Indian Small Caps

October 01, 2012
Indian Small Caps

THEMATIC
12 high quality small cap recovery plays

Over the last 4 months BSE Small Caps have risen by 12% compared to the 16% rise in the Nifty. Going forward, as we enter an economic recovery, small caps seem likely to outperform as they have been disproportionately hammered (both fundamentally and from a stock price perspective) in this prolonged economic downturn. In this note we highlight 12 stocks with market cap of less than US$0.5 bn which could be disproportionate beneficiaries in a rallying stock market. The sheer persistence of this economic downturn (five consecutive quarters of GDP growth decelerating) combined with relentless rate hikes by the RBI (11 repo rate hikes by the RBI before the April 12 cut) has meant that small caps have been hammered over FY11 and FY12 (see pages 3-4 for more details). With our Economist, Ritika Mankar, being of the view that GDP growth in FY13 will be 6.3% (vs 5.5% in Q1 FY13) and then 7.1% in FY14, arguably small caps are the best way to play an impending economic recovery. With that in mind, in this note we highlight 12 high quality small cap stocks (defined for the purposes of this note as stocks with market cap below roughly $0.5bn). The ideas profiled in this note are summarized below. Bajaj Electricals (BJE IN, mcap US$375 mn, NOT RATED, 3 mth ADV US$0.3mn, 12 mth price change 10%): Market leader in the small domestic appliances. Pg 5. Balkrishna Industries (BKT IN, mcap US$518 mn, BUY, 3 mth ADV US$1.2mn, 12 mth price change 62%): Leading exporter of Off-Highway tyres. Pg 11. Elgi Equipments (ELEQ IN, mcap US$248 mn, NOT RATED, 3 mth ADV US$0.1mn, 12 mth price change 20%): The local market leader in air compressors. Pg 17. Greaves Cotton (GRV IN, mcap US$356 mn, BUY, 3 mth ADV US$0.3mn, 12 mth price change (12%)): Largest manufacturer in India of lightweight single/dual cylinder diesel engines. Pg 23. Heidelberg Cement (HEIM IN, mcap US$203 mn, NOT RATED, 3 mth ADV US$0.4mn, 12 mth price change 32%): Indian subsidiary of the worlds fourth largest cement manufacturer. Pg 29. ICRA (ICRA IN, mcap US$228 mn, NOT RATED, 3 mth ADV US$0.1mn, 12 mth price change 30%): The second biggest credit rating agency in India. Pg 35. Infoedge (INFOE IN, mcap US$719 mn, BUY, 3 mth ADV US$0.2mn, 12 mth price change 0%): A leading Indian online classified firm present in the recruitment, real estate, and matrimony verticals. Pg 39. Kirloskar Oil Engines (KOEL IN, mcap US$460 mn, NOT RATED, 3 mth ADV US$0.1mn, 12 mth price change 21%): Market leader in small-medium segment diesel engines. Pg 45. Motilal Oswal (MOFS IN, mcap US$295 mn, BUY, 3 mth ADV US$0.1mn, 12 mth price change 33%): One of the largest and one of the more trusted retail and institutional stock brokers in India. Pg 51. Sadbhav Engineering (SADE IN, mcap US$414 mn, BUY, 3 mth ADV US$0.5mn, 12 mth price change 4%): The strongest player amongst mid-small sized construction companies. Pg 57. Supreme Industries (SI IN, mcap US$666 mn, NOT RATED, 3 mth ADV US$0.2mn, 12 mth price change 59%): Fastest growing firm in the plastics processing business in India; no major competitor for its Cross Laminated Films offering. Pg 63. WABCO (WIL IN, mcap US$578 mn, NOT RATED, 3 mth ADV US$0.2mn, 12 mth price change 27%): Market leader in airbrake systems for medium & heavy commercial vehicles in India. Pg 69.
Analyst contact
Saurabh Mukherjea, CFA Tel: +91 22 3043 3174 saurabhmukherjea@ambitcapital.com
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
Please refer to disclaimer section on the last page for further important disclaimer.
Indian Small Caps
CONTENTS
Small Caps: poised to rebound? ............................................................ 3 Bajaj Electricals ................................................................................ 5 Balkrishna Industries ......................................................................11 Elgi Equipments .............................................................................17 Greaves Cotton..............................................................................23 Heidelberg Cement........................................................................29 ICRA ..............................................................................................35 Info Edge .......................................................................................39 Kirloskar Oil Engines......................................................................45 Motilal Oswal ................................................................................51 Sadbhav Engineering .....................................................................57 Supreme Industries ........................................................................63 WABCO India ................................................................................69
Ambit Capital Pvt Ltd
Indian Small Caps
Small Caps: poised to rebound

The length of this economic downturn (five consecutive quarters of GDP growth decelerating) combined with repeated rate hikes by the RBI (11 repo rate hikes by the RBI before the April 12 cut) has meant that small caps have suffered badly over FY11 and FY12. This hammering is evident both in terms of fundamentals and in terms of share prices see charts below. Sales slowdown has been more pronounced for small caps.
Exhibit 1: Sales slowdown has been more pronounced for small caps
Sales growth 40% 35% 30% 25% 20% 15% 10% 5% 0% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
25% 20% 15% 10% 5% 0% Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11
Mar-11
Sep-11 Mar-11 Mar-12
Exhibit 2: although cash conversion has held on

Median CFO as % of Sales
small cap stocks
mid cap stocks
large cap stocks
small cap stocks
mid cap stocks
large cap stocks
Source: Ambit Capital research
Return ratios have taken a bigger hit for small caps as well.
Exhibit 3: ROCEs have suffered (as PAT drops)
Median RoCE
30% 25% 20% 15% 10% 5% Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar02
35% 30% 25% 20% 15% 10% 5% Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-12
Sep-12
Exhibit 4: and hence ROE has suffered as well

Median RoE
Mar02
small cap stocks
mid cap stocks
large cap stocks
small cap stocks
mid cap stocks
large cap stocks
However, valuations seem to discount most of these negatives.

Exhibit 5: Valuation discount of smallcaps-median P/B
Median PB
8.05 7.05 6.05 5.05 4.05 3.05 2.05 1.05 0.05 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12
12.05 10.05 8.05 6.05 4.05 2.05 0.05 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10
Exhibit 6: Valuation discount of smallcaps-avg P/B

Avg PB
small cap stocks
mid cap stocks
large cap stocks
small cap stocks
mid cap stocks
large cap stocks
Mar-12
Mar02
Indian Small Caps Whilst such a hammering for small caps is but normal in a prolonged economic downturn, it also suggests that they could be disproportionate beneficiaries of an upturn. With our Economist, Ritika Mankar, being of the view that GDP growth in FY13 will be 6.3% (vs 5.5% in Q1 FY13) and then 7.1% in FY14, arguably small caps are the best way to play an impending economic recovery. With that in mind, in the pages which follow we highlight some interesting small caps based on our sector leads bottom-up research. [For more details of our view on the impending economic recovery, please refer to our Strategy & Economics thematic published on Monday 24th September 2012.]
Exhibit 7: GDP growth over the last forty quarters
12% 10% 8% 6% 4% 2% 0% Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 15,000 12,000 9,000 6,000 3,000 Services Investment demand 9.3% 7.5% 8.9% 5.5% 8.5% 5.5% 8.1% 6.1% GDP Agriculture Industry 8.4% 7.0% 7.2% 6.5% 2.8% 3.4% 6.3% 0.7% 4.4% 7.1% 5.5% 5.7%
Exhibit 8: Our macro teams forecasts for FY13, FY14

(%) FY11 (actuals) FY12 (actuals) FY13 (estimate) FY14 (estimate)
GDP growth, % (LHS)

BSE Small Cap (RHS)
Light Electricals
October 01, 2012
Bajaj Electricals
Bloomberg: BJE IN EQUITY Reuters: BJEL.BO
NOT RATED
Accounting: AMBER Predictability: RED Earnings momentum: RED Analyst contacts

Bhargav Buddhadev
Tel: +91 22 3043 3252 bhargavbuddhadev@ambitcapital.com
Background: Bajaj Electricals, a 74 year old company, is part of the $7bn Bajaj Group. It has six strategic business units Engineering & Projects (manufactures transmission line towers), Appliances, Fans, Luminaries, Lightings and Morphy Richards. Competitive positioning and its underpinnings: Bajaj Electricals is the leader in the small domestic appliances segment with a market share of ~15% in the organized market which accounts for ~65% of the market. In Luminaries whilst its market positioning is 2nd with a market share of 17%, in fan and lightings its market positioning is 3rd with a market share of 16% and 8% respectively. Bajajs leadership position has been built on the back of its strong distribution network (the largest amidst the listed peers) comprising of 400,000+ retail outlets, 1,000+ distributors and 4,000+ authorized dealers. Secondly, global appliances majors like Morphy Richards (a big player in UK) and Nardi (a big player in Italy) have tied up with Bajaj Electricals for distributing their products in India. Lastly, return ratios for Bajajs non-Engineering and Projects (E&P) business is the highest in the industry due to its asset light model. RoCE in this business is a stellar 63% compared to 51% and 19% for Havells (domestic business) and V-Guard respectively thanks to a strong vendor base. Whilst Havells and V-Guards outsourcing ratio is ~15% and ~60% respectively, Bajaj outsources ~90% of its production with majority of the vendors being exclusive to Bajaj. Overall success of the business: Whilst the companys revenue growth at 20% CAGR over FY09-12 is impressive, its earning CAGR at 5% has been disappointing. The reason for the poor bottomline is due to its Engineering & Project (E&P) business wherein the margins declined by a staggering 960bps to 3.2% in FY12 compared to FY09 levels of 12.8%. The reason for such a sharp decline in the E&P margins was cost overruns across several sites as project implementation got delayed due to right of way issues. Consequently, the CFO/EBITDA ratio has also deteriorated to 63% in FY12 compared to 114% in FY09 given a rise in debtor and inventory days to 42 and 131 days compared to 37 and 116 days respectively. The increase in working capital days from 57 days in FY09 to 71 days in FY12 is completely attributable to the issues in the E&P business as the non E&P business operates on a negative working capital cycle. FY13 outlook: Whilst the FY13 outlook for the E&P business is sluggish (as the existing order book consists of many projects which have seen cost over runs), in FY14 the business is likely to see a significant improvement in margins and cash flows as management is confident of completing the majority of its troubled sites in 2HFY13. With regards to the non-E&P business, management is confident of recording an overall revenue growth of 15% underpinned by a healthy 25% growth in the domestic appliances segment. We believe this to be realistic guidance as the same is in line with the 30% guidance given by the management of TTK prestige. (TTK Prestige is a 100% kitchen appliances company and the majority of Bajajs domestic appliances are also kitchen appliances.) Valuation: The firm trades at 13.4x FY13 P/E, 2.4x FY13 book value and 8.9x FY13EV/EBITDA. Compared to peers - Havells and V-Guard - it trades at a discount of 31%, 24% and 56% based on P/E, EV/EBITDA and P/B respectively. Compared to its four year average, the company trades at a premium of 6% and 25% based on FY13 P/E and EV/EBITDA multiples respectively
Key financials
Year to March (` mn) Net Sales EBITDA EBITDA (%) EPS (`) RoE (%) P/E (x) Source: Company, Ambit Capital research FY10 22,286 2,434 10.9% 13.9 36.6% 13.8 FY11 27,414 2,550 9.3% 15.6 27.8% 12.3 FY12 30,990 2,371 7.7% 11.8 18.0% 16.2 FY13E 35,374 2,861 8.1% 14.8 19.6% 13.4 FY14E 41,202 3,532 8.6% 18.9 21.0% 10.5
Harshit Vaid
Tel: +91 22 3043 3259 harshitvaid@ambitcapital.com
Recommendation / Key details

CMP: Target Price: Previous TP: Upside (%): EPS (FY13E): Change from previous (%) Variance from consensus (%) `198 NA NA NA `14.8 NA NA
Stock Information
Mkt cap: 52-wk H/L: 3M ADV: Beta: BSE Sensex: Nifty: `20bn/US$375mn `234/132 `16.1mn/US$0.3mn 1.0x 18,762 5,703
Stock Performance (%)

Absolute Rel. to Sensex 1M 15 8 3M 1 (11) 6M 12M 2 10 (8) (4)
Performance (%)
20,000 1 9,000 1 8,000 1 7,000 1 6,000 1 5,000 Sep-1 1 Sensex Feb-1 2 Jul-1 2 B ajaj Electricals 250 230 21 0 1 90 1 70 1 50 1 30
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Please refer to the Disclaimers at the end of this Report.
Bajaj Electricals
Exhibit 1: Revenue growth and EPS growth over the last five years
35,000 30,000 25,000 20,000 15,000 10,000 5,000 FY08 FY09 FY10 FY11 FY12 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0
Exhibit 2: ROE and EBITDA margin over the last five years
60.0 50.0 40.0 30.0 20.0 10.0 0.0 FY08 FY09 RoE (%) FY10 FY11 FY12 12.00 10.00 8.00 6.00 4.00 2.00 0.00
Revenues (Rs mn) (LHS)

Source: Company, Ambit Capital research
EPS (Rs) (RHS)
EBITDA (%)
Source: Source: Company, Ambit Capital research.
Exhibit 3: CFO/EBITDA and Debt:Equity over the last five years

120% 100% 80% 60% 40% 20% 0% FY08 FY09 FY10 FY11 FY12 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00
Exhibit 4: P/E valuation bands
350 300 250 200 150 100 50 0 Mar-08 Mar-09 Apr-10 Apr-11 Aug-10 Aug-11 Apr-12 Nov-08 Aug-12 Jul-08 Jul-09 Dec-09 Dec-10 Dec-11
18x 16x 14x 12x 10x 8x
CFO/EBITDA (%)
Net Debt:Equity
Source: Bloomberg, Ambit Capital research.
Exhibit 5: P/B valuation bands
Exhibit 6: EV/EBITDA bands
350 300 250 200 150 100 50 0 Jul-08 Jul-09 Mar-08 Nov-08 Mar-09 Dec-09 Dec-10 Dec-11 Apr-10 Apr-11 Apr-12 Aug-10 Aug-11 Aug-12
3.5x 3x 2.5x 2x 1.5x 1x
350 300 250 200 150 100 50 0 Mar-08 Nov-08 Mar-09 Jul-08 Jul-09 Dec-09 Apr-10 Dec-10 Apr-11 Dec-11 Aug-10 Aug-11 Apr-12 Aug-12
6
9x 8x 7x 6x 5x
Source: Bloomberg, Ambit Capital research
Source: Bloomberg, Ambit Capital researc
Bajaj Electricals Exhibit 7: Explanation for our flags on the cover page
Segment Score Comments
Accounting Predictability Earnings momentum
AMBER RED RED
We give an amber flag on Bajajs accounting on account of low CFO/EBITDA ratio compared to its peers V-Guard and Havells on the back of extremely high debtor days, high percentage of loans and advances compared to net worth and low provisioning of debtors. Given the fact that the company has been surprising negatively compared to the guidance that the company has been providing with, the predictability remains uncertain. As per Bloomberg consensus estimates, there has been a decline of ~8% in the earnings estimates for FY13 in the past three months.
Bajaj Electricals
Balance sheet
Year to March (` mn) Shareholders' equity Reserves & surpluses Total networth Debt Deferred tax liability Total liabilities Gross block Net block CWIP Investments Cash & equivalents Debtors Inventory Loans & advances Total current assets Current liabilities Provisions Total current liabilities Net current assets Total assets Source: Company, Ambit Capital research FY08 173 1,575 1,748 2,367 41 4,156 1,440 916 3 223 320 4,253 1,622 890 7,084 3,645 426 4,071 3,013 4,156 FY09 173 2,277 2,450 2,139 31 4,620 1,545 946 25 316 538 5,592 1,777 1,131 9,038 5,192 513 5,704 3,334 4,620 FY10 195 4,749 4,944 1,518 (5) 6,457 1,700 1,016 1 366 612 7,507 2,094 1,777 11,990 6,273 643 6,916 5,074 6,457 FY11 198 5,913 6,111 1,122 (21) 7,212 2,302 1,533 366 486 10,656 2,946 1,651 15,739 9,694 731 10,425 5,314 7,212 FY12 199 6,799 6,999 1,872 (19) 8,851 2,721 1,840 30 441 536 11,082 3,552 2,015 17,186 9,848 797 10,645 6,540 8,851
Income statement
Year to March (` mn) Operating income % growth Operating expenditure EBITDA % growth Depreciation EBIT Interest expenditure Non-operating income PBT Tax Adjusted PAT/ Net profit % growth Extraordinaries Reported PAT / Net profit Adjusted net profit Source: Company, Ambit Capital research FY08 13,816 27.2 12,384 1,432 65 75 1,358 338 94 1,115 383 731 87 731 731 FY09 17,657 27.8 15,859 1,798 25.6 85 1,713 413 100 1,400 507 894 22 894 894 FY10 22,286 26.2 19,852 2,434 35.4 92 2,342 371 135 2,106 754 1,318 47 35 1,353 1,318 FY11 27,414 23.0 24,864 2,550 4.7 108 2,442 366 211 2,286 748 1,503 14 35 1,538 1,503 FY12 30,990 13.0 28,619 2,371 (7.0) 125 2,246 631 144 1,760 581 1,179 (22) 1,179 1,179
Bajaj Electricals
Cash flow statement

Year to March (` mn) PBT Depreciation Interest Tax (Incr) / decr in net working capital Others Cash flow from operating activities (Incr) / decr in capital expenditure (Incr) / decr in investments Others Cash flow from investing activities Issuance of equity Incr / (decr) in borrowings Others Cash flow from financing activities Net change in cash Free Cash Flow Source: Company, Ambit Capital research FY08 1,115 75 337 (378) (604) 40 584 (75) (0) 27 (48) (5) 1 (4) 532 536 FY09 1,400 85 413 (542) 55 99 1,510 (146) (92) (154) (392) (228) (224) (453) 665 1,118 FY10 2,106 92 370 (912) (1,564) 55 148 (144) (50) 58 (137) 1,634 (620) (235) 779 791 11 FY11 2,286 108 368 (806) (773) 41 1,224 (627) (0) (74) (702) 55 (397) (274) (615) (93) 522 FY12 1,760 125 607 (599) (1,047) 56 901 (463) (75) 59 (479) 38 750 (352) 436 858 422
Ratio analysis
Year to March (%) EBITDA margin (%) EBIT margin(%) Net profit margin(%) Dividend payout ratio(%) Net debt: equity (x) Working capital turnover (x) Gross block turnover (x) RoCE(%) FY08 10.4% 9.8% 5.3% 23% 1.17 5.13 9.59 30.3% FY09 10.2% 9.7% 5.1% 23% 0.65 6.32 11.43 25.1% 42.6% FY10 10.9% 10.5% 5.9% 22% 0.18 4.99 13.11 26.5% 36.6% FY11 9.3% 8.9% 5.5% 28% 0.10 5.68 11.91 23.5% 27.8% FY12 7.7% 7.2% 3.8% 30% 0.19 5.16 11.39 18.7% 18.0%
RoE(%) 50.2% Source: Company, Ambit Capital research
Valuation parameters
Year to March (` mn) EPS (`) Diluted EPS (`) Book value per share (`) Dividend per share (`) P/E (x) P/BV (x) EV/EBITDA (x) EV/EBIT (x) Source: Company, Ambit Capital research FY08 8.5 8.5 20.2 1.9 22.7 9.5 14.3 15.1 FY09 9.2 9.2 25.1 2.1 21.0 7.6 11.4 11.9 FY10 13.9 13.9 50.7 2.8 13.8 3.8 8.4 8.7 FY11 15.6 15.6 61.8 3.3 12.3 3.1 8.0 8.4 FY12 11.8 11.8 70.2 3.3 16.2 2.7 8.6 9.1
Bajaj Electricals
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10
Auto & Auto Ancillaries
October 01, 2012
Balkrishna Industries
Bloomberg: BIL IN EQUITY Reuters: LKI.BO
BUY
Accounting: AMBER Predictability: AMBER Earnings momentum: AMBER Analyst contact

Ashvin Shetty
Tel: +91 22 3043 3285 ashvinshetty@ambitcapital.com
Background: Balkrishna Industries (BKT) is the leading exporter of off-highway
tyres (OHT) from India. BKT currently accounts for close to 4% of the global OHT market. The company generated revenues of `28.2bn (up 48% YoY) and net earnings of `2.7bn (up 45% YoY) in FY12.
Competitive positioning and its underpinnings: Market share gain has been
the key driver for BKTs strong volumes and revenue growth in recent years. Going forward too, we believe BKT will continue to gain market share on the back of its competitive advantages relative to the large global incumbents while being relatively insulated from the threat of new entrants (including domestic players) in the OHT space. Some of the key factors underpinning BKTs competitive advantages are: (a) Lower prices for consumers in Western markets made possible by BKTs low cost structure; (b) The de-focus of global secular players (eg. Bridgestone, Michelin) from the OHT space; (c) OHTs are a high variety low volume and difficult to manage business; this acts as a strong entry barrier to new players; and (d) Relatively low threat in the OHT industry from Chinese imports (as this is not a labour intensive industry). Overall success of the business: BKTs standalone volumes, revenues, EBITDA and net earnings have grown at a CAGR of 19%, 26%, 23% and 25% respectively over FY07-FY12 (implying major market share gains). Furthermore, BKTs EBITDA margin is significantly ahead of both domestic and global peers driven by its export model (and ensuing fiscal benefits) and locational advantage (resulting in lower wage costs).
FY13 outlook: We expect BKT to record revenue growth of 27% YoY, EBITDA

CMP: Target Price (June 2013): Previous TP: Upside (%) EPS (FY13E): Change from previous (%) Variance from consensus (%) `284 `315 NA 11 `35.1 NA 4
Stock Information
Mkt cap: 52-wk H/L: 3M ADV: Beta: BSE Sensex: Nifty: `27bn/US$518mn `308/146 `64mn/US$1.2mn 0.4x 18,763 5,703
margin of 19.1% and net earnings growth of 26% in FY13. We expect the depreciation that has taken place in H1 FY13 in the INR (relative to both US$ and Euro) to favourably impact realisation and margins in the forthcoming quarters. However, on the negative side, the order book witnessed a decline of around 20% QoQ in volume terms (from around 64,000 MT to around 51,000 MT) and around 18% in value terms in 1QFY13. Our discussion with the company management indicated that there is some contraction in order inflows particularly from the European geography due to a postponement in orders from the distributors' end. However, the company expects orders to bounce back and has retained its sales volume guidance of around 160,000165,000 MT for FY2013 (against our estimate of 155,623 MT). More importantly, the company is going ahead with the new Bhuj facility as per schedule (scheduled to commence commercial production by September 2012). Valuation: BKT earns significantly better RoICs v/s peers due to its much better margin profile. Our DCF model values the core OHT business at `315/share, implying 11% upside and 8.5x FY14 net earnings (a premium of 10% to Apollo Tyres). On a crosscycle P/E comparison, BKT is trading at a premium of 14% to the average multiple of the company over last six years.
Key financials (standalone)
Year to March (` mn) Net Sales EBITDA EBITDA (%) EPS (`) RoCE (%) RoE (%) P/E (x) P/B (x) Source: Company, Ambit Capital research FY10 13,870 3,698 26.7% 21.6 29.3% 36.6% 13.1 4.2 FY11 19,341 3,598 18.6% 19.2 22.2% 24.9% 14.8 3.3 FY12 28,200 5,058 17.9% 27.8 21.7% 28.1% 10.2 2.5 FY13E 35,893 6,865 19.1% 35.1 19.2% 27.3% 8.1 2.0 FY14E 42,852 7,917 18.5% 36.8 16.9% 22.6% 7.7 1.6

1M Absolute Rel. to Sensex 6.4 3M 16.0 5.5 6M 12M 16.7 7.1 62.3 48.3
Performance (%)
19,000 18,500 18,000 17,500 17,000 16,500 16,000 15,500 15,000 Sep-11 Dec-11 Mar-12 Sep-12 Jun-12 350 300 250 200 150 100
Sensex
Balkrishna
Exhibit 1: Strong revenue growth and steady EBITDA margin over the years
(Rs mn) 20,000 15,000 10,000 5,000 FY07 FY08 FY09 FY10 FY11 30% 25% 20% 15% 10%
40% 35% 30% 25% 20% 15% FY08 FY09 EBITDA margin
Source: Source: Company, Ambit Capital research
FY10
FY11
FY12 RoE
EBITDA margin (RHS)
Source: Company, Ambit Capital research.

140% 120% 100% 80% 60% 40% 20% FY08 FY09 FY10 FY11 FY12 CFO/EBITDA (LHS) 1.5 1.3 1.1 0.9 0.7 0.5 0.3 0.1 (0.1) (0.3) Net debt-equity (RHS)
Exhibit 4: Growing export revenues contribution through the years

(Rs mn) 20,000 17,000 14,000 11,000 8,000 5,000 FY07 FY08 FY09 FY10
and
export
90% 85% 80% 75% 70% 65% 60% FY11
Exports (Rs mn) (LHS)
Exports as % of Revenues (RHS)
Exhibit 5: BKT trading close to its six-year avg P/E

26 21 P/E 16 11 6 1 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12
Exhibit 6: BKT has closed the gap to Apollo on P/E

16
11 P/E 6 1 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12

12
BKT P/E 4 year average
6 year average
BKT P/E
APTY P/E
Source: Bloomberg, Ambit Capital research; Note: P/E bands arrived at using Bloomberg consensus estimates for respective periods
Source: Bloomberg, Ambit Capital research Note: P/E bands arrived at using Bloomberg consensus estimates for respective periods
Balkrishna Industries Exhibit 7: Explanation for our flags on the cover page
Segment Accounting Predictability Earnings momentum Score AMBER AMBER AMBER Comments Amber flag for much higher debtor days and a longer operating cycle compared to peers. Given the high fixed costs (including depreciation and interest expenses), any marginal outperformance/underperformance at the topline level tends to have a magnified impact at the net earnings level. However, this is an industry-wide phenomenon. No significant upgrades/downgrades to consensus numbers post 4QFY12 results.
13
Balance sheet (standalone)

Year to March (` mn) Shareholders' equity Reserves and surpluses Total net worth Debt Deferred tax liability Total liabilities Gross block Net block CWIP Investments (non-current) Cash & cash equivalents Debtors Inventory Loans & advances Total current assets Current liabilities Provisions Total current liabilities Net current assets Total assets Source: Company, Ambit Capital research FY10 193 6,414 6,608 4,643 548 11,799 8,715 6,149 589 807 42 2,403 2,031 3,697 8,173 1,149 2,769 3,918 4,254 11,799 FY11 193 8,124 8,318 6,070 570 14,958 10,089 6,874 1,464 322 110 3,248 4,104 4,853 12,315 2,393 3,624 6,017 6,297 14,958 FY12E 193 10,626 10,819 16,630 626 28,074 12,328 8,281 7,000 322 3,574 4,796 4,811 3,637 16,818 2,893 1,454 4,347 12,471 28,074 FY13E 193 13,841 14,034 19,630 626 34,289 22,048 16,741 5,703 322 181 6,105 6,123 4,626 17,035 3,682 1,816 5,498 11,537 34,289 FY14E 193 17,207 17,401 21,630 626 39,656 28,551 21,474 3,500 322 796 7,288 7,310 5,520 20,915 4,396 2,145 6,541 14,374 39,656
Income statement (standalone)

Year to March (` mn) Net Sales % growth Operating expenditure EBITDA % growth Depreciation EBIT Interest expenditure Non-operating income Adjusted PBT Tax Adjusted PAT Extraordinary expense/(income) Reported PAT after minority interest Source: Company, Ambit Capital research FY10 13,870 11% 10,172 3,698 56% 662 3,036 187 264 3,113 1,048 2,065 (22) 2,087 FY11 19,341 39% 15,743 3,598 -3% 744 2,854 207 101 2,749 894 1,855 (0) 1,855 FY12E 28,200 46% 23,141 5,058 41% 831 4,227 278 33 3,983 1,297 2,686 2,686 FY13E 35,893 27% 29,028 6,865 36% 1,260 5,605 709 138 5,034 1,639 3,395 3,395 FY14E 42,852 19% 34,935 7,917 15% 1,771 6,146 980 110 5,276 1,718 3,558 3,558
14
Cash flow statement (standalone)

Year to March (` mn) Net profit before tax Depreciation Others Tax (Incr)/decr in net working capital Cash flow from operations Capex (net) (Incr)/decr in investments Other income (expenditure) Cash flow from investments Net borrowings Interest paid Dividend paid Cash flow from financing Net change in cash Closing cash balance Free cash flow Source: Company, Ambit Capital research FY10 3,113 662 12 (1,003) (819) 1,965 (1,336) (485) 15 (1,806) 103 (196) (135) (228) (69) 46 629 FY11 2,749 744 142 (837) (2,199) 599 (2,162) 485 97 (1,580) 1,433 (228) (158) 1,047 66 108 (1,563) FY12E 3,983 831 273 (1,241) (2,721) 1,125 (7,774) 4 (7,770) 10,559 (278) (157) 10,125 3,480 3,588 (6,649) FY13E 5,034 1,260 671 (1,639) (2,470) 2,856 (8,423) 38 (8,385) 3,000 (709) (168) 2,123 (3,407) 181 (5,567) FY14E 5,276 1,771 970 (1,718) (2,234) 4,065 (4,300) 10 (4,290) 2,000 (980) (180) 841 615 796 (235)
Ratio analysis
Year to March (%) EBITDA margin (%) EBIT margin (%) Net prof. margin (%) Dividend payout ratio (%) Net debt: equity (x) Working capital turnover (x) Gross block turnover (x) RoCE (pre-tax) (%) RoIC (%) RoE (%) Source: Company, Ambit Capital research FY10 26.7% 21.9% 14.9% 6.5% 0.7 3.5 1.7 29.3% 19.4% 36.6% FY11 18.6% 14.8% 9.6% 7.3% 0.7 3.6 2.1 22.2% 14.9% 24.9% FY12E 17.9% 15.0% 9.5% 5.4% 1.2 3.7 2.5 21.7% 14.6% 28.1% FY13E 19.1% 15.6% 9.5% 4.6% 1.4 3.5 2.1 19.2% 13.0% 27.3% FY14E 18.5% 14.3% 8.3% 4.6% 1.2 3.4 1.7 16.9% 11.4% 22.6%
Year to March (` mn) Diluted EPS (`) Book value per share (`) Dividend per share (`) P/E (x) P/BV (x) EV/EBITDA (x) EV/EBIT (x) Source: Company, Ambit Capital research FY10 21.6 68 0.3 13.1 4.2 11.0 13.3 FY11 19.2 86 1.4 14.8 3.3 11.3 14.2 FY12E 27.8 112 1.5 10.2 2.5 8.0 9.6 FY13E 35.1 145 1.6 8.1 2.0 5.9 7.2 FY14E 36.8 180 1.7 7.7 1.6 5.1 6.6
15
16
Light Electricals
October 01, 2012
Elgi Equipments
Bloomberg: ELEQ IN EQUITY Reuters: ELGE.NS
NOT RATED
Accounting: AMBER Predictability: AMBER Earnings momentum: AMBER Analyst contacts

Bhargav Buddhadev
Background: In the air compressor market, Elgi Equipments is a market leader with a market share of ~30% in India. The firm is also Asias largest manufacturer of air compressors. In FY12, it posted revenues and PAT of `9.8bn (+5% YoY) and `755mn (-15% YoY) respectively. Competitive positioning and its underpinnings: The critical strength which has fuelled growth for Elgi has been the dominant position it enjoys in the small to medium air compressor market wherein it has market share ranging from 25-70% across various product categories and a product portfolio covering around 80% of the different air compressors in the market. The main competitive advantage Elgi has over key competitors (such as Ingersoll Rand and Atlas Copco) is its expertise in manufacturing airends which is the main component of the compressor and costs as much as ~50% of the compressor. Elgis ability to refurbish these airends in comparison to its peers (which have to be replaced), makes its compressors more economical. Furthermore, the competitive pricing of its products, the firms distribution and after-sales support (116 branches and 365 dealers across India) is significantly superior compared to Ingersoll Rand which has only around 20 dealers in India. Overall success of the business: Incorporated in 1960, revenues and profits for this majority family owned firm have grown at a CAGR of 21% and 26% respectively in the past 5 years. This has been accomplished by strong cash flows from operations and positive free cash flows over the years. That being said, margins have fallen in FY12 due to an increase in raw material prices, change in the product mix, increase in travel costs due to the expansion of the network within India and overseas employee expenses on opening of new offices in Brazil and Australia. Furthermore, the company has been focusing on making strategic acquisitions abroad to tap the global opportunity in air compressors. The management is aiming to triple its exports by FY15 (implied CAGR of 25% over FY11-15 compared to historical five-year average of 15%). In line with this strategy, Elgi in FY11 acquired Belair S.A. (a French company) for a consideration of `43mn. In the past month, Elgi has acquired Rotair S.p.a., an Italian company which has an annual turnover of ~`1.1bn. Elgi also has a strong balance sheet wherein the net debt-equity is zero and the firm had cash of `1.4bn as on March 12.
Harshit Vaid

CMP: Target Price: Previous TP: Upside (%): EPS (FY13E): Change from previous (%) Variance from consensus (%) `83 NA NA NA `5.4 NA NA
Stock Information

1M 2 3M 3 (8) 6M 12M 11 20 1 5
FY13 outlook: Whilst we do not have coverage on this stock, consensus Absolute (5) estimates as per Bloomberg imply growth of 10% and 13% in sales and PAT Rel. to Sensex respectively in FY13. The management has indicated that sales growth will be around 15% and that the firm will seek to maintain the EBITDA margin in the Performance (%) range of 10-11%. Valuation: The firm trades at 15x FY13 P/E, 2.8x FY13 book value and 9.3x FY13 EV/EBITDA. Compared to its own four year averages, these estimates are at a 33% premium, 18% premium and 42% premium respectively. Its peers Ingersoll Rand (India) and Atlas Copco - trade at 16x FY13 P/E and 12.3x FY13 P/E respectively.
Key Financials
Y/E Mar (` mn) Operating Income (` mn) EBITDA (` mn) EBITDA margin (%) EPS (`) BPS (`) RoE (%) EV / EBITDA (x) FY09 5,509 683 12.4% 6.12 31.39 22% 17.2 FY10 6,769 975 14.4% 6.74 33.01 23% 12.0 FY11 9,410 1,364 14.5% 4.97 20.57 30% 8.6 FY12 9,917 1,086 11.0% 4.63 24.20 21% 10.8 FY13E 10,946 1,259 11.5% 5.4 28.5 20.5% 9.3
20,000 1 9,000 1 8,000 1 7,000 1 6,000 1 5,000 Sep-1 1 Sensex
90 85 80 75 70 65 60 Feb-1 2 Jul-1 2 Elgi Equipments
Source: Company, Bloomberg, Ambit Capital research

Elgi Equipments
12,000 10,000 8,000 6,000 4,000 2,000 FY08 FY09 FY10 FY11 FY12 2.00 4.00 6.00
35% 30% 25% 20% 15% 10% 5% 0% FY08 FY09 RoE (%) FY10 FY11 EBITDA (%) FY12

EPS (Rs) (RHS)
Exhibit 3: CFO/EBITDA and Net Debt:Equity over the last five years
160% 140% 120% 100% 80% 60% 40% 20% 0% FY08 FY09 FY10 FY11 FY12 1.00 0.50 (0.50) (1.00)
Exhibit 4: P/E
valuation
bands
160 140 120 100 80 60 40 20 0 Aug-10 Aug-11 Nov-08 Aug-12 Jul-08 Mar-08 Mar-09 Jul-09 Apr-10 Apr-11 Dec-09 Dec-10 Dec-11 Apr-12
18x 16x 14x 12x 10x 8x
CFO/EBITDA (%)
Net Debt:Equity (x)
120 100 80 60 40 20 0 Mar-08 Nov-08 Mar-09 Dec-09 Jul-08 Jul-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12
3.5x 3x 2.5x 2x 1.5x 1x
160 140 120 100 80 60 40 20 0 Mar-08 Nov-08 Mar-09 Dec-09 Jul-08 Jul-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12
10x 8x 6x 4x 2x Aug-12
18
Elgi Equipments
Explanation for our flags on the cover page

Segment Accounting Score AMBER Comments On the basis of our various parameters, the company is flagged amber on account of poor asset turnover ratio, high percentage of loans and advances to net worth and no provision for doubtful debts. The positives for Elgi are the CFO/EBITDA ratio remains high, marginal contingent liabilities compared to net worth and lesser transactions with related parties. As we do not cover this stock and there are barely any estimates available for Elgi, the predictability remains uncertain. Bloomberg consensus consists of only 2 brokerages. There have been no significant upgrades / downgrades post the FY12 results.
Predictability Earnings Momentum
AMBER AMBER
19
Elgi Equipments
Balance sheet
Year to March (` mn) Shareholders' equity Reserves & surpluses Total net worth Debt Deferred tax liability Total liabilities Gross block Net block CWIP Investments Cash & equivalents Debtors Inventory Loans & advances Other current assets Total current assets Current liabilities Provisions Total current liabilities Net current assets Miscellaneous Total assets Source: Company, Ambit Capital research FY08 63 1,624 1,687 (25) 1,662 1,383 509 8 143 120 941 707 978 2,746 958 801 1,759 987 16 1,662 FY09 63 1,934 1,997 (4) 1,993 1,581 655 11 143 246 814 705 761 2,526 627 745 1,372 1,154 30 1,993 FY10 79 2,553 2,632 28 17 2,677 1,828 728 21 143 1,192 907 810 1,362 4,270 1,366 1,131 2,497 1,773 12 2,677 FY11 158 3,228 3,387 74 31 3,491 2,071 870 34 173 1,407 1,160 1,151 400 552 4,669 1,250 1,006 2,256 2,413 3,491 FY12 158 3,818 3,976 91 40 4,108 2,404 1,087 76 154 1,481 1,351 1,207 398 498 4,935 1,320 823 2,144 2,791 4,108
Income statement
Year to March (` mn) Operating income % growth Operating expenditure EBITDA % growth Depreciation EBIT Interest expenditure Non-operating income Adjusted PBT Tax Adjusted PAT/ Net profit % growth Extra ordinaries Adjusted Consolidated net profit Reported Consolidated net profit Source: Company, Ambit Capital research FY08 5,039 33% 4,432 607 57% 70 537 19 72 589 171 434 88% 15 434 419 FY09 5,509 9% 4,826 683 12% 83 600 16 69 654 247 409 -6% 1 409 407 FY10 6,769 23% 5,794 975 43% 105 871 12 82 940 361 530 30% (49) 530 579 FY11 9,410 39% 8,046 1,364 40% 115 1,249 4 117 1,363 472 890 68% (2) 890 891 FY12 9,917 5% 8,831 1,086 -20% 135 951 7 162 1,106 350 756 -15% 756 756
20
Elgi Equipments
Cash flow statement

Year to March (` mn) PBT Depreciation Others Tax (Incr) / decr in net working capital Cash flow from operations Capex (Incr) / decrin investments Other income (expenditure) Others Cash flow from investments Net borrowings Issuance of equity Dividend paid Others Cash flow from financing Net change in cash Closing cash balance Free cash flow Source: Company, Ambit Capital research FY08 589 70 (382) 171 (223) 225 (166) 2 16 13 (136) (2) (81) (4) (87) 2 120 88 FY09 651 83 80 (239) (239) 337 (232) 1 11 56 (165) (44) (2) (46) 127 246 172 FY10 940 108 (34) (314) 369 1,069 (177) 45 (99) (231) 28 232 (150) (1) 108 946 1,192 838 17 (182) 22 1 (116) (5) (98) 215 1,407 312 FY11 1,361 115 (26) (415) (540) 494 (258) (30) 89 FY12 1,106 135 (92) (346) (310) 494 (391) 19 114 20 (238) 22 (186) (17) (181) 75 1,481 257
Ratio analysis
Year to March EBITDA margin (%) EBIT margin (%) Net profit margin (%) Dividend payout ratio (%) Net debt: equity (x) Working capital turnover (x) Gross block turnover (x) RoCE(%) RoE (%) Source: Company, Ambit Capital research FY08 12.1% 10.7% 8.6% 18% (0.07) 5.81 3.64 35% 29% FY09 12.4% 10.9% 7.4% 20% (0.12) 6.07 3.48 32% 22% FY10 14.4% 12.9% 7.8% 25% (0.44) 11.64 3.70 37% 23% FY11 14.5% 13.3% 9.5% 18% (0.39) 9.35 4.54 41% 30% FY12 11.0% 9.6% 7.6% 21% (0.35) 7.57 4.13 25% 21%
Year to March EPS (`) Book value per share (`) Dividend per share (`) P/E (x) P/BV (x) EV/EBITDA (x) EV/EBIT (x) Source: Company, Ambit Capital research FY08 3.3 10.8 1.20 12.1 3.0 19.3 21.8 FY09 3.3 12.8 1.30 12.5 2.6 17.2 19.5 FY10 3.7 16.8 2.00 11.0 2.5 12.0 13.5 FY11 5.6 21.4 1.00 14.4 3.9 8.6 9.4 FY12 4.8 25.1 1.00 17.0 3.3 10.8 12.3
21
Elgi Equipments
22
Engineering & Capital Goods
October 01, 2012
Greaves Cotton
Bloomberg: GRV IN EQUITY Reuters: GRVBL.BO
BUY
Accounting: GREEN Predictability: AMBER Earnings momentum: AMBER Analyst contacts

Bhargav Buddhadev
Background: Greaves Cotton is the largest domestic manufacturer in India of light weight single/dual cylinder diesel engines for automotive and industrial applications. It has a virtual monopoly in the diesel three wheeler engine segment with exclusive arrangements to supply engines to M&M (5-year agreement until FY2016) and Piaggio (8-year agreement until FY2016). Recently, it has also made meaningful progress in the Small Commercial Vehicle (SCV) market by signing a 10-year agreement with Tata Motors to supply engines for its Ace Zip and Magic Iris models. The promoters of this Mumbai-based firm are the Thapar Group. Competitive positioning: The firm has a strong position in the three wheeler engine market with market share above 80% in diesel engines. Our discussions with industry participants suggests that Greaves is irreplaceable in the single cylinder three wheeler market and small CV market due to its superior technology, economies of scale and established product. In FY12, ~50% of revenues and ~2/3rds of profits for Greaves came from the auto segment. In the genset and the construction equipment business, Greaves does not any competitive advantage. Hence it makes losses in its construction equipment business (equipment used in road construction & ready mix concrete mixers) and lower margins in the genset business (in the 21-150 KVA segment which is the most commoditized space to be in) compared to peers such as Cummins and Kirloskar Oil Engines. Overall success of the business: The company has witnessed revenue growth at a CAGR of 13% over FY10-12. This was on the back of an increase in domestic three wheeler sales which grew at a CAGR of 8% over the same period. The company has a strong balance sheet with no debt and strong free cash flow generation over the last three years. FY12 was a difficult year for the company where it witnessed a decline of ~250bps in its operating margins compared to FY11 as its largest customer in the automotive engines segment, Piaggio lost market share in the three wheeler segment over the past year. However, going forward, the new tie up with Tata Motors provides improved visibility for Greaves engine sales and hence stronger revenue growth. FY13 outlook: Whilst the outlook for FY13 on revenues and earnings continue to remain muted we expect Greaves to announce entry into a new segment (possibly super compact cars) which could rerate the stock. The super compact car segment (seats upto-5, length normally between 4000-4250 mm, engine displacement normally upto 1.6 Litre) is growing at a fast pace (31% YoY growth in FY12) with volumes of 187,026 vehicles (compared to Greaves current volumes of ~0.4mn engines). Note that Suzuki, Hyundai and Honda are gearing up with their own compact versions of diesel passenger cars given the widening gap between diesel and petrol prices. On the genset and the construction equipment portfolio we expect an uptick from FY14 onwards given our Economist, Ritika Mankars, expectation of a pick-up in investment growth (measured by Gross Fixed Capital Formation). A rise in investment growth will drive manufacturing and capital goods sector growth and hence boost demand for gensets & construction equipment. Valuation: Our DCF assumes a WACC of 14% and terminal growth of 3% which translates into a valuation of `94 implying 25% upside. At CMP, the stock trades at 11.3x FY14 earnings which is a discount of 34% compared to Cummins. We believe such a huge discount is unjustified given a similar earnings profile and return ratios. Cummins and Greaves Cotton have earnings growth of 17% and 13% in FY14 respectively and similar ROCE of 21%.
Year to March (` mn) Net Sales EBITDA EBITDA (%) EPS (`) RoCE (%) RoE (%) P/E (x) P/B (x) Source: Company, Ambit Capital research FY10 13,923 2,101 15.1% 4.8 28% 28% 15.6 4.3 FY11 12,789 1,991 15.6% 6.9 25% 27% 10.9 3.6 FY12 17,893 2,367 13.2% 6.0 24% 33% 12.5 2.9 FY13E 18,342 2,458 13.4% 5.9 20% 21% 12.7 2.5 FY14E 20,152 2,801 13.9% 6.7 20% 21% 11.3 2.2
Harshit Vaid

CMP: Target Price (12 Months): Previous TP: Upside (%) EPS (FY13E): Change from previous (%) Variance from consensus (%) `78 `94 102 22 `5.9 (6) (3)
Stock Information
Mkt cap: 52-wk H/L: 3M ADV: Beta: BSE Sensex: Nifty: `19bn/US$356mn `99/`60 `16.1mn/US$0.3mn 0.7x 18,762 5,703

Absolute Rel. to Sensex 1M 17 10 3M 10 (1) 6M 12M (8) (12) (18) (26)
Performance (%)
20,000 1 9,000 1 8,000 1 7,000 1 6,000 1 5,000 Sep-1 1 Sensex Feb-1 2 Jul-1 2 Greaves Co tto n 50 70 90
Greaves Cotton
20,000 15,000 10,000 5,000 FY08 FY09 FY10 FY11 FY12 8.00 6.00 4.00 2.00 -
40% 35% 30% 25% 20% 15% 10% 5% 0% FY08 FY09 RoE (%) FY10 FY11 FY12 18.0% 15.0% 12.0% 9.0% 6.0% 3.0% 0.0%

EPS (Rs) (RHS)
EBITDA (%)
Exhibit 3: CFO/EBITDA and Net Debt:Equity over the last five years
120% 100% 80% 60% 40% 20% 0% FY08 FY09 FY10 FY11 FY12 1.00 0.50 (0.50) (1.00)
120 100 80 60 40 20 0 Mar-08 Mar-09 Jul-08 Jul-09 Aug-10 Nov-08 Aug-11 Apr-10 Aug-12 11x 9x 7x 5x 3x Aug-12
24
17x 15x 13x 11x 9x
Dec-09
Dec-10
Apr-11
CFO/EBITDA (%)
Net Debt:Equity

120 100 80 60 40 20 0 Mar-08 Mar-09 Aug-10 Aug-11 Aug-12 Jul-08 Nov-08 Jul-09 Apr-10 Apr-11 Apr-12 Dec-09 Dec-10 Dec-11 3.5x 3x 2.5x 2x 1.5x 1x
120 100 80 60 40 20 0 Mar-08 Mar-09 Aug-10 Nov-08 Aug-11 Jul-08 Jul-09 Apr-10 Apr-11 Dec-09 Dec-10 Dec-11 Apr-12
Dec-11
Apr-12
Greaves Cotton Exhibit 7: Explanation for our flags on the cover page
Segment Accounting Score GREEN Comments In our forensic accounting model, Greaves scores (253), far ahead of both the average score of Capital Goods companies (188) and the BSE 500 universe (196). Greaves has had a history of getting into non core diversifications (resins, tractors, autos, etc.) in the past. Whilst the company exited from most such areas during 2000-03, based on its track record we assign an Amber. Besides, the turnaround of its infrastructure equipment business continues to be elusive. Consensus estimates as per Bloomberg have seen a reduction of ~3-6% in earnings for FY13 and FY14 over the past three months.
Predictability
AMBER
Earnings momentum
AMBER
25
Greaves Cotton
Balance sheet
Year to March (` mn) Cash Debtors Inventory Loans & advances Investments Fixed assets Miscellaneous Total assets Current liabilities & provisions Debt Other liabilities Total liabilities Shareholders' equity Reserves & surpluses Total networth Net working capital Net debt (cash) Source: Company, Ambit Capital research FY10 225 2,092 1,594 1,002 983 2,805 8,701 4,098 146 246 4,490 488 3,723 4,211 590 (79) FY11 626 2,909 1,971 1,024 532 3,007 10,069 4,595 162 264 5,021 488 4,559 5,047 1,308 (464) FY12 715 2,567 1,821 1,369 937 3,510 10,919 3,978 330 301 4,609 488 5,822 6,310 1,780 (385) FY13E 1,469 3,046 2,066 1,084 937 4,106 12,707 4,810 330 301 5,441 488 6,778 7,266 1,386 (1,139) FY14E 1,683 3,121 2,205 1,611 937 4,128 13,684 4,844 330 301 5,476 488 7,721 8,209 2,093 (1,353)
Income statement
Year to March (` mn) Operating income % growth Operating expenditure EBITDA % growth Depreciation EBIT Interest expenditure Non-operational income / Exceptional items PBT Tax Minority Interest / others Reported PAT Adjustments Adjusted PAT FY10 13,923 30.7% 11,822 2,101 95% 305 1,796 136 73 1,732 558 1,175 1,175 FY11* 12,789 22.5% 10,797 1,991 26% 236 1,756 75 150 1,831 568 1,263 1,263 FY12 17,893 4.9% 15,526 2,367 -11% 416 1,951 37 635 2,549 660 1,889 426 1,463 FY13E 18,342 2.5% 15,884 2,458 4% 404 2,054 37 69 2,086 647 1,439 1,439 -2% FY14E 20,152 9.9% 17,351 2,801 14% 478 2,323 37 69 2,355 730 1,625 1,625 13%
% growth 170% 43% -13% Source: Company, Ambit Capital research, *Represents a nine month period
26
Greaves Cotton
Cash flow statement

Year to March (` mn) PBT Depreciation Interest Tax (Incr) / decr in net working capital Others Cash flow from operating activities (Incr) / decr in capital expenditure (Incr) / decr in investments Others Cash flow from investing activities Issuance of equity Incr / (decr) in borrowings Others Cash flow from financing activities Net change in cash FY10 1,732 305 136 (460) 113 (37) 1,790 (274) (636) 24 (886) (424) (447) (871) 34 FY11* 1,831 236 75 (548) (307) (113) 1,173 (363) 469 17 123 16 (911) (895) 401 FY12 2,549 416 37 (656) (390) (825) 1,132 (254) (530) 165 (620) 170 (579) (410) 102 (1,000) (521) (521) 755 1,275 FY13E 2,086 404 37 (647) 395 2,275 (1,000) FY14E 2,355 478 37 (730) (707) 1,433 (500) (500) (719) (719) 214 933
Free cash flow 905 1,296 512 Source: Company, Ambit Capital research, *Represents a nine month period
Ratio analysis
Year to March EBITDA margin (%) EBIT margin(%) Net profit margin(%) Net debt: equity (x) Working capital turnover (x) RoCE(%) RoE (%) Source: Company, Ambit Capital research, FY10 15.1% 12.9% 8.4% (0.02) 23.59 28% 28% FY11 15.6% 13.7% 9.9% (0.09) 9.78 25% 27% FY12 13.2% 10.9% 10.6% (0.06) 10.05 24% 33% FY13E 13.4% 11.2% 7.8% (0.16) 13.24 20% 21% FY14E 13.9% 11.5% 8.1% (0.16) 9.63 20% 21%
Year to March EPS (`) Book value per share (`) P/E (x) P/BV (x) EV/EBITDA (x) EV/EBIT (x) Source: Company, Ambit Capital research FY10 4.81 17.2 15.6 4.3 8.5 10.0 FY11 6.90 20.7 10.9 3.6 9.0 10.2 FY12 5.99 25.8 12.5 2.9 7.6 9.2 FY13E 5.89 29.8 12.7 2.5 7.3 8.7 FY14E 6.65 33.6 11.3 2.2 6.4 7.7
27
Greaves Cotton
28
Cement
October 01, 2012
Heidelberg Cement
Bloomberg: HEIM IN EQUITY Reuters: HEID.BO
NOT RATED
Accounting: AMBER Predictability: AMBER Earnings momentum: AMBER Analyst contacts

Nitin Bhasin
Tel: +91 22 3043 3241 nitinbhasin@ambitcapital.com
Background: A subsidiary of the worlds fourth largest cement producer, Heidelberg Cement India currently has 3.1mn tonnes of cement capacity and 1.6mn tonnes of clinker capacity across four manufacturing locations. Whilst the company generated revenues of `9.8bn (14% growth), its PAT declined 54% to `291mn in CY11 on account of a significant increase in operating costs Competitive positioning: Central India, the best placed region in India considering the demand-supply scenario, contributes ~65% to the overall revenues of Heidelberg, followed by the West (~22%) and the South (~13%). Over the last 3 years (FY09-12), whilst demand in India has grown at a CAGR of 7%, Central India grew by 10% (mainly driven by 23% demand growth in UP). Its presence in Central India (where strong demand growth is expected on the back of robust rural demand (in UP) and elections next year (in MP)), gives Heidelberg an edge over new entrants. Furthermore, the company is doubling its capacity to 6mn tonnes by Nov 2012 by setting up 2.9mn grinding units in MP and UP and plans to enter into markets of Bihar, Delhi, NCR, Haryana, Punjab and Uttarakhand. Whilst increasing the lead distance would mean higher freight costs, management believes that the North and East India have better realisations and hence they can easily pass the increase in cost to the consumers. Overall success of the business: Whilst Heidelbergs volumes and revenues have grown at a CAGR of 4% and 9%, respectively over CY08-11, its EBITDA and net earnings have declined by 12% and 39% respectively mainly on account of input cost pressures arising from the: (a) Increasing prices of linkage coal (90% dependence); (b) Unavailability of (and poor quality of) raw materials (gypsum, fly ash); and (c) Increase in diesel and rail freight prices. Apart from increasing capacities, Heidelberg is incurring `2bn of capex on conveyor belts for the transportation of limestone between the plant and the mine which would result in savings of `100/tonne. Expansion of the clinker unit to 3.1mn tonnes would also reduce raw material costs (~35% of the raw material costs is on account of clinker purchased). CY13 outlook: We believe cement volume growth is correlated to GFCF growth and given that the economy and corporate spending is likely to improve in the coming months, it would lead to higher cement demand from the institutional clients and thus benefit regional/smaller players given the higher proportion of institutional clients in their sales split. The doubling of capacity and the resultant operating leverage in terms of cost savings would enable Heidelberg to improve its margins and profitability. Stable cement prices and high utilisation in the Central region is also likely to benefit the company. With Heidelbergs current net debt of `7.6bn likely to have peaked out and with no major capex plans for CY13, the company will generate positive FCF. Consensus estimates indicate that Heidelbergs EBITDA and EPS will grow at a CAGR of 107% and 85% respectively over CY11-13 resulting in a sharp jump in return ratios going forward. Valuation: Heidelberg is currently trading at 6.9x 1-year forward EV/EBITDA on consensus EBITDA estimates. Whilst on EV/tonne the stock is trading at a US$55, a 39% premium to its 5-year average (but a significant discount to the large cap cement plays), on 1-year forward EV/EBITDA, the stock is trading at an 11% premium to its 5-year average. We expect return ratios to improve from here on. Expansions and cost rationlisation would lead to improvement in EBITDA/tonne.
Key financials
Year to December Operating Income (` mn) EBITDA (` mn) EBITDA margin (%) EPS (`) BPS (`) RoE (%) EV / EBITDA (x) Source: Company, Bloomberg CY09 9,364 1,595 17.0 5.9 32.5 19.9 3.7 CY10 8,655 989 11.4 2.8 34.6 8.3 8.8 CY11 9,827 605 6.2 1.3 36.0 3.6 25.7 CY12E 12,121 1,354 11.2 2.1 37.5 5.7 13.6 CY13E 18,228 2,942 16.1 4.4 43.9 10.0 6.9
Ritu Modi
Tel: +91 22 3043 3292 ritumodi@ambitcapital.com
Stock Information
CMP: Mkt cap: 52-wk H/L: 3M ADV: Beta: BSE Sensex: Nifty: `48 `11bn/US$203mn `49/25 `21mn/US$0.4mn 1.1x 18,568 5,660

1M Absolute Rel. to Sensex
14 9
3M
54 45
6M 12M
24 17 32 20
Performance
19,000 18,500 18,000 17,500 17,000 16,500 16,000 15,500 15,000 May-12 Sep-11 Dec-11 Sep-12 Feb-12 Jul-12 55 50 45 40 35 30 25 20
Sensex
Heidelberg
Heidelberg Cement
10,000 9,500 9,000 8,500 8,000 7,500 7,000 6,500 6,000 5,500 5,000 CY07 CY08 CY09 CY10 CY11 Revenues (Rs mn)
35 30 25 20
6.5 5.5 4.5 3.5 2.5 1.5 0.5 EPS (Rs) - RHS
15 10 5 CY07 CY08 CY09 CY10 CY11 RoE (%) EBITDA margin (%)
Exhibit 3: Heidelbergs CFO/EBITDA has started to improve since CY11 but its debt:equity increased substantially due to ongoing capex
200 180 160 140 120 100 80 60 40 20 CY07 CY08 CY09 CY10 CY11 CFO/EBITDA (%) - LHS Net debt (cash): Equity (x)
Exhibit 4: Heidelberg has operated at utilisations north of 85%, however input costs pressures have resulted in subdued profitability
3.00 2.80 2.60 2.40 2.20 2.00 1.80 1.60 1.40 CY07 CY08 CY09 CY10 CY11 1HCY12
Dec-11 Jun-11 Jun-12
30
0.8 0.6 0.4 0.2 (0.2) (0.4) (0.6) (0.8)
600 550 500 450 400 350 300 250 200 150
Cement despatches (mn tonnes)
EBITDA (Rs/tonne) - RHS
Source: Company, CMA, Ambit Capital research.
Exhibit 5: 1-year forward EV/EBITDA is trading at a 10% premium to its historical average
15 13 11 9 7 5 3 1 Dec-08 Dec-09 Dec-10 Dec-11 Jul-07 Jun-09 Jun-10 Jun-11 Jun-12 Jun-08 Jan-07 Jan-08 -1
Exhibit 6: 1-year forward EV/tonne (US$) is trading at a 27% premium to its historical average
120 100 80 60 40 20 0 Dec-08 Dec-09 Dec-10 Jul-07 Jun-09 Jun-10 Jun-08 Jan-07 Jan-08
1-yr fwd EV/EBITDA
Avg 1-yr fwd EV/EBITDA
1-yr fwd EV/tonne (US$)
Avg 1-yr fwd EV/tonne (US$)
Heidelberg Cement Exhibit 7: Explanation for the flags on cover page

Segment Accounting Score AMBER Comments In our forensic accounting screen, Heidelberg Cement scores above the industry average. The company scores high on CFO/EBITDA and doubtful debts as % of total debtors. However, the company scores poorly on contingent liabilities as % of networth and asset turnover. Management has made timely announcements in earnings calls and meetings regarding business outlook, capacity expansions, mergers & acquisitions and has rarely surprised in a positive or negative manner CY12 and CY13 EBITDA estimates have witnessed ~9-37% upgrades respectively over the past 6 months. However, CY12 and CY13 EPS estimates have witnessed ~11-35% downgrades respectively over the past six months.
Predictability
GREEN
Earnings momentum
AMBER
31
Heidelberg Cement
Balance sheet
Year to December (` mn) Share capital Reserves and surplus Total Networth Loans Deferred tax liability (net) Sources of funds Net block Capital work-in-progress Investments Cash and bank balances Sundry debtors Inventories Loans and advances Total Current Assets Current Liabilities Provisions Current liabilities and provisions Net current assets Application of funds Source: Company, Ambit Capital research CY07 1,715 1,931 3,646 3,646 1,768 95 1 1,807 125 617 739 3,289 938 570 1,507 1,782 3,646 CY08 2,401 3,698 6,099 100 6,199 2,740 558 1 3,378 199 711 999 5,287 1,586 800 2,387 2,900 6,199 CY09 2,401 4,961 7,362 20 165 7,547 3,163 588 1 4,954 222 645 1,186 7,007 2,138 1,074 3,212 3,795 7,547 CY10 2,266 5,566 7,833 301 8,134 3,305 4,282 2,195 243 712 1,482 4,631 3,000 1,084 4,084 548 8,134 CY11 2,266 5,890 8,156 7,769 331 16,256 3,476 11,083 3,107 243 1,107 2,540 6,997 4,179 1,122 5,300 1,697 16,256
Income statement
Year to December (` mn) Revenue yoy growth Total expenses EBITDA yoy growth Net depreciation EBIT Interest and financial charges Other income Adj PBT Provision for taxation Adjusted PAT yoy growth Reported PAT EPS basic (`) EPS diluted (`) Source: Company, Ambit Capital research 977 6.1 6.1 CY07 5,936 15.1% 4,904 1,033 252.4% 144 888 31 125 983 7 977 CY08 7,622 28.4% 6,743 879 -14.8% 214 666 41 443 1,067 (188) 1,255 28.6% 1,255 5.9 5.9 CY09 9,364 22.9% 7,769 1,595 81.4% 258 1,337 44 455 1,748 407 1,340 6.8% 1,340 5.9 5.9 CY10 8,655 -7.6% 7,666 989 -38.0% 289 701 42 301 960 327 633 -52.8% 633 2.8 2.8 CY11 9,827 13.5% 9,222 605 -38.9% 314 291 38 171 424 132 292 -53.9% 292 1.3 1.3
32
Heidelberg Cement
Cash flow statement

Year to December (` mn) PBT Depreciation Others Interest paid (net) CFO before change in WC Change in working capital Direct taxes paid CFO Net capex Net investments Interest received CFI Proceeds from borrowings Change in share capital Interest & finance charges paid Dividends paid CFF Net increase in cash Free Cash flows Source: Company, Ambit Capital research CY07 983 144 5 (63) 1,070 283 (8) 1,344 (242) (845) 82 (1,006) (29) (29) 310 1,102 CY08 1,076 214 (7) (211) 1,072 532 (77) 1,526 (743) (7) 209 (385) (60) (23) (83) 1,059 783 CY09 1,748 258 (119) (243) 1,644 727 (224) 2,146 (749) 271 (2,444) (80) (22) (102) (400) 1,397 CY10 960 289 (49) (148) 1,052 (246) (242) 564 (3,338) 12 200 27 (20) (25) (41) (229) 363 (2,774) CY11 424 314 16 (60) 694 (101) (73) 521 (6,821) 88 (6,523) 7,140 (15) 7,125 1,122 (6,301)
Ratio analysis (%)

Year to December Revenue growth EBITDA growth PAT growth EBITDA margin EBIT margin Net margin RoCE RoIC RoE Source: Company, Ambit Capital research CY07 15.1 252.4 403.7 17.4 15.0 16.4 31.9 28.5 30.7 CY08 28.4 (14.8) 28.5 11.5 8.7 16.5 22.6 14.5 25.8 CY09 22.9 81.4 6.8 17.0 14.3 14.3 26.0 21.2 19.9 CY10 (7.6) (38.0) (52.8) 11.4 8.1 7.3 12.7 12.9 8.3 CY11 13.5 (38.9) (53.9) 6.2 3.0 3.0 3.8 6.4 3.6
Year to December P/E (x) P/B(x) Debt/Equity(x) Net debt/Equity(x) EV/Sales(x) EV/EBITDA(x) Source: Company, Ambit Capital research CY07 7.9 2.1 (0.5) 1.0 5.6 CY08 8.1 1.2 0.0 (0.5) 0.6 4.9 CY09 8.2 1.5 0.0 (0.7) 0.6 3.7 CY10 17.3 1.4 (0.3) 1.0 8.8 CY11 37.2 1.3 1.0 0.6 1.6 25.7
33
Heidelberg Cement
34
BFSI
October 01, 2012
ICRA
Bloomberg: ICRA IN EQUITY Reuters: ICRA.NS
NOT RATED
Accounting: GREEN Predictability: GREEN Earnings momentum: AMBER Analyst contacts

Pankaj Agarwal, CFA
Tel: +91 22 3043 3206 pankajagarwal@ambitcapital.com
Background: Set up in 1991, ICRA is the second biggest credit rating agency in India (~21% market share) with a presence in other business segments such as consultancy, Information Technology services and outsourcing. Moodys is a strategic partner in the company having 28.5% stake where Moodys provides ICRA with technical services and also outsources certain services to ICRA. Competitive positioning and its underpinnings: (i) ICRA is the second biggest
Krishnan ASV
Tel: +91 22 3043 3205 vkrishnan@ambitcapital.com
rating agency in India amongst six rating agencies and hence is in a less crowded market than any other Financial Services industry; (ii) ICRA has access to Moodys global research base and credit risk analytics techniques; (iii) ICRA has a strong and credible brand name in a issuer paid industry where the independence of the rating agency is sometimes questionable; (iv) ICRAs presence in regional centers helps it in garner more business and gives this firm a better understanding of the regional entities it rates; (v) The company has diversified into other businesses like consulting, outsourcing, etc. which contribute ~33% of its revenues. This helps ICRA to maintain its profitability without compromising on independence in its rating business which we believe would be a critical factor in long term sustainability of business. Overall success of the business: After witnessing strong revenue and PAT CAGR of 31% and 39% respectively between FY06 to FY10, ICRA has seen a slowdown in its revenues and PAT between FY10-12 at a CAGR of 14% and 1% respectively due to sluggish debt markets, a slowdown in credit off take, increased employee overheads and competitive pressures due to an increase in number of players in the credit rating industry. FY13 and FY14 outlook: Whilst FY12 revenues and profits of ICRA grew modestly by only 11%-12%, ICRA would be a disproportionate beneficiary of a pick-up the in investment cycle leading to increased credit off-take and more bond issuances by Indian corporates. With operating leverage in the business model, PAT growth would be disproportionately higher than revenue growth. Moreover, as organizations like Employee Provident Fund Organisation (EPFO) and insurance companies are provided more flexibility in investing in below AAA rated bonds, bond markets could further widen in India benfiting rating agencies like ICRA disproportionately. That being said aggressive competition based on less independent rating to the issuer to gain business is less likely in the listed bond market (vs bank loan market) due to high reputational damage if the ratings turn wrong (due to involvement of multiple institutional and retail investors). Moreover, the increasing in SME rating pool could be another large opportunity for ICRA given that there are potentially ~25mn SMEs in India, with only a handful of them currently rated. Valuation: ICRA trades at 17.6x FY13E P/E and 15.6x FY14E P/E based on consensus estimates and is at 33% discount respectively to its closest peer CRISIL on 1 year rolling forward PE ratio. Increased competition in the segment leading to pressure on growth and margins is the key risk to the company.
Year to March (` mn) Total Revenue PAT Operating Margin EPS (`) RoA (%) RoE (%) P/E (x) P/B (x) Source: Company, Ambit Capital research FY08 1,073 285 38% 28.5 20.4% 17.4% 42.7 7.4 FY09 1,498 389 38% 38.9 25.4% 22.4% 31.2 6.4 FY10 1,765 535 40% 53.5 28.0% 27.2% 22.7 5.5 FY11 2,059 481 36% 48.1 20.4% 20.4% 25.3 4.7 FY12 2,288 540 35% 54.0 19.4% 19.3% 22.5 4.0
Aadesh Mehta
Tel: +91 22 3043 3239 aadeshmehta@ambitcapital.com
Stock Information
CMP: Mkt cap: 52-wk H/L: 3M ADV: Beta: BSE Sensex: Nifty: 1,212 `12bn/US$228mn `1,354/793 `7mn/US$0.1mn 0.7x 18,632 5,663

1M Absolute Rel. to Sensex 3.9 3M -6.6 6M 12M 12.9 3.7 30.3 14.2
-0.9 -16.8
Performance (%)
20,000 18,000 16,000 14,000 27-Sep-11 21-Feb-12 Sensex 11-Jul-12 ICRA 1500 1300 1100 900 700
Cross cycle P/E

1400 1300 1200 1100 1000 900 800 700 600 500 400 300 Apr-08 Apr-09 Apr-10 Apr-11 Oct-08 Oct-09 Oct-10 Oct-11 Apr-12 20x 16x
12x
ICRA
Exhibit 1: Revenue and EPS growth over the last 5 years
Exhibit 2: Operating Margin
50% 40% 30% 20% 10% 0% -10%
40% 42%
42%
40% 37%
38%
40% 40% 38% 38% 36% 36% 34% FY08 FY09 FY10 FY11 FY12 Operating Margin (%)
17% 18%
12% 11%
38%
35%
-10% FY08 FY09 FY10 FY11 FY12
Revenue Growth
EPS Growth
Exhibit 3: ROAs and ROEs

30% 28% 26% 24% 22% 20% 18% 16% 14% FY08 FY09 FY10 FY11 FY12 17% 22% 27% 20% 19% RoA RoE
Exhibit 4: Standalone revenues segment-wise breakup

Informatio n and outsourcin g Services Fees, 8%
Profession al Services Fees, 12%
Consulting Fees, 12%
Rating Services Fees, 67%
Exhibit 5: P/E valuation bands over the past five years

1400 1300 1200 1100 1000 900 800 700 600 500 400 300 Apr-08 Apr-09 Apr-10 Apr-11 Oct-08 Oct-09 Oct-10 Oct-11 Apr-12 20x 16x
Exhibit 6: P/B valuation bands over the past five years

1400 1300 1200 1100 1000 900 800 700 600 500 400 300 Apr-08 Apr-09 Apr-10 Apr-11 Oct-08 Oct-09 Oct-10 Oct-11 Apr-12 4.5x
3.5x
12x
2.5x
36
ICRA Exhibit 7: Explanation for our flags on the cover page

GREEN GREEN AMBER
Based on our analysis, we believe that reported numbers of the company shows the true economic picture of the company Whilst revenue and net profit growth patterns of the company moves in line with overall activity in debt markets, the earnings and net profits are unlikely to throw any major negative surprises for the investors. Earnings momentum could continue to remain weak in the near term due to weak credit offtake and weak debt markets.
37
ICRA Income statement

Y/E Mar (`mn) Total revenue Revenue from operations Rating Services Fees Consulting Fees Information and outsourcing Services Fees Professional Services Fees Other Income Total operating expenses Employee benefits Other expenses PBT Tax PAT EPS (`)- basic EPS (`)- diluted Dividend per share(`) Source: Company, Ambit Capital research FY08 1,073 995 603 181 86 126 79 669 428 241 404 119 285 28.5 28.5 10.0 FY09 1,498 1,358 885 189 118 166 140 930 552 378 568 179 389 38.9 38.9 12.0 FY10 1,765 1,623 1,061 216 167 178 142 1,057 685 373 708 173 535 53.5 53.5 17.0 FY11 FY12 2,059 2,288 1,930 1,291 251 159 230 128 885 434 740 258 481 48.1 48.1 17.0 2,075 1,394 252 176 252 213 1,067 429 792 252 540 54.0 54.0 20.0
1,319 1,496
Balance sheet
Y/E Mar (`mn) Sources of funds Net worth Net Borrowings Total sources of funds Application of funds Cash and cash equivalents Investments Fixed assets Total application of funds BVPS Source: Company, Ambit Capital research 256 902 237 1,395 164 1,126 299 241 1,667 189 1,165 746 242 2,153 222 420 1,912 243 2,576 257 409 2,362 236 3,006 302 1,639 (244) 1,395 1,887 (221) 1,667 2,217 (65) 2,153 2,570 5 2,576 3,016 (10) 3,006 FY08 FY09 FY10 FY11 FY12
Key metrics
(%) Operating Margin Revenue growth EPS growth FY08 38% 40% 42% FY09 38% 40% 37% FY10 40% 18% 38% FY11 36% 17% -10% FY12 35% 11% 12%
Valuation and return ratios

(%) P/E P/BV ROA ROE Source: Company, Ambit Capital research FY08 42.7 7.4 20.4% 17.4% FY09 31.2 6.4 25.4% 22.4% FY10 22.7 5.5 28.0% 27.2% FY11 25.3 4.7 20.4% 20.4% FY12 22.5 4.0 19.4% 19.3%
38
Technology
01 October, 2012
Info Edge
Bloomberg: INFOE IN EQUITY Reuters: INED.NS
BUY
Accounting: GREEN Predictability: GREEN Earnings momentum: AMBER Analyst contact

Ankur Rudra, CFA
Tel: +9122 3043 3211 ankurrudra@ambitcapital.com
Background: Info Edge is a leading Indian online classified firm present in the recruitment, real estate, and matrimony verticals. Info Edges businesses not only enjoy several structural growth drivers such as rising Internet penetration, usage of eCommerce and favourable demographics, but also sustainable competitive advantages such as strong brand recall, customer stickiness due to positive network effects and a robust balance sheet to take advantage of acquisition opportunities. Competitive positioning and its underpinnings: (1) Having built a strong brand over the last decade, Info Edges recruitment classifieds business, Naukri.com now enjoys unrivalled unaided brand recall. Naukri.com has around 60% traffic share in the high entry barrier online recruitment market. Competition from LinkedIn is primarily being felt by offline recruiters as opposed to Naukri. (2) Even as Info Edges real estate classifieds business, 99acres, now commands ~35% traffic share of the Online Real Estate Classifieds market, the addressable market remains in the early stages of hockey stick growth driven by increasing awareness amongst developers and brokers. With operating leverage set to manifest itself, we expect revenues and EBITDA to grow at 52% and 200% CAGR respectively over FY13-FY15. (3) Info Edge has potentially material option value from other classified businesses. We are particularly excited about InfoEdges investments into financial aggregation and education classifieds. Overall success of the business: InfoEdges standalone business (recruitment, real estate and matrimony) has grown at a 22% CAGR over FY07-12, driven by market share gains in its core recruitment business (up 19% CAGR) and blistering pace in its nascent real esate business. Over this period, Info Edges standalone EBITDA margins improved by 1130bps driven by rising pricing power, improving unaided brand recall that led to lower advertising costs and operational leverage. Due to the subscription led negative working capital cycle and low capital intensive nature of online classifieds, Info Edge generates strong CFO (average 83% of EBITDA over FY08-12) and free cash (70% of PAT excluding acquisitions and 55% of PAT including acquisitions over FY08-12) at the consolidated level. FY13 outlook: Over the rest of FY13, we expect the company to grow revenues strongly due to: (a) Healthy volume growth 10-12% YoY in core recruitment; and (b) Improving realizations due to price inflation and lower discounting as the economy improves. We expect slower earnings growth due to EBITDA margin dilution (240bps) from greater investment in scaling up the real estate and education businesses in the standalone entity. We expect cash conversion ratios to soften in FY13 (22%) due to weaker subscription growth in 1HFY13. Valuation: Our assumptions point to 22% FY12-14 EPS growth supported by growth in real estate and operational leverage as more businesses break even. This makes the shares look attractive even at 25xFY14 P/E and 17x FY14 EV/EBITDA. Our SOTP based 3 stage DCF valuation points to `423, implying 21% upside and FY14 P/E of 30x.
Key financials (Consolidated)
Year to March (` mn) Revenues EBITDA EBITDA (%) EPS (`) RoE (%) RoCE (%) P/E (x) FY10 2,371 625 26.4% 4.8 15.1% 10.0% 73.2 FY11 3,218 827 25.7% 5.8 14.9% 11.1% 60.3 FY12 3,903 1,146 29.4% 9.5 19.6% 14.2% 36.9 FY13E 4,821 1,551 32.2% 11.3 22.2% 17.2% 31.0 FY14E 6,245 1,961 31.4% 14.2 22.2% 17.7% 24.6 FY15E 8,231 2,595 31.5% 18.8 23.0% 19.1% 18.6

CMP: Target Price (Sep 2013): Previous TP: Upside (%) EPS (FY13E): Change from previous (%) Variance from consensus (%) `349 `423 `444 21 `11.3 NA 8
Stock Information

Absolute Rel. to Sensex 1M 5 (2) 3M (6) (16) 6M 12M (3) 0 (13) (14)
Performance (%)
20,000 15,000 10,000 Sep-11 Feb-12 Sensex
Source: Bloomberg
500 400 300 200 Jul-12 Infoedge

Info Edge
100% 80% 60% 40% 20% 0% -20% FY08 FY09 FY10 FY11 FY12
35% 30% 25% 20% 15% 10% FY08 FY09 ROE FY10 FY11 EBITDA margin FY12
Revenue growth
EPS growth

140% 120% 100% 80% 60% 40% 20% 0% FY08 FY09 FY10 FY11 FY12 0.05x 0.05x 0.04x 0.04x 0.03x 0.03x 0.02x 0.02x 0.01x 0.01x 0.00x
700.00 600.00 500.00 400.00 300.00 200.00 100.00 0.00 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Average PE Actual 1 year fwd PE
55X 45X 35X 25X
CFO/EBITDA
Debt/Equity (RHS)
Exhibit 5: P/B valuation bands over the past five years

1,000.00 900.00 800.00 700.00 600.00 500.00 400.00 300.00 200.00 100.00 0.00 Apr-08 Oct-07 Oct-08
Exhibit 6: EV/EBITDA valuation bands over the past five years

800 700 600 500 400 300 200 10x 100 0 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Price 4 year Average EV/EBITDA
15X Actual 1 year fwd PB Average PB 5X 1X Apr-09 Apr-10 Apr-11 Oct-09 Oct-10 Oct-11 10X
40x 30x 20x
40
Info Edge Exhibit 7: Changes to estimates

New estimates FY13E Recommendation TP (`) Recruitment revenue Non-recruitment revenue Total revenue EBITDA EBITDA margins PBT PAT EPS FCF BUY 423 3,522 1,299 4,821 1,551 32% 1,898 1,230 11 1,497 4,233 2,013 6,245 1,961 31% 2,335 1,547 14 1,563 FY14E Old estimates FY13E BUY 444 3,201 1,559 4,760 1,678 35% 1,996 1,306 12 1,285 3,695 2,374 6,069 2,173 36% 2,603 1,742 16 1,521 10% -17% 1% -8% (307) -5% -6% -6% 16% 15% -15% 3% -10% (441) -10% -11% -11% 3% Trickle down effect of lower EBITDA margins Lower working capital requirement driven by higher current liabilities Depressed margins in non-recruitment business drive our margin downgrade. We now estimate the EBITDA margins to turn positive in 2017 as against earlier estimate of 2015 Largely unchanged. Upgrade in recruitment business revenue offset by downgrade in nonrecruitment revenue FY14E % change FY13E FY14E Comments
Exhibit 8: Explanation for our flags on the cover page

Segment Accounting Score GREEN Comments In our forensic analysis of 360 companies, Info Edges score of 306 is substantially higher than the overall average of 169. Our analysis above also shows it is substantially superior to local and global peers. Info Edge has made timely disclosures regarding its future strategy, its investments in startups and the firms expected earnings performance. FY2013 estimates have been upgraded by 2% in the past 4 weeks.
Predictability Earnings momentum
GREEN AMBER
41
Info Edge
Balance sheet (Consolidated)

FY10 Share capital Reserves and surplus Shareholders' funds Loan Funds SOURCES OF FUNDS Property and equipment, net Other non current assets Investments Accounts receivable, net Cash & short term investments Other curent assets Accounts payable Other current liabilities & provisions APPLICATION OF FUNDS Source: Company, Ambit Capital research 273 3,474 3,746 6 3,753 363 54 1,141 80 2,791 219 209 686 3,753 FY11 546 3,805 4,351 7 4,374 712 101 2,628 149 2,076 200 352 1,141 4,374 FY12 546 4,726 5,272 3 5,250 627 745 3,152 81 2,216 282 382 1,471 5,250 FY13 1,092 5,414 6,506 4 6,510 644 317 3,152 113 4,096 292 383 1,722 6,510 FY14 1,092 6,961 8,053 4 8,074 781 317 3,152 165 6,079 292 513 2,200 8,074 FY15 1,092 9,010 10,102 4 10,114 791 317 3,152 218 8,914 292 674 2,896 10,114
Income statement (Consolidated)

FY10 Revenue Change (%) Operating Expenses EBITDA % of Net Sales Depreciation Interest Other Income PBT Tax Rate (%) NOPAT Adjusted PAT Net Income EPS (`.) Source: Company, Ambit Capital research 2,371 (4) 1,745 625 26.4% 65 20 307 848 318 37.5% 351 530 521 4.8 FY11 3,218 36 2,390 827 25.7% 80 23 279 1,004 400 39.9% 449 604 631 5.8 FY12 3,903 21 2,757 1,146 29.4% 83 1 411 1,472 529 35.9% 681 944 1,033 9.5 FY13 4,821 24 3,269 1,551 32.2% 85 9 440 1,898 590 31.1% 1,010 1,307 1,230 11.3 FY14 6,245 30 4,284 1,961 31.4% 98 3 476 2,335 718 30.8% 1,290 1,617 1,547 14.2 FY15 8,231 32 5,636 2,595 31.5% 114 3 515 2,993 902 30.2% 1,733 2,091 2,049 18.8
42
Info Edge
Cash flow statement (Consolidated)

FY10 PBT Depreciation Working Capital Non Operating Incomes Taxes Others CFO Capex Investments CFI Borrowings Others CFF Net Cash Flow Source: Company, Ambit Capital research 848 65 22 (288) (265) (5) 376 (44) (998) (784) 3 (25) (22) (430) FY11 1,004 80 540 (264) (393) 70 1,038 (434) (1,465) (1,728) 1 (25) (24) (715) FY12 1,472 83 402 (393) (569) 12 1,008 (89) 252 (181) (0) (48) (49) 779 FY13 1,898 85 638 (440) (590) 9 1,599 (102) 286 1 (9) (8) 1,877 FY14 2,335 98 556 (476) (718) 3 1,799 (236) 187 (3) (3) 1,983 FY15 2,993 114 804 (515) (902) 3 2,496 (123) 342 (3) (3) 2,835
Ratio analysis
Key ratios Growth Recruitment Total Non Recruitment Total Revenues EBITDA Growth EBIT Growth PAT Growth Margins EBITDA EBIT PAT Profitability Ratios (%) RoE RoCE 15.1% 10.0% 14.9% 11.1% 19.6% 14.2% 22.2% 17.2% 22.2% 17.7% 23.0% 19.1% 26.4% 23.6% 22.4% 25.7% 23.2% 18.8% 29.4% 27.2% 24.2% 32.2% 30.4% 27.1% 31.4% 29.8% 25.9% 31.5% 30.1% 25.4% -8% 23% -4% -5.5% -5.1% -8.9% 24% 90% 36% 32.3% 33.3% 13.9% 25% 9% 21% 38.5% 42.2% 56.3% 16% 51% 24% 35.4% 38.1% 38.5% 20% 54% 30% 26.4% 27.0% 23.7% 21% 54% 32% 32.3% 33.2% 29.3% FY10 FY11 FY12 FY13 FY14 FY15
Key ratios Per share metrics EPS Cash EPS BVPS Valuation (x) P/E Cash P/E EV/EBITDA EV/Sales Price/Book Value 73.2 48.8 54.4 14.3 10.2 60.3 48.1 41.1 10.6 8.8 36.9 31.8 29.7 8.7 7.2 31.0 29.0 21.9 7.1 5.9 24.6 23.2 17.3 5.4 4.7 18.6 17.6 13.1 4.1 3.8 4.8 7.1 34.3 5.8 7.3 39.9 9.5 11.0 48.3 11.3 12.0 59.6 14.2 15.1 73.8 18.8 19.8 92.5 FY10 FY11 FY12 FY13 FY14 FY15
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Info Edge
44
Engineering & Capital Goods
October 01, 2012
Kirloskar Oil Engines

Bloomberg: KOEL IN EQUITY Reuters: KIRO.BO
NOT RATED
Accounting: GREEN Predictability: AMBER Earnings momentum: AMBER Analyst contacts

Bhargav Buddhadev
Background: Kirloskar Oil Engines (KOEL) is part of the $1.6bn Kirloskar group. It is one of the largest manufacturers of diesel engines ranging in capacity from 4 hp to 800 hp and from 2,400 hp to 11,000 hp. The firm has market leadership in the small and medium diesel engine segment. These engines find application across sectors like power generation (used in gensets), agriculture (used in pumps), and off highway (used in construction equipments). The company generated revenues of `24 bn (3% decline) and PAT of `1.9 bn (11% growth) in FY12. Competitive positioning and its underpinnings: Despite KOEL having market leadership in the small and the medium engine segment, its EBITDA margins (13% in FY12) are lower compared to the leader in the larger engine segment, Cummins India (15.5% in FY12). This is because the small and the medium engine segment is a commoditized segment attracting competition from several unorganized players. However, KOEL is now trying to crack open the larger engine segment thanks to its tie-up with Daihatsu (established Japanese diesel engines manufacturer for marine and power plant applications). Whilst it will be a challenge for KOEL to compete with Cummins in this segment (given Cummins superior technology, first mover advantage and strong distribution network), initial feedback from corporates on the launch of KOELs large engines is encouraging. Overall success of the business: The Companys revenue growth in the last two years (FY10-12) has been flat (compared to a CAGR of 20% for Cummins) due to greater competition in the agriculture segment, loss of market share in the industrial engine segment (from 52% in FY11 to 30% in FY12) and sluggishness in the power generation business (primarily due to a decline in the telecom sector due to telecom companies preferring tower sharing arrangements instead of new roll-outs). Op margins also declined by 100bps to 13% primarily due to higher employee expenses which (as a % of revenues) increased from 5.7% in FY10 to 7.5% in FY12. However, CFO/EBITDA improved in FY12 to 146% compared to 105% in FY11 due to a reduction in debtor days from 57 days in FY11 to 47 days in FY12 (FY10 data is not available as the company demerged that year). FY13 outlook: FY13 so far has been a tough year for the industry given poor industrial production (IIP) numbers. YoY growth in IIP so far since April12 has been flat on the back of a persistent slowdown in the manufacturing and capital goods sector which have declined by -0.6% and -16% respectively in Apr-July12. However, in FY14 we expect the manufacturing and capital goods sector growth to pick up on the back of an improvement in investment growth measured by Gross Fixed Capital Formation (GFCF). Our Economist, Ritika Mankar, now expects YoY growth in GFCF for FY14 to increase to 6.1% from 5.5% earlier given the recent string of policy reforms unleashed by the Government and the likelihood of future policy reforms in H2 FY13. Valuation: The firm trades at 12.2x FY13 P/E, 2x FY13 book value and 7.4x FY13EV/EBITDA. Compared to peers (Cummins and Greaves Cotton), these estimates are at a 28%, 50% and 30% discount respectively. Compared to its two year average (last five years data is not available as the company got demerged in FY10), the company trades at a premium of 11% on both FY13 P/E and EV/EBITDA multiples.
Year to March (` mn) Net Sales EBITDA EBITDA (%) EPS (`) RoE (%) P/E (x) P/B (x) Source: Company, Ambit Capital research FY10 22,609 3,528 15.6% 11.26 24% 13.9 3.4 FY11 24,230 3,398 14.0% 11.93 22% 13.2 2.6 FY12 23,260 3,044 13.1% 13.17 20% 11.9 2.2 FY13E 24,965 3,187 12.7% 12.86 17% 12.2 2.03
Harshit Vaid

CMP: Target Price (12 Months): Previous TP: Upside (%) EPS (FY13E): Change from previous (%) Variance from consensus (%) `171 NA NA NA `12.9 NA NA
Stock Information

Absolute Rel. to Sensex 1M 9 2 3M 9 (2) 6M 12M 15 21 5 7
Performance (%)
20,000 1 9,000 1 8,000 1 40 1 7,000 1 6,000 1 5,000 Sep-1 1 Feb-1 2 Sensex Jul-1 2 KOEL 1 20 1 00 1 80 1 60
Exhibit 1: Revenues and EPS growth over the last three years
30,000 25,000 20,000 15,000 10,000 5,000 FY10 FY11 FY12 EPS (Rs) (RHS) 10.00 12.00 14.00
Exhibit 2: ROE and EBITDA margin over the last three years
30% 25% 20% 15% 10% 5% 0% FY10 RoE (%) FY11 FY12 EBITDA (%) 13% 12% 11% 16% 15% 14%
Source: Company, Ambit Capital research; Note: Since the company was demerged in FY10, results are available only for the past three years.
Exhibit 3: CFO/EBITDA and Net Debt:Equity (FY11&FY12)

160% 140% 120% 100% 80% FY11 CFO/EBITDA (%)

240 220 200 180 160 140 120 100 Sep-11 Dec-10 Jan-12 Apr-11 May-12 Sep-12 9x 8x 7x 6x 5x May-11 Sep-11 May-12 Dec-10 Jan-12 Sep-12
46
0.20 0.16 0.12 0.08 0.04 FY12 Net Debt:Equity (x)
12x 11x 10x 9x 8x

240 220 200 180 160 140 120 100 Sep-11 May-12 Dec-10 Apr-11 Jan-12 Sep-12 2.5x 2.25x 2x 1.75x 1.5x

240 220 200 180 160 140 120 100
Exhibit 7: Explanation for our flags on the cover page

Segment Accounting Predictability Earnings momentum Score GREEN AMBER AMBER Comments On the back of strong CFO/EBITDA ratios (100+% in FY11 and FY12), high investment income and no loans and advances to related parties, we give a green flag to the company. As we do not cover this stock and there are any barely any estimates available for KOEL, the predictability remains uncertain. Bloomberg consensus consists of only 2 brokerages. upgrades/downgrades in the past three months. There have been no significant
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Balance sheet
Year to March (` mn) Shareholders' equity Reserves & surpluses Total networth Debt Deferred tax liability Total liabilities Gross block Net block CWIP Investments Cash & equivalents Debtors Inventory Loans & advances Other current assets Total current assets Current liabilities Provisions Total current liabilities Net current assets Miscellaneous FY10 291 6,513 6,804 2,696 323 9,823 9,653 5,626 124 2,001 637 3,854 1,403 1,200 711 7,804 4,183 1,549 5,732 2,072 FY11 291 8,603 8,894 1,689 323 10,906 10,525 5,907 86 2,978 229 3,817 1,380 1,139 1,798 8,363 4,810 1,617 6,427 1,936 FY12 291 10,035 10,327 866 380 11,573 1,127 5,758 155 5,274 274 2,989 1,322 1,290 614 6,489 4,741 1,364 6,104 385 -
Total assets 9,823 10,906 11,573 Source: Company, Ambit Capital research, Note: Since the company was demerged in FY10, results are available only for the past three years.
Income statement
Year to March (` mn) Operating income % growth Operating expenditure EBITDA % growth Depreciation EBIT Interest expenditure Non-operating income Adjusted PBT Tax Adjusted PAT/ Net profit % growth Extraordinaries Reported Consolidated net profit Adjusted Consolidated net profit Source: Company, Ambit Capital research FY10 22,609 NA 19,081 3,528 NA 840 2,688 136 82 2,634 994 1,640 NA 1,640 1,640 FY11 24,230 7% 20,832 3,398 -4% 848 2,550 199 124 2,475 700 1,737 6% (37) 1,737 1,775 FY12 23,260 -4% 20,216 3,044 -10% 913 2,131 160 361 2,332 892 1,918 10% 477 1,918 1,441
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Cash flow statement

FY11 PBT Depreciation Others Tax (Incr) / decr in net working capital Cash flow from operations Capex (Incr) / decrin investments Other income (expenditure) Others Cash flow from investments Net borrowings Issuance of equity Dividend paid Others Cash flow from financing Net change in cash Closing cash balance Free cash flow Source: Company, Ambit Capital research (1,971) (369) (676) (202) (1,247) (421) 229 826 2,437 770 61 (772) 301 2,798 (1,112) (975) 116 FY12 2,810 912 (805) (713) 1,528 3,732 (7) (2,297) 328 (1,976) (991) (674) (47) (1,713) 43 274 1,756
Ratio analysis
Year to March (%) EBITDA margin (%) EBIT margin(%) Net profit margin(%) Dividend payout ratio(%) Net debt: equity (x) Working capital turnover (x) Gross block turnover (x) RoCE(%) RoE (%) Source: Company, Ambit Capital research FY10 15.6% 11.9% 7.3% 36% 0.30 15.75 2.34 28% 24% FY11 14.0% 10.5% 7.2% 34% 0.16 14.19 2.30 24% 22% FY12 13.1% 9.2% 8.2% 30% 0.06 209.36 20.64 19% 20%
Year to March (` mn) EPS (`) Book value per share (`) Dividend per share (`) P/E (x) P/BV (x) EV/EBITDA (x) EV/EBIT (x) Source: Company, Ambit Capital research FY10 11.26 46.72 4.00 13.9 3.4 6.7 8.7 FY11 11.93 61.07 4.00 13.2 2.6 6.9 9.2 FY12 13.17 70.91 4.00 11.9 2.2 7.7 11.0
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50
BFSI
October 01, 2012
Motilal Oswal
Bloomberg: MOFS IN EQUITY Reuters: MOFS.BO
BUY
Accounting: GREEN Predictability: AMBER Earnings momentum: GREEN
Background: Motilal Oswal is one of the largest retail and institutional stock Analyst contacts brokers in India with presence in investment banking and asset management as well. The company, which accounts for 2% in volumes on Indian stock Pankaj Agarwal, CFA exchanges, generated revenues of `4.6bn (22% de-growth) and PAT of `1bn Tel: +91 22 3043 3206 pankajagarwal@ambitcapital.com (24% de-growth) in FY12. Competitive positioning and its underpinnings: (1) MOFS has maintained its focus on non-capital intensive fee-based businesses such as broking, investment banking and asset management and has stayed away from capital intensive businesses such as retail financing, insurance, etc. In effect, MOFS has avoided businesses where stockbrokers have no visible competitive advantages. (2) MOFS has successfully built a franchisee-based retail broking model which is non-capital intensive and helps MOFS manage its cost structure better (even in a bear market) as all the fixed and operating costs are borne by the franchisee; (3) MOFS has a well established distribution channel of ~1500 branches in 550 cities along with a robust institutional client base to build its investment banking and asset management business; (4) In both retail and institutional broking, over the last 20 years, MOFS has built, arguably, the strongest brand in India. The firm is viewed by most market participants as a reliable and trustworthy broker. Overall success of the business: After witnessing strong revenue and PAT growth of 59% and 66% respectively between FY06 to FY08, the company has seen a de-growth in its revenues and PAT between FY08-12 at a CAGR of 9% and 11% respectively. Fall in cash market volumes, retail investors staying away from the market, declining commission rates (especially in institutional equities) and muted investment banking, capital market lending (margin financing, IPO financing, etc) have led to this decline. However, the silver lining is that despite intense competition in institutional equities along with the increasing cost structure in the broking business, MOFS has been able to broadly maintain its market share (in revenue terms) over the last two years. The combination of this and its franchisee model means that MOFS has been able to maintain its operating margins between 33%-42% on a cross cycle basis FY13 and FY14 outlook: Whilst the 1HFY13 profits for MOFS would continue to remain muted showing ~10% de-growth on YoY basis, if going forward cash market volumes on Indian exchanges remain at the levels seen in the second fortnight of Sep12, we expect a robust revenue and PAT CAGR of 24% and 34% between FY12-14.
Krishnan ASV
Tel: +91 22 3043 3205 vkrishnan@ambitcapital.com
Aadesh Mehta
Tel: +91 22 3043 3239 aadeshmehta@ambitcapital.com

CMP: Target Price (June 2013): Previous TP: Upside (%) EPS (FY13E): Change from previous (%) Variance from consensus (%) 108 143 128 32 8.5 -13% 13%
Stock Information

1M Absolute Rel. to Sensex 14.7 9.9 3M 9.2 -1.0 6M 12M -0.6 -9.8 33.4 17.3
Valuation: Given the cyclical nature of the business, we expect earnings multiples to expand. Our DCF model assumes a cost of equity of 15.0% and terminal growth of 5%. This translates to a valuation of `143 implying 32% upside and a FY14 P/E multiple of 11.0x (in-line with its average multiple Performance (%) between FY10-12).
Year to March (` mn) Total Income Operating Profit Operating Margin (%) EPS (`) RoA (%) RoE (%) P/E (x) P/B (x) Source: Company, Ambit Capital research FY10 6,367 2,683 42% 11.9 18.5% 19.7% 9.0 1.6 FY11 5,947 2,239 38% 9.5 12.9% 13.7% 11.2 1.4 FY12 4,619 1,526 33% 7.3 9.4% 9.4% 14.7 1.3 FY13E 5,393 2,100 39% 8.5 10.2% 10.3% 12.6 1.2 FY14E 7,097 3,093 44% 12.9 13.7% 13.8% 8.3 1.1
20,000 18,000 16,000 14,000
130 110 90 70 50 11-Jul-12 MOFS
27-Sep-11 21-Feb-12 Sensex
Motilal Oswal
130% 110% 90% 70% 50% 30% 10% -10% -30% -50% FY07 FY08 -49% FY09 FY10 39% 35% -35% -20% FY11 88% 42% -7% -22% -24% FY12 106% 89%
Exhibit 2: Operating Margin

45% 42% 39% 36% 33% 33% 30% FY07 FY08 FY09 FY10 FY11 FY12 38% 36% Operating Margin (%) 42%
37%
37%
Revenue Growth
EPS Growth
Exhibit 3: ROAs and ROEs

38% 33% 28% 23% 18% 13% 8% FY07 FY08 12% 11% FY09 FY10 19% 31% 30% 28% 20% 14% 13% FY11 9% 9% FY12 32% RoA RoE
Exhibit 4: Declining market share in value is limited inspite of declining market share in volume
6.0% 5.0% 4.0% 3.0% 2.0% 1.0% FY08 4.7% 4.2% 3.2% 2.5% 1.9% FY09 FY10 FY11 FY12 Brokerage market share - value terms Brokerage market share - volume terms 5.7% 5.4% 5.4% 5.3% 4.0%
Exhibit 5: as market volume growth has mostly come from lower yield options
1,600 1,400 1,200 Rs bn 1,000 800 600 400 200 FY08 Options Futures FY09 FY10 FY11 FY12 Cash Intraday Cash Delivery 728 612 950 1,431
400 300 200 100 0 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12
52
1,335
16x 12x 8x Mar-08 Mar-09 Mar-10 Mar-11 Mar-12
Source: Company, NSE, BSE, Ambit Capital research
Source: NSE, BSE, Ambit Capital research
Motilal Oswal Exhibit 7: Explanation for our flags on the cover page
GREEN AMBER GREEN
Based on our analysis, we believe that reported numbers of the company shows the true economic picture of the company The revenue and PAT of the company are as volatile as market levels and trading volumes on exchanges; hence the companys revenues and earnings are very unpredictable. Whilst 1HFY13 earnings would be lower on YOY basis, we believe that if the current market momentum continues, there would be a significant earnings momentum for MOFS.
53
Motilal Oswal Income statement

Y/E Mar (` mn) Brokerage Income Net interest income Other fee income Total Income Operating expenses Direct costs Employee costs Admin expenses Operating profit Depreciation Exceptional items PBT Less:tax PAT Extraordinary items, minority interest etc. Net Profit EPS (`)- basic EPS (`)- diluted Dividend per share(`) Source: Company, Ambit Capital research FY10 4,551 553 1,263 6,367 3,683 1,630 1,367 687 2,683 142 0 2,541 788 1,753 (40) 1,714 11.9 11.9 1.20 FY11 4,334 681 932 5,947 3,708 1,455 1,422 831 2,239 131 0 2,108 712 1,395 (24) 1,371 9.5 9.5 1.40 FY12 3,188 786 645 4,619 3,093 1,165 1,167 762 1,526 130 0 1,396 443 953 85 1,038 7.3 7.3 0.50 FY13E 3,633 848 912 5,393 3,293 1,328 1,113 852 2,100 250 0 1,850 608 1,242 (7) 1,235 8.5 8.5 0.59 FY14E 4,621 975 1,501 7,097 4,004 1,617 1,464 923 3,093 288 0 2,805 922 1,883 (8) 1,875 12.9 12.9 0.89
Balance sheet
Y/E Mar (` mn) Sources of funds Net worth Minority interest Borrowings Net deferred taxes Total sources of funds Application of funds Cash Investments Fixed assets Loan book Net working capital Total application of funds BVPS Source: Company, Ambit Capital research 4,333 514 2,400 1,600 1,705 10,553 66 2,665 588 2,894 2,900 1,601 10,648 74 2,710 941 3,445 3,500 (670) 9,926 80 2,733 1,103 3,291 3,000 (4) 10,123 87 3,143 1,268 3,785 3,450 (5) 11,641 101 9,460 41 1,083 (31) 10,553 10,595 52 2 10,649 11,409 44 47 11,500 12,672 29 48 12,749 14,573 33 55 14,661 FY10 FY11 FY12 FY13E FY14E
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Motilal Oswal Key metrics

(%) Broking market share (%) Brokerage yield Operating cost/income Debt to equity Revenue growth PAT growth Source: Company, Ambit Capital research FY10 3.2% 6.1 57.9% 11.4% 42.1% 91.5% FY11 2.5% 5.1 62.4% 0.0% -6.6% -20.0% FY12 1.9% 4.8 67.0% 0.0% -22.3% -24.3% FY13E 2.0% 4.8 61.1% 0.0% 16.8% 19.0% FY14E 0.0% 4.5 56.4% 0.0% 31.6% 51.9%
Valuation and return ratios

(%) P/E P/BV ROA ROE Source: Company, Ambit Capital research FY10 9.0 1.6 18.5% 19.7% FY11 11.2 1.4 12.9% 13.7% FY12 14.7 1.3 9.4% 9.4% FY13E 12.6 1.2 10.2% 10.3% FY14E 8.3 1.1 13.7% 13.8%
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Motilal Oswal
56
Infrastructure
October 01, 2012
Sadbhav Engineering
Bloomberg: SADE IN EQUITY Reuters: SADE.NS
BUY
Accounting: AMBER Predictability: GREEN Earnings momentum: AMBER Analyst contacts

Nitin Bhasin
Background: Sadbhav Engineering (SEL) is a mid-sized Construction-turneddeveloper operating in the roads/highways (70% of the total revenues), mining and irrigation sectors. Through its subsidiary, Sadbhav Infrastructure Projects Ltd (SIPL), SEL has an asset portfolio of five operational road BOT projects and 6 under construction projects (road and check post). Competitive positioning: Financial discipline sets Sadbhav apart from most midsized contractor-turned-developers & steady controlled asset growth through partnerships has made it one of the best road developers. In our analysis of 20 mid-small sized construction companies, Sadbhav not only stands out as the
Chhavi Agarwal
Tel: +91 22 3043 3203 chhaviagarwalt@ambitcapital.com
strongest player, it has continuously gained competitiveness over its peers over the last 3 years. Despite a much lower revenue base and networth impacting its prequalification strength, the firms markedly superior cost structure/ competitiveness gives it industry leading standing amongst the construction companies. We also compare Sadbhav with 10 listed road/diversified developers and find that it is amongst the top 3 road developers due to better performing operational road assets and superior cost structures compared to its diversified players. Also, on the bidding competitiveness (determined by the equity needs for BOT projects), Sadbhav is a strong player as it has low equity needs compared to peers (who are mainly diversified players).
Overall success of the business: In the last five years, Sadbhav has not only posted strong consolidated revenues and PAT growth (CAGR of 42% and 37%, respectively over FY07-12), but also strong CFO growth (CAGR 44% over FY0712), mainly due to strong degree of financial discipline maintained by the management. Further, Sadbhavs Western India (Maharashtra) dominant BOT road asset portfolio is expected to generate 14%-18% equity IR` and, these National Highway(NH) road assets are supplemented by two 20% plus IRR assets Ahmedabad Ring Road and Maharashtra Border Check Post which are unique assets circling Ahmedabad and Maharashtra and will benefit from traffic from multiple NH links. The present progress of operational and under-construction assets provide comfort to our NPV and IRR calculations. Outlook: We expect a recovery in earnings and returns from FY14 onwards with new assets becoming operational. Whilst consolidated PAT wont grow over FY12FY14, as 55% of Sadbhavs invested equity becomes operational by FY13-end, operating cash flows will grow at a 21% CAGR, thereby, not only providing for debt servicing (interest expenses to grow 4x between FY12-14E to Rs4.7bn) but also equity capital for under-construction assets. We expect the equity invested in Sadbhavs asset portfolio to increase to Rs14bn by end-FY14 (up 118% from endFY12) and expect 68% of it to be operational. The firms operational assets provide means to raise capital through equity stake sales or securitization. Valuation: Our SOTP value of `175 implies 2x FY14 book. Our road asset portfolio valuation implies 1.8x FY13 for Sadbhavs investment in SIPL (`11.8bn). The firms relatively rich valuation is justified given its more realistic EPS and BVPS vs. peers inflated metrics & second rung management teams. Our DCF-based construction business valuation implies 7x FY13 EPS, a discount to most peers.
Key financials (consolidated)
Year to March (` mn) Operating Income EBITDA Net Profit (Adj) Adjusted EPS (`) ROE (%) ROIC (%) P/B(x) Source: Company, Ambit Capital research FY10 23,296 3,335 894 6.5 14.5% 5.6% 2.3 FY11 28,663 4,144 1,222 8.1 11.9% 8.4% 1.9 FY12 28,719 5,432 1,154 7.6 9.4% 7.3% 1.7 FY13E 35,933 7,868 689 4.6 5.3% 8.9% 1.6 FY14E 43,106 9,393 1,070 7.1 7.8% 9.1% 1.5
Recommendation
CMP: Target Price (12 months): Upside (%) EPS (FY13): Variance from consensus (%) `145 `175 21 `7.6 NA
Stock Information
Mkt cap: 52-wk H/L: 3M ADV: Beta: BSE Sensex: Nifty: `22bn/US$414mn `94/161 `24mn/US$0.5mn 1x 17,792 5,366

Absolute Rel. to Sensex 1M 6 2 3M -2 -11 6M -7 -14 12M 4 -3
SOTP Value of Rs175/share

Underconstruction assets, 48 New roads, 8 Construction , 70
Operational roads, 48

Sadbhav 1yr fwd P/B for last 3 years
3.0 2.0 1.0 0.0 S e p-09 S e p-10 S e p-11 S e p-12
Source: Bloomberg, Ambit Capital research Note: We have taken actual BVPS as historical consensus estimates for BVPS are not available
Sadbav Engineering
Exhibit 1: Standalone performance in FY11 and FY12 is driven by increasing revenue share of well-funded captive orders
30 Rsbn 20%
Irrigation Mining
Exhibit 2: Consolidated EBITDA margin and cash returns are improving with an increasing share of BOT revenues in FY11 and FY12
10 8 6 4 2 0 FY13E FY14E FY15E FY10 FY11 FY12 0%
Cash profit/netwo rth (RHS)
30%
Toll EBITDA (Rsbn)
20
16%
Road others BOT roads RoCE (RHS)
20%
Construction EBITDA (Rsbn) RoE (RHS)
10
12%
10%
FY08 FY09 FY10 FY11 FY12
8%
EBITDA margin (RHS)
Source: Ambit Capital research, Company. Note: (a) We have taken standalone data for analysis (b) We have taken revenues on the LHS.
Source: Ambit Capital research, Company, Note: We have taken consolidated data for our analysis.
Exhibit 1: Organic cashflows and equity stake sales mean that Sadbhav has raised less debt for funding BOT assets
6 4 2 0 -2 FY13E FY14E FY15E FY10 FY11 FY12 Rs bn
Exhibit 2: Whilst RoE will decline, cash profit is expected to improve due to increasing share of EBITDA from BOT assets
8,000 6,000 4,000 2,000 0 FY10 FY11 FY12 FY13E FY14E FY15E C onsol. cash flows (Rsm n) C onsol.RoE (RHS) C ash profit/networth (RHS)
Source: Bloomberg, Ambit Capital research. Note: We have taken consolidated data for analysis
30% 24% 18% 12% 6% 0%
Equity to be invested CFO less interest paym ents Equity raised/contributed by parent
Source: Company, Ambit Capital research Note: We have taken consolidated data for analysis
Exhibit 5: Sadbhav is trading at a discount of 30% to its 5-year average PB multiple of 2.1x
250 200 150 100 50 0 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 (Rs) 2.5x 2x 1.5x 1x
Exhibit 6: Sadbhav trades at premium to IRB and ITNL, which appears justified
4.0 3.0 2.0 1.0 0.0 Jan-09 Jan-10 Jan-11 Jan-12 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 IRB IN(x) ITNL IN(x) SADE IN(x)
Source: Bloomberg, Ambit Capital research, Bloomberg
Source: Ambit Capital research, Bloomberg, Company
58
Sadbav Engineering Exhibit 7: Explanation for the flags

Segment Score Comments In our E&C thematic Gravy Train Approaching dated March 5, 2012, out of the 10 infrastructure developers; Sadbhav appeared to be an average player on accounting quality. Whilst the company is amongst the top four players on revenue recognition checks, it appeared to be an average player on cash expense manipulation and cash pilferage checks. This is on account of the fact the L&T has significantly higher: (a) Higher contingent liabilities as % of networth; and (b) Unclassified Loans as % of Networth, and (c) lower CWIP as % of networth as compared to other infrastructure developers. If we also compare Sadbhav with other 10 infrastructure developers on various management quality checks, we find that Sadbhav is an average player, but has a strong positioning on parameters of intensity of insider trading and promoter shareholding structure. This highlights that promoters are not actively involved in trading of companys shares and have a relatively simple shareholding structure Sadbhav has always made timely disclosures regarding its future strategy, expected business momentum and expected earnings performance in their conference calls Over the last six months, FY2013 and FY2014 consensus EPS have been revised upward by 15%-20%.
Accounting
AMBER
GREEN AMBER
Source: Ambit Capital research, Sadbhav, Bloomberg.
59
Sadbav Engineering Balance sheet (consolidated)

Y/E March (` mn) Share capital Reserves and surplus Total Networth Minority Interest Loans Sources of funds Gross Block Net block Capital work-in-progress Investments Inventories Sundry debtors Cash and bank balances Loans and advances Other current assets Total Current Assets Current Liabilities Provisions Current liabilities and provisions Net current assets Application of funds Source: Company, Ambit Capital research FY11 150 8,573 8,743 2,017 20,073 30,995 14,466 11,823 6,464 263 736 5,871 1,365 9,765 658 18,395 4,702 1,279 5,981 12,414 30,994 FY12 150 11,556 11,733 1,746 34,874 48,587 15,895 12,524 26,105 402 884 7,377 1,801 6,279 358 16,700 5,251 1,893 7,144 9,556 48,587 FY13E 150 12,563 12,740 1,338 45,754 60,067 38,994 34,089 17,819 402 751 7,085 1,663 5,761 489 15,749 6,042 1,951 7,993 7,756 60,066 FY14E 150 13,105 13,281 943 57,159 71,618 54,216 47,224 16,642 402 890 8,039 620 6,217 578 16,344 7,043 1,951 8,994 7,349 71,617 FY15E 150 13,963 14,140 648 67,489 82,513 83,010 73,574 5 402 886 9,115 700 6,659 691 18,050 7,504 2,016 9,519 8,531 82,513
Income statement (consolidated)

Y/E March (` mn) Revenue % growth Total expenses Adjusted EBITDA Adjusted EBITDA margin Net depreciation / amortisation EBIT Reported Net interest and financial charges Other income Adjusted PBT Reported PBT Provision for taxation Minority Interest Adjusted Consolidated PAT PAT margin Reported Consolidated PAT Adjusted EPS (diluted) ` Reported EPS (diluted) ` Source: Company, Ambit Capital research FY11 23,296 74.6% 19,961 3,335 14.3% 789 2,546 1,214 77 1,409 1,409 673 (157) 894 3.8% 928 6.3 6.5 FY12 28,663 23.0% 24,519 4,144 14.5% 860 3,284 1,335 49 1,998 1,998 809 (56) 1,222 4.3% 1,223 8.1 8.1 FY13E 28,719 0.2% 23,286 5,432 18.9% 1,534 3,898 2,695 30 1,842 1,842 855 (407) 1,154 4.0% 1,154 7.6 7.6 FY14E 35,933 25.1% 28,065 7,868 21.9% 2,086 5,782 4,606 33 1,208 1,208 768 (396) 689 1.9% 689 4.6 4.6 FY15E 43,106 20.0% 33,713 9,393 21.8% 2,444 6,949 5,270 36 1,715 1,715 870 (295) 1,070 2.5% 1,070 7.1 7.1
60
Sadbav Engineering
Cash flow statement (consolidated)

Year to March (` mn) EBIT Depreciation Others Direct taxes paid Change in working capital CFO Purchase of fixed assets Investments Interest received Others CFI Proceeds from borrowings Equity raised Interest and finance charges paid Dividends paid CFF Net change inflow/(outflow) Cash at the beginning Cash at the end Free cash flow Source: Company, Ambit Capital research FY11 2,546 789 118 (581) (408) 2,464 (10,959) 554 171 (1,402) (11,636) 5,478 4,332 (1,330) (58) 10,013 841 507 1,348 (8,495) FY12 3,284 860 80 (544) (1,385) 2,295 (21,208) (152) 216 4,470 (16,673) 14,772 1,852 (1,478) (105) 15,041 663 1,348 2,011 (18,913) FY13E 3,898 1,534 385 (855) 1,604 6,566 (14,813) 30 0 (14,783) 10,880 (2,695) (106) 8,079 (138) 1,801 1,663 (8,247) FY14E 5,782 2,086 (147) (768) (637) 6,317 (14,044) 33 (0) (14,011) 11,405 (4,606) (147) 6,651 (1,043) 1,663 620 (7,728) FY15E 6,949 2,444 (69) (870) (1,165) 7,288 (12,156) 36 0 (12,121) 10,330 (5,270) (147) 4,913 80 620 700 (4,868)
Ratio analysis
Year to March (%) EBITDA Margin (%) EBIT Margin (%) Net margin Debt:Equity (x) Net debt/Equity (x) Working capital turnover (x) Gross block turnover (x) ROCE ROIC ROE Source: Company, Ambit Capital research FY11 14.3% 10.9% 3.8% 2.3 2.1 2.9 1.8 5.4% 5.6% 14.5% FY12 14.5% 11.5% 4.3% 3.0 2.8 3.0 1.9 4.9% 8.4% 11.9% FY13E 18.9% 13.6% 4.0% 3.6 3.5 4.0 1.0 3.9% 7.3% 9.4% FY14E 21.9% 16.1% 1.9% 4.3 4.3 5.9 0.8 3.2% 8.9% 5.3% FY15E 21.8% 16.1% 2.5% 4.8 4.7 6.6 0.6 4.5% 9.1% 7.8%
Year to March (` mn) Adjusted EPS basic (`) Adjusted EPS diluted (`) BVPS DPS (`) P/E P/B EV/EBITDA Source: Company, Ambit Capital research FY11 6.3 6.5 62 0.60 23.0 2.3 11.7 FY12 8.1 8.1 78 0.60 18.0 1.9 12.9 FY13E 7.6 7.6 85 0.97 19.0 1.7 11.9 FY14E 4.6 4.6 88 0.97 31.9 1.6 9.8 FY15E 7.1 7.1 94 1.40 20.5 1.5 9.3
61
Sadbav Engineering
62
Industrials
October 01, 2012
Supreme Industries
Bloomberg: SI IN EQUITY Reuters: SUPI BO
NOT RATED
Accounting: Green Predictability: Green Earnings Momentum: Green Analyst contacts

Nitin Bhasin
Background: Supreme Industries is engaged in the plastic processing business and manufactures a comprehensive range of plastic products in India. The company has four divisions: plastics piping system (46% of revenues), packaging products (25% of revenues), industrial products (19% of revenues) and consumer products (10% of revenues), catering to different sectors and customers. Supreme sells its offering through a growing network of 2,052 exclusive distributors (36% YoY growth) spread across India. Competitive positioning - gaining market share in key segments:
Chhavi Agarwal
Tel: +91 22 3043 3203 chhaviagarwal@ambitcapital.com
Continuous product line expansions using feedback from its large distributor network and leveraging its global technology partners, has helped Supreme capture growth from the rising penetration of engineered plastics in India. Therefore, inspite a large number of competitors, Supremes pipe business (46% & 40% of FY12 revenues & EBITDA, respectively) has grown the fastest vis--vis its organized peers. Further, within the packaging segment (25% of revenues), there is no major competition to the companys 25%+ EBITDA margin productCross Laminated Films ((CLF), 50% of segment revenues).
Overall success of the business: Over FY07-12, company has posted revenue
Recommendation
CMP: Target Price (12 Months): Upside (%) EPS (FY12): `280 NA NA `19
growth of 21% and PAT growth of 35% respectively. Further, Supremes RoCE has risen to 34% from 12%, a manifestation of managements assertion that RoCE underpins its business discipline. New product launches and technology absorption have helped it penetrate deeper into higher-margin value-addedproducts (VAP) client segments (residential, infra), thus reducing its reliance on the low-margin high-volume Agri segment. Its multi industry/segment presence has allowed Supreme to vacate highly competitive products and replace them with VAPs. This in turn has not only generated steady growth in EBITDA margins but also kept working capital needs low, thus growing CFO (FY08-12 CAGR of 25%), which is more than enough to fund future expansions.
Outlook: For FY13E, management expects revenue growth of 20-25% and PAT growth ahead of 25%, mainly driven by the increasing share of the VAP products (30% in FY12). Over FY12-16, Supreme will invest `11bn over FY12-17 (equal
Stock Information
Mkt cap: 52-wk H/L: 3M ADV: Beta: BSE Sensex: Nifty: `26bn/US$666mn `290/160 `13mn/US$0.2mn 0.6 18,753 5,691

Absolute Rel. to Sensex 1M 0 -5 3M 27 17 12M 38 28 YTD 59 38
to last 5 years CFO or 1.5X capex) for near doubling of its capacities (more in pipes & industrial products (20% of revenues)). Alongside capacity and reach Ownership pie (%) expansion, Supreme is targeting raising VAP revenue share (to 35%) through: (a) Utilizing its technological relationships to manufacture composite products Others, (LPG cylinders (approval rising globally), and drill pipes (early days globally); 30% and (b) Bathroom fittings (leveraging the pipes dealer network). Capacity expansion and the increasing share of VAP products is expected to drive revenue and PAT CAGR over FY12-15 at more than 20% and 25% respectively. DII, 10%
Valuation: The stock is currently trading at 13X FY13 PE on consensus EPS of `21/share. Whilst the valuations appear to be at all time high, we highlight that present valuation is not demanding given this firms long history of positive free cash flows, ~25% RoCEs and ~40% RoEs.
Key financials (consolidated)
Year to June (` mn) Operating Income EBITDA Net Profit (Adj) Adjusted EPS (`) ROE (%) P/E(x) Source: Company, Ambit Capital research FY08 13,104 1,438 538 4.0 20.9% 69.2 FY09 16,549 2,378 909 6.8 31.6% 41.0 FY10 20,070 2,895 1,560 12.3 43.4% 22.8 FY11 24,695 3,574 1,958 15.4 40.7% 18.2 FY12 29,657 4,719 2,417 19.0 38.8% 14.7
FII, 10%
Promoters , 50%
1-year forward P/E chart

15 13 11 9 7 5 Aug-09 Aug-10 Apr-09 Apr-10 Dec-09 Aug-11 Aug-12 Apr-11 Dec-10 Dec-11 Apr-12
S upre m e Industrie s PE (x)
A ve rage PE (x)
Supreme Industries
Exhibit 1: Strong revenue growth and rising share of VAPs in overall revenues due to higher VAP in plastic and packaging segments
35 30 25 20 15 10 5 FY08 FY09 FY10 FY11 FY12 10% 20% 30% Rsbn 40% Consumer durables Industrial products Packaging products Plastic piping VAP revenue share (RHS)
Exhibit 2: Strong revenue growth is driving EBITDA and EBIT margins

30% 18% 16% 24% 14% 18% 12% 10% 12% 8% 6% FY08 FY09 FY10 FY11 FY12 6% Revenue growth EBITDA margin(RHS) EBIT margin (RHS)
Source: Ambit Capital research, Company, Note: VAP is Value Added Products which have an EBITDA margin of >17%
Source: Ambit Capital research, Company
Exhibit 3: Steadily rising RoCE throwing sufficient CFO to fund capex and repay debt
4 3 2 1 (1) FY08 FY09 FY10 FY11 FY12 50% 40% 30% 20% 10% 0%
CFO (Rsmn) FCF (Rsmn) RoCE (RHS) RoE (RHS)
Exhibit 4: An 80% increase in Gross Block over FY07-12, but VAP focus led to rising Gross Block turnover
2,500 2,000 1,500 2.0 1,000 500 0 FY08 FY09 FY10 FY11 FY12 1.5 3.0
2.5 Capex (Rsmn) Gross block turnover (x)(RHS)
1.0
Exhibit 5: 1-yr forward multiples at all time high

15 13 11 9 7 5 Sep-09 Jan-10 Sep-10 Jan-11 Sep-11 Jan-12 May-09 May-10 May-11 May-12 Sep-12
Exhibit 6: 1-yr forward multiples at all time high

8 7 6 5 4 Jan-11 Mar-11 Jan-12 Mar-12 Sep-11 May-11 May-12 Nov-11 Sep-12
64
Jul-11
Supreme Industries PE (x)

Source: Ambit Capital research, Company, Bloomberg
Average PE (x)
Supreme Industries EV/EBITDA (x) Average EV/EBITDA (x)

Source: Ambit Capital research, Company, Bloomberg
Jul-12
Supreme Industries
Exhibit 7: Explanation for the flags on the front page

Segment Score Comments In our accounting analysis of BSE-500 companies, we have classified Supreme Industries as an "Industrial company". Supreme Industries emerges as the best Industrial company (amongst 14 industrial companies) on account of its higher ranking on most of the parameters (such as Misc exps as % of revs, Other Loans & Advances /Networth, Asset turnover, Audit fee CAGR/revenue CAGR). The company has always given a detailed description regarding its future strategy and expansion plans, expected business momentum and expected earnings performance. These are disseminated through the firms annual reports and its conference calls. Over the last six months, FY2013 and FY2014 consensus EPS have been revised upward by 15%-20%.
Accounting
Green
Green Green
Source: Company, Ambit Capital research, Bloomberg
65
Supreme Industries
Consolidated Balance sheet (` mn unless specified) (June ending)

Particulars (` mn) Share capital Reserves and surplus Total Networth Loans Sources of funds Gross Block Net block Capital work-in-progress Investments Cash and bank balances Sundry debtors Inventories Loans and advances Total Current Assets Current Liabilities Other current liabilities Provisions Current liabilities and provisions Net current assets Other assets Application of funds Source: Company, Ambit Capital research FY08 276 2,429 2,705 3,176 6,404 8,279 4,890 684 536 460 1,373 1,567 891 4,291 1,929 1,862 207 3,998 293 6,404 FY09 254 2,787 3,041 2,487 6,172 9,036 5,443 123 496 107 1,153 2,455 721 4,436 1,921 1,845 561 4,327 110 6,172 FY10 254 3,887 4,141 3,874 8,713 9,689 5,655 131 693 187 1,310 2,906 978 5,382 2,536 613 3,148 2,234 8,713 FY11 254 5,223 5,477 5,203 11,610 12,021 7,417 262 916 142 1,529 3,454 1,165 6,289 2,338 697 626 3,661 2,628 371 11,610 FY12 254 6,713 6,967 3,520 11,449 12,451 7,394 338 887 144 1,712 3,140 1,085 6,081 2,905 175 800 3,879 2,202 621 11,449
Consolidated Income statement (` mn unless specified) (June ending)

Particulars (` mn) Operating Income % growth Total expenses EBITDA EBITDA margin Net depreciation / amortization EBIT Interest Expense/(income) Other income Adjusted PBT % growth Provision for taxation Adjusted consolidated PAT % growth Reported Consolidated PAT % growth EPS (Adjusted) (`.) Source: Company, Ambit Capital research FY08 13,104 12.7% 11,666 1,438 11.0% 395 1,043 403 141 780 4.3% 243 538 4.3% 538 4.3% 4.0 FY09 16,549 26.3% 14,171 2,378 14.4% 526 1,853 558 136 1,431 83.3% 487 909 75.5% 909 75.5% 6.8 FY10 20,070 21.3% 17,175 2,895 14.4% 529 2,366 349 151 2,169 51.6% 748 1,560 50.6% 1,560 50.6% 12.3 FY11 24,695 23.0% 21,121 3,574 14.5% 619 2,955 438 57 2,575 18.7% 877 1,958 19.5% 1,958 19.5% 15.4 FY12 29,657 20.1% 24,938 4,719 15.9% 725 3,994 578 58 3,474 34.9% 1,150 2,417 36.9% 2,417 36.9% 19.0
66
Supreme Industries
Consolidated Cash flow statement (` mn unless specified) (June ending)

Particulars (` mn) PBT Depreciation Interest expense/ (income) Other income Direct taxes paid Change in working capital CFO (post -exceptions) Purchase of fixed assets Investment Dividend received Interest Income CFI Net borrowings Dividends paid Interest paid CFF Net Cash Cash at the beg Cash at the end Free cash flow Source: Company, Ambit Capital research FY08 780 395 403 (8) (150) 137 1,463 (1,434) 2 37 14 (1,361) 720 (275) (403) 42 143 144 287 29 FY09 1,431 526 558 (215) 239 2,444 (1,290) (237) 29 13 (1,404) (516) (145) (558) (1,220) (180) 287 107 1,154 FY10 2,169 529 349 (5) (676) (506) 1,805 (733) 5 34 18 (675) (197) (505) (349) (1,051) 79 107 187 1,073 FY11 2,575 619 438 (0) (896) (544) 2,136 (2,468) (0) 52 13 (2,404) 1,239 (578) (438) 223 (45) 187 142 (333) FY12 3,474 725 578 (0) (1,167) (36) 3,519 (762) 8 81 30 (643) (1,632) (664) (578) (2,874) 2 142 144 2,757
Consolidated Ratio analysis (June ending)

Particulars EBITDA margin (%) EBIT Margin (%) Net margin (Adj) Dividend payout ratio (%) Net debt/Equity Working capital turnover (x) Gross block turnover (x) ROCE ROE Source: Company, Ambit Capital research FY08 11.0% 8.0% 4.1% 197.8% 1.0 6.9 1.7 13.6% 20.9% FY09 14.4% 11.2% 5.5% 175.5% 0.8 6.8 1.9 21.4% 31.6% FY10 14.4% 11.8% 7.8% 146.6% 0.9 7.5 2.1 22.9% 43.4% FY11 14.5% 12.0% 7.9% 27.9% 0.9 7.3 2.3 20.8% 40.7% FY12 15.9% 13.5% 8.1% 31.5% 0.5 8.3 2.4 25.2% 38.8%
Consolidated Valuation parameters (June ending)

Particulars Adjusted EPS basic (`) Adjusted EPS diluted (`) BVPS DPS (`) P/E (x) P/B (x) EV/EBITDA (x) Source: Company, Ambit Capital research FY08 4.0 4.0 20 8 69.2 13.8 26.6 FY09 6.8 6.8 23 12 41.0 12.2 16.0 FY10 12.3 12.3 33 18 22.8 8.6 13.6 FY11 15.4 15.4 43 4 18.2 6.5 11.4 FY12 19.0 19.0 55 6 14.7 5.1 8.3
67
Supreme Industries
68
Auto & Auto Ancillaries
October 01, 2012
WABCO India
Bloomberg: WIL IN EQUITY Reuters: WABC.NS
NOT RATED
Accounting: GREEN Predictability: AMBER Earnings momentum: AMBER Analyst contact

Ashvin Shetty
Tel: +91 22 3043 3285 ashvinshetty@ambitcapital.com
Background: WABCO India is the market leader in airbrake systems for medium & heavy commercial vehicles (MHCV) in India. It commands a market share of 85% with MHCV OEMs. The company, formed as a braking division of a joint venture (called Sundaram Clayton) between TVS Group and WABCO Group in 1962, now exists separately from Sundaram Clayton and is 75% owned by WABCO Group (the TVS Group has exited from the company). Competitive positioning and its underpinnings: WABCO commands a market share of 85% with MHCV OEMs. Furthermore, it also enjoys strong pricing power which is evident in its superior EBITDA margin (average of 19.1% over FY08-12). Key factors underpinning its strong competitive positioning are: (a) The strong parentage of WABCO Group, a US$ 3bn global leader in providing safety and efficiency solutions for CVs. WABCO India has benefited from this parentage in getting technology, new products and MNC OEM relationships (globally WABCO enjoys strong relationship with most of the big OEMs); (b) With braking systems being a critical product, brand name and quality are important factors for OEMs when it comes to selecting supplier and this acts as strong entry barrier; (c) Its first mover advantage in India has helped company build strong OEM relationships with domestic market leaders Tata Motors and Ashok Leyland and thereby build market share in both the OEM as well as the after-sales market. Overall success of the business: The company has been able to clock revenue growth of 18% CAGR over FY08-12, ahead of MHCV volume growth of 6% during the same period. This was helped by an increase in content supplied per vehicle and growing exports to its parent. Furthermore, WABCO India has been able to maintain EBITDA margin at 19-20% in the last five years (barring FY09). Besides profitability, the company enjoys a strong balance sheet with a net cash position (`1bn as of FY12 end) and strong CFO generation (averaging 75% of EBITDA over FY08-12). FY13 outlook: The MHCV industry is currently going through a slowdown (April to August volumes saw 12% YoY decline). While this may impact WABCOs FY13 revenues, some of the mitigating factors in the short term are: (a) After-sales market revenue growth continuing to hold up - 22% YoY growth in 1QFY13; (b) Exports to WABCO global have increased from 4% of total revenues in FY08 to 14% by FY12 and continues to grow at a healthy rate (21% YoY growth in 1QFY13); and (c) Rising content per vehicle. As a result, despite the MHCV industry de-growing by 12% in 1QFY13, the company was able to record 2% YoY growth in revenues. The consensus expectations factor in revenue growth of 13% and EBITDA margin of 22% for FY13. Over the longer term, we believe, the company has significant potential to increase the content per vehicle through the introduction of higher value products such as advanced braking systems (anti-lock braking systems, electronic braking systems, lift control axle valve) and entering into newer segments such as driveline products (automated manual transmission systems). Valuation: WABCO is trading at 15x one-year rolling forward EPS which is at a premium of 18% to the four average P/E but at a discount of 16% to the peak P/E multiple commanded by it in the last four years. Compared to other auto OEMs, it trades in-line with Bharat Forge but at a discount of 25% to Bosch Indias multiple.
Year to March (` mn) FY10 FY11 FY12 FY13E FY14E 14,228 3,040 21.4% 113 NA 24% 14.8 3.5 Net Sales 5,913 8,925 10,456 11,834 EBITDA 1,175 2,006 2,199 2,630 EBITDA (%) 19.9% 22.5% 21.0% 22.2% EPS (`) 41 67 81 95 RoCE (%) 37% 50% 47% NA RoE (%) 29% 33% 29% 26% P/E (x) 40.5 24.9 20.6 17.5 P/B (x) 11.7 8.2 6.0 4.5 Source: Company, Ambit Capital research, Bloomberg estimates for FY13 & 14.
Stock Information
CMP: Mkt cap: 52-wk H/L: 3M ADV: Beta: BSE Sensex: Nifty: `1,617 `31/US$578mn `1,837/1,125 `10mn/US$0.2mn 0.75x 18,763 5,703

1M Absolute Rel. to Sensex 1.1 (5.4) 3M 6.0 (4.4) 6M 12M 6.6 (3.0) 27.4 13.3
Performance (%)
19,000 18,500 18,000 17,500 17,000 16,500 16,000 15,500 15,000 Mar-12 Sep-11 Jun-12 Dec-11 Sep-12 Wabco 1800 1700 1600 1500 1400 1300 1200 1100
Sensex
WABCO India
12,000 11,000 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 FY08 FY09 FY10 FY11 FY12 EPS (Rs) (RHS) Revenues (Rs mn) (LHS)
45% 40% 35% 30% 25% 20% 15% 10% FY08 FY09 EBITDA margin
90.5 80.5 70.5 60.5 50.5 40.5 30.5 20.5 10.5 0.5
FY10
FY11
FY12 RoE

110% 100% 90% 80% 70% 60% 50% 40% 30% 20% FY08 FY09 FY10 FY11 FY12 CFO/EBITDA (LHS) 0.4 0.3
21 P/E 16 11 6 1 Oct-08 Oct-09 Oct-10 Oct-11

4 year average
0.2 0.1 (0.1) (0.2) (0.3) Net debt-equity (RHS)
WABCO P/E
Exhibit 5: P/B valuation over the past five years

5 4 P/E
Exhibit 6: EV/EBITDA valuation over the past five years

12 10 P/E 8 6 4 2 0
3 2 1 0 Oct-08 Oct-09 Oct-10 Oct-11
Oct-08
Oct-09
Oct-10
WABCO P/B
4 year average
WABCO EV/EBITDA
4 year average
Oct-11
70
WABCO India Exhibit 7: Explanation for our flags on the cover page
Segment Accounting Predictability Earnings momentum Score GREEN AMBER AMBER Comments WABCOs average accounting score ranks amongst the best for Indian auto stocks. Significant exposure to the highly cyclical commercial vehicle segment lends some degree of unpredictability to companys revenues and earnings. No significant consensus upgrades/downgrades in the recent few weeks.
71
WABCO India
Balance sheet (standalone)

Year to March (` mn) Shareholders' equity Reserves & surpluses Total net worth Debt Deferred tax liability Total liabilities Gross block Net block CWIP Investments Cash & equivalents Debtors Inventory Loans & advances Total current assets Current liabilities Provisions Total current liabilities Net current assets Total assets Source: Company, Ambit Capital research FY08 95 1,582 1,677 202 32 1,912 2,279 1,698 43 87 116 758 310 155 1,340 984 272 1,255 84 1,912 FY09 95 1,882 1,977 602 40 2,619 2,633 1,914 39 90 13 703 463 110 1,289 536 177 713 576 2,619 FY10 95 2,608 2,703 72 32 2,811 2,648 1,802 66 22 24 1,314 461 198 1,997 861 214 1,075 922 2,811 FY11 95 3,772 3,867 82 3,949 2,789 1,804 99 122 129 1,712 799 421 3,060 866 271 1,136 1,924 3,949 FY12 95 5,196 5,291 9 109 5,409 3,440 2,302 128 22 1,029 1,575 1,158 565 4,326 1,106 263 1,369 2,957 5,409
Income statement (standalone)

Year to March (` mn) Net Sales % growth Operating Income % growth Operating expenditure EBITDA % growth Depreciation EBIT Interest expenditure Non-operating income Adjusted PBT Tax Adjusted PAT/ Net profit % growth Source: Company, Ambit Capital research FY08 5,343 NA 5,343 NA 4,288 1,056 NA 101 955 37 127 1,044 345 698 NA FY09 4,260 39% 4,260 39% 3,724 535 119% 139 396 71 200 526 170 355 -49% FY10 5,913 39% 5,913 39% 4,738 1,175 119% 144 1,030 30 183 1,183 402 782 120% FY11 8,925 51% 8,925 51% 6,919 2,006 71% 144 1,862 2 54 1,914 639 1,274 63% FY12 10,456 17% 10,456 17% 8,257 2,199 10% 156 2,043 1 121 2,162 628 1,534 20%
72
WABCO India
Cash flow statement (standalone)

Year to March (` mn) PBT Depreciation Others Tax (Incr) / decr in net work. capital Cash flow from operations Capex Trf. of fixed assets from Sundaram Clayton (Incr) / decr in investments Other income (expenditure) Cash flow from investments Net borrowings Trf consequent to de-merger Issuance of equity Dividend paid Others Cash flow from financing Net change in cash Free cash flow Source: Company, Ambit Capital research FY08 1,044 101 (5) (327) (101) 712 (717) (1,113) (86) 4 (1,912) (12) 1,236 (110) 0 1,113 (86) (5) FY09 526 139 (7) (141) (484) 34 (351) 1 2 (348) 250 (189) 61 (253) (318) 0 (250) 291 469 -55 (55) 171 311 (110) (1) (111) 687 871 FY10 1,183 144 (0) (451) (344) 532 (63) 71 1 9 -250 FY11 1,914 144 (15) (643) (910) 490 (180) -90 6 (264) 0 FY12 2,162 156 (58) (644) (63) 1,553 -683 0 -95 23 (755) -
Ratio analysis
Year to March (%) EBITDA margin (%) EBIT margin (%) Net profit margin (%) Dividend payout ratio (%) Net debt: equity (x) RoCE (%) RoIC (%) RoE (%) Source: Company, Ambit Capital research FY08 19.8% 17.9% 13.1% 29.8% 0.1 56% 37% 42% FY09 12.6% 9.3% 8.3% 13.4% 0.3 16% 11% 18% FY10 19.9% 17.4% 13.2% 6.1% 0.0 37% 25% 29% FY11 22.5% 20.9% 14.3% 7.4% (0.0) 50% 34% 33% FY12 21.0% 19.5% 14.7% 6.2% (0.2) 47% 33% 29%
Year to March (` mn) EPS (`) Diluted EPS (`) Book value per share (`) Dividend per share (`) P/E (x) P/BV (x) EV/EBITDA (x) EV/EBIT (x) Source: Company, Ambit Capital research FY08 36.8 36.8 88 11.0 45.4 18.9 30.1 33.3 FY09 18.7 18.7 104 2.5 89.2 16.0 60.3 81.5 FY10 41.2 41.2 143 2.5 40.5 11.7 27.0 30.8 FY11 67.2 67.2 204 5.0 24.9 8.2 15.7 16.9 FY12 80.9 80.9 279 5.0 20.6 6.0 13.9 15.0
73
WABCO India
Institutional Equities Team

Saurabh Mukherjea, CFA Research Analysts Aadesh Mehta Ankur Rudra, CFA Ashvin Shetty Bhargav Buddhadev Chhavi Agarwal Dayanand Mittal Gaurav Mehta Harshit Vaid Jatin Kotian Karan Khanna Krishnan ASV Nitin Bhasin Nitin Jain Pankaj Agarwal, CFA Parita Ashar Rakshit Ranjan, CFA Ritika Mankar Mukherjee Ritu Modi Shariq Merchant Sales Name Deepak Sawhney Dharmen Shah Dipti Mehta Parees Purohit, CFA Pramod Gubbi, CFA Sarojini Ramachandran Production Sajid Merchant Production (022) 30433247 sajidmerchant@ambitcapital.com Regions India / Asia India / Asia India / Europe / USA USA India / Asia UK Desk-Phone (022) 30433295 (022) 30433289 (022) 30433053 (022) 30433169 (022) 30433228 +44 (0) 20 7614 8374 E-mail deepaksawhney@ambitcapital.com dharmenshah@ambitcapital.com diptimehta@ambitcapital.com pareespurohit@ambitcapital.com pramodgubbi@ambitcapital.com sarojini@panmure.com Industry Sectors Banking / NBFCs Technology / Telecom / Education Automobile Power / Capital Goods Construction / Infrastructure Oil & Gas Strategy / Derivatives Research Power / Capital Goods Metals & Mining / Healthcare Strategy / Derivatives Research Banking Construction / Infrastructure / Cement Technology NBFCs Metals & Mining / Telecom Consumer / Real Estate Economy / Strategy Cement / Infrastructure / Healthcare Consumer Desk-Phone (022) 30433239 (022) 30433211 (022) 30433285 (022) 30433252 (022) 30433203 (022) 30433202 (022) 30433255 (022) 30433259 (022) 30433261 (022) 30433251 (022) 30433205 (022) 30433241 (022) 30433291 (022) 30433206 (022) 30433223 (022) 30433201 (022) 30433175 (022) 30433292 (022) 30433246 E-mail aadeshmehta@ambitcapital.com ankurrudra@ambitcapital.com ashvinshetty@ambitcapital.com bhargavbuddhadev@ambitcapital.com chhaviagarwal@ambitcapital.com dayanandmittal@ambitcapital.com gauravmehta@ambitcapital.com harshitvaid@ambitcapital.com jatinkotian@ambitcapital.com karankhanna@ambitcapital.com vkrishnan@ambitcapital.com nitinbhasin@ambitcapital.com nitinjain@ambitcapital.com pankajagarwal@ambitcapital.com paritaashar@ambitcapital.com rakshitranjan@ambitcapital.com ritikamankar@ambitcapital.com ritumodi@ambitcapital.com shariqmerchant@ambitcapital.com Head of Equities (022) 30433174 saurabhmukherjea@ambitcapital.com
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WABCO India
Explanation of Investment Rating

Investment Rating Expected return (over 12-month period from date of initial rating) >5% <5%
Buy Sell
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Indian Small Caps - Thematic - 12 High Quality Small Cap - Oct2012

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Indian Small Caps - Thematic - 12 High Quality Small Cap - Oct2012

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October 01, 2012

12 high quality small cap recovery plays