tech mahindra - initiating coverage

8/8/2019 Tech Mahindra - Initiating Coverage

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TechMahindraLimited23December2010

Jaypee Research De

www.jaypeeindia.co

www.jaypeeusa.com

OurreportsareavailableonBloomberg

Pleaserefertothedisclaimerattheendofthereport

AsonDec22,2010.

MarketCap.(`.Mn.) 87,361

52WeekHigh/Low `1158/600

BookValue `236

FaceValue `10

Codes

BSECode 532755

NSESymbol TECHM

BloombergCode TECHMIN

ReutersCode TEML.BO

ShareholdingPattern

Sept2010 June2010 Mar2010

Promoters 72.8 73.8 74.9

FII 1.7 1.2 0.6

DII 15.1 15.6 8.7

Others 10.3 9.3 15.9

SharePriceReturns(%)1M 6M 12M

Absolute 7.8 9.9 33.2

Relative 6.8 21 53.3

VijayGautam

[email protected]

KrupaBShah

[email protected]

ContactNo:

+912243542019

We

initiate

coverage

on

Tech

Mahindra

with

a

target

price

of`

707

and

a

Neutrarating on the stock. Tech Mahindra is an IT services company focused only in the

telecomverticalandisexpectedtoclock$1billioninrevenuesinFY11.Thecompany

alsoholds42.7%stake inMahindraSatyam(erstwhileSatyamComputerServices)

Ouranalysissuggestsamuted5.8%YoYgrowthinEPSforFY12duetoshrinkingo

BTaccountaswellasbusinessfromEurope.Wevaluethecorebusinessat9xFY12E

EPS,whichwebelievefullyreflectscompanyfundamentals,andgivea25%discoun

toSatyamholdingtovalueitscontributiontoTechMahindramarketcap.

Telecomverticallosingsteam:TechMahindrahadbeenfocusedonWesterntelecom

industry,whichkeepsfacingachallengingenvironmentevenafterfinancialcrisishas

ended, due to large number of players and squeezedup margins as the industry is

highlymature.Thishasforcedthecompanyto look intoemergingmarkets likeIndia

and

Africa.

Indian

telecom

market

is

growing

at

a

frenetic

pace

and

telecomcompanies require IT as well as BPO service providers to service their elaborated

systems as well as service customers. Contribution of emerging markets to the

revenueshasincreasedfrommere8%inQ2FY09to32%inQ2FY11.

KeyclientBTreducing itsbusiness:AsBT,thekeystakeholder inTechMahindraas

well as its largest client, faces business and labor issues, it is reducing stake in the

company.From~$160mnrevenueinQ2FY09(~60%oftopline),BTaccountshrankto

~$115mnrevenue(~35%oftopline) inQ2FY11.ShrinkingofBTandotherEuropean

accountshasreducedEuropeancontributiontobusinessfrom72%inQ2FY09to43%

inQ2FY11.This,coupledwithEuropeanUnionfacingproblemsduetocreditcrisis,has

forced Tech Mahindra to reduce dependence on Europe and develop business in

EmergingMarketsaswellastheUS.

Satyam turnaround taking longer time than expected: Satyam reported operating

profitinQ2FY11but itsmarginsremain low.Becauseofsubduedtoplinegrowth,we

expectfurther46quartersbeforethesuppressedmarginsstartrevivingagain.

Valuations:BySOTPmethodology,wearriveatatargetpriceof`707,implyinga1.7%upside from present levels. We value the core business at 9x its FY12E earnings o

`58.31 to arrive at the core business value of`525 per share. We value Mahindra

Satyam stake by applying a holding discount of 25%. Risks to the valuation include

clientconcentration,declineinBTrevenuesandsluggishgrowthofMahindraSatyam.

FinancialSummary(` Mn)Year

ended

FY09

FY10

FY11E

FY12E

Netsales 44647 46254 51341 52246

EBIDTA 12825 11297 10321 10899

EBIDTAMargin (%) 28.7 24.4 20.1 20.9

PAT 10146 7003 6818 7219

PATMargin (%) 207.3 31.0 2.6 5.9

EPS 81.12 60.89 55.13 58.31

PER(x) 8.2 10.9 12.0 11.4

ROE(%) 54.0 24.0 23.0 22.0

INITIATINGCOVERAGE CMP:` 695 TARGET:` 707 NEUTRAL

80

90

100

110

120

TechM NIFTY

SharepricePerformancechart


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Corporate Access & Events

Clientandgeographicalconcentration

isabigweakness

Satyambusinessprovideswithalong

termopportunity.

Emerging markets, esp. India and

Africa

also

throw

opportunities

Cashbalance: TheCompanyholds`1,766mnofcashreservewhichisa

favorable situation and also offers a scope for inorganic expansion

However,

the

company

also

has

debt

of`14,264

mn

on

books,

which

dilutesthecashposition.

Weaknesses:

Clientconcentration:BTaccountsfor35%ofrevenues,andnext4clients

accountforfurther42%ofrevenues,makingtop5clientsaccountingfo

77%ofthebusiness.Suchhighclientconcentrationisabusinessrisk.

Geographicalconcentration:43%oftherevenuescome fromEuropean

region. Because of such geographical focus, Tech Mahindra was among

badlyimpactedstockduringtherecentEuropeancrisis.

Utilization

rates:

Tech

Mahindra

has

a

large

bench

and

employeeutilizationislowerthanitspeers.

Highemployeeattrition:TechMahindrasuffersfromanattritionrateo

30+%onannualizedbasis,whichishigherthanitspeers.

Vertical concentration: Though other verticals like BFSI have recovered afte

financial crisis and have expanded their IT budgets, telecom spending is stil

depressed, margins are lower and competition is high. Tech Mahindra is

sufferingbecauseofthisandiswitnessingmutedgrowth.

Opportunities:

Satyambusiness:

o IfTechMahindraacquiresSatyam, itwillbeabletogetbusiness

fromverticalslikeBFSIandmanufacturingalso.

o Clientbasewillalsoexpandafterbusiness inverticalsotherthan

telecomexpands.

DomesticBusiness:AsIndiantelecomsectorisexpandingwithcustome

base and installed capacity increasing, service providers like Tech

MahindraarerequiredtoprovideITandBPOservices.

Westerntelecomcompaniesaimingforcostefficiencies:Sincereduction

in

operating

expenditure

is

achieved

through

cost

efficiency,

Westerntelecomcompaniesareoffshoringmore:anopportunity.


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Threats:

Stiff

competition

from

IT

giants:

Even

in

the

telecom

vertical,

TechMahindra is facingstiffcompetitionfrom ITbiggies likeTCS, Infosysand

Wipro.

Geographicalconcentrationofbusiness:Thecompanywasearning43%

oftherevenuefromEurope,morespecificallyUK.Thecurrenteconomic

scenarioaswellasslowdecisionmakingcycles inEuropecandeterthe

toplinegrowth.

Marginpressure:Marginsareunderpressureduetosalaryhikesinboth

corebusinessandMahindraSatyam.

USDINR Volatility: Revenue realization in ` is under pressure due to

crosscurrencyfluctuations.

US

visa

fee

hike:

Recent

fee

hike

in

H1

and

L1

visas

by

US

govt.

canincreaseSG&Aexpenses,thusreducingoperatingmargins.

Lackluster telecom industry growth: Because of predominant telecom

focus, Tech Mahindra is growing less than its peers having presence in

other verticals also. Focus on the stagnant Western telecom industry

wheremanyclientshavestillnotrecoveredaftertherecession,onlyadds

ontotheproblem.

BT negotiating billing rates: BT, which is the largest client and

contributes 35%, is constantly negotiating on billing rates as its own

businessishavingtrouble.BTisplaguedbycashproblemsandunionism

which is opposing outsourcing. Recently BT sold 5.5% stake in Tech

Mahindra to Mahindra & Mahindra for`4,500 million, thus bringing its

stakein

Tech

Mahindra

to

24%.

Othercustomersalsoaskingforratecuts:SeeingTechMahindragiving

ratecutstoBT,othertop4customers,viz.AT&T,O2andMotorolahave

alsostartedaskingforratecuts,thusfurtherpressuringmargins.

Continuous investment in Sales & Marking is required to induct new

clients,developclientbaseandreduceclientconcentration.

ExitofCEO:ExitofMr.SanjayKalra,whowasinstrumentalingrowingBT

business,inSep10islikelytonegativelyimpactgrowthofBTaccount.

Crosscurrency volatility: With Tech Mahindra diversifying to new

geographies, and accepting payments in multiple currencies like USD

GBP,EUR,AUDetc,crosscurrencyvolatilityremainsarisk.


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BTrevenueshavebeenfalling.

The following chart illustrates consolidated revenue and net profit in past 6

quarters.Again,

if

the

pass

through

component

of

the

revenue

is

considered

pictureisdismal.

[Source:Company,JaypeeResearch]BT revenues in past 6 quarters have remained flattish from Q1FY10 levels

withadipinQ1FY11:

[Source:Company,JaypeeResearch]


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NonBT revenues have been in

growingtrend

Marginsarefalling

NonBT revenues in past 6 quarters have been on growth trend, and in

Q2FY11 have nearly doubled from Q1FY10 levels. This is mostly due to the

passthrough

component

as

well

as

focus

on

emerging

markets,

who

have

contributed32%torevenuesinQ2FY11,ascomparedto10%inQ1FY10:


Marginsofthecompanyhavebeenfalling,duetopricecutsbyBTandsalary

hikes:

25.2% 25.4%

23.6% 23.6%

18.8% 18.4%

22.5% 22.6%

20.9%20.2%

15.6% 16.1%

10%

12%

14%

16%

18%

20%

22%

24%

26%

28%

Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11

Margins

ConsolidatedMargins

EBITDAmargin EBITmargin



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The company has three business

segments:TSP,TEMandBPO

TSPrevenueshavebeenrising

BusinessSegments

Thecore

business

of

Tech

Mahindra

is

focused

on

telecom

in

which

it

provides

IT and BPO services. The company has three main business segments: a

Telecom Service Provider (TSP), b) Telecom Equipment Manufacturer (TEM

andc)BPO.

Thefollowingtableillustratesdetailsofthesebusinesssegments:

QoQ YoY QoQ YoY

TSP 89.3% 38.3% 40.0% 29.3% 19.6% 6.7%

TEM 4.5% 17.3% 2.1% 34.3% 23.8% 5.4%

BPO 5.0% 15.3% 14.4% 43.6% 21.8% 1.4%

RevenuegrowthBusinesssegment

Revenuecontribution

EBITDAgrowthEBITDAmargin


TSP revenuessawaspike inQ2FY11. Itwasmostly becauseofpassthrough

revenue of ~`300 Crore, accounting for hardware sale by Tech Mahindra to

one of its TSP client under a buildandmanaged services contract. The

contribution to operating profit by passthrough component was`23 Crore

EBITDAmargininTSPbusinessalsoimprovedfrom33.9%to37.5%:



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butTEMrevenueshavebeenflat

BPOrevenuesarealsorising

TEMrevenueshavebeenflattish,andmarginshavealsobeenvolatile:


BPObusiness isshowingtraction. InQ2FY11TechMahindrasignedatelecom

BPOdealwithBhartiAirtelinAfrica.



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The company has 124 clients. BT

accountsfor~35%oftherevenues

ClientDetails

Britishtelecom

provider

BT

owns

about

athird

of

Tech

Mahindra

and

is

also

its

largest customer. BT accounts for ~45% of the total revenues of Tech

Mahindra. Next 4 clients: AT&T, AlcatelLucent, Motorola and Vodafone

accountfor30%,thusmakingtop5clientsaccountingfor75%ofthebusiness

Top 10 clients account for 84% of the business, making client concentration

veryhigh.

Totalactiveclientsonboardincreasedfrom117inQ1FY11to124inQ2FY11.

Thefollowingtableillustratestheclientpyramid:

Clientmatrix Q1

FY10 Q2

FY10 Q3

FY10 Q4

FY10 Q1

FY11 Q2

FY11

ActiveClients 110 110 110 113 117 124

$12mnclients 18 18 19 15 16 13

$25mnclients 14 12 12 15 16 18

$510mnclients 7 8 9 7 7 7

$1015mnclients 2 1 3 5 6

$1520mnclients 4 2 3 3 2 1

$2025mnclients 1 1 1 2 2

$2550mnclients 2 2 2 2 2 2

$50mn+clients 2 2 2 2 2 3

[Source:Company,JaypeeResearch]Thefollowingtableillustrates$revenuecontributionfromtopaccounts:

$mn Q1FY10 Q2FY10 Q3FY010 Q4FY10 Q1FY11 Q2FY11

BT 118.4 118.3 116.7 119.0 113.0 114.9

Next4accounts 59.2 59.1 73.6 67.2 72.8 137.8

Next5accounts 18.2 21.3 17.8 23.3 20.1 23.0

[Source:Company,JaypeeResearch]ThefollowingtableandchartsillustratesQoQperformanceoftopaccounts:

Client Q1FY10 Q2FY10 Q3FY010 Q4FY10 Q1FY11 Q2FY11BT 7.7% 0.1% 1.3% 1.9% 5.0% 1.7%

Next4accounts 7.7% 0.1% 24.5% 8.6% 8.3% 89.3%

Next5accounts 43.5% 16.8% 16.5% 31.0% 13.7% 14.4%


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Currentutilizationat75% is lessthan

thepeers

TechMahindra is trying topenetrate

emergingmarkets inorder to reduce

riskduetogeographyfocus

Thefollowingchartexhibitsblendedemployeeutilizationforpastsixquarters:

[Source:Company,JaypeeResearch]GeographicalPresence

WithBTasitslargestcustomer,TechMahindrahas largestmarketinEurope

whichcontributes43%tothetopline. It isfollowedbyNorthAmerica,which

contributes 25%. The company expects business from North America to

increaseasdemanduptickisseen intheUS,andthatfromEuropetoremain

flataftertheeconomicuncertaintythatensuedinEuropeanUnionaftercredit

crisis.Tech

Mahindra

is

witnessing

project

delays

in

European

accounts,

while

USmarketisseeingtractionandallotmentofnewdeals.

The company is now earning ~30% of total revenue from RoW (Restofthe

World,regionsotherthantheUSandEurope).It isactivelypursuingmarkets

like Middle East, West Asia and Africa, where markets are fragmented and

competitive,anddealsizesaresmall.Contractsizecouldbeassmallas$1mn

stretchingupto$15mn.Thetenureofdealsrangesbetween3to12months

At present, Tech Mahindra has a team of around 250 people in Africa and

WestAsia.Thereareasmanyas170180telecommunicationoperatorsinthe

MENA region who outsource work. Tech Mahindra is chasing big telecom

companies

that

have

operations

in

more

than

one

country.


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BT account, the largest, is not

expectedtorevivesoon

TechMahindraislookingtoinorganic

expansion even after Satyam stake

purchase

BTBusiness:ADiscussion

BThas

been

badly

hit

by

the

recession.

Whilst

its

revenues

have

grown

by

a

0.5%CAGRoverFY0810,operatingprofitshavedeclinedbya5%CAGRduring

thesameperiod.TherushtosavecostsforcedBTtorestructureitscontracts

with Tech Mahindra and also to ramp down certain projects. Quarterly

revenue flow from BT, which was $171.3 mn in Q1FY09, has come down to

$114.9mninQ2FY11.BTisbelievedtobepursuingfewercontracts.Itisslated

to give a pay hike of ~3% to workers as well as distribute GBP 500 mn in

bonuses. The management has also aiming for aggressive cost cutting by

reducing headcount at onsite as well as offshore. It has set the cost saving

targetofGBP900mnforFY11.Itisalsoforcingitscontractorstocutcosts.

BT

is

passing

on

a

part

of

cost

reduction

to

Tech

Mahindra

in

form

of

price

cutsthrough common rate card method. We expect BT revenues to be flat in

comingquarters.

ManagementPlansandGuidance

TechMahindraeventuallyplanstomergeMahindraSatyamintoitself,afteral

legal issues are done with. We expect merger to complete only by H2FY13

Integration challenges include incorporating telecom vertical of Tech

Mahindra with nontelecom verticals of Mahindra Satyam, which has fou

majorverticals:BFSI,Manufacturing,RetailandHealthcare.TechMahindra,a

telecomvertical focusedcompany, isexpectedtoclock$1bnofrevenue in

FY11.Thus,withannualrevenuerunrateof$1bn,telecomwillemergeasthe

biggestverticalofthecombinedentity.

Already Tech Mahindra is jointly executing telecom deals with Mahindra

Satyam. Tech Mahindra is strong in operations support systems, business

support systems, network services, security and value added services, while

Mahindra Satyam's strengths are in ERP, content management and business

intelligence.Afterthemerger,TechMahindrawillbecomeafirmwithmultiple

servicelinesfromasingleverticalcompany.

Thecompanyislookingathugeinvestmentsbothorganicandinorganicto

buildall

five

verticals.

It

is

looking

to

acquire

amid

size

company

with

revenue

inrangeof$100mn,especiallyinBPO.

ThecompanyexpectsmarginpressuretoeasebyFY12andexpectspricingto

returntoprerecessionlevelsinnexttwotothreeyears.


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Due to stunted growth, company is

nowtrading

at

amultiple

much

lower than it enjoyed during FY06

07.

Wevaluecorebusinessat9x

and give 25% discount to Satyam

holding

The company, which draws 35% of its revenue from BT Group Plc, expects

growthtocomefromothernonBTcustomers.

Valuation

ThefollowingchartillustratesforwardPE(x)chartofTechMahindra:

[Source:BSEwebsite,JaypeeResearch]Asseeninthechart,PEratiohaswitnessedaconstantdeclinesinceFY07.An

uptick is seen only from the beginning of FY10. However by this time Tech

MahindraPrice

had

reflected

profit

contribution

from

Mahindra

Satyam

too

We have to value core business of Tech Mahindra and Mahindra Satyam

holdingseparatelybyapplyingSOTPmethodology.

We assign target PE(x) multiple of 9x to Core business, and multiply it with

FY12E EPS of`58.31 to arrive at core business value per share of`525. We

assigna25%holdingdiscounttomarketcaptoarriveatvaluepersharedue

toMahindraSatyamholding.


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Since Tech Mahindras mcap is

contingent on Satyams mcap,

scenarioanalysisisrequired.

Valuation ` mnSatyam'sprice(`) 60

Shares(mn) 1,175

TechMahindrastake 42.7%

MarketvalueofTechMahindrastake 30,104

Holdingdiscount 25%

TargetmcapofSatyam'sstake 22,578

FullydilutedFY12EEPSforTechM(`) 58.31

TargetPE(x) 9

Corebusinessvaluepershare(`) 525

Shares(mn) 123.8

Targetmcap(excl.Satyam) 64,967

Targetm

cap

(incl.

Satyam) 87,544

TargetPrice 707

By SOTP methodology, we arrive at target price of`707, implying a 1.7%

upsidefrompresentlevels.

Riskstovaluation

Riskstovaluationremain informofrisktothetopline informofshrinkingof

BTrevenues.Clientconcentrationremainsanotherrisk,whichTechMahindra

istryingtomitigatethroughdiversifyingtoemergingmarkets.

MahindraSatyamwilltakefurther46quarterstostabilize.Theintrinsicvalue

of Tech Mahindra is highly dependent on the stock price of Satyam. So if

Satyam stock exhibits strong volatility, then it is a risk to Tech Mahindra

valuation.

ScenarioAnalysis

We have performed scenario analysis by considering three scenarios: Base

Case,BullCaseandBearCase,andcalculatingintrinsicvalueofTechMahindra

stockaccordingly.ThereplacementcostofMahindraSatyamis`60pershare

andwe

have

assumed

accordingly

for

our

base

case

scenario.


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TargetPriceforTechMahindrawhen

Satyamstockisat`40,`60and`80is`646,`707and`768respectively.

i)BaseCase:Satyamstockprice=`60

Intrinsicvalue

of

Tech

Mahindra

stock

is

`707:


Shares(mn) 1,175



Holdingdiscount 25%



Target

PE(x) 9


Shares(mn) 123.8


Targetmcap(incl.Satyam) 87,544

TargetPrice 707

ii)BullCase:Satyamstockprice=`80

IntrinsicvalueofTechMahindrastockis`768:


Shares(mn) 1,175



Holdingdiscount 25%



TargetPE(x) 9


Shares(mn) 123.8



TargetPrice 768


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iii)BearCase:Satyamstockprice=`40

Intrinsicvalue

of

Tech

Mahindra

stock

is

`646:


Shares(mn) 1,175



Holdingdiscount 25%



Target

PE(x) 9


Shares(mn) 123.8



TargetPrice 646

Given above mentioned risk factors, we have a negative outlook on Tech

Mahindrabusinessintheshortterm.Howeverinthelongrun,withMahindra

Satyam turnaround and Tech Mahindra successfully diversifying its business

good times may return. Faster turnaroundofMahindraSatyamwillserveas

keyrerating

trigger

for

the

stock.

We Initiate coverage on Tech Mahindra with a NEUTRAL rating and target

priceof`707.


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CompanyDescription

Tech

Mahindra

is

a

global

systems

integrator

and

IT

consulting

organizationfocusedontelecomvertical.ItispartoftheUSD7.1bnMahindraGroup,and

is in partnership with British Telecom Plc (BT), UK based leading

communicationsserviceprovider.

Thecompanywasincorporatedin1986asMahindraBritishTelecom(MBT),as

a6040JVbetweenMahindra&MahindraandBritishTelecom.MBTfocused

exclusivelyontelecomvertical,withBTaccountingfor100%oftherevenues

Thisrevenuecontribution fromBTreducedto72%atthetimeof IPO inJuly

2006, and has further come down to 35% in Q2FY11. Tech Mahindra has

maintainedafocusontelecomindustry,andhasbuiltdomainskillstoprovide

services

across

the

spectrum

of

telecom

industry.

Tech

Mahindra

serves

thecompletetelecomecosystem including leadingserviceproviders,equipmen

manufacturersandindependentsoftwarevendorsworldwide.

Tech Mahindras execution capabilities spread across a broad spectrum

including Business Support Systems, Operations Support Systems, Network

Design&Engineering,NextGenerationNetworks,MobilitySolutions,Security

consultingandtesting.ThesolutionsportfolioincludesConsulting,Application

Development&Management (ADM),NetworkServices,Solution Integration

ProductEngineering, InfrastructureManagedServices,Remote Infrastructure

ManagementandBPO.

Thecompany

has

an

array

of

service

offerings

for

Telecom

Service

Providers

(TSPs),TelecomEquipmentManufacturers(TEMs)andIndependentSoftware

Vendors(ISVs),andisachosentransformationpartnerforseveralleadingwire

line, wireless and broadband operators in Europe, AsiaPacific and North

America. Ithassuccessfullyaugmentedmorethan15GreenFieldOperations

globallyandhas124activecustomerengagementsintheTelecomsector.The

companyhasbeeninvolvedinabout8transformationprogramsofincumben

telecomoperators.

The company has a global presence with 16 regional offices and 11 delivery

centres. Ithasnearly34,000employeesonboardbyQ2FY11.TechMahindra

providesIT

and

BPO

services

to

Telecom

Service

Providers

(TSP)

and

Telecom

Equipment Manufacturers (TEM). 43% of the revenue is contributed by the

EuropeanmarketsandtheUSmarketsaccountfor25%ofthepie.


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ConsolidatedFinancials

IncomeStatement BalanceSheet

Y/EJune(` mn) FY09 FY10 FY11E FY12E Y/EJune(` mn) FY09 FY10 FY11E FY12ERevenue 44,647 46,254 51,341 52,246 ShareCapital 1,218 1,223 1,223 1,223

YoYGrowth(%) 18.6% 3.6% 11.0% 1.8% Reserves &Surplus 17,592 27,642 28,174 30,900

PersonnelCost 18,557 20,584 23,569 25,151 MinorityInterest

SG&Aexpenses 13,266 14,373 17,451 16,196 Net Worth 18,810 28,865 29,397 32,124

EBITDA 12,825 11,297 10,321 10,899 Total Loans 13,672 13,672 13,672

EBITDAmargin 28.7% 24.4% 20.1% 20.9% DeferredRevenue 7,677 8,521 8,672

Depreciation 1,098 1,339 1,295 1,550 MinorityInterest 139 139 139

EBIT(OperatingIncome) 11,727 9,959 9,026 9,349 SourcesofFunds 18,810 50,354 51,730 54,606

EBIT(Operating)margin 26.3% 21.5% 17.6% 17.9% PPE,net 4,901 5,940 7,752 8,202

Interest 25 2,157 1,073 1,080 Add:CapitalWIP 1,541 3,312 1,500 1,500

OtherIncome (378) 754 830 1,045 TotalFixedAssets 6,442 9,252 9,252 9,702

PBT 11,324 8,556 8,782 9,314 Investments 4,535 30,145 30,145 30,145

IncomeTaxes 1,179

1,440

1,598

2,096

Deferred

Tax

Assets,

net 155

276

276

27 6

Effectivetaxrate(%) 10.4% 16.8% 18.2% 22.5% Inventori es 13

MinorityInterest 1.1 27.6 1.1 0.0 SundryDebtors 8,545 10,420 11,566 11,770

Extraordinary items 0.0 84.9 367.0 0.0 Cashand bankbal ances 4,961 2,187 2,629 4,890

Net income 10,146 7,003 6,818 7,219 Loansand advances 2,867 6,739 7,480 7,612

YoYGrowth(%) 207.3% 31.0% 2.6% 5.9% CurrentLiabi lities 6,718 5,895 6,544 6,659

Sharesoutstanding(mn) 125.1 115.0 123.7 123.8 Provisions 1,990 2,770 3,075 3,129

DilutedEPS(` ) 81.12 60.89 55.13 58.31 Net CurrentAssets 7,678 10,681 12,057 14,484YoYgrowth(%) 20.9% 24.9% 9.5% 5.8% ApplicationofFunds 18,810 50,354 51,730 54,606

DPS 10.8 0.0 11.0 11.7 BVPS(Rs) 150.4 251.0 237.7 259.5

Cashflow FinancialRatios

Y/EJune(` mn) FY09 FY10 FY11E FY12E Y/EJune FY09 FY10 FY11E FY12ENet

Profit

Before

Tax 10,905

8,742

8,782

9,314

DirectTaxes (1,784) (1,620) (1,598) (2,096) EBITDAmargi n 29% 24% 20% 21%

Depreciation&Amorti za ti on 1,07 4 1,299 1,188 1,550 EBITmargin 26% 22% 18% 18%

Changes in workingcapi tal 1,493 4,882 347 62 Netmargin 23% 15% 13% 14%

Otheroperatingcashflow (26) 1,430 1,345 1,345 ROE 54% 24% 23% 22%

CashflowfromOperations 11,662 14,733 10,063 10,176 ROA 37% 12% 11% 11%

Capitalexpenditure (2,415) (4,062) (3,000) (2,000) ROCE 54% 16% 16% 16%

Investmentin subsidiary (91) (25,625) (7,500) (7,500)

(Inc.)/Dec.in i nvestments (3,831) 3,919 3,919 3,919 Receivables(days) 70 82 82 82

Otherinvestingcashflow 132 61 61 61 Currentratio(x) 2.4 3.3 3.3 3.6

CashflowfromInvesting (6,205) (25,707) (6,520) (5,520) Cashratio(x) 0.7 0.4 0.4 0.7

Issueofequity 30 51

Issue/(repay)debt (300) 13,700 Grossfixed assetturnover 6.9 5.0 5.5 5.4

Dividendspaid

+div.

tax (1,352)

(1,364)

(1,444)

Total

asset

turnover 1.6

0.8

0.8

0.8

Otherfinancingcashfl ow (24) (5,712) (951) (951) DebttoEquityratio 0.0 0.5 0.5 0.4

CashflowfromFinancing (1,646) 8,039 (2,315) (2,395)

Net Changeincash&casheq 3,811 (2,935) 1,229 2,261 EV/Sales 2.2 2.1 1.9 1.9

Forextranslationeffect 341 (608) EV/EBITDA 7.6 8.7 9.5 9.0

Beginningcash&casheq 791 4,943 1,400 2,629 P/E 8.6 11.5 12.7 12.0

Closingcash&casheq 4,943 1,400 2,629 4,890 P/BV 4.6 2.8 2.9 2.7

[Source:Company,JaypeeResearchEstimates]

Profitability&

Return

ratios

(%)

WorkingCapital&Liquidityratios

Turnover&Leverage ratios(x)

Valuationratios(x)


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(`mn) FY09 FY10 FY11E FY12E (%) FY09 FY10 FY11E FY12ERevenue 44,647

46,254

51,341

52,246

EBITDA

margin 29% 24% 20% 21%

YoYGrowth 19% 4% 11% 2% EBITmargin 26% 22% 18% 18%

NetIncome 10,146 7,003 6,818 7,219 Netmargin 23% 15% 13% 14%

YoYGrowth 207% 31% 3% 6% ROE 54% 24% 23% 22%

EPS(`) 81.12 60.89 55.13 58.31 ROA 37% 12% 11% 11%

YoYGrowth 21% 25% 9% 6% ROCE 54% 16% 16% 16%

Snapshotoffinancials Profitabilityandreturnratios

[Source:JaypeeResearch]

Particulars(`mn) Q4FY10 Q1FY11 Q2FY11 Q3FY11E Q4FY11E Q1FY12ERevenue 11,833 11,337 15,339 12,252 12,413 12,405YoYgrowth(%) 12.6% 1.9% 34.3% 3.2% 4.9% 9.4%

QoQgrowth(%) 0.3% 4.2% 35.3% 20.1% 1.3% 0.1%

EBIT 2,389 1,772 2,472 2,440 2,341 2,076EBITmargin(%) 20.2% 15.6% 16.1% 19.9% 18.9% 16.7%Q0Qincrease(bp) (66) (455) 48 381 (106) (213)

Netincome 2,270 1,443 1,507 1,973 1,895 1,592YoYgrowth(%) 1.5% 9.6% 10.8% 14.2% 16.5% 10.3%

QoQgrowth(%) 31.4% 36.4% 4.4% 31.0% 4.0% 16.0%


QuarterlyTrend(consolidated)


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EquityResearchProducts1. InitiatingCoverage Indepthanalysiscoupledwithdetailedexplanationofinvestmentrationale2. IPONote IndepthanalysisofanIPOwitharecommendationforthesame3. ResultPreview Predictionof resultsto beannouncedwithaviewonmarginsforthestock4. ResultReview Analysisoftheresults andviewonthestockafter theresults5. EventUpdate Analysisofstock/sectorspecificevent whichhasoccurredanditsimpact6. EconomicUpdate AnalysisofIIP,GDP,Inflationandsix coreindustries7. CommodityOutlook Futureoutlookonbullion,basemetalsandenergyproducts

TechnicalReports1. Impact Technicalguidegivingalongtermviewon indexandstocks2. MarketMirror Technicalguidegivingashorttermviewon indexand stocks3. Match TechnicalanalysisofDollarindexanditsconstituentsagainstINR

DerivativesResearchProducts1. PairTrades Identificationofstockpairsbasedonco integrationandcorrelation2. NIFTYStrategies Strategiesbasedonmarketviewe.g.,straddle,skew,condoretc3. ArbitrageTrades CashFutureandSpecialSituationArbitrage4. NumeroMania MonthlyrepositoryoftradingstrategiesfromtheDerivativesDesk

DailyReports1. MorningGlance DailyupdateofglobalnewsbeforetheIndianmarketsopen2. PostMarketUpdate Dailymarketactionandkeystatisticsinanutshell3. CurrencyUpdate Analysisof thedomesticcurrencymarketwithanoutlookfortheday4. CommodityUpdate Snapshotofthecommoditymarketwithanoutlookfortheday5. DerivativesDaily DailyupdateoftheactivitiesintheDerivatives segment6. DerivativesWeekly Weeklyupdateoftheactivitiesinthe Derivativessegment7. RolloverAnalysis Dailyanalysisoftherollsduringtheexpiryweekeverymonth

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JaypeesInstitutionalEquitiesDeskRESEARCH

HeadofEquityResearch Oil&Gas AutomobilesAbbasMerchant +912243542010 ChiragDhaifule +912243542015 GaurantDadwal +912243542018InformationTechnology Metals&Mining CapitalGoodsVijayGautam +912243542019 RahulSinghvi +912243542016 ChiragMuchhala +912243542007KrupaShah +912243542019 SumitPoddar +912243542016 RuchikaDalmia +912243542007Pharmaceuticals Power&Shipping RealEstatePrafulBohra +912243542011 JyotsnaSawdekar +912243542017 HitendraGupta +912243542023DivyaAgarwal +912243542011 PrasunKumar +912243542017 ParasShah +912243542023Cement Infrastructure Economics

JinalJoshi +912243542012 AmitKumar +912243542024 PrasadShete +912243542007FMCG Telecom Technical

SachinBobade +912243542013 ArchitSinghal +912243542009 PranjalShah +912240621004Media SmallCaps QuantitativePriyankaJadhav +912243542014 KavitaKarwa +912243542001 RaunakChandra +912240621016

VinitJain +912240621016

SALES

Sales(Asia) SalesTrading(Equity) SalesTrading(Derivatives)VishadTurakhia +912240621012 KrishnakantPurohit +912240621018 PremalShah +912240621004HitashDang +912243541017 PramodBane +912240621000 ShirishGarodia +912240621008RajatVohra +912240621011 JaiprakashKataria +912240621003 RaviAgarwal +912240621009GautamTrehan +912243542025 GauravShah +912240621007 RahulSanghvi +912240621009

MaheshBohra +912240621005 DhruvalGala +912240621032Sales(UnitedStates) YogeshDhumal +912240621002 DeepShroff +912240621032KhushbuGupta +13476471003 SumeetRamchandani +912240621052 DeepakPurohit +912240621099AmitBansal +14052691322 JitendraTolani +912240621052 VishalVadel +912240621099


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Disclaimer:

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officialconfirmationofanytransaction.Thisdocumentissubjecttochangeswithoutpriornoticeandisintendedonlyfor

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RecommendationStructure:ABuyrecommendationimpliesanupsideof10%ormorefromthecurrentlevels.

ASellrecommendationimpliesadownsideof10%ormorefromthecurrentlevels.

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