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May 27, 2011

Index Stock Update >> Max India Stock Update >> Kewal Kiran Clothing Stock Update >> Ratnamani Metals and Tubes Viewpoint >> Tata Motors

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Max India
Stock Update

Emerging Star

Consolidated business turns profitable in Q4


Company details Price target: Market cap: 52 week high/low: NSE volume: (No of shares) BSE code: NSE code: Sharekhan code: Free float: (No of shares) Rs234 Rs3,882 cr Rs182/133 3.0 lakh 500271 MAX MAX 14.8 cr

Buy; CMP: Rs167

Result highlights During Q4FY2011, Max India reported a stand-alone loss of Rs13.5 crore but was profitable on a consolidated basis led by the life insurance business. The life insurance business showed healthy results for FY2011 with a total premium growth of 20%, conservation ratio of 81% and profit of Rs194 crore as against a loss of Rs21 crore in FY2010. The embedded value of the insurance business grew by 18% year on year (YoY) to Rs3,216 crore. Turns profitable on consolidated basis: Max India reported a profit of Rs130 crore in Q4FY2011 on a consolidated basis, a growth of 38% YoY. The profit was led by a strong growth in the revenues and the companys sharp focus on cost management. The total consolidated revenues for Q4FY2011 came in at Rs1,890 crore, up 5% YoY, led by a 22% year-on-year (Y-o-Y) increase in the operating revenues whereas the company has booked loss in its investment income. Life insurancesteady growth continues: Max New York Life (MNYL)s annualised premium equivalent (APE) during the quarter came in at Rs472 crore, a growth of 13% YoY while the other players registered a decline of 31% YoY. The strong APE growth was driven by a focus on the traditional products and a distribution tie-up with Axis Bank. The company has posted a profit of Rs194 crore in FY2011 as compared to a loss of Rs24 crore in FY2011. The expenses/ premium ratio for the quarter dropped to 29% from 30% in the corresponding period of the previous year. Health care revenues up 21.8% YoY, EBITDA improves as well: Max Health Care (MHC)s Q4FY2011 revenues were up 21.8% YoY to Rs179 crore. The EBITDA margin increased to 11% against 1.8% in Q4FY2011. The company plans to add 1,000 beds in CY2012 in the states of Punjab, Uttaranchal etc. Specialty filmsrevenues up 29.7% YoY: Max Specialty Products (MSP) reported a 29.7% Y-o-Y increase in its revenues to Rs118 crore in Q4FY2011. The EBITDA margin declined to 10% (from 14.2% in Q3FY2011). Profits from the segment grew by 16.7% YoY to Rs7 crore. Health insurance: Max Bupa, the health insurance business of Max India, registered a gross written premium (GWP) of Rs26 crore in FY2011. The company enrolled 46,000 lives in the first year of operations.

Shareholding pattern

Public & others 32%

Promoter 37%

Foreign 30%

MF & FI 1%

Price chart
180 175 170 165 160 155 150 145 140 135 130 May-10 Feb-11 May-11 Aug-10 Nov-10

Maintain Buy with a target of Rs234: Max India is among the best managed companies in the life insurance space which gets reflected by way of its balanced
Result table Particulars Operating revenue Investment & Other income Total revenue EBIDTA Profit/(Loss) before tax Q4FY11 1,941 -51 1,890 177 130 Q4FY10 1,592 201 1,793 158 94 % YoY 22 -125 5 12 38 FY2011 6,668 1,223 7,891 348 32 FY2010 5,574 2,087 7,661 114 -86 Rs (cr) % YoY 20 -41 3 205 -

Price performance (%) Absolute 1m 3.2 3m 16.3 13.7 6m 12m 9.7 -5.3

Relative 11.5 to Sensex

15.8 -15.2

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product mix, high persistency ratio, higher average case per agent etc. We remain convinced about the long-term growth prospects of the life insurance industry in spite of the regulatory concerns plaguing insurance sales in the near term. The company is already done with capital infusion in the life insurance business while the treasury corpus of Rs540 crore and inflows from life insurance business will take care of the funding requirements of the health insurance and healthcare segments. We maintain our Buy recommendation on the stock with our sum-of-theparts (SOTP) based target price of Rs234. Life insurance business APE growth better than industrys In Q4FY2011 MNYLs APE came in at Rs472 crore, a growth of 13% YoY, while the other players registered a steep decline of 31% YoY. The strong APE growth was driven by a focus on the traditional products and the distribution tie-up with Axis Bank. The key highlight was that the traditional policies contributed to 86% of the incremental sales during the quarter. Cost rationalisation to continue Though the companys top line got affected by the regulatory changes in the insurance sector, the cost rationalisation aided the growth in profits. The companys expenses/premium ratio for the quarter dropped to 29% from 30% in the corresponding period of the previous year. MNYL is taking steps to introduce several cost rationalisation measures like multichannel distribution network, productive agency force and other measures to bring the expense ratio to ~18% levels. Further, consolidation in agency force The agency force as in March 2011 stood at 43,692 agents down 40% YoYas MNYL continues to trim the unproductive agents. With the huge expansion in its branch network in recent times, the company intends to optimally utilise it and also leverage on the over 1,000 branches of Axis Bank to penetrate into the market. NPBAP margins decline while conservation ratio remains at higher levels The recent regulatory changes governing unit-linked insurance policies (ULIPs) have contributed to a decline in the margins. Max India had NBAP margin (new business achieved profits) in the range of 13-14% and expects to maintain it with focus on affluent segments and traditional policies. Further, the conservation ratio, which is amongst the best in the industry, increased sequentially to 82% (78% in Q2FY2011) due to a change in the product mix.

The management has guided to improve the conservation ratio in the coming quarters.
Life insurance (MNYL) Particulars First year premium Renewal premium Single premium Total Individual APE Conservation ratio (%) Average case size Case rate per agent per month Q4 FY11 480 1,103 99 1,682 472 82 0.7 21,681 Q4 FY10 438 903 46 1,387 419 82 21,608 0.6 % YoY 10 22 115 21 13 FY11 1,775 3,751 286 5,812 1,724 81 21,239 0.6 Rs (cr) FY10 1,648 3,011 202 4,861 1,584 83 20,665 0.7 % YoY 8 25 42 20 9

Healthcare business MHCs Q4FY2011 revenues grew by 21.8% YoY to Rs179 crore. The average revenue per occupied bed day for Q4FY2011 came in at Rs22,868 crore, a growth of 4% YoY. The EBITDA margin, which had moderated recently on being hit by the recent expansion carried out by the company, improved to 11% in Q4FY2011 from 1.8% in Q4FY2010. The occupancy rates were flat at 67% in Q4FY2011 as compared to 68% in Q4FY2010 and in Q3FY2011. The company plans to add 1,000 beds in CY2011, increasing the total capacity to 2,000 beds.
Healthcare (MHC) Particulars Revenues EBITDA EBITDA margins (%) Average operational bed Average occupancy Average rev per bed/day Q4 FY11 179.0 19.6 11.0 926 67.0 Q4 FY10 147.0 % FY11 YoY 21.8 685.0 51.9 7.6 FY10 534.0 4.4 751.0 73.0 Rs (cr) % YoY 28.3 72.7 23.3 -6.8 5.5

2.6 653.8 1.8 511.1 818 68.0

23.5 120.9

13.2 926.0 -1.5 68.0

22,868 22,056

3.7 21,558 20,431

Speciality products business Max Speciality Products reported a 29.7% Y-o-Y increase in its revenues to Rs118 crore in Q4FY2011. The EBITDA margin declined 10% in the quarter. Max India has added another 22,000 tonne per annum (tpa) of BOPP line which commenced operations from March 2011. The total capacity has now increased to 52,000tpa.

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Speciality films (MSF) Particulars Revenues EBITDA EBITDA margins (%) PBT Q4 FY11 118 11 10 7 Q4 FY10 91 12 13 6 % FY11 YoY 29.7 -8.3 -23.1 16.7 440 53 12 36 FY10 336 43 13 20

Rs (cr) % YoY 31.0 23.3 -7.7 80.0

Maintain Buy with a target of Rs234 Max India is among the best managed companies in the life insurance space which gets reflected by way of its balanced product mix, high persistency ratio, higher average case per agent etc. We remain convinced about the long-term growth prospects of the life insurance industry in spite of the regulatory concerns plaguing insurance sales in the near term. The company is already done with a capital infusion in the life insurance business while the treasury corpus of Rs540 crore and inflows from life insurance business will take care of the funding requirements in the health insurance and healthcare segments. We maintain Buy recommendation on the stock with our SOTP based price target of Rs234.
SOTP valuation table Business Life insurance (10% holding co discount) Healthcare Specialty products SOTP based price target Method Appraisal EV/EBITDA Price/Sales Stake Value/Share (%) (Rs) 70 76 100 195 29 10 234

Other businesses Clinical research: During the quarter, the revenues from the clinical research business came in at Rs8 crore, flat on a sequential basis and up 45% YoY. The order book stood at Rs32 crore, up Rs13 crore during the quarter. Health insurance: Max Bupa, the health insurance business of Max India, registered a gross written premium (GWP) of Rs26 crore in the first financial year of operation. As many as 46,000 lives were enrolled in the first year of operation.

The author doesnt hold any investment in any of the companies mentioned in the article.

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May 27, 2011

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Kewal Kiran Clothing


Stock Update

Ugly Duckling

Price target revised to Rs674


Company details Price target: Market cap: 52 week high/low: NSE volume: (No of shares) BSE code: NSE code: Sharekhan code: Free float: (No of shares) Rs674 Rs669 cr Rs649/263 1,901 532732 KKCL KKCL 32 lakh

Buy; CMP: Rs543

Result highlights Kewal Kiran Clothing Ltd (KKCL)s Q4FY2011 results were ahead of our expectation on all counts - revenues, margin as well as earnings. The profit after tax (PAT) came in at Rs11.1 crore as against our expectation of Rs7.5 crore (+32.1% on a year-on-year [Y-o-Y] basis), led by a strong operating leverage. The operating margin expanded by 140 basis points on a Y-o-Y basis and came in at 29.2% for the quarter. The income from operations for the quarter came in at Rs55 crore (+18.6% YoY), largely above our expectation of Rs51 crore. The value growth of 18% was largely on account of the price hike undertaken by the company. The average apparel realisation increased by 12% (per piece apparel realisation for Q4FY2011 was Rs703), while the volume growth remained muted at 2.2%. During the quarter the accessories brand Addiction clocked a revenue of Rs2.5 crore (selling 1.9 units at a average realisation of Rs128). Despite pressure on the gross margin level due to escalating raw material prices, the operating profit margin continued to surprise on the positive trajectory (+140 basis points YoY and 210 basis points quarter on quarter [QoQ]), led by leveraging benefits of selling and other administrative costs. To incorporate strong Q4FY2011 results, and also the accessory brand Addiction in the numbers, we have upgraded our earnings for FY2012 and FY2013 by 5.3% and 9.1% respectively. Our revised earnings per share (EPS) estimate is of Rs44.7 and Rs51.6 for FY2012 and FY2013 respectively. We believe that KKCL, with its strong collection of brands is smartly positioned in one of the fastest growing fashion apparel segments and we believe that the company will emerge as one of the most successful apparel brand stories of India. In view of the pedigree of its brands and its disciplined management which has a consistent track record and financial acumen, we maintain our Buy rating on the stock with a revised price target of Rs674 (~14x average FY2012 and FY2013 earnings).

Shareholding pattern

Public and others 7%

Foreign 13% Institutions 4% Non-promoter corporate 3%

Promoters 73%

Price chart
650 600 550 500 450 400 350 300 250 Feb-11 May-10 Aug-10 May-11 Nov-10

Result table Particulars Total income from operations Gross profit Gross margin (%) Price performance Personnel cost Manufacturing & other operating expenses Administrative selling & other expenses Operating profit Operating profit margin (%) PAT PAT margin (%) EPS (Rs) Q4FY11 55.0 33.7 61.2 6.2 3.9 7.5 16.1 29.2 11.1 20.2 9.0 Q4FY10 46.4 29.8 64.5 5.3 3.1 8.7 12.7 27.5 8.4 18.2 6.8 32.1 32.1 17.5 25.8 -13.7 26.5 % YoY 18.6 13.1

Rs (cr) FY2011 236.6 146.8 62.0 25.4 19.6 33.2 68.5 29.0 46.2 19.5 37.5

(%) Absolute Relative to Sensex

1m -5.2 2.4

3m 13.5 11.0

6m 12m -7.0 112.1 -1.8 89.8

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Topline growth of 18.6% YoY above our estimates The income from operations for the quarter came in at Rs55 crore (+18.6% YoY), which is above our expectation of Rs51 crore. The value growth of 18.6% was on account of a robust 13% growth in the realisation although the volume growth was muted at 2.2%. The per piece realisation for the quarter came in at Rs703. Brand wise, Killer continued its dominance with 52% revenue contribution, followed by Integriti (24%), and Lawman (22%). In line with our estimates and understanding, Integriti- the value brand in its kitty, continued to witness stupendous growth during the quarter growing 27% on a YoY basis. Currently Integriti is approximately a Rs60 crore per annum brand and is moving fast towards becoming another power brand like Killer. Product wise, jeans continued to be strong constituting 57% of the revenue portfolio. The sale of jackets and sweaters also increased considerably. Region wise the highest share for the quarter came in from the eastern region and the western region at 29% each.
Brand wise contribution sales Particulars Killer Integriti Page 3 Lawman Easies Total Q4FY11 28.3 13.3 11.8 1.3 54.6 Q4FY10 24.6 10.5 10.3 1.1 46.5 Rs (cr) % YoY 15 27 14 18 17%

Format-wise contribution to sales


Large f ormat stores 9% Factory outlets Exports 2% 5%

K-Lounge 27%

MBO 57%

Robust expansion of retail stores During the quarter, the retail store expansion was strong, with KKCL adding 12 stores in the three month period, all on the asset light franchisee model. We believe that decent store addition coupled with a judicious mix of other distribution formats augurs well for KKCL, which again points out towards the strong financial acumen of the management. Operating levers pay off- leading to 140 bps margin expansion Despite an increase in the raw material cost that resulted in gross margin contraction of 330 basis points, the operating leverage and lower sales and administration costs led to a margin expansion of 140 basis points YoY and 210 basis points QoQ for the quarter. Sales and administration expenses for the quarter stood at 13.7% as against 17.8% for Q3FY2011 and 18.8% for the same quarter last year. The margin for the quarter was robust at 29.2%, consequently the operating profit growth was 24.3%. Other highlights of the quarter Enhanced capacity to 4 million pieces During the quarter the Vapi plants capacity enhancement was completed with the company now having a total capacity to manufacture 4 million pieces annually. Lean working capital; Strong cash flows Despite being an integrated fabric to retail play, the outright sale policy of the company with no recourse to the sold inventory continues to aid KKCL in maintaining a lean working capital cycle. The working capital cycle for FY2011 was 60 days. Further, the operating as well as the free cash flow for the company continued to be strong. For FY2011, the company generated an operating cash flow of approximately Rs38 crore, with a free cash of Rs32 crore (constituting 70% of the earnings for the year).

MBO continues to dominate distribution set-up; Factory outlet saw a stupendous growth Of all the distribution channels employed; multi brand outlet (MBO)s continue to dominate; for the quarter around 58% of KKCLs sales came from them. Growth wise, factory outlets saw a stupendous 64% YoY growth led by the end of the season sale that was on during the quarter between January 15 and February 20.
Format-wise sales break-up Particulars K-Lounge MBO large format stores Factory outlets Exports Q4FY11 15.3 31.8 5.0 2.7 0.9 Q4FY10 13.3 25.5 4.1 1.7 1.7 Rs (cr) % YoY 15.1 24.7 20.1 64.5 -44.0

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Strong performance outlook; inflation could be a dampener The demand outlook for discretionary spent which includes apparels to an extent remains strong in the wake of an increase in consumer confidence and the booming economy. However higher raw material prices and general inflationary trends could prove to be a roadblock in the growth momentum witnessed in FY2011. The fact that KKCL has brands in the premium as well as value segment would work well for the company in such a scenario. This would help the company in maintaining the blended margin at the current levels. We expect KKCLs margin to sustain between 26-27%. We continue to like KKCL in the wake of its strong brand portfolio (Killer, Integriti, Lawman and Easies), robust balance sheet (debt free status; Rs103 cash per share constituting ~20% to the current stock price; strong returns ratio- return on capital employed [RoCE] at 23.3%, and return on equity [RoE] at 24.4%). Earnings and target price revised upwards, maintain Buy, target of Rs674 To incorporate strong Q4FY2011 results and also the accessory brand Addiction in the numbers we have upgraded our earnings for FY2012 and FY2013 by 5.3% and 9.1% respectively. Our revised EPS is Rs44.7 and Rs51.6 respectively. We believe that KKCL with its strong

collection of brands is smartly positioned in one of the fastest growing fashion apparel segments and we believe that the company will emerge as one of the most successful apparel brand stories of India. In view of the pedigree of its brands and its disciplined management which has a consistent track record and financial acumen, we maintain our Buy rating on the stock with a revised price target of Rs674 (~14x average FY2012 & FY2013 earnings).
Revised estimates Net profit Old earnings New earnings Upgrade (%) Valuation table Particulars Net sales (Rs cr) Net profit (Rs cr) % YoY change No of shares (cr) EPS (Rs) P/E (x) EV/EBITDA (x) RoE (%) RoCE (%) FY09 144.6 14.1 -32.9 1.2 11.5 48.4 30.6 9.7 8.8 FY10 175.3 32.7 131.1 1.2 26.5 21.0 12.9 20.0 22.1 FY11E 236.6 46.2 41.6 1.2 37.5 14.8 8.3 24.4 31.5 FY12E 300.2 55.1 19.1 1.2 44.7 12.4 6.7 25.6 33.2 FY13E 346.4 63.6 15.5 1.2 51.6 10.8 5.4 25.7 33.5 FY2012E 52.3 55.1 5.3 FY2013E 58.3 63.6 9.1

The author doesnt hold any investment in any of the companies mentioned in the article.

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Ratnamani Metals and Tubes


Stock Update

Ugly Duckling

Dull performance at operating level


Company details Price target: Market cap: 52 week high/low: NSE volume: (No of shares) BSE code: NSE code: Sharekhan code: Free float: (No of shares) Shareholding pattern Rs148 Rs538 cr Rs150/111 20,260 520111 RATNAMANI RATNAMANI 1.9 cr

Buy; CMP: Rs116

Result highlights Mixed sales performance: In Q4FY2011, Ratnamani Metals & Tubes Ltd (Ratnamani) reported a net sales decline of 20% year on year (YoY) to Rs257 crore. This was primarily on account of volume being lower by 31% YoY in carbon steel tubes and pipes. However the stainless steel pipes and the steel segment were able to post a growth of 18%. On a sequential basis, net sales jumped by 60% due to a significantly low volume base of Q3FY2011. The volume grew by 170% quarter on quarter (QoQ), which is a result of the jump in the order book at the end of Q3FY2011. OPM improved YoY but primarily on stock adjustment: Despite a decline in sales, the EBITDA reported a flat growth at Rs54 crore, as the EBITDA margin expanded by 393 basis points YoY to 20.7% in Q4FY2011. Though on the face of it, the EBITDA margin seemed to improve, but the major benefit has been derived from the change in stock in trade. Hence, we read it as a flat performance at the operating level. Sequentially, the EBITDA margin remained flat. Therefore driven by higher sales, the EBITDA grew by 53% sequentially. Net income grew, but on lower tax only: Below the EBITDA level, the interest cost surged substantially; so the profit before tax (PBT) reported a 13% decline to Rs38.7 crore in Q4FY2011. However, a lower tax (to factor in higher provisioning taken earlier) and an extraordinary item pushed up the profit after tax (PAT) by 15% to Rs28 crore. Sequentially, a higher (60%) sales growth, coupled with a lower depreciation cost percolated into a profit after tax (PAT) growth of 70%.
Result table Rs (cr) Q4FY11 256.6 203.4 53.2 1.0 54.2 5.2 10.4 38.7 11.5 27.2 1.1 28.3 5.9 20.7 15.1 10.6 Q4FY10 321.6 267.6 54.0 0.3 54.3 0.2 9.3 44.8 20.3 24.5 0.0 24.5 5.4 16.8 13.9 7.6 % YoY -20.2 -24.0 -1.5 239.5 -0.2 11.0 -13.6 -43.5 11.1 15.4 8.3 Q3FY11 161.0 128.0 32.9 2.5 35.4 3.2 10.2 22.0 5.4 16.6 0.0 16.6 3.6 20.5 13.7 10.3 69.8 62.5 % QoQ 59.4 58.9 61.5 -58.4 53.2 62.5 1.8 75.6 113.1 63.4

Others 29%

Institutions 2% Foreign 11%

Promoters 58%

Price chart
150 145 140 135 130 125 120 115 110 May-10 Feb-11 May-11 Aug-10 Nov-10

Particulars Net sales Total expenditure Operating profit Other income EBIDTA Interest Depreciation PBT Tax PAT Extraordinary items Reported PAT EPS Margins EBITDAM (%) PBTM (%) PATM (%)

Price performance (%) 1m 3m -6.5 -8.5 6m 12m 1.1 6.8 2.0 -8.7

Absolute -10.5 Relative -3.2 to Sensex

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Order book at Rs797 crore, a significant improvement YoY: At the end of FY2012, the order book stood at Rs797 crore, 127% higher YoY and flat on a sequential basis. Of the Rs797 crore order book, carbon steel pipe orders form Rs475 crore and stainless steel pipe orders make for the remaining Rs322 crore. This is almost 1x its FY2011 net sales. Hence, we read this as a strong order book position as the average execution period for most of it is around six-nine months. We feel that the company could achieve Rs800 crore of sales in the coming nine months. For the whole year FY2012, the top line could touch Rs1,100 crore. FY2011 annual performance declined at operation level: In FY2011, operationally Ratnamani witnessed a marginal decline as sales and EBITDA declined by 45% YoY. The PBT slipped further (13% YoY) to Rs112 crore on a higher interest cost. However, a lower tax compared to last year, led to a flat PAT of Rs82 crore. Introduced FY2013 estimates: We have retained our FY2012 sales estimate at Rs1,080 crore and PAT estimate at Rs99 crore. We estimate a sales growth of 14.5% YoY in FY2013 to Rs1,237 crore, driven by a volume growth in stainless steel (20%) and carbon pipes (30%). We sense that the input cost pressure may remain for some time; hence assume an EBITDA margin of approximately 18.4% for FY2012 against 19.2% in FY2011. So, the EBITDA is expected at Rs223 crore. The PAT for FY2013 is expected at Rs114 crore, percolating to an earning per share (EPS) of Rs24.5. This in turn indicates a two year earning compounded annual growth rate (CAGR) of 17-18% over FY2011-13E. Maintain Buy on better order book and attractive valuation: We expect an earnings growth (2 year CAGR) of 17-18% and sales growth (2 year CAGR) of 23% over FY2011-13. We see the company sustaining its return on equity (RoE) at approximately 20%. Moreover, we are positive on an improved order book position YoY and a likely reversal in investment cycle in the oil and gas segment could result in an upsurge in the order book further. Hence, at the current market price, the stock is attractively trading at a price/earnings (PE) multiple of 5.6x on FY2012 earnings and 5x FY2013 earnings. Also, at the current market price, it offers a healthy dividend yield of 2%. On an EV/EBITDA, it is trading at 3.5x on FY2012E EBITDA and 2.7x FY2013E EBITDA. We roll over our target multiple to FY2013E earnings but retain our target price at Rs148 (based on 6x FY2013E earnings) and maintain our Buy rating on the stock.

Cost analysis (% of sales) Particulars Net raw material cost Raw material consumed Stock adjustment Staff cost Other expenses Total cost (%) Q4FY11 64.6 78.0 -13.4 5.4 8.8 79.3 Q4FY10 76.2 68.6 7.7 4.4 2.6 83.2 Chg (bps) -1158 947 -2105 95 626 -1595

Segmental performance Stainless steel tubes and pipes Stainless steel tubes and pipes contributed by 48% to the total revenues. The revenue from this product category grew by 19% YoY to Rs127 crore. The growth was primarily driven by a 23% Y-o-Y growth in volume. Nevertheless, the realisation remained 3.5% lower YoY. Carbon steel pipes The volume of this segment witnessed a decline of 32% YoY. However, a 4.5% realisation improvement curtailed the sales decline to 28% YoY at Rs143 crore.
Product-wise analysis Particulars Stainless steel tubes & pipes Sales (Rs crore) Volume (MT tonnes) Realisation (Rs/tonne) Carbon steel tubes & pipes Sales (Rs crore) Volume (MT tonnes) Realisation (Rs/tonne) 143 34992 40829 200 51067 39088 -28.4 -31.5 4.5 127 4403 288257 107 3578 298773 18.7 23.1 -3.5 Q4FY11 Q4FY10 % YoY

Order book position As the company has executed a significant portion of the order backlog in Q3FY2011, now at the end of Q4FY2011, the backlog stands at Rs650 crore (carbon steel tubes make for Rs375 crore of it). After the Q3FY2011 order backlog execution and revenue booking in Q4FY2011, there seem no fresh orders having been received by the company during Q4FY2011. The current order book position indicates a 20% decline sequentially but an 86% rise on an annual basis. As per our discussion with the management, we sensed that some products of carbon steel tubes and pipes are having a shortage in the market and the segment is likely to witness a healthy order book inflow in future.

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Order book break-up Particulars Carbon steel tubes & pipes Stainless steel tubes & pipes Total Q4 FY11 375 275 650 Q4 FY10 235 350 % YoY 17.0 85.7 Q3 FY11 400 410

Rs (cr) % QoQ -6.3 -32.9

115 226.1

810 -19.8

Balance sheet analysis; higher inventory a reflective of higher order book At the end of FY2011, we observed that the company has paid back Rs64 crore of debt from its books. We believe a large part of this is paid by diluting the long term investment worth Rs43 crore. Nevertheless, the remaining amount would be paid by its internal accruals. The inventory has gone up sharply (almost doubled) YoY, as the company had to buy raw materials to execute the higher order book. Thus the higher inventory is justified as the average execution period of its orders is around six months only. Valuation and view We have retained our FY2012 sales and earnings estimates and introduce FY2013 estimates. We estimate sales of Rs1,237 crore and PAT of Rs114 crore for FY2013. This indicates a two year earning CAGR of 17-18% over FY201113E. Also, we see the company sustaining its RoE at approximately 20%. Moreover, we are positive on an

improved order book position YoY and a likely reversal in investment cycle in the oil and gas segment could result in an upsurge in the order book further. Hence, at the current market price, the stock is attractively trading at a PE multiple of 5.6x FY2012 earnings and 5x FY2013 earnings. Also, at the current market price it offers a healthy dividend yield of 2%. On EV/EBITDA, it is trading at 3.5x FY2012E EBITDA and 2.7x FY2013E EBITDA. We roll over our target (PE) multiple to FY2013 earnings but retain our target price at Rs148 (based on 6x FY2013 earnings) and maintain our Buy rating on the stock.
Valuation table Particulars Net sales (Rs cr) Net profit (Rs cr) Shares in issue (Cr) EPS (Rs) PER (x) Book value (Rs) P/BV (x) EV/EBIDTA (x) EV/Sales (x) Div yeild (%) RoCE (%) RoNW (%) FY09 955.2 95.9 4.5 21.3 5.5 63.2 1.9 3.4 0.7 1.2 37.9 28.1 FY10 852.0 81.4 4.6 17.7 6.6 79.4 1.5 5.0 1.0 0.9 22.5 25.1 FY11E 82.1 4.6 17.7 6.6 94.2 1.2 4.8 0.9 2.1 16.7 20.8 FY12E 99.1 4.6 21.4 5.5 114.2 1.0 3.4 0.6 2.1 20.8 20.5 FY13E 1,237.1 113.8 4.6 24.5 4.8 137.4 0.9 2.7 0.5 2.1 21.1 19.5

812.2 1,080.6

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Play on Tata Motors through DVRs


Tactical assessment of Tata Motors DVRs (differential voting rights) Tata Motors differential voting rights (DVRs) have underperformed the main stock by 60% in the last two years. The current DVR discount against Tata Motors stock is 44% against the original 10% rights issue discount and the 32% average two-year discount. The promoter, Tata Sons, has sold 67% of their original DVR holding to domestic and foreign institutions over the last two years. The shares have been lapped up by the domestic institutional investors (DIIs) and foreign institutional investors (FIIs) who now hold 71% of Tata Motors DVRs. Institutions are expected to have bought DVRs between Rs350 to Rs900 in the span of two years. Will the discount widen from here? Currently, the promoters stake on an expanded equity has reduced to 19% from 84% in two years. The scope for further reduction from hereon seems limited as this would risk the promoters control of the company. At the current price of Rs605 a share, DVRs also fall on the dividend yield radar. A higher pay-out in future can limit the absolute fall of the DVRs price. A lot of funds who would have entered at higher levels can look to accumulate given the compelling valuation of the DVRs. How do we expect Tata Motors DVRs to behave? Tata Motors DVRs have traded at a 32% average discount to Tata Motors stock since their inception. We believe the current discount of 44% would settle at average levels. Do we expect DVRs to rise or Tata Motors stock to fall? We expect Tata Motors DVRs to outperform Tata Motors stock, thereby narrowing the current discount to the long-term average. We expect both the stocks to rise over the next one year as the current fall in the stocks price has factored in most of the negatives. Valuation

CMP: Rs1,089

Tata Motors currently trades at 7.2x our quick FY2012 earnings per share (EPS) estimate of Rs152 while the DVRs trade at compelling valuation of under 4x. Our price target of Rs740 a share of Tata Motors DVR is based on the longterm average discount of 32% against the key stock. Our price target implies a 22% upside from the current levels. Tata Motors DVRs: stock description What is a DVR? DVRs A ordinary shares are a different class of equity shares with differential rights from ordinary shares. The difference is with respect to voting and dividend, ie higher dividend with lower voting right. Key rights of DVR shareholders: Subject to the applicable laws, A ordinary shareholders will have the following rights: Right to receive dividend, if declared Right to attend general body meetings and class meetings of all ordinary shareholders and exercise voting powers, unless prohibited by law Right to receive offers for rights share and be allotted bonus shares Right to receive surplus on liquidation as available to ordinary shares and in the proportion of ordinary shares to A ordinary shares Right to transferability of A ordinary shares A ordinary shares will not be convertible into ordinary shares at any time Tata Motors DVRs Tata Motors issued DVRsA ordinary shares in November 2008 at a price of Rs305, at about a 10% discount to the prevailing ordinary shares. Entitlement ratio: The A ordinary shares were issued on a rights basis to the existing ordinary shareholders of the company in the ratio of one A ordinary share for every six ordinary shares held.

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Dividend: The A ordinary shareholders will receive dividend for any financial year at five percentage points more than the aggregate rate of dividend declared on the ordinary shares for that financial year, ie the aggregate dividend paid on each A ordinary share in any financial year will be Rs0.50 a share more than the aggregate dividend paid on the ordinary share.
Tata Motors DVR absolute discount vs Tata Motors stock
1600 1400 1200 1000 800 600 400 200 0 Jul-09 Jul-10 Feb-11 Mar-10 May-09 May-10 Sep-09 Nov-09 Dec-09 Nov-10 Aug-09 Aug-10 Dec-10 Mar-11 Jan-10 Jun-10 Apr-10 Jan-11 Oct-09 Oct-10 Apr-11 5% 0% -5% -10% -15% -20% -25% -30% -35% -40% -45% -50%

Tata Motors Q4FY2011 results: stand-alone performance disappoints, consolidated reported results in line Q4FY2011 stand-alone performance The companys revenues at Rs14,600 crore grew by 19% year on year (YoY) on account of a volume growth of 15% and a realisation increase of 3.8% YoY. On the negative side, contribution margins declined 180 basis points QoQ to 28.2% on account of higher raw material cost and unfavourable product mix. Though the employee cost rationalised during the quarter, higher other expenses restricted the operating profit growth to 7.3% YoY. Consequently, the operating profit margin (OPM) at 8.8% declined by 130 basis points and 160 basis points YoY and quarter on quarter (QoQ) respectively. A much lower tax rate at 3% vs 22% in Q3FY2011 led the reported profit after tax (PAT) to grow by 40% QoQ to Rs573 crore.
Result snapshot (stand-alone) Rs (cr) %YoY Q3FY11 19.4 11519.55 21.1 10323.57 4.0 -11.0 13.2 -68.0 -65.0 -4.1 1195.98 274.92 364.78 561.69 440.56 410.06 10.4% %QoQ 26.7 29.0 7.3 -9.8 15.5 14.8 42.5 39.8

TATA DVR Rs(LHS)

Tata Motors Rs (LHS)

Discount % (RHS)

DVR underperformance chart


450 400 350 300 250 200 150 100 50 0 May-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% -10.0% -20.0%

Particulars Total income EBITDA Net Interest Depreciation PBT Adjusted PAT Reported PAT OPM (%)

Q4FY11 4QFY10 14600.6 1283.0 247.9 421.2 644.9 627.8 573.4 8.8 12230.3 10997.0 1233.3 278.6 372.0 2015.0 1792.4 597.7 10.1

Total expenditure 13317.6

TATA DVR

Tata Motors

Underperformance %

Stand-alone volume mix Particulars CV/Total Vols (%) PV/Total Vols (%) Exports/Total Vols (%) Q1FY11 54 40 7 Q2FY11 54 38 8 Q3FY11 60 32 9 Q4FY11 54 39 6

Tata Motors DVR shareholding trend


90 80 70 60 50 40 30 20 10 0 -10

Q4FY2011 consolidated performance Tata Motors total income grew by 23% YoY to Rs35,610 crore.
Mar-11 Mar-10 Dec-10 Sep-10 Dec-09 Mar-09 Jun-10 Jun-09

Total Foreign

Total Institutions

Total Promoters

Its raw material cost as a percentage of sales increased by 130 basis points QoQ to 65.3% whereas the other expenses as a percentage of sales saw an increase of 90 basis points to 14.1%. Consequently, the OPM at

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13.5% declined by 170 basis points QoQ. The operating profit at Rs4,820 crore was flat on a sequential basis. On account of a lower tax rate of 10% vs 11.7% in Q3FY2011 and an exchange gain to the tune of Rs177 crore, the reported PAT of Rs2,637 crore was in line with the consensus estimate. However, the adjusted PAT post-minority at Rs2,460 crore was lower than the Streets expectation.
Result snapshot (consolidated) Particulars Total income Operating profits Other income Interest Depreciation PBT Tax Adj. PAT Extraordinary items RPAT OPM (%) Q4FY11 Q4FY10 35610.4 4820.2 15.6 453.2 1649.0 2733.6 288.4 2459.8 177.4 2637.3 13.5 28901.8 25541.7 3360.2 1060.6 551.4 1121.5 2747.9 343.7 2425.3 -206.5 2218.8 11.6 18.9 %YoY Q3FY11 23.2 20.5 43.5 -98.5 -17.8 47.0 -0.5 -16.1 1.4 31685.3 26862.9 4822.4 9.9 499.3 1572.4 2760.5 318.9 2457.2 -32.7 2424.5 15.2 8.8 Rs (cr) %QoQ 12.4 14.6 0.0 57.8 -9.2 4.9 -1.0 -9.6 0.1

JLR results snapshot Particulars JLR volumes % YoY % QoQ Avg realisation % YoY % QoQ Revenues ( % YoY % QoQ EBITDA % YoY % QoQ PAT %YoY %QoQ OPM (%) Q1FY11 59,201 65 3.9 38,209 22 6.4 2,262 101 10.4 350 -1100 49.6 222 NA 96.5 15.5 Q2FY11 55,134 24 -6.9 40,759 27 6.7 2,247 58 -0.7 373 809 6.5 229 NA 3.1 16.6 Q3FY11 63,155 11 14.5 42,119 22 3.3 2,660 36 18.4 463 141 24.2 275 239.5 20.2 17.4 Q4FY11 64,083 12 1.5 42,695 19 1.4 2,736 34 2.9 432 85 -6.6 317 180.7 15.3 15.8

Total expenditure 30790.2

Subsidiary performance Particulars FY08 FY09 FY10 2714.6 8.7 1070.4 -13.8 209.8 47.9 237.6 53.7 1132.0 43.7 5364.4 81.6 -35.7 91.0 38.2 52.7 171.2 64.3 131.1 44.2 -136.6 345.3 3.0 8.5 25.1 27.1 3.9 FY11 2881.1 6.1 1249.3 16.7 294.4 40.3 312.1 31.3 1366.6 20.7 6103.5 73.0 -10.5 139.0 52.7 90.8 72.2 94.2 46.5 127.1 187.8 606.0 2.5 11.1 30.8 30.2 9.3

JLR performance The Jaguar and Land Rover (JLR) business reported revenues of 2,736 million and PAT of 317 million for Q4FY2011. The business margin for Q4FY2011 stood at 15.8% as against 17.4% in Q3FY2011. The net JLR debt as on March 31, 2011 at 233 million vs 603 million as on March 31, 2010. China has started to contribute significantly with Chinas share in total wholesale volumes increasing from 9% in FY2010 to 11% in FY2011. The management expects Chinas volumes to increase from about 20,000 units in FY2011 to about 40,000 units in FY2012. The management is also upbeat on strong response from the other key markets like Russia and Brazil. Evoque is slated to be launched in September 2011 with a very competitive pricing in its segment.

Revenues Tata Daewoo CV (TDCV) 2865.0 2497.6 % change YoY 27.4 -12.8 Tata Technologies Ltd (TTL) 1100.3 1241.2 % change YoY 13.5 12.8 HV Transmissions Ltd (HVTL) 190.9 141.8 % change YoY 9.8 -25.7 HV Axles Ltd (HVAL) 199.6 154.6 % change YoY 4.6 -22.5 TML Financial Serv (TMLFSL) 719.2 787.9 % change YoY 457.2 9.6 Total 5075.0 4823.1 Net profits Tata Daewoo CV (TDCV) 153.1 127.0 % change YoY 57.1 -17.1 Tata Technologies Ltd (TTL) 30.0 65.9 % change YoY 84.0 119.6 HV Transmissions Ltd (HVTL) 47.4 19.5 % change YoY 5.5 -59.0 HV Axles Ltd (HVAL) 63.4 27.8 % change YoY 9.5 -56.1 TML Financial servieces (TMLFSL) 44.8 -120.7 % change YoY 250.0 -369.6 TOTAL 446.0 134.1 PATM (%) Tata Daewoo CV (TDCV) 5.3 5.1 Tata Technologies Ltd (TTL) 2.7 5.3 HV Transmissions Ltd (HVTL) 24.8 13.7 HV Axles Ltd (HVAL) 31.8 18.0 TML Financial servieces (TMLFSL) 6.2 -15.3

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Other highlights Future products in pipeline for FY2012: Nano variants, Vista refresh, Manza Limited Edition, new Safari, Aria 2WD. In FY2011 capital expenditure (capex) stood at Rs8,521 crore (JLR 775 million + stand-alone Rs2,391 crore). For FY2012, the JLR business will incur a capex of 1.5 billion and the stand-alone entity will see a capex of Rs3,000 crore. The consolidated debt of the company stood at Rs32,000 crore. The net automotive debt/equity stood at 0.68 as on March 31, 2011. The board of directors has recommended a dividend of Rs20 per ordinary share and Rs20.50 per A ordinary share each for FY2011. Further, the board has also approved the stock split of the company's ordinary and A ordinary shares in the ratio 1:5, subject to the approval of the shareholders at the annual general meeting.

Valuation Tata Motors has reported adjusted FY2011 consolidated EPS of Rs142. The consensus EPS for FY2012 is Rs152 a share. The EPS growth would remain muted following a moderate stand-alone volume growth for FY2012 and a large capex programme. There are, however, possibilities of upward revisions in H2FY2012 after the successful launch of Evoque, the low-priced compact sports utility vehicle. View Overall, the stand-alone results were disappointing whereas the consolidated adjusted results were marginally lower than the Streets expectation. The stock may react negatively to factor in the Q4 performance. The better way to play Tata Motors would be through its DVRs as these are currently trading at a 44% discount against an average discount of 32% in last two years.

The author doesnt hold any investment in any of the companies mentioned in the article.

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