pc - nalco co update - feb 2014 final...

Please refer to Disclosures and Disclaimers at the end of the Research Report.

Nalco Alumina – the growth engine

METALS: Company Update 19 February 2014

PhillipCapital (India) Pvt. Ltd.

Higher alumina volumes, better realizations and improving cost profile along with the company’s efforts (such as aluminium pot shutdown and alumina capacity upgradation) will provide a much needed boost to Nalco’s profitability, helping reverse its seven‐year falling profit trend. While operating profit will be flat in FY14, we see a 31% growth in FY15. These positives will help Nalco’s profits in the near term, but the commissioning of its Utkal‐E coal block remains critical for long‐term profit growth. We have increased our FY15 operating profit and earnings estimates significantly to reflect immediate positives and are upping our target price to Rs 44 (from Rs 41 earlier) and our rating to Buy from Neutral. We also introduce our FY16 EPS estimate of Rs 3.3. Alumina – the growth engine and an important driver of profitability: We see alumina sales volumes rising at a FY13‐16 CAGR of 16% to 1.54mn tonnes. Higher contracted realizations for 2014 and strong spot market prices will help Nalco’s alumina realizations rise from 17% of LME aluminium prices in FY13 to 18.5% in FY15. Indonesia’s bauxite export ban—major driver for alumina realizations: If sustained, the ban will lead to structural industry‐wide changes with China curtailing or shutting down some of its alumina production. While Indonesia lifting the ban or diluting its stance remains a key risk to long‐term alumina pricing, cost support (~25% of world production operates at costs that are higher than current alumina prices) provides a cushion. Per tonne costs to fall in FY15: Improving consumption norms and lower raw material prices along with better fixed‐cost recoveries (due to higher production) will help Nalco reduce its per tonne cost for alumina in FY15. Cost savings are targeted from caustic soda and furnace oil, which cumulatively account for around 45‐50% of Nalco’s alumina operating costs. Aluminium – reaping pot shutdown benefits: With its 335‐pot shutdown, Nalco has not only been able to increase its alumina for sale, but has also recently increased the amperage at one of its aluminium pot lines, thereby giving it an incremental production of 1,000 tonnes per month. This will help improve its production cost with better fixed‐cost recovery. Stable power supply with increased amperage will also help lower power consumption and costs. Valuations At its current market price, the stock trades at a P/E of 12.2x FY14E EPS of Rs 2.7, 9.7x FY15E EPS of Rs 3.3 and 9.8x FY16 EPS of Rs 3.3. It trades at an EV/EBIDTA of 2.9x FY14, 2.3x FY15 and 2.2x FY16. To factor in lower return ratios, we value the company at 5x FY15 EV/EBIDTA, implying a steep discount to its 10‐year average of 9x. We roll forward our valuations to FY15 and raise our target price to Rs 44 (from Rs 41 earlier) representing a 37% upside. At our TP, the stock will trade at a P/E of 13.3x vs. its 10‐year average of 16x. We upgrade our rating on the stock to Buy from Neutral. The stock offers a dividend yield of 3.9% at the current prices.

Upgrade to Buy NACL IN | CMP RS 32

TARGET RS 44 (+36.8%) Company Data

O/S SHARES (MN) : 2577MARKET CAP (RSBN) : 83MARKET CAP (USDBN) : 1.452 ‐ WK HI/LO (RS) : 49 / 24LIQUIDITY 3M (USDMN) : 0.3FACE VALUE (RS) : 5

Share Holding Pattern, %

PROMOTERS : 81.1FII / NRI : 4.2FI / MF : 10.1NON PROMOTER CORP. HOLDINGS : 3.3PUBLIC & OTHERS : 1.3

Price Performance, % 1mth 3mth 1yr

ABS ‐11.7 ‐18.9 ‐30.4REL TO BSE ‐9.7 ‐17.9 ‐36.2

Price Vs. Sensex (Rebased values)

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140

Apr‐10 Apr‐11 Apr‐12 Apr‐13

Nalco BSE Sensex

Source: PhillipCapital India Research

Other Key Ratios

Rs mn FY14E FY15E FY16E

Net Sales 66,683 72,624 73,456EBIDTA 9,126 11,961 11,887Net Profit 6,834 8,591 8,536EPS, Rs 2.7 3.3 3.3PER, x 12.2 9.7 9.8EV/EBIDTA, x 2.9 2.3 2.2P/BV, x 0.7 0.7 0.6ROE, % 5.6 6.8 6.5Source: PhillipCapital India Research Est. Dhawal Doshi (+ 9122 6667 9769) [email protected] Dharmesh Shah (+ 9122 6667 9974) [email protected]

– 2 of 17 –

19 February 2014 / INDIA EQUITY RESEARCH / NALCO COMPANY UPDATE

Higher volumes + higher realizations + lower unit costs = reversal of the 7‐year falling profitability trend Higher alumina volumes, improving realizations and better cost profile will provide Nalco with the much needed boost to its profitability. These factors will help the company reverse its seven‐year falling profit trend—it has seen operating profits decline between FY07 and FY13 (with FY11 being the only exception). While operating profit will be flat in FY14, we see a 31% growth in FY15. Operating profit: A reversal of the downtrend in FY14‐15

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FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E

Rs bn

Source: Company, PhillipCapital India Research Estimates

The chart below highlights Nalco’s drivers for rising profitability. While volumes and realizations account for majority of the profit swing, improving consumption norms and lower costs will also aid overall growth.

EBIDTA (Rs mn) bridge: Mainly volumes and realizations, but also better consumption norms and costs

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‐ 10% growth in alumina sales volumes‐ 1.5% growth in Aluminium volumes

‐ Alumina realisation: 18.5% of LME from17.7%

‐ LME price improvement and better regional premiums

Improving Caustic soda consumption leading to cost lower by ~ Rs 220mn

Higher furnace oil discounts lowers cost by ~ Rs130mn

Annual employee attrition target between 100 ‐ 150 employees to offset higher DA

Source: PhillipCapital India Research Estimates

Operating profit to begin seeing growth in FY15 mainly on higher alumina volumes and realizations

– 3 of 17 –


Alumina – the growth engine Improving profitability from the alumina segment will help the company report a strong operating performance—we see a 16% CAGR in FY13‐16 alumina sales, and rising realizations backed by restocking demand (alumina) coupled with Indonesia’s ban on its bauxite exports. Volume growth Due to a 335‐aluminium‐pot shutdown gradually from Q4FY13, Nalco has had higher surplus alumina for sale at its disposal in FY14 (vs. FY13); consequently, alumina sales volume is likely to be up 39% in FY14 to 1.37mn tonnes. The company does not expect to re‐start the closed aluminium pots in the near future unless there is a jump in LME aluminium prices or if its Utkal‐E coal block is commissioned (still a year away). Nalco’s alumina volumes will also benefit from the de‐bottlenecking of its existing refinery—it is on the verge of commissioning an upgradation project that will take its alumina capacity to 2.275mn tonnes (from the current 2.1mn tonnes) at a cost of Rs 4.1bn. It will simultaneously increase its bauxite mining capacity to 6.825mn tonnes (from 6.3mn tonnes), and since it is expected to commission this project in Q4FY14, FY15 alumina volumes should benefit. We see a 10% growth in alumina sales to 1.5mn tonnes in FY15. Alumina volumes (mn tonnes)

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Production Sales


Multiple factors point at stable‐to‐rising alumina prices Along with volume growth, higher alumina prices will play a significant role in rising profitability. Of late, substantial re‐stocking demand and Indonesia’s bauxite ban have been the primary drivers of the firm alumina prices. However, going forward we see prices remaining steady since they are quoting close to the marginal cost of production. Besides, Chinese imports will keep prices propped up. The only risk to prices is Indonesia lifting its export ban. Alumina price as a % of LME aluminium price has touched a peak of 20.2% in Jan 2014 and is currently quoting at 19.4%. This compares to an average of 17.7% for CY13.

Sharp rise in alumina sales volumes FY14 — aluminium pot shutdowns making more alumina available FY15 — alumina capacity upgrade will drive volumes

Indonesia has banned unprocessed mineral ore exports to promote domestic processing — this has led to alumina prices strengthening

– 4 of 17 –


Alumina price as a % of LME

13%

14%

15%

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21%

Feb‐11

May‐11

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Feb‐14

Source: Bloomberg, PhillipCapital India Research

Most of the firmness has come from re‐stocking demand — the chart below shows surplus alumina produced increased significantly in 2013 over 2012 mainly in anticipation of Indonesia banning bauxite exports. World alumina surplus production

Alumina Surplus

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1.0

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Source: IAI, PhillipCapital India Research

While alumina prices could see some weakness in the near term with the re‐stocking demand waning, we believe that they have a cushion as they are quoting close to the marginal cost of production.

Indonesia’s widely anticipated bauxite ban (primary raw material for alumina) led to surplus production of alumina in 2013

– 5 of 17 –


Alumina cost curve: 25% of total alumina production operates at cash losses

Source: Alumina Ltd, PhillipCapital India Research

As seen in the chart above, around 25% of the total alumina production is currently operating at cash losses, thereby providing cost support for alumina prices. This has already led to stable prices over the last year despite the major volatility in aluminium prices. The past few months have also seen alumina prices behaving contrary to aluminium prices—alumina has been rising while aluminium was falling. Prices: Alumina vs. aluminium (normalized)

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Alumina Aluminium


Nalco, which sells around 55‐60% of alumina on a contract basis, has recently concluded the pricing for its 2014 contracts and the latest surge in alumina prices has helped the company lock its contract volumes at a good premium to its 2013 prices—the benefit will reflect from Q4FY14 onwards. We expect Nalco’s alumina realized prices as a % of LME aluminium prices to move up from 17% in FY13 to 17.7% in FY14 and 18.5% in FY15. Realized prices (as a % of LME) are expected to be the highest ever in the past 10 years.

Alumina prices quoting at marginal cost of production — this should provide a cost cushion

Alumina prices seem to have delinked from aluminium prices

Nalco’s realized prices for alumina will move up in FY14 and will see an even sharper spurt in FY15 on better contract negotiations

– 6 of 17 –


Nalco’s alumina realized price as a % of aluminium prices on the rise

15.6%

18.0%

15.7%

11.6%

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FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E

Alumina realisations % of LME Aluminium

Source: Company, Bloomberg, PhillipCapital India Research Estimates

Indonesia’s bauxite export ban – significant boost to long‐term alumina pricing Indonesia’s recent ban on bauxite exports will see structural changes to the alumina and aluminium industries over the longer term. If sustained, the ban can see some Chinese alumina capacities shut or curtail production for want of raw materials. This will act as a major driver for alumina prices and hence aluminium prices over the longer term. However, in the near term, prices may not react as much because of the considerable alumina and bauxite inventory piled up by China in anticipation of the ban. The key risk to alumina prices is Indonesia lifting the ban or diluting its current stance of a complete export ban on bauxite. Indonesia export ban ‐ Can see China curtail or close some of its alumina production China’s dependence on imported bauxite for its alumina and aluminium production is estimated at around 35‐40%. With Indonesia accounting for around 70% of China’s imported bauxite, the ban poses a major risk to China’s alumina production. However, we do not expect any disruption in the near term as China has piled up bauxite inventory to cater to its requirement—China’s bauxite imports increased 79% in CY13 while its alumina production rose only 18%. As per various industry sources, China’s current bauxite inventory can cater to around 9‐12 months of alumina production. China’s bauxite imports: Up sharply in CY13

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CY08 CY09 CY10 CY11 CY12 CY13

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China has piled up enough bauxite to last for a year of alumina production. If the ban persists longer than that, it may have to cut production or shut facilities

Realized prices of alumina (as a % of LME) are expected to be the highest ever in the past 10 years

– 7 of 17 –


While China has been trying to reduce its exposure to Indonesian bauxite, it has met with little success and Indonesia continues to account for a major share of its imports (see chart below). Indonesia’s share of total bauxite imports into China has reduced from 80% in CY11 to 68% in CY13. China: Region‐wise bauxite imports; Indonesia still a major supplier

66% 73% 76% 80%71% 68%

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CY08 CY09 CY10 CY11 CY12 CY13

Indonesia Australia Others


Australia not an immediate replacement to Indonesian bauxite supplies to China China’s potential to increase imports from Australia remains limited as already 92% of Australia’s bauxite exports go to China. While the recent closure of Rio Tinto’s 2.7mn‐tonne Gove Alumina refinery could further improve overall bauxite exports, it will still not be enough to cover the loss from Indonesia. In any case, Gove’s closure will be offset by the alumina capacity expansions of around 2.4mn tonnes that were commissioned in 2013 and are expected to ramp up in 2014. Australia’s bauxite production and exports CY08 CY09 CY10 CY11 CY12 11MCY13

Australia bauxite production 64.6 65.2 68.4 70.0 76.0 73.8 Australia bauxite exports 8.7 6.4 8.0 10.3 10.4 14.4 Bauxite exports to China 5.0 5.1 6.6 8.4 9.5 13.3 Export to China as a % of total exports 58% 80% 83% 82% 91% 92%


While Australia has the potential of replacing Indonesia in bauxite exports, it is not expected to do so before CY16. Australia can add around 17mn tonnes to bauxite exports from two major projects after 2016—Rio Tinto is expanding its Weipa bauxite mine, which can add around 10mn tonnes after 2016; Australia has also called for bids to develop the deposits in Aurukun (in Queensland), which has the potential to produce 7mn tonnes of bauxite annually. China diversifying its bauxite import sources, but not enough to offset Indonesia’s ban China has been ramping up its imports of bauxite from countries other than Indonesia and Australia and has also been focusing on coal‐ash based alumina projects over the last two years to minimize the impact of the Indonesian export ban. However, it is not enough to offset the impact of the ban. Bauxite imports into China from other regions have grown from just 0.3mn tonnes in CY09 to 8.6mn tonnes in CY13—a 126% CAGR. Even with this phenomenal growth, China’s bauxite imports from other regions still account for only around 18% of the total bauxite imports from Indonesia.

Indonesia is still a major bauxite supplier to China…but its share has dropped from 80% in CY11 to 68% in CY13

Out of Australia’s bauxite exports, 92% already go to China; this limits China’s scope of compensating the loss of Indonesian ore from Australia

China’s bauxite imports from other regions still account for only ~18% of its total bauxite imports from Indonesia

– 8 of 17 –


China’s coal‐ash based alumina projects have kicked off, but still a long way to go China developed 3.5mn‐tonnes of coal‐ash based alumina capacities till 2013 and an additional 1.6mn tonnes of capacities are expected to be commissioned by 2015. While the country has plans to substantially scale up these capacities, it requires further developmental work, and hence we do not see significant volumes from these in the near term. In total, 15mn tonnes of such additional capacities are under various stages of planning and implementation but are not likely to contribute in the near term. China’s coal‐ash based alumina capacities projects Operator

Initial capacity (ktpa)

Commissioning dates

Planned expansions (ktpa)

Datang Int Renewable Resources 200 Output from July 2012 2,500 China Coal 100 Sep‐12 1,900 Shenhua Energy 1,000 Oct‐12 5,000 Mengxi Aluminium 200 Nov‐12 200 Beijing Xinheng Group 800 Q12013 3,200 Qianhengxin Industry (Yidong Group) 1,200 End of 2013 1,200 Chalco 200 End of 2014 1,000 Kaiyuan Ecological Aluminium 400 2015 ‐ Tongsheng Power Company 1,000 2015 ‐ Total 5,100 15,000

Source: Industry, PhillipCapital India Research

Implications on alumina prices China would need to import around 10‐15mn tonnes of alumina per year (10‐15% of the world’s production) to maintain its current rate of aluminium production. While potentially this can drive up alumina prices appreciably over the longer term, we do not expect any major jump in the near future due to China’s bauxite inventory pile up. A key risk to our call of firm alumina prices is Indonesia falling back on its current policy of banning bauxite exports. However, the cost support (refer cost curve chart on page 5) will restrict any significant fall in alumina prices.

Coal‐ash based alumina projects are a definite threat to bauxite based alumina projects in the longer term due to their much lower electricity requirement (around 65% lower)

– 9 of 17 –


Alumina costs to subside in FY15 aiding profitability Nalco, which is already in the first quartile of the alumina cost curve (refer to the chart on page 5), is likely to further consolidate its position with lower unit costs in FY15 driven by better bauxite quality (leading to lower caustic soda consumption) and lower raw material costs. In FY14, Nalco has been unable to benefit from higher alumina prices and volumes as these were offset by higher cost, leading to flat profitability on a sequential basis (see chart below). Higher caustic soda (higher per unit consumption) and furnace oil costs (higher prices) impacted overall per unit cost. Alumina: Production vs. unit costs

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Production Alumina Cost * Q3FY14 cost similar to Q3FY13 despite of 17% higher production

Source: Company, PhillipCapital India Research

* ‐ Alumina cost at PBIT level

In FY15, Nalco should save on caustic soda consumption and furnace oil costs and will see a better fixed‐cost recovery due to higher production. Caustic soda and furnace oil costs account for an estimated 45‐50% of overall alumina production costs. Caustic soda – improving per‐tonne consumption to offset higher prices Poor bauxite quality (high silica content) in the past few years led to a significant jump in Nalco’s caustic soda consumption—this increased from 69 kgs in FY11 to around 90 kgs in FY14—which in turn raised the caustic soda cost‐per‐tonne of alumina (see chart below). This, along with higher prices resulted in caustic soda expenses doubling for the company.

Nalco has been unable to benefit from higher alumina prices as its costs have remained high too

– 10 of 17 –


Caustic soda per tonne of alumina; up sharply from FY12

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As per Nalco’s mining plan for FY15, bauxite quality should improve; this will see a marginal reduction in its caustic soda consumption, which we expect to reduce to 87kgs per tonne of alumina (FY13 levels)—this will help offset higher caustic soda prices. We estimate lower consumption to improve the profitability by Rs 220mn in FY15. To further lower its costs, Nalco is conducting technical audits to reduce reactive silica content in bauxite. It is also working on improving recoveries of caustic soda from red mud, which goes as waste. In FY13, it used around 5‐10% of recycled caustic soda recovered from red mud in its alumina refinery. However, we have not built any benefit from these measures into our estimates. Stage‐2 forest clearance for bauxite mine to play a critical role Stage‐2 forest clearance for the Panchpatmali (Odisha) bauxite mine will play a critical role in achieving cost savings, enabling Nalco to mine in areas with high bauxite quality, which in turn will lead to a better blending of bauxite to improve overall quality. The company expects the approval in Q1FY15 and does not anticipate further delays despite the upcoming elections. Stage‐2 forest clearance for the bauxite mine will also help in ensuring smooth alumina operations. Current alumina production is majorly dependent on the smooth supply of bauxite from the mine as the company has significantly drawn down on its bauxite inventory while the mine was temporarily shut for want of renewal of mining lease. Any disruptions in the bauxite supply will impact the alumina production—this was seen in Nalco’s Q3FY14 performance when supply was disrupted due to the cyclone Phailin, which struck Odisha in October 2013. The company is also building a conveyor belt (14kms long) from the mine to its alumina refinery (total distance 18kms), which will smoothen bauxite transportation. The belt’s construction was delayed due to the expiry of its mining lease, but the company has now secured all the permissions and the conveyor is expected to be commissioned in the first half of FY15. While the belt will lead to some fuel cost savings (dumpers) in addition to ensuring a stable supply of bauxite, we have not assumed any benefits from this into our estimates.

Caustic soda consumption increased dramatically in FY12 and has been rising steadily ever since, leading to a major cost surge

The stage‐2 forest clearance for its Panchpatmali mines in Odisha will help increase output thereby replenishing almost exhausted bauxite inventory

Better bauxite quality will help to reduce caustic soda consumption and boost margins—we expect a Rs 220mn addition to profitability because of this

– 11 of 17 –


Furnace Oil – Higher discounts to offset high prices Rising furnace oil prices over the past few years have hit Nalco’s overall costs and profitability. Its furnace oil cost‐per‐tonne for alumina have more than doubled over the last 10 years; however, the highest jump happened over the past 3‐4 years. Furnace oil per tonne of alumina

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Nalco has bagged higher discounts on furnace oil prices in its recently negotiated annual contracts and is likely to save around Rs 3,000/KL as a result. Benefits of these discounts were partly felt in Q3FY14, but most the benefit is expected to reflect Q4FY14 onwards. Aluminium: Pot shutdown helped raise amperage, reduced cost, and boosted production Nalco’s 335‐pot shutdown last year not only helped the company in terms of freeing up higher alumina volumes to be sold, but also increased the stability of power supply for the existing production. This enabled Nalco to increase amperage at one of its pot lines from 180KA to 195KA, giving it an incremental production of 1,000 tonnes per month from October 2013. While this will not pronouncedly add to the overall profitability, it will help the company reduce aluminium costs with a better fixed‐cost recovery. Aluminium per unit production cost has reduced by ~1.5% qoq in Q3FY14, primarily driven by higher output. Stability in power supply will also help improve power consumption norms thereby reducing power and fuel costs. We expect aluminium production to grow by 1.4% in FY15 to 322,000 tonnes after a steep 21% fall (due to pot shut down) in FY14.

We have estimated overall savings of Rs 130mn in FY15 due to higher discounts on furnace oil prices, which will help offset rising oil prices

Pot shutdowns have freed up alumina for sale, stabilized power supply, and actually added to production

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Nalco: Monthly aluminium production (‘000 tonnes)

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Source: Ministry of Mines, PhillipCapital India Research

Nalco is also working on a smelter upgradation project to increase its amperage from the current 180KA to 220KA. This will help the company increase its capacity by 107,000 tonnes at an investment of Rs 9bn. However, it will move ahead with the project only after the coal availability improves or after it commissions its Utkal‐E coal block in Odisha. Nalco will also increase its power capacity by 500MW (at a cost of Rs 27bn) to meet the incremental power requirements for its expanded aluminium capacity. We have not assumed any capex for these projects into our estimates. Coal mine commissioning – a significant boost to profits, but still a while away The commissioning of its Utkal‐E coal block will be a major driver for Nalco’s profitability—the company can not only restart its 335 pots that are shut down, but will also allow it to proceed with its aluminium smelter amperage upgradation project. While Nalco expects to commission the block by December 2014, we have not built benefits into our estimates given the delays in the regulatory process and the upcoming elections. So far, Nalco has received all regulatory approvals for the block (including a mining lease) except for forest clearance for a small patch of land (around 28 hectares out of total 197 hectares). Nalco was allocated Utkal‐E coal block in August 2004 for the 9th and 10th units of its captive power plant and to meet part requirements for smelter upgradation. The mine has reserves of around 67.49mn tonnes and is expected to mine 2mn tonnes of coal per annum. The project cost for developing the block is Rs 3.4bn, of which the company has already spent Rs 1.2bn towards land acquisition. It has also started constructing the Rehabilitation and Resettlement colony (leading to possession of land) and has initiated the process of appointing a mine developer‐cum‐operator for the block. This will speed up the commissioning once the pending forest approval is received. Nalco expects to get output from the block nine months after it receives the forest clearance.

Higher amperage will help the company maximize its profits from the operating pots with a better fixed‐cost recovery

For its Utkal‐E coal block, the only approval pending is a forest clearance for 28 hectares of land (out of 197 hectares). Since delays in regulatory processes are fairly common and in view of the upcoming election, which could further delay the process, we don’t build in benefits of the block into our estimates

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Valuations At its current market price, the stock trades at a P/E of 12.2x FY14E EPS of Rs 2.7, 9.7x FY15E EPS of Rs 3.3 and 9.8x FY16E EPS of Rs 3.3. It trades at an EV/EBIDTA of 2.9x FY14E, 2.3x FY15E and 2.2x FY16E. To factor in lower return ratios, we value the company at 5x EV/EBIDTA, implying a significant discount to its 10‐year average of 9x. We roll forward our valuations to FY15 and raise our target price to Rs 44 (from Rs 41 earlier) representing a 37% upside. At our TP, the stock will trade at a P/E of 13.3x vs. its 10‐year average of 16x. We upgrade our rating on the stock to Buy from Neutral. At the current price, the stock offers an attractive dividend yield of 3.9% and given its high cash balances, it is possible that it may pay even higher dividend. However, we have assumed dividend at FY13 levels. The company has convened a board meeting on Feb 25, 2014 to consider an interim dividend. The record date for the same is March 6, 2014. Changes in assumptions and estimates ___New Estimates___ __Old Estimates__ ____% chg_____Particulars FY14 FY15 FY16 FY14 FY15 FY14 FY15

Alumina Volumes (mn tonnes) 1.37 1.50 1.54 1.34 1.44 2.2% 4.5%Alumina realisation as a % of LME 17.7% 18.5% 18.5% 17.5% 16.3% Sales (Rs mn) 66,683 72,624 73,456 64,062 66,795 4.1% 8.7%Operating Profit (Rs mn) 9,126 11,961 11,887 8,521 8,531 7.1% 40.2%Net Profit (Rs mn) 6,834 8,591 8,536 6,545 6,337 4.4% 35.6%EPS 2.65 3.33 3.31 2.54 2.46 4.4% 35.6%

Source: PhillipCapital India Research Estimates

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– 14 of 17 –


Financials

Income Statement Y/E Mar, Rs mn FY13 FY14E FY15E FY16E

Net sales 68,095 66,683 72,624 73,456Growth, % 5 ‐2 9 1Other income 1,070 1,063 1,116 1,172Total income 69,165 67,746 73,740 74,628Raw material expenses ‐14,856 ‐15,253 ‐16,563 ‐16,817Employee expenses ‐11,539 ‐12,809 ‐13,449 ‐13,785Other Operating expenses ‐33,701 ‐30,559 ‐31,767 ‐32,139EBITDA (Core) 9,069 9,126 11,961 11,887Growth, % (20.8) 0.6 31.1 (0.6)Margin, % 13.3 13.7 16.5 16.2Depreciation ‐5,054 ‐5,206 ‐5,882 ‐6,032EBIT 4,014 3,920 6,079 5,855Growth, % (20.8) 0.6 31.1 (0.6)Margin, % 13.3 13.7 16.5 16.2Interest paid ‐75 ‐50 ‐50 ‐50Other Non‐Operating Income 5,111 5,622 5,903 6,050Non‐recurring Items 0 0 0 0Pre‐tax profit 9,050 9,491 11,932 11,855Tax provided ‐3,122 ‐2,658 ‐3,341 ‐3,319Profit after tax 5,928 6,834 8,591 8,536Net Profit 5,928 6,834 8,591 8,536Growth, % (32.0) 15.3 25.7 (0.6)Net Profit (adjusted) 5,928 6,834 8,591 8,536Unadj. shares (m) 2,577 2,577 2,577 2,577Wtd avg shares (m) 2,577 2,577 2,577 2,577

Balance Sheet Y/E Mar, Rs mn FY13 FY14E FY15E FY16E

Cash & bank 35,044 41,801 38,609 37,180Debtors 1,430 1,400 1,525 1,542Inventory 13,806 13,364 14,078 14,285Loans & advances 19,478 18,991 19,941 19,741Other current assets 2,303 2,326 2,349 2,372Total current assets 72,061 77,882 76,501 75,121Investments 14,901 15,273 17,654 20,046Gross fixed assets 141,750 148,750 156,850 160,850Less: Depreciation ‐75,461 ‐80,667 ‐86,549 ‐92,581Add: Capital WIP 10,019 8,519 10,419 17,419Net fixed assets 76,308 76,602 80,720 85,688Total assets 163,270 169,757 174,875 180,855 Current liabilities 31,201 34,056 33,852 34,379Provisions 3,713 3,806 3,711 3,803Total current liabilities 34,914 37,862 37,562 38,182Non‐current liabilities 9,031 9,506 10,102 10,695Total liabilities 43,945 47,368 47,665 48,877Paid‐up capital 12,886 12,886 12,886 12,886Reserves & surplus 106,438 109,503 114,325 119,091Shareholders’ equity 119,325 122,389 127,211 131,977Total equity & liabilities 163,270 169,757 174,875 180,855


Cash Flow Y/E Mar, Rs mn FY13 FY14E FY15E FY16E

Pre‐tax profit 9,050 9,491 11,932 11,855Depreciation 5,054 5,206 5,882 6,032Chg in working capital 1,345 3,885 ‐2,111 571Total tax paid ‐2,582 ‐2,183 ‐2,744 ‐2,727Other operating activities 15 0 0 0Cash flow from operating activities 12,882 16,399 12,958 15,731Capital expenditure ‐8,395 ‐5,500 ‐10,000 ‐11,000Cash flow from investing activities ‐15,753 ‐5,872 ‐12,382 ‐13,391Free cash flow ‐2,870 10,527 577 2,340Dividend (incl. tax) ‐3,769 ‐3,769 ‐3,769 ‐3,769Cash flow from financing activities ‐3,769 ‐3,769 ‐3,769 ‐3,769Net chg in cash ‐6,639 6,758 ‐3,193 ‐1,429

Valuation Ratios & Per Share Data FY13 FY14E FY15E FY16E

Per Share data EPS (INR) 2.3 2.7 3.3 3.3Growth, % (32.0) 15.3 25.7 (0.6)Book NAV/share (INR) 46.3 47.5 49.4 51.2FDEPS (INR) 2.3 2.7 3.3 3.3CEPS (INR) 4.3 4.7 5.6 5.7CFPS (INR) 3.0 4.2 2.7 3.8DPS (INR) 1.25 1.25 1.25 1.25Return ratios Return on assets (%) 3.8 4.1 5.0 4.8Return on equity (%) 5.0 5.6 6.8 6.5Return on capital employed (%) 4.6 5.1 6.2 6.0Turnover ratios Asset turnover (x) 0.8 0.8 0.9 0.8Sales/Total assets (x) 0.4 0.4 0.4 0.4Sales/Net FA (x) 0.9 0.9 0.9 0.9Working capital/Sales (x) 0.1 0.0 0.1 0.0Working capital days 31.2 11.1 20.3 17.7Liquidity ratios Current ratio (x) 2.3 2.3 2.3 2.2Quick ratio (x) 1.9 1.9 1.8 1.8Interest cover (x) 53.9 78.4 121.6 117.1Dividend cover (x) 1.8 2.1 2.7 2.6Net debt/Equity (%) (29.4) (34.2) (30.4) (28.2)Valuation PER (x) 14.1 12.2 9.7 9.8Price/Book (x) 0.7 0.7 0.7 0.6EV/Net sales (x) 0.5 0.4 0.4 0.4EV/EBITDA (x) 3.7 2.9 2.3 2.2EV/EBIT (x) 3.7 2.9 2.3 2.2

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Recommendation History

N (TP 82)

N (TP 70)N (TP 54)

N (TP 62)

N (TP 55)N (TP 42)

N (TP 49)

N (TP 49)

B (TP 31)

N (TP 41)

B (TP 44)

0

20

40

60

80

100

120

1/3/2011 6/27/2011 12/22/2011 6/12/2012 12/5/2012 5/29/2013 11/21/2013

C

Source: PhillipCapital India Research

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Management (91 22) 2300 2999(91 22) 6667 9735

Research Engineering, Capital Goods Pharma

Deepak Jain (9122) 6667 9758 Ankur Sharma (9122) 6667 9759 Surya Patra (9122) 6667 9768Priya Ranjan (9122) 6667 9965 Aditya Bahety (9122) 6667 9986

Retail, Real EstateInfrastructure & IT Services Abhishek Ranganathan, CFA (9122) 6667 9952

Manish Agarwalla (9122) 6667 9962 Vibhor Singhal (9122) 6667 9949 Neha Garg (9122) 6667 9996Sachit Motwani, CFA, FRM (9122) 6667 9953 Varun Vijayan (9122) 6667 9992

TechnicalsMetals Subodh Gupta (9122) 6667 9762

Naveen Kulkarni, CFA, FRM (9122) 6667 9947 Dhawal Doshi (9122) 6667 9769Vivekanand Subbaraman (9122) 6667 9766 Dharmesh Shah (9122) 6667 9974 Database ManagerManish Pushkar (9122) 6667 9764 Vishal Randive (9122) 6667 9944

Oil&Gas, Agri InputsCement Gauri Anand (9122) 6667 9943 Sr. Manager – Equities SupportVaibhav Agarwal (9122) 6667 9967 Deepak Pareek (9122) 6667 9950 Rosie Ferns (9122) 6667 9971

Anjali Verma (9122) 6667 9969

Sales & Distribution Kinshuk Tiwari (9122) 6667 9946 Sales Trader ExecutionAshvin Patil (9122) 6667 9991 Dilesh Doshi (9122) 6667 9747 Mayur Shah (9122) 6667 9945Shubhangi Agrawal (9122) 6667 9964 Suniil Pandit (9122) 6667 9745Kishor Binwal (9122) 6667 9989Sidharth Agrawal (9122) 6667 9934Dipesh Sohani (9122) 6667 9756

Economics

Consumer, Media, Telecom

Vineet Bhatnagar (Managing Director)Jignesh Shah (Head – Equity Derivatives)

Automobiles

Banking, NBFCs

Contact Information (Regional Member Companies)

SINGAPORE

Phillip Securities Pte Ltd 250 North Bridge Road, #06‐00 Raffles City Tower,

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

ANZ Tower 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, Ocean Tower 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, Vorawat Building, 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 Trade Building

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

AUSTRALIA PhillipCapital Australia

Level 37, 530 Collins Street Melbourne, Victoria 3000, Australia

Tel: (61) 3 9629 8380 Fax: (61) 3 9614 8309 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, C‐Block, 2nd Floor, Modern Center , Jacob Circle, K. K. Marg, Mahalaxmi Mumbai 400011 Tel: (9122) 2300 2999 Fax: (9122) 6667 9955 www.phillipcapital.in

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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 or may not match or may be contrary at times with the views, estimates, rating, 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 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 to future performance. This report does not have regard to 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 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 realized. In no circumstances it be used or considered as an offer to sell or a solicitation of any offer to buy or sell the Securities mentioned in it. The information contained in the research reports may have been taken from trade and statistical services and other sources, which we believe are 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 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. The Research Analyst certifies that he /she or his / her family members does not own the stock(s) covered in this research report. 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 may hold either long or short positions in such securities. PhillipCapital (India) Pvt. Ltd does not hold more than 1% of the shares of the company(ies) covered in this 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. Copyright: The copyright in this research report belongs exclusively to PCIPL. All rights are reserved. Any unauthorized 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 in can be substantial. You should carefully consider whether trading is appropriate for you in light of your experience, objectives, financial resources and other relevant circumstances. 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 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 the 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, Marco Polo Securities Inc. ("Marco Polo").Transactions in securities discussed in this research report should be effected through Marco Polo or another U.S. registered broker dealer PhillipCapital (India) Pvt. Ltd. Registered office: 2nd Floor, C‐Block, Modern Centre, Mahalaxmi, Mumbai – 400011

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