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Bharat Electronics (BHE IN) FY17 annual report analysis INDIA | CAPITAL GOODS | Company Update

6 September 2017

Bharat Electronics (BEL) FY17 annual report highlights the company’s efforts to become future ready with its continued focus on R&D and look at new avenues of growth in homeland security, space and solar. The company provides further clarity on capex initiatives announced in FY16 to gain leadership in missile systems, radar technologies and night vision devices. Management expects pace of new orders to sustain for the next 2‐3 years and orderbook to grow by 12‐15% in FY18.

Focus on R&D... BEL highlights its three tiered R&D process as it operates 13 labs to meet technological advances not only in existing projects but also to deliver new products. In FY17, BEL invested 8.8% of its revenues in R&D; its R&D expenditure has grown at 11% CAGR in the past five years (vs. 8.3% CAGR in sales). Indigenously developed products contributed 87% of its revenues (vs. 86% in FY16). Some of the products for which development was completed in FY17 and also contributed to sales were Weapon Locating Radar (WLR), Battle Field Surveillance Radar, Hand Held Thermal Imager with Laser Range Finder and Advanced Composite Communication System for IAC. The company has also entered into strategic arrangements with global OEM’s to develop in areas such as AESA radars, next gen electronic warfare systems and tactical communication systems (read SDR’s).

...leading to capacity enhancements in key areas In FY16 BEL had set out a five year capex plan of Rs 25bn. In FY17, it elaborates on its investments particularly in missile integration, upgrade of technology in night vision devises to the current global standard (XD‐5) and radar sub components. In our view these investments will allow BEL to maintain its leader position in surface to air missiles, a Rs 500bn opportunity over next five years, and night vision devices, a Rs 200bn opportunity. During the year BEL also inaugurated state of art testing facilities such as Electro Magnetic Compatibility (EMC) chamber and Blowing Sand & Dust Tests. The company is on track to enhance capacities in line with its five year target.

Working on new areas of growth beyond domestic defence BEL is exploring homeland security, space technologies and solar PV cell manufacturing as areas of growth outside the defence sector.

Performance of its core business has been strongest in five years BEL won Rs 163bn of new orders in FY17 (flat yoy), its revenues grew 17.5% driven by 24% yoy in defence sales. EBITDA margins, adjusted for one‐off increase in employee cost on account of gratuity, expanded 330bps yoy to 22% on operating leverage. Despite a 16% decline in other income recurring earnings grew 27% yoy.

Certain one‐offs that are part of financials BEL’s other operating income includes Rs 1.1bn of provision write backs for liquidated damages while other income includes lumpy dividend (Rs 520mn) from its associate company GE‐BE. The cost side includes Rs 1.4bn provision for gratuity part of employee cost.

Working capital well under control; FCF negative in FY17 due to high capex BEL’s net working capital to sales increased to 10% in FY17 vs. negative in FY16. Inventory and receivables intensity was flat but customer advances declined leading to the increase in working capital, but it remains well under control. Free cash flow was negative due to elevated capes and increase in working capital.

Maintain BUY; Target price Rs 220 We maintain our BUY thesis, which is predicated on robust growth in new orders, execution, and high free cash flow. We believe consensus is overestimating the impact of integration projects on margins. Our target price of Rs 220 discounts FY20 earnings at 25x PE.

BUY CMP RS 192 TARGET RS 220 (+15%) COMPANY DATA O/S SHARES (MN) : 2234MARKET CAP (RSBN) : 426MARKET CAP (USDBN) : 6.752 ‐ WK HI/LO (RS) : 195 / 119LIQUIDITY 3M (USDMN) : 11.1PAR VALUE (RS) : 1 SHARE HOLDING PATTERN, % Jun 17 Mar 17 Dec 16PROMOTERS : 68.2 68.2 74.4FII / NRI : 7.6 6.7 4.3FI / MF : 16.7 17.7 15.8NON PRO : 0.5 0.7 0.4PUBLIC & OTHERS : 7.0 6.7 5.2 PRICE PERFORMANCE, %

1MTH 3MTH 1YRABS 6.6 10.5 56.4REL TO BSE 9.0 8.6 44.8 PRICE VS. SENSEX

Source: Phillip Capital India Research KEY FINANCIALS Rs mn FY17 FY18E FY19ENet Sales 86,119 1,00,213 1,10,019EBIDTA 18,987 19,083 20,852Net Profit 16,123 14,841 16,533EPS, Rs 7.2 6.6 7.4PER, x 26.6 28.9 25.9EV/EBIDTA, x 20.6 19.8 17.2P/BV, x 4.5 3.8 3.3ROE, % 19.6 18.8 18.8

Source: PhillipCapital India Research Est. Jonas Bhutta (+ 9122 6246 4119) [email protected] Vikram Rawat (+ 9122 6246 4120) [email protected]

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BEL BSE Sensex


BHARAT ELECTRONICS COMPANY UPDATE

Highlights from management commentary Remains focused on R&D BEL’s R&D expenditure has grown at 11%CAGR in past five years. In FY17 it accounted for 8.8% of revenues. The management highlights the company’s focus on R&D to meet future technological requirements of the armed forces. It elaborates on the three tiered R&D structure of the company wherein it has two central research labs, which conduct futuristic R&D in core technology areas of BEL. Followed by a Central Design and Engineering and Product design and innovation center which develops common technology modules required by BEL’s business units and lastly its has D&E groups in each SBU to provide system of system solutions to individual business units. BEL’s 3‐tier R&D structure

Source: Company, PhillipCapital India Research R&D expenditure in FY17 = 8.8% of revenues

Source: Company, PhillipCapital India Research

SBU/Unit D&E> Provide System and System of Systems solutions having the required domain expertise,

> Technical support during the complete product life cycle> Develop sub‐systems & processes as necessary from CRLs, C‐D&E, PD&IC and Collaborative R&D.

Central D&E and PD&IC

> Develop common technology modules as required by SBUs/Units like Radar signal processing units, Encryption modules, Microwave components, Computing elements, Power Amplifiers, Power supplies, MMICs, Displays etc.

Central Research Laboratories (CRLs)> Conducting futuristic R&D in core technology areas of BEL

> Develop enabling technology modules for use by SBUs/Units

1.4 2.1 2.4

3.2 3.8

4.7 5.1

4.7 5.5

7.0 7.8

3.5%

5.1% 5.3%

6.1%

6.9%

8.2% 8.5%

7.6%8.2%

9.3%8.8%

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10%

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R&D expenditure (Rs bn) % of Sales (rhs)



R&D initiatives taken during the year • BEL has appointed three Chief Technology Officers (CTO), one each in the Area of

Radar & Weapon system, Electro‐optics & Laser and Communications to focus on R&D projects across the company.

• New R&D projects initiated include System‐on‐Chip, MMIC, Laser Warning Receiver, Light Weight Shelter, High Altitude Shelter, Low Frequency Variable Depth Sonar, Medium Power Radar, 1 Meter Ku band Satcom Manpack Terminal and collaborative development for 3‐D C/D Radar, Multi target Tracking Radar and SWIR Cameras.

• Product Development & Innovation Center (PD&IC) Lab has been established and recognized by DSIR during 2016‐17 as a R&D Center.

Some of the products developed by BEL’s R&D division in FY17 New products developed during FY17 Product introduced Category Weapon Locating Radar Radar Battle Field Surveillance Radar ‐ Extended Range (BFSR‐XR) Radar Identification of Friend or Foe Mark II (IFF MK II) Radar Radar HUMSA NG for P15B ‐ Sonar Radar USHUS‐2 ‐ Sonar Suite Coastal surveillance System – Maldives ACCS for Indigenous Aircraft Carrier Communication Gigabit Ethernet based Ship Data network (GBE SDN) for P15B Communication RRF up gradation to 8Mbps (High band) Communication VHF Tactical Radio (Bharati) ‐ Export Communication Missile two way Data link for QRSAM Communication BEACON MKIII for Army Communication Ship borne EW system Electronic Warfare Hand held Thermal Imager with Laser Range Finder (HHTI with LRF) Border Surveillance System (BoSS) Uncooled TI Binocular Others Voter Verifiable Paper Audit Trail (VVPAT) MK2 Others Point of Sale (POS) device for Fair Price Shop automation Others Dual Frequency IP Modem Others 2KW SSPA (for Tropo Communication) Others

Source: PhillipCapital India Research Strategic alliances for emerging businesses BEL has entered into strategic alliances for emerging business opportunities through co‐development, co‐production and manufacturing technology transfer. In areas such as AESA radars, next gen electronic warfare suites, air defence weapon systems, night vision devises, tactical communication systems and battlefield management systems. Targeting opportunities from offsets BEL is looking to opportunities emanating from offset obligations of foreign vendors. This would entail BEL to ‘Build to Print’, ‘Build to Spec’ and ‘Buyer Nominated Equipment’. BEL is working with major Aerospace and Defence companies to establish long term supply chain relationships.



Special focus on exports The Company is also pursuing possibilities to export products and systems to friendly countries with the approval of MoD. Currently, Akash Missile Systems, Coastal Surveillance Systems, Naval Air Surveillance Radars, Sonars, Night Vision Devices and Electronic Voting Machines etc are being promoted to South East Asian, Middle East and African countries. Looking at new sectors for growth BEL is looking at Homeland security, Solar and Space as potential opportunities outside the defence sector. Homeland security: The major segments of homeland security are Critical Infrastructure Protection, Paramilitary, Police & Urban Area Security, Ground Transportation, Port & Maritime Security and Cyber Security. The Homeland security market in India is spread across central and state governments. One of the major components of homeland security is border security management. This would be of interest to BEL. Solar: BEL is setting up utility scale solar power plants for Ordnance factories. It is also setting up a solar module manufacturing plant. This plant can manufacture modules upto 320 watts with efficiency levels of +16%. Space: BEL is exploring collaboration with ISRO leveraging their technological capabilities in design and development of various products/systems for possible use in Defence applications.



Analysis of P&L Order book up 26% yoy, targets 12‐15% growth in FY18 BEL won Rs 163bn of new orders in FY17, ‐5% yoy, driven by large orders such as LR‐SAM (Rs 64bn), Electronic warfare for navy (Rs 20bn) and Advance Composite Communication System (ACCS) for P17 (Rs 10bn). Orderbook of Rs 402bn is 4.9x FY17 revenues. The management expects its orderbook to grow by 12‐15% in FY18. Orders won during FY17 Long Range Surface to Air Missile (LR‐SAM) with MFSTAR Advanced Composite Communication System for P17 Electronic Voting Machine Static / L‐Band Tropo Upgrade Electronic Warfare Suite for Naval application ‐ Shakti & Nayan Giga Bit Ethernet based Ship Data Network for P17 Hand Held Thermal Imager Low Intensity Conflict EW System Home Land Security Advanced Landing Ground (ALG) Communication Terminal Shipborne Signals Intelligence System Voter Verified Paper Audit Trail AMC for Rukmani System AMC for Rohini Radar Navigational complex system Next generation main automatic exchange

Source: PhillipCapital India Research BEL’s order book grew 26% yoy in FY17 with a book to ...as it recorded strong order inflows for the 2nd bill of 4.9x FY17 revenues consecutive year


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2.5

3.0

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Order book (Rs bn) Book to Bill (x) (rhs)

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Order inflows (Rs bn) % YoY (rhs)



Sales growth highest in 12 years; Defence accounts for 88% of revenues BEL’s core revenues grew by 15.6% yoy to Rs 83bn in FY17 driven by Akash missile system (Army & Airforce), Hand Held Thermal Image with Laser Range Finder (HHTI‐LRF), Weapon Locating Radar (WLR), 3D‐Tactical Control Radar (3D‐TCR), Fire control systems for the Navy, Integrated Air Command and Control System to Airforce, L 70 Gun Upgrade to Army, Low Level Light Weight Radar to Airforce, Ship Borne EW System to Navy and New Generation Sonars to Navy. Defence sales accounted for 88% of revenues (vs. 82% in FY16) and the balance revenue came from civilian projects. Sales grew 17.5% yoy, fastest in 12 years ... Defence accounted 88% of the total sales

Source: Company, PhillipCapital India Research Share of indigenously developed products account for 87% of revenues BEL has historically worked closely with India’s defence laboratories, especially on projects in radars, electronic warfare, and missile systems. In FY17, products developed by BEL and DRDO and other national labs accounted for 87% of its revenues vs. 86% in FY16 and 80% in FY15. This relationship helps BEL stay ahead of the curve on future products that the armed forces require. 87% of revenues were from indigenously developed products


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FY11 FY12 FY13 FY14 FY15 FY16 FY17

Reveneus (Rs bn) % yoy (rhs)

78% 81% 78% 85% 80% 86% 87%

22% 19% 22% 15% 20% 14% 13%

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100%


Indigenously developed products Products from ToT

81% 83%75% 75% 78% 81% 78% 85% 80% 86% 87%

19% 17%25% 25% 22% 19% 22% 15% 20% 14% 13%

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100%

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17

Indigenously developed products Products from ToT



Growth was driven by domestic projects as exports declined 23% Revenue growth in FY17 was primarily driven by domestic sales as BEL’s exports declined sharply by 23% yoy to $ 66mn, as deliveries for a naval project were delayed due to issues at the customer’s end. In FY17 exports accounted for 5% of revenues, BEL targets to increase it to 10% as per its long term export plan. Spike in other operating income due to provision write backs, not sustainable BEL’s other operating income grew by 105% yoy in FY17 on back of Rs 2bn of provision write backs (average of previous years Rs 400mn) on onerous contracts (Rs 550mn) and liquidated damages (Rs 1.1bn). We do not expect this elevated level of provisions to recur in our future estimates. Provision write backs boosted other operating income (Rs mn) FY13 FY14 FY15 FY16 FY17 Sale of scrap 66 74 87 58 88 Export benefits & Govt grants/assistance 14 20 17 149 138 Customer grants 29 93 41 56 44 Provision withdrawn 221 509 450 412 1,989 Miscellaneous 804 836 1,077 867 899Other operating income 1,134 1,532 1,671 1,542 3,157% yoy ‐4% 35% 9% ‐8% 105%

Source: Company, PhillipCapital India Research Gross margin expansion aided by sales with higher local content BEL’s gross margin expanded 100bps yoy in FY17 to 48.8% mainly on account of increase in sales from indigenously developed products. Higher contribution of indigenously developed products aide gross margins


47.5% 48.5%

42.4%43.8%

37.9% 37.6%

42.1%44.8%

47.8% 48.8%

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FY11

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Gross margin



Increase in employee cost due to provisions for wage revision and one time gratuity BEL’s reported employee cost increased by 23% yoy to Rs 15.5bn (18% of sales) as the company made Rs 2.8bn of provisions for wage revisions on account of the 7th pay commission (Rs 1.4bn), increase in gratuity limits (Rs 700mn), to Rs 2mn/employee from Rs 1mn/employee, and miscellaneous nonrecurring costs (Rs 700mn). Adjusting for the one time impact of gratuity and miscellaneous expenses, employee costs rose 12% yoy. Employee costs increase on account of 7th pay commission

Source: Company, PhillipCapital India Research Technical employees account for 48% of its workforce in FY17 vs. 9% in FY03


12%

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Employee cost (Rs bn) % of sales (rhs)

One off gratuity & 7th pay hike

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Total employees % of Scientist/Engineers (rhs)



Operating leverage and gross margin expansion led to cyclically high EBITDA margin Aided by 100bps of gross margins expansion and operating leverage (160bps), BEL’s EBITDA margins expanded 330bps to 22%, a cyclical high. EBITDA margins at cyclically high levels, expanded 330bps yoy in FY17

Source: Company, PhillipCapital India Research Lower cash balance post buyback led to ‐20% yoy in other income BEL’s reported other income (Rs 4.7bn; ‐12% yoy) declined on account of lower interest income (‐26% yoy) due to lower cash balance (‐47% yoy) as the company undertook a share buyback. Other income also included significantly large dividend (Rs 520mn vs average Rs 50mn) from its associate company GE‐BE Pvt Ltd and forex gain of Rs 641mn. Adjusting for the forex gain, BEL’s recurring other income declined 20% yoy to Rs 4.07bn. Other Income impacted due to lower cash balance (Rs mn) FY13 FY14 FY15 FY16 FY17Interest on deposits 5,481 4,137 4,197 4,585 3,403Interest yield (%) 9.1% 8.4% 8.0% 7.1% 6.2%Other interest income 47 16 171 117 85Dividend income 26 26 26 39 520Profit on sale of fixed assets 347 60 12 3 19Foreign exchange gain 171 ‐ 327 504 641Miscellaneous income 28 46 45 122 43Other income 6,099 4,285 4,780 5,371 4,710Foreign exchange gain (171) ‐ (327) (504) (641)Other income ex forex gain 5,928 4,285 4,452 4,867 4,070


25.4% 25.7%24.1%

16.6%17.7%

10.7% 10.5%

14.2%

16.7%

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28%

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17

EBITDA margin



Recurring earnings grew 27% yoy After adjusting for one‐off’s in employees costs and other income BEL’s recurring earnings grew 27% yoy in FY17 to Rs16.1bn) Recurring earnings have doubled in the past five years


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Recurring PAT (Rs bn) % Ch YoY (rhs)



Balance sheet analysis Capex in line with its five year plan BEL invested Rs 7bn in FY17. The pace of capex is in line with its five year target of investing Rs 25bn (FY16‐21). In the past two years BEL has expended 50% of its capex target. Some of the facilities that were commissioned during FY17 were: • New Radar Assembly Hangar at Ghaziabad unit for Assembly, Testing and

Integration of Radar & Antenna Systems. • “Blowing Sand & Dust Test Facility” at Bengaluru Unit established for testing of

Abrasion resistance of subsystems mounted externally on Aircrafts as part of augmenting the quality related infrastructure.

• Electro Magnetic Compatibility (EMC) Chamber for system level testing facility at Bengaluru Unit.

• Pulse Current Injection Test Facility (PCI) for High Altitude Electro Magnetic Pulse/Nuclear Electro Magnetic Pulse (HEMP)/(NEMP) test of various system level projects at Bengaluru Unit.

• New Electronics Manufacturing Services (EMS) assembly line with state‐of‐the‐Art Surface Mount Technology (SMT) machine, wave soldering machine and Automated Optical Inspection (AOI) at Bengaluru Unit.

• The Low Pressure Chemical Vapor Deposition (LPCVD) equipment of the IC Wafer Fab Facility upgraded to handle wafers from 4” dia. to 6” diameter at Bengaluru Unit.

• New Photovoltaic Module Line and up‐gradation of the existing Solar Cell Plant with auto wet etching & automated printing lines at Bengaluru Unit.

• Automated Transmit/Receive Module Assembly Line consisting of die‐attach & wire‐bonding lines to increase the X‐Band TR Modules production capacity.

To augment its capacity in order to meet its growth plans BEL is setting up two new facilities and upgrading one plant over the next 3‐4 years. 1. Defence systems integration complex in Palasamudram, Andhra Pradesh. Total

capex of Rs 5bn over 3‐4 years. This will be a state of art facility for BEL’s missile systems business. It will be built in 3‐4 phases as multiple projects mature. Work on Phase‐1 is already under progress where hangars for weapon system integration and sub systems integration are being constructed. Subsequent phases will include Hard Stands for Radars and Weapon integration, RF radiation sources for target simulation, Automatic Test Equipment, Clean Rooms for electronic assembly, Non‐Explosive & Explosive Integration Buildings, Missile Storage buildings, Environmental Test Chambers, Fire Stations, Solar Power Plant, Estate and Admin buildings. In our view this plant will give BEL a clear edge over its competitors in the surface to air missile segment.

2. Infrared seekers and night vision devices at Nimmaluru, Andhra Pradesh. This plant will be set up over the next 2‐3 years with a capex Rs 2.5bn. It will manufacture IR seekers, NVD’s and TI cameras.

3. Upgrade of Imager Intensifier technology. BEL will be upgrading the image intensifier technology based tubes fabrication facility at its subsidiary BELOP from XD‐4 to XD‐5 with an investment of Rs 2bn.



Capex is inline with its five year target

Source: Company, PhillipCapital India Research Net working capital at 10% of sales is well under control BEL enjoys the benefit of customer advances on new orders. As the company has secured cumulative orders of Rs 340bn in FY16‐17 it has Rs 61bn of customer advances equivalent to 258 days of sales. This helps it effectively manage its working capital despite the skew of revenues towards 4Q (45% of full year revenues) which optically increases receivables intensity. Inventory and receivables days to sales remained flat in FY17 at 208 and 185 days respectively. Though BEL’s net working capital increased to 10% of sales in FY17 (vs. ‐5% in FY16) it still remains well under control. Modest decline in customer advances ... led to increase in net working capital intensity

Source: Company, PhillipCapital India Research Receivable analysis excluding 4Q sales (Rs mn) FY13 FY14 FY15 FY16 FY17Gross receivables (reported) 39,650 49,958 48,215 49,067 56,210Gross receivable days to sales 237 291 257 244 238Less: 4Q sales 27,778 31,310 29,282 32,235 39,877Gross receivables ex‐4Q sales 11,871 18,648 18,933 16,832 16,333TTM Sales 56,232 59,223 70,455 70,325 78,477Gross receivable days to TTM Sales 77 115 98 87 76Net Receivables (reported) 33,347 41,286 37,894 37,119 43,549Receivable days to sales 199 240 202 185 185


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(Rs bn)

17 21 22 30 35 64 72 59 53 50 63 61

25%23% 23%

29%31%

27% 28%

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(Rs bn) Customer advances % of Order book

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(Rs bn) Net working capital ex‐cash



Provisions for performance warranty have risen sharply in the past three years (Rs mn) FY13 FY14 FY15 FY16 FY17Dividend & dividend tax 1,526 1,619 ‐ ‐ ‐Employee benefits 5,365 4,030 5,160 5,985 9,303

Performance warranty 272 346 772 1,764 2,828

Provision for taxes ‐ ‐ ‐ 667 ‐Other provisions ‐ 0 999 1,422 872Provisions 7,162 5,995 6,931 9,840 13,003


FCF turned negative on elevated capex and higher NWC FCF working (Rs mn) FY13 FY14 FY15 FY16 FY17PBT 11,146 11,747 14,667 17,321 20,294Adjustments to PBT (3,742) (3,899) (1,627) (3,047) (2,826)Changes in working capital (21,622) (12,821) 3,835 12,506 (11,353)Taxes paid (2,327) (1,980) (3,380) (4,289) (7,200)Cash from operating activities (16,545) (6,952) 13,494 22,491 (1,085)Less: Capex (2,445) (2,531) (2,177) (6,584) (6,970)Free cash flow (18,989) (9,484) 11,318 15,906 (8,055)

Source: Company, PhillipCapital India Research FCF turned negative in FY17 due to higher capex and increased working capital


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(Rs bn) FCF FCF ex customer advances



Our BUY thesis in charts We build in 30% growth in orders over FY18‐20 vs FY14‐17, Pace of execution to increase: 12% CAGR FY18‐20 vs 5.6% potentially could be even higher over FY11‐16

Margins should be resilient after a decline in FY18 despite 2x increase in FCF ex customer advances over FY18‐20 higher share integration sales

ROE’s should be stable at 20% despite higher cash balances BEL’s PE is highly correlated to order inflows

Source: Company, PhillipCapital India Research Estimates

385

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FY15‐17 FY18‐20E Total opportunities

(Rs bn)

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Reveneus (Rs bn) % yoy (rhs)

CAGR 11.8%

CAGR 5.6%

17.7%

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EBITDA margin

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FCF (Ex‐Advances) (Rs bn) FCF (% of PAT )rhs)

19.6% 19.9%

‐294 bps‐13 bps ‐46 bps

385 bps 7 bps

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RoE FY17

Margin im

pact

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Leverage

RoE FY20E

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BEL 1yr fwd PE (x) 1yr fwd inflows (Rs bn)

Correl 0.78x



Outlook & Valuation BEL has seen a rerating over the past four years due to an improving environment for order inflows and positive surprise in earnings due to a non‐linear expansion in margins. BEL’s PE has a 0.8x correlation to order inflows and should remain the main driver of its valuations. We expect BEL to retain its premium valuations, as it exceeds expectations on new orders, execution, and margins, and generates high free cash. Among key monitorables would be the extent of margin contraction, which we believe should be lower than what we have incorporated into our estimates. Consensus seems to be overestimating the negative impact of integration projects on margins. We maintain our BUY rating and target price of Rs 220, which is based on 25x our FY20 earnings on high order visibility.



Financials

Income Statement Y/E Mar, Rs mn FY17 FY18e FY19e FY20eNet sales 86,119 1,00,213 1,10,019 1,25,348Growth, % 18 16 10 14Total income 86,119 1,00,213 1,10,019 1,25,348Raw material expenses ‐44,131 ‐54,365 ‐60,786 ‐70,320Employee expenses ‐14,113 ‐17,508 ‐18,440 ‐19,416Other Operating expenses ‐8,888 ‐9,256 ‐9,942 ‐11,327EBITDA (Core) 18,987 19,083 20,852 24,284Growth, % 38.4 0.5 9.3 16.5Margin, % 22.0 19.0 19.0 19.4Depreciation ‐1,915 ‐2,276 ‐2,638 ‐2,949EBIT 17,072 16,807 18,214 21,335Growth, % 42.3 (1.6) 8.4 17.1Margin, % 19.8 16.8 16.6 17.0Interest paid ‐118 ‐50 ‐50 ‐50Other Non‐Operating Income 4,070 3,031 3,880 4,822Non‐recurring Items ‐647 ‐1,110 0 0Pre‐tax profit 20,377 18,678 22,044 26,107Tax provided ‐4,901 ‐4,947 ‐5,511 ‐6,527Profit after tax 15,476 13,731 16,533 19,580Net Profit 15,476 13,731 16,533 19,580Growth, % 27.0 (8.0) 11.4 18.4Net Profit (adjusted) 16,123 14,841 16,533 19,580Unadj. shares (m) 2,234 2,234 2,234 2,234Wtd avg shares (m) 2,234 2,234 2,234 2,234 Balance Sheet Y/E Mar, Rs mn FY17 FY18e FY19e FY20eCash & bank 37,902 49,681 68,559 86,018Debtors 43,549 49,420 52,749 58,381Inventory 49,050 58,937 62,397 67,142Loans & advances 0 0 0 0Other current assets 12,025 13,483 14,652 16,396Total current assets 1,42,525 1,71,521 1,98,357 2,27,938Investments 4,597 4,597 4,597 4,597Gross fixed assets 16,170 21,451 28,787 33,299Less: Depreciation ‐3,617 ‐5,893 ‐8,530 ‐11,479Add: Capital WIP 6,563 5,282 2,445 1,934Net fixed assets 19,116 20,840 22,702 23,753Total assets 1,71,561 2,02,280 2,30,979 2,61,611Current liabilities 82,888 1,03,121 1,20,969 1,38,785Provisions 13,003 16,305 17,229 18,422Total current liabilities 95,891 1,19,426 1,38,198 1,57,206Total liabilities 96,391 1,19,426 1,38,198 1,57,206Paid‐up capital 2,234 2,234 2,234 2,234Reserves & surplus 72,937 80,622 90,547 1,02,172Shareholders’ equity 75,170 82,855 92,781 1,04,406Total equity & liabilities 1,71,561 2,02,281 2,30,979 2,61,612 Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY17 FY18e FY19e FY20ePre‐tax profit 20,377 18,678 22,044 26,107Depreciation 1,915 2,276 2,638 2,949Chg in working capital ‐12,364 6,318 10,815 6,885Total tax paid ‐5,616 ‐4,947 ‐5,511 ‐6,527Cash flow from operating activities ‐1,085 20,454 26,155 24,643Capital expenditure ‐6,968 ‐4,000 ‐4,500 ‐4,000Cash flow from investing activities 31,478 ‐2,079 ‐620 822Free cash flow 30,393 18,375 25,535 25,465Equity raised/(repaid) ‐166 0 0 0Dividend (incl. tax) ‐6,046 ‐6,607 ‐7,956 ‐9,422Other financing activities ‐22,522 511 1,298 1,416Cash flow from financing activities ‐28,234 ‐6,596 ‐6,657 ‐8,006Net chg in cash 2,159 11,780 18,878 17,459 Valuation Ratios

FY17 FY18e FY19e FY20ePer Share data EPS (INR) 7.2 6.6 7.4 8.8Growth, % 36.5 (8.0) 11.4 18.4Book NAV/share (INR) 33.7 37.1 41.5 46.7FDEPS (INR) 7.2 6.6 7.4 8.8CEPS (INR) 8.4 8.2 8.6 10.1CFPS (INR) 0.1 8.6 11.7 11.0DPS (INR) 2.3 2.5 3.0 3.5Return ratios Return on assets (%) 8.8 7.4 7.6 8.0Return on equity (%) 19.6 18.8 18.8 19.9Return on capital employed (%) 20.8 20.1 20.1 21.0Turnover ratios Asset turnover (x) 2.8 2.5 3.1 4.3Sales/Total assets (x) 0.5 0.5 0.5 0.5Sales/Net FA (x) 5.2 5.0 5.1 5.4Working capital/Sales (x) 0.3 0.2 0.1 0.0Receivable days 184.6 180.0 175.0 170.0Inventory days 207.9 214.7 207.0 195.5Payable days 73.2 77.1 78.4 82.1Working capital days 92.1 68.2 29.3 9.1Liquidity ratios Current ratio (x) 1.7 1.7 1.6 1.6Quick ratio (x) 1.1 1.1 1.1 1.2Interest cover (x) 144.9 336.1 364.3 426.7Net debt/Equity (%) (49.8) (60.0) (73.9) (82.4)Valuation PER (x) 26.6 28.9 25.9 21.9PEG (x) ‐ y‐o‐y growth 0.7 (3.6) 2.3 1.2Price/Book (x) 5.7 5.2 4.6 4.1Yield (%) 1.2 1.3 1.5 1.8EV/Net sales (x) 4.5 3.8 3.3 2.7EV/EBITDA (x) 20.6 19.8 17.2 14.1



Stock Price, Price Target and Rating History

Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year. Rating Criteria Definition

BUY >= +15% Target price is equal to or more than 15% of current market price

NEUTRAL ‐15% > to < +15% Target price is less than +15% but more than ‐15%

SELL <= ‐15% Target price is less than or equal to ‐15%.

B (TP 220)

120

130

140

150

160

170

180

190

J‐17 F‐17 M‐17 M‐17 J‐17 A‐17



Management Vineet Bhatnagar (Managing Director) (91 22) 2483 1919 Kinshuk Bharti Tiwari (Head – Institutional Equity) (91 22) 6246 4101 Jignesh Shah (Head – Equity Derivatives) (91 22) 6667 9735 Research Automobiles Engineering, Capital Goods Pharma & Specialty Chem Dhawal Doshi (9122) 6246 4128 Jonas Bhutta (9122) 6246 4119 Surya Patra (9122) 6246 4121 Nitesh Sharma, CFA (9122) 6246 4126 Vikram Rawat (9122) 6246 4120 Mehul Sheth (9122) 6246 4123 Banking, NBFCs IT Services & Infrastructure Strategy Manish Agarwalla (9122) 6246 4125 Vibhor Singhal (9122) 6246 4109 Naveen Kulkarni, CFA, FRM (9122) 6246 4122 Pradeep Agrawal (9122) 6246 4113 Shyamal Dhruve (9122) 6246 4110 Neeraj Chadawar (9122) 6667 9764 Paresh Jain (9122) 6246 4114 Logistics, Transportation & Midcap Telecom Consumer & Retail Vikram Suryavanshi (9122) 6246 4111 Naveen Kulkarni, CFA, FRM (9122) 6246 4122 Naveen Kulkarni, CFA, FRM (9122) 6246 4122 Media Manoj Behera (9122) 6246 4118 Preeyam Tolia (9122) 6246 4129 Manoj Behera (9122) 6246 4118 Technicals Metals Subodh Gupta, CMT (9122) 6246 4136 Cement Dhawal Doshi (9122) 6246 4128 Production Manager Vaibhav Agarwal (9122) 6246 4124 Ganesh Deorukhkar (9122) 6667 9966 Economics Mid-Caps & Database Manager Editor Anjali Verma (9122) 6246 4115 Deepak Agarwal (9122) 6246 4112 Roshan Sony 98199 72726 Shruti Bajpai (9122) 6246 4135 Oil & Gas Sr. Manager – Equities Support

Sabri Hazarika (9122) 6667 9756 Rosie Ferns (9122) 6667 9971

Sales & Distribution Corporate Communications Ashvin Patil (9122) 6246 4105 Sales Trader Zarine Damania (9122) 6667 9976 Shubhangi Agrawal (9122) 6246 4103 Dilesh Doshi (9122) 6667 9747 Kishor Binwal (9122) 6246 4106 Suniil Pandit (9122) 6667 9745 Bhavin Shah (9122) 6246 4102 Ashka Mehta Gulati (9122) 6246 4108 Execution Archan Vyas (9122) 6246 4107 Mayur Shah (9122) 6667 9945

Contact Information (Regional Member Companies)

SINGAPORE: Phillip Securities Pte Ltd 250 North Bridge Road, #06‐00 RafflesCityTower,

Singapore 179101 Tel : (65) 6533 6001 Fax: (65) 6535 3834

www.phillip.com.sg

MALAYSIA: Phillip Capital Management Sdn Bhd B‐3‐6 Block B Level 3, Megan Avenue II,

No. 12, Jalan Yap Kwan Seng, 50450 Kuala Lumpur Tel (60) 3 2162 8841 Fax (60) 3 2166 5099

www.poems.com.my

HONG KONG: Phillip Securities (HK) Ltd 11/F United Centre 95 Queensway Hong Kong Tel (852) 2277 6600 Fax: (852) 2868 5307

www.phillip.com.hk

JAPAN: Phillip Securities Japan, Ltd 4‐2 Nihonbashi Kabutocho, Chuo‐ku

Tokyo 103‐0026 Tel: (81) 3 3666 2101 Fax: (81) 3 3664 0141

www.phillip.co.jp

INDONESIA: PT Phillip Securities Indonesia ANZTower Level 23B, Jl Jend Sudirman Kav 33A,

Jakarta 10220, Indonesia Tel (62) 21 5790 0800 Fax: (62) 21 5790 0809

www.phillip.co.id

CHINA: Phillip Financial Advisory (Shanghai) Co. Ltd. No 550 Yan An East Road, OceanTower Unit 2318

Shanghai 200 001 Tel (86) 21 5169 9200 Fax: (86) 21 6351 2940

www.phillip.com.cn THAILAND: Phillip Securities (Thailand) Public Co. Ltd.

15th Floor, VorawatBuilding, 849 Silom Road, Silom, Bangrak, Bangkok 10500 Thailand

Tel (66) 2 2268 0999 Fax: (66) 2 2268 0921 www.phillip.co.th

FRANCE: King & Shaxson Capital Ltd. 3rd Floor, 35 Rue de la Bienfaisance

75008 Paris France Tel (33) 1 4563 3100 Fax : (33) 1 4563 6017

www.kingandshaxson.com

UNITED KINGDOM: King & Shaxson Ltd. 6th Floor, Candlewick House, 120 Cannon Street

London, EC4N 6AS Tel (44) 20 7929 5300 Fax: (44) 20 7283 6835

www.kingandshaxson.com UNITED STATES: Phillip Futures Inc.

141 W Jackson Blvd Ste 3050 The Chicago Board of TradeBuilding

Chicago, IL 60604 USA Tel (1) 312 356 9000 Fax: (1) 312 356 9005

AUSTRALIA: PhillipCapital Australia Level 10, 330 Collins Street

Melbourne, VIC 3000, Australia Tel: (61) 3 8633 9800 Fax: (61) 3 8633 9899

www.phillipcapital.com.au

SRI LANKA: Asha Phillip Securities Limited Level 4, Millennium House, 46/58 Navam Mawatha,

Colombo 2, Sri Lanka Tel: (94) 11 2429 100 Fax: (94) 11 2429 199

www.ashaphillip.net/home.htm INDIA

PhillipCapital (India) Private Limited No. 1, 18th Floor, Urmi Estate, 95 Ganpatrao Kadam Marg, Lower Parel West, Mumbai 400013 Tel: (9122) 2300 2999 Fax: (9122) 6667 9955 www.phillipcapital.in



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