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INSTITUTIONAL EQUITY RESEARCH

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Jubilant Food works (JUBI IN)

Take a bite before “double digit SSS growth” kicks in

INDIA | FMCG | Company Update

18 December 2017

We upgrade Jubilant Food works to BUY (34% upside) from neutral rating:

Improved product proposition shall drive double digit volume led SSS growth till end-FY19.

Our ground checks indicate cost efficiencies undertaken (+ measures likely to be taken) shall almost double EBITDA margin from 9.7% in FY17 to 16% in FY20.

Combination of Improving SSS growth + Cost rationalization = Valuation rerating. JUBI is poised for a structural double-digit SSS growth and its margin gains are likely to accelerate in the medium term. We believe the troika of (1) focus on improving product proposition and consumer experience, (2) cost-efficiencies programme and (3) increased traction on the online channel will almost double its EBITDA margin from 9.7% in FY17 to 16% in FY20. We believe our EBITDA margin estimates are conservative and factors like adoption of cloud kitchen, tie-up with online food aggregators, and expansion of its Transport and Travel channel remain upside risks to our estimates. Healthy double-digit SSS growth to continue in the medium term: Our channel checks indicate that JUBI has seen low-teen (11-12%) SSS growth in October and November. We expect this to accelerate in December as the management runs media campaign in the second half of December, highlighting Everyday Value (EDV) offer and night deliveries during the festive/holiday season. Consumer review on various social media platforms corroborates our view of solid consumer acceptance on new product offerings. We believe the appointment of Mr Anand Thakur as Chief Digital Officer and improved functionality of Domino’s mobile app (GPS-based store locator and digital wallet) will strengthen its digital analytics capabilities and in turn drive margin-accretive online sales. Cost efficiencies showing up: JUBI’s EBITDA margin already expanded c.330bps yoy in 1HFY18 to 12.9%; in our assessment, a large part of margin gains are due to management capability of extracting cost synergies and are sustainable in the medium term. Our ground-level checks suggest: (1) payment to temporary delivery personnel on per delivery basis (Rs 50 per delivery), (2) discontinuation of discounts (at 40%) to employees/managers on pizza purchases, (3) splitting of shifts for stores doing night delivery, (4) closing down unprofitable stores, (5) substantial reduction in Dunkin Donuts’ format losses (~Rs 200mn in 1HFY18 from ~Rs 320mn in 1HFY17), and (6) optimization of ad spends is driving margin improvement. Significant room exists for margin expansion: JUBI’s Q2 margins were 14.1% and we believe there is significant room for expansion (it delivered 17.5% margin in FY2013, when its number of stores were half at 576 vs. the current strength of 1,125). We believe these are the upside risks to our estimates: (1) adoption of cloud kitchen, (2) tie-up with online food aggregators, (3) renegotiating rental terms with landlords by giving higher deposits, (4) expansion of margin-accretive night deliveries into new cities, (5) expansion of its Transport and Travel vertical by serving more railway stations/highways. Valuations reasonable in the context of improving operating performance: We believe JUBI provides a favorable risk-reward for long-term investors to add positions, as its combination of double-digit SSS growth, focus on extracting cost synergies, and vigor of the new management towards improving operating performance will drive 53% PAT CAGR over FY17-20. We increase our EBITDA estimates for FY18/19 by 6%/5% respectively and upgrade JUBI to BUY with a target of Rs 2,300 (24x December 2019 EV/EBITDA) given 37% EBITDA CAGR over FY17-20e and sharp improvement in return profile (ROIC to quadruple from 10% in FY17 to almost 44% in FY20). Downside risk: Stake sale by promoter group for debt-repayment obligations of its group entity may keep stock under pressure.

Buy (Upgrade) CMP RS 1720 TARGET RS 2300 (34%) COMPANY DATA

O/S SHARES (MN) : 66

MARKET CAP (RSBN) : 113

MARKET CAP (USDBN) : 1.8

52 - WK HI/LO (RS) : 1832 / 761

LIQUIDITY 3M (USDMN) : 25.1

PAR VALUE (RS) : 10

SHARE HOLDING PATTERN, %

Sep 17 Jun 17 Mar 17

PROMOTERS : 44.9 44.9 45.0

FII / NRI : 32.3 29.4 28.9

FI / MF : 10.3 12.0 13.3

NON PRO : 2.9 2.9 2.3

PUBLIC & OTHERS : 9.5 10.8 10.6

PRICE PERFORMANCE, %

1MTH 3MTH 1YR

ABS -2.6 20.5 104.7

REL TO BSE -3.0 17.3 78.4

PRICE VS. SENSEX

Source: Phillip Capital India Research

KEY FINANCIALS

Rs mn FY17 FY18E FY19E FY20E

Net Sales 25,461 29,300 34,561 39,829 EBITDA 2,466 4,041 4,966 6,364 Net Profit 794 1,627 2,061 2,853 EPS, Rs 12.0 24.7 31.3 43.3 PER, x 142.8 69.7 55.0 39.8 EV/EBIDTA, x 45.9 27.6 22.0 16.7 P/BV, x 13.3 11.4 10.0 8.5 ROE, % 9.3 16.4 18.2 21.3

Source: PhillipCapital India Research Est. Vishal Gutka (+ 9122 6246 4118) [email protected] Naveen Kulkarni & Preeyam Tolia Change of Analyst: We transfer the coverage of JUBI, for better utilization of our resources.

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Jubilant Food BSE Sensex


JUBILANT FOODWORKS COMPANY UPDATE

Expecting double digit SSS growth to continue in medium term We believe Jubilant Food works is poised for a double digit SSS growth in the medium term driven by 1) improved product proposition (Everyday Value offer, making it more affordable), 2) favorable base effect (Jubilant SSS had declined by 3.3% and 7.5% in 3QFY17 and 4QFY17 respectively) on account of demonetization and 3) price hikes (our analysis suggest that average 5% price hikes taken in Mid- November, 2017) to offset denial of Input tax credit (ITC). Management highlighted that it has been able to cover part of ITC loss through price adjustments and expect volume growth to take care of the remaining losses.

Domino’s Pizza and McD have seen sharp recovery in 1HFY18 post demonetization

Source: Company, Westlife Development, PhillipCapital India Research

Expect Double digit volume driven SSS growth to continue from 2HFY18 to FY19

Source: Company, PhillipCapital India Research

4.6 3.2

2.0 2.9

(3.2)

4.2

(3.3)

(7.5)

6.5 5.5

(4.9)

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1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18

Jubilant Foodworks Westlife Development

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(2.4)

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Jubilant Foodworks - SSSG (%)



Improved product proposition gathering solid consumer acceptance Jubilant Food works used to give BOGO offers (Buy One Pizza Get one free) depending upon demand trends and consumer sentiments. But this lead a lot of volatility in sales as customers ordered only when such offers were on the anvil. The new management team under the leadership of Mr. Pratik Pota have decided to discontinue this practice and launched Everyday Value offer (from April, 2017) offering medium size pizzas at INR 199 (33% discount to erstwhile price). This offer is available only if consumer buys two medium size pizzas and new pizza offerings include crunchier crust, increased quantity of cheese and toppings and better quality sauce. Management in 2QFY18 con-call highlighted that business has gained solid momentum post the company started advertising its pizza upgrades/ EDV in a big way starting from 10

th August, 2017. We believe there is huge divergence in SSS

growth from 10th

August to 30th

September,2017 vs. SSS growth delivered from 1st

July,2017 to 10

th August,2017 in the Q2FY18 results.

Based on our channel checks across the stores in Mumbai and analyzing consumer reviews on various social media platforms revealed that Everyday Value (EDV) scheme is gaining good consumer acceptance. Domino’s Pizza has recently started a pilot project for offering regular size pizza at Rs 99 in the state of Tamil Nadu (40% discount to erstwhile price) and is available only if consumer buy 2 pizzas. We believe roll-out of this pilot project on Pan-India basis can significantly drive volumes and remains an upside risks to SSS estimates.



Price intervention in regular size pizza’s can significantly drive volume

Reviews

Source: Zomato, PhillipCapital India Research

High decibel advertising in December 2017 highlighting night deliveries and value offerings to set momentum for 2018 Our channel checks indicate that Jubilant’s management is planning to run a massive media campaign in 2

nd half of December to highlight night delivery capabilities and its

value offerings. Store managers have been given aggressive sales targets specifically for two days – 25

th December and 31

st December vs. previous year, since it was not

doing night deliveries in the base quarter (3QFY17) and this can significantly drive SSS in 3QFY18 (our expectation for 3QFY18 SSS growth is a whopping 13%).



Day Target to be achieved

25th December (Christmas) 5-6 times of daily sales

31st December (New year) 7-8 times of daily sales

Creating more opportunities for Pizza consumption Frequency of consumption and penetration for pizza is significantly lower vs. developed countries and the management acknowledges this. It is focusing on night deliveries and Transport and Travel channel (highways and railways) to create more opportunities for pizza consumption. Our discussion with employees at Domino’s revealed that serving pizza slices to commuters in Mumbai metro has met with decent success. Domino’s pizza has recently expanded its tie-up with IRCTC and is now serving 185 railway stations (vs.130 stations earlier). Increased focus on online channel to further drive margin We believe domain expertise (see table below) of Mr. Anand Thakur (as Chief Digital Officer) will help to significantly strengthen the digital capabilities (7 years experience in digital and technology side) which will further improve the uptake of online orders.

Anand’s Experience in E-commerce ventures to strengthen digital capabilities

Work period Company Name Yrs Exp. Designation

2017-present Jubilant Foodworks Current Chief Digital Officer

2016-2017 Koovs 1yr 6M CTO

2015-2016 Lenskart Solutions 2yrs 8M VP Engineering

2011-2013 Easy Ration Retail Pvt. Ltd 2yrs 4M CEO & Co-Founder

2005-2012 Adobe Systems 6yrs 7M Computer Scientist

2004-2005 Petronet Systems 1 Software Engineer

2003-2004 Infosys 1yr 2M Software Engineer

Source: Linkedin, PhillipCapital India Research

Contribution of online orders to delivery sales has almost doubled in the past two years from 33% in 1QFY16 to 57% in 2QFY18 and we believe contribution to inch upto 75% by end-FY20 owing to availability of low-cost smart phones and increased internet penetration. Online orders are margin accretive at the company level since it eliminates staff required to take down orders and has relatively higher ticket size as it is very easy to push customized orders using consumer analytics.

Solid traction in online orders in past two quarters driving margin improvement


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Online ordering (c. to delivery sales)

Mobile ordering (c. to online sales )



Cost measures bearing fruits now Cost efficiencies showing up We agree with the management view that a significant part of margin gains are more structural in nature. It has hardly retained any benefits arising out of favorable GST rate (prior to reduction in GST rate from 18% (with ITC) to 5% (without ITC)). We went on the ground to analyze as to what measures company has taken so far to reduce operating cost structure and post our visit, we came enthused and optimistic about new management capabilities of driving cost efficiencies. Appointment of Temporary delivery personnel on per delivery basis Jubilant used to appoint temporary staff on full day basis in order to provide better consumer experience during weekends, public holidays and peak demand period. Our ground check suggests that management has discontinued this policy and now has started practice of appointing delivery personnel and making payment on per delivery basis (Rs 50 per delivery). Our checks revealed temporary delivery personnel gets net Rs 39-40 per delivery post deduction of statutory levies (PF, ESIC etc).

Pay per use model, splitting of shifts has lead to employee cost rationalization at stores


Effective utilization of workforce for night deliveries Jubilant Food works started night delivery in Gurgaon in 2017 and lately expanded it to Mumbai, Noida, Bangalore and Pune etc. In those stores in which Domino’s pizza is doing night deliveries, the management has divided staff strength into two shifts; with majority of the staff being deployed in late night shift (since 2/3 of day’s business happens in evening); and we also noticed a good number of stores remained open till 1 am vs. claim of 3 AM. We believe sales from night deliveries are highly margin accretive since it is being done using existing staff. Discontinuation of discounts to employees/ Store manager Employees used to get 40% discount on pizza purchases made from Domino’s; however these discount coupons were restricted to two coupons per month. Store manager had discretion of offering ad-hoc discount based on value / quantum of order. Our channel checks suggest that Jubilant has discontinued with these practices from 2QFY18.

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Tight lid on operating costs Our ground checks also revealed that some of the stores have been fitted with sensors, which enables management to keep energy costs in check and cut back on operational costs. Management in 2QFY18 con-call highlighted that due to optimization of advertisement costs on back of rate negotiation with media agencies has enabled them to attract higher eyeballs at same costs. We believe five year agreement done with Wipro in 2016 for reducing energy and other operational costs shall start showing results in coming quarters.

Optimization of ad spends, stringent control over energy costs driving reduction in operating costs


Closure of unprofitable Domino’s stores Management appointed AT Kearney as external consultant in 2017 to drive cost synergies. Jubilant has closed down 20 Domino’s stores in past four quarters and we expect more closures in coming quarters if stores do not meet unit economics criteria and in turn drive margins at company level.

Domino’s has closed down 20 stores in past four quarters


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Other expenses (% sales)

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Store closure (Dominos)



Scaling down of Dunkin Donuts format Dunkin donuts had a negative impact of 225-250bps on company’s EBITDA margin FY17. Management intends to reduce losses by half in FY2018 by closing down unprofitable stores (closed 37 stores in last 7-8 quarters), and it is targeting operational break-even by FY2019. We believe the following measures will help in operational turnaround of Dunkin Donuts format 1) Focusing on high – margin donuts and beverages. Management is also focusing

on simplifying product portfolio which allows them to serve food that does not require much labour at the store level for assembly.

2) Reducing the size of stores thereby saving in rental outgo. 3) Rationalization of ad spends with greater emphasis on digital media and store

level marketing.

Jubilant Foodworks has cumulatively closed down 37 stores in past two years


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4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18

Store closure (Dunkin)



Significant room exists for margin expansion Jubilant margins expanded 330 bps y-y in 1HFY18 to 12.9% and we believe there exists significant room for margins to expand further as company has delivered 17.5% EBITDA margin in FY13; when nos. of stores were almost half vs. current strength of 1,125 stores. Retail, being fixed cost business – improving SSS growth can drive significant operating leverage. We believe 1) adoption of cloud kitchen, 2) tie-up with online food aggregators, 3) re-negotiating rental terms with landlord by giving higher deposits, 4) expansion of margin accretive night deliveries into new cities, 5) expanding its Transport and Travel vertical by serving more railway stations/highways and 6) in –house manufacturing of some raw materials at newly commissary based out in Noida remains upside risks to our margins. Adoption of cloud kitchen We suggest Jubilant Foodworks management to start cloud kitchen platform on pilot basis in densely populated areas as it leads to – 1) significant savings on rental costs and 2) enhance store/customer reach. Faasos, has been able to significantly cut down its losses post adoption of cloud kitchen in 2016. Kindly refer the following link for more details (https://economictimes.indiatimes.com/small-biz/startups/how-cloud-kitchens-are-helping-faasos-survive-the-foodtech-bloodbath/articleshow/61511937.cms)

Faasos has been able to significantly reduce its losses from Rs 1 bn in FY16 to Rs 690 m in FY17

Source: Economictimes, PhillipCapital India Research

Re-negotiating rental terms with landlord by giving them higher deposits We believe rental re-negotiation with landlord on favorable terms; given that Input tax credit on rent is no longer available can significantly boost margin profile for the company. GST is payable @18% if rent paid by tenant (Jubilant Foodworks) to landlord exceeds Rs 2 m p.a. Kindly note that the below mentioned thesis only hold true if tenant (in our case Jubilant Foodworks) is not liable to pay GST under reverse charge mechanism. As of now, government has stopped collecting GST under reverse charge mechanism till 31

st March, 2018. Our discussion with financial experts, government is likely to

bring reverse charge mechanism post general election (to be held in April – May, 2019) since unregistered dealers form core of its vote bank and it is unlikely to further disturb business given subdued economic environment.

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FY12 FY13 FY14 FY15 FY16 FY17 FY18E

Revenue (Rs mn) PAT (Rs mn)

https://economictimes.indiatimes.com/small-biz/startups/how-cloud-kitchens-are-helping-faasos-survive-the-foodtech-bloodbath/articleshow/61511937.cms

https://economictimes.indiatimes.com/small-biz/startups/how-cloud-kitchens-are-helping-faasos-survive-the-foodtech-bloodbath/articleshow/61511937.cms



As per our estimates, Jubilant Foodworks is expected to have cash balance of Rs 4.4 bn by end of FY19 and since majority of commissary capex behind us and management going slow on store expansion, we do not foresee any problem in company shelling out additional deposit of INR 10 m per store. (Kindly see the following table for more details)

Our Analysis shows that Domino’s Pizza can save Rs 0.5 m per store

Rs mn Current Proposed

Average sales per store 24 24

Average rental per store (A) 2.8 -

GST on Rent @ 18% (B) 0.5 -

Revised Rental terms with landlord ('C) - 2.0

Additional deposit to be given to Landlord to offset reduction in rent outflow - 10

Interest earned by Landlord @ 8 % p.a on additional deposit (D) - 0.8

Total costs to Jubilant Foodworks (A+B) 3.3 -

Total costs to Jubilant Foodworks (C+D) - 2.8

Savings per store (In m) 0.5

Income earned by Landlord in Current context (A) 2.8

Income earned by Landlord in Proposed context (C+D) 2.8

Source: PhillipCapital India Research

Tie-up with online food delivery players We believe there exists significant opportunity to further rationalize employee costs, if management plans to tie-up with online food tech delivery players (Swiggy, Zomato, Food Panda etc). Our discussion with ex-employees of online food tech players suggests that they charge 8% of sales as delivery fees to large QSR chains owing to huge quantum of orders. Employee’s costs constituted 23% of sales in FY2017, with significant part of employees being deployed in delivery operations. Expansion of margin accretive night deliveries into newer cities / mining in existing cities Jubilant Food works started night delivery in Gurgaon in early-2017 and lately expanded it to Mumbai, Noida, Bangalore and Pune. We believe expansion of night deliveries into other metro cities can give further boost to margin since it is done at minimal costs (explained earlier). In – house manufacturing of some raw materials at newly commissary based out in Noida Domino’s pizza plans to commence operations of new commissary based out in Noida by end of FY18, which has capability to serve 600 stores in Northern region. Management in one of the earlier concalls had highlighted that some of the raw materials can be manufactured internally and this can further drive up margins.

Ebitda margin shall almost double over FY17-20e


9.7%

16.0%

-174 bps

346 bps 113 bps

344 bps

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Margin FY17 COGS Staff costs Rent Other expenses

Margin FY20E



Key concerns/ risks Stake sale by promoters to fund debt obligations of Jubilant Consumer India Ratings (credit rating agency) (https://www.vccircle.com/qia-baring-to-exit-rmz-jubilant-consumer-may-pare-stake-in-jubilant-foodworks/) hinted that promoter group may pare some stake in Jubilant Food works to meet debt obligations of group entity. We believe, stake sale in short term is unlikely since debt obligation (Rs 3 bn) is due for payment in FY2019 and it also owns 3.5% stake in Jubilant Life sciences (valued at Rs 3.7b ; Mcap – Rs 107b). Slowdown in store addition Jubilant Food works has been adding 110+ stores on an average since last 5 years; however it plans to add 30-40 stores in FY18. Management highlighted it plans strengthen its store opening process and take variety of factors such as economic data, demographic data etc. into consideration before opening a new store We believe, there is higher probability that company may again go back to its historical run rate (110 stores per annum) of adding stores from FY20 onwards once it gets its house in order with regards to SSS growth and margin. Improper capital allocation may hurt financial prospects We expect cash balance to inch upto Rs 7.5bn in FY20 and any capex intensive diversification / unrelated diversification can weigh on stock price. We believe ideal solution, in absence of any opportunities for growth, will be higher dividend payouts to shareholders.

https://www.vccircle.com/qia-baring-to-exit-rmz-jubilant-consumer-may-pare-stake-in-jubilant-foodworks/

https://www.vccircle.com/qia-baring-to-exit-rmz-jubilant-consumer-may-pare-stake-in-jubilant-foodworks/



Britannia case study

Britannia stock rallied 5x post delivery in margins


During FY08-11, Britannia’s margins remained under pressure (declined from 8.5% in FY08 to 4.7% in FY11) owing to raw material inflation and increased competitive intensity. Britannia consolidated margin almost tripled from 5.2% in FY12 to 14.3% in FY17 on back of consolidating manufacturing units, increased in-house manufacturing, focus on brand-building, filing product gaps, eliminate wastage by implementing best management practices (Kaizen, TQM etc), distribution expansion in relatively weaker areas (Hindi Heartland) and focus on premiumization and innovation. Britannia stock has moved up almost 5x in past 5 years, significant part of which has also come due to expansion in PE multiple, in line with other consumer companies. We have enough confidence in Jubilant Foodworks operations turnaround story and believe similar theme might play out. Reasonable valuations in context of operation driven earnings recovery Jubilant is poised for structural double digit SSS growth and margin gains will accelerate going forward in medium term. Our channel checks indicate that Domino Pizza is likely to see double digit SSS growth in medium term driven by improved product proposition, favorable base effect and price hikes undertaken to offset denial of Input tax credit. We expect Jubilant EBITDA margin almost to double from 9.7% in FY17 to 16% in FY20 driven by reduction in manpower costs, optimization of ad spends, decline in discounts/ rebates, re-negotiation of rentals on favorable terms with landlord and partially off-set by increased RM costs. We increase our EBITDA estimates by 6/5% for FY18/19 respectively and introduce FY20 estimates and change our valuation methodology from PE to EV/EBITDA. Jubilant Food works net profit margin has declined from 9.8% in FY11 to 3.1% in FY17 due to subdued economic environment, aggressive competition from well-funded online aggregators, excessive price hikes undertaken to offset operating cost inflation thereby losing its value for money equation and sharp addition in store addition (store count almost doubled in past four years).

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Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17

Britannia consol margin almost doubled to 9% in 1QFY14, but stock did not gave any materail reaction , since there was lack of clarity from management on margin expansion

Britannia stock graually started moving after it delivered 9% margin for entire FY14

Britannia stock has rallied 5x since its margins almost tripled from 5% in FY12 to 14% in FY17



We believe, earnings (net income) is not appropriate metric on which it shall be evaluated and valuations will look exorbitantly expensive since company is going thorough operation turnaround phase and various operating measures undertaken will give results in medium to long –term. Jubilant Food works has traded at average 26x EV/ EBITDA over FY13-FY17 (on year forward basis), despite subdued SSS growth and EBITDA margins declining from 17.4% in FY13 to 9.7% in FY17. We upgrade Jubilant Food works from Neutral to BUY rating and conservatively value Jubilant Food works with TP of Rs 2300 (24x EV/EBITDA Dec-19). 1) Traction in SSS growth post FY19 on back of product innovation/price intervention and 2) clarity on Domino store addition in FY19/FY20 remains upside risk to our EV/ EBITDA multiple.

Jubilant Foodworks: EV/ EBITDA valuation chart

Source: Bloomberg, PhillipCapital India Research

Consumer discretionary valuation matrix

CAGR (%)

MCap ______P/E______ ____EV/EBITDA____ ____ROE____ Sales EBITDA PAT

(bn) FY18E FY19E FY20E FY18E FY19E FY20E FY19E FY20E FY17-20E FY17-20E FY17-20E

Asian Paints * 1,086 51 43 36 32 27 23 28 28 15.7 15.3 15.5

Titan* 747 66 52 43 45 36 30 26 27 21.3 29.6 34.8

Jubilant Foodworks 116 70 55 40 28 22 17 18 21 16.1 37.2 53.2

United Spirits* 495 90 63 49 45 36 30 27 26 7.8 20.3 114.2

Source: * Bloomberg consensus estimates, PhillipCapital India Research

P/E Band EV/EBITDA band

Source: PhillipCapital India Research Estimate

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Financials Income Statement Y/E Mar, Rs mn FY17 FY18e FY19e FY20e

Net sales 25,461 29,300 34,561 39,829

Growth, % 6 15 18 15

Raw material expenses -6,992 -8,341 -9,971 -11,630

Employee expenses -5,845 -6,153 -6,912 -7,767

Rent -2,986 -3,106 -3,888 -4,222

Other Operating expenses -7,171 -7,659 -8,824 -9,846

EBITDA (Core) 2,466 4,041 4,966 6,364

Growth, % (9.3) 63.9 22.9 28.2

Margin, % 9.7 13.8 14.4 16.0

Depreciation -1,512 -1,780 -2,080 -2,326

EBIT 954 2,261 2,885 4,038

Growth, % (35.3) 136.9 27.6 40.0

Margin, % 3.7 7.7 8.3 10.1

Interest paid 0 0 0 0

Other Non-Operating Income 145 167 192 220

Non-recurring Items -122 0 0 0

Pre-tax profit 978 2,428 3,077 4,258

Tax provided -305 -801 -1,015 -1,405

Profit after tax 673 1,627 2,061 2,853

Others (Minorities, Associates) 0 0 0 0

Net Profit 673 1,627 2,061 2,853

Growth, % (25.5) 104.8 26.7 38.4

Net Profit (adjusted) 794 1,627 2,061 2,853

Unadj. shares (m) 66 66 66 66

Wtd avg shares (m) 66 66 66 66

Balance Sheet Y/E Mar, Rs mn FY17 FY18e FY19e FY20e

Cash & bank 324 1,857 4,415 7,452

Debtors 156 161 189 218

Inventory 587 642 757 873

Loans & advances 1,535 1,766 2,083 2,401

Other current assets 327 327 327 327

Total current assets 2,930 4,753 7,773 11,272

Investments 1,680 1,680 1,680 1,680

Gross fixed assets 10,654 12,494 13,629 15,164

Less: Depreciation -2,541 -4,321 -6,402 -8,728

Add: Capital WIP 598 598 598 598

Net fixed assets 8,711 8,771 7,826 7,035

Total assets 12,628 14,511 16,585 19,293

Current liabilities 3,905 4,400 5,049 5,698

Provisions 201 201 201 201

Total current liabilities 4,106 4,601 5,249 5,899

Total liabilities 4,106 4,601 5,249 5,899

Paid-up capital 659 659 659 659

Reserves & surplus 7,862 9,251 10,676 12,735

Shareholders’ equity 8,522 9,910 11,336 13,394

Total equity & liabilities 12,628 14,511 16,585 19,293

Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY17 FY18e FY19e FY20e

Pre-tax profit 978 2,428 3,077 4,258 Depreciation 1,512 1,780 2,080 2,326 Chg in working capital 60 204 187 188 Total tax paid -341 -801 -1,015 -1,405 Cash flow from operating activities 2,208 3,611 4,329 5,367 Capital expenditure -1,915 -1,840 -1,135 -1,535 Chg in investments -155 0 0 0 Cash flow from investing activities -2,071 -1,840 -1,135 -1,535 Free cash flow 137 1,771 3,194 3,832 Equity raised/(repaid) 2 0 0 0 Dividend (incl. tax) -198 -238 -636 -795 Cash flow from financing activities -318 -238 -636 -795 Net chg in cash -181 1,533 2,558 3,037

Valuation Ratios

FY17 FY18e FY19e FY20e

Per Share data

EPS (INR) 12.0 24.7 31.3 43.3

Growth, % (25.7) 104.8 26.7 38.4

Book NAV/share (INR) 129.2 150.3 171.9 203.1

FDEPS (INR) 12.0 24.7 31.3 43.3

CEPS (INR) 36.8 51.7 62.8 78.5

CFPS (INR) 31.3 52.2 62.7 78.0

DPS (INR) 2.5 3.0 8.0 10.0

Return ratios

Return on assets (%) 5.5 12.0 13.3 15.9

Return on equity (%) 9.3 16.4 18.2 21.3

Return on capital employed (%) 8.0 17.3 19.0 22.7

Turnover ratios

Asset turnover (x) 3.5 4.0 5.2 7.1

Sales/Total assets (x) 2.1 2.2 2.2 2.2

Sales/Net FA (x) 3.0 3.4 4.2 5.4

Working capital/Sales (x) (0.1) (0.1) (0.0) (0.0)

Fixed capital/Sales (x) - - - -

Receivable days 2.2 2.0 2.0 2.0

Inventory days 8.4 8.0 8.0 8.0

Payable days 50.3 52.9 53.2 54.1

Working capital days (18.6) (18.7) (17.9) (17.2)

Liquidity ratios

Current ratio (x) 0.8 1.1 1.5 2.0

Quick ratio (x) 0.6 0.9 1.4 1.8

Total debt/Equity (%) - - - -

Net debt/Equity (%) (3.8) (18.7) (39.0) (55.6)

Valuation

PER (x) 142.8 69.7 55.0 39.8

PEG (x) - y-o-y growth (5.6) 0.7 2.1 1.0

Price/Book (x) 13.3 11.4 10.0 8.5

EV/Net sales (x) 4.4 3.8 3.2 2.7

EV/EBITDA (x) 45.9 27.6 22.0 16.7

EV/EBIT (x) 118.5 49.3 37.8 26.2



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%.

F-15

F-15 J-15 A-15

S-15

N-15

F-16

B (TP 1300) N (TP 1065) N (TP 1030)

S (TP 800)

N (TP 1200)

N (TP 1700)

500

700

900

1100

1300

1500

1700

1900

2100

N-14 J-15 F-15 A-15 M-15

J-15 A-15 S-15 N-15 D-15 F-16 M-16

M-16

J-16 A-16 S-16 N-16 D-16 J-17 M-17

A-17 J-17 J-17 S-17 O-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) 6246 4116

Paresh Jain (9122) 6246 4114

Logistics, Transportation & Midcap

Telecom

Consumer & Retail

Vikram Suryavanshi (9122) 6246 4111



Media

Preeyam Tolia (9122) 6246 4129


Technicals

Vishal Gutka (9122) 6246 4118

Vishal Gutka (9122) 6246 4118

Subodh Gupta, CMT (9122) 6246 4136

Cement

Metals

Production Manager

Vaibhav Agarwal (9122) 6246 4124

Dhawal Doshi (9122) 6246 4128

Ganesh Deorukhkar (9122) 6667 9966

Economics

Vipul Agrawal (9122) 6246 4127

Editor

Anjali Verma (9122) 6246 4115

Mid-Caps

Roshan Sony 98199 72726

Shruti Bajpai (9122) 6246 4135

Deepak Agarwal (9122) 6246 4112

Sr. Manager – Equities Support

Oil & Gas

Rosie Ferns (9122) 6667 9971

Sabri Hazarika (9122) 6246 4130

Sales & Distribution

Corporate Communications

Ashvin Patil (9122) 6246 4105

Asia Sales

Zarine Damania (9122) 6667 9976

Kishor Binwal (9122) 6246 4106

Dhawal Shah 8522 277 6747

Bhavin Shah (9122) 6246 4102

Sales Trader

Ashka Mehta Gulati (9122) 6246 4108

Dilesh Doshi (9122) 6667 9747

Execution

Archan Vyas (9122) 6246 4107

Suniil Pandit (9122) 6667 9745

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) 2483 1919 Fax: (9122) 6667 9955 www.phillipcapital.in

http://www.phillip.com.sg/

http://www.poems.com.my/

http://www.phillip.com.hk/

http://www.phillip.co.jp/

http://www.phillip.co.id/

http://www.phillip.com.cn/

http://www.phillip.co.th/

http://www.kingandshaxson.com/

http://www.kingandshaxson.com/

http://www.phillipcapital.com.au/

http://www.ashaphillip.net/home.htm

http://www.phillipcapital.in/



Disclosures and Disclaimers PhillipCapital (India) Pvt. Ltd. has three independent equity research groups: Institutional Equities, Institutional Equity Derivatives, and Private Client Group. This report has been prepared by Institutional Equities Group. The views and opinions expressed in this document may, may not match, or may be contrary at times with the views, estimates, rating, and target price of the other equity research groups of PhillipCapital (India) Pvt. Ltd.

This report is issued by PhillipCapital (India) Pvt. Ltd., which is regulated by the SEBI. PhillipCapital (India) Pvt. Ltd. is a subsidiary of Phillip (Mauritius) Pvt. Ltd. References to "PCIPL" in this report shall mean PhillipCapital (India) Pvt. Ltd unless otherwise stated. This report is prepared and distributed by PCIPL for information purposes only, and neither the information contained herein, nor any opinion expressed should be construed or deemed to be construed as solicitation or as offering advice for the purposes of the purchase or sale of any security, investment, or derivatives. The information and opinions contained in the report were considered by PCIPL to be valid when published. The report also contains information provided to PCIPL by third parties. The source of such information will usually be disclosed in the report. Whilst PCIPL has taken all reasonable steps to ensure that this information is correct, PCIPL does not offer any warranty as to the accuracy or completeness of such information. Any person placing reliance on the report to undertake trading does so entirely at his or her own risk and PCIPL does not accept any liability as a result. Securities and Derivatives markets may be subject to rapid and unexpected price movements and past performance is not necessarily an indication of future performance.

This report does not regard the specific investment objectives, financial situation, and the particular needs of any specific person who may receive this report. Investors must undertake independent analysis with their own legal, tax, and financial advisors and reach their own conclusions regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realised. Under no circumstances can it be used or considered as an offer to sell or as a solicitation of any offer to buy or sell the securities mentioned within it. The information contained in the research reports may have been taken from trade and statistical services and other sources, which PCIL believe is reliable. PhillipCapital (India) Pvt. Ltd. or any of its group/associate/affiliate companies do not guarantee that such information is accurate or complete and it should not be relied upon as such. Any opinions expressed reflect judgments at this date and are subject to change without notice.

Important: These disclosures and disclaimers must be read in conjunction with the research report of which it forms part. Receipt and use of the research report is subject to all aspects of these disclosures and disclaimers. Additional information about the issuers and securities discussed in this research report is available on request.

Certifications: The research analyst(s) who prepared this research report hereby certifies that the views expressed in this research report accurately reflect the research analyst’s personal views about all of the subject issuers and/or securities, that the analyst(s) have no known conflict of interest and no part of the research analyst’s compensation was, is, or will be, directly or indirectly, related to the specific views or recommendations contained in this research report.

Additional Disclosures of Interest: Unless specifically mentioned in Point No. 9 below: 1. The Research Analyst(s), PCIL, or its associates or relatives of the Research Analyst does not have any financial interest in the company(ies) covered in

this report. 2. The Research Analyst, PCIL or its associates or relatives of the Research Analyst affiliates collectively do not hold more than 1% of the securities of the

company (ies)covered in this report as of the end of the month immediately preceding the distribution of the research report. 3. The Research Analyst, his/her associate, his/her relative, and PCIL, do not have any other material conflict of interest at the time of publication of this

research report. 4. The Research Analyst, PCIL, and its associates have not received compensation for investment banking or merchant banking or brokerage services or for

any other products or services from the company(ies) covered in this report, in the past twelve months. 5. The Research Analyst, PCIL or its associates have not managed or co-managed in the previous twelve months, a private or public offering of securities for

the company (ies) covered in this report. 6. PCIL or its associates have not received compensation or other benefits from the company(ies) covered in this report or from any third party, in

connection with the research report. 7. The Research Analyst has not served as an Officer, Director, or employee of the company (ies) covered in the Research report. 8. The Research Analyst and PCIL has not been engaged in market making activity for the company(ies) covered in the Research report. 9. Details of PCIL, Research Analyst and its associates pertaining to the companies covered in the Research report:

Sr. no. Particulars Yes/No

1 Whether compensation has been received from the company(ies) covered in the Research report in the past 12 months for investment banking transaction by PCIL

No

2 Whether Research Analyst, PCIL or its associates or relatives of the Research Analyst affiliates collectively hold more than 1% of the company(ies) covered in the Research report

No

3 Whether compensation has been received by PCIL or its associates from the company(ies) covered in the Research report No

4 PCIL or its affiliates have managed or co-managed in the previous twelve months a private or public offering of securities for the company(ies) covered in the Research report

No

5 Research Analyst, his associate, PCIL or its associates have received compensation for investment banking or merchant banking or brokerage services or for any other products or services from the company(ies) covered in the Research report, in the last twelve months

No

Independence: PhillipCapital (India) Pvt. Ltd. has not had an investment banking relationship with, and has not received any compensation for investment banking services from, the subject issuers in the past twelve (12) months, and PhillipCapital (India) Pvt. Ltd does not anticipate receiving or intend to seek compensation for investment banking services from the subject issuers in the next three (3) months. PhillipCapital (India) Pvt. Ltd is not a market maker in the securities mentioned in this research report, although it, or its affiliates/employees, may have positions in, purchase or sell, or be materially interested in any of the securities covered in the report.

Suitability and Risks: This research report is for informational purposes only and is not tailored to the specific investment objectives, financial situation or particular requirements of any individual recipient hereof. Certain securities may give rise to substantial risks and may not be suitable for certain investors. Each investor must make its own determination as to the appropriateness of any securities referred to in this research report based upon the legal, tax and accounting considerations applicable to such investor and its own investment objectives or strategy, its financial situation and its investing experience. The value of any security may be positively or adversely affected by changes in foreign exchange or interest rates, as well as by other financial, economic, or political factors. Past performance is not necessarily indicative of future performance or results.



Sources, Completeness and Accuracy: The material herein is based upon information obtained from sources that PCIPL and the research analyst believe to be reliable, but neither PCIPL nor the research analyst represents or guarantees that the information contained herein is accurate or complete and it should not be relied upon as such. Opinions expressed herein are current opinions as of the date appearing on this material, and are subject to change without notice. Furthermore, PCIPL is under no obligation to update or keep the information current. Without limiting any of the foregoing, in no event shall PCIL, any of its affiliates/employees or any third party involved in, or related to computing or compiling the information have any liability for any damages of any kind including but not limited to any direct or consequential loss or damage, however arising, from the use of this document.

Copyright: The copyright in this research report belongs exclusively to PCIPL. All rights are reserved. Any unauthorised use or disclosure is prohibited. No reprinting or reproduction, in whole or in part, is permitted without the PCIPL’s prior consent, except that a recipient may reprint it for internal circulation only and only if it is reprinted in its entirety.

Caution: Risk of loss in trading/investment can be substantial and even more than the amount / margin given by you. Investment in securities market are subject to market risks, you are requested to read all the related documents carefully before investing. You should carefully consider whether trading/investment is appropriate for you in light of your experience, objectives, financial resources and other relevant circumstances. PhillipCapital and any of its employees, directors, associates, group entities, or affiliates shall not be liable for losses, if any, incurred by you. You are further cautioned that trading/investments in financial markets are subject to market risks and are advised to seek independent third party trading/investment advice outside PhillipCapital/group/associates/affiliates/directors/employees before and during your trading/investment. There is no guarantee/assurance as to returns or profits or capital protection or appreciation. PhillipCapital and any of its employees, directors, associates, and/or employees, directors, associates of PhillipCapital’s group entities or affiliates is not inducing you for trading/investing in the financial market(s). Trading/Investment decision is your sole responsibility. You must also read the Risk Disclosure Document and Do’s and Don’ts before investing.

Kindly note that past performance is not necessarily a guide to future performance.

For Detailed Disclaimer: Please visit our website www.phillipcapital.in

For U.S. persons only: This research report is a product of PhillipCapital (India) Pvt Ltd., which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S.-regulated broker-dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances, and trading securities held by a research analyst account.

This report is intended for distribution by PhillipCapital (India) Pvt Ltd. only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by the U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated, and/or transmitted onward to any U.S. person, which is not a Major Institutional Investor. In reliance on the exemption from registration provided by Rule 15a-6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain

business with Major Institutional Investors, PhillipCapital (India) Pvt Ltd. has entered into an agreement with a U.S. registered broker-dealer, Decker & Co, LLC. Transactions in securities discussed in this research report should be effected through Decker & Co, LLC or another U.S. registered broker dealer.

If Distribution is to Australian Investors This report is produced by PhillipCapital (India) Pvt Ltd and is being distributed in Australia by Phillip Capital Limited (Australian Financial Services Licence No. 246827).

This report contains general securities advice and does not take into account your personal objectives, situation and needs. Please read the Disclosures and Disclaimers set out above. By receiving or reading this report, you agree to be bound by the terms and limitations set out above. Any failure to comply with

these terms and limitations may constitute a violation of law. This report has been provided to you for personal use only and shall not be reproduced, distributed or published by you in whole or in part, for any purpose. If you have received this report by mistake, please delete or destroy it, and notify the sender immediately.

PhillipCapital (India) Pvt. Ltd. Registered office: No. 1, 18th Floor, Urmi Estate, 95 Ganpatrao Kadam Marg, Lower Parel West, Mumbai 400013

http://www.phillipcapital.in/

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