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November 19, 2008

GLOBAL ABSOLUTE

INDIAN FCCBs

Are Indian Bonds all Distressed or are there


some that provide a Quantum of Solace
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TABLE OF CONTENTS
GA Profile 01

Section 1: Purpose 02

Section 2: FCCB Background 03

Section 3: GA Credit Analysis 05

Section 4: Recommendations 07

A. Yield Play 07

Man Industries (India) Limited 08

Videocon Industries Limited 16

Reliance Communication Limited 24

Tata Motors Limited 31

Geetanjali Gems Limited 40

Bharati Shipyard Limited 48

Uflex Limited 56

Mahindra & Mahindra Limited 63

B. Equity Play 72

Housing Development Finance Corporation Limited 73

Punj Llyod Limited 78

Core Projects & Technologies Limited 86

Jain Irrigation Systems Limited 95

C. Distress Play 102

Hotel Leelaventure Limited 103

Sical Logistics Limited 112

Section 5: Conclusion 123

Appendix 1: GA Credit Score: An Explanation 124

Appendix 2: Universe of FCCB by Issuer 125

Appendix 3: FCCB Universe 129

Appendix 4: List of GA FCCB Picks 134


Global Absolute Profile

We are one of the fastest emerging financial service providers in India. We


specialize in providing broad range of financial services, including high-end
research, corporate advisory services and fund management. Backed by
qualified professionals, we provide macro and micro research in the areas of
economy, industry, and equity. Apart from this, we also provide various capital
advisory services including raising of funds M&A and corporate restructuring.

Though, based in India, we aim to shorten the timeline on investment returns for our
clients across the globe, which includes corporates, institutional investors, hedge
funds, pension funds, mutual funds, banks, insurance companies, and high net-
worth individuals. We also, continuously strive to be innovative and excel in client
servicing, through appropriate advice to clients on strategic transactions, and in
providing new opportunities such as the growing private equity deal flow market.

Our Group is driven by the vision and zeal of the main promoters, Mr. Rajinder Singh
and Mr. Deldar Tony Singh, ACA. The promoters have extensive experience of
working with various institutions such as investment banks, such as BNP Paribas,
Barclays, Deloitte & Touche, Cresvale Ltd, Mitsubishi Bank of Tokyo, etc. Our Group
consists of various business units, working in synergy with each other, and operating
from several locations throughout India, Europe, and Far East.

01
Global Absolute Section 1: Purpose

During the recent global economic crisis the credit and liquidity ratings of many
countries, sectors, companies, and bonds has been put to question.

The Indian FCCB universe have been adversely impacted with many
scaremongering stories making it appear that all such FCCBs are under threat – in
particular under threat of non-redemption by companies – quite simply meaning
default.

In addition, we believe since the market for FCCBs is very illiquid there has been an
occurrence of severe miss-pricing.

As a result many investors are unsure as to the

1. Credit worthiness of companies with such FCCBs

2. True valuation and pricing of FCCBs

3. The likeliness or unlikeliness of companies that can redeem or refinance to


redeem

The Bonds 008 : Quantum of Solace report is Global Absolute’s first FCCB Coverage
Guide that should be kept as a reference to the Indian FCCB market which we will
continuously add to over time and amend dependant on major changes in
market and economic conditions.

The report attempts to find some Solace/Value in the universe of FCCBs that
provide opportunities to earn significant yield, equity plays and even value in
distressed bonds.

In order to affect such analysis GA has created several credit and liquidity analysis
tools which are explained in the Report such as the :

n GA Z-Score

n GA Bond Rating

n GA Redemption Cover

The report starts with 14 key ideas and will develop further research updates over
time until we have analysed most Indian FCCBs that offer some value.

02
Global Absolute SECTION 2: FCCB Background

What are FCCBs?

n A type of convertible bond issued in a currency different than the issuer's


domestic currency. In other words, the money being raised by the issuing
company is in the form of a foreign currency.

n A convertible bond is a mix between a debt and equity instrument. It acts like
a bond by making regular coupon (however most Indian FCCBs are Zero
Coupon) and principal payments, but these bonds also give the bondholder
the option to convert the bond into stock.

n These types of bonds are attractive to both investors and issuers. The investors
receive the safety of guaranteed payments on the bond and are also able
to take advantage of any large price appreciation in the company's stock.
(Bondholders take advantage of this appreciation by means of an option,
which can be activated when the price of the stock reaches a certain
point.) Due to the equity side of the bond, which adds value, the coupon
payments on the bond are lower for the company, thereby reducing its
debt-financing costs.

FCCBs Pros:

n Provides downside protection for the investor with an option on the equity
known as the “Equity Kicker”.

n If the stock does not perform over the life of the bond, then at maturity the
issuer redeems the bonds back at a premium, which is basically the
accretive yield on the bond.

n For the issuer, the FCCB (mostly Zero Coupons) are not shown through the
P&L until maturity, which makes this an attractive method of raising finances.

n From the issuer’s perspective, it tends to offer a lower rate of return in


exchange for the value of the option to trade the bond into stock.

FCCBs Cons:

n The risk for the investor is that the stock of the issuer does not perform over the
life of the bond and the investor returns the bonds back to the issuer at
maturity above par depending on the coupon structure.

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n However, the bigger risk which we will discuss later is that, will the issuers be
able to redeem their bonds back on redemption date?

n From the investor's perspective, a convertible bond has a value-added


component built into it; it is essentially a bond with a stock option hidden
inside. Thus, it tends to offer a lower rate of return in exchange for the value of
the option to trade the bond into stock.

Current Indian FCCB Market situation

n Indian Corporate have issued ~$ 20bn in FCCBs over the last 5 years.

n With the bullish sentiment in India and other emerging markets, this was the
most effective and ideal instrument to use to raise money and to invest in.

n However with the recent market turmoil due to the credit Crunch, we have
witnessed a global capitulation in equity markets, resulting in many bonds
trading out-of–money and most importantly the decline in Market
capitalisation of the companies.

n The key question is not whether the issuing companies stock will perform
above conversion price and trade in-the-money, but if the issuers will have
enough cash to redeem their bonds back on maturity date or put date.

What happens if FCCBs do not convert?

n Reset Price – This lowers the conversion price, resulting in higher dilution which
is damaging to the equity holders.

n Refinance using New FCCB – This involves issuing a new FCCB with a lower
conversion price to buy back the old bond, resulting in higher dilution and
paying an early redemption premium.

n Refinance using plain Vanilla debt – this can be a costly and a difficult
process, especially when we are witnessing one of the greatest credit
Crunches of all time.

n Raise Equity – This involves raising new shares to buy back the bonds, which
again causes massive dilution and difficult to raise in today’s environment.

n Company “buy backs” it has been rumoured that changes in legislation are
being discussed, which will allow companies to legally buy back their bonds
from the investors PRIOR to maturity date, at an agreed price.

04
Global Absolute Section 3: GA Credit Analysis

THE FOLLOWING RATING METHODOLOGY IS USED FOR EACH FCCB

GA Z-Score: An Explanation

The adapted formula for Z-score for emerging market corporate used by Global
Absolute is as follows:

Z score = 3.25 + 6.56(x1) + 3.26(x2) + 6.72(x3) + 1.05(x4).

The constant of 3.25 is added to standardize the scores with a score of zero
equated to a “D” (distress) rated bond.

RATIO RATIOS & WEIGHTS WEIGHTS


X1 NET WORKING CAPITAL / T. TANGIBLE ASSETS 6.56
X2 RETAINED EARNINGS / TOTAL TANGIBLE ASSETS 3.26
X3 EBIT / TOTAL TANGIBLE ASSETS 6.72
X4 TANGIBLE NETWORTH / TOTAL TANGIBLE ASSETS 1.05
CONSTANT 3.25
TOTAL CREDIT SCORE 17.59

The interpretation of GA Z-Score is as follows:

GA CR ZONE INTERPRETATION US BOND


SCORE RATING EQV.
> 6.40 GREEN DISTRESS UNLIKELY. A-AAA
> 3.75 YELLOW CORRECTIVE ACTION AND
MONITORING NEEDED. B-BBB+
> 1.75 GREY IMMEDIATE CORRECTIVE ACTION &
STRICT MONITORING CALLED FOR. C
< 1.75 RED DISTRESS HIGHLY LIKELY D

05
GA Bond Rating

GA analysis using many different credit and liquidity measures is summarized in


three ratings as follows:

GA BOND RATING 1 Yield / Good Credit


GA BOND RATING 2 Yield / Low Credit
GA BOND RATING 3 Distress

These ratings are based upon the extent to which the FCCB repayment liability is
covered by the net cash flow generated from the company’s operations, GA
Credit score and a range of balance sheet and liquity ratios till the date of maturity
of the FCCBs.

GA FCCB Redemption Cover

FCCB Redemption Cover measures the extent to which the net cash balance at
the year-end covers the FCCB redemption liability as on that date.

Upto 1 At risk, but needs to thoroughly examine refinance as an option


1 – 2.5 No risk of non-repayment, but still examines refinance as an option
> 2.5 Repayment most likely from cash flows

06
Global Absolute Section 4: Recommendations

After thorough analysis, we have identified 30 Indian Convertibles which we feel


are good buys, falling under Yield Play, Equity Play and Distress Play. We have
discussed in detail 14 investment ideas in this booklet. We will come out with more
such ideas in coming weeks. (Please see Appendix 4 for the summary of entire GA
Bond Picks).

A. Yield Play – These are the bonds which are trading at considerably low levels,
below their bond Floor (Straight bond value). Our analysis proves that the issuing
companies have the cash weather from future cash flows, or cash reserves, to
redeem the bonds back from the investors on maturity.

Below are some of the names we recommend. Highlighted companies are


covered in detailed, with a full credit and financial analysis.

BONDS ISSUE SIZE O/S YTM (%) GA CREDIT REDEMPTION


In USD In USD RATING COVER RATIO
Videocon Ind. USD 4.500 '11 90 43 47.54 1 3.02
Videocon Ind. USD 5.000 '11 105 67 44.29 1 3.02
Man Industries 50 50 32.20 2 1.24
Tata Motors USD 0.000 '12 490 490 28.40 2 1.19
Tata Motors USD 1.000 '11 300 300 26.88 2 1.19
Suzlon USD 0.000 '12 300 300 35.73 2 1.88
Suzlon USD 0.000 '12 200 200 36.20 2 1.88
Reliance Com. USD 0.000 '11 500 297 22.67 2 1.56
Reliance Com. USD 0.000 '12 1000 990 25.56 2 1.56
Gitanjali Gems 110 73 23.52 2 2.03
M&M 200 200 20.30 1 1.19
UFlex 85 69 32.80 1 0.92
Rolta India 150 150 25.00 2 0.88
Bharati Shipyard 80 46 27.96 2 0.31
Tulip IT 150 150 36.00 2 0.46
Amtek Auto 250 250 36.20 2 0.60

The reports for Videcon, Man industries, Reliance Communication, Tata Motors,
Gitanjali Gems, Bharati Shipyard, UFlex and Mahindra and Mahindra.

07
Pipe Man Industries (India) Limited

GA BOND RATING : 2
YIELD / GOOD CREDIT : BUY

CMP 33 FCCB Description


Nominal Value 5 BOND NAME MAN INDUSTRIES I
BSE Sensex 9,385 USD 0.000 '12
COUPON (% p.a) 0.0
Stock Statistics
ISSUE SIZE ($m) 50.0
Bloomberg code MAN IN
Reuters Code MIND BO AMOUNT OUTSTANDING( $m) 50.0
BSE code 513269 MATURITY 5/23/2012
NSE code MANINDS TOTAL REDEMPTION AMOUNT($m) 73.0
ISIN No. INE993A01026 REDEMPTION AT MATURITY 146.6

Market Cap (mn) Rs. 1,746 ($34) YTM & YTP (%) 32.2
52 Wk High/Low (Rs.) 178 / 27 CONVERSION PRICE (INR) 115.0
NSE Avg Daily Vol(12 m) 77,432 PARITY 22.9
BSE Avg Daily Vol(12 m) 52,986 INDICATIVE BOND PRICE 55.0
PREMIUM 139.6
Shareholding Pattern (in mn)
COUPON YIELD 0%
Particulars No. of shares in %
BOND FLOOR 98.5
Promoters 23.8 44.7
CREDIT SPREAD 1,000bp
FIIs 2.5 4.6
FAIR VALUE 98.8
Mutual Funds & UTI 4.1 7.7
Banks/FI's/Insur Co 3.0 5.6 Source: Company & Global Absolute Research

Private corp. bodies 4.8 9.0


Indian Public 9.5 17.7 Recommendation: BUY BONDS AS YIELD PLAY
Others 5.6 10.7 Man Industries India Ltd. (MIIL) is a leading manufacturer of SAW pipes, and has
Total 53.3 100.0 technology collaboration with CHR Haeusler, Switzerland. The company is well
positioned to benefit from the increase in demand from the Oil & Gas industry, where
Stock Performance
the sector demand for pipe kilometers remains significantly higher even after our
In % 1m 3m 6m downgrade for growth. In addition, the committed capex should provide a buffer
Absolute -18 -53 -68 over the next 12 months, after which we do expect to see growth recovering in some
Relative -5 -17 -22 of MIIL’s markets. The company has strong cash flows, and should it be necessary has
Research Analyst the ability to raise funds to support the growth and its obligation (having current
Jitesh Muchchal debt:equity ratio of 0.85x and interest coverage ratio of 4.4). In addition, the
91-124-4386140 company has strong real estate assets, not currently valued on the balance sheet.
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With a Global Absolute (GA) Bond Rating of 2, we believe MIIL would be able to
120
repay its FCCB liability through its operations, as reflected in the 5-year average
100 FCCB Redemption Cover of 1.24. The current year GA Credit Score of 9.32 and
80 increasing ROE implies that the company has a strong capacity to pay interest and
principal, which is reflected through 5-year average interest coverage ratio of
60
4.18x. The ratio is expected to improve to 7.2x by FY12. Moreover, DuPont analysis
40
Sens ex MA N IN EQUITY shows that the growth, profitability and financial leverage have improved over the
20 years and are in line with the industry’s average. We expect an average annual
0
cash inflow from operations at ~Rs. 1.32bn ($ 25mn), upto FCCB redemption liability.
No v-07 Jan-08 M ar-08 M ay-08 Jul-08 Sep-08
(MAN IN) Iss'd 2/27 USD 50mn FCCB is currently trading at an attractive yield of
Chairman: Mr. R. C. Mansukhani 32.20%. Though, MIIL’s share price is currently trading at Rs. 33, the conversion price
Registered Man House, 102, S.V. Road of the FCCBs is at Rs. 115 on its maturity.
Office: Opp. Pawan Hans,
We believe, MIIL would not face any problems in the repayment of its FCCBs
Vile Parle (W), Mumbai - 056 obligations. Therefore, we recommend a BUY rating on the FCCB- Man Industries
Website: www.mangroup.com India Ltd. 0.000’12.

08
Equity Analysis A brief financial health of the company

Man Industries (India) Ltd. (MIIL), the flagship company of Asset analysis
Man Group, UK, is a leading manufacturer of SAW pipes for
high pressure applications, like transportation of Oil, Gas In FY08, the Tangible Fixed Assets (Net Fixed Assets+WIP-

and other Petrochemical products. The company’s Goodwill) of the company stands at Rs. 3.88bn. The

product portfolio includes LSAW (Longitudinal SAW) pipes, company has two plants, one in Pithampur (Madhya

HSAW pipes (HELICAL SAW), 3-Layer Polyethylene Coating, Pradesh) and one in Anjar (Gujarat). It has also acquired 155

Coaltar, Enamel Coating, Internal Cement Mortar / Epoxy acres in Little Rock, Arkansas, USA. Currently, Tangible Fixed

Lining, External Gunneting, Aluminium Extrusion etc. The Assets-Debt ratio is 1.25x, which clearly shows higher

company also has a Collaboration agreement with Chr. coverage of assets on debt, which is sufficient to pay off its

Haeusler, Switzerland for API-grade longitudinally welded full liabilities.

SAW pipes. Recently, MIIL also forayed in the real estate


MIIL is setting up a $ 100mn manufacturing unit for HSAW
business (in a small and selective manner) and demerged its
pipes in USA, for which it has already acquired land. This
Aluminium division into a new company, named Man
would further increase the asset base of the company.
Aluminium Ltd.

Profitability analysis
Revenues have been growing at a CAGR of 38% over FY04-
08, mainly on the back of increased demand from the Oil & MIIL has been a consistent performer, maintaining an
Gas industry. MIIL has recently added 0.2MMT production operating margin of 11%-12% in its core business of steel
capacity of HSAW pipes in its Anjar (Gujarat) facility. pipes. In H109, the margin declined 74 basis points to 10.62%,
Presently, the order book of MIIL stands at Rs. 15bn, to be as compared to FY08, on account of high raw material cost
executed in the next 6-8 months. The orders are of fixed and interest cost. Softening of steel prices would help to
price in nature, i.e. no price escalation clause built in. maintain the operating margins. But, net margins would be
Considering this order book, we expect MIIL's topline to impacted due to increase in the interest cost, which again is
grow by 15% from previous years and EBITDA margin to be expected to improve in the medium to long term. We the
between 10%-11% for FY09. For FY10, we expect a lower believe that the company is well positioned to maintain its
growth in the topline due to the slowdown in the expansion current margins, going forward.
or replacement plan of Oil & Gas companies. MIIL has also
forayed into Real Estate, developing few projects in Liquidity & Credit Analysis
Mumbai and Indore (this represents only 13% of the forward
Interest coverage ratio is at comfortable 4.4x and
turnover). Recent meltdown in the global markets is also
EBITDA/Debt is 0.6x. For FY09, the interest coverage would
impacting the Indian real estate industry, which could hit
be on the lower side because of the increase in interest cost.
the company’s planned revenues and margins in the short
However, going forward, we expect the coverage ratio to
term.
regain its current sustainable levels.
The fortune of the pipeline industry depends on the growth
Debt-Equity ratio is 0.85x. The leverage ratio is expected to
in Exploration & Production activites in both domestic and
come down going forward, as the company pays off its
international market. We expect, that MIIL would be
debt. Thus, MIIL would have a scope to increase its leverage
benefitted from the expansions in the global pipeline
in future, if so required.
capacity on account of new finds, LNG imports,
replacement of existing pipes and increase in international
Out of the total debt on the books, i.e. Rs. 3.1bn in FY08, FCCBs
pipeline project proposals. The key concern with the
constituted nearly 66%, i.e. Rs. 2.03bn. Presently, the FCCBs
company is the delay in order execution that could impact
outstanding payment obligation on maturity is Rs. 3.8bn.
the margins particularly, as their income tends to be fixed in
nature. Any appreciation of the Indian currency may also The company has an investment of Rs. 317.8mn, and cash &
impact its exports (65% of forward turnover). bank remains at Rs. 1.17bn. The cash & investment, together
forms nearly 48% of the total debt outstanding on the books.
Thus, the company should be able to take care of any short
term liability.

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Global Absolute Bond Rating Analysis Baseline Indicator III: Sustainable Growth Analysis

The company has a Bond Rating of 2, thus implying a strong The Sustainable Growth model is a combination of four
credit and low chance of not redeeming the FCCBs. ratios, and measures the maximum rate of growth in
revenue that can be sustained without obtaining additional
The weightings used for the bond score are as follows: outside funding. The maximum sustainable growth in total
revenue is calculated for each year, and is then compared
Redemption Cover 60% Highest weightage, since it is cash to the actual calculated growth rate in total.
based and includes future
projections Particulars 2006 03 2007 03 2008 03
GA Credit Score 20% Insolvency Rating (Historical); NET SALES REVENUE 7,933.90 11,194.10 14,467.80
therefore lower weightage MAXIMUM SUSTAINABLE
DuPont 20% Asset and Equity based (Historical); GROWTH IN REVENUE 12.60% 17.76% 19.50%
therefore lower weightage HISTORIC GROWTH IN
NET SALES - 40.03% 29.24%
HISTORIC GROWTH IN
Baseline Indicator I: FCCB Redemption Cover
NET SALES (ROLLING AVG.) - 20.02% 23.09%

Global Absolute Research has created a Cash Flow Analysis


Tool to examine the number of times that the FCCB
redemption amount is covered by net cash. The higher the Based upon the audited financial statements for the year
cover, the lesser the possibilities of default on the FCCB ending 2008/03, the Company's revenues grew by 29.24%
redemption date by the company. If the FCCB Redemption compared to the prior year. The data for 3 years included in
Cover is below 1, it indicates that the company will need to the analysis indicates an increase in revenues by an
raise additional debt in order to redeem the FCCBs on average of 23.09%.
maturity date, which it can as long as it has strong credit and
low debt:equity ratio. The actual growth in revenue for the year 2007 and 2008 is
greater than the Sustainable growth. This suggests that the
The company has an average FCCB Redemption Cover of company may need to obtain additional financing.
1.24x for FY08-FY12. In FY12, when FCCBs is to be redeemed,
the FCCB Redemption Cover is 1.37x. This indicates that the Baseline Indicator IV: DuPont Formula Analysis
company would have sufficient cash to pay off its FCCB
The DuPont Formula for Return on Assets and Return on
liability on maturity date.
Equity ratios are calculated for each full year of the historic
Baseline Indicator II: GA Credit Score Risk Assessment financial statements. The ratios are presented here as an
alternate way to evaluate the quality of the Company's
The GA Credit Score is a predictive model based on the Z Return on Equity and to help identify potential weaknesses.
score rating that indicates the likelihood of a company
becoming insolvent within the next twelve months. Particulars FY06 FY07 FY08
DUPONT RETURN ON
The Company has a current year GA Credit Score of 9.32 EQUITY 12.77% 18.02% 19.72%
(See Appendix IV, Section GA Z Score for Explanation). The DUPONT RETURN ON
credit score of 9.32 falls into green zone that implies that the EQUITY (ROLLING AVG.) - 15.40% 16.84%
company has strong balance sheet and financial ratios.
Therefore, it is unlikely that MIIL would not be able to pay of
its FCCB liability on maturity. The indicator also reflects the The DuPont Analysis indicates that ROE for the most recent
company's positive ability to refinance and raise capital to financial statement is 19.72%, which is an increase of 1.7%
redeem the FCCBs, if required. from the previous year. In addition, ROE for the current year
is higher than the rolling average of 16.84% for the three
Particulars 2006 03 2007 03 2008 03
TOTAL Z-SCORE 9.82 9.99 9.32 years included in this analysis.
CHANGE OVER PRIOR YEAR - 0.17 -0.67

10
DuPont Asset Turnover DuPont Financial Leverage

The first component of the DuPont formula is the Asset The third component is the Financial Leverage ratio, which
Turnover ratio, which measures the number of rupees of measures the number of rupees of Assets that the Company
Sales Revenue generated for each rupee of Assets. The is carrying for every rupee of Equity.
Asset Turnover ratio has been increasing in the last two years
and is currently at 2.03. The main reason for a rise in Asset Particulars FY06 FY07 FY08
Turnover ratio has been a higher growth in Sales as DUPONT FIN. LEVERAGE RATIO 2.01 1.93 1.97

compared to growth in tangible assets. The tangible assets


grew by 21% as compared to 29% growth in Sales in FY08. The Financial Leverage ratio decreased compared to the
prior year. The change in Leverage was driven by an
Particulars FY06 FY07 FY08 increase in Tangible Net worth, which is more than the
Asset Turnover Ratio 1.45 1.89 2.03 increase in Total Tangible Assets in growth terms. The
Tangible Net worth increased by Rs. 3.61bn i.e. 18% and
Total Tangible Assets increased by Rs. 7.13bn, i.e. 21%.
An increase in Total Assets and an increase in Sales revenues
suggest that asset growth is accompanied by an increase in
Notes:
sales.
It is to be noted that the rolling average for FY07 has not
DuPont Return on Assets been calculated for certain companies due to the
unavailability of the required data.
The second component of the DuPont formula is the Return
on Assets (ROA) ratio, which measures the amount of Net
Income that is generated for each rupee of Assets. The ROA
ratio has increased compared to the prior year. The change
in ROA was driven by higher growth in Net Profit after Tax of
29% to Rs. 712mn as compared to the growth of 21% in Total
Tangible Assets to Rs. 7.13bn for FY08.

Particulars FY06 FY07 FY08


DUPONT RETURN ON ASSETS 6.35% 9.36% 9.99%

An increase in Net Profit after Tax and an increase in Total


Assets indicate rising profitability accompanied by an
increase in asset levels. The combined effect results in an
increase in the Return on Asset ratio compared to the
previous year.

11
Financials Projection
SECTION 1: CASH INFLOW ESTIMATE (Rs.)
Particulars Mar-08 Mar-09 Mar-10 Mar-11 Mar-12
Net Sales 15,126 17,434 17,957 20,651 22,716
EBITDA 1,718 1,743 1,796 2,065 2,272
Less: DA 282 442 425 440 459
Less: Provision for FCCBs Premium - 862 302 302 302
EBIT 1,437 440 1,069 1,324 1,511
Less: Interest 329 402 329 263 211
EBT 1,107 38 739 1,060 1,301
Less: Tax 385 13 257 369 453
Net Profit after tax 722 25 482 691 848
Cash from Operations 1,004 1,328 1,209 1,433 1,608
Cash from Operations (USD) 19 26 23 28 31
Section 2: Working Cap and Investment/Capex
Working Capital Changes 905 (110) (41) (213) (163)
Changes from Investing/Capex Activities (1,507) (273) (574) (632) (347)
Net Cash from W/Cap and Investment/Capex (602) (384) (616) (845) (511)
Net Cash from W/Cap & Invest/Capex ($mn) (12) (7) (12) (16) (10)
Section 3: Financing Activities
Increase from Equity - - - - -
Changes in Debt 623 2,886 (316) (193) (94)
Net Cash from Financing Activities 623 2,886 (316) (193) (94)
Net Cash from Financing Activities ($mn) 12 56 (6) (4) (2)
Section 4: Net Cash Available for FCCB
Opening Net Cash Balance 146 1,170 4,139 4,115 4,208
Net Cash Flow For the Year 1,024 3,830 277 395 1,004
Closing Net Cash Available for FCCB 1,170 5,000 4,416 4,510 5,212
Closing Net Cash Available for FCCB ($mn) 23 97 86 88 101
SECTION 5: FCCB REPAYMENT LIABILITY
Original Issue Size (USD) 50 50 50 50 50
Less: Amount already converted (USD) - - - - -
FCCB O/S (USD) 50 50 50 50 50
Add: Premium on Redemption 6 6 6 6
Total Payable on maturity date (USD) 50 56 62 67 73
Total Payable on maturity date (Rs.) 2,590 2,892 3,193 3,495 3,796
SECTION 6: RATIO ANALYSIS
Current M Cap Rs. Mn 1,746
Current M Cap USD Mn 34
Networth (Rs.) 3,621 3,646 4,128 4,819 5,667
Networth (USD) 70 70 80 93 109
Debt (Rs.) 3,095 5,981 5,664 5,472 5,378
Debt / Equity 0.85 1.64 1.37 1.14 0.95
EBITDA / Debt 0.60 0.30 0.30 0.40 0.40
Interest Coverage Ratio 4.40 1.10 3.20 5.00 7.20
SECTION 7: FCCB COVER
FCCB Redemption Ratio 0.45 1.73 1.38 1.29 1.37
FCCB Lia. / Current M Cap 0.04 0.04 0.04 0.05 0.05
All USD / Irs. Figures are in millions.
Source: FY07 taken from Company Annual Report and results are consolidated.
* USD @ 51.8

12
Appendix I
GA CREDIT SCORE ANALYSIS
Credit Score: Risk Assessment Weight 200603 (12) 200703 (12) 200803 (12)
Ratio 1 NET WORKING CAPITAL / TOTAL TANGIBLE ASSETS 6.56 0.55 0.51 0.41
Ratio 2 RETAINED EARNINGS / TOTAL TANGIBLE ASSETS 3.26 0.45 0.47 0.47
Ratio 3 EBIT / TOTAL TANGIBLE ASSETS 6.72 0.14 0.19 0.20
Ratio 4 TANGIBLE NETWORTH / TOTAL TANGIBLE ASSETS 1.05 0.50 0.52 0.51
CONSTANT 3.25 3.25 3.25
GA CREDIT SCORE 17.59 9.82 9.99 9.32
Sustainable Growth Ratio
Ratio 5 NET PROFIT MARGIN 4.38% 4.94% 4.92%
Ratio 6 RETENTION RATIO 98.63% 98.55% 98.88%
Ratio 7 MAXIMUM SUSTAINABLE GROWTH IN REVENUE 12.60% 17.76% 19.50%
HISTORIC GROWTH IN NET SALES 40.03% 29.24%
HISTORIC GROWTH IN NET SALES (ROLLING AVERAGE) 20.02% 23.09%
DIFFERENCE FROM MAXIMUM 22.28% 9.75%
Dupont Analysis
Ratio 8 DUPONT RETURN ON EQUITY 12.77% 18.02% 19.72%
DUPONT RETURN ON EQUITY (ROLLING AVERAGE) 15.40% 16.84%
Ratio 9 DUPONT ASSET TURNOVER 1.45 1.89 2.03
Ratio 10 DUPONT RETURN ON ASSETS 6.35% 9.36% 9.99%
Ratio 11 DUPONT FINANCIAL LEVERAGE 2.01 1.93 1.97

Glossary of Financial Terms - Asset use efficiency, which is measured by total asset
turnover
1. Retention Ratio:
- Financial leverage, which is measured by the equity
This ratio measures the proportion of net profit after tax
multiplier
that is not paid out as dividends but retained in the
business. Calculated as:
Calculated as: ROE = Profit Margin (Profit/Sales) * Total Asset Turnover
(Sales/Assets) * Equity Multiplier (Assets/Equity)
= (Net Profit After Tax – Dividends) / Net Income
5. Rolling Average:
2. Asset Turnover:
The average of a security constructed in a period as
This ratio Indicates the relationship between assets
short as a few days or as long as several years and
and revenue and measures the amount of sales that
showing trends for the latest interval. As each new
are generated from each dollar of assets.
variable is included in calculating the average, the
Calculated as: last variable of the series is deleted.
= Net Revenue / Total Assets 6. DuPont Asset Turnover Ratio:
3. Sustainable Growth Rate: Calculated as:
The maximum growth rate that a firm can sustain = Gross Revenue / Total Tangible Assets
without having to resort to additional borrowings or
7. DuPont Return on Assets:
increase financial leverage.
It is a financial ratio that shows how the return on assets
Calculated as:
depends on both asset turnover and profit margin.
= ROE x Retention Ratio The DuPont method breaks out these two
components from the return on assets ratio in order to
4. DuPont Return on Equity:
determine the impact of each on the profitability of
The DuPont method breaks the return on equity (ROE) the company.
down into three parts: a) profit margin, b) asset
This ratio helps to highlight the impact of changes in
turnover and c) financial leverage.
asset turnover and profit margin.
DuPont Method tells us that ROE is affected by three
Calculated as:
things:
ROA DuPont = (Net Profit After Tax / Net Sales) x (Net
- Operating efficiency, which is measured by profit
Sales / Total Assets)
margin

13
Income Statement
Particulars (in Rs. mn) 2008 2009E 2010E 2011E 2012E
Revenue 15,126 17,434 17,957 20,651 22,716
Cost of Sales 13,407 15,691 16,162 18,586 20,444
EBITDA 1,718 1,743 1,796 2,065 2,272
Depreciation 282 442 425 440 459
Provision for FCCBs Premium 0 862 302 302 302
EBIT 1,437 440 1,069 1,324 1,511
Interest 329 402 329 263 211
EBT 1,107 38 739 1,060 1,301
Tax 385 13 257 369 453
PAT 722 25 482 691 848

Balance Sheet
Particulars (in Rs. mn) 2008 2009E 2010E 2011E 2012E
Share Capital 266 266 266 266 266
Reserves 3,405 3,439 3,931 4,631 5,488
Misc. Exp. 50 50 50 50 50
Total Shareholders Fund 3,621 3,655 4,147 4,847 5,704
Minority Interest 1 1 1 1 1
Debt 3,095 5,981 5,664 5,472 5,378
Non-FCCB Debt 1,065 3,089 2,471 1,977 1,582
FCCB Debt 2,030 2,892 3,193 3,495 3,796
Deferred Tax 420 420 420 420 420
Total Liabilities 7,137 10,057 10,232 10,740 11,503
Assets
Gross Block 4,266 5,318 5,584 6,142 6,756
Accumulated Dep. 939 1,366 1,778 2,204 2,648
Net Block 3,327 3,952 3,806 3,939 4,109
WIP 1,052 266 558 614 338
Net Fixed Assets 4,379 4,218 4,365 4,553 4,446
Investments 318 318 318 318 318
Current Assets
Inventories 3,516 4,052 4,174 4,800 5,280
Sundry Debtors 2,165 2,496 2,571 2,957 3,252
Cash in Hand 1,170 4,141 4,128 4,234 4,941
Loans & Advances 1,475 1,701 1,752 2,014 2,216
Current Liabilities 4,728 5,533 5,699 6,554 7,209
Provisions 1,159 1,336 1,376 1,582 1,741
Net Current Assets 2,440 5,522 5,550 5,869 6,739
Total Assets 7,137 10,057 10,232 10,740 11,503

14
Cash Flow Statement
Particulars (in Rs. mn) 2008 2009E 2010E 2011E 2012E
PBIT 1,437 440 1,069 1,324 1,511
Add : Depreciation 282 442 425 440 459
Add: Provision for FCCBs Premium - 862 302 302 302
(Inc)/Dec in WC 905 (110) (41) (213) (163)
Taxes Paid (385) (13) (257) (369) (453)
CF from Operations 2,238 1,620 1,497 1,483 1,656
(Inc)/Dec in FA (960) (1,202) (273) (574) (632)
(Inc)/Dec in Capex (812) 929 (301) (57) 284
(Pur)/Sale of Investments (306) - - - -
Misc. Expenses 572 - - - -
CF from Investments (1,507) (273) (574) (632) (347)
Increase Equity - - - - -
Premium from Equity Issue - - - - -
Increase in Debt 623 2,886 (316) (193) (94)
Provision for FCCBs Premium - (862) (302) (302) (302)
Interest Paid (329) (402) (329) (263) (211)
CF from Fin. Activity 293 1,622 (947) (758) (606)
Inc/Dec of Cash 1,024 2,969 (24) 94 702
Add: Beginning Balance 146 1,170 4,139 4,115 4,208
Closing Balance 1,170 4,139 4,115 4,208 4,910

15
Consumer Durables Videocon Industries Limited

GA BOND RATING : 1
YIELD / GOOD CREDIT : BUY

CMP 127 FCCB Description


Nominal Value 10 BOND NAME VIDEOCON INDUS VIDEOCON INDUS
BSE Sensex 9,964 USD 5.000 '11 USD 4.500 '11
Stock Statistics COUPON (% p.a) 5.00 4.50
Bloomberg code VCLF IN ISSUE SIZE ($mn) 90.00 105.00
Reuters Code VDCF.BO AMOUNT OUTSTANDING( $mn) 43.00 67.00
BSE code 511389 MATURITY 3/7/2011 7/25/2011
NSE code VIDEOIND TOTAL REDEMPTION AMOUNT($mn) 50.19 85.52
ISIN No. INE703A01011 REDEMPTION AT MATURITY 116.74 127.65
Market Cap (bn) Rs. 28 ($541 mn) YTM & YTP (%) 47.54 - 44.29 -
52 Wk High/Low (Rs.) 868/ 95 CONVERSION PRICE (INR) 452.13 476.98
NSE Avg Daily Vol(12 m) 507,041 PARITY 25.95 25.81
BSE Avg Daily Vol(12 m) 431,598 INDICATIVE BOND PRICE 50.00 50.00
PREMIUM 92.70 93.70
Shareholding Pattern
COUPON YIELD 10.00% 9.00%
Particulars No. of shares in %
Promoters 155,443,421 67.7 BOND FLOOR 100.20 104.50
FIIs 8,207,614 3.6 CREDIT SPREAD 1,000bp 1,000bp
Mutual Funds & UTI 1,504,380 0.7 FAIR VALUE 101.40 106.40
Banks/FI's/Insur Co 8,351,218 3.6 Source: Company & Global Absolute Research
Private corp. bodies 13,239,399 5.8
Indian Public 10,855,207 4.7
Others 31,849,525 13.9
Total 229,450,764 100 Recommendation: BUY BONDS AS YIELD PLAY
Stock Performance
Videocon is one of the leading brands & manufacturers of consumer electronics
In % 1m 3m 6m
Absolute -29 -58 -64 and home appliance goods in India. With a Global Absolute (GA) Bond Rating of 1,
Relative -14 -24 -22 we believe that Videocon would not face any problems in the repayment of its
Research Analyst FCCB liabilities. This is supported by the average 5 years FCCB Redemption Cover of
Suranjoy Singh
91-124-4386140 3.02x (4.2x in the year 2011) and a current year GA credit score of 8.86, thus
250
Videocon Vs Sensex
implying that it has a strong capacity to pay interest and repay the principal
amount. However, DuPont analysis shows that this is in line with the industry's
200
average, reflecting the Company’s strategy of growing its volume and topline
150
through OEM contracts, which generally have lower margins. The company has
100 strong current cash flows, and we have forecasted an average annual cash inflow
Videocon from operations of almost $ 474 mn upto the redemption dates, backed by
50
Sensex
substantial fixed assets.
0
Dec-07 Feb-08 Apr-08 May-08 Jul-08 Sep-08 Oct-08
We recommend a BUY rating on the FCCB - Videocon Industries USD 5.000'11 and
Chairman: Mr. Venugopal N Dhoot
Registered 14 Kms Stone, Aurangabad- USD 4.500'11, which are yielding 47.5% and 44.3% respectively upto redemption.
Office: Paithan Road, Chitegaon,
Aurangabad - 431 105
Website: www.videoconworld.com

16
Equity Analysis A brief analysis of Company's financial health

Videocon industries Ltd. (videocon), incorporated in 1979, is Asset analysis


a leading manufacturer and a well known brand in the field n Videocon has 7 manufacturing plants located in
of consumer electronic goods. Videocon also India.
manufactures telecommunication equipments, office
n The company's total net fixed assets at present are at
equipments, games and gaming solutions including Rs. 74bn, which include around Rs. 1.7bn of freehold
lotteries, etc. land (at book value).

Videocon commands a leadership position in consumer n Cash in hand in FY07 was around Rs. 19.2bn.
electronic and home appliance goods in India, and
n The company has an investment of around Rs. 6.5bn.
contributes around 80% to its revenues. However, Videocon
n The company has par ticipating interest in 6
has diversified successfully in other sectors, and is in the
exploration oil & gas blocks.
process of massive development, where unlocking of value
is expected to take place in the future, especially in oil & Profitability analysis
gas, telecom and retail segment. Videocon is also trying to
n Videocon has been performing consistently with its
consolidate its consumer electronic goods division, as core business in consumer electronics and home
shown from its acquisition of Electrolux & Thomson. Thus, appliances, contributing around 75% - 80% of the
going ahead, we expect Videocon to position itself at a consolidated revenues. In FY07, net profit of Videocon
very attractive valuation, where its old business of consumer decreased by around 10%, on account of higher
electronic and home appliance goods would provide expenses incurred on oil & gas subsidiaries. However,
going ahead, Videocon would emerge as one of the
steady growth, generating huge cash, which would be
beneficiaries, due to an interest rate cut and from the
invested into other growth sectors, like telecom, retail,
implementation of 6th pay commission, thus
power and oil & gas. At present, Videocon’s oil & gas joint increasing the spending on consumer durable goods.
venture extracts around 50,000 barrels of oil per day, with
n In FY08, margins may be lower due to higher raw
Videocon having 25% stake in the field.
material cost in consumer electronic division;
Videocon has been performing consistently with its core however, higher crude oil realization is expected to
business in consumer electronic and home appliances, sustain the profitability. Going ahead, in FY09, lower
raw material cost and higher spending from the
contributing around 80% of the consolidated revenues. In
Indian middle class would provide better than
FY07, net profit of Videocon decreased by around 10%, on
expected profit growth.
account of higher expenses incurred on oil & gas
subsidiaries. In FY08, its standalone total revenues grew by Liquidity & Credit analysis
around 15% as compared to FY07 (standalone). Net profit, n Videocon's interest coverage ratio is at a very
on standalone basis, also grew by around 8% to Rs. 9.3bn as comfortable position at 2.6x.
compared to Rs. 8.5bn in FY07 (standalone).
n Debt/equity ratio is also at a comfortable position at
Videocon is currently trading at a PER of 4.1x and 3.5x on its 1.0x.

FY07 and FY08E earnings respectively. The company is n Out of the total debt of the company, i.e., Rs. 69.5bn
attractively trading at an attractive price/book level of (FY07), FCCBs current bonds amount consists Rs. 7.8bn
around 0.39x. Videocon enterprises value (EV) is also trading (principal) + Rs. 267mn (interest). And, at present, the
at a very attractive level as compared to its net sales of 0.6x FCCBs outstanding payment obligation for the two
bonds on maturity is Rs. 7.0bn ($ 136mn), which is
and 0.5x in FY07 and FY08E respectively.
around 36% of the company's cash in hand position in
We believe that Videocon's consumer electronic goods & FY07.
home appliances would witness a steady growth, and the n Videocon also has more leveraging power as net
growing and burgeoning appetite of the Indian middle debt (total debt – cash in hand – investments) is at Rs.
class should act as robust growth drivers. We are expecting 43.8bn, which is around 0.6x of the company's
net sales to grow at a CAGR of around 24% between FY07 to Networth.
FY12, on the back of strong revenue growth from telecom n Strong holding of around 79% (after dilution of FCCBs,
and retail sectors. We expect the company’s margins to etc. – 67.75%), by the promoter itself, shows the
improve as it commences its operations in the telecom confidence in the business of the company.
sector and starts getting revenues from the retail segment.

17
Global Absolute Bond Rating Analysis to the actual calculated growth rate in total revenue, from
the prior year to the current year.
The company has a Bond Rating of 1. This means it has
strong credit and low chance of not redeeming the FCCBs. Particulars 2005 09 2006 09 2007 09
NET SALES REVENUE 6,7091 126,015.7 146066.28
The weightage we have used for the bond score are as
MAXIMUM SUSTAINABLE
follows:
GROWTH IN REVENUE 9.150% 12.50% 8.88%

Redemption Cover 60% Highest weightage since it is cash HISTORIC GROWTH IN

based and includes future NET SALES - 87.83% 15.91%

projections HISTORIC GROWTH IN NET

GA Credit Score 20% Insolvency Rating (Historical), SALES (ROLLING AVERAGE) - 87.83% 51.87%

therefore lower weightage


DuPont 20% Asset and Equity based (Historical),
Based upon the audited financial statements for the year
therefore lower weightage
ending 2007/09, the Company's revenues grew by 15.91%
compared to the prior year. For the 3 years of data included
in this analysis, revenues have increased by an average of
Baseline Indicator I: FCCB Redemption Cover 51.87%.

Global Absolute Research has created a Cash Flow Analysis The actual growth in revenue for years 2006 and 2007 is
Tool to examine the number of times that the FCCB greater than the Sustainable growth, which suggests that
redemption amount is covered by net cash. The higher the the Company may need to obtain additional financing.
cover the less chance we believe the company will default
Baseline Indicator IV: DuPont Formula Analysis
on the FCCB redemption date. Note that even when the
ratio is low (where the ratio is less than 1x), the company may The DuPont Formula for Return on Assets and Return on
still be able to redeem the FCCBs as long as it has strong Equity ratios are calculated for each full year of the historic
credit and can re-finance. financial statements. The ratios are presented here as an
alternate way to evaluate the quality of the Company's
The company has an average FCCB Redemption Cover of
Return on Equity and to help identify potential weaknesses.
3.02x upto the redemption date, indicating high cover and
low chance of not redeeming the FCCBs.
Particulars FY05 (Sept.) FY06 (Sept.) FY07 (Sept.)
Baseline Indicator II: GA Credit Score Risk Assessment DUPONT RETURN ON
10.96% 14.14% 10.32%
EQUITY
The GA Credit Score is a predictive model based on the Z DUPONT RETURN ON
score rating that indicates the likelihood of a company 10.96% 12.55% 11.81%
EQUITY (ROLLING AVG.)
becoming insolvent within the next twelve months. The
Company has a current year GA Credit Score of 8.86, which
The DuPont Analysis indicates that ROE for the most recent
places the Company in the “Green zone”, indicating a high
financial statement is 10.32%, which is a decline of 3.82%
comfort zone, and low chance of the company becoming
from the previous year. In addition, ROE for the current year
financially distressed in the near future. This is a decline from
is lower than the rolling average of 11.81% for the three years
the previous year’s Z-Score of 9.27.
included in this analysis.
Particulars 2005 09 2006 09 2007 09
TOTAL CREDIT SCORE 9.90 9.27 8.86
CHANGE OVER PRIOR YEAR - -0.62 -0.41

Baseline Indicator III: Sustainable Growth Analysis

The Sustainable Growth model is a combination of four


ratios, and measures the maximum rate of growth in
revenue that can be sustained without obtaining additional
outside funding. The maximum sustainable growth in total
revenue is calculated for each year, and is then compared

18
DuPont Asset Turnover DuPont Financial Leverage

The first component of the DuPont formula is the Asset The third component is the Financial Leverage ratio, which
Turnover ratio, which measures the number of rupees of measures the number of rupees of Assets that the Company
Sales Revenue generated for each rupee of Assets. The is carrying for every rupee of Equity.
Asset Turnover ratio was steady at 1.06 in the last two years.
The stability in Asset Turnover was driven by an increase in Particulars FY05 (Sept.) FY06 (Sept.) FY07 (Sept.)
Sales Revenues of Rs. 20,050mn and an increase in Total FINANCIAL LEVERAGE RATIO 2.16 2.11 2.02
Assets of Rs.19,760mn.
The Financial Leverage ratio decreased compared to the
Particulars FY05 (Sept.) FY06 (Sept.) FY07 (Sept.) prior year. The change in Leverage was driven by a
ASSET TURNOVER RATIO 0.85 1.06 1.06 decrease in Total Assets of Rs. 19,760mn and an increase in
Tangible Networth of Rs. 12,395mn.

An increase in Sales Revenue and an increase in Total Assets Notes:


suggest that sales growth is not accompanied by the
reduction of assets. It is to be noted that the rolling average for FY07 has not
been calculated for certain companies due to the
DuPont Return on Assets unavailability of the required data.

The second component of the DuPont formula is the Return


on Assets (ROA) ratio, which measures the amount of Net
Income that is generated for each rupee of Assets. The ROA
ratio has decreased compared to the prior year. The
change in ROA was driven by a decrease in Net Profit After
Tax of Rs. 864mn and an increase in Total Assets of Rs.
19,760mn.

Particulars FY05 (Sept.) FY06 (Sept.) FY07 (Sept.)


DUPONT RETURN ON ASSETS 5.07% 6.69% 5.11%

A decrease in Net Profit After Tax and an increase in Total


Assets indicate declining profitability accompanied by an
increase in asset levels. The combined effect results in a
decline in the Return on Asset ratio compared to the
previous year.

19
Financials Projection
SECTION 1: CASH INFLOW ESTIMATE (Rs.)
Particulars Sep-07 Sep-08 Sep-09 Sep-10 Sep-11
Revenues 126,610 157,769 169,998 200,147 265,259
EBITDA 19,550 22,546 26,134 35,292 47,663
Less: DA 5,751 6,562 6,794 7,117 7,439
Less:Prov. For Premium on FCCB Reserve - 534 801 1,067 1,334
EBIT 13,799 15,451 18,539 27,108 38,890
Less: Interest 4,565 5,111 4,476 3,716 3,399
EBT 9,251 10,340 14,064 23,392 35,491
Less: Tax 2,392 2,392 2,625 4,687 7,797
Net Profit after tax 6,859 7,948 11,439 18,705 27,695
Cash from Operations 17,795 19,959 21,494 27,574 35,952
Cash from Operations (USD) 344 385 415 532 694
Section 2: Working Cap and Investment/Capex
Working Capital Changes (7,637) (8,086) (7,061) (9,944) (12,377)
Changes from Investing/Capex Activities (13,734) (2,583) (4,083) (6,500) (6,500)
Net Cash from W/Cap and Investment/Capex (21,371) (10,670) (11,144) (16,444) (18,877)
Net Cash from W/Cap & Invest/Capex ($mn) (413) (206) (215) (317) (364)
Section 3: Financing Activities
Increase from Equity & share premium 2,081 (450) (801) (1,067) (1,334)
Changes in Debt 2,816 (5,772) (5,251) (3,457) (2,353)
Net Cash from Financing Activities 2,817 (11,333) (10,528) (8,240) (7,086)
Net Cash from Financing Activities ($mn) 54 (219) (203) (159) (137)
Section 4: Net Cash Available for FCCB
Opening Net Cash Balance 19,971 19,212 27,924 37,498 48,887
Net Cash Flow For the Year (759) (2,043) (178) 2,890 9,989
Closing Net Cash Available for FCCB 19,212 17,169 16,991 19,881 29,871
Closing Net Cash Available for FCCB ($mn) 371 331 328 384 577
SECTION 5: FCCB REPAYMENT LIABILITY
Original Issue Size (USD) 195 195 195 195 195
Less: Amount already converted (USD) 2 85 85 85 85
FCCB O/S (USD) 193 110 110 110 110
Add: Premium on Redemption 9 7 7 7 7
Total Payable on maturity date (USD) 203 117 123 130 136
Total Payable on maturity date (Rs.) 8,031 6,035 6,371 6,708 7,030
SECTION 6: RATIO ANALYSIS
Current M Cap Rs. Mn 28,005
Currernt M Cap USD Mn 541
Networth (Rs.) 69,344 77,143 86,519 102,115 125,777
Networth (USD) 1,339 1,489 1,670 1,971 2,428
Debt (Rs.) 69,528 63,756 58,504 55,047 52,694
Debt / Equity 1.0 0.8 0.7 0.5 0.4
EBITDA / Debt 0.2 0.3 0.4 0.5 0.7
Interest Coverage Ratio 2.6 2.7 3.6 5.2 8.3
SECTION 7: FCCB COVER
FCCB redemption ratio 2.39 2.85 2.67 2.96 4.25
FCCB Lia / Current M Cap 0.29 0.22 0.23 0.24 0.25
All USD / Irs. Figures are in millions.
Source: FY07 taken from Company Annual Report and results are consolidated.
* USD @ 51.8

20
GA CREDIT SCORE ANALYSIS
Credit Score: Risk Assessment Weight 2005 09 2006 09 2007 09
Ratio 1 NET WORKING CAPITAL / TOTAL TANGIBLE ASSETS 6.56 60.05% 47.19% 43.46%
Ratio 2 RETAINED EARNINGS / TOTAL TANGIBLE ASSETS 3.26 54.65% 52.33% 47.56%
Ratio 3 EBIT / TOTAL TANGIBLE ASSETS 6.72 6.52% 10.80% 10.29%
Ratio 4 TANGIBLE NETWORTH / TOTAL TANGIBLE ASSETS 1.05 46.28% 47.28% 49.49%
CONSTANT 3.25 3.25 3.25
GA CREDIT SCORE 9.90 9.27 8.86
Sustainable Growth Ratio
Ratio 5 NET PROFIT MARGIN 5.94% 6.29% 4.83%
Ratio 6 RETENTION RATIO 83.49% 88.38% 86.08%
Ratio 7 MAXIMUM SUSTAINABLE GROWTH IN REVENUE 85.44% 106.36% 105.66%
HISTORIC GROWTH IN NET SALES 87.83% 15.91%
HISTORIC GROWTH IN NET SALES (ROLLING AVERAGE) 87.83% 51.87%
DIFFERENCE FROM MAXIMUM 75.33% 7.03%
Dupont Analysis
Ratio 8 DUPONT RETURN ON EQUITY 10.96% 14.14% 10.32%
DUPONT RETURN ON EQUITY (ROLLING AVERAGE) 10.96% 12.55% 11.81%
Ratio 9 DUPONT ASSET TURNOVER 0.85 1.06 1.06
Ratio 10 DUPONT RETURN ON ASSETS 5.07% 6.69% 5.11%
Ratio 11 DUPONT FINANCIAL LEVERAGE 2.16 2.11 2.02

Glossary of Financial Terms - Asset use efficiency, which is measured by total asset
turnover
1. Retention Ratio:
- Financial leverage, which is measured by the equity
This ratio measures the proportion of net profit after tax
multiplier
that is not paid out as dividends but retained in the
business. Calculated as:
Calculated as: ROE = Profit Margin (Profit/Sales) * Total Asset Turnover
(Sales/Assets) * Equity Multiplier (Assets/Equity)
= (Net Profit After Tax – Dividends) / Net Income
5. Rolling Average:
2. Asset Turnover:
The average of a security constructed in a period as
This ratio Indicates the relationship between assets
short as a few days or as long as several years and
and revenue and measures the amount of sales that
showing trends for the latest interval. As each new
are generated from each dollar of assets.
variable is included in calculating the average, the
Calculated as: last variable of the series is deleted.
= Net Revenue / Total Assets 6. DuPont Asset Turnover Ratio:
3. Sustainable Growth Rate: Calculated as:
The maximum growth rate that a firm can sustain = Gross Revenue / Total Tangible Assets
without having to resort to additional borrowings or
7. DuPont Return on Assets:
increase financial leverage.
It is a financial ratio that shows how the return on assets
Calculated as:
depends on both asset turnover and profit margin.
= ROE x Retention Ratio The DuPont method breaks out these two
components from the return on assets ratio in order to
4. DuPont Return on Equity:
determine the impact of each on the profitability of
The DuPont method breaks the return on equity (ROE) the company.
down into three parts: a) profit margin, b) asset
This ratio helps to highlight the impact of changes in
turnover and c) financial leverage.
asset turnover and profit margin.
DuPont Method tells us that ROE is affected by three
Calculated as:
things:
ROA DuPont = (Net Profit After Tax / Net Sales) x (Net
- Operating efficiency, which is measured by profit
Sales / Total Assets)
margin

21
Income Statement
Year ended 31 Mar (Rs mn) FY06 FY07 FY08E FY09E FY10E FY11E
Net sales 126,016 121,722 152,636 164,609 194,489 259,317
growth (%) - -3 25 8 18 33
Other Income 4,830 4,888 5,132 5,389 5,658 5,941
Total Revenue 130,845 126,610 157,769 169,998 200,147 265,259
Operating expenses 114,500 107,060 135,222 143,864 164,855 217,596
Operating Profit 11,515 14,662 17,414 20,745 29,634 41,722
EBITDA 16,345 19,550 22,546 26,134 35,292 47,663
growth (%) - 19.6 15.3 15.9 35.0 35.1
Depreciation 4,481 5,751 6,562 6,794 7,117 7,439
Prov. For Premium on FCCB Reserve 534 801 1,067 1,334
EBIT 11,864 13,799 15,451 18,539 27,108 38,890
Interest Paid 3,414 4,565 5,111 4,476 3,716 3,399
Pre-Tax Profit ( before non-recurring item) 8,450 9,233 10,340 14,064 23,392 35,491
Add/(less): Exceptional items 278 18 0 0 0 0
Pre-tax Profit (after non-recurring item) 8,728 9,251 10,340 14,064 23,392 35,491
Tax (Current +Deferred+FBT) 983 2,392 2,625 4,687 7,797 11,829
Net Profit 7,745 6,859 7,715 9,376 15,596 23,662
growth (%) -11.4 12.5 21.5 66.3 51.7

Balance Sheet
Year ended 31 Mar (Rs mn) FY06 FY07 FY08E FY09E FY10E FY11E
Current Assets 89,403 88,781 100,890 110,338 130,774 168,494
Investments 3,399 6,525 6,525 6,525 6,525 6,525
Net Fixed Assets 69,716 74,491 70,513 67,802 67,185 66,246
Other Non-current Assets 505 651 651 651 651 651
Total Assets 163,023 170,448 178,579 185,315 205,135 241,916
Current Liabilities 33,490 26,619 32,685 35,249 42,852 58,206
Total Debt 62,016 69,528 63,756 58,504 55,047 52,694
Other non-current liabilities 1,976 4,957 4,996 5,043 5,121 5,239
Total Liabilities 97,482 101,104 101,437 98,796 103,020 116,139
Share Capital 2,208 2,209 2,293 2,293 2,293 2,293
Reserve & Surplus 62,873 66,675 74,389 83,766 99,361 123,023
Preference Share 460.09 460.09 460.09 460.09 460.09 460.09
Shareholders Funds 65,541 69,344 77,143 86,519 102,115 125,777
Less: Misc. expenditure 0 0 0 0 0 0
Total Equity & Liabilities 163,023 170,448 178,579 185,315 205,135 241,916
Capital employed 129,533 143,829 145,894 150,066 162,283 183,710

Cash Flow Statement


Year ended 31 Mar (Rs mn) FY06 FY07 FY08E FY09E FY10E FY11E
EBT & Exceptional items 8,450 9,233 10,340 14,064 23,392 35,491
Depreciation 4,481 5,751 6,562 6,794 7,117 7,439
Prov. For FCCB Premium 534 801 1,067 1,334
Net Chg in working capital -8,309 -7,637 -8,086 -7,061 -9,944 -12,377
Cash Flow from operation (a) 6,615 10,159 11,873 14,433 17,630 23,575
Capital Expenditure -37,150 -14,587 -2,583 -4,083 -6,500 -6,500
Cash Flow from Investing (b) -33,682 -13,734 -2,583 -4,083 -6,500 -6,500
Free Cash Flow (a+b) -27,067 -3,575 9,289 10,350 11,130 17,075
Equity Raised / (repaid) 603 1 84 0 0 0
Proceed from sale of shares -94 2,080 -534 -801 -1,067 -1,334
Debt raised / (repaid) 19,832 7,511 -5,772 -5,251 -3,457 -2,353
Cash flow from financing (c) 30,228 2,817 -11,333 -10,528 -8,240 -7,086
Net Chg in cash flow (a+b+c) 3,161 -759 -2,043 -178 2,890 9,989

22
Key ratios
Year ended 31 Mar FY06 FY07 FY08E FY09E FY10E FY11E
EPS (Rs) 35 31 34 41 68 103
EPS growth (%) -11 8 22 66 52
EBITDA margin (%) 12 15 14 15 18 18
EBIT margin (%) 9 11 10 11 14 15
ROCE (%) 6 5 5 6 10 13
Total Debt / Equity (%) 0.9 1.0 0.8 0.7 0.5 0.4

Valuations
Year ended 31 Mar FY06 FY07 FY08E FY09E FY10E FY11E
PER (x) 3.6 4.1 3.8 3.1 1.9 1.2
Price/Book (x) 0.4 0.4 0.4 0.3 0.3 0.2
EV / Net sales (x) 0.6 0.6 0.5 0.5 0.4 0.3
EV / EBITDA (x) 4.8 4.0 3.5 3.0 2.2 1.7
EV / EBIT (x) 6.4 5.5 4.9 4.1 2.8 2.0

DCF Valuation
Free Cash Flow
Particulars (Rs. Million) FY07 FY08E FY09E FY10E FY11E FY12E
Net Profit 6,859 7,715 9,376 15,596 23,662 35,441
Depreciation 5,751 6,562 6,794 7,117 7,439 7,761
Change in Working Capital -7,637 -8,086 -7,061 -9,944 -12,377 10,828
Capex -13,734 -2,583 -4,083 -6,500 -6,500 1,261
Free Cash Flow to Firm -8,760 3,607 5,026 6,269 12,224 55,293
Discounted Value -8,760 3,036 3,562 3,741 6,141 23,386

DCF Calculation inputs Assumptions


Terminal Phase FY12 Risk Free rate 9
Discounted value till FY12 39,866 Risk Premium 18
Discounted Terminal Value 132,844 Adjusted Beta 1
Total Value 172,710 Cost of Equity (%) 27.0
Net Debt 46,587 Cost of Debt (%) 8
Total Shareholders Value 126,123 WACC (%) 17.24
Number of Shares (million) 229 Project Risk Premium (%) 1.5
Value per share (Rs.) 550 Discount rate (%) 18.74
Our one year forward target price (Rs.) 358 Terminal growth rate (%) 1.0
Upside (%) 182%

23
Telecom Reliance Communication Limited

GA BOND RATING : 2
YIELD / GOOD CREDIT : BUY

CMP 209 FCCB Description


Nominal Value 5 RELIANCE COMM RELIANCE COMM
BSE Sensex 8,937 BOND NAME USD 0.000 '11 (RCOM IN) USD 0.000 '12 (RCOM IN)
Stock Statistics Iss'd /20 USD500m Iss'd 8/27 USD1,000m
Bloomberg code RCOM IN COUPON (% p.a) 0.0 0.0
Reuters Code RLCM.BO ISSUE SIZE ($mn) 500.0 1000.0
BSE code 532712 AMOUNT OUTSTANDING($mn) 297.0 990.0
NSE code RCOM MATURITY 5/10/2011 3/1/2012
ISIN No. INE330H01018 TOTAL REDEM. AMOUNT($mn) 373.7 1,264.1
Market Cap (Rs. mn) 435,510 ($8,408) REDEMPTION AT MATURITY 125.8 127.7
52 Wk High/Low (Rs.) 845 / 147 YTM & YTP (%) 22.7 - 25.6 -
NSE Avg Daily Vol(12 m) 5,828,388 CONVERSION PRICE (INR) 480.7 661.0
BSE Avg Daily Vol(12 m) 2,240,826 PARITY 39.7 28.7
Shareholding Pattern INDICATIVE BOND PRICE 74.0 58.0
Particulars No. of shares in % PREMIUM 86.5 102.0
Promoters 1,364,811,060 66.1 COUPON YIELD 0% 0.0%
FIIs 194,462,247 9.4 BOND FLOOR 95.7 88.3
Mutual Funds & UTI 52,530,762 2.6 CREDIT SPREAD 1,000bp 1,000bp
Banks/ FIs/ Insur Co 133,837,679 6.5 FAIR VALUE 101.5 93.6
PCBs 50,495,683 2.5 Source: Company & Global Absolute Research

Central/State Govt. 1,066,795 0.1


Indian Public 205,826,128 10.0
NRIs/OCBs 60,996,527 3.0 Recommendation: Yield Play with equity embedded value
Total 2,064,026,881 100.0
Reliance Communication Ltd (RCOM), the flagship company of the Anil Dhirubhai
Stock Performance
Ambani Group(ADAG) is an integrated telecommunication company with over
In % 1m 3m 6m
57 million customers and presence in wireless (CDMA and GSM), global wholesale
Absolute -11 -49 -65
voice and data, and broadband segments. RCOM’s wireless segment comprises
Relative 0 -10 -17
of CDMA based telecom services being present in 21 out of 23 circles and GSM-
Alice Chikara based services in 8 out of 23 circles. Global segment includes wholesale voice
91-124-4386140
services –national long distance (NLD) and international long distance (ILD), retail
140
ILD calling cards, and carries out these operations through submarine cable
120 systems FLAG and FALCON. The broadband segment caters to voice, data, video,
100 internet and IT infrastructure service requirements of enterprises. RCOM is the
80 second-largest handset retailer in the country after Nokia. RCOM also owns and
60 operates the world’s largest next generation IP enabled connectivity
40 infrastructure, comprising over 165,000 kilometers of fibre optic cable systems in
20
Sensex rcom IN EQUITY India, USA, Middle East and the Asia Pacific Region.

0 RCOM issued Zero Coupon FCCBs in May 2006 and Feb 2007, for amount totaling
Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08
US$1.5 billion (convertible to Rs. 66 billion). These were in two tranches –a US$ 500
Chairman: Mr. Anil D Ambani
million tranche convertible at Rs. 480 and a US $1 billion trance convertible at Rs
Registered H Block, 1st Floor,
661. These got converted to the extent of 40% and 1% respectively by FY08, raising
Office: Dhirubhai Ambani Knowledge
City, Navi Mumbai - 400 0710 the equity capital by Rs97m, while share premium account increased by Rs.
Website: www.rcom.co.in 9.35bn.

24
We have assigned Global Absolute Bond Rating of 2 backed Wireless Segment (up 16% to Rs. 43.4bn) global
by Average FCCB Redemption cover of 1.58 implying that broadband segment grew by 28% YoY to Rs. 16.9bn
the Company will be able to meet it’s FCCB liability on the and by 38% Yoy to Rs. 6.0bn, respectively.
maturity date and GA Credit Score of 5.08. The company
n EBITDA and net income was aided by Rs. 910mn
has a very comfortable liquidity position. Hence, we believe
received from TCOM post settlement of FLAG
that RCom may not face any problems in the repayment of
arbitration case. Adjusted EBITDA declined 1.8%.
its FCCBs liabilities. Also, it has low Debt/Equity ratio of 0.9x in
Adjusted EBITDA margin declined 310 bps to 39.2% on
FY08, which is further expected to decline to 0.5x by FY12. In
account of aggressive network expansion and
case of any redemption pressure, it may be easily able to
population overage by RCOM (leading to a share
refinance its debt in FY12.
jump in network operating costs).
The RELIANCE COMM USD 0.000 '11 ($ 500mn) and
n RCOM reported net financial income of Rs. 2.4bn,
RELIANCE COMM USD 0.000 '12 ($ 1,000mn) Bonds are
despite having Rs. 153bn as net debt, partly because
trading at an attractive yield of 22.7% and 25.6%. The bonds
of interest income and cash on hand.
are trading at their lows; so the downside looks pretty small
as compared to its upside. Hence, we recommend a Yield
n GSM rollouts in new circles, aggressive expansion
Play on these bonds.
plans in the broadband and global business could be
the key triggers for the growth of RCOM. Futher
Asset Analysis
upsides could be the inorganic acquisitions of Yaps,
n As a result of various transactions involving transfer of Vance and weave, which in turn could expand
assets amongst group companies and revaluation of RCom’s portfolio of services and network services.
assets and investments, RCOM’s consolidated and With the aggressive expansion of the voice and data
standalone Networth has increased by Rs. 12.9 bn services, RCOM could have better realizations from
and Rs. 12.8 bn, respectively. global and wireless business thereby boosting the

n The company’s total net fixed (total tangible assets) ARPUs.

assets as on March 2008 are Rs. 537 mn.


Liquidity and Credit Analysis
n Reliance Infratel (RITL) is one of the largest tower
companies in India, with a tower base of 36,849 towers n RCom’s Debt-to-Equity ratio has gone up to 0.9x;
at the end of FY08 accounting for approximately 21% however, interest coverage ratio has increased to
of the total estimated tower base in India. RITL expects 6.3x on account of higher profitability.
to expand its passive infrastructure to over 60,000
n Out of total debt of the company i.e. Rs.
multi-tenancy towers by FY09. This infrastructure will
258.2bn(FY08), the outstanding payment obligation
support RCOM’s CDMA network expansion and the
for the two bonds on maturity is Rs. 54.9bn, which is
launch of it’s nationwide GSM network.
about fifth of the company's total debt.
n A group of leading international investors across U.S.,
Europe and Asia bought 5% of the equity share n Its FCCB Redemption Ratio is 1.48 in the year of
capital of this tower company, for a consideration of maturity.
Rs. 14bn ( $ 337.5 mn) in July 2007.
Key Risks
n RITL’s equity valuation of Rs. 270bn translates to about
Rs. 135 per RCOM’s equity share. RCOM’s residual 95% Pushback in the SM rollout plans, high capex and
stake in RITL is valued at $ 6.4 bn (Rs. 260bn) and could promotional expenses and decline in MoU could hamper
unlock the value of the tower business through RITL RCOM’s revenue and profitability. RCOM may be required
IPO (draft RHO filed with SEBI). to provide for fluctuation in the value of its foreign currency
loans, which may be a sizeable amount.
Profitability Analysis

n RCOM sales increased from Rs. 45.8bn in Q2FY08 to


Rs. 56.4bn in Q2FY09; primarily driven by the

25
Global Absolute Bond Rating Analysis Baseline Indicator III: Sustainable Growth Analysis

The company has a Bond Rating of 1. This means it has The Sustainable Growth model is a combination of four
strong credit and low chance of not redeeming the FCCBs. ratios, and measures the maximum rate of growth in
revenue that can be sustained without obtaining additional
The weightage we have used for the bond score are as outside funding. The maximum sustainable growth in total
follows: revenue is calculated for each year and is then compared
to the actual calculated growth rate in total revenue from
Redemption Cover 60% Highest weightage since it is cash
the prior year to the current year.
based and includes future
projections Particulars 2007 03 2008 03
GA Credit Score 20% Insolvency Rating (Historical), NET SALES REVENUE 186,842 206,055
therefore lower weightage MAXIMUM SUSTAINABLE GROWTH
DuPont 20% Asset and Equity based (Historical), IN REVENUE 16.90% 20.59%
therefore lower weightage HISTORIC GROWTH IN
NET SALES - 10.28%
HISTORIC GROWTH IN NET SALES
(ROLLING AVERAGE) - -
Baseline Indicator I: FCCB Redemption Cover

Global Absolute Research has created a Cash Flow Analysis


Tool to examine the number of times that the FCCB Based upon the audited financial statements for the year
redemption amount is covered by net cash. The higher the ending 2008/03, the Company's revenues grew by 10.28%
cover the less chance we believe the company will default compared to the prior year. For the 2 years of data included
on the FCCB redemption date. Note that even when the in this analysis, the company’s revenues have increased by
ratio is low (where the ratio is less than 1x), the company may an average of 10.28%
still be able to redeem the FCCBs as long as it has strong
The actual growth in revenue for 2008 is lower than the
credit and can re-finance.
Sustainable growth, which suggests that the Company may
The company has an average FCCB Redemption Cover of not need to obtain additional financing.
1.58x upto the redemption date, indicating high cover and
Baseline Indicator III: DuPont Formula Analysis
low chance of not redeeming the FCCBs.

The DuPont Formula for Return on Assets and Return on


Baseline Indicator II: GA Credit Score Risk Assessment
Equity ratios are calculated for each full year of the historic
The Z-Score is a predictive model used by Global Absolute financial statements. The ratios are presented here as an
that indicates the likelihood that a company will become alternate way to evaluate the quality of the Company's
insolvent within the next twelve months. Return on Equity and to help identify potential weaknesses.

Particulars 2007 03 2008 03


Particulars 2007 03 2008 03
DUPONT RETURN ON
TOTAL CREDIT SCORE 5.74 5.08
EQUITY 17.49% 21.30%
CHANGE OVER PRIOR YEAR - -.66
DUPONT RETURN ON
EQUITY (ROLLING AVG.) - -

For the most recent year ending 2008/03, the Company has
a GA Credit Score of 5.08, which places the Company in the
The DuPont Analysis indicates that ROE for the most recent
“YELLOW” zone, implying that corrective action and
financial statement is 21.30%, which is an increase of 3.81%
monitoring is needed for the Company i.e. the Company
from the previous year.
has sufficient cash flows to meet its interest liabilities but not
necessarily its principal amount. However, an average DuPont Asset Turnover
FCCB Redemption Cover of more than 1 suggests that the
company may be able to repay its FCCB liabilities from its The first component of the DuPont formula is the Asset
cash from operations itself. Hence, we believe little Turnover ratio, which measures the number of rupees of
corrective action will help company to improve its Sales Revenue generated for each rupee of Assets. The
profitability substantially.

26
Asset Turnover ratio declined from 0.50x in FY07 to 0.38x in DuPont Financial Leverage
the current year. The decline in Asset Turnover was driven by
an increase in Sales Revenues of Rs.19,213mn and an The third component is the Financial Leverage ratio, which

increase in Total Assets of Rs. 160,759mn. measures the number of rupees of Assets that the Company
is carrying for every rupee of Equity.
Particulars 2007 03 2008 03
ASSET TURNOVER RATIO .50 .38 Particulars 2007 03 2008 03
FINANCIAL LEVERAGE RATIO 1.86 2.12

An increase in Sales Revenues and an increase in Total


Assets suggest that sales growth is not accompanied by the The Financial Leverage ratio increased compared to the

reduction in assets. prior year. The change in Leverage was driven by an


increase in Total Assets by Rs. 160,760mn and an increase in
The key issue is whether this change has resulted in greater Tangible Net worth by Rs. 51,672mn
turnover (i.e. higher sales for each rupee of assets). The
increase in the Asset Turnover ratio indicates that overall Notes:
utilization has improved. This can be a temporary condition
It is to be noted that the rolling average for FY07 has not
as changes in sales and asset policies take effect. The next
been calculated for certain companies due to the
question is: have sales and asset management resulted in
unavailability of the required data.
higher or lower margins? This is reviewed in the next DuPont
component, Return on Assets.

DuPont Return on Assets

The second component of the DuPont formula is the Return


on Assets (ROA) ratio, which measures the amount of Net
Income that is generated for each rupee of Assets. The ROA
ratio increased compared to the prior year. The change in
ROA was driven by an increase in Net Profit after Tax by Rs.
18,713mn, and an increase in Total Assets by Rs. 160,760mn
in FY08.

Particulars 2007 03 2008 03


DUPONT RETURN ON ASSETS 9.38% 10.36%

An increase in Net Profit after Tax and an increase in Total


Assets indicate rising profitability accompanied by an
increase in asset levels. The combined effect is an increase
in the Return on Asset ratio compared to the previous year.

27
Financials Projection
SECTION 1: CASH INFLOW ESTIMATE (in Rs. mn)
Particulars Mar-08 Mar-09 Mar-10 Mar-11 Mar-12
Revenue 190,678 232,614 302,399 362,878 417,310
EBITDA 81,991 97,882 127,247 152,696 175,601
Less: DA 28,053 32,174 36,829 40,964 44,599
Less: Prov. For FCCB - 4,805 4,805 4,805 3,759
EBIT 53,938 60,903 85,612 106,927 127,242
Less: Interest (-3,997) 2,500 26,263 23,522 21,037
EBT 57,935 58,403 59,350 83,404 106,205
Less: Tax 2,836 1,522 1,976 3,593 4,132
Net Profit after tax 55,099 56,881 57,374 79,811 102,073
Cash from Operations 83,152 93,860 99,008 125,581 150,432
Cash from Operations (USD mn) 1,605 1,812 1,911 2,424 2,904
Section 2: Working Cap and Investment/Capex
Working Capital Changes (-1,036) (-72,184) (-33,263) (-27,036) (-20,839)
Changes from Investing / Capex Activities 226,338 (-80,801) (-53,100) (-82,700) (-72,700)
Net Cash from W/Cap and Investment/Capex 225,302 (-152,985) (-86,363) (-109,736) (-93,539)
Net Cash from W/Cap & Invest/Capex ($mn) 4,349 (-2,953) (-1,667) (-2,118) (-166,239)
Section 3: Financing Activities
Changes Equity & Share premium - - - - -
Changes in Debt (-83,834) 59,343 (-27,403) (-24,852) (-22,557)
Net Cash from Financing Activities (-83,834) 59,343 (-27,403) (-24,852) (-22,557)
Net Cash from Financing Activities ($mn) (-1,618) 1,146 (-529) (-480) (-435)
Section 4: Net Cash Available for FCCB
Opening Net Cash Balance + ST Investments 182,003 118,778 118,996 104,239 95,231
Net Cash Flow For the Year 224,620 218 -14,758 -9,008 34,336
Closing Net Cash + Inv. Available for FCCB ($mn) 118,778 118,996 104,239 95,231 129,567
Closing Net Cash Available for FCCB ($mn) 2,293 2,297 2,012 1,838 2,501
SECTION 5: FCCB REPAYMENT LIABILITY
Original Issue Size (USD mn) 1,500 1,500 1,500 1,500 1,500
Less: Amount already converted (USD mn) 213
FCCB O/S (USD mn) 1,287 1,287 1,380 1,472 1,565
Add: Premium on Redemption (USD mn) 93 93 93 73
Total Payable on maturity date (USD mn) 1,287 1,380 1,472 1,565 1,638
Total Payable on maturity date (Rs. mn) 54,932 71,469 76,274 81,080 84,839
SECTION 6: RATIO ANALYSIS
Current M Cap Rs. Mn 435,510
Currernt M Cap USD Mn 8,408
Networth (Rs.) 290,263 347,144 404,518 484,329 586,402
Networth (USD) 5,604 6,702 7,809 9,350 11,321
Debt (Rs.) 258,217 334,097 311,499 291,452 272,654
Debt / Equity 0.89 0.96 0.77 0.60 0.46
EBITDA / Debt 0.32 0.29 0.41 0.52 0.64
Interest Coverage Ratio -13.49 24.36 3.26 4.55 6.05
SECTION 7: FCCB Cover
FCCB Redemption Ratio 2.16 1.67 1.37 1.17 1.53
FCCB Lia / Current M Cap 0.13 0.16 0.18 0.19 0.19
All USD / Irs. Figures are in millions.
Source: FY07 taken from Company Annual Report and results are consolidated.
*USD @ 51.8

28
GA CREDIT SCORE ANALYSIS
Credit Score: Risk Assessment Weight 200703 (15) 200803 (12)
Ratio 1 NET WORKING CAPITAL / TOTAL TANGIBLE ASSETS 6.56 -0.08 -0.18
Ratio 2 RETAINED EARNINGS / TOTAL TANGIBLE ASSETS 3.26 0.51 0.45
Ratio 3 EBIT / TOTAL TANGIBLE ASSETS 6.72 0.12 0.15
Ratio 4 TANGIBLE NETWORTH / TOTAL TANGIBLE ASSETS 1.05 0.54 0.47
CONSTANT 3.25 3.25
GA CREDIT SCORE 17.59 5.74 5.08
Sustainable Growth Ratio
Ratio 5 NET PROFIT MARGIN 18.90% 26.22%
Ratio 6 RETENTION RATIO 96.61% 96.65%
Ratio 7 MAXIMUM SUSTAINABLE GROWTH IN REVENUE 16.90% 20.59%
HISTORIC GROWTH IN NET SALES - 10.28%
HISTORIC GROWTH IN NET SALES (ROLLING AVERAGE) - -
DIFFERENCE FROM MAXIMUM - -10.31%
Dupont Analysis
Ratio 8 DUPONT RETURN ON EQUITY 17.49% 21.30%
DUPONT RETURN ON EQUITY (ROLLING AVERAGE) - -
Ratio 9 DUPONT ASSET TURNOVER 0.50 0.38
Ratio 10 DUPONT RETURN ON ASSETS 9.38% 10.06%
Ratio 11 DUPONT FINANCIAL LEVERAGE 1.86 2.12

Glossary of Financial Terms - Asset use efficiency, which is measured by total asset
turnover
1. Retention Ratio:
- Financial leverage, which is measured by the equity
This ratio measures the proportion of net profit after tax
multiplier
that is not paid out as dividends but retained in the
business. Calculated as:
Calculated as: ROE = Profit Margin (Profit/Sales) * Total Asset Turnover
(Sales/Assets) * Equity Multiplier (Assets/Equity)
= (Net Profit After Tax – Dividends) / Net Income
5. Rolling Average:
2. Asset Turnover:
The average of a security constructed in a period as
This ratio Indicates the relationship between assets
short as a few days or as long as several years and
and revenue and measures the amount of sales that
showing trends for the latest interval. As each new
are generated from each dollar of assets.
variable is included in calculating the average, the
Calculated as: last variable of the series is deleted.
= Net Revenue / Total Assets 6. DuPont Asset Turnover Ratio:
3. Sustainable Growth Rate: Calculated as:
The maximum growth rate that a firm can sustain = Gross Revenue / Total Tangible Assets
without having to resort to additional borrowings or
7. DuPont Return on Assets:
increase financial leverage.
It is a financial ratio that shows how the return on assets
Calculated as:
depends on both asset turnover and profit margin.
= ROE x Retention Ratio The DuPont method breaks out these two
components from the return on assets ratio in order to
4. DuPont Return on Equity:
determine the impact of each on the profitability of
The DuPont method breaks the return on equity (ROE) the company.
down into three parts: a) profit margin, b) asset
This ratio helps to highlight the impact of changes in
turnover and c) financial leverage.
asset turnover and profit margin.
DuPont Method tells us that ROE is affected by three
Calculated as:
things:
ROA DuPont = (Net Profit After Tax / Net Sales) x (Net
- Operating efficiency, which is measured by profit
Sales / Total Assets)
margin

29
Income Statement
Particulars (in Rs. mn) 2008 2009E 2010E 2011E 2012E
Net Sales 188,274 230,311 299,405 359,285 413,178
Cost of Sales 108,687 134,732 175,152 210,182 241,709
EBITDA 81,991 97,882 127,247 152,696 175,601
Depreciation 28,053 32,174 36,829 40,964 44,599
Prov. For Premium on FCCB 4805 4805 4805 3759
EBIT 53,938 60,903 85,612 106,927 127,242
Interest (3,997) 2,500 26,263 23,522 21,037
EBT 57,935 58,403 59,350 83,404 106,205
Tax 2,836 1,522 1,976 3,593 4,132
PAT 55,099 56,881 57,374 79,811 102,073

Balance Sheet
Balance Sheet (in Rs. mn) 2008 2009E 2010E 2011E 2012E
Share Capital 10,320 10,320 10,320 10,320 10,320
Reserves 279,943 336,824 394,197 474,009 576,082
Misc. Exp.
Total Shareholders Fund 290,263 347,144 404,518 484,329 586,402
Minority Interest 24,309 24,309 24,309 24,309 24,309
Debt 258,217 334,097 311,499 291,452 272,654
Non-FCCB Debt 203,285 262,628 235,225 210,372 187,815
FCCB Debt 54,932 71,469 76,274 81,080 84,839
Deferred Tax 1,028 1,028 1,028 1,028 1,028
Total Liabilities 573,817 706,578 741,354 801,118 884,393
Assets 573817 706578 741354 801118 884393
Gross Block 463,388 643,488 736,588 819,288 891,988
Accum Dep. 89,561 121,736 158,565 199,529 244,129
Net Block 373,826 521,752 578,023 619,758 647,859
WIP 149,299 50,000 10,000 10,000 10,000
Net Fixed Assets 373,826 521,752 578,023 619,758 647,859
Investments 109,996 71,728 66,728 61,728 56,728
Goodwill 35,654 35,654 35,654 35,654 35,654
Net Current Assets (94,959) 50,949 27,444 73,977 134,152
Total Assets 573,817 706,578 741,354 801,118 884,393

30
Auto Tata Motors Limited

GA BOND RATING : 2
YIELD / GOOD CREDIT : BUY

CMP 137 FCCB Description


Nominal Value 10 BOND NAME TATA MOTORS LTD TATA MOTORS LTD
BSE Sensex 9,385 USD 0.000 '12 USD 1.000 '11
Stock Statistics COUPON (% p.a) 0.0 1.0
Bloomberg code TTMT IN ISSUE SIZE ($m) 490.0 300.0
Reuters Code TAMO.BO AMOUNT OUTSTANDING( $m) 490.0 300.0
BSE code 500570 MATURITY 7/12/2012 4/27/2011
NSE code TATAMOTORS
TOTAL REDEMPTION AMOUNT($m) 645.9 365.3
ISIN No. INE155A01014
REDEMPTION AT MATURITY 131.8 121.8
Market Cap (Rs. mn) 62,052 ($1,198) YTM & YTP 28.4 - 26.9 -
52 Wk High/Low (Rs.) 798 / 131 CONVERSION PRICE (INR) 960.9 780.4
NSE Avg Daily Vol(12 m) 1,085,515 PARITY 12.9 17.2
BSE Avg Daily Vol(12 m) 269,463
INDICATIVE BOND PRICE 50.0 67.5
Shareholding Pattern PREMIUM 287.1 292.8
Particulars No. of shares in % COUPON YIELD 0% 1.48%
Promoters 128,579,405 33.3
BOND FLOOR 87.2 95.1
FIIs 57,502,476 14.9
CREDIT SPREAD 1,000bp 1,000bp
Mutual Funds & UTI 4,913,477 1.3
FAIR VALUE 87.7 95.7
Banks/FI's/Insur Co 62,110,978 18.9
Source: Company & Global Absolute Research
Central/State Govt. 4,400 0.1
Private corp. bodies 2,883,812 0.8
Indian Public 37,984,343 19.3 Recommendation: BUY BONDS AS YIELD PLAY
Others 233,187 0.1
Total 348,843,541 100 Tata Motors, India's largest passenger and commercial vehicle manufacturing
company has been growing at an aggressive pace through global acquisitions. It
Stock Performance
has recently been witnessing a contraction in its revenues and margins in line with
In % 1m 3m 6m
Absolute -44 -67 -79 the global downturn being witnessed in the automotive industry. Its volumes are
Relative -40 -31 -33 deteriorating across most of its product segments as vehicle credit financing costs
Research Analyst have gone up and purchases are being postponed by consumers.
Priyanka Singhi / Priyo Moyengam
91-124-4386140 As per our projections, the company has a positive FCCB Redemption Ratio of
120 above 1.0x in each year till fiscal 2013, the year in which its last issue matures. The
100 company has issued US$ 300mn worth 1% FCCBs, maturing in fiscal 2012, currently
80
quoting at a yield of 26.9%, and also US$ 490mn worth of zero coupon FCCBs,
maturing in fiscal 2013, which are trading at a yield of 28.4%. The stock price is
60
trading at a steep discount to the conversion price of both these bonds.
40

20 Sens ex TTMT IN EQUITY We have assigned a Global Absolute Bond Rating of 2, backed by a FCCB
Redemption Cover of a little over 1.0x and GA credit score of 7.88. 6 year's average
0
No v-07 Jan-08 M ar-08 M ay-08 Jul-08 Sep-08 (FY08-FY13) FCCB Redemption cover is 1.19x, implying that the company will be
Chairman: Mr. Ratan N Tata able to meet its FCCB liability on the maturity date. Further, GA credit score of 7.88
Registered Bombay House, indicates strong capacity to pay interest and principal.
Office: 24, Honi Mody Street,
Mumbai - 400 001 We recommend a BUY on both the FCCB issues of the company as a yield play and
Website: www.tatamotors.com bond with good credit.

31
Other Developments in Gujrat for the Nano project. It also has a project under
construction at Dharwad.
Tata Motors is currently facing a slowdown in demand and
margin pressure, in line with the global automotive industry. Its total assets as on 31st March, 2008 amounted to Rs.
This situation has been accentuated by the delay in some of 217.2bn, and its cap-ex during fiscal 2008 amounted to Rs.
its launches, and the problems faced by the company in 59.8bn. The company proposes a cap-ex of Rs. 100bn over
West Bengal for the NANO roll out, which has now been the next three years.
moved to Gujarat. Margins have been impacted by the rise
The company had stopped production at its Lucknow plant
in input costs in an era of high inflation and rising oil prices.
from November 10-15 to adjust production and inventory
Additionally, the burden of its acquisition of JLR (Jaguar
levels to demand. The company's Lucknow plant is one of its
Land Rover) is denting its margins on account of the high
youngest production facilities among all the Tata Motors
debt on its balance sheet, and the integration costs.
locations. The plant rolls out commercial vehicles and is
The company had taken on a bridge loan of $ 2.3bn to fund specialised in the designing and manufacturing of a range
the JLR acquisition, for which it raised about Rs. 41.5bn ($ of buses, which include low-floor, CNG, RE buses and also
864mn) through a rights issue. This has resulted in an equity specializes in manufacturing high capacity bus system
dilution of about 33.3%. The lackluster response to the issue (HCBS) vehicles.
during the current adverse capital market situation induced
The Pune plant will also be closed for six days starting
the promoters to subscribe to the issue, thereby increasing
November 21. The passenger car plant will, however,
their stake from 33.4% to 42%. Under this issue, the company
operate as usual. Apart from the Indica, Indigo, Safari and
offered ordinary shares at a rights price of Rs. 340 per share,
Sumo passenger vehicles, the Pune plant makes light,
and ‘A’ shares with lower voting rights at Rs. 305 per share.
medium and heavy commercial vehicles also.
Further, the company raised Rs. 4.9bn by selling a part of its
Revenue analysis
stake in Tata Steel to its promoter Tata Sons. It has also sold
15% stake in each of its subsidiaries, HV Axles and HV
Tata Motors has an exposure across product segments and
Transmission. The company, which had 27 subsidiaries as on
geographies. It has a track record of successful new
31st March, 2008, is also contemplating the sale of its stakes
launches and the ability to withstand industry downturns.
in other subsidiaries to repay the bridge loan, since the
equity route is not conducive in the current adverse capital The company’s product volumes declined for most of its
market situation. segments, but higher realizations triggered a 10% growth in
its topline in the first half of fiscal 2009.
We expect the company’s revenue and profit growth to
remain subdued over the next 12 – 18 months. However, The medium and heavy commercial vehicle segment
over the medium term, we expect the company to regain its (volumes dropped 48% in October, 2008) has been the worst
growth momentum as the industry cycle reverses and its hit. The light commercial veicle segment, which had fared
expanded capacities start generating revenues. well in the first half of the fiscal, also registered a slowdown in
the month of October.
A brief analysis of Company's financial health
The utitliy vehicle segment has registered a marked
Asset analysis slowdown since the ad-hoc levy of the additional element
of excise duty on vehicles with an engine displacement of
Tata Motors has plants located at Pune, Jamshedpur,
over 1.5 litres.
Lucknow and Uttarakhand for the production of medium
and heavy commercial vehicles, light commercial vehicles The downturn in the commercial vehicle segment has been
and utility vehicles. offset to a great extent by the company’s passenger
vehicle segment. This was aided by the launch of Indica
Its passenger car plants are located at Pune, and the Nano
Vista in August 2008.
is expected to be rolled out from the Rs. 150mn plant being
set up at Gujrat. While the company holds the land at Singur We expect the company to launch the Nano in the first half
on lease, it has been allotted 1,100 acres of land at Sanand of fiscal 2010, and produce about 2.5mn cars per annum

32
initially. This, in turn, is expected to boost its revenues from non-availability of finance are daunting challenges for the
the passenger car segment. commercial vehicle segment in the current downturn.
Further, changing emission norms in different countries
The company is launching certain new trucks at a global require higher capital investment in this segment.
level, in the early part of next year, which in turn could help it Additionally, the JLR business has not yet picked up in terms
to recover some of its lost market share. of revenues and profits, and requires further cap-ex. Hence,
high fixed costs and declining volumes pose a risk to the
JLR’s performance has been muted on account of the
company’s profitability.
slowdown in the US and in Europe, the two regions which
account for about 70% of its sales. Land Rover, which
Liquidity analysis
accounts for 65% of JLR’s volumes, has witnessed shrinkage
in volumes in Europe and US. On the other hand, Jaguar Tata Motors has a debt-equity ratio of 0.9x (reported by the
continues to grow its volumes on account of growing company), post the increase in its networth due to its rights
demand from Russia, (3rd largest market) Brazil and China issue. The company has raised about $ 1bn through the
(5th largest market). During Q2’09, the consolidated JLR rights issue and through stake sales to repay its bridge loan
volumes have fallen by almost 11% Y-O-Y. We expect of $ 2.3bn, which it had taken to fund its JLR acquisition. The
volumes to remain subdued for JLR over the next 18 months. interest burden on this loan is not high since it has been set at
a small margin above the LIBOR. We expect the company
Profitability analysis to re-finance some part of this loan in fiscal 2010.

The company’s EBITDA margin slipped to 8.1% during Q2’09, Out of its total debt of Rs. 115.8bn, its FCCB liabilities
from 9.2% in Q2’08. There are some concerns regarding the amounted to Rs. 36.6bn as on 31st March, 2008, which is
company’s declining profit margins, on account of the about 32% of its total debt. Its FCCB redemption ratio is a
slowdown in volumes and the acquisition of JLR. little over, 1.0x in the years when these liabilities mature.

High metal and oil prices resulted in high input costs for the As on 31st March, 2008, the company’s cash balance stood
company in the first half of the current fiscal, and the hikes at Rs. 37.7bn, with a networth of Rs. 87bn. It has investments
could not be passed on completely to clients due to in its subsidiaries and group companies which stood at Rs.
softening demand. However, oil and metal prices have 26.7bn as on 31st March, 2008. Hence, it can also sell its stake
softened and are expected to fall further in the current in these subsidiaries to raise funds to repay its debt
fiscal, which in turn could help the company to bring down obligations.
its variable costs, with some lag effect. The company’s steel
contracts range from 3 months to 6 months, and hence, the The company’s pension liability, on account of JLR’s
decline in steel prices is expected to reflect only by the last acquisition is up for revaluation in April 2009. Ford had paid
quarter of the current fiscal. about $ 633mn to fund this liability to Tata Motors. However,
a revaluation may result in a higher liability for the company.
The impact of declining input costs may however be
negligible since production cuts to align production with The company is expected to face some pressure on
demand have resulted in higher fixed costs and lower operating margins and cash flows on account of the JLR
utilization levels for the company. acquisition, but its interest coverage ratio is comfortable at
5.2x as on 31st March ,2008. We expect the company to be
While passenger cars are expected to generate higher able to comfortably service its debt in the forthcoming
volumes on account of new launches; low freight rates and years.

33
Global Absolute Bond Rating Analysis Baseline Indicator III: Sustainable Growth Analysis

The company has a Bond Rating of 2. This means it has The Sustainable Growth model is a combination of four
strong credit and will be able to meet its FCCBs liability. Even ratios, and measures the maximum rate of growth in
with the average FCCB cover of 1.19x, the credit score revenue that can be sustained without obtaining additional
indicates re-financing is also an option. outside funding. The maximum sustainable growth in total
revenue is calculated for each year, and is then compared
The weight-ages used for the bond score are as follows: to the actual calculated growth rate in total revenue, from
the prior year to the current year.

Redemption Cover 60% Highest weightage, since it is cash Particulars FY06 (Mar.) FY07 (Mar.) FY08 (Mar.)
based and includes future NET SALES REVENUE 236,089 320,665 354,132
projections MAXIMUM SUSTAINABLE
GA Credit Score 20% Insolvency Rating (Historical); GROWTH IN REVENUE - 20.57% 18.51%
therefore lower weightage HISTORIC GROWTH IN
DuPont 20% Asset and Equity based (Historical); NET SALES - 35.82% 10.44%
therefore lower weightage HISTORIC GROWTH IN NET
SALES (ROLLING AVERAGE) - 17.91% 15.42%

Baseline Indicator I: FCCB Redemption Cover


Based upon the audited financial statements for the year
Global Absolute Research has created a Cash Flow Analysis
ending 2008/03, the Company's revenues grew by 10.4%
Tool to examine the number of times that the FCCB
compared to the prior year. For the 3 years of data included
redemption amount is covered by net cash. The higher the
in this analysis, revenues have increased by an average of
cover, lesser the chances of the company to default on the
15.4%.
FCCB redemption date. It is to be noted that even when the
ratio is low (where the ratio is less than 1x), the company may The actual growth in revenue for years 2007 and 2008 is
still be able to redeem the FCCBs as long as it has strong lower than the Sustainable growth, which suggests that the
credit and can re-finance. Company may not need to obtain additional financing.

The company has an average FCCB Redemption Cover of Baseline Indicator IV: DuPont Formula Analysis
1.19x up-to the redemption date, indicating low chance of
not redeeming the FCCBs. The DuPont Formula for Return on Assets and Return on
Equity ratios are calculated for each full year of the historic
Baseline Indicator II: GA Credit Score Risk Assessment financial statements. The ratios are presented here as an
alternate way to evaluate the quality of the Company's
The GA Credit Score is a predictive model based on the Z
Return on Equity and to help identify potential weaknesses.
score rating that indicates the likelihood of a company
becoming insolvent within the next twelve months. Particulars FY06 (Mar.) FY07 (Mar.) FY08 (Mar.)
DUPONT RETURN ON
The Company has a current year GA Credit Score of 7.88 EQUITY 30.64% 30.13% 26.92%
(See Appendix I, Section GA Z Score for Explanation). It is in DUPONT RETURN ON
the green zone of GA Credit score, and implies that the EQUITY (ROLLING AVG.) - 30.38% 29.23%
company is unlikely to distress.

The DuPont Analysis indicates that ROE for the most recent
Particulars 2006 03 2007 03 2008 03 financial statement is 26.9%, which is a decline of 3.2% from
TOTAL Z-SCORE 9.58 9.64 7.88 the previous year. In addition, ROE for the current year is
CHANGE OVER PRIOR YEAR - 0.06 -1.76 lower than the rolling average of 29.2% for the three years
included in this analysis.

34
DuPont Asset Turnover DuPont Financial Leverage

The first component of the DuPont formula is the Asset The third component is the Financial Leverage ratio, which
Turnover ratio, which measures the number of rupees of measures the number of rupees of Assets that the Company
Sales Revenue generated for each rupee of Assets. The is carrying for every rupee of Equity.
Asset Turnover ratio declined from 2.06 in FY07 to 1.68 in the
current year. The decline in Asset Turnover was driven by an Particulars FY06 (Mar.) FY07 (Mar.) FY08 (Mar.)
increase in Sales Revenues of Rs. 33,467mn and an increase FINANCIAL LEVERAGE RATIO 1.75 2.16 2.62

in Total Assets of Rs. 55,099mn.


The Financial Leverage ratio increased compared to the
Particulars FY06 (Mar.) FY07 (Mar.) FY08 (Mar.)
prior year. The change in Leverage was driven by an
ASSET TURN OVER RATIO 2.39 2.06 1.68
increase in Total Assets of Rs. 55,099mn and an increase in
Tangible Net-worth of Rs. 8,513mn.
An increase in Sales Revenue and an increase in Total Assets
suggest that sales growth is not accompanied by the Notes:

reduction in assets.
It is to be noted that the rolling average for FY07 has not

DuPont Return on Assets been calculated for certain companies due to the
unavailability of the required data.
The second component of the DuPont formula is the Return
on Assets (ROA) ratio, which measures the amount of Net
Income that is generated for each rupee of Assets. The ROA
ratio has decreased compared to the prior year. The
change in ROA was driven by a decline in Net Profit After Tax
of Rs. 22.9mn and an increase in Total Assets of Rs. 55,099mn.

Particulars FY06 (Mar.) FY07 (Mar.) FY08 (Mar.)


DUPONT RETURN ON ASSETS 17.51% 13.94% 10.28%

An decline in Net Profit after Tax and an increase in Total


Assets indicate declining profitability accompanied by an
increase in asset levels. The combined effect results in a
decrease in the Return on Asset ratio compared to the
previous year.

35
Financials Projection
SECTION 1: CASH INFLOW ESTIMATE (Rs.)
Particulars Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13
Revenue 359,190 1,021,515 1,123,667 1,236,033 1,421,438 1,634,654
EBITDA 46,123 88,411 97,252 106,977 123,023 141,477
Less: DA 7,830 22,675 25,461 26,230 26,920 27,540
Less: Prov. For FCCB Premium - 2,441 2,441 2,446 2,462 1,615
EBIT 38,294 66,892 69,350 78,301 93,642 112,322
Less: Interest 7,431 23,473 13,828 9,762 5,696 1,629
EBT 30,863 43,420 55,522 68,539 87,946 110,692
Less: Tax 8,515 6,795 18,479 22,811 29,271 36,841
Net Profit after tax 22,348 36,624 37,043 45,727 58,675 73,851
Cash from Operations 30,177 61,740 64,944 74,403 88,057 103,006
Cash from Operations (USD) 583 1,192 1,254 1,436 1,700 1,989
Section 2: Working Cap and Investment/Capex
Working Capital Changes 40,032 (90,904) (3,544) (3,898) (6,431) (7,396)
Changes from Investing/Capex Activities (86,911) (48,741) (33,000) (33,000) (33,000) (33,000)
Net Cash from W/Cap and Investment/Capex (46,879) (139,645) (36,544) (36,898) (39,431) (40,396)
Net Cash from W/Cap & Invest/Capex ($mn) (905) (2,696) (705) (712) (761) (780)
Section 3: Financing Activities
Increase from Equity 1 37,727 (2,441) (2,446) (2,462) (1,615)
Changes in Debt 42,830 54,124 (36,956) (37,184) (43,033) (56,712)
Net Cash from Financing Activities 42,831 91,851 (39,396) (39,630) (45,495) (58,327)
Net Cash from Financing Activities ($mn) 827 1,773 (761) (765) (878) (1,126)
Section 4: Net Cash Available for FCCB
Opening Net Cash Balance 11,543 52,272 66,218 55,222 53,097 56,228
Net Cash Flow For the Year 26,129 13,946 (10,996) (2,125) 3,131 4,283
Closing Net Cash Available for FCCB 37,672 66,218 55,222 53,097 56,228 60,511
Closing Net Cash Available for FCCB ($mn) 727 1,278 1,066 1,025 1,085 1,168
SECTION 5: FCCB REPAYMENT LIABILITY
Original Issue Size (USD) 1,009 1,009 1,009 909 790 490
Less: Amount already converted (USD) 96 96 96 - - -
FCCB O/S (USD) 913 913 913 909 790 490
Add: Premium on Redemption - 47 47 47 48 31
Total Payable on maturity date (USD) 912 960 1,007 1,050 980 646
Total Payable on maturity date (Rs.) 43,537 49,736 52,182 54,400 50,768 33,458
SECTION 6: RATIO ANALYSIS
Current M Cap Rs. Mn 62,052
Currernt M Cap USD Mn 1,198
Networth (Rs) 86,906 281,627 318,670 364,397 423,072 496,924
Networth (USD) 1,678 5,437 6,152 7,035 8,167 9,593
Debt (Rs.) 115,849 220,743 183,787 146,603 103,570 46,858
Debt / Equity 1.3 0.8 0.6 0.4 0.2 0.1
EBITDA / Debt 0.4 0.4 0.5 0.7 1.2 3.0
Interest Coverage Ratio 5.2 2.8 5.0 8.0 16.4 68.9
SECTION 7: FCCB COVER
FCCB redemption ratio 0.87 1.33 1.06 0.98 1.11 1.81
FCCB Lia / Current M Cap 0.70 0.80 0.84 0.88 0.82 0.54
All USD / Irs. Figures are in millions.
Source: FY08 taken from Company Annual Report and results are consolidated.
Note – Fiscal 2008 has Tata Motors numbers excl. JLR, while projections starting 2009 have been based on JLR’s acquisition. * USD @ 51.8

36
GA CREDIT SCORE ANALYSIS
Credit Score: Risk Assessment Weight 200603(12) 200703(12) 200803(12)
Ratio 1 NET WORKING CAPITAL / TOTAL TANGIBLE ASSETS 6.56 61.50% 43.26% 36.95%
Ratio 2 RETAINED EARNINGS / TOTAL TANGIBLE ASSETS 3.26 45.49% 41.34% 39.08%
Ratio 3 EBIT / TOTAL TANGIBLE ASSETS 6.72 14.79% 14.30% 16.85%
Ratio 4 TANGIBLE NETWORTH / TOTAL TANGIBLE ASSETS 1.05 49.06% 44.12% 41.38%
CONSTANT 3.25 3.25 3.25
GA CREDIT SCORE 10.28 8.86 8.52
Sustainable Growth Ratio
Ratio 5 NET PROFIT MARGIN 29.63% 30.71% 29.09%
Ratio 6 RETENTION RATIO 75.12% 84.60% 86.00%
Ratio 7 MAXIMUM SUSTAINABLE GROWTH IN REVENUE 15.05% 20.23% 23.95%
HISTORIC GROWTH IN NET SALES 34.55% 39.30%
HISTORIC GROWTH IN NET SALES (ROLLING AVERAGE) 17.28% 24.62%
DIFFERENCE FROM MAXIMUM 14.32% 15.35%
Dupont Analysis
Ratio 8 DUPONT RETURN ON EQUITY 20.04% 23.92% 27.85%
DUPONT RETURN ON EQUITY (ROLLING AVERAGE) 21.98% 23.94%
Ratio 9 DUPONT ASSET TURNOVER 0.33 0.34 0.40
Ratio 10 DUPONT RETURN ON ASSETS 9.83% 10.55% 11.52%
Ratio 11 DUPONT FINANCIAL LEVERAGE 2.04 2.27 2.42

Glossary of Financial Terms - Asset use efficiency, which is measured by total asset
turnover
1. Retention Ratio:
- Financial leverage, which is measured by the equity
This ratio measures the proportion of net profit after tax
multiplier
that is not paid out as dividends but retained in the
business. Calculated as:
Calculated as: ROE = Profit Margin (Profit/Sales) * Total Asset Turnover
(Sales/Assets) * Equity Multiplier (Assets/Equity)
= (Net Profit After Tax – Dividends) / Net Income
5. Rolling Average:
2. Asset Turnover:
The average of a security constructed in a period as
This ratio Indicates the relationship between assets
short as a few days or as long as several years and
and revenue and measures the amount of sales that
showing trends for the latest interval. As each new
are generated from each dollar of assets.
variable is included in calculating the average, the
Calculated as: last variable of the series is deleted.
= Net Revenue / Total Assets 6. DuPont Asset Turnover Ratio:
3. Sustainable Growth Rate: Calculated as:
The maximum growth rate that a firm can sustain = Gross Revenue / Total Tangible Assets
without having to resort to additional borrowings or
7. DuPont Return on Assets:
increase financial leverage.
It is a financial ratio that shows how the return on assets
Calculated as:
depends on both asset turnover and profit margin.
= ROE x Retention Ratio The DuPont method breaks out these two
components from the return on assets ratio in order to
4. DuPont Return on Equity:
determine the impact of each on the profitability of
The DuPont method breaks the return on equity (ROE) the company.
down into three parts: a) profit margin, b) asset
This ratio helps to highlight the impact of changes in
turnover and c) financial leverage.
asset turnover and profit margin.
DuPont Method tells us that ROE is affected by three
Calculated as:
things:
ROA DuPont = (Net Profit After Tax / Net Sales) x (Net
- Operating efficiency, which is measured by profit
Sales / Total Assets)
margin

37
Income Statement
Particulars (in Rs. mn) 2008 2009E 2010E 2011E 2012E 2013E
Net Sales 359,190 1,021,515 1,123,667 1,236,033 1,421,438 1,634,654
Cost of Sales 313,066 933,105 1,026,415 1,129,057 1,298,415 1,493,177
EBITDA 46,123 88,411 97,252 106,977 123,023 141,477
Depreciation 7,830 22,675 25,461 26,230 26,920 27,540
Prov. For FCCB Premium - 2,441 2,441 2,446 2,462 1,615
EBIT 38,294 66,892 69,350 78,301 93,642 112,322
Interest 7,431 23,473 13,828 9,762 5,696 1,629
EBT 30,203 43,420 55,522 68,539 87,946 110,692
Tax 8,515 6,795 18,479 22,811 29,271 36,841
PAT 21,687 36,624 37,043 45,727 58,675 73,851

Balance Sheet
Particulars (in Rs. mn) 2008 2009E 2010E 2011E 2012E 2013E
Share Capital 3,855 5,101 5,101 5,101 5,101 5,101
Reserves 83,120 276,595 313,638 359,365 418,041 491,892
Misc. Expenditure 69 69 69 69 69 69
Total Shareholders Fund 86,906 281,627 318,670 364,397 423,072 496,924
Minority Interest 4,683 4,683 4,683 4,683 4,683 4,683
Pension Liability (JLR) (26,598) (26,598) (26,598) (26,598) (26,598)
Debt 115,849 220,743 183,787 146,603 103,570 46,858
Non-FCCB Debt 79,238 171,007 131,605 92,204 52,802 13,400
FCCB Debt 36,610 49,736 52,182 54,400 50,768 33,458
Deferred Tax 9,745 (29,892) (29,892) (29,892) (29,892) (29,892)
Total Liabilities 217,182 450,563 450,651 459,194 474,836 491,975
Assets
Gross Block 129,757 189,239 239,239 272,239 305,239 338,239
Accumulated Depreciation 60,605 83,279 108,740 134,970 161,890 189,430
Net Block 69,152 105,960 130,499 137,269 143,349 148,809
WIP 59,483 50,000 33,000 33,000 33,000 33,000
Net Fixed Assets 128,634 249,690 257,229 263,999 270,079 275,539
Goodwill 5,662 73,661 73,661 73,661 73,661 73,661
Investments 26,658 25,560 25,560 25,560 25,560 25,560
Current Assets
Inventories 32,946 93,698 103,067 113,374 130,380 149,937
Sundry Debtors 20,605 58,600 64,460 70,906 81,542 93,773
Cash in Hand 38,332 66,218 55,222 53,097 56,228 60,511
Other Current Assets 12 34 37 41 47 54
Loans & Advances 100,778 286,608 315,269 346,796 398,815 458,638
Current Liabilities 113,192 337,372 371,109 408,220 469,453 539,871
Provisions 23,254 66,132 72,745 80,020 92,023 105,826
Net Current Assets 56,228 101,653 94,201 95,974 105,536 117,215
Total Assets 217,182 450,563 450,651 459,194 474,836 491,975

38
Cash Flow Statement
Particulars (in Rs. mn) 2008 2009E 2010E 2011E 2012E 2013E
PBIT 38,294 66,892 69,350 78,301 93,642 112,322
Add : Depreciation 7,830 22,675 25,461 26,230 26,920 27,540
Add: Prov. For FCCB Premium - 2,441 2,441 2,446 2,462 1,615
(Inc)/Dec in WC 40,032 (90,904) (3,544) (3,898) (6,431) (7,396)
Taxes Paid (8,515) (6,795) (18,479) (22,811) (29,271) (36,841)
CF from Operations 77,640 (5,691) 75,229 80,268 87,321 97,240
(Inc)/Dec in FA (26,165) (59,483) (50,000) (33,000) (33,000) (33,000)
(Inc)/Dec in Capex (33,666) 9,483 17,000 - - -
(Pur)/Sale of Investments -14912.4 1,259 - - - -
Misc. Expenses (12,168)
CF from Investments (86,911) (48,741) (33,000) (33,000) (33,000) (33,000)
Increase Equity 1.30 1,246 - - - -
Premium from Equity Issue 36,482 (2,441) (2,446) (2,462) (1,615)
Increase in Debt 42,830 54,124 (36,956) (37,184) (43,033) (56,712)
Interest Paid (7,431) (23,473) (13,828) (9,762) (5,696) (1,629)
CF from Fin. Activity 35,400 68,378 (53,225) (49,392) (51,191) (59,957)
Inc/Dec of Cash 26,129 13,946 (10,996) (2,125) 3,131 4,283
Add: Beginning Balance 11543 52,272 66,218 55,222 53,097 56,228
Closing Balance 37,672 66,218 55,222 53,097 56,228 60,511

39
Gems Gitanjali Gems Limited

GA BOND RATING : 1
YIELD / GOOD CREDIT : BUY

CMP 72 FCCB Description


Nominal Value 10 BOND NAME GITANJALI GEMS USD 1.000 '11
BSE Sensex 9,385 (GITG IN )Iss'd 24/06 USD110m
COUPON (% p.a) 1
Stock Statistics
ISSUE SIZE ($m) 110
Bloomberg code GITG IN
Reuters Code GTGM.BO AMOUNT OUTSTANDING( $m) 73.9
BSE code 532715 MATURITY 11/25/2011
NSE code GITANJALI TOTAL REDEMPTION AMOUNT($m) 105
ISIN No. INE346H01014 REDEMPTION AT MATURITY 142.1

Market Cap (mn) Rs. 6,144 ($119) YTM & YTP 23.5 -
52 Wk High/Low (Rs.) 490 / 68 CONVERSION PRICE (INR) 275
NSE Avg Daily Vol(12 m) 367,102 PARITY 30.1
BSE Avg Daily Vol(12 m) 273,840 INDICATIVE BOND PRICE 74.5
PREMIUM 147.4
Shareholding Pattern
COUPON YIELD 1%
Particulars No. of shares in %
BOND FLOOR 102.9
Promoters 40,635,116 47.8
CREDIT SPREAD 1,000bp
FIIs 17,475,735 20.5
FAIR VALUE 106.9
Mutual Funds & UTI 6,661,230 7.8
Source: Company & Global Absolute Research
Banks/FI's/Insur Co 619,500 0.7
Private corp. bodies 6,696,915 7.9 Recommendation: BUY BONDS AS YIELD PLAY
Indian Public 3,234,773 3.8
Gitanjali Gems Ltd. (GGL) is a leading Gems & Jewellery company in India having
Others 9,739,614 11.5
global presence, with fully integrated operations. Out of the top 10 brands in India
Total 85,062,883 100.0
with high recall, 6 are owned by GGL. The operations are highly resilient to a
Stock Performance slowdown in the Indian and US markets, considering the small market share of
jewellery in the overall market sales. GGL is also developing Gems & Jewellery
In % 1m 3m 6m (G&J) SEZs in various locations in India. Hyderabad G&J SEZ is ready for commercial
Absolute -39 -72 -75 use, which will provide significant tax benefits.
Relative -26 -36 -29
Research Analyst With a Global Absolute (GA) Bond Rating of 1, Gitanjali Gems Ltd. would be able to
Jitesh Muchchal repay its FCCB liability through its operations, as reflected in the 5-year average
91-124-4386140 FCCB redemption cover of 2.03. Current year’s GA credit score of 11.91 implies that
140 the company has a strong capacity to pay interest and principal. Currently, the
120
Interest coverage ratio is at 4.2x and Debt-Equity ratio is at 0.9x, which are expected
to improve to 15.1x and 0.4x by FY12, respectively. The 5-year average interest
100
coverage ratio is at a comfortable level of 6.8x. This signifies the strong financial
80 health of the company and the ability to raise additional finance, if required.
60
Moreover, DuPont analysis shows an improvement in profitability & financial leverage,
40 which is in line with the industry’s average. Presently, the company has strong cash
Sens ex GITG IN EQUITY
20 flows, and we have estimated an average annual cash inflow from operations of Rs.
2.84bn ($ 55mn) upto the redemption date, backed by a surge in assets.
0
No v-07 Jan-08 M ar-08 M ay-08 Jul-08 Sep-08
(GITG IN) Iss'd 24/06 USD 110mn FCCB, paying 1% coupon, is currently trading at an
Chairman: Mr. Mehul C. Choksi attractive yield of 23.52%. Of the $ 110mn FCCBs issued, $ 74mn is left for
Registered 801/802, Prasad Chambers, conversion. Though the conversion price of FCCBs is Rs. 275 per share, the
Office: Opera House, company’s share price is currently trading at Rs. 72. Therefore conversion appears
Mumbai - 400 004 remote. We believe, GGL would not face any problems in the repayment of its
FCCBs obligations. Therefore, we recommend a BUY rating on the FCCB- Gitanjali
Website: www.gitanjaligroup.com
Gems 1.000’11.

40
Equity Analysis A brief financial health of the company

Gitanjali Gems Ltd. (GGL) is one of the largest integrated Assets Analysis
diamond and jewellery manufacturers. Its operations
include sourcing rough diamond from suppliers in Net Fixed Assets (excluding intangible assets) is Rs. 2.2bn,

international markets, cutting and polishing of diamonds, which covers 13.12% of the total debt on the books i.e. Rs.

manufacturing jewellery and retailing branded jewellery 16.4bn for FY08.

lines. It operates both in India and abroad through outlets


Total Assets (Net Fixed Assets+Net Current Assets+Cash-
distributors, franchisees and own outlets. Currently, it has
Intangible asset) are Rs. 34.68bn. This is 2.12 times more than
three manufacturing facilities each at Mumbai, Surat and
the total debt on the books. This is evident from the above
Kolkata. It is developing more units in Hyderabad SEZ. It is
mentioned ratio that the company has a strong balance
one of the Indian companies to be recognized as a DTC
sheet to support its liabilities.
sight holder. In December 2006, the company acquired 84%
equity stake in Samuels Jewellers, which operates 97 stores Profitability Analysis
in the US. It intends to increase its equity stake to 97% by
December 2008. In December 2007, the company GGL has been able to improve its margin in the recent years
expanded its portfolio by acquiring another US retail chains, on the back of changing business mix. Currently, EBIT margin
Rogers Jewellers, which operates 46 stores. The company is is 5.34%. The company is now focusing on the Jewellery
developing first Gems & Jewellery (G&J) SEZ in India for its segment, which has higher margins than the diamond
own manufacturing facilities as well as for other segment. The proportion of operating revenue has
manufacturers. It has also proposed to set up (G&J) SEZs at changed from 68:32 (Diamond:Jewellery) in FY07 to 56:44 in
various locations in the country. GGL has also ventured into FY08. This clearly shows the changing business dynamics.
lifestyle category through exclusive retail chains. This division The company intends to increase its Jewellery’s share in
focuses on various luxury segments like lifestyle, health & business to 60% by FY10. Therefore, we expect further
beauty, fashion, jewellery and luxury malls. improvement in the margins, going forward. The major
concern here is the profitability of GGL’s subsidiaries in US,
GGL's topline grew at a CAGR of nearly 42% over 2006-08, which currently have very low margins. GGL is confident of
on the back of increased access to the customers and pulling up the margins in next couple of years by integrating
acceptance of branded jewellery. Exports constitutes 60% operations with the parent company.
of the revenues in FY08. Key export markets include the US,
Europe, the Middle East, Japan, China, Hong Kong, and Moreover, the company is increasing its presence, through
Thailand. In FY07, diamonds accounted for 68% of the increasing number of outlets, in the domestic market and
revenues and 46% of the operating profit, whereas jewellery the US market- world’s largest market- thus, reflecting the
accounted for 32% of sales and 54% of the operating profit. revenue visibility.
Going forward, by FY10, it plans to have an equal
Liquidity & Credit Analysis
contribution from both the segments.

Interest coverage ratio is at a comfortable position of 4.2x.


We expect the company's topline to grow at a CAGR of 11%
We expect, the company would be able to maintain the
over FY08-FY11, on the back of retail penetration, popular
coverage ratio at the same sustainable level.
brand portfolio and increasing market for branded jewellery
in India. The company also has presence in the US, which is
Debt-Equity ratio is at 0.9x, having a scope for further
the world’s largest market, on account of various
increase. The major portion, i.e. 80% of total debt has been
acquisitions. The foreign acquisition is a concern in the short
taken to finance working capital. The company, due to its
term, but the effective supply chain management would
nature of business, needs significant investment in working
lead to better margins in the future. The company is also
capital.
diversifying its long-term earning sources by exploiting
opportunities in Lifestyle goods and SEZs. We believe, the Out of the total debt of Rs. 16.34bn, FCCBs constitute nearly
supply chain infrastructure and changing business mix 18% i.e. Rs. 2.96bn. The total outstanding FCCBs obligations
would improve the margins of the company in the future. on maturity amounts to be Rs. 5.45bn ($ 105mn).

41
Currently, cash, on the books, is sufficient to pay off nearly Baseline Indicator III: Sustainable Growth Analysis
68.7% i.e. Rs. 11.23bn of the total debt of Rs. 16.34bn.
The Sustainable Growth model is a combination of four
Global Absolute Bond Rating Analysis ratios, and measures the maximum rate of growth in
revenue that can be sustained without obtaining additional
The company has a Bond Rating of 2, thus implying a strong outside funding. The maximum sustainable growth in total
credit and low chance of not redeeming the FCCBs. revenue is calculated for each year, and is then compared
to the actual calculated growth rate in total.
The weightings used for the bond score are as follows:
Particulars 2006 03 2007 03 2008 03
Redemption Cover 60% Highest weightage, since it is cash
NET SALES REVENUE 24,033.2 34,674.4 48,317.4
based and includes future
MAXIMUM SUSTAINABLE
projections
GROWTH IN REVENUE 5.73% 9.71% 8.01%
GA Credit Score 20% Insolvency Rating (Historical);
HISTORIC GROWTH IN
therefore lower weightage
NET SALES - 44.28% 39.35%
DuPont 20% Asset and Equity based (Historical);
HISTORIC GROWTH IN NET
therefore lower weightage
SALES (ROLLING AVERAGE) - 22.14% 27.87%

Based upon the audited financial statements for the year


Baseline Indicator I: FCCB Redemption Cover
ending 2008/03, the Company's revenues grew by 39.35%
compared to the prior year. The data for 3 years included in
Global Absolute Research has created a Cash Flow Analysis
the analysis indicates an increase in revenues by an
Tool to examine the number of times that the FCCB
average of 27.87%.
redemption amount is covered by net cash. The higher the
cover, the lesser the possibilities of default on the FCCB
The actual growth in revenue for the year 2007 and 2008 is
redemption date, by the company. It is to be noted that the
greater than the Sustainable growth. This suggests that the
company may be able to redeem its FCCBs, as long as it has
Company may need to obtain additional financing.
strong credit and ability to re-finance, even if the ratio is low
(where the ratio is less than 1x). Baseline Indicator IV: DuPont Formula Analysis

The company has an average FCCB Redemption Cover of The DuPont Formula for Return on Assets and Return on
2.03x for FY08-FY12. In FY12, when the FCCB is to be Equity ratios are calculated for each full year of the historic
redeemed, the FCCB Redemption Cover is 1.21x. This financial statements. The ratios are presented here as an
indicates, the company would have sufficient cash to pay alternate way to evaluate the quality of the Company's
off its FCCB liability on maturity date. Return on Equity and to help identify potential weaknesses.

Baseline Indicator II: GA Credit Score Risk Assessment Particulars FY06 FY07 FY08
DUPONT RETURN ON
The GA Credit Score is a predictive model based on the Z EQUITY 6.60% 11.03% 9.01%
score rating that indicates the likelihood of a company DUPONT RETURN ON
becoming insolvent within the next twelve months. EQUITY (ROLLING AVG.) - 8.82% 8.88%

The Company has a current year GA Credit Score of 11.91


(See Appendix I, Section GA Z Score for Explanation). The
The DuPont Analysis indicates that ROE for the most recent
credit score of 11.91 falls into green zone that implies that the
financial statement is 9.01%, which is a decrease of 2.02%
company has strong balance sheet and financial ratios. The
from the previous year. In addition, ROE for the current year
indicator also reflects the company's positive ability to
is higher than the rolling average of 8.88% for the three years
refinance and raise capital to redeem the FCCBs, if required.
included in this analysis.
Particulars 2006 03 2007 03 2008 03
TOTAL Z-SCORE 12.17 11.22 11.91
CHANGE OVER PRIOR YEAR - -0.95 0.69

42
DuPont Asset Turnover An increase in Net Profit after Tax and an increase in Total
Assets indicate rising profitability accompanied by an
The first component of the DuPont formula is the Asset increase in asset levels. The combined effect results in an
Turnover ratio, which measures the number of rupees of increase in the Return on Asset ratio compared to the
Sales Revenue generated for each rupee of Assets. The previous year.
Asset Turnover ratio has been declining in the last two years
and is currently at 1.38. The main reason for a decline in DuPont Financial Leverage
Asset Turnover ratio has been a higher growth in tangible
assets as compared to growth in Sales. The tangible assets The third component is the Financial Leverage ratio, which

grew by 48% as compared to 39% growth in Sales in FY08. measures the number of rupees of Assets that the Company
is carrying for every rupee of Equity.
Particulars FY06 FY07 FY08
Particulars FY06 FY07 FY08
Asset Turnover Ratio 1.57 1.45 1.38
DUPONT FINANCIAL LEVERAGE RATIO 1.99 2.87 1.97

An increase in Total Assets and an increase in Sales revenues


suggest that asset growth is not accompanied by an The Financial Leverage ratio decreased compared to the

increase in sales. prior year. The change in Leverage was driven by an


increase in Tangible Net worth, which is more than the
DuPont Return on Assets increase in Total Tangible Assets in growth terms. The
Tangible Net worth increased by Rs. 9.75bn i.e. 120% and
The second component of the DuPont formula is the Return Total Tangible Assets increased by Rs. 11.49bn, i.e. 48%.
on Assets (ROA) ratio, which measures the amount of Net
Income that is generated for each rupee of Assets. The ROA Notes:
ratio has increased compared to the prior year. The change
in ROA was driven by higher growth in Net Profit after Tax of It is to be noted that the rolling average for FY07 has not

75% to Rs. 1.61bn as compared to the growth of 48% in Total been calculated for certain companies due to the

Tangible Assets to Rs. 35.1bn for FY08. unavailability of the required data.

Particulars FY06 FY07 FY08


DUPONT RETURN ON ASSETS 3.32% 3.85% 4.58%

43
Financials Projection
SECTION 1: CASH INFLOW ESTIMATE (Rs.)
Particulars Mar-08 Mar-09 Mar-10 Mar-11 Mar-12
Net Sales 48,398 50,202 55,222 66,267 76,207
EBITDA 2,785 2,888 3,177 4,142 4,953
Less: DA 201 381 346 388 415
Less: Provision for FCCB Premium - 1,273 403 403 403
EBIT 2,584 1,235 2,428 3,351 4,136
Less: Interest 621 684 560 393 274
EBT 1,963 551 1,868 2,958 3,862
Less: Tax 213 60 202 320 418
Net Profit after tax 1,750 491 1,666 2,637 3,444
Cash from Operations 1,951 2,144 2,415 3,428 4,261
Cash from Operations (USD) 38 41 47 66 82
Section 2: Working Cap and Investment/Capex
Working Capital Changes (5,642) (348) (1,426) (2,711) (2,921)
Changes from Investing/Capex Activities (278) (150) (628) (566) (650)
Net Cash from W/Cap and Investment/Capex (5,920) (498) (2,055) (3,277) (3,571)
Net Cash from W/Cap & Invest/Capex ($mn) (114) (10) (40) (63) (69)
Section 3: Financing Activities
Increase from Equity 7,276 - - - -
Changes in Debt 1,749 (1,402) (1,737) (1,309) (967)
Net Cash from Financing Activities 9,025 (1,402) (1,737) (1,309) (967)
Net Cash from Financing Activities ($mn) 174 (27) (34) (25) (19)
Section 4: Net Cash Available for FCCB
Opening Net Cash Balance 6,174 11,230 10,201 8,421 6,861
Net Cash Flow For the Year 5,056 245 (1,377) (1,157) (276)
Closing Net Cash Available for FCCB 11,230 11,474 8,824 7,264 6,585
Closing Net Cash Available for FCCB ($mn) 217 222 170 140 127
SECTION 5: FCCB REPAYMENT LIABILITY
Original Issue Size (USD) 110 110 110 110 110
Less: Amount already converted (USD) 36 36 36 36 36
FCCB O/S (USD) 74 74 74 74 74
Add: Premium on Redemption 8 8 8 8
Total Payable on maturity date (USD) 74 82 90 97 105
Total Payable on maturity date (Rs.) 3,833 4,236 4,639 5,042 5,445
SECTION 6: RATIO ANALYSIS
Current M Cap Rs. Mn 6,144
Current M Cap USD Mn 119
Networth (Rs.) 18,846 19,337 21,002 23,640 27,084
Networth (USD) 364 373 405 456 523
Debt (Rs.) 16,338 14,936 13,199 11,890 10,923
Debt / Equity 0.9 0.8 0.6 0.5 0.4
EBITDA / Debt 0.2 0.2 0.2 0.3 0.5
Interest Coverage Ratio 4.2 1.8 4.3 8.5 15.1
SECTION 7: FCCB Cover
FCCB Redemption Ratio 2.93 2.71 1.90 1.44 1.21
FCCB Lia / Current M Cap 0.56 0.62 0.68 0.74 0.80
All USD / Irs. Figures are in millions.
Source: FY07 taken from Company Annual Report and results are consolidated.
*USD @ 51.8

44
GA CREDIT SCORE ANALYSIS
Credit Score: Risk Assessment Weight 200603 (12) 200703 (12) 200803 (12)
Ratio 1 NET WORKING CAPITAL / TOTAL TANGIBLE ASSETS 6.56 97.07% 92.29% 92.30%
Ratio 2 RETAINED EARNINGS / TOTAL TANGIBLE ASSETS 3.26 46.31% 31.89% 48.36%
Ratio 3 EBIT / TOTAL TANGIBLE ASSETS 6.72 7.59% 7.52% 7.36%
Ratio 4 TANGIBLE NETWORTH / TOTAL TANGIBLE ASSETS 1.05 50.34% 34.89% 50.79%
CONSTANT 3.25 3.25 3.25
GA CREDIT SCORE 17.59 12.17 11.22 11.91
Sustainable Growth Ratio
Ratio 5 NET PROFIT MARGIN 2.11% 2.65% 3.33%
Ratio 6 RETENTION RATIO 86.75% 88.04% 88.85%
Ratio 7 MAXIMUM SUSTAINABLE GROWTH IN REVENUE 5.73% 9.71% 8.01%
HISTORIC GROWTH IN NET SALES 44.28% 39.35%
HISTORIC GROWTH IN NET SALES (ROLLING AVERAGE) 22.14% 27.87%
DIFFERENCE FROM MAXIMUM ` 34.57% 31.34%
Dupont Analysis
Ratio 8 DUPONT RETURN ON EQUITY 6.60% 11.03% 9.01%
DUPONT RETURN ON EQUITY (ROLLING AVERAGE) 8.82% 8.88%
Ratio 9 DUPONT ASSET TURNOVER 1.57 1.45 1.38
Ratio 10 DUPONT RETURN ON ASSETS 3.32% 3.85% 4.58%
Ratio 11 DUPONT FINANCIAL LEVERAGE 1.99 2.87 1.97

Glossary of Financial Terms - Asset use efficiency, which is measured by total asset
turnover
1. Retention Ratio:
- Financial leverage, which is measured by the equity
This ratio measures the proportion of net profit after tax
multiplier
that is not paid out as dividends but retained in the
business. Calculated as:
Calculated as: ROE = Profit Margin (Profit/Sales) * Total Asset Turnover
(Sales/Assets) * Equity Multiplier (Assets/Equity)
= (Net Profit After Tax – Dividends) / Net Income
5. Rolling Average:
2. Asset Turnover:
The average of a security constructed in a period as
This ratio Indicates the relationship between assets
short as a few days or as long as several years and
and revenue and measures the amount of sales that
showing trends for the latest interval. As each new
are generated from each dollar of assets.
variable is included in calculating the average, the
Calculated as: last variable of the series is deleted.
= Net Revenue / Total Assets 6. DuPont Asset Turnover Ratio:
3. Sustainable Growth Rate: Calculated as:
The maximum growth rate that a firm can sustain = Gross Revenue / Total Tangible Assets
without having to resort to additional borrowings or
7. DuPont Return on Assets:
increase financial leverage.
It is a financial ratio that shows how the return on assets
Calculated as:
depends on both asset turnover and profit margin.
= ROE x Retention Ratio The DuPont method breaks out these two
components from the return on assets ratio in order to
4. DuPont Return on Equity:
determine the impact of each on the profitability of
The DuPont method breaks the return on equity (ROE) the company.
down into three parts: a) profit margin, b) asset
This ratio helps to highlight the impact of changes in
turnover and c) financial leverage.
asset turnover and profit margin.
DuPont Method tells us that ROE is affected by three
Calculated as:
things:
ROA DuPont = (Net Profit After Tax / Net Sales) x (Net
- Operating efficiency, which is measured by profit
Sales / Total Assets)
margin

45
Income Statement
Particulars (in Rs. mn) 2008 2009E 2010E 2011E 2012E
Revenue 48,398 50,202 55,222 66,267 76,207
Cost of Sales 45,613 47,314 52,045 62,125 71,253
Depreciation 201 381 346 388 415
Provision for FCCB 0 1273 403 403 403
EBIT 2,584 1,235 2,428 3,351 4,136
Interest 621 684 560 393 274
EBT 1,963 551 1,868 2,958 3,862
Tax 213 60 202 320 418
PAT 1,750 491 1,666 2,637 3,444

Balance Sheet
Balance Sheet (in Rs. mn) 2008 2009E 2010E 2011E 2012E
Share Capital 851 851 851 851 851
Share Warrants 312 312 312 312 312
Reserves 17,683 18,174 19,840 22,477 25,921
Misc. Exp. 0 0 0 0 0
Total Shareholders Fund 18,846 19,337 21,002 23,640 27,084
Minority Interest 936 936 936 936 936
Debt 16,338 14,936 13,199 11,890 10,923
Non-FCCB Debt 13,375 10,700 8,560 6,848 5,478
FCCB Debt 2,963 4,236 4,639 5,042 5,445
Total Liabilities 36,120 35,209 35,138 36,466 38,943
Assets
Gross Block 2,395 2,993 3,142 3,771 4,336
Accumulated Dep. 432 812 1,158 1,547 1,961
Net Block 1,964 2,181 1,984 2,224 2,375
WIP 597 150 628 566 650
Net Fixed Assets 2,561 2,330 2,612 2,790 3,026
Goodwill 704.68 704.68 704.68 704.68 704.68
Investments 142 142 142 142 142
Current Assets
Inventories 12,366 12,379 12,104 13,616 15,659
Sundry Debtors 22,825 24,070 27,233 30,864 34,450
Cash in Hand 11,230 10,201 8,421 6,861 6,182
Loans & Advances 3,772 3,514 3,866 5,301 6,097
Current Liabilities 16,725 17,348 19,083 22,779 26,126
Provisions 758 786 865 1,037 1,193
Net Current Assets 32,710 32,029 31,676 32,827 35,068
Deferred Tax Assets 3 3 3 3 3
Total Assets 36,120 35,209 35,138 36,466 38,943

46
Cash Flow Statement
Particulars (in Rs. mn) 2008 2009E 2010E 2011E 2012E
PBIT 2,584 1,235 2,428 3,351 4,136
Add : Depreciation 201 381 346 388 415
Add: Provision for FCCBs - 1,273 403 403 403
(Inc)/Dec in WC (5642) (348) (1,426) (2,711) (2,921)
Taxes Paid (213) (60) (202) (320) (418)
CF from Operations (3,070) 2,481 1,549 1,110 1,614
(Inc)/Dec in FA (1233) (597) (150) (628) (566)
(Inc)/Dec in Capex (121) 448 (479) 63 (85)
(Pur)/Sale of Investments 87 - - - -
Misc. (Expenses)/Income 989
CF from Investments (278) (150) (628) (566) (650)
Increase Equity 186 - - - -
Premium from Equity Issue 6778 - - - -
Issue of Share Warrants 312 - - - -
Increase in Debt 1,749 (1,402) (1,737) (1,309) (967)
Provision for FCCBs 0 (1273) (403) (403) (403)
Interest Paid (621) (684) (560) (393) (274)
CF from Fin. Activity 8,404 (3,359) (2,700) (2,105) (1,643)
Inc/Dec of Cash 5,056 (1,028) (1,780) (1,560) (679)
Add: Beginning Balance 6174 11,230 10,201 8,421 6,861
Closing Balance 11,230 10,201 8,421 6,861 6,182

47
Shipping Bharati Shipyard Limited

GA BOND RATING : 2
YIELD / GOOD CREDIT : BUY

CMP 81 FCCB Description


Nominal Value 10 BOND NAME BHARATI SHIPYARD USD 0.000 '10
BSE Sensex 9,840 (BHSL IN) Iss'd 12/05 USD80m
Stock Statistics COUPON (% p.a) 0
Bloomberg code BHSL IN ISSUE SIZE ($m) 80
Reuters Code BHAR.BO AMOUNT OUTSTANDING( $m) 46.9
BSE code 532609 MATURITY 12/13/2010
NSE code BHARTISHIP TOTAL REDEMPTION AMOUNT($m) 56
ISIN No. INE673G01013 REDEMPTION AT MATURITY 119.86
Market Cap (mn) Rs. 2,043 ($39) YTM & YTP (%) 27.96 -
52 Wk High/Low (Rs.) 865 / 63 CONVERSION PRICE (INR) 497.89
NSE Avg Daily Vol(12 m) 47,358 PARITY 16.735
BSE Avg Daily Vol(12 m) 26,663 INDICATIVE BOND PRICE 85.50
PREMIUM 410.9
Shareholding Pattern
COUPON YIELD 0%
Particulars No. of shares in %
Promorter 10,010,219 36.3 BOND FLOOR 113.4
MFs/FIs/Banks 10,122,603 36.7 CREDIT SPREAD 1000bp
FIIs 3,722,695 13.5 FAIR VALUE 113.4
PCB 858,829 3.1 Source: Company & Global Absolute Research
Public 2,854,954 10.4
Recommendation: BUY BONDS AS YIELD PLAY
Total 27,569,300 100
Bharati Shipyard Ltd (BSL) is a value & growth play in the domestic shipbuilding
Stock Performance industry. BSL enjoys strong shipbuilding capabilities in special category ships like
In % 1m 3m 6m anchor handling tugs (AHTS), offshore supply vehicles (OSVs) and rigs, which
Absolute -26 -75 -84 require superior engineering and delivery skills, developed by it over a period of
Relative -16 -39 -40 time. This is reflected by the strong order book position of Rs. 48.3bn, which is 6.8x
FY08 sales.
Research Analyst
Deepika Agarwal Of the entire FCCBs of USD 100mn, USD 48.3mn FCCBs are left for conversion.
91-124-4386140 Though, the share price of the company is trading at Rs. 81 currently, the
conversion price of its bonds for its 1st FCCB (of which only USD 1.4mn is left) is at Rs.
140 497.9, to be redeemed by Dec.’08. We believe, the company has more than
120 sufficient balance to redeem its 1st FCCB issue. The balance USD 46.9mn from the
2nd FCCB are convertible at a share price above 421.94 or, redeemable by FY11.
100

80 With a Global Absolute Bond Rating of 2, we believe that BSL may be able to fully
cover its FCCB liability from its operational income. . Though the Average FCCB
60
Redemption Cover is very low at 0.31x, in the year FY11, yet the Company has
40
favourable debt to equity ratio of 0.7x and a comfortable interest cover of 8.5x in
20 Sens ex BHSL IN EQUITY FY08. The current year GA credit score of 10.8 and increasing ROE imply that the
0
company should be readily able to refinance its debt. By FY11, we expect the
No v-07 Jan-08 M ar-08 M ay-08 Jul-08 Sep-08 Company’s debt/equity ratio to decline to 0.3x from the current 0.7x, thus improving
its ability to refinance its debt further. We expect an average annual cash inflow
Chairman: Mr. PC Kapoor & Vijay Kumar from operations of the company of USD 37mn upto the redemption date.
Registered 606 Raheja Chambers
(BHSL IN) Iss'd12/05 USD 80mn FCCB is currently trading at an attractive yield of
Office: 6th Floor Nariman Point
27.96%. As we believe BSL may not face any major issues in the repayment of its
Mumbai, Maharashtra
FCCBs liabilities, particularly through refinancing using its strong balance sheet we
Website: www.bharatishipyard.com
Recommend a BUY on its 12/05 FCCBs as a yield / good credit play.

48
Equity Analysis revenues, which is spread over the period FY08E-FY11E.
About 60% of BSL’s order book is tilted towards
The voyage at Bharati Shipyard began in 1973 with a small offshore segment like AHTS, OSVs and oil drilling rig,
shipbuilding facility at Ratnagiri. It started building small which requires superior quality engineering and
barges and fishing vessels and trawlers. Over the years, delivery skills sets. BSL’s existing client list includes some
Bharati has expanded the capacity, capability and eminent names like Reliance Industries Ltd, GE
product range of its vessels manifold. The Ratnagiri Shipping, Bombay Port Trust, MK Shipping, Germany,
Shipyard, started as a small drop in the ocean has grown Qatar Shipping Co, Qatar, Bourbon and others.
several times during the last 30 years, and is today one of the
most advanced Shipyards of the Company. The yard is now n BSL currently has multi-located shipbuilding facilities at
building sophisticated vessels required for the offshore Ratnagiri, Ghodbunder, Kolkata and Goa. Bharati has
industry, including OSVs, MSVs, PSVs, AHTSs, etc. Besides this, increased its capacity from a meager 9,000DWT to
the Company has shipbuilding yards at Goa and Kolkatta 15,000DWT at Ratnagiri to ensure the appropriate
engaged in shipbuilding and ship repairs. execution of its healthy order book.

We expect BSL to report top line and bottom line growth at a n The Company’s net fixed assets as on 31st March’08
CAGR of 23% and 10% respectively for the period FY08- was Rs. 4.3bn which include Rs. 2.6bnmn as work in
FY011E, on account of strong order book position and its progress.
expertise in the offshore shipbuilding. We also expect BSL to
n The Company’s Long-term debt/Fixed asset Ratio is at
report strong ROCE and RONW of 18.1% and 18.9%
1.0. Fixed assets are just adequate to cover the long-
respectively for FY09E, backed by consistent improvement
term liabilities of the company.
in its financial performance. At the CMP of Rs. 81, the stock
trades at a PE of 1.8x TTM EPS of Rs. 44.3 and P/BV of 0.42xTTM
Profitability analysis
Book value of Rs. 207.8.
n In FY08, the company’s sales revenue registered a
A brief analysis of Company's financial health decline of 10.7% YoY but due to superior quality
engineering and better operational efficiency was
Asset analysis
able to improve bottomline by 47% YOY.

n BSL is the second largest private shipbuilding player in


n For H1FY09, BSL has posted strong growth in its
the Indian shipbuilding sector. The Company has also
financial performance. Its sales and EBITDA grew by
undertaken Greenfield expansions at Dabhol and
34.7%% and 41.1% YoY, respectively. Net profit for
Mangalore which are going to be two of the most
H1FY09 was up by 30.9% to Rs. 628.2mn.
technologically advanced yards in India. After the set
up of Mangalore facility, BSL can build vessels upto n For FY08-FY11, we expect BSL’s sales and net profit to
60,000 DWT with maximum length upto 270 mtrs. Both grow at a health rate of 19.5% and 19.8% CAGR,
the yards will be capable of building larger vessels respectively.
upto Aframax and Handymax size respectively. The
Dabhol yard is also capable of building Jack-up Drill Liquidity & Credit analysis

Rigs.
n Despite being an asset based company, BSL has a

n BSL is expected to relocate the assets of Swan Hunter very high interest coverage ratio of 8.5x.

Shipyard to Mangalore shipyard. It acquired assets of


n Its Debt/Equity ratio is also very low at 0.7x.
Swan Hunter for a total consideration of Rs. 2.5bn.

n Out of the total debt of the company, i.e, Rs. 4.3bn


n Swan Hunter has proven expertise in building ships of
(FY08), FCCBs current bonds amount consists of Rs.
more than 150,000DWT, , going ahead, we expect BSL
2.23bn (principal).
to use the acquired assets to build higher capacity
ships which will improve margins and lift the company
towards the higher shipbuilding league. BSL currently
has a strong order book of Rs. 48.3bn i.e. 6.8x of FY08

49
Global Absolute Bond Rating Analysis Baseline Indicator III: Sustainable Growth Analysis

The company has a Bond Rating of 2, thus implying adequate The Sustainable Growth model is a combination of four
refinancing capability to redeem existing FCCB liability. ratios, and measures the maximum rate of growth in
revenue that can be sustained without obtaining additional
The weightages used for the bond score are as follows: outside funding. The maximum sustainable growth in total
revenue is calculated for each year, and is then compared
Redemption Cover 60% Highest weightage since it is cash
to the actual calculated growth rate in total revenue, from
based and includes future
the prior year to the current year.
projections
GA Credit Score 20% Insolvency Rating (Historical), Particulars 200603 200703 200803
therefore lower weightage NET SALES REVENUE 2,010.80 2,338.80 2,090.80
DuPont 20% Asset and Equity based (Historical), MAXIMUM SUSTAINABLE
therefore lower weightage GROWTH IN REVENUE - 27.89% 17.19%
HISTORIC GROWTH IN
Baseline Indicator I: FCCB Redemption Cover NET SALES - 16.31% -10.60%
HISTORIC GROWTH IN NET
Global Absolute Research has created a Cash Flow Analysis SALES (ROLLING AVERAGE) - 8.16% 1.90%
Tool to examine the number of times that the FCCB
redemption amount is covered by net cash. The higher the Based upon the audited financial statements for the year
cover the lesser the possibilities of default on the FCCB ending 2008/03, the Company's revenues declined by
redemption date, by the company. It is to be noted that the 10.6% compared to the prior year. The data for 3 years
company may be able to redeem its FCCBs, as long it has included in the analysis indicates an increase in revenues by
strong credit and ability to re-finance, even if the ratio is low an average of 1.9%.
(where the ratio is less than 1x).
We believe that the company may not require additional
Based on our analysis, the Company’s FCCB Redemption finance to sustain its current growth momentum.
Cover is very low at 0.23x in FY12 and average FCCB
Redemption Cover of 0.31x upto the redemption date, Baseline Indicator IV: DuPont Formula Analysis
indicating that the company may not have adequate
FCCB coverage from its operational income. However, BSL The DuPont Formula for Return on Assets and Return on

currently has very low leverage of 0.7x as on 31st Mar.’08, Equity ratios are calculated for each full year of the historic

which is further expected to decline to 0.4x by FY11 (based financial statements. The ratios are presented here as an

on our assumptions). Also, the already high interest alternate way to evaluate the quality of the Company's

coverage of 8.5x in FY08 is expected to further improve to Return on Equity and to help identify potential weaknesses.

35.6x by FY12. For the period FY08-FY12, the average interest


Particulars 200603(12) 200703(12) 200803(12)
coverage ratio is expected to be 18.1x. Thus, BSL may be
DUPONT RETURN ON
easily able to refinance its debt and repay all its obligations.
EQUITY 30.21% 31.26% 18.89%

Baseline Indicator II: GA Credit Score Risk Assessment DUPONT RETURN ON


EQUITY (ROLLING AVG.) - 30.74% 26.79%
The GA Credit Score is a predictive model that indicates the
likelihood of a company becoming insolvent within the next
twelve months. The DuPont Analysis indicates that ROE for the most recent
financial statement is 18.89%, which even though is a
The Company has a current year GA Credit Score of 10.59 decent return, has declined sharply, on account of
(See Appendix I, Section GA credit Score for Explanation). aggressive capex, (which is expected to generate higher
With such high credit scoring, we believe it is highly unlikely margins in future) by 1237bps from the previous year. Also,
for BSL not having the ability to repay its debts. the ROE for the current year is lower than the rolling average
Particulars 200603(12) 200703(12) 200803(12) of 26.79% for the three years included in this analysis.
Total CREDIT SCORE 10.62 10.07 10.59
Change over Prior Year - -0.54 0.52

50
DuPont Asset Turnover DuPont Financial Leverage

The first component of the DuPont formula is the Asset The third component is the Financial Leverage ratio, which
Turnover ratio, which measures the number of rupees of measures the number of rupees of Assets that the Company
Sales Revenue generated for each rupee of Assets. The is carrying for every rupee of Equity.
Asset Turnover ratio has declined YoY in the last two years to
0.20 in FY08 from 0.27 in FY06, as the sales have declined by Particulars 200603 200703 200803
FINANCIAL LEVERAGE RATIO 4.34 3.50 1.81
10.6% YoY, whereas the total tangible assets have grown to
Rs. 10bn in FY08 from Rs.7.9bn in FY07.
The Financial Leverage ratio decreased compared to the
Particulars 200603 200703 200803
prior year. The change in Leverage was driven by an
ASSET TURNOVER RATIO 0.27 0.29 0.20
increase in Total Assets of Rs. 2,109.6mn and an increase in
Tangible Net worth of Rs. 3346.4mn.
DuPont Return on Assets
Notes:
The second component of the DuPont formula is the Return
on Assets (ROA) ratio, which measures the amount of Net It is to be noted that the rolling average for FY07 has not

Income that is generated for each rupee of Assets. The ROA been calculated for certain companies due to the

ratio has increased compared to the prior year. The change unavailability of the required data.

in ROA was driven by a more than proportionate increase in


Net Profit after Tax by 45.2% YoY, as compared to an
increase in Total Assets by 18% YoY.

Particulars 200603 200703 200803


DUPONT RETURN ON ASSETS 6.96% 8.93% 10.42%

More than proportionate increase in net profit over Assets


signifies higher profit generation ability of additional
acquired assets.

51
Financials Projection
SECTION 1: CASH INFLOW ESTIMATE (in Rs. mn)
Particulars Mar-08 Mar-09 Mar-10 Mar-11
Revenue 7,082 9,160 10,534 12,114
EBITDA 1,924 2,489 2,862 3,291
Less: DA 81 144 209 237
Less: Prov. For FCCB 0 309 157 156
EBIT 1,843 2,036 2,495 2,898
Less: Interest 216 212 135 82
EBT 1,627 1,824 2,361 2,816
Less: Tax 558 622 805 960
Net Profit after tax 1,069 1,202 1,556 1,856
Cash from Operations 1,151 1,655 1,923 2,250
Cash from Operations (USD) 22 32 37 43
Section 2: Working Cap and Investment/Capex
Working Capital Changes (7,081) (1,101) (728) (837)
Changes from Investing/Capex Activities 574 (2,120) (1,060) (358)
Net Cash from W/Cap and Investment/Capex (6,507) (3,221) (1,788) (1,195)
Net Cash from W/Cap & Invest/Capex ($mn) (126) (62) (35) (23)
Section 3: Financing Activities
Changes Equity & Share premium 2,370 (309) (157) (156)
Changes in Debt 1,239 (99) (250) (252)
Net Cash from Financing Activities 3,609 (408) (408) (408)
Net Cash from Financing Activities ($mn) 70 (8) (8) (8)
Section 4: Net Cash Available for FCCB
Opening Net Cash Balance 4,017 2,270 296 23
Net Cash Flow For the Year (1,747) (1,974) (273) 647
Closing Net Cash Available for FCCB 2,270 296 23 670
Closing Net Cash Available for FCCB ($mn) 44 6 0 13
SECTION 5: FCCB REPAYMENT LIABILITY
Original Issue Size (USD) 100 100 100 100
Less: Amount already converted (USD) 52 53 53 53
FCCB O/S (USD) 48 47 47 47
Add: Premium on Redemption 1 3 3 3
Total Payable on maturity date (USD) 49 50 53 56
Total Payable on maturity date (Rs.) 2,533 2,587 2,744 2,900
SECTION 6: RATIO ANALYSIS
Current M Cap Rs. Mn 2,043
Currernt M Cap USD Mn 39
Networth (Rs.) 5,758 6,960 8,516 10,372
Networth (USD) 111 134 164 200
Debt (Rs.) 4,317 4,218 3,968 3,716
Debt / Equity 0.7 0.6 0.5 0.4
EBITDA / Debt 0.4 0.6 0.7 0.9
Interest Coverage Ratio 8.5 9.6 18.5 35.5
SECTION 7: FCCB COVER
FCCB redemption ratio 0.90 0.11 0.01 0.23
FCCB Lia / Current M Cap 1.24 1.27 1.34 1.42
All USD / Irs. Figures are in millions.
Source: FY07 taken from Company Annual Report and results are consolidated.
* USD @ 51.8

52
GA CREDIT SCORE ANALYSIS
Credit Score: Risk Assessment Weight 200603(12) 200703(12) 200803(12)
Ratio 1 NET WORKING CAPITAL / TOTAL TANGIBLE ASSETS 6.56 85.87% 70.55% 58.29%
Ratio 2 RETAINED EARNINGS / TOTAL TANGIBLE ASSETS 3.26 19.98% 25.83% 52.48%
Ratio 3 EBIT / TOTAL TANGIBLE ASSETS 6.72 12.49% 15.69% 18.28%
Ratio 4 TANGIBLE NETWORTH / TOTAL TANGIBLE ASSETS 1.05 23.05% 28.57% 55.15%
CONSTANT 3.25 3.25 3.25
GA CREDIT SCORE 10.62 10.07 10.59
Sustainable Growth Ratio
Ratio 5 NET PROFIT MARGIN 25.38% 31.30% 51.48%
Ratio 6 RETENTION RATIO 87.42% 89.21% 91.01%
Ratio 7 MAXIMUM SUSTAINABLE GROWTH IN REVENUE 26.41% 27.89% 17.19%
HISTORIC GROWTH IN NET SALES 16.31% -10.60%
HISTORIC GROWTH IN NET SALES (ROLLING AVERAGE) 8.16% 1.90%
DIFFERENCE FROM MAXIMUM -11.58% -27.80%
Dupont Analysis
Ratio 8 DUPONT RETURN ON EQUITY 30.21% 31.26% 18.89%
DUPONT RETURN ON EQUITY (ROLLING AVERAGE) 30.74% 26.79%
Ratio 9 DUPONT ASSET TURNOVER 0.27 0.29 0.20
Ratio 10 DUPONT RETURN ON ASSETS 6.96% 8.93% 10.42%
Ratio 11 DUPONT FINANCIAL LEVERAGE 4.34 3.50 1.81

Glossary of Financial Terms - Asset use efficiency, which is measured by total asset
turnover
1. Retention Ratio:
- Financial leverage, which is measured by the equity
This ratio measures the proportion of net profit after tax
multiplier
that is not paid out as dividends but retained in the
business. Calculated as:
Calculated as: ROE = Profit Margin (Profit/Sales) * Total Asset Turnover
(Sales/Assets) * Equity Multiplier (Assets/Equity)
= (Net Profit After Tax – Dividends) / Net Income
5. Rolling Average:
2. Asset Turnover:
The average of a security constructed in a period as
This ratio Indicates the relationship between assets
short as a few days or as long as several years and
and revenue and measures the amount of sales that
showing trends for the latest interval. As each new
are generated from each dollar of assets.
variable is included in calculating the average, the
Calculated as: last variable of the series is deleted.
= Net Revenue / Total Assets 6. DuPont Asset Turnover Ratio:
3. Sustainable Growth Rate: Calculated as:
The maximum growth rate that a firm can sustain = Gross Revenue / Total Tangible Assets
without having to resort to additional borrowings or
7. DuPont Return on Assets:
increase financial leverage.
It is a financial ratio that shows how the return on assets
Calculated as:
depends on both asset turnover and profit margin.
= ROE x Retention Ratio The DuPont method breaks out these two
components from the return on assets ratio in order to
4. DuPont Return on Equity:
determine the impact of each on the profitability of
The DuPont method breaks the return on equity (ROE) the company.
down into three parts: a) profit margin, b) asset
This ratio helps to highlight the impact of changes in
turnover and c) financial leverage.
asset turnover and profit margin.
DuPont Method tells us that ROE is affected by three
Calculated as:
things:
ROA DuPont = (Net Profit After Tax / Net Sales) x (Net
- Operating efficiency, which is measured by profit
Sales / Total Assets)
margin

53
Income Statement
Particulars (in Rs. mn) 2008 2009E 2010E 2011E
Net Sales 7,082 9,160 10,534 12,114
Cost of Sales 5,158 6,671 7,672 8,823
EBITDA 1,924 2,489 2,862 3,291
Depreciation 81 144 209 237
Prov. For Premium on FCCB 309 157 156
EBIT 1,843 2,036 2,495 2,898
Interest 216 212 135 82
EBT 1,636 1,824 2,361 2,816
Tax 558 622 805 960
PAT 1,078 1,202 1,556 1,856

Balance Sheet
Particulars (in Rs. mn) 2008 2009E 2010E 2011E
Share Capital 276 276 276 276
Reserves 5,512 6,714 8,270 10,126
Misc. Exp. 30 30 30 30
Total Shareholders Fund 5,758 6,960 8,516 10,372
Minority Interest 13 13 13 13
Debt 4,317 4,218 3,968 3,716
Non-FCCB Debt 2,039 1,631 1,223 816
FCCB Debt 2,278 2,587 2,744 2,900
Deffered Tax 304 304 304 304
Total Liabilities 10,391 11,495 12,800 14,405
Assets
Gross Block 1,983 4,606 6,726 7,786
Accum Dep. 274 418 627 864
Net Block 1,709 4,189 6,100 6,922
WIP 2,623 2120 1060 358
Net Fixed Assets 4,333 6,309 7,160 7,280
Investments 34 34 34 34
Goodwill 3 3 3 3
Current Assets
Inventories 6,016 7,781 8,948 10,290
Sundry Debtors 1,865 2,412 2,774 3,190
Cash in Hand 2,270 296 23 670
Loans & Advances 2,918 3,775 4,341 4,992
Current Liabilities 6,033 7,803 8,973 10,319
Prov. 1,015 1,313 1,510 1,736
Net Current Assets 6,021 5,148 5,603 7,087
Total Assets 10,391 11,495 12,800 14,405

54
Cash Flow Statement
Particulars (in Rs. mn) 2008 2009E 2010E 2011E
PBIT 1,843 2,036 2,495 2,898
Add : Depreciation 81 144 209 237
Add: Prov. For Premium on FCCB - 309 157 156
(Inc)/Dec in WC -7081 (1,101) (728) (837)
Taxes Paid (558) (622) (805) (960)
CF from Operations (5,715) 766 1,329 1,494
(Inc)/Dec in FA (314) (2,623) (2,120) (1,060)
(Inc)/Dec in Capex (1,648) 503 1,060 702
(Pur)/Sale of Investments -15 - -
Misc. Expenses 2,552
CF from Investments 574 (2,120) (1,060) (358)
Increase Equity 51 - - -
Increase/decrease in Share premium 2,320 (309) (157) (156)
Increase in Debt 1,239 (99) (250) (252)
Interest Paid (216) (212) (135) (82)
CF from Fin. Activity 3,393 (620) (542) (489)
Inc/Dec of Cash (1,747) (1,974) (273) 647
Add: Beginning Balance 4017 2,270 296 23
Closing Balance 2,270 296 23 670

55
Packaging UFLEX Limited

GA BOND RATING : 1
YIELD / GOOD CREDIT : BUY

CMP 61 FCCB Description


Nominal Value 10 BOND NAME FLEX INDUSTRIES USD 4.000 '12
BSE Sensex 9,291 (UFLX IN )Iss'd /20 USD85m
Stock Statistics COUPON (% p.a) 0
Bloomberg code FLXI IN ISSUE SIZE ($m) 85
Reuters Code UFLX.BO AMOUNT OUTSTANDING( $m) 68.6
BSE code 500148 MATURITY 3/9/2012
NSE code UFLEX TOTAL REDEMPTION AMOUNT($m) 84.1
ISIN No. INE516A01017 REDEMPTION AT MATURITY 121.89
Market Cap (mn) Rs. 3,931 ($76) YTM & YTP (%) 32.82 -
52 Wk High/Low (Rs.) 253 / 58 CONVERSION PRICE (INR) 164.02
NSE Avg Daily Vol(12 m) 35,722 PARITY 34.24
BSE Avg Daily Vol(12 m) 10,826 INDICATIVE BOND PRICE 55.00
Shareholding Pattern PREMIUM 60.6
Particulars No. of shares in % COUPON YIELD 7%
Promoters 27,397,373 42.2 BOND FLOOR 94.3
FIIs 1,896,462 2.9 CREDIT SPREAD 1000bp
Mutual Funds & UTI 171,300 0.3 FAIR VALUE 97.9
Banks/FIs/Insur Co 78,830 0.1 Source: Company & Global Absolute Research

PCBs 15,107,988 23.2


Foreign Corp. 8,735,000 13.4 Recommendation: BUY BONDS AS YIELD PLAY
Indian Public 6,097,702 9.4
Uflex is one of the biggest multi integrated packaging groups in the world. Uflex has
NRIs/OCBs/Cust. 5,521,991 8.5
its plants located in India and Dubai for manufacturing almost all types of flexible
Total 65,006,646 100.0
packaging products. It provides all types of packaging & printing machines, and
Stock Performance offers total flexible packaging solutions to the entire world.
In % 1m 3m 6m
Uflex has FCCBs, which will mature in March 2012 ($ 84mn). With a Global Absolute
Absolute -28 -54 -56
(GA) Bond Rating of 1, we believe that Uflex would comfortably be able to pay its
Relative -21 -17 -10
FCCB liabilities, through cash generated from operations alone. This is supported
Research Analyst
Suranjoy Singh by the average five years FCCB Redemption Cover of 0.92x (1.73x in 2012), and a
91-124-4386140 current year GA credit score of 6.72, thus implying that it has strong capacity to pay
160 interest and the principal amount. Moreover, DuPont analysis shows that the
U flex Vs Sensex
140 growth, profitability and financial leverage are in line with the industry's average.
120 The average interest coverage ratio for 5 years is around 5.0x. Uflex has
100
debt/equity ratio of 1.9x, which is expected to decline to around 0.6x by FY12. Uflex
80
has strong current cash flows, and we have forecasted an average annual cash
60
inflow from operations of around USD 68 million upto the redemption dates.
40

20 Uflex Sensex (UFLX IN) Iss'd /20 $ 85mn is currently trading at an attractive yield of 32.82%. We
0 believe that, if needed, Uflex could comfortably pay its FCCBs liabilities by re-
Jan-00 Jan-08 Feb-08 Apr-08 Jun-08 Jul-08 Sep-08 Nov-08
financing, as an alternative to simply using cash generated from operations, as
Chairman: Mr. Ashok Kumar Chaturvedi they have strong cash in hand (Rs. 2.7bn) and liquid Investments (Rs. 1.4bn) in the
Registered A-107-108, balance sheet, which together is around Rs. 4.2bn ($ 81.5mn). Moreover, almost
Office: Sector-IV, the entire Uflex capex plans are executed in FY08, which implies that there are a
Noida, U.P. - 201 301 few future drains on cash, and therefore we recommend a BUY rating on the
Website: www.flexfilm.com FCCBs as Yield Play.

56
Equity Analysis 610mn (to be completed in FY09). Uflex is also expanding
the Dubai manufacturing plant for producing polyester and
Uflex (the erstwhile Flex Industries Ltd) was set up in 1988 by
polypropylene films, and is expected to be commissioned
Ashok Chaturvedi. At present, the company has the
by September 2009.
capacity to produce 54,000tpa of BOPET film and 28,000tpa
of BOPP film in India. Additionally, it has a laminates Uflex has mostly completed its capex plans by increasing its
(packaging material) capacity in India of 37,000tpa. Uflex debt. Due to the oversupply situation in the industry and the
also has wholly-owned subsidiaries in the US and Europe for higher raw materials price, Uflex’s margins were under
trading in packaging films and packaging equipment. Uflex pressure. However, going ahead, the margins are expected
has a 100% subsidiary in Dubai, with a BOPET film capacity of to increase due to lower commodity prices. Besides this,
44,400tpa. Uflex also has a realty subsidiary, and has Uflex’s Dubai plant is strategically located where the
invested Rs. 1bn in FY07. demand for flexible packaging is quite high. Thus, we are
expecting a growth in revenues at a CAGR of around 21%.
Uflex is currently trading at a PER of 3.6x and 3.0x on its FY08
and FY09E earnings respectively. The company’s Flexible Industry Scenario
price/book value per share is trading at a comfortable level
The flexible packaging industry at the global level is large
of around 0.5x. In terms of EV/EBITDA it is also trading at an
and offers opportunities for growth, particularly in
attractive level of around 3.5x and 3.0x on its FY08 and FY09E
associated film substrates. Since 2000, world's BOPP film
EBITDA respectively. Uflex is one of the leading
demand has grown by an average of 8.7% per annum to
manufacturers in the flexible packaging biaxially-oriented
reach an estimated 4.95mn tonnes in 2007. The Central and
polyethylene terephthalate (BOPET) and biaxially-oriented
East Asian region, which includes South Korea, Japan and
polypropylene (BOPP) industry in India, as well as its
China, is now the world's largest consumer of BOPP films
integrated operations (polyethylene terephthalate (PET)
accounting for 46% of demand.
chips, packaging films, inks, rotogravure cylinders and
machines). Uflex is the only major producer of packaging Historically, the Indian packaging market is growing year on
films in India to have forward integration into laminates year at around 14%-20%, and it is expected to grow at a
(production of packages including printing). higher rate of around 20% - 25%. Changing consumer tastes
in every field is placing new demands in the packing
The flexible packaging industry has been subject to supply-
industry, laminated products including form-fill-seal
led cyclicality in the past. Also, the high leverage for any firm
pouches, laminated tubes and tetra packs. The large
in this industry is a major concern. The flexible packaging
growing middle class, liberalization and organized retail
industry has been facing pricing pressures and cost
sector are the catalysts to growth in packaging
pressures simultaneously for the past three years. The prices
products/materials. Fast changing food habits are also likely
of basic raw materials (purified terephthalic acid (PTA),
to give boost to the flexible packaging market, especially
monoethylene glycol (MEG), and polypropylene (PP)
the pouch and microwave friendly products.
granules) are linked to petroleum prices, and have
therefore gone upwards during this period. Moreover, due In-spite of the rapid growth achieved by the Indian
to the over capacity condition of flexible packaging, packaging industry in the past few years, the per capita
globally and domestically, the industry has not been able to consumption of packaging (paper/board and plastics
pass the raw material prices fully. This, coupled with packaging) in India is still very low at around USD 15, against
intermittent pricing pressure on the finished product, the world’s average of around USD 100.
resulted in lower EBITDA profitability for the industry as a
A brief analysis of Company's financial health
whole.
Asset analysis
The company's net profit profitability fell sharply to around
5.2% in FY07, and improved to 6.2% in FY08. We are n Uflex has 10 manufacturing plants in India and 1
expecting the commodity prices to remain low, and manufacturing plant in Dubai.
margins to improve further in FY09 to FY11. Besides this,
n The company's total net fixed assets at present are at
Uflex’s profitability would be further supported by an
Rs. 13bn.
increase in other operating income on account of design
and art work, technical fees, etc. Uflex is setting up a distillery n Uflex debt/net asset is comfortably leveraged at 1.1x
plant of 90KL/day to produce alcohol at the cost of Rs. in FY08, decreasing upto 1.03x in FY12.

57
Profitability analysis Baseline Indicator I: FCCB Redemption Cover

Uflex has performed well in FY08, with a growth of around Global Absolute Research has created a Cash Flow Analysis
18% in total revenue. Net profit went up by around 42%, and Tool to examine the number of times that the FCCB
the company was able to sustain the margin, even when redemption amount is covered by net cash. The higher the
there was a rise in crude oil prices and the industry was cover, the less the chances of the company to default on
facing a situation of overcapacity. We are expecting some the FCCB redemption date. It is to be noted that even when
slowdown in revenues in FY09, due to the global slump. the ratio is low (where the ratio is less than 1x), the company
However, we expect the company to grow at a CAGR of may still be able to redeem the FCCBs as long as it has strong
around 21% from FY08 to FY12E. Moreover, due to a credit and can re-finance.
substantial completion of its entire capex plans, coupled
The company has an average five years FCCB Redemption
with lower commodity prices, the margins are expected to
Cover of 0.92x (the redemption cover for FY12 is 1.73x) upto
get better.
the redemption date, indicating strong cover and very high
Liquidity & Credit analysis chances of having the ability to repay its FCCBs liabilities.

n Uflex's interest coverage ratio is at a very comfortable Baseline Indicator II: GA Credit Score Risk Assessment
position at around 2.5x.
The GA Credit Score is a predictive model based on the Z-
n The company is comfortably leveraged at around score rating that indicates the likelihood of a company
1.9x, decreasing upto 0.6x in FY12. becoming insolvent within the next twelve months.

n Out of the total debt of the company, i.e. Rs. 14.49bn The Company has a current year GA Credit Score of 6.72,
(FY08), FCCBs amount consists of Rs. 2.75bn. Uflex has which places the Company in the “Green zone”, indicating
Rs. 2.76bn as cash in hand and another Rs. 2.9bn (Rs. a comfort zone to the investors, as the company would be
1.45bn, after 50% discounted) as investments in the unlikely to become a financially distressed company in the
balance sheet. The total amount is around Rs. 4.21bn near future. This is a decline from the previous year’s Z-Score
(50% discounted investment and cash in hand). On of 7.45.
the other hand, the FCCBs outstanding payment
obligation on maturity is around Rs. 4.3bn ($ 84mn), Particulars March 2006 March 2007 March 2008
which is almost the same as total cash in hand and the TOTAL CREDIT SCORE 6.58 7.45 6.72
amount available for investment in FY08. CHANGE OVER PRIOR YEAR - 0.88 -0.74

Particulars Amount in Amount in


Rs. (Mn) Dollar (Mn)
Baseline Indicator III: Sustainable Growth Analysis
FCCBs liabilities on maturity (2012) 4,337 84.1
Cash in hand (FY08) 2,766 53.39 The Sustainable Growth model is a combination of four
Investment (FY08) (50% discounted) 1,454 28.06 ratios, and measures the maximum rate of growth in
Total (Cash in Hand + Investment) 4,220 81.45 revenue that can be sustained without obtaining additional
outside funding. The maximum sustainable growth in total
Global Absolute Bond Rating Analysis revenue is calculated for each year, and is then compared
to the actual calculated growth rate in total revenue, from
The company has a Bond Rating of 1, thus implying that it
the prior year to the current year.
has strong credit and high chances of having the ability to
redeem the FCCBs liabilities. The weightages used for the
bond score are as follows: Particulars March 2006 March 2007 March 2008
NET SALES REVENUE 10,659.10 13,920.30 16,389.30
Redemption Cover 60% Highest weightage since it is cash MAXIMUM SUSTAINABLE
based and includes future GROWTH IN REVENUE - 10.84% 12.70%
projections HISTORIC GROWTH IN
GA Credit Score 20% Insolvency Rating (Historical), NET SALES - 30.60% 17.74%
therefore lower weightage HISTORIC GROWTH IN
DuPont 20% Asset and Equity based (Historical), NET SALES (ROLLING AVER.) - 15.30% 16.11%
therefore lower weightage

58
Based upon the audited financial statements for the year DuPont Return on Assets
ending 2008/03, the Company's revenues grew by 17.74%
The second component of the DuPont formula is the Return
compared to the prior year. For the last 2 years of data
on Assets (ROA) ratio, which measures the amount of Net
included in this analysis, revenues have increased by an
Income that is generated for each rupee of Assets. The ROA
average of 24%. The actual growth in revenue for the year
ratio decreased compared to the prior year. The change in
2007 & 2008 is also greater than the Sustainable growth.
ROA was driven by a decrease in asset turnover ratio and
Baseline Indicator III: DuPont Formula Analysis net margins.

The DuPont Formula for Return on Assets and Return on Particulars March 2006 March 2007 March 2008
Equity ratios are calculated for each full year of the historic DUPONT RETURN ON ASSETS 5.00% 4.27% 5.42%
financial statements. The ratios are presented here as an
alternate way to evaluate the quality of the Company's
Return on Equity and to help identify potential weaknesses. An increase in net margin is due to lower operating
expenses, along with an increase in Total Assets, thus
Particulars March 2006 March 2007 March 2008
DUPONT RETURN ON indicating increasing profitability, resulting in a better
EQUITY 13.92% 15.93% 17.47% ultilisation of the company’s assets. The combined effect is
DUPONT RETURN ON an increase in the Return on Asset ratio compared to the
EQUITY (ROLLING AVR.) - 14.93% 15.77% previous year.

DuPont Financial Leverage

The third component is the Financial Leverage ratio, which


The DuPont Analysis indicates that ROE for the most recent
measures the number of rupees of Assets that the Company
financial statement is 17.47%, which is a growth of around
is carrying for every rupee of Equity.
1.54% from the previous year. In addition, ROE for the current
year is higher than the rolling average of 15.77% for the two
years included in this analysis. Particulars March 2006 March 2007 March 2008
FINANCIAL LEVERAGE RATIO 2.78 3.73 3.22
DuPont Asset Turnover

The first component of the DuPont formula is the Asset


The Financial Leverage ratio decreased as compared to
Turnover ratio, which measures the number of rupees of
the prior year. The high leverage was driven by its expansion
Sales Revenue generated for each rupee of Assets. The
programme in Dubai, and domestic manufacturing plants.
Asset Turnover ratio was low at an average of around 0.20 in
We believe that since the capex plans are almost over, we
the last three years.
would be witnessing some de-leveraging in the future.
Besides this, the decreasing financial leverage in FY08
Particulars March 2006 March 2007 March 2008
indicates that the company has the ability to repay some of
ASSET TURNOVER RATIO 0.97 0.77 0.80
its debt.

Notes:
The low asset turnover ratio is due to a huge increase in
capex of around Rs. 3.65bn on account of capex It is to be noted that the rolling average for FY07 has not
programme of the company. However, the capex been calculated for certain companies due to the
programme is almost over, and we are expecting an unavailability of the required data.
increase in the asset turnover ratio from FY10 onwards.

59
Financials Projection
SECTION 1: CASH INFLOW ESTIMATE
Particulars (Rs. mn) Mar-08 Mar-09 Mar-10 Mar-11 Mar-12
Revenues 17,613 20,556 26,223 34,290 38,073
EBITDA 2,954 3,541 5,044 7,061 8,067
Less: DA 851 962 1,004 1,029 1,054
Less: Prov. For Premium on FCCB Reserve - 196 196 196 196
EBIT 2,103 2,384 3,844 5,836 6,817
Less: Interest 833 884 821 846 835
EBT 1,270 1,500 3,024 4,990 5,981
Less: Tax 171 203 916 1,917 2,275
Net Profit after tax 1,098 1,298 2,107 3,073 3,706
Cash from Operations 2,579 3,338 4,128 5,143 5,791
Cash from Operations (USD) 50 64 80 99 112
Section 2: Working Cap and Investment/Capex
Working Capital Changes (1,082) (771) (1,090) (1,821) (760)
Changes from Investing/Capex Activities (6,133) (473) (506) (528) (541)
Net Cash from W/Cap and Investment/Capex (7,215) (1,244) (1,596) (2,349) (1,301)
Net Cash from W/Cap & Invest/Capex ($mn) (139) (24) (31) (45) (25)
Section 3: Financing Activities
Increase from Equity & share premium 2,748 - - - -
Changes in Debt 2,286 (2,231) (813) 552 (498)
Net Cash from Financing Activities 2,392 (3,310) (1,829) (490) (1,529)
Net Cash from Financing Activities ($mn) 46 (64) (35) (9) (30)
Section 4: Net Cash Available for FCCB
Opening Net Cash Balance 5,009 2,766 1,550 2,253 4,557
Net Cash Flow For the Year (2,243) (1,216) 702 2,305 2,961
Closing Net Cash Available for FCCB 2,766 1,550 2,253 4,557 7,518
Closing Net Cash Available for FCCB ($mn) 53 30 43 88 145
SECTION 5: FCCB REPAYMENT LIABILITY
Original Issue Size (USD) 85 85 85 85 85
Less: Amount already converted (USD) 16.4 16.4 16 16 16
FCCB O/S (USD) 69 69 69 69 69
Add: Premium on Redemption 3.8 3.8 3.8 3.8
Total Payable on maturity date (USD) 69 72 76 80 84
Total Payable on maturity date (Rs.) 3,574 3,749 3,945 4,141 4,337
SECTION 6: RATIO ANALYSIS
Current M Cap Rs. Mn 3,931
Currernt M Cap USD Mn 76
Networth (Rs.) 7,752 9,050 11,157 14,230 17,936
Networth (USD) 150 175 215 275 346
Debt (Rs.) 14,495 12,265 11,452 12,004 11,506
Debt / Equity 1.9 1.4 1.0 0.8 0.6
EBITDA / Debt 0.2 0.3 0.4 0.6 0.7
Interest Coverage Ratio 2.5 2.7 4.7 6.9 8.2
SECTION 7: FCCB COVER
FCCB redemption ratio 0.77 0.41 0.57 1.10 1.73
FCCB Lia / Current M Cap 0.91 0.95 1.00 1.05 1.10
All USD / Irs. Figures are in millions.
All balance sheet numbers are at end FY08
* USD @ 51.8

60
GA CREDIT SCORE ANALYSIS
Credit Score: Risk Assessment Weight 200603 (12) 200703 (12) 200803 (12)
Ratio 1 NET WORKING CAPITAL / TOTAL TANGIBLE ASSETS 6.56 0.17 0.37 0.23
Ratio 2 RETAINED EARNINGS / TOTAL TANGIBLE ASSETS 3.26 0.32 0.24 0.28
Ratio 3 EBIT / TOTAL TANGIBLE ASSETS 6.72 0.12 0.10 0.10
Ratio 4 TANGIBLE NETWORTH / TOTAL TANGIBLE ASSETS 1.05 0.36 0.27 0.31
CONSTANT 3.25 3.25 3.25
GA CREDIT SCORE 17.59 6.58 7.45 6.72
Sustainable Growth Ratio
Ratio 5 NET PROFIT MARGIN 5.17% 5.55% 6.79%
Ratio 6 RETENTION RATIO 100.00% 68.03% 72.68%
Ratio 7 MAXIMUM SUSTAINABLE GROWTH IN REVENUE 13.92% 10.84% 12.70%
HISTORIC GROWTH IN NET SALES 30.60% 17.74%
HISTORIC GROWTH IN NET SALES (ROLLING AVERAGE) 15.30% 16.11%
DIFFERENCE FROM MAXIMUM 19.75% 5.04%
Dupont Analysis
Ratio 8 DUPONT RETURN ON EQUITY 13.92% 15.93% 17.47%
DUPONT RETURN ON EQUITY (ROLLING AVERAGE) 14.93% 15.77%
Ratio 9 DUPONT ASSET TURNOVER 0.97 0.77 0.80
Ratio 10 DUPONT RETURN ON ASSETS 5.00% 4.27% 5.42%
Ratio 11 DUPONT FINANCIAL LEVERAGE 2.78 3.73 3.22

Glossary of Financial Terms - Asset use efficiency, which is measured by total asset
turnover
1. Retention Ratio:
- Financial leverage, which is measured by the equity
This ratio measures the proportion of net profit after tax
multiplier
that is not paid out as dividends but retained in the
business. Calculated as:
Calculated as: ROE = Profit Margin (Profit/Sales) * Total Asset Turnover
(Sales/Assets) * Equity Multiplier (Assets/Equity)
= (Net Profit After Tax – Dividends) / Net Income
5. Rolling Average:
2. Asset Turnover:
The average of a security constructed in a period as
This ratio Indicates the relationship between assets
short as a few days or as long as several years and
and revenue and measures the amount of sales that
showing trends for the latest interval. As each new
are generated from each dollar of assets.
variable is included in calculating the average, the
Calculated as: last variable of the series is deleted.
= Net Revenue / Total Assets 6. DuPont Asset Turnover Ratio:
3. Sustainable Growth Rate: Calculated as:
The maximum growth rate that a firm can sustain = Gross Revenue / Total Tangible Assets
without having to resort to additional borrowings or
7. DuPont Return on Assets:
increase financial leverage.
It is a financial ratio that shows how the return on assets
Calculated as:
depends on both asset turnover and profit margin.
= ROE x Retention Ratio The DuPont method breaks out these two
components from the return on assets ratio in order to
4. DuPont Return on Equity:
determine the impact of each on the profitability of
The DuPont method breaks the return on equity (ROE) the company.
down into three parts: a) profit margin, b) asset
This ratio helps to highlight the impact of changes in
turnover and c) financial leverage.
asset turnover and profit margin.
DuPont Method tells us that ROE is affected by three
Calculated as:
things:
ROA DuPont = (Net Profit After Tax / Net Sales) x (Net
- Operating efficiency, which is measured by profit
Sales / Total Assets)
margin

61
Income Statement
Year ended 31 Mar (Rs. mn) FY07 FY08 FY09E FY10E FY11E FY12E
Net sales 13,920 16,389 19,381 24,857 32,623 35,864
growth (%) 18 18 28 31 10
Other Income 995 1,224 1,175 1,366 1,666 2,208
Total Revenue 14,915 17,613 20,556 26,223 34,290 38,073
Operating expenses 12,583 14,659 17,015 21,179 27,229 30,006
Operating Profit 1,337 1,730 2,366 3,678 5,394 5,859
EBITDA 2,332 2,954 3,541 5,044 7,061 8,067
growth (%) #DIV/0! 27 20 42 40 14
Depreciation 815 851 962 1,004 1,029 1,054
Less: Prov. For Premium on FCCB Reserve 0 0 196 196 196 196
EBIT 1,517 2,103 2,384 3,844 5,836 6,817
Interest Paid 489 833 884 821 846 835
Pre-Tax Profit ( before non-recurring item) 1,028 1,270 1,500 3,024 4,990 5,981
Add/(less): Exceptional items 0 0 0 0 0 0
Pre-tax Profit (after non-recurring item) 1,028 1,270 1,500 3,024 4,990 5,981
Tax (Current +Deferred+FBT) 255 171 203 916 1,917 2,275
Net Profit 773 1,098 1,298 2,107 3,073 3,706
growth (%) - 42 18 62 46 21

Balance Sheet
Year ended 31 Mar (Rs. mn) FY07 FY08 FY09E FY10E FY11E FY12E
Current Assets 11,328 11,397 11,774 15,116 21,440 26,078
Investments 186 2,909 2,909 2,909 2,909 2,909
Net Fixed Assets 10,413 13,160 12,671 12,174 11,673 11,160
Other Non-current Assets 0 0 0 0 0 0
Total Assets 21,927 27,465 27,354 30,199 36,022 40,147
Current Liabilities 3,100 4,663 5,485 7,035 9,232 10,150
Total Debt 12,209 14,495 12,265 11,452 12,004 11,506
Other non-current liabilities 1,018 555 555 555 555 555
Total Liabilities 16,328 19,713 18,305 19,042 21,792 22,211
Share Capital 516 650 650 650 650 650
Reserve & Surplus 4,948 6,823 8,121 10,228 13,301 17,008
Warrants 135 279 279 279 279 279
Shareholders Funds 5,599 7,752 9,050 11,157 14,230 17,936
Less: Misc. expenditure 0 0 0 0 0 0
Total Equity & Liabilities 21,927 27,465 27,354 30,199 36,022 40,147
Capital employed 18,826 22,802 21,869 23,164 26,789 29,997

Cash Flow Statement


Year ended 31 Mar (Rs. mn) FY07 FY08 FY09E FY10E FY11E FY12E
EBT & Exceptional items 1,028 1,270 1,500 3,024 4,990 5,981
Depreciation 815 851 962 1,004 1,029 1,054
Prov. For Premium on FCCB Reserve 0 0 196 196 196 196
Net Chg in working capital (1,014) (1,082) (771) (1,090) (1,821) (760)
Cash Flow from operation (a) 970 1,497 2,567 3,037 3,322 5,031
Capital Expenditure (542) (3,640) (473) (506) (528) (541)
Cash Flow from Investing (b) (528) (6,133) (473) (506) (528) (541)
Free Cash Flow (a+b) 441 (4,635) 2,094 2,532 2,794 4,490
Equity Raised / (repaid) 41 114 0 0 0 0
Debt raised / (repaid) 4,054 2,286 (2,231) (813) 552 (498)
Other Financing activities (91) (1,808) (196) (196) (196) (196)
Cash flow from financing (c) 4,330 2,392 (3,310) (1,829) (490) (1,529)
Net Chg in cash flow (a+b+c) 4,772 (2,243) (1,216) 702 2,305 2,961

62
Auto Mahindra & Mahindra Limited

GA BOND RATING : 1
YIELD / GOOD CREDIT : BUY

FCCB Description
CMP 301
BOND NAME MAHINDRA & MAHIN USD 0.000 '11
Nominal Value 10
(MM IN )Iss'd 3/26 USD200m
BSE Sensex 8,937
COUPON (% p.a) 0
Stock Statistics ISSUE SIZE ($m) 200
Bloomberg code MM IN AMOUNT OUTSTANDING( $m) 200
Reuters Code MAHM.BO MATURITY 4/14/2011
BSE code 500520
TOTAL REDEMPTION AMOUNT($m) 256.06
NSE code M&M
REDEMPTION AT MATURITY 128.03
ISIN No. INE101A01018
YTM & YTP 20.27 -
Market Cap (Rs. mn) 77,804 ($1,852) CONVERSION PRICE (INR) 922.04
52 Wk High/Low (Rs.) 874 /236
PARITY 32.24
NSE Avg Daily Vol(12 m) 573,212
INDICATIVE BOND PRICE 80.50
BSE Avg Daily Vol(12 m) 108,040
PREMIUM 149.70
Shareholding Pattern COUPON YIELD 0%
Particulars No. of shares in % BOND FLOOR 98.10
Promoters 68,655,389 26.5 CREDIT SPREAD 1,000bp
FIIs 63,750,649 24.7 FAIR VALUE 99.80
Mutual Funds & UTI 68,499,445 26.5 Source: Company & Global Absolute Research
Banks/FI's/Insur Co 12,219,362 4.7
Private corp. bodies 25029100 9.7 Recommendation: BUY BONDS AS YIELD PLAY
Indian Public 2,132,927 0.8
Others 18,282,493 7.1 Mahindra and Mahindra is a conglomerate with six key businesses, namely –
Total 258,569,365 100.0 automotive, farm-equipment, auto-component manufacturing, steel processing,
hospitality, IT services and infrastructure. It has a dominant position in the
Stock Performance automotive industry and is a market leader in the utility vehicle and tractor
In % 1m 3m 6m segments. Its IT subsidiary Tech Mahindra, is growing at a steady pace, and has
Absolute -12% -41% -49% established itself as one of the leading telecom software service providers of the
Relative 8% -19% -15% country. As on 31st March, 2008, the company had 85 subsidiaries, 4 joint ventures
Research Analyst and 10 associate companies engaged in different businesses.
Priyanka Singhi / Priyo Moyengam
91-124-4386140 The company’s businesses, primarily automotive (largest revenue generator) are
140
facing some slowdown on account of a slowdown in demand at a global level.
Consequently, a slowdown in revenue growth rates and margin pressure are being
120
faced across all business segments. However, M & M is a cash rich company, with a
100 comfortable long term leverage ratio and a healthy short term liquidity position.
80 Over the medium term, as demand picks up, we expect the group to regain its
growth momentum.
60

40 Sens ex MM in equity As per our projections, the Company has a positive FCCB redemption ratio of 1.19x.
20
Currently, the bond is trading at a YTM of 20.3% and matures in April 2011. Its
conversion price is Rs. 992, while the stock is currently trading at Rs. 319.
0
Oct-07 Dec-07 Feb-08 A pr-08 Jun-08 A ug-08
We have assigned Global Absolute Bond Rating of 1 to the company's FCCB issue,
Chairman: Mr. Kesum Mahindra backed by a FCCB Redemption cover of 1.19x and GA credit score of 9.43. FCCB
Registered Mahindra Tower, Redemption cover of 1.19x implies that the company will be able to meet its FCCB
Office: Dr. G.M. Bhosale Road, liability on the maturity date. Further, GA credit score of 9.43 indicates strong
Worli, Mumbai - 400 018 capacity to pay interest and principal. Hence, we recommend a BUY on the FCCB
Website: www.mahindra.com issue, as a yield play, and bond with good credit.

63
Asset analysis n The sales of the passenger car – Logan, from the
Mahindra-Renault joint venture dropped 52% to 1,062
The company’s manufacturing facilities are located at units only, in the month of October.
Kandivali, Nashik, Igatpuri, Nagpur, Zaheerabad, Jaipur,
Rudrapur, Haridwar and Pune. n The three-wheeler segment is the only one recording
a growth in sales. It had witnessed an outstanding
The company has planned a capital investment of Rs. 20bn growth in its volumes, which grew by 57.2% to 14,355
during FY2009, and has a capex of around Rs. 60bn – Rs. vehicles. Its market share in this segment improved
65bn lined up for the next three years. from 9.3% a year ago to 14.5% in Q2’09. It continued to
grow during October, albeit at a much lower rate of
M&M is building a new plant at Chakan with a capacity of
11%.
350,000 vehicles, which would be operational by fiscal 2010.
It plans to manufacture UVs and LCVs at this plant. These n The company is a leader in the pick-up segment
would include 50,000 units of Mahindra International trucks, controlling 86.4% of the market. This segment saw a
120,000 units of a new mass market platform, 90,000 units of growth of 20.2% in its volumes resulting in an increase
a new SUV, the successor to the ‘Scorpio’ and 90,000 units of in market share from 80.4% a year ago.
‘Ingenio’ variants.
The management expected a single digit growth in the
The company was planning two greenfield manufacturing festive months of October and November, but the month of
sites at Chakan, Pune and Chennai. October fell short of their expectations. Certain large
defence orders expected from countries abroad may help
It has deferred the investment at the joint manufacturing site
the company to sustain single digit growth in the current
at Chennai, which was in partnership with Renault. It will
quarter. Towards the end of fiscal 2009, volumes may pick
instead be using the new plant at Chakan and the existing
up with the launch of the Ingenio.
capacity to realign production with demand on account of
the slowdown in demand. Farm equipment segment

The company’s net fixed assets (consolidated) stood at Rs. The amalgamation of Punjab Tractors with the company
76.2bn, while its cash balance & investments were recorded helped it to establish its presence in the farm equipment
at Rs. 17.3bn and Rs. 13.5bn respectively. segment in a big way. During Q2’09, domestic tractor
volumes grew by 2.7% Y-O-Y to 21,090 units. The company’s
Revenue analysis tractor exports increased Y-O-Y by 27.3% during the quarter.
Its engine business, which clocked a growth of 101%, is
Automotive segment
growing at a healthy pace from a small base. Increased

n Domestic sales volumes, which accounted for close liquidity in the hands of farmers, (from the farm loan waiver)

to 98% of total volumes, fell by 15.8% Y-O-Y, during the helped the company to grow its volumes for this segment to

month of October, 2008. Export volumes dropped some extent. Healthy growth in the farm-equipment

more sharply by 65.2%, to only 383 units. segment is expected to compensate for the under-
performance of the automotive business in the forthcoming
n During Q2’09, the company launched Scorpio fiscal to a large extent.
Automatic and the new Bolero. Consequently, the
MUV segment of the company saw an increase in its Foray into two-wheeler industry

market share from 52.4% in Q2’09 to 54.3% in Q2’09.


The company forayed into the two-wheeler segment by
However, during the month of October, M&M’s utility
acquiring a stake of 80% in the JV, Mahindra Kinetic
vehicle sales fell by 17% Y-O-Y.
Scooters & Motorcycles, which will purchase the operating

n The company plans to launch its new MUV, Xylo, in assets of Kinetic Motors for Rs. 1.1bn. The company is in talks

India during the current quarter, and this, in turn, is with an Italian company Malaguti Moto, to enter the high-

expected to push up its volumes in the current fiscal. end scooter segment.

64
Tech Mahindra The company has a strong foothold in the farm equipment
segment (amalgamation of Punjab Tractors), and in this
Tech Mahindra, the company's IT subsidiary, has a robust segment has margins of close to 10%.
order book position with orders worth over $ 2bn from the
British Telecom (BT) group, which are to be executed over Liquidity & Credit analysis
the next five years. It has a strong presence in the telecom
space, with non-BT revenues accounting for more than a M&M had a debt equity ratio of 1.6x in FY08, which is

third of its total revenues. We expect this business to expected to decline to 1.2x in FY09E. The company is

continue to grow at a steady pace and maintain its expected to raise further debt, for its future capacity

profitability at a high level. expansion plans.

The US contributed 23% of total revenues in 2QFY09, Europe The company had a total debt of Rs. 98.8bn as on 31st

69%, and the rest of the world contributed 8% of total March 2008. Out of this, its FCCB liabilities amounted to Rs.

revenues. The share of the US business has increased over 8bn, which is about 8.1% of its total debt.

the years, but is much lower than that of other Indian IT


The company's FCCB, redemption ratio is 1.19x (average
players. This is on account of the large exposure to BT.
over 2008-2012), which indicates that the company will be

BT signed a $ 1bn, five-year deal with Tech Mahindra in FY07 able to repay its obligations on account of FCCBs, though it

and $ 350mn and $ 700mn contracts in FY08. The company’s may need to resort to re-finance. In our view, the company

AT&T services contract, which is a $ 350mn, five-year would be able to service its debt comfortably in the

contract (in effect till Dec ’09), is extendable by mutual forthcoming years.

agreement.
The company had cash and cash equivalent of Rs. 17.3bn,

Other businesses with a networth worth of Rs. 61.6bn and investments worth
Rs. 13.5bn as on 31st March 2008. We expect the company’s
The company’s auto-component and auto-designing operating margins to be impacted negatively on account
business under Systech is expected to perform in-line with its of a slowdown across different businesses, but its businesses
automotive business. Its real-estate venture through are generating sufficient cash flows. Hence, we expect it to
Mahindra Lifespace is also expected to witness some comfortably repay its debt obligations.
slowdown on account of the softening of demand. Its
financial services business is performing well and we expect The current ratio of the company was recorded at 2.5x in

it to continue to remain stable in the medium term. FY08 as compared to 2.69x in FY07. The interest coverage
ratio of the company stood at a comfortable level of 5.8x in
Profitability analysis FY08. It is generating positive operating cash flows and
hence, in our view, its short term liquidity position is better
The company’s automotive and farm equipment segments than that of its peers.
account for nearly 54.4% of its consolidated turnover, and
about 31.9% of its consolidated profits. Its technology
Main business subsidiaries in India Stake (%)
business under Tech Mahindra (including Systech) accounts
Mahindra Lifespace Developers 51.1
for 32.9% of its total revenues, and the largest share of 51.3% Tech Mahindra Ltd. 48.9
of its consolidated profits. Its financial services business Mahindra and Mahindra Financial Services Ltd. 61.1
accounts for 4.8% of its turnover and 7.1% of its profits. Its Mahindra Automotive Ltd. 100.0
infrastructure business accounts for less than 1% of its Mahindra Castings Pvt. Ltd. 65.0
revenues. Mahindra Forgings Ltd. 60.6
Mahindra Holidays and Resorts India Ltd. 95.9
Among its major business segments, its IT business
commands the highest margins of over 25%, and its
hospitality business, which accounts for less than 2% of its
revenues, commands margins of over 20%. The automotive
business has been witnessing some margin pressure on
account of the slowdown in the global automotive industry.

65
Global Absolute Bond Rating Analysis Baseline Indicator III: Sustainable Growth Analysis

The company has a Bond Rating of 1. This means it has The Sustainable Growth model is a combination of four
strong credit and would be able to meet its FCCBs liability by ratios, and measures the maximum rate of growth in
FY12. With an average FCCB cover of 1.19x, the credit score revenue that can be sustained without obtaining additional
indicates re-financing as an option. outside funding. The maximum sustainable growth in total
revenue is calculated for each year, and is then compared
The weight-age we have used for the bond score are as to the actual calculated growth rate in total revenue, from
follows: the prior year to the current year.

Particulars 2006 03 2007 03 2008 03


Redemption Cover 60% Highest weighting, since it is cash
NET SALES REVENUE 115,225.80 165,761.90 223,786.40
based and includes future
MAXIMUM SUSTAINABLE
projections
GROWTH IN REVENUE - 30.54% 31.62%
GA Credit Score 20% Insolvency Rating (Historical);
HISTORIC GROWTH IN
therefore lower weightage
NET SALES - 43.86% 35.00%
DuPont 20% Asset and Equity based (Historical);
HISTORIC GROWTH IN NET
therefore lower weightage
SALES (ROLLING AVERAGE) - 21.93% 26.29%

Baseline Indicator I: FCCB Redemption Cover

Based upon the audited financial statements for the year


Global Absolute Research has created a Cash Flow Analysis
ending 2008/03, the Company's revenues grew by 35.0%
Tool to examine the number of times that the FCCB
compared to the prior year. For the 3 years of data included
redemption amount is covered by net cash. The higher the
in this analysis, revenues have increased by an average of
cover the less chance we believe the company will default
26.29%.
on the FCCB redemption date. Note that even when the
ratio is low (where the ratio is less than 1x), the company may The actual growth in revenue for years 2007 and 2008 is
still be able to redeem the FCCBs as long as it has strong greater than the Sustainable growth, which suggests that
credit and can re-finance. the Company may need to obtain additional financing.

The company has an average FCCB Redemption Cover of Baseline Indicator IV: DuPont Formula Analysis
1.19x up-to the redemption date, indicating low chance of
not redeeming the FCCBs. The DuPont Formula for Return on Assets and Return on
Equity ratios are calculated for each full year of the historic
Baseline Indicator II: GA Credit Score Risk Assessment financial statements. The ratios are presented here as an
alternate way to evaluate the quality of the Company's
The GA Credit Score is a predictive model based on the Z
Return on Equity and to help identify potential weaknesses.
score rating that indicates the likelihood of a company
becoming insolvent within the next twelve months.
Particulars FY06 (Mar.) FY07 (Mar.) FY08 (Mar.)
DUPONT RETURN ON
The Company has a current year GA Credit Score of 9.43
EQUITY 36.64% 39.64% 40.18%
(See Appendix I, Section GA Z Score for Explanation). It is in
DUPONT RETURN ON
the green zone of GA Credit score, and implies that the
EQUITY (ROLLING AVG.) - 38.14% 38.82%
company is unlikely to distress.

Particulars 2006 03 2007 03 2008 03


The DuPont Analysis indicates that ROE for the most recent
TOTAL CREDIT SCORE 10.31 9.96 9.43
financial statement is 40.18%, which is an improvement of
CHANGE OVER PRIOR YEAR - -0.34 -0.53
1.36% from the previous year. In addition, ROE for the current
year is higher than the rolling average of 38.82% for the three
years included in this analysis.

66
DuPont Asset Turnover An increase in Net Profit after Tax and an increase in Total
Assets indicate increasing profitability accompanied by an
The first component of the DuPont formula is the Asset increase in asset levels. The combined effect results in an
Turnover ratio, which measures the number of rupees of increase in the Return on Asset ratio compared to the
Sales Revenue generated for each rupee of Assets. The previous year.
Asset Turnover ratio was increased from 1.22 in FY07 to 1.32 in
the current year. The increase in Asset Turnover was driven DuPont Financial Leverage
by an increase in Sales Revenues of Rs. 65,763.6mn and an
increase in Total Tangible Assets of 34,153.9mn. The third component is the Financial Leverage ratio, which
measures the number of rupees of Assets that the Company
Particulars FY06 (Mar.) FY07 (Mar.) FY08 (Mar.) is carrying for every rupee of Equity.
ASSET TURNOVER RATIO 1.16 1.22 1.32
Particulars FY06 (Mar.) FY07 (Mar.) FY08 (Mar.)
FINANCIAL LEVERAGE RATIO 2.86 3.59 4.34
An increase in Sales Revenue and an increase in Total Assets
suggest that sales growth is accompanied by the increase
in assets. The Financial Leverage ratio increased compared to the
prior year. The change in Leverage was driven by an
DuPont Return on Assets increase in Total Tangible Assets of Rs. 34,153.9mn and an
increase in Tangible Net-worth of Rs. 1327.9mn.
The second component of the DuPont formula is the Return
on Assets (ROA) ratio, which measures the amount of Net Notes:
Income that is generated for each rupee of Assets. The ROA
ratio has decreased compared to the prior year. The It is to be noted that the rolling average for FY07 has not

change in ROA was driven by an increase in Net Profit After been calculated for certain companies due to the

Tax of Rs. 739.4mn and an increase in Total Assets of Rs. unavailability of the required data.

34,153.9mn.

Particulars FY06 (Mar.) FY07 (Mar.) FY08 (Mar.)


DUPONT RETURN ON ASSETS 12.79% 11.03% 9.25%

67
Financials Projection
SECTION 1: CASH INFLOW ESTIMATE (Rs.)
Particulars Mar-08 Mar-09 Mar-10 Mar-11 Mar-12
Revenue 244,453 271,362 298,498 328,347 361,182
EBITDA 39,864 43,249 47,574 52,332 57,565
Less: DA 5,822 9,264 9,592 10,240 11,410
Less: Prov. For FCCB Premium - 725 725 725 725
EBIT 34,042 33,260 37,257 41,366 45,430
Less: Interest 5,895 5,528 5,764 6,313 6,783
EBT 28,147 27,733 31,493 35,054 38,646
Less: Tax 6,572 7,455 8,465 9,422 10,388
Net Profit after tax 21,575 20,278 23,028 25,631 28,258
Cash from Operations 27,397 30,267 33,345 36,597 40,394
Cash from Operations (USD) 529 584 644 706 780
Section 2: Working Cap and Investment/Capex
Working Capital Changes (17,248) (15,387) (10,021) (11,023) (12,126)
Changes from Investing/Capex Activities (33,060) (12,000) (15,000) (20,000) (20,000)
Net Cash from W/Cap and Investment/Capex (50,308) (27,387) (25,021) (31,023) (32,126)
Net Cash from W/Cap & Invest/Capex ($mn) (971) (529) (483) (599) (620)
Section 3: Financing Activities
Increase from Equity - (725) (725) (725) (725)
Changes in Debt 20,520 (6,726) (7,232) (4,832) (5,432)
Net Cash from Financing Activities 20,520 (7,451) (7,957) (5,557) (6,157)
Net Cash from Financing Activities ($mn) 396 (144) (154) (107) (119)
Section 4: Net Cash Available for FCCB
Opening Net Cash Balance 20,335 16,564 11,993 12,360 12,377
Net Cash Flow For the Year (2,391) (4,570) 367 16 2,111
Closing Net Cash Available for FCCB 17,944 11,993 12,360 12,377 14,488
Closing Net Cash Available for FCCB ($mn) 346 232 239 239 280
SECTION 5: FCCB REPAYMENT LIABILITY
Original Issue Size (USD) 200 200 200 200 200
Less: Amount already converted (USD) - 0 0 0 0
FCCB O/S (USD) 200.0 200 200 200 200
Add: Premium on Redemption 14 14 14 14
Total Payable on maturity date (USD) 200 214 228 242 256
Total Payable on maturity date (Rs.) 10,360 11,085 11,810 12,536 13,261
SECTION 6: RATIO ANALYSIS
Current M Cap Rs. Mn 77,804
Currernt M Cap USD Mn 1,502
Networth (Rs.) 60,834 81,113 104,140 129,772 158,030
Networth (USD) 1,174 1,566 2,010 2,505 3,051
Debt (Rs.) 99,438 92,712 85,481 80,649 75,218
Debt / Equity 1.6 1.1 0.8 0.6 0.5
EBITDA / Debt 0.4 0.5 0.6 0.6 0.8
Interest Coverage Ratio 5.8 6.0 6.5 6.6 6.7
SECTION 7: FCCB Cover
FCCB redemption ratio 1.73 1.08 1.05 0.99 1.09
FCCB Lia / Current M Cap 0.13 0.14 0.15 0.16 0.17
All USD / Irs. Figures are in millions.
Source: FY07 taken from Company Annual Report and results are consolidated.
* USD @ 51.8

68
GA CREDIT SCORE ANALYSIS
Credit Score: Risk Assessment Weight 200603(12) 200703(12) 200803(12)
Ratio 1 NET WORKING CAPITAL / TOTAL TANGIBLE ASSETS 6.56 61.50% 43.26% 36.95%
Ratio 2 RETAINED EARNINGS / TOTAL TANGIBLE ASSETS 3.26 45.49% 41.34% 39.08%
Ratio 3 EBIT / TOTAL TANGIBLE ASSETS 6.72 14.79% 14.30% 16.85%
Ratio 4 TANGIBLE NETWORTH / TOTAL TANGIBLE ASSETS 1.05 49.06% 44.12% 41.38%
CONSTANT 3.25 3.25 3.25
GA CREDIT SCORE 10.28 8.86 8.52
Sustainable Growth Ratio
Ratio 5 NET PROFIT MARGIN 29.63% 30.71% 29.09%
Ratio 6 RETENTION RATIO 75.12% 84.60% 86.00%
Ratio 7 MAXIMUM SUSTAINABLE GROWTH IN REVENUE 15.05% 20.23% 23.95%
HISTORIC GROWTH IN NET SALES 34.55% 39.30%
HISTORIC GROWTH IN NET SALES (ROLLING AVERAGE) 17.28% 24.62%
DIFFERENCE FROM MAXIMUM 14.32% 15.35%
Dupont Analysis
Ratio 8 DUPONT RETURN ON EQUITY 20.04% 23.92% 27.85%
DUPONT RETURN ON EQUITY (ROLLING AVERAGE) 21.98% 23.94%
Ratio 9 DUPONT ASSET TURNOVER 0.33 0.34 0.40
Ratio 10 DUPONT RETURN ON ASSETS 9.83% 10.55% 11.52%
Ratio 11 DUPONT FINANCIAL LEVERAGE 2.04 2.27 2.42

Glossary of Financial Terms - Asset use efficiency, which is measured by total asset
turnover
1. Retention Ratio:
- Financial leverage, which is measured by the equity
This ratio measures the proportion of net profit after tax
multiplier
that is not paid out as dividends but retained in the
business. Calculated as:
Calculated as: ROE = Profit Margin (Profit/Sales) * Total Asset Turnover
(Sales/Assets) * Equity Multiplier (Assets/Equity)
= (Net Profit After Tax – Dividends) / Net Income
5. Rolling Average:
2. Asset Turnover:
The average of a security constructed in a period as
This ratio Indicates the relationship between assets
short as a few days or as long as several years and
and revenue and measures the amount of sales that
showing trends for the latest interval. As each new
are generated from each dollar of assets.
variable is included in calculating the average, the
Calculated as: last variable of the series is deleted.
= Net Revenue / Total Assets 6. DuPont Asset Turnover Ratio:
3. Sustainable Growth Rate: Calculated as:
The maximum growth rate that a firm can sustain = Gross Revenue / Total Tangible Assets
without having to resort to additional borrowings or
7. DuPont Return on Assets:
increase financial leverage.
It is a financial ratio that shows how the return on assets
Calculated as:
depends on both asset turnover and profit margin.
= ROE x Retention Ratio The DuPont method breaks out these two
components from the return on assets ratio in order to
4. DuPont Return on Equity:
determine the impact of each on the profitability of
The DuPont method breaks the return on equity (ROE) the company.
down into three parts: a) profit margin, b) asset
This ratio helps to highlight the impact of changes in
turnover and c) financial leverage.
asset turnover and profit margin.
DuPont Method tells us that ROE is affected by three
Calculated as:
things:
ROA DuPont = (Net Profit After Tax / Net Sales) x (Net
- Operating efficiency, which is measured by profit
Sales / Total Assets)
margin

69
Income Statement
Year ended 31 Mar (in Rs. mn) 2008 2009E 2010E 2011E 2012E
Net Sales 244,453 271,362 298,498 328,347 361,182
Cost of Sales 204,589 228,112 250,923 276,016 303,617
EBITDA 39,864 43,249 47,574 52,332 57,565
Depreciation 5,822 9,264 9,592 10,240 11,410
Prov. For FCCB Premium 0 725.2 725.2 725.2 725.2
EBIT 34,042 33,260 37,257 41,366 45,430
Interest 5,895 5,528 5,764 6,313 6,783
EBT 25,040 27,733 31,493 35,054 38,646
Tax 6,572 7,455 8,465 9,422 10,388
PAT 18,468 20,278 23,028 25,631 28,258

Balance Sheet
Year ended 31 Mar (in Rs. mn) 2008 2009E 2010E 2011E 2012E
Share Capital 2,391 2,391 2,391 2,391 2,391
ESOP 40 40 40 40 40
Reserves 59,217 78,788 101,816 127,447 155,706
Misc. Exp. 142 106 106 106 106
Total Shareholders Fund 61,506 81,113 104,140 129,772 158,030
Minority Interest 27,345 27,345 27,345 27,345 27,345
Debt 98,810 92,712 85,481 80,649 75,218
Non-FCCB Debt 90,784 81,627 73,670 68,114 61,957
FCCB Debt 8,026 11,085 11,810 12,536 13,261
Deferred Tax 4,604 4,604 4,604 4,604 4,604
Total Liabilities 192,265 205,774 221,570 242,370 265,197
Assets
Gross Block 106,904 120,308 132,308 147,308 167,308
Accum Dep. 42,190 52,289 61,881 72,121 83,531
Net Block 64,713 68,019 70,427 75,187 83,777
WIP 11,542 12,000 15,000 20,000 20,000
Net Fixed Assets 76,255 80,019 85,427 95,187 103,777
Investments 13,547 13548 13548 13548 13548
Current Assets
Inventories 32,754 43,319 47,651 52,416 57,658
Sundry Debtors 37,678 41,790 45,969 50,566 55,623
Cash in Hand 17,280 11,993 12,360 12,377 14,488
Other Current Assets 157 172 189 208 229
Loans & Advances 81,416 89,754 98,729 108,602 119,463
Current Liabilities 52,912 59,502 65,452 71,997 79,197
Prov. 13,910 15,321 16,853 18,538 20,392
Net Current Assets 102,463 112,207 122,595 133,635 147,871
Total Assets 192,265 205,774 221,570 242,370 265,197

70
Cash Flow Statement
Particulars (in Rs. mn) 2008 2009E 2010E 2011E 2012E
PBIT 34,042 33,260 37,257 41,366 45,430
Add : Depreciation 5,822 9,264 9,592 10,240 11,410
Add: Prov. For FCCB Premium 725.2 725.2 725.2 725.2
(Inc)/Dec in WC (17,244) (15,387) (10,021) (11,023) (12,126)
Taxes Paid (6,572) (7,455) (8,465) (9,422) (10,388)
CF from Operations 16,048 20,408 29,088 31,886 35,051
(Inc)/Dec in FA (28,716) (11,543) (12,000) (15,000) (20,000)
(Inc)/Dec in Capex (5,949) (457) (3,000) (5,000) -
(Pur)/Sale of Investments (3,514)
Misc. Expenses 4,335
CF from Investments (33,844) (12,000) (15,000) (20,000) (20,000)
Increase Equity -
Premium from Equity Issue - (725) (725) (725) (725)
Increase in Debt 20,520 (6,726) (7,232) (4,832) (5,432)
Interest Paid (5,895) (5,528) (5,764) (6,313) (6,783)
CF from Fin. Activity 14,625 (12,979) (13,721) (11,870) (12,940)
Inc/Dec of Cash (3,171) (4,570) 367 16 2,111
Add: Beginning Balance 20451 16,564 11,993 12,360 12,377
Closing Balance 17,280 11,993 12,360 12,377 14,488

71
Global Absolute Section 4: Recommendations

B. Equity Play – These are the bonds which are trading close to or slightly above
the conversion price and / or on examining their equity story, we believe they can
achieve much higher price than the set conversion price before the maturity date
as they have strong fundamentals and are insulated to global pains. In addition,
they provide good yield which provides downside protection and returns should
the conversion price not be reached

We believe that these companies will perform well in the future and the stock will
trade above conversion price making it attractive for investors to trade the equity
option in the bond.

Below are some of the names we recommend.

BONDS ISSUE SIZE O/S YTM GA CREDIT REDEMPTION % AWAY FROM


In USD In USD IN % RATING COVER RATIO CONV. PRICE
Punj Lloyd 125 49.7 16.61 1 4.04 49
HDFC* 500 111 3.16 - - -11.4#
Educomp 80 78.5 14.92 1 1.21 21.6
Core Projects 80 25.2 23.61 2 0.66 66
Jain Irrigation 60 60 14.47 2 1.62 20.6
*HDFC being a financial Institution has been valued on CAMEL based Model
# trading above conversion price

The reports for HDFC, Punj. Lloyd, Core Projects and Jain Irrigation are as following.

72
Finance Housing Development Finance Corporation Ltd.

EQUITY PLAY
FCCB : BUY

CMP 1,559 FCCB Description


Nominal Value 10 BOND NAME HOUSING DEV FIN USD 0.000 '10
BSE Sensex 9,385 (HDFC IN )Iss'd 6/25 USD500m
Stock Statistics COUPON (% p.a.) 0
Bloomberg code HDFC IN ISSUE SIZE ($m) 500
Reuters Code HDFC.BO AMOUNT OUTSTANDING( $m) 111
BSE code 500010 MATURITY 9/27/2010
NSE code HDFC TOTAL REDEMPTION AMOUNT($m) 139.45
ISIN No. INE001A01028 REDEMPTION AT MATURITY 125.65
Market Cap (Rs. mn) 443,256($10,554) YTM & YTP 3.16 -
52 Wk High/Low (Rs.) 3,262 / 1,382 CONVERSION PRICE (INR) 1399
NSE Avg Daily Vol(12 m) 1,315,350 PARITY 114.15
BSE Avg Daily Vol(12 m) 276,128 INDICATIVE BOND PRICE 118.50
PREMIUM 3.80
Shareholding Pattern
COUPON YIELD 0%
Particulars No. of shares in %
MFs/FIs/Banks/ 13,596,126 4.8 BOND FLOOR 102.2
Insurance Co. 17,492,420 6.2 CREDIT SPREAD 1000bp
FIIs 171,697,784 60.4 FAIR VALUE 140.10
FDI/Foreign Bank 42,740,788 15.0 Source: Company & Global Absolute Research
Bodies Corporate 4,892,203 1.7 HDFC Ltd. is India’s largest provider of housing finance, particularly retail housing.
Indian Public 30,377,135 10.7 The company has a network of 254 offices, supplemented by its affiliate network
Others 3,435,299 1.2 and direct selling agency (DSA) channel.
Total 284,231,755 100.0
It has consistently maintained a healthy growth in its loan book, sound asset quality
Stock Performance and high capital adequacy. It has persistently followed conservative lending
In % 1m 3m 6m practices, and has shown considerable resilience to economic downturns in the
Absolute -18 -32 -44 past. We expect some slowdown in its lending business growth rates, and some
Relative -20 -22 -34 pressure on its margins in the current fiscal. However, it has a substantial cost
Research Analyst advantage, and hence, we expect it to continue to maintain its margins at a high
Priyanka Singhi
level.
91-124-4386140
140
The company had issued FCCBs amounting to $ 500mn, which are redeemable in
120 fiscal 2011 and are quoting a yield of 3.2%. Of these bonds, 77.8% have already
100 been converted into equity and $ 110.6mn worth of FCCBs are still outstanding.
80 These are convertible at a conversion price of Rs. 1,399.148, while the stock is
trading at Rs. 1,558, about 11.4% above the conversion price.
60

40 Sens ex hdf c in equity The adjusted book value of the stock is Rs. 438, and it is trading at a price to
20 adjusted book value of 3.5x its current ABVPS. Its PE ratio is quoting at 18.7x its TTM
EPS. The stock commands premium valuations in the market on account of its
0
Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 A ug-08 superior asset quality, formidable presence in the mortgage lending business and
Chairman: Mr. Deepak S. Parekh its consistency in maintaining earnings growth.
Registered Ramon House, H.T.Parekh
Based on our FY10E SOTP valuation, we recommend a BUY on the stock at the
Office: Marg,169, Backbay Reclamation
current market price, with a 24 month price target of Rs. 1,953. This represents an
Churchgate, Mumbai - 400 020
upside of about 25.4% from the current market price, and 39.6% from the
Website: www.hdfc.com
conversion price.

73
Sum of the Parts Valuation
Business Valuation method Value per share (in Rs.) % holding SOTP (in Rs. Per share)
Mortgage business 3.0x ABVPS 1,394 100.0% 1,394
HDFC Bank 2.5x ABVPS 923 24.1% 222
Life Insurance 16x FY10E NBAP 360 72.6% 261
General Insurance 10x FY10E PAT 22 74.0% 16
AMC 5% of AUMs 61 60.0% 37
Venture Funds 6% of AUMs 18 100.0% 18
Gruh Finance Market Value 8 61.5% 5
Value per share (in Rs.) 1,953

As a result of our equity BUY recommendation we also 25% in the first half of fiscal 2009. It disbursed Rs. 328.7bn loans
recommend a BUY on the HDFC FCCBs as an equity play, as during fiscal 2008. The Indian mortgage lender’s stock
investors could buy the bonds at an equivalent discounted commands a premium on account of its high asset
equity price (since the bonds conversion price is 11.4% quality and conservative practices.
below the current stock price) and convert them into equity
shares as a long term investment. n HDFC’s loan disbursals grew at a robust pace of 26% Y-
O-Y in fiscal 2008, but slowed down to 23% in Q2’09.
We have tried to adopt the CAMELS Model that is being This is still well above the home loan growth rates
used by central banks world over for analyzing HDFC’s recorded by the banking sector. The company is
operations from the public domain information. concentrating on the individual loan segment to
keep its risk at low levels. Consequently, this segment
Capital Adequacy grew at a higher pace of 31% during Q2’09.

n HDFC’s capital adequacy ratios have historically n The company has deliberately tempered down its
been above regulatory minimums, with a lending to developers and to the commercial
comfortable Tier I capital cushion. segment, on account of the cash crunch faced by this
sector, which is resulting in delays in project completion.
n The comfortable capital cushion is an assuring sign to
tide over business cycle downturns, when collateral n Its individual loans constitute about 68% of its total
values are expected to fall and non-performing assets loans, while loans to corporate bodies account for
could inch up for the sector as a whole. about 30%. Its average loan size is about Rs. 1.5mn
(approximately $ 35,000), which has helped it to
n Out of the total subordinate debt raised by the
spread its risk across a large number of accounts.
company amounting to Rs. 13.8bn, Rs. 12.2bn qualifies
for Tier II capital. These are redeemable at par n Its average loan-to-value ratio is conservatively
between 2011 and 2017. maintained at 65% (at origination), with a maximum
loan-to-value ratio of 85%. This protects the lender from
n HDFC Ltd. is generating sufficient earnings to maintain
the fall in collaterals during property market corrections.
its capital adequacy ratios at levels above the
regulatory minimum. n Its gross NPLs, which are more than 90 days old, amount
to 0.84% of its loan portfolio, while NPLs which are more
Particulars 2007 2008 Q2'09 than 180 days old account for 0.68%. Its provision cover
Actual CAR 12.9% 16.8% 15.2%
Tier I 7.6% 14.6% 14.1% As a percentage of Loan portfolio 2008 2007 2006
Tier II 5.3% 2.2% 1.1% Gross NPLs (more than 90 days) 0.84 0.92 0.96
Gross NPLs (more than 180 days) 0.68 0.77 0.79
Provisions 0.63 0.71 0.82
Asset Quality
(In Rs. Mn)

n HDFC’s mortgage loan assets stood at Rs. 811.9bn as Provisions reqd as per prudential norms (2008) 2,249

on 30th September, 2008, driven by a Y-O-Y growth of Actual provisions (2008) 4,703

74
is extremely healthy and covers 0.63% of its loan through HDFC Sales Pvt Ltd and 27% through the bank. The
portfolio. Hence, its NPLs in the 180 day category are remaining 3% is accounted for by its DSA network. As a
almost completely covered. Its NPL ratios have result, the company has considerable savings on
witnessed a declining trend in the last two fiscals, which account of lower marketing and distribution expenses
is indicative of the bank’s improving asset quality. in the form of commission payments outside its group.

Earnings Liquidity

HDFC has shown considerable stability in its earnings growth, n HDFC Ltd. has robust reserves, which were recorded

and has sustained its return on average assets (ROAA) in the at Rs. 116.6bn as on 31st March 2008. This amounts to

range of 2.7% - 2.8% in the last three fiscals. Its return on close to 15% of its total assets. The company’s earnings

equity is high at 27.8%, but declined on account of the are growing at a healthy pace, and hence, we

equity dilution during the year. expect it to continue to improve its return ratios, going
forward.
n Income growth
n Total borrowings as on 30th September, 2008 stood at
The company’s income clocked a Y-O-Y growth of Rs. 767.5bn, with deposits accounting for about 19% of
33% during Q2’09, while its net interest income grew total borrowings, compared to 17% as on 31st March,
by 29%. Going forward, we expect interest rates to 2008. The chunk of the borrowings comes from bonds,
soften, which in-turn would result in the re-pricing of its debentures and commercial papers, which account
adjustable rate loans. Its liabilities, though contracted for about 52% of total borrowings. Domestic term
at fixed rates of interest, are mostly swapped into loans account for 26% of the total borrowings.
floating rate ones, and hence, we expect the
Composition of borrowings (In percentage) 2008 Q2'09
mortgage lender to register a marginal decline in its
Deposits 17 19
net interest margin, on account of the fall in yields
FCCBs 1 1
from its assets.
International borrowings 2 2
Dometsic Term Loans 29 26
n Spread Analysis
Bonds/Debs/CPs 51 52

HDFC has moderated its loan growth, but is


contracting new loans at higher rates of interest. It n HDFC’s investments stood at Rs. 69.1bn as on 31st
raised its home loan rates by 50 bps in July 2008, and March, 2008, with its investments in subsidiaries and
then by 75 bps in August 2008. These hikes more than associate companies accounting for 42.4% of its total
offset the 56 bps increase in borrowing costs. investments. Its direct equity exposure to other
companies amounts to about 13% of its total
In the last three fiscals, the company has improved its
investments, and most of these are long term
interest spread from 2.16% to 2.32% in a rising interest
investments. The book value of HDFC’s quoted
rate regime. During this period, its pricing power helped
investments as on 31st March, 2008 was Rs. 22bn, while
it to improve its yields. Its stable borrowing profile
the market value was Rs. 85.5bn.
helped it to register a lower growth in interest costs.
n Its exposure to debentures, bonds, pass through
Going forward, we expect the lender to face some
certificates and security receipts of real estate
pressure on its spread due to lower loan growth. In our
projects amounts to about 5.2% of its investments and
view, loan yields, which touched a high of 12.6% in
was recorded at Rs. 3.6bn as on 31st March 2008.
Q2’09, have peaked. Hence, going forward, we
Inclusive of its investments in the corporate deposits of
expect them to remain stable in the immediate future
real estate companies, its investments in real estate
and eventually start declining.
projects stood at Rs. 11.1bn as on 31st March 2008. Its
cash and bank balances were recorded at Rs. 7.8bn
n Operational Efficiency
as on 31st March 2008. Its surplus from deployment in
97% of its mortgages are sourced by the company or cash management mutual fund schemes amounted
through its affiliates, about 30% by direct walk-ins, 40% to Rs. 1.1bn during fiscal 2008.

75
Sensitivity to market risk Sound financial position

As on 31st March, 2008, HDFC’s asset-liability maturity Based on our CAMELS (capital adequacy, asset quality,
positions are positively matched in the 0-5 years and 2 – 5 management quality, earnings, liquidity and sensitivity
years time buckets. In the above 5 years time bucket, its market risk) based rating system, we assigned a rating of 1 to
liabilities are higher than its assets, with its home loan the mortgage lender, implying the sound financial position
portfolio having an average maturity of about 13 years. of HDFC Ltd. This is based on the fact that :

The company has converted its fixed rate rupee liabilities on n Its actual capital adequacy ratios have consistently
a notional principal of Rs. 122.6bn into floating rate liabilities above regulatory minimum, with a high Tier I capital
through interest rate swaps, to hedge against its increasing cover
adjustable rate mortgages, since over 90% of incremental
individual loans are variable rate loans. HDFC Ltd. has 81% of n Its non-performing loans are less than 1% of loan

its assets and 77% of its liabilities in the floating rate category. portfolio

This protects its Balance Sheet from fluctuations in the


n Superior management quality with a proven track
movement of interest rates, since majority of its assets and
record
liabilities get re-priced with any change in interest rates.
n It is well hedged from interest rate risk/market risk
Risk management policies
n Its earnings are displaying a steady growth of above
n HDFC’s policy has been to evaluate its borrowers 15%
based first on their earning capacity and then by a
strict check on collateral value. n It has a stable borrowing profile and hence, it is well
protected from liquidity risk
n It has consistently kept a check on its loan-to-value
ratio, by maintaining it at low levels at the time of
origination.

n It usually procures post dated cheques from most of its


customers or has deduction at source arrangements
with employers.

n Strict underwriting policies have helped the mortgage


lender to tide over economic cycles for the past 30
years.

76
Income Statement
Particulars (In Rs. mn) 2007 2008 2009E 2010E 2011E 2012E
Income
Operating Income 57,739 81,131 110,779 124,452 146,211 183,066
Interest Income 53,140 77,840 105,240 116,985 134,515 166,590
Fees & other charges 686 632 820 960 1,026 1,335
Other income 208 197 177 160 144 129
Total Income 58,633 81,960 111,776 125,572 147,381 184,531
Expenditure
Interest and other charges 36,668 51,429 77,161 81,804 92,794 114,523
Staff expenses 913 1,178 1,674 1,842 2,185 2,721
Establishment expenses 257 303 413 464 545 682
Other expenses 1,022 1,192 1,787 1,917 2,303 2,850
Total Expenditure 38,860 54,102 81,035 86,027 97,826 120,777
Depreciation & amortization 175 166 293 243 214 338
Provisions & contingencies 250 320 563 579 587 769
PBT 19,348 27,372 29,885 38,722 48,753 62,647
Less Provision for tax 3,974 9,373 8,879 12,894 16,235 20,861
PAT 15,374 18,000 21,006 25,828 32,519 41,785

Balance Sheet
Particulars (in Rs. mn) 2007 2008 2009 2010 2011 2012
Liabilities
Capital 2,530 2,840 3,124 3,436 3,780 4,158
Reserves 52,984 116,633 137,639 163,466 195,985 237,770
Networth 55,514 119,473 140,763 166,903 199,765 241,928
Loan funds 571,930 691,512 830,620 1,017,510 1,272,962 1,686,748
Total 627,444 810,985 971,383 1,184,412 1,472,727 1,928,676
Assets
Loans 565,124 729,979 868,675 1,064,127 1,330,159 1,742,508
Investments 36,662 69,150 91,211 111,733 133,016 174,251
DTA 1,232 1,467 - - - -
Current Assets, loans and advances 50,565 41,524 44,783 54,084 58,439 77,147
Less : Current Liabilities & provisions 28,269 33,220 36,913 48,561 51,545 69,432
Net Current Assets 22,296 8,304 7,870 5,524 6,893 7,715
Net Fixed Assets 2,130 2,085 3,627 3,029 2,659 4,203
Total 627,444 810,985 971,383 1,184,412 1,472,727 1,928,676
Note – standalone data has been considered

Financial Parameters
Average yield on assets 8.7% 9.7% 10.9% 9.9% 9.2% 8.7%
Cost of borrowings 6.3% 7.4% 9.3% 8.0% 7.3% 6.8%
Spread 2.3% 2.3% 1.7% 1.9% 1.9% 1.9%
NII 16096 26082 28079 35181 41721 52067
NIM 2.7% 3.8% 3.3% 3.4% 3.2% 3.2%

77
Infrastructure Punj Lloyd Limited

GA BOND RATING : 1
EQUITY PLAY / GOOD CREDIT : BUY

CMP 183 FCCB Description


Nominal Value 2 BOND NAME PUNJ LLOYD LTD USD 0.000 '11
BSE Sensex 9,385 (PUNJ IN )Iss'd /20 USD125m
COUPON (% p.a) 0
Stock Statistics
ISSUE SIZE ($m) 125
Bloomberg code PUNJ IN
Reuters Code PUJL.BO AMOUNT OUTSTANDING( $m) 49.70
BSE code 532693 MATURITY 4/8/2011
NSE code PUNJLLOYD TOTAL REDEMPTION AMOUNT($m) 63.55
ISIN No. INE701B01021 REDEMPTION AT MATURITY 125.86

Market Cap (bn) Rs. 55.5 ($1.07) YTM & YTP 16.61 -
52 Wk High/Low (Rs.) 656 / 140 CONVERSION PRICE (INR) 272.59
NSE Avg Daily Vol(12 m) 3,253,526 PARITY 62.75
BSE Avg Daily Vol(12 m) 1,133,303 INDICATIVE BOND PRICE 86.00
PREMIUM 37.10
Shareholding Pattern
COUPON YIELD 0%
Particulars No. of shares in %
BOND FLOOR 96.70
Promoters 134,660,231 44.4
CREDIT SPREAD 1,000bp
FIIs 44,104,189 14.5
FAIR VALUE 107.20
Mutual Funds & UTI 55,277,079 18.2
Source: Company & Global Absolute Research
Banks/FIs/Insur Co 3,151,216 1.0
PCBs 19,709,196 6.5 Recommendation: BUY BONDS AS YIELD PLAY
Foreign VC 9,675,851 3.2
Indian Public 31,374,079 10.3 Punj Lloyd is amongst the world’s foremost Engineering, Procurement and
Construction (EPC) groups, having presence in 16 countries in Asia Pacific, South
NRIs/OCBs/Cust. 5,512,647 1.8
Asia, Middle-East, The Caspian, Africa, China and Europe. Punj Lloyd has strong
Total 303,464,488 100
order book position of around Rs 216.75bn (2.7 times of the FY08 revenues), clearly
Stock Performance showing growth visibility. Punj Lloyd has also scaled up its global operations with the
acquisition of Sembawang, Simon Carves, and Technodyne, which would provide
In % 1m 3m 6m
the better margins and would be able to enter the market of Europe, China and
Absolute -15 -33 -46
South East Asian markets.
Relative 3 3 -1
Research Analyst Punj Lloyd has FCCBs, which will mature in March 2011 ($ 63mn). With a Global
Suranjoy Singh Absolute (GA) Bond Rating of 1, we believe that Punj Lloyd would comfortably be
91-124-4386140 able to pay its FCCB liabilities, through cash generated from operations alone. This
200
Punj Lloyd Vs Sensex is supported by the average four years FCCB Redemption Cover of 4.04x, and a
160
current year GA Credit Score of 10.3, thus implying that it has a strong capacity to
pay interest and the principal amount. Moreover, DuPont analysis shows that the
120 growth, profitability and financial leverage are in line with the industry's average.
Punj Lloyd has interest coverage ratio for the 5 years average is around 8.0x. Its
80
debt/equity ratio is at a very comfortable level of 0.6x, which decline to around
40
0.3x in FY12. Punj Lloyd has strong current cash flows, and we have forecasted an
Punj Lloyd Sensex average annual cash inflow from operations of around USD 275 million upto the
0 redemption dates.
Jan-08 Mar-08 Jun-08 Aug-08 Nov-08

Chairman: Mr. Atul Punj (PUNJ IN) Iss'd /20 USD125m is currently trading at an attractive yield of 16.61%. We
Registered 78, Institutional Area, believe that Punj Lloyd would easily be able to pay its FCCBs liabilities through cash
Office: Sector 32, from operations alone. We recommend a strong BUY on the bond as good yield
and good credit but with an equity play on the upside should the stock rally from its
Gurgaon - 122 001, India
near low levels over the period to maturity and hit our target of Rs. 281 (downside
Website: www.punjlloyd.com
looks relatively safe with the yield of 16.6%).

78
Equity Analysis Order Book Status
Particulars FY06 FY07 FY08 Oct. 08
Punj Lloyd is one of the leading global EPC services Order Book (Rs. in Billions) 52.32 159.44 195.96 216.75
providers, which has the capability to provide integrated Growth in % 205% 23% 11%
design, engineering, procurement, construction and
project management services, mainly for the energy, 150mn. We expect that new order book would also grow at

infrastructure and petrochemical sectors. Punj Lloyd has a CAGR of around 30% from FY08 to FY13E.

presence in 16 countries and has successfully executed


Higher earnings, due to acquisition of Sembawang, Simon
projects across the world.
Carves, and Technodyne – Punj Lloyd has acquired

DCF model-based valuation, TP of Rs. 281 implies 54% companies, which are known for their execution

potential upside capabilities in the field of design and execution of


diversified infrastructure projects. Sembawang E&C is a
Punj Lloyd is trading at a attractive risk reward ratio, where design-and-build engineering and construction service
potential downside is relatively low as compared with a provider with core capabilities encompassing process &
significant upside potential. Our DCF fair value on the plant engineering, heavy civil engineering and building.
company works out at Rs. 312, however, our target price (TP) Simon-Carves's (a wholly owned subsidiary of Semb. E&C)
is Rs. 281, achievable within the next 15 months. We believe has core capabilities in engineering, procurement and
that an investment can be considered in the stock, due to its construction of LDPE, PVC, Styrene and refinery processes
healthy order-book position, qualification to bid for larger domain. Technodyne is a specialist engineering, design and
and complex orders, which provide better economies of consultancy company, which specialization is in large scale
scale, and steady profit margins. cryogenic and high pressure tanks. Punj Lloyd is aggressively
building up its capabilities to become one of the leading
Attractive Valuation – Punj Lloyd is currently trading at a PER diversified EPC services providers in the world. And we
of 15.4x and 9.7x on its FY08 and FY09E earnings respectively. believe that, due to these global acquisition, Punj Lloyd
The company’s price/book value per share is trading at a would be able to get pre qualification status for large,
comfortable level of around 2.0x. In terms of EV/EBITDA, it is complex and consequently higher value bids, which would
also trading at an attractive level of around 6.8x and 4.5x on yield better margins, and would also enable Punj Lloyd to
its FY08 and FY09E EBITDA respectively. Punj Lloyd has pursue opportunities in Europe (as a more economical
reported strong half yearly standalone results with revenues supplier), China and South east Asian markets.
of around Rs. 56.01bn, which is around 72% of the FY08
revenues. The strong revenues are from higher execution of Diversified presence in various global places would help
projects, mainly in infrastructure projects and process Punj Lloyd to sustain the recession in some specific area –
plants. We are expecting revenues would grow at a CAGR Punj Lloyd has presence in 16 offices worldwide, with current
of around 35% for FY08 to FY13E. projects across Asia-pacific, South Asia, Middle East, The
Caspian, Africa, China and Europe. Punj Lloyd has strong
Robust Order backlog to provide revenue visibility – Punj presence in Middle East, where despite a slowdown in the
Lloyd’s current order backlog stands at around Rs. 216.75bn, world; there is still significant capital to spend on
which is around 2.7 times of the FY08 revenues. During FY08, infrastructure development in oil & gas, urban, road, and
Punj Lloyd booked an order book of around Rs. 118.5bn, and other sectors. Punj Lloyd has recently bagged a substantial
due to global recessions, we are expecting some slowdown order of around Rs. 36.36bn from Qatar Petroleum, which
in the order intake in FY09. However, due to softening of confirms its capability to win big projects.
commodity prices, coupled with interest rate softening, we
are expecting further growth in infrastructure spending from Opportunities from foray into different sectors - Besides
Q4’09, onwards particularly in an election year. Punj Lloyd being one of the leading EPC services providers in
has increased its average ticket size from $ 100mn to $ infrastructure, Punj Lloyd is also foraying into various sectors,

Geographical Contribution of order book


Particulars South Asia Caspian Middle East South East Asia & Asia Pacific Rest of the World
Order Book (Rs. in Billions) 60.69 8.67 56.36 80.20 10.84
Share in % 28% 4% 26% 37% 5%

79
like aviation, defence, upstream, offshore, and real estate. and almost assured ability to redeem its FCCBs liabilities. The
Punj Lloyd has entered into joint venture (JV) with Swissport weightage, we have used for the bond score are as follows:
International, a world leader in the aviation ground and
cargo handling sector. Punj Lloyd has set up subsidiaries for Redemption Cover 60% Highest weightage since it is cash

foraying into aviation, upstream, offshore sector, and real based and includes future
projections
estate. Punj Lloyd has acquired 33% stake in Air Works India.
GA Credit Score 20% Insolvency Rating (Historical),
Punj Lloyd has also entered into a JV with ST Kinetics for
therefore lower weightage
defence foray in India. We believe that Punj Lloyd is going to
DuPont 20% Asset and Equity based (Historical),
replicate its success in the infrastructure sector with these
therefore lower weightage
forays, and would be developing its core activities into a
larger scale orientated business in the future.

Baseline Indicator I: FCCB Redemption Cover


A brief analysis of Company's financial health
Global Absolute Research has created a Cash Flow Analysis
Asset analysis
Tool to examine the number of times that the FCCB
n Punj Lloyd net fixed assets at present are at Rs.16.16bn. redemption amount is covered by net cash. The higher the
cover the less chance we believe the company will default
n Punj Lloyd debt/net asset is comfortably leveraged at
on the FCCB redemption date. Note that even when the
0.99x in FY08.
ratio is low (where the ratio is less than 1x), the company may
n Punj Lloyd has good asset turnover ratio of 1.0x. still be able to redeem the FCCBs as long as it has strong
credit and can re-finance.
Profitability analysis
The company has an average four years FCCB Redemption
Punj Lloyd has performed well in FY08, with a growth of Cover of 4.04x upto the redemption date, indicating high
around 51% in total revenue. EBIDTA was up by 65% at Rs. cover and high ability to redeem its FCCBs liabilities. Besides
8.1bn. Net profit went up by around 84% at Rs. 3.6bn, and this, its interest coverage, on an average of five years, is
was able to increase margins by around 80bps, even with very high at around 8.0x.
higher raw material prices. We expect some slowdown in
the order book growth, which would be reflected in the Baseline Indicator II: GA Credit Score Risk Assessment
revenue growth in FY09 and in Q1’10, due to the global
slump. However, we expect the company’s revenues to The GA Credit Score is a predictive model based on the Z

grow at a CAGR of around 35% from FY08 to FY13E. We are score rating that indicates the likelihood of a company

expecting the margins to increase, due to its acquisition of becoming insolvent within the next twelve months. The

Sembawang, Simon Carves, and Technodyne. Moreover, Company has a current year GA Credit Score of 10.30,

the softening and further reduction in interest expenses which places the Company in the “Green zone”, indicating

would also help in increasing its margins. a high comfort zone, and low chance of the company
becoming financially distressed in the near future. This is an
Liquidity & Credit analysis increase from the previous year’s Z-Score of 9.20.

n Punj Lloyd's average interest coverage ratio for the


Particulars Mar FY06 Mar FY07 Mar FY08
five years is at a very comfortable position at around
TOTAL CREDIT SCORE 10.27 9.20 10.30
8.0x. CHANGE OVER PRIOR YEAR - -1.07 1.10

n Out of the total debt of the company, i.e Rs. 16bn


(FY08), FCCBs amount consists Rs. 1.99bn. Punj Lloyd
Baseline Indicator II: Sustainable Growth Analysis
has around Rs. 6.8bn in cash in hand.
The Sustainable Growth model is a combination of four
Global Absolute Bond Rating Analysis ratios, and measures the maximum rate of growth in
revenue that can be sustained without obtaining additional
The company has a GA Bond Rating of 1. This is the highest
outside funding. The maximum sustainable growth in total
rating and implies that the company has both strong credit
revenue is calculated for each year, and is then compared

80
to the actual calculated growth rate in total revenue, from Particulars Mar FY06 Mar FY07 Mar FY08
the prior year to the current year. ASSET TURNOVER RATIO 1.00 1.78 1.81

Particulars Mar FY06 Mar FY07 Mar FY08


NET SALES REVENUE 17,273.10 51,389.60 77,595.10 An increase in Sales Revenue and an increase in Total Assets
MAXIMUM SUSTAINABLE suggest that sales growth is accompanied by an increase of
GROWTH IN REVENUE - 16.80% 13.55% assets. The key issue is whether this change has resulted in
HISTORIC GROWTH IN greater turnover (i.e. higher sales for each rupee of assets).
NET SALES - 197.51% 50.99% The increase in the Asset Turnover ratio indicates that overall
HISTORIC GROWTH IN NET
utilization has improved.
SALES (ROLLING AVERAGE) - 98.76% 82.84%

DuPont Return on Assets

Based upon the audited financial statements for the year The second component of the DuPont formula is the Return

ending March 2008, the Company's revenues grew by on Assets (ROA) ratio, which measures the amount of Net

around 51% compared to the prior year. The revenues of the Income that is generated for each rupee of Assets. The ROA

company for the past 2 years have increased by an ratio has increased compared to the prior year. The change

average of around 120%. This shows that the company has in ROA was driven by an increase in Net Profit After Tax by

the abilities to grow above the required growth rate to 84% at Rs. 3.6bn, and an increase in Total Assets by around

sustain its business. 10% at Rs. 7.34bn.

Particulars Mar FY06 Mar FY07 Mar FY08


Baseline Indicator III: DuPont Formula Analysis
DUPONT RETURN ON ASSETS 3.20% 6.83% 8.38%
The DuPont Formulas for Return on Assets and Return on
Equity ratios are calculated for each full year of the historic
An increase in Net Profit After Tax and an increase in Total
financial statements. The ratios are presented here as an
Assets indicate growth in the profitability, accompanied by
alternate way to evaluate the quality of the Company's
an increase in asset levels. The combined effect results in an
Return on Equity and to help identify potential weaknesses.
increase in the Return on Asset ratio compared to the
previous year.
Particulars Mar FY06 Mar FY07 Mar FY08
DUPONT RETURN ON
DuPont Financial Leverage
EQUITY 4.98% 17.62% 14.02%
DUPONT RETURN ON The third component is the Financial Leverage ratio, which
EQUITY (ROLLING AVG.) - 11.30% 12.21%
measures the number of rupees of Assets that the Company
is carrying for every rupee of Equity.

The DuPont Analysis indicates that ROE for the most recent Particulars Mar FY06 Mar FY07 Mar FY08
financial statement is 14.02%, which is a decline of 3.6% from FINANCIAL LEVERAGE RATIO 1.56 2.58 1.67
the previous year. In addition, ROE for the current year is
higher than the rolling average of 12.21% for the three years The Financial Leverage ratio decreased compared to the
included in this analysis. prior year. The change in Leverage was driven by an
increase in Total Assets of around Rs. 7.34bn and due to a
DuPont Asset Turnover decrease in the total debt by around Rs. 919mn. This shows
that the company has the ability to payoff its debt.
The first component of the DuPont formula is the Asset
Turnover ratio, which measures the number of rupees of
Notes:
Sales Revenue generated for each rupee of Assets. The
Asset Turnover ratio was steady at around 1.80 in the last two It is to be noted that the rolling average for FY07 has not
years. The stability in Asset Turnover was driven by an been calculated for certain companies due to the
increase in Sales Revenues at Rs. 78.7bn, which grew by unavailability of the required data.
around 51%, while Total Assets grew by around 10% only.

81
Financials Projection
SECTION 1: CASH INFLOW ESTIMATE (Rs.)
Particulars Mar-08 Mar-09 Mar-10 Mar-11 Mar-12
Revenues 78,711 108,612 141,578 205,883 280,402
EBITDA 8,104 12,189 19,005 31,202 45,789
Less: DA 1,462 1,872 2,232 2,649 3,156
Prov. For Premium on FCCB Reserve - 222 222 222 -
EBIT 6,641 10,095 16,551 28,331 42,633
Less: Interest 1,806 2,239 2,306 2,755 2,954
EBT 4,835 7,856 14,245 25,576 39,680
Less: Tax 1,235 2,023 3,668 6,586 10,217
Net Profit after tax 3,600 5,833 10,577 18,990 29,462
Cash from Operations 6,430 10,698 15,308 24,579 35,532
Cash from Operations (USD) 124 207 296 474 686
Section 2: Working Cap and Investment/Capex
Working Capital Changes (11,612) (9,574) (6,227) (3,545) (7,240)
Changes from Investing/Capex Activities (7,348) (3,594) (4,244) (5,810) (7,505)
Net Cash from W/Cap and Investment/Capex (18,960) (13,168) (10,471) (9,355) (14,745)
Net Cash from W/Cap & Invest/Capex ($mn) (366) (254) (202) (181) (285)
Section 3: Financing Activities
Increase from Equity 11,407 2,276 - - -
Changes in Debt (920) 987 1,238 754 (1,867)
Net Cash from Financing Activities 9,017 2,069 (1,194) 2,171 (868)
Net Cash from Financing Activities ($mn) 174 40 (23) 42 (17)
Section 4: Net Cash Available for FCCB
Opening Net Cash Balance 9,956 6,348 5,946 9,589 26,985
Net Cash Flow For the Year (3,608) (402) 3,643 17,395 19,919
Closing Net Cash Available for FCCB 6,348 5,946 9,589 26,985 46,903
Closing Net Cash Available for FCCB ($mn) 123 115 185 521 905
SECTION 5: FCCB REPAYMENT LIABILITY
Original Issue Size (USD) 125 125 125 125
Less: Amount already converted (USD) 75 75 75 75
FCCB O/S (USD) 50 50 50 50
Add: Premium on Redemption 4.28 4.28 4.28
Total Payable on maturity date (USD) 50 54 58 63
Total Payable on maturity date (Rs.) 2,574 2,796 3,018 3,240 -
SECTION 6: RATIO ANALYSIS
Current M Cap Rs. Mn 55,500
Currernt M Cap USD Mn 1,071
Networth (Rs.) 27,433 35,542 46,108 65,098 94,560
Networth (USD) 530 686 890 1,257 1,825
Debt (Rs.) 16,073 18,326 19,660 24,809 26,895
Debt / Equity 0.6 0.5 0.4 0.4 0.3
EBITDA / Debt 0.5 0.7 1.0 1.3 1.7
Interest Coverage Ratio 3.7 4.5 7.2 10.3 14.4
SECTION 7: REDEMTION COVER
FCCB redemption ratio 2.47 2.13 3.18 8.33 NA
FCCB Lia / Current M Cap 0.05 0.05 0.05 0.06 NA
All USD / Irs. Figures are in millions.
All balance sheet numbers are at end FY08
* USD @ 51.8

82
GA CREDIT SCORE ANALYSIS
Credit Score: Risk Assessment Weight 200603(12) 200703(12) 200803(12)
Ratio 1 NET WORKING CAPITAL / TOTAL TANGIBLE ASSETS 6.56 56.65% 52.50% 53.07%
Ratio 2 RETAINED EARNINGS / TOTAL TANGIBLE ASSETS 3.26 61.27% 36.93% 58.34%
Ratio 3 EBIT / TOTAL TANGIBLE ASSETS 6.72 9.44% 13.30% 15.49%
Ratio 4 TANGIBLE NETWORTH / TOTAL TANGIBLE ASSETS 1.05 64.29% 38.74% 59.76%
CONSTANT 3.25 3.25 3.25
GA CREDIT SCORE 10.27 9.20 10.30
Sustainable Growth Ratio
Ratio 5 NET PROFIT MARGIN 3.21% 3.84% 4.62%
Ratio 6 RETENTION RATIO 89.27% 95.35% 96.61%
Ratio 7 MAXIMUM SUSTAINABLE GROWTH IN REVENUE 4.45% 16.80% 13.55%
HISTORIC GROWTH IN NET SALES 197.51% 50.99%
HISTORIC GROWTH IN NET SALES (ROLLING AVERAGE) 98.76% 82.84%
DIFFERENCE FROM MAXIMUM 180.71% 37.44%
Dupont Analysis
Ratio 8 DUPONT RETURN ON EQUITY 4.98% 17.62% 14.02%
DUPONT RETURN ON EQUITY (ROLLING AVERAGE) 11.30% 12.21%
Ratio 9 DUPONT ASSET TURNOVER 1.00 1.78 1.81
Ratio 10 DUPONT RETURN ON ASSETS 3.20% 6.83% 8.38%
Ratio 11 DUPONT FINANCIAL LEVERAGE 1.56 2.58 1.67

Glossary of Financial Terms - Asset use efficiency, which is measured by total asset
turnover
1. Retention Ratio:
- Financial leverage, which is measured by the equity
This ratio measures the proportion of net profit after tax
multiplier
that is not paid out as dividends but retained in the
business. Calculated as:
Calculated as: ROE = Profit Margin (Profit/Sales) * Total Asset Turnover
(Sales/Assets) * Equity Multiplier (Assets/Equity)
= (Net Profit After Tax – Dividends) / Net Income
5. Rolling Average:
2. Asset Turnover:
The average of a security constructed in a period as
This ratio Indicates the relationship between assets
short as a few days or as long as several years and
and revenue and measures the amount of sales that
showing trends for the latest interval. As each new
are generated from each dollar of assets.
variable is included in calculating the average, the
Calculated as: last variable of the series is deleted.
= Net Revenue / Total Assets 6. DuPont Asset Turnover Ratio:
3. Sustainable Growth Rate: Calculated as:
The maximum growth rate that a firm can sustain = Gross Revenue / Total Tangible Assets
without having to resort to additional borrowings or
7. DuPont Return on Assets:
increase financial leverage.
It is a financial ratio that shows how the return on assets
Calculated as:
depends on both asset turnover and profit margin.
= ROE x Retention Ratio The DuPont method breaks out these two
components from the return on assets ratio in order to
4. DuPont Return on Equity:
determine the impact of each on the profitability of
The DuPont method breaks the return on equity (ROE) the company.
down into three parts: a) profit margin, b) asset
This ratio helps to highlight the impact of changes in
turnover and c) financial leverage.
asset turnover and profit margin.
DuPont Method tells us that ROE is affected by three
Calculated as:
things:
ROA DuPont = (Net Profit After Tax / Net Sales) x (Net
- Operating efficiency, which is measured by profit
Sales / Total Assets)
margin

83
Income Statement
Year ended 31 Mar (in Rs. mn) FY05 FY06 FY07 FY08 FY09E FY10E FY11E FY12E
Net sales 18,634 16,849 51,266 77,900 108,085 140,919 205,059 279,373
growth (%) (10) 204 52 39 30 46 36
Other Income 569 317 794 811 527 659 823 1,029
Total Revenue 19,203 17,166 52,059 78,711 108,612 141,578 205,883 280,402
Operating expenses 15,836 14,937 47,163 70,608 96,424 122,573 174,681 234,612
Operating Profit 2,798 1,912 4,103 7,293 11,662 18,346 30,379 44,760
EBITDA 3,367 2,229 4,897 8,104 12,189 19,005 31,202 45,789
growth (%) (34) 120 65 50 56 64 47
Depreciation 839 604 1,062 1,462 1,872 2,232 2,649 3,156
Prov. For Premium on FCCB Reserve 0 0 0 0 222 222 222 0
EBIT 2,528 1,625 3,835 6,641 10,317 16,772 28,553 42,633
Interest Paid 1,333 794 1,185 1,806 2,239 2,306 2,755 2,954
Pre-Tax Profit ( before non-recurring item) 1,195 831 2,650 4,835 8,078 14,466 25,797 39,680
Add/(less): Exceptional items 0 0 0 0 0 0 0 0
Pre-tax Profit (after non-recurring item) 1,195 831 2,650 4,835 8,078 14,466 25,797 39,680
Tax (Current +Deferred+FBT) 194 291 690 1,235 2,023 3,668 6,586 10,217
Net Profit 1,001 540 1,960 3,600 5,833 10,577 18,990 29,462
growth (%) - (46) 263 84 62 81 80 55

Balance Sheet
Year ended 31 Mar (in Rs. mn) FY05 FY06 FY07 FY08 FY09E FY10E FY11E FY12E
Current Assets 11,288 15,464 44,096 55,820 74,732 93,476 131,951 178,720
Investments 259 416 1,698 5,458 5,458 5,458 5,458 5,458
Net Fixed Assets 5,133 7,020 13,474 16,169 17,892 19,904 23,064 27,413
Other Non-current Assets 99 157 178 257 280 304 350 404
Total Assets 16,779 23,056 59,446 77,704 98,361 119,141 160,824 211,995
Current Liabilities 3,855 5,676 28,923 32,869 43,160 52,034 69,569 89,178
Total Debt 7,187 5,550 16,992 16,073 18,326 19,660 24,809 26,895
Other non-current liabilities 635 616 742 1,330 1,333 1,339 1,348 1,363
Total Liabilities 11,677 11,841 46,657 50,273 62,820 73,032 95,725 117,435
Share Capital 252 522 523 607 617 607 607 607
Reserve & Surplus 4,850 10,693 12,267 26,826 34,925 45,501 64,491 93,953
Preference Share 0 0 0 0 0 0 0 0
Shareholders Funds 5,102 11,215 12,789 27,433 35,542 46,108 65,098 94,560
Less: Misc. expenditure 0 0 0 0 0 0 0 0
Total Equity & Liabilities 16,779 23,056 59,446 77,704 98,361 119,141 160,824 211,995
Capital employed 12,924 17,381 30,523 44,836 55,201 67,107 91,255 122,818

Cash Flow Statement


Year ended 31 Mar (in Rs. mn) FY05 FY06 FY07 FY08 FY09E FY10E FY11E FY12E
EBT & Exceptional items 1,195 831 2,650 4,835 7,856 14,245 25,576 39,680
Depreciation 839 604 1,062 1,462 1,872 2,232 2,649 3,156
Prov. For Premium on FCCB Reserve 0 0 0 0 222 222 222 0
Net Chg in working capital (3,176) (1,752) (2,912) (11,612) (9,574) (6,227) (3,545) (7,240)
Cash Flow from operation (a) (1,360) 4 614 (5,183) 1,124 9,081 21,034 28,292
Capital Expenditure (2,077) (2,485) (4,793) (4,208) (3,594) (4,244) (5,810) (7,505)
Cash Flow from Investing (b) (1,335) (2,572) (8,083) (7,348) (3,594) (4,244) (5,810) (7,505)
Free Cash Flow (a+b) (2,695) (2,568) (7,468) (12,530) (2,471) 4,837 15,224 20,787
Equity Raised / (repaid) 46 84 0 338 10 0 0 0
Prov. For Premium on FCCB Reserve 0 0 0 0 (222) (222) (222) 0
Proceed from sale of shares 2,239 5,765 20 11,068 2,266 0 0 0
Debt raised / (repaid) 1,349 (1,637) 11,585 (920) 2,253 1,334 5,148 2,086
Cash flow from financing (c) 2,604 3,260 10,627 9,017 2,069 (1,194) 2,171 (868)
Net Chg in cash flow (a+b+c) (91) 692 3,159 (3,513) (402) 3,643 17,395 19,919

84
Key ratios
Year ended 31 Mar FY05 FY06 FY07 FY08 FY09E FY10E FY11E FY12E
EPS (Rs) 8 2 8 12 19 35 63 97
EPS growth (%) -74 263 58 59 84 80 55
EBITDA margin (%) 18 13 9 10 11 13 15 16
EBIT margin (%) 13 9 7 8 9 12 14 15
ROCE (%) 8 3 6 8 11 16 21 24
Total Debt / Equity (%) 1.4 0.5 1.3 0.6 0.5 0.4 0.4 0.3

Valuations
Year ended 31 Mar FY05 FY06 FY07 FY08 FY09E FY10E FY11E FY12E
PER (x) 23.1 88.5 24.4 15.4 9.7 5.2 2.9 1.9
Price/Book (x) 4.5 4.3 3.7 2.0 1.6 1.2 0.9 0.6
EV / Net sales (x) 3.5 3.8 1.3 0.8 0.6 0.5 0.3 0.2
EV / EBITDA (x) 16.3 24.6 11.2 6.8 4.5 2.9 1.8 1.2
EV / EBIT (x) 25.6 39.8 16.9 9.7 6.3 3.9 2.3 1.5

Du Pont Analysis - ROE


Year ended 31 Mar FY05 FY06 FY07 FY08 FY09E FY10E FY11E FY12E
Net margin (%) 5.2 3.1 3.8 4.6 5.4 7.5 9.2 10.5
Asset Turnover (x) 1.1 0.7 0.9 1.0 1.1 1.2 1.3 1.3
Equity Multiplier (x) 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0
Return on Equity (%) 6.0 2.3 3.3 4.6 5.9 8.9 11.8 13.9

DCF Valuation
Free Cash Flow
Particulars (Rs. Million) FY08 FY09E FY10E FY11E FY12E FY13E
Net Profit 3,600 5,833 10,577 18,990 29,462 39,797
Depreciation 1,462 1,872 2,232 2,649 3,156 3,686
Change in Working Capital (11,612) (9,574) (6,227) (3,545) (7,240) (6,153)
Capex (2,485) (4,793) (4,208) (3,594) (4,244) (5,810)
Free Cash Flow to Firm (9,035) (6,662) 2,374 14,500 21,134 31,519
Discounted Value (7,574) (5,585) 1,668 8,542 10,437 13,048

DCF Calculation inputs Assumptions


Terminal Phase FY13 Risk Free rate 9
Discounted value till FY13 28,110 Risk Premium 12
Discounted Terminal Value 79,658 Adjusted Beta 1.32
Total Value 107,768 Cost of Equity (%) 24.8
Net Debt 11,428 Cost of Debt (%) 12
Total Shareholders Value 96,340 WACC (%) 19.29
Number of Shares (million) 308 Discount rate (%) 19.29
Value per share (Rs.) 312 Terminal growth rate (%) 2.5
Our 15 months forward target price (Rs.) 281
Upside (%) 54%

85
IT / ITES CORE Projects & Technologies Limited

GA BOND RATING : 2
YIELD / GOOD CREDIT : BUY

FCCB Description
CMP 50
Nominal Value 2 BOND NAME CORE PROJECTS USD 0.000 '12
BSE Sensex 10,120 (CPTL IN )Iss'd 1/27 USD80m
COUPON (% p.a) 0
Stock Statistics
ISSUE SIZE ($m) 80
Bloomberg code CPTL IN
AMOUNT OUTSTANDING( $m) 25.2
Reuters Code CORE.BO
MATURITY 5/12/2012
BSE code 512199
NSE code COREPROTEC TOTAL REDEMPTION AMOUNT($m) 37.2
ISIN No. INE247G01024 REDEMPTION AT MATURITY 146.29
YTM & YTP 23.61
Market Cap (mn) Rs. 4,657 ($89.9)
CONVERSION PRICE (INR) 82.86
52 Wk High/Low (Rs.) 465 / 34
PARITY 49.58
NSE Avg Daily Vol(12 m) 857,495
BSE Avg Daily Vol(12 m) 757,670 INDICATIVE BOND PRICE 70
PREMIUM 41.19
Shareholding Pattern COUPON YIELD 0%
Particulars No. of shares in % BOND FLOOR -
Promorter 41,141,291 47.7 CREDIT SPREAD 1000bp
MFs/FIs/Banks 3,572,746 4.1
FAIR VALUE -
FIIs 6,796,542 7.9 Source: Company & Global Absolute Research
PCBs 22,867,493 26.5
Public 11,888,247 13.8 Recommendation: BUY BONDS AS YIELD PLAY
Total 86,266,319 100.0 Taking cognizance of Core Projects & Technology Ltd.'s (CPTL) product pipeline, its
core competence in working with state Governments, and the strong domain
Stock Performance knowledge of the education vertical, the company is expected to grow at a
CAGR of 26% for the period FY08-FY12. It is beneficial to work with the government
In % 1m 3m 6m
as the revenue visibility is very high and there is less probability of defaults on
Absolute -77 -74 -75 receipts, despite the economic slowdown.
Relative -53 -48 -37
Of the entire FCCBs of USD 80mn, only USD 25.2mn FCCB is left for conversion.
Research Analyst Though, the current share price of the company is Rs. 50 currently and original
Deepika Agarwal conversion price was rs. 165.2, the conversion price of the bonds has now been
91-124-4386140
reset downwards to Rs. 82.86. The bond is still redeem in May FY12 which provides 3
250 ½ years for the share price to appreciate to the conversion price.
With the current share price near all time lows, strong visible casflows, insulated
200 earnings (although we have reduced growth we do not see the global events
adversely effecting future growth) we see a potential equity upside and have a
150 target price based on DCF valuation of Rs 139.
In case FCCB conversion pirce is not achieved, with a Global Absolute Bond Rating
100
of 2, we believe that CPTL would not face any major problems in the repayment of
its FCCB liabilities. This is supported by the Average FCCB Redemption Cover of 0.66,
50 Sensex CPTL IN EQUITY till the year FY12. A current year GA credit score of 11.69 implies strong credit i.e. the
company is unlikely to default on payments. By FY12, we expect the Company’s
0 debt/equity ratio to decline to 0.2x from the current 0.4x, thus improving its ability to
Oc t-07 Dec -07 F eb-08 Apr-08 Jun-08 Aug-08
refinance its debt, if so required. Even DuPont analysis shows that there is YoY
Chairman: Mr. Sanjeev Mansotra improvement in ROE. The company is very thinly leveraged, and we have
Registered Unit No. 1-4, Building No. 4, forecasted an average annual cash inflow from operations of almost USD 43 mn,
upto the redemption dates.
Office: Sector III, Mahape Navi,
Mumbai (Maharashtra) The bonds are trading at an attractive yield of 23.61% on the downside based on
strong credit and provide an opportunity on the upside based on its equity
Website: www.coreprojectstech.com
performing so we recommend a BUY as a Yield and Equity play.

86
Equity Analysis n MoU with IGNOU: CPTL inked an MoU with the Indira
Gandhi National Open University (IGNOU) for setting
Core Projects and Technologies is a software solution up visualization learning centres at all IGNOU centres
provider having subsidiaries in USA, UK, Middle East and in India. Setting up of one centre will generate
Africa. The company is focused on Education, Healthcare, onetime license revenue of upto Rs. 30mn and
ERP, BFSI and Logistics verticals. Its major focus is in the recurring revenues of Rs. 28mn per year for the
Education vertical, whose contribution towards topline has company. Over the next five years, CPTL plans to set
grown from 25% to 60% in FY08, and is expected to be up 200 centres per year, including the centres to be
around 80% in FY09. set up for IGNOU. We expect the company to set up
40 IGNOU centres by FY09, and a further 100 by FY10.
CPTL, a niche player within the education vertical, having a
huge addressable domestic education infrastructure n Plans to spin off IGNOU alliance into a new subsidiary:
market, an aggressive inorganic strategy and exponential It has planned to spin off its IGNOU alliance into a new
growth in revenues and margins, promises to be a well subsidiary, which is supposed to add $ 100mn to the
positioned player in the long term. The company is moving top line, in the coming two years. CPTL also extensively
up the value chain, from a pure IT player to an IT education works with the state governments under the aegis of
infrastructure company and has great potential in the long- Sarva Shiksha Abhiyan (SSA) of the Central
run. However, we expect that the revenues from its Government. This partnership is supposed to add
initiatives will accrue post Q3FY09. At the CMP of Rs. 50, the another $ 100mn in the coming years. The IL&FS
stock trades at a PE of 5.1x FY08 EPS of Rs. 9.8 and P/BV of alliance would focus on the Indian education
0.9xon TTM Book Value of Rs. 57.7. Based on DCF, the industry, and is believed to be the growth driver for
company’s fair value comes at Rs. 139/share. Indian operations.

A brief analysis of Company's financial health n The company's total net fixed assets at present are at
Rs. 901.4mn.
Asset analysis
n Cash in hand in FY08 was Rs. 376.8mn.
n Acquisitions of the company: Acquisitions have been
a primary growth vehicle for CPTL over the last two The Company’s Long-term debt/fixed asset ratio is at 0.87.
years. In these years, the company has made six Since, Core projects and Technologies is an IT based
acquisitions. Most of these companies work in niche company, its net assets include Rs. 825mn of the intellectual
product and solution domain, with an average net property rights.
income margin of around 15%. This has helped CPTL to
Profitability analysis
move up the value chain, from just being a pure IT
service provider to an Education infrastructure
n The Company has been showing more than 100%
company. The acquired companies contribute over
growth in topline & bottomline on YoY basis since
60% to the top-line, and over 45% to the operating
FY06. The FY08 consolidated total income saw a
income.
tremendous 130.6% growth, to Rs 4,530mn.

n Tie-up with NASA’s Centre of Higher Learning (CHL), n Net profit showed much stronger growth of 153.2%. In
US: CHL is a collaborative effort between NASA and FY08, margins expanded by 165bps to 18.7% YoY.
the US state of Mississippi, CPTL will use CAVE (Cave
Automatic Virtual Environment) technology of CHL for n For H1FY09, CPTL has posted strong growth in its
writing content for the global education market. The financial performance. Its sales and net profit grew by
CPTL and CHL collaboration is exclusively confined to 60% and 53% YoY, respectively.
the Asia-Pacific region, and will enable CPTL to
assimilate and internalize the technology, for n For FY08-FY12, we expect CPTL’s sales and net profit to

developing content for the Indian and the grow at a 26.1% and 28% CAGR.

international education markets.

87
Liquidity & Credit analysis ratio for the period is expected to be 49.4x. Thus, CPTL may
be easily able to refinance its debt and repay all its
n CPTL has a very high interest coverage ratio of 39.7x in obligations.
FY08.
Baseline Indicator II: GA Credit Score Risk Assessment
n Its Debt/Equity ratio is also very low at 0.4x in the
current financial year. The GA Credit Score is a predictive model that indicates the
likelihood of a company becoming insolvent within the next
n Out of the total debt of the company, i.e., Rs. 1.7bn
twelve months.
(FY08), FCCBs current bonds amount consists of Rs.
1.3bn (principal). Of the USD 80mn FCCB, only USD Particulars 200603 200703 200803
25.2mn FCCB is currently outstanding, whose current TOTAL CREDIT SCORE 14.64 15.33 11.69
market-value is USD 21mn, whereas these bonds are CHANGE OVER PRIOR YEAR 0.69 -3.64

redeemable at a premium of 46.3% in FY12 i.e. Rs.


37mn (assumed US$ @ Rs. 51.8).
The Company has a current year GA Credit Score of 11.69
(See Appendix IV, Section GA credit Score for Explanation).
Global Absolute Bond Rating Analysis
The GA credit Score is in the green territory which represents
The company has a Bond Rating of 2. This means that that distress is highly unlikely for CPTL.
Company has a strong balance sheet support and may be
Baseline Indicator III: Sustainable Growth Analysis
able to refinance its FCCBs in case of redemption.

The Sustainable Growth model is a combination of four


The weightages used for the bond score are as follows:
ratios, and measures the maximum rate of growth in
revenue that can be sustained without obtaining additional
Redemption Cover 60% Highest weighting, since it is cash
outside funding. The maximum sustainable growth in total
based and includes future
revenue is calculated for each year, and is then compared
projections
GA Credit Score 20% Insolvency Rating (Historical); to the actual calculated growth rate in total revenue, from

therefore lower weightage the prior year to the current year.


DuPont 20% Asset and Equity based (Historical);
therefore lower weightage Particulars 200603(12) 200703(12) 200803(12)
NET SALES REVENUE 867.20 1,996.60 5,083.00
MAXIMUM SUSTAINABLE
Baseline Indicator I: FCCB Redemption Cover GROWTH IN REVENUE - 40.79% 52.06%
HISTORIC GROWTH IN
Global Absolute Research has created a Cash Flow Analysis NET SALES 130.24% 154.58%
Tool to examine the number of times that the FCCB HISTORIC GROWTH IN NET
redemption amount is covered by net cash. The higher the SALES (ROLLING AVERAGE) 65.12% 94.94%
cover, the lesser the possibilities of default on the FCCB
redemption date, by the company. It is to be noted that the
Based upon the audited financial statements for the year
company may be able to redeem its FCCBs, as long it has
ending 2008/03, the Company's revenues grew by 154.58%
strong credit and ability to re-finance, even if the ratio is low
compared to the prior year. The data for 3 years included in
(where the ratio is less than 1x).
the analysis indicates an increase in revenues by an
Based on our analysis, the Company’s FCCB Redemption average of 94.94%.
Cover is at 1.33x in FY12 and it has an Average FCCB
Even though, the company would require additional
Redemption Cover of 0.66 upto the redemption date.
finance to grow at near 100%, yet the maximum sustainable
However, CPTL currently has very low leverage of 0.4x as on
growth in sales for the company is ~52%, without any
31st Mar.’08, which is further expected to decline to 0.2x by
additional financing, which is very commendable. Thus, we
FY12 (based on our assumptions). Also, the already high
believe that the Company may not need to obtain
interest coverage of 39.7x in FY08 is further expected to
additional financing to keep growing at a healthy rate.
improve to 100.1x by FY12. The Average Interest Coverage

88
Baseline Indicator IV: DuPont Formula Analysis More than proportionate increase in net assets over net
profit signifies lower profit generation ability of additional
The DuPont Formula for Return on Assets and Return on acquired assets.
Equity ratios are calculated for each full year of the historic
financial statements. The ratios are presented here as an DuPont Financial Leverage
alternate way to evaluate the quality of the Company's
Return on Equity and to help identify potential weaknesses. The third component is the Financial Leverage ratio, which
measures the number of rupees of Assets that the Company
Particulars 200603(12) 200703(12) 200803(12) is carrying for every rupee of Equity.
DUPONT RETURN ON
EQUITY 90.11% 42.70% 53.28% Particulars 200603 200703 200803

DUPONT RETURN ON DUPONT FINANCIAL LEVERAGE 1.49 1.04 2.06

EQUITY (ROLLING AVG.) 66.41% 62.03%

The Financial Leverage ratio increased compared to the


prior year. The change in Leverage was driven by an
The DuPont Analysis indicates that ROE for the most recent
increase in Total Assets of Rs. 2,485mn and an increase in
financial statement is 53.28%, which is an increase of
Tangible Net worth of Rs. 835mn only.
1052bps from the previous year. But, the ROE for the current
year is lower than the rolling average of 62.03% for the three Notes:
years included in this analysis.
It is to be noted that the rolling average for FY07 has not
DuPont Asset Turnover been calculated for certain companies due to the
unavailability of the required data.
The first component of the DuPont formula is the Asset
Turnover ratio, which measures the number of rupees of
Sales Revenue generated for each rupee of Assets. The
Asset Turnover ratio has steadily declined YoY in the last two
years to 1.55 in FY08 from 4.76 in FY06. Even though, the sales
have grown over 130% YoY, the total tangible assets have
grown more than the sales growth, resulting in a decline in
the asset turnover ratio.

Particulars 200603 200703 200803


DUPONT ASSET TURNOVER 4.76 2.53 1.55

DuPont Return on Assets

The second component of the DuPont formula is the Return


on Assets (ROA) ratio, which measures the amount of Net
Income that is generated for each rupee of Assets. The ROA
ratio has decreased compared to the prior year. The
change in ROA was driven by a more than proportionate
increase in Net Profit After Tax of Rs. 525.5mn and an
increase in Total Assets of Rs. 2,485mn.

Particulars 200603 200703 200803


DUPONT RETURN ON ASSETS 60.54% 40.87% 25.83%

89
Financials Projection
SECTION 1: CASH INFLOW ESTIMATE
Particulars (in Rs. mn) Mar-08 Mar-09 Mar-10 Mar-11 Mar-12
Revenue 4,530 6,947 9,509 13,016 14,427
EBITDA 1,049 1,876 2,567 3,514 3,895
Less: DA 45 134 229 351 349
Less: Prov. For Premium on FCCB Redemption 0 153 156 156 156
EBIT 1,004 1,589 2,183 3,007 3,391
Less: Interest 25 100 68 51 34
EBT 979 1,489 2,115 2,957 3,357
Less: Tax 134 203 289 404 458
Net Profit after tax 845 1,286 1,826 2,553 2,898
Cash from Operations 891 1,572 2,211 3,060 3,403
Cash from Operations (USD) 17 30 43 59 66
Section 2: Working Cap and Investment/Capex
Working Capital Changes (1,585) (1,093) (1,117) (1,530) (615)
Changes from Investing/Capex Activities (2,223) (720) (1,440) (1,920) (323)
Net Cash from W/Cap and Investment/Capex (3,808) (1,813) (2,557) (3,450) (938)
Net Cash from W/Cap & Invest/Capex ($mn) (74) (35) (49) (67) (18)
Section 3: Financing Activities
Increase from Equity 1,516 452 (156) (156) (156)
Changes in Debt 1,660 553 2 2 2
Net Cash from Financing Activities 3,176 1,004 (154) (154) (154)
Net Cash from Financing Activities ($mn) 61 19 (3) (3) (3)
Section 4: Net Cash Available for FCCB
Opening Net Cash Balance 279 538 1,301 801 257
Net Cash Flow For the Year 258 764 (500) (544) 2,311
Closing Net Cash Available for FCCB 538 1,301 801 257 2,568
Closing Net Cash Available for FCCB ($mn) 10 25 15 5 50
SECTION 5: FCCB REPAYMENT LIABILITY
Original Issue Size (USD) 80 80 80 80 80
Less: Amount already converted (USD) 55 55 55 55 55
FCCB O/S (USD) 25 25 25 25 25
Add: Premium on Redemption 3 3 3 3
Total Payable on maturity date (USD) 25 28 31 34 37
Total Payable on maturity date (Rs.) 1,305 1,461 1,617 1,772 1,928
SECTION 6: RATIO ANALYSIS
Current M Cap Rs. Mn 4,657.5
Currernt M Cap USD Mn 89.9
Networth (Rs) 3,908 5,799 7,625 10,178 13,076
Networth (USD) 75 112 147 196 252
Debt (Rs.) 1,678 2,231 2,233 2,234 2,236
Debt / Equity 0.4 0.4 0.3 0.2 0.2
EBITDA / Debt 0.6 0.8 1.1 1.6 1.7
Interest Coverage Ratio 39.7 15.9 32.2 59.2 100.1
SECTION 7: FCCB Cover
FCCB redemption ratio 0.41 0.89 0.50 0.15 1.33
FCCB Lia / Current M Cap 0.27 0.30 0.33 0.36 0.39
All Usd / Irs. Figures are in millions.
Source: FY08 taken from Company Annual Report and results are consolidated.
*USD @ 51.8

90
GA CREDIT SCORE ANALYSIS
Credit Score: Risk Assessment Weight 200603(12) 200703(12) 200803(12)
Ratio 1 NET WORKING CAPITAL / TOTAL TANGIBLE ASSETS 6.56 70.03% 79.41% 67.90%
Ratio 2 RETAINED EARNINGS / TOTAL TANGIBLE ASSETS 3.26 47.04% 78.00% 43.42%
Ratio 3 EBIT / TOTAL TANGIBLE ASSETS 6.72 67.78% 49.39% 30.62%
Ratio 4 TANGIBLE NETWORTH / TOTAL TANGIBLE ASSETS 1.05 67.18% 95.70% 48.48%
CONSTANT 3.25 3.25 3.25
GA CREDIT SCORE 14.64 15.33 11.69
Sustainable Growth Ratio
Ratio 5 NET PROFIT MARGIN 12.72% 16.13% 16.68%
Ratio 6 RETENTION RATIO 96.19% 95.53% 97.71%
Ratio 7 MAXIMUM SUSTAINABLE GROWTH IN REVENUE 86.68% 40.79% 52.06%
HISTORIC GROWTH IN NET SALES 130.24% 154.58%
HISTORIC GROWTH IN NET SALES (ROLLING AVERAGE) 65.12% 94.94%
DIFFERENCE FROM MAXIMUM 89.44% 102.52%
Dupont Analysis
Ratio 8 DUPONT RETURN ON EQUITY 90.11% 42.70% 53.28%
DUPONT RETURN ON EQUITY (ROLLING AVERAGE) 66.41% 62.03%
Ratio 9 DUPONT ASSET TURNOVER 4.76 2.53 1.55
Ratio 10 DUPONT RETURN ON ASSETS 60.54% 40.87% 25.83%
Ratio 11 DUPONT FINANCIAL LEVERAGE 1.49 1.04 2.06

Glossary of Financial Terms - Asset use efficiency, which is measured by total asset
turnover
1. Retention Ratio:
- Financial leverage, which is measured by the equity
This ratio measures the proportion of net profit after tax
multiplier
that is not paid out as dividends but retained in the
business. Calculated as:
Calculated as: ROE = Profit Margin (Profit/Sales) * Total Asset Turnover
(Sales/Assets) * Equity Multiplier (Assets/Equity)
= (Net Profit After Tax – Dividends) / Net Income
5. Rolling Average:
2. Asset Turnover:
The average of a security constructed in a period as
This ratio Indicates the relationship between assets
short as a few days or as long as several years and
and revenue and measures the amount of sales that
showing trends for the latest interval. As each new
are generated from each dollar of assets.
variable is included in calculating the average, the
Calculated as: last variable of the series is deleted.
= Net Revenue / Total Assets 6. DuPont Asset Turnover Ratio:
3. Sustainable Growth Rate: Calculated as:
The maximum growth rate that a firm can sustain = Gross Revenue / Total Tangible Assets
without having to resort to additional borrowings or
7. DuPont Return on Assets:
increase financial leverage.
It is a financial ratio that shows how the return on assets
Calculated as:
depends on both asset turnover and profit margin.
= ROE x Retention Ratio The DuPont method breaks out these two
components from the return on assets ratio in order to
4. DuPont Return on Equity:
determine the impact of each on the profitability of
The DuPont method breaks the return on equity (ROE) the company.
down into three parts: a) profit margin, b) asset
This ratio helps to highlight the impact of changes in
turnover and c) financial leverage.
asset turnover and profit margin.
DuPont Method tells us that ROE is affected by three
Calculated as:
things:
ROA DuPont = (Net Profit After Tax / Net Sales) x (Net
- Operating efficiency, which is measured by profit
Sales / Total Assets)
margin

91
Income Statement
Particulars (in Rs. mn) 2008 2009E 2010E 2011E 2012E
Net Sales 4,530 6,947 9,509 13,016 14,427
Cost of Sales 3,481 5,071 6,941 9,502 10,531
EBITDA 1,049 1,876 2,567 3,514 3,895
Depreciation 45 134 229 351 349
Prov. For Prem. on FCCB redeem. 153 156 156
EBIT 1,004 1,589 2,183 3,007 3,391
Interest 25 100 68 51 34
EBT 979 1,489 2,115 2,957 3,357
Tax 134 203 289 404 458
PAT 845 1,286 1,826 2,553 2,898

Balance Sheet
Particulars (in Rs. mn) 2008 2009E 2010E 2011E 2012E
Share Capital 166 173 173 173 173
Share Warrants 214 210 210 210 210
Reserves 3,529 5,416 7,243 9,796 12,694
Misc. Exp. 1 1 1 1 1
Total Shareholders Fund 3,908 5,799 7,625 10,178 13,076
Minority Interest - - - - -
Debt 1,678 2,231 2,233 2,234 2,236
Non-FCCB Debt 370 770 616 462 308
FCCB Debt 1,309 1,461 1,617 1,772 1,928
Deferred Tax 12 12 12 12 12
Total Liabilities 5,599 8,041 9,869 12,424 15,324
Assets
Gross Block 1,531 2,040 2,760 4,200 6,120
Accum Dep. 109 243 472 823 1,172
Net Block 1,421 1,797 2,288 3,377 4,948
WIP 509 720 1440 1920 323
Net Fixed Assets 1,931 2,517 3,728 5,297 5,271
Goodwill on Consolidation 1,193 1,193 1,193 1,193 1,193
Current Assets
Inventories 43 66 90 124 137
Sundry Debtors 1,968 3,018 4,131 5,655 6,268
Cash in Hand 538 1,301 801 257 2,568
Loans & Advances 854 1,310 1,793 2,454 2,720
Current Liabilities 779 1,136 1,554 2,128 2,358
Prov. 149 229 313 429 475
Net Current Assets 2,474 4,331 4,948 5,934 8,860
Total Assets 5,599 8,041 9,870 12,424 15,324

92
Cash Flow Statement
Particulars (in Rs. mn) 2008 2009E 2010E 2011E 2012E
PBIT 1,004 1,589 2,183 3,007 3,391
Add : Depreciation 45 134 229 351 349
Add: Prov. For Premium on FCCB Redemption - 153 156 156 156
(Inc)/Dec in WC -1585.3 (1,093) (1,117) (1,530) (615)
Taxes Paid (134) (203) (289) (404) (458)
CF from Operations (670) 579 1,161 1,581 2,822
(Inc)/Dec in FA (1,327) (509) (720) (1,440) (1,920)
(Inc)/Dec in Capex (502) (211) (720) (480) 1,597
(Pur)/Sale of Investments 0 - - -
Misc. Expenses (394)
CF from Investments (2,223) (720) (1,440) (1,920) (323)
Increase Equity 240 3 - - -
Premium from Equity Issue 1,276 448 (156) (156) (156)
Increase in Debt 1,660 553 2 2 2
Interest Paid (25) (100) (68) (51) (34)
CF from Fin. Activity 3,151 904 (222) (205) (188)
Inc/Dec of Cash 258 764 (500) (544) 2,311
Add: Beginning Balance 279.218 538 1,301 801 257
Closing Balance 538 1,301 801 257 2,568

93
Discounted Cash Flow
Particulars (in Rs. mn) 2008 2009E 2010E 2011E 2012E
EBIT 1,004 1,589 2,183 3,007 3,391
Less Tax 134 203 289 404 458
NOPLAT 870 1,386 1,894 2,604 2,932
Add: Depreciation & Amortisation 45.4 286.4 384.4 506.9 504.7
Gross Cash Flow 916 1,672 2,279 3,111 3,437
Less: Change in W. Capital (1,585) (1,093) (1,117) (1,530) (615)
Cash Flow from Operations (670) 579 1,161 1,581 2,822
Less: Capital Expenditure (2,223) (720) (1,440) (1,920) (323)
Free Cash Flow To Firm (2,892) (141) (279) (339) 2,499
Terminal Value 23,997
Discounted Cash Flow (2,892) (124) (215) (230) 15,840
Fair Value To Firm 12,378
Debt 370
Fair Value for Equity Share Holder 12,008
Per Share vale on Fully Diluted Equity Base of 86.57mn shares 139.0

Ratio Analysis
Particulars 2008 2009E 2010E 2011E 2012E
EPS 9.8 14.9 21.2 29.6 33.6
EPS Growth 53% 42% 40% 14%
CEPS 10.3 18.2 25.6 35.5 39.4
BV/Share 45.1 67.2 88.4 118.0 151.6
Sales/Share 52.3 80.5 110.2 150.9 167.2
Enterprise Value (n Rs. Mn) 6,335 6,106 6,608 7,153 4,844
Profitability Ratio
EBIDTA Margin 23.2% 27.0% 27.0% 27.0% 27.0%
EBIT Margin 22.2% 22.9% 23.0% 23.1% 23.5%
PAT Margin 18.7% 18.5% 19.2% 19.6% 20.1%
Valuation Ratios
P/E 5.1 3.4 2.4 1.7 1.5
P/CEPS 4.9 2.7 2.0 1.4 1.3
P/B 1.1 0.7 0.6 0.4 0.3
EV/EBIDTA (X) 6.0 3.3 2.6 2.0 1.2
EV/Sales 1.4 0.9 0.7 0.5 0.3
Capital Efficiency Ratio
RONW 21.6% 22.2% 24.0% 25.1% 22.2%
ROCE 17.9% 19.8% 22.1% 24.2% 22.1%
D/E (X) 0.4 0.4 0.3 0.2 0.2

94
Irrigation Jain Irrigation Systems Limited

GA BOND RATING : 1
EQUITY PLAY / GOOD CREDIT : BUY

CMP 286 FCCB Description


Nominal Value 10 BOND NAME JAIN IRR SYT LTD USD 0.000 '11
BSE Sensex 8,937 (JI IN )Iss'd 9/26 USD60m
Stock Statistics COUPON (% p.a) 0
Bloomberg code JI IN ISSUE SIZE ($m) 60.00
Reuters Code JAIR.BO AMOUNT OUTSTANDING( $m) 60.00
BSE code 500219 MATURITY 3/30/2011
NSE code JISLJAL TOTAL REDEMPTION AMOUNT($m) 83.6346
ISIN No. INE175A01020 REDEMPTION AT MATURITY 139.391
Market Cap (mn) Rs. 20,721 ($400) YTM & YTP 14.47 -
52 Wk High/Low (Rs.) 770 / 236 CONVERSION PRICE (INR) 345.61
NSE Avg Daily Vol(12 m) 102,226 PARITY 80.66
BSE Avg Daily Vol(12 m) 101,532 INDICATIVE BOND PRICE 100.00
PREMIUM 24.00
Shareholding Pattern
COUPON YIELD 0%
Particulars No. of shares in %
Promoters 23,447,649 32.4 BOND FLOOR 106.80
FIIs 30,379,111 42.0 CREDIT SPREAD 1000bp
Mutual Funds & UTI 6,044,681 8.4 FAIR VALUE 116.90
Banks/FIs/ Insur Co 25,230 0.0 Source: Company & Global Absolute Research
PCBs 5,695,812 7.9
Foreign Corp. 3,146,246 4.4 Recommendation: BUY BONDS AS EQUITY PLAY
Indian Public 3,189,161 4.4
NRIs/OCBs 448,056 0.6 Jain Irrigation System Limited (JISL) has established its Leadership in diverse
Total 72,375,946 100 segments, like Micro & Sprinkler Irrigation Systems (MIS), Agricultural Inputs, Agro-
Processed Products, Plastic Pipes & Sheets. With a Global Absolute Bond Rating of
Stock Performance
1, we believe that JISL would not face any problems in the repayment of its FCCB
In % 1m 3m 6m
liabilities. This is supported by the FCCB Redemption Cover of 1.49x, in the year 2011.
Absolute 2 -42 -55
A current year GA credit score of 9.06 implies that the company has strong
Relative 13 -3 -7
capacity to pay interest and repay principal. However, DuPont analysis shows that
Archana Bhui
this is in line with the industry’s average reflecting the Company’s strategy of
91-124-4386140
growing its volume and top line through OEM contracts which generally have
140
lower margins. The company has current cash flows, and we have forecasted an
120
average annual cash inflow from operations of almost Rs. 2.4bn (US $ 46.06mn) up
100
to the redemption dates, backed by substantial fixed assets. The entire FCCBs of US
80
$ 60mn is outstanding.
60

40
Though, the current share price of the company is Rs. 286 and conversion price is
Sens ex JI IN EQ UITY
20
Rs. 345.6, the bond is to be redeemed in March FY11, which provides 2 ½ years for
0
the share price to appreciate to the conversion price.
N o v -0 7 J a n -0 8 M a r-0 8 M a y -0 8 J u l -0 8 S e p -0 8
With the current share price near its all time lows, strong visible cashflows, insulated
Chairman: Mr. Bhavarlal H Jain
earnings (although we have reduced growth, we do not see the global events
Registered Jain Plastic Park,
adversely affecting the future growth), we see a potential equity upside, and have
Office: PO Box 72, NH No 6,
Jalgaon - 425 001, India arrived at the target price based on conservative P/E valuation of 14.75x on FY09E
Website: www.jains.com earnings, which give a target price of around Rs. 366, achievable within 15 months.

95
We have only taken a conservative sales growth of 3% in Asset Analysis:
FY09, and 8% in the following years till the date of maturity.
Higher than our estimated growth in sales will improve the n JISL has 6 plants located in India.

redemption cover.
n The company's total net fixed assets at present are at
Rs. 10,924.9mn, which include around Rs. 626.2mn of
We recommend a BUY on the Bonds, which are yielding
freehold land (at book value).
14.47% up to redemption and provide downside protection,
as redemption appears covered by adequate cash from
n Cash in hand in FY08 was around Rs. 1,036.2mn.
operations. As the company’s stock is near its all time lows,
and we believe that the stock can surpass the conversion n The company has investments of around Rs. 637.1mn.
price during the period till redemption (our target price is Rs.
366), we believe the bond can provide an equity kicker on n The company has acquisitions in companies
the upside with yield protection on the downside. Chapmin Watermatics (New York, USA;
Holding:100%), Cascade Specialties Inc (Boardman,
Equity Analysis USA; Holding: 80.2%), NuCedar Mills (Chicopee, USA;
Holding: 80%), Acquarius (USA; Holding: 100%),
Jain Irrigation Systems (JISL) has been consistently delivering NaanDan (Israel; Holding: 50%) & Thomas Machines
over 50% growth in Revenues for the past 3-4 years owing to (Yvonand, Switzerland; Holding: 69.8%).
strong growth clocked by the Micro Irrigation (MI) segment.
JISL has also been active on the Acquisitions front-both Profitability Analysis:
domestically and internationally. We believe that the
n MIS continues to be JISL's flagship segment, even as
integration benefits of acquisitions will drive OPMs here-on,
the company has diversified into different segments
and further improve Earnings. Notably, JISL has maintained
like food processing, tissue culture, etc. The segment
its Margins amidst high raw material prices.
contributes over 40% of Total Revenues and over 50%
Driven by the core agri-portfolio (MIS and Food Processing) of Total Operating Profits. The government's efforts to
and further impetus offered by inorganic growth in global increase the irrigation acreage (gross irrigated
arena, JISL’s has emerged as one of the most attractive and acreage estimated at 77mn hectares (ha); additional
scalable agri model. As JISL continues to dominate the MIS irrigation potential at 16mn ha during the XI Five-Year
business space, it is best placed to piggy ride the rapidly Plan) have also been helping JISL to expand its reach.
growing MIS opportunity created by increased budgetary We believe that JISL, with its expanded capacities
allocation (60% higher hectares) and increased state and access to advanced technologies from its global
participation (Maharashtra, Karnataka and MP growing at acquisitions, is poised to take advantage of the
over 100%). We have estimated MIS to be in Rs. 55bn – Rs. favourable environment. It may be noted that the
60bn opportunity space in the next three years, and are initial two quarters of a fiscal are a lean period for the
confident of JISL’s MIS business growing at 40% CAGR over MIS segment, on account of being the pre and post
FY08-10E. Further growth is expected to be seen, due to a monsoon season.
series of international acquisitions that JISL has made in the
n However, in Q1FY09, JISL registered strong growth with
past two years (NaanDan, Aquarius and Chapin
the segment's Revenue y-o-y surging by over 87.2%
Watermatics in particular), which are expected to
and volume increasing by 68.5%. Although, resin’s
contribute around 10% to the profits in the next two
prices (key raw material) have risen significantly
years.With multiple growth drivers in place, we are
tracking the high crude oil prices, JISL has been
confident of JISL’s revenues growing at a CAGR of 7% and
successful in passing on the increase in price to its
profits at a CAGR of 5% over FY08-11E. High earnings visibility,
customers, thereby maintaining its Margins. D u r i n g
coupled with management’s ability to manage three of the
the quarter, JISL has reported forex losses to the tune
most critical variables – farmers, government and weather
of Rs. 220mn.
and valuations of around 14x FY10E, we remain positive over
JISL's growth prospects.

96
Liquidity and Credit Analysis: ability to redeem its FCCBs liabilities. Besides this, its interest
coverage, on an average four years is at a comfortable
n JISL’s interest coverage ratio is at 2.5x (March 08). level of around 2.3x.

n Debt/Equity ratio is also at a position of 1.5x (March


Baseline Indicator II: GA Credit Score Risk Assesement
08).
The GA Credit Score is a predictive model based on the Z
n Out of the total debt of the company, i.e. Rs. 1.27bn
score rating that indicates the likelihood of a company
(FY08), FCCBs current bonds amount consists of Rs.
becoming insolvent within the next twelve months.
533.6mn (principal) + Rs.Nil (interest). And, at present,
the FCCBs outstanding payment obligation for the Particulars Mar 2006 Mar 2007 Mar 2008
two bonds on maturity is Rs. 533.60mn ($ 13.35mn), TOTAL CREDIT SCORE 8.34 7.88 9.06
which is around 73% of the company's cash in hand CHANGE OVER PRIOR YEAR - -0.46 1.20
position in FY08.

n JISL’s Net Debt is Rs.1.11bn, which is 1.32x the


For the most recent year ending 2008/03, the Company has
company’s Networth.
a GA credit Score of 9.08 (see Appendix I, Section GA Credit

n Promoters’ holding in the Company is 32.4% (as on Score for explanation), which places the Company in the

September 30, 2008). “green zone”, indicating unlikely bankruptcy. This is an


increase from the previous year’s Z-Score of 7.88.
Global Absolute Bond Rating Analysis
Baseline Indicator III: Sustainable Growth Analysis

The company has a GA Bond Rating of 1. This is the highest


The Sustainable Growth model is a combination of four
rating and means that the company has both strong credit
ratios and measures the maximum rate of growth in revenue
and ability to redeem its FCCBs liabilities, either through
that can be sustained without obtaining additional outside
refinance or from cash generated from operations.
funding. The maximum sustainable growth in total revenue is

The weightage, we have used for the bond score are as calculated for each year and is then compared to the

follows: actual calculated growth rate in total revenue from the


prior year to the current year.
Redemption Cover 60% Highest weightage since it is cash
based and includes future
Particulars Mar 2006 Mar 2007 Mar 2008
projections
NET SALES REVENUE 10189.50 15817.80 23993.20
GA Credit Score 20% Insolvency Rating (Historical),
MAXIMUM SUSTAINABLE
therefore lower weightage
GROWTH IN REVENUE 13.10% 20.00% 15.75%
DuPont 20% Asset and Equity based (Historical),
HISTORIC GROWTH IN
therefore lower weightage
NET SALES - 55.24% 51.68%
HISTORIC GROWTH IN NET
SALES (ROLLING AVERAGE) - 27.62% 35.64%
Baseline Indicator I: FCCB Redemption Cover

Global Absolute Research has created a Cash Flow Analysis


Tool to examine the number of times that the FCCB Based upon the audited financial statements for the year

redemption amount is covered by net cash. The higher the ending 2008/03, the Company's revenues grew by 51.68%

cover the less chance we believe the company will default compared to the prior year. For the 3 years of data included

on the FCCB redemption date. Note that even when the in this analysis, revenues have increased by an average of

ratio is low (where the ratio is less than 1x), the company may 53.46%

still be able to redeem the FCCBs as long as it has strong


The actual growth in revenue for years 2006 and 2007 is
credit and can re-finance.
greater than the Sustainable growth, which suggests that

The company has an FCCB Redemption Cover of 1.49x, in the Company may need to obtain additional financing.

the year 2011, indicating sufficient coverage and high

97
Baseline Indicator III: DuPont Formula Analysis DuPont Return on Assets

The DuPont Formula for Return on Assets and Return on The second component of the DuPont formula is the Return
Equity ratios are calculated for each full year of the historic on Assets (ROA) ratio, which measures the amount of Net
financial statements. The ratios are presented here as an Income that is generated for each rupee of Assets. The ROA
alternate way to evaluate the quality of the Company's ratio decreased compared to the prior year. The change in
Return on Equity and to help identify potential weaknesses. ROA was driven by an increase in Net Profit after Tax of Rs.
491.50mn and an increase in Total Tangible Assets of Rs.
Particulars Mar 2006 Mar 2007 Mar 2008 8,978.40mn.
DUPONT RETURN ON
EQUITY 21.88% 26.20% 19.02% Particulars Mar 2006 Mar 2007 Mar 2008
DUPONT RETURN ON DUPONT RETURN ON ASSETS 6.70% 7.34% 6.52%
EQUITY (ROLLING AVG.) - 24.04% 22.37%

An increase in Net Profit after Tax and an increase in Total


Assets indicate rising profitability, accompanied by an
The DuPont Analysis indicates that ROE for the most recent
increase in asset levels. The combined effect is a decline in
financial statement is 19.02%, which is a decline of 718bps
the Return on Asset ratio compared to the previous year.
from the previous year. In addition, ROE for the current year
is lower than the rolling average of 22.37% for the three years
DuPont Financial Leverage
included in this analysis.
The third component is the Financial Leverage ratio, which
DuPont Asset Turnover measures the number of rupees of Assets that the Company
is carrying for every rupee of Equity.
The first component of the DuPont formula is the Asset
Turnover ratio, which measures the number of rupees of
Particulars Mar 2006 Mar 2007 Mar 2008
Sales Revenue generated for each rupee of Assets. The
FINANCIAL LEVERAGE RATIO 3.26 3.57 2.92
Asset Turnover ratio decreased by 0.22 in the last two years.
The decline in Asset Turnover was driven by an increase in
Sales Revenues of Rs. 8,175.4mn and an increase in Total The Financial Leverage ratio decreased compared to the

Tangible Assets of Rs. 8,978.4mn prior year. The change in Leverage was driven by an
increase in Total Assets of Rs. 8,978.40mn and an increase in
Particulars Mar 2006 Mar 2007 Mar 2008 Tangible Net worth of Rs. 3,784.30mn. The decrease in the
ASSET TURNOVER RATIO 1.11 1.40 1.18 financial leverage ratio shows that, company is able to
payoff its debt in FY08.

An increase in Sales Revenues and an increase in Total


Notes:
Assets suggest that sales growth is not accompanied by the
increase of assets. It is to be noted that the rolling average for FY07 has not
been calculated for certain companies due to the
The key issue is whether this change has resulted in greater
unavailability of the required data.
turnover or not (i.e. higher sales for each rupee of assets).
The increase in the Asset Turnover ratio indicates that overall
utilization has improved. This can be a temporary condition
as changes in sales and asset policies take effect. The next
question is: have sales and asset management resulted in
higher or lower margins? This is reviewed in the next DuPont
component, Return on Assets.

98
Financials Projection
SECTION 1: CASH INFLOW ESTIMATE
Particulars (in Rs. mn) Mar-08 Mar-09E Mar-10E Mar-11E
Revenue 22,560 23,247 25,124 27,126
EBITDA 3,843 4,189 4,499 4,852
Less: DA 558 575 598 625
Less: Prov. For FCCB 0 408 408 408
EBIT 3,285 3,206 3,493 3,818
Less: Interest 1,327 1,406 1,708 1,581
EBT 1,959 1,801 1,785 2,237
Less: Tax 574 10 593 640
Net Profit after tax 1,384 1,791 1,192 1,597
Cash from Operations 1,942 2,774 2,199 2,630
Cash from Operations (USD) 37 54 42 51
Section 2: Working Cap and Investment/Capex
Working Capital Changes (5,891) (3,123) 2,743 544
Changes from Investing / Capex Activities (4,934) (380) (500) (300)
Net Cash from W/Cap and Investment/Capex (10,831) (3,503) 2,243 244
Net Cash from W/Cap & Invest/Capex ($mn) (209) (68) 43 5
Section 3: Financing Activities
Changes Equity & Share premium 103 0 0 0
Changes in Debt 7,276 2,630 (1,676) (2,452)
Net Cash from Financing Activities 7,379 2,630 (1,676) (2,452)
Net Cash from Financing Activities ($mn) 142 51 (32) (47)
Section 4: Net Cash Available for FCCB
Opening Net Cash Balance + ST Investments 643 1,370 3,270 6,036
Net Cash Flow For the Year (1,510) 1,901 2,765 422
Closing Net Cash + Investment Available for FCCB ($mn) 1,370 3,270 6,036 6,458
Closing Net Cash Available for FCCB ($mn) 26 63 116 125
SECTION 5: FCCB REPAYMENT LIABILITY
Original Issue Size (USD) 60 60 60 60
Less: Amount already converted (USD) 0 0 0 0
FCCB O/S (USD) 60 60 60 60
Add: Premium on Redemption (USD) 8 8 8
Total Payable on maturity date (USD) 60 68 76 84
Total Payable on maturity date (Rs.) 3,108 3,516 3,924 4,333
SECTION 6: RATIO ANALYSIS
Current M Cap Rs. Mn 20,721
Currernt M Cap USD Mn 400
Networth (Rs) 8,374 7,589 8,782 10,379
Networth (USD) 162 147 170 200
Debt (Rs.) 12,756 18,368 17,100 15,056
Debt / Equity 1.52 2.42 1.95 1.45
EBITDA / Debt 0.30 0.23 0.26 0.32
Interest Coverage Ratio 2.48 2.28 2.05 2.42
SECTION 7: FCCB COVER
FCCB Redemption Ratio 0.44 0.93 1.54 1.49
FCCB Lia / Current M Cap 0.15 0.17 0.19 0.21
All USD / Irs. Figures are in millions.
Source: FY08 taken from Company Annual Report and results are consolidated.
* USD @ 51.8

99
GA CREDIT SCORE ANALYSIS
Credit Score: Risk Assessment Weight 200603(12) 200703(12) 200803(12)
Ratio 1 NET WORKING CAPITAL / TOTAL TANGIBLE ASSETS 6.56 52.69% 41.85% 53.78%
Ratio 2 RETAINED EARNINGS / TOTAL TANGIBLE ASSETS 3.26 14.37% 14.77% 26.36%
Ratio 3 EBIT / TOTAL TANGIBLE ASSETS 6.72 12.61% 16.51% 15.84%
Ratio 4 TANGIBLE NETWORTH / TOTAL TANGIBLE ASSETS 1.05 30.63% 28.03% 34.27%
CONSTANT 3.25 3.25 3.25
GA CREDIT SCORE 8.34 7.88 9.06
Sustainable Growth Ratio
Ratio 5 NET PROFIT MARGIN 6.04% 5.26% 5.52%
Ratio 6 RETENTION RATIO 59.86% 76.31% 82.83%
Ratio 7 MAXIMUM SUSTAINABLE GROWTH IN REVENUE 13.10% 20.00% 15.75%
HISTORIC GROWTH IN NET SALES 55.24% 51.68%
HISTORIC GROWTH IN NET SALES (ROLLING AVERAGE) 27.62% 35.64%
DIFFERENCE FROM MAXIMUM 35.24% 35.93%
Dupont Analysis
Ratio 8 DUPONT RETURN ON EQUITY 21.88% 26.20% 19.02%
DUPONT RETURN ON EQUITY (ROLLING AVERAGE) 24.04% 22.37%
Ratio 9 DUPONT ASSET TURNOVER 1.11 1.40 1.18
Ratio 10 DUPONT RETURN ON ASSETS 6.70% 7.34% 6.52%
Ratio 11 DUPONT FINANCIAL LEVERAGE 3.26 3.57 2.92

Glossary of Financial Terms - Asset use efficiency, which is measured by total asset
turnover
1. Retention Ratio:
- Financial leverage, which is measured by the equity
This ratio measures the proportion of net profit after tax
multiplier
that is not paid out as dividends but retained in the
business. Calculated as:
Calculated as: ROE = Profit Margin (Profit/Sales) * Total Asset Turnover
(Sales/Assets) * Equity Multiplier (Assets/Equity)
= (Net Profit After Tax – Dividends) / Net Income
5. Rolling Average:
2. Asset Turnover:
The average of a security constructed in a period as
This ratio Indicates the relationship between assets
short as a few days or as long as several years and
and revenue and measures the amount of sales that
showing trends for the latest interval. As each new
are generated from each dollar of assets.
variable is included in calculating the average, the
Calculated as: last variable of the series is deleted.
= Net Revenue / Total Assets 6. DuPont Asset Turnover Ratio:
3. Sustainable Growth Rate: Calculated as:
The maximum growth rate that a firm can sustain = Gross Revenue / Total Tangible Assets
without having to resort to additional borrowings or
7. DuPont Return on Assets:
increase financial leverage.
It is a financial ratio that shows how the return on assets
Calculated as:
depends on both asset turnover and profit margin.
= ROE x Retention Ratio The DuPont method breaks out these two
components from the return on assets ratio in order to
4. DuPont Return on Equity:
determine the impact of each on the profitability of
The DuPont method breaks the return on equity (ROE) the company.
down into three parts: a) profit margin, b) asset
This ratio helps to highlight the impact of changes in
turnover and c) financial leverage.
asset turnover and profit margin.
DuPont Method tells us that ROE is affected by three
Calculated as:
things:
ROA DuPont = (Net Profit After Tax / Net Sales) x (Net
- Operating efficiency, which is measured by profit
Sales / Total Assets)
margin

100
Income Statement
Particulars (in Rs. mn) FY08 FY09E FY10E FY11E
NET SALES & OP INCOME 22,159 22,823 24,700 26,676
Growth % - 3% 8% 8%
TOTAL EXPENSES 18,717 19,058 20,625 22,275
OPERATING PROFIT 3,442 3,766 4,076 4,402
ADD: OTHER INCOME 401 424 423 450
EBITDA 3,843 4,189 4,499 4,852
Less: DA 558 575 598 625
EBIT 3,286 3,614 3,901 4,227
Less: Interest 1,327 1,406 1,708 1,581
EBT B4 EXCEPTIONAL ITEMS 1,959 2,209 2,193 2,646
LESS: EXCEPTIONAL ITEMS 0 0 0 0
FCCB Redemption Premium 408 408 408
SERVICE TAX DISALLOWED 34 0 0 0
EBT 1,925 1,801 1,785 2,237
Less: Net Prov for Taxation 540 10 592 640
Net Profit after tax 1,384 1,791 1,192 1,597

Balance Sheet
Particulars (in Rs. mn) FY08 FY09E FY10E FY11E
Share Capital 1,606 1,606 1,606 1,606
Reserves & Surplus 6,768 5,984 7,176 8,773
REVALUATION RESERVE 0 0 0 0
TOTAL NETWORTH 8,374 7,589 8,782 10,379
Total Loans 12,756 18,368 17,100 15,056
Deferred Tax Liability (53) (53) (53) (53)
Minority Interests 649 650 650 650
TOTAL LIABILITIES 21,726 26,554 26,479 26,032
FIXED ASSETS
Gross Block 12,405 12,788 13,288 13,588
Less: Acc Depreciation 4,856 5,431 6,029 6,654
NET BLOCK 7,549 7,357 7,259 6,934
Capital Work in Progress 1,202 1,200 1,200 1,200
Investments 637 1,420 3,086 3,408
Goodwill 1,412 1,412 1,412 1,412
Total LT Assets 10,801 11,389 12,956 12,954
Total Current Assets 18,697 23,154 22,167 22,415
Total Current Liabilities 7,772 7,988 8,645 9,337
Net Current Assets 10,925 15,165 13,522 13,079
TOTAL ASSETS 21,726 26,554 26,479 26,032

101
Global Absolute Section 4: Trading Ideas

C. Distress Play – These are the bonds which are trading at deep discounts to their
bond floor and redemption value, for example some bonds are trading at $0.30 in
the $1 indicating a likely default in the bonds.

Below are some of the names we recommend.

BONDS ISSUE SIZE O/S YTM GA CREDIT REDEMPTION


In USD In USD In % RATING COVER RATIO
Sical Logistics 75 75 54.87 3 0.24
Hotel Leela 100 100 27.8 3 0.003
Hotel Leela EUR 1.000 '10 89 54 28.5 3 0.003
MARKSANS PHARMA 50 50 45.81 3 0.11
AUROBINDO PHARMA USD 0.000 '11 150 150 47.17 3 0.09
AUROBINDO PHARMA USD 0.000 '11 50 50 41.57 3 0.09
Moser Baer 75 75 60.01 3 -1.09
Pyramid Samira 90 90 44.07 3 0.17
Bartronics India USD 0.000 '12 25 06 24.00 3 -0.23
Bartronics India USD 0.000 '13 50 50 32.00 3 -0.23
Alok Ind. 45 23.75 34.00 3 -20.39
Adani Enterprise 250 250 16.32 3 -0.7

We have carried out a detailed credit, financial analysis and asset breakup value
of some of these distress bonds. The reports of Sical Logistics & Hotel Leela can be
found on the forthcoming pages.

102
Hotel Hotel Leelaventure Limited

GA BOND RATING : 3
DISTRESS : BUY

CMP 22 FCCB Description


Nominal Value 2 BOND NAME HOTEL LEELA VENT HOTEL LEELA VENT
BSE Sensex 9,385 USD 0.000 '12 (LELA IN) EUR 1.000 '10 (LELA IN)
Stock Statistics Iss'd 4/27 USD100m Iss'd 5/25 EUR60m
Bloomberg code LELA IN COUPON (% p.a) 0.00 0.00
Reuters Code HTLE.BO ISSUE SIZE ($m) 100.00 89.16
BSE code 500193 AMOUNT OUTSTANDING( $m) 100.00 54.00
NSE code HOTELEELA MATURITY 4/25/2012 9/16/2010
ISIN No. INE102A01024 TOTAL REDEMPTION AMT.($m) 146.61 68.00
Market Cap (Rs. bn) 8.4 ($163mn) REDEMPTION AT MATURITY 146.61 125.50
52 Wk High/Low (Rs.) 77 / 21 YTM & YTP 27.79 - 28.51 -
NSE Avg Daily Vol(12 m) 2,426,629 CONVERSION PRICE (INR) 72.00 46.65
BSE Avg Daily Vol(12 m) 1,001,505 PARITY 26.27 41.35
INDICATIVE BOND PRICE 60.00 78.50
Shareholding Pattern
PREMIUM 128.40 89.80
Particulars No. of shares in %
Promoters 193,957,544 51.3 COUPON YIELD 0.00% 1.27%
FIIs 20,399,716 5.4 BOND FLOOR 99.60 102.50
Mutual Funds & UTI 4,604,850 1.2 CREDIT SPREAD 1,000bp 1,000bp
Banks/FI's/Insur Co 25,618,523 6.8 FAIR VALUE 99.90 103.50
Private corp. bodies 26,565,995 7.0 Source: Company & Global Absolute Research * EURO denominated FCCB converted to USD
Indian Public 93,992,668 24.9
NRIs / OCBs 12,685,696 3.4 Recommendation: BUY BONDS AS DISTRESS PLAY
Total 377,824,992 100
Hotel Leela owns four 5 star deluxe hotels, located in Bangalore, Mumbai, Goa and
Stock Performance Kovalam (Kerala). Hotel Leela has two FCCBs outstanding, which are going to mature
In % 1m 3m 6m in Sept. 2010 ($ 68mn) and another in April 2012 ($ 147mn). With a Global Absolute (GA)
Absolute -19 -31 -52 Bond Rating of 3, we believe that Hotel Leela would find it difficult to pay its FCCB
Relative -1 5 -7 liabilities, through cash generated from operations. This is supported by the average
Research Analyst five years FCCB Redemption Cover of 0.003x (the FCCB Redemption Cover, without
Suranjoy Singh
91-124-4386140 capex expenses is around 0.54x). However, a current year GA credit score of 5.75
200 implies that it has a strong capacity to pay interest, which is also supported by the fact
that, hotel Leela has comfortable average interest cover of 8.2x for the period of FY08
160 Hotel Leela Vs Sensex
to FY12. But, it may still find some difficulty in paying out its principal amount. Hotel Leela
120
has strong current cash flows, and we have forecasted an average annual cash inflow
from operations of around USD 48 mn upto the redemption dates.
80
We believe that the capex plans of Hotel Leela would get completed by FY12, and
40 expect the economy to pick up after FY10. We expect the company to achieve robust
Hotel Leela Sensex
growth in revenues in FY11, as the demand in NCR picks up on account of
0
Jan-08 Mar-08 Jun-08 Aug-08 Nov-08 commencement of the Commonwealth games in 2010. The first part of FCCBs
Chairman: Mr. C P Krishnan Nair liabilities, redeemable in Sept. 2010 (FY11), is around $ 68mn, and the expected cash
Registered The Leela Kempinski, generated from operation in FY11 is around $ 58mn. Hotel Leela, due to its capacity
Office: Sahar, Mumbai - 400 059 expansion, slower growth in the hotel industry, and higher acquisition cost of its 3 acre
India plot located in Diplomatic Enclave in New Delhi, would find it difficult to repay its FCCBs
Website: www.theleela.com debt through cash generated from operations.

103
(LELA IN) Iss'd 4/27 USD100m and (LELA IN) Iss'd 5/25 EUR60m are currently trading at an attractive yield of 27.79%, and 28.51%
respectively. Hotel Leela is currently having a high Debt to Equity ratio of 2.2x, which is expected to decline to 1.1x by FY12. We
believe that Hotel Leela would find some difficulties in paying its FCCBs liabilities through cash generated from operations. It is
however expected that the company would be able to redeem its FCCBs either through refinancing its debt or could, relatively
easily, raise the amount by selling some of its attractive assets. Hence, we have performed a liquidation analysis on the
company. Based on the current Balance sheet position, the Company has substantial assets to repay all its liabilities including
contingent liabilities for around 80%. Thus, we recommend a BUY on its FCCBs as Distress Play, as their potential return is very high.

Bonds Potential Return After Liquidation


BOND NAME HOTEL LEELA VENT USD 0.000 '12 HOTEL LEELA VENT EUR 1.000 '10
(LELA IN )Iss'd 4/27 USD100m (LELA IN )Iss'd 5/25 EUR60m
FCCB Indicative Price per Bond 60.00 78.50
Liquidation Recovery per Bond 117.41 100.51
Potential Liquidated Return 95.70% 28.00%

Equity Analysis country. Hotel Leela is the market leader in Bangalore and
Goa. Hotel Leela has major expansion plans, and we are
Hotel Leela Venture (Hotel Leela), which was incorporated expecting the room inventory to double within the next
in 1985, owns several luxury hotels in the country. With four three years. Hotel Leela has sales and marketing tie up with
properties under ‘The Leela’ brand, it currently has a total of Kempinski Hotels, Global Hotel Alliance (GHA), and
1,125 rooms in Bangalore, Goa, Kovalam and Mumbai. Preferred Hotel Group. It also has a tie-up with around 8
Hotel Leela has huge capex plans and has charted to global airlines.
increase its room inventories at a CAGR of around 35% from
FY08 to FY11. Hotel Leela has an exclusive arrangement with Hotel Leela is going to launch one hotel in Gurgaon, Delhi
Kempinski Hotels, which helps it in getting a large number of (NCR), another resort in Udaipur, and a Business park in FY09.
foreign customers. Hotel Leela is present in both leisure and Another 7 star hotel is also coming up in New Delhi in 2010.
business segments. It generates around 65% of its revenue Thus, we are expecting robust growth in revenues from FY10
from room rent, 25% from its food & beverage business, and onwards, on account of its room addition, coupled with the
5% from other services. upcoming Commonwealth Games to be held in 2010 in
New Delhi, which would drive up the occupancy and
Hotel Leela’s Capex plans
average room rates (ARR).
Cities Present FY09E FY10E FY11E FY12
Mumbai 396 396 396 396 396 A brief analysis of Company's financial health
Bangalore 357 357 357 357 357
Goa 186 186 186 186 186 Asset analysis
Kovalam 186 186 186 186 186
Udaipur - 86 86 86 86 n Hotel Leela owns 4 premium 5-Star Deluxe category
Gurgaon - 409 409 409 409 hotels, operating in Mumbai, Bangalore, Goa &
Jaipur - - 100 100 100 Kovalam (Kerala), with a total of 1,125 rooms.
Chennai - - 385 385 385
Delhi - - 211 211 211 n The company's total net fixed assets at present are at
Agra - - - 100 100 Rs. 30bn, which include around Rs. 9.92bn of freehold
Pune - - - - 200 land (at book value).
Hyderabad - - - - 186
n Hotel Leela has acquired a prime property in the
Total No. of Rooms 1,125 1,620 2,316 2,416 2,802
Diplomatic Enclave in New Delhi at a cost of Rs.
Growth (%) - 44 43 4 16
6.11bn for a super luxury seven-star hotel in May 2007.
Source: Company & Global Absolute Research
The project is expected to be launched before the
2010 Commonwealth Games.
Hotel Leela is currently trading at a PER of 5.6x and 12.2x on
its FY08 and FY09E earnings respectively. The company’s
Profitability analysis
price/book value per share is trading at a comfortable level
of around 0.9x. The valuation of the company would be Hotel Leela has performed well in FY08, with a growth of
driven by the timely execution of the current projects, and around 20% in total revenue. However, due to some
an improvement in the average occupancy level. Hotel slowdown in the IT sector, revenue from the Bangalore
Leela enjoys strong brand equity, as its hotels are located property is expected to decline in FY09. Net profit went up
near the major tourist places and business centres of the by around 20%, and the company was able to sustain the

104
margin. We are expecting some slowdown in revenues in the ratio is low (where the ratio is less than 1x), the company
FY09 and FY10. However, we expect the company to grow may still be able to redeem the FCCBs as long as it has strong
at a CAGR of around 20% from FY08 to FY12E. credit and can re-finance.

Hotel Leela is increasing its room inventory by around 495


The company has an average five year FCCB Redemption
rooms, where 409 rooms are in Gurgaon, New Delhi (NCR).
Cover of 0.003x (the redemption ratio taken without the
We believe that, in FY09, the increase in room inventory
capex expenses is 0.54x) upto the redemption date,
would help in improving the revenue and margin of the
indicating low cover and high chances of not able to repay
company, which would not be fully reflected in FY09.
However, the impact for the same is expected to be fully its FCCBs liabilities through cash generated from operations.

reflected from FY10 onwards. The redemption cover for FY11 and FY12 is -0.16x and -0.66x
respectively. Since the redemption cover is very low, we
Liquidity & Credit analysis believe that the company would find it difficult to repay its

n Hotel Leela's interest coverage ratio is at a very FCCBs liabilities in time. However, since the company has
comfortable position at around 7.3x. strong credit in the market, back by its strong asset
valuation, company would either have to repay its FCCBs
n The company is highly leveraged at around 2.2x as
liabilities, through refinance of its debt or by selling some of
compared to the average industry’s figure of around
its attractive assets.
1.5x.

n Out of the total debt of the company, i.e Rs. 20.35bn Baseline Indicator II: GA Credit Score Risk Assessment

(FY08), FCCBs amount consists Rs. 6.98bn, which is


The GA Credit Score is a predictive model based on the Z-
about the same as the acquisition price of the Hotel
score rating that indicates the likelihood of a company
Leela New Delhi property (Rs. 6.11bn). And, at
present, the FCCBs outstanding payment obligation becoming insolvent within the next twelve months.

for the two bonds on maturity is Rs. 8.05bn ($ 155mn),


The Company has a current year GA Credit Score of 5.75,
which is around 2.72x of the company's cash in hand
which places the Company in the “yellow zone”, indicating
(Rs. 2.96bn) position in FY08.
a need for corrective action and monitoring required. This is
n Hotel Leela’s debt to asset ratio is at a very a decline from the previous year’s Score of 5.99.
comfortable position of around 0.68x.
Particulars March 2006 March 2007 March 2008
TOTAL CREDIT SCORE 6.11 5.99 5.75
Global Absolute Bond Rating Analysis
CHANGE OVER PRIOR YEAR - -0.13 -0.24

The company has a Bond Rating of 3, thus implying that it


has low credit and high chances of not been able to
Baseline Indicator III: Sustainable Growth Analysis
redeem its FCCBs liabilities. The weightage, we have used
for the bond score are as follows: The Sustainable Growth model is a combination of four
Redemption Cover 60% Highest weightage, since it is cash ratios, and measures the maximum rate of growth in
based and includes future revenue that can be sustained without obtaining additional
projections outside funding. The maximum sustainable growth in total
GA Credit Score 20% Insolvency Rating (Historical); revenue is calculated for each year, and is then compared
therefore lower weightage
to the actual calculated growth rate in total revenue, from
DuPont 20% Asset and Equity based (Historical);
the prior year to the current year.
therefore lower weightage

Particulars March 2006 March 2007 March 2008


Baseline Indicator I: FCCB Redemption Cover NET SALES REVENUE 3,269.50 3,808.61 5,145.75
MAXIMUM SUSTAINABLE
Global Absolute Research has created a Cash Flow Analysis
GROWTH IN REVENUE - 17.62% 17.84%
Tool to examine the number of times that the FCCB
HISTORIC GROWTH IN
redemption amount is covered by net cash. The higher the NET SALES - 16.49% 35.11%
cover, the less the chances of the company to default on HISTORIC GROWTH IN NET
the FCCB redemption date. It is to be noted that, even when SALES (ROLLING AVERAGE) - 8.24% 17.20%

105
Based upon the audited financial statements for the year expansion gets executed and starts functioning, we expect
ending 2008/03, the Company's revenues grew by 35.11% the asset turnover ratio to improve significantly from FY10
compared to the prior year. For the last 2 years of data onwards.
included in this analysis, revenues have increased by an
average of 26%. DuPont Return on Assets

The actual growth in revenue for the year 2008 is greater The second component of the DuPont formula is the Return

than the Sustainable growth, and with the addition of more on Assets (ROA) ratio, which measures the amount of Net

rooms in Q3’09, we are expecting a robust growth in the Income that is generated for each rupee of Assets. The ROA

revenues from FY10, better than the past years. ratio decreased compared to the prior year. The change in
ROA was driven by a decrease in asset turnover ratio and
Baseline Indicator III: DuPont Formula Analysis net margins.

The DuPont Formula for Return on Assets and Return on Particulars March 2006 March 2007 March 2008
Equity ratios are calculated for each full year of the historic DUPONT RETURN ON ASSETS 4.29% 5.84% 5.28%
financial statements. The ratios are presented here as an
alternate way to evaluate the quality of the Company's
A decrease in Net margin is due to higher operating
Return on Equity and to help identify potential weaknesses.
expenses, and an increase in Total Assets. It indicates that
profitability should also be accompanied by an increase in
Particulars March 2006 March 2007 March 2008
the asset levels. However, the combined effect is a decline
DUPONT RETURN ON
in the Return on Assets compared to the previous year as the
EQUITY 13.80% 16.15% 20.95%
net profit is not increasing as per the increase in total assets.
DUPONT RETURN ON
EQUITY (ROLLING AVG.) - 14.97% 16.97%
DuPont Financial Leverage

The third component is the Financial Leverage ratio, which


The DuPont Analysis indicates that ROE for the most recent
measures the number of rupees of Assets that the Company
financial statement is 20.95%, which is a growth of around
is carrying for every rupee of Equity.
4.8% from the previous year. In addition, ROE for the current
year is higher than the rolling average of 16.97% for the two Particulars March 2006 March 2007 March 2008
years included in this analysis. FINANCIAL LEVERAGE RATIO -0.59 2.65 3.84

DuPont Asset Turnover


The Financial Leverage ratio increased as compared to the

The first component of the DuPont formula is the Asset prior year. The change in Leverage was driven by an

Turnover ratio, which measures the number of rupees of increase in Total Assets of Rs. 8.6bn. This shows that the

Sales Revenue generated for each rupee of Assets. The company has increased its debt to acquired its fixed asset.

Asset Turnover ratio was low at an average of around 0.20 in


Notes:
the last three years.

It is to be noted that the rolling average for FY07 has not


Particulars March 2006 March 2007 March 2008
ASSET TURNOVER RATIO 0.20 0.23 0.18
been calculated for certain companies due to the
unavailability of the required data.

The low asset turnover ratio is due to a huge increase in


capex of around Rs. 8.6bn on account of land purchased
for the Delhi project, and due to the acquisition of the
Kovalam Hotel. The increase in asset is more than 6 times of
the increase in revenues for FY08. Thus Asset Turnover comes
out to be lower than expected. However, because of this
growth in assets, the company would have the flexibility to
grow its revenues. Thus, going ahead, as its capital

106
Hotel Leela Liquidation Analysis
Liquidation Analysis
Operating Assets BV (in Rs. mn) Factor Liquidation Value (in Rs. mn)
Cash 2,959 95% 2,811
Sundry Debtors 386 65% 251
Temp Inv (liquid assets) 1.0 90% 0.9
Inventories 387 50% 193
Loans & Adv 2,163 50% 1,081
Capital Assets
Land 9,919 95% 9,423
Leasehold Land 616 70% 431
Bldg 9,631 80% 7,705
Plant Machinery 3,931 30% 1,179
Vehicles & motor boats 187 50% 93
Furniture 1,760 40% 704
CWIP 4,058 50% 2,029
Assets Liquidation value 25,903
Liabilities Value Factor Liquidation Value
Preference Liabilities
Govt: Deferred Tax Liabilities, Customs Duty & Sales Taxes 922 100% 922
Secured loans 12,911 100% 12,911
Unsecured Creditors Allocation (a) 12,069
FCCB bond holders including premium on maturity 11,137 80% 8,910
Operating liabilities 938 80% 750
Contingent liabilities 2,538 80% 2,030
Compulsorily convertible debentures 0.0 80% 0.0
Others Unsecured Loans 458 80% 367
Total Unsecured (b) 15,071
% Allocation (a)/(b) 80%
Non-debt holders
Equity 8,982 0% 0.0

(in USD)

Bonds Potential Return After Liquidation


BOND NAME HOTEL LEELA VENT USD 0.000 '12 HOTEL LEELA VENT EUR 1.000 '10
(LELA IN )Iss'd 4/27 USD100m (LELA IN )Iss'd 5/25 EUR60m
FCCB Indicative Price (per Bond) (A) 60.0 78.5
Yield to Maturity per Bond (YTM) (B) 146.6 125.5
Recovery factor for FCCBs holder 80% 80%
Liquidation Recovery (% YTM) (C) 117.4 100.5
Potential Liquidated Return (d-c)/c) 95.7% 28.0%

107
Hotel Leelaventures Ltd – Liquidation Analysis Company Background

Liquidation Analysis Hotel Leela Venture (Hotel Leela), which was incorporated
in 1985, owns several luxury hotels in the country. Hotel Leela
We have tried to perform liquidation analysis of the
is a niche player in the premium 5-Star Deluxe category
company based on certain parameters like adjusting the
owning and operating four Five-Star Deluxe hotels in
books of the company with the liquidation factor.
Mumbai Bangalore, Goa & Kovalam (Kerala) with a total of
Liquidation Value is defined as the present value of the net 1125 rooms. Hotel has plans to expands its operations by
cash remaining if all assets are sold in a quick and orderly, developing additional luxury hotels in Udaipur, Gurgaon
piecemeal sale and all liabilities are paid at face value with (Delhi National Capital Region), Chennai, New Delhi, Jaipur,
the proceeds. In our analysis, the appraised value of Hyderabad, Agra and Pune. Setting up an IT Park (opening
individual assets and liabilities have been adjusted (with the in 2009) adjacent to The Leela Palace Kempinski, Chennai.
liquidation factor) to reflect the value that could be Hotel Leela also operates two commercial complexes – The
obtained in a quick and orderly liquidation. Estimated Leela Galleria, located adjacent to our hotels in Mumbai
liquidation costs in the amount of around Rs. 4mn have and Bangalore. The Leela Kempinski, Goa has expanded
been deducted. The net result is the total entity value. In with an additional 34 guestrooms totalling to 186.
addition, tax adjustment to the tune of the difference
Hotel Leela capex reports –
between the appraised value and the tax basis of assets
and liabilities using applicable tax rate. n Udaipur – Hotel plans to build a 86 room Five-Star
Deluxe resort, which is currently under construction.
The following items in the assets side have been omitted
They plan to open the resort in 2009. Property
from the liquidation valuation exercise or they have been
strategically located on the Pichhola lake-front on a
assigned 0% liquidation factor.
land area of 13,000 sq metres.
n Goodwill – We are of the view that goodwill will not be
n Gurgaon, Delhi (NCR) - Hotel Leela has entered into a
worth anything during the period of distress. So, we
Management Contract for The Leela, Kempinski
have assigned a factor of 0% to it.
Gurgaon, Delhi (NCR) – 319 rooms and The Leela
Tangible Assets having good resale market Residences, Gurgaon – 90 serviced residences.

n Land – According to the balance sheet as on March n Chennai - A 385 guestroom/suites hotel and an IT Park
2008, the value of the land is Rs. 9918.64mn. Hotel under construction, slated open in 2009.
Leela has acquired a 3 acre plot in Diplomatic
n New Delhi - Land acquired for setting up a 211 trophy
Enclave in New Delhi at a cost of Rs 6.11bn for a super
hotel, slated to open before the Commonwealth
luxury seven-star hotel in April 2007.
Games in 2010.
n Hotel Leela has four 5 star hotel located in Mumbai,
n Jaipur - Land acquired on long term lease along with
Goa, Bangalore and Kovalam (Kerala).
a Heritage Hotel built in 1837. A 100 room hotel
Shareholding Pattern (September 2008) planned to be operational by 2010.

Promoters – 51.3% n Agra - Acquired Land to construct a 100 Room Hotel,


Opening in 2011.
FIIs – 5.4%
n Pune - Land acquired for setting up a 200 room hotel,
Mutual Funds/UTI – 1.2%
opening in 2012.
Banks / FIs / Insurance Cos – 6.8%
n Hyderabad - Land acquired and concept design
PCBs – 7% completed for setting up a 235 room hotel – opening
in 2012.
Public – 24.9%

NRIs / OCBs / Others – 3.4%

108
Financials Projection
SECTION 1: CASH INFLOW ESTIMATE
Particulars (in Rs. mn) Mar-08 Mar-09 Mar-10 Mar-11 Mar-12
Revenues 5,891 5,661 7,344 10,631 12,226
EBITDA 3,042 2,762 3,802 5,549 6,336
Less: DA 453 661 579 653 712
Less:Prov. For Premium on FCCB Reserve - 661 661 572 482
EBIT 2,589 1,439 2,562 4,325 5,142
Less: Interest 356 412 393 391 413
EBT 2,233 1,028 2,169 3,934 4,729
Less: Tax 732 337 695 1,290 1,551
Net Profit after tax 1,501 691 1,474 2,644 3,178
Cash from Operations 2,139 1,763 1,735 3,026 3,731
Cash from Operations (USD) 41 34 33 58 72
Section 2: Working Cap and Investment/Capex
Working Capital Changes (937) (207) (211) (582) (281)
Changes from Investing/Capex Activities (8,638) (2,602) (4,654) (4,747) (3,842)
Net Cash from W/Cap and Investment/Capex (9,575) (2,809) (4,866) (5,329) (4,123)
Net Cash from W/Cap & Invest/Capex ($mn) (185) (54) (94) (103) (80)
Section 3: Financing Activities
Increase from Equity & share premium - 661 661 572 482
Changes in Debt 10,679 799 1,586 1,606 1,153
Net Cash from Financing Activities 10,268 1,048 1,854 (1,014) (2,963)
Net Cash from Financing Activities ($mn) 198 20 36 (20) (57)
Section 4: Net Cash Available for FCCB
Opening Net Cash Balance 126 2,833 2 (1,277) (3,317)
Net Cash Flow For the Year 2,833 2 (1,277) (3,317) (3,355)
Closing Net Cash Available for FCCB 2,959 2,962 1,685 (1,632) (4,988)
Closing Net Cash Available for FCCB ($mn) 57 57 33 (32) (96)
SECTION 5: FCCB REPAYMENT LIABILITY
Original Issue Size (USD) 163 163 163 163 100
Less: Amount already converted (USD) 9 9 9 9 -
FCCB O/S (USD) 154 154 154 154 100
Add: Premium on Redemption 12.8 12.8 12.8 11.0 9.3
Total Payable on maturity date (USD) 167 180 192 203 147
Total Payable on maturity date (Rs.) 8,638 9,299 9,960 10,532 7,594
SECTION 6: RATIO ANALYSIS
Current M Cap Rs. Mn 8,425
Currernt M Cap USD Mn 163
Networth (Rs.) 9,301 9,991 11,416 14,059 17,237
Networth (USD) 180 193 220 271 333
Debt (Rs.) 20,357 21,817 23,402 22,118 18,995
Debt / Equity 2.2 2.2 2.1 1.6 1.1
EBITDA / Debt 0.1 0.1 0.2 0.3 0.3
Interest Coverage Ratio 7.3 3.5 6.5 11.1 12.5
SECTION 7: FCCB COVER
FCCB redemption ratio 0.34 0.32 0.17 (0.15) (0.66)
FCCB Lia / Current M Cap 1.03 1.10 1.18 1.25 0.90
All USD / Irs. Figures are in millions.
All balance sheet numbers are at end FY08.
* USD @ 51.8

109
GA CREDIT SCORE ANALYSIS
Credit Score: Risk Assessment Weight 200603(12) 200703(12) 200803(12)
Ratio 1 NET WORKING CAPITAL / TOTAL TANGIBLE ASSETS 6.56 17.57% 6.59% 13.47%
Ratio 2 RETAINED EARNINGS / TOTAL TANGIBLE ASSETS 3.26 24.29% 31.76% 22.57%
Ratio 3 EBIT / TOTAL TANGIBLE ASSETS 6.72 8.81% 13.24% 9.15%
Ratio 4 TANGIBLE NETWORTH / TOTAL TANGIBLE ASSETS 1.05 31.04% 36.15% 25.22%
CONSTANT 3.25 3.25 3.25
GA CREDIT SCORE 6.11 5.99 5.75
Sustainable Growth Ratio
Ratio 5 NET PROFIT MARGIN 21.83% 25.85% 29.21%
Ratio 6 RETENTION RATIO 73.23% 80.54% 85.30%
Ratio 7 MAXIMUM SUSTAINABLE GROWTH IN REVENUE 10.11% 13.00% 17.87%
HISTORIC GROWTH IN NET SALES 16.49% 35.11%
HISTORIC GROWTH IN NET SALES (ROLLING AVERAGE) 8.24% 17.20%
DIFFERENCE FROM MAXIMUM 3.49% 17.24%
Dupont Analysis
Ratio 8 DUPONT RETURN ON EQUITY 13.80% 16.15% 20.95%
DUPONT RETURN ON EQUITY (ROLLING AVERAGE) 14.97% 16.97%
Ratio 9 DUPONT ASSET TURNOVER 0.20 0.23 0.18
Ratio 10 DUPONT RETURN ON ASSETS 4.29% 5.84% 5.28%
Ratio 11 DUPONT FINANCIAL LEVERAGE 3.22 2.77 3.96

Glossary of Financial Terms - Asset use efficiency, which is measured by total asset
turnover
1. Retention Ratio:
- Financial leverage, which is measured by the equity
This ratio measures the proportion of net profit after tax
multiplier
that is not paid out as dividends but retained in the
business. Calculated as:
Calculated as: ROE = Profit Margin (Profit/Sales) * Total Asset Turnover
(Sales/Assets) * Equity Multiplier (Assets/Equity)
= (Net Profit After Tax – Dividends) / Net Income
5. Rolling Average:
2. Asset Turnover:
The average of a security constructed in a period as
This ratio Indicates the relationship between assets
short as a few days or as long as several years and
and revenue and measures the amount of sales that
showing trends for the latest interval. As each new
are generated from each dollar of assets.
variable is included in calculating the average, the
Calculated as: last variable of the series is deleted.
= Net Revenue / Total Assets 6. DuPont Asset Turnover Ratio:
3. Sustainable Growth Rate: Calculated as:
The maximum growth rate that a firm can sustain = Gross Revenue / Total Tangible Assets
without having to resort to additional borrowings or
7. DuPont Return on Assets:
increase financial leverage.
It is a financial ratio that shows how the return on assets
Calculated as:
depends on both asset turnover and profit margin.
= ROE x Retention Ratio The DuPont method breaks out these two
components from the return on assets ratio in order to
4. DuPont Return on Equity:
determine the impact of each on the profitability of
The DuPont method breaks the return on equity (ROE) the company.
down into three parts: a) profit margin, b) asset
This ratio helps to highlight the impact of changes in
turnover and c) financial leverage.
asset turnover and profit margin.
DuPont Method tells us that ROE is affected by three
Calculated as:
things:
ROA DuPont = (Net Profit After Tax / Net Sales) x (Net
- Operating efficiency, which is measured by profit
Sales / Total Assets)
margin

110
Income Statement
Year ended 31 Mar (Rs mn) FY07 FY08 FY09E FY10E FY11E FY12E
Net sales 4,521 5,891 5,602 7,283 10,560 12,144
growth (%) 30 (5) 30 45 15
Other Income 415 0 59 61 71 81
Total Revenue 4,937 5,891 5,661 7,344 10,631 12,226
Operating expenses 2,228 2,849 2,899 3,542 5,082 5,890
Operating Profit 2,294 3,042 2,703 3,741 5,479 6,254
EBITDA 2,709 3,042 2,762 3,802 5,549 6,336
growth (%) 12 (9) 38 46 14
Depreciation 377 453 661 579 653 712
Prov. For Premium on FCCB Reserve 0 0 661 661 572 482
EBIT 2,332 2,589 1,439 2,562 4,325 5,142
Interest Paid 449 356 412 393 391 413
Pre-Tax Profit (before non-recurring item) 1,883 2,233 1,028 2,169 3,934 4,729
Add/(less): Exceptional items 0 0 0 0 0 0
Pre-tax Profit (after non-recurring item) 1,883 2,233 1,028 2,169 3,934 4,729
Tax (Current +Deferred+FBT) 617 732 337 695 1,290 1,551
Net Profit 1,266 1,501 691 1,474 2,644 3,178
growth (%) 19 (54) 113 79 20

Balance Sheet
Year ended 31 Mar (Rs mn) FY07 FY08 FY09E FY10E FY11E FY12E
Current Assets 2,371 5,895 6,004 5,527 3,939 1,418
Investments 1 1 1 1 1 1
Net Fixed Assets 18,642 26,737 28,678 32,753 36,847 39,977
Total Assets 21,013 32,633 34,683 38,281 40,787 41,397
Current Liabilities 1,260 2,061 1,961 2,549 3,696 4,251
Total Debt 10,035 20,357 21,817 23,402 22,118 18,995
Other non-current liabilities 736 914 914 914 914 914
Total Liabilities 12,031 23,332 24,691 26,865 26,728 24,160
Share Capital 741 756 756 756 756 756
Reserve & Surplus 8,242 8,545 9,236 10,660 13,304 16,482
Preference Share 0 0 0 0 0 0
Shareholders Funds 8,982 9,301 9,991 11,416 14,059 17,237
Less: Misc. expenditure 0 0 0 0 0 0
Total Equity & Liabilities 21,013 32,633 34,683 38,281 40,787 41,397
Capital employed 19,753 30,571 32,722 35,732 37,091 37,146

Cash Flow Statement


Year ended 31 Mar (Rs mn) FY07 FY08 FY09E FY10E FY11E FY12E
EBT & Exceptional items 1,883 2,233 1,028 2,169 3,934 4,729
Depreciation 377 453 661 579 653 712
Prov. For Premium on FCCB Reserve 0 0 661 661 572 482
Net Chg in working capital (131) (937) (207) (211) (582) (281)
Cash Flow from operation (a) 1,901 1,202 1,556 1,524 2,445 3,449
Capital Expenditure (2,438) (9,307) (2,602) (4,654) (4,747) (3,842)
Cash Flow from Investing (b) (1,279) (8,638) (2,602) (4,654) (4,747) (3,842)
Free Cash Flow (a+b) 622 (7,436) (1,046) (3,130) (2,303) (393)
Equity Raised / (repaid) 3 0 (0) 0 0 0
Prov. For Premium on FCCB Reserve 0 0 661 661 572 482
Debt raised / (repaid) (1,116) 10,679 799 1,586 1,606 1,153
Cash flow from financing (c) (2,145) 10,268 1,048 1,854 (1,014) (2,963)
Net Chg in cash flow (a+b+c) (1,523) 2,833 2 (1,276) (3,317) (3,356)

111
Logistics Sical Logistics Limited

GA BOND RATING : 3
DISTRESS : BUY

CMP 33 FCCB Description


Nominal Value 10 BOND NAME SICAL LOGISTICS USD 0.000 '11
BSE Sensex 9,840 (SICL IN )Iss'd 8/26 USD75m
Stock Statistics COUPON (% p.a) 0
Bloomberg code SICL IN ISSUE SIZE ($m) 75
Reuters Code SICA.BO AMOUNT OUTSTANDING( $m) 75
BSE code 520086 MATURITY 4/19/2011
NSE code SICAL TOTAL REDEMPTION AMOUNT($m) 102.37
ISIN No. INE075B01012 REDEMPTION AT MATURITY 136.49
Market Cap (mn) Rs. 1,329 ($26) YTM & YTP 54.87 -
52 Wk High/Low (Rs.) 370 / 23 CONVERSION PRICE (INR) 563.55
NSE Avg Daily Vol (6 m) 51,500 PARITY 5.60
BSE Avg Daily Vol (6 m) 44,349 INDICATIVE BOND PRICE 42.00
PREMIUM 649.70
Shareholding Pattern (in mn)
COUPON YIELD 0%
Particulars No. of shares in %
Promoters 15.9 43.1 BOND FLOOR 104.10
FIIs 8.0 20.3 CREDIT SPREAD 1,000bp
Mutual Funds & UTI 0.2 0.6 FAIR VALUE 104.10
Banks/FI's/Insur Co 0.7 2.2 Source: Company & Global Absolute Research
Private corp. bodies 2.4 6.4
Venture Cap. Fund 5.2 13.3
Indian Public 4.2 14.1 Recommendation: BUY BONDS AS DISTRESS PLAY
Total 36.6 100
Sical Logistics Ltd. (Sical) is a leading provider of logistics services in India. Sical
Stock Performance provides services, such as port handling, trucking and warehousing, ship and
In % 1m 3m 6m customs house agency, and container and offshore logistics.
Absolute -28 -64 -82
Relative -15 -28 -40 With a Global Absolute Bond Rating of 3, we believe that Sical may face pressure
Research Analyst during the repayment of its FCCB liabilities. This fact is also supported by the
Dev Jyoti Average FCCB Redemption Cover of 0.24x in FY12. The current cash flow of the
91-124-4386140 company is also not so strong, and our estimates show that the average annual
180
cash inflow from operations has been around $ 23mn upto the redemption dates,
160
though backed by high quality tangible assets. However, a current year GA credit
140

120
score of 6.05 implies that corrective action and monitoring is needed. Moreover,
100 DuPont analysis shows that ROE is quite high, but with a very high financial leverage
80 of 6.43x.
60
By FY12, we expect the Company’s debt/equity ratio to decline to 1.9x. Contrary to
40
Sensex SICL IN EQUITY GA Credit Score, we believe that the company may find it little difficult to
20
0 refinance its FCCB debt. Hence, we have performed a liquidation analysis on the
Nov-07 Jan-08 M ar-08 M ay-08 Jul-08 Sep-08
company. Based on the current Balance sheet position, the Company has
Chairman: Mr. Ashwin C Muthiah substantial assets to repay all its secured loans and nearly 54.45% of the balance
Registered South India House,
liabilities (i.e. FCCBs, Debentures, Operating liabilities, and contingent liabilities).
Office: No. 73, Armenian Street,
Currently, the bonds are trading at an attractive yield of 54.87%. Thus, we
Chennai - 600 001, INDIA
recommend a distress play on the bond.
Website: www.sical.in

112
(in USD)
As part of rail logistics, Sical has purchased 3 railway rakes
Potential Return from Bonds in case of Liquidation of the Company
worth Rs. 440mn. It plans to purchase two more rakes in FY09,
BOND NAME SICAL LOGISTICS USD 0.000 '11
and further plans to take the total tally of rakes to 13 by FY11.
(SICL IN )Iss'd 8/26 USD75m
At the CMP of Rs. 33.2, Sical is trading at a PER of 3.1x its FY08
FCCB Indicative Price per
earnings. Sical has a good mix of assets and services
Bond (% par) 42
business, and with the commencement of some big ticket
Liquidation Recovery
Per Bond (% par) 74.32
projects, its business is expected to be fully integrated with

Potential Liquidated Return 76.95% higher contribution from higher margin businesses. Also, the
offshore subsidiary is contributing significantly both at the
volume and net levels, which will drive the next level of
Equity Analysis growth for the company. All these projects provide stable
long term cash flows.
Sical provides services such as port handling, trucking and
warehousing, ship and customs house agency, and A brief analysis of Company's financial health
container and offshore logistics. The company has also built
a portfolio of Infrastructure assets, like iron ore terminal at Asset analysis
Ennore, container terminal at Chennai, container train
business, and MIHAN rail and road terminal at Nagpur. n According to the balance sheet as on March 2008,
the value of the land is Rs. 67.2mn. However, the value
Sical is implementing big ticket logistic projects, like an iron of this land has not been re-stated since 1995.
ore terminal at Ennore (Rs. 3.3bn), a container rail terminal According to the company, the present value of this
project (Rs. 3.7bn), a rail-road terminal at Nagpur (Rs. 1.8bn), land is around Rs. 500mn. Apart from this, the
and a joint venture with PSA for a second container terminal company has also invested in land worth Rs. 400mn in
at Chennai (Rs. 3.0bn). All these projects are in the various Chennai and Rs. 280mn in Bangalore for setting up
stages of implementation. To fund these projects, Sical has terminals.
raised $ 75mn through the FCCB route, $ 25mn through a
private placement to IDFC and the remaining $ 26mn n Till date, Sical has purchased 3 railway rakes worth Rs.

through QIP issue to Old lane of Mauritius. Apart from this, 440mn.

Sical’s JV projects at Nagpur have already achieved the


n The Company has acquired a cutter suction dredger,
financial closure. So, all these projects are now well funded,
at a consideration of $ 24.92mn.
and are under various stages of implementation.
n The Company has two vessels, which are only two
Sical has won various long term BOT projects like the iron ore
years old.
terminal at Ennore, container terminal at Chennai, and
MIHAN rail terminal at Nagpur airport. These long term n Presently, Sical has 311 trucks with average life of 2.5
contracts will help the company participate in high growth years.
sectors of India’s infrastructure creation. These contracts
also complement its existing service offerings, thereby n The company's total net fixed assets at present (FY08)
helping it to move up the bulk logistics value chain, and are at Rs. 6.7bn.
providing stable long term cash flows. Its existing logistics
n Cash in hand in FY08 was around Rs. 2.0bn.
business, trucking and warehousing, and contribution from
Bergen Offshore are expected to drive future growth.
Profitability analysis

Sical also forayed into the dredging market, with the


n In FY08, net sales of the company declined by 32.7%.
acquisition of Sical PortoFino, a cutter suction dredger, at a
This is on account of the demerger of the trading
consideration of $ 24.92mn. Presently, this dredger is
division into a separate company in FY08, along with
operating at Saudi Arabian waters and chartered for a five
the sale of non-core businesses by the company.
year contract at a rate of $ 26,000 per day (revenues of $
However, on y-o-y basis, the core business of the
34.3mn for a period of 5 years).
company increased by 1.5%.

113
n In FY08, EBITDA margins of the company increased the company may still be able to redeem the FCCBs as long
substantially by 540bps to 12.6%. Going ahead, in as it has strong credit and can re-finance.
FY09, we expect that the margins of the company will
be more or less intact. The company has an Average FCCB Redemption Cover of
0.24x upto the redemption date, indicating lower cover as
n In H2’09, Sical’s consolidated revenues declined by well as high chance of inability to redeem the FCCB bond
35.5%, on account of hive-off of its non-logistics holders. At the same time, though the debt-equity ratio may
business, discontinuation of contracts from Oil and decrease to 1.9x in FY12 from 2.2x in FY08 (still being on the
Natural Gas Corporation (ONGC) and Karnataka higher side), yet it may be difficult for the Company to raise
Power Corporation (KPCL, port logistics). further debt.

n The contribution from Sical’s subsidiaries, like Sical Baseline Indicator II: GA Credit Score Risk Assessment
Distriparks and Bergen Offshore, have improved by
around 25% in Q1’09 to around 29% in Q2’09. The GA Credit Score is a predictive model based on the Z
score rating that indicates the likelihood of a company
Liquidity & Credit analysis becoming insolvent within the next twelve months.

n Sical's interest coverage ratio is at a very comfortable Partculars FY06 FY07 FY08

position at 3.1x. TOTAL CREDIT SCORE 9.62 8.58 6.05


CHANGE OVER PRIOR YEAR - -1.05 -2.53
n Debt/equity ratio is at a higher level at 2.2x.

n Out of the total debt of the company, i.e. Rs. 6.9bn


(FY08), FCCBs current bonds amount consists Rs.3.0bn. The company has a current year credit score of 6.05 (See
Appendix I, Section GA Credit Score for explanation). This is
n Sical also has more leveraging power as net debt in the Yellow territory, suggesting that corrective action and
(total debt – cash in hand – investments) is at Rs. 3.4bn, monitoring is needed for the Company i.e. the Company
which is around 1.0x of the company's Net worth. has sufficient cash flows to meet its interest liabilities but not
its principal amount. Hence, we believe that even though
Global Absolute Bond Rating Analysis the Company has enjoyed strong credit rating in the past,
there may be a case of possible default by the Company in
The company has a Bond Rating of 3. This means it may not
future. This is also justified by steadily declining GA Credit
be able to fully redeem its FCCBs.
Score.

The weightages used for the bond score are as follows:


Baseline Indicator III: Sustainable Growth Analysis

Redemption Cover 60% Highest weightage since it is cash


The Sustainable Growth model is a combination of four
based and includes future
ratios, and measures the maximum rate of growth in
projections
revenue that can be sustained without obtaining additional
GA Credit Score 20% Insolvency Rating (Historical),
outside funding. The maximum sustainable growth in total
therefore lower weightage
revenue is calculated for each year, and is then compared
DuPont 20% Asset and Equity based (Historical),
to the actual calculated growth rate in total revenue, from
therefore lower weightage
the prior year to the current year.

Particulars FY06 FY07 FY08


Baseline Indicator I: FCCB Redemption Cover
NET SALES REVENUE 9,929.70 10,580.00 7,116.30
MAXIMUM SUSTAINABLE
Global Absolute Research has created a Cash Flow Analysis
GROWTH IN REVENUE - 13.11% 36.78%
Tool to examine the number of times that the FCCB
HISTORIC GROWTH IN
redemption amount is covered by net cash. The higher the
NET SALES - 6.55% -32.74%
cover, the lesser the possibilities of default on the FCCB
HISTORIC GROWTH IN NET
redemption date, by the company. It is to be noted that
SALES (ROLLING AVERAGE) - 3.27% -8.73%
even when the ratio is low (where the ratio is less than 1x),

114
Based upon the audited financial statements for the year DuPont Return on Assets
FY08, the Company's revenues fell by 32.7% compared to
the prior year. For the 3 years of data included in this analysis, The second component of the DuPont formula is the Return

revenues have declined by an average of -8.73%. This is on on Assets (ROA) ratio, which measures the amount of Net

account of the demerger of the trading division into a Income that is generated for each rupee of Assets. The ROA

separate company in FY08, along with the sale of non-core ratio has increased compared to the prior year. The change

businesses by the company. in ROA was driven by an increase in Net Profit after Tax of Rs.
52mn and a decrease in Total Assets by Rs. 1.2bn.
The actual growth in revenue for FY08 is less than the
Sustainable growth, which suggests that the Company may Partculars FY06 FY07 FY08
DUPONT RETURN ON ASSETS 9.97% 4.51% 5.72%
not need to obtain additional financing.

Baseline Indicator IV: DuPont Formula Analysis


An increase in Net Profit after Tax and a decrease in Total
Assets indicate increasing profitability, accompanied by a
The DuPont Formula for Return on Assets and Return on
decrease in asset levels. The combined effect results in an
Equity ratios are calculated for each full year of the historic
increase in the Return on Asset ratio compared to the
financial statements. The ratios are presented here as an
previous year.
alternate way to evaluate the quality of the Company's
Return on Equity and to help identify potential weaknesses.
DuPont Financial Leverage

Partculars FY06 FY07 FY08


The third component is the Financial Leverage ratio, which
DUPONT RETURN ON
measures the number of rupees of Assets that the Company
EQUITY 21.42% 13.25% 36.78%
is carrying for every rupee of Equity.
DUPONT RETURN ON
EQUITY (ROLLING AVERAGE) - 17.34% 23.82%
Partculars FY06 FY07 FY08
DUPONT FINANCIAL LEVERAGE 2.15 2.94 6.43

The DuPont Analysis indicates that ROE for the most recent
financial statement is 36.78%, which is a substantial increase The Financial Leverage ratio increased compared to the
of 2,353bps from the previous year. In addition, ROE for the prior year. The change in Leverage was driven by a
current year is higher than the rolling average of 23.82% for decrease in Total Assets of Rs. 1.2bn and a decrease in
the three years included in this analysis. Tangible Net worth by Rs. 2.0bn.

DuPont Asset Turnover Notes:

The first component of the DuPont formula is the Asset It is to be noted that the rolling average for FY07 has not
Turnover ratio, which measures the number of rupees of been calculated for certain companies due to the
Sales Revenue generated for each rupee of Assets. The unavailability of the required data.
Asset Turnover ratio has declined in FY08 to 0.83. The decline
in Asset Turnover was driven by a decrease in Sales
Revenues of Rs. 3.4bn and a decrease in Total Assets of
Rs.1.2bn.

Partculars FY06 FY07 FY08


DUPONT ASSET TURNOVER 1.44 1.06 0.81

A decline in Sales Revenue and a decline in Total Assets


suggest that the decline in sales is not accompanied by the
reduction of assets.

115
Liquidation Analysis

We have tried to perform liquidation analysis of the company based on certain parameters like adjusting the books of the company
with the liquidation factor.

Operating Assests BV (in Rs. mn) Factor Liquidation Value (in Rs. mn)
Cash 1,982 95% 1,883
Sundry Debtors 2,194 65% 1,426
Temp Inv (liquid assets) 1,338 90% 1,205
Inventories 74 50% 37
Loans & Adv 2,819 50% 1,410
Investment in group comp 0.5 35% 0.2
License Fee 500 75% 375
Share in JVs Assets 553 75% 414
Investment in Land 396 85% 337
Capital Assets
Land 67 95% 64
Bldg 360 70% 252
Plant Machinery 193 25% 48
Ships & Vessels 2,237 50% 1,118
Furniture 19 20% 4
Vehicles 32 25% 8
Trucks 212 40% 85
Office equip 33 15% 5
Port handling equipment 689 40% 276
CWIP 453 50% 227
Assets Liquidation value 9,173
Liabilities Value Factor Liquidation Value
Preferenced Liabilities
Govt: Deferred Tax Liabilities 254 100% 254
Secured loans 2,691 100% 2,691
Unsecured Creditors Allocation (a) 6,228
Total Unsecured (b) 12,154
% Allocation (a)/(b) 54%
FCCB bond holders including FCCB Premium 5,303 54% 2,887
Operating liabilities 5,759 54% 3,136
Contingent liabilities 69 54% 37
Compulsorily convertible debentures 1,024 54% 165
Non-debt holders -
Minority Interest 303 0% 0.0
Equity (Share Holder's Fund) 3,144 0% 0

Liquidation Value is defined as the present value of the net cash remaining if all assets are sold in a quick and orderly, piecemeal sale
and all liabilities are paid at face value with the proceeds. In our analysis, the appraised value of individual assets and liabilities have
been adjusted (with the liquidation factor) to reflect the value that could be obtained in a quick and orderly liquidation. Estimated
liquidation cost in the amount of Rs. 2.5mn has been deducted. The net result is the total entity value. In addition, a tax adjustment to the
tune of the difference between the appraised value and the tax basis of assets and liabilities has been taken, using applicable tax rate.

Based on the above analysis, we believe that the Company may be able to repay in full all its Govt. Taxes and Secured Loans. For all
unsecured liabilities (including contingent liabilities), the Company may be able to pay 54.45%. For calculating its liquidation value, we
have assumed that the Company may have to pay premium on FCCB Bonds. Based on this assumption, our expected return from
Bonds in case of Liquidation of the Company comes at 76.9%.

116
(In USD)

Potential Return from Bonds in case of Liquidation of the Company


BOND NAME SICAL LOGISTICS USD 0.000 '11 (SICL IN )Iss'd 8/26 USD75m
FCCB Indicative Price per Bond (A) 42.00
Yield To Maturity per Bond (B) 136.49
Recovery factor for FCCBs holder (C) 54.50%
Liquidation Recovery (D=B*C) 74.32
Potential Liquidated Return (D-A)/A 76.90%

The following items on the assets side have been omitted n It has also won the contract to manage and operate
from the liquidation valuation exercise or have been the second container terminal at Chennai, to be
assigned 0% liquidation factor. developed on BOT basis with a 30-year license period,
in JV with PSA Sical by forming an SPV CITPL. It is
n Goodwill – We are of the view that goodwill will not be expected to be operational in the year 2008 itself.
worth anything during the period of distress. So, we
have assigned a factor of 0% to it. n Nagpur Sical Gupta Logistics Ltd is developing the
MIHAN rail terminal on BOT basis, to be completed by
However, we have taken into account certain items, the year 2009.
which we thought were essential and were not part of
the accounts. Inclusion of Marketable Investments – As on March
2008, the investments of the company are in Liquid
n In FY08, claims against the Company not Mutual Funds, which are fairly liquid. The company
acknowledged as debts Rs. 68.7mn (Mentioned in has sold off all the investments in the equity markets in
the notes to accounts: Schedule 22B) have been fully the year itself. So, as on March, 2008, the company is
factored in this data of the liquidation analysis. not having any exposure in the equity markets.

Inclusion of Extraordinary Items- We have included Sound investments having high re-sale value
license fee in the liquidation analysis, though it is an
intangible asset. n Train rake - Sical Logistics Limited initiated the
operations of its two container train Sical Multimodal
n License Fee- The subsidiary of the company has And Rail Transport (SMART) Ltd, a 100% subsidiary of
signed a concession agreement with Indian Railways Sical, obtained the category 1 pan-India license in
and has procured Category I license (license fee of January ‘07 to run container trains for exim and
Rs. 500mn) for operating container trains across India domestic cargo. The first rake was operational from
in both EMIM and domestic Sectors. It has March 2008 and second rake started its operationsl
commenced its rail operations from March 2008. from August 2008. Till date, Sical has purchased 3
railway rakes worth Rs. 440mn.
n We have also valued the share in JV assets (part of
intangible fixed assets) in the liquidation. During the
n Dredger - Sical Logistics Ltd started its foray into the
liquidation process, there is always a probability of JV
dredging market, with the acquisition of Sical
being hived off into separate entities.
PortoFino, a cutter suction dredger, at a
consideration of $ 24.92mn. The acquisition is the
However, certain other items are there (like BOT
latest step in Sical’s expansion strategy into the global
contract), which are not valued-
offshore logistics market. The acquisition was funded
n The Company is implementing the project of by Sical’s foreign currency convertible bonds issue in
establishing iron ore terminal on BOT basis for a period 2006. Earlier, Sical had deployed it in the lucrative
of 30 years at Ennore Port. The concession agreement Chinese dredging market. The company plans to
has been entered into with the Ennore Port. The acquire more cutter suction and trailer suction
project is scheduled to be completed by April 2010.

117
hopper dredgers, to serve the needs of the booming According to the company, the present value of this
Indian and Asian dredging market. Recently, this land is around Rs. 500mn. Apart from this, the
dredger has been removed from the Chinese waters, company has also invested in land worth Rs. 400mn in
and is likely to start contributing from end August 2008, Chennai and Rs. 280mn in Bangalore for setting up
as it is chartered for a five year contract in Saudi terminals.
Arabia at chartered rate of $ 26,000 per day ($
18.1mn). n Ships and Vessels – The Company has two vessels,
which are only two years old.
Tangible Assets having good resale market
n Trucks – Presently, Sical has 311 trucks with an average
n Land – According to the balance sheet as on March life of 2.5 years.
2008, the value of the land is Rs. 67.2mn. However, the
value of this land is not re-stated since 1995.

118
Financials Projection
SECTION 1: CASH INFLOW ESTIMATE (in Rs. mn)
Particulars Mar-08 Mar-09 Mar-10 Mar-11 Mar-12
Revenues 7,205 8,157 10,067 13,378 16,565
EBITDA 907 954 1,249 1,803 2,603
Less: DA 278 327 373 418 456
Less: Prov for FCCB Premium 1,244 354 354 354
EBIT 630 (617) 522 1,030 1,792
Less: Interest 203 270 284 282 262
EBT 426 (887) 238 748 1,530
Less: Tax (9) (155) 42 131 268
Net Profit after tax 435 (731) 197 617 1,262
Cash from Operations 692 1,109 1,207 1,672 2,335
Cash from Operations (USD) 13 21 23 32 45
Section 2: Working Cap and Investment/Capex
Working Capital Changes (19) (105) (98) (197) (365)
Changes from Investing/Capex Activities (2,539) (1,140) (1,200) (1,200) (1,000)
Net Cash from W/Cap and Investment/Capex (2,558) (1,245) (1,298) (1,397) (1,365)
Net Cash from W/Cap & Invest/Capex ($mn) (49) (24) (25) (27) (26)
Section 3: Financing Activities
Increase from Equity & Share Premium 2,427 (1,244) (354) (354) (354)
Changes in Debt 870 367 502 502 502
Net Cash from Financing Activities 1,759 (1,146) (136) (134) (115)
Net Cash from Financing Activities ($mn) 34 (22) (3) (3) (2)
Section 4: Net Cash Available for FCCB
Opening Net Cash Balance 2,120 1,982 700 474 615
Net Cash Flow For the Year (107) (1,282) (226) 141 855
Closing Net Cash Available for FCCB 2,013 700 474 615 1,470
Closing Net Cash Available for FCCB ($mn) 39 14 9 12 28
SECTION 5: FCCB REPAYMENT LIABILITY
Original Issue Size (USD) 75 75 75 75 75
Less: Amount already converted (USD) - - - - -
FCCB O/S (USD) 75 75 75 75 75
Add: Premium on Redemption 7 7 7 7
Total Payable on maturity date (USD) 75 82 89 96 102
Total Payable on maturity date (Rs.) 3,885 4,239 4,594 4,948 5,303
SECTION 6: RATIO ANALYSIS
Current M Cap Rs. Mn 1,329
Currernt M Cap USD Mn 26
Networth (Rs) 3,144 2,413 2,609 3,227 4,489
Networth (USD) 61 47 50 62 87
Debt (Rs.) 6,857 7,224 7,726 8,229 8,731
Debt / Equity 2.2 3.0 3.0 2.6 1.9
EBITDA / Debt 0.1 0.1 0.2 0.2 0.3
Interest Coverage Ratio 3.1 (2.3) 1.8 3.7 6.8
SECTION 7: FCCB Cover
FCCB redemption ratio 0.52 0.17 0.10 0.12 0.28
FCCB Lia / Current M Cap 2.92 3.19 3.46 3.72 3.99
All USD / Irs. Figures are in millions.
Source: FY07 taken from Company Annual Report and results are consolidated.
*USD @ Rs. 51.8

119
GA CREDIT SCORE ANALYSIS
Credit Score: Risk Assessment Weight 200603(12) 200703(12)
Ratio 1 NET WORKING CAPITAL / TOTAL TANGIBLE ASSETS 6.56 51.61% 49.85%
Ratio 2 RETAINED EARNINGS / TOTAL TANGIBLE ASSETS 3.26 42.17% 31.00%
Ratio 3 EBIT / TOTAL TANGIBLE ASSETS 6.72 16.74% 10.26%
Ratio 4 TANGIBLE NETWORTH / TOTAL TANGIBLE ASSETS 1.05 46.54% 34.03%
CONSTANT 3.25 3.25
GA CREDIT SCORE 17.59 9.62 8.58
Sustainable Growth Ratio
Ratio 5 NET PROFIT MARGIN 6.92% 4.26%
Ratio 6 RETENTION RATIO 99.08% 98.96%
Ratio 7 MAXIMUM SUSTAINABLE GROWTH IN REVENUE 21.22% 13.11%
HISTORIC GROWTH IN NET SALES 6.55%
HISTORIC GROWTH IN NET SALES (ROLLING AVERAGE) 3.27%
DIFFERENCE FROM MAXIMUM -6.57%
Dupont Analysis
Ratio 8 DUPONT RETURN ON EQUITY 21.42% 13.25%
DUPONT RETURN ON EQUITY (ROLLING AVERAGE) 17.34%
Ratio 9 DUPONT ASSET TURNOVER 1.50 1.09
Ratio 10 DUPONT RETURN ON ASSETS 143.98% 105.93%
Ratio 11 DUPONT FINANCIAL LEVERAGE 2.15 2.94

Glossary of Financial Terms - Asset use efficiency, which is measured by total asset
turnover
1. Retention Ratio:
- Financial leverage, which is measured by the equity
This ratio measures the proportion of net profit after tax
multiplier
that is not paid out as dividends but retained in the
business. Calculated as:
Calculated as: ROE = Profit Margin (Profit/Sales) * Total Asset Turnover
(Sales/Assets) * Equity Multiplier (Assets/Equity)
= (Net Profit After Tax – Dividends) / Net Income
5. Rolling Average:
2. Asset Turnover:
The average of a security constructed in a period as
This ratio Indicates the relationship between assets
short as a few days or as long as several years and
and revenue and measures the amount of sales that
showing trends for the latest interval. As each new
are generated from each dollar of assets.
variable is included in calculating the average, the
Calculated as: last variable of the series is deleted.
= Net Revenue / Total Assets 6. DuPont Asset Turnover Ratio:
3. Sustainable Growth Rate: Calculated as:
The maximum growth rate that a firm can sustain = Gross Revenue / Total Tangible Assets
without having to resort to additional borrowings or
7. DuPont Return on Assets:
increase financial leverage.
It is a financial ratio that shows how the return on assets
Calculated as:
depends on both asset turnover and profit margin.
= ROE x Retention Ratio The DuPont method breaks out these two
components from the return on assets ratio in order to
4. DuPont Return on Equity:
determine the impact of each on the profitability of
The DuPont method breaks the return on equity (ROE) the company.
down into three parts: a) profit margin, b) asset
This ratio helps to highlight the impact of changes in
turnover and c) financial leverage.
asset turnover and profit margin.
DuPont Method tells us that ROE is affected by three
Calculated as:
things:
ROA DuPont = (Net Profit After Tax / Net Sales) x (Net
- Operating efficiency, which is measured by profit
Sales / Total Assets)
margin

120
Income Statement
Particulars (in Rs. mn) FY07 FY08 FY09E FY10E FY11E FY12E
Revenues 10653 7,205 8,157 10,067 13,378 16,565
Cost of Sales 9889.1 6,297 7,204 8,818 11,575 13,962
EBITDA 764 907 954 1,249 1,803 2,603
EBITDA Margin 7.2% 12.6% 11.7% 12.4% 13.5% 15.7%
Depreciation 236.8 278 327 373 418 456
Prov for FCCB Premium 0 1,244 354 354 354
EBIT 527 630 (617) 522 1,030 1,792
Interest 211.1 203 270 284 282 262
EBT 316 426 (887) 238 748 1,530
Tax 57.4 (9) (155) 42 131 268
PAT 259 435 (731) 197 617 1,262

Balance Sheet
Particulars (in Rs. mn) FY07 FY08 FY09E FY10E FY11E FY12E
Share Capital 301.9 395 395 395 395 395
Reserves 3219.6 2,749 2,017 2,214 2,831 4,093
Misc. Exp. 2
Total Shareholders Fund 3,520 3,144 2,413 2,609 3,227 4,489
Minority Interest 303 303 303 303 303
Debt 6,304 6,857 7,224 7,726 8,229 8,731
Secured Debt 2732 2690 2838 2986 3133 3281
FCCB Debt 3238.6 2995.9 4239 4594 4948 5303
Non FCCB Unsecured Debt 333 1171 147 147 147 147
Deferred Tax 314 264 264 264 264 264
Total Liabilities 10,137 10,569 10,205 10,903 12,023 13,787
Assets
Gross Block 4619.3 7,469 7,922 9,062 10,262 11,462
Accum Dep. 1235.5 1,188 1,515 1,888 2,306 2,763
Net Block 3,384 6,280 6,406 7,174 7,955 8,699
WIP 773.23 453 1140 1200 1200 1000
Net Fixed Assets 4,157 6,734 7,546 8,374 9,155 9,699
Investments 973.3 1,735 1,735 1,735 1,735 1,735
Deferred Tax Assets 28.3 10 10 10 10 10
Inventories 373.9 74 223 276 367 454
Sundry Debtors 2702.4 2,194 2,484 3,066 4,074 5,045
Cash in Hand 2164.9 1,982 700 474 615 1,470
Loans & Advances 4745.1 2,819 3,192 3,939 5,235 6,482
Current Liabilities 4263.8 4,153 4,751 5,815 7,634 9,208
Prov. 743.9 826 935 1,154 1,533 1,899
Net Current Assets 4,979 2,091 914 785 1,123 2,344
Misc Exp
Total Assets 10,137 10,569 10,205 10,903 12,023 13,787

121
Cash Flow Statement
Particulars (in Rs. mn) FY07 FY08 FY09E FY10E FY11E FY12E
PBIT 527 630 (617) 522 1,030 1,792
Add : Depreciation 237 278 327 373 418 456
Add: Prov for FCCB 1,244 354 354 354
(Inc)/Dec in WC (292) (19) (105) (98) (197) (365)
Other Operating Activities (12) (13)
Taxes Paid (150) (203) 155 (42) (131) (268)
CF from Operations 310 673 1,003 1,110 1,475 1,970
(Inc)/Dec in FA (1,354) (1,425) (453) (1,140) (1,200) (1,200)
(Inc)/Dec in Capex -401.4 (124) (687) (60) - 200
(Pur)/Sale of Investments -506.1 (1,287) - - - -
Misc. Expenses 942.2 296.2
CF from Investments (1,320) (2,539) (1,140) (1,200) (1,200) (1,000)
Increase Equity -224.9 2427 - - - -
Premium from Equity Issue (1,244) (354) (354) (354)
Increase in Debt 3138.6 870 367 502 502 502
Interest Paid -34 (1,538) (270) (284) (282) (262)
CF from Fin. Activity 2,880 1,759 (1,146) (136) (134) (115)
Inc/Dec of Cash 1835 (137) (1,282) (226) 141 855
Add: Beginning Balance 330 2,120 1,982 700 474 615
Closing Balance 2,165 1,982 700 474 615 1,470

122
Global Absolute Section 5: Conclusion

The overall impact of the Credit Crunch and financial turmoil has had a very
negative impact on equity markets worldwide, especially in the emerging markets.
This has left countries like India witnessing a steep decline in their markets of about
40% from the highs. This in turn has totally turned the Indian convertible bond
market upside down. The panic has unjustly seen some financially sound
companies beaten and their bonds trading at distress levels as all investors rush to
exit.

We believe that this is an overreaction especially for the companies we have


covered. Our analysis shows that most of these companies are well equipped
financially to survive and redeem their bonds on maturity.

India is an emerging market, and is expected to grow at 7% p.a. second to China.


When an economy is growing at such a rate in times of a global slowdown, any
sound company in that Economy yielding 40% + p.a. is a good buy, as these are the
companies that will benefit from and contribute to this growth that is being
generated.

Also, there are talks about a change in legislation that issuing companies will now
be allowed to buy back their own bonds, making some distress bonds very
attractive.

We have also witnessed a growing interest from Private Equity firms to get involved
in the Convertibles market in two ways:

i) Buy big blocks in bonds that are yielding 40% +

ii) Offering to infuse equity into the issuing company so that it can buy back its
bonds from the investors.

Overall, we hope that our research does show that some Indian FCCBs do provide
some Solace and Value, and it is a matter of picking the right company, in the right
space to do well. If we look at what the Indian FCCB market is showing today, it
indicates that at least 65% of all issues will default, this is an overreaction and we
hope that our document has proved this statement wrong in some instances.

123
Appendix 1- GA Credit Score: An Explanation

The adapted formula for credit score for emerging market GA Bond Rating
corporates used by Global Absolute is as follows:
GA analysis using many different credit and liquidity
Credit Score = 3.25 + 6.56(x1) + 3.26(x2) + 6.72(x3) + 1.05(x4). measures is summarized in three ratings as follows:

The constant of 3.25 is added to standardize the scores with GA BOND RATING 1 Yield / Good Credit
a score of zero equated to a “D” (distress) rated bond. GA BOND RATING 2 Yield / Low Credit
GA BOND RATING 3 Distress
RATIO RATIOS & WEIGHTS WEIGHTS
X1 NET WORKING CAPITAL / T. TANGIBLE ASSETS 6.560
X2 RETAINED EARNINGS / TOTAL TANGIBLE ASSETS 3.260 These ratings are mainly based upon the proprietary model
X3 EBIT / TOTAL TANGIBLE ASSETS 6.720 which includes GA credit score value, DuPont analysis,
X4 TANGIBLE NETWORTH / TOTAL TANGIBLE ASSETS 1.050 future net cash flows and sustainable growth analysis.
CONSTANT 3.250
TOTAL CREDIT SCORE 17.590 FCCB Redemption Cover

FCCB Redemption Cover measures the extent to which the


The interpretation of GA Credit Score is as follows:
net cash balance at the year end covers the FCCB
redemption liability as on that date.
GA CR ZONE INTERPRETATION US BOND
SCORE RATING EQV.
Upto 1 At risk, but needs to thoroughly examine refinance as an option
> 6.40 GREEN DISTRESS UNLIKELY. A-AAA
1 – 2.5 No risk of non-repayment, but still examines refinance as an option
> 3.75 YELLOW CORRECTIVE ACTION AND
> 2.5 Repayment most likely from cash flows
MONITORING NEEDED. B-BBB+
> 1.75 GREY IMMEDIATE CORRECTIVE ACTION &
STRICT MONITORING CALLED FOR. C
< 1.75 RED DISTRESS HIGHLY LIKELY D

124
Appendix 2: Universe of FCCBs By Issuer

Universe of FCCBs By Issuer


COMPANY NAME ISSUE SIZE ($M) AMOUNT O/S ($M) MATURITY DATE REDM. AMT ($m)
3I INFOTECH LTD 38 38 4/3/2012 53
3I INFOTECH LTD 50 22 3/17/2011 31
3I INFOTECH LTD 100 100 7/27/2012 141
ABAN OFFSHORE LTD 119 5 4/15/2011 7
ACC LTD 60 23 3/19/2009 24
ADANI ENTERPRISES LTD 250 250 1/27/2012 250
ADLABS FILMS LTD 107 107 1/26/2011 130
AFTEK LTD 35 34 6/25/2010 44
AKSH OPTIFIBRE LTD 9 9 1/29/2010 11
ALOK INDUSTRIES LTD 45 24 5/27/2010 31
AMTEK AUTO LTD 150 18 6/3/2010 23
AMTEK AUTO LTD 250 250 6/16/2011 336
AMTEK INDIA LTD 100 44 11/12/2010 59
ANKUR DRUGS & PHARMA LTD 16 15 5/27/2011 21
ASHOK LEYLAND LTD 100 100 4/30/2009 100
ASSAM COMPANY LTD 48 45 11/30/2011 68
AUROBINDO PHARMA LTD 60 56 8/11/2010 78
AUROBINDO PHARMA LTD 150 150 5/17/2011 219
AUROBINDO PHARMA LTD 50 50 5/17/2011 73
BAJAJ HINDUSTHAN LTD 50 50 5/14/2010 68
BAJAJ HINDUSTHAN LTD 120 120 2/2/2011 160
BALLARPUR INDUSTRIES LTD 60 60 7/13/2010 82
BARTRONICS INDIA LTD 25 6 6/11/2012 9
BARTRONICS INDIA LTD 50 50 1/4/2013 72
BHARAT FORGE LTD 40 40 4/28/2012 57
BHARAT FORGE LTD 40 40 4/28/2013 63
BHARAT FORGE LTD 60 60 4/20/2010 76
BHARAT FORGE LTD 60 60 4/20/2010 78
BHARATI SHIPYARD LTD 20 1 12/13/2008 2
BHARATI SHIPYARD LTD 80 47 12/13/2010 67
BHARTI AIRTEL LTD 115 107 5/12/2009 119
BILCARE LTD 50 41 12/22/2010 60
BRUSHMAN INDIA LTD 12 12 6/13/2013 15
CORE PROJECTS & TECHNOLOGIES 80 25 5/12/2012 37
COUNTRY CLUB INDIA LTD 25 25 11/12/2009 31
CRANES SOFTWARE INTL LTD 42 42 3/18/2011 47
DECCAN CHRONICLE HLDGS LTD 54 20 3/17/2011 28
DISHMAN PHARMACEUTICALS & CH 50 3 8/19/2010 4
EDUCOMP SOLUTIONS LTD 80 79 7/26/2012 111
ELECTROSTEEL CASTINGS LTD 75 75 5/26/2011 101
ERA INFRA ENGINEERING LTD 75 75 1/25/2012 112
EVEREST KANTO CYLINDER LTD 35 35 10/10/2012 50
FINANCIAL TECHN (INDIA) LTD 100 100 12/21/2011 147
FIRSTSOURCE SOLUTIONS LTD 275 275 12/4/2012 383
GAYATRI PROJECTS LTD 32 32 8/3/2012 38
GEMINI COMMUNICATIONS LTD 19 19 7/17/2012 20
GEODESIC LTD 125 125 1/18/2013 173

125
Appendix 2: Universe of FCCBs By Issuer

Universe of FCCBs By Issuer


COMPANY NAME ISSUE SIZE ($M) AMOUNT O/S ($M) MATURITY DATE REDM. AMT ($m)
GHCL LTD 81 80 3/21/2011 111
GITANJALI GEMS LTD 110 74 11/25/2011 105
GLENMARK PHARMACEUTICALS LTD 20 3 2/16/2010 4
GLENMARK PHARMACEUTICALS LTD 50 49 2/16/2010 66
GLENMARK PHARMACEUTICALS LTD 30 30 1/11/2011 42
GRABAL ALOK IMPEX LTD 20 20 4/5/2012 28
GRAPHITE INDIA LTD 40 35 10/20/2010 42
GREMACH INFRASTRUCTURE EQUIP 50 50 2/13/2013 69
GTL INFRASTRUCTURE LTD 300 268 11/29/2012 376
GUJARAT NRE COKE LTD 55 Blank 4/12/2011 0
GUJARAT NRE COKE LTD 60 Blank 3/14/2010 0
H.E.G. LTD 29 18 7/30/2010 24
HELIOS & MATHESON INFO TECH 20 20 7/15/2011 28
HINDUSTAN CONSTRUCTION CO 100 100 4/1/2011 138
HOTEL LEELAVENTURE LTD 89 54 9/16/2010 68
HOTEL LEELAVENTURE LTD 100 100 4/25/2012 147
HOUSING DEVELOPMENT FINANCE 500 111 9/27/2010 139
ICSA INDIA LTD 22 10 3/10/2012 14
ICSA INDIA LTD 24 13 4/28/2012 18
INDIA CEMENTS LTD 75 75 5/12/2011 111
IVRCL INFRASTRUCTURES & PROJ 65 65 12/9/2010 93
JAIN IRRIGATION SYSTEMS LTD 60 60 3/30/2011 84
JAIN IRRIGATION SYSTEMS LTD 210 13 3/9/2013 17
JAIN IRRIGATION SYSTEMS LTD 400 395 9/12/2012 583
JAIN IRRIGATION SYSTEMS LTD 100 2 2/17/2010 3
JBF INDUSTRIES LTD 35 35 12/1/2010 47
JCT LTD 35 26 4/8/2011 31
JINDAL SAW LTD 93 60 7/1/2011 70
JSL LTD 60 55 12/24/2009 72
JSW STEEL LTD 325 325 6/28/2012 464
JUBILANT ORGANOSYS LTD 75 63 5/24/2010 87
JUBILANT ORGANOSYS LTD 200 200 5/20/2011 285
JUBILANT ORGANOSYS LTD 35 2 5/15/2009 2
KARUTURI GLOBAL LTD 50 50 10/19/2012 71
KEI INDUSTRIES LTD 36 35 11/30/2011 51
KLG SYSTEL LTD 22 19 3/27/2012 27
KOHINOOR FOODS LTD 20 9 9/5/2010 12
LARSEN & TOUBRO LTD 150 150 11/30/2009 172
LARSEN & TOUBRO LTD 119 Blank 1/28/2011 0
LUPIN LTD 100 80 1/7/2011 108
MAHARASHTRA SEAMLESS LTD 75 75 7/30/2010 102
MAHINDRA & MAHINDRA LTD 200 200 4/14/2011 256
MAN INDUSTRIES (INDIA) LTD 50 50 5/23/2012 73
MARKSANS PHARMA LTD 55 55 11/9/2010 80
MASCON GLOBAL LTD 50 50 12/28/2012 65
MERCATOR LINES LTD 60 8 4/27/2010 10
MONNET ISPAT & ENERGY LTD 60 58 3/3/2011 85

126
Appendix 2: Universe of FCCBs By Issuer

Universe of FCCBs By Issuer


COMPANY NAME ISSUE SIZE ($M) AMOUNT O/S ($M) MATURITY DATE REDM. AMT ($m)
MONNET ISPAT & ENERGY LTD 60 16 2/24/2010 21
MOSER BAER INDIA LTD 75 75 6/21/2012 101
MOSER BAER INDIA LTD 75 75 6/21/2012 105
MOTHERSON SUMI SYSTEMS LTD 64 64 7/16/2010 81
MSK PROJECTS INDIA LTD 5 4 5/4/2011 4
MURLI INDUSTRIES LTD 23 23 2/6/2012 34
NAHAR INDUSTRIAL ENTERPRISES 45 45 2/16/2011 61
NAVA BHARAT VENTURES LTD 62 52 9/30/2011 66
NECTAR LIFESCIENCES LTD 35 33 4/26/2011 50
OK PLAY INDIA LTD 10 10 7/24/2012 15
ORCHID CHEMICALS & PHARMA 43 17 11/3/2010 25
ORCHID CHEMICALS & PHARMA 175 175 2/28/2012 250
PANACEA BIOTEC LTD 175 175 2/14/2011 250
PARAMOUNT COMMUNICATION LTD 27 27 11/23/2011 39
PLETHICO PHARMACEUTICALS LTD 75 75 10/23/2012 109
PRIME FOCUS LTD 55 55 12/13/2012 79
PSL LTD 40 40 9/7/2010 57
PUNJ LLOYD LTD 125 50 4/8/2011 63
PYRAMID SAIMIRA THEATRE LTD 90 90 7/4/2012 123
RADICO KHAITAN LTD 50 50 7/27/2011 65
RAJESH EXPORTS LTD 150 150 2/21/2012 222
RANBAXY LABORATORIES LTD 440 440 3/18/2011 558
RASANDIK ENGINEERING INDS 10 10 4/8/2009 11
RELIANCE COMMUNICATIONS LTD 500 297 5/10/2011 374
RELIANCE COMMUNICATIONS LTD 1000 990 3/1/2012 1264
RELIANCE INFRASTRUCTURE LTD 178 100 3/24/2009 111
RELIANCE NATURAL RESOURCES L 300 300 10/17/2011 300
ROLTA INDIA LTD 150 150 6/29/2012 209
RUCHI INFRASTRUCTURE LTD 40 40 2/3/2012 58
S. KUMARS NATIONWIDE LTD 50 50 4/8/2011 65
SAKTHI SUGARS LTD 20 20 5/30/2009 25
SAKTHI SUGARS LTD 40 40 5/31/2011 59
SHAKTI PUMPS (INDIA) LTD 7 7 5/10/2012 10
SHREE ASHTAVINYAK CINEVISION 33 28 12/22/2012 35
SICAL LOGISTICS LTD 75 75 4/19/2011 102
SIMBHAOLI SUGAR LTD 33 33 3/11/2011 45
SINTEX INDUSTRIES LTD 50 50 10/25/2010 70
SINTEX INDUSTRIES LTD 225 225 3/13/2013 291
SRI ADHIKARI BROS TELE NTWRK 9 8 6/12/2012 11
STERLING BIOTECH LTD 250 250 5/16/2012 342
STERLING BIOTECH LTD 175 175 9/30/2010 234
STERLING BIOTECH LTD 50 50 9/30/2009 53
STRIDES ARCOLAB LTD 100 100 6/27/2012 145
STRIDES ARCOLAB LTD 40 40 4/19/2010 55
SUBEX LTD 180 180 3/9/2012 245
SURYAJYOTI SPINNING MILLS 10 10 2/17/2012 14
SUZLON ENERGY LTD 300 300 6/12/2012 436

127
Appendix 2: Universe of FCCBs By Issuer

Universe of FCCBs By Issuer


COMPANY NAME ISSUE SIZE ($M) AMOUNT O/S ($M) MATURITY DATE REDM. AMT ($m)
SUZLON ENERGY LTD 200 200 10/11/2012 290
TATA CHEMICALS LTD 150 150 2/1/2010 181
TATA MOTORS LTD 119 119 3/21/2011 118
TATA MOTORS LTD 100 4 4/27/2009 4
TATA MOTORS LTD 490 490 7/12/2012 646
TATA MOTORS LTD 300 300 4/27/2011 365
TATA POWER CO LTD 200 200 2/25/2010 231
TATA STEEL LTD 875 875 9/5/2012 1079
TATA TELESERVICES MAHARASHTR 125 13 6/2/2009 16
TULIP TELECOM LTD 150 150 8/26/2012 217
UFLEX LTD 85 69 3/9/2012 84
UNITED PHOSPHORUS LTD 80 80 1/7/2011 105
UNITED SPIRITS LTD 100 100 3/30/2011 127
UTTAM GALVA STEELS LTD 25 25 8/10/2010 33
VARDHMAN TEXTILES LTD 60 60 2/17/2011 81
VENUS REMEDIES LTD 12 12 5/4/2009 14
VIDEOCON INDUSTRIES LTD 105 67 7/25/2011 86
VIDEOCON INDUSTRIES LTD 90 43 3/7/2011 50
VIVIMED LABS LTD 15 15 4/19/2012 15
WELSPUN-GUJARAT STAHL LTD 75 75 11/29/2010 107
WOCKHARDT LTD 110 108 10/25/2009 140
XL TELECOM AND ENERGY LTD 40 20 10/23/2012 29
ZEE ENTERTAINMENT ENTERPRISE 100 5 4/29/2009 6
ZENITH INFOTECH LTD 33 30 9/21/2011 40
ZENITH INFOTECH LTD 45 45 8/17/2012 55
Source: Bloomberg

128
Appendix 3: FCCB Universe
In the Table, "Universe of Indian FCCBs" the highlighted companies symbolises risk of non conversion of FCCBs as the stock prices more than 200% below the conversion price.
The FCCBs which face high risk of non redemption have been put in bold letter. As these companies have high capital gearing.

Universe of FCCBs By Issuer


COMPANY NAME ISSUE SIZE AMOUNT CONV. Share Price CON. MATURITY REDEM REDEMPTION CUR MKT Avg. Daily Val. DEBT to YTM (%)
($M) O/S ($M) PRICE PREM (%) DATE VAL AMT. ($m) CAP ($m) Traded 3M ($) EQUITY
SICAL LOGISTICS LTD 75 75 564 26 2101 4/19/2011 136 102 21 158,817 1.7 57.8
SUBEX LTD 180 180 656 34 1824 3/9/2012 136 245 24 2,797,630 1.2 49.1
GEMINI COMMUNICATIONS LTD 19 19 257 19 1229 7/17/2012 105 20 38 164,894 1.6 21.2
NECTAR LIFESCIENCES LTD 35 33 260 20 1187 4/26/2011 151 50 63 966,259 1.6 24.7
GREMACH INFRASTRUCTURE EQUIP 50 50 376 33 1044 2/13/2013 137 69 10 68,238 1.8 39.3
BAJAJ HINDUSTHAN LTD 120 120 456 48 857 2/2/2011 134 160 138 6,589,800 2.4 38.1
AMTEK AUTO LTD 250 250 459 49 846 6/16/2011 134 336 139 1,077,251 0.6 36.3
PYRAMID SAIMIRA THEATRE LTD 90 90 386 44 783 7/4/2012 136 123 25 914,563 N/A 46.3
SIMBHAOLI SUGAR LTD 33 33 153 18 769 3/11/2011 137 45 8 7,809 2.3 90.2
AUROBINDO PHARMA LTD 150 150 1,014 121 735 5/17/2011 146 219 133 696,102 1.3 51.4
SAKTHI SUGARS LTD 40 40 283 38 649 5/31/2011 148 59 24 103,036 2.1 28.8
AUROBINDO PHARMA LTD 50 50 879 121 624 5/17/2011 147 73 133 696,102 1.3 44.5
PRIME FOCUS LTD 55 55 1,387 192 622 12/13/2012 144 79 50 44,907 0.2
OK PLAY INDIA LTD 10 10 98 14 619 7/24/2012 146 15 4 6,436 0.7 47.5
SAKTHI SUGARS LTD 20 20 271 38 618 5/30/2009 123 25 24 103,036 2.1 65.5
TATA MOTORS LTD 119 119 1,001 140 617 3/21/2011 99 118 1,281 11,659,429 1.4 21.9
SUZLON ENERGY LTD 200 200 372 52 610 10/11/2012 145 290 1,599 48,388,678 0.7 36.2
FIRSTSOURCE SOLUTIONS LTD 275 275 92 13 591 12/4/2012 139 383 117 1,784,315 1.5 38.4
TATA MOTORS LTD 490 490 961 140 588 7/12/2012 132 646 1,281 11,659,429 1.4 28.4
SUZLON ENERGY LTD 300 300 360 52 588 6/12/2012 145 436 1,599 48,388,678 0.7 35.7
BHARAT FORGE LTD 40 40 690 102 575 4/28/2013 156 63 464 1,650,837 0.8 14.2
BHARATI SHIPYARD LTD 80 47 498 74 573 12/13/2010 143 67 42 333,380 0.3 28.2
NAHAR INDUSTRIAL ENTERPRISES 45 45 200 31 550 2/16/2011 136 61 22 20,065 1.5 42.8
SRI ADHIKARI BROS TELE NTWRK 9 8 94 15 530 6/12/2012 134 11 3 3,950 0.3 35.3
MOSER BAER INDIA LTD 75 75 364 59 518 6/21/2012 135 101 202 6,756,922 1.2 60.0
MOSER BAER INDIA LTD 75 75 364 59 518 6/21/2012 139 105 202 6,756,922 1.2 58.0
HELIOS & MATHESON INFO TECH 20 20 130 22 505 7/15/2011 139 28 10 46,136 0.3 38.2
BHARAT FORGE LTD 40 40 604 102 491 4/28/2012 143 57 464 1,650,837 0.8 14.9
MARKSANS PHARMA LTD 55 55 34 6 485 11/9/2010 145 80 42 816,614 2.2 47.2
BHARATI SHIPYARD LTD 20 1 422 74 471 12/13/2008 120 2 42 333,380 0.3 34.8
GHCL LTD 81 80 161 28 470 3/21/2011 139 111 58 1,586,269 6.1 48.3
HINDUSTAN CONSTRUCTION CO 100 100 248 44 462 4/1/2011 138 138 231 4,787,007 2.5 19.7

129
Appendix 3: FCCB Universe
Universe of FCCBs By Issuer
COMPANY NAME ISSUE SIZE AMOUNT CONV. Share Price CON. MATURITY REDEM REDEMPTION CUR MKT Avg. Daily Val. DEBT to YTM (%)
($M) O/S ($M) PRICE PREM (%) DATE VAL AMT. ($m) CAP ($m) Traded 3M ($) EQUITY
TATA MOTORS LTD 300 300 780 140 459 4/27/2011 122 365 1,281 11,659,429 1.4 26.9
KEI INDUSTRIES LTD 36 35 86 17 421 11/30/2011 146 51 21 107,125 1.5 32.7
AFTEK LTD 35 34 75 15 419 6/25/2010 128 44 28 390,688 (0.4) 38.7
PARAMOUNT COMM. LTD 27 27 43 8 417 11/23/2011 146 39 14 62,317 1.5 40.2
WOCKHARDT LTD 110 108 486 97 403 10/25/2009 130 140 216 382,551 2.0 26.2
STRIDES ARCOLAB LTD 100 100 462 95 386 6/27/2012 145 145 78 300,666 4.8 36.7
VIVIMED LABS LTD 15 15 185 39 377 4/19/2012 100 15 6 10,373 1.1
ALOK INDUSTRIES LTD 45 24 72 15 371 5/27/2010 129 31 61 546,975 3.0 34.0
COUNTRY CLUB INDIA LTD 25 25 103 22 370 11/12/2009 123 31 35 85,669 (0.3) 36.6
PLETHICO PHARMACEUTICALS LTD 75 75 605 133 354 10/23/2012 146 109 92 101,721 0.1 28.5
VARDHMAN TEXTILES LTD 60 60 253 56 350 2/17/2011 134 81 66 38,342 1.9 44.0
TATA STEEL LTD 875 875 756 168 349 9/5/2012 123 1,079 2,508 53,183,578 1.7 12.5
AMTEK AUTO LTD 150 18 210 49 333 6/3/2010 130 23 139 1,077,251 0.6 28.0
AUROBINDO PHARMA LTD 60 56 522 121 330 8/11/2010 140 78 133 696,102 1.3 39.2
VIDEOCON INDUSTRIES LTD 105 67 477 111 329 7/25/2011 128 86 521 1,218,524 0.7 44.6
KLG SYSTEL LTD 22 19 400 94 328 3/27/2012 144 27 24 329,783 0.5 28.4
BARTRONICS INDIA LTD 50 50 290 68 326 1/4/2013 143 72 40 723,418 1.1 29.5
3I INFOTECH LTD 100 100 166 39 325 7/27/2012 141 141 104 538,759 1.6 31.2
XL TELECOM AND ENERGY LTD 40 20 260 61 325 10/23/2012 144 29 23 483,727 1.8 22.6
AMTEK INDIA LTD 100 44 120 28 325 11/12/2010 134 59 65 366,606 0.4 31.1
GITANJALI GEMS LTD 110 74 275 65 323 11/25/2011 142 105 113 1,406,227 0.3 25.2
MURLI INDUSTRIES LTD 23 23 565 137 314 2/6/2012 150 34 29 17,974 3.1 30.6
JCT LTD 35 26 12 3 311 4/8/2011 120 31 21 12,518 2.4 33.7
SURYAJYOTI SPINNING MILLS 10 10 42 10 310 2/17/2012 140 14 3 2,504 3.0 37.2
TATA MOTORS LTD 100 4 573 140 310 4/27/2009 95 4 1,281 11,659,429 1.4 35.8
VIDEOCON INDUSTRIES LTD 90 43 452 111 307 3/7/2011 117 50 521 1,218,524 0.7 47.9
RAJESH EXPORTS LTD 150 150 96 24 304 2/21/2012 148 222 121 1,133,091 (5.3) 25.2
3I INFOTECH LTD 38 38 154 39 296 4/3/2012 140 53 104 538,759 1.6 30.4
AKSH OPTIFIBRE LTD 9 9 55 14 290 1/29/2010 121 11 16 14,887 0.6 50.1
JSW STEEL LTD 325 325 953 246 287 6/28/2012 143 464 938 10,592,748 1.8 29.8
ORCHID CHEMICALS & PHARMA 175 175 348 91 283 2/28/2012 143 250 131 1,089,187 2.9 28.6
GAYATRI PROJECTS LTD 32 32 378 99 283 8/3/2012 120 38 20 78,037 3.1 24.8
STRIDES ARCOLAB LTD 40 40 359 95 278 4/19/2010 137 55 78 300,666 4.8 37.0

130
Appendix 3: FCCB Universe
Universe of FCCBs By Issuer
COMPANY NAME ISSUE SIZE AMOUNT CONV. Share Price CON. MATURITY REDEM REDEMPTION CUR MKT Avg. Daily Val. DEBT to YTM (%)
($M) O/S ($M) PRICE PREM (%) DATE VAL AMT. ($m) CAP ($m) Traded 3M ($) EQUITY
FINANCIAL TECHN (INDIA) LTD 100 100 2,362 648 264 12/21/2011 147 147 607 2,631,477 (0.1) 20.9
JAIPRAKASH ASSOCIATES LTD 400 395 248 70 256 9/12/2012 148 583 1,676 43,436,230 1.8 30.4
GEODESIC LTD 125 125 302 85 256 1/18/2013 138 173 160 547,127 (0.3) 28.9
INDIA CEMENTS LTD 75 75 306 87 253 5/12/2011 148 111 498 1,742,269 0.4 22.1
JSL LTD 60 55 120 34 253 12/24/2009 130 72 112 235,475 2.7 33.4
RUCHI INFRASTRUCTURE LTD 40 40 43 12 249 2/3/2012 145 58 51 5,833 1.4 26.3
MAN INDUSTRIES (INDIA) LTD 50 50 115 33 247 5/23/2012 147 73 36 143,083 0.4 32.2
HOTEL LEELAVENTURE LTD 100 100 72 21 245 4/25/2012 147 147 161 1,086,543 1.9 27.8
ABAN OFFSHORE LTD 119 5 2,789 810 244 4/15/2011 122 7 624 18,908,060 24.1 25.2
CORE PROJECTS & TECHNOLOGIES 80 25 165 49 241 5/12/2012 146 37 85 11,631,263 0.3 24.9
SINTEX INDUSTRIES LTD 225 225 580 173 236 3/13/2013 129 291 481 2,042,171 0.3 18.1
BHARAT FORGE LTD 60 60 336 102 229 4/20/2010 127 76 464 1,650,837 0.8 16.4
BHARAT FORGE LTD 60 60 336 102 229 4/20/2010 130 78 464 1,650,837 0.8 16.8
ADLABS FILMS LTD 107 107 543 168 224 1/26/2011 122 130 158 9,898,443 1.3 21.9
RANBAXY LABORATORIES LTD 440 440 716 223 221 3/18/2011 127 558 1,912 27,863,892 1.3 14.2
BAJAJ HINDUSTHAN LTD 50 50 148 48 209 5/14/2010 138 68 138 6,589,800 2.4
RELIANCE COMMUNICATIONS LTD 1,000 990 661 218 204 3/1/2012 128 1,264 9,158 58,102,999 0.9 25.4
3I INFOTECH LTD 50 22 115 39 195 3/17/2011 140 31 104 538,759 1.6 29.9
MAHINDRA & MAHINDRA LTD 200 200 922 316 192 4/14/2011 128 256 1,667 6,145,649 1.4 20.3
ADANI ENTERPRISES LTD 250 250 1,066 370 188 1/27/2012 100 250 1,861 2,235,969 2.3 17.6
UNITED PHOSPHORUS LTD 80 80 272 96 185 1/7/2011 131 105 854 3,178,311 0.4 21.0
ASSAM COMPANY LTD 48 45 29 10 182 11/30/2011 150 68 65 124,442 0.8 31.8
RADICO KHAITAN LTD 50 50 159 57 179 7/27/2011 130 65 119 417,477 2.2 28.8
PANACEA BIOTEC LTD 175 175 358 130 175 2/14/2011 143 250 177 1,068,974 0.4 26.5
ORCHID CHEMICALS & PHARMA 43 17 244 91 168 11/3/2010 147 25 131 1,089,187 2.9 24.6
BRUSHMAN INDIA LTD 12 12 129 48 168 6/13/2013 128 15 11 156,028 1.9 21.3
JUBILANT ORGANOSYS LTD 200 200 413 155 168 5/20/2011 142 285 467 292,445 1.1 27.8
UFLEX LTD 85 69 164 62 166 3/9/2012 122 84 82 27,707 1.6 32.8
MASCON GLOBAL LTD 50 50 14 5 159 12/28/2012 129 65 41 72,931 0.5 32.4
GUJARAT NRE COKE LTD 55 63 25 153 4/12/2011 139 - 235 5,239,861 0.3 24.6
GRABAL ALOK IMPEX LTD 20 20 136 54 152 4/5/2012 142 28 9 19,834 3.2 24.7
VENUS REMEDIES LTD 12 12 437 175 150 5/4/2009 119 14 30 51,784 1.1 75.4
ELECTROSTEEL CASTINGS LTD 75 75 42 17 148 5/26/2011 134 101 98 401,601 0.4 25.8

131
Appendix 3: FCCB Universe
Universe of FCCBs By Issuer
COMPANY NAME ISSUE SIZE AMOUNT CONV. Share Price CON. MATURITY REDEM REDEMPTION CUR MKT Avg. Daily Val. DEBT to YTM (%)
($M) O/S ($M) PRICE PREM (%) DATE VAL AMT. ($m) CAP ($m) Traded 3M ($) EQUITY
JINDAL SAW LTD 93 60 675 277 144 7/1/2011 118 70 294 1,687,739 N/A 22.3
S. KUMARS NATIONWIDE LTD 50 50 57 24 136 4/8/2011 129 65 106 1,259,998 1.7 23.0
JBF INDUSTRIES LTD 35 35 90 38 136 12/1/2010 134 47 48 28,825 1.6 27.2
DECCAN CHRONICLE HLDGS LTD 54 20 105 45 132 3/17/2011 140 28 225 676,049 (0.1) 20.4
ZENITH INFOTECH LTD 45 45 522 225 132 8/17/2012 123 55 56 99,183 1.4 24.3
HOTEL LEELAVENTURE LTD 89 54 47 21 124 9/16/2010 126 68 161 1,086,543 1.9 28.5
RELIANCE COMMUNICATIONS LTD 500 297 481 218 121 5/10/2011 126 374 9,158 58,102,999 0.9 22.8
ERA INFRA ENGINEERING LTD 75 75 159 72 120 1/25/2012 149 112 170 1,196,416 2.4 34.6
SHAKTI PUMPS (INDIA) LTD 7 7 153 70 119 5/10/2012 141 10 7 3,080 3.7 30.7
MSK PROJECTS INDIA LTD 5 4 96 44 117 5/4/2011 100 4 21 80,459 0.7 19.5
MONNET ISPAT & ENERGY LTD 60 58 317 150 111 3/3/2011 145 85 151 1,023,571 0.7 20.2
MERCATOR LINES LTD 60 8 60 28 111 4/27/2010 125 10 136 3,392,356 1.0 29.3
ASHOK LEYLAND LTD 100 100 31 15 108 4/30/2009 100 100 404 1,505,878 0.4 33.2
BILCARE LTD 50 41 880 427 106 12/22/2010 145 60 150 140,189 1.3 26.1
BARTRONICS INDIA LTD 25 6 140 68 105 6/11/2012 143 9 40 723,418 1.1 22.5
RELIANCE INFRASTRUCTURE LTD 178 100 1,007 490 105 3/24/2009 110 111 2,321 74,822,093 0.2 24.4
PSL LTD 40 40 188 92 105 9/7/2010 144 57 80 181,834 0.8 25.0
ROLTA INDIA LTD 150 150 369 184 100 6/29/2012 139 209 604 6,859,690 0.1 25.2
GUJARAT NRE COKE LTD 60 48 25 94 3/14/2010 127 - 235 5,239,861 0.3 39.6
IVRCL INFRASTRUCTURES & PROJ 65 65 234 125 87 12/9/2010 143 93 339 8,416,481 0.4 24.4
EVEREST KANTO CYLINDER LTD 35 35 271 152 79 10/10/2012 143 50 313 759,010 0.3 20.1
GLENMARK PHARMACEUTICALS LTD 30 30 583 326 79 1/11/2011 140 42 1,665 6,277,395 0.5 19.4
JUBILANT ORGANOSYS LTD 75 63 273 155 77 5/24/2010 138 87 467 292,445 1.1 26.1
ZEE ENTERTAINMENT ENTERPRISE 100 5 198 113 76 4/29/2009 116 6 996 6,023,680 0.1 25.8
MAHARASHTRA SEAMLESS LTD 75 75 253 151 68 7/30/2010 136 102 217 699,770 (0.1) 21.5
PUNJ LLOYD LTD 125 50 273 164 67 4/8/2011 126 63 1,011 33,822,909 0.4 16.6
JAIPRAKASH ASSOCIATES LTD 210 13 112 70 61 3/9/2013 132 17 1,676 43,436,230 1.8 11.3
MONNET ISPAT & ENERGY LTD 60 16 237 150 58 2/24/2010 132 21 151 1,023,571 0.7 20.2
BALLARPUR INDUSTRIES LTD 60 60 35 23 53 7/13/2010 136 82 262 282,413 1.7 23.2
WELSPUN-GUJARAT STAHL LTD 75 75 163 108 51 11/29/2010 143 107 409 3,897,450 2.2
TATA CHEMICALS LTD 150 150 231 154 50 2/1/2010 121 181 738 4,006,720 1.2 17.8
UTTAM GALVA STEELS LTD 25 25 45 30 49 8/10/2010 131 33 70 535,995 1.7 13.8
H.E.G. LTD 29 18 192 131 47 7/30/2010 134 24 118 415,779 1.2 21.4

132
Appendix 3: FCCB Universe
Universe of FCCBs By Issuer
COMPANY NAME ISSUE SIZE AMOUNT CONV. Share Price CON. MATURITY REDEM REDEMPTION CUR MKT Avg. Daily Val. DEBT to YTM (%)
($M) O/S ($M) PRICE PREM (%) DATE VAL AMT. ($m) CAP ($m) Traded 3M ($) EQUITY
GRAPHITE INDIA LTD 40 35 53 36 47 10/20/2010 122 42 112 137,931 0.9 23.4
ANKUR DRUGS & PHARMA LTD 16 15 165 112 47 5/27/2011 145 21 43 205,026 2.8 22.0
MOTHERSON SUMI SYSTEMS LTD 64 64 74 51 45 7/16/2010 127 81 371 631,242 0.6 28.2
GTL INFRASTRUCTURE LTD 300 268 53 37 45 11/29/2012 140 376 577 3,097,169 1.3 27.4
KARUTURI GLOBAL LTD 50 50 12 8 42 10/19/2012 141 71 57 650,916 0.6 26.6
ICSA INDIA LTD 22 10 250 180 39 3/10/2012 136 14 162 1,524,496 0.4 17.7
ICSA INDIA LTD 24 13 250 180 39 4/28/2012 136 18 162 1,524,496 0.4 17.4
ZENITH INFOTECH LTD 33 30 310 225 38 9/21/2011 132 40 56 99,183 1.4 12.4
NAVA BHARAT VENTURES LTD 62 52 137 103 33 9/30/2011 126 66 164 409,008 0.1 18.5
CRANES SOFTWARE INTL LTD 42 42 115 92 25 3/18/2011 113 47 215 404,398 0.6 16.3
EDUCOMP SOLUTIONS LTD 80 79 2,950 2,374 24 7/26/2012 141 111 836 33,169,196 0.3 14.9
TATA TELESERVICES MAHARASHTR 125 13 24 20 20 6/2/2009 119 16 793 4,026,446 (12.8) 13.2
JAIN IRRIGATION SYSTEMS LTD 60 60 346 298 16 3/30/2011 139 84 440 1,849,678 1.4 15.0
DISHMAN PHARMACEUTICALS & CH 50 3 172 150 15 8/19/2010 129 4 247 404,015 1.1
STERLING BIOTECH LTD 250 250 205 181 13 5/16/2012 137 342 886 2,805,020 0.9 18.9
SINTEX INDUSTRIES LTD 50 50 184 173 6 10/25/2010 140 70 481 2,042,171 0.3 14.0
JUBILANT ORGANOSYS LTD 35 2 163 155 6 5/15/2009 114 2 467 292,445 1.1
LUPIN LTD 100 80 567 546 4 1/7/2011 135 108 923 2,911,138 0.8 9.1
HOUSING DEVELOPMENT FINANCE 500 111 1,399 1,443 -3 9/27/2010 126 139 8,372 80,553,244 5.5 6.6
UNITED SPIRITS LTD 100 100 781 806 -3 3/30/2011 127 127 1,633 8,723,058 0.6 12.2
ACC LTD 60 23 374 422 -11 3/19/2009 108 24 1,614 4,955,602 (0.3) 22.0
SHREE ASHTAVINYAK CINEVISION 33 28 440 499 -12 12/22/2012 126 35 105 1,191,871 1.8
TATA POWER CO LTD 200 200 591 697 -15 2/25/2010 116 231 3,149 18,212,254 1.1 11.2
STERLING BIOTECH LTD 175 175 153 181 -16 9/30/2010 134 234 886 2,805,020 0.9 14.7
KOHINOOR FOODS LTD 20 9 85 109 -22 9/5/2010 131 12 60 388,274 3.2 5.0
GLENMARK PHARMACEUTICALS LTD 50 49 253 326 -22 2/16/2010 134 66 1,665 6,277,395 0.5 7.9
LARSEN & TOUBRO LTD 150 150 561 771 -27 11/30/2009 115 172 9,218 91,177,213 1.0
JAIPRAKASH ASSOCIATES LTD 100 2 47 70 -32 2/17/2010 132 3 1,676 43,436,230 1.8 (9.5)
GLENMARK PHARMACEUTICALS LTD 20 3 216 326 -34 2/16/2010 134 4 1,665 6,277,395 0.5 (0.8)
RELIANCE NATURAL RESOURCES L 300 300 26 47 -45 10/17/2011 100 300 1,567 52,819,094 (0.8)
TULIP TELECOM LTD 150 150 137 560 -75 8/26/2012 145 217 331 606,684 0.7 29.0
Source: Bloomberg

133
Appendix - 4 : GA FCCB Picks

The initial booklet covers 14 FCCB Reports. We are hoping to cover all the following FCCBs and update this booklet over the coming
weeks. We urge investors to let us know any other FCCBs that require our critical analysis techniques as a service to institutional clients:

Appendix
Bond Name STOCK IND. PARITY YTM ISSUE AMOUNT GA CREDIT Avg. FCCB
PRICE BOND SIZE ($m) O/S ($m) SCORE Redemp.
PRICE * Cover
ADANI ENTERPRISE $ 6.000 '12 384.4 42.0 5.6 54.9 250.0 250.0 8.2 (0.1)
ALOK INDUSTRIES $ 1.000 '10 16.9 81.0 20.7 34.0 45.0 23.8 7.1 (0.3)
AMTEK AUTO $ 0.500 '10 60.1 89.5 27.3 33.9 150.0 18.0 8.4 0.9
AMTEK AUTO LTD $ 0.000 '11 60.1 57.0 12.8 29.0 250.0 250.0 8.4 0.9
AUROBINDO PHARMA $ 0.000 '11 128.3 55.5 12.9 47.2 150.0 150.0 8.8 (0.1)
AUROBINDO PHARMA $ 0.000 '11 128.3 52.0 14.8 41.6 50.0 50.0 8.8 (0.1)
BARTRONICS INDIA $ 0.000 '12 75.2 67.0 44.5 22.5 25.0 6.0 8.2 (0.2)
BARTRONICS INDIA $ 0.000 '13 75.2 46.0 20.9 29.5 50.0 50.0 8.2 (0.2)
BHARATI SHIPYARD $ 0.000 '10 79.8 85.5 16.7 28.0 80.0 47.0 10.6 0.3
CORE PROJECTS $ 0.000 '12 54.2 68.0 30.1 24.5 80.0 25.2 11.7 0.7
CRANES SOFTWARE EUR 2.500 '11 87.0 83.0 66.0 16.2 53.0 53.0 8.3 1.0
EDUCOMP SOLUTION $ 0.000 '12 2,426.3 84.5 68.2 14.9 80.0 78.5 9.8 1.9
FLEX INDUSTRIES $ 4.000 '12 62.5 55.0 34.2 32.8 85.0 69.0 6.7 0.9
GITANJALI GEMS $ 1.000 '11 72.6 74.5 30.1 23.5 110.0 73.9 11.9 1.6
GTL INFRASTRUCTR $ 0.000 '12 36.3 52.0 54.0 28.1 300.0 267.7 6.0
HOTEL LEELA VENT $ 0.000 '12 22.2 60.0 26.3 27.8 100.0 100.0 5.8 0.0
HOTEL LEELA VENT EUR 1.000 '10 22.2 78.5 41.4 28.5 89.0 54.0 5.8 0.0
HOUSING DEV FIN $ 0.000 '10 1,558.7 118.5 114.1 3.2 500.0 111.0
JAIN IRR SYT LTD $ 0.000 '11 296.8 100.0 80.7 14.5 60.0 60.0 9.1 1.6
JAIPRAKASH ASSO $ 0.000 '12 73.4 53.8 24.9 30.4 400.0 395.0 6.5 (1.2)
MAHINDRA & MAHIN $ 0.000 '11 333.6 80.5 32.2 20.3 200.0 200.0 9.4 2.2
MAN INDUSTRIES $ 0.000 '12 32.7 55.0 23.0 32.2 50.0 50.0 9.3 1.3
MARKSANS PHARMA $ 0.000 '10 6.6 64.0 21.4 45.8 55.0 55.0 7.5 0.1
MOSER BAER INDIA $ 0.000 '12 68.2 25.0 15.4 60.0 75.0 75.0 6.6 (1.1)
PUNJ LLOYD LTD $ 0.000 '11 182.9 86.0 62.7 15.2 125.0 49.7 10.3 4.0
PYRAMID SAIMIRA $ 1.750 '12 44.1 35.0 12.3 44.1 90.0 90.0 7.5 0.4
RELIANCE COMM $ 0.000 '11 218.9 74.0 39.7 24.7 500.0 297.0 5.1 1.6
RELIANCE COMM $ 0.000 '12 218.9 58.0 28.7 24.7 1,000.0 990.0 5.1 1.6
ROLTA INDIA LTD $ 0.000 '12 166.6 62.0 37.5 25.2 150.0 150.0 8.2 0.9
SICAL LOGISTICS $ 0.000 '11 27.3 42.0 5.6 54.9 75.0 75.0 6.1 0.2
SUZLON ENERGY LT $ 0.000 '12 54.6 45.0 12.5 35.7 300.0 300.0 9.3 2.0
SUZLON ENERGY LT $ 0.000 '12 54.6 43.5 11.8 36.2 200.0 200.0 9.3 2.0
TATA MOTORS LTD $ 0.000 '12 137.2 50.0 12.9 28.4 490.0 490.0 7.9 1.2
TATA MOTORS LTD $ 1.000 '11 137.2 67.5 17.2 26.9 300.0 300.0 7.9 1.2
TATA POWER CO $ 1.000 '10 746.7 122.0 119.9 (3.2) 200.0 200.0 6.0
TULIP IT SRVCS $ 0.000 '12 615.1 50.0 45.1 30.2 150.0 150.0 9.8 0.5
VIDEOCON INDUS $ 4.500 '11 112.2 45.0 21.5 47.5 90.0 43.0 8.9 3.0
VIDEOCON INDUS $ 5.000 '11 112.2 45.0 21.7 44.3 105.0 67.0 8.9 3.0
* Ind. Bond Price: Indicative Bond Price represents the Ask Price on the Bond
Share price as on 14th Nov.’08

134
Global Absolute Research Pvt. Ltd.

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