P/E 1-year fwd


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Current : 45.0x

Upgrade to BUY on improving volume growth visibility and continued margin gains from lower commodity costs

BUY TP: INR 1,000.00 16.0%




Fig 15 - APNT P/E Prem/(Disc) to Sensex


Fig 16 - APNT P/E Prem/(Disc) to Sector


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BUY TP: INR 1,000.00 16.0%




Per Share Data Y/E 31 Mar (INR) FY13A FY14A FY15E FY16E FY17E Reported EPS 11.6 12.7 15.7 22.3 26.9 Adjusted EPS 11.6 12.8 15.9 22.3 26.9 DPS 3.8 4.4 5.1 5.9 6.7 BVPS 35.3 42.1 50.7 64.8 82.4

Valuation Ratios Y/E 31 Mar (x) FY13A FY14A FY15E FY16E FY17E EV/Sales 7.7 6.7 5.7 4.9 4.2 EV/EBITDA 50.5 45.1 37.1 26.5 21.8 Adjusted P/E 74.2 67.3 54.1 38.7 32.0 P/BV 24.4 20.5 17.0 13.3 10.5

Financial Ratios Y/E 31 Mar FY13A FY14A FY15E FY16E FY17E Profitability & Return Ratios (%) EBITDA margin 15.3 14.8 15.5 18.5 19.1 EBIT margin 13.9 12.9 13.7 16.7 17.3 Adjusted profit margin 10.2 9.6 10.1 12.4 12.8 Adjusted ROAE 36.3 32.6 33.2 38.6 36.6 ROCE 30.3 26.8 28.0 32.9 32.1 YoY Growth (%) Revenue 13.6 15.4 16.5 17.4 17.6 EBITDA 13.0 11.8 21.6 40.0 21.4 Adjusted EPS 12.7 10.3 24.4 39.9 20.8 Invested capital 19.0 9.3 11.1 8.1 16.9 Working Capital & Liquidity Ratios Receivables (days) 29 30 30 30 30 Inventory (days) 97 97 96 97 96 Payables (days) 88 85 85 85 83 Current ratio (x) 1.3 1.3 1.4 1.6 1.7 Quick ratio (x) 0.2 0.3 0.3 0.5 0.6 Turnover & Leverage Ratios (x) Gross asset turnover 4.8 4.5 4.3 4.3 4.3 Total asset turnover 1.8 1.7 1.7 1.7 1.6 Net interest coverage ratio 41.3 38.3 45.7 62.1 72.5 Adjusted debt/equity (0.1) (0.2) (0.2) (0.4) (0.4)

DuPont Analysis Y/E 31 Mar (%) FY13A FY14A FY15E FY16E FY17E Tax burden (Net income/PBT) 67.3 65.9 66.1 68.0 68.5 Interest burden (PBT/EBIT) 109.4 113.3 111.2 109.6 108.1 EBIT margin (EBIT/Revenue) 13.9 12.9 13.7 16.7 17.3 Asset turnover (Revenue/Avg TA) 177.4 174.8 171.0 167.0 161.0 Leverage (Avg TA/Avg equities) 200.5 193.9 192.5 185.8 177.8 Adjusted ROAE 36.3 32.6 33.2 38.6 36.6

BUY TP: INR 1,000.00 16.0%




Income Statement Y/E 31 Mar (INR mln) FY13A FY14A FY15E FY16E FY17E Total revenue 109,060 125,816 146,528 171,974 202,161 EBITDA 16,672 18,647 22,674 31,739 38,525 EBIT 15,126 16,191 20,103 28,719 34,894 Net interest income/(expenses) (367) (422) (440) (463) (481) Other income/(expenses) 1,793 2,674 2,952 3,207 3,300 Exceptional items 0 (100) (251) 0 0 EBT 16,552 18,442 22,615 31,463 37,713 Income taxes (4,957) (5,715) (6,946) (9,675) (11,458) Extraordinary items 0 0 0 0 0 Min. int./Inc. from associates (456) (440) (380) (400) (420) Reported net profit 11,139 12,188 15,038 21,388 25,835 Adjustments 0 (100) (251) 0 0 Adjusted net profit 11,139 12,089 14,787 21,388 25,835

Balance Sheet Y/E 31 Mar (INR mln) FY13A FY14A FY15E FY16E FY17E Accounts payables 23,101 26,563 30,900 34,495 40,052 Other current liabilities 0 0 0 0 0 Provisions 5,394 6,679 8,142 11,456 13,731 Debt funds 2,591 2,400 2,586 2,571 2,672 Other liabilities 0 0 0 0 0 Equity capital 959 959 959 959 959 Reserves & surplus 32,884 39,433 47,670 61,237 78,078 Shareholders' fund 33,843 40,392 48,629 62,196 79,038 Total liabilities and equities 66,537 78,494 92,718 113,179 137,953 Cash and cash eq. 7,520 9,317 14,372 25,316 36,406 Accounts receivables 9,809 11,103 12,679 15,175 17,723 Inventories 18,303 20,699 23,996 26,922 31,190 Other current assets 4,426 5,711 6,536 7,652 9,287 Investments 2,807 7,212 7,212 7,212 7,212 Net fixed assets 14,858 19,079 21,713 25,086 30,191 CWIP 8,864 7,416 8,089 7,694 7,822 Intangible assets 0 0 0 0 0 Deferred tax assets, net (1,544) (1,878) (1,878) (1,878) (1,878) Other assets 214 0 0 0 0 Total assets 65,257 78,658 92,718 113,179 137,953

Cash Flow Statement Y/E 31 Mar (INR mln) FY13A FY14A FY15E FY16E FY17E Net income + Depreciation 12,685 14,645 17,610 24,407 29,466 Interest expenses 367 422 440 463 481 Non-cash adjustments 0 0 0 0 0 Changes in working capital 47 (228) 102 370 (620) Other operating cash flows (970) (2,875) (870) (2,744) (2,819) Cash flow from operations 12,128 11,964 17,282 22,496 26,508 Capital expenditures (6,622) (5,230) (5,878) (5,997) (8,864) Change in investments 4,700 (4,405) 0 0 0 Other investing cash flows 1,793 2,443 2,952 3,207 3,300 Cash flow from investing (129) (7,193) (2,926) (2,791) (5,563) Equities issued 0 0 0 0 0 Debt raised/repaid (982) 24 186 (15) 101 Interest expenses (367) (422) (440) (463) (481) Dividends paid (5,133) (5,914) (6,801) (7,821) (8,994) Other financing cash flows (367) (422) (440) (463) (481) Cash flow from financing (6,848) (6,734) (7,494) (8,762) (9,855) Changes in cash and cash eq 5,152 (1,963) 6,862 10,944 11,090 Closing cash and cash eq 9,893 7,510 14,372 25,316 36,406



27 January 2015

REPORT AUTHORS




SHARES O/S 693.3 mln

FREE FLOAT 25.0%




NOT RATED Berger Paints BRGR IN

Strong market position in decorative paints

BRGR is the second largest player in India’s decorative paints market (16-17% share). In the last five years, the company’s topline and margins have expanded consistently. Given its strong correlation with GDP growth, the decorative paints segment is poised for higher growth as the macro revives. BRGR, with its strong presence and well-timed expansion, would emerge a key beneficiary in this scenario. We do not have a rating on the stock.

Strong domestic presence; macro revival to strengthen foothold further: With a market share of 16-17%, BRGR is the second largest player in India’s decorative paints segment. The company generates ~80% of its revenues from decorative segments and the remaining 20% from industrial paints. Historically, the decorative paint market has grown at ~1.2-2.5x the GDP growth rate; with a macro revival ahead, the segment is set to record higher growth rates. Also, the per capita consumption of paint in India is 4kg, much lower than the international average of 10-13kg. Increased urbanisation and reduction in the painting cycle should fuel per capita paint consumption levels, in turn benefitting companies such as BRGR.

Well-time dealer network/capacity expansion: BGRG is expanding its dealer network not only in existing areas but also in newer geographies. The company has also expanded its capacity from ~157,000mt in FY07 to ~500,000mt in FY14. We think dealer network expansion and a ramp-up in capacity levels would help the company tap into India’s growing decorative paints market.

Consistent revenue growth with margin expansion: BGRG has posted a revenue/ EBITDA CAGR of 19.5%/21.3% over FY10-FY14. During this period, the company’s margins also expanded on product mix improvement and economies of scale from higher volumes. A correction in prices of titanium oxide (TiO2) and crude should boost margins and earnings further. At the net level, BRGR has posted ~20% CAGR over FY10-FY14. The stock is trading at 31.3x FY17E (consensus) earnings. NOT RATED.

Y/E 31 Mar FY10A FY11A FY12A FY13A FY14A

Revenue (INR mln) 18,935 23,407 29,477 33,464 38,697

EBITDA (INR mln) 1,991 2,503 3,035 3,712 4,314


Adjusted EPS (INR) 1.7 2.2 2.6 3.2 3.6


DPS (INR) 0.5 0.5 0.6 0.7 0.9

ROIC (%) 16.4 19.5 20.7 20.0 18.5

Adjusted ROAE (%) 24.6 22.9 24.3 25.0 24.0

Adjusted P/E (x) 129.2 103.6 86.3 71.3 62.4

EV/EBITDA (x) 79.8 63.1 51.9 42.4 36.9

P/BV (x) 26.1 22.6 19.6 16.3 13.9


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Business overview Second largest player in decorative segment

With a market share of 16-17%, BRGR is the second largest player in India’s decorative paints segment. The company generates ~80% of its revenues from decorative segments and the remaining 20% from industrial paints. BRGR also has a presence in international markets such as Nepal, Bangladesh, Poland and Russia, with overseas markets contributing ~10% of the company’s overall revenues.

Fig 1 - Revenue mix


Decorative segment poised for strong growth in near term

The decorative paints segment has historically grown at ~1.2-2.5x India’s GDP growth rate; with the economy set to revive from FY16 onwards, we expect the pace of growth to improve. Per capita consumption of paint in India stands at 4kg, much lower than the international average of 10-13kg. This, along with beneficial trends such as a reduction in the painting cycle and increased urbanisation, should shore up growth rates going ahead.

Fig 2 - Correlation between GDP growth rate and paint industry growth

Fig 3 - Per capita paint consumption – India vs. International average

Source: Industry Sources, RCML Research Source: Assocham India, RCML Research

Decorative Segment80%

Industrial Segment20%

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Commands 16-17% share India’s decorative paints market




Expansion in dealer network and capacity

BGRG is expanding its dealer network not only in existing areas but also in newer geographies. The company has also expanded its capacity from ~157,000mt in FY07 to ~500,000mt in FY14.

Consistent topline growth with margin expansion

BGRG has managed to grow at 19.5% CAGR over FY10-FY14, with EBITDA increasing at 21.3% CAGR. During the period, the company’s margins also expanded on product mix improvements and better economies of scale generated by higher volumes. A correction in prices of Titanium Oxide (TiO2) and crude should boost margins further and lead to higher growth in earnings. At the net level, BRGR has clocked ~20% CAGR over FY10-FY14.

Fig 4 - Revenue growth trend Fig 5 - EBITDA and EBITDA margin trends


Fig 6 - PAT growth trend


18,935

23,407

29,47733,464

38,697

16.4%

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1,991

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(Rs mn) EBITDA EBITDA (R)

1,204

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1,801

2,184

2,49445.3%

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(Rs mn) PAT PAT Growth (R)




Per Share Data Y/E 31 Mar (INR) FY10A FY11A FY12A FY13A FY14A Reported EPS 1.7 2.1 2.6 3.1 3.6 Adjusted EPS 1.7 2.2 2.6 3.2 3.6 DPS 0.5 0.5 0.6 0.7 0.9 BVPS 8.6 10.0 11.4 13.8 16.2

Valuation Ratios Y/E 31 Mar (x) FY10A FY11A FY12A FY13A FY14A EV/Sales 8.4 6.8 5.3 4.7 4.1 EV/EBITDA 79.8 63.1 51.9 42.4 36.9 Adjusted P/E 129.2 103.6 86.3 71.3 62.4 P/BV 26.1 22.6 19.6 16.3 13.9

Financial Ratios Y/E 31 Mar FY10A FY11A FY12A FY13A FY14A Profitability & Return Ratios (%) EBITDA margin 10.5 10.7 10.3 11.1 11.1 EBIT margin 8.6 9.0 8.7 9.4 9.3 Adjusted profit margin 6.3 6.3 6.1 6.5 6.4 Adjusted ROAE 24.6 22.9 24.3 25.0 24.0 ROCE 14.3 15.8 17.2 16.9 15.8 YoY Growth (%) Revenue 16.4 23.6 25.9 13.5 15.6 EBITDA 49.8 25.7 21.3 22.3 16.2 Adjusted EPS 33.9 24.7 20.0 21.2 14.1 Invested capital (0.7) 15.8 17.4 36.2 16.1 Working Capital & Liquidity Ratios Receivables (days) 45 40 39 42 42 Inventory (days) (110) (96) (98) (119) (117) Payables (days) (60) (62) (66) (67) (64) Current ratio (x) 1.8 2.0 1.9 1.4 1.2 Quick ratio (x) 0.1 0.3 0.3 0.2 0.1 Turnover & Leverage Ratios (x) Gross asset turnover 2.9 3.3 3.8 3.7 3.4 Total asset turnover 1.7 1.8 1.8 1.7 1.7 Net interest coverage ratio 9.5 8.7 7.9 8.4 7.7 Adjusted debt/equity 0.4 0.2 0.2 0.3 0.4

DuPont Analysis Y/E 31 Mar (%) FY10A FY11A FY12A FY13A FY14A Tax burden (Net income/PBT) 69.9 68.1 70.7 70.6 71.1 Interest burden (PBT/EBIT) 105.3 102.8 99.3 98.0 97.0 EBIT margin (EBIT/Revenue) 8.6 9.0 8.7 9.4 9.3 Asset turnover (Revenue/Avg TA) 169.2 176.0 184.6 171.6 165.1 Leverage (Avg TA/Avg equities) 229.2 206.8 215.6 223.5 226.0 Adjusted ROAE 24.6 22.9 24.3 25.0 24.0




Income Statement Y/E 31 Mar (INR mln) FY10A FY11A FY12A FY13A FY14A Total revenue 18,935 23,407 29,477 33,464 38,697 EBITDA 1,991 2,503 3,035 3,712 4,314 EBIT 1,633 2,102 2,563 3,145 3,607 Net interest income/(expenses) (172) (243) (323) (377) (466) Other income/(expenses) 259 302 305 314 360 Exceptional items 0 0 0 0 0 EBT 1,720 2,161 2,545 3,082 3,500 Income taxes (516) (660) (744) (898) (1,006) Extraordinary items 0 0 0 0 0 Min. int./Inc. from associates 0 0 0 0 0 Reported net profit 1,204 1,501 1,801 2,184 2,494 Adjustments (2) (29) (1) (7) (5) Adjusted net profit 1,202 1,472 1,800 2,177 2,489

Balance Sheet Y/E 31 Mar (INR mln) FY10A FY11A FY12A FY13A FY14A Accounts payables 3,031 4,075 5,530 5,334 6,683 Other current liabilities 0 0 0 0 0 Provisions 535 491 701 882 1,056 Debt funds 2,674 2,928 3,401 5,497 6,235 Other liabilities 0 0 0 210 230 Equity capital 692 692 692 693 693 Reserves & surplus 5,273 6,203 7,223 8,839 10,514 Shareholders' fund 5,965 6,895 7,915 9,532 11,207 Total liabilities and equities 12,205 14,389 17,547 21,453 25,410 Cash and cash eq. 413 1,253 1,824 2,270 1,841 Accounts receivables 2,423 2,728 3,586 4,114 4,857 Inventories 3,299 4,438 5,603 6,353 6,957 Other current assets 432 553 987 750 947 Investments 1,282 526 51 108 907 Net fixed assets 4,295 4,494 5,078 5,989 8,638 CWIP 326 660 730 1,725 1,333 Intangible assets 0 0 0 0 0 Deferred tax assets, net (264) (263) (312) (408) (538) Other assets 0 0 0 551 470 Total assets 12,205 14,389 17,547 21,453 25,410

Cash Flow Statement Y/E 31 Mar (INR mln) FY10A FY11A FY12A FY13A FY14A Net income + Depreciation 1,560 1,873 2,272 2,744 3,196 Interest expenses 172 243 323 377 466 Non-cash adjustments 0 0 0 0 0 Changes in working capital 298 (565) (792) (1,057) (20) Other operating cash flows (30) 1 (49) (96) (131) Cash flow from operations 2,000 1,552 1,754 1,968 3,511 Capital expenditures (637) (934) (1,126) (2,473) (2,964) Change in investments (1,237) 756 475 (57) (799) Other investing cash flows 0 0 0 0 0 Cash flow from investing (1,874) (178) (651) (2,530) (3,763) Equities issued 1,406 (15) (212) 169 79 Debt raised/repaid (927) 254 473 2,096 738 Interest expenses (172) (243) (323) (377) (466) Dividends paid (445) (527) (567) (729) (892) Other financing cash flows 0 0 0 0 0 Cash flow from financing (138) (531) (629) 1,158 (541) Changes in cash and cash eq (12) 843 473 596 (792) Closing cash and cash eq 352 1,256 1,726 2,420 1,478



27 January 2015

REPORT AUTHORS



PRICE CLOSE (23 Jan 15) INR 2,466.75 MARKET CAP INR 132.9 bln USD 2.2 bln

SHARES O/S 53.9 mln

FREE FLOAT 35.0%


52 WK HIGH INR 2,498.00


NOT RATED Kansai Nerolac KNPL IN

Poised to benefit from an auto industry revival

KNPL, a subsidiary of the Japan-based Kansai Paint Co, is a leader in India’s industrial paints segment with a majority of its revenues coming from the automotive segment due to strong collaborations with auto OEMs. KNPL also intends to capture market share in the high-margin decorative segment through increased customer interactions. Given an expected auto industry revival and the drop in raw material prices, KNPL is likely to see margin expansion ahead. We do not have a rating on the stock.

Leader in industrial paints: KNPL has been present in India for over 94 years and is a leader in the country’s industrial paints segment. Along with its parent company, the Japan-based Kansai Paint Co, KNPL enjoys a strong collaboration with various automotive OEMs and derives a bulk of its industrial paint revenues from the automotive segment. In addition, KNPL also caters to a vast array of other OEM industries with a variety of products.

Higher A&P to improve decorative paint market share: KNPL has taken several marketing initiatives to capture market share in the high-margin decorative segment. It intends to enhance visibility and deepen brand engagement with consumers, institutions and dealers through programs such as Painter Loyalty Program (for painters) and Archedge (for architects). The company is also trying to enhance the direct involvement of consumers through retail stores and digital marketing.

Auto industry revival to aid growth: With an improvement in macro conditions, growth in the automotive sector is expected to revive. Since a large part of KNPL’s industrial paint revenues come from the auto segment, the company will likely see a strong recovery in this business. KNPL is trading at 27.4x FY17E (consensus) earnings. NOT RATED.


Revenue (INR mln) 17,064 22,555 27,442 30,118 33,347

EBITDA (INR mln) 2,637 2,775 3,373 3,361 3,621


Adjusted EPS (INR) 32.4 34.6 38.7 38.4 38.0

Adjusted EPS growth (%) 67.9 6.7 11.8 (0.8) (1.1)

DPS (INR) 6.3 8.3 9.2 9.1 9.1

ROIC (%) 37.2 30.4 25.4 18.2 15.0

Adjusted ROAE (%) 24.1 25.6 23.0 26.0 15.9

Adjusted P/E (x) 76.0 71.3 63.7 64.3 64.9

EV/EBITDA (x) 50.5 48.2 39.5 39.6 36.7

P/BV (x) 17.8 15.4 13.2 10.8 9.7 Source: Company, Bloomberg, RCML Research

14,400

19,400

24,400

29,400

480

980

1,480

1,980

2,480


NOT RATED

Kansai Nerolac KNPL IN



Business overview Leader in India’s industrial paint segment

KNPL, a subsidiary of the Japan-based Kansai Paint Co, has a presence in India since 1920 and derives 45% of its overall revenues from the industrial paint segment where it enjoys market leadership. Given strong collaborations with auto OEMs, a bulk of the company’s industrial revenues come from the automotive segment – the largest part of the industrial paints market. KNPL has four manufacturing units strategically located across the Indian geography to provide high service levels and supply chain efficiency. Also, a strong technology focus of the parent company has helped KNPL to offer the latest technically advanced products to its customers.

With a balanced revenue mix of 45:55 for the industrial: decorative paint segments, KNPL has delivered a topline CAGR of 18% over FY10-FY14. Over the same period, its EBITDA/PAT grew at 8.3%/5.5% CAGR (PAT up from Rs 1.6bn in FY10 to Rs 2bn in FY14).

Fig 1 - Sales growth trend


Fig 2 - EBITDA and EBITDA margin trend Fig 3 - PAT growth trend


17,064

22,555

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(%)(Rs mn) Sales Sales Growth (R)

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(%)(Rs mn) EBITDA EBITDA margin (R)

1,6551,865

2,086 2,069 2,04767.9

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Over FY10-FY14, revenues/EBITDA/ PAT have grown at 18%/8.3%/5.5% CAGR

NOT RATED




A&P to drive up decorative segment market share

KNPL derives ~55% of its revenues from the decorative paint segment. To tap this fast- growing and high-margin segment, the company has taken several marketing initiatives which would enhance its brand engagement with consumers, institutions and dealers. Through programs like the Painter Loyalty Program for painters and Archedge for architects, KNPL aims to improve brand visibility. Also, as most of the paint selection in India is done by consumers, KNPL is directly engaging with consumers by setting up retail stores and digital marketing mediums.

Fig 4 - Experience Zone, Delhi Fig 5 - Encasa Store, Mumbai

Source: Company Source: Company

Recovery in auto industry to aid growth

India’s auto industry is expected to see a revival in growth rates as macro conditions improve. With favourable government reforms and improved customer sentiments, both commercial and passenger vehicles are likely to witness a growth rebound in FY16. As ~75% of KNPL’s industrial paint revenues come from the auto sector, the company will likely see a strong recovery in this business.

Fig 6 - Recovery in auto industry growth rates

Source: CMIE

12.4

32.1

6.2

(22.3)

35.431.4

18.8

(3.2)

(18.7)

3.1

13.0

7.3

20.6 11.5

9.7

26.922.4

5.1

(4.4)

(3.5)2.5

6.9

(30)

(20)

(10)

0

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FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

Commercial vehicle sales Passenger car sales

Higher demand for commercial and passenger vehicles to improve demand for industrial paints

NOT RATED






Financial Ratios Y/E 31 Mar FY10A FY11A FY12A FY13A FY14A Profitability & Return Ratios (%) EBITDA margin 15.5 12.3 12.3 11.2 10.9 EBIT margin 12.9 10.1 10.2 9.6 8.9 Adjusted profit margin 9.7 9.1 7.9 9.7 6.2 Adjusted ROAE 24.1 25.6 23.0 26.0 15.9 ROCE 19.3 18.0 19.6 16.8 14.7 YoY Growth (%) Revenue 24.1 32.2 21.7 9.8 10.7 EBITDA 67.5 5.2 21.6 (0.4) 7.7 Adjusted EPS 67.9 6.7 11.8 (0.8) (1.1) Invested capital 16.6 43.1 48.9 35.7 9.8 Working Capital & Liquidity Ratios Receivables (days) 47 40 41 47 48 Inventory (days) 71 77 84 92 100 Payables (days) 69 62 62 68 70 Current ratio (x) 1.4 1.6 1.7 1.7 1.8 Quick ratio (x) 0.1 0.1 0.1 0.1 0.1 Turnover & Leverage Ratios (x) Gross asset turnover 2.9 3.4 3.6 3.0 2.7 Total asset turnover 1.4 1.6 1.7 1.6 1.6 Net interest coverage ratio 182.9 2,281.2 2,809.4 14,449.5 660.2 Adjusted debt/equity 0.1 0.0 0.0 0.0 0.0


NOT RATED




Income Statement Y/E 31 Mar (INR mln) FY10A FY11A FY12A FY13A FY14A Total revenue 17,064 22,555 27,442 30,118 33,347 EBITDA 2,637 2,775 3,373 3,361 3,621 EBIT 2,194 2,281 2,809 2,890 2,971 Net interest income/(expenses) (12) (1) (1) 0 (5) Other income/(expenses) 204 611 243 1,312 103 Exceptional items 0 0 0 0 0 EBT 2,386 2,891 3,051 4,202 3,070 Income taxes (731) (832) (892) (1,280) (1,004) Extraordinary items 0 0 0 0 0 Min. int./Inc. from associates 0 0 0 0 0 Reported net profit 1,655 2,060 2,159 2,922 2,066 Adjustments 0 0 0 0 0 Adjusted net profit 1,655 2,060 2,159 2,922 2,066

Balance Sheet Y/E 31 Mar (INR mln) FY10A FY11A FY12A FY13A FY14A Accounts payables 3,043 3,676 4,440 5,457 6,020 Other current liabilities 0 0 0 0 0 Provisions 937 663 732 800 785 Debt funds 1,100 825 746 690 568 Other liabilities 245 957 961 914 817 Equity capital 10 10 10 10 10 Reserves & surplus 7,459 8,623 10,093 12,321 13,693 Shareholders' fund 7,469 8,633 10,103 12,331 13,703 Total liabilities and equities 12,794 14,753 16,981 20,192 21,892 Cash and cash eq. 411 396 592 601 549 Accounts receivables 2,324 2,603 3,588 4,200 4,548 Inventories 2,474 3,541 4,537 5,341 6,457 Other current assets 411 293 313 453 454 Investments 4,015 3,718 1,835 606 565 Net fixed assets 2,893 2,782 3,963 7,745 9,096 CWIP 164 752 1,615 1,235 482 Intangible assets 0 0 0 0 0 Deferred tax assets, net 115 134 102 (431) (658) Other assets 0 535 436 442 401 Total assets 12,808 14,753 16,981 20,192 21,893

Cash Flow Statement Y/E 31 Mar (INR mln) FY10A FY11A FY12A FY13A FY14A Net income + Depreciation 2,098 2,554 2,723 3,393 2,715 Interest expenses 0 0 0 0 0 Non-cash adjustments 0 0 0 0 0 Changes in working capital (227) (433) (189) (705) 53 Other operating cash flows 1,505 1,300 1,023 2,237 1,892 Cash flow from operations 3,375 3,421 3,557 4,925 4,660 Capital expenditures (757) (1,268) (2,239) (2,806) (1,274) Change in investments 157 182 145 104 147 Other investing cash flows (1,624) (558) (115) (1,410) (1,116) Cash flow from investing (2,224) (1,644) (2,209) (4,112) (2,242) Equities issued 164 (275) (79) 0 0 Debt raised/repaid (378) (404) (539) (593) (593) Interest expenses 0 0 0 0 0 Dividends paid (12) (68) (87) (217) (227) Other financing cash flows (227) (748) (705) (810) (819) Cash flow from financing (453) (1,496) (1,411) (1,620) (1,639) Changes in cash and cash eq 699 281 (62) (807) 779 Closing cash and cash eq 1,871 1,087 926 385 1,929



27 January 2015

REPORT AUTHORS




SHARES O/S 46.7 mln

FREE FLOAT 25.0%


52 WK HIGH INR 1,488.00


NOT RATED Akzo Nobel India AKZO IN

Strong parentage, diverse solutions

AKZO is the Indian arm of the world’s largest paint company, Akzo Nobel N.V., and has been operating in India for over 60 years. The company manufactures and markets a wide range of industrial coatings. Since it derives a large part of its revenue from the industrial paint segment, AKZO should significantly benefit from an improvement in the capex cycle as macro conditions revive in the country. We do not have a rating on the stock.

Strong parentage, diverse portfolio: Akzo Nobel N.V, the world’s largest paint company, has a presence in India for over six decades through its Indian arm, AKZO. The company manufactures and markets a wide range of coatings, including decorative paints, performance coatings and specialty chemicals. AKZO’s portfolio includes well-known brands such as Dulux, Sikkens, International and Interpon. The company provides solutions across industries, viz. automotive, consumer electronics, aviation and construction.

Dulux brand to tap high-growth mid-market segment: Dulux is one of AKZO’s most popular brands in the decorative paints segment and enjoys over 20% share in the premium end of the market. The company is also using the Dulux brand to penetrate the high-growth mid-segment through products like Dulux Promise and Dulux Rainbow.

Strong balance sheet, impressive dividend payout record: AKZO is a debt-free company with cash & cash equivalents of ~Rs 7bn that account for almost 10% of market cap. In the last two years, the company has given out special dividends to shareholders, showcasing its robust cash generation ability.

Trades at 26.4x FY17 consensus estimates: Over FY10-FY14, AKZO’s revenue grew at a 23.4% CAGR (helped largely by the merger of group companies) and EBITDA at 13% CAGR. The stock is trading at 26.4x FY17E (consensus) earnings. NOT RATED.


Revenue (INR mln) 10,417 10,968 19,878 22,320 24,179

EBITDA (INR mln) 1,176 1,331 1,746 1,885 1,919

Adjusted net profit (INR mln) 955 1,217 1,300 1,156 998

Adjusted EPS (INR) 43.3 48.0 54.8 46.9 32.2

Adjusted EPS growth (%) (44.0) 10.9 14.2 (14.5) (31.4)

DPS (INR) 13.3 15.0 21.6 66.3 62.2

ROIC (%) 230.2 106.3 37.9 38.8 54.9

Adjusted ROAE (%) 9.7 11.7 10.3 9.1 10.2

Adjusted P/E (x) 32.7 29.5 25.8 30.2 44.0

EV/EBITDA (x) 56.1 49.6 37.3 34.0 33.5

P/BV (x) 5.3 4.8 3.6 6.0 7.8 Source: Company, Bloomberg, RCML Research

14,400

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1,540





Business overview Strong parentage and a diverse portfolio

AKZO is the Indian arm of the world’s largest paint company Akzo Nobel N.V., which enjoys a leadership position in the decorative and industrial paint segments across the globe. This gives AKZO easy access to the rich experience and technology of its parent company.

AKZO manufactures and markets products catering to both, the decorative and industrial segments. Its portfolio comprises well-known brands such as Sikkens, International and Interpon, with Dulux being the most popular.

Fig 1 - AKZO's brands

Source: Company, RCML Research

AKZO has six plants across the country with 8,500+ retailers and ~800 B2B customers. Its products cater to various industries and sectors such as automotive, consumer, electronics, power, aviation, shipping and leisure craft, construction, oil & gas, water and waste water treatment and F&B.

Strong financials with a good dividend payout record

AKZO is a zero-debt company with cash & cash equivalents of ~Rs 7bn. The company’s revenues have grown at a 23.4% CAGR over FY10-FY14. It expanded two facilities at Hyderabad and Bengaluru in 2011 and established a new decorative paint unit at Gwalior in 2013.

Over the last two years, in addition to regular dividends, AKZO has rewarded its shareholders with special dividends.

Caters to decorative and industrial segments through a diverse portfolio of brands

Zero-debt company with revenue growth of 23.4% CAGR over FY10-FY14




Fig 2 - Dividend history

Source: Company, RCML Research

Economic revival to spur demand

With an upturn in the economic cycle, the country’s capex cycle is also expected to kick in. As a large part of the company’s revenues are derived from the industrial segment, AKZO is expected to witness strong demand for its industrial products.

Fig 3 - Improving PMI Manufacturing Index

Financial performance

AKZO’s revenues grew at a 23.4% CAGR over FY10-FY14, up from Rs 10.4bn in FY10 to Rs 24.2bn in FY14 aided by merger of group companies. EBITDA grew at ~13% CAGR over the same period, from Rs 1.2bn in FY10 to Rs 1.9bn in FY14. Reported PAT stood at Rs 1.5bn in FY14, similar to FY10 levels. AKZO’s ability to capture the growth opportunity as the economic cycle turns holds the key to price performance (trades at 26.4x FY17 consensus estimates). NOT RATED.

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(Rs) Regular Dividend Special Dividend

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Special dividend payouts seen over FY13-FY14

Improving manufacturing activity to increase demand from industrial segment




Fig 4 - Sales growth trend Fig 5 - EBITDA and margin trend


Fig 6 - PAT growth trend


10,417 10,968

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1,1761,331

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(Rs mn) EBITDA EBITDA (R)

1,5931,767

2,0182,188

1,502

(45.9%)

10.9%14.2%

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(31.4%)

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(Rs mn) PAT PAT Growth (R)






Financial Ratios Y/E 31 Mar FY10A FY11A FY12A FY13A FY14A Profitability & Return Ratios (%) EBITDA margin 11.3 12.1 8.8 8.4 7.9 EBIT margin 9.3 10.2 6.9 6.7 6.1 Adjusted profit margin 9.2 11.1 6.5 5.2 4.1 Adjusted ROAE 9.7 11.7 10.3 9.1 10.2 ROCE 7.7 8.6 8.9 9.2 11.2 YoY Growth (%) Revenue 4.4 5.3 81.2 12.3 8.3 EBITDA 16.0 13.2 31.2 8.0 1.8 Adjusted EPS (44.0) 10.9 14.2 (14.5) (31.4) Invested capital (58.1) 654.3 201.6 (64.8) 52.5 Working Capital & Liquidity Ratios Receivables (days) 27 25 27 39 42 Inventory (days) 86 79 78 91 85 Payables (days) 84 91 77 98 99 Current ratio (x) 0.7 1.1 1.2 0.8 0.8 Quick ratio (x) 0.0 0.2 0.3 0.2 0.2 Turnover & Leverage Ratios (x) Gross asset turnover 3.1 3.0 3.7 3.1 3.0 Total asset turnover 0.8 0.8 1.1 1.0 1.1 Net interest coverage ratio 87.6 76.3 35.2 16.8 98.8 Adjusted debt/equity 0.0 (0.1) (0.1) (0.2) (0.2)





Income Statement Y/E 31 Mar (INR mln) FY10A FY11A FY12A FY13A FY14A Total revenue 10,417 10,968 19,878 22,320 24,179 EBITDA 1,176 1,331 1,746 1,885 1,919 EBIT 964 1,114 1,380 1,499 1,482 Net interest income/(expenses) (11) (15) (39) (89) (15) Other income/(expenses) 1,047 1,100 1,123 1,381 567 Exceptional items 0 0 0 0 0 EBT 2,000 2,200 2,463 2,791 2,034 Income taxes (407) (433) (446) (603) (532) Extraordinary items 0 0 0 0 0 Min. int./Inc. from associates 0 0 0 0 0 Reported net profit 1,593 1,767 2,018 2,188 1,502 Adjustments (638) (550) (718) (1,032) (504) Adjusted net profit 955 1,217 1,300 1,156 998

Balance Sheet Y/E 31 Mar (INR mln) FY10A FY11A FY12A FY13A FY14A Accounts payables 2,236 2,588 5,067 5,956 6,101 Other current liabilities 0 0 0 0 0 Provisions 1,552 1,172 1,757 5,188 4,872 Debt funds 0 0 0 0 0 Other liabilities 21 723 846 855 938 Equity capital 368 368 368 467 467 Reserves & surplus 9,553 10,548 14,042 10,586 8,011 Shareholders' fund 9,921 10,916 14,410 11,053 8,478 Total liabilities and equities 13,730 15,399 22,080 23,052 20,389 Cash and cash eq. 143 876 1,931 1,774 1,772 Accounts receivables 808 701 2,260 2,516 3,076 Inventories 972 1,532 3,334 3,149 3,242 Other current assets 801 876 809 1,536 682 Investments 9,602 9,850 10,035 9,472 6,286 Net fixed assets 1,381 1,418 3,563 3,548 5,025 CWIP 23 145 148 1,057 306 Intangible assets 0 0 0 0 0 Deferred tax assets, net 0 0 0 0 0 Other assets 0 0 0 0 0 Total assets 13,730 15,399 22,080 23,052 20,389

Cash Flow Statement Y/E 31 Mar (INR mln) FY10A FY11A FY12A FY13A FY14A Net income + Depreciation 1,805 1,983 2,384 2,574 1,939 Interest expenses 0 0 0 0 0 Non-cash adjustments 0 0 0 0 0 Changes in working capital 217 (482) (296) 818 (508) Other operating cash flows (914) (1,138) (717) (1,312) 277 Cash flow from operations 1,108 364 1,371 2,080 1,708 Capital expenditures (271) (379) (1,328) (1,261) (1,199) Change in investments 1,026 652 1,061 1,592 3,704 Other investing cash flows 0 0 0 0 0 Cash flow from investing 755 273 (267) 331 2,505 Equities issued (13) 0 111 (12) 0 Debt raised/repaid 0 0 0 0 0 Interest expenses 0 0 0 0 0 Dividends paid (689) (776) (1,122) (4,368) (4,094) Other financing cash flows (1,165) 300 343 2,087 (254) Cash flow from financing (1,867) (476) (668) (2,293) (4,348) Changes in cash and cash eq (4) 160 436 118 (135) Closing cash and cash eq 143 303 739 857 722


27 January 2015

REPORT AUTHORS




Bata India (BATA) 1,450 1,650 Buy

Relaxo Footwear (RLXF) 686 NA Not Rated


Footwear Making strides

We expect the organised footwear market in India to grow at an 18-20% CAGR over the medium term, outpacing overall industry growth of 14%. While factors such as a turn in general macro conditions, low per-capita consumption of footwear and scope for product mix improvement will aid growth for the footwear industry as a whole, we expect organised players in particular to benefit from the rising traction in e-commerce and a leveling of the tax playing field upon GST implementation. BATA remains our top pick.

Footwear industry has large unorganised presence: India’s footwear market has clocked a CAGR of 14% over the past five years and is now estimated at Rs 340bn. Currently, 70-75% of the market is unorganised in volume terms and ~55% is unorganised in value terms. We expect the footwear industry to continue growing at a 14-15% CAGR over the medium term, with the organised segment growing at 18-20% CAGR, outpacing unorganised players.

Per capita consumption of footwear set to improve: India’s share in the global footwear market is pegged at ~15%. In comparison to most developed countries, India fares poorly both in terms of per capita consumption (half that of other developed markets) and average ASPs (merely ~Rs 150/pair). At present, the Indian footwear market is largely utility- rather than fashion-driven, a trend that will gradually change as income levels rise. Per capita spends on footwear have increased at a 15% CAGR over the past five years, but still remain low at just Rs 300.

E-commerce, GST to shape organised market growth: E-commerce in India is growing at a rate of ~40% p.a. and is currently expected to account for 8-9% (Rs 30bn) of India’s footwear market. We expect the online market to continue to grow faster over the medium term as the penetration of branded online retail increases in India. In another boost for the organised sector, the upcoming introduction of GST should help level the playing field in terms of tax burden and the resultant pricing gap (organised industry pays excise + VAT of 22-24% which unorganised players are able to avoid, leading to pricing advantages for the latter).

BATA to lead industry growth: We expect BATA to be a major beneficiary of the shift to the organised segment given its strong brand &product portfolio and wide distribution & retail network. We maintain BUY on the stock with a Mar’16 TP of Rs 1,650 (rolled over from a Dec’15 TP of Rs 1,400). We also profile RLXF (Not Rated), the second largest footwear producer in India, which is likely to benefit from the higher growth in the organised industry.




India remains a largely unorganised market…

India’s footwear market has clocked a 14% CAGR over the past five years and is now estimated at Rs 340bn. Currently, 70-75% of the market is unorganised in volume terms and ~55% in value terms. We expect the footwear industry to maintain a 14-15% CAGR over FY14-FY17, with the organised segment posting an 18-20% CAGR over this period, outpacing growth of unorganised players.

Fig 1 - Indian Footwear Market

Source: RCML Research, Relaxo Footwear Annual Report

Fig 2 - Organised vs. unorganised share in value terms

Source: Relaxo Footwear Annual Report, RCML Research

India’s share in the global footwear market is pegged at ~15%. In comparison to most developed countries, India fares poorly both in terms of per capita consumption (half that of other developed markets) and average ASPs (merely ~Rs 150/pair). At present, the Indian footwear market is largely utility- rather than fashion-driven, a trend that will gradually change as income levels rise. Per capita spends on footwear have increased at a 15% CAGR over the past five years, but still remain low at just Rs 300.

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70-75% of India’s footwear market is unorganised in volume terms and ~55% in value terms

Per capita spends on footwear remain low at just Rs 300




Fig 3 - India’s per capita consumption of footwear lower than developed economies

Source: Relaxo Footwear Annual Report, RCML Research

…but share of organised players set to rise

Women’s and kids’ segments under-serviced Men’s footwear accounts for ~54% of India’s footwear market, women’s 35% and that for kids 11%. In contrast to global trends where women’s footwear corners a major share of markets, India has historically had a lower share of women’s and kids’ footwear. While men’s products enjoy a high share in the branded segment, the footwear markets for women and kids are largely unorganised – this implies significant scope for expanding the share of branded footwear in these high-margin segments (kids segment more profitable).

Fig 4 - Segmental share of footwear market in India

Source: Relaxo Footwear Annual Report, Company

Low penetration of branded footwear In terms of categories, casual footwear is the most dominant in India. The market is largely dominated by the mass and mid segments (<Rs 700/pair). Therefore, the Indian footwear industry offers a big opportunity in the form of improving average realisations through product mix enhancements, as customers move from unbranded to branded footwear in tandem with rising income levels.

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Segments Mix (CY14)

Market dominated by men’s footwear; scope for expanding share of branded footwear in women’s/kids’ segments




Fig 5 - Indian footwear breakup across segments

Source: Industry, RCML Research

Introduction of GST to level the playing field With the likely introduction of GST (goods & services tax) over the next couple of years, we expect a further improvement in share of the branded segment. The organised footwear industry currently pays taxes of 22-24% (~12% excise and 12.5% state VAT), with footwear retailed at less than Rs 500 currently exempt from excise tax. Channel checks suggest that unorganised players hardly pay any tax at all and are hence in a position to competitively price their products. GST will bring all players under the same tax net, thereby reduced the pricing differential with the unorganised segment.

E-commerce a key growth driver E-commerce in India is growing at a rate of ~40% p.a. and is expected to account for 8-9% (Rs 30bn) of India’s footwear market currently. We expect the online market to continue to grow faster over the medium term as the penetration of branded online retail increases in India.

Fig 6 - Digital commerce in India

Source: The Marketing Whitebook 2014-15, RCML Research

Casual61%

Economy22%

Premium Non-Leather3%

Premium Leather7%

Sports/Active7%

Indian Footwear Breakup across segment

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(Rs bn) Market Size Growth (R)

Scope to improve average realisations through product mix enhancements

GST will reduce the pricing differential with the unorganised segment

Online sales are expected to capture close to 10% of the Indian footwear market by FY17





($ mn) EV

($ mn) CAGR


2020 HK ANTA SPORTS PRODUCTS LTD 4,322 2,862 18.7 21.4 23.1 24.0 16.0 13.0 12.0 10.3 8.7 7.7

1880 HK BELLE INTERNATIONAL HOLDINGS

9,584 6,995 6.8 16.9 16.8 17.1 13.6 13.0 12.0 8.0 7.5 7.0

1234 HK CHINA LILANG LTD 767 508 7.8 20.6 20.6 21.9 8.9 8.1 7.2 5.9 5.2 4.7

891 HK TRINITY LTD 340 378 2.8 5.4 6.5 8.1 14.5 11.2 9.0 8.2 7.0 5.7

ADS GR ADIDAS AG 14,231 14,835 9.1 11.9 13.4 14.1 19.5 17.6 15.1 10.2 9.5 8.5

NKE US NIKE INC -CL B 83,063 79,637 17.4 27.2 28.0 28.6 27.0 23.4 20.1 16.6 14.8 13.2




27 January 2015

REPORT AUTHORS




SHARES O/S 64.3 mln

FREE FLOAT 48.0%


52 WK HIGH INR 1,496.00


BUY TP: INR 1,650.00 13.8%

Bata India BATA IN

Expanding footprint to accelerate growth

We remain positive on BATA given a likely recovery in SSSg to ~9% in CY15 (from ~6% in CY14), improvement in operating leverage led by a better product mix & traction from new large-format stores, and reasonable valuations at 35.1x/28.2x CY15E/CY16E earnings. We upgrade earnings estimates and expect BATA to post a strong 24% earnings CAGR over CY14-CY17 led by 18% sales growth – this combined with a revision in target P/E multiple from 27x to 30x and rollover from Dec’15 gives us a new Mar’16 TP of Rs 1,650 (from Rs 1,400).

Topline CAGR at 18% over CY14-CY17: BATA enjoys a strong brand franchise in the fragmented Indian footwear segment and is the market leader with 20-25% market share in the branded segment. We expect the company to deliver an 18% topline CAGR over CY14-CY17 led by healthy 9-10% SSSg. The pace of store additions should remain strong at an estimated 100 stores p.a. over the next 2-3 years. Notably, the company has been focusing on closing down all non-profitable stores while opening larger format outlets.

Earnings CAGR of 24% through CY17: We forecast a ~200bps increase in BATA’s EBITDA margins to 17% over CY14-CY17 as operating leverage kicks in from new-store sales. This should fuel strong 24% earnings CAGR over CY14-CY17.

Robust balance sheet, cash flow generation: Given its healthy cash generation, BATA is likely to fund new-store capex through internal accruals – we expect FCF generation to improve from ~Rs 1bn in CY14 to Rs 3.7bn in CY17.

Maintain BUY: We upgrade CY15/CY16/CY17 earnings estimates by 2%/6%/9%, raise our target multiple on the stock from 27x to 30x Mar’17 earnings, and roll over to a Mar’16 TP of Rs 1,650 (from Rs 1,400). Key risks to our BUY call are: (a) protracted recovery in SSSg, (b) large format stores being unprofitable, and (c) increase in competitive intensity.

Y/E 31 Dec FY12A FY13A FY14E FY15E FY16E

Revenue (INR mln) 18,412 20,640 23,034 26,875 31,822

EBITDA (INR mln) 2,732 3,207 3,463 4,196 5,142


Adjusted EPS (INR) 26.7 30.7 33.8 41.4 51.4


DPS (INR) 6.0 6.5 8.5 10.3 12.9

ROIC (%) 30.2 30.4 28.5 32.1 37.2

Adjusted ROAE (%) 26.9 26.1 23.7 24.4 25.4

Adjusted P/E (x) 54.3 47.2 42.9 35.1 28.2

EV/EBITDA (x) 33.7 28.5 26.2 21.5 17.3

P/BV (x) 13.3 11.1 9.4 7.9 6.6


14,400

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160 360 560 760 960

1,160 1,360 1,560


BUY TP: INR 1,650.00 13.8%

Bata India BATA IN



Investment rationale Store addition and mix improvement to boost growth

BATA enjoys a strong brand franchise in the fragmented Indian footwear segment and is the market leader with 20-25% share in the branded segment. We expect the company to deliver an 18% topline CAGR over CY14-CY17 led by healthy 9-10% SSSg. The pace of store additions should remain strong at an estimated 100 stores p.a. over the next 2-3 years. Notably, BATA has been focusing on closing down all non-profitable stores while opening larger outlets.

Robust retail presence a key competitive edge, set to strengthen further BATA has a strong retail presence with ~1,400 stores (~3msf) selling footwear, accessories and garments in India’s urban markets. The company derives ~80% of its revenues through retail networks and the balance 20% from non-retail channels (dealers/institutional sales). About 80% of revenues are generated from metros, tier-1 and tier-2 cities, presenting a huge opportunity to tap into rural and semi-urban markets which are mainly serviced through dealer networks. Not surprisingly, BATA has stepped up the rate of store openings over the last few years, particularly in tier-2 and -3 cities, and plans to add 100 outlets p.a.

In the past few years, revenue benefits from store additions were largely nullified by store closures at other locations. Going forward, we expect BATA’s new stores to add significantly to revenues as the exercise to shut down non-profitable stores is largely complete. The new outlets will also be larger (~3,000sft) than the current average size of 2,000sft/store.

Improving product mix to drive topline and profitability BATA has shifted focus from low-end rubber/plastic footwear to the premium/mid-premium leather segment. Focus on more profitable products coupled with a growing share of high-margin women’s and kids’ footwear would contribute meaningfully to topline growth and also shore up margins.

Fig 1 - Product mix continues to improve

Source: RCML Research Estimates from CY12 onwards, Company

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Expect strong topline CAGR of 18% over CY14-CY17 (~12% growth in CY14)

Closure of lossmaking outlets and addition of 100 new stores p.a. to boost revenues

Shift in focus from lower end segments towards profitable leather business to aid margins

BUY TP: INR 1,650.00 13.8%

Bata India BATA IN



Fig 2 - Rising ASP per pair indicates a better product mix

Source: RCML Research estimates from CY12, Company

Operating leverage to kick in as topline growth picks up

Despite input cost inflation, BATA has gradually improved its gross margins over the last few years due to an improving product mix. We expect this trend to continue as the company maintains its focus on higher-end segments. For the footwear industry as a whole, we expect an increase in uptrading to higher priced brands once economic growth starts to revive, given rising income levels.

Fig 3 - Gross profit margin trend


Operating leverage from an improving growth profile should fuel EBITDA margin expansion for BATA. On the cost front, the company has sharply reduced employee costs since CY03, using VRS (voluntary retirement schemes) to slash its workforce by ~50% over CY03-CY14. This has resulted in a decline in employee cost/sales ratio from 25% to 10% over this period. The benefits from employee cost savings have largely been realised and we expect the employee costs/sales ratio to stabilise at current levels of 10-11%.

BATA’s rental/sales expense ratio, however, has increased from 4.2% in CY03 to ~13.4% in CY14 due to retail network expansion and larger store formats in high street locations and malls across top cities. We expect the rental/sales ratio to now stabilise at ~13% levels.

Overall, we model for ~200bps increase in BATA’s EBITDA margins over CY14-CY17 led by operating leverage from new-store sales growth.

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Expect ~200bps increase in EBITDA margin over CY14-CY17

BUY TP: INR 1,650.00 13.8%

Bata India BATA IN



Fig 4 - Employee cost trend Fig 5 - Rental cost trend


Earnings growth to strengthen

We estimate a strong 24% earnings CAGR for BATA over CY14-CY17. This would be driven by a revival in topline growth and operating leverage from new stores.

Fig 6 - EBITDA and Adj. PAT margin trend


Strong balance sheet and return ratios

BATA has a strong balance sheet with net cash of ~Rs 2.8bn in CY14. We expect its cash position to improve further on account of strong internal accruals and limited capex & working capital requirements. Return ratios should maintain their upward trajectory given the strength of BATA’s business model and improving margins.

Fig 7 - Net cash position Fig 8 - Improving return ratios


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We estimate a 24% earnings CAGR over CY14-CY17

FCF generation to improve from Rs 1bn in CY14 to Rs 3.7bn in CY17

BUY TP: INR 1,650.00 13.8%

Bata India BATA IN



Valuation Maintain BUY

We upgrade CY15/CY16/CY17 earnings by 2.4%/6%/9.7% and value the stock at 30x Mar’17 earnings from 27x earlier – a 5% premium to its 3 year historical average multiple on the back of improving topline growth and operating leverage. Rolling over to Mar’16, we have a new TP of Rs 1,650 for BATA from a Dec’15 TP of Rs 1,400. Key risks to our BUY call are: (a) protracted recovery in SSSg, (b) large format stores being unprofitable, and (c) increase in competitive intensity.


Key parameters CY15 CY16 CY17

Old New % Chg Old New % Chg Old New % Chg

Revenue (Rs mn) 26,691 26,875 0.7 31,168 31,822 2.1 36,429 37,734 3.6

EBITDA (Rs mn) 4,104 4,210 2.6 4,874 5,158 5.8 5,880 6,422 9.2

EBITDA margin (%) 15.4 15.7 30bps 15.6 16.2 60bps 16.1 17.0 90bps

Net profit (Rs mn) 2,596 2,659 2.4 3,119 3,303 5.9 3,846 4,218 9.7

EPS (Rs) 40.40 41.38 2.4 48.54 51.40 5.9 59.86 65.64 9.7


Fig 10 - BATA: 1-yr fwd P/E

Source: RCML Research, Bloomberg

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Current : 34.2x

We raise our TP to Rs 1,650; BUY

BUY TP: INR 1,650.00 13.8%

Bata India BATA IN



Per Share Data Y/E 31 Dec (INR) FY12A FY13A FY14E FY15E FY16E Reported EPS 26.7 29.7 33.8 41.4 51.4 Adjusted EPS 26.7 30.7 33.8 41.4 51.4 DPS 6.0 6.5 8.5 10.3 12.9 BVPS 109.0 130.9 154.7 184.0 220.4

Valuation Ratios Y/E 31 Dec (x) FY12A FY13A FY14E FY15E FY16E EV/Sales 5.0 4.4 3.9 3.4 2.8 EV/EBITDA 33.7 28.5 26.2 21.5 17.3 Adjusted P/E 54.3 47.2 42.9 35.1 28.2 P/BV 13.3 11.1 9.4 7.9 6.6

Financial Ratios Y/E 31 Dec FY12A FY13A FY14E FY15E FY16E Profitability & Return Ratios (%) EBITDA margin 14.8 15.5 15.0 15.6 16.2 EBIT margin 12.0 12.7 12.2 12.9 13.6 Adjusted profit margin 9.3 9.7 9.4 9.9 10.4 Adjusted ROAE 26.9 26.1 23.7 24.4 25.4 ROCE 23.3 23.3 21.0 21.8 22.9 YoY Growth (%) Revenue 19.5 12.1 11.6 16.7 18.4 EBITDA 19.4 17.4 8.0 21.2 22.6 Adjusted EPS 20.7 15.1 10.1 22.3 24.2 Invested capital 14.3 21.8 8.7 10.0 6.3 Working Capital & Liquidity Ratios Receivables (days) 8 8 9 8 8 Inventory (days) 179 201 212 208 209 Payables (days) 96 102 109 111 113 Current ratio (x) 1.9 1.9 1.8 1.9 2.0 Quick ratio (x) 0.4 0.5 0.5 0.5 0.7 Turnover & Leverage Ratios (x) Gross asset turnover 3.2 3.0 2.9 2.9 3.0 Total asset turnover 1.7 1.6 1.5 1.5 1.5 Net interest coverage ratio 221.8 201.3 216.6 266.8 334.3 Adjusted debt/equity (0.3) (0.3) (0.3) (0.3) (0.4)

DuPont Analysis Y/E 31 Dec (%) FY12A FY13A FY14E FY15E FY16E Tax burden (Net income/PBT) 68.1 68.6 68.5 68.5 68.5 Interest burden (PBT/EBIT) 113.6 111.9 112.8 112.0 111.0 EBIT margin (EBIT/Revenue) 12.0 12.7 12.2 12.9 13.6 Asset turnover (Revenue/Avg TA) 172.0 158.4 149.8 151.2 149.7 Leverage (Avg TA/Avg equities) 167.9 169.1 167.6 163.4 163.6 Adjusted ROAE 26.9 26.1 23.7 24.4 25.4

BUY TP: INR 1,650.00 13.8%

Bata India BATA IN



Income Statement Y/E 31 Dec (INR mln) FY12A FY13A FY14E FY15E FY16E Total revenue 18,412 20,640 23,034 26,875 31,822 EBITDA 2,732 3,207 3,463 4,196 5,142 EBIT 2,218 2,615 2,813 3,466 4,342 Net interest income/(expenses) (10) (13) (13) (13) (13) Other income/(expenses) 312 325 374 429 493 Exceptional items 0 0 0 0 0 EBT 2,520 2,927 3,174 3,882 4,822 Income taxes (804) (919) (1,000) (1,223) (1,519) Extraordinary items 0 0 0 0 0 Min. int./Inc. from associates 0 0 0 0 0 Reported net profit 1,716 2,008 2,174 2,659 3,303 Adjustments 0 0 0 0 0 Adjusted net profit 1,716 2,008 2,174 2,659 3,303

Balance Sheet Y/E 31 Dec (INR mln) FY12A FY13A FY14E FY15E FY16E Accounts payables 4,301 5,417 6,293 7,501 9,032 Other current liabilities 0 0 0 0 0 Provisions 0 0 0 0 0 Debt funds 0 0 0 0 4 Other liabilities 0 0 0 0 0 Equity capital 7,003 8,410 9,942 11,822 14,165 Reserves & surplus 0 0 0 0 0 Shareholders' fund 7,003 8,410 9,942 11,822 14,165 Total liabilities and equities 11,304 13,827 16,235 19,323 23,201 Cash and cash eq. 1,871 2,557 2,841 4,017 5,877 Accounts receivables 449 509 568 663 785 Inventories 4,621 5,827 6,500 7,584 8,980 Other current assets 1,276 1,505 1,642 1,885 2,164 Investments 49 49 49 49 49 Net fixed assets 2,659 3,148 3,935 4,425 4,645 CWIP 181 237 20 20 20 Intangible assets 0 0 0 0 0 Deferred tax assets, net 444 681 681 681 681 Other assets 0 0 0 0 0 Total assets 11,550 14,513 16,235 19,323 23,201

Cash Flow Statement Y/E 31 Dec (INR mln) FY12A FY13A FY14E FY15E FY16E Net income + Depreciation 2,230 2,600 2,824 3,389 4,103 Interest expenses 10 13 13 13 13 Non-cash adjustments 0 0 0 0 0 Changes in working capital 1 (379) 8 (214) (267) Other operating cash flows (101) (338) 0 0 0 Cash flow from operations 2,139 1,897 2,845 3,188 3,850 Capital expenditures (838) (697) (1,906) (1,220) (1,020) Change in investments 0 0 0 0 0 Other investing cash flows 0 0 0 0 0 Cash flow from investing (838) (697) (1,906) (1,220) (1,020) Equities issued 0 0 0 0 0 Debt raised/repaid (194) 0 0 0 3 Interest expenses (10) (13) (13) (13) (13) Dividends paid (434) (472) (611) (748) (929) Other financing cash flows 0 0 0 0 0 Cash flow from financing (659) (514) (655) (792) (970) Changes in cash and cash eq 642 686 284 1,176 1,860 Closing cash and cash eq 1,871 2,557 2,841 4,017 5,877



27 January 2015

REPORT AUTHORS



PRICE CLOSE (23 Jan 15) INR 686.25 MARKET CAP INR 41.2 bln USD 667.3 mln

SHARES O/S 60.0 mln

FREE FLOAT 25.0%




NOT RATED Relaxo Footwear RLXF IN

Strong play on India’s growing footwear market

RLXF is India’s second largest footwear producer (10 mfg. units in North India with a capacity of 535,000 pairs per day), catering to the mid-to-mass end market through 179 retail outlets. Its brands include Hawaii Slippers, Flite, Sparx and Schoolmate. Over FY10-FY14, RLXF has improved its average ticket size from Rs 66/pair to Rs 114 (14.7% CAGR), aiding a 21.6% revenue CAGR. India’s growing footwear market (Rs 387bn by CY15E) offers a huge opportunity for RLXF to further consolidate growth. We do not have a rating on the stock.

Targets mid-to-mass end segment: RLXF’s brands include Relaxo, Flite, Sparx and Schoolmate, with Relaxo being the flagship brand. Over the years, the company has managed to build a portfolio of high-recall brands in the lucrative mass-end of the footwear market through successful media campaigns.

Strong domestic presence: RLXF is India’s second largest footwear producer with 10 manufacturing units across North India. The company has ramped up capacity from 454,000 to 535,000 pairs per day, which would enable it to meet demand growth over the next 2-3 years. RLFX’s volumes have clocked a 6.3% CAGR over FY10-FY14.

Consistent revenue growth: RLFX posted a 21.6% revenue CAGR over FY10-FY14 aided by growth of 6.3% in volumes and 14.6% in realisations, mainly led by product mix improvement. PAT has grown by 14.8% over this period (FY14 PAT: Rs 656mn). Going forward, an improving product mix should support higher realisations for the company. RLXF is trading at 27.9x FY17E (consensus) earnings which is fair given the strong topline/ earnings growth trajectory of the company. We don’t have a rating on the stock.


Revenue (INR mln) 5,537 6,916 8,647 10,098 12,118

EBITDA (INR mln) 907 719 942 1,098 1,466

Adjusted net profit (INR mln) 377 270 404 448 662

Adjusted EPS (INR) 6.3 4.5 6.6 7.5 10.9

Adjusted EPS growth (%) 164.9 (29.1) 49.4 12.3 46.4

DPS (INR) 0.2 0.2 0.2 0.3 0.4

ROIC (%) 18.4 11.4 13.3 12.1 33.2

Adjusted ROAE (%) 30.8 17.6 20.9 18.3 47.8

Adjusted P/E (x) 109.2 154.2 103.2 91.9 62.7

EV/EBITDA (x) 46.6 59.3 45.6 39.1 29.6

P/BV (x) 37.5 30.6 23.9 19.2 14.9


14,400

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29,400

30

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430

630





Business overview Diverse product portfolio

RLFX has a product portfolio of 10 brands (including the popular Hawaii, Flite, SchoolMate and Sparx) catering to various age groups. Key products include slippers, sandals, school shoes and sports shoes.

Fig 1 - Brand portfolio

Source: Company

The company’s current capacity stands at 535,000 shoes per day. It has 179 fully-owned retail outlets across India with a significant presence in Delhi, Rajasthan, Gujarat, Haryana, Punjab, Uttar Pradesh and Uttarakhand. In FY14, it generated 89.6% of revenues through wholesale outlets, 7.5% through retail outlets and 2.6% by way of exports.

Robust revenue growth

RLFX has increased its topline at a 21.6% CAGR over FY10-FY14 led by a 6.3% volume CAGR and a 14.7% CAGR in average price realisations. The increase in realisations was driven by a combination of product mix improvements and price hikes.

Fig 2 - Sales growth trend Fig 3 - Volume growth trend


Fig 4 - EBITDA & EBITDA margin trend Fig 5 - PAT growth trend


5,5376,916

8,64710,098

12,11836%

25%

25% 17%20%

0%

5%

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15%

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40%

0

2,000

4,000

6,000

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14,000


(Rs mn) Net Sales % Net Sales growth (R)

84 8792

100108

23%

3%

7%8% 8%

0%

5%

10%

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20%

25%

0

20

40

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120


(Nos mn) No of Pairs Sold % Growth (R)

907

719

9421,098

1,466

16%

10%

11% 11%

12%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

0

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1,600


(Rs mn) EBITDA EBITDA margin % (R)

377

267

399448

656165%

(29%)

49%

12%

46%

(50%)

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(Rs mn) Recurring Net Profit Growth (%) (R)

Caters to various age groups at the mass-end of the market through a portfolio of 10 brands




Footwear market growing at 14% CAGR

India is the world’s second largest footwear manufacturer (15% of annual global footwear production), second only to China, and is also the third largest market globally in terms of revenue. While the country’s per capita footwear consumption has gone up from 1.4 pairs/year in 2004 to 2.5 pairs/year in 2012, it remains much lower than the 5 pairs/year for developed countries. The size of the Indian footwear market is expected to reach Rs 387bn (15% CAGR) by 2015. At present, the men’s segment contributes ~60% of the footwear market, with the women’s share trailing at 30%. However, while the men’s segment is growing at a 10% CAGR, the women’s market is racing ahead at 20% CAGR.

Fig 6 - India’s footwear market Fig 7 - Split between organised and unorganised segments


India’s footwear retail market is largely unorganised (~56% market share). However, with changing consumer preferences and brand awareness, there is a steady shift towards the organised market. The organised market stood at ~Rs 75bn in 2010 and increased to Rs 100bn in 2011, growing at a CAGR of 30% every year since 2008. The market is expected to touch Rs 175bn by 2015, offering a huge growth opportunity for players such as RLXF.

202231

263300

342388

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50

100

150

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450

CY10 CY11 CY12 CY13 CY14E CY15E

(Rs bn) Indian Footwear Market Size

37 43 44 44 44 45

63 57 56 56 56 55

0

20

40

60

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120

CY10 CY11 CY12 CY13 CY14 CY15

(%) Organised Unorganised

Men’s segment growing at 10% CAGR, women’s at 20% CAGR






Financial Ratios Y/E 31 Mar FY10A FY11A FY12A FY13A FY14A Profitability & Return Ratios (%) EBITDA margin 16.4 10.4 10.9 10.9 12.1 EBIT margin 13.6 7.4 8.2 8.3 9.5 Adjusted profit margin 6.8 3.9 4.7 4.4 5.5 Adjusted ROAE 30.8 17.6 20.9 18.3 47.8 ROCE 18.4 11.5 13.5 12.2 33.4 YoY Growth (%) Revenue 35.9 24.9 25.0 16.8 20.0 EBITDA 77.9 (20.7) 31.0 16.6 33.5 Adjusted EPS 164.9 (29.1) 49.4 12.3 46.4 Invested capital 42.4 24.0 11.6 26.0 7.1 Working Capital & Liquidity Ratios Receivables (days) 13 12 10 11 16 Inventory (days) 85 89 97 112 107 Payables (days) 0 0 0 0 0 Current ratio (x) 1.1 1.2 1.2 1.4 1.3 Quick ratio (x) 0.0 0.0 0.0 0.0 0.0 Turnover & Leverage Ratios (x) Gross asset turnover 2.3 2.2 2.4 2.4 2.5 Total asset turnover 2.0 1.9 2.0 2.0 2.0 Net interest coverage ratio 2.9 3.2 3.8 4.8 5.1 Adjusted debt/equity 1.3 1.3 1.0 1.0 0.7





Income Statement Y/E 31 Mar (INR mln) FY10A FY11A FY12A FY13A FY14A Total revenue 5,537 6,916 8,647 10,098 12,118 EBITDA 907 719 942 1,098 1,466 EBIT 752 509 711 843 1,154 Net interest income/(expenses) (256) (159) (187) (177) (227) Other income/(expenses) 41 5 11 11 28 Exceptional items 0 0 0 0 0 EBT 538 355 535 677 955 Income taxes (161) (88) (136) (229) (299) Extraordinary items 0 0 0 0 0 Min. int./Inc. from associates 0 0 0 0 0 Reported net profit 377 267 399 448 656 Adjustments 0 3 5 0 5 Adjusted net profit 377 270 404 448 662

Balance Sheet Y/E 31 Mar (INR mln) FY10A FY11A FY12A FY13A FY14A Accounts payables 0 0 0 0 0 Other current liabilities 648 886 836 1,090 1,419 Provisions 46 92 143 50 53 Debt funds 1,469 1,821 1,752 2,254 1,984 Other liabilities 0 25 72 90 84 Equity capital 60 60 60 60 60 Reserves & surplus 1,039 1,286 1,664 2,084 2,706 Shareholders' fund 1,099 1,346 1,724 2,144 2,766 Total liabilities and equities 3,263 4,169 4,527 5,629 6,304 Cash and cash eq. 10 21 11 30 57 Accounts receivables 209 232 230 360 682 Inventories 672 1,166 1,285 1,594 1,640 Other current assets 272 165 168 227 157 Investments 1 1 1 1 1 Net fixed assets 2,217 2,684 2,713 3,267 3,658 CWIP 67 8 213 237 242 Intangible assets 0 0 0 0 0 Deferred tax assets, net (184) (223) (220) (241) (264) Other assets 0 114 128 155 131 Total assets 3,263 4,169 4,527 5,629 6,304

Cash Flow Statement Y/E 31 Mar (INR mln) FY10A FY11A FY12A FY13A FY14A Net income + Depreciation 532 480 635 703 973 Interest expenses 256 159 187 177 227 Non-cash adjustments 0 0 0 0 0 Changes in working capital (157) (129) (117) (337) 32 Other operating cash flows (89) (39) 3 (21) (23) Cash flow from operations 541 471 707 522 1,209 Capital expenditures (848) (618) (464) (834) (708) Change in investments 0 0 0 0 0 Other investing cash flows 0 0 0 0 0 Cash flow from investing (848) (618) (464) (834) (708) Equities issued 4 (2) (5) 0 (5) Debt raised/repaid 385 352 (69) 502 (270) Interest expenses (256) (159) (187) (177) (227) Dividends paid (21) (21) (21) (28) (35) Other financing cash flows (1,263) (364) 97 (468) 333 Cash flow from financing (1,151) (194) (185) (171) (205) Changes in cash and cash eq (1,458) (341) 58 (483) 297 Closing cash and cash eq (1,431) (331) 79 (472) 327


27 January 2015

REPORT AUTHORS




Jubilant Food works (JUBI) 1,394 1,650 Buy

Westlife Development (WLDL) 299 NA Not Rated


Quick Service Restaurants Growing appetite for fast food in India We expect the Quick Service Restaurant (QSR) segment in India to report a 20% CAGR over FY13-FY18 as it makes steady inroads into the larger informal eating-out market. Quick expansion by QSR chains and the entry of new players is likely to accelerate the shift towards the organised industry, even as lower inflation and a macro recovery will drive footfalls in the largely urban QSR industry. JUBI, with its popular Domino’s Pizza franchise, is our top pick.

QSR outpacing other segments in food service industry: India’s informal eating-out (IEO) market is estimated to have grown at 11% YoY to US$ 107bn in 2014 (US$ 68bn in 2010). The QSR component in IEO currently stands at US$ 15.6bn and accounts for ~15% of the total food service market, posting faster growth than the other segments. As urban consumption recovers, we expect QSR to grow at a 20% CAGR in India over FY13-FY18.

Macro pick-up to fuel demand: Favourable demographics (~60% population below 30 years of age), rising per capita income, an increasing population of working women and urbanisation are some of the factors that will kick in strongly during a macro recovery, driving growth in India’s under-developed QSR market.

Store rollout and lower inflation to benefit large players in upturn: During the downturn of the past couple of years, most leading QSR players including JUBI, Hardcastle Restaurants (McDonalds) and Yum invested in raising their store counts. As the economy picks up, the benefits of expansion would aid players such as these who have invested during the downturn and are hence prepared to capitalise on the increase in consumption and the shift from the unorganised to the organised segment.

JUBI to lead revival and industry growth: The QSR industry was among the hardest hit by high inflation over the past couple of years, as lower disposable incomes sapped consumption levels. Same-store growth (SSSg) for most QSR chains including Domino’s, Pizza Hut, KFC, and McDonald’s declined into negative territory in FY15. Going ahead, we expect JUBI’s Domino’s Pizza franchise to lead a turnaround in growth with a strong recovery in SSSg and margins as urban consumption picks up, inflation and hence RM cost moderates, and store expansion benefits kick in. We upgrade JUBI’s earnings, roll forward to a Mar’16 TP of Rs 1,650 (from Rs 1,400) and reiterate BUY.

In this section, we also profile WLDL (Not Rated), one of the fastest growing McDonald’s restaurant franchisees globally.

Quick Service Restaurants Growing appetite for fast food in India



QSR remains the fastest growing segment in food services

India’s informal eating-out (IEO) industry is serviced by various formats – cafés, quick service restaurants (QSR), frozen dessert & ice cream parlours, casual dining, roadside vendors, and pubs, bars, clubs & lounges (PBCL) – in other words, all manner of formats excluding fine dining restaurants.

India’s IEO market is estimated to have grown at 11% YoY to US$ 107bn in 2014 (US$96 bn in 2013 and US$ 68bn in 2010). The QSR share currently stands at US$ 15.6bn and accounts for ~15% of India’s total food service market, posting faster growth than the other segments.

The western food format (WFF) is a fast growing part of India’s QSR industry, representing ~US$ 1.8bn of the US$ 15.4bn QSR market. The WFF category has been primarily driven by the entry of global food brands in India since 1995 such as McDonald’s, Dominos and KFC, and is one of the fastest growing segments within IEO, ramping up by 14% in 2014.

Fig 1 - India’s informal eating-out market Fig 2 - India’s IEO market vs. other countries

Source: RCML Research Source: RCML Research, Westlife Development Annual Report

We note that the QSR market in India is highly under-developed as compared to other Asian countries. Further, the branded component in India is a mere 1%, aggregating to 1,800-odd stores (FY14). In comparison, China has 7,000 units shared between two international QSR brands.

Going ahead, India’s favourable demographics (~60% population below 30 years of age), rising per capita income, increasing population of working women and urbanisation are some of the key factors that will kick in strongly during a macro recovery, driving growth in its under-developed QSR market. We expect a robust 20% CAGR for the segment over FY13-FY18.

Aggressive store rollout to benefit large players amid upturn

During the downturn of the past couple of years, most leading QSR players including JUBI, WLDL and Yum invested in raising their store counts. As the economy picks up, the benefits of expansion would aid players such as these who are now prepared to capitalise on the increase in consumption and the shift from the unorganised to the organised segment.

IEO - $96bn

QSR - $15.6bn

IFF - $14.5bnWFF -$1.8bn

16%

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India China Hong Kong Singapore

Share of Informal Eating-Out (IEO) market in various countries

US$ 15.6bn QSR market in India growing faster than other dining formats

Low penetration of QSR chains offers large scope for growth; expect 20% CAGR over FY13-FY18

Expanded reach will enable players to capitalise on the upturn




Fig 3 - Store counts across major QSR players Fig 4 - JUBI’s Domino’s franchise expanding rapidly


High inflation has hurt consumption – set to reverse

The QSR industry was among the hardest hit by high inflation over the past couple of years, as lower disposable incomes sapped consumption levels. Same-store growth (SSSg) for most QSR chains including Domino’s, Pizza Hut, KFC, and McDonald’s declined into negative territory in FY15. In FY14 for instance, McDonald’s increased prices by only 4-5% despite ~10% inflation and still saw SSSg decline by 6.4%.

Going ahead, we expect a turnaround in growth for QSR players led by a strong recovery in SSSg and margins as urban consumption picks up, inflation and hence RM cost moderates, and store expansion benefits kick in.

Fig 5 - CPI inflation trend Fig 6 - Same-store sales growth

Source: RCML Research, CMIE Source: RCML Research

Key risks

Key challenges for the QSR industry are high real estate costs as well as a risk of inflation raising its head, along with challenges in terms of managing attrition and wage inflation given the requirement of a large front-end workforce.

0

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Dominos Dunkin'Donuts

HRPL KFC Pizza Hut

(No of Stores) FY10 FY11 FY12 FY13 FY14

0100200300400500600700800900(No of Stores)

Dominos Dunkin' Donuts HRPL KFC Pizza Hut Taco Bell

9.9

9.6

9.5

9.8

10.2

11.2

9.9

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2

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8

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13

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3

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-13

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-13

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-13

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-13

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14

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14

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-14

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-14

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-14

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4

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-14

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-14

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-14

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-14

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-14

(%)

(15)

(10)

(5)

0

5

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25(%) Dominos HRPL Yum!

Moderating inflation to support recovery in urban consumption

High real estate/rental costs remain a key risk for the industry





($ mn) EV

($ mn) CAGR


Alsea* MM ALSEA SAB DE CV 2,378 2,870 19.2 9.4 10.3 11.9 48.6 30.8 23.9 15.1 10.7 9.1

322 HK TINGYI (CAYMAN ISLN) HLDG CO 13,126 19,689 15.6 14.2 16.0 16.4 28.7 23.3 20.6 11.5 9.8 8.9

CMG US CHIPOTLE MEXICAN GRILL INC

22,281 21,491 27.7 22.3 24.4 25.6 51.0 41.0 34.4 25.8 21.0 17.9

YUM US YUM! BRANDS INC 32,427 34,902 12.4 63.9 52.6 60.2 23.7 20.9 18.0 12.6 11.5 10.1

SBUX US STARBUCKS CORP 65,258 65,464 17.3 37.8 38.4 38.3 27.9 23.8 20.3 15.0 13.2 11.6




27 January 2015

REPORT AUTHORS




SHARES O/S 64.3 mln

FREE FLOAT 51.4%


52 WK HIGH INR 1,497.95


BUY TP: INR 1,650.00 18.3%

Jubilant Foodworks JUBI IN

Play on urban consumption recovery

We expect JUBI’s SSSg to rebound to double digits from FY16 (~12%) as consumption picks up and benefits of store additions accrue. Margins have likely bottomed out at 12-13% and should retrace to ~17% levels in FY16/FY17 as A&P spends moderate amid better demand traction. Valuations at 45.1x/30.9x FY16E/FY17E are sustainable given a strong 35% earnings CAGR expected over FY14-FY17. We roll over to a Mar’16 TP of Rs 1,650 from Rs 1,400, valuing JUBI at 35x Mar’17 earnings. Maintain BUY.

SSSg bottoming out: JUBI’s SSSg at its Domino’s Pizza franchise nosedived to 1.6% in FY14 from 16.2% in FY13, hit by a weak macro and cuts in discretionary spending by consumers. SSSg had declined ~4% in H1FY15 and we expect growth to be largely flattish in FY15 on account of some recovery in H2 as inflation likely peaks out. Thereafter, we anticipate a deeper recovery from FY16 onward as urban consumption picks up, supporting a 13% CAGR in SSSg over FY15-FY17. This coupled with benefits from new stores along with continued expansion over the next 2-3 years would support a 23% sales CAGR over FY14-FY17, in our view.

EBITDA margins to recover in tandem with SSSg: Higher operating leverage from improving SSSg together with benefits of lower food inflation would aid gross margins going ahead. JUBI’s EBITDA margins are also likely to have bottomed out at ~12% in H1FY15 and we expect a gradual recovery back to 17-18% levels as SSSg picks up and A&P spends moderate. We thus expect the company to report a 33%/35% EBITDA/PAT CAGR over FY14-FY17.

Raise earnings/TP; maintain BUY: We raise our FY16/FY17 earnings estimates by 5.7%/7.2% on expectations of a recovery in growth from H2FY15 onward. Rolling forward, we have a Mar’16 TP of Rs 1,650 (from a Dec’15 TP of Rs 1,400) set at 35x Mar’17 earnings.


Revenue (INR mln) 14,143 17,360 20,610 25,723 32,598

EBITDA (INR mln) 2,417 2,493 2,988 4,244 5,868


Adjusted EPS (INR) 20.1 18.1 20.9 30.9 45.1


DPS (INR) 0.0 0.0 0.0 0.0 0.0

ROIC (%) 60.1 40.3 32.2 36.4 46.6

Adjusted ROAE (%) 36.2 24.1 22.2 25.8 28.5

Adjusted P/E (x) 69.3 77.1 66.7 45.1 30.9

EV/EBITDA (x) 37.0 35.8 29.9 21.1 15.2

P/BV (x) 21.1 16.6 13.3 10.3 7.7


14,400

19,400

24,400

29,400

130

630

1,130


BUY TP: INR 1,650.00 18.3%




Investment thesis SSSg bottoming out

JUBI’s SSSg nosedived to 1.6% in FY14 from 16.2% in FY13, hit by a weak macro and cuts in discretionary spending by consumers. SSSg had declined ~4% in H1FY15 and we expect growth to be largely flattish in FY15 on account of some recovery in H2FY15 as inflation likely peaks out. Thereafter, we anticipate a deeper recovery from FY16 onward as urban consumption picks up, supporting a 13% CAGR in SSSg over FY15-FY17. This coupled with benefits from new stores along with continued expansion over the next 2-3 years would support a 23% sales CAGR over FY14-FY17, in our view.

Fig 1 - Net sales growth to pick up Fig 2 - Same-store sales growth (SSSg) has bottomed out


Fig 3 - Store additions going strong


EBITDA margins to recover as SSSg gathers momentum

Higher operating leverage from improving SSSg, benefits of lower food inflation, and an expected price hike of 4-5% p.a. would aid gross margins. JUBI’s EBITDA margins are also likely to have bottomed out at ~12% in H1FY15 and we expect a gradual recovery back to 17-18% levels as SSSg picks up and A&P spends moderate. Margins have been primarily hit by higher A&P spends, partly led by efforts to revive demand amid a weak macro and partly to counter competition. We don’t expect promotional intensity to worsen from current levels given that JUBI has already reduced some aggressive schemes (one-plus-one free Wednesdays). We thus model for a 33% EBITDA CAGR over FY14-FY17.

52.3%

32.9%

51.1%

59.9%

50.2%

38.8%

22.7%18.7%

24.8%26.7%

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(Rs mn) Sales Sales growth (R)

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Expect 13% CAGR in SSSg over FY15-FY17

EBITDA margin to expand 350bps over FY14-FY17

BUY TP: INR 1,650.00 18.3%




Fig 4 - Gross profit & gross margin trend Fig 5 - EBITDA & EBITDA margin trend


Margin hit from Dunkin Donuts to abate over medium term JUBI has 34 Dunkin Donuts (DD) stores across 11 cities currently. Contribution to revenue is limited with management indicating that even if store count rises to 80-100 over the next five years, revenue share would be in single digits. Nevertheless, the DD franchise has been a drag on JUBI’s EBITDA – we estimate a 150bps hit on margins in FY15 after ~120bps in FY14. Thereafter, however, we expect a diminishing impact on margins over the next 2-3 years, with breakeven for DD by end-FY17, supporting margin expansion from current levels.

Expect 35% PAT CAGR, improving return ratios

We expect JUBI to report an earnings CAGR of 35% over FY14-FY17 on the back of margin expansion. Revival in profitability would in turn support an improvement in return ratios that have come off sharply since FY14.

Fig 6 - PAT & PAT growth


74.8%

74.4%

75.2%

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75.0% 75.0%

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17.1%

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0%2%4%6%8%10%12%14%16%18%20%

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(Rs mn) EBITDA EBITDA margins (R)

39.0%

(13.1%)

388.9%

117.6%

44.0%27.2%

(10.0%)

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(50%)

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(Rs mn)Adj. PAT Adj. PAT growth (R)

Gradual turnaround in DD to lessen drag on margins over 2-3 years

BUY TP: INR 1,650.00 18.3%




Fig 7 - ROE Fig 8 - ROIC


Valuation Earnings downgrades largely behind us; BUY

We raise our FY16/FY17 earnings estimates by 5.7%/7.2% on expectations of a recovery in growth from H2FY15. Rolling forward, we have a Mar’16 TP of Rs 1,650 (from Rs 1,400 earlier) set at 35x Mar’17 earnings. We expect JUBI to deliver a 35% earnings CAGR over FY14-FY17 and hence value the company on a PEG of 1x (as we see SSSg and margins picking up from current depressed levels). Below-expected SSSg and a spike in food inflation are key risks to our call.


Key parameters FY16E FY17E

Old New % Chg Old New % Chg

Revenue (Rs mn) 25,516 25,723 0.8 31,822 32,598 2.4

EBITDA (Rs mn) 4,082 4,244 4.0 5,569 5,868 5.4

EBITDA margin (%) 16.0 16.5 50 bps 17.5 18.0 50 bps

Net profit (Rs mn) 1,917 2,025 5.7 2,754 2,952 7.2

EPS (Rs) 29.3 30.95 5.7 42.1 45.11 7.2


Fig 10 - JUBI P/E 1-yr fwd


63.6%

34.7%

47.0% 46.4%42.3%

36.2%

24.2% 22.2%25.8%

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0%

10%

20%

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70%


34.0%

24.5%

51.1%

69.4% 66.8%60.1%

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10%

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-10

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-10

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11

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-11

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-12

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15

(x) 1 Year fwd P/E Average +1 Std. Dev -1 Std Dev

Current : 47.6x

We have a Mar’16 TP of Rs 1,650 set at 35x Mar’17 earnings; BUY

BUY TP: INR 1,650.00 18.3%






Financial Ratios Y/E 31 Mar FY13A FY14A FY15E FY16E FY17E Profitability & Return Ratios (%) EBITDA margin 17.1 14.4 14.5 16.5 18.0 EBIT margin 13.2 9.8 9.4 11.4 13.2 Adjusted profit margin 9.3 6.8 6.6 7.9 9.1 Adjusted ROAE 36.2 24.1 22.2 25.8 28.5 ROCE 34.7 22.8 21.1 24.9 27.9 YoY Growth (%) Revenue 38.8 22.7 18.7 24.8 26.7 EBITDA 28.8 3.1 19.9 42.0 38.2 Adjusted EPS 26.8 (10.1) 15.5 48.1 45.7 Invested capital 19.1 43.6 47.4 23.2 8.6 Working Capital & Liquidity Ratios Receivables (days) 2 2 2 2 2 Inventory (days) 21 23 22 22 22 Payables (days) 39 38 40 39 40 Current ratio (x) 0.4 0.3 0.3 0.4 0.6 Quick ratio (x) 0.2 0.1 0.0 0.1 0.3 Turnover & Leverage Ratios (x) Gross asset turnover 2.8 2.4 2.1 2.0 2.0 Total asset turnover 2.7 2.6 2.4 2.4 2.3 Net interest coverage ratio 2,930.4 0.0 0.0 0.0 0.0 Adjusted debt/equity (0.1) 0.0 0.0 0.0 (0.2)


BUY TP: INR 1,650.00 18.3%




Income Statement Y/E 31 Mar (INR mln) FY13A FY14A FY15E FY16E FY17E Total revenue 14,143 17,360 20,610 25,723 32,598 EBITDA 2,417 2,493 2,988 4,244 5,868 EBIT 1,861 1,705 1,941 2,923 4,306 Net interest income/(expenses) (1) 0 0 0 0 Other income/(expenses) 81 97 100 100 100 Exceptional items 0 0 0 0 0 EBT 1,941 1,802 2,041 3,023 4,406 Income taxes (628) (620) (674) (998) (1,454) Extraordinary items 0 0 0 0 0 Min. int./Inc. from associates 0 0 0 0 0 Reported net profit 1,314 1,182 1,368 2,025 2,952 Adjustments 0 0 0 0 0 Adjusted net profit 1,314 1,182 1,368 2,025 2,952

Balance Sheet Y/E 31 Mar (INR mln) FY13A FY14A FY15E FY16E FY17E Accounts payables 1,325 1,737 2,153 2,428 3,377 Other current liabilities 897 1,404 1,649 2,186 2,771 Provisions 0 0 0 0 0 Debt funds 0 0 0 0 0 Other liabilities 0 0 0 0 0 Equity capital 651 654 654 654 654 Reserves & surplus 3,645 4,846 6,191 8,216 11,168 Shareholders' fund 4,296 5,500 6,846 8,871 11,823 Total liabilities and equities 6,518 8,642 10,647 13,485 17,971 Cash and cash eq. 375 242 68 362 2,117 Accounts receivables 68 90 124 144 196 Inventories 240 331 328 448 535 Other current assets 139 277 618 772 978 Investments 940 937 927 1,286 1,630 Net fixed assets 4,052 5,713 7,551 9,188 10,886 CWIP 0 0 0 0 0 Intangible assets 0 0 0 0 0 Deferred tax assets, net 0 0 0 0 0 Other assets 0 0 0 0 0 Total assets 5,814 7,591 9,617 12,199 16,341

Cash Flow Statement Y/E 31 Mar (INR mln) FY13A FY14A FY15E FY16E FY17E Net income + Depreciation 1,869 1,970 2,415 3,347 4,514 Interest expenses 1 0 0 0 0 Non-cash adjustments 0 0 0 0 0 Changes in working capital 1,008 668 289 520 1,189 Other operating cash flows (7) (17) 0 0 0 Cash flow from operations 2,871 2,620 2,703 3,866 5,702 Capital expenditures (1,867) (2,430) (2,885) (2,958) (3,260) Change in investments (721) (375) 61 (614) (688) Other investing cash flows 0 0 0 0 0 Cash flow from investing (2,588) (2,805) (2,825) (3,573) (3,947) Equities issued 0 0 0 0 0 Debt raised/repaid 0 0 0 0 0 Interest expenses (1) 0 0 0 0 Dividends paid 0 0 0 0 0 Other financing cash flows 13 (8) (9) (9) (9) Cash flow from financing 19 0 0 0 0 Changes in cash and cash eq 302 (185) (121) 294 1,755 Closing cash and cash eq 375 242 68 362 2,117



27 January 2015

REPORT AUTHORS



PRICE CLOSE (23 Jan 15) INR 299.00 MARKET CAP

INR 47.3 bln USD 770 mln


FREE FLOAT 35.0%

3M AVG DAILY VOLUME/VALUE 2 mln / 0 USD mln



NOT RATED Westlife Development

WLDL IN

Expanding rapidly in a high-growth industry

WLDL’s subsidiary Hardcastle Restaurants (HRPL) has been the development licencee for McDonald’s in West and South India since 1995. HRPL has expanded its network rapidly from 55 restaurants in FY08 to 184 in FY14. It further plans to invest ~Rs 8bn in the next 5 years to expand its network by an additional 175-250 restaurants. Aggressive expansion plans position the company well to capitalise on the immense growth opportunity in the QSR space. We do not have a rating on the stock.

QSR outpacing other segments in food service industry: India’s informal eating-out (IEO) market is estimated to have grown at 11% YoY to US$ 107bn in 2014 (US$ 68bn in 2010). The QSR component in IEO currently stands at US$ 15.6bn and accounts for ~15% of the total food service market, posting faster growth than the other segments. As urban consumption recovers, we expect QSR to grow at a 20% CAGR in India over FY13-FY18.

High growth potential for McDonald’s in India: As of FY14, HRPL operated 184 McDonald’s restaurants across 19 cities and 7 states. The company plans to invest ~Rs 8bn to expand its store count by a further 175-250 outlets in the next 5 years. This implies that HRPL will accelerate its store addition to 40-50 stores p.a. from the 20-30 annual run-rates over the past three years. We believe the McDonald’s format is highly scalable given changing consumer trends in favour of eating out and reasonable affordability of the franchisee.

Urban consumption recovery to buoy SSSg: HRPL is one of the fastest growing McDonald’s franchises in the world, with average SSSg of ~10% over the past five years. Despite a slowdown in the last two years, HRPL has continued its efforts to increase the product range and expand its store count. With an improvement in consumer sentiments ahead, the company is well placed to witness higher SSSg from the negative SSSg is has been reporting over the past year. WLDL is trading at 50.1x FY17E (consensus) earnings. We do not have a rating on the stock.


Revenue (INR mln) 2,745 3,793 5,445 6,843 7,403

EBITDA (INR mln) 89 371 632 581 431

Adjusted net profit (INR mln) (189) 188 425 333 10

Adjusted EPS (INR) (1.2) 1.2 2.7 2.1 0.1

Adjusted EPS growth (%) - - 126.4 (21.8) (97.1)

DPS (INR) 0.0 0.0 0.0 0.0 0.0

ROIC (%) (8.3) 11.8 19.1 8.6 (0.1)

Adjusted ROAE (%) - - - 23.3 0.2

Adjusted P/E (x) - 256.8 113.4 145.0 5,059.4

EV/EBITDA (x) 562.4 134.9 79.4 86.6 111.6

P/BV (x) - - 209.6 18.3 8.6


14,40016,40018,40020,40022,40024,40026,40028,400

-17030

230430630830

1,0301,2301,4301,630


NOT RATED Westlife Development WLDL IN



Business overview McDonald’s Corp is amongst the largest QSR food chains in the world with more than 33,000 restaurants across 119 countries (>80% of these are franchised). It serves ~68mn consumers daily and HRPL, its development licencee in India, serves 175mn annually.

HRPL well positioned to capture favourable demographics…

Due to the increasing working class and youth populations, consumer trends in India are changing, driving more people to eat out at restaurants. With 60% of India’s population below the age of 35, the potential customer base is vast. Also, urbanisation – a major driver for domestic consumption growth – is increasing by ~1% p.a. (31% urbanisation in 2011). A growing labour class along with estimated wage growth at 10%+ CAGR over 2010-20 is likely to be another driver of domestic consumption. We note that McDonald’s addressable market is largely untapped with 67% of potential consumers in India being unexploited.

…backed by a strong business model

HRPL’s story in India started in 1995 with the “Glocal” phase (Go Local) wherein the company opened its first McDonald’s restaurant and worked to develop the country’s budding eating-out culture. In the next “Build” phase (1997-2002), HRPL focused on determining the right value proposition for consumers and on achieving the right store economics, while building the supply chain for the business. Since then, the company has moved into the “Growth” phase with a focus on the right value equation for consumers.

As of end-FY14, HRPL catered to 175mn consumers annually through a chain of 184 restaurants in 19 cities (up from 15 restaurants in 2009), with a presence across major markets. As a development licencee, the company operates sites at its own cost while paying royalty to McDonald’s Corp. It aims to open 175-250 more outlets in the next 5 years which implies acceleration in store openings to ~40-50 per year from the 20-25 annual run-rate seen in previous years. We believe the company has over the past 15 years invested adequately in the build-out of a robust supply chain and in understanding the consumer value proposition, which will aid future aggressive rollout plans.

With the current store count average in India standing at just 0.02 McDonald’s stores per 100,000 people versus the global average of 1.32 stores, HRPL could potentially roll out 800+ McDonald’s outlets (in West and South India).

Fig 1 - Store distribution across West and South India


Maharashtra47%

Gujarat12%

Karnataka24%

Madhya Pradesh2%

Andhra Pradesh8%

Tamil Nadu7%

India’s growing youth and working population favour dining out

Business has graduated from “Build” to “Growth” phase with a focus on value without compromising on quality

Only 0.02 McDonald’s stores per 100,000 people in India vs. global average of 1.32 stores




Fig 2 - HRPL store count


SSSg likely to revive from current levels

HRPL is amongst the fastest growing McDonald’s restaurant franchisees in the world with average SSSg of 10%+ over the past five years. Except for the past 4-5 quarters, when the company was impacted by a macro slowdown, it has been reporting healthy double digit SSSg. The recovery in macro is likely to result in SSSg improving back to double digits in the next couple of years.

Fig 3 - HRPL – Sales and SSS growth


55

7487

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(%)(Rs mn) Sales SSS growth (R)

Aims to open 175-250 more outlets in the next 5 years

HRPL one of the fastest growing restaurant franchisees in the world




Financial snapshot Strong sales growth and margin expansion potential

HRPL has reported a strong sales CAGR of 28% over FY10-FY14, with average SSSg of 10.2%. During the same period, it has delivered faster EBITDA growth at ~42% CAGR. PAT for FY14 stood at Rs 10mn. The company has been adding 20-25 stores p.a. over the past five years and is likely to accelerate the pace of additions to 40-50 stores p.a. over the next 5 years, driving sales growth.

Fig 4 - EBITDA and EBITDA margin Fig 5 - PAT performance

Key risks Increase in real estate costs

Under the development licencee arrangement with McDonald’s Corp, HRPL is responsible for providing capital for the entire business, including the real estate component, with technical, operational and business support from McDonald’s Corp. HRPL owns or secures long-term leases for all its restaurant sites to ensure long-term occupancy rights and to control related costs. The profit dynamics of the food service industry rely heavily on the ability to find the perfect location (at the right price), and ultimately allow for value to customers. A constant increase in real estate prices across cities and the failure to attract customers at some locations can impact the company’s expansion plans.

2%

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FY09 FY10 FY11 FY12 FY13 FY14

(Rs mn) EBITDA EBITDA margins (R)

(235) (189)

188

425

333

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(300)

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FY09 FY10 FY11 FY12 FY13 FY14

(Rs mn)

Sales CAGR of 28% over FY10-FY14 coupled with EBITDA CAGR of ~42%

Rental increase could impact expansion plans




Per Share Data Y/E 31 Mar (INR) FY10A FY11A FY12A FY13A FY14A Reported EPS (1.2) 1.2 2.7 2.1 0.1 Adjusted EPS (1.2) 1.2 2.7 2.1 0.1 DPS 0.0 0.0 0.0 0.0 0.0 BVPS (2.5) (1.3) 1.5 16.9 36.1

Valuation Ratios Y/E 31 Mar (x) FY10A FY11A FY12A FY13A FY14A EV/Sales 18.2 13.2 9.2 7.3 6.5 EV/EBITDA 562.4 134.9 79.4 86.6 111.6 Adjusted P/E - 256.8 113.4 145.0 5,059.4 P/BV - - 209.6 18.3 8.6

Financial Ratios Y/E 31 Mar FY10A FY11A FY12A FY13A FY14A Profitability & Return Ratios (%) EBITDA margin 3.2 9.8 11.6 8.5 5.8 EBIT margin (3.8) 4.6 7.1 3.9 (0.1) Adjusted profit margin (6.9) 5.0 7.8 4.9 0.1 Adjusted ROAE - - - 23.3 0.2 ROCE (6.9) 9.6 16.1 7.9 (0.1) YoY Growth (%) Revenue 32.7 38.2 43.5 25.7 8.2 EBITDA 910.7 317.8 70.4 (8.2) (25.8) Adjusted EPS - - 126.4 (21.8) (97.1) Invested capital (9.9) 49.2 28.1 72.3 14.7 Working Capital & Liquidity Ratios Receivables (days) 0 1 3 4 4 Inventory (days) 22 21 20 19 21 Payables (days) 46 28 7 19 31 Current ratio (x) 0.1 1.6 1.4 1.1 0.8 Quick ratio (x) 0.0 0.7 0.4 0.2 0.1 Turnover & Leverage Ratios (x) Gross asset turnover 1.5 1.7 1.9 1.7 1.4 Total asset turnover 1.5 1.6 1.8 1.6 1.2 Net interest coverage ratio 0.0 12.7 535.5 45.4 0.0 Adjusted debt/equity - - 9.0 (0.1) 0.1

DuPont Analysis Y/E 31 Mar (%) FY10A FY11A FY12A FY13A FY14A Tax burden (Net income/PBT) 100.0 100.0 100.0 99.7 145.7 Interest burden (PBT/EBIT) 182.8 107.4 110.2 124.8 (157.6) EBIT margin (EBIT/Revenue) (3.8) 4.6 7.1 3.9 (0.1) Asset turnover (Revenue/Avg TA) 147.7 162.7 178.9 158.4 116.7 Leverage (Avg TA/Avg equities) (644.9) (806.8) 17350.3 302.2 154.0 Adjusted ROAE - - - 23.3 0.2




Income Statement Y/E 31 Mar (INR mln) FY10A FY11A FY12A FY13A FY14A Total revenue 2,745 3,793 5,445 6,843 7,403 EBITDA 89 371 632 581 431 EBIT (103) 175 386 267 (4) Net interest income/(expenses) (117) (14) (1) (6) (46) Other income/(expenses) 31 27 40 72 57 Exceptional items 0 0 0 0 0 EBT (189) 188 425 333 7 Income taxes 0 0 0 (1) 3 Extraordinary items 0 0 0 0 0 Min. int./Inc. from associates 0 0 0 0 0 Reported net profit (189) 188 425 333 10 Adjustments 0 0 0 0 0 Adjusted net profit (189) 188 425 333 10

Balance Sheet Y/E 31 Mar (INR mln) FY10A FY11A FY12A FY13A FY14A Accounts payables 421 101 73 577 590 Other current liabilities 0 148 219 531 548 Provisions 36 332 428 41 48 Debt funds 1,828 2,375 2,375 110 581 Other liabilities 0 0 0 0 0 Equity capital 1,235 1,235 1,235 187 311 Reserves & surplus (1,618) (1,430) (1,005) 2,440 5,299 Shareholders' fund (383) (195) 230 2,628 5,610 Total liabilities and equities 1,902 2,760 3,325 5,313 7,377 Cash and cash eq. 22 392 303 247 121 Accounts receivables 0 28 63 93 65 Inventories 70 117 150 177 199 Other current assets 175 418 503 903 987 Investments 236 18 35 9 1,586 Net fixed assets 1,285 1,641 2,076 3,489 4,238 CWIP 114 146 196 395 177 Intangible assets 0 0 0 0 0 Deferred tax assets, net 0 0 0 0 0 Other assets 0 0 0 0 0 Total assets 1,902 2,760 3,325 5,312 7,373

Cash Flow Statement Y/E 31 Mar (INR mln) FY10A FY11A FY12A FY13A FY14A Net income + Depreciation 3 384 672 646 445 Interest expenses 0 0 0 0 0 Non-cash adjustments 0 0 0 0 0 Changes in working capital 215 (196) (12) (28) (42) Other operating cash flows 0 0 0 0 0 Cash flow from operations 218 188 659 618 403 Capital expenditures (277) (584) (731) (1,925) (966) Change in investments (29) 219 (17) 26 (1,577) Other investing cash flows 0 0 0 0 0 Cash flow from investing (305) (366) (748) (1,900) (2,543) Equities issued 0 0 0 (1,048) 124 Debt raised/repaid (87) (177) (89) 2,209 (596) Interest expenses 0 0 0 0 0 Dividends paid 0 0 0 0 0 Other financing cash flows 0 0 0 0 0 Cash flow from financing (87) (177) (89) 1,162 (473) Changes in cash and cash eq (175) (355) (178) (120) (2,613) Closing cash and cash eq (152) (333) 214 183 (2,366)


27 January 2015

REPORT AUTHORS




Titan (TTAN) 399 430 Hold


Jewellery, Watches, Eyewear Bright prospects Jewellery is one of the fastest growing sectors in India wherein gold products comprise the lion’s share at 80-85%. Demand for gold is expected to improve post-withdrawal of the 20:80 import scheme and removal of gold lease curbs. In watches, the growing shift towards high-end brands will help organised players ramp up market share from the current 50%. Eyewear demand too is expected to witness a gradual shift towards the organised market as eyeglasses shed their purely utilitarian image.

Jewellery market growing rapidly but largely unorganised: The gems & jewellery sector is one of the fastest growing sectors of the Indian economy, with demand arising for the dual purposes of consumption and investment. As per FICCI, the domestic industry was estimated at Rs 2,510bn in 2013 and has the potential to touch Rs 5,000bn-5,300bn by 2018. With the government withdrawing its 20:80 gold import rule, volume growth in the sector should pick up, as gold accounts for an 80-85% revenue share. Removal of curbs on the gold lease scheme will also lead to better profitability for players in the sector.

High-end watch brands gaining traction: The Indian watch market is valued at ~Rs 47bn (~55mn units) split equally between organised and unorganised players. The organised market is largely dominated by TTAN, which holds 65% market share. Demand for watches depends highly on consumer sentiments and the segment competes with other categories such as apparel, mobile phones and laptops for consumer preference. With consumer preference shifting towards high-end branded watches from low-end unbranded products, organised players are expected to gain market share.

Eyewear – gradual shift towards organised market: The Indian eyewear market is highly fragmented. Market size is estimated at 25-35mn units per annum, having grown at an estimated 16% CAGR in the last five years in value terms. The eyewear market in India is largely controlled by unorganised players, but there has been a gradual shift towards organised players as eyeglasses are gradually shedding their utilitarian image and also becoming a key fashion accessory.

TTAN – long-term potential: TTAN is best positioned to capture a major share of the consumer shift towards the organised segment in these categories given its brand and distribution advantage. But valuations appear fair and we therefore restate our HOLD rating on the stock and recommend waiting for a better entry point. We roll forward to a Mar’16 TP of Rs 430 from an earlier Dec’15 TP of Rs 395.

Jewellery, Watches, Eyewear Bright prospects



Jewellery: Growing rapidly but largely unorganised

Gems & jewellery is one of the fastest growing sectors of the Indian economy, with demand arising for the dual purposes of consumption and investment. This sector is highly export oriented with exports contributing ~53% of the overall market in FY14. It is also labour intensive and a major contributor to employment, GDP and foreign exchange earnings for India. As per a FICCI report, the domestic industry was estimated at Rs 2,510bn in 2013 and has the potential to touch Rs 5,000bn-5,300bn by 2018.

The domestic market is largely controlled by local & independent stores which hold a market share of ~78%. Regional and national chains have a share of 17% and 5% respectively. In terms of product mix, gold jewellery forms 80-85% of the total Indian jewellery market with 12-16% contributed by diamond studded jewellery.

Fig 1 - Estimated market size by type of players Fig 2 - Product mix in domestic jewellery market

Source: RCML Research Source: RCML Research, TBZ Annual Report

The industry contributes significantly to India’s foreign exchange earnings through exports of gems & jewellery such as cut & polished diamonds, gold coins & medallions as well as precious and semi-precious stones.

As part of its objective of controlling India’s current account deficit, the government had undertaken several regulatory steps during the past two years to restrict gold imports into the country. These included hiking customs duty from 1% to 10%, introducing a 20:80 rule which required 20% exports mandatory for all the gold imported in the country, and withdrawing the gold lease scheme for gold procurement for domestic operations. In Q2FY15, however, the government withdrew the 20:80 rule, which is expected to lead to better volume growth, and also removed curbs on the gold lease scheme, which will support better profitability for players in the sector.

Local & Independent

Stores78%

Regional Chains17%

National Chains

5%

Gold Jewellery80-85%

Diamond Studded Jewellery12-16%

Others3-4%

Jewellery, Watches, Eyewear Bright prospects



Watches: Keeping time with consumer sentiments

The Indian watch market is valued at ~Rs 47bn (~55mn units) split equally between organised and unorganised players. The unorganised market primarily sells low-end watches and is dominated by small players assembling watches illegally or selling smuggled/fake watch brands. The organised market is largely dominated by TTAN, which holds 65% market share.

Demand for watches depends highly on consumer sentiments and the segment competes with other categories such as apparel, mobile phones and laptops for consumer preference. With consumer preference witnessing a shift towards high-end branded watches from low-end unbranded products, organised players are expected to gain market share.

Eyewear: Changing perceptions

The Indian eyewear market is highly fragmented in nature. Market size is estimated at 25-35mn units per annum, having grown at an estimated 16% CAGR in the last five years in value terms. While the eyewear market in India is largely controlled by unorganised players, there has been a gradual shift towards organised demand in both frames and sunglasses as eyeglasses are shedding their utilitarian image and becoming a key fashion accessory.

Spectacles comprise ~ 85% of the eyewear market, followed by sunglasses at 10%. Contact lenses, ready readers & accessories form the remaining 5%. With the incidence of eye correction at ~25% of the population and rising sharply in the 40+ age group, the market is expected to witness consistent growth.

Fig 3 - Market share by product type in Indian eyewear market

Source: RCML Research, Titan Annual Report

85%

10%5%

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30%

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50%

60%

70%

80%

90%

100%

Spectacles Sunglasses Others

Indian watch market (~ Rs 47bn)

Source: RCML Research, Company, Titan Annual Report

Unorganised Segment

50%

Organised Segment

50%



27 January 2015

REPORT AUTHORS





FREE FLOAT 46.6%




HOLD TP: INR 430.00 7.8%

Titan Industries TTAN IN

Wait for a better entry point – maintain HOLD

We expect TTAN to report a 19% earnings CAGR over FY14-FY17 on the back of 15% revenue growth, led by volume-led growth in jewellery and an expected revival in the watch business. Stability in gold prices should drive jewellery volumes, while a rising share of studded jewellery would also improve the mix. Valuations at 34.1x/28.4x FY16E/FY17E earnings, however, already factor in these positives. We maintain HOLD and roll over to a Mar’16 TP of Rs 430 (from a Dec’15 TP of Rs 395).

Topline CAGR at 15% over FY14-FY17: We model for a 15% topline CAGR for TTAN over FY14-FY17 led by a similar growth trajectory (~15%) in both its key businesses of jewellery and watches. We expect ~10% CAGR in watch volumes and 15% in jewellery as gold prices stabilise. Led by the ongoing macro recovery, eyewear revenues too should ramp up at a strong 25% CAGR (albeit off a low base) over FY14-FY17.

EBITDA CAGR of 18%: TTAN’s EBITDA margins are expected to climb ~80bps over FY14-FY17, leading to an 18% EBITDA CAGR over the same period. Mix improvement in jewellery (higher demand for studded jewellery than plain gold) and recovery in watch margins off a low base would contribute to margin expansion. This in turn should support a 19% earnings CAGR over FY14-FY17.

Maintain HOLD: We maintain our earnings estimates for FY16/FY17 while rolling over to a Mar’16 TP of Rs 430 (from a Dec’15 TP of Rs 395). Maintain HOLD as valuations appear fair and do not offer meaningful upside from current levels. Any rise/fall in gold prices would be an upside/downside risk to our estimates given the operating leverage that the movement in gold prices gives the business. Similarly, any reduction in import duty on gold would have a positive impact on volumes.


Revenue (INR mln) 1,01,233 1,09,273 1,20,018 1,40,796 1,65,877

EBITDA (INR mln) 10,213 10,442 11,930 14,471 17,269


Adjusted EPS (INR) 8.3 8.3 9.6 11.7 14.0


DPS (INR) 1.7 1.7 1.9 2.1 2.3

ROIC (%) 91.1 41.2 42.6 64.7 64.8

Adjusted ROAE (%) 42.9 32.7 30.1 29.5 28.4

Adjusted P/E (x) 48.1 48.2 41.6 34.1 28.4

EV/EBITDA (x) 33.7 32.8 29.6 23.3 19.2

P/BV (x) 18.0 14.0 11.3 9.1 7.3


14,400

19,400

24,400

29,400

70

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370


HOLD TP: INR 430.00 7.8%




Investment rationale Topline CAGR of 15% over FY14-FY17

We expect TTAN to report a revenue CAGR of 15% over FY14-FY17, from Rs 109.3bn in FY14 to Rs 165.8bn in FY17. The jewellery and watch businesses are likely to be the primary growth drivers, posting an estimated 15% CAGR each in revenue. In eyewear, we forecast strong 25% growth, albeit off a smaller base.

Fig 1 - Sales growth trend


Fig 2 - Jewellery sales growth Fig 3 - Watch sales growth


43.3

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Sales Sales growth (R)(Rs mn) (%)

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Jewellery Sales Sales growth (R)(Rs mn) (%)

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(%)(Rs mn) Watches Sales Sales growth (R)

Expect strong topline CAGR of 15% over FY14-FY17

HOLD TP: INR 430.00 7.8%




EBITDA CAGR of 18% over FY14-FY17

TTAN’s EBITDA margins are likely to expand 80bps from 9.6% in FY14 to 10.4% in FY17, supporting an EBITDA CAGR of 18% over the same period. We expect EBIT margins in watches and jewellery to improve by ~50bps each, with the eyewear business also contributing to profitability. In line with the all-round margin improvement, we expect TTAN to report an adjusted PAT CAGR of 19% over FY14-FY17, from Rs 7.4bn in FY14 to Rs 12.4bn in FY17.

Fig 4 - EBITDA growth Fig 5 - PAT growth


Valuation Maintain HOLD

TTAN currently trades at a P/E of 34.1x/28.4x FY16E/FY17E earnings – we believe valuations are fair and price in the company’s improving volume growth and margin trajectory. We maintain HOLD and roll over to a Mar’16 TP of Rs 430 (from a Dec’15 TP of Rs 395), valuing the stock at 30x FY17E earnings.

Fig 6 - Titan 1yr fwd P/E Chart


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EBITDA EBITDA margin (R)(Rs mn) (%)

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Positives priced in; maintain HOLD

HOLD TP: INR 430.00 7.8%






Financial Ratios Y/E 31 Mar FY13A FY14A FY15E FY16E FY17E Profitability & Return Ratios (%) EBITDA margin 10.1 9.6 9.9 10.3 10.4 EBIT margin 9.5 8.9 9.2 9.6 9.7 Adjusted profit margin 7.3 6.7 7.1 7.4 7.5 Adjusted ROAE 42.9 32.7 30.1 29.5 28.4 ROCE 40.7 26.8 25.0 27.9 26.8 YoY Growth (%) Revenue 14.4 7.9 9.8 17.3 17.8 EBITDA 22.3 2.2 14.2 21.3 19.3 Adjusted EPS 22.3 (0.1) 15.9 21.9 20.1 Invested capital 108.9 132.0 (42.2) 18.7 19.5 Working Capital & Liquidity Ratios Receivables (days) 6 5 5 5 5 Inventory (days) 159 171 159 148 147 Payables (days) 130 110 96 103 103 Current ratio (x) 1.4 2.0 1.7 1.7 1.8 Quick ratio (x) 0.3 0.3 0.5 0.5 0.6 Turnover & Leverage Ratios (x) Gross asset turnover 10.7 9.8 10.4 10.7 10.8 Total asset turnover 1.9 1.8 1.8 1.9 1.8 Net interest coverage ratio 19.1 11.2 13.9 15.9 18.9 Adjusted debt/equity (0.6) 0.0 (0.6) (0.6) (0.6)


HOLD TP: INR 430.00 7.8%




Income Statement Y/E 31 Mar (INR mln) FY13A FY14A FY15E FY16E FY17E Total revenue 1,01,233 1,09,273 1,20,018 1,40,796 1,65,877 EBITDA 10,213 10,442 11,930 14,471 17,269 EBIT 9,668 9,767 11,085 13,479 16,101 Net interest income/(expenses) (507) (871) (800) (850) (850) Other income/(expenses) 1,005 1,202 1,383 1,590 1,828 Exceptional items 0 0 0 0 0 EBT 10,166 10,098 11,667 14,219 17,079 Income taxes (2,811) (2,751) (3,150) (3,839) (4,611) Extraordinary items 0 0 0 0 0 Min. int./Inc. from associates 4 2 0 0 0 Reported net profit 7,359 7,348 8,517 10,380 12,468 Adjustments (4) (2) 0 0 0 Adjusted net profit 7,355 7,347 8,517 10,380 12,468

Balance Sheet Y/E 31 Mar (INR mln) FY13A FY14A FY15E FY16E FY17E Accounts payables 35,550 23,959 32,966 38,498 45,274 Other current liabilities 0 0 0 0 0 Provisions 3,584 3,854 4,608 5,143 5,754 Debt funds 0 8,068 0 0 0 Other liabilities 0 0 0 0 0 Equity capital 888 888 888 888 888 Reserves & surplus 18,811 24,340 30,457 38,198 47,763 Shareholders' fund 19,699 25,227 31,345 39,086 48,650 Total liabilities and equities 58,833 61,109 68,919 82,727 99,678 Cash and cash eq. 11,390 8,927 17,391 22,530 28,875 Accounts receivables 1,658 1,541 1,644 1,929 2,272 Inventories 36,803 38,694 38,827 45,342 53,323 Other current assets 3,817 5,357 4,441 5,209 6,137 Investments 29 31 31 31 31 Net fixed assets 6,919 5,972 6,232 7,331 8,686 CWIP 249 249 249 249 249 Intangible assets 0 0 0 0 0 Deferred tax assets, net 78 99 99 99 99 Other assets 0 0 0 0 0 Total assets 60,943 60,870 68,913 82,720 99,672

Cash Flow Statement Y/E 31 Mar (INR mln) FY13A FY14A FY15E FY16E FY17E Net income + Depreciation 7,904 8,024 9,362 11,371 13,636 Interest expenses 507 871 800 850 850 Non-cash adjustments 0 0 0 0 0 Changes in working capital (2,294) (14,635) 10,442 (1,502) (1,865) Other operating cash flows 0 0 0 0 0 Cash flow from operations 0 0 0 0 0 Capital expenditures (3,624) 271 (1,105) (2,090) (2,523) Change in investments (5) (2) 0 0 0 Other investing cash flows 0 0 0 0 0 Cash flow from investing 0 0 0 0 0 Equities issued 0 0 0 0 0 Debt raised/repaid (59) 8,068 (8,068) 0 0 Interest expenses (507) (871) (800) (850) (850) Dividends paid (2,181) (2,181) (2,399) (2,639) (2,903) Other financing cash flows (595) (510) (800) (850) (850) Cash flow from financing (3,343) 4,506 (12,068) (4,339) (4,603) Changes in cash and cash eq 0 0 0 0 0 Closing cash and cash eq 0 0 0 0 0


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