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Top Research Picks

India Strategy: Q2FY13 Earnings Tracker: So far so good: Sensex PAT

(20/30) up 15%

India Economics: Macro Junction: Policy: [pause]; INR: [weak]; Growth:

[bottom?]

JSW Energy: Limited scope of outperformance; downgrade to SELL

India Cements: Margins disappoint, downgrade to HOLD

Other Research Picks

EnergyPulse: Refinery margins flat; petchem bottoming out

Tech Mahindra: Revenue in line; margin performance drives EPS beat

Morning Buzz

INDIA

6 November 2012

This report has been prepared by Religare Capital Markets Limited or one of its affiliates. If the analyst who authored the report is based in the United Kingdom, then the report has been prepared by Religare Capital Markets (Europe) Limited. 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.

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Q2FY13 Earnings Tracker So far so good: Sensex PAT (20/30) up 15%

We take a quick look at Q2FY13 results so far (till Nov 1st

). A total

of 20 cos. in the Sensex and 85 from the RCML coverage have

reported results, and while Sensex ex-oil revenue growth at

14.3% was below our 16.4% estimate, PAT growth was ahead at

14.8%. Margin performance has also been better than

expectations. For the broader RCML coverage, results were

largely in-line with estimates, with ex-oil revenues/PAT growth at

15.1%/24.4% vs. our estimate of 15.0%/23.6%. Key sectors that

surprised positively on profits include Autos, FMCG, Energy,

Const/Infra, IT, Realty and Metals. Key laggards were Cap

Goods, Banks, Power and Retail. Cement and NBFCs were

largely in-line.

Topline growth slows down: Sensex (ex-oil) Cos so far have posted

revenue growth of 14.3%, below our 16.4% estimates. However,

revenue growth for the broader RCML ex-oil universe at 15.1% was in-

line with estimates, largely driven by Autos, FMCG, Cement, Metals,

Realty, and Media. Sectors that disappointed include Capital Goods,

NBFC, Energy, Const./Infra, Banks, Telecom and Retail.

Margin performance and PAT growth surprise positively: EBITDA

margin for Sensex ex-oil contracted 126bps, albeit lower than our

estimates. However, the broader RCML ex-oil universe posted a margin

expansion of ~100bps. PAT growth also stood ahead of our

expectations, with Sensex ex-oil/RCML ex-oil universe posting PAT

growth of 14.8%/24.4% vs. our estimates of 12.1%/23.6%.

Key winners: Sectors that surprised positively on earnings include 1)

Autos – largely led by MM, 2) FMCG – driven by strong performance

from ITC, 3) Energy – RIL, PLNG reported robust numbers, 4) Const./

Infra – LT reported a strong quarter on higher intl. revenues, 5) IT – yet

another strong quarter from HCLT led by higher margins and TCS on

strong volume growth, 6) Realty – robust performance across the

board, 7) Metals – healthy numbers reported by STLT on lower tax

/interest costs and HZ on better realizations, 8) Media – strong growth

from Z and JAGP.

Key laggards: Sectors that disappointed include 1) Capital Goods:

muted performance across the board, 2) Banks: weak quarter from

PSUs like PNB, BOI even as pvt. banks reported healthy numbers, 3)

Power: While PWGR reported a strong quarter, NTPC reported below-

expected PAT after adjusting for prior period items, and 4) Retail: weak

numbers reported by BATA and SHOP even as TTAN surprised positively

on PAT led by strong jewellery margins.

ERI has started to pick-up: The India Earnings Revision Index, a key

measure of sentiment, has started an upward trend after majority

sectors reporting better-than-expected earnings. However, it still

remains in the negative territory indicating more downgrades than

upgrades. While earnings revision in the upward direction should

continue, we don’t expect a sharp change until we see a meaningful

improvement on the macro front.

Strategy

INDIA

5 November 2012

REPORT AUTHORS

Tirthankar Patnaik, PhD (91-22) 6766 3446

[email protected]

Prerna Singhvi (91-22) 6766 3413

[email protected]

Saloni Agarwal (91-22) 6766 3438

[email protected]

Sensex ex-oil quarterly PAT growth trend

Source: RCML Research

Earnings revision index starting to pick-up

Source: RCML Research

12.1 14.8

(30)

(20)

(10)

0

10

20

30

40

50Q

2F

Y0

9

Q3

FY

09

Q4

FY

09

Q1

FY

10

Q2

FY

10

Q3

FY

10

Q4

FY

10

Q1

FY

11

Q2

FY

11

Q3

FY

11

Q4

FY

11

Q1

FY

12

Q2

FY

12

Q3

FY

12

Q4

FY

12

Q1

FY

13

Q2

FY

13E

Q2

FY

13A

(%)

-75%

-50%

-25%

0%

25%

50%

Oct-08 Jun-09 Feb-10 Oct-10 Jun-11 Feb-12 Oct-12

MSCI India: ERI IBES India: ERI

For further details, refer to our report released 5 November 2012. 2

Macro Junction Policy: [pause]; INR: [weak]; Growth: [bottom?]

We reiterate our negative on the INR in the near-term (expect it to

trade in 53-55 band) on quite simply, a weaker CAD. Hopes of a

revival in Q1 would have to wait, after the weak trade data, and

muted invisibles indicators. Meanwhile, yields have risen with the

RBI preferred inflation over growth on the 30th

, against market

expectations. ECBs maintained tempo in Sep at US$2.7bn.

Services PMI showed strain in Sep, but manufacturing remained

steady, in line with the ‘EightCore’ reading at a strong 5.1%yoy in

Sep (vs. 2.3% in Aug).

Remain negative on INR: Despite the reforms, we remain negative on the

INR and expect it to trade in the 53-55 band in the near-term on weaker

CAD. We continue to believe (despite the recent denial) in the RBI start

buying dollars to recoup lost FX reserves of US$20bn in FY12 on a sharp

rise. The INR weakness remains one of the key overhangs on the market

in the near-term.

RBI maintains pause: Policy rates were unchanged (repo at 8%) on the

30th, in-line with expectations (but against the market), and the CRR

reduced by 25bps to 4.25% to arrest tight liquidity conditions

‘prospectively’. With inflation at 7.8% in Sep’12 and unlikely to fall to sub-

7.5% levels by March, the case for reducing rates remains minimal for

now even as growth remains sluggish. We maintain expectations of rate

relief ahead in the fiscal (50bps by March’13).

ECB inflows improve further in Sep’12: ECBs increased further in Sep’12

to US$2.7bn. The total issuance in CY12 till date, however, has declined

by 35.9%yoy. While current account is expected to remain weak in FY13,

higher ECB inflows on recent relaxation of ECB norms should provide

some support on the capital account.

Latest PMI, Eight-core prints raises hope of macro bottoming out in 2Q:

India’s Oct PMI stood flat at 52.9, indicating steady economic activity led

by strong output growth and exports orders. The ‘EightCore’ also

displayed a sharp revival in Sep, growing at 5.1% vs. revised 2.3%/2.6% in

Aug’12/Sep’11. Prima facie this augurs well for Sep IIP, and could go long

way in determining if the Aug 2.7% print was flash in the pan after all.

Rabi MSPs raised by 10-20%: The CCEA approved the rise in MSPs of the

Rabi season crops by 10-20%, lower than last year’s 15-40% hike, with the

decision on wheat prices deferred for now. No change in wheat MSP, if

approved, would be positive not only for the Govt. fisc which is already

under immense pressure but also for the FCI given huge wheat stocks at

the Central pool (50MT) and high outstanding farm credit (Rs980bn).

Large corporates, retail drive credit growth: The sector-wise deployment

of credit indicates that credit growth in 1HFY13 has been driven primarily

by large industries, trade services, NBFCs and retail. Growth in mid-

corporates, SME and some service segments has declined significantly,

while large industry segment is seeing a pick-up led by power sector. The

retail segment is steady with healthy growth in housing/vehicle loans.

Economics

INDIA

5 November 2012

REPORT AUTHORS

Tirthankar Patnaik, PhD (91-22) 6766 3446

[email protected]

Prerna Singhvi (91-22) 6766 3413

[email protected]

Saloni Agarwal (91-22) 6766 3438

[email protected]

Repo Rate and CRR trend

Eight core and PMI

ECB issuance

8.0

4.54.0

5.0

6.0

7.0

8.0

9.0

Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12

Repo Rate CRR

49

51

53

55

57

59

0%

2%

4%

6%

8%

10%

Jan-11 Jun-11 Nov-11 Apr-12 Sep-12

Eight core industries growth

PMI (L)

2.7 2.6

3.8

2.7

3.4

2.0

1.1

2.42.7

0.0

0.9

1.8

2.7

3.6

4.5

Jan-12 Mar-12 May-12 Jul-12 Sep-12

(US$bn)


Financial Highlights

Results Review

INDIA

UTILITIES

5 November 2012

REPORT AUTHORS

Misal Singh +91 22 6766 3466

[email protected]

Arun Aggarwal +91 22 6766 3440

[email protected]

PRICE CLOSE (11/2/2012)

INR 63.20

MARKET CAP

INR 103,651 mln

USD 1,926 mln

SHARES O/S

1,640 mln

FREE FLOAT

23.3%

3M AVG DAILY VOLUME./VALUE

2 mln/ USD 2 mln

52 WK HIGH

INR 72.55

52 WK LOW

INR 37.50

SELL

20.9%

TP: INR 50.00

JSW Energy

JSW IN

Limited scope of outperformance; downgrade to SELL

We downgrade JSW to SELL on limited scope for outperformance even as

Q2FY13 results were strong – generation 4,593mn units, PLF improved

16%/28% YoY, average realisation higher 12% YoY. Adjusted PAT (Rs 1.8bn)

was lower than estimates as 27mn units were banked in Q2FY13. Break-

even at Barmer continues to be contingent on RERC approval for higher

tariff. We think there is limited downside to coal prices, while merchant tariff

may slide on improvement in power availability over the long term.

Strong operational numbers: Generation continued to be strong in Q2FY13 as well

at 4,593mn units, helped by a PLF of 100%, 90% and ~64% at Vijayanagar, Ratnagiri

and Barmer (72%/74%/0% in Q2FY12) respectively. PLF dropped slightly QoQ on

maintenance shut-down of a few units in Ratnagiri and Barmer. Further growth in

generation is contingent on production in Unit V-VIII in Barmer, which depends on

approval for extra lignite extraction from Kapurdi mine, now likely by Dec-end.

Q2FY13 PAT slightly lower as 27mn units banked: JSW’s Q2FY13 revenue /PAT

stood at Rs 20.7bn/Rs 2.5bn. Adjusting for Rs 925mn profit from the movement in

foreign exchange, the recurring PAT of Rs 1.8bn was 3% below our estimates, partly

as 27mn units were banked in Q2FY13. Fuel costs were higher QoQ as high CV coal

was used in the monsoons, which should reverse in Q3FY13.

Adverse adjudication by RERC in Barmer: RERC in October’12 adjudicated the first-

year tariff for Barmer’s Unit I-IV at Rs 2.43/unit vs. a production cost of ~Rs 3.7/unit.

JSW approached the APTEL and has not recognised a potential loss of Rs 780mn.

Downgrade to SELL: We downgrade the stock to sell as we believe coal prices may

have bottomed out while moderation in merchant tariff cannot be ruled out.


Y/E 31 Mar FY11A FY12A FY13E FY14E FY15E

Revenue (INR mln) 42,944 61,188 70,155 81,328 88,616

EBITDA (INR mln) 15,641 14,478 23,494 28,169 28,958

Adjusted net profit (INR mln) 8,341 3,313 6,141 8,306 9,575

Adjusted EPS (INR) 5.1 2.0 3.7 5.1 5.8

Adjusted EPS growth (%) n.a. (60.2) 85.2 35.2 15.3

DPS (INR) 1.0 0.5 0.7 1.0 1.2

ROIC (%) 8.6 5.9 9.5 12.5 13.5

Adjusted ROAE (%) 14.7 5.8 10.6 13.3 13.7

Adjusted P/E (x) 14.1 30.3 16.9 12.5 10.8

EV/EBITDA (x) 12.0 11.9 7.5 6.0 5.2

P/BV (x) 2.1 1.8 1.7 1.6 1.4

Source: Company, Bloomberg, RCML Research

30

50

70

90

110

(%) Stock Price Index Price


mailto:[email protected]



SELL

TP: INR 50.00

20.9%

JSW Energy JSW IN

Results Review

INDIA

UTILITIES

research.religare.com 5 November 2012

Per Share Data

Y/E 31 Mar (INR) FY11A FY12A FY13E FY14E FY15E

Reported EPS 5.1 1.0 2.9 5.1 5.8

Adjusted EPS 5.1 2.0 3.7 5.1 5.8

DPS 1.0 0.5 0.7 1.0 1.2

BVPS 34.6 34.8 36.2 40.2 44.8

Valuation Ratios

Y/E 31 Mar (x) FY11A FY12A FY13E FY14E FY15E

EV/Sales 4.4 2.8 2.5 2.1 1.7

EV/EBITDA 12.0 11.9 7.5 6.0 5.2

Adjusted P/E 14.1 30.3 16.9 12.5 10.8

P/BV 2.1 1.8 1.7 1.6 1.4

Financial Ratios


Profitability & Return Ratios (%)

EBITDA margin 36.4 23.7 33.5 34.6 32.7

EBIT margin 30.2 15.4 23.3 25.1 23.9

Adjusted profit margin 19.4 5.4 8.8 10.2 10.8

Adjusted ROAE 14.7 5.8 10.6 13.3 13.7

ROCE 7.2 5.0 8.2 11.0 11.7

YoY Growth (%)

Revenue n.a. 42.5 14.7 15.9 9.0

EBITDA n.a. (7.4) 62.3 19.9 2.8

Adjusted EPS n.a. (60.2) 85.2 35.2 15.3

Invested capital n.a. 1.0 2.7 (1.4) (6.6)

Working Capital & Liquidity Ratios

Receivables (days) 65 58 58 49 47

Inventory (days) 79 59 63 52 50

Payables (days) 130 137 188 160 150

Current ratio (x) 1.1 0.8 0.7 0.6 0.8

Quick ratio (x) 0.9 0.6 0.5 0.5 0.6

Turnover & Leverage Ratios (x)

Gross asset turnover 0.3 0.4 0.4 0.5 0.5

Total asset turnover 0.2 0.3 0.4 0.4 0.5

Net interest coverage ratio 4.2 1.7 1.9 2.0 2.3

Adjusted debt/equity 1.6 1.6 1.5 1.2 0.9

DuPont Analysis

Y/E 31 Mar (%) FY11A FY12A FY13E FY14E FY15E

Tax burden (Net income/PBT) 84.2 155.9 97.7 79.9 80.0

Interest burden (PBT/EBIT) 76.3 22.5 38.4 50.8 56.5

EBIT margin (EBIT/Revenue) 30.2 15.4 23.3 25.1 23.9

Asset turnover (Revenue/Avg TA) n.a. 33.4 36.9 43.5 47.8

Leverage (Avg TA/Avg equities) n.a. 321.9 326.5 298.6 266.1

Adjusted ROAE 14.7 5.8 10.6 13.3 13.7

5

SELL

TP: INR 50.00

20.9%

JSW Energy JSW IN

Results Review

INDIA

UTILITIES


Income Statement

Y/E 31 Mar (INR mln) FY11A FY12A FY13E FY14E FY15E

Total revenue 42,944 61,188 70,155 81,328 88,616

EBITDA 15,641 14,478 23,494 28,169 28,958

EBIT 12,973 9,444 16,370 20,451 21,211

Net interest income/(expenses) (3,071) (5,706) (8,687) (10,062) (9,235)

Other income/(expenses) 0 0 0 0 0

Exceptional items 0 (1,613) (1,400) 0 0

EBT 9,902 2,125 6,284 10,389 11,977

Income taxes (1,562) (419) (1,537) (2,078) (2,395)

Extraordinary items 0 0 0 0 0

Min. int./Inc. from associates 1 (6) (6) (6) (6)

Reported net profit 8,341 1,701 4,741 8,306 9,575

Adjustments 0 1,613 1,400 0 0

Adjusted net profit 8,341 3,313 6,141 8,306 9,575

Balance Sheet


Accounts payables 9,704 25,289 22,779 23,719 25,171

Other current liabilities 11,771 14,208 12,798 13,327 14,142

Provisions 2,296 1,802 1,979 2,395 2,946

Debt funds 93,227 92,897 90,828 79,996 68,763

Other liabilities 724 500 500 500 500

Equity capital 16,401 16,401 16,401 16,401 16,401

Reserves & surplus 40,365 40,600 42,970 49,488 57,021

Shareholders' fund 56,765 57,001 59,370 65,888 73,422

Total liabilities and equities 174,487 191,696 188,254 185,824 184,944

Cash and cash eq. 9,779 6,686 3,487 1,003 5,871

Accounts receivables 7,645 11,760 10,592 11,030 11,705

Inventories 5,348 7,658 6,485 6,899 7,622

Other current assets 4,433 5,042 5,781 6,702 7,303

Investments 13,941 15,396 15,396 15,396 15,396

Net fixed assets 134,732 146,152 147,510 145,793 138,045

CWIP 0 0 0 0 0

Intangible assets 171 294 294 294 294

Deferred tax assets, net (1,562) (1,292) (1,292) (1,292) (1,292)

Other assets 0 0 0 0 0

Total assets 174,486 191,696 188,254 185,824 184,944

Cash Flow Statement


Net income + Depreciation 11,009 6,734 11,865 16,023 17,322

Interest expenses 3,071 5,706 8,687 10,062 9,235

Non-cash adjustments 0 0 0 0 0

Changes in working capital (743) 10,635 (2,011) 80 519

Other operating cash flows 813 (488) 183 421 557

Cash flow from operations 14,151 22,587 18,724 26,587 27,633

Capital expenditures (20,850) (16,800) (8,482) (6,000) 0

Change in investments 403 (1,455) 0 0 0

Other investing cash flows 1,255 1,466 1,326 1,207 1,385

Cash flow from investing (19,192) (16,788) (7,156) (4,793) 1,385

Equities issued 0 0 0 0 0

Debt raised/repaid 12,073 22 (2,376) (11,216) (11,482)

Interest expenses (4,325) (7,172) (10,013) (11,269) (10,620)

Dividends paid (1,906) (951) (1,426) (1,793) (2,047)

Other financing cash flows 2,930 (790) (2,351) (0) 0

Cash flow from financing 8,772 (8,892) (14,767) (24,278) (24,150)

Changes in cash and cash eq 3,730 (3,093) (3,198) (2,485) 4,868

Closing cash and cash eq 9,779 6,686 2,087 1,003 5,871

6


Results Review

INDIA

MATERIALS

5 November 2012

REPORT AUTHORS

Mihir Jhaveri +91 22 6766 3459

[email protected]

Prateek Kumar +91 22 6766 3435

[email protected]

PRICE CLOSE (05 Nov 12)

INR 97.50

MARKET CAP

INR 29,950 mln

USD 548 mln

SHARES O/S

307.2 mln

FREE FLOAT

71.8%


1.9 mln/ USD 3.3 mln

52 WK HIGH

INR 117.50

52 WK LOW

INR 65.95

HOLD

TP: INR 110.00

12.8%

India Cements

ICEM IN

Margins disappoint, downgrade to HOLD

ICEM reported lower margins (18.3% vs. 19.8%) in Q2FY13 on higher power

and fuel cost, while PAT came in above estimates at Rs 491mn on lower

interest charges. Topline/EBITDA/PAT grew ~3%/(19%)%/(30)% and cement

EBITDA/t stood at ~Rs 777. We trim FY13E/FY14E EPS estimates by

11.8%/8% on weaker margin outlook and roll over to September’13 TP of Rs

110 – Rs 90 ascribed to the core business (on 5x EV/EBITDA) and Rs 20 to

IPL. We downgrade ICEM to HOLD on limited upside.

Topline up ~3% YoY to Rs 11.1bn: Cement revenues grew 6.7% YoY led by volume/

realisation growth of 2.3%/4.4% YoY. QoQ, realisations fell 1.2%. Revenues from

other businesses: (a) Windmill: Rs 106mn (vs. Rs 60mn YoY), (b) Freight: Rs 129mn

(vs. Rs 67mn YoY) and (c) IPL: Rs 52mn (vs. Rs 515mn YoY).

Margins lower on higher power/fuel (P&F) cost: ICEM’s P&F cost per ton jumped

18.3%YoY/9.5%QoQ as the company had to purchase higher-priced power from

outside due to 12 days per month power holiday in Andhra Pradesh. ICEM expects

such a power situation to continue in the next two quarters. While overall EBITDA

margin contracted ~485bps YoY/QoQ to 18.3% (19.8% estimated), cement EBITDA/t

was at ~Rs 777 (estimated Rs 794), lower Rs 109 YoY/Rs 250 QoQ. ICEM saw an

EBITDA loss of Rs 40mn /gain of Rs 55mn from IPL/freight.

PAT drops 30% YoY: PAT fell 30% YoY to Rs 491mn owing to lower profitability,

partially offset by lower interest charges (Rs 667mn vs. Rs 895mn YoY).

Downgrade to HOLD; we trim estimates: Owing to weaker margin outlook, we trim

FY13E/FY14E EPS estimates by 11.8%/8%. We value ICEM’s core cement business at

5x EV/EBITDA to arrive at a value of Rs 90. Including Rs 20 ascribed to IPL, Sep’13 TP

is at Rs 110. We downgrade ICEM to HOLD on limited upside and concerns related

to margin and South India demand outlook.



Revenue (INR mln) 35,007 42,034 44,830 47,884 51,707

EBITDA (INR mln) 4,337 9,034 9,489 10,490 11,574

Adjusted net profit (INR mln) 658 2,966 2,697 3,309 4,138

Adjusted EPS (INR) 2.1 9.7 8.8 10.8 13.5

Adjusted EPS growth (%) (78.8) 350.9 (9.1) 22.7 25.1

DPS (INR) 1.3 1.7 1.7 1.7 1.7

ROIC (%) 2.3 8.2 8.2 9.1 10.4

Adjusted ROAE (%) 1.6 7.3 6.5 7.5 8.8

Adjusted P/E (x) 44.6 11.5 11.1 9.1 7.2

EV/EBITDA (x) 12.0 5.8 5.1 4.3 3.5

P/BV (x) 0.7 0.8 0.7 0.7 0.6


50

100

150

200






HOLD

TP: INR 110.00

12.8%

India Cements ICEM IN

Results Review

INDIA

MATERIALS


Per Share Data

Y/E 31 Mar (INR) FY11A FY12A FY13E FY14E FY15E

Reported EPS 2.2 9.5 8.8 10.8 13.5

Adjusted EPS 2.1 9.7 8.8 10.8 13.5

DPS 1.3 1.7 1.7 1.7 1.7

BVPS 133.1 132.4 138.9 147.3 158.4

Valuation Ratios

Y/E 31 Mar (x) FY11A FY12A FY13E FY14E FY15E

EV/Sales 1.5 1.3 1.1 0.9 0.8

EV/EBITDA 12.0 5.8 5.1 4.3 3.5

Adjusted P/E 44.6 11.5 11.1 9.1 7.2

P/BV 0.7 0.8 0.7 0.7 0.6

Financial Ratios



EBITDA margin 12.4 21.5 21.2 21.9 22.4

EBIT margin 5.4 15.5 15.1 16.0 16.8


Adjusted ROAE 1.6 7.3 6.5 7.5 8.8

ROCE 2.2 7.6 7.1 7.7 8.5

YoY Growth (%)

Revenue (5.1) 20.1 6.7 6.8 8.0

EBITDA (42.0) 108.3 5.0 10.5 10.3

Adjusted EPS (78.8) 350.9 (9.1) 22.7 25.1

Invested capital 7.7 (6.9) 2.8 (1.2) (0.8)




Payables (days) 89 80 81 89 88

Current ratio (x) 2.1 1.8 1.8 1.9 2.0

Quick ratio (x) 1.7 1.5 1.5 1.5 1.6




Net interest coverage ratio 1.3 2.3 2.1 2.4 2.8


DuPont Analysis

Y/E 31 Mar (%) FY11A FY12A FY13E FY14E FY15E




Asset turnover (Revenue/Avg TA) 46.0 53.9 55.1 56.5 59.0

Leverage (Avg TA/Avg equities) 184.9 191.1 195.3 192.7 186.8

Adjusted ROAE 1.6 7.3 6.5 7.5 8.8

8

HOLD

TP: INR 110.00

12.8%

India Cements ICEM IN

Results Review

INDIA

MATERIALS


Income Statement


Total revenue 35,007 42,034 44,830 47,884 51,707

EBITDA 4,337 9,034 9,489 10,490 11,574

EBIT 1,897 6,521 6,790 7,661 8,665

Net interest income/(expenses) (1,417) (2,867) (3,286) (3,258) (3,141)

Other income/(expenses) 396 193 214 224 224

Exceptional items 0 0 0 0 0

EBT 876 3,846 3,717 4,627 5,748

Income taxes (218) (880) (1,021) (1,318) (1,609)

Extraordinary items 23 (36) 0 0 0

Min. int./Inc. from associates 0 0 0 0 0

Reported net profit 681 2,930 2,697 3,309 4,138

Adjustments (23) 36 0 0 0

Adjusted net profit 658 2,966 2,697 3,309 4,138

Balance Sheet



Other current liabilities 2,749 3,456 3,456 3,456 3,456

Provisions 757 1,324 905 964 1,023

Debt funds 24,561 27,010 27,518 26,918 26,318

Other liabilities 0 0 0 0 0

Equity capital 3,072 3,072 3,072 3,072 3,072




Cash and cash eq. 331 29 360 2,085 4,358


Inventories 4,973 5,258 6,003 6,557 7,037


Investments 1,603 8,520 9,020 10,020 11,020

Net fixed assets 38,345 41,329 43,580 42,252 41,843

CWIP 10,398 1,451 0 0 0


Deferred tax assets, net (2,743) (3,245) (3,335) (3,425) (3,515)

Other assets 0 89 89 89 89

Total assets 76,642 79,257 83,498 85,896 89,518

Cash Flow Statement



Interest expenses 610 2,414 3,286 3,258 3,141


Changes in working capital (1,176) (65) (525) (744) (103)

Other operating cash flows 251 468 276 149 148


Capital expenditures (5,690) (913) (3,500) (1,500) (2,500)

Change in investments 2,043 (4,616) (500) (1,000) (1,000)

Other investing cash flows 102 71 0 0 0

Cash flow from investing (3,545) (5,459) (4,000) (2,500) (3,500)

Equities issued 0 0 0 0 0

Debt raised/repaid 3,261 2,412 508 (600) (600)

Interest expenses (2,013) (4,979) (3,286) (3,258) (3,141)

Dividends paid (716) (536) (1,324) (719) (719)

Other financing cash flows 0 0 0 0 0

Cash flow from financing 531 (3,102) (4,102) (4,577) (4,460)

Changes in cash and cash eq (207) (302) 331 1,725 2,273

Closing cash and cash eq 331 29 360 2,085 4,358

9

Refining margins for the week ended 2 November averaged US$ 5.3/bbl, flat

WoW as crude and product prices traded sideways. We expect margins to

improve ahead as ~0.65mbopd of US East Coast refining capacity is either

offline or restricted while demand should increase post-Hurricane Sandy.

Chemical margins, though flat, appear to be bottoming out as PMIs in key

geographies indicate recovery. PX/MEG margins remained stable. Our top

picks are Thai Oil (TOP TB), PTTGC TB, MRPL IN and Essar Oil (ESOIL IN).

Economic indicators in key crude importing nations improve: Crude prices were

largely flat as weakness due to reduced demand from the US East Coast refinery

shutdown was counterbalanced by a decline in inventory and improving economic

indicators.

US crude inventory declines by 2mnbbl: US refinery utilisation rates stood at 87.7%

for the week ended 26 October, flat WoW. However, utilisation is likely to have

declined in the week ended 2 November, as refineries have suspended operations

in the wake of hurricane Sandy. US crude imports decreased by 0.9mnbbl WoW and

commercial crude inventory declined by 2mnbbl to 373mnbbl. Crude inventories

are above the average range for this time of year. Gasoline inventory increased by

0.9mnbbl, for the third week in a row – falling in the lower half of the average

range. Distillate inventory fell marginally and remains below the lower limit average

for this time of year.

GRMs largely flat but likely to improve: GRMs were flat WoW as key spreads and

crude traded sideways. But post-Sandy, the demand for refined products is

expected to improve. As the East Coast refineries of Phillips 66 and Hess Corp

remained shut during the storm, any demand pick-up is likely to strengthen spreads

in the coming weeks.

Chemical margins could be bottoming out: Trade and economic indicators in China

and the US are improving as PMIs in both regions rose to 50.2 and 51.7, from 49.8

and 51.5 respectively. Europe, however, continued to be a laggard as a gauge of

manufacturing in the Eurozone fell to 45.4 from 46 in September’12. In our view, as

key regions are showing signs of economic recovery, chemical demand would

gradually pick up, forming the basis of our view that chemical margins have started

to bottom out and should start to recover by the beginning of CY13.

Polyesters intermediate margins stable but final product margins under pressure:

China, a key manufacturer of polyester products, is experiencing weakness in

polyester prices. While demand for final products like polyester fibre remained

weak, the demand for PX improved as two new PTA capacities became operational

in China in the last two months. These comprise a 1.5mmtpa capacity by Jiaxing

Petrochemical and 2.2mmtpa by Hengli Petrochemical. While PTA and polyester

fibre margins remain under pressure, PX and MEG prices remained stable on the

back of new demand.


Sector Update

ASIA

ENERGY

5 November 2012

REPORT AUTHORS

Ballabh Modani +65 6671 8107

[email protected]

Nitin Tiwari (91-22) 6766 3437

[email protected]

EnergyPulse

Refinery margins flat; petchem bottoming out




Results Review

INDIA

INFORMATION TECHNOLOGY

5 November 2012

REPORT AUTHORS

Rumit Dugar +852 3586 5060

[email protected]

Udit Garg +91 22 6766 3445

[email protected]

PRICE CLOSE (02 Nov 12)

INR 951.60

MARKET CAP

INR 119,791 mln

USD 2,226 mln

SHARES O/S

125.9 mln

FREE FLOAT

12.3%


1.0 mln/ USD 16.2 mln

52 WK HIGH

INR 1,025.55

52 WK LOW

INR 543.95

BUY

TP: INR 1,000.00

5.1%

Tech Mahindra

TECHM IN

Revenue in line; margin performance drives EPS beat

TechM reported an in-line quarter on the revenue front – a 5.8% QoQ growth

(including acquisition) and 1.5% QoQ organic. The non-BT organic business

grew a solid ~4.8% QoQ, while the BT business posted a surprise dip.

Margins surprised positively as the dip was lower than estimated, leading to

an EPS beat. PAT came in at Rs 2.9bn, also helped by lower tax rate. While

BT remains a known drag, non-BT is growing well. We are positive on

attractive earnings potential and reasonable valuations (10x FY13E).

Revenues in line, BT weak but non-BT solid: TechM’s Q2FY13 revenues came in at

US$ 299mn (5.8% QoQ) due to the inclusion of Hutch deal ($ 13mn) for about a

month. Organic growth was muted at 1.5% due to BT decline. The BT business

declined 3.5% sequentially, against expectations of a flat-to-marginal dip. Non-BT

growth was good at 4.8% QoQ, wherein we remain more confident on deal outlook

and execution.

Margin surprises positively, lower tax helps EPS: While revenue performance was

mixed due to BT, margins came in at 17.8% (-91bps QoQ) and surprised positively

despite wages hikes during the quarter. The management attributed the modest

decline to a positive mix shift and lower visa costs. Further, we have seen cost

optimisation initiatives yielding positive results both at SCS and TechM, reflecting

good execution in our view. Tax rate was low at 12%, which helped the beat in the

quarter but is unlikely to sustain.

Metrics: Headcount rose by 9,849 QoQ, taking the total to 50,479 – Increase was in

the BPO business (net headcount increase of ~10,000) on Hutch acquisition. The IT

services headcount dropped by ~500 to 24,224. Services utilisation was flat QoQ at

74%. Active clients dropped to 126, but >$ 50mn accounts increased to three (two

in Q1). Region-wise, the US was flat QoQ, while Europe/RoW grew by 8%/11%.


Y/E 31 Mar FY10A FY11A FY12A FY13E FY14E

Revenue (INR mln) 46,254 51,402 54,897 63,198 66,471

EBITDA (INR mln) 11,325 10,033 9,193 12,574 12,681

Adjusted net profit (INR mln) 7,117 6,829 10,987 12,166 13,027

Adjusted EPS (INR) 58.4 54.5 86.5 95.4 102.2

Adjusted EPS growth (%) (25.0) (6.7) 58.9 10.3 7.1

DPS (INR) 3.5 4.0 4.0 5.0 5.0

ROIC (%) 59.7 38.5 30.2 40.7 38.4

Adjusted ROAE (%) 25.3 19.4 29.6 27.8 25.8

Adjusted P/E (x) 14.6 12.4 8.3 10.0 9.3

EV/EBITDA (x) 7.6 6.5 7.1 7.1 6.5

P/BV (x) 2.8 2.5 2.3 2.6 2.2


50

100

150

200






BUY

TP: INR 1,000.00

5.1%

Tech Mahindra TECHM IN

Results Review

INDIA



Per Share Data

Y/E 31 Mar (INR) FY10A FY11A FY12A FY13E FY14E

Reported EPS 58.4 54.5 86.5 95.4 102.2

Adjusted EPS 58.4 54.5 86.5 95.4 102.2

DPS 3.5 4.0 4.0 5.0 5.0

BVPS 299.9 267.3 317.7 368.5 424.1

Valuation Ratios

Y/E 31 Mar (x) FY10A FY11A FY12A FY13E FY14E

EV/Sales 1.9 1.3 1.2 1.4 1.2

EV/EBITDA 7.6 6.5 7.1 7.1 6.5

Adjusted P/E 14.6 12.4 8.3 10.0 9.3

P/BV 2.8 2.5 2.3 2.6 2.2

Financial Ratios

Y/E 31 Mar FY10A FY11A FY12A FY13E FY14E


EBITDA margin 24.5 19.5 16.7 19.9 19.1

EBIT margin 21.6 16.7 13.8 17.1 16.1


Adjusted ROAE 25.3 19.4 29.6 27.8 25.8

ROCE 23.8 15.2 12.3 15.5 14.4

YoY Growth (%)

Revenue 3.6 11.1 6.8 15.1 5.2

EBITDA (6.8) (11.4) (8.4) 36.8 0.9

Adjusted EPS (25.0) (6.7) 58.9 10.3 7.1

Invested capital 83.6 10.9 (1.6) 5.3 1.8




Payables (days) 66 51 61 74 76

Current ratio (x) 2.2 2.7 2.0 2.0 2.2

Quick ratio (x) 2.2 2.7 2.0 2.0 2.2




Net interest coverage ratio 7.0 n.a. 166.9 8.3 42.1


DuPont Analysis

Y/E 31 Mar (%) FY10A FY11A FY12A FY13E FY14E




Asset turnover (Revenue/Avg TA) 105.8 86.1 84.7 88.6 88.1

Leverage (Avg TA/Avg equities) 155.5 169.8 174.8 163.1 149.3

Adjusted ROAE 25.3 19.4 29.6 27.8 25.8

12

BUY

TP: INR 1,000.00

5.1%

Tech Mahindra TECHM IN

Results Review

INDIA



Income Statement

Y/E 31 Mar (INR mln) FY10A FY11A FY12A FY13E FY14E

Total revenue 46,254 51,402 54,897 63,198 66,471

EBITDA 11,325 10,033 9,193 12,574 12,681

EBIT 9,986 8,597 7,579 10,809 10,699

Net interest income/(expenses) (1,430) 176 (45) (1,309) (254)

Other income/(expenses) 0 0 (679) 0 0

Exceptional items 0 0 0 0 0

EBT 8,557 8,773 6,855 9,500 10,445

Income taxes (1,440) (1,315) (1,437) (2,273) (2,611)

Extraordinary items 0 0 0 0 0

Min. int./Inc. from associates 0 (629) 5,569 4,939 5,193

Reported net profit 7,117 6,829 10,987 12,166 13,027

Adjustments 0 0 0 0 0

Adjusted net profit 7,117 6,829 10,987 12,166 13,027

Balance Sheet



Other current liabilities 0 0 0 0 0

Provisions 2,770 3,080 1,506 2,169 2,292

Debt funds 13,672 12,227 11,266 7,266 3,266

Other liabilities 0 5,837 6,181 6,181 6,181

Equity capital 1,362 1,419 1,275 1,275 1,275




Cash and cash eq. 2,187 2,666 4,022 5,452 8,174


Inventories 0 0 0 0 0


Investments 30,145 29,081 34,271 34,271 34,271

Net fixed assets 7,710 5,734 6,955 7,190 7,208

CWIP 1,541 1,541 1,541 1,541 1,541


Deferred tax assets, net 0 0 0 0 0

Other assets 276 638 4,382 4,382 4,382

Total assets 59,018 60,448 69,191 73,495 77,404

Cash Flow Statement



Interest expenses 0 0 0 0 0


Changes in working capital (5,394) (3,585) 5,295 (813) (345)

Other operating cash flows 0 0 0 0 0


Capital expenditures (4,070) 540 (2,836) (2,000) (2,000)

Change in investments (30,225) 703 (8,935) 0 0

Other investing cash flows 0 0 0 0 0

Cash flow from investing (34,295) 1,243 (11,771) (2,000) (2,000)

Equities issued 10,521 (9,245) (3,553) (4,939) (5,193)

Debt raised/repaid 13,672 (1,445) (961) (4,000) (4,000)

Interest expenses 0 0 0 0 0

Dividends paid (501) (591) (598) (750) (750)

Other financing cash flows 0 0 0 0 0

Cash flow from financing 23,693 (11,281) (5,113) (9,689) (9,943)

Changes in cash and cash eq (7,541) (5,358) 1,013 1,430 2,721

Closing cash and cash eq 2,187 (3,171) 3,679 5,452 8,174

13


RCML India

ANALYST SECTOR EMAIL TELEPHONE

Varun Lohchab (Co-Head – India Research)

Consumer, Metals & Mining [email protected] +91 22 6766 3458

Siddharth Teli (Co-Head – India Research)

Financials [email protected] +91 22 6766 3463

Gaurang Kakkad Consumer [email protected] +91 22 6766 3470

Prasad Dhake Consumer, Metals & Mining [email protected] +91 22 6766 3475

Ishank Kumar Financials [email protected] +91 22 6766 3467

Vamsi Krishna Duvvuri Financials, Media [email protected] +91 22 6766 3474

Mihir Jhaveri Auto, Auto Ancillaries, Cement, Logistics [email protected] +91 22 6766 3459

Prateek Kumar Auto, Auto Ancillaries, Cement, Logistics [email protected] +91 22 6766 3435

Misal Singh Capital Goods, Utilities, Construction & Infrastructure [email protected] +91 22 6766 3466

Abhishek Raj Capital Goods, Construction & Infrastructure [email protected] +91 22 6766 3485

Ballabh Modani Energy, Media [email protected] +65 6671 8107

Nitin Tiwari Energy [email protected] +91 22 6766 3437

Rumit Dugar Information Technology, Telecom [email protected] +852 3586 5060

Udit Garg Information Technology, Telecom [email protected] +91 22 6766 3445

Arun Aggarwal Real Estate, Utilities [email protected] +91 22 6766 3440

Tirthankar Patnaik, PhD Strategy & Economics [email protected] +91 22 6766 3446

Prerna Singhvi Strategy & Economics, Mid-caps [email protected] +91 22 6766 3413

Saloni Agarwal Strategy & Economics [email protected] +91 22 6766 3438

Morning Buzz

INDIA

14

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