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- - - Contents Daily Alerts Change in Reco Amara Raja Batteries: Downgrade to SELL Company alerts Cummins India: Pricing in transient kicker of shortage-led demand Sector alerts Energy: Another delay, hopefully the last one Metals & Mining: Captive coal blocksa new chapter Technology: Accenture results - largely neutral for Indian IT INDIA DAILY September 25, 2014 India 24-Sep 1-day 1-mo 3-mo Sensex 26,745 (0.1) 1.2 5.7 Nifty 8,002 (0.2) 1.2 5.7 Global/Regional indices Dow Jones 17,210 0.9 0.8 2.0 Nasdaq Composite 4,555 1.0 (0.0) 4.0 FTSE 6,706 0.5 (1.0) (0.4) Nikkei 16,318 0.9 4.5 6.9 Hang Seng 24,048 0.5 (4.4) 5.2 KOSPI 2,042 0.3 (0.9) 3.0 Value traded India Cash (NSE+BSE) 206 208 203 Derivatives (NSE) 4,349 2,098 3,291 Deri. open interest 2,359 2,216 2,214
Forex/money market Change, basis points 24-Sep 1-day 1-mo 3-mo Rs/US$ 60.9 8 37 84 10yr govt bond, % 8.7 2 (4) (13) Net investment (US$ mn) 23-Sep MTD CYTD FIIs (157) 1,112 14,023 MFs 29 152 954 Top movers Change, % Best performers 24-Sep 1-day 1-mo 3-mo CIPLA IN Equity 600.0 2.7 18.2 40.7 BHFC IN Equity 794.6 (4.8) 0.3 35.0 LPC IN Equity 1367.3 0.7 8.2 33.5 DRRD IN Equity 3229.2 0.9 12.1 30.3 DIVI IN Equity 1730.5 1.1 9.7 28.0 Worst performers JPA IN Equity 31.9 (7.9) (38.5) (56.8) JSP IN Equity 189.5 (10.1) (25.2) (42.6) GMRI IN Equity 19.3 (11.5) (22.8) (42.2) UT IN Equity 20.2 (8.2) (10.4) (41.9) IDBI IN Equity 67.5 (5.5) (14.5) (37.2)
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Earnings upgrades unlikely We have built in revenue growth of 15% CAGR between FY2015E and FY2017E, which is based on the following assumptions (1) 15% CAGR in automotive four-wheeler replacement and four-wheeler OEM volumes and (2) 14% CAGR in industrial revenues over FY2015-17E. Replacement automotive volumes will likely track the growth of automobile OEM sales over the past six years as organized players capture the first two replacements of battery, post which customers tend to shift to unorganized players. In the past six years, automobile OEM volumes have grown at 12% CAGR and we believe battery industry automotive replacement volumes will likely grow at a similar rate. We have also built in EBITDA margin of 17.5% between FY2015E and FY2017E, which is higher than the companys past five-year average of 16%. We reckon that industrial business margins could go down from current levels as competition in the industrial business is increasing with Exide reentering the telecom business, and it will probably pursue business opportunities in the industrial segment due to likely slowdown in the inverter battery business with improving power situation. Exide Industries has also indicated that in the longer term it would like to maintain EBITDA margins in the range of 14-15%; Amara Raja, which has higher EBITDA margin than Exide due to lower overhead costs, will likely trend towards 15% EBITDA margin. Expensive valuations drive downgrade to SELL (from ADD earlier) We downgrade the stock to SELL (from ADD earlier) due to expensive valuations. We have kept our earnings estimates and target price (`550) unchanged. We value the stock at 18X FY2016E EPS.
Amara Raja Batteries (AMRJ) Automobiles Downgrade to SELL. We downgrade the stock to SELL (from ADD earlier) due to expensive valuations and limited probability of improvement in EBIT margin. Our reverse DCF valuation exercise indicates that the stock is discounting (1) 12% CAGR in sales over the next 15 years, (2) EBIT margin of 14% till perpetuity and (3) terminal growth of 5%. We believe the companys EBIT margins have averaged around 12% in the past 15 years and the competitive intensity in the industrial business is increasing, which should cap the EBIT margin in ~12% range in the longer term. We find the stock expensive; downgrade to SELL (from ADD earlier) with an unchanged target price of `550.
SELL SEPTEMBER 25, 2014 CHANGE IN RECO. Coverage view: Attractive Price (`): 630 Target price (`): 550 BSE-30: 26,745
Amara Raja Batteries Stock data Forecasts/Valuations 2014 2015E 2016E 52-week range (Rs) (high,low) EPS (Rs) 21.5 24.4 29.9 Market Cap. (Rs bn) EPS growth (%) 28.2 13.6 22.5 Shareholding pattern (%) P/E (X) 29.6 26.1 21.3 Promoters 52.1 Sales (Rs bn) 34.4 40.8 47.5 FIIs 16.9 Net profits (Rs bn) 3.7 4.2 5.1 MFs 9.5 EBITDA (Rs bn) 5.6 6.9 8.3 Price performance (%) 1M 3M 12M EV/EBITDA (X) 19.0 15.8 13.1 Absolute 13.8 32.9 109.5 ROE (%) 30.3 27.4 27.2 Rel. to BSE-30 12.3 24.3 55.7 Div. Yield (%) 0.5 0.8 0.9 Company dat a and v aluat ion summary 675-288 108.8
Amara Raja Batteries Automobiles KOTAK INSTITUTIONAL EQUITIES RESEARCH 3 Exhibit 1: Stock discounts 12% CAGR in revenues over the next 15 years and 5% perpetual growth after FY2030 Reverse DCF valuation exercise for Amara Raja Batteries, March fiscal year-ends (` mn) 20 14 20 15 20 16 20 17 20 18 20 19 20 20 20 28 20 29 20 30 Net sales 34,367 40,797 47,494 54,144 60,641 67,918 76,068 188,343 210,944 236,257 EBIT 4,958 5,669 6,808 7,885 8,490 9,509 10,650 26,368 29,532 31,895 EBIT (1-tax) 3,421 3,912 4,698 5,441 5,858 6,561 7,348 18,194 20,377 22,007 EBIT margin (%) 14.4 13.9 14.3 14.6 14.0 14.0 14.0 14.0 14.0 13.5 Depreciation (646) (1,196) (1,471) (1,596) (1,663) (1,863) (2,086) (5,166) (5,786) (6,480) Gross block 9,955 13,955 15,455 16,455 17,326 19,405 21,734 53,812 60,270 67,502 Fixed asset turnover 3.5 2.9 3.1 3.3 3.5 3.5 3.5 3.5 3.5 3.5 Capex (4,000) (1,500) (1,000) (871) (2,079) (2,329) (5,766) (6,457) (7,232) Working capital 4,124 4,896 5,699 6,497 7,277 8,150 9,128 22,601 25,313 28,351 Change in working capital (772) (804) (798) (780) (873) (978) (2,422) (2,712) (3,038) FCF 336 3,865 5,239 5,870 5,471 6,128 15,173 16,993 18,218 WACC 12.0 Discounting year 0 1 3 4 5 13 14 15 Discounted FCF 336 3,865 4,677 4,179 3,477 3,477 3,477 3,477 3,328 Sum of cash flows 54,298 Terminal value 49,924 Enterprise value 104,222 Net cash 4,473 Equity value 108,695 Share count 171 Eq uit y value per s h ar e 6 36
Source: Kotak Institutional Equities estimates
Exhibit 2: We expect 15% CAGR in replacement four-wheeler battery volumes over FY2015-17E Volume breakdown segment-wise, March fiscal year-ends, 2011-2017E (units) 20 11 20 12 20 13 20 14 20 15 E 20 16 E 20 17E Vo lume s o ld ( mn un it s ) Four-wheeler OEM 1.29 1.52 1.55 1.52 1.56 1.80 2.07 Yoy chg (%) 50.0 17.8 2.0 (2.0) 3.0 15.0 15.0 Four-wheeler replacement 1.70 2.00 2.66 3.06 3.52 4.12 4.71 Yoy chg (%) 21.4 17.6 33.0 15.0 15.0 17.0 14.5 To t al f o ur - wh eeler vo lumes 2. 9 9 3. 5 2 4. 21 4. 5 8 5 . 0 8 5 . 9 2 6 . 78 Yoy chg (%) 32.3 17.7 19.6 8.7 11.0 16.4 14.7 Replacemen t / OEM ( X) 1. 32 1. 32 1. 72 2. 0 1 2. 25 2. 29 2. 28 Two-wheeler OEM 0.90 2.20 2.60 3.15 Two-wheeler replacement 1.80 2.00 2.74 3.56 4.63 5.56 6.39 Yoy chg (%) 28.6 11.1 37.0 30.0 30.0 20.0 15.0 To t al t wo - wh eeler vo lumes 1. 8 0 2. 0 0 2. 74 4. 46 6 . 8 3 8 . 16 9 . 5 4 Yoy chg (%) 28.6 11.1 37.0 62.8 53.1 19.4 17.0 To t al aut o mo t ive vo lumes 4. 79 5 . 5 2 6 . 9 5 9 . 0 4 11. 9 1 14. 0 7 16 . 32 Reven ue b r eak- up ( Rs mn ) Four-wheeler OEM 2,899 3,689 4,064 4,182 4,383 5,128 6,001 Four-wheeler replacement 6,002 7,273 10,447 13,215 15,197 17,781 20,359 To t al f o ur - wh eeler 8 , 9 0 1 10 , 9 6 2 14, 5 11 17, 39 7 19 , 5 8 0 22, 9 0 9 26 , 36 0 Two-wheeler OEM 549 1,365 1,641 2,023 Two-wheeler replacement 1,480 1,809 2,677 3,653 4,749 5,699 6,554 To t al t wo - wh eeler 1, 48 0 1, 8 0 9 2, 6 77 4, 20 2 6 , 114 7, 341 8 , 5 78 Automotive 10,381 12,771 17,187 21,599 25,695 30,250 34,938
Source: Kotak Institutional Equities estimates
Automobiles Amara Raja Batteries 4 KOTAK INSTITUTIONAL EQUITIES RESEARCH Exhibit 3: We expect revenues to grow at 16% CAGR over the next three years Revenue breakdown for Amara Raja Batteries by segment, March fiscal year-ends, 2011-17E (` mn) 20 11 20 12 20 13 20 14 20 15 E 20 16 E 20 17E Reven ue ( Rs mn ) Four-wheeler OEM 2,899 3,689 4,064 4,182 4,383 5,128 6,001 Four-wheeler replacement 6,002 7,273 10,447 13,215 15,197 17,781 20,359 Two-wheeler OEM 549 1,365 1,641 2,023 Two-wheeler replacement 1,480 1,809 2,677 3,653 4,749 5,699 6,554 Automotive 10,381 12,771 17,187 21,599 25,695 30,250 34,938 Telecom 3,853 4,600 5,520 6,900 8,763 10,077 11,287 UPS 5,085 6,000 6,404 6,035 6,940 7,981 8,939 Railways and others 1,343 1,726 1,899 1,994 2,233 2,568 2,876 Trade auto batteries 17 535 856 800 840 966 1,111 Trade home UPS 48 346 1,092 714 749 824 907 Service and scrap revenue 38 50 152 330 364 400 440 To t al r even ues 20 , 76 5 26 , 0 29 33, 110 38 , 372 45 , 5 8 3 5 3, 0 6 6 6 0 , 49 6 Reven ue mix ( %) Four-wheeler OEM 14 14 12 11 10 10 10 Four-wheeler replacement 29 28 32 34 33 34 34 Two-wheeler OEM 1 3 3 3 Two-wheeler replacement 7 7 8 10 10 11 11 Aut o mo t ive 5 0 49 5 2 5 6 5 6 5 7 5 8 Telecom 19 18 17 18 19 19 19 UPS 24 23 19 16 15 15 15 Railways and others 6 7 6 5 5 5 5 Trade auto batteries 0 2 3 2 2 2 2 Trade home UPS 0 1 3 2 2 2 1 Service and scrap 0 0 0 1 1 1 1 To t al r even ues 10 0 10 0 10 0 10 0 10 0 10 0 10 0
Source: Kotak Institutional Equities estimates
Amara Raja Batteries Automobiles KOTAK INSTITUTIONAL EQUITIES RESEARCH 5 Exhibit 4: We expect earnings to grow at a healthy ~18% CAGR during FY2015-17E, driven by 15% CAGR in net sales Amara Raja Batteries profit and loss, balance sheet and cash flow statement, March fiscal year-ends, 2011-17E (` mn) 20 11 20 12 20 13 20 14 20 15 E 20 16 E 20 17E Pr o f it mo d el ( Rs mn ) Net sales 17,611 23,645 29,614 34,367 40,797 47,494 54,144 EBITDA 2, 5 46 3, 39 6 4, 5 15 5 , 6 0 3 6 , 8 6 5 8 , 278 9 , 48 0 Other income 96 280 466 455 372 590 875 Interest (15) (24) (10) (7) Depreciation (417) (465) (661) (646) (1,196) (1,471) (1,596) Pr o f it b ef o r e t ax 2, 210 3, 18 6 4, 310 5 , 40 6 6 , 0 41 7, 39 7 8 , 76 0 Tax expense (729) (1,036) (1,351) (1,692) (1,867) (2,286) (2,707) Ad jus t ed n et pr o f it 1, 48 1 2, 15 1 2, 8 6 7 3, 6 74 4, 174 5 , 112 6 , 0 5 3 Ear n in g s per s h ar e ( Rs ) 8 . 7 12. 6 16 . 8 21. 5 24. 4 29 . 9 35 . 4 Balan ce s h eet ( Rs mn ) Equity 6,459 8,235 10,598 13,627 16,824 20,740 25,377 Total borrowings 1,000 855 881 857 84 84 84 Deferred tax liability 205 220 195 301 301 301 301 Current liabilities 3,495 4,206 6,030 6,609 7,876 8,793 9,766 To t al liab ilit ies 11, 15 9 13, 5 15 17, 70 5 21, 39 4 25 , 0 8 6 29 , 9 18 35 , 5 28 Net fixed assets 3,526 3,861 4,618 7,679 10,483 10,513 9,917 Investments 161 161 161 161 1,161 4,161 7,161 Cash 451 2,292 4,108 2,946 604 396 1,461 Other current assets 7,021 7,202 8,818 10,609 12,839 14,849 16,989 To t al as s et s 11, 15 9 13, 5 15 17, 70 5 21, 39 4 25 , 0 8 6 29 , 9 18 35 , 5 28 Fr ee cas h f lo w ( Rs mn ) Operating cash flow excl. working cap. changes 1,999 2,865 3,448 4,103 4,998 5,992 6,774 Working capital changes (1,138) 120 (94) (1,315) (962) (1,094) (1,167) Capital expenditure (667) (809) (1,463) (3,731) (4,000) (1,500) (1,000) Fr ee cas h f lo w 19 5 2, 176 1, 8 9 2 ( 9 43) 36 3, 39 9 4, 6 0 7 Rat io s EBITDA margin (%) 14.5 14.4 15.2 16.3 16.8 17.4 17.5 PAT margin (%) 8.4 9.1 9.7 10.7 10.2 10.8 11.2 Net debt/equity (X) 0.1 (0.2) (0.3) (0.2) (0.0) (0.0) (0.1) Book value (Rs/share) 37.8 48.2 62.0 79.8 98.5 121.4 148.6 RoAE (%) 24.9 29.3 30.4 30.3 27.4 27.2 26.3 Ro ACE ( %) 21. 9 26 . 5 28 . 8 28 . 6 26 . 4 27. 0 26 . 2
Source: Kotak Institutional Equities estimates
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Planned TN power cuts for industries and coal block de-allocation positive for powergen The Tamil Nadu Generation and Distribution Corporation has announced power cuts for high- tension industrial and commercial power users for late peak hours and non-peak hours. This is a 2H phenomenon (wind power supply tapers) though becomes relevant for genset companies due to weak base (power cuts for industries moderated through FY2014). We assume a 2 GW deficit impact, of which 25% may get captured by genset companies. This yields 5% growth kicker for Cummins powergen sales for FY2015 (~1.5% impact on overall sales). De-allocation of coal-blocks will have a delayed impact on power supply as these would continue to operate for the next six months. Subsequent handover to Coal India or reallocation may disrupt power supply in FY2016. A complete disruption will reduce coal supply for power generation by 15-20 mn tons, affecting 4 GW of power. We assume 25% of this opportunity to get captured by genset companies and build in an additional 10% growth kicker in FY2016. Dealer feedback: demand for standby power remains weak, especially for Cummins Our discussion with one of the key dealers for Cummins (for West and South India) brings out focus of Cummins on improving its competitive positioning (longer warranty, better CPCB II- compliant product). This may hinder growth for Cummins powergen segment in the near term (pricing better for competition), though would eventually help the company garner higher market share. Near-term outlook for demand for standby power remains weak. CAT dealer statistics: recovery in core high hp exports for Cummins may not sustain Caterpillars global dealer sales for electric power (in constant US$ terms) have declined in double digits in July and August. This hints that the sequential recovery in HHP exports for Cummins in 1QFY15 may not sustain. Low hp exports have more than doubled yoy in 1QFY15, but can only contribute as much of positive surprise (~30% of sales) over our estimates (35% CAGR). We build in strong recovery in scale-up of new businesses; retain REDUCE We revise estimates by 2-5% to `27.5, `31.8 and `39.9 from `27.0, `30.5 and `37.8 for FY2015E-17E on higher estimates for domestic powergen sales growth margin (30-70 bps increase on correcting commodity prices). We revise TP to `640 from `610.
Cummins India (KKC) Industrials Pricing in transient kicker of shortage-led demand. The recent announcements of planned power cuts for industries in Tamil Nadu and the coal-block de-allocation will benefit the powergen business for Cummins India in FY2015-16. The impact will be muted for Cummins overall revenues apart from being transient. Dealer feedback for domestic standby power demand though remains sedate, especially for Cummins. Recovery in high hp exports for Cummins may also not sustain, as suggested by weak Caterpillar global dealer sales. Revise TP to `640 (from `610); retain REDUCE.
Cummins India Stock data Forecasts/Valuations 2014 2015E 2016E 52-week range (Rs) (high,low) EPS (Rs) 21.3 27.5 31.8 Market Cap. (Rs bn) EPS growth (%) (23.6) 28.9 15.7 Shareholding pattern (%) P/E (X) 31.9 24.7 21.4 Promoters 51.0 Sales (Rs bn) 39.8 47.8 59.4 FIIs 18.0 Net profits (Rs bn) 5.9 7.6 8.8 MFs 10.6 EBITDA (Rs bn) 7.0 8.7 11.5 Price performance (%) 1M 3M 12M EV/EBITDA (X) 26.5 21.3 16.2 Absolute 0.3 4.7 68.6 ROE (%) 23.9 27.9 28.5 Rel. to BSE-30 (0.9) (0.7) 25.6 Div. Yield (%) 1.5 1.9 2.1 Company dat a and valuat ion s ummar y 720-388 188.4
Cummins India Industrials KOTAK INSTITUTIONAL EQUITIES RESEARCH 7 TN power cuts for industries and coal block de-allocation positive for powergen We highlight the impending industry-focused power cuts in Tamil Nadu from October, as announced by the state electricity authority (a 20% cut during non-peak hours and 10% of supply available during peak hours of 6 pm to 10 pm). We note that power cuts to industries in the South had moderated significantly over FY2014. Likely stiff power cuts in 2H can thus lead to better growth for powergen companies. We note that the wind power tapers off in 2H, leading to the power shortage and the situation will self-correct starting May. We put below the trend in scheduled power cuts in the South, which shows the periodicity in power cuts for South India as well as the weak base of last year (beneficial for Cummins in 2HFY15). Exhibit 1: Power cuts had declined substantially in FY2014, making case for growth in 2H as power cuts return Details of power cuts (notified and load-shedding) on industries over Apr-2005 to Aug-2014 (MW) 6.5 7.6 10.3 12.4 13.3 12.8 6.7 8.1 0.1 0 2 4 6 8 10 12 14 A p r - 0 5 A p r - 0 7 A p r - 0 9 A p r - 1 1 J a n - 1 1 A u g - 1 1 O c t - 1 1 D e c - 1 1 F e b - 1 2 A p r - 1 2 J u n - 1 2 A u g - 1 2 O c t - 1 2 F e b - 1 3 A p r - 1 3 J u n - 1 3 A u g - 1 3 O c t - 1 3 D e c - 1 3 F e b - 1 4 A p r - 1 4 J u n - 1 4 A u g - 1 4 (GW) South Total North
Source: CEA, Kotak Institutional Equities The recent announcement of the Supreme Court on de-allocation of all private sector coal blocks will also have a bearing on the power situation for the country. We account for the impact of this development in the note below. Modest impact for Cummins overall sales Tamil Nadu power cuts. Based on past history of such shortages in the southern region, we believe that this can yield an additional power deficit of 2 GW. Assuming 25% of this demand buys gensets (many would already have, some will go for rented gensets), there may be sales of about 500 MW. This translates into a `1.5 bn opportunity for related engines and a `0.5 bn opportunity for Cummins. We build in this opportunity for Cummins (assume 25% revenue growth for FY2015 versus 20% earlier). Overall impact on Cummins Indias business will be lower at ~1-2% of sales for FY2015. Coal block de-allocation. De-allocation of coal blocks will take away another 20 mn tons of coal production or lead to a transient shortfall of about 4 GW. This will start affecting power supply in FY2016 as the coal blocks that have been de-allocated can produce for another six months. In FY2016, these blocks will either get reallocated or given to Coal India. In both the cases, there can be a delay of 6-12 months before resumption of normal supply. We factor in this benefit for Cummins by building in higher 20% revenue growth in FY2016 as well. This will improve sales of Cummins India by 2- 3% in FY2016.
Industrials Cummins India 8 KOTAK INSTITUTIONAL EQUITIES RESEARCH Shortage-led demand is mostly out of Cumminss powergen sales We believe that shortage-led demand has been broadly taken out in FY2012 and FY2014 and that growth from here should follow the pace of capacity additions. There is an upside risk from shortage-led demand returning on the back of specific bottlenecks as seen in the recent past. Cummins management has cited in the past that standby powergen sales should equate to 50% of capacity additions on a steady-state basis. The current share of powergen sales is close to 65% of thermal capacity additions, implying an adjusted share of close to 50% (assuming additions beyond thermal and 10% replacement demand). Exhibit 2: Contribution from shortage-led demand has corrected significantly over the past 2-3 years Powergen market as a proportion of total capacity additions in the market, March fiscal year-ends, 2006-14 2006 2007 2008 2009 2010 2011 2012 2013 2014 Cummins India powergen sales (Rs mn) 5,813 8,138 10,265 10,022 10,423 13,446 12,532 15,790 10,942 Engine pricing (Rs mn/MW) 2.0 2.1 2.2 2.3 2.4 2.5 2.6 2.8 2.9 Impllied Cummins sales (GW) 3.0 4.0 4.8 4.4 4.4 5.4 4.8 5.7 3.8 Impllied market sales (GW) 8.9 11.9 14.3 13.3 13.1 16.1 14.3 17.2 11.3 Annul power capacity addition (GW 2.0 4.5 7.0 3.5 9.6 12.2 20.5 20.6 17.8 Power gen demand as s har e of t ot al capacit y addit ions (%) 445 264 204 384 137 133 70 83 64
Notes: (a) We assume 5% growth in realization/MW for power gensets with base of Rs2.5 mn/MW in FY2011. (b) We assume static 33% market share of Cummins in powergen market. Source: CEA, Company, Kotak Institutional Equities estimates Recovery in core high hp exports may not sustain Based on Caterpillars dealer statistics, global electric power sales (in constant US$ terms) have declined further in July 2014 (down 16% yoy) and August 2014 (down 13% yoy). This hints that the sequential recovery in HHP exports for Cummins in 1QFY15 may not sustain. Exhibit 3: Sharp double-digit decline over past four months Yoy growth for CAT Global's electric power dealer sales (%) (21) (17) (15) (40) (20) 0 20 40 60 80 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec (%) 2013 2012 2011 2010 2014
Source: Company, Kotak Institutional Equities Low hp exports had more than doubled yoy in 1QFY15, but can only contribute as much of positive surprise (currently ~30% of sales) over our estimates (35% CAGR over FY2014-17E). CAT dealer statistics
Cummins India Industrials KOTAK INSTITUTIONAL EQUITIES RESEARCH 9 Exhibit 4: Low hp exports have doubled yoy though still account for 30% of export sales Exports break-up for Cummins India, March fiscal year-ends (` mn) LHP, 522 Mid range, 296 Heavy duty, 357 HHP, 1,429 Spares, 156 Export sales breakup in 1QFY14 (Rs2,800 mn)
LHP, 1,190 Mid range, 460 Heavy duty, 400 HHP, 1,720 Spares, 120 Export sales breakup in 1QFY15 (Rs3,900 mn)
Source: Company, Kotak Institutional Equities
Strengthening competitive positioning further; no recovery visible in demand Our discussion with one of the key dealers for Cummins (for West and South India) brings out focus of Cummins on improving its competitive positioning (longer warranty, better CPCB II-compliant product). This may hinder growth for Cummins powergen segment in the near term (pricing better for competition), though would eventually help the company garner higher market share. The sector as a whole though would not be able to grow at a strong pace as power capacity additions would keep shortage-led demand in check (as seen in recent months where power demand has grown in double digits with deficit maintained at sub-4% levels). Entry of Perkins (now expected in Oct 2014) would also contain business outperformance for Cummins. CPCB-II Cummins focused on the long term, unlike competition. Cummins India has taken a large price increase and has introduced electronic engines to comply with CPCB-II norms (sets base for compliance with next set of emission norms revision also). The competition has gone for a cheaper option in electronic gas recirculation (EGR). This may benefit in the short term in terms of better pricing, though would reduce engine life of their gensets. For its new engines, Cummins has increased warranty to five years from two years. Cummins has been able to get compliance approval for its key 100 and 125 kVA products in August while some of its competitors still having not got approval for their 500 kVA products. Near-term demand outlook remains weak. On the back of transition issues related to CPCB-II, there were dealer stock-outs in July, which have incrementally got corrected. The company has taken higher price increase versus competition for its CPCB II-compliant engines (provide a better product) and thus may see business go to competition in the short term. There is limited potential for support from government spending as it grapples with the situation of droughts announced in certain states. Private sector sentiment though has changed for the positive post May 2014 and its expected to lead to demand growth from November-December.
Powergen dealer feedback
Industrials Cummins India 10 KOTAK INSTITUTIONAL EQUITIES RESEARCH Low hp segment premium pricing in price-sensitive segment to limit share gains. The dealer has recently been given the distributorship of Cummins sub-7.5kVA products. For the entire LHP segment, Cummins has maintained its premium pricing and thus may not be able to make strong market share gains in this price-sensitive segment. The dealer shared the information of having done 5,000-6,000 genset sales in the segment in FY2014, similar to FY2010 levels. Distribution business getting impacted by lower usage. The dealer cited potential for service income to remain weak as the power situation in its territory improves. The dealer specifically pointed out Maharashtra, where there has been significant decline in usage of generator sets. We note that the impact of this on Cumminss distribution segment sales would be limited to the extent of share of power generation (distribution segment sales get dominated by mining and construction sales). Perkins entry gets delayed till Oct 2014. Perkins has further delayed the commissioning of its Aurangabad facility to October 2014 from June 2014 (we note more-than-a-year delay from original commissioning timeline of June 2013). The company plans to produce 3,000 units of its 4,000 series engines (23 liter to 61 liter engines), eventually ramping up to 5,000 units. At present, Cummins capacity in the high hp capacity may be in the range of 12,000-15,000 units. We build strong recovery in scale-up of new businesses; retain REDUCE We revise estimates by 2-5% to `27.5, `31.8, `39.9 from `27.0, `30.5, `37.8 for FY2015E- 17E on higher estimates for domestic powergen sales growth (5% revision each in FY2015 and FY2016) and margin (30-70 bps increase). We revise TP to `640 from `610. Exhibit 5: Key estimates for Cummins India, March fiscal year-ends, 2014-17E (` mn)
20 14 20 15 E 20 16 E 20 17E 20 15 E 20 16 E 20 17E 20 15 E 20 16 E 20 17E Reven ues 39 , 76 7 47, 76 4 5 9 , 40 5 73, 38 7 47, 217 5 8 , 0 9 2 71, 8 77 1. 2 2. 3 2. 1 Power generation 10,942 13,678 16,413 18,875 13,130 15,100 17,365 4.2 8.7 8.7 Industrials 5,200 5,460 6,825 8,531 5,460 6,825 8,531 0.0 0.0 0.0 Auto 1,170 1,346 1,615 1,938 1,346 1,615 1,938 0.0 0.0 0.0 Distribution 9,300 10,229 11,764 13,528 10,229 11,764 13,528 0.0 0.0 0.0 Exports 11,979 16,171 21,831 29,472 16,171 21,831 29,472 0.0 0.0 0.0 EBITDA 6,968 8,685 11,457 14,404 8,454 10,906 13,592 2.7 5.1 6.0 EBITDA mar g in ( %) 17. 5 18 . 2 19 . 3 19 . 6 17. 9 18 . 8 18 . 9 ( +30 b ps ) ( +5 0 b ps ) ( +70 b ps ) PAT 6,000 7,426 8,564 10,733 7,290 8,215 10,155 1.9 4.2 5.7 Contribution from JVS (92) 192 248 315 192 248 315 0.0 0.0 0.0 Adjusted PAT 5,908 7,618 8,811 11,048 7,482 8,463 10,470 1.8 4.1 5.5 EPS ( Rs ) 21. 3 27. 5 31. 8 39 . 9 27. 0 30 . 5 37. 8 1. 8 4. 1 5 . 5 Gr o wt h ( %) Revenues 20.1 24.4 23.5 18.7 23.0 23.7 Power generation 25.0 20.0 15.0 20.0 15.0 15.0 Industrials 5.0 25.0 25.0 5.0 25.0 25.0 Auto 15.0 20.0 20.0 15.0 20.0 20.0 Distribution 10.0 15.0 15.0 10.0 15.0 15.0 Exports 35.0 35.0 35.0 35.0 35.0 35.0 EBITDA 24.6 31.9 25.7 21.3 29.0 24.6 PAT 28.9 15.7 25.4 26.6 13.1 23.7 New es t imat es Old es t imat es % r evis io n
Cummins India Industrials KOTAK INSTITUTIONAL EQUITIES RESEARCH 11 Exhibit 6: Standalone balance sheet, profit model and cash flow statement of Cummins, March fiscal year-ends, 2010-17E (Rs mn)
20 10 20 11 20 12 20 13 20 14 20 15 E 20 16 E 20 17E Balan ce s h eet Sh ar eh o ld er s f un d s 15 , 6 10 18 , 0 6 3 20 , 432 23, 8 6 7 25 , 6 5 2 28 , 9 8 0 32, 8 19 37, 6 29 Loan funds 86 198 147 150 200 To t al s o ur ce o f f un d s 15 , 6 9 6 18 , 26 1 20 , 5 79 24, 345 26 , 117 28 , 9 8 0 33, 0 19 37, 6 29 Net block 3,337 3,564 4,649 4,934 9,192 12,608 16,068 17,443 Net f ixed as s et s 3, 337 4, 210 5 , 146 6 , 142 10 , 149 13, 35 8 16 , 318 17, 6 9 3 Investments and goodwill 7,329 7,255 5,975 6,276 4,954 5,267 5,267 5,267 Cash balances 559 1,037 2,235 3,547 865 606 144 1,716 Net cur r en t as s et s exclud in g cas h 4, 30 1 5 , 5 71 7, 15 3 8 , 38 1 10 , 149 9 , 748 11, 28 9 12, 9 5 4 To t al applicat io n o f f un d s 15 , 6 9 6 18 , 26 1 20 , 5 79 24, 345 26 , 117 28 , 9 8 0 33, 0 19 37, 6 29 Pr o f it mo d el To t al o per at in g in co me 29 , 0 27 40 , 425 41, 172 46 , 0 12 39 , 76 7 47, 76 4 5 9 , 40 5 73, 38 7 Total operating costs (23,175) (32,791) (34,200) (37,545) (32,799) (39,079) (47,947) (58,983) EBITDA 5 , 8 5 2 7, 6 34 6 , 9 72 8 , 46 7 6 , 9 6 8 8 , 6 8 5 11, 45 7 14, 40 4 Other operational income 578 914 651 922 776 880 957 1,043 Other income 638 804 1,233 1,949 1,777 2,141 1,325 1,436 PBDIT 6 , 48 9 8 , 438 8 , 20 6 10 , 416 8 , 745 10 , 8 26 12, 78 2 15 , 8 40 Financial charges (21) (48) (54) (46) (42) (11) (11) Depreciation (361) (366) (420) (473) (528) (791) (1,040) (1,126) Pre-tax profit 6,108 8,024 7,732 9,897 8,175 10,035 11,731 14,703 Taxation (1,670) (2,114) (2,282) (2,872) (2,175) (2,609) (3,167) (3,970) PAT 4, 437 5 , 9 10 5 , 45 0 7, 0 25 6 , 0 0 0 7, 426 8 , 5 6 4 10 , 733 Ad jus t ed PAT 4, 49 7 6 , 16 6 6 , 111 7, 732 5 , 9 0 8 7, 6 18 8 , 8 11 11, 0 48 Cas h f lo w s t at emen t Operating profit before working capital changes 4,819 6,324 5,924 7,544 6,570 8,217 9,615 11,870 Change in working capital / other adjustments 2,238 (1,270) (1,582) (1,229) (1,768) 401 (1,541) (1,665) Cas h f lo w f r o m o per at in g act ivit es 7, 0 5 6 5 , 0 5 4 4, 342 6 , 315 4, 8 0 2 8 , 6 18 8 , 0 74 10 , 20 5 Fixed assets (607) (1,240) (1,355) (1,469) (4,534) (4,000) (4,000) (2,500) Investments (3,337) 75 1,279 (300) 1,322 (314) Cas h ( us ed ) / r ealis ed in in ves t in g act ivit ies ( 3, 9 44) ( 1, 16 6 ) ( 76 ) ( 1, 76 9 ) ( 3, 212) ( 4, 314) ( 4, 0 0 0 ) ( 2, 5 0 0 ) Borrowings (82) 94 67 401 (13) (465) 200 (200) Dividend paid (2,775) (3,457) (3,544) (4,205) (3,311) (4,098) (4,725) (5,922) Cas h ( us ed ) / r ealis ed in f in an cin g act ivit ies ( 2, 8 76 ) ( 3, 411) ( 3, 5 31) ( 3, 8 5 1) ( 4, 271) ( 4, 5 6 3) ( 4, 5 36 ) ( 6 , 133) Cash generated /utilised 236 478 1,197 1,311 (2,681) (259) (462) 1,572 Cash at beginning of year 323 559 1,037 2,235 3,547 865 606 144 Cas h at en d o f year 5 5 9 1, 0 37 2, 235 3, 5 46 8 6 5 6 0 6 144 1, 716 Key r at io s ( %) EBITDA margin 22.4 20.9 19.9 22.6 22.0 22.7 21.5 21.6 PAT margin 15.3 14.6 13.2 15.3 15.1 15.5 14.4 14.6 RoE 30.0 35.1 30.7 34.5 24.2 27.2 27.7 30.5 RoCE 26.1 27.7 22.5 28.5 19.9 27.2 26.7 29.6 Net debt / equity (X) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 EPS ( Rs ) 16 . 2 22. 2 22. 0 27. 9 21. 3 27. 5 31. 8 39 . 9
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Government defers decision on gas price hike until mid-November The government has deferred a decision on raising domestic gas price until November 15, 2014. We note that the Committee of Secretaries (comprising senior bureaucrats from the power, fertilizer, expenditure and petroleum and natural gas ministries) formed to review the gas pricing formula had already submitted its recommendation on a new mechanism for pricing of domestic natural gas. Unauthenticated media articles suggest that the committee recommended an increase in price to around US$6/mn BTU instead of ~US$8/mn BTU as per the earlier Rangarajan Committee formula. Nevertheless, the CCEA has held back the final decision until mid-November presumably due to sociopolitical considerations (impending state elections) or a lack of consensus among the producing and consuming sectors (power and fertilizer). Higher gas (and oil) price is essential to incentivize indigenous production In our view, low natural gas (and crude oil) prices will prevent any meaningful reinvestment in existing fields and investments in new discovered fields and unexplored regions, which is necessary to sustain and grow domestic production. Higher natural gas (and crude oil) prices are essential to sustain the extant production of the upstream companies given (1) rising operating costs and (2) significant reinvestment in mature fields to simply sustain production; Exhibit 1 shows that the blended cost of oil and gas production for ONGCs domestic fields has increased over the past few years while Exhibit 2 shows that domestic capex of ONGC has increased over the years despite relatively steady production over the same period. In any case, we believe a comprehensive market-based pricing regime for all forms of energy is ultimately required to (1) remove inefficiencies in the energy chain, (2) rationalize domestic consumption and (3) incentivize indigenous production. A market-based pricing regime will adequately incentivize domestic producers, while taking care of the interests of consumers; a consumer will end up paying higher prices for energy imports if indigenous production continues to lag domestic demand as has been the case historically. This situation will continue in the future too. Clarity on several policies is desirable to enhance energy security in the long term The government may want to provide clarity on several aspects of the policy framework of the Indian oil and gas sector(1) pricing mechanism for domestic natural gas, (2) pricing of crude oil from nominated blocks of ONGC and OIL, (3) royalty calculation for onshore crude oil production, (4) formal deregulation of diesel prices and further reforms for curtailing subsidies on LPG/kerosene, (5) policy for extension of PSCs and (6) a framework for new PSCs for NELP X round. In our view, the government can and should quickly fix these issues over the next few months in order to focus on the more important aspect of increasing domestic energy production and enhancing Indias energy security. We believe (1) enhancement of domestic energy security and (2) acquisition of global energy assets should be the central objectives of Indias energy policy given Indias deteriorating energy situation (see Exhibit 3).
Energy India Another delay, hopefully the last one. The government has deferred a decision on rationalization of domestic gas prices until November 15, 2014. In our view, the government needs to quickly fix the pricing policies for oil and gas as part of a broader objective of enhancing Indias energy security. Non-remunerative pricing and policy uncertainties have led to sluggish domestic production, resulting in rising energy deficit and imports. Indias current energy policies that constrain domestic production and inadvertently encourage energy imports at global prices should be reviewed.
NEUTRAL SEPTEMBER 25, 2014 UPDATE BSE-30: 26,745
Energy India KOTAK INSTITUTIONAL EQUITIES RESEARCH 13 Exhibit 1: ONGC's cost of production has increased over a period of time Breakdown of ONGC's costs, March fiscal year-ends, 2000-14 (U$/boe) - 5 10 15 20 25 30 35 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3 2 0 1 4 Lifting costs SG&A Taxes DD&A One-off items (US$/boe)
India Energy 14 KOTAK INSTITUTIONAL EQUITIES RESEARCH Exhibit 3: India's dependence on energy imports is expected to double by 2020 Energy deficit, March fiscal year-ends, 2010-20E (mtoe) 20 10 20 11 20 12 20 13 20 14 20 15 E 20 16 E 20 17E 20 18 E 20 19 E 20 20 E En er g y d eman d Coal (mn tons) 581 625 696 749 818 887 956 1,029 1,112 1,204 1,304 Natural gas (bcm) 59 65 65 59 54 57 61 68 78 85 89 Petroleum products (mn tons) 138 142 148 155 158 163 168 175 185 193 200 Electricity (hydro+nuclear) (bn kWh) 126 140 163 147 150 159 169 185 199 209 224 To t al d eman d ( mt o e) 49 1 5 22 5 6 4 5 9 1 6 22 6 6 4 70 7 75 7 8 18 8 77 9 38 En er g y s upply Coal (mn tons) 515 523 536 571 594 615 649 680 707 736 766 Natural gas (bcm) 47 52 47 40 35 36 38 41 44 49 50 Crude oil (mn tons) 34 38 38 38 38 38 38 39 39 39 38 Electricity (hydro+nuclear) (bn kWh) 126 140 163 147 150 159 169 185 199 209 224 To t al s upply ( mt o e) 331 344 349 35 8 36 5 376 39 5 414 431 45 0 46 6 To t al en er g y s h o r t f all ( mt o e) 16 0 177 216 233 25 8 28 9 313 343 38 7 427 472 Notes: (a) We assume that natural gas demand will be constrained by supply. We do not assume any incremental demand for gas from the power sector.
Source: Kotak Institutional Equities estimates
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SC recommends de-allocation for all; allows six months relief to adjust to new normal The Supreme Court has recommended de-allocation of 214 coal blocks, exempting only four coal blocks allotted to Ultra Mega Power Projects (UMPP) and to state-owned companies such as NTPC (Pakhri Barwadih) and SAIL (Tasra). As interim relief, the court allowed six months time for the de-allocation to become effective, by which time the government should be in a position to transition operations of producing coal blocks to Coal India and eventually look at auctioning the coal blocks in a transparent bid process. The court also recommended payment of `295/ton as penalty for the cumulative quantum of coal produced from the blocks. We highlight that the SC order only deals with cancellation of coal blocks and handover of operational mines to Coal India from April 1, 2015. Impact assessmentone-time penalty, interim sourcing and sustainable rise in cost The impacts for companies come from (1) immediate one-time payment of penalty for cumulative coal extracted, which could fetch the government `78 bn for 265 mn tons mined, (2) interim sourcing of coal at an incremental cost from Coal India, based on the notified price or e-auctionthis would be applicable if the process extends beyond April 2015 and (3) eventual outcome of the auction process that would determine the sustainable cost of coal for continuing operations. Auctioning will determine the cost of coal on a sustained basis In our view, auctioning of coal blocks will likely solicit aggressive participation from a plethora of power and steel capacities starved for coal. The floor price that would be bid may be in a range that would make the effective cost of coal (cost of production + floor price) equivalent to the notified price of coal (cheapest alternative after captive coal) at the lower end, with a cap that makes the effective price of coal equivalent to that of imported coal. Alternatively, the government, in a low-probability scenario, could seek upfront payment for the coal block that absolves itself of responsibility of monitoring the production profiles of individual blocks. Jindal Steel and Powerunknowns are declining but uncertainties prevail Jindal Steel and Power, which enjoyed a higher proportion of coal allocations, has the most to lose(1) a one-time penalty of ~`27 bn, payable for cumulative coal mined, (2) an earnings hit in FY2016E probably due to higher cost and constrained availability until coal block auctioning is complete, and (3) higher sustainable cost of coal, considering the floor price bid in the auction process. We assume companies such as JSP will have a higher propensity to bid for captive coal blocks attached to its end-use projects than peers and accordingly business continuity will be maintained though with inferior returns.
Metals & Mining India Captive coal blocksa new chapter. The much awaited Supreme Court judgment on captive coal block allocations recommended de-allocation of all but four coal blocks. The apex court also recommended payment of Rs295/ton for the cumulative coal mined so far. As a relief measure, the de-allocation will be applicable from April 1, 2015, by which time the government must gear up to work towards auctioning coal blocks and allowing Coal India to assume operations until such an auction. JSP (REDUCE: TP cut to `170 from `280) and Hindalco (REDUCE: TP cut to `165 from `180).
CAUTIOUS SEPTEMBER 25, 2014 UPDATE BSE-30: 26,745
India Metals & Mining 16 KOTAK INSTITUTIONAL EQUITIES RESEARCH Auctioning may take longer than expected, meanwhile Coal India may benefit In our view, the process of auctioning and subsequent resumption of operations may take time. Coal India may benefit in the interim as it takes on itself the onus of maintaining production of operating coal blocks. Auctionsvarious points worth considering While the SC decision paves the way for the auction of coal blocks, several factors are worth considering. Benchmark price for auctions. As per the notified auctioning methodology, consideration is payable through (1) 10% upfront payment based on the NPV of the coal block and (2) production-based per ton payment on coal mined annually. The intrinsic value, which forms the floor price, of the coal block is obtained by computing the NPV of the block using the DCF model. This NPV is then reduced for discounts given by the government. This NPV number is again reduced by a 10% upfront payment made to the government. The balance NPV is then annuitized to become the `/ton number to be paid, based on production. For calculation of intrinsic value, the earlier regime decided to benchmark the value of coal blocks to five-year average of global indices, Platts and Argus. These prices are adjusted by 15% to account for inland freight costs. Media reports indicate questions are being raised on the benchmarking to global prices as this will result in unrealistic prices. What pricing methodology is used to arrive at intrinsic value is debatable. This methodology eliminated the uncertainty in estimated coal reserves and actual production. The winner in this process is one who agrees to the highest per ton payment to the government. A low-probability event is upfront-based auction payment for the coal block that could also be considered, which absolves of government of responsibility of monitoring the ongoing production profiles of individual blocks Logistics will be an important consideration for auctions. Logistics costs play an important part in the cost of coal delivered to plants. Competitive bidding would be a function of the location of a coal block. Gare Palma coal block is close to many new capacities that are running at sub-optimal utilization due to restricted coal availability. Land acquisition. Land acquisition from the original leaseholders can be a challenge given the myriad of issues involved. Changes to legislation may be required to expedite the process. End-use of coal blocks. Government may choose to prioritize allocation to a particular sector. For example, in the recent failed auction for three coal blocks, the government specified industries that would be eligible to participate. Financial health of players. Debt/ EBITDA ratios in the industry are stretched including for most large players. An entire upfront payment-based auction may not be preferred by most in the industry.
Metals & Mining India KOTAK INSTITUTIONAL EQUITIES RESEARCH 17 Impact on companiesnegative for JSP and Hindalco We have computed the impact at three levels for One-time payment for coal mined. The SC has asked companies to submit fines before the end of CY2014. JSP has cumulatively mined about 90 mn tons of coal. The penalty for JSP is `27 bn or `29/ share. Hindalco has mined about 17 mn tons and will have to pay `5 bn or `3/share. Higher cost for replacement of captive coal. Post March 2015, these companies can get coal from other sources In case the coal blocks are not auctioned and are run by Coal India, then through e- auction or linkage as decided by the government and Coal India and If the government auctions the coal blocks, then these players will have to bid and win the coal blocks. We assume (1) that holders of captive coal blocks retain the block in the auction process and (2) the auction price is paid in the form of per ton consideration on annual coal production. We peg the incremental cost at `600/ton (can be substantially higher) which is based on the difference between captive coal mining cost and Coal Indias linkage price for non-power users. Changes in our estimates Exhibits 1 and 5 highlight changes in our JSP and Hindalco estimates. We increase power and fuel costs to incorporate `600/ton of incremental cost for coal sourced from captive mines and assume expansion projects to be fully reliant on e-auction and imported coal. We also incorporate our economists revised forex rate of `60.5/61 for FY2015/16E from Rs59.5/58. Company-wise impact will be as follows. Jindal Steel and Power. We cut JSPs consolidated EBITDA estimate over FY2015-17 by 4- 7% led by 7-13% cut in standalone EBITDA. The decline in steel EBITDA is led by (a) increment cost of `600/ton for coal sourced from captive mines for the Raigarh plant, and (2) higher cost of coal for Angul steel plant for e-auction/imported coal purchases, and 3% decline in Jindal Powers EBITDA. The impact of `600/ton increase in coal costs has been partly offset by a 6% increase in our power tariff assumption to Rs3.7/unit. This results in cut in our JSP EPS estimate over FY2015-17 by 9-20%. Hindalco. We cut Hindalcos consolidated EBITDA by 1-4%. The impact of higher coal costs is partly offset by revenue gains from a lower USD-INR rate. Our standalone EBITDA declines by 7-13% over FY2015-17E, led by (1) a `600/ton increase in coal costs on 2.2 mtpa coal of Talabira 1, and (2) higher coal costs for Mahan and Aditya smelter from e-auction/imported coal sourcing. Given the limited e-auction coal availability, we believe Hindalco will have to source large quantities of imported coal, which will entail higher freight costs due to long distance. We cut our EPS estimate for HIndalco by 7-14% for FY2015-17E.
India Metals & Mining 18 KOTAK INSTITUTIONAL EQUITIES RESEARCH Coal block auctioning methodology The government notified the coal block auctioning methodology in November 2013 for fully explored coal blocks. The competitive bidding process follows: Production linked payment. The bids are invited for production linked payment for per ton of coal mined. The government sets a floor price and bids are accepted above the floor price. Intrinsic value of the coal block. To set the floor, the intrinsic value of the coal block is computed by net present value method using the DCF model. The net present value is then reduced for any discounts given by the government. The net present value is further reduced by 10% upfront payment made to the government. The balance net present value is then annuitized based on the estimated reserves to arrive at per ton consideration to be paid on annual coal mined. For intrinsic value computation, the earlier regime had decided to benchmark the value of coal blocks to five year average of global indices, Platts and Argus. These prices are adjusted by 15% to account for inland freight costs. Upfront payment. The bidder has to make an upfront payment of 10% of the intrinsic value of the coal block. Tariff based bidding. In case of tariff-based bidding for power plants, the reserves price is limited to 10% of the intrinsic value so as to ensure lower power generation costs. Effectively this translates to 90% discount on the floor price for power firms for tariff based bidding.
Exhibit 1: Jindal Steel and Power (consolidated), change in estimates, March fiscal year-ends, 2015-17E (` mn)
2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E Cons olidat ed Net sales 272,685 318,904 349,389 268,366 309,219 341,811 1.6 3.1 2.2 EBITDA 75,892 87,258 95,150 79,403 92,130 101,773 (4.4) (5.3) (6.5) EPS (Rs ) 20.3 21.3 26.4 22.4 25.8 32.9 (9.4) (17.1) (19.7) St andalone bus ines s Net sales 189,146 218,172 239,868 187,514 214,341 238,909 0.9 1.8 0.4 EBITDA 49,911 50,244 54,652 53,751 55,735 62,589 (7.1) (9.9) (12.7) Pr e- except ion PAT 13,689 8,199 9,003 15,657 12,378 15,563 (12.6) (33.8) (42.1) J indal Power Net sales 32,632 47,637 53,938 31,568 45,371 51,376 3.4 5.0 5.0 EBITDA 17,336 27,114 29,374 17,822 28,080 30,204 (2.7) (3.4) (2.7) Pr of it af t er t ax 7,489 13,270 16,425 7,760 14,023 17,148 (3.5) (5.4) (4.2) Old es t imat es Revis ed es t imat es % change
Source: Kotak Institutional Equities estimates
Metals & Mining India KOTAK INSTITUTIONAL EQUITIES RESEARCH 19 Exhibit 2: Jindal Steel and Power, Key assumptions, March fiscal year ends (2012-17E)
20 12 20 13 20 14 20 15 E 20 16 E 20 17E To t al s t eel s ales ( t o n s ) 2, 6 40 , 75 5 2, 8 77, 19 8 2, 8 19 , 146 3, 9 9 5 , 442 4, 75 1, 0 8 6 5 , 0 5 4, 5 27 Iron ore pellets (tons) 2,028,330 2,112,158 1,895,306 1,942,662 2,646,665 3,744,998 Power sales (mn units) 1,473 2,280 1,836 2,335 2,313 2,223 Reven ues ( Rs mn ) Sponge iron 1,815 598 1,003 2,786 1,460 Pig iron 1,995 714 111 9 1 Mild and finished steel sales 103,534 123,195 123,736 170,888 197,083 214,255 Iron ore pellets 18,981 20,223 17,120 16,576 21,260 30,083 Power 5,879 8,970 6,893 8,172 8,097 7,781 Others 10,534 14,583 14,220 15,642 15,642 15,642 To t al 147, 418 16 8 , 8 5 8 16 2, 0 9 2 212, 30 1 244, 8 8 0 26 9 , 232 Realizat io n ( Rs / t o n ) Sponge iron 20,899 19,532 18,057 17,391 17,935 Pig iron 21,119 25,527 24,597 24,525 24,456 25,000 Mild / finished steel 37,810 38,617 39,160 38,587 38,102 38,315 Mild / finished steel 789 710 648 638 625 628 Iron ore pellets 8,464 8,479 8,048 7,602 7,157 7,157 Power (Rs/ unit) 4.0 3.9 3.8 3.5 3.5 3.5 Re/ US$ r at e 47. 9 5 4. 4 6 0 . 5 6 0 . 5 6 1. 0 6 1. 0 St an d alo n e EBITDA ( Rs mn ) Iron ore 2,120 195 Pellets 17,168 17,910 6,440 5,735 6,634 9,388 Steel business 19,834 22,316 29,498 40,207 39,908 41,707 Power 3,683 5,367 3,771 3,969 3,701 3,557 To t al 42, 8 0 6 45 , 78 8 39 , 70 9 49 , 9 11 5 0 , 244 5 4, 6 5 2
Exhibit 3: Jindal Steel and Power, SOTP-based valuation, March 2016E basis (` mn)
(Rs mn) (Rs /s har e) Steel business + Shadeed EBITDA 60,401 Assigned multiple (X) 6 St eel bus ines s ent er pr is e value (Includes capt ive power ) 360,593 394 Less: Debt of steel business (including subsidiaries) 314,616 344 St eel bus ines s equit y value (A) 45,977 5 0 Power bus ines s Equity value of Tamnar I and Tamnar II 147 Power bus ines s equit y value (B) 134,097 147 Other investments 2,229 2 Less: Penalty to be paid as per SC order for coal mined (26,550) (29) Ar r ived mar ket capit alizat ion (A) + (B) 155,754 170 Tar get pr ice (Rs /s har e) 170
Source: Kotak Institutional Equities estimates
India Metals & Mining 20 KOTAK INSTITUTIONAL EQUITIES RESEARCH Exhibit 4: Jindal Steel & Power (consolidated), profit model, balance sheet and cash flow model, March fiscal year-ends, 2012-17E (` mn)
20 12 20 13 20 14 20 15 E 20 16 E 20 17E Pr o f it mo d el ( Rs mn ) Net sales 182,086 198,068 200,040 272,685 318,904 349,389 EBITDA 6 7, 9 32 6 5 , 6 8 5 5 7, 6 71 75 , 8 9 2 8 7, 25 8 9 5 , 15 0 Other income 1,419 1,364 656 1,359 2,513 3,695 Interest (3,600) (7,582) (14,915) (23,244) (29,672) (30,544) Depreciaiton (13,865) (15,392) (18,292) (27,978) (31,973) (34,259) Exceptional items (5,741) (26,550) Pr o f it b ef o r e t ax 5 1, 8 8 6 38 , 335 25 , 120 ( 5 21) 28 , 128 34, 0 43 Taxes (11,863) (9,218) (6,182) (7,184) (8,148) (9,303) Net pr o f it 40 , 0 23 29 , 116 18 , 9 38 ( 7, 70 5 ) 19 , 9 8 0 24, 740 Share in profit/(loss) of associates 200 402 26 26 26 26 Minority interest (574) (417) 140 (269) (476) (590) Pr o f it af t er t ax an d min o r it y in t er es t 39 , 6 49 29 , 10 1 19 , 10 4 ( 7, 9 49 ) 19 , 5 29 24, 176 Ad jus t ed PAT 39 , 6 49 33, 46 2 19 , 10 4 18 , 6 0 1 19 , 5 29 24, 176 Ear n in g s per s h ar e ( Rs ) 42. 4 35 . 8 20 . 9 20 . 3 21. 3 26 . 4 Balan ce s h eet ( Rs mn ) Equity 181,111 212,523 226,105 216,449 234,265 256,728 Deferred tax liability 11,920 13,365 14,727 13,199 13,514 13,993 Total Borrowings 170,908 246,182 363,682 420,189 442,245 447,160 Current liabilities 83,066 93,084 125,405 104,880 106,778 108,609 Minority interest 3,071 5,573 10,802 11,074 11,550 12,140 To t al liab ilit ies 45 0 , 0 75 5 70 , 726 740 , 721 76 5 , 79 1 8 0 8 , 35 3 8 38 , 6 30 Net fixed assets 301,460 385,049 522,072 535,157 543,184 548,925 Goodwill 918 1,543 5,930 5,930 5,930 5,930 Investments 3,776 8,089 3,418 3,444 3,469 3,495 Cash 1,492 2,001 10,153 28,931 53,805 69,043 Other current assets 142,430 174,045 199,148 192,329 201,964 211,237 To t al as s et s 45 0 , 0 75 5 70 , 726 740 , 721 76 5 , 79 1 8 0 8 , 35 3 8 38 , 6 30 Fr ee cas h f lo w ( Rs mn ) Operating cash flow excl. working capital 59,602 58,430 50,074 41,993 81,939 90,022 Working capital changes (23,398) (23,207) 12,816 (13,706) (7,737) (7,442) Capital expenditure (64,332) (93,466) (141,525) (41,063) (40,000) (40,000) Fr ee cas h f lo w ( 28 , 128 ) ( 5 8 , 243) ( 78 , 6 36 ) ( 12, 777) 34, 20 2 42, 5 8 0 Rat io s Debt/equity 1.0 1.2 1.7 2.0 2.0 1.8 Net debt/equity 0.9 1.1 1.6 1.8 1.7 1.5 RoAE (%) 24.8 14.9 8.9 8.6 8.9 10.1 Ro ACE ( %) 13. 3 8 . 5 5 . 7 5 . 6 6 . 1 6 . 7
India Metals & Mining 22 KOTAK INSTITUTIONAL EQUITIES RESEARCH Exhibit 7: Hindalco Industries, valuation, March 2016E basis (` mn)
Mult iple (X) (Rs mn) (Rs /s har e) Hindalco EBITDA 55,468 6.0 333,363 161 Novelis EBITDA 69,969 6.5 454,797 220 ABML EBITDA (proportionate stake) 979 6.0 5,873 3 Tot al Ent er pr is e Value 794,034 385 Add: Listed investments (20% discount to market price) 53,402 26 Less: Net debt 502,389 502,389 243 Less: Penalty to be paid as per SC order for coal mined (5,163) (3) Ar r ived mar ket capit alizat ion 339,885 165 Tar get pr ice (Rs ) 165 Value
Source: Kotak Institutional Equities estimates
Metals & Mining India KOTAK INSTITUTIONAL EQUITIES RESEARCH 23 Exhibit 8: Hindalco (consolidated), profit model, balance sheet and cash flow model, March fiscal year-ends, 2012-17E (` mn)
20 12 20 13 20 14 20 15 E 20 16 E 20 17E Pr o f it mo d el ( Rs mn ) Net sales 808,214 801,928 876,955 1,065,042 1,174,107 1,259,353 EBITDA 8 1, 8 9 4 78 , 36 8 8 2, 8 6 3 10 9 , 28 1 128 , 35 6 141, 8 37 Other income 7,831 10,122 10,172 8,169 3,709 4,384 Interest (17,580) (20,791) (27,016) (36,953) (44,176) (44,606) Depreciation (28,696) (28,611) (35,528) (39,349) (43,500) (45,428) Pr o f it b ef o r e t ax 43, 449 39 , 0 8 8 30 , 49 1 41, 148 44, 38 9 5 6 , 18 6 Exceptional item (3,960) (5,163) Taxes (7,862) (8,857) (5,249) (8,736) (11,374) (15,517) Pr o f it af t er t ax 35 , 5 8 7 30 , 231 21, 28 2 27, 249 33, 0 15 40 , 6 6 9 Minority interest (2,113) 196 (200) 558 630 700 Share in profit/(loss) of associates 496 (158) 668 682 695 709 Repo r t ed n et in co me 33, 9 6 9 30 , 26 9 21, 75 0 28 , 48 9 34, 341 42, 0 78 Ad jus t ed n et in co me 33, 9 6 9 30 , 26 9 25 , 710 33, 6 5 1 34, 341 42, 0 78 Fully d ilut ed EPS ( Rs ) 16 . 5 14. 7 12. 5 16 . 3 16 . 6 20 . 4 Balan ce s h eet ( Rs mn ) Equity 319,113 353,302 405,992 432,003 463,867 503,467 Deferred tax liability 36,050 34,677 31,889 31,889 31,889 31,889 Total Borrowings 410,165 569,507 647,558 647,613 628,054 583,654 Current liabilities 231,604 232,461 276,713 302,241 322,778 325,029 Minority interest 17,091 17,593 17,806 17,248 16,618 15,918 To t al liab ilit ies 1, 0 14, 0 23 1, 20 7, 5 40 1, 379 , 9 5 7 1, 430 , 9 9 4 1, 46 3, 20 6 1, 45 9 , 9 5 7 Net fixed assets 242,338 264,158 481,442 620,898 726,737 710,532 Capital work in progress 227,981 338,311 230,593 125,863 10,924 10,000 Goodwill 110,665 118,397 130,192 130,192 130,192 130,192 Investments 105,510 124,476 129,611 130,293 130,988 131,697 Cash 32,960 37,695 50,213 30,724 53,595 45,065 Other current assets 294,569 324,504 357,767 392,886 410,631 432,332 Deferred tax 139 139 139 139 To t al as s et s 1, 0 14, 0 23 1, 20 7, 5 40 1, 379 , 9 5 7 1, 430 , 9 9 4 1, 46 3, 20 6 1, 45 9 , 9 5 7 Fr ee cas h f lo w ( Rs mn ) Operating cash flow excl. working capital 45,873 29,618 21,950 63,592 72,806 81,714 Working capital changes (9,322) (38,740) 9,623 (9,590) 2,791 (19,450) Capital expenditure (143,641) (119,218) (94,236) (74,075) (34,400) (28,300) Fr ee cas h f lo w ( 10 7, 0 9 0 ) ( 128 , 339 ) ( 6 2, 6 6 2) ( 20 , 0 73) 41, 19 8 33, 9 6 4 Rat io s EBITDA margin (%) 10.1 9.8 9.4 10.3 10.9 11.3 EBIT margin (%) 6.6 6.2 5.4 6.6 7.2 7.7 Debt/equity (X) 1.3 1.6 1.6 1.5 1.4 1.2 Net debt/equity (X) 1.0 1.3 1.3 1.3 1.1 0.9 Net debt/EBITDA (X) 3.9 5.9 6.4 5.0 4.0 3.3 RoAE (%) 11.1 9.0 6.8 8.0 7.7 8.7 Ro ACE ( %) 6 . 5 4. 7 4. 0 5 . 3 6 . 2 6 . 7
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Accenture 4QFY14growth powered by outsourcing business Accenture reported a solid 4QFY14 (Aug 2014 quarter) with revenue growth of 8% in c/c, ahead of consensus estimates. The outsourcing business grew 13% yoy and powered growth. Consulting business grew 4%. Growth was strong across all operating groups (verticals) except resources. From a geographical standpoint, US grew at a robust 10% and EMEA grew 9% in c/c. Bookings of US$8.3 bn declined yoy but were in line with the management guidance. Net hiring of 12,353 people was strong, taking the total headcount to 305,882, of which 67% are in the global delivery network. Accentures digital business continues to lead the industry with close to US$5 bn of revenues in FY2014, resource base of 27,000 people and healthy double-digit revenue growth. FY2015 revenue growth outlook of 4-7%; outsourcing to be key growth driver Accenture has guided 4-7% revenue growth for FY2015. Management indicated a greater comfort of delivering growth in the upper half of the range. Acquisitions will likely contribute 1% to FY2015 growth as compared to 2% in FY2014. Management indicated bulk of the growth will be driven by the outsourcing segment, where it has guided for high-single-digit to low-double-digit growth. The company expects consulting growth to be broadly similar to FY2014 growth of 3%. The company expects FY2015E bookings to be largely stable and in the range of US$34-36 bn. Read-through for Indian IT is neutral Accentures result read-through is always tricky and open to multiple interpretations. A strong outsourcing-led growth quarter by Accenture can be viewed as aggressive turf protection/market share gain (negative for Indian IT) or strong demand environment (positive for Indian IT). Accentures growth in the outsourcing business in the recent quarter is comparable to other Tier-1 IT, except TCS and CTSH. We believe that Accentures growth in the outsourcing segment, on margin, reflects share gains. While the market may be large enough to absorb all players for now, this once again reaffirms our long-held view of increasing competitive intensity in the global IT services sector. Accentures FY2015 consulting revenue growth outlook is similar to actuals of FY2014, i.e. 3% growth. Accentures consulting business outlook is a good barometer for discretionary spending though the correlation has reduced due to (1) offshore players that are chipping away at small consulting assignments and (2) Accentures ERP-heavy portfolio is under increased pressure from as-a-service models in the market. A higher consulting growth outlook would have given greater comfort on discretionary spending. Continued market share gains and large deals in traditional services continue to power Indian IT growth. We maintain our positive view and retain Infosys, Wipro and Tech Mahindra as our top picks.
Technology India Accenture resultslargely neutral for Indian IT. Accenture reported a solid 4QFY14 (Aug 2014 quarter) with revenue growth ahead of consensus expectations. Growth was driven by outsourcing segment that grew 13% yoy in c/c while consulting revenues grew 4% in c/c. Management guidance of 4-7% for FY2015 (Aug year-end) assumes bulk of the growth will be led by outsourcing segment. A stronger outlook for consulting business could have been a positive read-through for Indian IT. Strong large cost takeout deal wins and pipeline keep powering Indian IT growth and underpin our positive view.
CAUTIOUS SEPTEMBER 24, 2014 UPDATE BSE-30: 26,745
Technology India Exhibit 1: Accenture interim results, August fiscal year-ends (US$ mn)
4QFY13 3QFY14 4QFY14 % qoq % yoy Revenues 7,087 7,736 7,777 0.5 9.7 Cost of revenues 4,737 5,199 5,309 2.1 12.1 SG&A expenses 1,366 1,358 1,389 2.3 1.7 EBIT 9 8 4 1,179 1,079 (8.4) 9.7 Other income (19) (3) 9 PBT 9 6 5 1,176 1,088 (7.5) 12.8 Provision for taxes 238 294 328 PAT 727 8 8 2 760 (13.8) 4.5 Minority interest 56 64 59 (8.3) 5.0 PAT af t er minor it y int er es t 671 817 701 (14.2) 4.5 Mar gins (%) EBIT 13.9 15.2 13.9 Net income 10.3 11.4 9.8
Source: Company, Kotak Institutional Equities
Exhibit 2: Valuation summary of key Indian technology companies
24- Sep- 14 PER ( X) EV/ EBITDA ( X) EV/ Sales ( X) Co mpan y Pr ice ( Rs ) Rat in g ( Rs m) ( US$ m) 20 14 20 15 E 20 16 E 20 14 20 15 E 20 16 E 20 14 20 15 E 20 16 E 20 14 20 15 E 20 16 E HCL Technologies 1,709 REDUCE 1,210,255 19,852 89.8 102.3 110.0 19.0 16.7 15.5 12.9 11.5 10.3 3.4 2.9 2.4 Hexaware Technologies 189 SELL 57,152 937 12.6 10.6 12.3 15.0 17.9 15.4 9.9 12.0 10.3 2.2 2.1 1.9 Infosys 3,645 ADD 2,082,639 34,163 186.3 211.4 242.2 19.6 17.2 15.1 13.4 11.9 9.9 3.6 3.3 2.9 Mindtree 1,199 ADD 100,682 1,652 53.7 63.3 73.8 22.3 18.9 16.2 16.3 13.6 11.4 3.3 2.7 2.3 Mphasis 444 SELL 93,263 1,530 14.7 35.0 36.8 12.6 12.7 12.1 8.9 9.0 8.4 1.5 1.5 1.4 TCS 2,643 ADD 5,176,844 84,919 97.6 113.0 129.9 27.1 23.4 20.3 19.8 17.4 14.8 6.1 5.1 4.3 Tech Mahindra 2,485 ADD 592,610 9,721 128.0 142.1 166.9 19.4 17.5 14.9 13.3 12.4 10.3 3.0 2.5 2.1 Wipro 593 ADD 1,459,943 23,948 31.7 35.8 40.8 18.7 16.5 14.5 13.1 10.9 9.2 3.1 2.6 2.3 Technology Caut io us 10, 773, 389 176, 722 22. 5 19. 6 17. 2 15. 9 13. 9 11. 8 4. 3 3. 7 3. 1 KIE univer se 67, 715, 488 1, 110, 773 18. 7 16. 2 13. 8 11. 4 9. 8 8. 3 1. 6 1. 4 1. 3 Tar g et O/ S s h ar es EPS g r o wt h ( %) Net Pr o f it ( Rs mn ) EBITDA ( Rs mn ) Sales ( Rs mn ) Co mpan y Pr ice ( Rs ) ( mn ) 20 14 20 15 E 20 16 E 20 14 20 15 E 20 16 E 20 14 20 15 E 20 16 E 20 14 20 15 E 20 16 E HCL Technologies 1,600 708 57.8 13.9 7.6 63,418 72,410 78,349 86,667 93,018 99,014 329,180 370,305 420,208 Hexaware Technologies 145 302 14.5 (16.4) 16.5 3,792 3,189 3,714 5,124 4,444 5,094 22,854 25,086 28,272 Infosys 4,100 571 13.0 13.5 14.5 108,670 120,804 138,374 136,340 149,024 175,559 501,330 535,383 606,367 Mindtree 1,180 84 31.4 18.0 16.5 4,508 5,320 6,198 6,100 7,180 8,392 30,316 35,970 41,744 Mphasis 400 210 (58.4) 138.0 5.2 3,091 7,355 7,738 4,397 10,037 10,384 25,939 61,423 64,121 TCS 2,800 1,959 37.4 15.7 15.0 191,166 221,242 254,492 251,322 282,883 328,712 818,094 964,766 1,121,376 Tech Mahindra 2,650 238 25.6 11.0 17.4 26,821 30,471 35,788 41,836 44,592 52,454 188,313 219,446 253,235 Wipro 650 2,463 27.1 13.1 13.9 77,966 88,215 100,461 102,241 115,949 131,322 437,628 479,442 533,465 Technology 29. 6 14. 5 13. 9 479, 432 549, 006 625, 114 634, 027 707, 128 810, 932 2, 353, 654 2, 691, 821 3, 068, 788 KIE univer se 6. 3 15. 7 16. 7 Notes: (a) HCL Technologies' fiscal year ends in June. (b) Hexaware Technologies' fiscal year ends in December. (c) Mphasis has changed its accounting year to March from October. Period ending Mar 2014 is for 5 months. We have annualized financials for computing ratios. Mkt cap. EPS ( Rs )
Disclosures KOTAK INSTITUTIONAL EQUITIES RESEARCH 30
Ratings and other definitions/identifiers Definitions of ratings BUY. We expect this stock to deliver more than 15% returns over the next 12 months. ADD. We expect this stock to deliver 5-15% returns over the next 12 months. REDUCE. We expect this stock to deliver -5-+5% returns over the next 12 months. SELL. We expect this stock to deliver <-5% returns over the next 12 months. Our target prices are also on a 12-month horizon basis. Other definitions Coverage view. The coverage view represents each analysts overall fundamental outlook on the Sector. The coverage view will consist of one of the following designations: Attractive, Neutral, Cautious. Other ratings/identifiers NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s) and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances. CS = Coverage Suspended. Kotak Securities has suspended coverage of this company. NC = Not Covered. Kotak Securities does not cover this company. RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. NA = Not Available or Not Applicable. The information is not available for display or is not applicable. NM = Not Meaningful. The information is not meaningful and is therefore excluded.
Kotak Institutional Equities Research coverage universe Dist ribut ion of rat ings/invest ment banking relat ionships Source: Kot ak Inst it ut ional Equit ies Asof June 30, 2014 Percent age of companiescovered by Kot ak Inst it ut ional Equit ies, wit hin t he specif ied cat egory. Percent age of companieswit hin each cat egory f or which Kot ak Inst it ut ional Equit iesand or it saf f iliat es hasprovided invest ment banking serviceswit hin t he previous12 mont hs. * The above cat egoriesare def ined asf ollows: Buy = We expect t hisst ock t o deliver more t han 15% ret urnsover t he next 12 mont hs; Add = We expect t hisst ock t o deliver 5-15% ret urnsover t he next 12 mont hs; Reduce = We expect t hisst ock t o deliver -5-+5% ret urnsover t he next 12 mont hs; Sell = We expect t hisst ock t o deliver lesst han - 5% ret urnsover t he next 12 mont hs. Our t arget pricesare also on a 12-mont h horizon basis. These rat ingsare used illust rat ively t o comply wit h applicable regulat ions. Asof 30/06/2014 Kot ak Inst it ut ional Equit iesInvest ment Research had invest ment rat ingson 149 equit y securit ies. 15.4% 23.5% 35.6% 25.5% 2.0% 0.7% 2.0% 0.7% 0% 10% 20% 30% 40% 50% 60% 70% BUY ADD REDUCE SELL
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